STRATEGIC PARTNERSHIP AGREEMENT

This Strategic Partnership Agreement between The City of Horseshoe Bay, Texas and the Lake LBJ Municipal Utility District (the "Agreement") is made and entered into by and between the LAKE LBJ MUNICIPAL UTILITY DISTRICT, a Texas municipal utility district (the "District"), acting by and through its duly authorized Board of Directors under the authority of Section 43.0751 of the Local Government Code, as amended, and Chapters 49 and 54 of the Texas Water Code, as amended; and the CITY OF HORSESHOE BAY, Type A General-Law municipal corporation (the "City"), acting by and through its duly authorized governing body.

A. The District is a municipal utility district created under Chapter 54 of the Water Code and located in Llano and Burnet Counties, Texas. Its boundaries include 5714.691 acres of land, more or less, more particularly described in the legal description and map or plat showing the District boundaries in Exhibit "A" attached to Lake LBJ Municipal Utility District Amended Information Form, as recorded in Volume 1104, Page 094 of the Official Records for Llano County, Texas and Volume 0958, Page 0717 in the Official Records of Burnet County, Texas and in Exhibit "A" attached to Lake LBJ Municipal Utility District Amended Information Form, as recorded in Volume 1235, Page 879 in the Official Records of Llano County, Texas and Volume 1200, Page 0364 in the Official Records of Burnet County, Texas.

B. The City, a Type A General-Law municipal corporation, was incorporated on September 20, 2005, and its municipal boundaries are almost entirely within the boundaries of the District - approximately 1.6 acres within the City's boundaries are not within the District's boundaries. The remainder of the District (i.e, the portion of the District that is not within City boundaries) is comprised entirely of an unincorporated real estate development area known as "The Trails" and a storage area of approximately 20 acres.

C. The City desires to effectively annex the Trails and a storage area of approximately 20 acres and dissolve the District in due time and succeed to all of the District's powers, duties, assets, and obligations.

D. The District and the City desire that effective, efficient, and responsible local government be provided to citizens of the District and the City prior to, during, and after the City annexes the District. To that end, the District and the City also desire to avoid any unnecessary duplication of resources and taxes, and to provide for the City's succession to all of the District's powers, duties, assets, and obligations.

E. The intent of this Agreement is to enter into a strategic partnership agreement between the District and the City regarding (i) terms and conditions of the City's full-purpose annexation of the District in accordance with Section 43.0751 of the Local Government Code, and its succession to all of the District's powers, duties, assets, and obligations, and (ii) the District's delivery of certain services to the City prior to annexation of the District.

F. The District and the City each have provided notice of two public hearings concerning the adoption of this Agreement in accordance with the procedural requirements of Section 43.0751 of the Local Government Code.

G. The District and the City conducted two joint public hearings regarding this Agreement in accordance with the procedural requirements of Section 43.0751 of the Local Government Code on January 3, 2006, at 2:30 p.m., at #1 Community Drive, Horseshoe Bay, Texas, and on January 24, 2006, at 2:30 p.m., at #1 Community Drive, Horseshoe Bay, Texas.

H. The District has, by formal action after the public hearings, adopted this Agreement on January 26, 2006, in open session at a meeting held at 8:30 a.m. in accordance with the Open Meetings Act.

I. The City has, by formal action after the public hearings, adopted this Agreement on January 26, 2006, in open session at a meeting held at 3:00 p.m. in accordance with the Open Meetings Act.

J. All procedural requirements imposed by state law for adoption of this Agreement have been met.

NOW, THEREFORE, for and in consideration of the mutual agreements, covenants, and conditions contained in this Agreement, and other good and valuable consideration, the District and the City agree as follows:

Section 1.01 Purpose of the Agreement. The purpose of this Agreement is to establish through contractual agreement (i) the terms and conditions of the City's full-purpose annexation of the District in accordance with Section 43.0751 of the Local Government Code, the dissolution of the District, and the City's succession to all of the District's powers, duties, assets, and obligations, and (ii) the District's delivery of certain services to the City prior to such annexation.

Section 1.02 Location of the District and the City. The District is a municipal utility district created under Chapter 54 of the Water Code. The territory of the District is located in Llano and Burnet Counties. The boundaries of the City are almost entirely within the boundaries of the District (approximately 1.6 acres within the City's boundaries are not within the District's boundaries), and the remainder of the District outside the boundaries of the City is comprised entirely of an unincorporated real estate development area known as "The Trails" and a storage area of approximately 20 acres.

Section 1.03 Conduct of Public Hearings. The District and the City agree that prior to the execution of this Agreement and prior to full purpose annexation pursuant to this Agreement, the District and the City have conducted public hearings for the purpose of considering the adoption of this Agreement and annexation of the District in accordance with the terms of this Agreement.

Section 1.04 Effective Date. Under the provision of Section 43.0751(c), this Agreement shall become effective on January 26, 2006, (the "Effective Date"), the date of adoption of this Agreement by the City. Upon adoption, this Agreement shall be filed by the District in the real property records of Llano and Burnet Counties, Texas. The District shall also file the following notice concerning this Agreement in the real property records of Llano and Burnet Counties for the property within the District:

This notice with appropriate modifications shall also be included in the notice to purchasers of real property in the District in each future edition of the District's Information Form required to be recorded in the real property records of Llano and Burnet Counties, Texas, pursuant to Section 49.455 of the Texas Water Code.

Section 2.02 Compensation. The City agrees to pay for the services being provided it by the District in the amount of $2,500 per month prior to the District Annexation Date. Payments shall accrue monthly and shall be paid in full upon the District Annexation Date or at such other time as the Parties may be subsequently agree.

Section 3.01 Interim Services to District Customers. To avoid duplication of services to District customers and City citizens, the City and the District agree that the District shall continue to be the sole provider of water, wastewater, garbage, police, and fire services in the District and to out-of-District service areas, as applicable, prior to the District Annexation Date. Notwithstanding, the City may perform in the District any other municipal functions in which the District is not engaged.

Section 3.02 Consent to Major Contracts and Activities. The District shall obtain written consent from the City prior to:

Section 3.03 Depreciation Reserve. The District has certain funds (the "Depreciation Reserve") dedicated for certain improvements to the District's water and wastewater system and facilities (the "Water and Wastewater System"). The District and the City agree that the Depreciation Reserve should be maintained in a dedicated account to preserve the Depreciation Reserve solely for use in capital improvements to or replacement of any part of the Water and Wastewater System. The parties further agree that, subject to the reasonable judgment of the City, the Depreciation Reserve will not be used for any other purpose including, by way of example and not in limitation, operation and ordinary repair and maintenance of the Water and Wastewater System.

Section 3.04 Insurance. The City agrees to maintain for a minimum of three years after the District's dissolution any "tail coverage" insurance policy obtained by the District prior to its dissolution protecting the District's directors from liability for possible errors and omissions.

Section 4.01 Annexation of the District. In accordance with Section 43.0751(f)(5), the District and the City agree that the District shall be annexed by the City for full purposes on March 1, 2006, or such other date as the District and the City may agree in writing (the "District Annexation Date"). Upon annexation of the District:

Section 4.02 District Dissolution. After full purpose annexation of the District by the City on the District Annexation Date in accordance with Section 4.01 above, the District shall be dissolved. After the District is dissolved, the District Board shall continue to exist for not more than ninety (90) days for the sole purpose of doing any and all acts or things necessary to complete transfer of the District's assets, debts, liabilities, and obligations to the City.

Section 5.01 Default. In the event of a default under or violation of this Agreement, the non-defaulting party shall send the defaulting party notice of its default or violation. Except as otherwise specifically provided in this Agreement, the defaulting party shall have twenty (20) days following receipt of the notice of default or violation to initiate steps to cure the default or violation. The defaulting party shall thereafter diligently proceed to cure the default or violation. If the defaulting party fails to timely initiate steps to cure or to thereafter diligently proceed to cure, the non-defaulting party may bring suit to enforce this Agreement and seek any remedy provided at law or in equity.

Section 6.01 Binding Agreement. This Agreement shall be binding upon all owners, present and future, of land that is included within the District's boundaries on the Effective Date.

Section 6.02 Execution. This Agreement shall not be effective unless executed by the City and the District on or before March 1, 2006. To facilitate execution, this Agreement may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature of all persons required to bind any party appear on each counterpart. All counterparts shall collectively constitute a single instrument.

Section 6.03 Termination. Sections 3.03, 3.04, 4.02, 5.01, and 6.03 shall survive termination of this Agreement. The remainder of this Agreement shall terminate at 12:01 a.m. on the day immediately following the District Annexation Date.

Section 6.04 Notices. Any notice required by this Agreement shall be void and of no effect unless given in accordance with the provisions of this Section�6.04. All notices shall be in writing and delivered, either by personal delivery or commercial delivery service to the office of the person to whom the notice is directed, or by United States Mail, postage prepaid, as a registered or certified item, return receipt requested. Notices delivered by personal delivery or commercial delivery service shall be deemed to have been given upon receipt at the office of the person to whom the notice is directed. Notices delivered by mail shall be deemed to have been given on the third day after the date such notice is deposited in a Post Office or other depository under the care or custody of the United States Postal Service, enclosed in a wrapper with proper postage affixed and addressed, as provided below. Notice may also be provided by facsimile transmission. Facsimile notice shall be deemed to have been given upon the sender's receipt of electronic confirmation of delivery to the facsimile station indicated below.

Any party hereto may change the address or facsimile number for notices specified above by giving the other party ten (10) days' advance written notice of such change of address or facsimile number.

Section 6.05 Indemnification. The City and the District shall each be responsible for the actions of its members, agents, and staff during the period of this Agreement, to the extent such actions are not made in good faith.

Section 6.06 Assignment. This Agreement may not be assigned by either party without the prior written consent of the non-assigning party.

Section 6.07 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE OBLIGATIONS OF THE PARTIES HERETO ARE AND SHALL BE PERFORMABLE IN BURNET AND LLANO COUNTIES, TEXAS.

Section 6.08 No Oral Modification. This Agreement may not be supplemented, modified or amended, except by an agreement in writing signed by the City and the District upon approval by their respective governing bodies.

Section 6.09 No Oral Waiver. The parties may waive any of the conditions contained herein or any of the obligations of the other party hereunder, but any such waiver shall be effective only if in writing and signed by the party waiving such conditions or obligations.

Section 6.11 Headings, Gender, etc. The headings used in this Agreement have been inserted for convenience and do not constitute matter to be construed or interpreted in connection with this Agreement. Unless the context of this Agreement otherwise requires (a)�words of any gender are deemed to include each other gender, (b)�words using the singular or plural number also include the plural or singular number, respectively, (c)�the terms "hereof," "herein," "hereby," "hereto," and derivative or similar words refer to this entire Agreement, (d)�the terms "Article" or "Section" refer to the specified Article or Section of this Agreement, (e)�the term "or" means "and/or" and (f)�all references to "dollars" or "$" refer to currency of the United States of America.

Section 6.12 Total Agreement. This Agreement, including the exhibits hereto, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings of the parties in connection therewith. No representation, warranty, covenant, agreement or condition not expressed in this Agreement shall be binding upon the parties hereto or shall be effective to interpret, change or restrict the provisions of this Agreement.

Section 6.13 Partial Invalidity. If any clause or provision of this Agreement is or should ever be held to be illegal, invalid, or unenforceable under any present or future law applicable to the terms hereof, then and in that event, it is the intention of the parties hereto that the remainder of this Agreement shall not be affected thereby, and that in lieu of each such clause or provision of this Agreement that is illegal, invalid, or unenforceable, there be added as a part of this Agreement a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable.

Section 6.14 Authorization. Each party executing this Agreement on behalf of the District and the City possesses all requisite authority to execute this Agreement on such party's behalf.

Section 6.15 Holidays. In the event that the date upon which any duties or obligations hereunder are to be performed or any deadline hereunder shall occur shall be a Saturday, Sunday or legal holiday, then, in such event, the due date for performance of any duty or obligation shall thereupon be automatically extended to the next succeeding business day.

EXECUTED and EFFECTIVE as of the Effective Date.

THE MUD:

LAKE LBJ MUNICIPAL UTILITY DISTRICT
a Texas municipal utility district

By: _______________/ S /_______________
J.E. Ayers, President, Board of Directors

ATTEST:

_______________/ S /________________
R.A. Lowry, Secretary, Board of Directors

THE CITY OF HORSESHOE BAY:

By: ________________/ S /________________
Robert W. Lambert, Mayor

ATTEST:

________________/ S /_______________
Toni Vanderburg, City Secretary

[NOTARIZATION ON THE FOLLOWING PAGE]

THE STATE OF TEXAS	§
	§
COUNTY OF LLANO	§

Before me, the undersigned authority, on this day personally appeared J.E. Ayers, President of the Lake LBJ Municipal Utility District, a municipal utility district created and operating pursuant to Chapters 49 and 54 of the Texas Water Code, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same as the act and deed of said municipal utility district, for the purposes and consideration therein expressed and in the capacity therein stated.

GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the _____ day of ____________, 2006.

____________________________________
Notary Public, State of Texas
Print Name: _________________________
My Commission Expires: ______________

THE STATE OF TEXAS §
§
COUNTY OF LLANO §

Before me, the undersigned authority, on this day personally appeared Robert W. Lambert, the Mayor of the City of Horseshoe Bay, a Type A general law municipal corporation of the State of Texas, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same as the act and deed of said municipal corporation, for the purposes and consideration therein expressed and in the capacity therein stated.

GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the _____ day of ____________, 2006.

____________________________________
Notary Public, State of Texas
Print Name:_________________________
My Commission Expires:_______________

STRATEGIC PARTNERSHIP AGREEMENT between the CITY OF HORSESHOE BAY, TEXAS and the LAKE LBJ MUNICIPAL UTILITY DISTRICT

STRATEGIC PARTNERSHIP AGREEMENT
between the
CITY OF HORSESHOE BAY, TEXAS
and the
LAKE LBJ MUNICIPAL UTILITY DISTRICT