WASTEWATER RECLAMATION PROJECT

TABLE OF CONTENTS -

Page(s)

Recitals .......... 4

Agreement ......... 5

1. Definitions ................ 5

1.1 Business Day ................ 5

1.2 Cal-Am ................... 5

1.3 Capital Costs ................ 5

1.4 CAWD/PBCSD 6

1.6 Certificates of Participation 6

1.7 Del Monte Forest 6

1.8 Emergency. 7

1.9 Fiscal Sponsorship Agreement 7

1.10 General Manager ............... 7

1.11 Irrigation Systems . ............ 7

1.12 Management Agreement ............ 7

1.13 Management Committee ............ 7

1.14 Operating Reserves 8

1.15 Operating Revenues ............. 9

1.16 Operation and Maintenance Expenses ..... 9

1.17 Project ................... 9

1.18 Public Participant ............. 9

1.19 Recycled Water ............... 9

1.20 Recycled Water Irrigation Areas ............. 10

1.21 Related Agreements ............. 10

1.22 Supplemental Financial Commitment 10

1.23 Supplemental Financing Agreement 11

1.24 Water Entitlement 11

1.25 Water Use Permit 11

2. Role of Public Participants and Use of Recycled Water 11

2.1 Role of Public Participants ......... 11

2.2 Use of Recycled Water .......... 12

3. Financing of Construction of Project 13

4. Construction of Project Expansion ........ 13

5. Operation of Project ............. 15

5.1 Management of Project ............ 15

5.2 Budgeting and Financial Accounting for Project 15

5.3 Standards of Operation ........... 17

5.4 Insurance .................. 18

5.5 Payment of Operation and Maintenance Expenses 19

6. Management of Project .............. 20

6.1 Role of Management Committee ........ 20

6.2 General Manager and Staff .......... 21

6.3 Management Agreement ............ 21

7. Investment of Operating Revenues .. 22

8. Certain Rights of PBC ......... 22

9. Representations and Warranties and Covenants 22

9.1 Mutual Representations and Warranties .... 22

9.2 Covenants of CAWD and PBCSD Concerning Construction of Project Expansion and Operation of Project 23

9.3 Covenants of CAWD Concerning Personnel 23

9.4 Effect of Agreement and Project on Existing Plant 24

10. Term ...................... 24

10.1 Termination. 24

11. Remedies for Breach ............... 24

11.1 Termination and Damages .......... 24

11.2 Remedies under Supplemental Financing

Agreement 25

11.3 Equitable Remedies ............. 25

12. Indemnification .................. 25

12.1 Protection of Parties ........ .... 25

12.2 Procedure For Indemnification ........ 25

12.3 Payment of Indemnified Claims ........ 26

12.4 Securities Law Indemnification ....... 26

13. Miscellaneous ..... ............. 26

13.1 Further Assurances .... “.......... 26

13.2 Relationship of the Parties ....... 26

13.3 Notices .................... 26

13.4 Exhibits .................. 27

13.5 Assignment ................. 27

13.6 Cumulative Remedies ............. 27

13.7 Severability ................ 27

13.8 Waiver ................... 28

13.9 Headings and Titles ............. 28

13.10 Presumptions ........ : ....... 28

13.11 Amendment or Modification ....... 28

13.12 Counterparts ................ 28

13.13 Entire Agreement .............. 28

13.14 Limitation on Liability of Partners .... 28

13.15 No Third-Party Beneficiary Rights . .... 28

13.16 Security Interest ............ 29

13.17 Expanded or Additional Facilities .... 29

Exhibit “A” Recycled Water Irrigation Areas

Exhibit “B” Description of Original Project

Exhibit “C” Description of Project Expansion [placeholder]

Exhibit “D” Description of Del Monte Forest [to be provided by PBC]

SUPPLEMENTAL CONSTRUCTION AND OPERATION AGREEMENT

This Supplemental Construction and Operation Agreement is entered into as of , 2003,, by and among the Monterey Peninsula Water Management District, a California public agency (“MPWMD”), Carmel Area Wastewater District (formerly Carmel Sanitary District), a California public agency (“CAWD”), Pebble Beach Community Services District, a California public agency (“PBCSD”), and Pebble Beach Company, a California general partnership (“PBC”), superseding the Wastewater Reclamation Project Construction And Operation Agreement among the parties hereto dated as of November 1, 1990 (“Construction and Operation Agreement”).

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. In furtherance of this authority, in 1990 MPWMD executed a Construction and Operation Agreement among Carmel Area Wastewater District (“CAWD”), the Pebble Beach Community Services District (“PBCSD”), and PBC, and executed a series of Related Agreements with PBC, and with the various users of recycled water, and in 1992 issued Certificates of Participation in the amount of $33.9 million to finance the design and construction of certain water recycling facilities, designed and intended by all parties 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 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 vegetated areas for other uses and purposes on the Monterey Peninsula. B. CAWD owns and operates, and PBCSD has a contractual right for one third of the capacity of, a wastewater treatment plant which is located on the Monterey Peninsula. Pursuant to the Construction and Operation Agreement dated as of November 1, 1990 among the parties hereto, CAWD and PBCSD, with the participation of PBC, managed the construction of, and now own and operate, water recycling facilities, comprising the “Original Project” as defined herein.

C. The performance of the Original Project has not met the expectations 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 grass 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 to consumers’ water conservation efforts), increased amount of salinity in the recycled water due to reduced influent flows caused by water conservation efforts, increased salinity added by water softening units (the demand for which increased as the source water became more saline), internal 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.

D. CAWD and PBCSD are willing to manage the construction of, and operate and maintain, an expanded recycled water project, with CAWD acting as the lead agency, and MPWMD desires that they do so, with financial assistance from PBC as further described in the Supplemental Financing Agreement

E. This Agreement constitutes an integral part of a series of related agreements among PBC, MPWMD, CAWD, and PBCSD and others to provide a reliable, high-quality recycled water supply for irrigation of golf courses and other Recycled Water Irrigation Areas, and thereby to eliminate the use of potable water for irrigation on the Monterey Peninsula.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, 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 following meanings:

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

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

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

(a) the cost of acquisition 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 construction and administration expenses of each of the Public Participants 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 any of the 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 the purpose of the applicable rate base, of machinery, piping, equipment and furnishings made obsolete or unusable to Cal-Am or any of the Public Participants 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;

(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 PBC and MPWMD, including, without limitation, capitalized interest on the Certificates of Participation;

(g) the Operating Reserve, as defined in the Supplemental Financing Agreement;

(h) the COP Carrying Costs, as that term is defined in the Supplemental Financing Agreement, to the extent reasonably determinable by the commencement of the offering of the Certificates of Participation and payable within one year of the closing of such offering; and

(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 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 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 on installation of any portion of the Project.

(4) payment of any expenses incurred concerning asserted deficiencies in the Project and related matters beginning in January 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 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 determinations concerning adjustments, and to implement and enforce the adjustments, to Water Use Permits that may be required in 2075.

1.4 “CAWD” means the Carmel Area Wastewater District, a California public agency. CAWD and PBCSD, pursuant to the Management Agreement, will separately own the various components comprising the Project and, through the Management Committee, manage, and be responsible for, the design, construction, operation and maintenance of their respective components of the Project.

1.5 “Certificates of Participation” means 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.

1.6 “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.

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

1.8 “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.

1.9 “Fiscal Sponsorship Agreement” means the Wastewater Reclamation Project Fiscal Sponsorship Agreement, dated as of October 3, 1989, between MPWMD and PBC.

1.10 “General Manager” means the General Manager of CAWD.

1.11 “Independent Recycled Water Users Group” or “IRWUG” means the Cypress Point Golf Club, Poppy Hills Golf Course, and Monterey Peninsula Country Club.

1.12 “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.

1.13 “Irrigation System” means the recycled water irrigation systems installed and operating on each of the Recycled Water Irrigation Areas.

1.14 “Management Committee” means a committee composed of (a) two representatives of CAWD, (b) two representatives of PBCSD, (c) one representative of PBC, until such time as PBC resigns from such committee or provides notice to MPWMD that, pursuant to the Supplemental Financing Agreement, it will cease providing the COP Letter of Credit and the NOD Letter of Credit, both as defined therein, 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 this Agreement, direct budgeting for, and the management, construction and operation of, the Project.

1.15 “Operating Revenues”, as applied to the Project, means all income, rents, rates, fees, charges and other moneys derived by any of the Public Participants from the ownership or operation of the Project, including, without limiting the generality of the foregoing, (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 payable to any Public Participant, resulting from damage to or destruction of any of the Project facilities or the Existing Facilities, as defined in Section 5.4(a) hereof, or from the condemnation of the Project, and (c) interest earned on all revenues referenced in (a) or (b) above, and 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 such term 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.

1.16 “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.

1.17 “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 any of 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.

1.18 “Operation and Maintenance Reserve Fund” or “O&M Reserve Fund” each mean the fund which shall be maintained and held separate and apart from other funds to pay for Operations and Maintenance expenses as they become due and payable to the extent Operating Revenues are insufficient to provide for such payments.

1.19 “Operation and Maintenance Reserve Requirement” or “O&M Reserve Requirement” each mean the amount calculated on or before July 1 of each year by the Management Committee to be equal to one quarter (1/4) of the projected amount of Operations and Maintenance expenses for the immediately succeeding fiscal year, as such amount may be revised upward and downward during the course of such fiscal year.

1.20 “PBCSD” means the Pebble Beach Community Services District, a California public agency. PBCSD and CAWD, pursuant to the Management Agreement, will separately own the various components comprising the Project and, through the Management Committee, manage, and be responsible for, the design, construction, operation and maintenance of their respective components of the Project.

1.21 “Project” means the Original Project as defined in subsection 1.21 (a) hereof, and the Project Expansion as defined in subsection 1.21 (b) hereof.

(a) The “Original Project” means and consists of (1) a tertiary treatment facility at the present CAWD wastewater 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 “B” 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 “B” hereto, and (3) recycled water irrigation systems on each of the Recycled Water Irrigation Areas.

(b) The Project Expansion 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 1.23 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.

1.22 “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.

1.23 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” shall mean 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 meeting the quality standards set forth on Exhibit E to this Agreement 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.

1.24 “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, as set forth in named on Exhibit “A” hereto.

1.25 “Related Agreements” means the agreements, in form and substance satisfactory to each of the parties to such agreements and PBC, 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 deem necessary or advisable, including, without limitation, the following agreements:

(a) Fiscal Sponsorship Agreement between MPWMD and PBC;

(b) Supplemental Financing Agreement between MPWMD and PBC; and

(c) Agreements for Sale of Recycled Water among MPWMD and the various Owners of Recycled Water Irrigation Areas - the long-term sale agreements with respect to the sale and delivery of the Recycled Water to the Recycled Water Irrigation Areas (individually called “Sale Agreement .

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

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

(ii) “Delivery Agreement” means the agreement among CAWD or CAWD/PBCSD, MPWMD, and Cal-Am - the agreement which will define the rights and responsibilities of each of such 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.

1.26 “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 J 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.

1.27 “Supplemental Financing Agreement” means the Supplemental Financing Agreement between MPWMD and PBC that supplements (but does not supersede) the Wastewater Reclamation Project Fiscal Sponsorship Agreement dated as of October 3, 1989.

1.28 “Water Entitlement” means an aggregate of 380 acre feet per year 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 providing 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.

1.29 “Water Use Permit” means a writing from MPWMD which evidences the dedication of the Water Entitlement as a present property right enuring to the use and benefit of the Benefited Properties as more fully described in Ordinance No. 109.

2. Role of Public Participants and Use of Recycled Water

2.1 Role of Public Participants.

(a) MPWMD shall, during the term of this Agreement, (i) cause the funds necessary to operate the Project to be provided and utilized for such purpose, as further described in this Agreement, (ii) as consideration for providing such funding, have the right to sell the Recycled Water pursuant to the terms and conditions of this Agreement and the Sales Agreements referenced in Section 1.25 hereof (the “Recycled Water Sales Agreements”), (iii) cause the Recycled Water to be sold and distributed to the owners of the Recycled Water Irrigation Areas and other users, as further described in this Agreement and the Recycled Water Sales Agreements, (iv) own [only that] Recycled Water [required] for the purpose of selling and distributing such water to the owners of the Recycled Water Irrigation Areas and other users pursuant to the terms and conditions of the Fiscal Sponsorship Agreement and the Supplemental Financing Agreement, with such ownership to begin upon completion of the treatment process and to end with the payment for such water by the user thereof, (v) cause the owners of the Recycled Water Irrigation Areas and other users of the Recycled Water to be billed for the purchase price of such water and such bills to be collected, as described in the Delivery Agreement referenced in Section 1.25 hereof, (vi) cause all Operating Revenues to be applied to payment of Operation and Maintenance Expenses and to payment of the Certificates of Participation, and (vii) as consideration for providing such funding, have the right to retain all of the Operating Revenues, including, without limitation, the proceeds which result from the above-referenced sales of Recycled Water. As consideration for providing the funding referenced above and performing the services it is obligated to perform pursuant to this Agreement, including, without limitation, this Section 2.1, MPWMD shall, after the later to occur of the expiration of the term of this Agreement and the term of the Recycled Water Sales Agreements, own and have the right to sell the Recycled Water and to retain all of the proceeds which result from such sales.

(b) In consideration of producing the Recycled Water, CAWD and PBCSD shall own the Project under the direction of the Management Committee, be responsible for the construction, operation and maintenance of their respective components of the Project, including, without limitation, the production of the Recycled Water, as further described herein, subject to the rights of MPWMD with respect to the Reclaimed Water set forth above and the rights of the users of the Recycled Water to purchase and use such water. [All Recycled Water produced and surplus to MPWMD’s sales obligation described in subsection (a) shall be owned by CAWD/PBCSD. Such surplus water shall be sold at the discretion of CAWD/PBCSD, subject to prior approval and authorization of the Reclamation Management Committee, at the highest obtainable price, and all proceeds of such sales shall be utilized as Operating Revenues.]

(c) MPWMD and CAWD/PBCSD have executed a water purchase agreement to facilitate the issuance of the Certificates of Participation for the purpose of financing the Capital Costs of the Project, as contemplated by Section 3 hereof.

2.2 Use of Recycled Water.

(a) MPWMD shall own Recycled Water as described in Section 2.1(a)(iv) and may sell such 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, on such Recycled Water Irrigation Areas in lieu of the potable water historically utilized by such Recycled Water Irrigation Areas for irrigation purposes, all as more fully described in the Sale Agreement, as described in Section 1.25(c) hereof, between MPWMD and such owner. In addition, the owner of each Recycled Water Irrigation Area shall have such further rights with respect to the purchase of Recycled Water, for use on its Recycled Water Irrigation Areas or other similar properties owned by such owner, as may be described in such Sale Agreement.

(i) During the duration of the Financial Commitment of the Fiscal Sponsor, all Recycled Water sold for use on the Recycled Water Irrigation Areas, or for use on other similar properties owned, from time to time, by the owners of the Recycled Water Irrigation Areas, shall be sold at rates and 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.

(ii) After the expiration of the Financial Commitment of the Fiscal Sponsor, all Recycled Water sold for use on the Recycled Water Irrigation Areas, or for use on other similar properties owned, from time to time, by the owners of the Recycled Water Irrigation Areas, shall be sold at rates and charges [that may exceed such Cal-Am charges, to the extent that CAWD/PBCSD shall recoup all Recycled Water production costs] for Recycled Water 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 parties to the Related Agreements may agree in writing otherwise.

(b) CAWD/PBCSD shall produce Recycled Water from the Project and shall deliver it to the Recycled Water Irrigation Areas in quantities sufficient to irrigate the Recycled Water Irrigation Areas without the use of potable water (except in the case of an Interruption); provided, however, notwithstanding the foregoing, in no event shall CAWD/PBCSD be obligated to produce Recycled Water in amounts in excess of the influent then available to the Project. Nothing in the preceding sentence shall be construed to limit CAWD’s or PBCSD’s respective obligation to serve Recycled Water stored in the Forest Lake Reservoir or elsewhere.

(c) Recycled Water produced by the Project shall meet the requirements of Section 1.23 herein. [If such requirements are met, neither CAWD nor PBCSD shall be liable for damage or injury to grass, landscaping, any other plant life, or any other property on which or to which the Recycled Water is lawfully used or applied.]

(d) Each Owner of a Recycled Water Irrigation Area, upon entering a Sale Agreement with MPWMD as described in Section 1.25 (c) hereof, shall be an intended beneficiary of this Agreement so as to enable it to enforce the requirements set forth in the two preceding subsection 2.2(b) and 2.2(c) against CAWD/PBCSD, who shall be responsible therefor with respect to their respective responsibilities concerning the operation and maintenance of the Project.

3. Financing of Construction of Project. MPWMD issued Certificates of Participation to pay for the design and construction of the Original Project. 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), provide the Supplemental Financial Commitment to pay for the design and construction of the Project Expansion and to pay all other capital, operating and financing costs thereof. Except for (1) the funds available in an Operating Reserve for the Project to be established under the Supplemental Construction and Operation Agreement, or (2) any funds of MPWMD or any other Public Participant provided in the sole discretion of such Public Participant for a portion of the Supplemental Financial Commitment, no funds of MPWMD or any other Public Participant shall be used to pay for the construction, equipping and operation of the Project Expansion by CAWD and PBCSD, respectively.

4. Construction of Project Expansion. CAWD and PBCSD shall each have responsibility for design and construction of the respective portions of the Project Expansion that each will own and have the responsibility to operate and maintain, subject to the Management Committee’s right to approve decisions relating to the design and construction thereof, including, without limitation, with respect to the matters described in this Section 4. Once PBC has given notice to MPWMD pursuant to Section Three of Ordinance No. 109 that the Supplemental Financial Commitment has been provided, and CAWD and PBCSD each concur in writing that the Supplemental Financial Commitment is available for their use, each shall forthwith commence construction of their respective portions of the Project Expansion and proceed diligently therewith until the Project Expansion is Completed. Neither CAWD nor PBCSD shall not be obligated to commence construction of the Project Expansion until and unless they have received the funds comprising the Supplemental Financial Commitment.

(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) Project Expansiona construction cost estimate for the Project Expansion, and a contingency for change orders in the amount of 5% of such cost estimate (collectively, the “Cost Estimate”); (ii) the approval of final design plans for the Project Expansion; (iii) the criteria to be used to award design and/or construction contracts and subcontracts for the Project Expansion; (iv) the establishment of the construction schedule; (v) all construction disbursements; and (vi) the adequacy of all payment and performance bonds and insurance requirements. The right to comment on, and make suggestions with respect to, the construction disbursements shall be provided, in part, by a designated representative of each member of the Management Committee being given the opportunity to participate in the periodic (but at least monthly) meetings, between the contractor(s) Project Expansionand/orthe engineer(s) retained by CAWD/PBCSD to accomplish the construction of the Project Expansion, with respect to the status of construction of the Project Expansion Expansion and the approval of the payment of each construction disbursement. The General Manager shall give MPWMD notice of such meetings and one representative of MPWMD may attend each such meeting. The Cost Estimate shall be determined only after the approval and letting of all of the contracts and subcontracts described above. The Management Committee shall engage in best efforts to complete such approval and letting process by , 2003.

(b) After the Management Committee has approved the design and scope of, and construction schedule for, the Project Expansion (upon which the Capital Costs have been determined), (i) no material change to such design, scope or construction schedule shall be made by the Management Committee, without the written approval of PBC, which shall not be unreasonably withheld or delayed, and (ii) if the net effect of all change orders when aggregated together will exceed 5% of the construction budget, excluding any contingency reserves, for the Project Expansion, as a whole, no additional change order in excess of $5,000 may be approved by other than the unanimous vote of the Management Committee. Each entity with representation on the Management Committee and MPWMD shall be designated a third party beneficiary of all construction contracts, and all payment and performance bonds, with respect to the construction of the Project Expansion.

(c) All Capital Costs incurred and approved, in the manner described in subsections (a) and (b) above, with respect to construction of the Project Expansion shall be paid by PBC from the proceeds of the sales of portions of its potable water entitlements by providing to CAWD/PBCSD an amount equal to the Cost Estimate. CAWD/PBCSD shall deposit such amount in an interest bearing account, and shall invest the portion thereof which is not, at the time, required to make construction disbursements pursuant to the criteria described in Section 7 hereof. The interest earned on such amount shall be deposited in such account. Upon the approval of a construction disbursement pursuant to subsections (a) and (b) hereof, the General Manager shall have the right to pay such disbursement from such account. On or before the 15th day of each calendar month, or portion thereof, during the period beginning with the construction of the Project and ending with the last payment of a construction disbursement, CAWD/PBCSD shall submit to MPWMD and PBC an accounting, in such format and with such detail as shall be acceptable to MPWMD and PBC, of the construction disbursements made during such month. Upon payment of all the required construction disbursements, CAWD/PBCSD shall promptly return to PBC the balance, if any, in such account.

(d) Each owner of a Recycled Water Irrigation Area shall be the owner of the Irrigation System constructed on the Recycled Water Irrigation Area it owns and shall operate and maintain such Irrigation System and be responsible for all expenses related to the operation, maintenance and repair of such Irrigation System.

(e) CAWD/PBCSD shall (i) timely file and diligently prosecute all applications for all applicable permits and governmental approvals and authorizations necessary to construct the Project Expansion, and to operate the Project, in the manner contemplated or required by this Agreement, (ii) timely satisfy and comply with all terms and conditions of all such permits, approvals and authorizations, and (iii) at all times maintain such permits, approvals and authorizations in full force and effect. Such permits, approvals and authorizations shall include, without limitation, those permits, approvals and authorizations actually required by the California Coastal Commission, the County of Monterey, the California Regional Water Quality Control Board, the Monterey Bay Unified Air Pollution Control District and the City of Carmel-by-the-Sea. CAWD/PBCSD shall also timely obtain, comply with all of the terms and conditions of, and maintain in full force and effect all private rights and consents necessary to construct and operate the Project in the manner contemplated or required by this Agreement.

5. Operation of Project.

5.1 Management of Project. CAWD/PBCSD shall have responsibility for management, operation and maintenance 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, operation and maintenance of the Project, including, without limitation, with respect to the matters described in this Section 5.

5.2 Budgeting and Financial Accounting for Project.

(a) The Management Committee shall cause to be developed, and shall approve, an annual budget for the Project for each fiscal year, whether partial or full, after the date first set forth herein, at least 30 days prior to the commencement of such year. The annual budget for the Project shall be prepared based upon projections of Operating Revenues to be received and Operation and Maintenance Expenses to be incurred by MPWMD and CAWD/PBCSD. MPWMD shall cooperate with the Management Committee in its budgeting efforts by expeditiously providing to the Management Committee, at its request, a projection of Operating Revenues that MPWMD expects to receive, and Operation and Maintenance Expenses that MPWMD expects to incur, during the applicable year. The annual budget for the first partial and the first full fiscal year of the Project shall be submitted to MPWMD for its approval, which shall not be unreasonably withheld or delayed, promptly after it has been approved by the Management Committee.

(b) In calculating the projected and actual Operation and Maintenance Expenses for any year: (i) no item of administrative or other overhead expense of any 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 $[ ], and such allowance shall not be modified if the Certificates of Participation are prepaid for any reason, [provided that any limitation set on the amount of the sinking fund in this subsection (ii) shall be removed after the Certificates of Participation have been fully paid, or twenty (20) years after the date set forth above, whichever is later, and thereafter Operations and Maintenance Expenses will include an allowance for depreciation, amortization and obsolescence to be determine pursuant to generally accepted accounting principles, and such allowance shall be deposited into a Capital Outlay Reserve Fund to be held and maintained by CAWD/PBCSD to finance future capital outlay replacement requirements]; and (iii) no debt service obligation on the Certificates of Participation shall be included.

(c) Each of the members of the Management Committee shall continue to have the right to participate in the development of the annual budget for the Project. 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 (i) with-respect to the first partial and the first full fiscal year of the Project, and for each fiscal year thereafter, if, during the immediately prior fiscal year, the results of operations (i.e. difference between Operation and Maintenance Expenses and Operating Revenues) of the Project reflect a negative difference from the results of operations projected in the budget for such fiscal year (an “Operating Short-Fall”), unaudited monthly financial statements of the Project, accompanied by an unqualified certificate of the chief financial officer of CAWD (an “Officer’s Certificate”), on or before the 15th day after each such month, (ii) with respect to each fiscal year for the Project not described in clause (i) above, unaudited quarterly financial statements of the Project, accompanied by an Officer’s Certificate, on or before the 30th day after each such quarter, (iii) 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 (iv) 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, as defined in the Fiscal Sponsorship Agreement, 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.

(d) Each of the members of the Management Committee shall continue to have the right to (i) receive initial drafts of each annual budget with respect to the Project at the same time such draft is first made available to the General Manager or Board of Directors of CAWD or PBCSD, (ii) receive the proposed final draft of each such annual budget at least 30 days before it is submitted to the Management Committee for its approval, (iii) 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 (iv) 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 CAWD, upon reasonable advance notice of its intention to do so having been given to the General Manager.

(e) Any member of the Management Committee may continue to request, from time to time, the General Manager 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, the 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 results of operations of the Project for such year will involve an Operating Short-Fall, 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(s) shall be paid by CAWD/PBCSD and shall be deemed to be an Operation and Maintenance Expense.

(f) Notwithstanding subsections (a) and (c) above, in the event the results of operations for any 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, Operating Short-Fall, PBC and MPWMD shall each have the right to approve the budget for the immediately succeeding fiscal year of the Project.

(g) In addition to the preparation of the annual budget for the Project described above, CAWD/PBCSD and MPWMD shall each continue to maintain separate accounts and budgets with respect to the Operating Revenues each receives and the Operation and Maintenance Expenses it incurs.

(h) The budgeting process described in this Section 5.2 shall be utilized as the basis for determining the projected and actual Net Operating Deficiency (as such term is defined in the Supplemental Financing Agreement) for purposes of the Supplemental Financing Agreement.

5.3 Standards of Operation.

(a) The Project shall be owned, operated, maintained and serviced by CAWD and PBCSD in accordance with applicable regulations, good engineering practice and prudent business practices so as to produce Recycled Water as defined herein from the Project and CAWD and PBCSD shall deliver such Recycled Water to the Recycled Water Irrigation Areas in quantities sufficient to irrigate the Recycled Water Irrigation Areas without the addition of any potable water thereto (except during an Interruption as defined herein). Notwithstanding the foregoing, in no event shall CAWD/PBCSD be obligated to produce Recycled Water in amounts in excess of the then currently designed capacity of the Project, subject to availability of adequate quantities of wastewater influent. Each Owner of a Recycled Water Irrigation Area, upon entering a Sale Agreement with MPWMD as described in Section 1.25 (c) hereof, shall be an intended beneficiary of this Agreement so as to enable it to enforce the requirements set forth in the preceding sentence against CAWD/PBCSD, who shall be responsible therefor with respect to their respective responsibilities concerning the operation and maintenance of the Project.

(b) The General Manager 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, CAWD/PBCSD shall promptly cause measures necessary to correct such deficiencies to be implemented. The charges of such consulting engineer shall be paid by CAWD/PBCSD and shall be deemed to be an Operation and Maintenance Expense.

5.4 Insurance.

(a) CAWD/PBCSD shall continue to obtain and maintain in effect insurance with respect to the Project and the operation of the Project, with such coverages (including with respect to risks, amounts and deductibles) as may be available in the marketplace, and placed through such brokers and with such insurance companies, as all members of the Management Committee may agree, or in the absence of such agreement, as PBC may request, from time to time, be obtained and maintained, including, without limitation, business interruption or similar insurance. In recognition that the Project is dependent upon the continued operation of the facilities, now or to be owned by CAWD and PBCSD, involved with the treatment of effluent (the “Existing Facilities”), each of CAWD and PBCSD shall (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 and MPWMD such information concerning the insurance in place with respect to such facilities, including, without limitation, a copy of each policy evidencing such insurance, and the risks of operating such facilities, as may be reasonably requested, from time to time, by any member of the Management Committee or MPWMD, and (iii) purchase such additional insurance with respect to such facilities and the operation of the Project, including, without limitation, business interruption or similar insurance, as may be available in the marketplace, and is placed through such brokers and with such insurance companies, as is requested by PBC, from time to time, with the incremental additional cost for such additional insurance to be reimbursed to CAWD and PBCSD from the revenues generated by the Project and deemed to be an Operation and Maintenance Expense. Each insurance policy in place with respect to the Project or the Existing Facilities, or the operation of either, shall (i) name CAWD/PBCSD, CAWD, PBCSD, PBC and MPWMD 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 initial placement and the . renewal of each such insurance policy, the Public Participant which has obtained such policy shall provide each member of the Management Committee and MPWMD with a copy of such policy. Upon the request, from time to time, of any member of the Management Committee or MPWMD, the Public Participant which has obtained any such insurance policy shall provide to such person or entity a certificate of insurance with respect to such policy.

(b) In the event that a casualty should occur to any improvement constituting all or a portion of the Project or the Existing Facilities, CAWD/PBCSD, CAWD or PBCSD, as the case may be, shall use the proceeds of any of the insurance described in Section 5.4(a) above, which is available as a result of such casualty, to expeditiously repair or rebuild such improvement.

5.5 Payment of Operation and Maintenance Expenses.

(a) MPWMD shall be responsible for paying all of the Operation and Maintenance Expenses of the Project and shall pay such expenses of CAWD and PBCSD in the manner provided in this subsection; provided, however, any Operating Revenues received by CAWD or PBCSD shall be devoted to Operation and Maintenance Expenses and shall reduce any corresponding obligation of MPWMD for the payment thereof.

[If the actual expenses exceed the advance payment in any quarter, CAWD/PBCSD will submit a written request to MPWMD for an advance of the next quarter’s scheduled payment. Upon receipt of the request, MPWMD will make the following quarter’s scheduled payment in advance of the scheduled date. If all four quarters’ scheduled advance payments are already made and CAWD/PBCSD still anticipates a cash shortage, it will prepare appropriate budget adjustments for the approval of the Management Committee. Upon approval of the budget adjustments, MPWMD will provide additional money from the Water Sale Revenue Account. If there are funds in excess of $10,000 remaining in the Project’s O&M Account at the end of any quarter, they shall be remitted back to MPWMD.]

Within five Business Days of MPWMD’s receipts of the budget (as approved pursuant to this Agreement) for any fiscal year of the Project, but in no event earlier than the 20th day of such fiscal year, MPWMD shall pay to CAWD/PBCSD an amount equal to 35% of the Operation and Maintenance Expenses of CAWD/PBCSD which are projected in such budget. On or before the 20th day of each of the second, third and fourth quarters of each fiscal year of the Project, MPWMD shall pay to CAWD/PBCSD an amount equal to 25%, 25% and 15%, respectively, of such Operation and Maintenance Expenses. The amount of each such payment with respect to a quarter shall be reduced by the difference, as of the last day of the immediately preceding quarter, between the aggregate of such payments made to CAWD/PBCSD by MPWMD and the aggregate of the Operation and Maintenance Expenses actually and properly incurred by CAWD/PBCSD pursuant to this Agreement. To the extent such difference, as of the last day of any quarter, less any previous repayments by CAWD/PBCSD to MPWMD pursuant to this subsection, is in excess of the payment which MPWMD is obligated to make to CAWD/PBCSD with respect to the immediately succeeding quarter, CAWD/PBCSD shall repay such excess to MPWMD on or before the 20th day of such succeeding quarter. Each such payment to CAWD/PBCSD by MPWMD shall be deemed to constitute an advance of Operation and Maintenance Expenses for the quarter with respect to which the payment is made and shall be deposited by CAWD/PBCSD in a separate account from which only such expenses are to be paid. All interest earned on the sums deposited in such account shall be deemed, for purposes of this subsection, to constitute a payment by MPWMD to CAWD/PBCSD pursuant to this subsection. In the event any of the fiscal years of the Project is a partial fiscal year, the parties hereto shall negotiate in good faith the percentage of the Operation and Maintenance Expenses projected to be incurred by CAWD/PBCSD during such fiscal year, as shown in the approved budget for such fiscal year, to be paid by MPWMD with respect to each of the quarters, whether partial or full, during such fiscal year, and such percentages shall be consistent with the front-end loaded payment concept followed by the parties with respect to a full fiscal year. Within 30 days after the termination of this Agreement, CAWD/PBCSD shall repay to MPWMD the balance in such account, after deducting any amount necessary to pay any Operation and Maintenance Expense which CAWD/PBCSD has actually and properly incurred pursuant to this Agreement prior to such termination.

(b) [The O&M Reserve Fund shall be transferred to and remain under the control of CAWD/PBCSD. The O&M Reserve Fund shall be used as the first source of working capital when operating revenues are insufficient to pay for the project expenses, including O&M expenses, bond carrying costs, and the annual contribution to the capital outlay fund. The O&M Reserve Fund will not be used for payment of principal or interest of the certificates. CAWD/PBCSD shall select appropriate investment vehicles which will allow immediate use of the O&M Reserve Fund in case a need arises. If at anytime, all or any portion of the O&M reserve fund is spent to pay for the project expenditures, MPWMD shall pay CAWD/PBCSD sufficient amounts to replenish it, as soon as water sale revenue becomes available. Replenishment of the O&M Reserve Fund to its full value will take precedence over using water sale revenue for the certificate interest or principal payments. ]

(c) On or before the 15th day after each calendar month, or portion thereof, after the date first set forth above, CAWD/PBCSD shall submit to each member of the Management Committee an accounting, in such format and with such detail as shall be acceptable to each such member, of the Operation and Management Expenses incurred with respect to the Project, and any payment of such expenses made, during such month. CAWD/PBCSD shall also submit to MPWMD a copy of each such accounting on the same date it submits such accounting to the members of the Management Committee.

(d) Cost accounting procedures for, and qualifying categories of, Operation and Maintenance Expenses will be established, and memorialized in writing, by the mutual agreement of each of the parties hereto and attached hereto, as an exhibit, upon such writing having been prepared. The parties shall each use its best efforts, on a good faith basis, to reach such mutual agreement and memorialize such agreement by , 2003.

6. Management of Project.

6.1 Role of Management Committee. In addition to its other duties specified in this Agreement, the Management Committee shall:

(a) make all decisions as prescribed in this Agreement with respect to the design, construction, management, operation and maintenance of the Project on behalf of the Board of Directors of each of CAWD and PBCSD, except for those matters requiring legally binding action by such boards, including, without limitation, the execution of any agreement, the adoption of any budget, and the initiation of any legal action;

(b) approve such rules with respect to the governance of its actions and the performance of its duties hereunder as are not inconsistent with this Agreement, the Supplemental Financing Agreement, any of the Related Agreements, the Management Agreement or applicable law;

(d) at its election, make recommendations to the Board of Directors of each of CAWD and PBCSD with respect to any matters concerning the Project requiring the approval, or ratification, of such board;

(e) permit the General Manager of both CAWD and PBCSD to attend its meetings, including any closed sessions, and participate in its deliberations; provided, however, such person shall not have a vote on the Management Committee unless he or she has been formally appointed as a representative of CAWD or PBCSD to the Management Committee;

(f) permit a representative of MPWMD to attend its meetings, including, without limitation, any closed session, when appropriate, and ensure that the General Manager of MPWMD is given written notice of each of the meetings at the same time and in the same manner as the notice of such meeting is given the members of the Management Committee (provided, however, it shall not be deemed appropriate for a representative of MPWMD to attend any such closed session to the extent such session is intended to involve a discussion of any personnel matter or threatened or pending litigation in which MPWMD is or may be a party adverse to CAWD/PBCSD); and

(g) ensure that all meetings of the Management Committee shall be open to the public and shall be called, noticed, held and conducted in accordance with the provisions of the Ralph M. Brown Act, being Sections 54950, et seq, of the California Government Code.

6.2 General Manager and Staff. The General Manager shall be responsible, subject to the direction and control of the Management Committee, for the day-to-day implementation of the responsibilities and duties of CAWD/PBCSD. In connection with performing such services, the General Manager shall receive such staff assistance as may be required, from time to time, from the staff members of CAWD. The General Manager, in addition to the other duties specified in this Agreement, shall report regularly to the Management Committee with respect to the construction and operation of the Project and present to the Management Committee for its review and action all matters ultimately requiring the approval, or ratification, of the Board of Directors of each of CAWD and PBCSD, payment requests with respect to Capital Costs or Operation and Maintenance Expenses, policy matters and any other category of matters which the Management Committee determines to be appropriate for its consideration. The General Manager shall be responsible, as well, for preparing payment requests for Capital Costs and Operation and Maintenance Expenses.

6.3 Management Agreement. So long as any of the Certificates of Participation, or any bonds or certificates of participation issued to refinance the Certificates of Participation, are outstanding, CAWD and PBCSD shall make no amendments to the Management Agreement which could, at the time or in the future, impair the ability of CAWD/PBCSD to perform any of its/their joint and several obligations hereunder or under any of the Related Agreements or adversely affect any of the rights of PBC or MPWMD hereunder, under the Supplemental Financing Agreement or under any of the Related Agreements.

7. Investment of Operating Revenues. All Operating Revenues of the Project, including, without limitation, those held by CAWD/PBCSD pursuant to Section 5.5(a) hereof as an advance against Operation and Maintenance Expenses of CAWD/PBCSD, shall be invested in a manner designed to maximize the investment return on such funds (under the circumstances, given the amount of the funds involved, and the time by which such funds are required to be expended), subject to applicable legal investment and/or tax law limitations and the investment criteria agreed upon by PBC and MPWMD pursuant to the Supplemental Financing Agreement.

8. Certain Rights of PBC.

PBC and other parties have 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 each shall have the right, but not the obligation, to continue to advance funds for such expenditures. PBC has raised these funds comprising the Supplemental Financial Commitment 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).

9. Representations and Warranties and Covenants.

9.1 Mutual Representations and Warranties. PBC, PBCSD, CAWD and MPWMD each hereby represents and warrants to the other that:

(a) the execution and delivery of this Agreement, and the performance of its obligations under this Agreement, 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 to perform its obligations hereunder;

(b) neither the execution and delivery of this Agreement by it, nor the performance by it of any of its obligations under this Agreement, 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 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) except as may be required to construct and operate the Project, 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 the performance by it of any of its obligations hereunder.

9.2 Covenants of CAWD and PBCSD Concerning Construction of Project Expansion and Operation of Project.

Each of CAWD and PBCSD hereby covenant and agree with each of PBC and MPWMD as follows:

(a) CAWD/PBCSD shall ensure that the Project Expansion is constructed in compliance with (i) all applicable provisions of federal, state and local laws and regulations, including, without limitation, building codes, and insurance policies in place with respect thereto, (ii) the terms and conditions of all construction contracts and subcontracts therefor, (iii) all performance bonds obtained in connection therewith, and (iv) the construction schedule therefor.

(b) The General Manager has implemented and shall continue to implement, upon the initiation of the construction of the Project Expansion, and maintain a safety and loss prevention program for the Project. CAWD/PBCSD shall ensure that (i) all reasonable precautions for the safety of CAWD/PBCSD employees, independent contractors and visitors in connection with the Project have been taken, and (ii) the Project is operated and maintained in compliance with (A) all applicable provisions of federal, state and local laws and regulations, including, without limitation, building codes, and (B) insurance policies in place with respect to the Project.

(c) In accordance with each approved budget, the General Manager shall procure inventory and maintain replacement spare parts, specialized tools, consumables and working supplies reasonably necessary to maximize the continuous operation of the Project.

(d) CAWD/PBCSD shall, to the maximum extent achievable under the law and subject to Section 2.2(b) hereof, use its best efforts to maintain the Project in full operation, producing Recycled Water as defined herein at its full rated capacity, 24 hours per day, seven days per week, throughout the entire year, including legal and other holidays. Each Owner of a Recycled Water Irrigation Area, upon entering a Sale Agreement with MPWMD as described in Section 1.25 (c) hereof, shall be an intended beneficiary of this Agreement so as to enable it to enforce the requirements set forth in the preceding sentence against CAWD/PBCSD, who shall be jointly and severally responsible therefor.

9.3 Covenants of CAWD and PBCSD Concerning Personnel.

CAWD hereby further covenants and agrees with the other parties as follows:

(a) CAWD and PBCSD shall provide and employ, as applicable, qualified plant management, operations and maintenance personnel for the Project in sufficient numbers, and at such times, as is necessary to accomplish CAWD and PBCSD’s respective obligations hereunder and to comply with statutory and regulatory practices and requirements for the operation and maintenance of the Project.

(b) All such personnel shall meet those qualifications required of their positions, as determined by CAWD and PBCSD to meet statutory and regulatory requirements, and to provide the level of skill necessary to meet obligations hereunder.

9.4 Effect of Agreement and Project on Existing Plant. Nothing in this Agreement shall permit any party to this Agreement, or any other person or entity, other than CAWD, pursuant to such agreements as exist between CAWD and PBCSD, to operate or manage the operation of the wastewater treatment plant presently being operated by CAWD.

10. Term. This Agreement shall commence and become effective upon its execution and delivery by each party and shall continue and remain in effect until the date on which the Certificates of Participation are fully paid, or the date which is thirty (30) years after the date first set forth above, whichever is later, and thereafter until terminated pursuant to section 10.1..

10.1 Termination. After the Certificates of Participation have been fully paid, or thirty (30) years after the date first set forth herein, whichever is later, MPWMD may terminate this Agreement upon providing at least six (6) months written notice of termination; provided, however, that MPWMD may not terminate this Agreement unless non-potable water is then reasonably available to Buyer in quantities sufficient for irrigation of all of Buyer’s Property.

11. Remedies for Breach.

11.1 Termination and Damages. In the event that CAWD/PBCSD breaches, in any material respect, any of its representations and warranties or covenants in this Agreement, PBC shall have the right, in addition to all other remedies it may have under law or in equity, to terminate this Agreement, 30 days or more after CAWD/PBCSD receives written notice of such termination, specifying such breach in reasonable detail, if such breach is not cured by CAWD/PBCSD during such 30-day period. In the event any party to this Agreement breaches, in any material respect, any of its representations and warranties or covenants in this Agreement, either of the other parties hereto shall have the right to bring an action against the breaching party for damages arising out of, or resulting from, such breach, 30 days or more after the breaching party receives written notice of the other party’s intention to bring such action, specifying such breach in reasonable detail, if such breach is not cured by the breaching party during such 30-day period. Notwithstanding the foregoing, if a cure of any such breach by any party hereto 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 exercise its rights under this Section 11.1 unless such cure is not effected within 90 days after the breaching party receives such written notice. In the event PBC should terminate the Supplemental Financing Agreement as a result of any material breach by MPWMD of any of its representations and warranties or covenants in such agreement, PBC shall have the right to terminate this Agreement upon giving all of the parties hereto ten days prior written notice of such termination. Except as specifically provided in this Section 11.1, no party shall have the right to terminate this Agreement as a result of any breach hereof or of the Supplemental Financing Agreement. No termination of this Agreement by PBC shall affect the Water Entitlement or the Water Use Permits, each as defined in the Supplemental Financing Agreement, or any rights thereto. For purposes of this Section 11.1, CAWD and PBCSD shall be deemed to be one party.

11.2 Remedies Under Fiscal Sponsorship Agreement. In the event that either CAWD or PBCSD breaches any of its representations and warranties or covenants in this Agreement or any Related Agreement, then so long as such breach continues, PBC’s obligations under the Fiscal Sponsorship Agreement with respect to any NOD Letter of Credit shall not be enforceable.

11.3 Equitable Remedies. Notwithstanding any implication in Section 11.1 above to the contrary, each of the parties hereby acknowledges that the other parties may have no adequate remedy at law if such party breaches any of its obligations hereunder, and, accordingly, each of the parties shall have the right, in addition to any other rights it may have hereunder or at law, to obtain, in any court of competent jurisdiction, injunctive relief to restrain a breach or threatened breach hereof by any other party or otherwise to specifically enforce any of the provisions hereof involved in any such breach or threatened breach.

12. Indemnification.

12.1 Protection of Parties. Subject to the limitations in this Section 12, each party shall defend and indemnify, and hold harmless, each of the other parties from and against any and all damages, liabilities, losses, and costs or expenses suffered or incurred by such other party, arising out of, or resulting from, any breach of its representations, warranties or agreements set forth in this Agreement. In particular, CAWD/PBCSD shall, to the extent of their respective responsibility therefor, indemnify, defend, and hold MPWMD harmless from and against any and all damages, liabilities, losses, and costs or expenses resulting from the breach of its/their respective obligations under sections 2.2(b), 5.3 (a), and 9.2(d) of this Agreement.

12.2 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 any party has indemnified any of the other parties under Section 12.1 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.

12.3 Payment of Indemnified Claims. Upon a final judgment or award with respect to any proceeding of the nature described in Section 12.2 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, or 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.

12.4 Securities Law Indemnification. Subject to the limitations in this Section 12, each party shall defend and indemnify, and hold harmless, each of the other parties from and against any and all expenses suffered or incurred by such other party as a result of any written information provided by the indemnifying party for inclusion in any of the COP Documents, as defined in the Supplemental Financing Agreement, or any COP Document prepared by the indemnifying party (except with respect to the portion thereof prepared based on written information provided by other than the indemnifying 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.

13. Miscellaneous.

13.1 Further Assurances. Each of the parties agrees to execute, and deliver to the other parties, 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.

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

13.3 Notices. Whenever any matter herein provides for notice or other communication to be given to any 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

P.O. Box 1767 Management District

Pebble Beach, CA 93953 P.O. Box 85

Attn: Mark Stillwell Monterey, CA 93942-0085

and and

Hoge, Fenton, Jones, Appel, Inc. David C. Laredo

2801 Monterey Salinas Highway De Lay & Laredo 606 Forest Avenue

Monterey, CA 93942 Pacific Grove, CA 93950

Attn: Thomas H. Jamison and Ronald F. Scholl

If to PBCSD: If to CAWD:

Pebble Beach Community Services Carmel Area Wastewater

District District

Forest Lake Road & Lopez Road P.O. Box 221428

Pebble Beach, California 93953 Carmel, California 93922

Attn: General Manager Attn: General Manager

13.4 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.

13.5 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, PBCSD and CAWD may each assign any of their rights or obligations hereunder only to any successor agency, 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. Notwithstanding the preceding sentence, neither party may assign or transfer its rights or obligations if to do so would: (1) impair the ability or right of any other party to receive the benefits of this Agreement, or (2) frustrate the purpose for which this Agreement was executed. Except as expressly stated to the contrary herein, nothing herein shall be construed to give any rights or benefits to anyone other than the parties to this Agreement, or to their respective successors and permitted assigns.

13.6 Cumulative Remedies. Except as specifically provided to the contrary in Section 11.1 hereof, no remedy or election hereunder shall be deemed exclusive, but shall be cumulative with all other remedies at law or in equity.

13.7 Severability. 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 under this Agreement of the parties hereto and thereto and as may be necessary in order for such provision to be valid and enforceable.

13.8 Waiver. No waiver of any right or obligation of any of the parties shall be effective unless in a writing, specifying such waiver, executed by the party against whom such waiver is sought to be enforced. A waiver by any of the parties of any of its rights under this Agreement on any occasion shall not be a bar to the exercise of the same right on any subsequent occasion or of any other right at any time.

13.9 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.

13.10 Presumptions. Because all of the 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.

13.11 Amendment or Modification. This Agreement may be amended, altered, or modified only by a writing, specifying such amendment, alteration or modification, executed by all of the parties hereto.

13.12 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.

13.13 Entire Agreement. This Agreement together with 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, any memoranda of understanding to which the parties or MPWMD, CAWD and PBCSD are parties.

13.14 Limitation on Liability of Partners. No recourse shall be had against any partner of PBC or any partner or subpartner of a partner of PBC, or any legal representative, heir, successor or assign of any thereof, on account of any covenant, agreement or indemnification contained herein or in any of the Related Agreements, or for any claim arising out of or with respect to this Agreement or any of the Related Agreements, or the performance hereof or thereof. Recourse therefor shall be limited solely to PBC and the assets of PBC (a deficit capital account of any partner of PBC or other funding obligation of a partner under the partnership agreement of PBC shall not be deemed an asset or property of PBC), and no action or proceeding on account of any such covenant, agreement or indemnification shall be sought, obtained or enforced against any partner of PBC or any partner or subpartner of PBC, or heir, successor or assign, or against their respective individuals assets.

13.15 No Third-Party Beneficiary Rights. CAWD and PBCSD each hereby acknowledge that all of its rights with respect to the Project are set forth in this Agreement, the Related Agreements to which it is a party and the Management Agreement and it is not a third-party beneficiary of the Supplemental Financing Agreement. Nothing in the preceding sentence shall in any way affect the third party beneficiary rights created in the owners of Recycled Water Irrigation Areas as expressly set forth in this Agreement.

13.16 Security Interest. MPWMD hereby grants to CAWD/PBCSD a security interest in all of its right, title and interest to the payments which the owners of the Recycled Water Irrigation Areas will be obligated to make to it pursuant to the Sale Agreements, and all proceeds thereof, (the “Collateral”) as security for the performance by MPWMD of its obligations to make payments to CAWD/PBCSD pursuant to Section 5.5(a) hereof. CAWD/PBCSD shall have all of the rights and remedies of a secured party under the California Commercial Code with respect to the Collateral.

13.17 Expanded or Additional Facilities. Notwithstanding any implication to the contrary herein, subject to the specific obligations of CAWD and PBCSD in Section 9.2 hereof, nothing in this Agreement shall prevent CAWD/PBCSD from expanding the capacity of the Project, or constructing and operating additional wastewater facilities, for the purpose of producing Recycled Water in excess of the capacity, from time to time, of the Project to produce Recycled Water, so long as such expansion or addition does not (a) adversely affect the operation or then existing capacity of the Project or the rights of the holders of any then outstanding Certificates of Participation with respect to the Project, (b) increase the capital costs or operating expenses of the Project or any of PBC’s obligations with respect to the Project or the Certificates of Participation, (c) diminish the operating revenues of the Project, or (d) diminish, or otherwise affect, the obligations of CAWD or PBCSD under this Agreement or the ability of CAWD or PBCSD to perform such obligations. In the event CAWD/PBCSD proposes any such expansion or additional facility, the parties hereto shall amend this Agreement, or enter into such other agreements, as may be necessary to properly and fully evidence the rights and obligations of the parties hereto and the rights of the holders of such Certificates of Participation with respect to the construction and operation of the Project and such expansion or additional facility, including, without limitation, with respect to the accounting for, and an allocation between the Project and such expansion or additional facilities of, the capital costs and operating expenses of each that equitably assigns such costs and expenses between the Project and such expansion or additional facilities.

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: ____________________

Pebble Beach Community Carmel Area Wastewater

Services District District

By: _________________________ By: ____________________

Its: _________________________ Its: ____________________

PreliminaryDraft

AGREEMENT

A Map of the unincorporated portion of the Del Monte Forest.

WATER QUALITY STANDARDS