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85 E. SEVENTH PLACE SUITE 100 <br />SAINT PAUL, MN 55101-2143 <br />612-223-3000 FAX: 612-223-3002 <br /> <br />October 7, 1998 <br /> <br />SPRINGSTED <br />Public Finance Advisors <br /> <br />Mr. Bryan Adams, General Manager <br />Elk River Municipal Utilities <br />322 King Avenue <br />Elk River, MN 55330 <br /> <br />Re: Proposed Gas Turbine Project <br /> <br />Dear Mr. A, dams~.' ~,r -~ ~ <br /> <br />You have asked us to comment on the potential linkage of a proposed taxable electdc revenue <br />bond issue of approximately $15.0 million with the City's general obligation credit rating as well <br />as the need to levy property taxes for debt service. It is our understanding that the Utility <br />intends to negotiate a contract with one or more regional cooperative generation utilities <br /> <br />First, we would like to address the property tax question. These are revenue bonds of the <br />utility, with no pledge of general obligation property taxing powers. The City will not be <br />obligated to levy property taxes for these bonds. The disclosure statement to investors will <br />clearly state this condition. The revenue bond structure allows the City/Utility flexibility in <br />responding to debt service shortfalls. Yet, as revenue bonds of the Utility, if there were a <br />problem in meeting debt service payments, and lacking contractual remedies, the Utility would <br />need to set user rates at the necessary levels. For this particular issue the secudty for the <br />bondholders and the City/Utility lies in the contract terms with the cooperatives. <br /> <br />Secondly, this revenue bond has no direct linkage with the City's general obligation credit <br />rating. In the event of default of the revenue bond, there may be an indirect impact. One of <br />the basic client rating criteda is the management area, which covers the strength and <br />rigorousness of the elected and professional officials. A contract that does not anticipate <br />default scenarios and rigorously insulates the City/Utility would have an adverse effect on the <br />general obligation rating, particularly given a financial default. <br /> <br />As is described herein, the City/Utility can have reasonable assurances of very Iow <br />probabilities for adverse impacts, if the contract with the cooperatives is well structured and <br />due diligence is completed on the financial strength of the cooperatives. As part of this <br />financing, we will be investigating the use of bond insurance, which would substantially reduce <br />any potential adverse impacts. <br /> <br />SAINT PAUL. MN MINNEAPOLIS, MN · BROOKFIELD, WI OVERLAND PARK, KS ' WASHINGTON, DC IOWA CITY, IA <br /> <br /> <br />