Loading...
HomeMy WebLinkAbout2001-203ORDINANCE NO. Aeol- O AN ORDINANCE AMENDING AN ORDINANCE AUTHORIZING THE ISSUANCE OF CITY OF DENTON, TEXAS UTILITY SYSTEM REVENUE REFUNDING BONDS, SERIES 1983 AND OTHER ORDINANCES RELATING TO THE CITY'S UTILITY SYSTEM REVENUE BONDS, PROVIDING AN EFFECTIVE DATE STATE OF TEXAS CITY OF DENTON WHEREAS, the City of Denton, Texas (the "City") has previously adopted an Ordinance Authorizing the Issuance of City of Denton, Texas Utility System Revenue Refunding Bonds, Series 1983 (the "1983 Ordinance") pursuant to whichthe City has issued its Utility System Revenue Bonds, Series 1992, Series 1993, Series 1993-A, Taxable Series 1993-B, Series 1996, Series 1996-A, Series 1998, Series 1998A, Series 1998B, Series 2000A, Taxable Series 2000B and Series 2001 (the "Bonds"), and WHEREAS, in connection with the issuance of each series of Bonds the City has adopted an ordinance authorizing the issuance of each series of Bonds (the "Other Ordinances"), and WHEREAS, the 1983 Ordinance and the Other Ordinances (collectively, the "Revenue Bond Ordinance") provide that the provisions thereof may be amended with the approval of the owners of 51% or more in aggregate principal amount of the Bonds then outstanding, and WHEREAS, the City finds it necessary and desirable to amend the Revenue Bond Ordinance, and WHEREAS, the necessary notice in wining of such amendment has been given to the owners of the Bonds, and WHEREAS, the aggregate principal amount of the Bonds now outstanding is $212,700,000 and the City has received the consent of $113,035,000 in aggregate principal amount of the Bonds now outstanding, representing 53 14% of the aggregate principal amount of the Bonds now outstanding, NOW THEREFOR, BE IT ORDAINED BY THE CITY COUNCIL OF DENTON, TEXAS, THAT SECTION 1 Section 26(g) of the 1983 Ordinance headed "Sale or Disposal of Property" and the corresponding section of each of the Other Bond Ordinances are hereby amended and restated to read as follows (g) Sale, Lease or Disposal of Property No part of the System shall be sold, leased, mortgaged, demolished, removed or otherwise disposed of, except as 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 exceeds $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 27(1) of tlus 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) be used to redeem or purchase Panty Bonds or Additional Bonds, (m) otherwise be used to provide for the payment of Panty Bonds or Additional Bonds or (m) 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 Panty 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 SECTION 2 Section 260) of the 1983 Ordinance headed "Records" and the corresponding section of the Other Bond Ordinances are hereby amended and restated as follows 0) 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 ofany 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 552 131 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 SECTION 3 Section 26(m) of the 1983 Ordinance headed "No Competition" and the corresponding section of the Other Bond Ordinances are hereby deleted in their entirety SECTION 4 This Ordinance shall become effective immediately upon its passage and approval PASSED AND APPROVED this the 15th day of May, 2001 Eulme Brock, Mayor ATTEST *if+eralters, City Secretary APPROVED AS TO LEGAL FORM HERBERT L PROUTY, CITY ATTORNEY FULBRIGHT & JAWORSKI L L P A REGISTERED LIMITED LIABILITY PARTNERSHIP TELEPHONE 2I4/BBBB000 2200 Ross AVENUE SUITE 2800 FACSIMILE 2I4/$55B200 DALLAS TEXAS 75201-2784 INTERNET ADDRESS RDRANSFIELDOFULBRIGHT COM DIRECT DIAL NUMBER 214/888-8088 August 1, 2001 Mr Michael A Conduff City Manager City of Denton 215 E McKinney Street Denton, Texas 76201 HOUSTON WASHINGTON DC AUSTIN SAN ANTONIO DALLAS NEW YORK LOS ANGELES MINNEAPOLIS LONDON HONG KONG Re $108,530,000 Texas Municipal Power Agency Subordinate Lien Revenue Refunding Bonds, Series 2001A Dear Mike In connection with the above -referenced series of bonds, enclosed is a fully executed original Continuing Disclosure Agreement and the final Official Statement for your files Should you have any questions or comments, please call me at the number referenced above or my legal assistant, Jenny Hackler at (214) 855-8025 Sincerely, Robert D Dransfield RDD leh Enclosures c Sharon Mays 45067103 1/10104326 CONTINUING DISCLOSURE AGREEMENT This Agreement is entered into this 10th day of May, 2001 by and between the Texas Municipal Power Agency, a joint powers agency, a municipal corporation, and a political subdivision of the State of Texas (the "Agency") and City of Denton, Texas, a political subdivision of the State of Texas (the "Contracting Party") RECITALS The Agency is in process of issuing its $108,530,000 Texas Municipal Power Agency Subordinate Lien Revenue Refunding Bonds, Series 2001A (the "Bonds"), proceeds of which will be used to refund a portion of the Agency's outstanding debt (the "Project") The Agency has sold the Bonds to Lehman Brothers (the "Underwriter"), pursuant to a Purchase Agreement between the Underwriter and the Agency (the "Purchase Agreement") In the Purchase Agreement, the Agency agreed to comply with Rule15c2-12 of the Securities Exchange Act of 1934, as amended (the "Rule")by providing financial information of the type contained in Tables numbered one through three and in Appendices A and B of the official statement relating to the Bonds (the "Official Statement") In its resolution authorizing the issuance of the Bonds (the "Bond Resolution"), the Agency has directed the General Manager of the Agency to comply with the Rule In order to assist the General Manager of the Agency in complying with the Rule, the Contracting Party agrees to provide certain information to the Agency pursuant to the terms set forth below Capitalized terms used harem shall, unless otherwise designated herein, have the meanings assigned to such terms in the Bond Resolution AGREEMENT Now, Therefore, in order to induce and enable the Agency to sell the Bonds in order to fund the Protect, the Agency and the Contracting Party contract and agree as follows Section 1 Annual Information (a) The Contracting Party will provide to the Agency, no later than March 1 of each year (or such other date as may be agreed to by the parties), until termination of this Agreement as provided in Section 9 hereof, the information with respect to the Contracting Party described in Appendix B of the Official Statement (b) Any financial statements to be provided pursuant to this Section shall be(i) prepared in accordance with the accounting principles described in Appendix B to the Official Statement, (n) audited, if the Contracting Party 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 Contracting Party shall provide notice to the Agency that audited financial statements are not available and shall provide unaudited financial statements for the applicable fiscal year to the Agency Thereafter, when and if 45033948 1/10104326 audited financial statements become available, the Contracting Party shall provide such audited financial statements as required to the Agency (c) If the Contracting Party's fiscal year end differs from the Agency's fiscal year end, the Contracting Party shall provide the most recent year end annual information as well as cumulative current year to date information The Agency shall notify the Contracting Party if the Agency changes its fiscal year (d) The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the Municipal Securities Rulemaking Board ["MSRB"]) that theretofore has been provided by the Contracting Party to each nationally recognized municipal securities information repository as determined by the United States Securities and Exchange Commission ("SEC") or its staff within the meaning of the Rule ("NRMSIR") and any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule ("SID") or filed with the SEC Section 2 Reporting of Significant Events (a) Upon the occurrence of any of the events described below, the Contracting Party will promptly notify the Agency and provide information requested by the Agency pertaining to the following (1) There is an action, suit, or other formal proceeding at law or in equity, against the Contracting Party that would materially and adversely affect the Contracting Party's financial condition or its ability to make payments under the Power Sales Contract, and (u) There is any change in the Contracting Party's financial condition or financing arrangements that would materially and adversely affect the Contracting Party's financial condition or its ability to make payments under the Power Sales Contract (b) The Contracting Party will notify the Agency as soon as possible if the information required by Sections 1 and 2 cannot be provided in the above -specified time frame Section 3 Material Events Notices (a) The Agency agrees to notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Bonds, if such event is material within the meaning of the federal securities laws (1) principal and interest payment delinquencies (li) nonpayment related defaults, (ui) unscheduled draws on debt service reserves reflecting financial difficulties, (iv) unscheduled draws on credit enhancements reflecting financial difficulties, (v) substitution of credit or liquidity providers, or their failure to perform, 45033948 1/10104326 2 Bonds, (vi) adverse tax opinions or events affecting the tax exempt status of the (vii) modifications to rights of Holders, (vm) Bond calls, (ix) defeasances, (x) release, substitution, or sale of property securing repayment of the Bonds, and (xi) rating changes (b) If the Agency determines that the occurrence of one of the events described above is material within the meaning of the federal securities laws, whether the Agency has obtained knowledge of the occurrence of such event because of notice from the Contracting Party or otherwise, the Agency shall notify, in a timely manner, any SID and either eachNRMSIR or the MSRB, of the occurrence of such event Section 4 Accuracy and Completeness The Contracting Party warrants that all information provided by it to the Agency pursuant to this Agreement will be accurate in all material respects to the best of its knowledge and belief The Contracting Party will provide the Agency with such information as the Agency may reasonably request to confirm the accuracy and completeness of any information provided by the Contracting Party pursuant to this Agreement If the Agency thereafter has reasonable grounds to question the completeness or accuracy of such information, the Contracting Party will afford the Agency and its attorneys and agents, at the expense of the Agency, reasonable access to any and all records, documents, contracts, and other information which is in the custody or control of the Contracting Parry to confirm such accuracy and completeness The Agency and its attorneys and agents shall maintain the confidentiality of all such information, unless required to be provided by the Agency to NRMSIRs, SIDs or the MSRB, and except as otherwise provided by law The Contracting Party shall not be required to provide information or to allow access to its records which exceeds the standards applicable to a due diligence inquiry in the preparation of an official statement in connection with the sale of Bonds or any Additional Bonds by the Agency Section 5 Severability The provisions of this Agreement are severable, and if any provision or part o this Agreement or the application thereof to any person or circumstances shall ever be held by any court of competent Jurisdiction to be invalid or unconstitutional for any reason, the remainder of this Agreement and the application of such provision or part of this Agreement to other persons or circumstances shall not be affected thereby Section 6 Modification This Agreement shall be subject to change or modification only with the mutual written consent of the Contracting Party and the Agency Section 7 Assignability This Agreement shall not be assignable by the Contracting Parry or the Agency without the prior written consent of the other party hereto which consent shall not be unreasonably withheld 45033948 1/10104326 Section 8 Notice All notices shall be in writing All notices shall be deemed to be received three (3) days,after deposit in the United States mail All notices shall be delivered to the following addresses and contact persons To the Agency Texas Municipal Power Agency P O Box 7000 Bryan, Texas 77805 Attn General Manager To the Contracting Party City of Denton, Texas 215 E McKinney Street Denton, Texas 76201 Attn City Manager Any party may designate a different address or contact person by giving the other parry ten (10) days' written notice in the manner described above Section 9 Limitations, Disclaimers and Amendments (a) The Agency and the Contracting Party shall be obligated to observe and perform the covenants specified in this Agreement for so long as, but only for so long as, the Agency and the Contracting Party each remains an Obligated Person, provided that the Agency and the Contracting Party in any event will give notice of any payment or deposit of funds by either of such parties that causes the Bonds to be retired or defeased (b) The provisions of this Agreement are for the sole benefit of the Holders and beneficial owners of the Bonds, and nothing in this Agreement, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person The Agency and the Contracting Party undertake to provide only the financial information, operating data, financial statements and notices which it has expressly agreed to provide pursuant to this Agreement and do not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the Agency's or the Contracting Parry's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Agreement or otherwise, except as expressly provided herein Neither the Agency nor the Contracting Party make any representation or warranty concerning such information or Its usefulness to a decision to invest in or sell Bonds at any future date (c) UNDER NO CIRCUMSTANCES SHALL THE AGENCY OR THE CONTRACTING PARTY BE LIABLE TO THE HOLDER 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 AGENCY OR THE CONTRACTING PARTY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS AGREEMENT, 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 (d) No default by the Agency or the Contracting Party in observing or performing its obligations under this Agreement shall comprise a breach of or default under the Bond Resolution, or any contract relating thereto, for purposes of any other provisions of this Agreement 450339481110104326 (a) Nothing in this Agreement is intended or shall act to disclaim, waive, or otherwise limit the duties of the Agency or the Contracting Party under federal and state securities laws (f) The provisions of this Agreement may be amended by the Agency and the Contracting Party (subject to Section 6) 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 Agency or the Contracting Party, only if (1) the provisions of this Agreement, 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 to the date of such amendment, as well as such changed circumstances, and (2) either (a) the Holders of a majority in aggregate principal amount (or any grater amount required by provisions of the Bond Resolution that authorizes such an amendment) of the outstanding Bonds consent to such amendment or (b) a person that is unaffiliated with the Agency or the Contracting Party (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the Holders and beneficial owners of the Bonds If the provisions of this Agreement are so amended, the Agency shall include with any amended financial information or operating data next provided in accordance with the Bond Resolution or the Purchase Agreement an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information or operating data so provided Section 10 Remedies In the event the Contracting Party fads or refuses to provide the information required by Sections 1 or 2 hereof, the Agency may enforce its right hereunder by an action for mandamus or specific performance, provided, however, before enforcing such remedies, the Agency shall give the Contracting Party notice as provided herein and a reasonable opportunity to provide the requested information 450339481/10104326 5 IN WITNESS WHEREOF, the parties hereby have executed this Agreement in multiple copies, each of equal dignity, as of the date and year set forth on the first page hereof TEXAS MUNICIPAL POWER AGENCY By Gary Plirsons, General Manager CITY OF DENTON, TEXAS By Michael A Conduff, City Manager [signature page to Continuing Disclosure Agreement] 45033948 11101_ S-1 IN WITNESS WHEREOF, the parties hereby have executed this Agreement in multiple copies, each of equal dignity, as of the date and year set forth on the first page hereof TEXAS MUNICIPAL POWER AGENCY a Gary Parsons, General Manager [signature page to Continuing Disclosure Agreement] 45033948 1/10104326 S_11 OFFICIAL STATEMENT Ratings Moody's "Aaa" S&P "AAA" Fitch "AAA" Ambac Insured see "Bond Insurance" and NEW ISSUE - Book -Entry -Only "Other Information —Ratings" herein) In the opinion of Bond Counsel, 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 Exemption" herein, including the alternative minimum tax on corporations $108,530,000 TEXAS MUNICIPAL POWER AGENCY SUBORDINATE LIEN REVENUE REFUNDING BONDS, SERIES 2001A Dated Date: June 15, 2001 Due September 1, as shown herein PAYMENT TERMS Interest on the $108,530 000 Texas Municipal Power Agency (the "Agency") Subordinate Lien Revenue Refunding Bonds, Series 2001A (the "Bonds") will accrue from the date of the initial delivery of the Bonds and will be payable on March 1 and September 1 of each year commencing, March 1 2002 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 owners thereof Principal of, premium if any and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Cc 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 First Union National Bank, Houston, Texas (see "The Bonds Paying Agent/Registrar") AUTHORITY FOR ISSUANCE The Bonds are being issued by the Texas Municipal Power Agency pursuant to V T CA Government Code, Chapters 1207 and 1371, as amended (the "Statutes") and V T C A Utilities Code Chapter 163 Subchapter C, as amended (the "Act") SECURITY FOR THE BONDS The Bonds are special obligations of the Agency issued pursuant to a resolution (the "Resolution") adopted by the Board of Directors of the Agency The Bonds and their terms are governed by the provisions of the Resolution and as adopted by the Board and approved by the Authorizing Officer The Bonds are payable solely from and equally and ratably secured by a pledge of Net Revenues and all Funds (including the investments therein) established by the resolutions of the Board relating to the Agency's currently outstanding senior lien bonds and commercial paper (collectively, the "Prior Lien Obligations"), such resolutions being herein referred to as the "Prior Lien Resolution" the resolution of the Board relating to the Agency's currently outstanding subordinate lien bonds (the 'Previously Issued Subordinate Lien Bonds') such resolution being referred to as the "Subordinate Lien Resolution" and the Resolution, other than the Revenue Fund and the Revenue Fund subject to the payment of Operating and Maintenance Expenses the particulars with respect to which are more fully set forth in the Resolution, provided, however, that such pledge :s and shall be subject and subordinated to prior hens of the Prior Lien Obligations (the "Net Revenues") The Holders of the Bonds shall never have the right to demand payment of such obligation out of any funds raised or to be raised by taxation PURPOSE Proceeds from the sale of the Bonds will be used to refund a portion of the Agency s outstanding debt $49,255 000 Refunding Revenue Bonds, Series 1987 and $56,035 000 Refunding Revenue Bonds Series 1991A (collectively the "Refunded Bonds") in order to lower the overall debt service requirements of the Agency purchase a surety bond, and to pay the costs associated with the issuance of the Bonds Ambac Payment of the principal of and interest on the Bonds when due will be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation simultaneously with the delivery of the Bonds (SEE MATURITY SCHEDULE ON INSIDE COVER) LEGALITY The Bonds are offered for delivery when as and :f issued and received by the Underwriters and subject to the approving opinion of the Attorney General of Texas and the opinion of Fulbright & Jaworski L L P , Bond Counsel Dallas Texas (see Appendix C, "Form of Bond Counsel's Opinion") Certain legal matters will be passed upon for the Underwriters by Vinson & Elkins L L P , Dallas Texas, Counsel for the Underwriters and for the Agency by Tiemann Shahady & Blackman P C, Pflugerville, Texas, Agency Attorney DELIVERY It is expected that the Bonds will be available for delivery through DTC on July 24 2001 LEHMAN BROTHERS JPMORGAN SALOMON SMITH BARNEY INC. June 22,2001 MATURITY SCHEDULE Principal Maturity Price or Principal Maturity Amount (September I) Rate Yield Amount (September 1 Rate Yield $ 4,600,000 2002 4 000% 2 90"/n $ 210,000 2008 4 250% 4 35% 5,385 000 2003 4 000% 3 23% 5,655,000 2009 4 400% 4 52% 5,610,000 2004 4 000% 3 51% 6,750,000 2010 4 500% 4 67% 5,835,000 2005 3 750% 3 80% 7,055,000 2011 4 625% 4 78% 6 025 000 2006 4 000% 100% 46,160,000 2012 4 750% 4 90% 4,725 000 2007 4 125% 4 20% 10 520,000 2013 5 000% 4 97% (Accrued interest from the date of the initial delivery of the Bonds to be added) OPTIONAL REDEMPTION fhe Agency reserves the right at its option to redeem Bonds having stated maturities on and after September 1, 2005, in whole or in part in principal amounts of $5 000 or any integral multiple thereof on September 1 2004 or any date thereafter at the par value thereof plus accrued interest to the date of redemption (see "The Bonds - Optional Redemption') 2 No dealer broker, salesman or other person has been authorized by the Agency or the Underwriters 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 Agency or the Underwriters This Official Statement does not constitute an offer to sell Bonds in anyjurisdiction to any person to whom it is unlawful to make such offer in suchlurisdmtion Certain information set forth herein has been obtained from the Agency 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 Underwriters 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 Agency or other matters described herein since the date hereof IN CONNECTION WITH THE OFFERING OF THE BONDS THE UNDERWRITERS MAY OVER ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET SUCH STABILIZING IF COMMENCED MAY BE DISCONTINUED AT ANYTIME TABLE OF CONTENTS OFFICIAL STATEMENT SUMMARY 4 OTHER INFORMATION 40 BOARD OF DIRECTORS 5 RATINGS 40 MANAGEMENT 5 LITIGATION 40 OPERATOR— DUKE /FLUOR DANIEL 5 REGISTRATION AND QUALIFICATION OF BONDS FOR CONSULTANTS AND ADVISORS 5 SALE 40 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE INTRODUCTION 7 PUBLIC FUNDS IN TEXAS 40 BACKGROUND 7 LEGAL OPINIONS 40 rINANCIAL ADVISOR 41 PLAN OF FINANCING 7 VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS 41 THE BONDS 8 UNDERWRITING 41 MISCELLANEOUS 41 BOND INSURANCE 14 SCHEDULE OF REFUNDED REGULATORY MATTERS 16 BONDS SCHEDULEI DEREGULATION OF THE TEXAS ELETRIC INDUSTRY 16 GENERAL PROVISIONS OF SB 7 16 APPENDICES FEDERAL REGULATION OF ELECTRIC TRANSMISSION SERVICES 18 EXCERPTS FROM THE ANNUAL FINANCIAL REPORT A 21 INFORMATION REGARDING UTILITY SYSTEMS OF THE AGENCY CITY OF BRYAN B I DEBT INFORMATION 23 CITY OF DENTON B-4 B-11 TABLE I —DEBT SERVICE REQUIREMENTS 23 CITY OF GARLAND CITY OF GREENVILLE B-15 FINANCIAL INFORMATION 24 FORM OF BOND COUNSEL'S OPINION !- TABLE 2 CONDENSED STATEMENT OF SPECIMEN INSURANCE POLICY D OPERATIONS 24 The cover page hereof this page, the appendices included LOAD AND ENERGY REQUIREMENTS AND herein and any addenda supplement or amendment hereto RESOURCES 25 are part of the Official Statement PEAR AND ENERGY REQUIREMENTS 25 CITIES' ELECTRIC SYSTEMS 25 SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION 26 INVESTMENTS 35 TABLE 3- CURRENT INVESTMENTS 36 TAX MATTERS 37 CONTINUING DISCLOSURE OF INFORMATION 38 OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement The offering of the Bonds to potential investors is made only by means of this entire Official Statement No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement THEAGENCY The Texas Municipal Power Agency is a joint action agency created in 1975 to provide reliable electric power to its four Member Cities of Bryan Denton Garland and Greenville Texas in an economically competitive and efficient manner THE BONDS The Bonds are issued as $108 530 000 Subordinate Lien Revenue Refunding Bonds Series 2001A The Bonds are issued as serial bonds maturing September 1, 2002 through September 1 2013 (see "The Bonds Description of the Bonds") PAYMENT OF INTEREST Interest on the Bonds will accrue from the date of the initial delivery of the Bonds and is payable March 1 2002 and each September 1 and March 1 thereafter until maturity or prior redemption (see The Bonds Description of the Bonds" and "The Bonds - Optional Redemption") AUTHORITY FOR ISSUANCF I he Bonds are being issued by the Texas Municipal Power Agency pursuant to V r CA Government Code Chapters 1207 and 1371 as amended (the "Statutes") and V T C A Utilities Code Chapter 163 Subchapter C as amended (the "Act") SECURITY FOR THE BONDS I he Bonds are payable solely from and equally and ratably secured by a pledge of Net Revenues and all Funds (including the investments therein) established by the Prior Lien Resolution the Subordinate Lien Resolution and the Resolution other than the Revenue Fund and the Revenue Fund subject to the payment of Operating and Maintenance Expenses the particulars with respect to which are more fully set forth in the Resolution provided, however that such pledge is and shall be subject and subordinated to first and prior liens of the Prior Lien Obligations The Holders of the Bonds shall never have the right to demand payment of such obligation out of any funds raised or to be raised by taxation OPTIONAL REDEMPTION The Agency reserves the right, at its option to redeem Bonds having stated maturities on and after September 1 2005 in whole or in part in principal amounts of $5,000 or any integral multiple thereof on September 1 2004 or any date thereafter at the par value thereof plus accrued interest to the date of redemption (see "The Bonds - Optional 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 and the Bonds are not private activity bonds See "Tax Matters Fax Exemption" for a discussion of the opinion of Bond Counsel, including a description of the alternative minimum tax consequences for corporations USE OF PROCEEDS Proceeds from the sale of the Bonds will be used to refund a portion of the Agency's outstanding debt $49 255 000 Refunding Revenue Bonds Series 1987 and $56 035 000 Refunding Revenue Bonds, Series 1991A (collectively the "Refunded Bonds") in order to lower the overall debt service requirements of the Agency pay for a surety bond and to pay the costs associated with the issuance of the Bonds RATINGS The presently outstanding subordinate lien revenue debt of the Agency is rated 'AT' by Moody's Investors Service Inc ("Moody's"), "A" by Standard & Poor's Ratings Services A Division of The McGraw-Hill Companies Inc ("S&P") and "A-" by Fitch Inc ("Fitch") The Bonds are rated 'A"' by Moody's "AAA" by S&P and "AAA" by Fitch based upon the municipal bond insurance policy of Ambac Assurance to be issued simultaneously with the delivery of the Bonds (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 physieal 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 & Cc 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") PAYMENT RECORD The Agency has never defaulted in payment of its Bonds TEXAS MUNICIPAL POWER AGENCY P O Box 7000 Bryan, Texas 77805 BOARD OF DIRECTORS Byron Chitwood, President Jim Spence Vice President Kenny Mallard Secretary Lonnie Stabler, Board Member George Hopkins, Board Member Sandy Knstoferson Board Member Harris Hollabaugh, Board Member Sue Ann Harting, Board Member MANAGEMENT Gary Parsons Earle Bagley Sharon Reed Larry Graves OPERATOR — DUKE /FLUOR DANIEL Plant Manager Regulatory Specialist/Environmental Operating and Maintenance Manager Transmission Specialist CONSULTANTS AND ADVISORS Auditors Bond Counsel Financial Advisor For additional information regarding the Agency, please contact Gary Parsons Texas Municipal Power Agency P O Box 7000 Bryan Texas 77805 (936)873-1144 City of Greenville City of Garland City of Bryan City of Bryan City of Denton City of Denton City of Garland City of Greenville General Manager Manager Planning & Regulatory Affairs General Accounting Manager Treasury/ Budget Manager Ricky Toney Patrick Matz Eddie Rhyne Ronnie Rhyne Arthur Andersen Houston Texas Fulbright & Jaworski L L P Dallas Texas J C Hall Steven Adams or First Southwest Company 1700 Pacific Avenue Suite 500 Dallas Texas 75201 (214) 953 4000 5 First Southwest Company Dallas Texas OFFICIAL STATEMENT RELATING TO $108,530,000 TEXAS MUNICIPAL POWER AGENCY SUBORDINATE LIEN REVENUE REFUNDING BONDS, SERIES 2001A INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the Texas Municipal Power Agency (the "Agency" or "TMPA"), the Cities of Bryan, Denton, Garland and Greenville, Texas (collectively the "Cities," "Member Cities" and individually, a "City") and the Agency's $108,530 000 Subordinate Lien Revenue Refunding Bonds, Series 200IA (the "Bonds") The Bonds are payable from "Net Revenues" (hereinafter defined), such pledge of revenues being subordinate to the Agency's previously issued senior hen bonds presently outstanding in the principal amount of $878,556 926 (excludes the Refunded Bonds) and the Agency's previously issued Commercial Paper Notes in the amount of $221 300,000 and the additional obligations that may hereafter be issued on parity with such senior hen bonds and Commercial Paper Notes The Agency has $126,005 000 subordinate hen revenue bonds outstanding, including the Bonds Capitalized terms not defined elsewhere herein but used herein have the same meanings assigned to such terms in the Resolution and the Power Sales Contract See "Summary of Certain Provisions of the Resolution" herein There follows in this Official Statement descriptions of the Bonds and certain information regarding the Agency 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 Agency's Financial Advisor First Southwest Company Dallas Texas BACKGROUND The Cities created the Agency in 1975 pursuant to the Act in order to obtain the economic advantages of jointly financing constructing and operating large generation units to supply the growing energy needs of the Cities and providing for a diversification of fuel types and sources Each of the Cities presently owns and operates a municipal electric power generation transmission and distribution system each of which is fueled primarily by natural gas Substantially all of the electric customers residing within the corporate limits of the Cities of Bryan, Denton and Greenville are served by those Cities, respectively The City of Garland serves approximately 85% of the electric customers within its corporate limits The City of Bryan serves additional customers outside its corporate limits through a distinct and separate rural transmission and distribution system The respective rights and obligations of the Agency and the Cities are set forth in individual, but identical Power Sales Contracts (collectively, the "Contract"), dated as of September 1, 1976, as amended (see "THE BONDS — THE POWER SALES CONTRACT") fhe Contract has been validated by various acts of the Texas Legislature and has been upheld in various prior judicial proceedings The Agency and the Cmesefforts are designed to permit the operation of the Agency's and the Cities' respective plants on an economic dispatch basis The lower incremental costs of Agency generated power in relation to the incremental costs of power generated by the Cities' plants have resulted in the Agency being the primary supplier of power and energy to the Cities with the Cities' plants being utilized after the Agency's Gibbons Creek Steam Electric Station (Gibbons Creek) is utilized and during peak or temporary shutdown periods PLAN OF FINANCING PURPOSE Proceeds from the sale of the Bonds will be used to refund a portion of the Agency s outstanding debt $49 255 000 Refunding Revenue Bonds Series 1987 and $56,035 000 Refunding Revenue Bonds Series 1991A (collectively the "Refunded Bonds") in order to lower the overall debt service requirements of the Agency and to pay the costs associated with the issuance of the Bonds REPuNDED BONDS The principal and interest due on the Refunded Bonds are to be paid on the scheduled interest payment dates and the respective redemption dates of such Refunded Bonds, from funds to be deposited pursuant to a certain Escrow Agreement (the "Escrow Agreement") between the Agency and The Chase Manhattan Bank (the "Escrow Agent") The Resolution provides that from the proceeds of the sale of the Bonds received from the Underwriters, together with other funds of the Agency the Agency will deposit with the Escrow Agent the amount necessary to accomplish the discharge and final payment of the Refunded Bonds on their respective redemption dates Such funds will be held by the Escrow Agent in a special escrow account (the "Escrow Fund") and used to purchase direct obligations of the United States of America (the "Federal Securities") Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Bonds Grant Thornton LLP a nationally recognized accounting firm, will verify at the time of delivery of the Bonds to the Underwriters thereof the mathematical accuracy of the schedules that demonstrate the Federal Securities will mature and pay interest in such amounts which together with uninvested funds if any in the Escrow Fund, will be sufficient to pay, when due the principal of and interest on the Refunded Bonds Such maturing principal of and interest on the Federal Securities will not be available to pay the Bonds (see "Other Information - Verification of Arithmetical and Mathematical Computations") By the deposit of the Federal Securities and cash if necessary with the Escrow Agent pursuant to the Escrow Agreement, the Agency will have effected the defeasance of all of the Refunded Bonds in accordance with the law It is the opinion of Bond Counsel that as a result of such defeasance and in reliance upon the report of Grant Thornton LLP, the Refunded Bonds will be outstanding only for the purpose of receiving payments from the Federal Securities and any cash held for such purpose by the Escrow Agent and such Refunded Bonds will not be deemed as being outstanding obligations of the Agency for the purpose of applying any limitation on the issuance of debt The Agency has covenanted in the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfully available funds, of any additional amounts required to pay the principal of and interest on the Refunded Bonds if for any reason, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund be insufficient to make such payment SOURCES AND Uses OF FUNDS The proceeds from the sale of the Bonds will be applied approximately as follows Sources of Funds Par Amount of Bonds $ 108 530,000 00 Reoffering Premium 226,244 00 transfers from Prior Issue Debt Service Funds 3,237,380 00 Total Sources $ 111,993,624 00 Uses of Funds Original Issue Discount $ 839,204 85 Underwriters Discount 649 757 75 Deposit to Current Refunding Fund 109,266,306 53 Costs of Issuance/Bond Insurance Premium/ Surety for Reserve Fund/Rounding Amount 1,238,354 87 Total Uses $1 11,993,624 00 THEBONDS DESCRIPTION OF THE BONDS T he Bonds are dated June 15, 2001 and mature on September 1 in each of the years and in the amounts shown on the inside cover page hereof Interest will be computed on the basis of a 360 day year of twelve 30-day months, will accrue from the date of the initial delivery of the Bonds and will be payable on March 1 and September I commencing March 1 2002 I he definitive Bonds will be issued only in fully registered form in any integral multiple of $5 000 for any one 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 owners thereof Principal of premium if any and interest on the Bonds will be payable by the Paying AgenURegistrar 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 'Book -Entry -Only System' herein AUTHORITY FOR ISSUANCE The Bonds are being issued pursuant to V T C A Government Code Chapters 1207 and 1371 as amended (the "Statutes") and V T C A Utilities Code Chapter 163, Subchapter C as amended (the "Act"), and the bond resolution (the "Resolution") of the Agency adopted May 10 2001 PLEDGE The Bonds are special obligations of the Agency and are payable solely from and equally secured by a subordinate lien on and pledge of the Net Revenues of the Agency the Revenue Fund (subject to payment of Operating and Maintenance Expenses), and other Funds (including investments therein) established by the Prior Lien Resolution the Subordinate Lien Resolution and the Resolution, which lien and pledge are subject to and subordinate to the lien and pledge of the Prior Lien Obligations The Resolution requires that upon the issuance of Bonds the Reserve I and contain an amount equal to the Required Reserve on the Bonds and the Previously Issued Subordinate Lien Bonds (See "Summary of Certain Provisions of the Resolution Reserve Fund") The Agency has reserved the right to issue additional Subordinate Lien Bonds See "Summary of Certain Provisions of the Resolution —Additional Subordinate Lien Bonds and Refunding Bonds " RATE COVENANTS The Agency covenants in the Prior Lien Resolution that it will at all times fix, establish and collect rates and other charges for power and energy or services sold or furnished by or in connection with the System which, together with other income are reasonably expected to yield Net Revenues equal to at least 1 25 times the Debt Service on the Prior Lien Obligations for the fiscal year for which such rates and charges shall apply and further covenants in the Resolution that it will establish, fix, prescribe and collect rates and charges for power and energy, or services sold or furnished by or in connection with the System which together with other income are reasonably expected to yield Net Revenues sufficient to satisfy the obligations of the Prior Lien Obligations and an amount equivalent to at least 125 times the Debt Service of all Subordinate Lien Bonds for the fiscal year for which such rates and charges shall apply The Agency further covenants in the Prior Lien Resolution and the Resolution that, promptly upon any material change in the circumstances which were contemplated at the time such rates and charges were most recently reviewed, but not less frequently than once in each fiscal year it will review the rates and charges for electric power and energy and services and will as necessary revise such rates and charges to comply with the foregoing requirements The Agency further covenants that such rates charges and income shall many event produce moneys sufficient to enable the Agency to comply with all of its covenants under the Prior Lien Resolution and the Resolution and to pay all obligations of the Agency To the extent not used, surplus amounts on deposit in the Revenue Fund may be used for any lawful purpose See "Summary of Certain Provisions of the Resolution —Rates and Charges " Each City covenants in the Contract to establish, maintain and collect rates and charges for the electric service of its electric system that will produce revenues at least sufficient, together with other revenues available to such electric system and available electric system reserves, to enable it to pay to the Agency, when due, all amounts payable by such City under the Contract DEBT SERVICE RESERVE FUND, AMBAC ASSURANCE SURETY BOND The Resolution requires the establishment of a Debt Service Reserve Fund for the Bonds The Resolution authorizes the Agency to obtain a surety bond in place of fully funding the Debt Service Reserve Fund Accordingly, application has been made to Ambac Assurance Corporation ("Ambac Assurance") for the issuance of a surety bond (the "Surety Bond") for the purpose of funding the Debt Service Reserve Fund for the Bonds (see "SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION" herein) '1 he Bonds will only be delivered upon the issuance of such Surety Bond The premium on the Surety Bond is to be fully paid at or prior to the issuance and delivery of the Bonds The Surety Bond provides that upon the later of (r) one (1) day after receipt by Ambac Assurance of a demand for payment executed by the Paying Agent/Registrar certifying that provision for the payment of principal of or interest on the Bonds when due has not been made or (it) the interest payment date specified in the Demand for Payment submitted to Ambac Assurance Ambac Assurance will promptly deposit funds with the Paying Agent sufficient to enable the Paying Agent to make such payments due on the Bonds, but in no event exceeding the Surety Bond Coverage as defined in the Surety Bond Pursuant to the terms of the Surety Bond, the Surety Bond Coverage is automatically reduced to the extent of each payment made by Ambac Assurance under the terms of the Surety Bond and the Agency is required to reimburse Ambac Assurance for any draws under the Surety Bond with interest at a market rate Upon such reimbursement, the Surety Bond is reinstated to the extent of each principal reimbursement up to but not exceeding the Surety Bond Coverage The reimbursement obligation of the Agency is subordinate to the Agency s obligations with respect to the Bonds In the event the amount on deposit, or credited to the Debt Service Reserve Fund exceeds the amount of the Surety Bond any draw on the Surety Bond shall be made only after all the funds in the Debt Service Reserve Fund have been expended In the event that the amount on deposit in, or credited to the Debt Service Reserve Fund in addition to the amount available under the Surety Bond includes amounts available under a letter of credit, insurance policy Surety Bond or other such funding instrument (the "Additional Funding Instrument"), draws on the Surety Bond and the Additional Funding Instrument shall be made on a pro rata basis to fund the insufficiency The Bond Resolution provides that the Debt Service Reserve Fund shall be replenished in the following priority (i) principal and interest on the Surety Bond and on the Additional Funding Instrument shall be paid from first available Revenues on a pro rata basis, (it) after all such amounts are paid in full, amounts necessary to fund the Debt Service Reserve Fund to the required level, after taking into account the amounts available under the Surety Bond shall be deposited from next available Revenues The Surety Bond does not insure against nonpayment caused by the insolvency or negligence of the Paying Agent/Registrar For more information regarding Ambac Assurance Corporation see "BOND INSURANCE" herein TnE POWER SALES CONTRACT A City's rights and obligations with respect to the Agency are set forth in the Contract Under the Contract, a City is obligated to take or pay for its percentage share of the energy generated by the Agency and the Agency is obligated to devote its best efforts to the generation and delivery of energy from the generating facilities of the Agency but the failure of the Agency to provide energy under the Contract will not relieve any Member City of its obligations under the Contract, as such obligations are unconditional and absolute The Take or Pay Percentage Under the Contract, each of the Member Cities is unconditionally obligated to pay to the Agency without offset or counterclaim and without regard to whether energy is delivered by the Agency to the Member Cities their percentage of the Agency's annual system casts, including the payment of the Agency's debt service requirements and operating and maintenance expenses, as set forth below City of Bryan Texas 21 7% City of Denton Texas 21 3% City of Garland Texas 47 0% City of Grecnvdle Texas 10 0% A City may choose to take or not take energy from the capacity of the Agency generating assets as it sees fit Debt Service Guarantee Percentage In any instance where the amount of money on deposit in the Agency's Bond Fund created by the Prior Lien Resolution is not the full amount then required to be on deposit therein without giving consideration to transfers made from other than the Agency's Revenue Fund or from proceeds of its bonds (provided that transfers may be made from the Agency's Reserve Fund for not more than two (2) consecutive calendar months) the Member Cities are obligated to make their percentage share of a payment to the Agency 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 Prior Lien Resolution to be on deposit in the Agency's Bond Fund Reserve Fund and Contingency Fund The percentage share of the payment to be made by each Member City under the Contract is determined by calculating the percentage relationship that each Member City's Net Energy for Load (as defined in the Contract) for the contract year immediately preceding the contract year in which the calculation is being made bears 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 Energy by the Agency Each Member City shall be entitled to schedule and receive each month for its own account the proportion of the available energy from the Agency'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 Contract Contract Term The contract term of the Contract is for a period of thirty-five years from September 1, 1976 or until all bonds and certain other indebtedness of the Agency is paid whichever occurs later At present the final maturity of the Agency's indebtedness is September 1 2018 although it is possible that the Agency could restructure its debt to shorten or extend the schedule of its debt retirement Construction of New Projects The Contract provides that the Agency 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 the Agency s opinion that such proposed project is necessary for the Agency to meet its commitments under the Contract and is economically feasible Each Member City is required thereafter to notify the Agency, within 60 days of its approval or disapproval of the project If each Member City approves the project the Agency 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 Contract The Contract includes provisions that differ from those described above for the sharing of energy and costs in the event that a new project is proposed and one or more Member Cities do not determine to participate in the project 7 here are no current plans for the Agency to initiate a new generation project Agency Rates The Contract provides that the rates and charges for power energy and services charged to each Member City by the Agency shall be (1) nondiscriminatory (2) fair and reasonable and be 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 the Agency's annual system costs (it) make the deposits to the funds required by the Prior Lien Resolution, the Subordinate Lien Resolution and the Resolution (m) fund the annual capital budget of the Agency and (iv) with respect to other funds or other accounts established by the board of directors of the Agency (the "Board of Directors") and not required by the provisions of the Prior Lien Resolution fund such funds or accounts in an amount not greater than 3 5% of the Agency'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 the Agency on September 30 2000 and any funds held by the Agency on the last day of each fiscal year thereafter over and above the amounts required in connection with subsections (i), (it) (in) and (iv) of clause (3) of the preceding paragraph shall be returned to the Member CItiLS 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 the Agency Contract Payments Constitute Operating Expenses of the City The Contract provides that all payments by a Member City under the Contract including any payments required to be made to the Agency'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 Contract Under the Contract 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 the Agency, when due all amounts payable by such City under the Contract 10 Sale or Assignment of Electric Systems Under the Contract and the Prior Lien 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 the Agency during the term of the Contract A Member City may assign its rights under the Contract but such assignment shall not relieve such Member City of its financial obligations under the Contract during the time any Agency Revenue Bonds are outstanding OPTIONAL REDEMPTION The Agency reserves the right, at its option, to redeem Bonds having stated maturities on and after September 1, 2005, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on September 1 2004 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 Agency 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 Agency 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 CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE NOTICE HAVING BEEN SO GIVEN THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE AND NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE DEFEASANCE The Resolution provides for the defeasance of the Bonds when the payment of the principal of and premium it any on the 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 Bonds The Resolution provides that 'Defeasance Securities" means (a) direct noncallable obligations of the 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 The Agency 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 Agency moneys in excess of the amount required for such defeasance Upon such deposit as described above such Bonds shall no longer be regarded to be outstanding or unpaid Provided however the Agency has reserved the option, to be exercised at the time of the defeasance of the Bonds to call for redemption at an earlier date, those Bonds which have been defeased to their maturity date, if the Agency 0) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption, (u) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the him banking and financial arrangements, and (ill) directs that notice of the reservation be included in any redemption notices that it authorizes BOOK -ENTRY -ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of premium if any, and interest on the Bonds are to be paid to and credited by DTC 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 Agency believes the source of such information to be reliable but takes no responsibility for the accuracy or completeness thereof The Agency 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 11 The Depository Trust Company ("DTC") New York New York, will act as securities depository for the Bonds The Bonds will be issued as fully -registered securities registered in the name of Cede & Co (DTC's partnership nominee) One fully registered certificate will be issued for each maturity of the Bonds in the aggregate principal amount of each such maturity and will be deposited with DTC DTC is a limited -purpose trust company organized under the New York Banking Law a 'banking organization" within the meaning of the New York Banking Law a member of the Federal Reserve System a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934 DTC holds securities that its participants ("Direct Participants") deposit with DTC DTC also facilitates the settlement among Participants of securities transactions such as transfers and pledges in deposited securities through electronic computerized book -entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates Direct Participants include securities brokers and dealers banks, trust companies, clearing corporations and certain other organizations DTC is owned by a number of its Direct Participants and by the New York Stock Exchange Inc the American Stock Exchange Inc and the National Association of Securities Dealers, Inc Access to the DTC system is also available to others such as securities brokers and dealers banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant either directly or indirectly ("Indirect Participants") The Rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission Purchases of Bonds under the D rC system must be made by or through DTC Participants, which will receive a credit for such purchases 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 or Indirect Participants' records Beneficial Owners will not receive written confirmation from DTC of their purchase but Beneficial Owners are 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 interest in the Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book -entry system described herein 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 The deposit of Bonds with D 1 C and their registration in the name of Cede & Co effect no change in beneficial ownership DTC has no knowledge of the actual Beneficial Owners of the Bonds DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited which may or may not be the Beneficial Owners The 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 Redemption notices shall be sent to Cede & Co if less than all of the Bonds within an issue are being redeemed D7 C'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 will consent or vote with respect to the Bonds Under its usual procedures DTC mails an Omnibus Proxy to the Agency as soon as possible after the Record Date (hereinafter defined) The Omnibus Proxy assigns Cede & Co's consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy) Principal and interest payments on the Bonds will be made to DTC DTC's practice is to credit Direct Participants' accounts on each payable date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on such payable date 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 the Paying Agent/Registrar or the Agency subject to any statutory or regulatory requirements as may be in effect from time to time Payment of principal and interest to DTC is the responsibility of the Agency disbursement of such payments to Direct Participants shall be the responsibility of DTC and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Agency Under such circumstances in the event that a successor securities depository is not obtained Bonds are required to be printed and delivered The Agency may decide to discontinue use of the system of book -entry transfers through DTC (or a successor securities depository) In that event Bonds will be printed and delivered Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in the Book -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 12 ownership must be exercised through DTC and the Book Entry Only System, and (u) 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 Agency 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 Agency the following provisions will be applicable to the Bonds The Bonds may be exchanged for an equal aggregate principal amount of the Bonds in authorized denominations and of the same maturity upon surrender thereof at the principal office for payment of the Paying Agent/Registrar The transfer of any Bond may be registered on the books maintained by the Paying Agent/Registrar for such purpose only upon the surrender of such Bond to the Paying Agent/Registrar with a duly executed assignment in form satisfactory to the Paying Agent/Registrar For every exchange or transfer of registration of Bonds, the Paying Agent/Registrar and the Agency may make a charge sufficient to reimburse them for any tax or other governmental charge required to be paid with respect to such exchange or registration of transfer The Agency shall pay the fee if any charged by the Paying Agent/Registrar for the transfer or exchange The Paying Agent/Registrar will not be required to transfer or exchange any Bond after its selection for redemption The Agency and the Paying Agent/Registrar may treat the person in whose name a Bond is registered as the absolute owner thereof for all purposes whether such Bond is overdue or not, including for the purpose of receiving payment of or on account of the principal of premium if any and interest on, such Bond PAYING AGENT/REGISTRAR The initial Paying AgenURegistrar is First Union National Bank, Houston Texas In the Resolution, the Agency retains the right to replace the Paying Agent/Registrar The Agency covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying AgentlRegistrar 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 Agency agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by Untied States mail first class, postage prepaid, which notice shall also give the address of the new Paying AgenURegistrar TRANSFER, EXCHANGE AND REGISTRATION In the event the Book -Entry -Only System should be discontinued, the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner except for any tax or other governmental charges required to be paid with respect to such registration exchange and transfer Bonds may be 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 AgenURegistrar in lieu of the Bonds being transferred or exchanged, at the designated office of the Paying Agent/Registrar or sent by Untied States mail first class, postage prepaid, to the new registered owner or his designee ro 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 any one maturity and for a like aggregate designated amount as the Bonds surrendered for exchange or transfer See "Book -Entry -Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds Neither the Agency 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 RECORD DATE FOR INTEREST PAYMENT The record date ("Record Date') for the interest payable on the Bonds on any interest payment date means the close of business on the 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 Agency 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 Untied States mail first class postage prepaid to the address of each Holder of a Bond appearing on the registration books of the Paying AgentRegistrar 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 Agency's covenants and obligations under the Resolution, the Resolution does not establish other remedies or specifically enumerate the Events of Default with respect to the Bonds The Resolution does not provide for a trustee to enforce the covenants and obligations of the Agency 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 Resolution would be successful Furthermore the Agency is eligible to seek relief from its creditors under Chapter 13 9 of the U S Bankruptcy Code Although Chapter 9 provides for the recognition of a smunty 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 Agency avail Itself of Chapter 9 protection from creditors the ability to enforce any remedies under the Resolution would be subject 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 Resolution and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors In addition while the Agency has covenanted to secure the Bonds by a lien on the Net Revenues Bond Counsel will opine only that a valid and enforceable lien has been granted on the Net Revenues Bond Counsel has not been requested to, and has not rendered any opinion as to the priority status of the pledge of the Net Revenues BONDINSURANCE Ambac Assurance Corporation, a Wisconsin stock insurance company ("Ambac Assurance"), has committed to deliver its insurance policy for the Bonds, as described below The following information has been furnished by Ambac Assurance for use in this Official Statement, and references to the "Obligor" should be read to mean the Agency The following information has not been independently verified by the Agency or the Underwriters and is not guaranteed as to completeness or accuracy by the Agency or the Underwriters and is not to be construed as a representation of the Agency or the Underwriters Reference is made to Appendix Cfor a specimen of the Ambac Assurance insurance policy PAYMENT PURSUANT To FINANCIAL GUARANTY INSURANCE POLICY Ambac Assurance has made a commitment to issue a Financial Guaranty insurance policy (the "Financial Guaranty Insurance Policy") relating to the Bonds effective as of the date of issuance of the Bonds Under the terms of the Financial Guaranty Insurance Policy, Ambac Assurance will pay to The Bank of New York in New York New York or any successor thereto (the "Insurance Trustee") that portion of the principal of and interest on the Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such terms are defined in the Financial Guaranty Insurance Policy) Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Trustee/Paying Agent The insurance will extend for the term of the Bonds and, once issued, cannot be canceled by Ambac Assurance The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates and on mandatory sinking fund installment dates in the case of principal and on stated dates for payment, in the case of interest If the Bonds become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Bonds Ambac Assurance will remain obligated to pay principal of and interest on outstanding Bonds on the originally scheduled interest and principal payment dates including mandatory sinking fund redemption dates In the event of any acceleration of the principal of the Bonds, the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration In the event the Paying Agent/Registrar has notice that any payment of principal of or interest on a Bond which has become Due for Payment and which is made to a Bondholder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment as defined in the Policy Specifically the Financial Guaranty Insurance Policy does not cover I payment on acceleration, as a result of a call for redemption (other than mandatory sinking fund redemption) or as a result of any other advancement of maturity 2 payment of any redemption prepayment or acceleration premium 3 nonpayment of principal or interest caused by the insolvency or negligence of any Trustee or Paying Agent if any If it becomes necessary to call upon the Financial Guaranty Insurance Policy payment of principal requires surrender of Bonds to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such Bonds to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of Bondholder entitlement to interest payments and an appropriate assignment of the Bondholder's right to payment to Ambac Assurance Upon payment of the insurance benefits Ambac Assurance will become the owner of the Bond appurtenant coupon, if any or right to payment of principal or interest on such Bond and will be fully subrogated to the surrendering Bondholder's rights to payment 14 AMBAC ASSURANCE CORPORATION Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin -domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states, the District of Columbia, the Territory of Guam and the Commonwealth of Puerto Rico, with admitted assets of approximately $4,568,000 000 (unaudited) and statutory capital of approximately $2 787 000 000 (unaudited) as of March 31, 2001 Statutory capital consists of Ambac Assurance's policyholders' surplus and statutory contingency reserve Standard & Penes Ratings Services, a division of The McGraw-Hill Companies, Inc, Moody's Investors Service and Fitch Inc have each assigned a triple-A financial strength rating to Ambac Assurance Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in its Financial Guaranty insurance policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor of the Bonds Ambac Assurance makes no representation regarding the Bonds or the advisability of investing of the Bonds and makes no representation regarding, nor has it participated in the preparation of the Official Statement other than the information supplied by Ambac Assurance and presented under the heading "BOND INSURANCE" AVAILABLE INFORMATION The parent company of Ambac Assurance, Ambac Financial Group, Inc (the "Company') is subject to the informational requirements of the Securities Exchange Act of 1934 as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission") Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N W Washington, D C 20549 and at the Commission's regional offices at 7 World Trade Center New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street Suite 1400 Chicago Illinois 60661 Copies of such material can be obtained from the public reference section of the Commission at 450 Fifth Street, N W , Washington, D C 20549 at prescribed rates In addition the aforementioned material may also be inspected at the offices of the New York Stock Exchange, Inc (the "NYSE") at 20 Broad Street, New York, New York 10005 The Company's Common Stock is listed on the NYSE Copies of Ambac Assurance's financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance The address of Ambac Assurance's administrative offices and its telephone number are One State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission (File No 1-10777) are incorporated by reference in this Official Statement 1) The Company s Current Report on Form 8-K dated January 24 2001 and filed on January 24 2001 2) The Company's Current Report on Form -K dated March 19 2001 and filed on March 19 2001 3) The Company s Annual Report on Form 10-K for the fiscal year ended December 31 2000 and filed on March 28 2001. and 4) The Company's Quarterly Report on Form 10- for the fiscal quarterly period ended March 31 2001 and filed on May 15, 2001 All documents subsequently filed by the Company pursuant to the requirements of the Exchange Act after the date of this Official Statement will be available for inspection in the same manner as described above in "Available Information" 15 REGULATORY MATTERS DEREGULATION OF THE TFXAS ELECTRIC INDUS I RY INTRODUCTION RECENT CHANGES IN RFGIILATORY ENVIRONMFNT The electric industry in Texas has experienced dramatic statutory and regulatory changes in the past several years significantly impacting the Member Cities Legislation enacted by the Texas Legislature in 1995 deregulated wholesale electric rate+ and services In order to promote wholesale electric competition such legislation duetted the Public Utilities Commission of rexas (the PUC") to adopt rules requiring all transmission system owners to make their transmission systems available for use by others at prices and terms comparable to each respective owner's use of its system for its own wholesale transactions the PUC implemented its initial transmission open access rules in January 1997 and most recently updated those rules in May 2001 During the 1999 legislative session the Texas I egislature enacted Senate Bill 7 ("SB 7") which provides for retail electric open competition beginning in 2002 continues electric transmission open access and fundamentally redefines and restructures the rexas electric industry SB 7 includes provisions that apply directly to municipally owned utilities ("Municipal Utilities") such as the Member Cities as well as other provisions that will govern investor owned utilities ('IOUs") and electric cooperatives ("Electric Coops") SB 7 allows retail customers of IOU's to choose their electric supplier beginning January 1 2002 as well as the retail customers of those Municipal Utilities and Electric Coops that have elected to participate in retail electric competition Provisions of SB 7 that apply to the Member Cities, as well as provisions that apply only to IOU's and Electric Coops are described below the latter for the purpose of providing information concerning the overall restructured electric utility market in which the Member Cities could choose to directly participate in the future GENERAL PROVISIONS OF SB 7 UNBUNDLING SB 7 required IOUs to separate retail energy service activities from regulated utility activities by September 1 2000 and requires IOUs to unbundle generation functions from transmission and distribution functions into separate companies by January 1 2002 An IOU may choose to sell one or more of its Imes of business to independent non-affiliated entities or it may create separate but affiliated companies and possibly operating divisions that may be owned by a common holding company but which must operate largely independent of each other in compliance with the PUC's Code of Conduct rules The services offered by such separate entities must be made available to other non-affiliated parties on a non discriminatory basis at prices and terns comparable to the IOU s use of its own system Certain Texas river authorities that operate electric generation and transmission systems are also required to unbundle their electric operations but need not operate such separated functions independently from one another Municipal Utilities and Electric Coops that opt into competition are not required to unbundle their electric system components UNBUNDLED COMPANIES Generating assets will be owned by "Power Generation Companies " which must register with the PUC and must comply with certain rules that are intended to protect consumers but they will otherwise be unregulated and may sell electricity at market prices Owners of transmission and/or distribution facilities will be "Transmission and Distribution Utilities" and will be fully regulated by the PUC Retail sales activities will be performed by new companies called "Retail Electric Providers" ("REPs") which are the only entities authorized to sell electricity to retard customers (other than to customers of Municipal Utilities and Electric Coops that have not opened their servILe areas to retail competition) REPs must register with the PUC demonstrate financial capabilities and comply with certain consumer protection requirements They will buy electricity from Power Generation Companies power marketers or other parties and may resell that electricity to retail customers at any location in the State (other than customers of Municipal Utilities and Electric Coops that have not opened their service areas to retail competition) Transmission and Distribution Utilities will be obligated to deliver the clei,tricrty, The PUC is required to approve the construction of new transmission facilities, and may order the constmction of new facilities to relieve transmission bottlenecks Transmission and Distribution Utilities will be required to provide access to both their transmission and distribution systems on a non-discriminatory basis to all eligible customers Rates for wholesale transmission systems of Municipal Utilities and Electric Coops shall be determined by the PUC rates for the use of the distribution systems of such entities will be determined by such entities rach type of unbundled company is prohibited from providing services that are provided by the other types of unbundled companies MEASURES To FOSTFR COMPFTITION AND ASSURE SERVICE SB 7 also provides a number of consumer protection provisions Fvery area of the State will have three "Provider of Last Resorts approved by the PUC one for residential customers one for small non-residential customers and one for largo non residential customers The Provider of Last Resort is a REP that must offer to sell electricity to any retail customer in its designated area at a standard rate approved by the PUC The Provider of Last Resort must also serve any customer whose REP has faded to provide service Each Municipal Utility and Electric Coop that opts into open competition shall appoint itself or another entity as the Provider of Last Resort for such service territory and the respective Municipal Utility or Electric Coop shall set the rates for such respective Provider of Last Resort rather than the PUC Beginning September 1 1999 each IOU must freeze its existing rates (except for a fuel factor passthrough) and must continue to serve its retail customers at such rates until 2002 Beginning January 1 2002 the unbundled REP of the IOU that held the certificate to provide retail sorvice to an area (the "AOiliatcd REP") must reduce electric rates by 6% below the frozen rates and offer that 16 reduced rate (the "price to beat") to all residential and small non residential retail customers in the area formerly served by the IOU The Affiliated REP must serve all residential and small non-residential customers who do not choose a different REP at such reduced rate The Affiliated REP may not sell electricity to residential or small non residential customers at any other rate until either 40% of the residential or small non-residential customers in the area have chosen to be served by other REPS or until January 12005 whichever occurs first Although the Affiliated REP may thereafter compete by offering prices that differ from the reduced rate, it must continue to offer such rate until January 1, 2007, to assure a maximum price that consumers will have to pay SB 7 allows Affiliated REPS to compete for large non-residential customers, and for certain aggregated commercial loads owned by a common entity To prevent concentration of generation in a single Power Generation Company, SB 7 requires IOUs to hold periodic "Capacity Auctions " Supervised by the PUC prior to the implementation of retail competition in which they must sell 15%of their generation capacity to others Affiliated REPS are not allowed to purchase capacity purchased by a related Power Generation Company The Capacity Auctions will end four years after retail competition begins SB 7 also provides protection by limiting the amount of generation that any single Power Generation Company, or group of commonly owned Power Generation Companies may own to 20% of the available generation within a "power region" which will be created by the PUC SB 7 required any IOU (or affiliated Power Generation Company) that owns more that 200/6 of the installed electric generation within a power region to file a mitigation plan with the PUC by December 1 2000 whereby (I) its excess generation plants will be sold at an independent sale (it) its excess generation capacity will be auctioned off to an independent party in a Capacity Auction, (m) it sells its excess capacity for at least a four year period to an independent party, or (tv) it implements some other reasonable mitigation method The Member Cities are not subject to SB Ts Capacity Auction requirements or the 20% maximum generation ownership within a power region restriction SB 7 preserves the PUC's regulatory authority over electric transmission facilities and open access to such transmission facilities SB 7 provides for a transmission system operator that would be independent of market participants and which will be responsible for directing and controlling the operation of the transmission network within ERCOT In addition, SB 7 directs the PUC to determine electric transmission open access rates on a 100%"postage stamp" pricing methodology STRANDED COST RECOVERY Under SB 7, IOUs may recover a portion of their "stranded costs" (the net book value of certain "non -economic" assets less market value and certain "above market" purchased -power costs) and "regulatory assets " which recovery is intended to permit recovery of the difference between the amount necessary to pay for the assets required under prior electric regulation and the amount that can be collected through market based rates in the open competition market SB 7 establishes the procedure to determine the amount of stranded costs and regulatory assets In proceedings before the PUC utilities' estimates are being reviewed for a ruling on the actual amount of stranded costs Once determined any stranded costs will be collected through a nonbypassable competition transition charge collected from the end retail electric users within the IOU's service territory as it existed on May 1, 1999, through, primarily, an additional component to the rate for the use of the retail electric distribution system delivering electricity to such end user IOUs may recover a certain portion of their respective stranded costs through the issuance of bonds with a maturity not to exceed 15 years, whereby the principal, interest and reasonable costs of issuing, servicing and refinancing such bonds is secured by a qualified rate order of the PUC that creates the "competition transition charge " Neither the State nor the PUC may amend the qualified rate order in any manner that would impair the rights of the "securnized" bondholders PROVISIONS OF SB 7 THAT APPLY TO MUNICIPAL UTILITIES AND ELECTRIC COOPS Municipal Utilities and Electric Coops are largely exempt from the requirements of SB 7 While IOUs will be subject to open competition on January 1 2002 the governing bodies of Municipal Utilities and Electric Coops have the sole discretion to determine whether and when to open their service territories to retail competition However, if a Municipal Utility or Electric Coop has not voted to open its territory, it will not be able to compete for retail customers at unregulated rates outside its traditional service territory While IOUs must unbundle their generation from transmission and distribution and from retail sales activities Municipal Utilities and Electric Coops retain the discretion to determine whether to unbundle those business activities The greatest potential impact on the System from SB 7 could result from a decision by the Member Cities to participate or not to participate in a fully -competitive market The potential effects of a decision to compete include the potential loss of customers to other REPS resulting in a reduced electric load, while the Member Cities obligations under the Contract would require the continuation of their take -or -pay obligations On the other hand, if a Member City's retail rates and its ability to deliver dependable service are competitive with those of other REPS, that City may be successful in retaining existing customers Any decision of the Member City to participate in full retail competition would also permit that Member City to offer electric service to customers that are not presently within the certified service area of the Member City A decision of the Member City not to compete may have other consequences such as decreases in economic development activity within the City due to the "protected" rate structure if the rate structure is higher in cost than rates in areas that are open to competition None of the Member Cities have currently elected to open their service territory to retail competition beginning January 1, 2002 but the respective Member Cities could determine to make such election in the future As discussed above, Municipal Utilities and Electric Coops will also continue to determine the rates for use of their distribution systems after they open their territories to competition although the PUC will determine the terms and conditions for access to those systems 17 SB 7 also permits Municipal Utilities and Electric Coops to recover their "stranded costs" through collection of a nonbypassable transition charge from their customers if so determined by such entities in a Similar fashion to IOUs Unlike IOUs the governing board of a Municipal Utility determines the amount of stranded costs to be recovered pursuant to rules and procedures established by such governing board The stranded costs of Electric Coops are determined by their board of directors pursuant to rules and procedures established by the PUC Municipal Utilities and Electric Coops are also permitted to recover their respective stranded costs through the issuance of bonds in a similar fashion to the IOUs Additionally SB 7 permits the Texas Public Finance Authority to issue bonds payable from a nonbypassable charge to the retail electric customer of a Member City to recover such city's stranded costs as determined in the PUC Stranded Cost Report MISCELLANEOUS PROVISIONS OF SB 7 SB 7 requires all old "grandfathered" power plants — plants that have not previously been required to comply with air quality emissions standards administered by the Texas Natural Resources Conservation Commission ("TNRCC") that are owned by IOUs Municipal Utilities and Electric Coops — to be brought into compliance with the air quality emissions standards by May 2003 The cost of bringing the old plants into compliance may be included in the determination of stranded costs of an IOU Municipal Utility or Electric Coop (See "Regulatory Matters — Environmental Regulation") SB 7 also sets goals for the development of renewable generating technologies requires that the amount of renewable energy triple in Texas by 2009 and sets certain renewable generation target levels If a Member City that opens its service territory to retail competition owns electric generation but has not met its required renewable generation level it may be required to purchase renewable energy credits established by the PUC to comply with SB 7 ERCOT ERCOT is one of 10 Regional Reliability Councils in the North American Electric Reliability Council The ERCOr bulk electric system is located entirely within the State of Texas and serves more than 14 7 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 35 000 miles of transmission lines including more than 7,000 miles at 345-kV ERCOT is connected electrically to other reliability councils through two direct current ("DC") lines, providing only limited import/export capability In response to legislative directive ERCOT amended its artic les 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 Prior to the enactment of SB 7 the ISO's primary responsibility was to ensure local reliability throughout ERCOT to re -dispatch generating units to ensure that local reliability criteria were met and to mitigate emergency conditions The ISO also assisted control areas by coordinating transaction schedules providing communication interface performing operating condition surveillance and serving as ERCOT's centralized source for information on system security SB 7 provides that the PUC shall certify an independent system operator (and the PUC has certified the ISO within ERCOT) or other person that is sufficiently independent of any producer or seller of electricity and which is governed by a board that has three representatives from each segment of the cicctric market to pertonn certain functions specified by SB 7 Such functions include cstablishmg and enforcing procedures relating to the reliability of the regional electrical network and accounting for the production and delivery of electricity among generators and all other market participants The procedures are subject to PUC oversight and review The PUC may authorize the independent organization that is certified for this purpose to charge a reasonable and competitively neutral rate to wholesale buyers and sellers to cover the independent organization's costs SB 7 provides that a retail electric provider municipally owned utility electric cooperative power marketer transmission and distribution utility or power generation company shall observe all scheduling operating planning reliability and settlement policies, rules, guidelines and procedures established by the independent system operator ERCOT TRANSMISSION REVENUES Under the PUC s transmission open access rules each transmission service provider in ERCOT is required to provide transmission service to transmission customers in ERUCT As compensation for this service each transmission service provider annually receives its 7 ransmission Cost of Service ( TCOS ) which is set by the PUC By order of the PUC dated February 16 2001 the Agency s TCOS was increased from $18 419 976 to $28 600 840 Because of a statutory provision that was included in SB 7 the Agency s new TCOS was determined by using a levelized debt service calculation The levelized debt service calculation yields additional transmission service revenues that are dedicated for the retirement of the Agency s indebtedness The PUC s order requires the Agency to obtain the PUC's approval of a plan to use the additional transmission service revenues for retirement of indebtedness FEDERAL REGULATION OF ELECTRIC TRANSMISSION SERVICES THE ENERGY POLICY ACT OF 1992 The federal Energy Policy Act of 1992 (the 'Energy Act") greatly expands the authority of the United States I ederal Energy Regulatory Commission (the "FERC') to order utilities including utilities within ERCOT to provide transmission service for other utilities qualifying facilities and independent power producers The FERC also has authority 18 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 the FERC under the Energy Act However, while the States may have authority to determine whether retail wheeling will be permitted FERC has determined that it has jurisdiction over the rates, terms and conditions of retail wheeling FERC FINAL RULES AND PROPOSED RULEMAKINGS IN FEDERAL REGULATION OF ELECTRIC UTILITIES To establish foundations necessary to develop a competitive wholesale electricity market and effectuate the transmission access provisions of the Energy Policy Act, on April 24, 1996 FERC issued two final rules ("FERC Rules") on non discriminatory open access transmission services by public utilities and stranded cost recovery rules 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-pnce terms and conditions set forth in the order and (u) 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 final role 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 The FERC stated that its overall objective is to ensure that all participants in wholesale electricity markets have non discriminatory open access to transmission service including network transmission service and ancillary services The FERC also indicated that it intends to apply the principles set forth in the FERC Rules to the maximum 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 In addition, on May 12, 1999 the FERC released a Notice of Proposed Rulemaking to establish Regional Transmission Organizations ("RTOs") The proposed rulemakmg contemplates RTOs as voluntary participation associations of power transmission owning entities comprising public and non-public utility entities which would more efficiently address operational and reliability issues confronting the industry in particular by improving grid reliability increasing efficiencies in transmission grid management preventing discriminatory practices and improving market performance Although the FERC Rules do not directly regulate municipally owned and other non-FERC-regulated utilities 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 IOUs whenever they are properly requested to do so under the Energy Policy Act or as a condition of taking transmission service from an IOU 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 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 including bills supported by the Clinton Administration 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 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 Electric utilities are subject to numerous environmental statutes regulations and other rules administered at the federal, state and local level These environmental rules are subject to change and tend to increase and become more stringent over time These changes may arise from continuing legislative regulatory and judicial action regarding the promulgation and implementation of such standards and procedures Consequently there is no assurance that Gibbons Creek will remain subject to the regulations currently in effect, will always be in compliance with present or future regulations or will always be able to obtain all required operating permits In addition more stringent environmental requirements may require significant upgrades in environmental controls, reduced operating levels or, where the necessary upgrades are not economical the complete shutdown of individual electric generating units ACID RAIN PROVISIONS OF THE 1990 CLEAN AIR ACT AMENDMENTS The Clean Air Act (CAA) originating in 1967 with the Air Quality Act, has imposed increasingly stringent controls on air emissions from industrial facilities including electric power generation facilities like the Gibbons Creek facility The most recent and far-reaching changes to the CAA are the 1990 amendments or the CAA Amendments of 1990 (CAAA) Of specific interest to owners of electric generation facilities the 1990 Amendments 19 seek to Improve the ambient air quality throughout the United States and reduce the effects of so-called "Acid Ram" through the reduction of sulfur dioxide and nitrogen oxides emissions from electric utility power plants particularly those fueled by coal With respect to sulfur dioxide emissions the 1990 Amendments provide for a two-phase approach for Implementation Phase I look effect January 1 1995 and requires 110 coal-fired units to reduce sulfur dioxide emissions to certain tonnage levels provided in the 1990 Amendments based on emission 'allowances" allocated to the "affected units " The 1990 Amendments Identify specific "affected units' which must meet the Phase I sulfur dioxide emission limits by the beginning of Phase I Phase 11 implemented January 1 2000 requires affected utility units to meet more stringent sulfur dioxide emission limitations than in Phase I The Gibbons Creek facility is subject to these sulfur dioxide emission requirements but based on the sulfur dioxide emission reductions achieved DI connection with the change to Wyoming Powder River Basin coal (discussed in greater detail below), the Agency has sufficient sulfur dioxide allowances for projected operating rates of the facility The EPA issued a final rule implementing the nitrogen oxide acid ram provisions under Section 407 of the CAA on March 22 1994 The rule establishes performance standards for controlling emissions from coal-fired dry bottom and tangentially fired boilers (Group I boilers, similar to those operated by the Agency) Phase I units were required to begin complying with these annual nitrogen oxide emission limits beginning January 1 1995 In December 1996 the FPA issued a rule implementing the second phase of the nitrogen oxide acid ram program The rule lowers the nitrogen oxide control standards for Phase 11 units with Group I boilers and became effective on January 1 2000 However, the final rule issued in March 1994 provides an "early election" option for those Phase 11 units that are capable of achieving early compliance with the Phase I nitrogen oxide standards As an incentive for early compliance, the early election program allowed participating units to defer compliance with any more stringent nitrogen oxide Phase 11 standards until January I, 2008 The Agency has chosen the "early election" option The owners and operators of all affected utility units under the acid disposition control program of the CAA must obtain a permit from the EPA or from a stair, agency with an EPA -approved permitting program to emit sulfur dioxide and nitrogen oxide The permit will be applicable for no more than five years To obtain the permit, owners and operators must submit a compliance plan to the permitting agency The Agency's Federal Operating Permit for the Gibbons Creek facility was issued on September 15 1999 Another aspect of the 1990 Amendments apphcablc to the electric utility industry is the requirement that continuous emission monitors ("CEMS") be installed and operated on all affected units The EPA promulgated final CEMS rules effective January 11 1993 A CEMS at the Gibbons Creek facility was installed during original construction and upgraded to CAAA 1990 specifications in 1994 The upgraded system was certified pursuant to the applicable regulatory standards in January 1995 AMBIENT AIR QUA11TV STANDARDS AND THE CONTROL OF NITROGEN OXIDE The 1990 Clear Air Act Amendments also implement more stringent rules designed to the achieve coinphance with the national ambient air quality standard for ozone When the ambient air concentration of ozone for a particular geographic area exceeds the standard the area is classified as "non -attainment" for ozone A non attainment 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 is the 'State Implementation Plan" or "SIP" for the particular ozone non-attamment area, which includes enforceable control measures for the reduction of relevant air emissions from industrial automotive and other sources For ozone non -attainment SIPS the emission reductions are generally targeted at nitrogen oxide and volatile organic compound emission sources because it is believed that the chemical reaction between these compounds in the presence of sunlight leads to ozone formation While the Gibbons Creek facility is not located in m ozone non -attainment area, the Texas Natural Resource Conservation Commission ( TNRCC ) concluded that emissions from electric utilities located in central and east Texas are contributing to ozone formation in three ozone non attainment areas located DI the Texas the Dallas Fort Worth, Houston -Galveston, and Beaumont -Port Arthur areas As a result on April 19, 2000 the TNRCC issued final rules that will require the reduction of nitrogen oxide emissions at large electric utilities located in 31 east and central texas counties, including Grimes County 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 by May 1 2005 To achieve the required level of emissions Gibbons Creek must undergo significant modification The Agency has developed a phased approach to achieving compliance The initial two phases involve modifications to the combustion process to limit the formation of nitrogen oxides in the burner system Specifically these initial two phases include improvements to the fuel supply systems and the au and fuel delivery to the combustion section of the boiler The Agency has begun these two initial phases and has budgeted approximately $10 7 million for this portion of the nitrogen oxide control project Following completion of phase I and 11 the Agency will reassess the nitrogen oxide emissions from the Gibbons Creek facility and evaluate what, if any, post combustion controls for nitrogen oxide emissions are necessary to achieve the required emission reductions Post combustion controls may include Selective Non -Catalytic Reduction ("SNCR") and Selective Catalytic Reduction ("SCR") systems The final cost of meeting the more stringent emission standards will depend upon the success of the first two phases of modifications and the technically feasible alternatives for post -combustion control The total capital cost of compliance with the revised NOx emission control requirements is expected to be on the order of $20 million but no assurances can be given in this regard If the more expensive post - combustion controls are necessary total capital costs may exceed $50 million Many of the proposed emission control technologies 20 also have the potential to significantly increase operating and maintenance costs as well The Agency expects that some portion of the capital costs will be financed by the use of tax exempt commercial paper PROPOSED NEW MERCURY EMISSION STANDARDS The 1990 Clean Air Act amendments also provide for possible further regulation of toxic air emissions from electric generating units, including potential air emissions of mercury compounds from coal- fired electnautility boilers In accordance with these statutory requirements the U S Environmental Protection Agency promulgated a regulatory determination in December 2000 announcing that it was developing new rules to regulate air emissions of mercury from coal-fired power plants EPA indicated that is would likely adopt final rules in 2004, and compliance requirements would likely be required no earlier than the 2007 time frame These new rules may require modifications to the Gibbons Creek facility CLOSED MINE AND WASTE DISPOSAL FACILITY REMEDIATION OBLIGATIONS Up until 1996 the Agency mined the coal utilized at the Gibbons Creek facility at the 18,000 acre lignite mine located adjacent to the power plant The Agency has shut down this mining operation following the conversion to low -sulfur Wyoming Powder River Basin coal The Agency is obligated to perform certain remediation and land reclamation activities at the closed mining sites Over the life of the mine the mining operations disturbed approximately 8744 acres The Agency reclamation plan calls for the creation of approximately 7 100 acres of pastureland 1,500 acres of developed water resources, and over 100 acres of property for industrial or commercial use Initial remediation work is complete on more than half of the disturbed area (4 700 acres) and these areas are either being monitored in the "Extended Responsibility Period," or released from the remedial program The Texas Railroad Commission rules include bonding requirements to provide financial assurance for the completion of the site remediation In the last two years progress in the remedial work has permitted the Agency to reduce its bonding requirements from $94 million to approximately $35 5 million Of this $35 5 million approximately $7 million is self -bonded Gibbons Creek also produces solid wastes primarily in the form of ash from the combustion of coal and historically scrubber sludge from the sulfur oxide scrubbers operated in conjunction with combustion of the high -sulfur lignite produced by the Gibbons Creek mine The ash and scrubber sludge are disposed of at the Agency's on -site landfill The Agency is generally responsible for the liabilities associated with this waste disposal and any related site contamination In that regard, the presence of hazardous substances at Gibbons Creek could expose the Agency to potential liabilities associated with the cleanup of contaminated soil and groundwater under federal or state "Superfund" statutes Under the federal Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA or "Superfund") owners and operators of facilities from which there has been a release or threatened release of hazardous substances, together with those who have transported or arranged for the disposal of those substances are liable for the cost of responding to the release as well as any damage to natural resources The liability imposed by the statute is both strict (i a without regard to fault) and under almost all circumstances joint and several Any such liabilities could have a material adverse effect on the Agency Nevertheless the Agency minimizes and where possible eliminates, the use of all hazardous substances in its operations and believes it is in compliance with all applicable rules in this regard Moreover the Agency is not aware of any liabilities that it is responsible for under CERCLA or similar state analog statutes that would have a material adverse effect on the Agency s financial position results of operations or cash flows THE AGENCY TEXAS MUNICIPAL POWER AGENCY The Agency 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 Contract requires the Agency 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 the Agency sets the rates and charges to be paid by the Cities for the ensuing year THE AGENCY's GENERATION UNIT The Agency's power supply source consists of the Gibbons Creek Steam Llectnc 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, 2000, Gibbons Creek's capacity and availability were 83 25% and 83 90% respectively MODIFICATIONS TO PLANT AND OPERATIONS 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 the Agency In 1996, the Agency 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 the Agency at the Gibbons Creek Mine in February 1996 In 1997 the Agency 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 21 reduce the planned outage cycle at Gibbons Creek and to allow the Agency to achieve compliance with the federal Clean Air Act without the need for additional sulfur dioxide allowances Over the period from fiscal year 1992-93 to 1998 99 the Agency has undertaken to reduce operating and maintenance costs of its plant including through the reduction of employees and personnel costs During such time, the number of regular employees has been reduced by approximately 61 % The largest factor of the reduction of personnel has been the closing of the Gibbons Creek Mine which reduced the number of engineering and operations employees and the related reduction of administrative support staff The 2000 01 fiscal year budget for the Agency includes 125 employees down from 346 in the 1992-93 fiscal year In November 2000 the Agency entered into an agreement with Kennecott Energy Company for a 36-month supply of coal from the Powder River Basin commencing on January 1 2001 The sources of coal under the agreement are the Cordero Rojo Complex and the Jacobs Ranch Mine in Wyoming In October 1995 the Agency entered into a coal transportation agreement with the Burlington Northern Railroad Company now the Burlington Northern Santa Fe ("BNSE") under which BNSF is obligated to provide rail transportation for the Wyoming Powder River Basin coal purchased by the Agency The 1995 agreement expired on March 31 2001 The Agency 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 the Agency 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 current contract In August 2000 BNSF gave a partial response by quoting a common carrier rate in cars supplied by BNSF The Agency considered this rate to be unacceptable, and in October, 2000 petitioned the federal Surface Transportation Board (STB) to compel BNSF to set reasonable rates for the Gibbons Creek service in both carrier supplied and shipper -supplied railcars A final decision by the STB is expected by February 2002 In the meantime, the Agency will use the common carrier rate and service quoted by BNSF as necessary to transport coal subject to appropriate adjustments and as applicable reparations payments by BNSF once the STB determines the proper rate THE AGENCY'S TRANSMISSION FACILITIES The Agency -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 (,times Hunt Montague Robertson, Rockwall and Wise counties of Texas Ihese facilities provide ties to the Member Cities TXU Electric Reliant Energy Incorporated and Brazos at a number of points in the ERCOT system CHANGE IN MANAGEMENT Between October 26 1998 and January 13 2000 Duke/Fluor Daniel ("DFD") managed the operation and maintenance of Gibbons Creek under a temporary operations and maintenance agreement On January 13 2000, the Agency and DFD replaced the temporary agreement with a new five-year operations and maintenance agreement (the "Employment Agreement") under which DFD will continue to manage the operation and maintenance of Gibbons Creek DFD's scope of work has been expanded under the new Employment Agreement In addition to managing Gibbons Creek DFD is under the new Employment Agreement responsible for managing the transmission system as well as managing materials procurement including procurement of fuel and fuel transportation services the General Manager of the Agency will continue to manage the (ribbons Creek Mine and Lake the Agency Finance Department and related administrative functions The new Employment Agreement authorizes the Agency to terminate the Employment Agreement for convenience at any time following a thirty -day notice period Under this provision the Agency is permitted to terminate the Employment Agreement for convenience without penalty by delivering a notice to DFD within 30 days after the end of the third year of the initial term of the Agreement, or within 30 days after the end of the third year of any renewal term In all other cases in order to terminate the Employment Agreement for convenience the Agency is obligated to pay to DFD a termination fee FACTORS AFFECTING THE ELECTRIC UTILITY INDIIS FRY the electric utility industry in general has been or in the future may be affected by a number of factors that could impact the financial condition and competitiveness of an electric utility and the level of utilization of generating and transmission facilities Such factors include among others, (a) effects of compliance with rapidly changing environmental safety licensing regulatory and legislative requirements (b) changes resulting from conservation and demand -side management programs on the timing and use of electric energy, (c) changes resulting from a national energy policy (d) effects of competition from other electric utilities (including increased competition resulting from mergers, acquisitions and "strategic alliances" of competing electric and natural gas utilities and from competitors transmitting less expensive electricity from greater distances over an interconnected system) and new methods of and new facilities for producing low-cost electricity, (e) the proposed repeal of certain federal statutes that would have the effect of increasing the competitiveness of many investor -owned utilities (0 increase competition from independent power producers and marketers brokers and federal power marketing agencies (g) 'self -generation" by certain industrial and commercial customers, (h) issues relating to the ability to issue tax exempt obligations including severe restrictions on the ability to sell to non -governmental entities electricity from generation projects and transmission service from transmission line projects financed with tax-exempt obligations (1) effects of inflation on the operating and maintenance costs of an electric utility and its facilities, p) increases in costs and uncertain availability of capital (k) shifts in the availability and relative costs of different fuels (including the cost of natural gas), and (1) sudden drastic increases in the price of energy purchased on the open market that may occur in times of high public demand in an area experiencing such high peak demand Additionally, while municipal utilities are largely exempt from the requirements of SB 7 as discussed above under "Regulatory Matters," the full impact of SB 7 on the Agency and the Member 22 Clues cannot be determined at this time Any of these factors (as well as other factors) could have an effect on the financial condition of any given electric utility and likely will affect individual utilities in different ways The Agency cannot predict what effects such factors will have on the operations and financial condition of the Member Cities 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 FORWARD LOOKING STATEMENTS The statements contained in this Official Statement and in any other information provided by the Agency that are not purely historical, are forward -looking statements including statement's regarding the Agency's expectations, hopes intentions or strategies regarding the future Readers should not place undue reliance on forward looking statements All forward-loakmg statements included in this Official Statement are based on information available to the Agency on the date hereof, and the Agency assumes no obligation to update any such forward-Iookmg statements It is important to note that the Agency's actual results could differ materially from those in such forward looking statements The forward -looking statements 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 Agency Any such assumptions could be inaccurate and, therefore there can be no assurance that the forward looking statements included in this Official Statement would prove to be accurate DEBT INFORMATION TABLE 1 —DEBT SERVICE REQUIREMENTS Fiscal Total Debt %of Ending Outstanding Debtaiiri The Bonds Service Principal 9/30 Principal Interest Total Pnnmpal Interest Total Requirements Refired 2001 $ 48 585 000 $ 45 941 164 $ 94 526 164 $ $ $ $ 94 526 164 2002 55 020 000 40 526 365 95 546 365 4 600 000 5 386 967 9 986 967 105 533 332 2003 55 839 556 44 209 112 100 048 668 5 385 D00 4 700 908 10 085 908 110 134 575 2004 47 234 943 57 412 897 104 647 840 5 610 000 4 485 508 10 095 508 114 743 348 2005 52 771 604 56 465 931 109 237 535 5 835 000 4 261 108 10 096 108 119 333 643 22 91 % 2006 58 802 512 55 037 390 113 839 903 6 025 000 4 042 295 10 067 295 123 907 198 2007 65 167 046 53 281 449 118 449 495 4 725 000 3 801 295 8 526 295 126 974 790 2008 72 305 854 50 740 293 123 046 148 210 000 3 606 389 3 816 389 126 862 536 2009 74 226 319 48 075 774 122 302 093 5 655 000 3 597 464 9 252 464 131 554 556 2010 75 558 277 45 258 748 120 817 025 6 750 000 3 348 644 10 098 644 130 915 669 53 05% 2011 78 591 710 42 229 840 120 821 550 7 055 000 3 044 894 10 099 894 130 921 444 2012 43 248 705 39 079 533 82 328 238 46 160 000 2 718 600 48 878 600 131 206 938 2013 38 016 069 82 090 931 120 107 000 10 520 000 526 000 11 046 000 131 153 000 2014 39 668 931 91 487 569 131 156 500 131 156 500 2015 32 186 232 99 516 768 131 703 000 131 703 000 77 15 2016 30 294 810 101 408 190 131 703 000 131 703 000 2017 28 514 359 103 188 642 131 703 000 131 703 000 2018 221 300 000 8 403 000 229 703 000 229 703 000 100 00% $ 1 117 331 926 S 1 064 353 595 $ 2 1816115 521 $ 108 530 000 $ 43 520 070 $ 152 050 070 $ 2 333 735 591 (1) includes $195,000,000 Tax exempt Commercial Paper Notes and $26 300 000 Taxable Commercial Paper Notes which have been illustrated at the interest rates of 3 50 and 6 0%, respectively, for purposes of illustration (2) Excludes the Refunded Bonds 23 FINANCIAL INFORMATION TABLE 2 -CONDENSED STA r@ MENT OI, OPERATIONS Fiscal Year Ended September 30 2000 1999 1998 1997 1996 (Dollars in Thousands) Operating Revenues Before Refunds Power Sales $ 165 097 $ 168,886 $ 168 103 $ 158,202 $ 163,661 Other Operating Income 18,226 8,790 5,710 5,903 5,994 Total Operating Income $ 183,323 $ 177,676 $ 173,813 $ 164,105 $ 169,655 Operating Fxpenses Fuel $ 39,542 $ 34144 $ 39,907 $ 37,581 $ 41,297 Purchased Power - - - 957 Production Operation and Maintenance 11,981 11,671 12,602 11 835 14 405 Transmission Operation and Maintenance 4,066 8,934 5,946 5,456 3 482 Administrative and General 11,446 8,923 10,480 9,155 10,425 Lignite Termmation costs 7 10,035 3,191 6,286 17,733 Deprecation 17,637 17,642 18,649 18,352 18,124 Total Operating Expenses $ 84,679 $ 91,349 $ 90,775 $ 88,665 $ 106,423 Operating Income $ 98,644 $ 86,327 $ 83,038 $ 75,440 $ 63,232 Other Income (Lxpenses) Investment Revenue Income $ 10,028 $ 8,010 $ 11,683 $ 11,391 $ 12 573 Miscellaneous Other Income (Lxpenses) (1,089) 2,757 1,649) 1856 1 787) Total Other Income $ 8 939 $ 10 767 $ 10,034 $ 13 247 $ 10 786 total Income $ 107,583 $ 97,094 $ 93,072 $ 88,687 $ 74,018 Interest Charges Interest Expense on Debt $ 79,510 $ 78,525 $ 78 835 $ 76,360 $ 75,226 Interest Expense on Other - 2,089 2 144 Amortization of Debt Issuance Costs and Excess Costs on Advance Refunding of Debt 13 544 15 377 15,543 15,784 15,840 Total Interest Charges $ 93 054 $ 93,902 $ 94,378 $ 94,233 $ 93 210 Costs to be Recovered in Future Years (11,426) (34,644) (30,876) (33,815) (47,776) Net Revenues before Refunds and Renewals and Replacements $ 25,955 $ 37,836 $ 29,570 $ 28,269 $ 28,584 Renewal and Replacements (3,042) (3 531) (2,085) (5,788) (2,544) Refunds to Cities (27,837) (28,814) 31,878 27,837 27,837 Change in Accumulated Excess Revenues (4,924) 5,491 (4,393) (5,356) (1,797) Accumulated Excess Revenues At Beginning of Period 32,990 27,499 31,892 36,835 38,632 At End of Period $ 28,066 $ 32,990 $ 27,499 $ 31,479 $ 36 835 24 LOAD AND ENERGY REQUIREMENTS AND RESOURCES PEAK AND ENERGY REQUIREMENTS The Cities - The Cities instituted a Load Management program in late 1986, in an effort to reduce Peak Demand growth and increase the Load Factor These programs are diverse, consisting of contracting with interruptible industrial customers customer rebates for installation of high efficiency appliances, and radio controlled switches to turn off customers au conditioners for a portion of each hour during peak periods The benefits of most of these programs are cumulative, and are not expected to reach saturation for a number of years During the last five years, the programs performed better than projected and have reduced peak demand by 94 M W Coupled with a 15% reserve requirement, the programs have reduced the need for future generation additions by over 108 M W The Agency and the Cities are actively pursuing these and other Load Management programs in an effort to better utilize existing base load generation and to defer future generating capacity additions CITIES' ELECTRIC SYSTEMS Under the Contract, the Cities are obligated to pay for all of the Agency's power and energy resources and are entitled to call upon the Agency to deliver 100% of its net power and energy to the Cities The Agency is obligated to use its best efforts to dispose of any available surplus over the amounts requested by the Cities The Act limits the Agency's authority to sell power and energy by providing that the Agency can make sales only to the Cities and to private entities which are joint owners of generating facilities located within the State of Texas The Cities are not subject to any similar limitations and are generally authorized by law to make sales of wholesale power to any public or private buyer The rates charged by each City for power and energy sold to its customers are set after taking into account amounts due the Agency other costs of such City's operations the shared savings from economic dispatch and revenue from sales to other utilities See Appendix B for a summary of the operations of the Member Cities (Remainder of Page Intentionally Left Blank) 25 SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION ARTICLE I UFFINITION OF TERMS Section 101 Definitions Unless the context shall indicate a contrary meaning or intent, the terms below defined for all purposes of any Bond Resolution or any resolution amendatory or supplemental thereto shall be construed are used and are intended to have meanings as follows "Act" - V T C A Utilities Code, Chapter 163 Subchapter C as amended "Additional Prior Lien Bonds" -- bonds authorized to be issued on a putty with the Previously Issued Prior Lien Bonds "Additional Subordinate I ten Bonds' bonds authorized to be issued under the provisions of Section 6 01 hereof "Agency" -- the 1 exas Municipal Power Agency a municipal corporation, a political subdivision of the State of Texas and a body politic and corporate, duly organized and existing under the Act "Annual Budget" the Annual Budget as amended or supplemented adopted or in effect for a particular Fiscal Year as provided in Section 5 18 "Authorized Officer" - the President Vice President or Secretary of the Board or the General Manager of the Agency and any other person authorized by resolution of the Board to perform the act or sign the document in question "Average Annual Debt Service" — the annual arithmetic average (Fiscal Year basis) of the principal of and interest on all Outstanding Bonds becoming due from the date of calculation to the earlier of the date of maturity of such Bonds or to the date such Bonds are required to be called for redemption "Board" the Board of Directors of the Agency "Bond Date" — the date specified in the Bond Purchase Agreement and as determined by the General Manager of the Agency in accordance with the provisions of Section 2 01 hereof "Bond Fund" the Subordinate Lien Bond Fund "Bond Purchase Agreement" tht, agreement between the Agency and the underwriter or underwriters named therein pursuant to which the Agency agrees to sell the Bonds "Bond Registration Books" the books for the registration and transfer of Bonds which the Registrar is required to maintain "Bonds — "Texas Muntupal Power Agency Subordinate Lien Revenue Refunding Bonds Series 2001A," initially issued in the principal amount of not to exceed $110 000 000 and delivered pursuant to the provisions of this Resolution "City or Cities" - individually or collectively the Cities of Bryan Denton, Garland and Greenville, Texas "Collateral Securities' - (Q Investment Securities and (u) obligations issued or guaranteed by any state of the United States or District of Columbia, or any political subdivision of any such state or agency provided such obligations are rated for investment purposes at not less than A (or its equivalent) by the Rating Agency and repurchase agreements with solvent banking or other financial institutions with respect to any of the obligations or securities referred to herein 'Commercial Paper Notes' — (i) "Fexas Municipal Power Agency Commercial Paper Notes, Series 1998," (it) 9exas Municipal Power Agency Commercial Paper Notes Series 1991" and (in) any commercial paper notes issued to refund all or a portion of the commercial paper notes referred in clauses (i) or (it) 'Construction Fund" the Fund by that name heretofore established and hereby reaffirmed by Section 4 05 hereof "Contingency Fund' the Fund by that name heretofore established pursuant to the Prior Lien Resolution "Cost of Acquisition and Construction" the Agency s costs and expenses attributable to the planning designing acquiring construction reconstruction installing and financing of transmission facilities placing the same in operation decommissioning and disposal of any facilities of the System if financed by the issuance of Bonds and obtaining all governmental approvals certificates, permits and licenses with respect thereto and shall include reimbursement to the Agency for any of the above items theretofore paid by or on behalf of the Agency 26 "Debt Service" -- shall mean, with respect to any period, the aggregate amounts required to be paid during said period on Outstanding Bonds, less those amounts on deposit for the payment thereof, as the same shall become due "Definitive Bonds" -- the Bonds, in substantially the form prescribed herein "Depository" - any bank or trust company selected by the Agency as a depository of moneys and securities held under the provisions of this Resolution or the Prior Lien Resolution "Engineer" -- at any time the engineer or engineering firm appointed pursuant to Section 5 17 "Financial Newspaper" - a financial journal or newspaper selected by the Board which is of general circulation in New York, New York (which is published at least five days in each week holidays excepted) and ajournal or newspaper selected by the Board which is published in the State of Texas "Fiscal Year" -- the 12 month period ending September 30 of each calendar year, or such other 12 consecutive month period as may be established as a Fiscal Year by the Board provided the Fiscal Year may not be changed more than once in any three year period "Fuel Reserve Account" -- the Account by that name heretofore established as a part of the Revenue Fund and reaffirmed by Section 4 02 "Generally Accepted Accounting Principles" and all other accounting methods and terminology contained or referred to in any Bond Resolution -- accounting principles, methods and terminology followed and construed as nearly m practicable in conformity with accounting principles generally accepted in the United States or such other system as may be required by any regulatory agency "Gross Revenues" -- the entire income and revenue of the Agency derived from the operation of the System or ownership of properties constituting the System The term does not include payments received by the Agency (i) from a City upon its withdrawal from the Agency, or (it) as proceeds of insurance (except business interruption insurance) or eminent domain or (in) as proceeds from Bonds or Subordinated Indebtedness, or (iv) except as provided in Section 6 05, from amounts received from leases installment sale payments, or other agreements entered into by the Agency in connection with the issuance by the Agency of Special Contract Obligations, or (v) investment income of the Construction Fund "Holder" or "Bondholder" — the person in whose name such Bond is registered on the registration books of the Paying Agent/Registrar "Initial Bonds" -- with respect to the Bonds, one or more bonds in the aggregate principal amount of not to exceed $110,000,000 which are to be originally executed on behalf of the Agency approved by the Attorney General of Texas and registered by the Comptroller of Public Accounts "Investment Securities" -- any of the following securities if and to the extent that the same are at the time legal for investment of Agency funds (i) direct obligations of the United States of America, obligations which in the opinion of the Attorney General of the United States are general obligations of the United States and backed by its full faith and credit obligations guaranteed by the United States of America, (it) evidences of indebtedness of the Federal Land Banks Federal Intermediate Credit Banks Banks for Cooperatives, Federal Home Loan Banks, Federal National Mortgage Association, Federal Financing Bank Participation Certificate's in the Federal Assets Financing Trust, New Housing Authority Bonds and Project Notes fully secured by contracts with the Unites) States of America, or any other agency or instrumentality of the United States of America bonds secured by the general credit of the State of Texas, and deposits which are fully secured (to the extent not insured by a corporation instrumentality or agency of the United States of America) by obligations in which the Agency may invest under the provisions of this definition, and (m) any other obligations issued in accordance with the Agency's investment policy "Joint Project" - a project undertaken by the Agency in cooperation with any other entity (as such term is defined by the Act) where the Agency and such entity each have an undivided ownership interest therein "Net Revenues" -- for any period, the Gross Revenues during such period less the Operating and Maintenance Expenses during such period "Note Payment Fund" the fund created and established in the Prior Lien Resolution to pay principal of and interest on the Commercial Paper Notes "Operating and Maintenance Expenses" - all expenses incurred in the operation and maintenance of the System and the Agency which are properly accounted for such purpose under Generally Accepted Accounting Principles Such term does not 27 include depreciation or obsolescence charges or reserves therefor interest charges and charges for the payment of principal or amortization, of Bonds or other indebtedness of the Agency "Outstanding' - as of the date of calculation all Bonds theretofore executed issued and delivered by the Agency except - (a) Bonds theretofore canceled by a Paying Agent/Registrar or surrendered to the Paying Agent/Registrar for cancellation, (b) Bonds in lieu or in substitution for which other Bonds shall have been executed, issued and delivered by the Agency pursuant to the terms of Sections 2 09 2 11 or Section 6 03 (c) Bonds for the payment or redemption of which moneys equal to the principal amount or Redemption Price thereof as the case may be with interest to the date of maturity or redemption date, shall be held under the Bond Resolution and set aside for such payment or redemption (whether at or prior to the maturity or redemption date) provided that if such Bonds are to be redeemed notice of such redemption shall have been given as in Article III provided and (d) Bonds deemed to have been paid as provided in subsection (b) of Section 10 01 "Paying Agent/Registrar" any bank or trust company and its successor designated as a Paying Agent/Registrar for the Bonds "Paying Agent/Registrar Agreement" — the agreement between the Agency and the Paying Agent/Registrar referred to in Section 2 04 hereof "Power Sales Contract" - those certain contracts by and between the Agency and the Cities of Bryan, Denton, Garland and Greenville which contracts are dated the I st day of September 1976 and any amendments or supplements thereto "Predecessor Bond" any mutilated lost destroyed or stolen Bond for which a replacement Bond has been registered and delivered, as permitted by this Resolution as well as any Bond canceled by reason of an exchange or transfer, pursuant to the provisions of Section 2 09 Section 2 11 or Section 3 04 hereof "Previously Issued Prior Lien Bonds" the previously issued (i) "Fexas Municipal Power Agency Refunding Revenue Bonds, Series 1987' (it) "Texas Municipal Power Agency Refunding Revenue Bonds, Series 1989 " (tit) "Texas Municipal Power Agency Revenue Refunding Bonds Series 1991A " (iv) 'Texas Municipal Power Agency Refunding Revenue Bonds Series 1992 " (v) "Texas Municipal Power Agency Refunding Revenue Bonds Series 1993 " and (vi) "Texas Municipal Power Agency Refunding Revenue Bonds Series 1994 " "Previously Issued Subordinate Lien Bonds' -- the previously issued 'Texas Municipal Power Agency 7 axable Subordinate Lien Revenue Bonds Series 2001 ' "Prior Lien Bond Fund" -- the Bond Fund and Note Payment Fund created and established by the Prior Lien Resolution "Prior Lien Bonds" the Previously Issued Prior Lien Bonds and any Additional Prior Lien Bonds issued pursuant to the Prior Lien Resolution "Prior Lien Obligations" -- the Prior Lien Bonds and the Commercial Paper Notes "Prior Lien Resolution" the resolutions authorizing the issuance of the Prior Lien Obligations and any resolutions subsequently adopted by the Agency which authorize the issuance of obligations on a parity with the Prior Lien Bonds or Commercial Paper Notes "Pro3ect -- one or more of the following (t) any power generating facility (or interest therein) to be constructed or acquired by the Agency as well as fuel therefor and any transmission facility required to connect or interconnect such generating facility with a City or others or (n) any addition or improvement to a power generating facility which is then owned in whole or in part by the Agency, or (tit) any contract right to purchase or receive a power supply or transmission capacity (a) by the making of a prepayment of capital costs which is associated with the supply or capacity so purchased, or (b) by the execution of a take or pay contract having a duration of more than 10 years including any renewals thereof or (c) by the execution of a contract to purchase power or energy (either or both) on an all requirements basis The term does not include any facilities financed with the proceeds of Special Contract Obligations as permitted under and defined in Section 6 05 "Rating Agency" —any of either Moody s Investors Service Inc, Standard & Poor s Ratings Services, a division of fhe McGraw-Hill Companies Inc Fitch Inc and their respective successors and assigns "Record Date the fifteenth day of the month preceding the interest payment date if such interest payment date is the first day of a month the last business day of the month preceding the interest payment date if such interest payment date is the fifteenth day of a month or such other date specified in the applicable resolution or agreement as of which ownership of the Bonds will be determined for the purpose of paying interest to the Holder on the next interest payment date "Redemption Price'-- with respect to any Bond the principal amount thereof, plus the applicable premium if any payable upon redemption thereof pursuant to such Bond or any Bond Resolution 28 "Refunded Bonds" — the bonds of the Agency shown on Schedule I attached to this Resolution "Reserve Fund" -- the Fund by that name created and established by the Prior Lien Resolution "Resolution" -- the resolution authorizing the issuance of the "Texas Municipal Power Agency Subordinate Lien Revenue Refunding Bonds, Series 2001A " and any resolutions subsequently adopted by the Agency authorizing obligations on a parity with the Bonds "Revenue Fund" - the Fund by that name heretofore established and hereby reaffirmed by Section 4 02 "Series" -- all of the obligations designated as being of the same Series and any obligations delivered DI lieu thereof or in substitution thereof under Section 2 13 hereof "Special Record Date" -- the date established by the Paying Agent/Registrar for the Bonds which is the new record date for the payment of interest in the event of a nonpayment of interest on a scheduled payment date "Stated Maturities" -- the dates the principal of the Bonds is scheduled to mature as specified in the Bond Purchase Agreement "Subordinate Lien Bond Fund" -- the Fund by that name established by the Subordinate Lien Resolution "Subordinate Lien Bonds" — the Previously Issued Subordinate Lien Bonds, the Bonds and any Additional Subordinate Lien Bonds "Subordinate Lien Reserve Fund" — the Fund by that name established by the Subordinate Lien Resolution "Subordinate Lien Resolution" — the resolution authorizing the issuance of any Outstanding Previously Issued Subordinate Lien Bonds "Subordinated Indebtedness" - any evidence of debt referred to in and complying with the provisions of Section 6 04 "System" the Agency's interest in all properties (owned or operated by or on behalf of the Agency) which are financed in whole or in parl, through the issuance of obligations by the Agency for approved Projects and approved System Development and Reliability Expenditures (approved pursuant to the Power Sales Contract) and Development Projects (as defined in the Power Sales Contract), prior to the time one of the Cities disapproves a Project under the provisions of Section 13 of the Power Sales Contract and elects Option One under paragraph (d) of said Section 13 The term also includes any contract for providing services or power and energy either or both The term does not include the Agency's interest in any facility financed with the proceeds of (1) Special Contract Obligations issued by the Agency as permitted under and defined in the Prior Lien Resolution or (u) bonds issued to finance any Project which is not approved by all of the Cities if a City or Cities which disapprove a Project elect Option One under Section 13 of the Power Sales Contract "Written Certificate of the Agency," "Written Request of the Agency" and "Written Statement of the Agency" — an instrument in writing signed on behalf of the Agency by an Authorized Officer ARTICLE IV PLEDGE —CREATION AND ADMINISTRATION OF FUNDS Section 4 01 Pledge The Bonds shall be and are hereby declared to be payable solely from and subject to the provisions of this Resolution permitting the application thereof for the purposes and on the terms and conditions set forth herein secured by an irrevocable pledge of (I) the Net Revenues and (it) all Funds (including the investments thereto) established by the Prior Lien Resolution , the Subordinate Lien Resolution and this Resolution other than the Revenue Fund and the Revenue Fund subject to the payment of Operating and Maintenance Expenses, provided however, that such pledge is and shall be subject and subordinate to the prior bens of the Agency's Prior Lien Obligations Section 4 02 The Revenue Fund The Revenue Fund heretofore created and established in the Prior Lien Resolution and hereby reaffirmed shall be held by a Depository The Gross Revenues of the Agency shall be deposited as received into the Revenue Fund Pursuant to the provisions of the Prior Lien Resolution the Subordinate Lien Resolution and this Resolution, money on deposit in the Revenue Fund shall be used to the following order of priority (1) For the payment of Operating and Maintenance Expenses as the same become due (2) For deposits into the Prior Lien Bond Fund and Note Payment Fund heretofore established and created for the payment of the principal of premium, if any and interest on the Prior Lien Obligations as the same become due or are required to be called for redemption 29 (3) For deposits into the Reserve Fund heretofore established and created pursuant to the Prior Lien Resolution for the security and payment of the Prior Lien Obligations when there is a deficiency of money available for such purpose in the Prior Lien Bond Fund or the Note Payment Fund (4) For deposits into the Contingency Fund heretofore established and created by the Prior Lien Resolution to the extent required by the Prior Lien Resolution (5) To cure a deficiency in the Prior Lien Bond Fund the Prior Lien Reserve Fund and the Contingency Fund in that order (6) 1 or deposit in the Subordinate Lien Bond Fund amounts required by the Subordinate Lien Resolution and this Resolution to pay principal of and interest on the Subordinate Lien Bonds and the Bonds (7) ro cure a deficiency in the Subordinate I ien Reserve Fund (8) For any lawful purpose including (a) deposits into a Fuel Reserve Account (heretofore established as a pan of the Revenue Fund and hereby reaffirmed) for use in paying the cost of fuel acquisition or replacement or fuel working capital and uninvested money therein shall be applied only to the Lost of acquisition leasing reprocessing and replacement and disposal of fuel and fuel resources assemblies materials services and components and (b) for distribution to the Cities on such basis as the Board may determine would be fair and equitable if the Board determines an amount of money (and investments) will not be required for the purposes mentioned in this Section Section 4 03 Subordinate Lien Bond Fund I he Subordinate Lien Bond Fund heretofore created and established by the Subordinate Lien Resolution shall be held in trust as an account of the Agency by a financial institution as custodian of said Fund as designated by the Authorized Officer said Fund to be held in trust for the benefit of the Holders Fhe Agency may remove such financial institution and designate another financial institution as custodian of said Fund In conjunction with the preparation of the Annual Budget and immediately following the delivery of the Bonds the Board shall cause a determination to be made (1) of the amount then on deposit in the Prior Lien Bond Fund the Note Payment Fund and the Subordinate Lien Bond Fund for the purpose of paying and discharging (a) interest on Outstanding Prior Lien Obligations to become due and (b) the principal on Outstanding Prior Lien Obligations to become due by reason of maturity or mandatory redemption and (it) the amount required to be deposited each month so as to provide in equal monthly installments the full amount required to pay the principal of Outstanding Previously Issued Subordinate Lien Bonds and Outstanding Bonds premium if any, and interest as the same becomes due 1 he Board shall (on or before the 25th day of each month) cause the amount so determined (in clause (u)) to be transferred from the Revenue Fund to the Subordinate Lien Bond I and In addition to the amounts provided for interest and principal requirements of the Previously Issued Subordinate Lien Bonds and the Bonds the Agency shall make appropriate arrangements for meeting the tees and charges of the Paying Agent/Registrar In the event the amount on hand and available in the Revenue Fund for transfer to the Subordinate Lien Bond Fund is insufficient to permit the required deposit in full in accordance with provisions of this Section then the amount of any deficiency shall be transferred by the Agency to the Subordinate Lien Bond Fund from other available funds as herein provided Section 4 06 Reserve Fund The creation and establishment of the Subordmah, Lien Bond Fund is hereby reaffirmed I he Subordinate Lien Reserve I and shall be held in trust as an account of the Agency by a financial institution, as custodian of said Fund said Fund to be held in trust tot the benefit of the Holders the Agency may remove such financial institution as custodian and designate another financial institution as custodian of said Fund The amount to be accumulated and maintained in the Subordinate Lien Reserve Fund as a result of the issuance of the Bonds shall be the Required RcserVe set forth below The Required Reserve shall be established and maintained with Gross Revenues the proceeds of sale of Bonds or by depositing to the credit of the Subordinate Lien Reserve Fund one or more surety bonds issued by a company or institution having a rating in the highest rating category by two nationally recognized rating agencies or set vices or any combination thereof Upon the issuance of the Bonds the Required Reserve shall be increased if required to an amount equal to the lesser of either (t) the Average Annual Debt Service (calculated on a Fiscal Year basis) for all Subordinate Lien Bonds and Bonds then Outstanding (after giving effect to the issuance of the Bonds) as determined on the date the Bonds are delivered or issued as the case may be or (it) the maximum amount that can be invested without restriction as to yield in a reasonably required reserve fund pursuant to Subsection (d) of Section 148 of the Internal Revenue Code of 1986 as amended and regulations promulgated thereunder Any additional amount required to be maintained in the Subordinate Licn Reserve Fund shall be accumulated (i) by depositing to the credit of the Subordinate Lien Reserve Fund (immediately after the delivery of the then proposed Bonds) cash or an additional surety bond or revised surety bond with surety bond coverage in an amount sufficient to provide for the new Required Reserve to be fully or partially funded, or (it) at the option of the Agency by making monthly deposits from funds in the Revenue Fund on or before the 25th day of each month following the month of delivery of the then proposed Bonds of not less than 1/36th of the additional amount to be maintained in said Fund by reason of the issuance of the Bonds then being issued (or 1/36th of the balance of the additional amount not deposited immediately in cash or provided by a surety bond) While the cash and investments and/or insurance coverage provided by a municipal bond debt service reserve insurance policy (the 'Reserve Policy") in the Subordinate Lien Reserve Fund total not less than the Required Reserve no deposits need be made to the credit of the Subordinate Lien Reserve Fund Should the Subordinate Lien Reserve Fund at any time contain less than the Required Reserve (or so much thereof as shall then be required to be contained therein if Additional Bonds have been issued and the Agency has elected to accumulate all or a portion of the Required Reserve with Gross Revenues) or should the Agency be obligated to repay or reimburse an issuer of a surety bond to replenish and restore the full amount of insurance coverage provided by the Reserve Policy held for the account of the Subordinate Lien Reserve Fund the Agency covenants and agrees to cause monthly deposits to be made to the Subordinate Lien Reserve Fund on or before, the twenty fifth day of each month (beginning the month next following the month the deficiency in the Required Reserve occurred by reason of a draw on the Subordinate Lien Reserve Fund or as a result of a reduction in the market value of investments held for the account of the Subordinate Lien Reserve 30 Fund) from Gross Revenues in an amount equal to (i) not less than 1/24th of the Required Reserve until the total Required Reserve then required to be maintained in said Fund has been fully restored or (u) the amounts required to be reimbursed and repaid to the issuer of the insurance policy in the event of a draw upon the Reserve Policy The Agency further covenants and agrees that the Gross Revenues shall be applied and appropriated and used to establish and maintain the Required Reserve and to cure any deficiency in such amounts as required by the terms of this Resolution During such time as the Subordinate Lien Reserve Fund contains the total Required Reserve, the Agency may, at its option, withdraw any amount in the Subordinate Lien Reserve fund in excess of the Required Reserve and deposit such surplus in the Revenue Fund except that amounts from Bond proceeds on deposit in the Subordinate Lien Reserve Fund may only be deposited to the Bond Fund or the Subordinate Lien Reserve Fund ARTICLE V COVENANTS OF THE AGENCY Section 5 01 Punctual Payment of Subordinate Gen Bonds The Agency will punctually pay or cause to be paid the principal amount of, premium if any, and interest on the Subordinate Lien Bonds in strict conformity, with the terms of the Subordinate Lien Bond Resolution, and this Resolution, and according to the true intent and meaning thereof Section 5 02 Against Encumbrances Except as permitted by Section 5 19 the Agency will not create, and will use its best efforts to prevent the creation of, any mortgage or lien upon the System or any part thereof or any property needed for the proper operation of the System or for the maintenance of the revenues therefrom The Agency will not create, or permit the creation of any pledge hen, charge or encumbrance upon the Net Revenues or Funds pledged for the payment of Bonds except only as provided in or permitted by the Prior Lien Resolution, the Subordinate Lien Resolution and this Resolution Section 5 03 Against Sale or Other Disposition of Property Except as permitted by Section 5 19 the Agency will not sell or otherwise dispose of any property needed for the proper operation of the System or for the maintenance of the revenues therefrom The Agency will not enter into any lease or agreement which impairs or impedes the operation of the System or which impairs or impedes the rights of the Bondholders with respect to the Net Revenues Notwithstanding the foregoing the Agency, with the prior written approval of the Cities, may hereafter sell an ownership interest in a portion of the System to another party and in consideration thereof acquire an ownership interest in property used in the generation or transmission of electric energy or other "electric facilities' (as defined in the Act), provided that the ownership interest so acquired shall become a part of the System and shall be an Approved Project as that term is defined in the Power Sales Contract Section 5 04 Maintenance and Operation of System The Agency upon the acquisition or construction of an operating System will operate the same continuously, to the extent practicable under conditions as they may from time to time exist in an efficient and economical manner, and will at all times maintain, preserve and keep, or cause to be maintained, preserved or kept the System, including all parts thereof and appurtenances thereto in good repair working order and condition and of such manner that the operanpg efficiency thereof will be of high character and the Agency will from time to time make or cause to be made all necessary and proper repairs and replacements so that the business carried on in connection with the System by the Agency may be properly and advantageously conducted in a manner consistent with prudent management and so that the rights and security of the Holders are fully protected and preserved Section 5 05 Maintenance of Revenues, Power Sales Contract (a) The Agency will at all times comply with all terms covenants and provisions, express and implied, of all contracts and agreements entered into by it for electric power and energy fumished by or available to the System and all other contracts or agreements affecting or involving the System or the business of the Agency with respect thereto The Agency shall promptly collect all charges due for electric power and energy and services supplied by it as the same become due, and shall at all times maintain and promptly and vigorously enforce its rights against any party who does not pay such charges when due (b) The Agency shall enforce the provisions of the Power Sales Contract and duly perform its covenants and agreements thereunder Section 5 06 Observance of Laws and Regulations The Agency will well and truly keep, observe and perform all valid and lawful obligations or orders or regulations now or hereafter imposed on it by contract, or prescribed by any law of the United States of America or the State of Texas, or by any officer board or commission having jurisdiction or control as a condition of the commuedlenjoyment of any and every right, privilege or franchise now owned or hereafter acquired by the Agency including its right to exist and carry on business, to the end that such rights privileges and franchises shall be maintained and preserved and shall not become abandoned, forfeited or in any manner impaired provided however, that the Agency shall not be required to comply with any such orders so long as the validity or application thereof shall be contested in good faith Section 5 07 Payment of Taxes and Claims The Agency will from time to time duly pay and discharge or cause to be paid and discharged, any taxes, assessments or other governmental charges lawfully imposed on it or its properties when the same shall become due, and will duly observe and conform to all valid requirements of any governmental authority relative to any such properties The Agency will keep the System and all parts thereof free from all other liens claims, demands and encumbrances to the end that the lien of the Subordinate Lien Bond Resolution on the Net Revenues may at all times be maintained and preserved Nothing herein shall be construed as requiring the Agency to pay any tax, claim, assessment or governmental charge or comply with any regulation during the time the validity thereof is being questioned by the Agency 31 Section 5 08 Insurance Subject in each case to the condition that insurance is obtainable at reasonable rates and upon reasonable terms and conditions (a) The Agency will procure and maintain or cause to be procured and maintained at all times while any Subordinate Lien Bonds shall be Outstanding, insurance on the System in such amounts and against such risks as are usually insurable in connection with similar systems and are usually carried by electric utilities operating similar systems Such insurance shall be adequate in amount and as to the risks insured against and shall be maintained with responsible insurers (b) The Agency will procure and maintain or cause to be procured and maintained so long as any Bonds shall be Outstanding public liability and property damage insurance as is usually carried by municipal electric utilities operating similar properties (c) The Agency will secure and maintain adequate fidelity insurance or bonds on all officers and employees handling or responsible for funds of the Agency (d) The obligation hereunder to procure and maintain insurance with respect to a Joint Project shall be met if the entity acting as the manager of the Joint Project obtains and maintains the insurance required for the benefit of all owners of the Joint Project as their interest may appear (e) The Agenc} may establish and create a special fund with and to be held by a Depository for the purpose of providing a self insurance fund and the amount deposited in such fund in any Fiscal Year shall be charged as an Operating and Maintenance Expense Money in such fund if created may be invested in Investment Securities, and interest income or increment may be retained therein or transferred to the Revenue Fund as may be determined by the Agency as evidenced by a Written Certificate of the Agency ro the extent amounts may be held in such fund the face amount of appropriate policies may be reduced Section 5 09 Books and Records The Agency covenants that proper books of record and account will be kept in which full true and correct entries will be made of all income expenses and transactions of and in relation to the System and each and every part thereof in accordance with Generally Accepted Accounting Principles On or before 120 days after the close of each Fiscal Year of the Agency a statement showing the gross operating income and revenues the operating and maintenance charges and the net operating income of the System for the Fiscal Year then last completed, and a balance sheet of the Agency as of the end of such last Fiscal Year all certified by an independent Certified Public Accountant, will be made available at the office of the Agency I he Agency further covenants and agrees that the System and each and every part thereof and all books records accounts documents and vouchers relating to the construction operation maintenance repair, improvement and extension thereof will at all times be open to inspection of the Holders and their representatives Section 5 10 Rates and Charges The Agency will at all times while any of the Bonds shall be Outstanding, establish fix, prescribe and collect rates and charges for the sale or use of electric power and energy or services produced transmitted distributed or furnished by the System which together with other income, are reasonably expected to yield Net Revenues sufficient to satisfy the obligations of the Prior Lien Obligations and an amount equal to at least 1 25 times the Debt Service of all Subordinate Lien Bonds for the Fiscal Year for which such rates and charges shall apply (but excluding amounts deposited in the Subordinate Lien Bond Fund payable as interest in such Fiscal Year which were provided from the proceeds of Bonds) and promptly upon any material change in the circumstances which were contemplated at the time such rates and charges were most recently reviewed but not less frequently than once in each Fiscal Year shall review the rates and charges for electric power and energy and services and shall as necessary revise such rates and charges to comply with the foregoing requirement provided that such rates charges and income shall at any event produce moneys sufficient to enable the Agency to comply with all its covenants under the Prior I ien Resolution and the Subordinate Lien Resolution and to pay all obligations of the Agency including Subordinated Indebtedness Section 5 11 Fmment Domain If all or any part of the System financed with the proceeds of the Bonds shall be taken by eminent domain proceedings or conveyance in lieu thereof the net proceeds realized by the Agency therefrom shall be deposited in the Construction 1 and Section 5 12 Reconstruction of the System Application of Insurance Proceeds If any useful portion of the System shall be damaged or destroyed the Agency shall as expeditiously as possible continuously and diligently prosecute or cause to be prosecuted the reconstruction or replacement thereof unless the Agency determines that such reconstruction or replacement is not in the interests of the Agency and the Bondholders The proceeds of any insurance paid on account of such damage or destruction other than business interruption loss insurance shall be paid into the Construction Fund and made available for and to the extent necessary apphcd to the cost of such reconstruction or replacement if any Pending such application such proceeds may be invested by the Agency in Investment Securities Section 5 13 Limitations on hree Use of Facilities None of the net electric power and energy owned controlled or supplied by the Agency or other services shall be furnished or supplied free If the Agency shall sell fuel or water developed or made available by or for the System a reasonable charge therefor shall be made Section 5 14 Power to Issue Bonds and Pledge Revenues and Other Funds The Agency is duly authorized under all applicable jaws to create and issue the Bonds and to adopt this Resolution and to pledge the Net Revenues and other moneys securities and funds purported to be pledged by this Resolution in the manner and to the extent provided in this Resolution The Bonds and the provisions of the Resolution are and will be valid and legally enforceable obligations of the Agency in accordance with their terms and the terms of the Resolution The Agency shall at all times to the extent permitted by law defend preserve and protect the pledge of the Net Revenues and other moneys securities and funds pledged under the Resolution and all the rights of the Holders under the Resolution against all claims and demand of all persons whomsoever 32 Section 5 15 Power to Construct and Operate System and Collect Rates and Fees The Agency has, and will have so long as any Bonds are Outstanding, good, right and lawful power to construct, reconstruct Improve, maintain, operate and repair the facilities of the System and to fix and collect rates fees and other charges in connection with the System subject to the jurisdiction of any applicable regulatory authority Section 5 16 General (a) The Agency shall do and perform or cause to be done and performed all acts and things required to be done or performed by or on behalf of the Agency under the provisions of the Act and the Resolution (b) Upon the date of delivery of any of the Bonds all acts, conditions and things required by law and the Resolution to exist, to have happened and to have been performed precedent to and in the Issuance of such Bonds shall exist, have happened and have been performed in regular and in due time form and manner as required by law and the Agency will have duly and regularly complied with all applicable provisions of jaw and will be duly authorized to Issue the Bonds under the Act in the manner and upon the terms as in the Resolution provided (c) The Agency may purchase Bonds from any available funds at public or private sale as and when and at such prices as the Agency may in Its discretion determine, but no purchase shall be made at a price exceeding the then current market price or in the case of Bonds which by their terms are subject to redemption prior to maturity, the then apphLable optional redemption price or, if such Bonds are not then redeemable, the price at which such Bonds will first become subject to optional redemption Section 5 17 Engineer The Agency may retain one or more recognized independent engineers or engineering firms as appropriate for the purpose of providing the Agency with engineering counsel Any engineer employed pursuant to this Section shall be selected with special reference to his knowledge and experience in the matter for which he is retained Section 5 18 Annual Budget Not less than 30 days prior to the beginning of each Fiscal Year, the Agency shall adopt an Annual Budget for the ensuing Fiscal Year which shall set forth in reasonable detail the amount of money on hand estimated Gross Revenues and Operating and Maintenance Expenses and other expenditures of the System for such Fiscal Year and the estimated amount to be deposited during such Fiscal Year in the Funds established by the Prior Lien Resolution and the Subordinate Lien Resolution At the end of the sixth month of each Fiscal Year the Agency shall review its estimates of Gross Revenues and Operating and Maintenance Expenses for such Fiscal Year, and in the event such estimates do not substantially correspond with actual Gross Revenues or Operating and Maintenance Expenses, the Agency may adopt an amended Annual Budget for the remainder of such Fiscal Year The Agency may also at any time adopt an amended Annual Budget for the remainder of the then current Fiscal Year Section 5 19 Acquisition and Disposal of Real Property or Fuel Resources In connection with the acquisition of real property of fuel resources the Agency may encumber, as a purchase money mortgage any land or rights in land or fuel resources and execute a deed of trust note as additional security therefor and such note may be made payable as provided in Section 6 04 Fuel may be sold by the Agency, as contemplated by Section 5 13, if the Board determines such sale would be in the best interest of the Agency Section 5 20 Covenants as to Power Sales Contract, other Agreements The Agency covenants that it will not do any act or omit to do any act which would cause a breach of contractor cause the Agency to be in default of any covenant condition or provision of the Power Sales Contract or any agreement with respect to any Joint Project and it will enforce all the terms and conditions of such contracts against the parties thereto During the time the Bonds are Outstanding, the Agency covenants that it will not permit the amendment of the Power Sales Contract without first having obtained the consent of all of the Cities The Agency recognizes that under the Power Sales Contract no sale or other disposition by a City of its electric utility distribution system in whole or substantially as a whole, may become effective so long as any Bonds are Outstanding Section 5 21 Sale of an Ownership Interest in Electric Facilities In the event another entity (as defined in the Act) acquires or increases its ownership interest in a Joint Project (as permitted by the Act) any money received by the Agency shall be placed in a construction fund so as to complete and provide the facilities constituting the Joint Project or other projects which the Agency is empowered to provide In no event shall the Agency permit the acquisition of an ownership interest in electric facilities in a manner that would cause the interest on Bonds to become subject to federal income taxation Section 5 22 Disposition of Proceeds of Sale In the event properties constituting a part of the System are sold the proceeds therefrom shall be deposited pursuant to the terms of the Prior Lien Resolution Section 5 23 Restriction on Outstanding Indebtedness The Agency agrees that during the period that the Previously Issued Subordinate Lien Bonds and the Bonds remain Outstanding it will not issue any Additional Prior Lien Bonds other than bonds issued to refund Outstanding Prior Lien Bonds and it will not have more than $250 000 000 in principal amount of commercial paper obligations Outstanding without first obtaining the prior written consent of AMBAC Assurance Corporation provided that Ambac Assurance Corporation is not in default under any financial guaranty insurance policy (the "Policy") issued to insure the timely payment of principal of and interest on Outstanding Subordinate Lien Bonds If Ambac Assurance Corporation is in default under the Policy, no such consent shall be required 33 ARTICLE VI ADDITIONAL SUBORDINATE LIEN BONDS AND REFUNDING BONDS Section 601 Additional Subordinate Lien Bonds Generally (a) Subject to the provisions hereinafter appearing with relation to conditions precedent which must first be met the Agency reserves the right to issue, from time to time as needed Additional Subordinate Lien Bonds for the lawful purposes of the Agency with respect to the System (including the payment of the principal of interest on and redemption premium if any on Subordinated Indebtedness issued by the Agency for such purposes pursuant to Section 6 04 hereof) All such Additional Subordinate Lien Bonds and requirements ascribed to them shall be payable from the same source and secured in the same manner on a panty and of equal dignity with the Bonds Additional Subordinate Lien Bonds shall be made to mature on the date or dates the Bonds mature or are permitted to mature under the documents applicable to the Bonds including but not limited to the Bond Purchase Agreement (b) In the discretion of the Board the Additional Subordinate Lien Bonds may be authorized and issued in such form as shall be lawful and deemed the most advantageous under the circumstances at the time More specifically but without intending any limitation they may be (I) in coupon form without privileges of registration as to principal (n) in coupon form with privileges of registration as to principal (in) in registrable form with privileges of conversion to coupon form (iv) in coupon form with privileges of conversion to registrable form (v) made to mature serially or as "term" or "sinking fund" Subordinate Lien Bonds with arrangements for mandatory redemption Should Subordinate Lien Bonds be issued as 'term" or "sinking fund" Subordinate Lien Bonds with provisions for mandatory redemption the date of mandatory redemption shall be considered a principal payment date (c) It is further provided that should in the future there be developed any characterization for evidence of indebtedness of debt instruments differing from those used hereunder the Agency shall have the right to employ those characterizations in its financing arrangements and to provide that such evidence or indebtedness or debt instruments may be payable from the same source and secuied in the same manner as the Subordinate Lien Bonds, on a parity therewith provided that the same conditions precedent herein required for the authorization and issuance of Additional Subordinate Lien Bonds first be met as conditions precedent to the authorization and issuance of any such other evidence of indebtedness or debt instruments Section 6 02 Additional Conditions for Issuance of Additional Subordinate Lien Bonds The Additional Subordinate Lien Bonds may be issued in one or more Series provided however that no Additional Subordinate Lien Bonds shall be issued unless and until the following conditions have been met (a) The Agency as evidenced by a certificate of an Authorized Officer is not in default (i) as to any covenant condition or obligation prescribed by the Resolution or (it) in the payments of Subordinated Indebtedness (b) The laws of the State of I exas effective at the time of the authorization of such Additional Subordinate Lien Bonds shall permit their issuance (c) The Board Resolution authorizing the Additional Subordinate Lien Bonds reaffirms the provisions of Section 4 03 hereof with respect to deposits being made in the Subordinate Lien Bond Fund in an amount adequate to pay the Debt Service on the Subordinate Lien Bonds as the same becomes due and sets forth the amount of Subordinate Lien Bond proceeds if any, to be deposited many fund established by this Resolution (d) The Agency shall have obtained a report from an independent certified public accountant showing that the Net Revenues (I) for the Fiscal Year next preceding the date of the Additional Subordinate Lien Bonds or (it) for 12 consecutive months out of the 18 months next preceding the date of the Additional Subordinate Lien Bonds were equal to at least 125 times the debt service on the Previously Issued Subordinate Lien Bonds and the Debt Service (excluding amounts deposited in the Subordinate Lien Bond Fund for the payment of interest which were provided from the proceeds of Subordinate I Ion Bonds) for such period provided however that the requirement of this paragraph (d) shall not be applicable to Additional Subordinate I ien Bonds issued for the purpose of completing the financing of a Project for which a series of Subordinate Lien Bonds has been issued (e) The Agency has obtained an opinion from bond counsel selected by it that the bonds then proposed to be issued are to be payable from the same sources and secured in the same manner as the Outstanding Bonds and that the obligation of the Cities (under Sootion 14 of the Power Sales Contract) is equally applicable to the proposed bonds Section 6 03 Refunding Bonds Tho Agency shall retain the right to issue refunding Subordinate Lien Bonds to refund all or any part of its outstanding Subordinate Lien Bonds as permitted by and in accordance with any lawful method [hereunto appertaining provided that the requRoments for the issuance of Additional Subordinate Lien Bonds shall be met Section 6 04 Subordinated Indebtedness I he Agency retains the right to issue evidence of indebtedness secured by a pledge subordinated in all respects to the pledge in favor of the Subordinate Lien Bonds of the Net Revenues as may from time to time be available for the purpose of payment thereof (after the payments required to be made into the Prior Lien Bond Fund, Note Payment Fund, Subordinate Lien Bond Fund Subordinate Lien Reserve Fund and any additional fund created and established by the Prior Lien Resolution the Subordinate Lien Resolution and this Resolution) provided however that such indebtedness shall bo incurred only for any one or more of the purposes set forth in the Act Section 605 Special Contract Obligations The Agency retains the right to issue bonds (but not Bonds) or other obligations for the purpose of financing the construction or acquisition of electric facilities (as defined in the Act) which are to be initially owned as co tenants or co owners by the Agency and any other entity or entities and such bonds or other obligations for the purpose of the Resolution shall be Special Contract Obligations Special Contract Obligations shall not be payable from Gross Revenues nor shall the expense of operating and maintenance of such electric facilities be an Operating and Maintenance Expense nor shall the electric facilities so financod be a part of the System as such terms are herein defined Such Obligations shall not be on a parity with the Bonds or be considered as having been issued pursuant to the Resolution Any lease payments installment sale payments or other payments or receipts of the Agency which are received by reason of the acquisition or financing of such electric facilities with any proceeds of Special Contract Obligations shall be kept separate and apart from any Funds created or established under the Resolution provided that any amounts received by the Agency in any Fiscal Year in excess of that required to pay 34 operating and maintenance expenses, the principal of, premium for redemption (if any) and interest on such Special Contract Obligations; the amounts required to establish or replenish any fund established for the payment and security of such Obligations and the fees of the paying agent, registrar, or trustee (any or all), shall be deposited in the Revenue Fund herein created and shall be applied, from that time forward as Gross Revenues ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF HOLDERS Section 8 01 Events of Default Each of the following occurrences or events shall be and is hereby declared to be an 'Event of Default," to wit (a) The failure to make payment of the principal of or premium, if any, on any of the Bonds when the same shall become due and payable, (b) The failure to pay any installment of interest when the same shall become due and payable (c) Default in any covenant, undertaking or commitment contained in the Resolution the failure to perform which materially affects the rights of the Holders of the Bonds to be repaid and the continuation thereof for a period of sixty (60) days after notice of such default by any Holder of any Bonds and (d) If there shall occur the dissolution or liquidation of the Agency (other than re-creation of the Agency as provided in the Act or Section 16 of the Power Sales Contract) or the filing by the Agency of a voluntary petition in bankruptcy or the commission by the Agency of any act of bankruptcy, or adjudication of the Agency as a bankrupt or assignment by the Agency for the benefit of its creditors, or the entry by the Agency into an agreement of composition with its creditors or the approval by a court of competent jurisdiction of a petition applicable to the Agency in a proceeding for its reorganization instituted under the provisions of the general bankruptcy act, as amended, or under any similar act in any jurisdiction which may now be in effect or hereafter enacted Section 8 02 Remedies for Default Upon the happening and continuation of any of the Events of Default as provided in Section 8 01 hereof, then and in every case any Holder may proceed against the Agency for the purpose of protecting and enforcing the rights of the Holders of Bonds under the Resolution, by mandamus or other suit, action or special proceeding in equity or at law in any court of competent jurisdiction for any relief permitted by law, including the specific performance of any covenant or agreement contained herein, or thereby to enjoin any act or thing which may be unlawful or in violation of any right of the Holder hereunder or any combination of such remedies Each such right or privilege shall be in addition to and cumulative of any other right or privilege and the exercise of any right or privilege by or on behalf of any Holders shall not be deemed a waiver of any other right or privilege thereof Section 8 03 Priority of Payments If an Event of Default has occurred then moneys of the Agency shall be applied first to the payment of interest on Bonds that has become due and second to the pro rats payment of the principal amount of and premium, if any, on Bonds Outstanding which have become due INVESTMENTS The Agency invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Board of Directors of the Agency Both state law and the Agency s investment policies are subject to change LEGAL INVESTMENTS Under Texas law the Agency 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 of and interest on which are unconditionally 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 cores 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 and share certificates issued by a state or federal credit union domiciled in the State of Texas that 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 the clauses (1) through (6) or in any other manner and amount provided by law for Agency 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) 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-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper that is rated at least A-1 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 regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio 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 (12) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invests exclusively in obligations described in the preceding clauses 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, provided, however, that the Agency is not authorized to invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service in such no load mutual funds and (13) for bond proceeds guaranteed investment contracts that have a defined termination dale are secured by obligations of the 35 United States or its agencies and instrumentalities in an amount at least equal to the amount invested under the contract and are pledged to the Agency and deposited with the Agency or a thud party selected and approved by the Agency, The Agency 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 Agency 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 INVESTMENT POLICIES Under Texas law, the Agency 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 Agency funds maximum allowable stated maturity of any individual investment and the maximum average dollar -weighted maturity allowed for pooled fund groups All Agency 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 Under Texas law Agency 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 Agency shall submit an investment report detailing (1) the investment position of the Agency, (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 Agency funds without express written authority from the Board of Directors ADDITIONAL PROVISIONS Under Texas law the Agency 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 Board of Directors (3) require the registered principal of fines seeking to sell securities to the Agency to (a) receive and review the Agency'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 Agency's investment policy (5) provide specific investment training for the Treasurer Chief rinancial 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 non -money market mutual funds 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 3- CURRENT INVESTMENTS As of April 30 2001 the Agency's investable funds were invested in the following categories Adjusted Market Percent of Security Type Cost Value Assets Yield Government Securities Treasury Notes $ 24,764,807 $ 24,901,389 1401% 5859% Agency Securities Agency Coupon Securities 70 731,475 71,395,319 40 17% 6 019% Agency Discount Notes 57,419,675 57,501,961 32 35% 4 744% Commercial Paper 12,343,537 12 345,422 6 95% 4 687% Repurchase Agreements 11 599,290 11,599,290 6 53% 4 673% Total Portfolio $ 176,858 784 $ 177 743,381 100 00% 5 404% 36 TAX MATTERS TAX EXEMPTION The delivery of the Bonds is subject to the opinion of Bond Counsel to the effect that interest on the Bonds for federal income tax purposes (1) will be excludable from gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date of such opinion (the "Code"), pursuant to section 103 of the Code and existing regulations published rulings, and court decisions, and (2) will not be included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations A form of Bond Counsel's opinion is reproduced as Appendix C The statute, regulations, rulings and court decisions on which such opinion is based are subject to change Interest on all tax-exempt obligations, including the Bonds owned by a corporation will be included in such corporation's adjusted current earnings for tax years beginning after 1989, for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a qualified mutual fund a real estate investment trust a real estate mortgage investment conduit or a financial asset sectu tization investment trust (FASIT) A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by Section 55 of the Code will be computed In rendering the foregoing opinions Bond Counsel will rely upon representations and certifications of the Agency made in a certificate dated the date of delivery of the Bonds pertaining to the use, expenditure, and investment of the proceeds of the Bonds and will assume continuing compliance by the Agency with the provisions of the Resolution subsequent to the issuance of the Bonds The' Resolution contains covenants by the Agency with respect to, among other matters, the use of the proceeds of the Bonds and the facilities financed therewith by persons other than state or local governmental units the manner in which the proceeds of the Bonds are to be invested, the periodic calculation and payment to the United States Treasury of arbitrage "profits" from the investment of the proceeds, and the reporting of certain information to the United States Treasury Failure to comply with any of these covenants would cause interest on the Bonds to be includable in the gross income of the owners thereof from date of the issuance of the Bonds Bond Counsel's opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the Agency described above No ruling has been sought from the Internal Revenue Service (the' Service ) with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel s opinion is not binding on the Service The Service has an ongoing program of auditing the tax exempt status of the interest on tax-exempt obligations If an audit of the Bonds is commenced under current procedures the Service is likely to treat the Issuer as the "taxpayer," and the Owners would have no right to participate in the audit process In responding to or defending an audit of the tax-exempt status of the interest on the Bonds the Agency may have different or conflicting interests from the Owners Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit regardless of its ultimate outcome Except as described above, Bond Counsel expresses no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on or the acquisition or disposition of the Bonds Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to among others, financial institutions, life insurance companies property and casualty insurance companies, certain foreign corporations doing business in the United States S corporations with subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits individuals otherwise qualifying for the earned income tax credit, owners of an interest in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances TAX ACCOUNTING TREATMENT OF DISCOUNT AND PREMIUM ON Cs RTAIN BONDS The initial public offering price of certain Bonds (the "Discount Bonds") may be less than the amount payable on such Bonds at maturity An amount equal to the difference between the initial public offering price of a Discount Bond (assuming that a substantial amount of the Discount Bonds of that maturity are sold to the public at such price) and the amount payable at maturity constitutes original issue discount to the initial purchaser of such Discount Bond A portion of such original issue discount allocable to the holding period of such Discount Bond by the initial purchaser will, upon the disposition of such Discount Bond (including by reason of its payment at maturity) be treated as interest excludable from gross income rather than as taxable gam for federal income tax purposes, on the same terms and conditions as those for other interest on the Bonds described above under "Tax Exemption " Such interest is considered to be accrued actuarially in accordance with the constant interest method over the life of a Discount Bond taking into account the semiannual compounding of seemed interest, at the yield to maturity on such Discount Bond and generally will be allocated to an original purchaser in a different amount from the amount of the payment denominated as interest actually received by the original purchaser during the tax year However, such interest may be required to be taken into account in determining the alternative minimum taxable income of a corporation, for purposes of calculating a corporation's alternative minimum tax imposed by Section 55 of the Code and the amount of the branch profits tax applicable to certain foreign corporations doing business in the United States even though there will not be a corresponding cash payment In addition the accrual of such interest may result in certain other collateral federal 37 income tax consequences to among others financial institutions, life insurance companies property and casualty insurance companies S corporations with "subchapter C" earnings and profits individual recipients of Social Security or Railroad Retirement benefits individuals otherwise qualifying for earned income tax credit, owners of an interest in a FASIT and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax exempt obligations Moreover, in the event of the redemption, sale or other taxable disposition of a Discount Bond by the initial owner prior to maturity the amount realized by such owner in excess of the basis of such 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 Discount Bond was held) is includable in gross income Owners of Discount Bonds should consult with their own tax advisors with respect to the determination of accrued original issue discount on Discount Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Discount Bonds It is possible that under applicable provisions governing determination of state and local income taxes, accrued interest on Discount Bonds may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment The initial public offering price of certain Bonds (the "Premium Bonds") may be greater than the amount payable on such Bonds at maturity An amount equal to the difference between the mural public offering price of a Premium Bond (assuming that a substantial amount of the Premium Bonds of that maturity are sold to the public at such price) and the amount payable at maturity constitutes premium to the initial purchaser of such Premium Bonds The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium Suoh reduction in basis will increase the amount of any gam (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Bond The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser's yield to maturity Purchasers of the Premium Bonds should consult with their own tax advisors with respect to the determination of amortizable bond premium on Premium Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Premium Bonds CONTINUING DISCLOSURE OF INFORMATION In the Resolution the Agency has authorized and directed the General Manager to meet the applicable continuing disclosure requirements of Rule 15c-2-12 of the Securities Exchange Act of 1934 as amended The General Manager will deliver a continuing disclosure undertaking for the benefit of the holders and beneficial owners of the Bonds The Agency is required to observe the undertaking for so long as it remains obligated to advance funds to pay the Bonds Under the undertaking the Agency will be obligated annually to provide certain updated financial information and operating data relating to the Agency and the Crites that is contained in Appendices A and B hereto, and to give 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 Agency 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 Agency of the general type included in this Official Statement under Tables numbered one through three and in Appendix A and Appendix B The Agency will update and provide this information within six months after the end of each fiscal year ending in or after 2001 The Agency 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 Agency 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 Agency commissions an audit and it is completed by the required time If audited financial statements we not available by the required time the Agency will provide unaudited financial statements by the required time and audited financial statements when and if audited such financial statements become available Any such financial statements will be prepared in accordance with the accounting principles described in Appendix A or such other accounting principles as the Agency may be required to employ from time to time pursuant to state law or regulation The Agency's current fiscal year end is September 30 Accordingly, it must provide updated information March 31 in each year unless the Agency changes its fiscal year If the Agency 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 38 MATERIAL EVENT NOTICES The Agency will also provide timely notices of certain events to certain information vendors The Agency will provide nonce 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) Band calls, (9) defeasances (10) release, substitution, or sale of property securing repayment of the Bonds and (11) rating changes Neither the Bonds nor the Resolution make any provision for liquidity enhancement In addition the Agency will provide timely notice of any failure by the Agency to provide information data, or financial statements in accordance with its agreement described above under "Annual Reports " The Agency will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemakmg Board ("MSRB") AVAILABILITY OF INFORMATION FROM NRMSIRS AND SID the Agency has agreed to provide the foregoing information only to NRMSIRs and the SID The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so LIMITATIONS AND AMENDMENTS The Agency has agreed to update information and to provide notices of material events only as described above The Agency 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 Agency 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 Agency 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 Agency to comply with its agreement The Agency 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 Agency if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein of 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 (it) 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 Agency (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 I he Agency 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 Agency 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 The Agency has complied in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12 39 OTHER INFORMATION RATINGS The presently outstanding subordinate hen revenue debt of the Agency is rated "AT' by Moody's Investors Service Inc ("Moody's") "A" by Standard & Poor's Ratings Services A Division of The McGraw-Hill Companies, Inc ("S&P") and 'A-" by Fitch Inc ("Fitch") The Bonds are rated "Ann" by Moody s "AAA" by S&P and "AAA" by Fitch based upon the municipal bond insurance policy of Ambac Assurance to be issued simultaneously with the delivery of the Bonds The senior lien bonds of the Agency have underlying ratings of "AT' by Moody's Investors Service Inc ("Moody's") "A+" by Standard & Poor's Ratings Services A Division of The McGraw Hill Companies Inc ("S&P") and "A" by Fitch Inc ("Fitch") A portion of the Agency's senior lien bonds are rated Aaa" by Moody s "AAA" by S&P and "AAA" by Fitch through insurance by various commercial insurance companies The Agency s Commercial Paper Notes are rated "P 1" by Moody's "A-1" by S&P and "F-I" by Fitch 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 Agency 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 LITIGATION It is the opinion of the Agency Attorney and Agency Staff that there is no pending litigation against the Agency that would have a material adverse financial impact upon the Agency 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 Agency 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 ELICIRILITV 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 I unds Investment Act Chapter 2256 Texas Government Code, requires that the Bonds be assigned a rating of "A" or its equivalent as to investment quality by a national rating agency See "OTHER INFORMATION - Ratings" herein In addition various provisions of the Texas Finance Code provide that subject to a prudent investor standard the Bonds are legal investments for state banks savings banks trust companies with at capital of one million dollars or more and savings and loan associations The Bonds 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 Agency 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 Agency 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 to the effect that the Bonds are valid and legally binding special obligations of the Agency and based upon examination of such transcript of proceedings the approving legal opinion of Bond Counsel to like effect Bond Counsel was not requested to participate and did not take part in the preparation of the Official Statement and such firm has not assumed any responsibility with respect thereto or undertaken independently to verity any of the information contained therein except that in its capacity as Bond Counsel, such firm has reviewed the information under captions Introduction" "Plan of Financing" "The Bonds" (exclusive of the subcaptmn "Book Entry -Only System") "Tax Matters" and 'Continuing Disclosure of Information" (exclusive of the subcaption "Compliance with Prior Undertakings") and the subcaptions "Legal Opinions" and 'Legal Investments and Eligibility to Secure Public Funds in Texas' in the Official Statement and such firm is of the opinion that the information relating to the Bonds and 40 the legal issues contained under such captions and subcaptmns is an accurate and fair description of the laws and legal Issues addressed therein and, with respect to the Bonds such information conforms to the Resolution 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 Certain legal matters will be passed upon for the Underwriters by Vinson & Elkins L L P Dallas Texas Counsel to the Underwriters FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the Agency 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, 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 Agency for the investment of bond proceeds or other funds of the Agency upon tha request of the Agency The Financial Advisor to the Agency 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 Agency 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 VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS The arithmetical accuracy of certain computations included in the schedules provided by First Southwest Company on behalf of the Agency relating to (a) computation of forecasted receipts of principal and interest on the Federal Securities and the forecasted payments of principal and interest to redeem the Refunded Bonds and (b) computation of the yields of the Refunding Bonds and the restricted Federal Securities were verified by Grant Thornton LLP certified public accountants Such computations were based solely on assumptions and information supplied by First Southwest Company on behalf of the Agency Grant Thomton LLP has restricted its procedures to verifying the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information on which the computations are based and, accordingly, has not expressed an opinion on the data used the reasonableness of the assumptions, or the achievability of the forecasted outcome UNDERWRITING 7 he Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the Agency at an underwriting discount of $649 757 75 The Underwriters will be obligated to purchase all of the Bonds if any Bonds are purchased The Bonds to be offered to the public may be offered and sold to certain dealers (including the Underwriters and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds and such public offering prices may be changed from time to time, by the Underwriters MISCELLANEOUS The financial data and other information contained herein have been obtained from the Agency's 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 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 The Resolution 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 Underwriters TEXAS MUNICIPAL POWCR AGENCY By BYRON CHITWOOD President of the Board of Directors 41 SCHEDULEI SCHEDULE OF REFUNDED BONDS Original Original Amount Maturities Date and Issue Issue To Be To Be Price of Maturity Series Date Amount Refunded Refunded or Redemption 1987 2-OI-1987 $ 430,650,000 $ 38 780,000 2012 9-01-2001 @Par 10,475,000 2013 9-01-2001 @ Par $ 49,255,000 1991A 7-01-1991 $ 72,005,000 $ 3,520 000 2002 9-01-2001 @ 102% 3,850,000 2003 9-01-2001 @ 102% 4,105,000 2004 9-01-2001 @ 102% 4,385 000 2005 901 2001 @ 102% 4,675 000 2006 9 01-2001 @ 102% 4,990,000 2007 9-01-2001 @ 102% 5 330 000 2008 9 01-2001 @ 102% 5690,000 2009 9-01-2001 @ 102% 6 075 000 2010 9-01-2001 @ 102% 6,490,000 2011 9 01-2001 @ 102% 6,925,000 2012 901 2001 @ 102% $ 56 035,000 APPENDIX A AGENCY AUDITED FINANCIAL STATEMENTS AND AUDITOR'S REPORT Auditors Report F, ARTHURANDERSEN REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of the Texas Municipal Power Agency We have audited the accompanying balance sheets of Texas Municipal Power Agency as of September 30,12000 and 1999, and the related statements of operations and accumulated excess revenues and cash flows for the years then ended These financial statements are the responsibility of the Company's management Our responsibility is to express an opinion on these financial statements based on our audits We conducted our audits in accordance with auditing standards generally accepted in 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation We believe that our audits provide a reasonable basis for our opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Texas Municipal Power Agency as of September 30, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States Houston, Texas January 29,2001 13 Texas Municipal Power Agency TEXAS MUNICIPAL POWER AGENCY BALANCE SHEETS ASSETS September 30 . 2000 1999 Electric Plant (Dollars in Thousands) In service $ 849,654 $ 853162 Less Accumulated depreciation (455,5311 r440.9041 Total — net 394 123 412 258 Construction work in progress 672 783 Total electric plant 394.795 413,041 Restricted Assets Cash and Investments (includes cash and cash equivalents of $1 790 and $1,302) 123,818 122,505 Accounts receivable and other 292 248 Total Restricted assets 124,110 122,751 Current Assets Cash and investments (Includes cash and cash equivalents of $8 780 and $23 744) 20 753 34,734 Inventories Fuel stock 3,151 3,966 Material and supplies 3,712 3,792 Accounts receivable and other 23,056 11,246 Accrued interest receivable 1 481 1.762 Due from restricted assets 1,395 218 Total current assets 53.548 55,718 Other Assets Unamortized debt Issuance costs 13,507 14,500 Unamorllzed excess cost on advanced refunding of debt 140.515 152,856 Deferred expenses to be recovered In future years 702,152 690.886 Total other assets 856,174 858.242 Total Assets $t.428.627 $1.449.762 14 The accompan}nng notes are an Integral part of the finanaal statements Texas Municipal Power Agency TEXAS MUNICIPAL POWER AGENCY BALANCE SHEETS ACCUMULATED EXCESS REVENUES AND LIABILITIES September 30, _ 2000 1999 (Dollars in Thousands) Accumulated Excess Revenues y 19,618 $ 19,660 Reserved Unreserved 8.448 �0 Total accumulated excess revenues 066 —— 32.990 Long-Term Debt Revenue bonds, less current maturities 935,262 983,847 Unamortlzed discount (16,848) 187 282 (18,105) 160 241 Zero coupon Interest payable 176 000 176 000 Tax-exempt commercial paper 26,300 29,200 Taxable commercial paper 271 411,308,267 Notes payable Total long-term debt 1.1.5 Non -Current Liabilities 603 - Regulatory liability Accrued mine reclamation costs 4,121 9,856 Total liabilities payable from restricted assets 4,724 --9,$56 Liabilities Payable From Restricted Assets 6 743 4,689 Accounts Payable 1.395 2118 Due to unrestricted assets 8.138 _4.907 Current Liabilities 2,900 2 BOD Taxable commercial paper 48 585 41,420 Current maturities of revenue bonds 139 164 Current notes payable 5 744 4,298 Current accrued rAine reclamation costs 4,620 4,819 Accrued interest 13 990 13,174 Accounts payable 2 320 3,297 Accrued distnbution to Cities 1.134 434 Accrued compensation and pension benefits 79.432 70.408 Total current liabilities Commitments and Contingencies Total Accumulated Excess Revenues and Liabilities 11,428,621 The accompanying notes are an integral part of the financial statements is Taxes Municipal Power Agency TEXAS MUNICIPAL POWER AGENCY STATEMENTS OF OPERATIONS AND ACCUMULATED EXCESS REVENUES For the Year Ended September 30, 2000 1999 Operating Revenues Before Refunds (Dollars in Thousands) Power sales $ 165,097 $ 168,886 Other operating income 18.228 8.790 Total Operating Income 183,323 177,076 Operating Expenses Fuel Production operation and maintenance 39 542 11 981 34 144 11,671 Transmission operation and maintenance 4,086 8,934 Administrative and general 11,446 8,923 Lignite termination costs 7 10,035 Depreciation 17.637 17,642 Total operating expenses 84,679 91.349 Operating Income 98,044 86,327 Other Income (expenses) Investment revenue income 10 028 8 010 Miscellaneous other income (expenses) (1,089) 2.757 Total other Income 8,939 10,767 107,583 97,094 Interest Charges Interest expense on debt 79,510 78,525 Amortization of debt Issuance costs and excess Costs on advance refunding of debt 13.544 15.377 Total Interest charges 93,054 93.902 Costs to be Recovered in Future Years (11,426) (34,644) Not Revenues before Refunds and Renewals and Replacements 25,965 37,836 Renewals and Replacements (3.042) (3,531) Refunds to Cities (27,837) (28,814) Change in Accumulated Excess Revenues (4,924) 6,491 Accumulated Excess Revenues At beginning of penod 32.990 27.499 At and of period S 28 oe6 a 32.990 The accompanNng notes are an Integral part of the Nnanual statements is Texas Municipal Power Agency TEXAS MUNICIPAL POWER AGENCY STATEMENTS OF CASH FLOWS For the Year Ended September 30, 200a 999 (Dollars In Thousands) Cash Flows From Operating Activities $ 98 644 $ 88 327 Operating Income Adjustments to reconcile to net cash provided by operating activities 17,637 1, 642 Depreciation 7 35 10,035 Accrued lignite termination costs (11.938) (1,285) Accounts receivable and other 757 (106) Inventory Accounts payable (1,77) (165) Other Net cash provided by operating activities 04 4 1—�� 111,012 Cash Flows from Investing Activities (94,347) 117 276) Purchase of investments 93 510 114,661 Proceeds from maturing Investments 725 204 Proceeds from disposition of assets 1,446 625 Fair value change for cash equivalents 81M 8,295 interest received on investments Net Cash provided by investing activities 9.367 6,509 Cash Flows From Capital and Related Financing Activities (92) Additions to electric plant (646) (3 042) (3 531) Renewals and replacements (184) (201) Notes payable repaid (1 (4 Taxable commercial paper repaid (41 420) 670) (27 837) Bonds repaid Refunds to Member Cities 837) (27,837) (27,837) Annual refund to Member Cities (977) 51 4 0 (4,041) (51,310) interest paid on debt Net casb used by financing activities (128,296) 1 4 8 Net Increasel(Decrease) In Cash and Cash Equivalents (14,476) (7,161) Cash and Cash Equivalents at Beginning of Year 25Q46 32,207 Cash and Cash Equivalents at End of Period S 10-57f) Noncash investing, capital, and financing activities The fair value change of investments that are not cash and cash equivalents was $971,000 In 2000 and ($1,091,000) In 1999 The accompanying notes are an Integral part of the financial statements 17 Taxes Municipal Power Agency �a w re a� a y" y ie Tekee MunkiPel Poww Agency TEXAS MUNICIPAL POWER AGENCY NOTES TO FINANCIAL STATEMENTS INDEX 20 Note 1 General Note 2 Summary of Significant Accounting Policies 21 24 Note 3 Restnded Assets 24 Note 4 Investments 25 Note 5 Risk Management Program 26 Note B Long -Term Debt Note 7 Tax -Exempt Commercial Paper Program 27 Note 8 Taxable Commercial Paper Program 28 29 Note 9 Notes Payable Note 10 Employee Benefit Plans 29 Note 11 Commitments and Contingencies 30 19 Texas MU NolPs1 Power Agency zo TEXAS MUNICIPAL POWER AGENCY NOTES TO FINANCIAL STATEMENTS 1 General The Texas Municipal Power Agency (TMPA" or the 'Agencyl was created In July 1975 by concurrent ordinances of the Texas cities of Bryan Denton Garland and Greenville ('Cities" or "Member Cdiesl pursuant to Acts 1975, 64th Leg ch 143, sec 1, now codified in Subchapter C Chapter 163, Utilities Code (the "Act") Under the provisions of the Act, TMPA Is a separate municipal corporation TMPA Is exempt from payment of federal income taxes under Section 115 of the Internal Revenue Code In September 1976 TMPA entered into identical Power Sales Contracts (the 'Contract') with each of the Cities for the purpose of obtaining the economic advantages of jointly financing, constructing and operating large electnc generating units and related facilities to supply the Cities' future energy needs Under the Contract the Cities are required to pay, for the benefits received or to be received by them from such activities an amount sufficient to pay TMPA's operating and maintenance expenses and the Bond Fund, Reserve Fund and Contingency Fund requirements of the Revenue Bond Resolutions (Resolutions) In addition the Cities are obligated to guarantee the payment of TMPA s Bonds (the "Debt Service Guarantee') As originally written in September 1976, the Contract was a requirements contract, which obligated the Cities with certain exceptions to purchase their wholesale electricity requirements from TMPA On November 5, 1997 the Contract was amended Under the amendment the Contract was converted from a requirements contract to a lake -or -pay contract, under which each City is obligated to take or pay for a specified percentage of electricity from TMPA's generating facility Currently those percentages are Bryan 21 7% Denton 21 3% Garland 47% and Greenville 10% The amendment confirmed the Cities obligations explained above, to pay all costs of TMPA The Debt Service Guarantee, contained in the Contract since September 1976 was not changed by the amendment Concurrently with the execution of the amendment on November 5, 1997 a Travis County District Court validated the Contract as amended and confirmed the authority of TMPA to enter into the amendment TMPA operates the Gibbons Creek Steam Electnc Station ("Gibbons Creek") a coal-fired generating plant located in Grimes County Texas with a net generating capability of 462 MW Due to failure of the main step-up transformer on May 4 2000, the unit capacity was reduced to 425 MW on its return to service with a spare transformer (430 MVA) in place on May 27 2000 During the scheduled spring outage in 2001, a new transformer will be put in -place and the unit will again be at full capacity of 462 MWs The plant began commercial operation on October 1 1983 Plant Operations Outsourcing In October 1998, TMPA entered into a temporary contract with Duke/Fluor Daniel ("D/FDI for the management of the operation and maintenance of the Gibbons Creek power plant Under the contract D/FD assigned to Gibbons Creek a management team to directly supervise TMPA employees working in the power production area In September 1999 the Board of Directors authorized the execution of a long-term agreement under which D/FD would continue to manage the operation and maintenance of the power production facility The new agreement executed on January 13 2000, has a five-year term which, unless terminated earlier or renewed, will expire on January 13 2005 The agreement expands beyond plant operations the areas for which DFD has certain management responsibilities to include, among other matters procurement of coal and coal transportation services and the operation and maintenance of TMPA s transmission system The agreement reserves to TMPA the right subject to compliance with certain conditions to terminate the agreement for convenience prior to the end of the five-year term In the event TMPA terminates the Agreement for convenience within thirty (30) days after the end of the third year of the Agreement (or within thirty (30) days after the end of the third year of any renewal tern), TMPA may terminate the Agreement for convenience without payment of any cancellation fee Otherwise in order to terminate the Agreement for convenience prior to the end of the initial term or any renewal term TMPA must pay a cancellation fee as provided for under the Agreement Texas Municipal Power Agency 2 summary of significant Accounting Policies System of Accounts The accounting records of TMPA are maintained substantially Comission accordance with the efU Klass rm System of Accounts prescnbed by the Federal Energy A and Class B Public Utilities and Licensees Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period Actual results could differ from those estimates Measurement Focus QOC1s of Accounting and Saals of Presentation The accounts of TMPA are organized and operated on the basis of account groups in a fund A fund Is an independent fiscal and accounting entity with a self -balancing set of accounts Fund accounting segregates funds according to their intended purpose and is used to aid management TMPA maintains an enterprise fund to account for its operations An enterprise fund is a proprietary fund, which is accounted for on the flow of economic resources measurement focus and uses the accrual basis of accounting Under this method revenues are recorded when earned and expenses are recorded at the time liabilities are incurred Enterprise funds are used to account for operations that are financed and operated in a manner similar to a private business enterprise, where the intent of management is to finance the costs of providing services to the public primarily through user charges Accounting and Financial Reoorlmo Governmental Accounting Standards Board ("GASB") Statement No 20 requires the Agency to apply all GASS pronouncements as well as Financial Accounting Standards Board ("FASB") Statements and Interpretations, Accounting Principals Board Opinions and Accounting Research Bulletins issued on or before November 30, 1989, unless such pronouncements conflict with or contradict GASB pronouncements, with the option to apply non-GASB pronouncements after November 30 1989 Subsequent to such date, the Agency has chosen to apply all GASB pronouncements and no FASB pronouncements GASB Statement No 31 ("GASB 31") 'Accounting and Financial Reporting for Certain Investments and for Extemal Investment Pools", requires investments to be reported at fair value rather than at cost Rates paid by the Member Cities include estimates for realized investment income Therefore the unrealized gain (loss) component of investment fair value changes $308 000 and ($2 371 000) for 2000 and 1999, respectively, for all investments other than Restricted Assets - Risk Management Program, is deferred to future periods in Costs to be Recovered in Future Years on the Statement of Operations and Accumulated Excess Revenues Recognition of investment fair value changes in the Statement of Operations and Accumulated Excess Revenues occurs when the investments mature or are sold Unrealized fair value net gains (losses) deferred as of September 30 2000 and 1999 were ($222,000) and ($530,000), respectively, and are included in Other Assets - Deferred expenses to be recovered in future years on the balance sheets Effective for the fiscal year ending September 30 1998 the Agency adopted GASB Statement No 27, 'Accounting for Pension by State and Local Governmental Employers ( GASB 27")' See Note 10 GASB Statement No 34 ("GASB 34"), 'Basic Financial Statements —and Management's Discussion and Analysis for State and Local Governments' has been enacted and upon implementation will result in financial statement presentation changes, including management discussions and analysis and direct cash flows statement presentation This statement will be effective for the Agency for the penods beginning after June 30, 2001 21 Texas Municipal Power Agency 22 2 Summary of Significant Accounting Policies, Continued Electnc Plant Electric plant, with the exception of mine assets, is stated at historical cost During construction, such cost includes payroll -related costs such as taxes and employee benefits, general and administrative costs and an allowance for funds used in projects Mine related assets of $21 708,000 and $22 326 000 In 2000 and 1999 respectively are included in electric plant and reported at expected realizable value The costs of repairs and minor replacements are charged to operating expenses as appropriate When the electric plant is retired, the original cost thereof and the cost of removal, less salvage, are charged to accumulated depreciation Allowance for Funds Used in Proiect Since inception TMPA capitalized to electric plant approximately $130 788,000 of the interest cost funded through bond proceeds The amount of Interest capitalized will be recovered in future years by setting rates sufficient to provide funds for the related debt service requirements TMPA has not capitalized Interest cost during 2000 and 1999 Deoreciation Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of plant, not to exceed the tens of the Agency long-term debt Useful lives of generating facilities range from 12 to 35 years Useful lives of other utility plant components range from 5 to 20 years Annual depreciation provisions expressed as a percent of average depreciable plant were approximately 21% in 2000 and in 1999 Depreciation expense aggregated $17,637,000 and $17,642 000 in 2000 and 1999, respectively Investments Investments are stated at fair value, and consist primarily of United States ('U S' Government and Agency obligations and prime commercial paper issues The Agency Invests in commercial paper with a Standard & Poor's rating of *Al' or Moody's rating of'P-1' The Agency's investment manager, First Southwest Asset Management, Inc, obtains market prices on U S Government and Agency instruments from Interactive Data Corporation ('IDC') These quotes reflect last transaction prices for a database of U S Government Treasury and Agency securities Market prices for commercial paper issues are determined by comparison to similar issues as found on Bloomberg Financial Markets System Inventone Fuel stock and materials and supplies inventories are valued at cost, using weighted average methods Rates TMPA's rates for power and energy billed to the Cities are designed to cover annual system costs as defined in the Resolutions and the Contract In general costs are defined to include TMPA's costs of operations (except for depreciation and amortization), 125 times debt service requirements, and certain renewals and replacements It is the Agency's practice to budget approximately 130 times debt service requirements The rates are set by the Board of Directors annually and are required to be reviewed on an annual basis TMPA's practice is to periodically refund accumulated excess revenues to the Cities to the extent of available funds after debt service coverage has been met Revenues Revenues from the sale of electricity are based upon two components as agreed to by the Member Cities The two components are (q demand and 0) energy The demand component is a fixed amount established for the fiscal year which is recognized ratably throughout the year The energy component is based on a per -unit generation amount and is recognized as generation occurs Transmission Revenues are pnmanly determined by the Electric Reliability Council of Texas ('ERCOT') annually based on regulatory filings and are recognized ratably throughout the year by the Agency Texas Municipal Power Agency 2 Summary of Significant Accounting policies, Continued Deferred Expenses to be Recovered in Future Years TMPA is subject to the accounting requirements of FASB Statement No 71 'Accounting for the Effects of certain Types of Regulation " Accordingly, certain costs may be capitalized as a deferred asset that would otherwise be charged to expense Such deferred assets are recorded when it is probable that future revenue in an amount at least equal to the capitalized costs will result from Inclusion of those costs in future rates Types of costs deferred include depreciation in excess of bond principal payments Included In rates zero coupon bond Interest debt issuance costs losses resulting from debt restructuring, mine related equipment lease termination costs and estimated mine area reclamation costs Recovery of costs will be through rate components such as debt service principial extendalton2018rest, renewfor debt servicereplacements comp nentstable 2008rforropaper Recovery periods taxabecomme al paper components, and are estimated to 2004 for renewals and replacements components Renewals and Replacements In accordance with the Resolutions and the Contract the balance of excess revenues is charged with the cost of certain renewal and replacement assets and identified operating and maintenance projects after all required deposits Into restricted funds have been made The original cost of assets is capitalized in electric plant in service and an offsetting contra account is established to reflect the current cost recovery of these items TMPA rates billed to the Cities are designed to cover renewals and replacements Renewals and replacements funding not utilized in the current year is carried forward for future capital projects During 2000 and 1999 excess revenues were charged with $3,042,000 and $3,531,000. respectively for renewals and replacements At September 30 2000, $3,871,000 was carried forward as amounts included in rates for renewals and replacements but not yet spent See Note 11 H for 2001 estimated capital expenditures Debt Related Costs Bond discounts are being amortized over the terms of the related bond issues under the interest method Issuance expenses for all issues after 1985 are amortized using the straight-line method, which approximates the interest method, over the tens of the bond issue Statements of Cash Flows For purposes of the Statements of Cash Flows the Agency considers all highly liquid investments with original maturities of three months or less to be rash equivalents Accumulated Excess Revenues During 2000 and 1999 the Board of Directors reserved Accumulated Excess Revenues for various specified purposes These purposes include reserves for construction or renovation and risk management funds retained for self-insurance The Construction Project Reserve was established in 1986 to help reduce borrowings for capital projects The funds were collected in rates and reserved for future capital projects by specifically segregating the applicable portion of accumulated excess revenues All funds collected in rates have been spent on approved capital projects The $12,156,000 Construction Project Reserve ('CPR's balance represents funds spent for capital The CPR will be depleted when hprojects funded prects are fulldepreciated the CPR is relieved y depreciated at d One of the provisions of Senate Bill 7 ("SB 7") authorizes the Agency at its option to use a methodology for establishing Its transmission cost of service which takes into consideration the Increasing debt service requirements of the Agency by levelizing Its transmission cost of service ("TCOS') The tevelized TCOS results in the Agency receiving in some years transmission revenues over and above the revenues it would have received under the standard methodology (the 'Additional Revenues") Senate Bill 7 requires that, to the extent the levelized TCOS results in Additional Revenues the Additional Revenues must be used to reduce the debt of the Agency Pursuant to this provision of Senate Bill 7 the Agency applied for and on December 13 2000 received from the Public Utility commission of Texas ('PUCT") an order revising the Agency s TCOS 23 Taxes Municipal Power Agency 2 Summary of Significant Accounting Policies, Continued While the Agency does contend that some errors were made by the PUCT in applying the provisions of Senate Bill 7 the PUCT s order which is presently subject to a motion for rehearing filed by the Agency, does result in Additional Revenues which must be used for debt retirement In anticipation of this order becoming final and the receipt of the Additional Revenues the Agency has established a Debt Retirement Reserve for purposes of accounting for the Additional Revenues Per provisions of the November 5 1997 Power Sales Contract amendment, the Risk Management Reserve and certain unreserved excess revenues are not available for refund to the Cities The Contract amendment provides for a cap relating to the amount of surplus funds to be retained by the Agency after 1998 As of September 30 2000, no excess revenues above the cap were available for refund to the Cities The aggregate amounts of reserved Accumulated Excess Revenues at September 30 are as follows Construction Project Reserve Debt Retirement Reserve Risk Management Reserve Total 3 Restricted Assets 2000 1999 (Dollars in Thousands) $12 156 $12,803 1 992 5.470 6,857 $1 618 $19.eso Restricted assets include those assets comprising the Bond Reserve, Contingency, Risk Management Program and Special Restricted funds if any, which are pnncipally established and maintained pursuant to the Resolutions Substantially all assets in the Bond and Reserve funds are available only to meet the principal and interest payments on the Revenue Bonds Assets in the Contingency fund are for use in paying extraordinary or unusual costs Assets in the Risk Management fund are available to pay certain claims and losses and to reimburse the Agency for certain administrative costs of the Risk Management Program The aggregate amount of assets in each of these as of September 30 is as follows Bond fund Reserve fund Contingency fund Risk Management Program Total 4 Investments 2000 19999 (Dollars in Thousands) $ 7 398 $ 7 005 101,953 101,975 2,028 2,030 731 11,741 $1 4 110 $ The Agency's portfolio is invested in fixed income securities as approved in the Bond Resolution and Contracts These investment securities include U S Treasury obligations U S Government Agency and government -sponsored corporation obligations and commercial paper For short-term needs and other market considerations, the Agency uses repurchase agreements consisting of investment securities whereby the Agency will resell at its cost plus accrued interest, the securities at specific future dates All investment securities are safekept in the New York Federal Reserve Bank In the depository institution's separate custodial account for TMPA or in a third -party safekeeping bank Securities underlying the repurchase agreement are safekept with Chase Manhattan Bank under a in - party agreement with Credit Suisse First Boston Corporation 24 Texas Municipal power Agency 4 Investments, Continued All of TMPA's investments are registered or held by TMPA or Its Agent in TMPA's name The fair value of the Agency's Investment portfolio by security type at September 30 is as follows 2000 L (Dollars in Thousands) U S Treasury obligations U S Government Agency & Government - Sponsored Corporation obligations Commercial Paper Repurchase agreements Total Fair Value Far 1B $ 25 502 $ 29 455 97 581 99 099 12 437 5,932 10,335 23,588 $ 145= E 159-052 Deposits The Bond Resolution requires that deposits be placed in a bank or trust company organized under the laws of the State of Texas or a national banking association located within the State of Texas Deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to the statutory limit of $100.000 and additionally collateralized by $11,000,000 of securities Securities that may be pledged as collateral are limited to obligations of the United States and its agencies and state obligations rated "A" or better by Moody's or Standard and Poors The pledged collateral is held in the Federal Reserve Bank of New York under a joint safekeeping account with the Agency's deposit institution Risk Management Program The Risk Management Program was established in July 1987 and funded through the sale of $20,480,000 Series 1987A Revenue Bonds These bonds were refunded by the Series 1993A bonds, which matured September 1 1997 The Risk Management Program extends through July 2008 The initial capitalization requirements were determined on an actuarial basis and each year an actuarial study is prepared by a professional actuary In addition to the initial funding, TMPA has purchased commercial insurance to cover certain property and liability risks The Risk Management Program does not include health and dental care coverage described in Note 10 TMPA is exposed to various risks of loss related to torts, theft of, damage to, and destruction of assets errors and omissions, injuries to employees, and natural disasters Under the Board Resolution establishing the Risk Management Program, withdrawals for the payment of claims (exclusive of defense costs which are not covered by any maximum on withdrawals from the fund) may not exceed maximum amounts as follows Type of Claim corporate general liability claims ansing from one occurrence Assumed general liability claims ansing from one occurrence Aggregate of corporate and assumed general liability claims per fiscal year Property losses ansing from one occurrence Aggregate of property losses per fiscal year Maximum Amount $1 million $1 million $ 3 million $ 5 million $5 million, or such larger amount that does not render the Program actuanally unsound 25 Taxes Municipal Power Agency 29 5 Risk Management Program, Continued Any claims or damages above self -Insured amounts are covered by commercial insurance Settled claims have not exceeded the self -insured maximum amount There were no changes in the level of commercial insurance from the previous year There were no settlements in 2000 or in 1999 that exceeded insurance coverage Effective October 1, 1995, the Agency adopted GASS Statement No 30, 'Risk Financing Omnibus ('GASB 30") which amends GASB Statement No 10 'Accounting and Financial Reporting for Risk Financing and Related Insurance Issues ( GASB 10") GASB 10 requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount can be reasonably estimated GASB 30 further requires that claims liabilities include specific, incremental claim adjustment expenditures/expenses In addition estimated recoveries or settled and unsettled claims should be evaluated and deducted from the liability for unpaid claims The Agency has included a liability of $6 512,000 in the restricted accounts payable balance at September 30 2000 based on the requirements of GASB's 10 and 30 Changes In the claims liability amount for 2000 and 1999 were as follows Beginning Claims and Changes Claim Ending Fiscal Yen Liabili In Estimates Payments Liablliri (Dollars In Thousands) 2000 $4,666 $3,103 ($1,257) $6,152 1999 $9 497 ($2,440) ($2,391) $4,866 6 Long -Tenn Debt Revenue Bonds outstanding as of September 30 are as follows Range of Earliest Amount Outstanding Maturing Interest Rates Redemption Series 2000 1999 From To From To at (Dollars in Thousands) 1987 $ 49 255 $ 49 255 2012 2013 5 600 5 500 2000 1989 85,632 100 807 2003 2012 7200 7 350 2000 1991A 59,340 62,450 2001 2012 6 500 6 750 2001 1992 105 425 105,425 2001 2007 5 600 6 100 2002 1993 519 495 541,810 2001 2017 4 800 6 150 2003 1994 164.700 165.520 2001 2014 4 300 5 000 2004 Total $ 983.847 $ Lu,§ sz The Bonds are subject to optional redemption prior to their scheduled maturity date at prices from 100% to 102% The Bonds are payable solely from and are collateralized by, an irrevocable first lien on the net revenues of TMPA and the funds established by the Bond Resolutions Zero coupon interest payable of approximately $187 282,000 through September 30 2000 will be recovered through the debt service interest component beginning in 2002 Debt service requirements for the revenue bonds for the next seventeen years as of September 30 2000 are as follow Texas Municipal Power Agency 6 Long -Tenn Debt, Continued Principal Interest Total (Dollars In Thousands) 2001 $ 48,585 $ 40,116 $ 88,701 2002 55,980 37,548 93,528 2003 57 215 41,139 98 354 2004 48 955 54,227 103,182 2005 54 862 53,143 108,005 2006 61272 51,555 112,827 2007 68,037 49 621 117 658 2008 75 606 46 879 122,485 2009 78,511 43,989 122,500 2010 81,633 40 880 122,513 2011 85,082 37,441 122,523 Y012 88,954 33,853 122.807 2013 48,491 74 264 122.755 2014 39 689 83 085 122,754 2015 32186 91114 123,300 2016 30 295 93 005 123,300 2017 28 514 94,786 123,300 The Resolutions contain certain restrictions and covenants including TMPNS covenant to establish and maintain rates and other charges to produce revenues sufficient to pay operating and maintenance expenses (exclusive of depreciation and amortization), to produce net revenues sufficient to pay the amounts required to be deposited In the debt service funds, and to produce net revenues equal to at least 1 25 times the annual debt service to be paid for the then outstanding bonds Bond Refundmas TMPA has six refunding bond issues outstanding - the 1987, the 1989, the 1991A, the 1992, the 1993, and the 1994 Series Refunding Revenue Bonds Proceeds from the refunding bond Issues are irrevocably deposited with escrow agents and used to purchase U S Government obligations which will mature at such time and yield interest at such amounts so that sufficient monies are available for payment of principal and interest on the refunded bonds when due Al September 30, none of the defeased bonds amounting to approximately $259,830,000 in 2000 and $278,705,000 In 1999, are included in TMPA s outstanding long -tens debt 7 Tax -Exempt Commercial Paper Program TMPA is authorized to Issue tax-exempt commercial paper In the principal amount not to exceed $180,000,000 The tax-exempt commercial paper notes (the Series 1991 Notes) are issued In denominations of $100,000 or more with maturities not to exceed 270 days from date of Issue The final maturity date for the Series 1991 Notes cannot extend beyond September 1 2018 interest rates during 2000 ranged from 2 95 percent to 6 05 percent Texas Municipal Power Agency V 2e 7 Tax -Exempt Commercial Paper Program, Continued Under the Resolution, the Series 1991 Notes are special obligations of the Agency payable from and collateralized by proceeds from the sale of Bonds proceeds from the sale of Commercial Paper Notes (the Series 1991 Notes and the Series 1998 Notes as descnbed below) Issued pursuant to the Resolution or other obligations issued pursuant to the provisions of law, and amounts held in the Note Payment Fund and Note Proceeds Account further, the Series 1991 Notes shall be collateralized by a pledge of net revenues subordinate in all respects to the pledge in favor of the Bonds TMPA agrees and covenants that at all limes it will maintain credit facilities with banks in amounts sufficient to pay principal on the Series 1991 Notes Under the terms of a revolving credit agreement with Morgan Guaranty Trust company of New York, The Chase Manhattan Bank and Bank of America, TMPA may barrow up to $180,000,000 on a revolving basis until April 15, 2001 There were no borrowings under this agreement in the fiscal year ended September 30, 2000 Under this agreement TMPA pays a commitment fee of 20% per annum on the unused portion of the banks' commitment and is obligated to pay Interest on any borrowings at the base rate as defined in the agreement (9 50% at September 30, 2000), with a maximum rate not to exceed that allowed by law Effective on January 29, 2001 the revolving credit agreement was superseded and replaced by a new revolving credit agreement with Morgan Guaranty Trust Company of New York the Chase Manhattan Bank and Bayensche Landesbank, New York Branch Under the new revolving credit agreement which terminates, in the case of The Chase Manhattan Bank on October 15, 2001, and in the case of the other banks on January 15 2002, TMPA may borrow up to $180,000,000 on a revolving basis Under the new agreement, TMPA pays a commitment fee of 275% per annum on the unused portion of the banks commitment and is obligated to pay interest on any borrowings at the base rate as defined in the agreement, with a maximum rate not to exceed that allowed by law Taxable Commercial Paper Program In February 1998 the Agency Issued new taxable commercial paper in the principal amount of $43,000,000 (the Series 1998 Notes") Proceeds were used to pay $22 300,000 principal outstanding and retire previously existing notes and to obtain ownership of the Lot 29 dragllne from General Electric Credit Corporation by purchasing the assets at "termination value" as defined in the leveraged lease The taxable commercial paper notes are issued in denominations of $250,000 or more with maturities not to exceed 270 days from date of issue The maximum maturity date of the Series 1998 Notes is September 1, 2008 Of the $29 200 000 outstanding, $2,900 000 is scheduled by the Agency for 2001 repayment and is therefore classified as a current liability in the accompanying balance sheet Interest rates during 2000 ranged from 5 85 percent to 6 92 percent Under the Resolution, the Series 1998 Notes are special obligations of the Agency payable from and collateralized by proceeds from the sale of Bonds proceeds from the sale of commercial paper notes (the Series 1991 Notes and the Series 1998 Notes) issued pursuant to the Resolution or other obligations issued pursuant to the provisions of law and amounts held in the Note Payment Fund and Note Proceeds Account, further the Series 1998 Notes shall be collateralized by a pledge of net revenues subordinate in all respects to the pledge in favor of the Bonds TMPA agrees and covenants that all times 0 will maintain credit facilities with banks In amounts sufficient to pay principal on the Series 1998 Notes Under the terms of a revolving credit agreement with Bank of America which terminated on December 20 2000 TMPA was authorized to borrow up to such principal and interest amounts on a revolving basis until February 10 2001 There were no borrowings under this agreement in the fiscal year ended September 30, 2000 On December 20 2000 the agreement with Bank of America was terminated by mutual agreement Concurrently with such termination TMPA entered into a revolving credit agreement with Bayensche Landesbank, New York Branch which similarly authorizes TMPA to borrow up to such principal and interest amounts on a revolving basis until December 19 2001 Texas Municipal Power Agency Taxable Commercial Paper Program, Continued Under the revolving credit agreement with Bank of America, TMPA paid a commitment fee of 1875% per annum on the unused portion of the bank's commitment and was obligated to pay interest on any Base Rate Loans at the base rate, as defined in the agreement (9 5% at September 30, 2000), with a maximum rate not to exceed that allowed by law Under the revolving credit agreement with Bayensche Landesbank New York Branch TMPA Is obligated to pay a commitment fee of 275% per annum on the unused portion of the bank's commitment and Is obligated to pay Interest on any Base Rate Loan at the base rate, as defined In the agreement, with a maximum rate not to exceed that allowed by law Notes Payable The Act permits TMPA to Issue non-negotiable purchase money notes, payable In installments (collateralized by the properties being acquired) In order to acquire land or fuel resources At i September 30, 2000 these notes totaled $410,000 bearing interest at rates between 5 0% and 8 0% Note payment requirements for each of the years ended September 30 2001 through 2006 are $139,000, $119,000 $89,000, $31,000, $16 000 and $16,000 respectively lot Employee Benefit Plans Defined Contribution Plan TMPA has a defined contribution retirement plan covering all full-time employees which provides for TMPA to contribute an amount equal to 10% of gross wages to a thud party trustee for the benefit of plan participants Cthe Plan') Chapter 810, Government Code and other state laws relating to political subdivisions such as the Agency, authorize the establishment and amendment of a pension plan by the Agency's Board of Directors The Plan Is administered by the TMPA Employees Pension Plan Administrative Committee Employees may contribute on a voluntary basis an additional amount up to 10% of earnings Participants are Immediately vested In their voluntary contributions plus actual earnings thereon Vesting In the remainder of their accounts Is based on years of continuous service A participant becomes vested in the Plan at 20% per year of credited service up to 100% Retirement plan costs for 2000 and 1999 were as follows 2000 L 1999 Y: (Dollars In Thousands) Agency's total payroll $ 7 240 - $ 6,983 Agency's covered payroll $ 7 171 100% $ 6 921 100% Agency s contribution $ 717 10% $ 692 10% Employees' contribution $ 67 1% $ 74 1% GASS 27 requires that employers with defined contribution plans recognize annual pension expense equal to their required contribution, which is the current practice of the Agency Loan provisions were established in 1999 In general, employee loans from the employee's employer contribution account (Account) may not exceed the lesser of $50 000 or 50% of the present value of the employee's vested Account Loan repayment is generally within a 1 to 5 year tlmeframe with specific use qualifications for payback penods up to fifteen years Loan interest rates are established according to loan provision guidelines Deferred Comoensation Plan In November 1997, the Board of Directors adopted an Internal Revenue Code Section 457 deferred compensation plan for Agency employees This plan Is In the form of the ICMA Retirement Corporation Deferred Compensation Plan and Trust The ICMA Retirement Corporation administers the deferred compensation plan The funds held under this plan are invested in the ICMA Retirement Trust, a trust established by public employers for the collective investment of funds held under their retirement and deferred compensation plans The Agency serves as trustee for the plan with the General Manager as the coordinator 29 Texas Municipal Power Agency 10 Employee Benefit Plans, Continued Employees may contribute up to 25% of predeferral taxable income or $8 000 whichever is less Employees direct the investment allocation contributions and payout option of their individual plans Participants at year-end totaled 39 and 35 and participant contributions were $110,000 and $97,000 for 2000 and 1999, respectively Post Retirement Procram The Agency has a post retirement benefit program which covers all full-time, regular employees for which related costs are recorded on a pay-as-you-go basis Employees are eligible for normal retirement at age 65 or early retirement at age 55 when age plus years of service equals 80 Benefits for the retirees consist of medical dental and life insurance coverages For active and retired employees the Agency pays 100% of the cost of life Insurance, 90% of the cost for employee medical and dental benefits and 33% of the cost for dependent medical and dental benefits The coverages are maintained at the same level except when the retiree reaches age 65 at which time the life Insurance coverage is reduced to 65% of the covered amount and at age 70 is reduced to $2,000 At age 65 Medicare becomes the pnmary medical camer for the retiree and the Agency's plan becomes secondary The program was instituted by Agency management policy and is currently administered by Agency management The Agency accounts for and funds the costs of such benefits as they are Incurred Additional post retirement benefit program Information as of September 30 is as follows 2000 L Retired participants 38 36 Costs Incurred $295 823 $211,038 Medical and Dental Benefit Effective December 1, 1991 the Agency began self -Insuring medical and dental benefits The Agency's medical and dental plan, which is not a component of the Agency's Risk Management Program, is administered by a third party administrator Both individual and aggregate catastrophic risks are protected through commercial reinsurance contracts Prescription drug claims are included in the reinsurance contracts Individual medical claims are currently remsured for paid losses above $60,000 per covered individual per year The Agency's aggregate liability for medical benefits above $1 170,900 per year is also reinsured Losses relating to these claims are recorded based upon the Agency's estimates of claims to be paid for the penod as well as a provision for recording claims incurred but not reported Estimated medical and dental claims liability is a component of current liabilities accounts payable Estimated claims liability at September 30, 2000 and 1999 was $324,000 and $80 000 respectively Changes in the claims liability amount for 2000 and 1999 were as follows Beginning Claims and Changes Net Claims Participant Ending Fiscal Year Liability In Estimates Payments Contribution Liabill 2000 $80,000 $1 763 000 ($1 305,000) ($214,000) $324,000 1999 $89 200 $1 087 800 ($889,000) ($208,000) $80,000 Incentive Plan In 2000, TMPA adopted an incentive -based compensation plan for which participants may receive additional income based upon the achievement of certain performance goals 11 Commitments and Contingencies A In connection with a court settlement entered into on July 19, 1978, TMPA is obligated to make certain payments to Grimes County and three school districts as long as the Gibbons Creek station is in operation The aggregate amount of these payments was $648 000 and $651,000 in 2000 and 1999 respectively 30 Texas Municipal Power Agency 11 Commitments and Contingencies, Continued B During fiscal 1995 the Agency authorized the conversion of its fuel source from locally -mined lignite to sub -bituminous coal from the Powder River Basin ("PRB") The Agency commenced construction of the necessary rail spur and receiving operation in fiscal 1995 and converted to PRB in fiscal 1996 In connection with this conversion, certain of the Agency's plant and mine -related assets were impaired Impaired assets have been written -down to their net realizable value In addition, the Agency recorded an accrual for reclamation costs related to the lignite mine operations The approximate amount of lignite related termination costs recorded for 2000 and 1999 were as follows 2000 L (Dollars in Thousands) Wnte-down of mine development $ 9 650 and other related assets 7 385 Reclamation $ $ 10.035 Lignite termination costs include accruing for expenditures to be incurred in the future, the writedown to net realizable value of lignite related assets and current year accruals for mine area reclamation For lignite termination costs expected to be fully recovered in future years, the charges against earnings of $7,000 in 2000 and $10,035 000 in 1999 have been offset with an increase in deferred expenses in the balance sheet and a related credit to the respective statement of operations C 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 is obligated to provide rail transportation for the coal purchased by TMPA from the PRB in Wyoming The agreement is scheduled to expire on March 31 2001 TMPA pursued negotiations with BNSF through the summer of 2000 but was unable to secure a satisfactory new or extended contract arrangement to take effect upon expiration of the 1995 agreement Therefore, in July 2000, TMPA formally requested BNSF to establish rates and terms for common comer coal transportation service to Gibbons Creek, in both shipper and comer - supplied railcars, effective at the conclusion of the current contract in August 2000, BNSF gave a partial response by quoting a common comer rate in cars supplied by BNSF TMPA considered this rate to be unacceptable, and in October 2000 petitioned the federal Surface Transportation Board (STB) to compel BNSF to set reasonable rates for the Gibbons Creek service in both comer -supplied and shipper -supplied railcars A final decision by the STB is expected by February 2002 In the meantime, TMPA will use the common comer rate and service quoted by BNSF as necessary to transport coal once the current contract expires, subject to appropriate adjustments and, as applicable, reparations payments by BNSF once the STB determines the proper rate D In January 1998 the Agency entered into an agreement with Kennecott Energy Company for a 35-month supply of coal from the Powder River Basin in Wyoming The agreement, which expired on December 31, 2000, provided that the coal would be supplied at the direction of the Agency from the Antelope Mine the Cordero Rojo Complex (consisting of the Cordero Mine and the Cabello Rojo Mine) or both In regard to coal supply commencing on January 1 2001, TMPA and Kennecott Energy Company in November 2000, entered into a new coal supply agreement The new agreement which provides for a 36-month supply of coal from the Powder River Basin, expires on December 31, 2003 The sources of coal under the new agreement are the Cordero Rojo Complex and the Jacobs Ranch Mine 31 Texas Municipal Power Ageney ]2 11 Commitments and Contingencies, Continued E In January 1979, TMPA entered into a transmission agreement with Texas Utilities Electric Company (TU Electric) (currently known as TXU Electric Company) (the Transmission Agreement) The Transmission Agreement provided for the transmission of Power and energy from Gibbons Creek, utilizing portions of TU Electric's transmission facilities The Transmission Agreement required payments to be made by TMPA to TU Electric based on levels of transmission plant investments In 1995 the Texas Legislature amended the Public Utility Regulatory Act to promote the development of wholesale competition by imposing certain open access requirements on transmission providers Also, in February 1996 the Texas Public Utility Commission ('PUCT adopted new rules under which the PUCT intended to adopt open access Electric Reliability Council of Texas ('ERCOT') wide transmission rates each calendar year commencing on January 1 1997 (as amended the *PUCT Transmission Rules') In adopting the PUCT Transmission Rules the PUCT requested and encouraged all ERCOT utilities to revise existing transmission agreements to conform to the PUCT Transmission Rules In accordance with such request TMPA and TU Electric, on January 19, 1999 entered into an agreement, which provided for the interconnection of transmission facilities between TMPA and TU Electric (the "Interconnection Agreement's The Interconnection Agreement provides for, among other things the termination of the Transmission Agreement and the refund of amounts paid by TMPA under the Transmission Agreement for transmission services provided by TU Electric on and after January 1, 1997 As a result of the Interconnection Agreement, the provision and pricing of transmission service are governed by the PUCT Transmission Rules retroactively to January 1, 1997 The Interconnection Agreement provides, however, that in the event open access requirements are invalidated as a result of judicial action or as a result of statutory changes, and the provision of transmission services is no longer required in the absence of agreement TU Electric will unless the parties otherwise agree, provide transmission services for TMPA under the same pricing, terms and conditions as set forth in the Transmission Agreement In August 1999, the Texas Court of Appeals in Austin Texas, rendered a decision in a case involving a challenge against the PUCT Transmission Rules by the City of San Antonio and Houston Lighting & Power Company (the 'San Antonio Case's In the decision the Court of Appeals invalidated the pricing provision contained in the PUCT Transmission Rules on the grounds of lack of statutory authonty Currently, the San Antonio Case Is pending in the Texas Supreme Court While this matter is pending in the Texas Supreme Court, the provision of transmission services by TU Electric to TMPA is governed by the PUCT Transmission Rules The Court of Appeals decision in the San Antonio Case does not appear to affect the open access provisions in the Public Utility Regulatory Act which require ERCOT transmission providers to provide transmission service to ERCOT transmission customers Nor does the decision appear to affect the pricing provisions of the PUCT Transmission Rules after September 1 1999 TMPA will continue to monitor the San Antonio Case and should be able to evaluate the effects if any on TMPA after a decision by the Texas Supreme Court is rendered Between January 1, 1992 and December 31 1995, wholesale electric service to the City of College Station was provided by the Cities In September 1995 after College Station made the decision to switch suppliers to TU Electric, commencing on January 1, 1996 College Station requested proposals from the Agency and Bryan to provide the wheeling services necessary to effectuate the purchase of electricity from TU Electric After proposals were submitted in November 1995 a dispute arose concerning the appropriate rates and terms of service In December 1995 College Station brought proceedings against the Agency and Bryan in Federal District Court and at the FERC Shortly thereafter related proceedings were initiated in the PUCT, and in the District Courts of Brazos County and Travis County Since January 1 1996 the transmission facilities of the Agency and Bryan have been used to provide wheeling service to College Station In March 1997, the PUCT adopted an order establishing interim rates during the pendency of the FERC proceeding Under that order the Agency was paid approximately $4 2 million for transmission services provided to College Station in calendar year 1996 Texas Municipal Power Agmcy 11 Commitments and contingencies, Continued For calendar year 1997 and subsequent calendar years the order requires the Agency to provide service under the PUCT Transmission Rules The PUCT Transmission Rules include a three- year transition mechanism, which precludes TMPA from recovering its transmission cost of service from to 01 Under services provided to all ERCOT transmission 0 utilities the Agency recorded nelthose rules reeip s of$1 380 000 intransmission $3,990,000 in 1998, $7,190,000 in 1999 and $16,230 000 in 2000 At issue in the FERC proceeding is the validity of the three-year transition mechanism in the PUCT Transmission Rules Under the transition mechanism, as indicated above the Agency could not receive as full cost of transmission service until calendar year 2000 TMPA is arguing in this proceeding that the three-year transmission mechanism is contrary to Federal law and that College Station should be required to share with the Member Cities in the costs of the shortfall resulting from the transmission mechanism, which shortfall is now allocated only to the Member Cities under the Power Sales Contract In February 1999 the FERC issued a decision which mirrored the Interim rate order of the PUCT The FERC order requires TMPA to provide transmission seance in accordance with the pricing provisions of the PUCT Transmission Rules The FERC proceeding is still pending on motions for rehearing filed by TMPA and Bryan Sine the San Antonio Case (see Note 11 E ) is relevant to the issues raised in the FERC proceeding TMPA has filed with the FERC a copy of the decision in the San Antonio Case and has urged that decision as an additional ground for reversing its February 1999, order This proceeding is not expected to have a material impact on the Agency's financial position operating results or cash flows G In July 1997 and July 1998, the Agency s Board of Directors adopted rates which were designed to cover among other costs the transmission costs incurred under the PUCT Transmission Rules and associated with the delivery of Gibbons Creek power to the Member Cities (the 'Transmission Costs? The City of Bryan opposes the inclusion of the Transmission Costs in the Agency's rates, and has argued that such inclusion violates the Power Sales Contract and the PUCT Transmission Rules In May 1998, Bryan began to withhold from its payments to the Agency, and to deposit in an escrow account, an amount considered by Bryan as constituting its share under the Power Sales Contract of the Transmission Costs The aggregate amount withheld by Bryan at September 30, 2000 was $5,534 000 In July 1998, Bryan filed a complaint at the PUCT against the Agency, and the Cities of Denton Garland and Greenville, complaining that the inclusion of the Transmission Costs in the Agency s rates violates the PUCT Transmission Rules In November 1998 the Agency filed a lawsuit against Bryan in State District Court in Grimes County Texas In the lawsuit the Agency seeks a declaratory judgement in relation to the validity of its rates under the Power Sales Contract as well as recovery of the Escrowed Amounts In May 1999 an Administrative Law Judge assigned to hear Bryan s complaint at the PUCT issued a ruling dismissing Bryan's complaint for lack of jurisdiction In July 1999, the PUCT reversed the Administrative Law Judge holding that the PUCT does have jurisdiction and deciding the ments of the dispute in Bryan s favor In September 1999 TMPA appealed the ruling of the PUCT to State District Court in Travis County, Texas, where it is now pending To date, no hearings have been held in either the Grimes County District Court case or in the Travis County District Court case, and no hearings have been scheduled As a result of the provisions of Senate Bill 7, the PUCT effective September 1 199Because, established under this new transmission etas based on a 100% postage stamp methodology methodology the cost of transmission service allocated to Bryan is the same regardless whether or not TMPA includes such charges in its budget and rates to the member Cities, the dispute has became moot from an economic perspective and the parties including the member Cities, are consequently engaged in settlement discussions concerning resolution of the various litigation proceedings Although the final provisions of a settlement document have not yet been agreed upon the parties have tentatively agreed on an amount by which Bryan s escrow account should be adjusted for the period prior to October 1 2000 33 Tows Municipal Power Agemy 34 11 Commitments and Contingencies, Continued These proceedings are not expected to have a material impact on the Agency s financial position operating results or cash flows H The Capital Improvement Plan a detailed cost estimate of projects for 2001 and proposed capital expenditures through 2010 includes authorization for estimated expenditures of $25 002 000 in 2001 1 Financial instruments that potentially subject the Agency to a concentration of credit risk principally consist of cash, Investments and trade receivables The Agency places its cash and investments, which include U S government backed securities and collateralized certificates of deposit with high credit quality financial institutions Concentrations of credit risk with respect to trade receivables are limited due to the fact that substantially all receivables are due from municipalities J In connection with the Gibbons Creek Lignite Mine, the Agency is self -bonded for approximately $8 000 000 and has irrevocable letters of credit in the amount of approximately $27 444,000 outstanding which ensure that the Agency will reclaim all lands disturbed by mining operations in accordance with all applicable Federal and State laws relating to surface mining K The Agency is a party to various lawsuits from time to time which anse during the normal course of business In the opinion of management, the potential claims against the Agency from these lawsuits would not materially affect the Agency s financial position results of operations, or cash flows L The 7dh Texas Legislature enacted legislation, Senate Bill 7 implementing retail competition in the electric utility industry commencing on January 1, 2002 Although participation by investor owned utilities in retail competition is required, participation by municipally owned utilities is on a voluntary basis Utilities which participate in retail competition including municipally owned utilities which decided to participate in retail competition, are authorized to recover stranded costs and may utilize secuntization provisions contained in the legislation Several provisions in Senate Bill 7 pertain to municipal power agencies One of these provisions (the "Debt Retirement Provision") provides that agencies such as TMPA shall "set as an objective the extinguishment of the agency's debt by September 1 2000", and further provides that, in the event the objective is not met TMPA must "provide detailed reasons to the electric utility 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 the 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 of TMPA established a Debt Retirement Committee to study and to recommend to the Board options for achieving the objective of extinguishing TMPA's debt Based on the work of the Committee, the Board in October 2000 caused to be prepared and submitted to the Joint Committee on Oversight of Electnc Utility Restructuring (I e the electric utility restructuring legislative oversight committee referred to in SB 7) the report required by the Debt Retirement Provision The report in addition to explaining the reasons why TMPA was not able to extinguish all of its debt by September 1 2000 identified the options explored by the Committee and available to TMPA to reduce TMPA's debt service requirements in the future Senate Bill 7 also contains provisions which provide assurance that the legislation will not "interfere with or abrogate the rights or obligations of parties to a contract with a municipally owned utility" In light of such assurance in the legislation, relevant provisions of TMPA s enabling legislation the judicial validation of the Power Sales Contract in 1997, and other pertinent considerations TMPA is of the view that Senate Bill 7 will have no adverse Impact on the Member Cities obligations to TMPA under the Power Sales Contract and therefore is not expected to have a material impact on TMPA's financial position, operating results or cash flows Texas Municipal Power Agency 11 Commitments and Contingencies, Continued M in November 1997, TMPA was Informed that the City of Denton had employed a consultant to assist it in soliciting proposals for the sale of Denton s interest in Gibbons Creek Subsequent to that dale, the City of Denton has engaged other consultants, and has participated in several efforts, to solicit proposals for the sale of its interest in Gibbons Creek Pursuant to Slate law any sale of all or a portion of Gibbons Creek would require the approval of TMPA's Board of Directors In addition, as a result of the Power Sales Contract, the approval of each Member City would also be required Given the early stages of these developments the effort to sell Denton's interest in Gibbons Creek is not expected to have a matenal impact on TMPA's financial position, operating results or cash flows 35 Taxes Munimpal Power Agency APPENDIX B INFORMATION REGARDING UTILITY SYSTEMS OF THE CITY OF BRYAN B I THE CITY OF DENTON B-4 THE CITY OF GARLAND B 10 THE CITY OF GREENVILLE B-14 The following balance sheets and operating results for each of the Cities have been condensed from the respective Cities audited financial statements by the Agency and reviewed by the Cities However, these financial statements have not been examined by independent public accounts and are incomplete in that relevant footnotes income statements and statements of changes in financial position are not presented as would be required for a presentation in accordance with generally accepted accounting principles CITY OF BRYAN THE CITY The City of Bryan Texas is a political subdivision and municipal corporation of the State located in Brazos County Texas The City encompasses approximately 32 3 square miles The City's estimated population for 2001 is approximately 69 000 The City's "Utility System" consists of the existing combined municipal electric light and power, waterworks and sewer systems THE ELECTRIC SYSTEM The City -owned generating capacity consists of the Atkins Street Plant with tour gas -fired (with oil standby capability and storage) steam turbine generator units (capacity 109,000 kW) and one combustion turbine generator (capacity 21 000 kW) and the Roland C Dansby Power Plant with one gas and/or oil -fired steam turbine generator (capacity 110 000 kW net) for a combined capacity of 240 000 kW The City currently is purchasing fuel on the spot market and on contracts which cover several months across either the summer or winter peaks Reserve fuel oil storago capacity of 4 700 000 gallons is available Distribution of electric power is made through three-phase 12 5 KV lines supplied from seven substations These substations are served by a looped 69 KV transmission system or 138 KV transmission Imes RURAL ELECTRIC LIGHT AND POWER SYSTEM The City owns and operates a rural electric light and power system (the ' Rural System") outside the boundaries of the City separate from its municipal electric light and power system The City has retained the right in the ordinances authorizing the outstanding bonds and in the ordinance authorizing the outstanding Rural System Revenue Bonds to merge the two systems and make the bonds of both systems parity bonds Rural Flectric System Revenue Bonds outstanding as of November 1 2000 amount to $745 000 The Rural System serves approximately 10 947 rural customers TExAs MUNICIPAL POWER POOL The City is a member of the Texas Municipal Power Pool (" rMPP") which also includes the Cities of Denton Garland and Greenville, and the Brazos Electric Power Cooperative Inc of Waco Texas ("Brazos") each of which has its own production, transmission, and distribution facilities I he City is also a member of the Electric Reliability Council of Texas ("ERCOT"), the regional reliability coordinating organization for electric power systems in I exas The City has access to the FRCOT intrastate network of six major investor -owned and several public systems through the TMPP members transmission system OTHER Bryan along with the Cities of Denton Garland and Greenville has wholesale contracts to supply power to the Cna.S of Bowie and Bridgeport Bryan also supplies power to the City of Granbury and, under a pilot program to Texas New Mexico Power for the Cities of Galesville and Olney ELECTRIC RATES (EFFECTIVE OCTOBER 2000) Customer Energy Fuel Charge Demand Charge Charge City Class Per Month Per kW Per kWh Per kWh Residential Winter (Nov Apr) $ 600 $ 000 $ 00475 $ 0 030 Residential Summer (May -Oct) 600 000 00575 0 030 Small Commercial 900 000 0 059 0 030 Medium Commercial 000 735 00345 0 030 Large Commercial 000 635 0 027 0 030 Large Industrial 000 1370 000735 0 030 Bryan Public Schools 3000 000 00535 0 030 Interdepartmental 3000 000 00551 0 030 Rural Electric Division 000 725 00204 0 029 Rural Class Residential Winter (Nov -Apr) 700 000 00440 0 030 Residential Summer (May -Oct) 700 000 00540 0 030 Small Commercial 1000 000 0 060 0 030 Medium Commercial 000 740 0 035 0 030 Large Commercial 000 665 00282 0 030 LID ENERGY SALES BY TYPES OF CUSTOMERS (FISCAL YEAR ENDED 9-30) 2000t'1 1999 Energy Sales %kWh Energy Sales %kWh Type of Customer (kWh) Sold (kWh) Sold Residental 315 233 000 23 93% 297 054 000 25 17% Commercial and Industrial 393 598,000 29 88% 365 937 000 31 00% Public Authorities 30,480,000 2 31 % 32 682 000 2 77% College Station - 0 00% - 0 00% Rural Electric Division 238 698,000 18 12% 225,707,000 19 12% Other Utilities 311 604 000 23 66% 233,713 000 19 80% Interdepartmental 27 441,000 2 08% 25,299,000 2 14% Total 1 317 054 000 100 00% 1 180 392 000 100 00% Type of Customer 1997 Energy Sales (kWh) %kWh Sold Residential 277 659 041 24 37% Commercial and Industrial 322 517 110 28 31% Public Authorities 22 520 080 1 98% College Station - 000% Rural Electric Division 227 178,000 19 94% Other Utilities 265,129,000 23 27% Interdepartmental 24 136 405 2 12% Total 1 139 139 636 100 00% (1) Unaudited CONDENSED STATEMENT OF UTILITY SYSTEM OPERATIONS 1996 1998 Energy Sales %kWh (kWh) Sold 300,217 000 23 36% 341 605 000 26 58% 26 394 000 2 054% - 0 00% 242 355,000 18 86% 349 355 000 27 18% 25,284,000 1 97% 1,285,210 000 100 00% Energy Sales %kWh (kWh) Sold 285 994 639 25 48% 297 610 998 26 52% 23 591 855 2 10% 1204650 011% 224 013 904 19 96% 265,814,000 23 68% 24,085,440 215% 1,122 315,486 100 00% Revenues 2000 1999 1998 1997 1996 Waterworks System $ 6 936 061 $ 5 933 692 $ 6,033 402 $ 5 247 698 $ 5 06 0069 Sewer System 8,957 331 8 423 639 8 183 611 7 810 827 7 707 894 Electric Light System 87 788 443 79 038,442 71 679 182 70 141 460 70 195 301 Miscellaneous - 2662,175 3 497 536 1 479,887 2 575 671 Total Revenues $ 103,681 835 $ 96 057,948 $ 89 393 731 $ 84,679 872 $ 85,544,935 Expenses Waterworks System $ 4 578 268 $ 4 056 059 $ 3,755 966 $ 4 189 991 $ 3293,339 Sewer System 4 506 995 3,960 700 3 791 245 3 796 590 3 567 924 Electric Light System 67,920,575 61,026 646 58 005 279 56 374 660 53 691 245 Total Expenses $ 77 005 838 $ 69 043,405 $ 65 552 490 $ 64 361 241 $ 60 552,508 NET AVAILABLE FOR DEBT SERVICE $ 26 675 997 $ 27 014 543 $ 23,841,241 $ 20,318,631 $ 24,992 427 Water Customers 19 061 19 148 18,710 18,414 17 405 Sewer Customers 18 874 18 485 18 149 17 908 17 216 Electric Customers 28,054 27 395 26 641 26 315 24 884 (1) Unaudited M COVERAGE AND FUND BALANCEStti Average Annual Principal and Interest Requirements, 2001 - 2019 $2 709 721 Coverage of Average Requirements by 9-30 00 Unaudited Net Available for Debt Service 9 84 Times Maximum Principal and Interest Requirements, 2002 $6 399 984 Coverage of Maximum Requirements by 9-30 00 Unaudited Net Available for Debt Service 4 17 1 imes Utility System Revenue Bonds Outstanding, 6-1 01 System Interest and Sinking Fund Balance, 9-30-00 System Reserve Fund balance, 9-30-00 (1) Unaudited $36 990 000 $2 709 721 $1 423 585 CITY OF DENTON The City has owned and operated its electric light and power system (the "Electric System") for approximately 90 years During this time, the Electric System has experienced a steady growth in customers and output requiring periodic additions to plant and distribution facilities HISTORICAL OPERATING AND FINANCIAL DATA The table below sets forth certain operating and financial data with respect to the Electric System for each of the five most recently completed fiscal years Year Ended September 30, 2000 1999 1998 1997 1996 Average Number of Monthly Customers by Service Classification(') Residential 29 436 29,353 28,515 27,624 26 888 Commercial & Industrial 3,606 3,754 3,621 3,466 3,387 Other 791 1,446 1,404 1,496 1,330 Total 33,833 34,553 33,540 32,586 31605 Annual Megawatt Hours Sales by by Service Classification Residential 617 356,644 366,461 312,521 318,604 Commercial & Industrial 674 081 626,536 603,553 556,749 551,297 Other 52,317 39,600 37,222 32,906 36,198 Subtotal 1101,015 1022,781 1007236 902,176 906,099 Sales for Resale 33 347 50,701 58,472 83 450 97,505 Total Sales 1 134 362 1 073 482 1,065 708 985 626 1 003,604 Loss and Unaccounted 14,780 25,037 48,941 51,116 27,453 Total MW to System 1,149,142 1,098,519 1,114,649 1,036,743 1,031,057 %Loss and Unaccounted 1 29% 2 28% 4 39% 4 93% 2 66% Annual Revenue by Service Classification ($ in Thousands) ($ Residential 31609 $ 28,121 $ 28,903 $ 25,224 $ 24,107 Commercial & Industrial 40,095 36,996 35,711 34,081 33,101 Other 3401 3,288 3,126 2,894 2,896 Total 75,105 $ 68,405 $ 67 740 $ 62 199 $ 60,104 Analysis of Electric Billing Residential Customers Avg Monthly Bill per Customer $ 8949 $ 7983 $ 8447 $ 7610 $ 7471 Avg Monthly kWh per Customer 1,061 1 012 1 071 943 987 Avg Monthly Cents per kWh 844 788 789 807 757 Commercial & Industrial Customers Avg Monthly Bill per Customer $ 92658 $ 821 29 $ 821 85 $ 81935 $ 81441 Avg Monthly kWh per Customer 15 479 13,909 13,890 13,385 13,564 Avg Monthly Cents por kWh 595 590 592 612 600 Capacity and Energy Mix (rounded to nearest MW) Capacity Owned Capacity (MW) 178 178 178 178 178 Firm Purchase (MW) TMPA 98 98 98 98 98 Firm Purchase (MW) Other 30 12 0 0 0 Total 306 288 276 276 276 (1) The average number of monthly customers appears to have decreased in the year ended September 30 2000 This decrease is a result of installation of new customer information software at the beginning of fiscal year 2000 The previous software system counted actual number of billings produced The new software counts customers who receive multiple bills as a single customer resulting in the apparent decrease in customers Total number of bills produced for the year ended September 30 2000 was 36 897 an increase of 7% over the previous year CURRENT ELECTRIC RATE SCHEDULES Approximately 96% 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, 1999) 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 of any event nor to temporary standby, or supplementary service except in conjunction with the applicable rider Facility Charge Single -Phase $ 7 73 / 30 days Three -Phase $15 45 / 30 day+ Energy Charge - Winter Rates First 1 000 KWH 4 340 / KWH Additional KWH 3 940 / KWH Energy Charge Summer Rates First 3,000 KWH 561¢/KWH Additional KWH 6 210 / KWH Energy Cost Admstment See description below General Service Large (Effective October 1 1999) Applicable to any commercial or industrial customer having a minimum actual demand of 250 KVA or 225 KW for all electric service supplied at one point of delivery and measured through one meter Customers with an average actual demand equal to or greater than 200 KVA or 180 KW during the previous twelve 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 subject to the minimum billing provision Facility Charge $60 60 / 30 days Demand Charge $ 8 64 / KVA (Minimum of 250 KVA billed) Energy Charge 1 410 / KWH Energy Cost Adiustmen[ See description below Minimum Billing An amount equal to the facility charge plus a demand charge billed at the above KVA rate where demand is determined by whichever of the following methods yields the greatest result numerically (1) the actual monthly KVA demand (2) 250 KVA or (3) seventy percent (70%) of the maximum monthly KW/KVA actual demand for any month during the previous billing months of May through October in the twelve months ending with the current month General Service Small (Effective October 1 1999) This rate is applicable to any commercial or industrial customer having a maximum demand less than 225 KW for all electric service supplied at one point of delivery and measured through one meter Facility Charge Single Phase Three Phase Demand Charge Energy Charge Customer with 20 KW or below Block 1 - First 2 500 KWH Block 2 All Additional KWH Customer above 20 KW Block 1 - First 2,500 KWH Block 2 - Next 3,500 + B2T KWH Block 3 - All Additional KWH $15 15 / 30 days $20 20 / 30 days $ 8 00 / KW (First 20 KW not Billed) 6750/KWH 3000/KWII 6 750 / KWH 3000/KWH 2650/KWH M. Minimum Billing An amount equal to the facility charge plus the greater of (1) the actual monthly KW demand charge, or (2) seventy percent (70%) of the maximum monthly actual demand charge for any month during the previous billing months of May through October in the twelve months ending with the current month Energy Cost Adjustment (Effective April 1 2001) All monthly KWH charges shall be increased or decreased by an amount equal to X' cents per KWH to be known as the energy cost adjustment (ECA) The ECA shall be computed during the last month of each fiscal year quarter (December March June and September) to be applied to the quarter immediately following The City shall in no case change the energy cost adjustment more than once many three (3) month period The ECA shall be calculated using the following formula ECA = Projected 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 TMPA energy and purchased energy (excluding TMPA's fixed charges) are greater than or less than the actual and projected ECA revenues by $500 000 or more during the next quarter the Director of Electric Utilities or his designate shall recompute the Energy Cost Adjustment and with Public Utilities Board approval may establish an ECA that collects or returns such difference over the next three month period Such change in ECA shall be applied evenly to each month during the three month period the third quarter rY 2000-2001 ECA rate is 4 000 / KWH ELECTRIC UTILITY SERVICE AREA In 1976 the Public Utility Commission of Texas (the "PUC") issued the City a Certificate of Convenience and Necessity ("CCN") to serve electric water and wastewater to a 150 square mile area encompassing the City's then city boundaries plus its extraterritorial jurisdiction area ("ETJ") The ETJ certification area extended approximately two miles beyond the City's 1976 city boundaries or to a neighboring city's boundary, whichever was closest The City is the exclusive provider of electric water and wastewater services to the area included within the 1976 city boundary area, with the exception of a small area where certification was granted to Texas Power and Light Co (now TXU Electric Company, and referred to herein as "TXU Electric") and/or Denton County Electric Cooperative, Inc ("CoServ") due to their existing service in the area Dual and occasional triple certification presently exist in the ETJ Approximately 69% of the City's electric service area is multiply certified According to records of the Electric System, approximately 96% 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 SB 7 provides that the City may file with the PUC for a recertification of its service area based upon the municipal boundaries as of February 1 1999 The City has made a filing with the PUC for the purposes of having its service area recertified under this provision of SB 7 The effects of the recertification will primarily affect new customers as SB 7 does not require existing customers of another utility to become customers of the City For the year ended September 30 2000 the Electric System provided electric service to a monthly average of 33 833 customers located in the City Driven by thi, economic magnets of the Dallas -Fort Worth International Airport Dallas Love Field Airport Fort Worth's Alliance Airport and the major business districts in the northern parts of the Dallas metropolitan area Denton and the Dallas -Fort Worth metropolitan area ("DEW") have in recent years experienced significant electric load and population growth Since 1990 Denton's employment has grown by approximately 31% due to strong performances in its industrial commercial medical, and education employment sectors and accompanying population growth In total the DEW metropolitan area experienced a 25% increase in employment between 1990 and 1998 and more recently experienced a 13% increase in employment between 1995 and 1998 For the year ended September 30 2000 the customer base that was served by the Electric System measured by number of accounts is approximately 87%residential and approximately 11%commercial and industrial although commercial and industrial accounts provided approximately 53% of the rate revenues of the Electric System For the year ended September 30, 1999 the top ten customers of the Electric System provided 22% of the tarnffed 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, 1999 the Universities provided 8% of the tarnffed rate revenues of the Electric System and purchased 11% of the energy sold by the Electric System State law provides that municipal utilities that provide electric service to agencies of the State, such as the Universities must do so in accordance with rate tariffs that are equal to the utilities' lowest rate less an additional 20% discount As a result of the discounted service that the City must provide to the Universities the Universities' cost of energy is less than the costs incurred by the Electric System for providing such energy EXISTING GENERATION FACILITIES Although the City presently owns 178 MW of generating capacity, including five natural gas generation units (known as the "Spencer Units") and two hydroelectric units (each of which are further described below) the B6 Electric System is a net purchaser of electric energy Spencer Units 4 and 5 the largest of the five Spencer Units have been identified by the Texas Natural Resource Conservation Commission (the "TNRCC") as having annual heat input that exceeds the State exemption level The Spencer Units are older units and other than general maintenance and overhaul have never been renovated The Spencer Units are generally inefficient to operate having high heat input rates Consequently, the Electric System has in recent years generally utilized the Spencer Units only for peaking purposes during periods of high demand Each of the five units at the Spencer plant utilize natural gas as their primary boiler fuel with No 2 fuel oil backup plus two diesel generators that provide backup capability The City has contracted with PXU Lone Star Pipeline a division of TXU Gas Company for transportation of natural gas and with several gas supply companies for spot market purchase of natural gas The current gas transportation agreement expires January 1 2002, but will continue in effect thereafter unless mutually terminated or unless unilaterally terminated by one of the parties thereto upon delivery of notice of termination to the other party at least 120 days prior to the termination date The Electric System buys treated water from the City's water treatment plant located next to Spencer Station for makeup water to the boilers Reverse osmosis units located next to the Spencer Station generating units process the treated water into demmeralized water for make up water to the boilers A table describing the Spencer Units is set forth below Number of Name Plat. Year Placed Type Units Capacity kW in Service Steam Turbine 5 Unit 1 12 650 1955 Unit 2 12,650 1955 Unit 3 22,000 1962 Unit 4 61 162 1966 Unit 5 65,483 1973 Roberts Hydro 1 1,250 1991 Lewisville Hydro 1 2,892 1991 7 178,087 The City's capacity requirements are calculated based upon the City's peak summer demand plus a 15% margin that is required for membership in the Electric Reliability Council of Texas ("ERCOT"), the regional reliability coordinating organization for electric power systems in Texas For the year ending September 30 2001 the City's capacity requirement is 305 MW based upon the summer 2000 peak demand of 265 MW plus the 15% ERCOT margin The City presently provides approximately 33% of its capacity requirements from TMPA in accordance with the City's "take or pay" power purchase agreement with TMPA (the "Contract") The City's remaining capacity requirement is presently supplied from electric generation of its Spencer Units (approximately 60%) and from twelve month firm power purchase capacity contracts (approximately 7%) In recent years the City has supplied approximately 1% of its energy from hydroelectric units of the City that are located on nearby Lake Ray Roberts and Lake Lewisville Because the hydroelectric units operate on surface water reservoirs that provide municipal water supply and water cannot be released solely to operate such hydroelectric units the electric generation capacity of the units cannot be taken into account for purposes of determining the City's electric capacity During the three most recently completed fiscal years of the City the Electric System has purchased an average of 55%of its energy from TMPA taken approximately 25% of its energy from its own generation facilities and acquired approximately 20% of its energy under spot market or short term purchase arrangements See Table above Since 1998 the City has not had sufficient electric capacity through the combination of the Contract and its own generation facilities Accordingly the City has developed a strategy that includes the purchase of additional capacity through one year contracts on the assumption that the developing wholesale market in Texas will continue to expand and provide more economical energy in the future than the City could provide through other long-term arrangements To satisfy load growth Denton purchased an additional 12 MW of capacity for 1999 an additional 30 MW of capacity for 2000 and an additional 40 MW of capacity for 2001 in each instance though one year firm power purchase capacity agreements I he f lectric System purchases energy under its firm power purchase capacity agreements, as well as from other utilities in Texas in the energy "spot market " In recent years, the Electric System has supplied approximately 5%of its energy from spot market purchases The Electric System also makes periodic sales of energy by marketing energy that is temporarily in excess of its needs primarily energy that is produced by the City's electric generation units during times of high demand Such energy sales typically represent less than 10% of the Electric System's annual revenues from the sale of energy OFFER TO SELL THE CITY's GENERATING ASSETS, REPLACEMENT POWER The City's continuing strategy has been to move towards a more traditional municipal electric system concept whereby all energy required for distribution over the municipal electric distribution system is purchased and no significant portion of it's electric energy is self -generated I The City is presently negotiating for the sale of the Spencer Units and the replacement of the energy and capacity therefrom The proposed power sale agreement would provide the City with the right to receive an amount of replacement capacity and energy equal to the output of the Spencer Units No assurances can be given that a sale of the Spencer Units will be consummated or that if such units are sold that the City will receive any particular compensation therefrom In the event that a sale does not occur the City's options would include but not be limited to continuing to operate the Spencer Units in accordance with past practice of the Electric System closing the Spencer Units and augmenting the Electric Systems energy and capacity requirements with firm power purchase capacity agreements or spot market energy purchases without regard to the disposition of the Spencer Units The City's strategy with respect to the Electric System includes making an assignment or other disposition of the City's share of the output of the TMPA Gibbons Creek plant The City is cognizant that any such transaction regarding its contract rights and obligations to TMPA would need to be structured within the framework of the various contract rights of TMPA bondholders MANAGEMENT OF THE ELECTRIC SYSTEM The Public Utilities Board serves the City's Department Of Utilities as a consulting advisory and supervisory body All actions of the Public Utilities Board are subject to final approval of the City Council The City's Director of Electric Utilities manages the Electric System with responsibility for production distribution engineering substations marketing planning and safety operations The staff of the Electric System includes approximately 130 full time and part time professional and administrative staff 37 of whom are directly associated with Spencer Station and the City's hydroelectric facilities COMPARABLE CALCULATION OF NET REVENUES AVAILABLE FOR DEBT SERVICE the following table 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 For purposes of the calculation depreciation amortization and payments in lieu of taxes are excluded from operating expenses Fiscal Year Ended September 30 Gross Revenues 2000 1999 1998 1997 1996 Electric Service $ 83 739 948 $ 78 654 866 $ 77 570 951 $ 72 048 516 $ 69 533 180 Water Service 19 269 891 17 829 251 17 248 400 14 700 321 15 328 596 Wastewater Service 12 066 564 10 815 175 10 432 408 9 889 807 9 997 665 Interest Income 7 020 081 7 116,779 5741,008 5280,534 5082,643 Other Income 1 724 174 530 763 483 959 695,122 511 383 Total Revenues 7 123 820 658 $ 114,946 834 $ 111 476 726 $ 102 614,300 $ 100 453 467 Expenses Electric System Fuel and Purchased Power(') $ 58 219 188 $ 52 521 369 $ 48 611 430 $ 45 737,864 $ 47 511,851 Other Operating and Arlin Expenses 17 787 364 15 883 336 17 248 747 13 652 393 14 442 837 $ 76,006 552 $ 68 404 705 $ 65 860 177 $ 59,390 257 $ 61 954 688 Water System Fuel and Purchased Power $ 666 449 $ 526 995 $ 619 880 $ 570,289 $ 566 832 Water Purchased 146 135 97 797 72 299 77 227 80 290 Other Operating and Adm Expenses 7 559 307 7 309 160 4,251 361 3833,171 4,113722 $ 8 371 891 $ 7 933 952 $ 4 943 540 $ 4 480 687 $ 4 760 844 Wastewater System Fuel and Purchased Power $ 445 577 $ 416,230 $ 438 825 $ 434 320 $ 372 023 Other Operating and Admm Expenses 6 295 119 5,852 370 3,966 679 3 690 061 3 320 397 7 6 740 696 $ 6 268 600 $ 4 405 504 $ 4 124 381 $ 3 692 420 Total Expenses $ 91,119 139 $ 82,607 257 $ 75,209 221 $ 67 995,325 $ 70 407,952 Net Revenue Available for Debt Service and Other Lawful Purposes $ 32 701 519 $ 32 3 99,577 -T 36 2 77,505 $ 34 618,975 -T 30,0 55,515 (1) The electric systems fuel and purchased power was understated for the fiscal year ended September 30 1999 in the amount of $3 201 693 Prior year retained earnings has been restated in the Comprehensive Annual Financial Report for the fiscal year ended September 30 2000 to reflect this amount Likewise fuel and purchased power have been restated in the Net Revenue calculation for the fiscal year ended September 30 1999 to more accurately represent the Net Revenues Available for debt service IM CITY OF GARLAND THE CITY The City of Garland, Texas is a political subdivision and municipal corpu,4non of Texas The City encompasses approximately some 57 square miles The City's certified 2000,. the State located inDallas County The ensus population is 215 768 1 maintains The dimim tra ive responsibility for operating and melectric aintaining the Utilower ity System i rworks shandled by orrN Manager for Ut lity Services y y e orr (the the Ass System") y e of the Assistant City THE ELECTRIC 3isTEM The municipal electric system in Garland was started in 1923 The electric system currently serves 65,560 customets (approximately 85% of the electric customers within the City the remaining 15% is served by Texas Utilities Electric Company) The electric system does not serve any retail customers outside of the City limits but n does provide wholesale power surplus power to other cities While the City owns and operates two power generating stations t its own, its provide source of power �s the Texas Municipal power Agency The City owns and operates electric generating stations designated m the C E Newman Power Plant with a rated capacity of 85 000 kilowatts ("kW"),i located within the City limits and the Ray Olinger Power Plant (rated capacity of 335,000 kW) located at Lavon Lake All of the City owned and operated generating facilities use natural gas as the primary boiler fuel In addition the City is a member of the Texas Municipal Power Agency and is responsible for 47 00% of the electric output, operation and maintenance expense of that 3o tit power agency The Texas Municipal Power Agency is an integral part of Garland's power system, and as such, the operations of t�tat entity have a significant financial impact on the Electric System The City's Electrid Distribution Division is responsible for the construction operation maintenance and repair of the transmission, substation, and di tribution facilities of the Electric System Included are 112 miles of transmission line 17 substations and 793 miles of distribuu n line The department also constructs and maintains the street lighting system consisting of 10 923 street lights and 2 192 guard h is CITY OWNED AND OPERATED GENERATING UNITS generating ands Shown below is certain information on the eight City owned and operated Station Type N Unit Name Plate Year Placedmber Capacity (MWI �C E Newman Steam Turbine 1 '- Capacity 5-- In Service C E Newman Steam Turbine 2 1956 C E Newman Steam Turbine 7 5 1957 C E Newman Steam Turbine 3 165 1960 C E Newman 4 165 196] Steam Turbine 5 330 Ray Olinger Steam Turbine 1 1964 Ray Olinger Steam Turbine 2 75 0 1966 Ray Olinger Steam Turbine 110 0 1971 3 1460 1975 4120 POWER INTERCHANGE AGREEMENTS The City is a member of the Texas Municipal Power Pool ("TMPp") which also includes the Cities of Bryan Denton, Greenville, and the Brazos Electric Power Cooperative Inc of Waco Texas ("Brazos") each of which has its own production, transmission and distribution facilities The City is also a member of the Electric Reliability Council of Texas ("ERCOT") the regional reliability coordinating organization for electric power systems in Texas The City has access to the ERCOT intrastate network of six major investor -owned and several public systems through the TMPP members transmission system Shown below are the bnterchanges the City has access to MPP_ TMPA and Tr EC i o r hops 111 TMPP 138KV North Interchange "MVA" Brazos 69KV Interchange 140 mva TMPA/fP&L Olinger Plant 138KV Interchana TMPP 138KV South Interchange 8 20 mva 140 mva 14en0 mva �--� (1) Texas Municipal Power Pool ("TMPP") Texas Municipal Power Agency AA 440 mva (2) ("TMPA") Texas Utilities Electric Company ("TUEC") (2) Additionally TMPA has capacity to famish 400 mva of power to a 138 kva transmission loop around the City from its 345 kv transmission line which is tied to the TUEC transmission grid Power to Garland's 69 kv 138 kv transmission loop through transmission one 75 mva and three 140 mva transformers system is supplied from the B-10 COVERAGE AND FUND BALANCES $ 12 263 325 wrements, 2001 - 2030 Average Annual Principal and interest 9.30 00 Net Available for Debt Service Y 2 67 Times Coverage of Average Requcement $ 18 871 198 Maximum Principal and tn[erest Requirements 2002 Requirements by 9-30 00 Net Available for Debt Service 173 Times Coverage of Maximum $212 400,000 System Revenue Bonds Outstanding (as of 6-1 2001) $ 6384,864 Interest and Sinking Fund as of 3-1-2001 $ 9 926 458 $ 248 251 Reserve Fund as of 3 1-2001 $ 4 838 410 Emergency Fund, as of 3-1-2001 Fund as of 3-1-2001 Extension and Replacement nu ELECTRIC RATE SCHEDULES (EFFECTIVE OCPOBER 1,1992) Residential Service Rate Customer Charge $ 75500 per kWh November/April 00529 per kWh May/October 00588 per kWh General Service - Small (0-20 kW Demand Customer Charge $11 55 0/2,000 All over 2,000 November/April $00493per kWh $00440Per kWh May/October $0 0602 per kWh $0 0549 Per kWh General Service - Large 20 kW and Greater Demand Energy Demand Demand November/Aord May/October 0-60 000 kWh $0 0276 Per kWh First 200 kW $6 88 Per kW 0 200 kW $8 53 Per kW All over 60,000 $0 0235 Per kWh All over 200 kW $6 33 Per kW All over 200 kW $7 98 Per kW Public Institutional High Tension Service Rate Electric Service Rate (5,000 kW and Greater Demand) Customer Charge $19 25 Energy November/April $0 0413 per kWh 0 6 000 000 $0 0056 per kWh May/October $0 0520 per kWh Over 6,000 000 $0 0033 per kWh Demand Charge $8 25 Per kWh Customers with all electric service are billed at the rate of $0 0314 per kWh for consumption in excess of 1,000 kWh per month during the period of November through April of each year Fuel Cost Factor The formula for calculation of the Fuel Cost Factor is as follows and will be applied on a per kWh basis Fuel Cost Factor = F� x L F = All estimated fuel costs for current calendar month S = Estimated kWh sales for current billing month, excluding inter -system sales A = Correction adjustment to be applied in the current billing month to account for the difference between actual fuel cost revenue and the actual fuel cost of the second preceding billing month L = Loss Factor to account for differences in line losses corresponding to voltage level of service B-11 ENERGY SALES AND CUSTOMER INFORMATION (FISCAL YEAR ENDED 9-30)h1 2000 Energy Sales Number of Type of Customer (kWh) Revenues Customers Residential 925 636,047 $ 81 289 538 59,725 Commercial 689 599 789 48 090,665 5,384 Industrial 222 208 345 10,920 958 4 Total 1 837,444181 $ 140301 161 65,113 Type of Customer Residential Commercial Industrial Total (1) Unaudited 1998 Energy Sales Number of (kWh) Revenues Customers 1 005 017 232 $ 79 111,319 58 501 700 631 526 45 540,854 5 236 173 600 960 6610,934 3 1 879 249,718 $ 131,263 107 63 740 1999 Energy Sales Number of (kWh) Revenues Customers 949,546 686 $ 74,759,383 59 525 684,986 791 44 318,505 5 344 220 916,348 10 560,903 4 1 855,449 825 $ 129,638 791 64 873 1997 Energy Sales Number of (kWh) Revenues Customers 888 735 905 $ 73 469,696 57,744 686,554 364 46 369,640 5 156 148,657,452 5 242 417 3 1,723 9 77,721 $ 125,081,753 62,903 1996 Fnergy Sales Number of Type of Customer (kWh) Revenues Customers Residential 912 703 060 $ 72 761 105 57 596 Commercial 694 593,500 47 243,004 5,064 Industrial 140 152,600 4867,635 2 Total 1 747 449 160 $ 124 871 744 62 662 ENERGY PRODUCTION (FISCAL YEAR 9-30)(o 2000 1999 1998 1997 1996 Owned Capacity (MW) 430 430 430 430 430 Firm Purchase Capacity (MW) 200 200 200 200 200 Peak Demand (MW) 490 481 472 455 435 (1) Unaudited ME CONDENSED STATEMENT OF UTILITY SYSTEM OPERATIONS 1999 199b Reve ues Electric Service $ 181,076,206 $ 161,142,100 $ 156 941,032 $ 148,082,806 $ 151,830 666 Water Service 22,259,790 20,576,261 23,287,886 19,669,715 19,591 540 Sewer Service 21,377,707 20,177,040 20,180,013 21,175,069 21,017,897 Miscellaneous 10,747,642 6,025,741 7,736,208 5,545,478 4,368,731 Total Revenues $ 235,461,345 $ 207,921 142 $ 208,145 139 $ 194 473,068 $ 196,808 834 Expenses([) Waterworks System $ 15,305,647 $ 13,885,935 $ 13 056,837 $ 12,868 516 $ 12 819,532 Sewer System 8,703,617 9,495,886 8,536 942 8853,836 9,326,654 Electric Light System 151,368,855 132,213,076 129,404,788 122,628 346 122,041,334 Total Expenses $ 175,378,119 $ 141,708,962 $ 150,998 567 $ 144 350,698 $ 144,187 520 NET AVAILABLE FOR DEBT SERVICE $ 60,083,226 $ 66,212,180 $ 57 146 572 $ 50 122,370 $ 52,621 314 Water Customers 63,485 62 277 62 176 62 515 61,037 Sewer Customers 61,990 61,935 59 228 59 775 59 169 Electric Customers 65 560 65,132 63,993 63 159 62 913 (1) Excludes payments in lieu of taxes and depreciation COVERAGE AND FUND BALANCES Average Annual Principal and Interest Requirements, 2001 - 2009 Coverage of Average Requirements by 9-30 00 Net Available for Debt Service Maximum Principal and Interest Requirements, 2001 Coverage of Maximum Requirements by 9-30-00 Net Available for Debt Service Utility System Revenue Bonds Outstanding, 6-1-01 System Interest and Sinking Fund balance 9-30 00 System Reserve Fund balance 9-30 00 B 13 $2 625 238 22 89 Times $8 307 913 7 23 Times $13 973 000 $3 637 540 $5 057 844 CITY OF GREENVILLE THE ELECTRIC UTILITY BOARD The System provides electric service to customers in an approximately 92 square -mile area which includes the City of Greenville Until 1989, the City's electric system was managed and controlled by the City Council of the City Pursuant to Article XI A of the Charter of the City (adopted at an election held on May 7 1988) and Article I I15a Vernon's Texas Civil Statutes in 1988 the City transferred management control and operation of the electric system to a new five -member Board of Trustees (the "Board") Among the powers delegated to the Board by the City Charter is the power to own and operate all properties rights and interests used in connection with the generation transmission or distribution of electric power including customer and energy services the provision of cable television Internet access, or other purposes permitted by law The City Charter was amended on May 6 2000 by a public vote of 62% for and 38% against to include cable television and internet access among the services authorized to be provided by GEUS The Board is authorized to establish rates and charges for services supplied by the System to exercise the power of condemnation and to issue revenue obligations to finance or refinance improvements to the System The Board has the primary responsibility for the payment of all obligations which are payable from the revenues of the System Although the City Council and the Board Jointly appoint all Board members the Board members may only be removed by vote of the citizens of the City The System's operating and capital expenditures including debt service are financed entirely through rates charged for the provision of the services of the System As a general rule there is a lack of financial interdependency between the City and the System although the City Charter and an agreement between the Board and the City Council require the payment of a portion of the adjusted gross revenues of the System to the City each year and the payment of amounts in lieu of taxation Financial transactions between the System and the City reported in the System's financial statements reflect contractual agreements between the parties for the provision of special services by the City to the System the System is included as a discretely presented component unit in the City's general purpose financial statements References herein to covenants and agreements made by the City in the Ordinance authorizing the Bonds and in the Escrow Agreement relating to the retirement of the Refunded Bonds are to covenants and agreements made by the City acting through the Board in such instruments as authorized by the City Charter The Electric Utility generates transmits and distributes its own electric power and additionally is a member of Texas Municipal Power Agency (the "Agency") and the Texas Municipal Power Pool ("TMPP") At the present time the Electric Utility has three gas -fired steam generating units One unit was installed in 1966 with 18,750 kW capacity one in 1969 with 25,000 kW capacity and another in 1977 with 43,200 kW capacity Base load coal fired generation for the System is supplied by the Agency The Electric Utility has a 10% capacity share of the Agency's 462,000 kW unit bringing the Electric Utility's total aggregate maximum capability to 133,200 kW The service area of the System covers approximately 92 square miles 7 he City encompasses approximately 26 5 square miles Part of the service area outside the City is dually certified as a service area by the Public Utility Commission (the "PUC") and is served by two rural electric cooperatives in addition to the System the area outside of the City is rural and sparsley populated Presently, approximately 12 178 customers are served by the System approximately 90% of the System's customers are within the City limits TRANSMISSION AND DISTRIBUTION SYSTEM, INTERCONNECTIONS AND POWER DISPATCH GEUS' transmission and distribution facilities include 31 6 miles of 69 kv looped transmission Imes two 138 kv interconnected ties with a total capacity of 150 MVA and eight distribution substations that serves at a distribution voltage of 12 5 kv GEUS owns 440 miles of overhead distribution Imes GEUS is interconnected with two TMPA 138kv transmission Imes one of which connects to the TXU 345kv transmission system at Royce City Texas and one of which connects to the City of Garland's 138 kv system at its Olinger Power Plant In February 2001 GFUS issued $7 950 million of Revenue Refunding and Improvement Bonds Series 2001 of which approximately $6 2 million will be applied to purchase or improve distribution facilities including improvements to substations Imes and feeders GEUS is a member of the Texas Municipal Power Pool (" I MPP"), which also includes the cities of Bryan Garland, Denton and the Brazos Electric Power Cooperative Inc of Waco Texas ("Brazos"), a generation and transmission co-op, and each of the Cities has its own production transmission and distribution facilities GEUS participates with Garland and Denton as a "subcontrol area" within TMPP for purposes of serving their combined loads with their combined generation resources and sharing the benefits of improved operational efficiency rhis pool of loads and generation resources referred to as DGG has been in existence since January 1 1997 The City of Garland of its role as pool operator makes all dispatch and commitment decisions regarding GEUS' generation DG6 operates as a "sub control area" to the TMPP control area As a sub -control area DOG performs the functions of an ERCOT-certified control area including balancing load and generation of real time monitoring and controlling transmission maintaining required levels of operating reserves developing and submitting daily operation plans and scheduling transactions GEUS is also a member of ERCOT ERCOf has only a total of 600 MW of direct current interconnections with other power pools Historically and at present the members of ERCOT have operated as an 'island " whereby no significant amounts of electric energy have been imported into or exported from the ERCOT member utilities HM ELECTRIC BATES (EFFECTivE APRIL 1, 2000) Customer Charge $7 50 Energy Charge $0 0592/kWh for months of June through October $0 0557/kWh for the first 600 kWh for months of November through M ay $0 0390/kWh for need 600 kWh for months of November through M ay $0 0220/kWh for all over 1200 kWh for months of November through M ay Commercial - General Service Non Demand(2) Customer Charge $14 00 Energy Charge $0 0616/kWb for all kWh Commercial - General Service Demand(�) Customer Charge $14 00 Demand Charge $8 00/kW of Billing Demand Energy Charge $0 0303/kWh for the first 6 000* kWh $0 0700/kWh for all additional kWh * Plus 215 kWh for each kW in excess of IOkW (1) Apileation To any residential consumer for all domestic uses in private dwellings or in individually metered apartments at one point of delivery through one meter Not for temporary, standby or resale service (Single phase service) (2) Application To any consumer for electric service supplied atone point of delivery through one meter Not for standby or resale service (Single phase service under IOkW and under 2500 kWh during any single month during the year) (3) Application To any consumer for electric service supplied atone point of delivery through one meter Not for breakdown standby or resale service (Single phase or three phase service equal to or greater than I OkW or 2500 kWh during any single month during the year) Multiple service and metering points may only be obtained by special contract with the utility NOTE Fuel adjustment and power cost recovery factors are applied in addition to the base rate to each class of service ENERGY SALES AND CUSTOMER INFORMATION (FISCAL YEAR 9.30) Kilowatt Hours Residential Commercial Wholesale Total Kilowatt Hours Historical Peak Demand (MW) Revenue Residential Commercial Wholesale Total Revenue Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended 2000 1999 1998 1997 1996 123,659,000 123,898,000 128,128,000 109 208,000 112,367,591 353,248,000 336,284,000 327,096,000 314 844,000 313,663,738 16,807,000 19,021,000 37571,000 36,114,000 19,882,000 493,714,000 479,203,000 492,795 000 460,166,000 445,913,329 106 105 104 98 95 $ 11,410,538 $ 10,312,187 $ 10,281,226 $ 9 141,358 $ 9,223,746 23,308,353 20,558,486 19,889,972 20,081030 19208,996 1,423,095 1,294,701 1,201 196 1 358,803 1,755, 899 $ 36,141,986 $ 32,165 374 $ 31,372 394 $ 30 581 191 $ 30,188,641 CONDENSED STATEMENT OF OPERATIONS Fiscal Year Ended September 30 2000 1999 1998 1997 1996 Operating Revenues Charges for services $ 37,230,967 $ 34,083,669 $ 32,826,924 $ 31,047,248 $ 30,834,870 Interest Revenue 835,340 691,541 679,156 764,526 722,376 Total Operating Revenues $ 38 066,307 $ 34 775,210 $ 33 506,080 $ 31,811,774 $ 31,557,246 Operating Expenses (Excluding Depreciation) Fuel and purchased power operations and maintenance $ 28 540,939 $ 26 285,253 $ 24,609 162 $ 23,879,258 $ 23,591 098 Administrative expenses 146,070 163,836 160,801 151,417 175,832 Intergovernmental 2,250,347 2,153,268 2,212,631 2,196,457 2,162,341 Total Operating Expenses $ 30,937 356 $ 28,602,357 $ 26,982,594 $ 26,227,132 $ 25,929 271 NET AVAILABLE FOR DEBT SERVICE $ 7,128951 $ 6,172,853 $ 6,523,486 $ 5,584,642 $ 5,627975 Debt Service Requirements Coverage of Debt Service Requirements by Net Revenues Available for Debt Service Electric Customers COVERAGE AND FUND BALANCES $ 1,723 565 $ 1,922,209 4 14x 3 2l x 12,178 12,074 Average Annual Principal and Interest Requirements 2001 - 2018 Coverage of Average Requirements by 9 30 00 Net Income Maximum Principal and Interest Requirements 2001 Coverage of Maximum Requirements by 9-30-00 Net Income System Bonds Outstanding, 6 0 1 -01 Operating Fund September 30 2000 Debt Service Fund September 30 2000 Capital Improvements Fund September 30 2000 Debt Reduction Fund September 30 2000 B-16 $ 2,125,533 $ 2,335,928 $ 2,337,105 307x 239x 241x 11,867 11,787 11,768 $935 484 7 62 Times $1 662 272 4 29 Times $10 370 000 $2 768,670 $930,120 $2,013 500 $4 771 493 FULBRIGHT & JAWORSKI L L P A REGISTERED LIMITED LIABILITY PARTNERSHIP HOUSTON TELEPHONE 214/8558000 2200 ROSS AVENUE SUITE P800 FACSIMILE E14/855SE00 DALLAS TEXAS �5201 2�84 WASHINGTON D C AUST SAN TOIN DALLAS NEW YORK LOS ANGELES MINNEAPOLIS LONDON HONG KONG IN REGARD to the authorization and issuance of the "Texas Municipal Power Agency Subordinate Lien Revenue Refunding Bonds, Series 2001A" (the "Bonds'), in the aggregate principal amount of $108,530,000, we have examined into the legality and validity of the issuance thereof by the Texas Municipal Power Agency (the "Agency"), which Bonds are issuable in fully registered form only The Bonds mature, bear interest and are payable on the dates and are subject to prior redemption, all as provided in the resolution authorizing the issuance of the Bonds (the "Bond Resolution") Except as herein provided, capitalized terms have the meaning assigned to them in the Bond Resolution WE HAVE SERVED AS BOND COUNSEL for the Agency solely to pass upon the legality and validity of the issuance of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exemption of the interest on the Bonds from federal income taxes and none other 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 financrial condition or capabilities of the Agency Our examinations into the legality and validity of the Bonds included a review of the applicable and pertinent provisions of the Constitution and laws of the State of Texas, a transcript of certified proceedings of the Agency relating to the authorization and issuance of the Bonds, including the Bond Resolution, customary certifications and opinions of officials of the Agency and other pertinent showings, and an examination of the Bond executed and delivered initially by the Agency, which we found to be in due form and properly executed BASED ON OUR EXAMINATIONS, IT IS OUR OPINION that the Bonds have been duly authorized by the Agency in compliance with the Constitution and laws of the State of Texas now in force, and the Bonds issued in compliance with the provisions of the Bond Resolution are valid and legally binding special obligations of the Agency, in accordance with the terms thereof, and, together with the outstanding and unpaid Previously Issued Subordinate Lien Bonds, are payable solely from and equally secured by an irrevocable lien on and pledge of the Net Revenues of the System and all funds (including the investments therein) established or reaffirmed by the Bond Resolution, other than the Revenue Fund, and the Revenue Fund subject to the payment of the Operating and Maintenance Expenses, subject, however, to the lien on and pledge of the Net Revenues of the System associated with the Agency's Prior Lien Obligations The Bond Resolution provides certain conditions under which the Agency may issue additional obligations payable from the same source and secured in the same manner as the Bonds IT IS FURTHER OUR OPINION THAT, assuming continuing compliance after the date hereof by the Agency with the provisions of the Bond Resolution and in reliance upon representations and certifications of the Agency made in a certificate of even date herewith pertaining to the use, expenditure, and investment of the proceeds of the Bonds, interest on the Bonds for federal income tax purposes (1) will be excludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date hereof, of the owners thereof pursuant to section 103 of such Code, existing regulations, published rulings, Page 2 of Legal Opinion of Fulbright & Jaworski L L P Re Texas Municipal Power Agency Subordinate Lien Revenue Refunding Bonds, Series 2001A and court decisions thereunder, and (2) will not be included in computing the alternative minimum taxable income of individuals or, except as hereinafter described, corporations Interest on all tax-exempt obligations, such as the Bonds, owned by a corporation will be included in such corporation's adjusted current earnings for tax years beginning after 1989 for purposes of calculating the alternative minimum taxable income of such corporations, other than an S corporation, a qualified mutual fund, a real estate mortgage investment conduit, a real estate investment trust, or a financial asset securitization investment trust ("FASIT") A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by Section 55 of the Code will be computed WE EXPRESS NO OPINION with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds Ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, owners of interest in a FASIT, individual recipients of Social Security or Railroad Retirement Benefits, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations Ambac Financial Guaranty Insurance PolFcv Obh},or Obbi, [[tons Amh « Assuranct ( orpomnun Ont Stet Srrtcc Plvi 15rh II Ncvs Yuri. Ncw York 10ID1 Ttkphnnt (212) 664 Ili 111 Pubes Numhcr Premum Ambac Assurance Corporation (Ambac) a Wisconsin stock insurance corporation in consideration of the payment of the premium Ind Willett it, the terms of tills Pohey htreby ay,rees to pay to The Bank of New York as trustee or Its successor (the Insurance Tnutee ) for the benefit of the I luldtrs that portion of the primpal of and mccrast on the above describ obligations (the Obbb mans ) which shall become Due for Paymenc but shall be unpaid by reason of Nonpayment by the O qo Ambac will m tke such payments to the Insurance Trustee wrhn one (I) business day followm), written canon o bac of Nonpayment Upon a Holders presenrinon and surrender to the Insurance Trustee of such unpaid Obhg loos o lat c pons ununulcd and in better Form and free of any adverse claim the Insurance frustee will disbur t the o t of t of principal and Interest which is then Due for Payment but is unpaid Upon such disburse me c shal be ine own of the surrtndcrcd Oblii,ations and/or coupons and shall be fully subrobated to all of the Z. ers ghcs t ay ent there In cases where the Obli),ations are issued In registered form the Insurance Trustee I di or in to a of r only upon presenntion and surrender tn the Insurance Trustee oFthe unpaid Obligation u c ce d a free Ely a rse tin together with an msvumcm of assg omen[ m Form satisfactory to Ambac and the nsum a ru ee ly ecu[ y e Holder or such Holders duly authorized representative so as m permit ownership of s hgat n b egi ere n c ame of Ambac or its nominee The InSntlnce Trustee shall disburse interest to a Holder f e ce d li do onl Pon presentation to the Insurance Trustee of proof that the claimant is the person entirl the ay tic f n r t o the ligation and delivery to the Insurance Trustee of n instrument of assil,nment in form form satis ao n m a an r I nce Trustee, duly executed by the Holder or such Holders duly aurhnnmed represents r fee n}, o A ba a rig s under such Obligation n receive the interest in respect of which the msunna disbar me act A bac ha be royated to all of the Holders rights to payment on re},lsrued Obligations n the extent f a y insurance or s rs en made nj In the event chat a trustee or payi, en For the Obhgeon it that any payment of principal of or interest on an Obligation which has become Due r P ent a d ich ism de to a older by or on behalf of the Obligor has been deemed a preferential transfer and therer re r verec om he Ide or ant to the United States Bankruptcy Code in accordance with a final nonappealablc order of a or of pe nt 1u dunon th Holder will be entitled to payment from Ambac to the extent of such recovery if stiff n rid are or erwist avai As used herein e Id an any rso Cher than b) the Obit or or (it) any person whose obligations constitute the underlymy, secu ry o sonic of avert t the bi,ations who at the time of Nonpayment is the owner of an Obligation or of a coup tin}, n a ib ion A us aerem Due for Payment when referrmb to the principal of Obligations is when the the led am try di or mandato redemption date for the application of a required sinking fund nstailmem has been re ch an oes not efe o any earlier date on which payment is due by reason of call For redemption (other than by application o re t r n i fu d i tallmcnrs) acceleration or athcr advancement of maturity and when referring to interest on the O iganons hen the c tiled date for payment of interest has been reached As used herein Nonpayment means the failure of t s ibor to ha e provided sufficient funds to tilt trustee or paying agent for payment in full of all principal of and interest on the Lis hich are Due for Payment This Po tie mcehble the premium on this Policy is nor refundable for any reason including payment of the Obligations prior to maturity This Policy does nor insure t},amst loss of any prepayment or other acceleration payment which at any time may become due in tespeer of any Obligation other th In at the sole option of All nor ay,ainst any risk ocher than Nonpayment In witness whercnf Ambac h IS c lotted Ellis Policy to lit affixed with a facsimile of its corporate stal and to he signed by its duly Iuthoriied officers In facSindc to become effective as its oni,Inal seal and signatures and hmdmi, upon Ambac by virtue of the co inters[gnumre of its duly authorized representative /CfS tpEY-Ygrf �pj�� t//L�11•j1_/\Q� resit{ent %`' �� Secretary i 0 ' S � 1` coW Lffeerist Dit, \�� Authorized Represenntive THr BANK OF NEW YORK tckno vetices th it it his tnreed to perform the dunes of Insunncc Trustee under this Pohc} Form No 2B 001'_ (1/01) Audio <ed Officer of Insurance Trustee Financial Advisory Services Provided By FIRST SOUTHWEST COMPANY INVESTMENT BANKERS