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2001-203 ORDINANCE NO. AN oRDr A CE A ENDINO AN ORDINANCE AUT O INO ISSUANCE Or CITY Or 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 "Ctty") has previously adopted an Ordinance Authorizing the Issuance of C~ty of Denton, Texas Utlhty System Revenue Refunding Bonds, Series 1983 (the "1983 Ordinance") pursuant to which the City has msued ~ts Utility System Revenue Bonds, Series 1992, Series 1993, Series 1993-A, Taxable Series 1993 -B, Series 1996, Series 1996-A, Series 1998, Series 1998A, S eries 1998B, Series 2000A, Taxable Series 2000B and Series 2001 (the "Bonds"), and WHEREAS, m connecnon w~th the msuance of each series of Bonds the C~ty has adopted an ordinance authorizing the issuance of each series of Bonds (the "Other Orchnances"), 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 m 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 not~ce m writing 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 C~ty has received the consent of$113,035,000 In aggregate pnncipal amount of the Bonds now outstanding, representing 53 14% of the aggregate principal amount of the Bonds now outstanding, NOW THEREFOR, BE 1T ORDAINED BY THE CITY COUNCIL OF DENTON, TEXAS, THAT SECTION 1 Section 26(g) ofthe 1983 Ordinance headed "Sale or Dmposal of Property" and the corresponding section of each of the Other Bond Ordinances are hereby amended and restated to read as follows (g) Sale, Leas~ (~r Dmposal of Property No part of the System shall be sold, leased, mortgaged, damohshed, removed or otherwme (hsposed of, except as follows (1) To the extent pernutted by law, the City may sell, lease, mortgage, demohsh, remove or otherwise dispose of at any time and from t~me to time any property or facilities ennstltutmg part of the System only fi(A) the C~ty Council shall determine, as evidenced by a resolution to that effect, such property or facilities are not useful m the operation of the System, or (B) the proceeds of such sale are $250,000 or less, or the City Councd shall determine, as evadeaced by a resolution to that effect, the fair market value of the property or facthttes exchanged ~s $250,000 or less, or (C) ~f such proceeds or fmr market value exceeds $250,000 the C~ty Council shall dctemune, as evidenced by a resolution to that effect, that the sale or exchange of such property or facthties will not ~mpmr the ability of the C~ty to comply during the current or any future fiscal year w~th the covenant of the C~ty set forth m Section 27(0 ofth~s Ordinance The proceeds of any such sale or exchange not used to aeqmre other property necessary or desirable for the sale or efficient operataon of the System shall forthwath, at the option of the City, (0 be used to redeem or purchase Panty Bonds or Adaht~onal Bonds, (n) othervnse be used to prowde for the payment of Panty Bonds or Addmonal 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 hcenses 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, provtded that any such lease, contract, hcense, arrangement, easement or right (A) does not impede the operation of the System by the City and (B) does not in any manner ~mpmr or adversely affect the rights or security of the owners of the Panty Bonds or Add~tional Bonds under this Ordinance, and prowded, further, that if the depreciated cost of the property to be covered by any such lease, contract, license, arrangement, easement or other right is m excess of $500,000, the City Council shall determine, as evidenced by a resolution to that effect, that the action of the C~ty with respect thereto does not result m a breach of the conchtions under this clause (2) Any payments received by the C~ty under or in connection with any such lease, contract, license, arrangement, easement or right m respect of the System or any part thereof shall constitute Gross Revenues SECTION 2 Sectton 260) of the 1983 Ordinance headed "Records" and the corresponding section of the Other Bond Ordinances are hereby amended and restated as follows (l) Records The City shall keep proper books of record and account in which full, trae, proper, and correct entries will be made of all dealings, act~vmes, and transactions relating to the System, the Pledged Revenues, and the Funds created pursuant to thts Ordinance, and all books, documents, and vouchers relating thereto shall at all reasonable tames be made available for inspection upon request of any Bondholder, provided, that all books, documents, and vouchers relating to the City's electric system shall be made available for inspection only to the extent required by law, including, w~thout hmitation, the prov~s~ons of Section 552 131 of the Texas Government Code To the extent consistent with the provisions of ttus Orahnance, the C~ty shall keep ~ts books and records in a manner confonmng to standard accounting practices as usually would be followed by private eorpomtaons owmng and operating a s~mflar System, w~th appropnate reeognltaon being g~ven to essential d~fferences between mume~pal and corporate an¢ountlng prant~ees SECTION 3 Section 26(m) of the 1983 Ordinance headed "No Competnlon' and the corresponding section of the Other Bond Ordinances are hereby deleted m their entirety SECTION 4 Th~s Ordinance shall become effective nnmed~ately upon ~ts passage and approval PASSED AND APPROVED fins the 15th day of May, 2001 Eulme Brock, Mayor ATTEST APPROVED AS TO LEGAL FORM HERBERT L PROUTY, CITY ATTORNEY IFULBRIgHT ~ ~IAwORSKI I I P A F:~EGISTERED LIMITED LIABILITY PARTNERSHIP HOUSTON TeLephone 2i4/BSBBO00 ~00 F;~OSS AVENUE SUITE 2800 WASHINGTON dC AUSTIN FACSIMILE 214/$5~B~00 DALLAS TEXAS 75~0J-~784 SAN ANTONIO August 1, 2001 Mr Michael A Conduff C~ty Manager City of Donton 215 E MeI~nney Street Denton, Texas 76201 Re $108,530,000 Texas Mummpal Power Agency Subordinate Lien Revenue Refunding Bonds, Series 200lA Dear M~ke In connection w~th the above-referenced series of bonds, enclosed is a fully executed original Contmumg D~sclosure 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 jeh Enclosures C Sharon Mays 45067103 1/10104326 CONTINUING DISCLOSURE AGREEMENT Th~s Agreement ~s entered ~nto th~s 10th day of May, 2001 by and between the Texas Mumc~pal Power Agency, a joint powers agency, a mumc~pal corporation, and a poht~ca[ subd~wsmn of the State of Texas (the "Agency") and C~ty of Denton, Texas, a poht~cal subd~ws~on of the State of Texas (the "Contrachng Party") RECITALS The Agency ~s ~n process of ~ssu~ng ~ts $108,530,000 Texas Municipal Power Agency Subordinate L~en Revenue Refunding Bonds, Senes 2001A (the "Bonds"), proceeds of which w~ll be used to refund a port~on 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 w~th Rule15c2-12 of the Secur~bes Exchange Act of 1934, as amended (the "Rule')by prowd~ng financial ~nformat~on of the type contained ~n Tables numbered one through three and ~n Appendices A and B of the official statement relating to the Bonds (the "Official Statement") In ~ts resolubon authorizing the ~ssuance of the Bonds (the "Bond Resolubon"), the Agency has d~rected the General Manager of the Agency to comply w~th the Rule In order to assist the General Manager of the Agency ~n complying w~th the Rule, the Contracting Party agrees to prowde certain mformat~on to the Agency pursuant to the terms set forth below Cap~tahzed terms used here~n shall, unless otherwise designated here~n, have the meamngs assigned to such terms m the Bond Resolution AGREEMENT Now, Therefore, ~n order to ~nduce and enable the Agency to sell the Bonds in order to fund the Project, the Agency and the Contracting Party contract and agree as follows Section 1 Annual Information (a) The Contracting Party w~ll provide to the Agency, no later than March 1 of each year (or such other date as may be agreed to by the part~es), unbl termination of th~s Agreement as provided ~n Section 9 hereof, the ~nformatlon w~th respect to the Contracting Party described ~n Appendix B of the Official Statement (b) Any financial statements to be provided pursuant to th~s Section shall be(0 prepared ~n accordance w~th the accounting principles described ~n Appendix B to the Official Statement, (~l) audited, if the Contracting Party commissions an audit of such statements and the audit is completed within the period during which they must be prowded If the audit of such financial statements ~s not complete w~th~n such per~od, then the Contracbng Party shall prowde nobce to the Agency that audited financial statements are not available and shall prowde unaudited financial statements for the apphcable fiscal year to the Agency Thereafter, when and ~f 45033948 1/10104326 audited financial statements become available, the Contracbng Party shall provide such audited financial statements as requ~rad to the Agency (c) If the Contracbng Party's fiscal year end d~ffers from the Agency's fiscal year end, the Contracting Party shall provide the most recent year end annual mformabon as well as cumulabve current year to date ~nformabon The Agency shall nohfy the Contracbng Party ~f the Agency changes its fiscal year (d) The financial ~nformabon and operating data to be prowded pursuant to th~s Section may be set forth ~n full in one or more documents or may be included by specific reference to any document (including an official statement or other offenng document, if it ~s available from the Mumclpal Secunt~es Rulemak~ng Board ["MSRB"]) that theretofore has been prowded by the Contracting Party to each nabonally recognized municipal secunbes ~nformat~on repository as determined by the Un~ted 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 ~ts staff to be, a state mformat~on depository w~th~n the meaning of the Rule ("SID") or filed with the SEC Section 2 Reporting of Si~lmflcant Events (a) Upon the occurrence of any of the events described below, the Contracting Party will promptly nobly the Agency and provide ~nformat~on requested by the Agency pertaining to the following (~) There ~s an acbon, su~t, 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 ~ts ability to make payments under the Power Sales Contract, and (~) There ~s any change ~n the Contracting Party's financial cond~bon or financing arrangements that would materially and adversely affect the Contracting Party's financial condition or ~ts ability to make payments under the Power Sales Contract (b) The Contracting Party w~ll not~fy the Agency as soon as possible ~f the ~nformat~on required by Sections 1 and 2 cannot be prowded ~n the above-specified bme frame Section 3 Material Events Notices (a) The Agency agrees to nobfy any SID and e~ther each NRMSIR or the MSRB, ~n a t~mely manner, of any of the following events w~th respect to the Bonds, ~f such event ~s material w~thm the meamng of the federal secunbes laws (0 pnnclpal and interest payment delinquencies (ii) nonpayment related defaults, (m) unscheduled draws on debt serv~ca reserves reflecbng financial d~fficulties, (~v) unscheduled draws on credit enhancements reflecting financial d~fficultles, (v) substitution of credit or I~quld~ty providers, or their failure to perform, 45033948 1/'10104326 2 (vi) adverse tax opinions or events affecting the tax exempt status of the Bonds, (vii) modifications to rights of Holders, (w,) Bond cells, (~x) defeasances, (x) release, substitubon, or sale of property secunng repayment of the Bonds, and (x0 rating changes (b) If the Agency determines that the occurrence of one of the events described above ~s material w~thm the meamng of the federal securities laws, whether the Agency has obtained knowledge of the occurrence of such event beceuse of not~ce from the Contracting Party or otherwise, the Agency shall not~fy, 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 ~nformat~on provided by ~t to the Agency pursuant to th~s Agreement will be accurate ~n all matenal respects to the best of ~ts knowledge and behef The Contracbng Party w~ll provide the Agency w~th such ~nformat~on as the Agency may reasonably request to confirm the accuracy and completeness of any information prowded by the Contracting Party pursuant to th~s Agreement If the Agency thereafter has reasonable grounds to question the completeness or accuracy of such mformat~on, the Contracting Party w~ll afford the Agency and ~ts attorneys and agents, at the expense of the Agency, reasonable access to any and all records, documents, contracts, and other informat~on which is in the custody or control of the Contracting Party to confirm such accuracy and completeness The Agency and ~ts attorneys and agents shall maintain the confident~ality of all such Information, unless requlrad to be prowded by the Agency to NRM$1Rs, BIDs or the MSRB, and except as otherwise prowded by law The Contracting Party shall not be required to provide ~nformatlon or to allow access to ~ts records which exceeds the standards apphcable to a due dlhgence ~nqu~ry ~n the preparabon of an official statement in connection w~th the sale of Bonds or any Additional Bonds by the Agency Section 5 Severablhty The prowslons of this Agreement ara severable, and if any provision or part of th~s Agreement or the apphcet~on thereof to any person or circumstances shall ever be held by any court of competent jurisdiction to be invahd or unconstitutional for any reason, the ramalnder of th~s Agreement and the apphcet~on of such prows~on or part of th~s Agreement to other persons or circumstances shall not be affected thereby Section 6 Mod~fication Th~s Agreement shall be subject to change or mod~ficet~on only w~th the mutual written consent of the Contracting Party and the Agency Section 7 Asslgnab~hty This Agreement shall not be assignable by the Contracbng Party or the Agency without the prior wdtten consent of the other party hereto which consent shall not be unreasonably withheld 45033948 1/10104326 3 Section 8 Not~ce All nobces shall be ~n wnt~ng All notices shall be deemed to be received three (3) days,after deposit ~n the Un~ted States ma~l All notices shall be dehvered to the following addresses and contact persons To the Agency Texas Mumc~pal Power Agency P O Box 7000 Bryan, Texas 77805 Attn General Manager To the Contracbng Party C~ty of Denton, Texas 215 E McK~nney Street Denton, Texas 76201 Attn C~ty Manager Any party may designate a different address or contact person by g~wng the other party ten (10) days' wntten not~ce ~n the manner described above Section 9 L~m~tations, D~sclaimers and Amendments (a) The Agency and the Contracting Party shall be obhgated to observe and perform the covenants specified in th~s Agreement for so long as, but only for so long as, the Agency and the Contracting Party each remains an Obhgated Person, provided that the Agency and the Contracting Party ~n any event w~ll give notice of any payment or deposit of funds by e~ther of such part~es that causes the Bonds to be retired or defeased (b) The prows~ons of th~s Agreement are for the sole benefit of the Holders and beneficial owners of the Bonds, and nothing m th~s Agreement, express or ~mphed, shall g~ve any benefit or any legal or equitable right, remedy, or claim hereunder to any other person The Agency and the Contracting Party undertake to prowde only the financial ~nformat~on, operabng data, financial statements and nobces which ~t has expressly agreed to prowde pursuant to th~s Agreement and do not hereby undertake to prowde any other ~nformat~on that may be relevant or material to a complete presentation of the Agency's or the Contracting Party's financial results, condition, or prospects or hereby undertake to update any ~nformat~on prowded in accordance w~th this Agreement or otherwise, except as expressly prowded here~n Neither the Agency nor the Contracting Party make any representation or warranty concerning such informat~on or its usefulness to a decision to ~nvest ~n 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 PEI~$ON, IN CONTRACT, O1~ TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PAR~ FI~OM ANY BI, EACH 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 ~n observing or performing its obhgabons 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 th~s Agreement 45033948 1/10104326 4 (e) Nothing ~n th~s Agreement ~s ~ntended or shall act to d~scla~m, waive, or otherwise hm~t the duties of the Agency or the Contracbng Party under federal and state securities laws (f) The prows~ons of th~s Agreement may be amended by the Agency and the Contracting Party (subJect to Section 6) from brae to t~me to adapt to changed c~rcumstances that anse from a change m legal requirements, a change ~n law, or a change ~n the ~dent~ty, nature, status, or type of operations of the Agency or the Contracting Party, only ~f (1) the provisions of th~s Agreement, as so amended, would have permitted an underwriter to purchase or sell Bonds ~n the primary offenng of the Bonds ~n comphance w~th the Rule, taking ~nto account any amendments or ~nterpretat~ons of the Rule to the date of such amendment, as well as such changed c~mumstances, and (2) e~ther (a) the Holders of a majority ~n aggregate pnnc~pal amount (or any grater amount required by prows~ons of the Bond Resolubon that authorizes such an amendment) of the outstanding Bonds consent to such amendment or (b) a person that ~s unaffihated w~th the Agency or the Contracting Party (such as nabonally recognized bond counsel) determines that such amendment w~ll not materially ~mpalr the ~nterests of the Holders and beneficial owners of the Bonds If the provisions of th~s Agreement are so amended, the Agency shall include w~th any amended financial ~nformat~on or operabng data next prowded in accordance w~th the Bond Resolution or the Purchase Agreement an explanation, m narrative form, of the reasons for the amendment and of the ~mpact of any change ~n the type of financial ~nformat~on or operating data so prowded Section 10 Remedies In the event the Contracting Party fa~ls or refuses to prowde the ~nformat~on reequ~red by Sections 1 or 2 hereof, the Agency may enforce ~ts r~ght hereunder by an action for mandamus or specific performance, prowded, however, before enforcing such remedies, the Agency shall g~ve the Contracting Party not~ce as prowded here~n and a reasonable opportumty to prowde the requested ~nformation 45033948 1/10104326 5 IN IWITNESS WHEREOF, the parties hereby have executed th~s Agreement ~n multiple cop~es, each of equal digmty, as of the date and year set forth on the first page hereof TEXAS MUNICIPAL POWER AGENCY Gary I:~rsons, General Manager CITY OF DENTON, TEXAS By Michael A Conduff, C~ty Manager [signature page to Continuing Disclosure Agreement] 45033948 1/101__ S-1 IN WITNESS WHEREOF, the parties hereby have executed th~s Agreement ~n multiple cop~es, each of equal d~gn~ty, as of the date and year set forth on the first page hereof TEXAS MUNICIPAL POWER AGENCY By Gary Parsons, General Manager ~~ger [s~gnature page to Continuing D~sclosum Agreement] 45033948 1110104326 S~1 OFFICIAL STATEMENT Ratings Moody's "Aaa*' S&P "AAA" Fitch "AAA" Arabic Insured see "Bond Insurance" and NEW ISSUE - Bank-Entry-Only "Other Information -Ratings" herein) In the oplmon of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the maRers described under "Tax Exemption" herein, ~nclud~ng the alteranUve mlmmum tax on corporations $108,530,000 TEXAS MUNICIPAL POWER AGENCY SUBORDINATE LIEN REVENUE REFUNDING BONDS, SERIES 200lA Doted Dote: June 15, 2001 Due September 1, as shown herein PAYMENT TERMS Interest on the $108,530 000 Texas Municipal Power Agency (thc "Agency") Subordinate Lien Revenue Refunding Bonds, Series 200lA (the "Bonds") will accrue from the date of the initial debvery of the Bonds and wdl be payable on March 1 and September I of each year commencing, March I 2002 and will be calculated on the basis of a 360-day year consisting of twelve 30 day months The defimtlve Bonds will be mmally registered and dehvered only to Cede & Co the nominee of The Depository Trust Company ("DTC") pursuant to the Book Entry-Only System described hem~n Beneficml ownership of the Bonds may be acquired m denominations of $5,000 or integral multiples thereof No physical debvery of the Bonds will be made to the owners thereof Principal of, premium ~f any and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds See "The Bonds Book-Entry-Only System" herein The initial Paying Agent/Registrar is First Union Nanonal Bank, Houston, Texas (see "The Bonds Paying Agent/Registrar") AUTHORITY FOR ISSUANCE The Bonds are being Issued by the Texas Mumc~pal Power Agency pursuant to V T C A Government Code, Chapters 1207 and 1371, as amended (the "Statutes") and V T C A Ut~htles Code Chapter 163 Subchapter C, as amended (the "Act") SECURITY FOR THE BONDS The Bonds are special obhgatlons of the Agency ~ssued pursuant to a resolution (the "Resolution") adopted by the Board of Directors of the Agency The Bonds and their terms are governed by the prowslons 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 semor lien bonds and commercml paper (collectively, the "Prior Lien Obligations"), such resolutions being herein referred to as the "Prior L~en Resolution" the resolution of the Board relating to the Agency's currently outstanding subordinate ben bonds (the ' Previously Issued Subordinate L~en Bonds' ) such resolution being referred to as the "Subordinate Lxen Resolution" and the Resolution, other than the Revenue Fund and the Revenue Fund subject to the payment of Operating and Maintenance Expenses the partmulars with respect to which are more fully set forth In the Resolutmn, provided, however, that such pledge ~s and shall be subject and subordinated to prior liens 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 fi.om the sale of the Bonds wdl 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 w~th the issuance of the Bonds Ambac Payment of the prlncrpal of and interest on the Bonds when due will be insured by a financial guaranty ~nsurance pohcy to be Issued by Arabic 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 ff issued and received by the Undarwrlters and subject to the approving oplmon of the Attorney General of Texas and the oplmon of Fulbrlght & Jaworskl L L P, Bond Counsel Dallas Texas (see Appendix C, "Form of Bond Counsel's Opinion") Certain legal matters wall be passed upon for the Underwriters by Vmson & Elkms L L P, Dallas Texas, Counsel for the Underwriters and for the Agency by Tmmann Shahady & Blackman P C, Pflugervllle, Texas, Agency Attorney DELIVERY It ~S expected that the Bonds wdl be available for debvery through DTC on July 24 2001 LEHMAN BROTHERS JPMORGAN SALOMON SMITH BARNEY INC. June 22, 2001 MATURITY SCHEDULE Pnnc~pal Maturity Price or Pnnclpal Maturity Amount {September 1) Rate Y~eld Amount {September 1) Rate Yield $ 4,600,000 2002 4 000% 2 90% $ 210,000 2008 4 250o/o 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 dehvery of the Bonds to be added) OPTIONAL REDEMPTION fhe Agency reserves the right at its option to redeem Bonds having stated maturities on and al~er September I, 2005, In whole or tn part ~n prmctpal amounts of $5 000 or any Integral multiple thereof on September 1 2004 or any date thereafter at the par value thereof plus accrued ~nterest to the date of redemption (see "The Bonds - Optional Redemption") No dealer broker, salesman or other person has been authortzed by the Agency or the Underwrtters to gtve any mformatlon or to make any representatton~ other than those contatned tn thts Official ~tatement and ~f gtven or madt, such other information or representattorts must not be rehed upon as having been authortzed by the Agency or the Underwrtters This Offictal Statement does not constttute an offer to sell Bonds tn any jurtsdtetton to any person to whom tt ts unlawful to make such offer tn such jurtsdtctton Certam mformatton set forth heretn has been obtatned from the Agency and other sources whtch are believed to be rehable but ts not guaranteed as to accuracy or completeness and ts not to be construed as a representatton by the Underwrtters Any mformatton and expressions of opmton herem contamed are subject to change wtthaut notice and neither the dehvery of thts Offictal Statement nor any sale made hereunder shall under any ctrcutnstances create any tmphcatton that there has been no change tn the affatrs of the Agency or other matters descrtbed herem s~nce the date hereof IN CONNECTION WITH THE OFFERING OF THE BONDS THE UNDERWRITERS MAY OVER ALLOT OR EFFECT TP~NSACTIONS 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 ATANY TIME 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 LLGAL INVES~IENTS AND ELIGIBILITY TO SECURE INTRODUCTION 7 PUBLIC FUNDS IN TEXAS 40 BACKGROUND 7 LEGAL OPIN1ONS 40 FINANCIAL ADVISOR 41 PLAN OF FINANCING 7 VER[FIEATION OF ARITHMETICAL AND MATHEMATICAL COM~UTATIONS 41 THE BONDS 8 UNDERWRITING 41 MISCELLANEOUS 41 BONO INSURANCE 14 REGULATORY MATTERS 16 SCHEDULE OF REFUNDED BONDS SCHEDULE I DEREGULATION OF THE TEXAS ELETRIC INDUSTRY 16 GENERAL PROVISIONS OF SB 7 16 APPENDICES FEDERAL REGULATION OF ELECTRIC TRANSMISSION SERVICES 18 EXCERPTS FROM 3~dE ANNUAL FINANCIAL REPORT A THE AGENCY 21 INPOP. MATION REGARDING UTILI3~ SYSTEMS OF CITY OF BRYAN B 1 DEBT INFORMATION 23 CITY OF DENTON B-4 TABLE 1 --DEBT SERVICE REQUIREMENTS 23 CI~Y OF GARLAND B- I I CITY OF GREENVILLE B- 15 FINANCIAL INFORMATION 24 FORM OF BOND COUNSEL'S OPINION C TABLE 2 CONDENSED STATEMENT OF SPECIMEN INSURANCE POLICY D OPERATIONS 24 The cover page hereof this page, thc appendices mcludcd LOAD AND ENERGY REQUIREMENTS AND hereto and any addenda supplement or amendment hereto RESOURCES 25 are part of the Officml Statement PEAK AND ENERGY REQUIREMENTS 25 CITIES' ELECTRIC SYSTEMS 25 SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION 26 INVESTMENTS 35 TABLE 3 - CURRENT INVESTMENTS 36 TAX MA~TERS 37 CONTINUING DISCLOSURE OF INFORMATION 38 OFFICIAL STATEMENT SUMMARY This summary ~s subject m all respects to the more complete reformation and defimtIons contained or ~ncorporated m th~s OfficmlStatement The~ffermg~ftheB~ndst~potentmlmvest~rs~smade~n~ybymeans~fth~sent~re~f~cm~Statement No person is anthonzed to detach th~s ~ummary from th~s Officml Statement or to otherwise use ~t w~thout the entire Offlcm~ Statement TltEAGENCY The Texas Mumc~pal Power Agency ~s a joint action agency created m 1975 to prowde rehable electric power to ~ts four Member C~t~es of Bryan Denton Garland and Greenwlle Texas tn an economically competitive and efficient manner THEBONDS The Bonds are ~ssued as $108 530 000 Subordinate Lien Revenue Refunding Bonds Series 200lA The Bonds are ~ssued as serial bonds maturing September 1, 2002 through September I 2013 (see "The Bonds Descrlpt~onoftheBonds") PAYMENTOF INTEREST lntere~t on the Bonds wdl accrue from the date of the mitml dehvery of the Bonds and Is payable March I 2002 and each September 1 and March I thereafter until maturity or prior redemption (see The Bonds Description of the Bonds" and "The Bonds - Optional Redemption") AUTHORITY FOR ISSUANCF lhe Bonds are being ~ssued by the Texas Mumc~pal Power Agency pursuant to V f C A Government Code Chapters 1207 and 1371 as amended (the "Statutes") and V T CA Utd~t~es Code Chapter 163 Subchapter C as amended (the "Act") SECURITY FOR THE BONDS lhe Bonds are payable solely from and equally and ratably secured by a pledge of Net Revenues and all ,~unds (including the investments thereto) established by the Prior L~en Resolution the Subordinate Lien Resolution and the Resolution other than the Revenue l~und and the Revenue Fnnd subject to the payment of Operating and Mmntenanee Expenses the particulars w~th respect to watch are more fully set forth m the Resolution prowded, however that such pledge is and shall be subject and subordinated to first and prior hens of the Prior L~en Obhgat~ons The Holders of the Bonds shall never have the r~ght to demand payment of such obhgat~on 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 I 2005 In whole or m part m 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 Redempuon") TAX EXEMPTION In the opinion of Bond Counsel the ~nterest on the Bonds wdl be excludable from gross income for federal income tax purposes under existing law and the Bonds are not private acUwty bonds See "Tax Matter~ f~x Exemption" for a d~scuss~on of the oplmon of Bond Counsel, including a description ot the alternative mlmmum tax consequences for corporations USE OF PROCEEDS Proceeds 1rom the sale of the Bonds will be used to refund a port~on 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 serwce reqmrements of the Agency pay for a surety bond and to pay the costs associated w~th the Issuance of the Bonds RATINGS The presently outstanding subordinate hen revenue debt of the Agency ~s rated "A2" by Moody's Investors Serwce lnc ("Moody's"), "A" by Standard & Poor's Ratings Serwces A D~wsion of The McGraw-Hall Compames lnc ("S&P") and "A-" by F~tch Inc ("F~tch") The Bonds are rated 'Aaa' by Moody's "AAA" by S&P and "AAA" by F~tch based upon the municipal bond insurance policy of Ambac Assurance to be issued s~multaneously with the dehvery of the Bonds (see "Other Information - Ratings") BOOK-ENTRY-ONLY SYSTEM The definmve Bonds wdl be m~tially registered and dehvered only to Cede & Co the nominee of DTC pursuant to the Book Entry-Only System described here~n Beneficml ownership of the Bonds may be acquired m denominations of $5,000 or integral multiples thereof No physical dehvery of the Bonds wdl be made to the beneficml owners thereof Prmcrpal of premium, ff any and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co which wdl make d~stnbution of the amounts so prod to the participating members of DTC for subsequent payment to the beneficml owners of the Bonds (see "The Bonds Book-Entry-Only System") PAYMENT RECORD The Agency has never defaulted m payment of its Bonds TEXAS MUNICIPAL POWER AGENCY P O Box 7000 Bryan, Texas 77805 BOARD OF DIRECTORS Byron Chitwood, President City of Greenvdle Jim Spence Vice President City of Garland Kenny Mallard Secretary City ol Bryan Lonme Stabler, Board Member City of Bryan George Hopkins, Board Member City of Denton Sandy Kos'~oferson Board Member City o£Denton Harris Hollabaugh, Board Member City ot Garland Sue Ann Harting, Board Member City o£Greenvdle MANAGEMENT Gary Parsons General Manager Earle Bagley Manager Planning & Regulatory Affairs Sharon Reed General Accounting Manager Larry Graves Treasury/Budget Manager OPERATOR -- DUKE/FLUOR DANIEL Plant Manager Rlcky Toney Regulatory Speoiahst/Envlranmantal Patrick Marz Oparatlng and Maintenance Manager Eddie Rhyne Transmission Speoiahst Ronme Rhyne CONSULTANTS AND ADVISORS Auditors Arthur Andersen Houston Texas Bond Counsel Fulbr~ght & Jaworskl L L P Dallas Texas Financial Advisor F~rst Southwest Company Dallas Texas For additional information regarding the Agency, please contact Gary Parsons J C Hall Texas Municipal Power Agency Steven Adams P O Box 7000 or First Southwest Company Bryan Texas 77805 1700 Pacific Avenue Suite 500 (936) 873-1144 Dallas Texas 75201 (214) 953 4000 OFFICIAL STATEMENT RELATING TO $108,530,000 TEXAS MUNICIPAL POWER AGENCY SUBORDINATE LIEN REVENUE REFUNDING BONDS, SERIES 200lA INTRODUCTION Th~s Official Statement, which ~ncludes the Appendices hereto, provides certain information regarding the Texas Municipal Power Age~acy (the "Agency" or "TMPA"), the Cities of Bryan, Denton, Garland and Greenville, Texas (collectively the "C~tles," "Member Cities" and individually, a "City") and the Agency's $108,530 000 Subordinate Llan Revenue Refunding Bonds, Sones 200lA (the "Bonds") The Bonds are payable from "Net Revenues" (hereinafter defined), such pledge of revenues being subordinate to the Agency's prewously issued semor lien bonds presently outstanding in the pnnclpal amount of $878,556 926 (excludes the Refunded Bonds) and the Agency's previously ~ssued Commercial Paper Notes m the amount of $221 300,000 and the additional obhgat~ons that may hereafter be maned on parity w~th such semor hen bonds and Commermal Paper Notes The Agency has $126,005 000 subordmate han revenue bonds outstanding, lncluthng the Bonds Capitalized terms not defined elsewhere hereto but used harem have the same meanings assigned to such terms in the Resolution and the Powar Sales Contract See .Summary of Curtmn Prov~sions of the Resolution" herein '13~ere follows in this Official Statement descriptions of the Bonds and certain mfurmat~on regarding the Agency and its finances All descriptions of documents contained herein are only summaries and are qualified m their entirety by reference to each such document Copies of such documents may be obtained from the Agency's Flnancml Adwsor F~rst Southwest Company Dallas Texas BACKGROUND The Cities created the Agency In 1975 pursuant to the Act in order to obtmn the economic advantages of jointly financing constructing and operating large generation umts to supply the growing energy needs of the Cities and prowdmg for a diversification of fuel types and sources Each of the Cities presently owns and operates a municipal electric power generation transmission and d~stnbutlon system each of wthch is fueled primarily by natural gas Substantially all of the electric customers residing within the corporate hmlts of the C~Ues of Bryan, Denton and Greanvflle are served by those Cttles, respectively The C~ty of Garland serves approximately 85% of the electrm customers within its corporate hm~ts The City of Bryan serves add~tional customers outside Its corporate hm~ts through a d~stmct and separate rural transrmssion and distribution system The raspe~lve rights and obhgatlons of the Agency and the Cities are set forth m mdiwdual, but identical Power Sales Contracts (collectively, the "Contrant"), dated as of September 1, 1976, as amended (see "THE BONDS - THE POWI~P' SALIns CO~qTRACT") fhe Contract has been valtdated by various acts of the Texas Legislature and has been upheld m vanous prior judicial proceadmgs The Agency and the Cities' efforts 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 thc Cities' plants have resulted m the Agency being the primary suppher of power and energy to the Cities with the Cities~ plants being utihzed after the Agency's Gibbons Creek Steam Electric Station (Gibbons Creek) ~s utdlzed and during peak or temporary shu~own periods PLAN OF FINANCING PURPOSE Proceeds from the sale of the Bonds will be used to refund a port.on of the Agency s outstanding debt $49 255 000 Refunding Revenue Bonds Series 1987 and $56,035 000 Refunding Revenue Bonds Sertes 1991A (collectively the "Refunded Bonds") 10 order to lower the overall debt service requirements of the Agency and to pay the costs assocmted with the ~ssuance of the Bonds REFUNDED BONDS The principal and interest due on the Refunded Bonds are to be prod 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 pmwdes that from the proceeds of the sale of the Bonds received from the Underwriters, together w~th other funds of the Agency the Agency wdl depomt with the Escrow Agent the amount necessary to accomplish the discharge and final payment of the Refunded Bonds on thetr respective redemption dates Such funds will be held by the Escrow Agent m a special escrow account (the "Escrow Fund") and used to purchase direct obhgations of the Umtad States of America (the "Federal Securitms") Under the Escrow Agreement, the Escrow Fund ~s trrevocably pledged to the payment of the prmmpal of and interest on the Refunded Bonds Grant Thornton LLP a nationally recogmzed accounting firm, wdl verify at the t~me of dehvery of the Bonds to the Underwriters thereof the mathematical accuracy of the schedules that demonstrate the Federal Secunt~es wdl mature and pay Interest in such amounts whmh together wah uninvested funds ffany m the Escrow Fund, wdl be suffic~ant to pay, when due the principal of and interest on the Refi~nded Bonds Such maturing principal of and interest on the Federal Securities will not be available to pay the Bonds (see "Other Infonnatmn - Verification of Arithmetical and Mathematical Computations") By the deposit of the Federal Secuntms and cash ~f necessary with the Escrow Agent pursuant to the Escrow Agreement, the Agency wdl have effected the defeasance oI all of the Refi~nded Bonds ~n accordance with the law It ~s the opmlon of Bond Counsel that as a result of such defeasance and m rehance upon the report of Grant 'llmrnton 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 wdl not be deemed as being outstanthng obbgatlons of the Agency for the purpose of applying any hmltatlon on the ISSUance of debt The Agency has covenanted m the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfully avadable funds, of any additional amounts mqmred 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 ANI) USES OF FUN~)S The proceeds from the sale of the Bonds will be apphed approximately as follows Sources of Funds Par Amount of Bonds $108 530,000 00 Reoffermg Premium 226,244 00 I ransfers [rom Prmr Issue Debt Service bunds 3,237,380 00 Total Sources $111,993,624 00 Uses of Funds Original Issue Discount $ 839,204 85 Underwriters D~scount 649 757 75 Deposit to Current Refimdmg Fund 109,266,306 53 Costs of Issuance/Bond Insurance Premium/ Surety for Reserve Fund/Rounding Amount 1,238,354 87 Total Uses $111,993,624 00 THE BONDS DESCRIPTION OF TIlE BONDS ~[ he Bonds arc dated Jane 15, 2001 and mature on September I m each of the years and m the amounts shown on the ~nslde cover page hereof Interest wdl be computed on the basis of a 360 day year of twelve 30-day months, wdl accrue from the date of the m~tial dehvery of the Bonds and will be payable on March I and September 1 commencing March I 2002 I he defimt~ve Bonds will be issued only In fully registered form in any integral multiple of $5 000 for any one maturity and wdl be m~tmlly registered and dehvered only to Cede & Co the nominee of The Deposlto~ Trust Company ("DTC") pursuant to the Book-Entry Only System described hereto No physical dehvery of the Bonds will be made to the owners thereof Principal of premium ~fany and Interest on the Bonds will be payable by the Paying Agant/Reglstrar to Cede&Co which wdl make &stnbutlon of the amounts so paid to the participating members of DTC for subsequent payment to the baneficml owners o! the Bonds See 'Book-Entry-Only System' hereto 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 Uttht~es Code Chapter 163, Subchapter C as amended (the "Act"), and the bond resolution (the "Resolutmn") of the Agency adopted May 10 2001 PLEDGE The Bonds are specml obhgatmns 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 bund (subject to payment of Operating and Maintenance Expenses), and other Funds (mcfudmg investments therem) established by the Prior Lien Resolution the Subordinate L~en Resolution mid the Resolution, which hen and pledge are subject to and subordinate to the hen and pledge of the prmr Lien Obhgatlons The Resolution requires that upon the ~ssuance of Bonds the Reserve [ und contain an amount equal to the Required Reserve on the Bonds and the Previously Issued Subordinate L~en Bonds (See "Summary ofCertmn Provmons of the Resolutmn Reserve Fund") The Agency has reserved the right to issue additional Subordinate Lien Bonds See "Summary of Certain Prowslons o! the Resolution - Additional Suborthnate L~en Bonds and Relundmg Bonds" RATE COVENANTS The Agency covenants in the Prmr L~en Rasolntaon that It wdl at all times fix, establish and collect rates and other charges for power and energy or services sold or thrmshed by or m connectmn w~th the System which, together with 8 other raceme are reasonably expected to yield Net Revenues equaI to at least 1 25 times the Debt Service on the Prior L~en Obhgatlons for the fiscal year for wfuch such rates and charges shall apply and further covenants ~n the Resolntlon that ~t wxll estabhsh, fix, prescribe and collect rates and charges for power and energy, or services sold or furmshed by or in connection w~th the System which together with other income are reasonably expected to y~eld Net Revenues sufficient to satisfy the obhgat~ons of the Prior Lien Obligations and an amount equivalent 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 The Agency further covenants In the Prior L~en Resolntlun and the Resolution that, promptly upon any material change m the c~rcumstances which were contemplated at the t~me such rates and charges were most recently reviewed, but not less frequently than once In each fiscal year It w~ll 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 in any event produce moneys sufficient to enable the Agency to comply with all of its covenants under the Pr~or L~en Resolution and the Resolution and to pay all obhgat~ons of the Agency To the extent not used, surplus amounts on deposit ~n the Revenue Fund may be used for any lawful purpose See "Summary of Certain Prowslons of the Resolution - Rates and Charges" Each City covenants m the Contract to estabhsh, maintain and collect rates and charges for the elecmc service of ~ts electric system that will produce revenues at least sufficient, together with other revenues avadable to such electric system and avmlable electric system reserves, to enable ~t to pay to the Agency, when due, all amounts payable by such C~ty under the Contract DEu~r SERVICE RESERVE [q'UND, AMBAC ASSURAnCI~ St~RETY BOND The Resolution requires the estabhshment of a Debt Service Resarve Fund for the Bonds The Resolut~un anthor~zes the Agency to obtain a surety bond in place of fully funding the Debt Service Reserve Fund Accordingly, apphcanon 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 fur the Bonds (see "SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION" hereto) ~lhe Bonds w~ll 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 0) one (1) day after receipt by Ambac Assurance of a demand for payment executed by the Paying Agent/Registrar cert~tymg that prows~on for the payment of principal of or interest on the Bonds when due has not been made or (il) the mtarest payment date specified in the Demand for Payment submnted to Ambac Assurance Ambac Assurance wdl promptly deposit funds w~th the Paying Agent su~ic~ent 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 Covemge ~s automatically reduced to the extent of each payment made by Ambac Assuranan under the terms of the Surety Bond and the Agency ~s required to reimburse Ambac Assurance for any draws under the Surety Bond w~th interest at a market rate Upun such reimbursement, the Surety Bond ~s reinstated to the extent of each principal reimbursement up to but not exceeding the Surety Bond Coverage The reimbursement obhgat~on of the Agency Is subordinate to the Agency s obllgattons with respect ~ 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 a~er all the funds In the Debt Serwce Reserve Fund have been expended In the event that the amount on deposit in, or credited to the Debt Service Reserve Fund ~n addition to the amount avadable under the Surety Bond includes amounts available under a letter of credit, insurance pobcy 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 bas~s to fi~nd the lnsufticlency The Bond Resolution provides that the Debt Service Reserve Fund shall be replemshed ~n the fullowmg prlortty 0) principal and interest on the Surety Bond and on the Additional Funding Instrument shall be paid from first available Revenues on a pro mtn basis, (Il) a~er all such amounts are paid In full, amounts necessary to fund the Debt Service Reserve Fund to the required level, after taking ~nto account the amounts available under the Surety Bond shall be deposited from next avadable Revenues The Surety Bond does not insure against nonpayment caused by the insolvency or neghgence of the Paying Agent/Registrar For more mformatlon regarding Amban Assurance Corporation see "BOND INSURANCE" hereto THE POWER SALES CONTRACT A C~ty's rights and obhgatlons w~th respect to the Agency are set forth ~n the Contract Under the Contract, a City ~s obligated to take or pay for ~ts percentage share of the energy generated by the Agency and the Agency ~s obhgated to devote its best efforts to the generation and dehvery of energy from the generating fuctht~es of the Agency but the failure of the Agency to provide energy under the Contract wtll not reheve any Member C~ty of its obhgat~ons under the Contract, as such obbgat~ons are unconditional and absolute The Take or Pay Percentage Under the Contract, each of the Member Cttles ~s unconditionally obhgated to pay Io the Agency without offset or counterclaim and without regard to whether energy is dehvered by the Agency to the Member C~t~es their percentage of the Agency's annual system costs, including the payment of the Agency's debt serwce requirements and operating and maintenance expenses, as set forth below City of Bryan Texas 21 7% C~ty of Denton Fexas 21 3% Cay ol Garland Texas 47 0% Cay of Grecnvdle Texas 10 0% A City may choose to take or not take energy from the capacity of the Agency generating assets as ~t sees fit Debt Servtce Guarantee Percentage In any instance where the amount of money on deposit m the Agency's Bond Fund created by the Prior L~en Resolution ~s not the full amount then reqmred to be on deposit thereto w~thout giving conslderatmn to transfers made from other than the Agency's Revanue Fund or from proceeds of ~ts 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 obhgated to make their percantage share of a payment to the Agancy The aggregate amount of such payment ~s the amount that is necessary to estabhsh or reestabhsh the amount then reqmred under the terms of the Prmr Lmn 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 ~s determined by calculating the percentage relatmnsh~p that each Member City's Net Fnergy for Load (as defined ~n the Contract) for the contract year ~mmedmtely preceding the contract year m which the' calculation ts being made bears to the total aggregate Net Energy for Load o! all Member Cities for such contract year and the sum of the adlusted percentages shall equal 100% Allocation of Energy by the Agency Each Member C~ty shall be entitled to schedule and receive each month for ~ts own account the proportion of the available energy lrom the Agency's generation faclht~es equal to the Take or Pay Percentage as such percentage may be from t~me to time adjusted tn accordance with the provisions of the Contract Contract Term The contract term of the Contract m for a period of thirty-five years from September 1, 1976 or untd all bonds and certain other Indebtedness of the Agency ~s prod whichever occurs later At present the final maturity of the Agency's indebtedness ~s September 1 2018 although ~t is possible that the Agency could restructure its debt to shorten or extend the schedule of ~ts debt retirement Construction of New ProJects The Contract prowdes that the Agency must g~ve not~ce of intent to each Member C~ty containing a general descnptmn of any new proposed project the projected sources and uses of funds ~n connection therewith and a statement of the Agency s opmmn that such proposed project ~s necessary for the Agency to meet its commitments under the Contract and ~s economically feasible Each Member C~ty ts reqmred thereafter to notify the Agency, w~th~n 60 days ol its approval or disapproval of the project If each Member C~ty approves the project the Agency may thereafter ~ssue bonds to finance the prolect without further approval ol the Member C~t~es Any Member City disapproving a proposed project is reqmmd to elect one of two options set forth m the Contract The Contract ~ncludes provisions that thffer from those described above for the sharing of anergy and costs m the event that a new project ~s proposed and one or mom Member Cities do not detemune to pamc~pate ~n the prolect l here are no current plans for the Agency to initiate a new generation project Agency Rates The Contract prowdes that the rates and charges lot power energy and services charged to each Member C~ty by the Agency shall be (1) nondiscriminatory (2) fair and reasonable and be based on the cost of prowding the power energy and serwces with respect to which the rates or charges are based and (3) an amount sufhclent to 0) pay the Agency's annual system costs (ii) make thc deposits to the funds reqmred by the Prior Lien Resolution, the Suborthnate Lien Resolution and the Resolution (lu) fund the annual capital budget of the Agency m~d 0v) w~th respect to other funds or other accounts estabhshed by the board of d~rectorq of the Agency (the "Board of D~rectors") and not reqmred by the prowstons of the Prior L~en Resolution fund such funds or accounts m 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 s~x members of the Board of D~rectors with at least one member of the Board of D~rectors appmnted by each Member C~ty voting in favor of any such increase Rebate of Excess Revenues to the Member Ottes 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 ot each ltscal year thereafter over and above the amounts required in connection w~th subsections 0), (n) (n0 and 0v) of clause (3) of the preceding paragraph shall be returaed to the Member C~t~cs w~thm 120 days of such date ~n the same percentage as the percentage each C~ty contributed to such amounts Funds held pursuant to clause subsection 0v) of clause (3) of the precethng paragraph ~f approved by the affirmative vote of at least six members of the Board of D~rectors w~th at least one member of the Board of Directors appointed by each Member C~ty voting m the affirmative may be used to reduce the debt of the Agency Contract Payments Constitute Operating Expenses of the Ct(V Fhe Contract prowdes 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 electrm system Rate Covenant under the Contract Under the Contract each Member C~ty has covenanted to estabhsh maintain and collect rotes and charges for the electric serwce of ~ts electric system whmh shall produce revenues at least sufficient together with other revenue available to such electric system and avadable electric system reserves to enable it to pay to the Agency, when due all amounts payable by such C~ty under the Contract 10 Sale or Asstgnrnent of Electric &~stems Under the Contract and the Prior Lien Resolution, no sale or other disposition by a Member City of Its electric utihty d~strlbution system as a whole or substantially as a whole may become effective without the consent of all the Member Cities and the Agency durmg the term of the Contract A Member C~ty may assign its r~ghts under the Contract but such assignment shall not reheve such Member C~ty of ~ts financial obhgatlons under the Contract during the time any Agency Revenue Bonds are outstanding OPTIONAL REDEMPTION The Agency reserves the right, at ~ts optmn, to redeem Bonds hawng 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 I 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 ta 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 lfa 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 prmclpal amount thereof to be redeemed) shall become due and payable on such redemption date and mterest thereon shall cease to accrue from and after the redemption date, provided thnds 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 pr~or to a redemption date for the Bonds the Agency shall cause a not,ce el redemption to be sent by Umted States mall, first class postage prepaid, to the registered owners of the Bonds to be redeemed In whole or ~n part, at the address of the registered owner appearing on the registration books of the Paying AgenffReg~strar at the close of business on the busmass day next precethng the date of mathng such not'ce ANY NOT1CE 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 prowdas for thc defeasance of the Bonds when the payment of the principal of mid premium ~f 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 suffic*ent to make such payment or (2) Defeasance Securities, certified by an independent public accounting firm of nat:oriel reputatmn to mature as to pnnc*pal and interest ~n such amounts and at such times to insure the avmlabthty, w~thout relnvestment of sufficient money to make such payment, and all necessary and proper fees compensation and expenses of the paymg agent for the Bonds The Resolution prowdes that "Defeasance Securities" means (a) direct noncallable obhgatlons of the United States of America mcludmg obligations that are unconditionally guaranteed by the Umted States of America, (b) noncallable obhgatlons of an agency or mstrumentahty of the United States of America, including obhgat~ons that are unconditionally guaranteed or msured by the agency or instrumentality and that are rated as to investment quality by a natmnally recognized mvestment rating firm not less than AAA or its equivalent, and (c) noncallable obligations of a state or an agency or a county mumc~pahty or other political subd~v~sion of a state that have been refunded and that are rated as to investment quahty by a nationally recognized mvestment ratmg firm not less than AAA or ~ts equivalent The Agency has additionally reserved the r~ght subject ti) sat~sfymg the requirements of(l) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities or~gmally deposited to reinvest the uninvested moneys on deposit for such defeasance and to w~thdraw for the benefit of the Agency moneys m 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 Prowded 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 earher date, those Bonds which have been defeased to their maturity date, ff the Agency 0) in the proceethngs prowdlng fur the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption, (~) g~ves notice of the reservation of that right to the owners of the Bonds immediately fei}owing the making of the llrm bankmg and lmanc~al arrangements, and (ut) directs that notice of the reservation be included m any redemption notices that it authorizes BOOK-ENTRY-ONLY SYSTEM This sectmn describes how ownership of the Bonds ~s to be transferred and how the prmc~pal of premium ~f any, and ~nterest on the Bonds are to be prod 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 ~n disclosure documents such as this Offlclal Statement The Agency beheves the source of such reformation to be rehable but takes no responsibthty for the accuracy or completeness thereof The Agency cannot and does not g~ve any assurance that (1) DTC wdl distribute payments of debt service on the Bonds or redemption or other notices to DTC Participants, (2) DTC Participants or others will thstribute debt serwce payments pa~d 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 w~ll serve and act m the manner described mn this Official Statement The current rules apphcable to DTC are on file with the Securities and Exchange Comrmsslon, and the current procedures of DTC to be followed in dealing with DTC Partanpants 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 wdl be issued as fully-registered securities registered m the name of Cede & Co (DTC's partnership nominee) One fully registered cartlficate will be ~ssued for each matumy of the Bonds m the aggregate pnnclpal amount of each such maturity and wdl be deposited with DTC DTC is a limited-purpose trust company orgamzed under the New York Banking Law a ' banking organization" within the meaning of the New York Banking Law a member o! the Federal Reserve System a "clearing corporation" w~thm the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provlslons of Section 17A of the Secur~tlas Exchange Act of1934 DTCholdssecur~t~esthatltspartmlpants("DlmctPartlclpants")deposltwlthDTC DTCalso facthtates the settlement among Participants of securities transactions such as transfers and pledges In deposited securities through electromc computerized book-entry changes In Partm~pants' accounts, thereby ehmmatmg the need for physical movement of securities certificates D~rect Partm~pants include securities brokers and dealers banks, trust companies, cleanng corporations and certmn other organizations DTC is owned by a number of Its D~rect Participants and by the New York Stock Exchange Inc theAmencanqtockExchange Inc andtheNattonalAssocmtmnofSecunt~esDealers, lnc Access to the DTC system is also available to others such as securities brokers and dealers banks and trust companies that clear through or mmntam a custodial relationship w~th a D~mct Participant e~ther d~rectIy or Indirectly ("Indirect Partlc~pants") The Rules applicable to DTC and ItS Participants are on file w~th the Securities and Exchange Comm~sslon Purchases of Bonds under the DFC system must be made by or through DTC Parhc~pants, which will receive a credit tot such purchases on DTC's records The ownership interest of each actual purchaser of each Bond ("Beneficial Owner,,) ~s m turn to be recorded on the D~rect or Inthrect Partm~pants' records Baneficlal Owners will not receive written confirmation from DTC of their purchase but Beneficial Owners are expected to receive written confirmanons prowthng detads of the transaction as well as periodic statements ofthmr holdings from the Direct or Indirect Participant through which the Baneficlal Owner entered into the transaction Transfers of ownership ~nterest m the Bonds am to be accomphshed by entr~as made on the books of Participants acting on behalf of Beneficial Owners Beneficml Owners will not receive certificates representing their ownership mterasts in the Bonds, except ~n the event that use of the book-entry system described here~n is discont~nued To facilitate subsequent transfers ail Bonds deposited by Direct Participants with DTC are registered ~n the name ot DTC's partnership nominee Cede & Co The deposit of Bonds w~th DIC and their registration ~n the name of Cede & Co effect no change m beneficml ownership DTC has no knowledge of the actual Beneficial Owners of the Bonds DTC's records reflect only the ~dent~ty of the Direct Participants to whose accounts such Bonds are credited which may or may not be the Baneficml Owners The Part~cipants wdl remain responsible for keeping account of their holdings on behalf of their customers Conveyance of notices and other commumcatlons by DTC to Direct Partanpants by Direct Participants to Indirect Participants, and by Direct Part~mpants and Indirect Participants to Beneficial Owners will be governed by arrangements among them subject to any statutory or regulatory reqmrements as may be ~n effect from time to time Redemption notices shall be sent to Cede & Co if less than all of the Bonds wahm an ~ssue are being redeemed D~IC's practice IS to determine by lot the amount of the interest of each D~rect Participant ~n such issue to be redeemed Neither DTC nor Cede & Co wdl consent or vote w~th respect to the Bonds Under ~ts usual procedures DTC mails an Ommbus Proxy to the Agency as soon as possible aider the Record Date (hereinafter defined) The Omnibus Proxy assigns Cede & Co's consenting or voting rights to those D~rect Participants to whose accounts the Bonds are credited on the Record Date 0dent~fied tn a hstmg attached to the Ommbus Proxy) Principal and interest payments on the Bonds wall be made to DTC DTC's practice ~s to credit D~rect Partanpants' accounts on each payable date in accordance with their respecuve holdings shown on DTC's records unless DTC has reason to beheve that It will not receive payment on such payable date Payments by Partlmpants to Beneficial Owners will be governed by standing instructions and customary practices as is the case w~th securities held for the accounts of customers In bearer form or registered In "street name" and wdl be the responslbthty of such Participant and not of DTC the Paying Agent/Registrar or the Agency subject to any statutory or regulatory reqmrements as may be m effect from t~me to time Payment of prmclpal and Interest to DTC is the respons~bthty of the Agency d~sbursement of such payments to Direct Past~c~pants shall be the raspons~bthty of DTC and dmbursement of such payments to the Beneficml Owners shall be the respons~bthty of D~rect and Indirect Participants DTC may discontinue providing ~ts serwces as ~ecunties depository w~th respect to the Bonds at any nme by glwng reasonable notice to the Agency Under such c~rcumstances m thc event that a successor securities depository is not obtained Bonds are required to be printed and debvered The Agency may dec,de to d~scontmue use of the system of book-entry transfers through DTC (or a successor securities depository) In that event Bonds wdl be printed and dehvered Use of Certam Terms m Other Seetmns of this Official Statement In reading this Official Statemant tt should be understood that wh~le the Bonds are m the Book-Entry Only System references m other sections of th~s Official Statement to registered owners should be mad to Include the person for which the Pastlclpant acqmres an interest m the Bonds but (1) all rights of I2 ownership must be exercised through DTC and the Book Entry Only System, and (n) except as described above notxces that are to be given to registered owners under the Rasolutton 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 ts not to be construed as a representation by the Agency or the Underwriters Effect of Ter mmatton of Book-Entry Only System in the event that the Book Entry Only System ts d~scont~nued bY DTC or the use of the Book-Entry Only System ts discontinued by the Agency the following prowsmns will be applicable to the Bonds The Bonds may be exchanged for an equal aggregate principal amount of the Bonds in anthor~zed denominations and of the same maturity upon surrander thareof at the prmcipal 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 w~th a duly executed assignment m form satisfactory to the Paying Agent/Registrar For every exchange or transfer of registration of Bonds, the Paying Agant/Reglstrar and the Agency may make a charge sufficient to reimburse them for any tax or other governmental charge required to be pa~d w~fu respect to such exchange or registration of transfer The Agency shall pay the fee If any charged by the Paying AgentIReglstrar for the transfer or exchange The Paying Agent]Registrar will not be reqmred to transfer or exchange any Bond after ~ts selection for redemption The Agency and the Paying Agent/Registrar may treat the person in whose name a Bond ~s registered as the absolute owner thereof for all purposes whether such Bond ts overdue or not, mcfudmg for the purpose of receiving payment of or on account of the principal of premium if any and mtarest on, such Bond PAYING AGENT/REGISTRAR The initial Paying Agent/Registrar ~s F~rst Union Nanonal Bank, Houston Texas FU tbe Resolution, the Agency retains the right to replace the Paymg Agent/Registrar The Agency covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly prod and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent]Registrar for the Bonds Upon any change tn 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 United States mail first class, postage prepaid, which not,ce shall also give the address of the new Paying Agent/Registrar 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 AgentfRegtstrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or serwce charge to the registered owner except for any tax or other governmental charges required to be prod 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 asstgnmant acceptable to the Paying Agent/Registrar New Bonds will be delivered by the Paying AgentIRegtstrar ~n heu of the Bonds being transferred or exchanged, at the destganted office of the Paying Agent]Registrar or sent by Umted States mall first class, postage prepaid, to the new registered owner or his designee fo the extent possible new Bonds ~ssued m an exchange or transfer of Bonds will be dehvered 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 transfar 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 dehvered in an exchange or transfer shall be tn any integral multiple of $5,000 for any one maturity and for a hke aggregate designated amount as the Bonds surrendered for exchange or transfer See "Book-Entry-Only System" hereto for a descr~ption of the system to be utilized initially tn regard to ownership and transferabthty 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 ~n part w~th~n 45 days of the date fixed for redemption, provided, however, such hmitatmn of transfer shall not be apphcable to an exchange by the registered owner of the uncalled balance ora Bond RECORD DATE FOR INTEREST PAYMENT The record date ("Record Date') for the ~nterest payable on the Bonds on any ~nterest payment date means the close of business on the 15th day of the preceding month In the event ora non-payment of tntarest on a scheduled payment date and for 30 days thereafter, a new record date for such mterest payment (a "Special Record Date") wdl be estabhshed by the Paying Agent/P, eglstrar if and when funds for the payment of such interest have been received from the Agency Not,ce of the Special Record Date and of the scheduled payment date oi the past due interest ("Special Payment Date", which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mall first class postage prepaid to the address of each Holder of a Bond appearing on the registration books of the Paying AgentfReg~strar at the close of business on the last business day next preceding the date of marhng of such notice BONDHOLDERS' REMEDIES Except for the remedy of mandamus to enforce the Agency's covenants and obhgations under thu Resolution, the Resolution does not estabhsh 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 obhgations of the Agency In no event 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 tane conanmmg No assurance can be given that a mandamus or other legal acnon to enforce a default under the Resolutton would be succassful Fmthermore the Agency ts ehgible to seek reheffrom ~ts credttors under Chapter 13 9 of the U S Bankruptcy Code Although Chapter 9 prowdes for the recogmtion of a security Interest mpmsentod by a specffically pledged soume of revenues such prowsmn Is subject to judmml construction Chapter 9 also includes an automatic stay provision that would profufut, w~thout Bankruptcy Court approval the prosecution of any other legal action by credltom or bondholders of an entity which has sought protection under Chapter 9 Therefore, should the Agency avail ~tself of Chapter 9 protection from creditors the abthty 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 m Bankruptcy Court mstead of other federal or state court) and the Bankruptcy Code pmwdes for broad d~scretlonary powers of a Bankruptcy Court in administering any proceeding brought before it The opImon of Bond Counsel will note that all opinions relahve to the enforceabthty of the Resolution and the Bonds are quahfied with respect to the customary rights of debtors relative to their creditors In addltmn 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 hen 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 BOND INSURANCE Ambae Assurance Corporatton, a [,Ftsconsin stock insurance company ("Ambac Assurance"), has committed to deliver its lnsurancepohcyfortheBonds, asdescrtbedbelow ThefollowinglnformattonhasbeenfurnishedbyAmbacAssurancefor use In thts Offictal Statement, and references to the "Obhgor" should be read to mean the Agency The following mformatlon has not been tndependently vertfied by the Agency or the Underwriters and ts not guaranteed as to completeness or accuracy by the Agency or the Underwrtters and ts not to be construed as a representation of the Agency or the Underwriters ReferencetsmadetoAppendtxCforaspectmenoftheAmbacAssurancelnsurancepohey PAYMENT PURSUANT TO FINANCIAl GUARANTY INSURANCE POLICY Ambac Assurance has made a commitment to ~ssue a Financial Guaranty insurance pohcy (the "F~nanc~al Guaranty Insurance Pohey") relating to the Bonds effective as of the date of issuance of the Bonds Under the terms of the F~nanc~al Guaranty Insurance Pohcy, Ambac Assurance wlll pay to The Bank of New York m 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 Obhgor (os such terms are defined m the Fmancml Guaranty Insurance Pobcy) Ambac Assurance wdl make such payments to the Insurance Trustee on the later of the date on wfuch such pnncipal and mtereat becomes Due for Payment or wltfun one business day following the date on wfuch Ambac Assurance shall have rece~vad notme of Nonpayment from the Tmstoe/Paymg Agent The insurance will extond for the term of the Bonds and, once issued, cannot be canceled by Ambac Assurance The Flnancml Guaranty Insurance Pohcy wdl insure payment only on stated maturity dates and on mandatory sinking fund ~nstallment dates tn the case of principal and on stated dates for payment, m the case of interest If the Bonds become subject to mandatory redemption and ~nsufficlent funds are avadable for redemption of all outstanding Bonds Ambac Assurance will remain obhgated to pay pnnc~pal of and interest on outstanthng Bonds on the originally scheduled interest and principal payment dates ~ncludlng mandatory stoking fund redemption dates In the event of any acceleration of the pnnclpal of the Bonds, the insured payments will be made at such t~mes and m 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 whmh has become Due for Payment and wfuch is made to a Bondholder by or on behalf of the Obhgor has been deemed a preferential transfer and theretofure recovered from its registered owner pursuant to the Umted States Bankruptcy Code In accordance with a final, nonappealable order of a court of competent junsdanmn such registered owner wdl be entttled to payment from Ambac Assurance to the extent of such recovery If sufficient funds are not otherwise avadable The Financial Guaranty Insurance Policy does not Insure any rlsk other than Nonpayment as defined in the Pohcy Specifically the FmallClal Guaranty insurance Policy does not cover payment on acceleration, as a result o! a call for redemption (other than mandatory sinking fund redemption) or as a result of any other advancement of maturity 2 payment of any redemptmn prepayment or acceleration premium 3 nonpayment of principal or ~ntemst caused by the insolvency or neghgence of any Trustee or Paying Agent if any lflt becomes necessary to call upon the Fmancml Guaranty Insurance Pohcy payment of prmmpal requires surrender of Bonds to the Insurance Tmstoe together with an appropriate instrument of assignment so as to permit ownership of such Bonds to be reglstared in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy Payment of interest pumuant to the F~nanclal Guaranty Insurance Pohcy reqmres proof of Boadholder entitlement to interest payments and an approprmte assignment of the Bondholder's right to payment to Ambac Assurance Upon payment of the insurance benefits Ambac Assurance wdl become the owner of the Bond appurtenant coupon, if any or right to payment of pnnc~pal or interest on such Bond and wdl be fully submgated to the surrendering Bondholder's rights to payment 14 AMBAC ASSURANCE CORPORATION Ambac Assurance Corporation CAmbac Assurance") ~s a W~sconsm-domanled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of W~scoasm and hanased to do business ~n 50 states, the Dlstrtct of Columbia, the Tercltory of Guam and the Commonwealth of Puerto R~co, with admitted assets of approxlmataly $4,568,000 000 (unaudited) and statutory capital of approximately $2 787 000 000 (anandlted) as of March 31, 2001 Statutory capital consists of Ambac Assuranco's pohcyholders' surplus and statutory contmgancy reserve Standard & Poor's Ratings Services, a division of The McGraw-Hall Companies, lac, Moody's Investors Service and Fitch Inc have each asstgned a tr~ple-A financial strength rating to Ambac Assurance Ambac Assurance has obtained a nlbng from the Internal Revenue Service to the effect that the insuring of an obhgatlon by Ambac Assurance will not affect the treaUnent for federal income tax purposes of interest on such obhgat~on and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantmlly ~dentlcal to those contained in its Financial Guaranty insurance pobcy shall be treated for federal ~ncome tax purposes ~n the same manner as If such payments were made by the~ Obhgor of the Bonds Ambac Assurance makes no representation regarding the Bonds or the adwsabdlty of investing ~n the Bonds and makes no representation regarding, nor has ~t partanpated m the preparanon of the Official Statement other than the reformation supphed by Ambac Assurance and presented under the heathng "BOND INSURANCE" AVAILABLE INFORMATION The parent company of Ambac Assurance, Ambac Financial Group, lnc (the "Company ') ~s subject to the Informational requirements of the Securttlas Exchange Act of 1934 as amended (the "Exchange Act"), and In accordance therewith files reports, proxy statements and other Information with the Sceurmes and Exchange Comm~ssmn (the "Commlssmn") Such reports, proxy statements and other information may be ~nspected and cop~ed at the public reference faclhties mmntamed by the Comm~ssmn at 450 F~flh Street, N W Washington, D C 20549 and at the Commission's regmnal offices at 7 World Trade Center New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street Suite 1400 Chicago [Ihnots 60661 Cop~es of such material can be obtained from the pubhc reference sectmn of the Commission at 450 Flfrh Street, N W, Washington, D C 20549 at presarlbed rates In addition the aforementioned materml may also be ~nspected 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 ~s listed on the NYSE Copies of Amban Assurance's financial statements prepared in accordance w~th statutory accounting standards are avadable from Ambac Assurance The address of Ambac Assurance's admarlstratlve 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 w~th 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 2001and filed on January 24 2001 2) The Company,s Current Report on Foma S.K dated March l9 2001and filed on March l9 2001 3) The Company s Annual Report on Form 10-K for th~ fiscal year ended December 31 2000 and filed on March 28 2001, and 4) The Company's Quarterly Report on .Form 10-O for the fiscal quarterly permd 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 Officml Statement will be avmlable for inspection in the same manner as described above m "Avmlable lnformatmn" 15 REGULATORY MATTERS DEREGULATION OF THE TFXAS ELECTRIC [NDUS I RY INTRODUCTION RECENT CIIANGES IN RFGULATORY ENVIRONMFNT The electric industry in Texas has experienced dramatic statutory and regulatory changes m the past several year~ significantly impacting the Member Cities Legislation enacted by the TcxasLegislaturem 1995 deregulatedwholesalecl¢ctrlcralesandservicas thorder to promote wholesale electrlc compettoon such legislation d~rected the Public Utdltles Commission of Fexas (the PUC") to adopt rules reqmnng all transmission system owners to make their tr,~nsmission systcm~ available lot use by others at prices and terms comparable to each respective owner's use o£ its system for its own wholesale transactlon~ Yhe PUC implemented its ~ntoal transmission open access rules m Janumy ! 997 and most recently updated those ru~es in May 2001 Dunng the 1999 legislative session the Texas l cglsl,~tore enacted Senate Bill 7 ("SB 7") which provides £or retail electric open competition beginning in 2002 continues electric transml~sion open access and fi~ndameatally redefines and restpacturas the Foxes electric industry SB 7 includes prowstons that apply d;rectly to municipally owned utthtlas ("Mumcipal Utilities") such as the Member Cities as well as other provisions that wdl govern investor owned atthtlas ('!OCs") and electric cooperatives ("Electric Coops") SB 7 a}lows retail customers of IOU'~ to choose their electric supplier beglnmng January I 2002 as well as the retail customers o£ those Municipal Utilities and Electric Coups that have elected to part~clpate in retail electric competition Provisions ofSB 7 that apply to the Member Cities, as well as provisions that apply only to !OU'~ and Electric Coops are described below the lat~er for the purpose o£provldmg information concerning the overall restructured electric utthty market in which the Member Cities could choose to directly participate In the future GENERAL PROVIMONS OF SB 7 UNBUNDLING ~B 7 reqmrcd IOUs to separate retail energy service aatlwtles from regulated utility actlvlt~as by September 1 2000 and requires IOUs to unbundle generation /'unctions from transmission and thstnbutmn fiarcttons into separate companies by January I 2002 An !OU may choose to ~,el] one or more of 1ts hues of business to independent non-affiliated entitles or it may create separate hut afl, hated companies and possibly operating divisions that may be owned by a common holding company but which must operate largely Independeat of each other m comphance with the PUC,s Code o£ Conduct rules The services offered by such separate entities must be made evadable to other non-a~]hated parties on a non discriminatory basis at prices and terms comparable to the lOC s use o! 1ts own system Certain Pexas river authorities that operate electric generation and transm~s,,~on systems are also required to unbundle their electric operations but need not operate such separated fi~nctions independently from one another Mumc~pal Ut~ht~es and Electric Coopt that opt into competit~on are not required to unhundle 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 roles that are intended to protect consumers but they will otherwise be unregulated and may Tell electricity at market prices Owners of transmission and/or distribution taclht~es w~ll be "Transmission and Distribution Utthtles" and will be fi~lly regulated by thc PUC Retail sales acttwtlcS will be performed by new companies called "Retail Electric Prowdcrs" ("REPs") which are the only eatlt~cs authorized to sell electricity to fermi customers (other than to customers of Municipal Utlhtles and Electric Coop~ that have not opened their serwt~e areas to retail competition) REPs must register with the PUC demonstrate financial capabd;t~es and comply with certain consumer protection requirements They w~ll buy electricity from Power Generation Companies power marketers or other part.es and may resell that electranty to retail customers at any location in the State (other than customers o£Mumc~pal Utdmes and Electric Coops that have not opened their service areas to retail competition) Transmission and DIstrthution Utd~t~e~ wdl be obhgated to dehver the ~le{~trlc~ty Tbe PUC is required to approve the construatmn o~C new transm~ssion £acthties, and may order the construatlon of new facd~t~es to reheve transm~ssion bot~leneaks Transmission and Distribution Uttht~es w~ll be required to prowd¢ ,~ccess to both their transm~%ton and d~stnbutlon system~ on a non-d~scnmmatory bas~s to all ehgthle customers Rates for wholesale tra~smlsslon systems of Mumc~pal Utdltles a~d Electric Coops shall be determined by the PUC rates for the use o£ the dl~trlbatlon systems of such ent~tle~ wdl be determined by such entities Fach type o£ unbundled company is prohibited from providing services that are provided by the other types of unbundled companies MEASURES TO FOSTFR COMPFTITION AND ASSURF SERVICF S]~ 7 also provides a number ot consumer protection provisions Fvery area of the State will haw three "Prowder of Last Resorts approved by the PUC one for residential customers one for small non-resldentml customers and one for large non rcsident~al 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 o! Last Resort must also serve any customer whose REP has failed to prowde service Each Mumclpal Utihty and Electric Coop that opts into open competition shall appoint ~tsefi or another eatlty as the Provider o! Last Resort !or such service territory and the respective Mumc~pal Utility or Electrl~ Coop shall set the rates for such respective Provider of Last Resort rather than thc PUC Beginning September I 1999 each lOC must freeze it,, existing rates (except for a fuel factor passthrough) and must continue to serve ~ts retad customers at such ra~.es until 2002 Y~¢gmmng January I 2002 the unbundlcd REP o£the IOU that held the certificate to provide feted serwce to an area (the "Athhated 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 msldenDal retad customers ~n the area formerly served by the IOU The Affihated REP must serve all residential and small non-resident~al 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 untd January I 2005 whichever Occurs first Although the Affiliated REP may thereafter compete by offering prices that thffer from the reduced rate, xt most contmHe 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 lmplementet~un of reted competition in which they must sell 15% of their ganerat~on 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 a.qer retail competitlun begins SB 7 also provides protection by hmlDng the amount of generation that any single Power Generation Company, or group of commonly owned Power Generation Companies may own to 20% of the avmlable gcoemtion within a "power region" which wdl be created by the PUC SB 7 required any IOU (or affihated Power Gen~ration Company) that owns more that 20% of the installed electric genemtion wlthzn a power region to file a mit~gatiun plan with the PUC by December I 2000 whereby (1) its excess generation plants wdl be sold at an independent sale (n) its excess generation capacity will be auctioned offto an independent party m a Capacity Auct~un, (iu) it sells ~ts excess capacity for at least a four year period to an independent party, or 0v) it implements some other reasonable m~tlgaDon method The Member Cities are not subject to SB 7's Capacity Auction requirements or the 20% maximum generation ownership within a power region restrtct~un SB 7 preserves the PUC's regulatory authority over electric transm~ssion facilities and open access to such transmission faed~ties SB 7 provides for a transmission system operator that would be independent of market participants and which will be responsible for direct~ng and controlling the operation of the transmission network within ERCOT In addtuon, SB 7 thrects the PUC to determine electric transmission open access rates on a 100% "postage stamp" pricing methodology STRANDED COST RECOVERY Under SB 7, lOUs may recover a portion of their "stranded costs" (the net book value of certain "unn-ecunomic" 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 mount 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 compat~tlon market SB 7 estabhshes the procedure to determine the mount of stranded costs and regulatory assets In proceedings before the PUC utthtles' estimates are being reviewed for a mhng on the actual amount of stranded costs Once determined any stranded costs will be collected through a nonbypassable competltlun transition charge collected fi.om the end retail electric users w~thm 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 dehvermg electricity to such end user IOUs may recover a certain portlun 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 ssu ng, servicing and refinancing such bonds is secured by a quahfied 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 "secuntlzed" bondholders PROVISIONS OF SB 7 THAT APPLY TO MUNICIPAL UTILITIES AND ELECTRIC COOPS Mumclpal Utilities and Electric Coops are largely ex~mpt from the requirements of SB 7 While IOUs will be subject to open compeDtlon on January 1 2002 the govermng bodies of Municipal Ut~lities and Electric Coops have the sole thscreDon to determine whether and when to open their service territories to retail anmpetltiun However, if a Municipal Utth~y or Electric Coop has not voted to open its territory, ~t wdl n°t be able to compete for fetal customers at unregulated mtas outside its tratht~onal service territory While 1OUs must unbundle their generation from transmission and distribntlon and from retail sales activities Mumclpal Utihties and Electric Coops retain the discranon to determine whether to unbundle those business activities The greatgst potential impact on the System fi.om 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 P,.Eps resulting in a reduced electric Icad, while the Member C~Des obhganons under the Contract would require the continuation of their tske-or-pay obl~gations On the other hand, if a Member City's retail rates and ~ts abthtY to dehver dependable serwce am competitive with those of other REPs, that City may be successful m retaining existing customers Any decision of the Member City to participate in full retml competition would also permit that Member C~ty to offer electric service to customers that are unt 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 m areas that are open to competlD°n None of the Member Cities have anrrently elected to open their service temtury to retml competit~un beginning Janutuy 1, 2002 but the raspeetlve Member Cities could determine to make such election in the future As thscussed above, Municipal Utthties and Electrxc Coops will also continue to determine the rates for use of thexr distr~butxun systems after they open their temtorles to compettuon although the PUC will determine the terms and conditions for access to those systems 17 SB 7 also permits Mumc~pal Utd~tms and Electric Coops to recover their "stranded costs" through collection of a nonbypassable transit~on charge from their customers ~f so determined by such eta~t~es m a snmlar fashion to 1OUs Unllke IOUs the governing board ora Mumctpal Utthty determines the amount ol stranded costs to be recovered pursuant to rules and procedures established by such govermng board The stranded costs of Electric Coops are detenmned by their board of d~rectors pursuant to rules and procedures estabhshed by the PUC Mumc~pal Uttht~es and Flectrm Coops are also perm~iled to recover their raspecttve stranded costs through the ~ssuance of bonds ~n a similar fashion to the IOUs Adtht~onally SB 7 penmts the Texas Pubhc Finance Authority to Issue bonds payable fi-om a nonbypassable charge to the retail electrm customer of a Member City to recover such city's stranded costs as determined m the PUC qtranded Cost Report MISCELLANEOUS PROVISIONS OF SB 7 SB 7 reqmres all old "grandfathared" power plants - plants that have not previously been reqmred to comply w~th mr quahty em~ssmns standards administered by the Texas Natural Resources Conservation Comm~ssion ('qNRCC") that are owned by IOUs Mumc~pal Unht~es and Electrm Coops - to be brought into comphance w~th the mr quality emissions standards by May 2003 The cost of bringing the old plants into comphance may be included tn the determmanon of stranded costs oran IOU Munanpal Utility or Electric Coop (See 'Regulatory Matters- EnwronmentalRegu ation") SB 7 also sets goals for the development of renewable genaratmg technologies reqmras that the amount of renewable energy triple In Texas by 2009 and sets certain renewable generatmn target levels If a Member C~ty that opens ~ts sarvlce temtory to retad competition owns elecmc generanon but has not met ~ts reqmred renewable generation level ~t may be reqmred to purchase renewable energy arethts estabhshed by the PUC to comply w~th SB 7 ERCOT ERCOT ~s one of 10 Regmnal Rehab~hty Councils In the North American Electric Rehabthty Council The ERCO F bulk electric system ~s located entirely w~thm the qtate of Texas and serves more than 14 7 mithon customers, representing approximately 85% of Texas' electrical load The ERCOT service regmn covers more than 75% or 200 000 square mdes of the State and contmns a total ot approximately 35 000 redes of transmission hnes lncIuthng more than 7,000 miles at 345-kV ERCOT ~s connected electrically to other rehabthty couands through two direct current ("DC") lines, provlthng only hmlted ~mporffexport capablhty In response to legislative directive ERCOT mnended its art~( les of ~ncorporat~on to estabhsh aI~ Independent System Operator ("ISO")m1996 UnderERCOT'sorganlzatmnalstmcture the lSO reports to the ERCOT Board ofD~rectors ISOresponslbtht~es include security operations of the bulk system facthtanon and efficient use of the transmission system by all market participants m~d coordination of regional transmission planning anlong transmission owning utlhtles and providers Pnor to the enactment of SB 7 the ISO's primary respons~bthty was to ensure local rehablhty throughout ERCOT to re-d~spatch generating units to ensure that local rehablhty cmerta were met and to mitigate emergency condltlons The ISO also assisted control areas by coordinating transactmn schedules prowdmg commumcatmn interface performing operating condition surveillance and serving as ERCOT% centrahzed source tot ~nfonnatlon on system security SB 7 provides that the PUC shall earthly an independent system operator (and the PUC has certified the ISO within ERCOT) or other person that ~s sufficiently Independent of any producer or seller of electricity and which ts governed by a board that has three representatives from each segment of the electric market to perform certain fimct~ons specified by SB 7 Such thantlons include ~.stabhshmg mid enforcing procedures relating to the rehabdlty of thc regional electrical network and accounting for the production and dehve~y of electricity among generators and all other market partanpants The procedures are subject to PUC oversight and rewew The PUC may authorize the independent organization that ~s certified for th~s purpose to charge a reasonable and compet~t~valy neutral rate to wholesale buyers and sellers to cover the independent organization's costs SB 7 provides that a retad electric provider mumc~pally owned utthty electric cooperative power marketer transmission and distribution utthty or power genaratlon company shall observe all scheduhng operating planning rehabfi~ty and settlement pobc~es, rules, guldehnes and procedures estabhshed by the ~ndependent system operator ERCOT TRANSMISSION REVENUES Under the PUC s transmission open access rules each transmlsslon service provider m ERCOT is reqmred to prowde transmission servme to transmission customers m ERCOT As compensation for this service each transmission serwce provider annually receives ~ts ~lransmlsslon Cost of Service ( TCOS ) which ~s 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 prowston that was ~ncluded in SB 7 the Agency s new TCOS was determined by using a levehzed debt servme calculation The levehzed debt service calculation yields additional transmission service revenues that are dethcated 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 TIlE ENERGY POLICY ACT OF 1992 The lederal Energy Pohcy Act of 1992 (the ' Energy Act") greatly expands the authority of the United States I ederal Energy Regulatory Commtssmn (the "FERC ') to order utlhtlas including uttht~as within ERCOT to prowde transmissmn service for other uttht~es quahfymg facilities mid independent power producers The FERC also has anthoriB, 18 to determine the prices that may be charged for transmission but has generally deferred to the PUC eleetnc transmission open access roles for access and pricing within ERCOT RETAIL WHEELING The authority to order retail wheeling, which allows a retml customer to be located m one utdlty's service area and to obtmn power from another utility or non-utlhty source IS spee~fically excluded from the enhanced authority granted to the FERC under the Energy Act However, while the States may have anthomy to determine whether retad wheehng wdl be permitted FERC has determined that it has junsdmtlon over the rates, terms and condmons of fermi wheeling FERC FINAL RULES AND PROPOSED RULEMAKINGS IN FEDERAL REGULATION OF ELECTRIC UTILITIES To estabhsh foundations necessary to develop a competitive wholesale electricity market and effectuate the transmission access pmwslons of the Energy Pohuy Act, on April 24, 1996 FERC ~ssued two final roles ("FERC Rules") on non discriminatory open access transmission services by pubhc utilities and stranded cost recovery roles The first of the FERC Final Rules, Order No 888, requires all pubhc utthtlas that own, control or operate facilities used for transmitting elecmc energy ~n Interstate commerce to 0) file open-access, non- discriminatory transmission tsnffs containing, at a minimum the non-price terms and condtuons set forth In the order and (Il) thnct~onally unbundle wholesale power services by (1) applying unified transmission tariffs system to all customers, (2) pmwdlng separate rate systems for wholesale generation transralssion and ancillary services and (3) relying on the same electronic reformation dissemination network that its transmission customers rely on in sethug and purchasing energy The second final rule Order No 889, reqmres all pubhc utilities to establish or participate m an Open Access Same-T~me Information System (OASIS) that meets cerlam specifications, and comply with standards of conduct designed to prevent employees of a pubhc utthty (or any employees of ~ts afllhates) engaged m wholesale power marketing functions from obtaining pmterentml access to pertinent transrmss~on system m formation The FERC stated that its overall objective ts to ensure that all partanpants tn wholesale electricity markets have non thsarimlnatory open access to transmission service including network transmission service and ancillary services The FERC also lndlcatad that ~t intends to apply the pnnclples 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 requmng such utdit~es to agree to pmwde open access transmission service as a condtuon to securing transmission servlee from jurisdictional investor-owned utd~txas under open access tariffs In addition, on May 12, 1999 the FERC released a Notice of Proposed Rulemakmg to estabhsh Regional Transmission Organlzatmns ("RTOs") The proposed rulemaking contemplates RTOs as voluntary partanpatlon assomat~ons of power transmission owning entities comprising public and non-pubhc utthty entities which would more efficiently address operational and rehabthiy issues confronting the industry In particular by improving grid rehablhty increasing effimencies 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 unhtles the FERC Rules have a significant Impact on such uttht~as' operations The FERC Rules have significantly changed the competitive climate m which the non FERC regulated ottht~es operate giving their customers much greater access to altamat~ve sources of electric transmission services The rules require them to provide open access transmission servme conforming to the requirements f°r IOUs whenever they are properly requeeted to do so undar the Energy Pohcy Act or as a condition of taking transmlssl°n serwce fr°m an IOU In certain c~rcumstances, the non-FERC-regnlated utilities are required to pay compensation to thmr present suppliers of wholesale power and energy for stranded costs that may arise when the non-FERC-regulated utilities exercise their optmn to sw~tch to an alternative supplier of electricity PROPOSED FEDERAL LEGISLATION Many bills have been lntreduced ~n the Umted States House of Representatives and the Umted States Senate to deregulate the electric utthty industry on the federal or state level including bdls supported by the Chnton Administration Many of the bills prowde for open competitmn m the fi~rmshlng of electricity to all retail customers 0 e, retad wheeling) In addition, various bdls 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 bdls will become law or ~f they become law what their final form or eflbct would be ENVIRONMENTAL REGULATION Electric utlhtles are subject to numerous enwronmental statutes regulations and other rules admlmstered at the federal, state and local level These environmental rules are subject to change and tend to increase and become more stringent over ttme These changes may arise from continuing leg~slatwe regulatory and jud~cml actmn regarding the promulgation and implementation of such standards and procedures Consequently there ~s no assurance that Gthbons Creek wdl remain sub.leer to the regulations currently m effect, will always be in comphance with present or future regulauons or will always be able to obtain all required operating permits In addition more stringent environmental requirements may reqmre slgmficant upgrades m environmental controls, reduced operating levels or, where the necessary upgrades are not economical the complete shutdown of mthvidual elecmc generating units ACiD RAiN PROVISIONS OF THE 1990 CLEAN AIR ACT AMENDMENTS The Clean Air Act (CAA) originating m 1967 with the A~r Quality Act, has imposed increasingly stringent controls on mr emissions from industrial factht~es ~nclud~ng elecmc power generat~onfacdtueshketheG~bbonsCreekfacthty Themost recantand far-reachlng changes to the CAA arethe 1990amendments ortheCAAAmandmentsofl990(CAAA) Ofspeclficmteresttoownersofelectrmgeneratmnfacfl~tles the 1990Amendments 19 seek to improve the mnb~ent mr quahty throughout the Umted States and reduce the effects of so-called "Ac~d Rmn" through the reduc0on of sulfur dmx~de and mtrogan omdes cm~ssmns from electric utlhty power plants particularly those fueled by coal W~threspecttosulfurthox~deem~ss~ons the 1990 Amendments prowde for a two-phase approach for ~mplementat~on Phaseltook effect January I 1995 and reqmres 110 coal-fired umts to reduce sulfur dioxide emissions to certain tonnage levels provided in the 1990 Amendments based on em~sslon 'allowances" allocated to the "affected umts" The 1990 Amendments identify specific "affected umts' which must meet the Phase I sulfur dlomde emlssmn hmlts by the beginning of Phase I Phase II lmplemanted January I 2000 reqmres affected utthty un:ts to meet more stringent sulfur thomde emission hrmtations than m Phase I fhe Gibbons Creek lacthty is subject to these sulfur dioxide emission requirements but based on the sulfur dioxide emission reductions achieved m connection w~th the change to Wyoming Powder R~ver Basin coal (thscussed m greater detad below), the Agency has suffic~ant sulfur dmx~de allowances lot projected operating rates of the facthty The EPA Issued a finaI rule ~mplement~ng the mtrogan oxide acal ratn provisions under Section 407 of the CAA on March 22 1994 The role eslabbshes performance standards for controlhng emissions from coaM~red dry bottom and tangentmlly fired boilers (Group I boilers, s~mllar to those operated by the Agency) Phase I umts were requtred to begin complying with these annual mtrogan oxide em~sslon hmltsbegmnmgJanumy I 1995 In December 1996 the FPA ~ssued a rule ~mplementmg the second phase of the mtrogen oxide acid raar program The rule lowers the mtrogan oxide control standards for Phase Il umts w~th Group I boilers and became effective on January I 2000 However, the final rule ~ssued m March 1994 provtdes an "early electron" option for those Phase Il umts that are capable of anhlewng early compbance w~th the Phase I mtrogen oxale standards As an recent:ye for early compbance, the early elect~on program allowed partanpatmg un~ts to defer comphance w~th any more stringent mtrogan oxide phase II standards until january 1, 2008 The Agancy has chosen the "early electron" op0on The owners and operators of all affected utthty units under the acid disposthon control program of the CAA must obtarn a permit from the EPA or from a state agency with an EPA-approved permitting program to emit sulfur dlomde 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 T he Agency s Federal Operating Permit for he Gthbons Creek tacl lty was issued on September 15 1999 Another aspect of the 1990 Amendments apphcablc to the electric utfuty industry is the requirement that continuous emlssmn monitors ("CEMS") bc xnslalled m~d operated on all affected umts The EPA promulgated final CEMS rules effective January 11 1993 ACEMSattheGtbbonsCreekfacthtywas~nstalleddunngor~gmalconstructlonand upgraded to CAAA 1990specfficatmns in 1994 The upgraded system was cert~fied pursuant to the apphcable regulatory standards ~n January 1995 AMBIENT AIR QIJAI ITY STANDARDS AND THE CONTROL OF NITROGEN OXIDE The 1990 Clear Air Act Amendments also ~mplemant more strmgent rules designed to the acfueve comphance with the national ambmnt air quahty standard for ozone When the ambient air concentration of ozone for a particular geographic area exceeds the standard the area ~s classified as "non-attainment" for ozone A non atlammant designation then triggers a process by which the afrEcted slate must develop and ~mplemant a plan to improve mr quahty and "attain" comphaace with the appropriate standard This is the ' State lmplemanlatlon Plan" or "SIP" for the partmular ozone non-attainment area. which includes enforceable control measures for the reduction of relevant air emissions from ardustrlal automottve mid other sources For ozone non-attammant SIPs the emission reductions are generally targeted at nitrogen oxide and volatde orgamc compound emission sources because :t is beheved that the chemical reaction between these compounds ~n the presence of sunbght leads to ozone formation Whde the G~bbons Creek lacd~ty ~s not located m an ozone non-atlalnmant area, the Texas Natural Resource Conservation Commission ( q31RCC ) concluded that emissions lrom elecmc utflmes located in central and east Texas are contrthutmg to ozone formation ~n throe ozone non attmnment areas located ~n the Pexas the Dallas Fort Worth, Houston-Galveston, and Beanmont-Port Arthuramas As a result on Apn119, 2000 the~NRCC~ssuedfinalrulesthatwdlreqmrethereductionofmtroganoxldeemlsslons at large elecmc uttht~es located m 31 east and central lexas counties, including Grtmes Couniy For coal-fired electric utilities including Gthbons Creek the combustion umt must acfueve an average annual mtrogan oxide eralSSlOn rate of 0 165 pounds of mtrogan oxide per m~lhon BTU of heat generated Comphance with tfus standard must be acfueved by May 1 2005 To achieve the reqmred level of emissions Gibbons Creek must undergo slgmficant modification The Agency has developed a phased approach to achtevmg comphance The ~mt~al two phases revolve modifications to the combustion process to hm~t the formation of nitrogen oxides m the burner system Spemfically these lmtial two phases include ~mprovemants to the fuel supply systems and the mr and fuel dehvery to the combustmn section of the holies The Agency has begun these two m~tial phases and has budgeted approximately $I0 7 mdhon for th~s port~on of the nitrogen oxide control project Followarg corapletlon of phase I and Il the Agency wdl reassess the mtrogen oxide emissions from the Gthbons Creek faclhty and evaluate what, if any, post combustion controls for mtrogen oxide emlsmons are necessary to achieve the required emission reductions Post combustion controls may arclude Select~ve Non-Catalytic Reductmn ("SNCR,,) and Seiect~ve Catalytic Reductton (.SCR,,) systems The final cost of meeting the more stnngent emission standards will depend upon the success of the first two phases of mothficatlons and the technically feasible alternatives for post-combustion control The total capital cost of compliance with the revised NOx emission control reqmrements ~s expected to be on the order of $20 mdhon but no assurances can be glvan in this regard If the more expensive post- combustion controls are necessmy total capital costs may exceed $50 million Many of the proposed emission control technologies 20 also have the potential to slgmficantly increase operating and mmntenance 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 prowde for possible further regulation of toxic air emissions from electric ganemtmg umts, including potantlal a~r emissions of mercury compounds from coal- fired elcetrlc,utthty bmlers In accordance with these statutory requirements the U S Environmental Pretect~on Agency promulgated a regulatory determination m December 2000 annouanmg that it was developing new rules to regulate a~r emlssmns of marcury from coal-fired power plants EPA mthcated that ~s would likely adopt final mlas m 2004, and compliance reqmrements would likely be required no earlier than the 2007 t~me frame These new rules may require medlficat~ons to the Gibbons Creek facility CLOSED MINI~ AND WASTE DISPOSAL FACILITY REMEOIATION OBLIGATIONS Up until 1996 the Agency mined the coal utlhzed at the GIbbons Creek fucthty at the 18,000acrehgmtemmel°catedad3acentt°thep°werplant The Agency has shut down this mining operation following the conversxon to low-sulfur Wyoming Powder River Basra coal The Agency ~s obligated to perform certain remedlat~on and land reclamation actlVtuas at the closed mtmng sites Over the hfe of the mine the m~mng opemtxons d~sturbed approximately 8744 acres The Agency reclamation plan calls for the creation of apprexlmately 7 100 acres of pastureland 1,500 acres of developed water resources, and over 100 acres of property for industrial or commereml use lnlt~al remed~atlon work IS anmplete on more than half of the disturbed area (4 700 acres) and these areas are either being momtored m the "Extended Responslbthty Period," or released from the remedial program The Texas Radroad Commission rules include bonding requ~remantstoprowdefinanclalassurancefurthecompletlonofthes~teremedlatxon In the last ~wo years progress mtheremed~al work has permitted the Agency to reduce its bonding requlremants from $94 mdhon to appruxlmately $35 5 mllhon Of th~s $35 5 million apprux~mately $7 mllhon is self-banded G~bbons 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 ~n conjunction w~th combustion of the h~gh-sulfur hgmte produced by the Gibbons Creek mme The ash and scrubber sludge are thsposed of at the Agency's on-site landfill The Agency Is generally responsible for the hab~htlas associated wxth th~s waste disposal and any related site contamination In that regard, the presence of hazardous substances at ~lbbons Creek could expose the Agency to potential habd~t~es associated with the cleanup ot contaminated soil and groundwater under federal or state "Superfund" statutas Undar the federal Comprehensive Enwronmental Response Compensation and Llabdlty Act of 1980, as amended (CERCLA or "Superfund") owners and operators of fuellme~ from wfuch there has been a release or threatened release of hazardous substances, together w~th those who have transported or arranged for the disposal of those substances are l~able for the cost of responding to the release as well as any damage to natural resources The hablhty imposed by the statute is both strict (t e without regard to fault) and under almost all circumstances joint and several Any such l~afuhtlas could have a material adverse effect on the Agency Nevertheless the Agency rmmmlzes and where possthle eliminates, the use of all hazardous substances m ~ts operations and believes ~t Is m comphance with all apphcable rules in tfus regard Moreover the Agency ~s not aware of any habdlttes that it is responsible for under CERCLA or slmdar 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 D~rectors 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 C~tlas The Contract requires the Agency to prepare annual budgets projecting ~ts Annual System Costs for the succeeding year including debt serwce requirements on ~ts bonds, and to submit the same to the Member Cltlas Based on these and other budgetary facts and astlmates the Agency sets the rates and charges to be prod by the Cxt~es for the ensuing year THE AGENCY'S GENERATION UNIT The Agency's power supply source consists of the Gthbons Creek Steam Electric Station located m Gr~mas County, Texas and includes a single net 462 megawat~ ("MW") Wyoming Powder R~ver Basin coal fueled steam aleetr~c plant, reservmr, rmlroad spur, associated transmission factht~as, an adjacent surface m~ne no longer m use and relatedpr~pertresandequ~pmant("GlbbonsCreek") GlbbonsCreekbegancommarclaloperatlononOctoberl 1983 Forthe fiscal year ended September 30, 2000, Gibbons Creek's capacity and avaxlabxhty were 83 25% and 83 90% respectively MODIFICATIONS TO PLANT AND OPERATIONS Gthbons Creek was daslgned to burn hgmte 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 m the Wyoming Powder R~ver Basin The medlficatlons included the installation of an advanced design steam path turbine and the installation of adthtmnal superheat sectmns These modifications have increased the generation capacity and the operating efficiency of the plant The mothficatlons made to G~bbons Creek relating to the fuel conversion were completed m the summer of 1997 Mining operations were halted by the Agency at the G~bbons Creek M~ne m February 1996 In 1997 the Agency terminated several leveraged leases for certain m~nlng equipment by acquiring the equipment and then selhng ~t m order to reduce operating expenses at the Gibbons Creek Mine The modifications to the plant and the change m fuel were made w~th the expectation that they would provide fuel cost savings m comparxson with the operation of the Gibbons Creek Mine for fuel, to 21 reduce the planned outage cycle at G~bbons Creek and to allow the Agency to achieve compliance with the federal Clean Air Act w~thout the need for add~tmnal sulfur dmmde allowances Over the permd from fiscal year 1992-93 to 1998 99 the Agency has undertaken to reduce operating and maintenance costs of its plant including through the reduc0on of employees and personnel costs During such t~me, the number of regular employees has been reduced by apprommately 61% The largest lactor in the reduction of personnel has been the closing of the G~bbons Creek Mine whmh reduced the number of engineering and operations employees and the related reduction tn administrative support staff The 2000 01 fiscal year budget for the Agency ~ncludes 125 employees down from 346 m the 1992-93 fiscal year In November 2000 the Agency entered ~nto an agreement w~th Kennecott Energy Company for a 36-month supply of coal from the Powder R~ver Basra commencing on January I 2001 The sources of coal under the agreement are the Cordero Rojo Complex and the Jacobs Ranch Mine ~n Wyoming In October 1995 the Agency entered Into a coal transportation agreement with the Burhngton Northern Rmlroad Company now the Burhngton Northern Santa l~e ("BNSF") under whmh BNSF ~s obhgated to prowde rml transportation for the Wyoming Powder R~ver Basra coal purchased by the Agency The 1995 agreement expired on March 31 2001 The Agency pursued negotmtlons w~th BNSF through the Summer of 2000 but was unable to secure a satmfactory new or extended contract arrangement to take effect upon exp~ratmn of the 1995 agreement Therefore tn July 2000 the Agency formally requested BNSF to establish rates and terms for common carrier coal transportation service to G~bbons Creek in both shtpper and carrier supplied rallcars etlec0ve at the conclusion ol the current contract In August 2000 BNSF gave a partial response by quoting a common carrier rate tn cars supphed by BNSF The Agency considered th~s rate to be unacceptable, and In October, 2000 petltmned the federal Surface Transportatmn Board (STB) to compel BNSF to set reasonable rates for the Gibbons Creek service m both carnet supplied and shtpper-supphed radcars A final decision by the STB ~s expected by February 2002 In the meantime, the Agency w~ll use the common carnet rate and ~erwce quoted by BNSF as necessary to transport coal subject to approprmte adjustments and as apphcable reparations payments by BNSF once the STB determtnes the proper rate THE AGENCY'S TRANSMISSION FACILITIES The Agency-owned transm~ssmn system consists of 345-kV and 138-kV switchyard faclht~es and transmlssmn hne faclhtles m the wcmlty of the G~bbons Creek Statmn, as well as add~tmnal 345-kV and 138-kV hnes and substatmn facllmes m Brazos Colhn Dallas Denton Grimes Hunt Montague Robertson, Rockwall and Wise countms of Texas lhese facilities prowde t~es to the Member C~t~es TXU Electric Relmnt 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 Darnel ("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 w~ll continue to manage the operation and mamtanance of G~bbons Creek DFD's scope of work has been expanded under the new Employmant Agreement In addition to managing Gibbons Creek DFD Is under the new Employment Agreement responsible for managing the transm~ssmn system as well as managing matermls procurement ~ncludmg procurement ot fuel and fuel transportation services lhe General Manager of the Agency will continue to manage the (J~bbons Creek Mine and Lake the Agency Finance Department and related adm~mstrat~ve functions The new Employment Agreement authorizes the Agency to terminate the Employment Agreement for convemance at any t~me following a thirty-day notice period Under th~s provision the Agency ~s permitted to terminate the Employment Agreement for convemence w~thout penalty by dehvermg a nooce to DFD w~thm 30 days after the end of the third year of the lmtlal term of the Agreement, or w~thln 30 days after the end ot the third year of any renewal term In all other cases ~n order to terminate the Employment Agreement for convemence the Agency ~s obhgated to pay to DFD a termmatmn fee FACTORS AFFECTING THE ELECTRI( UTILITY INDUSTRY 'lhe electric utdlty industry ~n general has been or m the future may be affected by a number of factors that could nnpact the financial condlnon and competalveness of an elecmc utthty and the level of utd~zat~on of generanng and transmission lac~htms Such factors include among others, (a) effects of compliance w~th rapidly changing environmental saIety hcenslng regulatory and legislative requlremants (b) changes resulting from conservation and demand-s~de management programs on the t~m~ng and use of electric energy, (c) changes resulting lrom a national energy pohcy (d) effects ot competition from other electric uttht~es (including increased competmon resulting from mergers, acqms~tmns and "strategic alhances" of competing electric and natural gas utilities and from competitors transmitting less expensive electrmlty from greater distances over an Interconnected system) and new methods of and new faclhtles for producing Iow-cost electnctty, (e) the proposed repeal of certain federal statutes that would have the effect of Increasing the competltlvaness of many investor-owned utlhtlas (f) increase competition from Independent power producers and marketers brokers and federal power marketing agencies (g) 'self-generatmn" by certmn mdustrml and commercml customers, (h) ~ssues relating to the abd~ty to issue tax exempt obhgatmns including severe restrictions on the abthty to sell to non-governmental entlt~es electranty from generation projects and transm~ssmn service from transmission hne projects financed w~th tax-exempt obhgatlons 0) effects of ~nflatlon on the operating and maintenance costs of an electric utthty and tts thcthttes, (I) increases m costs and uncertain avadabd~ty of capttal (k) shffis m the avadabd~ty and relative costs of d~fferant fuels (including the cost of natural gas), and (1) sudden drastic ~ncreases in the price of energy purchased on the open market that may occur m t~mes ofh~gh pubhc demand tn an area experiencing such h~gh peak demand Add~ttonally, while mumc~pal utthties are largely exempt from the reqmrements ofSB 7 as d~scussed above under "Regulatory Matters," the full Impact ofSB 7 on the Agency and the Member 22 Cities cannot be determined at th~s 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 utlhnes m different ways The Agency cannot predict what effects such factors will have on the operations and finanmal condition of the Member Crees but the effects could be significant The discussion ofanch factors herein does not purport to be comprehensive or definitive and these matters are subJeCt to change subsequent to the date hereof Extensive mformat~on on the electric utihty ~ndustry ~s and wdl be, avmlable from the legislat~ve and regulatory bodies and other sources m the pubhc domain and potential purchasers of the Bonds should obtain and review such information FORWARD ~OOKING STATEMENTS The statements contained ~n th~s Official Statement and ~n any other reformation 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 futura Readers should not place undue reliance on forward looking statements All forward-looking statements included m this Official Statement are based on reformation avadable to the Agency on the date hereof, and the Agency assumes no obhgation to update any such forward-looking statements It is ~mportant to note that the Agency's actual results could differ materially from those m such forward looking statements The forward-looking statements hemm are necessardy 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 c~rcumstanees and conditions and actions taken or omitted to be taken by third part,es ~ncludmg customers, supphers, business partners and competitors, and leg~alatlve judicial and other governmental authorit~es and offimals Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and futum 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 lnaccurata and, themfom them can be no assurance that the forward looking statements included In this Official Statement would prove to be accurate DEBT INFORMATION TABLE I -DEBT SERVICE REQUIREMENTS (1) Includes $195,000,000 Tax exempt Commarc~al Paper Notes and $26 300 000 Taxable Commercial Paper Notes whmh have been illustrated at the interest rates of 3 50 and 6 0%, respectively, for parposes of dlustratlon (2) Excludes the Refunded Bonds 23 FINANCIAL INFORMATION TABLE 2 - CONDENSED STA r~ MENT O~ OPERATIONS Fiscal Year Ended September 30, 2000 1999 1998 1997 1996 (Dollars In Thousands) Operating Revenues Betore Relunds Power Sal~.s $165 097 $168,886 $168 103 $158,202 $163,661 Other Operating Income 18,226 8,790 5,710 5,903 5,994 Total Opemnng Income $183,323 $177,676 $173,813 $164,105 $169,655 Operating Fxpenses Fuel $ 39,542 $ 34 144 $ 39,907 $ 37,581 $ 41,297 Purchased Power 957 Productmn Operation and Maintenance 11,981 11,671 12,602 I I 835 14 405 Transmission Operation and Maintenance 4,066 8,934 5,946 5,456 3 482 Adm~mstratlve and General I 1,446 8,923 10,480 9,155 10,425 L~gmte Temunatmn costs 7 10,035 3,191 6,286 17,733 Depreciation 17,637 17,642 18,649 18,352 18,124 Total OpemttngExpenses $ 84,679 $ 91,349 $ 90,775 $ 88,665 $106,423 Operatlnglncome $ 98,644 $ 86,327 $ 83,038 $ 75,440 $ 63,232 Other Income (Lxpenses) lnvestmentRevenuelncome $ 10,028 $ 8,010 $ 11,683 $ 11,391 $ 12573 Miscellaneous Other Income (Lxpenses) (1,089) 2,757 (1,649) 1,856 (I 787) TotalOtherlncome $ 8939 $ 10767 $ i0,034 $ 13247 $ 10786 Fotallncome $107,583 $ 97,094 $ 93,072 $ 88,687 $ 74,018 Interest Charges Interest ExpenseonDebt $ 79,510 $ 78,525 $ 78 835 $ 76,360 $ 75,226 lntemst Expense on Other 2,089 2 144 Amor~lzatmn of Debt issuance Costs and Excess Costs on Advance Relundmg of Debt 13 544 15 377 15,543 15,784 15,840 Total lntemst Charges $ 93054 $ 93,902 $ 94,378 $ 94,233 $ 93210 Costs to be Recovered m Future Years (11,426) (34,644) (30,876) (33,815) (47,776) Net Revenues before Refimds 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 Crees (27,837) (28,814) {31,878) (27,837) (27,837) Change in Accumulated Excess Revenues (4,924) 5,491 (4,393) (5,356) (I,797) Accumulated Excess Revenues At Beginning of Period 32,990 27,499 31,892 36,835 38,632 At End ofPenod $ 28,066 $ 32,990 $ 27,499 $ 31,479 $ 36835 24 LOAD AND ENERGY REQUIREMENTS AND RESOURCES PEAK AND ]~NERGY REQUIREMENTS The Cities - The Cities ~nst~tuted a Load Management program in late 1986, ~n an effort to reduce Peak Demand growth and increase the Load Factor These programs are diverse, consisting of contractmg w~th mterruptlble ~ndustrad customem customer rebates for mstallatlon of high efficiency appliances, and radio controlled switches to turn off customem air condluoners for a portion of each hour durmg peak periods The benefits of most of thase programs are cumulative, and are not expected to reach saturation for a number ofyears Dunng the last five years, the programs performed better than projected and have reduced peak demand bY 94 MW Coupled w~th a15% reserve reqmrement, the programs have reduccd the need for fut~aregeneratlonaddltlonsbyover 108MW The Agency and the Cities are actively pursumg these and other Load Management programs ~n an effort to better utthze existing base load genarat~on and to defer future ganer~lmg 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 dehver 100% of its net power and energy to the Ctuas Tbe Agency Is obhgated to use ~ts best efforts to d~spose of any avmlable surplus over the amounts requested by the Clt~as The Act hmxts the Agency's authority to sell power and energy by prowthng that the Agency can make sales only to the Cities and to private entities which are jomt owners of generanng thctht~es located within the State of Texas The Cities are not subject to any slmdar hmltat~ons and are ganarally authorized bY law to make sales of wholesale power to any pubhc 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 C~ty's operataons the shared savings from economic d~spatch and revenue from sales to other uttht~es See Appandlx B for a summary of the operations of the Member Ctues (Retnalnder of Page Intentionally Left Blank) 25 SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION ARTICLE I DFFINITION OF TERMS Sectmn I 01 Defimtmns Unless the context shall mthcate a cantrary meaning or intent, the terms below defined for all purposes of any Bond Reanlutmn or any resolution amendatory or supptemental thereto shall be construed are used and are Intended to have meanings as follows "Act" - V T C A Utd~t~es Code, Chapter 163 Subchapter C as amended "Adthtmnal Prior L~an Bonds" -- bonds anthonzed to be Issued on a parity with the Previously Issued Prior Lien Bonds "Additional Subordinate I ten Bonds ~ bonds anthonzed to be Issued under the provisions of Sectmn 6 01 hereof "Agancy" -- the ~I exas Municipal Power Agency a munanpal corporation, a pohtlcal subthvlslon o£the State of Texas and a body pohtlc and corporate, duly orgamzed and existing under the Act "Annual Budget" the Annual Budget as amended or supplemented adopted or m effect £or a parttanlar F~scal Year as prowded m Sectmn 5 18 "Authorized Ol~cer" - the President V~c¢ President or Secretary of the Board or the General Manager of the Agency and any other person authorized by resolntmn of the Board to perform the act or sign the document ~n question "Average Annual Debt Service" - the annual arithmetic average (F~scal Year bas~s) of the principal o£ and mtarest on all Outstanthng Bands becoming due trom the date ol calanlatlon to the earlier of the date of maturity of such Bonds or to the date such Bonds are reqmred to be called for redemption "Board" the Board o£D~rectors o~ the Agency "Bond Date" the date specified m the Bond Purchase Agreement and as detarmmed by the General Manager o£ the Agency m accordance w~th the provanons of Sectmn 2 01 hereof "Bond Fund" the Subordinate L~en Bond Fund "Bond Purchase Agreement" thc agreement between the Agency and the underwriter or underwriters muned thereto pursuant to which the Agency agrees to sell the Bonds "Bond Reg~stmtton Books" the books for the registration and transfer of Bonds which the Registrar ts reqmmd to marntam "Bonds - "Texas Mumc~pal Power Agency Subordinate L~en Revenue Relundmg Bonds Series 200lA," mltmlly ~ssued m the principal amount of not to exceed $110 000 000 and dehvered pursuant to the prowslons ofth~s Resolution "City or Cltlas" - mdlwdually or collectively the Cit~es of Bryan Denton, Garland and Greenwlle, Texas "Collateral Seanrmes' - 0) Investment Securities and (n) obbgatlons ~ssued or guaranteed by any state of the United States or D~stnct of Columbm, or any polntcal subd~vlsmn of any such state or agency provided such obhgatlons are rated for Investment purposes at not less than A (or ~ts equivalent) by the Rating Agency and repurchase agreements w~th soIvant banking or other financml mstltutmns w~th respect to any of the obhgat~ons or securmes referred to hereto 'Commemml Paper Notes' - 0) "l'exas Mumc~pal Power Agency Commercial Paper Notes, Series 1998," 00 'qexas Mumclpal Power Agency Commercial Paper Notes Sones 1991" and (m) any commercial paper notes Issued to refund all or a portion of the commercial paper notes referred tn clauses (1) or (u) 'Construction Fund" the I~ und by that name heretothre established and hereby reaffirmed by Section 4 05 hereof "Contingency I~und' the Fund by that name heretolore estabhshed pursuant to the Prior Lmn Resolntmn "Cost of Acqmsmon and Constructmn" the Agency s costs and expenses attrthutable to the planning designing acqulrmg construction reconstructmn mstathng and financing of transmission facllltlas placing the same in operatloo decommissioning and d~sposal of any facthtms of the System ~f financed by the issuance ol Bonds and obtaining all governmental approvals certificates, pernuts and bcanses wtth respect thereto and shall include reimbursement to the Agency for any of the above ~tems theretofore paid by or on behalf of the Agency 26 "l)ebt 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 prowslons of this Resolution or the Prior Lien Resolution "Engineer" -- at any time the engineer or engmeenng firm appointed pursuant to SecUon 5 17 "Fman¢lal Newspaper" - a financial journal or newspaper selected by the Board which is of general c~rculatton m New York, New York (which Is published at least five days m each week holidays excepted) and ajoumal or newspaper selected by the Board which is pubhshed tn the State of Texas "Fiscal Year" -- the 12 month period ending September 30 of each calendar year, or such other 12 consecutive month permd as may be estabhshed as a Fiscal Year by the Board provided the F~scal Year may not be changed more than once in any three year permd "Fuel Reserve Account" -- the Account by that name heretofore estabhshed as a part of the Revenue Fund and reaffirmed by Section 4 02 "Generally Accepted Accounting Pnnelples" and all other accounting methods and terminology contained or referred to m any Bond Resolution -- accounting prmelplas, methods and terminology followed and construed as nearly as pracucable ~n conformity with accountmg pnnc~ples generally accepted In the Umted 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 operatmn of the System or ownership of properties constituting the System The term does not include payments received by the Agency (i) fi'om a City upon ~ts withdrawal fi.om the Agency, or (n) as proceeds of insurance (except business interruption msurancc) or eminent domain or (ni) as proceeds fi.om Bonds or Subordinated Indebtedness, or 0v) except as provided In Sectmn 6 05, fi.om amounts received fi.om leases installment sale payments, or other agreements entered into by the Agency tn connection w~th the ~ssuance by the Agency of Special Contract Obhgatlon~, or (v) Investment income of the Construction Fund "Holder" or "Bondholder" - the person m whose name such Bond Is registered on the regtstratmn books of the Paying Agent/Registrar "Imttal Bonds" -- with respect to the Bonds, one or more bonds m 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 Pubhc Accounts "Investment Secontles" -- any of the following secontles ff and to the extent that the same are at the ume legal for investment of Agency funds (t) direct obhgatlons of the United States of America, obligations which In the opinion of the Attorney General of the Umted States are general obhgaUons of the Umted States and backed by ~ts full fadh and credit obhgatmns guaranteed by the United States of America, (ti) evtdencos of indebtedness offue Federal Land Banks Federal Intermediate Credit Banks Banks for Cooperatives, Federal Home Loan Banks, Federal NaUonal Mortgage Association, Federal Financing Bank Participation Certificote~ in the Federal Assets Fmancmg Trust, New Houamg Authority Bonds and ProJect Notes fully secured by contracts w~th the Umtec~ States of America, or any other agency or mstrumentahty of the United States of America bonds secured by the general aredtt of the State of Texas, and deposits which are fully secured (to the extent not insured by a corporatmn mstrumentahty or agency of the Um~ed States of America) by obbgat~ons tn which the Agency may mvast under the provisions of this defimtmn, and (m) any other obhgatmns issued in accordance with the Agency's investment policy ~q'olnt Project" - a project undertaken by the Agency in cooperatmn wUh any other entity (as such term ~s defined by the Act) where the Agency and such etmty eneh have an undivided ownership ~nterest therein "Net Revenues" -- for any period, the Gross Revenues during such period less the OperaUng and Maintenance Expenses dunng such period "Note Payment Fund" the fund created and estabhshed in the Prmr L~en Resolutmn to pay principal of and ~nterast on the Commercial Paper Notes "Operating and Mamtenance Expenses" - all expenses recurred m the operatmn and maintenance of the System and the Agency which am properly accounted for such purpose under Generally Accepted Accounting Pnnclples Such term does not 27 include depreciation or obsolescence charges or reserves therefor interest charges and charges for the payment of principal or amortlzatmn, of Bonds or other ~ndebtedness of the Agency "Outstanding' - as of the date of calculation all Bonds theretofore executed ~ssued and dehvered by the Agency except - (a) Bonds theretofort, canceled by a Paying Agent/Registrar or surrendered to the Paying Agent/Registrar for cancellation, (b) Bonds m heu or m substitution for whmh other Bonds shall have been executed, Issued and dehvered by the Agency pursuant to the terms of Sections 2 09 2 11 or Sectmn 6 03 (c) Bonds tor the payment or redemption of which moneys equal to the principal amount or Redemption Price thereof as the case may be w~th interest to the date of maturity or redemptton date, shall be held under the Bond Resolution and set aside tot such payment or redemptmn (whether at or prior to the maturity or redemption date) prowded that ~f such Bonds are to be redeemed not,ce ot such redemption shall have been g~ven as ~n Article III prowded and (d) Bonds deemed to have been prod as prowded in subsection (b) of Sectmn 10 01 "Paying Agent/Registrar" any bank or trust company and its successor designated as a Paying AgenffReg~strar for the Bonds "Paying Agent/Registrar Agreement" - the agreement between the Agency and the Paying Agent/Registrar referred to m Section 2 04 hereof "Power Sales Contract" - those certain contracts by and between the Agency and the Cities of B~yan, Denton, Garland and Gmenwlle which contracts are dated the I st day of September 1976 and any amendments or supplements thereto "Predecessor Bond" any mutdated 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 re.on of an exchange or transfer, pursuant to the provisions of Section 2 09 Section 2 11 or Section 3 04 hereof "Previously issued Prior Llan Bonds" the prewously ~ssued (1) "Fexas Mumctpal Power Agency Refunding Revenue Bonds, Series 1987 ' (n) "Texas Mumc~pal Power Agency Refunding Revenue Bonds, Series 1989" (ru) "Texas MunanpaI Power Agency Revenue Refimdmg Bonds Series 1991A" (iv) 'Texas Mumc~pal Power Agency Refunding Revenue Bonds Series 1992" (v) "Texas Mumclpal Power Agency Refimdmg Revenue Bonds Series 1993" and (vi) "Texas MunanpaI Power Agency Refiard~ng Revenue Bonds Ser~es 1994" "Prewously Issued Subordinate L~en Bonds' -~ the prewously issued 'Texas Mumc~pal Power Agency ~laxable Subordinate L~en Revenue Bonds Series 2001 ' "Prior L~en Bond Fund" -- the Bond Fund and Note Payment Fund created and estabhshed by the Prior L~en Resolution "Prior Lien Bonds" the Previously Issued Prtor Lien Bonds and any Adthtlonal Prior L~en Bonds Issued pursuant to the Prior Lien Resolutmn "Prior L~en Obhgat~ons" -- the Prior L~en Bonds and the Commeroml Paper Notes "Prior Lien Resolution" the resolutmns authorizing the Issuance of the Prior L~en Obhgatlons and any resolutions subsequently adopted by the Agenc5 which authorize the ~ssuance of obhgatrons on a panty w~th the Prior L~en Bonds or Commercml Paper Notes "Project -- one or more of the following 0) anY power generating facthty (or interest them~n) to be constructed or acqmred by the Agency as weIl as fi~el therefor and any transmission facthty reqmred to connect or interconnect such ganaratmg facd~ty w~th a City or others or (u) any adtht~on or improvement to a power ganaratmg facthty whmh Is then owned m whole or ~n part by the Agency, or (Ul) any contract right to purchase or mce~ve a power supply or mmsmlsslon capacity (a) by the making of a prepayment of capital costs which ~s associated w~th the supply or capacliy so pumhased, or (b) by the execution ora take or pay contract having a duration of mom 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 mqu~remants bas~s The term does not include any factht~es financed with the proceeds of Specml Contract Obhgatlons as penmtted under and defined in Section 6 05 "Rating Agency" - any of e~ther Moody s Investors Serwce lnc, Standard & Poor s Ranngs Serwces, a thwamn of fhe McGraw-Hdl Compames lnc Fitch lnc and their respective successors and assigns "Record Date the fifteenth day of the month preceding the interest payment date ~f such ~nterest payment date ~s the first day of a month the last business day of the month preceding the interest payment date ffsuch interest payment date is the fifteenth day ora month or such other date specified In the apphcable resolution or agreement as of which ownership of the Bonds will be determined for the purpose of paying ~nterest to the Holder on the next interest payment date "Redemption Price' -- w~th respect to any Bond the principal amount thereof, plus the apphcable premium ~f any payable upon redemption thereof pursuant to such Bond or any Bond Resolution 28 "Refunded Bonds" - the bonds of the Agency shown on Schedule 1 attached to th~s Resolution "Reserve Fund" -- the Fund by that name created and astabhshed by the Prior Lien Resoltmon "Resolution" -- the resolntlon authorizing the issuance of the "Texas Municipal Po~ver Agency Subordinate Lien Revenue Refunding Bonds, Series 200lA" and any resolutions subsequently adopted by the Agency anthonzmg obbgatmns on a panty w~th the Bonds "Revenue Fund" - the Fund by that name heretofore astabbshed and hereby reaffirmed by Secuon 4 02 "Series" -- all of the obligations designated as being of the same Series and any obllgatmns delivered m lieu thereof or in substitution thereof under Section 2 13 hereof "Special Record Date" -- the date established by the Paying AganffReglstrar for the Bonds which ~s the new record date for the payment of mterest in the event ora nonpayment of interest on a scheduled payment date "Stated Maturities" -- the dates the principal of the Bonds ~s scheduled to mature as specified m the Bond Pumhase Agreement "Subordinate Lien Bond Fund" -- the Fund by that name established by the Subordinate Lien Resolution "Subordinate Llan Bonds" - the Previously Issued Subordinate L~en Bonds, the Bonds and any Adthtional Subordinate Lien Bonds "Subordinate Llea Reserve Fund" - the Fund by that name established by the Subordinate L~en Rasolutmn "Subordinate Lien Resolution" - the resolution authorizing the issuance of any Outstanding Previously lssued Subordinate L~en Bonds "Subordinated Indebtedness" - any ev~denea of debt referred to in and complying w~th the pmveaons of Section 6 04 "System" the Agency's lnUgrest in all properties (owned or operated by or on behalf of the Agency) which are financed In whole or in part, through the issuance of obhgataons 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), prmr to the time one of the Cltias disapproves a Project under the prowqions of Section 13 of the Power Sales Contract and elects Optlon One under paragraph (d) of said Section 13 The term also includes any contract for prowdlng serv~cas or power energy either or both The term does not include the Agency's interest in any facthty financed with the proceeds of (1) Specml Contract Obligations issued by the Agency as permitted under and defined In the Prior L~an Resolunon or (n) bonds ~ssued to finance any Project which ~s not approved by all of the Citrus if a City or Ctues which d~sapprove a Project elect Option One under Section 13 of the Power Sales Contract "Written Cert~cata of the Agency," "Wnttan Request of the Agency" and "Written Statement of the Agency" - an instrument in wntmg signed on behalf of the Agency by an Authorized Officer ARTICLE IV PLEDGE -- ~REATION AND ADMINISTRATION OF FUNDS Sectmn 4 01 Pledge The Bonds shall be and are hereby declared to be payable solely from and subject to the prowsmns of this Resolution permitting the appbcation thereof for the purposes and on the terms and conthtmns set forth herein secured by an irrevocable pledge of (l) the Net Revenues and (n) all Funds (including the investments thereto) estabbshed by the Prmr 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 Mamtenanec Expenses, provided however, that such pledge ~s and shall be subject and subordinate to the prmr liens of the Agency's Prior Lien Obbgations Section 4 02 The Revenue Fund The Revenue Fund heretofore created and astabhshed m the Prior Lien Resolution and hereby reaffirmed shall be held by a Depositary The Gross Revenues of the Agency shall be deposited as received into the Revenue Fund Pursuant to the provisions of the Prior Llan Resolution the Subordinate L~en Resolution and th~s Resolntxon, money on deposit in the Revenue Fund shall be used in the following order of prmnty (1) For the payment of Operating and Mamtenanea Expenses as the same become due (2) For deposits into the Prior Lien Bond Fund and Note Payment Fund heretofore astabbshed and created for the payment of the prtacipal of premium, if any and interest on the Prmr Lien Obhgatmns os the same become due or are required to be called for redemption 29 (3) For depostts into the Reserve Fund heretofore estabhshed and created pursuant to the Prior Lien Resolution lor the security and payment of the Prior Lien Obbgatlons when there is a deficiency of money available for such purpose m the Prmr Lien Bond Fund or the Note Payment Fund (4) I~or deposits into the Contingency Fund heretolbre established and created by the Prior Lien Resolution to the extent reqmmd by the Prior Lien Resolution (5) To cure a deficiency ~n the Prior Lten Bond Fund the Prior Lien Reserve Fund and the Contingency Fund in that order (6) I or deposit in the Subordinate Lien Bond Fund amounts reqmred by the Suborthnate Lien Resolution and th~s Resolution to pay pnnc~pal of and interest on thc Subordinate L~en Bonds and the Bonds (7) Fo cure a deficmncy ~n the Subordinate I len Reserve Fund (8) For any lawful purpose ~ncludmg (a) deposits into a Fuel Reserve Account (heretofore estabhshed as a part ol the Revenue Fund and hereby reafhrmed) for use mpaytng the cost of fuel acqmsltlon or replacement or fuel working capital and uninvested money thereto shall be appbed only to the cost o! acqmsmon leasing mprocess~ng and replacement and d~sposal ol luel and fuel resources assembhes materials serwces and components and (b) fur dmtrthut~on to the C~tles on such bas~s as the Board may determine would be fmr and equitable ~fthe Board determines an mnount of money (mid investments) will not be reqmred for the purposes mentmned m th~s Section Sectmn 4 03 Subordinate L~en Bond Fund Ihc qubord~nate Lten Bond Fund heretofore created and estabhshed by the Subordinate Lmn Resolution shall be held ltl trust as an account of the Agency by a finm~clal restitution as custodian of smd Fund as designated by thc Authorized Officer said Fund to be held ~n trust lor the benefit of the Holders Fhe Agency may remove such financial mstltutmn and designate another financial ~nsntutmn as custothan ot said Fund In conjunction w~th the preparation of the Annual Budget and ~mmcthately iollowmg the dehvery ol the Bonds the Board shall cause a determmatton to be made 0) of the amount then on deposit ~n the Prior Lien Bond Fund the Note Payment Fund and the Subordinate L~en Bond Fund lor the purpose of paying and d~schargmg (a) interest on Outstanding Prior Lien Obhgatmns to become due and (b) the principal on Outstanthng Prmr Lien Obbgat~ons to become due by reason of maturity or mandatory redemption and (U) the amount reqmred to be deposited each month so as to prowde m equal monthly installments the full amount required to pay the principal of Outstanding Prewously Issued Subordinate Lien Bonds ,:nd Outstanding Bonds premmm ~f any, and tnterest as the same becomes due Ibc Board shall (on or before the 25th day ol each month) cause the amount so determined (in clause (u)) to be transferred from the Revenue Fund to thc Subordinate Lien Bond 1 und In adthtlon to the amounts prowded for Interest and principal reqmrements of tile Previously Issued gubordlnale Lien Bonds and the Bonds the Agency shall make appropriate arrangements for meeting the lees and charges of the Paying Agent/Registrar In the event the amount on hand and available ~n the Revenue Fund lot transfer to the Suborthnatc Lien Bond Fund Is ~nsufficlent to permit the required deposit m lull in accordance w:th prows~ons of th~s Sectmn then the amount of any deficmncy shall be transferred by the Agency to the Subordinate L~en Bond Fund from other avadable funds as here~n prowded Sectmn 4 06 Reserve Fund The creanon and estabhshment of the Subordinate L~en Bond Fund ~s hereby reaffirmed Ihe Suborthnate L~en Reserve I und shall bt, held m trust as an account of the Agency by a financial mstltut~on, as custothan of smd Fund smd Fund to be held m trust lor the beneht of the Holders Fhe Agency may remove such financml institution as custodian and designate another financial msntut~on as custodttm of said Fund The amount to be accumulated aad mmntmned ~n the Subordinate L~en Reserve l~und as a result ol the ~ssuance of the Bonds shall be the Required Reserve set forth below The Reqmred Reserve shall be estabhshed and maintained w~th Gross Revenues the proceeds ol sale o! Bonds or by depositing to the credit ol the Subordinate L~an Reserve Fund one or more surety bonds tssued by a company or mstttutlon having a rating in the h~ghest rating categoly by two nationally recogmzed mtmg agencies or services or any combination thereof Upon the ~ssuance of the Bonds the Reqmred Reserve shall be increased ffreqmred to an amount equal to the lesser of either 0) the Average Annual Debt qerv~ce (calculated on a Fiscal Year bas~s) for all Subordinate L~en Bonds and Bonds then Outstanding (after g~wng effect to the ~ssuance of the Bonds) as detarmmed on the date thc Bonds are dchwred or tssued as the case may be or 01) the maximum amount that can be invested w~thout restriction as to y~eld ~n a reasonably rcqmred reserve fund pursuant to Subsection (d) of Sectmn 148 of the Internal Revenue Code of 1986 as ,unend~.d and regalat~ons promulgated thereunder Any add~t~anal amount reqmred to be mamtmned ~n the Subordinate L~n Reserve Fund shall be accumulated (0 by depositing to the credit of the Subordinate Lmn Reserve Fund 0mmedtately Miter the delivery of the then proposed Bonds) c&h or an additional surety bond or revised surety bond wtth surety bond coverage tn an amount sufficient to prowde for the new Reqmred Reserve to be fully or partmlly funded, or (u) at the optton of the Agency by making monthly deposits from funds m tbe Revenue Fund on or before the 25th day of each month following thc month of dehvery of the then proposed Bonds of not less than 1/36th o! the add~tmnal amount to be mamtarned tn sa~d Fund by reason of the ~ssuance of the Bonds then being ~ssued (or 1/36th o! the balance of the additional amount not deposzted ~mmed~ately m cash or provided by a surety bond) While the cash and investments and/or insurance coverage prowded by a mumclpal bond debt serwce reserve tnsurance policy (the 'Reserve Pobcy") m the Subordinate Lien Reserve Fund total not less than the Required Reserve no deposits need be made to the creda of the Subordinate L~en P. esarve Fund Should the Subordinate L~en Reserve Fund at any t~me contain less than the Reqmred Reserve (or so much tht.reof as shall then be reqmred to be contained thereto if Adthtmnal Bonds have been tssued and the Agency has elected to accumulate all or a portmn of the Reqmred Reserve w~th Gross Revenues) or should the Agency be obhgated to repay or reimburse an Issuer of a surety bond to replemsh and restore the full amount of msurance coverage prowded by the Reserve Pobcy held for the account ol the Subordinate L~en Reserve Fund the Agency covenants and agrees to cause monthly deposits to be made to the Subordinate L~en Reserve Fund on or before the twenty hflh day of each month (begmmng the month next following the month the deBc~ency In the Reqmred Reserve occurred by reason of a draw on the Subordinate L~en Reserve Fund or as a result ofa mducnon m the market value of investments held for the account of the Subordinate Lien Reserve 30 Fund) from Gross Revenues in an amount equal to (x) not less than 1/24th of the Reqmmd Reserve untd the total Reqmred Reserve then reqmred to be mmntamed in said Fund has been fully restored or (il) the amounts required to be reimbursed and repaid to the ~ssuer of tha insurance pohcy m the event of a draw upon the Reserve Policy The Agency thrther covenants and agrees that the Gross Revenues shall be applied and appropriated and used to establish and mamtam the Reqmred Reserve and to cure any deficiency in such amounts as required by the terms of this Resolution During such tame as the Subordinate Lien Reserve Fund contains the total Required Reserve, the Agency may, at its optaon, w~thdraw any mount m the Subordinate Lien Reserve Fund ~n excess of the Reqmmd Reserve and deposit such surplus ~n the Revenue Fund except that amounts from Bond proceeds on deposit m the Subordinate Lien Reserve Fund may only be deposited to the Bond Fund or the Subordinate Lien Reserve Fund ARTICLE V COVENANTS OF Tile AGENCY Section 5 01 Punctual Payment of Subordinate Lien Bonds The Agency wdl punctually pay or cause to be prod the prmc~pal amount of, premmm if any, and interest on the Suborthnate Lien Bonds in strmt conformity with thc terms of thc Suburdmata Lien Bond Resolution, and th~s Rasolutaon, and according to the truc intent and manmng thereof Section 5 02 Against Encumbrances Except as permitred by Sectlan 5 19 the Agency wdl not create, and wdl use its best efforts to prevent thc 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 mmntcnance of thc revenues therefrom The Agency wdl not create, or permit the creatxon 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 pertained by the Prior Lien Rasolutaon, the Subordinate L~an Rasolutaon and th~s Resolution Section 5 03 Against Sale or Other Disposition of Property Except as pemutted by Sectaon 5 19 the Agency wdl not sell or otherwise dispose of any property needed for the proper operation of the System or for the mamtanance of the revenues therefrom The Agency will not enter into any lease or agreement which impasto or ~mpedas the operation of the System or which xmpa~rs or ~mpedes the rights of the Bondholders with respect to the Net Revenues Notwithstanding the foregmng the Agency, wxth the prmr written approval of the Ca,es, may hereal~er sell an ownership interest ~n a port~on of the System to another party and m cons~deratmn thereof acqmrc an ownersfup interest in property used in the generalmn or transm~samn of elecmc energy or other "electrm facthnes' (as defined,m the Act), prowded that the ownership mterast so acqmred shall become a part of the System and shall be an Approved Project as that term is defined ~n the Power Sales Contract Section 5 04 Mmntanance and Operation of System The Agency upon the acqmsxtmn or construction of an operating System will operate the same continuously, to the extent pmctacable under condalons as they may from t~me to t~me ex~st m an efficient and economical manner, and will at all tlmas mmntam, preserve and keep, or cause to be maintained, preserved or kept the System, ~ncludmg all parts thereof and appurtenances thereto m good repair working order and condltaon and ~n such manner that the operatly~g efficiency thereof wdl be of h~gh character and the Agency wdl from tame to time make or cause to be made all necessary and proper repaxm and replacements so that the business earned on m connactaon with the System by the Agency may be properly and advantageously conducted m a manner cons~stant w~th prudent management and so that the rights and secumy of the Holders are fully protected and preserved Section 5 05 Maintenance of Revenues, Power Sales Contract (a) The Agency wdl at all t~mes comply w~th all terms covenants and pmvis~ons, express and lmphed, of all contracts and agreements entered into by n for electric power and energy furmshed by or avmlable to the System and all other contracts or agreements affectang or ~nvolvmg the System or the business of the Agency with respect thereto The Agency shall promptly collect all charges due for alectnc power and energy and services supplied by ~t as thc same become due, and shall at all tamee mmntam and promptly and wgorously enforce as rights against any pafly who does not pay such charges when due (b) The Agancy shall enfome the provisions of the Power Sales Contract and duly Peff°rm ~ts covenants and agreements thereunder ~ectaon 5 06 Observance of Laws and Regulations The Agency wdl well and truly keep, observe and perform all vahd and lawful obhgataons or orders or regulataons now or hereafter imposed on It by contract, or prescrthed by any law of the Umted States of Amenco or the State of Taxas, or by any officer board or commlsamn hawng jur~sthct~on or control as a conthtxon of the connnuedlenjoyment of any and every right, privilege or franchise now owned or hereafter acqmred by the Agency including ~ts right to exrst m]d carry on business, to the end that such rights pnv ages and franch~sas shall be mmntamed and preserved and shall not become abandoned, forfeited or ~n any manner Impaired provided however, that the Agency shall not be required to comply w~th any such orders so long as the validity or apphcation thereof shall be contested m good faith Section 5 07 Payment of Taxas and Clmms The Agency will from nme to tame duly pay and thscharge or cause to be prod and d;scharged, any taxes, assessments or other governmental charges lawfully ~mposed on ~t or ~ts properties when the same shall become due, and wdl duly observe and conform to all vahd requirements of any governmental authority relative to any such propemes The Agency will keep the System and all parts thereof free from all other hens clmms, demands and encumbrances to the end that the lien of the Subordinate Lien Bond Rasolut~on on the Net Revenues may at all t~mas be maintained and preserved Nothing harem shall be construed as requmng the Agency to pay any tax, clmm, assessment or governmental charge or comply w~th any regulation during the tame the vahthty thereof is being quastaoned by the Agency 31 Section 5 08 Insurance Subject m each case to the contht~on that insurance is obtainable at reasonable rates and upon reasonable terms and conditions (a) The Agency wdl procure and maintain or cause to be procured and mmntmned at all times whale any Subordinate L~en Bonds shall be Outstanding, msurance on the System ~n such amounts and agamst such risks as are usually ~nsurable in conneanon with s~mdar systems and are usually carned by electric uttht~es operatmg mmdar systems Such insurance shall be adequate m amount and as to the risks insured against and shall be maintained w~th 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 babthty and property damage insurance as is usually carned by munanpal electric uttht~as operating similar properties (c) The Agency wall secure and maintain adequate fidehty insurance or bonds on all officers and employees handhng or mspoaslble fur funds of the Agency (d) The obhgatlon hereunder to procure and maintain msurmme w~th respect to a Joint Project shall be met ff the entity ant~ng as the manager of the Joint Prolect obtmns and maintains the insurance mqmred for the benefit of all owners of the Jmnt ProJect as their Interest may appear (e) Thc Agency, may estabhsh and create a special lund with and to be held by a Depository for the purpose of prowdmg a self tnsurance fund and the amount deposited in such fund m any Fiscal Year shall be charged as an Operating and Maintenance Expense Money m such fund ffcreated may be invested tn Investment Securities, and tnterast ~ncome or Increment may be retained thereto or transferred to the Revenue Fund as may be determined by the Agency as evidenced by a Wnttan Certificate ot the Agency fo the extent an~ounts may be held m such fund the face amount of appropriate pobcles may be reduced Section 5 09 Books and Records The Agency covenants that proper books of record and account wall be kept in which full true and correct entries wtll be made ol all income expenses and transactions of and m relation to the System and each and evary part thereof m accordance w~th Generally Accepted Accounting Prmclples On or before 120 days after the close of each F~scal Year of the Agency a statement showing the gross operating income and revenues the oparattng and maintenance charges and the net operating Income of the qyqtem for the F~scal Year then last completed, and a balance sheet of the Agency as of the end of such last F~scal Year all certffied by an independent Certified Pubhc Accountant, wall 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 rdatmg to the construction operation maintenance repair, Improvement and extension thereof will at all tlmas be open to inspection of the ltolders and their representatives Section 5 10 Rates and Charges The Agency will at all t~mas whde any of the Bonds shall be Outstanding, estabhsh fix, prescribe and collect rates and charges for the sale or use of electric power and energy or services produced transmitted thstnbuted or fumtshed by the System which together w~th other income, are reasonably expected to y~eld Net Revenues sufficient to satisfy the obhgat~ons of the Prior L~en Obhgatmns and an amount equal to at least I 25 ureas the Debt Serwce of all Subordinate L~en Bonds for the F~scal Year fur whmh such rates and charges shall apply (but excluthng amounts deposited ~n the Suborthnate Lmn Bond Fund payable as interest ~n such F~scal Year which were prowded from the proceeds of Bonds) and promptly upon any material change m the c~rcumstances which were contemplated at the t~me such rates and charges were most recently mvtewed but not less frequently than once m each F~scal Year shall rewew thc rates and charges for electric power and energy and servmes and shall as necessary rewse such rates and charges to comply with the foregoing requirement provided that such rates charges and income shall m any event produce moneys sufficient to enable the Agency to comply w~th all Its covenaots under the Prior l ~en Resolurton and the Subordinate Lien Resolutmn and to pay all obhgatmn~ of the Agency including Subordinated Indebtedness Section 5 11 Fmment Domain Il all or any part ol the System financed with the proceeds of the Bonds shall be taken by eminent dommn proceethngs or conveyance m heu tht. reof the net proceeds realized by the Agency therefrom shall be deposited m the Construction I und Sectton 5 12 Reconstructmn of the System Apphcat~on oflnsurance Proceeds If,my useful portmn of the System shall be damaged or destroyed the Agency shall as expedmously as possible continuously and dthgently prosecute or cause to be prosecuted the reconstruanon or replacement thereof unless the Agency determmas that such reconstruction or replacement ~s not m the Interests of the Agency and the Bondholders The proceeds of any tnsurance pard on account of such dan~age or destructmn other than busmass mtermptmn loss insurance shall be prod into the Construction Fund and made available for and to the extent necessar~ apphcd to the cost of such reconstruction or replacement ~fany Pending such apphcatton such proceeds may be invested by the Agency m Investment Securities Section 5 13 L~m~tat~ons on Free Use of Factht~es None of the net electric power and energy owned controlled or supphed by the Agency or other services shall be furmshed or supphed free If the Agency shall sell fuel or water developed or made available by or for the System a rcaannable charge themfur shall be made Section 5 14 Power to Issue Bonds and Pledge Revenues and Other Funds The Agency is duly authorized under all applicable laws to create and ~ssue the Bonds and to adopt th~s Resolution and to pledge the Net Revenues and other moneys secure,es and funds purported to be pledged by th~s Resolution m the manner and to the extent prowded ~n this Resolutmn The Bonds and the pmv~s~ons of the Resolutmn are and wdl be vahd and legally enforceable obhgatlons of the Agency m accordance w~th their terms and the terms of the P. esolut~on The Agency shall at all trines to the extent permitted by law defend preserve and protect the pledge of the Net Revenues and other moneys secunhes and funds pledged under the Re~olutmn and all the rights of the Holders under the Resolutton against all clmms and demand of all persons whomsoever 32 Seetlon 5 15 Power to Construct and Operate System and Collect Rates and Fees The Agency has, and wall have so long as any Bonds are Outstanding, good, right and law~l power to construct, reconstruct ~mprove, maintain, operate and repair the factht~es of the System and to fix and collect rates fees and other charges m connectmn wnh the System sublect to the jurisdiction of any apphcable regulatory authority Section 5 16 General (a) The Agency shall do and perform or cause to be done and performed all acts and things reqmred to be done or performed by or on behalf of the Agency under the provisions of the Act and the Resolutmn (b) Upon the date of dehvery of any of the Bonds all acts, contht~ons and things reqmred by law and the Resolution to ex~st, to have happened and to have been performed precedent to and in the ~ssuance of such Bonds shall ex~st, have happened and have been performed In regular and in due t~me fgrm and manner as required by law and the Agency wdl have duly and regularly comphed w~th all apphcable provisions of law and wdl be duly anthortzed to issue the Bonds under the Act ~n the manner and upon the terms as ~n 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 ~n ~ts ~hsemt~on determine, but no pumhase shall be made at a price exceeding the then current market price or m the case ot Bonds whmh by their terms are subject to rademptlon prmr to matar~ty, the then apphcable optional redemption prlee or, ff such Bonds are not then redeemable, the price at which such Bonds wall first become subject to opttonal redemptton Section 5 17 Engineer The Agency may mtam one or more recogmzed independent engineers or engineering firms as appropriate for the purpose of provlthng the Agency w~th engineering counsel Any engineer employed pursuant to th~s Section shall be selected with specml reference to h~s knowledge and experience ~n the matter for which he ts retained Section 5 18 Annual Budget Not less than 30 days prior to the beginning of each F~scal Year, the Agency shall adopt an Annual Budget for the ensuing F~scal Year which shall set forth m reasonable detail the amount of money on hand estimated Gross Revenues and Operating and Mamtanance Expenses and other expandxtures of the System for such F~scal Year and the estimated amount to be deposited daring such F~seal Year m the Funds estabhshed by the Prior Lien Resolution and the Subardlnate Lmn Resolution At the end of the sixth month of each F~seal Year the Agency shall rewew ~ts estimates of Gross Revenues and Operating and Maintenance Expenses for such Fxscal Year, and m the event such esumates do not substantially correspond w~th actual Gross Revenues or Operating and Mamtananee Expenses, the Agency may adopt an mended Annual Budget for the remtunder of such F~scal Year The Agency may also at any time adopt an amended Annual Budget for tbe rem;under of the then current Fiscal Year Sectton 5 19 Acqms~t~un and Disposal of Real Property or Fuel Resources In connectmn w~th the acqmslt~on of real proper~y of fual resources the Agency may encumber, as a purchase money mortgage any land or rights m land or fuel resources and execute a deed of trust note as additional security therefor and such note may be made payable as prowded m Seetmn 6 04 Fuel may be sold by the Agency, as contemplated by Seet~un 5 13, ff the Board determines such sale would be m the best ~nterest of the Agency Sect;on 5 20 Covenants as to Power Sales Contract, other Agreements The Agency covenants that ~t wdl not do any act or omit to do any act which would cause a breach of contractor cause the Agency to be m default of any covenant condmon or provision of the Power Sales Contract or any agreement w~th respect to any Joint Project and it wdl enforce all the terms and condmons of such contracts against the part,es thereto During the t~me the Bonds are Outstanthng, the Agency covenants that ~t wall not permit the amendment of the Power Sales Contract without first hawng obtained the consent of all of the Citrus The Agency recogurzes that under the Power Sales Contract no sale or other dlsposmon by a Cay of ~ts elecmc utthty d~smbutmn system m whole or substantmlly as a whole, may become effectxve so long as any Bonds are Outstanding Section 5 21 Sale of an Ownersthp Interest ~n Electric Facdltles In the event another entity (as defined m the Act) acqmrcs or increases ~ts ownarshlp interest in a Joint Project (as permlttad by the Act) any money received by the Agency shall be placed m a construction fund so as to complete and prowde the facthnes constituting the Joint ProJect or other projects which the Agency ~s empowered to provide In no event shall the Agency perrmt the acquisition of an ownership interest m electric facthtles in a manner that would cause the interest on Bonds to become subject to federal income taxanon Section 5 22 Dtspos~t~on of Proceeds of Sale In the event propemes constxtutmg a part of the System are sold the proceeds therefrom shall be deposited pursuant to the terms of the Prmr L~en Resolution Seetlon 5 23 Rastr~ct~on on Outstanding Indebtedness l'he Agency agrees that dunng the period that the Previously Issued Subordinate L~en Bonds and the Bonds remain Outstanding it will not issue any Additional Prior L~en Bonds other thm~ bonds ~ssued to refund Outstanding Prior L~an Bonds and it wall not have more than $250 000 000 m principal an~ount ol cornmerc~al paper obhgat~ons Outstanding without first obtaining the prior written consent of AMBAC Assurance Corporatmn prowded that Ambac Assurance Corporation ~s not m default under any financial guaranty msuranee pohcy (the "Pohcy") ~ssued to insure the t~mely payment ofprrnc~pal of and interest on Outstanthng Subordinate Lien Bonds If Ambac Assurance Corpomtmn ts m default under the Pohcy, no such consent shall be reqmred 33 ARTICLE VI ADDITIONAL SUBORDINATE LIEN BONDS AND REFUNDING BONDS Sectmn 6 01 Addmonal Subordinate Lien Bonds Generally (a) SubJect to the prows~ons hereinafter appeanng w~th relation to conthtmns precedent which must first be met the Agency reserves the right to Issue, from time to time as needed Additional Subordinate L~en 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 ~f any on Subordinated Indebtedness ~ssuad by the Agency for such purposes pursuant to Sectmn 6 04 hereof) All such Adtht~onal Subordinate L~en Bonds and mqutremants ascribed to them shall be payable from the same soume and secured In the same manner on a panty and of equal thgmty w~th the Bonds Additional Subordinate L~en Bonds shall be nmde to mature on the date or dates the Bonds mature or are permitted to mature under the documents apphcable to the Bonds mcluthng but not hm~ted to the Bond Purchase Agreement (b) In the thscretmn of the Board the Addtuonal Suborthnate L~en Bonds may be authorized and ~ssued m such furm as shall be lawthl and deemed the most advantageous under the circumstances at the t~me More spemfically but w~thout intending any bmltatlon they may be 0) ~n coupon form w~thout pnvdeges of reglstratmn as to principal (n) m coupon form with prlvdeges of registration as to principal (in) m reglstmble form with pnvdeges of conversion to coupon forn~ (iv) m coupon form w~th pnwleges of conversion to reg~strable form (v) made to mature serially or as "term" or "s~nkmg fund" Subordinate L~en Bonds w~th arrangements for mandatory redemption Should Subordinate L~en Bonds be issued as 'term" or "stoking fired" Suborthnate L~en Bonds with provisions for mandatory redemption the date of mandatory redemption shall be cons~dared a pnnctpal payment date (c) It ~s further provided that should In the future there be developed any charactar~zat~on for evldance of indebtedness of debt instruments thffermg from those used hereunder the Agency shall have the right to employ those characterizations m Its financing arrangements and to prowde that such ewdence or ~ndebtedness or debt ~nstruments may be payable from the same source and secured m the same manner as the Subordinate Lmn Bonds, on a parity therewith prowded that the same conditions precedent hemm reqmred for the author~zatmn and Issuance of Additional Subordinate L~en Bonds fimt be met as conditions precedent to the authonzatmn and ,ssuance of*my such other evldance of indebtedness or debt instruments Section 6 02 Add~tmnal Conditions fur Issuance of Addltwnal Subordinate Llan Bonds The Additional Subordinate Lien Bonds may be ~ssued m one or more Series prowded however that no Additional Subordinate Lien Bonds shall be issued unless and until the following condmons have been met (a) The Agency as ewdenced by a cert~hcate of an Authorized Officer ~s not ~n default (1) as to any covenant condmon or obhgat~on prescribed by the Rasolut~on or (n) In the payments of Subordinated Indebtedness (b) fhe laws of the State of Texas effecUve at the t~me of the authorlzatmn of such Adthtlonal Subordinate L~en Bonds shall permit their ~ssuance (c) Fhe Board Resolution authorizing the Additional Subordinate Lien Bonds reaffirms the provtsmns of Section 4 03 hereof w~th respect to deposits being made in the Subordinate Lien Bond Fund m an amount adequate to pay the Debt Servme on the Subordinate Lmn Bonds as the same becomes due and sets forth the amount of Subordinate L~en Bond proceeds ff any, to be deposited m any fund estabhshcd by th~s Resolutmn (d) The Agency shall have obtained a report from an Independent certffied pubhc accountant showing that the Net Revenues 0) for the F~scal Year next preceding the date of the Addltmnal Subordinate L~en Bonds or (n) tor 12 consecutive months out of the 18 months next preceding the date of the Additional Suborthnatc L~en Bonds were equal to at least I 25 times the debt service on the Previously Issued Suborthnate L~en Bonds and the Debt Service (excluding amounts deposned m the Subordinate Lmn Bond Fund for the payment of interest which were provided from the proceeds of Subordinate l ~cn Bonds) for such period provided however that the requirement ofth~s paragraph (d) shall not be applicable to Additional Subordinate I ~en Bonds ~ssued for the purpose of completing the financing of a Project for which a series of Suborthnate Lien Bonds has been ~ssued (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 obhgatlon of the C~t~es (under Sccnon 14 of the Power Sales Contract) ~s equally apphcable to the proposed bonds Sectmn 6 03 Refunding Bonds Thc Agency shall retain the right to ~ssue refunding Subordinate Lien Bonds to refund all or any part of ~ts Outstanding %bordmatc L~an Bonds as permitted by and In accordance w~th any lawful method thereunto appertaining provided that the rcqmrcmcnts for the issuance of Additional Subordinate L~an Bonds shall be met Section 6 04 Subordinated Indebtedness lhe Agency retains the right to ~ssue ewdence of Indebtedness secured by a pledge subordinated m all respects to the pledge m favor of the Subordinate L~en Bonds of the Net Revenues as may from t~me to t~me be available for the purpose of payment thereof (aRer the payments reqmred to be made ~nto the Prior L~en Bond Fund, Note Payment Fund, Subordinate L~en Bond Fund Subordinate L~an Reserve Fund and any addmonal lurid created and estabhshed by the Prior Llan Resoluuon thc Suborthnate L~en Resolutmn and th~s Resolution) prowdad however that such indebtedness shall bc recurred only for any one or more of the purposes set forth m the Act Section 6 05 Special Contract Obhgatlons The Agency retains the r~ght to Issue bonds (but not Bonds) or other obhgatlons for the purpose of financing the construcuon or acqmsltlon of electric fucd~tles (as defined ~n the Act) which are to be mltlalIy owned as co tenants or co owners by the Agency and any other entity or entlt~es and such bonds or other obligations for the purpose of the Resoltu~on shall be Special Contract Obhgatmns Special Contract Obhgations shall not be payable from Gross Revenues nor shall the expense o! operating and mamtenm~ce of such electric factht~es be an Operating and Maintenance Expense nor shall the elecmc factht:es so financed be a part of the System as such terms are herein defined Such Obhgatmns shall not be on a parity w~th the Bonds or be considered as having been ~ssued 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 acqmslUon or financing of such electric facilities w~th any proceeds ot Special Contract Obhgat~ons shall be kept separate and apart from any Funds created or estabhshed under the Resolutmn provided that any mnounts received by the Agency ~n any F~scal Year In excess of that required to pay 34 operating and maintenance expenses, the principal of, premium for mdemptlan 0f any) and Interest on such Special Contract Obhgatlons; the amounts reqmred to estabhsh or replan~sh any fund estabhshed for the payment and security of such Obhgat~ons and the fees of the paying agent, registrar, or trustee (any or all), shall be deposited in the Revenue Fund hereto created and shall be apphed, from that ttme forward as Gross Revenues ARTICLE VII1 EVENTS OF DEFAULT AND REMEDIES OF HOLDERS Sectmn 8 01 Events of Default Each of the fullowmg occurrences or events shall be and ~s hereby declared to be an "Event of Default," to w~t (a) The fmlure to make payment of the principal of or premium, If any, on any of the Bonds when the saree shall become due and payable, (b) The failure to pay any ~nstallment of interest when the stone shall become due and payable (c) Default m any covenant, undertakmg or commttmant contained ~n the Resolution the fadure to perform which matarmlly affects the r~ghts of the Holders of the Bonds to be repmd and the cantmuatmn thereof for a per~od of sixty (60) days after notme of such default by any Holder of any Bonds and (d) If there shall occur the dlssolntlon or hqualatlan of the Agency (other than re-creatmn of the Agency as provtded in the Act or Section 16 of the Power Sales Contract) or the fihng by the Agency of a voluntary petition ~n bankruptcy or the conumasmn by the Agency of any act of bankruptcy, or adjud~catmn of the Agency as a bankrupt or assignment by the Agency for the benefit of ~ts cred~rs, or the entry by the Agency into an agreement of composition w~th Its credxtors or the approval by a court of eompeteot jurlsd~ctmn of a petition applicable to the Agency :n a proceeding for ~ts reorgan~zatmn instituted under the provisions of the general bankruptcy act, as amended, or under any s~m~lar act m any jurlsd~ctmn wfuch may now be m effect or hereafter enacted Scot,on 8 02 Remedies for Default Upon the happemng and contmuatlon of any of the Events of Defanlt as prowded m Section 8 01 hereof, then and in every case any Holder may proceed against the Agency for the purpose of protecting and enforcing the r~ghts of the Holders of Bonds under the Resolution, by mandamus or other stat, act:on or special proceeding m equity or at law m any court of competent jur~sd~ctmn for any rehef permitted by law, including the specxfic performance of any covenant or agreement contmned herein, or thereby to enjom any act or thxng which may be unlawful or m violation of any r~ght of the Holder hereunder or any comfunat~on of such remedies Each such right or privilege shall be In addition to and cumulatme of any other r~ght or pnwlege and the exercise of any r~ght or privilege by or on behalf of any Holders shall not be deemed a waiver of any other r~ght or pr~wlege thereof Sectmn 8 03 Prmrtty of Payments lfan Event of Default has occurred then moneys of the Agency shall be apphed first to the payment of interest on Bonds that has become due and second to the pro rata payment of the prmc~pal amount of and premmm, ~f any, on Bonds Outstanding wfuch have become due INVESTMENTS The Agency invests tts lnvastable funds in investments authorized by Texas law ~n accordance with investment pohc~es approved by the Board of D~rectors of the Agency Both state law and the Agency s ~nvestment pohc~es are subject to change LEGAL INVESTMENTS Under Texas law the Agency ~s anthor~zed to revest m (I) obhgatmns of the Umted States or ~ts agenctes and mstmmentalntes, (2) direct obhgatmns of the State of Texas or ~ts agencies and instrumentaht~es (3) collaterahzed mortgage obhgatlans directly ~ssued by a federal agency or mstmmentahty of the United States, the underlying security for which ~s guaranteed by an agency or lnstrumeotahty of the United States, (4) other obhgntlons the principal of and interest on which are unconditionally guaranteed or insured by, or backed by the full froth and credit of, the State of Texas or the United States or their respective agencies and tnstrumentaht~as, (5) obhgnt~ons of states, agencies, counties cities and other poht~cal subd~wsmns ol any state rated as to investment qualfiy by a nationally reeogn~zed investment ratmg firm not less than A or ~ts equivalent (6) bonds ~ssued assumed or guaraDteed by the State of Israel (7) certificates of deposit and share certificates ~ssued by a state or federal credit umon dom:eded m the State of Texas that are guaranteed or msured by the Federal Deposit Insurance Corporation or the National Credit Umon Share Insurance Fund or are secured as to principal by obhgatmns descrthed m the clauses (1) through (6) or in any other manner and amount provided by law for Agency depostts (8) fully collatarahzed repurchase agreements that have a defined termination date are fully secured by obhgntmns desanbed ~n clause (1), and are placed through a primary government securmes dealer or a financial mstltutmn domg busmess ~n the State of Texas, (9) bankers acceptances w~th the remaining term of 270 days or less if the short-term obhgattons of the acceptmg bank or its parent are rated at least A-I or P-1 or the equ~valant by at least one nat~oanlly recogmzed credit rating agency, (10) commercial paper that is rated at least Aol 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 letier of credit Issued by a U S or state bank, (11) no-load money market mutual funds regulated by the Seeurmes and Exchange Commission that have a dollar welgfued average portfuho maturity of 90 days or less and include m their investment objectives the maintenance of a stable net asset value orS1 for each share (12) no-loed mutual funds registered w~th the Securities and Exchange Commission that have an average weighted maturity of less than two years, invests exclusively m obhgat~ons described in the preceding clauses and are continuously rated as to investment quahty by at least one natmnally reeogmzed mvestment rating firm of not less than AAA or ~ts eqmvalent, prowded, however, that the Agency ~s not anfuorlzed to invest ~n the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service m such no load mutual funds and (13) for bond proceeds guaranteed ~nvestment contracts that have a defined term~nanon date are secured by obhgatlons of the 35 United States or ~ts agencies and mstrumentahtms ~n an amount at least equal to the amount invested under the contract and are pledged to the Agency and deposited w~th the Agency or a third party selected and approved by the Agency, The Agency may revest m such obhgat~ons d~rectly or through government ~nvestment pools that Invest solely ~n such obhgatmns provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recogmzed rating serwce Fhe Agency ~s specffically prohibited from investing m (I) obhgat~ons whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no pnnc~pal, (2) obligations whose payment represents the pnnc~pal stream of cash flow from the underlying mortgage-backed security and bears no interest (3) collaterahzed mortgage obhgatmns that have a stated final maturity of greater than 10 years, and (4) collaterahzed mortgage obhgat~ons the interest rate of which ts determined by an index that adjusts oppos~ta to the changes m a market index INVESTMENT POLICIES Under Texas law, the Agency ~s reqmred to Invest Its funds under written investment policies that primarily emphasize safety of principal and liquidity that address investment diversification, yield, maturity, and the quahty and capabfuty of investment management and that includes a bst ofanthonzed investments for Agency funds maximum allowable stated maturity of any md~wdual 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 concem~ng (1) smtabfuty of mvestment type (2) preservation and safety &principal (3) hqulthty (4) markatabthty of each investment, (5) thverslficatlon of the portfolio, and (6) yield Under Texas law Agency investments must be made w~th judgment and care, under prcvathng Clmumstances, that a person of prudence thscretmn and intelligence would exercise ~n the mtmagcment of thc 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 officars jointly prepared and s~gned the report (3) the begmmng market value any adthtmns 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 matanty date of each separately invested asset (6) the account or fund or pooled fund group for which each mthvldual investment was acqmred and (7) the compliance of the mvas~nent portfolio as ~t relates to (a) adopted mvastmant strategy statements and (b) state law No person may ~nvest Agency funds w~thout express written authority from the Board of D~rectors ADDITIONAL PROVISIONS Under Texas law the Agency ~s add~tmnally required to (1) a~mually review its adopted policies and strategies {2) reqmre 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 pnncipal &firms seeking to sell securmcs to the Agency to (a) receive and review the Agency's investment pohcy (b) acknowledge that reasonable controls and procedures have been Implemented to preclude ~mpmdent Investment antlvltles and (c) deliver a written statement attesting to these requirements (4) perform an annual audit &the management controls on investments and adherence to thc Agency's investment policy (5) provide specific investment tmmmg for the Treasurer ChlefFmancml Officer and mvestmeat 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 &the reverse repurchase agreement (7) restrlat 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) reqmre local government mvestmant pools to conform to the new thsclosure rating, net asset value yield calculation add advisory board reqmrements TABLE 3 - CURRENT INVESTMENTS As of Aprd 30 2001 the Agency's mvestable funds were invested m the following categories Adlusted 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 Securtues 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 Portfobo $176,858 784 $177 743,381 100 00% 5 404% 36 TAX MATTERS TAX EXEMPTION The dehvery 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) wdl be excludable from gross income, as defined ~n 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 pubhshed rulings, and court decisions, and (2) will not be included in computing the alterantlve minimum taxable income of the owners thereof who are md~wduals or, except as hereinafter descrthed, corporations A form of Bond Counsel's opinion is reproduced as Appendix C The statute, regulations, ruhngs and court declsmns on which such opinion is based are subject to change Interest on all tax-exempt obligations, ~ncluthng the Bonds owned by a corporation wdl be Included In such corporat~on'~ adjusted current earnings for tax years beginning afier 1989, for purposes of calculating the alternative mlmmum taxable income of such corporation, other than an S corporation, a qualified mutual fund a real estate investment trust a real estate mortgage investment condmt or a financial asset securitization investment trust (FAS1T) A corporation's alternative mm~mum taxable income ~s the basis on which the alternative mlmmum tax ~mposed by Section 55 of the Code wdl be computed In rendering the foregoing oplmons Bond Counsel wdl rely upon representations and certifications of the Agency made m a certificate dated the date of delivery of the Bonds pertaining to the use, expand~tare, and investment of the proceeds of the Bonds and will assume continuing compliance by the Agency with the prows~ons of the Resolution subsequent to the issuance of thc Bonds The'Resolution contains covenants by the Agency w~th respect to, among other martcrs, the usc of the proceeds of the Bonds and the facilities financed therewith by persons other than state or local governmental umts the manner m 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 Umted States Treasury Fadure to comply w~th any of these covenants would cause mtarest on the Bonds to be ~ncludable in the gross ~ncome 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 rewew of existing statutes, regulations, pubhshed ruhngs and court declsmns and the representations and covenants of the Agency described above No ruling has been sought from the Internal Revenue Service (the ' Serwce ) w~th respect to the matters addressed ~n the opinion of Bond Counsel, and Bond Counsel s opinion Is not bmdmg on the Service The Service has an ongoing prugram of andltmg the tax exempt status of the interest on tax-exempt obhgatlons If an audit of the Bonds is commenced under current procedures the Service ~s likely to treat the Issuer as the "taxpayer," and the Owners would have no right to partanpate In the audit process In responding to or defending an audit of the tax-exempt status of thc interest on the Bonds the Agency may have d~fferent or conflicting interests from the Owners Pubhc awareness of any future audit of the Bonds could adversely affect the value and hqmthty of the Bonds during the pendency of the audit regardless of ~ts ultimate outcome Except as described above, Bond Counsel expresses no other opmmn 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 thsposltlon of the Bonds Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obhgat~ons such as thc Bonds may result in collateral federal tax consequences to among others, financial mstffutions, hfe insurance companies property and casualty insurance companies, certain foreign corporations dmng business m the United States S corporations with subchapter C earmngs and profits, individual recipients of Social Security or Radroad Retirement benefits individuals otherwise qualifying for the earned lnanme tax credit, owners of an interest m a I~ASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or recurred certain expenses allocable to, tax-exempt obhgat~ons Prospective purchasers should consult their own tax adwsors as to the apphcabthty of these consequences to their particular ¢~rcumstances TAX ACCOUNTING TREATMENT OF DISCOUNT AND PREMIUM ON El0 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 dlffercncc between the lmtlal 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 fue initial purchaser of such Discount Bond A portion of sanh original issue d~scount allocable to the holding pcrmd of such Discount Bond by the initial purchaser will, upon the d~sposltlon of such Discount Bond (including by reason of ~ts payment at maturity) be treated as interest excludable from gross income rather then as taxable gain for federal income tax purposes, on the same terms and conditions as those for other interest on thc Bonds described above under "Tax Excmptmn" Such interest ~s considered to be accrued astuarmlly in accordance with the constant interest method over the life of a Discount Bond taking into account the semiannual compounthng of accrued Interest, at the yield to maturity on such D~scount Bond and generally wdl be allocated to an original purchaser m 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 ~mposed by Sectmn 55 of the Code and the amount of the branch profits tax applicable to certain foreign corporations doing business ~n the United States even though there wdl 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 lnstltatlons, life Insurance companies property and casualty insurance compames S corporations w~th "subchapter C" earmngs and profits mthwdual recipients of Social Security or Rmlroad Retirement benefits ~nd~vlduals otherwise quah~mg for earned income tax credit, owners of an Interest in a FASIT and taxpayers who may be deemed to have recurred or continued indebtedness to purchase or carry, or who have paid or Incurred certain expanses a~Iocable to, tax exempt obhgatlous Moreover, in the event of the redemption, sale or other taxable disposition of a Discount Bond by the m~t~al owner prior to maturity the amount realized by such owner m excess of the basis of such Discount Bond m 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 m gross income Owners of Discouat Bonds should consult w~th their own tax adwsors with respect to the determination of accrued original ~ssue 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 apphcable provisions governing datennmatlon of state and local ~ncome taxes, accrued interest on Discount Bonds may be deemed to be received ~n the year of accrual even though there will not be a corresponding cash payment The Imtml pubhc offering price ofcertmn Bonds (the "Premium Bonds") may be greater than the amount payable on such Bonds at maturity An amount equal to the d~fl'erence between the antlal pubhc 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 ~nmal purchaser of such Premium Bonds The basis for federal income tax purposes of a Premium Bond In the hands of such m~t~al 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 m bas~s for mnort~zable bond premium Such reduction m basis wdl increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable thspos~t~an of a Premium Bond The amount of premium which is amortizable each year by an lmt~al purchaser ~s determined by using such purchaser's yield to maturity Purchasers of the Premium Bonds should consult w~th their own tax adwsors w~th respect to the determination of an~ort~zabIe bond premmm on Premium Bonds for lederal income tax purposes and w~th respect to the state and local tax consequences of owmng and thsposlng of Premium Bonds CONTINUING DISCLOSURE OF INFORMATION In the Resolut~an the Agency has authorized and directed the General Manager to meet the appheable contmumg d~sclosure requ~remants of Rule 15c-2-12 of the Securities Exchange Act of 1934 as amended The General Manager will dehver 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 ~t remains obhgated to advance funds to pay the Bonds Under the undertaking the Agency w~ll be obhgated annually to prowde certain updated financial Information and operating data relating to the Agency and the Cities that ~s contained m Appand~ces A and B hereto, and to give timely not,ce of specified material events to certain mformat~on vendors Th~s Information will be available to securities brokers and others who subscribe to receive the information from the vendors ANNUAL REPORTS fhe Agency will prowde certain updated financial mformat~on and operating data to certain Information vendors annually The mformat~on to be updated ~ncludes all quantitative financial Information and operating data with respect to the Agency of the general type included in th~s Official Statement under Tables numbered one through three and In Appendix A and Appendix B The Agency wdl update and prowde th~s information within s~x months after the end of each fiscal year ending m or after 2001 The Agency will prowde the updated reformation to each natmnally recognized municipal securities Information repository ("NRMSIR") and to any state information depository ("SID") that ~s designated by the State of Texas and approved by the State of Texas and approved by the staffof the Umted States Securities and Exchange Commission (the "SEC") The Agency may prowde updated mformat~on 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 ~s completed by the required time If audited financial statements are not available by the required time the Agency will prowde unaudited financial statements by the required time and audited financial statements when and ff audited such financial statements become avmlable Any such financial statements wdl be prepared m 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 Agancy's current fiscal year end ~s September 30 Accordingly, It must provldeupdated mformatlonMarch 31 ineashyear unless the Agency changes ~ts fiscal year If the Agency changes ItS fiscal year it will not~fy each NRMSIR and the SID of the change The Mumclpal Adwsory Council of Texas has been designated by the State of Texas and approved by the SEC staff' as a quahfied SID The address of the Mumc~pal Adwsory Councd is 600 West 8th Street, P O Box 2177 Austin Texas 78768 2177 and its telephone number ~s 512/476 6947 38 MATERIAL EVENT NOTICES The Agency will also prowde timely notices of certain events to certain reformation vendors The Agency will provide nonce of any of the following events with respect to the Bonds ffsuch event is material to a dec,sion to purchase or sell Bonds (1) principal and interest payment dehnquenc~es, (2) non-payment related defaults, (3) unscheduled draws on debt serwce reserves reflecting financial difficulties (4) unscheduled draws on credit enhancements reflecting financial difficulties, (5) subatltutlon of credit or hquidlty providers or their failure to perform (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds, (7) modifications to rights of holders of the Bonds (8) Bond calls, (9) defeasances (!0) release, substitution, or sale of property securing repayment of the Bonds and (11) rating changes Neither the Bonds nor thc Resolution make any provision for hqu~dlty enhancement In addition the Agency wdl provide t~mely not~ce of any failure by the Agency to provide reformation data, or financial statements m accordance w~th ~ts agreement described above under "Annual Reports" The Agency will prowde each not,ce described In this paragraph to the S1D and to either each NICMSIR or the Mumclpal Securltlas Rulemakmg Board ("MSRB") AVAILABILITY OF INFORMATION FROM NRMSIRs AND SID fhe Agency has agreed to provide the foregoing mformanon only to NRMSIRs and the SID The mformatlon will be available to holders of Bonds only if the holders comply w~th the procedures and pay the charges estabhshed by such mformatmn vendors or obtain the mformatmn through secar~nes brokers who do so LIMITATIONS AND AMENDMENTS The Agency has agreed to update ~nformatlon and to provide notices of material events only as described above The Agency has not agreed to provide other mformatmn that may be relevant or mater~al to a complete presentation of ~ts financial results of operatmns, condltmn, or prospects or agreed to update any reformation that ~s prowded except as described above The Agency makes no representation or warranty concermng such reformation or concerning ~ts usefulness to a decision to invest m or sell Bonds at any future date The Agency disclaims any contractual or tort hablhty for damages reanltmg in whole or in part from any breach of ~ts continuing d~sclosure 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 w~th ~ts agreement The Agency may amend ~ts continuing d~sclosure agreement from Dme to t~me to adapt to changed c~mumstances that arise from a change m legal reqmrements a change ~n law or a change m the ~dent~ty, 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 m the ofl'ermg described hereto m compliance with the Rule, ~aklng mto account any amendments or interpretanons of the Rule to the date of such amendment as well as such changed e~rcumstances and (il) either (a) the holders of a maJority in aggregate pnnc~pal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated w~th the Agency (such as nationally rccogmzed bond counsel) determines that the amendment w~l! not materially impair the interests of the holders and beneficial owners of the Bonds ~l he Agency may also amend or repeal the provisions of this continuing d~sclosure agreement ~f the SEC amends or repeals the apphcable provisions of the SEC Rule 15e2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15e2 12 are mvahd but only ffand to the extent that the prow~lons of th~s sentence would not prevent an underwriter from lawfully purchasing or selhng Bonds ~n the primary offermg of the Bonds If the Agency so amends the agreement, tt has agreed to ~nclude with the next financial mfarmatmn and operating data provided m accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the ~mpact of any change ~n the type of financial mformat~on and operating data so prowded COMPLIANCE WITH PRIOR UNDERTAKINGS The Agency has comphcd m all mater~al respects w~th all continuing d~sclosure agreement~ 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 "A2" by Moody's Investors Service thc ("Moody's") "A" by Standard & Poor's Ratings Services A D~vlslon of The McGraw-Hall Companies, Inc ("S&P") and 'A-" by F~tch lnc ("F~tch") The Bonds are rated "Aaa" by Moody s "AAA" by S&P and "AAA" by Fitch based upon the manic,pal bond Insurance policy ot Ambac Assurance to be Issued s~multaneously with the dehvery of the Bonds The semor hen bonds of the Agency have underlymg raOngs of .... A2 by Moodys Investors Serv ce Inc ("Moody's") "A+" by Standard & Poor's Ratings Serwces A Dtv~smn of The McGraw Hall Compames Inc ("S&P") and "A" by Fttch lnc CFttch") A port,on of the Agency's senior hen bonds are rated ' Aaa" by Moody s "AAA" by S&P and "AAA" by Fitch through Insurance by vanous commercml Insurance compames The Agency s Commercial Paper Notes are rated "P 1" by Moody's "A-1" by S&P and "F-1" by Fttch An explanation of the s~gmficance of such ratings may be obtained lrom the company furnishing the rating The ratings reflect only the respective views of such organlzatmns and the Agency makes no representatmn as to the approprmtaness of the ratings There is no assurance that such ratings wall continue for any given period of time or that they will not be revised downward or w~thdrawn enttrely by rather or both of such rating compames ~fm the judgment of e~ther 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 oplmon of the Agency Attorney and Agency Staff that there is no pending ht~gat~on agmnst the Agency that would have a materml adverse financml ~mpaat upon the Agency or ~ts operations REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been regmtered under the Federal Securttles Act of 1933 as amended In reliance upon the exemptmn prowded thereunder by Section 3(a)(2) and the Bonds have not been qualified under the Securities Act of Texas In rehance upon various exemptmns contained thereto nor have the Bonds been qualified under the securities acts of any jurisdiction The Agency assumes no responslbthty for quahficatlon of the Bonds ander the securities laws of any jurlsthctlan ~n which the Bonds may be sold assigned, pledged hypothecated or otherwise transferred This dlsclmmer of responslbthty for quahficatmn for sale or other dtspos~tlan of the Bonds shall not be construed as an ~nterpretatlon of any kind with regard to the avadabdlty of any exemption from secarttles registration prowslons LEGAL INVESTMENTS AND ELICIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201 041 of the Pubhc Security Procedures Act (Chapter 1201 Texas Government Code) provides that the Bonds are negotiable ~nstruments governed by Chapter 8, 'lexas Business and Commerce Code, and are legal and anthorlzed investments for insurance compames, f~ducmrles mid trustees and for the stoking funds of munlclpahtles or other political subthvls~ons or public aganmes of the State ot Texas With respect to investment m the Bonds by mumc~pahtms or other pohtlcal subd~wsmns or pubhc agencies o! the State of Texas the Pubhc tunds Investment Act Chapter 2256 Texas Government Code, requires that the Bond~ be assigned a rating ot "A" or tts eqmvalent as to investment quahty by a nattonal rating agency See "OTHER INFORMATION - Ratings" hereto In addttlon various prowslons o1 the Texas Finance Code prowde that subject to a prudent investor standard the Bonds are legal investments tot state banks sawngs banks trust companies w~th at capital of one mllhon dollars or more and savings and loan associations The Bonds are ehglble to secure deposits of any public funds of the State ~ts agencies and Its pohttcal subthvlstons 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 varmus Institutions in those states LEGAL OPINIONS The Agency wall furmsh a complete transcript of proceedtngs had me,dent to the anthorlzatlon and ~ssuance of the Bonds including the unquahfied approving legal opinion of the Attorney General of Texas approving the Imtlal Bond and to the effect that the Bonds are vahd and legally binding special obhgat~ons of the Agency and based upon examination of such transcript of proceedings the approvmg legal opinion of Bond Counsel to like effect Bond Counsel was not requested to participate and d~d not take part m the preparation of the Official Statement and such firm has not assumed any responsthlhty with respect thereto or undertaken ~ndependently to verdy any of the mformatmn contmned therein except that m ~ts capacity as Bond Counsel, such firm has remewed the ~nformat~on under capOons Introduction" "Plan of Financing" "The Bonds" (exclusive of the subcapt~on "Book Entry-Only System") "Tax Matters" and 'Continuing D~sclosure of Information" (exclusive of the subcaptton "Comphance wah Prior Undertakings") and the subcaptlons "Legal Op~mons" and 'Legal Investments and Ehglbthty to Secure Pubhc Funds tn Texas' ~n the Officml Statement and such firm ~s of the optnlon that the ~nformatmn relattng to the Bonds and 40 the legal Issues contained under such captions and subcapt~ons ~s an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Bonds such reformation conforms to the Resolution The legal opmmn wdl accompany the Bonds deposited w~th DTC or will be printed on the Bonds ~n the event of the discontinuance of the Book-Entry- Only System Certain legal matters will be passed upon for the Underwriters by V~nson & Elkxns L L P Dallas Texas Counsel to the Underwriters FINANCIAL ADVISOR F~rst Southwest Company ~s emple,yed as Financial Adwsor to the Agency m connection with the msuance of the Bonds The F~nanclal Advisor's fee for servleeS rendered with respect to the sale of the Bonds ~s contingent upon the Issuance and dehvery of the Bonds First Southwest Company, m its capacity as Fmanclal Adwsor has rehed on the opinion of Bond CounseI and has not verified and does not assume any responsthlhty for the reformation, covenants and representatlon~ contained In any of the legal documents w~th respect to the federal income tax status of the Bonds, or the possible ~mpact of any present pending or future actions taken by any legislative or Judicial bothes In the normal course of bus~ness the Fmancml Adwsor may from t~me to time sell investment securities to the Agency for the investment of bond proceeds or other funds of the Agency upon thc request of the Agency The Financial Advisor to the Agency has provided the following sentence for ~nclus~on m this Official Statement The F~nancml Adwsor has mwewed the reformation in this Official Statement in accordance with and as part of, ~ts responsththties to the Agency and as applicable to investors under the federal seeurlt~es laws as apphed to the facts and c~mumstances of th~s tmnsacnon, but the Financial Advisor does not guarantee the accuracy or completeness of such reformation VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS The arithmetical accuracy of certmn computations included m the schedules provided by First Southwest Company on behalf of the Agency relating to (a) computation of forecasted receipts of principal and mtarest on the Federal Seearmes 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 Thomtun LLP certified pubhc accountants Such computations were based solely on assumptmns and information supphed by F~rst Southwest Company on behalf of the Agency Grant Thomtun LLP has restricted Its procedures to verifying the arithmetical accuracy of eertmn computations and has not made any study or evaluation of the assumptions and Information on wfuch the computations are based and, accordingly, has not expressed an opinion on the data used the reasonableness of the assumptions, or the achievabthty &the forecasted outcome UNDERWRITING 'l 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 obhgated to purchase all of the Bonds ff any Bonds are purchased The Bonds to be offered to the pubhc 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 offarmg prices of such Bonds and such pubhc offenng prices may be changed from tlme to t~me, by the Underwriters MISCELLANEOUS The financial data and other Information contmned harem have been obtained from the Agency's records audited financial statements and other sourees which are behaved to be rehable Thare ~s no guarantee that any of the assumptions or estimates contained herein wdlbereahzed Allofthesummar~esofthestatutea,docomentsand resolut~onscontamed mthlsOffic~al Statement are made subject to all of the provisions of such statutes documents and resolutions These summaries do not purport to be complete state~nents ot such provisions and reference is made to such documents for further mformat~on Reference ~s 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 ~ts further use ~n the reoffermg of the Bonds by the Underwriters TEXAS MUNICIPAL POWFR AGENCY By BYRON CHITWOOD President of the Board of Directors 41 SCHEDULE 1 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 2-01-1987 $ 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 9 01 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% 5 690,000 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 9 01 2001 ~ 102% $ 56 035,000 APPENDIX A AGENCY AUDITED FINA]qCIAL STATEMENTS AND AUDITOR'S REPORT Auditors Report ARTHURANDERSEN REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of D~ctors of the Texas Mumclpal Power Agency We have aud~d the accompanying balance sheets of Texas Mumclpal Power Agency as of September 30,12000 and 1999, and the ~elated statements of operations and accumulated excess revenues and cash flows for the yann than ended These financial statements are the responsibility of the Company's management Our responslbthty ts to express an opinion on these financml statements based on our audtts We conducted our audtts m accordance wttb audmng standards ganerally accepted m thc United States Those smndard~ reqmte that we plan and peffurm the audtt m oberon reasonable assurance about whether the finanmal statemants are free of material mtssta~mant An an&t includes exammm8, on a test bas~s, cvtdance supporting the amounts and dtsciosures m the financra~ statements An andtt alse mcludas assessing the accountmg principles used and stgmflcant esUmates made by management, as well as evaiuatmg t~e overall financm] statement presentatmn We beheve that our andtts ptovtde a reasonable b~sts for our opmton In our opmton, the flnancml statements referred to above presant fmrly, m all mnterml respects, the financtal posmon of Texac Mumctpal Power Agency as of September :30, 2000 and 1999, and the results of ~ts operattons and its cash flows for the years than ended m conformtty wtth accoantmg pnnctplcs ginerally accepted tn the Umted States Houston, Texas .lanuaty 29, 2001 13 Texan Municipal Power Agenoy TEXAS MUNICIPAL POWER AGENCY BALANCE SHEETS ASSETS September 30 ~ 2000 1999 Electric Plant (Dollars in Thousands) In senqce $ 849,654 $ 853 162 Less Accumulated deprectabon (455.531} (440.904) Total - net 394 123 412 258 Construchon wonV, m progress 672 783 Total electnc plant 394.795 413.041 Restnctad Assets Cash and investments (includes cash and cash equ~vstents of $1 790 and $1,302) 123,818 122,505 Accounts receivable and other ~ 246 Total Restricted assets 124.110 ~ Current Assets Cash and investments (includes cash anti cash equivalents of $8 780 and $23 744) 20 753 34,734 Inventories Fuel stock 3,151 3,966 Material and supphes 3,712 3,792 Accounts receivable and other 23,056 11,246 Accrued interest receivable 1 481 1,782 Due from restncted assets 1.395 ,, 218 Total current assets 53-546 55.718 Other Assets Unamortized debt ;ssuance costs 13,507 14,500 Unamortized excess cost on advanced refunding of debt 140,515 152,856 Deferred expenses to be recovered m future years 702.152 690.886 Total other assets 856.174 858.242 Total Assets ~ $1.449.782 The accompanying n~tes are an ~ntegrel part of the financial statements TEXAS MUNICIPAL POWER AGENCY BALANCE SHEETS ACCUMULATED EXCESS REVENUES AND LIABILITIES 2000 1999 (Dollars ~n Thousands) Accumulated Excess Revenues Reserved $ 19,618 $ 19,660 Unreserved 8,448 1~,,:~30 Total accumulated excess revenues 28.066 Long-Term Debt Revenue bonds, less current maturit~es 935,262 983,847 Unamortized discount (16,848) (18,105) 187 282 160 241 Zero coupon interest payable 176 000 176 000 Tax-exempt commen3al paper Taxable commercial paper 26,300 29,200 Notes payable Total long-term debt 1.308.267 1.331.593 Non-Currant Liabilities 603 Regulatory I~abillty Accrued m,ne reciamst~on costs 4.121 9,856 Total Ilabilit~es payable from restricted assets 4,7~4 9.856 Liabilities Payable From Restricted Assets 6 743 4,689 Accounts Payable 1,395. 218 Due to unrestncted assets 8,138 4, r Current Liab~litias Taxable commercial paper 2,900 2 800 Current maturities of revenue bonds 48 585 41,420 Current notes payable 139 164 Currant accrued rfiine reclamation costs 5 744 4,298 Accrued interest 4,620 4,819 Accounts payable 13 990 13,174 Accrued distnbubon to Cities 2 320 3,297 Accrued compensshon and pension benefits 1,134 434 Total cun'ent llabilibes 79,432 70,406 Commitments and Contingencies Total Accumulated Excess Revenues and Liabilities ~ $1.449.762 The eccompeny;ng notes are an integral parr of the financial statements 15 Texas Municipal Power Agency TEXAS MUNICIPAL POWER AGENCY STATEMENTS OF OPERATIONS AND ACCUMULATED EXCESS REVENUES For the Year Ended September 30~ 2000 t999 (Dollars an Thousands) Operattng Revenues Before Refunds Powersales $ 165,097 $ 168,886 Other operating income ~ 8.790 Total Operabng income 183.323 177,676 Operating Expenses Fuel 39 542 34 144 Production operation and mantenance 11 981 11,871 Transmission operation and maintenance 4,066 8,934 Admimstrat~ve and general 11,446 8,923 t 'gnite ten~nat~on costs 7 10,035 Depreciation 171637 17.642 Total operating expenses 84,~79 91.349 Operating Income . 98,644 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 Amort;zatlon 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 tn Future Years ~ (34.644~ Net Revenues before Refunds and Renewals and Replacements 25,955 37,836 Renewals and Replacements (3.042~ (3.531~ Refunds to C~t~es ~ ¢28.814~ Change tn Accumulated Excess Revenues (4,924) 5,491 Accumulated Excess Revenues At beg~nmng of period 32.990 27.499 At end of period $ 28.066 $ 32.990 The eccornpany;ng notes are an ;ntegral part of the financial statements 18 Texas Municipal Power Agency TEXAS MUNICIPAL POWER AGENCY STATEMENTS OF CASH FLOWS For the Year Ended September 30~gg 2000 (Dollars ~n Thousands) Cash Flows From Operating Actlvitms $ 98 644 $ 86 327 Operating income Adjustments to reconcile to net cash pmwded by operating activees 17,637 17,642 Depreciation 7 10,035 Accroed ]ignCe term~nation costs Accounts receivable and other (11,938) (1,285) Inventory 757 (106) (1,427) (1 657) Accounts payable 773 ~6 Other Net cash provided by operating scflwtms 104,45~ 111,012 Cash Flows from Investing Activities Purchase of investments (94,347) (117 276) Proceeds from matudng investments 93 510 114,661 725 204 Pmcaeds from d~sposltlon of assets 1,446 625 Fair value change for cash equivalents Interest received on investments 8.033 8.295 Net Cash provided by investing achvrl~es 9.367 6.509 Cash Rows From Capital and Related Financing Activities Additions to electric plant (646) (92) Renewals and replacements (3 042) (3 531) Notes payable repaid (164) (2Ol) Taxable commercial paper repaid (2,800) (2,500) (41 420) (34 670) Bonds repaid Refunds to Member Cities (27,837) (27,837) Annual refund to Member C~tles (977) (4,041) Interest pa~d on debt (51.410) (51.810~ Net cesl3 used by financing actlwhes ~ [124.882~ Net Incmasel(Dscrease) m Cash and Cash Eqmvalents (14,476) (7,161) Cash and Cash Eqmvalents at Beginning of Year 251046 32.207 Cash and Cash Eqmvalents at End of Penod ~ In 570 ~ ~5.046 Noncash investing, capital, and financing activ~t~es The fmr value change of investments that are not cash and cash eqmvalents was $971,000 m 2000 and ($1,091,000) ~n 1999 The accompanying netes ere an ~ntegral part of the financial statements 18 Texas Municipal Power Agefl,~y TEXAS MUNICIPAL POWER AGENCY NOTES TO FINANCIAL STATEMENTS INDEX 2O Note I General Note 2 Summary of Significant Accounting Policies 21 Note $ Restricted Assets 24 24 Note 4 Investments Note 5 Risk Management Program 25 Note 6 Long.Term Debt 26 Note 7 Tax-Exempt Commercial Paper Program 27 Note 8 Taxable Commercial Paper Program 28 Note 9 Notes Payable 29 Note 10 Employee Benefit Plans 29 Note 11 Commitments and Contingencies 30 TEXAS MUNICIPAL POWER AGENCY NOTES TO FINANCIAL STATEMENTS t General The Texas Mumcipal Power Agency ('TMPA' or the 'Agency') was created In July 1975 by concurrent ordinances of the Texas c~hes of Bryan Denton Garland and Greenwlle ('Cities" or "Member C~t~es") pursuant to Acts 1975, 64th Leg ch 143, sec 1, now cod~ed in Subchepter C Chapter 163, Ut~l~hes Code (the "Act") Under the provisions of the Act, TMPA is a separate municipal corporation TMPA ~s exempt from payment of federal income taxes under Section 115 of the Internal Revenue Code In September 1976 TMPA entered ~nto ~dent~cel Power Sales Contracts (the *Contract') with each of the Cities for the purpose of obtaining the economic advantages of Jointly financing, constmchng and operating large electric generating units and related facilities to supply the C~t~es' future energy needs Under the Contract the Cibes are required to pay, for the benefits received or to be received by them from such actIvit~es 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 (Resolubons) In addition the C~t~es are obligated to guarantee the payment of TMPA s Bonds (the 'Debt Serwce Guarantee") As originally wntten m September 1976, the Contract was a requirements contract, which obligated the C~hes w~th caftan excepbons to purchase their wholesale electncity reqmmments from TMPA On November 5, 1997 the Contract was amended Under the amendment the Contract was converted from a requirements contract to a take.or-pay contract, under which each City ~s obligated to take or pay for a specified percentage of electricity from TMPA's generahng facility Currently those percentages are Bryan 21 7% Denton 21 3% Garland 47% and Greenville 10% The amendment confirmed the Cities obl~gabons explained above, to pay all costs of TMPA The Debt Service Guarantee, contained m the Contract s~nce September 1976 was not changed by the amendment Concurrently with the execution of the amendment on November 5, 1997 a Traws County DIstnct Court validated the Contract as amended and confirmed the authonty of TMPA to enter into the amendment TMPA operates the Gibbons Creek Steam Electric Stahon ("G~bbons Creek") a coal-fired generating plant located in Gnmes County Texas with a net generating capability of 462 MW Due to failure of the main step-up transformer on May 4 2000, the umt capaQty was reduced to 425 MW on ~ts retum to service with a spare transfonmer (430 MVA) in place on May 27 2000 Dudng the scheduled spnng outage ~n 2001, a new transformer w~ll be put m-place and the unit w~ll again be at full capacity of 462 MWs The plant began commercial operation on October 1 1983 Plant Operations Outsourcmfl In October 1998, TMPA entered ,nto a temporary contract w~th Duke/Fluor Darnel ('D/FD') for the management of the operation and maintenance of the Gibbons Creek power plant Under the contract D/FD assigned to G~bbons Creek a management team to d~rectly supervise TMPA employees working m the power production area In September 1999 the Board of Dtrectors authonzed the execution of a long-term agreement under which D/FD would continue to manage the operatron 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 whmh DFD has certain management responsibilities to ~nclude, among other matters procurement of coal and coal transportabon services and the operahon and maintenance of TMPA s transm~ssion system The agreement reserves to TMPA the nght subject to compliance with certain conditions to terminate the agreement for convenience pnor to the end of the five-year term In the event TMPA terminates the Agreement for convemence w~thin thirty (30) days after the end of the third year of the Agreement (or w~th~n thirty (30) days after the end of the third year of any renewal term), TMPA may terminate the Agreement for convemence w~thout payment of any cancellation fee Othenv~se ~n order to terminate the Agreement for convemence prior to the end of the initial term or any renewal term TMPA must pay a cancellation fee as provided for under the Agreement 20 Texas Mumcipal Power A~enc¥ 2 Summary of Sigmflcant Accounting Pohcles The accounbng records of TMPA are maintained substantially ~n accordance with the Umfon~ System of Accounts prescnbed by the Federal Energy Regulatory Commission ('FERC") for Class A and Class B Public Uhl~t~es and Licensees The preparation of flnancaat statements in conformity with generally accepted accounting pnncaples requires management to make estimates and assumphons that affect the reported amounts of assets and liabilities and d~sclosure of contingent assets and hab~l~bes at the date of the financaal statements and the reported amounts of revenues and expenses dunng the reporbng period Actual results could differ from those estimates Mf~asurement Focus, Bsc~s of Accounhno and Bas~s of Presentatton The accounts of TMPA are organized and operated on the bas~s of account groups in a fund A fund is an independent fiscal and accounhng entity w~th a self-balancing set of accounts Fund acoount~ng segregates funds according to their ~ntended purpose and ~s used to a~d management TMPA maintains an enterpnse fund to account for Rs operahons An enterpnse fund ~s a propnetary 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 ara recorded at the time i~abilities are tncurred Entsrpnse funds are used to account for operations that ara financed and operated in a manner similar to a pnvate business enterpnse, where the intent of management is to finance the costs of prowdmg serwces to the pubhc pnmanly through user charges Acoount~no and Financial Reoorhno Govemmental Accounting Standards Board ~'GASB") Statement No 20 requires the Agency to apply all GASB pronouncements as well as Financial Accounhng Standards Board ('FASB") Statements and Interpretations, Accounting Pnnctpals Board Opinions and Accounting Reseamh Bulletins ~ssued on or before November 30, 1989, unless such pronouncements confl~ct with or contred~ct 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 Fmancml Reporting for Certain Investments and for External Investment Pools', requires investments to be reported at fair value rather than at cost Rates paid by the Member Ctfles ~nclude estimates for realized ~nvestment ~ncome Therefore the unrealized gain (loss) component of ~nvestment fair value changes $308 000 and ($2 371 000) for 2000 and 1999, respectively, for all ~nvestments other than Restricted Assets - R~sk Management Program, is deferred to future pedods in Costs to be Recovered in Future Years on the Statement of Operetions and Accumulated Excess Revenues Recognition of ~nvestment fair value changes ~n the Statement of Operations and Accumulated Excess Revenues occurs when the investments mature or ars sold Unrealized fair value net gains (tosses) deferred as of September 30 2000 and 1999 were ($222,000) and ($550,000), respectively, and are included m 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 Govemmentst Employers ( GASB 27")' See Note 10 GASB Statement No 34 ('GASB 34"), 'Basic F~nanc~al 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 analys~s and direct cash flows statement presentshon This statement will be effective for the Agency for the peneds beginmng after June 30, 2001 2 Summary of Significant Accounting Policies, Continued Electnc Plant Electric plant, w~th the exception of mine assets, ~s stated at h~stoncal cost During construction, such cost includes paymll-mleted costs such as taxes and employee benefits, general and edmmlstrebve costs and an allowance for funds used m projects Mine related assets of $21 708,000 and $22 326 000 m 2000 and 1999 mspechvely are included m electric plant and reported at expected reahzable value The costs of repairs and m~nor replacements are charged to operating expenses as appropriate When the electnc plant ~s retired, the ongmal cost thereof and the cost of removal, less salvage, are charged to accumulated deprec.~et~on Allowance for Funds Used In Prolects Since ~ncept~on TMPA capltahzed to electnc plant approxlmalely $130 766,000 of the interest cost funded through bond proceeds The amount of interest capitalized w~ll be recovered m future years by setting rates sufficient to prowde funds for the related debt service requirements TMPA has not cap~tahzed ~nterest cost dunng 2000 and 1999 Deoreciat~or} Deprec~abon ~s provided using the straight-bna method over the est~msted useful I~ves of the vanous classes of plant, not to exceed the term of the Agencys long-term debt Useful lives of generabng fac~htms range from 12 to 35 years Useful hves of other utihty plant components range from ,5 to 20 years Annual deprecmt~on provisions expressed as a percent of average deprec~able plant were approximately 2 1% in 2000 and m 1999 Depreciet~on expense aggregated $17,837,000 and $17,642 000 in 2000 and 1999, respecbvely Investments Investments are stated at fmr value, and consist primarily of Umted States ("U S ") Government and Agency obligations and prime cemmemml paper ~ssues The Agency invests m commemlal paper w~th a Standard & Poor's rahng of"A1 · or Moody's feting of'P.1 · The Agency's investment manager, F~rst Southwest Asset Management, Inc, obtains market prices on U S Government and Agency instruments from Interect~ve Data Corporabon (·IDC") These quotes reflect last transaction paces for a database of U S Government Treasury and Agency secunbes Market pnces for commercml paper Issues are determined by companson to s~mllar issues as found on Bloomberg Financial Markets System Inventohe{~ Fuel stock and metenals and supphes Inventories are valued at cost, using weighted average methods Rates TMPA's rates for power and energy bdled to the C~ms are designed to cover annual system costs es defined in the Reselut~ons and the Contract In general costs are defined to ~nclude TMPA's costs of operations (except for depremation and amort~zetion), 1 26 times debt sen/ice reqmrements, and certain renewals and replacements It ~s the Agency's practice to budget approximately 1 30 times debt sen/~ce requ~remeets The rates are set by the Boarcl of D~rectors annually and are required to be reviewed on an annual basis TMPA's practice ~s to penod~celly refund accumulated excess revenues to the Cities to the extent of available funds after debt sen/ice coverage has been met Revenq~s Revenues from the sale of eleetnc~ty are based upon two components as agreed to by the Member Cdles The two components are (~ demand and (i~ energy The demand combonent is a fixed amount estabhshed for the fiscal year whmh ~s recogmzed ratably throughout the year The energy component ~s based on a per-umt generation amount and IS recognized as generation occurs Transmission Revenues are pnmanly determined by the Electnc Rehab~hty Council of Texas ('ERCOT") annually based on regulatory fihngs and are recegmzed ratably throughout the year by the Agency 22 Texas Muniglpal Power Agency 2 Summary of Stgmflcant Accounting Pohc~es, Conttnued Deferred Exoenses to be Recovered ;n Future Year~ TMPA ~s subject to the accounting requirements of FASB Statement No 71 'Accounting for the Effects of Ce~ain Types of Regulation" Acoord~ngly, certain costs may be cap~ahzed as a deferred asset that would otherwise be charged to expense Such deferred assets are recorded when tt is probable that future revenue ~n an amount at least equal to the cap~talized costs w~ll result from inclusion of those costs in future rates Types of costs deferred ~nclude depreciation m excess of bond principal payments included in rates zero coupon bond interest debt ~ssuance 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 principal and interest, renewals and replacements and taxable commem~al paper Recovery pedods extend to 2018 for debt service recoven/ components, 2008 for taxable commen=al paper components, and are eshmated 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 ~denbfied operating and maintenance projects after all required deposits into restricted funds have been made The onglnal cost of assets is copitahzed ~n electric plant ~n service and an offsetting contra account ~s estabhshed to reflect the curt'ant cost recovery of these items TMPA rates billed to the Cities are designed to cover renewals and replacements Renewals and replacements funding not ut~hzed m the current year is camed forward for future capital projects Dunng 2000 and 1999 excess revenues were charged w~th $3,042,000 and $3,831,000, respect~vciy for renewals and replacements At September 30 2000, $3,871,000 was carried forward as amounts tncluded m rates for renewals and replacements but not yet spent See Note 11 H for2001 estimated capital expenditures Bond discounts are being amo;llzed over the terms of the related bond ~ssues under the interest method Issuance expenses for all ~ssues after 1988 are amorhzed using the stre~ght-ltne method, which approximates the interest method, over the term of the bond ~ssue Sf;~tements of Cash Flows For purposes of the Statements of Cash Flows the Agency considers all highly I~qu~d investments with onglnal matunhes of three months or less to be cash equivalents Accumulated Excess Revenues Dunng 2000 and 1999 the Board of Directors reserved Accumulated Excess Revenues for various specified purposes These purposes include reserves for construct;on or renovahon and nsk management funds retained for self-insurance The Construction Project Reserve was established ~n 1986 to help reduce borrowings for capital projects The funds ware collected ~n rates and reserved for future capital projects by specifically segregabng the applicable port;on of accumulated excess revenues All funds collected in rates have been spent on approved capital projects The $12,156,000 Construction Project Reserve ('CPR") balance represents funds spent for capital projects that have not yet been depreciated As these projects are depreciated the CPR ~s relieved The CPR wall be depleted when the funded projects are fully depreciated One of the provisions of Senate S{II 7 (*SB 7') authorizes the Agency at ~ts ophon to use a methodology for estabhsh~ng its transmission cost of service which takes rote consideration the Increasing debt service requirements of the Agency by ievehzlng its transmission cost of service ('TCOB-) The level.ed 'I'COS results in the Agency receiving In some years transmission revenues over and above the revenues ~t would have received under the standard methodology (the 'Additional Revenues') Senate B~II 7 requires that, to the extent the levehzed TCOS results in Additional Revenues the Add~[;onal Revenues must be used to reduce the debt of the Agency Pursuant to this provision of Senate Bill 7 the Agency apphed for and on December 13 2000 received from the Public Uhl~ty commission of Texas ('PUCT") an order rewsmg the Agency s Toes 23 Texas Mun~pal Power Agency 2 Summary of Significant Accounting Pohcles, Continued While the Agency does contend that some errors were made by the PUCT ~n applying the prows~ons of Senate B~II 7 the PUCTs order which ~s presently subject to a mohon for reheanng filed by the Agency, does result m Add~honal Revenues which must be usecl for debt retirement In anticipation of this order becoming final and the receipt of the Add~honal Revenues the Agency has estabhshed a Debt Rehrement Reserve for purposes of accounting for the Additional Revenues Per prows~ons of the November 5 1997 Power Bales Contract amendment, the Risk Management Reserve and cartaln unreserved excess revenues are not available for refund to the Cities The Contract amendment pmwdes 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 2000 1991) (Dollars m Thousands) Constructron Project Reserve $12 156 $12,803 Debt Rehrement Reserve 1 992 R~sk Management Reserve 5,470 6.857 Total $19.618 $19.660 3 Rastncted Assets Restncted assets Include those assets compns;ng the Bond Reserve, Contingency, Risk Management Program and Special Restricted funds if any, which are pnnc~pally established and maintained pursuant to the Resolutions Substanhally all assets in the Bond and Reserve funds am available only to meet the pnnc~pal and interest payments on the Revenue Bonds Assets in the Contingency fund are for use ~n paying extraordinary or unusual costs Assets an the Risk Management fund are available to pay carfare claims and losses and to reimburse the Agency for certain admm~strabve costs of the R~sk Management Program The aggregate amount of assets m each of these as of September 30 ~s as follows 2000 (Dollars ;n Thousands) Bond fund $ 7 398 $ 7005 Reserve fund 101,953 101,975 Contingency fund 2,028 2,030 R~sk Management Program 1;~,731 11,741 Total $.1.2_4....1~ $122.751 4 Investments The Agency's portfci~o Is invested in fixed income secunt~es as approved in the Bond Resoluhon and Contracts These ~nvestment secunt~es include U S Treasury obhgafions U S Government Agency and government-sponsored corporahon obl~gahons and commemal paper For short.term needs and other market cons~derahons, the Agency uses repurchase agreements consisting of Investment securthes whereby the Agency will resell at ~ts cost pJus accrued Interest, the securities at specific future dates All ~nvestment secunbes are safekept ~n the New York Federal Reserve Sank in the depository msntut~on's separate custodial account for TMPA or m a th~rd-party safekeeping bank Secunt~es underlying the repurchase agreement are safekept w~th Chase Manhattan Bank under a tm party agreement with Credit Su~sse First Boston Corporal~on 24 Texas Municipal Power Agency 4 Investments, Continued , All of TMPA's ~nvestments are registered or held by TMPA or ~ts Agent m TMPA's name The fair value of the Agency's investment pon'folio by securRy type at September 30 ~s as follows ~ZO00 1990 (Doltars ~n Thousands) pmr Value ~ U S Treasury obhgaflons $ 25 502 $ 29 455 U S Government Agency & Government- Sponsored Corporation obligations 97 581 99 099 Commercial Paper 12 437 5,932 Repurchase agreements 10,,~35 23,566 Total t 148 855 ~ pecosits The Bond Resolution requires that deposits be placed m a bank or trust company orgamzed under the laws of the State of Texas or a nattonal banking assocmbon located w~thm the State of Texas Deposits are insured by the Federal Deposit Insurance Corporation ('FDIC') up to the statutory hm;t of $100,000 and addlbonally collaterahzed by $11,000,000 of secunt;es Secunties that may be pledged as collateral are limited to obhgabons of the Umted States and ~ts agencies and state obligations rated "A" or better by Moody's or Standard and Poor's The pledged collateral ~s held ;n the Federal Reserve Bank of New York under a joint safekeeping account w~th the Agency's deposd institution 5 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 R~sk Management Program extends through July 2008 The initial capttehzation reqmrements were determined on an actuanal basis and each year an actuarial study ~s prepared by a professional actuary in add~t]on to the ~n~hal funding, TMPA has purchased commereiat msurenco to cover certain property and hab~l~ty nsks The Risk Management Program does not mciude health and dental care coverage described ~n Note 10 TMPA ~s exposed to various risks of loss related to torts, theft of, damage to, and destruct;on of assets errors and omissions, injuries to employees, and natural disasters Under the Board Resolution estabhshmg the Risk Management Program, w~thdrawals for the payment of cJa~ms (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 Clmm Maximum Amount Corporate general habihty cJstms ansing $1 m~lhon from one occurrence Assumed general liability claims ans~ng $1 mllhon from one occurrence Aggregate of corporate and assumed $ 3 m~lhon general liablhty clmms per fiscal year Property losses arising from one occurrence $ 5 mllhon Aggregate of property losses per fiscal year $5 mdhon, or such larger amount that does not render the Program actuanally unsound Risk Management Program, Continued Any claims or damages above self.~nsured amounts are covered by commercial rnsurance SeWed claims have not exceeded the self.~nsured max;mum amount There were no changes in the level of commercial ~nsurance from the previous year There were no settlements m 2000 or ~n 1999 that exceeded insurance coverage Effect;ve October 1, 1995, the Agency adopted GASB Statement No 30, 'R~sk F~nancm90mmbus ('GASB 30") whmh amends GASB Statement No 10 'Accounting sncl Financial Reporting for Risk Financing and Related Insurance issues ('GASB 10') GASB 10 reqmres that a hab~hty for claims be reported if ~nformahon poor to the ~ssuance of the financial statements indicates that ~t ;s pmbeble that a llabddy has been mcun'ed at the date of the financial statements and the amount can be reasonably estimated GASB 30 further requires that cimms habdibes include specific, ~ncremental cta~m adjustment exbend~t u res/expenses In add~hon eshmated recoveries or settled and unsettled claims should be evaluated and dedusted from the hab~hty for unpaid clams The Agency has ~ncluded a hab;l~ty 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 ~n the claims hab~hty amount for 2000 and 1999 were as follows Beglnmng Claims and Changes Claim Ending Frsca~ YeRr L,ablhtv In Estimates Payments Uabilitv (Dollars ~n Thousands) 2000 $4,666 $3,103 ($1,257) $6,152 1999 $9 497 ($2,440) ($2,391) $4,866 6 Long-Term Debt Revenue Bonds outstanding as of September 30 are as foflows Range of Earliest Amount Outstanding Maturing Interest Rates Redemption Series 2000 1999 Fron~ To From To Data (Dollam ~n Thousan(~s) 1987 $ 49 255 $ 49 255 2012 2013 5 500 5 500 2000 1989 85,632 100 807 2003 2012 7 200 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 $ ~ The Bonds am subject to ophonal redemphon poor to their scheduled matunty date at prices from 100% to 102% The Bonds are payable solely from and are collateralized by, an irrevocable first hen on the net revenues of TMPA and the funds estabhsfled by the Bond Resoluhons Zero coupon ~nrerest payable of approximately $187 282,000 through September 30 2000 will be recovered through the debt service interest component beg~nmng ~n 2002 Debt service requirements for the revenue bonds for the next seventeen years as of September 30 2000 are as follow 26 Texas Muntcipal Power Agency Debt, Continued pflncloal ~nterest Total (Dollam ~n 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 61 272 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 2012 88,954 33,853 122,807 2013 48,491 74 264 122,755 2014 39 669 83 085 122,754 2015 32 186 91 114 123,300 2016 30 295 93 005 123,300 2017 28 514 94,786 123,300 ,~ 983.847 $ 966.645 ;~ 1 9~0.492 Resolutions contain certain mstnct~ons and covenants ;nclud~ng TMPA's covenant to establish maintmn rates and other charges to produce revenues sufficient to pay operating and maintenance expenses (exclusive of depractstlon and amorhzabon), to produce net revenues sufficient to pay the amounts requ~rad to be deposited m the debt servme funds, and to produce net revenues equal to at least 1 25 times the annual debt service to be prod for trte then outstanding has six refunding bond issues outstanding - the 1987, the 1989, the 1991A, the 1992, the and the 1994 Senes Refunding Revenue Bonds Proceeds from the refunding bond ;ssues am ilTeVocebly deposited with escrow agents and used to purchase U S Government obhgst~ons which mature at such t~me and yield interest at such amounts so that sufficient monies are available for payment of princtpel and interest on the refunded bonds when due September 30, none of the defeased bonds amounting to approx;mately $259,830,000 in 2000 $278,705,000 ~n 1999, are included in TMPA s outstanding long-term debt Tax-Exempt Commercial Paper Program is authorized to ~ssue tax-exempt commercial paper m the pnnmpal amount not to exceed $180,000,000 tax-exempt commercial paper notes (the Senes 1991 Notes) are ~ssued in denominahons of $100,000 or moro w~th maturities not to exceed 270 days from date of ~ssue The final restudy dste Senes 1991 Notes cannot extend beyond September 1 2018 interest rates dudng 2000 from 2 95 percent to 6 05 percent Munlmpel Power Agency 27 7 Tax-Exempt Commercial Paper Program, Continued Under the Resolution, the Senes 1991 Notes are special obhgabons of the Agency payable fmm and collateral~zed by proceeds from the sale of Bonds proceeds from the sale of Commenflal Paper Notes (the Senes 1991 Notes and the Senes 1998 Notes as descnbed below) issued pursuant to the Resolution or other obligations ~ssued pursuant to the prows~ons of law, and amounts held ~n the Note Payment Fund and Note Proceeds Account further, the Senes 1991 Notes shall be collalerahzed by a pledge of net revenues subordinate ~n all respects to the pledge ;n favor of the Bonds TMPA agrees and covenants that at all bmes ~t w~ll maintain credit facilities with banks m amounts sufficient to pay pnnc. dpal on the Senes 1991 Notes Under the temls of a revolving cred~ agreement w~th Morgan Guaranty Trust company of New York, The Chase Manhattan Bank and Bank of America, TMPA may borrow up to $180,000,000 on a revolving basis until Apnl 15, 2001 There were no borrowings under th~s agreement in the fiscal year ended September 30, 2000 Under th~s agreement TMPA pays a cornnrn~tment fee of 20% per annum on the unused porfion of the banks' commitment and ~s obligated to pay interest on any borrowings at the base rate as defined ~n 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 revolwng credit agreement w~th Morgan Guaranty Trust Company of New York the Chase Manhattan Bank and Bayensche Landesbank, New York Branch Under the new revolwng credit agreement which terminates, m the case of The Chase Manhattan Bank on October 15, 2001, and ;n the case of the other banks on January 15 2002, TMPA may borrow up to $180,000,000 on a revolwng bas;s Under lhe new agreement, TMPA pays a commitment fee of 275% per annum on the unused portion of the banks commitment and Ls obhgated to pay ~nterest on any borrowpngs at the base rate as defined m the agreement, w~th a maximum rate not to exceed that allowed by law 8 Taxable Commercial Paper Program In February 1998 the Agency ~ssued new taxable cornmerc;al paper ~n the pnnc~pal amount of $43,000,000 ('the Series 1998 Notes") Proceeds were used to pay $22300,000 pnnc~pal outstanding and refire prewously existing notes and to obtain ownership of the Lot 29 draghne fmrn General Electnc Credit Coqoorafion by purchasing the assets at 'termmabon value' as defined In lhe leveraged lease The taxable commercml paper notes are issued ~n denommafions of $250,000 or more with matunhes not to exceed 270 days from date of ~ssue The maximum matunty date of the Sedes 1998 Notes is September 1, 2008 Of the $29 200 000 outstanding, $2,900 000 ~s scheduled by the Agency for 2001 repayment and ~s therefore classified as a currenl liability m the accompanying balance sheet Interest rates dunng 2000 ranged from 5 85 percent to 6 92 percent Under the Resoluhon, the Senes 1998 Notes are specml obhgabons of the Agency payable from and collsterehzed by proceeds from the sale of Bonds proceeds from the sale of commercdal paper notes (the Series 1991 Notes and the Senes 1998 Notes) ~ssued pursuant to the Resolution or olher obligations issued pursuant to the prows~ons of law and amounts held in the Note Payment Fund and Note Proceeds Account, further the Senes 1998 Notes shall be collateral[zed by a pledge of net revenues subordinate in all respects to the pledge ~n favor of the Bonds TMPA agrees and covenants that all braes ~t w~ll rnamtam crsd~t facilities w~th banks in amounts sufflQent to pay pnnclpal on the Sertes 1998 Notes Under the terms of a revolving credit agreement wdh Bank of Amenca wh~ctl terminated on December 20 2000 TMPA was authonzed to borrow up to such pnncdpal and ~nterest amounts on a revolwng bas~s until February 10 2001 There were no barrowmgs under th~s agreernent rn the fiscal year ended Septernber 30, 2000 On Decernper 20 2000 the agreement w;th Bank of Arnenca was terminated by mutual agreement Concurrently w~lh such termination TMPA entered into a revoiwng credff agreement w~th Bayensche Landesbank, New York Branch which s~m;larty authonzes TMPA to borrow up to such pnnc~pal and interest amounts on a revolving bas~s unhl December 19 2001 28 Texas Municipal Power Agency 8 Taxablo Commercial Paper Program, Continued , Under the revolving credit agreement with Bank of Amenca, TMPA prod a commitment fee of 1875% per annum on the unused portion of the bank's commitment and was obligated to pay interest on any i Base Rate Loans at the base rate, as defined in the agreement (9 5% at September 30, 2000), w~th a max]mum rate not to exceed that allowed by law Under the revctv~ng credit agreement with Bayensche Landesbank New York Branch TMPA ~s obligated to pay a commitment fee of 275% per annum on the unused port~on of the bank's commitment and ~s obhgsted to pay interest on any Base Rate Loan at the base rate, as defined ~n the agreement, with a maximum rate not to exceed that allowed by law 9 Notes Payable The Act paint,ts TMPA to ~ssue non.negotmble purchase money notes, payable ~n installments (oollaterallzed by the properties being acquired) m order to acquire tend or fuel resoumes At I September 30, 2000 these notes totaled $410,000 beanng ~nterest at rates between $ 0% and 8 0% ~ Note payment requirements for each of the years ended September $0 2001 through 2006 are , $139,000, $119,000 $89,000, $31,000, $16 000 and $16,000 respectively t0f Employee Benefit Plans efine o buo Pla TMPA has a defined contnbut~on retirement plan covering all full-brae employees which prowdes for TMPA to contribute an amount equal to 10% of gross wages to a thtrd party trustee for the benefit of plan participants ("the P~an') Chapter 810, Government Code and other state laws relating to political subdivisions such as the Agency, authorize the estabhshment and amendment of a pension plan by the Agency's Board of Directors The Plan ts adm;mstered by the TMPA Employees Pension Plan Admimstretive Committee Employees may contnbute on a voluntary bas~s an additional amount up to 10% of earnings Participants are ~mmed~ately vested ~n thmr voluntary contflbutmns plus actual earnings thereon Vesting in the remainder of thmr accounts ts based on years of continuous sea/ice A participant becomes vested in the Plan st 20% per year of credited service up to 100% Retirement plan costs for 2000 and 1999 were as follows 2000 % leOS ~ (Dollars m Thousands) Agency's total payroll $ 7 240 $ 6,983 Agency's covered payroll $ 7 171 100% $ 6 921 100% Agencyscontnbutlon $ 717 10% $ 692 10% Employees' contribution $ 67 1% $ 74 1% GASB 27 requires that employers w~th defined contnbut~on plans recogmze annual pension expense equal to thmr required contnbubon, which ~s the current practice of the Agency Loan prowsions were established ~n 1999 In general, employee loans from the employee's employer contribution account (Account) may not exceed the lesser of $50 090 or 50% of the present value of the employee's vested Account Loan repayment ~s generally wdh~n a 1 to 5 year bmeframe wdh specific use qualificaUons for payback periods up to fifteen years Loan interest rates are estabhshed according to loan pmwsion gmdelines In November 1997, the Board of D~rectors adopted an Internal Revenue Code Section 457 deferred compensation plan for Agenoy employees Th~s plan ~s in the fon*n of the ICMA Rebrement Corporation Deferred Compensat;on Plan and Trust The ICMA Retirement Corporation adm;nisters the deferred compensation plan The funds held under th~s plan are ~nvested ~n the ICMA Retirement Trust, a trust estabhshed by pubhc employers for the collechve investment of funds held under their retirement and deferred compensabon plans The Agency serves as trustee for the plan wtth the General Manager as the coordinator Texas Mun~lpsl power Agency 29 10 Employee Benefit Plans, Contmnued Employees may contnbote up to 25% of predefen'al taxable ~ncome or $8 000 whichever ~s less Employees direct the investment allocahon contnbuhons and payout opt;on of the;r ~nd~vldual plans Participants at year-end totaled 39 and 35 and parbc~pant contnbubons were $110,000 and $97,000 for 2000 and 1999, respectively Post Retirement Prooram 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 bas~s Employees are ehgibie for normal rehrement at age 65 or early rebrement at age 55 when age plus years of service equals 80 Benefrls for the rehrees consist of medical dental and hfe insurance coverages For acbve and retired employees the Agency pays 100% of the cost of hfe msuranca, 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 ~nsurance 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 career for the rst~ree and the Agency's plan becomes secondary The program was instituted by Agency management pohcy and is currently adm~mstered by Agency management The Agency accounts for and funds the costs of such beneffis as they are incurred Add~honal post rehrement benefit program mformat~on as of September 30 ~s as follows 2000 1999 Rst~red partm~pants 38 36 Costs incurred $295 823 $211,038 ca an ental enefi Effective December 1, 1991 the Agency began self-msunng medmcal and dental benefits The Agency's medical and dental plan, which ~s not a component of the Agency's R~sk Management Program, ~s administered by a third pa~ty adm~mstrator Both md~wdual and aggregate catastrophic risks are protected through commemial reinsurance contracts Prescnpbon drug claims are ~nctuded In the relnsurunce contracts Individual medical cJalms are currently reinsured for paid losses above $80,000 per covered ~ndiv~dual per year The Agency's aggregate hab~hty for medical benefits above $1 170,900 per year ~s also reinsured Losses relalmg to these claims are recorded based upon the Agency's estimates of claims to be pa~d for the period as well as a prowmon for recording C~alms ~ncurred but not reported Estimated medical and dental claims habtl~ty ~s a component of curt'ant habd~hes accounts payable Estimated claims hab~ldy at September 30, 2000 and 1999 was $324,000 and $80 000 respechvely Changes m the claims habd~ty amount for 2000 and 1999 were as follows Begmrung Claims and Changes Net Claims Participant Ending F~scal Year .L. mab~hty In Estimates Payments Contr~buflop Liability 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 Incenhve Plan In 2000, TMPA adopted an ~ncenhve-based compensahon plan for which participants may reca~ve additional income based upon the achievement of certain performance goals Commitments and Crmflngenc~es A In connecbon w~th a court settlement entered into on July 19, 1978, TMPA Is obligated to make certain payments to Grimes County and three school d~stncts as long as the Gibbons Creek stahon ~s ~n operation The aggregate amount of these payments was $648 000 and $651,000 tn 2000 and 1999 respecbvely 30 Texas Municipal Power Agency Commitments and Contingencies, Continued B Dunng fiscal 1995 the Agency authonzed the conversmn of (ts fuel source from locally-mined hgnite to sub-b~tummous coal from the Powder R~ver Basra CPRB') The Agency commenced construction of the necessary rmt spur and recopying operatton in fiscal 1995 and converted to PRB ~n fiscal 1996 In connection with this convem~on, certain of the Agency's plant and mine-related assets were impaired Impaired assets have been wntten-down to their net reahzable value in eddltlon, the Agency recorded an accrual for reclamation costs related to the hgmte mine operabons The approximate amount of lignite related termmatmn costs recorded for 2000 and 1999 were ss follows 2000 1~09 (Dollars ~n Thousands) Wnte-down of mine development and other related assets $ 9 650 Reclamabon 7 3~5 $=.===Z $ Ligmte ten'nlnat~on costs ~nclude accruing for expenditures to be ~ncun'ed m the future, the writedown to net realizable value of I~gn~te related assets and current year accruals for m~ne area reclamation For hgmte tenlninahon costs expected to be fully recovered ~n future years, the charges against earnings of $7,000 ~n 2000 and $10,035 000 ~n 1999 have been offset w~th an increase m deferred expenses m the balance sheet and a related credit to the respecbve statement of operet~ons C On October 2, 1995, TMPA entered into a coal transportahon agreement w~th the Burlington Northern Railroad Company, now the Buffington Northern Santa Fe ("BNSF") under which BNSF ~s obligated to prowde rml transportahon for the coal purchased by TMPA from the PRB m Wyoming The agreement is scheduled to expire on Mamh 31 2001 TMPA pursued negobations w~th BNSF through the summer of 2000 but was unable to secure a satisfactory new or extended contract arrangement to take effect upon exp~ratmn of the 1995 agreement Therefore, m July 2000, TMPA formally requested BNSF to establish rotes and ten~s for common comer coal transportatmn service to Gibbons Creek, ~n both sh~pper and camer- supphed rmlcars, effective at the conclusion of the current contract In August 2000, BNSF gave a pa~lial response by quoting a common comer rate m cars supphed by BNSF TMPA considered this rate to be unacceptable, and ~n October 2000 per,boned the federal Surface Transportation Board (STB) to compel BNSF to set reasonable rates for the Gibbons Creek se~ce m both camer-supphed and sh~pper-supphed ra~lcars A final decision by the STB ~s expected by February 2002 In the meantime, TMPA w~ll use the common career rate and serwce quoted by BNSF as necessary to transport coal once the current contract expires, subject to apprepnste 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 w~th Kennecott Energy Company for a 35-month supply of coal from the Powder R~ver Basra ~n Wyoming The agreement, which expired on December 31, 2000, prowded that the coal would be supphed at the dlrechon of the Agency from the Antelope Mine the Corders Rojo Complex (cons~shng of the Cordero M~ne and the Caballo 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 prowdes for a 36-month supply of coal from the Powder R~ver Bas~n, exp~rss on December 31, 2003 The sources of coal under the new agreement are the Cordero Rojo Complex and the Jacobs Ranch Mine Texas Mun~lpal Power Agency 11 Commitments and Contingencies, Continued E In January t979, TMPA entered rolo a transmission agreement w~th Texas Utit~ties Electflc Company (TU Electric) (currently known as TXU Electnc Company) (the Transmission Agreement) The Trensm;sslon Agreement provided for the transmlssmn of power and energy from G~bbons Creek, utiliz~ng portions of TU Electnc's transmission facitibes 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 Pubhc Ubhty Regulatory Act to promote the development of wholesale compeht~on by ~mposmg certain open access requirements on transmission prowders Also, in February 1996 the Texas Public Utddy Commtss~on (*PUCT"} adopted new rules under which the PUCT intended to adopt open access Electric Rehabd~ty Council of Texas ('ERCOT") w~de 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 uhhhes to rewse ex~stmg transmission agreements to conform to the PUCT Transmission Rules In accordance w~th such request TMPA and TU Electnc, on January 19, 1999 entered ~nto an agreement, which prowded for the Interconnechon of transmission facdit~es between TMPA and TU Electnc (the *lnterconnechon Agreement"} The Interconnect~on Agreement prowdes for, among other things the termmabon of the Transm~ssion Agreement and the refund of amounts paid by TMPA under the Transmission Agreement for transm~ssmn services prowded by TU Electnc on and after January 1, 1997 As a result of the Interconnectlon Agreement, the prevision and pnc~ng of transmtsslon service are governed by the PUCT Transmission Rules retroactn/ely to January 1, 1997 The Interconnect~on Agreement provides, however, that m the event open access requirements are mvahdated as a result of JUdicial action or as a result of statutory changes, and the provision of transmission sen/~ces ~s no longer required ~n the absence of agreement TU Electnc wdl unless the parhes otherwise agree, prowde transmission services for TMPA under the same pnclng, terms and conditions as set forth m the Transmission Agreement In August 1999, the Texas Court of Appeals m Aushn Texas, rendered a decision In s case mvolwng a challenge against the PUCT Transmission Rules by the City of San Antonio and Houston Lighting & Power Company (the 'San Antonio Case"} In the decision the Court of Appeals mvahdated the pricing prowsmn contained ~n the PUCT Transm~ssmn Rules on the grounds of lack of statutory authonty Currently, the San Antonio Case is pending m the Texas Supreme Court Whde th~s matter ~s pending ~n the Texas Supreme Court, the provision of transmission services by TU Electnc to TMPA ~s govemed by the PUCT Transmission Rules The Court of Appeals decision m the San Antomo Case does not appear to affect the open access provisions m the Pubhc Ubhty Regulatory ACt which reqmre ERCOT transm~sston providers to provide transmission servme to ERCOT transmission customers Nor does the dec,stun appear to affect the pncmg prows~ons of the PUCT Transmission Rules after September 1 1999 TMPA wdl continue to momtor the San Antomo Case and should be able to evaluate the effects ~f any on TMPA after a decision by the Texas Supreme Court ~s rendered F Between January 1, 1992 and December 31 1995, wholesale electnc service to the City of College Station was provided by the Cities In September 1995 after College Stst~on made the decision to switch suppliers to TU Electnc, commencing on January 1, 1996 College Station requested proposals from the Agency and Bryan to prowde the wbeehng serv~cas necessary to effectuate the purchase of electncity from TU Electnc Alter proposals were submitted ~n November 1995 a d~spute arose concerning the appropriate rates and terms of sen/ica 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 mihsted m the PUCT, and ~n the D~str~ct Courts of Brazos County and Traws County Since January I 1996 the transmission fac~ldms of the Agency and Bryan have been used to pmwde wheehng service to College Stahon In March 1997, the PUCT adopted an order estabhshmg mtenm rates dunng the pendency of the FERC proceeding Under that order the Agency was pa~d approximately $4 2 mdhon for transmission services prowded to College Station ~n calendar year 1996 32 Texas Municipal Power Agency For calendar year 1997 and subsequent calendar years the order requires the Agency to provide service under the PUCT Transm;ss~on Rules The PUCT Transmtsston Rules include a three- year transition mechamsm, whtch precludes TMPA from recovenng its transmission cost of servlca from ERCOT transmission customers until 2001 Under those roles for transmission serv;ces provided to all ERCOT uhltties the Agency recorded net receipts of $1 380 000 m 1997 $3,990,000 in 1998, $7,190,000 ~n 1999 and $18,230 000 m 2000 At issue in the FERC proceeding is the validity of the three-year transition mechamsm m the PUCT Transmission Rules Under the transition mechanism, as mdtcated above the Agency could not rece;ve ~ts full cost of trensm~ss~on service until calendar year 2000 TMPA ;s arguing ~n th~s proceeding that the three-year transmission mechanism ~s contrary to Federal law and that College Station should be required to share w~th the Member Cites ~n the costs of the shortfall resulting from the transmiss;on mechanism, which shortfall is oow allocated only to the Member Clt;es under the Power Sales Contract In February 1999 the FERC tssued a decision wh;ch mm'ored the ~ntertm rate order of the PUCT The FERC order requtres TMPA to provtde transmission service ~n accordance w~th the pncmg prows~ons of the PUCT Transmission Rules The FERC proceeding ~s still pending on motions for reheanng filed by TMPA and Bryan Since the San Antonio Case (see Note 11 E ) ~s relevant to the issues raised m the FERC proceeding TMPA has filed w~th the FERC a copy of the dectslon ~n the San Antomo Case and has urged that expected to have a matenal ;mpact on the Agency's financial position operating results or cash flows G in July 1997 and July 1998, the Agency s Board of D~rectors adopted rates whmh were designed and assoc;ated w~th the delivery of G~bbons Creek power to the Member C~hes (the · Transmission Costs') The C~ty of Bryan opposes the tnclus~on of the Transmission Costs ~n 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 w~thhold from its payments to the Agency, and to deposit in an Contract of the Trensm;ssion 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 C~ties of Denton Garland and Greenwlle, compla~mng that the ~nclus~on of the Transmission Costs m the Agency s rates violates the PUCT Tronsm~ss~on Rules in November 1998 the Agency filed a lawsmt against Bryan in State Distnct Court ;n Gnmes County Texas In the lawsuit the Agency seeks a declaratory judgement in relation to the vahdtty of tls 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 ;ssued a ruhng d;sm~ss~ng Bryan's complaint for lack of lunsd~ct~on In July 1999, the PUCT reversed the Adm~mstrative Law Judge hold~ng that the PUCT does have jurisdiction and deciding the merits of the dispute in Bryan s favor in September 1999 TMPA appealed the ruhng of the PUCT to State D~stnct Court ~n Traws County, Texas, where ~t ~s now pending To County D~stnct Court case, and no heanngs have been scheduled As a result of tfie provisions of Senate B~II 7, the PUCT effective September 1 1999 estabhshed new transmission rates based on a 100% postage stamp methodology Because, under thts methodology the cost of transm~ss;on service allocated to Bryan ~s the same regardless whether or not TMPA includes such charges ~n ~ts budget and rates to the member Cities, the dispute has proceedings Although the final prowslons of a settlement document have not yet been agreed be adjusted for the penod pnor to October 1 2000 tl Comm;tments and Contingencies, Continued These proceedings are not expected to have a material ~rnpact on the Agency s financial poalt~on operating results or cash flows H The Cap~tal Improvement Plan a detailed cost eshmate of projects for 2001 and proposed capital expenditures through 2010 ~ncludes authorization for estimated expenditures of $25 002 000 in 2001 Financial ~nstruments that potentially subject the Agency to a concentrahon of credit risk pdnc~pelly consist of cash, investments and trade receivables The Agency places its cash and investments, which ~ndude U S govemment backed secunhes and collaterehzed cortificetes of deposit w~th h~gh credit quahty financial ~nsbtut~ons Concentrations of credit risk with respect to trade receivables are I~m~ted due to the fact that substanbally all receivables am due from munm~pahbes J In connection with the G~bbons Creek L~gmte Mine, the Agency ~s self-bonded for approximately $8 000 000 and has ~rrevocable letters of credit ~n the amount of approximately $27 444,000 outstanding which ensure that the Agency w~ll reclaim all lands disturbed by mining operations in accordance w~th all apphcable Federal and State laws relabng to surface mmmg K The Agency ~s a party to vanous lawsmts from t~me to bme which anse dunng the normal course of bus,ness In the opinion of management, the potenhal claims against the Agency from these lawsuits would not matenally affect the Agency s financial pos~bon results of operations, or cash flows L The 76~ Texas Legislature enacted leg~slabon, Senale B~II 7 ~mplementmg retail competition in the electric ubhty ~ndustry commencing on January 1, 2002 Although participation by ~nvestor owned ubl,t~es m retail compet~bon ~s required, participation by municipally owned utilities ~s on a voluntary bas~s Uhhhes which part~mpate ~n retail compet~hon including municipally owned ut~l~bes which decided to participate m retail compebt~on, are authorized to recover stranded costs and may uhhze securlhzahon prows~ons contained in the leglslahon Several provisions In Senate B~II 7 pertain to munlclpst power agencies One of these provisions (the "Debt Rebrement Prows~on") 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, m the event the objechve ~s not met TMPA must 'provide detailed reasons to the electnc utility restructunng legislative oversight committee by November 1 2000, why the agency was not able to meet th~s object~ve' The Debt Retirement Prows~on goes on to state that the agency "shall extmgmsh the agency's ~ndebtedness by sale of the electnc facihty to one or more purchasem, by way of a sale through the ~ssuance of taxable or tax-exempt debt to the member c~hes, or by any other method ' The Debt Rehrement Prows~on does not provide for any penalty or remedial action to be taken against a mumc~pal power agency for the failure to meet the objective of extinguishing ~ts debt by September 1 2000 In July 1999 the Board of D~rectors of TMPA established a Debt Retirement Committee to study and to recommend to the Board ophons for achlewng the obJective of extinguishing TMPA's debt Based on the work of the Committee, the Board m October 2000 caused to be prepared and submitted to the Joint Committee on Oversight of Electnc Uhhty Restructunng (i · the electnc ublity restmctunng legislative oversight committee relented to m SB 7) the report required by the Debt Retirement Prowslon The report in add~bon to explaining the reasons why TMPA was not able to exhngmsh all of its debt by September 1 2000 ~dent~fied the options explored by the Committee and available to TMPA to reduce TMPA's debt service requirements in the future Senate B~ll 7 also contains prows~ons which provide assurance that the legislation w~lJ not 'interfere w~th or abrogate the nghts or obl~gahons of part~es to a contract with a municipally owned ubl~ty" in hght of such assurance ~n the leg~slabon, relevant prowslons of TMPA s enabling leg~slabon the judicial vahdahon of the Power Sales Contract ~n 1997, and other pertinent cons~derehons TMPA is of the wew 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 matenal ~mpact on TMPA's financ4al pos~bon, operating results or cash flows 34 Texals Municipal Power Agency tl Commitments and Contingencies, Continued M In November 1997, TMPA was reformed that the C~ty of Denton had employed a consultant to assist It ~n sohc4t~ng proposals for the sale of Denton s ~nterest ~n G~bbons Creek Subsequent to that date, the City of Denton has engaged other consultants, and has part~c;pated m several efforts, to soli~ proposals for the sale of ~ts interest ,n G~bbons Creek Pursuant to State 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 CRy 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 ~mpact on TMPA's financial position, operating results or cash flows 35 Texas Munlc~pal Power Agency APPENDIX B INFORMATION REGARDING UTILITY SYSTEMS OF THE CITY OF BRYAN B 1 THE CITY OF DENTON B-4 THE CITY OF GARLAND B 10 THE CITY OF GREENVILLE B-14 The following balance sheets and oparatmg results for each of the Crees have been condensed from the respective Cities audited financml statements by the Agency and reviewed by the Cttles However, these financial statements have not been examined by independent pubhc accounts and are mcomplete In that relevant footnotes income statements and statements of changes m financial posltmn are not presanted as would be required for a presentatmn m accordance with generally accepted accounting principles CITY OF BRYAN E CIl~' The ClTM of Bryan Texas s a po t cai subdlwslon and mun c~pal corporation of the State located ~n Brazos County ~e~x~as The C~ty end'passes approximately 32 3 square miles The City's estimated population for 2001 is approx mately 69 000 The C~ty's "Utility System" consists of the ex~sttng combined mumc~pal elecmc hght and power, waterworks and sewer systems THE ELECTRIC SYSTEM The C~ty-owned generating capacity consists of the Atk~ns Street Plant with lour gas-fired (w~th od standby capablhty and storage) steam turbine generator umts (capacay 109,000 kW) and one combumon turbine generator (capaoty 21 000 kW) and the Roland C Dansby Power Plant with one gas and/or od-fired steam turbine generator (capacity 110 000 kW net) for a combmed capacity of 240 000 kW The City currently Is purchasing Iud on the spot market and on contracts which cover several months across either the summer or winter peaks Reserve Mel od storage capacity of 4 700 000 gallons IS avadable D~smbution of electric power ~s made through three-phase 12 5 KV hnes supphed from s~ven substatmns These substatmns are served by a looped 69 KV transmission system or 138 KV transmission hnes RURAL ~LECTRIC LIOBT AND POWER SYSTEM The C~ty owns and operates a rural elecmc hght and power system (the ' Rural System.) outside the boundarias of the C~ty separate from ~ts municipal elecmc hght and p°wer system The City has retained thc right m the ordinances authorizing the outstanding bonds and in the ordinance authorizing the outstm~thng Rural System Revenue Bonds to merge the two systems and make the bonds of both systems pmty bonds Rural Flectrlc System Revenue Bonds outstanding as of November 1 2000 amount to $745 000 The Rural System serves approximately l0 947 raral customers TEXAS MUNICIPAL POWER POOL The City ~s a member of the Texas Mumc~pal Power Pool (" FMPP") which also includes the C~t~es &Denton Garland and Greenwlle, and the Brazos Electric Power Cooparauve Inc of Waco Texas ("Brazos") each of which has its own production, transm~ssmn, and d~stnbut~on facdlties I he City ~s also a member of the Electric RehabdIty Councd of Texas(,,ERCOT.,),theregmnalrehabditycoordmatmgorganlzatmn for electrm power systemsm lexas The Clty has access lo the ERCOT intrastate network of six major investor-owned and several pubhc systems through the TMPP members transmissmn system R B an alon with the Cities of Denton Garland and Greenwlle has wholesale contracts to supply power to the Cm~ o! for the Cities of Gatesvllle and OIney ELECTRIC RATES (EFFECTIVE OCTOBER 2000) Customer Energy Fuel Charge Demand Charge Charge Clef Class Per Month Per kW Per kWh _per kwh Residential Winter (Nov Apr) $ 6 00 $ 0 00 $ 0 0475 $ 0 030 Residential Summer (May-Oct) 6 00 0 00 0 0575 0 030 Small Commercial 9 00 0 00 0 059 0 030 Medium Coreanermal 0 00 7 35 0 0345 0 030 Large Commarcml 0 00 6 35 0 027 0 030 Large Industrial 0 00 13 70 0 00735 0 030 Bryan Public Schools 30 00 0 00 0 0535 0 030 Interdepartmental 30 00 0 00 0 0551 0 030 Rural Electric D~v~slon 0 00 7 25 0 0204 0 029 Rural Class Res~denual Wmter (Nov-Apr) 7 00 0 00 0 0440 0 030 Residantml Summer (May-Oct) 7 00 0 00 0 0540 0 030 Small Commercml 10 00 0 00 0 060 0 030 Medmm Commercial 0 00 7 40 0 035 0 030 Large Commercial 0 00 6 65 0 0282 0 030 B-1 ENERGY SALES BY TYPES OF CUSTOMERS (FISCAL YEAR ENDED 9-30) 20000) 1999 1998 Energy Sales % kWh Energy Sales % kWh Energy Sales % kWh Type of Customer (kWh) Sold (kWh) Sold (kWh) Sold ResMentml 315 233 000 23 93% 297 054 000 25 17% 300,217 000 23 36% Commercml and Industrial 393 598,000 29 88% 365 937 000 31 00% 341 605 000 26 58% Pubhc Authorities 30,480,000 2 31% 32 682 000 2 77% 26 394 000 2 054% College Station 0 00%0 0 00%0 0 00% Rural Electrm D~v~s~on 238 698,000 18 12% 225,707,000 19 12% 242 355,000 18 86% Other Utllmes 311 604 000 23 66% 233,713 000 19 80% 349 355 000 27 18% Interdepartmental 27 441,000 2 08% 25,299,000 2 14% 25,284,000 I 97% Total 1 317 054 000 100 00% I 180 392 000 100 00% 1,285,210 000 100 00% 1997 1996 Energy Sales % kWh Energy Sales % kWh Type of Customer (kWh) Sold (kWh) Sold ResMentlal 277 659 041 24 37% 285 994 639 25 48% Commercial and Industrial 322 517 I 10 28 31% 297 610 998 26 52% Pubhc Authorities 22 520 080 I 98% 23 591 855 2 10% College Statmn 0 00% 1 204 650 0 11% Rural Electric D~v~smn 227 178,000 19 94% 224 013 904 19 96% Other Utflmes 265,129,000 23 27% 265,814,000 23 68% Interdepartmental 24 136 405 2 12% 24,085,440 2 15% Total I 139 139 636 10000% 1,122315,486 10000% (1) Unaudited CONDENSED STATEMENT OF UTILITY SYSTEM OPERATIONS Revenues 200001 1999 1998 1997 1996 Waterworks System $ 6 936 061 $ 5 933 692 $ 6,033 402 $ 5 247 698 $ 5 066 069 Sewer System 8,957 331 8 423 639 8 183 611 7 810 827 7 707 894 Electric L~ght System 87 788 443 79 038,442 71 679 182 70 141 460 70 195 301 Miscellaneous 2 662,175 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 Exoens~_s Waterworks System $ 4578268 $ 4056059 $ 3,755966 $ 4189991 $ 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 (I) Unaudited B-2 COVERAGE AND FUND BALANCES(l) Average Annual Principal and Interest Requirements, 2001 - 2019 $2 709 721 Coverage of Average Requirements by 9-30 00 Unaudited Net Avadable for Debt Service 9 84 T~mes Maximum Principal and Interest Requirements, 2002 $6 399 984 Coverage of Maximum Reqmrements by 9-30 00 Unaudited Net Available for Debt Service 4 17 l ~rnes Utlhty System Revenue Bonds Outstanding, 6-1 01 $36 990 000 System Interest and Stoking Fund Balance, 9-30-00 $2 709 72 I System Reserve Fund balance, 9-30-00 $1 423 585 (1) Unaudited B3 CITY OF DENTON The C~ty has owned and operated its elecmc hght and power system (the "Electric System") for approximately 90 years Dunng thAs tame, the Electric System has experienced a steady growth m customers and output reqmrmg perlodm addAtAons to plant and dAstnbutmn facd~t~es HISTORICAL OPERATING AND FINANCIAL DATA The table below sets forth cartam operating and financml data wtth respect to the Electric System for each of the five most recently completed fiscal years Year Ended September 30, 2000 1999 1998 1997 1996 Average Number of Monthly Customers by Service Classificationm Res~dentml 29 436 29,353 28,515 27,624 26 888 Commercml & industrial 3,606 3,754 3,621 3,466 3,387 Other 791 1,446 1,404 1,496 1,330 Total 33,833 34,553 33,540 32,586 31 605 Annual Megawatt Hours Sales by Service Classification Residentml 374617 356,644 366,461 312,521 318,604 Conunercml & lndusmal 674 081 626~536 603,553 556,749 551,297 Other 52,317 39,600 37,222 32,906 36,198 Subtotal I 101,015 1 022,781 I 007236 902,176 906,099 Sales for Resale 33 347 50,701 58,472 83 450 97,505 Total Sales I 134 362 I 073 482 1,065 708 985 626 I 003,604 Loss and Unaccounted 14,780 25,037 48,941 51,116 27,453 Total MW to System 1,149,142 1,098,519 1,114,649 1,036,743 1,031,057 % Loss and Unaccounted I 29% 2 28% 4 39% 4 93% 2 66% Annual Revenue by Service Classlficatmn ($ m Thousands) Resldantlal $ 31609 $ 28,121 $ 28,903 $ 25,224 $ 24,107 Comraercml & industrial 40,095 36,996 35,711 34,081 33,101 Other 3 401 3,288 3,126 2,894 2,896 Total $ 75,105 $ 68,405 $ 67740 $ 62199 $ 60,104 Anal~,sls ol Electric Btllln~ ResAdentlal Customers Avg Monthly BAIl per Customer $ 89 49 $ 79 83 $ 84 47 $ 76 I0 $ 74 71 Avg Monthly kWh per Customer 1,061 I 012 I 071 943 987 Avg Monthly Cents per kWh 8 44 7 88 7 89 8 07 7 57 Commemlal & Industrial Customers Avg Monthly Bdl per Customer $ 926 58 $ 821 29 $ 821 85 $ 819 35 $ 814 41 Avg Monthly kWh per Customer 15 479 13,909 13,890 13,385 13,564 Avg Monthly Cents per kV~ 5 95 5 90 5 92 6 12 6 00 Capacity and Energy M~x (rounded to nearest MW) Capaclt7 Owned Capacity (MW) 178 178 178 178 178 Firm Purchase (MW) TMPA 98 98 98 98 98 F~rm Purchase (MW) Other 30 12 0 0 0 Total 306 288 276 276 276 (I) Theavarag~number~fm~nth~ycust~m~rsappearst~havedecreasedmtheyearendedSeptember3~ 2000 Th~sdecrease~sa result of installation of new customer mformatton software at the begmmng of fiscal year 2000 The pmvAous soRware system counted actual number of bdbngs produced The new software counts customers who receive multAple bills as a s~ngle customer msult~ng m the apparent decrease tn customers Total number of bdls produced for the year ended September 30 2000 was 36 897 an arcrease of 7% over the prewous year B-4 CURRENT ELECTRIC I~ATE SCHEDULES Approximately 96% of the Electric System customers are bdled under the rate schedules summarized below Special rate schedules are avadable for customers with unique load curves such as c~ty slreet hght~ng, Crc Residential Serwce Rate (Effective October l, 1999) Apphcable to any customer for all electric service used for residential purposes in an individual private dwelhng or an mdiwdually metered apartment, supplied at one point of delivery and measured through one meter Also apphcable to any customer heating with electric energy, resistance or heat pump Not applicable to resale servme m any event nor to temporary standby, or supplementary service except in conjunction w~th the apphcable rider FamhW Charge Single-Phase $ 7 73 / 30 days Three-Phase $15 45 / 30 days Enemy Charge - Winter Rates F~rst I 000 KWH 4 34¢ / KWH Additional KWH 3 94¢ / KWH Enemy Chame Summer Rates F~rst 3,000 KWH 5 61¢ / KWH Additional KWH 6 21¢ / KWH ~stment See description below General Serwce Lame (EffectlveOctober I 1999) Applicable to any commercial or industrial customer having a minimum actual demand of 250 KVA or 225 KW for all electrm service supphed at one point of dehvery 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 servme under this rate subject to the minimum bdhng provision Customers other than commercial and industrial may be allowed service under thts rate sublect to the minimum billing provision Fa~ditv Charge $60 60 / 30 days Demand Charte $ 8 64 / KVA (Minimum of 250 KVA bdled) Enemy Chame I 41¢ / KWH Energy Cost Admstment See description below M~mmum Bdhn~ An amount equal to the famhty charge plus a demand charge bdled at the above KVA rate where demand xs determmed by whichever of the followxng methods y~elds the greatest result numerically (1) the actual monthly KVA demand (2) 250 KVA or (3) seventy percent (70%) ot the maximum monthly KW/KVA actual demand for any month during the prewous bdhng months of May through October m the twelve months ending w~th the current month General Serwce Small (Effect~veOctobar I 1999) Th~s rate Is apphcable to any commercial or mdustrml customer hawng a mmx~mum demand less than 225 KW for all electrtc serwce supphed at one pmnt of dehvery and measured through one meter Facdltv Charge Single Phase $15 15 / 30 days Three Phase $20 20 / 30 days Demand Chame $ 8 00 / KW (F~rst 20 KW not Billed) Energy Charge Customer with 20 KW or below Block 1 - First 2 500 KWH 6 75¢ / KWH Block 2 All Add~tmnal KWH 3 00¢ / KWll Customer above 20 KW Block 1 - First 2,500 KWH 6 75¢ / KWH Block 2 - Next 3,500 + B2T KWH 3 00¢ / KWH Block 3 - All Additional KWH 2 65¢ / KWH B-5 Mlmmum Bdhng 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 prevmus bllhng months of May through October In the twelve months ending with the current month Energy Cost Adjustment (Effective April I 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 appbed to the quarter ~mmedmtely following The C~ty shall ~n no case change the energy cost adjustment mom than once ~n any three (3) month period The ECA shall be calculated using the following formula ECA Prmected energy cost for next ouarter Projected KWH sales for next quarter In the event that actual plus estimated cumulatlve costs of fuel variable costs of TMPA energy and pumhased 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 D~rector of Electric Ut~htles or his designate shall recompute the Energy Cost Adjustment and w~th Pubhc Utthtles Board approval may estabhsh an ECA that collects or returns such d~fference over the next three month period Such change in ECA shall be apphed evenly to each month during the three month permd fhc third quarter FY 2000-2001 ECA rate ~s 4 00¢ / KWH ELECTRIC UTILITY SERVICE AREA In 1976 the Pubhc Ut~hty Commission of Texas (the "PUC") Issued the C~ty a Certlficate of Convenience and Necess~y ("CCN") to serve electric water and wastewater to a 150 square mile area encompassing the C~ty's then c~ty boundaries plus its extratemtonal Jurlsdmt~on area ("ETJ") The ETJ certfficatlon area extended apprommately two miles beyond the City's 1976 c~ty boundaries or to a neighboring tory's boundary, whichever was closest The C~ty ~s the exclusive prowder of electric water and wastewater services to the area ~ncluded wlth~n the 1976 c~ty boundary area, w~th the exception of a small area where certification was granted to Fexas Power and L~ght Co (now TXU Electric Company, and referred to herren as "TXU Electric") and/or Denton County Electric Cooperative, thc ("CoServ") due to the~rexlstmgserwcemthearea Dualandoccas~onaltrlplecert~ficatmnpresentlyexlst~ntheETl Approx~mately 69% of the C~ty's electrm serwce area ~s multiply certffied According to records of the Electric System, approximately 96% of the new res~dentml subd~v~smns and large industrial accounts m the mult~ple certified service area have become customers of the C~ty during the last two fiscal years SB 7 provides that the C~ty may file with the PUC for a recertlficat~on of ~ts serwce area based upon the mumc~pal boundarms as of February I 1999 The C~ty has made a fihng wlth the PUC for the purposes of havmg ~ts service area recertffied under th~s provision of SB 7 The effects of the recertlficatmn will prlmardy affect new customers as SB 7 does not require emstmg customers of another utility to become customers of the C~ty For the year ended September 30 2000 the Electric System provided electric serwce to a monthly average of 33 833 customers located m the C~ty Driven by thc economic magnets of the Dallas-Fort Worth International Airport Dallas Love F~eld A~rport Fort Worth's Athance A~rport and the major business d~stncts m the northern parts of the Dallas metropohtan area Denton and the Dallas-Fort Worth metropohtan area ("DFW") have m recent years experienced slgmficant electric load and population growth Since 1990 Denton's employment has grown by approximately 31% due to strong performances in Its industrial commercial medmal, and education employment sectors and accompanying population growth In total the DFW metropohtan area experienced a 25% increase m employment between 1990 mid 1998 and more recently experienced a 13% Increase m employment between 1995 and I998 For the year ended September 30 2000 the customer base that was served by the Electric System measured by number of accounts ~s apprommately 87% residential and approximately 11% commercial and industrial although commemlal and ~ndustrml accounts prowded apprommately 53% of the rate revenues of the Electrm System For the year ended September 30, 1999 the top ten customers of the Electric System prowdcd 22% of the tamffed rate revenues of the Electric System and purchased 28% of the energy sold by the Elecmc System Two State mst~tunons of h~gher education the Umvers~ty of North Texas and Texas Woman's Umvers~ty (collectively the "Umverstt~es") were tncluded tn 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 Umvers~tles provided 8%o of the tamffed rate revenues of the Electrm System and purchased 1 I% of the energy sold by the Electric System State law prowdcs that municipal utlhtlcs that provide electric service to agencies of the State, such as the UmversltleS must do so in accordance wtth rote tariffs that are equal to the utfi~tms' lowest rate less an add~tmnal 20% dxscount As a result of the discounted serwce that the C~ty must pmwde to the Universities the Umvers~t~es' cost of energy ~s less than the costs incurred by the Flectnc System for provlthng such energy EXISTING GENERATION FACILITIES Although the C~ty presently owns 178 MW of generating capacity, including five natural gas generation units (known as the "qpencer Umts") and two hydroelecmc umts (each of which are further described below) the B6 Electric S~)stem is a net purchaser of electrm energy Spencer Umts 4 and 5 the largest of the five Spencer Units have been ~dentffied by the Texas Natural Resoume Conservation Commission (the "TNRCC") as hawng annual heat input that exceeds the State exemption level The Spencer Umts are older umts and other than general maintenance and overhaul have never been renovated The Spencer Units are generally inefficient to operate hawng high heat input rates Consequently, the Elecmc System has m recant years ganerally utthzed the Spencer Un~ts only for peaking purposes during per~ods of high demand Each of the five~umts at the Spencer plant utd~ze natural gas as their primary bmler fuel w~th No 2 fuel od backup plus two dmsel generators that provide backup capability The City has contracted with FXU Lone Star P~pehne a dlws~on of TXU Gas Company for transportatmn of natural gas and with several gas supply compames for spot market pumhase ol natural gas The current gas transportation agreement expires January I 2002, but will continue m effect thereafter unless mutually terminated or unless unilaterally terminated by one of the part,es thereto upon debvery of notice of termination to the other party at least 120 days prior to the termmat~on date The Electric System buys treated water from the C~ty's water treatment plant located next to Spencer S~atlon for makeup water to the boilers Reverse osmosis units located next to the Spencer Station generating umts process the treated water into demmerahzed water for make up water to the boders A table describing the Spencer Umts ~s set forth below Number of Name Plate Year Placed Type Units Capaclt7 kW In Service Steam Turhne 5 Unit I 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 Leuasvllle Hydro I 2,892 1991 7 178,087 The City's capacity requirements are calculated based upon the C~ty's peak summer demand plus a 15% margin that Is reqmred for membership in the Electric Rehablhty Council of Texas ("ERCOT"), the regmnal rellablhty coordinating orgamzatlon for electric power systems In Texas For the year ending September 30 2001 the City's capacity reqmrement ~s 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 C~ty's "take or pay" power purchaqe agreement with TMPA (the "Contract") The City's remammg capacity mqmrement is presently supplied from elecmc generation of ~ts Spencer Umts (approximately 60%) and from twelve month firm power purchase capacity contracts (approximately 7%) in recent years the C~ty has supplied approximately I% of Its energy from hydroelectric units of the C~ty that are located on nearby Lake Ray Roberts and Lake Lewlsvllle Because the hydroelectric umts operate on surlace water reservoirs that prowde mumclpal water supply and water cannot be released solely to operate such hydroelectric units the electrm generation capacity of the umts cannot be taken into account for purposes of determmarg the City's electric capacity During the three most recently completed fiscal years of the C~ty the Electric System has pumhased an average of 55% of ~ts energy from TM PA taken appmmmately 25% of ~ts energy from Its own generation facilities and acqmmd apprommately 20% of ~ts energy under spot market or short term purchase arrangements See Table above Since 1998 the City has not had sufficlant electric capacity through the combination of the Contract and its own generation faclhtles Accordingly the City has developed a strategy that includes the purchase of addltmnal capacity through one year contracts on the assumption that the developing wholesale market m Texas will continue to expand and prowde more economical energy In the future than the C~ty could provide through other long-term arrangements To satisfy load growth Denton purchased an additional 12 MW of capamty 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 capamty agreements lhe Flectnc System purchases energy under ~ts firm power purchase capacity agreements, as well as from other utlht~es m Texas m the energy "spot market" In recent years, the Electric System has supplied approximately 5% of ~ts energy from spot market purchases The Electric System also makes periodic sales of enargy by marketing energy that Is temporarily ~n excess of its needs primarily energy that is produced by the City's electric generation units during t~mes of high demand Such energy sales typically represent less than 10% of the Elecmc System's annual revenues from the sale ol energy OFFER TO SELL THE CI'I~'S GENERATING ASSETS, REPLACEMENT POWER The C~ty's continuing strategy has been to move towards a more traditional mumclpal electric system concept whereby all energy mqmmd for dlsmbut~on over the mumc~pal electric distribution system IS purchased and no slgmficant portion of it's electric energy ~s self-generated B-7 The City ~s PmSantly negotmt~ng for the sale of the Spencer Un~ts and the replacemant of the energy and capacity therefrom The proposed power sale agreement would pmvtde the C~ty with the right to recmve an amount of replacement capacity and energy equal to the output of the Spencer Umts No assurances can be g~ven that a sale of the Spencer Umts wdl be consummated or that ~f such umts are sold that the C~ty will recmve any particular compensation therefrom In the event that a sale does not occur the City's optmns would include but not be hmited to contmmng to operate the Spencer Units m accordance w~th past practme of the Electric System closing the Spencer Umts and augmantlng the Electric Systems energy and capacity mqmmments with firm power purchase capacity agreements or spot market energy purchases w~thout regard to the disposition of the Spencer Umts The City's strategy w~th respect to the Electric System mcludas making an assignment or other disposition of the C~ty's sham o! the output of the TMPA G~bbons Creek plant The City ~s cogmzant that any such transaction regarding its contract rights and obhgatlons to TMPA would need to be structured w~thm the framework of the various contract rights of TMPA bondholders MANAGEMENT OF THE ELECTRIC SYSTEM The Pubhc Ut~btms Board serves the C~ty's Department of Utlht~es as a consulting advisory and supervisory body All actions of the Pubbc Uttlmes Board are subject to final approval of the City Council The City's Director of Electric Utthtles manages the Electric System w~th responstbthty for production distrlbutton engineering substations marketing planmng and safety operations The staffofthe Flectnc System includes approximately 130 full time and part tane professmnal and admmistrat~ve staff' 37 of whom are directly assocmted with Spencer Station and the Ctty's hydroelectric factht~es COMPARABLE CALCULATION OF NET REVENUES AVAILABLE FOR DEBT SERVICE fhe lollowmg table prowdes comparable calculations of Net Revenues available for debt service for the periods shown Such calculatmns include all operating revenues plus interest income less operating expenses For purposes of the calculation depreciat~on amortization and payments tn lleu o1 taxes are excluded from operating expenses F~scal Year Ended September 30 Gross Revenues 2000 1999 1998 1997 1996 ElectncServme $ 83739948 $ 78654866 $ 77570951 $ 72048516 $ 69533180 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 5 741,008 5 280,534 5 082,643 Other Income I 724 174 530 763 483 959 695,122 511 383 Total Revenues $123 820 658 $114,946 834 $111 476 726 $102 614,300 $100 453 467 Elecmc System Fuel and Purchased PowerI~) $ 58219188 $ 52521369 $ 48611430 $ 45737,864 $ 47511,851 Other Operating and Adm Expenses 17 787 364 15 883 336 17 248 747 13 652 393 14 442 837 $ 76,006552 $ 68404705 $ 65860177 $ 59,390257 $ 61954688 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 3 833,171 4,113 722 $ 8371891 $ 7933952 $ 4943540 $ 4480687 $ 4760844 Wastewater System Fuel and Pumhased 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 06l 3 320 397 $ 6740696 $ 6268600 $ 4405504 $ 4124381 $ 3692420 TotalExpenses $ 91,119139 $ 82,607257 $ 75,209221 $ 67995,325 $ 70407,952 Net Revenue Avadable for Debt Service and Other Lawfial Purposes $ 32701519 $ 32339,577 $ 36267,505 $ 34618,975 $ 30,045,515 (1) The electric system s fi~el 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 Fmancml Report for the t~scal year ended September 30 2000 to reflect th~s amount Likewise fuel and purchased power have been restated ~n the Net Revenue calculation for the fiscal year ended September 30 1999 to more accurately represent the Net Revenues Available tot debt serwce B8 CITY OF GARLAND THE CITY The City of Garland, Texas is a poht cai subdlwsion and mum,c.~pal corpomtion of the State located m Dal as County Texas TheC~tyancompassasapprox~matelysome57squaremdas TheC~tyscerttfied200b.anSaspopuat~onm215768 The C~ty owns~ operates, and maintains an e ectr c hght and power waterworks and wastewater ~astem the . The administrative rasponsthihty for operating and ma ntamm the Uttht ( Ut~ht Manager for Utility Services g y System is handled by the om ~ _ Y System ) i x°e ottoe Assistant City THE ELECTRIC YSTEM Tile munlmpal electric s stem m 65,560 customers (annroxim-~- oeo/ .... Y Garland was started ~n 923 T eleetr Electric Company) The electric system does not serve any retail customers outside of the City limits but ~t does provide hm ..,..-.sty [ne remain ng 15% ~s served by Texas [Jtditles wholesale surplt~s power to other c~tlas source of power ,is the Texas Municipal Power Agency Whde the C~ty owns and operates two power generating statmns of its own, ~ts principal k~lowatts ("kW"),~ located within the C~ty hm~ts and the Ray Ohnger Power Plant (rated capacity of 335,000 kW) located at Lavon The C~ty owns and operates electric generating stations dasl~ated as the C E Newman Power Plant w~th a rated capan~ty of 85 000 Lake All of the City owned and operated generating facthtms use natural gas as the pnmar7 boiler fi~al In adtht~on the City is a member of the Texas Mumclpal Power Agency and ~s msponsthle for 47 00% of the electric output, operation and maantanance expense of that joint power agency The Texas Mumclpal Power Agency s ma integra part of Garland's power system, and as such, the operations oftlat entity have a sigmficant financml impact on the Electric System The City's ElectrldDlstrlbutlon Division ~s responsible for the constmctaon operation maintenance and repair of the transmission, substataon, and dl~trthution facllmes of the E ectric System Included are 112 miles of transmission ,ne The dep ant a so eons. c and ma suhstat,ons and Unit Name Plate Year Placed Station __Tyne _~Lmber. Ca ac~W) In Service C E Newman Steam~urbm~ I 75 - 1956 C E Newman Steam Turbine 2 7 5 1957 C E Newman Steam Turbine 3 165 1960 C E Newman Steam Turbine 4 16 5 1961 C E Newman Steam Turbine 5 33 0 1964 Ray Ohnger Steam Turbme I 75 0 1966 Ray Ohngar Steam Furbme 2 II00 1971 Ray Ohnger Steam Turbine 3 146 0 ~ . -- 1975 I 412 0 POWER INTERCHANt~E AGREEMENTS The C~ty is a member of the Texas Municipal Power Pool ("TMPP") whmh also ~ncludas the C~tms of Bryan Denton' Greenville, and the Brazes Electric Power Cooperat ye Inc of Waco Texas "Braz " Texas ("ERCO*") t~2 remon ehah,h.., .-~ ~ U!lOn faclhtlas The City IS also a member o tho I~,o,.t~ .. ,os~').each ofwhlch .~t~vurg. OISIX major investor-owned and several nubhc s ..... '~ .u.-^~,~.~ms~n...?xas The C~ty has access to the TMPP. TMPA and TU~E_C lnterconneetions (l) ~VA")_ TMPp 138KV North Interchange Brazes 69KV Interchange 140 mva 20 mva TMPA/TP&L Ohnger Plant 138KV Interchange 140 mva TMPP 138KV South Intemhange 14~0 mva (1) T~-~xas Munanp~l Power Pool ("TMPp',) ~ reval2) Texas Munanpal Power Agency ("TMPA") Texas Utthtms Elecfi.lc Company CTUEC") (2) Additmnally TMPA has capacity to furmsh 400 mva of power to a 138 kva transmission loop around the City fi.om its 345 ky 138 kv transmlss~o~l loop through one 75 mva and three 140 mva transformers B-lO COVERAGE AND FUND BALANCE$ $ 12263 325 2 67 Times Average Annual principal and Interest l*'xlmrements' 2001 - 2030 Coverage of Average Reqmrement~ oy 9-30 00 Net Avadable for Debt Serwce $ 18 871 198 Maximum principal and l~terest Reqmrements 2002 1 73 Ttmes Coverage of Maximum ?,eqmrements by 9-30 00 Net Available for Debt Service $212 400,000 System Revenue Bonds Outstanding (as of 6-1 2001) $ 6 384,864 Interest and Stoking Fund as of 3-l-2001 $ 9 926 458 $ 248 251 Reserve Fund as of 3 1-2001 $ 4 838 410 Emergency ~und, as ol 3-1-2001 Extensmn and Replacement Fund as of 3-1-2001 B-9 ELECTRIC RATE SCHEDULES (EFFECTIVE OCTOBER I, 1992) Residential Service Rate Customer Charge $ 7 5500 per kWh November/April 0 0529 per kWh May/October 0 0588 per kWh General Service - Small (0-20 kW Demand) Customer Charge $11 55 0/2,000 All over 2,000 November/Aprd $0 0493 per kWh $0 0440 Per kwh May/October $0 0602 per kWh $0 0549 Per kWh General Service - Large (20 kW and Greater Demand) Energy Demand Demand November/Aoril May/October 0-60 000 kWh $0 0276 Per kwh First 200 kW $6 88 Per kW 0 200kW $8 53 PerkW 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 Demandl Customer Charge $19 25 Energy November/Aprd $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 wdh all electric service are billed at the rote of $0 0314 per kWh for consumption in excess of 1,000 kWh per month during the pe~od of November through April of ench year Fuel Cost Factor The formula for calculation of the Fuel Cost Fector is as follows and w~ll be applied on a per kWh bas~s 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 d~fference between actual fuel cost revenue and the actual fuel cost of the second preceding billing month L - Loss Factor to account for differences m hne losses corresponthng to voltage level of service B-11 ENERGY SALES AND CUSTOMER INFORMATION (FISCAL YEAR ENDED 9-30)0) 2000 1999 Energy Sales Number of Energy Sales Number of Type of Customer (kWh) Revenues Customers (kWh) Revenues Customers Res~dentml 925 636,047 $ 81 289 538 59,725 949,546 686 $ 74,759,383 59 525 Commemml 689 599 789 48 090,665 5,384 684,986 791 44 318,505 5 344 Industrial 222 208 345 10,920 958 4 220 916,348 I 0 560,903 4 Total I 837,444 181 $140 301 161 65,113 I 855,449 825 $129,638 791 64 873 1998 1997 Energy Sales Number of Energy Sales Number of Type of Customer (kWh) Revenues Customers (kWh) Revenues Customers Res~dentml I 005 017 232 $ 79 I 11,319 58 501 888 735 905 $ 73 469,696 57,744 Commercial 700 631 526 45 540,854 5 236 686,554 364 46 369,640 5 156 Industrial 173 600 960 6 610,934 3 148,657,452 5 242 417 3 Total I 879 249,718 $131,263 107 63 740 1,723 947,721 $125,081,753 62,903 1996 Fnergy Sales Number of Type of Customer (kWh) Revenues Customers Res~dentml 912 703 060 $ 72 761 105 57 596 Commercial 694 593,500 47 243,004 5,064 Industrial 140 152,600 4 867,635 2 Total I 747 449 160 $ 124 871 744 62 662 (1) Unaudited ENERGY PRODUCTION (FISCAL YEAR 9-30)°l 2000 1999 1998 1997 1996 Owned Capamty (MW) 430 430 430 430 430 Flr~n Purchase Capacity (MW) 200 200 200 200 200 Peak Demand (MW) 490 481 472 455 435 (1) Unaudited B12 CONDENSED STATEMENT OF UTILITY SYSTEM OPERATIONS Fiscal Year Ended September 30, 2000 1999 1998 1997 1996 Revenues 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 Mmcellaneous 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 Exoenses°) Waterworks System $ 15,305,647 $ 13,885,935 $ 13056,837 $ 12,868516 $ 12819,532 Sewer System 8,703,617 9,495,886 8,536 942 8 853,836 9,326,654 Electric Light System 151,368,855 132,213,076 129,404,788 . 122,628346 122,041,334 Total Expenses $175,378,1t9 $141,708,962 $150,998 567 $144 350,698 $144,187 520 NET AVAILABLE FOR DEBT SERVICE $ 60,083,226 $ 66,212,180 $ 57 146572 $ 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 ~n heu of taxes and depreciation COVERAGE AND FUND BALANCES Average Annual Prmmpal and Interest Reqmremants, 2001 - 2009 $2 625 238 Coverage of Average Reqmrements by 9-30 00 Net Avmlable for Debt Service 22 89 Times Maximum Prmc~pal and Interest Requirements, 2001 $8 307 913 Coverag~ of Maximum Reqmrements by 9-30-00 Net Available for Debt Serwce 7 23 T~mes Utility System Revenue Bonds Outstanding, 6-1-01 $13 973 000 System Interest and Stoking Fund balance 9-30 00 $3 637 540 System Reserve Fund balance 9-30 00 $5 057 844 B13 CITY OF GREENVILLE THE ELECTRIC UTILITY BOARD The System provides clectrm serwce to customers m an apprommately 92 square-mdc area which mcludesthe C~tyofGreenvllle Until 1989, theC~ty'selectrlcsystem wasmanaged and controlled bythe City Courted of the City Pursuant to Artmle XI A of the Charter of the Clly (adopted at an election held on May 7 I988) and Article 1115a Vemon's Texas Ctvd Statutes m 1988 the C~ty transterred 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 C~ty Charter ts the power to own and operate all properties rights and ~nterests used tn connection w~th the generation transm~ssmn or thstrlbutlon of electric power ~ncludlng customer and energy serwces the provision of cable television lnternet access, or other purposes permitted by law The City Charter was amended on May 6 2000 by a pubhc vote of 62% for and 38% against to Include cable television and mtemet access among the servmes authorized to be prowded by GEUS The Board ~s authorized to estabhsh rates and charges lot serwces supphed by the System to exercise the power of condemnation and to ~ssue revenue obhgatmns to finance or refinance ~mprovements to the System The Board has the primary responslblhty for the paymant of all obhgat~ons which are payable from the revenues of the System Although the Ctty Councd and the Board jointly appoint all Board members the Board members may only be removed by vote of the c~t~zens of the City The System's operating and capital expenthtures including debt serwce are financed enttrely through rates charged for the prowslon ol the serwces of the System As a general rule there ~s a lack of financml interdependency between the C~ty and the System although the C~ty Charter and an agreement between the Board mid the C~ty Councd require the payment of a pomon of the adjusted gross revenues of the System to the C~ty each year and the payment of amounts ~n heu of taxation Fmancml transactions between the System and the C~ty reported ~n the System's financial statements reflect contractual agreements between the part,es fur the provision of spectal serwces by the City to the System ~1 he System ts included as a dtscretely presanted component umt m the C~ty's general purpose financml statements References hereto to covenants and agreements made by the City ~n the Ordinance anthorlzmg the Bonds and ~n the Escrow Agreement relating to the retirement of the Refunded Bonds are to covenants and agreements made by the C~ty actmg through the Board tn such instruments as authonzad by the C~ty Charter The Electric Utthty generates transmits and d~stnbutes ~ts own elecmc power and add~ttonally ts a member of Texas Municipal Power Agency (the "Agency") and the Texas Mumc~pal Power Pool ("TMPP") At the present time the Electric Utlhty has three gas-fired steam generating umts One umt was installed m 1966 w~th 18,750 kW capactty one In 1969 with 25,000 kW capacity and another tn 1977 w~th 43,200 kW capacity Base load coal fired ganerat~on for the System IS supphed by the Agency The Electric Ut~hty has a 10°,4 capacity share of the Agency's 462,000 kW unit bringing the Electric Utthty's total aggregate maximum capabd~ty to 133,200 kW The serwce area of the System covers approximately 92 square miles ~!he C~ty encompasses apprommately 26 5 square m~les Part of the service area outside the City Is dually certffied as a serwce area by the Pubhc Utlhty Comm~ssmn (the "PUC") and ~s served by two rural electric cooperanves m add~tton to the System l'he area outside of the C~ty ~s rural and sparsley populated Presently, approximately 12 178 customers are served by the System approximately 90% of the System's customers am w~thm the C~ty hm~ts TRANSMISSION AND DISTRIBUTION SYSTEM~ INT[RCONNECTIONS AND POWER DISPATCH GEUS' transmlss~on and d~strlbutlon fac~htles include 31 6 redes of 69 ky looped transmission bnes two 138 kv ~nterconnected ties with a total capacity of 150 MVA and e~ght d~stnbut~on substations that serves at a d~strlbutlon voltage of 12 5 ky GEUS owns 440 redes of overhead d~strlbutlon hnes GEUS is interconnected wah two TMPA 138ky transmission hnes one of which connects to the TXU 345kv transmission system at Royce C~ty Texas and one of which connects to the C~ty of Garland's 138 ky system at ~ts Ohnger Power Plant In February 2001 GFUS issued $7 950 mllhon of Revanue Refunding and Improvement Bonds Series 2001 of whmh apprommately $6 2 mdhon w~ll be apphed to purchase or ~mprove d~stnbut~on faclht~es including ~mprovemants to substations bnes and feeders GEUS ~s a member of the Texas Mumctpal Power Pool ("1MPP"), whmh also includes the c~tms 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 C~tles has ~ts own producnon transmission and d~stnbutlon facthtles GEUS pamc~pates w~th Garland and Denton as a "subcontml area" w~thm TMPP for purposes of serwng their combined loads w~th their combined generation resources and sharing the benefits of ~mprovcd operational efficiency l'hm pool of loads and generation resources referred to as DGG has been ~n exlstance s~nce January I 1997 The C~ty of Garland m ~ts role as pool operator makes all d~spatch and commitment decisions regarding GEUS' generation DGG operates as a "sub control area" to the TMPP control area As a sub-control area DGG performs the functtons of an ERCOT-certlficd control area including balancing load and generation m real time momtormg and contmlhng transmission mmntammg reqmrad levels of operating reserves developing and submitting daily operation plans and scheduhng transactions GEUS ~s also a member of ERCOT ERCO f has only a total of 600 MW of d~rect current mtemonnectlons w~th other power pools Historically and at present the members of ERCOT have operated as an 'island" whereby no s~gmficant amounts of electric energy have been imported into or exported from the ERCOT member utd~tles B 14 ELECTRIC RATES (EFFECTIVE APRIL 1, 2000) Resldentml(0 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 Novearber through M ay $0 0390/kWh for nexI 600 kWh for months &November through M ay $0 0220/kWh for all over 1200 kwh for months of November through May Commercial- General Service Non Demandt2) Customer Charge $14 00 Energy Charge $0 0616/kWh for all kwh Commemal- GeneralSerwce Demandt3) Customer Charge $14 00 Demand Charge $8 00/kW of Bllhng Demand Energy Charge $0 0303/kWh for the first 6 000' kwh $0 0700/kWh for all add~tmnal kwh * Plus 215 kwh for each kW m excess of 10kW (1) Apltcatton T~anyres~dentm~c~nsumerf~ral~d~mestmusesmpr~vatedwe~hngs~r~nmd~v~dua~ymeteredapartmentsat one poart ofdehvery through one meter Not for temporary, standby or resale serwce (S~nglephaseserwce) (2) Apphcauon To any consumer for elecmc service supphed at one point ofdehvery through one meter Not for standby or resaleservlce (Slnglephaseserv~ceunder 10kW and under 2500 kWh dunng any smgle month durarg the year) (3) Apphcatlon Toanyconsumerforelectr~cservlcesupphedatonepomtofdehverythroughonemeter Not for breakdown standby or resale Serwce (S~ngle phase or three phase serwce equal to or greater than 10kW or 2500 kWh durmganys~ngle month during the year) Muluple service and meterarg points may only be obtained by specarl contract wah the utility NOTE Fuel adjustment end power cost recovery factors are apphed in addition to the base rate to each class of service ENERGY SALES AND CUSTOMER INFORMATION (FISCAL YEAR %30) F~scal Year F~scal Year F~scal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended K~lowatt Hours 2000 1999 1998 1997 1996 Res~dentml 123,659,000 123,898,000 128,128,000 109208,000 112,367,591 Commemml 353,248,000 336,284,000 327,096,000 314844,000 313,663,738 Wholesale 16,807,000 19,021,000 37571,000 36,114,000 19,882,000 Total Kdowatt Hours 493,714,000 479,203,000 492,795 000 460,166,000 445,913,329 H~stoncal Peak Demand (MW) 106 105 104 98 95 Resldentml $11,410,538 $10,312,187 $10,281,226 $ 9 141,358 $ 9,223,746 Commercml 23,308,353 20,558,486 19,889,972 20,081 030 19 208,996 Wholesale 1,423,095 1,294,701 1,201 196 1 358,803 1,755,899 Total Revenue $ 36,141,986 $32,165374 $31,372394 $30581 191 $ 30,188,641 B-15 CONDENSED STATEMENT OF OPERATIONS F~scal Year Ended September 30, 2000 1999 1998 1997 1996 O~erating 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 ODeratm~ Expenses (Exclud~n~ Denrecmtmn) Fuel and purchased power operations and mmntenance $ 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 Oparatmg Expenses $ 30,937 356 $ 28,602,357 $ 26,982,594 $ 26,227,132 $ 25,929 271 NETAVAILABLEFORDEBTSERVICE $ 7,128951 $ 6,172,853 $ 6,523,486 $ 5,584,642 $ 5,627975 Debt ServleeReqmrements $ 1,723565 $ 1,922,209 $ 2,125,533 $ 2,335,928 $ 2,337,105 Coverage of Debt Servme Reqmmments by Net Revenues Avmlable for Debt Servme 4 14x 3 21x 3 07x 2 39x 2 41x Electric Customers 12,178 12,074 11,867 11,787 11,768 COVERAGE AND FUND BALANCES Average Annual Pnnc~pal and Interest Reqmremcnts 2001 - 2018 $935 484 Coverage of Average Requirements by 9 30 00 Net Income 7 62 T~mes Maximum Principal and Interest Reqmrements 2001 $1 662 272 Coverage of Maximum Reqmrements by 9-30-00 Net Income 4 29 T~mas System Bonds Outstanding, 6 01-01 $10 370 000 Operating Fund September 30 2000 $2 768,670 Debt Service Fund September 30 2000 $930,120 Capital Improvements Fund September 30 2000 $2,013 500 Debt Reduction Fund September 30 2000 $4 771 493 B-16 FULBRIGHT & JAWORSKI L L P IN REGARD to the authorization and issuance of the "texas Municipal Power Agency Subordinate L~en Revenue Refunding Bonds, Senes 2001A" (the "Bonds'), in the aggregate pnnc~pal amount of $108,530,000, we have examined ~nto the legahty and validity of the ~ssuance thereof by the Texas Municipal Power Agency (the "Agency"), which Bonds are ~ssuable ~n fully registered form only The Bonds mature, bear ~nterest and are payable on the dates and are subject to pnor redempbon, all as prowded m the resolution authorizing the issuance of the Bonds (the "Bond Resolution") Except as here~n prowded, capitalized terms have the meamng assigned to them ~n the Bond Resolubon WE HAVE SERVED AS BOND COUNSEL for the Agency solely to pass upon the legahty and vahd[ty of the ~ssuance of the Bonds under the Consbtubon and laws of the State of Texas, and w~th respect to the exemption of the ~nterest on the Bonds from federal ~ncome taxes and none other We have not been requested to ~nvest~gate or venfy, and have not ~ndependently ~nvestlgated or venfled, any records, data or other matenal relating to the flnanq~al cond~tton or capabilities of the Agency Our examinations into the legality and validity of the Bonds ~ncluded a review of the applicable and pertinent prows~ons of the Consbtut~on and laws of the State of Texas, a transcript of cert~hed proceedings of the Agency relabng to the authorization and ~ssuance of the Bonds, ~ncludlng the Bond Resolubon, customary certifications and op~n~ons of officials of the Agency and other perbnent showings, and an examlnabon of the Bond executed and delivered in~t~ally 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 ~n comphance w~th the Constitution and laws of the State of Texas now tn force, and the Bonds ~ssued in compltance with the provisions of the Bond Resolubon are vahd and legally b~nd~ng special ob,gat~ons of the Agency, ~n accordance w~th the terms thereof, and, together w~th the outstanding and unpaid Prewously Issued Subordinate L~en Bonds, are payable solely from and equally secured by an Irrevocable I~en on and pledge of the Net Revenues of the System and all funds (including the investments there~n) established or reaffirmed by the Bond Resolubon, other than the Revenue Fund, and the Revenue Fund subject to the payment of the Operabng and Maintenance Expenses, subject, however, to the I~en on and pledge of the Net Revenues of the System associated w~th the Agency's Prior L~en Obhgat~ons The Bond Resolution provides certain conditions under which the Agency may issue addtbonal obl~gabons 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 herbof by the Agency w~th the prows~ons of the Bond Resolubon and m reliance upon representabons and cerbflcat~ons of the Agency made ~n a certificate of even date herewith pertaining to the use, expenditure, and investment of the proceeds of the Bonds, ~nterest 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, ex~sbng regulations, published rulings, Page 2 of Legal Opinion of Fulbnght & Jaworsk~ L L P Re Texas Municipal Power Agency Subordinate L~en Revenue Refunding Bonds, Series 2001A and court decisions thereunder, and (2) wdl not be ~ncluded ~n compubng the alternative minimum taxable income of Ind~v~duals or, except as hereinafter described, corporations Interest on all tax-exempt obligations, such as the Bonds, owned by a corporation will be ~ncluded ~n such corporation's adjusted current earnings for tax years beginning after 1989 for purposes of calculating the alternative m~n~mum taxable income of such corporabons, other than an S corporabon, a quahfled mutual fund, a real estate mortgage ~nvestment condu~t, a real estate ~nvestment trust, or a financial asset secuntlzabon ~nvestment trust ("FASIT") A corporabon's alternative m~mmum taxable ~ncome ~s the basis on which the altemabve m~n~mum tax ~mposed by Secbon 55 of the Code w~ll be computed WE EXPRESS NO OPINION w~th respect to any other federal, state, or local tax consequences under present law or any proposed leglslabon resulting from the receipt or accrual of interest on, or the acquisition or d~spos~t~on of, the Bonds Ownership of tax-exempt obl~gabons such as the Bonds may result in collateral federal tax consequences to, among others, financial ~nsbtubons, hfe Insurance compames, property and casualty Insurance compames, certain foreign corporations doing bus~ness ~n the Umted States, S corporebons with subchapter C earnings and profits, owners of ~nterest m a FASIT, ~nd~v~dual recipients of Social Secunty or Railroad Retirement Benefits, and taxpayers who may be deemed to have recurred or continued ~ndebtedness to purchase or carry, or who have pa~d or ~ncurred certain expenses allocable to, tax-exempt obl~gabons (the Obh5 tnons ) wh:ch shall become Due for Payment but shall be unpaid by reason of Nonpayment b uno mcckd anti m bearer form and free of any adverse claim the Insurance Frustee wall d~sbt of the surrendered Obbgatmns and/or coupons and shall be fully subrogated to a~l of the Hi In eqses where tile Obhgat~ons are ~ssued tn registered form ~r only upon Holder or such Holderx duly authorized Obbgatmn to receive the Obhgqt*on xvh~cb has become Du or on behalf of the Obhgor has been deemed a preferenml transfer anti the Umted States Bankruptcy Code m accordance w~th a final nonappealablc order h Holder wdl be entttled to payment from Ambac to the extent As used hereto 0) the Ohhgor or tn) any person whose obhgatmns consntute the umlerl who at the ume of Nonpayment ~s the owner of an Obhganon or of tl~, 'edempnon date fi~r the apphcat~on of a reqmred stoking fund installment has been o any earlier date on winch payment ~s due by reason of call for redemption (other than by apphcatmn ~ded su~fictent itmds co the trustee or paying agent for payment ~n full of all principal of and interest Th~s Fbe prtrmum on rh~s Pobcy ~s nor refundable for any reason including payment of the Obbgarlons mqy become due m ~especr of any Obbgat*on other ch tn at the sole option of Ambac nor against any mk other than Nonpayment In wlmess whertnf Amb'tc h ts · lused this Pohcy to bt tffixed with a facsimile of ~ts corporate Teal and to he s~gned by its duly authorized officers m f~csm~dc m become eff~cnve qs ~ts onb, mal seal and s~gnatures and bmdm;s upon Ambac by wrtue of the Form No 2B 0012(I/01) zed Officer of Insurance Trustee Financial Advisory Services Provided By ~IFIRST SOUTHWEST COMPANY INVESTMENT BANKERS