MPWMD BOARD MEETING--APR 22, 2004--EXHIBIT 1D--SUPPLEMENTAL CONSTRUCTION AND OPERATION AGREEMENT

SUPPLEMENTAL CONSTRUCTION AND OPERATION AGREEMENT

This Supplemental Construction and Operation Agreement is entered into as of ______________________, 2004, by and among the Monterey Peninsula Water Management District, a California public agency (AMPWMD@), Carmel Area Wastewater District (formerly Carmel Sanitary District), a California public agency (ACAWD@), Pebble Beach Community Services District, a California public agency (APBCSD@), and Pebble Beach Company, a California general partnership (APBC@), superseding the Wastewater Reclamation Project Construction And Operation Agreement among the parties hereto dated as of November 1, 1990 (AConstruction 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 (ACAWD@), the Pebble Beach Community Services District (APBCSD@), 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 Afreeing 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 AOriginal 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 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 amounts 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 ABusiness Day@ means any weekday which is not a Federal or California state holiday.

1.2 ACal-Am@ means the California American Water Company, a California corporation, and its successors and assigns.

1.3 “Capital Costs,” has the meaning given to such term in the Construction and Operation Agreement, as set forth on Exhibit “A” to this Agreement.

1.4 “Capital Costs of the Project Expansion” means costs falling within the preceding definition of Capital Costs that apply to the Project Expansion, and without limitation specifically includes payment of expenses incurred concerning the Project Expansion, the need therefor, 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.

1. 5 "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.

1.6 ACertificates 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, as more fully described in the Supplemental Financing Agreement.

1.7 "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.

1.8 "Del Monte Forest@ means the area of unincorporated Monterey County described and/or depicted on Exhibit "D."

1.9 AGeneral Manager@ means the General Manager of CAWD.

1.10"Independent Recycled Water Users Group" or "IRWUG" means the association comprised of the respective owners of the Cypress Point Golf Club, Poppy Hills Golf Course (Northern California Golf Association), and the Monterey Peninsula Country Club.

1.11 "Interruption," for the purposes of Rule 23.5 and Ordinance No. 109, means an interruption for longer than 12 hours in the supply of Recycled Water to a Recycled Water Irrigation Area.

1.12 AIrrigation System@ means the recycled water irrigation systems installed and operating on each of the Recycled Water Irrigation Areas.

1.13 AManagement Committee@ means a committee {the composition of this Committee is under discussion} 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 the 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.

1.14 “Operating and Maintenance Reserve” or “O&M Reserve” have the meaning given to such terms in the Water Purchase Agreement.

1.15 “Operating Revenues,” has the meaning given to such term in the Water Purchase Agreement.

1.16 “Operation and Maintenance Expenses,” has the meaning given to such term in the Water Purchase Agreement.

1.17 "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.

1.18 "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.

1.19 AProject@ means the Original Project as defined in subsection 1.19 (a) hereof, and the Project Expansion as defined in subsection 1.19 (b) hereof.

(a) The AOriginal 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 AB@ 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 AB@ hereto, and (3) recycled water irrigation systems on each of the Recycled Water Irrigation Areas.

(b) The AProject 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 X 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.

1.20 APublic 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.

1.21 The meaning of the term ARecycled 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.

1.22 ARecycled 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 on Exhibit "A" hereto.

1.23 ARelated Agreements@ {this definition will require further attention} 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 ASale Agreement);

(d) ~~(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;

1.24 "Supplemental Financial Commitment" means all of the following:

(a) the irrevocable written commitment by PBC to pay all costs of the Project Expansion from commencement through the time that it is Completed, using funds raised through the sale of such portions of its Water Entitlement pursuant to Subsection C of Section Three of Ordinance 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), and to continue to pay 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 to continue to pay all Ancillary Project Costs; and

(b) the written representation by each of PBC, CAWD, and PBCSD that each is prepared and intends forthwith to commence construction of the Project Expansion and to proceed

1.25 “Supplemental Financing Agreement” means the Supplemental Financing Agreement between MPWMD and PBC dated , 2004, supplementing the Fiscal Sponsorship Agreement (as amended by the Financing Implementation Agreement, dated as of November 1, 1992).

1.26 "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 the Benefited Properties (as that term is defined in Ordinance 109) located 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 Original Project. MPWMD 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.

1.27 "Water Use Permit" means a writing from MPWMD which evidences the dedication of the Water Entitlement as a present vested property right inuring to the use and benefit of the Benefited Properties as more fully described in MPWMD 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 1.23(c) hereof (the ARecycled 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 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, 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 that is produced [by the Project][for the Recycled Water Irrigation Areas] and to [retain all of the proceeds which result from such sales].

(b) {this will need further discussion} 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 MPWMD][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 and] [MPWMD], at the highest obtainable price, and all proceeds {there may be other requirements in the financing documents} 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 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 for irrigation purposes, all as more fully described in the Sale Agreement, as described in 1.23(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. 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 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; provided, however, that following retirement of the Certificates of Participation, such water charges shall be comparable to the cost of supplying potable domestic water Cal-Am charges, unless agreed to in writing by the users, that CAWD/PBCSD shall recoup all Recycled Water production costs {this needs to be harmonized with the Water Sales Agreement}.

(b) CAWD/PBCSD shall, subject to availability of adequate quantities of wastewater effluent, produce Recycled Water from the Project and shall deliver it to the Recycled Water Irrigation Areas in quantities sufficient to irrigate all portions of the Recycled Water Irrigation Areas; provided, however, 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. Recycled Water produced by the Project shall meet standards set out in Exhibit [X], attached hereto and incorporated herein by this reference, and, having met such standards, shall be deemed by all parties hereto as suitable for irrigation of all portions of the Recycled Water Irrigation Areas. Further, if such standards are met, CAWD/PBCSD shall in no event 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 used or applied. Each Owner of a Recycled Water Irrigation Area, upon entering a Sale Agreement with MPWMD as described in Section 1.23(c) hereof, shall be an intended beneficiary of this Agreement so as to enable it to enforce the requirements of this section 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. {This section may not reflect current discussions} AWD 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 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) a construction cost estimate for the Project Expansion and a contingency for change orders in the amount of 5% of such cost estimate (collectively, the ACost 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) for the Project Expansion and/or the 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 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 , 2004.

(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) {This needs to be harmonized with the other documents}All Capital Costs incurred and approved, in the manner described in subsections (a) and (b) above, with respect to construction of the Project Expansion, as applicable, 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.

(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 included 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 {this needs to be examined carefully lest it impairs the security of the COPs} Capital Outlay Reserve Fund in a minimum amount of $2,000,000, and such allowance shall not be modified if the Certificates of Participation are prepaid for any reason. The amount of annual allowance defined in this subsection (ii) will be determined by the Management Committee and will be included in each annual budget of the Project. In determining the annual amount, the Management Committee will consider factors including the balance and the estimated earnings on the amount deposited in the Capital Outlay Reserve Fund and the number of years to retirement of the Certificates of Participation. Any limitation set on the amount of the Capital Outlay Reserve 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 earlier, 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 the 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 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 AOperating Short-Fall@), unaudited monthly financial statements of the Project, accompanied by an unqualified certificate of the chief financial officer of CAWD (an AOfficer=s Certificate@), on or before the 15th day after each such month, or as soon as information is available, (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, or as soon as information is available, (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, or as soon as information is available, 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 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 or PBCSD be obligated to produce Recycled Water in amounts in excess of the then currently designed capacity of the Project, and subject to availability of adequate quantities of wastewater effluent. Recycled Water produced by the Project shall meet standards set out in Exhibit __ , attached hereto and incorporated herein by this reference, and, having met such standards, shall be deemed by all parties hereto as suitable for irrigation of all portions of the Recycled Water Irrigation Areas. Further, if such standards are met, CAWD and PBCSD shall in no event 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 used or applied. Each Owner of a Recycled Water Irrigation Area, upon entering a Sale Agreement with MPWMD as described in Section 1.23(c) hereof, shall be an intended beneficiary of this Agreement so as to enable it to enforce the requirements set forth in this subsection (a) against CAWD and 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. {This may need to be evaluated under the financing agreements} The charges of such consulting engineer are 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 AExisting 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) {The wording of these subsections needs to be confirmed, but the concept expressed is workable from the financial perspective} MPWMD shall be responsible for paying all of the Operations andMaintenance 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. Within five Business Days of MPWMD=s receipt of the annual budget (as approved pursuant to this Agreement) for any fiscal year of the project but in no event earlier than the 20^th day of such fiscal year, MPWMD shall pay CAWD/PBCSD amounts requested under that budget on an as needed basis as determined and notified at sole discretion of CAWD/PBCSD. If the actual expenses over the course of the year exceed budgeted Operation and Maintenance Expenses, CAWD/PBCSD 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 Sales Revenue Account. At the end of the fiscal year, if necessary, a budget to actual adjustment will be made and MPWMD will forward any amount necessary to make up for any deficit for that fiscal year. Each advance made to CAWD/PBCSD by MPWMD shall be deemed to constitute an advance of Operations and Maintenance Expenses for the fiscal year 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 the 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 Operations 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. 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 Expenses 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, or as soon as information is available from all participating parties to this Agreement, 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 , 2004.

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 with respect to the Project. 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 their respective 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) {the concept here – that plant operations/NPDES requirements may affect plant operation, needs further work} CAWD and PBCSD shall, to the maximum extent achievable under the law, as required, and subject to Section 2.2(b) hereof, use their best efforts to maintain the Project in full operation, producing Recycled Water 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 1.23(c) hereof, shall be an intended beneficiary of this Agreement so as to enable it to enforce the requirements set forth in the preceding sentences against CAWD and PBCSD, who shall be responsible therefor with respect to their respective responsibilities.

9.3 Covenants of CAWD and PBCSD Concerning Personnel. CAWD and PBCSD hereby further covenant and agree 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. {this needs to be harmonized with the other agreements} 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 any 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. {this right may not be realistic if the Project still needs to deliver water} 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 and 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 AFinal 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