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Page 3 <br /> <br />AUTHORITY: Statutory Authority: The Bonds are being issued pursuant to Minnesota Statutes, <br />Chapters 453 and 475. <br />Parity Debt: In addition to the Bonds, the Utility has three other outstanding issues payable <br />from net revenues of its electric utility system (the “Electric System”): <br />• Electric Revenue Refunding Bonds, Series 2014A (the “Series 2014A Bonds”), <br />today outstanding in the aggregate principal amount of $420,000 with a final <br />maturity of August 1, 2018 <br />• Electric Revenue Bonds, Series 2016A (the “Series 2016A Bonds”), today <br />outstanding in the aggregate principal amount of $9,755,000 with a final maturity of <br />February 1, 2036 <br />• Electric Revenue Refunding Bonds, Series 2016B (the “Series 2016B Bonds”), <br />today outstanding in the aggregate principal amount of $930,000 with a final <br />maturity of February 1, 2022 <br />As of the closing of the Bonds on September 26, 2018, only the Series 2016A Bonds and the <br />Series 2016B Bonds will be outstanding (the Series 2016A Bonds and Series 2016B Bonds <br />are together referred to as the “Parity Bonds”). <br />Rate Covenant: The Utility has pledged to establish user rates and charges for the Electric <br />System so that annual net revenues shall not be less than 110% of the average annual debt <br />service on the Bonds, the Parity Bonds and any additional parity bonds. <br />Additional Bonds: Additional bonds may be issued on a parity of lien with the Parity Bonds <br />so long as the net revenues of the Electric System for the audited fiscal year immediately <br />preceding the issuance of such additional bonds are not less than 125% of the average <br />annual principal and interest due on all outstanding parity bonds and the additional bonds to <br />be issued, during the remaining term of the outstanding bonds. A coverage ratio of about <br />510% is projected based on the December 31, 2017 Electric Fund audited financial <br />statements and the projected average annual principal and interest payment on the Parity <br />Bonds and the Bonds of $1,013,600 (see table below). <br />The issuance of additional bonds requires that the balance in the Reserve Account be <br />adjusted to equal the Reserve Requirement, which may require additional money to be <br />deposited into the Reserve Account from bond proceeds or any other available funds of the <br />Utility. <br />Debt Service Reserve Account: The Utility will maintain a Debt Service Reserve Account <br />(the “Reserve Account”) in the amount of the Reserve Requirement. "Reserve Requirement" <br />means, as of the date of issuance of a series of bonds, an amount equal to the least of <br />(i) 10% of the original principal amount of the outstanding bonds and Additional Bonds, or <br />(ii) the maximum amount of principal and interest payable during the then current Fiscal Year <br />or any future Fiscal Year on all outstanding bonds and Additional Bonds as of the date of <br />issuance of a series of bonds, or (iii) 125% of the average annual principal and interest <br />payable on all outstanding bonds and Additional Bonds as of the date of issuance of a series <br />of bonds.