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HomeMy WebLinkAboutApril 1, 2003ss Agenda AGENDA CITY OF DENTON CITY COUNCIL April 1, 2003 After determining that a quorum is presem, the City Council will convene in a Special Called Meeting of the City of Demon City Council on Tuesday, April 1, 2003 at 11:00 a.m. in the City Council Chambers of City Hall, 215 E. McKinney, DeNon, Texas at which the following item will be considered: Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of DeNon Utility System Revenue Refunding and Improvemem Bonds, Series 2003, and approving and authorizing instruments and procedures relating thereto; and providing an effective date. (DuBose) CERTIFICATE I certify that the above notice of meeting was posted on the bulletin board at the City Hall of the City of DeNon, Texas, on the day of ,2003 at o'clock (a.m.) (p.m.) CITY SECRETARY NOTE: THE CITY OF DENTON CITY COUNCIL CHAMBERS IS ACCESSIBLE IN ACCORDANCE WITH THE AMERICANS WITH DISABILITIES ACT. THE CITY WILL PROVIDE SIGN LANGUAGE INTERPRETERS FOR THE HEARING IMPAIRED IF REQUESTED AT LEAST 48 HOURS IN ADVANCE OF THE SCHEDULED MEETING. PLEASE CALL THE CITY SECRETARY'S OFFICE AT 349-8309 OR USE TELECOMMUNICATIONS DEVICES FOR THE DEAF (TDD) BY CALLING 1-800- RELAY-TX SO THAT A SIGN LANGUAGE INTERPRETER CAN BE SCHEDULED THROUGH THE CITY SECRETARY'S OFFICE. AGENDA INFORMATION SHEET AGENDA DATE: DEPARTMENT: ACM: April 1, 2003 Fiscal Operations Kathy DuBose, Fiscal and Municipal Services SUBJECT Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of DeNon Utility System Revenue Refunding and Improvemem Bonds, Series 2003, and approving and authorizing instruments and procedures relating thereto; and providing an effective date. BACKGROUND On April 1, 2003, David Medanich of First Southwest Company and Ted Brizzolara III of McCall, Parkhurst and Horton, will presem the underwriting company of the City of DeNon Utility System Revenue Refunding and Improvemem Bonds, Series 2003. The $49 million (plus cost of issuance) in bonds will be issued to fund system improvemems, extensions, to make a deposit to the reserve fund, and to pay cost of issuance associated with the sale of bonds. PRIOR ACTION/REVIEW (Council, Boards, Commissions) The projects were previously approved in 2003-2007 Capital Improvemem Program (CIP). They were also reviewed by the Debt Managemem Committee Meeting at the February 13, 2002, meeting. FISCAL INFORMATION Payment for the Utility System Revenue Bonds, Series 2003 has been included in the debt service funding projections. Respectfully submitted: Diana G. Ortiz Director of Fiscal Operations ORDINANCE NO. 2003- ORDINANCE AUTHORIZING THE ISSUANCE, SALE, AND DELIVERY OF CITY OF DENTON UTILITY SYSTEM REVENUE REFUNDING AND IMPROVEMENT BONDS, SERIES 2003, AND At?PROVING AND AUTHORIZING INSTRUMENTS AND PROCEDURES RELATING THERETO; AND PROVIDING AN EFFECTIVE DATE THE STATE OF TEXAS : COUNTY OF DENTON : CITY OF DENTON : WHEREAS, the City of Denton, Texas, heretofore has duly issued the following revenue bonds: City of Denton Utility System Revenue Bonds, Series 1992, dated March 1, 1992; City of Denton Utility System Revenue Bonds, Series 1993, dated March 1, 1993; City of Denton Utility System Revenue Refunding Bonds, Series 1993-A, dated June 1, 1993; City of Denton Utility System Revenue Refunding Bonds, Taxable Series 1993-B, dated June 1, 1993; City of Denton Utility System Revenue Bonds, Series 1996, dated May 1, 1996; City of Denton Utility System Revenue Refunding Bonds, Series 1996-A, dated May 1, 1996; City of Denton Utility System Revenue Bonds, Series 1998, dated March 15, 1998; City of Denton Utility System Revenue Refunding Bonds, Series 1998A, dated July 15, 1998; City of Denton Utility System Revenue Refunding Bonds, Series 1998B, dated August 1, 1998; City of Denton Utility System Revenue Bonds, Series 20(~0A, dated April 15, 2000; City of Denton Utility System Revenue Bonds, Taxable Series 2000B, dated April 15, 2000; City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2001, dated April 15, 2001; City of Denton Utility System Revenue Bonds, Series 2002A, dated April 1, 2002; and City of Denton Utility System Revenue Bonds, Taxable Series 2002B, dated April 1, 2002; WHEREAS, the City Council of the City of Denton deems it necessary and advisable to refund the following revenue bonds: City of Denton Utility System Revenue Refunding Bonds, Series 1993-A, dated June 1, 1993 scheduled to mature on December 1 in each of the years 2003 through 2009, aggregating $11,605,000 in the principal amount (collectively, the "Refunded Bonds"); and WHEREAS, the City Council of the City deems it necessary and advisable to provide for improvements and extensions of the City of Denton Utility System, which consists of the City's Combined Waterworks, Sewer and Electric Light and Power System (the "System"); and WHEREAS, the City Council of the City deems it necessary and advisable to authorize, issue, and deliver the additional Utility System Revenue Bonds hereinafter described to refund the Refunded Bonds and to provide for improvements and extensions to the System; and WHEREAS, the Series 2003 Bonds hereinafter authorized and described are to be issued, sold and delivered pursuant to Chapters 1207 and 1502, Texas Government Code, the City's Home Rule Charter, and other applicable laws, NOW, THEREFORE THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS: Section 1. AMOUNT AND PURPOSE OF THE BONDS. The bond or bonds of the City of Denton, Texas (the "Issuer") are hereby authorized to be issued and delivered in the aggregate principal amount of $49,620,000, for the purpose of (a) refunding a portion of the City's outstanding debt described in Schedule I (the "Refunded Bonds") in order to lower the overall debt service requirements of the System (b) making System improvements; (c) upgrading the System including the acquisition of land related thereto; (d) making a deposit to the reserve fund; and (e) paying costs of issuance associated with the sale of the Bonds, and shall be designated "City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2003" (the "Bonds"). Section 2. DESCRIPTION OF THE BONDS. (a) With respect to the Series 2003 Bonds, initially there shall be issued, sold, and delivered hereunder a single fully registered bond, - without interest coupons, payable in installments of principal (the "Initial Series 2003 Bond"), but the Initial Series 2003 Bond may be assigned and transferred and/or converted into and exchanged for a like aggregate principal amount of fully registered bonds, without~interest coupons, having serial maturities, and in the denomination or denominations of $5,000 or any integral multiple of $5,000, all in the manner here~inatter provided. The term "Series 2003 Bonds" as used in this Ordinance shall mean and include collectively the Initial Series 2003 Bond and all substitute bonds exchanged therefor, as well as all other substitute bonds and replacement bonds issued pursuant hereto, and the term "Series 2003 Bond" shall mean any of the Series 2003 Bonds. (b) The term "Initial Bond" as used in this Ordinance shall mean and include collectively the Initial Series 2003 Bond, the term "Bonds" as used in this Ordinance shall mean and include collectively the Initial Bond and all substitute bonds exchanged therefor, as well as all other substitute bonds and replacement bonds issued pursuant hereto, and the term "Bond" shall mean any of the Bonds. Section 3. INITIAL DATE, DENOMINATION, NUMBER, MATURITIES, INITIAL REGISTERED OWNER, AND CHARACTERISTICS OF THE INITIAL BOND. (a) The Initial Series 2003 Bond is hereby authorized to be issued, sold, and delivered hereunder as a single fully registered Bond, without interest coupons, dated April 1, 2003, in the denomination and aggregate 2 principal amount of $49,620,000 numbered R-l, payable in annual installments of principal to the initial registered owner thereof, to-wit: or to the registered assignee or assignees of said Bond or any portion or portions thereof (in each case, the "registered owner"), with the annual installments of principal of the Initial Seres 2003 Bond to be payable on the dates, respectively, and in the principal amounts, respectively, stated in the FORM OF INITIAL BOND set forth in this Ordinance. (b) The Initial Series 2003 Bond (i) may and shall be prepaid or redeemed prior to the respective scheduled due dates of installments of principal thereof, (ii) may be assigned and transferred, (iii) may be converted and exchanged for other Bonds, (iv) shall have the characteristics, and (v) shall be signed and sealed, and the principal of and interest on the Initial Series 2003 Bond shall be payable, all as provided, and in the manner required or indicated, in the FORM OF INITIAL SERIES 2003 BOND set forth in this Ordinance. Section 4. INTEREST. The unpaid principal balance of the Initial Series 2003 Bond shall bear interest from the date of each Initial Series 2003 Bond to the respective scheduled due dates, or to the respec- tive dates of prepayment or redemption, of the installments of principal of the Initial Series 2003 Bond, and said interest shall be payable, all in the manner provided and at the rates and on the dates stated in the FORM OF INITIAL SERIES 2003 BOND set forth in this Ordinance. Section 5. FORM OF INITIAL SERIES 2003 BOND. The form of the Initial Series 2003 Bond, including the form of Regislration Certificate of the Comptroller of Public Accounts of the State of Texas to be endorsed on the Initial Series 2003 Bond, shall be substantially as follows: FORM OF INITIAL SERIES 2003 BOND NO. R-1 $49,620,000 UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON UTILITY SYST!}M REVENUE REFUNDING AND IMPROVEMENT BOND SERIES 2003 THE CITY OF DENTON, in Denton County, Texas (the "Issuer"), being a political subdivision of the State of Texas, hereby promises to pay to or to the registered assignee or assignees of this Bond or any portion or portions hereof (in each case, the "registered owner") the aggregate principal amount of $49,62O,OOO (FORTY NINE MILLION SIX HUNDRED TWENTY THOUSAND DOLLARS) in annual installments of principal due and payable on December 1 in each of the years, and in the respective principal amounts, as set forth in the following schedule, and to pay interest, from the date of this Bond hereinafter stated, on the balance of each such installment of principal, respectively, from time to time remaining unpaid, at the rates as follows: PRINCIPAL INTEREST PRINCIPAL INTEREST YEAR AMOUNT RATE(%) YEAR AMOUNT RATE(%) 2003 $3,725,000 2013 $1,865,000 2004 3,900,000 2014 1,950,000 2005 3,735,000 2015 2,045,000 2006 2,560,000 2016 2,145,000 2007 2,605,000 2017 2,245,000 2008 2,405,000 2018 2,355,000 2009 2,225,000 2019 2,475,000 2010 1,655,000 2020 2,600,000 2011 1,720,000 2021 2,740,000 2012 1,785,000 2022 2,885,000 Interest shall first be due and payable on December 1, 2003, and semiannually on each June 1 and December 1 thereafter while this Bond or any portion hereof is outstanding and unpaid. Said interest shall be calculated on the basis of a 360-day year composed of twelve 30-day months. THE INSTALLMENTS OF PRINCIPAL OF AND THE INTEREST ON this Bond are payable in lawfi~ money of the United States of America, without exchange or collection charges. The installments of principal and the interest on this Bond are payable to the registered owner hereof through the services of BANK ONE, NATIONAL ASSOCIATION, AUSTIN, TEXAS, which is the "Paying Agent/Registrar" for this Bond. Payment of all principal of and interest on this Bond shall be made by the Paying Agent/Registrar to the registered owner hereof on each principal and/or interest payment date by check, dated as of such date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the ordinance authorizing the issuance of this Bond (the "Bond Ordinance") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such check shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid, on each such principal and/or interest payment date, to the registered owner hereof, at the address of the registered owner, as it appeared on the 15th day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. The Issuer covenants with the registered owner of this Bond that on or before each principal and/or interest payment date for this Bond it will make available to the Paying Agent/Registrar, from the "Interest and Sinking Fund" maintained pursuant to the Bond Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on this Bond, when due. IN THE EVENT of a nonpayment of interest on a scheduled payment date, and for thirty (30) days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the Issuer. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("SpecialPayment Date", which shall be fifteen (15) days after the Special Record Date) shall be sent at least five (5) business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the 15th business day next preceding the date of mailing of such notice. IF THE DATE for the payment of the principal of or interest on this Bond shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions in the City where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND has been authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of $49,620,000, for the purpose of (a) refunding a portion of the City's outstanding debt described in Schedule I (the "Refunded Bonds") to the Bond Ordinance in order to lower the overall debt service requirements of the System (b) making System improvements; (c) upgrading the System including the acquisition of land related thereto; (d) making a deposit to the reserve fund; and (e) paying costs of issuance associated with the sale of the Bonds. THE OUTSTANDING BONDS of this Series scheduled to mature on DECEMBER 1, , DECEMBER 1, __ and DECEMBER 1, __ are subject to mandatory redemption prior to their scheduled maturities, and shall be redeemed by the Issuer, in part, prior to their scheduled maturities, with the particular Bonds or portions thereof to be redeemed to be selected by the Paying Agent/Registrar at random, by lot or other customary method (provided that a portion of a Bond may be redeemed only in an integral multiple of $5,000), at a redemption price equal to the par or principal amount thereof and accrued interest to the date of redemption, on the dates, and in the principal amounts, respectively, as shown in the following schedule: December 1, __ Maturity Mandatory Principal Redemption Dates Amounts (maturity) December 1, __ Maturity~ Mandatory Principal Redemption Dates Amounts (maturity) December 1, __ Maturity Mandatory Principal Redemption Dates Amounts (maturity) The principal mount of the Bonds required to be redeemed on the Mandatory Redemption Dates pursuant to the foregoing shall be reduced, at the option of the Issuer by the principal amount of any Bonds out of any such maturity which, at least 45 days prior to the aforesaid appropriate redemption date (1) shall have been acquired by the Issuer at a price not exceeding the principal amount of such Bonds plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, or (2) as shall have been redeemed pursuant to the optional redemption provisions hereof and not previously credited to the Mandatory Sinking Fund Redemption. ON JUNE 1, 2013, or on any date whatsoever thereafter, the unpaid installments of principal of this Bond may be prepaid or redeemed prior to their scheduled due dates, at the option of the Issuer, with funds derived from any available source, as a whole, or in part, and, if in part, the particular portion of this Bond to be prepaid or redeemed shall be selected and designated by the Issuer (provided that a portion of this Bond may be redeemed only in an integral multiple of $5,000), at the prepayment or redemption price of the par or principal amount thereof, plus accrued interest to the date fixed for prepayment or redemption. AT LEAST 30 days prior to the date fixed for any such prepayment or redemption a written notice of such prepayment or redemption shall be mailed by the Paying Agent/Registrar to the registered owner hereof. By the date fixed for any such prepayment or redemption due provision shall be made by the Issuer with the Paying Agent/Registrar for the payment of the required prepayment or redemption price for this Bond or the portion hereof which is to be so prepaid or redeemed, plus accrued interest thereon to the date fixed for prepayment or redemption. If such written notice of prepayment or redemption is given, and if due provision for such payment is made, all as provided above, this Bond, or the portion thereof which is to be so prepaid or redeemed, thereby automatically shall be treated as prepaid or redeemed prior to its scheduled due date, and shall not bear interest after the date fixed for its prepayment or redemption, and shall not be regarded as being outstanding except for the right of the registered owner to receive the prepayment or redemption price plus accrued interest to the date fixed for prepayment or redemption from the Paying Agent/Registrar out of the funds provided for such payment. The Paying Agent/Registrar shall record in the Registration Books all such prepayments or redemptions of principal of this Bond or any portion hereof. THIS BOND, to the extent of the unpaid or unredeemed principal balance hereof, or any unpaid and unredeemed portion hereof in any integral multiple of $5,000, may be assigned by the initial registered owner hereof and shall be transferred only in the Registration Books of the Issuer kept by the Paying Agent/Registrar acting in the capacity of registrar for the Bonds, gpon the terms and conditions set forth in the Bond Ordinance. Among other requirements for such transfer, this Bond must be presented and surrendered to the Paying Agent/Registrar for cancellation, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, evidencing assignment by the initial registered owner of this Bond, or any portion or portions hereof in any integral multiple of $5,000, to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be transferred and registered. Any instrument or insmnnents of assignment satisfactory to the Paying Agent/Registrar may be used to evidence the assignment of this Bond or any such portion or portions hereof by the initial registered owner hereof. A new bond or bonds payable to such assignee or assignees (which then will be the new registered owner or owners of such new Bond or Bonds) or to the initial registered owner as to any portion of this Bond which is not being assigned and transferred by the initial registered owner, shall be delivered by the Paying Agent/Registrar in conversion of and exchange for this Bond or any portion or portions hereof, but solely in the form and manner as provided in the next paragraph hereof for the conversion and exchange of this Bond or any portion hereof. The registered owner of this Bond shall be deemed and treated by the Issuer and the Paying Agent/Registrar as the absolute owner hereof for all purposes, including payment and discharge of liability upon this Bond to the extent of such payment, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary. AS PROVIDED above and in the Bond Ordinance, this Bond, to the extent of the unpaid or unredeemed principal balance hereof, may be converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, payable to the assignee or assignees duly designated in writing by the initial registered owner hereof, or to the initial registered owner as to any portion of this Bond which is not being assigned and transferred by the initial registered owner, in any denomination or denominations in any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute bond issued in exchange for any portion of this Bond shall have a single stated principal maturity date), upon surrender of this Bond to the Paying Agent/Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Ordinance. If this Bond or any portion hereof is assigned and transferred or converted each bond issued in exchange for any portion hereof shall have a single stated principal maturity date corresponding to the due date of the installment of principal of this Bond or portion hereof for which the substitute bond is being exchanged, and shall bear interest at the rate applicable to and bome by such installment of principal or portion thereof. Such bonds, respectively, shall be subject to redemption prior to maturity on the same dates and for the same prices as the corresponding installment of principal of this Bond or portion hereof for which they are being exchanged. No such bond shall be payable in installments, but shall have only one stated principal maturity date. AS PROVIDED IN THE BOND ORDINANCE, THIS BOND IN ITS PRESENT FORM MAY BE ASSIGNED AND TRANSFERRED OR CONVERTED ONCE ONLY, and to one or more assignees, but the bonds issued and delivered in exchange for this Bond or any portion hereof may be assigned and transferred, and converted, subsequently, as provided in the Bond Ordinance. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for transferring, converting, and exchanging this Bond or any portion thereof, but the one requesting such transfer, conversion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make any such assignment, conversion, or exchange (i) during the period commencing with the close of business ori any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for prepayment or redemption prior to maturity, within 45 days prior to its prepayment or redemption date. IN THE EVENT any Paying Agent/Registrar for this Bond is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Bqnd Ordinance that it promptly will appoint a competent and legally qualified substitute therefor, and promptly will cause written notice thereof to be mailed to the registered owner of this Bond. IT IS HEREBY certified, recited, and covenanted that this Bond has been duly and validly authorized, issued, sold, and delivered; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Bond have been perfom~ed, existed, and been done in accordance with law; that this Bond is a special obligation of the Issuer, secured by and payable, together with other bonds, from a first lien on and pledge of the "Pledged Revenues", which include initially the "Net Revenues of the System" as such terms are defined in the Bond Ordinance, with the System consisting of the City's entire combined waterworks, sewer, and electric light and power system. THE ISSUER has reserved the right, subject to the restrictions stated in the Bond Ordinance, to issue Additional Bonds payable from and secured by a first lien on and pledge of the "Pledged Revenues" on a parity with this Bond. THE ISSUER also has reserved the right, subject to the restrictions stated in the Bond Ordinance, to amend the Bond Ordinance with the approval of the holders or owners of fifty-one percent in principal amount of all outstanding bonds which are secured by and payable from a fn:st hen on and pledge of the Pledged Revenues. THE REGISTERED OWNER hereof shall never have the right to demand payment of this Bond or the interest hereon out of any funds raised or to be raised by taxation or from any source whatsoever other than specified in the Bond Ordinance. BY BECOMING the registered owner of this Bond, the registered owner thereby acknowledges all of the terms and provisions of the Bond Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Bond Ordinance is duly recorded and available for inspection in the official minutes and records of the goveming body of the Issuer, and agrees that the terms and provisions of this Bond and the Bond Ordinance constitute a contract between the registered owner hereof and the Issuer. IN WITNESS WHEREOF, the Issuer has caused this Bond to be signed with the manual or facsimile signature of the Mayor of the Issuer and countersigned and attested with the manual signature or facsimile of the City Secretary of the Issuer, has caused the official seal of the Issuer to be duly impressed on this Bond, and has caused this Bond to be dated April 1, 2003. ATTEST: CITY OF DENTON, TEXAS By:. By:. Jennifer Walters City Secretary, City of Denton, Texas (CITY SEAL) Eulme Brock Mayor, City of Denton, Texas (BOND INSURANCE LEGEND, IF ANY) FORM OF REGISTRATION CERTIFICATE OF THE COMPTROLLER OF PUBLIC ACCOUNTS: COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Bond has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Bond has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this (COMPTROLLER'S SEAL) Comptroller of Public Accounts of the State of Texas Section 6. ADDITIONAL CHARACTERISTICS OF THE BONDS. Re~stration and Transfer. (a) The Issuer shall keep or cause to be kept at the Austin, Texas, corporate trust office of BANK ONE, NATIONAL ASSOCIATION (the "Paying Agent/Registrar") books or records of the registration and transfer of the Bonds (the "Registration Books"), and the Issuer hereby appoints the Paying Agent/Registrar as its registrar and transfer agent to keep such books or records and make such transfers and registrations under such reasonable regulations as the Issuer and Paying Agent/Registrar may prescribe; and the Paying Agent/Registrar shall make such transfers and registrations as herein provided. The Paying Agent/Registrar shall obtain and record in the Registration Books the address of the registered owner of each Bond to which payments with respect to the Bonds shall be mailed, as herein provided; but it shall.be the duty of each registered owner to notify the Paying Agent/Registrar in writing of the address to which payments shall be mailed, and such interest payments shall not be mailed unless such notice has been given. The Issuer shall have the right to inspect the Registration Books during regular business hours of the Paying Agent/Registrar, but otherwise the Paying Agent/Registrar shall keep the Registration Books confidential and, unless otherwise required by law, shall not permit their inspection by any other entity. Registration of each Bond may be transferred in the Registration Books only upon presentation and surrender of such Bond to the Paying Agent/Registrar for transfer of registration and cancellation, together with proper written instruments of assigmnent, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, evidencing (i) the assignment of the Bond, or any portion thereof in any integral multiple of $5,000, to the assignee or assignees thereof, and (ii) the right of such assignee or assignees to have the Bond or any such portion thereof registered in the name of such assignee or assignees. Upon the assignment and transfer of any Bond or any portion thereof, a new substitute Bond or Bonds shall be issued in conversion and exchange therefor in the manner herein provided. The Initial Bond, to the extent of the unpaid or unredeemed principal balance thereof, may be assigned and transferred by the imtial registered owner thereof once only, and to one or more assignees designated in writing by the imtial registered owner thereof. All Bonds issued and delivered in conversion of and exchange for the Initial Bond shall be in any denomination or denominations of any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute Bond shall have a single stated principal maturity date), shall be m the form prescribed m the FORM OF SUBSTITUTE SERIES 2003 BOND set forth in this Ordinance, and shall have the characteristics, and may be assigned, transferred, and converted as hereinafter provided. If the Initial Bond or any portion thereof is assigned and transferred or converted the Initial Bond must be surrendered to the Paying Agent/Registrar for cancellation, and each Bond issued in exchange for any portion of the Initial Bond shall have a single stated principal maturity date, and shall not be payable in installments; and each such Bond shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Bond is being ex- changed; each such Bond shall bear interest at the single rate applicable to and borne by such installment of principal or portion thereof for which it is being exchanged. If only a portion of the Initial Bond is assigned and transferred, there shall be delivered to and registered in the name of the initial registered owner substitute Bonds in exchange for the unassigned balance of the Initial Bond in the same manner as if the initial registered owner were the assignee thereof. If any Bond or portion thereof other than the Initial Bond is assigned and transferred or converted each Bond issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Bond for which it is exchanged. A form of assignment shall be printed or endorsed on each Bond, excepting the Initial Bond, which shall be executed by the registered owner or its duly authorized attorney or representative to evidence an assignment thereof. Upon surrender of any Bonds or any portion or portions thereof for transfer of registration, an authorized representative of the Paying Agent/Registrar shall make such transfer in the Registration Books, and shall deliver a new fully registered substitute Bond or Bonds, having the characteristics herein described, payable to such assignee or assignees (which then will be the registered owner or owners of such new Bond or Bonds), or to the previous registered owner in case only a portion of a Bond is being assigned and transferred, all in conversion of and exchange for said assigned Bond or Bonds or any portion or portions thereof, in the same form and manner, and with the same effect, as provided in Section 6(d), below, for the conversion and exchange of Bonds by any registered owner ora Bond. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer and delivery ora substitute Bond or Bonds, but the one requesting such transfer shall pay any taxes or other governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make transfers of registration of any Bond or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date. (b) Ownership of Bonds. The entity in whose name any Bond shall be registeked in the Registration Books at any time shall be deemed and treated as the absolute owner thereof for all purposes of this Ordinance, whether or not such Bond shall be overdue, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary; and payment of, or on account of, the principal of, premium, if any, and interest on any such Bond shall be made only to such registered owner. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond to the extent of the sum or sums so paid. . (c) Payment of Bonds and Interest. The Issuer hereby fuIther appoints the Paying Agent/Registrar to act as the paying agent for paying the principal of and interest on the Bonds, and to act as its agent to convert and exchange or replace Bonds, all as provided in this Ordinance. The Paying Agent/Registrar shall keep proper records of all payments made by the Issuer and the Paying Agent/Registrar with respect to the Bonds, and of all conversions and exchanges of Bonds, and all replacements of Bonds, as provided in this Ordinance. However, in the event of a nonpayment of interest on a scheduled payment date, and for thirty (30) days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the Issuer. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date", which shall be fifteen (15) days after the Special Record Date) shall be sent at least five (5) business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the 15th business day next preceding the date of mailing of such notice. 10 (d) C0nversion and Exchange or Replacement: Authentic~tign. Each Bond issued and delivered pursuant to this Ordinance, to the extent of the unpaid or unredeemed principal balance or principal amount thereof, may, upon surrender of such Bond at the principal corporate trust office of the Paying Agent/Registrar, together with a written request therefor duly executed by the registered owner or the assignee or assignees thereof, or its or their duly authorized attorneys or representatives, with guarantee of signatures satisfactory to the Paying Agent/Registrar, may, at the option of the registered owner or such assignee or assignees, as appropriate, be converted into and exchanged for fully registered bonds, without interest coupons, in the form prescribed in the FORM OF SUBSTITUTE SERIES 2003 BOND set forth in this Ordinance, in the denomination of $5,000, or any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute Bond shall have a single stated maturity date), as requested in writing by such registered owner or such assignee or assignees, in an aggregate principal amount equal to the unpaid or unredeemed principal balance or principal amount of any Bond or Bonds so surrendered, and payable to the appropriate registered owner, assignee, or assignees, as the case may be. If the Initial Bond is assigned and transferred or converted each substitute Bond issued in exchange for any portion of the Initial Bond shall have a single stated principal maturity date, and shall not be payable in installments; each such Bond shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Bond is being exchanged; and each such Bond shall bear interest at the single rate applicable to and borne by such installment of principal or portion thereof for which it is being exchanged. If a portion of any Bond (other than the Initial Bond) shall be redeemed prior to its scheduled maturity as provided herein, a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in the denomination or denominations of any integral multiple of $5,000 at the request of the registered owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the registered owner upon surrender thereof for cancellation. If any Bond or portion thereof (other than the Initial Bond) is assigned and transferred or converted, each Bond issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Bond for which it is being exchanged. Each substitute Bond shall bear a letter and/or number to distinguish it from each other Bond. The Paying Agent/Registrar shall convert and exchange or replace Bonds as provided herein, and each fully registered bond delivered in conversion of and exchange for or replacement of any Bond or portion thereof as permitted or required by any provision of this Ordinance shall constitute one of the Bonds for all purposes of this Ordinance, and may again be converted and exchanged or replaced. It is specifically provided that any Bond authenticated in conversion of and exchange for or replacement of another Bond on or prior to the first scheduled Record Date for the Initial Bond shall bear interest from the date of the Initial Bond, but each substitute Bond so authenticated after such first scheduled Record Date shall bear in~terest from the interest payment date next preceding the date on which such substitute Bond was so authen[icated, unless such Bond is authenticated after any Record Date but on or before the next following interest payment date, in which case it shall bear interest from such next following interest payment date; provided, however, that if at the time of delivery of any substitute Bond the interest on the Bond for which it is being exchanged is due but has not been paid, then such Bond shall bear interest from the date to which such interest has been paid in full. The Initial Bond issued and delivered pursuant to this Ordinance is not required to be, and shall not be, authenticated by the Paying Agent/Registrar, but on each substitute Bond issued in conversion of and exchange for or replacement of any Bond or Bonds issued under this Ordinance there shall be printed a certificate, in the form substantially as follows: 11 "PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE It is hereby certified that this Bond has been issued under the provisions of the Bond OrdNance described in this Bond; and that this Bond has been issued in conversion of and exchange for or replacement of a bond, bonds, or a portion of a bond or bonds of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. BANK ONE, NATIONAL ASSOCIATION Paying Agent/Registrar Dated By Authorized Representative" An authorized representative of the Paying Agent/Registrar shall, before the delivery of any such Bond, date and manually sign the above Certificate, and no such Bond shall be deemed to be issued or outstanding unless such Certificate is so executed. The Paying Agent/Registrar promptly shall cancel all Bonds surrendered for conversion and exchange or replacement. No additional ordinances, orders, or resolutions need be passed or adopted by the governing body of the Issuer or any other body or person so as to accomplish the foregoing conversion and exchange or replacement of auy Bond or portion thereof, and the Paying Agent/Registrar shall provide for the printing, execution, and delivery of the substitute Bonds in the manner prescribed herein. Pursuant to Chapter 1201, Texas Government Code, the duty of conversion and exchange or replacement of Bonds as aforesaid is hereby imposed upon the Paying Agent/Registrar, and, upon the execution of the above Paying AgenffRegistrar's Authentication Certificate, the converted and exchanged or replaced Bond shall be valid, incontestable, and errtbrceable in the same manner and with the same effect as the Initial Bond which originally was issued pursuant to this Ordinance, approved by the Attorney General, and registered by the Comptroller of Public Accounts. The Issuer shall pay the Paying AgentJRegistmr's'standard or customary fees and charges for transferring, converting, and exchanging any Bond or any portion thereof, but the one requesting any such transfer, conversion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto as a condition precedent to the exercise of such privilege of conversion and exchange. The Paying Agent/Registrar shall not be required to make any such conversion and exchange or replacement of Bonds or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the n?xt following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for r~demption prior to maturity, within 45 days prior to its redemption date. (e) In General. All Bonds issued in conversion and exchange or replacement of any other Bond or portion thereof, (i) shall be issued in fully registered form, without interest coupons, with the principal of and interest on such Bonds to be payable only to the registered owners thereof, (ii) may and shall be redeemed prior to their scheduled maturities, (iii) may be transferred and assigned, (iv) may be converted and exchanged for other Bonds, (v) shall have the characteristics, (vi) shall be signed and sealed, and (vii) the principal of and interest on the Bonds shall be payable, all as provided, and in the manner required or indicated, in the FORM OF SUBSTITUTE SERIES 2003 BOND set forth in this Ordinance. (f) Payment of Fees and Charges. The Issuer hereby covenants with the registered owners of the Bonds that it will (i) pay the standard or customary fees and charges of the Paying Agent/Registrar for its services with respect to the payment of the principal of and interest on the Bonds, when due, and (ii) pay the 12 fees and charges of the Paying Agent/Registrar for services with respect to the transfer of registration of Bonds, and with respect to the conversion and exchange of Bonds solely to the extent above provided in this Ordinance. (g) Substitute Pa~ng Agent/Re~strar. The Issuer covenants with the registered owners of the Bonds that at all times while the Bonds are outstanding the Issuer will provide a competent and legally qualified bank, trust company, financial institution, or other agency to act as and perform the services of Paying Agent/Registrar for the Bonds under this Ordinance, and that the Paying Agent/Registrar will be one entity. The Issuer reserves the right to, and may, at its option, change the Paying Agent/Registrar upon not less than 120 days written notice to the Paying Agent/Registrar, to be effective not later than 60 days prior to the next principal or interest payment date after such notice. In the event that the entity at any time acting as Paying Agent/Registrar (or its successor by merger, acquisition, or other method) should resign or other- wise cease to act as such, the Issuer covenants that it will promptly appoint a competent and legally qualified bank, trust company, financial institution, or other agency to act as Paying Agent/Registrar under this Ordinance. Upon any change in the Paying Agent/Registrar, the previous Paying Agent/Registrar shall promptly transfer and deliver the Registration Books (or a copy thereof), along with all other pertinent books and records relating to the Bonds, to the new Paying Agent/Registrar designated and appointed by the Issuer. Upon any change in the Paying Agent/Registrar, the Issuer promptly will cause a written notice thereof to be sent by the new Paying Agent/Registrar to each registered owner of the Bonds, by United States mail, first-class postage prepaid, which notice also shall give the address of the new Paying Agent/Registrar. By accepting the position and performing as such, each Paying Agent/Registrar shall be deemed to have agreed to the provisions of this Ordinance, and a certified copy of this Ordinance shall be delivered to each Paying Agent/Registrar. Section 7. FORM OF SL~STITUTE SERIES 2003 BOND. The form of all Series 2003 Bonds issued in conversion and exchange or replacement of any other Series 2003 Bond or portion thereof, including the form. of Paying Agent/Registrar's Certificate to be printed on each of such Series'2003 Bonds, and the Form of Assignment to be printed on each of the Series 2003 Bonds, shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are permitted or reqmred by this Ordinance. FORM OF SUBSTITUTE SERIES 2003 BOND NO. UNITED STATES OF AMEklCA PRINCIPAL AMOUNT STATE OF TEXAS $ COUNTY OF DENTON CITY OF DENTON UTILITY SYSTEM REVENUE REFUNDING AND IMPROVEMENT BOND SERIES 2003 INTEREST MATURITY ORIGINAL DATE RATE DATE OF ISSUE CUSIP NO. __% APRIL 1, 2003 ON THE MATURITY DATE specified above the CITY OF DENTON, in Denton County, Texas (the "Issuer"), being a political subdivision of the State of Texas, hereby promises to pay to 13 , or to the registered assignee hereof (either being hereinafter called the "registered owner") the principal amount of and to pay interest thereon from April 1, 2003, to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; with interest being first due and payable on December 1, 2003, and semiannually on each June 1 and December 1 thereafter, except that if the date of authentication of this Bond is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date (hereinafter defined) but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date. Said interest shall be calculated on the basis of a 360-day year composed of twelve 30-day months. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawfial money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the registered owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity, at the Austin, Texas, corporate trust office of BANK ONE, NATIONAL ASSOCIATION, which is the "Paying Agent/Registrar" for this Bond. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the registered owner hereof on each interest payment date by check, dated as of such interest payment date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the ordinance authorizing the issuance of the Bonds (the "Bond Ordinance") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such check shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid, on each such interest payment date, to the registered owner hereof, at the address of the registered owner, as it appeared at the close of business on the 15th day of the month next preceding each ~uch date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. However, the payment of such interest may be made by any other method acceptable to the Paying Agent/Registrar and requested by, and at the risk and expense of, the registered owner hereof. Any accrued interest due upon the redemption of this Bond prior to maturity as provided herein shall be paid to the registered owner at the principal corporate trust office of the Paying Agent/Registrar upon presentation and surrender of this Bond for redemption and payment at the principal corporate trust office,of the Paying Agent/Registrar. The Issuer covenants with the registered owner of this Bond that on or bef~ore each principal payment date, interest payment date, and accrued interest payment date for this Bond it will make available to the Paying Agent/Registrar, from the "Interest and Sinking Fund" created by the Bond Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. IN THE EVENT of a nonpayment of interest on a scheduled payment date, and for thirty (30) days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the Issuer. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("SpecialPayment Date", which shall be fifteen (15) days after the Special Record Date) shall be sent at least five (5) business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the 15th business day next preceding the date of mailing of such notice. 14 IF THE DATE for the payment of the principal of or interest on this Bond shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions in the City where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same fome and effect as if made on the original date payment was due. THIS BOND is one of a series of Bonds initially dated April 1, 2003, authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of $49,620,000, for the purpose of (a) refunding a portion of the City's outstanding debt described in Schedule I (the "Refunded Bonds") to the Bond Ordinance in order to lower the overall debt service requirements of the System (b)'making System improvements; (c) upgrading the System including the acquisition of land related thereto; (d) making a deposit to the reserve fund; and (e) paying costs of issuance associated with the sale of the Bonds. THE OUTSTANDING BONDS of this Series scheduled to mature on DECEMBER 1, , DECEMBER 1, __ and DECEMBER 1, __ are subject to mandatory redemption prior to their scheduled maUmties, and shall be redeemed by the Issuer, in part, prior to their scheduled maturities, with the particular Bonds or portions thereof to be redeemed to be selected by the Paying Agent/Registrar at random, by lot or other customary method (provided that a portion of a Bond may be redeemed only in an integral multiple of $5,000), at a redemption price equal to the par or principal amount thereof and accrued interest to the date of redemption, on the dates, and in the principal amounts, respectively, as shown in the following schedule: December 1, __ Maturity Mandatory Principal Redemption Dates Amounts (matmty) December 1, __ Maturity Mandatory Principal Redemption Dates Amounts (maturity) December 1, __ Maturity Mandatory Principal Redemption Dates Amounts (manmty) The principal amount of the Bonds required to be redeemed on the Mandatory Redemption Dates pursuant to the foregoing shall be reduced, at the option of the Issuer by the principal amount of any Bonds out of any such maturity which, at least 45 days prior to the aforesaid appropriate redemption date (1) shall have been 15 acquired by the Issuer at a price not exceeding the principal amount of such Bonds plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, or (2) as shall have been redeemed pursuant to the optional redemption provisions hereof and not previously credited to the Mandatory Sinking Fund Redemption. ON JUNE 1, 2013, or on any date whatsoever thereafter, the Bonds of this Series may be redeemed prior to their scheduled maturities, at the option of the Issuer, with funds derived from any available and lawfifl source, as a whole, or in part, and, if in part, the particular Bonds, or portions thereof, to be redeemed shall be selected and designated by the Issuer (provided that a portion of a Bond may be redeemed only in an integral multiple of $5,000), at the redemption price of the par or principal amount thereof, plus accrued interest to the date fixed for redemption. AT LEAST 30 days prior to the date fixed for any redemption of Bonds or portions thereof prior to maturity a written notice of such redemption shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid, at least 30 days prior to the date fixed for any such redemption, to the registered owner of each Bond to be redeemed at its address as it appeared on the 45th day prior to such redemption date and to major securities depositories, national bond rating agencies and bond information services; provided, however, that the failure of the registered owner to receive such notice, or any defect therein or in the sending or mailing thereof, shall not affect the validity or effectiveness of the proceedings for the redemption of any Bond. By the date fixed for any such redemption due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof that are to be so redeemed. If such written notice of redemption is sent and if due provision for such payment is made, all as provided above, the Bonds or portions thereof that are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the fimds provided for such payment. If a portion of any Bond shall be redeemed, a substitute Bond or Bonds hax;ing the same maturity date, bearing interest at the same rate, in any denomination or denominations in any integral multiple of $5,000, at the written request of the registered owner, and in aggregate principal amount.' equal to the unredeemed portion thereof, will be issued to the registered owner upon the surrender thereof for cancellation, at the expense of the Issuer, all as provided in the Bond Ordinance. THIS BOND OR ANY PORTION OR PORTIONS HEi~EOF IN ANY INTEGRAL MULTIPLE OF $5,000 maybe assigned and shall be transferred only in the Registration Books of the Issuer kept by the Paying Agent/Registrar acting in the capacity of registrar for the Bonds, upon the terms and conditions set forth in the Bond Ordinance. Among other requirements for such assignment and transfer, this Bond must be presented and. surrendered to the Paying Agent/Registrar, together with proper insmunents of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, evidencing assignment of this Bond or any portion or portions hereof in any integral multiple of $5,000 to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be transferred and registered. The form of Assignment printed or endorsed on this Bond shall be executed by the registered owner or its duly authorized attorney or representative, to evidence the assignment hereof. A new Bond or Bonds payable to such assignee or assignees (which then will be the new registered owner or owners of such new Bond or Bonds), or to the previous registered owner in the case of the assignment and transfer of only a portion of this Bond, may be delivered by the Paying Agent/Registrar in conversion of and exchange for this Bond, all in the form and manner as provided in the next paragraph hereof for the conversion and exchange of other Bonds. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer, but the one requesting such transfer shall pay any taxes or other 16 governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make transfers of registration of this Bond or any portion hereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date. The registered owner of this Bond shall be deemed and treated by the Issuer and the Paying Agent/Registrar as the absolute owner hereof for all purposes, including payment and discharge of liability upon this Bond to the extent of such payment, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary. ALL BONDS OF THIS SERIES are issuable solely as fully registered bonds, without interest coupons, in the denomination of any integral multiple of $5,000. As provided in the Bond Ordinance, this Bond, or any unredeemed portion hereof, may, at the request of the registered owner or the assignee or assignees hereof, be converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, payable to the appropriate registered owner, assignee, or assignees, as the case may be, having the same maturity date, and beating interest at the same rate, in any denomination or denominations in any integral multiple of $5,000 as requested in writing by the appropriate registered owner, assignee, or assignees, as the case may be, upon surrender of this Bond to the Paying Agent/Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Ordinance. The Issuer shall pay the Paying Agent/Registmr's standard or customary fees and charges for transferring, converting, and exchanging any Bond or any portion thereof, but the one requesting such transfer, conversion, and exchange shall pay any taxes or govermnental charges required to be paid with respect thereto as a condition precedent to the exercise of such privilege of conversion and exchange. The Paying Agent/Registrar shall not be required to make any such conversion and exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for redemption prior to matur- ity, within 45 days prior to its redemption date. IN THE EVENT any Paying Agent/Registrar for the Bonds is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Bond Ordinance that it promptly will appoint a competent and legally qualified substitute therefor, and will promptly cause written notice thereof to be mailed to the registered owners of the Bonds. IT IS HEREBY certified, recited, and covenanted that this ]3ond has been duly and validly authorized, issued, sold, and delivered; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Bond have been performed, existed, and been done in accordance with law; that this Bond is a special obligation of the Issuer, secured by and payable, togethe~ with other bonds, from a first lien on and pledge of the "Pledged Revenues", which include initially the "Net Revenues of the System", as such terms are defined in the Bond Ordinance, with the System consisting of the City's entire combined waterworks, sewer, and electric light and power system. THE ISSUER has reserved the fight, subject to the restrictions stated in the Bond Ordinance, to issue Additional Bonds payable from and secured by a first lien on and pledge of the "Pledged Revenues" on a parity with this Bond and series of which it is a part. THE ISSUER also has reserved the right, subject to the restrictions stated in the Bond Ordinance, to amend the Bond Ordinance with the approval of the holders or owners of fifty-one percent in principal amount of all outstanding bonds which are secured by and payable from a f~rst lien on and pledge of the Pledged Revenues. 17 THE REGISTERED OWNER hereof shall never have the fight to demand payment of this Bond or the interest hereon out of any funds raised or to be raised by taxation or from any source whatsoever other than specified in the Bond Ordinance. BY BECOMING the registered owner of this Bond, the registered owner thereby acknowledges all of the terms and provisions of the Bond Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Bond Ordinance is duty recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Bond and the Bond Ordinance constitute a contract between each registered owner hereof and the Issuer. IN WITNESS WHEREOF, the Issuer has caused this Bond to be signed with the manual or facsimile signature of the Mayor of the Issuer and countersigned and attested with the manual or facsimile signature of the City Secretary of the Issuer, and has caused the official seal of the Issuer to be duly impressed, or placed in facsimile, on this Bond. ATTEST: CITY OF DENTON, TEXAS By: By:. Jennifer Walters City Secretary, City of Denton, Texas (CITY SEAL) Euline Brock Mayor, City of Denton, Texas FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE ?AYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE It is hereby certified that this Bond has been issued under the provisions of the Bond Ordinance described in this Bond; and that this Bond has been issued in conversion of and exchange for or replacement of a bond, bonds, or a portion of a bond or bonds of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller pfPublic Accounts of the State of Texas. BANK ONE, NATIONAL ASSOCIATION Paying AgenffRegistmr Dated By Authorized Representative (BOND INSURANCE LEGEND, IF ANY) 18 FORM OF ASSIGNMENT: ASSIGNMENT FOR VALUE RECEIVED, the undersigned registered owner of this Bond, or duly authorized representative or attorney thereof, hereby assigns this Bond to / / (Assignee's Social Security or Taxpayer Identification Number) (print or type~vrite Assignee's name and address, including zip code) and hereby irrevocably constitutes and appoints attomey to transfer the registration of this Bond on the Paying Agent/Registrar's Registration Books with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by an eligible gtmrantor institution participating in a securities transfer association recognized signature guarantee program. Registered Owner NOTICE: This signature must correspond with the name of the Registered Owner appearing on the face of this Cel-tificate in every particular without alteration or enlargement or any change whatsoever: Section 8. DEFINITIONS. As used in this Ordinance the following terms shall have the meanings set forth below, unless the text hereof specifically indicates otherkvise: (a) The terms "City" and "Issuer" shall mean the City of Denton, in Denton County, Texas. (b) The.term "City Council" or "Council" shall mean the governing body of the City. (c) The term "Bonds" shall mean collectively the Initial Bond as defined and described in Section 2 of this Ordinance and all substitute bonds exchanged therefor, and all other substitute bonds and replacement bonds, issued pursuant to and as provided in this Ordinance. (d) The term "Parity Bonds" shall mean collectively (i) the outstanding City of Denton Utihty System Revenue Bonds, Series 1992, authorized by ordinance passed on March 3, 1992 (the "Series 1992 Bonds"), (ii) the outstanding City of Denton Utility System Revenue Bonds, Series 1993, authorized by ordinance passed on March 16, 1993 (the "Series 1993 Bonds"), (iii) the outstanding City of Denton Utility System Revenue Refimding Bonds, Series 1993-A, authorized by ordinance passed on June 8, 1993 (the "Series 1993- A Bonds"), (iv) the outstanding City of Denton Utihty System Revenue Refunding Bonds, Taxable Series 19 1993-B, authorized by ordinance passed on June 8, 1993 (the "Series 1993-B Bonds"), (v) the outstanding City of Denton Utility System Revenue Bonds, Series 1996, authorized by an ordinance passed on May 7, 1996 (the "Series 1996 Bonds"), (vi) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 1996-A, authorized by an ordinance passed on May 7, 1996 (the "Series 1996-A Bonds"), (vii) the outstanding City of Denton Utility System Revenue Bonds, Series 1998, authorized by an ordinance passed on March 24, 1998 (the "Series 1998 Bonds"), (viii) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 1998A, authorized by an ordinance passed on July 21, 1998 (the "Series 1998A Bonds"), (ix) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 1998B, authorized by an ordinance passed on August 4, 1998 (the "Series 1998B Bonds"), (x) the outstanding City of Denton Utility System Revenue Bonds, Series 2000A, authorized by an ordinance passed on April 25, 2000 (the "Series 2000A Bonds"), (xi) the outstanding City of Denton Utihty System Revenue Bonds, Taxable Series 2000B, authorized by an ordinance passed on April 25, 2000 (the "Taxable Series 2000B Bonds"), (xii) the outstanding City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2001, authorized by an ordinance passed on April 17, 2001 (the "Series 2001 Bonds"), (xiii) the outstanding City of Denton Utility System Revenue Bonds, Series 2002A, authorized by an ordinance passed on April 9, 2002 (the "Series 2002A Bonds"), (xiv) the outstanding City of Denton Utility System Revenue Bonds, Taxable Series 2002B, authorized by an ordinance passed on April 9, 2002 (the "Taxable Series 2002B Bonds"), and (xv) the Bonds. (e) The term "Additional Bonds" shall mean the additional parity revenue bonds which the City reserves the right to issue in the furore, in accordance with Section 25 of this Ordinance. (f) The term "System" shall mean (1) the City's entire existing waterworks and sewer system and the City's entire existing electric light and power system, together with all future extensions, improvements, enlargements, and additions thereto, and all replacements thereof, and (2) any other related facilities, all or any part of the revenues or income from which do, in the future, at the option of the City, and in accordance with law, become "Pledged Revenues" as hereinafter defined; provided that, notwiths/anding the foregoing, and to the extent now or hereafter authorized or permitted by law, the term System shall not mean any water, sewer, electric, or other facihties of any kind which are declared not to be a part of the System, and which are acquired or constructed by the City with the proceeds from the issuance of "Special Facilities Bonds", which are hereby defmed as being special revenue obligations of the City which are not payable from or secured by any Pledged Revenues, but which are secured by and payable from liens on and pledges of any other revenues, sources, or payments, including, but not limited to, special contract revenues or payments received from any other legal entity in connection with such facilities; and such revenues, sources, or payments shall not be considered as or constitute Gross Revenues of the System, unless and to the extent otherwise provided in the ordinance or ordinances authorizing the issuance of such "Special Facihties Bonds". (g) The terms "Gross Revenues of the System" and "Gross Revenues" shall mean all revenues and income of every nature derived or received by the City from the operation and ownership of the System, including the interest income from the investment or deposit of money in any Fund created by this Ordinance. (h) The terms "Net Revenues of the System", and 'net Revenues" shall mean all Gross Revenues after deducting therefrom an amount equal to the current expenses of operation and maintenance of the System, including all salaries, labor, materials, repairs, and extensions necessary to render efficient service, provided, however, that only such repairs and extensions, as in the judgment of the City Council, reasonably and fairly exercised by the adoption of appropriate resolutions, are necessary to keep the System in operation and render adequate service to said City and the inhabitants thereof, or such as might be necessary to meet some physical accident or condition which would otherwise impair the Bonds or Additional Bonds, shall be 20 deducted in determining "Net Revenues". Payments required to be made by the City for water supply or water facilities, sewer services or sewer facilities, fuel supply, and for the purchase of electric power, which payments under law constitute operation and maintenance expenses of any part of the System, shall constitute and be regarded as expenses of operation and maintenance of the System under this Ordinance. Depreciation and amortization shall not constitute or be regarded as expenses of operation and maintenance of the System. (i) The term "Pledged Revenues" shall mean (1) the Net Revenues, plus (2) the net revenues of the Drainage System, which shall be calculated on the same basis as the Net Revenues of the System, plus (3) any additional revenues, income, or other resources relating to the System which are expected to be available to the City on a regular periodic basis, including, without limitation, any grants, donations, or income received or to be received from the United States Government, or any other public or private source, whether pursuant to an agreement or otherwise, which in the future may, at the option of the City, be pledged to the payment of the Parity Bonds or Additional Bonds. (j) The term "year" or "fiscal year" shall mean the fiscal year used by the City in connection with the operation of the System. (k) The term "Government Obligations" shall mean direct obligations of the United States of America, including obligations the principal of and interest on which are unconditionally guaranteed by the United States of America, which may be United States Treasury obligations such as its State and Local Government Series, and which may be in book-entry form. thereto. "Drainage System" means the City's entire existing drainage system and all facilities related (m) "Rate Stabilization Fund" means the City's separate Rate Stabilization Fund established for the purpose of stabilizing rates for ratepayers. Section 9. PLEDGE. (a) The Bonds are "Additional Bonds" as permitted by Sections 24 and 25 of the ordinance passed on March 10, 1983, authorizing the City of Denton Revenue Refunding Bonds, Series 1983 (the "Series 1983 Bonds"); and it is hereby determined, declared, and resolved that all of the Parity Bonds (including the Bonds) are secured and payable equally and ratably on a parity, and that Sections 8 through 28, of this Ordinance are supplemental to and cumulative of Sections 7 through 27 of the aforesaid ordinance passed on March 10, 1983, with Sections 8 through 29 of this Ordinance being applicable to all of the Parity Bonds. (b) The Parity Bonds and any Additional Bonds, and the interest thereon, including any interest coupons appertaining thereto, are and shall be secured by and payable from a first lien on and pledge of the Pledged Revenues, and the Pledged Revenues are further pledged to the establishment and maintenance of the Funds created by this Ordinance, and any Funds created by any ordinance authorizing the issuance of any AdditionalBonds. The Parity Bonds and any Additional Bonds are not and will not be secured by or payable from a mortgage or deed of trust on any real, personal, or mixed properties constituting the System. 21 Section 10. SYSTEM FUND. There heretofore has been and is hereby created and there shall be established and maintained on the books of the City, and accounted for separate and apart from all other funds of the City, a special fund to be entitled the "City of Denton Utility System Fund" (the "System Fund"). All Gross Revenues shall be credited to the System Fund immediately upon receipt, unless otherwise provided in this Ordinance. All current expenses of operation and maintenance of the System shall be paid from such Gross Revenues credited to the System Fund as a frrst charge against same. Before making any deposits hereinafter required to be made from the System Fund, the City shall retain in the System Fund at all times an amount at least equal to one-sixth of the amount budgeted for the then current fiscal year for the current operation and maintenance expenses of the System. Section 11. INTEREST AND SINK/NG FUND. For the sole purpose of paying the principal of and interest on all Parity Bonds and Additional Bonds, there heretofore has been and is hereby created and there shall be established and maintained on the books of the City, and accounted for separate and apart from all other funds of the City, a separate fund to be entitled the "City of Denton Utility System Revenue Bonds Interest and Sinking Fund" (the "Interest and Sinking Fund"). Section 12. RESERVE FUND. There heretofore has been, and is hereby, created, and there shall be established and maintained at Bank One, National Association, and hereafter, at the option of the City, established and maintained at any time at any national bank having a capital and surplus in excess of $25,000,000, a separate fund to be entitled the "City of Denton Utihty System Bonds and Additional Bonds Reserve Fund" (the "Reserve Fund"). The Reserve Fund shall be used to pay the principal of and interest' on any Parity Bonds or Additional Bonds when and to the extent the amounts in the Interest and Sinking Fund available for such payment are insufficient for such purpose, and may be used for the purpose of finally retiring the last of any Parity Bonds or Additional Bonds. Section 13. EXTENSION AND IMPROVEMENT FUND. There heretofore has been and is hereby created and there shall be established and maintained on the books of the City, and accounted for separate and apart from all other funds of the City, a separate fund to be entitled the "City of Denton Utility System Extension and Improvement Fund" (the "Extension and Improvement Fund"). The Extension and Improvement Fund shall be used for the purpose of paying the costs of improvements, enlargements, extensions, additions, replacements, or other capital expenditures related to the System, or for paying the costs of unexpected or extraordinary repairs or replacements of the System for which System funds are not available, or for paying unexpected or extraordinary expenses of operation and maintenance of the System for which System funds are not otherwise available, or for any other lawful purpose. Section 14. EMERGENCY FUND. There is hereby created and there shall be established and maintained on the books of the City, and accounted for separate and apart from all other funds of the City, a separate fund to be entitled the "City of Denton Utility System Emergency Fund" (the "Emergency Fund"). The Emergency Fund shall be used for the purpose of paying unexpected or extraordinary expenses of repair, replacement, operation, and maintenance of the System for which neither System funds nor the moneys in the Extension and Improvement Fund are available. There was deposited in the Emergency Fund simultaneously with the delivery of the Series 1983 Bonds to the initial purchasers thereof from lawfully available funds of the City the amount of $250,000. All investment interest income from the Emergency Fund shall be transferred to the System Fund as received. Section 15. DEPOSITS OF PLEDGED REVENUES. Pledged Revenues shall be credited to or depositedin the Interest and Sinking Fund, the Reserve Fund, the Extension and Improvement Fund, and other 22 funds when and as required by this Ordinance and any ordinance authorizing the issuance of Additional Bonds. Section 16. INVESTMENTS. Money in any Fund established pursuant to this Ordinance or any ordinance authorizing the issuance of Additional Bonds, may, at the option of the City, be placed in time deposits or certificates of deposit secured by obligations of the type hereinafter described, or be invested in Government Obligations (as defined in Section 8 hereof) or obligations guaranteed or insured by the United States of America, which, in the opinion of the Attomey General of the United States, are backed by its full faith and credit or represent its general obligations, or invested in obligations of instrumentalities of the United States of America, including, but not limited to, evidences of indebtedness issued, insured, or guaranteed by such governmental agencies as the Federal Land Banks, Federal Intermediate Credit Banks, Banks for Cooperatives, Federal Home Loan Banks, Government National Mortgage Association, United States Postal Service, Farmers Home Administration, Federal Home Loan Mortgage Association, Small Business Administration, Federal Housing Association, or Participation Certificates in the Federal Assets Financing Trust; provided that all such deposits and investments shall be made in such manner as will, in the opinion of the City, permit the money required to be expended from any Fund to be available at the proper time or times as expected to be needed. Such investments (except United States Treasury Obligations--State and Local Government Series investments held in book enlry form, which shall at all times be valued at cost) shall be valued in terms of current market value as of the last day of each fiscal year. Unless otherwise set forth herein, all interest and income derived from such deposits and inveslments immediately shall be credited to, and any losses debited to, the Fund from which the deposit or investment was made, and surpluses in any Fund shall or may be disposed of as hereinafter provided. Such investments shall be sold promptly when necessary to prevent any default in connection with the Parity Bonds or Additional Bonds consistent with the ordinances, respectively, authorizing their issuance. Section 17. FUNDS SECURED. That money in all Funds created by this Ordinance, to the extent not invested, shall be secured in the manner prescribed by law. Section 18. PRIORITY OF DEPOSITS AND PAYMENTS FROM SYSTEM FUND. That the City shall make the deposits and payments from Pledged Revenues in the System Fund when and as required by this Ordinance and any ordinance authorizing any Additional Bonds, and such deposits shall be made in the following manner and with the following irrevocable priorities, respectively: First, to the Interest and Sinking Fund, when and in the amounts required by this Ordinance and any ordinance authorizing any Additional Bonds; then Second,- to the Reserve Fund, when and in the amounts required by this Ordinance and any ordinance authorizing any Additional Bonds; then Third, to the Extension and Improvement Fund, when and as required by Section 21 of this Ordinance. Section 19. INTEREST AND SINKING FUND REQUIREMENTS. The City shall cause to be deposited to the credit of the Interest and Sinking Fund the accrued interest and any premium received from the sale of the Imtial Bond, and on or before the 25th day of each month, the City shall cause to be deposited to the credit of the Interest and Sinking Fund, in approximately equal monthly payments, amounts sufficient, together with any other funds on hand therein, to pay all of the interest or principal and interest coming due, including the principal amount of any Parity Bonds required to be redeemed prior to maturity pursuant to any 23 mandatory redemption requirements, on the Parity Bonds and any Additional Bonds on the next succeeding interest payment date. Any moneys so deposited in the Interest and Sinking Fund with respect to a mandatory redemption requirement, together with other lawfully available funds of the City, may be used by the City, to purchase, in advance of a mandatory redemption date and at a price not exceeding the principal mount thereof plus accrued interest thereon to the date of purchase, Parity Bonds which would be subject to being chosen for mandatory redemption on such mandatory redemption date. The Paying Agent shall cancel any Parity Bonds so purchased. Section 20. RESERVE FUND REQUIREMENTS. There is now on hand in the Reserve Fund an amount of money and Government Obligations which is in excess of $3,000,000 and which is at least equal to the average annual principal and interest requirements of the outstanding Series 1992 Bonds, the Series 1993 Bonds, the Series 1993-A Bonds, the Taxable Series 1993-B Bonds, the Series 1996 Bonds, the Series 1996-A Bonds, the Series 1998 Bonds, the Series 1998A Bonds, the Series 1998B Bonds, the Series 2000A Bonds, the Series 2000B Bonds, the Series 2001 Bonds, the Series 2002A Bonds and the Taxable Series 2002B Bonds (the current "Required Reserve Amount"). Following the issuance and delivery of the Initial Bonds the Required Reserve Amount shall become and be an amount of money and investments equal to the average annual principal and interest requirements of all the outstanding Parity Bonds and Additional Bonds; provided further, however, that the Required Reserve Amount shall never be less than $3,000,000 if the maximum annual principal and interest requirements on all outstanding Parity Bonds and Additional Bonds exceeds $3,000,000. Immediately after the issuance and delivery of the Imtial Bond there shall be deposited to the credit of the Reserve Fund, from the proceeds of the sale of the Initial Bond, money sufficient to cause the Reserve Fund to contain an aggregate amount of money and investments equal to the Required Reserve Amount for all then outstanding Parity Bonds. ARer the delivery of any future Additional Bonds the City shall cause the Reserve Fund to be increased, if and to the extent necessary, so that such Fund will contain an amount of money and investments equal to the Required Reserve Amount. Any increase in the Required Reserve Amount may be funded from Pledged Revenues, or from proceeds from the sale of any Additional Bonds, or any other available source or combination of sources. All or any part of ~he Required Reserve Amount not funded initially and immediately after the delivery of any installment or issue of Additional Bonds shall be funded, within not more than five years from the date of such delivery, by deposits of Pledged Revenues in approximately equal monthly installments on or before the 25th day of each month. Principal amounts of the Parity Bonds and any Additional Bonds which must be redeemed pursuant to any applicable mandatory redemption requirements shall be deemed to be maturing amounts of principal for the purpose of calculating principal and interest requirements on such bonds. ~When and so long as the amount in the Reserve Fund is not less than the Required Reserve Amount no deposits shall be made to the credit of the Reserve Fund; but when and if the Reserve Fund at any time contains less than the Required Reserve Amount, then the City shall transfer from Pledged Revenues in the System Fund, and deposit to the credit of the Reserve Fund, monthly on or before the 25th day of each month, a sum equal to 1/60th of the Required Reserve Amount, until the Reserve Fund is restored to the Required Reserve Amount. The City specifically covenants that when and so long as the Reserve Fund contains the Required Reserve Amount, the City shall cause all amounts in excess of the Required Reserve Amount to be deposited to the credit of the Interest and Sinking Fund. Section 21. EXTENSION AND IMPROVEMENT FUND REQUIREMENTS. During each year, subject and subordinate to making the required deposits to the credit of the Interest and Sinking Fund and the Reserve Fund, the City shall be required to deposit to the credit of the Extension and Improvement Fund, fi:om Pledged Revenues in the System Fund, an amount equal to 8% of the "Adjusted Gross Revenues of the System", which term is hereby defined to mean the following: 24 the Gross Revenues of the System for such year after deducting from such Gross Revenues an amount equal to the current expenses of operation and maintenance of the System for such year which are directly attributable to (i) all fuel costs related to the production of electric energy by the City and/or (ii) the purchase of electric energy by the City. Additional excess Pledged Revenues may, at the option of the City Council, be deposited to the credit of the Improvement Fund as permitted by Section 22 (b) hereof, but no such additional deposit is required. All investment interest income from the Extension and Improvement Fund shall be retained in and remain a part of such Fund. Section 22. RATE STABILIZATION FUND. (a) In each fiscal year, the City hereby agrees to ~ransfer the Transfer Amount (as defined below) from the Rate Stabilization Fund into the System Fund for the purpose of paying the current expenses of operation and maintenance of the System and pledges such Transfer Amount to the payment of the Bonds, all Parity Bonds and any Additional Bonds. (b) The Transfer Amount shall be an amount of moneys and investments contained in the Rate Stabilization Fund equal to the amount for each fiscal year of the City that will, when added to the otherwise expected Pledged Revenues for that fiscalyear, produce an amount of Pledged Revenues during such fiscal year at least equal to the greater of 1.25 times the average annual principal and interest requirements of all then outstanding Bonds, Parity Bonds and Additional Bonds or 1.25 times the succeeding fiscal year's principal and interest requirements of all then outstanding Bonds, Parity Bonds and Additional Bonds. (c) The Transfer Amount will be calculated and reflected in the annual budget for each fiscal year and will, on the first day of such fiscal year, be Iransferred from the Rate Stabilization Fund into the System Fund. Section 23. DEFICIENCIES; EXCESS PLEDGED REVENUES. (a) If on any occasion there shall not be sufficient Pledged Revenues to make the required deposits into the Interest and Sinking Fund or the Reserve Fund, such deficiency shall be made up as soon as possible from the next available Pledged Rev- enues. (b) Subject to making the required deposits to the credit Qfthe various Funds when and as required by this Ordinance or any ordinance authorizing the issuance of Additional Bonds, any surplus Pledged Revenues may be used by the City for any lawful purpose. Section 24. PAYMENT OF PARITY BONDS AND ADDITIONAL BONDS. On or before December 1, 2003, and semiannually on or before each June 1 and December 1 thereafter while any of the Parity Bonds or Additional Bonds are outstanding and unpaid the City shall make available to the Paying Agents therefor, out of the Interest and Sinking Fund, or if necessary, out of the Reserve Fund, money sufficient to pay, on each of such dates, the principal of and interest on the Parity Bonds and Additional Bonds as the same matures and comes due, or to redeem the Parity Bonds or Additional Bonds prior to maturity, either upon mandatory redemption or at the option of the City. At the direction of the City the Paying Agents shall either deliver paid Parity Bonds and Additional Bonds, and any interest coupons appertaining thereto, to the City or destroy all paid Parity Bonds and Additional Bonds, and any coupons appertaining thereto, and furnish the City with an appropriate certificate of cancellation or destruction. 25 Section 25. FINAL DEPOSITS. (a) Any Parity Bond or Additional Bond shall be deemed to be paid, retired, and no longer outstanding within the meaning of this Ordinance when payment of the principal of, redemption premium, if any, on such Parity Bond or Additional Bond, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption or provision for the proper giving of such notice having been made), or (ii) shall have been provided by irrevocably depositing with or making available to a Paying Agent therefor, in trust and irrevocably set aside exclusively for such payment, (1) money sufficient to make such payment or (2) Government Obligations which mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation, and expenses of such Paying Agent pertaining to the Parity Bonds and Additional Bonds with respect to which such deposit is made shall have been paid or the payment thereof provided for to the satisfaction of such paying agent. At such time as a Bond or Additional Bond shall be deemed to be paid hereunder, as aforesaid, it shall no longer be secured by or entitled to the benefits of this Ordinance or a lien on and pledge of the Pledged Revenues, and shall be entitled to payment solely fi:om such money or Government Obligations. (b) Any moneys so deposited with a paying agent may at the direction of the City also be invested in Government Obligations, manmng in the amounts and times as hereinbefore set forth, and all income from all Government Obligations in the hands of the paying agent pursuant to this Section which is not required for the payment of the Parity Bonds and Additional Bonds, the redemption premium, if any, and interest thereon, with respect to which such money has been so deposited, shall be turned over to the City or deposited as directed by the City. Section 26. ADDITIONAL BONDS. (a) The City shall have the fight and power at any time and from time to time, and in one or more series or issues, to authorize, issue, and deliver ad,ditional parity revenue bonds (herein called "Additional Bonds"), in accordance with law, in any amounts, for any lawfi,d propose, including the refimding of any Parity Bonds or Additional Bonds, or other obligations. Such Additional Bonds, if and when authorized, issued, and delivered in accordance with this Ordinance, shall be payable fi:om and secured by an irrevocable fn:st lien on and pledge of the Pledged Revenues, equally and ratably on a parity in all respects with the Parity Bonds and any other outstanding Additional Bonds. (b) The principalof all Additional Bonds must be scheduled to be paid or mature on December 1 of the years in which such principal is scheduled to be paid or mature. Section 27. FURTHER REQUIREMENTS FOR ADDITIONAL BONDS. Additional Bonds shall be issued only in-accordance with this Ordinance, and no installment, Series, or issue of Additional Bonds shall be issued or delivered unless: (a) The Mayor of the City and the City Secretary sign a written certificate to the effect that the City is not in defauk as to any covenant, condition, or obligation in connection with all then outstanding Parity Bonds and Additional Bonds, and the ordinances authorizing same, and that the Interest and Sinking Fund and the Reserve Fund each contains the amount then required to be therein. (b) An independent certified public accountant, or independent firm of certified public accountants, acting by and through a certified public accotmtant, signs a written certificate to the effect that, in his or its opinion, during either the next preceding fiscal year, or any twelve consecutive calendar month period out of the 18-month period mediately preceding the month in which the ordinance authorizing the issuance of the 26 then proposed AdditionalBonds is passed, the Pledged Revenues were at least (i) 1.25 times an amount equal to the average annualprincipal and interest requirements, and (ii) 1.10 times an amount equal to the principal and interest requirements during the fiscal year during which such requirements are scheduled to be the greatest, of all Parity Bonds and Additional Bonds which are scheduled to be outstanding after the delivery of the then proposed Additional Bonds. It is specifically provided, however, that in calculating the amount of Pledged Revenues for the purposes of this subsection (b), if there has been any increase in the rates or charges for services of the System which is then in effect, but which was not in effect during all or any part of the entire period for which the Pledged Revenues are being calculated (hereinafter referred to as the "entire period") then the certified public accountant, or in lieu of the certified public accountant a firm of consulting engineers, shall determine and certify the amount of Pledged Revenues as being the total of (i) the actual Pledged Revenues for the entire period, plus (ii) a sum equal to the aggregate amount by which the actual billings to customers of the System during the entire period would have been increased if such in- creased rates or charges had been in effect during the entire period. (c) Provision shall be made in the ordinance authorizing their issuance for increasing the Reserve Fund to the Required Reserve Amount as required by Section 20 hereof. (d) All calculations of average annual principal and interest requirements of any bonds made in connection with the issuance of any then proposed Additional Bonds shall be made as of the date of such Additional Bonds; and also in making calculations for such purpose, and for any other purpose under this Ordinance, principal amounts of any bonds which must be redeemed prior to maturity pursuant to any apphcable mandatory redemption requirements shall be deemed to be maturing amounts of principal of such bonds. Section 28. GENERAL COVENANTS. The City further covenants and agrees that in accordance with and to the extent required or permitted by law: (a) performance. It will faithfi~ly perform at all times any and all covenants, undertakings, stipulations, and provisions contained in this Ordinance, and each ordinance authorizing the issuance of Additional Bonds, and in each and every Parity Bond and Additional Bond; that it will promptly pay or cause to be paid the principal of and interest on every Parity Bond and Additional Bond, on the dates and in the places and manner prescribed in such ordinances and Parity Bonds or Additional Bonds; and that it will, at the times and in the manner prescribed, deposit or cause to be deposited the amounts required to be deposited into the Interest and Sinking Fund and the Reserve Fund; and any holder of the Parity Bonds or Additional Bonds may require the City, its officials, and employees, to carry out, respect, or enforce the covenants and obligations of this Ordinance, or any ordinance authorizing the issuance of Additional Bonds, by all legal and equitable means,-including specifically, but without limitation, the use and filing of mandamus proceedings, in any court of competent jurisdiction, against the City, its officials, and employees. (b) City's Legal Authority. The City is a duly created and existing home role city of the State of Texas, and is duly authorized under the laws of the State of Texas to create and issue the Parity Bonds and Additional Bonds; that all action on its part for the creation and issuance of the said obligations has been or will be duly and effectively taken, and that said obligations in the hands of the holders and owners thereof are and will be valid and enforceable special obligations of the City in accordance with their terms. (c) Title. The City has or will obtain lawful tire to the lands, buildings, structures, and facilities constituting the System, that it warrants that it will detbnd the title to all the aforesaid lands, buildings, structures, and facilities, and every part thereof, for the benefit of the holders and owners of the Parity Bonds 27 and Additional Bonds, against the claims and demands of all persons whomsoever, that it is lawfully qualified to pledge the Pledged Revenues to the payment of the Parity Bonds and Additional Bonds in the manner prescribed herein, and has lawfully exercised such rights. (d) Lien~. The City will from time to time and before the same become delinquent pay and discharge all taxes, assessments, and governmental charges, if any, which shall be lawfully imposed upon it, or the System, that it will pay all lawful claims for rents, royalties, labor, materials, and supphes which if unpaid might by law become a lien or charge thereon, the lien of which would be prior to or interfere with the liens hereof, so that the priority of the liens granted hereunder shall be fully preserved in the manner provided herein, and that it will not create or suffer to be created any mechanic's, laborer's, materialman's, or other lien or charge which might or could be prior to the liens hereof, or do or suffer any matter or thing whereby the liens hereof might or could be impaired; provided, however, that no such tax, assessment, or charge, and that no such claims which might be used as the basis ora mechamc's, laborer's, materialman's, or other lien or charge, shall be required to be paid so long as the validity of the same shall be contested in good faith by the City. (e) Operation of System; No Free Service. While the Parity Bonds or any Additional Bonds are outstanding and unpaid the City shall continuously and efficiently operate the System, and shall maintain the System in good condition, repair, and working order, all at reasonable cost. No free service of the System shall be allowed, and should the City or any of its agencies, instrumentalities, lessors, or concessionaires make use of the services and facilities of the System, payment monthly of the standard retail price of the services provided shall be made by the City or any of its agencies, instrumentalities, lessors, or concessionaires out of funds from sources other than the revenues of the System, unless made from surplus Pledged Revenues as permitted by Section 23(b) hereof. (f) Further Encumbrance. While the Parity Bonds or any Additional Bonds are outstanding and unpaid, the City shall not additionally encumber the Pledged Revenues in any manner, except as permitted in this Ordinance in connection with Additional Bonds, unless said encumbrance is made junior and subordi- nate in all respects to the liens, pledges, covenants, and agreements of this Ordinance and any ordinance authorizing the issuance of Additional Bonds; but the right of the City to issue revenue bonds payable from a subordinate lien on surplus Pledged Revenues is specifically recognized and retained, as permitted under Section 23(b) hereof). (g) Sale, Lease or Disposal of Property. No part of the,System shall be sold, leased, mortgaged, demolished, removed or otherwise disposed of, except as followsx (1) To the extent permitted by law, the City may sell, lease, mortgage, demolish, remove or otherwise dispose of at any time and from time to time any property or facilities constituting part of the System only if (A) the City Council shall determine, as evidenced by a resolution to that effect, such property or facilities are not useful in the operation of the System, or (B) the proceeds of such sale are $250,000 or less, or the City Council shall determine, as evidenced by a resolution to that effect, the fair market value of the property or facilities exchanged is $250,000 or less, or (C) if such proceeds or fair market value exceed $250,000 the City Council shall determine, as evidenced by a resolution to that effect, that the sale or exchange of such property or facilities will not impair the ability of the City to comply during the current or any future fiscal year with the covenant of the City set forth in Section 28(i) of:chis Ordinance. The proceeds of any such sale or exchange not used to acquire other property necessary or desirable for the sale or efficient operation of the System shall forthwith, at the option of the City, (i) to be used to redeem or purchase Parity Bonds or Additional 28 Bonds, (ii) otherwise be used to provide for the payment of Patty Bonds or Additional Bonds or (iii) be used for any other lawful purpose. (2) To the extent permitted by law, the City may lease or make contracts or grant licenses for the operation of, or make arrangements for the use of, or grant easements or other rights with respect to, any part of the System, provided that any such lease, contract, license, arrangement, easement or right (A) does not impede the operation of the System by the City and 03) does not in any manner impair or adversely affect the rights or security of the owners of the Parity Bonds or Additional Bonds under this Ordinance; and provided, further, that if the depreciated cost of the property to be covered by any such lease, contract, license, arrangement, easement or other right is in excess of $500,000, the City Council shall determine, as evidenced by a resolution to that effect, that the action of the City with respect thereto does not result in a breach of the conditions under this clause (2). Any payments received by the City under or in connection with any such lease, contract, license, arrangement, easement or right in respect of the System or any part thereof shall constitute Gross Revenues. (h) Insurance. (I) The City shall cause to be insured such parts of the System as would usually be insured by corporations operating like properties, with a responsible insurance company or companies, against risks, accidents, or casualties against which and to the extent insurance is usually carried by corporations operating like properties, including, to the extent reasonably obtainable, fire and extended coverage insurance, insurance against damage by floods, and use and occupancy insurance. Public liability and property damage insurance also shall be carried unless the City Attorney gives a written opinion to the effect that the City is not liable for claims which would be protected by such instmance. All insurance premiums shall be paid as an expense of operation of the System. At any time while any contractor engaged in construction work shall be fully responsible therefor, the City shall not be required to carry insurance on the work being constructed if the contractor is required to carry appropriate insurance. All such policies shall be open to the inspection of the Bondholders and their representatives at all reasonable times. Upon the hapioening of any loss or damage covered by insurance from one or more of said causes, the City shall make due proof of loss and shall do all things necessary or desirable to cause the insuring companies to make payment in full directly to the City. The proceeds of insurance covering such property, together with any other funds necessary and available for such purpose, shall be used forthwith by the City for repairing the property damaged or replacing the property destroyed; provided, however, that if said insurance proceeds and other funds are insufficient for such purpose, then said insurance proceeds pertaining to the ~ystem shall be deposited in a special and separate trust fund, at an official depository of the City, to be rlesignated the Insurance Account. The Insurance Account shall be held until such time as other funds become available which, together with the Insurance Account, will be sufficient to make the repairs or replacements originally required. (2) The annual audit hereinafter required may contain a section commenting on whether or not the City has complied with the requirements of this Section with respect to the maintenance of insurance, and shall state whether or not all insurance premiums upon the insurance policies to which reference is made have been paid. (i) Annual Budget and Rate Covenant. The City shall prepare, prior to the beginmng of each fiscal year, an annual budget, in accordance with law, reflecting an estimate of cash receipts and disbursements for the ensuing fiscal year in sufficient detail to indicate the probable Gross Revenues and Pledged Revenues for such fiscal year. The City shall fix, establish, maintain, and collect, such rates, charges, and fees for the use and availability of the System at all times as are necessary (1) to produce Gross Revenues sufficient, together with any other Pledged Revenues, to pay all current operation and maintenance expenses of the 29 System, and (2) to produce an mount of Pledged Revenues during each fiscal year at least equal to the greater of 1.25 times the average annual principal and interest requirements of all then outstanding Parity Bonds and AdditionalBonds or 1.25 times the succeeding fiscal year's principal and interest requirements of all then outstanding Parity Bonds and Additional Bonds. (j) Records. The City shall keep proper books of recordand account in which full, true, proper, and correct entries will be made of all dealings, activities, and transactions relating to the System, the Pledged Revenues, and the Funds created pursuant to this Ordinance, and all books, documents, and vouchers relating thereto shall at all reasonable times be made available for inspection upon request of any Bondholder, provided, that all books, documents, and vouchers relating to the City's electric system shall be made available for inspection only to the extent required by law, including, without limitation, the provisions of Section 552.133 of the Texas Government Code. To the extent consistent with the provisions of this Ordinance, the City shall keep its books and records in a manner conforming to standard accounting practices as usually would be followed by private corporations owning and operating a similar System, with appropriate recognition being given to essential differences between mumcipal and corporate accounting practices. (k) Audits. After the close of each fiscal year while any of the Parity Bonds or any Additional Bonds are outstanding, an audit will be made of the books and accounts relating to the System and the Pledged Revenues by an independent certified public accountant or an independent firm of certified public accountants. As soon as practicable after the close of each such year, and when said audit has been completed and made available to the City, a copy of such audit for the preceding year shall be mailed to the MunicipalAdvisory Council of Texas, to each paying agent for any bonds payable from Pledged Revenues, and to any Bondholders who shall so request in writing. The annual audit reports shall be open to the inspec- tion of the Bondholders and their agents and representatives at all reasonable times. (1) Governmental Agencies. It will comply with all of the terms and conditions of any and all franchises, permits, and authorizations applicable to or necessary with respect to the S3~stem, and which have been obtained from any governmental agency; and the City has or will obtain and keep in full force and effect all franchises, permits, authorization, and other requirements applicable to or necessary with respect to the acquisition, construction, equipment, operation, and maintenance of the System. (m) No Competition. It will not operate, or grant any franchise or, to the extent it legally may, permit the acquisition, construction, or operation of, any facilities which would be in competition with the System, and to the extent that it legally may, the City will prohibit any such competing facilities. (n) No Arbitrage. The City covenants to and with the purchasers of the Parity Bonds and any Additional Bonds that no use will be made of the proceeds of any of such bonds at any time throughout the term of any of such bonds which, if such use had been reasonably expected on the date of delivery of any of such bonds to and payment therefor by the purchasers, would have caused any of such bonds to be arbitrage bonds within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended (the "Code"), or any regulations or rulings pertaining thereto; and by this covenant the City is obligated to comply with the requirements of the aforesaid Code and all applicable and pertinent Department of the Treasury regulahons relating to arbitrage bonds. The City further covenants that the proceeds of all such bonds will not otherwise be used directly or indirectly so as to cause all or any part of such bonds to be or become arbitrage bonds within the meaning of the aforesaid Code, or any regulations pertaining thereto. Section 29. AMENDMENT OF ORDINANCE. (a) The holders or owners of Parity Bonds and Additional Bonds aggregating in principal amount 51% of the aggregate principal amount of then outstanding 30 Parity Bonds and Additional Bonds shall have the fight from time to t/me to approve any amendment to this Ordinance which may be deemed necessary or desirable by the City, provided, however, that nothing herein contained shall permit or be construed to permit the amendment of the terms and conditions in this Ordinance or in the Parity Bonds or Additional Bonds so as to: (1) Make any change in the maturity of the outstanding Parity Bonds or Additional Bonds; (2) Reduce the rate of interest borne by any of the outstanding Parity Bonds or Additional Bonds; (3) Reduce the amount of the principal payable on the outstanding Parity Bonds or Additional Bonds; (4) Modify the terms of payment of principal of or interest on the outstanding Parity Bonds or Additional Bonds, or impose any conditions with respect to such payment; (5) (6) Affect the rights of the holders or owners of less than all of the Parity Bonds and Additional Bonds then outstanding; Change the minimum percentage of the principal amount of'Parity Bonds and Additional Bonds necessary for consent to such amendment. (b) If at any time the City shall desire to amend the Ordinance under this Section, the City shall cause notice of the proposed amendment to be published in a financial publication of general circulation in The City of New York, New York, once during each calendar week for at least two successive calendar weeks. Such notice shall briefly set forth the nature of the proposed amendment and shall state that a copy thereof is on file at the principal office of the Paying Agents for inspection by all holders or owner's ,of Parity Bonds and Additional Bonds. Such publication is not required, however, if notice in writing is given to each holder or owner of Parity Bonds and Additional Bonds. (c) Whenever at any time not less than thirty days, and within one year, from the date of the first publication of said notice or other service of written notice the City shall receive an insmanent or instruments executed by the holders or owners of at least 51% in aggregate principal amount of all Parity Bonds and Additional Bonds then outstanding, which instrument or insmanents shall refer to the proposed amendment described in said notice and which specifically consent to and approve such amendment in substantially the form of the copy thereof on file with the Paying Agents, the City Council may pass the amendatory ordinance in substantially the same form. (d) Upon the passage of any amendatory ordinance pursuant to the provisions of this Section, this Ordinance shall be deemed to be amended in accordance with such amendatory ordinance, and the respective rights, duties, and obligations under this Ordinance of the City, and all the holders or owners of then out- standing Parity Bonds and Additional Bonds and all future Parity Bonds and Additional Bonds shall thereafter be determined, exercised, and enforced hereunder, subject in all respects to such amendments. (e) Any consent given by the holder or owner of a Parity Bond or Additional Bond pursuant to the provisions of this Section shall be irrevocable for a period of one year from the date of the first publication of the notice provided for in this Section, and shall be conclusive and binding upon all future holders or owners of the same Parity Bond or Additional Bond during such period. Such consent may be revoked at any time 31 after one year from the date of the first publication of such notice by the holder or owner who gave such consent, or by a successor in title, by filing notice thereof with the paying agents and the City, but such revocation shall not be effective if the holders or owners of 51% in aggregate principal amount of the then outstanding Parity Bonds and Additional Bonds as in this Section defined have, prior to the attempted revocation, consented to, and approved the amendment. (f) For the purpose of this Section, the fact of the holding of Parity Bonds or Additional Bonds which are in bearer, coupon form, by any bondholder and the amount and numbers of such bearer Parity Bonds or Additional Bonds and the date of their holding same, may be proved by the affidavit of the person claiming to be such holder or owner, or by a certificate executed by any trust company, bank, banker, or any other depository wherever situated showing that at the date therein mentioned such person had on deposit with such trust company, bank, banker, or other depository, the Parity Bonds and Additional Bonds described in such certificate. The City may conclusively assume that such ownership continues until written notice to the contrary is served upon the City. The ownership of all registered Parity Bonds and Additional Bonds shall be determined from the registration books kept by the registrar therefor. Section 30. DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED BONDS. (a) Replacement Bonds. In the event any outstanding Bond is damaged, mutilated, lost, stolen, or destroyed, the Paying Agent/Registrar shall cause to be printed, executed, and delivered, a new bond of the same principal amount, maturity, and interest rate, as the damaged, mutilated, lost, stolen, or destroyed Bond, in replacement for such Bond in the manner hereinafter provided. (b) Apphcation for Replacement Bonds. Application for replacement of damaged, mutilated, lost, stolen, or destroyed Bonds shall be made by the registered owner thereof to the Paying Agent/Regiswar. In every case of loss, theft, or destruction ora Bond, the registered owner applying for a replacement bond shall furnish to the Issuer and to the Paying Agent/Registrar such security or indemnity as may be required by them to save each of them harmless from any loss or damage with respect thereto. Also, 'in every case of loss, theft, or destruction of a Bond, the registered owner shall furnish to the Issuer and to the Paying Agent/Registrar evidence to their satisfaction of the loss, theft, or destruction of such Bond, as the case may be. In every case of damage or mutilation of a Bond, the registered owner shall surrender to the Paying Agent/Registrar for cancellation the Bond so damaged or mutilated. (c) No Default Occurred. Notwithstanding the foregoing~provisions of this Section, in the event any such Bond shall have matured, and no default has occurred which is then continuing in the payment of the prmcipalof, redemption premium, if any, or interest on the Bond, the Issuer may authorize the payment of the same (without surrender thereof except in the case of a damaged or mutilated Bond) instead of issuing a replacement Bond, provided security or indemnity is furnished as above provided in this Section. (d) Charze for Issuing Replacement Bonds. Prior to the issuance of any replacement bond, the Paying Agent/Registrar shall charge the registered owner of such Bond with all legal, printing, and other expenses in connection therewith. Every replacement bond issued pursuant to the provisions of this Section by virtue of the fact that any Bond is lost, stolen, or destroyed shall constitute a contractual obligation of the Issuer whether or not the lost, stolen, or destroyed Bond shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Ordinance equally and proportionately with any and all other Bonds duly issued under this Ordinance. (e) Authori .ty for Issuing Replacement Bonds. In accordance with Chapter 1201, Texas Government Code, this Section of this Ordinance shall constitute authority for the issuance of any such replacement bond 32 without necessity of further action by the governing body of the Issuer or any other body or person, and the duty of the replacement of such bonds is hereby authorized and imposed upon the Paying Agent/Registrar, and the Paying Agent/Registrar shall authenticate and deliver such Bonds in the form and manner and with the effect, as provided in Section 6(d) of this Ordinance for Bonds issued in conversion and exchange for other Bonds. Section 31. COVENANTS REGARDING TAX-EXEMPTION. The Issuer covenants to refrain from any action which would adversely affect, and to take such action to ensure, the treatment of the Bonds as obligations described in section 103 of the Code, the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the Issuer covenants as follows: (a) to take any action to assure that no more than 10 percent of the proceeds of the Bonds (less amounts deposited to a reserve fund, if any) are used for any "private business use", as defmedin section 141(b)(6) of the Code or, if more than 10 percent of the proceeds are so used, that amounts, whether or not received by the Issuer, with respect to such private business use, do not, under the terms of this Ordinance or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Bonds, in contravention of section 141(b)(2) of the Code; (b) to take any action to assure that in the event that the "private business use" described in subsection (a) hereof exceeds 5 percent of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used for a "private business use" which is "related" and not "disproportionate", within the meaning of section 141(b)(3) of the Code, to the governmental use; (c) to take any action to assure that no amount which is greaier than the lesser of $5,000,000, or 5 percent of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; (d) to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of aection 141(b) of the Code; (e) to regain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of sectuon 149(b) of the Code; (f) to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with -- (1) proceeds of the Bonds invested for a reasonable temporary period of 3 years or less until such proceeds are needed for the purpose for which the Bonds are issued, (2) amounts invested in a bona fide debt service fund, within the meaning of section 1.148-1 (b) of the Treasury Regulations, and 33 (3) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the stated principal amount (or, in the case of a discount, the issue price) of the Bonds; (g) to otherwise restrict the use of the proceeds of the Bonds or amounts treated as proceeds of the Bonds, as may be necessary, so that the Bonds do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage), Section 149(g) of the Code (relating to hedge bonds), and, to the extent applicable, section 149(d) of the Code (relating to advance refundings); and (h) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings", within the meaning of section 148(I) of the Code and to pay to the United States of America, not later that 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148(f) of the Code. For purposes of the foregoing (a) and (b), the Issuer understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Bonds. It is the understanding of the Issuer that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify, or expand provisions of the Code, as applicable to the Bonds, the Issuer will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nation, ally-recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Bonds, the Issuer agrees to comply with the additional requirements to the extent necessaiy and reasonably possible, in the opinion of nationally-recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In furtherance of such intention, the Issuer hereby authorizes and directs the Mayor to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the Issuer, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. The Issuer covenants to comply with the covenants contained in this section after defeasance of the Bonds. In order to facilitate compliance with the above covenant (h), a "Rebate Fund" is hereby established by the Issuer for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation, the owners of the Bonds. The Rebate Fund is established for the additional purpose of compliance with Section 148 of the Code. Section 32. ALLOCATION OF, AND LIMITATION ON, EXPENDITURES FOR THE PROJECT. The Issuer covenants to account for the expenditure of sale proceeds and investment earnings to be used for the purposes described in Section 1 of this Ordinance (the "Project") on its books and records in accordance with the requirements of the Internal Revenue Code. The Issuer recognizes that in order for the proceeds to be considered used for the reimbursement of costs, the proceeds must be allocated to expenditures within 18 months of the later of the date that (1) the expenditure is made, or (2) the Project is completed; but in no event later than three years after the date on which the original expenditure is paid. The foregoing notwithstanding, the Issuer recogmzes that in order for proceeds to be expended under the Internal Revenue Code, the sale proceeds or investment earnings must be expended no more than 60 days after the 34 earlier of (1) the fifth anniversary of the delivery of the Bonds, or (2) the date the Bonds are retired. The Issuer agrees to obtain the advice of nationally-recognized bond counsel if such expenditure fails to comply with the foregoing to assure that such expenditure will not adversely affect the tax-exempt status of the Bonds. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. Section 33. DISPOSITION OF PROJECT. The Issuer covenants that the property constituting the Project will not be sold or otherwise disposed in a transaction resulting in the receipt by the Issuer of cash or other compensation, unless the Issuer obtains an opinion of nationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. For purposes of the foregoing, the portion of the property comprising personal property and disposed of in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. Section 34. INTEREST EARNINGS ON BOND PROCEEDS. Interest earnings derived from the investment of proceeds from the sale of the Initial Bonds, other than proceeds deposited in the Interest and Sinking Fund and the Reserve Fund, shall be used along with other available proceeds for improving the System; provided that after completion of the improvements if any of such interest earnings remain on hand, such interest earnings shall be deposited in the Interest and Sinking Fund. It is further provided, however, that any interest earnings on bond proceeds which are required to be rebated to the United States of America pursuant to the Covenants Regarding Tax-Exemption herein so as to prevent the Bonds from being arbitrage bonds shall be so rebated and not considered as interest earnings for the purposes of this Ordinance. Section 35. CUSTODY, APPROVAL, AND REGISTRATION OF BONDS; BOND COUNSEL'S OPINION, CUSIP NUMBERS, PREAMBLE, AND INSURANCE. The Mayor o~' the Issuer is hereby authorized to have control of the Initial Bonds issued hereunder and all necessary records and proceedings pertaining to the Initial Bond pending their delivery and the investigation, examination, and approval by the Attorney General of the State of Texas, and the registration by the Comptroller of Public Accounts of the State of Texas. Upon registration of the Imtial Bond said Comptroller of Public Accounts (or a deputy designated in writing to act for said Comptroller) shall manually sign the Comptroller's Registration Certificate on the Imtial Bond, and the seal of said Comptroller shall be impressed, or placed in facsimile, on the Initial Bonds. The approving legal opinion of the Issuer's Bond Counseland the assigned CUSIP numbers may, at the option of the Issuer, be printed on the Initial Bond or on any Bonds issued and delivered in conversion of and exchange or replacement of any Bond, but neither shall have any legal effect, and shall be solely for the convenience an6 information of the registered owners of the Bonds. The preamble to this Ordinance is hereby adopted and made a part hereof for all purposes. If insurance is obtained on any of the Bonds, the Initial Bond and all other Bonds shall bear an appropriate legend conceming insurance as provided by the insurer. Section 36. SALE OF INITIAL BONDS. The Initial Bonds are hereby sold and shall be delivered to , for cash for the par value thereof and accrued interest thereon to date of delivery plus a premium of $ (accrued interest and premium, if any, to be deposited into the Interest and Sinking Fund). It is hereby officially found, determined, and declared that the InitialBonds have been sold at public sale to the bidder offering the lowest interest cost, after receiving sealed bids pursuant to an Official Notice of Sale and Bidding Instructions and Official Statement dated ,2003, prepared and distributed in connection with the sale of the Imtial Bonds. Said 35 Official Notice of Sale and Bidding Instructions and Official Statement, and any addenda, supplement, or amendment thereto have been and are hereby approved by the governing body of the Issuer, and their use in the offer and sale of the Bonds is hereby approved. It is further officially found, determined, and declared that the statements and representations contained in said Official Notice of Sale and Official Statement are tree and correct in all material respects, to the best knowledge and betel of the governing body of the Issuer. Section 37. OFFICIAL STATEMENT. An Official Statement dated as of the date of this meeting has been prepared in connection with the sale of the Imtial Bonds and the Bonds, in the form and substance submitted at this meeting. Said Official Statement and any supplement or addenda thereto have been and are hereby approved, and their use in the offer and sale of the Bonds is hereby approved. It is further officially found, determined, and declared that the statements and representations contained in said Official Statement are tme and correct in all material respects, to the best knowledge and belief of the Issuer. The distribution and use of the Preliminary Official Statement dated March __, 2003, prior to the date hereof is hereby ratified and approved. Section 38. REFUNDING OF REFUNDED BONDS. That concurrently with the delivery of the InifialBonds the Issuer shall deposit an amount from the proceeds from the sale of the Imtial Bonds with The Bank of New York Trust Company of Florida, N.A, Jacksonville, Florida, as Escrow Agent, sufficient, together with other available amounts, to refund all of the Refunded Bonds in accordance with Chapter 1207, Texas Government Code, as amended. The Issuer hereby authorizes the execution of the Escrow Agreement dated as of April 1, 2003 betweenthe Escrow Agent and the Issuer. The Mayor of the Issuer is authorized and directed to execute, on behalf of the Issuer, said Escrow Agreement in the form and substance presented to this meeting. It is hereby found and determined that the refunding of the Refunded Bonds is advisable and necessary in order to restructure the debt service requirements and procedures of the Issuer, and that the debt service requirements on the Bonds will be less thanthose on the Refunded Bonds, resulting in a reduction in the amount of principal and interest which otherwise would be payable both on an actual and a present value basis being an actual gross debt service savings of approximately $ ~ and a present value debt service savings of approximately $ Section 39. REDEMPTION OF REFUNDED BONDS. There is attached hereto as Exhibit B and made a part hereof for all purposes a notice of redemption for the Refunded Bonds, which Refunded Bonds are hereby called for redemption, and shall be redeemed, prior to their scheduled maturities, on the date, at the place, and at the price, set forth therein; the Issuer shall cause the appropriate notices of such redemption to be given in accordance with the requirements of the respective proceedings authorizing the issuance of such Refunded Bonds; and due provision shall be made by the Issuer in accordance with law for the payment of the redemption price of said bonds by the place of payment (paying agent) for such Refunded Bonds. Section 40. DTC REGISTRATION. The Bonds initially shall be issued and delivered in such manner that no physical distribution of the Bonds will be made to the public, and The Depository Trust Company ("DTC"), New York, New York, initially will act as depository for the Bonds. DTC has represented that it is a limited purpose trust company incorporated under the laws of the State of New York, a member of the Federal Reserve System, a "cleating corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered under Section 17A of the federal Securities Exchange Act of 1934, as amended, and the Issuer accepts, but in no way verifies, such representations. The Initial Bond authorized by this Ordinance shall be delivered to and registered in the name of the Purchaser. However, it is a condition of delivery and sale that the Purchaser, immediately after such delivery, shall cause the Paying Agent/Registrar, as provided for in this Ordinance, to cancel said Initial Bond and deliver in exchange therefor a substitute Bond for each maturity of such Initial Bond, with each such substitute Bond 36 to be registered in the name of CEDE & CO., the nominee of DTC, and it shall be the duty of the Paying Agent/Registrar to take such action. It is expected that DTC will hold the Bonds on behalf of the Purchaser and/or the DTC Participants, as defined and described in the Official Statement referred to and approved in Section 36 hereof (the "DTC Participants"). So long as each Bond is registered in the name of CEDE & CO., the Paying Agent/Registrar shall treat and deal with DTC in all respects the same as if it were the actual and beneficial owner thereof. It is expected that DTC will maintain a book entry system which will identify beneficial ownership of the Bonds by DTC Participants in integral amounts of $5,000, with transfers of ownership being effected on the records of DTC and the DTC Participants pursuant to rules and regulations established by them, and that the substitute Bonds imtiaily deposited with DTC shall be immobihzed and not be further exchanged for substitute Bonds except as hereinafter provided. The Issuer is not responsible or liable for any fimctions of DTC, will not be responsible for paying any fees or charges with respect to its services, will not be responsible or liable for maintaining, supervising, or reviewing the records of DTC or the DTC Participants, or protecting any interests or rights of the beneficial owners of the Bonds. It shall be the duty of the Purchaser and the DTC Participants to make all arrangements with DTC to establishthis book- entry system, the beneficial ownership of the Bonds, and the method of paying the fees and charges of DTC. The Issuer does not represent, nor does it in any way covenant that the initial book-entry system established with DTC will be maintained in the future. The Issuer reserves the right and option at any time in the future, in its sole discretion, to terminate the DTC (CEDE & CO.) book-entry only registration requirement described above, and to permit the Bonds to be registered in the name of any owner. If the Issuer exercises its right and option to terminate such requirement, it shall give written notice of such termination to the Paying AgenffRegistrar and to DTC, and thereafter the Paying Agent/Registrar shall, upon presentation and proper request, register any Bond in any name as provided for in this Ordinance. Notwithstanding the initial establishment of the foregoing book-entry system with DTC, if for any reason any of the originally delivered substitute Bonds is duly filed with the Paying Agent/Registrar with proper request for transfer and substitution, as provided for in this Ordinance, substitute Bonds will be duly delivered as provided in this Ordinance, and there will be no assurance or representation that any book-entry system will be maintained for such Bonds. Section 41. COMPLIANCE WITH RULE 15c2-12. (a) Annual Reports. (i) The Issuer shall provide annually to each NRMSIR and any SID, within six months after the end of each fiscal year ending in or after 2002, financial information and operating data with respect to the Issuer of the general type inchded in the final Official Statement authorized by Section 37 of this Ordinance, being the information described in Exhibit A hereto, which Exhibit is attached to and incorporated in this Ordinance as if written word for word herein. Any financial statements soto be provided shall be (1) prepared in accordance with the accounting principles described in Exhibit A hereto, or such other accounting principles as the Issuer may be required to employ from time to time pursuant to state law or regulation, and (2) audited, if the Issuer commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the Issuer shall provide unaudited financial statements by the required time and will provide audited financial statements for the applicable fiscal year to each NRMSIR and any SID, when and if the audit report on such statements become available. (ii) If the Issuer changes its fiscal year, it will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the Issuer otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or fried with the SEC. 37 (b) MaterialEvent Notices, The Issuer shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Bonds, if such event is material within the meaning of the federal securities laws: 1. Principal and interest payment delinquencies; 2. Non-payment related defaults; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions or events affecting the tax-exempt status of the Bonds; 7. Modifications to rights of holders of the Bonds; 8. Bond calls; 9. Defeasances; 10. Release, substitution, or sale of property securing repayment of the Bonds; and 11. Rating changes. The Issuer shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the Issuer to provide financial information or operating data in accordance with subsection (a) of this Section by the time required by such subsection. (c) Limitations, Disclaimers, and Amendments. (i) The Issuer shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the Issuer remains an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the Issuer in any event will give the notice required by Subsection (b) hereof of any,Bond calls and defeasance that cause the Issuer to no longer be such an "obligated person". (ii) The provisions of this Section are for the sole benefit of the registered owners and beneficial owners of the Bonds, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable fight, remedy, or claim hereunder to any other person. The Issuer undertakes to provide only the fmancialinformation, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the Issue#s financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Section or otherwise, except as expressly provided herein. The Issuer does not make any representation or warranty concerning such information or its usefulness to a decision to revest in or sell Bonds at any future date. ('iii) UNDER NO CIRCUMSTANCES SHALL THE ISSUER, ITS OFFICERS, AGENTS AND EMPLOYEES, BE LIABLE TO THE REGISTERED OWNER OR BENEFICIAL OWNER OF ANY 38 BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE ISSUER, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. (iv) No default by the Issuer in observing or performing its obligations under this Section shall comprise a breach of or default under the Ordinance for purposes of any other provision of this Ordinance. Nothing in this Section is intended or shall act to disclaim, waive, or otherwise limit the duties of the Issuer under federal and state securities laws. (v) The provisions of this Section may be amended by the Issuer fi:om time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Issuer, but only if (1) the provisions of this Section, as so amended, would have permitted an underwhter to purchase or sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (2) either (a) the registered owners of a majority in aggregate principal amount (or any greater amount required by any other provision of this Ordinance that authorizes such an amendment) of the outstanding Bonds consent to such amendment or (b) a person that is unaffiliated with the Issuer (such as nationally recognized bond counsel) determined that such amendment will not materially impair the interest of the registered owners and beneficial owners of the Bonds. If the Issuer so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with subsection (a) of this Section an explanation, in narrative form, of the reason for the amendment and of the impact of any change in the type of financial information or operating data so provided. The Issuer may also amend or repeal the pmvisiqns of this continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter tSom lawfully purchasing or selling Bonds in the primary offering of the Bonds. (d) Definitions. As used m this Section, the following terms have the meanings ascribed to such terms below: ~ "MSRB" means the Municipal Securities Rulemaking Board. "NRMSIR" means each person whom the SEC or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule fi:om time to time. "Rule" means SEC Rule 15c2-12, as amended fi:om time to time. "SEC" means the Umted States Securities and Exchange Commission. "SID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule fi:om time to time. 39 Section 42. PROTECTION OF PLEDGE. Chapter 1208, Government Code, applies to the issuance of the Bonds and the pledge of the revenues granted by the Issuer under Section 9 of this Ordinance, and is therefore valid, effective, and perfected. If Texas law is amended at any time while the Bonds are outstanding and unpaid such that the pledge of the revenues granted by the Issuer under Section 9 of this Ordinance is to be subject to the filing requirements of Chapter 9, Texas Business & Commerce Code, then in order to preserve to the registered owners of the Bonds the perfection of the security interest in said pledge, the Issuer agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Texas Business & Commerce Code and enable a filing to perfect the security interest in said pledge to occur. Section 43. FURTHER PROCEDURES. The Mayor of the Issuer, the City Secretary of the Issuer, and all other officers, employees, and agents of the Issuer, and each of them, shall be and they are hereby expressly authorized, empowered, and directed from time to time and at any time to do and perform all such acts and things and to execute, acknowledge, and deliver in the name and under the corporate seal and on behalf of the Issuer all such instruments, whether or not herein mentioned, as may be necessary or desirable in order to carry out the terms and provisions of this Bond Ordinance, the Bonds, the sale of the Bonds, and the Official Statement; and the Assistant City Manager/Finance of the City shall cause the expenses of issuance of the Bonds to be paid from the proceeds of sale of the Initial Bonds or from other lawfully available funds of the Issuer. In case any officer whose signature shall appear on any Bond shall cease to be such officer before the delivery of such Bond, such signature shall nevertheless be valid and sufficient for all purposes the same as if such officer had remained in office until such delivery. Section 44. OPEN MEETINGS. The City Council has found and determined that the meeting at which this Ord/nance is considered is open to the public and that notice thereof was given in accordance with the provisions of the Texas Open Meetings, Law, Tex. Gov't. Code, Chapter 551, as amended. Section 45. EFFECTWE DATE. passage and approval. This Ordinance shall become effective immediately upon its 4O PASSED AND APPROVED this the __ day of April, 2003. Euline Brock, Mayor ATTEST: Jennifer Walters, City Secretary APPROVED AS TO LEGAL FORM: Herbert L./~, C~,Attorney 41 SCHEDULE I Utility System Revenue Refunding Bonds, Series 1993-A Principal Principal Original Original Interest Amount Amount Dated Date Maturi _ty Rate Outstanding Refunded 6/1/1993 12/1/2003 5.00% $2,530,000 $2,530,000 12/1/2004 5.10% 2,465,000 2,465,000 12/1/2005 5.25% 2,355,000 2,355,000 12/1/2006 5.30% 1,195,000 1,195,000 12/1/2007 5.40% 1,230,000 1,230,000 12/1/2008 5.40% 1,020,000 1,020,000 12/1/2009 5.40% 810,000 810,000 The 2003-2009 maturities will be redeemed prior to original maturity on June 1, 2003 at par. EXHIBIT A DESCRIPTION OF ANNUAL FINANCIAL INFORMATION The following information is referred to in Section 41 of this Ordinance: Annual Financial Statements and Operating Data The fmancial information and operating data with respect to the Issuer to be provided annually in accordance with such Section are as specified (and included in the Appendix or under the tables of the Official Statement referred to) below: Tables numbered 1 through 11, inclusive, under the captions "The Electric System", "The Water System", "The Wastewater System", "Debt Requirements" and "Financial Information" m the Official Statement. Appendix B in the Official Statement. Accounting Principles The accounting principles referred to in such Section are the accounting principles described in the notes to the financial statements referred to in the paragraph above. EXHIBIT B NOTICE OF PRIOR REDEMPTION CITY OF DENTON (TEXAS) UTILITY SYSTEM REVENUE REFUNDING BONDS, SERIES 1993-A NOTICE IS HEREBY GIVEN that the City of Denton, Texas has called for redemption the outstanding Bonds of the City described as follows: CITY OF DENTON (TEXAS) UTILITY SYSTEM REVENUE REFUNDING BONDS, SERIES 1993-A, dated June 1, 1993, scheduled to mature on December 1, 2003 through December 1, 2009, aggregating $11,605,000 (and being all of the outstanding bonds of said series scheduled to mature on and after December 1, 2003 to and including December 1, 2009). Call date: June 1, 2003; redeemable at a redemption price of par plus accrued interest at the principal corporate offices of The Bank of New York, Jacksonville, Florida, only upon presentation by the registered owner. If moneys sufficient for the payment of such redemption price are held by or on behalf of the respective paying agent, the described Bonds shall become due and payable on the redemption date specified, and the interest thereon shall cease to accrue from and after the redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, payors making certain payments due on debt securities may be obligated to deduct and withhold 31 percent of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of the withholding of tax, such payees should submit a taxpayer identification number when surrendering the bonds for redemption. ~ NOTICE IS FURTHER GIVEN that all Bonds described above should be submitted to the following address: The Bank of New York Trust Company of Flo~da, N.A. 10161 Centurion Parkway Jacksonville, FL 32256 THE BANK OF NEW YORK TRUST COMPANY OF FLORIDA, NA. ! I ! ! I I ! I I I I I I I I I I i I HANDOUT TO COUNCIL $50,180,000 UTILITY SYSTEM REVENUE REFUNDING AND IMPROVEMENT BONDS, SERIES 2003 Bids Due Tuesday, April 1, 2003, at 10:30 AM, CST The following ratings have been assigned: Moody's Investors Service, Inc. Standard & Poor's Rating Group A Division of McGraw-Hill, Inc. PREPARED BY: Underlying Credit Rating "Al" "A+" FIRST SOUTHWEST COMPANY I I ! I I I I ! i I I I ! I I I I ! i Global Credit Research New Issue 24 MAR 2003 New Issue: Denton (City of) TX MOODY'S ASSIGNS Al TO CITY OF DENTON, TX UTILITY SYSTEM REVENUE ISSUES Affects Approximately $254 Hillion of Debt Combined Utilities TX Moody's Rating ISSUE Utility System Revenue Refunding and Improvement Bonds, Series 2003 Sale Amount $49,620,000 Expected Sale Date 04101/03 Rating Description Utility Revenue RATING A1 Opinion NEW YORK, Mar 24, 2003 ~- Moody's Investors Service has assigned the underlying credit rating of A1 with a stable outlook to the Denton, Texas offering of $49.6 million of Utility System Revenue Refunding and Improvement Bonds, Series 2003. Additionally, Moody's has affirmed the A1 credit rating on the outstanding $254.18 million parity debt. The debt is secured by a joint pledge of net revenues from the water, wastewater and electric utilities. This rating action reflects the inherent strengths of the water and wastewater systems, including a growing service area and a solid financial position while also considering the strong financial resources provided by the electric utility operations. The City of Denton (general obligation bonds rated Aa3 by Moody's) provides the utility system with a growing service area. The city is home to the University of North Texas and Texas Women's University with a combined enrollment of approximately 40,000. The customers of the system are diversified, with the top ten customers representing about 22% of 2001 operating revenue. For additional information on the City of Denton please see the New Issue Report dated March 2003. The city has more than adequate water supply that it receives from Lake Ray Roberts and Lake Lewisville, which have sufficient capacity to address the city's growth needs for the foreseeable future. The sewer system serves city residents and two wholesale customers and will increase its treatment capacity from 15 MGD to 21 MGD in January 2004, which should meet projected needs through 2013. The utility system maintains a stable financial position. As traditional municipal monopolies, the water and sewer services are expected to provide stable revenue streams. The electric utility may be somewhat more volatile. For fiscal 2002, pledged revenues provide 1.66 times coverage for the system's debt. This level of coverage is the narrewest since 1995, which is reflective of the very "wet" and cool summer experienced in the region. Rate increases for electric and wastewater have not occurred in the recent past and no future rate increases are planned at this time. Modest increases of 3% and 2% are slated for water rates in 2004 and 2005, which will be the first such increase since 1995. However, the system successfully implemented a drainage fee in the most recent fiscal year that will generate $3.5 million in 2003 and increase annually with new development. Officials anticipate that the fee will prev[de funding for debt service for previous storm water activities and for approximately $2 million in new capital projects each year. In addition, the system has substantial liquidity, including rate stabilization funds for each of the systems that totaled $69 million at FYE 2002. The system plans about $96 million in debt issuance for capital improvements during the next four years, with the proceeds allocated $37 million for electric, $35 million for wastewater/drainage and $24 million for water capital improvements, The system's debt ratio has steadily increased over the past few years but additional debt can be readily absorbed. The indenture for the current issue and parity bonds includes a rate covenant of 1.25 times average annual debt service coverage. The debt service reserve fund will be funded at a level equal to average annual debt service to be accumulated over a period not to exceed 60 months. Also the I I i I I ! I I I I I ! I I I ! I I I indenture provides for an extension and improvement fund in an amount equal to 8% of the defined adjusted gross revenues. The additional bonds test is 1,25 times the average annual debt service requirements or 1.1 times maximum annual debt service, Moody's believes the system will continue to pursue prudent financial management that maintains debt service coverage at or near the current levels. Outlook Our rating outlook for the bonds is stable. Moody's expects the electric utility to continue its preparation for deregulation, and for the water and wastewater utility to continue to pursue system improvements and an appropriate capital improvement program. The outlook also reflects Moody's expectations that the city will continue to implement prudent fiscal and debt management practices to provide at least current levels of debt service coverage. KEY STATISTICS: Service Area Population (City of Denton): 96,168 Operating ratio, FY 2002: 81.4% Debt ratio: FY 2002:49.1% Debt service coverage, FY 2002: 1.66x Coverage of maximum debt service (FY 2004): 1.21x Analysts Douglas Benton Analyst Public Finance Group Moody's Investors Service Sarrah Angelos Backup Analyst Public Finance Group Moody's Investors Service Con~c~ Journalists: (212) 553-0376 Research Clients: (212) 553-1653 © Copyright 2003, Moody's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, MOODY'S). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED~ DISSEMINATED, REDISTRIBUTED OR RESOLD~ OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE~ IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WiTHOUT MOODY'S PRIOR WRITTEN CONSENT. All Information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided "as is" without warranty of any kind and {4OODY'S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no clrcumsLances shall MOODY'S Ilave any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, speclal~ consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLLED, AS TO THE ACCURACY, TIMELINESS~ COMPLE3'ENESS, MERCHANTABILi~ OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR ~IANNER WHATSOEVER. Each rating or other opinion must be weighed solety as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and or each Issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or seiting. Pursuant to Section :t7(b) of the Securities Act of 1-933, MOODY'S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY'S have, prior to assignment of any rating, agreed to pay to MOODY'S for appralsa~ and rating services rendered by it fees ranging I I i Publication date: 28-Mar-2003 Repdnted from RatingsDirect Denton, Texas, Utility System Revenue Refunding and Improvement Bonds, Series 2003 Credit Analysts: Peter V Murphy, New York (1) 212-438-2065; Theodore Chapman, Dallas (1) 214-871-1401 I I i i I I I ! I I I I i ! I I Credit Profile $49,62 mil Util Sys Rev Rfdg and Imp Bnds Series 2003 dtd 04/01/2003 due 12/01/2022 A+ Sale date: 01-APR-2003 AFFIRMED $49.815 mil Util Sys Rev Bnds Sedes 2000A dtd 04/1512000 due 12/01/2000-2014 2017- 2019 AAA/A+(SPUR) $3.675 mil Util Sys Rev Bnds Taxable Series 2000B dtd 04115/2000 due 12/01/2000- 2010 2014 A.AA/A+(SP U R) $6,095 mil Util Sys Rev Bnds Series 1998 dtd 03/15/1998 due 12/01/1998-2017 A.AA/A+(SP U R} $59,545 mil Util Sys Rev Rfdg and Imp Bnds Series 2001 dtd 04/15/2001 due 12/01/2001-2020 A.AA/A+(SP U R) $7.475 mil Ufil Sys Rev Rfdg Bnds Series 1998 B dtd 08/01/1998 due 12/01/1998-2014 AAA/A+(SPUR) $36,795 mi Ufil Sys Rev Rfdg Bnds Sedes 1998A dtd 07115/1998 due 12/0112006-2018 2023 2029 AAA/A+(SPUR) OUTLOOK: STABLE Rationale The 'A+' rating on Denton, Texas' utility system revenue refunding and improvement bonds series 2003 reflects the following credit risks associated with the city's combined electric water and sewer system: · The electric system's reliance on Texas Municipal Power Agency's (TMPA) debt-laden Gibbons Creek coal facility for more than half of its power requirements; · High electricsystern fixed cost through 2018, primarily from off~balance sheet debt of TMPA; and · The challenge of funding a sizeable capital plan, largely driven by Denton's expanding population base. The rating also reflects: · A growing service area economy with a stable base, · Adequate capacity to meet demand in each of the three systems, · Substantial reserves held to combat future rate pressures, and · Strong liquidity levels. The bonds are secured by a first-lien pledge of net revenues of Denton's electric water and sewer funds, The electric system's business profile remains a '4' on Standard & PooCs Ratings Services' 10-point scale, with '1' being the strongest score attainable, reflecting the projected increasing cost of power from TMPA, which operates one 462-mWh coal-fired plant. Denton owns a 21.3% share of the plant, which typically provides Denton with 55% of its power. Despite successful efforts to lower fuel and operating costs in the past few years, the plant's high fixed costs remain a challenge to TMPA's members. Denton benefits from its location in the diverse Dallas-Forth Worth Metroplex. The city's electric system, which provides 75% of the combined utility revenues, has experienced stable retail energy sales growth, a 4% annual increase by mVVh, and a 2.7% annual increase in dollar volume between 1992-2002. Management has been proactive in preparing for statewide deregulation by offering competitive rates, and has focused on its distribution strengths by divesting itself of its generation capacity. In 2001, the city sold ail of its owned generation capacity to PG&E Energy Trading, a unit of PG&E National Energy Group inc. Constellation Power Source Inc., the successor to PG&E Energy Trading under a transition power agreement, is required to supply the city, at a cost that varies, and is linked to market movements, with all its power requirements above what the city receives from TMPA, and is also required to provide certain ancillary services that permit the city to receive energy from the Electdc Reliability Council of Texas power grid. The contract runs through June 2006. Residential and industrial rates are competitive with other power providers. In areas where there are dual and triple certifications, the city's electric systems have been able to compete effectively for new customers. Available power resources are sufficient to meet demand. Water supply sources and treatment capacity are sufficient to meet demand for at least 30 years, and wastewater treatment capacity will increase by 40% upon completion of an ongoing expansion, sufficient to accommodate sewer needs for a population in excess of 110,000. I I I I I I I ! ! I I I i I I I I I I Historically, financial operations have been strong. Due to increased debt service in support of recent capital projects, particularly in the water department, coverage of annual debt held steady vemus 2001 at 2.1x before transfers in 2002, and 1.5x after transfers. Coverage of maximum annual debt service, which occurs in fiscal 2006, has declined to about 1.23x before transfers. Unrestricted cash balances are reported as $24 million; however, total funds (unrestricted and restricted cash and investments) increased to $210 million as of Sept. 30, 2002, a portion of which includes a substantial $68 million in a rate-stabilization fund, most of which is attributable to the electric system. The 2003-2007 capital plan is sizeable, yet manageable, and includes an additional $134 million of new debt during the next five years, including the series 2003 bonds to fund the projects. Bond sales will fund various projects, consisting of $85 million of water and sewer projects and $49 million of electric projects. The utility expects to issue bonds in each of the next four yearn to complete the projects. Outlook The stable outlook reflects the expectation that coverage levels will stabilize. The outlook also reflects Denton's sufficient rate-setting flexibility, which will allow its electric utility to remain competitive for several yearn as a deregulated energy market evolves in Texas. The stable outlook assumes that, based on current management practices, Denton will continue to formulate and implement long-range plans that will enable it to accommodate its growth needs while maintaining sufficient coverage and liquidity levels. Economy Denton is roughly 35 miles from both Dallas and Fort Worth, providing residents with good access to employment in the Dallas-Forth Worth Metroplex. The local economic base is anchored by three universities and various local government entities (schools, city, and county), with each providing a stable source of employment while experiencing little fluctuation during business cycles. In addition, the city serves as a medical and retail center for the northern reaches of the Dallas-Forth Worth Metroplex. Denton fully supports efforts by the University of North Texas to gain tier-one university status from the state, which would greatly improve state support and help the city in its continuing economic development efforts. The city aggressively markets downtown redevelopment and the pursuit of high-paying jobs, especially those with some university connection, and the partnership with the city to develop a research and development park. The city continues to grow its commercial base, targeting moderate-priced large retailers, restaurants, and manufacturers. In addition, Denton Municipal Airport is only one of two super-relievers for Dallas-Fort Worth International Airport, and is expected to capture a larger share of general aviation traffic with recent and ongoing improvements to airport facilities. Also, residential growth is ongoing in both the city and its extraterritorial jurisdiction with several large master-planned community developments including upscale homes, an active retirement community, and a large mixed- use development. The city's population is expanding, with growth in the 1990s topping 16%. The utility's service area extends beyond the city limits into undeveloped areas of the county, which gives the system additional customer growth potential. Business Profile Denton's combined utilities business profile of '4' is average, reflecting retail rate competitiveness and proactive management. However, TMPA wholesale power costs, which have been somewhat contained in the last two years, are projected to rise. In addition, the system faces challenges posed by the above-average fixed charges and dependence on TMPA for the bulk of its power needs. Regulation. Texas Senate Bill 7 (SB 7), enacted in 1999, provides for retail electric open competition, which began in January 2002. Customers of retail, investor- owned utilities (IOUs) are able to choose suppliers of power. For municipally I I I I I I I I ! I I I I I I owned systems, customers will be able to choose a supplier if the utility has elected to participate in competition. Other regulatory outcomes of SB 7 include a rate freeze for IOUs as of September 1999 and a required 6% rate cut in 2002, although fuel charges will be passed through. Currently, Denton does not expect to opt in to open competition in the near future, but nevertheless continues to prudently develop plans for open competition, including its efforts to maintain competitive rates. Denton is also evaluating its competitiveness in expectation of some increases in IOU rates beginning in 2007, when the rate freeze is lifted. Municipally owned utilities such as Denton's are exempt from the major provisions of SB 7 but will be unable to compete for additional retail customers outside its service territory unless its own territory is open to outside market penetration. Operations The city owns and operates its electric distribution, water, and wastewater systems. Each of the three systems currently has sufficient capacity to serve its growing customer base, and although the bonds benefit from the combined systems, each operates so that it remains self-supporting on a stand-alone basis. For the electric distribution system, Denton purchased 55% of its power from TMPA and acquired the balance pursuant to the transition power agreement. The city's average rate in 2002 was high at about nine cents per kVVh, which includes fixed charges related to its TMPA contract. Texas Municipal Power Agency. TMPA is a joint power agency created by the cities of Bryan, Denton, Garland, and' Greenville. Each of the member cities entered into a contract in 1976 with the agency, which obligates the cities to purchase from TMPA all of their energy requirements in excess of the amounts generated by the cities' existing municipal systems. The cities have renegotiated the contract to allow them to pumhase future power need related to growth from other sources or to build their own facilities. TMPA sets rates to meet its rate covenant, which specifies that net revenues be 1.25x annual debt service. Revenues derived from this excess coverage are rebated each year to the member cities. The approximate pement shares of the cities of TMPA power are as follows: Denton 21.3%, Bryan 21~7%, Garland 47.0%, and Greenville 10%. TMPA generates its power at its Gibbon's Creek Steam Electric Station in Grimes County. Unplanned outages at the Gibbon's Creek plant in 1999 resulted in a 1-mill increase in the cost of power, demonstrating the sensitivity associated with Denton's concentrated power supply. Another unplanned outage occurred in 2000 with less financial impact. The plant began operations in 1983 and includes a 405-mWh lignite-coal-fueled steam electric unit. In April 1996 the plant was converted to accept the cheaper V~/oming coal, which also increased the efficiency of the plant and resulted in capacity increasing to 462 mWh. TMPA entered a three-year agreement with Kennecott Energy Co. for a supply of coal from the Powder River Basin. The agreement commenced on Jan. 1, 2001. The coal is transported by Burlington Northern Santa Fe, which is the sole railroad serving the required route. Following a breakdown in contract extension, TMPA is using a common carrier rate and has submitted a filing seeking reduced transportation charges as well as a refund of prior payments. The Federal Surface Transportation Board recently issued a preliminary ruling that will reduce TMPA's ongoing transportation cost. I I i ! TMPA has about $1.1 billion in senior- and subordinate-lien bonds and CP outstanding. Debt service on TMPA debt, for which Denton is responsible for a 21.3% share, is scheduled to range from $112 million in 2003 to about $128 million annually during 2008-2017. Denton is obligated to pay its share of TMPA's fixed debt service costs whether or not it is sold any power from TMPA. TMPA's wholesale rates are designed to cover its operations and debt service costs, plus an additional 25% cushion that ultimately flows back to the participants. Water system. The water system provides retail water service to 24,054 customers in the ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] city, a 6.4% increase over the fiscal 2001 figure, as well as wholesale water service to the Upper Trinity Regional Water District ('A-'). The system comprises 431 miles of water mains, 7.0 million gallons of ground storage, and 4.4 millions of gallons of elevated storage. Water supply comes from two main surface water soumes. The city holds 21,000 acre-feet of storage at the 436,000 acre-feet of the nearby Lewisville Reservoir, which produces 4.34 millions of gallons per day (mgd). The Ray Roberts Reservoir has 207,896 acre-feet of annual withdrawal rights. The city's share is 26% of the annual output of the project, or 19.8 mgd. Average daily use is about 13.9 mgd in 2002, down from its all-time high of 14.2 mgd in 2000. Peak usage has been about 26 mgd the past several years. The combined surface water capacity is expected to accommodate the city's growing water needs for 12-15 years. Denton also maintains a raw water contract with Dallas for 500,000 mgd through 2015. Denton is obligated for this minimum amount. The contract allows larger amounts to be purchased at favorable rates in the future if needed. The city's treatment capacity is 28.8 mgd, although the city has contracted for the design of a 20-mgd plant near Ray Roberts Lake. The new plant should be operational by May 2003. The 10 leading water customers account for $2.4 million of fiscal 2002 revenues, or a non-concentrated 13% of total water service charges. Rates are slightly above those of nearby competitors, at $29 per month for 7,500 gallons. Rates should remain competitive, although the city's projects rate increases of 3% and 2% in 2004 and 2005, respectively. A separate fee to cover costs of its drainage utility has helped offset drainage project costs and raises about $3 million per year. Financial margins have remained stable, but as debt service linked to water projects has dsen, the ability of the water system to cover operations and debt service, as is the city's stated goal, may depend on rate increases in the near to middle term. Wastewater system. Wastewater system treatment capacity is currently 15 mgd, which could serve a population of 110,000. The city is adding an additional 6 mgd of treatment capacity to its plant by 2004, which should provide additional growth capacity. The city has diversified its sewer operations by selling effluent for reuse in irrigation and by producing and selling compost. These efforts increase financial flexibility and enable the city to maintain competitive rates. The system is in compliance with all state and federal regulations. Rates for residential customers inside the city are similar to those charged for water service, and are also projected to remain stable. Rates for sewer service are about $24 per month, based on usage similar to water purchases, and are also expected to remain flat through 2005 and then rise by 4% in each of the subsequent two years. Article 9 Provision Chapter 1208, Texas Government Code, effectively preempts the application of Article 9 of the Uniform Commercial Code (adopted in Texas as Chapter 9, Business & Commercial Code) to security interests created by governmental units in connection with the issuance of governmental securities. As a result, the only filings required to be made, with respect to governmental securities in Texas, are filings in local county records with respect to any security interests created by a governmental unit in real estate. The city is pledging net system revenues as security for the bonds and has represented and warranted that bondholders have a first, priority, perfected security interest in the net revenues from the utility systems. I I I I I I I I I I ! I I I I I I I This report was reproduced from Standard & Poor's RatingsDirect, the premier soume of real-time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic on-line product, visit our RatingsDirect Web site at www.standardandpoors.com/ratingsdirect. Standard & Poor's. Setting The Standard. Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive off~ces: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212~.38-7280. Copyright 2002 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights resen/ed. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of fOe possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee fOe accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securdies. I I I I I I I I ! I I I I I I I I I I Prepm'ed by: ~FIRST SOUTHWEST COMPANY TABULATION OF BIDS RECEIVED AT SALE OF BIDS DUE TUESDAY, APRIL 1, 2003, AT 10:30 AM, CST $50,180,000 CITY OF DENTON, TEXAS UTILITY SYSTEM REVENUE REFUNDING AND IMPROVEMENT BONDS, SERIES 2003 TRUE INTEREST ACCOUNT MANAGER COST I I I I I ! I i I I I I I I I I I I I I I I ! I NOTICE OF SALE AND BIDDING INSTRUCTIONS ON $50,180,000 CITY OF DENTON, TEXAS (Denton County) UTILITY SYSTEM REVENUE REFUNDING AND IMPROVEMENT BONDS, SERIES 2003 Sealed Bids Due Tuesday, April 1, 2003, at 10:30 AM, CST THE BONDS WILL NOT BE DESIGNATED AS "OUALIFIED TAX-E~MPT OBLIGATIONS" FOR FINANCIAL INS rt f L~IONS. THE SALE I I ! I I I I I I I I I I I EON~ OI~RED POP. SALE Al' CO]~ff}ffllTIVE BraVInG ... The City of Denton, Texas (the "City") is offering for sale its $50,180,000 Utility System Revenue Refunding and Improvement Bonds, Series 2003 (the "Bonds"). Bidders may submit bids for the Bonds by any of the following methods: (1) Deliver bids to the City as described below in "Bids Delivery to City"; (2) Submit bids electronically as described below in "Electronic Bidding Procedures"; or (3) Submit bids by telephone or facsimile as described below in "Bids by Telephone or Facsimile". Bras DZLIVER~O TO CITY... Scaled bids, plainly marked "Bid for Bonds", should be addressed to "Mayor and City Council, City of Denton, Texas", and should be delivered to Kathy DuBose, City of Denton, 215 E. McKianey Street, Denton, Texas 76201, on the data of the bid opening. All bids must be submitted in accordance with one of the procedures identified below. ELECTRONIC BIDDING PROCEDURE... Any prospective bidder that intends to submit an electronic bid must submit its electronic bid through the facilities of PARITY. Bidders must submit, prior to April 1, 2003, SIGNED Official Bid Forms to David Medanich, First Southwest Company, 777 Main Street, Suite 1200, Fort Womb, Texas 76102. Subscription to i-Deal's BIDCOMP/PARITY Competitive Bidding System is required in order to submit an electronic bid. The City will neither confirm any subscription nor bo responsible for the failure of any prospective bidder to subscribe. An electronic bid made through the facilities of PARITY shall be deemed an irrevocable offer to purchase the Bonds on the terms provided in the Notice of Sale, and shall be binding upon tho bidder as if made by a signed, scaled bid delivered to the City. The City shall not be responsible for any malfunction or mistake made by, or as a result of the use of the facilities of, PARITY, the use of such facilities being the sole risk of tho prospective bidder. If any provisions of the 'Notice of Sale shall conflict with information provided by PARITY as the approved provider of electrunie bidding services, this Notice of Sale shall control. Further information about PARITY, including any fee charged, may be obtained from Dalcomp/Parity, 39/$ Hudson Street, New York, New York 10014, attention: Anthony Leyden (212) 806-8304. For purposes of both the written sealed bid process and the electronic bidding process, the time as maintained by PARITY shall constitute the official time. For information purposes only, bidders are requested to state in their electronic bids the mae interest cost to the City, as described under '*Basis of Award" below. All electronic bids shall be deemed to incorporate the provisions of this Notice of Sale and the Official Bid Form. BIOS BY TELEPHONE OR FACSIMILE... Bidders must submit, prior to Anril 1. 2003, SIGNED Official Bid Forms to David Medanich, First Southwest Company, 777 Main Street, Suite 1200, Fort Worth, T~xas 76102-3123, and submit their bid by telephone or facsimile (fax) on the date of the sale. Telephone bids will be accepted at (940) 349-8531, between 9:30 AM, CST and 10:30 AM, CST on the date of the sale. Fax bids will be received between 9:30 AM, CST and 10:30 AM, CST, on the date of the sale at (940) 349-7206, attention: Kathy DuBose. First Southwest Company will not be responsible for submifiing any bids received after the above deadlines. The City and First Southwest Company are not respons{ble if such telephone or facsimile numbers are busy which prevents a bid or bids from being submitted on a timely basis. First Southwest Company will not be responsible for submitting any bids received after the above deadlines. First Southwest Company assumes no responsibility or liability with respect to any irregularities associated with the submission of bids if any options are exercised. PLACE AND TIME OF Bm OPENING... The bids for thc Bonds will be publicly opened and reed in the office of the Assistant City Manager of Fiscal and Municipal Services, at City Hail, at 10:30 AM, CST, Tuesday, April 1, 2003. AWARD OF THE BONOS... The City Council will take action to award the Bonds (or reject all bids) at a meeting scheduled to convene at 11:00 AM, CST, on the date of the bid opening, and adopt an ordinance authorizing the Bonds and approving the Official Statement (the "Bond Ordinance"). I THE BONDS DESCIm'T~ON... Tl~e Bonds will be dated April 1, 2003 (the "Dated Date"). Interest will accrue from the Dated Date and will be due on December 1, 2003, and each Jane I and December 1 thereafter until the earlier of maturity or prior redemption. The Bonds will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity. The Bonds will mature on December 1 in each year as follows: MATURITY SCHEDULE Principal Principal Principal Year Amount Year Amount Year Amount 2003 $ 3,545,000 2010 $ 1,645,000 2016 $ 2,215,000 2004 3,830,000 2011 1,725,000 2017 2,330,000 2005 3,700,000 2012 1,800,000 2018 2,445,000 2006 2,550,000 2013 1,900,000 2019 2,575,000 2007 2,600,000 2014 2,000,000 2020 2,700,000 2008 2,420,000 2015 2,100,000 2021 2,845,000 2009 2,255,000 2022 3,000,000 OPTIONAL REDEMPTION ... The City reserves the tight, at its option, to redeem Bonds having stated maturities on and after December I, 2013, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on June 1, 2013, or any date fuareai~ar, at the par value thereof plus accrued interest to the date fixed for redemption. SERIAL BONDS AND/OR TERM BONDS... Bidders may provide that all of the Bonds be issued es serial Bonds or may provide that any two or more consecutive annual principal amounts be combined into one or more term Bends. M~d~I}ATORY SrnKING Ftr~... If the successful bidder elec~s to alter the Maturity Schedule reflected above and convert principal amounts of the Serial Bonds into "Term Bonds", such "Term Bonds" shall be subject to mandatory redemption on the first December I next following the last maturity for Serial Bonds, and annually thereafter on each December 1 until fue stated maturity for the Term Bonds at the redemption prices of par plus accmed interest to the date of redemption. The principal amounts of the Term Bonds to be redeemed on each mandatory redemption date shall be the principal amounts that would have been due and payable in the Maturity Schedule shown above had no conversion to Term Bonds occurred. At least thirty (30) days prior to each mandatory redemption date, the Paying Agent/Regista'ar shall select by lot the Term Bonds to be redeemed and cause a notice of redemption to be given in the manner provided in the Preliminary Official Statement. The principal amount of the Term Bonds required to be redeemed pursuant to the operation of such mandatory redemption provisions may be reduced, at the option of the City, by the principal amount of the Term Bonds of the same maturity which (i) shall have been acquired by the City at a price not exceeding the principal amount of such Term Bonds plus accrued interest to the date or purchase thereof, and delivered to the Paying Agent/Registrar for cancellation or (ii) shall have been redeemed pursuant to the optional redemption provisions and not theretofore credited against a mandatory redemption requirement. A final official statement will incorporate the mandatory redemption provisions for the Bonds in the event thc successful bidder elects to convert serial maturities into one or more Term Bonds. BOOK-ENTRY-ONLY SYSTEM ... The City intends to utilize the Book-Entry-Only System of The Depository Trust Company ("DTC"). See "The Bonds - Bunk-Entry-Only System" in the Preliminary Official Statement. PAYING AGENT/REGISTRAR . . . The initial Paying Agent/Registrar shall be Bank One, National Association (see "The Bonds - Paying Agent/Registrar" in the Preliminary Official Statement). SOURCE OF PAYMENT... The Bonds are payable, both as to principal and interest, solely from and secured by a first lien on and a pledge of the Net Revenues of the Utility System aider payment of maintenance and operating expenses (see "The Bonds - Security and Source of Payment"). Further details regarding the Bonds are set forth in the Preliminary Official Statement. I I ! I I I I I I I I I ! i I I I I ! I I I I I I I I CONDITIONS OF THE SALE TYPE OF BIDS AND INTEREST RATES... The Bonds will be sold in one block on an "All or Nane" basis, and at a price of 103% of their par value plus accrued interest from the dated date of the Bonds (the "Dated Date") to the date of delivery of the Bonds. Bidders are invited to name the rate(s) of interest to be borne by the Bonds, provided that each rate bid must be in a multiple of 1/8 of 1% or 1/100 of 1% and the net effective interest rate must not exeeed 15%. The highest rate bid may not exceed the lowest rate bid by more than 2% in rate. Using the interest rate established for the December 1, 2013 maturity as the base year, interest rates for successive maturities shall be sizuctored in ascending order such that for each succeeding maturity, rates shall be equal to or greater than the interest rate for the maturity of the preceding year. No limitation is imposed upon bidders as to the number of rates or changes which may be used. All Bonds of one maturity must bear one and the same rate. No bids involving supplemental intemat rates will be considered. Each bidder shah state in the bid the total interest cost in dollars and the effective interest rate determined thereby (calculated in the manner prascribed by Chapter 1204, Texas Government Code), which shall be considered informative only and not as a part of the bid. BASIS FOR AWARD... The sale of the Bonds will be awarded to the bidder making a bid that conforms to the specifications herein and which produces the lowest True Interest Cost rate to the City. The True Interest Cost rate is that rate which, when used to compute the total present value as of the Dated Date of all debt service payments on the Bonds on the basis of semi-annunl compounding, pmdacas an amount equal to the sum of the par value of the Bends plus any premium bid (but not interest accrued fi.om the Dated Date to the date of their delivery). In the event ora bidder's error in interest cost rate calculations, the interest rates, and premium, if any, set forth in the Official Bid Form will be considered as the official bid. GOOD FAITH DEPOSIT... A Good Faith Deposit, payable to the "City of Denton, Texas", in the amount of $992,400.00, is required. Such Good Faith Deposit shall be a bank cashiea's check or certified cheek, which is to be retained uncashed by the City pending the Initial Purchaser's compliance with the terms of the bid and the Notice of Sale and Bidding Ins~uctions. The Good Faith Deposit may accompany the Official Bid Form or it may be submitted separately. If submitted separately, it shall be made available to the City prior to the opening of the bids, and shall be accompanied by instructions from the bank on which drawn which acthoriz~ its use as a Good Faith Deposit by the Initial Purchaser who shall be named in such instructions. The Good Faith Deposit nfthe Initial Purchaser will be returned to the Initla[ Purchaser upon payment far the Bonds. No interest will be allowed on the Good Faith Deposit. In the event the Initial Pumhaser should fail or refuse to take up and pay for the Bonds in accordance with the bid, then said check shall be cashed and accepted by the City as full and complete liquidated damages. The checks accompanying bids other than the winning bid will be returned immediately after the bids are opened, and an award of the Bonds has been made. I I I I I i I I DELIVERY OF THE BONDS AND ACCOMPANYING DOCUMENTS CUSIP NUMBI:RS... It is anticipated that CUSIP identification numbars will appear on the Bonds, but neither the failure to print or type such number on any Bond nor any error with respect thereto shall constitute cause for a failure or refusal by the Initial Purchaser to accept deliver/of and pay for the Bonds in accordance with the terms of this Notice of Sale and Bidding Instractions and the terms of the Offialal Bid Form. All expenses in relation to the printing or typing of CUSIP numbers on the Bonds shall be paid by the City; provided, however, that the CUSIP Service Bureau charge for the assignment of the numbers shall be the responsibility of and shall be paid for by the Initial Pumhaser. DELIVERy OF BONDS ... Initial Delivery will be accomplished by the issuance of one Initial Bond (also called the "Bond" or "Bonds"), either in typed or printed funn, in the aggregate principal mount of $50,180,000, payable in slateq instellmcote to the Initial Pumhaser or its designee, signed by the Mayor and City Secretary, approved by the Attorney General, and registered and manually signed by the Comp~'ollar of Public Accounts. Upon delivery nfthe Initial Bond, it shall be immediately cancelled and one definitive Bond for each maturity will be registered and delivered only to Cede & Co., and deposited with DTC in connection with DTC's Book-Entry-Only System. Delivery will be at the corporate trust office nfth¢ Paying Agent/Registrar in Dallas, Texas. Payment for the Bonds must be made in immediately available funds for unconditional credit to the City, or as otherwise directed by the City. The Initial Purchaser will be given six business days' notice of the time fixed for dalivery of the Bonds. It is anticipated that delivery of the Bonds can be made on or about April 29th, 2003, and it is undetstuod and agreed that the Initial Purchaser will accept delivery and make payment for the Bonds by 10:00 AM, CDT, on April 29th, 2003, or thereafi.er on the date the Bond is tendered for delivery, up to and including May 15, 2003. fffur any reason the City is unable to make delivery on or before May 15, 2003, the City shall immediately contact the Initial Purchaser and offer to allow the Initial Purchaser to extend its offer for an additional thirty days. ffthe Initial Pumhaser does not elect to extend its offer within six days the~'eaffer, then its Good Faith Deposit will be returned, and both the City and the Initial Purchaser shall be relieved nfany further obligation. In no event shall the City be liable for any damages by reason of its failure to deliver the Bonds, provided such failure is due to circumstances beyond the City's reasonable control CONDITIONS TO DELWERY . . . The obligation of the Initial Purchaser to take up end pay for the Bonds is subject to the Initial Purchaser's receipt of (a) the legal opinion of McCall, Parkhurst & Hortun, L.L.P., Dallas, Texas, Bond Counsel for the City ("Bond Counsel"), (b) the no-litigation certificate, and (¢) the certification as to the Preliminary Official Statement, all as further dasaribed in the Preliminary Official Statement. I I In order to provide the City with information required to enable it to comply with certain conditions of the Internal Revenue Code of 1986 relating to the exemption of interest on the Bonds from the gross income of their owners, the Initial Purchaser will be iii required to complete, execute, and deliver to the City (on or before the 6th business day prior to the delivery of the Bonds) a certification as to their "issue price" substantially in the form and to the effect attached hereto or accompanying this Notice of Sale and Bidding Instructions. In the event the successful bidder will not reoffer the Bonds for sale, such certificate may be modified in a manner approved by the City. In no event will the City fail to deliver the Bonds as a result of the Initial Purchaser's inability to sell a substantial amount of the Bonds at a particular price prior to delivery. Each bidder, by submitting its bid, agrees to complete, execute, and deliver such a certificate by the date of delivery of the Bonds, if its bid is accepted by the City. It will be the responsibility of the Initial Purchaser to institute such syndicate reporting requirements to make such investigation, or otherwise to ascertain the facts necessary to enable it to make such certification with reasonable certainty. Any questions concerning such certification should be directed to Bond Counsel. LEGAL OPINIONS . . . The Bonds ere offered when, as and if issued, subject to the approval of the Attorney General of the State of Texas. Delivery of and payment for the Bonds is subject to thc seceipt by the Initial Purchaser of opinions of Bond Counsel, to the effect that the Bonds ere valid and binding obligations of the City and that the interest on the Bonds will be cxcindable from gross income for federal income tax purposes under existing law, subject to the matters described under "Tax Matters" in the Preliminary Official Statement, including alternative minimum tax consequences for corporations. CERTIFICATION OF PRELIMINARY OPMCIAL STATEMENT.. - At the time of paymcot for and Initial Delivery of fac Bonds, the City will execute and deliver to the Initial Purchaser a certificate in the form set forth in the Preliminary Official Statement. CHANGE IN TAX EXEIm'T STATUS....At any time before the Bonds ere tendered for delivery, thc Initial Purchaser may withdraw its bid if the interest received by private holders on obligations of the same type and character shall be declared to be includable in gross income under prescot federal income tax laws, either by ruling of the Internal Revenue Service or by a decision of any Federal court, or shall be declared tsxable or be rexluired to be taken into account in computing any federal income taxes, by the terms of any federal income tax law enacted subsequent to the date of this Notice of Sale and Bidding Instructions. GENERAL FINANCIAL ADVISOR... First Southwest Company is employed as Finanalal Advisor to the City in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. First Southwest Company may submit a bid for the Bonds, either independently or as a member cfa syndicate organized to submit a bid for the Bonds. First Southwest Company, in its capacity as Financial Advisor, has relied on the opinion of Bond Counsel and has not verified and does not assume any responsibility for the information, covenants and representations contained in any of thc legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judinial bodies. In the normal course of business, the Financial Advisor may from time to time sell invastraent securities to the City for the investment of bond proceeds or other funds of the City upon the request of the City. BLUE SK"Y LAWS... By submission of its bid, the Initial Purchaser represents that the sale of the Bonds in states other than Texas will be made only pursuant to exemptions from registration or, where necessary, the Initial Purchaser will register the Bonds in accordance with the securities law of the states in which the Bonds are offered or sold. The City agrees to cooperate with the Initial Purchaser, at the Initial Purchaser's written request and expense, in registering the Bonds or obtaining an exemption fi.om registration in any state where such action is necessary, provided, however, that the City shall not be obligated to execute a general or special consent to service of process in any such jurisdiction. NOT AN OFFER TO SELL... This Notice of Sale and Bidding Instmctinns does not alone constitute an offer to sell the Bonds, but is merely notice of the sale of the Bonds. The offer to sell the Bonds is being made by means of the Notice of Sale and Bidding Instmctioas, the Official Bid Form and the Preliminary Official Statement. prospective purchasers ere urged to carefally examine thc Preliminary Official Statement to determine the investment quality of fac Bonds. ISSUANCE OF ADDITIONAL DEBT. The City does not anticipate the issuance of additional revenue debt within the next 12 months. RATINGS... The presently outstanding revenue debt of the City is rated "Al" by Moody's Investors Service, Inc. ("Moody's") and "A+" by Standerd & Poor's Ratings Services, A Division of McGrew-Hill Companies, Inc. ("S&P"). The City also has issues outstanding which ere rated "Aaa" by Moody's and "AAA" by S&P through insurance by various commercial insurance companies. Applications for contract ratings on this issue have been made to Moody's and S&P. The results of their determinations will be provided as soon as possible. MUNICIPAL BONO INSURANCE ... In the event the Bonds are qualified for municipal bond insurance, and the Initial Purchaser desires to purchase such insurance, the cost therefore will be paid by the Initial Purchaser. Any fees to be paid to the rating agencies as a result of said insurance will be paid by the City. It will be the responsibility of the Initial Purchaser to disclose the existence of insurance, its terms and the effect thereof with respect to the rcoffcring of the Bonds. I I I I I I I I I I I I I I i I i I I I I I I I i i I I I I I I I I I I I I THE PRELIMINARY OFFICIAL STATEMENT AND COMPLIANCE WITH SEC RULE 15C2-12... The City has prepased the accompanying Preliminary Official Statement and, for tho limited purpose of complying with SEC Rule 15c2-12, deems such Preliminary Official Statement to be final as of its date within the meaning of such Rule for the purpose of rovinw prior to bidding. To the best know[edge and belief of the City, the Preliminary Official Statement contains information, including financial information or operating da~ concerning every entity, enterprise, fund, account, or person that is material to an evaluation of tho offering of the Bonds. Representations made and to be made by the City concerning the absence of material misstatements and omissions in the Preliminary Official Statement are addressed elsewhere in this Notice of Sale and Bidding Instructions and in tho Preliminary Official Statement. The City will furnish to the Initial Purchaser, acting through a designated senior representative, in accordance with instructions received from tho Initial Purchaser. within seven (7) business days from the sale date an aggregate of 250 copies of tho Official Statement reflecting interest rates and other terms relating to the initial reoffering of the Bunds. Tho cost of any Official Statement in excess of the number specified shall be prepared and distributed at tho cost of the Initial Pumhaser. The Initial Purchaser shall be responsible for providing in writing the initial reoffering prices and other terms, if any, to the Financial Advisor by the close of the next business day after the award. Except as noted above, the City assumes no responsibility or obligation for the distribution or dalivea'y of any copies of the Official Statement in connection with the offering or re. offering of the subject securities. CONTINUING DISCLOSORE AGREEMENT... The City will agree in the Bond Ordinance to provide certain periodic information and notices of material events in accordance with Securities and Exchange Commission Rule 15o2-12, as described in the Prelimina~ Official Statement under "Continuing Disclosure of Information". Tho Initial Pumhaser's obligation to accept and pay for the Bonds is conditioned upon delivery to the Initial Purchaser or agent of a certified copy of tho Bond Ordinance containing the agreement described under such heading. COMPLIANCE WI'tH PRIOR UNDERTAKINGS... The City has complied in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. ADDITIONAL COPIES OF NOTICE, BID FORM AND STATEMENT... A limited number of additional copies of this Notice of Sale and Bidding Instructions, the Official Bid Form and the Preliminary Official Statement, as available over and above the normal mailing, reay be obtained at the offices of Fi~at Southwest Company, Investment Bankers, 325 North St. Paul, Suite 800, Dallas, Texas 75201, Financial Advisor to tho City. On thc date of the sale, tho City will, in the Bond Ordinance authorizing the issuance of tho Bonds, confirm its approval of the form and content of tho Preliminary Official Statement, and any addenda, supplement or amendment thereto, and authorize its use in thc reoffering of the Bonds by the Initial Purchaser. ATYEST: EULINE BROCK Mayor City of Denton, Texas JENNIFER WALTERS City Secretary March 28, 2003 Bonds Maturing Amount 2003 $ 3,545,000 2004 3,830,000 2005 3,700,000 2006 2,550,000 2007 2,600,000 2008 2,420,000 2009 2,255,000 2010 1,645,000 2011 1,725,000 2012 1,800,000 2013 1,900,000 2014 2,000,000 2015 2,100,000 2016 2,215,000 2017 2,330,000 2018 2,445,000 2019 2,575,000 2020 2,700,000 2021 2,845,000 2022 3,000,000 Average Maturity.. BOND YEARS Accumulated Bonds Bond Years Bond Years Maturing 2,363.333 2,363.333 2003 6,383.333 8,746.667 2004 9,866.667 18,613.333 2005 9,350.000 27,963.333 2006 12,133.333 40,096.667 2007 13,713.333 53,810.000 2008 15,033.333 68,843.333 2009 12,611.667 81,455.000 2010 14,950.000 96,405.000 201 I 17,400.000 113,805.000 2012 20,266.667 134,071.667 2013 23,333.333 157,405.000 2014 26,600.000 184,005.000 2015 30,271.667 214,276.667 2016 34,173.333 248,450.000 2017 38,305.000 286,755.000 2018 42,916.667 329,671.667 2019 47,700.000 377,371.667 2020 53,106.667 430,478.333 2021 59,000.000 489,478.333 2022 ........................... 9.754 Years I I I i I I I I I ! I I I I i I 1 I I I I I I I I I I I I I I I I I I OffICIAL BID FORM Honorable Mayor and City Council City of Denton, Texas April 1, 2003 Honorable Mayor and Members of the City Council: Reference is made to your Preliminary Official Statement and Notice of Sale and Bidding Instructions, dated March 28, 2003 of $50,180,000 CITY OF DENTON, TEXAS UTILITY SYSTEM REVENUE REFUNDING AND IMPROVElVIENT BONDS, SERIES 2003, both of which constitute a part hereof. For your legally issued Bonds, as described in said Notice of Sale and Bidding Instructions and Preliminary Official Statement, we will pay you par and accrued interest from their dated date to date of delivery to us, plus a cash premium of $1,505,000.40 for Bonds maturing and bearing interest as follows: Principal Interest Principal Interest Maturity Amount Rate Maturity Amount Rat~ Maturity 12/1/2003 $ 3,545,000 % 12/112010 $ 1.645,000 % 12/I/2016 $ 2.215.000 12/]/2004 3,830,000 % 12/112011 1,725.000 % 12/1/2017 2,330,000 12/1/2005 3,700,000 % 12/1/2012 1,800,000 % 12/I/2018 2,445,000 12/1/2006 2,550,000 % 12/1/2013 1,900,000 % 12/1/2019 2.575,000 12/I/2007 2,600,000 % 12/I/2014 2,000,000 % 12/1/2020 2,700,000 12/1/2008 2,420,000 % 12/1/2015 2,100,000 % 12/1/2021 2,845.000 12/1/2009 2,255,000 % 12/1/2022 3,000,000 Principal Interest Of the principal maturities set forth in the table above, term bonds have been ca'eared as indicated in thc following table (which may include multiple term bonds, one term bond or no term bond if none is indicated). For those years which have been combined into a term bond, the principal amount shown in the table above shall be the mandatory sinking fund redemption amounts in such years except that the amount shown in the year of the term bond maturity date shall mature in such year. The term bonds created are as follows: Year of Maturity Date First Mandatory Principal Interest December 1 Redemption Amount Rate $ % $ % $ $ % $ % $ % Our calculation (which is not a part of this bid) of the Wue interest cost from the above is: % % % % % % TRUE ~REST COST We are having the Bonds of the following maturities insured by at a premium of $ , said premium to be paid by fha Initial Purchaser. Any fees to be paid to fue rating agencies as a result of said insurance will be naid by the City. The Initial Bonds shall be registered in the name of , which will, upon payment for the Bonds, be canceled by the Paying Agent/Registrar. The Bonds will then be registered in the name of Cede & Co. (DTC's partnership nominee), under the Book-Entry-Only System. I A bank cashier's check or certified check of the Bank, , in the amount of $992,400.00, which represents our Good Faith Deposit (is attached hereto) or (has been made available to you prior to the opening of this bid), and is submitted in accordance with the terms as set forth in thc Preliminary Official Statement and Notice of Sale and Bidding Instructions. We agree to accept delivery of the Bonds utilizing the Book-Enlry-Only System through DTC and make payment for the Initial Bond in immediately available funds in the Corporate Trust Division, Bank One, National Association, not later than 10:00 AM, CDT, on April 29th, 2003, or thereafter on the date the Bonds are tendered for delivery, pursuant to the terms set forth in the Notiue of Sale and Bidding Instructions. It will be the obligation of the purchaser of the Bonds to complete the DTC Eligibility Questionnaire. The undersigned agrees to complete, execute, and deliver to the City, at least six business days prior to delivery of the Bonds, a certificate relating to the "issue price" of the Bonds in the form and to the effect accompanying the Notice of Sale and Bidding Instructions, with such changes thereto as may be acceptable to the City. We agree to provide in writing the initial reoffering prices and other terms, if any, to the Financial Advisor by the close of the next business day after the award. Respectfully submitted, Syndicate Members: Name of Underwriter or Manager Authorized Representative Phone Number Signature ACCEPTANCE CLAUSE The above and foregoing bid is hereby in all things accepted by the City of Denton, Texas, subject to and in accordance with the Notice of Sale and Bidding ins~uctions, this the 1st day of April, 2003. AFl"EST: Mayor City of Denton, Texas City Secretary I I I I I I ! I I I I I I I I I i I I I I I I I I ! I I I I I I I I I I I CERTIFICATE OF UNDERWRITER The undersigned hereby certifies as follows with respect to the sale of $50,180,000 CITY OF DENTON, TEXAS UTILITY SYSTEM REVENUE REFUNDING AND IMPROVEMENT BONDS, SERIES 2003 (the "Bonds"). 1. The undersigned is the underwriter or the manager of the underwriters and selling group (the "Purchaser") which has purchased the Bonds fi.om the City of Dentun, Texas (the "City"). 2. The undersigned has made a bona fide offering of thc Bonds to the public. 3. The first priee during the initial offering (expressed as a "yield") of each maturity of the Bonds at which a substantial amount hereof(at least 10 percent of the principal amount of each maturity of the Bonds) has been sold to the public is set forth below: Principal Offering Principal Amount Year of Price Amount Year of Maturing Maturity (°/dYield) Maturin~ Maturity $ 3,545,000 2003 $ 1,900,000 2013 3,830,000 2004 2,000,000 2014 3,700,000 2005 2, 100,000 2015 2,550,000 2006 2,215,000 2016 2,600,000 2007 2,330,000 2017 2,420,000 2008 2,445,000 2018 2,255,000 2009 2,575,000 2019 1,645,000 2010 2,700,000 2020 1,725,000 2011 2,845,000 2021 1,800,000 2012 3,000,000 2022 Offering Price (~/dYield) 4. For purposes of this certificate, the term "public" does not include (a) thc undersigned, (b) members of the syndicate, if any, managed by the undersigned, or (c) any bondhansas, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of any syndicate in which the undersigned is participating in the sale of the Bonds. 5. The offering price described above reflects current market prices at thc time of such sales. 6. If any or all of the obligations constituting the Bonds are to bc guaranteed then the premium paid for such guarantee in an amount equal to $ is a reasonable amount payable solely for the transfer of credit risk for the payment of debt service on the Bonds and does not include any amount payable for a cost other than such guarantee, e.g., a credit rating fee. The Underwriter has represented that the present value of the premium paid for the guarantee for each obligation constituting the Bonds to which such premium is properly allocated and which are insured thereby is less than the present value of the interest reasonably expected to be saved as a result of the insurance on each obligation constituting the Bonds. The premium has been paid to a person which is not exempt from federal income taxation and which is not a user or related to the user of any proceeds of the Bonds. In determining present value for this purpose, the yield of the Bonds (determined with regard to the payment of the guarantee fee) has been used as the discount rate. 7. The undersigned understands that the statements made herein will be relied upon by the City in its effort to comply with the conditions imposed by the Internal Revenue Code of 1986 and by Bond Counsel in rendering their opinion that thc interest on the Bonds is excludable fi.om the gross income of the owners thereof. EXECUTED and DELIVERED this day of ,2003. (Name of Underwriter or Manager) By (Title) I THIS PAGE LEFT BLANK INTENTIONALLY I I I I I I I I i I I I I I I I I I I PRELIMINARY OFFICIAL STATEMENT Ratings: Moody's: "Applied For" Dated March 28, 2003 S&P: "Applied For" See ("Other Information - NEW I~SUE - Book-Entry-Only Ratings" herein) In thc opinion of Bond Counsel, interest on the Bonds will bc excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court d~cisions existing on the date thereof, subject to the matters described under "Tax Matters" herein, including the alternative minimum tax on corporations. THE BONDS WILL NOT BE DESIGNATED AS "OUA~FIED TAX-EXE~IPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $50,1g0,000 CITY OF DENTON, TEXAS ~ut~n ~unt~) Amount Matu~t~ Rate Yield Suffix(° Amount Maturi~ 3,545,000 2003 $ 1,900,000 2013 3,830,000 2004 2,000,000 2014 3,700,000 2005 2,100,000 2015 2,550,000 2006 2,215,000 2016 2,600,000 2007 2,330,000 2017 2,420,000 2008 2,445,000 2018 2,255,000 2009 2,:575,000 2019 1,645,000 2010 2,700,000 2020 1,725,000 2011 2,845,000 2021 1,800,000 2012 3,000,000 2022 (Accrued Interest from April 1, 2003 to be added) CUSIP Rate Yield Suffixt° (1) CUSIP is a registur~d trademark of the American Bankers Association. CUSW data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This datu is not intended to create a database and does not serve in any way as a substitute for thc CUSIP Services. RgOgMl"rlON... Thc City reserves the right, at its option, to redeem Bonds having stated maturities on and after December l, 2013. in whole or in part in principal amounts of $5,000 or any intugral multiple thereof, on June 1,2013, or an}' date thereafter, at the par value thereof plus accrued interest to the data of redemption. Additionally. the Bonds may be subject tu mandatory redemption in the event the Initial Purchaser of the Bonds elects to aggregate one or more maturities as a Term Bond (see "The Bonds - Optional Redemption*' and "The Bonds - Mandatory Sinking Fund Redemption'*). LF. GALITY... The Bonds are offered for deliver/when, as and if issued and received by thc Initial Purchaser and subject to the approving opinion of the Attorney General of Texas and the opinion of McCall, Parkhurst & Horton, L.L.P., Bond Counsel, Dallas, Texas (see Appendix C, "Form of Bond Counsel's Opinions"). DELIVERY... It is expected that the Bonds will be available for deliw~ through The Dopositoo] Trust Company on April 29, 2003. BIDS DUE TUESDAY, APRIL 1, 2003, AT 10:30 AM, CST For purposes of compliance with Rule 15c2-12 of the Securities and Exchange Commission, as amended and in effect on the date hereof, this document constitutes an Official Statement of the City with respect to the Bonds that has been "deemed final" by the City as of its date except far the omission of no more than the information permitted by Rule 15c2-12. No dealer, broker, salesman or other person has been authorized by the City to give any information, or to make any representations other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sell Bonds in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. Certain information set forth herein has been obtained from the City and other sources which are believed to be reliable but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Financial Advisor. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there ha~ been no change in the affairs of the City or other matters described herein since the date hereof. See "Continuing Disclosure of lnformation" for a description of the City's undertaking to provide certain information on a continuing basis. THE BONDS ARE EXEMPT FROM REGISTRMTION WITH THE SECURITIES AND EXCHANGE COMMISSION MiND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUAIJF1CATION, OR E,,YEMPTION OF THE BONDS IN ACCOP-.DANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THESE SECURITIES H.A VE BEEN REGISTERED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THE CITY NOR ITS FINANCIAL ADVISOR MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOK-ENTRY- ONLY SYSTEM. TABLE OF CONTENTS pRELIMINARY OFFICIAL STATEMENT SUMMARY .3 CITY OFFICIALS, STAFF AND CONSULTANTS ........... 5 ELECTED OFFICIALS ........................................................ SELECTED ADMINISTRATIVE STAFF ................................ 5 CONSULTANTS AND ADVISORS ....................................... 5 INTRODUCTION .................................................................. 7 THE BONDS ........................................................................... 7 MANAGEMENT OF THE SYSTEM ................................. 15 THE ELECTRIC SYSTEM ................................................. 16 TABLE 1 - HISTOKICAL OPI~ATINO AND DATA .................................................................. 18 TABLE 2- CUgRE~T ELECTRIC EATE SCHEDULES ......... 19 THE WATER SYSTEM ...................................................... 37 TABLE 3 - WATER USAGE .............................................38 TABLE 4 - TOP TEN WATEK CUSTOMERS ...................... 38 TABLE $ - WATER RATES .............................................. 38 THE WASTEWATER SYSTEM ........................................ 39 TABLE 6 - WASTEWATER RATES ................................... 39 DEBT INFORMATION ....................................................... 40 TABLE 7 - DEBT SERVICE REQUIP~EM~NT$ .................... 40 FINANCIAL INFORMATION ........................................... 41 TABLE g - COMI~ARABLE CALCULATION OF NET REVENUES AVAILABLE FOR DEBT SERVICE........41 TABLE 9 - COVERAGE AND FUND BALANCES ............... 42 TABLE 10 - CuP,~rr INVESTMENTS ............................ 44 SELECTED PROVISIONS OF THE BOND ORDINANCE45 TAX MATTERS .................................................................. 56 OTHER INFORMATION .................................................. 57 RATINGS ....................................................................... 57 LITIGATION .................................................................. 5g REGISTRATION AND QUALIFICATION OF BONDS FOR SALE ................................................................... 58 LEGAL ImrESTMENTS ~ ELtOmmlTY TO SECURE PuBlic FUNDS n4 TEXAS .................................... 58 LEGAL OPINIONS AND No-LITIGATION CERTIFICATE .. 58 AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION .................................................... 58 CONTINU~G DISCLOSURE OF INFORMATION ............... 59 F~A~CP~L ADVmOR .................................................... 60 VERIFICATION OF ARITI~tETICAL AND MATHEMATICAL COMPUTATIONS ................................................. 60 INITIAL PO~CNASER ..................................................... 60 FORWArD-LooKiNG STATEMENTS DISCI~dlV~R ......... 60 CERTIFICATION OF ~HE OFFICIAL STATEMENT ............. 61 SCHEDULE OF REFUNDED BONDS ............... SCHEDULE I APPENDICES GENERAL INFOPaMATION REGARDING THE CITY ........... A DE$CRIFrION OF SENATE BILL 7 AND THE TEXAS MUNICIPAL POWER AGENCY ................................ B EXCERPTS FROM THE ANNUAL FINANCIAL ~EPORT.... C FORM OF BOND COUNSEL S OPINION .......................... D The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Preliminary Official Statement. I I I I I I I I ! I I I I I I I I I I I I I I I ! I I I I I I I I i I I I I PRELIM]NARY OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the mom complete information and definitions contained or incorporated in this Preliminary Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Preliminary Official Statement. No person is authorized to detach this Summary from this Preliminary Official Statement or to otherwise use it without the entire Preliminary Official Statement. THgCITY ....................................... Thc City of Denton is apolitical subdivision mad municipal corporation of thc State, located in Denton County, Texas. The City covers approximately 67.6 square miles (see "Introduction - Dascrip~inn of City"). T~IE BONDS .................................. The Bonds arc issued as $50,180,000 Utility System Revenue Refunding and Improvement Bonds, Series 2003. The Bonds are issued as serial bonds maturing December 1, 2003 through December 1, 2022 unless the initial Purchaser of the Bonds designates one or more maturities as a Term Bond (see "The Bonds - Description of the Bonds"). PAYMENT OF INTERE,~T .............. Interest on the Bonds accrues from April 1, 2003, and is payable December 1, 2003, and each June I and December 1 thereaRer until matotity or prior redemption (see "The Bonds - Description of thc Bonds," and "Tho Bonds - Optional Redemption"). AUTHORITY FORISSUANCE ......... The Bonds are issued pursuant to the general laws of the State, including particularly Texas Oovemmont Code, Chapters 1207 and 1502, as amended, and an Ordinance passed by the City Council of the City (see "The Bonds - Authority for Issuance"). SECURITY FOR THE BONDS ............ The Bonds constitute special obligations of the City payable, both as to principal and interest, solely from and secured by a first lien on and pledge of certain Pledged Revenues ianluding the Not Revenues of the Ci0fs combined water, sower and electric light and power system (the "System"). Special referenec is made to "The Electric System" herein for a description of certain legal and regulatory changes that have affected, and are expected to thrther affect, the environment in which tho City's electric utility system operates. The City has not covenanted or obligated itself to pay the Bonds from monies raised or to be raised from taxation (see "The Bonds - Authority for Issuance"). REDEMPTION ...............................Tho City rasorvas the right, at its option, to redeem Bonds having stated maturities on and after December 1, 2013, in whale or in part in principal amounts of $5,000 or any integral multiple thereof, on June 1, 2013, or any date therea~er, at the par value thereof pins accrued interest to the date of redemption. Additionally, the Bonds may be subject to mandatory redemption in the event the Initial Purchaser of the Bonds elects to aggregate one or more maturities as a Term Bond. TAX EXEMPTION ......................... I11 the opinion of Bond Counsel, the interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under the caption "Tax Matters - Bonds" herein, including the alternative minimum tax on corporations. USE OF BOND PROCEEDS ............... Proceeds from the sale of the Bonds will be used to (a) refund a portion of the City's outstanding System revenue bonds as shown of Schedule I hereto, for the purpose of lowering the debt service requirements associated with System debt, (b) fund capital improvements for the City, including (i) electric system transmission and distribution facilities (ii) miscellaneous water system improvements, (iii) sewer system improvements, including collection lines, lif~ stations, a water reclamation plant and interecptor and reuse llne and (iv) drainage system improvements, including the acquisition of land; (e) make a deposit to the System debt service reserve fund; and (d) pay the costs of issuance of the Bonds. RATINGS ..................................... The presently outstanding revenue debt of the City is rated "Al" by Moody's Investors Service, lan. ("Moody's") and "A+" by Standard & Poor's Ratings Serviecs, A Division of The McGraw-Hill Companies, Inc. ("S&P'). The City also has issues outstanding which are rated "Aaa" by Moody's and "AAA" by S&P through insurance by various commercial insurance companies. Applications for contract ratings on the Bonds have been made to Moody's and S&P (see "Other Information - Ratings"). 3 BOOK-ENTRY-ONLY SYSTEM ...................................... The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book-Entry-Only System described herein. Beneficial ownership of tho Bonds may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds (see "The Bonds - Book-Entry-Only System"). PAYMENTR~coI~D ........................ The City has never defaulted with respect to the payment of bonds secured by revenues of the System. For additional information regarding the City, please contact: Kathy DuBose Assistant City Manager of Fiscal and Municipal Services City of Danton 215 E. McKinney Street Denton, Texas 76201 (940) 349-8228 David K. Medanich Laura Alexander First Southwest Company or 777 Main Street Suite 1200 Fort Worth, Texas 76102 (817) 332-9710 4 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I CITY OffICIALS, STAFF AND CONSULTANTS City Council Expires Euline Brock May, 2004 Mayor Mark Burroughs May, 2004 Mayor Pro Tam Raymond Rcdmon May, 2003 Councilmembcr, District 1 Jane Fulton May, 2003 Councilmambcr, District 2 Michael Phillips May, 2003 Councilmcmbar, District 3 Perry McNeill May, 2003 Councilmember, District 4 Bob Montgomery May, 2004 Councilmember, At Large SELECTED ADMINISTRATIVE STAFF Name Michael A. Conduff Howard Martin Kathy DuBosa David Hill Jun Fortune Diana Ortiz Jennifer K. Walters Position City Manager Assistant City Manager of Utilifias Assistant City Manager of Fiscal and Municipal Services Assistant City Manager of Davelopment Services Assistant City Manager of Public Safety and Transportation Operations Director of Fiscal Operations City Secretary CONSULTANTS AND ADVISORS Auditors De oitte & Touche LLP Fort Worth, Texas Bond Counsel .......................................... McCall Parkhurst & Horton L.L.P. Dallas, Texas Financial Advisor F rst Southwest Company Fort Worth, Texas THIS PAGE LEFT BLANK INTENTIONALLY I I. I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I PRELIMINARY OFFICIAL STATEMENT RELATING TO $S0,180,000 UTILITY Sye~ ........ CITY OF DENTON, TEXAs om~,j.~ Kr~V ~NUE REFUNDING AND IMPROVEMENT BONDS, SERIES 2003 INTRODUCTION This Preliminary Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $50,180,000 City of Denton, Texas Utility System Revenue Refunding and Improvement Bonds, Set es 2003 (the "Bonds"). Capitalized terms used in this Prelim/nary Official Statement have the same meanings ass gned to such terms in the Ordinance to be adopted on the date of sale of the Bonds which will authorize the issuance of the Bonds, except as otherwise indicated herein. There follows in this Preliminary Official Statement descript OhS of the Bonds and c ' ' · ~nances, including, particularly, the City's combined water s ........ ~ ~ .. ,.. crtam mformst[un regardin the ' nec, urn. ents contained herein are unlv summar ~o o~a .... ;.:.~',,..! ,?,,,~ e~ctr]c ngnt system (the "Svstem"'~ ^,g, ~ C~.ty.and its ~ .... manea ri'om the City's Financial Advisor, First Southv~as(~r-~n-c_.e ~ e..acn ~uch document. Copies of DESCRIPTION OF THE CITY... The City of Denton, Texas is a political subdivision located in Denton County operating as a home- role city under the laws of the State of Texas and a charter approved by the voters in 1959. The City oparstcs Cpancil/Managar form of government in which the Ma or and ' CJty Council formulates ' - . Y six Councilmembem are under the opera,rig pohcy for the C~ty while the City Manager i~ th~, eol~-'~-!? ,f°r- -s~gge. red two-year terms. Thc appmrdmately 67.6 square miles in are0. ....... me~ anmm~slrattve offiCer The City is ~ BONDS DgscRn~r~o~ o~ T~ BUenOS ... The Bonds are dated April 1, 2003, and mature on December 1 in each of the years and in the amounts shown on the cover page hereof. Interest will be eom uted on such interest will be payable on De-~ ~ · . . P the basis of a 360-day ve~r ,,ch., an - only m fully regmtered form m any intelmfl mulfinle e,¢ el- ,,[~n2~flncmg December 1 2003 The definitiv,- n,,~a y ., ~ th.s, and Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described No phyaleal delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for sub System" herein, sequent payment to the beneficml owners of tho Bonds. See "Book-Entry-Only Pm~Pos~... The Bonds are being issued to (i) refund a portion of the City's outstanding System Bonds") as shown of Schedule I hereto, for the purpose of lowering the debt service requirements of debt secured Revenues of the System, (ii) fund capital improvements fo . . . . revenue bonds (the "Refunded transm!ssian and dis~'ibutiun facilities ~bl ..... ~-.. [ the~,C~ty:.~.neluthng (a) approximately $12 m' i~, ,,e,, ?.Y the Net rip?roxrmately $23 milllon ofsewar syst~n~ ih~fo~n~;22~e',y .*~. annmn of miscellaneous writer s-st~lmi°'~Z'- ~,ecmc system mtarceptor and reuse line and (d) ennroximat~[,~ "~'~'~':~.?' mcmumg collection lines, lift stations o -~*~-':'. ?upro.vemant% (c) ............ a ~g mlulon of dtllina~e suste~ ~ ..... , ? na[~ reclanlatloo plant and for drainage purposes; (iii) make ,a,. depos t to the System debt servic°e r~ ....... v~ovements, mcmding the acquisition of land Bonds, their call date and redemption price, fF ......... ocneume l Iora description of the Refun~eh~ SOURCES anO US~S o~* FONnS... Proceeds of the Bonds will be applied approximately as follows: Par Amount of Bunds Original Issue Premium Accrued Interest Transfer from Prior Issue Debt Service Fund Total Sources of Funds Uses of Funds Deposit to Current Refunding Fund Deposit to Project Fund Deposit to Debt Service Reserve Fund Deposit to Interest and Sinking Fund Cost of Issuance Total Uses of Fands 7 and interest due on the Refunded Bonds are to be paid on the redemption date (June 1, 2003), REFUNDED BONDS... The principal he "Escrow Agreement") between the City and The Bank of . .. ~ .... ant to a certain Escrow Agreem. ent.!.tl ........ a,,ent'q. The Ordinance provides that from the from funds to be aeposneu pu~ ..... T~cksonville,Flortda (.the ~sc,,~,- -.~ , New York Trust Company of ~qortaa, ~-~.r.., ,,~ . proceeds of the sale of the Bonds received from the parehasar, the City will deposit the amount necessaq' to accomplish the · Such funds will be held by the Escrow Agent m a discharge and final payment of the Refunded Bonds on such redemption date. trust clearing asenunt pending their disbursement to pay the Refunded Bonds on the aforesaid redemption date or the date the same are presented for redemption. Grant Thornton LLP, a nationally recognized accounting finn, will verify at the time of delivety of the Bonds to the Purchaser thereof .... ' Securities will mature and pay interest in such amounts carat ' ' d ........ u~, of the schedules that demonstrate ?e r_~un~ will be suffic ant to pay, when due, the pnnctpal of ~ay which, together with umnvestea xanua, . . ' ns . interest on the Refunded Bonds. Such maturing principal of and interast on the Federal Securities will not be available to the Bonds (see "Other Information - Verification of Arithmetical and Mathemacacal Computano ) · Escrow Agent with firm banking arcangnmants, the City will · L ~,.~._~oa,mISecuritiasendcash, ifnecessary'wath~tl~-e-~..,~,thelaw it is the opinian of Bond Counsul thst as a By the depostt et u.~. .... _~: .q of the Refunded Bonds m asanroan~ ..... outstanding only for have effected the o~easance o~ ,~, held for such purpose by the Escrow Agent and such result of such defeasance and in reliance upon the report of Orant Thornton LLP, the Refunded Bonds wall be the purpose of receiving payments from the Federal Securities and any cash Refunded Bonds will not b~ deemed as being outstanding obligations offue Ctty payable fi.om Pledged Revenues The City has covenanted in the Escrow Agreement to make timely deposits with the Escrow Agent, fi.om lawfully available funds, of any additional amounts required to pay the principal of and interest on the Refunded Bonds, if for any rsasan the cash balances on deposit or scheduled th be on deposit in the t~ast clearing account be insufficicut to make such payment- AUTHORITY FOR ISSUANCE The Bonds are issued pursuant to the general laws of the State of Texas, particularly Chapters 1207 outstanding revenue bonds of the City (collectively with the Bonds, the "parity Bonds") solely fi.om and, together with certain the City's entire and any additional parity bonds (,,Additional Bonds") that may be issued in the future, secured by a first lien on and pledge of the Pledged Revenues, including the Net Revenues of the System. In the Ordinance, the "System" is defined as existing waterworks and sewer system and the City's entire existing aleetrie light and power system, together with all future improvements, enlargements, and additions thereto, and all replacements thereof, and any other related fuciliti.os, but or other faallities of any kind that are declared not to be a part of the System, and wfueh are excluding any water, sewer, eleeb'ie, - · ..... e of "Sneeial Facdthes Bonds. The Ordinance defines acquired consh'uc~d by the City with the proceeds from the tsau,~,,~ ~ System, or The Ordinance "Gross Revenues" to include all revenues and income reenived by the City from the operation and ownership of the of operation and maintenance of the System, including the interest income fi.om the investment or deposit of money in any fund created by the Ordinance. ~ _ .ao~ aeduetine the current expenses Maintenance and operating and extensions necessary to render efficient survice. including all salaries, labor, materials, repairS, . . See expenses of the System include anntrastual payments which under Texas laws and their provisions are established as operating expenses The City has several contracts for the purchase of water and energY that are mamtcuanen expenses of the System "The Electric System - ,Introduction" and "Tho Water System - Water Supply". The Ordinance defines "Pledged Revenues" as revenues of the City's drainage system, plus (e) any additional revenues, (a) the Net Revenues of the System, plus (b) the net expected to be available on a regular periodic basis which in the income or other resources relating to the System which are and the parity Bonds· The City currently has future may, at fue option of the City, be pledged to the payment of the Bonds outstanding Parity Bonds as follows: I I I I I I I I I I I I I I I I I I I I I I I I I I I I ! ! I i Outstanding Dated Principal Date Amount 0) 3/1/1992 $ 610,000 3/1/1993 990,000 6/1/1993 11,605,000 6/1/1993 1,105,000 5/I/1996 465,000 5/1/1996 26,190,000 3/15/1998 5,375,000 7/15/1998 36,795,000 8/1/1998 7,355,000 4/15/2000 46,610,000 4/I 5/2000 3,355,000 4/15/2001 56,730,000 4/1/2002 54,975,000 4/1/2002 13,625,000 Total $ 254,180,000 Issue Description Utility System Revenue Bonds, Series 1992 Utility System Revenue Bonds, Series 1993 Utility System Revenue Refunding Bonds, Series 1993-A Utility System Revenue Refunding Bonds, Taxable Series 1993-B Utility System Revenue Bonds, Series 1996 Utility System Revenue Refunding Bonds, Series 1996-A Utility System Revenue Bonds, Series 1998 Utility System Revenue Refunding Bonds, Series 1998-A Utility System Revenue Refunding Bonds, Series 1998-B Utility System Revenue Bonds, Series 2000-A Utility System Revenue Bonds, Taxable Series 2000-B Utility System Revenue Refunding and Improvement Bonds, Series 2001 Utility System Revenue Bonds, Series 2002-A Utility System Revenue Bonds, Taxable Series 2002-B (I) As of Febma~ 15, 2003. Excludes the Refunded Bonds. The Bonds are not a charge upon any other income or revenues of the City and shall never constitute an indebtedness or pledge of the general credit or taxing powers of the City, Thc Ordinance does not create a lien or mortgage on thc System, axenpt thc Pledged Revenues, and any judgmant against the City may not be enforced by levy and execution against any property owned by thc City. Special reference is made to "The Electric System" herein for a description of eestain legal and regulatory changes that have affected, and arc expected to further affest, the environment in which thc City's electric utility system operates. PLIgDG~D R~V~Nt~S... The payment of the Parity Bonds and thc interest thereon constitutes a first lien upon tho Pledged Revenues. Tile RESERV~ ~...The Ordinance confirms tho establishment of thc "Reserve Fund" by thc City and requires the City to maintain therein an amount of money and investments equal to the average annual principal and interest requirements of all the outstanding Parity Bonds and Additional Bonds (thc "Required Reserve Amount"); provided, however, that the Required Reserve Amount shall never be less than $3,000,000 if the maximum annual principal and interest requirements on all outstanding Parity Bonds and Additional Bonds exceeds $3,000,000. Immediately after thc issuance and delivery of thc Bonds there shall be deposited to the credit of the Reserve Fund, from thc proceeds of thc sale of tho Bonds, money sufficient to cause the Reserve Fund to contain an aggregate amount of money and investments equal to thc Required Reserve Amount for all then outstanding Parity Bonds. After the delivery of any future Additional Bonds the City shall cause the Reserve Fund to be increased, if and m the extent necessary, so that the Reserve Fund will contain an amount of money and investments equal to the Required Reserve Amount. Any increase in thc Required Reserve Amount may be funded fi.om Pledged Revenues, or from proceeds from the sale of any Additional Bonds, or any other available soume or combination of sources. All or any part of the Required Reserve Amount not funded initially and immediately altar the delivery of Additional Bonds shall bo funded, within not more than five years from the date of such delivery, by deposits of Pledged Revenues in approximately equal monthly installments on or before the 25th day of each month. If et any time after thc funding of the Required Reserve Amount there is a depletion therein or thc Reserve Fund otherwise holds less than thc Required Reserve Amount, the Ordinance requires that thc City commence making transfers of Pledged Revenues from the System Fund to the Reserve Fund monthly in an amount equal to 1/60th of thc Required Reserve Amount, until the Reserve Fund is restored to the Required Reserve Amount. The Reserve Fund shall be used to pay thc principal of and interest on any Parity Bonds or Additional Bonds when and to thc extent the amounts in the Interest and Sinking Fund available for such payment are insufficient for such purpose, and may bo used for thc purpose of finally retiring the last of any Parity Bonds or Additional Bonds. FLOW OF FUI~DS... The Ordinance confirms the creation of thc "System Fund," thc *'Interest and Sinking Fund," the *'Reserve Fund" and the "Extension and Improvement Fund," among others, and provides that all Gross Revenues be credited to the System Fund immediately upon receipt. The current expenses of opcmtiun and maintenance of the System arc required to be paid from thc Gross Revenues as a first charge from amounts in the System Fund. Before making the deposits to thc other funds described below, thc City is required by thc Ordinance to retain in the System Fund an amount ut least equal to one-sixth of the amount budgeted for the then current fiscal year for the current operation and maintenance expenses of thc System. Thereafter, the City is required to transfer Pledged Revenues in thc System Fund to the funds described below and in the following order of priority: I First, to the Interest and Sinking Fund, on or before the 25th day of each month in approximately equal monthly payments, amounts sufficient, together with any other funds on hand therein, to pay all of the interest or principal and interest coming due, including with respect to any mandatory redemption requirements, on the Parity Bonds and any Additional Bonds on the next interest payment date; Second, to the Reserve Fund, to fund the Required Reserve Requirement, as described above; and Third, to the Extension and Improvement Fund, an amount equal to 8% of the "Adjusted Gross Revenues of the System", which means the Gross Revenues of the System for each year after deducting from the Gross Revenues an amount equal to the current expenses of operation and maintenance of the System for such year that are directly attributable to (i) all fuel costs related to the production of electric energy by the City and/or (ii) the pumhase of electric energy by the City. The Extension and Improvement Fund shall be used for the purpose of paying thc costs of improvements, enlargements, extensions, additions, replacements, or other capital expenditures related to the System, or for paying the costs of unexpected or extraordinary repairs or replacements of the System for which System funds are not available, or for paying unexpected or extraordinary expenses of operation and maintenance of the System for which System funds are not otherwise available, or for any other lawful purpose. Subject to making the required deposits to the credit of the various Funds when and as required by thc Ordinance or any ordinance authorizing the issuance of Additianal Bonds, any surplus Pledged Revenues may be used by the City for any lawful purpose. RATES... The Ordinance requires the City to establish, maintain and collect, such rates, charges and fees for the use and availability of the System that are at all times in amounts necessary (1) to produce Gross Revenues suffialent, together with any other "Pledged Revenues" (which consist of the Net Revenues and any additional revenues, income, or other resources which are expected to be available to the City on a regular periodic basis that in the future, at the option of the City, may be pledged to the payment of the Parity Bonds and any Additional Bonds), to pay all current operation and maintenance expenses of the System, and (2) to produce an amount of Pledged Revenues during each fiscal year at least equal to the greater of 1.25 times the average annual principal and interest requirements of all then outstanding Parity Bonds and Additional Bonds or 1.25 times the succeeding fiscal year's principal and interest requirements of all then outstanding Parity Bonds and Additional Bonds. The City has established certain accounts (the "rate stabilization funds") within each of its water, sewer and electric light enterprise funds to serve as operating reserves that may be drawn upon from time to time in lieu of increasing utility rates. In accordance with the terms of the Ordinance, the City Council may pledge all or part of the amounts in one or more of the rote stabilization funds to secure the Parity Bonds, in which event, such pledged amounts will become "Pledged Revenues" that may be taken into account by the City for purposes of satisfying the foregoing rate covenant. OPTIONAL REOI~M~TmN... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after December I, 2013, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on June 1, 2013, or any date thereafter, at the par value thereof plus accroed interest to the date of redemption. If less than all of the Bonds are to be redeemed, the City may select the maturities of Bonds to be redeemed. If less than all the Bonds of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Bonds are in Book-Entry-Only form) shall determine by lot the Bonds, or portions thereof, within such maturity to be redeemed. Ifa Bond (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Bond (or the principal amount thereof to be redeemed) shall become duo and payable on such redemption date and interest thereon shall cease to accrue from and at, er the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying AganffRegistrar on the redemption date. MANDATORY SINKING FUND REDEMPTION... In addition to being subject to optional redemption as provided above, should the Initial Purchaser of the Bonds select a combination of serial bonds and term bonds in accordance with the Notice of Sale for the Bonds, the term bonds are subject to mandatory redemption on the first December Ist next following the last maturity of the serial bonds, and annually thereal~er on each December 1~t until the stated maturity for the term bonds at the redemption price of par plus accrued interest to the date of redemption. In each of the years the term bonds are to be mandatorily redeemed, the Paying Agent/Registrar shall select by lot the numbers of the term bonds within the applicable Stated Maturity to be redeemed on the next following December 1st from moneys set aside for that purpose in the Interest and Sinking Fund. Any term bond not selected for prior redemption shall be paid on the date of its Stated Maturity. The principal amount of the term bonds for a Stated Maturity required to be redeemed pursuant to the operation of such mandatory redemption provisions shall be reduced, at the option of the City, by the principal amount of the term bonds of like Stated Maturity which (1) shall have been acquired by the City at a price not exceeding the principal amount of such term bonds plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation or (2) shall have been redeemed pursuant to the optional redemption provisions and not theretofom credited against a mandatory redemption requimment. 10 I I I I I I I I I I I I I I I ! I i I I ! I I I I I I I I I I I I I I I NOTICE OF REDEMPTION... Not less than 30 days prior to a redemption date for the Bonds, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Bonds to be redeemed, in whole or in part, at the address of thc registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding thn date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION TI-IEREOF SHALL CEASE TO ACCRUE. ADDITIONAL BONDS... Subject to satisfying certain conditions for the issuance of parity bonds, the City has reserved the right in thc Ordinance to issue Additional Bends from time to time. Any such Additional Bonds will be secured on a parity with the pledge of the Pledged Revenues that secures the outstanding Parity Bonds and the Bonds. Among the conditions required by the Ordinance for the issuance of Additional Bonds, is the delivery to thc City ofa wtit~an certification from an independent certified public accountant to the effect that, in his or its opinion, during either thc next preceding fiscal year, or any twelve consecutive calendar month period out of the 18-manth period immediately preceding thc month in which the ordinance authorizing the issuance of the then proposed Additional Bonds is passed, the Pledged Revenues were at least (i) 1.25 times an amount equal to the average annual principal and interest requirements, and (ii) 1.10 times an amount equal to the principal and interest requirements during the fiscal year during which such requirements are scheduled to be the greatest, of all Parity Bonds and Additional Bonds which are scheduled to be outstanding aRer the delivery of the then proposed Additional Bonds. In calculating the amount of Pledged Revenues for this purpose, if there has been any increase in the rotes or charges for services of the System which is then in effect, but which was not in effect during all or any part of thc entire period for which the Pledged Revenues are being calculated (hereinafter referred to as the "entire period") then the certified public accountant, or in lieu of the certified public accountant n firm of consulting engineers, may determine and certify the amount of Pledgnd Revenues as being the total of (i) the actual Pledged Revenues for the entire period, plus (ii) a sum equal to the amount by which the actual billings to customers of the System during the entire period would have been increased if such increased rates or charges had been in effect during the entire period. Reference is made to "Selected Provisions of the Bond Ordinance" for further requirements with respect to the issuance of Additional Bonds. AMENDMENT OF THE ORDINANCE... The Ordinance provides that thc holders or owners of Parity Bonds and Additional Bonds aggregating in principal amount $l% of the aggregate principal amount of then outstanding Parity Bonds and Additional Bonds shall have thc right from time to time to approve any amendment to thc Ordinance which may be deemed necessmy or desirable by the City, provided, however, that without the consent of all holders or owners of Parity Bonds and Additional Bonds, no amendment may be made that would: (1) make any change in thc maturity of the outstanding Parity Bonds or Additional Bonds; (2) reduce thc rate of interest borne by any of thc outstanding Parity Bonds or Additional Bonds; (3) reduce the amount of the principal payable on thc outstanding Parity Bonds or Additional Bonds; (4) modify thc terms of payment of principal of or interest on thc outstanding Parity Bonds or Additional Bonds, or impose any conditions with respect to such payment; (5) affect thc rights of thc holders or owners of less than ail of thc Parity Bonds and Additional Bonds then outstanding; (6) change thc minimum percentagn of thc principal amount of Parity Bonds and Additional Bonds necessary for consent to such amendment. For a description of the notice requirements and other provisions pertaining to the amendmant of thc Ordinance, sec "Selected Provisions of thc Bond Ordinance." DEFEASANCE O1~ BONDS... The Ordinance provides for the defeasance of thc Bonds when payment of thc principal of and premium, if any, on Bonds, plus interest thereon to thc duc date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably dcpesiting with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securltias, ccrtificd by an indepandant public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestmant, of sufficient money to make such payment, and all necassary and proper fees, compensation and expenses of thc paying agent for the respective series of Bonds. The Ordinance provides that "Defeasance Securities" means (1) direct, noncallablc obligations of the United States of America, including obligations that are unconditionally guaranteed by thc United States of America, (2) noncallablc obligations of an agancy or instrumentality of thc United States of America, including obligations that arc unconditionally guaranteed or insured by the agency or instrumentality and that arc rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (3) noncallablc obligations ora state or an agnncy or a county, municipality, or other political subdivision of n state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent. Thc City has additionally reserved thc right, subject to satisfying thc requirements of (1) and (2) above, to substitute other Defeasance Securities for thc Defeasance Securities originally deposited, to reinvest the uninvested moneys on dcpesit for such defeasance and to withdraw for thc benefit of the City moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such Bonds shall no iongnr be regarded to be outstanding or unpaid. After firm banking and financial arrangeroants for the discharge and final payment or redemption of thc Bonds have been made as described above, all rights of the City to initiate proceedings to call the Bonds for redemption or take any other action amending thc terms of thc Bonds arc extingaishcd; provided, however, that the right to call the Bonds for redemption is not extinguished if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves thc right to call the Bonds for redemption; (ii) gives notice of thc reservation of that right to the owners of thc Bonds immediately following thc making of the firm banking and financial arrangements; (iii) directs that notice of the reservation be included in any redemption notices that it authorize; and (iv) at the time of the redemption, satisfies the conditions of the preceding paragraph with respect to such Bonds as though it was being defeased at the time of the exercise of the option to 11 I redeem thc Bonds, after taking the redemption into account in dctcrmining thc sufficiency of the provisions made for thc payment of the Bonds. BOOK-ENTRY-ONLY SYSTEM... This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company ("DTC"), New York, New York, while the Bonds, as applicable, are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (I) DTC will dish'ibute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC 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 Security certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, 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 tho Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S, equity issues, corporate and municipal debt issues, and money market instruments fi.om over 85 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, in tarn, is owned by a number of Direct Participants'of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Secorities Dealers, Inc. 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 bc found at www.dtcc.com. Purchases of Bonds under the DTC system must be made by or through Direct 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 Bonds, except in the event that use of the book-cotry 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 thc 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. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. 12 I I I I I i I I I I I I I I I I I I I I I I I I I I I I I I i I I I I i I Redemption notices shall 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 redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to City as soon as possible altar the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest 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 Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be guvemed by standing instructions and customary practices, as is tho case with securities held for the accounts of customars in bearer form or regismad in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, Paying Agent/Registrar, or the City, subject to any statutory or 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 tho responsibility of tho City or Paying Agant/Registrar, 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 or Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered. Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement it should be understood that while the Bonds are in the Book-Ent~-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except es described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Information concerning DTC and the Bank-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the City or the Pumhaser. Effect of Termination of Book-Entry Only System. In the event the Book-Entry-Only System with respect to the Bonds is discontinued by DTC, or tho use of the Book-Ent~-Only System with respect to the Bonds is discontinued by the City, printed securities certificates will be issued to the respective holders of the Bonds, as the case may bo, and the respective Bonds will be subject to transfer, exchange and registration provisions as set forth in thc Ordinance, summarized under "The Bonds - Transfer, Exchange and Registration" below. PAYING AGENT/REGISTRAR... The initial Paying Agent/Registrar is Bank One, National Association. In thc Ordinance, the City retains the right to replace the Paying Agunt/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agunt/Registrar for the Bonds, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mall, first class, postage prepaid, which notice shall also give tho address of the new Paying Agent/Registrar. Interest on tho Bonds shall bo paid to the registered owners appearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (defined below), and such interest shall be paid (I) by check sent United States Mail, first class pastage prepaid to tho address of the registered owner recorded in the registration books of the Paying Agent/Registrar or (ii) by such other method, acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner. Principal of the Bonds will be paid to the registered owner at their stated maturity or earlier redemption upon presentation to designated payment/transfer office of the Paying Agent/Registrar. If the date for the payment of the principal of or inter~t on the Bonds shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated paymant/transfer oft'lee of the Paying Agent/ Registrar is located are authorized to close, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. 13 TRANSFER, EXCHANGE AND REGISTRATION . . . fu the event thc Book-Entry-Only System should be discontinued, printed certificates will be deliver to the registered owners a~d thereafter the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds may be ass!gned by the execution of an assignment form on the respective Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying Agent/Registrar, in Iieu of the Bonds being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument oft~ansfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to thc Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate designated amount as the Bonds surrendered for exchange or transfer. See "Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and [ransferability of the Bonds. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Bond called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. RECOIm DATE FOR INTEREST PAYMENT... The record date ("Record Date") for the interest payable on the Bonds on any interest payment date means the close of business on the 15ta business day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date", which shall be 15 days aloes the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. BONDHOLDERS~ REMEDIES... Except for the remedy of mandamus to enforce the City's covenante and obligations under thc Ordinance, the Ordinance does not establish other remedies or specifically enumerate the events of default with respect to the Bonds. The Ordinance does not provide for a trustee to enforce the covenants and obligations of the City. In no event will registered owners have the right to have the maturity of the Bonds accelerated as a remedy. The enforcement of the remedy of mandamus may be difficult and time consuming. No assurance can be given that a mandamus or other legal action to enforce a default under the Ordinance would be successful. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce any remedies under the Ordinance would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of othes federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before. The opinion of Bond Counsel will note that ail opinions relative to the enforceability of the Ordinance and the Bonds are qualified with respect to the eustommy rights of debtors relative to their creditors. 14 I I I ! I I I I I I I I i I I i I I I I I I I I I I I I I i ! I I I I ! I i MANAGEMENT OF THE SYSTEM The System includes the City's entire existing electric, light and power system and the existing waterworks and sewer system, together with all future extensions, improvements, enlargements and additions thereto. The Public Utilities Board... By City Charter, there has been created a Public Utilities Board (the "Board") composed of five members, appointed by the City Council with the City Manager and the Assistant City Manager of Utilities serving as ex-officio, non- voting members of the Board. The Board serves the Dapamnent of Utilities as a consulting advisory and supervisory body. The duties of the Board are summarized as follows: 1. Review of the Annual Utility Operating Budget and 5-year Capital Improvements Plan, and the transmission thereof to the City Council. Review of recommended: a. expansion of. additions to, betterment of. or extensions to the System; b. incorring of debt; c. issuance of bonds and d. establishment of rates and charges. All actions of the Board are subject to final approval of the City Council. Management of the System... The System is managed by the Assistant City Manager of Utilities, who is responsible to the City Manager. The System is organized into three major services, Electric, Water and Wastewater, and consists of approximately 308 employees. In addition, within Utility Administration, there are various administrative staff, customer service, energy management, and financial administration responsibilities. The Electric Utility is composed of seven main divisions: 1. Electric Production, 2. Electric Disfa'ibution, 3. Electric Substations, 4. Electric Engineering 5. Elec~c Metering, 6. Electric Administration, and 7. Eleatrie Marketing. The Water/Westewater Utilities are composed of five main divisions, each of which is headed by a Division Manager. They include: 1. Water Production, 2. Water/Wastewater Field Services, 3. Westewater Treatment Plant, 4. Municipal LaboratovflEnvironmantni Services, and 5. Drainage. The System utilizes the services of the City's Finance Deparmaent for accounting purehesing and warehousing. The System utilizes the services of the Engineering mad Tnmsportation Department for design of minor water/sewer lines, easement and/or right-of-way acquisition and inapeefion of developer-installed water and sewer lines end project management of cepital projects. The System also utilizes various adminisWative dapartments of the City for its personnel, and data processing needs. UTILITY RATES... It is the City's policy to review electric, water and waatewater rates on an annual basis to assure adequacy and equity. Independent consultants are generally used every 5th year, with City staffcemplefing thc work in house during the interim. Rate recommendations are submitted by the staff to the Public Utilities Board for review and approval, which then forwards a recemmcodafion to the City Council for final approval. To date, the City Council has approved all rate recommendations of the Public Utilities Board. 15 THE ELECTRIC SYSTEM ]N'rI~oI~UCrlON... The City has owned and operated its electric light and power system (the "Electric System") since 1905. In order to secure access to a long-term baseline electric generating facility, the Cities of Bryan, Denton, Garland and Greenville, Texas created the Texas Municipal Power Agency C'TMPA") in 1975. TMPA is a joint power agency without taxing power, and a separate municipal corporation and political subdivision of the State that operates in accordance with Article 1435a, Vemon's Texas Civil Statutes, as amended. (See "The Electric System - The TMPA Power Sales Agreement" below and "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Description of TMPA.") TMPA owns the Gibbons Creek Steam Electric Station ("Gibbons Creek"), a coal-fired generating plant located in Grimes County, Texas, which has a net generating capacity of 462 megawatts ("MW"). The City's contractual right to TMPA's generation represents approximately 98 MW, or approximately 35% of the City's projected 2003 peak system-wide demand. The City's rights and obligations relative to TMPA arc sot forth in an agreement (the "TMPA Agreement"), dated as of September 1, 1976, between TMPA and the cities of Bryan, Denton, Garland and Greenville (collectively, the "Member Cities"). In June 2001, the City sold its uneconomical generating units, having a capacity of 178 MW, and entered into a five-year power purchase agreement (the "Transition Power Agreement") with PG&E Energy Trading - Power, L.P. ("PG&E Energy Trading") to supply all the capacity and energy requirements of the City above those suppIied from the City's power purchase agreement with TMPA~ In December 2002, the rights and obligations of PG&E Energy Trading under the Transition Power Agreement were assigned to and assumed by Constellation Power Source, Inc. ("Constellation Power Source"). See "The Electric System - Electric System Challenges and Responses - Transition Power Agreement." Tho Electric System, like other municipal electric systems in the State, presently is confronted by fundamental changes to the system of electric utility regulation in the State brought about by the enactment of Senate Bill 7 C'SB 7") by the Texas Legislature (the "Legislature") in 1999. As further described below, SB 7 provides for open competition in the provision of retail electric service in the State, which competition commenced on January 1, 2002 in tho part of tho State that is within the service area of thc Electric Reliability Council of Texas ("ERCOT"). The City is located in the ERCOT service area. See "Tho Electric System - Texas Deregulation Structure, Status and Issues - ERCOT." Municipal utilities, like the Electric System, are not required to participate in the competitive market, although they may "opt in" to retail electric competition. To date, the City Council has taken a "wait and watch" approach to the new market, and has decided not to open the City to retail electric competition. While SB 7 generally deregulates the retail generation and sale of energy in the State, SB 7 maintains the existing regulated structure with respect to electric transmission and distribution services in the State. For the reasons discussed below, management of the Electric System ("Electric System Management") is of the view that the Electric System is positioned to continue to participate in the distribution of energy within the City's service area, which in recent years has experienced strong growth trends, particularly with respect to energy sales to the City's primarily residential customer base. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Dasaription of TMPA - SB 7, TMPA and the Member Cities" and "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Senate Bill 7." Factors Affecting the Electric Utility Industry...The electric utility industry in thc State in general has been, and in thc future may bo, affected by a number of factors that could impact tho financial condition and competitiveness of the Electric System. Such factors include: · prevailing governmental policies and regulatory actions, including those of the Federal Energy Regulatory Commission, the Environmental Protection Agency, the Texas Department of Environmental Quality, the Public Utility Commission of Texas (the "PUC") and ERCOT, with respect to: -transmission cost rate structure; - purchased power and recovery of investments; - acquisitions and disposal of assets and facilities; - operation and construction of facilities; - present or prespective wholasaie and retail competition; - changes in and compliance with environmental and safety laws and policies; and - developments in federal law with respect to the ability of tho City and TMPA to finance and operate facilities and make energy sales in a manner that permits them to finance facilities with, and honor existing covenants with respect to, tax-exempt debt; · continued implementation of the legislation passed during the 1999 session of the Texas Legislature to restructure the electric utility industry in Texas or any amendments that may be enacted to that legislation in thc current or future Texas legislative sessions; · power costs and availability, including the continued development, and financial stability of owners of, merchant power plants in the State; 16 I I ! I I i i I I I I I i I I ! ! i I I I ! I I I ! I I I I i ! I I i I I ! ·weather conditions and other natural phenomena; · unanticipated population growth or decline, and changes in market demand and demographic pa~eras; · changes in business strategy, development plans or vendor relationships; · competition for retail and wholesale customers; · access to adequate transmission facilities to meet changing demands; · pricing and transportation of coal, natural gas and other commodities that may affect the cost of energy sold to the City by TMPA and others; · unanticipated changes in interest rates, commodity prices or rates of inflation; · unanticipated changes in operating expenses and capital expenditures; · commercial bank market and capital market conditions; · competition for new energy development and other business opportunities; · legal and administrative proceedings and settlements; · inability of the various counterparties to meet their obligations with respect to the Electric System's power purchase arrangements; · significant changes in the Electric System's relationship with its employees, including the availability of qualified personnel; · significant changes in critical accounting policies material to the Electric System; and · actions of rating agencies. The City cannot f~lly predict what effects such factors will have on the operations and financial condition of the Electric System, but the effects could be significant. The discussion of such factors herein does not purport to be comprehensive or definitive, and these matters are subject to change subsequent to the date hereof. Extensive information on the electric utility industry is, and will be, available from the legislative and regulatory bodies and other sources in the public domain, and potential purchasers of the Bonds should obtain and review such information. 17 TABLE 1 - HISTORICAL OPERATING AND FINANCIAL DATA The tabl~ below sets forth certain operating nnd finnncial data with respect to thc Electric System for each of the five most recently completed fiscal years. · Average Number of Monthly Year Ended September 30, Customers by Service Cl~sification 2002 2001 2000 m 1999 1998 Residential 31,974 31,151 29,436 29,353 28,515' Commercial and Industrial 4,083 4,017 3,606 3,754 3,62 I Other 534 537 791 1,446 1,404 Total 36,591 35,705 33,833 34,553 33,540 Annual Megawatt Hour Sales by Service Classification Residential 396,546 403,880 374,617 Commercial and Industrial 636,347 606,309 674,08 l Other 39,030 36,150 52,317 Subtotal 1,071,923 1,046,339 1,101,015 Sales for Re~ale 0 26,864 33,347 Total Sales 1,071,923 1,073,203 1,134,362 Loss and Unaccounted 50,030 53,125 14,780 Total MW to System 1,121,953 1,126,328 1,149,142 % Loss and Unaccounted 4.46% 4.72% 1.29% ^nnual Revenue by Service Classification ($ in Thousands) 356,644 366,461 626,536 603,553 39,600 37,222 1,022,780 1,007,236 50,701 58,472 1,073,481 1,065,708 25,037 48,941 1,098,518 1,114,649 2.28% 4.39% Residential $ 33,670 $ 37,921 $ 31,609 $ 28,121 $ 28,903 Commercial and Industrial 43,128 47,809 40,095 36,996 35,711 Other 4,039 3,894 3,401 3,288 3,126 Total $ 80,837 $ 89,624 $ 75,105 $ 68,405 $ 67,740 Analysis of Electric Billing Residential Customers Avg. Monthly Bill per Customer Avg. Monthly kwh per Customer Avg. Monthly Cents per kwh 78.27 $ 100.24 $ 89.49 $ 79.83 $ 84.47 1,038 1,062 1,061 1,012 1371 7.54 9.32 8.44 7.88 7.89 Commercial and Industrial Customers Avg. Monthly Bill per Customer Avg. Monthly kWh per Customer Avg. Monthly Cents per kWh Capacity and Energy Mix (rounded to nearest MW) Capacity $ 848.52 $ 962.82 $ 926.58 $ 821.29 $ 821.85 13,135 11,798 15,578 13,920 13,890 6.46 8.22 5.95 5.90 5.92 Owned Capacity (MW) 0 0 178 178 178 Finn Purchase (MW) - TMPA 98 98 98 98 98 Finn Purchase (MW) - Other 227 220 30 12 0 Total 325 318 306 288 276 Annual Peak Demand 266 260 265 259 239 Energy Owned Capacity (MWH) 0 79,989 257,903 316,190 273,699 Firm Purchase (MWH) - TMPA 672,087 691,289 636,718 552,183 659,018 Firm Purchase (MWH) - Other 449,866 355,050 254,521 230,146 181,932 Total 1,121,953 1,126,328 1,149,142 1,098,519 1,114,649 (1) The average number of monthly customers appears to have decreased in the year ended September 30, 2000. This decrease is a result of installation of new customer information software at the beginning of fiscal year 2000. The previous software system counted actual number of billings produced. The new sofavare counts customers who receive multiple bills as a single customer, resulting in the apparent decrease in customers. Total number of bills produced for the year ended September 30, 2000 was 36,897, an increase of 7% over the previous year. 18 I I I I i I I I I I ! I I I ! i I I I I I I I I I I I I I I I I I I I I i I TABLE 2- CURRENT ELECTRIC RATE SCHEDULES Approximately 97% of the Electric System customers are billed under the rate schedules summarized below. Special rate schedules are available for customers with unique load curves such as city street lighting, etc. Residential Service Rate (Effective October 1, 1994) ' Applicable to any customer for all electric service used for residential purposes in an individual private dwelling or an individually metered apartment, supplied at one point of delivery and measured through one meter. Also applicable to any customer heating with electric energy, resistance or heat pump. Not applicable to resale service in any event, nor to temporary, standby, or supplementary service except in conjunction with the applicable rider. Facility Charge Single-Phase Three-Phase ~ Winter Rates First 1,000 KWH Additional KWH Enar Chafe- Summer Rates First 3,000 KWH Additional KWH Enerm, Cost Adiustmant $7.73 / 30 days $15.45 / 30 days 4.34¢ / KWH 3.94¢ / KWH 5.61g/KWH 6.21g/KWH See description below. General Service Large (Effective October I, 1995) Applicable to any commercial or industrial customer having a minimum actual demand of 250 KVA or 225 KW for all electric service supplied at one point of delivery and measured through one meter. Customers with an average actual demand equal to or greater than 200 KVA or 180 KW during thc previous twelve month period may be allowed service under this rate, subject to thc minhnum billing provision. Customers other than commercial and industrial may be allowed service under this rate, subject to the minimum billing provision. Facility Charne $60.60 / 30 days Demand Charge $ 8.64 / KVA (Minimum of 250 KVA billed) Ener~ Charan 1.41g / KWH Energy Cost Adiustment See description below. Minimum Billin~ An amount equal to the facility charge, plus a demand charge billed at the above KVA rate, where demand is determined by whichever of the following methods yields the greatest result numerically: (1) the actual monthly KVA demand; (2) 250 KVA; or (3) seventy percent (70%) of the maximum monthly KW/KVA actual demand for any month during the previous billing months of May through October inthe twelve months ending with the current mqnth. 19 General Service Small (Effective October 1, 1995) This rate is applicable to any commercial or industrial customer having a maximum demand less than 225 KW for all electric service supplied at one point of delivery and measured through one meter. Facility Charge · Single Phase $15.15 / 30 days Throe Phase $20.20 / 30 days Demand Charge $ 8.00 / KW (First 20 KW not Billed) Enemy Charae Customer with 20 KW or below: Block 1 - First 2,500 KWH Block 2 - All Additional KWH 6.75g / KWH 3.00~ / KWH Customer above 20 KW: Block 1 - First 2,500 KWH Block 2 - Next 3,500 + B2T* KWH Block 3 - All Additional KWH 6.75¢ / KWH 3.00g / KWH 2.65~ / KWH Minimum Billin~ An amount equal to the facility charge plus the greater of: (1) the actual monthly KW demand charge, or (2) seventy percent (70%) of the maximum monthly actual demand charge for any month during the previous billing months of May through October in the twelve months ending with the current month. Energy Cost Adjustment (Effective October 1, 1995) All monthly KWH charges shall be increased or decreased by an amount equal to "X" cents per KWH, to be known as the energy cost adjustment (ECA). The ECA shall be computed during the last month of each fiscal year quarter (December, March, June and September) to be applied to the quarter immediately following. The City shall in no case change the energy cost adjustment more than once in any throe (3) month period. The ECA shall be calculated using the following formula: ECA = Proiacted enerc, v cost for next auartur Projected KWq-I sales for next quarter In the event that actual plus estimated cumulative costs of fuel, variable costs of TMPA energy and purchased energy (excluding TMPA's fixed charges) are greater than or less than the actual and projected ECA revenues by $500,000 or more during the next quarter, the Director of Electric Utilities or his designate shall recompute the Energy Cost Adjustment and, with Public Utilities Board approval, may establish an ECA that collects or returns such difference over the next three month period. Such change in ECA shall be applied evenly to each month during the three month period. The second quarter FY 2002-03 ECA rate is 2.80¢ / KWH. MANAGEMENT OF THE ELECTRIC SYSTEM... The Board serves the City's Department of Utilitias as a consulting, advisory and supervisory body. All actions of the Board are subject to final approval of the City Council. The City's Director of Electric Utilities manages the Electric System with responsibility for wholesale power supply, distribution, engineering, substations, marketing, metering, planhing and safety operations. The staff of the Electric System includes approximately 108 full-time and part-time professional and administrative staff. THE ELECTPdC SYSTEM BUSINESS PLAN... Although there are many evolving issues concerning retail electric competition in the State, the Electric System has identified a business strategy, which is described below, that is designed to permit the City to accommodate its long-term contractual commitment to purchase energy from TMPA, while positioning the Electric System for flexibility in the short to intermediate time frame. In accordance with its strategy, the City has taken a number of steps in connection with the changing market, including, in particular, tho transactions described under "The Electric System - Electric System Challenges and Responses - The Transition Power Agreement." In anticipation of the changes effected by SB 7, the Electric System undertook an extensive examination of the financial implications of retail electric deregulation on its operations, under a variety of assumptions for the major components of its expenses. The analysis was made only for internal planning purposes and with an objective of designing a strategy to protect the 2O I I I ! I I I i I I ! I I I I I I I I I I ! Electric System from the volatility of the deregulated market while assuring that its capacity and energy supplies are competitive with the cost ofthase resources to other competitors operating in ERCOT. The City closely monitors federal and State legislative and regulatory actions for the purpose of observing and influencing, to the extent possible, developments the could affect the operations of the Electric System and the options of the City relative to the Electric System. During the current session of the Legislature, which conunenecd in mid-fanuary 2003 and is scheduled to expire at the end of May, 2003, the City plans to monitor legislation that might result in amendments to the Texas Public Utility Regulatory Act ("PURA") that would impact the City and the Electric System. I I I I I I I i I I I I I I I The Electric System business plan generally pmvidas that the electric facilities owned by the City will be transmission and distribution facilities, which provide a regulated return on investment, whether or not tho City Council elects to open the City to full retail electric service competition. However, Electric System Management will review and report to thc Board and thc City Council all options with respect to meeting the City's energy needs, particularly in view of the scheduled expiration of the Transition Power Agreement in mid-2006. Principal policy initistives that have been pursued to date as a result of this review include the sale of obsolete generating assets in 2001 and replacement of those assets with capacity and energy through a power supply and management oon~act. In entering into this five-year Transition Power Agreement, which is expected to provide approximately 45% of the City's pumhased energy during its term, the City has assumed that by the end of the Agreement's term, the City will be positioned to assess its options in a developed, competitive market, both as a wholesale purchaser and retail seller of anargy. This business strategy is intended to provide the EIecffic System with a relatively safe cash flow from its transmission and distribution business, which will not be subject to competition, while reducing its risk of holding unneeded capacity in the event the City Council should elect to open tho Electric System's service territory to retail power competition. The City has also followed a policy in tho last three years of bond-financing transmission and distribution facilities, which permits the City to amortize the cost of such facilities over a period that approximates the useful life of the facilities. In light of recent regulatory guidance in the form of the U.S. Treasury Department's so-called "Output Facilities Regulations," the City anticipates that it will continue to bond-finance such facilities using relatively low-cost tax-exempt debt. See "The Electric System - Capital Improvement Plan and Additional Debt." If the City Counall decides to opt in to retail competition, Electric System Management believes that TXU Energy Company, LLC ("TXU Energy") would be the most likely immediate competitor, given its proximity to the City's service area; however, market barriers for non-incumbent utilities have become less significant under SB 7, so other retail electric providers ("REPs") would also compete. While any competing REPs could offer service at a rate lower than the City's rates, Electric System Management dues not expect that TXU Energy or other potential competitors would substantially undercut the City's electric service rate to residential or commercial customers, although large industrial load customers would likely be aggressively recruited by potential competitors. Presently, the City's customer base is only 11% indastrial/commereial in composition, based upon the number of customer accounts, although for the year ended September 30, 2002, approximately 59% of the City's energy sales was generated by commercial and industrial customers. It is possible that competitors could use factors other than price in efforts to obtain desirable customers. ELECTRIC SYSTEM CHALLENGES AND RESI'ONSES... The Electric System is committed to malatalning its electric mtos at levels that are competitive with other retail electric providers. In the view of Elecffic System Management, among the most significant challenges facing the Electric System are those arising from the City's long-terra power purchase agreement with TMPA, under which the City is obligated to purchase or pay for 21.3% of TMPA's fixed costs, including debt service, as well as TMPA's variable costs relating to the energy that the City takes from TMPA. Depending upon the relative cost of natoral gas and coal, and owing to the relatively high debt service requirements of TMPA (see "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Description of TMPA - Outstanding Debt"), the TMPA energy cost from time to time may be above market (i.e., a "stranded cost"). In the event that the City should open its service ama to retail competition, the Electric System could and likely would seek to recover this cost through the use of the nonbypassable competitive transition charge that SB7 allows municipal electric utilities to place on their distribution rates. Thc greatest potential impact on the Electric System from SB 7 could result from a decision by the City Council to participate in a fully-competitive market. The potential effects of a decision to compete include the potential loss of customers to other REPs resulting in a reduced electric load, while the City's obligations under the TMPA Agreement would require the continuation of the City's take-or-pay obligations. Similarly, thc City is obligated under the Transition Power Agreement to purchase certain minimum amounts of energy. On thc other hand, if the City's retail rates and its ability to deliver dependable service are competitive with those of other REPs, the City may be successful in retaining existing customers. Any decision of the City Council to participate in full retail competition would also permit the Electric System to offer electric service to customers that are not presently within the certified service area of thc City. A decision of the City Council not to compete may have other consequences, such as decreases in economic development activity within the City due to the "protected" rate structure of the Electric System, if thc rate structure is higher in cost than rates in areas that are open to competition. Other significant challenges confronting the Electric System for the future include issues arising from the continued development of the wholesale and retail energy markets in the State, transmission constraints that may affect the cost of enargy delivered to the City, environmental compliance and political considerations that could affect the City's "opt in" decision in years to come. Moreover, Electric System Management has begun a general review of the options that will need to he presented to the City Management, the Public Utility Board and the City Council to satisfy the City's energy requirements that exceed its capacity 21 I rights in TMPA when the Transition Power Agreement expires in 2006. A discussion of the status of the Texas energy market and issues that are being reviewed by State ragnlatury bodies and the State Legislature afier the first full year of retail customer choice in ERCOT is sat forth under the caption "The Elect'lc System - Texas Deregulation Structure, Status and Issues." Measures Relatine to TMP,4. TMPA has reduced its operation and maintenance expenses ia recent years through certain measures, including those described herein under "Appendix B - Description of Senate Bill 7 and thc Texas Municipal Power Agency - Description of TMPA," and Electric System Management believes that thc variable costs of TMPA energy are likety to be competitive for the foreseeable future. However, the City's share of TMPA's fixed costs, particularly its debt service requirements, could result in thc total cost of tho City's purchased power bom TMPA exceeding the cost of power that is marketed within ERCOT from time to time. As shown below under "Appendix B - Description of Senate Bill 7 and thc Texas Municipal Power Agency - Description of TMPA - Outstanding Debt," the debt service on TMPA's Revenue Bonds, as currently stxuctured, increases from approximately $105.5 million in the fiscal year ending September 30, 2002 (an increase of approximately 25% since 2000) to approximately $130 million in the year ending September 30, 2009, which represents an approximately 23% increase from 2002 levels. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Description of TMPA - SB 7, TMPA and the Member Cities" for a description cfa provision of SB 7 that permits TMPA to recover tnmsmission costs of services on an accelerated basis for thc purpose of funding a debt service reserve. As described under "The Electric System - The TMPA Power Sales Agreement," a series of amendments to the TMPA Agreement made during 1997 provide flexibility to the Electric System, while at the same time establishing a firm percentage obligation for the Electric System with respect to its TMPA payment obligations. Prior to the amendment of the TMPA Agreement, the City's proportion of TMPA costs fluctuated from year to year (although it typically was between 21% and 23% of TMPA costs). Except as described below under "The TMPA Power Sales Agreement - The Debt Service Guarantee Percentage," under the 1997 amendments to thc TMPA Agreement, the City has a fixed obligation to pay for 21.3% of TMPA's annual system costs, including the payment of TMPA's debt service requirements and operating and maintenance expenses and, in connection with such obligation, the City is entitled to receive the same percentage of TMPA's available output of energy. The 1997 amendments to the TMPA Agreement also repealed provisions of the TMPA Agreement that had prohibited the Member Cities from purchasing energy from others or from constructing new generating facilities of their own. Prior to the 1997 amendments, the Member Cities were, in effect, acting as a consortium for all power production and off-system energy sales. As described below under "The Eleet~ie System - Electric System Challenges and Responses - Thc Transition Power Agreement," the Electric System has taken advantage of this flexibility to act independently from the other Member Cities in connection with the sale in 2001 of obsolete generation units and the execution of the Transition Power Agreement. As described below under "The Electric System - The TMPA Power Sales Agreement - Rebate of Excess Revenues to the Member Cities," tho 1997 amendments also require that TMPA annually rebate to each Member City its proportionate share of TMPA revenues that are in excess of the amount needed by TMPA to pay its operating costs and to meet its debt service requirements. The City has deposited these rebates into a rate stabilization fund (the "Stabilization Fund"). See thc discussion of the Stabilization Fund below. It should be noted, however, that the resolutions under which TMPA has issued its outstanding revenue bonds (collectively, the "TMPA Resolution") contain covenants for the protection of its bondholders and the maintenance of the t~x-exempt status of its debt, which could affect the means available to both TMPA and the Elect'lc System in responding to developing market conditions. The Transition Power Agreement. In Sune 2001, the City entered into a five-year Transition Power Agreement with PG&E Energy Trading, a subsidiary of PG&E National Energy Group, lnc. The Agreement expires on June 29, 2006. On December 16, 2002, the City, PG&E Energy Trading and Constellation Power Source entered into an assignment and assumption agreement, pursuant to which ail of thc right, title, interest and obligations of PG&E Energy Trading were assigned to and assumed by Constellation Power Soumc. The assignment and assumption were made as a result of PG&E Energy Trading closing down its Texas operations due to the company's financial situation. Under the Transition Power Agreement, Constellation Power Source is obligated to supply all the capacity and energy requirements of the City above those supplied from the City's existing purchased power agreement with TMPA (see "The Eleetric System - Thc TMPA Power Sales Agreement"). All energy rasourees of the City during the term of the Transition Power Agreement, including power supplied to the City under its TMPA power purchase agreement, will be delivered to the City in accordance with the terms of the Transition Power Agreement at points of delivery located within thc City. In addition to supplying the City's energy in excess of the City's TMPA allocation, the Transition Power Agreement requires Constellation Power Source to perform certain ancillary services for the City that are necessary to permit the City to receive energy from the ERCOT power grid. Such services include scheduling and dispatch of energy. Given the nature of ERCOT as a closed grid with few interconnactioas with other power grids, energy supplied to the City by Constellation Power Source that are in excess of amounts supplied from the City's TMPA power supply agreement must be generated from other resources within ERCOT. Constellation Power Source has reserved the right to contract to sell power to other energy users that are located within the ERCOT grid, provided, however, that Constellation Power Source may not enter into contracts with other customers that could reasonably be foreseen as precluding it from meeting its obligations to serve the City's load under the Transition Power Agreement. The Transition Power Agreement provides that, with certain limitations, Constellation Power Source will dispatch TMPA energy to supply the City as long as TMPA power and energy is available. Thc cost to the City of energy provided to the City under the Transition Power Agreement in excess of that delivered to the City from its TMPA resource is not fixed, but will vary from time to time depending upon a number of factors, including the month in which the energy is delivered, the amount of energy that the City periodically projects to be required under the terms of the Transition Power Agreement, the cost of fuel and 22 I I I I I I I I I i I I I I I I I I I I I I I I I I I I I I ! I I I I ! ! · energy trensmission end other factors. In addition, the Transition Power Agreement specifies that the City's energy payment under the contract shall not be less then certain minimum amounts of purchased energy that arc, in general, based upon the City's 2001 electric load, as adjusted according to an annual load adjustment factor. In the event that the City should take less then the minimum energy requirement, Constellation Power Soume is required to mitigate the cost to the City by seeking to resell the City's purohased-energy shortfall. Certain costs for services to be provided to the City under the Transition Power Agreement are subject to annual escalation or de-escalation depending upon en inflation index set forth in the agreement. The obligations of Constellation Power Source under the Transition Power Agreement have been secured end/or guaranteed within certain limits by Constellation Energy Group, Inc. Certain security arrangements that the City had made with PG&E Energy Trading, including a security interest retained by the City in the generation assets that it sold to PG&E Energy Trading, were released as part of thc December 2002 assignment of tho Transition Power Agreement. Constellation Power Source is a Delaware corpomtion and a wholly-owned subsidiary of Coustellation Power Source Holdings, Inc., which in mm is a wholly-owned subsidimy of Constellation Energy Group, Inc., which trades on the New York Stock Exchange. Constellation Power Source is a national merchant energy company that sells energy to wholesale customers such as electric co-operstives, power marketers, municipalities end utilities. Constellation Power Source markets end trades electricity in the wholesale market, menages associated risks in volatile electricity markets, end is aligned with its affiliates, which develop, own end opemte power plants in North America. To back-up Constellation Power Source's power marketing end trading, Constellation Energy Group, Inc. owns or controls generation capacity in excess of 11,300 MW, including an 800 MW combined-cycle generating facility located in Segain, Texas, which is known as the Rio Nogales plant. The Rate Stabilization Fund. In 1996, the City established a rate stabilization fund (the "Rate Stabilization Fund") by trensfurring approximately $45.1 million fi.om the unreserved fund balances of the Electric System. In general, the Rate Stabilization Fund was created to serve as a reserve that could be drawn upon, at least in part, in lieu of increasing electric rates in the full amount required to provide funding to pay the cost of purchased power from TMPA as the amount of T/vIPA debt servica (end thus the City's contract payments) increases. At September 30, 2002, the City had approximately $61.8 million on deposit in the Rate Stabilization Fund. During the ycar ended September 30, 2002, $1.4 million of the Fund was used to subsidize operations of the Electric System. Such draw down of the Fund was not budgeted, but was the result ora mild summer when revenues were lower then budget targets (see "Table 8 - Comparable Calculation of Net Revenues Available for Debt Service"). Prior to 2002, the City increased the balance each year, end had targeted the 2002-2003 fiscal year as the first planned use of the Fund to supplement opemfions. (In fiscal year 2000, the Fund was drawn upon to pay feel costs associated with then- current high natural gas prices end for funds needed for the purchase end installation of required pollution control equipment. However, an amount equal to the amount used to pay for natural gas during 2000 was retumed to the Rate Stabilization Fund at the end of 2001 after the City had increased the energy cost factor of its electric rate tariffs.) The use of the Rate Stabilization Fund is part of the City's business plan to maintain competitive electric rates after the advent of SB 7. Marketing. The Electric System has instituted a campaign to raise the awareness of its customers of the quality of its service end to its commitment to the local community. A marketing program alreed to develop, implement, end maintain programs that effectively solicit new customers, cultivate end reinforce eustoroar loyalty, end improve and expend available services to customers is in place. The marketing program targets key large commercial and industrial customers end promotes various energy efficiency, energy audit, end other programs across all rata classes. THE TMPA POWER SALE~ AGREEMENT... The City's rights end obligations with respect to TMPA are set forth in the TMPA Agreement. Under the TMPA Agreement, the City is obligated to take or pay for its percentage share of the energy generated by TMPA, end TMPA is obligated to devote its best efforts to the generation end delive~ of energy fi.om the generating facilities of TMPA, but the failure of TMPA to provide energy under the TMPA Agreement will not relieve any Member City of its obligations under the TMPA Agreement, as such obligations am unconditional end absolute. The City's payment obligations under the TMPA Agreement are equal to thc greater of the "Take or Pay Percentage" (as defined below) and the "Debt Service Guarenten Percentage" (as defined below). For additional information regarding TMPA, see "Appendix B - Description of Senate Bill 7 end the Texas Municipal Power Agency - Description of TMPA." The Take or Pay Percentaee. Under thc TMPA Agreement, each of thc Member Cities is unconditionally obligated to pay to TMPA, without offset or counterclaim and without regard to whether energy is delivered by TMPA to the Member Cities, their percentage of TMPA's enunal system costs, including the payment of TMPA's debt service requirements end operating end maintcaenca expenses, as set forth below: City of Bryan, Texas 21.7% City of Denton, Texas 21.3% City of Garland, Texas 47.0% City of Greenville, Texas 10.0% A City may choose to take or not take energy fi.om the TMPA generating assets, as it sees fit (as noted above, while the City's TMPA resources have represented approximately one-third of the City's firm power capacity in recent years, the City has averaged taking approximately 55% of its energy fi.om TMPA over the last three fiscal years). While the City is obligated to pay its fixed percentage of the annual system costs, it becomes obligated to pay the variable costs of generating energy only to the extent that it actually takes energy from TMPA. 23 The Debt Service Guarantee Percentage. In any instance where thc amount of money on deposit in TMPA's funds created by the Resolution is not the full amount then required to be on deposit therein, without giving consideration to transfers made from funds other than TMPA's revenue fund or from proceeds of its bonds (provided that transfers may be made from TMPA's reserve fund to its debt service fund for not more than two (2) consecutive calendar months), the Member Cities are obligated to make their percentage share of a payment to TMPA. The aggregate amount of such payment is the amount that is neanssa~ to establish or reestablish tho amount then required, under the terms of the Resolution, to be on deposit in TMPA's bond fund, reserve fund and contingency fund. The percentage share of the payment to be made by each Member City under the TMPA Agreement is determined by calculating the percentage relationship that each Member City's Net Energy for Load (as defined in the TMPA Agreement) for the contract year immediately preceding the contract year in which the calculation is being made to the total aggregate Net Energy for Load of all Member Cities for such conlxact year, and the sum of the adjusted percentages shall equal 100%. ,4llocation of Energy bv TMP,,L Each Member City shall be entitled to schedule and receive, each month for its own account, the proportion of the available energy from TMPA's generation facilities equal to the Take or Pay Percentage, as such percentage may be from time to time adjusted in accordance with the provisions of the TMPA Agreement. TMPA Agreement Term. The contract term of the TMPA Agreement is for a period of thirty-five years from September 1, 1976 or until all bonds and certain other indebtedness of TMPA is paid, whichever occurs later. At present, the final maturity of TMPA's indebtedness is September 1, 2018, although it is possible that TMPA could restructure its debt to shorten or extend the schedule of its debt retirement. Construction of New Proiects. The TMPA Agreement provides that TMPA must give notice of intent to each Member City containing a general description of any new proposed project, the projected sources and uses of funds in connection therewith, and a statement of TMPA's opinion that such proposed project is necessary for TMPA to meet its commitments under the TMPA Agreement and is economically feasible. Each Member City is required thereafter to notify TMPA, within 60 days, of its approval or disapproval of the project. If each Member City approves the project, TMPA may thereafter issue bonds to finance the project without further approval of the Member Cities. Any Member City disapproving a proposed project is required to elect one of two options set forth in the TMPA Agreement. The TMPA Agreement includes provisions that differ from those described above for the sharing of energy and costs in the event that a new project is proposed and one or more Member Cities do not determine to participate in the project. There are no current plans for TMPA to initiate a new generation project. ,~gencv Rates. The TMPA Agreement provides that the rates and charges for power, energy and services charged to each Member City by TMPA shall be (1) nondiscriminatory, (2) fair and reasonable and based on the cost of providing the power, energy and services with respect to which the rates or charges are based and (3) an amount sufficient to (i) pay TMPA's annual system costs, (ii) make the deposits to the funds required by the TMPA Resolution, (iii) fund the annual capital budget of TMPA, and (iv) with respect to other funds or other accounts established by the board of directors of TMPA (the "Board of Directors") and not required by the provisions of the TMPA Resolution, fund such funds or accounts in an amount not greater than 3.5% of TMPA's annual system budget, or such greater amount as may be approved by the affirmative vote of at least six members of the Board of Directors with at least one member of the Board of Directors appointed by each Member City voting in favor of any such increase. Rebate o£F, xces$ Revenues to the Member Cities. Except for funds held for purposes of self insurance, any funds held by TMPA on September 30, 1998, and any funds held by TMPA on the lest day of each fiscal year thereafter over and above the amounts required in connection with subsections (i), (ii), (iii) and (iv) of clause (3) of the preceding paragraph shall be returned to the Member Cities within 120 days of such date in the same percentage as the percentage each City contributed to such amounts. Funds held pursuant to clause subsection (iv) of clause (3) of the preceding paragraph, if approved by the affirmative vote of at least six members of the Board of Directors with at least one member of the Board of Directors appointed by each Member City voting in the affirmative, may be used to reduce the debt of TMPA. TMPA Agreement Payments Constitute Operating Expenses of the City. The TMPA Agreement provides that all payments by a Member City under the TMPA Agreement, including any payments required to bo made to TMPA's bond, reserve and contingency funds, shall constitute an operating expense of its electric system payable solely from the revenues and receipts of such electric system. Rate Covenant under the TMPA Agreement. Under the TMPA Agreement, each Member City has covenanted to establish, maintain and collect rates and charges for the electric service of its electric system which shall produce revenues at least sufficient, together with other revenue available to such electric system and available electric system reserves, to enable it to pay to TMPA, when due, all amounts payable by such city under the T1VIPA Agreement. Sale or Assignment of Electric Systems. Under the TMPA Agreement and the TMPA Resolution, no sale or other disposition by a Member City of its electric utility distribution system as a whole or substantially as a whole may become effective without the consent of all the Member Cities and TMPA during the term of the TMPA Agreement. A Member City may assign its rights under the TMPA Agreement but such assignment shall not relieve such Member City of its financial obligations under tho TMPA Agreement during the time any TMPA Revenue Bonds are outstanding. 24 I I I I I I I I I I I I ! i ! I I I I I I i I I I I I I I I I I I i I ! I I CAPITAL IMPROVEMENT PLAN AND Aon[TIONnL DE~:r... Capital projects involve the acquisition or construction of major facilities and equipment. Each year, the City Council adopts a capital budget for the Electric System that differs from the operating budget because it is a "multi-year" process. "Multi-year" means that the project's budget is active until the project is finished. Due to the multi-year nature of capital projects, budgeted expenditures in these plans consist of carryover projects from previous years and new projects being initiated in the current year. Due to its nature as a planning tool, a capital budget, while identifying and prioritizing capital expenditures, is subject to revision as circumstances change, including changes in the economy and in the need for various governmental services and the placement of such services within the City. Consequently, the inclusion of an expenditure in a capital budget is not a fu'm commitment to a project, particularly as the planning horizon extends into the future. The Electric System's current capital improvement plan (the "Electric CIP") identifies projects for five year period ending September 30, 2008. The Electric CIP identifies approximately $75 million in transmission and distribution projects, of which approximately 95% are projected to be bond-financed. The Electric CIP indicates that the Electric System improvements would be funded through bonds issued in mounts ranging fi-om approximately $10.5 million to approximately $16 million annually over the period covered by the plan. ELECTRIC SYSTEM'S SERVICE AREA AND SERVICE AREA COMPOSITION... In 1976, the Public Utility Commission of Texas (thc "PUC") issued thc City a Certificate of Convenience and Necessity CCCN") to serve electricity to an area encompassing the City's then boundaries, plus its extraterritorial jurisdiction area ("ETJ"}. SB 7 provided that the City may file with the PUC to single certificate areas within its municipal boundaries as they existed on February I, 1999. With the exception of two existing subdivisions being served by TXU Energy and CoServ Electric ("CoServ"), the City was granted single certification of these areas in April of 2002. The territoD, now single certified for electric service for the City is approximately 60 square miles in area. Dual and occasional triple certification presently exist in the ETJ. Approximately 56% of the Clefs electric service area is multiple certified, representing an area of approximatuly 47 square miles. While the City's multiply certified service area will not be open to new competitors unless the City Council "opts in" to retail competition, the Electric System competes within that area against the other utilities that have been certified in the past to provide service in that area. For the year ended September 30, 2002 the Electric System provided electric serviec tu a monthly average of 36,516 customers located in the City. Driven by the economic magnets of thc Dallas-Fort Worth International Airport, Fort Worth's Alliance Airport and the major business districts in the northern parts of the Dallas-Fort Worth metropolitan area ("DFW"), Denton and the DFW area have in recent ycam experienced significant electric load and population growth. According to ERCOT, in 2001 Denton County ranked seventh among the 254 Texas counties for peak electric load, and for the forecast period 2001 through 2006, the County ranked fiffil in projected peak load growth. For the year ended September 30, 2002, the customer base that was served by the Electric System measured by number of accounts is approximately 87% residential and approximately 11% commercial and industrial in composition, although commercial and industrial accounts provided approximately 52% of the energy sold. For the year ended September 30, 2001, the top ten customers of the Electric System provided 23% of thc gross revenues of the Electric System and purchased 29% of the energy sold by the Electric System. Two State institutions of higher education, the University of North Texas and Texas Woman's University (collectively, the "Universities"), were included in the top ten customers of the Electric System for each of thc five most recently completed fiscal years. For the year ended September 30, 2001, the Universities provided 7% of the gross revenues of the Electric System and purchased 11% of the energy sold by the Electric System. State law provides that municipal utilities that provide electric service to agencies of the Stute, such as thc Universities, must do so in accordance with rate tariffs that are equal to the utilities' lowest rate, less an additional 20% discount As a result of the discounted service that the City must provide to the Universities, the Universities' cost of energy is less than thc costs incurred by the Electric System for providing such energy. The Electric System has competed successfully for customers with TXU Energy and CoServ in multiply certified areas since 1976. According to records of the Electric System, approximately 97% of the new residential.subdivisions and large industrial accounts in the multiply certified service area have become customers of the City during thc last two fiscal years. In 2002, 100%of thc new residential subdivisions and large industrial accounts in the multiply certified service area chose the Electric System as their electric supplier. LOAD REQUIREMENTS... The City's capacity requirements are calculated based upon the City's peak summer demand. For the year ending September 30, 2002, tho City's peak capacity requirement was 266 MW, which occurred in both July and August of 2002, representing the City's all-time high peak. The City has forecasted a maximum load of 272 MW for 2003. Given the resources provided under the Transition Power Agreement and current market conditions, the City expects that it will take approximately 55% of its energy fi-om TMPA and the balance from Constellation Power Source during the remaining term of the Transition Power Agreement. In 2000 ERCOT discontinued its requirement that member entities maintain a 15% energy reserve margin, although through the Transition Power Agreement, the City has provided for a 15% margin. Afier reviewing the need to reinstate a reserve margin within the ERCOT market area, ERCOT has recommended the establishment of a 12% reserve margin. In 2002, the PUC initiated a ruIe making process for the development ora new reserve capacity margin arrangement far the ERCOT market. See "The Electric System - Texas Deregulation Structure, Status and Issues - Status of Deregulation; Issues Reported by the PUC to the State Legislature - Generation capacity adequacy." 25 I I~q'ERCONNECTIONS AND POWER DISPATCH... The City is intemonancted with two TMPA 138 kilovolt ("kV") lines and one Brazes Electric Cooperative 138 kV transmission system. Thc TMPA transmission system serves the City via a 138 kV loop around the City. TMPA furnishes energy to the loop via a 345 kV transmission system and two 138 kV ties also interconnected with thc TXU Energy transmission system. Proceeds of the Bonds aggregating approximately $12 million will be used by the Electric System for the purpose of constructing transmission and distribution system improvements. Including the proceeds of the Bonds, over the last three years, the City has funded approximately $47.5 million of transmission and distribution system improvements. These improvements are consistent with the City's strategy of maintaining a commitment to its distribution system in order to provide a City-established rate of return for the City in tha cvant that the City should elect to open to retail competition. Since January 1, 1997, the City, TMPA and all other ERCOT electric utilities have operated under thc PUC opan-accass transmission rules. In 1997, the legal authority and pricing methodology of such PUC opan-accass rules were challenged in State District Court by several electric utilities and electricity providers. A State Court of Appeals ruled in 1999 that the PUC lacked legal authority to establish transmission open access pricing rates. The case only relates to the period of January 1, 1997 to September I, 1999. Beginning September 1, 1999, SB 7 mandated a 100% "postage stamp" pricing methodology (i.e., transmission cost for each transmission owner is collected on a single ERCOT-wide cost-per-megawatt basis). The decision by the Texas Court of Appeals in the case has been upheld by the Texas Supreme Court and the parties involved in this litigation have tantatively settled their claims in a manner that will require the City to pay approximately $34,000 to satisfy its share of the damages. CONTRIBUTIONS TO THE CITY OF DENTON... The Electric System enterprise fund annually transfers an amount to the General Fund of the City to reimburse for the Electric System's share of administrative overhead of the City, as determined by an independent consultant engaged for that purpose. The E[actric System also makes an annual transfer to the General Fund in lieu of a franchise payment equal to 4% of the Electric System's gross revcnuas. In addition, the City Charter provides that the City shall be entitled to receive annually on the net inveslment from excess revenues, if any, of the Electric System not more than 6% of the net investment as a "return on investment." The City Council has adopted an ordinance providing that transfers from the Water System, Wastewater System and Electric System Rate Stabilization Funds (which represent excess revenues from prior years) may be transferred to the General Fund to the extent needed to maintain compliance with the City's bond covenants (see "The Bonds - Rates"). In satisfaction of this Charter requirement, the Electric System annually makes an additional transfer to the General Fund of the City in an amount calculated at 3.5% of gross revenues. The amount transferred to the General Fund for administrative overhead is an operating expense of the Electric System, while amounts transferred in lieu of a franchise tax and as a return on investment ara made after thc Electric System has provided for the payment of operating expenses and debt service requirements. TEXAS DEREGULATION STRUCTURE~ STATUS AND ISSUES... The following discussion of deregulation in Texas is presented for the purpose of providing information concerning the current Texas legal and market structure, which is unique in many respects from deregulated markats in other parts of the United States, in part due to the isolation of the market in ERCOT (in which the City is located), which is essentially a transmission grid and associated generation facilities comprising an "island," there being few interconnects to other transmission grids. While the City has not "opted in" to full retail competition, it does participate in the wholesale energy market, and its participation is currently best represented by the Transition Power Agreement. In general, the full impact of SB 7's restructuring of the electric utility industry cannot be determined at this time. However, the City is observing and evaluating the changes in the developing energy market in the State. During calendar year 2002, Electric System Management noted the continued development within the ERGOT service area of a market-driven wholesale market in which energy is a commodity. It is apparent that traditional planning methods using known generation resources paired with known load has become less important as a planning approach in the market in general. As the competitive market matures in Texas, the market will almost certainly exparience ebbs and flows in the construction of new generation and transmission facilities, and some of the existing generation will be displaced by newer resources, which may affect the market price of energy on both the retail and wholesale levels, as well as the demands on, and capacity of, the existing electric transmission system. During 2002, entities continued to enter the market, exit the market, and in some instances market participants consolidated operations with others, thus changing the universe of participants and the contractual supply arrangements of market participants. Changes in generation pattams were also noted, including the introduction of large, remote wind development and the retirement nf older plants near metropolitan areas due to economics or environmental restrictions, among other factors. The wholesale energy market in ERCOT was established by legislation enacted in the 1995 Texas Legislature, and it has been significantly modified and developed through enactment of SB 7 and the commencement of retail electric choice in the Texas on January 1, 2002. The discussion balow describes some of the effects on the market and the challenges presented to the market as a whole, es well as, in some instances, local regions within ERCOT that are facing particular effects of deregulation after the first gull year of retail choice. The continuing development of wholesale and retail competition in the ERCOT market will affect the planning, actions, options, cost structure and other essential factors that will effect the Electric System. The information in this section is derived from various PUC and ERCOT source materials, and in particular, portions of this section are excerpted from the PUC's Report to the 78th Texas Legislature, entitled Scope of Competition in Electric Markets in Texas (the "2003 PUC Report"), which report was submitted to the Legislature by the PUC on January 15, 2003. That report in full is available on the PUC webalte at http://www.puc.state.tx.us/alactric/revorts/scope/index.cfm. Except for specific references to the City or as otherwise noted as being provided by another source or entity, all expressions of opinion, summaries of events and statistical information contained in this section "The Electric System - Texas Deregulation Structure, Status and Issues" are from the 2003 PUC Report. The City is does not take responsibility for the content of the 2003 PUC Report or other information 26 I I I I I I I I I I I I I I I I I I I ! I I I I I I I I I I ! I I I I ! I presented on the PUC website; however, based upon observations of market activity and developments during 2002, the City believes that the 2003 PUC Report provides a reliable source of information for those wishing to know more about these matters. ERCOT... ERCOT is one of 10 Regional Reliability Councils in the North American Electric Reliability Council. The ERCOT balk electric system is located entirely within the State of Texas and serves more than 12 million customers, representing approximately 85% of Texas' electrical load. The ERCOT service region covem more than 75%, or 200,000 square miles of the State and contains a total of approximately 37,000 miles of transmission lines, including more than 7,000 miles at 345-kV. ERCOT is connected electrically to other reliability councils through two direct current lines, providing only limited import/export capability. Other electric reliability councils, such as the Southwest Power Pool, serve areas in the Texas panhandle, east Texas and west Texas. In response to legislative directive, ERCOT amended its articles of incorporation to establish an Independent System Operator ("ISO") in 1996. Under ERCOT's organizational structure, the ISO reports to the ERCOT Board of Directors. ISO responsibilities include security operations of the bulk system, facilitation and efficient use of the transmission system by all market participants, and coordination of regional transmission planning among transmission owning utilities and providers. Under Texas law, ERCOT is required to perform four primary functions: ensuring non-discriminatory access to the transmission and distribution systems for all electricity buyers and sellers; ensuring the reliability and adequacy of the regional electric network; ensuring that information related to customer retail choice is provided in a timely manner; and ensuring that electricity production and delivery are accurately accounted for among all regional generators and wholesale buyers and sellers. The PUC has primary jurisdiction over ERCOT. ERCOT regulations require that each market participant, including Municipal Utilities, either be, or engage, a qualified scheduling entity ("QSE") to submit schedules and ancillary services bids and settle payments with ERCOT. Under the terms of the Transition Power Agreement, Constellation Power Source has agreed to provide QSE services, diranfly or though another entity, for the Electric System. Individual electric utilities own sections or components of the ERCOT transmission grid and are responsible for operating and maintaining their own lransmiasian lines and equipment. The ISO coordinates the operation of the transmission grid to ensure its reliability, and ERCOT coordinates with the various transmission-owning electric utilities to make sure the transmission system will meet the needs of the electric market. With the adoption of SB 7, IOUs have functionally "unbandled" their respective electric generation business, electric transmission business and retail electric business from one another. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Senate Bill 7." Overview of the Senate Bill 7 Marl~t Structure... Senate Bill 7 dramatically altered the production and sale of electricity to retail customers in the State. Prior to SB 7, all retail customers were served by integrated investor owned electric utilities, electric cooperatives ("Electric Co-ops"), or municipally-owned utilities ("MOUs"). The PUC certificated the service areas of utilities, Electric Co-ops, and MOUs, where, for the most part, these entities were granted the exclusive right and obligation to service customers in an ama. Integrated utilities, MOUs, and Electric Co-ops built generation plants and constructed transmission and distribution facilities and performed retail functions such as billing and customer service to meet their obligations to serve. The PUC set electric rates for those utilities over which it had rate-making authority that gave utilities the opportunity to earn a reasonable r~urn on prudent investments and to recover reasonably incurred expenses, but that were also just and reasonable to retail customers. To maintain the reliability of the electrical network, the amount of generation produced by generators must match the amount consumed by retail customers, within strict tolerances. Under traditional regulation, the major utilities, MOUs and Electric Co- ops in the State maintained their own "control areas" and managed the flow of electricity within their region such that reliability was maintained. Utilities, MOUs, and Electric Co-ops were also generally the only entities permitted to build the generation plants needed to serve retail customers. The wholesale electric market was opened to competition as a result of thc amendments to PUPA adopted by thc Legislature in 1995. As a part of these amendments, independent power producers ("IPPs") were pcrmittad to construct generation facilities and were granted access to the transmission lines of utilities, Electric Co-ops, and MOUs in order for IPPs and power marketers to move power to wholesale customers. As noted above, SB 7, adopted by the Legislature in 1999, established a framework to allow retail electric customers to select a provider of electricity other than the traditional utility beginning in January 1, 2002, unless the PUC delayed competition for a utility's service area. The governing boards of Electric Co-ops and MOUs were granted the authority to decide if and when to open their service areas to customer choice. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Senate Bill 7." Although transmission and distribution facilities remain regulated by the PUC, the prices for the production and sale of electricity to both wholesale and retail customers are now predominantly dictated by market forces instead of regulatory rate- setting procedures. Customers with peak demand of one MW or less will continue to have a regulated price to beat available until 2007 (REPs can offer rates lower than the price to beat beginning January 1, 2005, or earlier if at least 40% of residential or small-anmmereial customers move to competitors), and the PUC is required to designate "providers of fast resort" ("POLRs") to ensure that all customers have access to electricity in the competitive market. Electric System Management believes that if the City opts in to retail electric competition, the City will designate the Electric System as the distributor of energy within the City. The POLR for the City would be determined when and if the City opts in to retail competition. 27 SB 7 established a framework for retail competition that is different from that adopted in other states. Formerly integrated investor-owned utilities were required to separate their business functions into three distinct companies: a power generation company ("PGC"), a transmission and distribution utility ("TDIJ"), and a REP. PGCs operate as wholesale providers of ganerstion services, in the same manner as independent generators. REPs operate as retail providers of electricity and energy services, and arc the entities that have the primary contact with retail customers in the new market. TDIJs remain regulated by the PUC, and are required to provide ng~-discriminstorY access to the transmission and distribution grid at rates and terms of access prescribed by the PUC. It is noteworthy that, in Texas, ERCOT performs functions in the retail market that are performed by the TDUs in other states that have introduced retail competition. Key elements in the design of the ERCOT retail market are the creation cfa single, large retail market throughout the region and the use cfa neutral third party to perform tasks related to the scheduling of power and settlement functions. ERCOT also serves as tho registration agent for all retail transactions. All customer switch requests, move- in and move-out requests, and monthly electricity usage data flow through ERCOT. It is expected that standardization efforts such as the protocols that ERCOT has developed in response to PUC, PURA and ERCOT staff initiatives (the "Protocols") and the PUC's proforma tariff for transmission and distribution service will result in lower barriers for REPs entering the Texas market. This approach, where ERCOT, rather than each TDU, performs these functions, is intended to minimize the possibility for bias in tho wholesale settlement process and in switching customers from one REP to another. ERCOT also now has the responsibility of managing the flow of electricity such that reliability is maintained across the network. To perform this task, ERCOT manages and operates markets in which generators bid to provide the services needed to ensure that supply and demand balances in real time. REPs generally provide electricity to customers by purchasing wholesale electricity from generators located within the ERCOT region. REPs usa a QSE to schedule power through ERCOT to meet their customers' daily energy needs. All schedules and transactions within ERCOT "flow," which means that schedules are not contingent upon a determination that there is adequate transmission capacity available to move power from the generation resource to the load. ffall of the schedules submiRed for a particular day or hour cannot be accommodated because of transmission constraints, ERCOT uses a market-based congestion management system to clear the congestion and maintain reliability. The costs associated with clearing the congestion are assigned to market participants under methods outlined in the ERCOT Protocols and approved by the PUC. Texas has not frozen prices at levels below market prices, as in some other parts of the countW. In those areas, retail competition has not fully developed. In contrast to thc fixed-price regimes established in other states, SB 7 created a framework whereby thc remaining regulated rates charged by the affiliated REPs were reduced from 1999 levels, but can be adjusted to reflect changes in the market prices of natoral gas and purchased energy. This price-to-beet concept is perhaps tho single most important provision of SB 7 with respect to the development of thc competitive retail market for residential and small commercial customers, ffthe price to beat charged by the affiliated REPs is a below-market rate, other REPs will be unable to compete for customers, and competition will not develop. In most areas of the State that are open to competition, these price-to-beat rates chargud by affiliated REPs provide a 6% reduction from January 1999 rates, adjusted for changes in fuel costs. These rates appear to have remained above market rates, permitting other competitive REPs to enter the market and profitably serve retail customers. Generally, REPs must be able to price at a level sufficient to recover expenses associated with paying for transmission and distribution service, wholesale gsnerstion costs, and costs related to operating a retail business, and still be able to offer price savings sufficient to induce retail customers to switch suppliers. This diffcrenee between the price to beat and the costs incurred by non-affiliated REPs is referred to as "headroom," as it defines the range of prices in which non-affiliated REPs eon profitably priee their services and still entice customers to switch by providing a discount offthe price to beat. Status of Deregulation: Issues Ranorted by the PUC to the State Legislature. According to the 2003 PUC Report, residential customers have saved approximstaly $900 million on electric bills in 2002 as compared to 2001. The 2003 PUC Report also notes that as of December 2002, competing REPs were offering up to 14% in additional savings off the price to beat to residential customers. The 2003 PUC Report further notes that commercial and industrial customers have also seen significant savings, paying approximately $645 million less in 2002, compared to 2001, although much of the savings is attributable to decreases in fuel costs. According to the PUC's September 2002 Report Card on Retail Competition, of approximately $740 million in savings realized for the first eight months of 2002, $175 million were attributable to the 6% reduction in energy cost mandated by SB 7 and $565 million were attributable to reduced fuel costs and expiration of fuel surcharges. On January 31, 2003, the cost of natural gas was approximately 65% higher than at the end of August, 2002, when these cost savings were calculated. The PUC reports that many of the customers, who have benefited, especially cities and other government entities, have achieved savings through successfully aggregating with other customers. The 2003 PUC Report notes that es of December 2002, residential customers had at least three choices of REPs, and in some service areas, had a choice of ten different providers, and even more product offerings, including renewable, or "green," power. Customers in all customer classes have taken advantage of the opportunities to switch providers. As of August 16, 2002, nearly 400,000 retail customers were taking service from REPs not affiliated with their local TDU, representing approximately 4.2% of residential and small commercial customers in competitive areas, and about 16.6% of the total electricity sold in those areas. 28 I I I I I I I I ! I I I I I I I ! I I -o~s ~00~- ~ switch t, .otoCOlS ~o~ation ~n ~ond thc techm.~ continues to ~t rct~l c°~petltlu ~~{ct p~ctp~'~ - -'~- c~W gcnC~U~--~.r 100~. ~ ~nrC th~ ~"~ --- cud of ~" :0 a comtO~"" ~cnt Y~c~ m~gms ~-. ~on~Ct~°u~ .~w is expected..~snst thc prt~ ~othball, ~003 ~1.6% ~005 16.1% ~006-ult oi such s~dicS, ~o since One o£ the ~Judamen resolve transmi~o;~ tal market desi-. . serve custom..-~'vn COnge~(/on ~ cJe. ments in Proto~ · - lf ~s~: . ~' n~ds Canno* ~ ' ~uges~on c~ ~ ,,, vms ~s that ~Ongestion is .~,. ,,~s omit ~e o~-~-. ""~ "~smissi~- ,.~ -'~mca/syste~ ,Use a ZOnal co. .... ~d ~e eons~,seved through r~'au~n of the on~" ~mes Would b~..'~",w~en ~e lowe~ ~s~Stson m~ane ,ncre~ ~:~-ammg line is n~ ,~75~gmg or "re.~Z~'~/ Of generatio. Z~n°ade~ Under ,ff~. ~ost msx Of ge~'t System to ~u ou~ut to ~lie~ .~.ger m d~er ~e ~?~rC. mg,, gcnc~;." P~ts, ~e ~no~. *,,~t PaRc~ of ~o. ~,~.ung pl~ t In ~e ERCOT zOnal systc --c COngestion ~.. ~. Oemg OVerload~a*-~n Such that the~~''ussmn ~id is ~"e~tmn ~d gcnarato~ ~ , ~"Jnc~t Cons~n~sssson elements ~,cr m~ket n~i~: ~ uraared by E~'u ~s altered, 2001 ~ro.~c~rs bc~een zon~ West), ~d in ~' on ~c CSCs b o-.~ ~s divided into ~ .o~ of elcc~ic' . , ~nas COngestion ~ *~" ~. but it c~ ~, ~ w~ added for ~' ~ zuOl, for ex~7cn ~at each oe ~ugestion c*-. o ..~n ~. Fro~ · t ~ Were abou~ e.~" ~Y When ERCOT be , u~Vorced ~_~ ",rorer P~icin...- "~mg~e con~ol ERc~o~ by the C~lio~mn th~ th~ ~ra~on across co.~_~mmlY ~Used ,~["~ mad on ~c ~'~" Were "unlio~a,, antmspatcd c~n..-"?r a system of .~ ~,.zVO3 or six m~ ~aeSSed. Thc pr;~°' ~oWlng ~ ;~'~", ~d provide~"~° mcch~ism COngcsUon ..~?~Stmn co~. ~ ~r~Smsssion con.~:~nms ~cr zona~ - ~ rcqui~d ER~~cy Would like~.. ~ incentives fo P~icio~,~ ~-. me TCR svst.~uc ~20 milllon ,'~[son ri~ (,,Tco',~Ongcstion cos*~ -~ to switch t~ ,~.rece ~e more; r lnterz~ ~j~aa to exemis~o~.Were implc~ent~r~S~oM w~ rca~ A Which woul~Ceeded $20 mil~;~ mrec/ Ssign~o~ ""Psementcd ~. . 'Y" costs tot~-~ .y--on m schca.,. ~ 15. 2nn~ ~ugust 15, 2On, '"~ret p~ici.._. ' aa ~ required 2002). ~" reO~ 15, 20~; ~ million ~L~"~ aaro~ CSCs-~2] Once divot .o~' ~d direct ~7~~ to i 'dge thei; the cos~ of c~ . RCOT Pmtoc~, ,ta~ed Only $3n '..~ter di~ct ~._. ~ tsc~tly. t~get w~ re~mg local con,~ss' ~e PUc also --~ "mUhon (~roud~Sgm ~nt w~ imPlemo , ~Cned on M~_~ ?~uon rose ab~-- - -ruered ERC~ . gene~.."g uni~ in pro~'"ent of local co~_~,s M~ket Over i~."°~s~ the PUC * ~ ~. vc a Pa~cnt ~o_ ~geStion Woula~ '[~act ~ey hav~~s m~ket usin~ ~ ~cvClOped a nfo.-" ~ mfe~iblc -~ -. ~- a ~ee for the co~r? local ~sm;~u. apPro~h ~at ~n ~qUest to M~k~t p~iclp~ have CXpress~ including ~mplemcn * c lmplemen~ ~. tmg location I ~ o~ccms about proposals ~ ~'~ WOuld mn.:a '"~gmal pricin- ~,~ approach reo~ , ~u ~tmipatcs d.~'re a subs~t;~~ ~ ~ ~"), ~ ~_ ~ended b- ~ ~et P~icip~ ..~ , proper resol,tio, ;~'~ for ERco~ ~" ~ar elcc~ic Ln~/c Proposed ~1,~ . . cCess~ for ~ .- - ~/u ERCOT ~e ~Y 2003 · , ne PUc is ~. ",~kets in ~ ·. T'~at~ves, "eeued for re. [,.Y~'eements i ...... ~ for mt;~ .~/u Slmul~e -~.~ e~cien costs re~* 5~.,aotu~. but wh- "~utvmg 16 unPo -..:~bfl~ (reliab;~;~yus opttmt~tion~ t ~thods to nr thc PtI~ ~' uctober 200~ ~ ~gcnerators for ~Unccd intentio-~ ~ ,,auO M~ tff ~;~ Uni~). ERo~?nStdcrine wa.. Addition~; ~Wncrs. ERCOT~° a~out both thc ~Omatcd to be ~..~Ong all m~- rue pl~ fOr*c~ re, serVice that ._" ,SS~es . Tr~.--, ',.'related issue/.. ~ a [~k force ;...' :u ~eSi~ate n~'''"n, ~d m..,.~? CO~s re/~..~ Ohs. The r~smission C-~ ~:.l~sson Investm. ~. ~e aeScHbed ~, '"~estsgatine wh~.~'~'~ uni~ ~ 72~ "~kct P~ici.- ~'~ to ~R "-Scarers in the D:;T"'~ssues'' ~d ,,~,o~ UOder "T~e ~';~? Ch~ges t- ~ m~ cost recove'~e~n~. ~ Well ~ ~ -~ea., :~em'Tex~D-"'''eX~Derem"'~°'°C°ls~en'~""e , The ERCOT - -UC~re, S~s ~u~e, Status bal~c~S.l ~d to contracts for electrici.~h°les~e m~ket is - · , a Issues . -,.c p ~oun~ of POWer~ on Whatever terms ~/Y a bilatarai m~.* addition, th rest of ~e: ~ Caoosc. ERCOT, ~e~, m Which buve COmpatible with the ~u~Umption Of no,~ut m~kets that discussed below Uad t~ ~ ~s considerin~ ',~ "'~ ~KCOT . ~ e ~er ~c always ia on Pdces., er ~ne Elec~ic SYStem m~eet, Tex~ in a ") ' Texas Deregulation ~s re/a~ng to m~k~ g m~kct des' · ,-Cmre, Sta~s and lsd,- ~ i~ sgn Petition 30 I I ! ~o~ t~ ~"- ~ ~cli~5 ~" . ,- co~~' ~ ~ ~" --d bu~ ~ ~h~s ~ '~ ~ m~~' ~10o~ -. ~cu ~ , oticCS to~ - ~so t~P~ ~t~ ~ - · s~l .- - *'~ b~~ u . ~[ ~c~ ~*. --,do~, ~' · -~xc~ ~ ~ ~ ~u,, .- o~ ~ o ~ to c°~txnu~- ~c~ o[ ~cu~ ~6 ~c~W'~ dis~but~ ~c~t/~ '" ..~tsc ~ ' ~s i~ t~ "- ~n~xfxo~, ~'*h~ ~s~x" ~x~ -~0~ ~g~ r~SoiV~ ,, ~RCO~ ~ ~ . -toiCC~ t~ u~' t~c ~to~S~ ~s ~gcs i~ ~ _s~ts~XOU pt 3 t~hs .a ~6 b~l; ..~v ~i~es . lu addit~ . ~or ~003: ~ south x~ .. to ~oUSt° ' the i sYSte~ In the ca~e of rgff,~erally t~n ne~v trans~iss. outing evah, ~ ~o raVor ex' mn fi~es, ~ COns~c~ 'aoons ~d ~sti~g righ.~ ~'OT Pe~ p ~ r~n- - each nm. propo$aI ~ Of Wa,. O~s aO 0 12 ~c~ to a Pron~ ~c~ Ua ~.~s. ~e ~e m ~ ~d avoidi~ ?eci~c to-,' ~qui~ ~ ~r~CUl~n~: ~Curoutc ,~"~'s~Ssion ~ CSponsibiB~. -ug ~o~ ~Ung OVal · ncc F ~ . ~ ~,ac routin~ ~ ~OV~der ~d ~'~ P~icul~ ~ or eavlrn-' Proposal at ~. Wo~ ~'~~Dnn ~'~ addre~ ' reach ~ c~ Provi~ ~e~ ~ ~ o ~~gest ~ ..- ~Sed at th - mU~l ~er that ~ ' °Peci~c co~'~, wi~ a~' . · ~ ~ "~CN ..~ ~ u~e mso~. ., ~ ~d ~ ~ descdk~°me eases .~cn[ Ye~, si~n Ye~ 2002 ~"' zOoI OFa~u~ ~o~h a ..... ~ related to ~' . ~Cu below. , me sxting oe.~"X~c~t a~. nad a comk, ~uut 16,00n ~.~ [ DFW,,I , ~- al~ou~~ ~_ -mcnew~e~UntsoF~e/'*~medload~.~.W. ~. .. m ~hich .~ DF~ ~" ~P'W 1o~ · ~ uemtion h~ ~ "craYon ca- y~about ~. jY counties ;~ ..me Ci~ is, ~ ~ ge~erati~. .u ts CO~c~~ -'~ uee~ s~ "Pacl~ h~- - ' G~uO ~ ~ '- me ce~- ~ ~Ocated . ~ -.uuO ~u~ _ ~u totMs .~ ~"~ated ln~.: ~°~gly in~ ~' Oeen c~ ' " OUt a cn ~'~al Dall~ ~' ~s ~ ou~id. .~' °rgencm.. eoout 5, En~ ."~ue a Fo.. "'~Uenced b- Y"S~Cted :. ~mU~ned ~ '~Fo~ ~ Publi~ ~ ~e ~s~;~o, h~ be~'~ ~ ~th ;;~Cou~ ~c~ - ~ air qu~i~ i~ust ou~ide 'o~,~aci~ of ~om fo Velopment ~ ~e DFW'~'u. Since 1o~e load. ~o~ va ~ um~ted ~ out all thes~ 2~~ about POWer ~ ' ~e likely [~ Pt~ts ~e ~[~ci~, C°naiderin~ ..non. to e' oU. Soodoti,i . °f generati~u °.rnCw volta me need £o? Practice, l~^ m's thadequa2 ~ thc ~7~'.P~ojec~. s~ ? ~e D)~stated that it a. ic COns~_~Smtssion - "c~t incre,- us ZOr ~e Dp~-~° ~e ~ns~u°re, ERco~'.m~ SU~cie ~ocal COns~-.'~ Pr°Posea -'~ Jn ~e Nn-~ -w generatio_' c~ be met ,~yste~ ~a ,~ed ~at it ~ '[~USsion ~,.,.. Voltage ~ appr~ -t~S~issio.'~ UFW area ~ C°~Plete~ Pt~ning re ' .,g gene~ti.- ~u, the exi~i "g ~ aPOm -~.t ~i~ a ~ oPrtatc ~,~ "~acilit;~ '~Ureact[o~, '~* ACCord: 'r~e/c~, it ~-~eu i~ ge~i~- ~ovi~ ~- ~'u~ustbe . ~vt~n~ . ~-~. *',atton in th~'~ along ~ ~ter~ t~sr~*c s~iBc "{ PrOjects ~ . . Price ~ uyW~e~ .,, ~S~issi~.~,~ ~ill reon:~t t~Provem o ~tttgate ' '~ wOrkin~ ~ ~or h~ghcr aSApX to the 32 the liquid I I I I I I I I I I ! I I I I i i I I markets in the country, and provide reliable prices as a result of CFTC oversight and regulation of NYMEX, and thc extensive audit trail and quality assurance procedures that NYMEX has in place. Confidence in these private indices and exchanges has been significently decreased as a result of revelations that market participants provided false information to the reporting firms and engaged in "round-trip" or "wash" trading whereby equal amounts of electricity were traded between buyers and sellers at the same prices. The lack of confidence in private exchanges and indices has lead to a contraction in the reporting to and trading in these markets. Conversely, NYMEX natural gas markets have actually seen an increase in trading, as traders have shil~ed their business to the more reliable markets conducted by NYMEX. However, because NYMEX is still in the process of developing electricity trading products for ERCOT, REPs and power ganemtors are finding it difficalt to appropriately value wholesale electricity products, potentially making the market less eltieient. Additionally, rating agencies have downgraded the credit ratings of the majority of energy industry participants, making it more difficult for these companies to participate in the wholesale market. As a result, trading has declined further as market participants have either scaled back, or eliminated their trading organizations as a way to reduce their collateral requirements, so that available cash and credit may be used for other purposes. Private reporting agencies and the companies that report trading data to them have begun to respond to these concerns by creating more explicit and rigid standards for reporting data, such as preventing individual finders from reporting prices and instead certifying prices through companies' risk management officers. The energy industry has also begun to develop codes of conduct for participation in wholesale markets and standard trading and netting agreements that reduce the collateral needed to conduct trades. Several parties have also expressed concerns that al~liated REPs and their affiliated power generation companies in ERCOT have largely contracted with each other in bilateral contracts, thereby limiting the ability of new generation plants to compete to serve retail custumem. This problem should decrease over time as the ties between the affiliated REP and PGC diminish as customers switch to alternate suppliers and increased pressures are pissed on the affiliated REPs to procure the least expensive power available. The PUC is also addressing this issue through several rulemaking projects related to codes of conduct in the wholesale market and the reporting of bilateral trades, discussed further below. In approving the ERCOT Protocols, thc PUC ordered ERCOT to prepare a report concerning thc technical implications of relaxing or eliminating the balanced schedule requirement. Thc current Protocols require each QSE to submit a day-ahead balanced energy schedule for every 15-minute interval based on the QSE's load forecast for thc following day. Stakeholders included the balanced schedule requirement because it would create less credit and financial risk for ERCOT, and potentially provide raore operational stability during the transition to a single control area. However, a relaxed balanced schedule in which QSEs can schedule their loads and resources according to market incentives rather than strict adherence to load forecasts could increase liquidity in spot and forward energy markets. ERCOT implemented thc relaxed balanced schedule on a trial basis in November 2002. Additionally, the PUC has opened a rulcmaking to explore requiring wholesale market participants to provide information regarding their bilateral contracts, including price and duration of contracts, to the PUC, which would then disclose the data while protecting the confidentiality of individual buyers and sellers. The PUC is also exploring whether elements of the FERC's Standard Market Design should be implemented in ERCOT, in part due to the added transparency and liquidity that those elements raight add to the ERCOT market. The combination of these initiatives and an eventual recovery of the wholesale alectricity industry from its current downturn should help improve the liquidity of the wholesale market and increase price transparency in thc market. However, thc PUC will continue to explore methods and market designs that will aid in the development of a robust and liquid marketplace. FEDERAL REGULATION OF W. LECTRIC TRANSMISSION SERVICES . . . The Enert, v Polio Act of 1992. The Federal Energy Policy Act of 1992 (the "Energy Act"), greatly expanded the authority of the FERC to order utilities, including utilities within ERCOT, to provide transmission service for other utilities, qualifying facilities, and independent power producers. The FERC also has authority to determine the prices that may be charged for transmission, but has generally deferred to the PUC electric transmission open access roles for access and pricing within ERCOT. Retail Wheeling. The authority to order retail wheeling, which allows a retail customer to be located in one utility's service area and to obtain power from another utility or non-utility source, is specifically excluded from the enhanced authority granted to the FERC under the Energy Act. However, while the States may have authority to determine whether retail wheeling will be permitted, FERC has determined that it has jurisdiction over the rates, terms and conditions of retail wheeling. 33 1 FERC Final Rules and Proposed Rulemakin£s in Federal Regulation of Electric Utilities. To establish foundations necessary to develop a competitive wholesale electricity market and effectuate the transmission access provisions of the Energy Policy Act, on April 24, 1996, FERC issued two final rules ("FERC Final Rules") on non-discriminatory open access transmission services by public utilities and stranded cost recovery. The first of the FERC Final Rules, Order No. 888, requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to (i) file open-access, non-discriminatory transmission tariffs containing, at a minimum, the non-price terms and conditions set forth in the order and (ii) functionally unbundle wholesale power services by (1) applying unified transmission tariffs system to all customers, (2) providing separate rate systems for wholesale generation, transmissinn and ancillary services and (3) relying on the same electronic information dissemination network that its transmission customers rely on in selling and purchasing energy. The second of the FERC Final Rules, Order No. 889, requires all public utilities to establish or participate in an Open Access Same-Time Information System (OASIS) that meets certain specifications, and comply with standards of conduct designed to prevent employees of a public utility (or any employees of its affiliates) engaged in wholesale power marketing functions from obtaining preferential access tO pertinent transmission system information. Thc FERC stated that its overall objective is to ensure that all participants in wholesale electricity markets have non-discriminatory open access to transmission service, including network transmission service and ancillary services. The FERC also indicated that it intends to apply the principles set forth in the FERC Rules to the maximum extant to municipal and other non-FERC regulated utilities, both in deciding cases brought under the Federal Power Act and by requiring such utilities to agree to provide open access transmission service as a condition to securing transmission service from jurisdictional investor-owned utilities under open access tariffs. In addition, on December 20, 1999 the FERC adopted rules to establish Regional Transmission Organizations ("RTOs"). The rules contemplate RTOs as voluntary participation associations of power-transmission-owning entities, comprising public and non-public utility entities, that would more efficiently address operational and reliability issues confronting the industry in particular by improving grid reliability, increasing efficiencies in transmission grid management, preventing discriminatory practices and improving market performance. On July 11, 2001, FERC directed the formation of four large RTOs that excluded ERCOT. Although the FERC Rules do not directly regulate municipally-owned and other non-FERC-rugulated utilities such as the Electric System, the FERC Rules have a significant impact on such utilities' operations. The FERC Rules have significantly changed the competitive climate in which the non-FERC regulated utilities operate, giving their customers much greater access to alternative sources of electric transmission services. The rules require them to provide open access transmission service conforming to the requirements for investor-owned utilities whenever they are properly requested to do so under the Energy Policy Act or as a condition of taking transmission service from an investor owned utility. In certain circumstances, the non-FERC-regulated utilities are required to pay compensation to their present suppliers of wholesale power and energy for stranded costs that may arise when the non-FERC-rugnlated utilities exercise their option to switch to an alternative supplier of electricity. PROPOSED FED'~RAL LEGISLATION... Many bills have bccn introduced in thc United States House of Rcprusantatives and thc United States Senate to derugnlatu thc electric utility industry on thc federal or state level. Many of thc bills provide for open competition in the furnishing of electricity to all retail customers (i.e., retail wheeling). No prediction can be made as to whether these bills or any future proposed federal bills will become law or, if they become law, what their final form or effect would be. The United States Senate and thc United States House of Representatives both passed legislation relating to the energy industry during the 107th Congress. However, thc bills could not be reconciled in conference committee proceedings, and no legislation wes ultimately adopted by the Congress. Generally, the Senate version of the bill included many provisions rulatcd to electricity restructuring, while the House included far fewer provisions relatud to electricity issues. Energy legislation is expected to be considered again in 2003 during the 108th Congress. Several electricity provisions of the House and Senate energy bills that would have an impact on Texas are expected to be reconsidered. Major issues included in one or both bills include amendments to the Federal Power Act. The Senate version of the energy bill would have placed municipal and federal utilities under the jurisdiction of FERC and would have required these utilities to provide open access to their transmission systems. FERC would have also received extended merger authority under thc Senate version of the bill, but the bill would have excluded FERC from review of plant sales that are under State jurisdiction. The House version did not have similar provisions. ENVIRONMENTAL REGUI~.TION . . . Electric utilities are subject to numerous environmental regulations administered at the federal and State level. Furthermore, over time, such environmental regulations may increase and/or become more stringent. Thc tightening of such environmental regulation or the introduction of new regulations could result in thc need for significant upgrades of environmental controls, reduced operating levels or, in extreme situations, the complete shutdown of individual electric generating units. There is no assurance that the units that the Electric System depends on for energy, incIuding Gibbons Creek, or any units that the Electric System may be construct or participate in the future, will remain subject to the regulations currently in effect, will always be in compliance with future regulations or will always be able to obtain all required operating permits. 34 ! I I I I I I ! ! I I I I I I I I I I I I I I I I I I I I I I I I I I I Acid Rain Provisions of the 1990 Clean Air Act Amendments. On November 15, 1990, legislation was signed into law that imposed additional rcquiremcots under the Federal Clean Air Act (the "FCAA" or thc "1990 Amendments"). Among other requirements, thc 1990 Amendments scek to address acid rain deposition through the reduction of sulfur dioxide and nitrogcn oxide emissions from electric utility power plants, particularly those fueled by coal. The EPA issued a final rule implementing the nitrogen oxide acid rain provisions under Section 407 of thc FCAA on March 22, 1994. The rule establishes performance standards for controlling omissions from coal-fired dry bottom and tangentially fired boilers (Group I boilers, similar to those operated by TMPA). Phasc I units were rcquired to begin complying with these annual nitrogen oxide emission limits beginning January 1, 1995. In December 1996, the EPA issued a rule implementing the second phase of the nitrogen oxide acid rain program. The rule inwcrs the nitrogen oxide control standards for Phase II units with Group I boilers and became effective on January I, 2000. However, the final rule issued in March 1994 provides an "early election" option for those Phase II units that arc capable of achieving early compliance with the Phase I nitrogen oxide standards. As an incentive for early compliance, the early election program will allow participating units to defer compliance with any more stringent nitrogen oxide Phase II standards until Janua~ 1, 2008. The owners and operators of all affected utility units under the acid disposition control program of the FCAA will have to obtain a permit from the EPA or from a state agency with an EPA-approved permitting program to emit sulfur dioxide and nitrogen oxide. Thc permit will be applicable for no more than five years. To obtain the parmit, owners and operators also will have to submit a compliance plan to the permitting agency. Thc Gibbons Creek facility of TMPA is subject to Phase II of this program, which went into effect in year 2000. Under the program, thc unit received sufficient sulfur dioxide allowances to sustain current operuting requirements. See "Appendix B - Description of Sanate Bill 7 and thc Texas Municipal Power Agency - Description of TMPA - Clean Air Act Compliance." Ambient Air Oualitv Standards. The EPA has established national air quality standards for six regulated pollutants: ozone, lead, carbon monoxide, sulfur dioxide, nitrogen dioxide, and particulate matter. When a pollutant concentration in an area excecds a standard, the area is classified as "noanttainmcot" for that pollutant. A nonaRalnmant dcsiguation then triggers a process by which the affected ststc must develop and implcmcot a plan to improve air quality and "attain" compliance with the appropriate standard. This so-called State Implcmcotation Plan or "SIP" entails enforceable control measures and time frames. Of these six pollutants, large urban arans have had thc grcalast difficulty achieving the ozone standard. This challcngu was compounded in July of 1997, when the EPA adopted a revised and more stringent ozone standard. Thc tighter standard is ofran refarred to as thc 8-hour standard bacausc it is based on an 8-hour average and is intanded to protect public health against longer cxpoanrc. The existing standard is based on a I-hour averuge. Under the existing l-hour standard, thcre arc currently four areas in the State classified as nonattalnmant: Houston/Galvaston, Beaumont/Port Arthur, Dallas/Fort Worth, and El Paso. Tho existing I-hour standard will remain in effect for these nonaRalnmant regions until such time as they have aRalncd compliance, then thc 8-hour standard will come into effact. Thc remaining areas of the Stats were to have been reclassified under the new standard in July of 2000, based on 8-hour data from 1997, 1998 and 1999. However, thc standard was challenged and in May of 1999, thc Federal District of Columbia Circuit Court of Appeals remanded the standard to EPA. In response to an EPA petition, the Supreme Court agreed to hear the case and on November 7, 2000 oral arguments were presentad. In a Februmy 27, 2001 decision by the Supreme Court, EPA's implementation policy was found to be unlawful, and the matter was remanded to the Court of Appeals. EPA will be ruquired to develop a reasonable interpretation of the noanttalnmcnt implementation provisions in so far as they apply to the revised ozone standards. State Imn/ementation Plan for DFW Ozone Non-Attainment Status. The Dallas/Fort Worth ozone nonattainment area (Collin, Dallas, Denton, and Tan'ant Counties) was originally designated "moderute" under thc FCAA amendments of 1990, and thus was required to attain the one-hour ozone standard by November 15, 1996 (a one-hour standard is an EPA measure that spacifias that certain pollutants not be at or above a particular level on moro than threc days over three years). As required by tho FCAA, the Ststc submitted an attainment demonstration plan (a SIP) in 1994 which projactcd atminmant of thc ozone air quality standard by 1996. This plan was based on a volatile organic compounds reduction strateg3'. DFW did not aRaln the ozone standard in 1996. The EPA is authorized to redcsignate an area to thc next higher classification ("bump up") flit fails to attain by thc required date. Consequently, in March 1998, and in accordance with FCAA, thc EPA reclassified DFW from modcrutc to serious, based on monitored excccdances of the ozone standard bstwecn 1994 and 1996. The reclassification required the State to submit a revised State Implementation Plan demonstrating attainment of thc ozone standard by November 15, 1999. Because DFW continued to exceed the ozone standard in 1999, thc EPA required submittal of a revised SIP by May 1, 2000, demonstrating attainment. On April 19, 2000, the TNRCC (now the TCEQ) adopted a new SIP, which included a plan for thc fuur-county DFW area that includes Denton County. In February 2001, the EPA accepted the SIP and the DFW plan. In accepting the plan, the EPA noted that the State had demonstrated that the DFW area is impacted by ozone traveling from the Houston/Galveston area. Moreover, the EPA did not reclassify the DFW area from serious to severe, and deferred the compliance date for the DFW area to November 35 I 15, 2007 from November 15, 1999. The DFW plan includes a mid-course review in May 2004, at which time the State is required to submit data to the EPA demonstrating the effects of the controls that are included in the plan. The plan includes local and regional controls, including the adoption of national vehicle emission standards, controls on off-road mobile sources of emissions, the use of reformulated gasoline and controls affecting electrical generation and industrial facilities in the four county DFW area. According to the TCEQ, ma.~or stationary sources contribute about 15% of the total NOx in DFW during the ozone season, and therefore must be included in these maximal efforts. The proposed NOx emission limits for electric utility and large industrial, commercial, and institutional boilers approach the maximum practicable emission reductions for these sources. The proposed NOx emission limits for lann-bura engines effectively limits the emissions from an unregulated category of major stationary sources of NOx in DFW. The inclusion of such stationary sources, which include electric generating plants, is expected to curtail the siting of new generation facilities within the four county area. Should EPA determine at the mid-point review or at the November 2007 attainment date that the State fails to demonstrate attainment, the EPA may bump up the area to the severe classification. (The FCAA provides various punitive measures for areas that are classified as "severe." Two of these measures involve the loss of federal highway funding and the implementation ora more stringent environmental permitting program for commercial and industrial entities, possibly retarding economic growth in such areas.) Clean AirAct Reforms. Oivcn thc piecemeal, uncoordinated and uncertain approach to air regulations, many have called for an integrated "multi-pollutant control" approach to thc FCAA. In fact, thc National Energy Policy Report rccommandcd that EPA work with thc U.S. Congress to propose legislation that would establish a flexible market-based program to reduce and cap emissions of sulfur dioxide, nitrogen oxides and mercury. To this end, in Fcbraary 2002, thc Bush Administration annannccd their multi-pollutant proposal, dubbed the Clear Skies Initiative ("Clear Skies"). Under Clear Sklcs, a markct based cap and trade approach, modeled afrcr thc acid rain program, would result in significant reductions of sulfur dioxide, nitrogen oxide and mercury emissions in two phases culminating in 2018. In late July of 2002, thc legislative version of thc Bush proposal wes introduced in both thc U.S. House and Senate. Thc initiatives were not enacted during thc 107t~ Congress, but it is expected that thc dcbatc will begin in earnest during the current session of the U.S. Congress. Clear Skies is expected to provide one avenue into thc debate, while othcrs will be calling for much more stringent reductions and time flames and may also call for thc inclusion of carbon dioxide in an effort to address thc threat ora changing world climate. Mercury Emission Reffulation. Thc EPA made thc regulatory determination in December 2000 to regulate mercury emissions from coal fired powar plants. EPA is scheduled to finalize rules by December 2004 and appropriate controls arc expected to be required in thc 2008 time frame. The Board of Directors of TMPA has authorized a study for thc purpose of determining what modifications and technologies may bc required to bc made to Gibbons Creek to remove mercury and other particles. The study was completed in thc fall of 2002, and it identified alteraativc mcanures that could bc taken by TMPA to address various levels of mercury emissions that may bc implemented through future EPA regulations. 36 I I I ! I I I I I I I I ! I I ! I I I I I I I I I I I I I I I I I I I i I I THE WATER SYSTEM The Water System provides retail water service to ail customers located within the city limits, as well as wholesale treated and raw water service of approximately 10 MGD ("MGD") to the Upper Trinity Regional Water District ("UTRWD"). The water distribution system consists of 431 miles of water mains, 7 million gallons of ground storage, and 4.36 million gallons of elevated storage. The City continues to operate in compliance with all State and Federal water quality requirements. Water Supply... The present municipal supplies are obtained priraarily from surface sources, but ground water sources (water wells) are available for drought, cmcrgancy, and back-up purposes. The City has conservation storage rights in Lewisville Reservoir which was constructed by the U.S. Corps of Engincers. This Reservoir has a maximum conservation storage area of 436,000 acrs feet of water. Thc City holds the rights to 21,000 acre feet of storage, with thc balance being held by thc City of Dallas ("Dallas"). Based on the safe yield of 90.20 MGD, the City receives 4.34 MGD in water rights from Lewisville Reservoir. The City also has 207,896 acru feet of annual withdrawal rights from the Ray Roberts Reservoir (799,600 acre feet) located on the Elm Fork of the Trinity River nine miles upstream from the Lewisvillc Reservoir. The City and Dallas have determined and agreed by contract that thc safe yield of Ray Roberts Reservoir is 76 MGD, and that the CiWs sham is 26% or 19.786 MGD, and Dallas' share is 74% or 56.24 MGD. Due to the City's current surplus reservoir water supply, the City has contracted with the UTRWD to provide on an interim basis thc excess capacity, which is presently approximately 8.8 MGD of mw water, as available supplies permit. The City's contract with UTRWD will expire in July 2012, unless it is extended by mutual agreement. Thc City maintains and utilizes its ground water well system as a contingency supply in thc cvcnt of a drought, unusual shortagu, or in an emergency rcadinass occasion due to a natural disaster which may disrupt thc water treatment plant and/or transmission system from thc water treatment plant. During thc drought of 2000, the City activated three ground water wells for five days, receiving approximately 1.07 MGD. The combined 24.62 MGD of currently available surface water volume from Lewisville Lake (4.86 MGD including wastewater effluent rctums and Ray Roberts Lake (19.76 MGD) are sufficient to serve the City's needs for approximately ten to fil~cen years. The City's retail and wholesale treated water volume during 2001 averaged approximately 14 MGD. The City has a raw water supply contract with Dallas, dated August 7, 1985, that has a 30 year term, provided that the City can, upon five years' notice to Dallas, reduce or cease taking water under the contract. The contract obligates the City to purchase at least 500,000 gallons per day from Dallas. This is a minimum contract volume that the City maintains in order to keep open a long term option to purchase additional raw water from Dallas in the future that may be provided from existing or new water resources developed by Dallas. The water contract with Dallas is similar to the contracts for retail and/or wholesale water that Dallas supplies to twenty three (23) other North Texas municipalities. As regional water provider, Dallas is actively exploring prospects for obtaining additional water resources to serve its customer cities. The City's wholesale water purchase price from Dallas is currently 0.3922 cents per 1,000 gallons. State legislation has been enacted in recent years to organize similarly-situation water use areas into water planning groups. Thc City is working with Dallas and thc other water users of the State's seventean-anunty Region C Water Planning Group, which are conducting a lung-range water supply study to determine the water requirements and supply altematives for thc region through 2050. Given its raw water contract with Dallas, thc City is of thc view that it has the flexibility to work with Dallas at least through the remaining term of thu agreement, but that it could also become a participant or a customer of other regional water suppliers that arc investigating additional water supplies for the Region C Water Planning Group. The City has adopted a drought contingency plan, but at present, due to the surplus water quantities that are available to the City, the City has used its drought contingency plan for educational purposes. Thc City anticipates that mandatory water conservation measures aru likely to bc implemented by thc City, in thc same or similar manner that Dallas and some customer cities of Dallas have implemented year around water usc limitations. Water Treatment Plants... The Denton water treatment plant is capable of treating and pumping 28.75 MGD. The maximum volume pumped to date was 27.85 MGD in 2000. The City is currently constructing a 20 MGD water treatment plant to be located near Ray Roberts Lake. Construction of this plant, high service pump station, and transmission facilities began during fiscal year 2001. The City projects, using forecasted growth rates, that it has sufficient available capacity in thc existing 28.75 MGD water treatment plant and its ground storage wells to meet its retail customer peak use requirement until the summer of 2003. The new 20 MGD water plant is projected to be complete in May, 2003. Upper Trinity Regional Water District... On June 16, 1989, the City, in cooperation with 32 other Denton County cities, towns and water supply entities, effected the creation of the UTRWD through enabling State Legislation. The UTRWD*s purpose is to provide future raw water supplies, wholesale water and wastowator services to entities primarily in, but not limited to, Denton County. UTRWD is controlled by a Board of Directors representing the cities in the region. The UTRWD will also plan, acquire or develop future raw water supplies or reservoirs for its participating members. Wholesale treated water sales to the UTRWD began in June 1994. The current contract provides for treated water sales to the UTRWD for resale to the City of Sanger. Treated water sales in 2002 totaled 161,137 gallons per day. The UTRWD water treatment plant has been completed and the City is selling raw water to the UTRWD for treatment based upon excess available capacity after serving the City's customers. Total raw water sales were approximately 9.56 MGD in 2002. 37 TABLE 3 - WATER USAGE (GALLONS) Year 1998 1999 2000 2001 2002 Da~, (Sales) 13,519,826 12,639,838 14,217,910 13,366,465 13,890,891 Maximum Day 26,439,000 26,204,000 27,850,000 26,477,000 26,031,000 TABLE 4 - TOP TEN WATER CUSTOMERS Name of Customer University of North Texas Texas Woman's University Denton Independent School District Upper Trinity Regional Water District City of Denton Peterbilt Motors Denton State School Denton Regional Medical Center Denton County Woodh0l Apartments 2002Annual Consumption (Gallons/ Revenue 232,321,550 $ 752,148 156,585,920 484,286 62,422,400 216,624 58,815,000 193,228 52,304,140 209,346 51,810,200 153,622 49,649,200 144,662 43,076,230 133,766 34,956,600 114,882 25,642,800 81,184 767,584,040 $ 2,483,749 TABLES -WATER RATES (EFFECTIVE OCtOBER 1, 1995) Residential Facility Charge I 1/2" meter Inside City Limits $ 9.55 per month 11.40 per month 16.25 per month 18.10 per month Outside City Limits $11.00 per month 13.10 per month 18.65 per month 20.80 per month Volume Charne Inside City Limits First 15,000 gallons Next 15,000 gallons Over 30,000 gallons Outside City Limits First 15,000 gallons Next 15,000 gallons Over 30,000 gallons (May-October) $2.60 per 1,000 gallons 3.50 per 1,000 gallons 4.35 per 1,000 gallons $3.00 per 1,000 gallons 4.05 per 1,000 gallons 5.00 per 1,000 gallons Winter (November-April) $2.60 per 1,000 gallons 2.60 per 1,000 gallons 2.60 per 1,000 gallons $3.00 per 1,000 gallons 3.00 per 1,000 gallons 3.00 per 1,000 gallons Commercial and Industrial (Inside City Limits) Facility Charge 3/4" meter $20.20 per month 1" meter 22.20 per month 1 1/2" meter 25.75 per month 2" meter 31.65 per month Volume Charge 2.87 per 1,000 gallons Rate Management . . . Over the past seven years, System debt has increased as the City has financed water and sewer infi'astmcture improvements to meet increased demands for service, however, the City has not increased water or sewer rates during that period. The City's current water and sewer rates are comparable, though slightly higher, than rates charged in nearby municipalities of similar size. In addition, the City has identified significant water and sewer in~astructure that it anticipates will be funded through a mix of currently-generated funds, the use of financial reserves and System debt over the next five years (see 38 I I I I I I I I I I I I I I I I I I I I I ! ! ! I ! I ! I I ! ~ ~ Will ne~d t~ · Ps'~ Improvemen, m_ the *~' ~u oy 4~ ia 20~ ,,~r rates by 3~ ' '~,uclpated ~ec~ to impact fee~ ~.'a ~u07. HOWeve~ - ~?,Onal 2% in 2nne ' ~, W~mh is ~tiCiaate~ ~ ~uc~ projections ~.~ ~ Wamr. In add,ion. ~e Ci~ ~ benefite due to seve~l racto~ debt at favorable r~ ' '"~ oz2003. ~"~' 'ete~ination of Ofwater~ · ~O~r~: .- d~Omade~- · . · ~esefa~. . ~sociate~. ~teWater im~*, ~mc~t factor i. ~ ~e m mte~ ~,~..~-~s include a reload.. · need to recove- - -,,~e m new derek*- "' uccu~d in 199~ TM ~'~agement of ,,,~ ~d it to ~d could ~.~. ?s~ ~m exists. ~ment ~e~. lm~o~, ~' ~ n~e fees ~ ~.~.~re~ ~d Sewer ~te~ ~w ~d refin~c~ ~"~ ~or ~e ~e ~ter ~d -,~ [~gn m~er utilih, ~ ~[~ ~ to meet ne.,~~' me additional ;_~ "'P*ement~ion ~?e~e ~nds that Were establi ~ewater im ..... ¥ ~r ~ ~tes a - ~ uevelopmen, oemg Used to minimize . Shed to add~s ~ zees. ' ~ uew ~mnact ~ a~e S~dy is c~e~.~-.'lmout the ~dUce ~e ~ n rate mc~ ~,. _ s ~re caoi~ ~.~ . -uy m prO~ess, m v~i~l- - ' -ow of the wa*~- ~. w~ such re~e~ ~ ~u contin ~ev r~ . a .... ~ ope~tin~ c*~ '~ system ~. -.,es, ~e Ci~, *- g ~'~qmremen~ 2. ~e water ~ ~ '~ to absorb ~ Wea~er tha~ -- ~u SeWer rate .... ~.~mP~ra~ mcr~es ~"m~t~on ~nds held ~~,w~e~ter ~em ..... ~ WAgT~WA . . "°~e W~te...-- ~,oV~aes re~iI .. TER SYSTE~ appro~a~elv ~,~ customer, ~water collect;~ - ~oo~ miles Of~v~.' - --~ OfCorln~ ,~ '~' ~a ~a~en* o_ Wa~tewater Trea~e~, ~, Water bnes, 18 mile~ ~ °f ~le ~d &e ~ ~ c~ti~ns ~n o,_ m for Pe~i~.a ~ ' · - ~ ~y4 ~e Ci~, * --.a, ~a 2~ li~ ~,. ,.e collection s..~''~ ~ty s thee ~,o~te~dFede~..,~u~entof.~' 7~Ompleteda~ .... auons. ~atemConsis~of pe~ed ~=~ ,~ u~sca~ge ~.~.~ ~v to 15 MGD ~ ~-,ouu, u00 ex~-- - ~e Cle~ ~ent cap~i~ to ~'J'~' A six (61 ..~'~x ne W~te~ter~..~Smn of i~ W~e.- ~e Ci~'s W~tewat~ mmov~ of ~on;~ ~on Agency datea ~ume Conse~atio~ ~ge P~it ~ averaged 12 S~ ~'~ ucCblorinat;,_ "~OVember 2~ .~ ~o~i~ion~ ;~ ~..me l~x~ C · ~--MGD in 2002. '~', ~d sl~d~ co~. ~1. ~ese di~ .... reom~ 200* omm~SSmn on -umomng ~d ~°~"~ge Pe~i~ i~-" ~d ~°~P°~t a~ E~ ...... ~e ~a~ent volume a~e W~ewater For *~ ~ ~i~c. SeVen acres ~}'~ Of sludge dis.i~ewater b~rod.., - ...... GD. .... ~_a cOmpoa proem -~l~er compac~d ~ zor the Ci~ ~a ~d recycled ~L'~erpro~..~_F''' ~-cCi~h.~.~ ~u'cre~suffa ~roouccdan ~uW~teto ;F ro maio ° SOUr ~ ~L~ 6- WA~--- , ~ m rcvenu~ ~o~:~ ~ ne e~Uent Wa,~.~~nr e~uent. ~ ~f~t exp~sion --,. ~a (~r~lv~ 0~- ,-uent to ~e lOCa[el~.SC~cdulcd for c~'.~.m~ ~ muse -, o.~R 1, 1995) ~nc generating pl~'t~P~etion in oxYgen d~ ~-~ge b~ed on ~ "o-mpt~on) F~ili~ Ch~ge R~identia~ Customer Ou~fde Ci~ Limi~ o-~pena~ solids Volume Ch~ge ~. 15 per month · 73 per 1,000 gMlons Mini~u~ Billing l~on Wi~m ~ bound~ies, ~e Ci~ h $7' l S per mon~ ~Vanageme~.. e... · For a thSCussion of the ~' , thct~on OVer ~e Water ~d w ~ s Wastewater ~tewater ~Stem rate 39 - Rate DEBT 1NyoRMA'~ION 9/~30 ~ $ 14,021,96. 20,9'70,506 2003 $ 9.'~ , 13,260,501} 20,937,'709 2004 7,710,000 12,847,709 20,930,925 2005 $,090,000 $,505,000 12,425,925 11,965,225 2006 10,295,000 11,442,S91 2007 11,050,000 10,$77,0Sl 2005 11,335,000 10,275,$59 2009 2010 12,005,000 2011 11,455,000 9,675,$31 12,015,000 9,057,026 8,446,6'76 2012 12,610,000 7,752,244 2013 13,260.000 7,024,054 2014 13,645,000 6,2'78,676 2015 13,605,000 5,505,326 2016 14,365,000 4.701,7'79 2017 14,965,000 3,872,406 2015 15,455.000 3,010,274 2019 16,345,000 2,215,$59 2020 12,S90,000 1,604,563 2021 9,520,000 t ,230,422 2022 4,065,000 996,22S 2023 4,300,000 '745,359 2024 4,550,000 565,031 2025 2026 2,150,000 450,359 202'/ 2028 2029 %of Total principal Outstanding ~ ~ Debt $ 3,545,000 $ 2,459,592 $ 6,004,592 26,9'75,098 3,S30,000 1,990,000 5,820,000 26,'/57,709 3,700,000 1,$77,050 5,577,050 26,50'7,975 15 51% t ,783.300 4,333.300 26,596,525 ' 26,~22,441 22,263,225 2,550,000 4,299,550 22,522,891 2,600,000 1,699,550 26,237,'731 22,212,051 2,420,000 1,605,650 4,025,650 22,250,859 2,255,000 1,506,513 3,761,513 26,042,371 21,130,831 1,645,000 1,418,763 3,063,763 24,194,594 21,102,026 1,725,000 1,335,625 3,063,625 24,165,651 40.32% 21,056,676 1,$00,000 1,250,500 3,050,500 24,10'7,176 21.012,244' 1,900.000 1,158,000 3,055,000 24.070.244 20,669,054 2,000,000 1,060,500 3,060,500 23,729,554 19,$83,676 2,100,000 95S,000 3,058,000 22,941,676 19,873,326 2,215,000 850,125 3,065,125 22,938,451 64.97% i9,666,7'79 2,330,000 736,500 3,066,500 22,733,279 19,327,406 2,445,000 617,125 3,062,125 22,359,531 19,355,2'/4 2,575,000 491,625 3,066,625 22,421,899 359,'/50 3,059,750 18,165,609 3,066,125 14,190,688 91.08% $,370,422 15,105,S59 2,'700,000 11,124,563 2,845,000 221,125 3,000,000 75,000 3,075,000 5,296,225 5,298,359 5,295,422 2,745,031 5,296,225 2,'745,359 9'7.5'7% 5,295,359 2,744,666 2,745,031 2,747,566 100.00% 2,745,359 ~ I I I I I I 2,295,000 329,666 2,744,666 2,747,566 ~ ~ 2,415,000 2,545,000 202,566 · endcd Bonds- - li alienS. Excludes ~e K ~f~-oee rate of 4.750/0 for pnrposcs . , ~o./nurchaSe ob g.~ . calCulated at Be avc.~ - ~,, do~S not include ~c~c Bonds h~ ~cc- - "ou~ {~of thc ~ssUC .... 'ssUCd r~vcnUc bo~. Av~ragu --- .. ~c Ci~ h~ no voted but um I~ for the System (~hff illus~atlon' 'mi imprOVement Pf .._~ the issuance _~ RE~ ~0~ y ~ -.ill b~ ~na~ . ~li~ated to ~u. a the fm~c~at a ...... for thc AmICWAT~ ~m includes tmpro-~ _~in° tool ~o u~ ~ic conditions ~ ;.c/udes total cap~ ~c issuance o~ AddlUOnm ~ on contmueO u~.--~_ ~th~r factorS. ~'~, ~ million ge p~_~ .heWn in the ton e endont m P~? the C1P, amou~ ~ ~nroximatet7 ~ ~' ~.evenuO deo~ lo ~ 2007 d p ~ .~ ~ndmg of .-- ~ of which, ~ ~ ;.su~CeS ~-- 2006 suppOt~ '"~ ..iv $18B rotate-, "-~t The pl~neu ,~ ~ of appr°xtma~'[-s o~er System u~. 2004 4,000 $10,000 3,000 Bonds and pernap 2003 ~ 9,000 ~,000 re. eaed g~venu~ B°nd Sales 000's ~ 10,000 6,500 Electric Dttutl ~ ~ $ 29,000 Water Utilities ~asteWater~rimage Utiilties $ 38,000 ! ! I ! ! 4O I ! I I I I I I I ! i I I ! I I I I i FINANCIAL INFORMATION TABLE S - COMPARABLE CALCULATION OF NET REVEN~E$ AVAILABLE FOR DEBT SERVICE The table below provides comparable calculations of Net Revenues available for debt service for the periods shown. Such calculations include ail operating revenues plus interest income, less operating expenses. For purposes of the calculation, depreciation, amortization, franchise fees, and payments in lieu of taxes are excluded from operating expenses. Fiscal Year Ended September 30, Gross Revenuez 2002 0) 2001 2000 1999 1998 E[~IricS~vice $ 87.736,178 $ 96,112,000 $ 83,739,948 $ 78,654,866 $ 77,570.951 Water Service 18~202,404 18,375,845 19,269,891 17,829,251 17,248.400 W~tewater Servic~ 14,085,531 12,120,932 12,066,564 10,815,175 10,432,408 Other Fees (~} 4,748,502 50,283 319,000 530,763 483,959 Interest Incame 8,406.425 10,168,594 8,327,680 7,116,779 5,741,008 Impact Fees°) 4,294,000 1,437,773 90,287 Total Revenues $ 137,473~040 $ 138,265,427. $ 123.813,370 $ 114,946,834 $ 111,476,726 Electric ~ystem Fucl and Purchased PowerO) Other Operating and Administrative Expenscs $ 69,869,177 $ 72.505,324 $ 58.219,188 $ 52,521,369 $ 48.611.430 16,649,839 17,646,386 17.787.364 15,883,336 17.248,747 $ 86,519,016 $ 90,151,710 $ 76,006,552 $ 68,404,705 $ 65,860,177 ~Fater b~ystern Fuel and Purch~zed Power $ 791,629 $ 952,022 $ 666,449 $ 526,995 $ 619,880 Water Purch~ed 112,523 126,399 146,135 97,797 72,299 Other Operating and Administrative Expenses 7~138~159 7~820~088 7.559,307 7.309.160 4,251,361 $ 8.042,311 $ 8,898,509 $ 8.371,891 $ 7,933,952 $ 4,943,540 Total Expeme~ Net P~venue Available for Debt Service and Other Lawful Parposez $ 485,381 $ 636,473 $ 445,577 $ 416,230 438,825 10,023,440 6~834.666 6.295,119 5,852.370. 3,966,679 $ 10,508,821 $ 7,471,139 $ 6,740,696 $ 6,268,600 $ 4,405,504 $ 105,070,148 $ 106~521,358 $ 91,119,139 $ 82,607,257 $ 75.209r221 $ 32,402,892 $ 31,744,069 $ 32,694~231 $ 32,339,577 $ 36,267,505 Contribution to Net Revenues Available Electric System 27.10% 36.79% 38.06% 36.19% 43.81% Water System 53.24% 42.43% 40.91% 44.95% 37.48% Wastewater System 19.66% 20.79% 19.09% 18.89% 18.19% Electric Customers 36,591 35,705 33,833 34,553 33,540 Water Customers 24,054 22,614 21.146 18,825 17,921 Wastewater Customers 22,225 20,759 19,325 18,259 17.799 (1) 2~~2dataisderivedfr~m~nan~iaistatements~ftheCitybutisunaudited~see"FinanciaiInf~rmati~n-Imp~emantatinn~f New Accounting Standards" for a discussion of new accounting standards implemented for the fiscal year ended September 30, 2002 and the impact of these standards on the City's financial reporting. (2) Incind~sareimbursemantf~rthee~~~tri~~cansmissi~naswe~~aswat~randwastewatertappingfeerevenues (3) Reflects the City's recognition of impact fee revenue. Impact fee revenue is deferred until spent at which time it is recognized as earned revenue. (4) The eles~ic system% fuel and purcbased power wes understated for the fiscal year andcd September 30, 1999 in thc amount of $3,201,693. Prior year retained earnings has been restated on the Comprehensive Annual Financial Report for the fiscal year ended September 30, 2000 to reflect this amount. Likewise, fuel and purchased power have been restated in the Net Revenue calculation for the fiscal year ended September 30, 1999 to more accurately represent the Net Revenues Available for debt service. 41 TABLE 9 - COVERAGE AND FUND BALANCES Average Annual Principal and Interest Requirements, 2003-2030 ...................................... $ 18,166,838 Coverage of Average Requirements by 9/30/02 Net Available ......................................... 1.78 times Maximum Principal and Interest Requirements, 2004 ................................................ $ 26,975,098 Coverage of Maximum Requirements by 9/30/02 Net Available ........................................ 1.20 times Utility System Revenue Bonds Outstanding as of 2/15/03 ............................................ $ 254,180,000 The Bonds ................................................................................. 50,180,000 Total Outstanding Revenue Bonds ............................................................... $ 304,360,000 Interest and Sinking Fund, as of 9-30-02 .......................................................... $ 11,476,657 Reserve Fund, as of 9-30-02 ................................................................... $ 16,550,929 Emergency Fund, as of 9-30-02 ................................................................. $ 248,251 Extension and Replacement Fend, as of 9-30-02 .................................................... $ 5,139,669 (1) Includes the Bonds, excludes the Refunded Bonds; preliminary, subject to change. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS...Certain financial data included in this Official Statement for the year ended September 30, 2002 (principally, data used in Tables 8 and 9) is derived from unaudited financial statements of the City. For the year ended September 30, 2002, the City implemented tho provisions of the Governmental Accounting Standard Board ("GASB") Statement No. 34, Basic Financial Statements - and Management's Discussion and .4nalysis -for State and Local Governments, GASB Statement No. 37, Basic Financial Statements - and Management's Discussion and.4nalysis -for State and Local Governments: Omnibus, and GASB Statement No. 38, Certain Financial Note Disclosures which results in a change in content and format of the City's financial statements (collectively, the "New OASB Statements"). The audited financial statements of the City for the year ended September 30, 2002, prepared in accordance with the New OASB Statements, are in included in Appendix C hereto. The purpose of the New GASB Statements is to create new information and restructure much of the information that governments hove presented in the past to provide a more comprehensive demonstration of their annual financial performance on a system-wide basis. Among the significant changes effected by tho new accounting standards are new presentations for proprietary or business-type operations of the City, such as those reported for the City's electric, water and waste water operations (the "Proprietary Funds"). As required by the newly adopted accounting principles, the City's annual report consists of three basin financial statements for the Proprietary Funds: the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and thc Statement of Cash Flows. Those statements are included in the financial statements of the City for the year ended September 30, 2002 in Appendix C. In addition to the changes discussed in the preceding paragraph, certain items comprising the Pledged Revenues are no longer reported in the City's financial statements in the same detail as in prior years. For various reasons, including budgeting for each business-type activity as a cost center, and for purposes of its disclosure obligations, the City maintains additional detail, some of which is included in tables used herein. While the information for 2002 is consistent with the Proprietary Fund information contained in its audited financial statements, the 2002 columns have been marked as unaudited to reflect the inclusion of additional detail maintained in the financial records of the City, but which are no longer reported in the audited financial statements. A discussion of the New GASB Statements is set forth in the Management Discussion and Analysis and in various notes to the City's financial statements in Appendix C. 42 I (i) I I I I I I l ! i I I I i I ! i I i I I I I FINANCIAL POLICIES Basis of Accounting... . The accounting policies of the City conform to generally accepted accounting principles of the Govemmental Accounting Standards Board and program standards adopted by the Govemment Finance Officers Association of the United States and Canada (GFOA). The GFOA awarded a Certificate of Achievement for Excellence in Financial Reporting to tho City for its comprehensive annual financial report for the fiscal year ended September 30, 2002. This Certificate is the highest form of i'acognition for excellence in state and local government financial reporting. A Certificate of Achicvemetu is valid for a period of one year only. The City has received a Certificate since 1984. In addition to the Ce~ificate, the City received OFOA's Award for Distinguished Budget Presentation for its fiscal year 2001 annual budget document. Thc measurement focuses for the Enterprise Funds, Internal Service Funds and Noncxpcadablc Trust Funds arc incomc determination and cost of service, respectivcly. Accordingly, thc accmal basis, whereby revenues and expanses arc identificd in thc accounting period in which they are earned and incurred and net income, is utilized for these funds. Tho modified accrual basis, whereby revenues arc recognized when they become both measurable and available for usc during thc year and expenditures arc recognized wben the related fond liability is incun*ed, is used for all other funds. I I I I i i I ! I I I Budgetary Procedures.., As prescribed by City Charter the City Manager, at least 60 days prior to the beginning of each fiscal year, submits to the City Council a proposed budget for the fiscal year beginning the folinwing October 1. The budget includes proposed expenditures and revenues required to fund the expenditures. Following Council considemtinns, amendments and refinements, a public hearing is ordered and conducted for the purpose of obtaining taxpayer comments. The budget is finally approved and adopted by passage of an ordinance by the City Council prior to the beginning of the fiscal year. The budget is adopted on a basis consistent with generally accepted accounting principles. The City invests its investablo funds in investments authorized by Texas law in accordance with investment policies approved by the City Council of the City. Both state law and the City's investment policies are subject to change. INVESTMENT AUTHORYrY AND INVESTMENT PRACTICES OIt THE CITY... Available City funds are invested as authorized by Texas law and in accordance with investment policies approved by the City Council. Both state law and the City's investment policies are subject to change. Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instmmantalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) colintcralized mortgage obligations diractly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligation, the principal and interest of which is guaranteed or insured by or backed by the foil faith end credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit that arn issued by a state or national bank domiciled in the State of Texas, a savings bank domiciled in the State of Texas, or a state or federal credit union domiciled in the State of Texas and are guaranteed or insured by the Federal Deposit Insurance Corporation or tho National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for City deposits, (8) folly colleteralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (I), and are placed through a primary government securitits dealer or a financial institution doing business in the State of Texas, (9) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-I or P-I or tho equivalent by at least one nationally recognized credit rating agency, (10) commercial paper with a stated aratarity of 270 days or less that is rated at least A-I or P-I or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one natinnally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (11) no-load money market mutual fonds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (12) no-load mutual funds registered with the Secorifies and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one antianaliy recognized investment rating firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and arc secured by obligations, including letters of credit, of the United States or its agencies and instrornentatities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligetinns described in the next succeeding paragraph. I i The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The City may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-I et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other fonds under its control for a term up to two years, but the City retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the City must do so by order, ordinance, or resolution. The City is 43 specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the City is required to invest its funds under written thvestrnent policies that primarily emphasize safety of principal and liquidity; that address inveslment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for City thnds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of prinalpal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the City's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and probable income to be derived." At least quarterly the City's investment officers must submit an investment report to the City Council detailing: (1) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, and any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest City funds without express written authority from the City Council. Under Texas law, the City is additionally required to: (I) annually review its adopted policies and strategies, (2) require any investment officers with personal business relationships or family relationships with firms seeking to sell securities to the City to disclose the relationship and file a statement with the Texas Ethics Commission and the City, (3) require the registered principal of firms seeking to sell securities to the City to: (a) receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) in conjunction with its annual financial audit, perform a compliance audit of the management controls on investments and adherence to the City's investment policy, (5) restrict reverse repurchase agreements to not more than 90 days and restrict the invesanant of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement, (6) restrict the investment in non-money market mutual funds in the aggregate to no more than 15% of the City's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements and (8) provide specific investment training for the Treasurer, the chief financial officer (if not the Treasurer) and the investment officer. TABLE 10 - CURRENT INVESTMENTS As of Februa~ 15, 2003, the following percentages of the City's investable funds were invested in the following categories of investments: Description Federated/Money ~larket U.S. Federal Agency Coupon U.S. Federal Agency Discount U.S. Federal Agency Callables Cash Investments Book Market Percent Value Value 5.89% $ 16,000,000 $ 16,000,000 50.09% 136;120,472 138,586,684 3.28% 8,905,716 8,905,815 38.83% 105,504,010 106,149,016 1.91% 5,196,220 5,196,220 100.00% $ 271,726,418 $ 274,837,735 As of such date, the market value of such investments (as determined by the City by reference to published quotations, dealer bids, and comparable information) was over 100% of their book value. No funds of the City are invested in derivative securities, i.e., securities whose rate of return is determined by reference to some other instrument, index, or commodity. 44 I I I I I i I I I I i ! I I I I I I I I I I I SELECTED PROVISIONS OF THE BOND ORDINANCE On thc date of the sale of thc Bonds, thc City Council will adopt thc Ordinance authorizing thc Bonds, which will be in substantially thc same form as thc ordinances authorizing the outstanding Parity Bonds. Selected provisions of thc Ordinancc arc set forth below. Thc complete Ordinance is available from thc City, thc City's Financial Advisor and, during the offering pcriod for thc Bonds, from thc Underwriters, upon request. Section 8. DEFINITIONS. As used in this Ordinance the following terms shall have the meanings set forth below, unless the text hereof specifically indicates otherwise: (a) The terms "City" and '*Issuer" shall mean the City of Denton, in Denton County, Texas. I I I I I I I i I I I I I I (b) The term "City Council" or "Council" shall mean the governing body of the City. (c} The term "Bonds" shall mean collectively the Initial Bond as defined and described in Section 2 of this Ordinance and all substitute bonds exchanged therefor, and all other substitute bonds and replacement bonds, issued pursuant to and as provided in this Ordinance. (d) The term "Parity Bonds" shall mean collectively (i) the outstanding City of Denton Utility System Revenue Bonds, Series 1992, authorized by ordinance passed on March 3, 1992 (the "Seres 1992 Bonds"), (ii) the outstanding City of Danton Utility System Revenue Bonds, Series 1993, authorized by ordinance passed on March 16, 1993 (the "Series 1993 Bonds"), (iii) the outstanding City of Danton Utility System Revenue Refunding Bonds, Series 1993-A, authorized by ordinance passed on June 8, 1993 (the "Series 1993-A Bonds"), (iv) tho outstanding City of Danton Utility System Revenue Refunding Bonds, Taxable Series 1993-B, authorized by ordinance passed on June 8, 1993 (the "Series 1993-B Bonds"), (v) the outstanding City of Danton Utility System Revenue Bonds, Series 1996, authorized by an ordinance passed on May 7, 1996 (the "Series 1996 Bonds"), (vi) the outstanding City of Dentun Utility System Revenue Refunding Bonds, Series 1996-A, authorized by an ordinance passed on May 7, 1996 (the "Series 1996-A Bonds"), (vii) thu outstanding City of Denton Utility System Revenue Bonds, Series 1998, authorized by an ordinance passed on March 24, 1998 (the "Series 1998 Bonds~), (viii) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 1998A, authorized by an ordinance passed on July 21, 1998 (the "Series 1998A Bonds"), (ix) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 1998B, authorized by an ordinance passed on August 4, 1998 (the "Series 1998B Bonds"), (x) the outstanding City of Denton Utility System Revenue Bonds, Series 2000A, authorized by an ordinance passed on April 25, 2000 (the "Series 2000A Bonds"), (xi) the outstanding City of Dantun Utility System Revenue Bonds, Taxable Series 2000B, authorized by an ordinance passed on April 25, 2000 (the "Taxable Series 2000B Bonds"), (xii) the outstanding City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2001, authorized by an ordinance passed on April 17, 2001 (the "Series 2001 Bonds"), (xiii) the outstanding City of Denton Utility System Revenue Bonds, Seres 2002A, authorized by an ordlnanee passed on April 9, 2002 (the "Series 2002A Bonds"), (xiv) the outstanding City of Danton Utility System Revenue Bonds, Toy, able Series 2002B, authorized by an ordinance passed on April 9, 2002 (the "Taxable Series 2002B Bonds"), and (xv) thc Bonds. (c) The term "Additional Bonds" shall mean the additional parity revenue bonds which thc City reserves thc right to issue in thc future, in accordance with Section 25 of this Ordinance. (f) The term "System" shall muan (i) the City's entire existing waterworks and sewer system and the City's entire existing electric light and power system, together with all future extensions, improvements, enlargements, and additions thereto, and all replacements thereof, and (2) any other related fueilifies, all or any part of the revenues or income from which do, in the future, at the option of the City, and in accordance with law, become "Pledged Revenues" as hereinafter defined; provided that, notwithstanding the foregoing, and to the extent now or hereafter authorized or permitted by law, the term System shall not mean any water, sewer, electric, or other facilities of any kind which are declared not to be a part of the System, and which are acquired or constructed by the City with the proceeds from the issuance of "Special Facilities Bonds", which are hereby defined as being special revenue obligations of thc City which are not payable from or secured by any Pledged Revenues, but which are secured by and payable from liens on and pledges of any other revenues, sources, or payments, including, but not limited to, special contxact revenues or payments received from any other legal entity in connection with such facilities; and such revenues, sources, or payments shall not be considered as or constitute Gross Revenues of the System, unless and to the extent otherwise provided in the ordinance or ordinances authorizing the issuance of such "Special Facilities Bonds". (g) The terms "Gross Revenues of the System" and "Gross Revenues" shall mean all revenues and income of every nature derived or received by the City from the operation and ownership of the System, ineinding the interest income from the investment or deposit of money in any Fund created by this Ordinance. (h) The terms "Net Revenues of the System", and "Net Revenues" shall mean all Gross Revenues after deducting therefrom an amount equal to the current expenses of operation and maintenance of the System, including all salaries, labor, materials, repairs, and extensions necessary to render efficient service, provided, however, that only seeh repairs and extensions, as in the judgment of the City Council, reasonably and fairly exercised by the adoption of appropriate resolutions, are necessary to keep the System in operation and render adequate service to said City and the inhabitants thereof, or such as might be necessary to meet some physical accident or condition which would otherwise impair the Bonds or Additional Bonds, shall be deducted in determining "Net Revenues". Payments required to be made by the City for water supply or water facilities, sewer services or sewer facilities, 45 I I fuel supply, and for the purchase of electric power, which payments under law constitute operation and maintenance expenses of any part of the System, shall constitute and be regarded as expenses of operation and maintenance of the System under this Ordinance. Depreciation and amortization shall not constitute or bo regarded as expenses of operation and maintenance of the System. (i) The term "Pledged Revenues" shall mean (I) the Net Revenues, plus (2) the net revenues of the Drainage System, which shall be calculated on the same basis as the Net Revenues of the System, plus (3) any additional revenues, income, or other resources relating to thc System which arc expected to be available to the City on a regular periodic basis, including, without limitation, any grants, donations, or income received or to be received from the United States Government, or any other public or private source, whether pursuant to an agreement or otherwise, which in the future may, at the option of the City, be pledged to the payment of the Parity Bonds or Additional Bonds. The term "year" or "fiscal year" shall mean the fiscal year used by the City in connection with the operation of the System. (k) The term "Government Obligations" shall mcan direct obligations of the United States of America, including obligations the principal of and interest on which are unconditionally guaranteed by thc United States of America, which may be United States Treasury obligations such as its State and Local Government Series, and which may bc in book-entry form. (1) "Drainage System" means the City's entire existing drainage system and all facilities related thereto. (m) "Rate Stabilization Fund" means thc City's separate Rate Stabilization Fund established for thc purpose of stabilizing rates for ratepayers. Section 9. PLEDGE. (a) The Bonds are "Additional Bonds" as permitted by Sections 24 and 25 of the ordinance passed or/ March I0, 1983, authorizing the City of Denton Revenue Refunding Bonds, Series 1983 (the "Series 1983 Bonds"); and it is hereby determined, declared, and resolved that all of the Parity Bonds (including the Bonds) are secured and payable equally and ratably on a parity, and that Sections 8 through 28, of this Ordinance are supplemental to and cumulative of Sections 7 through 27 of tho aforesaid ordinance passed on March 10, 1983, with Sections 8 through 29 of this Ordinance being applicable to all of the Parity Bonds. (b) The Parity Bonds and any Additional Bonds, and the interest thereon, including any interest coupons appertaining thereto, are and shall be secured by and payable from a first lien on and pledge of the Pledged Revenues, and the Pledged Revenues are further pledged to the establishment and maintenance of the Funds created by this Ordinance, and any Funds created by any ordinance authorizing the issuance of any Additional Bonds. The Parity Bonds and any Additional Bonds are not and will not be secured by or payable from a mortgage or deed of trust on any real, personal, or mixed properties constituting the System. Section 10. SYSTEM FUND. Tfiere heretofore has been and is hereby created and there shall be established and maintained on the books of the City, and accounted for separate and apart from all other funds of the City, a special fund to be entitled tho "City of Denton Utility System Fund" (the "System Fund"). All Gross Revenues shall be credited to the System Fund immediately upon receipt, unless otherwise provided in this Ordinance. All current expenses of operation and maintenance of thc System shall be paid from such Gross Revenues credited to the System Fund as a first charge against same. Before making any deposits hereinal%r required to be made from the System Fund, the City shall retain in the System Fund at all times an amount at least equal to one-sixth of the amount budgeted for the then current fiscal year for the current operation and maintenance expenses of the System. Section 11. INTEREST AND SINKING FUND. For the sole purpose of paying the principal of and interest on all Parity Bonds and Additional Bonds, there heretofore has been and is hereby created and there shall be established and maintained on the books of the City, and accounted for separate and apart from all other funds of the City, a separate fund to be entitled the "City of Denton Utility System Revenue Bonds Interest and Sinking Fund" (the "Interest and Sinking Fund"). Section 12. RESERVE FUND. There heretofore has been, and is hereby, created, and there shall be established and maintained at Bank One, National Association, and hereafter, at the option of the City, established and maintained at any time at any national bank having a capital and surplus in excess of $25,000,000, a separate fund to be entitled the "City of Denton Utility System Bonds and Additional Bonds Reserve Fund" (thc "Reserve Fund"). The Reserve Fund shall be used to pay the principal of and interest on any Parity Bonds or Additional Bonds when and to the extent thc amounts in the Interest and Sinking Fund available for such payment are insufficient for such purpose, and may be used for the purpose of finally retiring the last of any Parity Bonds or Additional Bonds. 46 I i I I I I I I I I i I I I I I I I I I I I I I I I I I I i ! I I Section 13. EXTENSION AND IMPROVEIvlENT FUND. There haretofum has been and is hereby created and there shall be established and maintained on the hooks of the City, and accounted for separate and apart from ail other fund~ of the City, a separate fund to be entitled the "City of Denton Htility System Extension and Improvement Fund" (the "Extension and Improvement Fund"). Tho Extension and Improvement Fund shall be used for the purpose of paying the costs of improvements, enlargements, extensions, additions, replacements, or other capital expenditures related to the System, or for paying the costs of unexpected or extraordinary repairs or replacements of the System for which System funds are not available, or for paying unexpected or extraordinary expenses of operation and maintenance of the System for which System funds are not otherwise available, or for any other law~l purpose. Section 14. EMERGENCY FUND. There is hereby created and there shall be established and maintained on the books of the City, and aecountod for separate and apart from all other funds of the City, a separate fund to be entitled the "City of Denton Utility System Emergency Fund" (the "Emergency Fund"). The Emergency Fund shall be used for the purpose of paying unexpected or extraordina~ expenses of repair, replacement, operation, and maintonanee of the System for which neither System funds nor the moneys in the Extension and Improvement Fund are available. There was deposited in the Emergency Fund simultaneously with the delivery of the Series 1983 Bonds to the initial purchasers thereof from lawfully available funds of the City the amount of $250,000. All investment interest income from the Emergency Fund shall be transferred to the System Fund as received. Section 15. DEPOSITS OF PLEDGED REVENUES. Pledged Revenues shall be credited to or deposited in the Interest and Sinking Fund, the Reserve Fund, the Extension and Improvement Fund, and other funds when and as required by this Ordinance and any ordinance authorizing the issuance of Additional Bonds. Section 16. INVESTMENTS. Money in any Fund established pursuant to this Ordinance or any ordinance authorizing the issuance of Additional Bonds, may, at the option of the City, be placed in time deposits or certificates of deposit secured by obligations of the type hereinalter described, or be invested in Govemmeat Obligations (as defined in Section 8 hereof) or obligations guaranteed or insured by the United States of America, which, in the opinion of the Attorney General of the United States, are backed by its full faith and credit or represent its general obligations, or invested in obligations of instrumentalities of the United States of America, including, but not limited to, evidences of indebtedness issued, insured, or guaranteed by such governmental agencies as the Federal Land Banks, Federal Intermediate Credit Banks, Banks for Cooperatives, Federal Home Loan Banks, Government National Mortgage Association, United States Postal Service, Farmers Home Administration, Federal Home Loan Mortgage Association, Small Business Administration, Federal Housing Association, or Participation Certificates in the Federal Assets Financing Trust; provided that all such deposits and investments shall be made in such manner as will, in the opinion of the City, permit the money required to be expended fi-om any Fund to be available at the proper time or times as expected to be needed. Such investments (except United States Treasury Obligations--State and Local Government Series investments held in honk entry form, which shall at all times be valued at cost) shall be valued in terms of currant market value as of the last day of each fiscal year. Unless otherwise set forth herein, all interest and income derived fi.om such deposits and investments immediately shall be credited to, and any losses debited to, the Fund from which the deposit or investment was made, and surpluses in any Fund shall or may be disposed of as hereinafrer provided. Such investments shall be sold promptly when neeassm-y to prevent any default in eoanaction with the Parity Bonds or Additional Bonds consistent with the ordlnanees, respantivaly, authorizing their issuance. Section 17. FUNDS SECURED. That money in all Funds created by this Ordinance, to the extent not invested, shall he secured in the manner proscribed by law. Section 18. PRIORITY OF DEPOSITS AND PAYMENTS FROM SYSTEM FUND. That the City shall make the deposits and payments fi.om Pledged Revenues in the System Fund when and as required by this Ordinance and any ordinance authorizing any Additional Bonds, and such deposits shall ba made in the following manner and with the following irrevocable priorities, respectively: First, to the Interest and Sinking Fund, when and in the amounts required by this Ordinance and any ordinance authorizing any Additional Bonds; then Second, to the Reserve Fund, when and in the amounts required by this Ordinance and any ordinance authorizing any Additional Bonds; then I I I Third, to the Extension and Improvement Fund, when and as required by Section 21 of this Ordinance. Section 19. INTEREST AND SINKING FUND REQUIREMENTS. The City shall cause to be deposited to the credit of the Interest and Sinking Fund the accrued interest and any premium received from the sale of the Initial Bond, and on or before the 25th day of each month, the City shall cause to be deposited to the credit of the Interest and Sinking Fund, in approximately equal monthly payments, amounts sufficient, together with any other funds on hand therein, to pay all of the interest or principal and interest coming due, including the principal amount of any Parity Bonds required to be redeemed prior to maturity pursuant to any mandatory redemption requirements, on the Parity Bonds and any Additional Bonds on the next succeeding interest payment date. Any moneys so deposited in the Interest and Sinking Fund with respect to a mandatory redemption requirement, 47 I together with other lawfully available funds of the City, may be used by the City, to purchase, in advance of a mandatory redemption date and at a price not exceeding the principal amount thereof plus accrued interest thereon to the date of purchase, Parity Bonds which would be subject to being chosen for mandatory redemption on such mandatory redemption date. The Paying Agent shall cancel any Parity Bonds so purchased. Section 20. RESERVE FIJND REQUIREMENTS. There is now on hand in the Reserve Fund an amount of money and Government Obligations which is in excess of $3,000,000 and which is at least equal to the average annual principal and interest requirements of the outstanding Series 1992 Bonds, the Series 1993 Bonds, the Series 1993-A Bonds, the Taxable Series 1993-B Bonds, the Series 1996 Bonds, the Series 1996-A Bonds, the Series 1998 Bonds, the Series 1998A Bonds, the Series 1998B Bonds, the Series 2000A Bonds, the Series 2000B Bonds, the Series 2001 Bonds, the Series 2002A Bonds and the Taxable Series 2002B Bonds (the current "Required Reserve Amount"). Following the issuance and delivery of the Initial Bonds the Required Reserve Amount shall become and be an amount of money and investments equal to the average annual principal and interest requirements of all the outstanding Parity Bonds and Additional Bonds; provided further, however, that the Required Reserve Amount shall never be less than $3,000,000 if the maximum annual principal and interest requirements on all outstanding Parity Bonds and Additional Bonds exceeds $3,000,000. Immediately a~er the issuance and delivery of the Initial Bond them shall he deposited to the credit of the Reserve Fund, from the proceeds of the sale of the Initial Bond, money sufficient to cause the Reserve Fund to contain an aggregate amount of money and investments equal to the Required Reserve Amount for all then outstanding Parity Bonds. Afrer the delivery of any future Additional Bonds the City shall cause the Reserve Fund to be increased, if and to the extent necessary, so that such Fund will contain an amount of money and investments equal to the Required Reserve Amount. Any increase in the Required Reserve Amount may be funded from Pledged Revenues, or from proceeds from the sale of any Additional Bonds, or any other available source or combination of sources. All or any part of the Required Reserve Amount not funded initially and immediately afler the delivery of any installment or issue of Additional Bonds shall be funded, within not more than five years from the date of such delivery, by deposits of Pledged Revenues in approximately equal monthly installments on or before the 25th day of each month. Principal amounts of the Parity Bonds and any Additional Bonds which must be redeemed pursuant to any applicable mandatory redemption requirements shall be deemed to be maturing amounts of principal for the purpose of calculating principal and interest requirements on such bonds. When and so long as the amount in the Reserve Fund is not less than the Required Reserve Amount no deposits shall be made to the credit of the Reserve Fund; but when and if the Reserve Fund at any time contains less than the Required Reserve Amount, then the City shall transfer from Pledged Revenues in the System Fund, and deposit to the credit of the Reserve Fund, monthly on or before the 25th day of each month, a sum equal to 1/60th of the Required Reserve Amount, until the Reserve Fund is restored to the Required Reserve Amount. The City specifically covenants that when and so long as the Reserve Fund contains the Required Reserve Amount, the City shall cause all amounts in excess of the Required Reserve Amount to be deposited to the credit of the Interest and Sinking Fund. Section 21. EXTENSION AND IMPROVEMENT FUND REQUIREMENTS. During each year, subject and subordinate to making the required deposits to the credit of the Interest and Sinking Fund and the Reserve Fund, the City shall be required to deposit to the credit of the Extension and Improvement Fund, from Pledged Revenues in the System Fund, an amount equal to 8% of the "Adjusted Gross Revenues of the System", which term is hereby defined to mean the following: the Gross Revenues of the System for such year after deducting from such Gross Revenues an amount equal to the current expenses of operation and maintenance of the System for such year which are directly attributable to (i) all fuel costs related to the production of electric energy by the City and/or (ii) the purchase of electric energy by the City. Additional excess Pledged Revenues may, at the option of the City Council, be deposited to the credit of thc Improvement Fund as permitted by Section 22 (b) hereof, but no such additional deposit is required. All investment interest inceme from the Extension and Improvement Fund shall be retained in and remain a part of such Fund. Section 22. RATE STABILIZ~.TION FUND. (a) In each fiscal year, the City hereby agrees to transfer the Transfer Amount (as defined below) from the Rate Stabilization Fund into the System Fund for the purpose of paying the current expenses of operation and maintenance of the System and pledges such Transfer Amount to the payment of the Bonds, all Parity Bonds and any Additional Bonds. (b) The Transfer Amount shall be an amount of moneys and investments contained in the Rate Stabilization Fund equal to the amount for each fiscal year of the City that will, when added to the otherwise expected Pledged Revenues for that fiscal year, produce an amount of Pledged Revenues during such fiscal year at least equal to the greater of 1.25 times the average annual principal and interest requirements of ail then outstanding Bonds, Parity Bonds and Additional Bonds ur 1.25 times the succeeding fiscal year's principal and interest requirements of all then outstanding Bonds, Parity Bonds and Additional Bonds. (c) The Transfer Amount will be calculated and reflected in the annual budget for each fiscal year and will, on the first day of such fiscal year, be transferred from the Rate Stabilization Fund into the System Fund. 48 I I I ! I I I I I I I I I I I I I I I I I ! ! I ! ! ! ! I ! ! ! not be sufi]cicnt pledged ., occasion there shall,., +~,qcnCV shall bc made · ' ' ' ' " ' ~ -and~SreqUlr~U 7_ Ci"'[oranY - --iouS Funds wac- ~-, be used by thc · o~ the credit of the v.u~ ,,lodged RevenUeS up as s --i~ed depoSitS ~" _ '~s any surplus r ~ Subi~t to m~k. ing ~,~uq~ce o~ ^dditi°n~t ~°n~ ' ~;tioanee author,zing tho ,o mv:~o~ ~o~ d.~ v~i~ ~onas or A~ing Fun& or uu~OSe. ~. ~O~S ~D ~ ~r while ~Y o~ ~, . e ~e lo. test ~u o, ~ -- the p~i~ ' ---.=-~ OF p~X ~. ~ecembet I there~ ~ents lherefor, om o., -i-al of ~d interes~u"~-flor to c~ion 24. pAY~ e~h ]une I ~ ~:,~1~ th ~e paying ~ t ~uch dat~, &e pr~ g. or Additional ~onu~ ~ shall .... · -nufllv on or uo~f ~iw sh~l m~e av~'w~, to ~aY, on each o. o ~-em ~e pmi~ ~on~ ~:.. ~e paying Agen~ ~ ou~' _. ~ut of ~e gese~ _ ,~e s~e m~rus T' --.;on of ~e ~t~. -~ _. aune~ning me-7--,~iw with ~ apprOp-~ n~cess~,.~aaition~ BonOS ~ "-----liOn or at me uv-~ ~.~ interest ~upOn~ vr~.d ~mish the ~--. ~-L.~, eider upon m~_.as ~d Additionally., couuonS appe~n"~ mare,,?. .... ~d P~ D~,.~ . uonds, ~a ~Y - eider o~uwx v _ a Additional ~ p~ p~i~ BonOS ~ ~ ~c~fiatlon or des ~ . lddifioual Bonn ~ · ~ r~ptiOU pr~ml ~n of mathri~, cc~ifica~ o~ ~ - u~.i~ Bonn o..- - ~ ,~6 u~cip~ o.. a . a~ be by ~ _ __~/includmg -- ~ _. Additional no. ;, ~*~r (13 shall uaw ~ --.,ision fO[ ~c v'Tr - ~ PaVing Agcm u,~ · n~lioations wm~,~." ~.; at have been proVinCe fff,.ch naymcn~ 0) m°"sffa at such times ~ w'__ensation, ~d cxp~:,~ .,~ been paid or ~e w~ a +o be paid -~ eluSiVelY tot ~-~ . ~ ch ~oun~ ~ ~ ~r fees, consp~ _:. ;s made shm~ -aY7 ~ a shall be deemeu · ~ the ~ldo ex. , -~d interost m su ~ afl nocoss~ ~d p ~-;ch such depO*,. · ~ _. Additional ~on- ':-n on ~d pledgo or the r,~'5~ ~.. to thu sa~.'~, ~ Soua~r b~ s~CUr~ ~. ~ kom such mon~ ' vested in Government ObligatiOns, proVtaeu ~' ¢~-es~d, it shah n~ 'L, 5 +o na~unt sotS. - . e m . , · he h~ds of the h~muuder, ~ ~o~ ~d shMl b~ enttue~- r - -;~- of ~ Ci~ al~ b ~ent Obhgauons m.t ~ hoodS, -- a ~c dttccu~- ~-~ all Oov~'" ~ ~-d Addlttonm _.,..~ deposit~ ~' ~..einb~fOre set '~'T' ~ ~r ~e pa~'" ~. been so m~nng m ~.].~su~t to ~ls ae~"-~..t ~ctCOn, wi~ r~~ ' c to time, ~d in one .... a nowcr at ~Y · -~qcd "Admn°"°. reo~m~:., or deposi~d ~ nh- · I have ~ ~'.~- ~ hue bonds (herem.~T~nds or to ~ ~"~ .~. ~.x ~e Ci~ ~ ~:.~ v~iW reV~ ~,_. of ~Y p~tx ~T wlth ~is sccno- ~2~ or issUeS, to au~..a~ for ~Y t~ ~n au~oriZed, ts~k¢ ~c pledged gcve,, or more ~" ,.~ law. in ~Y ~uT' is aonfls, tf ~a ~..- ,..~ ~n ~d pl~e ~; ~ or o~¢r obn~ ~ ]~ ~d secured oy . __a my o~er ou~, or mature on December I of thc yems in which such sh~l be payable no-. ;*h ~e pmi~ BonOS m~ ~ in all ~spe~ (b) ~e p~nClp~ of ~1 Addltion~ Bonds mu~ be sch~ul~ th be paid · ~ -ds sh~l be issued only in accord~ princip~ is sch~utcd to b~ p~d or matte- ~-'~S Additioua~ no- ~ m,crcd unleSS: ~. ~x~S FOR ~olT~O~i~;nds sh~l be ,s~cd or ut--. is not in default ~ to any ~e ~Q~Y; 'es or issue o~ ~ wi~ this ordm~C', ~ .~. CiW Secretly ~ ~'f...u then ou~t~, ~ u~se~c Funu ~ - - __. condltton, ~ --d that u,c --- ordin~CCs authorizing cut ce~ifie~ puU ' en ce~ificae to uj ~ut of ~c l ~-mo~ ~. is n~scd, thc plca~ __ ~ount equal  b ~ mdc?nd t~h s~s a ~ mon~ period ~ a Additional Bo~u~ Y.~ and (ii) 1.10 umeS m,. thc ereatest, - ~ tw~. . issuanC- - ' ci at ~ - uirCmc,,-~ . thc then r - fiscal Y~, or ~ au~Ozizmg ~ ...... ~ ~nual p~m Pi, '-- which such ~uq ~ ,~ d~hve~ of . nuruoscs of Additional BonOS. ' ' I this subsection (b), if there which was . has been an · . (hereinafter n~ff~ ra_effect during all o y increase ra the rates or ti,~ ~ ,,-,crreu to as th~ ,,_ .. r any part of the . -' charges for servia.= ~,~,,: od consult/n~ c--: ,. entire period'q *h .... - ~nnru period fo~ ...L. th~ -ff-~ ~. -'.eVanuas for the en*;~ ~".umcrrarac and ccrt;~..~'~u Panlm accountan. ~~ , h~.caged Revanues ~ ,,;~n, m effect, hut · - oysrem during the entF~"-'~ P. erjod, plus (ii) a SUm ~..m,c~ amount of Pled ,, or m heu of thc ccrti .,,c o.emg calculate entire period. -~ patina Would haw ~- -'-F'/-a~ to thc aggre~,o ged Revenues as bal-~ .!fled Public account--- d ,. uanan increased ro~_~ -....c,s tue actual billin~,o .- ~l~ tue actual "~ or charges had be.- -:.._~o t~o custoraars of ~" "~ ertect during the ! ! (c) Provision shall be raade in the ordinance authonzrag their issuance for incruas' (d) All calculations Ofavera rag the Reserve Fund to the Required Reserve any then proposed Ad~. . ge annual pr/nc/ al· such bonds, e raandatory rede,~-.- c, Principal amount° ~,. o~n. ms; and also in . th thc issuance of · -priori requ/mman =~.,,, o.~-any ~onds which raakmg calculations ts o,,~,~ nc accrued to he raatar ~m~ast bc redeemed priorf~tr "'~ amounts ofprincip~i o~ Sect!on 28. GBNER.4jo COVENANTS reqmred orpcrraitted by law. · The City fi~rth . (0 Parf_~.q.~_O~an,.~ ~ cr covenants and agrees that i- - ~ t?ncd in this Ordin.-~ '..m~lly Perform at ~. -. -Ira and to the A..dthtlonal Bond, o- .~ d., that it wall prora,~-.. - Uthonzrag thc iSsu .... 'e~n~nts, undertakin~. ... , dc~as;.~"*" ,,~a~ it will, at thc t;~- .- mc places and ,~o- to he Prod the Drinci.~ ~ Bonds. and in eo-~ ' a~. d provisions ._~.~_...~u ratu the Intare~, o.~ ~.~-:s and in thc ra~.. .,.,-mar Prescribed i- 'o ~'~'~' o~and intcrc.~ ~~ "'~ and every Parch. any ordinanc. '~: :,~ O~lc~als, and cra~...u ann thc Rascrve F._f "~Paslt or cause to ~ '~ aaa Parity Bon.~ ':'.~and and ""~mamus procandln~s :'_~' ny all legal and e..:._'~:chants and obilgat/o..."~l~tonal Bonds ~"rapctant jurisdicti~"_ "~m. mng spccificallv ~ ,,.,an. ce. or '~". against thc Ci~.. '.f' ~,u~ without -.-, i~ o/ftc/als, and and~. The City is a Creation and ;-- toe State of Texas to ~Y crc, ated and axis ' of thc h~ '~sUancc °fthe said ~-- c.reatc and ~ssuc th. ~ ,~mg home rule city ~ .~ _ ~ .,,~uers and OWne~ .~ '~v~lgatlons has b~- ~ -anty BOnds ~na ,~ .,~*~. '~' me 3tale of ~ ann will be valid and ~-~ amy and effectively t'~'~_ annas; that all act/on'~-u~lY authorized "umreeablc Special o~i~'~'~.:c_n' and that said oblioo~'_~. l~ part for thc dance w~th their bw~hn~e~it of the holdars ~d the tltle tu all the t~ tr~: ~,land~, huildings, struc~- · ~ norasoevcr, that it is .~..u~.o..wners of thc Parit., r~-~-a, lands, buiidin s tufas, and facilities , . (d) ~ The Ci~ ~ .aw~altyexereiscds.. ~-.~cs to thc payment ~.,~s and deraands o" ~' mr the hma~agt?~i!an~oyd, mwts~hTcCh ~Cnnghts. 'o, tueParityBo~.~_~adpersons · ! '. ' ,,u~ and Additional ~P~lor, .to or interfere with th" applies which/fun .... ~.Osed upon it, or th,* o_. pay and dlschar~e o.. ~,r.o. viaed herein, and ~-. ~.~e I!ans hereof, so that tb~'~m. rag. iht by/aw bcco,~ ' o.:~srera, that it will ..... axes, assassrae .~tuch raight or co,.*.~'~ it wall not Creatu o- ~. ~**~ priority of thc lic-~ -,e a lien or charge ,~_ pay all/aWFul c/a/m° eats, and .... s, raaturialraante ~ ~" ~scsamant, or -ko.- *' ,-after or thing wh~.~"~'."na?an's, or ot~ ~. -'*~ manner bc contested in good faith by thc City-; ~' omar hen or ch~-.o ~,~c, and that no s-~°~ 7~'~°y tuc liens herc~,~ "~.' ~len or charge -s'~ anall be re · *,,-u cia/ms whic~ "-ratght or c ' (c) ~era: qrared to §c n~i.~ . o raight be us-.~ OUld be shall C~cc ut~.., ,-~,, so long as thc vali.~;,-- ~ as thc basis of order, all at re ...... ~clantly oparat~'y aaa cff~,~,,~ th,~e thc Parity BOnds or ~,,,. ~ .... ~'~y ot the same shall standard retail pr/cc ^~ .~ Sionaires a~ ~Ystura shall bc allo,.,~ystem good COndit;~- . P id thc City -"~ in *"uS and un a' · Permitted ~!~s o~t of f~nds frora ~- provided shall . -~u, and should the Ci~'~:' r~?awL .and Workln~ ~,.v ~ectlon 23(b) hereoF. ~ources other than ~ ' ~'~Y ut its agencies, · raonth, of the , Unless ,~.~_ ~ raantalities, l '""'~ ~rura surplus Pledged n CSSors, or Amount as required by Section 20 hereoF. 50 II II II II ! II II II ! II ! ! II II II II [ (f) Further Encumbrance. While the Parity Bonds or any Additional Bonds me outstanding and unpaid, the City shall not additionally encumber the Pledged Revenues in any manner, except as permitted in this Ordinance in connection with Additional Bonds, unless said encumbrance is made junior and subordinate in all respects to the liens, pledges, covenants, and agreements of this Ordinance and any ordinance authorizing the issuance of Additional Bonds; but the right of the City to issue revenue bonds payable fi.em a subordinate lien on surplus Pledged Revenues is specifically recognized and retained, as permitted under Section 23(b) hereof). (g) Sale, Lease or Disposal of Pronertv. No part of the System shall be sold, leased, mortgaged, demolished, removed or otherwise disposed of, except as follows: (1) To the extent permitted by law, the City may sell, lease, mortgage, demolish, remove or otherwise dispose of at any time and fi.om time to time any property or faailities constituting part of the System only if (A) the City Council shall determine, as evidenced by a resolution to that effect, such property or faallities are not useful in the operation of the System, or (B) the proceeds of such sale are $250,000 or less, or the City Council shall determine, as evidenced by a resolution to that effeet, the fair market value of the property or facilities exchanged is $250,000 or less, or (C) if such proceeds or fair market value exceed $250,000 the City Council shall determine, as evidenced by a resolution to that effect, that the sale or exchange of such property or facilities will not impair the ability of the City to comply during tho current or any future fiscal year with the covenant of the City set forth in Section 28(i) of this Ordinance. The proceeds of any such sale or exchange not used to acquire other property necessary or desirable for the sale or efficient operation of the System shall forthwith, at the option of the City, (i) to be used to redeem or purchase Parity Bonds or Additional Bonds, (ii) otherwise be used to provide for the payment of Parity Bonds or Additional Bonds or (iii) be used for any other lawful purpose. (2) To the extent permitted by law, the City may lease or make contracts or grant licenses for the operation of, or make arrangements for the use of, or grant easements or other rights with respect to, any part of the System, provided that any such lease, contract, license, arrangement, easement or right (A) does not impede the operation of the System by the City and (B) does not in any manner impair or adversely affect the rights or security of the owners of the Parity Bonds or Additional Bonds under this Ordinance; and provided, further, that if the depreciated cost of the property to be covered by any such lease, contract, license, arrangement, easement or other right is in excess of $500,000, the City Council shall determine, as evidenced by a resolution to that effect, that the action of the City with respect thereto does not result in a breaab of the conditions under this clause (2). Any payments received by the City under or in connection with any such lease, contract, license, arrangement, easement or right in respect of the System or any part thereof shall constitute Gross Rcvenuas. (h) Insurance. (I) The City shall cause to bo insured such parts of thc System as would usually be insured by corporations operating like properties, with a responsible insurance company or companies, against risks, aeeidents, or casualties against which and to the extent insurance is usually carried by corporations operating like properties, including, to the extent reasonably obtainable, fire and extended coveragn insurance, insurance against damage by floods, and use and occupancy inanranee. Public liability and property damage inanranee also shall be carried unless the City Attorney gives a written opinion to the effect that the City is not liable for claims which would be protected by such insurance. Ail insanmce premiums shall be paid as an expansa of operation of the System. At any time while any contractor engaged in construction work shall be fully responsible therefor, the City shall not be required to carry insurance on the work being constructed if the contractor is required to carry appropriate insurance. All such policies shall be open to the inspection of the Bondholders and their representatives at all reasonable times. Upon the happening of any loss or damage covered by insurance from one or more of said eanses, the City shall make due proof of loss and shall do all things necessary or desirable to eanse the insuring companies to make payment in full directly to the City. The proceeds of insurance covering such property, together with any other funds necessa~ and available for such purpose, shall be used forthwith by the City for repairing the property damaged or replacing the property destroyed; provided, however, that if said insurance proceeds and other funds are insufficient for such purpose, then said insurance proceeds pertaining to the System shall be deposited in a special and separate trust fund, at an official depository of the City, to be designated the Insurance Account. The Insurance Account shall be held until such time as other funds become available which, together with the Insurance Account, will be sufficient to make the repairs or replacements originally required. (2) Thc annual audit hereinat%r required may contain a section commenting on whether or not thc City has complied with the requirements of this Seetian with respect to the maintcoanee of insurance, and shall state whether or not all insurance premiums upon the insurance policies to which reference is made have been paid. (i) Annual Budget and Rate Covenant. The City shall prepare, prior to the beginning of each fiscal year, an annual budget, in accordance with law, reflecting an estimate of cash receipts and disbursements for the ensuing fiscal year in sufficient detail to indicate the probable Gross Revenues and Pledged Revenues for such fiscal year. The City shall fix, establish, maintain, and anlleet, such rates, charges, and fees for the use and availability of the System at all times as are necessary (1) to produce Gross Revenues sufficient, together with any other Pledged Revenues, to pay all current operation and maintenance expenses of the System, and (2) to produce an amount of PIedged Revenues during each fiscal year at least equal to the greater of 1.25 times the average annual principal and interest requirements of all then outstanding Parity Bonds and Additional Bonds or 1.25 times the succeeding fiscal year's principal and interest requirements of all then outstanding Parity Bonds and Additional Bonds. 51 I ~j) Records. The City shall keep proper books of record and account in which full, tree, proper, and correct entries will be made of all dealings, activities, and transactions relating to the System, the Pledged Revenues, and the Funds created pursuant to this Ordinance, and all books, documents, and vouchers relating thereto shall at all reasonable times be made available for inspection upon request of any Bondholder, provided, that all books, documents, and Vouchers relating to the City's electric system shall be made available for inspection only to thc extent required by law, including, without limitation, the provisions of Section 552.133 of the Texas Government Code. To the extent consistent with the provisions of this Ordinance, the City shall keep its books and records in a manner conforming to standard accounting practices as usually would be followed by private corporations owning and operating a similar System, with appropriate recognition being given to essential differences between municipal and corporate accounting practices. (k) Audits. After the close of each fiscal year while any of thc Parity Bonds or any Additional Bonds are outstanding, an audit will be made of the books and accounts relating to thc System and the Pledged Revenues by an independent certified public accountant or an independent firm of certified public accountants. As soon as practicable afler the close of anch such year, and when said audit has been completed and made available to thc City, a copy of such audit for the preceding year shall be mailed to thc Municipal Advisory Council of Texas, to each paying agent for any bonds payable from Pledged Revenues, and to any Bondholders who shall so mquast in writing. Thc annual audit reports shall be open to thc inspection of thc Bondholders and their agents and representatives at all reasonable times. (I) Governmental A~cncies. It will comply with all of thc terms and conditions of any and all franchises, permits, and authorizations applicable to or necessary with respect to thc System, and which have been obtained from any governmental agency; and thc City has or will obtain and keep in full force and effect all franchises, permits, authorization, and other requimmants applicable to or necessary with respect to thc acquisition, construction, equipment, operation, and maintenance of thc System. (m) No Comoetition. It will not operate, or grant any franchise or, to the extent it legally may, permit the acquisition, construction, or operation of, any facilities which would be in competition with the System, and to the extent that it legally may, the City will prohibit any such competing facilities. (n) No Arbitrane. The City covenants to and with the purchasers of the Parity Bonds and any Additional Bonds that no use will be made of the proceeds of any of such bonds at any time throughout the term of any of such bonds which, if such use had been reasonably expected on the date of delivery of any of anch bonds to and payment therefor by the purchasem, would have caused any of such bonds to be arbitrage bonds within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended (the "Code"), or any mgnlations or rulings pertaining thereto; and by this covenant the City is obligated to comply with the requirements of the aforesaid Code and all applicable and pertinent Department of the Treasury regulations relating to arbitrage bonds. The City further covenants that the proceeds of all such bonds will not otherwise be used directly or indirectly so as to cause all or any part of such bonds to be or become arbitrage bonds within the meaning of the aforesaid Code, or any regulations pertaining thereto. Section 29. AMENDMENT OF ORDINANCE. (a) The holders or owanm of Parity Bonds and Additional Bonds aggregating in principal amount 51% of the aggregate principal amount of then outstanding Parity Bonds and Additional Bonds shall have the right from time to time to approve any amendment to this Ordinance which may be deemed necessary or desirable by the City, provided, however, that nothing herein contained shall permit or be construed to permit the amendment of the terms and conditions in this Ordinance or in the Parity Bonds or Additional Bonds so as to: (1) Make any change in the maturity of the outstanding Parity Bonds or Additional Bonds; (2) Reduce the rate of interest borne by any of the outstanding Parity Bonds or Additional Bonds; (3) Reduce the amount of the principal payable on the outstanding Parity Bands or Additional Bonds; (4) Modify the terms of payment of principal of or interest rm the outstsnding Parity Bonds or Additional Bands, or impose any conditions with respect to such payment; (5) Affect the rights of the holders or owners of less than all of the Parity Bonds and Additional Bonds then outstanding; (6) Change the minimum percentage of the principal amount of Parity Bonds and Additional Bonds necessary for consent to such amendment. I · I I I I I I ! I i I I I I I (b) If at any time the City shall desire to amend the Ordinance under this Section, the City shall cause notice of the proposed amendment to be published in a financial publication of general circulation in The City of New York, New York, once during each calendar week for at least two successive calendar weeks. Such notice shall briefly set forth the nature of the proposed amendment and shall state that a copy thereof is on file at the principal office of the Paying Agents for inspection by all holders or owners of Parity Bonds and Additional Bonds. Such publication is not required, however, if notice in writing is given to each holder or owner of Parity Bonds and Additional Bonds. 52 I I I I I I I I I I I I I I I I I I I I I I (c) Whenever at any time not less than Other sarv/ce of written notice the City shthail7 days, and within one year, from · · - receive an instrument or instruments executed by the holders or OWners of at least P posed amandmc~S:nr,~ed ~ sa,d notice ~tid°nw;liBc:ns/:cithtifi:nal~utstanfung, which instrument or' sebstanttally the form of tho copy tho I th the Paying Aeentn ,,- ~. Y consent to and an ..... msh'Umants substantially the same form. ~ -, a,e t~lty Council may ..... r~-,ove anon amendment (d) Upon the Passage of any amandatory ordinance ars b~e .amended in accordance with s P ~ant to the prov~stons of this Section, this Ordin~-,- vrdmance of the City, and alt t~, ~- u.,c,h amendatory ordinance -e -elects or oWners o~,~ - ~.'~.u. me respective rights d ' . Bonds and Additional Bonds shall thereal~er' ' -~,~c s,~ut be dcemed to determined, exercised, and cnforcc~ hcreundar, subject in all respects to such ..... nm ~ands and all future Pa~t~ (e) Any consent given by the holder or oWner cfa Parity shall bc irr¢¥ocab/c for a pcr~od of one year Bond or Additional Bond pursuant to sh~.l be eu~closive and binding .po. all ~m the d~e of ~e.rst P.hlieatio. the Provisioos o~ this period Such annscnt may bc rcvoked at any time of thc noticc provided for in this Scetion. and holders or owners of thc Same Pari'-- Bo - Section or oWner who gave s.ch oonse.- .er oney the date of the Bond d. ng aneh reVOCation shall not he effective if ~c hold.ers or owners of 51% in. . ~tsucn notice by thc ho/dar Bonds and Additional Bonds as in ' ' ' ' ', oy a successor in title by filing notice thereof with the paying agents and the City, but such ---, umsanted to, and approved t~ form, by any bondholder and the amount a~.d numbers of such bearer Parity Bonds or · · holding same, may be proved by the affidavit of the person claimin~ t ' Additional Ben~ (f) For the purpose of this Section, the fact of the holding of Parity Bonds or Additional Bonds which arc in bearer, coupon ~ o ce such holder or o ...... us and the date of their contrary is sarve~~ certificate. The City ma,, ~-~'- '~'~.~ canker, or other deno~;*~ "~ ~uJa~ at the date therein upon the City. ~ -~ ~-uncmslveiy asSUme *~.~, T ~..,,ry, ~e Parity Bond~ ~.~ - '-~nUOned such ,,at anon OWnershin ,..~o:_ .~. ,~u .'~dditinnal Bonito The OWnership of all registered Parity Bonds ..... the registration books kept by the registrar therefor, and Additional Bonds shall be determined from Section 30. DAMAGED, MUTiLA,,~.~ anY outstanding Bond is damaeed t/z.~., LOST, STOLEN, OR a new bond of the same Prfucipal destroyed, the Paying Ar, e~a) e~' In the event stolen, or destroyed Bond, in replacement for such Bond in the manner hereinafrar provic"'ed.t/R'~a'°u ,u ana, cause to be printed, amount, maturity, and interest rate, as the damaged, mutilated, lost, (b) ~nt B the --olStered owner thereof to the ~l~f~°,,r: reP/.acement of damaged, muti~ Bond, the registered oWner an I i · . - -~.,mg ~gent/Registrar In ~-. .,~,~u, test, stolen, or destr,,,,~.~ ,~ - security or indemnity as mayPo.P_~ y ng .for a replacement bond o~,o- ,~ . _ · - ,-~ery case of loss t~.~,~ ~'"~ -onns Also. in every case of loss, thet[ . · -~-, or destruction Cfa Agent/Registrar evidence to .~- '~ or. destruction of a Bond. th~ .~ . - . from any loss or ~ ...... t/Registrar such th- -~.,,ng ~gant/Registrer for ~o.-'---,~" .m every case of (c) No Default Occurred. Notwithstanding the foregoing provisions of this Section, in the event any such Bond shall have .matured, and no default has occurred which is then continuing in the payment of the principal of, redcm lion re ' . damaged or mutilated Bond) instead of issuing a replac~mant Bond, provided security or indemnity is furnished as above (d) ~me ch~~?.ndf. Prior to the s o~ this Scetion b,, -.:~- ~ _ er expenses in connection tl,~.~,n,;g, ~gant/Rcgistrar shall ,Constitute a contractual obligation of the Issuer Whether or not the test, stolen .. ~-tue ol-tho fact that any Bond is lo~'~,~w~th' Every replacement ce enforceable by anyone, and shall be entitled to all the benefits o .... , or destroyed Bond she- ~- ~ other Bonds duly issued ~-, ~oten, or destroyed shall under this Ordinance. · [ms Ordinance equally and ~,r,,~ _cc tannd at any time, or ' ~"-'~ tt~nately with any and all (e) ~cemant Bonds Ordinate hs all -- .... ~ ~acernant Bonds. . In accordance wsth Chapter 1201, Tex~ Govarnmen. t Code, this Sect on of this .governing body of the .Issuer or any other body or person, an constitute authority for the issuance of any such replacement bond without necessity of further action by the Other Bonds. d in Scot on 6~d~ o~- .... all authenticate ann ,~, ey authorized and on and exchange for 53 sin from any action Which would ..... Tho Issuer covenants.to [cfr_ ~oscribcd in section 10~ of ~c I . -,.~-Am.lNG TAX-BXEMFlt~%nt of ~o Bonds ~ obhgatm~gf federal income t~at'o"- m interest on wh,cn ,s nu en~m ~ follows onds (less ~ounm deposited to a -~ .ha¢ no mom ~ ~ ~ -,, ~n dofin~ m secUu- -~ y -; -'or wi~ respect to . . ~b~ ~v ~tion to ~sutu ~ ,,~-ivate business us~ , --. ~- -et received by t~e xsau~ 'a, ~.,~ or indirectlY, (a) to .~ ~. , ~-- used for ~Y ~' - .... untS, whether ~-" . , .__ .~eement, utter.,, ~ r*o-';~.o~ntoftheproceeu~m'., ,~s ofthis oram~ . ~ ~u.v-.?~. use do no~ under me '-'~L.. 10 nercant of the acer private ~ustn~?~ ., .~ ~avment of more u,~, · ,, aescfibed in subsection (a) her~ 141(b)(2) of the code, - .~at ~e ,,private business use ~e ~nd, ff ~Y) ~an the ~oum ..... sure that m thc event --~.,nts deposited into a rose,, the ~. +~ ~ ~y actton to ~ ~.-~ n~nds (hess ~ . * "related" ~d not ,,dispropo~ionate", within (bi ~ - - c(nt of ~c proceeds ox m~ ~ exceeds a per . ,'~rlvatc busineSS usc" which ts nf 5 percent ts used fo~ ~ ~i~ to ~o governmental usc, mc~ing of scctmn ~'~x ' ~ount which is ~catCr than thc lesser of $5,000,000, or 5 percent of thc or indirectly used to fin~CC loans (c) to t~e ~Y action to ~surc ~to::mmantal unim, in con~avantion of section 14l(c)oftheCode; proceeds of thc Bonds (less ~oun~ deposited into a rese~C ~nd. if ~Y) is direCtly . aetiviW to personS, o~Cr ~ state or local . . ~ ~tion which would o~c~isc rcsult in ~c Bonds being treated ~ ,.prorate (e) to rein ~om ~ing ~Y action that would result in ~e Bonds being ,,federally gu~teed" w~thtn the me~mg of · · ti to acquire or to replace ~nds section 149(b) of~e Code; ~-~ ~nds directly or md?~ Y'-~finn 148(b)(2) of the Code) (0 to re.mn ~ .... .-. or indirectly, to acqmre ~v ~e Be'rids, o~er ~ inve~ent P~v~' '~ ac_ ~hich were used, a~e~.~,.. ~-her vidd over ~e te~ ~- or less until such proceeds which produ~S a matenan~ ,"~' ~ · (1) proceeds of the Bonds invested for a m~onable tempor~ permd of 3 ye~S ~e needed for the pu~OSO for which ~e Bonds ~e issued, (2) ~oun~ invoked in a bona fide debt so.ice ~nd, wi~in ~ me~ing of section 1.148-1(b) of the · ~d ~ extant such ~oun~ do Tre~u~ Re. Introns, . .... ~ or ~placement ~n~ t° ~ the issue price) of the {3~ ~oun~ depostted ~ ~ated ufincipal ~oum ko-, - ~t exceed 10 percent ox u Bond, s; -~s~ict ~ use of tho proceeds of ~ Bonds or ~oun~ ~eated ~ proceeds of ~ Bonds, ~ may be requirements of section 148 of the code (relatlng to (g) to othemme '~ Bonds do not o~emise ~n~vene the to ~e extent applicable, section 149(d) of neceSS~, so ~at ~ arbi~age). Section 149(g) of the Code (relating to hedge bonds), ...... in~ to ~v~CC re~ndmgs); ~d .~ e~ p~fiod (beginning °n the d:~ °~:~:t~ 148(~ of the Code ~d to pay to tho Umted States of ~enc~ not later that 60 days ~er the Bonds have been paid in - - o.~*~s of ~erica at le~t once -- .~f the ,'ExceSs E~m~, {h~ to pay to the Umtea ~[~ ~ at le~t equ~ to 90 percent .- · ~cess Earnings under section 148(0 of the Code ~ithe Bonds) ~ ~ount u, .... :d to be paid ~ a testat o~ ~' ~11, 100 percent of the amount then requir~ . ' ' ' " .....' ~lin~ promulgated by the U.S. For pu~OSeS o~ ~,,m e~ulatmns ~fl, m m . ~ner nromulgated which modi~, or defined in the '~re~--, R ~ date of issuance of the BondS. Code ~d ~Y regulations or rounded bonds expended prior to tho compli~ce wi~ tho ,--:~s or ~lmgs ~e here~- ,~...,:,~ ~ covenant contained contained herein intended to assure n ~e event that regmu,,~- be requi~d to comply ~'~:[~ ~ot adverSelY affect ~ ~ ~u~ ~ursu~t ~ereto. I .~ ~nds the Issuer wall not --:~ed bond counsm, ~'"" . Code. In ~e event that regulations De a~mant oxme ...... e as applicable to ute ~ ~:~:~ of nation~ly-reco~"'~ P -~ ~rovislons of the Cod V .... *~ com~lY, in me op- exp~ v - '"at such muu, ........ ~e Bonds under sectm9 103 ~able to me BondS, me Issuer a~ees herein to ~ extent ~,~ . ...... alien of interest ~ ~=' , ~nlremants which ~e uvv ' le in the opinion of nationallY- -"onfromfeder~mcmn~;-himuose addm°natre~----. ~nfl re~onably posmb ,.~ ~nndsundet secrion 103 of the ex~mp~, ~ hereafter promulgated w,, · dditional requi~ments to .the ~xten~.~e~s~~ t~arion of interest on u,e ~__ documents, or ~hngs m~ ---- Mayor to execute ~Y to comply w~th the a ~ to ~resorVe the oxempUon ~om recognized bond counSe,, v issuer hereby authorizes ~d directs the uer ~hich may be permiRed by the In ~her~ce of such intention, the - , *~s on behalf of the lss ' ~ -omnlv with the coronets - ~-~ ~d to make such cleero- ~ The Issuer coronets ~ the Code. · b the cc~ificatcS or rcp~S rs?gg~dth~oU~OSc for thc ,ssuanCe of the ~onu, contained in this section after dcfe~ancc of thc Bonds. I I I I I I I I i I I I I I I I 1 I I I I ! I I I I I I I I I I I I ! I In order to facilitate compliance with the above covenant (h), a "Rebate Fund" is hereby established by the Issuer for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation, the owners of the Bonds. Thc Rebate Fund is established for tho additional purpose of compliance with Section 148 of the Code. Section 32. ALLOCATION OF, AND LIMITATION ON, EXPENDITURES FOR THE PROJECT. The Issuer covenants to account for the expenditure of sale proceeds and investment earnings to be used for the purposes described in Section I of this Ordinance (the "Project") on its books and records in accordance with the requirements of the Internal Revenue Code. The Issuer recognizes that in order for the proceeds to be considered used for the reimbursement of costs, the proceeds must be allocated to expenditures within 18 months of the later of the date that (1) the expenditure is made, or (2) the Project is completed; but in no event later than three years after the date on which the original expenditure is paid. The foregoing notwithstanding, the Issuer recognizes that in order for proceeds to be expended under the Internal Revenue Code, the sale proceeds or investment earnings must be expended no more than 60 days al~er the earlier of (1) the fifth anniversary of the delivery of the Bonds, or (2) tho date the Bands are retired. The Issuer agrees to obtain the advice of nationally-recognized bond counsel if such expenditure fails to comply with the foregoing to assure that such expenditure will not adversely affect the tax- exempt status of the Bonds. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. Section 33. DISPOSITION OF PROJECT. The Issuer covenants that the property constituting the Project will not be sold or otherwiso disposed in a transaction resulting in thc receipt by the Issuer of cash or other eompansatinn, unless the Issuer obtains an opinion of nationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. For purposes of the foregoing, the portion of the property comprising personal property and disposed of in the ordinary course shall not be treated as a U'ansaction resulting in the receipt of cash or other compensation. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the exeindability for federal income tax purposes from gross income of the interest. Section 34. INTEREST EARNINGS ON BOND PROCEEDS. Interest earnings derived from the investment of proceeds from the sale of the Initial Bonds, other than proceeds deposited in the Interest and Sinking Fund and the Reserve Fund, shall be used along with other available proceods for improving tho System; provided that al~er ¢omplction of the improvements if any of such interest earnings remain on hand, such interest earnings shall be deposited in the Interest and Sinking Fund. It is further provided, however, that any interest earnings on bond proc~ads which are required to be rebated to the United States of America pursuant to the Covenants Regarding Tex-Exemptinn herein so as to prevent the Bonds from being arbitrage bonds shall be so rebated and not considered as interest earnings for the purposes of this Ordinance. 55 I TAXMATTERS OPINION... On the date of initial delivery of thc Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof, (l) interest on the Bonds will be excludable from the "gross income" of the holders thereof and (2) the Bonds will not be treated as "private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (thc "Code"). Except as stated above, Bond Counsel will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Bonds. See Appendix C - Form of Bond Counsel's Opinion. In rendering its opinion, Bond Counsel will rely upon (a) ce~ain information and representations of the City, including information and representations contained in the City's federal tax certificate, (b) covenants of the City contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the property financed or refinanced therewith. Failure of the City to comply with these representations or covenants could cause the interest on thc Bonds to become includable in gross income retroactively to the date of issuance of the Bonds. The Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that such Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of Existing Law and the representations and covenants of the City described above. No ruling has been sought from the Internal Revenue Service (the "Service") with respect to the matters addressed in the opinion of Bond Counsel, and no assurance can be given that the Service would agree with thc opinion of Bond Counsel, if the tax-exempt status of the interest on the Bonds were the subject of an audit. If an audit is commenced, under current procedures the Service is likely to treat the City as the "taxpayer," and the owners of the Bonds would have no right to participate in the audit process. In responding to or defending an audit of the tax- exempt status of the interest on the Bonds, the City may have different or conflicting interests fi`om the owners of the Bonds. FEDERAL INCOME TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT, The initial public offering price to be paid for one or more maturities of the Bonds (the "Original Issue Discount Bonds") may be less than the principal amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year. In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on thc bunds lass the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under existing law, any owner who has purchased such Original Issue Discount Bond in the initial public offering such initial owner is entitled to exclude fi`om gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequanees, see the discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and thc accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon thc redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) thc sum of thc issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on thc basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according tn rules which differ from those described above. All owners of Original Issue Discount Bonds should consalt their own tax advisors with respect to the determination for federal, state and local income tax purposes of interest accrued upon redemption, sale or ether disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. 56 I I I I I I I I I I I I I I I I I I I I I I I I I I I I i I I I I I I I I COLLATERAl, FEDERAL INCOME TAX CONSEQUENCES... The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regnlations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed earned income credit, owners of an interest in a FASIT, certain S corpomtians with Subchapter C earnings and profits and taxpayers who may be deemed to have incurred or continued indebtedness to pumhase tax-exempt obligations. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM ~ PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE SERIES 2003 BONDS. Interest on the Bonds will bc includable as an edjustmant for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Section 55 of the Code imposes a tax equal to 20 percent for corporations, or 26 percent for non corporate taxpayers (28 percent for taxable excess exceeding $175,000), of the taxpayer's "alternative minimum taxable income," if the amount of such alternative minimum tax is greater than the taxpayer's regular income tax for the taxable year. Interest on the Bonds may be subject to the "branch profits tax" imposed by section 884 of the Code on the effectively-connected earnings and profits ora foreign corporation doing business in the United States. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bends, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tux-axempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the ftxed maturity of such obligation is equal to or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds, although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price or, in the case cfa bond ssued at an original issue ~acerued original issue discount). " . ,,. discount, the "revised issue price" (i.e., the issue price plus The accrued market dlecount la the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. STATE, LOCAL AND FOREIGN TAXES... Investors should consult their own tax advisors concerning thc tax implications of thc purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. OTHER INFORMATION RATING~ The presently outstanding revenue debt of the City is rated "Al" by Moody's and "A+" by S&P. The City also has issues outstanding which are rated "Aaa" by Moody's and "AAA" by S&P through insurance by various commercial insurance companies. Applications for contract ratings on this issue have been made to Moody's and S&P. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies, if in the judgmant of either or both companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Bonds. The Texas Pub lc Utthtles Regu atory Act ( PURA ) provides that munanpaltuas, such as the City, that operate electric utilities may exempt information or records that relate to the electric utility from the requirements of the State's open records act, if the information or records are reasonably related to a competitive matter, and without regard to whether the municipally owned utility has adopted customer choice or serves in a multiply certificated service area. PUPA defines such protected information to include commercial information that the municipality believes would, if disclosed, give advantage to competitors or prospective competitors. In applying for ratings on the Bonds, the City has provided certain information that it deems to be protected from public disclosure under PUPA to the Rating Agencies. Such information has been provided under the terms of confidentiality agreements. 57 LITIGATION It is the opinion of the City Attorney and City Staff that there is no pending litigation against the City that would have a material adverse financial impact upon the City or its operations. BEGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sole of thc Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided therednder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have thc Bonds been qualified under thc securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS nN~ ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 nfthe Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and am legal and authorized investments for insurance companies, fiduciaries, and trasteas, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State nf Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigaed a rating of "A" or its equivalent as to investment quality by a national rating agency. See "OTHER INFORMATION - Ratings" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at capital of one million dollars or more, and savings and loan associations. The Bonds arc eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the City has been made of the laws in other states to determine whether the Bonds are legal mvestments for venous ~nst tutmns m those states. LEGAL OPINIONS AND No-LITIGATION CERTIFICATE The City will furnish a complete transaript of prnceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney Oeneral of Texas approving the Initial Bond and Initial Certificate and to the effect that the Bonds are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Bonds will. be excludable from gross income for federal income tax purposes under Section 103(a) of the Code, subject to the matters described under "Tax Matters" herein, including the alternative minimum tax on corporations. The customary closing papers, including a certificate to the effect that no litigation of any natam has been filed or is then pending to restrain the issuance and delivery of the Bonds, or which would affect the provision made for their payment or security, or in any manner questioning the validity of said Bonds will also be furnished. Its capacity as Bond Counsel, McCall, parkhumt & Horton L.L.P. has reviewed the information describing the Bonds in the Official Statement to verify that such description conforms to the provisions of the Ordinance. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent on the sale and delivery nffue Bonds. McCall, parkhurst & Horton L.L.P. has also served as disclosure counsel to the City for the limited purpose of reviewing the information under the captions "The Electric System," "The Water System" and "The Wastewater System." In connection with the issuance of the Bonds, McCall, parkhurst & Hortun L.L.P. represents only the City. The legal opinion will accompany the Bonds deposited with DTC or will be printed on the Bonds in the event of the discontinuance of the Book-Entry-Only System. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction, nor does thc rendering of an opinion guarantee the outcome of any legal dispute that may arise out nfthe transaction. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The financial data and other information contained herein have been obtained from City records, audited financial statements and ether sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Preliminary Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further infunnation. Reference is mode to original documents in all respects. 58 i I I i I I I I I I I I I I I I I I I I I I I I CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to cartain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. ANNUAL REPORTS, . . The City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Preliminary Official Statement under Tables numbered I through 10, BI and in Appendix C. The City will update and provide this information within six months after thc end of each fiscal year ending in or afler 2003. The City will provide the updated information to each nationally recognized municipal securities information repository ('~NRMSIR') and to any state information depository ("SID") that is designated by the State of Texas and approved by the State of Texas and approved by the staffofthe United States Securities and Exchange Commission (thc "SEC"). I I The City may provide updated information in full text or may incorporate by reference certain other publicly available doeumants, as permitted by SEC Rule 15e2-12. The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the City will provide unaudited financial statements by the required time and audited finanalai statements when and if audited such financial statements become available. Any such financial statements will be prepared in aceordanee with the accounting principles described in Appendix B or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. I I I I i I I I The City's current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify each NRMSIR and thc SID of the change. The Municipal Advisory Council of Texas has been designated by the State of Texas and approved by the SEC staff as a qualified SID. The address of the Municipal Advisory Council is 600 West 8th Street, P. O. Box 2177, Austin, Texas 78768- 2177, and its telephone number is 512/476-6947. MATERIAL EVENT NOTICES... The City will also provide timely notices of certain events to certain information vendors. The City will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (I) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (I I) rating changes. (Neither the Bonds nor the Ordinance make any provision for liquidity enhancement.) In addition, thc City will provide timely notice of any failure by the City to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports." The City will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemaking Board ("MSRB"). AVAIlaBILITY OF INFORMATION FROM NRMSIRs ANt) SID... The City has agreed to provide the foregoing information only to NRMSIRs and the SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. LIMITATIONS AND AMENDMENTS... The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the City to comply with its agreement. I ! I The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully 59 1 purchasing or selling Bonds in the primary offering of the Bonds. If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of finanaial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS . . . The City has complied in ail material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. I I FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in eormection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. First Southwest Company may submit a bid for the Bonds, either independently or as a member of a syndicate organized to submit a bid for the Bonds. First Southwest Company, in its capacity as Financial Advisor, has relied on the opinion of Bond Counsel and has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future aetioas taken by any legislative or jmiieial bodies. The Financial Advisor has agreed to sell to the City the Federal Securities for deposit into the Escrow Fund in connection with the refunding. In the normal course of business, the Financial Advisor may also from time to time sell investoaent securities to the City for the investment of bond proceeds or other funds of the City upon the request of the City. The Financial Advisor to the City has provided the following sentence for inclusion in this Preliminary Official Statement. The Financial Advisor has reviewed the information in this Preliminary Official Statement in aecordanco with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transantion, but the Financial Advisor does not guarantee the accuracy or completeness of such information. VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS I I I I I Thc arithmetical accuracy of certain computations included in the schedules provided by First Southwest Company on behalf of the City relating to computation of forecasted receipts of principal and interest on thc Federal Securities and the forecasted payments of principal and interest to redeem the Refunded Bonds were verified by Grant Thornton, LLP, certified public accountants. Such computations were based solely on assumptions and information supplied by First Southwest Company on behalf of the City. Grant Thornton, LLP has restricted its procedures to verifying tho arithmetical accuracy of ecflain computations and has not made any study or evaluation of the assumptions and information on which the anmputations are based and, acanrdingiy, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. INITIAL ~URCHASER After requesting competitive bids for the Bonds, the City accepted the bid of (the "Initial Purchaser") to purchase the Bonds at the interest rates shown on the cover page of the Official Statement at a price of par plus a cash premium of $1,984,800. The Purchaser(s) can give no assurance that any trading market will be developed for the Bonds after their sale by the City to the Initial Purchaser. The City has no control over the prine at which the Bonds are subsequently sold and the initial yield at which the Bonds will be priced and reoffered will be established by and will be the responsibility of the Initial Purchaser FORWARD-LOOKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date hgreof, and the City assumes no obligation to update any such forward-looking statements. The City's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economin, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economle, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. 60 I I I I I I I I I I I I I I I I I I I i I I I I I I I I I I CERTIFICATION OF THE OFFICIAL STATEMENT At the time of payment for and delivery of the Bonds, the City will furnish a certificate, executed by proper officers, acting in their official capacity, to tho effect that to tho best of their knowledge and belief: (a) tho descriptions and statements of or pertaining to the City contained in its Official Statement, and any addenda, supplement or amendment thereto, on the date of such Official Statement, on the date of sale of said Bonds and the acceptance of the best bid therefor, and on the date of the del!very, were and are true and correct in all material respects; (b) insofar as the City and its affairs, including its financial affairs, are concerned, such Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) insofar as the descriptions and statements, including financial data, of or pertaining to entities, other than the City, and their activities contained in such Official Statement are concerned, such statements and data have been obtained from sources which the City believes to be reliable and the City has no reason to believe that they are untrue in any material respect; and (d) there has been no material adverse change in the financial condition of the City since the date of the last audited financial statements of the City. The Ordinance authorizing the issuance of the Bonds will also approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Bonds by the Purchaser. AI'I~ST: EULINE BROCK Mayor City of Denton, Texas JENNwER WALTERS City Secretary City of Danton, Tcxas 61 THIS PAGE LEFT BLANK INTENTIONALLY I I I I I ! I I i I I I I I I I I I I I I I I I I I I I I ! '1 I I I I I ! I SCHEDULE OF REFUNDED BONDS* Original Dated Date 6/1/1993 Utility System Revenue Refunding Bends, Series 1993-A Principal Principal Original Interest Amount Amount Maturit~ Pate Outstanding Refunded 12/I/2003 5.00% $ 2,530,000 $ 2,530,000 12/1/2004 5.10°/$ 2,465,000 2,465,000 12/1/2005 5.25% 2,355,000 2,355,000 12/1/2006 5.30% 1,195,000 1,195,000 12/1/2007 5.40% 1,230,000 1,230,000 12/1/2008 5.40% 1,020,000 1,020,000 12/1/2009 5.40% 810,000 810,000 Thc 2003 - 2009 maturities will be redeemed prior to original maturity on June 1, 2003 at par. * Preliminmy, subject to change. Schedule I THIS PAGE LEFT BLANK INTENTIONALLY I I I I I I ! I I I ! I I I I I I I I I I I ! I I I I I I I I I I I I I I ! APPENDIX A GENERAL INFORMATION REGARDING THE CITY LOCATION . . . The City of Denton is located in the northern portion of the Dallas/Fort Worth Consolidated Statistical Area (CSMA). The City is a part of the Dallas/Fort Worth Metroplex, and is situated at the apex of a triangle based by Dallas (38 miles to the southeast) and Fort Worth (36 miles to the southwest). The City has excellent access to and from all parts of the ECONOMY... Denton is in the midst of a rich agricultural and livestock area; The hub city of Texas' new "Land of Lakes" region, which provides Denton and neighboring cities with abundant water for municipal, industrial and recreational purposes; One of the three major university centers in Texas; The home of diversified industrial interests; The site of the Nation's first underground Control Center of the Office of Emergency Planning and Office of Civil and Defense Mobilization; One of the key cities in the economically significant Dallas Consolidated Metropolitan Area. ECONOMIC I~JTURE... The fiscal year 2001-2002 brought exciting news in economic development. Listed below are just a few of the highlights. Major Employer & Industrial News · Peterbilt's parent company PACCAR expanded their regional headquarters in Denton. The 31,000 square foot facility was completed in April. About 40 employees from the PACCAR financial office in Las Colinas were relocated to the regional office. The expansion also included 65 parking spaces in an underground parking garage, and guest rooms for visitors and corporate auditors. · A Peterbilt supplier, Alcoa, opened a 30,000 square foot facility in north Denton. The plant provides tire and wheel assembly and storage for "just-in-time" delivery to Peterbilt. · FEMA completed and occupied its new 82,000 square foot facility on Karina St. The new facility consolidated several office and call center operations at various locations around Denton. Sally Beauty Company announced its plans to stay in Denton and expand at their current location. The beauty supply distributor has had its international headquarters in Denton since 1982. To accommodate the tremendous growth of the company, officials plan to annvert warehouse space into a 2-story office building. This would increase the company's square footage fi.om 40,000 square feet to 100,000 square feet. Conesco Doka Ltd., an international concrete supplier, announced that it would open a distribution facility in Denton. The company purchased 9 acres in north Denton and will construct a 10,000 square foot distribution center. A~er considering several other Metroplex locations, Denton was chosen. The Denton location will create 25 new jobs. Denton Community Hospital (DCH) today announced plans to build a new 272,538 square foot, $100 million hospital in Denton. The hospital will be located on 35 acres that fi.ont 1-35, adjacent to the current 11-acre DCH campus on Bonnie Brae. Groundbreaking is projected to take place in late summer 2003. North Denton is proving to be a development focus · Early summer brought the announcement of Clear Creek Ranch, located between FM 2164 and Bonnie Brae. Upon completion this will be a 750-aare mixed-use development complete with 1500 homes, 600 apartments, retail development, hiking and biking trails and schools. · Prominence Square, a 112 acre housing development located in the NW corner of HWY 377 and Loop 288 also announced in Summer of 2002. The Denton School District and the City of Denton have partnered on an aquatic center to be called Waterworks Park. The indoor natatorium will include a competition pool plus a warm water therapy pool for swim lessons, water aerobics and physical therapy yeas-round. The outdoor portion of the park will include 2 large slides, a children's play pool and a "lazy river" feature. Construction is currently underway. · In August of 2002 the University of North Texas officially opened the LINT Research Park. A-1 I I I I I I I I I I i I I I I I I I I I I I I I I I I I I I I I I I I I I I Development at Denton Municipal ~lirport · June 2001 brought the ground breaking of the new airport control tower. The addition of the tower will greatly increase the safety of the airport. The project was completed in December 2002. · A new fixed based operation (FBO), Business Air Center, opened in 2002. · U. S Flight Academy broke ground on a new hanger in Spring of 2002. · Flight Line, which also opened in Spring of 2002 offers Cessna aimraR for rent and for flying lessons. · Chelton Plight Systems, an intemationai avionics company, will soon open its Denton location where employees will design and install autopilots in aircraft to get certification from the Federal Aviation Administration. · Future plans for the airport include adding a parallel runway, a runway extension and a new terminal building. Retail News · Denton Crossing Partners is developing a 52-acrs site off of Loop 288 into a retail "Lifestyle Center". Thc center should include large anchor tenants and many other smaller shops and restaurants. The city estimates that the development will create approximately 325 new full-time jobs and 130 part-time jobs. Tenants for the center include T.J. Maxx, Best Buy, Bed Bath & Beyond, Pier I Imports, World Market, Dress Barn, Michaels and a Kroger Signature Store. · Denton's "Restaurant Row" is under construction on Brinker Road. Texas Roadhouse and On the Board will celebrate its grand opening in October of 2002. Olive Garden is currently under construction. · Denton Park 35 is another area attractive to developers. Johnny Carino's Italian restaurant has been in operation for several months. Chuck E. Cheese recently opened for business and Hampton Inn is under construction. · Other r~ail announcements during the 2001-2002 fiscal year included Car Toys, Family Dollar, Albertson's grocery store and Wing Zone. Other Developments · City/Economic Development visioning process was started. In cooperation with TWU, UNT, and the City of Denton, the Chamber hosted Denton Tomorrow in October 2001. The purpose of this event was to provide City and Metl'oplex stakeholders with a glimpse of Danton's economic development opportunities. Following the October meeting, several community leaders altunded a strategic planning retreat held in November. A task force has been created and will work with consultants from TIP Development Smitegles to compose a s~atcglc plan for economic development focusing on specific projects and opportunities available for Denton. · The City of Denton's new development code was approved by the city council and is now in effect. The new code offers developers the opportunity to mix various densities and land uses without compromising quality. · Denton was named one of the "Best Biotech Locations in the South" by Southern Business and Development magazine. Denton was featured in a full-page article in the November 2001 issue. The purchase of the former Texas Instruments facility by the University of North Texas was named one of the Real Estate Deals of the Year by the Dallas Business Journal. A total of sixtean awards were given - One for "Best Real Estate Deal of the Year" and fiReen in specialized categories. The University of North Texas - Texas Instruments Project received thc award for "Best Deal with Developed Real Estate". A-2 INDUSTRY AND BUSINESS Employer University of North Texas Denton Independent School District Denton State School Peterbilt Motors/PACCAR Denton County City of Dantan Texas Woman's University Denton Regional Medical Center FEMA (Regional HQ & Call Center) Denton Community Hospital Victor Equipment Sally Beauty Anderson Merchandisers Andrew Corporation Telesetvices Marketing Corp. C B S Mechanical Vacation Tour & Travel Infinity Partners Cifigroup Tetm Pak General Telemarketing Inc. Vedzon Morrison Milling The Vintage Russell Newman Manufacturing Acme Brick Good Samaritan Village Safety Kleen Wells Fargo United Copper Industries Denton Publishing Company Mayday Manufacturing Radisson Hotel Sanmina/SCI MujorEmployera Approximate Number of Description Employees Educational Facility 6,995 School System 2,000 MHMR Facility 1.380 Diesel Truck Assembly/Regional HQ 1,325 County Govemmant 1,225 Municipal Government 1,200 Educational Facility 900 Hospital 850 Federal Government Call Center 750 Hospital 500 Welding Equipment 470 World HQ Beauty Supply Company 360 Warehouse/Distribution 310 Telecommunications 300 Call Center 300 Construction Services 300 Call Center 300 Jet Interior Manufacturing 300 Financial Services 290 Aseptic Packaging 280 Call Center 250 Class Ring Manufacturer 250 Telephone Company 230 Flour/Groin Mill 200 Assisted Living/Nursing Facility 185 Lingerie Manufacturer 180 Brick Manufacturer 160 Retirement Center 150 Fuel Recycling 140 Banking 135 Copper Wire Manufacturer 120 Newspaper 117 Aerospace Machined Parts 115 Hotel 110 Plastic Molding 100 Source: City of Denton and Denton Chamber of Commarce Economic Development Offices Denton is proud to boast over 30 companies and institutions that employ 100 or more people, several of them representing a corporate, regional and international headquarters. Well over 100 companies that produce, manufacture, and distribute goods all over the world call Denton home. Mom than 3,000 businesses employing I to 6,995 people choose to do business in Denton. With Small, medium, and large businesses operating in a variety of industries, diversity is strength in Denton. Statistics show most of these workers are skilled and receive their training right here in Denton. A-3 I I. I I I I I I I I I I I I I I I I I ! I i I I I I I ! I I I I I I I I ! I ECONOMIC AND POPULATION GAINS... Denton has noted a consistent population increase and a steady economic growth in the last four decades. Historical population totals from U.S. Census records are: 1940 Census- 11,192 1950 Census- 21,345 1960 Cansus-26,844 1970 Census-39,874 1980 Census-49,079 1990 Census-66,270 2000 Census-80,537 The City's ascension toward a top rang on Texas' economic ladder is attributed partly to the steady influences of governmental activity which includes the year-by-yeas expansion of the two state-supported universities, and partly because of such environmental factors as its location in a rich agricultural region, some oil and gas production in the northwest section of Denton County, its inclusion in the Dallas/Fort Worth Metroplex, its proximity to throe of Texas' largest reservoirs {Lake Texoma is only 40 miles fi.om Denton), its mild climate, and the less tangible but influential aspects of social, cultural and educational advantages that have prompted professional workers to choose Denton as a place of residence. ECONOMIC RANKING... Tho following data was taken from Sales and Marketing Management 2001 Survey of Buying Power, dated August 2002. % of Population Whose Age is: 18-24 25.30% 25-34 17.20% 35-49 18.10% 50 and Over 18.80% Households 32,800 Median Household Effective Buying Income Total Effective Buying Income $ 32,210 $1,471,949,000 % of Households by EBI Group $20,000 - $34,999 23.20% $35,000 - $49,999 15.40% $50,000 and Over 32.00% Retail Sales Food Eating and Drinking General Memhandise Furniture-Home Furnishings-Appliances Automotive $1,263,973,000 120,726,000 132,098,000 168,725,000 56,945,000 275,645,000 A-4 EMPLOYMENT/LABOR FORCE . . . The 2001 annual average available workforce in Denton is 60,501 Additionally Denton is fortunate to draw workers from the Dallas and Fort Worth/Arlington MSA's representing 5. I million people, as well as north to southern Oklahoma. Average Average Average Average Average November Annual Annual Annual Annual Annual City of Denton 2002 2001 2000 1999 1998 1997 Civilian Labor Force 60,432 58,946 57,834 56,286 53,298 50,418 Total Employed 56,546 56,360 56,126 54,726 51,749 48,747 Total Unemployed 3,886 2,586 1,708 1,560 1,549 1,671 Percent of Unemployed 6.43% 4.39% 2.95% 2.77% 2.91% 3.31% Denton County Civilian Labor Force 266,162 261,347 257,610 250,861 237,439 224,314 Total Employed 254,268 253,431 252,383 246,086 232,698 219,198 Total Unemployed 11,894 7,916 5,227 4,775 4,741 5,116 Percent of Unemployed 4.47% 3.03% 2.03% 1.90% 2.00% 2.28% State of Texas Civilian Labor Force 10,751,678 10,462,712 10,324,527 10,219,113 10,094,763 9,838,951 Total Employed 10,104,730 9,955,270 9,887,039 9,746,879 9,609,026 9,309,966 Total Unemployed 646,948 507,442 437,488 472,234 485,737 528,985 Percent of Uanmployed 6.02% 4.85% 4.24% 4.62% 4.81% 5.38% Source: Texas Employment Commission. EOt/CATION . . . Denton is home to the University of North Texas, founded in 1890, Tcxas Woman's University, founded in 1901, and an extension campus site for North Ccntral Texas College, established in 1924. The two universities and community college have a combined enrollment of more than 36,000 students and approximately 7,788 faculty members. With an enrollment of over 27,000, the University of North Texas exceeds the combined enrollment of Southern Methodist University in Dallas, Texas Christian University in Fort Worth and Rice University in Houston. Texas Woman's University has an approximate enrollment of 6,500 in Denton with an additional 1,500 students attending in Dallas and Houston. The University of North Texas (LINT) campus comprises a land urea of more than 425 acres valued in excess of $167 million. The University encompasses nine colleges and schools of study and offers Bachelor's degrees in 93 fields, Master's degrees in 124 areas and Doctoral programs in 47 disciplines. UNT maintains a low 16:1 student-faculty ratio more prevalent among private rather than public institutions. UNT is listed in both America's 100 Best College Buys and America's 100 Most Wired Colleges. Texas Woman's University (TWU), a major state-supported teaching and research institution, is the nation's largest public university attended primarily by women, who comprise 90% of attending students. Almost 90% of TWU's faculty members hold a Doctoral degree or other appropriate terminal degree in their field. Through its seven schools and colleges, TWU offers 106 programs leading to a Bachelor's degree, 106 Master's degree fields, and Doctoral degrees in 23 specialization areas. In 2001, TWU's Doctoral health studies program tied with Harvard University for second place nationally in a study of recommended practices by the National Association of Gradunte-Professional studies. North Central Texas College (NCTC), established in 1924, offers Associate Degrees in Occupational Therapy Assistance, Criminal Sustice, Mid-Management Training and Micro Computer Applications, among other fields. NCTC specializes in training geared directly to business and industry needs. NCTC serves the citizens of Danton with quality education by offering a broad scope of educational choices and offers the local business community educational options as well. The competitive need to keep employees current with modem technology and mnthodology is easier due to NCTC's customized training which teaches curriculum developed closely with business management to ensure individual company needs are met. A-5 I I I I I I I I ! I I I I I I I I I I I ! I I I I I I ] I i i i ] I n n I! I Approximately 15,068 students enrolled in the Denton Independent School District (DISD) for thc 2002-2003 school year. Students attend 24 schools, including 12 elementary schools (grades K-5), four middle schools (6-8), two high schools (9-12), one early childhood center sod six alternative schools. DISD offers classes at each school and at the instructional center for students who experience learning disabilities or hsodicaps. Counselors, speech and [soguage specialists, psychologists, sod reading sod diagnostic consultants are available for ail grade levels. In 2001-2002, DISD continued to expetienee a very low drop out rate of lass thso 1%. In a "Best High Schools" survey conducted by D Magazine, Denton High School was ranked 26th sod Ryan High School was 36th out of 95 high schools surveyed in the Dallas-Fort Worth Metroplex. The rankings were based on AP scores sod the percentage of students who passed the exams. The district had 18 students who qualified as National Merit Scholar winners; three National Merit Sehlolar Semifinalists, 10 commended students, five National Hispsoic Recognized students sod one Africso-American Recognized student. Denton Sta~ School is one of the counfi.y's most modem sod progressive educational institutions. This state supported educational institution for mentally handicapped Texas residents is located on a 200-acre site paid for by Denton citizens. Present facilities include residences that ascommedate 677 students, more thso 20 buildings for physically handicapped individuals with a capacity of 600, and a 32 bed acute hospital with supporting facilities such as X-ray, laboratory, dental, sod pharmacenticai. Additional buildings include a modem administration building, so academic building, laundry facility, maintenance shop sod a warehouse. The school has a staffof 1,380 with so sonunl payroll in excess of $28,705,000. DENTON UNIVERSITIES EXPAND,,. Texas Womso's University - The University completed expansion of its $500,000 food sciences lab to advsoce the development sod soalysis of new foods sod tuste-tasting, In a joint effort with Texas A & M University, TWU is thc first university in the country to fund a position responsible for commerciaiizatien of intellectual property for food sciences. University of North Texas - UNT purchased a 277-acre property in north Denton approximately 4 miles from the main campus that includes four interconnected buildings totaling 553,000 square feet. Purchased for $8.9 million fi.om Texas Instruments, the university will move some administration sod academic programs to the new site almost irmnediately. Longnr-term considerations for the new site include housing a new business incubator program or as the potential site of a new $28 million health science center. UNT has been recognized since 1976 by the Carnegie Foundation Center as a Doctoral I Research University. In 2001, lINT experienced record enrollment which was impacted by the opening of its new System Center in Dallas. AGRICULTURE... Northwestern Denton County is one of the more diversified agricultural areas in Texas. With soil types ranging from rich black to ssody loam, sod good, sof~ artesiso water, it is ideal for diversified fanning sod livestuek. Principal crops are corn, wheat, oats, hay, grain sorghums and pesouts. Beef earle, sheep, chickens sod turkeys contribute a substantial sod steady insome every year to the farmers and rsnehers of the County. A very slgnifieant eonesotration of valuable world champion horses and horse rsoehes, located immediately to the north sod east of the City's sorporate boundaries, provide a prosperous economic resouree for the City sod am~. Products significant to thc economy are horses, beef, eggs, wheat, grain sorghums, hay, sod nurse3, crops. 'I~SPORTATION . . . Denton is located only 20 miles northeast of the Dallas-Fort Worth International Airport which begso operations in Jsouary 1974. In addition, Dallas' Love Field Airport sod Fort Worth's Measham International Airport are in close proximity to Denton. Allisoce Airport, located about 20 miles southwest of Denton, is the only purely industrial airport in the world. Aacompsoying the Allisoce Airport are five business parks. Together, Allisoce's access to highway, rail and air trsosportation offers so excellent opportunity for future industrial growth. Much development is occurring at the Denton Municipal Airport. The runway will be expsoded by 1,500 feet within the next 24 months, taking it to 7,000 feet. A control tower sod additional private hsogar space has also been built. A terminal building will also be constructed The Kansas City Southern Railroad and thc Union Pacific Railroad provide daily service to Denton. Full switching is available, providing direct access to all major markets across the nation. Gmyhound/Trailways serves Denton through Dallas and Oklahoma City. Motor freight in Denton is included in the D/FW commercial t~ade zone sod is served by major freight carriers. BANKING . . . There ere eleven bsoks in Denton: Bank of America, N.A., Bsok One, N.A., Wells Fargo Bsok, Farmers and Merchsots State Bsok, Northwest Bank Texas, N.A., Provident Bank, Guarsoty Federal Bsok, Point Bsok, Texas Bsok sod Denten's only locally-owned bank, Northstar Bank. A-6 GROWTH INDICES City State Fiscal Buildin~ Values {millions) Water Sewer Electric Unemployment Unemployment Year Commercial Residential Total Customers Customers Customers Rates Rates I I I 1998 $ 109 $ 75 $ 184 17,921 17,799 33,540 2.91% 4.81% 1999 39 167 206 18,825 18,259 35,549 2.77% 4.62% 2000 41 176 217 21,146 19,325 33,833 2.95% 4.24% 2001 40 219 259 22,772 20,931 35,704 4.39% 4.85% 2002 22 216 238 24,054 22,225 36,591 6.43% 6.02% (1) New Construction Only. MEDICAL... Denton Regional Medical Center is a 186 bed community hospital that serves the growing population of Denton, Wise, Cooke, and Montague Counties. Offering a fi~ll-spectmm of healthcare including advanced open-heart surgery and neurosurgery programs. Denton Regional's more than 1,000 employees and 250 physicians are constantly striving to offer the highest quality service to the north Texas area. Denton Community Hospital is a 110 bed (all private room) acute care facility with 10 well baby cribs and three intermediate care units. The hospital consists of a three story structure with approximately 128,000 square feet. It has approximately 500 employees and more than 200 physicians on staff. Patient care is available to neonates, pediatric, adult, and geriatric patients based on their needs, diagnostics, acuity of illness, and specialized treatments. RECP-.E~TION... Lake Ray Roberts, located approximately 8 miles northeast of the City's corporate boundary on the Elm Fork of the Trinity River, is a major water conservation and flood control facility of more than 799,600 acre-feet of storage that allows for an abundance of parks and other water and outdoor related recreational facilities. Nearby Lake Lewisville, one of North Texas' largest lakes is one of Texas' most popular recreation areas. Lake Lewisville has a shoreline of 183 miles located entirely in Denton County. Lake Lewisville aaracts over 3,000,000 visitors to its shores annually. The upper reaches of the lake are only about 3 miles east of the Denton City Limits, while the dam is 15 miles from downtown Denton. Grapevine Lake, another large body of water was created by the U.S. Army Corps of Engineers, is located in Denton and Tarrant Counties. The dam is 23 miles from Denton. Parks and reereatlonal areas abound on the shores of Lake Ray Roberts, Lake Lewisville and Grapevine Lakes. Boating, fishing, hunting, swimming and all water sports are the favorite recreational pastimes, which, because of this area's favorable climate, are in use the year round. The City of Denton Parks and Recreation Department and the Denton Independent School District have created a partnership to produce a signature water recreation attraction. The $12,165,782 Denton Aquatic Park will open in 2003. A-7 I I I I I I I I I I I I I i I I I I i I I I I I ! I I I I I I I I I I APPENDIX B DESCRIPTION OF SENATE BILL 7 AND THE TEXAS MUNICIPAL POWER AGENCY TEXAS MUNICIPAL POWER AGENCY... TMPA is governed by a Board of Directors made up of two representatives from each Member City and is empowered to plan, finance, acquire, construct, own, operate and maintain facilities to be used in the business of ganaratinn, transmission and sale of electric energy to the Member Cities. The TMPA Agreement requires TMPA to prepare annual budgets, projecting its Annual System Costs for the succeeding year, including debt service requirements on its bonds, and to submit the same to the Member Cities. Based on these and other budgetary facts and estimates, TMPA sets the rates and charges to be paid by thc Cities for the ensuing year. TMPA's Generation Unit. TMPA's power supply source consists of thc Gibbons Creek Steam Electric Station located in Grimes County, Texas, and includes a single net 462 megawatt ("MW") Wyoming Powder River Basin coal fueled steam electric plant, reservoir, railroad spur, associated transmission facilities, an adjacent surface mine no longer in use and related properties and equipment ("Gibbons Creek"). Gibbons Creek began commercial operation on October 1, 1983. For the fiscal year ended September 30, 2002, Gibbons Crank's capacity and availability were 78.98% and 88.53%, respectively, which represent a 10.2% decline and a 3.4% decline, respectively, in these measures of productivity from the preceding fiscal year. The reduced productivity was due in part to planned outages associated with plant modifications to add emission controls to Gibbons Creek (see "The Electric System - Texas Municipal Power Agency - Modifications to Plant and Operations"), as well as the availability of low cost energy in the market that led the Member Cities to request lower output from the plant. Gibbons Creek also participated in ERCOT's balancing up loads protocol, in which capacity payments are paid by ERCOT to owners of generation based on the market clearing price for capacity in non-spinning reserves. Modifications to Plant and Oneratioas. Gibbons Creek was designed to burn lignite mined at a mine located on approximately 18,000 acres adjacent to the facility (the "Gibbons Creek Mine") and owned by TMPA. In 1996, TMPA commenced various modifications to Gibbons Creek, including the conversion of the plant to burn western coal mined in the Wyoming Powder River Basin. The modifications included the installation of an advanced design steam path turbine and the installation of additional superheat sections. These modifications have increased the generation capacity and the operating efficiency of the plant. The modifications made to Gibbons Creek relating to the fuel conversion were completed in the summer of 1997. Mining operations were halted by TMPA at the Gibbons Creek Mine in February 1996. In 1997, TMPA terminated several leveraged leases for certain mining equipment by acquiring the equipment and then selling it in order to reduce operating expenses at the Gibbons Creek Mine. The modifications to the plant and the change in fuel were made with the expectation that they would provide fuel cost savings in comparison with the operation of the Oibbons Creek Mine for fuel, to reduce the planned outage cycle at Gibbons Creek and to allow TMPA to achieve compliance with the federal Clean Air Act (the "FCAA") without the need for additional sulfur dioxide allowances based on current regulations. Over the period from fiscal year 1992-93 to 1998-99, TMPA reduced operating and maintenance costs of its plant, including through the reduction of employees and personnel costs. During such time, the number of regular employees has been reduced by approximately 67%. Effective January 1, 2001, TMPA and Kennecott Energy Company entered into a new coal supply agreement. The new agreement, which provides for a 36-month supply of coal from the Powder River Basin, expires on December 31, 2003. The sources of coal under the new agreement are the Cordero Rojo Complex and the Jacobs Ranch Mine. TMPA will begin negotiating a new coal supply agreement during the Spring of 2003. On October 2, 1995, TMPA entered into a coal transportation agreement with the Burlington Notthem Railroad Company, now the Burlington Northern Santa Fe ("BNSF") under which BNSF is obligated to provide rail transportation for the coal purchased by TMPA from the PRB in Wyoming. The agreement expired on March 31, 2001. TMPA pursued negotiations with BNSF through the summer of 2000, but was unable to secure a satisfactory new or extended contract arrangement to take effect upon expiration of the 1995 agreement. Therefore, in July 2000, TMPA formally requested BNSF to establish rates and terms for common carrier coal transportation service to Gibbons Creek, in both shipper and carrier-supplied railcars, effective at the conclusion of the 1995 contract. In August 2000, BNSF gave a partial response by quoting a common carrier rate in cars supplied by BNSF. TMPA considered this rate to be unaeceptabin, and in October 2000 petitioned the federal Surface Transportation Board ("STB") to compel BNSF to set reasonable rates for the Gibbons Creek service in both carrier-supplied and shipper-supplied railcars. A final decision by the STB is expected by the end of Mamh 2003. In the meantime, TMPA will use the common carrier rate and service quoted by BNSF as necessary to transport coal, subject to appropriate adjustments and, as applicable, reparations payments by BNSF, if any, once the STB determines the proper rate. TMPA's Transmission Facilities. TMPA-owned transmission system consists of 345-kV and 138-kV switchyard facilities and transmission line facilities in the vicinity of the Gibbons Creek Station, as well as additional 345-kV and 138-kV lines and substation facilities in Brazes, Collin, Dallas, Denton, Grimes, Hunt, Montague, Robertson, Rockwell, and Wise counties of Texas. These facilities provide 345-kV ties to TXU Electric and Reliant Energy, Incorporated at several points throughout the ERCOT system. These facilities provide ties to the Member Cities, TXU Electric, Reliant Energy, Incorporated, and Brazes at a number of points in the ERCOT system. B-1 I I I I I I I I ! I I I I I I I I I I i I I I I I I I I I I I I I I I I I I Chan~e in Management. Between January 13, 2000 and January 3, 2003, Duke/Fluor Daniel managed the operation and maintenance of the Gibbons Creek Facility under a five-yanr operation and maintenance agreement (the "TMPA Operating Agreement"), which would have expired on January 12, 2005. In November 2002, after an extensive review of all options for operating and maintaining the TMPA facilities, a decision was made to terminate the TMPA Operating Agreement effective January 3, 2003 and hire key management employees. TMPA hired a Plant Manager and a Transmission Manager, each having over 20 years experience in the utility industry, to manage the operation and maintenance of its plant and transmission facilities at a substantially reduced cost as compared to the cost associated with tho TMPA Operating Agreement. Table BI - Outstanding Debt At September 30, 2002, TMPA had approximately $1 billion in outstanding fixed rate revenue bonds (the "Revenue Bonds") and $218 million in outstanding variable rate commercial paper (the "Commercial Paper"). The Revenue Bonds and the Commercial Paper have a final maturity of Septomher 1, 2017 and September 1, 2018, raspeetively. The debt service requirements of TMPA with respect to its Revenue Bonds and Commercial Paper are set forth below (assumed interest rates are used with respect to the variable rate debt): Fiscal Year Ended 9/30 Principal Interest Total 2003 $ 61,224,556 $ 46,317,019 $ 107,541,575 2004 52,844,943 59,305,404 112,150,348 2005 58,606,604 58,134,039 116,740,643 2006 64,827,512 56,486,685 121,314,198 2007 69,519,083 53,507,708 123,026,790 2008 72,168,866 50,745,670 122,914,536 2009 79,558,490 48,048,066 127,606,556 2010 82,007,928 44,959,741 124967,669 2011 85,367,282 41,606,162 12~973,444 2012 89,159,287 38,154,551 127,313,838 2013 48,132,876 79,072,124 127,205,000 2014 39,289,247 87,919,253 127,208,500 2015 31,832,523 95,922,477 12%755,000 2016 29,961,887 97,793,114 127,755,000 2017 28,211,407 99,588,593 127,800,000 2018 209,200,000 5,810,000 215,010,000 $ 1,101,912,488 $ 963,370,607 $ 2,065,283,095 In accordanco with the TMPA Agreement, thc City is responsible for a proportion of the costs of TMPA, including debt service, as described above. TMPA has no plans to issue additional indebtedness within the next twelve month period. The TMPA Resolution provides that TMPA shall fund certain funds and accounts, including a bond reserve fund, and shall annually maintain rates to produce net revenues equal to at least 1.25 times the debt service on the Revenue Bonds. At September 30, 2002, TMPA's debt service reserve fund was valued at approximately $103.6 million. Amounts collected by TMPA from the Member Cities over and above its requirements for the expenses of operations and maintenance, the payment of debt service and maintaining the funds and accounts relating thereto are rebated back to each Member City as described below under "The Electric System - The Power Sales Contract." SB 7. TMPA and the Member Cities. Several provisions in SB 7 pertain to TMPA and its Member Cities. One of these provisions (the "Debt Retirement Provision") provides that TMPA shall "set as an objective the extinguishment of the agency's debt by September 1, 2000," and further provides that, in the event the objective is not met, TMPA must "provide detailed reasons to the electric utility restmctoring legislative oversight committee by November 1, 2000, why the agency was not able to meet this objective." The Debt Retirement Provision goes on to state that each municipal power agency "shall extinguish the agency's indebtedness by sale of the elech'ie facility to one or more purchasers, by way of a sale through the issuance of taxable or tax-exempt debt to the member cities, or by any other method." The Debt Retirement Provision does not provide for any penalty or remedial action to be taken against a municipal power agency for the failure to meet the objective of extinguishing its debt by September 1, 2000. B-2 In July 1999, the Board of Directors of TMPA established a Debt Retirement Committee to study end to recommend options for achieving the objective of extinguishing TMPA's debt. Based on the work of the Committee, in October 2000, TMPA submitted to the Joint Committee on Oversight of Electric Utility Restructuring (i.e. the electric utility restructuring legislative oversight committee referred to in SB 7) the report required by the Debt Retirement Provision. The report, in addition to explaining the reasons why TMPA was not able to extinguish all of its debt by September 1, 2000, identified the options explored by the Committee and available to TMPA to reduce TMPA's debt service requirements in the future. The options that are available to TMPA may be affected, and possibly limited, by certain provisions of the TMPA Agreement that pertain to asset sales and provisions of the TMPA Resolution that require it to comply with federal requirements that guvem the use of facilities that have been finenced with proceeds oft~x-exempt bonds, among other factors. In addition, SB 7 provides that TMPA may, at its option, use the rate of return method for calculating its trensmission cost of service. If the rate of return method is used, the return component for the transmission cost of service ("TCOS") revenue requirement shall be sufficient to meet the transmission function's pro rata share of levelized debt service and debt service coverage ratio end other annual debt obligations; provided that the total levelized debt service may not exceed the total debt service under TMPA's current payment schedule. Any additional revenue generated by this methodology must be applied to reduce TMPA's outstending indebtedness. This provision of SB 7 allows TMPA to take into account in determining the ttensmission revenue requirement a portion of the transmission system's share of TMPA debt service as if such debt service was level instead of increasing over time (see "The Electric System - Texas Municipal Power Agency - Outstanding Debt"), which accelerates the recovery of that portion of debt service vis-a-vis actual debt requirements. Pursuent to this provision of SB 7, TMPA applied for, and, on Febmmy 16, 2001, received from the PUC en order revising end levelizing TMPA's TCOS. On August 1, 2001, the PUC approved a plan for the use of the additional revenues resulting from the levelized TCOS for the reduction of TMPA's debt. The major components for the plen are determination of the trensmission portion of TMPA's debt service; calculation of TCOS revenues based on levelized end actual debt service, end identification of the indebtedness instruments that would maximize reduction of debt service. In addition, TMPA has established a debt retirement reserve for purpose of accounting for the additional revenues. As additional revenues are used to retire outstending indebtedness identified in the PUC approved plan, the debt retirement reserve will be relieved. According to the TMPA plen, which was approved by the PUC, the leveling of TMPA's TCOS will produce additional revenues of approximately $18.3 million dollars during the years 2001 through 2006, which will be invested under escrow agreements and used to pay down approximately $28.8 million in TMPA debt in the years 2007 through 2017. The actual amount of debt retired will be dependent upon the investment rate of the additional moneys received in the years 2001 though 2006, among other factors. For the years 2000 and 2001, the Agency collected TCOS revenues of $8.67 million end used that to defease $14.80 million of the Revenue Bonds maturing in the years 2007 through 2017. Future excess TCOS revenues for the years 2002 through 2005 of $9.61 million in the aggregate will be applied to defease approximately an additional $14.06 million of the TMPA's outstanding Revenue Bonds. SB 7 also provides that the PUC, if requested by a Member City of TMPA, shall examine all areas within the Member City's service area that are also certificated to one or more other retail electric utilities end, after notice and hearing, the PUC may amend the retail electric utilities' CCNs so that only one retail electric utility is certificated to provide distribution services in the area, provided that an application is filed with the PUC prior to September 1, 2000 end is limited to single certification of the area within the Member City's boundaries as of February 1, 1999 end that the right of an electtio utility or en electric cooperative to serve its existing customers, including eny property owned or leased by eny customer, is preserved. See "The Electric System - Electric System's Service Area and Service Area Composition" for a discussion of actions that have been taken by the City under this provision of SB 7. Clean Air Act Comnlience. The Gibbons Creek facility is subject to sulfur dioxide emission requirements under the FCAA, but based on the sulfur dioxide emission reductions achieved in connection with the chenge to Wyoming Powder River Basin coal, TMPA has sufficient sulfur dioxide allowences for projected operating rates of Gibbons Creek. See "The Electric System - Texas Municipal Power Agency - Modifications to Plant end Operations." The 1990 amendments to the FCAA also implement more stringent roles designed to achieve compliance with the national ambient air quality standard for ozone (see "The Electric System - Environmental Regulation - Acid Rain Provisions of The 1990 Clean Air Act Amendments"). The Texas Commission on Environmental Quality CTCEQ'') concluded that emissions from electric utilities located in central and east Texas are contributing to ozone formation in three ozone non-attainment areas located in Texas: the Dallas-Fort Worth, Houston-Galveston, end Beaumont-Port Arthur areas. As a result on April 19, 2000, the TCEQ issued final rules that will require the reduction of nitrogen oxide ("NOx") emissions at large electric utilities located in 31 east and central Texas counties, including Grimes County, where Gibbons Creek is located. For coal-fired electric utilities including Gibbons Creek, the combustion unit must achieve en average annual nitrogen oxide emission rate of 0.165 pounds of nitrogen oxide per million BTU of heat generated. Compliance with this standard must be achieved no later then May 1, 2005. B-3 I I I I I I I I I I I I I I I I I I I I I I I ! I' i I I I I i I I I I I I i To achieve the required level of emissions, Gibbons Creek under went a significant modification. To accomplish this in a cost effective manner, TMPA developed a phased approach to achieving compliance. The initial two phases involved modifications to the combustion process to limit thc formation of nitrogen oxides in thc burner system. Spacifically, these initial two phases included improvements to the fuel supply systems and thc air and fuel delivery to thc combustion section of thc boiler. TMPA has recently completed work on these two phrases. Following completion of phase I and II, it was detarmincd that the project to reduce NOx emissions from the Gibbons Creek facility was fully successful, with no additional, post combustion controls for NOx emissions necessary. The final cost of meeting the more stringent NOx emission standard is calculated at $ I 1.25 million. Senate Bill 7... Introduction: Recent Chanacs in Renulatorv Environment. Legislation enacted by the Texas Legislature in 1995 deregulated wholesale electric ratas and services. In order to promote wholesale clactric competition, such legislation directed the PUC to adopt roles requiring all transmission system owners to make their transmission systems available for usc by others at prices and terms comparable to each respective owner's usc of its system for its own wholesale transactions. Thc PUC implemented its initial transmission open access mlas in January 1997 and updated those mlas in April 1999. During the 1999 legislative session, thc Texas Legislature enacted Senate Bill 7 ("SB 7"), which provides for retail electric open competition that began on January I, 2002, continues electric transmission open access and fundamentally redefines and restructures the Texas electric industry. SB 7 includes provisions that apply directly to municipally owned utilities CMOUs"), such as the Electric System, as well as other provisions that will govern investor owned utilities ("IOUs") and electric Co-operatives ("Electric Co-ops"). SB 7 allows retail customers of IOU's to choose their electric supplier, as well as the retail customers of those MOUs and Electric Co-ops that have elected to participate in retail electric competition. Provisions of SB 7 that apply to the Electric System (including the TM"PA Agreement), as well as provisions that apply only to IOlYs and Eleetrle Co-ops are described below, the latter for the purpose of providing information concerning the ovemll restructured electric utility market in which the Elactric System could choose to directly participate in the future. General Provisions of SB 7... Unbundlinm SB 7 required IOUs to separate retail energy service activities from regulated utility activities by September 1, 2000 and to unbandle genemtion, ttansmissiod/distribution and retail clecttic sales functions into separate companies by January 1, 2002 (although not all IOUs met that scheduled due to a need to receive Federal appmvals, among other reasons). IOUs were able to comply by selling one or more of its lines of business to independent entities, or creating separate but affiliated enmpanies owned by a common holding anmpany, but which must operate largely independent of each other. The services offered by such separate entities must be available to other parties on a non-discriminatory basis. Certain Texas river authorities that operate elactrie generation and transmission systems are also required to unbundle their electric operations but are not required to operate such separated funations independently from one another. MOUs and Electric Co-ops which opt into competition are not required to unbundle their electric system components. Unbundled Comuanias. Under SB 7, genemting assets are owned by "Power Generation Companies," which are registered with the PUC and which are subject to certain mlas that are intended to protect consumem. Otherwise, Power Generation Companies are unregulated and may sell electricity at market prices. Owners of transmiasion and/er distribution facilities are "Transmission and Distribution Utilities" and are fully regulated by the PUC. Retail sales activities are being performed by new companies called "Retail Electric Providers" ("REPs"), which are the only entities authorized to sell electricity to retail customers (other than to customers of MOUs and Electric Co-ops that have not opened their service areas to retail eompatition). REPs must register with the PUC, demonstrate financial capabilities and comply with certain consumer protection requirements. They buy electricity from Power Generation Companies, power marketers or other parties and may resell that electricity to retail eustumers at any location in the State (other than customers of MOUs and Electric Co-ops that have not opened their service areas to retail enmpetirion). Transmission and Distribution Utilities are obligated to deliver the electricity. The PUC is required to approve the construction of new transmission facilities, and may order the construction of most new facilities to relieve transmission bottlenecks. Transmission and Distribution Utilities are required to provide access to both their transmission and distribution systems on a non-discriminatory basis to all eligible customers. Rates for wholesale transmission systems of MOUs and Electric Co-ops are determined by the PUC, rates for the use of the distribution systems of such entities will be determined by such entities. Each type of unbundled company is prohibited from providing services that are provided by the other types of unbundled companies. B-4 Measures to Foster Competition and Assure Service. SB 7 also provides a number of consumer protection provisions. Every area of the State that has been opened to retail choice (currently, only the ERCOT area) has a "Provider of Last Resort" ("POLR") approved by the PUC. The POLR is a REP that must offer to sell electricity to any retail customer in its designated area at a standard rate approved by the PUC. The POLR must also serve any customer whose REP has failed to provide service. Each Municipal Utility and Electric Co-op that opts into open competition shall appoint itself or another entity as the POLR for such service territory and the respective Municipal Utility or Electric Co-op sets the rotes for such respective POLR mther than the PUC. In the event that no other entity is available to serve in that capacity, the Municipally Utility serves as the POLR. Beginning September 1, 1999, each IOU was required to freeze its existing rates (except for a fi~al factor passthrough) and was required to serve its retail customers at such rates until 2002. Beginning January 1, 2002, thc unbundled REP of the IOU that held thc certificate to provide retail service to an area (tho "Affiliated REP") reduced electric rates by 6% below thc frozen rates made that reduced rata (the "price to beat") available to all residential and small commercial customers in the area formerly served by thc IOU. The Affiliated REP may not sell electricity to residential or small commercial customers at any other rate until either 40% of the residential or small commercial customers in the ama have chosen to be served by other REPs or until January 1, 2007, whichever occurs first. SB 7 does allow Affiliated REPs to compete for industrial customers, and for certain aggregated commercial loads owned by a common entity. The price to beat provisions ofSB 7 will have no direct impact on the Electric System. To help ensure the availability of electric generation to non-traditional suppliers, SB 7 requires IOUs to hold periodic "Capacity Auctions," supervised by the PUC, in which they must sell 15% of their energy to others. Affiliated REPs are not allowed to purchase energy from a related Power Generation Company. These Capacity Auctions provide resources to other parties for up to, and shall end, four years after the date that retail competition began. SB 7 also provides protection by limiting the amount of generation that any single Power Generation Company, or group of comroonly owned Power Generation Companies, may own to 20% of the available generation within a "power region," i.e., ERCOT. SB 7 required any IOU (or affiliated Power Generation Company) that owned more that 20% of the installed electric generation within a power region to file a mitigation plan with the PUC by December 31, 2001 whereby (i) its excess generation plants were sold at an independent sale, (ii) its excess generation capacity were auctioned offto an independent party in a Capacity Auction, (iii) it sold its excess capacity for at least a four year period to an independent party, or (iv) it implemented some other reasonable mitigation method. The City is not subject to SB 7's Capacity Auction requirements or the 20°/6 maximum generation ownership within a power region restriction. SB 7 preserves the PUC's regulatory authority over electric transmission facilities and open access to such transmission facilities. SB 7 provides for a transmission system apemtor that is independent of market participants and is responsible for directing and controlling the operation of the transmission network within ERCOT. The PUC has designated ERCOT as the "independent system operator." In addition, SB 7 directs the PUC to determine electric transmission open access rates on a 100°A "postage stamp" pricing methodology. Stranded Coat Recovery. Under SB 7, IOUs may recover their "stranded costs" (thc net book value of certain "non-economic" assets less market value and certain "above market" purchased-power costs) and "regulatory assets," which recovery is intended to permit recovery of the difference between the amount necessary to pay for the assets required under prior electric regulation and the amount that can be collected through market based rates in the open competition market. Such stranded costs are based, in large measure, on the amount of stranded costs associated with the respective IOUs determined in the PUC Stranded Cost Report (as defined below). SB 7 establishes the procedure to determine the amount of stranded costs and regulatory assets. Once determined, the stranded costs will be collected through a nonbypassable competition transition charge collected from the end retail electric users within the IOU's service territory as it existed on May 1, 1999, through, primarily, an additional component to the mte for the use of the retail electric distribution system delivering electricity to such end user. IOUs may recover a certain portion of their respective stranded costs through tho issuance of bonds, with a maturity not to exceed 15 years, whereby the principal, interest and reasonable costs of iasuing, servicing and refinancing such bonds is secured by a qualified rate order of the PUC that creates the "competition transition charge." Neither the State nor the PUC may amend the qualified rate order in any manner that would impair the rights of the "securitized" bondholders. Provisions of SB 7 that apply to MOUs and Electric Co-ops. MOUs and Electric Co-ops are largely exempt from the requirements of SB 7. While IOUs in ERCOT are currently open to customer choice, the governing bodies of MOUs and Electric Co-ops have the sole discretion to determine whether and when to open their service territories to retail competition. The roles of the PUC, however, require a six month period between the election to opt into retail competition and participation in such competition. However, if a Municipal Utility or Electric Co-op has not voted to open its territory, it will not be able to compete for retail customers at unregulated rates outside its traditional service territory. While IOUs must unbundle their generation from transmission and distribution and from retail sales activities, MOUs and Electric Co-ops retain the discretion to determine whether to unbundle those business activities. B-5 I I I I I I I I I I I I I I I I I I I i I i I I I I I I I I I I I I ! I I I While the April 1998 Report to the Texas Senate Interim Committee on Electric Utility Restructuring entitled "Potentially Strandable Investment (ECOM) Report: 1998 Update" (the "PUC Stranded Cost Report") indicated a base market cost for the City's stranded costs of approximately $143 million, SB 7 does not restrict tho City's stranded costs to the amounts included in the PUC Stranded Cost Report. According to the 2003 PUC Report, stranded costs for the six largest IOUs in ERCOT were estimated at $4.4 billion in the ECOM Report, but such utilities had negative stranded costs of approximately $6 billion in 2001 due primarily to a rise in natural gas prices which increased the value of other coal and nuclear generation owned by the IOUs. While some IOUs have issued stranded cost secoritized bonds, in connection with the PUC approval of such financings, most have entered into rate orders that required substantial rebates to customers that were collected in rates from 1999 to 2001. SB 7 provides a different methodology for MOUs with respect to stranded cost recovery. SB 7 allows the City to determine the amount of its stranded costs and the bast manner in which to collect its stranded costs. At present, there are a number of variables that will need to be resolved before the City can definitively establish its stranded costs and the manner in which the Electric System will seek to recover the costs. While SB 7 pmvidas that the City Council has exclusive jurisdiedon to reasonably determine the amount of the Elec~c System's stranded investment, SB 7 provides little detail to guide MOUs through the process and the City is not aware that any MOU has proceeded with stranded cost recovery'. The City is unable to predict what, if any, additional conditions may be imposed on the MOUs' right to determine and recover their stranded costs. As discussed above, MOUs and Electric Co-ops will also continue to determine the rates for use of their distribution systems after they open their territories to competition, although the PUC will determine the terms and conditions for access to those systems. Additionally, MOUs and Electric Co-ops that do not elect to participate in open competition are required to offer distribution services upon conditions and terms established by the PUC. SB 7 also permits MOUs and Electric Co-ops to recover their "stranded costs," through collection of a nonbypassable transition charge from their customers if so determined by such entities in a similar fashion to IOUs under SB 7. Unlike IOUs, the governing board of a Municipal Utility (in the case of the Electric System, the City Council) determines the amount of stranded costs to be recovered pursuant to rules and procedures established by such governing board. The stranded costs of Elantrlc Co- ops are determined by their board of directors pursuant to rules and procedures established by the PUC. MOUs and Electric Co- ops are also permitted to recover their respective smmded costs through the issuance of bonds in a similar fashion to the IOUs. Additionally, as a Member City of TMPA, SB 7 permits the Texas Public Finance Authority to issue bonds payable from a nonbypassable charge of the retail electric customer of a Member City to recover such city's stranded costs as determined in the PUC Stranded Cost Report. In accordance with SB 7, the PUC has adopted code-of-conduct mica for MOUs and Electric Co-ops that will apply once they have implemented customer choice and begin providing service outside their certificated areas. The rule establishes broad safeguards to guvem the interaction between the transmission and distribution business unit of an MOU or a Co-op and its affiliates to avoid potential anti-competitive practices, such as cross-subsidization between regulated and competitive activities. Miscellaneous Provisions of SB 7. SB 7 requires all old "grandfathered" power plants - plants that have not previously been required to comply with air quality emissions standards administered by the TCEQ that are owned by IOUs, MOUs and Electric Co-ops - to be brought into compliance with the air quality emissions standards by May 2003 if it is cost effective to do so. If not cost effective, the plants ara required to be shut down. The cost of bringing the old plants into compliance may be included in the determination of sa'ended costs of an IOU, Municipal Utility or Electric Co-op. SB 7 also sets goals for the development of renewable generating technologies that do not burn oil and gas and do not produce air pollution, requires that the amount of renewable energy triple in Texas by 2009 and sets certain renewable generation target levels. If in the future the Electric System acquires electric generation and has opted in to customer choice, but has not met its required renewable generation level, it may be required to purchase renewable energy credits established by the PUC to comply with SB 7. B-6 THIS PAGE LEFT BLANK INTENTIONALLY I I I I I I I I I I I I I I I I I I I I I I I I ! I I I I I I I I I I I I I APPENDIX C EXCERPTS FROM THE CITY OF DENTON, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2002 The infonnation contained in this Appendix consists of excerpts from the City of Denton, Texas Annual Financial Report for the Year Ended September 30, 2002, and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information. THIS PAGE LEFT BLANK INTENTIONALLY I I I I I I I I I I I I I I I I I I I ! I I ! I I I I I I I I I I I I I I I APPENDIX D FORM OF BOND COUNSEL'S OPINION 600 CONGRESS AVENUE 1250 ONE AMERICAN CENTER AUSTIN, TEXAS 78701-3246 M-=CALL, PARKHURST & HOP, TON L.L.P. CITY OF DENTON UTILITY SYSTEM REVENUE REFUNDING AND IMPROVEMENT BOND SERIES 2003 DATED APRIL 1, 2003 IN THE PRINCIPAL AMOUNT OF $50,180,000 AS BOND COUNSEL for the City of Denton, in Denton County, Texas (the "Issuer"), we have examined into the legality and validity of the bond issue initially evidenced by the bond described above (the "Initial Bond"), which Initial Bond originally has been issued and delivered as a single fully regis- tered bond, without interest coupons, with the principal amount thereof payable as set forth in the Initial Bond, and with the unpaid balance of each installment of principal, respectively, bearing interest from the date of the Initial Bond to the scheduled due date ("maturity"), or to the date of prepayment or redemption, of each installment of principal, at the rates per annum for each maturity set forth in the Initial Bond with interest, calculated on the basis of a 360-day year composed of twelve 30-day months, payable on December I, 2003, and semiannually on each June 1 and December 1 thereafter, and with the then outstanding principal of the Initial Bond being subject to prepayment or redemption, as a whole, or in part, prior to scheduled maturity, at the option of the Issuer, on June 1,2013, or on any date whatsoever thereafter, in accordance with the terms and conditions stated on the face of the Initial Bond. The Initial Bond may, at the request of the registered owner, be transferred and converted into, and/or exchanged for, fully registered bonds, without interest coupons, in the denomination of $5,000 or any integral multiple of $5,000, and such bonds again may be transferred and/or exchanged, all subject to the conditions stated and in the manner provided in the Ordinance authorizing the issuance of the Initial Bond (the "Bond Ordi- nance''), with any such bonds which are registered, authenticated, and delivered in accordance with the Bond Ordinance being hereinafter called "Definitive Bonds". WE HAVE EXAMINED the applicable and pertinent provisions of the Constitution and laws of the State of Texas, and have examined and relied upon a transcript of certified proceedings of the Issuer and other pertinent instruments furnished by the Issuer relating to the authorization of the Initial Bond and Definitive Bonds and the issuance and delivery of the Initial Bond, including the executed Initial Bond and a printed specimen of the form for Definitive Bonds initially made available by the Issuer for comple- tion and exchange for the Initial Bond; and we have examined and relied upon the Issuer's Federal Tax Certificate, of even date herewith. BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Initial Bond and Def'mitive Bonds have been duly authorized, and that the Initial Bond has been duly issued and delivered, all in accordance with law, and that, except as may be limited by laws relating to bankruptcy, reorganization, and other similar matters affecting creditors' rights, the covenants and agreements in the Bond Ordinance constitute valid and binding obligations of the Issuer, and the Initial Bond constitutes and Definitive Bonds will constitute valid and legally binding special obligations of the Issuer, secured by and payable, together with other bonds, from a ftrst lien on and pledge of the "Pledged Revenues", which include initially the "Net Revenues of the System" as such terms are defined in the Bond Ordinance, with the System consisting of the City's entire combined waterworks, sewer, and electric light and power system. I I I I I I I I I I I I I I I I I I I I I I I I I I I THE ISSUER has reserved the right, subject to the restrictions stated in the Bond Ordinance, to issue additional parity revenue bonds which also may be secured by and made payable from a first lien on and pledge of the Pledged Revenues. THE ISSUER also has reserved the right, subject to the restrictions stated in the Bond Ordinance, to amend the Bond Ordinance with the approval of the holders or owners of fifty-one pement in principal mount of all outstanding bonds which are secured by and payable from a first lien on and pledge of the Pledged Revenues. THE REGISTERED OWNERS of the Initial Bond and the Definitive Bonds shall never have the fight to demand payment of the principal thereof or interest thereon out of any funds raised or to be raised by taxation, or from any source whatsoever other than specified in the Bond Ordinance. IN OUR OPINION, except as discussed below, the interest on the Initial Bond and the Definitive Bonds (collectively, the "Bonds") is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, and assume compliance by the Issuer with, certain representations and covenants regarding the use and investment of the proceeds of the Initial Bond. We call your attention to the fact that failure by the Issuer to comply with such representations and covenants may cause the interest on the Bonds to become includable in gross income retroactively to the date of issuance of the Bonds. WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as the Initial Bond and tho Definitive Bonds, is (a) included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code, (b) subject to the branch profits tax imposed on fomigu corporations by section 884 of tho Code, and (c) included in tho passive investment income of an S corporation and subject to the tax imposed by section 1375 of the Code. EXCEPT AS STATED ABOVE, we express no opinion as to any federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Initial Bond and the Definitive Bonds. WE HAVE ACTED AS BOND COUNSEL for the Issuer for the sole purpose of rendering an opinion with respect to the legality and validity of the bonds described above under the Constitution and laws of the State of Texas, and with respect to the exemption of the interest on such bonds from federal income taxes, and for no other reason or purpose. We have not been requested to investigate or verify, and have not investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, and have not assumed any responsibility with respect thereto. Respectfully, 2 THIS PAGE LEFT BLANK INTENTIONALLY I I I I I I I I I I I I I I I I I I I