6.1a ERMUSR 08-14-2018 - Laserfiche WebLink

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FINANCIAL PERFORMANCE REMAINS STRONG Operating performance at the agency has strengthened over the last seven years with funds available for debt service(FADS)growing to $36.3 million in 2017, a nearly 100% increase since 2009. The improved results are due to a combination of factors, including higher asset depreciation, increased operating revenue and relatively stable operating expenses, including lower purchased power costs.Fitch-calculated debt service coverage, which improved over that span, totaled 1.44x in fiscal 2017 and matches well with the 'A+' category median of 1.21x for wholesale systems. The bond indenture requires a coverage ratio of 1.15x. MMPA's liquidity is sound. MMPA ended 2017 with$37.5 million in cash and equivalents, which while lower than 2016 is a very strong 176 days cash on hand and above the median for similarly rated wholesale systems(133 days). The agency also benefits from an available credit facility, which was recently increased to $20 million and extended to 2019, strengthening liquidity to 270 days. IMPROVED LEVERAGE, MODEST CAPITAL NEEDS MMPA had just over$300 million in total debt outstanding as of fiscal-end 2017. All existing debt is fixed-rate and matures in 2046. Leverage as measured by net adjusted debt to adjusted FADS has been on a steady decline following the wind down of MMPA's earlier construction cycle and ended 2017 at 7.4x.In 2010, leverage totaled 13.3x. Equity capitalization also improved but remains somewhat low at 21.3%in 2017 (equity capitalization was just 8% in 2010). Over the next five years MMPA will amortize approximately $50 million in existing debt. With modest capital needs going forward due primarily to the shift toward contracted purchased power and away from additional new construction, leverage should continue to improve. RATES ARE COMPETITIVE,LIMITED INCREASES PROJECTED Wholesale rates for power charged by MMPA are reviewed monthly by the board and management and are not subject to the approval of any federal or state authority including the Minnesota Public Utilities Commission. MMPA reserves the right to adjust rates at any time pursuant to the terms of the PSA. Management's authority to determine MMPA's forward-looking monthly energy adjustment clause ensures adequate recovery of fuel costs. Members are required under the terms of the PSA to set retail rates sufficient to meet their obligations under the agreement, and are free to do so without regulatory oversight. Payments under each PSA constitute an operating expense of each member and are derived solely from the revenues of each member's electric system. Lower gas prices led to a significant drop in rates from $73.00/MWh in 2008 to $58.77/MWh in 2009. Since then,MMPA's wholesale rates have been on the rise reflecting increasing debt service requirements, higher transmission rates and the transfer of funds to the rate stabilization fund. MMPA rates to members totaled a still competitive$73.19/MWh in 2017. MMPA's updated financial forecast projects wholesale rates will increase by a manageable 1% annually through 2022. Previous forecasts assumed larger rate increases from new debt to fund construction costs related to new generating resources. Contact: Primary Analyst 141