SUPPLEMENTAL FINANCING AGREEMENT

This Supplemental Financing Agreement is entered into as of , 2003, by and between the Monterey Peninsula Water Management District, a California public agency (“MPWMD”), and Pebble Beach Company, a California general partnership (“PBC”).

RECITALS

A. MPWMD was created in 1977 and authorized to manage and regulate the use, reuse, and conservation of water on the Monterey Peninsula and the bond financing of related public works projects.

B. In furtherance of this authority, in 1989 MPWMD adopted Ordinance No. 39, and in accordance with Ordinance No. 39, subsequently adopted Resolution No. 89-21 approving a plan for the construction, financing, and operation of a wastewater reclamation project and executed a Wastewater Reclamation Project Fiscal Sponsorship Agreement with PBC dated as of October 3, 1989 (which, as amended, is referred to as the “Fiscal Sponsorship Agreement”), and executed a series of related agreements with the Carmel Sanitary District, now known as the Carmel Area Wastewater District (“CAWD”), the Pebble Beach Community Services District (“PBCSD”), and various users of recycled water., and

C. In 1992, consistent with the Resolution and the Fiscal Sponsorship Agreement, MPWMD issued Certificates of Participation in the amount of $33.9 million to finance the design and construction of water recycling facilities, designed and intended to be capable of producing, from the secondary effluent emitted from CAWD’s existing wastewater treatment plant, at least 800 acre feet per year of recycled water suitable for irrigation of vegetated areas within the Del Monte Forest on the Monterey Peninsula, and related distribution system and irrigation systems, with the intention of “freeing up” potable water that would otherwise be used to irrigate such areas for other uses and purposes on the Monterey Peninsula.

D. The facilities contemplated by and described in the Fiscal Sponsorship Agreement were completed in 1994 and are operational (the “Original Project”), and the financing plan specified in the Fiscal Sponsorship Agreement is in effect. PBC was granted a Water Entitlement by MPWMD in the amount of 365 acre feet annually in the Fiscal Sponsorship Agreement, and MPWMD issued to PBC on December 10, 1992 a Water Use Permit pursuant to MPWMD Ordinance No. 39 evidencing such Water Entitlement. The parties have carried out and satisfied to date all of their obligations under the Fiscal Sponsorship Agreement.

E. The performance of the Original Project has not met the expectations of any of the parties either with regard to quantity or quality due to a number of factors beyond the consideration [or control] of any of the parties participating in the Original Project. Prominent among these factors are the salt-sensitivity of the dominant species planted in the greens of many of the golf courses, inadequacy of the drainage facilities to conduct accumulated salts away from the greens, smaller than anticipated amounts of secondary effluent due to decreased flows of influent to the CAWD wastewater plant (resulting in part from consumers’ water conservation efforts), increased amount of salinity added by water softening units (the demand for which increased as the source water became more saline), increased amount of salinity in the recycled water due to decreased influent flows caused by water conservation efforts, internal wastewater plant processes contributing additional salinity loading, the lack of sufficient data concerning the composition of the secondary effluent produced by the CAWD Wastewater Treatment Plant or concerning the water quality and water quantity requirements for golf course irrigation, and the absence of any seasonal storage of recycled water.

F. MPWMD has requested that PBC assist, and PBC is willing to assist, with the implementation and financing of improvements to the Original Project (such improvements as further defined herein being the “Project Expansion”) in consideration of MPWMD’s agreement to a financing plan therefor. Such financing plan, as authorized by MPWMD Ordinance No. 109, and as specifically set forth in this Agreement, provides that PBC shall have the right to sell and convey a portion of its Water Entitlement to be dedicated to an expended class of Benefited properties, for such consideration as PBC may determine, with the proceeds of such sales and conveyances to be devoted first to the Capital Costs of the Project Expansion and thereafter to the costs of the Original Project.

G. This Agreement constitutes an integral part of a joint financing arrangement among PBC, MPWMD, CAWD and PBCSD and other entities to provide a reliable, high-quality recycled water supply for irrigation of golf courses and other vegetated areas, and thereby to eliminate to the maximum extent practicable the use of potable water for irrigation of the golf courses and other vegetated areas in the Del Monte Forest on the Monterey Peninsula.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals of fact, and the covenants and representations and warranties set forth in this Agreement, the parties have agreed as follows:

1. Definitions As used in this Agreement, the following terms shall have the meanings set forth below. The definitions set forth below are the same as those set forth in the Fiscal Sponsorship Agreement for such terms, except to the extent any such meanings are modified by Ordinance No. 109 or herein and to the extent additional terms are defined herein :

1.1 “Ancillary Project Costs” means net revenues (gross revenues less allocable operation and maintenance costs and administrative and general costs, as such terms are defined in accordance with generally accepted utility practices), with respect to the potable water, subject, from time to time, to the Water Entitlement or Water Use Permits, which Cal-Am does not receive by reason of operation of the Project, all as more fully described in the Service Agreement. Ancillary costs shall not include any return on assets of Cal-Am which have been removed from the water distribution system rate base by reason of the Project. Ancillary Costs shall be reduced over time by net revenues received by Cal-Am by reason of sales of Cal-Am water (with respect to the Benefited Properties) following the first date of Project operation.

1.2 “Benefited Properties” means those properties described on Exhibit “A” hereto within the Cal-Am service area on which a portion of the Water Entitlement may be utilized. All Benefited Properties are located in the unincorporated portion of the Del Monte Forest (the area shown on Exhibit “B”) except as otherwise noted in Exhibit “A.”

1.3 “Board” means the Board of Directors of MPWMD.

1.4 “COP Carrying Costs” means the following costs incurred with respect to the Certificates of Participation (“COP”)or additional certificates of participation or bonds: fees and expenses of trustees, remarketing agents, tender agents and paying agents, arbitrage rebate calculation fees, costs incurred in connection with renewals of the COP Letter of Credit or additional letter of credit (including COP, MPWMD and bank counsel fees and rating agency fees), fees for preparing or updating offering circulars, auditor or accounting fees, bond counsel and other counsel fees generally, and other similar ordinary and necessary costs, incurred with respect to the Certificates of Participation or additional certificates of participation or bonds.

1.5 “COP Documents” means the COP documents and the terms and conditions of all COP issuance documentation, including, without limitation, the authorizing indenture or resolution, lease or installment sale agreement, purchase agreement and COP Letter of Credit.

1.6 “COP Requisite Credit Rating” means a credit rating in one of the rating categories of AAA or AA or Aaa or Aa without reference to plus or minus subcategories, from either Moodys or S & P, respectively, for certificates of participation or bonds issued by public agencies.

1.7 “Certificates of Participation” and “COP” each mean the Certificates of Participation issued by MPWMD in 1992 in the amount of $33.9 million to finance the Capital Costs of the Original Project.

1.8 “Business Day” means any weekday which is not a Federal or California state holiday.

1.9 “Cal-Am” means the California American Water Company, a California corporation, and its successors and assigns.

1.10 “Capital Costs,” as applied to the Project or any portion thereof, means all or any part of:

(a) the cost of acquisition by CAWD or PBCSD of all lands, structures, real or personal property, rights-of-way, franchises, easements, and interests acquired or used for the Project, inclusive of fees and commissions for acquisition;

(b) the cost of construction of the Project, including, without limitation, demolition, modification, replacement or renovation of existing structures, facilities, fixtures or equipment essential to the construction and operation of the Project; cost of improvements and materials; direct and indirect Public Participant construction and administration expenses properly allocable to the Project in accordance with generally accepted accounting principles; cost of painting, decorating, furnishing and landscaping; contractor and subcontractor profit; and costs related, by reason of the Project, to plumbing, mains, tanks, or pipes which are modified, replaced or renovated, whether owned by Public Participants or others;

(c) the cost of demolishing or removing any buildings, fixtures, equipment, or structures on land so acquired, including, without limitation, the cost of acquiring any lands to which such buildings or structures may be moved;

(d) the cost of all new machinery, piping, equipment and furnishings and the lesser of (i) the fair market value, or (ii) depreciated value for purposes of the applicable rate base, of machinery, piping, equipment and furnishings made obsolete or unusable to Cal-Am, or any of the Public Participants, or others by reason of the Project to the extent not replaced by the Project;

(e) costs of selling and issuing the Certificates of Participation, including, without limitation, the underwriter's discount and any other applicable financing charges;

(f) interest on any funds advanced to permit payment of any of the Capital Costs prior to, during, and for a reasonable period after completion of the construction of the Project as determined by MPWMD, including, without limitation, capitalized interest on the Certificates of Participation;

(g) provisions for working capital;

(h) the Operating Reserve and other similar reserves for routine or extraordinary repairs and replacements necessary to the Project;

(i) the cost of architectural, engineering, planning, environmental analysis, financial, accounting, auditing and legal services, plans, specifications, estimates, administrative expenses, permits, fees, adverse claims, personnel and overhead costs (both direct and indirect, to the extent properly allocable to the Project in accordance with generally accepted accounting principles), and other expenses necessary or incident to determining the feasibility of construction of the Project or incident to the planning, construction, acquisition, or financing of any portion of the Project, including, without limitation:

(1) payment during the construction period of the premiums for all title and other insurance, bonds, or undertakings required to be obtained and maintained with respect to any part of the Project, to the extent such amounts are not paid by any contractor who constructs or installs any portion of the Project;

(2) payment of the taxes, assessments and other fees or charges, if any, that may become payable during the construction period with respect to any portion of the Project, or reimbursements thereof; and

(3) payment of expenses incurred in seeking to enforce any remedy against any contractor or subcontractor in respect of any default under a contract relating to the acquisition, construction or installation of any portion of the Project.

(4) payment of expenses incurred concerning asserted deficiencies in the Project and related matters beginning on January 1, 1995, and continuing through the drafting, negotiation, and execution of any and all agreements necessary or desirable to implement the design, construction, operation, and maintenance of the Project Expansion and any modifications thereof or thereto, to the extent that corresponding expenses concerning the implementation of the Original Project were treated as reimbursable.

(5) payment of any expenses incurred to track and record changes in the Water Entitlements following issuance of new Water Use Permits or Water Permits, to verify water use capacity pursuant to Subsection E of MPWMD Rule 23, to otherwise monitor compliance with or to enforce actual water usage pursuant to such laws, ordinances, and regulations as are generally applicable to persons actually using water from the Cal-Am water distribution system, and to make such determinations concerning adjustments, and to implement the adjustments, to Water Use Permits (or Water Permits issued pursuant to MPWMD Rule 23.5) that may be required in 2075.

1.11 “Completed” with respect to the Project Expansion shall mean that (1) all required permits or other approvals have been obtained, (2) all construction activities for the advanced treatment components (being added to the tertiary treatment plant facilities of the Original Project), Forest Lake Reservoir, and all treatment, and distribution facilities associated therewith, have been completed and tested in accordance with their respective approved plans, permits and other approvals, (3) Forest Lake Reservoir has been filled to capacity with “Recycled Water” suitable for irrigation of all portions of the Recycled Water Irrigation Areas without the addition of any potable water thereto and otherwise meeting all regulatory and health standards for such usage, and (4) all portions of the distribution system are capable of delivering such Recycled Water to the Recycled Water Irrigation Areas.

1.12 “CAWD” means the Carmel Area Wastewater District, formerly the Carmel Sanitary District, a public agency.

1.13 “Emergency” means one or more sudden, unexpected occurrences, beyond the reasonable control of the entity having operation and maintenance responsibilities of a particular facility comprising part of the Project, that interrupt the supply of Recycled Water to the Recycled Water Irrigation Areas, demanding immediate and diligent action by such entity to restore such supply. Under no circumstances shall an Emergency last longer than the period of time reasonably required to promptly and diligently complete the repair or replacement activities.

1.14 “Del Monte Forest” means the area of unincorporated Monterey County described and/or depicted on Exhibit “E.”

1.15 “Financial Commitment” means the commitment of PBC, as the Fiscal Sponsor, or any subsequent Fiscal Sponsor, to assume and guarantee payment of (1) the Capital Costs of the Project (including the payment of the principal of and interest on the Certificates of Participation or any bonds or other obligations issued by any Public Participant to finance such costs), and (2) the Net Operating Deficiencies of the Project until the Certificates of Participation (and any bonds or other obligations issued by any Public Participant to finance such costs) have been paid in full (or for any shorter periods as permitted by MPWMD), and (3) payment of all Ancillary Project Costs.

1.16 “Financial Institution Requisite Credit Rating” means a credit rating, with respect to long-term unsecured obligations of a corporation, in one of the rating categories of AAA or AA or Aaa or Aa, without reference to plus or minus subcategories, from either Moodys or S & P, respectively.

1.17 “Griffin” means the Hester Hyde Griffin Trust, dated October 31, 1988.

1.18 “Interest Reserve” means the amount of interest on the Certificates of Participation or additional certificates of participation or bonds required to be covered by the COP Letter of Credit or additional letter of credit, respectively, in order to obtain and maintain the COP Requisite Credit Rating.

1.19 “Interruption,” for the purposes of Rule 23.5 and Ordinance No. 109, means an interruption for longer than { [hours] [days]} in the supply of Recycled Water to a Recycled Water Irrigation Area. The use of potable water for irrigation of a Recycled Water Irrigation Area shall not extend for any longer than the period of time reasonably required to promptly and diligently complete repair or replacement activities necessary to restore Recycled Water service except as determined in accordance with subsection F of MPWMD Rule 23.5.

1.20 “Issuer,” with regard to the Certificates of Participation issued in 1992, means MPWMD, and with regard to any refunding certificates of participation or bonds, means the Public Participant which issues the refunding certificates of participation or bonds.

1.21 “Lohr” means J. Lohr Properties, Inc., a California corporation, in conjunction with the Winifred H. Braun Charitable Annuity Trust, dated December 1, 1980.

1.22 “Management Agreement” means the agreement between CAWD and PBCSD dated , 19 which established and allocated the rights and responsibilities of CAWD and PBCSD with respect to the construction, ownership and operation of the Original Project.

1.23 “Management Committee” means a committee, composed of (a) two representatives of CSAWD, (b) two representatives of PBCSD, (c) so long as PBC is required to deliver a NOD Letter of Credit, as defined in Section 3.2.3 hereof, one representative of PBC, and (d) one, non-voting representative of IRWUG (to become a voting member after the Certificates of Participation are fully paid and retired). The Management Committee will, pursuant to the Supplemental Construction and Operation Agreement described in Section 1.35(a) hereof, cause to be developed, and approve, a budget for, and direct budgeting for and the construction and operation of, the Project.

1.24 “Moodys” means Moody’s Investors Service Inc.

1.25 “Net Operating Deficiency,” as applied to the Project, means, for any fiscal year, or portion thereof, of the Public Participant operating the Project, the amount by which the Operation and Maintenance Expenses for such period exceed the Operating Revenues for such period.

1.26 “Recycled Water Irrigation Areas” means the golf courses and other vegetated areas located within the Del Monte Forest that now or in the future may be irrigated with Recycled Water supplied by the Project.

1.27 “Operating Reserve” means a reserve maintained for the purpose of paying for operations, providing working capital, and paying for routine and extraordinary repairs and replacements.

1.28 “Operating Revenues,” as applied to the Project, means all income, rents, rates, fees, charges and other moneys derived by the Public Participants from the ownership or operation of the Project, including, without limitation, (a) all income, rents, rates, fees, charges or other moneys derived from the sale, furnishing and supplying of Recycled Water or from potable water supplied in lieu thereof (but only to the extent the use of potable water is permitted under Ordinance No. 109), (b) insurance and condemnation proceeds resulting from damage to or destruction of any of the Project’s facilities or from the condemnation of any of such facilities, and (c) interest earned on all revenues referenced in (a) or (b) above, on the Operating Reserve or on any other fund or account relating to the Project (excluding any amounts required to be rebated to the United States pursuant to Section 148 of the Internal Revenue Code); provided, however, that the term “Operating Reserve” shall not include customers’ deposits or any other deposits subject to refund until such deposits are no longer subject to refund and have become the property of one of the Public Participants.

1.29 “Operation and Maintenance Expenses,” as applied to the Project, means all expenses and costs of management, operation, maintenance and repair of the Project, including; without limitation, payments to be made by the Public Participants under agreements with Cal-Am for the purchase of potable water and all incidental costs, fees and expenses incurred for such purpose properly chargeable to the Project in accordance with generally acceptable accounting principles.

1.30 “Ordinance” means Ordinance No. 109as adopted by the Board on

, 2003, amending Ordinance No. 39, as approved by the Board on February 13, 1989, and as subsequently amended.

1.31 “PBCSD” means the Pebble Beach Community Services District, a public agency.

1.32 “Project” means the Original Project as defined in subsection 1.3.2 (a) hereof, and the the Project Expansion as defined in subsection 1.3.2 (b) hereof.

(a) The “Original Project” means and consists of (1) a tertiary treatment facility at the present CAWD treatment plant site, designed to produce at least 800 acre feet per year of disinfected recycled water suitable for irrigation of the Recycled Water Irrigation Areas, as more specifically described on Exhibit “C” hereto, (2) a distribution system which is capable of distributing the recycled water from the facility to a point of distribution in the Del Monte Forest for further distribution to the Recycled Water Irrigation Areas, as more specifically described on Exhibit “C” hereto, and (3) recycled water irrigation systems on each of the Recycled Water Irrigation Areas.

(b) The “Project Expansion” means and consists of the addition of advanced treatment components to the treatment facilities of the Original Project, to produce “Recycled Water” as defined in section 1.34 herein, and the addition of storage, treatment, and distribution facilities at or associated with the Forest Lake Reservoir located within the Del Monte Forest and owned by PBCSD

1.33 “Public Participant” means any one or more of the following: MPWMD, CAWD, PBCSD, or any successor public agency, including, without limitation, any joint powers agency formed by one or more of such agencies.

1.34 The meaning of the term “Recycled Water” depends upon whether or not the Project Expansion is Completed:

(a) Before the Project Expansion is Completed, “Recycled Water” means water originating from the tertiary treatment facilities of the CAWD wastewater treatment plant.

(b) After the Project Expansion is Completed, “Recycled Water” shall mean water produced by the Project and receiving further treatment so as to be suitable for irrigation of the Recycled Water Irrigation Areas without the addition of any potable water thereto (except during an Interruption as defined herein) and otherwise meeting all regulatory and health standards for such usage.

1.35 “Related Agreements” means the agreements, in form and substance satisfactory to PBC and MPWMD, between or among two or more of CAWD, PBCSD, MPWMD, Cal-Am, an owner of one or more of the Recycled Water Irrigation Areas and PBC, as the case may be, reasonably necessary to implement the Project, and addressing all matters related to the Project as the parties may deem necessary or advisable, including, without limitation, the following agreements:

(a) Fiscal Sponsorship Agreement between MPWMD and PBC;

(b) the Supplemental Construction and Operation Agreement Among PBC, MPWMD and CAWD/PBCSD Relating to the Construction and Operation of the Project - the agreement pursuant to which MPWMD will be entitled to own all Recycled Water produced by the Project in exchange for the payment of all Capital Costs and Net Operating Deficiencies of the Original Project; CAWD and PBCSD will undertake to construct and manage the Project; and PBC will be given certain rights to review and participate in decisions with respect to such construction and management.

(c) Sale Agreements Between MPWMD and Owners of Recycled Water Irrigation Areas - the long-term sale agreement with respect to the sale and delivery of the Recycled Water to the Recycled Water Irrigation Areas.

(d) Specifically excluded from the definition of “Related Agreements” are the following agreements:

(i) “Service Agreement” means the agreement dated , 19 between Cal-Am and PBC pursuant to which Cal-Am agreed to reserve the necessary water supply and to serve the Benefited Properties and PBC agrees to pay the Ancillary Project Costs.

(ii) “Delivery Agreement” means the agreement dated , 19 among CAWD or CAWD/PBCSD, MPWMD, and Cal-Am - the agreement which defines the rights and responsibilities of each of the parties with respect to the operation and maintenance of all distribution systems for Recycled Water, distribution of the Recycled Water to the users thereof, and the billing and collecting of the charges for use of the Recycled Water.

1.36 “Supplemental Financial Commitment” means the funds that PBC will raise through the sale of such portions of its Water Entitlement pursuant to Subsection C of Section Three of Ordinance No. 109 (combined with any funds which may be independently committed by PBC, IRWUG, CAWD, PBCSD, or any other entity willing to commit funds to the Capital Costs of the Project Expansion). Pursuant to Subsection E of Section Three of Ordinance No. 109, any proceeds received by PBC from the sales of portions of PBC’s Water Entitlement pursuant to Subsection C thereof shall be applied to payment of the Capital Costs of the Project Expansion (including repayment of any funds independently committed by PBC, IRWUG, CAWD, PBCSD, or any other entity as a part of the Supplemental Financial Commitment), and any proceeds from such sales in excess of the Capital Costs of the Project Expansion shall be applied to the Net Operating Deficiencies of the Project or the Capital Costs of the Original Project.

1.37 “S & P” means Standard & Poor’s Corporation.

1.38 “Terminate” means the withdrawal, without formal MPWMD action, of authority to act as previously provided by a valid permit or water service connection, whichever is applicable.

1.39 “Water Entitlement” means an aggregate of 380 acre feet per year of potable water which has been dedicated (as evidenced by Water Use Permits issued pursuant to Ordinance No. 39, the Resolution, and the Fiscal Sponsorship Agreement) to land within the jurisdiction of MPWMD for the purpose of provided for the payment of the Capital Cost, Ancillary Project Cost, and Net Operating Deficiencies of the Project. Ordinance No. 109 provides a process by which a portion of the Water Entitlement held by PBC may be separately sold and conveyed and thereby be dedicated to other land within the jurisdiction of MPWMD with the proceeds therefrom to be applied to the costs of the Project Expansion and the Original Project as more specifically described therein.

1.40 “Water Permit” means a permit issued by MPWMD authorizing the expansion/extension of the Cal-Am water distribution system pursuant to a Water Entitlement (as evidenced by a Water Use Permit issued pursuant to MPWMD Rule 23.5). Upon compliance with Subsection F of Rule 23.5, MPWMD shall by non-discretionary ministerial action, cause the present Expansion/Extension of the Cal-Am water distribution for Benefitted Properties. A Water Permit shall take the place of and be used instead of any Expansion/Extension Permit (as defined pursuant to Rule 23) upon any Benefited Property as relates to the use of a specified portion of the Water Entitlement.

1.41 “Water Use Permit” means a writing from MPWMD which evidences the dedication of the Water Entitlement as a present vested property right enuring to the use and benefit of one or more of the Benefited Properties. A Water Use Permit shall, by non-discretionary ministerial action, cause the present expansion/extension of the Cal-Am water distribution system for the Benefited Properties, upon designation of the location of use, and upon payment of applicable connection fees and charges. A Water Use Permit shall take the place of, and be used in lieu of, any expansion/extension permit upon any Benefited Property as relates to the use of any portion of the Water Entitlement.

2. The Project Expansion.

2.1 Description

“Project Expansion” refers generally to the addition of advanced treatment components to the treatment facilities of the Original Project to produce “Recycled Water,” and the addition of storage, treatment, and distribution facilities at or associated with the Forest Lake Reservoir located within the Del Monte Forest and owned by PBCSD. [further description to be provided by PBC, CAWD, or PBCSD]

2.2 Respective Roles of Participants.

(a) In connection with the continued operation of the Original Project:

(i) As further specified in the Fiscal Sponsorship Agreement, MPWMD shall continue to:

(A) own the Recycled Water produced by the Original Project;

[CAWD & PBCSD will probably desire limitations on this ownership]

(B) cause the Recycled Water to be sold and distributed to the owners of the Recycled Water Irrigation Areas and other users;

(C) bill and collect from the owners of the Recycled Water Irrigation Areas and other users of the Recycled Water the purchase price of such water;

(D) repay the Certificates of Participation issued to finance the Original Project with the revenues from such Recycled Water sales (or by drawing down the COP Letter of Credit, as required if such revenues are insufficient for such purpose); and

(E) pay any Net Operating Deficiencies from the Operating Reserve established for this purpose or from the NOD Letter of Credit, as required if the Operating Reserve is insufficient for such purpose.

(ii) As further specified in the Supplemental Construction and Operation Agreement, CAWD and PBCSD shall continue to own, operate, and maintain the Original Project.

(b) In connection with the construction and operation of the Expanded Project:

(i) PBC shall, through sales of portions of its potable water entitlement (to individual Del Monte Forest residential property owners who have agreed to invest in the Project) in accordance with section 3.2 of this Agreement and the Ordinance, raise the funds necessary to pay for the design and construction of the Expanded Project and to pay all other capital, operating and financing costs thereof. All such funds shall be used solely to pay costs associated with the Project as further described in section 3.2 of this Agreement and the Ordinance.

(ii) MPWMD shall:

(A) own the Recycled Water produced by the Expanded Project;

[CAWD & PBCSD will probably desire limitations on this ownership]

(B) shall cause the Recycled Water to be sold and distributed to the owners of the Recycled Water Irrigation Areas and other users;

(C) bill and collect from the owners of the Recycled Water Irrigation Areas and other users of the recycled water the purchase price of such Recycled Water:

(D) repay the Certificates of Participation issued to finance the Original Project with the revenues from such Recycled Water sales (or by drawing down the COP Letter of Credit, as required if sales revenues are insufficient for such purpose); and

(E) pay any Net Operating Deficiencies from the Operating Reserve established for this purpose or from the NOD Letter of Credit, as required if the Operating Reserve is insufficient for such purpose.

(iii) As further specified in the Supplemental Construction and Operation Agreement, CAWD and PBCSD shall construct, own and operate the Project Expansion in conjunction with their operation of the Original Project, all as further described herein and in the agreements referenced herein.

2.2 Use of Recycled Water.

MPWMD shall sell Recycled Water to each of the owners of the Recycled Water Irrigation Areas in such quantities as each such owner shall require for irrigation purposes, from time to time, in lieu of the potable water previously utilized by such Recycled Water Irrigation Areas for irrigation purposes, both before and after the Original Project, all as more fully described in the respective Sale Agreement between MPWMD and such owner. In addition, the owner of each Recycled Water Irrigation Area shall have a pro-rata right-of-first-refusal with respect to the purchase of surplus Recycled Water (Recycled Water produced by the Project Expansion in excess of the requirements of the Recycled Water Irrigation Areas) for use on its Recycled Water Irrigation Areas.

So long as the Financial Commitment is in effect, all Recycled Water sold for use on the Recycled Water Irrigation Areas shall be sold at charges which are not in excess of Cal-Am’s charges for potable water, in similar quantities for similar uses and to similar users, from time to time, except as the owners of the Recycled Water Irrigation Areas may agree in writing otherwise. After the expiration of the Financial Commitment of the Fiscal Sponsor, the rates and charges for Recycled Water shall be sufficient to maximize payment for Operation and Maintenance Expenses and Capital Costs of the Reclamation Project, subject to the limitation set forth in Water Code section 13550 that the price for Recycled Water shall be comparable to the cost of supplying potable domestic water except as the owners of the Recycled Water Irrigation Areas may agree in writing otherwise.

3. Financing of the Project

3.1 Financing of the Original Project. MPWMD selected PBC as the Fiscal Sponsor pursuant to Part II of Ordinance No. 39 and granted the Water Entitlement (as described in more detail in Section 4 of this Agreement) based upon the irrevocable commitment of PBC to underwrite, be responsible for, assure and guarantee the full payment of the Financial Commitment (Capital Costs and Net Operating Deficiencies and Ancillary Project Costs of the Original Project as set forth in the Fiscal Sponsorship Agreement. In 1992, MPWMD issued Certificates of Participation in the amount of $33.9 million to finance the design and construction of the Original Project. MPWMD and PBC shall continue performing their respective obligations under the Fiscal Sponsorship Agreement, which have the effect of securing the Certificates of Participation.

3.2 Financing of the Project Expansion

(a) Addition of new Benefited Properties The parties primarily involved in the planning of the Project Expansion (CAWD, PBCSD, PBC, and IRWUG) have conferred with MPWMD and have concluded that the most effective means of financing and implementing of the Project Expansion without public funds is to expand the scope of the Benefited Properties within the Del Monte Forest, and to allow PBC, on terms and conditions set forth in the following Subsections of this Agreement, to separately sell and convey portions of its existing Water Entitlement solely for dedication to the Benefited Properties (as defined in this Ordinance) not owned by PBC as of the date that this ordinance is adopted. PBC will devote and apply the proceeds of such sales and conveyances to the costs of the Project Expansion and the Original Project as more specifically described in Subsections 3.2(d) and 3.2(e) of this Agreement.

(b) Authorization for PBC to Sell and Convey PBC’s Water Entitlement In recognition of PBC’s Supplemental Financial Commitment concerning the Project Expansion through the sale of portions of its Water Entitlement (subject to the terms and conditions specified in the Ordinance and in MPWMD Rule 23.5), PBC is hereby authorized to separately sell and convey to other owners of land within Del Monte Forest, for such consideration and upon such terms and conditions as PBC in its discretion may determine, such portions of its Water Entitlement as it may choose, provided that no such conveyance shall be effective unless and until PBC has provided the Supplemental Financial Commitment as described in Subsections (d) and (e) of this Section 3.2; and provided further that each portion of the PBC Water Entitlement thus conveyed shall be subject to the conditions set forth in section 4.5 of this Agreement and the Ordinance.

(c) Good Faith Efforts and Accounting for Proceeds PBC will use its good faith efforts to sell such portions of its Water Entitlement pursuant to this Section 3.2 as PBC in its discretion may determine to raise the funds necessary to cover the Capital Costs of the Project Expansion. At the end of each month after the effective date of this Ordinance, PBC shall report to MPWMD, in a manner that shall not adversely impact its continuing ability to sell such portions of its Water Entitlement pursuant to this Section 3.2 and the Ordinance, on PBC’s progress in raising the Supplemental Financial Commitment.

(d) Application of Proceeds All proceeds received by PBC from any separate sale or conveyance of a portion of PBC’s Water Entitlement as described in Subsection C of this Section Three shall be used to pay for, in the first instance, the Capital Costs of the Project Expansion. Any proceeds from such sales in excess of the Capital Costs of the Project Expansion shall be used to pay the Net Operating Deficiencies of the Project or the Capital Costs of the Original Project.

(e) Providing the Supplemental Financial Commitment The Capital Costs of the Project Expansion are currently estimated as of the date of this Agreement at $22 million but may exceed this estimated amount. At such time as the proceeds received by PBC for the separate sale of portions of its Water Entitlement pursuant to Subsection C of this Section Three (combined with any funds which may be independently committed by PBC, IRWUG, CAWD, PBCSD, or any other entity willing to commit funds to the Capital Costs of the Project Expansion) which funds are collectively called the “Supplemental Financial Commitment,” are, in the judgment of PBC, sufficient to pay for the Capital Costs of the Project Expansion, and CAWD and PBCSD each concur in writing that the Supplemental Financial Commitment is available for their use and that each is prepared forthwith to commence construction of the Project Expansion, PBC will give notice to MPWMD that the Supplemental Financial Commitment has been provided, together with evidence of CAWD’s and PBCSD’s respective intent to forthwith to commence construction of the Project Expansion.

(f) Effect on Existing Rights Nothing in this section 3.2 shall affect the right and ability of PBC to use and apply, on Benefited Properties owned by PBC as of the date that the Ordinance is adopted, such quantity of PBC’s Water Entitlement as has not been sold and conveyed by PBC pursuant to this Section 3.2 and the Ordinance Three. PBC may sell and convey a parcel of land that it owns together with a portion of PBC’s remaining Water Entitlement without being required to apply any consideration received therefor to the Supplemental Financial Commitment further described in Subsections I and J of this Section Three. However, as a condition for the preceding sentence, PBC shall provide such information as is necessary for MPWMD to demonstrate that no money or other valuable consideration has been separately given or received for the portion of the Water Entitlement conveyed with the land (other than reimbursement for the MPWMD Rule 24 connection fee or other Cal-Am or MPWMD fees or charges paid by PBC).

3.3 Capital Costs. CAWD and PBCSD shall have responsibility for construction of the Original Project, subject to the Management Committee’s right to approve decisions relating to the design and construction of the Project Expansion, including, without limitation, with respect to the matters described in this Section 3.3.

(a) With respect to design and construction of the Project Expansion, each member of the Management Committee shall be given advance written notice, in reasonable detail, and a reasonable period of time after its receipt of such notice to comment on, and make suggestions with respect to, each of the following actions prior, as applicable, to such action becoming effective or complete: (i) initial design plans for the Project Expansion; (ii) cost estimates for the Project Expansion as set forth in a construction budget and other writings, including the setting of a contingency; (iii) the approval of final design plans for the Project Expansion; (iv) the establishment of bid criteria for all construction contracts and subcontracts for the Project Expansion; (v) the preparation of all construction contracts for the Project Expansion; (vi) the letting and approval of all such contracts and the related subcontracts; (vii) the establishment of the construction schedule; (viii) all construction disbursements; and (ix) the adequacy of all payment and performance bonds and insurance requirements. [The preceding sentence needs to be harmonized with the corresponding provisions of the Supplemental Construction and Operation Agreement.] The right to comment on, and make suggestions with respect to, the construction disbursements shall be provided, in part, by each member of the Management Committee being given the opportunity to participate in the periodic (but at least monthly) meetings, between the general contractor(s) for the Project Expansion and the construction engineer(s) retained by CAWD and PBCSD to supervise the construction of the Project Expansion, with respect to the status of construction of the Project Expansion and the approval of the payment of each construction disbursement.

[(b) Without the written approval of PBC, which shall not be unreasonably withheld or delayed, (i) upon and after the approval by the Management Committee of the final design and scope of, and construction schedule for, the Project Expansion (upon which the Capital Costs have been determined), no material change to such design, scope or construction schedule shall be made by the Management Committee, and (ii) upon and after the net effect of all change orders having aggregated an amount which exceeds 5% of the construction budget (upon which the Capital Costs have been determined), without reference to the contingency, no additional change order in excess of $5,000 may be approved by the Management Committee. Each entity with representation on the Management Committee shall be designated a third party beneficiary of all construction contracts, all payment and performance bonds and all insurance policies in connection with the Project Expansion providing coverage with respect to the construction of the Project Expansion.]

3.4 Calculation and Monitoring of Net Operating Deficiencies of the Project.

(a) The calculation of the projected Net Operating Deficiency, if any, for each year, shall be made by reference to the annual budget for the Project for each year. The Management Committee shall cause to be developed, and shall approve, an annual budget for the Project for each year at least 30 days prior to the commencement of such year. In calculating the projected and actual Net Operating Deficiencies for any year: (i) no item of administrative or other overhead expense of the Public Participants, other than such reasonable expenses which relate to the Project, shall be included in the calculation of Operation and Maintenance Expenses without the prior written consent of each of the members of the Management Committee who is not a representative of such Public Participant, with the exact amount of any such includable expenses to be determined by the Management Committee; (ii) Operation and Maintenance Expenses shall only include an allowance for depreciation, amortization and obsolescence (established in the first annual budget for the Project) which is determined pursuant to generally accepted utility practices, but is limited to an amount sufficient to create, over the original term of the Certificates of Participation, a sinking fund for replacement and renovation which shall not exceed $1,000,000, and such allowance shall not be modified if the Certificates of Participation are prepaid for any reason; and (iii) no debt service obligation on the Certificates of Participation, covered by the COP Letter of Credit shall be included.

(b) CAWD and PBCSD have had and shall continue to have responsibility for management and operation of the Project, subject to the rights of each member of the Management Committee to receive financial data (both projected and historical) concerning the Project, and to review, and comment upon, decisions related to such financial data and the management and operation of the Project, including, without limitation, with respect to the matters described in this subsection (b):

(i) Each of the members of the Management Committee has had and shall continue to have the right to participate in the development of an annual budget for the Project, which shall include projected Operating Revenues and Operation and Maintenance Expenses for such year. Only expenses, provided in a budget for the Project, or approved in writing by each member of the Management Committee, shall be deemed to constitute Operation and Maintenance Expenses. CAWD shall submit to each member of the Management Committee (A) for each fiscal year, if, during the immediately prior fiscal year, the actual Net Operating Deficiency exceeded the budgeted Net Operating Deficiency, if any, for such year, unaudited monthly financial statements of the Project, accompanied by an unqualified certificate of the chief financial officer of the Public Participant which owns the Project (an “Officer’s Certificate”), on or before the 15th day after each such month, (B) with respect to each fiscal year for the Project not described in clause (A) above, unaudited quarterly financial statements of the Project, accompanied by an Officer’s Certificate, on or before the 30th after each such quarter, (C) with respect to each fiscal year of the Project, audited annual financial statements of the Project, accompanied by an unqualified certificate of the auditing firm approved by the Management Committee, on or before the 45th day after the end of each fiscal year, and (D) such other written information with respect to the Project as may be reasonably requested by such person, including, without limitation, such information as may be necessary to make a proper accounting to PBC with respect to its obligations in connection with the Financial Commitment, within a reasonable period of time after it is requested. Each of such financial statements shall consist of a balance sheet, as of the end of the applicable period, and an income statement and statement of changes in financial position, for such applicable period, and shall be prepared in accordance-with generally accepted accounting principles consistently applied.

(ii) Each of the members of the Management Committee has had and shall continue to have the right to (A) receive initial drafts of each annual budget with respect to the Project at the same time such draft is first submitted to the General Manager or Board of Directors of the Public Participant which owns the Project, (B) the proposed final draft of each such annual budget at least 30 days before it is submitted to the Management Committee for its approval, (C) make comments to such General Manager and the Management Committee with respect to each such draft of the annual budget and each of the financial statements for the Project which it has the right to receive, and (D) review and audit, or cause its designated representatives to review and audit, the books and records with respect to the Project, at its own expense, during the business hours of such Public Participant, upon reasonable advance notice of its intention to do so having been given to such Public Participant.

(iii) Any member of the Management Committee has had and shall continue to have the right to request, from time to time, the General Manager of CAWD to prepare projections of the operating results of the Project through the end of the then fiscal year of the Project. Upon receiving such request, such General Manager shall engage in best efforts to prepare and deliver such projections to each member of the Management Committee within 30 days of receiving such request. In the event that any such projections reveal that it is likely that the operating results for such year will involve a Net Operating Deficiency and either no Net Operating Deficiency was included in the budget for such year or such projected Net Operating Deficiency was in excess of the Net Operating Deficiency included in the budget for such year, at the request of any member of the Management Committee, the Management Committee shall retain a consulting engineer to review the operation and maintenance of the Project and to make recommendations with respect thereto. If requested by PBC, the Management Committee shall cause the Project to promptly comply with all such recommendations which are reasonable. The charges of such consulting engineer shall be paid by the Project and shall be deemed to be an Operation and Maintenance Expense.

(iv) Notwithstanding subparagraph (i) above, in the event the results of operations (i.e. difference between the Operating and Maintenance Expenses and Operating Revenues) for a fiscal year of the Project, based upon the results of operations of the Project through the first nine months of such year projected through the end of such year, reflects a $100,000, or greater, negative difference from the results of operations projected in the budget for such year, PBC shall have the right to approve the budget for the immediately succeeding fiscal year of the Project.

(c) CAWD and PBCSD and MPWMD shall each maintain separate accounts and budgets with respect to Operating Revenues and Operation and Maintenance Expenses.

(d) The Project shall be owned, operated, maintained and serviced in accordance with applicable regulations, good engineering practice and prudent business practices. Recycled Water produced by the Project shall be suitable for irrigation of vegetated areas (including golf courses) and otherwise meet all regulatory and health standards for such usage.

(e) The Public Participant which owns the Project shall cause an annual inspection of the Project to be performed, during the last month of each fiscal year of the Project, by a consulting engineer acceptable to the Management Committee, and a report of such engineer to be delivered to each member of the Management Committee, on or before the 45th day of the ensuing year. In the event that operating or other deficiencies are disclosed in any such report, at the request of PBC, such Public Participant shall promptly cause measures necessary to correct such deficiencies to be implemented. The charges of such consulting engineer shall be paid by the Project and shall be deemed to be an Operation and Maintenance Expense.

(f) The Public Participant which owns the Project has maintained and shall continue to obtain and maintain in effect insurance for the Project, with such coverages (including with respect to risks, amounts and deductibles), and with such insurance companies, as are acceptable to each member of the Management Committee, which approval shall not be unreasonably withheld or delayed. In recognition that the Project is dependent upon the continued operation of the existing wastewater treatment plant owned by CAWD which produce secondary effluent, CAWD shall each continue to (i) make all reasonable efforts to maintain in place its present insurance coverages (including with respect to risks, amounts and deductibles) for such facilities, (ii) promptly provide to all members of the Management Committee such information concerning the insurance in place with respect to such facilities, and the risks of operating such facilities, as may be reasonably requested, from time to time, by any member of the Management Committee, and (iii) purchase such additional insurance with respect to such facilities as may be available in the marketplace and is requested by PBC, with the incremental additional cost for such additional insurance to be paid by the Project and deemed to be an Operation and Maintenance Expense. Each such insurance policy shall (i) name each entity which has a representative on the Management Committee and which has an insurable interest thereunder as an additional insured thereunder, and (ii) shall provide that it may not be terminated or amended or otherwise modified, in any material respect, without each additional insured thereunder being given at least 30 days prior written notice of such termination, amendment or modification. Upon the renewal of each such insurance policy and upon the request of any member of the Management Committee, such Public Participants shall provide such person with written evidence, in the form of policies or certificates o£ insurance, of such insurance.

(g) The generation of Operating Revenues and the application thereof shall include the following:

(i) The price charged by MPWMD for the Recycled Water sold for use on other than the Recycled Water Irrigation Areas, at all times that any portion of the Financial Commitment is in effect, shall be as described in Section 2.2 hereof.

(ii) All of the Recycled Water Irrigation Areas shall be obligated for the purchase of Recycled Water for a term not less than the term of the Certificates of Participation. MPWMD will engage in best efforts to maximize the sales, and the revenues derived therefrom, of Recycled Water, to the extent not required by the Recycled Water Irrigation Areas, to other users.

(iii) MPWMD, or Cal-Am on behalf of MPWMD, shall efficiently bill and collect water charges from, and enforce its agreements with, the Recycled Water Irrigation Areas and other purchasers of Recycled Water and (in the case of Cal-Am) shall promptly remit all Operating Revenues to MPWMD.

3.5 Application of Surplus Revenue. All Operating Revenues in excess of Operation and Maintenance Expenses (“Net Operating Income”) has been and shall continue to be applied against any principal and interest payments on the Certificates of Participation which come due, from time to time, any COP Carrying Costs not constituting a Capital Cost and any Ancillary Project Costs, in that order, and the balance of any such excess (“Surplus Revenue”) shall, at the election of PBC, be applied to (a) the early payment or redemption of the Certificates of Participation or set aside, in a trust account, irrevocably for such purpose, or (b) the Operating Reserve.

3.6 Investment of Operating Revenues. All Operating Revenues of the Project and all amounts in any reserve with respect to the Project, including, without limitation, the Operating Reserve, have been and shall continue to be invested in a manner designed to maximize the investment return on such amounts, subject to applicable legal investment and/or tax law limitations and investment criteria to be agreed upon by the parties.

4. Water Entitlement.

4.1 Confirmation of Water Entitlement and Water Use Permits Issued to Date. In section 4.1 of the Fiscal Sponsorship Agreement, granted to PBC, Lohr and Griffin certain binding entitlements to potable water (herein called the “Water Entitlement”), for use on any properties within the Del Monte Forest (hereinafter called the “Benefited Properties”) in the respective quantities and properties set forth on Exhibit “A” hereto during each water year (October 1^st through the following September 30^th), subject to (i) payment of all fees and charges therefor, (ii) compliance with all MPWMD rules, regulations, and ordinances, (iii) reductions in usage as described in section 4.4 of that Agreement, and (iv) termination as described in section 4.5 of that Agreement.

4.2 Confirmation of Water Use Permits.

(a) To evidence the Water Entitlement, the General Manager of MPWMD has issued Water Use Permits to PBC, Lohr & Griffin authorizing the expansion and extension of the Cal-Am water distribution system to provide water service and connections for the Benefited Properties as described in Exhibit “A” to the Fiscal Sponsorship Agreement as amended). Each Water Use Permit has granted a present vested irrevocable (except as provided in Section 4.5 hereto) property interest upon one or more of the Benefited Properties for the use and benefit of a specified quantity of potable water per year (in acre feet) produced by the Cal-Am water distribution system, and authorizes the expansion and extension of the Cal-Am water distribution system as necessary to provide water service to and connections for the benefit of such Benefited Property.

(b) Each Water Use Permit issued by MPWMD for water subject to the Water Entitlement is and shall be subject to the restrictions and limitations set forth in Rule 23.5, many of which are identified below. (1) the permit shall not limit the power of MPWMD to curtail water use in the event of any emergency caused by drought, or other threatened or existing water shortage, as defined in Section 332 of the Monterey Peninsula Water Management Act, including without limitation the power of MPWMD to terminate water service as a consequence of a violation of water use restrictions;

(2) the permit shall not relieve or reduce any obligation of the recipient of water to pay customary fees, connection charges, user fees, surcharges, taxes, utility taxes, and/or any other customary monetary obligation which may be imposed by the California Public Utilities Commission, Cal-Am, MPWMD, or other Public Participants upon water users of the same class within the Cal-Am service area, including but not limited to fees and charges due and payable to MPWMD by reason of Rule 24 of MPWMD’s Rules and Regulation, nor shall such permit limit the authority of Cal-Am or MPWMD to terminate water use for non-payment of such fees and charges;

(3) the permit shall enable present use of the Water Entitlement by PBC only upon the continuing financial assurance or guarantee by the Fiscal Sponsor/Sponsor(s) relating to the payment of Net Operating Deficiencies for the Project; and

(4) notwithstanding any other provision of this Agreement or Rule 23.5:

(a) the Water Entitlement allocated to the Benefited Properties as a whole shall not exceed 380 AF,

(b) the water usage under the Water Entitlement on any Benefited Property shall not exceed the aggregate amount of the Water Entitlement allocated to such Benefited Property,

(c) water usage of the Benefited Properties shall be calculated by MPWMD in the manner set forth in Subsections C.4 and C.5 of MPWMD Rule 23.

(c) A Water Use Permit issued with respect to a Benefited Property may be assigned, in whole or in part, in connection with a transfer of title to all or any portion of such Benefited Property in the manner and under the circumstances described in Subsections A and E of MPWMD Rule 23.5.

(d) The owner of a Benefited Property who is the holder of a Water Use Permit or a Water Permit for that property shall be entitled to request and receive potable water service from the Cal-Am water distribution system for such Benefited Property, including, without limitation, the installation of water meters and mains as necessary, in the manner and under the circumstances described in Subsections A and E of MPWMD Rule 23.5.

4.3 Effect of this Agreement on Water Use Permits Issued to PBC, Lohr, and Griffin. Nothing in this Agreement shall affect the right and ability of PBC, Lohr, or Griffin (or their respective successors of interest to title of a parcel located within the Benefited Properties as described in Exhibit “A” to the Fiscal Sponsorship Agreement as amended to which a portion of the Water Entitlement has been dedicated) to use and apply the quantity of water dedicated for use on that parcel, or their respective rights to sell and convey a parcel of land located within the Benefited Properties as described in Exhibit “A” to the Fiscal Sponsorship Agreement as amended that it owns together with the portion of the Water Entitlement that has been dedicated to the parcel.

4.4 Revocation and Termination of Water Use Permits.

(a) Each Water Use Permit may be revoked, terminated, or modified by MPWMD in the manner and under the circumstances described in Subsection D of MPWMD Rule 23.5.

4.5 Conditions on Separate Conveyance of portion of Water Entitlement by PBC

(a) Any portion of the Water Entitlement separately conveyed by PBC pursuant to this Agreement and the Ordinance shall not be effective unless and until PBC has provided the Supplemental Financial Commitment as described in this Agreement; and provided further that each portion of the PBC Water Entitlement thus conveyed:

(i) shall be dedicated solely to property within the Del Monte Forest that is not owned by PBC as of the date that that this ordinance is adopted;

(ii) shall be put solely to Residential use through a Residential Connection (as those capitalized terms are defined in Rule 11), and at no time shall any portion of such water be classified in any User Category other than Residential (as defined in Rule 11);

(iii) shall be offered on a right of first refusal basis to persons on the Monterey County waiting list for approved residential development projects awaiting water availability within the Del Monte Forest whose intended use is consistent with the preceding two subparagraphs (a)(i) and (a)(ii), and

(iv) the proceeds therefrom shall be applied to the costs of the Project Expansion and the Original Project as more specifically described in Section 3.2 of this Agreement.

(b) Any portion of the Water Entitlement of PBC separately conveyed pursuant to this Agreement and the Ordinance may be used only on the specific property to which it is first dedicated following the conveyance, and the water shall be put solely to Residential use through a Residential Connection (as those capitalized terms are defined in Rule 11), and at no time shall any portion of such water be classified in any User Category other than Residential (as defined in Rule 11). In addition, the quantity of water acquired pursuant to Subsection C of this Section Three (i.e., the portion of the PBC Water Entitlement thus conveyed) and actually used shall not exceed the quantity set forth in the Water Permit issued pursuant to Subsection D of this Section Three. Each of these restrictions of use shall be set forth on the face of the Water Permit, and notice thereof shall be recorded in the form of a deed restriction against the Benefited Property to which the conveyed Water Entitlement is dedicated.

(c) As of the date that PBC provides the Supplemental Financial Commitment, each recipient of a portion of PBC’s Water Entitlement separately sold and conveyed pursuant to this Agreement and the Ordinance shall be entitled to issuance by the General Manager of a Water Permit, the face of which shall limit uses to those permitted under the User Category entitled “Residential” (as these terms are defined in Rule 11), for such amount of the Water Entitlement as is documented in the conveyance documentation presented to the General Manager. The General Manager shall simultaneously note, on the face of the Water Permit issued pursuant to Rule 23.5 (and Rule 23 to the extent consistent with Rule 23.5), the quantity of the Water Entitlement thus conveyed and shall simultaneously account for a commensurate reduction in the aggregate amounts of the Water Entitlement thereafter held by PBC.

(d) All Water Use Permits or Water Permits issued to evidence the portions of the Water Entitlement separately conveyed by PBC, all pursuant to this Section 4.5, shall not be Revoked (as defined in MPWMD Rule 11) or Terminated as defined in MPWMD Rule 23.5 with respect to the entire Water Entitlement so conveyed; provided, however, in each case, that the actual use of water on each of the properties to which a portion of the Water Entitlement is dedicated (after conveyance by PBC pursuant to this Section 4.5) shall at all times remain subject to the limitations and restrictions referenced in MPWMD Rule 23.5 on the same basis as other customers of Cal-Am, and that such water use rights shall be subject to modification after year 2075 as provided in this ordinance and in Ordinance No. 39.

4.6 Water Charges. The potable water shall be sold to the owners of each of the Benefited Properties at charges which are not in excess of Cal-Am’s charges for potable water, in similar quantities and sold to similar users for similar uses, from time to time. Nothing in this or any other provision of this Agreement shall be construed as a limitation upon amounts that PBC may charge individual Del Monte Forest residential property owners for sales of portions of its potable water entitlement separate and apart from the property benefited thereby. When PBC sells and conveys a parcel of land that it owns together with a portion of PBC’s remaining Water Entitlement, PBC shall provide such information as is necessary for MPWMD to demonstrate that no money or other valuable consideration has been separately given or received for the portion of the Water Entitlement conveyed with the land (other than reimbursement for the Rule 24 connection fee or other Cal-Am or MPWMD fees or charges paid by PBC).

4.7 Agreements with Recycled Water Irrigation Areas. MPWMD has used and shall continue to use its powers and authority to cause each owner of a Recycled Water Irrigation Area to purchase Recycled water for irrigation of the Recycled Water Irrigation Areas it owns, as contemplated by Sections 13500, et seq. of the California Water Code, on terms and conditions which are the same, in all material respects, as the terms and conditions of the agreements that each of the other owners of the Recycled Water Irrigation Areas enter into with respect to the purchase of Recycled Water for use on the Recycled Water Irrigation Areas it owns. Such terms and conditions shall prohibit the use of potable water for irrigation, except during an Emergency as defined herein.

5. Advance of Costs. PBC, MPWMD, CAWD, PBCSD, and IRWUG have each advanced funds for expenditures with respect to design, engineering and other matters incident and preparatory to the Project Expansion, including, without limitation, legal and consulting fees and costs associated with the Project Expansion and its implementation and this Agreement and each Related Agreement, and shall have the right, but not the obligation, to continue to advance funds for such expenditures. As described in section 3.1, PBC has raised these funds through sales of portions of its potable water entitlement (to individual Del Monte Forest residential property owners who have agreed to invest in the Project). Accordingly, all such expenditures shall be eligible for reimbursement as Capital Costs of the Expanded Project Expansion.

6. Representations and Warranties.

6.1 Material Representations and Warranties. PBC and MPWMD each hereby represents and warrants to the other that:

(a) the execution and delivery of this Agreement and each of the Related Agreements by it, and the performance of its obligations under this Agreement and each of the Related Agreements, have been duly authorized by all necessary action on its part, and it has full power, right and authority to enter into this Agreement and each of the Related Agreements and to perform its obligations hereunder and thereunder;

(b) neither the execution and delivery of this Agreement nor any of the Related Agreements by it, nor the performance by it of any of its obligations under this Agreement or any of the Related Agreements, violates any applicable Federal, state or local law, whether statutory or common, or regulation or, with respect to PBC, partnership agreement, or constitutes a violation of, or a breach or default under, any agreement or instrument, or judgment or order of any court or governmental authority, to which it is a party or to which it or any of its property is subject;

(c) this Agreement and each of the Related Agreements is a valid and binding obligation of it, enforceable against it in accordance with its terms, except as such enforceability may be limited by equitable principles or by bankruptcy or other laws affecting creditors' rights generally; and

(d) no consent, approval, order or authorization of any person, entity, court or governmental authority is required on its part in connection with the execution and delivery of this Agreement or any of the Related Agreements or the performance by it of any of its obligations hereunder or thereunder.

6.2 Representations and Warranties of MPWMD. MPWMD hereby further represents and warrants to PBC that [

(a) Subject to the terms and conditions of this Agreement, each owner of a Benefited Property upon dedication of a portion of the Water Entitlement thereto, shall be vested with all right, title and interest to an irrevocable (except as expressly provided in Section 4.5 hereof) property right and interest in the portion of the Water Entitlement and the Water Use Permits which benefits the Benefited Property it owns, free and clear of any liens, claims or encumbrances, statutory or otherwise, including, without limitation, the right to transfer its portion of the Water Entitlement, all as described in Sections 4.1 and 4.2 hereof; and

(b) Each of the Water Entitlements and the Water Use Permits granted pursuant to the terms and conditions of this Agreement shall constitute a valid and binding vested property right and interest, as described in sections 4.1 and 4.2 hereof, to the potable water subject to such enforceability may be limited by equitable principles or by bankruptcy or other laws affecting creditor’s rights generally.

(c)] the terms and conditions of this Agreement are in compliance, in all material respects, with the terms and conditions of the Ordinance.

7. Covenants.

7.1 Other Agreements. Each of the parties shall, within 30 days after the effectiveness of this Agreement, execute, and deliver to the other parties thereto, each of the Related Agreements to which it is a party and engage in reasonable efforts to cause each of the parties to each such agreement, other than it, to execute, and deliver to each of the other parties thereto, such agreement.

7.2 Conflicting Agreements or Actions. Neither party shall enter into any agreements, or take any actions, which may (1) injure the right of each other Party to receive the benefits of this Agreement, (2) frustrate the purpose for which this Agreement was executed, (3) adversely affect or impair the right, title and interest of the holders of the Certificates of Participation, or (4) except in accordance with the procedures set forth in the Ordinance or this Agreement, adversely affect or impact the right, title and interest of the owner of any portion of the Water Use Permit to legally put to use the water authorized thereby on the Benefited Properties it owns[, including, without limitation, any amendment, repeal or revocation of the Ordinance].

7.3 Validation Proceeding. PBC shall have the right to initiate and prosecute, in MPWMD’s name, an action, in a court of competent jurisdiction, for the purpose of having this Agreement validated under California law. MPWMD shall cooperate with PBC in its efforts in connection with such action. PBC shall reimburse MPWMD for the reasonable out-of-pocket expenses it incurs in connection with such action. PBC shall be represented by such counsel in connection with such proceeding as is reasonably acceptable to MPWMD.

8. Effectiveness. This Agreement shall become effective upon its execution and delivery by each party. Notwithstanding any implication to the contrary herein, this Agreement may be terminated by either party, if all of the Related Agreements shall not have been executed, and delivered to each of the other parties thereto on or before , 2003. Upon any such termination, neither party hereto shall have any further obligation hereunder to the other party or any other person or entity.

9. Termination of Agreement.

9.1 Termination for Breach. In the event that either party fails to perform, in any material respect, any of its obligations under this Agreement, the other party shall have the right, in addition to all other remedies it may have under law or in equity, to terminate this Agreement, within 30 days after the breaching party receives written notice of such termination, if such failure is not cured by the breaching party prior to such date; provided, however, if such cure cannot practicably be effected within such 30 day period, and the breaching party, upon receiving such written notice, promptly initiates efforts to cure such failure and diligently pursues such cure, the other party shall not have the right to terminate this Agreement unless such cure is not effected within 90 days after the breaching party receives such written notice.

9.2 Remedies for MPWMD Breach. In the event MPWMD breaches any of its representations and warranties or covenants in this Agreement with respect to the Water Entitlement or the Water Use Permits such that, after such breach, an owner of a Benefited Property is entitled to less potable water for use on such Benefited Property than is contemplated by this Agreement or ceases to be entitled to a Water Use Permit for such Benefited Property, to the extent contemplated by this Agreement, MPWMD shall utilize its regulatory powers to the fullest extent to immediately ensure that the owner of such Benefited Property is entitled to receive, and does receive, potable water at such times, in such quantities and pursuant to such terms and conditions as are substantially equivalent to its rights with respect to potable water specified in this Agreement.

10. Indemnification.

10.1 Protection of Parties. Subject to the limitations in this Section 10, each party shall defend and indemnify, and hold harmless, the other party from and against any and all damages, liabilities, losses, and costs and expenses suffered or incurred by the other party, arising out of, or resulting from, any breach of its representations, warranties or agreements set forth in this Agreement.

10.2 Procedure for Indemnification. In the event that any legal proceedings are instituted, or any claim or demand is asserted, by any third party which may give rise to any damage, liability, loss, or cost or expense in respect of which either party has indemnified the other party under Section 10.1 hereof, the indemnified party shall give the indemnifying party written notice of the institution of such proceedings, or the assertion of such claim or demand, promptly after the indemnified party first becomes aware thereof; provided, however, any failure by the indemnified party to give such notice on such prompt basis shall not affect any of its rights to indemnification hereunder unless such failure materially and adversely affects the ability of the indemnifying party to defend such proceeding. The indemnifying party shall have the right, at its option and at its own expense, to utilize counsel of its choice in connection with such proceeding, claim or demand, subject to the approval of the indemnified party, which approval shall not be unreasonably withheld or delayed, and to defend against, negotiate with respect to, settle or otherwise deal with such proceeding, claim or demand; provided, however, that no settlement of such proceeding, claim or demand shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld or delayed, unless, pursuant to the terms and conditions of such settlement, the indemnified party shall be released from any liability or other exposure with respect to such proceeding, claim or demand; and provided, further, that the indemnified party may participate in any such proceeding with counsel of its choice at its own expense. In the event, or to the extent, the indemnifying party elects not to, or fails to, defend such proceeding, claim or demand and the indemnified party defends against, settles or otherwise deals with any such proceeding, claim or demand, any settlement thereof may be made without the consent of the indemnifying party if it is given written notice of the material terms and conditions of such settlement at least ten days prior to a binding agreement with respect to such settlement being reached. Each of the parties agrees to cooperate fully with each other in connection with the defense, negotiation or settlement of any such proceeding, claim or demand.

10.3 Payment of Indemnified Claims. Upon a final judgment or award with respect to any proceeding of the nature described in Section 10.2 hereof having been rendered by a court, arbitration board or administrative agency of competent jurisdiction and the expiration of the time in which an appeal therefrom may be made (a “Final Judgment”), or a settlement of such proceeding, claim or demand having been consummated, on the parties having arrived at a mutually binding agreement with respect to each separate matter indemnified hereunder, the indemnifying party shall forthwith pay all of the sums so owing to the indemnified party. In the event any such proceeding is brought, in which allegations of fault are made against both of the parties, the extent of any indemnification shall be determined in accordance with the findings of the court as to the relative contribution by each of the parties to the damage suffered by the party seeking indemnity with respect to such proceeding.

10.4 Securities Law Indemnification. Subject to the limitations in this Section 10, each party shall defend and indemnify, and hold harmless, the other party from and against any and all expenses suffered or incurred by, the other party as a result of any written information provided by the indemnifying party for inclusion in any of the COP Documents, or any COP Document prepared by the indemnifying party (except with respect to the portion thereof prepared based on written information provided by the other party for inclusion in such COP Document), containing any untrue statement of a material fact or omitting to state a material fact necessary to make such written information or COP Document not misleading.

11. Miscellaneous.

11.1 Further Assurances. Each of the parties agrees to execute, and deliver to the other party, such documents and instruments, and take such actions, as may reasonably be required to effectuate the terms and conditions of this Agreement; provided, however, such covenant shall not have the effect of increasing the obligations of any party pursuant to this Agreement or require any representations and warranties by any party in addition to those of such party set forth herein.

11.2 Relationship of the Parties. Nothing in this Agreement shall create a joint venture, partnership or principal-agent relationship between the parties.

11.3 Notices. Whenever any matter herein provides for notice or other communication to be given to either of the parties, such notice shall be in writing and given to the persons, and at the addresses, designated below for such party, or to such other person or other address as such party shall provide, in writing, to the other party. All notices may be given by being personally delivered, placed in the United States mail, postage prepaid, certified or registered mail, or sent by overnight, prepaid air freight, addressed to the party to whom notice is to be given. Each such notice shall be deemed to be effective upon receipt, if personally delivered or sent by air freight, or five days after being so mailed.

If to PBC: If to MPWMD:

Pebble Beach Company Monterey Peninsula Water Management District

P.O. Box 1767 P.O. Box 85

Pebble Beach, CA 93953 Monterey, CA 93942-0085

Attn: Mark Stillwell Attn: General Manager

David C. Laredo

Delay & Laredo

606 Forest Avenue

Pacific Grove, CA 93950

11.4 Exhibits All exhibits referred to in this Agreement and attached hereto are hereby incorporated herein and made a part of this Agreement, for all purposes, by this reference.

11.5 Assignment. This Agreement shall be binding upon, and inure to the benefit of, the successors and permitted assigns of the parties. Notwithstanding the foregoing, (a) MPWMD may assign any of its rights or obligations hereunder to CAWD, PBCSD, a joint powers agency in which either or both agencies are members, or any successor agency thereto, and (b) PBC and any successor assignee may at any time assign any of its rights hereunder and/or may assign any of its obligations hereunder to any person or entity which assumes such obligations in writing. In the event any permitted assignment occurs, the assignor shall thereafter have no further responsibility with respect to such obligation. Nothing herein shall be construed to give any rights or benefits to anyone other than the parties to this Agreement or to the Related Agreements as defined herein, or to their respective successors and permitted assigns.

11.6 Cumulative Remedies. Except as specifically provided to the contrary herein, no remedy or election hereunder shall be deemed exclusive, but shall be cumulative with all other remedies at law or in equity.

11.7 Severability. Although it is the intent of the parties that each obligation of the parties in this Agreement, including, without limitation, the financial responsibilities of PBC pursuant to Section 3 hereof and the grant of the Water Entitlement by MPWMD pursuant to Section 4 hereof, be valid and enforceable, should any provision of this Agreement be declared invalid or unenforceable in any jurisdiction by a court of competent jurisdiction, then such portion or provision shall be deemed to be severable, to the extent invalid or unenforceable, from this Agreement as to such jurisdiction (but, to the extent permitted by law, not elsewhere) and shall not affect the remainder hereof. Notwithstanding the foregoing, (a) such provision of this Agreement shall be interpreted by the parties and by any such court, to the extent possible, in such a manner that such provision shall be deemed to be valid and enforceable, and (b) such court shall have the right to make such modifications to any provision of this Agreement as do not materially affect the rights or obligations of either of the parties and as may be necessary in order for such provision to be valid and enforceable.

11.8 Waiver. No waiver of any obligation of either of the parties shall be effective unless in a writing, specifying such waiver, executed by the other party. No waiver of any right of either of the parties shall be effective unless in a writing, specifying such waiver, executed by such party. A waiver by either of the parties of any of its rights or remedies under this Agreement on any occasion shall not be a bar to the exercise of the same right or remedy on any subsequent occasion Or of any other right or remedy at any time.

11.9 Headings and Titles. The designation of a title, or a caption or a heading, for each section of this Agreement is for the purpose of convenience only and shall not be used to limit or construe the contents of this Agreement.

11.10 Presumptions. Because both parties have participated in preparing this Agreement, there shall be no presumption against any party on the ground that such party was responsible for preparing this Agreement or any part hereof.

11.11 Amendment or Modification. This Agreement may be amended, altered, or modified only by a writing, specifying such amendment, alteration or modification, executed by both parties.

11.12 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

11.13 Entire Agreement. This Agreement and the Related Agreements constitute the entire agreement between the parties regarding the subject matter hereof and thereof, and supersede all prior or contemporaneous negotiations, understandings or agreements of the parties, whether written or oral, with respect to such subject matter, including, without limitation, the Memorandum.

IN WITNESS WHEREOF, this Agreement has been executed by the officers of each of the parties effective the date first shown above.

Pebble Beach Company Monterey Peninsula Water

Management District

By: _________________________ By: ___________________

Its: _________________________ Its: ____________________

[1]. All quantities are listed in acre feet per year (af/yr) as of September 30, 2003.

OWNER	ORIGINAL WATER ENTITLEMENT (af/yr)	QUANTITY OF WATER ENTITLEMENTFOR WHICH WATER PERMITS HAVE BEEN ISSUED ^[1] (af/yr)	QUANTITY OF WATER ENTITLEMENT FOR WHICH WATER PERMITS HAVE NOT BEEN ISSUED ¹ (af/yr)
Pebble Beach Company	365.000	9.882	355.118
Macomber Estates	10.000	9.654	0.346
Griffin Trust	5.000	3.716	1.285

PreliminaryDraft

AGREEMENT

WATER PERMIT ISSUED FOR PORTIONS OF

WATER ENTITLEMENT

ENTITLEMENT

HAVE NOT BEEN ISSUED ¹

A Map of the unincorporated portion of the Del Monte Forest

PreliminaryDraft

AGREEMENT

WATER PERMIT ISSUED FOR PORTIONS OF

WATER ENTITLEMENT

ENTITLEMENT

HAVE NOT BEEN ISSUED 1

A Map of the unincorporated portion of the Del Monte Forest

HAVE NOT BEEN ISSUED ¹