2.4 ERMUSR 12-17-2013lElk River.
Municipal Utilities
UTILITIES COMMISSION MEETING
TO:
FROM:
Elk River Municipal Utilities Commission
Troy Adams, P.E. — General Manager
John Dietz — Chair
Al Nadeau — Vice Chair
Daryl Thompson — Trustee
MEETING DATE:
AGENDA ITEM NUMBER:
December 17, 2013
2.4
SUBJECT:
CAPX Brookings Project Allocation Increase
BACKGROUND:
In May 2006, the Utilities Commission authorized ERMU joining Midwest Municipal
Transmission Group (MMTG) to explore the potential to obtain ownership in the regional
transmission system. This action represented ERMU's decision to investigate a change in
direction towards ownership instead of renting. Ownership in the transmission system
essentially works as a hedge to mitigate volatility in transmission costs.
This is a unique type of investment opportunity for a municipal utility. Because of a municipal's
ability to finance with tax exempt bonds, our cost of money is less than investor owned and
cooperative utilities. With the Federal Energy Regulatory Commission (FERC) approval of a
hypothetical capital structure and a guaranteed rate of return on investment, transmission
ownership becomes an incredible advantage for municipal utilities to position themselves with
very competitive rates compared to the investor owned and cooperative utilities. At the time of
initial research into transmission ownership back in 2007, ERMU could invest in approximately
$21,000,000 of transmission, be completely hedged against volatility in transmission costs, and
still fall under the levels where the bonds would be tax exempt. This amount changes with
ERMU's demand and energy usage.
In February 2007, ERMU entered into an agreement to participate through Central Minnesota
Municipal Power Agency (CMMPA) in the CAPX2020 Brookings -Twin Cities Transmission
Project. Initially the municipals were looking into independently funding their share of the
project. Because of the number of utilities involved, CMMPA chose to act as the bonding agent
for all the municipal utilities investing in this project through them. Even though CMMPA was
the bonding agent, their bond counsel requested resolutions and certifications from all
commissions and councils. And in March 2011, the Commission and Council both approved
resolutions authorizing the Utilities' participation in the project for an amount not to exceed
$7,140,953.
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The bonding related to this project does not impact the City's bond rating or ability to issue
municipal general obligation bonds. Also, the bonding associated with this project does not
require the Utilities, through bond covenants, to have dedicated reserves. The Utilities'
obligation for repayment on this bonding appears as an expense line item. And by design, the
revenue that ERMU will receive will exceed the expense of the bond repayment creating a
positive cash flow for the life of the asset. The amount of this cash flow will not be finalized
until the value of the asset is determined at the time it is put into service. This will likely be in
2015.
Shortly thereafter Delano Municipal Utilities (Delano), another participant in this project through
CMMPA, elected to transfer their allocation of this project to ERMU and five other municipal
utilities. Because of savings in the overall project, this increase to ERMU's percent ownership in
the project did not cause the investment amount to exceed the previously approved investment
amount. This allocation change was also approved in 2011 by the Commission and Council
through resolutions.
DISCUSSION:
The next phase of the CAPX2020 Brookings/Twin Cities Project was an extension from
Brookings to Big Stone. This is a significantly smaller project yet required all the same amount
of legal work associated with the Federal Energy Regulatory Commission (FERC) filings.
Because of the size of the project, the CMMPA Board of Directors elected to not extend an
invitation to a nonmember like ERMU to invest in their $2.5M eligible share of this project.
Because of the amount of work for such a small investment, CMMPA and the other upstream
investors have agreed to swap the investment rights for the Big Stone transmission project for an
increase in the Brookings project. The decision to swap creates a requirement for CMMPA to
offer ERMU, and other nonmembers participating in the Brookings project through CMMPA,
the opportunity to increase their Brooking project allocations based on their current entitlement
share.
The current ERMU entitlement share of the 3.6% CMMPA share of the Brookings project is
18.890%. This current project forecast is for ERMU's share to have a $4,649,874 value, well
below the approved not to exceed amount. The ERMU eligible allocation increase to the
Brookings project due to the Big Stone project swap would be $472,250. If approved to accept
the swap and increase our Brookings allocation, this would increase our current forecasted
Brookings transmission investment to $5,122,124. This is still well below the approved not to
exceed amount.
To approve the swap and allocation increase, ERMU will need a resolution appointing a
representative on the Transmission Project Coordinating Committee and authorize the
representative to vote in favor of the change in allocation. A similar resolution will be needed
from City Council authorizing the same representative and authority. The action request for the
City Council was requested on December 16, 2013.
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FINANCIAL IMPACT:
There is no additional financial impact beyond what had been previously approved through
Utilities Commission and City Council resolutions. The approval to increase ownership
allocation in the Brookings Project will not increase the ownership value to be higher than the
previously approved $7,140,953 not to exceed amount. The approval to increase ownership will
have an increase in the return on investment.
ACTION REQUESTED:
• Adoption of a resolution appointing Troy Adams, P.E. — ERMU General Manager as the
Transmission Project Coordinating Committee representative and authorizing the
appointed representative to vote in favor of the increase in project ownership.
ATTACHMENTS:
CMMPA's spreadsheet: Increase in CAPX Brookings Entitlements Due to Big Stone
Swap
Proposed resolution appointing a Transmission Project Coordinating Committee
representative for the CAPX2020 Brookings Project Agreement with CMMPA
Proposed certificate for the resolution
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RESOLUTION No. 13-11
BOARD OF COMMISSIONERS
ELK RIVER MUNICIPAL UTILITIES
A RESOLUTION OF THE BOARD OF COMMISSIONERS OF ELK RIVER
MUNICIPAL UTILITIES APPOINTING A REPRESENTATIVE ON THE
TRANSMISSION PROJECT COORDINATING COMMITTEE AND AUTHORIZING
AN ALLOCATION CHANGE.
NOW BE IT RESOLVED: By the Elk River Municipal Utilities Commission, (hereinafter
referred to as "Commission"), as follows:
A. Section 1. In accordance with Section 404 of the Brookings -Twin Cities Transmission
Project Agreement (the "Brookings Project Agreement") between the Commission and
Central Minnesota Municipal Power Agency ("CMMPA"), the Commission hereby
appoints Troy Adams, P.E. as its representative on the Transmission Project Coordinating
Committee for the Transmission Project (as the foregoing terms are defined in the
Brookings Project Agreement), with the power and authority to take action on behalf of
the Commission within the scope of the powers granted to the Transmission Project
Coordinating Committee by Section 404 of the Brookings Project Agreement.
B. Section 2: The appointment of the Commission's Transmission Project Coordinating
Committee representative and the power and authority conferred on the Commission's
representative by Section 1 of this resolution specifically includes the power to vote on
behalf of the Commission with respect to a pending proposal whereby CMMPA may be
authorized, by vote of the Transmission Project Coordinating Committee, to proceed with
an Elective Increase to CMMPA Percentage Interest (as that term is defined in the
Brookings Project Agreement) that would increase CMMPA's Percentage Interest in the
Transmission Project from [3.6%] to [3.9%] (the "Proposed Increase").
C. Section 3: The Commission acknowledges and agrees that if the Transmission Project
Coordinating Committee votes, in accordance with the requirements of Section 404(d) of
the Brookings Project Agreement, to authorize the Proposed Increase, (a) this will
authorize, but not obligate, CMMPA to undertake the actions necessary to contractually
commit itself to the Proposed Increase, and (b) if CMMPA does contractually commit
itself to the Proposed Increase, the Commission (without any further authorizing action
by the Commission) will be obligated in accordance with the terms of the Brookings
Project Agreement to pay its Participant Share of additional Monthly Transmission
Project Costs (as the foregoing terms are defined in the Brookings Project Agreement)
resulting from the Proposed Increase, even if the Commission's representative appointed
in Section 1 of this resolution has voted against the Proposed Increase.
D. Section 4: The appointment of the Commission's Transmission Project Coordinating
Committee representative and the power and authority conferred on the Commission's
representative by Section 1 of this resolution will remain in effect until the Commission
delivers written notice to CMMPA that such appointment has been terminated or
superseded.
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This Resolution Passed and Adopted this day of , 2013.
John Dietz, Chair
Troy Adams, P.E., General Manager
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CERTIFICATE
I, Troy Adams, P.E., the General Manager of Elk River Municipal Utilities, do hereby
certify that attached hereto is a true and correct copy of a resolution duly adopted and
representative duly appointed by the Elk River Municipal Utilities Commission at a meeting duly
held on the 17`h day of December, 2013, notice of such meeting having been given in accordance
with law and at which meeting a quorum was present and acting throughout.
I also do hereby certify that such resolution and appointment has not been rescinded or
amended in any way from the date of such adoption and appointment to the date hereof.
IN WITNESS WHEREOF I have hereunto set my hand this 17`h day December, 2013,
Troy Adams, P.E., General Manager
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