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G-06-09-14-10A4 - 9/14/2006CERTIFICATE FOR ORDINANCE THE STATE OF TEXAS § COUNTIES OF WILLIAMSON AND TRAVIS § CITY OF ROUND ROCK § The undersigned City Secretary of the City of Round Rock, Texas (the "City"), hereby certify as follows: 1. The City Council of the City convened in a REGULARLY SCHEDULED MEETING ON THE 14TH DAY OF SEPTEMBER, 2006, at the designated meeting place (the "Meeting"), and the roll was called of the duly constituted officers and members of the Council, to -wit:: Nyle Maxwell, Mayor Rufus Honeycutt, Place 1 Alan McGraw, Mayor Pro -tem, Place 2 Joe Clifford, Place 3 Carlos T. Salinas, Place 4 Scott Rhode, Place 5 Ted Williamson, Place 6 Christine Martinez, City Secretary and all of the persons were present, except the following absentees: f k. -' � thus constituting a quorum. Whereupon, among other business, the following was transacted at the Meeting: a written FIRST SUPPLEMENTAL ORDINANCE TO THE MASTER ORDINANCE ESTABLISHING THE CITY OF ROUND ROCK, TEXAS UTILITY SYSTEM REVENUE FINANCING PROGRAM was duly introduced for the consideration of the City Council. It was then duly moved and seconded that the Ordinance be passed; and, after due discussion, said motion carrying with it the passage of the Ordinance, prevailed and carried by the following vote: AYES: NOES: 0 2. A true, full and correct copy of the Ordinance passed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that the Ordinance has been duly recorded in the City Council's minutes of the Meeting; that the above and foregoing paragraph is a true, full and correct excerpt from the City Council's minutes of the Meeting pertaining to the RROCK1UtilSysRevBonds2006: FirstSuppResCert passage of the Ordinance; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting city officials as indicated therein; that each of the elected officials and members of the City Council was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the Meeting, and that the Ordinance would be introduced and considered for passage at the Meeting, and each of the elected officials and members consented, in advance, to the holding of the Meeting for such purpose, and that the Meeting was open to the public and public notice of the time, place and purpose of the meeting was given, all as required by Chapter 551, Government Code, as amended. 3. The Mayor of the City has approved and hereby approves the Ordinance and the Mayor and the City Secretary of the City have duly signed the Ordinance. RROCK\Ut SysRevBonds2006: Firs[SuppResCert 2 SIGNED AND SEALED the [CITY SEAL] RROCK\Uti1SysRevBonds2006. FirstSuppResCet l4th oto,°t ,ouzo, 2JthsR. City Secretary 3 FIRST SUPPLEMENTAL ORDINANCE TO THE MASTER ORDINANCE ESTABLISHING THE CITY OF ROUND ROCK, TEXAS UTILITY SYSTEM REVENUE FINANCING PROGRAM Adopted September 14, 2006 RROCK\UtiiSysRevBonds2006: FirstSupplementalResolution FIRST SUPPLEMENTAL ORDINANCE TO THE MASTER ORDINANCE ESTABLISHING THE CITY OF ROUND ROCK, TEXAS UTILITY SYSTEM REVENUE FINANCING PROGRAM SECTION ARTICLE I Section 1.01. Section 1.02. Section 1.03. Section 1.04. ARTICLE H Section 2.01. Section 2.02. Section 2.03. Section 2.04. Section 2.05. Section 2.06. Section 2.07. ARTICLE III TABLE OF CONTENTS PAGE BONDS ISSUED UNDER UTILITY SYSTEM REVENUE FINANCING PROGRAM 1 DEFINITIONS 2 ESTABLISHMENT OF FINANCING PROGRAM AND ISSUANCE OF PARITY DEBT 2 FIRST SUPPLEMENT TO CONSTITUTE A CONTRACT; EQUAL SECURITY 2 LIMITATION OF BENEFITS WITH RESPECT TO THIS FIRST SUPPLEMENT 2 BOND AUTHORIZATION AND SPECIFICATIONS 3 AMOUNT, PURPOSE AND DESIGNATION OF THE BONDS 3 DATE, DENOMINATIONS, NUMBERS, MATURITIES AND TERMS OF BONDS 3 PAYMENT OF BONDS; PAYING AGENT/REGISTRAR 5 REDEMPTION 6 REGISTRATION; TRANSFER; EXCHANGE OF BONDS; PREDECESSOR BONDS; BOOK -ENTRY -ONLY SYSTEM; SUCCESSOR SECURITIES DEPOSITORY; PAYMENTS TO CEDE & CO. 7 INITIAL BOND 10 FORM OF BONDS 10 EXECUTION; REPLACEMENT OF BONDS; AND BOND INSURANCE 11 Section 3.01. EXECUTION AND REGISTRATION 11 Section 3.02. CONTROL AND CUSTODY OF BONDS 11 Section 3.03. PRINTED OPINION 12 Section 3.04. CUSIP NUMBERS 12 Section 3.05. MUTILATED, DESTROYED, LOST, AND STOLEN BONDS 12 Section 3.06. BOND INSURANCE 13 RROCK\UtilSysReVBonds2006: FirstSupplementalResolution ARTICLE IV Section 4.01. Section 4.02. Section 4.03 ARTICLE V Section 5.01. Section 5.02. Section 5.03. ARTICLE VI Section 6.01. Section 6.02. Section 6.03. ARTICLE VII PAYMENTS, REBATE FUND AND RESERVE FUND 13 PAYMENTS 13 REBATE FUND 13 RESERVE FUND 14 COVENANTS REGARDING TAX EXEMPTION 17 COVENANTS REGARDING TAX EXEMPTION 17 ALLOCATION OF, AND LIMITATION ON, EXPENDITURES FOR PROJECT 19 DISPOSITION OF PROJECT 19 AMENDMENTS AND MODIFICATIONS 19 AMENDMENTS OR MODIFICATIONS WITHOUT CONSENT OF OWNERS OF BONDS 19 AMENDMENTS OR MODIFICATIONS WITH CONSENT OF OWNERS OF BONDS 20 EFFECT OF AMENDMENTS. 21 MISCELLANEOUS 22 Section 7.01. DISPOSITION OF BOND PROCEEDS AND OTHER FUNDS 22 Section 7.02. MAILED NOTICES 22 Section 7.03. DEFEASANCE OF BONDS 23 Section 7.04. PAYING AGENT/REGISTRAR AGREEMENT AND ESCROW AGREEMENT 24 Section 7.05. FURTHER PROCEDURES 25 Section 7.06. NONPRESENTMENT OF BONDS 25 Section 7.07. EFFECT OF SATURDAYS, SUNDAYS, AND LEGAL HOLIDAYS 25 Section 7.08. PARTIAL INVALIDITY 25 Section 7.09. CONTINUING DISCLOSURE UNDERTAKING 26 Section 7.10. CREDIT AGREEMENT 28 Section 7.11. REMEDIES 28 Section 7.12. RULES OF INTERPRETATION 28 Section 7.13. NO PERSONAL LIABILITY 29 Section 7.14. PAYMENT OF ATTORNEY GENERAL FEE 29 Section 7.15. COMPLIANCE WITH THE TEXAS WATER DEVELOPMENT BOARD'S RULES AND REGULATIONS 29 EXHIBIT A - Definitions EXHIBIT B - Form of Bonds EXHIBIT C - Description of Annual Financial Information RROCK\UUISysRevBonds20o6: FirstSupplementalResoluton FIRST SUPPLEMENTAL ORDINANCE TO THE MASTER ORDINANCE ESTABLISHING THE CITY OF ROUND ROCK, TEXAS UTILITY SYSTEM REVENUE FINANCING PROGRAM THE STATE OF TEXAS § CITY OF ROUND ROCK § WHEREAS, on September 14, 2006, the City Council of the City of Round Rock, Texas (the "City"), adopted a "Master Ordinance Establishing the City of Round Rock, Texas Utility System Revenue Financing Program" (referred to herein as the "Master Ordinance"); and WHEREAS, in order to enable the City to provide for the financing of the utility system projects authorized by Chapter 1502, Texas Government Code, as amended, and any other applicable provisions of State law, the Master Ordinance establishes a revenue financing program pursuant to which the City can issue and enter into obligations, including bonds and other types of obligations, secured by and payable from a pledge of and lien on all or part of the Security, as hereinafter defined; and WHEREAS, for such purposes, the City deems it necessary to issue Parity Debt, as hereinafter defined, pursuant to this "First Supplemental Ordinance to the Master Ordinance establishing the City of Round Rock, Texas Utility System Revenue Financing Program" (the "First Supplement"); and WHEREAS, the City further finds and determines that all terms and conditions for the issuance of the bonds herein authorized as Parity Debt have been or can be met and satisfied; and WHEREAS, the bonds authorized to be issued by this First Supplement are to be issued and delivered pursuant to the Enabling Act, as hereinafter defined, and other applicable State laws. NOW THEREFORE, BE IT ORDAINED BY THE CITY OF ROUND ROCK, TEXAS THAT: ARTICLE I BONDS ISSUED UNDER UTILITY SYSTEM REVENUE FINANCING PROGRAM Section 1.01. DEFINITIONS. (a) Definitions. The capitalized terms used herein (except in the FORM OF BONDS set forth in Exhibit B hereto) and not otherwise defined shall have the meanings given in the Master Ordinance or in Exhibit A to this First Supplement. The recitals to this First Supplement and the exhibits hereto are incorporated herein and made a part hereof for all purposes. RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution 1 (b) Construction of Terms. If appropriate in the context of this First Supplement, words of the singular number shall be considered to include the plural, words of the plural number shall be considered to include the singular, words of the masculine, feminine, or neuter gender shall be considered to include the other genders, and words importing persons shall include firms, associations, and corporations. Section 1.02. ESTABLISHMENT OF FINANCING PROGRAM AND ISSUANCE OF PARITY DEBT. (a) First Supplement. By adoption of the Master Ordinance, the City has established the City of Round Rock, Texas Utility System Revenue Financing Program for the purpose of enabling the City to provide for the financing of utility system projects authorized by the Enabling Act and any other applicable provisions of State law pursuant to which the City may issue and enter into obligations, including bonds and other types of obligations, secured by and payable from a pledge of and lien on all or part of the Security. This First Supplement provides for the authorization, form, characteristics, provisions of payment and redemption, and security of the Bonds. This First Supplement is subject to the terms of the Master Ordinance and the terms of the Master Ordinance are incorporated herein by reference and as such are made a part hereof for all purposes. (b) Bonds Are Parity Debt. As required by Section 6 of the Master Ordinance governing the issuance of Parity Debt such as the Bonds, the City hereby finds that, upon the issuance of the Bonds, the Security will be sufficient to meet the financial obligations relating to the Financing Program, including Security in amounts sufficient to satisfy the Annual Debt Service Requirements of the Financing Program. The Bonds are hereby declared to be Parity Debt under the Master Ordinance. Section 1.03. FIRST SUPPLEMENT TO CONSTITUTE A CONTRACT; EQUAL SECURITY. In consideration of the acceptance of the Bonds by those who shall hold the same from time to time, this First Supplement shall be deemed to be and shall constitute a contract between the City and the Owners from time to time of the Bonds, and the pledge made in this First Supplement by the City and the covenants and agreements set forth in this First Supplement to be performed by the City shall be for the equal and proportionate benefit, security, and protection of all Owners from time to time of the Bonds, without preference, priority, or distinction as to security or otherwise of any of the Bonds authorized hereunder over any of the other Bonds by reason of time of issuance, sale, or maturity thereof or otherwise for any cause whatsoever, except as expressly provided in or permitted by this First Supplement and the Master Ordinance. Section 1.04. LIMITATION OF BENEFITS WITH RESPECT TO THIS FIRST SUPPLEMENT. With the exception of the rights or benefits herein expressly conferred, nothing expressed or contained herein or implied from the provisions of this First Supplement or the Bonds is intended or should be construed to confer upon or give to any person other than the City, the Owners, and the Paying Agent/Registrar, any legal or equitable right, remedy, or claim under or by reason of or in respect to this First Supplement or any covenant, condition, stipulation, promise, agreement, or provision herein contained. This First Supplement and all of the covenants, conditions, stipulations, promises, agreements, and provisions hereof are intended to be and shall RROCK\UtilSysRevBonds2006: FvstSupplementa]Resolution 2 be for and inure to the sole and exclusive benefit of the City, the Owners, and the Paying Agent/Registrar as herein and therein provided. ARTICLE II BOND AUTHORIZATION AND SPECIFICATIONS Section 2.01. AMOUNT, PURPOSE AND DESIGNATION OF THE BONDS. The Bonds designated "CITY OF ROUND ROCK, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES " in one or more Series (the "Bonds") are hereby authorized to be issued pursuant to this First Supplement in the maximum aggregate principal amount of $12,000,000 for the purpose of (i) paying costs of acquiring, purchasing, constructing, improving, renovating, enlarging or equipping the City's Utility System and (ii) paying the costs of issuing such Bonds. Each Series of the Bonds shall be designated by the year in which it is awarded pursuant to Section 2.02 below and each Series within a year may have a letter designation following the year. The authority for the Chief Financial Officer to execute and deliver the Award Certificate for a Series of Bonds shall expire at the close of business on September 14, 2007. The Bonds are authorized pursuant to authority conferred by and in conformity with State law, particularly the provisions of the Enabling Act and Chapter 1371, Texas Government Code. The Bonds may be in the form of either Current Interest Bonds or Capital Appreciation Bonds as provided in Section 2.02 and the FORM OF BONDS in Exhibit B to this First Supplement. Section 2.02. DATE, DENOMINATIONS, NUMBERS, MATURITIES AND TERMS OF BONDS. (a) Terms of Bonds. For each Series of Bonds, there shall initially be issued, sold, and delivered hereunder fully registered bonds, without interest coupons, in the form of Fixed Rate Bonds as Current Interest Bonds or Capital Appreciation Bonds, numbered consecutively for each Series of Bonds from R-1 upward (or CR -1 upward, in the case of Capital Appreciation Bonds), payable to the respective initial registered owners thereof, or to the registered assignee or assignees of said bonds or any portion or portions thereof (in each case, the "Registered Owner"), in Authorized Denominations, maturing not later than thirty (30) years after the date of issuance, serially or otherwise on the dates, in the years, and in the principal amounts in the case of Current Interest Bonds and Maturity Amounts in the case of Capital Appreciation Bonds, respectively, and dated, all as set forth in the Award Certificate of the Chief Financial Officer relating to each Series. (b) Award Certificate. As authorized by Chapter 1371, Texas Government Code, as amended, the Chief Financial Officer is hereby authorized, appointed, and designated to act on behalf of the City in selling and delivering the Bonds of each Series and carrying out the other procedures specified in this First Supplement, including the date of the Bonds of each Series, any additional or different designation or title by which the Bonds of each Series shall be known, the price at which the Bonds of each Series will be sold, the years in which the Bonds of each Series will mature, the principal amount to mature in each of such years, the aggregate principal amount of the Bonds of each Series, the rate or rates of interest to be borne by each maturity, the interest payment periods, the dates, price, and terms upon and at which the Bonds of each Series shall be subject to redemption prior to maturity at the option of the City, as well as any mandatory sinking fund redemption provisions, and all other matters relating to the issuance, sale, and delivery of the RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 3 Bonds of each Series, including procuring municipal bond insurance with a Bond Insurer, if any, all of which shall be specified in a certificate of the Chief Financial Officer (the "Award Certificate"); provided that (i) the price to be paid for the Bonds of each Series shall not be less than 95% of the aggregate original principal amount thereof plus accrued interest thereon from its date to its delivery, if any, and (ii) none of the Bonds shall bear interest at a rate greater than the Maximum Rate. It is further provided, however, that, notwithstanding the foregoing provisions, the Bonds of a Series shall not be delivered unless prior to delivery (i) the Award Certificate relating to that Series of Bonds has been executed and filed with the City and (ii) the Bonds of such Series have been rated by a nationally -recognized rating agency for municipal securities in one of the four highest rating categories for long-term obligations as required by Chapter 1371, Texas Government Code, as amended. Each Award Certificate is hereby incorporated into and made a part of this First Supplement and shall be filed in the minutes of the City as a part of this First Supplement. (c) Sale of the Bonds. To achieve the lowest borrowing costs for the Financing Program, each Series of Bonds shall be sold to the Texas Water Development Board. (d) In General. The Bonds of each Series (i) may and shall be redeemed prior to the respective scheduled maturity dates, (ii) may be assigned and transferred, (iii) may be exchanged for other Bonds of such Series, (iv) shall have the characteristics, and (v) shall be signed and sealed, and the principal of and interest on the Bonds shall be payable, all as provided, and in the manner required or indicated, in the FORM OF BONDS set forth in Exhibit B to this First Supplement and as determined by the Chief Financial Officer as provided herein, with such changes and additions as are required to be consistent with the terms and provisions shown in the Award Certificate relating to each Series of the Bonds. (e) Interest. The Current Interest Bonds shall bear interest calculated on the basis of a 360 -day year composed of twelve 30 -day months from the dates specified in the FORM OF BONDS set forth in Exhibit B to this First Supplement to their respective dates of maturity or redemption at the rates per annum set forth in the Award Certificate. The Capital Appreciation Bonds shall accrete interest from the Issuance Date, calculated on the basis of a 360 -day year composed of twelve 30 -day months (subject to rounding to the Compounded Amounts thereof), compounded semiannually on the dates set forth in the Award Certificate (the "Compounding Dates") commencing on the date set forth in the Award Certificate, and payable, together with the principal amount thereof, in the manner provided in the FORM OF BONDS set forth in Exhibit B at the rates set forth in the Award Certificate. Attached to the Award Certificate, if Capital Appreciation Bonds are to be issued, shall be an exhibit (the "Compounded Amount Table") that will set forth the rounded original principal amounts at the Issuance Date for the Capital Appreciation Bonds and the Compounded Amounts and Maturity Amounts thereof (per $5,000 Maturity Amount) as of each Compounding Date, commencing the date set forth in the Award Certificate, and continuing until the final maturity of such Capital Appreciation Bonds. The Compounded Amount with respect to any date other than a Compounding Date is the amount set RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 4 forth on the Compounded Amount Table with respect to the last preceding Compounding Date, plus the portion of the difference between such amount and the amount set forth on the Compounded Amount Table with respect to the next succeeding Compounding Date that the number of days (based on 30 -day months) from such last preceding Compounding Date to the date for which such determination is being calculated bears to the total number of days (based on 30 -day months) from such last preceding Compounding Date to the next succeeding Compounding Date. (f) Payments on Holidays. In the event that any date for payment of the principal of or interest on the Bonds is a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment will be the next succeeding day that is not a Saturday, Sunday, legal holiday, or day on which such banking institutions are authorized to close. Payment on such later date will not increase the amount of interest due and will have the same force and effect as if made on the original date payment was due. Section 2.03. PAYMENT OF BONDS; PAYING AGENT/REGISTRAR. The principal of, premium, if any, and the interest on the Current Interest Bonds and Maturity Amount on any Capital Appreciation Bonds shall be payable, without exchange or collection charges to the Owner thereof, in any coin or currency of the United States of America that at the time of payment is legal tender for the payment of public and private debts. The Bank ofNew York Trust Company, N.A. is hereby appointed as Paying Agent/Registrar for the Bonds. By accepting the appointment as Paying Agent/Registrar, the Paying Agent/Registrar acknowledges receipt of copies of the Master Ordinance and this First Supplement, and is deemed to have agreed to the provisions thereof and hereof. The City agrees and covenants to cause to be kept and maintained at the designated office of the Paying Agent/Registrar a Security Register, all as provided herein, in accordance with the terms and provisions of the Paying Agent/Registrar Agreement and such reasonable rules and regulations as the Paying Agent/Registrar and the City may prescribe. In addition, to the extent required by law, the City covenants to cause to be kept and maintained the Security Register or a copy thereof in the State. The City expressly reserves the right to appoint one or more successor Paying Agent/Registrars, by filing with the Paying Agent/Registrar a certified copy of a resolution or minute order of the City making such appointment. The City further expressly reserves the right to terminate the appointment of the Paying Agent/Registrar by filing a certified copy of a resolution of the City giving notice of the City's termination of the City's agreement with such Paying Agent/Registrar and appointing a successor. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are paid and discharged, and any successor Paying Agent/Registrar shall be a bank, trust company, financial institution, or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. If a Paying Agent/Registrar is replaced, such Paying Agent/Registrar, promptly upon the appointment of the successor, will deliver the Security Register (or a copy thereof) and all other pertinent books and records relating to the Bonds to the successor Paying Agent/Registrar. Upon RROCK\UtilSysRevBonds2006- FirstSupplementalResolutlon 5 any change in the Paying Agent/Registrar, the City agrees promptly to cause a written notice thereof to be sent to each Owner by United States mail, first-class postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. The principal of, premium, if any, and interest on the Current Interest Bonds and Maturity Amounts for any Capital Appreciation Bonds due and payable by reason of maturity, redemption, or otherwise, shall be payable only to the Owner thereof appearing on the Security Register, and, to the extent permitted by law, neither the City nor the Paying Agent/Registrar, nor any agent of either, shall be affected by notice to the contrary. Principal of, and premium, if any, on the Current Interest Bonds and Maturity Amounts for any Capital Appreciation Bonds, shall be payable only upon the presentation and surrender of said Bonds to the Paying Agent/Registrar at its designated office. Interest on the Bonds shall be paid to the Owner whose name appears in the Security Register at the close of business on the Record Date and shall be paid (i) by check sent on or prior to the appropriate date of payment by United States mail, first-class postage prepaid, by the Paying Agent/Registrar to the address of the Owner appearing in the Security Register on the Record Date or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested in writing by, and at the risk and expense of, the Owner. In the event of a nonpayment of interest on a scheduled payment date on a Current Interest Bond, and for thirty (30) days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be fifteen (15) days after the Special Record Date) shall be sent at least five (5) business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Owner of a Current Interest Bond appearing on the Security Register at the close of business on the last business day next preceding the date of mailing of such notice. Section 2.04. REDEMPTION. (a) Generally. The Bonds shall be subject to redemption prior to scheduled maturity at such times and with such provisions as provided in an Award Certificate. (b) Notices of Redemption and Defeasance. (i) Unless waived by any Owner of the Bonds to be redeemed, the Chief Financial Officer shall give notice of redemption or defeasance to the Paying Agent/Registrar at least thirty-five (35) days prior to a redemption date in the case of a redemption (unless a lesser period is acceptable to the Paying Agent/Registrar) and on the defeasance date in the case of a defeasance and the Paying Agent/Registrar shall give notice of redemption or of defeasance of Bonds by mail, first-class postage prepaid at least thirty (30) days prior to a redemption date and within thirty (30) days after a defeasance date to each Owner and to the central post office or each registered securities depository and to any national information service that disseminates such notices. In addition, in the event of a redemption caused by an advance refunding of the Bonds, the Paying Agent/Registrar shall send a second notice of redemption to the persons specified in the immediately preceding sentence at least thirty (30) days but not more than ninety (90) days prior to the actual redemption date. Any notice sent to the central RROCK\UUISysRevBonds2006: FirstSuppiementa]Resolution 6 post office or registered securities depositories or such national information services shall be sent so that they are received at least two (2) days prior to the general mailing or publication date of such notice. The Paying Agent/Registrar shall also send a notice of prepayment or redemption to the Owner of any Bond who has not sent the Bonds in for redemption sixty (60) days after the redemption date. (ii) Each notice of redemption or defeasance shall contain a description of the Bonds to be redeemed or defeased including the complete name of the Bonds, the date of issue, the interest rate, the maturity date, the CUSIP number, the certificate numbers, the amounts called of each certificate, the publication or mailing date for the notice, the date of redemption or defeasance, the redemption price, if any, the name of the Paying Agent/Registrar, and the address at which the Bonds may be redeemed or paid, including a contact person telephone number. (iii) All redemption payments made by the Paying Agent/Registrar to the Owners of the Bonds shall include a CUSIP number relating to each amount paid to such Owner. The failure of any Owner of the Bonds to receive notice given as provided in this Section 2.04, or any defect therein, shall not affect the validity of any proceedings for the redemption of any Bonds. Any notice mailed as provided in this Section 2.04 shall be conclusively presumed to have been duly given and shall become effective upon mailing, whether or not any Owner receives such notice. So long as DTC is effecting book -entry transfers of the Bonds, the Paying Agent/Registrar shall provide the notices specified in this Section 2.04 only to DTC It is expected that DTC shall, in turn, notify its participants and that the participants, in turn, will notify or cause to be notified the beneficial owners. Any failure on the part of DTC or a participant, or failure on the part of a nominee of a beneficial owner of a Bond to notify the beneficial owner of the Bond so affected, shall not affect the validity of the redemption of such Series ofBonds. (c) Conditional Notice of Redemption. With respect to any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Master Ordinance or this First Supplement have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent prior to the giving of such notice of redemption, such notice shall state that said redemption may, at the option of the City, be conditional upon the satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, the City shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. Section 2.05. REGISTRATION; TRANSFER; EXCHANGE OF BONDS; PREDECESSOR BONDS; BOOK -ENTRY -ONLY SYSTEM; SUCCESSOR SECURITIES DEPOSITORY; PAYMENTS TO CEDE & CO. (a) Registration, Transfer, Exchange, and RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 7 Predecessor Bonds. The Registrar shall obtain, record, and maintain in the Security Register the name and address of each Owner issued under and pursuant to the provisions of this First Supplement. Any Bond may, in accordance with its terms and the terms hereof, be transferred or exchanged for Bonds in Authorized Denominations upon the Security Register by the Owner, in person or by his duly authorized agent, upon surrender of such Bond to the Registrar for cancellation, accompanied by a written instrument of transfer or request for exchange duly executed by the Owner or by his duly authorized agent, in form satisfactory to the Registrar. Upon surrender for transfer of any Bond at the designated office of the Registrar, there shall be registered and delivered in the name of the designated transferee or transferees, one or more new Bonds, executed on behalf of, and furnished by, the City, of Authorized Denominations and having the same Maturity and of a like aggregate principal amount as the Bond or Bonds surrendered for transfer. At the option of the Owner, Bonds may be exchanged for other Bonds of Authorized Denominations and having the same Maturity, bearing the same rate of interest, and of like aggregate principal amount or Maturity Amount and Series as the Bonds surrendered for exchange, upon surrender of the Bonds to be exchanged at the principal office of the Registrar. Whenever any Bonds are so surrendered for exchange, there shall be registered and delivered new Bonds executed on behalf of, and furnished by, the City to the Owner requesting the exchange. All Bonds issued upon any transfer or exchange of Bonds shall be delivered at the principal office of the Registrar or sent by United States mail, first-class, postage prepaid to the Owners or the designee thereof, and, upon the registration and delivery thereof, the same shall be the valid obligations of the City, evidencing the same debt, and entitled to the same benefits under the Master Ordinance and this First Supplement, as the Bonds surrendered in such transfer or exchange. All transfers or exchanges of Bonds pursuant to this Section shall be made without expense or service charge to the Owner, except as otherwise herein provided, and except that the Registrar shall require payment by the Owner requesting such transfer or exchange of any tax or other governmental charges required to be paid with respect to such transfer or exchange. Bonds canceled by reason of an exchange or transfer pursuant to the provisions hereof are hereby defined to be "Predecessor Bonds," evidencing all or a portion, as the case may be, of the same debt evidenced by the new Bond or Bonds registered and delivered in the exchange or transfer therefor. Additionally, the term "Predecessor Bonds" shall include any mutilated Bond that is surrendered to the Paying Agent/Registrar or any Bond for which satisfactory evidence of the loss of which has been received by the City and the Paying Agent/Registrar and, in either case, in lieu of which a Bond or Bonds have been registered and delivered pursuant to Section 3.05 hereof Neither the City nor the Registrar shall be required to issue or transfer to an assignee of a Owner any Bond called for redemption, in whole or in part, within forty-five (45) days of the date fixed for the redemption of such Bond; provided, however, such limitation of transfer shall not be applicable to an exchange by the Owner of the unredeemed balance of a Bond called for redemption in part. RROCK\UtilSysRevBonds2006: Fir stSupplementalResolution 8 (b) Ownership of Bonds. The entity in whose name any Bond shall be registered in the Security Register at any time shall be deemed and treated as the absolute Owner thereof for all purposes of this First Supplement, whether or not such Bond shall be overdue, and, to the extent permitted by law, the City and the Paying Agent/Registrar shall not be affected by any notice to the contrary; and payment of, or on account of, the principal of, premium, if any, and interest on any such Current Interest Bond or Maturity Amount in the case of Capital Appreciation Bonds shall be made only to such Owner. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond to the extent of the sum or sums so paid. (c) Book -Entry -Only System. The Bonds of each Series issued in exchange for the Initial Bond for such Series issued as provided in Section 2.06 shall be issued in the form of a separate single fully -registered Bond for each of the maturities thereof registered in the name of Cede & Co., as nominee of DTC, and except as provided in this subsection (c) or the Award Certificate relating to a Series of Bonds, all of the Outstanding Bonds shall be registered in the name of Cede & Co., as nominee of DTC. With respect to 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 Bonds. Without limiting the immediately preceding sentence, the City and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Bonds, (ii) the delivery to any DTC Participant or any other person, other than a Owner as shown on the Security Register, of any notice with respect to the Bonds, including any notice of redemption, or (iii) the payment to any DTC Participant or any other person, other than a Owner as shown on the Security Register, of any amount with respect to principal of, premium, if any, or interest on the Bonds. Notwithstanding any other provision of this First Supplement to the contrary but to the extent permitted by law, the City and the Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Bond is registered in the Security Register as the absolute owner of such Bond for the purpose of payment of principal, premium, if any, and interest, with respect to such Bond, for the purpose of registering transfers with respect to such Bond, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of, premium, if any, and interest on the Bonds only to or upon the order of the Owners, as shown in the Security Register as provided in this First Supplement, 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 Bonds to the extent of the sum or sums so paid. No person other than a Owner, as shown in the Security Register, shall receive a Bond certificate evidencing the obligation of the City to make payments of principal, premium, if any, and interest pursuant to this First Supplement. 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 First Supplement with respect to interest checks being mailed to the Owner at the close of business on the Record Date the words "Cede & Co." in this First Supplement shall refer to such new nominee of DTC. RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution 9 (d) Successor Securities Depository; Transfers Outside Book -Entry -Only System. In the event that the City determines to discontinue the book -entry -only system through DTC or a successor or DTC determines to discontinue providing its services with respect to a Series of Bonds, the City shall either (i) 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 and DTC Participants of the appointment of such successor securities depository, and transfer one or more separate Bonds to such successor securities depository or (ii) notify DTC and DTC Participants of the availability through DTC of Bonds and transfer one or more separate Bonds to DTC Participants having Bonds credited to their DTC accounts. In such event, the Bonds of such Series shall no longer be restricted to being registered in the Security 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 Owners transferring or exchanging Bonds shall designate, in accordance with the provisions of this First Supplement. (e) Payments to Cede & Co. Notwithstanding any other provision of this First Supplement to the contrary, so long as any Bond is registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of, premium, if any, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively, in the manner provided in the representation letter of the City to DTC. (f) Blanket Issuer Letter of Representations. The City heretofore has executed and delivered to DTC a "Blanket Issuer Letter of Representations" with respect to the utilization by the City of DTC's book -entry -only system and the City intends to utilize such book -entry -only system in connection with each Series of the Bonds. Section 2.06. INITIAL BOND. The Bonds of each Series shall initially be issued as a fully registered bond, being one bond (or two bonds, being one initial Current Interest Bond and one initial Capital Appreciation Bond, if both such bonds are issued) (singularly or collectively, the "Initial Bond"). Each Initial Bond shall be registered in the name of the initial purchaser(s) of the Series of Bonds as set out in the Award Certificate. Each Initial Bond shall be submitted to the Office of the Attorney General of the State for approval and registration by the Office of the Comptroller of Public Accounts of the State and delivered to the initial purchaser(s) thereof. Immediately after the delivery of the Initial Bond of a Series on the Issuance Date, the Registrar shall insert the "Date of Original Issue" thereon, cancel the Initial Bond and shall complete the "Date of Original Issue" on each installment of Bonds initially and subsequently delivered to the Texas Water Development Board as of the date of each such delivery, and interest on each installment of the Bonds so delivered shall accrue from the "Date of Original Issue." The Paying Agent/Registrar shall deliver to DTC on behalf of the Texas Water Development Board a separate single fully - registered Bond for each of the maturities thereof registered in the name of Cede & Co., as nominee of DTC and, except as provided in Section 2.05(d), all of the Outstanding Bonds of such Series shall be registered in the name of Cede & Co., as nominee of DTC all in accordance with the "Escrow Agreement" approved herein. To the extent the Paying Agent/Registrar is eligible to participate in DTC's FAST System, the Paying Agent/Registrar shall hold the definitive Bonds in safekeeping for DTC. RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 10 Section 2.07. FORM OF BONDS. The Bonds (including each Initial Bond), the Registration Certificate of the Comptroller of Public Accounts of the State or the Authentication Certificate, and the form of Assignment to be printed on each of the Bonds shall be substantially in the forms set forth in Exhibit B to this First Supplement with such appropriate insertions, omissions, substitutions, and other variations as are permitted or required by this First Supplement and the Award Certificate relating to a Series of Bonds, may have such letters, numbers, or other marks of identification and such legends and endorsements (including any reproduction of an opinion of counsel and information regarding the issuance of any bond insurance policy) thereon as may, consistently herewith, be established by the City or determined by the officers executing such Bonds as evidenced by their execution thereof Any portion of the text of any Bonds may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Bond. The Bonds shall be typewritten, photocopied, printed, lithographed, engraved, or produced in any other similar manner, all as determined by the officers executing such Bonds as evidenced by their execution thereof. ARTICLE III EXECUTION; REPLACEMENT OF BONDS; AND BOND INSURANCE Section 3.01. EXECUTION AND REGISTRATION. The Bonds shall be executed on behalf of the City by the Mayor under its seal reproduced or impressed thereon and attested by the City Secretary. The signature of said officers on the Bonds may be manual or facsimile. Bonds bearing the manual or facsimile signatures of individuals who are or were the proper officers of the City as of their authorization shall be deemed to be duly executed on behalf of the City, notwithstanding that such individuals or either of them shall cease to hold such offices at the time of delivery of the Bonds to the initial purchaser(s) and with respect to Bonds delivered in subsequent exchanges and transfers, all as authorized and provided in Chapter 1201, Texas Government Code, as amended. No Bond shall be entitled to any right or benefit under this First Supplement, or be valid or obligatory for any purpose, unless there appears on such Bond either a certificate of registration substantially in the form provided in Exhibit B to this First Supplement, executed by the Comptroller of Public Accounts of the State or its duly authorized agent by manual signature, or the Paying Agent/Registrar's Authentication Certificate substantially in the form provided in Exhibit B to this First Supplement executed by the manual signature of an authorized officer or employee of the Registrar, and either such certificate duly signed upon any Bond shall be conclusive evidence, and the only evidence, that such Bond has been duly certified, registered, and delivered. Section 3.02. CONTROL AND CUSTODY OF BONDS. The Chief Financial Officer shall be and is hereby authorized to take and have charge of all necessary orders and records pending investigation and examination by the Attorney General of the State, including the printing and supply of printed Bonds, and shall take and have charge and control of each Initial Bond pending the approval thereof by the Attorney General, the registration thereof by the Comptroller of Public Accounts, and the delivery thereof to the initial purchaser(s). RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 11 Furthermore, each Authorized Representative is hereby authorized and directed to furnish and execute such documents relating to the Utility System, the City and its financial affairs as may be necessary for the issuance of the Bonds of each Series, the approval of the Attorney General, and the registration by the Comptroller of Public Accounts and, together with the City's Bond Counsel and the Paying Agent/Registrar, make the necessary arrangements for the delivery of the Initial Bond to the initial purchaser(s) and the initial exchange thereof for Bonds of such Series other than the Initial Bond. Section 3.03. PRINTED OPINION. The initial purchaser(s)' obligation to accept delivery of the Bonds of each Series is subject to the initial purchaser(s) being furnished the final opinion of McCall, Parkhurst & Horton L.L.P. approving the Bonds of such Series as to their validity, said opinion to be dated and delivered as of the date of delivery and payment for the Bonds of such Series. If bond insurance is obtained for the Bonds, the Bonds may bear an appropriate insurance legend. Section 3.04. CUSIP NUMBERS. CUSIP numbers may be printed or typed on the Bonds. It is expressly provided, however, that the presence or absence of CUSIP numbers on the Bonds shall be of no significance or effect as regards the legality thereof and neither the City nor attorneys approving the Bonds as to legality are to be held responsible for CUSIP numbers incorrectly printed or typed on the Bonds. Section 3.05. MUTILATED, DESTROYED, LOST, AND STOLEN BONDS. If(1) any mutilated Bond is surrendered to the Paying Agent/Registrar, or the City and the Paying Agent/Registrar receive evidence to their satisfaction of the destruction, loss, or theft of any Bond, and (2) there is delivered to the City and the Paying Agent/Registrar such security or indemnity as may be required to save each of them harmless, then, in the absence of notice to the City or the Paying Agent/Registrar that such Bond has been acquired by a bona fide purchaser, the City shall execute and, upon its request, the Paying Agent/Registrar shall register and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost, or stolen Bond, a new Bond of the same Series and Maturity and of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost, or stolen Bond has become or is about to become due and payable, the City in its discretion may, instead of issuing a new Bond, pay such Bond and the interest due thereon to the date of payment. Upon the issuance of any new Bond under this Section, the City may require payment by the Owner of a sum sufficient to cover any tax or other governmental charge imposed in relation thereto and any other expenses (including the fees and expenses of the Paying Agent/Registrar) connected therewith. Every new Bond issued pursuant to this Section in lieu of any mutilated, destroyed, lost, or stolen Bond shall constitute a replacement of the prior obligation of the City, whether or not the mutilated, destroyed, lost, or stolen Bond shall be at any time enforceable by anyone, and shall be RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 12 entitled to all the benefits of this First Supplement equally and ratably with all other Outstanding Bonds. Section 3.06. BOND INSURANCE. (a) Purchase of Insurance. In connection with the sale of the Bonds, the City may obtain municipal bond insurance policies from one or more Bond Insurers to guarantee the full and complete payment required to be made by or on behalf of the City on some or all of the Bonds as determined by the Chief Financial Officer. The Chief Financial Officer is hereby authorized to sign a commitment letter with a Bond Insurer and to pay the premium for the bond insurance policies at the time of the delivery of the Bonds out of the proceeds of sale of the Bonds or from other available funds and to execute such other documents and certificates as necessary in connection with the bond insurance policies as he or she may deem appropriate. Printing on Bonds covered by the bond insurance policies a statement describing such insurance, in form and substance satisfactory to a Bond Insurer and the Chief Financial Officer, is hereby approved and authorized. The Award Certificate may contain provisions related to the bond insurance policies, including payment provisions thereunder, and the rights of a Bond Insurer, and any such provisions shall be read and interpreted as an integral part of this First Supplement. (b) Rights of Bond Insurer(s). As long as a Bond Insurer is not in default on the related bond insurance policy for the Bonds, the Bond Insurer shall be deemed to be the sole Owner of such Bonds insured by it for all purposes of this First Supplement or the Master Ordinance. ARTICLE IV PAYMENTS, REBATE FUND AND RESERVE FUND Section 4.01. PAYMENTS. (a) Accrued and Capitalized Interest. Immediately after the delivery of each Series of Bonds the City shall deposit any accrued interest and any sale proceeds to be used to pay capitalized interest received from the sale and delivery of such Bonds to the credit of the Interest and Sinking Account to be held to pay interest on such Bonds. (b) Debt Service Payments. Semiannually on or before each principal or interest payment date while any of the Current Interest Bonds are outstanding and unpaid, commencing on the first interest payment date for the Current Interest Bonds as provided in the Award Certificate(s), the City shall make available from the Interest and Sinking Account to the Paying Agent/Registrar, money sufficient to pay such interest on and such principal of the Current Interest Bonds as will accrue or mature, or be subject to mandatory redemption prior to maturity, on such principal, redemption, or interest payment date. The Paying Agent/Registrar shall cancel all paid Bonds and shall furnish the City with an appropriate certificate of cancellation. Section 4.02. REBATE FUND. A separate and special fund to be known as the Rebate Fund is hereby established by the City pursuant to the requirements of Section 148(0 of the Code and the tax covenants of the City contained in Section 5.01 of this First Supplement for the benefit of the United States of America and the City, as their interests may appear pursuant to this First Supplement. Such amounts shall be deposited therein and withdrawn therefrom as is necessary to comply with the provisions of Section 5.01. Any moneys held within the Rebate Fund shall not constitute Security under the Master Ordinance. RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution 13 Section 4.03. RESERVE FUND. (a) To accumulate and maintain a reserve for the payment of the Bonds equal to the Average Annual Debt Service Requirements of the Bonds (calculated by the City at the beginning of each Fiscal Year) (the "Required Reserve Amount"), the Reserve Fund has been established and shall be maintained by the City. Earnings and income derived from the investment of amounts held for the credit of the Reserve Fund shall be retained in the Reserve Fund until the Reserve Fund contains the Required Reserve Amount; thereafter, such earnings and income shall be deposited to the credit of the Revenue Fund. The City shall deposit and credit to the Reserve Fund amounts required to maintain the balance in the Reserve Fund in an amount equal to the Required Reserve Amount. There shall be deposited into the Reserve Fund any Reserve Fund Obligations so designated by the City. All funds, investments and Reserve Fund Obligations on deposit and credited to the Reserve Fund shall be used solely for (i) the payment of the principal of and interest on the Bonds, when and to the extent other funds available for such purposes are insufficient, (ii) to make Reserve Fund Obligation Payments and (iii) to retire the last Stated Maturity or Stated Maturities of or interest on the Bonds. The Reserve Fund is solely for the benefit of this series of Bonds and is not available to pay Annual Debt Service Requirements on any other Parity Debt. (b) When and for so long as the cash, investments and Reserve Fund Obligations in the Reserve Fund equal the Required Reserve Amount, no deposits need be made to the credit of the Reserve Fund; but, if and when the Reserve Fund at any time contains less than the Required Reserve Amount, the City covenants and agrees that the City shall cure the deficiency in the Reserve Fund by resuming the Required Reserve Fund Deposits to such Fund from the Pledged Revenues by monthly deposits and credits in amounts equal to not less than 1/60th of the Required Reserve Amount with any such deficiency payments being made on or before each interest payment date until the Required Reserve Amount has been fully restored; provided, however, that no such deposits shall be made into the Reserve Fund during any six month period beginning on an interest payment date until there has been deposited into the Interest and Sinking Account the full amount required to be deposited therein by the next following semi-annual payment date, as the case may be. In addition, in the event that a portion of the Required Reserve Amount is represented by a Reserve Fund Obligation, the Required Reserve Amount shall be restored as soon as possible from monthly deposits of Pledged Revenues on deposit in the System Fund, but subject to making the full deposits and credits to the Interest and Sinking Account required to be made by the next following interest payment date, as the case may be. The City further covenants and agrees that, subject only to the prior deposits and credits to be made to the Interest and Sinking Account, the Pledged Revenues shall be applied and appropriated and used to establish and maintain the Required Reserve Amount, including by paying Reserve Fund Obligation Payments when due, and to cure any deficiency in such amounts as required by the terms of this First Supplement. During such time as the Reserve Fund contains the Required Reserve Amount, the obligation to maintain the Required Reserve Amount has been suspended pursuant to subsection (d) below or any cash is replaced with a Reserve Fund Obligation pursuant to subsection (c) below, the City may, at its option, withdraw all surplus funds in the Reserve Fund and deposit such surplus in the Interest and Sinking Account or otherwise use such amount in any manner permitted by law. RROCK\URISysRevBonds2006: FirstSupplementalResolution 14 (c) A Reserve Fund Obligation issued in an amount equal to all or part of the Required Reserve Amount for the Bonds may be used in lieu of depositing cash into the Reserve Fund. In addition, a Reserve Fund Obligation may be substituted for monies and investments in the Reserve Fund if the substitution of the Reserve Fund Obligation will not, in and of itself, cause any ratings then assigned to the Bonds by any rating agency to be lowered and the ordinance authorizing the substitution of the Reserve Fund Obligation for all or part of the Required Reserve Amount contains a finding that such substitution is cost effective. (d) Notwithstanding anything to the contrary contained herein, the requirement set forth in subsection (a) above to maintain the Required Reserve Amount in the Reserve Fund shall be suspended for such time as the Net Revenues for each Fiscal Year are equal to at least 1.35 times the average Annual Debt Service Requirements. In the event that the Net Revenues for any Fiscal Year are less than 1.35 times the average Annual Debt Service Requirements, the City will be required to commence making Required Reserve Fund Deposits, as provided in subsection (b) above, and to continue such Required Reserve Fund Deposits until the earlier of (i) such time as the Reserve Fund contains the Required Reserve Amount or (ii) the Net Revenues in each of two consecutive years have been equal to not less than 1.35 times the average Annual Debt Service Requirements. Notwithstanding the provisions of Section 4.03(a) of this section, if the City commences deposits in the Reserve Fund and later is authorized to suspend payments into the fund under this section any funds so accumulated may, at the discretion of the City: (i) remain in the Reserve Fund or (ii) be used for any lawful purpose including additional projects or to pay debt service on the Bonds. (e) A Reserve Fund Obligation permitted under (a) above, must be in the form of a surety bond or insurance policy meeting the requirements described below. (1) (i) A surety bond or insurance policy issued to the Paying Agent/Registrar, as agent of the Holders, by a company licensed to issue an insurance policy guaranteeing the timely payment of debt service on the Parity Obligations (a "municipal bond insurer") if the claims paying ability of the issuer thereof shall be rated "AAA" or "Aaa", respectively, by S&P and Moody's, or (ii) a surety bond or insurance policy issued to the Paying Agent/Registrar, as agent of the Holders, by an entity other than a municipal bond insurer, if the form and substance of such instrument and the issuer thereof shall be approved in writing by each Bond Insurer of record. (2) The obligation to reimburse the issuer of a Reserve Fund Obligation for any claims or draws upon such Reserve Fund Obligation in accordance with its terms, including expenses incurred in connection with such claims or draws, to the extent permitted by law, (a Reserve Fund Obligation Payment) shall be made from the deposits made to the Reserve Fund as provided in this Section. The Reserve Fund Obligation shall provide for a revolving feature under which the amount available thereunder will be reinstated to the extent of any reimbursement of draws or claims paid. If the revolving feature is suspended or terminated for any reason, the right of the issuer of the Reserve Fund Obligation to reimbursement will be subordinated to the cash replenishment of the Reserve Fund to an amount equal to the difference between the full original amount available under the Reserve Fund Obligation and RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 15 the amount then available for further draws or claims. In the event (a) the issuer of a Reserve Fund Obligation becomes insolvent, or (b) the issuer of a Reserve Fund Obligation defaults in its payment obligations thereunder, or (c) the claims paying ability of the issuer of the insurance policy or surety bond falls below "AAA" or "Aaa", by S&P and Moody's, respectively, the obligation to reimburse the issuer of the Reserve Fund Obligation shall be subordinated to the cash replenishment of the Reserve Fund. (3) In the event (a) the revolving reinstatement feature described in the preceding paragraph is suspended or terminated, or (b) the rating of the claims paying ability of the issuer of the surety bond or insurance policy falls below "AAA" or "Aaa", by S&P and Moody's, respectively, the City shall either (i) deposit into the Reserve Fund, in accordance with this Section, an amount sufficient to cause the cash or investments credited to the Reserve Fund to accumulate to the Required Reserve Amount, or (ii) replace such instrument with a surety bond or insurance policy meeting the requirements of 1 and 2 above, within six months of such occurrence. In the event (a) the rating of the claims -paying ability of the issuer of the surety bond or insurance policy falls below "A" by S&P and Moody's, or (b) the issuer of the Reserve Fund Obligation defaults in its payment obligations hereunder, or (c) the issuer of the Reserve Fund Obligation becomes insolvent, the City shall either (i) deposit into the Reserve Fund, in accordance with this Section, amounts sufficient to cause the cash or investments on deposit in the Reserve Fund to accumulate to the Required Reserve Amount, or (ii) replace such instrument with a surety bond or insurance policy meeting the requirements of 1 and 2 above within six months of such occurrence. (4) The Paying Agent/Registrar shall ascertain the necessity for a claim or draw upon any Reserve Fund Obligation and provide notice to the issuer of the Reserve Fund Obligation in accordance with its terms not later than three days (or such appropriate time period as will, when combined with the timing of required payment under the Reserve Fund Obligation, ensure payment under the Reserve Fund Obligation on or before the interest payment date) prior to each date upon which the principal of or interest on the Parity Obligations will be due. It is recognized that a Reserve Fund Obligation may be issued which is payable only with respect to a part of the Bonds with the remainder of the Required Reserve Amount being satisfied by monies and investments and in that case any draws upon the Reserve Fund will have to be made on a pro -rata basis. Therefore, (i) draws upon one or more such Reserve Fund Obligations shall be made on a pro -rata basis with cash and investments available in the Reserve Fund and (ii) deposits and credits to the Reserve Fund to restore it to the Required Reserve Amount shall be utilized on a pro -rata basis to pay Reserve Fund Obligation Payments to reimburse the issuers of the Reserve Fund Obligations, thus restoring that part of the Required Reserve Amount, and to restore with cash and investments the balance of the Required Reserve Amount. RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 16 ARTICLE V COVENANTS REGARDING TAX EXEMPTION Section 5.01. COVENANTS REGARDING TAX EXEMPTION. (a) Covenants. The City covenants to take any action necessary to assure, or refrain from any action which would adversely affect, the treatment of the Bonds as obligations described in section 103 of the Code, the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the City covenants as follows: (1) to take any action to assure that no more than ten percent (10%) of the proceeds of the Bonds or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, if more than ten percent (10%) of the proceeds or the projects financed therewith are so used, such amounts, whether or not received by the City, with respect to such private business use, do not, under the terms of this First Supplement or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than ten percent (10%) of the debt service on the Bonds, in contravention of section 141(b)(2) of the Code; (2) to take any action to assure that in the event that the "private business use" described in subsection (1) hereof exceeds five percent (5%) of the proceeds of the Bonds or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of five percent (5%) is used for a "private business use" which is "related" and not "disproportionate," within the meaning of section 141(b)(3) of the Code, to the governmental use; (3) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or five percent (5%) of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; (4) to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of section 141(b) of the Code; (5) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of section 149(b) of the Code; (6) to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with -- RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 17 (A) proceeds of the Bonds invested for a reasonable temporary period of three (3) years or less until such proceeds are needed for the purpose for which the bonds are issued, (B) amounts invested in a bona fide debt service funds, within the meaning of section 1.148-1(b) of the Treasury Regulations, and (C) amounts deposited in any reasonably required reserve or replacement funds to the extent such amounts do not exceed ten percent (10%) of the proceeds of the Bonds; (7) to otherwise restrict the use of the proceeds of the Bonds or amounts treated as proceeds of the Bonds, as may be necessary, so that the Bonds do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section 149(d) of the Code (relating to advance refundings); and (8) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148(0 of the Code. The City will file IRS Form 8038 in accordance with Section 149(e) of the Code. (b) Rebate Fund. In order to facilitate compliance with the above covenant in subsection (a)(8), a "Rebate Fund" is hereby established by the City for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the bondholders. The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code. (c) Proceeds. The City understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Bonds. It is the understanding of the City that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Bonds, the City will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nationally recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Bonds, the City agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In furtherance of such intention, the City hereby authorizes and directs the Chief Financial Officer to execute any documents, RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution 18 certificates or reports required by the Code and to make such elections, on behalf of the City, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. Section 5.02. ALLOCATION OF, AND LIMITATION ON, EXPENDITURES FOR PROJECT. The City covenants to account for the expenditure of sale proceeds and investment earnings to be used for the purposes described in Section 2.01 of this First Supplement on its books and records by allocating proceeds to expenditures within 18 months of the later of the date that (i) the expenditure is made, or (ii) the purposes for which the Bonds are issued have been accomplished. The foregoing notwithstanding, the City shall not expend sale proceeds or investment earnings thereon more than 60 days after the earlier of (i) the fifth anniversary of the delivery of the Bonds, or (ii) the date the Bonds are retired, unless the City obtains an opinion of nationally -recognized bond counsel that such expenditure will not adversely affect the tax-exempt status of the Bonds. For purposes hereof, the City shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. Section 5.03. DISPOSITION OF PROJECT. The City covenants that the property financed with the Bonds will not be sold or otherwise disposed in a transaction resulting in the receipt by the City of cash or other compensation, unless the City obtains an opinion of nationally - recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. For purposes of the foregoing, the portion of the property comprising personal property and disposed in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. For purposes hereof, the City shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. ARTICLE VI AMENDMENTS AND MODIFICATIONS Section 6.01. AMENDMENTS OR MODIFICATIONS WITHOUT CONSENT OF OWNERS OF BONDS. Subject to the provisions of the Master Ordinance, this First Supplement and the rights and obligations of the City and of the Owners of the Outstanding Bonds may be modified or amended at any time without notice to or the consent of any Owner of the Bonds or any other Parity Debt, solely for any one or more of the following purposes: (i) To add to the covenants and agreements of the City contained in this First Supplement, other covenants and agreements thereafter to be observed, or to surrender any right or power reserved to or conferred upon the City in this First Supplement; (ii) To cure any ambiguity or inconsistency, or to cure or correct any defective provisions contained in this First Supplement, upon receipt by the City of an Opinion of Counsel, that the same is needed for such purpose, and will more clearly express the intent of this First Supplement; RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 19 (iii) To supplement the Security for the Bonds; (iv) To make such other changes in the provisions hereof, as the City may deem necessary or desirable and which shall not, in the judgment of the City, materially adversely affect the interests of the Owners of the Outstanding Bonds; (v) To make any changes or amendments requested by the State Attorney General's Office as a condition to the approval of the Bonds, which changes or amendments do not, in the judgment of the City, materially adversely affect the interests of the Owners of the Outstanding Bonds; or (vi) To make any changes or amendments requested by any bond rating agency then rating or requested to rate the Bonds, as a condition to the issuance or maintenance of a rating, which changes or amendments do not, in the judgment of the City, materially adversely affect the interests of the Owners of the Outstanding Bonds. Section 6.02. AMENDMENTS OR MODIFICATIONS WITH CONSENT OF OWNERS OF BONDS. (a) Amendments. Subject to the other provisions of this First Supplement and the Master Ordinance, the Owners of Outstanding Bonds aggregating a majority in Outstanding Principal Amount shall have the right from time to time to approve any amendment, other than amendments described in Section 6.01 hereof, to this First Supplement that may be deemed necessary or desirable by the City, provided, however, that nothing herein contained shall permit or be construed to permit, without the approval of the Owners of all of the Outstanding Bonds, the amendment of the terms and conditions in this First Supplement or in the Bonds so as to: (i) Make any change in the maturity of the Outstanding Bonds; (ii) Reduce the rate of interest borne by Outstanding Bonds; (iii) Reduce the amount of the principal payable on Outstanding Bonds; (iv) Modify the terms of payment of principal of or interest on the Outstanding Bonds, or impose any conditions with respect to such payment; (v) Affect the rights of the Owners of less than all Bonds then Outstanding; or (vi) Change the minimum percentage of the Outstanding Principal Amount of Bonds necessary for consent to such amendment. (b) Notice. If at any time the City shall desire to amend this First Supplement pursuant to Subsection (a), the City shall cause notice of the proposed amendment to be published in a RROCK\UtilSysRevBonds2006: PirstSupplementalResolution 20 financial newspaper or journal of general circulation in the City of New York, New York (including, but not limited to, The Bond Buyer or The Wall Street Journal) or in the State (including, but not limited to, The Texas Bond Reporter), once during each calendar week for at least two successive calendar weeks or disseminated by electronic means customarily used to convey notices of redemption. Such notice shall briefly set forth the nature of the proposed amendment and shall state that a copy thereof is on file at the principal office of the Paying Agent/Registrar for inspection by all Owners of Bonds. Such publication is not required, however, if the City gives or causes to be given such notice in writing to each Owner of Bonds. A copy of such notice shall be provided in writing to each rating agency maintaining a rating on the Bonds. (c) Receipt of Consents. Whenever at any time the City shall receive an instrument or instruments executed by all of the Owners or the Owners of Outstanding Bonds aggregating a majority in Outstanding Principal Amount, as appropriate, which instrument or instruments shall refer to the proposed amendment described in said notice and which consent to and approve such amendment in substantially the form of the copy thereof on file as aforesaid, the City may adopt the amendatory resolution in substantially the same form. (d) Consent Irrevocable. Any consent given by any Owner pursuant to the provisions of this Section shall be irrevocable for a period of six (6) months from the date of the first publication or other service of the notice provided for in this Section, and shall be conclusive and binding upon all future Owners of the same Bond during such period. Such consent may be revoked at any time after six (6) months from the date of the first publication of such notice by the Owner who gave such consent, or by a successor in title, by filing notice thereof with the Paying Agent/Registrar and the City, but such revocation shall not be effective if the Owners of Outstanding Bonds aggregating a majority in Outstanding Principal Amount prior to the attempted revocation consented to and approved the amendment. Notwithstanding the foregoing, any consent given at the time of and in connection with the initial purchase of Bonds shall be irrevocable. (e) Ownership. For the purpose of this Section, the ownership and other matters relating to all Bonds registered as to ownership shall be determined from the Security Register kept by the Paying Agent/Registrar therefor. The Paying Agent/Registrar may conclusively assume that such ownership continues until written notice to the contrary is served upon the Paying Agent/Registrar. Section 6.03. EFFECT OF AMENDMENTS. Upon the adoption by the City of any resolution to amend this First Supplement pursuant to the provisions of this Article, this First Supplement shall be deemed to be amended in accordance with the amendatory resolution, and the respective rights, duties, and obligations of the City and all the Owners of Outstanding Bonds shall thereafter be determined, exercised, and enforced under the Master Ordinance and this First Supplement, as amended. RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution 21 ARTICLE VII MISCELLANEOUS Section 7.01. DISPOSITION OF BOND PROCEEDS AND OTHER FUNDS. Proceeds from the sale of each Series of Bonds shall, promptly upon receipt thereof, be applied by the Chief Financial Officer as follows: (i) any underwriting discount or fees and any Credit Agreement fees for each Series of Bonds may be retained by and/or wired directly to such parties; (ii) any accrued interest and sale proceeds to be used to pay capitalized interest for the Series of Bonds, if any, shall be deposited as provided in Section 4.01; and (iii) an amount sufficient to pay the remaining costs of issuance of the Bonds and the cost of acquiring, purchasing, constructing, improving, enlarging, and equipping the improvements being financed with the proceeds of each Series of Bonds shall be deposited in a separate subaccount for each Series within the Bond Proceeds Account to be used for such purposes. Any sale proceeds of the Bonds remaining after making all deposits and payments provided for above shall be deposited into the Interest and Sinking Account and applied to the payment of principal of and interest on the Current Interest Bonds and Maturity Amounts in the case of Capital Appreciation Bonds. Section 7.02. MAILED NOTICES. Except as otherwise required herein, all notices required or authorized to be given to the City, any Bond Insurer (as defined in, and pursuant to, Section 3.06 hereof) or the Paying Agent/Registrar pursuant to this First Supplement shall be in writing and shall be sent by registered or certified mail, postage prepaid, to the following addresses or otherwise given in a manner deemed, in writing, acceptable to the party to receive the notice: 1. to the City: City of Round Rock, Texas 221 E. Main Street Round Rock, Texas 78664 Attn: Chief Financial Officer Telephone: (512) 218-5430 Facsimile: (512) 218-7097 to the Paying Agent/Registrar: The Bank of New York Trust Company, N.A. 2001 Bryan - 8th Floor Dallas, TX 75201 Attn: Corporate Trust Telephone: (214) 468-6411 Facsimile: (214) 468-6322 RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 22 3. to any Bond Insurer: The address, phone number and fax number specified in the Award Certificate. or to such other addresses as may from time to time be furnished to the parties, effective upon the receipt of notice thereof given as set forth above. Section 7.03. DEFEASANCE OF BONDS. (a) Deemed Paid. The principal of and/or the interest and redemption premium, if any, on any Bonds shall be deemed to be Defeased Debt within the meaning of the Master Ordinance, except to the extent provided in subsections (c) and (e) of this Section, when payment of the principal of such Bonds, plus interest thereon to the due date or dates (whether such due date or dates be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption or the establishment of irrevocable provisions for the giving of such notice) or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar for such Bonds or an eligible trust company or commercial bank for such payment (1) lawful money of the United States of America sufficient to make such payment, (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times as will ensure the availability, without reinvestment, of sufficient money to provide for such payment and when proper arrangements have been made by the City with the Paying Agent/Registrar for such Bonds or an eligible trust company or commercial bank for the payment of its services until all Defeased Debt shall have become due and payable or (3) any combination of (1) and (2). At such time as Bonds shall be deemed to be a Defeased Debt hereunder, as aforesaid, such Bonds and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of the Security as provided in the Master Ordinance and this First Supplement, and such principal and interest shall be payable solely from such money or Defeasance Securities. (b) Investments. The deposit under clause (ii) of subsection (a) of this Section shall be deemed a payment of Bonds as aforesaid when proper notice of redemption of such Bonds shall have been given or upon the establishment of irrevocable provisions for the giving of such notice, in accordance with the Master Ordinance and this First Supplement. Any money so deposited with the Paying Agent/Registrar for such Bonds or an eligible trust company or commercial bank as provided in this Section may at the discretion of the City also be invested in Defeasance Securities, maturing in the amounts and at the times as hereinbefore set forth, and all income from all Defeasance Securities in possession of the Paying Agent/Registrar for such Bonds or an eligible trust company or commercial bank pursuant to this Section which is not required for the payment of such Bonds and premium, if any, and interest thereon with respect to which such money has been so deposited, shall be remitted to the City for deposit to the General Account of the System Account. (c) Continuing Duty of Paying Agent and Registrar. Notwithstanding any provision of any other Section of this First Supplement which may be contrary to the provisions of this Section, all money or Defeasance Securities set aside and held in trust pursuant to the provisions of this Section for the payment of principal of Bonds and premium, if any, and interest thereon, shall be applied to and used solely for the payment of the particular Bonds and premium, if any, and interest thereon, RROCK\UtiSysRevBonds2006: FirstSupplementalResolution 23 with respect to which such money or Defeasance Securities have been so set aside in trust. Until all Defeased Debt shall have become due and payable, the Paying Agent/Registrar for such Defeased Debt shall perform the services of Paying Agent/Registrar for such Defeased Debt the same as if they had not been defeased, and the City shall make proper arrangements to provide and pay for such services as required by this First Supplement. Upon defeasance, the Paying Agent/Registrar shall deliver a certificate of discharge. (d) Amendment of this Section. Notwithstanding anything elsewhere in this First Supplement, if money or Defeasance Securities have been deposited or set aside with the Paying Agent/Registrar for such Bonds or an eligible trust company or commercial bank pursuant to this Section for the payment of Bonds and such Bonds shall not have in fact been actually paid in full, no amendment of the provisions of this Section shall be made without the consent of the registered owner of each Bonds affected thereby. (e) Retention of Rights. Notwithstanding the provisions of subsection (a) of this Section, to the extent that, upon the defeasance of any Defeased Debt to be paid at its maturity, the City retains the right under State law to later call that Defeased Debt for redemption in accordance with the provisions of this First Supplemental Ordinance and the Award Certificate relating to the Defeased Debt, the City may call such Defeased Debt for redemption upon complying with the provisions of State law and upon the satisfaction of the provisions of subsection (a) of this Section with respect to such Defeased Debt as though it was being defeased at the time of the exercise of the option to redeem the Defeased Debt and the effect of the redemption is taken into account in determining the sufficiency of the provisions made for the payment of the Defeased Debt. (f) Bond Counsel Opinion. In connection with the defeasance, nationally recognized bond counsel shall deliver an opinion that the Bonds are no longer outstanding under this First Supplement. Section 7.04. PAYING AGENT/REGISTRAR AGREEMENT AND ESCROW AGREEMENT. The Paying Agent/Registrar Agreement by and between the City and the Paying Agent/Registrar is hereby approved and the Chief Financial Officer is hereby authorized to complete, amend, modify, execute, and deliver such Paying Agent/Registrar Agreement, as necessary. The Escrow Agreement by and between the City and The Bank of New York Trust Company, N.A., as Escrow Agent ("Escrow Agreement") is hereby approved, and the Chief Financial Officer is hereby authorized to complete, amend, modify and execute the Escrow Agreement, as necessary. The Bonds have been purchased by the Texas Water Development Board pursuant to its Resolution No. 06-73, adopted on August 15, 2006, which provides that the Bonds are being purchased pursuant to the pre -design commitment option from the Drinking Water State Revolving Fund and that in accordance therewith the Executive Administrator of the Texas Water Development Board will purchase the Bonds on an installment basis with the proceeds of each such installment delivery to be deposited into the Bond Proceeds Account. Such installments shall be delivered in accordance with the terms of the Escrow Agreement. RROCK\UtilSysRevBonds2006: Fi stSupplementalResolution 24 Section 7.05. FURTHER PROCEDURES. Each Authorized Representative is hereby expressly authorized, empowered, and directed from time to time and at any time to do and perform all such acts and things and to execute, acknowledge, and deliver in the name and under the corporate seal and on behalf of the City all such instruments, whether or not herein mentioned, as may be necessary or desirable in order to carry out the terms and provisions of this First Supplement, each Series of Bonds, the sale and delivery of each Series of Bonds, and fixing all details in connection therewith, and the Paying Agent/Registrar Agreement. In connection with the issuance and delivery of each Series of Bonds, the above -stated officers, with the advice of the City Attorney and Bond Counsel to the City, are hereby authorized to approve, subsequent to the date of the adoption of this First Supplement, any amendments to the above named documents, and any technical amendments to this First Supplement as permitted by Section 6.01 (v) or (vi) and a Authorized Representative is hereby authorized to execute this First Supplement to evidence approval of such changes. Section 7.06. NONPRESENTMENT OF BONDS. If any Bond shall not be presented for payment when the principal thereof becomes due, either at maturity or otherwise, or if the Maturity Amounts of Capital Appreciation Bonds become due, if moneys sufficient to pay such Bond shall have been deposited with the Paying Agent/Registrar, it shall be the duty of the Paying Agent/Registrar to hold such moneys, without liability to the City, any Owner, or any other person for interest thereon, for the benefit of the Owner of such Bond. Any moneys so deposited with and held by the Paying Agent/Registrar due to nonpresentment of Bonds must be retained by the Paying Agent/Registrar for a period of at least two years after the final maturity date of the Bonds or advance refunding date, if applicable. Thereafter, to the extent permitted by the unclaimed property laws of the State, such amounts shall be paid by the Paying Agent/Registrar to the City, free from the trusts created by this First Supplement and Owners shall be entitled to look only to the City for payment, and then only to the extent of the amount so repaid by the Paying Agent/Registrar. Section 7.07. EFFECT OF SATURDAYS, SUNDAYS, AND LEGAL HOLIDAYS. Whenever this First Supplement requires any action to be taken on a Saturday, Sunday, or legal holiday, such action shall be taken on the first business day occurring thereafter. Whenever in this First Supplement the time within which any action is required to be taken or within which any right will lapse or expire shall terminate on a Saturday, Sunday, or legal holiday, such time shall continue to run until midnight on the next succeeding business day. Section 7.08. PARTIAL INVALIDITY. If any one or more of the covenants or agreements or portions thereof provided in this First Supplement on the part of the City should be determined by a court of competent jurisdiction to be contrary to law, then such covenant or covenants, or such agreement or agreements, or such portions thereof, shall be deemed severable from the remaining covenants and agreements or portions thereof provided in this First Supplement and the invalidity thereof shall in no way affect the validity of the other provisions of this First Supplement or of the Bonds, but the Owners of the Bonds shall retain all the rights and benefits accorded to them hereunder and under any applicable provisions of law. RROCK\UtilSysRevBonds2006: FustSupplementalResolution 25 Section 7.09. CONTINUING DISCLOSURE UNDERTAKING. (a) Annual Reports. The City shall provide annually to each NRMSIR and any SID, within six months after the end of each Fiscal Year, financial information and operating data with respect to the Bonds, including financial statements of the City, as determined by the Chief Financial Officer at the time the Bonds are sold. Any financial statements so to be provided shall be (i) prepared in accordance with generally accepted accounting principles or such other Accounting Principles as the City may be required to employ from time to time pursuant to state law or regulation, and (ii) audited, if the City commission an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the City will provide unaudited financial statements and shall provide audited financial statements for the applicable Fiscal Year to each NRMSIR and any SID, when and if the audit report on such statements become available. 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. (b) 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 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 Bonds; G. Modifications to rights of holders of the Bonds; H. Bond calls; I. Defeasances; RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution 26 Release, substitution, or sale of property securing repayment of the 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 7.09(a) of this First Supplement by the time required by such Section. (c) Limitations, Disclaimers, and Amendments. The City shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the City remains an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the City in any event will give notice of any deposit made in accordance with Section 7.03 of this First Supplement that causes the Bonds no longer to be outstanding. The provisions of this Section are for the sole benefit of the Owners and beneficial owners of the Bonds, and nothing in this Section, 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 Section 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 Section 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 Bonds at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE OWNER OR BENEFICIAL OWNER OF ANY 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 SECTION, 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 IN WILLIAMSON COUNTY, TEXAS. No default by the City in observing or performing its obligations under this Section shall comprise a breach of or default under this First Supplement or the Master Ordinance for purposes of any other provision of this First Supplement. Nothing in this Section 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 Section 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 (i) the provisions of this RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution 27 Section, as so amended, would have permitted an underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (ii) either (a) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this First Supplement that authorizes such an amendment) of the outstanding Bonds consents to such amendment or (b) a person that is unaffiliated with the City (such as Bond Counsel) determines that such amendment will not materially impair the interest of the Owners and beneficial owners of the Bonds. If the City so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with Section 7.09(a) an explanation, in narrative form, of the reason 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 continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. The filing of such continuing disclosure information with a central post office approved for such purposes by the SEC, such as Disclosure USA, for submission to the NRMSIRs and SID (without also separately submitting such filings to the NRMSIRs and SID by some other means) will satisfy the City's obligation to file such information with the NRMSIRs and SID so long as such filing is acceptable to the SEC. Section 7.10. CREDIT AGREEMENT. To the extent permitted by law, the City reserves the right to enter into Credit Agreements in connection with the Bonds, upon the written opinion of the Chief Financial Officer that such Credit Agreements are in the best interest of the City given the market conditions at the time. The Credit Agreements will constitute a Credit Agreement as defined in the Master Ordinance. Credit Agreements and the obligations thereunder may, pursuant to their terms, constitute (i) Parity Debt secured by a pledge of the Security on parity with the Bonds and other Parity Debt, (ii) Subordinated Debt secured by a pledge of the Security subordinate to the Bonds and other Parity Debt or (iii) partially Parity Debt and partially Subordinated Debt. Section 7.11. REMEDIES. Any owner ofParity Debt in the event of default in connection with any default in the payment of Annual Debt Service Requirements due in connection with any Parity Debt or other costs and expenses related thereto, may require the City, its officials and employees and any appropriate official of the City, to carry out, respect, or enforce the obligations of the Master Ordinance or this First Supplement, by all legal and equitable means, including specifically, the use and filing of mandamus proceedings and specific performance of any covenant or agreement contained herein, or thereby to enjoin any act or thing that may be unlawful or in violation of any right of the owners hereunder or any combination of such remedies in any court of competent jurisdiction in Williamson County, Texas against the City, its officials and employees or any appropriate official of the City. Section 7.12. RULES OF INTERPRETATION. For purposes of this First Supplement, except as otherwise expressly provided or the context otherwise requires: RROCK\UtilSysRevBonds2006- FirstSupplementalResolution 28 (a) The words "herein," "hereof' and "hereunder" and other similar words refer to this First Supplement as a whole and not to any particular Article, Section, or other subdivision. (b) The definitions in an Article are applicable whether the terms defined are used in the singular or the plural. (c) All accounting terms that are not defined in this First Supplement have the meanings assigned to them in accordance with then applicable accounting principles. (d) Any pronouns used in this First Supplement include both the singular and the plural and cover both genders. (e) Any terms defined elsewhere in this First Supplement have the meanings attributed to them where defined. (0 The captions or headings are for convenience only and in no way define, limit or describe the scope or intent, or control or affect the meaning or construction, of any provisions or sections hereof. (g) Any references to Section numbers are to Sections of this First Supplement unless stated otherwise. Section 7.13. NO PERSONAL LIABILITY. No covenant or agreement contained in the Bonds, this First Supplement or any corollary instrument shall be deemed to be the covenant or agreement of any member of the City or any officer, agent, employee or representative of the City in his individual capacity, and neither the directors, members, officers, agents, employees or representatives of the City nor any person executing the Bonds shall be personally liable thereon or be subject to any personal liability for damages or otherwise or accountability by reason of the issuance thereof, or any actions taken or duties performed in relation to the issuance of the Bonds, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability being expressly released and waived as a condition of and in consideration for the issuance of the Bonds. Section 7.14. PAYMENT OF ATTORNEY GENERAL FEE. The City hereby authorizes the disbursement of a fee equal to the lesser of (i) one-tenth of one percent of the principal amount of the Bonds of each Series or (ii) $9,500 per Series, provided that such fee shall not be less than $750, to the Attorney General of Texas Public Finance Division for payment of the examination fee charged by the State of Texas for the Attorney General's review and approval of public securities and credit agreements, as required by Section 1202.004 of the Texas Government Code. The Authorized Representative is hereby instructed to take the necessary measures to make this payment. The City is also authorized to reimburse the appropriate City funds for such payment from proceeds of the Bonds of each Series. Section 7.15. COMPLIANCE WITH THE TEXAS WATER DEVELOPMENT BOARD'S RULES AND REGULATIONS. (a) General. The City covenants to comply with the RROCK\UtilSysRevBonds2006: FirstSupplementalResolution 29 rules and regulations of the Texas Water Development Board, and to maintain insurance on the District's System in that amount required by the Texas Water Development Board. (b) Final Accounting. The City shall render a final accounting to the Texas Water Development Board in reference to the total cost incurred by the City for the improvements and extensions to the System together with a copy of "as built" plans of the project upon completion. (c) Surplus Bond Proceeds. The City shall use any surplus proceeds from the Bonds remaining after completion of the Utility System improvements, to redeem in inverse annual order of maturity, the Bonds owned by the Texas Water Development Board or in any other manner approved by the Texas Water Development Board or its Executive Administrator. Any remaining surplus thereafter shall be transferred to the credit of the Interest and Sinking Account or expended in any other manner approved by the Texas Water Development Board or its Executive Administrator. (d) Annual Reports. At the end of each fiscal year (and in no event later than 120 days), annual audits of the City shall be delivered to the Texas Water Development Board as long as the State owns any of the Bonds. RROCK\UtilSysRevnonds2006: FissstSupplementalResolution 30 IN ACCORDANCE WITH SECTION 1201.028, Texas Government Code, passed and approved on the first and final reading on the 14th day of September, 2006. Mayor ,!!� City of ' . _ d Rock, xas ATTEST: 1.A.At Christine Martinez, City Secretary [SEAL] Authorized Rsentative FirstSupplementSigPg EXHIBIT A DEFINITIONS As used in this First Supplement, the following terms shall have the meanings set forth below, unless the text hereof specifically indicates otherwise: "Authorized Denominations" - Means (i) for Current Interest Bonds, $5,000 or any integral multiple thereof or (ii) for Capital Appreciation Bonds, $5,000 in Maturity Amount or any integral multiple thereof. "Authorized Representative" - Means the City Manager, Assistant City Manager/Chief Financial Officer or such other individuals so designated by the City to perform the duties of an Authorized Representative under this First Supplement. "Award Certificate" - The Award Certificate of the Chief Financial Officer to be executed and delivered pursuant to Section 2.02(b) hereof in connection with each Series of Bonds. "Bonds" - The Bonds issued pursuant to and governed by this First Supplement, as described in Article II hereof which includes the Series 200 Bonds, the Current Interest Bonds and Capital Appreciation Bonds, as applicable, in accordance with the Award Certificate. "Bond Insurer" - One or more companies, if any, insuring all or any portion of any Series of Bonds (or any portion thereof) or any successor thereof or assignee thereof as set forth in any Award Certificate. "Capital Appreciation Bonds" - The Bonds on which no interest is paid prior to maturity, maturing variously in each of the years and in the aggregate principal amount as set forth in an Award Certificate. "Chief Financial Officer" - Means the Chief Financial Officer of the City, Finance Director or such other officer or employee of the City or such other individual so designated by the City to perform the duties of Chief Financial Officer under this First Supplement. "Compounded Amount" - With respect to a Capital Appreciation Bond, as of any particular date of calculation, the original principal amount thereof, plus initial premium, if any, plus all interest accrued and compounded to the particular date of calculation, as determined in accordance with Section 2.02 of this First Supplement and the Compounded Amount Table relating to such Bonds. "Compounded Amount Table" - With respect to the Capital Appreciation Bonds, the table attached as an exhibit to the Award Certificate relating to the Bonds that shows the Compounded Amounts per $5,000 Maturity Amount on the Compounding Dates for each maturity to its Maturity. "Compounding Dates" - Compounding Dates as defined in Section 2.02 of this First Supplement. RROCK\UtilSysRevBonds2006: FirstSupplementalResoluuon A-1 "Current Interest Bonds" - The Bonds paying current interest and maturing in each of the years and in the aggregate principal amounts set forth in an Award Certificate. "Defeasance Securities" - Means (i) Federal Securities, (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the City adopts or approves proceedings authorizing the issuance of refunding bonds or otherwise provide for the funding of an escrow to effect the defeasance of Bonds are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, and (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 City adopts or approves proceedings authorizing the issuance of refunding bonds or otherwise provide for the funding of an escrow to effect the defeasance of Bonds, are rated as to investment quality by a nationally recognized investment rating firm no less than "AAA" or its equivalent. "DTC" - The Depository Trust Company, New York, New York, or any successor securities depository. "DTC Participant" - Securities 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. "Escrow Agreement" - The agreement authorized by Section 7.04 of this First Supplement. "Federal Securities" - Direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America (including Interest Strips of the Resolution Funding Corporation). "First Supplement" - This First Supplemental Ordinance, which was adopted pursuant to authority reserved by the City under the Master Ordinance. "Fixed Rate Bonds" - The Bonds of a Series bearing interest at fixed, nonvariable interest rate(s), as established in accordance with Section 2.02 of this First Supplement and the Award Certificate. "Issuance Date" - The date of delivery of a Series of Bonds to the initial purchaser(s) thereof against payment therefor. "Master Ordinance" - The "Master Ordinance Establishing the Utility System Revenue Financing Program," adopted by the City on September 14, 2006, as may be amended or supplemented from time to time. "Maturity" - When used with respect to the Bonds, the scheduled maturity of the Bonds. RROCK\UtilSysRevBonds2006: FirstSupplementalResolution A-2 "Maturity Amount" - The Compounded Amount of a Capital Appreciation Bond due on its Maturity. "Maximum Rate" - A net effective interest rate (as defined in and calculated in accordance with the provisions of the Chapter 1204, Texas Government Code, as amended not to exceed fifteen percent (15%)). "MSRB" - The Municipal Securities Rulemaking Board. "NRMSIR" - 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. "Owner" - The registered owners of the Bonds as shown on the Security Register and to the extent set forth in a Credit Agreement relating to the Bonds, the party contracting with the City under a Credit Agreement. "Paying Agent" - The agent selected and appointed by the City for purposes of paying the principal of, premium, if any, and interest on the Bonds to the Owners thereof, as identified in Section 2.03 hereof and any successor to such agent. "Paying Agent/Registrar" - Collectively, the Paying Agent and the Registrar designated in Section 2.03 of this First Supplement or any successor to such agent. "Paying Agent/Registrar Agreement" - The agreement having such name executed by and between the City and the Paying Agent/Registrar. "Predecessor Bonds" - Predecessor Bonds as defined in Section 2.05(a) hereof. "Rebate Fund" - The fund by that name described in Section 4.02 hereof. "Record Date" - With respect to each interest payment date of a Current Interest Bond, the date as determined in the respective Award Certificate. "Registrar" - The agent selected and appointed by the City for purposes of keeping and maintaining books and records relating to the registration, transfer, exchange, and payment of the Bonds and interest thereon, as identified in Section 2.03 hereof and any successor to such agent. "Reserve Fund" - The fund that was described in Section 4.04 hereof. "Reserve Fund Obligation" - Means, to the extent permitted by law, as evidenced by an opinion of nationally recognized bond counsel, a surety bond or insurance policy deposited in the Reserve Fund to satisfy the Required Reserve Amount 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. RROCK\UtilSysRevBonds2006' FtrstSupplementalResolution A-3 "Rule" - SEC Rule 15c2-12, as amended from time to time. "SEC" - The United States Securities and Exchange City. "Section" - Unless the context clearly requires otherwise, refers to a Section of this First Supplement. "Security Register" - The books and records kept and maintained by the Registrar relating to the registration, transfer, exchange, and payment of the Bonds and the interest thereon. "Series" - A separate series of Bonds as specified by or pursuant to the terms of this First Supplement. "SID" - Any person designated by the State 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. RROCK\Uti1SysRevBonds2006: FirstSupplementalResolution A-4 EXHIBIT B FORM OF BONDS UNITED STATES OF AMERICA STATE OF TEXAS COUNTIES OF WILLIAMSON AND TRAVIS CITY OF ROUND ROCK, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 200 [FORM OF FIRST PARAGRAPH OF CURRENT INTEREST BOND] No. R- $ ORIGINAL BOND ISSUE INTEREST MATURITY DATE: DATE: RATE: DATE: REGISTERED OWNER: CUSIP: PRINCIPAL AMOUNT: DOLLARS The City of Round Rock, Texas (the "City"), being a political subdivision and municipal corporation of the State of Texas, hereby promises to pay, solely from the sources hereinafter identified and as hereinafter stated, to the Registered Owner named above, or the registered assigns thereof, the Principal Amount specified above on the Maturity Date specified above and to pay interest on the unpaid principal amount hereof from the Original Issue Date* specified above at the per annum rate of interest specified above computed on the basis of a 360 -day year of twelve 30 -day months; such interest being payable on * and * of each year, commencing *. Principal of this Bond shall be payable to the Registered Owner hereof, upon presentation and surrender, at the designated office of the Paying Agent/Registrar named in the registration certificate appearing hereon, or its successor. Interest shall be payable to the Registered Owner of this Bond whose name appears on the "Security Register" maintained by the Paying Agent/Registrar at the close of business on the "Record Date," which is the * day of the month next preceding each interest payment date. All payments of principal of, premium, if any, and interest on this Bond shall be payable in lawful money of the United States of America, without exchange or collection charges, and interest payments shall be made by the Paying Agent/Registrar by check sent on or before the appropriate date of payment, by United States mail, first-class postage prepaid, *As provided in the Award Certificate. To the extent that the Award Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete missing information in this Form of Bond, the language in the Award Certificate shall be used in the executed Bonds. RROCK\UtilSysRevBonds2006: FirstSupplementalResolution B-1 to the Registered Owner hereof at the address appearing in the Security Register or by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the Registered Owner hereof In addition, so long as the Texas Water Development Board is the owner of the Bonds, payments made to the Texas Water Development Board shall be made by wire transfer without costs to the Texas Water Development Board. [FORM OF FIRST TWO PARAGRAPHS OF CAPITAL APPRECIATION BOND] No. CR- $ ISSUANCE INTEREST MATURITY DATE: RATE: DATE: REGISTERED OWNER: CUSIP: MATURITY AMOUNT: DOLLARS On the Maturity Date specified above, the City of Round Rock, Texas (the "City") hereby promises to pay, solely from the sources hereinafter identified and as hereinafter stated, to the Registered Owner set forth above, or the registered assigns thereof, the Maturity Amount specified above, representing the original principal amount hereof and accrued and compounded interest hereon. Interest shall accrue on the principal amount hereof plus initial premium, if any, from the Issuance Date at the interest rate per annum specified above, compounded semiannually on * and * of each year commencing The Maturity Amount on this Bond shall be payable in lawful money of the United States of America, without exchange or collection charges, and interest payments shall be made by the Paying Agent/Registrar by check sent on or before the appropriate date of payment, by United States mail, first-class postage prepaid, to the Registered Owner hereof at the address appearing in the Security Register or by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the Registered Owner hereof. For convenience of reference, a table appears on the back of this Bond showing the "Compounded Amount" of the original principal amount plus initial premium, if any, per $5,000 Maturity Amount stated above compounded semiannually at the yield shown on such table. In addition, so long as the Texas Water Development Board is the owner of the Bonds, payments made to the Texas Water Development Board shall be made by wire transfer without costs to the Texas Water Development Board. 'As provided in the Award Certificate. To the extent that the Award Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete missing information in this Form of Bond, the language in the Award Certificate shall be used in the executed Bonds. RROCK\UtilSysRevBonds2006: FirstSupplementalResolution B-2 [REMAINDER OF EACH BOND] This Bond is one of a duly authorized issue of bonds designated as "City of Round Rock, Texas Utility System Revenue Bonds, Series 20" (the "Bonds"), in the aggregate principal amount of $ issued pursuant to the laws of the State of Texas, including specifically the Enabling Act and Chapter 1371, Texas Government Code, as amended (collectively, the "Acts"), and initially under and pursuant to an ordinance of the City adopted on , 2006, and entitled First Supplemental Ordinance to the Master Ordinance Authorizing the Texas Transportation City Mobility Fund Revenue Financing Program (the "First Supplement") for the purpose of (i) paying costs of acquiring, purchasing, constructing, improving, renovating, enlarging or equipping the City's Utility System and (ii) paying the costs of issuing such Bonds. The Bonds are secured by a first lien on and pledge of the Security as defined in the Master Ordinance adopted on , 2006 (the "Master Ordinance"), on a parity with all other Parity Debt (as defined in the Master Ordinance and the First Supplement). The Master Ordinance, as supplemented by the First Supplement, is referred to in this Bond as the "Ordinance." Terms used herein and not otherwise defined shall have the meanings given in the Ordinance. *[The Bonds are issued in part as "Current Interest Bonds," which total in principal amount $ *` and which pay accrued interest at stated intervals to the Registered Owners and in part as "Capital Appreciation Bonds," which total in original principal amount $ and pay no accrued interest prior to their Stated Maturities.] Redemption Provisions [As provided in the Award Certificate] ** Notice of redemption shall be given at the times and in the manner provided in the First Supplement. If this Bond is in a denomination in excess of $5,000, portions of the principal sum hereof in ***[principal amount] **"[Maturity Amount] of $5,000 or any integral multiple thereof may be redeemed, and, if less than all of the principal sum hereof is to be redeemed, there shall be issued, without charge therefor, to the Registered Owner hereof, upon the surrender of this Bond at the *To be included with respect to a Series of Bonds only if Current Interest Bonds and Capital Appreciation Bonds are both issued. **As provided in the Award Certificate. To the extent that the Award Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete missing information in this Form of Bond, the language in the Award Certificate shall be used in the executed Bonds. ** Current Interest Bonds only. Capital Appreciation Bonds only. RROCK\Uti1SysRevBonds2006: FvstSupplementalResolution B-3 principal office of the Paying Agent/Registrar, a new Bond or Bonds of like maturity, series and interest rate in any authorized denominations provided by the Resolution for the then unredeemed balance of the "[principal amount] ***[Maturity Amount] hereof. If this Bond is selected for redemption, in whole or in part, neither the City nor the Paying Agent/Registrar shall be required to transfer this Bond to an assignee of the Registered Owner within forty-five (45) days of the redemption date therefor; provided, however, such limitation on transferability shall not be applicable to any exchange by the Registered Owner of the unredeemed balance hereof in the event of its redemption in part. So long as the Texas Water Development Board owns the Bonds, the City shall use any surplus proceeds after completion of the project to redeem Bonds in inverse annual order of maturity to the nearest multiple of $5,000 at a price of par plus accrued interest to the date of redemption or in any other manner approved by the Texas Water Development Board or its Executive Administrator. Any remaining surplus thereafter shall be transferred to the credit of the Interest and Sinking Account or expended in any other manner approved by the Texas Water Development Board or its Executive Administrator. The Bonds are special obligations of the City, payable solely from and equally secured by a first lien on and pledge of the Security. The Bonds do not constitute a legal or equitable pledge, charge, lien, or encumbrance upon any property of the City, except with respect to the Security. The pledge of the Security and the other obligations of the City under the Ordinance may be discharged at or prior to the maturity of the Bonds upon the making of provision for their payment on the terms and conditions set forth in the Ordinance. Subject to satisfying the terms and conditions stated in the Ordinance, the City has reserved the right to issue additional Parity Debt payable solely from and equally and ratably secured by a .parity lien on and pledge of the Security and other moneys and securities pledged under the Resolution to the payment of the Bonds. Reference is hereby made to the Ordinance, a copy of which is on file in the designated office of the Paying Agent/Registrar, and to all of the provisions of which any Registered Owner of this Bond by his acceptance hereof hereby assents, for definitions of terms; the description of and the nature and extent of the security for the Bonds; the Security; the nature and extent and manner of enforcement of the pledge; the terms and conditions for the issuance of additional Parity Debt; the conditions upon which the Ordinance may be amended or supplemented with or without the consent of the Registered Owners of the Bonds; the rights and remedies of the Registered Owner hereof with respect hereto and thereto; the rights, duties and obligations of the City; the terms and provisions upon which the liens, pledges, charges, and covenants made therein may be discharged at or prior to the maturity or redemption of this Bond and this Bond thereafter no longer to be secured by the Ordinance or be deemed to be outstanding thereunder; and for the other terms and provisions thereof. This Bond, subject to certain limitations contained in the Ordinance, may be transferred only upon its presentation and surrender at the designated office of the Paying Agent/Registrar named RROCK\UtilSysRevBonds2006: FirstSupplementalResolution B-4 below, or its successor with the Assignment hereon duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Paying Agent/Registrar duly executed by, the Registered Owner hereof, or his duly authorized agent, and such transfer is noted on the Security Register by the Paying Agent/Registrar. When a transfer occurs, one or more new fully -registered Bonds of the same Maturity, of authorized denominations, bearing the same rate of interest, and of the same aggregate *[principal amount] +*[Maturity Amount] will be issued to the designated transferee or transferees. The City and the Paying Agent/Registrar, and any agent of either, shall treat the Registered Owner whose name appears on the Security Register (i) on the Record Date as the owner entitled to payment of interest hereon, (ii) on the date of surrender of this Bond as the owner entitled to payment of *[principal] **[the Maturity Amount] hereof at its Maturity or its redemption, in whole or in part, and (iii) on any other date as the owner for all other purposes, and neither the City nor the Paying Agent/Registrar, nor any agent of either, shall be affected by notice to the contrary. In the event of nonpayment of interest on a scheduled payment date and for thirty (30) days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Registered Owner appearing on the Security Register at the close of business on the last business day next preceding the date of mailing of such notice. It is hereby certified, recited, represented, and declared that the City is a duly organized and legally existing home -rule city, organized under and by virtue of the Constitution and laws of the State of Texas; that the issuance of this Bond and the series of which it is a part are duly authorized by law; that all acts, conditions, and things required to exist and be done precedent to and in the issuance of this Bond to render the same lawful and valid have been properly done, have happened, and have been performed in regular and due time, form, and manner as required by the Constitution and laws of the State of Texas and the Ordinance; that this series of bonds does not exceed any Constitutional or statutory limitation; and that due provision has been made for the payment of this Bond and the Series of which it is a part as aforestated. In case any provision in this Bond shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The terms and provisions of this Bond and the Ordinance shall be construed in accordance with and shall be governed by the laws of the State of Texas. IN TESTIMONY WHEREOF, the City has caused its seal to be impressed or a facsimile thereof to be printed hereon and this Bond to be executed in the name of and on behalf of the City with the manual or facsimile signatures of its Mayor, and attested by the City Secretary. *Current Interest Bonds only. Capital Appreciation Bonds only. RROCK\UUISysRevBonds2006: FirstSupplementalResolution B-5 CITY OF ROUND ROCK, TEXAS By: By: City Secretary Mayor (SEAL) [INSERTIONS FOR THE INITIAL BOND] The Initial Bond shall be in the form set forth in this exhibit, except that: A. Immediately under the name of the Bond, the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the words "As shown below", and the heading "CUSIP NO." shall be deleted. B. The first paragraph of the Current Interest Bond shall be deleted and the following will be inserted (with all blanks and bracketed items to be completed with information contained in the Award Certificate): "The City of Round Rock, Texas (the "City") hereby promises to pay, solely from the sources hereinafter identified and as hereinafter stated, to the Registered Owner named above, or the registered assigns thereof, on * in each of the years, in the principal installments and bearing interest at the per annum rates set forth in the following schedule: Principal Amount Maturity Date Interest Rate (Information from Award Certificate to be inserted) The City promises to pay interest on the unpaid principal amount hereof from the [Issuance Date] [Bond Date] specified above at the respective per annum rate of interest specified above computed on the basis of a 360 -day year of twelve 30 -day months; such interest being payable on * and * of each year, commencing , '. Principal of this Bond shall be payable to the Registered Owner hereof, upon presentation and surrender, at the principal office of the Paying Agent/Registrar named in the registration certificate appearing hereon, or its successor. Interest shall be payable to the Registered Owner of this Bond whose name appears on the "Security "As determined in the Award Certificate. To the extent that the Award Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete missing information in this Form of Bond, the language in the Award Certificate shall be used in the executed Bonds. RROCK\UtilSysRevBonds2006: FirstSupplementalResolution B-6 Register" maintained by the Paying Agent/Registrar at the close of business on the "Record Date," which is the `. All payments of principal of, premium, if any, and interest on this Bond shall be payable in lawful money of the United States of America, without exchange or collection charges, and interest payments shall be made by the Paying Agent/Registrar by check sent on or before the appropriate date of payment, by United States mail, first-class postage prepaid, to the Registered Owner hereof at the address appearing in the Security Register or by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the Registered Owner hereof." C. The first two paragraphs of the Capital Appreciation Bond shall be deleted and the following will be inserted (with all blanks and bracketed items to be completed with information contained in the Award Certificate): "On the respective Maturity Dates set forth in the following schedule, the City of Round Rock, Texas (hereinafter referred to as the "City")hereby promises to pay, solely from the sources hereinafter identified and as hereinafter stated, to the Registered Owner set forth above, or the registered assigns thereof, the respective Maturity Amounts set forth in the following schedule: Maturity Dates Maturity Amounts Interest Rates (Information from Award Certificate to be inserted) The respective Maturity Amounts specified above, represent the original principal amounts hereof and accrued and compounded interest thereon. Interest shall accrue on the principal amounts hereof from the Issue Date at the interest rate per annum specified above, compounded semiannually on * and * of each year commencing `. The respective Maturity Amounts on this Bond shall be payable in lawful money of the United States of America, without exchange or collection charges, and interest payments shall be made by the Paying Agent/Registrar by check sent on or before the appropriate date of payment, by United States mail, first-class postage prepaid, to the Registered Owner hereof at the address appearing in the Security Register or by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the Registered Owner hereof. For convenience of reference, a table appears on the back of this Bond showing the "Compounded Amount" of the original principal amount plus initial premium, if any, per $5,000 Maturity Amount stated above compounded semiannually at the yield shown on such table." D. The Initial Bond for a Current Interest Bond shall be numbered "T-1", and the Initial Bond for a Capital Appreciation Bond shall be numbered "TCR -1". 'As determined in the Award Certificate. To the extent that the Award Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete missing information in this Form of Bond, the language in the Award Certificate shall be used in the executed Bonds. RROCK\UtilSysRevBonds2006: FirstSupplementalResolution B-7 Form of Registration Certificate of Comptroller of Public Accounts to Appear on Initial Bond only. REGISTRATION CERTIFICATE OF COMPTROLLER OF PUBLIC ACCOUNTS OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS THE STATE OF TEXAS REGISTER NO. 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 duly registered by the Comptroller of Public Accounts of the State of Texas. WITNESS my signature and seal of office this (SEAL) Comptroller of Public Accounts of the State of Texas AUTHENTICATION CERTIFICATE OF PAYING AGENT/REGISTRAR This Bond has been duly issued and registered under the provisions of the within -mentioned Resolution; the bond or bonds of the above titled and designated series originally delivered having been approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts, as shown by the records of the Paying Agent/Registrar. Registered this date: RROCK\UtilSysRevBonds2006: FirstSupplementalResolution THE BANK OF NEW YORK TRUST COMPANY, N.A., as Paying Agent/Registrar By: Authorized Signature B-8 Form of Assignment. ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto (Please insert Social Security or Taxpayer Identification Number of Transferee) (Please print or typewrite name and address, including zip code, of Transferee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints attorney, to transfer the within Bond on the books kept for registration thereof, with full power of substitution in the premises. DATED: Signature guaranteed by: NOTICE: The signature on this assignment must correspond with the name of the Registered Owner as it appears on the face of the within Bond in every particular. [INSURANCE LEGEND IF APPLICABLE] RROCK\UtilSysRevBonds2006- FirstSupplementalResolution B-9 DATE: September 6, 2006 SUBJECT: City Council Meeting - September 14, 2006 ITEM: 10.A.4. Consider an ordinance adopting the First Supplemental Ordinance to the Master Ordinance establishing the City of Round Rock, Texas Utility System Revenue Financing Program. (First Reading) res Department: Finance Staff Person: Cindy Demers, Finance Director Justification: The first series of obligations being issued under the new Master Ordinance are being issued pursuant to the First Supplemental Ordinance as they relate to the Texas Water Development Board loan for up to $12,000,000. The Master Ordinance is the main governing document and the City must comply with the provisions of the Master Ordinance in connection with the issuance of any debt payable from the net revenues of the Utility System. Each series of debt obligations will be issued pursuant to a supplemental ordinance, which supplements the Master Ordinance. Funding: Cost: N/A Source of funds: N/A Outside Resources: McCall, Parkhurst & Horton, L.L.P Background Information: N/A Public Comment: N/A GENERAL AND NO -LITIGATION CERTIFICATE THE STATE OF TEXAS COUNTIES OF WILLIAMSON AND TRAVIS CITY OF ROUND ROCK We, the undersigned officers of the City, hereby certify as follows: GENERAL 1. This certificate is executed for and on behalf of the City, for the benefit of the Attorney General of the State of Texas and for the benefit of the Texas Water Development Board ("TWDB") in connection with the issuance of the Obligations. The words and terms used herein shall have the meanings whenever they are used given in Exhibit "A" attached hereto. 2. Any certificate signed by an official of the City delivered to the TWDB or the Attorney General of the State of Texas shall be deemed a representation and warranty by the City as to the statement made therein. The Public Finance Division of the Office of the Attorney General of the State of Texas is hereby authorized to date this certificate as of the date of approval of the Certificates and is entitled to rely upon the accuracy of the information contained herein unless notified by telephone or fax to the contrary. The Comptroller of Public Accounts is further authorized to register the Certificates upon receipt of the Attorney General approval. After registration, the Certificates, opinions and registration papers shall be delivered to C. D. Polumbo at McCall, Parkhurst & Horton L.L.P. MATTERS RELATING TO THE CITY 3. The City is a duly incorporated home rule city, operating and existing under the Texas Constitution and laws of the State of Texas, including its Charter which has not been amended since the issuance by the City of its last series of obligations. 4. No litigation of any nature has ever been filed pertaining to, affecting or contesting: (a) the Ordinance; (b) the issuance, delivery, payment, security or validity of the Obligations; (c) the authority of the governing body and the officers of the City to issue, execute and deliver the Obligations; (d) the validity of the corporate existence ofthe City; (e) the current tax rolls of the City; and that no litigation is pending pertaining to, affecting, questioning or contesting the current boundaries of the City. 5. Neither the corporate existence nor boundaries of the City is being contested, no litigation has been filed or is now pending which would affect the authority of the officers of the City to issue, execute, sign and deliver the Obligations, and that no authority or proceedings for the issuance of the Obligations have been repealed, revoked or rescinded. RROCKlAiISysRevBondsTWDB2006- GENNOLIT Cat 6. We officially executed and signed the Obligations with our manual signatures or by causing facsimiles of our manual signatures to be imprinted or copied on each of the Certificates, and, if appropriate, we hereby adopt such facsimile signatures as our own, respectively, and declare that such facsimile signatures constitute our signatures the same as if we had manually signed each of the Obligations. 7. The Obligations are substantially in the form, and have been duly executed and signed in the manner, prescribed in the Ordinance. 8. At the time we so executed and signed the Obligations we were, and at the time of executing this certificate we are, the duly chosen, qualified and acting officers indicated therein, and authorized to execute the same. 9. We have caused the official seal of the City to be impressed, or printed, or copied on the Obligations and such seal on the Obligations has been duly adopted as, and is hereby declared to be, the official seal of the City. 10. That none of the revenues or income of the City's System have been pledged or encumbered to the payment of any debt or obligation of the City or the System. 11. A true and correct copy of the City's current water and sewer rate charges are attached hereto as Exhibit "B". 12. A true, full and correct schedule of the income and expenses of the System for the past three years is attached hereto as Exhibit "C". 13. The true and correct schedule showing the annual requirements of all the outstanding System revenue indebtedness of the City is set forth in Exhibit "D" hereto. 14. On September 14, 2006, and at all times since such date the persons set forth in Exhibit "E" have held and now hold the positions with the City shown opposite their names and the signature appearing beside each name set froth in Exhibit "E" is such person's genuine signature and each person is an Authorized Representative under the Master Ordinance and the First Supplement. [The Remainder of this Page is Intentionally Left Blank] RROCKUtiISysRevBond, WDB2006: GENNOI.R' Cat 2 SIGNED AND SEALED this R City Secretary Autunot Before me, on this day personally appeared the foregoing individuals, known to me to be the officers whose true and genuine signatures were subscribed to the foregoing instrument in my presence. Given under my hand and seal of office this S =- f- mQ I I a 0(D, (, (Notary Seal) RROCKUtilSysRevBandsTWDB2006. GENNOLIT Cut 4J2-)3 t -i N• ary Public EXHIBIT A DEFINITIONS Bonds - City of Round Rock, Texas Utility System Revenue Bonds, Series 2006 City - City of Round Rock, Texas. City Council - The City Council of the City. Closing - October 11, 2006 or at such other time agreed upon between the City and the TWDB. Obligations - Collectively, the Bond and the Certificates. Ordinance - RROCKUtiISysRevBoodsiWDB2006: GENNOIIF Cert The Master Ordinance Establishing the City of Round Rock, Texas Utility System Revenue Financing Program and .First Supplemental Ordinance to the Master Ordinance Establishing the City of Round Rock, Texas Utility System Revenue Financing Program. A- I EXHIBIT B CURRENT WATER AND SEWER RATE CHARGES RROCKUtilSysRevBo,ds WDB2006. GFNNOLR Cat B-1 ORDINANCE NO. G -0540-13 -q 131 AN ORDINANCE AMENDING CHAPTER 10, SECTIONS 10.201 AND 10.202, CODE OF ORDINANCES (1995 EDITION), CITY OF ROUND ROCK, TEXAS, AMENDING WATER AND WASTEWATER UTILITY RATES; PROVIDING FOR A SAVINGS CLAUSE AND REPEALING CONFLICTING ORDINANCES OR RESOLUTIONS. BE IT ORDAINED BY THE COUNCIL OF THE CITY OF ROUND ROCK, TEXAS, THAT: I. That Chapter 10, Section 10.201(6), Code of Ordinances (1995 Edition), City of Round Rock is hereby amended to read as follows: (6) Water Rates for Retail Customers (a) Except as provided below, the following schedule of monthly rates or charges for retail commercial and residential services furnished by the City's water system shall be and such is hereby adopted and established as follows: (i) Volume Rates 1. The water rate for retail Customers shall be $1.96 per 1,000 gallons of water used. 2. Effective January 1, 2006, the water rate for retail Customers shall be $2.02 per 1,000 gallons of water used. (ii) Monthly Service Charge Except as provided below, in addition to the foregoing rates, each Customer shall also pay a monthly water service charge pursuant to the following schedule regardless of the amount of water used. Meter Size % inch 14 inch 1 inch 1% inch 2 inch 3 inch 4 inch evFDeskcop\ODKA/RORi.DOk/0,/11DOX/ORDLDIRC/ogO22A4.WPD/bbr Current Monthly Service Monthly Service Charge Effective Charge January 1 2006 $11.72 16.33 25.78 49.40 77.75 143.90 238.40 $ 11.95 16.66 26.30 50.39 79.31 146.78 243.17 6 inch 8 inch 10 inch 12 inch 758.15 1,325.15 2,081.15 2,553.65 758.15 1,325.15 2,081.15 2,553.65 II. That Chapter 10, Section 10.202(1), Code of Ordinances (1995 Edition), City of Round Rock is hereby amended to read as follows: (1) Sewer Rates for Retail Customers (a) Inside City Limits: The rate schedule for retail customers of the City's sanitary sewer system shall be hereinafter set forth. (i) Volume Rates 1. The sewer rate for retail Customers shall be $2.26 per 1,000 gallons of water used for all users. 2. Effective January 1, 2006, the sewer rate for retail Customers shall be $2.48 per 1,000 gallons of water used. (ii) Monthly Service Charge Except as provided below, in addition to the foregoing rates, each Customer shall also pay a monthly sewer service charge pursuant to the following schedule regardless of the amount of water used. Meter Size Current Monthly Service Monthly Service Charge Effective Charge January 1.2006 5/8" $9.08 $9.72 3/4" 11.85 12.68 1" 17.00 18.19 11/2" 31.00 33.17 2" 47.80 51.15 3" 87.00 93.09 4" 143.00 153.01 6" 451.00 451.00 8" 787.00 787.00 10" 1,235.00 1,235.00 12" 1,515.00 1,515.00 2 A. All ordinances, parts of ordinances, or resolutions in conflict herewith are expressly repealed. B. The invalidity of any section or provision of this ordinance shall not invalidate other sections or provisions thereof. C. The City Council hereby finds and declares that written notice of the date, hour, place and subject of the meeting at which this Ordinance was adopted was posted and that such meeting was open to the public as required by law at all times during which this Ordinance and the subject matter hereof were discussed, considered and formally acted upon, all as required by the Open Meetings Act, Chapter 551, Texas Government Code, as amended. READ and APPROVED on first reading this the 0(aC., day of , 2005. READ, APPROVED and ADOPTED on second reading this the 13 day of Oet, 2005. ATTEST: Auttiwie NYLE L, ayor Cit o Round Rock, Texas CHRISTINE R. MARTINEZ, City Secre 3 RROCKUtiISysRevBondsPNDB2006: GENNOIdf Cert EXHIBIT C INCOME AND EXPENSES OF THE SYSTEM C-1 City of Round Rock, Texas Combining Statement of Revenues, Expenses, and Changes in Retained Earnings/ Fund Net Assets 2003 2004 2005 Operating revenues Charges for services $24,002,196 $24,962,107 $27,161,741 Total operating revenues $24,002,196 $24,962,107 $24,161,741 Operating expenses - Personal Services $4,990,402 $5,385,325 $5,780,578 Contractual services $7,520,158 $8,002,443 59,193,766 Supplies $653,221 $618,519 $780,862 Materials $775,788 $923,823 $756,059 Heat, light and power $1,270,889 $1,427,724 $1,817,816 Bad debts $117,911 $109,566 $123,372 Depreciation $4,876,702 $6,039,195 $6,732,231 Total operating expenses $20,205,071 $22,506,595 $25,184,684 Operating income $3,797,125 $2,455,512 $1,977,057 Non-operating revenues (expenses) Investment and other revenues $893,526 $620,906 $1,035,603 Other non-operating expenses Interest and fiscal charges ($179,505) ($130,428) ($82,805) Total non-operating revenues (expenses) $714,021 $490,478 $952,798 Income before operating transfers $4,511,146 $2,945,990 $2,929,855 Contributions and transfers - Contributions -impact fees $6,215,734 $5,810,326 $8,648,921 Contributions -other $98,866 $823,755 $1,162,145 Developer contributions -infrastructure $9,206,954 $7,874,205 $6,165,506 Operating transfers (out) ($1,798,013) ($2,295,474) ($2,341,964) Total contributions and transfers $13,723,541 $12,212,812 $13,634,608 Change in net assets $18,234,687 $15,158,802 $16,564,463 Beginning fiscal year net assets $166,396,201 5184,630,888 $199,789,690 Ending fiscal year net assets $184,630,888 $199,789,690 $216,354,153 Number of customers 23,822 25,400 26,650 RROCKUtilSysRevBonds1WDB2006: GENNOUII Cot EXHIBIT D COMBINED DEBT SERVICE SCHEDULE D-1 EXHIBIT E AUTHORIZED REPRESENTATIVES Jim Nuse, P.E. City Manager David Kautz, Assistant City Manager/CFO Cindy Demers Finance Director RROCKUtiiSysRevBondsTWDB2006: GENNOLR Ca[ E-1 FEDERAL TAX CERTIFICATE In General. 1.1. The undersigned is the Mayor of the City of Round Rock, Texas (the "Issuer"). 1.2. This Certificate is executed for the purpose of establishing the reasonable expectations of the Issuer as to future events regarding the Issuer's Utility System Revenue Bonds, Series 2006 (the "Bonds"). The Bonds are being issued pursuant to an ordinance of the Issuer (the "Ordinance") adopted on the date of sale of the Bonds. The Ordinance is incorporated herein by reference. 1.3. To the best of the undersigned's knowledge, information and belief, the expectations contained in this Certificate are reasonable. 1.4. The undersigned is an officer of the Issuer delegated with the responsibility of issuing and delivering the Bonds. 1.5. The undersigned is not aware of any facts or circumstances that would cause him to question the accuracy of the representations made by First Southwest Company (the "Financial Advisor") in Section 5.3 of this Certificate. 2. The Purpose of the Bonds and Useful Lives of Projects. 2.1. The Bonds are being issued pursuant to the Ordinance (a) to provide for the payment of costs of issuing the Bonds, and (b) to acquire, purchase, construct, improve, renovate, enlarge or equip the Issuer's utility system (the "Projects"). 2.2. The Issuer expects that the aggregate useful lives of the Projects exceed 28 years from the later of the date the Projects are placed in service or the date on which the Bonds are issued. 2.3. All earnings, such as interest and dividends, received from the investment of the proceeds of the Bonds during the period of acquisition and construction of the Projects and not used to pay interest on the Bonds, will be used to pay the costs of the Projects, unless required to be rebated and paid to the United States in accordance with section 148(0 of the Internal Revenue Code of 1986 (the "Code"). The proceeds of the Bonds, together with any investment earnings thereon, are expected not to exceed the amount necessary for the governmental purpose of the Bonds. The Issuer expects that no disposition proceeds will arise in connection with the Projects or the Bonds. 3. Expenditure of Bond Proceeds and Use of Projects. 3.1. The Issuer will incur, within six months after the date of issue of the Bonds, a binding obligation to commence the Projects, either by entering into contracts for the construction of the Projects or by entering into contracts for architectural or engineering services for such Projects, or contracts for the development, purchase of construction materials, or purchase of equipment, for the Projects, with the amount to be paid under such contracts to be in excess of five percent of the proceeds which are estimated to be used for the cost of the Projects. 3.2. After entering into binding obligations, work on such Projects will proceed promptly with due diligence to completion. 3.3. All original proceeds derived from the sale of the Bonds to be applied to the Projects and all investment earnings thereon (other than any amounts required to be rebated to the United States pursuant to section 148(0 of the Code) will be expended for the Projects no later than a date which is three years after the date of issue of the Bonds. 3.4. The Ordinance provides that allocations of proceeds to expenditures for the Projects are expected not to be later than 18 months after the later of the date of the expenditure or the date that the Projects are placed in service, but, in any event, not longer than 60 days after the earlier of five years of the date hereof or the date the Bonds are retired. 3.5. The Issuer will not invest the proceeds prior to such expenditure in any guaranteed investment contract or other non -purpose investment with a substantially guaranteed yield for a period equal to or greater than four years. 3.6. Other than members of the general public, the Issuer expects that throughout the lesser of the term of the Bonds, or the useful lives of the Projects, the only user of the Projects will be the Issuer or the Issuer's employees and agents. The Issuer will be the manager of the Projects. The Issuer does not expect to enter into long-term sales of output from the Projects and sales of output will be made on the basis ofgenerally-applicable and uniformly applied rates. The Issuer may apply different rates for different classes of customers, including volume purchasers, which are reasonable and customary. 3.7. Except as stated below, the Issuer expects not to sell or otherwise dispose of property constituting the Projects prior to the earlier of the end of such property's useful life or the final maturity of the Bonds. The Ordinance provides that the Issuer will not sell or otherwise dispose of the Projects unless the Issuer receives an opinion of nationally -recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. 3.8. For purposes of Section 3.7 hereof, the Issuer has not included the portion of the Projects comprised of personal property that is disposed in the ordinary course at a price that is expected to be less than 25 percent of the original purchase price. The Issuer, upon any disposition of such property, will transfer the receipts from the disposition of such property to the general operating fund and expend such receipts within six months for other governmental programs. 4. Interest and Sinking Account. 4.1. A separate and special Interest and Sinking Account has been created and established solely to pay the principal of and interest on the Bonds and any parity bonds, with a portion of the Interest and Sinking Account constituting a bona fide debt service fund for the Bonds, and money deposited into the Interest and Sinking Account for the Bonds will not be invested at a yield higher than the yield on the Bonds, except during the thirteen month period beginning on the date of each such deposit of money, and the amounts received from the investment of money in the Interest and Sinking Account will not be invested at a yield higher than the yield on the Bonds, except during the one year period beginning on the date of receipt of such amounts; provided, however, and except that, if any money so deposited, and any amounts received from the investment thereof, are accumulated in the 2 Interest and Sinking Account and remain on hand in the Interest and Sinking Account after thirteen months from the date of deposit of any such money or one year after the receipt of any such amounts from the investment thereof, such money and amounts allocable to the Bonds, to the extent of an aggregate not exceeding the lesser of five percent of the proceeds of the Bonds or $100,000 will not be subject to investment yield restrictions, and shall constitute a separate portion of the Interest and Sinking Account. 4.2. It is expected that a portion of the Interest and Sinking Account will be used primarily to achieve a proper matching of revenues collected for the Bonds and debt service on the Bonds within each bond year, and it is expected that such portion of the Interest and Sinking Account will be depleted once a year on a first -in - first -out basis, except for a possible carryover amount which will not exceed the greater of one year's earnings on the Interest and Sinking Account or 1/12 of annual debt service on the Bonds payable from the Interest and Sinking Account, but any money and amounts which may be accumulated in the Interest and Sinking Account, to constitute a debt service reserve fund for the Bonds as described in Section 4.1, above, shall constitute a separate portion of the Interest and Sinking Account, and will not be depleted annually, and will not be subject to yield restrictions; provided that in no event will such debt service reserve fund portion of the Interest and Sinking Account ever exceed the lesser of five percent of the proceeds of the Bonds or $100,000. 5. Reserve Fund. 5.1. Funds on deposit in the Reserve Fund created by the Ordinance are held in trust for the benefit of the holders of the Bonds. If on any interest payment or maturity date, the Interest and Sinking Account does not contain an amount sufficient to make debt service payments on the Bonds, the Issuer is required to transfer money from the Reserve Fund to the Interest and Sinking Account in an amount sufficient to make such payments. 5.2. The present value of the investments deposited to the Reserve Fund and allocable to the Bonds that will be invested at a yield higher than the yield on the Bonds will not, as of any date, exceed an aggregate amount which equals the lesser of (a) 10 percent of the stated principal amount (or, in the case of a discount, the issue price) of the Bonds, (b) 1.25 of the average annual debt service on the Bonds, or (c) maximum annual debt service on the Bonds. 5.3. Based on the recommendation of the Financial Advisor to the Issuer, the amount deposited to the Reserve Fund, if any, does not exceed that amount which is reasonably prudent to be maintained to secure the timely payment of debt service in the event of periodic fluctuations in revenues of the Issuer. No proceeds received from the sale of the Bonds will be deposited in the Reserve Fund. 6. Yield. All of the Bonds have been the subject of a bona fide initial offering to the Texas Water Development Board (the "Purchaser") who is acquiring as a member of the public and not for the present purposes of resale at a purchase price of 97.75 percent of the stated principal amount thereof. 3 7. Invested Sinking Fund Proceeds, Replacement Proceeds. 7.1. The Issuer has, in addition to the moneys received from the sale of the Bonds, certain other moneys that are invested in various funds which are pledged for various purposes. These other funds are not available to accomplish the purposes described in Section 2 of this Certificate. 7.2. Other than the Interest and Sinking Account and the Reserve Fund, there are, and will be, no other funds or accounts established, or to be established, by or on behalf of the Issuer (a) which are reasonably expected to be used, or to generate earnings to be used, to pay debt service on the Bonds, or (b) which are reserved or pledged as collateral for payment of debt service on the Bonds and for which there is reasonable assurance that amounts therein will be available to pay such debt service if the Issuer encounters financial difficulties. Accordingly, there are no other amounts constituting "gross proceeds" of the Bonds, within the meaning of section 148 of the Code. 8. Other Obligations. There are no other obligations of the Issuer that (a) are sold at substantially the same time as the Bonds, i.e., within 15 days of the date of sale of the Bonds, (b) are sold pursuant to a common plan of financing with the Bonds, and (c) will be payable from the same source of funds as the Bonds. 9. Federal Tax Audit Responsibilities. The Issuer acknowledges that in the event of an examination by the Internal Revenue Service (the "Service") to determine compliance of the Bonds with the provisions of the Code as they relate to tax-exempt obligations, the Issuer will respond, and will direct its agents and assigns to respond, in a commercially reasonable manner to any inquiries from the Service in connection with such an examination. The Issuer understands and agrees that the examination may be subject to public disclosure under applicable Texas law. 10. Record Retention. The Issuer has covenanted in the Ordinance that it will comply with the requirements of the Code relating to the exclusion of the interest on the Bonds under section 103 of the Code. The Service has determined that certain materials, records and information should be retained by the issuers of tax- exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under section 103 ofthe Code. ACCORDINGLY, THE ISSUER SHALL TAKE STEPS TO ENSURE THAT ALL MATERIALS, RECORDS AND INFORMATION NECESSARY TO CONFIRM THE EXCLUSION OF THE INTEREST ON THE BONDS UNDER SECTION 103 OF THE CODE ARE RETAINED FOR THE PERIOD BEGINNING ON THE ISSUE DATE OF THE BONDS AND ENDING THREE YEARS AFTER THE DATE THE BONDS ARE RETIRED. The Issuer acknowledges receipt ofthe letter attached hereto as Exhibit "B" which, in part, discusses specific guidance by the Service with respect to the retention of records relating to tax-exempt bond transaction. The Issuer also acknowledges that the letter does not constitute an opinion of Bond Counsel as to the proper record retention policy applicable to any specific transaction. 11. Rebate to United States. 4 The Issuer has covenanted in the Ordinance that it will comply with the requirements of the Code, including section 148(0 of the Code, relating to the required rebate to the United States. Specifically, the Issuer will take steps to ensure that all earnings on gross proceeds of the Bonds in excess of the yield on the Bonds required to be rebated to the United States will be timely paid to the United States. The Issuer acknowledges receipt of the memorandum attached hereto as Exhibit "A" which discusses regulations promulgated pursuant to section 148(0 of the Code. This memorandum does not constitute an opinion of Bond Counsel as to the proper federal tax or accounting treatment of any specific transaction. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 5 DATED: CITY OF ROUND ROCK, TEXAS By: Mayor The undersigned represents that, to the best of the undersigned's knowledge, information and belief, the representations contained in Section 5.3 of this Federal Tax Certificate are accurate. FIRST SOUTHWEST COMPANY By: Exhibit "A" LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. S00 CONGRESS AVENUE 717 NORTH HARW00D 700 N. ST. MARY'S STREET 1250 ONE AMERICAN CENTER NINTH FLOOR 1525 ONE RIVERWALK PLACE AUSTIN, TEXAS 78701-3248 DALLAS, TEXAS 75201-3587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (512) 478-3805 TELEPHONE (214) 754-9200 TELEPHONE: (210) 225-2800 FACSIMILE: (512) 472-0871 FACSIMILE (214) 754-9250 FACSIMILE: (210) 225-2984 January 1, 2006 ARBITRAGE REBATE REGULATIONS© The arbitrage rebate requirements set forth in section 148(f) of the Internal Revenue Code of 1986 (the "Code") generally provide that in order for interest on any issue of bonds' to be excluded from gross income (i.e., tax-exempt) the issuer must rebate to the United States the sum of, (1) the excess of the amount earned on all "nonpurpose investments" acquired with "gross proceeds" of the issue over the amount which would have been earned if such investments had been invested at a yield equal to the yield on the issue, and (2) the eamings on such excess eamings. On June 18, 1993, the U.S. Treasury Department promulgated regulations relating to the computation of arbitrage rebate and the rebate exceptions. These regulations, which replace the previously -published regulations promulgated on May 15, 1989, and on May 18, 1992, are effective for bonds issued after June 30, 1993. This memorandum was prepared by McCall, Parkhurst & Horton L.L.P. and provides a general discussion of these arbitrage rebate regulations. This memorandum does not otherwise discuss the general arbitrage regulations, other than as they may incidentally relate to rebate. This memorandum also does not attempt to provide an exhaustive discussion of the arbitrage rebate regulations and should not be considered advice with respect to the arbitrage rebate requirements as applied to any individual or govemmental unit or any specific transaction. Any tax advice contained in this memorandum is of a general nature and is not intended to be used, and should not be used, by any person to avoid penalties under the Code. McCall, Parkhurst & Horton L.L.P. remains available to provide legal advice to issuers with respect to the provisions of these tax regulations but recommends that issuers seek competent financial and accounting assistance in calculating the amount of such issuer's rebate liability under section 148(f) of the Code and in making elections to apply the rebate exceptions. In this memorandum the word "bond" is defined to include any bond, note, certificate, financing lease or other obligation of an issuer. Copyright 2006 by Harold T. Flanagan, McCall, Parkhurst & Horton L.L.P. All rights reserved. Effective Dates The regulations promulgated on June 18, 1993, generally apply to bonds delivered after June 30, 1993, although they do permit an issuer to elect to apply the rules to bonds issued prior to that date. The temporary regulations adopted by the U.S. Treasury Department in 1989 and 1992 incorporated the same effective dates which generally apply for purposes of section 148(f) of the Code. As such, the previous versions of the rebate regulations generally applied to bonds issued between August 1986 and June 30, 1993 (or, with an election, to bonds issued prior to August 15, 1993). The statutory provisions of section 148(0 of the Code, other than the exception for construction issues, apply to all bonds issued after August 15, 1986, (for private activity bonds) and August 31, 1986, (for governmental public purpose bonds). The statutory exception to rebate applicable for construction issues generally applies if such issue is delivered after December 19, 1989. The regulations provide numerous transitional rules for bonds sold prior to July 1, 1993. Moreover, since, under prior law, rules were previously published with respect to industrial development bonds and mortgage revenue bonds, the transitional rules contained in these regulations permit an issuer to elect to apply certain of these rules for computing rebate on pre - 1986 bonds. The regulations provide for numerous elections which would permit an issuer to apply the rules (other than 18 -month spending exception) to bonds which were issued prior to July 1, 1993 and remain outstanding on June 30, 1993. Due to the complexity of the regulations, it is impossible to discuss in this memorandum all circumstances for which specific elections are provided. If an issuer prefers to use these final version of rebate regulations in lieu of the computational method stated under prior law (e.g., due to prior redemption) or the regulations, please contact McCall, Parkhurst & Horton L.L.P. for advice as to the availability of such options. Future Value Computation Method The regulations employ an actuarial method for computing the rebate amount based on the future value of the investment receipts (i.e., eamings) and payments. The rebate method employs a two-step computation to determine the amount of the rebate payment. First, the issuer determines the bond yield. Second, the issuer determines the arbitrage rebate amount. The regulations require that the computations be made at the end of each five-year period and upon final maturity of the issue (the "computation dates"). THE FINAL MATURITY DATE WILL ACCELERATE IN CIRCUMSTANCES IN WHICH THE BONDS ARE OPTIONALLY REDEEMED PRIOR TO MATURITY. AS SUCH, IF BONDS ARE REFUNDED OR OTHERWISE REDEEMED, THE REBATE MAY BE DUE EARLIER THAN INITIALLY PROJECTED. In order to accommodate accurate record-keeping and to assure that sufficient amounts will be available for the payment of arbitrage rebate liability, however, we recommend that the computations be performed at least annually. Please refer to other materials provided by McCall, Parkhurst & Horton L.L.P. relating to federal tax rules regarding record retention. Under the future value method, the amount of rebate is determined by compounding the aggregate earnings on all the investments from the date of receipt by the issuer to the computation date. Similarly, a payment for an investment is future valued from the date that the payment is made to the computation date. The receipts and payments are future valued at a discount rate equal to the yield on the bonds. The rebatable arbitrage, as of any McCall, Parkhurst & Horton L.L.P. - Page 2 computation date, is equal to the excess of the (1) future value of all receipts from investments (i.e., eamings), over (2) the future value of all payments. The following example is provided in the regulations to illustrate how arbitrage rebate is computed under the future value method for a fixed -yield bond: "On January 1, 1994, City A issues a fixed yield issue and invests all the sale proceeds of the issue ($49 million). There are no other gross proceeds. The issue has a yield of 7.0000 percent per year compounded semiannually (computed on a 30 day month/360 day year basis). City A receives amounts from the investment and immediately expends them for the govemmental purpose of the issue as follows: Date Amount 2/1/1994 $ 3,000,000 4/1/1994 5,000,000 6/1/1994 14,000,000 9/1/1994 20,000,000 7/1/1995 10,000,000 City A selects a bond year ending on January 1, and thus the first required computation date is January 1, 1999. The rebate amount as of this date is computed by determining the future value of the receipts and the payments for the investment. The compounding interval is each 6 -month (or shorter) period and the 30 day month/360 day year basis is used because these conventions were used to compute yield on the issue. The future value of these amounts, plus the computation credit, as of January 1, 1999, is: Date Receipts (Payments) FY (7.0000 percent) 01/1/1994 ($49,000,000) ($69,119,339) 02/1/1994 3,000,000 4,207,602 04/1/1994 5,000,000 6,932,715 06/1/1994 14,000,000 19,190,277 09/1/1994 20,000,000 26,947,162 01/1/1995 (1,000) (1,317) 07/1/1995 10,000,000 12,722,793 01/1/1996 (1,000) (1,229) Rebate amount (01/01/1999) $878.664" General Method for Computing Yield on Bonds In general, the term "yield," with respect to a bond, means the discount rate that when used in computing the present value of all unconditionally due payments of principal and interest and all of the payments for a qualified guarantee produces an amount equal to the issue price of the bond. The term "issue price" has the same meaning as provided in sections McCall, Parkhurst & Horton L.L.P. - Page 3 1273 and 1274 of the Code. That is, if bonds are publicly offered (i.e., sold by the issuer to a bond house, broker or similar person acting in the capacity of underwriter or wholesaler), the issue price of each bond is determined on the basis of the initial offering price to the public (not to the aforementioned intermediaries) at which price a substantial amount of such bond was sold to the public (not to the aforementioned intermediaries). The "issue price" is separately determined for each bond (i.e., maturity) comprising an issue. The regulations also provide varying periods for computing yield on the bonds depending on the method by which the interest payment is determined. Thus, for example, yield on an issue of bonds sold with variable interest rates (i.e., interest rates which are reset periodically based on changes in market) is computed separately for each annual period ending on the first anniversary of the delivery date that the issue is outstanding. In effect, yield on a variable yield issue is determined on each computation date by "looking back" at the interest payments for such period. The regulations, however, permit an issuer of a variable -yield issue to elect to compute the yield for annual periods ending on any date in order to permit a matching of such yield to the expenditure of the proceeds. Any such election must be made in writing, is irrevocable, and must be made no later than the earlier of (1) the fifth anniversary date, or (2) the final maturity date. Yield on a fixed interest rate issue (i.e., an issue of bonds the interest rate on which is determined as of the date of the issue) is computed over the entire term of the issue. Issuers of fixed -yield issues generally use the yield computed as of the date of issue for all rebate computations. Such yield on fixed -yield issues generally is recomputed only if (1) the issue is sold ata substantial premium, may be retired within five years of the date of delivery, and such date is earlier than its scheduled maturity date, or (2) the issue is a stepped -coupon bond. In such cases, the regulations require the issuer to recompute the yield on such issues by taking into account the early retirement value of the bonds. Similarly, recomputation may occur in circumstances in which the issuer or bondholder modify or waive certain terms of, or rights with respect to, the issue or in sophisticated hedging transactions. IN SUCH CIRCUMSTANCES. ISSUERS ARE ADVISED TO CONSULT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. For purposes of determining the principal or redemption payments on a bond, different rules are used for fixed-rate and variable-rate bonds. The payment is computed separately on each maturity of bonds rather than on the issue as a whole. In certain circumstances, the yield on the bond is determined by assuming that principal on the bond is paid as scheduled and that the bond is retired on the final maturity date for the stated retirement price. For bonds subject to early redemption or stepped -coupon bonds, described above, or for bonds subject to mandatory early redemption, the yield is computed assuming the bonds are paid on the early redemption date for an amount equal to their value. Premiums paid to guarantee the payment of debt service on bonds are taken into account in computing the yield on the bond. Payments for guarantees are taken into account by treating such premiums as the payment of interest on the bonds. This treatment, in effect, raises the yield on the bond, thereby permitting the issuer to recover such fee with excess earnings. McCall, Parkhurst & Horton L.L.P. - Page 4 The guarantee must be an unconditional obligation of the guarantor enforceable by the bondholder for the payment of principal or interest on the bond or the tender price of a tender bond. The guarantee may be in the form of an insurance policy, surety bond, irrevocable letter or line of credit, or standby purchase agreement. Importantly, the guarantor must be legally entitled to full reimbursement for any payment made on the guarantee either immediately or upon commercially reasonable repayment terms. The guarantor may not be a co -obligor of the bonds or a user of more than 10 percent of the proceeds of the bonds. Payments for the guarantee may not exceed a reasonable charge for the transfer of credit risk. This reasonable charge requirement is not satisfied unless it is reasonably expected that the guarantee will result in a net present value savings on the bond (Le., the premium does not exceed the present value of the interest savings resulting by virtue of the guarantee). If the guarantee is entered into after June 14, 1989, then any fees charged for the nonguarantee services must be separately stated or the guarantee fee is not recoverable. The regulations also treat certain "hedging" transactions in a manner similar to qualified guarantees. "Hedges" are contracts, e.g., interest rate swaps, futures contracts or options, which are intended to reduce the risk of interest rate fluctuations. Hedges and other financial derivatives are sophisticated and ever -evolving financial products with which a memorandum, such as this, can not readily deal. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Earnings on Nonpurpose Investments The arbitrage rebate provisions apply only to the receipts from the investment of "gross proceeds" in "nonpurpose investments." For this purpose, nonpurpose investments are stock, bonds or other obligations acquired with the gross proceeds of the bonds for the period prior to the expenditure of the gross proceeds for the ultimate purpose. For example, investments deposited to construction funds, reserve funds (including surplus taxes or revenues deposited to sinking funds) or other similar funds are nonpurpose investments. Such investments include only those which are acquired with "gross proceeds." For this purpose, the term "gross proceeds" includes original proceeds received from the sale of the bonds, investment earnings from the investment of such original proceeds, amounts pledged to the payment of debt service on the bonds or amounts actually used to pay debt service on the bonds. The regulations do not provide a sufficient amount of guidance to include an exhaustive list of "gross proceeds" for this purpose; however, it can be assumed that "gross proceeds" represent all amounts received from the sale of bonds, amounts earned as a result of such sale or amounts (including taxes and revenues) which are used to pay, or secure the payment of, debt service for the bonds. The total amount of "gross proceeds" allocated to a bond generally can not exceed the outstanding principal amount of the bonds. The regulations provide that an investment is allocated to an issue for the period (1) that begins on the date gross proceeds are used to acquire the investment, and (2) that ends on the date such investment ceases to be allocated to the issue. In general, proceeds are allocated to a bond issue until expended for the ultimate purpose for which the bond was issued or for which such proceeds are received (e.g., construction of a bond -financed facility or payment of debt service on the bonds). Deposit of gross proceeds to the general fund of the McCall, Parkhurst & Horton L.L.P. - Page 5 issuer (or other fund in which they are commingled with revenues or taxes) does not eliminate or ameliorate the Issuer's obligation to compute rebate in most cases. As such, proceeds commingled with the general revenues of the issuer are not "freed -up" from the rebate obligation. An exception to this commingling limitation for bonds, other than private activity bonds, permits "investment earnings" (but not sale proceeds or other types of gross proceeds) to be considered spent when deposited to a commingled fund if those amounts are reasonably expected to be spent within six months. Other than for these amounts, issuers may consider segregating investments in order to more easily compute the amount of such arbitrage earnings by not having to allocate investments. Special rules are provided for purposes of advance refundings. These rules are too complex to discuss in this memorandum. Essentially, the rules relating to refundings, however, do not require that amounts deposited to the escrow fund to defease the prior obligations of the issuer be subject to arbitrage rebate to the extent that the investments deposited to the escrow fund do not have a yield in excess of the yield on the bonds. Any Toss resulting from the investment of proceeds in an escrow fund below the yield on the bonds, however, may be recovered by combining those investments with investments deposited to other funds, e.g., reserve or construction funds. The arbitrage regulations also provide an exception to the arbitrage limitations for the investment of bond proceeds in tax-exempt obligations. As such, investment of proceeds in tax exempt bonds eliminates the Issuer's rebate obligation. A caveat; this exception does not apply to gross proceeds derived allocable to a bond, which is not subject to the alternative minimum tax under section 57(a)(5) of the Code, if invested in tax-exempt bonds subject to the alternative minimum tax, i.e., "private activity bonds." Such "AMT -subject" investment is treated as a taxable investment and must comply with the arbitrage rules, including rebate. Earnings from these tax-exempt investments are subject to arbitrage restrictions, including rebate. Similarly, the investment of gross proceeds in certain tax-exempt mutual funds are treated as a direct investment in the tax-exempt obligations deposited in such fund. While issuers may invest in such funds for purposes of avoiding arbitrage rebate, they should be aware that if "private activity bonds" are included in the fund then a portion of the earnings will be subject to arbitrage rebate. Issuers should be prudent in assuring that the funds do not contain private activity bonds. The arbitrage regulations provide a number of instances in which earnings will be imputed to nonpurpose investments. Receipts generally will be imputed to investments that do not bear interest at an arm's-length (i.e., market) interest rate. As such, the regulations adopt a "market price" rule. In effect, this rule prohibits an issuer from investing bond proceeds in investments at a price which is higher than the market price of comparable obligations, in order to reduce the yield. Special rules are included for determining the market price for investment contracts, certificates of deposit and certain U.S. Treasury obligations. For example, to establish the fair market value of investment contracts a bidding process between three qualified bidders must be used. The fair market value of certificates of deposit which bear a fixed interest rate and are subject to an early withdrawal penalty is its purchase price if that price is not less than the yield on comparable U.S. Treasury obligations and is the highest yield available from the institution. In any event, a basic "common sense" rule -of -thumb that can be used to determine whether a fair market value has been paid is to ask whether the general McCall, Parkhurst & Horton L.L.P. - Page 6 funds of the issuer would be invested at the same yield or at a higher yield. An exception to this market price rule is available for United States Treasury Obligations - State or Local Government Series in which case the purchase price is always the market price. Reimbursement and Working Capital The regulations provide rules for purposes of determining whether gross proceeds are used for working capital and, if so, at what times those proceeds are considered spent. In general, working capital financings are subject to many of the same rules that have existed since the mid-1970s. For example, the regulations generally continue the 13 -month temporary period. By adopting a "proceeds -spent -last" rule, the regulations also generally require that an issuer actually incur a deficit (i.e., expenditures must exceed receipts) for the computation period (which generally corresponds to the issuer's fiscal year). Also, the regulations continue to permit an operating reserve, but unlike prior regulations the amount of such reserve may not exceed five percent of the issuer's actual working capital expenditures for the prior fiscal year. Another change made by the regulations is that the issuer may not finance the operating reserve with proceeds of a tax-exempt obligation. Importantly, the regulations contain rules for determining whether proceeds used to reimburse an issuer for costs paid prior to the date of issue of the obligation, in fact, are considered spent at the time of reimbursement. These rules apply to an issuer who uses general revenues for the payment of all or a portion of the costs of a project then uses the proceeds of the bonds to reimburse those general revenues. Failure to comply with these rules would result in the proceeds continuing to be subject to federal income tax restrictions, including rebate. To qualify for reimbursement, a cost must be described in an expression (e.g., resolution, legislative authorization) evidencing the issuer's intent to reimburse which is made no later than 60 days after the payment of the cost. Reimbursement must occur no later than 18 months after the later of (1) the date the cost is paid or (2) the date the project is placed in service. Except for projects requiring an extended construction period or small issuers, in no event can a cost be reimbursed more than three years after the cost is paid. Reimbursement generally is not permitted for working capital; only capital costs, grants and loans may be reimbursed. Moreover, certain anti -abuse rules apply to prevent issuers from avoiding the limitations on refundings. IN CASES INVOLVING WORKING CAPITAL OR REIMBURSEMENT, ISSUERS ARE ADVISED TO CONTACT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. Rebate Payments Rebate payments generally are due 60 days after each installment computation date. The interim computation dates occur each fifth anniversary of the issue date. The final computation date is on the latest of (1) the date 60 days after the date the issue of bonds is no longer outstanding, (2) the date eight months after the date of issue for certain short-term obligations (i.e., obligations retired within three years), or (3) the date the issuer no longer reasonably expects any spending exception, discussed below, to apply to the issue. On such McCall, Parkhurst & Horton L.L.P. - Page 7 payment dates, other than the final payment date, an issuer is required to pay 90 percent of the rebatable arbitrage to the United States. On the final payment date, an issuer is required to pay 100 percent of the remaining rebate liability. Failure to timely pay rebate does not necessarily result in the loss of tax -exemption. Late payments, however, are subject to the payment of interest, and unless waived, a penalty of 50 percent (or, in the case of private activity bonds, other than qualified 501(c)(3) bonds, 100 percent) of the rebate amount which is due. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Rebate payments are refundable. The issuer, however, must establish to the satisfaction of the Commissioner of the Internal Revenue Service that the issuer paid an amount in excess of the rebate and that the recovery of the overpayment on that date would not result in additional rebatable arbitrage. An overpayment of Tess than $5,000 may not be recovered before the final computation date. Alternative Penalty Amount In certain cases, an issuer of a bond the proceeds of which are to be used for construction may elect to pay a penalty, in lieu of rebate. The penalty may be elected in circumstances in which the issuer expects to satisfy the two-year spending exception which is more fully described under the heading "Exceptions to Rebate." The penalty is payable, if at all, within 60 days after the end of each six-month period. This is more often than rebate. The election of the alternative penalty amount would subject an issuer, which fails the two-year spend -out requirements, to the payment of a penalty equal to one and one-half of the excess of the amount of proceeds which was required to be spent during that period over the amount which was actually spent during the period. The penalty has characteristics which distinguish it from arbitrage rebate. First, the penalty would be payable without regard to whether any arbitrage profit is actually earned. Second, the penalty continues to accrue until either (1) the appropriate amount is expended or (2) the issuer elects to terminate the penalty. To be able to terminate the penalty, the issuer must meet specific requirements and, in some instances, must pay an additional penalty equal to three percent of the unexpended proceeds. Exceptions to Rebate The Code and regulations provide certain exceptions to the requirement that the excess investment earnings be rebated to the United States. a. Small Issuers. The first exception provides that if an issuer (together with all subordinate issuers) during a calendar yeardoes not issue tax-exempt bonds2 in an aggregate 2 For this purpose, "private activity bonds" neither are afforded the benefit of this exception nor are taken into account for purposes of determining the amount of bonds issued. McCall, Parkhurst & Horton L.L.P. - Page 8 face amount exceeding $5 million, then the obligations are not subject to rebate. Only issuers with general taxing powers may take advantage of this exception. Subordinate issuers are those issuers which derive their authority to issue bonds from the same issuer, e.g., a city and a health facilities development corporation, or which are controlled by the same issuer, e.g., a state and the board of a public university. In the case of bonds issued for public school capital expenditures, the $5 million cap may be increased to as much as $15 million. For purposes of measuring whether bonds in the calendar year exceed these dollar limits, current refunding bonds can be disregarded if they meet certain structural requirements. Please contact McCall, Parkhurst & Horton L.L.P. for further information. b. Spending Exceptions. Six -Month Exception. The second exception to the rebate requirement is'available to all tax-exempt bonds, all of the gross proceeds of which are expended during six months. The six month rule is available to bonds issued after the effective date of the Tax Reform Act of 1986. See the discussion of effective dates on page two. For this purpose, proceeds used for the redemption of bonds (other than proceeds of a refunding bond deposited to an escrow fund to discharge refunded bonds) can not be taken into account as expended. As such, bonds with excess gross proceeds generally can not satisfy the second exception unless the amount does not exceed the lesser of five percent or $100,000 and such de minimis amount must be expended within one year. Certain gross proceeds are not subject to the spend -out requirement, including amounts deposited to a bona fide debt service fund, to a reserve fund and amounts which become gross proceeds received from purpose investments. These amounts themselves, however, may be subject to rebate even though the originally expended proceeds were not. The Code provides a special rule for tax and revenue anticipation notes (i.e., obligations issued to pay operating expenses in anticipation of the receipt of taxes and other revenues). Such notes are referred to as TRANs. To determine the timely expenditure of the proceeds of a TRAN, the computation of the "cumulative cash flow deficit" is important. If the "cumulative cash flow deficit" (i.e., the point at which the operating expenditures of the issuer on a cumulative basis exceed the revenues of the issuer during the fiscal year) occurs within the first six months of the date of issue and must be equal to at least 90 percent of the proceeds of the TRAN, then the notes are deemed to satisfy the exception. This special rule requires, however, that the deficit actually occur, not that the issuer merely have an expectation that the deficit will occur. In lieu of the statutory exception for TRANs, the regulations also provide a second exception. Under this exception, 100 percent of the proceeds must be spent within six months, but before note proceeds can be considered spent, all other available amounts of the issuer must be spent first ("proceeds -spent -last" rule). In determining whether all available amounts are spent, a reasonable working capital reserve equal to five percent of the prior year's expenditures may be set aside and treated as unavailable. 18 -Month Exception. The regulations also establish a non -statutory exception to arbitrage rebate if all of the gross proceeds (including investment earnings) are expended within 18 months after the date of issue. Under this exception, 15 percent of the gross proceeds must be expended within a six-month spending period, 60 percent within a 12 -month spending period and 100 percent within an 18 -month spending period. The rule permits an issuer to rely on its reasonable expectations for computing investment earnings which are included as gross McCall, Parkhurst & Horton L.L.P. - Page 9 proceeds during the first and second spending period. A reasonable retainage not to exceed five percent of the sale proceeds of the issue is not required to be spent within the 18 -month period but must be expended within 30 months. Rules similar to the six-month exception relate to the definition of gross proceeds. Two Year Exception. Bonds issued after December 19, 1989 (i.e., the effective date of the Omnibus Reconciliation Act of 1989), at least 75 percent of the net proceeds of which are to be used for construction, may be exempted from rebate if the gross proceeds are spent within two years. Bonds more than 25 percent of the proceeds of which are used for acquisition or working capital may not take advantage of this exception. The exception applies only to governmental bonds, qualified 501(c)(3) bonds and private activity bonds for governmentally - owned airports and docks and wharves. The two-year exception requires that at least 10 percent of the available construction proceeds must be expended within six months after the date of issue, 45 percent within 12 months, 75 percent within 18 months and 100 percent within 24 months. The term "available construction proceeds" generally means sale proceeds of the bonds together with investment earnings Tess amounts deposited to a qualified reserve fund or used to pay costs of issuance. Under this rule, a reasonable retainage not to exceed five percent need not be spent within 24 months but must be spent within 36 months. The two-year rule also provides for numerous elections which must be made not later than the date of issuance of the bonds. Once made, the elections are irrevocable. Certain elections permit an issuer to bifurcate bond issues, thereby treating only a portion of the issue as a qualified construction bond; and, permit an issuer to disregard earnings from reserve funds for purposes of determining "available construction proceeds." Another election permits an issuer to pay the alternative penalty amount discussed above in lieu of rebate if the issuer ultimately fails to satisfy the two-year rule. Issuers should discuss these elections with their financial advisors prior to issuance of the bonds. Of course, McCall, Parkhurst & Horton L.L.P. remains available to assist you by providing legal interpretations thereof. Debt Service Funds. Additionally, an exception to the rebate requirement, whether or not any of the previously discussed exceptions are available, applies for earnings on "bona fide debt service funds." A "bona fide debt service fund" is one in which the amounts are expended within 13 months of the accumulation of such amounts by the issuer. In general, most interest and sinking funds (other than any excess taxes or revenues accumulated therein) satisfy these requirements. For private activity bonds, short term bonds (i.e., have a term of less than five years) or variable rate bonds, the exclusion is available only if the gross earnings in such fund does not exceed $100,000, for the bond year. For other bonds issued after November 11, 1988, no limitation is applied to the gross earnings on such funds for purposes of this exception. Therefore, subject to the foregoing discussion, the issuer is not required to take such amounts into account for purposes of the computation. FOR BONDS ISSUED AFTER THE EFFECTIVE DATE OF THE TAX REFORM ACT OF 1986 WHICH WERE OUTSTANDING AS OF NOVEMBER 11, 1988, OTHER THAN PRIVATE ACTIVITY BONDS, SHORT TERM BONDS OR VARIABLE RATE BONDS, A ONE-TIME ELECTION MAY BE MADE TO EXCLUDE EARNINGS ON "BONA FIDE DEBT SERVICE FUNDS" WITHOUT REGARD TO THE $100,000, LIMITATION. THE ELECTION MUST BE MADE IN WRITING (AND MAINTAINED AS PART OF THE ISSUER'S BOOKS AND McCall, Parkhurst & Horton L.L.P. - Page 10 RECORDS) NO LATER THAN THE LATER OF MARCH 21, 1990, OR THE FIRST DATE A REBATE PAYMENT IS REQUIRED. Conclusion McCall, Parkhurst & Horton L.L.P. hopes that this memorandum will prove to be useful as a general guide to the arbitrage rebate requirements. Again, this memorandum is not intended as an exhaustive discussion nor as specific advice with respect to any specific transaction. We advise our clients to seek competent financial and accounting assistance. Of course, we remain available to provide legal advice regarding all federal income tax matters, including arbitrage rebate. If you have any questions, please feel free to contact either Harold T. Flanagan or Faust N. Bowerman at (214) 754-9200. McCall, Parkhurst & Horton L.L.P. - Page 11 Exhibit "B" LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET 1250 ONE AMERICAN CENTER NINTH FLOOR 1525 ONE RIVERWALK PLACE AUSTIN, TEXAS 78701-3248 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (512) 478-3805 TELEPHONE: (214) 754-9200 TELEPHONE: (210) 225-2800 FACSIMILE (512) 472-0871 FACSIMILE: (214) 754-9250 FACSIMILE: (210) 225-2984 September 8, 2006 Ms. Cindy Demers Finance Director City of Round Rock 221 East Main Street Round Rock, Texas 78664 Re: City of Round Rock, Texas Utility System Revenue Bonds, Series 2006 Dear Ms. Demers: As you know, the City of Round Rock, Texas (the "Issuer") will issue the captioned bonds in order to provide for the acquisition and construction of the project. As a result of that issuance, the federal income tax laws impose certain restrictions on the investment and expenditure of amounts to be used for the project or to be deposited to the interest and sinking account and the reserve fund for the captioned bonds. The purpose of this letter is to set forth, in somewhat less technical language, those provisions of the tax law which require the timely use of bond proceeds and that investment of these amounts be at a yield which is not higher than the yield on the captioned bonds. For this purpose, please refer to line 21(e) of the Form 8038-G included in the transcript of proceedings for the yield on the captioned bonds. Generally, the federal tax laws provide that, unless excepted, amounts to be used for the project or to be deposited to the interest and sinking account and the reserve fund must be invested in obligations the combined yield on which does not exceed the yield on the bonds. Importantly, for purposes of administrative convenience, the bonds, however, have been structured in such a way as to avoid, for the most part, this restriction on investment yield. They also contain certain covenants relating to expenditures of proceeds designed to alert you to unintentional failures to comply with the laws affecting expenditures of proceeds and dispositions of property. First, the sale and investment proceeds to be used for the project may be invested for up to three years without regard to yield. (Such amounts, however, may be subject to rebate.) Thereafter, they must be invested at or below the bond yield. Importantly, expenditure of these proceeds must be accounted in your books and records. Allocations of these expenditures must occur within 18 months of the later of the date paid or the date the project is completed. The foregoing notwithstanding, the allocation should not occur later than 60 days after the earlier of (1) of five years after the delivery date of the bonds or (2) the date the bonds are retired unless you obtain an opinion of bond counsel. Second, the interest and sinking account is made up of amounts which are received annually for the payment of current debt service on all the Issuer's outstanding bonds. Any taxes or revenues deposited to the interest and sinking account which are to be used for the payment of current debt service on the captioned bonds, or any other outstanding bonds, are not subject to yield restriction. By definition, current debt service refers only to debt service to be paid within one year of the date of receipt of these amounts. For the most part, this would be debt service in the current fiscal year. These amounts deposited to the account for current debt service may be invested without regard to any constraint imposed by the federal income tax laws. Third, a portion of the interest and sinking account is permitted to be invested without regard to yield restriction as a "minor portion." The "minor portion" exception is available for de minimis amounts of taxes or revenues deposited to the interest and sinking account. The maximum amount that may be invested as part of this account may not exceed the lesser of five percent of the principal amount of the bonds or $100,000. In addition, the reserve fund contains an amount, which although not expended for debt service within the current year, is necessary to ensure that amounts will be sufficient to pay debt service in the event that taxes or revenues are insufficient during that period. This amount represents a reserve against periodic fluctuations in the receipt of taxes and revenues. The Internal Revenue Code permits amounts which are held in reserve for the payment of debt service, in such instances, to be invested without regard to yield restriction if such amounts do not exceed the lesser of (1) 10 percent of the outstanding principal amount of all outstanding bonds, (2) maximum annual debt service on all outstanding bonds, or (3) 125 percent of average annual debt service on all outstanding bonds. Accordingly, you should review the current balance in the interest and sinking account and the reserve fund in order to determine if such balances exceed the aggregate amounts discussed above. Additionally, in the future it is important that you be aware of these restrictions as additional amounts are deposited to the funds. The amounts in these funds which are subject to yield restriction would only be the amounts which are in excess of, in the case of the interest and sinking account, the sum of (1) the current debt service account and (2) the "minor portion" account and, in the case of the reserve fund, the amount which is the lesser of the three amounts described above. Moreover, to the extent that additional bonds are issued by the Issuer, whether for new money projects or for refunding, these amounts will change in their proportion. The Ordinance contains covenants that require the Issuer to comply with the requirements of the federal tax laws relating to the tax-exempt obligations. The Internal Revenue Service (the "Service") has determined that certain materials, records and information should be retained by the issuers of tax-exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under the Internal Revenue Code. Accordingly, the Issuer should retain such materials, records and information for the period beginning on the issue date of the captioned bonds and ending three years after the date the captioned bonds are retired. Please note this federal tax law standard may vary from state law standards. The material, records and information required to be retained will generally be contained in the transcript of proceedings for the captioned bonds, however, the Issuer should collect and retain additional materials, records and information to ensure the continued compliance with federal tax law requirements. For example, beyond the transcript of proceedings for the bonds, the Issuer should keep schedules evidencing the expenditure of bond proceeds, documents relating to the use of bond -financed property by governmental and any private parties (e.g., leases and management contracts, if any) and schedules pertaining to the investment of bond proceeds. In the event that you have questions relating to record retention, please contact us. Finally, you should notice that the contains a covenant that limits the ability of the Issuer to sell or otherwise dispose of bond -financed property for compensation. Beginning for obligations issued after May 15, 1997 (including certain refunding bonds), or in cases in which an issuer elects to apply new private activity bond regulations, such sale or disposition causes the creation of a class of proceeds referred to as "disposition proceeds." Disposition proceeds, like sale proceeds and investment earnings, are tax -restricted funds. Failure to appropriately account, invest or expend such disposition proceeds would adversely affect the tax-exempt status of the bonds. In the event that you anticipate selling property, even in the ordinary course, please contact us. Obviously, this letter only presents a fundamental discussion of the yield restriction rules as applied to amounts deposited to the funds. Moreover, this letter does not address the rebate consequences with respect to the interest and sinking account and the reserve fund. You should review the memorandum attached to the Federal Tax Certificate as Exhibit "A" for this purpose. If you have certain concerns with respect to the matters discussed in this letter or wish to ask additional questions with regards to certain limitations imposed, please feel free to contact our firm. Thank you for your consideration and we look forward to our continued relationship. Very truly yours, McCALL, PARKHURST & HORTON L.L.P. cc: Ms. Carol D. Polumbo Exhibit "C" CERTIFICATE OF ELECTION PURSUANT TO SECTION 148(f)(4)(C) OF THE INTERNAL REVENUE CODE OF 1986 I, the undersigned, being the duly authorized representative of the City of Round Rock, Texas (the "Issuer") hereby state that the Issuer elects the provisions of section 148(f)(4)(C) of the Internal Revenue Code of 1986 (the "Code"), relating to the exception to arbitrage rebate for temporary investments, as more specifically designated below, with respect to the Issuer's Utility System Revenue Bonds, Series 2006 (the "Bonds") which are being issued on the date of delivery of the Bonds in a face amount equal to $12,000,000. The CUSIP Number for the Bonds is stated on the Form 8038-G filed in connection with the Bonds. The Issuer intends to take action to comply with the two-year temporary investments exception to rebate afforded construction bonds under section 148(0(4)(C) of the Code. Capitalized terms have the same meaning as defined in the Federal Tax Certificate. 1. PENALTY ELECTION. In the event that the Issuer should fail to expend the "available construction proceeds" of the Bonds in accordance with the provisions of section 148(f)(4)(C) of the Code, the Issuer elects, in lieu of rebate, the penalty provisions of section 148(f)(4)(C)(vii)(I) of the Code. 2. RESERVE FUND ELECTION. The Issuer elects to exclude from "available construction proceeds," within the meaning of section 148(f)(4)(C)(vi) of the Code, of the Bonds, earnings on the Reserve Fund in accordance with section 148(f)(4)(C)(vi)(IV) of the Code. 3. MULTIPURPOSE ELECTION. The Issuer elects to treat that portion of the Bonds the proceeds of which are to be used for the payment of expenditures for construction, reconstruction or rehabilitation of the Projects, as defined in the instrument authorizing the issuance of the Bonds, in an amount which is currently expected to be equal to $ as a separate issue in accordance with the provisions of section 148(f)(4)(C)(v)(II) of the Code. (Note: This election is not necessary unless less than 75 percent of the proceeds of the Bonds will be used for construction, reconstruction or renovation.) 4. ACTUAL FACTS. For purposes of determining compliance with section 148(0(c) of the Code (other than qualification of the Bonds as a qualified construction issue), the Issuer elects to use actual facts rather than reasonable expectations. 5. NO ELECTION. The Issuer understands that the elections which are adopted as evidenced by the check in the box adjacent to the applicable provision are irrevocable. Further, the Issuer understands that qualification of the Bonds for eligibility for the exclusion from the rebate requirement set forth in section 148(0 of the Code is based on subsequent events and is unaffected by the Issuer's expectations of such events as of the date of delivery of the Bonds. Accordingly, while failure to execute this certificate and to designate the intended election does not preclude qualification, it would preclude the Issuer from the relief afforded by such election. DATED: Mayor City of Round Rock, Texas 221 East Main Street Round Rock, Texas 78664 Employer I.D. Number: 74-6017485 DATED: CITY OF ROUND ROCK, TEXAS By: M Exhibit "C" CERTIFICATE OF ELECTION PURSUANT TO SECTION 148(t)(4)(C) OF THE INTERNAL REVENUE CODE OF 1986 I, the undersigned, being the duly authorized representative of the City of Round Rock, Texas (the "Issuer") hereby state that the Issuer elects the provisions of section 148(f)(4)(C) of the Internal Revenue Code of 1986 (the "Code"), relating to the exception to arbitrage rebate for temporary investments, as more specifically designated below, with respect to the Issuer's Utility System Revenue Bonds, Series 2006 (the "Bonds") which are being issued on the date of delivery of the Bonds in a face amount equal to $12,000,000. The CUSIP Number for the Bonds is stated on the Form 8038-G filed in connection with the Bonds. The Issuer intends to take action to comply with the two-year temporary investments exception to rebate afforded construction bonds under section 148(f)(4)(C) of the Code. Capitalized terms have the same meaning as defined in the Federal Tax Certificate. 1. PENALTY ELECTION. In the event that the Issuer should fail to expend the "available construction proceeds" of the Bonds in accordance with the provisions of section 148(f)(4)(C) of the Code, the Issuer elects, in lieu of rebate, the penalty provisions of section 148(f)(4)(C)(vii)(I) of the Code. 2. RESERVE FUND ELECTION. The Issuer elects to exclude from "available construction proceeds," within the meaning of section 148(f)(4)(C)(vi) of the Code, of the Bonds, earnings on the Reserve Fund in accordance with section 148(0(4)(C)(vi)(IV) of the Code. 3. MULTIPURPOSE ELECTION. The Issuer elects to treat that portion of the Bonds the proceeds of which are to be used for the payment of expenditures for construction, reconstruction or rehabilitation of the Projects, as defined in the instrument authorizing the issuance of the Bonds, in an amount which is currently expected to be equal to $ as a separate issue in accordance with the provisions of section 148(0(4)(C)(v)(10 of the Code. (Note: This election is not necessary unless less than 75 percent of the proceeds of the Bonds will be used for construction, reconstruction or renovation.) 4. ACTUAL FACTS. For purposes of determining compliance with section 148(f)(c) of the Code (other than qualification of the Bonds as a qualified construction issue), the Issuer elects to use actual facts rather than reasonable expectations. 5. NO ELECTION. The Issuer understands that the elections which are adopted as evidenced by the check in the box adjacent to the applicable provision are irrevocable. Further, the Issuer understands that qualification of the Bonds for eligibility for the exclusion from the rebate requirement set forth in section 148(0 of the Code is based on subsequent events and is unaffected by the Issuer's expectations of such events as of the date of delivery of the Bonds. Accordingly, while failure to execute this certificate and to designate the intended election does not preclude qualification, it would preclude the Issuer from the relief afforded by such election. DATED: M ity . Round Rock, Texas 221 East Main Street Round Rock, Texas 78664 Employer I.D. Number: 74-6017485 IN TESTIMONY WHEREOF, the City has caused its seal to be impressed or a facsimile thereof to be printed hereon and this Bond to be executed in the name of and on behalf of the City with the manual or facsimile signatures of its Mayor, and attested by the City Secretary. By: alustrinv 12 J21 CITY OF ROUND ROCK, TEXAS By: City Secretary or Form 8038-G (Rev. November 2000) Department or the Treasury Internal Revenue Service Information Return for Tax -Exempt Governmental Obligations ► Under Internal Revenue Code section 149(e) ► See separate Instructions. Caution: If the issue price is under $100,000, use Form 8038 -GC. OMB No. 1545-0720 Part I Reporting Authority If Amended Return, check here ► 1 issuer's name ROUND ROCK, TEXAS (CITY OF) 2 Issuer's employer identification number 74 i 6017485 3 Number and street (or P.O. box if mail is not delivered to street address) 221 EAST MAIN STREET Room/suite 4 Report number 3 5 City, town, or post office, state, and ZIP code ROUND ROCK, TEXAS 78664 6 Date of issue 7 Name of issue UTILITY SYSTEM REVENUE BONDS, SERIES 2006 8 CUSIP number 9 Name and title of officer or legal representative whom the IRS may call for more information CINDY DEMERS, FINANCE DIRECTOR 10 Telephone number of officer or legal representative ( 512 ) 218-5400 art 11 12 ❑ Health and hospital 13 ❑ Transportation 14 ❑ Public safety 15 ❑ Environment (including sewage bonds) 16 ❑ Housing 17 ❑ Utilities 18 ❑ Other. Describe ► 19 If obligations are TANs or RANs, check box ► ❑ If obligations are BANs, check box 20 If obligations are in the form of a lease or installment sale, check box ype of Issue (check applicable box(es) and enter the issue price) See instructions and attach schedule ❑ Education Part III 21 Description of Obligations. Complete for the entire issue for which this (a) Final maturity date (b) Issue price (c) Stated redemption price at maturity 11 12 13 14 15 16 17 18 o. ► ❑ r//��j form is being filed. (d) Weighted average maturity (e) Yield $ Part IV Uses of Proceeds of Bond Issue (including underwriters' discount) 22 Proceeds used for accrued interest 23 Issue price of entire issue (enter amount from line 21, column (b)) 24 Proceeds used for bond issuance costs (including underwriters' discount) 24 25 Proceeds used for credit enhancement . 26 Proceeds allocated to reasonably required reserve or replacement fund 27 Proceeds used to currently refund prior issues 28 Proceeds used to advance refund prior issues 29 Total (add lines 24 through 28) 30 Nonrefundinq proceeds of the issue (subtract line 29 from line 23 and enter amount here) . . Description of Refunded Bonds (Complete this part only for refunding bonds.) years Part V 25 26 27 28 31 Enter the remaining weighted average maturity of the bonds to be currently refunded . . . ► 32 Enter the remaining weighted average maturity of the bonds to be advance refunded . , ► 33 Enter the last date on which the refunded bonds will be called ► 34 Enter the date(s) the refunded bonds were issued ► Part VI 22 23 29 30 years years Miscellaneous 35 Enter the amount of the state volume cap allocated to the issue under section 141(b)(5) 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract (see instructions) b Enter the final maturity date of the guaranteed investment contract ► 35 36a 37 Pooled financings: a Proceeds of this issue that are to be used to make loans to other govemmental units 37a b If this issue is a loan made from the proceeds of another tax-exempt issue, check box ► ❑ and enter the name of the issuer ► and the date of the issue II - 38 38 If the issuer has designated the issue under section 265(b)(3)(B)(i)(III) (small issuer exception), check box 39 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box 40 If the issuer has identified a hedge, check box Sign Here Under penalties of perjury, I declare that I have exa and belief, the .re ue, co rr, and co ► ❑ ▪ ❑ ► ❑ -Led this return and accompanying schedules and statements, and to the best of my knowledge of iss oozed representative Date For Paperwork eduction Act Notice, see page 2 of the Instructions. C: Type or print name and title Cat. No. 63773S Form 8038-G (Rev. 11-2000) PAYING AGENT/REGISTRAR AGREEMENT THIS AGREEMENT entered into as of October 1, 2006 (this "Agreement"), by and between the City of Round Rock, Texas (the "Issuer"), and The Bank of New York Trust Company, N.A. of Dallas, Texas, a banking corporation duly organized and existing under the laws of the United States of America (the "Bank"). RECITALS WHEREAS, the Issuer has duly authorized and provided for the issuance of its $12,000,000 City of Round Rock, Texas Utility System Revenue Bonds, Series 2006, (the "Securities"), such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchasers thereof on or about October 11, 2006; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on the Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof, and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Ordinances" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of the Securities and with respect to the transfer and exchange thereof as provided herein and in the "Resolution." RROCKUti1SysRevBonds20061WDB. PayingAgtRegAgnnnt The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto for the first year of this Agreement and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for political subdivisions, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). ARTICLE TWO DEFINITIONS Section 2.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the designated office for payment of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Fiscal Year" means the fiscal year of the Issuer, ending August 31. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Resolution" means a written request or resolution signed in the name of the Issuer by the System Representative, as defined in the Resolution, any one or more of said officials, delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. RROCKUti1SysReVBonds2006[WDB- PayingAgtRegAgnnnt 2 "Ordinances" means the Master Ordinance and the First Supplement of the governing body of the Issuer pursuant to which the Securities are issued, certified by the Secretary of the Board or any other officer of the Issuer and delivered to the Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Resolution). "Redemption Date" when used with respect to any Bond to be redeemed means the date fixed for such redemption pursuant to the terms of the Resolution. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice - Chairman of the Board of Directors, the Chairman or Vice-chairman of the Executive Committee of the Board of Directors, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank.on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Resolution on which the principal of a Security is scheduled to be due and payable. Section 2.02. Other Definitions. The terms "Bank," Issuer," and "Securities (Security)" have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. RROCKUti]SysReVBonds20061WDB: PayingAgtRegAgrmnt 3 ARTICLE THREE PAYING AGENT Section 3.01. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first-class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Resolution. Section 3.03 Reporting Requirements. To the extent required by the Internal Revenue Code of 1986, as amended, or the Treasury Regulations, the Bank shall report to or cause to be reported to the Holders and the Internal Revenue Service the amount of interest paid or the amount treated as interest accrued on the Securities which is required to be reported by the Holders on their returns of federal income tax. ARTICLE FOUR REGISTRAR Section 4.01. Security Register - Transfers and Exchanges. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register"), and, if the Bank Office is located outside the State of Texas, a copy of such books and records shall be kept in the State of Texas, for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. The Bank also agrees to keep a copy ofthe Security Register within the State of Texas. All transfers, exchanges and replacement of Securities shall be noted in the Security Register. RROCKUti1Sys RevBonds2006TWDB: PayingAgtRegAgnnnt 4 Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect a re - registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereof will be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three (3) business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. Section 4.02. Certificates. The Issuer shall provide an adequate inventory of printed Securities certificates to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities certificates will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities certificates in safekeeping, which shall be not less than the level of care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that it maintains for its own securities. Section 4.03. Form of Security Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. RROCKUti1SysReVBonds2006 WDB: PayingAgtRegAgvnnt 5 The Bank will not release or disclose the contents ofthe Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order or other notice of a legal proceeding and prior to the release or disclosure of any of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the same or such release or disclosure of the contents of the Security Register. Section 4.05. Return of Cancelled Certificates. The Bank will, at such reasonable intervals as it determines, surrender to the Issuer, Securities in lieu of which or in exchange for which other Securities have been issued, or which have been paid. Section 4.06. Mutilated, Destroyed, Lost or Stolen Securities. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Resolution, to deliver and issue Securities certificates in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities certificates as long as the same does not result in an overissuance. In case any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities certificates it has paid pursuant to Section 3.01, Securities certificates it has delivered upon the transfer or exchange of any Securities certificates pursuant to Section 4.01, and Securities certificates it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities certificates pursuant to Section 4.06. ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and agrees to use reasonable care in the performance thereof. RROCKUti1SysRevBond62006TWDB: PayingAgtRegAgnnnt 6 The Bank is also authorized to transfer funds relating to the closing and initial delivery of the securities in the manner disclosed in the closing memorandum approved by the Issuer as prepared by the Issuer's financial advisor or other agent. The Bank may act on a facsimile transmission of the closing memorandum to be followed by an original of the closing memorandum signed by the financial advisor or the Issuer. Section 5.02. Reliance on Documents, Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank by the Issuer. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proven that the Bank was negligent in ascertaining the pertinent facts. (c) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities certificates containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by the Issuer. (e) The Bank may consult with legal counsel, and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon, provided that any such written advice or opinion is supplied to the Issuer by the Bank. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the statements of the Issuer, and the Bank assumes no responsibility for their correctness. RROCKUti1SysReVBonds2006TWDB: PayingAgtRegAgnnnt 7 The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Moneys Held by Bank. The Bank shall deposit any moneys received from the Issuer into a segregated account to be held by the Bank solely for the benefit of the owners of the Securities to be used solely for the payment of the Securities, with such moneys in the account that exceed the deposit insurance available to the Issuer by the Federal Deposit Insurance Corporation, to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas to secure and be pledged as collateral for such accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such account shall be made by check drawn on such account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Subject to the Unclaimed Property Law of the State of Texas, any money deposited with the Bank for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for three years after the final maturity of the Security has become due and payable will be paid by the Bank to the Issuer if the Issuer so elects, and the Holder of such Security shall hereafter look only to the Issuer for payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. If the Issuer does not elect, the Bank is directed to report and dispose of the funds in compliance with Title Six of the Texas Property Code, as amended. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on the Bank's part, arising out of or in connection with the Bank's acceptance or administration of its duties hereunder, including the cost and expense incurred by the Bank in defending against any claim or from liability imposed on the Bank in connection with the Bank's exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the Travis County, Texas, and agree that service of process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement RROCKUtilSysReVBonds2006TWDB: PayingAgtRegAgrmnt 8 shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction in Travis County, Texas to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective August 1, 1987, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. Attached hereto is a copy of the Blanket Issuer Letter of Representations between the Issuer and The Depository Trust Company, New York, New York, providing for the Bonds to be issued in a Book -Entry Only System. The Bank and the Issuer hereby confirm their obligations under such Letter of Representation. hereto. other. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. Section 6.04. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. RROCKUtilSysRevBonds2006 WDB: PayingAgtRegAgrmnt 9 Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer and the Bank shall bind their respective successors and assigns, whether so expressed or not. Section 6.06. Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Resolution constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between this Agreement and the Resolution, the Resolution shall govern. Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of final payment of the principal of and interest on the Securities to the Holders thereof or (ii) may be earlier terminated by either party upon thirty (30) days written notice; provided, however, an early termination of this Agreement by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termination of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securities, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02, 5.02, 5.03 and 5.06 of this Agreement shall survive and remain in full force and effect following the termination of this Agreement. RROCKUti1SysReVBonds20067WDB: PayingAgtRegAgnnnt 10 Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. [The remainder of this page is intentionally left blank.] RROCKUtiWSysRevBonds2o06rWDB: PayingAgtRegAgannt 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. RROCKUtiJSysRevBonds2006TWDB: PayingAgtRegAgnnnt THE BANK OF NEW YORK TRUST COMPANY, N.A. By: Title: BONYSignaturePage 2001 Bryan - 8th Floor Dallas, TX 75201 RROCKUtiJSysReVBonds2006TWDB: PayingAgtRegAgnnnt CITY OF ROUND ROCK, TEXAS By: Title: Chief Fina Officer 221 E. Main Round Rock, Texas 78664 TSUSSignaturePage SCHEDULE A Paying Agent/Registrar Fee Schedule Annual Fee $ RROCKUti1SysRevBonds20067WDB: PayingAgtRegAgrmnt CHIEF FINANCIAL OFFICER CERTIFICATE IN ACCORDANCE with Section 7(b)(ii) of the Master Ordinance Establishing the City of Round Rock, Texas Utility System Revenue Financing Program (the "Master Ordinance") adopted by the City Council on September 14, 2006, I hereby certify the following in connection with the issuance of the $12,000,000 City ofRound Rock, Texas Utility System Revenue Bonds, Series 2006 (the "Bonds"). Any capitalized terms not otherwise defined herein have the meaning given in the Master Ordinance. (i) I am the Finance Director for the City and authorized to sign this certificate in accordance with the Master Ordinance; and (ii) For the Fiscal Year ending September 30, 2006, the Net Earnings were at least equal to the sum of 1.25 times the average Annual Debt Service Requirements (computed on a Fiscal Year basis) of the Bonds. There is no other Parity Debt or Subordinate Debt outstanding. EXECUTED this 14th day of September, 2006. By: Cindy ers Title: Finance Director RROCK\Uti1SysRevBonds2006IWDB- CFOCert AWARD CERTIFICATE THE STATE OF TEXAS § WILLIAMSON AND TRAVIS COUNTIES § CITY OF ROUND ROCK § I, the undersigned, Director of Finance of the City of Round Rock, Texas (the "City"), acting as the Chief Financial Officer pursuant to the authority granted to me by the "First Supplemental Ordinance to the Master Ordinance Establishing the City of Round Rock, Texas Utility System Revenue Financing Program" (the "First Supplement") adopted by the City Council of the City on September 14, 2006 authorizing the issuance of the "City of Round Rock, Texas Utility System Revenue Bonds, Series 2006" (the "Series 2006 Bonds") hereby certify as follows: 1. This certificate is executed for and on behalf of the City and for the benefit of the Attorney General of the State of Texas and the Texas Water Development Board ("TWDB"), the purchaser, of the Series 2006 Bonds. 2. This certificate is the Award Certificate of the Chief Financial Officer as required by Section 2.02(b) of the First Supplement. 3. The terms used herein have the same meanings as those used and defined in the First Supplement. 4. The First Supplement is substantially in the form and substance submitted to the City at the meeting at which it was adopted, with such changes as I have approved as evidenced by my execution of this Award Certificate and the First Supplement. 5. As required by Section 2.02(b) of the First Supplement, I have determined that (i) the price to be paid for the Series 2006 Bonds is not less than 95% of the aggregate original principal amount thereof plus accrued interest, if any, and (ii) none of the Series 2006 Bonds bear interest at a rate greater than the Maximum Rate. 6. The Series 2006 Bonds shall be titled as set forth in the first paragraph hereof and shall reflect the terms set forth in Exhibit A hereto, including the provisions relating to redemption, and shall otherwise be as set forth in the Form of Bonds provided in the First Supplement and this Award Certificate. 7. As set forth in Exhibit A hereto, the Series 2006 Bonds shall (i) be dated, (ii) be sold to the TWDB, (iii) be in the aggregate original principal amount, (iv) be in the form of Current Interest Bonds in the aggregate principal amount, (v) mature in the years and in the principal amounts, (vi) bear interest at the rates for each such Maturity with such interest being payable on the dates, (vii) in accordance with the First Supplement, be subject to optional and mandatory redemption on the dates, at the prices and subject to the terms, and (viii) have the other terms and provisions all as provided in the First Supplement, the Official Statement and Exhibit A hereto. RROCKTWDBUti1SysRevBonds2006: Award Cert 8. Pursuant to Section 7.09(a) relating to the First Supplement the City agrees to provide the updated financial information and operating data of the City's Utility System to the NRMSIRs and SID each year to the extent required by SEC Rule 15c2-12. 9. The Series 2006 Bonds are being insured by Financial Security Assurance Inc. Pursuant to Section 3.06 of the First Supplement, the terms and provision relating to the bond insurance policy are attached hereto as Exhibit "B". [The Remainder of this Page is Intentionally Left Blank] RROCKTWDBUti1SysRevBands2006: Award Cert 2 EXECUTED this September 14, 2006. cHT \T \>) t Cindy Dem Director of Finance Round Rock, Texas RROCK7WDBUti1SysRevBonds2006: Award Cert 3 EXHIBIT A TERMS OF THE BONDS GENERAL DESCRIPTION OF SERIES 2006 BONDS The aggregate principal amount of the Series 2006 Bonds shall be $12,000,000. The Series 2006 Bonds shall be dated October 1, 2006, shall be issued as Current Interest Bonds and shall be numbered from R-1 upwards (except for the Initial Series 2006 Bond which is numbered T-1). The Series 2006 Bonds shall mature on August 1 of the years and in the amounts shown in the following schedule. The Series 2006 Bonds shall bear interest from the delivery date and be payable August 1 and February 1 of each year, commencing February 1, 2007, until maturity or prior redemption as set forth below. Principal Maturity Date Interest Amount (August 1) Rate $ 125,000 2008 2.20% 320,000 2009 2.20 555,000 2010 2.25 565,000 2011 2.30 580,000 2012 2.30 595,000 2013 2.40 605,000 2014 2.45 620,000 2015 2.50 640,000 2016 2.55 655,000 2017 2.60 670,000 2018 2.65 690,000 2019 2.70 705,000 2020 2.75 725,000 2021 2.75 745,000 2022 2.80 770,000 2023 2.85 790,000 2024 2.90 810,000 2025 2.90 835,000 2026 2.95 The Record Date for the payment of interest on the Bonds shall be the fifteenth day of the month next preceding each interest payment date. Board. The Initial Series 2006 Bond shall be registered in the name of the Texas Water Development RROCK7WDBUtfSysRevHonds2006: Award Cert A-1 REDEMPTION PROVISIONS Optional Redemption. On August 1, 2016, or on any date thereafter, the Bonds of this series maturing on and after August 1, 2017 may be redeemed prior to their scheduled maturities, at the option of the City, with funds derived from any available and lawful source, at par plus accrued interest to the date fixed for redemption as a whole, or in part, and, if in part, in inverse order of stated maturity and if less than all of a maturity is to be redeemed the Paying Agent/Registrar shall determine by lot the Bonds, or portions thereof within such maturity to be redeemed (provided that a portion of a Bond may be redeemed only in integral multiples of $5,000 of principal amount). No less than 30 days prior to the date fixed for any such redemption, the City shall cause the Paying Agent/Registrar to send notice by United States mail, first-class postage prepaid to the Registered Owner of each Bond to be redeemed at its address as it appeared on the Registration Books of the Paying Agent/Registrar at the close of business on the 45th day prior to the redemption date; provided, however, that the failure to send, mail or receive such notice, or any defect therein or in the sending or mailing thereof, shall not affect the validity or effectiveness of the proceedings for the redemption of any Bonds. By the date fixed for any such redemption due provision shall be made with the Paying Agent/Registrar for the payment ofthe required redemption price for the Bonds or portions thereof which are to be so redeemed. If due provision for such payment is made, all as provided above, the Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. If a portion of any Bonds shall be redeemed a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in any denomination or denominations in any integral multiple of $5,000, at the written request of the Registered Owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the City, all as provided in the Resolution. So long as the Texas Water Development Board owns the Bonds, the District shall use any surplus proceeds after completion of the project to redeem Bonds in inverse annual order of maturity to the nearest multiple of $5,000 at a price of par plus accrued interest to the date of redemption or in any other manner approved by the Texas Water Development Board or its Executive Administrator. Any remaining surplus thereafter shall be transferred to the credit of the Interest and Sinking Fund or expended in any other manner approved by the Texas Water Development Board or its Executive Administrator. With respect to any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Bond Resolution have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice shall state that RROCKTWDBUti1SysRevBonds2006: Award Cert A-2 said redemption may, at the option of the City, be conditional upon the satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, the City shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. RROCKTWDBUti1SysRevBonds200&. Award Cert A-3 EXHIBIT B INSURANCE PROVISIONS Notwithstanding anything in the Master Ordinance or the First Supplement to the contrary, the following bond insurance provisions apply related to the Bonds. (a) "Insurance Policy" means the insurance policy issued by the Insurer guaranteeing the scheduled payment of principal of and interest on the Bonds when due". "Insurer" means 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 Account. Notwithstanding anything to the contrary set forth in the First Supplement, amounts on deposit in the Reserve Account shall be applied solely to the payment of debt service due on the Bonds. (c) Each of the Texas Water Development Board (the Board) and the Insurer shall be deemed to be a holder of the Bonds insured by it 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 Bonds are entitled to take pursuant to the provisions of the Master Ordinance pertaining to defaults or remedies. Notwithstanding the forgoing, (I) there shall be no waiver of (i) covenant compliance or (ii) a breach or an event of default without the consent of both the Board and the Insurer, (II) there shall be no compromise or settlement reached by the Board wherein the recovery is less than an amount necessary to retire or discharge the outstanding Bonds without the consent of the Insurer, and (III) there shall be no modification of the First Supplement without the written consent of both the Board and the Insurer. (d) The insurer is a third party beneficiary to the First Supplement. (e) Any amendment, supplement, modification to, or waiver of, the First Supplement or any other transaction document, including any underlying security agreement (each a "Related Document"), 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. (f) Unless the Insurer otherwise directs, upon the occurrence and continuance of an event of default or an event which with notice or lapse of time would constitute an event of default, amounts on deposit in the Bond Proceeds Account shall not be disbursed, but shall instead be applied to the payment of debt service or redemption price of the Bonds. The rights granted to the Insurer under the First Supplement or any other 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 (g) RROCKTWDBUti1SysRevBonds2006: Award Cert B-1 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. (h) Amounts paid by the Insurer under the Insurance Policy shall not be deemed paid for purposes of the First Supplement 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 First Supplement. The First Supplement shall not be discharged unless all amounts due or to become due to the Insurer have been paid in full or duly provided for. Each of the City and Paying Agent covenant and agree 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 security under the Master Ordinance and First Supplement under applicable law. (i) (j) 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 First Supplement, 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. RROCKTN/DBUti1SysRevBonds2006: Award Cert B-2 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, the City 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 Security and payable from such Security on a parity with debt service due on the Bonds. 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. (k) 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. The City 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) (1) RROCKTWDBUti1SysRevBonds2006: Award Cert B-3 (m) the pursuit of any remedies under the First Supplement 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 First Supplement or any other Related Document whether or not executed or completed, or (iv) any litigation or other dispute in connection with the First Supplement 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 First Supplement or any other Related Document. 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 Account to the Reserve Requirement. (n) 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 First Supplement, 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. (o) 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." (p) 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 City's fiscal year (together with a certification of the Issuer that it is not aware of any default or event of default under the First Supplement or Master Ordinance), and the City'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 Account within two Business Days after knowledge thereof other than (i) withdrawals of amounts in excess of the Reserve Requirement and (ii) withdrawals in connection with a refunding of Bonds; (iii) Notice of any default known to the Paying Agent or City within five Business Days after knowledge thereof, RROCKTWDBUOISysRevBonds2006: Award Cert B-4 (q) (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 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 or Obligor 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. Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Master Ordinance, no such issuance may occur (1) if an event of default (or any event which, once all notice or grace periods have passed, would constitute an event of default) exists unless such default shall be cured upon such issuance and (2) unless the Reserve Account is fully funded at the Reserve Requirement (including the proposed issue) upon the issuance of such Additional Bonds, in either case unless otherwise permitted by the Insurer. (r) In determining whether any amendment, consent, waiver or other action to be taken, or any failure to take action, under the First Supplement would adversely affect the security for the Bonds or the rights of the Bondholders, the Paying Agent shall consider the effect of any such amendment, consent, waiver, action or inaction as if there were no Insurance Policy. (s) 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. RROCKTWDBUrt2SysReVBonds2006: Award Cert B-5 COMMITMENT CERTIFICATE The undersigned, the duly appointed and acting Chief Financial Officer, as defined in the Master Ordinance, of the City of Round Rock, Texas (the "City"), does hereby certify to Financial Security Assurance Inc. ("Financial Security"), pursuant to the Commitment Letter dated September 13, 2006 relating to certain Utility System Revenue Bonds, Series 2006 (the "Bonds"), as follows: 1. The representations and warranties of the City made to Financial Security in connection with the Bonds are true and correct in all material respects as of the date hereof and the City has performed all of its obligations under the First Supplement to be performed at or prior to the date hereof and is in full compliance with its agreements set forth in the First Supplement. 2. No material adverse change has occurred in the business, properties, other assets or financial position of the City since the date of the most recent audited financial statements delivered to Financial Security by the City (the "Submitted Financial Statements") and the Submitted Financial Statements present fairly the business, properties, other assets and financial position of the City as of the date thereof and the results of its operations for the period therein described. There is no litigation or other legal or governmental action, proceeding, inquiry or investigation of any nature pending, or to our knowledge threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, application of the proceeds thereof, or the payment, collection or application of income or revenues of the City; seeking to restrain or enjoin the execution, delivery or performance of the First Supplement; in any manner questioning the proceedings or City pursuant to which the Bonds are authorized or issued; in any manner questioning or relating to the validity of the Bonds, or the First Supplement; in any way contesting the corporate existence of the City or the title of its present officers to their respective offices; or contesting the powers of the City with respect to the Bonds, or the First Supplement, or any act to be done or documents or certificates to be executed or delivered in connection with any of them, or which in the aggregate would have a material adverse affect on the financial condition of the City. IN WITNESS WHEREOF, I have hereunto set my hand on this day of 2006. RROCK7WDBUtilSysRevBonds2006: Award Cert B-6 CITY OF ROUND ROCK, TEXAS Title: ESCROW AGREEMENT THIS ESCROW AGREEMENT, dated as of October 1, 2006 ("Escrow Agreement"), by and between the City of Round Rock, Texas (the "Issuer") and The Bank of New York Trust Company, N.A., as Escrow Agent (the "Bank") together with any successor in such capacity. WITNESSETH: WHEREAS, the Issuer has authorized and sold the City of Round Rock, Texas Utility System Revenue Bonds, Series 2006, dated October 1, 2006, in the aggregate principal amount of $12,000,000 (the "Bonds") to the Texas Water Development Board, an agency of the State of Texas, hereinafter called "TWDB"; and WHEREAS, it is deemed advisable to escrow the Bonds, after they have been approved by the Attorney General of the State of Texas, and registered by the Comptroller of Public Accounts of the State of Texas, with the Bank for delivery to TWDB as the work progresses on the improvements to the Issuer's Utility System to be made from the Bond proceeds; and WHEREAS, the Bank is qualified and possesses due legal authority to enter into this Escrow Agreement. NOW, THEREFORE, in consideration ofthe mutual undertakings, promises and agreements herein contained, the sufficiency of which hereby are acknowledged, and in order to secure the delivery ofthe Bonds, the parties hereto mutually undertake, promise and agreement for themselves, their respective representatives, successors, and assigns, as follows: 1. The Issuer shall cause its Bonds to be delivered to the Bank to be held in safekeeping pending delivery of the Bonds to TWDB. 2. The Bonds shall be delivered, in whole or in part, in numerical order, beginning with Bond or Bond No. R-1, upon payment by TWDB of the principal amount of the Bonds to be purchased (less any administrative fee of the TWDB), as specified by the TWDB. Such delivery shall be accomplished by the delivery to The Depository Trust Company of New York ("DTC"), for the account of the TWDB, of a Bond or Bonds in the appropriate principal amount or amounts, registered in the name of Cede & Co., as nominee of DTC. The Bank, upon such delivery of the Bonds, shall then date (in the space designated "Original Issue Date") such Bonds so delivered as of the delivery date, and date three copies each of the Signature Identification and No -Litigation Bond and Receipt of Proceeds for Installment Deliveries and shall forward two copies of such documents to McCall, Parkhurst & Horton L.L.P., Attorneys at Law, 600 Congress Avenue Suite 1250, Austin, Texas 78701. 3 The Issuer shall advise the Bank and the TWDB of any litigation pending or threatened restraining or enjoining the issuance and delivery of the Bonds or in any manner questioning the proceedings or authority by which the same is made or affecting said Bonds. Upon RROCKUtiISysRev2006TWDB: EscrowAgr 1 such advice, the Bank will not deliver any Bonds unless advised by both the Issuer and TWDB that delivery of the Bonds may be reinstated. 4. The Bonds proceeds received by the Bank from the delivery of the Bonds as provided herein shall be immediately transmitted to the Issuer for deposit into the Issuer's Project Fund, established by the Issuer in the Ordinance authorizing the issuance of the Bonds. 5. The Bank shall not be liable for any act done or step taken or omitted by it or any mistake of fact or law, except for its negligence or default or failure in the performance of any obligation imposed upon it hereunder. The Bank shall not be responsible in any manner for any proceedings in connection with the Bonds or any recitation contained in the Bonds. 6. This Escrow Agreement shall expire, and the Bank shall thereupon cancel and return to the Issuer any undelivered definitive Bonds, upon the earlier of (a) delivery of all of the Bonds to TWDB and (b) the date of receipt by the Bank of written notification from the TWDB that the Bonds are no longer to be purchased and delivered hereunder. 7. That the Issuer agrees to obtain approval of the Texas Water Development Board to any amendment, change or termination of the Escrow Agreement. 8. As compensation for the Bank's services as Escrow Agent, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). [The remainder of this page is left blank intentionally.] RROCKUtiISysRev2006TWDB: EscrowAgr 2 IN WITNESS WHEREOF, the parties have executed this Escrow Agreement in counterpart originals, each of which shall be deemed to be an original, as of the date and year first written above. RROCKUtiISysRev2006TWDB: EscrowAgr CITY OF ROUND ROCK, TEXAS of:Jcat Chief Fin 1 Officer THE BANK OF NEW YORK TRUST COMPANY, N.A. Title: ATTEST: Title: BANK SEAL RROCKUtiISysRev2006TWDB: EscrowAgr 4 SCHEDULE A Escrow Agent Fee Schedule Annual Administrative Fee $ Installment Payment Fee (Per Installment) $ RROCKUtiISysRev2006TWDB: EscrowAgr A- 1 ttr FSA 9 1?nf:iet f'tnt:perta VIA E-MAIL Ms. Cindy Demers City of Round Rock, Texas 221 East Main Street Round Rock, Texas 78664 September 13, 2006 Re: Not to Exceed $12,160,000 aggregate principal amount of City of Round Rock, Texas Utility System Revenue Bonds, Series 2006 Dear Ms. Demers: Please find attached the original of our commitment letter in respect of the above -referenced issue. Please return one fully executed copy to Ms. Erika Diaz, 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, opinion 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. 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. Note that any questions with regard to rating agency fees should be directed to the respective rating agency. Please ensure that the following people are added to the Distribution List for this Financing: Elliot Schreiber, Associate General Counsel Telephone: (212) 339-0869 Telecopier: (212) 857-0518 E -Mail: ESchreiber@FSA.com Michael Caldiero, Assistant Vice President Telephone: (212) 339-3468 Telecopier: (212) 857-0313 E -Mail: Mcaldiero@FSA.com Erika Diaz, Legal Assistant and Closing Coordinator Telephone: (212) 893-2706 Telecopier: (212) 857-0349 E -Mail: EDiaz@FSA.com As a post -closing condition, Financial Security shall receive one original and two copies of the final closing transcript of proceedings. Such closing transcript may be in the form of either hard copies or three CD-ROMs. We look forward to working with you. ec: Carol Polumbo, Esq.; McCall, Parkhurst & Horton, L.L.P. Mr. Mike Smith; Texas Water Development Board Mr. Garry Kimball; First Southwest Company I'i33.W3t`L' . :.: • \ ti• St • i'?: •;•.„ Very truly yours, Elliot Schreiber Associate General Counsel IP INA 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 any 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 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 by the Issuer 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. Any disclosure document 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 FOUR PRINTED COPIES OF ANY DISCLOSURE DOCUMENT. MUNICIPAL BOND INSURANCE COMMITMENT TERM SHEET Issuer: City of Round Rock, Texas Name of Bonds Insured: Utility System Revenue Bonds, Series 2006 Principal Amount of Bonds Insured: Not to Exceed $12,160,000 Date of Commitment EXHIBIT A Page 1 of 1 September 13, 2006 Expiration Date: Friday, November 17, 2006* Premium: .299% of total debt service on the Bonds Insured. Additional Conditions: 1. The amortization schedule for, and final maturity date of, the Bonds shall be acceptable to Financial Security. 2. See attached Exhibits B -D. Terms used in this Commitment and not otherwise defined shall have the meanings ascribed to them in the transaction document authorizing the issuance of, and setting forth the terms for, the Bonds described above (the "Ordinance"). FINANCIAL SECURITY ASSURANCE INC. Authorized Officer *To maintain the Commitment in effect until the Expiration Date, Financial Security must receive a duplicate of this Exhibit A executed by an authorized officer of the Issuer [Obligor] by the earlier of the date on which the Official Statement containing disclosure language regarding 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 this Commitment. CITY OF ROUND ROCK, TEXAS Authorized Officer L:\LEGAL\MUNIS\STATES\TX\93430 N.doc EXHIBIT B Page 1 of 1 OPINION REQUIREMENTS 1. Each of the Ordinance, Bonds and other transaction documents (collectively, 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 respective terms. 2. There is no litigation or other proceeding pending or, to the best of such counsel's knowledge, threatened in any court, agency or other administrative body (either State or Federal) which could have a material adverse effect on (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, (d) the transactions contemplated by the Related Documents or (e) the ability of the Issuer to maintain and operate the System. 3. Nothing has come to the attention of disclosure counsel which would cause them to believe that, as of the closing date, the final Official Statement (excluding information provided by Financial Security) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. The Bonds are payable from and secured by a valid lien on and pledge of the Trust Estate in the manner and to the extent provided in the Ordinance. The Issuer is duly authorized to pledge such Trust Estate, and no further action on the part of the Issuer or any other party is required to perfect the same or the interest of the Bondowners therein. L \LEGAL\MUNIS\STATES\TX193430 N.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 Debt Service Reserve Fund, if any. Notwithstanding anything to the contrary set forth in the Ordinance, amounts on deposit in the Debt Service Reserve Fund shall be applied solely to the payment of debt service due on the Bonds. (c) Each of the Texas Water Development Board (the "Board") and the Insurer shall be deemed to be a holder of the Bonds insured by it 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 Bonds are entitled to take pursuant to the provisions of the Master Ordinance pertaining to defaults or remedies. Notwithstanding the forgoing, (I) there shall be no waiver of (i) covenant compliance or (ii) a breach or an event of default without the consent of both the Board and the Insurer, (II) there shall be no compromise or settlement reached by the Board wherein the recovery is less than an amount necessary to retire or discharge the outstanding Bonds without the consent of the Insurer, and (III) there shall be no modification of the Ordinance without the written consent of both the Board and the Insurer. (d) The security for the Bonds shall include a pledge of any agreement with any underlying obligor that is a source of payment for the Bonds and a default under any such agreement shall constitute an Event of Default under the Ordinance. (e) If acceleration is permitted under the Ordinance, the maturity of Bonds insured by the Insurer shall not be accelerated without the consent of the Insurer and 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. No grace period for a covenant default shall exceed 30 days or be extended for more than 60 days, without the prior written consent of the Insurer. No grace period shall be permitted for payment defaults. (f) (g) The Insurer shall be included as a third party beneficiary to the Ordinance. (h) 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. Any amendment, supplement, modification to, or waiver of, the Ordinance or any other transaction document, including any underlying security agreement (each a "Related Document'), 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. (i) (j) Unless the Insurer otherwise directs, upon the occurrence and continuance of an Event of Default or an event which with notice or lapse of time would constitute an Event of Default, amounts on deposit in the Construction Fund shall not be disbursed, but shall instead be applied to the payment of debt service or redemption price of the Bonds. L:\LEGAL\MUNIS\STATES\TX\93430 N.doc EXHIBIT C Page 2 of 5 (k) The rights granted to the Insurer under the Ordinance or any other 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. (1) (m) 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 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. 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. (n) Each of the Issuer and Paying Agent covenant and agree 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. (o) 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. L \LEGAL\MUNIS\STATES\TX\93430 N doc (P) (q) EXHIBIT C Page 3 of 5 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 Agents 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. 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, 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 Trust Estate and payable from such Trust Estate on a parity with debt service due on the Bonds. 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. 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. 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 L:\LEGAL\MUNIS\STATES\TX\9343o N.doc EXHIBIT C Page 4 of 5 to executing any amendment, waiver or consent proposed in respect of the Ordinance or any other Related Document. (r) 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 Debt Service Reserve Fund to the Debt Service Reserve Requirement. (s) 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. (t) 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." (u) 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 or Event of 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 Debt Service Reserve Fund within two Business Days after knowledge thereof other than (i) withdrawals of amounts in excess of the Debt Service Reserve Requirement 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 or Obligor 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. L \LEGAL\MUNIS\STATES\TX\93430 N.doc EXHIBIT C Page 5 of 5 (v) Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Ordinance, no such issuance may occur (1) if an Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default) exists unless such default shall be cured upon such issuance and (2) unless the Debt Service Reserve Fund is fully funded at the Debt Service Reserve Requirement (including the proposed issue) upon the issuance of such Additional Bonds, in either case unless otherwise permitted by the Insurer. (w) 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 Paying Agent shall consider the effect of any such amendment, consent, waiver, action or inaction as if there were no Insurance Policy. (x) 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. (y) If the Bonds are issued for refunding purposes, there shall be delivered an opinion of Bond Counsel addressed to the Insurer (or a reliance letter relating thereto), or a certificate of discharge of the Paying Agent for the Refunded Bonds, to the effect that, upon the making of the required deposit to the escrow, the legal defeasance of the Refunded Bonds shall have occurred. If the Refunded Bonds are FSA -insured, at least three business days prior to the proposed date for delivery of the Policy with respect to the Refunding Bonds, the Insurer shall also receive (i) the verification letter, of which Financial Security shall be an addressee, by an independent firm of certified public accountants which is either nationally recognized or otherwise acceptable to the Insurer, of 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, and (ii) the form of an opinion of Bond Counsel addressed to the Insurer (or a reliance letter relating thereto) to the effect that the Escrow Deposit Agreement is a valid and binding obligation of the parties thereto, enforceable in accordance with its terms (such Escrow Deposit Agreement shall provide that no amendments are permitted without the prior written consent of the Insurer). An executed copy of each of such opinion and reliance letter, if applicable, or Paying Agent's discharge certificate, as the case may be, shall be forwarded to the Insurer prior to delivery of the Bonds. L:\LEGAL\MUNIS\STATES\TX\93430 N.doc COMMITMENT CERTIFICATE The undersigned, the duly appointed and acting Chief Financial Officer, as defined in the Master Ordinance, of the City of Round Rock, Texas (the "City"), does hereby certify to Financial Security Assurance Inc. ("Financial Security"), pursuant to the Commitment Letter dated September 13, 2006 relating to certain Utility System Revenue Bonds, Series 2006 (the "Bonds"), as follows: 2006. 1. The representations and warranties of the City made to Financial Security in connection with the Bonds are true and correct in all material respects as of the date hereof and the City has performed all of its obligations under the First Supplement to be performed at or prior to the date hereof and is in full compliance with its agreements set forth in the First Supplement. 2. No material adverse change has occurred in the business, properties, other assets or financial position of the City since the date of the most recent audited financial statements delivered to Financial Security by the City (the "Submitted Financial Statements") and the Submitted Financial Statements present fairly the business, properties, other assets and financial position of the City as of the date thereof and the results of its operations for the period therein described. 3. There is no litigation or other legal or governmental action, proceeding, inquiry or investigation of any nature pending, or to our knowledge threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, application of the proceeds thereof, or the payment, collection or application of income or revenues of the City; seeking to restrain or enjoin the execution, delivery or performance of the First Supplement; in any manner questioning the proceedings or City pursuant to which the Bonds are authorized or issued; in any manner.questioning or relating to the validity of the Bonds, or the First Supplement; in any way contesting the corporate existence of the City or the title of its present officers to their respective offices; or contesting the powers of the City with respect to the Bonds, or the First Supplement, or any act to be done or documents or certificates to be executed or delivered in connection with any of them, or which in the aggregate would have a material adverse affect on the financial condition of the City. IN WITNESS WHEREOF, I have hereunto set my hand on this il-iday of y RROCKTWDBUtilSysRevBonds2006: Award Ced B-6 CITY OF ROUND ROCK, TEXAS Title7D1 r flno/444. 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 Amount to be Paid: Upon determination of the final debt service 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.: 93430 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 Erika Diaz, Legal Assistant and Closing Coordinator , (212) 893-2706. DATE: September 6, 2006 SUBJECT: City Council Meeting - September 14, 2006 ITEM: 10.A.4. Consider an ordinance adopting the First Supplemental Ordinance to the Master Ordinance establishing the City of Round Rock, Texas Utility System Revenue Financing Program. (First Reading) Requires two readings Department: Finance Staff Person: Cindy Demers, Finance Director Justification: The first series of obligations being issued under the new Master Ordinance are being issued pursuant to the First Supplemental Ordinance as they relate to the Texas Water Development Board loan for up to $12,000,000. The Master Ordinance is the main governing document and the City must comply with the provisions of the Master Ordinance in connection with the issuance of any debt payable from the net revenues of the Utility System. Each series of debt obligations will be issued pursuant to a supplemental ordinance, which supplements the Master Ordinance. Funding: Cost: N/A Source of funds: N/A Outside Resources: McCall, Parkhurst & Horton, L.L.P Background Information: N/A Public Comment: N/A