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HomeMy WebLinkAboutJuly 18, 2006 SS Agenda AGENDA CITY OF DENTON CITY COUNCIL July 18, 2006 After determining that a quorum is present, the City Council will convene in a Special Called Meeting of the City of Denton City Council on Tuesday, July 18, 2006 at 11 :30 a.m. in the City Council Chambers of City Hall, 215 E. McKinney, Denton, Texas at which the following items will be considered: 1. Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of Denton Certificates of Obligation ($12,665,000), Series 2006; approving and authorizing instruments and procedures relating thereto; and providing an effective date. 2. Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of Denton General Obligation Bonds ($3,695,000), Series 2006; approving and authorizing instruments and procedures relating thereto; and providing an effective date. 3. Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of Denton Utility System Revenue Bonds ($8,515,000), Series 2006; approving and authorizing instruments and procedures relating thereto; and providing an effective date. CERTIFICATE I certify that the above notice of meeting was posted on the bulletin board at the City Hall of the City of Denton, Texas, on the day of , 2006 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: July 18,2006 DEPARTMENT: Fiscal Operations ACM: Jon Fortune SUBJECT Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of Denton Certificates of Obligation ($12,665,000), Series 2006; approving and authorizing instruments and procedures relating thereto; and providing an effective date. BACKGROUND This ordinance authorizes the issuance, sale and delivery of Certificates of Obligation (COs) in the amount of $12,665,000 (including issuance costs) to fund the following capital improvements: $3,125,000 1,000,000 4,471,000 3,275,000 700,000 94~000 $12,665,000 Streets and Transportation Public Safety - Fire Station # 7 Solid Waste Improvements Vehicles and Equipment Airport Estimated Cost of Issuance Total Each of these items meet the stated purposes included in the City's Debt Service Management Policy [Section 403.07 IX(C)] for which COs may be issued. The Policy specifically states that COs may be issued to: . finance permanent improvements and land acquisition, the need for which arose between bond elections . finance costs associated with capital project overruns . acquire equipment/vehicles . leverage grant funding . renovate, acquire, construct facilities and facility improvements . construct street improvements . provide funding for master plans/studies . address necessary life safety needs Agenda Information Sheet July 18, 2006 Page 2 Following a comprehensive analysis on the City's financial outlook and stability, the City has obtained favorable bond ratings on these Bonds from both Standard and Poor's and Moody's Investor Services. The ratings are summarized below: Certificates of Obligation ($12~665~000)~ Series 2006 . Standard and Poor's AA- . Moody's Aa3 These Bonds will be sold through a competitive bid process following the guidelines established in the City's Debt Service Management Policy [Section 403.07 XII (A)]. All bids on these Bonds must be delivered to the City prior to 10:00 a.m., on July 18th. Award of the sale to the successful bidder will occur at the Special Called City Council meeting on July 18, 2006, at 11 :30 a.m. The agenda information packet includes a binder providing various documents as it relates to the issuance of these COs and General Obligation Bonds (discussed under a separate agenda item). The binder includes the rating reports from Standard and Poor's and Moody's, blank bid tabulation forms, a summary of historical bond sales and rates, bidding instructions and Preliminary Official Statements. I am providing this information to allow you ample time to review it prior to the sale. However, please be aware that information as it relates to the bids submitted and interest rates will not be available until the bidding period closes on July 18. Following the award of the bid by the City Council, the interest rates and information from the successful bidder will be included in the preliminary official statement making it final. Additional information is provided (not in binder) that includes a summary of the Capital Improvement Plan, the Ordinance to issue the COs, and a Paying Agent/Registrar Agreement. PRIOR ACTION/REVIEW (Council.. Boards.. Commission) These projects were approved by the City Council in the Capital Improvement Program (CIP), fiscal year ending 2005-2009. Changes or additions to the 2005-2009 CIP as it relates to the current use of COs have been reviewed and approved by the City Council Audit/Finance Committee. The City Council approved an Ordinance on June 20, 2006, directing the publication of Notice of Intention to issue these COso Agenda Information Sheet July 18, 2006 Page 3 FISCAL INFORMATION An estimated debt service schedule is included on page 21 in the Preliminary Official Statement attached. The estimated average annual debt service payment, including principal and interest, will total approximately $855,000. This payment is anticipated and included in the City's Long Range Financial Plan. EXHIBITS Capital Improvement Plan Ordinance Paying Agent/Registrar Agreement Information included in Binder: Rating Agency Reports Blank Bid Tabulation Forms Historical Bond Sales and Rates Bidders Instruction Forms Preliminary Official Statements Respectfully submitted: ,.. pI-.~ Jon Fortune Assistant City Manager GENERAL FUND Capital Improvement Plan 2005-06 TRANSPORTATION $4,445,600 $11,584,500 $6,045,000 $4,656,500 $26,731,600 Residential Streets 270,000 270,000 Intersection Signalization 270,000 270,000 Miscellaneous Roadways 220,000 220,000 Sidewalk Installation 210,000 210,000 BUILDINGIEQUIPMENT 200,000 400,000 1,305,000 1,905,000 South Branch Library Expansion 1,900,000 1,900,000 Senior Center Improvements 195,000 195,000 PARKS & BEAUTIFICATION 354,400 5,405,500 2,080,000 2,233,500 10,073,400 Civic Center Pool Slide Improvements 171,000 171,000 Avondale/Civic Center Park Equipment 135,000 135,000 Clear Creek Natural Heritage Center 100,000 100,000 City Hall Courtyard Renovation 90,000 90,000 Fred Moore Park Multipurpose Court 83,000 83,000 PrairieIRobertson Rail Trail Bridge 31,000 31,000 City Wide.Park Land Acquisition 20,000 20,000 Misc Paving 750,000 750,000 V intage Road 1,600,000 1,600,000 Replace Fire Engine 500,000 500,000 1,000,000 Replace Fire Quint 800,000 800,000 Fire Station #7 3,250,000 1,000,000 4,250,000 Public Safety Training Facility 8,200,000 8,200,000 Public Safety Radio Upgrade 2,500,000 2,500,000 Multi Modal Station 1,400,000 2,500,000 3,900,000 City Hall East Renovation 500,000 500,000 HV AC Replacement Program 400,000 550,000 950,000 Roof Replacement Program 500,000 250,000 750,000 Flooring Replacement Program 400,000 400,000 Pave City Hall East Parking Lot 125,000 125,000 Replace Animal Svcs Crematorium 90,000 90,000 Airport Western Development 500,000 500,000 Airport Improvements 700,000 700,000 Motor Pool 1,500,000 2,285,000 1,500,000 1,300,000 1,500,000 8,085,000 Solid Waste 1,550,000 4,471,000 1,486,500 876,500 641,500 9,025,500 ORDINANCE NO. 2006- AN ORDINANCE AUTHORIZING THE ISSUANCE, SALE, AND DELIVERY OF CITY OF DENTON CERTIFICATES OF OBLIGATION, SERIES 2006; APPROVING AND AUTHORIZING INSTRUMENTS AND PROCEDURES RELATING THERETO; AND PROVIDING AN EFFECTIVE DA TE~ THE STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON WHEREAS, the Certificate of Obligation Act of 1971, Section 271(c) of the Texas Local Government Code, as amended (the "Act") permits the City to issue and sell for cash the Certificates of Obligation hereinafter authorized; and WHEREAS, the City has duly caused notice of its intention to issue the Certificates of Obligation hereinafter authorized to be published at the times and in the manner required by the Act and no petition has been filed protesting the issuance thereof, NOW, THEREFORE THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS: Section 1.. AMOUNT AND PURPOSE OF THE CERTIFICATES~ The certificate or certificates of the City of Denton, Texas (the "Issuer") are hereby authorized to be issued and delivered in the aggregate principal amount of $12,665,000, for the purpose of paying all or a portion of the City's contractual obligations incurred pursuant to contracts for the purchase of certain real and personal property, to-wit: (a) road street and parking improvements; (b) construction and equipping of westside fire station No.7; (c) acquisition and installation of replacement heating venting and air conditioning equipment for City buildings; (d) improvements to the City's solid waste disposal system and acquisition of related equipment; (e) construction of a crematoriwn for the City's animal control department; (f) improvements to the municipal airport; (g) acquisition of vehicles and equipment for the City's motor pool; (h) construction of a multi -modal transit station and the acquisition of interests in land in connection with the construction .of such station; and also for the purpose of paying all or a portion of the City's contractual obligations for professional services, including engineers, architects, attorneys, map makers, auditors, and financial advisors, in connection with said Certificates of Obligation. Section 2. DESIGNA TION OF THE CERTIFICA TES~ Each certificate issued pursuant to this Ordinance shall be designated: "CITY OF DENTON CERTIFICATE OF OBLIGA nON, SERIES 2006", and initially there shall be issue4, sold, and delivered hereunder a single fully registered certificate, without interest coupons, payable in installments of principal (the U Initial Certificate IT), but the Initial Certificate may be assigned and transferred and/or converted into and exchanged for a like aggregate principal amount of fully registered certificates, without interest coupons, having serial maturities, and in the denomination or denominations of$5,000 or ally integral multiple of$5,000, all in the manner hereinafter provided~ The term "Certificates" as used in this Ordinance shall mean and include collectively the Initial Certificate and all substitute certificates exchanged therefor, as well as all other substitute certificates and replacement certificates issued pursuant hereto, and the term "CertificatesU shall mean any of the Certificates~ Section 3. INITIAL DATE, DENOMINATION, NUMBER, MATURITIES, INITIAL REGISTERED OWNER, AND CHARACTERISTICS OF THE INITIAL CERTIFICATE. (a) The Initial Certificate is hereby authorized to be issued, sold, and delivered hereunder as a single fully registered Certificate, without interest coupons, dated July 15, 2006, in the denomination and aggregate principal amount of $12,665,000, numbered R..-, payable in annual installments of principal to the initial registered owner thereot: to-wit: [INlTIAL PURCHASER] or to the registered assignee or assignees of said Certificate or any portion or portions thereof (in each case, the "registered ownern), with the annual installments of principal of the Initial Certificate to be payable on the dates, respectively, and in the principal amounts, respectively, stated in the FORM OF INITIAL CERTIFICATE set forth in this Ordinance~ (b) The Initial Certificate (i) mayor 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 Certificates, (iv) shall have the characteristics, and (v) shall be signed and sealed, and the principal of and interest on the Initial Certificate shall be payable, all as provided, and in the manner required or indicated, in the FORM OF INITIAL CERTIFICATE set forth in this Ordinance~ Section 4~ INTEREST.. The unpaid principal balance of the Initial Certificate shall bear interest from the date of the Initial Certificate to the respective scheduled due dates of the installments of principal of the Initial Certificate, and said interest shall be payable, all in the manner provided and at the rates and on the dates stated in the FORM OF INlTIAL CERTIPICA TE set forth in this Ordinance~ Section 5~ FORM OF INITIAL CERTIFICATE. The form of the Initial Certificate, including the form of Registration Certificate of the Comptroller of Public Accounts of the State of Texas to be endorsed on the Initial Certificate, shall be substantially as follows: FORM OF INITIAL CERTIPICA TE NO. R-_ $12,665,000 ~TEDSTATESOFAMEroCA STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON CERTIFICATE OF OBLIGATION SERIES 2006 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 Certificate or any portion or portions hereof (in each case, the "registered ownerU) the aggregate principal amount of $12,665,000 , (TWELVE MILLION SIX HUNDRED SIXTY FIVE THOUSAND DOLLARS) in annual installments of principal due and payable on February 15 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 Certificate hereinafter stated, on the balance of each such installment of principal, respectively, from time to time remaining unpaid, at the rates per annum as follows: YEAR 2007 PRINCIPAL AMOUNT $ 1,000,000 INTEREST RA TE(%) YEAR 2017 PRINCIPAL AMOUNT $ 340,000 INTEREST RA TE(%) 2 2008 1,090,000 2018 355,000 2009 1,135,000 2019 375,000 2010 1,190,000 2020 385,000 2011 1,235,000 2021 400,000 2012 765,000 2022 420,000 2013 805,000 2023 445,000 2014 405,000 2024 465,000 2015 425,000 2025 480,000 2016 450,000 2026 500,000 Interest shall fIrst be due and payable on February 15, 2007, and semiannually on each February 15 and August 15 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 Certificate are payable in lawful money of the United States of America, without exchange or collection charges. The installments ofprincipal and the interest on this Certificate are payable to the registered owner hereof through the services of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, DALLAS, TEXAS, which is the "Paying Agent/Registrar" for this Certificate. Payment of all principal of and interest on this Certificate 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 AgentJRegistrar on, and payable solely from, funds of the Issuer required by the ordinance authorizing the issuance of this Certificate (the "Certificate Ordinance") to be on deposit with the Paying AgentIRegistrar for such purpose as hereinafter provided; and such check shall be sent by the Paying AgentlRegistrar 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 at the close of business on the last day of the month next preceding each such date (the "Record Date't) on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. The Issuer covenants with the registered owner of this Certificate that on or before each principal and! or interest payment date for this Certificate it will make available to the Paying Agent/Registrar, from the "Interest and Sinking Pundt! created by the Certificate Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on this Certificate, 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 (n Special Payment Daten, 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 Certificate appearing on th~ registration books of the Paying AgentJRegistrar 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 Certificate 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 CERTIFICATE has been authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of $12,665,000 for the purpose of paying all or a portion of the City's contractual obligations incurred pursuant to contracts for the purchase of certain real and personal property, 3 to-wit: (a) road street and parking improvements; (b) construction and equipping of wests ide fIre station No. 7; (c) acquisition and installation of replacement heating venting and air conditioning equipment for City buildings; (d) improvements to the City's solid waste disposal system and acquisition of related equipment; ( e) construction of a crematoriwn for the City's animal control department; (f) improvements to the municipal aitport; (g) acquisition of vehicles and equipment for the City's motor pool; (h) construction of a mu It i- modal transit station and the acquisition of interests in land in connection with the construction of such station; and also for the purpose of paying all or a portion of the City's contractual obligations for professional services, including engineers, architects, attorneys, map makers, auditors, and financial advisors, in connection with said Certificates of Obligation. ONFEBRUARY 15,2016, or on any date whatsoever thereafter, the unpaid installments ofprincipal of this Certificate of Obligation 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, at the prepayment or redemption price of the par or principal amount thereof, plus accrued interest to the date fIXed for prepayment or redemption. If less than all of the Certificates are to be redeemed, the Issuer may select the maturities of the Certificates to be redeemed. If less than all of the Certificates of any maturity are to be redeemed, the Paying AgentIRegistrar shall determine by lot the Certificates, or portions thereot: within such maturity to be redeemed. A T 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 AgentIRegistrar 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 AgentIRegistrar for the payment of the required prepayment or redemption price for this Certificate 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 give~ and if due provision for such payment is made, all as provided above, this Certificate, or the portion thereofwhich 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/Registnir out of the funds provided for such payment. The Paying AgentIRegistrar shall record in the Registration Books all such prepayments or redemptions ofprincipal of this Certificate or any portion hereof. THIS CERTIFICATE, to the extent of the unpaid principal balance hereof, or any unpaid 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 Certificates, upon the terms and conditions set forth in the Certificate Ordinance. Among other requirements for such transfer, this Certificate must be presented and surrendered to the Paying AgentIRegistrar for cancellation, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying AgentIRegistrar, evidencing assignment by the initial registered owner of this Certificate, or any portion or porti~ns hereof in any integral multiple of $5,000, to the assignee or assignees in whose name or names this Certificate or any such portion or portions hereof is or are to be trans- ferred and registered. Any instrument or instruments of assignment satisfactory to the Paying AgentIRegistrar may be used to evidence the assignment of this Certificate or any such portion or portions hereofby the initial registered owner hereof. A new certificate or certificates payable to such assignee or assignees (which then will be the new registered owner or owners of such new Certificate or Certificates) or to the initial registered owner as to any portion of this Certificate which is not being assigned and transferred by the initial registered owner, shall be delivered by the Paying AgentIRegistrar in conversion of and exchange for this Certificate 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 Certificate or any portion hereof~ The registered owner of this Certificate shall be deemed and treated by the Issuer and the Paying AgentIRegistrar as the absolute owner 4 hereoffor all purposes, including payment and discharge ofliability upon this Certificate 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 Certificate Ordinance, this Certificate, to the extent of the Wlpaid principal balance hereof, may be converted into and exchanged for a like aggregate principal amount offully registered certificates, 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 Certificate 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 certificate issued in exchange for any portion of this Certificate shall have a single stated principal maturity date), upon surrender of this Certificate to the Paying Agent/Registrar for cancellation, all in accordance with the form and procedures set forth in the Certificate Ordinance.. If this Certificate or any portion hereof is assigned and transferred or converted each certificate 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 Certificate or portion hereof for which the substitute certificate is being exchanged, and shall bear interest at the rate applicable to and borne by such installment of principal or portion thereof. No such certificate shall be payable in installments, but shall have only one stated principal maturity date. AS PROVIDED IN THE CERTIFICATE ORDINANCE, TIllS CERTIFICATE IN ITS PRESENT FORM MAY BE ASSIGNED AND TRANSFERRED OR CONVERTED ONCE ONLY, and to one or more assignees, but the certificates issued and delivered in exchange for this Certificate or any portion hereof may be assigned and transferred, and converted, subsequently, as provided in the Certificate Ordinance~ The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for transferring, converting, and exchanging this Certificate 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 assigmnent, conversion, or exchange 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~ IN THE EVENT any Paying Agent/Registrar for this Certificate is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Certificate 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 Certificate. IT IS HEREBY certified, recited, and covenanted that this Certificate has been duly and validly authorized, issued, 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 Certificate have been perfonned, existed, and been done in accordance with law; that this Certificate is a general obligation of the Issuer, issued on the full faith and credit thereof; and that annual ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Certificate, as such interest comes due and. such principal matures, have been levied and ordered to be levied against all taxable property in the Issuer, and have been pledged irrevocab~y for such payment, within the limit prescribed by law; and that, together with other parity obligations, this Certificate additionally is payable from and secured by certain surplus revenues (not to exceed $10,000 in aggregate amount) derived by the Issuer from the ownership and operation of the City's Utility System (consisting of the City's combined waterworks system, sanitary sewer system, and electric light and power system), all as provided in the Certificate Ordinance. THE ISSUER has reserved the right to issue, in accordance with law, and in accordance with the Certificate Ordinance, other and additional obligations, and to enter into contracts, payable from ad valorem taxes and/or revenues of the City's Utility System, on a parity with, or with respect to said revenues, superior in lien to, this Certificate.. 5 BY BECOMING the registered owner of this Certificate, the registered owner thereby acknowledges all of the terms and provisions of the Certificate Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Certificate Ordinance is duly 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 Certificate and the Certificate Ordinance constitute a contract between the registered owner hereof and the Issuer.. IN WITNESS WHEREOF, the Issuer has caused this Certificate 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, has caused the official seal of the Issuer to be duly impressed, or placed in facsimile, on this Certificate, and has caused this Certificate to be dated July 15, 2006~ ATTEST: CITY OF DENTON, TEXAS By: Jennifer Walters City SecretaIy, City of Denton, Texas By: Perry R. McNeill Mayor, City of Denton, Texas (CITY SEAL) (INSERT BOND INSURANCE LEGEND, IF ANY) FORM OF REGISTRATION CERTIFICATE OF THE COMPTROLLER OF PUBLIC ACCOUNTS: COMPTROLLER'S REGISTRA nON CERTIFICATE: REGISTER NO.. I hereby certify that this Certificate has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Certificate has been registered by the Comptroller of Public Accounts of the State of Texas.. Witness my signature and seal this Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) Section 6.. ADDITIONAL CHARACTERISTICS OF THE CERTIFICATES. Re~stration and Transfer.. (a) The Issuer shall keep or cause to be kept at the principal corporate trust office of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, DALLAS, TEXAS (the "Paying AgentIRegistrar") books or records of the registration and transfer of the Certificates (the uRegistration Bookstl), and the Issuer hereby appoints the Paying AgentJRegistrar 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 Certificate to which payments with respect to the Certificates shall be mailed, as herein 6 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, Wlless otherwise required by law, shall not permit their inspection by any other entity. Registration of each Certificate may be transferred in the Registration Books only upon presentation and surrender of such Certificate to the Paying AgentJRegistrar for transfer of registration and cancellation, together with proper written instnunents of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, (i) evidencing the assignment of the Certificate, 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 Certificate or any such portion thereof registered in the name of such assignee or assignees.. Upon the assignment and transfer of any Certificate or any portion thereof: a new substitute Certificate or Certificates shall be issued in conversion and exchange therefor in the manner herein provided. The Initial Certificate, to the extent of the unpaid principal balance thereot: may be assigned and transferred by the initial registered owner thereof once only, and to one or more assignees designated in writing by the initial registered owner thereof. All Certificates issued and delivered in conversion of and exchange for the Initial Certificate shall be in any denomination or denominations of any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute Certificate shall have a single stated principal maturity date), shall be in the form prescribed in the FORM OF SUBSTITUTE CERTIFICATE set forth in this Ordinance, and shall have the characteristics, and may be assigne~ transferred, and converted as hereinafter provided.. If the Initial Certificate or any portion thereofis assigned and transferred or converted the Initial Certificate must be surrendered to the Paying Agent/Registrar for cancellation, and each Certificate issued in exchange for any portion of the Initial Certificate shall have a single stated principal maturity date, and shall not be payable in installments; and each such Certificate shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Certificate is being exchanged; and each such Certificate 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 Certificate is assigned and transferred, there shall be delivered to and registered in the name of the initial registered owner substitute Certificates in exchange for the unassigned balance of the Initial Certificate in the same manner as if the initial registered owner were the assignee thereof. If any Certificate or portion thereof other than the Initial Certificate is assigned and transferred or converted each Certificate issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Certificate for which it is exchanged. A form of assignment shall be printed or endorsed on each Certificate, excepting the Initial Certificate, which shall be executed by the registered owner or its duly authorized attorney or representative to evidence an assignment thereof. Upon surrender of any Certificates 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 Certificate or Certificates, having the characteristics herein described, payable to such assignee or assignees (which then wiU be the registered owner or owners of such new Certificate or Certificates), or to the previous registered owner in case only a portion of a Certificate is being assigned and transferred, all in conversion of and exchange for said assigned Certificate or Certificates or any portion or portions thereof, in the same form and marmer, and with the same effect, as provided in Section 6( d), below, for the conversion and exchange of Certificates by any registered owner of a Certificate. The Issuer shall pay the Paying Agent/Registrar1s standard or customary fees and charges for making such transfer and delivery of a substitute Certificate or Certificates, but the one requesting such transfer shall pay any taxes or other govermnental charges required to be paid with respect thereto.. The Paying Agent/Registrar shall not be required to make transfers of registration of any Certificate or any portion thereof 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.. 7 (b ) Ownership of Certificates~ The entity in whose name any Certificate shall be registered 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 Certificate shall be overdue, and the Issuer and the Paying AgentJRegistrar 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 Certificate shall be made only to such registered owner.. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Certificate to the extent of the sum or sums so paid.. ." ( c) Payment of Certificates and Interest. The Issuer hereby further appoints the Paying Agent/Registrar to act as the paying agent for paying the principal of and interest on the Certificates, and to act as its agent to convert and exchange or replace Certificates, 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 Certificates, and of all conversions and exchanges of Certificates, and all replacements of Certificates, 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 DateU) 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 C.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 Certificate 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. (d) Conversion and Exchange or Renlacement: Authentication. Each Certificate issued and delivered pursuant to this Ordinance, to the extent of the unpaid principal balance or principal amount thereof, may, upon surrender of such Certificate 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 du1y 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 certificates, without interest coupons, in the forin prescribed in the FORM OF SUBSTITUTE CERTIFICATE set forth in this Ordinance, in the denomination of$5,OOO, or any integral multiple of$5,000 (subject to the requirement hereinafter stated that each substitute Certificate 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 principal balance or principal amount of any Certificate or Certificates so surrendere~ and payable to the appropriate registered owner, assignee, or assignees, as the case may be. If the Initial Certificate is assigned and transferred or converted each substitute Certificate issued in exchange for any portion of the Initial Certificate shall have a single stated principal maturity date, and shall not be payable in installments; and each such Certificate shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Certificate is being exchanged; and each such Certificate shall bear interest at the single rate applicable to and b~me by such installment of principal or portion thereof for which it is being exchanged. If any Certificate or portion thereof (other than the Initial Certificate) is assigned and transferred or converted, each Certificate issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Certificate for which it is being exchanged.. Each substitute Certificate shall bear a letter and/or nwnber to distinguish it from each other Certificate~ The Paying Agent/Registrar shall convert and exchange or replace Certificates as provided herein, and each fully registered certificate delivered in conversion of and exchange for or replacement of any Certificate or portion thereof as permitted or required by any provision of this Ordinance shall constitute one of the Certificates for all purposes of this Ordinance, and may again be converted and exchanged or replaced. It is specifically provided that any Certificate authenticated in conversion of and exchange for or replacement of another Certificate on or prior to the first scheduled Record Date for the Initial Certificate shall bear interest from the date of the Initial 8 Certificate, but each substitute Certificate so authenticated after such first scheduled Record Date shall bear interest from the interest payment date next preceding the date on which such substitute Certificate was so authenticated, unless such Certificate 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 Certificate the interest on the Certificate for which it is being exchanged is due but has not been pai~ then such Certificate shall bear interest from the date to which such interest has been paid in full. THE INITIAL CERTIPICA TE issued and delivered pursuant to this Ordinance is not required to be, and shall not be, authenticated by the Paying AgentIRegistrar, but on each substitute Certificate issued in conversion of and exchange for or replacement of any Certificate or Certificates issued under this Ordinance there shall be printed a certificate, in the form substantially as follows: up A YING AGENTIREGISTRAR'S AUTHENTICATION CERTIFICATE It is hereby certified that this Certificate has been issued under the provisions of the Certificate Ordinance described on the face of this Certificate; and that this Certificate has been issued in conversion of and exchange for or replacement of a certificate, certificates, or a portion of a certificate or certificates of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public ACCOWltS of the State of Texas. JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, DALLAS, TEXAS, Paying AgentIRegistrar Dated By "Authorized Representative" An authorized representative of the Paying Agent/Registrar shall, before the delivery of any such Certificate, date and manually sign the above Certificate, and no such Certificate shall be deemed to be issued or outstanding unless such Certificate is so executed. The Paying Agent/Registrar promptly shall cancel all Certificates 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 any Certificate or .portion thereof: and the Paying AgentIRegistrar shall provide for the printing, execution, and delivery of the substitute Certificates in the manner prescribed herein~ Pursuant to Chapter 1201, Texas Government Code, the duty of conversion and exchange or replacement of Certificates as aforesaid is hereby _ imposed upon the Paying AgentIRegistrar, and, upon the execution of the above Paying Agent/Registrar's Authentication Certificate, the converted and exchanged or replaced Certificate shall be va1i~ incontestable, and enforcea~le in the same manner and with the same effect as the Initial Certificate 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 AgentJRegistrar's standard or customary fees and charges for transferring, . converting, and exchanging any Certificate or any portion thereof: but the one requesting any such transfer, conversion, and exchange shall pay any taxes or govenunental charges required to be paid with respect thereto as a condition precedent to the exercise of such privilege of conversion and exchange. The Paying AgentIRegistrar shall not be required to make any such conversion and exchange or replacement of Certificates or any portion thereof 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. 9 (e) In GeneraL All Certificates issued in conversion and exchange or replacement of any other Certificate or portion thereof, (i) shall be issued in fully registered form, without interest coupons, with the principal of and interest on such Certificates to be payable only to the registered owners thereof: (ii) mayor shall be redeemed prior to their scheduled maturities, (iii) may be transferred and assigned, (iv) may be converted and exchanged for other Certificates, (v) shall have the characteristics, (vi) shall be signed and sealed, and (vii) the principal of and interest on the Certificates shall be payable, all as provided, and in the manner required or indicated, in the FORM OF SUBSTITUTE CERTIFICATE set forth in this Ordinance. (f) Payment of Fees and Charges. The Issuer hereby covenants with the registered owners of the Certificates that it will (i) pay the standard or customary fees and charges of the Paying AgentIRegistrar for its services with respect to the payment of the principal of and interest on the Certificates, when due, and (ii) pay the fees and charges of the Paying AgentJRegistrar for services with respect to the transfer of registration of Certificates, and with respect to the conversion and exchange of Certificates solely to the extent above provided in this Ordinance.. (g) Substitute Payin@: AgentIRegistrar. The Issuer covenants with the registered owners of the Certificates that at all times while the Certificates 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 Certificates 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 AgentJRegistrar upon not less than 120 days written notice to the Paying AgentJRegistrar, 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 otherwise cease to act as such, the Issuer covenants that it will promptly appoint a competent and legally qualified b~ trust company, financial institution, or other agency to act as Paying AgentIRegistrar under this Ordinance. Upon any change in the Paying AgentJRegistrar, the previous Paying AgentJRegistrar shall promptly transfer and deliver the Registration Books (or a copy thereof), along with all other pertinent books and records relating to the Certificates, to the new Paying AgentIRegistrar designated and appointed by the Issuer.. Upon any change in the Paying AgentIRegistrar, the Issuer promptly will cause a written notice thereof to be sent by the new Paying Agent/Registrar to each registered owner of the Certificates, by United States mail, frrst-class postage prepaid, which notice also shall give the address of the new Paying AgentJRegistrar. 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 AgentIRegistrar. Section 7. FORM OF SUBSTITUTE CERTIFICATES.. The fonn of all Certificates issued in conversion and exchange or replacement of any other Certificate or portion thereof, including the form of Paying AgentJRegistrar's Certificate to be printed on each of such Certificates, and the Form of Assignment to be printed on each of the Certificates, shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are permitted or required by this Ordinance.. FORM OF SUBSTITUTE CERTIFICATE (Book-Entry Only Legend, ifappropriate) NO~ UNITED STATES OF ArvtERICA STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON CERTIFICATE OF OBLIGATION SERIES 2006 PRINCIPAL AMOUNT $ 10 INTEREST RATE MATURITY DATE DA TEn DATE CUSIP NO. % 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 or to the registered assignee hereof (either being hereinafter called the "registered ownerlJ) the principal amount of and to pay interest thereon, calculated on the basis of a 360..day year composed of twelve 30-day months, from July 15, 2006, to the matwity date specified above, at the interest rate per annum specified above; with interest being first due and payable on February 15, 2007, and semiannually on each August 15 and February 15 thereafter, except that if the date of authentication of this Certificate 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~ THE PRINCIPAL OF AND INTEREST ON this Certificate are payable in lawful money of the United States of Am.eric~ without exchange or collection charges~ The principal of this Certificate shall be paid to the registered owner hereof upon presentation and surrender of this Certificate at matwity, at the principal corporate trust office of JPMORGAN CHASE BANK, NATIONAL AS SOCIA nON, DALLAS, TEXAS, which is the "Paying AgentIRegistrar" for this Certificate. The payment of interest on this Certificate 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 Certificates (the" Certificate Ordinance U) 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 last day of the month next preceding each such date (the "Record Daten) on the Registration Books kept by the Paying AgentIRegistrar, 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. The Issuer covenants with the registered owner of this Certificate that on or before each principal payment date, interest payment date, and accrued interest payment date for this Certificate it will make available to the Paying AgentIRegistrar, from the "Interest and S~ing Fund" created by the Certificate Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Certificates, 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 ("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, frrst class postage prepaid, to the 11 address of each Holder of a Certificate 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 Certificate shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions in the City where the Paying AgentlRegistrar 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 CERTIFICATE is one of an issue of Certificates initially dated July 15,2006, authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of $ 12,665,000, for the purpose of paying all or a portion of the City's contractual obligations incurred pursuant to contracts for the purchase of certain real and personal property, to-wit: (a) road street and parking improvements; (b) construction and equipping of wests ide fire station No.7; (c) acquisition and installation of replacement heating venting and air conditioning equipment for City buildings; (d) improvements to the City's solid waste disposal system and acquisition of related equipment; (e) construction of a crematorium for the City's animal control department; (1) improvements to the municipal airport; (g) acquisition of vehicles and equipment for the City's motor pool; (h) construction of a multi..modal transit station and the acquisition of interests in land in connection with the construction of such station; and also for the purpose of paying all or a portion of the City's contractual obligations for professional services, including engineers, architects, attorneys, map makers, auditors, and fmancial advisors, in connection with said Certificates of Obligation.. ON FEBRUARY 15, 2016, or on any date whatsoever thereafter, the Certificates of this Series may be redeemed prior to their scheduled maturities, at the option of the Issuer, with funds derived from any available and lawful source, as a whole, or in part, at the redemption price of the par or principal amount thereof, plus accrued interest to the date fixed for redemption. If less than all of the Certificates are to be redeemed, the Issuer may select the maturities of the Certificates to be redeemed. If less than all of the Certificates of any maturity are to be redeemed, the Paying Agent/Registrar shall determine by lot the Certificates, or portions thereof, within such maturity to be redeemed. A T LEAST 30 days prior to the date fixed for any redemption of Certificates or portions thereofprior to maturity a written notice of such redemption shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid, to the registered owner of each Certificate to be redeemed at its address as it appeared on the 45th day prior to such redemption date; provided, however, that the failure to send, mail, or 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 Certificate. 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 Certificates or portions thereof which are to be so redeemed, plus accrued interest thereon to the date fixed for redemption~ If such written notice of redemption is given and if due provision for such payment is made, all as provided above, the Certificates or portions thereof which 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 plus accrued interest from the Paying Agent/Registrar out of the funds provided for such payment If a portion of any Certificate shall be redeemed a substitute Certificate or Certificates having 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~ 12 THIS CERTIFICATE OR ANY PORTION OR PORTIONS HEREOF IN ANY INTEGRAL MOL TIPLE OF $5,000 may be assigned and shall be transferred only in the Registration Books of the Issuer kept by the Paying AgentJRegistrar acting in the capacity of registrar for the Certificates, upon the terms and conditions set forth in the Certificate Ordinance. Among other requirements for such assignment and transfer, this Certificate must be presented and surrendered to the Paying AgentJRegistrar, together with proper instrwnents of assignment, in form and with guarantee of signatures satisfactory to the Paying AgentJRegistrar, evidencing assignment of this Certificate or any portion or portions hereof in any integral multiple of $5,000 to the assignee or assignees in whose name or names this Certificate or any such portion or portions hereof is or are to be transferred and registered. The form of Assignment printed or endorsed on this Certificate shall be executed by the registered owner or its duly authorized attorney or representative, to evidence the assignment hereof A new Certificate or Certificates payable to such assignee or assignees (which then will be the new registered owner or owners of such new Certificate or Certificates), or to the previous registered owner in the case of the assignment and transfer of only a portion of this Certificate, may be delivered by the Paying AgentJRegistrar in conversion of and exchange for this Certificate, all in the form and manner as provided in the next paragraph hereof for the conversion and exchange of other Certificates.. The Issuer shall pay the Paying AgentJRegistrar's standard or customary fees and charges for making such transfer, but the one requesting such transfer shall pay any taxes or other governmental charges required to be paid with respect thereto~ The Paying AgentIRegistrar shall not be required to make transfers of registration of this Certificate or any portion hereof 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. The registered owner of this Certificate shall be deemed and treated by the Issuer and the Paying AgentJRegistrar as the absolute owner hereof for all purposes, including payment and discharge of liability upon this Certificate to the extent of such payment, and the Issuer and the Paying AgentJRegistrar shall not be affected by any notice to the contrary. ALL CERTIFICATES OF THIS SERIES are issuable solely as fully registered certificates, without interest coupons, in the denomination of any integral multiple of $5,OOO~ As provided in the Certificate Ordinance, this Certificate, 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 offully registered certificates, without interest coupons, payable to the appropriate registered owner, assignee, or assignees, as the case may be, having the same maturity date, and bearing 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 Certificate to the Paying AgentIRegistrar for cancellation, all in accordance with the form and procedures set forth in the Certificate Ordinance. The Issuer shall pay the Paying AgentJRegistrar's standard or customary fees and charges for transferring, converting, and exchanging any Certificate 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 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 during the period conunencing 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. IN THE EVENT any Paying AgentJRegistrar for the Certificates is changed by the Issuer, resigns, or othelWise ceases to act as such, the Issuer has covenanted in the Certificate 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 Certificates~ IT IS HEREBY certified, recited, and covenanted that this Certificate has been duly and validly authorized, issued, 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 Certificate have been performed, existed, and been done in accordance with law; that this Certificate is a general obligation of the 13 Issuer, issued on the full faith and credit thereof; and that annual ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Certificate, as such interest comes due and such principal matures, have been levied and ordered to be levied against all taxable property in the Issuer, and have been pledged irrevocably for such payment, within the limit prescribed by law; and that, together with other parity obligations, this Certificate, and the other Certificates of this Series, additionally are payable from and secured by certain surplus revenues (not to exceed $10,000 in aggregate amount) derived by the Issuer from the ownership and operation of the City's Utility System (consisting of the City1s combined waterworks system, sanitary sewer system, and electric light and power system), all as provided in the Certificate Ordinance. THE ISSUER has reserved the right to issue, in accordance with law, and in accordance with the Certificate Ordinance, other and additional obligations, and to enter into contracts, payable from ad valorem taxes and/or revenues of the City's Utility System, on a parity with, or with respect to said revenues, superior in lien to, this Certificate. BY BECOMING the registered owner of this Certificate, the registered owner thereby acknowledges all of the terms and provisions of the Certificate Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Certificate Ordinance is duly 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 Certificate and the Certificate Ordinance constitute a contract between each registered owner hereof and the Issuer~ IN WIlNESS WHEREOF, the Issuer has caused this Certificate to be signed with the manual or facsimile signature of the Mayor of the Issuer and cOWltersigned 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 Certificate~ ATTEST: CITY OF DENTON, TEXAS By: Jennifer Walters City Secretary, City of Denton, Texas By: Perry R. McNeill Mayor, City of Denton, Texas (CITY SEAL) FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE PAYING AGENT/REGISTRAR'S AUTHENTICA TION CERTIFICATE It is hereby certified that this Certificate has be.en issued under the provisions of the Certificate Ordinance described on the face of this Certificate; and that this Certificate has been issued in conversion of and exchange for or replacement of a certificate, certificates, or a portion of a certificate or certificates of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public ACCOWlts of the State ofTexas~ JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, DALLAS, TEXAS, Paying Agent/Registrar Dated 14 By Authorized Representative (INSERT BOND INSURANCE LEGEND, IF ANY) FORM OF ASSIGNMENT: ASSIGNMENT FOR V ALOE RECEIVED, the undersigned registered owner of this Certificate, or duly authorized representative or attorney thereof, hereby assigns this Certificate to / (Assignee's Social Security or Taxpayer Identification Number / (print or typewrite Assignee's name and address, including zip code) and hereby irrevocably constitutes and appoints attorney to transfer the registration of this Certificate 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 guarantor 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 Certificate in every particular without alteration or enlargement or any change whatsoever ~ Section 8. TAX .LEVY~ A special Interest and Sinking Fund (the "Interest and Sinking Fundft) is hereby created solely for the benefit of the Certificates, and the Interest and Sinking Fund shall be established and maintained by the Issuer at an official depository bank of the Issuer~ The Interest and Sinking Fund shall be kept separate and apart from all other funds and accounts of the Issuer, and shall be used only for paying the interest on and principal of the Certificates~ All ad valorem taxes levied and collected for and on account of the Certificates, together with any premium and accrued interest received upon sale of the Certificates, shall be deposited, as collected, to the credit of the Interest and Sinking Fund. During each year while any 15 of the Certificates or interest thereon are outstanding and unpaid, the governing body of the Issuer shall compute and ascertain a rate and amount of ad valorem tax which will be sufficient to raise and produce the money required to pay the interest on the Certificates as such interest becomes due, and to provide and maintain a sinking fund adequate to pay the principal of its Certificates as such principal matures or is scheduled for redemption (but never less than 2% of the original principal amount of the Certificates as a sinking fund each year)9 Said tax shall be based on the latest approval tax rolls of the Issuer, with full allowance being made for tax delinquencies and the cost of tax collection~ Said rate and amount of ad valorem tax is hereby levied, and is hereby ordered to be levied, against all taxable property in the Issuer for each year while any of the Certificates or interest thereon are outstanding and unpaid; and said tax shall be assessed and collected each such year and deposited to the credit of the aforesaid Interest and Sinking Fund. Said ad valorem taxes sufficient to provide for the payment of the interest on and principal of the Certificates, as such interest comes due and such principal matures or is scheduled for redemption, are hereby pledged for such payment, within the limit prescribed by law. Section 9. SURPLUS REVENUES. The Certificates additionally shall be payable from and secured by surplus revenues in accordance with Section 1502 of the Texas Government Code, as amended, to the extent hereinafter permitted, derived by the Issuer from the ownership and operation of the Issuer's Utility System (consisting of its combined waterworks system, sanitary sewer system, and electric light and power system) remaining after (a) payment of all amounts constituting operation and maintenance expenses of said Utility System, and (b) payment of all debt service, reserve, and other requirements and amounts required to be paid under all ordinances heretofore or hereafter authorizing (i) all bonds and (ii) all other obligations not on a parity with the Certificates, which are payable from and secured by any Utility System revenues, and ( c) payment of all amounts payable from any Utility System revenues pursuant to contracts heretofore or hereafter entered into by the Issuer in accordance with law (the "Surplus Revenues"). If, for any reason, the Issuer fails to deposit ad valorem taxes levied pursuant to Section 8 hereof to the credit of the Interest and Sinking Fund in an amount sufficient to pay, when due, the principal of and interest on the Certificates, then Surplus Revenues, to the extent hereinafter pennitted, shall be deposited to the credit of the Interest and Sinking Fund and used to pay such principal and/or interest A maximwn aggregate of $10,000 of Surplus Revenues may be used to pay principal and/or interest on the Certificates and any obligations on a parity therewith.. The Certificates and any obligations on a parity therewith are not, and shall not be deemed to be, payable from or secured by any Surplus Revenues in excess of an aggregate of$lO,OOO. Until and unless an aggregate of $10,000 of Surplus Revenues actually is used to pay any such principal and/or interest, additional obligations, payable from and secured by all or any remaining unused part of said aggregate of $10,000 of Surplus Revenues, may be issued by the Issuer on a parity with the Certificates and any other then outstanding parity obligations, with the Certificates and all such additional parity obligations to be payable from and secured equally and ratably by all or any remaining unused part of said aggregate. The Issuer reserves, and shall have, the right to issue bonds, and other obligations not on a parity with the Certificates, and to enter into contracts, in accordance with applicable laws, to be payable from and secured by any Utility System revenues other than the aggregate of $10,000 of Surplus Revenues as. described above. The Certificates are on a parity with those issues of City of Denton Certificates of Obligation, Series 1998, Series 1999, S~ries 2000, Series 2001, Series 2002, Series 2003, Series 2004 and Series 2005 (the ".Outstanding Certificatestf), as permitted in the Ordinances authorizing same; and it is hereby found and determined that none of the above defined Surplus Revenues have ever been used to pay any principal and/or interest on the Outstanding Certificates9 Section 10. DEFEASANCE OF CERTIFICA TES9 (a) Any Certificate and the interest thereon shall be deemed to be paid, retired, and no longer outstanding (a II Defeased Certificate U) within the meaning of this Ordinance, except to the extent provided in subsection (d) of this Section, when payment of the principal of such Certificate, plus interest thereon to the due date either (i) shall have been made or caused to be made in accordance with the terms thereof, or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar for such payment (1) lawful 16 money of the United States of America 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 provide for such payment, and when proper arrangements have been made by the Issuer with the Paying Agent/Registrar for the payment of its services until all Defeased Certificates shall have become due and payable~ At such time as a Certificate shall be deemed to be a Defeased Certificate hereunder, as aforesaid, such Certificate and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, the ad valorem taxes herein levied and pledged as provided in this Ordinance, and such principal and interest shall be payable solely from such money or Government Obligations. (b) Any moneys so deposited with the Paying Agent/Registrar may at the written direction of the Issuer also be invested in Government Obligations, maturing in the amounts and times as hereinbefore set forth, and all income from such Government Obligations received by the Paying Agent/Registrar which is not required for the payment of the Certificates and interest thereon, with respect to which such money has been so deposited, shall be turned over to the Issuer, or deposited as directed in writing by the Issuer~ (c) The term "Government Obligations" as used in this Section shall mean (i) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America., (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date of the purchase thereof are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision ofa state that have been refunded and that, on the date the governing body of the District adopts or approves the proceedings authorizing the financial arrangements are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent. (d) Until all Defeased Certificates shall have become due and payable, the Paying Agent/Registrar shall perfonn the services of Paying Agent/Registrar for such Defeased Certificates the same as if they had not been defeased, and the Issuer shall make proper arrangements to provide and pay for such services as required by this Ordinance. Section ll~ DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED CERTIFICATES~ (a) Reolacement Certificates. In the event any outstanding Certificate is damaged, mutilated, lost, stolen, or destroyed, the Paying Agent/Registrar shall cause to be printed, executed, and delivered, a new certificate of the same principal amount, maturity, and interest rate, as the damaged, mutilated, lost, stolen, or destroyed Certificate, in replacement for such Certificate in the manner hereinafter provided. (b) Anolication for Replacement Certificates~ Application for replacement of damaged, mutilated, lost, stolen, or destroyed Certificates shall be made by the registered owner thereof to the Paying Agent/Registrar. In every case of loss, theft, or destruction of a Certificate, the registered owner applying for a replacement certificate 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 Certificate, the registered owner shall furnish to the Issuer and the Paying Agent/Registrar evidence to their satisfaction of the loss, theft, or destruction of such Certificate, as the case may be. In every case of damage or mutilation of a Certificate, the registered owner shall surrender to the Paying Agent/Registrar for cancellation the Certificate so damaged or mutilated~ 17 ( c ) No Default Occurred~ Notwithstanding the foregoing provisions of this Section, in the event of any such Certificate shall have matured, and no default has occurred which is then continuing in the payment of the principal of, or interest on the Certificate, the Issuer may authorize the payment of the same (without surrender thereof except in the case of a damaged or mutilated Certificate) instead of issuing a replacement Certificate, provided security or indemnity is :furnished as above provided in this Section~ (d) Charge for Issuing Replacement Certificates9 Prior to the issuance of any replacement certificate, the Paying Agent/Registrar shall charge the registered owner of such Certificate with all legal, printing, and other expenses in connection therewith9 Every replacement certificate issued pursuant to the provisions of this Section by virtue of the fact that any Certificate is lost, stolen, or destroyed shall constitute a contractual obligation of the Issuer whether or not the lost, stolen, or destroyed Certificate 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 Certificates duly issued under this Ordinance. (e) Authority for Issuing Replacement Certificates. In accordance with Chapter 1201, Texas Government Code, this Section of this Ordinance shall constitute authority for the issuance of any such replacement certificate 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 certificates is hereby authorized and imposed upon the Paying AgentJRegistrar, and the Paying Agent/Registrar shall authenticate and deliver such Certificates in the form and manner and with the effect, as provided in Section 6( d) of this Ordinance for Certificates issued in conversion and exchange for other Certificates. Section 12. CUSTODY, APPROVAL, AND REGISTRATION OF CERTIFICATES; CER TIFICA TE COUNSEL'S OPINION, CUSIPNUMBERS, PREAMBLE AND INSURANCE. The Mayor of the Issuer is hereby authorized to have control of the Initial Certificate issued hereWlder and all necessary records and proceedings pertaining to the Initial Certificate pending its delivery and its investigation, exami- nation, and approval by the Attorney General of the State of Texas, and its registration by the Comptroller of Public Accounts of the State of Texas9 Upon registration of the Initial Certificate said Comptroller of Public Accounts (or a deputy designated in writing to act for said Comptroller) shall manually sign the Comptrollers Registration Certificate on the Initial Certificate, and the seal of said Comptroller shall be impressed, or placed in facsimile, on the Initial Certificate. The approving legal opinion of the Issuer's Bond Counsel and the assigned CUSIP numbers may, at the option of the Issuer, be printed on the Initial Certificate or on any Certificates issued and delivered in conversion of and exchange or replacement of any Certificate, but neither shall have any legal effect, and shall be solely for the convenience and information of the registered owners of the Certificates. The preamble to this Ordinance is hereby adopted and made a part hereof for all purposes. If insurance is obtained on any of the Certificates, the Initial Certificate and all other Certificates shall bear an appropriate legend concerning insurance as provided by the insurer~ Section 13. COVENANTS REGARDING TAX-EXEMPTION OF INTEREST ON THE CER TIFICA TES. (a) Covenants. The Issuer covenants to take any action necessary to assure, or refrain from any action which would adversely affect, the ~eatment of the Certificates as obligations described in section 103 of the Internal Revenue Code of 1986, as amended (the tfCode"), the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation9 In furtherance thereot the Issuer covenants as follows: (1) to take any action to assure that no more than 10 percent of the proceeds of the Certificates or the projects fmanced therewith (less amoWlts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, ifmore than 10 percent of the proceeds or the projects financed therewith are so used, such amounts, whether or not received by the Issuer, with respect to such private business use, do not, under the terms of this Order 18 or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Certificates, in contravention of section 141 (b )(2) of the Code; (2) to take any action to assure that in the event that the "private business use" described in subsection (1) hereof exceeds 5 percent of the proceeds of the Certificates or the projects fmanced therewith (less amounts deposited into a reserve fim~ if any) then the amount in excess of 5 percent is used for a "private business use" which is n related n and not U disproportionate, If within the meaning of section 141(b)(3) of the Code, to the governmental use; (3) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Certificates (less amoWlts deposited into a reserve fimd, if any) is directly or indirectly used to fmance loans to persons, other than state or local governmental units, in contravention of section 141 (c) of the Code; (4) to refrain from taking any action which would othenvise result in the Certificates being treated as "private activity bondstl within the meaning of section 141(b) of the Code; (5) to refrain from taking any action that would result in the Certificates being "federally guaranteed" within the meaning of section 149(b) of the Code; (6) to refrain from using any portion of the proceeds of the Certificates, directly or indirectly, to acquire or to replace fimds which were used, directly or indirectly, to acquire investment property (as defmed in section 148(b )(2) of the Code) which produces a materially higher yield over the tenn of the Certificates, other than investment property acquired with -- (A) proceeds of the Certificates invested for a reasonable temporary period of 3 years or less or, in the case of a refunding bond, for a period of 90 days or less until such proceeds are needed for the purpose for which the bonds are issued, (8) amounts invested in a bona fide debt service fimd, within the meaning of section L148-1(b) of the Treasury Regulations, and (C) amoWlts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Certificates; (7) . to otherwise restrict the use of the proceeds of the Certificates or amounts treated as proceeds of the Certificates, as may be necessary, so that the Certificates do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section. 149(d) of the Code (relating to advance refimdings); and (8) , to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Certificates) an amount that is at least equal to 90 percent of the tlExcess Earnings," within the meaning of section 148(t) of the Code and to pay to the United States of America, not later than 60 days after the Certificates have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings lUlder section 1_48(t) of the Code.. (b) Proceeds. The Issuer understands that the tenn "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 Certificates~ 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~ 19 In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Certificates, 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 nationally recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Certificates 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 Certificates, the Issuer agrees _to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Certificates 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 Certificates. Section 14~ ALLOCATION OF, AND LIMlTATIONON, 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 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 after the earlier of (1) the fifth anniversary of the delivery of the Certificates, or (2) the date the Certificates 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 Certificates~ 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 15.. 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 Certificates~ For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains a legal opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. Section 16~ INTEREST EARNINGS ON CERTIFICATE PROCEEDS. Interest earnings derived from the investment ofproceeds from the sale of the Initial Certificate shall be used along with other proceeds for the purposes for which the Certificates are issued; provided that after.completion of such purposes, 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 certificate proc~eds which are required to be rebated to the United States of America pursuant to Section 13 hereof in order to prevent the Certificates from being "arbitrage bonds" within the meaning of the Code shall be so rebated and not considered as interest earnings for the purposes of this Section~ Section 17. SALE OF INITIAL CERTIFICATE. The Initial Certificate is 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 to be deposited into the Interest and Sinking Fund)~ It is hereby officially found, determined, and declared that the Initial Certificate has been sold at public sale to the bidder offering the lowest interest cost, after receiving sealed bids pursuant to a Notice of Sale and Bidding Instructions and Preliminary Official Statement dated ~ 2006, 20 prepared and distributed in connection with the sale of the Initial Certificate. Said Notice of Sale and Bidding Instructions and Preliminaty 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 Certificate is hereby approved9 It is further officially found, determined, and declared that the statements and representations contained in said Notice of Sale and Bidding Instructions and Preliminaty Official Statement are true and correct in all material respects, to the best knowledge and belief of the governing body of the Issuer. Section 18~ OFFICIAL STATEMENT. An Official Statement dated as of the date of this meeting has been prepared in connection with the sale of the Initial Certificate and the Certificates, 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 Certificates is hereby approved9 It is further officially found, detennined, and declared that the statements and representations contained in said Official Statement are true 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 2006, prior to the date hereof is hereby ratified and approved9 Section 19. DTC REGISTRATION. The Certificates initially shall be issued and delivered in such manner that no physical distribution of the Certificates will be made to the public, and The Depository Trust Company ('tDTe"), New York, New York, initially will act as depository for the Certificates9 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 "clearing corporationU within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered under Section 17 A of the federal Securities Exchange Act of 1934, as amended, and the Issuer accepts, but in no way verifies, such representations~ The Initial Certificate 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 Certificate and deliver in exchange therefor a substitute Certificate for each maturity of such Initial Certificate, with each such substitute Certificate to be registered in the name of CEDE & CO., the nominee ofDTC, and it shall be the duty of the Paying Agent/Registrar to take such action~ It is expected that DTC will hold the Certificates on behalf of the Purchaser and/or the DTC Participants, as defmed and described in the Official Statement referred to and approved in Section 18 hereof (the nDTC Participants"). So long as each Certificate 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 Certificates by DTC Participants in integral amounts of$5,000, with transfers of ownership being effected on the records ofDTC and the DTC Participants pursuant to rules and regulations established by them, and that the substitute Certificates initially deposited with DTC shall be immobilized and not be further exchanged for substitute Certificates except as hereinafter provided. The Issuer is not responsible or liable for any functions ofDTC, will not be responsible for paying any fees or charges with respect to its selVices, will not be responsible or liable for maintaining, supervising, or reviewing the records of DTC or the DTC J;>articipants, or protecting any interests or rights of the beneficial owners of the Certificates. It shall be the duty of the Purchaser and the DTC Participants to make all arrangements with DTC to establish this book-entry system, the beneficial ownership of the Certificates, and the method of paying the fees and charges ofDTC~ 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 & C09) book-entry only registration requirement described above, and to pennit the Certificates to be registered in the name of any owner. If the Issuer exercises its right and option to tenninate such requirement, it shall give written notice of such termination to the Paying Agent/Registrar and to DTC, and thereafter the Paying Agent/Registrar shall, upon presentation and proper request, register any Certificate in any name as provided for in this Ordinance9 Notwithstanding the initial establishment of the foregoing 21 book-entry system with DTC, if for any reason any of the originally delivered substitute Certificates is duly filed with the Paying Agent/Registrar with proper request for transfer and substitution, as provided for in this Ordinance, substitute Certificates 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 Certificates. Section 20. CONTINUING DISCLOSURE. (a) Annual Reports. (i) The Issuer shall provide armuaIly to each NRMSIR and any SID, within six months after the end of each fiscal year ending in or after 2006, financial infonnation and operating data with respect to the Issuer of the general type included in the final Official Statement authorized by Section 18 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 so to be provided shall be (1) prepared in accordance with the acCOlUlting 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 fmancial infonnation 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, ifit is available from the MSRB) that theretofore has been provided to each NRMSIRand any SIn or filed with the SEC. (b) Material Event Notices. The Issuer shall notify any SID and either each NRMSIR or the MSRB, in a timely ffi8lll1er, of any of the following events with respect to the Certificates, if such event is material within the meaning of the federal securities laws: 1. Principal and interest payment delinquencies; 29 Non-payment related defaults; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4~ Unscheduled draws on credit enhancements reflecting fmancial 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 Certificates; 7~ Modifications to rights of holders of the Certificates; 8. Certificate calls; 99 Defeasances; 10. Release, substitution, or sale of property securing repayment of the Certificates; and 22 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 fmancial infonnation 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 perfonn 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 Certificates within the meaning of the Rule, except that the Issuer in any event will give the notice required by Subsection (b) hereof of any Certificate calls and defeasance that cause the Issuer to no longer be such an ftobligated person" ~ (ii) The provisions of this Section are for the sole benefit of the registered owners and beneficial owners of the Certificates, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The Issuer Wldertakes to provide only the fmancial information, 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 Issuerls 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 infonnation or its usefulness to a decision to invest in or sell Certificates at any future date. (iii) UNDER NO CIRCUMSTANCES SHALL THE ISSUER, ITS OFFICERS, AGENTS AND EJ\1PLOYEES, BE LIABLE TO THE REGISTERED OWNER OR BENEFICIAL OWNER OF ANY CERTIFICATE 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 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 Issuer, but only if (1) the provisions of this Section, as so amended, would have permitted an underwriter to purchase or sell Certificates in the prirnat)' offering of the Certificat~s in compliance with the Ru1e, taking into account any amendments or interpretations ~fthe 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 Certificates 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 Certificates~ 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 provisions of this continuing disclosure agreement if the SEe amends or repeals the applicable provision of the Rule or 23 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 from lawfully purchasing or selling Certificates in the primary offering of the Certificates~ (d) Definitions. As used in 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 SEe or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time.. "Rule" means SEe Rule 15c2-12, as amended from time to time. "SEe" means the United 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 SEe or its staff to be, a state information depository within the meaning of the Ru1e from time to time. Section 21 ~ PROTECTION OF PLEDGE~ Chapter 1208, Government Code, applies to the issuance of the Certificates and the pledge of the taxes and surplus revenues granted by the Issuer under Sections 8 and 9 of this Ordinance, and is therefore valid, effective, and perfected. If Texas law is amended at any time while the Certificates are outstanding and unpaid such that the pledge of the taxes and surplus revenues granted by the Issuer under Sections 8 and 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 Certificates 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 22. 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 Certificate Ordinance, the Certificates, the sale of the Certificates, the Notice of Sale and Bidding Instructions and the Official Statement; and the Assistant City Manager/Fiscal and Municipal Services of the City shall ca~se the expenses of issuance of the Certificates to be paid from the proceeds of sale of the Initial Certificate or from other lawfully available funds of the Issuer. In case any officer whose signature shall appear on any Certi~cate shall cease to be such officer before the delivery of such Certificate, 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 23. OPEN MEETINGS. The City Council has found and determined that the meeting at which this Ordinance 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 24.. EFFECTIVE DATE. This Ordinance shall become effective immediately upon its passage and approval. 24 PASSED AND APPROVED this the 18th day of July, 2006~ Perry R. McNeill, Mayor ATTEST: Jennifer Walters, City Secretary APPROVED AS TO LEGAL FORM: By: 26 EXHIBIT A DESCRIPTION OF ANNUAL FINANCIAL INFORMATION The following information is referred to in Section 20 of this Ordinance: Annual Financial Statements and Operating Data The financial infonnation 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 wtder the tables of the Official Statement referred to) below: Tables numbered 1 through 6 and 8 tIrrough 15, inclusive, under the captions "Tax Information", "Debt Information # " and rTFinancial Information" in 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~ A-I PAYING AGENT/REGISTRAR AGREEMENT THIS AGREEMENT entered into as of July 15, 2006 (this "Agreement"), by and between the City of Denton, Texas (the "Issuer"), and JPMorgan Chase Bank, National Association, a national banking association (the "Bank"). RECITALS WHEREAS, the Issuer has duly authorized and provided for the issuance of its Certificates of Obligation, Series 2006 (the "Securities") in the aggregate principal amount of$12,665,000 such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchaser thereof on or about August 22, 2006; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on said Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Ordinance" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of said Securities and with respect to the transfer and exchange thereof as provided herein and in the "Ordinance." The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto for the first year of this Agreement and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for municipalities, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). ARTICLE TWO DEFINITIONS Section 2.01. Definitions. F or all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the principal corporate trust office of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Ordinance" means a written request or ordinance signed in the name of the Issuer by the Mayor of the Issuer delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. "Ordinance" means the ordinance of the governing body of the Issuer pursuant to which the Securities are issued, certified by the City Secretary or any other officer of the Issuer and delivered to the Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Ordinance). "Redemption Date" when used with respect to any Bond to be redeemed means the date fixed for such redemption pursuant to the terms of the Ordinance. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice-Chairman of the Board of Directors, the Chairman or Vice-Chairman of the Executive Committee of the Board of Directors, the President, any V ice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above 2 designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Ordinance the principal of a Security is scheduled to be due and payable. Section 2.02. Other Definitions. The terms "Bank," Issuer," and Securities (Security)" have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. ARTICLE THREE PAYING AGENT Section 3.01. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Ordinance. Section 3.03. Reporting Requirements. To the extent required by the Code or the Treasury Regulations, the Bank shall report to the Holders and the Internal Revenue Service the amount of interest paid or the amount treated as interest accrued on the Bonds which is required to be reported by the Holders on their returns of federal income tax. ARTICLE FOUR REGISTRAR 3 Section 4.01. Security Register - Transfers and Exchanges. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register"), and, if the Bank Office is located outside the State of Texas, a copy of such books and records shall be kept in the State of Texas, for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. All transfers, exchanges and replacement of Securities shall be noted in the Security Register. Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect are-registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereofwill be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three (3) business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. Section 4.02. Certificates. The Issuer shall provide an adequate inventory of printed Securities to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities in safekeeping, which shall be not less than the care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that is maintained for its own securities. Section 4.03. Form ofSecuritv Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. 4 The Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order and prior to the release or disclosure of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the court order or such release or disclosure of the contents of the Security Register. Section 4.05. Return of Cancelled Certificates. All certificates surrendered to the Bank, at the designated Payment/Transfer Office, for payment, redemption, transfer, or replacement, shall be promptly cancelled by the Bank. The Bank will provide to the Issuer, at reasonable intervals determined by the bank, a certificate evidencing the destruction of canceled certificates. Section 4.06. Mutilated., Destroved., Lost or Stolen Securities. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Ordinance, to deliver and issue Securities in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities as long as the same does not result in an overissuance. In case any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities it has paid pursuant to Section 3.01, Securities it has delivered upon the transfer or exchange of any Securities pursuant to Section 4.01, and Securities it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities pursuant to Section 4.06. ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and agrees to use reasonable care in the performance thereof. Section 5.02. Reliance on Documents., Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible 5 Officer, unless it shall be proved that the Bank was negligent in ascertaining the pertinent facts. (c ) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by Issuer. (e) The Bank may consult with counsel, and the written advice of such counselor any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the state- ments of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Monevs Held bv Bank. The Bank shall deposit any moneys received from the Issuer into a segregated account to be held by the Bank solely for the benefit of the owners of the Securities to be used solely for the payment of the Securities, with such moneys in the account that exceed the deposit insurance available to the Issuer by the Federal Deposit Insurance Corporation, to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas and to the extent permitted by the laws of the United States of America to secure and be pledged as collateral for such accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such account shall be made by check drawn on such account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Subject to the Unclaimed Property Law of the State of Texas, any money deposited with the Bank for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for three years after the final maturity of the Security has become due and payable will be paid by the Bank to the Issuer if the Issuer so elects, and the Holder of such Security shall hereafter look only to the Issuer for 6 payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. If the Issuer does not elect, the Bank is directed to report and dispose of the funds in compliance with Title Six of the Texas Property Code, as amended. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the State and County where the administrative offices of the Issuer is located, and agree that service of process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective August 1, 1987, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. Section 6.04. Effect of Headings. 7 The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer shall bind its successors and assigns, whether so expressed or not. Section 6.06. Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between his Agreement and the Ordinance, the Ordinance shall govern. Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of final payment of the principal of and interest on the Securities to the Holders thereof or (ii) may be earlier terminated by either party upon sixty (60) days written notice; provided, however, an early termination of this Agreement by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termina tion of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securi- ties, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02 and of Article Five shall survive and remain in full force and effect following the termination of this Agreement. Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. JMORGAN CHASE BANK, NATIONAL ASSOCIA TION By Title 2001 Bryan Street, 8th Floor Dallas, Texas 75201 CITY OF DENTON, TEXAS By Mayor 215 E. McKinney Street Denton, Texas 76201 10 SCHEDULE A Paying Agent/Registrar Fee Schedule [To be supplied by the Bank] 11 JPMorgan 0 Schedule of Fees for Services as Paying Agent and Registrar in connection with $12,665,000 City of Denton Certificates of Obligation, Series 2006 Based upon our current understanding of your proposed transaction, our fee proposal is as follows: Pricing for Paying Agent and Registrar The Paying Agent and Registrar Fee covers the maintenance of records as registrar, processing of transfers, and payment of interest/principal funds for Debt Service. Acceptance Fee Annual Fee (payable annually in advance) $0.00 $300.00 Notes: Please note that our willingness to act in the capacities specified above and the fees designated in this proposal are indicative and based upon our understanding of the transaction. We reserve the right to revise this proposal should any material aspect of the transaction differ from our understanding. Also, our acceptance of the above contracts and duties is subject to our usual internal review, document review and the receipt of appropriate immunities and indemnities. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, we will ask for information that will allow us to identify you. Annual fees include one standard audit confirmation per year without charge. Standard audit confirmations include the final maturity date, principal paid, principal outstanding, interest cycle, interest paid, cash and asset information, interest rate, and asset statement information. Non-standard audit confirmation requests may be assessed an additional fee. Periodic tenders, sinking fund, optional or extraordinary call redemptions will be assessed an additional charge of $300 per event. Performance of any extraordinary service or incurring extraordinary expenses, such as those in connection with any default, account resignation, or outside legal counsel charges, will be billed in addition to the stated per annum fees. JPMorgan Chase & Co. ("JPMorgan") has entered into an agreement with The Bank of New York Company, Inc. ("BNY") pursuant to which JPMorgan intends to exchange select portions of its corporate trust business, including municipal, corporate and structured finance trusteeships and agency appointments, for BNY's consumer, small-business and middle-market banking businesses. This transaction has been approved by both companies' boards of directors and is subject to regulatory approvals. It is expected to close in the late third quarter or fourth quarter of 2006. J. P. Morgan Trust Company, N. A. . 420 Throckmorton, 9th Floor, Fort Worth, TX 76102 Telephone: (817) 884-4726 . Facsimile: (817) 884-4651 j effrey. c. salavarria@jpmorgan.com AGENDA INFORMATION SHEET AGENDA DATE: July 18,2006 DEPARTMENT: Fiscal Operations ACM: Jon Fortune SUBJECT Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of Denton General Obligation Bonds ($3,695,000), Series 2006; approving and authorizing instruments and procedures relating thereto; and providing an effective date. BACKGROUND This ordinance authorizes the issuance, sale and delivery of General Obligation Bonds (GOs) in the amount of $3,695,000 to fund the following capital improvements: $ 970,000 2,095,000 630~000 $3,695,000 Streets and Transportation Buildings and Equipment Parks and Beautification Total These items represent projects as approved by voters on February 5, 2005. Following a comprehensive analysis on the City's financial outlook and stability, the City has obtained favorable bond ratings on these bonds from both Standard and Poor's and Moody's Investor Services. The ratings are summarized below: General Obligation Bonds ($3~695~000)~ Series 2006 . Standard and Poor's AA- . Moody's Aa3 These bonds will be sold through a competitive bid process following the guidelines established in the City's Debt Service Management Policy [Section 403.07 XII (A)]. All bids on these bonds must be delivered to the City prior to 10:30 a.m., on July 18th. Award of the sale to the successful bidder will occur at the Special Called City Council meeting on July 18, 2006, at 11 :30 a.m. Your agenda information packet includes a binder that provides various documents as it relates to the issuance of the GOs and Certificates of Obligation (discussed under a separate agenda item). The binders include the rating reports from Standard and Poor's and Moody's, blank bid tabulation forms, a summary of historical bond sales and rates, bidding instructions and Preliminary Official Statements. Agenda Information Sheet July 18, 2006 Page 2 I am providing this information to allow you ample time to review it prior to the sale. However, please be aware that information as it relates to the bids submitted and interest rates will not be available until the bidding period closes on July 18. Following the award of the bid by the City Council, the interest rates and information from the successful bidder will be included in the Preliminary Official Statement making it final. Additional information is provided (not in binder) that includes a summary of the Capital Improvement Plan, the ordinance to issue the GOs and a Paying Agent/Registrar Agreement. PRIOR ACTION/REVIEW (Council.. Boards.. Commission) These projects were approved by voters in a successful bond election held on February 5, 2005. These projects were approved by the City Council in the Capital Improvement Program (CIP), fiscal year ending 2005-2009. Changes or additions to the CIP as it relates to timing and use of GOs have been reviewed and recommended by the Citizen Oversight Committee, various City Council committees (Mobility, Audit/Finance and etc.), and approved by the City Council at the June 20, 2006, Work Session. FISCAL INFORMATION An estimated debt service schedule is included on page 21 in the Preliminary Official Statement attached. The estimated average annual debt service payment, including principal and interest, will total approximately $290,000. This payment is anticipated and included in the City's Long Range Financial Plan. EXHIBITS Capital Improvement Plan Ordinance Paying Agent/Registrar Agreement Information included in Binder: Rating Agency Reports Blank Bid Tabulation Forms Historical Bond Sales and Rates Bidders Instruction Forms Preliminary Official Statement Respectfully submitted: ~"..... p6r"' ,-'~ " , " - 1- " is:: .." "~ - ..; ~ Jon Fortune Assistant City Manager GENERAL FUND Capital Improvement Plan 2005-06 TRANSPORTATION $4,445,600 $11,584,500 $6,045,000 $4,656,500 $26,731,600 Residential Streets 270,000 270,000 Intersection Signalization 270,000 270,000 Miscellaneous Roadways 220,000 220,000 Sidewalk Installation 210,000 210,000 BUILDINGIEQUIPMENT 200,000 400,000 1,305,000 1,905,000 South Branch Library Expansion 1,900,000 1,900,000 Senior Center Improvements 195,000 195,000 PARKS & BEAUTIFICATION 354,400 5,405,500 2,080,000 2,233,500 10,073,400 Civic Center Pool Slide Improvements 171,000 171,000 Avondale/Civic Center Park Equipment 135,000 135,000 Clear Creek Natural Heritage Center 100,000 100,000 City Hall Courtyard Renovation 90,000 90,000 Fred Moore Park Multipurpose Court 83,000 83,000 PrairieIRobertson Rail Trail Bridge 31,000 31,000 City Wide.Park Land Acquisition 20,000 20,000 Misc Paving 750,000 750,000 V intage Road 1,600,000 1,600,000 Replace Fire Engine 500,000 500,000 1,000,000 Replace Fire Quint 800,000 800,000 Fire Station #7 3,250,000 1,000,000 4,250,000 Public Safety Training Facility 8,200,000 8,200,000 Public Safety Radio Upgrade 2,500,000 2,500,000 Multi Modal Station 1,400,000 2,500,000 3,900,000 City Hall East Renovation 500,000 500,000 HV AC Replacement Program 400,000 550,000 950,000 Roof Replacement Program 500,000 250,000 750,000 Flooring Replacement Program 400,000 400,000 Pave City Hall East Parking Lot 125,000 125,000 Replace Animal Svcs Crematorium 90,000 90,000 Airport Western Development 500,000 500,000 Airport Improvements 700,000 700,000 Motor Pool 1,500,000 2,285,000 1,500,000 1,300,000 1,500,000 8,085,000 Solid Waste 1,550,000 4,471,000 1,486,500 876,500 641,500 9,025,500 ORDINANCE NO. 2006- AN ORDINANCE AUTHORIZING THE ISSUANCE, SALE, AND DELIVERY OF CITY OF DENTON GENERAL OBLIGATION BONDS, SERIES 2006, LEVYING THE TAX TO PAY SAME; APPROVING AND AUTHORIZING INSTRUMENTS AND PROCEDURES RELATING THERETO; AND PROVIDING AN EFFECTIVE DATE. THE STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON WHEREAS, an election was held on February 5, 2005 at which the City Council was authorized to issue certain of the bonds hereinafter authorized; and WHEREAS, at said election the following bonds were authorized to be issued: Amount Prop~ AmoWlt Amount Being Previously Voted No. Authorized Issued Issued But Unissued 1 (Senior Center $ 4,000,000 $2,095,000 $ 200,000 $ 1,705,000 & Library) 2 (Streets) 27,700,000 970,000 4,445,600 22,284,400 3 (parks) 10,700,000 630,000 354,400 9,715,600 WHEREAS, the bonds hereinafter authorized and designated were voted and are to be issued, sold, and delivered pursuant to Chapter 1331, Texas Government Code, and Article IX of the City's Home Rule Charter, and other applicable laws; and WHEREAS, it is considered to be in the best interest of the City that said interest bearing bonds be issued, 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 "Issuertt) are hereby authorized to be issued and delivered in the aggregate principal amount of $3,695,000, FOR THE PURPOSE OF THE ACQUISITION OF PROPERTY AND MAKING IMPROVE:tv1ENTS FOR PUBLIC PURPOSES IN SAID CITY, TO-WIT: SENIOR CENTER AND LIBRARY IMPROVEMENTS, STREET IMPROVEMENT~ AND PARK IMPROVEMENTSu Section 2.. DESIGNATION OF THE BONDS.. Each bond issued pursuant to this Ordinance shall be designated: "CITY OF DENTON GENERAL OBLIGATION BOND, SERIES 2006, and initially there shall be issued, sold, and delivered hereunder a single fully registered bond, without interest coupons, payable in installments of principal (the "Initial Bond n), but the Initial Bond may be assigned and transferred and! or converted into and exchanged for a like aggregate principal amount offully registered bonds, without interest coupons, having serial maturities, and in the denomination or denominations of$5,000 or any integral multi- ple of$5,000, all in the manner hereinafter provided. 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 uBonds" 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 Bond is hereby authorized to be issued, sol~ and delivered hereWlder as a single fully registered Bond, without interest coupons, dated July 15, 2006, in the denomination and aggregate principal amount of $3,695,000, numbered R-I, payable in annual installments of principal to the initial registered owner thereof, to...wit: [INITIAL PURCHASER] 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 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 Bond (i) may 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 Bond shall be payable, all as provided, and in the manner required or indicated, in the FORM OF INITIAL BOND set forth in this Ordinance. Section 4.. INTEREST~ The unpaid principal balance of the Initial Bond shall bear interest from the date of the Initial Bond to the respective scheduled due dates, or to the respective dates of prepayment or redemption, of the installments of principal of the Initial 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 BOND set forth in this Ordinance~ Section 5~ FORM OF INITIAL BOND.. The form of the Initial Bond, including the fonn of Registration Certificate of the Comptroller of Public Accounts of the State of Texas to be endorsed on the Initial Bond, shall be substantially as follows: 2 FORM OF INITIAL BOND NO~ R-l $3,695,000 UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON GENERAL OBLIGATION BOND SERIES 2006 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 $3,695,000 (THREE MILLION SIX HUNDRED NINETY FIVE THOUSAND DOLLARS) in armual installments of principal due and payable on February 15 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 per annum as follows: PRINCIPAL INTEREST PRINCIPAL INTEREST YEAR AMOUNT RA TE(%) YEAR AMOUNT RA TE(%) 2007 $ 100,000 2017 $185,000 2008 120,000 2018 195,000 2009 125,000 2019 200,000 2010 130,000 2020 210,000 2011 140,000 2021 220,000 2012 145,000 2022 230,000 2013 150,000 2023 245,000 2014 160,000 2024 255,000 2015 165,000 2025 265,000 2016 175,000 2026 280,000 Interest shall fIrst be due and payable on February 15, 2007, and semiannually on each February 15 and August ~ 5 thereafter while this Bond or any portion hereof is outstanding and unpaid~ Said interest shall be calculated on the basis ofa 360-day year composed of twelve 30-day months. THE INSTALLMENTS OF PRINCIPAL OF AND THE INTEREST ON this Bond are payable in lawful 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 JPMORGAN CHASE BANK, NA TIONAL ASSOCIATION, DALLAS, 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 3 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 Ordinancell) 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 at the close of business on the last day of the month next preceding each such date (the "Record Daten) on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described9 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 ttInterest 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 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 (n Special Payment Datelt, 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 notice9 IF THE DATE for the payment of the principal of or interest on this Bond shall be a Saturday, SWlday, 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 due9 TIllS BOND has been authorized in accordance with the Constitution and laws of the State of Texas FOR THE PURPOSE OF THE ACQUISITION OF PROPERTY AND MAKING IrvtPROVEMENTS FOR PUBLIC PURPOSES IN SAID CITY, TO-WIT: SENIOR CENTER AND LIBRARY I~ROVEMENTS, STREET IMPROVEMENTS AND PARK IMPROVErvrnNTS~ ON FEBRUARY 15, 2016, 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, ifirt 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 amoWlt thereof, plus accrued interest to the date fixed for prepayment or redemption9 A T LEAST 30 days prior to the date fixed for any such prepayme~t or redemption a written notice of such prepayment or redemption shall be mailed by the Paying Agent/Registrar to the registered owner hereo[ 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 4 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 hereo[ TIllS BOND, to the extent of the unpaid or unredeemed principal balance hereof, or any unpaid and unredeemed portion hereofin any integral multiple of$5,OOO, may be assigned by the initial registered owner hereof and shall be transferred only in the Registmtion 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 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 instruments of assignment satisfactory to the Paying Agent/Registrar may be used to evidence the assignment of this Bond or any such portion or portions hereofby 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 tiot 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 princi pal 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 borne 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 ~ey 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 MAYBE 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 tmnsferring, 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, 5 or exchange (i) dwing 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, Of, (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 AgentJRegistrar for this Bond 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 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 voted, authorized, issued, sold, and delivered; that all acts, conditions, and things required or proper to be perfonned, 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 general obligation of the Issuer, issued on the full faith and credit thereof; and that annual ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Bond, as such interest comes due and such principal matures, have been levied and ordered to be levied against all taxable property in the Issuer, and have been pledged irrevocably for such payment, within the limit prescribed by law~ BY BECOMING the registered owner of this Bond, the registered owner thereby acknowledges all of the tenns 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 governing 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 or facsimile signature of the City Secretary of the Issuer, has caused the official seal of the Issuer to be duly impressed, or placed in facsimile, on this Bond and has caused this Bond to be dated July 15, 20069 ATTEST: CITY OF DENTON, TEXAS By: Jennifer Walters City Secretary, City of Denton, Texas By: Perry ~ McNeill Mayor, City of Denton, Texas (CITY SEAL) (INSERT BOND INSURANCE LEGEND, IF ANY) 6 FORM OF REGISTRATION CERTIFICATE OF THE COMPTROLLER OF PUBLIC ACCOUNTS: (To be attached to Initial Bond only) COMPTROLLER'S REGISTRA nON 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 of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) Section 6. ADDITIONAL CHARACTERISTICS OF THE BONDS. (a) Registration and Transfer. The Issuer shall keep or cause to be kept at the principal corporate trust office of JPMORGAN CHASE BANK, NATIONAL ASSOCIA nON, DALLAS, TEXAS (the ~~Paying AgentJRegistrar") books or records of the registration and transfer of the Bonds (the "Registration Books"), and the Issuer hereby appoints the Paying AgentJRegistrar 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 AgentIRegistrar may prescribe; and the Paying AgentJRegistrar shall make such transfers and registrations as herein provided. The Paying AgentJRegistrar 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 AgentJRegistrar 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 homs of the Paying AgentJRegistrar, but otherwise the Paying AgentJRegistrar 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 AgentIRegistrar for transfer of registration and cancellation, together with proper written instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying AgentJRegistrar, (i) evidencing the assignment of the Bond, or any portion thereof in any integral multiple of $5,000, to the "assignee or assignees thereot: 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 assigmnent 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 initial registered owner thereof once only, and to one o~ more assignees designated in writing by the initial registered owner thereof~ All B~nds issued and de- livered 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 in the form prescribed in the FORM OF SUBSTITUTE 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 AgentJRegistrar 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 7 to the due date of the installment of principal or portion thereof for which the substitute Bond is being ex- changed; 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 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 fonn 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 thereo[ Upon surrender of any Bonds or any portion or portions thereof for transfer of registration, an authorized representative of the Paying AgentIRegistrar shall make such transfer in the Registration Books, and shall deliver a new fully registered substitute Bond or Bonds, having the characteristics herein describe~ 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 transferre~ 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 of a Bond~ The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer and delivery of a 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 4S days prior to its redemption date~ (b) Ownershio of Bonds. The entity in whose name any Bond shall be registered 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 AgentJRegistrar shall not be affected by any notice to the contrary; and payment of, or on account ot: 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 further 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 (n 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 notice9 8 (d) Conversion and Exchan.ge or Replacement: Authentication. 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 AgentJRegistrar, 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 AgentJRegistrar, 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 fann prescribed in the FORM OF SUBSTITUTE 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 unre- deemed 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; 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 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 AgentJRegistrar 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 pmposes 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 interest from the interest payment date next preceding the date on which such substitute Bond was so authenticated, 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 BONP issued and delivered pursuant to this Ordinance is not required to be, and shall not be, authenticated by the Paying AgentJRegistrar, but on each substitute Bond issued in conversion of and exchange for or replacement of any ~ond or Bonds issued under this Ordinance there shall be printed a certificate, in the form substantially as follows: "PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE 9 It is hereby certified that this Bond has been issued Wlder 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 of Public Accounts of the State of Texas. JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, DALLAS, TEXAS, 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 Bond, and no such Bond shall be deemed to be issued or outstanding unless such Bond 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 any Bond or portion thereof, and the Paying AgentJRegistrar shall provide for the printing, execution, and delivery of the substitute Bonds in the manner prescribed herein, and said Bonds shall be of type composition printed on paper with lithographed or steel engraved borders of customary weight and strength. 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 AgentJRegistrar, and, upon the execution of the above Paying Agent/Registrar's Authentication Certificate, the converted and exchanged or replaced Bond shall be valid, incontestable, and enforceable 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 Agent/Registrar'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 next following principal or interest payment date, Of, (ii) with respect to any Bond or portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date. (e) In Geneml. All Bonds issued in conversion and exchange or replacement of any other Bond or portion thereot (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) mayor shallbe redeemed prior to their scheduled maturities, (iii) may be transferred and assigned, (iv) may be converted and exchanged for other Bonds, (y) 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 BOND set forth in this Ordinance.. (1) 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 fees and charges of the Paying Agent/Registrar for services with respect to the transfer of registration of 10 Bonds, and with respect to the conversion and exchange of Bonds solely to the extent above provided in this Ordinance. (g) Substitute Paving Agent/Registrar~ 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 AgentJRegistrar 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 AgentJRegistrar (or its successor by merger, acquisition, or other method) should resign or otherwise cease to act as such, the Issuer covenants that it will promptly appoint a competent and legally qualified bank, trust company, fmancial 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 thereot), along with all other pertinent books and records relating to the Bonds, to the new Paying AgentJRegistrar designated and appointed by the Issuer. Upon any change in the Paying AgentJRegistrar, the Issuer promptly will cause a written notice thereof to be sent by the new Paying AgentJRegistrar 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 provi.. sions of this Ordinance, and a certified copy of this Ordinance shall be delivered to each Paying AgentJRegistrar ~ Section 7~ FORM OF SUBSTITUTE BONDS. The form of all Bonds issued in conversion and exchange or replacement of any other Bond or portion thereo~ including the form ofpaying AgentJRegistrar's Bond to be printed on each of such Bonds, and the Form of Assignment to be printed on each of the Bonds, shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are permitted or required by this Ordinance~ FORM OF SUBSTITUTE BOND (Book-Entry Only Legend, if appropriate) NO. UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON GENERAL OBLIGATION BOND SERIES 2006 PRINCIPAL AMOUNT $ INTEREST RATE MA TURITY DATE DA TED DATE CUSIP NO. % ON THE MATURITY DATE specified above the CITY OF DENTON, in Denton County, Texas (the "Issuern), being a political subdivision of the State of Texas, hereby promises to pay to , or to the registered assignee hereof (either being hereinafter called the ftregistered owner") the principal amount of 11 and to pay interest thereon, calculated on the basis of a 360...day year composed of twelve 30-day months, from July 15,2006, to the matwity date specified above, or the date of redemption prior to matwity, at the interest rate per annum specified above; with interest being first due and payable on February 15,2007, and semiannually on each August 15 and February 15 thereafter, except that if the date of authentication of this Bond is later than the frrst 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. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful 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 principal corporate trust office of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, DALLAS, TEXAS, which is the npayingAgent/RegistrarU 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 Ordinancetl) 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, frrst...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 last 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~ 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 matwity as provided herein shall be paid to the registered owner at the principal corporate trust office of the Paying Agent/Regis- trar 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 before 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 Daten) 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~ 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 12 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 is one of an issue of Bonds initially dated July 15,2006, authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of$5,000,000, FOR THE PURPOSE OF THE ACQUISITION OF PROPERTY AND MAKING IMPROVEMENTS FOR PUBLIC PURPOSES IN SAID CITY, TO-WIT: SENIOR CENTER AND LIBRARY IMPROVEMENTS, STREET IMPROVEMENTS AND PARK IMPROVEMENTS. ON FEBRUARY 15, 2016, 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 lawful 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. A T 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, 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; provided, however, that the failure to send, mail, or 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 which are to be so redeemed, plus accrued interest thereon to the date fixed for redemption. If such written notice of redemption is given and if due provision for such payment is made, all as provided above, the Bonds or portions thereof which 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 plus accrued interest from the Paying Agent! Registrar out of the funds provided for such payment If a portion of any Bond shall be redeemed a substitute Bond or Bonds having 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 cancellatio~ at the expense of the Issuer, all as provided in the Bond Ordinance. TIllS BOND OR ANY PORTION OR PORTIONS HEREOF IN ANY INTEGRAL MOL TIPLE OF $5,000 may be 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 instruments 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 hereofin any integral multiple of$5,OOO 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 assigmnent and transfer of only a portion of this Bon~ may be delivered by the Paying AgentlRegistrar 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 13 exchange of other Bonds9 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 governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make transfers ofregistration of this Bond or any portionhereof(i) during the period commencing with the close ofbusiness 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 TillS 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 bearing 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 fonn and procedures set forth in the Bond Ordinance9 The Issuer shall pay the Paying Agent! Registrar'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, Of, (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 Bond has been duly and validly voted, 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 general obligation of the Issuer, issued on the full faith and credit thereof; and that annual ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Bond, as such interest comes due and such principal matures, have been levied and ordered to be levied against all taxable property in the Issuer, and ~ve been pledged irrevocably for such payment, within the limit prescribed by law.. 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 tenns and provisions, acknowledges that the Bond Ordinance is duly 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. 14 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: Jennifer Walters City Secretary, City of Denton, Texas By: Perry R~ McNeill Mayor, City of Denton, Texas (CITY SEAL) FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE PAYING AGENT/REGISTRAR'S AUTHENTICATION CER TIFICA TE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) 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 of Public ACCOWltS of the State of Texas. JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, DALLAS, TEXAS, Paying Agent/Registrar Dated By Authorized Representative (INSERT BOND INSURANCE LEGEND, IF ANY) 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 / / 15 (Assignee's Social Security or Taxpayer Identification Number) (print or typewrite Assigneets name and address, including zip code) and hereby irrevocably constitutes and appoints attorney to transfer the registration of this Bond on the Paying Agent/Registrarts Registration Books with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by an eligible guarantor 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 Certificate in every particular without alteration or enlargement or any change whatsoever. Section 8~ TAX LEVY. A special Interest and Sinking Food (the lTlnterest and Sinking Fund") is hereby created solely for the benefit of the Bonds, and the Interest and Sinking Fund shall be established and maintained by the Issuer at an official depository bank of the Issuer.. The Interest and Sinking Food shall be kept separate and apart from all other funds and accounts of the Issuer, and shall be used only for paying the interest on and principal of the Bonds. All ad valorem taxes levied and collected for and on account of the Bonds, together with any premium and accrued interest received upon sale of the Bonds, shall be deposited, as collected, to the credit of the Interest and Sinking Food. During each year while any of the Bonds or interest thereon are outstanding and unpaid, the governing body of the Issuer shall compute and ascertain a rate and amount of ad valorem tax which will be sufficient to raise and produce the money required to pay the interest on the Bonds as such interest becomes due, and to provide and maintain a sinking fund adequate to pay the principal of its Bonds as such principal matures (but never less than 2% of the original principal amount of the Bonds as a sinking fund each year)~ Said tax shall be based on the latest approved tax rolls of the Issuer, with full allowance being made for tax delinquencies and the cost of tax collection~ Said rate and amount of ad valorem tax is hereby levied, and is hereby ordered to be levied, against all taxable property in the Issuer for each year while any of the Bonds or interest thereon are outstanding and unpaid; and said tax shall be assessed and collected each such year and deposited to the credit of the aforesaid Interest and Sinking Fund~ Said ad valorem taxes sufficient to provide for the payment of the interest on and principal of the Bonds, as such interest come$ due and such principal matures, are hereby pledged for such payment, within the limit prescribed by law. Section 9~ DEFEASANCE OF BONDS~ (a) Any Bond and the interest thereon shall be deemed to be paid, retired, and no longer outstanding (a "Defeased Bondn) within the meaning of this Ordinance, except to the extent provided in subsection (d) of this Section 9, when payment of the principal of such Bond, plus interest thereon to the due date. (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 tenns thereof (inc- luding the giving of any required notice of redemption), or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar for such payment (1) lawful money of the United States of America sufficient to make such payment or (2) Government 16 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 provide for such payment, and when proper arrangements have been made by the Issuer with the Paying Agent/Registrar for the payment of its services until all Defeased Bonds shall have become due and payable. At such time as a Bond shall be deemed to be a Defeased Bond hereunder, as aforesaid, such Bond and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, the ad valorem taxes herein levied and pledged as provided in this Ordinance, and such principal and interest shall be payable solely from such money or Government Obligations. (b) Any moneys so deposited with the Paying Agent/Registrar may at the written direction of the Issuer also be invested in Govenunent Obligations, maturing in the amounts and times as hereinbefore set forth, and all income from such Government Obligations received by the Paying Agent/Registrar which is not required for the payment of the Bonds and interest thereon, with respect to which such money has been so deposited, shall be turned over to the Issuer, or deposited as directed in writing by the Issuer. (c) The term "Government Ob ligations" as used in this Section shall mean (i) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America~, (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or intstrumentality and that, on the date of the purchase thereof are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (iii) noncallable obligations of a state or an agency or a county, municiplaity , or other political subdivision or a state that have been refunded and that, on the date the governing body of the District adopts or approves the proceedings authorizing the financial arrangements are rated as to investment quality by a nationally recognized investment rating frnn not less than AAA or its equivalent. (d) Until all Defeased Bonds shall have become due and payable, the Paying Agent/Registrar shall perform the services of Paying Agent/Registrar for such Defeased Bonds the same as if they had not been defeased, and the Issuer shall make proper arrangements to provide and pay for such services as required by this Ordinance. Section 10~ DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED BONDS. (a) Reolacement 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, matwity, and interest rate, as the damaged, mutilated, lost, stolen, or destroyed Bond, in replacement for such Bond in the manner hereinafter provided. (b) Apolication 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/Registrar ~ In every case of loss, theft, or destruction of a Bond, the registered owner applying for a replacement bond shall furnish to ~e Issuer and to the Paying Agent/Registrar such security or indemnity as may be required by them to save each of them hannless 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 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 of any such Bond shall have matured, and no default has occurred which is then continuing in the payment 17 of the principal of, 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 BontL provided security or indemnity is furnished as above provided in this Section~ (d) Chari!e 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 lUlder this Ordinance. (e) Authority for Issuin2: Reolacement 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 without necessity offurther 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 11. COVENANTS REGARDING TAX-EXEMPTION~ The Issuer covenants to refrain from taking any action which would adversely affect, or to take such action to assure, the trea1ment of the Bonds as obligations described in section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), the interest on which is not includable in the ngross income-- of the holder for purposes of federal income taxation~ In fwtherance 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 or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use", as defined in section 141 (b )( 6) of the Code, or if more than 10 percent of the proceeds or the projects fmanced therewith are so used, such 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 five percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of five percent is used for a "private business use'. which is tlrelated't and not "disproportionate", within the meaning of section 141(b)(3) of the Code, to the governm.ental use; (c) to take any action to assure that no amount which .is greater than the lesser of $5,000,000, or five percent of the proceeds of the Bonds (less amounts deposited into a reserve fun~ if any) is, directly or indirectly~ used to fmance 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 t'private activity bonds" within the meaning of section 141(b) of the Code; 18 (e) to refrain from taking any action that would result in the Bonds being ufederally guaranteed" within the meaning of section 149(b) of the Code; (t) 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 defmed 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 of3 years or less, or in the case of a refunding bonds, for a period of 30 days 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 (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(1) 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 tenn "proceeds" includes ttdisposition 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 nationally-recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under section 103 of the Code9 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 necessary 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 in this section after defeasance of the Bonds. 19 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 bondholders~ The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code~ Section 12~ ALLOCATION OF, AND LIMITA nON 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 Proj ect 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 after the later 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 ifit 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 13. 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 hereof, the Issuer shall not be obligated to comply with this covenant if it obtains a legal opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest Section 14~ CUSTODY, APPROVAL, AND REGISTRATION OF BONDS; BOND COUNSEL'S OPINION, CUSIP NUMBERS, PREAMBLE AND INSURANCE.. The Mayor of the Issuer is hereby authorized to have control of the Initial Bond issued hereunder and all necessary records and proceedings pertaining to the Initial Bond pending its delivery and its investigation, examination, and approval by the Attorney General of the State of Texas, and its registration by the Comptroller of Public Accounts of the State of Texas. Upon registration of the Initial Bond said Comptroller of Public Accounts (or a deputy designated in writing to act for said Coinptroller) shall manually sign the Comptrollerls Registration Certificate on the Initial Bond, and the seal of said Comptroller shall be impressed, or placed in facsimile, on the Initial Bond. The approving legal opinion of the Issuer's Bond Counsel and 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 and informatio~ 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 concerning instrrallce as provided by the insurer ~ Section 1 S. SALE OF INITIAL BOND~ The Initial Bond is 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 to be deposited into the Interest and Sinking Fund)~ It is hereby officially fOlUld, determined, and declared that the Initial Bond has been sold 20 at public sale to the bidder offering the lowest interest cost, after receiving sealed bids pursuant to a Notice of Sale and Bidding Instructions and Preliminary Official Statement dated ,2006, prepared and distributed in connection with the sale of the Initial Bond~ Said Notice of Sale and Bidding Instructions and Preliminary 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 Initial Bond is hereby approved~ It is further officially found, detennined, and declared that the statements and representations contained in said Notice of Sale and Bidding Instructions and Preliminary Official Statement are true and correct in all material respects, to the best knowledge and belief of the governing body of the Issuer. Section 16. OFFICIAL ST A TEMENT. An Official Statement dated as of the date of this meeting has been prepared in connection with the sale of the Initial Bond 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 true 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 , 2006, prior to the date hereof is hereby ratified and approved. Section 17~ INTEREST EARNINGS ON BOND PROCEEDS. Interest earnings derived from the investment of proceeds from the sale of the Initial Bond shall be used along with other bond proceeds for the acquisition and construction of the improvements for which the Bonds are issued; provided that after completion of such 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 Section 11 hereof in order to prevent the Bonds from being arbitrage bonds shall be so rebated and not considered as interest earnings for the purposes of this Section~ Section 18. 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 DepositoI)' Trust Company (nDTCu), New York, New York, initially will act as depository for the Bonds~ DTC has represented that it is a limited pwpose trust company incorporated under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a uclearing agencyU registered Wlder Section 17 A 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 deli very and sale that the Purchaser, immediately after such delivery, shall cause the Paying AgentIRegistrar, 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 to be registered in the name of CEDE & CO~, the nominee of DTC, and it shall be the duty of the Paying Age~tlRegistrar to take such action. It is expected that DTC will hold the Bonds on behalf ~f the Purchaser and/or The DTC Participants, as defined and described in the Official Statement referred to and approved in Section 15 hereof(the "DTe Participantstl)~ 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 ofDTC and the DTC Participants pursuant to rules and regulations established by them, and that the substitute Bonds initially deposited with DTC shall be immobilized and not be further exchanged for substitute Bonds except as hereinafter provided~ The Issuer is not responsible or 21 liable for any functions 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 ofDTC 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 establish this book- entry system, the beneficial ownership of the Bonds, and the method of paying the fees and charges ofDTC. 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 Agent! Registrar and to DTC, and thereafter the Paying AgentfRegistrar 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 Dre, if for any reason any of the originally delivered substitute Bonds is duly filed with the Paying AgentJRegistrar 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 19. CONTINUING DISCLOSUR.E~ (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 2006, financial information and operating data with respect to the Issuer of the general type included in the final Official Statement authorized by Section 16 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 fmancial statements so to 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 fmancial statements for the applicable fiscal year to each NRMSIR and any SID, when and if the audit report on such statements become availab Ie. (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 fmancial information and operating data pursuant to this Section. The fmancial 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, ifit is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC~ (b) Material Event 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 ~e 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 fmancial difficulties; 22 4. Unscheduled draws on credit enhancements reflecting fmanciaI 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 fmancial 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 right, remedy, or claim hereunder to any other person. The Issuer undertakes to provide only the financial information, 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 Issuer's fmancial 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 invest in or sell Bonds at any future date~ (iii) UNDER NO CIRCUMSTANCES SHALL TIlE ISSUER ITS OFFICERS, AGENTS AND EMPLOYEES, BE LIABLE TO THE REGISTERED OWNER OR BENEFICIAL OWNER OF ANY 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 lUlder 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. 23 (v) The provisions of this Section may be amended by the Issuer 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 Issuer, but only if (1) the provisions of this Section, as so amended, would have permitted an underwriter 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 amoWlt (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 fmancial information or operating data next provided in accordance with subsection (a) of this Section an explanation, in narrative fonn, 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 provisions of this continuing disclosure agreement if the SEe amends or repeals the applicable provision of the Rule or a court of fmal 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 from lawfully purchasing or selling Bonds in the primary offering of the Bonds~ (d) Defmitions. As used in this Section, the following terms have the meanings ascribed to such terms below: "MSRB" means the Municipal Securities Rulemaking Board. UNRMSIR" means each person whom the SEe or its staff has detennined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time.. "Rule" means SEe Rule 15c2-12, as amended from time to time~ "SEe" means the United States Securities and Exchange Commission. nSID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEe or its staff to be, a state information depository within the meaning of the Rwe from time to time~ Section 20.. PROTECTION OF PLEDGE~ Chapter 1208, Government Code, applies to the issuance of the Bonds and the pledge of the taxes granted by the Issuer under Section 8 of this Ordinance, and is therefore valid, effective, and perfected~ If Texas law is amended at any time while the Bonds c;re outstanding and unpaid such that the pledge of the taxes granted by the Issuer lUlder Section 8 of this Ordinance is to be subject to the filing requirements of Chapter 9, Texas Business & Commerce Code, then in order to prese~e 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 21.. 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 perfonn all such 24 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 Ordinance, the Bonds, the sale of the Bonds, and the Notice of Sale and Bidding Instructions and Official Statement; and the Assistant City Manager of the City shall cause the expenses of issuance of the Bonds to be paid from the proceeds of sale of the Initial Bond or from any other lawfully available ftmds 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 22~ OPEN MEETINGS. The City Council has found and determined that the meeting at which this Ordinance is considered is open to the public and that notice thereofwas given in accordance with the provisions of the Texas Open Meetings, Law, Tex. Gov't Code, Chapter 551, as amended~ Section 23~ EFFECTIVE DATE. This Ordinance shall become effective immediately upon its passage and approval. 25 PASSED AND APPROVED this the 18th day of July, 2006. Perry R. McNeill, Mayor ATTEST: Jennifer Walters, City Secretary By: APPROVED AS TO LEGAL FORM: By: 26 EXHIBIT A DESCRIPTION OF ANNUAL FINANCIAL INFORMATION The following information is referred to in Section 19 of this Ordinance: Annual Financial Statements and Operating Data The financial infonnation 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 6 and 8 through 15, inclusive, under the captions "Tax Information", "Debt Service Requirements" and "Financial Information" in 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 fmancial statements referred to in the paragraph above~ PAYING AGENT/REGISTRAR AGREEMENT THIS AGREEMENT entered into as of July 15, 2006 (this "Agreement"), by and between the City of Denton, Texas (the "Issuer"), and JPMorgan Chase Bank, National Association, a national banking association (the "Bank"). RECITALS WHEREAS, the Issuer has duly authorized and provided for the issuance of its General Obligation Bonds, Series 2006 (the "Securities") in the aggregate principal amount of $3,695,000 such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchaser thereof on or about August 22, 2006; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on said Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Ordinance" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of said Securities and with respect to the transfer and exchange thereof as provided herein and in the "Ordinance." The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto for the first year of this Agreement and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for municipalities, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). ARTICLE TWO DEFINITIONS Section 2.01. Definitions. F or all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the principal corporate trust office of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Ordinance" means a written request or ordinance signed in the name of the Issuer by the Mayor of the Issuer delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. "Ordinance" means the ordinance of the governing body of the Issuer pursuant to which the Securities are issued, certified by the City Secretary or any other officer of the Issuer and delivered to the Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Ordinance). "Redemption Date" when used with respect to any Bond to be redeemed means the date fixed for such redemption pursuant to the terms of the Ordinance. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice-Chairman of the Board of Directors, the Chairman or Vice-Chairman of the Executive Committee of the Board of Directors, the President, any V ice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above 2 designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Ordinance the principal of a Security is scheduled to be due and payable. Section 2.02. Other Definitions. The terms "Bank," Issuer," and Securities (Security)" have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. ARTICLE THREE PAYING AGENT Section 3.01. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Ordinance. Section 3.03. Reporting Requirements. To the extent required by the Code or the Treasury Regulations, the Bank shall report to the Holders and the Internal Revenue Service the amount of interes paid or the amount treated as interes accrued on the Bonds which is required to be reported by the Holders on their returns of federal income tax. ARTICLE FOUR REGISTRAR 3 Section 4.01. Security Register - Transfers and Exchanges. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register"), and, if the Bank Office is located outside the State of Texas, a copy of such books and records shall be kept in the State of Texas, for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. All transfers, exchanges and replacement of Securities shall be noted in the Security Register. Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect are-registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereofwill be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three (3) business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. Section 4.02. Bonds. The Issuer shall provide an adequate inventory of printed Securities to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities in safekeeping, which shall be not less than the care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that is maintained for its own securities. Section 4.03. Form ofSecuritv Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. 4 The Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order and prior to the release or disclosure of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the court order or such release or disclosure of the contents of the Security Register. Section 4.05. Return of Cancelled Bonds. All bonds surrendered to the Bank, at the designated Payment/Transfer Office, for payment, redemption, transfer, or replacement, shall be promptly cancelled by the Bank. The Bank will provide to the Issuer, at reasonable intervals determined by the bank, a certificate evidencing the destruction of canceled bonds. Section 4.06. Mutilated., Destroved., Lost or Stolen Securities. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Ordinance, to deliver and issue Securities in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities as long as the same does not result in an overissuance. In case any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities it has paid pursuant to Section 3.01, Securities it has delivered upon the transfer or exchange of any Securities pursuant to Section 4.01, and Securities it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities pursuant to Section 4.06. ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and agrees to use reasonable care in the performance thereof. Section 5.02. Reliance on Documents., Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on bonds or opinions furnished to the Bank. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible 5 Officer, unless it shall be proved that the Bank was negligent in ascertaining the pertinent facts. (c ) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by Issuer. (e) The Bank may consult with counsel, and the written advice of such counselor any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the state- ments of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Monevs Held bv Bank. The Bank shall deposit any moneys received from the Issuer into a segregated account to be held by the Bank solely for the benefit of the owners of the Securities to be used solely for the payment of the Securities, with such moneys in the account that exceed the deposit insurance available to the Issuer by the Federal Deposit Insurance Corporation, to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas and to the extent permitted by the laws of the United States of America to secure and be pledged as collateral for such accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such account shall be made by check drawn on such account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Subject to the Unclaimed Property Law of the State of Texas, any money deposited with the Bank for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for three years after the final maturity of the Security has become due and payable will be paid by the Bank to the Issuer if the Issuer so elects, and the Holder of such Security shall hereafter look only to the Issuer for 6 payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. If the Issuer does not elect, the Bank is directed to report and dispose of the funds in compliance with Title Six of the Texas Property Code, as amended. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the State and County where the administrative offices of the Issuer is located, and agree that service of process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective August 1, 1987, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. Section 6.04. Effect of Headings. 7 The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer shall bind its successors and assigns, whether so expressed or not. Section 6.06. Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between his Agreement and the Ordinance, the Ordinance shall govern. Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of final payment of the principal of and interest on the Securities to the Holders thereof or (ii) may be earlier terminated by either party upon sixty (60) days written notice; provided, however, an early termination of this Agreement by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termina- tion of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securi- ties, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02 and of Article Five shall survive and remain in full force and effect following the termination of this Agreement. Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. JMORGAN CHASE BANK, NATIONAL ASSOCIATION By Title 2001 Bryan Street, 8th Floor Dallas, Texas 75201 CITY OF DENTON, TEXAS By Mayor 215 E. McKinney Street Denton, Texas 76201 10 SCHEDULE A Paying Agent/Registrar Fee Schedule [To be supplied by the Bank] 11 JPMorgan 0 Schedule of Fees for Services as Paying Agent and Registrar in connection with $3,695,000 City of Denton General Obligation Bonds, Series 2006 Based upon our current understanding of your proposed transaction, our fee proposal is as follows: Pricing for Paying Agent and Registrar The Paying Agent and Registrar Fee covers the maintenance of records as registrar, processing of transfers, and payment of interest/principal funds for Debt Service. Acceptance Fee Annual Fee (payable annually in advance) $0.00 $300.00 Notes: Please note that our willingness to act in the capacities specified above and the fees designated in this proposal are indicative and based upon our understanding of the transaction. We reserve the right to revise this proposal should any material aspect of the transaction differ from our understanding. Also, our acceptance of the above contracts and duties is subject to our usual internal review, document review and the receipt of appropriate immunities and indemnities. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, we will ask for information that will allow us to identify you. Annual fees include one standard audit confirmation per year without charge. Standard audit confirmations include the final maturity date, principal paid, principal outstanding, interest cycle, interest paid, cash and asset information, interest rate, and asset statement information. Non-standard audit confirmation requests may be assessed an additional fee. Periodic tenders, sinking fund, optional or extraordinary call redemptions will be assessed an additional charge of $300 per event. Performance of any extraordinary service or incurring extraordinary expenses, such as those in connection with any default, account resignation, or outside legal counsel charges, will be billed in addition to the stated per annum fees. JPMorgan Chase & Co. ("JPMorgan") has entered into an agreement with The Bank of New York Company, Inc. ("BNY") pursuant to which JPMorgan intends to exchange select portions of its corporate trust business, including municipal, corporate and structured finance trusteeships and agency appointments, for BNY's consumer, small-business and middle-market banking businesses. This transaction has been approved by both companies' boards of directors and is subject to regulatory approvals. It is expected to close in the late third quarter or fourth quarter of 2006. J. P. Morgan Trust Company, N. A. . 420 Throckmorton, 9th Floor, Fort Worth, TX 76102 Telephone: (817) 884-4726 . Facsimile: (817) 884-4651 j effrey. c. salavarria@jpmorgan.com 111'1'''''' ....-. ..... Global Credit Research New Issue 11 JUL 2006 " New Issue: Denton (City of) TX MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF DENTON [TX] $3.7 MilliON G.O. BONDS, SERIES 2006 AND $12.7 MilliON CERTIFICATES OF OBLIGATION, SERIES 2006 RATING AFFECTS $121 MILLION IN OUTSTANDING PARITY DEBT INCLUDING CURRENT SALES Municipality TX Moody's Rating ISSUE General Obligation Bonds, Series 2006 Sale Amount $3,695,000 Expected Sale Date 07/18/06 Rating Description General Obligation Limited Tax RATING Aa3 Certificates of Obi igation, Series 2006 Sale Amount $12,665,000 Expected Sale Date 07/18/06 Rating Description General Obligation Limited Tax Aa3 Opinion NEW YORK, Ju111, 2006 -- Moody's has assigned a Aa3 rating to the City of Denton's [TX] $3.7 million General Obligation Bonds, Series 2006 and $12.7 million Certificates of Obligation, Series 2006. Concurrently, Moody's affirms the Aa3 rating on the City's $104 million in outstanding parity general obligation secured. The rating affirmation reflects the City's sizeable and solidly expanding tax base, stable financial operations, and manageable debt burden. Moody's also considers the City's ongoing borrowing needs and swift principal payout rate. The Bond proceeds will be used to finance various street improvements, senior center improvements, library improvements, and park improvements. The Certificates will be used for the purchase, construction, and acquisition of various facilities and land. Annual principal and interest payments on both the bonds and certificates are secured by the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property within the City. The Certificates are additionally secured by a limited pledge of surplus net revenues of the City's utility system not in excess of $10,000. STRONG RESIDENTIAL AND COMMERCIAL GROWTH DRIVING TAX BASE EXPANSION The City of Denton is located within Denton County (general obligation rated Aa2) at the apex of the Dallas- Fort Worth-Denton industrial triangle and covers an area of 98.1 square miles. Situated approximately 38 miles northwest of Dallas and 36 miles northeast of Fort Worth, the City's 2006 estimated population is 104,904, representing a 30o~ increase since 2000. Denton's economy is diversified by manufacturing, state supported institutions, and agriculture. As a result of healthy residential and retail development, the City's tax base has grown on average 9.40~ annually over the past five years to reach $4.8 billion FY 2006. The FY 2006 A.V. increased 80~ or $366 million and of the increase, approximately half was derived from new construction. Key recent developments have included the significant expansion of several hospitals, the construction of new facilities at Texas Woman's University and The University of North Texas, the opening of a $30 million international headquarter facility for Sally Beauty Company, and the opening of the 52 - acre "Denton Crossing" retail development. A 90 - acre, 900,000 square foot business park is slated to be full developed within 5 years. Other projects currently in progress or slated for future development include two 3000+ acre residential developments and the 340,000 square - feet "Denton Crossing" retail development. Officials conservatively anticipate 80~ A V growth in FY 2007. As strong migration patterns into the City continue, spurring demand for services and housing, it is Moody's belief that the City will continue to experience healthy tax base growth. ADEQUATE FINANCIAL RESERVES BEING MAINTAINED WITH CONSERVATIVE FINANCIAL PLANNING AND COST REDUCTION MEASURE The City has historically maintained adequate financial operations. With a FY 2004 commitment to maintain at least 130~ of budgeted annual expenditures in reserves, the City achieved 150~. The reserve goal was increased to 13.50~ for FY 2005 and City officials continue to maintain an annual commitment to increase general fund balances in ~o~ increments, as a percentage of budgeted expenditures, with an ultimate goal of 150~ in FY 2008. At FYE 2005, the City's General Fund balance held $9.9 million, representing an adequate 15.40~ of General Fund revenues. Officials anticipate that the FY 2006 General Fund balance will remain relatively constant. General fund revenues are primarily derived from property taxes (32.90~) and sales taxes (25.1 O~). The maintenance and operations (M&O) tax rate was increased in FY 2006 from $3.99 per $1,000 AV to $4.29. For FY 2004, sales tax revenues rebounded from a listless FY 2003 and grew by approximately 10o~ to $17.7 million. Growth continued in FY 2005 with sales tax revenues rising by 70~, reaching $19 million. Officials budgeted FY 2006 sales tax revenues at $19.4 million, with collections through April totaling $11.7 million. Actual year to date sales tax revenues in FY 2006 are tracking 70~ higher than the previous year, officials indicate. In addition to property tax and sales tax revenues, a sizeable 21.70~ of the FY 2005 General Fund budget was funded by transfers from the City's utility system. Given the size of these transfers, Moody's believes the City's General Fund operations would be considerably pressured in the event that the utility system faced an unexpected decline in net revenues and was no longer able to make such sizeable contributions. In order to mitigate this risk, officials hope to decrease the amounts transferred into the General Fund from the utility system over time. In order to bolster financial resources available for public safety and offset budgetary shortfalls, the City eliminated approximately 50 positions, half of which were vacant, by the end of FY 2005. Moody's believes the recent cost reduction measures, which were necessary to achieve a balanced budget, indicate the City is facing some fiscal challenges in meeting the rising demand for services that has been spurred by strong population growth. Given expectations that this growth trend will continue for at least several more years, Moody's believes the City may face additional fiscal challenges through the medium term. Never the less, considering an adequate fund balance, conservative and prudent budgeting (including a recently initiated multi year financial forecast), and a strong committment to increasing reserves, Moody's believes the City's financial position is consistent with other credits in the high level Aa3 rating category. ELEVATED DEBT BURDEN WITH CONSIDERABLE DEBT TO BE INCURRED GOING FORWARD In February 2005, Denton voters approved the City's request for a $42 million general obligation authorization. After the current sales, approximately $38 million remains available. Inclusive of the current sales, the City's debt profile remains elevated but manageable, with debt burdens of 2.060~ direct and 9. 70~ overall, both represented as a percentage of assessed valuation. The considerably high overall debt burden reflects sizeable debt issuances by Denton I.S.D. and Denton County. Payout of principal is favorable with approximately 660~ retired over ten years. As the City's population continues to grow at a solid pace, capital needs abound. Officials expect to issue $17.4 million of general obligation bonds in FY 2007, $9.4 million in FY 2008, and $6.9 million in FY 2009. In addition, $14.2 million of certificates of obligation is slated to be issued in FY 2007, $5.2 million in FY 2008, and $5.1 million in FY 2009. Considering the City's sizeable debt issuance plans, the debt burdens will remain elevated. However, Moody's believes the City's debt position will also remain manageable given expectations of continues tax base growth and a rapid payout rate. KEY STATISTICS: 2006 Estimated Population: 104,904 2006 Full Valuation: $4.8 billion 2006 Full Valuation per Capita: $45,655 Direct Debt Ratio: 2.060~ Overall Debt Ratio: 9.70~ Payout of Principal (10 years): 660~ FY 2005 General Fund Balance: $9.9 million or 15.40~ of General Fund Revenues Post Sale Parity Debt Outstanding: $121 million Analysts Anil Chandy Analyst Public Finance Group Moody's Investors Service Douglas Benton Backup Analyst Public Finance Group Moody's Investors Service Contacts Journalists: (212) 553-0376 Research Clients: (212) 553-1653 @ Copyright 2006, 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 MOODY'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 circumstances shall MOODY'S have 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, special, 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 and financial reporting analysis observations, 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 IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY 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 MANNER WHATSOEVER. Each rating or other opinion must be weighed solely 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 of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. 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 appraisal and rating services rendered by it fees ranging from $1,500 to $2,400,000. Moody's Corporation (MCO) and its wholly- owned credit rating agency subsidiary, Moody's Investors Service (MIS), also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 50/0, is posted annually on Moody's website at www.moodys.com under the heading "Shareholder Relations - Corporate Governance - Director and Shareholder Affiliation Policy." Moody's Investors Service pty Limited does not hold an Australian financial services licence under the Corporations Act. This credit rating opinion has been prepared without taking into account any of your objectives, financial situation or needs. You should, before acting on the opinion, consider the appropriateness of the opinion having regard to your own objectives, financial situation and needs. 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O~ .~ t- <!) fF7 r:/'l M fF7 NOTICE OF SALE AND BIDDING INSTRUCTIONS ON $3,695,000 CITY OF DENTON, TEXAS (Denton County) GENERAL OBLIGATION BONDS, SERIES 2006 Sealed Bids Due Tuesday, July 18, 2006, at 10:30 AM, CDT THE BONDS WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS. THE SALE BONDS OFFERED FOR SALE AT COMPETITIVE BIDDING. . . The City of Denton, Texas (the "City") is offering for sale its $3,695,000 General Obligation Bonds, Series 2006 (the "Bonds"). Bidders may submit bids for the Bonds by any of the following methods: (1) Deliver bids directly to the City as described below in "Bids Delivered to the 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." BIDS DELIVERED TO CITY. . . Sealed bids, plainly marked "Bid for Bonds," should be addressed to "Mayor and City Council, City of Denton, Texas," and should be delivered to Mr. Jon Fortune, City of Denton, 215 E. McKinney Street, Denton, Texas 76201, prior to 10:30 AM, CDT, on the date of the sale. ELECTRONIC BIDDING PROCEDURE . . . Any prospective bidder that intends to submit an electronic bid must submit its electronic bid through the facilities of PARITY. Subscription to i-Deal's BIDCOMP Competitive Bidding System is required in order to submit an electronic bid. The City will neither confirm any subscription nor be responsible for the failure of any prospective bidder to subscribe. Bidders submitting an electronic bid shall not be required to submit Official Bid Forms. An electronic bid made through the facilities of PARITY shall be deemed an irrevocable offer to purchase the Bonds on the terms provided in this Notice of Sale, and shall be binding upon the bidder as if made by a signed, sealed 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 the prospective bidder. If any provisions of the Notice of Sale shall conflict with information provided by PARITY as the approved provider of electronic bidding services, this Notice of Sale shall control. Further information about PARITY, including any fee charged, may be obtained from Parity Customer Support, 40 West 23rd Street, 5th Floor, New York, New York 10010, (212) 404-8102. For purposes of the bidding process, regardless of the bidding method, the time as maintained by i-Deal shall constitute the official time. For information purposes only, bidders are requested to state in their electronic bids the true interest cost to the City, as described under "Basis for Award" below. All electronic bids shall be deemed to incorporate the provisions of this Notice of Sale and the Official Bid Form. BIDS BY TELEPHONE OR FACSIMILE. . . Bidders must submit, prior to July 18, 2006, SIGNED Official Bid Forms to David Medanich, First Southwest Company, 777 Main Street, Suite 1200, Fort Worth, Texas 76102, if they are submitting their bid by telephone or facsimile (fax) on the date of the sale. Telephone bids will be accepted at (940) 349-8288, between 9:30 AM, CDT and 10:30 AM, CDT on the date of the sale. Fax bids will be received between 9:30 AM, CDT and 10:30 AM, CDT, on the date of the sale at (940) 349-7206, attention: Mr. Jon Fortune. First Southwest Company will not be responsible for submitting any bids received after the above deadlines. The City and First Southwest Company are not responsible if such telephone or facsimile numbers are busy which prevents a bid or bids from being submitted on a timely basis. 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 BID OPENING. . . The bids for the Bonds will be publicly opened and read in the office of the Assistant City Manager, at City Hall, at 10:30 AM, CDT, Tuesday, July 18,2006. AWARD OF THE BONDS. . . The City Council will take action to award the Bonds (or reject all bids) at a meeting scheduled to convene at 11:30 AM, CDT, on the date of the bid opening, and adopt an ordinance authorizing the Bonds and approving the Official Statement (the "Bond Ordinance"). THE BONDS DESCRIPTION. . . The Bonds will be dated July 15, 2006 (the "Dated Date"). Interest will accrue from the Dated Date and will be due on February 15, 2007, and each August 15 and February 15 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 anyone maturity. The Bonds will mature on February 15 in each year as follows: MA TURITY SCHEDULE Principal Principal Principal Year Amount Year Amount Year Amount 2007 $ 100,000 2014 $ 160,000 2020 $ 210,000 2008 120,000 2015 165,000 2021 220,000 2009 125,000 2016 175,000 2022 230,000 2010 130,000 2017 185,000 2023 245,000 2011 140,000 2018 195,000 2024 255,000 2012 145,000 2019 200,000 2025 265,000 2013 150,000 2026 280,000 OPTIONAL REDEMPTION . . . The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2016, or any date thereafter, 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 as serial Bonds or may provide that any two or more consecutive annual principal amounts be combined into one or more term Bonds. MANDA TORY SINKING FUND. . . If the successful bidder elects 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 February 15 next following the last maturity for Serial Bonds, and annually thereafter on each February 15 until the stated maturity for the Term Bonds at the redemption prices of par plus accrued 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/Registrar 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 the 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 - Book-Entry-Only System" in the Preliminary Official Statement. PAYING AGENT/REGISTRAR. . . The initial Paying Agent/Registrar shall be JPMorgan Chase Bank, National Association (see "The Bonds - Paying Agent/Registrar" in the Preliminary Official Statement). SOURCE OF PAYMENT. . . The Bonds are direct and voted general obligations of the City payable out of the receipts from an annual ad valorem tax levied, within the limits prescribed by law, on all taxable property located within the City, as provided in the Bond Ordinance. Further details regarding the Bonds are set forth in the Preliminary Official Statement. ii CONDITIONS OF THE SALE TYPE OF BIDS AND INTEREST RATES. . . The Bonds will be sold in one block on an "All or None" basis, and at a price of 101.2% 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 exceed 15%. The highest rate bid may not exceed the lowest rate bid by more than 1 % in rate. Using the interest rate established for the February 15, 2017 maturity as the base year, interest rates for successive maturities shall be structured 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 interest rates will be considered. Each bidder shall state in the bid the total interest cost in dollars and the effective interest rate determined thereby (calculated in the manner prescribed 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-annual compounding, produces an amount equal to the sum of the par value of the Bonds plus any premium bid (but not interest accrued from the Dated Date to the date of their delivery). In the event of a 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 $73,900.00, is required. Such Good Faith Deposit shall be a bank cashier's check or certified check, 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 Instructions. 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 authorize its use as a Good Faith Deposit by the Initial Purchaser who shall be named in such instructions. The Good Faith Deposit of the Initial Purchaser will be returned to the Initial Purchaser upon payment for the Bonds. No interest will be allowed on the Good Faith Deposit. In the event the Initial Purchaser 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. DELIVERY OF THE BONDS AND ACCOMPANYING DOCUMENTS CUSIP NUMBERS. . . It is anticipated that CUSIP identification numbers 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 delivery of and pay for the Bonds in accordance with the terms of this Notice of Sale and Bidding Instructions and the terms of the Official 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 Purchaser. 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 form, in the aggregate principal amount of $3,695,000, payable in stated installments to the Initial Purchaser or its designee, signed by the Mayor and City Secretary, approved by the Attorney General, and registered and manually signed by the Comptroller of Public Accounts. Upon delivery of the 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 of the 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 delivery of the Bonds. It is anticipated that delivery of the Bonds can be made on or about August 22, 2006, and it is understood and agreed that the Initial Purchaser will accept delivery and make payment for the Bonds by 10:00 AM, CDT, on August 22, 2006, or thereafter on the date the Bond is tendered for delivery, up to and including September 5, 2006. If for any reason the City is unable to make delivery on or before September 5, 2006, the City shall immediately contact the Initial Purchaser and offer to allow the Initial Purchaser to extend its offer for an additional thirty days. If the Initial Purchaser does not elect to extend its offer within six days thereafter, then its Good Faith Deposit will be returned, and both the City and the Initial Purchaser shall be relieved of any 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 DELIVERY. . . The obligation of the Initial Purchaser to take up and pay for the Bonds is subject to the Initial Purchaser's receipt of (a) the legal opinion of McCall, Parkhurst & Horton, L.L.P., Dallas, Texas, Bond Counsel for the City ("Bond Counsel"), (b) the no-litigation certificate, and (c) the certification as to the Preliminary Official Statement, all as further described in the Preliminary Official Statement. 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 are offered when, as and if issued, subj ect to the approval of the Attorney General of the State of Texas. Delivery of and payment for the Bonds is subject to the receipt by the Initial Purchaser of opinions of Bond Counsel, to the effect that the Bonds are valid and binding obligations of the City and that 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 "Tax Matters" in the Preliminary Official Statement, including alternative minimum tax consequences for corporations. CERTIFICATION OF PRELIMINARY OFFICIAL STATEMENT. . . At the time of payment for and Initial Delivery of the 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 EXEMPT STATUS. . . .At any time before the Bonds are tendered for delivery, the 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 present federal income tax laws, either by ruling of the Internal Revenue Service or by a decision of any Federal court, or shall be declared taxable or be required 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 Financial 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 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 actions taken by any legislative or judicial bodies. In the normal course of business, the Financial Advisor may from time to time sell investment securities to the City for the investment of bond proceeds or other funds of the City upon the request of the City. BLUE SKY 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 from registration in any state where such action is necessary, provided, however, that the City shall not be obligated to qualify as a foreign corporation or 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 Instructions 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 Instructions, the Official Bid Form and the Preliminary Official Statement. Prospective purchasers are urged to carefully examine the Preliminary Official Statement to determine the investment quality of the Bonds. ISSUANCE OF ADDITIONAL DEBT. . . Other than the City's $12,665,000 Certificates of Obligation, Series 2006 being offered for sale concurrently with, but separately from, the Bonds, the City does not anticipate the issuance of additional general obligation debt within the next 12 months. RATINGS . . . The presently outstanding tax supported debt of the City is rated "Aa3" by Moody's Investors Service, Inc. ("Moody's") and "AA-" by Standard & Poor's Ratings Services, A Division of 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 this issue have been made to Moody's and S&P. The results of their determinations will be provided as soon as possible. MUNICIPAL BOND 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 reoffering of the Bonds. iv THE PRELIMINARY OFFICIAL STATEMENT AND COMPLIANCE WITH SEC RULE 15c2-12... The City has prepared the accompanying Preliminary Official Statement and, for the 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 review prior to bidding. To the best knowledge and belief of the City, the Preliminary Official Statement contains information, including financial information or operating data, concerning every entity, enterprise, fund, account, or person that is material to an evaluation of the 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 the Preliminary Official Statement. The City will furnish to the Initial Purchaser, acting through a designated senior representative, in accordance with instructions received from the Initial Purchaser, within seven (7) business days from the sale date an aggregate of 150 copies of the Official Statement reflecting interest rates and other terms relating to the initial reoffering of the Bonds. The cost of any Official Statement in excess of the number specified shall be prepared and distributed at the cost of the Initial Purchaser. 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 delivery of any copies of the Official Statement in connection with the offering or reoffering of the subject securities. CONTINUING DISCLOSURE 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 15c2-12, as described in the Preliminary Official Statement under "Continuing Disclosure of Information". The Initial Purchaser's obligation to accept and pay for the Bonds is conditioned upon delivery to the Initial Purchaser or agent of a certified copy of the Bond Ordinance containing the agreement described under such heading. COMPLIANCE WITH 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, may be obtained at the offices of First Southwest Company, Investment Bankers, 325 North St. Paul, Suite 800, Dallas, Texas 75201, Financial Advisor to the City. On the date of the sale, the City will, in the Bond Ordinance authorizing the issuance of the Bonds, confirm its approval of the form and content of the Preliminary Official Statement, and any addenda, supplement or amendment thereto, and authorize its use in the reoffering of the Bonds by the Initial Purchaser. PERRY McNEILL Mayor City of Denton, Texas ATTEST: JENNIFER WALTERS City Secretary July 7, 2006 v BOND YEARS Bonds Accumulated Bonds Maturing Amount Bond Years Bond Years Maturing 2007 100,000 58.333 58.333 2007 2008 120,000 190.000 248.333 2008 2009 125,000 322.917 571.250 2009 2010 130,000 465.833 1,037.083 2010 2011 140,000 641.667 1,678.750 2011 2012 145,000 809.583 2,488.333 2012 2013 150,000 987.500 3,475.833 2013 2014 160,000 1,213.333 4,689.167 2014 2015 165,000 1,416.250 6,105.417 2015 2016 175,000 1,677.083 7,782.500 2016 2017 185,000 1,957.917 9,740.417 2017 2018 195,000 2,258.750 11,999.167 2018 2019 200,000 2,516.667 14,515.833 2019 2020 210,000 2,852.500 17,368.333 2020 2021 220,000 3,208.333 20,576.667 2021 2022 230,000 3,584.167 24,160.833 2022 2023 245,000 4,062.917 28,223.750 2023 2024 255,000 4,483.750 32,707.500 2024 2025 265,000 4,924.583 37,632.083 2025 2026 280,000 5,483.333 43,115.417 2026 Average Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.669 Years OFFICIAL BID FORM Honorable Mayor and City Council City of Denton, Texas July 18, 2006 Honorable Mayor and Members of the City Council: Reference is made to your Preliminary Official Statement and Notice of Sale and Bidding Instructions, dated July 7, 2006 of $3,695,000 CITY OF DENTON, TEXAS GENERAL OBLIGATION BONDS, SERIES 2006, 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 date of issue to date of delivery to us, plus a cash premium of $ for Bonds maturing and bearing interest as follows: Principal Interest Principal Interest Principal Interest Maturity Amount Rate Maturity Amount Rate Maturity Amount Rate 2/15/2007 $ 100,000 % 2/15/2014 $ 160,000 % 2/15/2020 $ 210,000 % 2/15/2008 120,000 % 2/15/2015 165,000 % 2/15/2021 220,000 % 2/15/2009 125,000 % 2/15/2016 175,000 % 2/15/2022 230,000 % 2/15/2010 130,000 % 2/15/2017 185,000 % 2/15/2023 245,000 % 2/15/2011 140,000 % 2/15/2018 195,000 % 2/15/2024 255,000 % 2/15/2012 145,000 % 2/15/2019 200,000 % 2/15/2025 265,000 % 2/15/2013 150,000 % 2/15/2026 280,000 % Of the principal maturities set forth in the table above, term bonds have been created as indicated in the 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: Maturity Date February 15 Year of First Mandatory Redemption Principal Amount Interest Rate $ $ $ $ $ $ % % % % % % Our calculation (which is not a part of this bid) of the true interest cost from the above is: TRUE INTEREST COST ~ We are having the Bonds of the following maturities insured by at a premium of $ , said premium to 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. 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. A bank cashier's check or certified check of the Bank" in the amount of $73,900.00, 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 the Preliminary Official Statement and Notice of Sale and Bidding Instructions. We agree to accept delivery of the Bonds utilizing the Book-Entry-Only System through DTC and make payment for the Initial Bond in immediately available funds in the Corporate Trust Division, JPMorgan Chase Bank, National Association, not later than 10:00 AM, CDT, on August 22, 2006, or thereafter on the date the Bonds are tendered for delivery, pursuant to the terms set forth in the Notice 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 Instructions, this the 18th day of July, 2006. ATTEST: Mayor City of Denton, Texas City Secretary CERTIFICATE OF UNDERWRITER The undersigned hereby certifies as follows with respect to the bid and purchase of the City of Denton, Texas General Obligation Bonds, Series 2006 (the "Bonds "): 1. The undersigned is the duly authorized representative of the purchaser (the "Purchaser") of the Bonds from the City of Denton, Texas (the "Issuer"). 2. All of the Bonds have been offered to members of the public in a bona fide initial offering. For purposes of this Certificate, the term "public" does not include any bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers (including the Purchaser or members of the selling group or persons that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of the selling group). 3. Each maturity of the Bonds was offered to the public at a price which, on the date of such offering, was reasonably expected by the Purchaser to be equal to the fair market value of such maturity. 4. Other than the obligations set forth in paragraph 5 hereof (the "Retained Maturity" or "Retained Maturities"), the first price/yield at which a substantial amount (i.e., at least ten (10) percent) of the principal amount of each maturity of the Bonds was sold to the public is set forth below. Principal Offering Principal Offering Amount Year of Price Amount Year of Price Maturing Maturity (%/Yield) Maturing Maturity (%/Yield) $ 100,000 2007 $ 185,000 2017 120,000 2008 195,000 2018 125,000 2009 200,000 2019 130,000 2010 210,000 2020 140,000 2011 220,000 2021 145,000 2012 230,000 2022 150,000 2013 245,000 2023 160,000 2014 255,000 2024 165,000 2015 265,000 2025 175,000 2016 280,000 2026 5. In the case of the Retained Maturities, the Purchaser reasonably expected on the offering date to sell a substantial amount (i.e., at least ten (10) percent) of each Retained Maturity at the initial offering price/yield as set forth below: Principal Offering Principal Offering Amount Year of Price Amount Year of Price Maturing Maturity (%/Yield) Maturing Maturity (%/Yield) $ 100,000 2007 $ 185,000 2017 120,000 2008 195,000 2018 125,000 2009 200,000 2019 130,000 2010 210,000 2020 140,000 2011 220,000 2021 145,000 2012 230,000 2022 150,000 2013 245,000 2023 160,000 2014 255,000 2024 165,000 2015 265,000 2025 175,000 2016 280,000 2026 6. Please choose the appropriate statement: ) The Purchaser will not purchase bond insurance for the Bonds. ) The Purchaser will purchase bond insurance from (the "Insurer") for a fee/premium of $ (the "Fee"). The Fee 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 or legal fees. The Purchaser represents that the present value of the Fee for each obligation constituting the Bonds to which such Fee 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 Fee has been paid to a person who is not exempt from federal income taxation and who 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. No portion of the Fee is refundable upon redemption of any of the Bonds in an amount which would exceed the portion of such Fee that has not been earned. 7. The Purchaser understands that the statements made herein will be relied upon, by the Issuer 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 the interest on the Bonds is excludable from the gross income of the owners thereof. EXECUTED and DELIVERED this _day of , 2006. (N ame of Purchaser or Manager of Purchasing Syndicate) By: Title: NOTICE OF SALE AND BIDDING INSTRUCTIONS ON $12,665,000 CITY OF DENTON, TEXAS (Denton County) CERTIFICATES OF OBLIGATION, SERIES 2006 Sealed Bids Due Tuesday, July 18, 2006, at 10:00 AM, CDT THE CERTIFICATES WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS. THE SALE CERTIFICATES OFFERED FOR SALE AT COMPETITIVE BIDDING. . . The City of Denton, Texas (the "City") is offering for sale its $12,665,000 Certificates of Obligation, Series 2006 (the "Certificates"). Bidders may submit bids for the Certificates by any of the following methods: (1) Deliver bids directly to the City as described below in "Bids Delivered to the 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." BIDS DELIVERED TO CITY. . . Sealed bids, plainly marked "Bid for Certificates," should be addressed to "Mayor and City Council, City of Denton, Texas," and should be delivered to Mr. Jon Fortune, Assistant City Manager, City of Denton, 215 E. McKinney Street, Denton, Texas 76201, prior to 10:00 AM, CDT, on the date of the sale. ELECTRONIC BIDDING PROCEDURE . . . Any prospective bidder that intends to submit an electronic bid must submit its electronic bid through the facilities of PARITY. Subscription to i-Deal's BIDCOMP Competitive Bidding System is required in order to submit an electronic bid. The City will neither confirm any subscription nor be responsible for the failure of any prospective bidder to subscribe. Bidders submitting an electronic bid shall not be required to submit Official Bid Forms. An electronic bid made through the facilities of PARITY shall be deemed an irrevocable offer to purchase the Certificates on the terms provided in this Notice of Sale, and shall be binding upon the bidder as if made by a signed, sealed 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 the prospective bidder. If any provisions of the Notice of Sale shall conflict with information provided by PARITY as the approved provider of electronic bidding services, this Notice of Sale shall control. Further information about PARITY, including any fee charged, may be obtained from Parity Customer Support, 40 West 23rd Street, 5th Floor, New York, New York 10010, (212) 404-8102. For purposes of the bidding process, regardless of the bidding method, the time as maintained by i-Deal shall constitute the official time. For information purposes only, bidders are requested to state in their electronic bids the true interest cost to the City, as described under "Basis for Award" below. All electronic bids shall be deemed to incorporate the provisions of this Notice of Sale and the Official Bid Form. BIDS BY TELEPHONE OR FACSIMILE. . . Bidders must submit, prior to July 18, 2006, SIGNED Official Bid Forms to David Medanich, First Southwest Company, 777 Main Street, Suite 1200, Fort Worth, Texas 76102, if they are submitting their bid by telephone or facsimile (fax) on the date of the sale. Telephone bids will be accepted at (940) 349-8288, between 9:00 AM, CDT and 10:00 AM, CDT on the date of the sale. Fax bids will be received between 9:00 AM, CDT and 10:00 AM, CDT, on the date of the sale at (940) 349-7206, attention: Mr. Jon Fortune. First Southwest Company will not be responsible for submitting any bids received after the above deadlines. The City and First Southwest Company are not responsible if such telephone or facsimile numbers are busy which prevents a bid or bids from being submitted on a timely basis. 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 BID OPENING. . . The bids for the Certificates will be publicly opened and read in the office of the Assistant City Manager, at City Hall, at 10:00 AM, CDT, Tuesday, July 18,2006. AWARD OF THE CERTIFICATES. . . The City Council will take action to award the Certificates (or reject all bids) at a meeting scheduled to convene at 11 :30 AM, CDT, on the date of the bid opening, and adopt an ordinance authorizing the Certificates and approving the Official Statement (the "Certificate Ordinance"). THE BONDS DESCRIPTION. . . The Certificates will be dated July 15, 2006 (the "Dated Date"). Interest will accrue from the Dated Date and will be due on February 15, 2007, and each August 15 and February 15 thereafter until the earlier of maturity or prior redemption. The Certificates will be issued only in fully registered form in any integral multiple of $5,000 for anyone maturity. The Certificates will mature on February 15 in each year as follows: MA TURITY SCHEDULE Principal Principal Principal Year Amount Year Amount Year Amount 2007 $ 1,000,000 2014 $ 405,000 2020 $ 385,000 2008 1,090,000 2015 425,000 2021 400,000 2009 1,135,000 2016 450,000 2022 420,000 2010 1,190,000 2017 340,000 2023 445,000 2011 1,235,000 2018 355,000 2024 465,000 2012 765,000 2019 375,000 2025 480,000 2013 805,000 2026 500,000 OPTIONAL REDEMPTION . . . The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2016, or any date thereafter, at the par value thereof plus accrued interest to the date fixed for redemption. SERIAL CERTIFICATES AND/OR TERM CERTIFICATES. . . Bidders may provide that all of the Certificates be issued as serial Certificates or may provide that any two or more consecutive annual principal amounts be combined into one or more term Certificates. MANDA TORY SINKING FUND. . . If the successful bidder elects to alter the Maturity Schedule reflected above and convert principal amounts of the Serial Certificates into "Term Certificates", such "Term Certificates" shall be subject to mandatory redemption on the first February 15 next following the last maturity for Serial Certificates, and annually thereafter on each February 15 until the stated maturity for the Term Certificates at the redemption prices of par plus accrued interest to the date of redemption. The principal amounts of the Term Certificates 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 Certificates occurred. At least thirty (30) days prior to each mandatory redemption date, the Paying Agent/Registrar shall select by lot the Term Certificates 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 Certificates 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 Certificates of the same maturity which (i) shall have been acquired by the City at a price not exceeding the principal amount of such Term Certificates 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 Certificates in the event the successful bidder elects to convert serial maturities into one or more Term Certificates. BOOK-ENTRy-ONLY SYSTEM. . . The City intends to utilize the Book-Entry-Only System of The Depository Trust Company ("DTC"). See "The Bonds and Certificates - Book-Entry-Only System" in the Preliminary Official Statement. PAYING AGENT/REGISTRAR. . . The initial Paying Agent/Registrar shall be JPMorgan Chase Bank, National Association (see "The Bonds and Certificates - Paying Agent/Registrar" in the Preliminary Official Statement). SOURCE OF PAYMENT. . . The Certificates constitute direct obligations of the City, payable from a combination of (i) the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge (not to exceed $10,000) of surplus net revenues of the City's Utility System, as provided in the Certificate Ordinance. Further details regarding the Certificates are set forth in the Preliminary Official Statement. ii CONDITIONS OF THE SALE TYPE OF BIDS AND INTEREST RATES. . . The Certificates will be sold in one block on an "All or None" basis, and at a price of not less than par and not more than 100.5% of their par value plus accrued interest from the dated date of the Certificates (the "Dated Date") to the date of delivery of the Certificates. Bidders are invited to name the rate( s) of interest to be borne by the Certificates, 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 exceed 15%. The highest rate bid may not exceed the lowest rate bid by more than 1 % in rate. Using the interest rate established for the February 15, 2017 maturity as the base year, interest rates for successive maturities shall be structured 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 Certificates of one maturity must bear one and the same rate. No bids involving supplemental interest rates will be considered. Each bidder shall state in the bid the total interest cost in dollars and the effective interest rate determined thereby (calculated in the manner prescribed 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 Certificates 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 Certificates on the basis of semi-annual compounding, produces an amount equal to the sum of the par value of the Certificates plus any premium bid (but not interest accrued from the Dated Date to the date of their delivery). In the event of a 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 $253,300.00, is required. Such Good Faith Deposit shall be a bank cashier's check or certified check, 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 Instructions. 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 authorize its use as a Good Faith Deposit by the Initial Purchaser who shall be named in such instructions. The Good Faith Deposit of the Initial Purchaser will be returned to the Initial Purchaser upon payment for the Certificates. No interest will be allowed on the Good Faith Deposit. In the event the Initial Purchaser should fail or refuse to take up and pay for the Certificates 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 Certificates has been made. DELIVERY OF THE BONDS AND ACCOMPANYING DOCUMENTS CUSIP NUMBERS . . . It is anticipated that CUSIP identification numbers will appear on the Certificates, but neither the failure to print or type such number on any Certificate nor any error with respect thereto shall constitute cause for a failure or refusal by the Initial Purchaser to accept delivery of and pay for the Certificates in accordance with the terms of this Notice of Sale and Bidding Instructions and the terms of the Official Bid Form. All expenses in relation to the printing or typing of CUSIP numbers on the Certificates 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 Purchaser. DELIVERY OF CERTIFICATES . . . Initial Delivery will be accomplished by the issuance of one Initial Certificate (also called the "Certificate" or "Certificates"), either in typed or printed form, in the aggregate principal amount of $12,665,000, payable in stated installments to the Initial Purchaser or its designee, signed by the Mayor and City Secretary, approved by the Attorney General, and registered and manually signed by the Comptroller of Public Accounts. Upon delivery of the Initial Certificate, it shall be immediately cancelled and one definitive Certificate 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 of the Paying Agent/Registrar in Dallas, Texas. Payment for the Certificates 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 delivery of the Certificates. It is anticipated that delivery of the Certificates can be made on or about August 22, 2006, and it is understood and agreed that the Initial Purchaser will accept delivery and make payment for the Certificates by 10:00 AM, CDT, on August 22, 2006, or thereafter on the date the Certificate is tendered for delivery, up to and including September 5, 2006. If for any reason the City is unable to make delivery on or before September 5, 2006, the City shall immediately contact the Initial Purchaser and offer to allow the Initial Purchaser to extend its offer for an additional thirty days. If the Initial Purchaser does not elect to extend its offer within six days thereafter, then its Good Faith Deposit will be returned, and both the City and the Initial Purchaser shall be relieved of any further obligation. In no event shall the City be liable for any damages by reason of its failure to deliver the Certificates, provided such failure is due to circumstances beyond the City's reasonable control. CONDITIONS TO DELIVERY. . . The obligation of the Initial Purchaser to take up and pay for the Certificates is subject to the Initial Purchaser's receipt of (a) the legal opinion of McCall, Parkhurst & Horton, L.L.P., Dallas, Texas, Bond Counsel for the City ("Bond Counsel"), (b) the no-litigation certificate, and (c) the certification as to the Preliminary Official Statement, all as further described in the Preliminary Official Statement. iii 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 Certificates from the gross income of their owners, the Initial Purchaser will be required to complete, execute, and deliver to the City (on or before the 6th business day prior to the delivery of the Certificates) 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 Certificates for sale, such certificate may be modified in a manner approved by the City. In no event will the City fail to deliver the Certificates as a result of the Initial Purchaser's inability to sell a substantial amount of the Certificates 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 Certificates, 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 Certificate Counsel. LEGAL OPINIONS . . . The Certificates are offered when, as and if issued, subj ect to the approval of the Attorney General of the State of Texas. Delivery of and payment for the Certificates is subject to the receipt by the Initial Purchaser of opinions of Bond Counsel, to the effect that the Certificates are valid and binding obligations of the City and that the interest on the Certificates will be excludable 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 OFFICIAL STATEMENT. . . At the time of payment for and Initial Delivery of the Certificates, 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 EXEMPT STATUS. . . .At any time before the Certificates are tendered for delivery, the 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 present federal income tax laws, either by ruling of the Internal Revenue Service or by a decision of any Federal court, or shall be declared taxable or be required 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 Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. First Southwest Company may submit a bid for the Certificates, either independently or as a member of a syndicate organized to submit a bid for the Certificates. 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 Certificates, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. In the normal course of business, the Financial Advisor may from time to time sell investment securities to the City for the investment of bond proceeds or other funds of the City upon the request of the City. BLUE SKY LAWS. . . By submission of its bid, the Initial Purchaser represents that the sale of the Certificates in states other than Texas will be made only pursuant to exemptions from registration or, where necessary, the Initial Purchaser will register the Certificates in accordance with the securities law of the states in which the Certificates 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 Certificates or obtaining an exemption from registration in any state where such action is necessary, provided, however, that the City shall not be obligated to qualify as a foreign corporation or 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 Instructions does not alone constitute an offer to sell the Certificates, but is merely notice of the sale of the Certificates. The offer to sell the Certificates is being made by means of the Notice of Sale and Bidding Instructions, the Official Bid Form and the Preliminary Official Statement. Prospective purchasers are urged to carefully examine the Preliminary Official Statement to determine the investment quality of the Certificates. ISSUANCE OF ADDITIONAL DEBT. . . Other than the City's General Obligation Bonds, Series 2006 being offered for sale concurrently with, but separately from, the Certificates, the City does not anticipate the issuance of additional general obligation debt within the next 12 months. RATINGS . . . The presently outstanding tax supported debt of the City is rated "Aa3" by Moody's Investors Service, Inc. ("Moody's") and "AA-" by Standard & Poor's Ratings Services, A Division of 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 this issue have been made to Moody's and S&P. The results of their determinations will be provided as soon as possible. MUNICIPAL BOND INSURANCE . . . In the event the Certificates 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 reoffering of the Certificates. iv THE PRELIMINARY OFFICIAL STATEMENT AND COMPLIANCE WITH SEC RULE 15c2-12... The City has prepared the accompanying Preliminary Official Statement and, for the 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 review prior to bidding. To the best knowledge and belief of the City, the Preliminary Official Statement contains information, including financial information or operating data, concerning every entity, enterprise, fund, account, or person that is material to an evaluation of the offering of the Certificates. 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 the Preliminary Official Statement. The City will furnish to the Initial Purchaser, acting through a designated senior representative, in accordance with instructions received from the Initial Purchaser, within seven (7) business days from the sale date an aggregate of 150 copies of the Official Statement reflecting interest rates and other terms relating to the initial reoffering of the Certificates. The cost of any Official Statement in excess of the number specified shall be prepared and distributed at the cost of the Initial Purchaser. 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 delivery of any copies of the Official Statement in connection with the offering or reoffering of the subject securities. CONTINUING DISCLOSURE AGREEMENT .. . The City will agree in the Certificate Ordinance to provide certain periodic information and notices of material events in accordance with Securities and Exchange Commission Rule 15c2-12, as described in the Preliminary Official Statement under "Continuing Disclosure of Information". The Initial Purchaser's obligation to accept and pay for the Certificates is conditioned upon delivery to the Initial Purchaser or agent of a certified copy of the Certificate Ordinance containing the agreement described under such heading. COMPLIANCE WITH 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, may be obtained at the offices of First Southwest Company, Investment Bankers, 325 North St. Paul, Suite 800, Dallas, Texas 75201, Financial Advisor to the City. On the date of the sale, the City will, in the Certificate Ordinance authorizing the issuance of the Certificates, confirm its approval of the form and content of the Preliminary Official Statement, and any addenda, supplement or amendment thereto, and authorize its use in the reoffering of the Certificates by the Initial Purchaser. PERRY McNEILL Mayor City of Denton, Texas ATTEST: JENNIFER WALTERS City Secretary July 7, 2006 v BOND YEARS Certificates Accumulated Certificates Maturing Amount Bond Years Bond Years Maturing 2007 1,000,000 583.333 583.333 2007 2008 1,090,000 1,725.833 2,309.167 2008 2009 1,135,000 2,932.083 5,241.250 2009 2010 1,190,000 4,264.167 9,505.417 2010 2011 1,235,000 5,660.417 15,165.833 2011 2012 765,000 4,271.250 19,437.083 2012 2013 805,000 5,299.583 24,736.667 2013 2014 405,000 3,071.250 27,807.917 2014 2015 425,000 3,647.917 31,455.833 2015 2016 450,000 4,312.500 35,768.333 2016 2017 340,000 3,598.333 39,366.667 2017 2018 355,000 4,112.083 43,478.750 2018 2019 375,000 4,718.750 48,197.500 2019 2020 385,000 5,229.583 53,427.083 2020 2021 400,000 5,833.333 59,260.417 2021 2022 420,000 6,545.000 65,805.417 2022 2023 445,000 7,379.583 73,185.000 2023 2024 465,000 8,176.250 81,361.250 2024 2025 480,000 8,920.000 90,281.250 2025 2026 500,000 9,791.667 100,072.917 2026 Average Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7.902 Years OFFICIAL BID FORM Honorable Mayor and City Council City of Denton, Texas July 18, 2006 Honorable Mayor and Members of the City Council: Reference is made to your Preliminary Official Statement and Notice of Sale and Bidding Instructions, dated July 7, 2006 of $12,665,000 CITY OF DENTON, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2006, both of which constitute a part hereof. For your legally issued Certificates, as described in said Notice of Sale and Bidding Instructions and Preliminary Official Statement, we will pay you par and accrued interest from date of issue to date of delivery to us, plus a cash premium of $ (not to exceed 0.5% of the total par amount) for Certificates maturing and bearing interest as follows: Princi pal Interest Principal Interest Principal Interest Maturity Amount Rate Maturity Amount Rate Maturity Amount Rate 2/15/2007 $ 1,000,000 % 2/15/2014 $ 405,000 % 2/15/2020 $ 385,000 % 2/15/2008 1,090,000 % 2/15/2015 425,000 % 2/15/2021 400,000 % 2/15/2009 1,135,000 % 2/15/2016 450,000 % 2/15/2022 420,000 % 2/15/2010 1,190,000 % 2/15/2017 340,000 % 2/15/2023 445,000 % 2/15/2011 1,235,000 % 2/15/2018 355,000 % 2/15/2024 465,000 % 2/15/2012 765,000 % 2/15/2019 375,000 % 2/15/2025 480,000 % 2/15/2013 805,000 % 2/15/2026 500,000 % Of the principal maturities set forth in the table above, term bonds have been created as indicated in the 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: Maturity Date February 15 Year of First Mandatory Redemption Principal Amount Interest Rate $ $ $ $ $ $ % % % % % % Our calculation (which is not a part of this bid) of the true interest cost from the above is: TRUE INTEREST COST % We are having the Certificates of the following maturities insured by at a premium of $ , said premium to 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. The Initial Certificates shall be registered in the name of , which will, upon payment for the Certificates, be canceled by the Paying Agent/Registrar. The Certificates will then be registered in the name of Cede & Co. (DTC's partnership nominee), under the Book-Entry-Only System. A bank cashier's check or certified check of the Bank" in the amount of $253,300.00, 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 the Preliminary Official Statement and Notice of Sale and Bidding Instructions. We agree to accept delivery of the Certificates utilizing the Book-Entry-Only System through DTC and make payment for the Initial Certificate in immediately available funds in the Corporate Trust Division, JPMorgan Chase Bank, National Association, not later than 10:00 AM, CDT, on August 22, 2006, or thereafter on the date the Certificates are tendered for delivery, pursuant to the terms set forth in the Notice of Sale and Bidding Instructions. It will be the obligation of the purchaser of the Certificates 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 Certificates, a certificate relating to the "issue price" of the Certificates 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 Instructions, this the 18th day of July, 2006. ATTEST: Mayor City of Denton, Texas City Secretary CERTIFICATE OF UNDERWRITER The undersigned hereby certifies as follows with respect to the bid and purchase of the City of Denton, Texas Certificates of Obligation, Series 2006 (the "Certificates"): 1. The undersigned is the duly authorized representative of the purchaser (the "Purchaser") of the Certificates from the City of Denton, Texas (the "Issuer"). 2. All of the Certificates have been offered to members of the public in a bona fide initial offering. For purposes of this Certificate, the term "public" does not include any bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers (including the Purchaser or members of the selling group or persons that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of the selling group). 3. Each maturity of the Certificates was offered to the public at a price which, on the date of such offering, was reasonably expected by the Purchaser to be equal to the fair market value of such maturity. 4. Other than the obligations set forth in paragraph 5 hereof (the "Retained Maturity" or "Retained Maturities"), the first price/yield at which a substantial amount (i.e., at least ten (10) percent) of the principal amount of each maturity of the Certificates was sold to the public is set forth below. Principal Offering Principal Offering Amount Year of Price Amount Year of Price Maturing Maturity (%/Yield) Maturing Maturity (%/Yield) $ 1,000,000 2007 $ 340,000 2017 1,090,000 2008 355,000 2018 1,135,000 2009 375,000 2019 1,190,000 2010 385,000 2020 1,235,000 2011 400,000 2021 765,000 2012 420,000 2022 805,000 2013 445,000 2023 405,000 2014 465,000 2024 425,000 2015 480,000 2025 450,000 2016 500,000 2026 5. In the case of the Retained Maturities, the Purchaser reasonably expected on the offering date to sell a substantial amount (i.e., at least ten (10) percent) of each Retained Maturity at the initial offering price/yield as set forth below: Principal Offering Principal Offering Amount Year of Price Amount Year of Price Maturing Maturity (%/Yield) Maturing Maturity (%/Yield) $ 1,000,000 2007 $ 340,000 2017 1,090,000 2008 355,000 2018 1,135,000 2009 375,000 2019 1,190,000 2010 385,000 2020 1,235,000 2011 400,000 2021 765,000 2012 420,000 2022 805,000 2013 445,000 2023 405,000 2014 465,000 2024 425,000 2015 480,000 2025 450,000 2016 500,000 2026 6. Please choose the appropriate statement: ) The Purchaser will not purchase bond insurance for the Certificates. ) The Purchaser will purchase bond insurance from (the "Insurer") for a fee/premium of $ (the "Fee"). The Fee is a reasonable amount payable solely for the transfer of credit risk for the payment of debt service on the Certificates and does not include any amount payable for a cost other than such guarantee, e.g., a credit rating or legal fees. The Purchaser represents that the present value of the Fee for each obligation constituting the Certificates to which such Fee 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 Certificates. The Fee has been paid to a person who is not exempt from federal income taxation and who is not a user or related to the user of any proceeds of the Certificates. In determining present value for this purpose, the yield of the Certificates (determined with regard to the payment of the guarantee fee) has been used as the discount rate. No portion of the Fee is refundable upon redemption of any of the Certificates in an amount which would exceed the portion of such Fee that has not been earned. 7. The Purchaser understands that the statements made herein will be relied upon, by the Issuer 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 the interest on the Certificates is excludable from the gross income of the owners thereof. EXECUTED and DELIVERED this _day of , 2006. (N ame of Purchaser or Manager of Purchasing Syndicate) By: Title: PRELIMINARY OFFICIAL STATEMENT Ratings: Moody's: "Applied For" S&P: "Applied For" See (" Other Information - Ratings" herein) Dated July 7, 2006 NEW ISSUE - Book-Entry-Only In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court decisions 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 "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $3,695,000 CITY OF DENTON, TEXAS (Denton County) GENERAL OBLIGATION BONDS, SERIES 2006 Dated Date: July 15, 2006 Due: February 15, as shown below PAYMENT TERMS. . . Interest on the $3,695,000 City of Denton, Texas General Obligation Bonds, Series 2006 (the "Bonds") will accrue from July 15, 2006, (the "Dated Date") and will be payable February 15 and August 15 of each year commencing February 15,2007, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the 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" herein. The initial Paying Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas (see "The Bonds and Certificates - Paying Agent/Registrar") . AUTHORITY FOR ISSUANCE. . . The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, (the "State") including particularly Chapter 1331, Texas Government Code, as amended, and are direct obligations of the City of Denton, Texas (the "City"), payable from an annual ad valorem tax levied on all taxable property within the City, within the limits prescribed by law, as provided in the ordinance authorizing the Bonds (the "Bond Ordinance") (see "The Bonds and Certificates - Authority for Issuance"). PURPOSE . . . Proceeds from the sale of the Bonds will be used for various street improvements, senior center improvements, library improvements, park improvements and to pay the costs of issuing the Bonds. MATURITY SCHEDULE CUSIP Prefix: 248865 (1) Principal Interest CUSIP Principal Interest CUSIP Amount Maturity Rate Yield Suffix (1) Amount Maturity Rate Yield Suffix (1) $ 100,000 2007 185,000 2017 120,000 2008 195,000 2018 125,000 2009 200,000 2019 130,000 2010 210,000 2020 140,000 2011 220,000 2021 145,000 2012 230,000 2022 150,000 2013 245,000 2023 160,000 2014 255,000 2024 165,000 2015 265,000 2025 175,000 2016 280,000 2026 (Accrued Interest from July 15, 2006 to be added) (l) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. REDEMPTION. . . The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2016, or any date thereafter, at the par value thereof plus 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 (see "The Bonds and Certificates - Optional Redemption" and "The Bonds and Certificates - Mandatory Sinking Fund Redemption"). SEPARATE ISSUES. . . The Bonds are being offered by the City concurrently with one other issue, the "City of Denton, Texas, Certificates of Obligation, Series 2006", in the principal amount of $12,665,000 (the "Certificates"), under a common Official Statement, and such Certificates and the Bonds are hereinafter sometimes referred to collectively as the "Obligations". The Bonds and the Certificates are separate and distinct securities offerings being issued and sold independently except for the common Official Statement, and, while the Obligations share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of the holders, and other features. LEGALITY. . . The Bonds are offered for delivery when, as and if issued and received by the 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 delivery through The Depository Trust Company on August 22,2006. SEALED BIDS DUE TUESDAY, JULY 18,2006, AT 10:30 AM, CDT THIS PAGE LEFT BLANK INTENTIONALLY 2 PRELIMINARY OFFICIAL STATEMENT Ratings: Moody's: "Applied For" S&P: "Applied For" See ("Other Information - Ratings" herein) Dated July 7, 2006 NEW ISSUE - Book-Entry-Only In the opinion of Bond Counsel, interest on the Certificates will be excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters described under "Tax Matters" herein, including the alternative minimum tax on corporations. THE CERTIFICATES WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $12,665,000 CITY OF DENTON, TEXAS (Denton County) CERTIFICATES OF OBLIGATION, SERIES 2006 Dated Date: July 15, 2006 Due: February 15, as shown below PAYMENT TERMS. . . Interest on the $12,665,000 City of Denton, Texas Certificates of Obligation, Series 2006 (the "Certificates") will accrue from July 15, 2006, (the "Dated Date ") and will be payable February 15 and August 15 of each year commencing February 15, 2007, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Certificates will be payable by the Paying AgentIRegistrar 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 Certificates. See "The Bonds and Certificates - Book-Entry-Only System" herein. The initial Paying Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas (see "The Bonds and Certificates - Paying AgentIRegistrar"). AUTHORITY FOR ISSUANCE. . . The Certificates are issued pursuant to the Constitution and general laws of the State of Texas, (the "State") particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, and constitute direct obligations of the City of Denton, Texas (the "City"), payable from a combination of (i) the levy and collection of a direct annual ad valorem tax, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge of surplus net revenues of the City's Utility System not in excess of $10,000, as provided in the ordinance authorizing the Certificates (the "Certificate Ordinance") (see "The Bonds and Certificates - Authority for Issuance"). PURPOSE. . . Proceeds from the sale of the Certificates will be used for the purchase, construction and acquisition of certain real and personal property, to wit: (a) road, street and parking improvements; (b) construction and equipping of fire station No.7; (c) acquisition and installation of replacement heating venting and air conditioning equipment for City buildings; (d) improvements to the City's solid waste disposal system and acquisition of related equipment; (e) construction of a crematorium for the City's animal control department; (f) improvements to the municipal airport; (g) acquisition of vehicles and equipment for the City's motor pool; (h) construction of a multi-modal transit station and the acquisition of interests in land in connection with the construction of such station; and also for the purpose of paying all or a portion of the City's contractual obligations for professional services, including engineers, architects, attorneys, map makers, auditors, and financial advisors, in connection with the Certificates. MATURITY SCHEDULE CUSIP Prefix: 248865 (1) Principal Interest CUSIP Principal Interest CUSIP Amount Maturity Rate Yield Suffix (1) Amount Maturity Rate Yield Suffix (1) $ 1,000,000 2007 $ 340,000 2017 1,090,000 2008 355,000 2018 1,135,000 2009 375,000 2019 1,190,000 2010 385,000 2020 1,235,000 2011 400,000 2021 765,000 2012 420,000 2022 805,000 2013 445,000 2023 405,000 2014 465,000 2024 425,000 2015 480,000 2025 450,000 2016 500,000 2026 (Accrued Interest from July 15, 2006 to be added) (l) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. REDEMPTION. . . The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15,2016, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. Additionally, the Certificates may be subject to mandatory redemption in the event the Initial Purchaser of the Certificates elects to aggregate one or more maturities as a Term Certificate (see "The Bonds and Certificates - Optional Redemption" and "The Bonds and Certificates - Mandatory Sinking Fund Redemption"). SEPARATE ISSUES. . . The Certificates are being offered by the City concurrently with one other issue, the "City of Denton, Texas, General Obligation Bonds, Series 2006", in the principal amount of $3,695,000 (the "Bonds"), under a common Official Statement, and such Bonds and the Certificates are hereinafter sometimes referred to collectively as the "Obligations". The Certificates and the Bonds are separate and distinct securities offerings being issued and sold independently except for the common Official Statement, and, while the Obligations share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of the holders, and other features. LEGALITY. . . The Certificates are offered for delivery when, as and if issued and received by the Initial Purchaser of the Certificates 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 Certificates will be available for delivery through The Depository Trust Company on August 22,2006. SEALED BIDS DUE TUESDAY, JULY 18,2006, AT 10:00 AM, CDT 3 THIS PAGE LEFT BLANK INTENTIONALLY 4 For purposes ofcompliance 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 Obligations that has been "deemed final" by the City as of its date except for 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 Obligations 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 has been no change in the affairs of the City or other matters described herein since the date hereof See "Continuing Disclosure of Information" for a description of the City's undertaking to provide certain information on a continuing basis. THE OBLIGATIONS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE OBLIGATIONS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THESE SECURITIES HA 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 .............................................................6 CITY OFFICIALS, STAFF AND CONSULTANTS.....8 ELECTED OFFICIALS ................................................... 8 SELECTED ADMINISTRATIVE STAFF ............................. 8 CONSULTANTS AND ADVISORS.................................... 8 INTRODUCTION............................................................ 9 THE BONDS AND CERTIFICATES ............................. 9 TAX INFORMATION ...................................................14 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT ..........................................17 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORy...................................................... 18 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORy................................................ 19 TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORy......................................................... 19 TABLE 5 - TEN LARGEST TAXPAYERS...................... 19 TABLE 6 - ESTIMATED OVERLAPPING DEBT ............. 20 DEBT INFORMATION ................................................21 TABLE 7 - GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS............................................... 21 TABLE 8 - INTEREST AND SINKING FUND BUDGET PROJECTION.................................................... 22 TABLE 9 - COMPUTATION OF SELF-SUPPORTING DEBT22 TABLE 10 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS ........................................23 TABLE 11 - OTHER OBLIGATIONS ............................23 FINANCIAL INFORMATION..................................... 24 TABLE 12 - CHANGES IN NET ASSETS...................... 24 TABLE 12A - GENERAL FUND REVENUES AND EXPENDITURE HISTORy.................................. 25 TABLE 13 - MUNICIPAL SALES TAX HISTORY.......... 26 TABLE 14 - CURRENT INVESTMENTS......................... 28 TAX MATTERS............................................................. 29 OTHER INFORMATION ............................................. 31 RATINGS.................................................................. 31 LITIGATION .............................................................. 31 REGISTRATION AND QUALIFICATION OF BONDS AND CERTIFICATES FOR SALE ................................. 31 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS................................. 31 LEGAL OPINIONS...................................................... 31 CONTINUING DISCLOSURE OF INFORMATION............. 32 FINANCIAL ADVISOR................................................ 33 AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION................................................. 33 INITIAL PURCHASER ................................................. 33 FORWARD-LOOKING STATEMENTS DISCLAIMER ....... 34 CERTIFICATION OF THE OFFICIAL STATEMENT ..........34 APPENDICES GENERAL INFORMATION REGARDING THE CITy........ A EXCERPTS FROM THE ANNUAL FINANCIAL REpORT.. B FORM OF BOND COUNSEL'S OPINIONS ...................... C The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Preliminary Official Statement. 5 PRELIMINARY OFFICIAL STATEMENT SUMMARY This summary is subj ect in all respects to the more complete information and definitions contained or incorporated in this Preliminary Official Statement. The offering of the Bonds and Certificates 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. THE CITy..................................... The City of Denton is a political subdivision and municipal corporation of the State, located in Denton County, Texas. The City covers approximately 74.8 square miles (see "Introduction - Description of City"). THE BONDS .................................. The Bonds are issued as $3,695,000 General Obligation Bonds, Series 2006. The Bonds are issued as serial bonds maturing February 15, 2007 through February 15, 2026, unless the Initial Purchaser of the Bonds designates one or more maturities as a Term Bond (see "The Bonds and Certificates -Description of the Bonds"). THE CERTIFICATES ..................... The Certificates are issued as $12,665,000 Certificates of Obligation, Series 2006. The Certificates are issued as serial certificates maturing February 15, 2007 through February 15, 2026, unless the Initial Purchaser of the Certificates designates one or more maturities as a Term Certificate (see "The Bonds and Certificates -Description of the Certificates"). PAYMENT OF INTEREST .............. Interest on the Bonds and Certificates accrues from July 15, 2006, and is payable February 15, 2007, and each August 15 and February 15 thereafter until maturity or prior redemption (see "The Bonds and Certificates - Description of the Bonds," "The Bonds and Certificates - Optional Redemption" and "The Bonds and Certificates - Mandatory Sinking Fund Redemption"). AUTHORITY FOR ISSUANCE.......... The Bonds are issued pursuant to the general laws of the State, including particularly Chapter 1331, Texas Government Code, as amended, and the Bond Ordinance passed by the City Council of the City (see "The Bonds and Certificates - Authority for Issuance"). The Certificates are issued pursuant to the general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, and the Certificate Ordinance passed by the City Council of the City (see "The Bonds and Certificates - Authority for Issuance"). SECURITY FOR THE BONDS .......... The Bonds constitute direct and voted obligations of the City, payable from a direct annual ad valorem tax levied, within the limits prescribed by law, on all taxable property located within the City (see "The Bonds and Certificates - Security and Source of Payment"). SECURITY FOR THE CERTIFICATES .............................. The Certificates constitute direct obligations of the City, payable from a combination of (i) a direct annual ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge (not to exceed $10,000) of surplus net revenues of the City's Utility System (see "The Bonds and Certificates - Security and Source of Payment"). REDEMPTION ............................... The City reserves the right, at its option, to redeem Bonds and Certificates, as the case may be, having stated maturities on and after February 15, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2016, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. Additionally, the Bonds and Certificates may be subject to mandatory redemption in the event the Purchasers of the Bonds and/or Certificates elects to aggregate one or more maturities as a Term Bond or Term Certificate (see "The Bonds and Certificates - Optional Redemption" and "The Bonds and Certificates - Mandatory Sinking Fund Redemption"). TAX EXEMPTION ............................ In the opinion of Bond Counsel, the interest on the Bonds and Certificates will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under the caption "Tax Matters" herein, including the alternative minimum tax on corporations. 6 USE OF PROCEEDS....................... Proceeds from the sale of the Bonds will be used for various street improvements, senior center improvements, library improvements, park improvements and to pay the costs of issuing the Bonds Proceeds from the sale of the Certificates will be used for the purchase, construction and acquisition of certain real and personal property, to wit: ( a) road, street and parking improvements; (b) construction and equipping of fire station No.7; (c) acquisition and installation of replacement heating venting and air conditioning equipment for City buildings; (d) improvements to the City's solid waste disposal system and acquisition of related equipment; (e) construction of a crematorium for the City's animal control department; (f) improvements to the municipal airport; (g) acquisition of vehicles and equipment for the City's motor pool; (h) construction of a multi-modal transit station and the acquisition of interests in land in connection with the construction of such station; and also for the purpose of paying all or a portion of the City's contractual obligations for professional services, including engineers, architects, attorneys, map makers, auditors, and financial advisors, in connection with the Certificates. RATINGS ...................................... The presently outstanding general obligation debt of the City is rated "Aa3" by Moody's Investors Service, Inc. ("Moody's") and "AA-" by Standard & Poor's Ratings Services, 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 and Certificates have been made to Moody's and S&P (see "Other Information - Ratings"). BOOK-ENTRy-ONLY SySTEM...... The definitive Bonds and Certificates 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 the Bonds and Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds and Certificates will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds and Certificates 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 and Certificates (see "The Bonds and Certificates - Book-Entry-Only System"). PAYMENT RECORD ...................... The City has never defaulted. SELECTED FINANCIAL INFORMATION Funded Ratio Funded Fiscal Per Capita Tax Per Capita Tax Debt to Year Estimated Taxable Taxable Debt Funded Taxable %of Ended City Assessed Assessed at End Tax Assessed Total Tax 9/30 Population Valuation Valuation of Year Debt Valuation Collections - 2002 91,588 $ 3,434,258,870 $ 37,497 $ 99,990,494 $ 1,092 2.91% 99.76% 2003 93,450 3,756,343,085 40,196 103,883,037 1,112 2.77% 99.98% 2004 98,123 4,112,454,803 41,911 110,005,000 1,121 2.67% 100.34% 2005 101,543 4,423,204,694 43,560 113,800,000 1,121 2.57% 99.47% 2006 104,904 4,789,376,811 (1) 45,655 121,000,000 (2) 1,153 2.53% 99.29% (3) (1) Source: Denton Central Appraisal District as of July 19, 2005. (2) Proj ected, includes the Bonds and Certificates. (3) Collections for part year only, through June 1, 2006. F or additional information regarding the City, please contact: Mr. Jon Fortune Assistant City Manager City of Denton 215 E. McKinney Street Denton, Texas 76201 (940) 349-8288 or David K. Medanich Laura Alexander First Southwest Company 777 Main Street, Suite 1200 Fort Worth, Texas 76102 (817) 332-9710 7 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS Term City Council Expires Perry McNeill May, 2008 Mayor Pete Kamp May, 2007 Mayor Pro Tern, District 2 Charlye Heggins May, 2007 Councilmember, District 1 Jack Thomson May, 2007 Councilmember, District 3 Guy McElroy May, 2007 Councilmember, District 4 Bob Montgomery May, 2008 Councilmember, At Large Place 5 Joe Mulroy May, 2008 Councilmember, At Large Place 6 SELECTED ADMINISTRATIVE STAFF Name Howard Martin Jon Fortune Jennifer K. Walters Edwin M. Snyder Robin Ramsay Position Interim City Manager Assistant City Manager/Chief Financial Officer City Secretary City Attorney Municipal Judge CONSUL TANTS AND ADVISORS Auditors...................................................................................................................... ..................................................... KPMG LLP Dallas, Texas Bond Counsel ............................................................................................................................. McCall, Parkhurst & Horton L.L.P. Dallas, Texas Financial Advisor....................................................................................................................... ............... First Southwest Company Fort Worth, Texas 8 PRELIMINARY OFFICIAL STATEMENT RELATING TO $3,695,000 CITY OF DENTON, TEXAS GENERAL OBLIGATION BONDS, SERIES 2006 $12,665,000 CITY OF DENTON, TEXAS CERTIFICATES OF OBLIGATION, SERIES 2006 INTRODUCTION This Preliminary Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $3,695,000 City of Denton, Texas, General Obligation Bonds, Series 2006 (the "Bonds") and $12,665,000 City of Denton, Texas, Certificates of Obligation, Series 2006 (the "Certificates"). Capitalized terms used in this Preliminary Official Statement have the same meanings assigned to such terms in the Bond Ordinance and Certificate Ordinance each to be adopted on the date of sale of the Bonds and Certificates which will authorize the issuance of the Bonds and Certificates, respectively, except as otherwise indicated herein. The Bonds and the Certificates are being offered by the City concurrently under a common Official Statement, and the Bonds and Certificates are hereinafter sometimes referred to collectively as the "Obligations". The Bonds and the Certificates are separate and distinct securities offerings being issued and sold independently except for the common Official Statement, and, while the Obligations share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of the holders, and other features. There follows in this Preliminary Official Statement descriptions of the Bonds and Certificates and certain information regarding the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City's Financial Advisor, First Southwest Company, Fort Worth, Texas. DESCRIPTION OF THE CITY. . . The City of Denton, Texas is a political subdivision located in Denton County operating as a home- rule city under the laws of the State of Texas and a charter approved by the voters in 1959. The City operates under the Council/Manager form of government where the Mayor and six Councilmembers are elected for staggered two-year terms. The City Council formulates operating policy for the City while the City Manager is the chief administrative officer. The City is approximately 74.8 square miles in area. THE BONDS AND CERTWICATES DESCRIPTION OF THE BONDS AND CERTIFICATES ... The Bonds and Certificates are dated July 15, 2006, and mature, or are subject to redemption prior to maturity, on February 15 in each of the years and in the amounts shown on the cover page and page 3 hereof. Interest will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on August 15 and February 15, commencing February 15, 2007. The definitive Bonds and Certificates will be issued only in fully registered form in any integral multiple of $5,000 for anyone maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. No physical delivery of the Bonds and Certificates will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds and Certificates 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 and Certificates. See "The Bonds and Certificates - Book-Entry-Only System" herein. AUTHORITY FOR ISSUANCE. . . The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas, particularly Chapter 1331, Texas Government Code, as amended; an election held and passed by a majority of the participating voters; and the Bond Ordinance. The Certificates are being issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, and the Certificate Ordinance. SECURITY AND SOURCE OF PAYMENT. . . The Bonds. . . All taxable property within the City is subject to a direct annual ad valorem tax levied by the City sufficient to provide for the payment of principal of and interest on all Bonds which tax must be levied within the limits prescribed by law. The Certificates. . . All taxable property within the City is subject to a direct annual ad valorem tax levied by the City sufficient to provide for the payment of principal of and interest on all obligations payable in whole or in part from ad valorem taxes, which tax must be levied within limits prescribed by law. Additionally, the Certificates are payable from and secured by a limited pledge of surplus net revenues of the City's Utility System, not in excess of$10,000, as provided in the Ordinance authorizing the Certificates. 9 TAX RATE LIMITATION. . . All taxable property within the City is subject to the assessment, levy and collection by the City of a continuing, direct annual ad valorem tax sufficient to provide for the payment of principal of and interest on all ad valorem tax debt within the limits prescribed by law. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City adopts the constitutionally authorized maximum tax rate of $2.50 per $100 Taxable Assessed Valuation. OPTIONAL REDEMPTION . . . The City reserves the right, at its option, to redeem Bonds and Certificates, as the case may be, having stated maturities on and after February 15, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2016, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Bonds or Certificates are to be redeemed, the City may select the maturities of Bonds and Certificates to be redeemed. If less than all the Bonds or Certificates of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Bonds and Certificates are in Book-Entry-Only form) shall determine by lot the Bonds or Certificates, or portions thereof, within such maturity to be redeemed. If a Bond or Certificate (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 Certificate (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. MANDATORY SINKING FUND REDEMPTION. . . In addition to being subject to optional redemption as provided above, should the Initial Purchasers of the Bonds or Certificates select a combination of serial bonds or serial certificates and term bonds or term certificates, the term bonds or term certificates are subject to mandatory redemption on the first February 15th next following the last maturity of the serial bonds or serial certificates, and annually thereafter on each February 15th 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 or term certificates are to be mandatorily redeemed, the Paying Agent/Registrar shall select by lot the numbers of the term bonds or term certificates within the applicable Stated Maturity to be redeemed on the next following February 15th from moneys set aside for that purpose in the Interest and Sinking Fund. Any term bond or term certificate not selected for prior redemption shall be paid on the date of its Stated Maturity. The principal amount of the term bonds or term certificates 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 or term certificates 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 or term certificates 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 theretofore credited against a mandatory redemption requirement. NOTICE OF REDEMPTION. . . Not less than 30 days prior to a redemption date for the Bonds or Certificates, 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 or Certificates to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the 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. If a Bond or Certificate (or any portion of its principal sum) shall have been duly called for redemption and notice of such redemption duly given, then upon the redemption date such Bond (or the portion of its principal sum to be redeemed) shall become due and payable, and, if moneys for the payment of the redemption price and the interest accrued on the principal amount to be redeemed to the date of redemption are held for the purpose of such payment by the Paying Agent/Registrar, interest shall cease to accrue and be payable from and after the redemption date on the principal amount redeemed. DEFEASANCE. . . The Ordinances provide that any Obligation and the interest thereon shall be deemed to be paid, retired, and no longer outstanding (a "Defeased Obligation") within the meaning of such Ordinance when payment of the principal of such Obligation, plus interest thereon to the due date either (i) shall have been made or caused to be made in accordance with the terms thereof, or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar for such payment (1) lawful money of the United States of America 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 provide for such payment, and when proper arrangements have been made by the City with the Paying Agent/Registrar for the payment of its services until all Defeased Obligations shall have become due and payable. At such time as an Obligation shall be deemed to be a Defeased Obligation hereunder, as aforesaid, such Obligation and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, the ad valorem taxes herein levied and pledged as provided in the Ordinance, and such principal and interest shall be payable solely from such money or Government Obligations. Any moneys so deposited with the Paying Agent/Registrar may at the written direction of the City also be invested in Government Obligations, maturing in the amounts and times as hereinbefore set forth, and all income from such Government Obligations received by the Paying Agent/Registrar which is not required for the payment of the Obligations and interest thereon, with respect to which such money has been so deposited, shall be turned over to the City, or deposited as directed in writing to the City. The Ordinances provide that "Government Obligations" means (a) direct, noncallable obligations of the 10 United States of America, including obligations that are unconditionally guaranteed by the United States of America, (b) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a 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. Upon such deposit as described above, such defeased Obligations shall no longer be regarded to be outstanding obligations payable from ad valorem taxes levied by the City or from the other revenues pledge to their payment in the Ordinances, but will be payable only from the funds and defeasance securities deposited in escrow and will not be considered debt of the City for any purpose. After firm banking and financial arrangements for the discharge and final payment or redemption of the Obligations have been made as described above, all rights of the City to initiate proceedings to call the Obligations for redemption or take any other action amending the terms of the Obligations are extinguished; provided, however, that the right to call the Obligations for redemption is not extinguished if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Obligations for redemption; (ii) gives notice of the reservation of that right to the owners of the Obligations immediately following the 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 Obligations as though it was being defeased at the time of the exercise of the option to redeem the Obligations, after taking the redemption into account in determining the sufficiency of the provisions made for the payment of the Obligations. BOOK-ENTRy-ONLY SYSTEM. . . This section describes how ownership of the Bonds and Certificates are to be transferred and how the principal of, premium, if any, and interest on the Bonds and Certificates are to be paid to and credited by DTC while the Bond or Certificates 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 (1) DTC will distribute payments of debt service on the Bonds and Certificates, 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 and Certificates), 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. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Obligations. The Obligations 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 and Certificates, as set forth on the cover page and page 3 hereof, 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 17 A of the 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 from 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 turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MB S 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 Securities 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 be found at www.dtcc.com. Purchases of Obligations under the DTC system must be made by or through Direct Participants, which will receive a credit for the Obligations on DTC's records. The ownership interest of each actual purchaser of each Obligation ("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 Obligations 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 11 certificates representing their ownership interests in Obligations, except in the event that use of the book-entry system for the Obligations is discontinued. To facilitate subsequent transfers, all Obligations deposited by Direct Participants with DTC are registered in the name ofDTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Obligations with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Obligations; DTC' s records reflect only the identity of the Direct Participants to whose accounts such Obligations are credited, which mayor 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 Obligations may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Obligations, such as redemptions, defaults, and proposed amendments to the Obligation documents. For example, Beneficial Owners of Obligations may wish to ascertain that the nominee holding the Obligations 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. Redemption notices shall be sent to DTC. If less than all of the Obligations within an issue 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 Obligations 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 after the record date. The Omnibus Proxy assigns Cede & Co.' s consenting or voting rights to those Direct Participants to whose accounts Obligations are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, principal and interest payments on the Obligations 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 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 governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC [nor its nominee], Paying Agent/Registrar or City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of City or Paying Agent/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 Obligations at any time by giving reasonable notice to City or Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Obligation certificates are required to 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 Obligations are in the Book-Entry 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 Obligations, but (i) all rights of ownership must be exercised through DTC and the Book-Entry Only System, and (ii) except as described above, notices that are to be given to registered owners under the Resolution will be given only to DTC. Information concerning DTC and the Book-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 Purchasers. Effect of Termination of Book-Entry Only System In the event that the Book-Entry Only System is discontinued by DTC or the use of the Book-Entry Only System is discontinued by the City, printed Obligations will be issued to the holders and the Obligations will be subject to transfer, exchange and registration provisions as set forth in the Ordinances and summarized under "The Obligations - Transfer, Exchange and Registration" below. PAYING AGENT/REGISTRAR. . . The initial Paying Agent/Registrar is IPMorgan Chase Bank, National Association, Dallas, Texas. In the Ordinances, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds and Certificates 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 and Certificates. Upon any change in the Paying Agent/Registrar for the Bonds and Certificates, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds and Certificates by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. 12 Principal of the Bonds and Certificates is payable to the registered holder appearing on the registration books of the Paying Agent/Registrar (the "Registered Owner") at the designated corporate trust office of the Paying Agent/Registrar upon surrender of the Bonds and Certificates for payment. Interest on the Bonds and Certificates is payable to the Register Owners appearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (identified below) and such interest shall be paid by the Paying Agent/Registrar by check mailed, first class postage prepaid, to the Register Owner or by such other arrangement, acceptable to the Paying Agent/Registrar, requested by and at the risk and expense of the Registered Owner. If the date for the payment of the principal of or interest on the Bonds and Certificates shall be a Saturday, Sunday, a legal holiday, or a day when banking institutions in the city where the designated corporate office of the Paying Agent/Registrar is located is 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 when 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. TRANSFER, EXCHANGE AND REGISTRATION. . . In the event the Book-Entry-Only System should be discontinued, printed Obligations will be delivered to the registered owners and thereafter the Obligations may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender of such printed Obligations 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. Obligations may be assigned by the execution of an assignment form on the Obligations or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Obligations will be delivered by the Paying Agent/Registrar, in lieu of the Obligations 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 Obligations issued in an exchange or transfer of Obligations 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 Obligations to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Obligations registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for anyone maturity and for a like aggregate principal amount as the Obligations surrendered for exchange or transfer. See "The Obligations-Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Obligations. N either the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Certificate 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 Certificate or Bond. RECORD DATE FOR INTEREST PAYMENT. . . The record date ("Record Date") for the interest payable on the Bonds and Certificates on any interest payment date means the close of business on the last business day of the month next preceding such interest payment date. 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 after 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 and Certificate 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 . . . The Ordinances do not establish specific events of default with respect to the Bonds and Certificates. Under State law there is no right to the acceleration of maturity of the Bonds and Certificates upon the failure of the City to observe any covenant under the Ordinance. Although a registered owner of Bonds and Certificates could presumably obtain a judgment against the City if a default occurred in the payment of principal of or interest on any such Bonds and Certificates, such judgment could not be satisfied by execution against any property of the City, and some recent Texas lower court decisions have held that statutory language authorizing cities to plead and be impleaded is insufficient to waive a home- rule city's sovereign immunity to suit. Such registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy and collect tax sufficient to pay principal of and interest on the Bonds and Certificates as it becomes due. The enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. Neither the Bond Ordinance nor the Certificate Ordinance provides for the appointment of a trustee to represent the interests of the bondholders upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code. Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, and 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 would be subj ect to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinances and the Bonds and Certificates are qualified with respect to the customary rights of debtors relative to their creditors. 13 TAX INFORMATION An VALOREM T AX LAW . . . The appraisal of property within the City is the responsibility of the Denton Central Appraisal District (the "Appraisal District"). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal District is required under the Texas Property Tax Code (the "Property Tax Code") to appraise all property within the Appraisal District on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the market value of the property, or (2) the sum of (a) 10% of the appraised value of the property for the last year in which the property was appraised for taxation times the number of years since the property was last appraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the market value of all new improvements to the property. The value placed upon property within the Appraisal District is subj ect to review by an Appraisal Review Board, consisting of three members appointed by the Board of Directors of the Appraisal District. The Appraisal District is required to review the value of property within the Appraisal District at least every three years. The City may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the City by petition filed with the Appraisal Review Board. Reference is made to the Property Tax Code, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution ("Article VIII") and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Section I-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant: (1) An exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; (2) An exemption of up to 20% of the market value of residence homesteads. The minimum exemption under this provision is $5,000. In the case of residence homestead exemptions granted under Section I-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. As of January 1, 2004, under Article VIII and State law, the governing body of a county, municipality or junior college district may provide for a freeze on total amount of ad valorem levied on the residence homestead of a disabled person or persons 65 years of age or older above the amount of tax imposed in the year such residence qualified for such exemption. Also, upon receipt of a petition signed by five percent of the registered voters of the county, municipality or junior college district, an election must be held to determine by majority vote whether to establish such a limitation on taxes paid on residence homesteads of persons 65 years of age or who are disabled. Upon providing for such exemption, the total amount of taxes imposed on such homestead cannot be increased except for improvements and such freeze is transferable to a different residence homestead and to the surviving spouse living in such homestead who is disabled or is at least 55 years of age. Once established such freeze cannot be repealed or rescinded. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000. Article VIII provides that eligible owners of both agricultural land (Section I-d) and open-space land (Section I-d-l), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section I-d and I-d-l. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article VIII, Section I-j, provides for "freeport property" to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Notwithstanding such exemption, counties, school districts, junior college districts and cities may tax such tangible personal property provided official action to tax the same was taken before April 1, 1990. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. The City or Denton County may create one or more tax increment financing districts ("TIF") within the City or Denton County, as applicable, and freeze the taxable values of property in the TIF at the value at the time of its creation. Other overlapping taxing units levying taxes in the TIF may agree to contribute all or part of future ad valorem taxes levied and collected against 14 the value of property in the TIF in excess of the "frozen values" to payor finance the costs of certain public improvements in the TIF. Taxes levied by the City against the values of real property in the TIF in excess of the "frozen" value are not available for general city use but are restricted to paying or financing "project costs" within the TIF. The City also may enter into tax abatement agreements to encourage economic development. Under the agreements, a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. EFFECTIVE TAX RATE AND ROLLBACK TAX RATE. . . Under the current Property Tax Code a governing body of a taxing unit is required to adopt its annual tax rate per $100 taxable value for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. By each September 1 or as soon thereafter as practicable, the City Council adopts a tax rate per $100 taxable value for the current year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. Under the Property Tax Code, the City must annually calculate and publicize its "effective tax rate" and "rollback tax rate". The City Council may not adopt a tax rate that exceeds the lower of the effective tax rate or the rollback tax rate until it has held two public hearings on the proposed increase following notice to the taxpayers and otherwise complied with the Property Tax Code. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. "Effective tax rate" means the rate that will produce last year's total tax levy (adjusted) from this year's total taxable values (adjusted). "Adjusted" means lost values are not included in the calculation of last year's taxes and new values are not included in this year's taxable values. "Rollback tax rate" means the rate that will produce last year's maintenance and operation tax levy (adjusted) from this year's values (adjusted) multiplied by 1.08 plus a rate that will produce this year's debt service from this year's values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one-half cent sales tax on retail sales of taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PROPERTY ASSESSMENT AND TAX PAYMENT. . . Property within the City is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the final installment due on August 1. PENAL TIES AND INTEREST. .. Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March 7 2 9 April 8 3 11 May 9 4 13 June 10 5 15 July 12 6 18 After July, penalty remains at 12%, and interest increases at the rate of 1 % each month. In addition, if an account is delinquent in July, an attorney's collection fee of up to 20% may be added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law does not allow for the collection of penalty and interest against an estate in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and 15 obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. CITY ApPLICATION OF TAX CODE . . . The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of $25,000 and those who are disabled of $10,000. The City grants an additional one-half of one percent, or a minimum of $5,000 exemption of the market value of residence homesteads. See Table 1 for a listing of the amounts of the exemptions described above. Ad valorem taxes are not levied by the City against the exempt value of residence homesteads for the payment of debt. The City does not tax nonbusiness personal property; and the City collects its own taxes. The City does permit split payments, and discounts are not allowed. The City does not tax freeport property. The City collects the additional one-half cent sales tax for reduction of ad valorem taxes. The City has not adopted the tax freeze for citizens who are disabled or are 65 years of age or older, which became a local option and subject to local referendum on January 1, 2004. The City has adopted a tax abatement policy. TAX ABATEMENT POLICY. . . The City has established a tax abatement program to encourage economic development. In 1990 the City Council adopted a resolution setting guidelines and criteria for granting abatements in reinvestment zones created within the City. These guidelines specifically note that incentives are limited to companies which create new wealth and do not adversely affect existing businesses operating within the City. On May 13, 2003, the council voted to rebate 40% of ad valorem taxes paid for a new facility and new equipment to Sally Beauty Company for 10 years, beginning in 2004, under a Section 380 Economic Development Program Agreement. The new property value is estimated at $24,000,000. On September 2, 2003, the council voted to abate taxes on 35% of $30,000,000 for expansion and renovations to an existing facility to Flowers Foods Bakeries Group for 5 years beginning in 2005. Flower Foods is a new corporate citizen and plans to begin construction in 2004. Flower Foods employs approximately 94 employees and estimates 216 employees in its 5th year. The tax abatement agreement provides for a three-year phase-in of the total project. The agreement requires a total threshold of $30,000,000 over the 3-year period. The company will receive a prorated abatement amount based on the percentage increase in valuation. On March 2, 2004, the council voted to abate taxes on 35% on approximately $6,000,000 for a new facility and equipment to Fastenal Company for five years, beginning in 2007. Fastenal is locating a new regional headquarters/distribution center near the Denton Municipal Airport. They are working with the University of North Texas' Logistics Department, employing students. The tax abatement agreement requires a minimum threshold of $5,000,000 in valuation over the five-year period. On March 1, 2005, the council voted to grant an amount equal to 50% of the ad valorem taxes paid for new facilities within the Granite Point Business Park for ten years. Granite Properties is constructing Denton's first speculative building industrial park. When complete the park will have over 900,000 square feet under roof. On July 31, 2001, the council voted to abate taxes on 100% of new valuation generated from the expansion of the Peterbilt Motors regional headquarters building in Denton for ten years. The company was required to spend a minimum of $5,000,000 on the renovation and consolidate approximately 35 jobs to the facility. 16 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT City Funded Debt Payable from Ad Valorem Taxes (as of 6-1-06) (1) General Obligation Bonds Tax and Utility System Certificates of Obligation The Certificates The Bonds $5,186,895,723 $ 73,159,075 85,324,381 2,454,393 3,739,135 163,527,529 4,817,863 129,310,731 2,151,028 65,920 405,076 19,070,538 9,097,589 493,123,258 $ 4,693,772,465 95,604,346 $4,789,376,811 $ 58,630,000 46,010,000 12,665,000 3,695,000 $ 121,000,000 $ 15,557,100 4,388,758 4,305,340 24,251,198 $ 96,748,802 2005/06 Market Valuation Established by Denton Central Appraisal District Less Exemptions/Reductions at 100% Market Value: Residence Homestead Exemptions Over 65 Exemptions Disabled Persons Exemptions Disabled Veterans Exemptions Agricultural Land Use Productivity Historical/Other Exemptions Freeport Exemptions Abatement Exemptions House Bill 366 Prorated Exempt Property Pollution Exemptions Homestead Cap Adjustment 2005/06 Taxable Assessed Valuation (as of 7 -19-05) Plus Supplements 2005/06 Taxable Assessed Valuation, inclusive of Supplements (as of 7 -19-05) Funded Debt Payable from Ad Valorem Taxes Less Self-Supporting General Obligation Debt (2) Solid Waste System General Obligation Debt (3) Drainage System General Obligation Debt Motor Pool System General Obligation Debt (3) Net Tax Supported Debt Payable from Ad Valorem Taxes Interest and Sinking Fund as of 6-1-06 $ 753,081 Ratio Total Funded Debt to Taxable Assessed Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio Net Funded Debt to Taxable Assessed Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 2.58% 2.06% 2006 Estimated Population - 104,904 Per Capita Taxable Assessed Valuation - $44,744 Per Capita Total Funded Debt $1,153 Per Capita Net Funded Debt - $922 (1) The above statement of indebtedness does not include currently outstanding $281,120,000 Utility System Revenue Bonds or $8,100,000 Utility System Revenue Bonds, Series 2006 being sold simultaneously with the issuance of the Bonds and Certificates, as these bonds are payable solely from the net revenues of the Utility System (the "System"), as defined in the ordinances authorizing the bonds. (2) General Obligation debt in the amounts shown for which repayment is provided from revenues of the respective revenue systems. The amount of self supporting debt is based on the percentages of revenue support as shown in Table 10. It is the City's current policy to provide these payments from respective system revenues; this policy is subject to change in the future. (3) Includes a portion of the Certificates. 17 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY Taxable Appraised Value for Fiscal Year Ended September 30, 2006 2005 2004 %of %of %of Category Amount Total Amount Total Amount Total Real, Residential, Single Family $ 2,630,845,438 50.72% $2,445,993,713 51.86% $ 2,243,246,671 51.54% Real, Residential, Multi-Family 446,271,900 8.60% 415,779,403 8.82% 397,690,655 9.14% Real, Vacant Lots/Tracts 98,411,369 1.90% 89,988,573 1.91 % 100,332,693 2.31% Real, Acreage (Land Only) 222,710,266 4.29% 218,495,173 4.63% 221,844,869 5.10% Real, Farm and Ranch Improvements 23,387,957 0.45% 18,670,346 0.40% 17,401,518 0.40% Real, Commercial and Industrial 1,000,517,019 19.29% 859,873,094 18.23% 747,983,391 17.19% Real, Oil, Gas, and Other Mineral Reserves 26,722,880 0.52% 22,681,700 0.48% 0.00% Real and Tangible Personal, Utilities 61,453,659 1.18% 71,236,279 1.51 % 68,858,670 1.58% Tangible Personal, Commercial and Industrial 577,041,159 11.12% 474,612,410 10.06% 456,589,726 10.49% Tangible Personal, Other 26,019,704 0.50% 27,083,367 0.57% 28,504,241 0.65% Real and Special Property, Inventory 73,514,372 1.42% 71,809,892 1.52% 69,711,912 1.60% Total Appraised Value Before Exemptions $ 5,186,895,723 100.00% $4,716,223,950 100.00% $ 4,352,164,346 100.00% Less: Total Exemptions/Reductions (493,123,258) ( 445,814,852) (442,887,140) Supplements 95,604,346 152,795,596 203,177,597 Taxable Assessed Value $ 4,789,376,811 $ 4,423,204,694 $ 4,112,454,803 Category Real, Residential, Single Family Real, Residential, Multi-Family Real, Vacant Lots/Tracts Real, Acreage (Land Only) Real, Farm and Ranch Improvements Real, Commercial and Industrial Real, Oil, Gas, and Other Mineral Reserves Real and Tangible Personal, Utilities Tangible Personal, Commercial and Industrial Tangible Personal, Other Real Property, Inventory Total Appraised Value Before Exemptions Less: Total Exemptions/Reductions Supplements Taxable Assessed Value Taxable Appraised Value for Fiscal Year Ended September 30, 2003 2002 %of Amount $ 2,016,091,440 395,673,434 72,222,153 204,320,591 17,390,233 742,450,124 75,691,705 556,273,112 30,663,435 68,060,766 $ 4,178,836,993 (475,424,478) 52,930,570 $ 3,756,343,085 Total 48.25% 9.47% 1.73% 4.89% 0.42% 17.77% 0.00% 1.81% 13.31 % 0.73% 1.63% 100.00% Amount $1,745,672,780 366,376,170 102,824,427 158,854,088 13,976,287 693,626,894 65,153,809 464,720,534 26,830,819 19,973,109 $ 3,658,008,917 (381,281,194) 157,531,147 $ 3,434,258,870 %of Total 47.72% 10.02% 2.81% 4.34% 0.38% 18.96% 0.00% 1.78% 12.70% 0.73% 0.55% 100.00% (1) Valuations shown are certified taxable assessed values reported by the Denton Central Appraisal District to the State Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. For the Fiscal Year ended 2006 the values are as of July 19,2005. 18 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY Ratio Fiscal Taxable Tax Debt Tax Debt Funded Year Taxable Assessed Outstanding to Taxable Debt Ended Estimated Assessed Valuation at End Assessed Per 9/30 Population(l) Valuation Per Capita of Year Valuation Capita - 2002 91,588 $ 3,434,258,870 $ 37,497 $ 99,990,494 2.91% $ 1,092 2003 93,450 3,756,343,085 40,196 103,883,037 2.77% 1,112 2004 98,123 4,112,454,803 41,911 110,005,000 2.67% 1,121 2005 101,543 4,423,204,694 43,560 113,800,000 2.57% 1,121 2006 104,904 4,789,376,811 (2) 45,655 121,000,000 (3) 2.53% 1,153 (1) Source: City Officials. (2) Source: Denton Central Appraisal District as of July 19, 2005. (3) Proj ected, includes the Bonds and Certificates. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Year Distribution Ended Tax General Interest and % Current % Total 9/30 Rate Fund Sinking Fund Tax Levy Collections Collections - 2002 $ 0.54815 $ 0.31948 $ 0.22867 $ 18,824,890 98.26% 99.76% 2003 0.54815 0.33816 0.20999 20,590,395 98.58% 99.98% 2004 0.54815 0.34928 0.19887 22,542,421 98.47% 100.34% 2005 0.59815 0.39928 0.19887 26,457,399 98.33% 99.47% 2006 0.60815 0.42928 0.17887 29,126,595 97.81% (1) 99.29% (1 ) (1) Collections for part year only, through June 1, 2006. TABLE 5 - TEN LARGEST TAXPAYERS Name of Taxpayer Columbia Medical Center of Denton Anderson Merchandisers Verizon Southwest (formerly GTE) Paccar/Peterbilt Motors Presbyterian Hospital United Copper Industries James Wood Motors Tetra Pak Acme Brick Denton Educational Housing Corp. Source: Denton Central Appraisal District. Nature of Property Hospital/Professional Building Distribution Center Telephone Utility Diesel Truck Manufacturing Hospital & Professional Bldg. Copper Wiring Manufacturer Auto Dealership Packaging Manufacturer Brick Manufacturer Student Housing 2005/06 Taxable Assessed Valuation $ 73,785,473 44,864,451 43,922,068 40,088,142 32,190,882 30,846,200 26,447,293 22,937,093 20,461,302 19,719,410 $ 355,262,314 % of Total Taxable Assessed Valuation 1.54% 0.94% 0.92% 0.84% 0.67% 0.64% 0.55% 0.48% 0.43% 0.41% 7.42% GENERAL OBLIGATION DEBT LIMITATION. . . No general obligation debt limitation is imposed on the City under current State law or the City's Home Rule Charter (see "The Bonds and Certificates - Tax Rate Limitation"). 19 TABLE 6 - ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds ("Tax Debt") was developed from information contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may have issued additional Tax Debt since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional Tax Debt, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the City. 2005/06 City's Authorized Taxable 2005/06 Total Estimated Overlapping But Unissued Assessed Tax Funded % Funded Debt Debt As Of Taxing Jurisdiction Val ue Rate Debt Applicable As of 6-1-06 6-1-06 City of Denton $ 4,789,376,811 $0.60815 $ 96,748,802 (1) 100.00% $ 96,748,802 $ 38,172,000 (2) Denton Independent School District 6,612,085,108 1.86400 422,317,579 88.04 % 371,808,397 91,614,713 Denton County 38,025,464,543 0.24648 181,477,571 20.42% 37,057,720 198,259,373 Argyle Independent School District 680,433,449 1.91950 38,503,841 1.84% 708,471 Krum Independent School District 548,316,128 1.72500 21,264,394 0.59% 125,460 Total Direct and Overlapping Funded Debt $506,448,849 Ratio of Direct and Overlapping Funded Debt to Taxable Assessed Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.57% Per Capita Overlapping Funded Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ 4,827.74 (1) Includes the Bonds and Certificates, less self-supporting debt. (2) Excludes the Bonds being offered herein. 20 ~ "'d 4-1 0.. ~ o 'u '.c ~ .S ~ d: ~ ~ U'l u "E '> ~ ~ ~ S "0 [/'J ~ ~ ,:b 'S ~ 0"' Q ~ ~ bJ)"O V .S 0 ~ [/'J ~ :: ,:b U'l 0.. 0 ~ U'l 0.. "0 Q ~ a ~ ~ bJ) v ..8 ~ [/'J l-< ro ,:b o ::::: ~ ~ o..'a Q ~ ~ Q ~ [/'J I bJ) E ~ ..8 ~ ~ [/'J b ~ ,:b ~ g::-9 ~ ~ ;::::$ "0 Q ~ [/'J [/'J bJ) ::::: ~ :.a ,:b "0 ~ ~ ~ U'l Q 'S o --+-> U'l ~ M l-< ~ ~ "E ~ ~ u ~ l-< U ~ 0.. ~ 'u ~ .S l-< ~ rJ'1 ~ z ~ ~ ~ ~ s o ~ ~ ~ u > ~ ~ rJ'J. ~ ~ ~ ~ z o E= < ~ ~ ~ o ~ ~ ~ z ~ ~ --+-> U'l ~ l-< 8 ~ U'l ~ "'d ::::: o c:o ~ ~ ...s::: 0.. ~ 'u .S l-< ~ --+-> U'l ~ l-< ,:b ~ Q ~ bJ) ::::: :.a ~ U'l 'S o t'-- ~ ~ ~ < ~ ~ a ~ ~O',I ~ ~ "'d ___ ~ ~ ~ DEBT INFORMATION ~ 0', \0 ~ M ~ M M M \0 ~ \0 00 ~ 00 ~ ~ o 0 ~ 0 0-; 0 0', 0 ...... \0 ~ ...... ...... ~ \0 ~ ~ ...... ~ 0 00 M ~ ...... \0 \0 ~ ...... ~ 0 00 00 ~ M ~ M ~ 0 0', M \0 \0 ~ ~ ...... 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TABLE 9 - COMPUTATION OF SELF-SUPPORTING DEBT Net Revenue from Solid Waste System, Fiscal Year Ended 9-30-05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,$ 4,852,614 Less: Solid Waste System Revenue Bond Requirements, 2006 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance Available for Other Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,852,614 Solid Waste System General Obligation Bond Requirements, 2006 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 2,606,119 Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ 2,246,495 Net Revenue from Drainage System, Fiscal Year Ended 9-30-05......................................... $ 2,297,912 Less: Drainage System Revenue Bond Requirements, 2006 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance Available for Other Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,297,912 Drainage System General Obligation Bond Requirements, 2006 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631,764 Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ 1,666,148 Net Revenue from Motor Pool System, Fiscal Year Ended 9-30-05....................................... $ 3,574,047 Less: Motor Pool System Revenue Bond Requirements, 2006 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance Available for Other Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,574,047 Motor Pool System General Obligation Bond Requirements, 2006 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799,374 Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ 2,774,673 22 TABLE 10 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS Amount Date Amount Heretofore Purpose Authorized Authorized Issued Street and Traffic Improvements 12/13/1986 $ 7,736,000 $ 6,979,000 Parks 12/13/1986 5,950,000 4,550,000 Street and Traffic Improvements 2/24/1996 11,112,000 11,110,000 Drainage Improvements 2/24/1996 7,238,000 4,930,000 Transportation 2/5/2005 27,700,000 4,445,600 Parks 2/5/2005 10,700,000 354,400 Buildings 2/5/2005 4,000,000 200,000 $ 74,436,000 $ 32,569,000 TABLE 11 - OTHER OBLIGATIONS Amount Being Issued $ 970,000 630,000 2,095,000 $ 3,695,000 Unissued Balance $ 757,000 1,400,000 2,000 2,308,000 22,284,400 9,715,600 1,705,000 $38,172,000 The City has entered into capital lease agreements. The following is a schedule of future minimum lease payments under these capital leases and the present value of the net minimum lease payments as of September 30, 2005: Year Ending 30-Sep 2006 2007 2008 2009 2010 Annual Lease Payment $ 619,437 532,482 532,482 410,974 289,466 $ 2,384,841 (173,995) $ 2,210,846 Total Minimum Lease Payment Less: Amount Representing Interest Present Value of Minimum Future Lease Payments PENSION FUND . . . The City provides pension benefits for all of its full-time employees through the Texas Municipal Retirement System ("TMRS "), a State-wide administered pension plan. The City makes annual contributions to the plan equal to the amounts accrued for pension expense. (For more detailed information concerning the retirement plan, see Appendix B, "Excerpts from the City's Annual Financial Report".) 23 FINANCIAL INFORMATION TABLE 12 - CHANGES IN NET ASSETS (1) Fiscal Year Ended September 30, Revenues: 2005 2004 2003 2002 Program Revenue: Charges for Services $ 11,998,876 $ 10,224,627 $ 10,175,929 $ 8,193,653 Operating Grants and Contributions 2,995,978 3,264,777 3,221,264 2,480,309 Capital Grants and Contributions 7,426,194 14,046,071 14,023,056 6,379,228 General Revenue: Property Tax 26,678,783 23,149,916 20,964,738 19,075,268 Sales Tax 18,998,057 17,871,380 16,047,297 15,875,935 Other Taxes/Fees 16,628,912 15,689,937 15,099,363 13,063,774 Miscellaneous 4,218,245 4,213,163 5,354,783 7,237,530 Total Revenue $ 88,945,045 $ 88,459,871 $ 84,886,430 $ 72,305,697 Exoenditures: General Government $ 26,675,799 $ 26,411,608 $ 22,933,107 $ 16,240,418 Public Safety 33,642,445 30,508,765 28,837,158 27,322,153 Public Works 11,986,881 11,053,131 10,274,822 13,691,514 Parks and Recreation 9,912,996 9,418,580 8,419,508 7,362,939 Interest on Long-Term Debt 4,175,466 4,494,851 4,186,051 4,252,970 Total Expenses $ 86,393,587 $ 81,886,935 $ 74,650,646 $ 68,869,994 Increase in Net Assets before Transfers $ 2,551,458 $ 6,572,936 $ 10,235,784 $ 3,435,703 Transfers 864,493 1,410,947 1,000,305 1,073,857 Increase (Decrease) in Net Assets $ 3,415,951 $ 7,983,883 $ 11,236,089 $ 4,509,560 Prior Period Adjustment 191,800 Net Assets at Beginning of Year 122,666,601 114,490,918 103,254,829 98,745,269 Net Assets at End of Year $126,082,552 $122,666,601 $114,490,918 $ 103,254,829 (1) Beginning with fiscal year ended September 30, 2002, the City implemented Government Accounting Standards Board Statement No. 34 ("GASB 34"). In accordance with GASB 34, the City's financial statements for the fiscal year ended September 30, 2005, which are attached hereto as Appendix B, include a management discussion and analysis of the operating results of such fiscal year. Reference is made to Appendix B for such information. 24 TABLE 12A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY Fiscal Year Ended September 30, Revenues: 2005 2004 2003 2002 2001 Taxes $ 37,179,874 $ 32,863,098 $ 29,455,465 $ 27,264,954 $ 27,772,653 Licenses and Permits 1,235,337 1,700,044 1,151,169 91,049 233,219 Franchise Fee 14,250,484 13,215,882 12,571,989 11,930,612 10,709,710 Fines and Forfeitures 3,959,476 3,338,979 3,422,952 3,522,895 3,222,517 Fees for Service 5,520,074 6,178,245 6,020,190 4,852,845 2,846,339 Interest Revenue 621,164 441,755 856,204 1,011,454 843,423 Net (Decrease) Increase in Fair Value of Investments 16,805 Intergovernmental 629,259 664,896 692,581 458,189 700,137 Miscellaneous 382,494 1,581,327 418,817 268,673 643,659 Total Revenues $ 63,778,162 $ 59,984,226 $ 54,589,367 $ 49,417,476 $46,971,657 Exoenditures: General Government $18,214,630 $ 19,524,403 $ 16,166,690 $ 10,430,176 $12,119,014 Public Safety 32,252,497 29,347,031 28,081,091 25,913,382 22,836,527 Public Works 5,228,666 4,465,283 4,342,542 7,866,251 6,760,208 Parks and Recreation 6,810,881 6,060,086 5,873,122 5,610,114 5,156,722 Capital Outlay 341,958 160,077 147,196 267,558 422,852 Total Expenditures $ 62,848,632 $ 59,556,880 $ 54,610,641 $ 50,087,481 $47,295,323 Excess (Deficiency) of Revenues Over Expenditures $ 929,530 $ 427,346 $ (21,274) $ (670,005) $ (323,666) Proceeds of Capital Lease Operating Transfers In 748,065 1,110,160 529,721 195,259 668,689 Operating Transfers (Out) (1,365,689) (500,219) (393,074) (831,469) (43,000) Excess of Revenues and Other Sources Over (Under) Expenditures and Other Uses $ 311,906 $ 1,037,287 $ 115,373 $ (1,306,215) $ 302,023 Beginning Fund Balance 9,617,280 8,579,993 8,464,620 9,770,835 9,468,812 Ending Fund Balance $ 9,929,186 $ 9,617,280 $ 8,579,993 $ 8,464,620 $ 9,770,835 25 TABLE 13 - MUNICIPAL SALES TAX HISTORY The City has adopted the Municipal Sales and Use Tax Act, V.T.C.A., Tax Code, Chapter 321, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Bonds or the Certificates. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. In January 1994, the voters of the City approved the imposition of an additional one-half of one percent (Yz of 1 %) for property tax reduction. In September 2003, the voters of the City approved the imposition of an additional one-half of one percent (1/2 of 1 %) for the Denton County Transportation Authority. The implementation of this tax began January 2004. Fiscal Year %of Equivalent of Ended Total Ad Valorem Ad Valorem Per 9/30 Collected (1) Tax Levy Tax Rate Capita - 2002 $ 15,875,931 84.33% $ 0.4623 $ 173 2003 16,047,297 77.94% 0.4272 172 2004 17,871,380 79.28% 0.4346 182 2005 18,998,057 71.81 % 0.4295 187 2006 (2) 11,695,783 40.15% 0.2442 111 (1) Source: City of Denton Annual Program of Services for 2005-06. (2) Collections for part year only, received through June 1, 2006 (actual collections incurred through April). The sales tax breakdown for the City is as follows: Property Tax Relief 0.50~ Denton County Transportation Authority 0.50~ City Sales & Use Tax 1.00~ State Sales & Use Tax 6.25~ Total 8.25~ FINANCIAL POLICIES Basis of Accounting . . . The accounting policies of the City conform to generally accepted accounting principles of the Governmental Accounting Standards Board and program standards adopted by the Government Finance Officers Association of the United States and Canada. The GFOA has awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Denton for each of the fiscal years ended September 30, 1983 through September 30, 2005. The City's current report has been submitted to GFOA to determine its eligibility for another Certificate. The City has also received the GFOA's award for Distinguished Budget Presentation each year since 1988. The City has submitted its 2005/06 budget to the GFOA to determine its eligibility for another Certificate. The measurement focuses for the Enterprise Funds, Internal Service Funds and Nonexpendable Trust Funds are income determination and cost of service, respectively. Accordingly, the accrual basis, whereby revenues and expenses are identified in the accounting period in which they are earned and incurred and net income, is utilized for these funds. The modified accrual basis, whereby revenues are recognized when they become both measurable and available for use during the year and expenditures are recognized when the related fund liability is incurred, is used for all other funds. 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 following October 1. The budget includes proposed expenditures and revenues required to fund the expenditures. Following Council considerations, 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. 26 INVESTMENTS The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council. Both state law and the City's investment policies are subject to change. LEGAL INVESTMENTS. . . Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly 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 obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and 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 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 the 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) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities 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-lor P-I or the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper with a stated maturity of 270 days or less that is rated at least A-lor P-I or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally 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 funds 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 Securities 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 nationally recognized investment rating firm of not less than AAA or its equivalent. If specifically authorized in the authorizing document, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. 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 AAA-m or an equivalent by at least one nationally recognized rating service. The City is 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. Effective September 1, 2003, governmental bodies in the State are authorized to implement securities lending programs if (i) the securities loaned under the program are collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) of the first paragraph under this subcaption, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm not less than "A" or its equivalent, or (c) cash invested in obligations that are described in clauses (1) through (6) and (10) through (12) of the first paragraph under this subcaption, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the governmental body, held in the name of the governmental body and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less. INVESTMENT POLICIES. . . Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, 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 funds' investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. 27 Under Texas law, City 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 the probable income to be derived." At least quarterly the investment officers of the City shall submit an investment report detailing: (1) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, 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 strategy statements and (b) state law. No person may invest City funds without express written authority from the City Council. ADDITIONAL PROVISIONS . . . Under Texas law the City is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers' with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the City Council; (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) perform an annual audit of the management controls on investments and adherence to the City's investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (7) restrict the investment in no-load mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to no more than 15% of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; and (8) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. TABLE 14 - CURRENT INVESTMENTS As of June 1, 2006, the City's investable funds were invested in the following categories: Description U.S. Federal Agency Discounts U.S. Federal Agency Coupon U.S. Federal Agency Callables U.S. Federal Agency Step-Ups U.S. Treasury Strip Bonds Zeros Money Market/Cash Percent 5.91% 44.09% 21.36% 5.71% 10.60% 12.34% 100.00% Market Value $ 14,807,000 110,457,601 53,505,938 14,294,687 26,562,148 30,924,115 $250,551,489 28 TAX MATTERS OPINION. . . On the date of initial delivery of the Bonds and Certificates, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel, will render its opinions that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the Bonds and Certificates for federal income tax purposes will be excludable from the "gross income" of the holders thereof and (2) the Bonds and Certificates will not be treated as "specified 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 (the "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 and Certificates. See Appendix C -- Form of Bond Counsel's Opinions. In rendering its opinion, Bond Counsel will rely upon (a) certain information and representations of the City, including information and representations contained in the City's federal tax certificate, and (b) covenants of the City contained in the Bond and Certificate documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and Certificates and the property financed or refinanced therewith. Failure of the City to comply with these representations or covenants could cause the interest on the Bonds and Certificates to become includable in gross income retroactively to the date of issuance of the Bonds and Certificates. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds and the Certificates in order for interest on the Bonds and the Certificates to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds and the Certificates to be included in gross income retroactively to the date of issuance of the Bonds and the Certificates. The opinions of Bond Counsel are conditioned on compliance by the City with such requirements, and Bond Counsel has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds and the Certificates. Bond Counsel's opinion represents its legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. 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 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 and the Certificates. A ruling was not sought from the Internal Revenue Service by the City with respect to the Bonds or the Certificates or the property financed or refinanced with proceeds of the Bonds or the Certificates. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds or the Certificates. The opinion of Bond Counsel is not binding on the Internal Revenue Service. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the City as the taxpayer and the holders of the Bonds and the Certificates may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. 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 and Certificates (the "Original Issue Discount Bonds" or "Original Issue Discount Certificates") may be less than the principal amount thereof or one or more periods for the payment of interest on the Bonds or Certificates 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 or Original Issue Discount Certificate, and (ii) the initial offering price to the public of such Original Issue Discount Bond or Original Issue Discount Certificate would constitute original issue discount. The" stated redemption price at maturity" means the sum of all payments to be made 0 the Bonds and Certificates less 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 or Original Issue Discount Certificate in the initial public offering is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond or Original Issue Discount Certificate 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 consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond or Original Issue Discount Certificate prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond or Original Issue Discount Certificate 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 or Original Issue Discount Certificate was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Bond or Original Issue Discount Certificate is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the 29 date before the semiannual anniversary dates of the date of the Bonds and Certificates and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond or Original Issue Discount Certificate for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to ( a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the 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 Bonds and Certificate. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds or Original Issue Discount Certificates which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds or Original Issue Discount Certificates should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds or Original Issue Discount Certificates 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 or Original Issue Discount Certificates. 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 and Certificates. This discussion is based on existing statutes, regulations, 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, certain S corporations with accumulated Subchapter C earnings and profits and excess passive investment including foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. 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 THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS AND CERTIFICATES. Interest on the Bonds and Certificates will be includable as an adjustment 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. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds and Certificates, 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 tax-exempt obligation, such as the Bonds and Certificates, if such obligation was acquired at a "market discount" and if the fixed 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 of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount.). The" accrued market discount" is 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 the tax implications of the purchase, ownership or disposition of the Bonds and Certificates 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. 30 OTHER INFORMATION RATINGS The presently outstanding tax supported debt of the City is rated "Aa3" by Moody's and "AA-" 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 the Bonds and the Certificates 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 organization 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 judgment 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 and Certificates. 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. REGISTRATION AND QUALIFICATION OF BONDS AND CERTIFICATES FOR SALE The sale of the Bonds and Certificates has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds and Certificates have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds and Certificates been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Bonds and Certificates under the securities laws of any jurisdiction in which the Bonds and Certificates may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds and Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds and Certificates are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, 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 and Certificates by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds and Certificates be assigned a rating of at least "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 and Certificates 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 and Certificates are 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 and Certificates are legal investments for various institutions in those states. LEGAL OPINIONS The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Bonds and Certificates, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Bond and Initial Certificate and to the effect that the Bonds and Certificates are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinions of Bond Counsel, to like effect and to the effect that the interest on the Bonds and Certificates 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 nature 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, Parkhurst & 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. In connection with the issuance of the Bonds, McCall, Parkhurst & Horton L.L.P. represents only the City. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds and Certificates is contingent on the sale and delivery of the Bonds and Certificates. The legal opinion will accompany the Bonds and Certificates deposited with DTC or will be printed on the Bonds and Certificates in the event of the discontinuance of the Book-Entry -Only System. 31 The various legal opinions to be delivered concurrently with the delivery of the Bonds and Certificates 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 the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. CONTINUING DISCLOSURE OF INFORMATION In each of the Ordinances, the City has made the following agreement for the benefit of the holders and beneficial owners of the Bonds and the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds and the Certificates. 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 certain 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 Official Statement under Tables numbered 1 through 5 and 7 through 14 and in Appendix B. The City will update and provide this information within six months after the end of each fiscal year ending in or after 2006. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") approved by the staff of the United States Securities and Exchange Commission ("SEC") and to any state information depository ("SID") that is designated and approved by the State of Texas and by the SEC staff. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12. 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 information by the required time, and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance 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. 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 the 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. The Municipal Advisory Council has also received SEC approval to operate, and has begun to operate, a "central post office" repository for information filings made by municipal issuers, such as the City, which repository then transmits the filed information to the NRMSIRs and the appropriate SID. This central post office can be accessed and utilized at www.DisclosureUSA.com ("Disclosure USA"). The City may utilize DisclosureUSA for the filing of information relating to the Bonds. 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 and the Certificates, as applicable, if such event is material to a decision to purchase or sell Bonds or Certificates: (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 or Certificates; (7) modifications to rights of holders of the Bonds or Certificates; (8) Bonds or Certificate calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds or Certificates; and (11) rating changes. Neither the Bonds or Certificates or the Ordinances make provisions for debt services reserves, or liquidity enhancement. In addition, the 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 AND SID. . . The City has agreed to provide the foregoing information only to NRMSIRs (or in the case of material event notices, the MSRB) and the SID. The information will be available to holders of Bonds and the Certificates 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, 32 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 or Certificates 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 or Certificates may seek a writ of mandamus to compel the City to comply with its agreement. 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 or Certificates 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 or Certificates 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 or Certificates. 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 purchasing or selling Bonds or Certificates in the primary offering of the Bonds or Certificates. 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 financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS. . . During the last five years, the City has complied in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Bonds and Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds and Certificates is contingent upon the issuance and delivery of the Bonds and Certificates. First Southwest Company may submit a bid for the Bonds and Certificates, either independently or as a member of a syndicate organized to submit a bid for the Bonds and Certificates. 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 and Certificates, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. In the normal course of business, the Financial Advisor may also from time to time sell investment 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 Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance 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 transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. 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 other 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 information. Reference is made to original documents in all respects. INITIAL PURCHASER After requesting competitive bids for the Bonds, the City accepted the bid of (the "Initial Purchaser of the Bonds") 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 $ . The Initial Purchaser of the Bonds can give no assurance that any trading market will be developed for the Bonds after their sale by the City to the Initial Purchaser of the Bonds. The City has no control over the price 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 of the Bonds. After requesting competitive bids for the Certificates, the City accepted the bid of (the "Initial Purchaser of the Certificates") to purchase the Certificates at the interest rates shown on page 3 of the Official Statement at a price of par plus a cash premium of $ . The Initial Purchaser of the Certificates can give no assurance that any trading market will be developed for the Certificates after their sale by the City to the Initial Purchaser of the Certificates. The 33 City has no control over the price at which the Certificates are subsequently sold and the initial yield at which the Certificates will be priced and reoffered will be established by and will be the responsibility of the Initial Purchaser of the Certificates. 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 hereof, 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, economic, 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 economic, 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. CERTIFICATION OF THE OFFICIAL STATEMENT At the time of payment for and delivery of the Bonds and Certificates, the City will furnish a certificate, executed by proper officers, acting in their official capacity, to the effect that to the best of their knowledge and belief: (a) the 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 Certificates and the acceptance of the best bid therefor, and on the date of the delivery, 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 Ordinances authorizing the issuance of the Bonds and Certificates 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 and Certificates by the Initial Purchasers. PERRY McNEILL Mayor City of Denton, Texas ATTEST: JENNIFER K. WALTERS City Secretary 34 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 area. ECONOMIC FUTURE. . . The fiscal year 2004-2005 brought exciting news in economic development. Listed below are just a few of the highlights. MAJOR EMPLOYER & INDUSTRIAL NEWS . In January 2005, Sally Beauty Company officially opened its new $30 million international headquarter facility in Denton. The 203,000 square-foot multi-story building is located by the to the 1-35 corridor entering eastern Denton. . Flowers Foods Bakeries Group began production at their $40 million bakery employing 200 people in the former Andrew Corporation facility in Denton. Flowers Foods has bakeries in four other Texas cities: San Antonio, Houston, EI Paso and Tyler. Flowers Foods Bakeries were awarded a tax abatement from the City as an incentive to locate in Denton. Additionally, they partnered with North Central Texas College and received a state Skills Development Fund Grant for employee training. . The 52-acre Denton Crossing retail development on Loop 288 completed construction and is fully leased providing approximately 325 new full-time and 130 part-time jobs. . In 2004, the consolidation of Thermadyne Holdings Corporation operations resulted in adding employees to Victor Equipment. Warehouse, shipping and assembly operations for both Victor and Tweco were moved to an Alliance Gateway warehouse in Roanoke. Machining operations were combined at the Denton Victor plant. The consolidation brought approximately 120 employees to the Denton area with approximately 30 employees at the Denton facility. The additional manufacturing at the Denton plant is estimated to bring about $15 million in taxable value to the city. Victor Equipment opened in Denton in 1965. The company manufactures and is an international supplier of gas- operated cutting and welding torches, gas and flow pressure regulation equipment and medical equipment for the oxygen therapy market. . Anderson Merchandisers is expanded its Denton facility with a 144,000 square foot warehouse. The $3.96 million addition will support Anderson Merchandiser's distribution of all books, CD's, VHS and DVD products to one-third of the nation's WalMart stores. Anderson Merchandisers employs 440 in Denton. . Denton's Jim McNatt Honda dealership completed construction of a 38,000 square foot dealership valued at $2.58 million. DEVELOPMENT AT DENTON MUNICIPAL AIRPORT The arrival of the Denton Municipal Airport's new air traffic control tower in May of 2004 precipitated a reclassification of air space from Class G to Class D during daily operation hours of 8 a.m. and 10 p.m. and increased our corporate jet traffic. . Airport Hangar Construction continued with the completion of two projects. Finley Ledbetter Southeast Airport Hangar completed construction of their 5,600 square foot hangar valued at $233,000 in October 2004. The 13,650 square foot Doug Weyer Airport Hangar completed in July 2005 and is valued at $375,000. . Jet Works Aviation, Inc. and Business Air Management merged and created Jet Works Air Center in 2004. Jet Works Air Center began construction of a 26,000 square foot hangar/office complex in July 2005 at the Denton Municipal Airport. Jet Works Air Center will provide major airframe, engine maintenance, avionics repair and installation, interior refurbishment and completion, and will soon offer aircraft painting services. To better facilitate the merger, Jet Works Aviation, Inc. is considering the relocation of their current operation at Meacham Airport in Fort Worth to the Denton Municipal Airport. This relocation would result in 30 employees on the airfield and total employment reached 40 by the end of 2005. RETAIL NEWS . The 52-acre Denton Crossing retail development on Loop 288 has spawned much interest from national retailers and restaurateurs. Golden Triangle Mall and Brinker Plaza have had renewed appeal as a result. The tenants in Denton Crossing began opening for business in September 2003. Some of the new retailers and restaurants in Denton are Foley's Department Store, Barnes & Noble Booksellers, DSW Shoe Warehouse, Pacific Sun Wear, Best Buy, World Market, Michaels, The Sports Authority, Pier 1 Imports, Whataburger, Golden Corral, Famous Footwear, Lane Bryant and Bed Bath & Beyond. Old Navy, Southtrust Bank, Kroger, Michael's, Kirkland's, Carvel, TJ Maxx, Rice Boxx, Chipotle, Wing Pit, Popeye' s, Hollywood Video, Sweet Basil Thai Bistro, New York Sub Hub, Cold Stone Creamery and Motherhood Maternity moved into Denton Crossing in 2004. Mardel's, Grand Chinese Buffet, Floors Today, Master Grill Churrascaria, and Walgreens completed construction and moved into Denton Crossing in 2005. A-I . Development of mixed use project Unicorn Lake is underway with the January 2005 completion of Cine mark Theatre. The theatre has 60,727 square feet and has a valuation of $9,910,646. Cinemark's 14 screen theatre include high-back rocking chairs with cup holders, digital and wall-to-wall sound and concessions, set in an art deco surrounding. The master plan for the remaining development includes restaurants, residential, additional retail and commercial, and park trails and incorporates the urban sty Ie development of residential over retail along the lake with a public facility, such as a library. . The Denton Towne Crossing 43-acre retail development began construction in the southeastern corner of Brinker Road and Loop 288. The plans call for approximately 340,000 square-feet of retail development including Home Depot and Super Target. The site includes 5 additional restaurant and retail pads. . Restaurant Row Texas Roadhouse, On the Border, Olive Garden, Johnny Carino's Italian Restaurant and Chuck E. Cheese make up Denton's new "Restaurant Row." Panera Bread, Le Peep's and Rudy's BBQ opened their doors in 2004, and Hooters in 2005. Other new restaurants that have announced they are coming to Denton are Shady Oaks Barbeque and The Mexican Inn. HEALTHCARE IN DENTON In 2005 both of Denton's hospitals completed or began expansion plans that confirm Denton's status as a regional center for quality medical services. The hospitals spent approximately $150 million on these facility expansions. . Denton Community Hospital changed its name to Presbyterian Hospital of Denton and opened a new $100 million, 308,000 square foot medical complex in April 2005. The hospital also completed an 82,000 square foot professional building with a second medical office complex planned as needed. The medical office valuation is $5,584,200. In September 2005, a new 52,000 square foot physical rehabilitation hospital was announced for construction across from Presbyterian Hospital. The $14 million facility will be modeled after the Kessler Institute for Rehabilitation. . Denton Regional Medical Center, which moved into its five-story building in 1999, opened a 13,900 square foot Day Surgical Hospital. The new ambulatory surgical facility is valued at $2,268,480. Construction is underway on Denton Regional's sixth floor addition to its acute care facility for a new Progressive Care Unit and renovation of one wing of the third floor to create a new eight-bed Intensive Care Unit. This $19 million expansion will add 24,000 square feet is scheduled for completion in October 2006. Denton Regional Medical Center is also constructing additional medical offices. An additional 13,926 square foot medical office building in under construction and has a $1,219,918 valuation. . Privately owned North Texas Hospital completed construction in 2005 on its new surgery center at Interstate 35 and Mayhill Road, east of Denton Regional Medical Center. The 60,727 square foot hospital has a valuation of $9,910,646 and includes outpatient and short-term facilities for surgical patients. In addition, a $3.9 million, 44,000 square foot professional building for medical offices and the 40,000 square foot Mayhill Hospital rehabilitation hospital valued at $6.4 million broke ground on the site. OTHER DEVELOPMENTS . A 51,561 square foot Fairfield Inn and Suites will be opened in the summer of 2005. The project has a valuation of $3,851,607. . Holiday Inn is currently in the development process. With 89,637 square feet, the hotel will have a value of $9,053,337. . Five area banks have located in Denton and are building new facilities. Farmers & Merchants Bank built a 30,759 square foot bank/office building at 1517 Center Place. The project has a permit value of $3,183,556. Point Bank purchased an abandoned building at 1700 N. Carroll Boulevard. A small portion of the original building was saved and construction of the new 5,645 square foot bank is now complete. The Point Bank project has a permit value of $368,957. First State Bank is building at 400 W. Oak Street. The 30,875 square foot bank/office building has a permit value of $3,260,400 and construction was completed in 2004. Denton Area Teachers Credit Union built a branch office in south Denton. The building is 4,100 square feet and has a valuation of $516,650. SouthTrust Bank built a 3,865 square foot facility with a valuation of $466,052. . The Denton School District new $23 million stadium opened with the Denton High vs. Ryan High game September 3, 2004. This stadium includes 10' x 20' display screen for replays and video presentations, a split level field house and conference room, elevated plaza concession stands and restrooms, and the "real grass" rubber infill turf system. This facility will seat 12,000 fans as well as accommodate four teams with simultaneous dressing ability. A- 2 . Denton School District construction continues on its new Advanced Technology Center. The $16.7 million, 121,000 square foot facility located adjacent to the new stadium on Loop 288 will concentrate state-of-the-art industry-specific training equipment and instruction for Denton high school students, area businesses, and adult instruction for those updating career skills. Business areas focus on health occupation, education instruction, business and marketing, pre- law, computer technology and CAD applications, and construction science. The facility will open for classes in August 2006. INDUSTRY AND BUSINESS Employer University of North Texas Denton Independent School District Peterbilt Motors-Headquarters & Plant Denton State School Denton County City of Denton Texas Woman's University Denton Regional Medical Center FEMA (Regional Heaquarters Presbyterian Hospital of Denton Victor Equipment Sally Beauty Anderson Merchandisers James Wood Auto Park J ostens Class Ring Manufacturer Progressive Industries Vacation Tour & Travel Acme Brick United Copper Morrison Milling Russell Newman Ltd. CBS Mechanical General Telemarketing International Denton Rehabilitation & Nursing Center Tetra Pak Wells Fargo Nucon Steel Precision Pattern Inc. The Vintage Mayday Manufacturing Mayhill Hospital Denton Good Samaritan Village DATCU Lake Forest Good Samaritan Village Ben E. Keith Beers Integrated Alliance, LP Hulcher Services Major Employers Description Educational Facility School System Diesel Trucks MHMR Facility County Government City Government Educational Facility Hospital Federal Government Call Center Hospital Welding Equipment World HQ Beauty Supply Company Consumer Products Distributor Car /Truck Sales & Service Class Ring Manufacturer MHMR Facility Call Center Brick Manufacturer Copper Wire Flour Grain Mill World HQ Sleepwear/Loungewear Mechanical Contractor Call Center Retirement/Rehabilitation Aseptic Packaging Bank Steel Manufacturing Jet Interior Manufacturing Retirement/Rehabilitati on Aeorspace Machined Parts Psychiatric & Rehabilitation Retirement Center Financial Institution Retirement Center Beverage Distributor Call Center Railroad Emergency Response Source: City of Denton and Denton Chamber of Commerce Economic Development Offices Approximate Number of Employees 6,937 2,461 1,800 1,450 1,409 1,125 897 770 750 550 512 500 500 284 280 276 256 225 191 190 180 175 170 160 160 150 150 150 150 125 110 108 103 100 100 100 100 Denton is proud to boast over 35 companies and institutions that employ 100 or more people, several of them representing a corporate, regional and international headquarters. A- 3 Well over 100 companies that produce, manufacture, and distribute goods all over the world call Denton home. More than 3,000 businesses employing 1 to 6,937 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. ECONOMIC AND POPULATION GAINS. . . In 2005 Denton population surpassed the 100,000-milestone, as the city grew to 101,543 citizens! Historical population totals from U.S. Census depict Denton's consistent population increases commensurate with Denton's steady economic growth. 1940 Census - 11,192 1950 Census - 21,345 1960 Census - 26,844 1970 Census - 39,874 1980 Census - 49,079 1990 Census - 66,270 2000 Census - 80,537 estimated 2006 Population is 104,904 Source: North Central Texas Council of Government/City of Denton. The City's ascension toward a top economic position in Texas is attributable to the steady influence of governmental activity that include the annual expansion of the two state-supported universities, and due to several desirable environmental factors. Denton is located in a rich agricultural, oil and gas production region; is part of the Dallas/Fort Worth Metroplex; has proximity to three of Texas' largest reservoirs (Lake Texoma is only 40 miles from Denton); a mild climate; and the influential aspects of social, cultural and educational advantages have prompted professional workers to select Denton as their residence. ECONOMIC RANKING. . . The following data was taken from Claritas 2005 Survey. % Of Population Whose Age is: 0-17 18-34 35-54 55-64 65 and over $250,000 + $100,000 - $249,999 $ 50,000 - $ 99,999 $ 35,000 - $ 49,999 $ 25,000 - $ 34,999 22.00% 39.00% 24.00% 7.00% 8% 40,843 $ 56,303 1.00% 12.00% 26.00% 26.00% 13.00% Households City of Denton Average Household Income Population by Occupation: Sales & Office Professional & Related Occupations Service Management, Business & Finance Production & Transportation Construction Farming, Fishing, & Forestry 29.00% 24.00% 17.00% 11.00% 10.00% 9.00% <1.00% A- 4 EMPLOYMENT/LABOR FORCE. . . The 2005 annual available workforce in Denton is 63,473. Additionally Denton is fortunate to draw workers from the Dallas and Fort Worth MSA's representing 5.1 million people, as well as north to southern Oklahoma. EDUCATION. . . Denton is home to the University of North Texas, founded in 1890, Texas Woman's University, founded in 1901. North Central Texas College, established in 1924 built an extension campus just outside Denton's ETJ in adjacent city, Corinth. The two universities and community college have a combined enrollment of more than 44,000 students and approximately 8,887 faculty members. With an enrollment of over 30,000, 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 9,500 in Denton with an additional 1,500 students attending in Dallas and Houston. The University of North Texas (UNT) campus comprises a land area 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 114 areas and Doctoral programs in 49 disciplines. UNT maintains a low 18:1 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 research institution, it 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 fields. Through its seven schools and colleges, TWU offers 65 programs leading to a Bachelor's degree, 75 Master's degree fields, and Doctoral degrees in 21 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 Graduate-Professional studies. North Central Texas College (NCTC), established in 1924, offers Associate Degrees in Occupational Therapy Assistance, Criminal Justice, 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 Denton 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 modern technology and methodology is easier due to NCTC's customized training which teaches curriculum developed closely with business management to ensure individual company needs are met. Over 17,000 students enrolled in the Denton Independent School District (DISD) for the 2005-2006 school year. Students attend 27 schools, including 15 elementary schools (grades K-5), four middle schools (6-8),three high schools (9-12), one early childhood center, and six alternative schools. DISD offers classes at each school and at the instructional center for students who experience learning disabilities or handicaps. Counselors, speech and language specialists, psychologists and reading and diagnostic consultants are available for all grade levels. In 2004-2005, DISD continued to experience a very low drop out rate of less than 1.8%. In a "Best High Schools" survey conducted by D Magazine, Denton High school was 26th and Ryan High School was ranked 36th our of 95 high schools surveyed in the Dallas-Fort Worth Metroplex. The ranking were based on AP scores and the percentage of students who passed the exams. In 2004, the district had five students who qualified as National Merit Scholar Semifinalists, seven commended student, one National Hispanic Recognized student and one National African-American recognized student. Denton State School is one of the country's most modern and 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 accommodate 653 students, more than 20 buildings for physically handicapped individuals, and a 32 bed acute hospital with supporting facilities such as X-ray, laboratory, dental, and pharmaceutical. Additional buildings include a modern administration building, an academic building, laundry facility, chapel, maintenance shop and a warehouse. The school has a staff of 1,450 with an annual budget of $44 million. DENTON UNIVERSITIES EXPAND. . . Texas Woman's University (TWU) has grown dramatically with a 27.9% increase in student enrollment between 2000 and 2004. TWU's fall 2005 enrollment was 11,353, an increase of 5.6% over fall 2004. To meet growing housing demand, TWU completed a 167-unit apartment -style dormitory residence hall in August 2005. The dorm complex features a community center, activity deck and early childcare program. A parking area was added to provide an additional 88 spaces near the student union and administrative offices. Almost half of TWU students (45%) are graduate students. Health science majors comprise 42% ofTWU students and TWU produces more new nurses than any other program in Texas and is among the nation's leading providers of health care professionals. TWU is proud of its diversity; minority students comprise 35% of students, and 71 % of the most recent semester's graduates were first generation college graduates. Recognized for excellence in baccalaureate and master degree nursing programs, TWU student's first-time pass rate for nursing licensure exceeds 95%, ahead of the national average of 87%. A- 5 University of North Texas (UNT) - UNT Research Park, a 277-acre, 553,000 square foot facility purchased from Texas Instruments is the site of research and patents in the field of nanotechnology and the site of the UNT Engineering School that occupies approximately 180,000 square feet. Masters and bachelors degrees in electrical engineering degrees have been added to the existing engineering programs in materials science, computer science, and engineering technology. UNT expects to have 650 engineering students by 2007 and 1,250 by 2010. Longer-term plans for the Research Park include housing additional research fields and a new business incubator program. The 2004-2005 academic year began with the official dedication of UNT' s new 105,000 square foot, $30 million Chemistry Building that houses state-of-the-art research facilities, laboratories and classrooms. Also dedicated was Victory Hall, a 600-bed, $25.3 million residence hall featuring a #3.9 million dining hall and a 8.9 million athletic center with a total square footage of 220,000. Two large courtyards flank a student center with a cyber cafe, computer lab, kitchenette, media room, classroom, and game and seating areas. AGRICULTURE. . . Northwestern Denton County is one of the more diversified agricultural areas in Texas. With soil types ranging from rich black to sandy load, and good, soft artesian water, it is ideal for diversified farming and livestock. Principal crops are corn, wheat, oats, hay, grain sorghums and peanuts. Beef cattle, sheep, chickens and turkeys contribute a substantial and steady income annually to the farmers and ranchers of the County. A very significant concentration of valuable world champion horse farms east of the City's corporate boundaries; provide a prosperous economic resource for the City and area. Products significant to the economy are horses, beef, eggs, wheat, grain sorghums, hay, and nursery crops. TRANSPORTATION. . . Denton is located only 20 miles northeast of the Dallas-Fort Worth International Airport which began operations in January 1974. In addition, Dallas' Love Field Airport and Fort Worth's Meacham International Airport are in close proximity to Denton. Alliance Airport, located about 20 miles southwest of Denton, is the only purely industrial airport in the world. Accompanying the Alliance Airport are five business parks. Together, Alliance's access to highway, rail and air transportation offers an excellent opportunity for future industrial growth. Much development is occurring at the Denton Municipal Airport. The runway will be expanded within the next 12 months from 6,000 to 7,000 feet. A control tower and additional private hangar space have also been built. A terminal building will also be constructed. Denton's airport is a designated "super reliever" airport for D/FW International Airport. The Kansas City Southern Railroad and the Union Pacific Railroad provide daily service to Denton. Full switching is available, providing direct access to all major markets across the nation. Greyhound/Trailways serves Denton through Dallas and Oklahoma City. Motor freight in Denton is included in the D/FW commercial trade zone and is served by major freight carriers. BANKING. . . There are 15 banks in Denton: Bank of America, N.A., Bank One, N.A., Wells Fargo Bank, N.A., Farmers and Merchants state Bank, First State Bank, Northwest Bank Texas, N.A., Provident Bank, Guaranty Federal Bank, Point Bank, TexasBank, First Bank, Inwood National Bank, Washington Mutual, Denton's only locally-owned bank, Northstar Bank, and First United Bank with Denton's first "Banco" branch specializing in serving Denton's Hispanic community. GROWTH INDICES City State Fiscal Building Values (millions) (1) Water Sewer Electric Unemployment Unemployment Year Commercial Residential Total Customers Customers Customers Rates (2) Rates (2) 2001 $ 40 $219 $ 259 22,614 20,759 35,704 4.90% 4.84% 2002 22 216 238 24,054 22,225 36,591 6.78% 6.33% 2003 36 277 313 24,978 23,329 37,057 7.19% 6.76% 2004 48 267 315 26,416 24,453 39,507 5.10% 5.30% 2005 85 260 345 27,584 25,695 41,846 4.41% 5.67% (1) New Construction Only. (2) Source: Texas Workforce Commission. MEDICAL. . . Denton is well on its way to becoming a regional medical destination serving north Texas and southern Oklahoma. Denton Regional Medical Center is a 184-bed community hospital that serves the growing population of Denton, Wise, Cooke, and Montague Counties. Offering a full-spectrum of healthcare including advanced open-heart surgery and neurosurgery programs. Denton Regional opened a new $7 million, 13,500 square-foot day surgery center on a 2-acre lot adjacent to the hospital. A $19 million expansion project is underway to add a fifth floor to the four-story building will add 24,500 square feet and will house a 29-bed progressive care unit. Presbyterian Hospital of Denton (formerly Denton Community Hospital) celebrated the grand opening of its 272,538 square- foot, 161-bed facility. An 80,000 square-foot, medical office building was also completed. A new 52,000 square-foot, $14 million physical rehabilitation hospital will be built across from Presbyterian Hospital and will be modeled after the Kessler Institute for Rehabilitation. A- 6 Additional new medical facilities beginning or completing construction in 2005 include North Texas Hospital's 60,000 square foot special hospital featuring eight surgical suites and 16 inpatient beds and the 40,000 square-foot Mayhill Hospital featuring physical rehabilitation and behavioral health services. RECREATION. . . 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 attracts 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 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 recreational 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 $12.16 million Denton Aquatic Park opened in 2003. A-7 APPENDIX B EXCERPTS FROM THE CITY OF DENTON, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2005 The information contained in this Appendix consists of excerpts from the City of Denton, Texas Annual Financial Report for the Year Ended September 30, 2005, 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. ~? j.-"" M _#3 }'~~ 1.. <!:;..>..J' t ~i f.i <f ~ =~ ,\\: .t !.!i. ~ f.. :t.:..;~..i, KPMG LLP Suite 3100 717 North Harwood Street Dallas, TX 75201-6585 Independent Auditors' Report The Honorable Mayor and Members of City Council City of Denton, Texas: We have audited the accompanying financial statements of the governmental activities, business type activities, each major fund and the aggregate remaining fund information of the City of Denton, Texas (the City) as of and for the year ended September 30, 2005, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the City as of September 30, 2005, and the respective changes in financial position, and, where applicable, cash flows thereof and the budgetary comparison for the General Fund for the year then ended in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued our report dated January 20, 2006 on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1 KPMG LLP, a u.s. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. The management's discussion and analysis, and the schedule of funding progress on pages 3 through 10, and 57, respectively, are not a required part of the basic financial statements but are supplementary information required by u.s. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The introductory section, combining and individual fund financial statements and schedules, capital assets used by governmental funds schedules, regulatory section and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund financial statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section, capital assets used by governmental funds schedules, regulatory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements and accordingly, we express no opinion on them. ..............1#413 January 20, 2006 2 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS SEPTEMBER 30, 2005 The City of Denton's Management's Discussion and Analysis is designed to (a) assist the reader in focusing on significant financial issues, (b) provide an overview of the City's financial activity, (c) identify changes in the City's financial position (its ability to address the next and subsequent years' challenges), (d) identify any material deviations from the financial plan (the approved budget), and (e) identify individual fund issues or concerns. Since the Management's Discussion and Analysis (MD&A) is designed to focus on the current year's activities, resulting changes and currently known facts, please read it in conjunction with the Transmittal Letter (beginning on page i) and the City's financial statements (beginning on page 11). FINANCIAL HIGHLIGHTS . The assets of the City exceeded its liabilities at the close of the fiscal year ended September 30, 2005, by $427,329,415 (net assets). Of this amount, $95,245,210 (unrestricted net assets) may be used to meet the government's ongoing obligations to citizens and creditors. . The City's total net assets increased by $17,717,666. This increase can be attributed to the net revenue of the business-type activities and the contribution of capital assets by developers. . As of September 30, 2005, the City's governmental funds reported combined fund balances of $41,665,973, an increase of $1,596,632 in comparison with the prior fiscal year, due to increased revenue from taxes. Approximately 32% of this total amount, $13,332,857, is available for spending at the government's discretion (unreserved fund balance). . At the end of the fiscal year, unreserved fund balance for the General Fund was $9,718,368, or 13.98% of budgeted general fund expenditures. . The City's total noncurrent liabilities decreased by $7,775,840 during the fiscal year. The primary reason for the decrease was the payment or defeasance of $108.4 million of principal offset by the issuance of $78.7 million of revenue refunding bonds, $9.4 million of general obligation refunding bonds, and $12.1 million of certificates of obligation and general obligation bonds. OVERVIEW OF THE FINANCIAL STATEMENTS The Management's Discussion and Analysis is intended to serve as an introduction to the City of Denton's basic financial statements. The City's basic financial statements comprise three components: (1) government- wide financial statements, (2) fund financial statements and (3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide Financial Statements. The government-wide financial statements are designed to provide readers with a broad overview of the City's finances in a manner similar to private-sector business. The statement of net assets presents information on all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents information showing how the City's net assets changed during the most recent fiscal year. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but not used vacation leave). Both the statement of net assets and the statement of activities are prepared using the accrual basis of accounting as opposed to the modified accrual basis. In its Statement of Net Assets and the Statement of Activities, the City is divided between two kinds of activities: . Governmental activities. Most of the City's basic services are reported here, including police, fire, libraries, development, public services and operations, public works, building inspection, technology 3 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 services and general administration. Property taxes, sales taxes and franchise taxes finance most of these activities. . Business-type activities. The City charges a fee to customers to cover the cost of services it provides. The City's utility system (electric, water and wastewater) and solid waste activities are reported here. The government-wide financial statements can be found on pages 11 - 13 of the report. Fund Financial Statements. A fund is a grouping of related accounts used to maintain control over resources that have been segregated for specific activities or objectives. Fund financial statements provide detailed information about the most significant funds, not the City as a whole. Some funds are required to be established by state law or bond covenants. However, the City Council establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants and other monies. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds and fiduciary funds. . Governmental funds. The majority of the City's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method identified as the modified accrual basis of accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the City's general government operations and the basic services it provides. Governmental fund information helps the reader determine whether there are more or fewer financial resources that can be spent in the near future to finance the City's programs. By comparing information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements, readers may better understand the long-term impact of the government's near-term financing decisions. The relationship or differences between governmental activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds is detailed in a reconciliation following the fund financial statements. The City of Denton maintains 11 individual governmental funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures and changes in fund balances for the general fund, debt service fund and capital projects fund, all of which are considered to be major funds. Data from the other eight governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report. . Proprietary funds. The City charges customers for certain services it provides, whether to outside customers or to other units within the City. These services are generally reported in proprietary funds. Proprietary funds are reported in the same manner that all activities are reported in the Statement of Net Assets and the Statement of Activities. In fact, the City's enterprise funds (a component of proprietary funds) are similar to the business-type activities that are reported in the government-wide statements but provide more detail and additional information, such as cash flows. The internal service funds (the other component of proprietary funds) are utilized to report activities that provide supplies and services for the City's other programs and activities, such as the City's municipal warehouse, the City's self-insurance fund and equipment maintenance function. Because these services benefit both governmental and business-type functions, they have been included in both the governmental and business-type activities in the government-wide financial statements. The City of Denton maintains four enterprise funds. The City uses enterprise funds to account for its electric, water and wastewater systems and solid waste operations. The funds provide the same type of information as the government-wide financial statements, only in more detail and include some of the internal service fund-type activity. The City considers all enterprise funds to be major funds. 4 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 . Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statement because the resources of those funds are not available to support the City's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. Agency funds are a component of fiduciary funds. Agency funds differ from other fiduciary funds in that they do not typically involve a formal trust agreement. Agency funds are used to account for situations where the City's role is purely custodial, such as receipt, temporary investment and remittance of fiduciary resources to individuals, private organizations, or other governments. The City maintains three fiduciary funds. The City uses agency funds to account for the collection and payment of the City's payroll and associated liabilities, employee-purchased insurance and other similar relationships. Notes to the financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 29 - 55 of this report. GOVERNMENT-WIDE FINANCIAL ANALYSIS As of September 30, 2005, the City's combined net assets were $427,329,415, of which $126,082,552 can be attributed to governmental activities and $301,246,863 attributed to business-type activities. This analysis focuses on the net assets (Table 1) and changes in net assets (Table 2) of the City's governmental and business- type activities. The largest portion of the City's net assets (70.4%) reflects its investment in capital assets (e.g., land, building, machinery and equipment), less any related debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Table 1 Net Assets (in thousands) Governmental Business-type Activities Activities Total 2005 2004 2005 2004 2005 2004 Current and other assets $ 64,709 $ 61,034 $ 222,072 $ 230,808 $ 286,781 $ 291,842 Capital assets 177 .493 174.093 402.296 389.381 579.789 563.474 Total assets 242,202 235,127 624,368 620,189 866,570 855,316 Long-term liabilities outstanding 100,426 95,935 286,048 299,662 386,474 395,597 Other liabilities 15.694 16.525 37.074 33.582 52.768 50.107 Total liabilities 116,120 112,460 323,122 333,244 439,242 445,704 Net assets: Invested in capital assets, net of related debt 107,112 107,755 193,657 172,589 300,769 280,344 Restricted 451 297 30,864 35,812 31,315 36,109 Unrestricted 18.519 14.615 76.726 78.544 95.245 93.159 Total net assets $ 126.082 $ 122.667 $ 301.247 $ 286.945 $ 427.329 $ 409.612 5 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Governmental activities and business-type activities increased the City's net assets by $3,415,951 and $14,301,715, respectively. The key elements of these increases are contained in Table 2. Table 2 Changes in Net Assets (in thousands) Governmental Business-type Activities Activities Total 2005 2004 2005 2004 2005 2004 Revenue: Program Revenue: Charges for services $11~999 $ 1 0~225 $188~258 $168~457 $200~257 $178~682 Operating grants and contributions 2~996 3 ~265 2~996 3 ~265 Capital grants and contributions 7~426 14~ 046 9~809 8~415 1 7 ~23 5 22~461 General Revenue: Property tax 26~679 23~ 150 26~679 23 ~ 150 Sales tax 18~998 17 ~871 18~998 17 ~871 Franchise tax 14~25 0 13 ~216 14~250 13 ~216 Hotel occupancy tax 989 911 989 911 Beverage tax 216 209 216 209 Bingo tax 25 21 25 21 Investment Income 1 ~ 149 1 ~333 3~252 2~699 4~401 4~032 Miscellaneous 4~218 4~213 1 ~036 914 5 ~254 5~127 Total revenue 88~945 88~460 202~355 180~485 291~300 268~945 Expenses: General government 26~676 26~412 26~676 26~412 Public safety 3 3 ~ 643 30~509 3 3 ~ 643 30~509 Public works 11 ~987 11 ~053 11 ~987 11 ~053 Parks and recreation 9~913 9~418 9~913 9~418 Interest on long-term debt 4~ 176 4~495 4~ 176 4~495 Electric 132~830 119~650 132~830 119~650 Water 22~3 81 21~279 22~3 81 21~279 Wastewater 18~808 18~528 18~808 18~528 Solid waste 13~169 11 ~302 13~ 169 11 ~302 Total expenses 86,395 81,887 187,188 170,759 273,583 252,646 Increase in net assets before transfers 2,550 6,573 15,167 9,726 17,717 16,299 Transfers 865 1,411 (865) (1,411) Increase in net assets 3,415 7,984 14,302 8,315 17,717 16,299 Net assets at beginning of year - as previously reported 122,667 114,491 286,945 272,418 409,612 386,909 Prior period adjustment 192 6,212 6,404 Net assets at beginning of year - as restated 122,667 114,683 286,945 278,630 409,612 393,313 Net assets at end of year $126,082 $122,667 $301,247 $286,945 $427,329 $409,612 Governmental activities. The most significant governmental activities expense was in providing public safety, which incurred expenses of $33,642,445. These expenses were funded by revenues collected from a variety of sources, with the largest being from property taxes, which are $26,678,783 for the fiscal year ended September 30, 2005. The most significant portion of public safety is the cost of personnel, which totaled $27,168,766. Other significant governmental activities expense for the City includes general government, which incurred $26,675,799 in expenses, of which $15,015,963 represented personnel charges. The decrease in capital grants and contributions reflects a reduction of transportation grants received during the year. 6 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Business-type activities. Business-type activities increased the City's net assets by $14,301,715, accounting for 80.7% of the total growth in the government's net assets. A key element of this increase is capital contributions, emerging as a major revenue source for the Water and Wastewater funds during the current fiscal year, producing $9,808,842 in revenue. Contributions of assets arise from new property development within the City. Charges for services increased $19,800,346 due to various rate increases. The expense increase between fiscal years 2004 and 2005 reflects increased costs of production. FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the City's governmental funds is to provide information on near-term inflows, outflows, and balances of resources available to spend. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the City's governmental funds reported a combined ending fund balance of $41.7 million, an increase of $1.6 million in comparison with the prior year. Approximately $13.3 million constitutes unreserved, undesignated fund balance, which is available for spending at the government's discretion. The remainder of the fund balance is reserved to indicate that it is not available for new spending because it has already been committed 1) to purchase or construct capital assets ($27.7 million), 2) to pay debt service ($0.5 million), or 3) to liquidate contracts and purchase orders of the prior period ($0.2 million). The general fund is the chief operating fund of the City. At September 30, 2005, unreserved fund balance of the general fund was $9.7 million, or 13.98% of budgeted general fund expenditures. The unreserved fund balance of the general fund increased by a moderate $0.2 million during the current fiscal year due to a slight increase in revenue from taxes. Expenditures were closely monitored and compared to revenues received. At the end of the fiscal year, the capital projects fund has a fund balance of $27.7 million. The entire balance in this fund is reserved for capital construction and acquisition. The debt service fund has a total fund balance of $0.5 million all of which is reserved for the payment of debt service. The overall increase in the debt service fund balance ($0.2 million) was partly due to the increase in revenue from taxes ($0.7 million). Proprietary funds. The City's proprietary funds provide the same type of information found In the government-wide financial statements, but in more detail. Unrestricted net assets in Electric, Water, and Wastewater at September 30, 2005 are $58.9 million, $12.5 million, and $1.6 million respectively. Solid Waste has unrestricted net assets of $2.4 million. The results reflect a decrease of unrestricted net assets in each fund, specifically $1.7 million in Electric, $0.5 million in Water, $0.5 million in Wastewater, and $0.7 million in Solid Waste. Other factors concerning the finances of these funds have already been addressed in the discussion of the City of Denton's business-type activities. 7 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 GENERAL FUND BUDGETARY HIGHLIGHTS In March 2005, the City Council amended the original budget (Ordinances 2005-094) from $69,505,208 to $69,511,708 to allow for the appropriation of funds for review of a cable television franchise application by the University of North Texas. For fiscal year 2004-05, General Fund actual expenditures (including transfers) on a budgetary basis were $68.2 million compared to the amended budget of$69.5 million. The $1.3 million variance was primarily due to reduced personnel costs for the general government offset by transfers to increase net assets of Materials Management and to anticipate the funding of other post-employment benefits. Actual revenue (including transfers) on a budgetary basis was $68.4 million compared to the original budget of$69.5 million. Of the $1.1 million variance, approximately $750,000 was due to taxes and fees for services being below expectations. Over the years, the Denton City Council has followed a policy of maintaining a general fund balance in order to plan for unforeseen emergencies and place the City in a more favorable position. In 1997-1998, the policy level was increased from 10% to 12.5% of general fund expenditures. In 1999-2000, the percentage was increased to 13%. The 2004-05 budget increased the policy level to 13.5%. The City of Denton's unreserved fund balance at September 30, 2005 is $9.7 million, or 13.98% of budgeted expenditures. Below is a listing of the ending unreserved balances for the past three years, as well as fiscal year 2004-05 projected and actual. For those years where the actual ending balance has exceeded the policy level, the following year's budget has included utilization of that amount for one-time expenditures. By using the fund balance for one-time expenditures only, the financial impact on future budgets is eliminated. Actual Actual Actual Projected Actual 9/30/02 9/30/03 9/30/04 9/30/05 9/30/05 Unreserved balances $8,033,092 $8,442,942 $9,504,988 $9,383,205 $9,718,368 % of total expenditures 13.64% 13.64% 14.68% 13.50% 13.98% Policy level 13.00% 13.00% 13.00% 13.50% 13.50% The largest revenue source of the General Fund's budget was the ad valorem tax. Denton's ad valorem tax rate is comprised of two components. The first is the operations and maintenance component that is used to calculate revenue for the City's General Fund operations. The second component is the debt portion that is used to calculate revenue to pay the City's general debt service obligations. The Denton Central Appraisal District's certified appraisal roll shows an increase of 8.23% over the prior year certified value and 6.34% over the final 2003 value (including supplements). This increase consisted of$205.7 million of new value added for 2004 and a $127.0 million increase in value for property on the tax rolls in 2003. The 2004-05 ad valorem tax rate was increased by $0.05 to $.59815 per $100 of valuation, which was used to fund additional police officers as well as additional staff required to open Emily Fowler Central Library. CAPITAL ASSET AND DEBT ADMINISTRATION Capital assets. At the end of fiscal year 2005, the City had $579,789,389 invested in a broad range of capital assets, including police and fire equipment, buildings, park facilities, roads, bridges and water and sewer lines (see Table 3 on the following page). This amount represents a net increase (including additions and deductions) of $16,315,642 or 2.9% over the prior fiscal year. 8 Land Landfill improvements Buildings and improvements Plant, machinery and equipment Water rights Infrastructure Construction in progress Total capital assets CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Table 3 Capital Assets at Year-end (Net of Accumulated Deoreciation.. in Thousands) Governmental Business-type Activities Activities 2005 2004 2005 2004 $ 7~848 $ 5~134 $ 8~467 $ 8~338 $ 899 1,435 36,172 32,821 28,660 31,614 100,758 94,461 58,492 59,188 94,285 86,539 203,403 118,864 10,528 17,985 30,277 107,095 $177~493 $174~093 $402~296 $389~381 Totals 2005 2004 16~315 $ 13~472 899 1,435 36,172 32,821 129,418 126,075 58,492 59,188 297,688 205,403 40,805 125,080 $579~789 $563~474 This year's major additions included: Description Lake Ray Roberts Water Treatment Plant Pecan Creek Water Reclamation Plant Expansion 54" Finished Water Transmission Line Spencer Road Solid Waste Operations Building Fleet Service Facility Renovation Middle Pecan Basin III Correction Total Amount $ 42,260,928 21,020,777 7,001,267 3,906,511 3,372,153 2,556,297 2,041,960 $ 82,159,893 Additional information on the City's capital assets can be found in note IV. D. on pages 40 - 42 of this report. Debt. At year-end, the City had $398.1 million in bonds and notes outstanding as compared to $406.1 million at the end of the prior fiscal year, a decrease of 2.0%, as shown in Table 4. General obligation bonds Certificates of obligation Revenue bonds Notes Total Governmental Activities 2005 2004 $ 58,871 $55,893 41,792 40,540 Table 4 Outstanding Debt at Year-end (in thousands) Business-type Activities 2005 2004 $ 3,904 $ 2,047 9,233 11,326 281,120 293,105 3,141 3,141 $297,398 $309,619 Totals $100,663 $96,433 2005 $ 62,775 51,025 281,120 3,141 $398,061 2004 $ 57,940 51,866 293,105 3,141 $406,052 These amounts do not include net unamortized premiums/(discounts) of $8,262,135 or net deferred gain/Closs) on refunding of($9,510,754). During the current fiscal year, the City issued debt in October 2004, January 2005 and June 2005. The new debt resulted primarily from the issuance of $78,695,000 in revenue refunding bonds, $9,410,000 in general obligation refunding bonds, $5,000,000 in general obligation bonds, and $7,145,000 in certificates of obligation. 9 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Moody's Investor's Service, Inc. has given the City's General Obligation Bonds and the Certificates of Obligation a rating of "Aa3." Standard and Poor's Corporation has given both the City's General Obligation Bonds and Certificates of Obligation an "AA-" rating. The City's Utility Revenue Bonds carry "AI" and "A+" ratings by Moody's and Standard and Poor's respectively. The City is permitted by Article XI, Section 5 of the State of Texas Constitution to levy taxes up to $2.50 per $100 of assessed valuation for general governmental services including the payment of principal and interest on general obligation long-term debt. The current ratio of tax-supported debt to assessed value of all taxable property is 2.26%. Other long-term liabilities. The City maintains a self-insurance program for general liability, public officials' errors and omission, police professional liability, property loss and workers' compensation. Private insurance companies cover claims for property loss over $100,000 per occurrence and for workers' compensation over $500,000 per occurrence. The City has a reserve for claims and judgments of$I.8 million outstanding at year- end compared with $1.8 million at the end of the prior fiscal year. Other obligations include accrued vacation pay and sick leave. More detailed information about the City's long-term liabilities is presented in Note IV. G., on pages 45 - 50 of this report. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES To help offset increasing costs, the City's fiscal year 2005-06 budget reflects the elimination of 51.2 full-time equivalent positions that were cut during fiscal year 2004-05. Additionally, the budget incorporates a $0.01 increase in the ad valorem tax rate. Sales tax revenue is projected to increase 2.5% due to sales tax sharing economic development agreements becoming active. The 2005-06 budget also increases the fund balance reserve level of the general fund to 14.0% of budgeted expenditures. The fiscal year 2005-06 budget includes base rate increases for some electric customers and a 6% average rate increase for Wastewater. There is no budgeted retail rate increase for Water. The Solid Waste budget includes various rate increases as well as the transition to once per week cart service for residential customers. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the City's finances for all those with an interest in the City's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the City of Denton Finance Department, 215 E. McKinney, Denton, Texas 76201. 10 CITY OF DENTON, TEXAS Exhibit I STATEMENT OF NET ASSETS SEPTEMBER 30, 2005 Primary Government Governmental Business-type Activities Activities Total ASSETS: Current assets: Cash, cash equivalents and investments, at fair value $ 25,535,327 $ 70,793,162 $ 96,328,489 Receivables, net of allowances: Taxes 3,937,328 3,937,328 Accounts 12,229,747 12,229,747 Unbilled utility service 8,975,217 8,975,217 Interest 398,866 292,078 690,944 Other 1,883,557 1,883,557 Internal balances ( 4,805,660) 4,805,660 Due from other governments 2,034,304 2,034,304 Inventory 4,418,867 4,418,867 Prepaid items 22,327 22,327 Deferred charges 7,279,862 7,279,862 Deferred debt issuance costs 613,141 2,222,744 2,835,885 Total current assets 34,038,057 106,598,470 140,636,527 Noncurrent assets: Restricted assets: Cash, cash equivalents and investments, at fair value 30,005,616 114,061,540 144,067,156 Escrow deposits 663,356 286,400 949,756 Accrued interest 2,328 716,103 718,431 Other receivables 409,592 409,592 Capital assets not being depreciated: Land 7,848,270 8,466,829 16,315,099 Construction in progress 10,528,186 30,277,357 40,805,543 Capital assets, net of accumulated depreciation: Buildings 36,171,529 36,171,529 Plant, machinery and equipment 28,659,612 100,757,878 129,417,490 Infrastructure 94,285,324 203,403,923 297,689,247 Landfill improvements 898,732 898,732 Water rights 58,491,749 58,491,749 Total noncurrent assets 208,164,221 517,770,103 725,934,324 Total assets 242,202,278 624,368,573 866,570,851 LIABILITIES: Current liabilities: Accounts payable 3,074,041 13,168,456 16,242,497 Retainage payable 34,096 34,096 Deposits 3,218,826 3,218,826 Accrued interest 657,846 657,846 Due to fiduciary funds 73,932 40,162 114,094 Noncurrent liabilities due within one year 11,068,987 14,961,690 26,030,677 Other liabilities 654,205 654,205 Unearned revenue 50,694 50,694 Payable from restricted assets: Accounts payable 80,218 594,968 675,186 Retainage payable 236,073 236,073 Accrued interest 4,853,829 4,853,829 Total current liabilities 15,694,019 37,074,004 52,768,023 Noncurrent liabilities: Noncurrent liabilities due in more than one year 100,425,707 286,047,706 386,473,413 Total noncurrent liabilities 100,425,707 286,047,706 386,473,413 Total liabilities 116,119,726 323,121,710 439,241,436 NET ASSETS: Invested in capital assets, net of related debt 107,112,321 193,657,258 300,769,579 Restricted: Restricted for debt service 451,046 28,369,981 28,821,027 Restricted for capital acquisition 2,493,599 2,493,599 Unrestricted 18,519,185 76,726,025 95,245,210 Total net assets $ 126_082_552 $ 301_246_863 $ 427_329_415 The notes to the financial statements are an integral part of this statement. 11 CITY OF DENTON, TEXAS STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2005 Functions/Programs Primary government: Governmental activities: General government Public safety Public works Parks and recreation Interest expense Total governmental activities Business-type activities: Electric system Water system Wastewater system Solid waste Total business-type activities Total primary government Expenses $ 26,675,799 33,642,445 11,986,881 9,912,996 4,175,466 86,393,587 132,829,976 22,380,589 18,808,374 13,168,880 187,187,819 $ 273,,581,,406 Charges for Services Program Revenues Operating Grants and Contributions $ 3,333,866 4,965,056 1,086,387 2,613,567 $ 2,182,361 194,460 619,157 11,998,876 2,995,978 129,343,037 24,890,289 20,423,424 13,600,512 188,257,262 $ 200,,256,,138 $ 2,,995,,978 General revenues: Taxes: Property tax Sales tax Franchise tax Hotel occupancy tax Beverage tax Bingo tax Investment income Miscellaneous Transfers Total general revenues and transfers Change in net assets Net assets at beginning of year Net assets at end of year The notes to the financial statements are an integral part of this statement. 12 Capital Grants and Contributions $ 673,699 645,477 6,070,020 36,998 7,426,194 3,295,429 6,513,413 9,808,842 $ 17 ,,235,,036 Exhibit II Governmental Activities Net (Expense) Revenue and Changes in Net Assets Primary Government Business-type Activities Total $ (20,485,873) $ $ (20,485,873) (27,837,452) (27,837,452) (4,830,474) (4,830,474) (6,643,274) (6,643,274) ( 4,175,466) (4,175,466) ( 63,972,539) ( 63,972,539) (3,486,939) (3,486,939) 5,805,129 5,805,129 8,128,463 8,128,463 431,632 431,632 10,878,285 10,878,285 ( 63,972,539) 10,878,285 (53,094,254) 26,678,783 26,678,783 18,998,057 18,998,057 14,250,484 14,250,484 988,573 988,573 215,872 215,872 25,466 25,466 1,148,517 3,252,342 4,400,859 4,218,245 1,035,581 5,253,826 864,493 (864,493) 67,388,490 3,423,430 70,811,920 3,415,951 14,301,715 17,717,666 122,666,601 286,945,148 409,611,749 $ 126,,082,,552 $ 301 ,,246,,863 $ 427,,329,,415 13 CITY OF DENTON, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2005 Exhibit III Other Total General Capital Governmental Governmental Fund Debt Service Pro i ects Funds Funds ASSETS: Cash, cash equivalents and investments. at fair value $ 6,738,492 $ 451,046 $ 27,311,764 $ 3,928,164 $ 38,429,466 Receivables, net of allowances for uncollectibles: Taxes 3,937,328 3,937,328 Accrued interest 107,604 194,204 34,645 336,453 Other 1,598,062 100,096 101,179 1,799,337 Interfund receivables 1,752,973 599,632 661,687 3,014,292 Due from other governments 159,448 1,874,856 2,034,304 Total assets $ 14.293.907 $ 451.046 $ 2R.205.696 $ 6.600.531 $ 49.551.1 RO LIABILITIES AND FUND BALANCES LIABILITIES: Accounts payable $ 1,444,481 $ $ 500,348 $ 533,183 $ 2,478,012 Retaina2e payable 34,096 34,096 Interfund payables 1,418,596 1,401,757 2,820,353 Other liabilities 653,912 293 654,205 Deferred revenues 847,,732 1,,050,,809 1,,898,,541 Total liabilities 4"364,, 721 534,,444 2,,986,,042 7,,885,,207 FUND BALANCES: Reserved for debt service 451,046 451,046 Reserved for encum brances 210,818 210,818 Reserved for capital projects 27,671,252 27,671,252 Unreserved, undesignated 9,718,368 9,718,368 Unreserved, undesignated in special revenue funds 3,,614,,489 3,,614,,489 Total fund balances 9,,929,,186 451,,046 27,,671,,252 3,,614,,489 41,,665,,973 Total liabilities and fund balances $ 14.293.907 $ 451.046 $ 2R.205.696 $ 6.600.531 $ 49.551.1RO The notes to the financial statements are an integral part of this statement. 14 CITY OF DENTON, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET ASSETS AS OF SEPTEMBER 30, 2005 Total fund balances - governmental funds (Exhibit III) Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported as assets in governmental funds. Certain receivables will be collected next year but are not available soon enough to pay for the current period's expenditures and therefore are reported on deferred revenues in the funds. An internal charge to business-type activities is not recorded at the fund level. Several internal service funds are used by the City's management. The assets and liabilities of the internal service funds are included with governmental activities. Total assets of internal service funds Less: Capital assets reported above Less: Total liabilities of internal service funds Liabilities reported below Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported as liabilities in the funds. Long-term liabilities at year-end consist of: Bonds payable Certificates of obligation payable Less: Deferred charge for issuance costs Accrued interest on the bonds Leases payable Compensated absences Total net assets of governmental activities (Exhibit I) The notes to the financial statements are an integral part of this statement. 15 $ 45,952,296 (22,969,264) (17,712,818) 10,912,884 $ (58,870,849) (41,791,588) 684,885 (657,846) (2,210,846) (6,932,537) Exhibit IV $ 41,665,973 177,492,921 1,847,847 (1,328,506) 16,183,098 (109,778,781) $ 126,082,552 CITY OF DENTON, TEXAS Exhibit V STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2005 Other Total General Capital Governmental Governmental Fund Debt Service Projects Funds Funds REVENUES: Taxes $ 37,179,874 $ 8,700,451 $ $ 988,573 $ 46,868,898 Licenses and permits 1,235,337 1,235,337 Franchise fees 14,250,484 14,250,484 Fines and forfeitures 3,959,476 3,959,476 Fees for services 5,520,074 2,735,268 8,255,342 Investment revenue 621,164 465,955 61,398 1,148,517 Intergovernmental 629,259 1,640,668 3,173,590 5,443,517 Miscellaneous 382,494 968,291 580,977 1,931,762 Total revenues 63,778,162 8,700,451 3,074,914 7,539,806 83,093,333 EXPENDITURES: Current: General government 18,214,630 313 130,242 3,927,496 22,272,681 Public safety 32,252,497 804,623 33,057,120 Public works 5,228,666 18,880 5,247,546 Parks and recreation 6,810,881 2,365,805 9,176,686 Capital outlay 341,958 10,642,438 775,960 11,760,356 Debt service: Principal retirement 5,642,487 5,642,487 Advance refunding escrow 216,148 216,148 Bond issuance costs 129,900 163,768 293,668 Interest and other charges 4,018,765 4,018,765 Total expenditures 62,848,632 10,007,613 10,936,448 7,892,764 91,685,457 Excess (deficiency) of revenues over (under) expenditures 929,530 (1,307,162) (7,861,534) (352,958) (8,592,124) OTHER FINANCING SOURCES (USES): Refunding bonds issued 7,316,688 7,316,688 Payment to refunded bond escrow agen1 (7,491,938) (7,491,938) Issuance of long-term deb1 9,070,000 9,070,000 Premium on debt issuancf 310,593 93,768 404,361 Transfers in 748,065 1,326,134 313,304 953,544 3,341,047 Transfers (out) (1,365,689) (492,416) (593,297) (2,451,402) Total other financing sources (uses) (617,624) 1,461,477 8,984,656 360,247 10,188,756 Net change in fund balances 311,906 154,315 1,123,122 7,289 1,596,632 Fund balances at beginning of year 9,617,280 296,731 26,548,130 3,607,200 40,069,341 Fund balances at end of year $ 9.929.186 $ 451.046 $ 27.671.252 $ 3.614.489 $ 41.665.973 The notes to the financial statements are an integral part of this statement. 16 CITY OF DENTON, TEXAS RECONCILIATION OF STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2005 Exhibit VI Net change in fund balances - total governmental funds (Exhibit V) Amounts reported for governmental activities in the statement of activities are different because: $ 1,596,632 Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which depreciation and retirement of assets ($13,454,228=$16,903,156-$3,448,928 internal service portion) exceeded capital outlays ($11,760,356) in the current period. (1,693,872) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. Such amounts ar( recorded in the funds when considered available. 1,055,369 Donations of capital assets increase net assets in the statement of activities but do not appear in the governmental funds because they are not financia resources. 4,796,339 Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net assets. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net assets. This is the amount by which proceeds exceeded payments. (3,689,562) Fund-level financials report costs related to bonds as expenditures; however, these are deferred and amortized on the government-wide financials 390,696 Certain expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. (66,814) Internal service funds are used by management to charge the costs of certain activities, such as insurance and telecommunications, to individual funds. A portion of the net revenue (expense) of certain internal service funds is reported with governmental activities. The amount reported with business-type activities is $1,104,323. 1,027,163 Change in net assets of governmental activities (Exhibit II) $ 3,415,951 The notes to the financial statements are an integral part of this statement. 17 18 CITY OF DENTON, TEXAS Exhibit VII STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE - BUDGET TO ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2005 Variance with Adjustments - Actual on a Final Budget - Budgeted Amounts Actual Budgetary Budgetary Positive Original Final Amounts Basis Basis (N egative ) REVENUES: Taxes $ 37,540,883 $ 37,540,883 $ 37,179,874 $ $ 37,179,874 $ (361,009) Licenses and permits 1,413,890 1,413,890 1,235,337 1,235,337 (178,553) Franchise fees 14,163,514 14,163,514 14,250,484 14,250,484 86,970 Fines and forfeitures 4,040,340 4,040,340 3,959,476 3,959,476 (80,864) Fees for services 5,916,251 5,916,251 5,520,074 5,520,074 (396,177) Investment revenue 550,000 550,000 621,164 621,164 71,164 Intergovernmental 4,702,925 4,702,925 629,259 3,868,138 4,497,397 (205,528) Miscellaneous 388,465 388,465 382,494 382,494 (5,971) Total revenues 68,716,268 68,716,268 63,778,162 3,868,138 67,646,300 (1,069,968) EXPENDITURES: General government 24,430,276 23,796,123 18,214,630 3,996,567 22,211,197 1,584,926 Public safety 32,087,675 32,508,218 32,252,497 32,252,497 255,721 Public works 5,155,446 5,347,726 5,228,666 5,228,666 119,060 Parks and recreation 7,175,520 7,203,542 6,810,881 6,810,881 392,661 Capital outlay 361,798 361,606 341,958 341,958 19,648 Total expenditures 69,210,715 69,217,215 62,848,632 3,996,567 66,845,199 2,372,016 Excess (deficiency) of revenues over expenditures (494,447) (500,947) 929,530 (128,429) 801,101 1,302,048 OTHER FINANCING SOURCES (USES): Transfer in 753,010 753,010 748,065 748,065 ( 4,945) Transfers (out) (294,493) (294,493) (1,365,689) (1,365,689) (1,071,196) Total other financing sources (uses) 458,517 458,517 (617,624) (617,624) (1,076,141) Excess (deficiency) of revenues and other sources over (under) expenditures and other uses (35,930) ( 42,430) 311,906 (128,429) 183,477 225,907 Fund balances at beginning of year 9,617,280 9,617,280 9,617,280 9,617,280 Fund balance at end of year $ 9,581,350 $ 9,574,850 $ 9,929,186 $ (128,429) $ 9,800,757 $ 225,907 Adjustments - Budgetary Basis include $3,868,138 of expenditures allocated to and reimbursed by other funds. These expenditures are recorded in the other funds' financials. Also included is $128,429 of expenditures for prior year encum brances. 19 CITY OF DENTON, TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS AS OF SEPTEMBER 30, 2005 Business-type Activities - Enterprise Funds Electric Water Wastewater Solid System System System Waste ASSETS: Current assets: Cash, cash equivalents and investments, at fair value $ 50,165,193 $ 14,635,420 $ 607,893 $ 5,384,656 Receivables, net of allowances: Accounts 8,856,240 1,674,863 988,911 709,733 Unbilled utility service 6,547,341 1,186,415 883,233 358,228 Accrued interest 171,640 80,885 88 39,465 Other Interfund receivables 3,354,268 681,427 315,743 87,386 Merchandise inventory Prepaid items Deferred charges 7,279,862 Deferred bond issuance costs 698,607 945,180 469,082 109,875 Total current assets 77,073,151 19,204,190 3,264,950 6,689,343 Noncurrent assets: Restricted assets: Cash, cash equivalents and investments, at fair value 36,974,043 45,771,461 28,604,646 2,711,390 Escrow deposit 133,279 92,381 60,740 Accrued interest 272,508 265,563 165,013 13,019 Other receivables 409,592 Interfund receivables 25 39,352 Capital assets, net of accum ulated depreciation 84,361,045 175,123,287 127,867,994 14,944,142 Total noncurrent assets 122,150,467 221,252,692 156,698,418 17,707,903 Total assets 199,223,618 240,456,882 159,963,368 24,397,246 LIABILITIES: Current liabilities: Accounts payable 12,362,165 419,143 168,519 218,629 Claims payable Compensated absences payable 163,687 164,789 106,614 111,137 Leases payable Deposits 2,937,999 212,002 68,825 Accrued interest Interfund payables 112,930 426,062 436,180 63,839 Payable from restricted assets: Accounts payable 348,289 72,836 109,455 64,388 Retainage payable 71,796 164,277 Accrued interest 1,356,081 2,299,906 1,114,774 83,068 Interfund payables 1,072 1,126 Revenue and general obligation bonds 4,256,771 4,780,000 3,293,229 2,085,463 Total current liabilities paid from restricted assets 5,962,213 7,224,538 4,682,861 2,232,919 Total current liabilities 21,538,994 8,446,534 5,394,174 2,695,349 20 Total Enterprise Funds Exhibit VIII Governmental Activities - Internal Service Funds 21 CITY OF DENTON, TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS AS OF SEPTEMBER 30, 2005 Electric System Business-type Activities - Enterprise Funds Water Wastewater System System Noncurrent liabilities: Leases payable Payable from restricted assets: Arbitrage payable General obligation bonds payable Certificates of obligation Revenue bonds payable, net of premium/discount Deferred amount on refunding Notes payable Compensated absences payable Claims payable Landfill closure/postclosure costs Total noncurrent liabilities Total liabilities NET ASSETS: $ $ $ 575 643 77,819,952 134,515,586 64,298,910 (2,605,076) (4,834,734) (1,422,953) 3,141,222 235,550 237,135 153,419 75,451,001 133,059,209 63,030,019 96,989,995 141,505,743 68,424,193 73,096,335 83,118,659 11,838,028 5,853,938 1,484,720 1,008,879 58,857,368 12,532,056 1,557,699 $ 102,233,623 $ 98,951,139 $ 91,539,175 Adjustment to reflect inclusion of internal service fund activities related to enterprise funds. Net assets of business-type activities (Exhibit I) The notes to the financial statements are an integral part of this statement. Invested in capital assets, net of related debt Restricted for debt service Restricted for capital acquisition Unrestricted Total net assets 32,698,240 10,678,015 22 Solid Waste $ 3,621,347 7,454,073 (139,498) 159,928 3,411,627 14,507,477 17,202,826 4,744,024 2,450,396 $ 7,194,420 Exhibit VIII Governmental Activities - Total Internal Enterprise Service Funds Funds $ $ 1,668,736 1,218 3,621,347 7,129 7,454,073 7,283,744 276,634,448 (9,002,261 ) 3,141,222 786,032 120,565 1,193,000 3,411,627 286,047,706 10,273,174 324,122,757 17,712,818 193,657,258 16,811,810 28,369,981 2,493,599 75,397,519 11,427,668 $ 299,918,357 $ 28,239,478 1,328,506 $ 301,246,863 ( concluded) 23 CITY OF DENTON, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2005 Business-type Activities - Enterprise Funds Electric Water Wastewater Solid System System System Waste OPERATING REVENUES: Utility services $ 127,207,343 $ 20,899,624 $ 18,261,962 $ 13,437,604 Charges for goods and services Other fees 2,135,694 980,260 965,237 162,908 Miscellaneous Total operating revenues 129,343,037 21,879,884 19,227,199 13,600,512 OPERATING EXPENSES: Operating expenses before depreciation 125,691,848 12,353,007 12,504,152 11,469,880 Depreciation 3,897,701 3,746,536 3,094,680 1,458,729 Total operating expenses 129,589,549 16,099,543 15,598,832 12,928,609 Operating income (loss) (246,512 ) 5,780,341 3,628,367 671,903 NON-OPERATING REVENUES (EXPENSES): Investment revenue 1,844,700 975,236 294,318 138,088 Interest expense and fiscal charges (3,571,873) ( 6,528,512) (3,460,631 ) (514,593) Impact fee revenue 3,010,405 1,196,225 Gain (loss) on disposal of capital assets (35,326) (57,201) Other non-operating revenues (expenses) 1,256,399 (142,887) 10,815 3,781 Total non-operating revenues (expenses) (506,100) (2,685,758) (1,959,273) (429,925) Income (loss) before contributions and transfers (752,612) 3,094,583 1,669,094 241,978 CONTRIBUTIONS AND TRANSFERS: Capital contributions 3,295,429 6,513,413 Transfers in 2,625 Transfers (out) (74,829) (109,863) (611,628) (70,798) Total contributions and transfers (74,829) 3,185,566 5,904,410 (70,798) Change in net assets (827,441) 6,280,149 7,573,504 171,180 Total net assets at beginning of year 103,061,064 92,670,990 83,965,671 7,023,240 Total net assets at end of year $ 102,233,623 $ 98,951,139 $ 91,539,175 $ 7,194,420 Change in fund net assets of proprietary funds Adjustment to reflect inclusion of internal service fund activities related to enterprise funds. Change in net assets of business-type activities (Exhibit II) The notes to the financial statements are an integral part of this statement. 24 Exhibit IX Governmental Activities - Total Internal Enterprise Service Funds Funds $ 179,806,533 $ 22,236,662 4,244,099 45,285 184,050,632 22,281,947 162,018,887 16,589,344 12,197,646 3,448,928 174,216,533 20,038,272 9,834,099 2,243,675 3,252,342 107,753 (14,075,609) (392,480) 4,206,630 (92,527) (37,905) 1,128,108 (9,891 ) (5,581,056) (332,523) 4,253,043 1,911,152 9,808,842 245,486 2,625 647,000 (867,118) (672,152) 8,944,349 220,334 13,197,392 2,131,486 286,720,965 26,107,992 $ 299,918,357 $ 28,239,478 13,197,392 1,104,323 $ 14,301,715 25 CITY OF DENTON, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2005 Business-type Activities - Enterprise Funds Electric Water Wastewater System System System CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 129,483,048 $ 22,057,105 $ 19,197,563 Cash paid to em ployees for services (5,986,204) (6,763,464) ( 4,422,222) Cash paid to suppliers (124,080,478) (6,668,012) (8,992,939) Net cash provided (used) by operating activities (583,634) 8,625,629 5,782,402 CASH FLOWS FROM NON CAPITAL FINANCING ACTIVITIES: Transfers (out) (74,829) (109,863) (611,628) Transfers in 2,625 Net cash used by noncapital financing activities: (74,829) (109,863) (609,003) CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: Capital contributions Principal payments on capital debt (3,897,572) (5,419,021 ) (13,292,124) Interest and fiscal charges (3,535,480) (6,738,329) (3,622,054) Principal payments under capital lease obligation Proceeds from issuance of capital debt 9,443,169 Proceeds from impact fees 3,010,405 1,196,225 Acquisition and construction of capital assets (6,996,189) (2,484,477) (2,624,756) Net cash used by capital financing activities ( 4,986,072) (11,631,422) (18,342,709) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale and maturities of investment securities 24,386,805 24,385,491 29,641,810 Purchase of investment securities (24,075,129) (22,200,000) (14,800,000) Interest received on investments 1,832,671 1,043,675 364,132 Net cash provided (used) by investing activities 2,144,347 3,229,166 15,205,942 Net increase (decrease) in cash and cash equivalents (3,500,188) 113,510 2,036,632 Cash and cash equivalents at beginning of year 5,937,493 2,093,718 (786,169) Cash and cash equivalents at end of year 2,437,305 2,207,228 1,250,463 Investments, at fair value (Note IV.A.) 84,701,931 58,199,653 27,962,076 Cash, cash equivalents and investments, at fair value $ 87..139,,236 $ 60,,406,,881 $ 29,,212,,539 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Operating income (loss) Adjustments: Depreciation expense Decrease (Increase) in receivables Decrease (Increase) in interfund receivables Decrease (Increase) in inventories Decrease (Increase) in prepaid items Increase (Decrease) in accounts payabh~ Increase (Decrease) in compensated absences payable Increase (Decrease) in closure/postclosure liability Increase (Decrease) in interfund payables Total adjustments Net cash provided (used) by operating activities NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES: Noncash activity during the year consisted of contributed capital assets for the Water and Wastewater funds in the amount of $3,295,429 and $6,513,413, respectively; the change in the fair value of investments of $(875,761), $(651,144), $(500,353) and $(78,037) for the Electric, Water, Wastewater and Solid Waste funds, respectively; the addition oj a capital lease in the Internal Service funds of $1,604,035; and the change in fair value of investments of $(275,203) for the Internal Service funds. $ (246,512) $ 5,780,341 $ 3,628,367 3,897,701 3,746,536 3,094,680 (1,174,063) (160,511 ) (81,416) 625,734 (87,176) (263,963) (6,262,542) 3,570,027 ( 410,655) (555,837) 12,317 24,362 29,448 (1,006,296) (267,268) (68,877) (337,122) 2,845,288 2,154,035 $ (583,,634) $ 8,,625,,629 $ 5" 782,,402 The notes to the financial statements are an integral part of this statement. 26 Exhibit X Governmental Activities Total Internal Solid Enterprise Service Waste Funds Funds $ 13,861,554 $ 184,599,270 $ 23,325,674 (4,761,509) (21,933,399) ( 4,134,220) (6,787,698) (146,529,127) (13,085,613) 2,312,347 16,136,744 6,105,841 (70,798) (867,118) (672,152) 2,625 647,000 (70,798) (864,493) (25,152) 245,486 (1,736,264) (24,344,981 ) (960,555) (619,212) (14,515,075) (404,731) (6,758) 1,550,000 10,993,169 1,518,965 4,206,630 (2,035,068) (14,140,490) (2,464,452) (2,840,544) (37,800,747) (2,072,045) 5,533,149 83,947,255 3,305,651 (4,450,000) (65,525,129) ( 6,950,000) 151,416 3,391,894 206,189 1,234,565 21,814,020 (3,438,160) 635,570 (714,476) 570,484 111,527 7,356,569 760,736 747,097 6,642,093 1,331,220 7,348,949 178,212,609 15,780,257 $ 8,,096,,046 $ 184"854,, 702 $ 17,,111,,477 $ 671,903 $ 9,834,099 $ 2,243,675 1,458,729 12,197,646 3,448,928 98,150 (1,317,840) (65,613) 99,053 373,648 1,109,340 330,770 (6,262,542) 23,844 (99,902) 2,503,633 (69,525) 8,456 74,583 (54,176) 551,377 551,377 (475,419) (1,817,860) (861,402) 1,640,444 6,302,645 3,862,166 $ 2,,312,,347 $ 16,,136,,744 $ 6,,105,,841 27 CITY OF DENTON, TEXAS STATEMENT OF ASSETS AND LIABILITIES AGENCY FUNDS AS OF SEPTEMBER 30, 2005 ASSETS: Cash, cash equivalents and investments, at fair value Interfund receivables Other receivables Total assets LIABILITIES: Accounts payable Interfund payables Total liabilities Exhibit XI Total Agency Funds $ 1,926,363 116,794 48,518 $ 2,091,675 $ 2,088,975 2,700 $ 2,091,675 The notes to the financial statements are an integral part of this statement. 28 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS SEPTEMBER 30, 2005 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Denton is a municipal corporation governed by an elected mayor and six-member council. The City receives funding from state and federal government sources and must comply with the requirements of these funding source entities. However, the City is not included in any other governmental "reporting entity," as defined in pronouncements by the Governmental Accounting Standards Board (GASB) Statement No. 14, "The Financial Reporting Entity," since council members are elected by the public and have decision-making authority, the authority to levy taxes, the power to designate management, the ability to significantly influence operations, and primary accountability for fiscal matters. During fiscal year 2005, the City implemented GASB Statement 40, "Deposit and Investment Risk Disclosures," which requires the City to disclose the risks related to deposits and investments, including credit risk, custodial credit risk, and interest rate risk. The disclosure related to this statement can be found in Note IV.A. The financial statements of the City have been prepared to conform to accounting principles generally accepted (GAAP) in the United States of America as applicable to state and local governments. GASB is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The following is a summary of the more significant policies. A. Reporting entity An elected mayor and a six-member council govern the City. As required by accounting principles generally accepted in the United States of America, these financial statements present the City (the primary government) and its component units, which are entities for which the City is considered to be financially accountable. Blended component units, although legally separate entities, are, in substance, part of the City's operations, and so data from these units are combined with data of the primary government. A discretely presented component unit, on the other hand, is reported in a separate column in the government-wide financial statements to emphasize it is legally separate from the City. The City had no discretely presented or blended component units at September 30, 2005. B. Government-wide and fund financial statements The basic financial statements include both government-wide (based on the City as a whole) and fund financial statements. The reporting focus is either the City as a whole (government-wide financial statements) or major individual funds (within the fund financial statements). The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all non-fiduciary activities of the primary government. For the most part, the effect of inter-fund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The government-wide statement of activities demonstrates the degree to which the direct expenses of a functional category (public safety, public works, etc.) or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include (1) charges to customers or applicants who purchase, use or directly benefit from goods, services or privileges provided by a given function or segment; (2) grants and contributions that are restricted to meeting operational requirements of a particular function or segment; and (3) grants and contributions that are restricted to meeting the capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. The net cost (by function or business-type activity) is normally covered by general revenue (property taxes, sales taxes, franchise fees, intergovernmental revenues, interest income, and the like). Separate fund financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major governmental funds and major enterprise funds are reported as separate columns in the fund financial statements. GASB Statement 29 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 No. 34 sets forth minimum criteria (percentage of assets, liabilities, revenues or expenditures/expenses of either fund category and for the governmental and enterprise funds combined) for the determination of major funds. Non-major funds are combined in a column in the fund financial statements. Internal service funds, which traditionally provide services primarily to other funds of the government, are presented in summary form as part of the proprietary fund financial statements. The financial statements of internal service funds are allocated (based on the percentage of goods or services provided) between the governmental and business-type activities when presented at the government-wide level. The City's fiduciary funds are presented in the fund financial statements. Since by definition these assets are being held for the benefit of a third party (other local governments, individuals, etc.) and cannot be used to address activities or obligations of the government, these funds are not incorporated into the government-wide statements. The government-wide focus is more on the sustainability of the City as an entity and the change in aggregate financial position resulting from the activities of the fiscal period. The focus of the fund financial statements is on the major individual funds of the governmental and business-type categories, as well as the fiduciary funds (by category). Each presentation provides valuable information that can be analyzed and compared to enhance the usefulness of the information. C. Measurement focus, basis of accounting and financial statement presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund statements. Revenues are recorded when earned, and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund-level financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Property tax, franchise fees, sales tax and other taxes associated with the current fiscal period are all susceptible to accrual and so have been recognized as revenues of the current fiscal period. All of the other revenue items are considered to be measurable and available only when cash is received. The City reports the following major governmental funds: The general fund is the City's primary operating fund. All general tax revenues and other receipts that are not allocated by law or contractual agreement to some other fund are accounted for in this fund. From the fund are paid general operating costs, fixed charges and capital improvement costs that are not paid through other funds. The debt service fund accounts for the payment of principal and interest on general long-term liabilities, paid primarily by taxes levied by the City, and for payment of principal and interest on capital leases in the governmental funds. The capital projects fund accounts for financial resources used for the acquisition or construction of major capital facilities being financed from bond proceeds, capital contributions, or transfers from other funds, other than those recorded in the enterprise funds and internal service funds. Other governmental funds is a summarization of all of the non-major governmental funds. 30 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 The City reports the following major proprietary funds: The City utility system is made up of three separate funds as follows: The electric fund accounts for electrical utility services to the residents and commercial establishments of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The water fund accounts for water utility services to the residents and commercial establishments of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The wastewater fund accounts for sewer and storm water services to the residents and commercial establishments of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The City provides additional services through the following fund: The solid waste fund accounts for the provision of solid waste services to the residents of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The City additionally reports the following funds: Internal service funds are used to account for the financing of materials and services provided by one department of the City to other departments of the City on a cost-reimbursement basis. Agency funds are used to account for the payment of payroll, employee insurance, and other similar liabilities. The City holds the assets in an agency capacity for individuals, private organizations or other governments. Private-sector standards of accounting and financial reporting (as issued by the Financial Accounting Standards Board) issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the GASB. Governments also have the option of following subsequent private-sector guidance for business-type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's electric, water, wastewater and solid waste funds are charges to customers for services. Operating expenses for the enterprise funds and internal service funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. For deferred charges, the City recognizes, as an asset or a liability, the difference between the electric fund's energy cost adjustment (ECA) revenue collected and related costs, in compliance with Financial Accounting Standards Board Statement No. 71. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. D. Assets, liabilities and net assets or equity 1. Cash., cash equivalents and investments The City's cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. 31 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Investments are carried at fair value or cost, if maturities are one year or less. Fair value is determined as the price at which two willing parties would complete an exchange. Interest earned on investments is recorded in the funds in which the investments are recorded. 2. Receivables Outstanding balances between funds are reported as "interfund receivables/payables." Any residual balances between governmental activities and business-type activities are reported in the government-wide statements as "internal balances." Trade and property tax receivables are shown net of an allowance for uncollectibles. The City accrues amounts for utility services provided in September, but not billed at September 30, 2005. 3. Inventories Inventories of supplies are maintained at the City warehouse for use by all City funds and are accounted for by the consumption method. Inventories are valued at the lower of cost or market. Cost is determined using a moving average method. No inventories exist in the governmental fund types. 4. Restricted Assets Certain proceeds of the City's proprietary fund revenue bonds, general obligation bonds, and certificates of obligation, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. Assets collected from impact fees are limited in use and also shown as restricted on the balance sheet of the Water and Wastewater funds. 5. Capital Assets Capital assets, which include property, plant, equipment and infrastructure assets (e.g., roads, bridges, sidewalks and similar items) are reported in applicable governmental or business-type activities columns in the government-wide financial statements and in the proprietary fund financial statements. The City defines capital assets as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the time received. Infrastructure acquired in fiscal years ended after June 30, 1980 is reported in the capital assets section of this report. Major outlays for capital assets and improvements are capitalized as projects are constructed. Net interest incurred during the construction phase of capital assets of business-type activities and enterprise funds is included as part of the capitalized value of the assets constructed. For 2005, net interest capitalization of $227,396 was recorded for electric fund projects, $65,688 was recorded for water fund projects and $67,138 was recorded for wastewater fund projects. 32 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Capital assets are depreciated using the straight-line method over the following useful lives: Assets Buildings Infrastructure Streets General improvements Machinery and equipment Furniture and office equipment Computer equipment/software Plant and equipment Underground pipe Water storage rights Water recreation rights Communication equipment Vehicles Years 40 30 - 40 20 10 10 - 20 10 3 -10 5 40 50 - 100 50 5 3 -10 Renewals and betterments of property and equipment are capitalized, whereas normal repaIr and maintenance are charged to expense as incurred. 6. Compensated Absences The City allows employees to accumulate unused vacation up to 40 days. Upon termination, any accumulated vacation time will be paid to an employee. Generally, sick leave is not paid upon termination except for fire fighters and police officers. Firefighters and police officers accumulate unused sick leave up to a maximum of 90 days. All other employees are paid only upon illness while in the employ of the City. Accumulated vacation and sick leave is accrued when incurred in the government-wide, proprietary and fiduciary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as a result of employee resignations and retirements. The General Fund has been used in prior years to liquidate governmental funds' related liability. 7. Arbitrage Arbitrage involves the investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate, resulting in interest revenue in excess of interest costs. Federal tax code requires that these excess earnings be rebated to the federal government. The Capital Projects Fund has been used in prior years to liquidate governmental funds' related liability. 8. Long-term obligations In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term obligations are reported as liabilities. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. Gains and losses on refunding are amortized over the life of the refunded debt or the life of the new issue, whichever is shorter. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 33 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 9. Fund equity In the fund financial statements, governmental funds report reservations of fund balance for accounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balances represent management plans that are subject to change. II. RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. Explanation of certain differences between the governmental fund balance sheet and the government- wide statement of net assets The governmental fund balance sheet includes a reconciliation between fund balance - total governmental funds and net assets - governmental activities as reported in the government-wide statement of net assets. One element of that reconciliation explains the "long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported as liabilities in the funds." The details of this $(109,778,781) difference are shown below. General obligation bonds payable Certificates of obligation payable Less: deferred charge for issuance cost Accrued interest on bonds Leases payable Compensated absences Net adjustments to reduce fund balance - total governmental funds to arrive at net assets - governmental activities $ (58,870,849) (41,791,588) 684,885 (657,846) (2,210,846) (6~932~537) $(109_778_781 ) B. Explanation of certain differences between the governmental fund statement of revenues, expenditures and changes in fund balances and the government-wide statement of activities The governmental fund statement of revenues, expenditures and changes in fund balances includes a reconciliation between net changes in fund balances - total governmental funds and changes in net assets of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains, "Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is capitalized and allocated over their estimated useful lives and reported as depreciation expense." The details of the $(1,693,872) difference are as follows: Capital outlay Depreciation expense Loss on disposal of capital assets Adjustment for depreciation expense on governmental activities Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities 34 $11,760,356 (11,337,358) (2,069,207) (47~663) $(1_693_872) CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Another element of that reconciliation states, "The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities." The details of this $(3,689,562) difference are as follows. Debt issued or incurred: Issuance of general obligation debt Issuance of certificates of obligation Principal repayments: Principal retirement Payment to refunded bond escrow agent Less: Deferred loss Reclassification of principal between funds Net adjustment to decrease net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $(12,316,688) ( 4,070,000) 5,642,487 7,491,938 (379,865) (57~434) $ (3_689_562) Another element of that reconciliation states, "The net effect of various miscellaneous transactions involving capital assets (i.e., sales, trade-ins and donations) is to increase net assets." The details of this $4,796,339 difference are as follows: Donations of capital assets increase net assets in the statement of activities but do not appear in the governmental funds because they are not financial resources. $4,796,339 Another element of that reconciliation states, "Certain expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures of governmental funds." The details of the $(66,814) difference are as follows: Compensated absences Accrued interest Net adjustments to decrease net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities 35 $ (4,735) (62~079) $(66_814) CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 III. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary information The City Council follows these procedures, as prescribed by City Charter, in establishing the budgets reflected in the financial statements: 1. At least sixty days prior to the beginning of each fiscal year, the City Manager submits to the City Council a proposed budget for the fiscal year beginning on the following October 1. The operating budget includes proposed expenditures and the means of financing them. 2. Public hearings are conducted prior to the adoption of the budget in order to obtain taxpayer comments. 3. The annual budget adopted by the City Council covers the general fund, special revenue funds (Recreation Fund, Police Confiscation Fund, Emily Fowler Library Fund, and Tourist and Convention Fund only), the debt service fund, the enterprise funds, and internal service funds (except for the Risk Retention Fund). The budget is legally enacted by the City Council through passage of an ordinance prior to the beginning of the fiscal year. The basic financial statements reflect the legal level of control, (i.e. the level at which expenditures cannot legally exceed the appropriated amount) which is established by function activity within an individual fund as approved by City Council. 4. The City Charter provides that the City Manager has the authority to transfer any unencumbered appropriation balances from one appropriation to another within a single function (office, department, or agency). City Council approval is not required at this level. The Charter also provides that at any time during the year, at the request of the City Manager, City Council may by resolution transfer any part of the unencumbered appropriation balances or the entire balance thereof between functions, as well as make any increases in fund appropriations. Budgets are adopted on a basis for the governmental funds, proprietary funds, and the budgeted special revenue funds where encumbrances are treated as budgeted expenditures in the year of commitment to purchase; and depreciation expense for the proprietary funds is not budgeted. At the end of the year, encumbrances for which goods and services have not been received are cancelled. At the beginning of the subsequent year, management reviews all open encumbrances and, as provided in the budget ordinance appropriation, these encumbrances may be re-established. Also, during the budgetary process, amounts are included in fund budgets to recognize administrative transfers between funds for goods or services. These amounts are not included in the reporting of actual activity for the funds. For funds reporting required budget-to-actual comparisons, these administrative transfers are included as adjustments - budgetary basis. B. Deficit fund equity The Recreation special revenue fund had a deficit fund balance of $(979,320) at September 30, 2005. This deficit was a result of less than anticipated revenue from park admission, summer camp attendance, swim lesson attendance, concession sales, and fall adult softball registration. The deficit fund balance will be eliminated through the one-cent increase property tax through fiscal year 2009-10. IV. DETAILED NOTES ON ALL FUNDS A. Cash and investments In order to facilitate effective cash management practices, the operating cash of all funds is pooled into common accounts for the purpose of increasing income through combined investment activities. At year-end, the City had $11,472,211 in cash and cash equivalents, including $10,000,000 invested in money market funds that the City considers cash equivalent. Of this amount, agency funds reported $1,926,363. The bank balance was covered by collateral with a fair value of $4,923,342. In addition, the City had $12,537 in petty cash at year- end. Statutes authorize the City to invest in obligations of the u.S. Treasury; U.S. agencies, fully collateralized repurchase agreements, public fund investment pools, SEC-registered, no-load, money market mutual funds, 36 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 investment-grade, rated municipal securities of any state and fully collateralized certificates of deposit. The investments reported at September 30, 2005, were similar to those held during the fiscal year. The City reports all investments in the financial statements at fair value. At September 30, 2005, the City's investments carried a fair value of $230,837,260. As of September 30, 2005, City investments were as follows: Weighted Average Investment Type Fair Value Maturity (Years) U.S. Treasury Securities $ 26,373,500 3.11 U.S. Agency Securities-Coupon 130~474~035 1.22 U.S. Agency Securities-Callable 47~938~375 3.17 U.S. Agency Securities-Discount 26~051 ~350 0.42 Total fair value of investments $ 230,837,260 Portfolio weighted average maturity 1.67 Interest rate risk. In accordance with its investment policy, the City manages its exposure to declines in fair values due to interest rate fluctuations by limiting the weighted average maturity of its investment portfolio to less than eighteen months. With review and approval of the City's investment committee, the weighted average maturity of its investment portfolio may be extended beyond eighteen months. Credit risk. The City's investment policy limits investments to obligations of the United States of America and its agencies, investment quality obligations of the States with a rating not less than AA, fully insured Certificates of Deposit, and commercial paper that has a maturity of 270 days or less and a rating of A-lor P-1. The City's investments in the bonds of U.S. agencies was rated AAA by Standard & Poor's and Fitch Ratings and Aaa by Moody's Investors Service. Custodial credit risk. This is the risk that in the event of a bank or counterparty failure, the City's deposits or investments may not be returned to it. The policy states that all bank deposits and investments of City funds shall be secured by pledged collateral with a market value equal to no less than 102 percent of the principal plus accrued interest less an amount insured by FDIC, if a deposit. 37 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Cash, cash equivalents and investments, at fair value are reported together on the financial statements. Investments, at fair value, by fund were as follows: Other General Capital Governmental Fund Projects Funds Electric Unrestricted investments $ 8,849,062 $ 24,625,882 $ 3,641,266 $ 48,034,255 Change in fair value (38,543) (212,151) (21,123) (1,230,182) Restricted investments 38,508,725 Change in fair value (610,867) Total $ 8,810,519 $ 24,413,731 $ 3,620,143 $ 84,701,931 Internal Total Service City Water Wastewater Solid Waste Funds Investments Unrestricted investments $ 14,427,211 $ 900,000 $ 5,736,378 $ 14,520,930 $ 120,734,984 Change in fair value (85,624) (6,188) (61,835) (217,080) (1,872,726) Restricted investments 44,877,292 27,750,783 1,693,092 1,500,074 114,329,966 Change in fair value (1,019,226) (682,519) (18,686) (23,666) (2,354,964) Total $ 58,199,653 $ 27,962,076 $ 7,348,949 $ 15,780,258 $ 230,837,260 B. Property tax revenue Property taxes attach as an enforceable lien on property as of January 1. Taxes are levied on October 1 and are due and payable at that time; therefore, the legally enforceable claim arises on October 1. A receivable is recorded at that time. All unpaid taxes levied October 1 become delinquent February 1 of the following year. Property taxes at the fund level are recorded as receivables and revenue at the time the tax levy is billed. Current-year revenues recognized are those ad valorem taxes collected within the current period or soon enough thereafter to pay current liabilities, which is sixty days after year-end. Current tax collections for the year ended September 30, 2005, were 98.3% of the tax levy. An allowance is provided for delinquent taxes not expected to be collected in the future. At September 30,2005, the City had a tax rate of $0.59815 per $100 valuation. Based upon the maximum ad valorem tax of $2.50 per $100 valuation imposed by Texas Constitutional law, the City had a tax rate margin of $1.90185. Additional revenues up to $83,204,869 could be raised per year based on the current year's assessed value of $4,374,943,831 before the limit is reached. 38 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 C. Receivables Receivables at September 30, 2005, for the City's individual major funds and other funds (non-major funds, internal service funds and fiduciary funds), including the applicable allowances for uncollectible accounts, are shown below. Capital Waste- General Pro] ects Electric Water water Receivables: Taxes $4,304,122 $ $ $ $ Accounts 19,907,555 2,976,391 2,520,507 Accrued interest 107,604 194,204 444,148 346,448 165,101 Unbilled utility service 6,547,341 1,186,415 883,233 Other 5,395,357 100,096 409,592 Gross receivables 9,807,083 294,300 27,308,636 4,509,254 3,568,841 Less: Allowance for uncollectibles (4,164,089) (11,051,315) (1,301,528) (1,531,596) Net total receivables $5~642~994 $ 294~300 $ 16~257~321 $ 3 ~207 ~ 726 $ 2~037~245 Other Internal Solid Governmental Service Waste Funds Funds Total Receivables: Taxes $ $ $ $ 4,304,122 Accounts 1,838,458 27,242,911 Accrued interest 52,484 34,645 64,741 1,409,375 Unbilled utility service 358,228 8,975,217 Other 101,179 84,220 6,090,444 Gross receivables 2,249,170 135,824 148,961 48,022,069 Less: Allowance for uncollectibles (1,128,725) (19,177,253) Net total receivables $1~120~445 $ 135~824 $ 148~961 $ 28~844~816 39 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 D. Capital assets Capital assets balances and transactions for the year ended September 30, 2005 are summarized below and on the following page. Governmental activities: Balance at Balance at October 1,2004 Increases Decreases September 30, 2005 Capital assets not being depreciated: Land $ 5,133,293 $ 2,714,977 $ $ 7,848,270 Construction in progress 17 ~984~927 12~269~752 (19~726~493) 1 0~528~ 186 Total capital assets not being depreciated 23~118~220 14~984~ 729 (19~726~493) 18~3 7 6~456 Capital assets being depreciated: Buildings 42,321,997 4,483,574 (17,909) 46,787,662 Infrastructure 142,391,035 15,018,369 (11,000) 157,398,404 Machinery and equipment and other improvements 61 ~24 7 ~ 135 6~099~063 (6~993~877) 60~352~321 Total capital assets being depreciated 245~960~ 167 25~60 1 ~006 (7~022~786) 264~538~387 Less accumulated depreciation for: Buildings 9,500,780 1,118,158 (2,805) 10,616,133 Infrastructure 55,851,764 7,272,316 (11,000) 63,113,080 Machinery and equipment and other improvements 29~633~006 6~395~812 ( 4~336~ 1 09) 31~692~709 Total accumulated depreciation 94~985~550 14~786~286 (4~349~914) 105~421~922 Total capital assets, being depreciated, net 150~974~617 10~814~720 (2~672~872) 159~116~465 Governmental activities capital assets, net $174~092~837 $25~799~449 $(22~3 99 ~3 65) $177 ~492~921 Capital assets for governmental activities include capital assts held in the internal service funds. (Continued) 40 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Business- type activities: Balance at Balance at October 1, 2004 Increases Decreases September 30, 2005 Capital assets not being depreciated: Land $ 8,337,533 $ 129,296 $ $ 8,466,829 Construction in progress 107 ~095~495 15~462~209 (92~280~34 7) 30~277~357 Total capital assets not being depreciated 115~433~028 15~591~505 (92~280~34 7) 38~744~186 Capital assets being depreciated: Landfill improvements 9,726,427 69,130 9,795,557 Water rights 69,883,098 69,883,098 Infrastructure 171,575,951 90,109,193 (1,348,245) 260,336,899 Plant, machinery, equipment and other improvements 166~584~307 11~916~787 (973~433) 177~527~661 Total capital assets being depreciated 417~769~783 1 02~095~ 110 (2~321 ~678) 517~543~215 Less accumulated depreciation for: Landfill improvements 8,291,374 605,451 8,896,825 Water rights 10,695,019 696,330 11,391,349 Infrastructure 52,711,775 5,385,053 (1,163,852) 56,932,976 Plant, machinery, equipment and other improvements 72~123~733 5~51 0~812 (864~762) 76~769~783 Total accumulated depreciation 143~821~901 12~ 197 ~646 (2~028~614 ) 153~990~933 Total capital assets, being depreciated, net 273~947~882 89~897~464 (293~064) 363~552~282 Business-type activities capital assets, net $389~380~910 $1 05~488~969 $(92~573~411 ) $402~296~468 Depreciation expense was charged to governmental activities functions/programs as follows: Governmental activities: General government Public safety Public works Parks and recreation Capital assets held by the internal service funds are charged to the various functions based upon usage Total depreciation expense - governmental activities Business-type activities: Electric Water Wastewater Solid Waste Total depreciation expense - business-type activities 41 $ 2,622,474 959,520 6,857,197 898,167 3 ~448~928 $14,786,286 $ 3,897,701 3,746,536 3,094,680 1 ~458~ 729 $12,197,646 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Construction commitments The City has several major construction projects planned or in progress as of September 30, 2005. These projects are evidenced by contractual commitments with contractors and include: Proiect R DWells Denton West R D Wells Loop 288 Water and Wastewater Relocate 380 to Spencer Hwy 380 Water and Wastewater Relocate Locust to IH35 Loop 288 West Water Transmission Line Hwy 77 Utility Relocation Spent-to-Date $ 78,173 204,025 772,465 265,509 3,014,238 1,395,880 Remaining Commitment $3,247,792 3,057,648 1,887,699 1,105,491 427,762 404,120 E. Interfund receivables, payables and transfers A summary of inter fund receivables and payables (in thousands) at September 30,2005, is as follows: Interfund Payables: Governmental Major Funds Business- Type Major Funds Non-Major Internal Interfund Governmental Solid Service Agency Receivables: General Fund Funds Electric Water Wastewater Waste Funds Funds Total Governmental Major Funds: General Fund $ $ 1,393 $ $ $ $ $ 355 $ 3 $ 1,753 Capital Projects Fund 596 3 599 Non-Major Governmental Funds 335 75 110 57 56 29 662 Business- Type Major Funds: Electric 265 3,089 3,354 Water 6 360 315 681 Wastewater 316 316 Solid Waste 37 10 80 127 Internal Service Funds 420 27 119 568 Agency Funds 61 6 11 13 8 8 10 117 Total $ 1,418 $ 1,402 $ 114 $ 426 $ 437 $ 64 $ 4,313 $ 3 $ 8,177 42 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 The more significant interfund receivables and payables include the following: Interfund receivables General fund Electric fund Capital projects fund General fund Interfund pavables Internal service funds-materials management Internal service funds-materials management General fund Other governmental funds Amount $ 402,048 3,089,375 548,328 1,057,743 The outstanding balances between the General Fund, Electric Fund, and the Materials Management Fund are a result of the cash position in the Materials Management Fund due to inventory purchases. The balance between the Capital Projects Fund and the General Fund reflects the funding of airport construction projects. The balance between the General Fund and Other Governmental Funds reflects the General Fund's support of the activities within those funds. Transfers between funds (in thousands) during the year were as follows: Transfers Out: Governmental Major Funds Business- Type Major Funds Capital Non-Major Internal General Projects Governmental Solid Service Transfers In: Fund Fund Funds Electric Water Wastewater Waste Funds Total Governmental Major Funds: General Fund $ $ 51 $ 243 $ $ $ $ $ 454 $ 748 Debt Service Fund 441 126 555 15 189 1,326 Capital Projects Fund 137 176 313 Non-Major Governmental Funds 582 45 75 110 57 56 29 954 Business- Type Major Funds: Wastewater 3 3 Internal Service Funds 647 647 Total $ 1,366 $ 492 $ 593 $ 75 $ 110 $ 612 $ 71 $ 672 $ 3,991 43 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 The more significant transfers include the following: Transfers from fund General fund Internal service funds-risk retention Wastewater fund Capital projects fund Internal service funds-tech services Other governmental funds Other governmental funds Transfers to fund Other governmental funds General fund Debt service fund Debt service fund Debt service fund Debt service fund General fund Amount $ 500,000 454,219 554,404 441,378 188,039 125,974 299,345 Transfers from the Wastewater Fund, Capital Projects Fund, Technology Services Fund, Other Governmental Funds to the Debt Service Fund are used to move revenues from the fund with collection authorization to the Debt Service Fund as debt service principal and interest payments become due. Transfers from the Risk Retention Fund to the General Fund reflect indirect cost transfers. Transfers from the General Fund to Other Governmental Funds reflect the anticipated funding of post-employment benefits. Transfers from Other Governmental Funds to the General Fund reflect indirect cost transfers. F. Leases Leases payable represent the remaining principal amounts payable under lease purchase agreements for the acquisition of equipment through the motor pool fund, an internal service fund. These leases are recorded as capital leases. Remaining requirements, including interest, under these leases are as follows: Year 2006 2007 2008 2009 2010 Payments $ 619~437 532~482 532~482 410~974 289~466 2,384,841 173~995 $2,210,846 Total minimum lease payments Less: amount representing interest Present value of minimum future lease payments 44 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 G. Long-term debt Long-term liabilities transactions for the year ended September 30, 2005, are summarized as follows below and on the following page: Balance at Balance at Octo ber 1, September 30, Due Within 2004 Increases Decreases 2005 One Year Governmental Activities: General obligation bonds $ 55,893,370 $12,427,434 $ 9,449,955 $ 58,870,849 $ 3,822,949 Certificates of obligation 40,540,162 5,575,000 4,323,574 41,791,588 3,251,588 Obligations under capital leases 1,244,678 1,604,035 637,867 2,210,846 542,110 Arbitrage payable 34,228 34,228 Compensated absences payable 6,981,978 3,049,686 3,099,127 6,932,537 2,842,340 Claims payable 1,803,000 914,797 914,797 1,803,000 610,000 Unamortized premium/( discounts) ( 11 , 11 7) 423,229 17,745 394,367 Unamortized deferred gain/(loss) (594,958) (86,465) (508,493) Total governmental long - term liabilities $106,486,299 $23,399,223 $18,390,828 $111,494,694 $11,068,987 Business-type Activities: Revenue bonds $293,105,000 $78,695,000 $90,680,000 $281,120,000 $12,330,000 General obligation bonds 2,046,630 2,040,000 182,479 3,904,151 322,051 Certificates of obligation 11,325,838 1,570,000 3,662,426 9,233,412 1,763,412 Arbitrage payable 6,315 5,097 1 ,218 Compensated absences payable 1,257,676 1,222,345 1,147,762 1,332,259 546,227 Note payable 3,141,222 3, 141 ,222 Landfill closure/post-closure costs 2,860,250 551,377 3,411,627 Unamortized premium/( discounts) 1,688,686 6,423,754 244,672 7,867,768 Unamortized deferred gain/(loss) (1,637,991) (7,768,938) ( 404,668) (9,002,261) Total business-type activities 313,793,626 82,733,538 95,517,768 301,009,396 14,961,690 T otallong - term liabilities $420,279,925 $106,132,761 $113,908,596 $412,504,090 $26,030,677 45 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 General bonded debt - General bonded debt at September 30, 2005, is comprised of the following: Gross Amount Original Outstanding at Interest Rate Final Amount September 30, Bonded Debt (%) Issue Date Maturity of Issue 2005 General obligation 5.4 to 7.4 1996 2012 $ 2,515,000 $ 115,000 General obligation 5.0 to 7.0 1997 2017 4,700,000 660,000 General obligation 5.25 to 5.25 1998 2018 9,660,000 6,265,000 General obligation 4. 1 to 5.0 1999 2019 8,215,000 5,740,000 General obligation refunding 3.2 to 5.0 1999A 2016 5,538,780 4,635,375 General obligation 5.25 to 6.125 2000 2020 3,750,000 1,135,000 General obligation 4.5 to 5.5 2001 2021 14,245,000 11,405,000 General obligation 5.0 to 5.25 2002 2022 12,075,000 11,180,000 General obligation refunding 3.0 to 4.75 2003 2023 7,233,065 5,365,474 General obligation refunding 2.5 to 5.0 2004 2020 7,370,000 7,370,000 General obligation 3.0 to 5.0 2005 2025 5,000,000 5,000,000 Total general obligation bonds 80,301,845 58,870,849 Certificates of obligation 5.0 to 7.0 1996 2010 189,954 6,588 Certificates of obligation 4.0 to 5.0 1998 2018 5,625,000 1,315,000 Certificates of obligation 4.1 to 5.0 1999 2019 5,926,273 4,135,000 Certificates of obligation 5.25 to 6.125 2000 2020 3,125,000 930,000 Certificates of obligation 4.25 to 5.25 2001 2021 10,400,000 5,295,000 Certificates of obligation 4.7 to 5.25 2002 2022 7,145,000 6,950,000 Certificates of obligation 3.0 to 4.75 2003 2023 5,650,000 5,055,000 Certificates of obligation 2.0 to 5.0 2004 2024 12,805,000 12,530,000 Certificates of obligation 3.0 to 4.375 2005 2025 5,575,000 5,575,000 Total certificates of obligation 56,441,227 41,791,588 Total general bonded debt $136,743,072 $100,662,437 [These amounts do not include net unamortized premiums/( discounts) of $394,367 nor net deferred gain/(loss) on refunding of ($508,493).] Proceeds of general bonded debt are restricted to the uses for which they were approved in the bond elections. The City Charter expressly prohibits the use of bond proceeds to fund operating expenses. The general obligations are collateralized by the full faith and credit of the City and, primarily, payable from property taxes. In prior years, the City defeased general obligation bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the City's financial statements. On September 30, 2005, $9,715,000 of general obligation bonds considered defeased are still outstanding, including the bonds related to the December 2004 refunding. 46 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 In May 2005, the City issued $7,145,000 in certificates of obligation and $5,000,000 of general obligation bonds. The debt was issued to pay the cost of various Capital Project improvements ($9,070,000) and proprietary fund capital improvements ($3,075,000). The bonds and obligations are payable over the next 20 years. Also in December 2004, the City issued $9,410,000 of general obligation refunding bonds. The reacquisition price exceeded the net carrying amount of the old debt by $667,148, of which $72,190 is reported in business- type activities. This amount is being amortized over the remaining life of the refunded debt, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 15 years by $632,399 and resulted in a net present value savings of $477,470. Revenue bonds - Revenue bond debt at September 30, 2005, is comprised of the following issues: Principal Net Net Original Outstanding at Unamortized Outstanding at Interest Rate Issue Final Amount September 30, Premium September 30, Revenue Bonds (%) Date Maturity of Issue 2005 (Discount) 2005 Utility system refunding 3.55 to 6.75 1993 2008 $ 6,045,000 $ 775,000 $ (1,469) $ 773,531 Utility system refunding 5.3 to 7.8 1996 2025 36,510,000 1,675,000 (8,220) 1,666,780 Utility system 5.3 to 7.4 1996 2017 2,750,000 245,000 245,000 Utility system 4.3 to 6.3 1998 2018 7,175,000 2,160,000 2,160,000 Utility system refunding 4.65 to 6.65 1998 2030 36,795,000 19,665,000 (229,851) 19,435,149 Utility system refunding 4.0 to 5.0 1998 2015 7,640,000 7,220,000 7,220,000 Utility system 4.974 to 6.0 2000 2020 54,880,000 20,035,000 21,254 20,056,254 Utility system 4.0 to 5.4 2001 2021 59,545,000 52,925,000 489,074 53,414,074 Utility system 4.25 to 5.0 2002 2022 56,710,000 51,255,000 301,362 51,556,362 Utility system 5.0 to 6.5 2002 2022 13,985,000 4,290,000 (12,385) 4,277,615 Utility system 3.625 to refunding 5.625 2003 2022 50,180,000 42,805,000 1,366,143 44,171,143 Utility system refunding 2.0 to 5.25 2004 2024 24,850,000 24,225,000 1,198,037 25,423,037 Utility system refunding 3.0 to 5.0 2005 2022 53,845,000 53,845,000 4,720,503 58,565,503 Total revenue Bonds $410,910,000 $281,120,000 $7,844,448 $288,964,448 [These amounts do not include net unamortized gain/Closs) on refunding of ($8,862,763).] 47 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Other enterprise obligations - General obligation bonds and certificates of obligation issued for solid waste fund at September 30, 2005, is comprised of the following: Gross Amount Interest Original Outstanding at Rate Issue Final Amount September 30, Other Obligations (%) Date Maturity of Issue 2005 General obligation refunding 3.2 to 5.0 1999 2016 $ 1,481,220 $ 1,239,625 General obligation refunding 3.0 to 4.75 2003 2023 846,935 624,526 General obligation refunding 2.5 to 5.0 2004 2015 2,040,000 2,040,000 Total general obligation bonds 4,368,155 3,904,151 Certificates of obligation 5.0 to 7.0 1996 2010 5,000,046 173,412 Certificates of obligation 4.25 to 5.25 2001 2021 3,845,000 1,650,000 Certificates of obligation 4.7 to 5.25 2002 2022 5,445,000 3,475,000 Certificates of obligation 3.0 to 4.75 2003 2023 1,755,000 1,255,000 Certificates of obligation 2.0 to 5.0 2004 2024 1,195,000 1,110,000 Certificates of obligation 3.0 to 4.375 2005 2025 1,570,000 1,570,000 Total certificates of obligation 18,810,046 9,233,412 Total other enterprise obligations $23,178,201 $13,137,563 [These amounts do not include net unamortized premiums/(discounts) of $23,320 nor net deferred gain/Closs) on refunding of ($139,498).] The revenue bonds are collateralized by the revenue of the Denton utility system funds (System) and the various special funds established by the bond ordinance. The ordinance provides that the revenue of the System is to be used first to pay operating and maintenance expenses of the System and second to establish and maintain the revenue bond funds. Any remaining revenues may then be used for any lawful purpose. The ordinance also contains provisions, which among other items restrict the issuance of additional revenue bonds unless the special funds noted above contain the required amounts and certain financial ratios are met. Management believes the City is in compliance with all significant requirements. Assets in these accounts consist of cash and u.S. government securities. Below is a summary of the various net asset balances in the funds required by the bond ordinance to be restricted for debt service. Interest and sinking fund Reserve fund Total restricted net assets restricted for debt service $11,664,832 16,705,149 $28,369,981 In prior years, the City defeased revenue bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the City's financial statements. On September 30, 2005, $32,995,000 of revenue bonds considered defeased are still outstanding, including the bonds related to the 2005 refunding. 48 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 In October 2004, the City issued $24,850,000 of revenue refunding bonds. The reacquisition price exceeded the net carrying amount of the old debt by $2,405,143. This amount is being amortized over the remaining life of the refunded debt, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 20 years by $2,997,965 and resulted in a net present value savings of $1,786,416. In June 2005, the City issued $53,845,000 of revenue refunding bonds. The reacquisition price exceeded the net carrying amount of the old debt by $5,291,605. This amount is being amortized over the remaining life of the refunded debt, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 20 years by $5,958,637 and resulted in a net present value savings of $3,125,999. Note payable In 1980, the City and the City of Dallas contracted with the Corps of Engineers for the construction and development of Ray Roberts Reservoir in Denton County. In contracts with the Corp of Engineers, the City will pay for twenty-six (26%) percent of the estimated water storage rights of the reservoir. Water obtained from the reservoir will be pro rata on the basis of each city's proportional share of total construction cost. The closing of the dam was completed in 1987 with water being available from the reservoir in 1989. Schedule of long-term debt maturities Aggregate maturities of the long-term debt (principal and interest) for the years subsequent to September 30, 2005, are shown below and on the following page: Governmental Activities: Fiscal Year 2006 2007 2008 2009 2010 2011-2015 2016-2020 2021-2025 Total General Obligation Principal Interest $ 3,822,949 $ 2,739,425 3,917,583 2,513,883 3,770,723 2,342,730 3,603,569 2,179,287 3,530,885 2,021,948 19,187,200 7,480,281 15,887,940 3,051,126 5,150,000 371,267 $58,870,849 $22,699,947 Certificates of Obligation Total Principal Interest $ 7,616,647 $ 4,655,214 7,196,782 4,222,960 7,118,079 3,929,219 6,927,940 3,637,934 6,723,695 3,351,183 29,552,200 12,581,928 25,887,940 5,856,433 11,850,000 993,545 $173,995 $102,873,283 $39,228,416 Capital Leases Principal Interest $ 542,110 $ 77,327 489,199 43,283 502,356 30,126 394,371 16,603 282,810 6,656 Principal $ 3,251,588 2,790,000 2,845,000 2,930,000 2,910,000 10,365,000 10,000,000 6,700,000 $41,791,588 Interest $ 1,838,462 1,665,794 1,556,363 1,442,044 1,322,579 5, 101 ,647 2,805,307 622,278 $16,354,474 $2,210,846 49 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Business- Type Activities: Fiscal Year 2006 2007 2008 2009 2010 2011-2015 2016-2020 2021-2025 2026-2030 Total Fiscal Year 2006 2007 2008 2009 2010 2011-2015 2016-2020 2021-2025 2026-2030 Total General Obligation Principal $ 322,051 482,417 449,277 471,431 474,115 1,607,800 97,060 Interest $142,982 130,088 115,145 100,124 83,630 197,255 2,427 Certificates of Obligation Principal Interest $ 1,763,412 $ 377,674 1,085,000 305,606 760,000 272,226 570,000 248,425 510,000 227,464 1,725,000 890,823 1,775,000 486,407 1,045,000 81,583 $9,233,412 $2,890,208 Total Principal Interest - $ 14,415,463 $ 14,319,467 17,728,639 13,483,338 15,069,277 12,759,912 14,976,431 12,008,805 15,434,115 11,232,781 75,962,800 45,158,026 87,567,060 25,213,681 44,130,000 7,144,135 12,115,000 1,616,297 - $297,398,785 $142,936,442 $3,141,222 $ Revenue Principal Interest $ 12,330,000 $ 13,798,811 13,020,000 13,047,644 13,860,000 12,372,541 13,935,000 11,660,256 14,450,000 10,921,687 72,630,000 44,069,948 85,695,000 24,724,847 43,085,000 7,062,552 12,115,000 1,616,297 $281,120,000 $139,274,583 $3,904,151 $771,651 50 [These amounts do not include net unamortized premium/( discount) of $8,262,135 nor net unamortized gain/Closs) on refunding of ($9,510,754).] Notes Payable Principal Interest $ $ 3, 141 ,222 Bonds authorized and unissued General obligation bonds authorized but unissued as of September 30, 2005, amounted to $41,867,000. When issued, the proceeds will be allocated to the applicable capital projects. H. Landfill closure and post-closure cost State and federal laws and regulations require the City to place a final cover on its Mayhill Road landfill site upon closure and to perform certain maintenance and monitoring functions at the site for thirty years after closure. Although closure and post-closure care costs will be paid only upon anticipated closure, the City reports a portion of these costs as an operating expense in each period based on landfill capacity used as of each balance sheet date. During the year, the City conducted an engineering study. As a result, total landfill closure and post-closure cost increased from $12,376,116 to $14,226,967 and increased this year's reported landfill closure and post-closure expense by $551,337. The $3,411,627 reported as landfill closure and post-closure care liability represents the cumulative amount incurred to date based on the use of 24% of the estimated capacity of the entire landfill at September 30, 2005. Based on this estimate, the remaining potential estimated liability for closure and post-closure care of the entire landfill is $10,815,340. The City will recognize the remaining estimated cost of closure and post-closure care as the remaining capacity is filled. These amounts are based on what it would cost to perform closure and post- closure care in 2005. Actual cost may fluctuate due to inflation, changes in technology, or changes in CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 regulations. The landfill has a remaining life of 29 years, and the City expects to close the landfill in fiscal year 2034. The solid waste fund has provided for a designation of cash and investments of $3,411,627 at September 30, 2005, and anticipates increasing the reserve in future periods as the closure and post-closure activities are carried out. v. OTHER INFORMATION A. Pension plans Texas Municipal Retirement Plan Plan description The City provides pension benefits for all of its full-time employees (except fire fighters) through a nontraditional, joint contributory, hybrid-defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), one of 801 administered by TMRS, an agent, multiple-employer, public employee, retirement system. Benefits Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City-financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have been contributed by the employee, with interest, prior to establishment of the plan. Monetary credits for service since the plan began are a percent (200%) of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contribution rate and City matching percent had always been in existence and if the employee's salary had always been the average of their salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions with interest and the employer-financed monetary credits with interest were used to purchase an annuity. Members can retire at ages 60 and above with five or more years of service or with 20 years of service regardless of age. A member is vested after five years. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Contributions The contribution rate for the employees is 7%, and the City matching ratio is currently 2 to 1, both as adopted by the governing body of the City. Under the state law governing TMRS, the actuary annually determines the city contribution rate. This rate consists of the normal cost contribution rate and the prior service contribution rate, both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to the City matching percent, which are the obligation of the City as of an employee's retirement date, not at the time the employee's contributions are made. The normal cost contribution rate is the actuarially determined percent of payroll necessary to satisfy the obligation of the City to each employee at the time a retirement becomes effective. The prior service contribution rate amortizes the unfunded actuarial liability over the remainder of the plan's 25-year amortization period. The unit credit actuarial cost method is used for determining the City contribution rate. Both the employees and the City make contributions monthly. 51 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Three-Year Trend Information for TMRS Funding Year Ending Annual Required Contribution (ARC) Actual Contributions Percent Contributed 12/31/04 $8,707,103 $8,707,103 100% 12/31/03 $8,313,904 $8,313,904 100% 12/31/02 $8,387,271 $8,387,271 100% Actuarial Assumptions 12/31/04 Actuarial cost method Amortization method Remaining amortization period Asset valuation method Investment rate of return Projected salary increases Includes inflation at Cost-of-living adjustments Unit Credit Level Percent of Payroll 25 Years - Open Period Amortized Cost 7% 5% 3.5% None The City of Denton is one of 801 municipalities having the benefit plan administered by TMRS. Each of the 801 municipalities has an annual, individual actuarial valuation performed. All assumptions for the December 31, 2004, valuations are contained in the 2004 TMRS Comprehensive Annual Financial Report, a copy of which may be obtained by writing to P.O. Box 149153, Austin, Texas 78714-9153. Fireman's Relief and Retirement Plan The City provides pension benefits for all Civil Service employees of the Fire Department through a defined contribution plan. The Board of Trustees of the Denton Fireman's Relief and Retirement Fund (the Plan) is the administrator. The Plan is not considered a part of the City of Denton entity. In a defined contribution plan, benefits depend solely on amounts contributed to the Plan plus investment earnings. The Texas Local Firefighter's Retirement Act (TLFFRA) authorizes the benefit provisions of the Plan. TLFFRA provides the authority and procedure to amend benefit provisions. Under the Plan, an employee becomes fully vested after ten years of credited service. The Plan provides service retirement, death, disability, and withdrawal benefits. Employees may retire at age 50 with twenty years of service. The Plan provides a monthly normal service retirement benefit, payable in a Joint and Two-thirds to Spouse form of annuity, equal to 2.3% of highest 36-month average salary for each whole year of service. City contributions for, and interest forfeited by, employees who leave employment before vesting are redistributed to plan participants. F or the Plan in effect through December 31, 2004, the funding policy required contributions equal to 12% of pay by the fire fighters and 10% by the City of Denton. During the year, the City and employees made the required contributions of $829,269 and $995,123, respectively. 52 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 B. Deferred compensation plan The City offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan, available to all permanent City employees, permits them to defer, until future years, up to 25% of annual gross earnings not to exceed $14,000. Employees who are within three years of retirement may elect to participate in a catch-up provision allowed by Section 457, which has an annual maximum contribution amount of $28,000. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. All amounts of compensation deferred under the plan, all property and rights purchased with those amounts, and all income attributable to those amounts, property or rights are, until paid or made available to the employee or other beneficiary, solely the property and rights of the employees. Accordingly, the assets and associated liability of the plan are not included in the City's financial statements. It is the opinion of the City's legal counsel that the City has no liability for losses under the plan. C. Self-insurance plan The City has established a self-insurance plan for workers' compensation benefits and general liability. Employee health insurance is a fully-insured plan. Accrued claims payable include provisions for claims reported and claims incurred but not reported. The provision for reported claims is determined by estimating the amount, which will ultimately be paid each claimant. The provision for claims incurred but not yet reported is estimated based on the City's experience. The costs associated with the self-insurance plan are reported as interfund transactions. Accordingly, they are treated as operating revenues of the Internal Service Risk Retention Fund and operating expenditures (expenses) of the other funds. Workers' compensation and general liability insurance It is the policy of the City of Denton not to purchase commercial insurance for workers' compensation claims or general liability. Commercial liability insurance coverage is purchased for public officials, airport operations, emergency medical services, take-home vehicles, employee theft and dishonesty. Additionally, excess insurance is purchased for general liability and workers' compensation exposure. The City reports liabilities when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Because actual claims liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claims liability does not necessarily result in an exact amount. Claims liabilities are re-evaluated periodically to take into consideration settlement of claims, new claims and other factors. As of September 30, 2005, the estimated value of these liabilities was $1,803,000. Changes in balances of claims liabilities during fiscal years 2005 and 2004 were as follows: 53 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Claims Liability Claims and Claims Liability Beginning of Change in Claims End of Fiscal Year Estimates Payments Fiscal Year Workers' Compensation 2005 $1,450,000 $518,915 $518,915 $1,450,000 2004 1,450,000 860,236 860,236 1,450,000 General Liability 2005 $ 353,000 $395,882 $395,882 $ 353,000 2004 353,000 151,967 151,967 353,000 On September 30, 2005, the City of Denton held net assets of $1,401,716 in the Risk Retention Fund for payment of claims. There were no significant reductions in insurance coverage from coverage in the prior year, and the amount of settlements did not exceed insurance coverage in the current year or in any of the past three fiscal years. D. Commitments and contingencies Agreement with TMP A In 1976, the City, along with the cities of Bryan, Greenville, and Garland, Texas (the Cities) entered into a Power Sales Contract with the Texas Municipal Power Agency (TMP A). TMP A was created through concurrent ordinances of the Cities and is governed by a Board of Directors consisting of eight members, two appointed by the governing body of each city. Under the terms of the agreement, TMP A agreed to construct or acquire electric generating plants to supply energy and power to the Cities for a period of not less than 35 years. The Cities in turn agreed to purchase all future power and energy requirements in excess of the amounts generated by their systems from TMP A at prices intended to cover operating costs and retirement of debt. In the event that revenues are insufficient to cover all costs and retire the outstanding debt, each of the Cities has guaranteed a portion of the unpaid debt based, generally, upon its pro rata share of the energy delivered to consumers in the prior operating year. As of September 30,2005, total TMPA long-term debt outstanding was approximately $1,120,231,000, and the City's percentage was approximately 21.3 %. In the opinion of management, the possibility of a material payment in the near future under this guarantee is remote in that TMP A is generating operating profits and assets exceed liabilities. TMPA operates a 452-megawatt, lignite-fueled generating plant. In 1996, TMPA switched to an external source of lignite to reduce costs. Should TMP A be dissolved, each city would be entitled to an undivided interest in the property. 54 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Selected financial statement information of TMP A is as follows: September 30 (Unaudited) 2005 2004 Operating revenues Operating expenses Operating income Other non-operating sources Current assets Total assets Long-term debt T otalliabilities Total equity (OOOs) $ 234,871 98,050 136,821 4,120 56,539 1,284,353 1,120,231 1,249,909 34,444 (OOOs) $ 225,689 100,624 125,065 2,220 57,220 1,332,334 1,176,803 1,300,316 32,018 Agreement with the City of Dallas During 1985, the City entered into an agreement with the City of Dallas that provides for the purchase of a minimum of 500,000 gallons/day of untreated water from the City of Dallas from Lake Lewisville. This contract will be effective for 30 years. The cost of water purchased under this agreement during fiscal year 2005 was $66,779. E. Litigation Various claims and lawsuits are pending against the City. In accordance with GAAP, those judgments considered "probable" are accrued, while those claims and judgments considered "reasonably possible" are disclosed but not accrued. In the opinion of City management and legal counsel, the maximum amount of all significant claims considered reasonably possible, excluding condemnation proceedings, is approximately $500,000 as of September 30, 2005. Potential losses after insurance coverage on all probable claims and lawsuits will not have a material effect on the City's financial position as of September 30, 2005. **** 55 APPENDIX C FORM OF BOND COUNSEL'S OPINIONS Proposed Form of Opinion of Bond Counsel An opinion in substantially the followingform will be delivered by McCall, Parkhurst & Horton LoLoPo, Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or lawo CITY OF DENTON GENERAL OBLIGATION BOND, SERIES 2006 DATED JULY 15, 2006 IN THE PRINCIPAL AMOUNT OF $3,695,000 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 registered 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 February 15, 2007, and semiannually on each August 15 and February 15 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, 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 Ordinance"), 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 specimen of the form for Definitive Bonds initially made available by the Issuer for completion 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 Definitive Bonds have been duly authorized, and the Initial Bond has been duly issued and delivered, all in accordance with law, and that, except as may be limited by laws applicable to the Issuer relating to bankruptcy, reorganization, and other similar matters affecting creditors' rights, the Initial Bond constitutes and the Definitive Bonds will constitute valid and legally binding obligations of the Issuer; and that ad valorem taxes sufficient to provide for the payment of the interest on and principal of the Initial Bond and Definitive Bonds have been levied and pledged for such purpose, within the limit prescribed by law. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on 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 "specified 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 certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may 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 Bonds, is 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. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Bonds. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. Respectfully, 2 Proposed Form of Opinion of Bond Counsel An opinion in substantially the followingform will be delivered by McCall, Parkhurst & Horton LoLoPo, Bond Counsel, upon the delivery of the Certificates, assuming no material changes in facts or lawo CITY OF DENTON CERTIFICATE OF OBLIGATION, SERIES 2006 DATED JULY 15, 2006 IN THE PRINCIPAL AMOUNT OF $12,665,000 AS BOND COUNSEL for the City of Denton, in Denton County, Texas (the "Issuer"), we have examined into the legality and validity of the issue of Certificates of Obligation initially evidenced by the certificate described above (the "Initial Certificate"), which Initial Certificate originally has been issued and delivered as a single fully registered certificate, without interest coupons, with the principal amount thereof payable as set forth in the Initial Certificate, and with the unpaid balance of each installment of principal, respectively, bearing interest, calculated on the basis of a 360-day year composed of twelve 30-day months, from the date of the Initial Certificate to the scheduled due date ("maturity") of each installment of principal, at the rates per annum for each maturity, set forth in the Initial Certificate with interest payable on February 15, 2007, and semiannually on each August 15 and February 15 thereafter, and with the then outstanding principal of the Initial Certificate being subject to prepayment or redemption, as a whole or in part, prior to scheduled maturity, in accordance with the terms and conditions stated on the face of the Initial Certificate. The Initial Certificate may, at the request of the registered owner, be transferred and converted into, and/or exchanged for, fully registered certificates, without interest coupons, in the denomination of $5,000 or any integral multiple of $5,000, and such certificates 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 Certificate (the "Certificate Ordinance"), with any such certificates which are registered, authenti- cated, and delivered in accordance with the Certificate Ordinance being hereinafter called "Definitive Certificates" . 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 Certificate and Definitive Certificates and the issuance and delivery of the Initial Certificate, including the executed Initial Certificate and a specimen of the form for Definitive Certificates initially made available by the Issuer for completion and exchange for the Initial Certificate; 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 Certificate and Definitive Certificates have been duly authorized and the Initial Certificate 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 Certificate Ordinance constitute valid and binding obligations of the Issuer, and the Initial Certificate constitutes and Definitive Certificates (collectively, the "Certificates") will constitute valid and legally binding obligations of the Issuer, which, together with the interest thereon, and together with other parity obligations of the Issuer, are payable from and secured by (i) annual ad valorem taxes, within the limit prescribed by law, levied on all taxable property within the Issuer, and (ii) certain surplus revenues (not to exceed $10,000 in aggregate amount) derived by the Issuer from the ownership and operation of the City's Utility System (consisting of the City's combined waterworks system, sanitary sewer system, and electric light and power system), all as provided in the Certificate Ordinance. THE ISSUER has reserved the right to issue, in accordance with law, and in accordance with the Certificate Ordinance, other and additional obligations, and to enter into contracts, payable from ad valorem taxes and/or revenues of the City's Utility System, on a parity with, or with respect to said revenues, superior in lien to, this Certificate. THE ISSUER also has reserved the right, subject to the restrictions stated in the Certificate Ordinance, to amend the Certificate Ordinance with the approval of the holders or owners offifty-one percent in principal amount of all outstanding Certificates which are payable from and secured by certain surplus revenues. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Certificates 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 Certificates are not "specified private activity bonds" and that, accordingly, interest on the Certificates 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 certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Certificates and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Certificates may become includable in gross income retroactively to the date of issuance of the Certificates. WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as the Certificates, is 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. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Certificates. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Certificates as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Certificates, nor as to any such insurance policies issued in the future. 2 OUR SOLE ENGAGEMENT in connection with the issuance of the Certificates is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Certificates for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Certificates, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Certificates. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. Respectfully, 3 AGENDA INFORMATION SHEET AGENDA DATE: July 18,2006 DEPARTMENT: Fiscal Operations ACM: Jon Fortune SUBJECT Consider adoption of an ordinance authorizing the issuance, sale, and delivery of City of Denton Utility System Revenue Bonds ($8,515,000), Series 2006; approving and authorizing instruments and procedures relating thereto; and providing an effective date. BACKGROUND This ordinance authorizes the issuance, sale and delivery of Utility System Revenue Bonds (Revenue Bonds) in the amount of $8,515,000 to fund capital improvements for Electric System infrastructure. The amount includes the necessary deposit into the debt service reserve fund and cost of issuance. Following a comprehensive analysis on the Utility System's financial outlook and stability, the City has obtained favorable bond ratings on these Bonds from both Standard and Poor's and Moody's Investor Services. The ratings are summarized below: Utility System Revenue Bonds ($8~515~000)~ Series 2006 . Standard and Poor's A+ . Moody's Al These Bonds will be sold through a competitive bid process following the guidelines established in the City's Debt Service Management Policy [Section 403.07 XII (A)]. All bids on these Bonds must be delivered to the City prior to 11 :00 a.m., on July 18th. Award of the sale to the successful bidder will occur at the Special Called City Council meeting on July 18, 2006 at 11 :30 a.m. The agenda information packet includes a binder that provides various documents as it relates to the issuance of the Revenue Bonds. The binder includes the rating reports from Standard and Poor's and Moody's, blank bid tabulation forms, a summary of historical bond sales and rates, bidding instructions and Preliminary Official Statements. I am providing this information to allow you ample time to review it prior to the sale. However, please be aware that information as it relates to the bids submitted and interest rates will not be available until the bidding period closes on July 18. Following the award of the bid by the City Council, the interest rates and information from the successful bidder will be included in the Preliminary Official Statement making it final. Agenda Information Sheet July 18, 2006 Page 2 Additional information is provided (not in binder) that includes the Ordinance to issue the Bonds and a Paying Agent/Registrar Agreement. PRIOR ACTION/REVIEW (Council.. Boards.. Commission) The projects funded from the Revenue Bonds were approved by the Public Utility Board and the City Council, in the Capital Improvement Program (CIP), fiscal year ending 2005-2009. FISCAL INFORMATION An estimated debt service schedule is included on page 42 in the Preliminary Official Statement attached. The estimated average annual debt service payment, including principal and interest, will total approximately $660,000. This payment is anticipated and included in the Utility System long-range financial pro forma. EXHIBITS Ordinance Paying Agent/Registrar Agreement Information included in Binder: Rating Agency Reports Blank Bid Tabulation Forms Historical Bond Sales and Rates Bidders Instruction Forms Preliminary Official Statements Respectfully submitted: ,.~ ~ r. . ~ . " .. ~ ~_. - '" ,- ~\ . . . Jon Fortune Assistant City Manager ORDINANCE NO. 2006.._ ORDINANCE AUTHORIZING THE ISSUANCE, SALE, AND DELIVERY OF CITY OF DENTON UTILITY SYSTEM REVENUE BONDS, SERIES 2006, AND APPROVING 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 Refunding Bonds, Taxable Series 1993-8, 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 2000A, 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 Aprill, 2002; City of Denton Utility System Revenue Bonds, Taxable Series 2002B, dated April 1, 2002; City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2003, dated Aprill,2003; City of Denton Utility System Revenue Refunding Bonds, Series 2004, dated September 1, 2004; and City of Denton Utility System Revenue Refunding Bonds, Series 2005, dated May 15,2005; and WHEREAS, the Series 2006 Bonds hereinafter authorized and described are to be issued, sold and delivered pursuant to Chapters 1502, Texas Government Code, the Cityls 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 ttIssuern) are hereby authorized to be issued and delivered in the aggregate principal amount of $8,515,000, for the purpose of (a) funding capital improvements for the City, to wit: (i) electric system transmission and distribution facilities, (ii) miscellaneous water system improvements, (iii) sewer system improvements, including collection lines, lift stations, a water reclamation plant and interceptor and reuse line and (iv) drainage system improvements, including the acquisition of land; (b) make a deposit to the System debt service reserve fund; and (c) pay the costs of issuance of the Bonds.. Section 2. DESCRIPTION OF THE BONDS. (a) With respect to the Series 2006 Bonds, initially there shall be issued, sold, and delivered hereunder a single fully registered bond, without interest coupons, payable in installments of principal (the "Initial Series 2006 Bond"), but the Initial Series 2006 Bond may be assigned and transferred and/or converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, having serial maturities, and in the denomination or denominations of$S,OOO or any integral multiple of$5,000, all in the manner hereinafter provided~ The term nSeries 2006 Bonds" as used in this Ordinance shall mean and include collectively the Initial Series 2006 Bond and all substitute bonds exchanged therefor, as well as all other substitute bonds and replacement bonds issued pmsuant hereto, and the term "Series 2006 Bond" shall mean any of the Series 2006 Bonds.. (b) The term t'Initial Bondtt as used in this Ordinance shall mean and include collectively the Initial Series 2006 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, NUMBE~ MATURITIES, INITIAL REGISTERED OWNER, AND CHARACTERISTICS OF THE INITIAL BOND~ (a) The Initial Series 2006 Bond is hereby authorized to be issued, sold, and delivered hereunder as a single fully registered Bond, without interest coupons, dated July 15, 2006, in the denomination and aggregate principal amount of$8,515,000 numbered R-I, payable in annual installments of principal to the initial registered owner thereof, to-wit: [INITIAL PURCHASER] or to the registered assignee or assignees of said Bond or any portion or portions thereof (in each case, the nregistered owner"), with the annual installments of principal of the Initial Series 2006 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 2006 Bond (i) may and shall be prepaid or redeemed prior to the respective sched1l:led due dates of installments of principal thereof, (ii) may be assigned and transferre~ (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 2006 Bond shall be payable, all as provided, and in the manner required or indicated, in the FORM OF INITIAL SERIES 2006 BOND set forth in this Ordinance~ Section 4. INfEREST. The unpaid principal balance of the Initial Series 2006 Bond shall bear interest from the date of each Initial Series 2006 Bond to the respective scheduled due dates, or to the respective dates of prepayment or redemption, of the installments of principal of the Initial Series 2006 Bond, 2 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 2006 BOND set forth in this Ordinance.. Section 5~ FORM OF INITIAL SERIES 2006 BOND.. The form of the Initial Series 2006 Bond, including the form of Registration Certificate of the Comptroller of Public Accounts of the State of Texas to be endorsed on the Initial Series 2006 Bond, shall be substantially as follows: FORM OF INITIAL SERIES 2006 BOND NO.. R-l $8,515,000 UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON UTILITY SYSTEM REVENUE BOND SERIES 2006 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 Uregistered owner") the aggregate principal amount of $8,515,000 (EIGHT MILLION FIVE HUNDRED FIFTEEN 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 RA TE(%) YEAR AMOUNT RA TE(%) 2006 $ 305,000 2016 $ 415,000 2007 270,000 2017 440,000 2008 285,000 2018 460,000 2009 295,000 2019 485,000 2010 310,000 2020 505,000 2011 325,000 2021 530,000 2012 345,000 2022 560,000 2013 360,000 2023 585,000 2014 380,000 2024 615,000 2015 400,000 2025 645,000 3 Interest shall first be due and payable on December 1, 2006, 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 lawful 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 the Dallas, Texas corporate trust office of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, which is the "Paying AgentIRegistrar" 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 AgentIRegistrar for such purpose as hereinafter provided; and such check shall be sent by the Paying AgentIRegistrar 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 Daten) 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!1 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 ffSpecial Record Date") will be established by the Paying AgentIRegistrar, 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 AgentIRegistrar at the close of business on the 15th business day next preceding the date of mailing of such notice. IF lEE 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 AgentIRegistrar 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 $8,515,000 for the purpose of (a) funding capital improvements for the City, to wit: (i) electric system transmission and distri~ution facilities, (ii) miscellaneous water system improvements, (iii) sewer system improvements, including collection lines, lift stations, a water reclamation plant and interceptor and reuse line and (iv) drainage system improvements, including the acquisition of land; (b) make a deposit to the System debts service reserve fund; and (c) pay the costs of issuance of the Bonds~ ON DECEMBER 1, 2016, 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 4 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. A T 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 oopaid or unredeemed principal balance hereof, or any unpaid and unredeemed portion hereofin 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, upon 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 instruments of assignment satisfactory to the Paying AgentJRegistrar 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 AgentJRegistrar in conversion of and exchange for this Bond or any portion or portions hereo~ 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 AgentJRegistrar 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 ~ A.S PROVIDED above and in the Bond Ordinance, this Bond, to the extent of the unpaid or wrredeemed 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,OOO (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 fonn 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 mte applicable to and 5 borne 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 ofbusiness 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 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 Bond 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 Bond9 IT IS HEREBY certifie~ 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 performed, 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 9 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 frrst lien 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 governing 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.. 6 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 July 15,2006. ATTEST: CITY OF DENTON, TEXAS By: Jennifer Walters City Secretary, City of Denton, Texas By: Perry R~ McNeill Mayor, City of Denton, Texas (CITY SEAL) (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 ACCOWlts of the State of Texas. Witness my signature and seal this Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) Section 6. ADDITIONAL CHARACTERISTICS OF THE BONDS. Registration and Transfer. (a) The Issuer shall keep or cause to be kept at the Dallas, Texas, corporate trust office of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION (the "I:'aying Agent/RegistrarU) 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 ~uch 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 AgentIRegistrar shall keep the Registration Books confidential and, unless otherwise required by law, shall not permit their inspection by any other entity. Registration of each 7 Bond may be transferred in the Registration Books only upon presentation and surrender of such Bond to the Paying AgentJRegistrar for transfer of registration and cancellation, together with proper written instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying AgentJRegistrar, 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 copversion and exchange therefor in the manner herein provided. The Initial Bon~ to the extent of the Wlpaid or unredeemed principal balance thereof, may be assigned and transferred by the initial registered owner thereof once only, and to one or more assignees designated in writing by the initial 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 (subj ect to the requirement hereinafter stated that each substitute Bond shall have a single stated principal maturity date), shall be in the form prescribed in the FORM OF SUBSTITUTE SERIES 2006 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 AgentJRegistrar 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 exchanged; 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 du1y 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 of a Bond. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer and delivery of a 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 AgentJRegistrar 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 ) Ownershio of Bonds. The entity in whose name any Bond shall be registered 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 AgentJRegistrar shall not be affected by any notice to the contrary; and payment of, or on account of, the principal o~ premiwn, if any, and interest on any such Bond shall be made only to such registered owner.. All such 8 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 further 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 AgentJRegistrar 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 n 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.. (d) Conversion and Exchange or Replacement: Authentication~ 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 2006 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 amolUlt 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 exchanged9 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 r~quest of the registered owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the registere~ 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 Bond9 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 replaced9 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 9 substitute Bond so authenticated after such first scheduled Record Date shall bear interest from the interest payment date next preceding the date on which such substitute Bond was so authenticated, 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: "PAYING 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 of Public Accounts of the State ofTexas~ JPMORGAN CHASE BANK, NATIONAL ASSOCIA TION, 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 any Bond or portion thereo~ 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 AgentfRegistrar's Authentication Certificate, the converted and exchanged or replaced Bond shall be valid, incontestable, and enforceable 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 Agent/Registrar's standard or customary fees and charges for transferring, converting, and exchanging any Bo~d 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 next following principal or interest payment date, Of, (ii) with respect to any Bond or portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date9 10 ( e) In GeneraL All Bonds issued in conversion and exchange or replacement of any other Bond or portion thereot (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 provide<L and in the manner required or indicated, in the FORM OF SUBSTITUTE SERIES 2006 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 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 Paving AgentlRegistrar. 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, fmancial 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 AgentIRegistrar upon not less than 120 days written notice to the Paying AgentIRegistrar, 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 otherwise 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 thereot), 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 AgentIRegistrar 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 AgentJRegistrar .. Section 7 ~ FORM OF SUBSTITUTE SERIES 2006 BOND~ The form of all Series 2006 Bonds issued in conversion and exchange or replacement of any other Series 2006 Bond or portion thereof: including the fonn of Paying Agent/Registrar's Certificate to be printed on each of such Series 2006 Bonds, and the F onn of Assignment to be printed on each of the Series 2006 Bonds, shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are pennitted or required by this Ordinance~ 11 FORM OF SUBSTITUTE SERIES 2006 BOND NO.. UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF DENTON UTILITY SYSTEM REVENUE BOND SERIES 2006 PRINCIPAL AMOUNT $ INTEREST RATE MA TURITY DATE ORIGINAL DATE OF ISSUE CUSIP NO.. % July 15, 2006 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 ~ or to the registered assignee hereof (either being hereinafter called the "registered ownertt) the principal amount of and to pay interest thereon from July 15,2006, to the maturity date specified above, or the date ofredemption prior to maturity, at the interest rate per annum specified above; with interest being first due and payable on December 1, 2006, and semiarmually on each June 1 and December 1 thereafter, except that if the date of authentication of this Bond is later than the frrst 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 defmed) 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 lawful 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 Dallas, Texas, corporate trust office of JPMORGAN CHASE BANK., NA TIONAL ASSOCIATION, which is the "Paying Agent/Registrar" for this Bond. The payment of inter est 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, ~ds 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, frrst~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 such 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 12 for redemption and payment at the principal corporate trust office of the Paying AgentJRegistrar. The Issuer covenants with the registered owner of this Bond that on or before 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 Pundt! 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 (n 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. 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 is one of a series of Bonds initially dated July 15,2006, authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of $8,515,000 for the purpose of ( a) funding capital improvements for the City, to wit: (i) electric system transmission and distribution facilities, (ii) miscellaneous water system improvements, (iii) sewer system improvements, including collection lines, lift stations, a water reclamation plant and interceptor and reuse line and (iv) drainage system improvements, including the acquisition of land; (b) make a deposit to the System debt service reserve fund; and (c) pay the costs of issuance of the Bonds. ON DECEMBER 1, 2016, 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 fimds derived from any available and lawful source, as a whole, or in part, an~ 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 thereot plus accrued interest to the date fixed for redemption. A T LEAST 30 days prior to the date fIXed for any redemption o.fBonds 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 ~uch 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 13 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 AgentJRegistrar out of the funds provided for such payment.. If a portion of any Bond shall be redeemed, a substitute Bond or Bonds having 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 thereot will be issued to the registered owner upon the surrender thereoffor cancellation, at the expense of the Issuer, all as provided in the Bond Ordinance. THIS BOND OR ANY PORTION OR PORTIONS HEREOF IN ANY INTEGRAL MULTIPLE OF $5,000 may be assigned and shall be transferred only in the Registration Books of the Issuer kept by the Paying AgentJRegistrar acting in the capacity of registrar for the Bonds, upon the tenns 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 instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying AgentJRegistrar, 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 fonn 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 AgentJRegistrar in conversion of and exchange for this Bond, all in the fonn and manner as provided in the next paragraph hereof for the conversion and exchange of other Bonds. The Issuer shall pay the Paying AgentJRegistrar's standard or customary fees and charges for making such transfer, 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 this Bond or any portion hereof (i) during the period commencing with the close ofbusiness on any Record Date and ending with the opening ofbusiness 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 AgentJRegistrar shall not be affected by any notice to the contraty. 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 re"quest 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 bearing interest at the same rate, in any denomination or denominations in any integral multiple of$5,OOO 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 AgentJRegistrar's standard or customary fees and charges for transferring, converting, and exchanging any Bond or any portion thereot: but the one requesting such transfer, conversion, and exchange shall pay any taxes or govennnentaI 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 maturity, within 45 days prior to its redemption date. 14 IN THE EVENT any Paying AgentJRegistrar 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 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 performed, 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 frrst lien on and pledge of the "Pledged Revenues", which include initially the "Net Revenues of the System", as such tenns 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 frrst 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 first lien 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 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.. 15 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: Jennifer Walters City Secretary, City of Denton, Texas By: Perry R. McNeill Mayor, City of Denton, Texas (CITY SEAL) FORM OF PAYING AGENTIREGISTRAR'S AUTHENTICATION CERTIFICATE PAYING AGENTIREGISTRAR'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 of Public Accounts of the State ofTexas~ JPMORGAN CHASE BANK, NATIONAL ASSOCIATION Paying AgentIRegistrar Dated By Authorized Representative (BOND INSURANCE LEGEND, IF ANY) 16 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 typewrite Assignee's name and address, including zip code) and hereby irrevocably constitutes and appoints attorney to transfer the registration of this Bond on the Paying AgentIRegistrarfs Registration Books with full power of substitution in the premises9 Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by an eligible guarantor 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 Bond in every particular without alteration or enlargement or any change whatsoever9 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 COWlty, Texas. (b) The term "City Council" or ttCouncil" shall mean the governing body of the City. (c) The term "Bonds" shall mean collectively the Initial Bond as defmed 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 Refunding Bonds, Taxable Series 1993- B, authorized by ordinance passed on June 8, 1993 (the" Series 1993 - B Bonds"), (ii) the outstanding City of Denton Utility System Revenue Bonds, Series 1996, authorized by an ordinance passed on May 7, 1996 (the "Series 1996 Bonds"), (iii) 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"), (iv) the outstanding City of Denton Utility System Revenue Bonds, Series 1998, authorized by an ordinance passed on March 24, 1998 (the "Series 1998 Bonds"), (v) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 1998A, authorized by an 17 ordinance passed on July 21, 1998 (the nSeries 1998A Bonds"), (vi) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 1998B, authorized by an ordinance passed on August 4, 1998 (the "Series 1998B BondsU), (vii) the outstanding City of Denton Utility System Revenue Bonds, Series 2000A, authorized by an ordinance passed on April 25, 2000 (the "Series 2000A Bondslt), (viii) the outstanding City of Denton Utility System Revenue Bonds, Taxable Series 20008, authorized by an ordinance passed on April 25, 2000 (the "Taxable Series 2000B Bondsn), (ix) the outstanding City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2001, authorized by an ordinance passed on April!7, 200 1 (the "Series 2001 Bondslt), (x) the outstanding City of Denton Utility System Revenue Bonds, Series 2002A, authorized by an ordinance passed on April 9, 2002 (the "Series 2002A Bonds"), (xi) 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") (xii) the outstanding City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2003, authorized by an ordinance passed on Aprill, 2003 (the "Series 2003 Bonds"), (xiii) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 2004, authorized by an ordinance passed on September 7, 2004 (the "Series 2004 Bonds"), (xiv) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 2005, authorized by an ordinance passed on May 24, 2005 (the "Series 2005 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 future, in accordance with Section 26 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, 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 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 tt Special F acUities Bonds" . (g) The terms "Gross Revenues of the System" and tTGross Revenuestl 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 th.e investment or deposit of money in any Fund created by this Ordinance~ (h) The terms "Net Revenues of the ~ystem", 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 necessaty 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, 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 18 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 ttPledged Revenueslt 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. G) 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 (i) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America., (ii) noncallable obligations of an agency or instrumentality of the United States of America, ine 1 uding obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date of the purchase thereof are rated as to investment quality by a nationally recognized investment rating fIrm not less than AAA or its equivalent, and (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the District adopts or approves the proceedings authorizing the financial arrangements are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent (1) thereto. "Drainage Systemn means the City's entire existing drainage systein and all facilities related (m) "Rate Stabilization FlUld" means the City's separate Rate Stabilization Fund established for the purpose of stabilizing rates for mtepayers. 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 Refimding 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 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~ 19 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")9 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 first charge against same9 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 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 fimd to be entitled the nCity 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 JPMorgan Chase Bank, 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 uCity of Denton Utility System Bonds and Additional Bonds Reserve Fund" (the ttReserve Fundn)~ 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 Food available for such payment are insufficient for such purpose, and may be used for the purpose of fma11y 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 ftExtension 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 fimds 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 ofpaying 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 avaiIable~ 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 159 DEPOSITS OF PLEDGED REVENUES~ Pledged Revenues shall be credited to or deposited in the Interest and Sinking Fund, the Reserve Food, the Extension and Improvement FuntL and other funds when and as required by this Ordinance and any ordinance authorizing the issuance of Additional Bonds. 20 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 defmed 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 Americ~ 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 Treaswy Obligations--State and Local Govermnent Series investments held in book entry 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 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 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 SYSTEMFUND~ 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 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, 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 21 chosen for mandatory redemption on such mandatoI)' 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 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, the Taxable Series 20028 Bonds, the Series 2003 Bonds, the Series 2004 Bonds, and the Series 2005 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,OOO,OOO~ Immediately after the issuance and delivery of the Initial 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. After 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 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 swn equal to 1/6Oth 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 Fun~ from Pledged Revenues in the Syste~ Fund, an amount equal to 8% of the "Adjusted Gross Revenues of the SystemU, 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 the Extension and Improvement Fund as permitted by Section 23(b) hereof, but no such additional deposit is 22 required~ All investment interest income from the Extension and Improvement Fund shall be retained in and remain a part of such Food. Section 22. RATE STABILIZATION 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 AmoWlt 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 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 transferred 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 Revenues~ (b) Subject to making the required deposits to the credit of the various Foods 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, 2006, 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. Section 25~ FINAL DEPOSITS. (a) Any Parity Bond or Additional Bond shall be deemed to be paid, retire~ 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, (I) 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 23 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 from 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, maturing 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 right and power at any time and from time to time, and in one or more series or issues, to authorize, issue, and deliver additional parity revenue bonds (herein called "Additional Bondsn), in accordance with law, in any amounts, for any lawful purpose, including the refunding 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 from and secured by an irrevocable frrst 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 principal of 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 default 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 accountant, 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 I8-month period immediately preceding the month in which the ordinance authorizing the issuance of the then proposed Additional Bonds is passed, the Pledged Revenues were at least (i) L25 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 whi~h 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 periodff) then the certified public accountant, or in lieu of the certified public accountant a flfDl of consulting engineers, shall detennine 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 increased rates or charges had been in effect during the entire period. 24 ( 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 applicable 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 faithfully 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 payor 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 cany out, respect, or enforce the covenants and obligations ofthis Ordinance, or any ordinance authorizing the issuance of Additional Bonds. by all legal and equitable means, including specifi cally, 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 Le~al Authority. The City is a duly created and existing home rule 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 title to the lands, buildings, structures, and facilities constituting the System. that it warrants that it will defend 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 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) Liens. 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 supplies 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 of a mechanic'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. 25 ( e) Oneration 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~ (t) 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 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 from a subordinate lien on surplus Pledged Revenues is specifically recognized and retained, as pennitted under Section 23(b) hereof~ (g) Sale.. Lease or DisDOSal ofProoertv. 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, demo lish, 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 (8) the proceeds of such sale are $250,000 or less, or the City Council shall detennine, 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 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) othenvise 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 ot: or make arrangements for the use ot: 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 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, 26 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, frre 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 insurance. 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 cany 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 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 pwpose, 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 pwpose, 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) 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 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 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 ClUTent 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. (1) Records. The City shall keep proper books of record and 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 municipal 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 27 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 Municipal Advisory 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 armual audit reports shall be open to the inspection of the Bondholders and their agents and representatives at all reasonable times~ (I) Governmental Agencies. It will comply with all of the terms and conditions of any and all franchises, pennits, and authorizations applicable to or necessary with respect to the System, 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, pennits, authorization, and other requirements applicable to or necessary with respect to the acquisition, construction, equipmen~ operation, and maintenance of the System. (m) No Competition. It will not operate, or grant any franchise Of, 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 Arbitrw:e. 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 tenn 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 of1986, 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 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. Alv1ENDMENT OF ORDINANCE. (a) The holders or owners of Parity Bonds and Additional Bonds aggregating in principal amount 51% of the aggregate principal amoWlt 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) (2) (3) Bonds; Make any change in the maturity of the outstanding Parity Bonds or Additional Bonds; Reduce the rate ofinterest borne by any of the outstanding Parity Bonds or Additional Bonds; Reduce the amount of the principal payable on the outstanding Parity Bonds or Additional ( 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) 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 28 (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, ifnotice 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 instrument 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 instruments 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 outstanding Parity Bonds and Additional Bonds and all future Parity Bonds and Additional Bonds shall thereafter be detennined, 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 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 amoWlt 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 nwnbers 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 detemllned from the registration b<?oks 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 ) Application 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/Registrar.. 29 In every case of loss, theft, or destruction of a 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 hannless 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 principal of, 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) Charge for Issuing Reolacement 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) Authority for Issuine: Reolacement 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 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 T AX -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 offederal 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 uself, as defined in section 141(b)(6) of the Code Of, ifmorethan 10 percent of the proceeds are so use~ 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 tlprivate 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; 30 ( c) to take any action to assure that no amount which is greater 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 fmance 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 bondstt within the meaning of section 141(b) of the Code; (e) to refrain from taking any action that would result in the Bonds being "federally guaranteedn within the meaning of section 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 defmed 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 30 days or less in the case of an advance refunding bond and 90 days of less in the case of a current refunding bond, (2) amounts invested in a bona fide debt service fund, within the meaning of section 1 ~ 148-1 (b) of the Treasury Regulations, and (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 ofa 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 n, within the meaning of section 148( f) 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. F or purposes of the foregoing ( a) and (b), the Issuer understands that the term "proceeds" ineI udes "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 nationally-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 31 to the extent necessary 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~ DISPOSITION OF PROJECT~ The Issuer covenants that the property constituting the projects fmanced 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 33~ 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 34. CUSTODY, APPROVAL, AND REGISTRATION OF BONDS; BOND COUNSEL'S OPINION, CUSIP NUMBERS, PREAMBLE, AND INSURANCE. The Mayor of the Issuer is hereby authorized to have control ofthe 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 Initial 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 Initial Bond, and the seal of said Comptroller shall be impressed, or placed in facsimile, on the Initial Bonds. The approving legal opinio~ of the Issuer's Bond Counsel and 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 and 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 concerning insurance as provided by the insurer ~ Section 35~ SALE OF INITIAL BOND. The Initial Bond is hereby sold and shall be delivered to , for cash for the par value thereof and accrued interest thereon to date of 32 delivery plus a premium of $ (accrued interest to be deposited into the Interest and Sinking Fund). It is hereby officially found, determined, and declared that the Initial Bond has been sold at public sale to the bidder offering the lowest interest cost, after receiving sealed bids pursuant to a Notice of Sale and Bidding Instructions and Preliminary Official Statement dated ,2006, prepared and distributed in connection with the sale of the Initial Bond9 Said Notice of Sale and Bidding Instructions and Preliminary 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 Bond is hereby approved.. It is further officially foun~ determined, and declared that the statements and representations contained in said Notice of Sale and Bidding Instructions and Preliminary Official Statement are true and correct in all material respects, to the best knowledge and belief of the governing body of the Issuer~ Section 36. OFFICIAL STATEMENT. An Official Statement dated as of the date of this meeting has been prepared in cormection with the sale of the Initial 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, detennined, and declared that the statements and representations contained in said Official Statement are true and correct in all material respects, to the best knowledge and belief of the Issuer9 The distribution and use of the Preliminary Official Statement dated , 2006, prior to the date hereof is hereby ratified and approved. Section 379 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 Yor~ 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 "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a ..clearing agency" registered under Section 17 A 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 AgentJRegistrar, 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 to be registered in the name of CEDE & C09, the nominee of DTC, and it shall be the duty of the Paying AgentJRegistrar 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 nDTe Participants"). So long as each Bond is registered in the name of CEDE & CO~, the Paying AgentJRegistrar 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 ofDTC and the DTC Participants pursuant to rules and regulations estab lished by them, and that the substitute Bonds initially deposited with DTC shall be immobilized and not be further exchanged for substitute Bonds except as hereinafter provided~ The Issuer is not responsible or liable for any functions 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 Bonds9 It shall be the duty of the Purchaser and the DTC Participants to make all arrangements with DTC to establish this 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 33 exercises its right and option to terminate such requirement, it shall give written notice of such termination to the Paying AgentJRegistrar and to DTC, and thereafter the Paying AgentJRegistrar 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, iffor any reason any of the originally delivered substitute Bonds is duly filed with the Paying AgentIRegistrar 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 38. 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 2006, financial information and operating data with respect to the Issuer of the general type included in the final Official Statement authorized by Section 36 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 so to 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 regulatio~ 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 fmancial 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, ifit is available from the MSRB) that theretofore has been provided to each NRMSIRand any SID or filed with the SEC~ (b) Material Event Notices~ The Issuer shall notify any SID and either each NRMSIR or the MSRB, in a timely marmer, of any of the following events with respect to the Bonds, ifsuch 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; 34 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 fmancial information or operating data in accordance with subsection (a) of this Section by the time required by such subsection. (c) Limitations__ Disclaimers__ and Amendments9 (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 personll 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 personlt ~ (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 right, remedy, or claim hereunder to any other person. The Issuer undertakes to provide only the financial information, operating data, fmancial statements, and notices which it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other infonnation that may be relevant or material to a complete presentation of the Issuer's fmancial results, condition, or prospects or hereby undertake to update any infonnation provided in accordance with this Section or otherwise, except as expressly provided herein~ The Issuer does not make any representation or warranty concerning such infonnation or its usefulness to a decision to invest in or sell Bonds at any future date~ (iii) UNDER NO CIRCUMSTANCES SHALL THE ISSUER, ITS OFFICERS, AGENTS AND E1\1PLOYEES, BE LIABLE TO THE REGISTERED OWNER OR BENEFICIAL OWNER OF ANY 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 WITHOUTF AULTONITS 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 perfonning 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 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 Issuer, but only if(l) the provisions of this Section, as so amended, would have permitted an underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with the Rwe, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circwnstances 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 35 Issuer so amends the provisions of this Section, it shall include with any amended financial infonnation 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 fmancia! information or operating data so provided~ The Issuer may also amend or repeal the provisions of this continuing disclosure agreement if the SEe amends or repeals the applicable provision of the Rule or a court affinal jurisdiction enters judgment that such provisions of the Rwe are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds~ (d) Defmitions~ As used in 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 SEe or its staff has determined to be a nationally recognized municipal securities infonnation repository within the meaning of the Rule from time to time~ "Rule" means SEe Rule 15c2-12, as amended from time to time.. USEe" means the United States Securities and Exchange Commission.. "SlOtt means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and detennined by the SEe or its staff to be, a state information depository within the meaning of the Rule from time to time.. Section 39. 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 anytime 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 40. 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 authorize~ empowered, and directed from time to time and at any time to do and perform all such acts and things and to execll:te, acknowledge, and deliver in the name and under the corporate seal and on behalf of the Issuer all such instrwnents, 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 41. OPEN MEETINGS~ The City Council has found and determined that the meeting at which this Ordinance is considered is open to the public and that notice thereofwas given in accordance with the provisions of the Texas Open Meetings, Law, Tex. Gov't Code, Chapter 551, as amended~ 36 Section 42. REPEALER~ All indentures, ordinances or resolutions, or parts thereof, that are in conflict or inconsistent with any provision of this Ordinance are hereby repealed to the extent of such conflict and the provisions of this Ordinance shall be and remain controlling as to the matters contained herein. Section 43~ EFFECTIVE DATE9 This Ordinance shall become effective immediately upon its passage and approvaL 37 PASSED AND APPROVED this the 18th day of July, 2006. Perry R. McNeill, Mayor ATTEST: Jennifer Walters, City Secretary APPROVED AS TO LEGAL FORM: By: 38 EXHIBIT A DESCRIPI10N OF ANNUAL FINANCIAL INFORMATION The following information is referred to in Section 38 of this Ordinance: Annual Financial Statements and Operating Data The financial infonnation and operating data with respect to the Issuer to be provided armuaIly 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 10, inclusive, under the captions ItThe Electric SystemlT, "The Water System", "The Wastewater System'" "Debt Information" and "Financial Information" in the Official Statement Appendix C in the Official Statement. Accounting Principles The accounting principles referred to in such Section are the accounting principles described in the notes to the fmancial statements referred to in the paragraph above~ PAYING AGENT/REGISTRAR AGREEMENT THIS AGREEMENT entered into as of July 15, 2006 (this "Agreement"), by and between the City of Denton, Texas (the "Issuer"), and JPMorgan Chase Bank, National Association, a national banking association (the "Bank"). RECITALS WHEREAS, the Issuer has duly authorized and provided for the issuance of its Utility System Revenue Bonds, Series 2006 (the "Securities") in the aggregate principal amount of $8,515,000 such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchaser thereof on or about August 22, 2006; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on said Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Ordinance" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of said Securities and with respect to the transfer and exchange thereof as provided herein and in the "Ordinance." The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto for the first year of this Agreement and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for municipalities, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). ARTICLE TWO DEFINITIONS Section 2.01. Definitions. F or all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the principal corporate trust office of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Ordinance" means a written request or ordinance signed in the name of the Issuer by the Mayor of the Issuer delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. "Ordinance" means the ordinance of the governing body of the Issuer pursuant to which the Securities are issued, certified by the City Secretary or any other officer of the Issuer and delivered to the Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Ordinance). "Redemption Date" when used with respect to any Bond to be redeemed means the date fixed for such redemption pursuant to the terms of the Ordinance. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice-Chairman of the Board of Directors, the Chairman or Vice-chairman of the Executive Committee of the Board of Directors, the President, any V ice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above 2 designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Ordinance the principal of a Security is scheduled to be due and payable. Section 2.02. Other Definitions. The terms "Bank," "Issuer," and Securities (Security)" have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. ARTICLE THREE PAYING AGENT Section 3.01. Duties of Paving Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Ordinance. Section 3.03. Reporting Requirements. To the extent required by the Code or the Treasury Regulations, the Bank shall report to the Holders and the Internal Revenue Service the amount of interest paid or the amount treated as interest accrued on the Bond which is required to be reported by the Holders on their returns of federal income tax. ARTICLE FOUR REGISTRAR Section 4.01. Security Register - Transfers and Exchanges. 3 The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register"), and, if the Bank Office is located outside the State of Texas, a copy of such books and records shall be kept in the State of Texas, for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. All transfers, exchanges and replacement of Securities shall be noted in the Security Register. Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect are-registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereofwill be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three (3) business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. Section 4.02. Bonds. The Issuer shall provide an adequate inventory of printed Securities to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities in safekeeping, which shall be not less than the care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that is maintained for its own securities. Section 4.03. Form ofSecuritv Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. 4 The Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order and prior to the release or disclosure of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the court order or such release or disclosure of the contents of the Security Register. Section 4.05. Return of Cancelled Bonds. All bonds surrendered to the Bank, at the designated Payment/Transfer Office, for payment, redemption, transfer, or replacement, shall be promptly cancelled by the Bank. The Bank will provide to the Issuer, at reasonable intervals determined by the bank, a bond evidencing the destruction of canceled bonds. Section 4.06. Mutilated., Destroved., Lost or Stolen Securities. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Ordinance, to deliver and issue Securities in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities as long as the same does not result in an overissuance. In case any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities it has paid pursuant to Section 3.01, Securities it has delivered upon the transfer or exchange of any Securities pursuant to Section 4.01, and Securities it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities pursuant to Section 4.06. ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and agrees to use reasonable care in the performance thereof. Section 5.02. Reliance on Documents., Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on bonds or opinions furnished to the Bank. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible 5 Officer, unless it shall be proved that the Bank was negligent in ascertaining the pertinent facts. (c ) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by Issuer. (e) The Bank may consult with counsel, and the written advice of such counselor any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the state- ments of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Monevs Held bv Bank. The Bank shall deposit any moneys received from the Issuer into a segregated account to be held by the Bank solely for the benefit of the owners of the Securities to be used solely for the payment of the Securities, with such moneys in the account that exceed the deposit insurance available to the Issuer by the Federal Deposit Insurance Corporation, to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas and to the extent permitted by the laws of the United States of America to secure and be pledged as collateral for such accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such account shall be made by check drawn on such account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Subject to the Unclaimed Property Law of the State of Texas, any money deposited with the Bank 6 for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for three years after the final maturity of the Security has become due and payable will be paid by the Bank to the Issuer if the Issuer so elects, and the Holder of such Security shall hereafter look only to the Issuer for payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. If the Issuer does not elect, the Bank is directed to report and dispose of the funds in compliance with Title Six of the Texas Property Code, as amended. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the State and County where the administrative offices of the Issuer is located, and agree that service of process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective August 1, 1987, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the 7 Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. Section 6.04. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer shall bind its successors and assigns, whether so expressed or not. Section 6.06. Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between his Agreement and the Ordinance, the Ordinance shall govern. Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of final payment of the principal of and interest on the Securities to the Holders thereof or (ii) may be earlier terminated by either party upon sixty (60) days written notice; provided, however, an early termination of this Agreement by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termination of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securi- ties, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02 and of Article Five shall survive and remain in full force and effect following the termination of this Agreement. 8 Texas. Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. JPMORGAN CHASE BANK, NATIONAL ASSOCIATION Dallas, Texas By Title 2001 Bryan Street 10th Floor Dallas, Texas 75201 CITY OF DENTON, TEXAS By Mayor 215 E. McKinney Denton, Texas 76201 10 SCHEDULE A Paying Agent/Registrar Fee Schedule [To be supplied by the Bank] 11 JPMorgan 0 Schedule of Fees for Services as Paying Agent and Registrar in connection with $8,515,000 City of Denton Utility System Revenue Bonds, Series 2006 Based upon our current understanding of your proposed transaction, our fee proposal is as follows: Pricing for Paying Agent and Registrar The Paying Agent and Registrar Fee covers the maintenance of records as registrar, processing of transfers, and payment of interest/principal funds for Debt Service. Acceptance Fee Annual Fee (payable annually in advance) $0.00 $300.00 Notes: Please note that our willingness to act in the capacities specified above and the fees designated in this proposal are indicative and based upon our understanding of the transaction. We reserve the right to revise this proposal should any material aspect of the transaction differ from our understanding. Also, our acceptance of the above contracts and duties is subject to our usual internal review, document review and the receipt of appropriate immunities and indemnities. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, we will ask for information that will allow us to identify you. Annual fees include one standard audit confirmation per year without charge. Standard audit confirmations include the final maturity date, principal paid, principal outstanding, interest cycle, interest paid, cash and asset information, interest rate, and asset statement information. Non-standard audit confirmation requests may be assessed an additional fee. Periodic tenders, sinking fund, optional or extraordinary call redemptions will be assessed an additional charge of $300 per event. Performance of any extraordinary service or incurring extraordinary expenses, such as those in connection with any default, account resignation, or outside legal counsel charges, will be billed in addition to the stated per annum fees. JPMorgan Chase & Co. ("JPMorgan") has entered into an agreement with The Bank of New York Company, Inc. ("BNY") pursuant to which JPMorgan intends to exchange select portions of its corporate trust business, including municipal, corporate and structured finance trusteeships and agency appointments, for BNY's consumer, small-business and middle-market banking businesses. This transaction has been approved by both companies' boards of directors and is subject to regulatory approvals. It is expected to close in the late third quarter or fourth quarter of 2006. J. P. Morgan Trust Company, N. A. . 420 Throckmorton, 9th Floor, Fort Worth, TX 76102 Telephone: (817) 884-4726 . Facsimile: (817) 884-4651 j effrey. c. salavarria@jpmorgan.com 111'1'''''' ....-. ..... Global Credit Research New Issue 11 JUL 2006 " New Issue: Denton (City of) TX MOODY'S ASSIGNS A1 TO THE CITY OF DENTON'S [TX] SALE OF $8.5 MilliON UTiliTY SYSTEM REVENUE BONDS, SERIES 2006 RATING AFFECTS $277 MILLION IN OUTSTANDING PARITY DEBT INCLUDING CURRENT SALE Combined Utilities TX Moody's Rating ISSUE Utility System Revenue Bonds, Series 2006 Sale Amount $8,515,000 Expected Sale Date 07/18/06 Rating Description Utility System Revenue RATING A1 Opinion NEW YORK, Ju111, 2006 -- Moody's has assigned an A1 rating to the City of Denton's [TX] $8.5 million Utility System Revenue Bonds, Series 2006. At the same time, Moody's has affirmed the A1 rating on the City's $269 million in outstanding revenue debt. The rating affirmation reflects improved debt service coverage, sizeable reserves, and a steadily expanding customer base. The rating also considers the System's sizeable future borrowing needs as well as the challenges presented by the deregulated Texas electricity market. STRONG UTILITY SYSTEM CUSTOMER GROWTH DRIVEN BY DENTON'S RESIDENTIAL AND COMMERCIAL EXPANSION IN RECENT YEARS Strong population growth in Denton (280~ from 2000 to 2005) has driven residential and commercial expansion over the past several years. As residential and commercial developments have expanded, demand for utility services has similarly grown. The customer base has increased at approximately 40~ annually over the past four years. As of FY 2005, the City provides service to 41 ,846 electric customers, 27,584 water customers, and 25,695 sewer customers. Officials expect the water and sewer customer base to continue to grow between 30~ to 50~ annually over the medium term and the electric system customer base to increase at 20~ to 30~ annually. Ample treated water is available to meet the growing needs of the City well into the future and is supplied primary by the system's own treatment facilities that are capable of treating and pumping 48.8 million gallons per day (MGD). The maximum volume pumped was 29.3 MGD in 2003. Raw water for the system is ample and is obtained primarily from Lewisville Lake (4.9 MGD) and Ray Roberts Lake (19.8 MGD). The City has a raw water supply contract with Dallas obligating Denton to purchase at least 500,000 gallons per day from Dallas. Due to the City's current surplus reservoir water supply, the City has contracted with the Upper Trinity Regional Water District to provide raw water on an interim basis from the excess capacity. The City has owned and operated its electric light and power system since 1905. In order to secure access to a long - term generating facility, the Cities of Bryan, Denton, Garland, and Greenville, Texas created the Texas Municipal Power Agency (TMPA)(rated by Moody's A2 with stable outlook). TMPA owns the Gibbons Creek Steam Electric Station, 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 amounts to approximately 98 MW, or approximately 320~ of the City's projected 2006 peak system - wide demand. Though the City can choose to not take its prorated share of energy from TMPA, Denton is obligated nevertheless to purchase or pay for 21.30~ of TMPA's fixed costs, including debt service, as well as TMPA's variable costs (i.e. fuel costs) relating to the energy that the City takes from TMPA. To meet energy needs above what is provided by TMPA, the City has a contract with Constellation Power Source, which was recently renewed in 2006. Officials indicate the new contract energy cost is 290~ less expensive than the prior one. In addition, the new contract will allow for a significant reduction on the cost of demand, scheduling, and other miscellaneous expenses. STABILITY DRIVEN BY IMPROVED DEBT SERVICE COVERAGE COUPLED WITH AMPLE RESERVES AND RECENT RATE INCREASES After declining from 2.6 times annual debt service in FY 1999 to 1.23 times in FY 2004, coverage recovered modestly in FY 2005 reaching 1.45 times. The coverage calculation does not factor the payment by the system for payment-in-lieu-of-franchise fees and return on investment to the City's general fund, which amounted to approximately $14 million in FY 2005. Including these transfers as expenditures, FY 2005 annual debt service coverage would fall to 1.05 times. The higher coverage level in FY 2005 was largely a function of a 60~ and 90~ increase of electric base and wastewater rates, respectively. In addition, the City raised its ECA (energy cost adjustment) rate in each of the four quarters of FY 2005. The ECA reflects the underlying costs of providing power based upon any changes in commodity fuel expenses. The ECA, together with the base rate comprises a resident's electric utility rate. Although debt service coverage is not exceptional, the system benefits from ample reserves. Net working capital in FY 2005 stood at approximately $168 million, including a rate stabilization reserve of $57 million that can be pledged to meet debt service coverage. Of the $57 million aforementioned rate stabilization reserve, $48 million is allocated to the electric system to help the electric component address base rate challenges. The electric rate stabilization fund was created to be utilized in lieu of electric rate increases which could otherwise be required in order to pay the cost of purchased power as well as the City's share of TMPA debt. ELECTRIC SYSTEM FACING CHALLENGES FROM DEREGULATED RETAIL LANDSCAPE Similar to other municipal electric systems in the State, Denton's electric system has been faced with substantial changes to the electric utility regulation brought about by the enactment of Senate Bill 7 by the Texas legislature in 1999. SB 7 provided for open retail electric competition in the part of the State that is within the service area of the Electric Reliability Council of Texas (ERCOT). Denton is located within the ERCOT service area. Municipally - owned utilities are not required to participate in the competitive market, although they are given the ability to irrevocably "opt in". The City has taken a cautionary approach to the new market, and has not decided to open the City to retail electric competition. The City has identified the most significant risk related to opting into competitive markets to be the City's ability to pay its portion of TMPA fixed costs. Another issue of relevance includes the possible reduction of fund transfers to the General Fund of the City from the electric system ($9 million in FY 2005) if the City opted into a competitive electric retail market. The City has also considered the increased costs relating to technology upgrades that would be needed to accommodate multiple retail energy providers if the electric system were to choose to remain as the sole transmission and distribution utility in the City. Considering the substantial risks associated with opting into competitive markets at the present, the City's ability to provide electric service to residents at competitive rates is imperative. UTILITY SYSTEM TO INCUR SIGNIFICANT ADDITIONAL DEBT GOING FORWARD Inclusive of the current issue, the system's debt ratio is elevated at approximately 48.50~. Payout is steady with approximately 520~ of principal structured to be retired over the next ten years. The high debt ratio is reflective of the large amount of debt issued in recent years to accommodate the City's strong growth. In order to accommodate ongoing infrastructure needs, the system will have considerable borrowing requirements going forward. Officials plan to issue $31 million of revenue bonds in FY 2007, $20.5 million in FY 2008, $26.5 million in FY 2009, $13.5 million in FY 2010, and $18.8 million in FY 2011. Considering sizeable debt issuance plans, the system will continue to remain substantially leveraged. It is Moody's expectation that officials will prudently manage future debt offerings and raise utility rates appropriately. KEY STATISTICS: Water Customers: 27,584 Sewer Customers: 25,695 Electric Customers: 41 ,846 FY 2005 annual debt service coverage: 1.45x FY 2005 Net Working Capital: $168 million Payout of Principal (10 years): 520~ Debt Ratio: 48.50~ Operating Ratio: 80o~ Post Sale Parity Debt Outstanding: $277 million Analysts Anil Chandy Analyst Public Finance Group Moody's Investors Service Douglas Benton Backup Analyst Public Finance Group Moody's Investors Service Contacts Journalists: (212) 553-0376 Research Clients: (212) 553-1653 @ Copyright 2006, 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 MOODY'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 circumstances shall MOODY'S have 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, special, 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 and financial reporting analysis observations, 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 IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY 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 MANNER WHATSOEVER. Each rating or other opinion must be weighed solely 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 of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. 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 appraisal and rating services rendered by it fees ranging from $1,500 to $2,400,000. Moody's Corporation (MCO) and its wholly- owned credit rating agency subsidiary, Moody's Investors Service (MIS), also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 50/0, is posted annually on Moody's website at www.moodys.com under the heading "Shareholder Relations - Corporate Governance - Director and Shareholder Affiliation Policy." Moody's Investors Service pty Limited does not hold an Australian financial services licence under the Corporations Act. This credit rating opinion has been prepared without taking into account any of your objectives, financial situation or needs. You should, before acting on the opinion, consider the appropriateness of the opinion having regard to your own objectives, financial situation and needs. Prepared by: 1-''' First.: :.S..out.hwest .C. .....:0. :.mp..a.nr u i' lovestme:nt Ba:nke:rs: $inc~194Et TABULATION OF BIDS RECEIVED AT SALE OF BIDS DUE TUESDAY, JULY 18,2006 $8,515,000 CITY OF DENTON, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 2006 TRUE INTEREST ACCOUNT MANAGER COST VltS ~<C~ ~~~ ~>~ ~< ~ Vl~ ~~ ~~ ~ ~ ;. = QJ ~ ~ = ~ ~ ~ ~ ~ < o ~ ~ Vl \C = I 00 ~ I t'- ~ ~ ~ o ~ ~ ~ Vl ~ u PZ o ~ Vl ~ r;J "'C = o ~ QJ = = QJ ~ == QJ ....... ~ ~ 00 ~ .. ~ .. ....... ~ = o ....... = QJ ~ ~ o ~ U\C == == ~M In ~ ~ QJ In .. ..- ;. 00 QJ VJOO 00 ~ <1) ~ ~ 0\ 00 ~ ~ '!( 00 ~ ~ \0 00 \0 o ~ '-n o I ~ C"'l I '-n bI) o ;.a o ~ ~ <1) S <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ o o ~ <1) o ~ O'-n c8 . ~ C"'l U 00 o .2 o ~ o <1) '-n"'Vl ~ 00'" 00'"0 '" 0 M 0 ~~ 00 ~ <1) ~ t"- t"- ~ ~ ~ '!( \0 \0 C"'l \0 M 00 ~ ~ ~ o I t"- I 0\ bI) o ;.a o ~ ~ <1) S <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ o o ~ <1) o ~ O~ c8 . ~ C"'l U 00 o .2 o ~ o <1) O"'Vl '-n 00'" 00'"0 '" 0 ~ 0 ~~ 00 ~ <1) ~ ~ '-n t"- 0\ '!( o ~ 00 \0 ~ ~ M o I ~ I ~ bI) o ;.a o ~ ~ <1) S <1) :> ~ S <1) ~ 00 ~M VlO .e~ ~ ~ ~ ~ .C o <1) OVl ~ 00'" <1)'"0 o 8 ~~ c~ .~ <1) u s 8 ~ 0", 2 o ~ ~] 0"''"0 ~~ 00 ~ <1) ~ t"- 0\ t': ~ ~ '!( M M \0 C"'l t"- oo ~ C"'l o I 0\ I ~ 00 <1) .~ ~ <1) Vl 00'" '"0 o o ~ <1) s <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ o o ~ <1) o ~ o C U o o o 0'" ~< t"-",C"'l \0 0 '-n 0 fF7 C"'l 00 ~ <1) ~ ~ o M 0i ~ '!( ~ 0\ \0 t"- '-n \0 C"'l o I 0\ I ~ 00'" '"0 o o ~ <1) s <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ o o ~ <1) o~ ~ C"'l 00 c~ U ~ o .C o <1) o Vl '-n'" <1) oo~ O\"'~ ~ ~ fF7~ 00 ~ <1) ~ C"'l C"'l ~ ~ ~ '!( 0\ C"'l ~ o ~ '-n ~ o I t"- ~ I ~ bI) o ;.a o ~ ~ <1) s <1) :> ~ S <1) ~ 00 ~~ Vlo .e~ ~ ~ ~ ~ .C o <1) OVl ~ 00'" <1)'"0 o 8 ~~ c~ .~ <1) u s 8 ~ 0", 2 '-n ~ ~] 0\"''"0 ~~ 00 ~ <1) ~ 00 o 0; ~ ~ '!( '-n ~ M \0 \0 ~ '-n o o I '-n C"'l I ~ 00 <1) .~ ~ <1) Vl 00'" '"0 o o ~ <1) S <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ o o ~ <1) o ~ o C U o o o '-n'" 00< 0",0 ~ 0 '-n 0 fF7 C"'l 00 ~ <1) ~ o o o 0\ '!( 00 ~ M 0\ t"- t"- ~ o o I '-n C"'l I ~ 00'" '"0 o o ~ <1) S <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ o o ~ <1)~ 00 ~ 0 00 cC"'l .~ 00 U .2 ~ o <1) OVl 0", <1) '-n~ O\~ t"-", ~ ~~ 00 ~ <1) ~ \0 ~ ~ o ~ '!( M '-n '-n M t': ~ 00 0\ I ~ I 00 <1) ;:j o <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ 00 ~~ ~~ ",0\ o~ o 00 ~ <1) <1) .C o <1) ~Vl o 00'" c] .~ 0 U~ o bI) 8 .s "''"0 ~ 0 \O~ ~~ 00 ~ <1) ~ '-n '-n \0 0i C"'l '!( C"'l M C"'l C"'l ~ '-n 00 0\ I ~ C"'l I t"- <1) s <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ 00 ~ ~ ~~ ",0\ 00\ o~ ~ 00 <1) .2 o ~ ~Vl o '" c~ U 8 o~ o bI) 0", 0 ~;.a t"- 0 \O"'~ ~~ 00 ~ <1) ~ '-n 00 ~ o ~ '!( o 00 M 0; ~ 00 0\ I ~ C"'l I M 00'" '"0 o o ~ <1) ;:j o <1) :> ~ S <1) ~ 00 ~ Vl C .~ ~ ~ 00 ~ ~ <1) ~ 0'" o ~ <1) o ~ o C U 000 00\ 00\ '" ~ '-n 00 t"- <1) ~ .~ '" ~ t"- <1) fF7 Vl NOTICE OF SALE AND BIDDING INSTRUCTIONS ON $8,515,000 CITY OF DENTON, TEXAS (Denton County) UTILITY SYSTEM REVENUE BONDS, SERIES 2006 Sealed Bids Due Tuesday, July 18,2006, at 11:00 AM, CDT THE BONDS WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS. THE SALE BONDS OFFERED FOR SALE AT COMPETITIVE BIDDING. . . The City of Denton, Texas (the "City") is offering for sale its $8,515,000 Utility System Revenue Bonds, Series 2006 (the "Bonds"). Bidders may submit bids for the Bonds by any of the following methods: (1) Deliver bids directly to the City as described below in "Bids Delivered to the 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." BIDS DELIVERED TO CITY. . . Sealed bids, plainly marked "Bid for Bonds," should be addressed to "Mayor and City Council, City of Denton, Texas," and should be delivered to Mr. Jon Fortune, City of Denton, 215 E. McKinney Street, Denton, Texas 76201, prior to 11 :00 AM, CDT, on the date of the sale. ELECTRONIC BIDDING PROCEDURE . . . Any prospective bidder that intends to submit an electronic bid must submit its electronic bid through the facilities of PARITY. Subscription to i-Deal's BIDCOMP Competitive Bidding System is required in order to submit an electronic bid. The City will neither confirm any subscription nor be responsible for the failure of any prospective bidder to subscribe. Bidders submitting an electronic bid shall not be required to submit Official Bid Forms. An electronic bid made through the facilities of PARITY shall be deemed an irrevocable offer to purchase the Bonds on the terms provided in this Notice of Sale, and shall be binding upon the bidder as if made by a signed, sealed 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 the prospective bidder. If any provisions of the Notice of Sale shall conflict with information provided by PARITY as the approved provider of electronic bidding services, this Notice of Sale shall control. Further information about PARITY, including any fee charged, may be obtained from Parity Customer Support, 40 West 23rd Street, 5th Floor, New York, New York 10010, (212) 404-8102. For purposes of the bidding process, regardless of the bidding method, the time as maintained by i-Deal shall constitute the official time. For information purposes only, bidders are requested to state in their electronic bids the true interest cost to the City, as described under "Basis for Award" below. All electronic bids shall be deemed to incorporate the provisions of this Notice of Sale and the Official Bid Form. BIDS BY TELEPHONE OR FACSIMILE. . . Bidders must submit, prior to July 18, 2006, SIGNED Official Bid Forms to David Medanich, First Southwest Company, 777 Main Street, Suite 1200, Fort Worth, Texas 76102, if they are submitting their bid by telephone or facsimile (fax) on the date of the sale. Telephone bids will be accepted at (940) 349-8288, between 10:00 AM, CDT and 11:00 AM, CDT on the date of the sale. Fax bids will be received between 10:00 AM, CDT and 11 :00 AM, CDT, on the date of the sale at (940) 349-7206, attention: Mr. Jon Fortune. First Southwest Company will not be responsible for submitting any bids received after the above deadlines. The City and First Southwest Company are not responsible if such telephone or facsimile numbers are busy which prevents a bid or bids from being submitted on a timely basis. 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 BID OPENING. . . The bids for the Bonds will be publicly opened and read in the office of the Assistant City Manager, at City Hall, at 11:00 AM, CDT, Tuesday, July 18,2006. AWARD OF THE BONDS. . . The City Council will take action to award the Bonds (or reject all bids) at a meeting scheduled to convene at 11:30 AM, CDT, on the date of the bid opening, and adopt an ordinance authorizing the Bonds and approving the Official Statement (the "Bond Ordinance"). THE BONDS DESCRIPTION. . . The Bonds will be dated July 15, 2006 (the "Dated Date"). Interest will accrue from the Dated Date and will be due on December 1, 2006, and each June 1 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 anyone maturity. The Bonds will mature on December 1 in each year as follows: MA TURITY SCHEDULE Principal Principal Principal Year Amount Year Amount Year Amount 2006 $ 305,000 2013 $ 360,000 2019 485,000 2007 270,000 2014 380,000 2020 505,000 2008 285,000 2015 400,000 2021 530,000 2009 295,000 2016 415,000 2022 560,000 2010 310,000 2017 440,000 2023 585,000 2011 325,000 2018 460,000 2024 615,000 2012 345,000 2025 645,000 OPTIONAL REDEMPTION . . . The City reserves the right, at its option, to redeem Bonds having stated maturities on and after December 1, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on December 1, 2016, or any date thereafter, 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 as serial Bonds or may provide that any two or more consecutive annual principal amounts be combined into one or more term Bonds. MANDA TORY SINKING FUND. . . If the successful bidder elects 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 1 next following the last maturity for Serial Bonds, and annually thereafter on each December 1 until the stated maturity for the Term Bonds at the redemption prices of par plus accrued 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/Registrar 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 the 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 - Book-Entry-Only System" in the Preliminary Official Statement. PAYING AGENT/REGISTRAR. . . The initial Paying Agent/Registrar shall be JPMorgan Chase Bank, 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 Pledged Revenues including the Net Revenues of the Utility System after 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. ii CONDITIONS OF THE SALE TYPE OF BIDS AND INTEREST RATES. . . The Bonds will be sold in one block on an "All or None" basis, and at a price of not less than 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 exceed 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, 2017 maturity as the base year, interest rates for successive maturities shall be structured 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 interest rates will be considered. Each bidder shall state in the bid the total interest cost in dollars and the effective interest rate determined thereby (calculated in the manner prescribed 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-annual compounding, produces an amount equal to the sum of the par value of the Bonds plus any premium bid (but not interest accrued from the Dated Date to the date of their delivery). In the event of a 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 $170,300.00, is required. Such Good Faith Deposit shall be a bank cashier's check or certified check, 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 Instructions. 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 authorize its use as a Good Faith Deposit by the Initial Purchaser who shall be named in such instructions. The Good Faith Deposit of the Initial Purchaser will be returned to the Initial Purchaser upon payment for the Bonds. No interest will be allowed on the Good Faith Deposit. In the event the Initial Purchaser 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. DELIVERY OF THE BONDS AND ACCOMPANYING DOCUMENTS CUSIP NUMBERS. . . It is anticipated that CUSIP identification numbers 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 delivery of and pay for the Bonds in accordance with the terms of this Notice of Sale and Bidding Instructions and the terms of the Official 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 Purchaser. 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 form, in the aggregate principal amount of $8,515,000, payable in stated installments to the Initial Purchaser or its designee, signed by the Mayor and City Secretary, approved by the Attorney General, and registered and manually signed by the Comptroller of Public Accounts. Upon delivery of the 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 of the 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 delivery of the Bonds. It is anticipated that delivery of the Bonds can be made on or about August 22, 2006, and it is understood and agreed that the Initial Purchaser will accept delivery and make payment for the Bonds by 10:00 AM, CDT, on August 22, 2006, or thereafter on the date the Bond is tendered for delivery, up to and including September 5, 2006. If for any reason the City is unable to make delivery on or before September 5, 2006, the City shall immediately contact the Initial Purchaser and offer to allow the Initial Purchaser to extend its offer for an additional thirty days. If the Initial Purchaser does not elect to extend its offer within six days thereafter, then its Good Faith Deposit will be returned, and both the City and the Initial Purchaser shall be relieved of any 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 DELIVERY. . . The obligation of the Initial Purchaser to take up and pay for the Bonds is subject to the Initial Purchaser's receipt of (a) the legal opinion of McCall, Parkhurst & Horton, L.L.P., Dallas, Texas, Bond Counsel for the City ("Bond Counsel"), (b) the no-litigation certificate, and (c) the certification as to the Preliminary Official Statement, all as further described in the Preliminary Official Statement. 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 are offered when, as and if issued, subj ect to the approval of the Attorney General of the State of Texas. Delivery of and payment for the Bonds is subject to the receipt by the Initial Purchaser of opinions of Bond Counsel, to the effect that the Bonds are valid and binding obligations of the City and that 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 "Tax Matters" in the Preliminary Official Statement, including alternative minimum tax consequences for corporations. CERTIFICATION OF PRELIMINARY OFFICIAL STATEMENT. . . At the time of payment for and Initial Delivery of the 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 EXEMPT STATUS. . . .At any time before the Bonds are tendered for delivery, the 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 present federal income tax laws, either by ruling of the Internal Revenue Service or by a decision of any Federal court, or shall be declared taxable or be required 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 Financial 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 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 actions taken by any legislative or judicial bodies. In the normal course of business, the Financial Advisor may from time to time sell investment securities to the City for the investment of bond proceeds or other funds of the City upon the request of the City. BLUE SKY 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 from registration in any state where such action is necessary, provided, however, that the City shall not be obligated to qualify as a foreign corporation or 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 Instructions 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 Instructions, the Official Bid Form and the Preliminary Official Statement. Prospective purchasers are urged to carefully examine the Preliminary Official Statement to determine the investment quality of the Bonds. ISSUANCE OF ADDITIONAL DEBT. . . The City does not anticipate the issuance of additional utility system revenue debt within the next 12 months. RATINGS. . . The presently outstanding tax supported debt of the City is rated "AI" by Moody's Investors Service, Inc. ("Moody's") and "A+" by Standard & Poor's Ratings Services, A Division of 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 this issue have been made to Moody's and S&P. The results of their determinations will be provided as soon as possible. MUNICIPAL BOND 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 reoffering of the Bonds. iv THE PRELIMINARY OFFICIAL STATEMENT AND COMPLIANCE WITH SEC RULE 15c2-12... The City has prepared the accompanying Preliminary Official Statement and, for the 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 review prior to bidding. To the best knowledge and belief of the City, the Preliminary Official Statement contains information, including financial information or operating data, concerning every entity, enterprise, fund, account, or person that is material to an evaluation of the 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 the Preliminary Official Statement. The City will furnish to the Initial Purchaser, acting through a designated senior representative, in accordance with instructions received from the Initial Purchaser, within seven (7) business days from the sale date an aggregate of 150 copies of the Official Statement reflecting interest rates and other terms relating to the initial reoffering of the Bonds. The cost of any Official Statement in excess of the number specified shall be prepared and distributed at the cost of the Initial Purchaser. 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 delivery of any copies of the Official Statement in connection with the offering or reoffering of the subject securities. CONTINUING DISCLOSURE 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 15c2-12, as described in the Preliminary Official Statement under "Continuing Disclosure of Information". The Initial Purchaser's obligation to accept and pay for the Bonds is conditioned upon delivery to the Initial Purchaser or agent of a certified copy of the Bond Ordinance containing the agreement described under such heading. COMPLIANCE WITH 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, may be obtained at the offices of First Southwest Company, Investment Bankers, 325 North St. Paul, Suite 800, Dallas, Texas 75201, Financial Advisor to the City. On the date of the sale, the City will, in the Bond Ordinance authorizing the issuance of the Bonds, confirm its approval of the form and content of the Preliminary Official Statement, and any addenda, supplement or amendment thereto, and authorize its use in the reoffering of the Bonds by the Initial Purchaser. PERRY McNEILL Mayor City of Denton, Texas ATTEST: JENNIFER WALTERS City Secretary July 7, 2006 v BOND YEARS Bonds Accumulated Bonds Maturing Amount Bond Years Bond Years Maturing 2006 305,000 115.222 115.222 2006 2007 270,000 372.000 487.222 2007 2008 285,000 677.667 1,164.889 2008 2009 295,000 996.444 2,161.333 2009 2010 310,000 1,357.111 3,518.444 2010 2011 325,000 1,747.778 5,266.222 2011 2012 345,000 2,200.333 7,466.556 2012 2013 360,000 2,656.000 10,122.556 2013 2014 380,000 3,183.556 13,306.111 2014 2015 400,000 3,751.111 17,057.222 2015 2016 415,000 4,306.778 21,364.000 2016 2017 440,000 5,006.222 26,370.222 2017 2018 460,000 5,693.778 32,064.000 2018 2019 485,000 6,488.222 38,552.222 2019 2020 505,000 7,260.778 45,813.000 2020 2021 530,000 8,150.222 53,963.222 2021 2022 560,000 9,171.556 63,134.778 2022 2023 585,000 10,166.000 73,300.778 2023 2024 615,000 11,302.333 84,603.111 2024 2025 645,000 12,498.667 97,101.778 2025 Average Maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.404 Years OFFICIAL BID FORM Honorable Mayor and City Council City of Denton, Texas July 18, 2006 Honorable Mayor and Members of the City Council: Reference is made to your Preliminary Official Statement and Notice of Sale and Bidding Instructions, dated July 7, 2006 of $8,515,000 CITY OF DENTON, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 2006, 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 date of issue to date of delivery to us, plus a cash premium of $ for Bonds maturing and bearing interest as follows: Principal Interest Principal Interest Principal Interest Maturity Amount Rate Maturity Amount Rate Maturity Amount Rate 12/1/2006 $ 305,000 % 12/1/2013 $ 360,000 % 12/1/2019 $ 485,000 % 12/1/2007 270,000 % 12/1/2014 380,000 % 12/1/2020 505,000 % 12/1/2008 285,000 % 12/1/2015 400,000 % 12/1/2021 530,000 % 12/1/2009 295,000 % 12/1/2016 415,000 % 12/1/2022 560,000 % 12/1/2010 310,000 % 12/1/2017 440,000 % 12/1/2023 585,000 % 12/1/2011 325,000 % 12/1/2018 460,000 % 12/1/2024 615,000 % 12/1/2012 345,000 % 12/1/2025 645,000 % Of the principal maturities set forth in the table above, term bonds have been created as indicated in the 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: Maturity Date December 1 Year of First Mandatory Redemption Principal Amount Interest Rate $ $ $ $ $ $ % % % % % % Our calculation (which is not a part of this bid) of the true interest cost from the above is: TRUE INTEREST COST % We are having the Bonds of the following maturities insured by at a premium of $ , said premium to 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. 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. A bank cashier's check or certified check of the Bank" in the amount of $170,300.00, 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 the Preliminary Official Statement and Notice of Sale and Bidding Instructions. We agree to accept delivery of the Bonds utilizing the Book-Entry-Only System through DTC and make payment for the Initial Bond in immediately available funds in the Corporate Trust Division, JPMorgan Chase Bank, National Association, not later than 10:00 AM, CDT, on August 22, 2006, or thereafter on the date the Bonds are tendered for delivery, pursuant to the terms set forth in the Notice 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 Instructions, this the 18th day of July, 2006. ATTEST: Mayor City of Denton, Texas City Secretary CERTIFICATE OF UNDERWRITER The undersigned hereby certifies as follows with respect to the bid and purchase of the City of Denton, Texas Utility System Revenue Bonds, Series 2006 (the "Bonds"): 1. The undersigned is the duly authorized representative of the purchaser (the "Purchaser") of the Bonds from the City of Denton, Texas (the "Issuer"). 2. All of the Bonds have been offered to members of the public in a bona fide initial offering. For purposes of this Certificate, the term "public" does not include any bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers (including the Purchaser or members of the selling group or persons that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of the selling group). 3. Each maturity of the Bonds was offered to the public at a price which, on the date of such offering, was reasonably expected by the Purchaser to be equal to the fair market value of such maturity. 4. Other than the obligations set forth in paragraph 5 hereof (the "Retained Maturity" or "Retained Maturities"), the first price/yield at which a substantial amount (i.e., at least ten (10) percent) of the principal amount of each maturity of the Bonds was sold to the public is set forth below. Principal Offering Principal Offering Amount Year of Price Amount Year of Price Maturing Maturity (%/Yield) Maturing Maturity (%/Yield) $ 305,000 2006 $ 415,000 2016 270,000 2007 440,000 2017 285,000 2008 460,000 2018 295,000 2009 485,000 2019 310,000 2010 505,000 2020 325,000 2011 530,000 2021 345,000 2012 560,000 2022 360,000 2013 585,000 2023 380,000 2014 615,000 2024 400,000 2015 645,000 2025 5. In the case of the Retained Maturities, the Purchaser reasonably expected on the offering date to sell a substantial amount (i.e., at least ten (10) percent) of each Retained Maturity at the initial offering price/yield as set forth below: Principal Offering Principal Offering Amount Year of Price Amount Year of Price Maturing Maturity (%/Yield) Maturing Maturity (%/Yield) $ 305,000 2006 $ 415,000 2016 270,000 2007 440,000 2017 285,000 2008 460,000 2018 295,000 2009 485,000 2019 310,000 2010 505,000 2020 325,000 2011 530,000 2021 345,000 2012 560,000 2022 360,000 2013 585,000 2023 380,000 2014 615,000 2024 400,000 2015 645,000 2025 6. Please choose the appropriate statement: ) The Purchaser will not purchase bond insurance for the Bonds. ) The Purchaser will purchase bond insurance from (the "Insurer") for a fee/premium of $ (the "Fee"). The Fee 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 or legal fees. The Purchaser represents that the present value of the Fee for each obligation constituting the Bonds to which such Fee 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 Fee has been paid to a person who is not exempt from federal income taxation and who 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. No portion of the Fee is refundable upon redemption of any of the Bonds in an amount which would exceed the portion of such Fee that has not been earned. 7. The Purchaser understands that the statements made herein will be relied upon, by the Issuer 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 the interest on the Bonds is excludable from the gross income of the owners thereof. EXECUTED and DELIVERED this _day of , 2006. (N ame of Purchaser or Manager of Purchasing Syndicate) By: Title: PRELIMINARY OFFICIAL STATEMENT Ratings: Moody's: "Applied For" S&P: "Applied For" See ("Other Information - Ratings" herein) Dated July 7, 2006 NEW ISSUE - Book-Entry-Only In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court decisions 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 "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $8,515,000 CITY OF DENTON, TEXAS (Denton County) UTILITY SYSTEM REVENUE BONDS, SERIES 2006 Dated Date: July 15, 2006 Due: December 1, as shown below PAYMENT TERMS. . . Interest on the $8,515,000 City of Denton, Texas Utility System Revenue Bonds, Series 2006 (the "Bonds") will accrue from July 15, 2006, (the "Dated Date") and will be payable December 1 and June 1 of each year commencing December 1, 2006, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the 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" herein. The initial Paying Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas (see "The Bonds - Paying Agent/Registrar"). AUTHORITY FOR ISSUANCE. . . The Bonds are issued pursuant to the general laws of the State of Texas, particularly Vernon's Texas Codes Annotated ("V.T.C.A") Government Code, Chapter 1502, as amended, and an ordinance (the "Series 2006 Ordinance") passed by the City Council, and are special obligations of the City of Denton (the "City"), payable, both as to principal and interest, solely from and secured by a first lien on and pledge of certain Pledged Revenues, including the Net Revenues of the City's combined water, sewer and electric light and power system (the "System"). Special reference is made to "The Electric System" herein for a description of certain legal and regulatory changes that have affected, and are expected to further affect, the environment in which the 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" and "The Bonds - Security and Source of Payment"). PURPOSE . . . Proceeds from the sale of the Bonds will be used to ( a) fund capital improvements for the electric system transmission and distribution facilities; (b) make a deposit to the System debt service reserve fund; and (c) pay the costs of issuance of the Bonds. MA TURITY SCHEDULE CUSIP Prefix (1): 249015 Principal Interest CUSIP Principal Interest CUSIP Amount Maturity Rate Yield Suffix (1) Amount Maturity Rate Yield Suffix (1) $ 305,000 2006 $ 415,000 2016 270,000 2007 440,000 2017 285,000 2008 460,000 2018 295,000 2009 485,000 2019 310,000 2010 505,000 2020 325,000 2011 530,000 2021 345,000 2012 560,000 2022 360,000 2013 585,000 2023 380,000 2014 615,000 2024 400,000 2015 645,000 2025 (Accrued Interest from July 15, 2006 to be added) (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. REDEMPTION. . . The City reserves the right, at its option, to redeem Bonds having stated maturities on and after December 1, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on December 1, 2016, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "The Bonds - Optional Redemption"). LEGALITY. . . The Bonds are offered for delivery when, as and if issued and received by the Underwriters 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 Opinion"). DELIVERY. . . It is expected that the Bonds will be available for delivery through The Depository Trust Company on August 22,2006. SEALED BIDS DUE TUESDAY, JULY 18,2006, AT 11:00 AM, CDT For purposes ofcompliance 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 for 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 has been no change in the affairs of the City or other matters described herein since the date hereof See "Continuing Disclosure of Information" for a description of the City's undertaking to provide certain information on a continuing basis. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THESE SECURITIES HA 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 ................................................... 5 SELECTED ADMINISTRATIVE STAFF .............................5 CONSULTANTS AND ADVISORS.................................... 5 INTRODUCTION............................................................ 7 THE BONDS ..................................................................... 7 MANAGEMENT OF THE SYSTEM........................... 14 THE ELECTRIC SySTEM........................................... 15 TABLE 1 - HISTORICAL OPERATING AND FINANCIAL DATA.............................................................. 17 TABLE 2- CURRENT ELECTRIC RATE SCHEDULES ......18 THE WATER SySTEM................................................ 38 TABLE 3 - WATER USAGE .........................................39 TABLE 4 - Top TEN WATER CUSTOMERS................... 39 TABLE 5 - WATER RATES.......................................... 39 THE WASTEWATER SYSTEM ..................................40 TABLE 6 - WASTEWATER RATES ...............................40 SELECTED PROVISIONS OF THE BOND ORDINANCE........................................................ 47 TAX MATTERS............................................................. 58 OTHER INFORMATION............................................. 59 RATINGS.................................................................. 59 LITIGATION.............................................................. 60 REGISTRATION AND QUALIFICATION OF BONDS FOR SALE.............................................................. 60 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS................................. 60 LEGAL OPINIONS...................................................... 60 CONTINUING DISCLOSURE OF INFORMATION............. 61 FINANCIAL ADVISOR................................................ 62 AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION................................................. 62 INITIAL PURCHASER ................................................. 62 FORWARD-LOOKING STATEMENTS DISCLAIMER ....... 62 CERTIFICATION OF THE OFFICIAL STATEMENT .......... 63 APPENDICES GENERAL INFORMATION REGARDING THE CITy........ A DESCRIPTION OF SENATE BILL 7 AND THE TEXAS MUNICIPAL POWER AGENCY.............................. B EXCERPTS FROM THE ANNUAL FINANCIAL REpORT.. C FORM OF BOND COUNSEL'S OPINION ........................ D WATER AND W ASTEW A TER RATE MANAGEMENTERROR! BOOKMARK NOT DEFINED. The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Preliminary Official Statement. DEBT INFORMATION ................................................. 42 TABLE 7 - DEBT SERVICE REQUIREMENTS................. 42 FINANCIAL INFORMATION .....................................43 TABLE 8 - COMPARABLE CALCULATION OF NET REVENUES AVAILABLE FOR DEBT SERVICE .....43 TABLE 9 - COVERAGE AND FUND BALANCES............. 44 TABLE 10 - CURRENT INVESTMENTS .........................46 2 PRELIMINARY OFFICIAL STATEMENT SUMMARY This summary is subj ect in all respects to the more 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. THE CITy........................................ The City of Denton is a political subdivision and municipal corporation of the State, located in Denton County, Texas. The City covers approximately 74.8 square miles (see "Introduction - Description of City"). THE BONDS .................................. The Bonds are issued as $8,515,000 Utility System Revenue Bonds, Series 2006. The Bonds are issued as serial bonds maturing December 1, 2006 through December 1, 2025 (see "The Bonds - Description of the Bonds"). PAYMENT OF INTEREST .............. Interest on the Bonds accrues from July 15,2006, and is payable December 1,2006, and each June 1 and December 1 thereafter until maturity or prior redemption (see "The Bonds - Description of the Bonds," and "The Bonds - Optional Redemption"). AUTHORITY FOR ISSUANCE.......... The Bonds are issued pursuant to the general laws of the State, including particularly V.T.C.A. Government Code, Chapter 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 including the Net Revenues of the City's combined water, sewer and electric light and power system (the "System"). Special reference is made to "The Electric System" herein for a description of certain legal and regulatory changes that have affected, and are expected to further affect, the environment in which the 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" and "The Bonds - Security and Source of Payment'). REDEMPTION ............................... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after December 1, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on December 1, 2016, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. TAX EXEMPTION.......................... In 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" herein, including the alternative minimum tax on corporations. USE OF BOND PROCEEDS ............... Proceeds from the sale of the Bonds will be used to (a) fund capital improvements for the electric system transmission and distribution facilities; (b) make a deposit to the System debt service reserve fund; and ( c) pay the costs of issuance of the Bonds. RATINGS ...................................... The presently outstanding System revenue debt of the City is rated "AI" by Moody's Investors Service, Inc. ("Moody's") and "A+" by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"). The City also has outstanding System debt which is 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"). 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 the 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"). 3 PAYMENT RECORD......................... The City has never defaulted with respect to the payment of bonds secured by revenues of the System. F or additional information regarding the City, please contact: Mr. Jon Fortune Assistant City Manager City of Denton 215 E. McKinney Street Denton, Texas 76201 (940) 349-8288 or David K. Medanich Laura Alexander First Southwest Company 777 Main Street, Suite 1200 Fort Worth, Texas 76102 (817) 332-9710 4 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS City Council Perry McNeill Mayor Term Expires May, 2008 Pete Kamp Mayor Pro Tern, District 2 May, 2007 Charlye Heggins Councilmember, District 1 May, 2007 Jack Thomson Councilmember, District 3 May, 2007 Guy McElroy Councilmember, District 4 May, 2007 Bob Montgomery Councilmember, At Large Place 5 May, 2008 Joe Mulroy Councilmember, At Large Place 6 May, 2008 SELECTED ADMINISTRATIVE STAFF Name Howard Martin Jon Fortune VACANT Jennifer K. Walters Edwin M. Snyder Robin Ramsay Position Interim City Manager Assistant City Manager Chief Financial Officer City Secretary City Attorney Municipal Judge CONSUL TANTS AND ADVISORS Auditors...................................................................................................................... ..................................................... KPMG LLP Dallas, Texas Bond Counsel ............................................................................................................................. McCall, Parkhurst & Horton L.L.P. Dallas, Texas Financial Advisor....................................................................................................................... ............... First Southwest Company Fort Worth, Texas 5 THIS PAGE LEFT BLANK INTENTIONALLY 6 PRELIMINARY OFFICIAL STATEMENT RELATING TO $8,515,000 CITY OF DENTON, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 2006 INTRODUCTION This Preliminary Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $8,515,000 City of Denton, Texas Utility System Revenue Bonds, Series 2006 (the "Bonds"). Capitalized terms used in this Preliminary Official Statement have the same meanings assigned 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 descriptions of the Bonds and certain information regarding the City and its finances, including, particularly, the City's combined water, sewer and electric light system (the "System"). All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City's Financial Advisor, First Southwest Company, Dallas, Texas. DESCRIPTION OF THE CITY. . . The City of Denton, Texas is a political subdivision located in Denton County operating as a home- rule city under the laws of the State of Texas and a charter approved by the voters in 1959. The City operates under the Council/Manager form of government in which the Mayor and six Councilmembers are elected for staggered two-year terms. The City Council formulates operating policy for the City while the City Manager is the chief administrative officer. The City is approximately 74.8 square miles in area. THE BONDS DESCRIPTION OF THE BONDS. . . The Bonds are dated July 15, 2006, and mature on December 1 in each of the years and in the amounts, and accrue interest at the per annum rates, shown on the cover page hereof. Interest will be computed on the basis of a 360-day year of twelve 30-day months, and such interest will be payable on December 1 and June 1, commencing December 1, 2006. The definitive Bonds will be issued only in fully registered form in any integral multiple of $5,000 for anyone maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. 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" herein. AUTHORITY FOR ISSUANCE. . . The Bonds are issued pursuant to the general laws of the State of Texas, particularly V.T.C.A. Government Code, Chapter 1502, as amended, and the Ordinance. SECURITY AND SOURCE OF PAYMENT. . . The Bonds are special obligations of the City payable, both as to principal and interest, solely from and, together with certain outstanding revenue bonds of the City (collectively with the Bonds, the "Parity Bonds") 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 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 any other related facilities, but excluding any water, sewer, electric, or other facilities of any kind that 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." The Ordinance defines "Gross Revenues" to include all revenues and income 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 the Ordinance. The Ordinance defines "Net Revenues" as all Gross Revenues after deducting the current expenses of operation and maintenance of the System, including all salaries, labor, materials, repairs, and extensions necessary to render efficient service. Maintenance and operating expenses of the System include contractual 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 maintenance expenses of the System. See "The Electric System - "Introduction" and "The Water System - Water Supply". The Ordinance defines "Pledged Revenues" as (a) the Net Revenues of the System, plus (b) the net revenues of the City's drainage system, plus (c) any additional revenues, income or other resources relating to the System which are expected to be available on a regular periodic basis which in the future may, at the option of the City, be pledged to the payment of the Parity Bonds and any Additional Bonds issued hereafter (see "Selected Provisions of the Bond Ordinance" herein). The City currently has outstanding Parity Bonds as follows: 7 Dated Date 6/1/1993 5/1/1996 5/1/1996 3/15/1998 7/15/1998 8/1/1998 4/15/2000 4/15/2000 4/15/2001 4/1/2002 4/1/2002 4/1/2003 9/1/2004 5/15/2005 Total (1) As of June 1, 2006. Outstanding Principal Amount (1) $ 580,000 125,000 865,000 1,800,000 19,655,000 7,150,000 16,615,000 1,305,000 50,725,000 49,265,000 3,860,000 39,105,000 23,940,000 53,790,000 $ 268,780,000 Issue Description 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 Utility System Revenue Refunding and Improvement Bonds, Series 2003 Utility System Revenue Refunding Bonds, Series 2004 Utility System Revenue Refunding Bonds, Series 2005 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. The Ordinance does not create a lien or mortgage on the System, except the Pledged Revenues, and any judgment against the City may not be enforced by levy and execution against any property owned by the City. Special reference is made to "The Electric System" herein for a description of certain legal and regulatory changes that have affected, and are expected to further affect, the environment in which the City's electric utility system operates. PLEDGED REVENUES. . . The payment of the Parity Bonds and any Additional Bonds and the interest thereon constitutes a first lien upon the Pledged Revenues. THE RESERVE FUND. . . The Ordinance confirms the establishment of the "Reserve Fund" by the 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 (the "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 the issuance and delivery of the Bonds there shall be deposited to the credit of the Reserve Fund, from the proceeds of the sale of the Bonds, an amount of money, if necessary, 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. After 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 the Reserve 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 after the delivery 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. If at any time after the funding of the Required Reserve Amount there is a depletion therein or the Reserve Fund otherwise holds less than the Required Reserve Amount, the Ordinance requires that the City commence making transfers of Pledged Revenues from the System Fund to the Reserve Fund monthly in an amount equal to 1I60th of the Required Reserve Amount, until the Reserve Fund is restored to the Required Reserve Amount. 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. See "Selected Provisions of the Bond Ordinance" herein. FLOW OF FUNDS . . . The Ordinance confirms the creation of the" System Fund," the "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 operation and maintenance of the System are required to be paid from the Gross Revenues as a first charge from amounts in the System Fund. Before making the deposits to the other funds described below, the City is required by the Ordinance to retain in the System Fund 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. Thereafter, the City is required to transfer Pledged Revenues in the System Fund to the funds described below and in the following order of priority: 8 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 purchase of electric energy by the City. 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. Subject to making the required deposits to the credit of the various Funds when and as required by the Ordinance or any ordinance authorizing the issuance of Additional Bonds, any surplus Pledged Revenues may be used by the City for any lawful purpose. See "Selected Provisions of the Bond Ordinance" herein. 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 sufficient, 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 rate 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. See "Selected Provisions of the Bond Ordinance" herein. OPTIONAL REDEMPTION . . . The City reserves the right, at its option, to redeem Bonds having stated maturities on and after December 1, 2017, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on December 1, 2016, or any date thereafter, at the par value thereof plus accrued 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. If a 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 due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. 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 the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVEL Y PRESUMED TO HAVE BEEN DUL Y 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 THEREOF SHALL CEASE TO ACCRUE. ADDITIONAL BONDS. . . Subject to satisfying certain conditions for the issuance of parity bonds, the City has reserved the right in the Ordinance to issue Additional Bonds 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 including the Bonds. Among the conditions required by the Ordinance for the issuance of Additional Bonds, is the delivery to the City of a written certification from an independent certified public accountant 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 immediately preceding the 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 9 and Additional Bonds which are scheduled to be outstanding after 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 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, may 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 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 the holders or owners 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 the Ordinance which may be deemed necessary 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 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) 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. For a description of the notice requirements and other provisions pertaining to the amendment of the Ordinance, see "Selected Provisions of the Bond Ordinance." DEFEASANCE OF BONDS . . . The Ordinance provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securities, certified by an independent 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 reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. The Ordinance provides that "Defeasance Securities" means (1) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (3) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a 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. The City has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the City moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such defeased Bonds shall no longer be regarded to be outstanding obligations payable from Pledged Revenues, but will be payable only from the funds and defeasance securities deposited in escrow and will not be considered debt of the City for purposes of applying any limitation on the City's ability to issue revenue obligations or for any other purpose. After firm banking and financial arrangements for the discharge and final payment or redemption of the 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 the terms of the Bonds are extinguished; 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 the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the 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 redeem the Bonds, after taking the redemption into account in determining the sufficiency of the provisions made for the payment of the Bonds. BOOK-ENTRy-ONLY SYSTEM. . . This section describes how ownership of the Bonds are 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 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 (1) DTC will distribute 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. 10 The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds. The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, 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 17 A of the 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 from 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 turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MB S 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 Securities 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 be 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-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC' s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC' s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which mayor 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 Bond 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. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity 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 the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.' s consenting or voting rights to those Direct Participants to whose accounts 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 the 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 governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, 11 or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying Agent/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 the 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. 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-Entry 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 as described above, notices that are to be given to registered owners under the Resolution will be given only to DTC. Information concerning DTC and the Book-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 Underwriters. Effect of Termination of Book-Entry Only System In the event that the Book-Entry Only System is discontinued by DTC or the use of the Book-Entry Only System is discontinued by the City, printed Bonds will be issued to the holders and the Bonds will be subject to transfer, exchange and registration provisions as set forth in the Ordinance and summarized under "The Bonds - Transfer, Exchange and Registration" below. PAYING AGENT/REGISTRAR. . . The initial Paying Agent/Registrar is IPMorgan Chase Bank, National Association, Dallas, Texas. In the Ordinance, the City retains the right to replace the Paying Agent/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 Agent/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 mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. Interest on the Bonds shall be 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 postage prepaid to the 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 interest on the Bonds shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated payment/transfer office 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. TRANSFER, EXCHANGE AND REGISTRATION. . . In the event the Book-Entry-Only System should be discontinued, printed certificates will be deliver to the registered owners and thereafter the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender of such printed certificates 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 assigned 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 lieu 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 of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for anyone maturity and for a like aggregate designated amount as the Bonds surrendered for exchange or transfer. See "The Bonds - Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability 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. 12 RECORD DATE FOR INTEREST PAYMENT. . . The record date ("Record Date") for the interest payable on the Bonds on any interest payment date means the 15th 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 after 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 covenants and obligations under the 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. In addition, recent Texas lower court decisions have questioned whether statutory language authorizing cities to plead and be impleaded is sufficient to waive a home rule city's sovereign immunity to suit. 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 subj ect to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other 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 all opinions relative to the enforceability of the Ordinance and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors. 13 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 Department 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. 2. Review of recommended: a. expansion of, additions to, betterment of, or extensions to the System; b. incurring 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 Distribution, 3. Electric Substations, 4. Electric Engineering, 5. Electric Metering, 6. Electric Administration, and 7. Electric Marketing. The Water/Wastewater Utilities are composed of five main divisions, each of which is headed by a Division Manager. They include: 1. Water Production, 2. W ater/W astewater Field Services, 3 . Wastewater Treatment Plant, 4. Municipal LaboratorylEnvironmental Services, and 5. Drainage. The System utilizes the services of the City's Finance Department for accounting, purchasing and warehousing. The System utilizes the services of the Engineering and Transportation Department for design of minor water/sewer lines, easement and/or right-of-way acquisition and inspection of developer-installed water and sewer lines and project management of capital projects. The System also utilizes various administrative departments of the City for its personnel, and data processing needs. UTILITY RATES. . . It is the City's policy to review electric, water and wastewater rates on an annual basis to assure adequacy and equity. Independent consultants are generally used every 5th year, with City staff completing the work in house during the interim. Rate recommendations are submitted by the staff to the Board for review and approval, which then forwards a recommendation to the City Council for final approval. To date, the City Council has approved all rate recommendations of the Board. 14 THE ELECTRIC SYSTEM INTRODUCTION. . . 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 baseload electric generating facility, the Cities of Bryan, Denton, Garland and Greenville, Texas created the Texas Municipal Power Agency ("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 Chapter 163, Texas Utilities Code, as amended. (See "The Electric System - The TMP A Power Sale Agreement" below and "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency.") 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 TMP A's generation represents approximately 98 MW, or approximately 32% of the City's projected 2006 peak system-wide demand. The City's rights and obligations relative to TMPA are set 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 "2001 Power Purchase Agreement") with PG&E Energy Trading - Power, L.P. ("PG&E") - the agreement was subsequently assigned by PG&E to Constellation Power Source, Inc. Effective November 1, 2004, Constellation Power Source, Inc. became known as Constellation Energy Commodities Group, Inc. ("Constellation Commodities Group"). The 2001 Power Purchase Agreement expires on June 29, 2006, but until that date Constellation Commodities Group is obligated to supply all the capacity and energy requirements of the City above those supplied from the City's power purchase agreement with TMP A pursuant to the 2001 Power Purchase Agreement. On May 16, 2006, the City Council approved a new 5 year agreement with Constellation Commodities Group (the "2006 Power Purchase Agreement"), the term of which begins on June 30, 2006 and expires on June 30, 2011 unless terminated prior to that date as permitted under certain exceptional circumstances set forth in the 2006 Power Purchase Agreement. See "The Electric System - Electric System Challenges and Responses - Power Purchase Agreements." The Electric System, like other municipal electric systems in the State, is presently functioning as a traditional electric utility, supplying all aspects of electric service to its customers, within an electric system structure that has largely been unbundled and deregulated by the fundamental changes to the system of electric utility regulation in the State brought about by the enactment of Senate Bill 7 ("SB 7") by the Texas Legislature (the "Legislature") in 1999, and, in addition, by subsequent regulatory actions. See "The Electric System - The New Nodal Design Rule". 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 the part of the State that is within the service area of the Electric Reliability Council of Texas ("ERCOT"). The City is located in the ERCOT service area. See "The Electric System - Texas Deregulation Structure, Status and Issues - ERCOT." Municipally-owned utilities ("MOU s"), like the Electric System, are not required to participate in the competitive retail market, although they may" opt in" to retail electric competition. To date, no MOU in ERCOT has opted in to competition, and under the statutory scheme of SB 7 any decision by a MOU to opt in would be irrevocable. The City Council to date has decided not to open the City to retail electric competition based on various technical and financial analyses. The most recent comprehensive assessment of the City's options with respect to retail electric competition was made in January 2004. In that review, management of the Electric System ("Electric System Management") reported to the City Council and the Board, identifying several conceptual options available to the City should it decide to opt in to retail competition, including continuing to provide the current services in a competitive environment or converting the Electric System into a transmission and distribution utility, and discontinuing service as a retail provider of energy. The issues surrounding the opt in decision remain the same as those identified in the 2004 report. The report described issues that would need to be addressed by the City Council in the event that it or a future Council should be disposed toward opting in to retail competition; certain of the issues would affect all options available to the City, while other issues would apply only in selected scenarios. The report identified a number of risks and uncertainties associated with opting in to retail electric deregulation, but concluded that the largest single issue is the City's ability to pay its TMP A obligations. The City's TMP A contract requires each Member City to approve certain changes affecting the consortium, and the City is contractually obligated to pay its portion of TMP A fixed costs through at least 2018, which provides the prospect of potentially large "stranded costs" for the City (see "The Electric System - The TMP A Power Sale Agreement"). Other issues identified in the report include the potential reduction of fund transfers to the General Fund of the City, which are currently allowed by the City Charter to be made by the Electric System (see "The Electric System - Contributions to the City of Denton"), and additional costs that would be borne by the City in connection with technology upgrades needed to accommodate multiple retail energy providers if the Electric System were to opt to remain as the sole transmission and distribution utility in the City, as is permitted by SB 7. While SB 7 generally deregulates the retail sale of energy in the State, SB 7 maintains the existing regulated structure with respect to electric transmission and distribution services in the State. As discussed below under "The Electric System - The New Nodal Design Rule," on April 5, 2006, the Public Utility of Commission of Texas (the "PUC") ordered the adoption of a new, nodal wholesale market design within ERCOT based on the theory of locational marginal pricing ("LMP") of energy. The operation of the nodal system was ordered by the PUC to begin on January 1, 2009, or as soon thereafter as technically possible, through implementation of a set of ERCOT -proposed protocols (the "Nodal Design Rule"). ERCOT is presently estimating a 95% probability that the nodal protocols can be implemented on July 1, 2009. The Nodal Design Rule will dramatically alter the wholesale market design in ERCOT. However, for the reasons discussed below, 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 - Texas Municipal Power Agency - Senate Bill 7, TMPA and the Member Cities" and "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Senate Bill 7." 15 FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY . . . The electric utility industry in the State in general has been, and in the future may be, affected by a number of factors that could impact the 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 ("FERC"), the Environmental Protection Agency, the Texas Commission on Environmental Quality ("TCEQ"), the PUC and ERCOT, with respect to: wholesale market design, including allocation of transmission congestion costs; transmission cost rate structure; purchased power and recovery of investments; acquisitions and disposal of assets and facilities; operation and construction of facilities; present or prospective wholesale 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 the City and TMP A 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 the 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; . weather conditions and other natural phenomena, and acts of sabotage, wars or terrorist activities; . unanticipated population growth or decline, and changes in market demand and demographic patterns; . changes in business strategy, development plans or vendor relationships; . competition for retail and wholesale customers; . access to adequate and reliable 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 TMP A 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 fully 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. 16 TABLE 1- HISTORICAL OPERATING AND FINANCIAL DATA The table below sets forth certain operating and financial data with respect to the Electric System for each of the five most recently completed fiscal years. Average Number of Monthly Year Ended September 30, Customers by Service Classification 2005 2004 2003 2002 2001 Residential 36,699 34,635 32,478 31,974 31,151 Commercial and Industrial 4,574 4,269 4,120 4,083 4,017 Other 573 603 459 534 537 Total 41,846 39,507 37,057 36,591 35,705 Annual Megawatt Hours Sales by Service Classification Residential 443,400 411,893 414,411 396,546 403,880 Commercial and Industrial 735,225 685,470 654,257 636,347 606,309 Other 39,873 38,787 38,910 39,030 36,150 Subtotal 1,218,498 1,136,150 1,107,578 1,071,923 1,046,339 Sales for Resale 26,864 Total Sales 1,218,498 1,136,150 1,107,578 1,071,923 1,073,203 Loss and Unaccounted 62,286 54,885 57,561 50,030 53,125 Total MW to System 1,280,784 1,191,035 1,165,139 1,121,953 1,126,328 % Loss and Unaccounted 4.86% 4.61% 4.94% 4.46% 4.72% Annual Revenue by Service Classification ($ in Thousands) Residential $ 47,717 $ 41,011 $ 38,746 $ 33,670 $ 37,921 Commercial and Industrial 65,116 55,342 48,746 43,128 47,809 Other 5,313 4,816 5,904 4,039 3,894 Total $ 118,147 $ 101,169 $ 93,395 $ 80,837 $ 89,624 Analysis of Electric Billing Residential Customers Avg. Monthly Bill per Customer $ 107.62 $ 95.84 $ 99.01 $ 87.81 $ 100.24 A vg. Monthly kWh per Customer 1,003 986 1,075 1,038 1,062 Avg. Monthly Cents per kWh 10.7298106 9.77 9.21 8.46 9.32 Commercial and Industrial Customers Avg. Monthly Bill per Customer $ 1,191.63 $ 1,083.70 $ 997.83 $ 872.68 $ 985.44 A vg. Monthly kWh per Customer 13,480 13,346 13,269 13,025 12,047 Avg. Monthly Cents per kWh 8.84 8.12 7.52 6.70 8.18 Capacity and Energy Mix (rounded to nearest MW) Capacity Owned Capacity (MW) Firm Purchase (MW) - TMPA 98.00 98 98 98 98 Firm Purchase (MW) - Other 242.00 236 230 227 220 Total 340.00 334 328 325 318 Annual Peak Demand 299 277 286 266 260 Energy Owned Capacity (MWH) 79,989 Firm Purchase (MWH) - TMPA 731,647 672,531 722,401 672,087 691,289 Firm Purchase (MWH) - Other 549,137 518,504 442,738 449,866 355,050 Total 1,280,784 1,191,035 1,165,139 1,121,953 1,126,328 (1) The decline in revenues in 2002 is attributable in large part to a decline in the cost of fuel in that year, and a resulting reduction of the energy cost adjustment ("ECA"). The ECA is adjusted quarterly to recover the cost associated with purchased power under the TMPA Agreement and, beginning June 1, 2001, the Transition Power Agreement. The ECA is a pass through of fuel cost to Electric System Customers. The average ECAs for fiscal years 2002, 2003, 2004 and 2005 were $0.02625/KWh, $0.0350/KWh, $0.0393/KWh, and $0.0465/KWh, respectively. 17 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, 2005) 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 $ 8.251 bill $16.50 1 bill Energy Charge - Winter Rates First 600 KWH Additional KWH 5.70~ 1 KWH 3.79~ 1 KWH Energy Charge - Summer Rates All KWH 5.70~ 1 KWH Energy Cost Adiustment See descriotion below. General Service Large (Effective October 1, 2005) Applicable to any commercial or industrial customer having a minimum actual demand of 250 KV A 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 KV A or 180 KW during the previous twelve (12) month period may be allowed service under this rate, subject to the minimum billing provision. Customers other than commercial and industrial may be allowed service under this rate, subj ect to the minimum billing provision. Facility Charge $65.55 1 bill Demand Charge $ 9.33 1 KV A (Minimum of250 KV A billed) Energy Charge First 200,000 KWH2.14~ 1 KWH Additional KWH 1.21~ 1 KWH Energy Cost Adiustment See description below. Minimum Billing An amount equal to the facility charge, plus a demand charge billed at the above KV A rate, where demand is determined by whichever of the following methods yields the greatest result numerically: (1) the actual monthly KV A demand as measured during fifteen (15) minute period of maximum use each month; (2) 250 KV A; or (3) seventy percent (70%) of the maximum monthly KW IKV A actual demand for any month during the previous billing months of May through October in the twelve months ending with the current month. 18 General Service Medium (Effective October 1, 2005) Applicable to any commercial or industrial customer having a maximum demand of at least 20 KW in anyone of the previous twelve (12) months but less than 225KW in each of the previous twelve (12) months for all electric service supplied at point of deliver and measured through one meter. Facility Charge Single- Phase Three- Phase $ 15.801 bill $ 21.101 bill Demand Charge $ 4.00 I KW (All KW) Energy Charge First 6,000 KWH Additional KWH 4.43~ I KWH 3.66~ I KWH Energy Cost Adiustment See description below. Minimum Billing An amount equal to the facility charge, plus a demand charge billed at the above KV A rate, where demand is determined by whichever of the following methods yields the greatest result numerically: (1) the actual monthly KW demand as measured during the fifteen (15) minute period of maximum use each month; (2) seventy percent (70%) of the maximum monthly actual demand for any month during the previous billing months of May through October in the twelve months ending with the current month. General Service Small (Effective October 1, 2005) Applicable to any commercial or industrial customer having a maximum demand less than 20 KW for all electric service supplied at one point of delivery and measured through one meter. Facility Charge Single Phase Three Phase $15.80 I bill $21.10 I bill Energy Charge First 2,500 KWH Additional KWH 7.02~ I KWH 3.67~ I KWH Energy Cost Adiustment See descriotion below. Minimum Billing An amount equal to the facility charge. Energy Cost Adiustment (Effective October 1, 2005) The Energy Cost Adjustment (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 ECA shall be calculated using the following formula: ECA Proj ected energy cost for next quarter Projected KWH sales for next quarter In the event that actual plus estimated cumulative costs of fuel, variable costs of TMP A 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 third quarter FY 2005-06 ECA rate is $0.0650/KWH. 19 MANAGEMENT OF THE ELECTRIC SYSTEM. . . The Board serves the City's Department of Utilities as a consulting, advisory and supervisory body. All actions of the Board are subj ect 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, planning and safety operations. The staff of the Electric System includes approximately 110 full-time and part-time professional and administrative staff. THE ELECTRIC SYSTEM BUSINESS PLAN . . . Although there are many evolving issues concerning retail electric competition in the State and potential changes in the wholesale market design, for the early years of retail electric choice in the State, the Electric System identified and implemented a business strategy, which is described below, designed to permit the City to accommodate its long-term contractual commitment to purchase energy from TMP A, 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, the transactions described under "The Electric System - Electric System Challenges and Responses - Power Purchase Agreements." 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, with an objective of designing a strategy to protect the Electric System from the volatility and potentially fluid nature of the deregulated market design while assuring that its capacity and energy supplies are competitive with the cost of those resources to other competitors operating in ERCOT. Although, recent regulatory developments, most notably the recent order of the PUC with respect to the Nodal Design Rule, were not specifically addressed in that analysis, the strategies it laid out have functioned as planned by placing the Electric System in a position to adjust to these changes with the same level of flexibility as deregulated electric providers. The City's strategies must continue to evolve with new market developments, including the impact on the City's electric customers of increased fossil - fuel costs, and regulatory and legal developments that effect the operations of the Electric System and ERCOT market in general, thus the City closely monitors Federal and State legislative and regulatory actions for the purpose of observing and influencing, to the extent possible, developments that could affect the operations of the Electric System and the options of the City relative to the Electric System. The City has actively engaged as a stakeholder in connection with the New Nodal Design Rule, although during the PUC administrative hearings the City and other similarly-situated MOUs presented several proposed modifications to the Nodal Design Rule that were generally intended to preserve the benefits of existing MOU power supply agreements, however those modifications were rejected by the PUC in adopting its April 5, 2006 order implementing the Nodal Design Rule. The current Electric System business plan generally provides that the electric facilities owned by the City will be transmission and distribution facilities, which provide a return on investment established by the City Council, whether or not the City Council elects to open the City to full retail electric service competition. This Electric System business plan was implemented in anticipation of the restructuring of the Texas energy market that occurred in 2002 in accordance with SB 7. The business plan was implemented to provide the City with a relatively safe cash flow from the Electric System transmission and distribution business, which is not subject to competition, even under a retail deregulation scenario, while reducing risk to the City of holding unneeded generation capacity in the event the City Council should elect to open the Electric System's service territory to retail power competition. In addition, it is the City's policy to bond-finance 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. 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." Principal policy initiatives that have been pursued in light of the enactment of SB 7 include the City's sale of its obsolete generating assets in 2001 and replacement of those assets with capacity and energy through power supply and management contracts. In entering into the 2001 Power Purchase Agreement and the 2006 Power Purchase Agreement (collectively with the 2001 Power Purchase Agreement, the "Power Purchase Agreements"), the City has augmented the energy it is obligated to purchase from TMP A with such energy purchased under the agreements, which has represented approximately 40% to 45% of the City's energy purchases. The 2006 Power Purchase Agreement, together with the energy to be purchased under the TMP A Agreement, will permit the City to have established energy supply agreements for all of its requirements through June of 2011, which will extend beyond the inauguration of the ERCOT protocols that constitute the Nodal Design Rule in 2009. The City anticipates that any increased cost for energy delivered from TMP A as a result of the Nodal Design Rule will be limited, at least in the short-term, due to (1) the fact that Gibbons Creek is presently located in the same "load zone" as the Electric System, and under the Nodal Design Rule charges to loads will be based on the average zone cost and (2) the Nodal Protocols adopted by the PUC provide for "preassigned congestion revenue rights" for delivery of Gibbons Creek energy to the City in the event the present zone configuration is changed in a way that places Gibbons Creek in a different zone from the Electric System, which could result in additional congestion costs being borne by the City for delivery of Gibbons Creek energy. Additionally, the 2006 Power Purchase Agreement provides the City greater certainty with respect to energy price and services for its non- TMP A energy purchases during the transition from the existing zonal market design in ERCOT to the nodal market design, as compared to contracting for supplemental energy under a contract of shorter duration, purchasing a substantial portion of its supplemental energy needs in ERCOT spot market, or some combination thereof. 20 The ERCOT wholesale market, from which all retail energy providers ("REPs") serving retail customers in ERCOT purchase their power, has evolved into a market priced largely on the marginal generation cost in ERCOT, which is natural gas fueled combined cycle generation, regardless of the generation source the energy is delivered from. The Electric System's ability to provide 55% to 60% of the energy its customers require at actual cost of service from a coal fired plant, with the remaining power supply coming from the same wholesale market that serves deregulated REPs, has helped to offset the fixed cost associated with TMP A debt payments. This resource mix, combined with selective use of a rate stabilization fund, which was established in 1996 (the "Rate Stabilization Fund") to address the TMP A debt and competitive issues, have to date allowed the Electric System to maintain rates that are competitive with the rates available in the deregulated areas of ERCOT, even after base rate increases were implemented by the Electric System in January and October of 2005 (see "The Electric System - Electric System Challenges and Responses - Rate Study; Transmission Cost Filing and the Rate Stabilization Fund"). Based on these considerations, Electric System Management does not expect that potential competitors would be able to substantially undercut the City's electric service rate to residential or commercial customers, although large industrial load customers could be aggressively recruited by potential competitors. Presently, the City's customer base is only 11 % industrial/commercial in composition, based upon the number of customer accounts, although for the year ended September 30,2005, approximately 60% of the City's energy sales were 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 RESPONSES. . . The Electric System is committed to maintaining its electric rates at levels that are competitive with other retail electric providers. In the view of Electric System Management, among the most significant challenges facing the Electric System are those arising from the City's long-term power purchase agreement with TMP A, 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 TMP A. Depending upon the relative cost of natural gas and coal, and owing to the relatively high debt service requirements of TMP A, the total TMP A energy cost from time to time may be above market (i. e., a "stranded cost"). Over the past four years, however, natural gas prices have had a more or less sustained upward trend, and as a result TMP A's coal-generated energy costs have been attractive relative to gas-generated energy in the ERCOT market, particularly during times when demand for energy in ERCOT is high. (See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency - Outstanding Debt. ") In the event that the City should open its service area to retail competition, the Electric System could and likely would seek to recover any stranded costs represented by the TMP A power purchase agreement through the use of the nonbypassable competitive transition charge that SB 7 allows municipal electric utilities to place on their distribution rates. 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 energy delivered to the City, environmental compliance and political considerations that could affect the City's "opt in" decision in years to come. Electric System Management is of the view that the greatest potential impact on the Electric System from SB 7 could result from a decision by the City Council to participate in the competitive retail electric 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 TMP A Agreement would require the continuation of the City's take-or-pay obligations to TMP A. On the 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 should the City determine to open the City's service area to retail competition. 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 the City. A decision of the City Council not to compete may have other consequences, such as declines in economic development activity within the City due to the "protected" rate structure of the Electric System, if the rate structure is higher in cost than rates in areas that are open to competition. Under the Nodal Design Rule, the cost of energy will include charges assessed with respect to transmission constraints that affect power delivery within a particular load zone area. Therefore, the Nodal Design Rule is likely to result in lower energy delivery costs to utilities in load zones that have fewer transmission constraints than those located in more constrained areas. At present, the City is located in a load zone that is more highly constrained than some other zones in ERCOT. However, this level of transmission constraint has been reduced on the past two years. ERCOT has an organized statewide transmission system planning process that identifies such constraints and is capable of assuring that needed transmission facilities are built. The cost for such transmission is paid for on a statewide "postage stamp" basis that assures funds are available for identified transmission projects needed to reduce congestion. The ERCOT transmission planning process is continuing to pursue transmission projects designed to increase transmission delivery to Dallas/Fort Worth area in which the Electric System is located. Measures Relatinf! to TMP A. TMP A has reduced its operation and maintenance expenses in recent years through certain measures, including those described herein under "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency," and Electric System Management believes that the variable costs of TMPA energy are likely to be competitive for the foreseeable future. However, the City's share of TMP A's fixed costs, particularly its debt service requirements, could result in the total cost of the City's purchased power from TMP A exceeding the cost of power that is marketed within ERCOT from time to time. (See "The Electric System - Litigation and Potential Litigation Concerning Cost of Energy Delivered by TMP A under the TMP A Agreement" for a discussion of the potential impact that the Nodal Design Rule could have on the cost of delivering energy to the respective Member Cities of TMP A, depending upon a variety of factors, including whether the TMP A generating assets and each of the Member Cities continue to be included in a common load zone.) The price of natural gas, which fuels a significant part of the energy presently generated and marketed within ERCOT, will in 21 large part determine the relative cost of TMP A energy to other marketed energy in both the wholesale and retail markets that the City views as benchmarks. As shown below under "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency - Outstanding Debt," the debt service on TMP A's Revenue Bonds, as currently structured, increases from approximately $112 million in the fiscal year ending September 30, 2006 (an increase of approximately 35% over 2001 TMPA debt service requirements) to approximately $120 million in the year ending September 30, 2009, which represents an approximately 7% increase from 2006 levels. As described under "The Electric System - The TMP A Power Sale Agreement," a series of amendments to the TMP A 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 TMP A payment obligations. Prior to the amendment of the TMP A 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 TMP A Power Sale Agreement - The Debt Service Guarantee Percentage," under the 1997 amendments to the TMPA Agreement, the City has a fixed obligation to pay for 21.3% of TMPA's annual system costs, including the payment of TMP A'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. (See "The Electric System - Litigation and Potential Litigation Concerning Cost of Energy Delivered by TMP A under the TMP A Agreement. ") The 1997 amendments to the TMP A Agreement also repealed provisions of the TMP A 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 Electric System - Electric System Challenges and Responses - The Power Purchase Agreements," 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 by negotiating the Power Purchase Agreements. As described below under "The Electric System - The TMP A Power Sale Agreement - Rebate of Excess Revenues to the Member Cities," the 1997 amendments also require that TMP A annually rebate to each Member City its proportionate share of TMP A revenues that are in excess of the amount needed by TMP A 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 the discussion of the Stabilization Fund below. It should be noted, however, that the resolutions under which TMP A has issued its outstanding first lien revenue bonds (the "TMP A Prior Lien Resolution") and certain other resolutions under which TMP A has issued subordinate lien debt (such resolutions, together with the TMP A Prior Lien Resolution are collectively, the "TMP A Resolution") contain covenants for the protection of its bondholders and the maintenance of the tax-exempt status of its debt, which could affect the means available to both TMP A and the Electric System in responding to developing market conditions. The 2006 Power Purchase Af!reement. ... On May 16, 2006, the City Council approved the 2006 Power Purchase Agreement with Constellation Commodities Group. Under the 2006 Power Purchase Agreement, Constellation Commodities Group 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 TMP A (see "The Electric System - The TMP A Power Sale Agreement"). All energy resources of the City during the term of the 2006 Power Purchase Agreement, including power supplied to the City under its TMP A power purchase agreement, will be delivered to the City in accordance with the terms of the 2006 Power Purchase Agreement at points of delivery located within the City. In addition to supplying the City's energy in excess of the City's TMP A allocation, the 2006 Power Purchase Agreement requires Constellation Commodities Group 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 interconnections with other power grids, energy supplied to the City by Constellation Commodities Group that are in excess of amounts supplied from the City's TMP A power supply agreement must be generated from other resources within ERCOT. The City is obligated to give Constellation Commodities Group notice each day of the City's energy requirements for the next day, which requirements are required to be supplied to the City from a combination of energy taken from TMP A and other energy supplied by Constellation Commodities Group. The cost to the City of energy provided to the City under the 2006 Power Purchase Agreement in excess of that delivered to the City from its TMP A resource is not fixed, but will vary from time to time depending upon a number of factors, including the cost of fuel and energy transmission and other factors, although the City has the right under the agreement to hedge its natural gas fuel requirements for energy supplied by Constellation Commodities Group. The obligations of Constellation Commodities Group under the 2006 Power Purchase Agreement have been secured and/or guaranteed within certain limits by Constellation Energy Group, Inc. and under certain extraordinary conditions described in the 2006 Power Purchase Agreement, the City is obligated to provide additional collateral to secure its payment obligations. As is the case with the TMP A Agreement, the City's payment obligations under the 2006 Power Purchase Agreement will constitute an operating and maintenance expense of the System. Constellation Commodities Group is a Delaware corporation and a wholly-owned subsidiary of Constellation Energy Group, Inc., the shares of which trade on the New York Stock Exchange. Constellation Commodities Group is the wholesale energy operation of Constellation Energy, a Fortune 200, integrated energy company. Constellation Commodities Group is the largest supplier of wholesale power in North America, with a business focus on energy sales to wholesale customers such as electric co- operatives, power marketers, municipalities and utilities. Constellation Energy provides energy generation through its affiliate, Constellation Generation Group, LLC ("Constellation Generation"), which, in calendar year 2005 operated an energy portfolio that included nuclear, coal, natural gas, oil, and renewable and alternative fuels. In 2005, Constellation Generation owned more 22 than 12,000 MW of capacity, generated nearly 60 million MW hours, had more than 4,000, employees, had generating plants in 10 states, including an 800 MW combined-cycle generating facility located in Seguin, Texas, which is known as the Rio Nogales plant, and had ownership of more than 30 power and fuel processing stations. On December 19, 2005, Constellation Energy announced that it had signed a merger agreement with FPL Group, Inc. The announcement stated that the merger is subj ect to certain regulatory and shareholder approvals, but that the merger was expected to close in the last quarter of 2006. Under the terms of the merger agreement, the merged companies will be named Constellation Energy, Inc. and the merged company will continue to have its shares traded on the New York Stock Exchange. The press release announcing the merger states that the transaction will create a company with a market capitalization of approximately $28 billion (based on market values at the date of the announcement), combined annual revenues of $27 billion, and $57 billion in total assets. All information regarding the operations of Constellation Energy, its business operations, plans, affiliates and subsidiaries is derived from information published by Constellation Energy, including the merger announcement described above, and its most recent form 10K, filed with the Securities and Exchange Commission on March 3, 2006. Rate Studv: Transmission Cost Filinf! and the Rate Stabilization Fund. In 1996, the City established the Rate Stabilization Fund by transferring approximately $45.1 million from 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 TMP A as the amount of TMP A debt service (and thus the City's contract payments) increases. At September 30, 2005, the City had approximately $48.2 million on deposit in the Rate Stabilization Fund. During the year ended September 30, 2004, approximately $7.4 million of the Fund was used to subsidize operations of the Electric System, but during the year ended September 30, 2005, less than $500,000 of Rate Stabilization Funds were used by the Electric System, due largely to an increase in the base rates charged to its residential and general service customer classes by approximately 6%, which was effective on January 1, 2005. This rate increase was the first base rate increase implemented by the Electric System since 1994 (base rates exclude the energy cost adjustment, which is subject to change quarterly). 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. As noted above, effective January 1, 2005, the City increased the base rates charged to its residential and general service customer classes. A base rate increase was implemented effective October 1, 2005 for the Government, Temporary Service, Weekend, Athletic Fields, and Lighting customer classes. The City's rates, including the 2005 rate increases, remain competitive with TXU Energy, the incumbent investor owned utility that serves a portion of the dual certified area of the City. TXU Energy is obligated to offer the price-to-beat rate to requesting residential and small business customers in the historical service territory of TXU Electric Delivery Company, its incumbent utility, through January 1, 2007. As of January 1, 2005, TXU Energy was permitted under the terms of SB 7 to offer electricity to the residential customers in its historical service territory at a price other than the price-to-beat rate. On October 25, 2004, the Electric System filed for an increase to its Transmission Cost of Service ("TCOS") and resulting wholesale transmission rates with the PUC. The PUC staff and the City electric staff reached agreement on all but one aspect of the proposed rate increase. The parties could not reach agreement on the appropriate method of allocating debt service costs between the City electric system and the other utilities operated by the City. A hearing on that matter was held, and the State Office of Administrative Hearings issued a proposal for decision supporting the City electric staff s position. The PUC issued a final order on June 16, 2005 that agreed with the City's position on allocating debt service costs. The final order increased the City's transmission investment from which its annual TCOS payments are calculated from $995,000 to $4,021,887. The City submitted revised tariff pages complying with the final order and the revised tariff pages were approved by the PUC on August 4, 2005, with the new rates being effective as of June 16, 2005. Marketing. In light of the increased levels of electric market advertising, particularly by the investor owned utilities, that resulted from the onset of retail electric competition, the Electric System has instituted a campaign to raise the awareness of its customers of the services it offers, and to reinforce in the minds of its customers that the City provides the same level of service and service options as are available in the open market (to this end, for example, in 2004 the City initiated a green energy rate option for its customers). A marketing program aimed to develop, implement, and maintain programs that effectively solicit new customers, cultivate and reinforce customer loyalty, and improve and expand available services to customers is in place. The marketing program targets key large commercial and industrial customers and promotes various energy efficiency, energy audit, and other programs across all rate classes. THE TMPA POWER SALE AGREEMENT. . . The City's rights and obligations with respect to TMPA are set forth in the TMPA Agreement. Under the TMP A Agreement, the City is obligated to take or pay for its percentage share of the energy generated by TMP A, and TMP A is obligated to devote its best efforts to the generation and delivery of energy from the generating facilities of TMP A, but the failure of TMP A to provide energy under the TMP A Agreement will not relieve any Member City of its obligations under the TMP A Agreement, as such obligations are unconditional and absolute. The City's payment obligations under the TMP A Agreement are equal to the greater of the "Take or Pay Percentage" (as defined below) and the "Debt Service Guarantee Percentage" (as defined below). For additional information regarding TMPA, see "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency." 23 The Take or Pav Percentaf!e. Under the TMPA Agreement, each of the Member Cities is unconditionally obligated to pay to TMP A, without offset or counterclaim and without regard to whether energy is delivered by TMP A to the Member Cities, their percentage of TMPA's annual system costs, including the payment of TMPA's debt service requirements and operating and maintenance expenses, as set forth below: City of Bryan, Texas City of Denton, Texas City of Garland, Texas City of Greenville, Texas 21.70% 21.30% 47.00% 10.00% A City may choose to take or not take energy from the TMP A generating assets, as it sees fit (as noted above, while the City's TMP A resources have represented approximately one-third of the City's firm power capacity in recent years, the City has averaged taking approximately 55% to 60% of its energy from 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 TMP A. The Debt Service Guarantee Percentaf!e. In any instance where the amount of money on deposit in TMP A's funds created by the TMP A Prior Lien Resolution is not the full amount then required to be on deposit therein, without giving consideration to transfers made from funds other than TMP A'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 TMP A. The aggregate amount of such payment is the amount that is necessary to establish or reestablish the amount then required, under the terms of the TMP A Prior Lien Resolution, to be on deposit in TMP A'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 contract year, and the sum of the adjusted percentages shall equal 100%. Allocation of Enerf!V bv TMP A. Each Member City shall be entitled to schedule and receive, each month for its own account, the proportion of the available energy from TMP A'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 TMP A 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 TMP A 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 Projects. 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 TMP A's opinion that such proposed proj ect is necessary for TMP A to meet its commitments under the TMP A Agreement and is economically feasible. Each Member City is required thereafter to notify TMP A, within 60 days, of its approval or disapproval of the project. If each Member City approves the project, TMP A 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 TMP A Agreement. The TMP A Agreement includes provisions that differ from those described above for the sharing of energy and costs in the event that a new proj ect is proposed and one or more Member Cities do not determine to participate in the project. There are no current plans for TMP A to initiate a new generation project, although TMP A is reviewing the prospects of constructing new transmission proj ects. Agencv Rates. The TMP A 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 TMP A's annual system costs, (ii) make the deposits to the funds required by the TMP A Resolution, (iii) fund the annual capital budget of TMP A, and (iv) with respect to other funds or other accounts established by the board of directors of TMP A (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 of Excess Revenues to the Member Cities. Except for funds held for purposes of self insurance, any funds held by TMP A on the last day of each fiscal year (commencing September 30, 1998) 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 TMP A. 24 TMP A Af!reement Pavments Constitute Overatinf! Exvenses of the Citv. The TMP A Agreement provides that all payments by a Member City under the TMPA Agreement, including any payments required to be 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 TMP A Af!reement. Under the TMP A 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 TMP A, when due, all amounts payable by such city under the TMP A Agreement. Sale or Assif!nment of Electric Svstems. Under the TMP A Agreement and the TMP A 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 TMP A during the term of the TMP A Agreement. A Member City may assign its rights under the TMP A Agreement but such assignment shall not relieve such Member City of its financial obligations under the TMP A Agreement during the time any TMP A Revenue Bonds are outstanding. CAPITAL IMPROVEMENT PLAN AND ADDITIONAL DEBT . . . 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 firm 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, 2011. The Electric CIP identifies approximately $93.1 million in transmission and distribution projects, of which approximately 97% are projected to be bond-financed, including the use of funds from prior bond issues. The current Electric CIP indicates the total level of bond funded expenditures (including the use of both bond funds available from previous bond issues and bond funds from new issues) for Electric System improvements in the following amounts: Total Bond Funded Year Expenditures 2007 $24.8 million 2008 17.4 million 2009 17.0 million 2010 18.2 million 2011 15.7 million ELECTRIC SYSTEM'S SERVICE AREA AND SERVICE AREA COMPOSITION. . . In 1976, the Public Utility Commission of Texas (the "PUC") issued the City a Certificate of Convenience and Necessity ("CCN") 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 1, 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 territory 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 49% of the City's electric service area is multiple-certified, representing an area of approximately 53 square miles. While the City's electric service customers in the multiple-certified service area will not be open to new competitors unless the City Council "opts in" to retail competition, the Electric System competes for new customers that move into the multi -certified service area against the other utilities that have been certified in the past to provide service in that area. For the year ended September 30, 2005, the Electric System provided electric service to a monthly average of 41,876 customers located in the City. As a result of the economic catalysts of the 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 years experienced significant electric load and population growth. According to ERCOT, the load in Denton County grew from 663 MW in 1997 to 1,362 MW in 2005, which is an annual growth rate of 11.7%, and the load for the area is predicted to grow to 1,595 MW by 2010, an annual growth rate of approximately 3%. In July 2005, ERCOT reported that over 88% of the 2005 summer load for Denton County was projected to be imported from generation sources outside of the County. Denton County is in the nine-county DFW ozone nonattainment area, which will restrict the construction of traditional generation capacity in the County, ERCOT forecasts show that by the summer of 2010, approximately 90% of energy to meet the Denton County load will be imported from outside of the County. Denton County's energy import statistics are similar to those for the other three counties in the former four-county ozone non-compliance area (the area was expanded to nine counties 25 in April 2004), in which construction of new generation has been, and is expected to continue to be, restricted due to environmental compliance issues. (See "The Electric System - Environmental Regulation - State Implementation Plan for DFW Ozone Non-Attainment Status. ") The need to import energy into the DFW area contributes to the transmission constraint status of the north Texas area. (See "The Electric System - Texas Deregulation Structure, Status and Issues.") For the year ended September 30, 2005, the customer base that was served by the Electric System measured by number of accounts is approximately 88% residential and approximately 11 % commercial and industrial in composition, although commercial and industrial accounts provided approximately 60% of the energy sold. For the year ended September 30, 2005, the top ten customers of the Electric System provided 24% of the tarriffed rate revenues of the Electric System and purchased 28% 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 the five most recently completed fiscal years. For the year ended September 30, 2005, the Universities provided 8% of the tarriffed rate revenues of the Electric System and purchased 11 % of the energy sold by the Electric System. State law provides that utilities that provide electric service to State educational institutions, such as the Universities, must do so in accordance with rate tariffs that are equal to the utilities' established rate for the customer class applicable to such State educational institutions, 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 the costs incurred by the Electric System for providing such energy. This discount requirement terminates January 1, 2007. The Electric System has competed successfully for customers with TXU Energy and CoServ in multiple-certified areas since 1976. According to records of the Electric System, approximately 100% of the new residential subdivisions and large industrial accounts in the multiple-certified service area have become customers of the City during the last two fiscal years. LOAD REQUIREMENTS . . . The City's capacity requirements are calculated based upon the City's peak summer demand. For the year ending September 30,2005, the City's peak capacity requirement was 299 MW, which occurred in August 2005. The City has forecasted a maximum load of 307 MW for 2006. INTERCONNECTIONS AND POWER DISPATCH. . . The City is interconnected with two TMPA 138 kilovolt ("kV") lines and one Brazos Electric Cooperative 138 kV transmission system. The 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 the TXU Energy transmission system. Over the last five years, the City has funded approximately $59 million of transmission and distribution system improvements. The distribution 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 the event that the City should elect to open to retail competition. The transmission improvements are part of the ERCOT planned transmission system upgrades. The Electric System receives TCOS payments from the ERCOT "postage stamp" transmission system structure that covers the cost of investment in and maintenance of its transmission system. See "The Electric System - Electric System Challenges and Responses - Rate Study; Transmission Cost Filing and the Rate Stabilization Fund." LITIGATION AND POTENTIAL LITIGATION CONCERNING COST OF ENERGY DELIVERED BY TMPA UNDER THE TMPA AGREEMENT. . . In 1997, the PUC adopted open access transmission regulations that required each transmission customer to nominate load for development of the approved cost of transmission service matrix on an annual basis. After adoption of these regulations a dispute arose between TMP A and the cities of Denton, Garland, and Greenville (the "Northern Cities"), on the one hand, and the City of Bryan ("Bryan"), on the other, concerning which entity, TMP A or Bryan, could nominate the load for transmission service to Bryan. The dispute also involved whether TMP A could include in its wholesale rates for power and energy to the four Member Cities the costs of the ERCOT charges associated with open access transmission service from Gibbons Creek to the Member Cities. After both TMP A and Bryan attempted to nominate the load for Bryan, and Bryan filed a complaint at the PUC concerning the dispute, the PUC, in July 1999, ruled that under its regulations and transmission pricing orders, Bryan was entitled to nominate the load for transmission service to Bryan (the "PUC Decision"). The PUC Decision also held that while TMP A could nominate the load for the Northern Cities as their agent, TMP A could not include the ERCOT charges associated with transmission service to the Northern Cities in its rates to Bryan. TMP A appealed the PUC Decision arguing, among other things, that the PUC did not have jurisdiction to change TMP A's delivery obligations under the TMP A Agreement, to adjudicate a contract dispute, to require TMP A to provide unbundled transmission service, or to regulate TMP A's wholesale rates for power and energy. The PUC Decision was appealed and has become the subject of a series of rulings by Texas district and appellate courts. In May 2004, the Texas Court of Appeals affirmed a lower court's holding that the PUC has jurisdiction to determine the reasonableness of TMP A's transmission rate to Bryan. The Court of Appeals decision was appealed to the Texas Supreme Court, which granted TMP A's petition for review, and the Supreme Court heard oral argument in the case on October 18, 2005 (the case is styled: "Texas Municipal Power Agency, et al. v. Public Utility Commission of Texas, et al." and is referred to herein as "TMP A v. PUC"). If the appellate court decision ultimately stands, it would mean that TMP A may be unable to allocate open access transmission costs to the Member Cities in accordance with the fixed percentages set forth in the TMP A Agreement. However, under the current postage stamp method used by the PUC to price open access transmission service until the initiation of the Nodal Design Rule in ERCOT, the cost to transmit power from Gibbons Creek to each Member City is equal to each Member City's contract share of the cost of transmission service to all four Member Cities. 26 Under the Nodal Design Rule, transmission congestion is addressed by including in the cost of wholesale power a component known as "transmission congestion rent," the result being that the cost of wholesale power delivered to loads located in zones with greater transmission congestion will be higher than the cost of wholesale power in zones having less transmission congestion. The Nodal Design Rule thus uses location sensitive, or nodal, cost methodology to address transmission congestion (see "The Electric System - The New Nodal Design Rule"). Under the Nodal Design Rule, the cost of Gibbons Creek power to anyone TMP A member could be different than the cost of Gibbons Creek power to other TMP A member cities, depending upon the load zone or zones to which the TMP A member cities and Gibbons Creek are assigned. At present, each TMP A Member City and Gibbons Creek are in the northern load zone ofERCOT, thus under the Nodal Design Rule all Member Cities would be assessed the same cost for power from Gibbons Creek. However, under the Nodal protocols adopted by the PUC, after three years, zone designations could be changed, which could cause the cost of Gibbons Creek power to no longer be identical for all TMP A cities. The PUC has completed its administrative rulemaking relating to the Nodal Design Rule, but has initiated a new administrative project to examine issues relating to creating and changing load zones in the nodal market. Under the ERCOT protocols adopted by the PUC on April 5, 2006, the nodal zone configurations will not change from the current five zone configuration for the first three years after the start date of the nodal wholesale system, thus during such period all TMP A Member Cities and Gibbons Creek will remain in the North Texas zone. The new PUC rulemaking is to determine what method will be used to calculate, review, and approve any future changes to the zones. It is possible that, at some point after the first three years of nodal operation, smaller, more localized zones could be created that would result in substantially different prices for energy delivered to one or more of the Member Cities, and that such price could be substantially higher than the percentage of TMP A's annual system costs. Gibbons Creek is located approximately 19 miles east of Bryan and 225 miles southeast of the City. There are significant transmission constraints for energy coming into the DFW area, where the Northern Cities are located, from the south where Gibbons Creek is located, particularly as compared to transmission capacity between Gibbons Creek and the City of Bryan. (See "The Electric System - Texas Deregulation Structure, Status and Issues - Transmission Constraints. ") During the administrative hearing held by the PUC in connection with the adoption of the order implementing the Nodal Design Rule, each of the Northern Cities filed legal briefs and provided expert testimony to the effect that such result would, among other impacts, impair their rights under the TMPA Agreement and violate various provisions of the Texas Utilities Code. Each of the Northern Cities asserted that the TMP A Agreement provides that each Member City shall be responsible for its percentage share of TMP A's annual system costs, including debt service, operation and maintenance costs, which include energy delivery costs. The Northern Cities and TMP A also asserted that provisions of the legislation under which TMP A was created, as well as provisions of SB 7 that relate to MOU s, prohibit the PUC from interfering with such agreements. The City of Bryan intervened in the administrative hearing in support of the adoption of the Nodal Design Rule. In its April 5, 2006 order promulgating the Nodal Design Rule, the PUC stated that the modifications supported by TMP A were not presented in a manner that met the standard established by the PUC in its preliminary order relating to the hearing. That standard provided, among other things, that the Nodal Design Rule would be presumed to be valid, and that the burden of proof would be placed upon a party challenging the Nodal Design Rule to show that the Rule should be modified. TMP A and the TMP A Northern Cities filed motions for rehearing challenging the validity of the April 5, 2006 order on a number of grounds, which motion was denied by the PUC on May 16,2006. On June 15,2006, TMPA and the City of Garland filed suits in State District Court in Travis County to appeal the denial of the motion for rehearing. The final decision of the Texas Supreme Court in TMP A v. PUC, which is still awaited, could provide important precedent either for or against the arguments of TMP A and the City of Garland, as both matters involve questions of the PUC's regulatory powers vis-a-vis the rights and obligations of TMP A and the Member Cities under the TMP A Agreement. 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 Electric System also makes an annual transfer to the General Fund in lieu of a franchise payment equal to 4% of the Electric System's revenues. In addition, the City Charter provides that the City shall be entitled to receive annually on the net investment 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 revenues, although the portion of the energy cost adjustment ("ECA") that is included in the revenues subject to transfer is capped at $0.02/KWH. As part of its budget development process for the 2006-07 fiscal year, the City is reviewing the possibility of capping the portion of the ECA revenue that is used in the calculation of payment in lieu of franchise taxes at $0.04/KWH (the current ECA is $0.065/KWH), and raising the existing $0.02/KWH ECA revenue cap used for calculation of the return on investment contribution from the Electric System to the General Fund to $0.04/KWH with the possibility of a planned decrease in the portion of the ECA used in those calculations in future years. However, no final decision is expected on this matter under the final budget is adopted in September 2006. 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 are made after the Electric System has provided for the payment of operating expenses and debt service requirements. 27 TEXAS DEREGULATION STRUCTURE, STATUS AND ISSUES. . . The following discussion, as well as the discussion set forth under "The Electric System - The New Nodal Design Rule" is presented for the purpose of providing information concerning the current Texas legal and market structure, which is unique in many respects from deregulated markets 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 through its use of power purchase agreements, specifically, the 2001 Power Purchase Agreement and the 2006 Power Purchase Agreement, to meet its energy needs above the energy supplied by its TMP A entitlement. The wholesale energy market in ERCOT was established by legislation enacted in the 1995 Texas Legislature, and 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 below describes some of the effects on the market and the challenges presented to the market as a whole, as well as, in some instances, local regions within ERCOT that are facing particular effects of deregulation. The continuing development of wholesale and retail competition in the ERCOT market will affect the planning, actions, options, cost structure and other essential factors of 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 2005 PUC Report and the PUC's Report to the 78th Texas Legislature, entitled Scope of Competition in Electric Markets in Texas (the "2003 PUC Report" and, collectively with the 2005 PUC Report, the "PUC Legislative Reports"). The 2005 PUC Report is available in full on the PUC website at http://www.puc.state.tx.us/electric/reports/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 PUC Legislative Reports. The City is does not take responsibility for the content of the PUC Legislative Reports or other information presented on the PUC website. In general, the restructuring of the electric utility industry in accordance with SB 7 continues to evolve, and the City is observing and evaluating the changes in the developing energy market in the State. Since January 1, 2002 when consumer choice began in competitive areas of ERCOT, Electric System Management has noted the continued development within ERCOT 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 experience 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. Since January 1, 2002, entities have continued to enter the market, exit the market, and in some instances market participants have consolidated operations with others, thus changing the universe of participants and the contractual supply arrangements of market participants. Changes in generation patterns have also occurred as a result of the enactment of SB 7, including a substantial overbuilding of combined cycle gas plants in ERCOT, more recently, the announcement of plans for new coal generation units in the State, in apparent reaction to continued high price levels for natural gas, and the introduction of large, remote wind development and the retirement of older plants near metropolitan areas due to economics or environmental restrictions, among other factors. According to the ERCOT Report on the Capacity, Demand, and Reserves in the ERCOT Region, June 2005, which includes capacity from units that have been mothballed, in 2005 approximately 72% of the generation capacity in ERCOT is gas or duel fuel units (which typically burn natural gas and another fuel, usually diesel), approximately 20% of the capacity is from coal-fired units, approximately 7% is nuclear capacity, and the remaining 1 % is wind, hydro and other types of generation. ERCOT . . . ERCOT is one of 10 Regional Reliability Councils in the North American Electric Reliability Council. The ERCOT bulk 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 covers more than 75%, or 200,000 square miles of the State and contains a total of approximately 38,000 miles of transmission lines, including approximately 8,000 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 MOUs, 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 2001 Power Purchase Agreement, Constellation Power Source has agreed to provide QSE services, 28 directly or though another entity, for the Electric System through June of 2006. From July of 2006 through June of 2011, Constellation Commodities Group will provide QSE services to the Electric System under the 2006 Power Purchase Agreement. Individual electric utilities own sections or components of the ERCOT transmission grid and are responsible for operating and maintaining their own transmission 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, investor owned utilities have functionally "unbundled" their respective electric generation business, electric transmission and distribution 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." On April 17, 2006 ERCOT experienced an all-time peak demand for the month of April when temperatures in urban areas of the State unexpectedly increased, reaching 100 degrees in Austin, 101 degrees in Dallas and 108 degrees in Laredo. As a result, demand increased to over 53,000 MW, while the ERCOT day-ahead forecast had anticipated a peak load of approximately 49,000 MW. Some 14,500 MW of capacity was unavailable for the day due to planned maintenance, and some 2,440 of capacity became unavailable during the day due to unscheduled loss of generating units that were scheduled to be available, including some 1,700 MW around 4:00 p.m. when temperatures were peaking within the ERCOT control area. As a result, ERCOT implemented its emergency electric curtailment plan procedures for a controlled, rolling blackout of 15 minutes duration, which lasted for approximately three hours until interruptible loads were restored. ERCOT has issued a report on these events, which concludes that while ERCOT operational decisions were commendable, and the emergency procedures and implementation served to achieve the precise purpose for which they were created, notice of the emergency to some market participants, the PUC, State and local leadership, and the general public was inadequate. Overview of the Senate Bill 7 Market 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 MOU s. The PUC certificated the service areas of utilities, Electric Co-ops, and MOU s, where, for the most part, these entities were granted the exclusive right and obligation to service customers in an area. Integrated utilities, MOU s, 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 those utilities the opportunity to earn a reasonable return on prudent investments and to recover reasonably incurred expenses, but that were also just and reasonable to retail customers. As described below under "The Electric System - The New Nodal Design Rule," the Nodal Design Rule will again dramatically alter the wholesale market dynamics in ERCOT. The wholesale electric market was opened to competition as a result of the amendments to the Texas Public Utility Regulatory Act ("PURA") adopted by the Legislature in 1995. As a part of these amendments, independent power producers ("IPPs") were permitted to construct generation facilities and were granted access to the transmission lines of utilities, Electric Co-ops, and MOU s 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 (beginning January 1, 2005, affiliated REPs were permitted to offer rates lower than the price to beat), and the PUC is required to designate "providers of last resort" ("POLRs") to ensure that all customers have access to electricity in the competitive market. The POLR for the City would be determined when and if the City opts in to retail competition. 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 ("TDU"), and an REP. PGCs operate as wholesale providers of generation services, in the same manner as independent generators. REPs operate as retail providers of electricity and energy services, and are the entities that have the primary contact with retail customers in the new market. TDU s remain regulated by the PUC, and are required to provide non-discriminatory access to the transmission and distribution grid at rates and terms of access prescribed by the PUC. 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 of a single, large retail market throughout the region and the use of a neutral third party to perform tasks related to the scheduling of power and settlement functions. ERCOT also serves as the registration agent for all retail transactions. All customer switch requests, move-in and move-out requests, and monthly electricity usage data flow through ERCOT. 29 In November 2004, the PUC adopted rules to enhance its ability to execute its statutory duties in overseeing the operations of ERCOT. One rule requires ERCOT to immediately report to the PUC any event or situation that could reasonably be anticipated to adversely affect the reliability of the regional electric network; the accounting procedures applicable to ERCOT or the ERCOT market; ERCOT's performance of activities related to the customer registration function; or the public's confidence in the ERCOT market or in ERCOT's performance of its duties. REPs generally provide electricity to customers by purchasing wholesale electricity from generators located within the ERCOT region. REPs use 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. If all of the schedules submitted 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 protocols adopted by ERCOT (the "ERCOT Protocols" or the "Protocols") and approved by the PUC. Texas has not frozen prices at levels below market prices, as in some other parts of the country. In contrast to the fixed-price regimes established in other states, SB 7 created a framework whereby the 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 natural gas and purchased energy, which have resulted in rate increases in rates by the incumbent providers, who have passed through, with PUC approval, at least portions of the increased fuel charges that have affected gas-generated facilities since January 1, 2002. This price-to-beat concept is perhaps the single most important provision of SB 7 with respect to the development of the competitive retail market for residential and small commercial customers. If the 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 charged 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 generation 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 difference 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 can profitably price their services and still entice customers to switch by providing a discount off the price to beat. Status of Deregulation: Issues Revorted bv the PUC to the State Legislature. . . In the 2005 PUC Report, the PUC expressed its view that the Texas retail electric market has continued to develop and mature since 2003. By most objective measures, Texas has the most robust, well-functioning retail market in the United States. New providers continue to enter the marketplace and develop new and innovative products for customers. Customers are becoming increasingly aware of their options in the marketplace, and are continuing to examine their options from various providers. While increasing natural gas and electricity prices have been a challenge to the development of the marketplace, the PUC believes that market forces appear to be working well to provide competitive prices to customers. Wholesale and retail electricity prices have increased significantly since 2002. The PUC report attributes this increase largely to dramatic increases in the market price of natural gas. Because the majority of generation in ERCOT is fueled by natural gas, the market price of electricity in ERCOT is very highly correlated with natural gas prices. In addition, the ERCOT bid structure, as mandated by SB 7, pays all entities offering energy into the market the highest price accepted by the market at a particular time; this mechanism results in nuclear and coal fired generation plants, which generally have lower variable costs, receiving the ERCOT natural gas based marginal price for their energy . Natural gas prices increased approximately 250% since the retail market opened to competition on January 1, 2002 to January 1, 2006, and wholesale electricity prices have also more than doubled. Customers continue to take advantage of their opportunities to switch providers and obtain a lower rate. As of March 2006, in areas of ERCOT that have opened to competition (approximately 25% of the ERCOT market is served by MOU s or Electric Co- ops that have not opted in to retail competition), over 1.5 million retail customers were taking service from a non-affiliated provider, and a total of 2.4 million switch requests had been processed by ERCOT. Over 29% of residential customers and more than 32% of commercial and industrial customers are receiving service from non-affiliated REPs. These customers are typically the biggest and most energy intensive customers, as evidenced by the fact that these customers represent more than 43 % of the energy used by all retail customers. Generation cavacitv adeauacv. According to the ERCOT Report on Existing and Potential Electric System Constraints and Needs, October 2005 (the "ERCOT Transmission Report"), from 1999 to 2005 the peak demand on the ERCOT system has increased approximately 1.6% per year. The current forecast for 2006 to 2011 indicates ERCOT's peak demand is expected to continue this trend with an increase of 1.6% annually. For the ERCOT system energy usage has grown approximately 1.5% per year since 1999. Current ERCOT forecasts indicate this trend will increase to approximately 2.1 % per year from 2005 to 2011 based on projected growth in the fundamental economic variables which have historically driven load growth in the ERCOT 30 region. Current installed generation capacity in the ERCOT Region is about 80,000 MW, which includes 7,350 MW of generation that is "mothballed" (suspended operations from the grid for more than six months). Currently there are about 8,500 MW of generation within ERCOT that is over 40 years in age. Generation maturity is important to ERCOT planners in determining available capacity, long-range reliability, and whether there will be enough new capacity to compensate for load growth requirements. Age and efficiency are maj or factors in the decommissioning of units. Most of the capacity greater than 50 years is around DFW. Since 1999 the ERCOT system has added 59 plants, totaling over 24,000 MW of generation. Three of these new plants are capable of serving ERCOT and the Southwest Power Pool ("SPP"). Much of the new generation is around Houston and in the Rio Grande Valley in south Texas. Several large wind projects have been built in west Texas. These new plants, especially the wind generation, have resulted in significant changes which have placed new challenges on the adequacy and the reliability of the existing transmission grid. Companies in the electric business have made significant investments in Texas (State-wide, including non-ERCOT areas) in recent years. Eighty-two new generation plants were installed in Texas between January 1995 and March 2006, leading to reserve margins in excess of 17% in ERCOT for 2005. About 33,501 MW of new capacity has been added in Texas since 1995, with another 1,413 MW under construction and some 10,988 MW of new capacity has been announced but has not yet begun construction (all statistics in this paragraph include fossil - fueled and renewable generation). In October 2005, ERCOT reported that it was tracking about 15,000 MW of proposed generation capacity, and that load growth in the state, revisions to the PUC transmission rules, market deregulation, and other factors continue to attract merchant plant developers to the Texas market. However, there is still uncertainty associated with the proposed plants because many are in competition with one another and some may not be built. In April 2006, TXU Energy announced plans to file for regulatory approval to construct an additional 8,600 MW of coal generation capacity at 8 generating units in ERCOT. The chart below provides information on ERCOT projected summer reserve margin for the years 2006 through 2010. ERCOT experiences peak demand during the summer; proj ected winter reserve margins are substantially higher than the proj ected summer margins. Reserve Margin Total if Mothballed Summer Load Firm Load Resources Reserve Units Remain Year Forecast (MW) Forecast (MW) Available (MW) Margin Out of Service 2006 61,656 60,544 70,756 16.90% 16.90% 2007 63,222 62,110 71,573 15.20% 12.00% 2008 64,318 63,206 70,690 11.80% 9.00% 2009 65,950 64,838 70,628 8.90% 6.20% 2010 67,548 66,436 71,205 7.20% 4.50% 2011 69,034 67,922 71,242 4.90% 2.20% Source: ERCOT Report on the Capacity, Demand, and Reserves in the ERCOT Region, June 2006 Note: Reserve margins shown in the table above are based on summer firm load for ERCOT, not peak summer load. ERCOT has performed technical studies and reviewed the appropriate level of reserve margins. As a result of such studies, ERCOT has established a 12.5% reserve margin goal for the ERCOT market. The PUC has opened a rulemaking project to determine whether the adequacy of reserve margins should be left to market forces, or whether other means should be created to help ensure a minimum reserve margin. Transmission Constraints . . . One of the fundamental market design elements in the current ERCOT Protocols is the use of a zonal congestion management system to resolve transmission congestion. Congestion can occur in any electrical system when the lowest-cost mix of generating plants to serve customer needs cannot be used because transmission lines would be overloaded under that pattern of generation and load. If transmission facilities limit the operation of the optimal set of generation plants, the transmission grid is said to be "congested." Congestion is relieved through rearranging or "re-dispatching" generation such that the flow of electricity on the grid is altered, and the constraining line is no longer in danger of being overloaded. Generating units that are ordered by ERCOT to lower or increase their output to relieve congestion receive payments to do so from other market participants. In the ERCOT zonal system, the transmission elements that are most likely to limit the free flow of electricity are identified as "commercially significant constraints" ("CSCs"), and the transmission grid is divided into congestion zones such that each of the generators and loads within a zone has a similar effect on the CSCs between the zones. ERCOT has identified five congestion zones (Houston, North, Northeast, South and West). In a zonal system, most congestion occurs between zones ("zonal congestion"), but it can also occur within a zone ("intrazonal congestion"). ERCOT reports that between June 1, 2002 and May 31 31,2003, total zonal congestion costs borne by consumers were approximately $238 million. The ERCOT Transmission Report states the total zonal congestion costs declined to approximately $30 million by 2004-05, with the South to North portion of that amount being less than $5 million. Since 1999 ERCOT TDUs have completed projects costing approximately $2.2 billion. ERCOT estimates that the projects that are being considered over the next six years to meet the growing electricity needs in its control area are estimated to cost $2.8 billion. ERCOT has implemented a zonal balancing energy market for the resolution of transmission congestion between the five zones. A CSC is generally a high voltage (138 kV to 345 kV) power line which acts as an interface between two zones and physically limits (due to its design capacity) the economic flow of energy between the zones to a commercially significant degree. When an ERCOT system operator determines a CSC is congested, the system operator reduces the line loading by issuing instructions to increase the generation in the zone importing the power and to decrease generation in the zone exporting the power. The instructions are based upon the generators' bids available in the balancing market. The resulting overall higher costs are defined as zonal congestion costs and are directly assigned on a pro-rata basis to those market participants scheduling energy over the CSC. Since 2002, zonal congestion costs dropped significantly and have remained fairly constant for the past three years. Intrazonal Congestion . . . Intrazonal, or local, congestion occurs when the lack of sufficient transmission infrastructure in a given area (within a single congestion zone) results in a limitation, or bottleneck, of the flow of energy into or within that area. For 2004-2005 ERCOT identified nine general areas with local constraints, including an eight county area within the North Texas zone, designated as the DFW intrazonal area, which includes the City. Intrazonal congestion is usually remedied by running higher-cost, less-efficient generation in the local area to reduce transmission flows and to improve the voltage profiles in the area. To resolve intrazonal congestion, three different ERCOT market services for the use of generation-unit-specific deployments are used. These are Out-of-Merit Energy, Out-of-Merit Capacity and Reliability Must-Run. The cost of providing these services is collectively defined as intrazonal (local) congestion costs and is uplifted to all load-serving entities within the ERCOT region. Intrazonal congestion costs are highly dependent on local generation availability, the limits of the current transmission infrastructure (including the impact of scheduled and non-scheduled outages), the local area load demand, and projected load growth. ERCOT is working diligently with market participants to develop both short-range and long-range plans to minimize intrazonal congestion costs. As a result, due to new transmission and other operational improvements, annual intrazonal congestion costs were reduced from over $360 million in 2003-2004 to $240 million in 2004-2005. Congestion costs have decreased in DFW and other intrazonal areas in recent years, but have increased areas in south Texas. For DFW, intrazonal congestion costs were approximately $81 million in 2002-03, $104 million in 2003-04 and $59 million in 2004- 05. Transmission Constraints in the Dallas-Fort Worth Area. . .The DFW area is the large, dense load center comprised of many of the cities in north Texas. The large load in this area continues to grow by a significant amount each year. In addition, several generating units in the area have recently been mothballed. The increasing load in DFW, as well as mothballing of these older gas units, has led to increased requirements on the transmission system in the area. These increased requirements include the need for additional transmission capacity into DFW and into certain subsections within DFW, as well as additional autotransformer capacity to allow power to be transferred from the 345-kV bulk transmission system down to the load that is served off the 138-kV system. The DFW area, in which the City is located, is one of ERCOT's two largest load centers, with a total load in 2005 of about 18,000 MW for the four counties in the central Dallas/Fort Worth area (Dallas, Tarrant, Collin, Denton), but a combined capacity of only about 5,000 MW. In recent years, a significant amount of generation capacity has been constructed just outside of the four-county area. In some cases, the siting of the new generation has been strongly influenced by air quality issues affecting the DFW area, as described below. Although DFW load is concentrated inside a four-county area, few power plants are located inside that region to serve the load. DFW generation totals about 5,000 MW, with the remainder imported over the ERCOT transmission grid. Since 1999 about 2,600 MW of generation has been built and another 3,300 MW of generation is planned near DFW, but all these plants are outside the transmission-constrained metro area. Sites for new generation development are limited and are likely to encounter public opposition. Construction of generation in the four-county DFW area is further compounded by the fact that the area is part of a nine-county area that has been designated by the Environmental Protection Agency ("EP A") and TCEQ as a non-attainment area for ground- level ozone, which is produced in part from nitrogen oxide (often referred to as "NOx") emissions from fossil - fuel burning. For a discussion of current State Implementation Plan ("SIP") mandates of specific actions to reduce emissions of NO x from various sources within the area, see liThe Electric System - Environmental Regulation - State Implementation Plan for DFW Ozone Non-Attainment Status. II To conform to the SIP, DFW power plants will be required either to retrofit existing generation units 32 with new NOx reduction devices or to reduce or cease operation. Because the existing DFW transmission system was designed assuming continued operation of this in-area generation capacity, the DFW area could experience significant problems of peak period supply adequacy and voltage stability if significant amounts of the in-area generation becomes unavailable and no new in- area plants are built. THE NEW NODAL DESIGN RULE. . . Introduction. . . In August 2003, the PUC adopted an order setting forth the parameters of the Nodal Design Rule. In adopting its order, the PUC required that the rule be developed with consideration of microeconomic principles, and implemented through a stakeholder process developed under the auspices of ERCOT, which established the Texas Nodal Team ("TNT") for the purpose of developing new protocols on which the wholesale market design in ERCOT would be based. In November 2004, ERCOT filed a cost-benefit study with the PUC and a set of draft protocols describing a proposed nodal market design similar to the market design adopted by FERC in its Standard Market Design. Pure theoretical nodal market design is based upon the costs incurred for delivery of energy to a specific location on the electric grid, and assessing that cost to the specific location as opposed to spreading the cost to all participants on the grid, as in the current "zonal" wholesale market design of ERCOT. This nodal approach is used in the service areas of several national ISOs, particularly, those in the northeast region of the United States. The Texas design is a variation of that theoretical approach in which load costs are settled by zones and all other participant costs are settled by specific location (node). On September 25, 2005, the Texas nodal protocols were filed with the PUC, and a series of administrative hearings were held by the PUC in late 2005 during which expert testimony and legal briefs were presented by over 40 stakeholders, including consumer groups, associations representing large energy users, independent power producers, investor owned utilities, MOU s, Electric Co-ops, ERCOT, the Office of Public Counsel of the PUC, and energy aggregation groups. Comvarison of the Existinf! Zonal Market to a Nodal Market. . . The existing ERCOT zonal market operates in a manner that allows parties to meet their contractual requirements and deliver power based upon those contracts. It also allows entities to self- supply their energy requirements from their owned resources without any market impacts other than the potential of reliability related transmission congestion costs. An MOU, such as the City, is able to schedule all of its energy, reliability and other ancillary energy services from its own resources, and if so scheduled those resources will be dispatched to provide those services. Under the current scheme, ERCOT may only move such resources off of their dispatch points to address system reliability concerns. The current ERCOT zonal market design also includes a balancing energy market operated by ERCOT to cover any deviations in scheduled transactions and actual requirements. This market clears energy transactions on a uniform price within each geographical load zone. The transmission system is divided into five zones based upon the electrical configuration of the transmission system. Each of the five zones includes all of the load and generation resources geographically bounded by the designated electrical system network. If a generating resource is moved from its scheduled dispatch point to another dispatch point, either up or down, that resource receives compensation based upon the direction of movement and a uniform clearing price across that single load zone. The balancing energy market approximates 5% of the total energy delivered within the ERCOT system, with the remaining 95% representing energy sold bilaterally among contracting buyers and sellers of energy. One of the key features of a market based on bilateral contracts is that there is an ability to gain price assurance for the cost of meeting the energy requirements on a short-term and long-term basis. In contrast to the existing zonal wholesale market design, the nodal market design uses the locational marginal price ("LMP") solutions model, which requires all generating units to offer energy to the market at some price, and all energy transactions are settled through an ERCOT -developed LMP algorithm. Under a nodal LMP market, ERCOT will calculate a price for every monitored location within the transmission grid. These prices reflect the impact of each and every generator or virtual injection and the relationship of each and every megawatt of energy withdrawn from the system relative to the load carrying capability of the transmission system. This is done on a system-wide basis for each and every settlement period (generally, a settlement period is a 15 minute interval). Under a nodal LMP model more money is purposefully collected from "Load Serving Entities" (MOU s, Electric Co-ops or REPs that sell energy to retail customers) than is necessary to compensate the supply side (generators or wholesale power marketers). This is done through the introduction of a new pricing element called" congestion rent" into the market. The revenue from this "congestion rent" is disbursed to holders of Congestion Revenue Rights ("CRRs") associated with each specific transmission element in ERCOT. CRRs can be obtained by any entity, that meets specified credit standards, wishing to bid in an ERCOT managed CRR auction. CRRs obtained through the ERCOT auction process can be traded between entities in secondary markets. CRRs may be obtained by Load Serving Entities as a hedge against "congestion rents" they may be assessed or by entities wishing to trade in this commodity market purely for the opportunity it offers to provide a return on their investment. In adopting the Nodal Design Rule on April 5, 2006, only one change was made to the protocols that were filed with the PUC by ERCOT in September 2005. That change was suggested by an Electric Co-op and included definitional changes related to ancillary energy services to allow for self-scheduling of generation load in the scheduling with ERCOT to permit separate determination of congestion charges or payments and energy imbalance service charges or payments to permit self-scheduling entities to designate a source and sink for their transactions. In addition, the PUC recommended that additional study be given to three issues raised during the administrative proceeding, specifically, (1) co-optimization of energy reserves in the real-time 33 market (measures designed to optimize the resources that produce energy as contrasted with those relied on to provide operating reserves, i.e., co-optimization of energy and reserves), (2) load participation in the nodal market (the ability of supply side participants to participate in the market with energy and capacity services and to encourage the demand side of the market to respond better to wholesale "price signals") and (3) creating and changing load zones in the nodal market, including any load zones that may be created by NOlEs (the PUC has expressed its intent to establish a separate rulemaking project to address how load zones will be determined and changed, which will impact how broad or narrow a load zone is for purposes of spreading congestion costs among the participants in that area. Concerns Exvressed bv the Citv with Resvect to the Develovment of the Nodal Desifzn Rule . . . During the course of the stakeholder process during which the nodal protocols were developed and during the administrative hearings, the City has expressed concerns that the Nodal Design Rule may reallocate the costs of alleviating transmission constraints in a manner that could increase the total cost of energy in transmission constrained areas of ERCOT, which include the City. It has also expressed an overall concern that, based on the experience in electric markets, which operate under a nodal design, application of a nodal design in ERCOT will increase the volatility of energy prices and cause a system wide increase in energy costs paid by consumers. The City challenged the authority of the PUC to implement the Nodal Design Rule on several grounds and proposed modifications to the proposed protocols that were designed to ensure that the City will continue to have energy price certainty under the terms of the TMP A Agreement for energy purchased by the City from TMP A. The City's challenges and proposed modifications, as well as those of other participants, were rejected by the PUC in its order of April 5, 2006. FEDERAL REGULATION OF ELECTRIC TRANSMISSION SERVICES. . . The Enerf!V Policv Act of 1992. The Federal Energy Policy Act of 1992 (the "Energy Act"), greatly expanded the authority of FERC to order utilities, including utilities within ERCOT, to provide transmission service for other utilities, qualifying facilities, and independent power producers. 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 rules 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 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. FERC Final Rules and Provosed Rulemakinf!s in Federal Ref!ulation 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, transmission 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. 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. FERC also indicated that it intends to apply the principles set forth in the FERC Rules to the maximum extent 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. Although the FERC Rules do not directly regulate municipally-owned and other non-FERC-regulated 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-regulated utilities exercise their option to switch to an alternative supplier of electricity. 34 Over the past several years, various efforts have been made to provide some interstate connections with the ERCOT transmission grid. These efforts have resulted in protracted judicial and administrative proceedings involving ERCOT members. FERC has issued orders, which, among other things, permit the ERCOT members to avoid Federal regulation of rates as the result of the ordered interconnections with another interstate connected utility. PROPOSED FEDERAL LEGISLATION. . . Many bills have been introduced in the United States House of Representatives and the United States Senate to deregulate the electric utility industry on the Federal or state level. Many of the bills provide for open competition in the furnishing of electricity to all retail customers (i. e., retail wheeling). In addition, various bills have been introduced that would impact the issuance of tax-exempt bonds for electric transmission and generation facilities. 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. ENVIRONMENTAL REGULATION. . . General. Electric utilities are subject to numerous environmental regulations administered at the Federal and State level. Over time such regulations have become more stringent as water and air quality goals have tightened, and as pollution control technologies have advanced. Although it is expected that this trend will continue into the future, the uncertainty associated with future regulations, coupled with the piecemeal and uncoordinated manner in which they are implemented, presents the electric utility industry with a formidable challenge. This challenge was further compounded in 1999 when EPA launched a major enforcement initiative targeting older coal-fired electric generation plants. In undertaking this action, it was EP A's assertion that a number of coal-fired electric generation plants have undertaken major modifications in the past without concurrently upgrading pollution controls as required under the new source review ("NSR") provision of the Federal Clean Air Act ("FCAA"). The seriousness of this enforcement initiative has had a chilling effect on the electric utility industry, as many companies are hesitant to pursue improvements or perform needed maintenance on their generation assets for fear of unwittingly triggering NSR provisions or actual EP A enforcement actions. Through several rulemaking actions, EPA has attempted to provide both clarity and some degree of reform to the implementation of the NSR provisions. However the rules have been challenged and will likely be tied up in litigation for some time to come. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency - Clean Air Act Compliance." The Federal Clean Air Act. In 1990, legislation was signed into law that significantly amended the FCAA (the "1990 Amendments"). Among other requirements, the 1990 Amendments addressed acid rain deposition through the reduction of sulfur dioxide and nitrogen oxide emissions from electric utility power plants, particularly those fueled by coal. In an innovative approach to pollution control, sulfur dioxide emissions were limited by means of a market-based emission cap and trade program, which was implemented in two phases. The Gibbons Creek facility of TMP A were subject to Phase II of this program, which went into effect in year 2000. Under the program, the unit received sufficient sulfur dioxide allowances to sustain current operating requirements. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency - Clean Air Act Compliance." The 1990 Amendments also required coal units to reduce nitrogen oxide emissions. As with the sulfur dioxide program, the nitrogen oxide program consists of a two-phase strategy, with the first set units achieving compliance in 1996 and the second in 2000. Gibbons Creek is covered under Phase II. Ambient Air Oualitv Standards. The EP A 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 exceeds a standard, the area is classified as "nonattainment" for that pollutant. A nonattainment designation then triggers a process by which the affected state must develop and implement a plan to improve air quality and "attain" compliance with the appropriate standard. This so called State Implementation Plan or "SIP" entails enforceable control measures and time frames. Of these six pollutants, large urban areas have had the greatest difficulty achieving the ozone standard. This challenge was compounded in July of 1997, when EP A adopted a revised and more stringent ozone standard along with a new standard for fine particulates. The tighter ozone standard is often referred to as the 8-hour standard because it is based on an 8-hour average and is intended to protect public health against longer exposure. Whereas the previous standard was based on a one-hour average, both the 8-hour ozone and fine particulate standard withstood a formidable challenge and were ultimately upheld by the Supreme Court in February of 2001. In an effort to improve the air quality in both existing and impending nonattainment areas, the State has implemented two regional programs targeted at reducing statewide nitrogen oxide emissions from power plants. Nitrogen oxide emissions are targeted in that these compounds reacts with volatile organic compounds in the presence of sunlight to form ground level ozone. The first program, which was part of SB 7, required that "grandfathered" power plants, i.e., facilities that were constructed prior to the 1971 Texas Clean Air Act, obtain a Texas Air Permit and reduce nitrogen oxide emissions by approximately 50%. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency - Clean Air Act Compliance." 35 The second program was implemented on April 19, 2000, when TCEQ adopted a regional nitrogen oxide reduction rule affecting permitted power plants in the attainment counties in the eastern half of the State. The regional rule, as with the grandfathered provisions of SB 7, calls for an approximate 50% reduction of nitrogen oxide from permitted power plants. Gibbons Creek is affected by this rule and must achieve compliance by May 1, 2005. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency -Texas Municipal Power Agency - Clean Air Act Compliance." Through these regional nitrogen oxide reductions, the power plant sources located in the nonattainment regions are facing much more severe nitrogen oxide control requirements. State lmvlementation Plan for DFW Ozone Non-Attainment Status. The Dallas/Fort Worth ozone nonattainment area (originally, Collin, Dallas, Denton, and Tarrant Counties, and as of April 15, 2004, Ellis, Johnson, Kaufman, Parker and Rockwall Counties were added to the nonattainment area) was originally designated "moderate" under the 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 EP A measure that specifies that certain pollutants not be at or above a particular level on more than three days over three years). As required by the FCAA, the State submitted an attainment demonstration plan (a SIP) in 1994 which proj ected attainment of the ozone air quality standard by 1996. This plan was based on a volatile organic compounds reduction strategy. DFW did not attain the ozone standard in 1996. The EP A is authorized to redesignate an area to the next higher classification ("bump up ") if it fails to attain by the required date. Consequently, in March 1998, and in accordance with FCAA, EPA reclassified DFW from moderate to serious, based on monitored exceedances of the ozone standard between 1994 and 1996. The reclassification required the State to submit a revised State Implementation Plan demonstrating attainment of the ozone standard by November 15, 1999. Because DFW continued to exceed the ozone standard in 1999, EP A required submittal of a revised SIP by May 1, 2000, demonstrating attainment. On April 19, 2000, the Texas Natural Resources Conservation Commission (now TCEQ) adopted a new SIP, which included a plan for the then four-county DFW nonattainment area that included Denton County. In February 2001, EPA accepted the SIP and the DFW plan. In accepting the plan, EPA noted that the State had demonstrated that the DFW area is impacted by ozone traveling from the Houston/Galveston area. Moreover, EP A did not reclassify the DFW area from serious to severe, and deferred the compliance date for the DFW area to November 15,2007 from November 15, 1999. The overwhelming majority of NOx in the DFW area comes from on-road mobile (cars and trucks) and non-road mobile (construction equipment, aircraft, locomotives, among others) sources. According to TCEQ, major stationary sources contribute about 15% of the total NOx in DFW during the ozone season, and therefore must be included in efforts to meet the ozone standards. Although the DFW SIP contains regulations for the control of point source NOx, mostly from power plants and cement kilns, the attainment demonstration will continue to rely heavily on reductions from on road and non-road mobile sources. 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 lean-burn 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 nine-county nonattainment area. The nine-county area is now classified as a "moderate" ozone nonattainment area under the eight-hour ozone standard, with an attainment date of June 15, 2010. The requirements of the one-hour standard will remain in effect for the four core counties until EP A revokes that standard on June 15, 2005. At that time the entire nine-county area will be subject to the eight-hour requirements. However, anti-backsliding provisions ensure that all one-hour control strategies currently in the SIP remain in place. In April 2004, along with its classification of new counties in the DFW under the eight-hour ozone standard, EP A also addressed other aspects of eight-hour attainment in Phase I of its Implementation Rule, promulgated April 30, 2004. The Implementation Rule outlines a number of options for areas with outstanding obligations for an approved one-hour ozone attainment demonstration, which applies to the DFW nonattainment area. Should EP A ultimately determine in accordance with its review time line that the State fails to demonstrate attainment, EP A 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 of a more stringent environmental permitting program for commercial and industrial entities, possibly retarding economic growth in such areas.) As noted above, the original "attainment" deadline for DFW was 1996, which was subsequently extended by the EPA to 1999. Texas submitted its SIP in 2000 for the then-current one-hour ozone standard. EP A took no action on the 2000 Texas SIP until litigation styled "Blue Skies vs. EP A," described below, was filed in October 2004. On a national basis, EP A has adopted a revised and more stringent ozone standard based on an eight-hour exposure period, and adopted a regulation revoking the one hour ozone standard as of June 15, 2005. That revocation by EPA is currently being challenged in another lawsuit in Federal court. 36 In October 2004 a coalition of environmental action organizations (the "EAOs") filed suit in federal District Court seeking an order directing EPA to take action on the 2000 Texas SIP. The TCEQ, several counties in the DFW area, and a number of industrial trade associations, including the Association of Electric Companies of Texas, joined the litigation. Settlement discussions ensued, in an attempt to focus future SIP efforts on the new eight-hour ozone standard, rather than the old one hour ozone standard. In May 2005, a series of settlement agreements were entered among the parties to the litigation, involving separate agreements between the EAOs, EP A, TCEQ and the North Central Texas Council of Governments ("NCTCOG"). The legal settlement includes two elements pertaining to EP A. The first is a consent decree between the EAOs and EP A that requires EPA to take final action by December 1, 2005 on three submitted but unapproved portions of the Texas SIP: (1) the Texas Emission Reduction Program ("TERP"), providing funding for various voluntary emissions reductions, largely addressing heavy duty diesel and similar equipment; (2) the Voluntary Mobile Source Emission Reduction Program ("VEMP"); and (3) a series of Transportation Control Measures ("TCMs"). In April 2005, EP A also took final action in on two other outstanding elements of the State's 2000 SIP, the 9% Rate of Progress ("ROP") SIP (for period 1997-1999) and the 15% ROP SIP (1990- 1996). In its settlement agreements, TCEQ has agreed to use its best efforts to develop and submit the eight-hour SIP in advance of the June 2007 deadline, and strive for attainment in advance of the 2010 deadline. TCEQ has agreed to perform an analysis of potentially available control measures, including consideration of all control measures in Los Angeles, California, which has the most extensive air pollution controls of any area in the nation. TCEQ has agreed to implement and submit any available" early measures" for EP A approval into the SIP as soon as they are available. TCEQ has agreed to immediately commence an independent study of advanced control strategies for DFW area cement kilns, and consult with the EAOs and others in developing and administering the kiln control study. TCEQ has agreed to model future air quality using the recommendations of that study, and consider the study's recommendations in developing the eight-hour SIP control strategy. Air pollution control planning processes are on-going until a region achieves and can maintain compliance with the health-based ambient air quality standards. TCEQ is developing an interim plan to meet new EPA requirements that will be adopted by June 2005. According to press reports, it is expected that the new eight-hour SIP will follow closely. Legislation is currently pending in the Texas Legislature for the reauthorization and extension of TERP and Low Income Repair, Retrofit and Accelerated Replacement Program (LIRAP), each of which are seen as critical to success in air quality improvement in the DFW area. Mercurv Ref!ulation and Clean Air Act Reforms. In an attempt to provide regulatory certainty and some degree of reform, while achieving the nation's air quality goals; in 2002 the Bush Administration proposed the Clear Skies Initiative ("Clear Skies"), which would have required electric generators to reduce sulfur dioxide, nitrogen oxide and mercury emissions by about 70% by 2018. However, in the Spring of 2005, when it became apparent that Clear Skies legislation would not be enacted by Congress, the EP A implemented the Clear Skies emission reductions through rulemakings under the existing Clean Air Act. The Clean Air Interstate Rule ("CAIR") is a cap and trade program designed to bring states in the eastern half of the United States into compliance with the ozone and fine particulate standards by reducing nitrogen oxides and sulfur dioxides in upwind states. The rule applies to power plants in 28 states, including Texas and in the District of Columbia. The reductions will be achieved through a cap and trade program modeled after EP A's acid rain program. The reductions will be implemented in two phases, beginning in 2009 and culminated in 2015 with about 70% emission reductions. The Clean Air Mercury Rule ("CAMR") is also a market based cap and trade program that is imposed on all coal fired power plants. As with CAIR, the reductions will be achieved in two phases, beginning in 2010 and culminating in 2018 with an approximate 70% reduction. The effects of these regulations on Gibbons Creek are currently being investigated by TMP A. In an attempt to provide regulatory certainty and clarity with respect to the aforementioned NSR program, the EP A introduced a NSR reform package that consisted of two separate rulemaking actions issued in late 2002 and the fall of 2003. Although both rules were challenged, the more controversial of the two, which is intended to better clarify those activities considered to be "routine maintenance, repair and replacement," was vacated by the D.C. Circuit Court of Appeals on March 17, 2006. See "Appendix B - Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency - Clean Air Act Compliance." 37 THE WATER SYSTEM The water system provides retail water service to all customers located within the City limits, as well as wholesale treated and raw water service to the Upper Trinity Regional Water District ("UTR WD") for its use and for resale to two of its customer cities. The water distribution system consists of 2 water treatment plants, 450 miles of water mains, 14 million gallons of ground storage, and 4.36 million gallons of elevated storage. The City continues to operate the water system in compliance with all State and Federal water quality requirements. Water Supply. . . The present municipal supplies are obtained from surface sources. The City has conservation storage rights in Lewisville Reservoir, which was constructed by the U.S. Corps of Engineers. This Reservoir has a maximum conservation storage area of 436,000 acre feet of water. The City holds the rights to 21,000 acre feet of storage, with the balance being held by the City of Dallas ("Dallas"). Based on the safe yield of 90.20 MGD, the City receives 4.34 million gallons per day ("MGD") in water rights from Lewisville Reservoir. The City also has 207,896 acre 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 Lewisville Reservoir. The City and Dallas have determined and agreed by contract that the safe yield of Ray Roberts Reservoir is 76 MGD, and that the City's share is 26% or 19.786 MGD, and Dallas' share is 74% or 56.24 MGD. The City projects that the combined 24.62 MGD of currently available surface water volume from Lewisville Reservoir (the City has rights to 4.86 MGD in Lewisville Reservoir, including wastewater effluent returns) and Ray Roberts Lake (the City's rights in Ray Roberts total 19.76 MGD) will be sufficient to serve the City's needs for approximately eight years. The City's retail and wholesale treated water volume during 2005 averaged approximately 15.16 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 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 0.4406 cents per 1,000 gallons. State legislation has been enacted in recent years to organize similarly-situated water use areas into water planning groups. The City is working with Dallas and the other water users of the State's seventeen-county Region C Water Planning Group, which are conducting a long-range water supply study to determine the water requirements and supply alternatives for the region through 2050. Given its raw water contract with Dallas, the City is of the view that it has the flexibility to work with Dallas at least through the remaining term of the agreement, but that it could also become a participant or a customer of other regional water suppliers that are investigating additional water supplies for the Region C Water Planning Group. The City has adopted a drought contingency plan, designed to help reduce water system demands in the event of a reduced water supply due to extended drought conditions or a temporary loss of critical facilities. Since the City shares two water supply reservoirs with Dallas, the drought contingency plan of the City shares common "trigger points" with the Dallas with respect to water that may be taken from the shared water supply reservoirs, although the City may implement its drought contingency plan for water treatment and/or distribution system limitations even if Dallas has not implemented its drought contingency plan. The City enacted an irrigation ordinance effective June 1, 2006 that is similar in design to the Dallas irrigation ordinance, each of which contains various restrictions on the use of excess water for irrigation, requires new construction to use water saving devices and limits the hours for irrigation during high periods of water use. Water Treatment Plants. . . The City's water treatment plants are capable of treating and pumping 48.75 MGD. The maximum volume pumped to date was 30.09 MGD in 2005. In June 2003, the operations began at the City's second water treatment plant, which has a capacity of 20 MGD. 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 in accordance with enabling State Legislation. The UTRWD's purpose is to provide future raw water supplies, wholesale water and wastewater services to entities primarily in, but not limited to, Denton County. UTR WD is controlled by a Board of Directors representing the cities in the region. The UTR WD is also authorized to plan, acquire or develop future raw water supplies or reservoirs for its participating members. The City began selling raw water to UTR WD in 1994 from the surplus capacity of the Lewisville Reservoir. During the 2004 Fiscal Year, a raw water pipeline from a new reservoir in east Texas was completed, which allows UTRWD to pass raw water though Lewisville Reservoir to a treatment plant in which it has an ownership interest. As a result of the completion of this water supply project by UTRWD, raw water sales to UTRWD have been substantially eliminated. However, the pricing of the water sold to UTR WD by the City was at a wholesale, untreated rate, so the reduced raw water sales have not materially impacted the water system or its water rate models. The City's contract with UTRWD provides for treated water sales to the UTRWD for resale to the City of Sanger, a municipality with a population of approximately 6,000 ("Sanger"). Sanger's water purchases are currently based on a demand charge for .5 MGD, plus a use charge based upon actual water taken. In 2005, treated water sales by the City for resale to the City of Sanger averaged 173,054 gallons per day. In early 2004, the City contracted with UTR WD to deliver City treated water to UTR WD for resale to City of Krum, a municipality of about 3,250 people ("Krum"). The City began selling water to Krum through the UTRWD in April 2005, and it is expected that the water sales to Krum will continue for a term of eight years (to 2013). Like the Sanger water contract, the Krum water contract also includes demand and use components. Currently, the Krum contact is for .2 MGD. The City's contract with UTRWD will expire in July 2012, unless it is extended by mutual agreement. 38 TABLE 3 - WATER USAGE (GALLONS) Year 2001 2002 2003 2004 2005 Average Day (Sales) 13,366,465 13,890,891 14,334,020 13,571,727 15,156,884 TABLE 4 - Top TEN WATER CUSTOMERS Name of Customer University of North Texas Upper Trinity Regional Water District Denton Independent School District Texas Women's University Denton State School Denton County Denton Regional Medical Center Clayton Homes Inc. City of Denton Affordable Housing TABLE 5 - WATER RATES (EFFECTIVE OCTOBER 1, 1995) Residential Facility Charge 3/4" meter 1" meter 1 1/2" meter 2" meter Volume Char2e Inside City Limits $ 9.55 per month 11.40 per month 16.25 per month 18.10 per month Inside City Limits First 15,000 gallons Next 15,000 gallons Over 30,000 gallons Summer (May-October) $2.60 per 1,000 gallons 3.50 per 1,000 gallons 4.35 per 1,000 gallons Outside City Limits First 15,000 gallons Next 15,000 gallons Over 30,000 gallons $3.00 per 1,000 gallons 4.05 per 1,000 gallons 5.00 per 1,000 gallons Maximum Day 26,477,000 26,031,000 29,340,000 25,030,000 30,090,000 2005 Annual Consumption (Gallons) 213,999,560 78,637,000 67,418,950 62,673,740 53,485,300 37,525,600 35,917,700 35,234,000 27,310,620 27,193,000 639,395,470 Revenue $ 690,806 305,454 224,656 200,725 149,271 120,552 106,498 103,121 99,511 86,754 $ 2,087,348 Outside City Limits $11.00 per month 13.10 per month 18.65 per month 20.80 per month 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 1 " meter 1 1/2" meter 2" meter Volume Charge 39 $20.20 per month 22.20 per month 25.75 per month 31.65 per month 2.87 per 1,000 gallons THE W ASTEW A TER SYSTEM The wastewater system provides retail wastewater collection and treatment service to City citizens, as well as the City's four wholesale wastewater customers. The collection system consists of approximately 452 miles of gravity wastewater lines, 19 miles of force mains, and 27 lift stations. Wastewater Reclamation Plant. . . In 1994 the City completed an expansion of its wastewater reclamation plant, which has an operating permit for treatment of up to 15 MGD. A 6 MGD expansion was completed at the reclamation plant in December 2003, bringing total permitted treatment capacity to 21 MGD, which the City projects will meet its needs through 2013. The City's treated wastewater effluent volume averaged 13.90 MGD in 2005. The wastewater system is subject to, and is presently operated and maintained in compliance with, applicable State and Federal laws, regulations and effluent discharge permits. The City's discharge permit for the wastewater reclamation plant imposes stringent limitations on the removal of ammonia, dechlorination, and sludge conditioning and treatment. Wholesale Customers. . . The City has contracts to treat wholesale wastewater for the Cities of Corinth, Krum, Argyle and the Lake City Municipal Utility Authority. In 2004, the wholesale treatment volume averaged approximately 1.51 MGD. Compost and Effluent Programs. . . Use of wastewater byproducts and recycled yard waste to make compost material has provided an additional means of sludge disposal for the City, and has produced a new revenue source through sale of the compost product. The City has seven acres of roller-compacted concrete surface at its wastewater reclamation plant that is used for the City's compost program. All sludge from the reclamation plant is composted by the City. The City has also implemented a reuse system for treatment effluent. The City is expanding its reuse water program for sale to major irrigation users in the City. The effluent waterline project was completed in March 2004. In recent years, the City has generated approximately $225,000 in revenues from the sale of effluent, largely to a local electric generating plant that is operated sporadically. Smaller amounts of revenues are generated by sales to irrigation customers and other types of users of effluent. TABLE 6 - WASTEWATER RATES (EFFECTIVE OCTOBER 1, 2005) Residential Facility Charge $7.03 per month Volume Charge 2.69 per 1,000 gallons (Based on 98% of average water consumption billed during December through February) CommerciaVlndustrial Facility Charge $18.37 per month Volume Charge 3.49 per 1,000 gallons (Based on 85% of monthly water consumption) (Industrial surcharge based on concentration of biochemical oxygen demand and total suspended solids of effluent) Residential Customer Outside City Limits Facility Charge(l) Volume Charge Minimum Billing $8.11 per month $3.10 per 1,000 gallons $23.61 per bill (1) The Facility Charge is also the minimum charge for residential customers outside City Limits. Rate Regulation. . . Within its boundaries, the City has exclusive jurisdiction over the water and wastewater system rates. Rate Management. . . For a discussion of the City's wastewater system rate structure, see "Water and Wastewater - Rate Management. " WATER AND W ASTEW A TER RA TE MANAGEMENT Since the late 1990's, the City has financed substantial amounts of new water and wastewater infrastructure improvements to meet increased demands for service (though no new infrastructure has been financed since 2003, and none is planned for 2006); however prior to the 2003 fiscal year the City had not increased water or wastewater rates since fiscal year 1996. During the 2004 fiscal year, the City increased wastewater rates by 4% and in 2005 the City implemented a 9% increase in wastewater rates. The City increased wastewater rates by another 6% in 2006. Current planning estimates include a 2% water rate increase in 2007 and an additional 2% in FY 2008. The ability of the City to maintain relatively stable rates is attributable to several factors, including a relatively stable cost to the City for raw water. In addition, the City has benefited from a decline in interest rates that has permitted it to borrow and refinance System debt at favorable rates. Another significant factor in the City's management of water and wastewater rates include the implementation of water and wastewater impact fees that occurred in 1998 and in May 2003, when impact fees for new utility connections were increased from $2,044 to $3,155 for water and from $483 to $1,437 for wastewater. These fees are assessed to offset the additional infrastructure costs associated with service to new development areas. Impact fees allow the City to meet new development requirements without the need to recover costs from existing customers through higher utility or tax 40 rates. When the impact fee rate ordinance was approved in 2003, there was a provision to increase the wastewater impact fee in each of the three drainage basins in the City in 2006. The increase is from $1,437 in all basins to $1,570 in the Hickory & Pecan Basins and to $1,893 in the Clear Creek Basin. The increase was made effective on May 29, 2006, although to date no development has occurred in the Clear Creek Basin, which is in the northern part of the City. The City's current water and wastewater rates are comparable, though slightly higher, than rates charged in nearby municipalities of similar size. The City has identified significant water and wastewater infrastructure 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 "Debt Information - Anticipated Issuance of Revenue Bonds"). The increasing capital expenditures and growth in debt service associated with the capital expenditures, particularly for the wastewater system, are significant contributors to the increased wastewater rates, discussed above. In addition, the wastewater increases reflect a financial goal for both the water and wastewater systems to (i) generate net revenues each year in amounts equal to the System's debt service coverage ratio of 1.25 times debt service, after payment of operating expenses of each system, with each component of the System meeting the rate covenant on a stand-alone basis, and (ii) with each system building toward the accumulation of reserves equal to 60 days of working capital and an unreserved fund balance of 15% of budgeted expenses. Reserve funds, including rate stabilization accounts, that were established to address future capital and contingency requirements and to provide financial flexibility are being used to minimize rate increases. Through the use of such reserves, the City can meet budget demands during cycles of wet weather, such as occurred in the summer of 2004, that reduce the cash flow of the water system. The use of rate stabilization funds also permits the City to absorb temporary increases in variable operating costs, such as energy costs. 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 rate stabilization funds to secure the Parity Bonds, in which event, such pledged amounts become "Pledged Revenues" that may be taken into account by the City for purposes of satisfying the debt service coverage covenant described in the preceding paragraph. Each year the City budgets to use a portion of its rate stabilization funds to meet its water and wastewater budgets, but in recent years conservative budgeting has resulted in relatively small uses of the rate stabilization moneys as compared to the budgeted amounts. For the year ended September 30, 2005, the City increased the water rate stabilization fund by $500,000, and used $200,000 of wastewater rate stabilization reserves to fund System operations. For fiscal year 2006, the City does not anticipate that it will use $650,000 of rate stabilization funds previously budgeted ($300,000 water and $350,000 wastewater). The City's fiscal year 2005 budget includes a beginning combined balance of approximately $7.0 million in the water rate stabilization fund and $1.35 million in the wastewater rate stabilization fund. The City Charter provides that the City shall be entitled to receive annually on the net investment from excess revenues of its utility enterprise funds, if any, of not more than 6 percent of the net investment of such funds in each year. In satisfaction of this "rate of return" transfer provision, the City annually makes transfers from the water and wastewater system (except for amounts attributable to drainage operations, as described below) to the City's General Fund that equal to 3.5% of the rate revenue of each fund. In addition, a there is an annual transfer of 4% of rate revenue as a payment in lieu of franchise taxes and an indirect allocation for recovery of administrative overhead, which, for fiscal year is equal to 4.6% of rate revenue. Since February 2002, when the City implemented its drainage fee, drainage projects have been funded by such fee, which is administered through the wastewater system budget. During the 2003 Texas legislative session, legislation was approved that exempted State agencies, including State institutions of higher education, from paying drainage fees. As a result of this change in the law, prior year projections of drainage revenues were reduced by $252,000 each year. To address the loss of such funds, commencing with fiscal year 2006, the City has determined that no transfers will be made to the General Fund from drainage revenues that are comparable to the rate of return or payment in lieu of franchise taxes made to the General Fund from the water system and other rate revenues of the wastewater system. The City will also cease making a transfer to the wastewater system equivalent to the drainage fee. The net result is expected to be an approximately $200,000 benefit for drainage operations. 41 DEBT INFORMATION TABLE 7 - DEBT SERVICE REQUIREMENTS Fiscal Year Total %of Ended Outstanding Revenue Bonds (1) The Bonds (2) Outstanding Principal 9/30 Principal Interest Total Principal Interest Total Debt Retired - 2006 $ 12,330,000 $ 13,798,811 $ 26,128,811 $ $ $ $ 26,128,811 2007 13,020,000 13,047,644 26,067,644 305,000 355,106 660,106 26,727,750 2008 13,860,000 12,372,541 26,232,541 270,000 391,638 661,638 26,894,179 2009 13,935,000 11,660,256 25,595,256 285,000 378,179 663,179 26,258,435 2010 14,450,000 10,921,687 25,371,687 295,000 364,114 659,114 26,030,801 23.74% 2011 13,295,000 10,205,534 23,500,534 310,000 349,443 659,443 24,159,977 2012 13,880,000 9,536,414 23,416,414 325,000 334,044 659,044 24,075,458 2013 14,520,000 8,847,435 23,367,435 345,000 317,796 662,796 24,030,231 2014 15,240,000 8,119,723 23,359,723 360,000 300,700 660,700 24,020,423 2015 15,695,000 7,360,841 23,055,841 380,000 282,755 662,755 23,718,596 49.41 % 2016 15,700,000 6,592,373 22,292,373 400,000 263,840 663,840 22,956,213 2017 16,500,000 5,804,416 22,304,416 415,000 244,076 659,076 22,963,493 2018 17,145,000 4,978,536 22,123,536 440,000 223,343 663,343 22,786,878 2019 17,700,000 4,122,783 21,822,783 460,000 201,518 661,518 22,484,301 2020 18,650,000 3,226,739 21,876,739 485,000 178,601 663,601 22,540,341 79.75% 2021 15,425,000 2,377,184 17,802,184 505,000 154,594 659,594 18,461,778 2022 12,160,000 1,688,750 13,848,750 530,000 129,495 659,495 14,508,245 2023 6,890,000 1,228,619 8,118,619 560,000 103,063 663,063 8,781,681 2024 4,190,000 959,122 5,149,122 585,000 75,296 660,296 5,809,418 2025 4,420,000 735,628 5,155,628 615,000 46,196 661,196 5,816,824 95.59% 2026 2,180,000 565,031 2,745,031 645,000 15,641 660,641 3,405,673 2027 2,295,000 450,359 2,745,359 2,745,359 2028 2,415,000 329,666 2,744,666 2,744,666 2029 2,545,000 202,566 2,747,566 2,747,566 2030 2,680,000 68,675 2,748,675 2,748,675 100.00% $ 281,120,000 $ 139,201,333 $ 420,321,333 $ 8,515,000 $ 4,709,436 $ 13,224,436 $ 433,545,769 (1) "Outstanding Revenue Bonds" does not include lease/purchase obligations. (2) Average life of the issue - 11.404 years. Interest on the Bonds has been calculated at the average rate of 4.80% for purposes of illustration. VOTED BUT UNISSUED REVENUE BONDS. . . The City has no voted but unissued revenue bonds. ANTICIPATED ISSUANCE OF REVENUE BONDS. . . The City has developed a five year capital improvement plan for the System (the "CIP"). The CIP includes improvements that will be funded with revenues of the System as well as through the issuance of Additional Bonds. The CIP is a planning tool and the City is not obligated to fund the CIP. The funding of the CIP will be dependent in part on continued demand for services, economic conditions in the City and the financial ability of the System to support the funding of the CIP, among other factors. The current five year CIP includes total capital expenditures for the System of approximately $195 million, of which, approximately $159 million are planned to be funded from proceeds of System debt (a portion of such expenditures will be made from prior issues of System debt). The planned issuances of revenue debt is shown in the following table. Proiected Revenue Bond Sales (OOO's) 2006-07 2007 -08 2008-09 2009-10 2010-11 Electric Utilities $ 8,000 $ 8,500 $ 8,000 $ 8,000 $ 8,000 Water Utilities 21,000 5,000 10,000 2,500 7,750 Wastewater/Drainage Utilities 2,000 7,000 8,500 3,000 3,000 $ 31,000 $ 20,500 $ 26,500 $ 13,500 $ 18,750 42 FINANCIAL INFORMATION TABLE 8 - COMPARABLE CALCULATION OF NET REVENUES AVAILABLE FOR DEBT SERVICE The table below provides comparable calculations of Net Revenues available for debt service for the periods shown. Such calculations include all operating revenues plus interest income, less operating expenses. F or 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 Revenues 2005 (1) 2004 (1) 2003 (1) 2002 (1)(2) 2001 Electric Service $ 127,207,343 $ 109,297,461 $ 101,862,084 $ 87,736,178 $ 96,112,000 Water Service 20,899,624 18,222,344 19,348,543 18,202,404 18,375,845 Wastewater Service 18,261,962 16,476,726 15,677,355 14,085,531 12,120,932 Other Fees (3) 4,081,191 4,516,158 5,168,922 4,748,502 1,437,773 Interest Income (4) 5,141,512 4,141,819 6,919,311 8,406,425 10,168,594 Impact Fees (5) 4,206,630 6,771,671 5,150,000 4,294,000 50,283 Total Revenues $ 179,798,262 $ 159,426,179 $ 154,126,215 $ 137,473,040 $ 138,265,427 Exoenses Electric System Fuel and Purchased Power $ 103,375,311 $ 91,622,708 $ 85,716,083 $ 69,869,177 $ 72,505,324 Other Operating and Administrative Expenses 14,393,426 13,238,604 12,971,117 16,649,839 17,646,386 $ 117,768,737 $ 104,861,312 $ 98,687,200 $ 86,519,016 $ 90, 151 ,71 0 Water System Fuel and Purchased Power $ 1,190,957 $ 970,035 $ 932,388 $ 791,629 $ 952,022 Water Purchased 66,779 71,454 118,979 112,523 126,399 Other Operating and Administrative Expenses 9,528,608 8,715,391 8,463,887 7,138,159 7,820,088 $ 10,786,344 $ 9,756,880 $ 9,515,254 $ 8,042,311 $ 8,898,509 Wastewater System Fuel and Purchased Power $ 880,197 $ 744,984 $ 641,772 $ 485,381 $ 636,473 Other Operating and Administrative Expenses 10,191,287 9,925,557 8,906,191 10,023,440 6,834,666 $ 11,071,484 $ 10,670,541 $ 9,547,963 $ 10,508,821 $ 7,471,139 Total Expenses $ 139,626,565 $ 125,288,733 $ 117,750,417 $ 105,070,148 $ 106,521,358 Net Revenue Available for Debt Service and Other Lawful Purposes $ 40,171,697 $ 34,137,446 $ 36,375,798 $ 32,402,892 $ 31,744,069 Contribution to Net Revenues Available Electric System 35.20% 27.10% 28.66% 27.10% 36.79% Water System 39.50% 45.30% 46.65% 53.24 % 42.43% Wastewater System 25.30% 27.60% 24.4 9% 19.66% 20.79% Electric Customers 41,846 39,507 37,057 36,591 35,705 Water Customers 27,584 26,270 24,913 24,054 22,614 Wastewater Customers 25,695 24,435 23,329 22,225 20,759 (1) Data is derived from financial statements of the City that are unaudited, see "Financial Information - Implementation of New Accounting Standards" for a discussion of new accounting standards implemented for the fiscal year ended September 30, 2002 and the impact of those standards on the City's financial reporting. (2) The decline in electric revenue and cost of energy purchased in 2002 is attributable in large part to a decline in fuel cost in that year, as compared to 2001 and 2003, in particular. For additional information, see footnote 1 to Table 1 in this Official Statement. (3) Includes a reimbursement for the electric transmission as well as water and wastewater tapping fee revenues. (4) Excludes changes in non-cash Fair Market Value in years 2002 through 2005. (5) In years 2004 and 2005, impact fees are recognized as collected. Prior to 2004, impact fee revenues were deferred until spent at which time it is recognized as earned revenue. 43 TABLE 9 - COVERAGE AND FUND BALANCES Utility System Revenue Bonds Outstanding as of 6-1-06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Outstanding Revenue Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,341,831 (1) 2.32 times $ 26,894,179 (1) 1.49 times $ 268,780,000 (1) 8,515,000 $ 277,295,000 $ 3,257,212 $ 17,092,544 $ 250,000 $ 5,901,600 Average Annual Principal and Interest Requirements, 2006-2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coverage of Average Requirements by 9-30-05 Net Available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum Principal and Interest Requirements, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coverage of Maximum Requirements by 9-30-05 Net Available ................................... .... Interest and Sinking Fund, as of 6-1-06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve Fund, as of 6-1-06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Emergency Fund, as of 6-1-06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Extension and Replacement Fund, as of 6-1-06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Includes the Bonds. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS. . .Certain financial data included in this Official Statement for the years ended September 30, 2002, 2003, 2004 and 2005 (principally, data used in Tables 8 and 9) are derived from unaudited financial statements of the City. For the year ended September 30, 2002, the City implemented the provisions of the Governmental Accounting Standard Board ("GASB") Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, GASB Statement No. 37, Basic Financial Statements - and Management's Discussion and Analysis - 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 GASB Statements"). The audited financial statements of the City for the year ended September 30, 2005, prepared in accordance with the New GASB 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 have 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 the 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 new GASB statements, the City's annual report consists of three basic financial statements for the Proprietary Funds: the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and the Statement of Cash Flows. Those statements are included in the financial statements of the City for the year ended September 30, 2005 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, 2003, 2004 and 2005 is consistent with the Proprietary Fund information contained in its audited financial statements, the 2002, 2003, 2004 and 2005 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. 44 FINANCIAL POLICIES Basis of Accounting . . . The accounting policies of the City conform to generally accepted accounting principles of the Governmental Accounting Standards Board and program standards adopted by the Government Finance Officers Association of the United States and Canada (GFOA). The GFOA awarded a Certificate of Achievement for Excellence in Financial Reporting to the City for its comprehensive annual financial report for the fiscal year ended September 30, 2004. This Certificate is the highest form of recognition for excellence in state and local government financial reporting. A Certificate of Achievement is valid for a period of one year only. The City has received a Certificate since 1984. In addition to the Certificate, the City received GFOA's Award for Distinguished Budget Presentation for its fiscal year 2004 annual budget document. The measurement focuses for the Enterprise Funds, Internal Service Funds and Nonexpendable Trust Funds are income determination and cost of service, respectively. Accordingly, the accrual basis, whereby revenues and expenses are identified in the accounting period in which they are earned and incurred and net income, is utilized for these funds. The modified accrual basis, whereby revenues are recognized when they become both measurable and available for use during the year and expenditures are recognized when the related fund liability is incurred, is used for all other funds. 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 following October 1. The budget includes proposed expenditures and revenues required to fund the expenditures. Following Council considerations, 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. INVESTMENTS The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council. Both state law and the City's investment policies are subject to change. INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF 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 instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly 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 full faith and 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 are 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 the 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) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) certain bankers' acceptances with the remaining term of270 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 the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper with a stated maturity 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 nationally 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 funds 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 Securities 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 nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, if specifically authorized in the authorized document, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. 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 funds 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 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. 45 Governmental bodies in the State are authorized to implement securities lending programs if (i) the securities loaned under the program are collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) of the first paragraph under this subcaption, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm not less than "A" or its equivalent, or (c) cash invested in obligations that are described in clauses (1) through (6) and (10) through (12) of the first paragraph under this subcaption, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the governmental body, held in the name of the governmental body and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less. Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for City funds, 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 principal, (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: (1) 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 investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement, (6) restrict the investment in no-load 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 June 1, 2006, the following percentages of the City's investable funds were invested in the following categories of investments: Description U.S. Federal Agency Discounts U.S. Federal Agency Coupon U.S. Federal Agency Callables U.S. Federal Agency Step-Ups U.S. Treasury Strip Bonds Zeros Money Market/Cash Percent 5.91% 44.09% 21.36% 5.71% 10.60% 12.34% 100.00% Market Value $ 14,807,000 110,457,601 53,505,938 14,294,687 26,562,148 30,924,115 $ 250,551,489 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. 46 SELECTED PROVISIONS OF THE BOND ORDINANCE On the date of the sale of the Bonds, the City Council will adopt the Ordinance authorizing the Bonds, which will be in substantially the same form as the ordinances authorizing the outstanding Parity Bonds. Selected provisions of the Ordinance are set forth below. The complete Ordinance is available from the City, the City's Financial Advisor and, during the offering period for the Bonds, from the Initial Purchaser, 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. (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 Refunding Bonds, Taxable Series 1993-B, authorized by ordinance passed on June 8, 1993 (the "Series 1993-B Bonds"), (ii) the outstanding City of Denton Utility System Revenue Bonds, Series 1996, authorized by an ordinance passed on May 7, 1996 (the "Series 1996 Bonds"), (iii) 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"), (iv) the outstanding City of Denton Utility System Revenue Bonds, Series 1998, authorized by an ordinance passed on March 24, 1998 (the "Series 1998 Bonds"), (v) 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"), (vi) 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"), (vii) the outstanding City of Denton Utility System Revenue Bonds, Series 2000A, authorized by an ordinance passed on April 25, 2000 (the "Series 2000A Bonds"), (viii) the outstanding City of Denton Utility System Revenue Bonds, Taxable Series 2000B, authorized by an ordinance passed on April 25, 2000 (the "Taxable Series 2000B Bonds"), (ix) 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"), (x) the outstanding City of Denton Utility System Revenue Bonds, Series 2002A, authorized by an ordinance passed on April 9, 2002 (the "Series 2002A Bonds"), (xi) 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") (xii) the outstanding City of Denton Utility System Revenue Refunding and Improvement Bonds, Series 2003, authorized by an ordinance passed on April 1, 2003 (the "Series 2003 Bonds"), (xiii) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 2004, authorized by an ordinance passed on September 7, 2004 (the "Series 2004 Bonds"), (xiv) the outstanding City of Denton Utility System Revenue Refunding Bonds, Series 2005 authorized by an ordinance passed on May 24, 2005 (the "Series 2005 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 future, in accordance with Section 26 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, 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 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 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, 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 47 physical accident or condition which would otherwise impair the Bonds or Additional Bonds, shall be deducted in determining "N et 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. U) 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. (1) "Drainage System" means the City's entire existing drainage system and all facilities related thereto. (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 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. 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 first 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 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 IPMorgan Chase Bank, 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" (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. 48 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 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 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 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 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 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 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 entry 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 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 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 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, 49 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 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 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, the Taxable Series 2002B Bonds, the Series 2003 Bonds, the Series 2004 Bonds and the Series 2005 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 Initial 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. After 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 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 1I60th 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 the Extension and 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 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 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 transferred from the Rate Stabilization Fund into the System Fund. 50 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 Revenues. (b) Subj ect to making the required deposits to the credit of the 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, 2006, 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. 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 from 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, maturing 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 right and power at any time and from time to time, and in one or more series or issues, to authorize, issue, and deliver additional parity revenue bonds (herein called "Additional Bonds"), in accordance with law, in any amounts, for any lawful purpose, including the refunding 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 from and secured by an irrevocable first 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 principal of 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 default 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 accountant, 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 immediately preceding the 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 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 51 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 increased 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 applicable 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 faithfully 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 payor 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 rule 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 title to the lands, buildings, structures, and facilities constituting the System, that it warrants that it will defend 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 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) Liens. 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 supplies 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 of a mechanic'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) Ooeration 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. 52 (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 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 from a subordinate lien on surplus Pledged Revenues is specifically recognized and retained, as permitted under Section 23(b) hereof). (g) Sale. Lease or DisDosal of ProDertv. 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 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 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 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. (1) 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 insurance. 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 happening 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 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) 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 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 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 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. 53 U) Records. The City shall keep proper books of record and 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 municipal 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 Municipal Advisory 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 inspection 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 System, 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 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 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 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 owners 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 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) 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. (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. 54 (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 instrument 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 instruments 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 outstanding 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 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) Aoolication for Reolacement Bonds. Application for replacement of damaged, mutilated, lost, stolen, or destroyed Bonds shall be made by the registered owner thereof to the Paying Agent/Registrar. In every case of loss, theft, or destruction of a 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 principal of, 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) Charge for Issuing Reolacement 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) Authority for Issuing Reolacement 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 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. 55 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 defined in 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 greater 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 section 141 (b) of the Code; (e) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of section 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 (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(f) 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 nationally-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 necessary 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. 56 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. 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 33. 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. 57 TAX MATTERS OPINION. . . On the date of initial delivery of the 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 ("Existing Law"), (1) 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 (the "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 D - Form of Bond Counsel's Opinion. In rendering its opinion, Bond Counsel will rely upon (a) certain 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 the Bonds to become includable in gross income retroactively to the date of issuance of the Bonds. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel is conditioned on compliance by the Issuer with such requirements, and Bond Counsel has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. Bond Counsel's opinion represents its legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. 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 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. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the property financed or refinanced with proceeds of the Bonds. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds, or as to whether the Internal Revenue Service would agree with the opinion of Bond Counsel. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. 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 the bonds less 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 from 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 consequences, 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 the 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 the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the 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. 58 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 to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of interest accrued upon redemption, sale or other 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. COLLA TERAL 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, regulations, 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 F ASIT, certain S corporations with Subchapter C earnings and profits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. 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 THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Interest on the Bonds will be includable as an adjustment 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. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, 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 tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed 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 of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is 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 the tax implications of the 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 RATINGS The presently outstanding System revenue debt of the City is rated "AI" by Moody's and "A+" by S&P. The City also has System 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 judgment 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 Public Utilities Regulatory Act ("PURA") provides that municipalities, 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 multiple certificated service area. PURA defines such protected information to 59 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 PURA to the Rating Agencies. Such information has been provided under the terms of confidentiality agreements. 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. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder 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 the Bonds been qualified under the 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 AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of the 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 are legal and authorized investments for insurance companies, fiduciaries, and trustees, 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 of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least "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 are 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 investments for various institutions in those states. LEGAL OPINIONS The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General 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 nature 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, Parkhurst & 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 of the 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 & Horton 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 the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. 60 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 certain 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 Official Statement under Tables numbered 1 through 10 and in Appendix C. The City will update and provide this information within six months after the end of each fiscal year ending in and after 2006. 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 staff of the United States Securities and Exchange Commission (the "SEC"). The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12. 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 information by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix C or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. 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 the 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. The Municipal Advisory Council has also received SEC approval to operate, and has begun to operate, a "central post office" repository for information filings made by municipal issuers, such as the City, which repository then transmits the filed information to the NRMSIRs and the appropriate SID. This central post office can be accessed and utilized at www.DisclosureUSA.org ("Disclosure USA"). The City may utilize DisclosureUSA for the filing of information relating to the Bonds. 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: (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. (Neither the Bonds nor the Ordinance make any provision for liquidity enhancement.) In addition, the 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 AND SID. . . The City has agreed to provide the foregoing information only to NRMSIRs (or in the case of material event notices, the MSRB) 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. 61 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 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 financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS. . . During the last five years, the City has complied in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. FINANCIAL ADVISOR First Southwest Company is employed as Financial 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 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 actions taken by any legislative or judicial bodies. In the normal course of business, the Financial Advisor may also from time to time sell investment 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 Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance 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 transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. 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 other 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 information. Reference is made to original documents in all respects. INITIAL PURCHASER 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 $ . The Initial Purchaser 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 price 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 hereof, 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. 62 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, economic, 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 economic, 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. 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 the effect that to the best of their knowledge and belief: (a) the 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 delivery, 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. PERRY McNEILL Mayor City of Denton, Texas ATTEST: JENNIFER K. WALTERS City Secretary 63 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 area. ECONOMIC FUTURE. . . The fiscal year 2004-2005 brought exciting news in economic development. Listed below are just a few of the highlights. MAJOR EMPLOYER & INDUSTRIAL NEWS . In January 2005, Sally Beauty Company officially opened its new $30 million international headquarter facility in Denton. The 203,000 square-foot multi-story building is located by the to the 1-35 corridor entering eastern Denton. . Flowers Foods Bakeries Group began production at their $40 million bakery employing 200 people in the former Andrew Corporation facility in Denton. Flowers Foods has bakeries in four other Texas cities: San Antonio, Houston, EI Paso and Tyler. Flowers Foods Bakeries were awarded a tax abatement from the City as an incentive to locate in Denton. Additionally, they partnered with North Central Texas College and received a state Skills Development Fund Grant for employee training. . The 52-acre Denton Crossing retail development on Loop 288 completed construction and is fully leased providing approximately 325 new full-time and 130 part-time jobs. . In 2004, the consolidation of Thermadyne Holdings Corporation operations resulted in adding employees to Victor Equipment. Warehouse, shipping and assembly operations for both Victor and Tweco were moved to an Alliance Gateway warehouse in Roanoke. Machining operations were combined at the Denton Victor plant. The consolidation brought approximately 120 employees to the Denton area with approximately 30 employees at the Denton facility. The additional manufacturing at the Denton plant is estimated to bring about $15 million in taxable value to the city. Victor Equipment opened in Denton in 1965. The company manufactures and is an international supplier of gas- operated cutting and welding torches, gas and flow pressure regulation equipment and medical equipment for the oxygen therapy market. . Anderson Merchandisers is expanded its Denton facility with a 144,000 square foot warehouse. The $3.96 million addition will support Anderson Merchandiser's distribution of all books, CD's, VHS and DVD products to one-third of the nation's WalMart stores. Anderson Merchandisers employs 440 in Denton. . Denton's Jim McNatt Honda dealership completed construction of a 38,000 square foot dealership valued at $2.58 million. DEVELOPMENT AT DENTON MUNICIPAL AIRPORT The arrival of the Denton Municipal Airport's new air traffic control tower in May of 2004 precipitated a reclassification of air space from Class G to Class D during daily operation hours of 8 a.m. and 10 p.m. and increased our corporate jet traffic. . Airport Hangar Construction continued with the completion of two projects. Finley Ledbetter Southeast Airport Hangar completed construction of their 5,600 square foot hangar valued at $233,000 in October 2004. The 13,650 square foot Doug Weyer Airport Hangar completed in July 2005 and is valued at $375,000. . Jet Works Aviation, Inc. and Business Air Management merged and created Jet Works Air Center in 2004. Jet Works Air Center began construction of a 26,000 square foot hangar/office complex in July 2005 at the Denton Municipal Airport. Jet Works Air Center will provide major airframe, engine maintenance, avionics repair and installation, interior refurbishment and completion, and will soon offer aircraft painting services. To better facilitate the merger, Jet Works Aviation, Inc. is considering the relocation of their current operation at Meacham Airport in Fort Worth to the Denton Municipal Airport. This relocation would result in 30 employees on the airfield and total employment reached 40 by the end of 2005. RETAIL NEWS . The 52-acre Denton Crossing retail development on Loop 288 has spawned much interest from national retailers and restaurateurs. Golden Triangle Mall and Brinker Plaza have had renewed appeal as a result. The tenants in Denton Crossing began opening for business in September 2003. Some of the new retailers and restaurants in Denton are Foley's Department Store, Barnes & Noble Booksellers, DSW Shoe Warehouse, Pacific Sun Wear, Best Buy, World Market, Michaels, The Sports Authority, Pier 1 Imports, Whataburger, Golden Corral, Famous Footwear, Lane Bryant and Bed Bath & Beyond. Old Navy, Southtrust Bank, Kroger, Michael's, Kirkland's, Carvel, TJ Maxx, Rice Boxx, Chipotle, Wing Pit, Popeye' s, Hollywood Video, Sweet Basil Thai Bistro, New York Sub Hub, Cold Stone Creamery and Motherhood Maternity moved into Denton Crossing in 2004. Mardel's, Grand Chinese Buffet, Floors Today, Master Grill Churrascaria, and Walgreens completed construction and moved into Denton Crossing in 2005. A-I . Development of mixed use project Unicorn Lake is underway with the January 2005 completion of Cine mark Theatre. The theatre has 60,727 square feet and has a valuation of $9,910,646. Cinemark's 14 screen theatre include high-back rocking chairs with cup holders, digital and wall-to-wall sound and concessions, set in an art deco surrounding. The master plan for the remaining development includes restaurants, residential, additional retail and commercial, and park trails and incorporates the urban sty Ie development of residential over retail along the lake with a public facility, such as a library. . The Denton Towne Crossing 43-acre retail development began construction in the southeastern corner of Brinker Road and Loop 288. The plans call for approximately 340,000 square-feet of retail development including Home Depot and Super Target. The site includes 5 additional restaurant and retail pads. . Restaurant Row Texas Roadhouse, On the Border, Olive Garden, Johnny Carino's Italian Restaurant and Chuck E. Cheese make up Denton's new "Restaurant Row." Panera Bread, Le Peep's and Rudy's BBQ opened their doors in 2004, and Hooters in 2005. Other new restaurants that have announced they are coming to Denton are Shady Oaks Barbeque and The Mexican Inn. HEALTHCARE IN DENTON In 2005 both of Denton's hospitals completed or began expansion plans that confirm Denton's status as a regional center for quality medical services. The hospitals spent approximately $150 million on these facility expansions. . Denton Community Hospital changed its name to Presbyterian Hospital of Denton and opened a new $100 million, 308,000 square foot medical complex in April 2005. The hospital also completed an 82,000 square foot professional building with a second medical office complex planned as needed. The medical office valuation is $5,584,200. In September 2005, a new 52,000 square foot physical rehabilitation hospital was announced for construction across from Presbyterian Hospital. The $14 million facility will be modeled after the Kessler Institute for Rehabilitation. . Denton Regional Medical Center, which moved into its five-story building in 1999, opened a 13,900 square foot Day Surgical Hospital. The new ambulatory surgical facility is valued at $2,268,480. Construction is underway on Denton Regional's sixth floor addition to its acute care facility for a new Progressive Care Unit and renovation of one wing of the third floor to create a new eight-bed Intensive Care Unit. This $19 million expansion will add 24,000 square feet is scheduled for completion in October 2006. Denton Regional Medical Center is also constructing additional medical offices. An additional 13,926 square foot medical office building in under construction and has a $1,219,918 valuation. . Privately owned North Texas Hospital completed construction in 2005 on its new surgery center at Interstate 35 and Mayhill Road, east of Denton Regional Medical Center. The 60,727 square foot hospital has a valuation of $9,910,646 and includes outpatient and short-term facilities for surgical patients. In addition, a $3.9 million, 44,000 square foot professional building for medical offices and the 40,000 square foot Mayhill Hospital rehabilitation hospital valued at $6.4 million broke ground on the site. OTHER DEVELOPMENTS . A 51,561 square foot Fairfield Inn and Suites will be opened in the summer of 2005. The project has a valuation of $3,851,607. . Holiday Inn is currently in the development process. With 89,637 square feet, the hotel will have a value of $9,053,337. . Five area banks have located in Denton and are building new facilities. Farmers & Merchants Bank built a 30,759 square foot bank/office building at 1517 Center Place. The project has a permit value of $3,183,556. Point Bank purchased an abandoned building at 1700 N. Carroll Boulevard. A small portion of the original building was saved and construction of the new 5,645 square foot bank is now complete. The Point Bank project has a permit value of $368,957. First State Bank is building at 400 W. Oak Street. The 30,875 square foot bank/office building has a permit value of $3,260,400 and construction was completed in 2004. Denton Area Teachers Credit Union built a branch office in south Denton. The building is 4,100 square feet and has a valuation of $516,650. SouthTrust Bank built a 3,865 square foot facility with a valuation of $466,052. . The Denton School District new $23 million stadium opened with the Denton High vs. Ryan High game September 3, 2004. This stadium includes 10' x 20' display screen for replays and video presentations, a split level field house and conference room, elevated plaza concession stands and restrooms, and the "real grass" rubber infill turf system. This facility will seat 12,000 fans as well as accommodate four teams with simultaneous dressing ability. A- 2 . Denton School District construction continues on its new Advanced Technology Center. The $16.7 million, 121,000 square foot facility located adjacent to the new stadium on Loop 288 will concentrate state-of-the-art industry-specific training equipment and instruction for Denton high school students, area businesses, and adult instruction for those updating career skills. Business areas focus on health occupation, education instruction, business and marketing, pre- law, computer technology and CAD applications, and construction science. The facility will open for classes in August 2006. INDUSTRY AND BUSINESS Employer University of North Texas Denton Independent School District Peterbilt Motors-Headquarters & Plant Denton State School Denton County City of Denton Texas Woman's University Denton Regional Medical Center FEMA (Regional Heaquarters Presbyterian Hospital of Denton Victor Equipment Sally Beauty Anderson Merchandisers James Wood Auto Park J ostens Class Ring Manufacturer Progressive Industries Vacation Tour & Travel Acme Brick United Copper Morrison Milling Russell Newman Ltd. CBS Mechanical General Telemarketing International Denton Rehabilitation & Nursing Center Tetra Pak Wells Fargo Nucon Steel Precision Pattern Inc. The Vintage Mayday Manufacturing Mayhill Hospital Denton Good Samaritan Village DATCU Lake Forest Good Samaritan Village Ben E. Keith Beers Integrated Alliance, LP Hulcher Services Major Employers Description Educational Facility School System Diesel Trucks MHMR Facility County Government City Government Educational Facility Hospital Federal Government Call Center Hospital Welding Equipment World HQ Beauty Supply Company Consumer Products Distributor Car /Truck Sales & Service Class Ring Manufacturer MHMR Facility Call Center Brick Manufacturer Copper Wire Flour Grain Mill World HQ Sleepwear/Loungewear Mechanical Contractor Call Center Retirement/Rehabilitation Aseptic Packaging Bank Steel Manufacturing Jet Interior Manufacturing Retirement/Rehabilitati on Aeorspace Machined Parts Psychiatric & Rehabilitation Retirement Center Financial Institution Retirement Center Beverage Distributor Call Center Railroad Emergency Response Source: City of Denton and Denton Chamber of Commerce Economic Development Offices Approximate Number of Employees 6,937 2,461 1,800 1,450 1,409 1,125 897 770 750 550 512 500 500 284 280 276 256 225 191 190 180 175 170 160 160 150 150 150 150 125 110 108 103 100 100 100 100 Denton is proud to boast over 35 companies and institutions that employ 100 or more people, several of them representing a corporate, regional and international headquarters. A- 3 Well over 100 companies that produce, manufacture, and distribute goods all over the world call Denton home. More than 3,000 businesses employing 1 to 6,937 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. ECONOMIC AND POPULATION GAINS. . . In 2005 Denton population surpassed the 100,000-milestone, as the city grew to 101,543 citizens! Historical population totals from U.S. Census depict Denton's consistent population increases commensurate with Denton's steady economic growth. 1940 Census - 11,192 1950 Census - 21,345 1960 Census - 26,844 1970 Census - 39,874 1980 Census - 49,079 1990 Census - 66,270 2000 Census - 80,537 estimated 2006 Population is 104,904 Source: North Central Texas Council of Government/City of Denton. The City's ascension toward a top economic position in Texas is attributable to the steady influence of governmental activity that include the annual expansion of the two state-supported universities, and due to several desirable environmental factors. Denton is located in a rich agricultural, oil and gas production region; is part of the Dallas/Fort Worth Metroplex; has proximity to three of Texas' largest reservoirs (Lake Texoma is only 40 miles from Denton); a mild climate; and the influential aspects of social, cultural and educational advantages have prompted professional workers to select Denton as their residence. ECONOMIC RANKING. . . The following data was taken from Claritas 2005 Survey. % Of Population Whose Age is: 0-17 18-34 35-54 55-64 65 and over $250,000 + $100,000 - $249,999 $ 50,000 - $ 99,999 $ 35,000 - $ 49,999 $ 25,000 - $ 34,999 22.00% 39.00% 24.00% 7.00% 8% 40,843 $ 56,303 1.00% 12.00% 26.00% 26.00% 13.00% Households City of Denton Average Household Income Population by Occupation: Sales & Office Professional & Related Occupations Service Management, Business & Finance Production & Transportation Construction Farming, Fishing, & Forestry 29.00% 24.00% 17.00% 11.00% 10.00% 9.00% <1.00% A- 4 EMPLOYMENT/LABOR FORCE. . . The 2005 annual available workforce in Denton is 63,473. Additionally Denton is fortunate to draw workers from the Dallas and Fort Worth MSA's representing 5.1 million people, as well as north to southern Oklahoma. EDUCATION. . . Denton is home to the University of North Texas, founded in 1890, Texas Woman's University, founded in 1901. North Central Texas College, established in 1924 built an extension campus just outside Denton's ETJ in adjacent city, Corinth. The two universities and community college have a combined enrollment of more than 44,000 students and approximately 8,887 faculty members. With an enrollment of over 30,000, 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 9,500 in Denton with an additional 1,500 students attending in Dallas and Houston. The University of North Texas (UNT) campus comprises a land area 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 114 areas and Doctoral programs in 49 disciplines. UNT maintains a low 18:1 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 research institution, it 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 fields. Through its seven schools and colleges, TWU offers 65 programs leading to a Bachelor's degree, 75 Master's degree fields, and Doctoral degrees in 21 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 Graduate-Professional studies. North Central Texas College (NCTC), established in 1924, offers Associate Degrees in Occupational Therapy Assistance, Criminal Justice, 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 Denton 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 modern technology and methodology is easier due to NCTC's customized training which teaches curriculum developed closely with business management to ensure individual company needs are met. Over 17,000 students enrolled in the Denton Independent School District (DISD) for the 2005-2006 school year. Students attend 27 schools, including 15 elementary schools (grades K-5), four middle schools (6-8),three high schools (9-12), one early childhood center, and six alternative schools. DISD offers classes at each school and at the instructional center for students who experience learning disabilities or handicaps. Counselors, speech and language specialists, psychologists and reading and diagnostic consultants are available for all grade levels. In 2004-2005, DISD continued to experience a very low drop out rate of less than 1.8%. In a "Best High Schools" survey conducted by D Magazine, Denton High school was 26th and Ryan High School was ranked 36th our of 95 high schools surveyed in the Dallas-Fort Worth Metroplex. The ranking were based on AP scores and the percentage of students who passed the exams. In 2004, the district had five students who qualified as National Merit Scholar Semifinalists, seven commended student, one National Hispanic Recognized student and one National African-American recognized student. Denton State School is one of the country's most modern and 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 accommodate 653 students, more than 20 buildings for physically handicapped individuals, and a 32 bed acute hospital with supporting facilities such as X-ray, laboratory, dental, and pharmaceutical. Additional buildings include a modern administration building, an academic building, laundry facility, chapel, maintenance shop and a warehouse. The school has a staff of 1,450 with an annual budget of $44 million. DENTON UNIVERSITIES EXPAND. . . Texas Woman's University (TWU) has grown dramatically with a 27.9% increase in student enrollment between 2000 and 2004. TWU's fall 2005 enrollment was 11,353, an increase of 5.6% over fall 2004. To meet growing housing demand, TWU completed a 167-unit apartment -style dormitory residence hall in August 2005. The dorm complex features a community center, activity deck and early childcare program. A parking area was added to provide an additional 88 spaces near the student union and administrative offices. Almost half of TWU students (45%) are graduate students. Health science majors comprise 42% ofTWU students and TWU produces more new nurses than any other program in Texas and is among the nation's leading providers of health care professionals. TWU is proud of its diversity; minority students comprise 35% of students, and 71 % of the most recent semester's graduates were first generation college graduates. Recognized for excellence in baccalaureate and master degree nursing programs, TWU student's first-time pass rate for nursing licensure exceeds 95%, ahead of the national average of 87%. A- 5 University of North Texas (UNT) - UNT Research Park, a 277-acre, 553,000 square foot facility purchased from Texas Instruments is the site of research and patents in the field of nanotechnology and the site of the UNT Engineering School that occupies approximately 180,000 square feet. Masters and bachelors degrees in electrical engineering degrees have been added to the existing engineering programs in materials science, computer science, and engineering technology. UNT expects to have 650 engineering students by 2007 and 1,250 by 2010. Longer-term plans for the Research Park include housing additional research fields and a new business incubator program. The 2004-2005 academic year began with the official dedication of UNT' s new 105,000 square foot, $30 million Chemistry Building that houses state-of-the-art research facilities, laboratories and classrooms. Also dedicated was Victory Hall, a 600-bed, $25.3 million residence hall featuring a #3.9 million dining hall and a 8.9 million athletic center with a total square footage of 220,000. Two large courtyards flank a student center with a cyber cafe, computer lab, kitchenette, media room, classroom, and game and seating areas. AGRICULTURE. . . Northwestern Denton County is one of the more diversified agricultural areas in Texas. With soil types ranging from rich black to sandy load, and good, soft artesian water, it is ideal for diversified farming and livestock. Principal crops are corn, wheat, oats, hay, grain sorghums and peanuts. Beef cattle, sheep, chickens and turkeys contribute a substantial and steady income annually to the farmers and ranchers of the County. A very significant concentration of valuable world champion horse farms east of the City's corporate boundaries; provide a prosperous economic resource for the City and area. Products significant to the economy are horses, beef, eggs, wheat, grain sorghums, hay, and nursery crops. TRANSPORTATION. . . Denton is located only 20 miles northeast of the Dallas-Fort Worth International Airport which began operations in January 1974. In addition, Dallas' Love Field Airport and Fort Worth's Meacham International Airport are in close proximity to Denton. Alliance Airport, located about 20 miles southwest of Denton, is the only purely industrial airport in the world. Accompanying the Alliance Airport are five business parks. Together, Alliance's access to highway, rail and air transportation offers an excellent opportunity for future industrial growth. Much development is occurring at the Denton Municipal Airport. The runway will be expanded within the next 12 months from 6,000 to 7,000 feet. A control tower and additional private hangar space have also been built. A terminal building will also be constructed. Denton's airport is a designated "super reliever" airport for D/FW International Airport. The Kansas City Southern Railroad and the Union Pacific Railroad provide daily service to Denton. Full switching is available, providing direct access to all major markets across the nation. Greyhound/Trailways serves Denton through Dallas and Oklahoma City. Motor freight in Denton is included in the D/FW commercial trade zone and is served by major freight carriers. BANKING. . . There are 15 banks in Denton: Bank of America, N.A., Bank One, N.A., Wells Fargo Bank, N.A., Farmers and Merchants state Bank, First State Bank, Northwest Bank Texas, N.A., Provident Bank, Guaranty Federal Bank, Point Bank, TexasBank, First Bank, Inwood National Bank, Washington Mutual, Denton's only locally-owned bank, Northstar Bank, and First United Bank with Denton's first "Banco" branch specializing in serving Denton's Hispanic community. GROWTH INDICES City State Fiscal Building Values (millions) (1) Water Sewer Electric Unemployment Unemployment Year Commercial Residential Total Customers Customers Customers Rates (2) Rates (2) 2001 $ 40 $219 $ 259 22,614 20,759 35,704 4.90% 4.84% 2002 22 216 238 24,054 22,225 36,591 6.78% 6.33% 2003 36 277 313 24,978 23,329 37,057 7.19% 6.76% 2004 48 267 315 26,416 24,453 39,507 5.10% 5.30% 2005 85 260 345 27,584 25,695 41,846 4.41% 5.67% (1) New Construction Only. (2) Source: Texas Workforce Commission. MEDICAL. . . Denton is well on its way to becoming a regional medical destination serving north Texas and southern Oklahoma. Denton Regional Medical Center is a 184-bed community hospital that serves the growing population of Denton, Wise, Cooke, and Montague Counties. Offering a full-spectrum of healthcare including advanced open-heart surgery and neurosurgery programs. Denton Regional opened a new $7 million, 13,500 square-foot day surgery center on a 2-acre lot adjacent to the hospital. A $19 million expansion project is underway to add a fifth floor to the four-story building will add 24,500 square feet and will house a 29-bed progressive care unit. Presbyterian Hospital of Denton (formerly Denton Community Hospital) celebrated the grand opening of its 272,538 square- foot, 161-bed facility. An 80,000 square-foot, medical office building was also completed. A new 52,000 square-foot, $14 million physical rehabilitation hospital will be built across from Presbyterian Hospital and will be modeled after the Kessler Institute for Rehabilitation. A- 6 Additional new medical facilities beginning or completing construction in 2005 include North Texas Hospital's 60,000 square foot special hospital featuring eight surgical suites and 16 inpatient beds and the 40,000 square-foot Mayhill Hospital featuring physical rehabilitation and behavioral health services. RECREATION. . . 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 attracts 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 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 recreational 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 $12.16 million Denton Aquatic Park opened in 2003. A-7 APPENDIX B DESCRIPTION OF SENATE BILL 7 AND THE TEXAS MUNICIPAL POWER AGENCY TEXAS MUNICIPAL POWER AGENCY. . . TMP A 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 generation, transmission and sale of electric energy to the Member Cities. The TMP A Agreement requires TMP A 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, TMP A sets the rates and charges to be paid by the Cities for the ensuing year. TMP A's Generation Unit. TMP A's power supply source consists of the 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, 2005, Gibbons Creek's capacity and availability were 86.67% and 91.22%, respectively, which represent an 11.44% increase and a 10.52% increase, respectively, in these measures of productivity from the preceding fiscal year. The increased in productivity was due in part to gains achieved from better boiler management placed in operations with the modifications made to Gibbons Creek for the purpose of limiting nitrogen oxide ("NOx") emissions. See "Description of Senate Bill 7 and the Texas Municipal Power Agency - Texas Municipal Power Agency - Clean Air Act Compliance. II Gibbons Creek also participated in ERCOT's balancing uploads 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 Overations. 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 Gibbons Creek Mine for fuel, to reduce the planned outage cycle at Gibbons Creek and to allow TMP A 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, TMP A 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 was reduced by approximately 67%. In July 2003, TMPA entered into an agreement with Kennecott Coal Sales Company effective January 1, 2004. The agreement for a supply of coal from the PRB is a six-year agreement which, unless terminated earlier, expires on December 31, 2009. Pricing under the agreement is fixed for three years subject to adjustment as provided in the agreement. The agreement provides that, in 2006, the parties will endeavor to negotiate new pricing to be effective during calendar years 2007-2009. In the event the parties are unable to reach agreement in 2006 on new pricing for the remaining three years, either party may terminate the agreement effective January 1,2007. The primary source of coal under the agreement is the Cordero Rojo Complex. However, the agreement provides that, under certain circumstances, coal may be supplied from other mines, including the Jacobs Ranch Mine and the Antelope Mine. On October 2, 1995, TMPA entered into a coal transportation agreement with the Burlington Northern Railroad Company, now the Burlington Northern Santa Fe ("BNSF"), under which BNSF was obligated to provide rail transportation for the coal purchased by TMPA from the PRB. 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, TMP A 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. TMP A considered this rate to be unacceptable, and in October 2000 petitioned the Federal Surface Transportation Board (the "STB") to compel BNSF to set reasonable rates for the Gibbons Creek service in both carrier-supplied and shipper-supplied railcars. On March 21, 2003, the STB issued a decision holding that BNSF's common carrier rate to TMP A was in excess of the maximum reasonable rate allowed by law. The decision established a maximum reasonable rate and requires BNSF to make a reparations payment to account for the difference between the rate charged and the maximum reasonable rate allowed by law. On April 14, 2003, TMPA and BNSF each filed a petition for reconsideration of the STB's decision. In September 2003, TMP A and BNSF reached an agreement relating to the obligation of BNSF to pay TMP A for amounts charged in excess of maximum allowed common carrier rates. Based on this agreement, TMP A recorded a refund amount by reducing 2003 fuel cost and recognizing interest earned on the refund amount as of the September agreement date. Payment of the refund, in the amount of $3.5 million, occurred on December 12, 2003. B-1 On September 24, 2004, the STB issued a ruling on the petitions for reconsideration. The ruling, though confirming that the rate that had been originally appealed by TMPA exceeded the maximum reasonable rate allowed by law, increased the maximum reasonable rate by approximately $2.7 million, thus reducing the amount that BNSF had previously refunded to TMP A. As of September 30, 2004, TMP A accrued a liability to BNSF, resulting from this increase in the prescribed rate, of $2.7 million. On December 3, 2004, TMP A discharged this liability by refunding to BNSF $2.8 million. TMP A did not engage in any further appeal of the rate prescribed by the STB. Coal transportation services to TMP A by BNSF are currently governed by the final STB Order and the BNSF tariff as approved in that proceeding. Subsequent to the March 2003 decision of the STB, TMP A began conducting certain engineering, environmental, routing, and related studies to determine the feasibility of constructing a railroad spur between Gibbons Creek and a rail line of the Union Pacific Railroad. These feasibility studies are ongoing. 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 Brazos, Collin, Dallas, Denton, Grimes, Hunt, Montague, Robertson, Rockwall, 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 Brazos Electric Power Cooperative, Inc. at a number of points in the ERCOT system. TABLE Bl- OUTSTANDING DEBT At September 30,2005, TMPA had approximately $721 million in outstanding fixed rate revenue bonds (the "Revenue Bonds") and $191.8 million in outstanding variable rate tax-exempt commercial paper, and $12.7 million in outstanding variable rate taxable commercial paper (the "Commercial Paper"). The Revenue Bonds and the Commercial Paper have a final maturity of September 1, 2017 and September 1, 2018, respectively. The debt service requirements of TMP A 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 Total Year Debt %of Ending Outstanding Debt (1) Service Princi pal 9/30 Principal Interest Requirements Retired 2006 $ 64,002,512 $ 55,188,587 $ 119,191,099 2007 68,343,278 51,331,846 119,675,124 2008 73,801,448 48,571,848 122,373,296 2009 80,717,825 46,343,753 127,061,578 2010 82,781,394 43,637,746 126,419,140 39.89% 2011 85,949,662 40,550,916 126,500,578 2012 89,045,218 37,759,920 126,805,138 2013 47,909,852 79,597,473 127,507,325 2014 38,962,390 88,549,447 127,511,838 2015 31,514,054 96,547,246 128,061,300 71.56% 2016 29,662,133 98,399,168 128,061,300 2017 27,920,020 100,146,280 128,066,300 2018 205,980,000 7,336,300 213,316,300 100.00% $ 926,589,786 $ 793,960,528 $ 1,720,550,314 (1) Includes $191,780,000 Tax-exempt Commercial Paper Notes and $12,700,000 Taxable Commercial Paper Notes, which have been illustrated at the interest rates of 2.50% and 5.0%, respectively, for purposes of illustration. In accordance with the TMP A Agreement, the City is responsible for a proportion of the costs of TMP A, including debt service, as described above. On March 10, 2005, the Board of Directors of TMP A adopted resolutions (i) re-issuing, as Series 2005A, the taxable commercial paper notes, in an amount not to exceed $20 million, and (ii) re-issuing, as Series 2005, the tax-exempt commercial paper notes, in an amount not to exceed $255 million, representing an increase of $60 million in the amount of tax- exempt commercial paper notes authorized to be issued. TMP A has no plans to issue additional indebtedness within the next twelve month period. B-2 The TMP A Resolution provides that TMP A 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, 2005, TMP A's debt service reserve fund was valued at approximately $102.7 million. Amounts collected by TMP A 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 TMP A 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 restructuring 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 electric 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. In July 1999, the Board of Directors ofTMPA established a Debt Retirement Committee to study and to recommend options for achieving the objective of extinguishing TMP A's debt. Based on the work of the Committee, in October 2000, TMP A 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 TMP A was not able to extinguish all of its debt by September 1, 2000, identified the options explored by the Committee and available to TMP A to reduce TMP A's debt service requirements in the future. The options that are available to TMP A may be affected, and possibly limited, by certain provisions of the TMP A Agreement that pertain to asset sales and provisions of the TMP A Resolution that require it to comply with federal requirements that govern the use of facilities that have been financed with proceeds of tax-exempt bonds, among other factors. In addition, SB 7 provides that TMP A may, at its option, use the rate of return method for calculating its transmission 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 and 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 outstanding indebtedness. This provision of SB 7 allows TMPA to take into account in determining the transmission revenue requirement a portion of the transmission system's share of TMP A debt service as if such debt service was level instead of increasing over time, which accelerates the recovery of that portion of debt service vis-a-vis actual debt requirements. Pursuant to this provision of SB 7, TMPA applied for, and, on February 16,2001, received from the PUC an order revising and 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 TMP A's debt. The major components for the plan are determination of the transmission portion of TMP A's debt service; calculation of TCOS revenues based on levelized and actual debt service, and identification of the indebtedness instruments that would maximize reduction of debt service. In addition, TMP A has established a debt retirement reserve for purpose of accounting for the additional revenues. As additional revenues are used to retire outstanding indebtedness identified in the PUC approved plan, the debt retirement reserve will be relieved. According to the TMP A plan, which was approved by the PUC, the leveling of TMP A'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 $28.3 million in TMP A debt in the years 2007 through 2017. 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 and, after notice and hearing, the PUC may amend the retail electric utilities' CCN s 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 and is limited to single certification of the area within the Member City's boundaries as of February 1, 1999 and that the right of an electric utility or an electric cooperative to serve its existing customers, including any property owned or leased by any 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 Comoliance. 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 change to Wyoming Powder River Basin coal, TMP A has sufficient sulfur dioxide allowances for projected operating rates of Gibbons Creek. The 1990 amendments to the FCAA also implement more stringent rules designed to achieve compliance with the national ambient air quality standard for ozone (see "The Electric System - Environmental Regulation - The Federal Clean Air Act"). The Texas Commission on Environmental Quality ("TCEQ") 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, and Beaumont-Port Arthur areas. As a result on April 19, 2000, the TCEQ issued final rules that will B-3 require the reduction of 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 an 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 than May 1, 2005. To achieve the required level of emissions, Gibbons Creek has undergone significant modification using a phased approach to achieving compliance. The initial two phases involved modifications to the fuel and air supply systems to control the combustion process and to limit the formation of nitrogen oxides in the boiler. These phases were completed following the spring 2002 outage. Completion of the final tuning of the system occurred in early 2003. Currently, TMPA anticipates that no additional post-combustion controls will be necessary. The final cost of meeting the standards for the NOx emissions was approximately $12 million. New cooling water intake structure regulations were introduced in July 2004 for existing power generating facilities with intake structures that withdraw 50 million gallons per day or more. The effects of these regulations on the Gibbons Creek Power plant are currently being investigated by TMP A. In March 2005, the EP A finalized two significant rules targeting NOx, S02 and mercury emissions from power plants. See "The Electric System - Environmental Regulation - Mercury Regulation and Clean Air Act Reforms." The technology for controlling mercury emissions is at present still being developed. TMP A anticipates managing future emission control projects in a conservative manner, using a cost controlled phased approach. B-4 APPENDIX C EXCERPTS FROM THE CITY OF DENTON, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2005 The information contained in this Appendix consists of excerpts from the City of Denton, Texas Comprehensive Annual Financial Report for the Year Ended September 30, 2005, 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. ~? j.-"" M _#3 }'~~ 1.. <!:;..>..J' t ~i f.i <f ~ =~ ,\\: .t !.!i. ~ f.. :t.:..;~..i, KPMG LLP Suite 3100 717 North Harwood Street Dallas, TX 75201-6585 Independent Auditors' Report The Honorable Mayor and Members of City Council City of Denton, Texas: We have audited the accompanying financial statements of the governmental activities, business type activities, each major fund and the aggregate remaining fund information of the City of Denton, Texas (the City) as of and for the year ended September 30, 2005, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the City as of September 30, 2005, and the respective changes in financial position, and, where applicable, cash flows thereof and the budgetary comparison for the General Fund for the year then ended in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued our report dated January 20, 2006 on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1 KPMG LLP, a u.s. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. The management's discussion and analysis, and the schedule of funding progress on pages 3 through 10, and 57, respectively, are not a required part of the basic financial statements but are supplementary information required by u.s. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The introductory section, combining and individual fund financial statements and schedules, capital assets used by governmental funds schedules, regulatory section and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund financial statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section, capital assets used by governmental funds schedules, regulatory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements and accordingly, we express no opinion on them. ..............1#413 January 20, 2006 2 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS SEPTEMBER 30, 2005 The City of Denton's Management's Discussion and Analysis is designed to (a) assist the reader in focusing on significant financial issues, (b) provide an overview of the City's financial activity, (c) identify changes in the City's financial position (its ability to address the next and subsequent years' challenges), (d) identify any material deviations from the financial plan (the approved budget), and (e) identify individual fund issues or concerns. Since the Management's Discussion and Analysis (MD&A) is designed to focus on the current year's activities, resulting changes and currently known facts, please read it in conjunction with the Transmittal Letter (beginning on page i) and the City's financial statements (beginning on page 11). FINANCIAL HIGHLIGHTS . The assets of the City exceeded its liabilities at the close of the fiscal year ended September 30, 2005, by $427,329,415 (net assets). Of this amount, $95,245,210 (unrestricted net assets) may be used to meet the government's ongoing obligations to citizens and creditors. . The City's total net assets increased by $17,717,666. This increase can be attributed to the net revenue of the business-type activities and the contribution of capital assets by developers. . As of September 30, 2005, the City's governmental funds reported combined fund balances of $41,665,973, an increase of $1,596,632 in comparison with the prior fiscal year, due to increased revenue from taxes. Approximately 32% of this total amount, $13,332,857, is available for spending at the government's discretion (unreserved fund balance). . At the end of the fiscal year, unreserved fund balance for the General Fund was $9,718,368, or 13.98% of budgeted general fund expenditures. . The City's total noncurrent liabilities decreased by $7,775,840 during the fiscal year. The primary reason for the decrease was the payment or defeasance of $108.4 million of principal offset by the issuance of $78.7 million of revenue refunding bonds, $9.4 million of general obligation refunding bonds, and $12.1 million of certificates of obligation and general obligation bonds. OVERVIEW OF THE FINANCIAL STATEMENTS The Management's Discussion and Analysis is intended to serve as an introduction to the City of Denton's basic financial statements. The City's basic financial statements comprise three components: (1) government- wide financial statements, (2) fund financial statements and (3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide Financial Statements. The government-wide financial statements are designed to provide readers with a broad overview of the City's finances in a manner similar to private-sector business. The statement of net assets presents information on all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents information showing how the City's net assets changed during the most recent fiscal year. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but not used vacation leave). Both the statement of net assets and the statement of activities are prepared using the accrual basis of accounting as opposed to the modified accrual basis. In its Statement of Net Assets and the Statement of Activities, the City is divided between two kinds of activities: . Governmental activities. Most of the City's basic services are reported here, including police, fire, libraries, development, public services and operations, public works, building inspection, technology 3 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 services and general administration. Property taxes, sales taxes and franchise taxes finance most of these activities. . Business-type activities. The City charges a fee to customers to cover the cost of services it provides. The City's utility system (electric, water and wastewater) and solid waste activities are reported here. The government-wide financial statements can be found on pages 11 - 13 of the report. Fund Financial Statements. A fund is a grouping of related accounts used to maintain control over resources that have been segregated for specific activities or objectives. Fund financial statements provide detailed information about the most significant funds, not the City as a whole. Some funds are required to be established by state law or bond covenants. However, the City Council establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants and other monies. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds and fiduciary funds. . Governmental funds. The majority of the City's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method identified as the modified accrual basis of accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the City's general government operations and the basic services it provides. Governmental fund information helps the reader determine whether there are more or fewer financial resources that can be spent in the near future to finance the City's programs. By comparing information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements, readers may better understand the long-term impact of the government's near-term financing decisions. The relationship or differences between governmental activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds is detailed in a reconciliation following the fund financial statements. The City of Denton maintains 11 individual governmental funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures and changes in fund balances for the general fund, debt service fund and capital projects fund, all of which are considered to be major funds. Data from the other eight governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report. . Proprietary funds. The City charges customers for certain services it provides, whether to outside customers or to other units within the City. These services are generally reported in proprietary funds. Proprietary funds are reported in the same manner that all activities are reported in the Statement of Net Assets and the Statement of Activities. In fact, the City's enterprise funds (a component of proprietary funds) are similar to the business-type activities that are reported in the government-wide statements but provide more detail and additional information, such as cash flows. The internal service funds (the other component of proprietary funds) are utilized to report activities that provide supplies and services for the City's other programs and activities, such as the City's municipal warehouse, the City's self-insurance fund and equipment maintenance function. Because these services benefit both governmental and business-type functions, they have been included in both the governmental and business-type activities in the government-wide financial statements. The City of Denton maintains four enterprise funds. The City uses enterprise funds to account for its electric, water and wastewater systems and solid waste operations. The funds provide the same type of information as the government-wide financial statements, only in more detail and include some of the internal service fund-type activity. The City considers all enterprise funds to be major funds. 4 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 . Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statement because the resources of those funds are not available to support the City's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. Agency funds are a component of fiduciary funds. Agency funds differ from other fiduciary funds in that they do not typically involve a formal trust agreement. Agency funds are used to account for situations where the City's role is purely custodial, such as receipt, temporary investment and remittance of fiduciary resources to individuals, private organizations, or other governments. The City maintains three fiduciary funds. The City uses agency funds to account for the collection and payment of the City's payroll and associated liabilities, employee-purchased insurance and other similar relationships. Notes to the financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 29 - 55 of this report. GOVERNMENT-WIDE FINANCIAL ANALYSIS As of September 30, 2005, the City's combined net assets were $427,329,415, of which $126,082,552 can be attributed to governmental activities and $301,246,863 attributed to business-type activities. This analysis focuses on the net assets (Table 1) and changes in net assets (Table 2) of the City's governmental and business- type activities. The largest portion of the City's net assets (70.4%) reflects its investment in capital assets (e.g., land, building, machinery and equipment), less any related debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Table 1 Net Assets (in thousands) Governmental Business-type Activities Activities Total 2005 2004 2005 2004 2005 2004 Current and other assets $ 64,709 $ 61,034 $ 222,072 $ 230,808 $ 286,781 $ 291,842 Capital assets 177 .493 174.093 402.296 389.381 579.789 563.474 Total assets 242,202 235,127 624,368 620,189 866,570 855,316 Long-term liabilities outstanding 100,426 95,935 286,048 299,662 386,474 395,597 Other liabilities 15.694 16.525 37.074 33.582 52.768 50.107 Total liabilities 116,120 112,460 323,122 333,244 439,242 445,704 Net assets: Invested in capital assets, net of related debt 107,112 107,755 193,657 172,589 300,769 280,344 Restricted 451 297 30,864 35,812 31,315 36,109 Unrestricted 18.519 14.615 76.726 78.544 95.245 93.159 Total net assets $ 126.082 $ 122.667 $ 301.247 $ 286.945 $ 427.329 $ 409.612 5 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Governmental activities and business-type activities increased the City's net assets by $3,415,951 and $14,301,715, respectively. The key elements of these increases are contained in Table 2. Table 2 Changes in Net Assets (in thousands) Governmental Business-type Activities Activities Total 2005 2004 2005 2004 2005 2004 Revenue: Program Revenue: Charges for services $11~999 $ 1 0~225 $188~258 $168~457 $200~257 $178~682 Operating grants and contributions 2~996 3 ~265 2~996 3 ~265 Capital grants and contributions 7~426 14~ 046 9~809 8~415 1 7 ~23 5 22~461 General Revenue: Property tax 26~679 23~ 150 26~679 23 ~ 150 Sales tax 18~998 17 ~871 18~998 17 ~871 Franchise tax 14~25 0 13 ~216 14~250 13 ~216 Hotel occupancy tax 989 911 989 911 Beverage tax 216 209 216 209 Bingo tax 25 21 25 21 Investment Income 1 ~ 149 1 ~333 3~252 2~699 4~401 4~032 Miscellaneous 4~218 4~213 1 ~036 914 5 ~254 5~127 Total revenue 88~945 88~460 202~355 180~485 291~300 268~945 Expenses: General government 26~676 26~412 26~676 26~412 Public safety 3 3 ~ 643 30~509 3 3 ~ 643 30~509 Public works 11 ~987 11 ~053 11 ~987 11 ~053 Parks and recreation 9~913 9~418 9~913 9~418 Interest on long-term debt 4~ 176 4~495 4~ 176 4~495 Electric 132~830 119~650 132~830 119~650 Water 22~3 81 21~279 22~3 81 21~279 Wastewater 18~808 18~528 18~808 18~528 Solid waste 13~169 11 ~302 13~ 169 11 ~302 Total expenses 86,395 81,887 187,188 170,759 273,583 252,646 Increase in net assets before transfers 2,550 6,573 15,167 9,726 17,717 16,299 Transfers 865 1,411 (865) (1,411) Increase in net assets 3,415 7,984 14,302 8,315 17,717 16,299 Net assets at beginning of year - as previously reported 122,667 114,491 286,945 272,418 409,612 386,909 Prior period adjustment 192 6,212 6,404 Net assets at beginning of year - as restated 122,667 114,683 286,945 278,630 409,612 393,313 Net assets at end of year $126,082 $122,667 $301,247 $286,945 $427,329 $409,612 Governmental activities. The most significant governmental activities expense was in providing public safety, which incurred expenses of $33,642,445. These expenses were funded by revenues collected from a variety of sources, with the largest being from property taxes, which are $26,678,783 for the fiscal year ended September 30, 2005. The most significant portion of public safety is the cost of personnel, which totaled $27,168,766. Other significant governmental activities expense for the City includes general government, which incurred $26,675,799 in expenses, of which $15,015,963 represented personnel charges. The decrease in capital grants and contributions reflects a reduction of transportation grants received during the year. 6 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Business-type activities. Business-type activities increased the City's net assets by $14,301,715, accounting for 80.7% of the total growth in the government's net assets. A key element of this increase is capital contributions, emerging as a major revenue source for the Water and Wastewater funds during the current fiscal year, producing $9,808,842 in revenue. Contributions of assets arise from new property development within the City. Charges for services increased $19,800,346 due to various rate increases. The expense increase between fiscal years 2004 and 2005 reflects increased costs of production. FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the City's governmental funds is to provide information on near-term inflows, outflows, and balances of resources available to spend. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the City's governmental funds reported a combined ending fund balance of $41.7 million, an increase of $1.6 million in comparison with the prior year. Approximately $13.3 million constitutes unreserved, undesignated fund balance, which is available for spending at the government's discretion. The remainder of the fund balance is reserved to indicate that it is not available for new spending because it has already been committed 1) to purchase or construct capital assets ($27.7 million), 2) to pay debt service ($0.5 million), or 3) to liquidate contracts and purchase orders of the prior period ($0.2 million). The general fund is the chief operating fund of the City. At September 30, 2005, unreserved fund balance of the general fund was $9.7 million, or 13.98% of budgeted general fund expenditures. The unreserved fund balance of the general fund increased by a moderate $0.2 million during the current fiscal year due to a slight increase in revenue from taxes. Expenditures were closely monitored and compared to revenues received. At the end of the fiscal year, the capital projects fund has a fund balance of $27.7 million. The entire balance in this fund is reserved for capital construction and acquisition. The debt service fund has a total fund balance of $0.5 million all of which is reserved for the payment of debt service. The overall increase in the debt service fund balance ($0.2 million) was partly due to the increase in revenue from taxes ($0.7 million). Proprietary funds. The City's proprietary funds provide the same type of information found In the government-wide financial statements, but in more detail. Unrestricted net assets in Electric, Water, and Wastewater at September 30, 2005 are $58.9 million, $12.5 million, and $1.6 million respectively. Solid Waste has unrestricted net assets of $2.4 million. The results reflect a decrease of unrestricted net assets in each fund, specifically $1.7 million in Electric, $0.5 million in Water, $0.5 million in Wastewater, and $0.7 million in Solid Waste. Other factors concerning the finances of these funds have already been addressed in the discussion of the City of Denton's business-type activities. 7 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 GENERAL FUND BUDGETARY HIGHLIGHTS In March 2005, the City Council amended the original budget (Ordinances 2005-094) from $69,505,208 to $69,511,708 to allow for the appropriation of funds for review of a cable television franchise application by the University of North Texas. For fiscal year 2004-05, General Fund actual expenditures (including transfers) on a budgetary basis were $68.2 million compared to the amended budget of$69.5 million. The $1.3 million variance was primarily due to reduced personnel costs for the general government offset by transfers to increase net assets of Materials Management and to anticipate the funding of other post-employment benefits. Actual revenue (including transfers) on a budgetary basis was $68.4 million compared to the original budget of$69.5 million. Of the $1.1 million variance, approximately $750,000 was due to taxes and fees for services being below expectations. Over the years, the Denton City Council has followed a policy of maintaining a general fund balance in order to plan for unforeseen emergencies and place the City in a more favorable position. In 1997-1998, the policy level was increased from 10% to 12.5% of general fund expenditures. In 1999-2000, the percentage was increased to 13%. The 2004-05 budget increased the policy level to 13.5%. The City of Denton's unreserved fund balance at September 30, 2005 is $9.7 million, or 13.98% of budgeted expenditures. Below is a listing of the ending unreserved balances for the past three years, as well as fiscal year 2004-05 projected and actual. For those years where the actual ending balance has exceeded the policy level, the following year's budget has included utilization of that amount for one-time expenditures. By using the fund balance for one-time expenditures only, the financial impact on future budgets is eliminated. Actual Actual Actual Projected Actual 9/30/02 9/30/03 9/30/04 9/30/05 9/30/05 Unreserved balances $8,033,092 $8,442,942 $9,504,988 $9,383,205 $9,718,368 % of total expenditures 13.64% 13.64% 14.68% 13.50% 13.98% Policy level 13.00% 13.00% 13.00% 13.50% 13.50% The largest revenue source of the General Fund's budget was the ad valorem tax. Denton's ad valorem tax rate is comprised of two components. The first is the operations and maintenance component that is used to calculate revenue for the City's General Fund operations. The second component is the debt portion that is used to calculate revenue to pay the City's general debt service obligations. The Denton Central Appraisal District's certified appraisal roll shows an increase of 8.23% over the prior year certified value and 6.34% over the final 2003 value (including supplements). This increase consisted of$205.7 million of new value added for 2004 and a $127.0 million increase in value for property on the tax rolls in 2003. The 2004-05 ad valorem tax rate was increased by $0.05 to $.59815 per $100 of valuation, which was used to fund additional police officers as well as additional staff required to open Emily Fowler Central Library. CAPITAL ASSET AND DEBT ADMINISTRATION Capital assets. At the end of fiscal year 2005, the City had $579,789,389 invested in a broad range of capital assets, including police and fire equipment, buildings, park facilities, roads, bridges and water and sewer lines (see Table 3 on the following page). This amount represents a net increase (including additions and deductions) of $16,315,642 or 2.9% over the prior fiscal year. 8 Land Landfill improvements Buildings and improvements Plant, machinery and equipment Water rights Infrastructure Construction in progress Total capital assets CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Table 3 Capital Assets at Year-end (Net of Accumulated Deoreciation.. in Thousands) Governmental Business-type Activities Activities 2005 2004 2005 2004 $ 7~848 $ 5~134 $ 8~467 $ 8~338 $ 899 1,435 36,172 32,821 28,660 31,614 100,758 94,461 58,492 59,188 94,285 86,539 203,403 118,864 10,528 17,985 30,277 107,095 $177~493 $174~093 $402~296 $389~381 Totals 2005 2004 16~315 $ 13~472 899 1,435 36,172 32,821 129,418 126,075 58,492 59,188 297,688 205,403 40,805 125,080 $579~789 $563~474 This year's major additions included: Description Lake Ray Roberts Water Treatment Plant Pecan Creek Water Reclamation Plant Expansion 54" Finished Water Transmission Line Spencer Road Solid Waste Operations Building Fleet Service Facility Renovation Middle Pecan Basin III Correction Total Amount $ 42,260,928 21,020,777 7,001,267 3,906,511 3,372,153 2,556,297 2,041,960 $ 82,159,893 Additional information on the City's capital assets can be found in note IV. D. on pages 40 - 42 of this report. Debt. At year-end, the City had $398.1 million in bonds and notes outstanding as compared to $406.1 million at the end of the prior fiscal year, a decrease of 2.0%, as shown in Table 4. General obligation bonds Certificates of obligation Revenue bonds Notes Total Governmental Activities 2005 2004 $ 58,871 $55,893 41,792 40,540 Table 4 Outstanding Debt at Year-end (in thousands) Business-type Activities 2005 2004 $ 3,904 $ 2,047 9,233 11,326 281,120 293,105 3,141 3,141 $297,398 $309,619 Totals $100,663 $96,433 2005 $ 62,775 51,025 281,120 3,141 $398,061 2004 $ 57,940 51,866 293,105 3,141 $406,052 These amounts do not include net unamortized premiums/(discounts) of $8,262,135 or net deferred gain/Closs) on refunding of($9,510,754). During the current fiscal year, the City issued debt in October 2004, January 2005 and June 2005. The new debt resulted primarily from the issuance of $78,695,000 in revenue refunding bonds, $9,410,000 in general obligation refunding bonds, $5,000,000 in general obligation bonds, and $7,145,000 in certificates of obligation. 9 CITY OF DENTON, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) SEPTEMBER 30, 2005 Moody's Investor's Service, Inc. has given the City's General Obligation Bonds and the Certificates of Obligation a rating of "Aa3." Standard and Poor's Corporation has given both the City's General Obligation Bonds and Certificates of Obligation an "AA-" rating. The City's Utility Revenue Bonds carry "AI" and "A+" ratings by Moody's and Standard and Poor's respectively. The City is permitted by Article XI, Section 5 of the State of Texas Constitution to levy taxes up to $2.50 per $100 of assessed valuation for general governmental services including the payment of principal and interest on general obligation long-term debt. The current ratio of tax-supported debt to assessed value of all taxable property is 2.26%. Other long-term liabilities. The City maintains a self-insurance program for general liability, public officials' errors and omission, police professional liability, property loss and workers' compensation. Private insurance companies cover claims for property loss over $100,000 per occurrence and for workers' compensation over $500,000 per occurrence. The City has a reserve for claims and judgments of$I.8 million outstanding at year- end compared with $1.8 million at the end of the prior fiscal year. Other obligations include accrued vacation pay and sick leave. More detailed information about the City's long-term liabilities is presented in Note IV. G., on pages 45 - 50 of this report. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES To help offset increasing costs, the City's fiscal year 2005-06 budget reflects the elimination of 51.2 full-time equivalent positions that were cut during fiscal year 2004-05. Additionally, the budget incorporates a $0.01 increase in the ad valorem tax rate. Sales tax revenue is projected to increase 2.5% due to sales tax sharing economic development agreements becoming active. The 2005-06 budget also increases the fund balance reserve level of the general fund to 14.0% of budgeted expenditures. The fiscal year 2005-06 budget includes base rate increases for some electric customers and a 6% average rate increase for Wastewater. There is no budgeted retail rate increase for Water. The Solid Waste budget includes various rate increases as well as the transition to once per week cart service for residential customers. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the City's finances for all those with an interest in the City's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the City of Denton Finance Department, 215 E. McKinney, Denton, Texas 76201. 10 CITY OF DENTON, TEXAS Exhibit I STATEMENT OF NET ASSETS SEPTEMBER 30, 2005 Primary Government Governmental Business-type Activities Activities Total ASSETS: Current assets: Cash, cash equivalents and investments, at fair value $ 25,535,327 $ 70,793,162 $ 96,328,489 Receivables, net of allowances: Taxes 3,937,328 3,937,328 Accounts 12,229,747 12,229,747 Unbilled utility service 8,975,217 8,975,217 Interest 398,866 292,078 690,944 Other 1,883,557 1,883,557 Internal balances ( 4,805,660) 4,805,660 Due from other governments 2,034,304 2,034,304 Inventory 4,418,867 4,418,867 Prepaid items 22,327 22,327 Deferred charges 7,279,862 7,279,862 Deferred debt issuance costs 613,141 2,222,744 2,835,885 Total current assets 34,038,057 106,598,470 140,636,527 Noncurrent assets: Restricted assets: Cash, cash equivalents and investments, at fair value 30,005,616 114,061,540 144,067,156 Escrow deposits 663,356 286,400 949,756 Accrued interest 2,328 716,103 718,431 Other receivables 409,592 409,592 Capital assets not being depreciated: Land 7,848,270 8,466,829 16,315,099 Construction in progress 10,528,186 30,277,357 40,805,543 Capital assets, net of accumulated depreciation: Buildings 36,171,529 36,171,529 Plant, machinery and equipment 28,659,612 100,757,878 129,417,490 Infrastructure 94,285,324 203,403,923 297,689,247 Landfill improvements 898,732 898,732 Water rights 58,491,749 58,491,749 Total noncurrent assets 208,164,221 517,770,103 725,934,324 Total assets 242,202,278 624,368,573 866,570,851 LIABILITIES: Current liabilities: Accounts payable 3,074,041 13,168,456 16,242,497 Retainage payable 34,096 34,096 Deposits 3,218,826 3,218,826 Accrued interest 657,846 657,846 Due to fiduciary funds 73,932 40,162 114,094 Noncurrent liabilities due within one year 11,068,987 14,961,690 26,030,677 Other liabilities 654,205 654,205 Unearned revenue 50,694 50,694 Payable from restricted assets: Accounts payable 80,218 594,968 675,186 Retainage payable 236,073 236,073 Accrued interest 4,853,829 4,853,829 Total current liabilities 15,694,019 37,074,004 52,768,023 Noncurrent liabilities: Noncurrent liabilities due in more than one year 100,425,707 286,047,706 386,473,413 Total noncurrent liabilities 100,425,707 286,047,706 386,473,413 Total liabilities 116,119,726 323,121,710 439,241,436 NET ASSETS: Invested in capital assets, net of related debt 107,112,321 193,657,258 300,769,579 Restricted: Restricted for debt service 451,046 28,369,981 28,821,027 Restricted for capital acquisition 2,493,599 2,493,599 Unrestricted 18,519,185 76,726,025 95,245,210 Total net assets $ 126_082_552 $ 301_246_863 $ 427_329_415 The notes to the financial statements are an integral part of this statement. 11 CITY OF DENTON, TEXAS STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2005 Functions/Programs Primary government: Governmental activities: General government Public safety Public works Parks and recreation Interest expense Total governmental activities Business-type activities: Electric system Water system Wastewater system Solid waste Total business-type activities Total primary government Expenses $ 26,675,799 33,642,445 11,986,881 9,912,996 4,175,466 86,393,587 132,829,976 22,380,589 18,808,374 13,168,880 187,187,819 $ 273,,581,,406 Charges for Services Program Revenues Operating Grants and Contributions $ 3,333,866 4,965,056 1,086,387 2,613,567 $ 2,182,361 194,460 619,157 11,998,876 2,995,978 129,343,037 24,890,289 20,423,424 13,600,512 188,257,262 $ 200,,256,,138 $ 2,,995,,978 General revenues: Taxes: Property tax Sales tax Franchise tax Hotel occupancy tax Beverage tax Bingo tax Investment income Miscellaneous Transfers Total general revenues and transfers Change in net assets Net assets at beginning of year Net assets at end of year The notes to the financial statements are an integral part of this statement. 12 Capital Grants and Contributions $ 673,699 645,477 6,070,020 36,998 7,426,194 3,295,429 6,513,413 9,808,842 $ 17 ,,235,,036 Exhibit II Governmental Activities Net (Expense) Revenue and Changes in Net Assets Primary Government Business-type Activities Total $ (20,485,873) $ $ (20,485,873) (27,837,452) (27,837,452) (4,830,474) (4,830,474) (6,643,274) (6,643,274) ( 4,175,466) (4,175,466) ( 63,972,539) ( 63,972,539) (3,486,939) (3,486,939) 5,805,129 5,805,129 8,128,463 8,128,463 431,632 431,632 10,878,285 10,878,285 ( 63,972,539) 10,878,285 (53,094,254) 26,678,783 26,678,783 18,998,057 18,998,057 14,250,484 14,250,484 988,573 988,573 215,872 215,872 25,466 25,466 1,148,517 3,252,342 4,400,859 4,218,245 1,035,581 5,253,826 864,493 (864,493) 67,388,490 3,423,430 70,811,920 3,415,951 14,301,715 17,717,666 122,666,601 286,945,148 409,611,749 $ 126,,082,,552 $ 301 ,,246,,863 $ 427,,329,,415 13 CITY OF DENTON, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2005 Exhibit III Other Total General Capital Governmental Governmental Fund Debt Service Pro i ects Funds Funds ASSETS: Cash, cash equivalents and investments. at fair value $ 6,738,492 $ 451,046 $ 27,311,764 $ 3,928,164 $ 38,429,466 Receivables, net of allowances for uncollectibles: Taxes 3,937,328 3,937,328 Accrued interest 107,604 194,204 34,645 336,453 Other 1,598,062 100,096 101,179 1,799,337 Interfund receivables 1,752,973 599,632 661,687 3,014,292 Due from other governments 159,448 1,874,856 2,034,304 Total assets $ 14.293.907 $ 451.046 $ 2R.205.696 $ 6.600.531 $ 49.551.1 RO LIABILITIES AND FUND BALANCES LIABILITIES: Accounts payable $ 1,444,481 $ $ 500,348 $ 533,183 $ 2,478,012 Retaina2e payable 34,096 34,096 Interfund payables 1,418,596 1,401,757 2,820,353 Other liabilities 653,912 293 654,205 Deferred revenues 847,,732 1,,050,,809 1,,898,,541 Total liabilities 4"364,, 721 534,,444 2,,986,,042 7,,885,,207 FUND BALANCES: Reserved for debt service 451,046 451,046 Reserved for encum brances 210,818 210,818 Reserved for capital projects 27,671,252 27,671,252 Unreserved, undesignated 9,718,368 9,718,368 Unreserved, undesignated in special revenue funds 3,,614,,489 3,,614,,489 Total fund balances 9,,929,,186 451,,046 27,,671,,252 3,,614,,489 41,,665,,973 Total liabilities and fund balances $ 14.293.907 $ 451.046 $ 2R.205.696 $ 6.600.531 $ 49.551.1RO The notes to the financial statements are an integral part of this statement. 14 CITY OF DENTON, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET ASSETS AS OF SEPTEMBER 30, 2005 Total fund balances - governmental funds (Exhibit III) Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported as assets in governmental funds. Certain receivables will be collected next year but are not available soon enough to pay for the current period's expenditures and therefore are reported on deferred revenues in the funds. An internal charge to business-type activities is not recorded at the fund level. Several internal service funds are used by the City's management. The assets and liabilities of the internal service funds are included with governmental activities. Total assets of internal service funds Less: Capital assets reported above Less: Total liabilities of internal service funds Liabilities reported below Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported as liabilities in the funds. Long-term liabilities at year-end consist of: Bonds payable Certificates of obligation payable Less: Deferred charge for issuance costs Accrued interest on the bonds Leases payable Compensated absences Total net assets of governmental activities (Exhibit I) The notes to the financial statements are an integral part of this statement. 15 $ 45,952,296 (22,969,264) (17,712,818) 10,912,884 $ (58,870,849) (41,791,588) 684,885 (657,846) (2,210,846) (6,932,537) Exhibit IV $ 41,665,973 177,492,921 1,847,847 (1,328,506) 16,183,098 (109,778,781) $ 126,082,552 CITY OF DENTON, TEXAS Exhibit V STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2005 Other Total General Capital Governmental Governmental Fund Debt Service Projects Funds Funds REVENUES: Taxes $ 37,179,874 $ 8,700,451 $ $ 988,573 $ 46,868,898 Licenses and permits 1,235,337 1,235,337 Franchise fees 14,250,484 14,250,484 Fines and forfeitures 3,959,476 3,959,476 Fees for services 5,520,074 2,735,268 8,255,342 Investment revenue 621,164 465,955 61,398 1,148,517 Intergovernmental 629,259 1,640,668 3,173,590 5,443,517 Miscellaneous 382,494 968,291 580,977 1,931,762 Total revenues 63,778,162 8,700,451 3,074,914 7,539,806 83,093,333 EXPENDITURES: Current: General government 18,214,630 313 130,242 3,927,496 22,272,681 Public safety 32,252,497 804,623 33,057,120 Public works 5,228,666 18,880 5,247,546 Parks and recreation 6,810,881 2,365,805 9,176,686 Capital outlay 341,958 10,642,438 775,960 11,760,356 Debt service: Principal retirement 5,642,487 5,642,487 Advance refunding escrow 216,148 216,148 Bond issuance costs 129,900 163,768 293,668 Interest and other charges 4,018,765 4,018,765 Total expenditures 62,848,632 10,007,613 10,936,448 7,892,764 91,685,457 Excess (deficiency) of revenues over (under) expenditures 929,530 (1,307,162) (7,861,534) (352,958) (8,592,124) OTHER FINANCING SOURCES (USES): Refunding bonds issued 7,316,688 7,316,688 Payment to refunded bond escrow agen1 (7,491,938) (7,491,938) Issuance of long-term deb1 9,070,000 9,070,000 Premium on debt issuancf 310,593 93,768 404,361 Transfers in 748,065 1,326,134 313,304 953,544 3,341,047 Transfers (out) (1,365,689) (492,416) (593,297) (2,451,402) Total other financing sources (uses) (617,624) 1,461,477 8,984,656 360,247 10,188,756 Net change in fund balances 311,906 154,315 1,123,122 7,289 1,596,632 Fund balances at beginning of year 9,617,280 296,731 26,548,130 3,607,200 40,069,341 Fund balances at end of year $ 9.929.186 $ 451.046 $ 27.671.252 $ 3.614.489 $ 41.665.973 The notes to the financial statements are an integral part of this statement. 16 CITY OF DENTON, TEXAS RECONCILIATION OF STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2005 Exhibit VI Net change in fund balances - total governmental funds (Exhibit V) Amounts reported for governmental activities in the statement of activities are different because: $ 1,596,632 Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which depreciation and retirement of assets ($13,454,228=$16,903,156-$3,448,928 internal service portion) exceeded capital outlays ($11,760,356) in the current period. (1,693,872) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. Such amounts ar( recorded in the funds when considered available. 1,055,369 Donations of capital assets increase net assets in the statement of activities but do not appear in the governmental funds because they are not financia resources. 4,796,339 Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net assets. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the statement of net assets. This is the amount by which proceeds exceeded payments. (3,689,562) Fund-level financials report costs related to bonds as expenditures; however, these are deferred and amortized on the government-wide financials 390,696 Certain expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. (66,814) Internal service funds are used by management to charge the costs of certain activities, such as insurance and telecommunications, to individual funds. A portion of the net revenue (expense) of certain internal service funds is reported with governmental activities. The amount reported with business-type activities is $1,104,323. 1,027,163 Change in net assets of governmental activities (Exhibit II) $ 3,415,951 The notes to the financial statements are an integral part of this statement. 17 18 CITY OF DENTON, TEXAS Exhibit VII STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE - BUDGET TO ACTUAL GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2005 Variance with Adjustments - Actual on a Final Budget - Budgeted Amounts Actual Budgetary Budgetary Positive Original Final Amounts Basis Basis (N egative ) REVENUES: Taxes $ 37,540,883 $ 37,540,883 $ 37,179,874 $ $ 37,179,874 $ (361,009) Licenses and permits 1,413,890 1,413,890 1,235,337 1,235,337 (178,553) Franchise fees 14,163,514 14,163,514 14,250,484 14,250,484 86,970 Fines and forfeitures 4,040,340 4,040,340 3,959,476 3,959,476 (80,864) Fees for services 5,916,251 5,916,251 5,520,074 5,520,074 (396,177) Investment revenue 550,000 550,000 621,164 621,164 71,164 Intergovernmental 4,702,925 4,702,925 629,259 3,868,138 4,497,397 (205,528) Miscellaneous 388,465 388,465 382,494 382,494 (5,971) Total revenues 68,716,268 68,716,268 63,778,162 3,868,138 67,646,300 (1,069,968) EXPENDITURES: General government 24,430,276 23,796,123 18,214,630 3,996,567 22,211,197 1,584,926 Public safety 32,087,675 32,508,218 32,252,497 32,252,497 255,721 Public works 5,155,446 5,347,726 5,228,666 5,228,666 119,060 Parks and recreation 7,175,520 7,203,542 6,810,881 6,810,881 392,661 Capital outlay 361,798 361,606 341,958 341,958 19,648 Total expenditures 69,210,715 69,217,215 62,848,632 3,996,567 66,845,199 2,372,016 Excess (deficiency) of revenues over expenditures (494,447) (500,947) 929,530 (128,429) 801,101 1,302,048 OTHER FINANCING SOURCES (USES): Transfer in 753,010 753,010 748,065 748,065 ( 4,945) Transfers (out) (294,493) (294,493) (1,365,689) (1,365,689) (1,071,196) Total other financing sources (uses) 458,517 458,517 (617,624) (617,624) (1,076,141) Excess (deficiency) of revenues and other sources over (under) expenditures and other uses (35,930) ( 42,430) 311,906 (128,429) 183,477 225,907 Fund balances at beginning of year 9,617,280 9,617,280 9,617,280 9,617,280 Fund balance at end of year $ 9,581,350 $ 9,574,850 $ 9,929,186 $ (128,429) $ 9,800,757 $ 225,907 Adjustments - Budgetary Basis include $3,868,138 of expenditures allocated to and reimbursed by other funds. These expenditures are recorded in the other funds' financials. Also included is $128,429 of expenditures for prior year encum brances. 19 CITY OF DENTON, TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS AS OF SEPTEMBER 30, 2005 Business-type Activities - Enterprise Funds Electric Water Wastewater Solid System System System Waste ASSETS: Current assets: Cash, cash equivalents and investments, at fair value $ 50,165,193 $ 14,635,420 $ 607,893 $ 5,384,656 Receivables, net of allowances: Accounts 8,856,240 1,674,863 988,911 709,733 Unbilled utility service 6,547,341 1,186,415 883,233 358,228 Accrued interest 171,640 80,885 88 39,465 Other Interfund receivables 3,354,268 681,427 315,743 87,386 Merchandise inventory Prepaid items Deferred charges 7,279,862 Deferred bond issuance costs 698,607 945,180 469,082 109,875 Total current assets 77,073,151 19,204,190 3,264,950 6,689,343 Noncurrent assets: Restricted assets: Cash, cash equivalents and investments, at fair value 36,974,043 45,771,461 28,604,646 2,711,390 Escrow deposit 133,279 92,381 60,740 Accrued interest 272,508 265,563 165,013 13,019 Other receivables 409,592 Interfund receivables 25 39,352 Capital assets, net of accum ulated depreciation 84,361,045 175,123,287 127,867,994 14,944,142 Total noncurrent assets 122,150,467 221,252,692 156,698,418 17,707,903 Total assets 199,223,618 240,456,882 159,963,368 24,397,246 LIABILITIES: Current liabilities: Accounts payable 12,362,165 419,143 168,519 218,629 Claims payable Compensated absences payable 163,687 164,789 106,614 111,137 Leases payable Deposits 2,937,999 212,002 68,825 Accrued interest Interfund payables 112,930 426,062 436,180 63,839 Payable from restricted assets: Accounts payable 348,289 72,836 109,455 64,388 Retainage payable 71,796 164,277 Accrued interest 1,356,081 2,299,906 1,114,774 83,068 Interfund payables 1,072 1,126 Revenue and general obligation bonds 4,256,771 4,780,000 3,293,229 2,085,463 Total current liabilities paid from restricted assets 5,962,213 7,224,538 4,682,861 2,232,919 Total current liabilities 21,538,994 8,446,534 5,394,174 2,695,349 20 Total Enterprise Funds Exhibit VIII Governmental Activities - Internal Service Funds 21 CITY OF DENTON, TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS AS OF SEPTEMBER 30, 2005 Electric System Business-type Activities - Enterprise Funds Water Wastewater System System Noncurrent liabilities: Leases payable Payable from restricted assets: Arbitrage payable General obligation bonds payable Certificates of obligation Revenue bonds payable, net of premium/discount Deferred amount on refunding Notes payable Compensated absences payable Claims payable Landfill closure/postclosure costs Total noncurrent liabilities Total liabilities NET ASSETS: $ $ $ 575 643 77,819,952 134,515,586 64,298,910 (2,605,076) (4,834,734) (1,422,953) 3,141,222 235,550 237,135 153,419 75,451,001 133,059,209 63,030,019 96,989,995 141,505,743 68,424,193 73,096,335 83,118,659 11,838,028 5,853,938 1,484,720 1,008,879 58,857,368 12,532,056 1,557,699 $ 102,233,623 $ 98,951,139 $ 91,539,175 Adjustment to reflect inclusion of internal service fund activities related to enterprise funds. Net assets of business-type activities (Exhibit I) The notes to the financial statements are an integral part of this statement. Invested in capital assets, net of related debt Restricted for debt service Restricted for capital acquisition Unrestricted Total net assets 32,698,240 10,678,015 22 Solid Waste $ 3,621,347 7,454,073 (139,498) 159,928 3,411,627 14,507,477 17,202,826 4,744,024 2,450,396 $ 7,194,420 Exhibit VIII Governmental Activities - Total Internal Enterprise Service Funds Funds $ $ 1,668,736 1,218 3,621,347 7,129 7,454,073 7,283,744 276,634,448 (9,002,261 ) 3,141,222 786,032 120,565 1,193,000 3,411,627 286,047,706 10,273,174 324,122,757 17,712,818 193,657,258 16,811,810 28,369,981 2,493,599 75,397,519 11,427,668 $ 299,918,357 $ 28,239,478 1,328,506 $ 301,246,863 ( concluded) 23 CITY OF DENTON, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2005 Business-type Activities - Enterprise Funds Electric Water Wastewater Solid System System System Waste OPERATING REVENUES: Utility services $ 127,207,343 $ 20,899,624 $ 18,261,962 $ 13,437,604 Charges for goods and services Other fees 2,135,694 980,260 965,237 162,908 Miscellaneous Total operating revenues 129,343,037 21,879,884 19,227,199 13,600,512 OPERATING EXPENSES: Operating expenses before depreciation 125,691,848 12,353,007 12,504,152 11,469,880 Depreciation 3,897,701 3,746,536 3,094,680 1,458,729 Total operating expenses 129,589,549 16,099,543 15,598,832 12,928,609 Operating income (loss) (246,512 ) 5,780,341 3,628,367 671,903 NON-OPERATING REVENUES (EXPENSES): Investment revenue 1,844,700 975,236 294,318 138,088 Interest expense and fiscal charges (3,571,873) ( 6,528,512) (3,460,631 ) (514,593) Impact fee revenue 3,010,405 1,196,225 Gain (loss) on disposal of capital assets (35,326) (57,201) Other non-operating revenues (expenses) 1,256,399 (142,887) 10,815 3,781 Total non-operating revenues (expenses) (506,100) (2,685,758) (1,959,273) (429,925) Income (loss) before contributions and transfers (752,612) 3,094,583 1,669,094 241,978 CONTRIBUTIONS AND TRANSFERS: Capital contributions 3,295,429 6,513,413 Transfers in 2,625 Transfers (out) (74,829) (109,863) (611,628) (70,798) Total contributions and transfers (74,829) 3,185,566 5,904,410 (70,798) Change in net assets (827,441) 6,280,149 7,573,504 171,180 Total net assets at beginning of year 103,061,064 92,670,990 83,965,671 7,023,240 Total net assets at end of year $ 102,233,623 $ 98,951,139 $ 91,539,175 $ 7,194,420 Change in fund net assets of proprietary funds Adjustment to reflect inclusion of internal service fund activities related to enterprise funds. Change in net assets of business-type activities (Exhibit II) The notes to the financial statements are an integral part of this statement. 24 Exhibit IX Governmental Activities - Total Internal Enterprise Service Funds Funds $ 179,806,533 $ 22,236,662 4,244,099 45,285 184,050,632 22,281,947 162,018,887 16,589,344 12,197,646 3,448,928 174,216,533 20,038,272 9,834,099 2,243,675 3,252,342 107,753 (14,075,609) (392,480) 4,206,630 (92,527) (37,905) 1,128,108 (9,891 ) (5,581,056) (332,523) 4,253,043 1,911,152 9,808,842 245,486 2,625 647,000 (867,118) (672,152) 8,944,349 220,334 13,197,392 2,131,486 286,720,965 26,107,992 $ 299,918,357 $ 28,239,478 13,197,392 1,104,323 $ 14,301,715 25 CITY OF DENTON, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2005 Business-type Activities - Enterprise Funds Electric Water Wastewater System System System CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 129,483,048 $ 22,057,105 $ 19,197,563 Cash paid to em ployees for services (5,986,204) (6,763,464) ( 4,422,222) Cash paid to suppliers (124,080,478) (6,668,012) (8,992,939) Net cash provided (used) by operating activities (583,634) 8,625,629 5,782,402 CASH FLOWS FROM NON CAPITAL FINANCING ACTIVITIES: Transfers (out) (74,829) (109,863) (611,628) Transfers in 2,625 Net cash used by noncapital financing activities: (74,829) (109,863) (609,003) CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: Capital contributions Principal payments on capital debt (3,897,572) (5,419,021 ) (13,292,124) Interest and fiscal charges (3,535,480) (6,738,329) (3,622,054) Principal payments under capital lease obligation Proceeds from issuance of capital debt 9,443,169 Proceeds from impact fees 3,010,405 1,196,225 Acquisition and construction of capital assets (6,996,189) (2,484,477) (2,624,756) Net cash used by capital financing activities ( 4,986,072) (11,631,422) (18,342,709) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale and maturities of investment securities 24,386,805 24,385,491 29,641,810 Purchase of investment securities (24,075,129) (22,200,000) (14,800,000) Interest received on investments 1,832,671 1,043,675 364,132 Net cash provided (used) by investing activities 2,144,347 3,229,166 15,205,942 Net increase (decrease) in cash and cash equivalents (3,500,188) 113,510 2,036,632 Cash and cash equivalents at beginning of year 5,937,493 2,093,718 (786,169) Cash and cash equivalents at end of year 2,437,305 2,207,228 1,250,463 Investments, at fair value (Note IV.A.) 84,701,931 58,199,653 27,962,076 Cash, cash equivalents and investments, at fair value $ 87..139,,236 $ 60,,406,,881 $ 29,,212,,539 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Operating income (loss) Adjustments: Depreciation expense Decrease (Increase) in receivables Decrease (Increase) in interfund receivables Decrease (Increase) in inventories Decrease (Increase) in prepaid items Increase (Decrease) in accounts payabh~ Increase (Decrease) in compensated absences payable Increase (Decrease) in closure/postclosure liability Increase (Decrease) in interfund payables Total adjustments Net cash provided (used) by operating activities NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES: Noncash activity during the year consisted of contributed capital assets for the Water and Wastewater funds in the amount of $3,295,429 and $6,513,413, respectively; the change in the fair value of investments of $(875,761), $(651,144), $(500,353) and $(78,037) for the Electric, Water, Wastewater and Solid Waste funds, respectively; the addition oj a capital lease in the Internal Service funds of $1,604,035; and the change in fair value of investments of $(275,203) for the Internal Service funds. $ (246,512) $ 5,780,341 $ 3,628,367 3,897,701 3,746,536 3,094,680 (1,174,063) (160,511 ) (81,416) 625,734 (87,176) (263,963) (6,262,542) 3,570,027 ( 410,655) (555,837) 12,317 24,362 29,448 (1,006,296) (267,268) (68,877) (337,122) 2,845,288 2,154,035 $ (583,,634) $ 8,,625,,629 $ 5" 782,,402 The notes to the financial statements are an integral part of this statement. 26 Exhibit X Governmental Activities Total Internal Solid Enterprise Service Waste Funds Funds $ 13,861,554 $ 184,599,270 $ 23,325,674 (4,761,509) (21,933,399) ( 4,134,220) (6,787,698) (146,529,127) (13,085,613) 2,312,347 16,136,744 6,105,841 (70,798) (867,118) (672,152) 2,625 647,000 (70,798) (864,493) (25,152) 245,486 (1,736,264) (24,344,981 ) (960,555) (619,212) (14,515,075) (404,731) (6,758) 1,550,000 10,993,169 1,518,965 4,206,630 (2,035,068) (14,140,490) (2,464,452) (2,840,544) (37,800,747) (2,072,045) 5,533,149 83,947,255 3,305,651 (4,450,000) (65,525,129) ( 6,950,000) 151,416 3,391,894 206,189 1,234,565 21,814,020 (3,438,160) 635,570 (714,476) 570,484 111,527 7,356,569 760,736 747,097 6,642,093 1,331,220 7,348,949 178,212,609 15,780,257 $ 8,,096,,046 $ 184"854,, 702 $ 17,,111,,477 $ 671,903 $ 9,834,099 $ 2,243,675 1,458,729 12,197,646 3,448,928 98,150 (1,317,840) (65,613) 99,053 373,648 1,109,340 330,770 (6,262,542) 23,844 (99,902) 2,503,633 (69,525) 8,456 74,583 (54,176) 551,377 551,377 (475,419) (1,817,860) (861,402) 1,640,444 6,302,645 3,862,166 $ 2,,312,,347 $ 16,,136,,744 $ 6,,105,,841 27 CITY OF DENTON, TEXAS STATEMENT OF ASSETS AND LIABILITIES AGENCY FUNDS AS OF SEPTEMBER 30, 2005 ASSETS: Cash, cash equivalents and investments, at fair value Interfund receivables Other receivables Total assets LIABILITIES: Accounts payable Interfund payables Total liabilities Exhibit XI Total Agency Funds $ 1,926,363 116,794 48,518 $ 2,091,675 $ 2,088,975 2,700 $ 2,091,675 The notes to the financial statements are an integral part of this statement. 28 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS SEPTEMBER 30, 2005 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Denton is a municipal corporation governed by an elected mayor and six-member council. The City receives funding from state and federal government sources and must comply with the requirements of these funding source entities. However, the City is not included in any other governmental "reporting entity," as defined in pronouncements by the Governmental Accounting Standards Board (GASB) Statement No. 14, "The Financial Reporting Entity," since council members are elected by the public and have decision-making authority, the authority to levy taxes, the power to designate management, the ability to significantly influence operations, and primary accountability for fiscal matters. During fiscal year 2005, the City implemented GASB Statement 40, "Deposit and Investment Risk Disclosures," which requires the City to disclose the risks related to deposits and investments, including credit risk, custodial credit risk, and interest rate risk. The disclosure related to this statement can be found in Note IV.A. The financial statements of the City have been prepared to conform to accounting principles generally accepted (GAAP) in the United States of America as applicable to state and local governments. GASB is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The following is a summary of the more significant policies. A. Reporting entity An elected mayor and a six-member council govern the City. As required by accounting principles generally accepted in the United States of America, these financial statements present the City (the primary government) and its component units, which are entities for which the City is considered to be financially accountable. Blended component units, although legally separate entities, are, in substance, part of the City's operations, and so data from these units are combined with data of the primary government. A discretely presented component unit, on the other hand, is reported in a separate column in the government-wide financial statements to emphasize it is legally separate from the City. The City had no discretely presented or blended component units at September 30, 2005. B. Government-wide and fund financial statements The basic financial statements include both government-wide (based on the City as a whole) and fund financial statements. The reporting focus is either the City as a whole (government-wide financial statements) or major individual funds (within the fund financial statements). The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all non-fiduciary activities of the primary government. For the most part, the effect of inter-fund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The government-wide statement of activities demonstrates the degree to which the direct expenses of a functional category (public safety, public works, etc.) or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include (1) charges to customers or applicants who purchase, use or directly benefit from goods, services or privileges provided by a given function or segment; (2) grants and contributions that are restricted to meeting operational requirements of a particular function or segment; and (3) grants and contributions that are restricted to meeting the capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. The net cost (by function or business-type activity) is normally covered by general revenue (property taxes, sales taxes, franchise fees, intergovernmental revenues, interest income, and the like). Separate fund financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major governmental funds and major enterprise funds are reported as separate columns in the fund financial statements. GASB Statement 29 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 No. 34 sets forth minimum criteria (percentage of assets, liabilities, revenues or expenditures/expenses of either fund category and for the governmental and enterprise funds combined) for the determination of major funds. Non-major funds are combined in a column in the fund financial statements. Internal service funds, which traditionally provide services primarily to other funds of the government, are presented in summary form as part of the proprietary fund financial statements. The financial statements of internal service funds are allocated (based on the percentage of goods or services provided) between the governmental and business-type activities when presented at the government-wide level. The City's fiduciary funds are presented in the fund financial statements. Since by definition these assets are being held for the benefit of a third party (other local governments, individuals, etc.) and cannot be used to address activities or obligations of the government, these funds are not incorporated into the government-wide statements. The government-wide focus is more on the sustainability of the City as an entity and the change in aggregate financial position resulting from the activities of the fiscal period. The focus of the fund financial statements is on the major individual funds of the governmental and business-type categories, as well as the fiduciary funds (by category). Each presentation provides valuable information that can be analyzed and compared to enhance the usefulness of the information. C. Measurement focus, basis of accounting and financial statement presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund statements. Revenues are recorded when earned, and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund-level financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Property tax, franchise fees, sales tax and other taxes associated with the current fiscal period are all susceptible to accrual and so have been recognized as revenues of the current fiscal period. All of the other revenue items are considered to be measurable and available only when cash is received. The City reports the following major governmental funds: The general fund is the City's primary operating fund. All general tax revenues and other receipts that are not allocated by law or contractual agreement to some other fund are accounted for in this fund. From the fund are paid general operating costs, fixed charges and capital improvement costs that are not paid through other funds. The debt service fund accounts for the payment of principal and interest on general long-term liabilities, paid primarily by taxes levied by the City, and for payment of principal and interest on capital leases in the governmental funds. The capital projects fund accounts for financial resources used for the acquisition or construction of major capital facilities being financed from bond proceeds, capital contributions, or transfers from other funds, other than those recorded in the enterprise funds and internal service funds. Other governmental funds is a summarization of all of the non-major governmental funds. 30 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 The City reports the following major proprietary funds: The City utility system is made up of three separate funds as follows: The electric fund accounts for electrical utility services to the residents and commercial establishments of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The water fund accounts for water utility services to the residents and commercial establishments of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The wastewater fund accounts for sewer and storm water services to the residents and commercial establishments of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The City provides additional services through the following fund: The solid waste fund accounts for the provision of solid waste services to the residents of the City. Activities necessary to provide such services are accounted for in the fund, including, but not limited to, administration, operations, maintenance, finance and related debt service. The City additionally reports the following funds: Internal service funds are used to account for the financing of materials and services provided by one department of the City to other departments of the City on a cost-reimbursement basis. Agency funds are used to account for the payment of payroll, employee insurance, and other similar liabilities. The City holds the assets in an agency capacity for individuals, private organizations or other governments. Private-sector standards of accounting and financial reporting (as issued by the Financial Accounting Standards Board) issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the GASB. Governments also have the option of following subsequent private-sector guidance for business-type activities and enterprise funds, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's electric, water, wastewater and solid waste funds are charges to customers for services. Operating expenses for the enterprise funds and internal service funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. For deferred charges, the City recognizes, as an asset or a liability, the difference between the electric fund's energy cost adjustment (ECA) revenue collected and related costs, in compliance with Financial Accounting Standards Board Statement No. 71. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. D. Assets, liabilities and net assets or equity 1. Cash., cash equivalents and investments The City's cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. 31 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Investments are carried at fair value or cost, if maturities are one year or less. Fair value is determined as the price at which two willing parties would complete an exchange. Interest earned on investments is recorded in the funds in which the investments are recorded. 2. Receivables Outstanding balances between funds are reported as "interfund receivables/payables." Any residual balances between governmental activities and business-type activities are reported in the government-wide statements as "internal balances." Trade and property tax receivables are shown net of an allowance for uncollectibles. The City accrues amounts for utility services provided in September, but not billed at September 30, 2005. 3. Inventories Inventories of supplies are maintained at the City warehouse for use by all City funds and are accounted for by the consumption method. Inventories are valued at the lower of cost or market. Cost is determined using a moving average method. No inventories exist in the governmental fund types. 4. Restricted Assets Certain proceeds of the City's proprietary fund revenue bonds, general obligation bonds, and certificates of obligation, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. Assets collected from impact fees are limited in use and also shown as restricted on the balance sheet of the Water and Wastewater funds. 5. Capital Assets Capital assets, which include property, plant, equipment and infrastructure assets (e.g., roads, bridges, sidewalks and similar items) are reported in applicable governmental or business-type activities columns in the government-wide financial statements and in the proprietary fund financial statements. The City defines capital assets as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the time received. Infrastructure acquired in fiscal years ended after June 30, 1980 is reported in the capital assets section of this report. Major outlays for capital assets and improvements are capitalized as projects are constructed. Net interest incurred during the construction phase of capital assets of business-type activities and enterprise funds is included as part of the capitalized value of the assets constructed. For 2005, net interest capitalization of $227,396 was recorded for electric fund projects, $65,688 was recorded for water fund projects and $67,138 was recorded for wastewater fund projects. 32 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Capital assets are depreciated using the straight-line method over the following useful lives: Assets Buildings Infrastructure Streets General improvements Machinery and equipment Furniture and office equipment Computer equipment/software Plant and equipment Underground pipe Water storage rights Water recreation rights Communication equipment Vehicles Years 40 30 - 40 20 10 10 - 20 10 3 -10 5 40 50 - 100 50 5 3 -10 Renewals and betterments of property and equipment are capitalized, whereas normal repaIr and maintenance are charged to expense as incurred. 6. Compensated Absences The City allows employees to accumulate unused vacation up to 40 days. Upon termination, any accumulated vacation time will be paid to an employee. Generally, sick leave is not paid upon termination except for fire fighters and police officers. Firefighters and police officers accumulate unused sick leave up to a maximum of 90 days. All other employees are paid only upon illness while in the employ of the City. Accumulated vacation and sick leave is accrued when incurred in the government-wide, proprietary and fiduciary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as a result of employee resignations and retirements. The General Fund has been used in prior years to liquidate governmental funds' related liability. 7. Arbitrage Arbitrage involves the investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate, resulting in interest revenue in excess of interest costs. Federal tax code requires that these excess earnings be rebated to the federal government. The Capital Projects Fund has been used in prior years to liquidate governmental funds' related liability. 8. Long-term obligations In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term obligations are reported as liabilities. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. Gains and losses on refunding are amortized over the life of the refunded debt or the life of the new issue, whichever is shorter. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 33 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 9. Fund equity In the fund financial statements, governmental funds report reservations of fund balance for accounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balances represent management plans that are subject to change. II. RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. Explanation of certain differences between the governmental fund balance sheet and the government- wide statement of net assets The governmental fund balance sheet includes a reconciliation between fund balance - total governmental funds and net assets - governmental activities as reported in the government-wide statement of net assets. One element of that reconciliation explains the "long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported as liabilities in the funds." The details of this $(109,778,781) difference are shown below. General obligation bonds payable Certificates of obligation payable Less: deferred charge for issuance cost Accrued interest on bonds Leases payable Compensated absences Net adjustments to reduce fund balance - total governmental funds to arrive at net assets - governmental activities $ (58,870,849) (41,791,588) 684,885 (657,846) (2,210,846) (6~932~537) $(109_778_781 ) B. Explanation of certain differences between the governmental fund statement of revenues, expenditures and changes in fund balances and the government-wide statement of activities The governmental fund statement of revenues, expenditures and changes in fund balances includes a reconciliation between net changes in fund balances - total governmental funds and changes in net assets of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains, "Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is capitalized and allocated over their estimated useful lives and reported as depreciation expense." The details of the $(1,693,872) difference are as follows: Capital outlay Depreciation expense Loss on disposal of capital assets Adjustment for depreciation expense on governmental activities Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities 34 $11,760,356 (11,337,358) (2,069,207) (47~663) $(1_693_872) CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Another element of that reconciliation states, "The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities." The details of this $(3,689,562) difference are as follows. Debt issued or incurred: Issuance of general obligation debt Issuance of certificates of obligation Principal repayments: Principal retirement Payment to refunded bond escrow agent Less: Deferred loss Reclassification of principal between funds Net adjustment to decrease net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $(12,316,688) ( 4,070,000) 5,642,487 7,491,938 (379,865) (57~434) $ (3_689_562) Another element of that reconciliation states, "The net effect of various miscellaneous transactions involving capital assets (i.e., sales, trade-ins and donations) is to increase net assets." The details of this $4,796,339 difference are as follows: Donations of capital assets increase net assets in the statement of activities but do not appear in the governmental funds because they are not financial resources. $4,796,339 Another element of that reconciliation states, "Certain expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures of governmental funds." The details of the $(66,814) difference are as follows: Compensated absences Accrued interest Net adjustments to decrease net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities 35 $ (4,735) (62~079) $(66_814) CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 III. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary information The City Council follows these procedures, as prescribed by City Charter, in establishing the budgets reflected in the financial statements: 1. At least sixty days prior to the beginning of each fiscal year, the City Manager submits to the City Council a proposed budget for the fiscal year beginning on the following October 1. The operating budget includes proposed expenditures and the means of financing them. 2. Public hearings are conducted prior to the adoption of the budget in order to obtain taxpayer comments. 3. The annual budget adopted by the City Council covers the general fund, special revenue funds (Recreation Fund, Police Confiscation Fund, Emily Fowler Library Fund, and Tourist and Convention Fund only), the debt service fund, the enterprise funds, and internal service funds (except for the Risk Retention Fund). The budget is legally enacted by the City Council through passage of an ordinance prior to the beginning of the fiscal year. The basic financial statements reflect the legal level of control, (i.e. the level at which expenditures cannot legally exceed the appropriated amount) which is established by function activity within an individual fund as approved by City Council. 4. The City Charter provides that the City Manager has the authority to transfer any unencumbered appropriation balances from one appropriation to another within a single function (office, department, or agency). City Council approval is not required at this level. The Charter also provides that at any time during the year, at the request of the City Manager, City Council may by resolution transfer any part of the unencumbered appropriation balances or the entire balance thereof between functions, as well as make any increases in fund appropriations. Budgets are adopted on a basis for the governmental funds, proprietary funds, and the budgeted special revenue funds where encumbrances are treated as budgeted expenditures in the year of commitment to purchase; and depreciation expense for the proprietary funds is not budgeted. At the end of the year, encumbrances for which goods and services have not been received are cancelled. At the beginning of the subsequent year, management reviews all open encumbrances and, as provided in the budget ordinance appropriation, these encumbrances may be re-established. Also, during the budgetary process, amounts are included in fund budgets to recognize administrative transfers between funds for goods or services. These amounts are not included in the reporting of actual activity for the funds. For funds reporting required budget-to-actual comparisons, these administrative transfers are included as adjustments - budgetary basis. B. Deficit fund equity The Recreation special revenue fund had a deficit fund balance of $(979,320) at September 30, 2005. This deficit was a result of less than anticipated revenue from park admission, summer camp attendance, swim lesson attendance, concession sales, and fall adult softball registration. The deficit fund balance will be eliminated through the one-cent increase property tax through fiscal year 2009-10. IV. DETAILED NOTES ON ALL FUNDS A. Cash and investments In order to facilitate effective cash management practices, the operating cash of all funds is pooled into common accounts for the purpose of increasing income through combined investment activities. At year-end, the City had $11,472,211 in cash and cash equivalents, including $10,000,000 invested in money market funds that the City considers cash equivalent. Of this amount, agency funds reported $1,926,363. The bank balance was covered by collateral with a fair value of $4,923,342. In addition, the City had $12,537 in petty cash at year- end. Statutes authorize the City to invest in obligations of the u.S. Treasury; U.S. agencies, fully collateralized repurchase agreements, public fund investment pools, SEC-registered, no-load, money market mutual funds, 36 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 investment-grade, rated municipal securities of any state and fully collateralized certificates of deposit. The investments reported at September 30, 2005, were similar to those held during the fiscal year. The City reports all investments in the financial statements at fair value. At September 30, 2005, the City's investments carried a fair value of $230,837,260. As of September 30, 2005, City investments were as follows: Weighted Average Investment Type Fair Value Maturity (Years) U.S. Treasury Securities $ 26,373,500 3.11 U.S. Agency Securities-Coupon 130~474~035 1.22 U.S. Agency Securities-Callable 47~938~375 3.17 U.S. Agency Securities-Discount 26~051 ~350 0.42 Total fair value of investments $ 230,837,260 Portfolio weighted average maturity 1.67 Interest rate risk. In accordance with its investment policy, the City manages its exposure to declines in fair values due to interest rate fluctuations by limiting the weighted average maturity of its investment portfolio to less than eighteen months. With review and approval of the City's investment committee, the weighted average maturity of its investment portfolio may be extended beyond eighteen months. Credit risk. The City's investment policy limits investments to obligations of the United States of America and its agencies, investment quality obligations of the States with a rating not less than AA, fully insured Certificates of Deposit, and commercial paper that has a maturity of 270 days or less and a rating of A-lor P-1. The City's investments in the bonds of U.S. agencies was rated AAA by Standard & Poor's and Fitch Ratings and Aaa by Moody's Investors Service. Custodial credit risk. This is the risk that in the event of a bank or counterparty failure, the City's deposits or investments may not be returned to it. The policy states that all bank deposits and investments of City funds shall be secured by pledged collateral with a market value equal to no less than 102 percent of the principal plus accrued interest less an amount insured by FDIC, if a deposit. 37 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Cash, cash equivalents and investments, at fair value are reported together on the financial statements. Investments, at fair value, by fund were as follows: Other General Capital Governmental Fund Projects Funds Electric Unrestricted investments $ 8,849,062 $ 24,625,882 $ 3,641,266 $ 48,034,255 Change in fair value (38,543) (212,151) (21,123) (1,230,182) Restricted investments 38,508,725 Change in fair value (610,867) Total $ 8,810,519 $ 24,413,731 $ 3,620,143 $ 84,701,931 Internal Total Service City Water Wastewater Solid Waste Funds Investments Unrestricted investments $ 14,427,211 $ 900,000 $ 5,736,378 $ 14,520,930 $ 120,734,984 Change in fair value (85,624) (6,188) (61,835) (217,080) (1,872,726) Restricted investments 44,877,292 27,750,783 1,693,092 1,500,074 114,329,966 Change in fair value (1,019,226) (682,519) (18,686) (23,666) (2,354,964) Total $ 58,199,653 $ 27,962,076 $ 7,348,949 $ 15,780,258 $ 230,837,260 B. Property tax revenue Property taxes attach as an enforceable lien on property as of January 1. Taxes are levied on October 1 and are due and payable at that time; therefore, the legally enforceable claim arises on October 1. A receivable is recorded at that time. All unpaid taxes levied October 1 become delinquent February 1 of the following year. Property taxes at the fund level are recorded as receivables and revenue at the time the tax levy is billed. Current-year revenues recognized are those ad valorem taxes collected within the current period or soon enough thereafter to pay current liabilities, which is sixty days after year-end. Current tax collections for the year ended September 30, 2005, were 98.3% of the tax levy. An allowance is provided for delinquent taxes not expected to be collected in the future. At September 30,2005, the City had a tax rate of $0.59815 per $100 valuation. Based upon the maximum ad valorem tax of $2.50 per $100 valuation imposed by Texas Constitutional law, the City had a tax rate margin of $1.90185. Additional revenues up to $83,204,869 could be raised per year based on the current year's assessed value of $4,374,943,831 before the limit is reached. 38 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 C. Receivables Receivables at September 30, 2005, for the City's individual major funds and other funds (non-major funds, internal service funds and fiduciary funds), including the applicable allowances for uncollectible accounts, are shown below. Capital Waste- General Pro] ects Electric Water water Receivables: Taxes $4,304,122 $ $ $ $ Accounts 19,907,555 2,976,391 2,520,507 Accrued interest 107,604 194,204 444,148 346,448 165,101 Unbilled utility service 6,547,341 1,186,415 883,233 Other 5,395,357 100,096 409,592 Gross receivables 9,807,083 294,300 27,308,636 4,509,254 3,568,841 Less: Allowance for uncollectibles (4,164,089) (11,051,315) (1,301,528) (1,531,596) Net total receivables $5~642~994 $ 294~300 $ 16~257~321 $ 3 ~207 ~ 726 $ 2~037~245 Other Internal Solid Governmental Service Waste Funds Funds Total Receivables: Taxes $ $ $ $ 4,304,122 Accounts 1,838,458 27,242,911 Accrued interest 52,484 34,645 64,741 1,409,375 Unbilled utility service 358,228 8,975,217 Other 101,179 84,220 6,090,444 Gross receivables 2,249,170 135,824 148,961 48,022,069 Less: Allowance for uncollectibles (1,128,725) (19,177,253) Net total receivables $1~120~445 $ 135~824 $ 148~961 $ 28~844~816 39 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 D. Capital assets Capital assets balances and transactions for the year ended September 30, 2005 are summarized below and on the following page. Governmental activities: Balance at Balance at October 1,2004 Increases Decreases September 30, 2005 Capital assets not being depreciated: Land $ 5,133,293 $ 2,714,977 $ $ 7,848,270 Construction in progress 17 ~984~927 12~269~752 (19~726~493) 1 0~528~ 186 Total capital assets not being depreciated 23~118~220 14~984~ 729 (19~726~493) 18~3 7 6~456 Capital assets being depreciated: Buildings 42,321,997 4,483,574 (17,909) 46,787,662 Infrastructure 142,391,035 15,018,369 (11,000) 157,398,404 Machinery and equipment and other improvements 61 ~24 7 ~ 135 6~099~063 (6~993~877) 60~352~321 Total capital assets being depreciated 245~960~ 167 25~60 1 ~006 (7~022~786) 264~538~387 Less accumulated depreciation for: Buildings 9,500,780 1,118,158 (2,805) 10,616,133 Infrastructure 55,851,764 7,272,316 (11,000) 63,113,080 Machinery and equipment and other improvements 29~633~006 6~395~812 ( 4~336~ 1 09) 31~692~709 Total accumulated depreciation 94~985~550 14~786~286 (4~349~914) 105~421~922 Total capital assets, being depreciated, net 150~974~617 10~814~720 (2~672~872) 159~116~465 Governmental activities capital assets, net $174~092~837 $25~799~449 $(22~3 99 ~3 65) $177 ~492~921 Capital assets for governmental activities include capital assts held in the internal service funds. (Continued) 40 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Business- type activities: Balance at Balance at October 1, 2004 Increases Decreases September 30, 2005 Capital assets not being depreciated: Land $ 8,337,533 $ 129,296 $ $ 8,466,829 Construction in progress 107 ~095~495 15~462~209 (92~280~34 7) 30~277~357 Total capital assets not being depreciated 115~433~028 15~591~505 (92~280~34 7) 38~744~186 Capital assets being depreciated: Landfill improvements 9,726,427 69,130 9,795,557 Water rights 69,883,098 69,883,098 Infrastructure 171,575,951 90,109,193 (1,348,245) 260,336,899 Plant, machinery, equipment and other improvements 166~584~307 11~916~787 (973~433) 177~527~661 Total capital assets being depreciated 417~769~783 1 02~095~ 110 (2~321 ~678) 517~543~215 Less accumulated depreciation for: Landfill improvements 8,291,374 605,451 8,896,825 Water rights 10,695,019 696,330 11,391,349 Infrastructure 52,711,775 5,385,053 (1,163,852) 56,932,976 Plant, machinery, equipment and other improvements 72~123~733 5~51 0~812 (864~762) 76~769~783 Total accumulated depreciation 143~821~901 12~ 197 ~646 (2~028~614 ) 153~990~933 Total capital assets, being depreciated, net 273~947~882 89~897~464 (293~064) 363~552~282 Business-type activities capital assets, net $389~380~910 $1 05~488~969 $(92~573~411 ) $402~296~468 Depreciation expense was charged to governmental activities functions/programs as follows: Governmental activities: General government Public safety Public works Parks and recreation Capital assets held by the internal service funds are charged to the various functions based upon usage Total depreciation expense - governmental activities Business-type activities: Electric Water Wastewater Solid Waste Total depreciation expense - business-type activities 41 $ 2,622,474 959,520 6,857,197 898,167 3 ~448~928 $14,786,286 $ 3,897,701 3,746,536 3,094,680 1 ~458~ 729 $12,197,646 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Construction commitments The City has several major construction projects planned or in progress as of September 30, 2005. These projects are evidenced by contractual commitments with contractors and include: Proiect R DWells Denton West R D Wells Loop 288 Water and Wastewater Relocate 380 to Spencer Hwy 380 Water and Wastewater Relocate Locust to IH35 Loop 288 West Water Transmission Line Hwy 77 Utility Relocation Spent-to-Date $ 78,173 204,025 772,465 265,509 3,014,238 1,395,880 Remaining Commitment $3,247,792 3,057,648 1,887,699 1,105,491 427,762 404,120 E. Interfund receivables, payables and transfers A summary of inter fund receivables and payables (in thousands) at September 30,2005, is as follows: Interfund Payables: Governmental Major Funds Business- Type Major Funds Non-Major Internal Interfund Governmental Solid Service Agency Receivables: General Fund Funds Electric Water Wastewater Waste Funds Funds Total Governmental Major Funds: General Fund $ $ 1,393 $ $ $ $ $ 355 $ 3 $ 1,753 Capital Projects Fund 596 3 599 Non-Major Governmental Funds 335 75 110 57 56 29 662 Business- Type Major Funds: Electric 265 3,089 3,354 Water 6 360 315 681 Wastewater 316 316 Solid Waste 37 10 80 127 Internal Service Funds 420 27 119 568 Agency Funds 61 6 11 13 8 8 10 117 Total $ 1,418 $ 1,402 $ 114 $ 426 $ 437 $ 64 $ 4,313 $ 3 $ 8,177 42 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 The more significant interfund receivables and payables include the following: Interfund receivables General fund Electric fund Capital projects fund General fund Interfund pavables Internal service funds-materials management Internal service funds-materials management General fund Other governmental funds Amount $ 402,048 3,089,375 548,328 1,057,743 The outstanding balances between the General Fund, Electric Fund, and the Materials Management Fund are a result of the cash position in the Materials Management Fund due to inventory purchases. The balance between the Capital Projects Fund and the General Fund reflects the funding of airport construction projects. The balance between the General Fund and Other Governmental Funds reflects the General Fund's support of the activities within those funds. Transfers between funds (in thousands) during the year were as follows: Transfers Out: Governmental Major Funds Business- Type Major Funds Capital Non-Major Internal General Projects Governmental Solid Service Transfers In: Fund Fund Funds Electric Water Wastewater Waste Funds Total Governmental Major Funds: General Fund $ $ 51 $ 243 $ $ $ $ $ 454 $ 748 Debt Service Fund 441 126 555 15 189 1,326 Capital Projects Fund 137 176 313 Non-Major Governmental Funds 582 45 75 110 57 56 29 954 Business- Type Major Funds: Wastewater 3 3 Internal Service Funds 647 647 Total $ 1,366 $ 492 $ 593 $ 75 $ 110 $ 612 $ 71 $ 672 $ 3,991 43 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 The more significant transfers include the following: Transfers from fund General fund Internal service funds-risk retention Wastewater fund Capital projects fund Internal service funds-tech services Other governmental funds Other governmental funds Transfers to fund Other governmental funds General fund Debt service fund Debt service fund Debt service fund Debt service fund General fund Amount $ 500,000 454,219 554,404 441,378 188,039 125,974 299,345 Transfers from the Wastewater Fund, Capital Projects Fund, Technology Services Fund, Other Governmental Funds to the Debt Service Fund are used to move revenues from the fund with collection authorization to the Debt Service Fund as debt service principal and interest payments become due. Transfers from the Risk Retention Fund to the General Fund reflect indirect cost transfers. Transfers from the General Fund to Other Governmental Funds reflect the anticipated funding of post-employment benefits. Transfers from Other Governmental Funds to the General Fund reflect indirect cost transfers. F. Leases Leases payable represent the remaining principal amounts payable under lease purchase agreements for the acquisition of equipment through the motor pool fund, an internal service fund. These leases are recorded as capital leases. Remaining requirements, including interest, under these leases are as follows: Year 2006 2007 2008 2009 2010 Payments $ 619~437 532~482 532~482 410~974 289~466 2,384,841 173~995 $2,210,846 Total minimum lease payments Less: amount representing interest Present value of minimum future lease payments 44 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 G. Long-term debt Long-term liabilities transactions for the year ended September 30, 2005, are summarized as follows below and on the following page: Balance at Balance at Octo ber 1, September 30, Due Within 2004 Increases Decreases 2005 One Year Governmental Activities: General obligation bonds $ 55,893,370 $12,427,434 $ 9,449,955 $ 58,870,849 $ 3,822,949 Certificates of obligation 40,540,162 5,575,000 4,323,574 41,791,588 3,251,588 Obligations under capital leases 1,244,678 1,604,035 637,867 2,210,846 542,110 Arbitrage payable 34,228 34,228 Compensated absences payable 6,981,978 3,049,686 3,099,127 6,932,537 2,842,340 Claims payable 1,803,000 914,797 914,797 1,803,000 610,000 Unamortized premium/( discounts) ( 11 , 11 7) 423,229 17,745 394,367 Unamortized deferred gain/(loss) (594,958) (86,465) (508,493) Total governmental long - term liabilities $106,486,299 $23,399,223 $18,390,828 $111,494,694 $11,068,987 Business-type Activities: Revenue bonds $293,105,000 $78,695,000 $90,680,000 $281,120,000 $12,330,000 General obligation bonds 2,046,630 2,040,000 182,479 3,904,151 322,051 Certificates of obligation 11,325,838 1,570,000 3,662,426 9,233,412 1,763,412 Arbitrage payable 6,315 5,097 1 ,218 Compensated absences payable 1,257,676 1,222,345 1,147,762 1,332,259 546,227 Note payable 3,141,222 3, 141 ,222 Landfill closure/post-closure costs 2,860,250 551,377 3,411,627 Unamortized premium/( discounts) 1,688,686 6,423,754 244,672 7,867,768 Unamortized deferred gain/(loss) (1,637,991) (7,768,938) ( 404,668) (9,002,261) Total business-type activities 313,793,626 82,733,538 95,517,768 301,009,396 14,961,690 T otallong - term liabilities $420,279,925 $106,132,761 $113,908,596 $412,504,090 $26,030,677 45 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 General bonded debt - General bonded debt at September 30, 2005, is comprised of the following: Gross Amount Original Outstanding at Interest Rate Final Amount September 30, Bonded Debt (%) Issue Date Maturity of Issue 2005 General obligation 5.4 to 7.4 1996 2012 $ 2,515,000 $ 115,000 General obligation 5.0 to 7.0 1997 2017 4,700,000 660,000 General obligation 5.25 to 5.25 1998 2018 9,660,000 6,265,000 General obligation 4. 1 to 5.0 1999 2019 8,215,000 5,740,000 General obligation refunding 3.2 to 5.0 1999A 2016 5,538,780 4,635,375 General obligation 5.25 to 6.125 2000 2020 3,750,000 1,135,000 General obligation 4.5 to 5.5 2001 2021 14,245,000 11,405,000 General obligation 5.0 to 5.25 2002 2022 12,075,000 11,180,000 General obligation refunding 3.0 to 4.75 2003 2023 7,233,065 5,365,474 General obligation refunding 2.5 to 5.0 2004 2020 7,370,000 7,370,000 General obligation 3.0 to 5.0 2005 2025 5,000,000 5,000,000 Total general obligation bonds 80,301,845 58,870,849 Certificates of obligation 5.0 to 7.0 1996 2010 189,954 6,588 Certificates of obligation 4.0 to 5.0 1998 2018 5,625,000 1,315,000 Certificates of obligation 4.1 to 5.0 1999 2019 5,926,273 4,135,000 Certificates of obligation 5.25 to 6.125 2000 2020 3,125,000 930,000 Certificates of obligation 4.25 to 5.25 2001 2021 10,400,000 5,295,000 Certificates of obligation 4.7 to 5.25 2002 2022 7,145,000 6,950,000 Certificates of obligation 3.0 to 4.75 2003 2023 5,650,000 5,055,000 Certificates of obligation 2.0 to 5.0 2004 2024 12,805,000 12,530,000 Certificates of obligation 3.0 to 4.375 2005 2025 5,575,000 5,575,000 Total certificates of obligation 56,441,227 41,791,588 Total general bonded debt $136,743,072 $100,662,437 [These amounts do not include net unamortized premiums/( discounts) of $394,367 nor net deferred gain/(loss) on refunding of ($508,493).] Proceeds of general bonded debt are restricted to the uses for which they were approved in the bond elections. The City Charter expressly prohibits the use of bond proceeds to fund operating expenses. The general obligations are collateralized by the full faith and credit of the City and, primarily, payable from property taxes. In prior years, the City defeased general obligation bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the City's financial statements. On September 30, 2005, $9,715,000 of general obligation bonds considered defeased are still outstanding, including the bonds related to the December 2004 refunding. 46 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 In May 2005, the City issued $7,145,000 in certificates of obligation and $5,000,000 of general obligation bonds. The debt was issued to pay the cost of various Capital Project improvements ($9,070,000) and proprietary fund capital improvements ($3,075,000). The bonds and obligations are payable over the next 20 years. Also in December 2004, the City issued $9,410,000 of general obligation refunding bonds. The reacquisition price exceeded the net carrying amount of the old debt by $667,148, of which $72,190 is reported in business- type activities. This amount is being amortized over the remaining life of the refunded debt, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 15 years by $632,399 and resulted in a net present value savings of $477,470. Revenue bonds - Revenue bond debt at September 30, 2005, is comprised of the following issues: Principal Net Net Original Outstanding at Unamortized Outstanding at Interest Rate Issue Final Amount September 30, Premium September 30, Revenue Bonds (%) Date Maturity of Issue 2005 (Discount) 2005 Utility system refunding 3.55 to 6.75 1993 2008 $ 6,045,000 $ 775,000 $ (1,469) $ 773,531 Utility system refunding 5.3 to 7.8 1996 2025 36,510,000 1,675,000 (8,220) 1,666,780 Utility system 5.3 to 7.4 1996 2017 2,750,000 245,000 245,000 Utility system 4.3 to 6.3 1998 2018 7,175,000 2,160,000 2,160,000 Utility system refunding 4.65 to 6.65 1998 2030 36,795,000 19,665,000 (229,851) 19,435,149 Utility system refunding 4.0 to 5.0 1998 2015 7,640,000 7,220,000 7,220,000 Utility system 4.974 to 6.0 2000 2020 54,880,000 20,035,000 21,254 20,056,254 Utility system 4.0 to 5.4 2001 2021 59,545,000 52,925,000 489,074 53,414,074 Utility system 4.25 to 5.0 2002 2022 56,710,000 51,255,000 301,362 51,556,362 Utility system 5.0 to 6.5 2002 2022 13,985,000 4,290,000 (12,385) 4,277,615 Utility system 3.625 to refunding 5.625 2003 2022 50,180,000 42,805,000 1,366,143 44,171,143 Utility system refunding 2.0 to 5.25 2004 2024 24,850,000 24,225,000 1,198,037 25,423,037 Utility system refunding 3.0 to 5.0 2005 2022 53,845,000 53,845,000 4,720,503 58,565,503 Total revenue Bonds $410,910,000 $281,120,000 $7,844,448 $288,964,448 [These amounts do not include net unamortized gain/Closs) on refunding of ($8,862,763).] 47 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Other enterprise obligations - General obligation bonds and certificates of obligation issued for solid waste fund at September 30, 2005, is comprised of the following: Gross Amount Interest Original Outstanding at Rate Issue Final Amount September 30, Other Obligations (%) Date Maturity of Issue 2005 General obligation refunding 3.2 to 5.0 1999 2016 $ 1,481,220 $ 1,239,625 General obligation refunding 3.0 to 4.75 2003 2023 846,935 624,526 General obligation refunding 2.5 to 5.0 2004 2015 2,040,000 2,040,000 Total general obligation bonds 4,368,155 3,904,151 Certificates of obligation 5.0 to 7.0 1996 2010 5,000,046 173,412 Certificates of obligation 4.25 to 5.25 2001 2021 3,845,000 1,650,000 Certificates of obligation 4.7 to 5.25 2002 2022 5,445,000 3,475,000 Certificates of obligation 3.0 to 4.75 2003 2023 1,755,000 1,255,000 Certificates of obligation 2.0 to 5.0 2004 2024 1,195,000 1,110,000 Certificates of obligation 3.0 to 4.375 2005 2025 1,570,000 1,570,000 Total certificates of obligation 18,810,046 9,233,412 Total other enterprise obligations $23,178,201 $13,137,563 [These amounts do not include net unamortized premiums/(discounts) of $23,320 nor net deferred gain/Closs) on refunding of ($139,498).] The revenue bonds are collateralized by the revenue of the Denton utility system funds (System) and the various special funds established by the bond ordinance. The ordinance provides that the revenue of the System is to be used first to pay operating and maintenance expenses of the System and second to establish and maintain the revenue bond funds. Any remaining revenues may then be used for any lawful purpose. The ordinance also contains provisions, which among other items restrict the issuance of additional revenue bonds unless the special funds noted above contain the required amounts and certain financial ratios are met. Management believes the City is in compliance with all significant requirements. Assets in these accounts consist of cash and u.S. government securities. Below is a summary of the various net asset balances in the funds required by the bond ordinance to be restricted for debt service. Interest and sinking fund Reserve fund Total restricted net assets restricted for debt service $11,664,832 16,705,149 $28,369,981 In prior years, the City defeased revenue bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the City's financial statements. On September 30, 2005, $32,995,000 of revenue bonds considered defeased are still outstanding, including the bonds related to the 2005 refunding. 48 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 In October 2004, the City issued $24,850,000 of revenue refunding bonds. The reacquisition price exceeded the net carrying amount of the old debt by $2,405,143. This amount is being amortized over the remaining life of the refunded debt, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 20 years by $2,997,965 and resulted in a net present value savings of $1,786,416. In June 2005, the City issued $53,845,000 of revenue refunding bonds. The reacquisition price exceeded the net carrying amount of the old debt by $5,291,605. This amount is being amortized over the remaining life of the refunded debt, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 20 years by $5,958,637 and resulted in a net present value savings of $3,125,999. Note payable In 1980, the City and the City of Dallas contracted with the Corps of Engineers for the construction and development of Ray Roberts Reservoir in Denton County. In contracts with the Corp of Engineers, the City will pay for twenty-six (26%) percent of the estimated water storage rights of the reservoir. Water obtained from the reservoir will be pro rata on the basis of each city's proportional share of total construction cost. The closing of the dam was completed in 1987 with water being available from the reservoir in 1989. Schedule of long-term debt maturities Aggregate maturities of the long-term debt (principal and interest) for the years subsequent to September 30, 2005, are shown below and on the following page: Governmental Activities: Fiscal Year 2006 2007 2008 2009 2010 2011-2015 2016-2020 2021-2025 Total General Obligation Principal Interest $ 3,822,949 $ 2,739,425 3,917,583 2,513,883 3,770,723 2,342,730 3,603,569 2,179,287 3,530,885 2,021,948 19,187,200 7,480,281 15,887,940 3,051,126 5,150,000 371,267 $58,870,849 $22,699,947 Certificates of Obligation Total Principal Interest $ 7,616,647 $ 4,655,214 7,196,782 4,222,960 7,118,079 3,929,219 6,927,940 3,637,934 6,723,695 3,351,183 29,552,200 12,581,928 25,887,940 5,856,433 11,850,000 993,545 $173,995 $102,873,283 $39,228,416 Capital Leases Principal Interest $ 542,110 $ 77,327 489,199 43,283 502,356 30,126 394,371 16,603 282,810 6,656 Principal $ 3,251,588 2,790,000 2,845,000 2,930,000 2,910,000 10,365,000 10,000,000 6,700,000 $41,791,588 Interest $ 1,838,462 1,665,794 1,556,363 1,442,044 1,322,579 5, 101 ,647 2,805,307 622,278 $16,354,474 $2,210,846 49 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Business- Type Activities: Fiscal Year 2006 2007 2008 2009 2010 2011-2015 2016-2020 2021-2025 2026-2030 Total Fiscal Year 2006 2007 2008 2009 2010 2011-2015 2016-2020 2021-2025 2026-2030 Total General Obligation Principal $ 322,051 482,417 449,277 471,431 474,115 1,607,800 97,060 Interest $142,982 130,088 115,145 100,124 83,630 197,255 2,427 Certificates of Obligation Principal Interest $ 1,763,412 $ 377,674 1,085,000 305,606 760,000 272,226 570,000 248,425 510,000 227,464 1,725,000 890,823 1,775,000 486,407 1,045,000 81,583 $9,233,412 $2,890,208 Total Principal Interest - $ 14,415,463 $ 14,319,467 17,728,639 13,483,338 15,069,277 12,759,912 14,976,431 12,008,805 15,434,115 11,232,781 75,962,800 45,158,026 87,567,060 25,213,681 44,130,000 7,144,135 12,115,000 1,616,297 - $297,398,785 $142,936,442 $3,141,222 $ Revenue Principal Interest $ 12,330,000 $ 13,798,811 13,020,000 13,047,644 13,860,000 12,372,541 13,935,000 11,660,256 14,450,000 10,921,687 72,630,000 44,069,948 85,695,000 24,724,847 43,085,000 7,062,552 12,115,000 1,616,297 $281,120,000 $139,274,583 $3,904,151 $771,651 50 [These amounts do not include net unamortized premium/( discount) of $8,262,135 nor net unamortized gain/Closs) on refunding of ($9,510,754).] Notes Payable Principal Interest $ $ 3, 141 ,222 Bonds authorized and unissued General obligation bonds authorized but unissued as of September 30, 2005, amounted to $41,867,000. When issued, the proceeds will be allocated to the applicable capital projects. H. Landfill closure and post-closure cost State and federal laws and regulations require the City to place a final cover on its Mayhill Road landfill site upon closure and to perform certain maintenance and monitoring functions at the site for thirty years after closure. Although closure and post-closure care costs will be paid only upon anticipated closure, the City reports a portion of these costs as an operating expense in each period based on landfill capacity used as of each balance sheet date. During the year, the City conducted an engineering study. As a result, total landfill closure and post-closure cost increased from $12,376,116 to $14,226,967 and increased this year's reported landfill closure and post-closure expense by $551,337. The $3,411,627 reported as landfill closure and post-closure care liability represents the cumulative amount incurred to date based on the use of 24% of the estimated capacity of the entire landfill at September 30, 2005. Based on this estimate, the remaining potential estimated liability for closure and post-closure care of the entire landfill is $10,815,340. The City will recognize the remaining estimated cost of closure and post-closure care as the remaining capacity is filled. These amounts are based on what it would cost to perform closure and post- closure care in 2005. Actual cost may fluctuate due to inflation, changes in technology, or changes in CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 regulations. The landfill has a remaining life of 29 years, and the City expects to close the landfill in fiscal year 2034. The solid waste fund has provided for a designation of cash and investments of $3,411,627 at September 30, 2005, and anticipates increasing the reserve in future periods as the closure and post-closure activities are carried out. v. OTHER INFORMATION A. Pension plans Texas Municipal Retirement Plan Plan description The City provides pension benefits for all of its full-time employees (except fire fighters) through a nontraditional, joint contributory, hybrid-defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), one of 801 administered by TMRS, an agent, multiple-employer, public employee, retirement system. Benefits Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City-financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have been contributed by the employee, with interest, prior to establishment of the plan. Monetary credits for service since the plan began are a percent (200%) of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contribution rate and City matching percent had always been in existence and if the employee's salary had always been the average of their salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions with interest and the employer-financed monetary credits with interest were used to purchase an annuity. Members can retire at ages 60 and above with five or more years of service or with 20 years of service regardless of age. A member is vested after five years. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Contributions The contribution rate for the employees is 7%, and the City matching ratio is currently 2 to 1, both as adopted by the governing body of the City. Under the state law governing TMRS, the actuary annually determines the city contribution rate. This rate consists of the normal cost contribution rate and the prior service contribution rate, both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to the City matching percent, which are the obligation of the City as of an employee's retirement date, not at the time the employee's contributions are made. The normal cost contribution rate is the actuarially determined percent of payroll necessary to satisfy the obligation of the City to each employee at the time a retirement becomes effective. The prior service contribution rate amortizes the unfunded actuarial liability over the remainder of the plan's 25-year amortization period. The unit credit actuarial cost method is used for determining the City contribution rate. Both the employees and the City make contributions monthly. 51 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Three-Year Trend Information for TMRS Funding Year Ending Annual Required Contribution (ARC) Actual Contributions Percent Contributed 12/31/04 $8,707,103 $8,707,103 100% 12/31/03 $8,313,904 $8,313,904 100% 12/31/02 $8,387,271 $8,387,271 100% Actuarial Assumptions 12/31/04 Actuarial cost method Amortization method Remaining amortization period Asset valuation method Investment rate of return Projected salary increases Includes inflation at Cost-of-living adjustments Unit Credit Level Percent of Payroll 25 Years - Open Period Amortized Cost 7% 5% 3.5% None The City of Denton is one of 801 municipalities having the benefit plan administered by TMRS. Each of the 801 municipalities has an annual, individual actuarial valuation performed. All assumptions for the December 31, 2004, valuations are contained in the 2004 TMRS Comprehensive Annual Financial Report, a copy of which may be obtained by writing to P.O. Box 149153, Austin, Texas 78714-9153. Fireman's Relief and Retirement Plan The City provides pension benefits for all Civil Service employees of the Fire Department through a defined contribution plan. The Board of Trustees of the Denton Fireman's Relief and Retirement Fund (the Plan) is the administrator. The Plan is not considered a part of the City of Denton entity. In a defined contribution plan, benefits depend solely on amounts contributed to the Plan plus investment earnings. The Texas Local Firefighter's Retirement Act (TLFFRA) authorizes the benefit provisions of the Plan. TLFFRA provides the authority and procedure to amend benefit provisions. Under the Plan, an employee becomes fully vested after ten years of credited service. The Plan provides service retirement, death, disability, and withdrawal benefits. Employees may retire at age 50 with twenty years of service. The Plan provides a monthly normal service retirement benefit, payable in a Joint and Two-thirds to Spouse form of annuity, equal to 2.3% of highest 36-month average salary for each whole year of service. City contributions for, and interest forfeited by, employees who leave employment before vesting are redistributed to plan participants. F or the Plan in effect through December 31, 2004, the funding policy required contributions equal to 12% of pay by the fire fighters and 10% by the City of Denton. During the year, the City and employees made the required contributions of $829,269 and $995,123, respectively. 52 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 B. Deferred compensation plan The City offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan, available to all permanent City employees, permits them to defer, until future years, up to 25% of annual gross earnings not to exceed $14,000. Employees who are within three years of retirement may elect to participate in a catch-up provision allowed by Section 457, which has an annual maximum contribution amount of $28,000. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. All amounts of compensation deferred under the plan, all property and rights purchased with those amounts, and all income attributable to those amounts, property or rights are, until paid or made available to the employee or other beneficiary, solely the property and rights of the employees. Accordingly, the assets and associated liability of the plan are not included in the City's financial statements. It is the opinion of the City's legal counsel that the City has no liability for losses under the plan. C. Self-insurance plan The City has established a self-insurance plan for workers' compensation benefits and general liability. Employee health insurance is a fully-insured plan. Accrued claims payable include provisions for claims reported and claims incurred but not reported. The provision for reported claims is determined by estimating the amount, which will ultimately be paid each claimant. The provision for claims incurred but not yet reported is estimated based on the City's experience. The costs associated with the self-insurance plan are reported as interfund transactions. Accordingly, they are treated as operating revenues of the Internal Service Risk Retention Fund and operating expenditures (expenses) of the other funds. Workers' compensation and general liability insurance It is the policy of the City of Denton not to purchase commercial insurance for workers' compensation claims or general liability. Commercial liability insurance coverage is purchased for public officials, airport operations, emergency medical services, take-home vehicles, employee theft and dishonesty. Additionally, excess insurance is purchased for general liability and workers' compensation exposure. The City reports liabilities when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. Because actual claims liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claims liability does not necessarily result in an exact amount. Claims liabilities are re-evaluated periodically to take into consideration settlement of claims, new claims and other factors. As of September 30, 2005, the estimated value of these liabilities was $1,803,000. Changes in balances of claims liabilities during fiscal years 2005 and 2004 were as follows: 53 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Claims Liability Claims and Claims Liability Beginning of Change in Claims End of Fiscal Year Estimates Payments Fiscal Year Workers' Compensation 2005 $1,450,000 $518,915 $518,915 $1,450,000 2004 1,450,000 860,236 860,236 1,450,000 General Liability 2005 $ 353,000 $395,882 $395,882 $ 353,000 2004 353,000 151,967 151,967 353,000 On September 30, 2005, the City of Denton held net assets of $1,401,716 in the Risk Retention Fund for payment of claims. There were no significant reductions in insurance coverage from coverage in the prior year, and the amount of settlements did not exceed insurance coverage in the current year or in any of the past three fiscal years. D. Commitments and contingencies Agreement with TMP A In 1976, the City, along with the cities of Bryan, Greenville, and Garland, Texas (the Cities) entered into a Power Sales Contract with the Texas Municipal Power Agency (TMP A). TMP A was created through concurrent ordinances of the Cities and is governed by a Board of Directors consisting of eight members, two appointed by the governing body of each city. Under the terms of the agreement, TMP A agreed to construct or acquire electric generating plants to supply energy and power to the Cities for a period of not less than 35 years. The Cities in turn agreed to purchase all future power and energy requirements in excess of the amounts generated by their systems from TMP A at prices intended to cover operating costs and retirement of debt. In the event that revenues are insufficient to cover all costs and retire the outstanding debt, each of the Cities has guaranteed a portion of the unpaid debt based, generally, upon its pro rata share of the energy delivered to consumers in the prior operating year. As of September 30,2005, total TMPA long-term debt outstanding was approximately $1,120,231,000, and the City's percentage was approximately 21.3 %. In the opinion of management, the possibility of a material payment in the near future under this guarantee is remote in that TMP A is generating operating profits and assets exceed liabilities. TMPA operates a 452-megawatt, lignite-fueled generating plant. In 1996, TMPA switched to an external source of lignite to reduce costs. Should TMP A be dissolved, each city would be entitled to an undivided interest in the property. 54 CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued) SEPTEMBER 30, 2005 Selected financial statement information of TMP A is as follows: September 30 (Unaudited) 2005 2004 Operating revenues Operating expenses Operating income Other non-operating sources Current assets Total assets Long-term debt T otalliabilities Total equity (OOOs) $ 234,871 98,050 136,821 4,120 56,539 1,284,353 1,120,231 1,249,909 34,444 (OOOs) $ 225,689 100,624 125,065 2,220 57,220 1,332,334 1,176,803 1,300,316 32,018 Agreement with the City of Dallas During 1985, the City entered into an agreement with the City of Dallas that provides for the purchase of a minimum of 500,000 gallons/day of untreated water from the City of Dallas from Lake Lewisville. This contract will be effective for 30 years. The cost of water purchased under this agreement during fiscal year 2005 was $66,779. E. Litigation Various claims and lawsuits are pending against the City. In accordance with GAAP, those judgments considered "probable" are accrued, while those claims and judgments considered "reasonably possible" are disclosed but not accrued. In the opinion of City management and legal counsel, the maximum amount of all significant claims considered reasonably possible, excluding condemnation proceedings, is approximately $500,000 as of September 30, 2005. Potential losses after insurance coverage on all probable claims and lawsuits will not have a material effect on the City's financial position as of September 30, 2005. **** 55 APPENDIX D FORM OF BOND COUNSEL'S OPINION Proposed Form of Opinion of Bond Counsel An opinion in substantially the followingform will be delivered by McCall, Parkhurst & Horton LoLoPo, Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or lawo CITY OF DENTON UTILITY SYSTEM REVENUE BOND SERIES 2006 DATED JULY 15, 2006 IN THE PRINCIPAL AMOUNT OF $8,515,000 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 registered 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 pre-payment 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 1, 2006, 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 December 1, 2016, 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 Ordinance"), 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 completion and exchange for the Initial Bond; and we have examined and relied upon the Issuer's Federal Tax Certificate, of even date herewith, incorporating certain schedules prepared by First Southwest Company, financial advisor to the Issuer. BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Initial Bond and Definitive Bonds (collectively, the "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 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 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 percent in principal amount 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 Bonds shall never have the right 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. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on 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 "specified 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 certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may 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 Bonds, is 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. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Bonds. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the 2 Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto . We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. Respectfully, 3