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<br /> <br />Pre-Sale Report <br />Electric Revenue Bonds, Series 2006A <br /> <br />January 9, 2006 <br /> <br />Proposed Issue: $3,595,000 Electric Revenue Bonds, Series 2006A <br /> <br />Purpose: Provide funding for improvements to the City's municipal electric utility. <br /> <br />Term/Call Feature: The first principal payment will be August 1, 2007 and the final payment is <br />August 1, 2021. The first interest payment will be August 1, 2006. We propose a <br />call (pre-payment) date of February 1,2014, which is in eight years. <br /> <br />Funding Sources: The funding source will be revenues from the City's electric utility system <br />operated by the Elk River Municipal Utilities. The City has chosen to pledge <br />only electric revenues to the Bonds. Given historical cash flow of the electric <br />utility system, the debt service coverage is more than adequate for the proposed <br />financing. <br /> <br />Electric revenue bonds typically require a debt service reserve equal to the lesser <br />of one year of debt service or 10% of the issue amount. We recommend that the <br />City restrict approximately $350,000 of cash assets in an account to serve as the <br />debt service reserve instead of funding the reserve out of bond proceeds. A cash <br />reserve will reduce costs of issuance and will still allow for the interest earnings <br />on the fund to be used for any purpose. No trustee will be required to hold the <br />funds. The actual amount of the reserve will be set on the day of the bond sale. <br /> <br />Covenants: <br /> <br />The City currently has an outstanding electric utility revenue bond of $940,000 <br />issued in 2004. The bond resolution for the 2004 sale sets the terms for all future <br />bond issues secured by the pledge of electric revenues. Because these types of <br />obligations are not backed by the City's general obligation, it is necessary to set <br />certain covenants in the bond documents which restrict the issuance of future <br />debt unless certain debt service requirements are met. Specifically: <br /> <br />Parity of Lien: In order for the City to issue additional bonds on a parity of lien <br />in the future, the bond resolution require that the net revenues of the utility in the <br />preceding two fiscal years be at least 1.25 times the average annual principal and <br />interest coming due on all outstanding bonds and the additional bonds (the <br />"Coverage Test"). The bond resolution defines the method used to determine the <br />net revenues for the preceding two fiscal years. <br />