$21,440,000 city of carlsbad, new mexico joint ...101 n. halagueño street carlsbad, new mexico...

NEW ISSUE - BOOK ENTRY ONLY Assured Guaranty Corp. Insured Ratings:,Moody’s: “Aa2”; Standard & Poor’s: “AAA”; Underlying Rating: Moody’s “A3”

In the opinion of Modrall, Sperling, Roehl, Harris & Sisk, P.A., Bond Counsel, assuming continuous compliance with certain covenants described in “TAX EXEMPTION” herein, interest on the Bonds (a) is excludable from gross income of the recipients thereof for federal income tax purposes, (b) is not a specific preference item for purposes of the federal alternative minimum tax for individuals and corporations and (c) is excludable from net income for present State of New Mexico income tax purposes. For a more complete description of such opinion of Bond Counsel and a description of certain provisions of the Internal Revenue code of 1986, as amended, which may affect the federal tax treatment of interest on the Bonds for certain owners of the Bonds, see “TAX EXEMPTION” herein.

$21,440,000 CITY OF CARLSBAD, NEW MEXICO

Joint Water and Sewer Refunding and Improvement Revenue Bonds Series 2009

Dated: Date of Delivery Due: June 1, As Shown on the inside cover The Bonds are special limited obligations of the City of Carlsbad, issuable only as fully registered bonds as to both principal and interest in the denomination of $5,000 and integral multiples thereof. Interest accrues from the date of delivery of the Bonds and is payable semiannually on June 1 and December 1 in each year beginning June 1, 2009. The Bonds will be issued pursuant to a book-entry-only system and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC") in New York, New York. Purchasers of the Bonds ("Beneficial Owners") will not receive physical delivery of bond certificates representing their beneficial ownership interests. So long as DTC or its nominee is the owner of the Bonds, disbursement of payments of principal and interest to DTC is the responsibility of the Paying Agent (as defined herein), disbursement of such payments to DTC Participants (as defined herein) is the responsibility of DTC and disbursement of such payments to Beneficial Owners is the responsibility of DTC Participants, as more fully described herein.

The Bonds maturing on and after June 1, 2019, are subject to optional redemption on and after June 1, 2018, in whole or in part at any time. See "THE BONDS - Prior Redemption" herein.

The Bonds are being issued to provide funds (1) to refund, refinance, pay and discharge the City’s Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 1998 in the outstanding principal amount of $13,705,000, (2) to extend, enlarge, better, repair and otherwise improve the City’s Joint Water and Sewer System and (3) to pay all costs incidental thereto and to the issuance of the Bonds. The Bonds do not constitute an indebtedness of the City within the meaning of any constitutional or statutory provision or limitation, are not general obligations of the City and are payable and collectible solely from the Net Revenues of the Joint Water and Sewer System specifically pledged therefor. See "THE NET REVENUES" herein. Neither the full faith and credit of the City, nor the ad valorem taxing power or general resources of the City, the State of New Mexico or any other political subdivision is pledged to the payment of the Bonds. The Bonds constitute an irrevocable first lien (but not necessarily an exclusive first lien) upon the Net Revenues (as defined herein). See "THE BONDS-Source of Payment and Security" and "THE NET REVENUES."

The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under a financial guaranty insurance policy to be issued concurrently with the delivery of the Bonds by Assured Guaranty Corp. See "BOND INSURANCE."

The Bonds are offered when, as and if issued by the City and purchased by the Underwriter and subject to the delivery of

an approving opinion by Modrall, Sperling, Roehl, Harris & Sisk, P.A., Bond Counsel, and other conditions. Certain legal matters will be passed upon by the City by Eileen P. Riordan, City Attorney. Modrall, Sperling, Roehl, Harris & Sisk, P.A., has also acted as special counsel to the City in connection with the preparation of this Official Statement and the sale of the Bonds. It is expected that delivery of the Bonds will be made on or about March 12, 2009 through the facilities of The Depository Trust Company, New York, New York against payment therefor. This cover page contains certain information for quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision.

RBC Capital Markets Corporation

Official Statement Dated February 6, 2009

$21,440,000 CITY OF CARLSBAD, NEW MEXICO


MATURITY SCHEDULE Maturity

Date (June 1)

Principal Amount

Coupon

Yield

CUSIP 2009 $150,000 3.000% 0.900% 142771 HU1 2010 750,000 3.000% 1.200% 142771 HV9 2011 775,000 3.000% 1.950% 142771 HW7 2012 800,000 3.000% 2.100% 142771 HX5 2013 820,000 3.000% 2.350% 142771 HY3 2014 845,000 3.000% 2.600% 142771 HZ0 2015 870,000 3.000% 2.800% 142771 JA3 2016 900,000 3.250% 3.000% 142771 JB1 2017 925,000 3.500% 3.200% 142771 JC9 2018 960,000 3.750% 3.450% 142771 JD7 2019 995,000 4.000% 3.700% 142771 JE5 2020 1,035,000 4.000% 4.020% 142771 JF2 2021 1,075,000 4.125% 4.270% 142771 JG0 2022 1,120,000 4.250% 4.460% 142771 JH8 2023 1,170,000 4.500% 4.650% 142771 JJ4 2024 1,220,000 4.625% 4.830% 142771 JK1

$2,615,000 Term Bond @ 4.750% due June 1, 2026 Yield 5.000% CUSIP 142771 JM7 $4,415,000 Term Bond @ 5.000% due June 1, 2029 Yield 5.150% CUSIP 142771 JQ8

CITY OF CARLSBAD

101 N. Halagueño Street Carlsbad, New Mexico 88221-1569

(505) 887-1191

MAYOR Bob Forrest

CITY COUNCIL

Paul C. Aguilar Nick Salcido Jeff Diamond Sandra Nunley Wesley Carter Ned Z. Elkins Brad A. Day

Nathan McDonald

CITY ADMINISTRATION Harry Burgess, City Administrator

Monica Harris, City Treasurer Amanda Asbury, City Clerk

Eileen P. Riordan, City Attorney

BOND COUNSEL Modrall, Sperling, Roehl, Harris & Sisk, P.A.

Albuquerque, New Mexico 500 Fourth Street NW, Suite 1000

Bank of America Centre Albuquerque, New Mexico 87102

(505) 848-1800

REGISTRAR AND PAYING AGENT City Treasurer

101 N. Halagueño Street Carlsbad, New Mexico 88221-1569

(505) 887-1191

USE OF INFORMATION IN THIS OFFICIAL STATEMENT No dealer, salesman, or other person has been authorized to give any information or to make any representation, other than the information contained in this Official Statement, in connection with the offering of the Bonds, and, if given or made, such information or representations must not be relied upon as having been authorized by the City or the Underwriter. This Official Statement does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized, or in which any person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy of such information. The information contained in this Official Statement has been obtained from the City and other sources which are deemed to be reliable, but it is not guaranteed as to completeness or accuracy by, and is not to be construed as a representation by, the Underwriter. The information in this Official Statement is subject to change without notice, and neither the delivery of this Official Statement nor any sale hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or others since the date hereof. THE PRICES AT WHICH THE BONDS ARE OFFERED TO THE PUBLIC BY THE UNDERWRITER (AND THE YIELDS RESULTING THEREFROM) MAY VARY FROM THE INITIAL PUBLIC OFFERING PRICES APPEARING ON THE COVER PAGE HEREOF. IN ADDITION, THE UNDERWRITER MAY ALLOW CONCESSIONS OR DISCOUNTS FROM SUCH INITIAL PUBLIC OFFERING PRICES TO DEALERS AND OTHERS. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. This Official Statement contains statements that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. When used in this Official Statement, the words “estimate,” “project,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bonds have not been registered under the Securities Act of 1933, nor has the Bond Ordinance been qualified under the Trust Indenture Act of 1939, in reliance upon exemptions contained in such acts. The registration and qualification of the Bonds in accordance with applicable provisions of the securities laws of the states in which the Bonds have been registered or qualified and the exemption from registration or qualification in other states cannot be regarded as a recommendation thereof. Neither the Securities and Exchange Commission nor any other federal, state, municipal or other governmental entity, nor any agency or department thereof, has passed upon the merits of the Bonds or the accuracy or completeness of this Official Statement. Any representation to the contrary may be a criminal offense. Assured Guaranty makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, Assured Guaranty has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding Assured Guaranty supplied by Assured Guaranty and presented under the heading “BOND INSURANCE” and “Appendix C - Specimen Financial Guaranty Insurance Policy.”

TABLE OF CONTENTS Page

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INTRODUCTION ...........................................................................................................................1

The Issuer ......................................................................................................................................1 Purpose and Authorization ............................................................................................................1 Authority for Issuance ...................................................................................................................2 Terms of the Bonds .......................................................................................................................2 Security and Sources of Payment ..................................................................................................3 Tax Exemption ..............................................................................................................................3 Professionals Involved in the Offering..........................................................................................3 Offering and Delivery of the Bonds ..............................................................................................3 Other Information..........................................................................................................................4

SPECIAL FACTORS ......................................................................................................................4

Waste Isolation Pilot Plant ............................................................................................................4 Priority of Water Rights ................................................................................................................4 General Economic Concerns .........................................................................................................5

PURPOSE AND PLAN OF FINANCING......................................................................................5

Sources and Uses of Funds............................................................................................................5 The Project Plan ............................................................................................................................5

THE BONDS ...................................................................................................................................7

Generally .......................................................................................................................................7 Special Limited Obligations ..........................................................................................................8 Payment - Regular and Special Record Dates ...............................................................................8 Registration....................................................................................................................................8 Book-Entry-Only System ..............................................................................................................9 Prior Redemption.........................................................................................................................12 Creation and Administration of Funds ........................................................................................14 General Administration of Funds ................................................................................................18 Additional Bonds.........................................................................................................................19 Source of Payment and Security..................................................................................................22 Protective Covenants ...................................................................................................................22 Defeasance...................................................................................................................................27 Events of Default .........................................................................................................................28 Duties Upon Default....................................................................................................................28 Remedies Upon Default ..............................................................................................................28 Enforcement ................................................................................................................................29 Amendments to the Bond Ordinance ..........................................................................................29

BOND INSURANCE ....................................................................................................................30

The Insurance Policy ...................................................................................................................30 The Insurer...................................................................................................................................31

BOND INSURANCE RISK FACTORS .......................................................................................35

THE NET REVENUES .................................................................................................................36

Historical Joint System Net Revenues ........................................................................................36


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Joint System Revenues and Expenditures ...................................................................................38 Joint System Revenues and Expenditures – Actual and Budgeted .............................................39 Historical Joint System Balance Sheets ......................................................................................40

THE SYSTEM...............................................................................................................................41

Utility Management.....................................................................................................................42 Employees ...................................................................................................................................42 Budgeting ....................................................................................................................................43 Accounting and Auditing ............................................................................................................43 Enforcement of Rates and Charges .............................................................................................43 Connection, Billing and Collection Procedures ..........................................................................44 Insurance......................................................................................................................................45 Water Utility................................................................................................................................45 Wastewater Utility.......................................................................................................................48 Capital Improvement Plan...........................................................................................................51

RATES AND CHARGES .............................................................................................................52

Water Rates .................................................................................................................................52 Sewer Rates .................................................................................................................................52 Rate Comparisons - Residential ..................................................................................................54 Rate Comparisons - Commercial.................................................................................................54

HISTORICAL GENERAL FINANCIAL INFORMATION FOR THE CITY.............................55

Historical General Fund Balance Sheets .....................................................................................55 Historical General Fund Revenues and Expenditures .................................................................56 General Fund Revenues and Expenditures (Actual and Budgeted) ............................................57

THE CITY .....................................................................................................................................58

General ........................................................................................................................................58 Mayor and City Commission.......................................................................................................58 Other Employees .........................................................................................................................59 Retirement Plan ...........................................................................................................................59 Financial Statements and Budgets...............................................................................................59 Intergovernmental and Other Agreements ..................................................................................60 City Insurance Coverage .............................................................................................................60 City Investment Policy ................................................................................................................60

AREA ECONOMIC INFORMATION .........................................................................................61

Potash Production........................................................................................................................61 Oil and Gas Production ...............................................................................................................61 WIPP Project (Waste Isolation Pilot Plant).................................................................................62 Agriculture...................................................................................................................................63 Education.....................................................................................................................................63 Population and Age Distribution .................................................................................................64 Income .........................................................................................................................................65 Effective Buying Income.............................................................................................................65 Gross Receipts .............................................................................................................................66


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Employment ................................................................................................................................66 Covered Wage and Salary Employment by NAICS Code Classification ...................................67 Major Employers .........................................................................................................................68

GENERAL OBLIGATION BOND INFORMATION..................................................................68

City of Carlsbad Historical Property Value Assessments ...........................................................69 Statement of Estimated Direct and Overlapping Debt ................................................................69 Property Tax Rates and Collections ............................................................................................69 History of Assessed Valuation ....................................................................................................70 Major Taxpayers in Eddy County ...............................................................................................71

LITIGATION AND INSURANCE ...............................................................................................71

LEGAL MATTERS.......................................................................................................................71

TAX EXEMPTION .......................................................................................................................71

CONTINUING DISCLOSURE.....................................................................................................74

UNDERWRITING ........................................................................................................................76

RATINGS ......................................................................................................................................77

FINANCIAL STATEMENTS.......................................................................................................77

INDEPENDENT ACCOUNTANTS.............................................................................................77

ADDITIONAL INFORMATION..................................................................................................78

OFFICIAL STATEMENT CERTIFICATION..............................................................................78

APPENDIX A - Form of Legal Opinion .................................................................................... A-1

APPENDIX B - Excerpts from Audited Financial Statements of the City of Carlsbad, NM for the Year Ending June 30, 2007..........................................................................................................B-1

APPENDIX C - Specimen Financial Guaranty Insurance Policy ...............................................C-1

(THIS PAGE LEFT BLANK INTENTIONALLY)

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OFFICIAL STATEMENT

$21,440,000 City of Carlsbad, New Mexico


INTRODUCTION

This Official Statement, which includes the cover page and appendices hereto, provides certain information in connection with the City of Carlsbad, New Mexico (the "City") Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 2009 (the "Bonds") being issued by the City pursuant to the Bond Ordinance (as defined below).

This introduction is not a summary of this Official Statement. It is only a description of and guide to, and is qualified by, the more complete information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Bonds to potential investors is made only by means of the entire Official Statement. No person is authorized to detach this "INTRODUCTION" from this Official Statement, or to otherwise use it without the entire Official Statement. This Official Statement has been prepared by the City in connection with the original issuance and sale of the Bonds, and detachment or other use of this "INTRODUCTION" without the entire Official Statement, including the cover page and appendices, is unauthorized.

All terms used in this Official Statement which are not defined herein shall have the meanings given such terms in the ordinance authorizing the issuance of the Bonds adopted by the City on February 6, 2009 (the "Bond Ordinance "). The Issuer

The City of Carlsbad is a political subdivision of the State of New Mexico (the "State") organized and existing under and pursuant to the Constitution and laws of the State. The City was incorporated in 1918, operates under a Mayor-Council form of government, and is located in the southeastern portion of the State, approximately 270 miles southeast of Albuquerque. The City has a land area of approximately 28 square miles and, as of the 2006 Census, its population was approximately 25,410. Carlsbad is the largest community in Eddy County and serves as the county seat. See "THE CITY" and "AREA ECONOMIC INFORMATION." Purpose and Authorization

The Bonds are being issued to provide funds (1) to refund, refinance, pay and discharge the outstanding City of Carlsbad Joint Water and Sewer Refunding and Improvement Bonds, Series 1998, (2) to extend, enlarge, better, repair and otherwise improve the City's Joint Water and Sewer System and (3) to pay all costs incidental to the foregoing and incidental to the issuance of the Bonds.

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Authority for Issuance

The Bonds are being issued pursuant to the City's powers under the laws and the Constitution of the State, including Sections 3-31-1 through 3-31-12, NMSA 1978, as amended, and the Bond Ordinance. The Bonds are expected to be ready for delivery on or about March 12, 2009, subject to the approving opinion of Bond Counsel. Terms of the Bonds

Principal and Interest Payment Dates

The Bonds will be dated the date of delivery. Interest on the Bonds will be payable on June 1 and December 1 of each year to registered owners shown on the books of the Registrar on the 15th day of the calendar month preceding each regularly scheduled interest payment date, commencing June 1, 2009. The Bonds will be issued in the aggregate principal amount of $21,440,000 and will mature on June 1 of each year in the amounts shown on the cover page (unless redeemed prior to maturity).

Denominations

The Bonds will be issuable in denominations of $5,000, or integral multiples thereof.

Reserve Requirement The Reserve Requirement for the Bonds is $1,624,856.26. The Reserve Requirement

will be funded with the Reserve Account Insurance Policy, as more fully described in "THE BONDS - Creation and Administration of Funds."

Optional Redemption

Bonds maturing on and after June 1, 2019, are subject to optional redemption beginning June 1, 2018, as more fully described in "THE BONDS - Prior Redemption."

Mandatory Sinking Fund Redemption Bonds maturing on June 1, 2026 and June 1, 2029 are also subject to mandatory sinking fund redemption as more fully described in "THE BONDS - Prior Redemption."

Additional Parity Bonds

Except with respect to certain refunding bonds, the City will be required to meet certain tests prior to the issuance of additional bonds with a lien on the Net Revenues on a parity with the lien of the Bonds. For a description of these tests, see "THE BONDS - Additional Bonds."

3

Security and Sources of Payment

The Bonds are not general obligations of the City and no pledge of the full faith and credit of the City, the taxing power or general resources of the City is made for the payment thereof. The Bonds are special limited obligations of the City and are not an indebtedness of the City within the meaning of any constitutional or statutory provision or limitation. The Bonds are payable and collectible solely from the Net Revenues, as defined in the Bond Ordinance. For a more complete description of the pledge for payment of the Bonds, see "THE NET REVENUES."

Outstanding Obligations Payable From Net Revenues

Other than the City’s Joint Water and Sewer Refunding and Improvement Revenue

Bonds, Series 1998, and the February 8, 2008 subordinate loan from the New Mexico Water Trust Board in the amount of $25,000, the City has no obligations payable from the Net Revenues. Pursuant to the Bond Ordinance, the City is not permitted to incur obligations payable from Net Revenues which are senior to the Bonds. However, the City will be permitted to incur parity obligations in accordance with certain tests and upon satisfaction of certain tests as described in "THE BONDS - Additional Bonds" and to incur obligations payable from Net Revenues which are junior to the Bonds. Tax Exemption

In the opinion of Modrall, Sperling, Roehl, Harris & Sisk, P.A., Bond Counsel, assuming continuous compliance with certain covenants described in “TAX EXEMPTION” herein, interest on the Bonds (a) is excludable from gross income of the recipients thereof for federal income tax purposes, (b) is not a specific preference item for purposes of the federal alternative minimum tax for individuals and corporations and (c) is excludable from net income for present State of New Mexico income tax purposes. For a more complete description of such opinion of Bond Counsel and a description of certain provisions of the Internal Revenue Code of 1986, as amended, which may affect the federal tax treatment of interest on the Bonds for certain owners of the Bonds, see “TAX EXEMPTION” herein. Professionals Involved in the Offering

At the time of the issuance and sale of the Bonds, Modrall, Sperling, Roehl, Harris & Sisk, P.A., as Bond Counsel, will deliver a bond opinion in substantially the form included in Appendix A hereto. Certain legal matters will be passed upon for the City by Eileen P. Riordan, City Attorney. See "LEGAL MATTERS." Offering and Delivery of the Bonds

The Bonds are offered when, as and if issued, subject to approval of Bond Counsel and certain other conditions. It is anticipated that the Bonds will be delivered through the facilities of The Depository Trust Company, New York, New York, on or about March 12, 2009

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Other Information

This Official Statement speaks only as of its date, and the information contained herein is subject to change.

The quotations from, and summaries and explanations of the statutes, regulations and documents contained herein do not purport to be complete, and reference is made to such laws, regulations and documents for full and complete statements of their provisions. Copies, in reasonable quantity, of such laws, regulations and documents may be obtained during the offering period, upon request to the City and upon payment to the City of a charge for copying, mailing and handling, at 101 N. Halagueño Street, Carlsbad, New Mexico 88221-1569, Attn: City Administrator.

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the City and the purchasers or holders of any of the Bonds.

SPECIAL FACTORS Waste Isolation Pilot Plant

The Waste Isolation Pilot Plant ("WIPP"), located approximately 26 miles from Carlsbad, has become a significant contributor to the City economy. In general, WIPP salaries are higher than any other local industry. If WIPP were to close, the negative effect on the City economy could be substantial. See "AREA ECONOMIC INFORMATION-WIPP Project (Waste Isolation Pilot Plant)." Priority of Water Rights

The City relies primarily on underground wells with priority dates for its water rights ranging from 1883 through 1950s. The wells are located in the Capitan Reef which is hydrologically connected to the Pecos River. Some other users of Pecos River water rights have earlier water right priority dates. In addition, the State of New Mexico is obligated to provide a certain amount of water to Texas under the 1949 Pecos River Compact. The amount of water to be delivered is "a quantity of water equivalent to that available to Texas under the 1947 condition" plus, as a result of a judicial decision, an additional 34,010 acre-feet of water each year.

Consequently, if the amount of available water in the Pecos River was significantly reduced because of an extended period of dry weather, while it is unlikely, the Pecos River Water Master could order cutbacks in diversion from the City wells or could order imposition of substantial conservation measures in the City. Either action would reduce water consumption and local economic activity thereby adversely impacting Net Revenues.

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The City believes that industrial and agricultural uses of Pecos River water would be curtailed prior to City water uses. General Economic Concerns The City may be negatively affected by the recent national economic slowdown. As a result of declining energy prices, revenues from the production of oil and gas within Eddy County and related activities in the City will decrease. Additionally, revenues generated from travel and tourism to Carlsbad Caverns and other area destinations could decline as a result of the current economic slowdown.

PURPOSE AND PLAN OF FINANCING

Sources and Uses of Funds

The estimated sources and uses of funds to be received in connection with the issuance of the Bonds are set forth in the following table.

SOURCE OF FUNDS:

Par Amount of Bonds $21,440,000.00 Original Issue Discount (58,838.65) Transfers from prior debt service and reserve funds 898,247.50

TOTAL $22,279,408.58

USE OF FUNDS:

Refund Series 1998 Bonds $13,705,000.00 Deposit to Project Acquisition Account 8,003,484.91 Underwriter's Discount 169,415.15 Costs of Issuance 401,508.79

TOTAL $22,279,408.85 The Project Plan

The City is authorized by law to issue the Bonds to extend, enlarge, better, repair and otherwise improve the System and to pay all costs incidental thereto and to the issuance of the Bonds. The City is also authorized to issue the Bonds to refund its existing indebtedness related to the System.

The Improvement Project The City has developed a prioritized list of water and sewer projects that include

renovations of existing infrastructure, extensions of service to new areas, and enhancements to the delivery/collection systems. These projects include the replacement and/or upsizing of water

6

and wastewater lines, upgrades to existing water wells, development of new water wells and water distribution lines, extension of sewer lines into areas not currently served, and renovations to the wastewater treatment facility. The complete list of projects, including a brief description of each, is available on the City of Carlsbad’s website at www.cityofcarlsbadnm.com.

The Refunding Project

On or about December 2, 1998, the City, pursuant to City Ordinance No. 98-13, issued its

Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 1998 (the "1998 Bonds") in the aggregate principal amount of $21,370,000, of which the aggregate principal amount of $13,705,000 remains outstanding. The City used the proceeds to finance the cost of refunding, refinancing, paying and discharging the City’s promissory note to the New Mexico Environmental Department (the “NMED”) and extending, enlarging, bettering, repairing and otherwise improving the System. The 1998 Bonds maturing on or after June 1, 2009 may be refunded at any time on or after June 1, 2008 and the City will use a portion of the proceeds of the Bonds to pay the 1998 Bonds in full on or about March 12, 2009

[Remainder of page intentionally left blank.]

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DEBT SERVICE SCHEDULE

Fiscal Year

Principal

Interest

Annual Debt Service

Coverage(1)

2009 $ 150,000 $ 192,037.20 $ 342,037.20 9.15 2010 750,000 870,606.26 1,620,606.26 1.93 2011 775,000 848,106.26 1,623,106.26 1.93 2012 800,000 824,856.26 1,624,856.26 1.93 2013 820,000 800,856.26 1,620,856.26 1.93 2014 845,000 776,256.26 1,621,256.26 1.93 2015 870,000 750,906.26 1,620,906.26 1.93 2016 900,000 724,806.26 1,624,806.26 1.93 2017 925,000 695,556.26 1,620,556.26 1.93 2018 960,000 663,181.26 1,623,181.26 1.93 2019 995,000 627,181.26 1,622,181.26 1.93 2020 1,035,000 587,381.26 1,622,381.26 1.93 2021 1,075,000 545,981.26 1,620,981.26 1.93 2022 1,120,000 501,637.52 1,621,637.52 1.93 2023 1,170,000 454,037.52 1,624,037.52 1.93 2024 1,220,000 401,387.52 1,621,387.52 1.93 2025 1,275,000 344,962.50 1,619,962.50 1.93

2026* 1,340,000 284,400.00 1,624,400.00 1.93 2027 1,400,000 220,750.00 1,620,750.00 1.93 2028 1,470,000 150,750.00 1,620,750.00 1.93

2029* 1,545,000 77,250.00 1,622,250.00 1.93

* Term Bonds (1) Based on estimated principal and interest payments and on Net Revenues

of $3,130,185 for Fiscal Year 2007 (unaudited). See "THE NET REVENUES – Historical Joint System Net Revenues." There is no assurance that actual Net Revenues received in the future will equal the Net Revenues used in the coverage computation.

THE BONDS Generally

The City is authorized under Sections 3-31-1 through 3-31-12, NMSA 1978, as amended, to issue joint utility revenue bonds, including the Bonds, and to pledge joint utility revenues pursuant to the Bond Ordinance. The Bonds shall be dated the date of delivery to the Underwriter (the "Series Date"), will be issued in the aggregate principal amount of $21,440,000, are issuable in denominations of $5,000 each or any integral multiple thereof, shall bear interest from the Series Date until maturity at the rates shown on the inside cover page hereof payable on June 1, 2009 and semiannually thereafter on December l and June 1 in each year, and shall mature on June 1 in the years and in the amounts shown on the cover page hereof (unless redeemed prior to maturity).

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Special Limited Obligations

The Bonds are special limited obligations of the City, payable solely from and secured by the Net Revenues of the System. For a more complete description of the pledge for payment of the Bonds, see "THE NET REVENUES." Except as described in the preceding sentences, the registered owners of the Bonds may not look to any general or other municipal fund of the City for payment of the principal of and interest on the Bonds. The Bonds do not constitute a general obligation of the City, and registered owners of the Bonds have no right to have any taxes levied for the payment therefor. Payment - Regular and Special Record Dates

The principal of and any prior redemption premium applicable to any Bond shall be payable to the registered owner thereof as shown on the registration books kept by the City Treasurer, as Registrar and Paying Agent for the Bonds upon maturity or prior redemption thereof and upon presentation and surrender at the Paying Agent. If any Bond shall not be paid upon such presentation and surrender at or after maturity (including sinking fund redemption, if any), or on a designated prior redemption date on which the City may exercise its right to prior redeem such Bond pursuant to the ordinance, it shall continue to draw interest at the rate borne by such Bond until the principal thereof is paid in full. Payment of interest on any Bond shall be made to the registered owner thereof as of the 15th calendar day of the month preceding each interest payment date (“ the Regular Record Date”) by check or draft mailed by the Registrar, on or before each interest payment date (or, if such interest payment date is not a business day, on or before the next succeeding business day), to the registered owner thereof on the Regular Record Date at his address as it last appears on the registration books kept by the Registrar on the Regular Record Date (or by such other arrangement as may be mutually agreed to by the Registrar and any registered owner on such Regular Record Date). All such payments shall be made in lawful money of the United States of America. The person in whose name any Bond is registered at the close of business on any Regular Record Date with respect to any interest payment date shall be entitled to receive the interest payable thereon on such interest payment date notwithstanding any transfer or exchange thereof registered subsequent to such Regular Record Date and prior to such interest payment date; but any such interest not so timely paid or duly provided for shall cease to be payable as provided above and shall be payable to the person in whose name any Bond is registered at the close of business on a Special Record Date fixed by the Registrar for the payment of any such defaulted interest. Such Special Record Date shall be fixed by the Registrar whenever moneys become available for defaulted interest, and notice of any such Special Record Date shall be given not less than 10 days prior thereto, by first-class mail, to the registered owners of the Bonds as of a date selected by the Registrar, stating the Special Record Date and the date fixed for the payment of such defaulted interest. Registration

Transfer and Exchange

Books for the registration and transfer of the Bonds shall be kept by the Registrar. Upon the surrender for transfer of any Bonds at the Registrar, duly endorsed for transfer or

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accompanied by an assignment duly executed by the registered owner or his attorney duly authorized in writing, the Registrar shall authenticate and deliver in the name of the transferee or transferees a new Bond or Bonds of a like aggregate principal amount and of the same maturity, bearing a number or numbers not contemporaneously outstanding. Bonds may be exchanged at the Registrar for an equal aggregate principal amount of Bonds of the same maturity of other authorized denominations. The Registrar shall authenticate and deliver a Bond or Bonds which the registered owner making the exchange is entitled to receive, bearing a number or numbers not contemporaneously outstanding. Exchanges and transfers of Bonds as provided in the Bond Ordinance shall be without charge to the owner or any transferee, but the Registrar may require the payment by the owner of any Bond requesting exchange or transfer of any tax or other governmental charge required to be paid with respect to such exchange or transfer.

Times When Transfer or Exchange Not Required

The Registrar shall not be required (1) to transfer or exchange all or a portion of any Bond subject to optional prior redemption during the period of 15 days next preceding the mailing of notice to the registered owners calling any Bonds for optional prior redemption pursuant to the Bond Ordinance or (2) to transfer or exchange all or a portion of a Bond after the mailing to registered owners of notice calling such Bond or portion thereof for prior redemption.

Registered Owners

The person in whose name any Bond shall be registered, on the registration books kept by the Registrar, shall be deemed and regarded as the absolute owner thereof for the purpose of making payment thereof and for all other purposes except as may otherwise be provided with respect to payment of defaulted interest as is provided in Section 5(B) of the Bond Ordinance; and payment of or on account of either principal or interest on any Bond shall be made only to or upon the written order of the registered owner thereof or his legal representative, but such registration may be changed upon transfer of such Bond in the manner and subject to the conditions and limitations provided in the Bond Ordinance. All such payments shall be valid and effectual to discharge the liability upon such Bond to the extent of the sum or sums so paid.

Replacement Bonds

If any Bond shall be lost, stolen, destroyed or mutilated, the Registrar shall, upon receipt of such evidence, information or indemnity relating thereto as it may reasonably require, authenticate and deliver a replacement Bond or Bonds of a like aggregate principal amount and of the same maturity, bearing a number or numbers not contemporaneously outstanding. If such lost, stolen, destroyed or mutilated Bond shall have matured, the Registrar may direct the Paying Agent to pay such Bond in lieu of replacement. Book-Entry-Only System

Unless otherwise noted, the information contained under the caption “General” below has been provided by DTC. Neither the City nor the Underwriter make any representations as to the

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accuracy or the completeness of such information. The Beneficial Owners of the Bonds should confirm the following information with DTC, the Direct Participants or the Indirect Participants.

NEITHER THE CITY NOR THE PAYING AGENT WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIRECT PARTICIPANTS, TO INDIRECT PARTICIPANTS, OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (A) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY DIRECT PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (B) ANY NOTICE THAT IS PERMITTED OR REQUIRED TO BE GIVEN TO THE OWNERS OF THE BONDS UNDER THE BOND ORDINANCE, (C) THE SELECTION BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE BONDS; (D) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OR INTEREST DUE WITH RESPECT TO THE OWNER OF THE BONDS; (E) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE OWNERS OF THE BONDS; OR (F) ANY OTHER MATTER REGARDING DTC.

General

The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the

New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation, and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

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Purchases of the Bonds under the DTC system must be made by or through Direct or

Indirect Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

While the Bonds are in the book-entry-only system, redemption notices will be sent to DTC. If less than all of the Bonds are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be prepaid.

Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts, upon DTC’s receipt of funds and corresponding detail information from the City or agent on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, agent, or the City, subject to any statutory or

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regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the City. Under such circumstances, in the event that a successor depository is not obtained, certificates representing the Bonds are required to be printed and delivered to DTC.

The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, certificates representing the Bonds will be printed and delivered.

The information in this Appendix concerning DTC and DTC’s book-entry system has been obtained from sources that the City believes to be reliable, but neither the City nor the Underwriter take any responsibility for the accuracy thereof. Prior Redemption

Optional Redemption

Bonds maturing on and after June 1, 2019, shall be subject to prior redemption at the City's option in one or more units of principal of $5,000 on and after June 1, 2018, in whole or in part at any time, in such order of maturities as the City may determine (and by lot if less than all of the Bonds of such maturity is called, such selection by lot to be made by the Registrar in such manner as the Registrar shall consider appropriate and fair), for 100% of the principal amount of each $5,000 unit so redeemed, plus accrued interest thereon to the redemption date.

Mandatory Sinking Fund Redemption.

Bonds maturing on June 1, 2026 and June 1, 2029 are also subject to mandatory sinking fund redemption on June 1 in each of the years and principal amounts stated below at a redemption price equal to 100% of the principal amount thereof plus accrued interest to the redemption date. As and for a sinking fund for the redemption of Bonds so specified, the City shall cause to be deposited in the Bond Fund a sum which is sufficient to redeem (after credit as provided below) the following principal amounts of such Bonds plus accrued interest to the sinking fund redemption date:

Year Amount

2025 $1,275,000 2026* 1,340,000

*Maturity Date

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Year Amount

2027 $1,400,000 2028 1,470,000 2029* 1,545,000

*Maturity Date

Not more than 70 days nor less than 40 days prior to each sinking fund redemption date, the Registrar shall proceed to select for redemption (by lot in such manner as the Registrar may determine) from all outstanding Bonds of the applicable maturity subject to sinking fund redemption, a principal amount of Bonds equal to the aggregate principal amount of Bonds redeemable with the required sinking fund payment, shall call such Bonds or portions thereof ($5,000 or any integral multiple thereof) for such redemption on such sinking fund redemption date, and shall give notice of such call.

At the option of the City to be exercised by delivery of a written certificate to the

Registrar on or before the seventieth day next preceding any sinking fund redemption date, it may (i) deliver to the Registrar for cancellation Bonds maturing on June 1, 2026 and June 1, 2029, as applicable, as being subject to mandatory sinking fund redemption in an aggregate principal amount desired by the City or (ii) specify a principal amount of Bonds, maturing on June 1, 2026 and June 1, 2029, as applicable, as being subject to mandatory sinking fund redemption, which prior to said date have been redeemed (otherwise than through the operation of the sinking fund) and canceled by the Registrar at the request of the City and not theretofore applied as a credit against any sinking fund redemption obligation for any Bonds maturing on the same date. Each Bond so delivered or previously redeemed shall be credited by the Registrar at 100% of the principal amount thereof against the obligation of the City on such sinking fund redemption date for the Bonds and any excess over such amount shall be credited against the next succeeding sinking fund obligation, if any, for the Bonds of such maturity in chronological order. In the event the City shall avail itself of the provisions of clause (i) of the first sentence of this paragraph, the certificate required by the first sentence of this paragraph shall be accompanied by the Bonds or portions thereof to be canceled.

Except for any sinking fund redemption noted above, at least 45 days prior to any date selected by the City for optional prior redemption of any of the Bonds, unless waived by the Registrar, the City shall give written instructions to the Registrar with respect to such optional prior redemption and if the Registrar is not also the Paying Agent, to the Paying Agent.

Notice of Redemption

Notice of prior redemption (including notice of sinking fund redemption) shall be given

by the Registrar by sending a copy of such notice by first-class, postage prepaid mail, not more than 60 days and not less than 30 days prior to the redemption date to each registered owner of the Bond or Bonds to be prior redeemed as shown on the registration books kept by the Registrar as of the date of selection of units of principal for redemption. Unless waived by the Registrar, the Registrar shall not be required to give notice of any prior redemption unless the Registrar has

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received written instructions from the City in regard thereto, at least 45 days prior to such redemption date. Failure to give such notice by mailing to the registered owner of any Bond, or any defect therein, shall not affect the validity of the proceedings for the redemption of any of the Bonds. The Registrar shall also give notice to the Bond Insurer as provided in the Bond Ordinance.

The notice required shall specify the number or numbers of the Bond or Bonds or portions thereof to be so redeemed if less than all are to be redeemed; and all notices required shall specify the date fixed for redemption, and shall further state that on such redemption date there will become and be due and payable upon each $5,000 unit of principal so to be redeemed at the office of the Paying Agent the Redemption Price thereof, and that from and after such date interest will cease to accrue. Accrued interest to the redemption date will be paid by check or draft mailed to the registered owner (or by alternative means if so agreed to by the Paying Agent and the registered owner). Notice having been given in the manner hereinbefore provided, the Bond or Bonds so called for redemption shall become due and payable on the redemption date so designated; and upon presentation thereof at the Paying Agent, the City will pay the Bond or Bonds so called for redemption. In the event that only a portion of the principal amount of a Bond is so redeemed, a new Bond representing the unredeemed principal shall be duly completed, authenticated and delivered by the Registrar to the registered owner without charge.

If money or Government Obligations sufficient to pay the redemption price of the Bonds to be called for optional redemption are not on deposit with the Paying Agent prior to the giving of notice of optional redemption, such notice shall state such Bonds will be redeemed in whole or in part on the optional redemption date in a principal amount equal to that part of the optional redemption price received by the Paying Agent on the applicable optional redemption date. If the full amount of the optional redemption price is not received as set forth in the preceding sentence, the notice shall be effective only for those Bonds for which the optional redemption price is on deposit with the Paying Agent. If all Bonds called for optional redemption cannot be redeemed, the Bonds to be redeemed shall be selected in a manner deemed appropriate and fair by the Registrar and the Registrar shall give notice, in the manner in which the original notice of optional redemption was given, that such money was not received and including the information hereinbefore provided. In that event, the Registrar shall promptly return to the owners thereof the Bonds or certificates which it has received evidencing the part thereof which have not been redeemed.

Creation and Administration of Funds

Administration of Income Fund

The Bond Ordinance requires that so long as any of the Bonds shall be outstanding, either as to principal or interest, or both, the City shall credit all revenues of the System to the "City of Carlsbad Joint Water and Sewer System Gross Income Fund" (the "Income Fund"). So long as any of the Bonds are outstanding, either as to principal or interest or both, the following payments shall be made monthly from the Income Fund.

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Operation and Maintenance Fund

As a first charge on the Income Fund, there shall from time to time be set aside into and credited to the “City of Carlsbad Joint Water and Sewer Operation and Maintenance Fund,” monies in the Income Fund sufficient to pay operation and maintenance expenses as they become due and payable, and thereupon shall be promptly paid.

The Bond Fund

As a second charge on the Income Fund, subordinate to the payments to the Operation

and Maintenance Fund and concurrently with and on a parity with any monthly deposits for payment of principal and interest on Parity Obligations, from any moneys remaining in the Income Fund, i.e., from the Net Revenues of the System, there shall be credited to the "City of Carlsbad Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 2009, Interest and Bond Retirement Fund" (the "Bond Fund"), the following amounts:

(1) Monthly, commencing on the first day of the month immediately succeeding the delivery of any of the Bonds, an amount in equal monthly installments necessary, together with any moneys therein and available therefor, to pay the next maturing installment of interest on the Bonds then outstanding, and monthly thereafter commencing on the interest payment date, one-sixth (1/6th) of the amount necessary to pay the next maturing installment of interest on the outstanding Bonds, and

(2) Monthly, commencing on the first day of the month immediately succeeding the delivery of the Bonds, an amount in equal monthly installments necessary, together with any moneys therein and available therefor, to pay the next maturing installment of principal on the Bonds then outstanding and monthly thereafter commencing on the principal payment date, one-twelfth (1/12th) of the amount necessary to pay the next maturing installment of principal on the Bonds.

If, prior to any interest payment date or principal payment date, there has been accumulated in the Bond Fund the entire amount necessary to pay the next maturing installment of interest or principal, or both, the installments of interest or principal, as the case may be, referred to above may be appropriately reduced and the required monthly installments again shall be so credited to such account commencing on such interest or principal payment date, whichever is applicable. The moneys in the Bond Fund are irrevocably and exclusively pledged to the payment of the Bonds.

The Reserve Fund

Immediately upon delivery of the Bonds, a Reserve Fund Insurance Policy in the amount of the Reserve Fund Requirement shall be deposited into and credited to the City of Carlsbad Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 2009, Reserve Fund (the "Reserve Fund"). The monies and/or the Reserve Fund Insurance Policy, if any, in the Reserve Fund are irrevocably and exclusively pledged to payment of the Bonds.

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Third, and subordinate to the payments described above and concurrently with and on a parity with the payments required for any monthly reserve fund payments for Parity Obligations, there shall be credited monthly to the Reserve Fund, from the Net Revenues, such cash amount or amounts, if any, or a Reserve Fund Insurance Policy in a sufficient amount, or both, as are necessary to maintain the Reserve Fund as a continuing reserve in an amount not less than the Reserve Fund Requirement to meet possible deficiencies in the Bond Fund. The moneys, and a Reserve Fund Insurance Policy, if any, in the Reserve Fund shall be accumulated and maintained as a continuing reserve to be used, except as otherwise provided below, only to prevent deficiencies in the payment of the principal of and interest on the Bonds resulting from failure to credit to the Bond Fund sufficient funds to pay the principal and interest as the same become due and payable. Cash amounts in the Reserve Fund which, together with the amount of the Reserve Fund Insurance Policy, are in excess of the Reserve Fund Requirement shall be withdrawn from the Reserve Fund and deposited into the Bond Fund (including investment income therefrom) and shall be used to pay the principal of or interest on the Bonds or any obligations refunding the Bonds or interest on amounts advanced under the Reserve Fund Insurance Policy pursuant to the Guaranty Agreement, if applicable.

Any Reserve Fund Insurance Policy shall be held by the Paying Agent. In the event of a draw upon a Reserve Fund Insurance Policy, the Paying Agent shall deliver a demand for payment in substantially the form required by the Reserve Fund Insurance Policy Issuer to be delivered to the Reserve Fund Insurance Policy Issuer at least 3 days prior to the date on which the funds are required. In the event there is cash in the Reserve Fund at the time of a draw from a Reserve Fund Insurance Policy, such cash (including any investments) shall be drawn down completely before any demand is made on the Reserve Fund Insurance Policy. If the Reserve Fund contains reserve fund insurance policies from more than one Reserve Fund Insurance Policy Issuer, any draw shall be on a pro-rata basis from both. After such a draw, any available Net Revenues, concurrently and on a parity with the payments in described in the paragraph above, and the payments required to replenish the reserve fund for any additional Parity Obligations, shall be used first to reimburse each Reserve Fund Insurance Policy Issuer for such payment of principal of and interest on the Bonds pursuant to the terms of the applicable agreement so as to reinstate each Reserve Fund Insurance Policy and thereafter to replenish any cash in the Reserve Fund.

The Reserve Fund Insurance Policy

Assured Guaranty has made a commitment to issue a financial guaranty insurance policy for the reserve fund with respect to the Bonds (the “Reserve Fund Insurance Policy”), effective as of the date of issuance of such Bonds. Under the terms of the Reserve Fund Insurance, Assured Guaranty will unconditionally and irrevocably guarantee to pay that portion of the scheduled principal and interest on the Bonds that becomes due for payment but shall be unpaid by reason of nonpayment by the City (the “Insured Payments”). Assured Guaranty will pay each portion of an Insured Payment that is due for payment and unpaid by reason of nonpayment by the City to the Paying Agent, as beneficiary of the Reserve Fund Insurance Policy on behalf of the holders of the Bonds on the later to occur of (i) the date such scheduled principal or interest becomes due for payment or (ii) the business day

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next following the day on which Assured Guaranty receives a demand for payment therefor in accordance with the terms of the Reserve Fund Insurance Policy.

No payment shall be made under the Reserve Fund Insurance Policy in excess of $1,624,856.26 (the “Reserve Fund Insurance Policy Limit”). Pursuant to the terms of the Reserve Fund Insurance Policy, the amount available at any particular time to be paid to the Paying Agent shall automatically be reduced to the extent of any payment made by Assured Guaranty under the Reserve Fund Insurance Policy, provided, that, to the extent of the reimbursement of such payment to Assured Guaranty, the amount available under the Reserve Fund Insurance Policy shall be reinstated in full or in part, in an amount not to exceed the Reserve Fund Insurance Policy Limit. The Reserve Fund Insurance Policy does not insure against nonpayment caused by the insolvency or negligence of the Paying Agent. The Reserve Fund Insurance Policy is not covered by any insurance or guaranty fund established under New York, California, Connecticut or Florida insurance law.

Termination Upon Deposits to Maturity

No payment need be made into the Bond Fund, the Reserve Fund, or both, if the amounts in the Bond Fund and Reserve Fund (excluding the Reserve Fund Insurance Policy) total a sum at least equal to the entire amount of the outstanding Bonds, both as to principal and interest to their respective maturities, and both accrued and not accrued, in which case, moneys in the two funds in amount at least equal to such principal and interest requirements shall be used solely to pay such as the same accrue and any moneys in excess thereof in the funds and any other moneys derived from the operation of the System may be used for any other lawful purpose.

Defraying Delinquencies in Bond and Reserve Funds

If, in any month, the City shall, for any reason, fail to pay into the Bond Fund the full

amount above stipulated from the Net Revenues in the System, then an amount shall be paid into the Bond Fund in such month from the moneys, if any, in the Reserve Fund (including, as applicable, the amount of the Reserve Fund Insurance Policy except that there shall be no draw on the Reserve Fund Insurance Policy except immediately prior to an interest or principal payment date) equal to the difference between that paid from the Net Revenues and the full amount so stipulated. The money in the Reserve Fund so used shall be replaced in the Reserve Fund, and the issuer of the Reserve Fund Insurance Policy shall be reimbursed for any draw from the first revenues thereafter received from the operation of the System not required to be otherwise applied. If the City shall, for any reason, fail to pay into the Reserve Fund the full amount above stipulated (or to reinstate the Reserve Fund Insurance Policy) from the Net Revenues of the System, the difference between the amount paid and the amount so stipulated shall in like manner be paid therein from the first revenues thereafter received from the operation of the System not required to be otherwise applied. The moneys in the Bond Fund and the Reserve Fund shall be used solely and only for the purpose of paying the principal of and interest on the Bonds; provided however, that any moneys in the Bond Fund and the Reserve Fund

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(excluding the amount represented by a Reserve Fund Insurance Policy) in excess of accrued and unaccrued principal and interest requirements to the respective maturities of the outstanding Bonds may be withdrawn and used for any lawful purpose.

Rebate Fund

The Bond Ordinance creates the "City of Carlsbad Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 2009, Bond Rebate Fund" (the "Rebate Fund"). Amounts on deposit in the Rebate Fund shall not be subject to the lien and pledge of the Bond Ordinance to the extent they are required to be paid to the United States Treasury. Fourth, and after and subordinate to the payments described above but on a parity with any rebate fund established for any Parity Obligations to which the Net Revenues have been pledged in whole or in part, there shall be transferred into the Rebate Fund from the Income Fund, such amounts as are required to be deposited therein to meet the City's obligations in accordance with Section 148(f) of the Internal Revenue Code. Amounts in the Rebate Fund in excess of the amount required to be deposited therein shall be withdrawn therefrom and deposited into the Income Fund, Bond Fund or the Reserve Fund as may be permitted by law.

Interest on Reserve Fund Insurance Policy Draws

Fifth, and subordinate and subsequent to the payments described above, Net Revenues of the System shall be used to pay interest on amounts advanced under a Reserve Fund Insurance Policy, pursuant to a guaranty agreement or under any relevant agreement.

Subordinate Obligations

Sixth, and subordinate to and after making the payments described above, any balance in the Income Fund shall be used to pay principal of, interest on and any reserve fund for obligations payable from the Net Revenues having a lien thereon which is subordinate and junior to the lien of the Bonds.

Use of Surplus Revenues

Seventh, subordinate to, and after making the required payments from the Income Fund as described above, and after any payments which may be required by any ordinance or resolution hereafter adopted related to the payment of additional obligations, the remaining Net Revenues, if any, may be applied to any other lawful purpose or purposes authorized by the Constitution and laws of the State of New Mexico, as the City Council may direct. General Administration of Funds

The funds and accounts designated in the Bond Ordinance shall be administered as follows:

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Investment of Money

A. Any moneys in any fund designated in the Bond Ordinance may be invested in Permitted Investments (as defined in the Bond Ordinance). The obligations so purchased as an investment of moneys in such fund shall be deemed at all times to be part of such fund, and the interest accruing thereon and any profit realized therefrom shall be credited to the fund, and any loss resulting from each investment shall be charged to the fund. The City Treasurer shall present for redemption or sale on the prevailing market any obligations so purchased as an investment of moneys in the fund whenever it shall be necessary to do so in order to provide moneys to meet any payment or transfer from such fund. All of the amounts on deposit in the accounts and funds created and established by the Bond Ordinance and all amounts pledged to the payment of debt service for the Bonds shall be invested in compliance with the requirements of the Bond Ordinance.

Deposit of Funds

The moneys and investments comprising each of the funds and accounts designated in the Bond Ordinance shall be held by the City and maintained and kept separate from all other funds and accounts. The amounts prescribed shall be paid to the appropriate funds as specified in the Bond Ordinance. Each payment shall be made into the proper account and credited to the proper fund not later than the last day designated; provided that when the designated date is not a business day, then such payment shall be made on the next succeeding business day. Nothing in the Bond Ordinance prevents the establishment of one such account or more (or consolidation with any existing account), for all of the funds and accounts described in the Bond Ordinance.

Additional Bonds

Limitations Upon Issuance of Parity Obligations Nothing contained in the Bond Ordinance shall be construed in such a manner as to

prevent the issuance by the City of additional bonds or other obligations payable from the Net Revenues derived from the operation of the System and constituting a lien upon the Net Revenues on a parity with, but not prior or superior to, the lien of the Bonds, nor to prevent the issuance of bonds or other obligations refunding all or a part of the Bonds, provided, however, that before any such additional Parity Obligations are authorized or issued, including those Parity Obligations and including Parity Obligations which refund subordinate lien bonds and other subordinate lien obligations, as permitted in the Bond Ordinance (but excluding any Parity Obligations which refund outstanding Parity Obligations as permitted by the Bond Ordinance):

(1) The City is then current in all of the accumulations required to be made into the Bond Fund and Reserve Fund (which includes any amount furnished by the Reserve Fund Insurance Policy) pursuant to the Bond Ordinance; and

(2) either:

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(a) the gross revenues derived from the operation of the System for the Fiscal Year immediately preceding the date of the issuance of such additional Parity Obligations shall have been sufficient to pay the annual Operation and Maintenance expenses for such preceding Fiscal Year and, in addition, sufficient to pay an amount representing at least 120% of the maximum annual Principal and Interest Coming Due in any subsequent Fiscal Year on the then outstanding Bonds, all other then outstanding Parity Obligations and the Parity Obligations proposed to be issued (excluding any reserves therefor); or

(b) (i) the gross revenues derived from the operation of the System for the

Fiscal Year immediately preceding the date of issuance of such additional other Parity Obligations shall have been sufficient to pay the annual Operation and Maintenance expenses for such preceding Fiscal Year, and in addition, sufficient to pay an amount representing at least 120% of the maximum annual Principal and Interest Coming Due in any subsequent Fiscal Year on only the outstanding Bonds and other then outstanding Parity Obligations of the City (excluding any reserves therefor) and (ii) the estimated gross revenues derived from the operation of the System for the twelve months ("succeeding twelve months") commencing on the first day of the thirty-sixth month following the estimated completion date of the project for which such additional Parity Obligations are proposed to be issued or the first day of the thirty-sixth month following the delivery of such Parity Obligations, whichever is earlier, shall be sufficient to pay the estimated Operation and Maintenance expenses for such succeeding twelve months and an amount representing at least 120% of the maximum annual Principal and Interest Coming Due in any subsequent fiscal year on the outstanding Bonds and other then outstanding Parity Obligations of the City and the Parity Obligations proposed to be issued (excluding any reserves therefor).

Provided that with respect to any Parity Obligations which bear interest at floating or

variable rates, the maximum allowable rate under the applicable ordinance or resolution authorizing such Parity Obligations shall be used for purposes of the tests set forth in subparagraph (2) above. For purposes of the tests set forth in clauses (a) and (b) above, if on the date of issuance of any such Parity Obligations the full amount of a reserve fund requirement or minimum reserve for the Parity Obligations is immediately funded or capitalized from the proceeds of such Parity Obligations (but excluding the amount of any Reserve Fund Insurance Policy), the amount of such reserve fund requirement or minimum reserve so funded shall be deducted from the Principal and Interest Coming Due in the final fiscal year for the proposed additional Parity Obligations.

Adjustment of Expenses and Revenues

In determining whether or not the additional Parity Obligations may be issued as aforesaid:

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(1) Consideration shall be given to any probable increase or reduction in Operation

and Maintenance expenses that will result from the expenditure of the funds proposed to be derived from the issuance and sale of the the bonds or other obligations; and

(2) The revenues of the System shall be increased if any schedule of rate increases

shall have been adopted by ordinance, resolution or other appropriate action and shall have become effective (and the time during which a referendum petition [if applicable] with respect to such ordinance, resolution or other appropriate action has expired prior to the issuance of the Parity Obligations), by an amount conservatively estimated to equal the difference between the gross revenues actually received by the City and the gross revenues which the City probably would have received during the Fiscal Year if the last of any such schedule of rate increases had been in effect during the entire Fiscal Year.

Certification or Opinion of Amounts

A written certification or opinion by the City Treasurer that the Net Revenues, when adjusted as described above, are sufficient to pay the specified amounts, shall be conclusively presumed to be accurate in determining the right of the City to authorize, issue, sell and deliver the additional Parity Obligations; provided that a written certification or opinion of a Consulting Engineer as to the estimated completion date of any such project, and the estimated revenues and estimated Operation and Maintenance expenses for the "succeeding twelve months" also shall be conclusively presumed to be accurate and the City Treasurer may conclusively rely upon such written opinion of the Consulting Engineer in determining the test set forth above. A written estimate by a Consulting Engineer as to the increase or decrease in Operation and Maintenance Expenses as provided above shall conclusively presumed to be accurate and the City Treasurer may conclusively rely thereupon. The adjustment in revenues above shall be conclusive and may be relied on by all parties if made in writing by the City Treasurer.

Nothing in the Bond Ordinance shall be construed in such a manner to prevent the issuance by the City of additional bonds or other obligations payable from the Net Revenues of the System and constituting a lien upon the Net Revenues of the System subordinate, inferior and junior to the lien of the Bonds. Nothing in the Bond Ordinance shall be construed so as to permit the City to issue bonds or other obligations payable from the Net Revenues of the System having a lien thereon prior and superior to the Bonds.

Refunding Obligations

The City is also allowed to issue parity refunding obligations for the purpose of refunding

other outstanding obligations that are payable out of the Net Revenues on a parity with the Bonds, if the lien on the Net Revenues of the outstanding obligations being refunded is on a parity with the lien thereon of the Bonds or the refunding bonds are issued in compliance with the test set forth above for additional Parity Obligations. If only a part of the outstanding obligations of any issue payable from Net Revenues is refunded, then such obligations may not be refunded without the consent of the registered owners of the unrefunded portion of such obligations unless the refunding bonds or other refunding obligations do not increase any

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aggregate annual Principal and Interest coming due evidenced by such refunding obligations and by the outstanding obligations not refunded on and prior to the last maturity date of such unrefunded obligations, or the refunding bonds or other refunding obligations are issued in compliance with the test set forth above for additional Parity Obligations, or the lien on the Net Revenues of the System for the payment of the refunding obligations is subordinate to each such lien for the payment of any obligations not refunded. Source of Payment and Security

The Net Revenues and amounts in the Bond Fund and Reserve Fund are pledged to secure the payment of principal of and interest on the Bonds. The payments of principal and interest on all of the Bonds will be payable solely from the Net Revenues of the System. For a more complete description of the pledge for payment of the Bonds, see "THE NET REVENUES."

The Bonds are secured by an irrevocable and first lien (but not necessarily an exclusive first lien) on the Net Revenues. The Bonds are not general obligations of the City, and the registered owners of the Bonds may not look to any general or other fund for any payment that becomes due on the Bonds other than the special funds that are specifically pledged to repayment under the terms of the Bond Ordinance. The Bonds will not constitute an indebtedness of the City, the State of New Mexico or other political subdivision within the meaning of any constitutional or statutory provision or limitation. Protective Covenants

The City's covenants in the Bond Ordinance include the following:

A. Use of Bond Proceeds. The City, with the proceeds derived from the sale of the Bonds will proceed without delay to complete the Refunding Project and the Improvement Project as provided in the Bond Ordinance.

B. Payment of Bonds. The City will promptly pay the principal of and the

interest on every Bond issued and secured under the Bond Ordinance at the place, on the dates and in the manner specified in the Bond Ordinance and in the Bonds according to the true intent and meaning therein. Such principal and interest are payable solely from the Net Revenues to be derived from the operation of, the resultant rates and charges for the use of, and the products and services rendered by, the System, and nothing in the Bonds or in the Bond Ordinance shall be construed as obligating the City to redeem any of the bonds, principal or interest, from, and the registered owner or owners thereof may not look to, any general or other fund except the income which is pledged under the provisions of the Bond Ordinance.

C. Use Charges. Rates for all services rendered by the System to the City

and its inhabitants shall be reasonable and just, taking into account and consideration the cost and value of the System and the proper and necessary allowances for the depreciation thereof and the amounts necessary for the retirement of all bonds and other securities or obligations payable from the revenues of the System, accruing interest thereon, and reserves therefor, and

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there shall be charged against all purchasers of service, including the City, such rates and amounts as shall be adequate to meet the requirement of this and the preceding Sections hereof, and which shall be sufficient to produce Revenues annually to pay the annual operation and maintenance expenses of the System and one hundred twenty per centum (120%) of both the Principal of and Interest on bonds and any other obligations payable annually from the revenues thereof (excluding the reserves therefor), all of which revenues, including those received from the City, shall be subject to distribution to the payment of the cost of operating and maintaining the System and the payment of principal (including payments coming due on mandatory sinking fund redemption) of and interest on all obligations payable from the revenues of the System, including reasonable reserves therefor. No free service, facilities nor commodities shall be furnished by the System. Should the City elect to use for municipal purposes water supplied by, or the sanitary sewer or other facilities of, the System, or any combination thereof, or in any other manner use the System, or any part thereof, any use of the System by or of the services rendered thereby to the City, or any department, board or agency thereof, will be paid for from the City's general fund or other available revenues at the reasonable value of the use so made, or service, facility or commodity so rendered; and all the revenue so derived from the City shall be deemed to be income derived from the operation of the System, to be used and accounted for in the same manner as any other income derived from the operation of the System. The City is granted by statute a lien upon each lot or parcel of land in the City for the charges imposed hereunder for water and sewer services supplied by the System to the owner thereof (except as otherwise provided in Section 3-23-6, NMSA 1978), and the City expressly covenants and agrees that it will cause each such lien to be perfected in accordance with the provisions of Sections 3-23-6 and 3-36-1 through 3-36-7, NMSA 1978, as from time to time amended and supplemented, and the City covenants and agrees that it will take all reasonable steps necessary to enforce such lien as to each piece of property the owner of which shall be delinquent for more than 6 months in the payment of charges imposed hereunder.

D. Levy of Charges. The City will forthwith and in any event prior to the

delivery of any of the Bonds fix, establish and levy the rates and charges which are required by paragraph C of this Section, if such action be necessary therefor. No reduction in any initial or existing rate schedule for the System may be made unless:

(1) The City has fully complied with the provisions of Section 19 of

the Bond Ordinance for at least the full Fiscal Year immediately preceding such reduction of the initial rate schedule; and

(2) The audit of the Independent Accountant described below for the

full Fiscal Year immediately preceding such reduction discloses that the estimated revenues resulting from the proposed rate schedule, after its proposed reduction, will be sufficient to pay an amount at least equal to the annual cost for the period of operation and maintenance, and, in addition, 120% of both the Principal of and Interest on the Bonds and any other obligations payable annually from the revenues of the System (excluding reasonable reserves therefor but including amounts coming due under mandatory sinking fund redemption provisions).

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E. Efficient Operation. The City will (i) operate the System so long as any of the Bonds are outstanding, (ii) maintain the System in efficient operating condition and (iii) make such improvements, extensions, enlargements, repairs and betterments thereto as may be necessary or advisable to insure its economical and efficient operation at all times and to the extent sufficient to supply public or private demands for service within the City and the territory adjacent thereto.

F. Records. So long as any of the Bonds remain outstanding, proper books

of record and account will be kept by the City, separate and apart from all other records and accounts, showing complete and correct entries of all transactions relating to the System. Such books shall include (but not necessarily be limited to) annual records showing:

(1) The number of customers separately for the water facilities and sanitary sewer facilities;

(2) The revenues separately received from charges by classes of

customers, including but not necessarily limited to classification by water facilities and sanitary sewer facilities; and

(3) A detailed statement of the expenses of the System.

G. Right to Inspect. Any registered owner of any of the Bonds, or any duly

authorized agent or agents of such registered owner, shall have the right at all reasonable times to inspect all records, accounts and data relating thereto and to inspect the System and all properties comprising the System.

H. Audits. The City further agrees that, except where the State Auditor of the State of New Mexico performs the audit or where the due date for the audit has been postponed as may otherwise be required by the State Auditor or any other state office or agency with appropriate authority, it will, within 180 days following the close of each Fiscal Year, cause an audit of such books and accounts to be made by an Independent Accountant, showing the receipts and disbursements for the account of the System, and that such audit will be available for inspection by any registered owner of any of the Bonds. All expenses incurred in the making of the audits and reports required by this Section shall be regarded and paid as an operation and maintenance expense. The City agrees to furnish forthwith a copy of each of such audits and reports as may be provided in the Continuing Disclosure Agreement.

I. Billing Procedure. All bills for water, water service or facilities, sewer service or facilities, or any combination thereof, furnished or served by or through the System shall be rendered to customers on a regularly established basis in each and every month either monthly in advance or in the month next succeeding the month in which the service was rendered and shall be due within 20 days from the date rendered; and in the event the bills are not paid within 35 days after the date when rendered, water and water service shall be discontinued, except as otherwise provided by law, and the rates and charges due shall be collected in a lawful manner, including but not limited to the cost of disconnection and

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reconnection. Water charges and sewer charges may be billed jointly with each other; provided that each such joint bill shall show separately water and sewer charges.

J. Use of 2009 Bond and Reserve Fund. The Bond Fund and the Reserve Fund shall be used solely and only for the purposes set forth in the Bond Ordinance.

K. Charges and Liens upon System. From the Revenues of the System, the City will pay all taxes and assessments or other municipal or governmental charges, if any, lawfully levied, assessed upon or in respect to the System, or any part thereof, when the same shall become due, and it will duly observe and comply with all valid requirements of any municipal or governmental authority relative to any part of the System. The City will not create or suffer to be created any lien or charge upon the System or upon the Revenues therefrom except as permitted by the Bond Ordinance, or it will make adequate provisions to satisfy and discharge within 60 days after the same shall accrue, all lawful claims and demands for labor, materials, supplies or other objects, which, if unpaid, might by law become a lien upon the System or upon the Revenues therefrom; provided, however, that nothing in the Bond Ordinance shall require the City to pay or cause to be discharged, or make provision for any such tax assessment, lien or charge before the time when payment thereof shall be due or so long as the validity thereof shall be contested in good faith by appropriate legal proceedings.

L. Insurance. The City in its operation of the System will carry fire and extended coverage insurance, and other types of insurance in such amounts and to such extent as is normally carried by municipal corporations operating public utilities of the same type including, but not limited to self-insurance and self-insurance pools. The cost of such insurance shall be considered as one of the operating costs of the System. In the event of property loss or damage, insurance proceeds shall be used first for the purpose of restoring or replacing the property lost or damaged, and any remainder shall be treated as Net Revenues of the System, and shall be subject to distribution in the manner provided in the Bond Ordinance, for Net Revenues derived from the operation of the System.

M. Alienating System. The City will not sell, lease, mortgage, pledge, or otherwise encumber, or in any manner dispose of, or otherwise alienate, the System, or any part thereof, including any and all extensions and additions that may be made thereto, until all the Bonds shall have been paid in full, both principal and interest, or there has been defeasance as provided below or unless provision has been made therefor, except that the City may sell any portion of the property which shall have been replaced by other property of at least equal value, or which shall cease to be necessary for the efficient operation of the System, but in no manner nor to such extent as might prejudice the security for the payment of the Bonds, provided, however, that in the event of any sale as aforesaid, the proceeds of such sale shall be distributed as Net Revenues of the System in accordance with the provisions of the Bond Ordinance.

N. Extending Interest Payments. In order to prevent any accumulation of claims for interest after maturity the City will not directly or indirectly, extend or assent to the extension of the time for payment of any claim for interest on any of the Bonds, and it will not directly or indirectly be a party to or approve any arrangement for any such extension or for the purpose of keeping alive any of such interest and in case the time for payment of any such

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interest shall be extended, such installment or installments of interest after such extension or arrangement shall not be entitled in case of default hereunder to the benefit or security of the Bond Ordinance except subject to the prior payment in full of the principal of all Bonds then outstanding, and of matured interest on such Bonds the payment of which has not been extended.

O. Surety Bonds. Each municipal official or other person having custody of any funds derived from operation of the System, or responsible for their handling, shall be bonded at all times, which bond shall be conditioned upon the proper application of such funds. The cost of each such bond shall be considered one of the operating costs of the System.

P. Competent Management. The City shall employ or contract for experienced and competent management personnel for each component of the System. In the event of (i) default on the part of the City in paying principal of or interest on the Bonds promptly as each falls due, (ii) failure of the City to perform any covenants (other than with respect to payment of principal and interest on the Bonds herein contained or with respect to continuing disclosure) which failure shall continue for a period of 60 days, or (iii) failure of the Net Revenues of the System in any Fiscal Year to equal at least the amount of the principal of and interest on the revenue bonds and other obligations (including all reserves therefor specified in the authorizing proceedings, including but not limited to the Bond Ordinance) payable from the Net Revenues in that Fiscal Year, the City shall retain a firm of competent Consulting Engineers skilled in the operation of water and sanitary sewer systems to assist the management of the System so long as such default continues or the Net Revenues are less than the amount hereinabove specified. Nothing in the Bond Ordinance shall prevent the City from contracting with persons or private entities to manage or operate the System or any part thereof.

Q. Performing Duties. The City will faithfully and punctually perform all duties with respect to the System required by the Constitution and laws of the State of New Mexico, and the ordinances and resolutions of the City, including but not limited to the making and collecting of reasonable and sufficient rates and charges for services rendered or furnished by the System as hereinbefore provided, and the proper segregation of the revenues of the System and their application to the respective funds.

R. Other Liens. Other than as provided in the Bond Ordinance, there are no liens or encumbrances of any nature, whatsoever, on or against the System or the Revenues derived or to be derived from the operation of the same.

S. Completion Bonds. In order to insure the completion of the Improvement Project, and to protect the registered owner or owners of the Bonds, the City will require that the contractor to whom is given any contract for construction appertaining to the Improvement Project supply a completion bond or bonds satisfactory to the City, and that any sum or sums derived from the completion bond or bonds shall be used within 6 months after such receipt for the completion of such construction, and if not so used within such period, shall be placed in and be subject to the provisions of the Income Fund provided for in the Bond Ordinance.

T. City's Existence. The City will maintain its corporate identity and existence so long as any of the Bonds remain outstanding unless another political subdivision by

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operation of law succeeds to the duties, privileges, powers, liabilities, disabilities, immunities and rights of the City and is obligated by law to receive and distribute the Net Revenues of the System in place of the City, without affecting to any substantial degree the privileges and rights of any registered owner of any outstanding Bonds.

U. Tax Covenant. The City covenants for the benefit of the owners of the Bonds that it will not take any action or omit to take any action with respect to the Bonds, the proceeds thereof, any other funds of the City or any facilities financed with the proceeds of the Bonds if such action or omission (i) would cause the interest on the Bonds to lose its exclusion from gross income for federal income tax purposes under Section 103 of the Tax Code, (ii) would cause interest on the Bonds to lose its exclusion from alternative minimum taxable income as defined in Section 55(b)(2) of the Tax Code except to the extent such interest is required to be included in the adjusted current earnings adjustment applicable to corporations under Section 56 of the Tax Code in calculating corporate alternative minimum taxable income or (iii) would cause interest on the Bonds to lose its exclusion from net income under present New Mexico income tax laws, i.e., the New Mexico State Income Tax Act and the New Mexico Corporate Income and Franchise Tax Act, each as amended to the date of issuance of the Bonds (together the "New Mexico Tax Acts"). The foregoing covenant shall remain in full force and effect notwithstanding the payment in full or defeasance of the Bonds until the date on which all obligations of the City in fulfilling the above covenant under the Tax Code and the New Mexico Tax Acts have been met.

Defeasance

When all principal, any applicable prior redemption premium and interest in connection with the Bonds hereby authorized have been duly paid, the pledge and lien and all obligations hereunder shall thereby be discharged and the Bonds shall no longer be deemed to be outstanding within the meaning of the Bond Ordinance. There shall be deemed to be such due payment as to any Bond when the City has placed in escrow and in trust with a commercial bank or trust company located within or without the State of New Mexico and exercising trust powers, a cash amount sufficient (including the known minimum yield from Federal Securities in which all or a portion of such amount may initially be invested) to meet all requirements of principal, interest and any applicable prior redemption premium as the same become due to its maturity or designated redemption date as of which the City shall have exercised or obligated itself to exercise its option to call such Bond. The Federal Securities shall become due prior to the respective times on which the proceeds thereof shall be needed, in accordance with a schedule established and agreed upon between the City and such bank or trust company at the time of the creation of the escrow or the Federal Securities shall be subject to the redemption at the option of the holders thereof to assure such availability as so needed to meet such schedule. Federal Securities within the meaning of the Bond Ordinance shall include only direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America and which are not callable prior to maturity by the issuer of such obligations. This Section is subject to the provisions of the Bond Ordinance with respect to the Bond Insurer.

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Events of Default

Each of the following events is declared in the Bond Ordinance as an "event of default" with respect to the Bonds:

A. Nonpayment of Principal. If payment of principal and prior redemption premium,

if applicable, of any of the Bonds shall not be made when the same become due and payable, either at maturity or by proceedings for prior redemption or otherwise; or

B. Nonpayment of Interest. If payment of any installment of interest shall not be made when the same becomes due and payable or within 30 days thereafter; or

C. Incapable to Perform. If the City shall for any reason be rendered incapable of fulfilling its obligations under the Bond Ordinance; or

D. Default of Any Other Provision. If the City shall default in the due and punctual performance of its covenants or conditions, agreements and provisions contained in the Bonds or Bond Ordinance on its part to be performed other than with respect to (1) payment of principal, any prior redemption premium or interest on the Bonds and (2) continuing disclosure, and if such default shall continue for 30 days after written notice specifying such default and requiring the same to be remedied shall have been given to the City by the registered owners of at least 25% in principal amount of Bonds outstanding. This Section is subject to the provisions of the Bond Ordinance with respect to the Bond Insurer. Duties Upon Default

Upon the happening of any of the events of default as provided in the Bond Ordinance, the City will do and perform all proper acts on behalf of and for the registered owners of the Bonds to protect and preserve the security created for the payment of the principal of and interest on the Bonds promptly as the same become due. All proceeds derived from the Net Revenues of the System, so long as any of the Bonds are outstanding and unpaid, shall be paid into the Bond Fund and used for the purposes provided in the Bond Ordinance. In the event the City fails or refuses to proceed in this manner, the registered owner or registered owners of not less than 25% in principal amount of the Bonds then outstanding or so long as it is not in default under the Municipal Bond Insurance Policy, or the Reserve Fund Insurance Policy, the Bond Insurer, after demand in writing, may proceed to protect and enforce the rights of the registered owners as provided in the Bond Ordinance. This Section is subject to the provisions of the Bond Ordinance with respect to the Bond Insurer. Remedies Upon Default

Upon the happening and continuance of any of the events of default as provided in the Bond Ordinance, the registered owner or owners of not less than 25% in principal amount of the Bonds then outstanding, including but not limited to a trustee or trustees therefor, may proceed against the City, its Council, and its agents, officers and employees to protect and enforce the rights of any registered owner of Bonds by mandamus or other suit, action or special proceedings

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in equity or at law, in any court of competent jurisdiction, either for specific performance of any covenant or agreement contained in the Bond Ordinance or in an award or execution of any power in the Bond Ordinance granted for the enforcement of any power, legal or equitable remedy as such registered owner or owners may deem most effectual to protect and enforce the rights aforesaid, or thereby to enjoin any act or thing which may be unlawful or in violation of any right of any registered owner, or to require the Council to act as if it were the trustee of an expressed trust, or any combination of such remedies. All such proceedings at law or in equity shall be instituted, had and maintained for the equal benefit of all registered owners of the Bonds then outstanding. The failure of any such registered owner so to proceed shall not relieve the City or any of its officers, agents or employees of any liability for failure to perform any duty. Each right or privilege of any such registered owner (or trustee thereof) is in addition and cumulative to any other right or privilege, and the exercise of any right or privilege by or on behalf of any registered owner shall not be deemed a waiver of any other right or privilege thereof. This Section is subject to the provisions of the Bond Ordinance with respect to the Bond Insurer. Enforcement

Any registered owner of any one or more of the Bonds, may, either by law or in equity, by suit, action, mandamus or other appropriate proceedings in any court of competent jurisdiction enforce the payment of principal of or interest on any Bond on or after the date on which such payment is due, and may by suit, action, mandamus or other appropriate proceeding or proceedings enforce and compel the performance of such payment in accordance with the provisions of the Bond Ordinance. Amendments to the Bond Ordinance

The Bond Ordinance may be amended or supplemented by ordinance adopted by the Council in accordance with the laws of the State of New Mexico as follows:

A. Without Consent or Notice. The City, without the consent of or notice to the registered owners of the Bonds or the Bond Insurer, may adopt an ordinance supplemental to the Bond Ordinance (which supplemental ordinance shall thereafter form a part of the Bond Ordinance) for any one or more or all of the following purposes:

(1) To add to the covenants and agreements in the Bond Ordinance other covenants and agreements thereafter to be observed for the protection or benefit of the registered owners of the Bonds;

(2) To cure any ambiguity, to cure, correct or supplement any defect or

inconsistent provision contained in the Bond Ordinance, or to make any provision with respect to matters arising under the Bond Ordinance or for any other purpose if such provisions are necessary or desirable and do not adversely affect the interests of the owners of the Bonds; or

(3) To subject to the Bond Ordinance additional revenues, properties or

collateral; and

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(4) In connection with the issuance of Parity Obligations pursuant to the Bond

Ordinance.

B. With Consent of the Registered Owners. The City, without receipt by the City of any additional consideration but with the written consent of the registered owners of 75% of the Bonds outstanding at the time of the adoption of such amendatory or supplemental ordinance also may amend the Bond Ordinance in any other manner; provided, however, that no such ordinance shall have the effect of permitting:

(1) An extension of the maturity of any Bond authorized by the Bond Ordinance;

(2) A reduction in the principal amount of any Bond or the rate of interest

thereon; or (3) The creation of a lien upon or pledge of Net Revenues of the System

ranking prior to the lien or pledge created by the Bond Ordinance; or (4) A reduction of the principal amount of Bonds required for consent to such

amendatory or supplemental ordinance; or (5) The establishment of priorities as between Bonds issued and outstanding

under the provisions of the Bond Ordinance; or (6) The modification of or otherwise affecting the rights of the registered

owners of less than all of the Bonds then outstanding.

BOND INSURANCE The following information is not complete and reference is made to Appendix C for a

specimen of the financial guaranty insurance policy (the “Policy”) of Assured Guaranty Corp. (“Assured Guaranty” or the “Insurer”).

The Insurance Policy

Assured Guaranty has made a commitment to issue the Policy relating to the Bonds,

effective as of the date of issuance of such Bonds. Under the terms of the Policy, Assured Guaranty will unconditionally and irrevocably guarantee to pay that portion of principal of and interest on the Bonds that becomes Due for Payment but shall be unpaid by reason of Nonpayment (the “Insured Payments”). Insured Payments shall not include any additional amounts owing by the City solely as a result of the failure by the Paying Agent to pay such amount when due and payable, including without limitation any such additional amounts as may be attributable to penalties or to interest accruing at a default rate, to amounts payable in respect of indemnification, or to any other additional amounts payable by the Paying

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Agent by reason of such failure. The Policy is non-cancelable for any reason, including without limitation the non-payment of premium.

“Due for Payment” means, when referring to the principal of the Bonds, the stated

maturity date thereof, or the date on which such Bonds shall have been duly called for mandatory sinking fund redemption, and does not refer to any earlier date on which payment is due by reason of a call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless Assured Guaranty in its sole discretion elects to make any principal payment, in whole or in part, on such earlier date) and, when referring to interest on such Bonds, means the stated dates for payment of interest.

“Nonpayment” means the failure of the City to have provided sufficient funds to the

Paying Agent for payment in full of all principal and interest Due for Payment on the Bonds. It is further understood that the term Nonpayment in respect of a Bond also includes any amount previously distributed to the Holder (as such term is defined in the Policy) of such Bond in respect of any Insured Payment by or on behalf of the City, which amount has been recovered from such Holder pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction that such payment constitutes an avoidable preference with respect to such Holder. Nonpayment does not include nonpayment of principal or interest caused by the failure of the Paying Agent to pay such amount when due and payable.

Assured Guaranty will pay each portion of an Insured Payment that is Due for Payment and unpaid by reason of Nonpayment, on the later to occur of (i) the date such principal or interest becomes Due for Payment, or (ii) the business day next following the day on which Assured Guaranty shall have received a completed notice of Nonpayment therefor in accordance with the terms of the Policy.

Assured Guaranty shall be fully subrogated to the rights of the Holders of the Bonds to receive payments in respect of the Insured Payments to the extent of any payment by Assured Guaranty under the Policy.

The Policy is not covered by any insurance or guaranty fund established under New York, California, Connecticut or Florida insurance law.

The Insurer

Assured Guaranty Corp. (“Assured Guaranty”) is a Maryland-domiciled insurance company regulated by the Maryland Insurance Administration and licensed to conduct financial guaranty insurance business in all fifty states of the United States, the District of Columbia and Puerto Rico. Assured Guaranty commenced operations in 1988. Assured Guaranty is a wholly owned, indirect subsidiary of Assured Guaranty Ltd. (“AGL”), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol “AGO.” AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, structured finance and mortgage markets. Neither

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AGL nor any of its shareholders is obligated to pay any debts of Assured Guaranty or any claims under any insurance policy issued by Assured Guaranty.

Assured Guaranty is subject to insurance laws and regulations in Maryland and in New York (and in other jurisdictions in which it is licensed) that, among other things, (i) limit Assured Guaranty’s business to financial guaranty insurance and related lines, (ii) prescribe minimum solvency requirements, including capital and surplus requirements, (iii) limit classes and concentrations of investments, (iv) regulate the amount of both the aggregate and individual risks that may be insured, (v) limit the payment of dividends by Assured Guaranty, (vi) require the maintenance of contingency reserves, and (vii) govern changes in control and transactions among affiliates. Certain state laws to which Assured Guaranty is subject also require the approval of policy rates and forms.

Assured Guaranty’s financial strength is rated “AAA” (stable) by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”), “AAA” (stable) by Fitch, Inc. (“Fitch”) and “Aa2” (stable) by Moody’s Investors Service, Inc. (“Moody’s”). Each rating of Assured Guaranty should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of any security guaranteed by Assured Guaranty. Assured Guaranty does not guaranty the market price of the securities it guarantees, nor does it guaranty that the ratings on such securities will not be revised or withdrawn.

Recent Developments

Agreement to Acquire FSA

On November 14, 2008, AGL announced that it had entered into a definitive agreement with Dexia SA to purchase Financial Security Assurance Holdings Ltd. (“FSA”), the parent of financial guaranty insurance company, Financial Security Assurance, Inc. For more information regarding the proposed acquisition by AGL of FSA, see Item 1.01 of the Current Report on Form 8-K filed by AGL with the Securities and Exchange Commission (the "SEC") on November 17, 2008.

Ratings

On July 21, 2008, Moody’s issued a press release stating that it had placed under review for possible downgrade the “Aaa” insurance financial strength rating of Assured Guaranty. In a press release dated November 14, 2008, Moody’s responded to AGL’s announcement of its agreement to acquire FSA, stating that “the potential impact of the proposed transaction on the ratings of Assured Guaranty and FSA will be considered in the context of its ongoing rating reviews of both companies; those reviews are now expected to conclude in the near term.” Reference is made to the press releases for the complete text of Moody’s comments; copies of such documents are available at www.moodys.com.

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On November 21, 2008, Moody’s issued a press release announcing that it had downgraded the insurance financial strength rating of Assured Guaranty to “Aa2” from “Aaa” and that the status of Assured Guaranty’s insurance financial strength rating had been changed to “outlook stable” from “on review for possible downgrade.” In the release, Moody’s stated that “Today’s rating action concludes a review for possible downgrade that was initiated on July 21, 2008, and primarily reflects Moody’s updated views on Assured’s exposure to weakness inherent in the financial guaranty business model. The outlook for the ratings is stable, and the announced acquisition of FSA’s financial guaranty business is not expected to have a meaningful impact on the credit profile of [Assured Guaranty]…. The rating agency added that the acquisition of FSA by [AGL] will, if completed as planned, create a combined entity with substantial financial resources and a strong market position.” Reference is made to such release for the complete text of Moody’s comments; a copy of such document is available at www.moodys.com.

Assured Guaranty’s “AAA” (stable) financial strength ratings by S&P and by Fitch were affirmed on June 18, 2008 and December 12, 2007, respectively. On November 14, 2008, Fitch issued a press release responding to AGL’s announcement of its agreement to acquire FSA, indicating that they do not expect the acquisition, as presented, to have a negative impact on Assured Guaranty’s rating. Reference is made to the press release for the complete text of Fitch’s comments; a copy of such press release is available at www.fitchratings.com. On November 17, 2008, S&P issued a press release responding to AGL’s announcement of its agreement to acquire FSA, stating that the agreement “appears to pose limited rating risk” for Assured Guaranty. Reference is made to the press release for the complete text of S&P’s comments; a copy of such press release is available at www.ratingsdirect.com. There can be no assurance as to what impact, if any, Moody’s downgrade or the proposed acquisition will have on the company’s financial strength ratings from Fitch or S&P.

For more information regarding Assured Guaranty’s insurance financial strength ratings, see AGL’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 (which was filed by AGL with the SEC on November 7, 2008).

Capitalization of Assured Guaranty Corp.

As of September 30, 2008, Assured Guaranty had total admitted assets of $1,767,134,629 (unaudited), total liabilities of $1,341,373,221 (unaudited), total surplus of $425,761,408 (unaudited) and total statutory capital (surplus plus contingency reserves) of $1,106,199,863 (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of December 31, 2007, Assured Guaranty had total admitted assets of $1,361,538,502 (audited), total liabilities of $961,967,238 (audited), total surplus of $399,571,264 (audited) and total statutory capital (surplus plus contingency reserves) of $982,045,695 (audited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. The Maryland Insurance Administration recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under the Maryland Insurance Code, and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the Maryland Insurance Administration to financial statements prepared in accordance with accounting principles generally accepted in the United States in making such determinations.

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Incorporation of Certain Documents by Reference

The portions of the following documents relating to Assured Guaranty are hereby

incorporated by reference into this Official Statement and shall be deemed to be a part hereof:

The Annual Report on Form 10-K of AGL for the fiscal year ended December 31, 2007 (which was filed by AGL with the SEC on February 29, 2008);

• The Quarterly Report on Form 10-Q for the quarterly period ended March 31,

2008 (which was filed by AGL with the SEC on May 9, 2008);

• The Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 (which was filed by AGL with the SEC on August 8, 2008);

• The Quarterly Report on Form 10-Q for the quarterly period ended September 30,

2008 (which was filed by AGL with the SEC on November 7, 2008); and • The Current Reports on Form 8-K filed by AGL with the SEC, as they relate to

Assured Guaranty.

All consolidated financial statements of Assured Guaranty and all other information relating to Assured Guaranty included in documents filed by AGL with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date of this Official Statement and prior to the termination of the offering of the Bonds shall be deemed to be incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such consolidated financial statements.

Any statement contained in a document incorporated herein by reference or contained

herein under the heading “BOND INSURANCE – The Insurer” shall be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any subsequently filed document which is incorporated by reference herein also modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement.

Copies of the consolidated financial statements of Assured Guaranty incorporated by

reference herein and of the statutory financial statements filed by Assured Guaranty with the Maryland Insurance Administration are available upon request by contacting Assured Guaranty at 1325 Avenue of the Americas, New York, New York 10019 or by calling Assured Guaranty at (212) 974-0100. In addition, the information regarding Assured Guaranty that is incorporated by reference in this Official Statement that has been filed by AGL with the SEC is available to the public over the Internet at the SEC’s web site at http://www.sec.gov and at AGL’s web site at http://www.assuredguaranty.com, from the SEC’s Public Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the office of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.

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Assured Guaranty makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, Assured Guaranty has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding Assured Guaranty supplied by Assured Guaranty and presented under the heading “BOND INSURANCE.”

BOND INSURANCE RISK FACTORS

In the event of default of the payment of principal or interest with respect to the Bonds

when all or some becomes due, any owner of the Bonds shall have a claim under the applicable Bond Insurance Policy (the Policy) for such payments. However, in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments are to be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. The Policy does not insure against redemption premium, if any. The payment of principal and interest in connection with mandatory or optional prepayment of the Bonds by the City which is recovered by the City from the bond owner as a voidable preference under applicable bankruptcy law is covered by the insurance policy, however, such payments will be made by the Bond Insurer at such time and in such amounts as would have been due absence such prepayment by the City unless the Bond Insurer chooses to pay such amounts at an earlier date.

Under most circumstances, default of payment of principal and interest does not obligate acceleration of the obligations of the Bond Insurer without appropriate consent. The Bond Insurer may direct and must consent to any remedies that the Paying Agent exercises and the Bond Insurer’s consent may be required in connection with amendments to the applicable agreements.

In the event the Bond Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Bonds are payable solely from the moneys received by the Paying Agent pursuant to the applicable agreements. In the event the Bond Insurer becomes obligated to make payments with respect to the Bonds, no assurance is given that such event will not adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds.

The long-term ratings on the Bonds are dependent in part on the financial strength of the Bond Insurer and its claim paying ability. The Bond Insurer’s financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance is given that the long-term ratings of the Bond Insurer and of the ratings on the Bonds insured by the Bond Insurer will not be subject to downgrade and such event could adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds. See “THE RATINGS” herein.

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The obligations of the Bond Insurer are general obligations of the Bond Insurer and in an event of default by the Bond Insurer, the remedies available to the Paying Agent may be limited by applicable bankruptcy law or other similar laws related to insolvency.

Neither the City or Underwriter have made independent investigation into the claims paying ability of the Bond Insurer and no assurance or representation regarding the financial strength or projected financial strength of the Bond Insurer is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the City to pay principal and interest on the Bonds and the claims paying ability of the Bond Insurer, particularly over the life of the investment. See “BOND INSURANCE” herein for further information provided by the Bond Insurer and the Policy, which includes further instructions for obtaining current financial information concerning the Bond Insurer.

THE NET REVENUES

The Bonds are special obligations of the City, payable from the Net Revenues and moneys in the Bond Fund and Reserve Fund created under the Bond Ordinance. The Net Revenues consist of all revenues of the System (i.e., all income and revenues derived by the City from the operation of the System or any part thereof, whether resulting from extensions, enlargements or betterments to the System, or otherwise, and includes all revenues received by the City from the System and from the sale and use of water, water service and facilities, sanitary sewer service and facilities, or any combination thereof to the inhabitants of the City) after deducting operation and maintenance expenses (as defined in the Bond Ordinance) of the System.

The City charges all customers for services rendered by the System. The City is granted by statute a lien upon each lot or parcel of land in the City for the charges imposed for water and sewage facilities and services supplied by the System to the owner thereof (except as otherwise provided in Section 3-23-6, NMSA 1978, as amended from time to time). The City has expressly covenanted to cause each such lien to be perfected in accordance with the provisions of Sections 3-23-6 and 3-36-1 through 3-36-5, NMSA 1978, as amended from time to time, and has agreed that it will take all reasonable steps necessary to enforce such lien as to each property the owner of which shall be delinquent for more than six months in payment of charges imposed for services rendered by the System.

The Bonds do not constitute a debt or indebtedness of the City within the meaning of any constitutional or statutory provision or limitation, will not be payable from the proceeds of any general ad valorem taxes, and will not be considered or held to be general obligations of the City. The payment of the Bonds is not secured by an encumbrance, mortgage or other pledge of property of the City, except for the Net Revenues and the moneys in the Bond Fund and Reserve Fund lawfully pledged for the payment of the Bonds. No property of the City, subject to such exception, shall be liable to be forfeited or taken in payment of the Bonds.

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Fiscal Year Ending 6/30 2007 2006 2005 2004 Operating Revenues $6,927,030 $7,244,340 $6,750,120 $6,925,666 Operating Expenses 5,702,029 5,446,566 5,172,808 4,802,238 Net Operating Revenues 1,225,001 1,797,774 1,577,312 2,123,428 Depreciation 1,373,789 998,519 1,095,826 880,697 Interest Income 531,395 294,162 333,901 377,778 NET REVENUES(1) $3,130,185 $3,090,455 $3,007,039 $3,381,903 __________________________ (1) Unaudited. Source: City of Carlsbad, Audited Financial Statements 2004-2007. 2008 Audited Financial Statements were unavailable as of January, 2009.

Historical Joint System Net Revenues

The following is a five-year history of the Net Revenues of the Joint System.

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Historical Joint System Revenues and Expenditures

The following is a four-year history of Joint System Revenues and Expenditures.

Fiscal Year Ending 6/30 2007 2006 2005 2004 Operating Revenues: Taxes Oil and gas $10,720 -- -- -- Intergovernmental -- -- -- State grants 4,885 -- -- -- Charges for services 6,892,989 $7,243,832 $6,698,750 $6,925,666 Miscellaneous 18,436 508 51,370 -- Total operating revenues 6,927,030 7,244,340 6,750,120 6,925,666 Operating expenses: Current: Personnel services 2,297,184 2,359,624 2,303,774 2,249,104 Other operating expenses 3,404,845 3,086,942 2,869,034 2,553,134 Capital outlay -- -- -- -- Total operating expenses 5,702,029 5,446,566 5,172,808 4,802,238 Operating Income (Loss) 1,225,001 1,797,774 1,577,312 2,123,428 Non-Operating Revenue & (Expenses)

Sale of assets (17,093) 1,423 8,344 -- Interest income 531,395 294,162 333,901 377,778 Interest expense (746,124) (783,224) (817,105) (849,421) Miscellaneous -- -- -- 50,896 Total non-operating revenues (expenses)

(231,822)

(487,639)

(474,860)

(420,747)

Income (Loss) before transfers 993,179 1,310,135 1,102,452 1,702,681 Transfers in -- 488,454 26,710 -- Transfers (out) (1,784,184) (2,058,845) (1,809,309) (1,058,994) Total transfers (1,784,184) (1,570,391) (1,782,599) (1,058,994) Change in net assets (791,005) (260,256) (680,147) 643,687 Net assets – beginning of year 30,613,702 32,591,659 33,280,366 32,636,679 Prior period adjustment -- (1,717,701) (8,560) -- Net assets – beginning of the year as restated

30,613,702

30,873,958

33,271,806

32,636,679

Net assets – end of year $29,822,697 $30,613,702 $32,591,659 $33,280,366 Source: City of Carlsbad, Audited Financial Statements 2004-2007. 2008 Audited Financial Statements were unavailable as of January, 2009.

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Joint System Revenues and Expenditures – Actual and Budgeted Actual and budgeted revenues and expenditures of the System, presented on a cash basis, are as follows:

Fiscal Year 2007

(Actual)

Fiscal Year 2008

(Budgeted) Revenues: Taxes Property -- -- Gross receipts -- -- Gasoline and motor vehicle taxes -- -- Oil and gas $10,720 -- Intergovernmental Federal grants -- -- State grants 4,885 -- Licenses and permits -- -- Charges for services 7,238,018 $7,328,479 Miscellaneous 18,436 20,000 Interest 486,378 50,000 Total revenues 7,758,437 7,398,479 Expenditures: Current: Personnel services 2,266,852 2,791,202 Power and fuel -- -- General insurance -- -- Workers' compensation and Health benefits

--

--

Other operating expenses 2,235,880 2,125,994 Capital outlay 229,636 82,600 Debt service: -- -- Principal 905,000 950,000 Interest 716,828 678,365 Total expenditures 6,354,196 6,628,731 Excess (deficiency) of revenues over expenditures

1,404,241

769,748

Other financing sources (uses): Designated cash -- -- Sale of assets 6,104 4,000 Loan proceeds -- -- Transfers in (out) (2,843,734) (3,485,428) Total other financing sources (uses) (2,837,630) (3,481,428) Change in net assets (1,433,389) (2,715,680) Net assets – beginning of year 13,457,152 12,023,763 Net assets – end of year $12,023,763 $9,308,083

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Historical Joint System Balance Sheets (1) 2007 2006 2005 2004 Assets: Current Assets: Cash and cash equivalents $6,610,306 $366,598 $832,213 $3,750,619 Investments 3,100,000 11,604,912 2,650,000 -- Interest receivable -- -- -- 63,542 Accounts receivable 836,124 1,054,062 909,597 739,842 Interfund receivable 1,570,064 563,537 -- -- Due from other funds -- -- 4,441 -- Inventory 260,665 229,798 206,821 272,955 Total current assets 12,377,159 13,818,907 4,603,072 4,826,958 Noncurrent assets: Restricted assets: Capital acquisitions 396,117 396,117 4,937,869 -- Other purposes 347,277 347,277 7,591,906 -- Cash, including time deposits -- -- -- 8,315,060 Investments -- -- -- 6,446,384 Total restricted assets 743,394 743,394 12,529,775 14,761,444 Capital assets: Land, water rights and construction in progress

1,422,934

1,742,869

3,099,844

1,467,246

Other assets, net of accumulated depreciation

30,564,910

30,536,788

29,218,923

29,970,333

Total capital assets 31,987,844 32,279,657 32,318,767 31,437,579 Other assets: Unamortized bond discount 387,316 419,818 452,320 484,821 Total noncurrent assets 33,118,554 33,442,869 45,300,862 46,683,844 Total assets 45,495,713 47,261,776 49,903,934 51,510,802 Liabilities and net assets: Current Liabilities: Accounts payable 98,970 239,402 87,151 140,192 Accrued expenses 76,978 70,379 59,791 -- Accrued wages and benefits -- -- -- 47,705 Compensated absences current portion

16,333

15,329

8,369

--

Current portion of long-term debt -- -- -- 840,000 Bond payable – current portion 950,000 905,000 870,000 -- Note payable – current portion -- -- -- -- Total Current Liabilities:

1,142,281

1,230,110

1,025,311

1,027,897

Liabilities from restricted assets: Customer deposits -- -- -- 642,737 Accrued interest payable -- -- -- 65,617 Total Liabilities from restricted assets

--

--

--

708,354

Noncurrent liabilities: Bonds payable–net of cur. portion 13,705,000 14,655,000 15,560,000 -- Bonds and notes -- -- -- 16,430,000 Compensated absences 64,658 41,928 56,010 -- Customer deposits 761,077 721,036 670,954 -- Accrued compensated absences -- -- -- 64,185 Total noncurrent liabilities 14,530,735 15,417,964 16,286,964 16,494,185

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Historical Joint System Balance Sheets (Continued) 2007 2006 2005 2004 Net Assets: Invested in capital assets, net of related debt

17,332,844

17,624,657

16,758,767

14,167,578

Restricted for capital projects -- -- -- 6,517,313 Restricted for debt service -- -- -- 98,460 Restricted for other purposes -- -- -- 7,437,317 Unrestricted 12,489,853 12,989,045 15,832,892 5,059,698 Total net assets

29,822,697

30,613,702

32,591,659

33,280,366

Total liabilities and net assets $45,495,713 $47,261,776 $ 49,903,934 $51,510,802

(1) 2008 Audited Balance Sheets unavailable as of January, 2009.

No adjustment has been made for the Harround Farm water rights and the Tatum water rights, which are reserved from the System under the Bond Ordinance.

THE SYSTEM

The City currently owns and operates three public utilities for its own account: water, wastewater and solid waste. The City Council sets rates and establishes policies for the System and governs the operation and management of the System.

The proceeds of sale of the Bonds will be used to finance and refinance improvements for the joint water and wastewater utility (constituting the System described herein) as more fully described under "PURPOSE AND PLAN OF FINANCING" above. The term "System" as used in this Official Statement refers to the joint water and wastewater utility, the Net Revenues of which are pledged pursuant to the Bond Ordinance to secure the Bonds and any Parity Obligations, as described under "THE NET REVENUES" above. The term "System" does not include the solid waste utility.

The System is defined in the Bond Ordinance as the municipally owned public utility designated as the City water system and sanitary sewer system, consisting of all properties, real, personal, mixed or otherwise, now owned or hereafter acquired by the City through purchase, construction or otherwise and used in connection with the water system and sanitary sewer system of the City and in any way appertaining thereto whether situated within or without the limits of the City including but not necessarily limited to the water supply distribution network known as Double Eagle.

The System, in addition to the water and wastewater distribution and collection lines located in the City limits, includes the Double Eagle water system. The Double Eagle water system produces from 17 wells in the Ogallala Aquifer which is piped through 400 miles of distribution lines to approximately 100 customers consisting of industrial users, stockwater users, extractive industries and the Waste Isolation Pilot Plant. Additionally, the Double Eagle water system has 11 wells which are not currently producing water. The City currently obtains only a small amount of its municipal water supply from the Double Eagle water system but plans to expand that utilization in the future. The Double Eagle water system has a total of 18,240 acre-

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feet of groundwater rights, 7,600 acre-feet of which are developed with approximately 1,700 acre-feet pumped each year, and 10,640 acre-feet (the Tatum Rights) which are undeveloped and which are reserved from the System. Approximately 8,835 acre-feet of Pecos River surface water rights (the Harround Farm Rights) are also excluded from the System. Utility Management

The day-to-day management of the System is under the direction of the Public Works Director. The Director is selected by the City Administrator from qualified candidates that are identified through a selection committee process.

The design and construction of development and rehabilitation projects and all capital improvements for the System are under the supervision of the Public Works Director. The day-to-day management of the portion of the System consisting of the water utility is under the direction of the Water Department Superintendent, and the day-to-day management of the portion of the System consisting of the wastewater utility is under the direction of the Wastewater Department Superintendent.

Luis R. Camero is the current Public Works Director of the City, having served in this position since July, 1995. Mr. Camero has over 15 years' experience in positions of increasing responsibility, ranging from mine shift supervisor to graduate engineer with a civil and soils engineering consulting firm to Public Works Director for the City. Mr. Camero has over 17 years' experience in the management of water and wastewater utilities, solid waste collection and disposal and other areas of public works. Mr. Camero holds a B. S. degree in mining engineering from the New Mexico Institute of Mining and Technology, which he received in 1979. Prior to joining the City, Mr. Camero was employed by the City of Socorro, New Mexico, as Water Utilities and Landfill Division Director from 1990 to 1995 and as Water Department Superintendent from 1988 to 1990.

Art Sena is the Superintendent of the Wastewater Department. He has served in his position since 2002. Prior to this position, Mr. Sena held several positions within the wastewater department, having been employed by the City of Carlsbad since 1989. Mr. Sena has also held the position of Public Works Director for the Village of Loving for one year.

Mike Abel is the Superintendent of the Water Department, having been assigned this position in 2003. From 1996 to 2003, he served the City of Carlsbad in a variety of capacities in both the water and wastewater departments. Prior to his employment with the City of Carlsbad, Mr. Abel worked for the City of Las Cruces in their wastewater division. Mr. Abel holds an A.S. in Water Utilities Management from New Mexico State University. Employees

As of July 1, 2007, the Joint Utilities Department employed 50 full-time employees, 26 of whom work for the Water Department, 20 for the Wastewater Department and 4 in the Office of the Public Works Director. The City believes that its relationship with the employees of the Joint Utilities Department is good.

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Budgeting

The budget for the Joint Utilities Fund for the System is prepared on a basis consistent with generally accepted accounting principles, using an estimate of the anticipated revenues and expenditures. An annual appropriated budget is adopted for the Joint Utilities Fund. All unexpended appropriations lapse at the end of the fiscal year. The New Mexico Department of Finance and Administration allows GAAP budgeting to the extent cash and investments required for operations are available.

New Mexico law prohibits a municipality from making an expenditure in excess of approved appropriations. If a fund (such as the Joint Utilities Fund) is not overspent, it is in compliance with State law. The adopted budget may be amended by the City Council of the City. New Mexico Department of Finance and Administration approval must be obtained for budget increases and budget transfers between funds.

The accrual basis of accounting is followed in the Joint Utilities Fund. Revenues are

recognized in the accounting period in which earned; expenses are recorded in the period in which they are incurred.

Accounting and Auditing

The New Mexico Audit Act (being Sections 12-6-1 through 12-6-14, NMSA 1978) provides that the financial affairs of all municipalities (among others) in the State of New Mexico must be thoroughly examined and audited annually in accordance with generally accepted auditing standards by the New Mexico State Auditor or his staff or by independent auditors approved by the State Auditor. The State Auditor may also cause the financial affairs and transactions of any municipality to be audited in whole or in part. Enforcement of Rates and Charges

New Mexico law provides that any charge imposed by ordinance for service rendered by a municipal utility (such as the System) will be (1) payable by the owner, personally, at the time the charge accrues and becomes payable and (2) a lien upon the tract or parcel of land being served from such time. Once the lien is filed in accordance with New Mexico law, it is a first and prior lien on the property subject only to the lien of general State and county taxes. The lien may be enforced in the manner provided by New Mexico law, including foreclosure against real estate in the same manner that mortgages or other liens against real estate are foreclosed, with like rights of redemption, and foreclosure against personal property in the same manner that security interests are foreclosed. The proceeds of sale of property pursuant to a foreclosure sale are applied in the manner required by New Mexico law. The City has covenanted in the Bond Ordinance to cause each lien to be perfected in accordance with New Mexico law and to take all reasonable steps necessary to enforce the lien against any parcel of property the owner of which is delinquent for more than six months in the payment of charges imposed for the use of the System.

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New Mexico law provides that if payment of any fee or other charge for water or sewer service is not made within 30 days from the date of the payment is due, the water service may be discontinued and will not be again supplied to the person liable for the payment until the arrears with interest and penalties have been fully paid. Connection, Billing and Collection Procedures

Connection Requirement In accordance with New Mexico law, the City is authorized to require the owner, agent or

occupant of a building on a lot or land adjoining a street in which a sanitary sewer exists to connect the building to the sanitary sewer. City ordinances require owners or occupants within the City to connect to the City sewer system if the property is capable of being served by the sewer system and the property line is not more than 100 feet from the sewer system. The City actively enforces this connection policy.

Billing Procedures The City sends a single, combined monthly bill to each of the customers of the System.

The bill separately identifies the charges attributable to each of the water, wastewater and solid waste services provided during the preceding period and the total amount due for such services.

Collection Procedures The City continually monitors utility accounts for delinquencies. Billings with a previous

balance are mailed with a reminder notice. At the end of 10 days, a listing is run by cycle of billing with past due balances. Records are researched for any payment agreement that may exist. The customer is contacted and a notice is delivered in an attempt to collect the amount owed. The notice allows the customer 24 hours to either make the required payment or make arrangements to pay the bill. If neither event occurs, service may be terminated.

If the customer pays the bill at a later date, delinquent and reactivation charges are assessed. A customer who has been delinquent three or more times during a one-year period of time, or has had services terminated for delinquency, may be assessed an additional deposit. The deposit may be up to an estimated high two-month billing.

Delinquent, inactive accounts are monitored for 4 years in the following manner. A final bill is issued upon termination of service. After 30 days a second bill is issued and research is performed to see if a new account exists. If a new account is found, any unpaid balance is transferred to the new account. If no new account is found, a letter is mailed indicating the possibility of the unpaid account being turned over to a collection agency. At the end of 90 days from the date the account is finaled, any accounts with unpaid balances are turned over to a collection agency.

A current list of unpaid accounts is maintained by the Customer Service Department in the event customers attempt to sign up for service again.

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After a 4 year period, bad debts can be written off with City Council approval. The City

Council receives information not only on the amount to be written off, but on the total billings for the year and the percentage of those billings that are required to be written off.

Since at least July 1, 1990, the City bad debt write-offs for the System have averaged less than one-quarter of one percent of billings. Insurance

The City has covenanted in the Bond Ordinance to carry fire and extended coverage insurance and other types of insurance in such amounts and to such extent as is normally carried by municipal corporations operating public utilities of the same type, including but not limited to self-insurance and self-insurance pools. The cost of such insurance shall be considered an operating cost of the System.

The City maintains qualified self-insurance programs that the City expects will satisfy the insurance covenant contained in the Bond Ordinance. Water Utility

Existing Water Utility The City began providing water service to its citizens in the 1930's. The service area of

the water utility consists of all the land area within the City limits, or approximately 28 square miles. The water utility had 10,758 connections as of June 30, 2007, with an average daily consumption in 2007 of approximately 6.2 million gallons. See "Water Consumption" below.

Water Supply Water is extremely important, particularly in the arid climate of southeastern New

Mexico where the City is located. A reliable supply of good quality water in sufficient quantities is essential to the long-term viability, growth and development of the City.

Due to its location on the Pecos River, the City has physical access to this surface water as a source of supply. However, the City relies entirely upon ground water obtained from 9 wells for its municipal water supply. The City's wells tap the Capitan Reef Aquifer (a portion of the declared Carlsbad Underground Water Basin), which is a regional "basin-fill" aquifer that contains large quantities of fresh water. Existing wells have maintained a high rate of production without apparent long-term drawdowns, due principally to the significant interconnection between the aquifer and the Pecos River. The quality of the City's ground water supply is reported as generally good. Most of the City's wells produce water directly to the transmission piping network.

The City also owns and operates a separate water system known as the “Double Eagle System,” which presently supplies industrial, ranching, and a limited number of household

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customers. This system is connected to the main municipal system, but due to present demand and infrastructure, it is not utilized within the municipal system.

To meet water demands, the City either increases ground water pumping or drills new

wells. At present, the City has declared municipal water rights of 9,271 acre-feet per year. The City is in the process of developing a long-term plan to acquire additional water rights and works cooperatively with other governmental entities in the Pecos River Valley (including the Carlsbad Irrigation District and the New Mexico Interstate Stream Commission) to assure the City's future firm supply of quality water resources in sufficient quantities to accommodate the City's projected needs.

The City's ability to acquire water rights is affected by several factors, including the validity, price and marketplace availability of water rights. New appropriations of ground water by the City will also require that there be no net effect on Pecos River stream flows. See "Required Permits" below.

Water Storage and Distribution Facilities The municipal water system includes 3 reservoirs, 9 pressure-regulating stations and 3

pump stations. The reservoir capacity totals 11 million gallons. All reservoirs are above ground level, are of steel or concrete construction and are in good condition. 4 pressure zones with 9 pressure-regulating stations are located throughout the City to isolate and maintain static pressure of between 30 and 90 pounds per square inch. The City has 3 pump stations to transfer production between reservoirs and to charge the distribution system.

The municipal water distribution system contained approximately 671 miles of transmission and distribution lines as of June 30, 2007. The City considers the water transmission and distribution systems to be in good condition and of adequate size to serve system demand including fire flows.

The portion of the Project relating to the water system development and rehabilitation projects that are to be financed with a portion of the proceeds of the Bonds is described under "PURPOSE AND PLAN OF FINANCING"-The Project Plan above.

Water Plan On April 13, 1994, the City engaged Leedshill-Herkenhoff, Inc., to develop a water plan

to guide the City's planning for a 40-year period through the year 2040. The water plan (the "Water Plan") was completed in 1995, and evaluated three water supply options for the City's future, including continued reliance on pumping ground water as the sole source of supply or utilization of a treated surface water supply from the Pecos River in addition to a reduced continuing ground water supply. The Water Plan recommended (among other things) that the City continue to use ground water as its source of supply for the short-term future, seek to complete its acquisition of new water rights appropriations which are projected to extend the adequacy of the ground water supply until about the year 2020 and actively protect and assert its interests with other governmental entities in firm water supply from ground water and surface

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water, to the extent it may become available. This plan has been reviewed and updated periodically, as necessitated by the plan and current conditions.

Water Utility Customers As of June 30, 2007, there were approximately 10,758 residential and commercial

customers of the municipal water utility. The following is a list of the 10 largest users of the water utility (based on percentage of total water utility revenues) for the City's fiscal year ended June 30, 2007, according to the City's records. Total water utility revenues for the City's fiscal year ended June 30, 2008 were approximately $5,184,514.38. Without including the revenues generated by Double Eagle, the City’s water utility revenues were approximately $4,307,480.15. The 10 largest users of the water utility accounted for approximately 4.6% of the total water utility revenues.

NAME BUSINESS ANNUAL WATER REVENUES

Constructors, Inc. Construction $55,569.20 Otis Water Co-op Water Cooperative 32,239.58 Carlsbad Schools Education 27,384.76 CARC Farm Agriculture 24,126.19 Guadalupe Medical Center Hospital 21,521.89 Vista Del Rio Apartments Multi-Family Housing 18,291.40 Stevens Motel Motel 17,043.24 Lakeview Christian Home Nursing Home 14,192.59 I & W, Inc. 14,070.90 Hamilton Construction Construction 13,586.32 $238,026.07

Required Permits The New Mexico State Engineer's Office ("NMSEO") has jurisdiction over ground water

in the City. All wells in the City require a permit from the NMSEO. The City has established water rights totaling 9,867 acre-feet per year in Sheep’s Draw and 7,648 acre-feet per year in Double Eagle. Although getting NMSEO approval for a new well may be time-consuming, the City has not been subject to any permit conditions or other limitations that restrict the use of its established water rights.

The City believes that it is in compliance with all permits that it holds relating to the operations of the water utility.

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Water Consumption The following table indicates historical water system connections, fiscal year sales and

peak and average daily water consumption.

Water Consumption (Mgd) Average Year Ended

June 30 Water Sales

(Mg)*

Peak**

Average** Number Of Customers

1998 2,938.4 18 9.3 10,485 1999 2,251.6 16.3 6.2 11,073 2000 2,906.3 15.2 8.9 10,665 2001 2,780.5 14.1 7.6 10,528 2002 3,104.5 13.4 8.5 10,489 2003 2,841.8 13 7.8 10,573 2004 2,823.9 12.8 7.7 10,685 2005 2,331.3 10.8 6.4 10,709 2006 2,946.9 14.2 8.1 10,761 2007 2,259.0 11.7 6.2 10,758

2009 (projection) 2,264.6 n/a n/a 10,784 2014 (projection) 2,278.8 n/a n/a 10,852 * In million gallons. ** In million gallons per day.

Peak day consumption usually occurs in June or July and, in recent years, usually has been two times the average daily consumption. The estimated per capita water consumption is currently approximately 89 gallons per day. Wastewater Utility

Existing Wastewater Utility The City's wastewater utility provides service to approximately 88% of the households in

the City, the balance being served by septic tanks. The wastewater utility has approximately 9,320 connections as of June 30, 2007.

The collection system consists of approximately 300 miles of collection lines of primarily clay and plastic construction. The wastewater collection system includes 14 lift stations.

The wastewater projects that are to be financed with a portion of the proceeds of the Bonds are described under "PURPOSE AND PLAN OF FINANCING-The Project Plan" above.

Wastewater Treatment Facility The City has a single wastewater treatment facility ("WWTF") for treating all wastewater

collected within its service area. The WWTF was originally constructed in 1962, and the last

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major expansion was completed in 1995. The WWTF is designed to produce an effluent containing less than 30 milligrams per liter of both biochemical oxygen demand (BOD) and total suspended solids (TSS) at a capacity of 6.0 million gallons per day (MGD). The wastewater flow averages 2.5 MGD during the year. The treated wastewater is discharged to the Pecos River. Stabilized waste solids are composted at the WWTF.

The City engaged HDR Engineering to develop a preliminary engineering report (“PER”) regarding the wastewater collection system and treatment facility. The draft PER has been delivered, and the anticipated wastewater projects included in the “project plan” are in accordance with the current version of the PER.

Required Permits In order to operate the WWTF, the City is required to have a National Pollutant

Discharge Elimination System ("NPDES") permit, which is issued by the United States Environmental Protection Agency, Region 6, in Dallas, Texas. Such permits are designed to implement and assure compliance with federal and State effluent limitations and water quality standards. NPDES permits are issued for a term of no more than 5 years, and renewals are conditioned upon compliance with the requirements of the existing permit and the then currently applicable limitations and water quality standards. Violation of the water quality standards set forth in an NPDES permit may be grounds for injunctive sanctions, criminal and civil penalties and revocation of the permit. The NPDES permit for the WWTF is effective until February 1, 2011, at which time it is renewable.

The current permit was issued on February 1, 2007. At some future date, the City may experience a stringent numeric limit for ammonia that will require treatment far more advanced than is now possible at the WWTF. The current NPDES permit also imposes a new effluent limit for mercury.

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User Connections The following table indicates the historical and projected sewer connections and daily

flows.

Fiscal Year

Ended June 30

Effluent Process (Mg)*

Monthly

Peak Flow (Mgd)**

Average

Discharge (Mgd)**

Average Number

Of Customers

1998 1,290 5.5 3.6 9,195 1999 1,329 4.8 4.0 9,229 2000 1,270 4.7 3.5 9,210 2001 1,119 3.4 2.6 9,227 2002 1,018 3.0 2.8 9,169 2003 861 2.9 2.4 9,175 2004 987 3.4 2.7 9,237 2005 889 3.1 2.4 9,233 2006 733 2.2 2.0 9,271 2007 812 4.0 2.2 9,320

2009 (projection) 814 n/a n/a 9,271 2014 (projection) 819 n/a n/a 9,401

* In million gallons. ** In million gallons per day.

Environmental Matters The wastewater utility is subject to the rules and regulations promulgated by the New

Mexico Environmental Improvement Board as to its treatment of liquid and solid wastes and to standards of the New Mexico Water Quality Control Act. The wastewater utility is also subject to numerous federal laws concerning pollution and effluent control as well as environmental regulations promulgated by the United States Environmental Protection Agency. The City believes it is currently in compliance with all applicable rules and regulations.

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Major Wastewater Utility Customers The following is a list of the 10 largest customers of the wastewater utility (based on

percentage of total wastewater utility revenues) for the City's fiscal year ended June 30, 2007, according to the City's utility records. Total wastewater utility revenues for the City's fiscal year ended June 30, 2007 were approximately $2,379,115.79. The 10 largest customers of the wastewater utility accounted for approximately 6.1% of such total wastewater utility revenues.

Name

Business

Annual Wastewater Revenues

Carlsbad Medical Center Hospital $26,874.21 Motel Stevens Motel 21,351.46 Mesa Grande Multi-Family Housing 13,606.72 Tom Sharesy Multi-Family Housing 13,535.88 Eddy County Government 13,384.02 CARC Group Home 13,137.28 Vista Del Rio Apartments Multi-Family Housing 11,548.12 Lakeview Chrisitan Home Nursing Home 11,081.66 Furr's Cafeteria Restaurant 10,128.23 Riverwood Apartments Multi-Family Housing 9,728.10 $144,375.68

Capital Improvement Plan

The City has developed a capital improvement plan for the water utility and the wastewater utility. The plan includes a prioritized list of 8 projects for the water utility, at a total estimated cost of $20,118,127, and a prioritized list of 7 projects for the wastewater utility, at a total estimated cost of $20,611,429.

The City intends to use the proceeds of the Bonds to complete the first projects on the water utility list. The City intends to complete the remaining projects over a period of years, financing them with revenues of the System, additional bond issues and other legally available funds.

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RATES AND CHARGES

The City collects a monthly fee for water and sewer service. The most recent adjustment to water and sewer charges was approved by ordinance on August 11, 1998 when the City Council adopted rates for a multi-year period.

The water and sewer rates as shown on the following tables are effective for the October

2008 billing cycle and thereafter: Water Rates

Meter Size

(Inches)

Residential Fixed Monthly

Fee

Commercial Fixed Monthly

Fee

.75 $8.26 $10.31 1.0 9.26 10.31 1.5 10.25 20.66 2.0 11.24 36.72 3.0 -- 82.62 4.0 -- 146.87 6.0 -- 330.49

The fixed monthly water fee includes the delivery of up to and including three thousand

(3,000) gallons of water. The monthly rates for any and all water for residential and commercial customers in excess of three thousand (3,000) gallons are as follows:

Water Usage (Thousand Gallons)

Rate/1000 Gallons

Above 3 ad Up to 10 $0.98 Above 10 and Up to 25 1.08 Above 25 and Up to 50 1.26

Above 50 and Up to 100 1.39 Above 100 and Up to 500 1.58

Above 500 1.75 Sewer Rates

Water Meter Size (Inches)

Residential Fixed Monthly Service Charge

Commercial Fixed Monthly

Service Charge

.75 $10.25 $12.81 1.0 10.25 12.81 1.5 10.92 25.62 2.0 10.92 45.52 3.0 -- 102.45 4.0 -- 182.12 6.0 -- 409.78

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The fixed monthly sewer service charge includes the furnishing of up to and including 3,000 gallons of water a month. The monthly sewer service rates for any and all water for residential and commercial customers in excess of three thousand (3,000) gallons are as follows:

Water Usage

(Thousand Gallons) Sewer Service Charge

1000 Gallons

Above 3 and Up to 10 $1.40 Above 10 and Up to 25 1.54 Above 25 and Up to 50 1.69 Above 50 and Up to 100 1.84 Above 100 and Up to 500 2.03

Above 500 2.20

For commercial users, the sewer service charge for water furnished in excess of 3,000 gallons per month is based on each commercial user's actual use during each billing cycle.

For residential users, the sewer service charge for water furnished in excess of 3,000 gallons per month is based on the average amount of water furnished during the months of January and February. In the event that an average amount of water furnished in those months cannot be established, the charges for water furnished in excess of 3,000 gallons per month are based on the average established for similar residences within the immediate area of such residence. This average is the basis for the billings for the subsequent May through April.

The fixed monthly fees and usage rates for water and sewer services are automatically increased each year. Beginning in October 2002 and every 4 years thereafter, the annual increase has been adjusted to reflect the average annual change in the Consumer Price Index (CPI-U) for the 4 year period ending the preceding July.

There is no assurance that the water and sewer rates adopted by the City Council will not be reduced in the future by the City Council (except to the extent of the rate covenant contained in the Bond Ordinance). See "THE BONDS - Protective Covenants." Additionally, there is no assurance that further increases in water and sewer rates in excess of those provided will not be required to meet demands for maintenance and expansion of the System.

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Rate Comparisons - Residential

The following chart shows a residential customer's bill at different volumes of water consumed. Bill amounts are determined by using each city's 2007 rate schedule.

COMBINED WATER & SEWER BILLS

Residential ¾” meter – 7,000 gallons water – 3,000 gallons sewer

Residential ¾” meter – 17,000 gallons water – 5,000 gallons sewer

Residential 1” meter – 34,000 gallons water – 8,000 gallons sewer

Artesia $17.66 Artesia $29.06 Artesia $51.06 Carlsbad 21.75 Carlsbad 34.67 Carlsbad 59.10 Hobbs 20.56 Hobbs 36.38 Hobbs 67.26 Las Cruces n/a1 Las Cruces n/a1 Las Cruces n/a1 Roswell 63.82 Roswell 159.52 Roswell 319.72 Alamogordo 24.20 Alamogordo 47.60 Alamogordo 127.55 Las Vegas n/a1 Las Vegas n/a1 Las Vegas n/a1 Rio Rancho 55.33 Rio Rancho 99.76 Rio Rancho 179.80

As of the foregoing chart shows, the City's bills for water and wastewater services for

residential customers remain below the average bills for most of the comparable New Mexico cities

Rate Comparisons - Commercial

The following chart shows a commercial customer's bill at different volumes of water consumed. Bill amounts are determined by using each city's 2007 rate schedule.

COMBINED WATER & SEWER BILLS

Commercial ¾” meter – 3,000 gallons water – 3,000 gallons sewer

Commercial 2” meter – 70,000 gallons water – 70,000 gallons sewer

Commercial ¾ 3” compound meter

– 700,000 gallons water – 700,000 gallons sewer

Artesia $24.41 Artesia $227.39 Artesia $2,528.23 Carlsbad 22.51 Carlsbad 270.24 Carlsbad 2,648.78 Hobbs 17.31 Hobbs 1,005.37 Hobbs 2,288.71 Roswell 30.52 Roswell 1,005.37 Roswell 9,631.87 Las Cruces n/a1 Las Cruces n/a1 Las Cruces n/a1 Alamogordo 18.00 Alamogordo 222.73 Alamogordo 4,496.40 Las Vegas n/a1 Las Vegas n/a1 Las Vegas n/a1 Rio Rancho 43.09 Rio Rancho 666.95 Rio Rancho n/a1

As the foregoing chart shows, the City's bills for water and wastewater services for commercial customers are in between the high and low average bills for commercial customers in comparable New Mexico cities.

1 Not Available.

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HISTORICAL GENERAL FINANCIAL INFORMATION FOR THE CITY

The data appearing on the pages under this heading have been excerpted from the audited

financial statements of the City for the years indicated. As presented, the data does not include the related "Notes to Financial Statements" which are an integral part of the audited financial statements. The audited financial statements, including the related notes, are available on request from the City.

The General Fund of the City is not pledged to pay debt service on the Bonds, and the

following charts are included for information purposes only.

Historical General Fund Balance Sheets

2007 2006 2005 2004 Assets: Cash and cash equivalents $20,088,410 $8,672,823 $10,371,032 $14,711,626 Interest receivable -- -- -- 94,871 Taxes receivable -- -- -- 126,427 Accounts receivable (net) -- -- -- 979,392 Receivable from other governments -- -- -- 1,370,605 Investments 6,785,000 15,569,912 7,866,580 -- Receivables (net of allowance for uncollectibles) 5,407,395 4,685,902 4,220,656 -- Inventories 260,665 229,798 206,821 272,955 Restricted cash and investments 3,541,004 4,319,914 16,360,021 15,733,342 Unamortized bond discount -- -- -- 484,821 Capital assets: Land, water rights and construction in progress 3,558,137 4,416,554 7,420,703 2,934,138 Other assets, net of accumulated depreciation 74,030,365 75,029,555 63,572,582 61,886,221 Other assets: 387,316 419,818 452,320 -- Total assets: $114,058,292 $113,344,276 $110,470,715 $98,594,398 Liabilities and net assets: Accounts payable and other current liabilities $2,034,157 $2,446,808 $1,750,836 $ 329,367 Accrued wages and benefits -- -- -- 405,308 Accrued interest payable 173,027 151,610 149,491 40,891 Current portion of revenue bonds payable -- -- -- 1,175,000 Deferred revenue 1,650,000 1,650,000 1,650,000 1,033,925 Noncurrent liabilities: Compensated absences -- -- -- 1,043,193 Due within one year 191,967 104,500 137,148 -- Due in more than one year 1,011,834 742,474 815,884 -- Long-term debt Due within one year 1,639,900 1,581,269 1,603,510 -- Due in more than one year 20,010,686 21,650,586 22,273,097 -- Revenue bonds -- -- -- 20,040,000 Estimated liability for landfill closure and post closure care

2,525,505 1,960,339 1,234,542 1,114,100

Liabilities payable from restricted assets: customer deposits -- -- -- 642,737 accrued interest payable -- -- -- 67,036 Total liabilities $29,237,076 $30,287,586 $29,614,508 $25,891,557 Net Assets: Invested in capital assets, net of related debt $55,937,916 $57,169,975 $48,166,320 $43,605,359 Restricted for public safety -- 121,011 361,716 -- Restricted for public works -- 576,274 900,279 -- Restricted for culture and recreation -- 1,855,357 91,236 -- Restricted for public health and welfare -- -- 8,488 -- Restricted for economic development -- -- 265,962 -- Restricted for debt service 950,041 1,086,618 776,938 273,527 Restricted for capital projects -- -- -- 9,483,412 Restricted for other purposes -- -- -- 10,094,874 Unrestricted 27,933,259 22,247,455 30,285,268 9,245,669 Total net assets $84,821,216 $83,056,690 $80,856,207 $72,702,841 Total liabilities and net assets $114,058,292 $113,344,276 $110,470,715 $98,594,398

Source: City of Carlsbad, Audited Financial Statements, 2004-2007. 2008 Audited Financial Statements were unavailable as of

January 2009.

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Historical General Fund Revenues and Expenditures

The General Fund is used to account for all financial resources of the City except for those required to be accounted for in one of the other funds.

Fiscal Year Ending

June 30

2007

2006

2005

Revenues Taxes $21,548,163 $20,879,148 $19,116,130 Licenses and permits -- -- -- Charges for services 12,015,303 11,496,075 11,128,546 Operating grants and contributions 1,072,844 2,265,741 2,708,263 Capital grants and contributions 8,876,285 4,122,817 4,117,881 Interest and investment earnings -- -- -- Other 6,058,975 2,370,223 2,383,854 Total Revenues $49,571,570 $41,134,004 $39,454,674 Expenses Current: General government $8,937,820 $4,479,785 $3,605,280 Public safety 15,013,412 10,995,463 9,983,739 Public works 6,212,797 4,367,966 4,732,595 Culture and recreation 4,545,496 3,763,616 3,156,271 Public health and welfare 701,159 208,060 233,955 Economic development 1,255,441 2,304,906 888,210 Unallocated interest expense -- -- -- Debt Service: -- -- -- Interest on long-term debt 178,218 271,598 250,988 Solid waste 3,498,777 3,671,329 2,843,442 Joint water and sewer 6,448,153 6,229,790 5,989,913 Museum 8,057 8,602 6,564 Municipal transit 562,923 482,553 450,962 Performing arts centre 214,181 186,229 178,037 Cemetery 230,611 245,923 221,223 Total Expenses $47,807,045 $37,215,820 $32,541,179 Excess of revenues over expenses $1,764,525 $3,918,184 $6,913,495

Source: City of Carlsbad, Audited Financial Statements, 2004-2007. 2008 Audited Financial Statements were unavailable as of January 2009.

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General Fund Revenues and Expenditures (Actual and Budgeted)

Actual and budgeted revenues and expenditures of the City's general fund, presented on a cash basis, are shown below.

Fiscal Year 2008 (Budgeted)

Fiscal Year 2007

(Actual) Revenues: Property $ 1,675,000 $1,673,993 Gross receipts 17,105,768 16,832,196 Gasoline and motor vehicle taxes -- Lodging taxes -- Franchise tax 768,147 714,996 Cigarette tax 35,000 47,732 Intergovernmental Federal grants 239,765 223,415 State grants 1,026,725 738,603 Charges for services 462,200 475,194 Licenses and permits 195,300 249,901 Fines and forfeits 354,500 364,147 Miscellaneous 730,150 432,029 Investment income 399,122 150,657 Total revenues $22,991,477 $21,902,863 Expenditures: Current General government $4,137,681 $2,965,772 Public safety 12,560,256 10,201,541 Public works 3,743,771 2,948,038 Culture and recreation 3,106,533 2,470,280 Public health and welfare 705,968 143,302 Economic development 152,944 300,116 Capital outlay 818,460 546,508 Debt service: Principal -- -- Interest -- -- Total expenditures $25,255,613 $19,575,557 Excess (deficiency) of revenues over expenditures

$2,264,136

$2,327,306

Other financing sources (uses): Sale of assets -- -- Transfers in $3,243,536 $2,882,872 Transfers (out) (4,11,467) (1,869,048) Total other financing sources (uses)

$(767,931) $1,013,824

Net change in fund balances $1,496,205 $3,341,130 Fund balances – beginning of year $11,516,973 $8,175,843 Fund balances – end of year $13,013,178 $11,516,973

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THE CITY General

The City of Carlsbad is located in south-eastern New Mexico and serves as the county seat of Eddy County. The City was incorporated in 1918 and since has served as the hub for the Eddy County area. The City is located approximately 270 miles south of Albuquerque. The 2006 census population for the City was 25,410, which represented approximately 48% of the total population of Eddy County. Mayor and City Commission

The City operates under a Mayor-Council form of government. Eight councilors are elected from districts for four-year terms of office with terms staggered. Non-partisan elections are held bi-annually. The Mayor is elected at large for a four-year term and serves as the Chief Executive. A City Administrator is appointed by the Mayor and confirmed by the City Council to act as chief administrative officer of the City.

Name Term Expires Principal Occupation

Bob Forrest, Mayor March 2010 Hospitality/Hotel Paul C. Aguilar, City Council Ward 1 March 2010 Retired City Employee Nick Salcido, City Council Ward 1 March 2012 Retired State Employee Jeff Diamond, City Council Ward 2 March 2010 Lawyer Sandra Nunley, City Council Ward 2 March 2012 Educator Wesley Carter, City Council Ward 3 March 2012 Construction Ned Z. Elkins, City Council Ward 3 March 2010 Los Alamos National

Laboratories Brad A. Day, City Council Ward 4 March 2010 Sandia National Laboratories Nathan McDonald, City Council Ward 4 March 2012 Construction

The City Administrator is the chief administrative officer of the City and is responsible

for the proper and efficient administration of the City. He is charged with enforcing all ordinances, rules and regulations enacted by the Council; fully advising the Council of the City's financial condition and needs; preparing and submitting an annual budget; and making recommendations to the Council on all matters concerning the welfare of the City. Certain members of the administration are described below:

Harry Burgess, City Administrator. Mr. Burgess has been employed by the City since 2005, when he was appointed City Administrator. He has worked in local government in New Mexico since 1997, previously as County Manager for Grant County and as Administrative Services Director for Eddy County. Mr. Burgess received his M.B.A. from Western New Mexico University, an M.S. from Oklahoma State University, and a B.A. from the University of North Carolina.

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Amanda Asbury, City Clerk. Ms. Asbury has been employed by the City since 2001. She was appointed Deputy City Clerk in October of 2007 and was appointed City Clerk on January 1, 2009.

Eileen P. Riordan, Esq., City Attorney. Ms. Riordan has been employed by the City as City Attorney since 1995. Prior to that time, she practiced law with the Rosenberg & David Law Firm in Carlsbad, New Mexico. Ms. Riordan received her J.D. from the University of New Mexico and a B.S. from New Mexico State University. Other Employees

The City has 325 full-time employees and 30 part-time employees, approximately 75% of whom are represented by labor unions. The City believes its relations with the employees are good. The City's police force consists of 53 sworn officers. The City operates a library, museum, airport, swimming area on the Pecos River, 2 senior citizens' centers, 6 fire stations, and a municipal water and sewer utility. The City operates ball fields and playgrounds with paid staff members during an active summer recreational program. Retirement Plan

Substantially all of the City's full-time employees participate in a public employee retirement system organized on a statewide basis and operated by the State of New Mexico. The Public Employees' Retirement Association of New Mexico (the "Plan"), established by Chapter 167, Laws of 1947, as amended, requires contributions, computed as a percentage of salary, from both employee and employer for all full-time employees. The majority of State and municipal employees in New Mexico participate in the Plan. All participating general employees contribute 13.15% of their salaries to the Plan and the City currently contributes 9.15%. Different rates of contribution apply to law enforcement officers, with police contributing 16.3% and the City contributing 18.5%, and with firefighters contributing 16.2% and the City contributing 21.25%. In addition to retirement benefits, the Plan provides disability benefits, surviving spouse and children's benefits, deferred benefits options, and cost-of-living adjustments for all eligible participants. For the fiscal year ended June 30, 2007, the City's contributions to the pension plan amounted to $3,561,745, which consisted of $1,697,770 from the City and $1,863,975 from employees. The payroll for the period ended June 30, 2007 for all employees was $17,010,253. The City's liability under the Plan is limited to the periodic employer contributions as described above that it is required to make for its participating employees. Future deficits of the Plan, if any, are expected to be financed by the State. Financial Statements and Budgets

The City’s financial statements for the fiscal year ended June 30, 2008 are currently being audited. The City's financial statements for the fiscal year ended June 30, 2007, have been audited by Accounting & Consulting Group, LLP, Certified Public Accountants, Carlsbad, New Mexico. Copies of the financial statements for the fiscal year ended June 30, 2007 and earlier years are available for review on the internet @www.cityofcarlsbadnm.com or at the City Library in Carlsbad, or a copy will be mailed at a reasonable charge upon request to the City of

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Carlsbad, 101 N. Halagueño Street, Carlsbad, New Mexico 88221-1569, Attention: City Administrator.

The City adheres to a three-part procedure in adopting its annual budget. First, the Mayor

submits to the City Council and the Local Government Division of the State Department of Finance and Administration before June 1 a proposed operating budget for the fiscal year commencing the following July 1. The operating budget includes proposed expenditures and the means of financing them. Second, the Council holds public hearings to obtain public comments. Third, prior to July 20, the final budget is legally enacted through passage of a resolution after preliminary Local Government Division approval. The City is authorized to transfer budgeted amounts among departments within any fund, but must obtain approval of the Local Government Division prior to making revisions that alter the total expenditures of any fund. As a management control device, the City employs formal budgetary integration at the line item level.

Budget appropriations are allowed to carry over from one fiscal year to another with approval of the Local Government Division. Deficit financing is not permitted under New Mexico law. The level of classification detail at which expenditures may not legally exceed appropriation for each budget item is the fund level (i.e., General, Water & Sewer, etc.). Intergovernmental and Other Agreements

The City is party to certain agreements which impose obligations upon the City. According to the City Attorney, there are no contracts or agreements in effect which potentially could have an effect on the security of the Bonds. City Insurance Coverage

The City maintains insurance on its assets and operations as is customary and adequate, in its opinion, for similar entities insuring similar operations and assets. The City obtains both its general liability coverage and its errors and omissions liability coverage from private insurance providers. However, there can be no assurance that the City will continue to maintain the present level of coverage or that the present level of coverage will be adequate. City Investment Policy

In November 1999, the City adopted Resolution No. 99-37 establishing the City’s written investment policy. The City's investment policy was intended to protect the principal of excess City funds, increase the efficiency of the City’s cash management system, maximize investment earnings through prudent investment and portfolio diversification and to recognize the impact of the City investments on the local economy. Permitted investments include the financial instruments allowed by Section 6-10-1 et seq., NMSA 1978. Reports reflecting the City's investments are submitted on a quarterly basis and are contemporaneous with the City’s General Quarterly Report to the State Department of Finance and Administration.

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AREA ECONOMIC INFORMATION

The following general information concerning the economic and demographic conditions in Eddy County and the surrounding area was obtained from the sources indicated, and the City makes no representation as to the accuracy or completeness of the data presented. Potash Production

Discovered in 1925, the potash industry in Carlsbad has long been important to the economy of the region. Potash is a mined salt containing water-soluble potassium. New Mexico ranks first in the nation in potash production. The Carlsbad potash district represents approximately 2% of worldwide potash production and more than 75% of all domestic potash production. There are presently four mining companies engaged in the mining and milling of potash for chemical fertilizers. New Mexico potash is used primarily as an agricultural fertilizer or animal feed supplement, with most sold to nearby states. Oil and Gas Production Oil and gas production is an important factor in the economic base of Eddy County. The following table depicts a 10-year history of the production of these products.

Crude Oil

Eddy County New Mexico

Year Volume

(Barrels) Value (000’s)

Volume (Barrels)

Value (000’s)

2007 21,581,166 $1,453,649 60,145,322 $4,040,754 2006 20,731,860 1,288,910 58,771,398 3,689,011 2005 21,798,224 1,153,947 61,618,656 3,211,150 2004 24,266,545 946,317 58,888,164 2,289,229 2003 26,566,509 792,483 67,715,933 1,985,530 2002 25,985,261 644,107 68,502,966 1,683,891 2001 24,967,118 603,957 69,874,553 1,674,956 1999 21,760,930 690,073 69,454,156 2,023,510 1998 21,659,876 382,130 67,718,035 1,168,475

Source: New Mexico ONGARD Service Center Website, 2007

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Natural Gas

Eddy County New Mexico

Year Volume (MCF)

Value (000’s)

Volume (MCF)

Value (000’s)

2007 259,503,325 $1,776,794 1,451,359,917 $10,201,443 2006 271,087,803 1,711,030 1,532,070,740 9,659,710 2005 280,381,018 2,047,663 1,514,281,220 10,889,316 2004 294,415,519 1,630,124 1,392,139,992 7,472,376 2003 316,184,516 1,583,147 1,523,545,616 7,089,039 2002 330,749,364 988,900 1,589,500,472 4,357,419 2001 324,952,750 1,402,296 1,646,741,836 6,505,435 1999 303,237,068 1,272,658 1,637,583,070 6,239,731 1998 278,854,973 658,385 1,637,239,312 3,474,435

Source: New Mexico ONGARD Service Center Website, 2007

WIPP Project (Waste Isolation Pilot Plant)

The bedded salt formations in Eddy County made the area the chosen site for the Department of Energy's Waste Isolation Pilot Plant (WIPP).

The WIPP safely disposes of the nation’s defense related transuraninc radioactive waste. WIPP's deep underground storage chambers are constructed in salt beds that have remained geologically unchanged for millions of years. The site is about 26 miles east of the City of Carlsbad in the Chihuahuan Desert.

Construction at the site began in 1981 and was completed in 1988. The project has been evaluated by the Environmental Protection Agency, which has certified the project's compliance with applicable regulations. The plant opened in 1999, and has received 7,063 shipments of radioactive by-product waste as of November 24, 2008. By law, the facility can dispose of 6.2 million cubic feet of waste, or about 850,000 55-gallon drums. More than 20 temporary above-ground storage facilities will send waste to the unique repository, which will take about 35 years from the date of opening to fill to capacity.

Currently there are approximately 800 persons employed at WIPP. Westinghouse TRU is the operating contractor.

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Agriculture

Eddy County is a significant producer of agricultural products in New Mexico. Its primary products are hay, cotton, sorghum, pecans, cattle, wheat. The following chart shows selected agricultural cash receipts statistics (in $1,000s) for Eddy County:

Year

Livestock

Crops

Total Eddy County

Total New Mexico

2005 $77,063 $39,236 $116,299 $2,611,152 2004 83,205 34,123 117,328 2,581,051 2003 68,716 35,400 104,116 2,146,473 2002 58,320 34,248 92,568 1,956,977 2001 72,027 27,956 99,983 2,213,828 2000 67,049 29,558 96,607 2,107,718 1999 64,085 29,952 94,037 1,953,386 1998 66,848 30,563 97,411 1,940,718 1997 78,105 31,295 109,400 1,920,007 1996 63,763 33,200 96,963 1,703,991

Source: United States Department of Agriculture

Education Approximately 5,900 students attend the Carlsbad Municipal Schools. There are three parochial/private schools in the Carlsbad area. New Mexico State University – NMSU-Carlsbad is a two-year branch community college of New Mexico State University and is independently accredited by the North Central Association. For 1998, 1999 and 2000, NMSU-Carlsbad was the only two-year college in the state to be recognized consecutively by Quality New Mexico. NMSU-Carlsbad has a student population of approximately 1,200 students, approximately 28 full-time faculty, 45 part-time faculty and 70 full-time staff members. NMSU-Carlsbad offers a variety of quality educational opportunities. The college is the Eddy County provider for Adult Basic Education Services (ABE). The college offers developmental studies designed to provide students with basic skills needed to achieve academic success. Certificate programs of 30-36 credit hours are designed to provide the students with marketable and employable skills upon completion. Associate of Arts degrees are designed for individuals who plan to complete their educational goals with a baccalaureate degree. Associate of Applied Science degrees are designed for those who enter the work force upon graduation. Transfer programs are designed to provide freshman and sophomore level course work for students planning to transfer to institutions offering baccalaureate degrees. Non-credit programs offered through Community Services and Continuing Education programs provide a variety of educational, personal interest and enrichment programs for all ages. NMSU-Carlsbad hosts the regional Small Business Development Center (SBDC) and the Manufacturing Sector Development Program (MSDP) that serves business and industry training needs through customized programs.

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Population and Age Distribution

The following chart sets forth historical population data for the City of Carlsbad, Eddy County and the State of New Mexico.

Population

Year

City of Carlsbad

Eddy County

State of New Mexico

1940 7,116 24,311 531,818 1950 17,975 40,640 681,187 1960 25,541 50,783 951,023 1970 21,297 41,119 1,017,055 1980 25,496 47,855 1,303,143 1990 24,952 48,605 1,515,069 2000 25,531 51,736 1,819,046 2010* N/A 55,274 2,112,986 2020* N/A 58,514 2,383,116 2030* N/A 61,066 2,626,553

*Projected Source: U.S. Department of Commerce, Bureau of the Census.

The following table sets forth a comparative age distribution profile for the City of Carlsbad, Eddy County, the State and the United States as of June, 2008.

Age Distribution

Age

City of Carlsbad

Eddy County

State of New Mexico

United States

0-17 25.71% 25.73% 25.24% 24.54% 18-24 9.08% 9.94% 10.50% 9.88% 25-44 24.08% 22.79% 25.70% 27.74% 45-54 13.39% 15.19% 14.50% 14.44%

55 & Older 27.74% 26.35% 24.06% 23.40%

Source: Claritas, Inc. June 2008

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Income

The following table sets forth annual per capita personal income levels for Eddy County, the State and the United States. Eddy County's and the State's per capita income level over this period has been lower than the national average.

Per Capita Personal Income

Year Eddy

County State of

New Mexico United States

2007 N/A $ 31,474 $ 38,611 2006 $32,382 29,725 36,629 2005 29,132 27,889 34,685 2004 27,131 26,679 33,072 2003 25,007 24,846 31,466 2002 23,734 23,908 30,832 2001 22,637 23,081 30,413 2000 20,572 21,788 29,760 1999 19,791 20,865 27,880 1998 19,827 20,551 26,893 1997 19,118 19,641 25,412

Source: UNM, Bureau of Business & Economic Research

Effective Buying Income The following table reflects the percentage of households by Effective Buying Income (“EBI”) and a two-year comparison of the estimated median household income as reported by Claritas Inc. EBI is personal income less personal tax and non tax payments. Personal income includes wages and salaries, other labor income, proprietors' income, rental income, dividends, personal interest income and transfer payments. Deductions are made for federal, state and local taxes, non-tax payments such as fines and penalties, and personal contributions for social security insurance. During the period shown in the following chart, the estimated median household income level for Eddy County compares favorably with the State but has consistently been lower than the national level.

Percent of Households by Effective Buying Income Groups - 2008

Effective Buying Income Group

City of Carlsbad

Eddy County

State of New Mexico

United States

Under $25,000 31.0% 29.7% 29.2% 23.4% $25,000 - 34,999 12.5% 12.2% 12.5% 11.0% $35,000 - 49,999 17.4% 16.1% 16.5% 15.4%

$50,000 - $74,999 20.1% 20.0% 18.5% 19.6% Over $75,000 18.9% 22.0% 23.4% 30.6%

2006 Est. Median Household Income $36,498 $38,150 $41,045 $48,775 2007 Est. Median Household Income $38,053 $39,647 $41,569 $49,314 2008 Est. Median Household Income $40,556 $42,551 $42,577 $50,170

Source: Claritas Inc., June 2008

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Gross Receipts

The following table shows the total reported and retail gross receipts generated in the City of Carlsbad and the State of New Mexico for the past ten years. For the purposes of these tables, gross receipts means the total amount of money received from selling property in the State, from leasing property employed in the State and from performing services in the State.

City of Carlsbad State of New Mexico Fiscal Retail Total Retail Total

2008* $330,685,996 $1,124,880,596 $25,711,762,199 $111,658,328,633 2007 308,419,734 955,483,439 26,012,239,572 103,740,330,414 2006 329,148,366 922,214,323 24,014,746,059 94,347,408,225 2005 274,272,643 811,012,786 20,454,852,088 78,771,700,292 2004 252,977,264 723,570,454 18,414,335,199 70,477,791,653 2003 260,340,581 697,046,303 18,700,756,931 63,358,239,874 2002 281,158,997 693,607,634 19,094,649,339 62,280,612,865 2001 262,772,720 677,236,594 20,743,109,632 65,894,850,915 2000 253,026,340 606,903,319 17,648,495,366 59,397,663,620 1999 245,259,679 601,253,723 15,759,691,923 54,260,304,216

* 2008 Unaudited Source: New Mexico Taxation and Revenue Department and UNM Board of Business and Economic Research

Employment

The following table provides a ten-year history of unemployment rates in Eddy County, the State and the United States.

Labor Force and Percent Unemployed

Eddy County State of New Mexico United States

Year

Labor Force

Percent Unemployed

Labor Force

Percent Unemployed

Percent Unemployed

2008* 26,524 2.60% 942,173 3.20% 4.80% 2007 26,410 3.60% 934,099 3.50% 4.50% 2006 25,749 4.30% 951,287 4.10% 4.70% 2005 24,993 6.20% 934,667 5.80% 5.60% 2004 24,048 5.80% 910,502 4.80% 5.70% 2003 24,263 6.80% 878,749 6.10% 5.80% 2002 23,955 6.20% 875,293 5.40% 5.80% 2001 23,451 5.10% 860,131 4.80% 4.70% 2000 23,658 6.70% 854,076 5.00% 4.00% 1999 23,654 8.10% 824,355 5.60% 4.20% 1998 24,680 6.90% 845,074 6.20% 4.50%

*As of March 2008. Source: State of New Mexico, Department of Labor, Economic Research & Analysis.

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Covered Wage and Salary Employment by NAICS Code Classification The following is a history of non-agricultural wage and salary employment for Eddy

County. The New Mexico Department of Labor publishes quarterly reports of covered employment and wages. Beginning with 2001 data, employment was classified according to the new North American Industry Classification System (NAICS).

Non-Agricultural Employment - Eddy County Annual Average

2001 2002 2003 2004 2005 2006

Grand Total 19,212 19,548 19,684 19,705 20,238 21,040 Total Private 15,950 16,241 16,343 16,306 16,802 17,529 Agriculture, Forestry, Fishing & Hunting 378 453 407 363 361 320 Mining 2,584 2,494 2,489 2,660 2,820 3,123 Utilities 130 130 132 128 121 122 Construction 1,097 1,088 1,149 926 1,058 1,112 Manufacturing 828 877 877 824 783 706 Wholesale Trade 452 441 435 459 471 478 Retail Trade 2,263 2,186 2,184 2,098 2,117 2,188 Transportation & Warehousing 764 725 752 760 787 789 Information 314 301 259 228 242 239 Finance & Insurance 512 580 589 601 587 626 Real Estate & Rental & Leasing 337 437 403 389 407 409 Professional & Technical Services 354 382 453 460 515 407 Management of Companies & Enterprises 37 42 * * * * Administrative & Waste Services 1,305 1,331 1,305 1,300 1,395 1,735 Educational Services 31 35 53 44 41 39 Health Care & Social Assistance 1,971 2,177 2,248 2,308 2,251 2,258 Arts, Entertainment & Recreation 78 * * * 81 53 Accommodation & Food Services 1,724 1,704 1,697 1,672 1,746 1,839 Other Services, ex. Public Administration 790 796 801 824 833 854 Unclassified 2 3 * * * * * Total Government 3,262 3,307 3,341 3,399 3,436 3,511 Federal 501 534 529 560 596 653 State 3 565 569 580 603 605 608 Local 2,197 2,204 2,232 2,236 2,234 2,250

* Withheld to avoid disclosing confidential data. Data that are not disclosed for individual industries are always included in the totals. 1 Data by industry from 2001 forward are not generally comparable with industry date for prior years. Prior to

2001, industry categories are based on the Standard Industrial Classification (SIC) system. This system was replaced with the North American Industry Classification System (NAICS). The “Grand Total,” along with the “State Government” and “Federal” sectors are the exemptions. Data for these three categories are comparable from 1990 forward.

2 The unclassified category may include data for other industries that were withheld for reasons of confidentiality.

3 Beginning in 2001, employment in Native American enterprises and Tribal Government were included in the Local Government sector. Prior to 2001 they were classified by kind of business, primarily in the services sector.

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Major Employers

Some of the larger employers in Eddy County are described below. No independent investigation of the stability or financial condition of the listed employers has been conducted and no representation can be made that these employers will maintain their status as major employers in Eddy County.

Employers Type of Business

Westinghouse WIPP Carlsbad Schools Education

IMCC Potash Mine Mississippi Potash Corporation Potash Mine Sandia National Laboratories Government

Carlsbad Medical Center Hospital City of Carlsbad Government

State of New Mexico Government Lakeview Christian Home Nursing Home

Eddy County Government Source: Carlsbad Department of Development

GENERAL OBLIGATION BOND INFORMATION

City of Carlsbad Historical Property Value Assessments

2008 2007 2006 2005 2004 Assessments Value of Land $56,982,631 $53,532,784 $53,309,466 $49,336,330 $51,251,874 Improvements 299,942,607 286,928,083 256,794,743 237,057,080 226,611,284 Personal Property 20,183,395 17,310,721 15,395,394 16,893,029 13,994,205 Mobile Homes 5,484,716 5,565,880 5,551,525 5,451,515 5,413,083 Livestock 56,202 63,789 68,929 59,490 43,535 Assessor's Total Valuation $382,649,551 $363,401,257 $331,120,057 $308,797,444 $297,313,981 Less Exemptions Head of Family $7,791,975 $7,806,036 $7,744,841 $7,749,720 $7,830,525 Veterans 6,031,877 5,986,850 6,022,077 5,370,652 4,399,579 Other 84,214,240 81,411,317 71,768,586 60,700,457 60,171,354 Total Exemptions $98,038,092 $95,204,203 $85,535,504 $73,820,829 $72,401,458

Assessor's Net Valuation $284,611,459 $268,197,054 $245,584,553 $234,976,615 $224,912,523

Central Assessed $15,582,495 $16,478,628 $15,647,119 $15,247,108 $14,570,420

Oil and Gas $6,368,285 $9,155,008 $17,052,903 $16,790,931 $6,397,071

Total Assessed Valuation $306,562,239 $293,830,690 $278,284,575 $267,014,654 $245,880,014 Residential $ 187,825,636 $ 180,752,799 $ 167,307,892 $ 158,005,509 $ 153,030,991 Non-Residential 112,368,318 103,922,883 93,923,780 92,218,214 86,451,952 Oil and Gas 6,368,285 9,155,008 17,052,903 - -

$306,562,239 $293,830,690 $278,284,575 $250,223,723 $239,482,943

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Statement of Estimated Direct and Overlapping Debt

2008 Assessed G/O Debt Percent Valuation Outstanding Applicable Amount

State of New Mexico $50,399,084,039 $299,865,000 0.6% $1,823,987 Eddy County $2,774,006,186 - 11.1% - NMSU-Carlsbad Branch $1,385,246,413 $3,000,000 22.1% $663,916 City of Carlsbad $306,562,239 - 100.00% - Carlsbad Schools $1,385,246,413 $12,810,000 22.1% $2,834,920 Total Direct & Overlapping $5,322,822

1.74% 0.44%

$209.48

Ratio of Estimated Direct & Overlapping Debt to 2008 Assessed Valuation: Ratio of Estimated Direct & Overlapping Debt to 2008 Estimated Actual Valuation: Per Capita Direct & Overlapping Debt: Population: 25,410

Property Tax Rates and Collections

Property Tax Rates Within 20 Mill Limit for General Purposes

2008 2007 2006 2005 2004 2003 State of New Mexico $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 Eddy County 6.809 6.598 6.623 6.518 6.448 6.335 City of Carlsbad 6.225 6.176 6.225 6.225 6.172 6.011 Carlsbad Schools 0.439 0.426 0.427 0.420 0.414 0.404 Total $13.473 $13.200 $13.275 $13.163 $13.034 $12.750

Over 20 Mill Limit - Interest, Principal, Judgment, etc. State of New Mexico $1.250 $1.221 $1.291 $1.234 $1.028 $1.520 Eddy County 0.000 0.000 0.000 0.000 0.000 0.000 City of Carlsbad 0.000 0.000 0.000 0.000 0.000 0.000 NMSU - Carlsbad Branch 3.389 0.944 0.903 0.862 0.849 0.843 Carlsbad Schools 5.406 5.298 5.309 5.315 5.707 5.803 Total $10.045 $7.463 $7.503 $7.411 $7.584 $8.166

Total Levy

State of New Mexico $1.250 $1.221 $1.291 $1.234 $1.028 $1.520 Eddy County 6.809 6.598 6.623 6.518 6.448 6.335 City of Carlsbad 6.225 6.176 6.225 6.225 6.172 6.011 NMSU - Carlsbad Branch 3.389 0.944 0.903 0.862 0.849 0.843 Carlsbad Schools 5.845 5.724 5.736 5.735 6.121 6.207 Total Residential $23.518 $20.663 $20.778 $20.574 $20.618 $20.916

Total Non-Residential $24.071 $21.606 $21.825 $21.774 $21.960 $22.144

Total Residential in Unincorporated County $14.487 $14.487 $14.553 $14.349 $14.446 $14.501

Total Non-Residential in Unincorporated County $15.525 $15.525 $15.600 $15.549 $15.735 $15.919 Source: State of New Mexico, Department of Finance & Administration

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Property Tax Collections for Eddy County Net Taxes Current Current/ Current/Delinquent Tax Fiscal Charged to Current Tax Collections as of Delinquent Tax Collections as of Year Year Treasurer (1) Collections (1) % of Net Levied Collections (2) % of Net Levied 2007 07/08 $20,865,653 $19,484,054 93.38% $19,484,054 93.38% 2006 06/07 18,742,480 17,497,554 93.36% 17,926,182 95.64% 2005 05/06 17,299,453 16,635,934 96.16% 17,136,394 99.06% 2004 04/05 15,470,415 14,950,124 96.64% 15,468,575 99.99% 2003 03/04 14,329,080 13,787,124 96.22% 14,322,800 99.96% 2002 02/03 13,138,173 12,529,696 95.37% 13,131,883 99.95% 2001 01/02 13,675,487 13,058,672 95.49% 13,660,548 99.89% 2000 00/01 13,290,418 12,772,629 96.10% 13,307,885 100.13% 1999 99/00 12,618,108 12,187,748 96.59% 12,614,652 99.97% 1998 98/99 12,157,583 11,836,101 97.36% 12,168,312 100.09% (1) As of June 30 of each year (2) As of December 2008

History of Assessed Valuation The following is a ten-year history of assessed valuation for the City and Eddy County.

History of Assessed Valuation

Tax City of Eddy Year Carlsbad County 2008 $306,562,239 $2,774,006,186 2007 293,830,690 2,876,875,700 2006 278,284,575 2,576,570,476 2005 267,014,654 2,198,134,658 2004 245,880,014 1,963,294,457 2003 237,212,603 1,569,194,465 2002 232,286,691 1,285,012,676 2001 225,562,838 1,701,974,782 2000 217,019,196 1,173,615,220 1999 209,208,500 1,098,703,443

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Major Taxpayers in Eddy County

The following is a list of major taxpayers along with the 2007 assessed valuation.

Major Taxpayer 2007 A.V. % of Total Assessed

Valuation

Mosaic Potash $97,073,136 3.50%

Navajo Refining 88,447,203 3.19%

Intrepid Potash 71,143,300 2.56%

El Paso Natural Gas 22,652,852 0.82%

WWC Cellular 18,715,820 0.67%

$298,032,311 10.74%

Source: County Assessor

LITIGATION AND INSURANCE

At the time of the original delivery of the bonds, the City will deliver a no-litigation certificate to the effect that no litigation or administrative action or proceeding is pending or, to the knowledge of the appropriate officials, threatened, restraining or enjoining, or seeking to restrain or enjoin, the issuance and delivery of the Bonds, the effectiveness of the Bond Ordinance, the levying or collecting of utility charges to pay the principal of and interest on the Bonds or contesting or questioning the proceedings and authority under which the Bonds have been authorized and are to be issued, sold, executed or delivered, or the validity of the Bonds.

The City maintains insurance on its assets and operations and believes its coverages are

customary for similar entities insuring similar operations and assets.

LEGAL MATTERS

Modrall, Sperling, Roehl, Harris & Sisk, P.A., Albuquerque, New Mexico, Bond Counsel will render an opinion with respect to the validity of the Bonds and with respect to tax matters described below (see "TAX EXEMPTION"). The proposed form of such opinion is attached hereto as “Appendix A.” Certain legal matters will be passed upon for the City by Eileen P. Riordan, City Attorney.

TAX EXEMPTION

In the opinion of Modrall, Sperling, Roehl, Harris & Sisk, P.A., Bond Counsel, to be delivered at the time of original issuance of the Bonds, under existing laws, regulations rulings and judicial decisions, and assuming compliance with covenants described herein, interest on

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Bonds is excludable from gross income for federal income tax purposes and is not a specific preference item for purposes of the federal alternative minimum tax for individuals and corporations. Additionally, interest on the Bonds is excludable from net income for present State of New Mexico income tax purposes.

The Internal Revenue Code of 1986, as amended (the “Code”), imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal tax purposes of interest on obligations, such as the Bonds. The City has made various representations and warranties with respect to, and has covenanted in the Bond Ordinance, and other documents, instruments and certificates to comply with certain guidelines designed to assure that interest on the Bonds will not become included in gross income. Failure to comply with these covenants or the inaccuracy of these representations and warranties may result in interest on the Bonds being included in gross income from the date of issue of the Bonds. The opinion of Bond Counsel assumes compliance with the covenants and the accuracy of such representations and warranties.

Although Bond Counsel has opined that interest on the Bonds is not a specific preference item for purposes of the alternative minimum tax provisions contained in the Code, interest on the Bonds will be included in the adjusted current earnings of certain corporations, and such corporation’s adjusted current earnings over its alternative minimum taxable income (determined without regard to this adjustment and prior to reduction for certain net operating losses).

Although Bond Counsel has rendered an opinion that interest on the Bonds is excludable from gross income for federal income tax purposes, the accrual or receipt of interest on the Bonds may otherwise affect the federal income tax liability of the recipient. The extent of these other tax consequences will depend upon the recipient’s particular tax status or other items of income or deduction. Bond Counsel expresses no opinion regarding any such consequences. Purchasers of the Bonds, particularly purchasers that are corporations (including S corporations and foreign corporations operating branches in the United States), property or casualty insurance companies, banks, thrifts or other financial institutions, certain recipients of Social Security or Railroad Retirement benefits, taxpayers otherwise entitled to claim the earned income credit or taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations are advised to consult their tax advisors as to the tax consequences of purchasing or owning the Bonds.

The opinions expressed by Bond Counsel are based upon existing legislation as of the date of issuance and delivery of the Bonds, and Bond Counsel expresses no opinion as of any date subsequent thereto or with respect to any pending legislation.

From time to time, there are legislative proposals in Congress that, if enacted, could alter or amend the federal tax matters referred to above or adversely affect the market value of the Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether if enacted, it would apply to bonds issued prior to enactment. Each purchaser of the Bonds should consult his or her own tax advisor regarding any pending or proposed federal tax legislation. Bond Counsel expresses no opinion regarding any pending or proposed federal tax legislation.

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Original Issue Discount

The Bonds maturing on June 1, 2020 through June 1, 2029 were offered at a discount (“original issue discount”) equal generally to the difference between public offering price and principal amount. For federal income tax purposes, original issue discount on a bond accrues periodically over the term of the bond as interest with the same tax exemption and alternative minimum tax status as regular interest. The accrual of original issue discount increases the holder’s tax basis in the bond for determining taxable gain or loss from sale or from redemption prior to maturity. Holders of Bonds offered at an original issue discount should consult their tax advisors for an explanation of the accrual rules.

Original Issue Premium

The Bonds maturing on June 1, 2009 through June 1, 2019 were offered at a premium (“original issue premium”) over their principal amount. For federal income tax purposes, original issue premium is amortizable periodically over the term of a bond through reductions in the holders’ tax basis in the bond for determining taxable gain or loss from sale or from redemption prior to maturity. Amortizable premium is accounted for as reducing the tax-exempt interest on the bond rather than creating a deductible expense or loss. Holders of Bonds offered at an original issue premium should consult their tax advisors for an explanation of the amortization rules.

Internal Revenue Service Audit Program

The Internal Revenue Service (the “Service”) has an ongoing program auditing tax-exempt obligations to determine whether, in the view of the Service, interest on such tax-exempt obligations is includible in the gross income of the owners thereof for federal income tax purposes. No assurances can be given as to whether the Service will commence an audit of the Bonds. If an audit is commenced, under current procedures the Service will treat the City as the taxpayer and the Bond owners may have no right to participate in such procedure. None of the City, the Underwriter, or Bond Counsel is obligated to defend the tax-exempt status of the Bonds. However, the City has covenanted in the Bond Ordinance not to take any action that would cause the interest on the Bonds to lose its exclusion from gross income, except to the extent described above, for the owners thereof for federal income tax purposes. None of the City, the Underwriter or Bond Counsel is responsible to pay or reimburse the costs of any Bond owner with respect to any audit or litigation relating to the Bonds.

State of New Mexico Tax Status

Bond Counsel is also of the opinion based on existing laws of the State of New Mexico as enacted and construed that interest on the Bonds is excludable from net income for present State of New Mexico income tax purposes.

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CONTINUING DISCLOSURE

The City will make a written undertaking for the benefit of the holders of the Bonds required by Section (b)(5)(i) of Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange Act of 1934, as amended (17 CFR Part 240, Section 240.15c 2-12) (the “Rule”). The City undertakes to provide the following information:

a. Annual Financial Information;

b. Audited Financial Statements, if any; and

c. Material Event Notices.

While any Bonds are outstanding, the City will provide the Annual Financial Information on or before March 31 of each year (the “Report Date”), beginning March 31, 2010, to each then existing NRMSIR and the SID, if any. It will be sufficient if the City provides to each then existing NRMSIR and the SID, if any, the Annual Financial Information by specific reference to documents previously provided to each NRMSIR and the SID, if any, or filed with the Securities and Exchange Commission and, if such a document is a “final official statement” within the meaning of the Rule, available from the Municipal Securities Rulemaking Board.

If the Audited Financial Statements are not provided as part of the Annual Financial Information, the City will provide the Audited Financial Statements when and if available while any Bonds are outstanding to each then existing NRMSIR and the SID, if any.

If a Material Event occurs while any Bonds are outstanding, the City will provide a Material Event Notice in a timely manner to each NRMSIR or the Municipal Securities Rulemaking Board, and to the SID, if any.

The City will provide in a timely manner to each NRMSIR or the Municipal Securities Rulemaking Board, and to the SID, if any, notice of any failure by the City while any Bonds are outstanding to provide to each then existing NRMSIR and the SID, if any, Annual Financial Information on or before the Report Date, any changes in its fiscal year-end, or any amendment to its undertaking described in this section.

The following are the definitions of the capitalized terms used in this section:

“Annual Financial Information” means the financial information (which will be based on financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) for governmental units as prescribed by the Governmental Accounting Standards Board (“GASB”) or operating data with respect to the City), provided at least annually, consisting of information of the type set forth in “Historical Joint System Net Revenues” and “Historical Joint System Balance Sheets” of this Official Statement. Such Annual Financial Information shall also include Audited Financial Statements, or if Audited Financial Statements are unavailable, then unaudited financial statements.

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“Audited Financial Statements” means the City’s annual financial statements, prepared in accordance with GAAP for governmental units as prescribed by GASB, which financial statements have been audited by such auditor as is then required or permitted by the laws of the State.

“Material Event” means any of the following events, if material, with respect to the Bonds.

Principal and interest payment delinquencies; Non-payment related defaults; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers, or their failure to perform; Adverse tax opinions or events affecting the tax-exempt status of the Bonds; Modifications to rights of Bond holders; Bond calls; Defeasances; Release, substitution, or sale of property securing repayment of the securities; and Rating changes.

“Material Event Notice” means written or electronic notice of a Material Event.

“NRMSIR” means a nationally recognized municipal securities information repository, as recognized from time to time by the Securities and Exchange Commission for the purposes referred to in the Rule.

“SID” means a state information depository as operated or designated by the State as such for the purposes referred to in the Rule.

Unless otherwise required by law and subject to technical and economic feasibility, the City will employ such methods of information transmission as are requested or recommended by the designated recipients of the City’s information.

The continuing obligation of the City to provide Annual Financial Information, Audited Financial Statements, if any, and Material Event Notices will be in effect from and after the issuance and delivery of the Bonds and will extend to the earliest of (i) the date all principal and interest on the Bonds has been paid or legally defeased pursuant to the terms of the Bond Ordinance; (ii) the date on which the City is no longer an “obligated person” with respect to the Bonds within the meaning of the Rule; or (iii) the date on which those portions of the Rule which require the undertaking are determined to be invalid by a court of competent jurisdiction in a non-appealable action, have been repealed retroactively or otherwise do not apply to the Bonds.

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The City’s undertaking described in this section may be amended from time to time, without the consent of any Bond owner upon the City’s receipt of an opinion of independent counsel experienced in federal securities laws to the effect that such amendment:

(a) is made in connection with a change in circumstances that arises from a change in legal requirements, a change in law or a change in the identity, nature or status of the City;

(b) the undertaking, as amended, would have complied with the Rule at the time of the initial issue and sale of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any changes in circumstances; and

(c) the amendment does not materially impair the interests of the owners of the Bonds.

Any Annual Financial Information containing amended operating data or financial information will explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment changes the accounting principles to be followed in preparing financial statements, the Annual Financial Information and Audited Financial Statements for the year in which the change is made will present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

The obligations of the City under the undertaking described in this section are for the benefit of the owners (including beneficial owners) of the Bonds. Each owner is authorized to take action to seek specific performance by court order to compel the City to comply with its obligations under the undertaking, which action will be the exclusive remedy available to it or any other owner. The City’s breach of its obligations under the undertaking will not constitute an event of default under the Bond Ordinance and none of the rights and remedies provided by the Bond Ordinance will be available to the owners with respect to such a breach.

The City is current in its outstanding continuing disclosure agreements.

UNDERWRITING

RBC Capital Markets has agreed to purchase the Bonds from the City pursuant to a Bond Purchase Agreement dated February 6, 2009 (the "Bond Purchase Agreement"), at a price of $21,211,746.20 (which is equal to the par amount of the Bonds less a net original issue discount of $58,838.65 and less an underwriting discount of $169,415.15). The Bond Purchase Agreement provides that the Underwriter will purchase all of the Bonds if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the Bond Purchase Agreement, including the approval of certain legal matters by counsel and certain other conditions.

The prices at which the Bonds are offered to the public (and the yields resulting

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therefrom) may vary from the initial public offering prices appearing on the cover page of this Official Statement. In addition, the Underwriter may allow commissions or discounts from such initial offering prices to dealers and others.

RATINGS

The Bonds have received a rating of “Aa2” from Moody’s Investors Services (“Moody’s”) and a rating of “AAA” from Standard & Poor’s (“S&P”) with the understanding that upon delivery of the Bonds, a policy insuring the payment when due of the principal of and interest on the Bonds will be issued by Assured Guaranty Corp. The Bonds have an underlying rating of “A3” from Moody’s.

Such ratings reflect only the views of the rating agency. The ratings are not a recommendation to buy, sell or hold the Bonds and there is no assurance that the ratings will not be revised downward or withdrawn entirely by the rating agency, if, in its judgment, circumstances so warrant. Any downward revision or withdrawal of such rating may have an effect on the market price of the Bonds. The Underwriter has not undertaken any responsibility to bring to the attention of the owners of the Bonds any proposed revision or withdrawal of the ratings on the Bonds, or to oppose any such proposed revision or withdrawal.

FINANCIAL STATEMENTS

“Appendix B” contains excerpts from audited financial statements of the City for fiscal year ended June 30, 2007. The Bonds are not payable from any revenues or funds of the City other than as set forth in the Official Statement. The financial statements are included for informational purposes only.

INDEPENDENT ACCOUNTANTS Accounting & Consulting Group, LLP, Carlsbad, New Mexico, audited the financial statements of the City as of and for the year ended June 30, 2007 and delivered their report to the New Mexico State Auditor and the City. An excerpt from the 2007 audit is included in Appendix B to this Official Statement. Accounting & Consulting Group, LLP has not been engaged to perform, and has not performed since June 30, 2007, any procedures on the financial statements shown in the excerpt. Further, Accounting & Consulting Group, LLP has not been engaged to perform and has not performed any procedures relating to financial information or any other information contained in this Official Statement. Copies of the City’s financial statements for the fiscal year ended June 30, 2007 and earlier years are available for review on the City’s website at http://www.cityofcarlsbadnm.com or at the City Library in Carlsbad or a copy will be mailed at a reasonable charge upon request to the City of Carlsbad, 101 N. Halagueño Street, Carlsbad, New Mexico 88221-1569, Attention: City Administrator.

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ADDITIONAL INFORMATION All of the summaries of the statutes, ordinances, resolutions, opinions, contracts, agreements, financial and statistical data, and other related reports described in this Official Statement are subject to the actual provisions of such documents. The summaries do not purport to be complete statements of such provisions and reference is made to such document, copies of which are either publicly available or available for inspection during normal business hours at the offices of the City Clerk of the City of Carlsbad, 101 N. Halagueño, Carlsbad, New Mexico 88221 or at the offices of RBC Capital Markets Corporation, 6301 Uptown Blvd. NE, Suite 110, Albuquerque, New Mexico 87110.

OFFICIAL STATEMENT CERTIFICATION

As of the date hereof, to my knowledge and belief, this Official Statement is true, complete and correct in all material respects, and does not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein, in light of the circumstances under which they are made, not misleading.

The preparation of this Official Statement and its distribution have been authorized by the

City. CITY OF CARLSBAD, NEW MEXICO

By: /s/ Bob Forrest Mayor

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APPENDIX A

Form of Legal Opinion

March __, 2009 City of Carlsbad Carlsbad, New Mexico

$21,440,000 City of Carlsbad, New Mexico

Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 2009 Ladies and Gentlemen:

We have acted as bond counsel to the City of Carlsbad, New Mexico (the "City") in connection with the issuance and sale by the City of its $21,440,000 City of Carlsbad, New Mexico Joint Water and Sewer Refunding and Improvement Revenue Bonds, Series 2009 (the "Bonds"). The Bonds are issued pursuant to the Constitution and laws of the State of New Mexico (the "State"), and Ordinance No. 2009-01 adopted by the Council on February 6, 2009, (the "Bond Ordinance").

Except as expressly defined herein, capitalized terms used herein have the same meanings as such terms have in the Bond Ordinance.

We have examined the laws of the State and the United States of America relevant to the opinions herein, and other proceedings and documents relevant to the issuance by the City of the Bonds. As to the questions of fact material to our opinion, we have relied upon representations of the City contained in the certified proceedings and other certifications furnished to us, without undertaking to verify the same by independent investigation.

Based upon the foregoing, and subject to the assumptions and qualifications set forth below, we are of the opinion that, under existing law on the date of this opinion:

1. The Bonds are valid and binding special, limited obligations of the City under and in accordance with the Bond Ordinance.

2. The Bond Ordinance has been duly authorized, executed and delivered by the City and the provisions of the Bond Ordinance are valid and binding on the City.

3. The Bonds are payable as to principal and interest, solely from, and are secured by a pledge (but not an exclusive pledge) of Net Revenues of the System, as more fully described in the Bond Ordinance. The owners of the Bonds have no right to have taxes levied by the City for the payment of principal and interest on the Bonds and the Bonds do not represent or constitute a debt or pledge of, or a charge against, the general credit of the City.

4. The Bond Ordinance creates the lien on the Net Revenues that it purports to create.

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5. Under existing laws, regulations, rulings and judicial decisions, interest on the Bonds is excludable from gross income for federal income tax purposes. We are also of the opinion that interest on the Bonds is not a specific preference item for purposes of the alternative minimum tax provisions contained in the Internal Revenue Code of 1986, as amended (the "Code"); however, such interest on the Bonds will be included in the adjusted current earnings of certain corporations, and such corporations are required to include in the calculation of alternative minimum tax 75% of the excess of a corporations adjusted current earnings over its alternative minimum taxable income (determined without regard to this adjustment and prior to reduction for certain net operating losses). Although we are of the opinion that interest on the Bonds is excludable from gross income for federal income tax purposes, the accrual or receipt of interest on the Bonds may otherwise affect the federal income tax liability of the recipient. The extent of these other tax consequences will depend upon the recipient’s particular tax status or other items of income or deduction. We express no opinion regarding any such consequences.

6. Interest on the Bonds is excludable from net income for present State income tax purposes.

The opinions set forth in Paragraph 5 above are subject to continuing compliance by the City with covenants regarding federal tax law contained in the proceedings and other documents relevant to the issuance by the City of the Bonds. Failure to comply with these covenants may result in interest on the Bonds being included in gross income retroactive to their date of issuance.

The opinions expressed herein are based upon existing legislation as of the date of issuance and delivery of the Bonds, and we express no opinion as of any date subsequent thereto or with respect to any pending legislation.

The obligations of the City related to the Bonds are subject to the reasonable exercise in the future by the State and its governmental bodies of the police power inherent in the sovereignty of the State and to the exercise by the United States of the powers (including bankruptcy powers) delegated to it by the United States Constitution. The obligations of the City and the security provided therefor, as contained in the Bond Ordinance, may be subject to general principles of equity which permit the exercise of judicial discretion and are subject to the provisions of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors rights generally, now or hereafter in effect.

We understand that Assured Guaranty Corp. has issued a municipal bond insurance policy and a reserve fund insurance policy relating to the Bonds. We express no opinion as to the validity or enforceability of such municipal bond insurance policy, reserve fund insurance policy or the security afforded thereby.

The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of result.

We are passing upon only those matters set forth in this opinion and are not passing upon the accuracy or completeness of any statement made in connection with any sale of the Bonds or upon any tax consequences arising from the receipt or accrual of interest on, or the ownership of, the Bonds except those specifically addressed in Paragraphs 5 and 6 above.

Respectfully submitted,

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APPENDIX B

EXCERPTS FROM AUDITED FINANCIAL STATEMENTS OF THE CITY OF CARLSBAD, NEW MEXICO FOR THE YEAR ENDING JUNE 30, 2007

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APPENDIX C

SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY

of 2 Form NY-FG (05/07)

Financial Guaranty Insurance Policy

Issuer: Policy No.:

Obligations: Premium:

Effective Date:

Assured Guaranty Corp., a Maryland corporation (“Assured Guaranty”), in consideration of the payment of the Premium and on the terms and subject to the conditions of this Policy (which includes each endorsement hereto), hereby unconditionally and irrevocably agrees to pay to the trustee (the “Trustee”) or the paying agent (the “Paying Agent”) for the Obligations (as set forth in the documentation providing for the issuance of and securing the Obligations) for the benefit of the Holders, that portion of the Insured Payments which shall become Due for Payment but shall be unpaid by reason of Nonpayment.

Assured Guaranty will make such Insured Payments to the Trustee or the Paying Agent on the later to occur of (i) the date

applicable principal or interest becomes Due for Payment, or (ii) the Business Day next following the day on which Assured Guaranty shall have Received a completed Notice of Nonpayment. If a Notice of Nonpayment by Assured Guaranty is incomplete or does not in any instance conform to the terms and conditions of this Policy, it shall be deemed not Received, and Assured Guaranty shall promptly give notice to the Trustee or the Paying Agent. Upon receipt of such notice, the Trustee or the Paying Agent may submit an amended Notice of Nonpayment. The Trustee or the Paying Agent will disburse the Insured Payments to the Holders only upon receipt by the Trustee or the Paying Agent, in form reasonably satisfactory to it of (i) evidence of the Holder's right to receive such payments, and (ii) evidence, including without limitation any appropriate instruments of assignment, that all of the Holder's rights to payment of such principal or interest Due for Payment shall thereupon vest in Assured Guaranty. Upon and to the extent of such disbursement, Assured Guaranty shall become the Holder of the Obligations, any appurtenant coupon thereto and right to receipt of payment of principal thereof or interest thereon, and shall be fully subrogated to all of the Holder's right, title and interest thereunder, including without limitation the right to receive payments in respect of the Obligations. Payment by Assured Guaranty to the Trustee or the Paying Agent for the benefit of the Holders shall discharge the obligation of Assured Guaranty under this Policy to the extent of such payment.

This Policy is non-cancelable by Assured Guaranty for any reason. The Premium on this Policy is not refundable for any

reason. This Policy does not insure against loss of any prepayment premium or other acceleration payment which at any time may become due in respect of any Obligation, other than at the sole option of Assured Guaranty, nor against any risk other than Nonpayment.

Except to the extent expressly modified by any endorsement hereto, the following terms shall have the meanings specified

for all purposes of this Policy. “Avoided Payment” means any amount previously distributed to a Holder in respect of any Insured Payment by or on behalf of the Issuer, which amount has been recovered from such Holder pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction that such payment constitutes an avoidable preference with respect to such Holder. “Business Day” means any day other than (i) a Saturday or Sunday, (ii) any day on which the offices of the Trustee, the Paying Agent or Assured Guaranty are closed, or (iii) any day on which banking institutions are authorized or required by law, executive order or governmental decree to be closed in the City of New York or in the State of Maryland. “Due for Payment” means (i) when referring to the principal of an Obligation, the stated maturity date thereof, or the date on which such Obligation shall have been duly called for mandatory sinking fund redemption, and does not refer to any earlier date on which payment is due by reason of a call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless Assured Guaranty in its sole discretion elects to make any principal payment, in whole or in part, on such earlier date) and (ii) when referring to interest on an Obligation, the stated date for payment of such interest. “Holder” means, in respect of any Obligation, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Obligation to payment of principal or interest thereunder, except that Holder shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Obligations. “Insured Payments” means that portion of the principal of and interest on the Obligations that shall become Due for Payment but shall be unpaid by reason of Nonpayment. Insured Payments shall not include any additional amounts owing by the Issuer solely as a result of the failure by the Trustee or the Paying Agent to pay such amount when due and payable, including without limitation any such additional amounts as may be attributable to penalties or to interest accruing at a default rate, to amounts payable in respect of indemnification, or to any other additional amounts payable by the Trustee or the Paying Agent by reason of such failure. “Nonpayment” means, in respect of an Obligation, the failure of the Issuer to have provided sufficient funds to the Trustee or the Paying Agent for payment in full of all principal and interest Due for Payment on such Obligation. It is further understood that the term "Nonpayment" in respect of an Obligation includes any Avoided Payment. “Receipt” or “Received” means actual receipt or notice of or, if notice is given by overnight or other delivery service, or by certified or registered United States mail, by a delivery receipt signed by a person authorized to accept delivery on behalf of the person to whom the notice was given. Notices to Assured Guaranty may be mailed by registered mail or personally delivered or telecopied to it at 1325 Avenue of the Americas, New York, New York 10019, Telephone Number: (212) 974-0100, Facsimile Number: (212) 581-3268, Attention: Risk Management Department – Public Finance Surveillance, with a copy to the General Counsel, or to such other address as shall be specified by Assured Guaranty to the Trustee

of 2 Form NY-FG (05/07)

or the Paying Agent in writing. A Notice of Nonpayment will be deemed to be Received by Assured Guaranty on a given Business Day if it is Received prior to 12:00 noon (New York City time) on such Business Day; otherwise it will be deemed Received on the next Business Day. “Term” means the period from and including the Effective Date until the earlier of (i) the maturity date for the Obligations, or (ii) the date on which the Issuer has made all payments required to be made on the Obligations.

At any time during the Term of this Policy, Assured Guaranty may appoint a fiscal agent (the “Fiscal Agent”) for purposes of this Policy by written notice to the Trustee or the Paying Agent, specifying the name and notice address of such Fiscal Agent. From and after the date of Receipt of such notice by the Trustee or the Paying Agent, copies of all notices and documents required to be delivered to Assured Guaranty pursuant to this Policy shall be delivered simultaneously to the Fiscal Agent and to Assured Guaranty. All payments required to be made by Assured Guaranty under this Policy may be made directly by Assured Guaranty or by the Fiscal Agent on behalf of Assured Guaranty. The Fiscal Agent is the agent of Assured Guaranty only, and the Fiscal Agent shall in no event be liable to the Trustee or the Paying Agent for any acts of the Fiscal Agent or any failure of Assured Guaranty to deposit, or cause to be deposited, sufficient funds to make payments due under this Policy.

To the fullest extent permitted by applicable law, Assured Guaranty hereby waives, in each case for the benefit of the Holders only, all rights and defenses of any kind (including, without limitation, the defense of fraud in the inducement or in fact or any other circumstance that would have the effect of discharging a surety, guarantor or any other person in law or in equity) that may be available to Assured Guaranty to deny or avoid payment of its obligations under this Policy in accordance with the express provisions hereof. Nothing in this paragraph will be construed (i) to waive, limit or otherwise impair, and Assured Guaranty expressly reserves, Assured Guaranty’s rights and remedies, including, without limitation: its right to assert any claim or to pursue recoveries (based on contractual rights, securities law violations, fraud or other causes of action) against any person or entity, in each case, whether directly or acquired as a subrogee, assignee or otherwise, subsequent to making any payment to the Trustee or the Paying Agent, in accordance with the express provisions hereof, and/or (ii) to require payment by Assured Guaranty of any amounts that have been previously paid or that are not otherwise due in accordance with the express provisions of this Policy.

This Policy (which includes each endorsement hereto) sets forth in full the undertaking of Assured Guaranty with respect to the subject matter hereof, and may not be modified, altered or affected by any other agreement or instrument, including, without limitation, any modification thereto or amendment thereof. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. This Policy will be governed by, and shall be construed in accordance with, the laws of the State of New York.

IN WITNESS WHEREOF, Assured Guaranty has caused this Policy to be affixed with its corporate seal, to be signed by its duly authorized officer, and to become effective and binding upon Assured Guaranty by virtue of such signature.

ASSURED GUARANTY CORP.

(SEAL)

By:__________________________________ [Insert Authorized Signatory Name] [Insert Authorized Signatory Title]

Signature attested to by:

_______________________________ Counsel