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Elk River Municipal Utilities
<br />Elk River, Minnesota
<br />Notes to the Financial Statements
<br />December 31, 2022
<br />Note 4: Other Information
<br />A. Territorial Acquisition Agreement
<br />In 2015, the Utilities entered into an agreement to transfer ownership of electric plants and electric service to customers
<br />in eight designated areas receiving service from Connexus Energy. Specific payment terms have been negotiated for 5
<br />years, and if any of the eight areas are not acquired within this timeframe, the payment terms may be renegotiated. In
<br />2019, the Utilities acquired the final service areas.
<br />The agreed cost of property purchased from Connexus Energy is net book value, integration expenses, and a loss of
<br />revenue payment. The loss of revenue payment for each area acquired is based on a formula outlined in the agreement,
<br />payable for the subsequent ten years after initial purchase.
<br />The Utilities acquired designated service area 1 in 2015 for $877,807, service area 2 in 2016 for $663,586, service areas 3
<br />and 4 in 2017 for $276,776, service areas 5 and 6 in 2018 for $298,736 and service areas 7 and 8 in 2019 for $78,457. The
<br />loss of revenue payments made were $411,157 in 2017, $570,725 in 2018, $751,860 in 2019, $834,185 in 2020, $857,538
<br />in 2021, $924,187 in 2022, and $940,467 in 2023. All amounts paid are included in property and equipment, and loss of
<br />revenue payments are included in intangible assets.
<br />B. Risk Management
<br />The Utilities are exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and
<br />omissions; injuries to employees; and natural disasters for which the Utilities carries commercial insurance. The Utilities
<br />obtain insurance through participation in the League of Minnesota Cities Insurance Trust (LMCIT), which is a risk sharing
<br />pool with approximately 800 other governmental units. The Utilities pays an annual premium to LMCIT for its workers
<br />compensation and property and casualty insurance. The LMCIT is self-sustaining through member premiums and will
<br />reinsure for claims above a prescribed dollar amount for each insurance event. Settled claims have not exceeded the
<br />Utilities' coverage in any of the past three fiscal years.
<br />Liabilities are reported when it is probable that a loss has occurred, and the amount of the loss can be reasonably
<br />estimated. Liabilities, if any, include an amount for claims that have been incurred but not reported (IBNRs). The Utilities'
<br />management is not aware of any incurred but not reported claims.
<br />C. Commitments
<br />The Utilities entered into an agreement in 2007 with Central Minnesota Municipal Power Agency (CMMPA) to acquire an
<br />interest in the CAPX Initiative Brookings Project, a power transmission line in Minnesota. The project is a 250-mile, 345 kV
<br />AC transmission line with a rating of 2,300 MW, between Brookings, South Dakota, and the Southeast Twin Cities. In 2011
<br />there was increased opportunity for investment, and subsequent agreements provide the Utilities with an ownership share
<br />of $5.6 million or 18.89 percent. Revenues have been less than originally projected due to the decrease in Rate of Return
<br />(ROE) issued by FERC. The original ROE 12.38% has been reduced to 10.52%. The current return of 10.52% on this
<br />investment through CMMPA is designed to provide approximately $80K annually over the 40-year project life. With
<br />majority of the distribution once the bonds are paid off. The projected over recovery in 2022 is estimated to be $25K The
<br />bond obligations are satisfied first, distribution to participants is directly affected by over recovery. The over recovery is
<br />rolled forward under the true up. However,the over recovery in 2022 (approximately $25K) would be included in the
<br />revenue requirements in 2024. The transmission payments for 2022 were $78,165, all of which was a receivable at
<br />December 31, 2022.
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