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8e Page 53 RISK FACTORS The following discussion of risks is not meant to be an exhaustive list of the risks associated with the purchase of the Bonds and does not necessarily reflect the relative importance of the various risks. Payment of principal of and interest on the Bonds depends primarily upon the City's payments of the Installment Payments pursuant to the Installment Purchase Contract. Some of the events which could prevent the City from making the Installment Payments are set forth below, Risks Relating to Water Supplies ,A,S described above under "THE ENTERPRISE - Water Supply and \^Jater Demand", the Enterprise currently receives virtually all of its water, and all of its potable water, from San Francisco's Regional Water System pursuant to the Master Water Sales Contract and its Individual Contract. Accordingly, an interruption in the delivery of water from San Francisco for any reason would severely impact the ability of the Enterprise to deliver water to its customers, thereby reducing the amount of Gross Revenues available to the Enterprise to pay its Maintenance and Operation Costs and its obligations under the Installment Purchase Contract. The City estimates, for example, that a 20% water shortage of the Regional Water System would reduce water deliveries to the Enterprise by 27.7%. Additionally, as the demands on the Regional Water System grow, the possibility of water shortages will increase. Although the Master Water Sales Contract expires in 2009 and the City cannot predict the outcome of negotiations involving a new water sales contract with San Francisco, the City believes that it will be subject, at most, to only an immaterial reduction in its supply assurance under the new water sales contract. Wholesale Water Costs San Francisco is expected to substantially raise wholesale water rates for the Suburban Customers, including the Enterprise, due to the costs of San Francisco's capita! improvement program, which is described above under "THE ENTERPRISE - Water Supply - San Francisco Capital Improvement Plan and Long-Range Financial Plan" above. The City projects that these rates may increase by up to 240% through Fiscal Year 2014-2015, from $444 per acre foot to $1,607 per acre foot. The City has covenanted in the Installment Purchase Contract to prescribe and collect rates, fees and charges in connection with the Enterprise in an amount sufficient to allow the Enterprise to pay Operation and Maintenance Costs and amounts due under the Installment Purchase Contract and any Parity Obligations, and to replenish, if necessary, the Reserve Fund to the Reserve Requirement. Further, the Enterprise has agreed, in the Installment Purchase Contract, to prescribe and collect rates, fees and charges in connection with the Enterprise during each Fiscal Year which are sufficient to yield estimated Net Revenues which are at least equal to one hundred twenty percent (120%) of the aggregate amount of the Installment Payments, and principal of and interest on any Parity Obligations (including the 2005 Installment Purchase Contract and the 2006 Installment Purchase Contract) payable from Net Revenues coming due and payable during such Fiscal Year. In order to issue Parity Obligations in the amounts currently anticipated based on future expected operating and non~operating expenses (see Table 16), the City will be required to 38