5.1. ERMUSR 05-10-2011ilk River
Municipal Utilities
1306) Orono Parkway • P.O. Box 430
Elk River, MN 55330-0430
UTILITIES COMMISSION MEETING
Phone: 763.441.2020
Fax: 763.441.8099
TO: FROM:
Elk River Municipal Utilities Commission Theresa Slominski -Finance Director
John Dietz
Daryl Thompson
Allan Nadeau
MEETING DATE: AGENDA ITEM NUMBER:
Ma 1 Q 2011 5.1 Review Reserves Balances and Polic
SUBJECT:
Annual review of reserves balances
BACKGROUND:
Per our Reserves Policy, annually after the audit the year-end reserve balances shall be reviewed
and the Utilities Commission shall consider any balances above or below target levels.
DISCUSSION:
At the conclusion of our audit, a review of the cash balances of $7,311,517 and reserves
determines that our current reserves balances are at target levels. The three Reserve
Classifications and respective calculated amounts for the Electric Department are Unrestricted
Designated Reserves, $3,755,770; Reserve Restricted for Debt Service, $724,500; and
Unrestricted Reserves, $2,831,247. The Reserve Classifications and respective calculated
amounts for the Water Department are Unrestricted Designated Reserves, $1,197,562; Reserve
Restricted for Debt Service, $0; and Unrestricted Reserves, $1,595,581.The current reserves
policy is attached which defines the various classifications and specifies the target calculations.
With the discussion of the Electric Department Reserve Policy last year, it was determined that a
purchased power component of the reserves was not to be included -not because of its
unimportance, but because it was a significant increase in the target balances and would have left
the reserves under target by a significant amount. Instead, the Unrestricted Reserves were
default designated as working capital that could be used to meet power cost needs (for the
electric department) or rate stabilization, etc. Our current cash balances would allow us to
reconsider this important purchased power component, adjust our policy for the target balance
accordingly, and meet this target balance.
Currently, purchased power is our largest expense for the Electric Department, at approximately
71% of total budgeted expenses. During the high usage summer months, it can be high as 78%
of the total expenses. With looming double digit wholesale power rate increases forecasted by
Great River Energy, this component of our budget will continue to grow in significance. Since
this is such a significant and important expense, I would like to reconsider the Electric target
reserve level to include a purchased power component. There are a few different options to
consider, adding either the prior year's peak monthly purchased power cost or, adding the
average monthly amount of the prior year or the budgeted year. Any of the three scenarios result
in achieving target balances and are presented for your review. The impacted variable component
is the Unrestricted Reserves account and, ultimately, the Commission's comfort level with that
balance.
The Water Department has a significant balance in the Unrestricted Reserves account, and also
has significant upcoming capital projects that could utilize these funds without having to bond
for these projects. For the 2011 year, it was determined that the Gary Street Water Tower project
and the Well 9 project would be funded through reserves instead of bonding. The 2012 year has
an upcoming project for the Freeport Water Tower that could be partially funded or entirely
funded through reserves, again depending upon the Commission's comfort level with the
Unrestricted Reserves account balance.
ACTION REQUESTED:
Staff recommends revising the Electric Reserves Policy to include a component for purchased
power.
Elk Ri
Municipal Utilities
8.20b FINANCIAL RESERVES POLICY
1.0 Purpose and Summary
In order to maintain stable rates and provide reliable services, Elk River Municipal Utilities
(ERMU) requires financial buffers in the form of reserves to mitigate changes in costs or
operational performance. For ERMU there are two utility funds, the Electric Utility and the
Water Utility. These funds shall have separate reserves. Their reserve balances shall be
classified as either Restricted for Debt Service or Unrestricted Designated Reserve.
The target levels for these reserves shall be determined by the criteria herein. These target levels
and target criteria will be reviewed annually, modified by Utilities Commission to support the
long-term goals of ERMU, and adopted with the annual budget. Unless otherwise specified by
bond covenants, these reserve balances shall be invested consistent with ERMU's Investment
Policy (policy number 8.20a).
2.0 Electric Utility Reserve Classifications
Restricted For Debt Service: This reserve is established to maintain compliance with bond
covenants.
The target level for this reserve shall be set at the level specified by bond covenants.
Unrestricted Designated Reserve: This reserve is established to address the short-term financial
variability inherent in operating an Electric Utility. Potential sources of this variability include
but are not limited to: risks associated with natural disasters, reduction in overall customer usage,
changes in total system load resulting from the actions of large customers, failure to achieve
budgeted levels of net income, changes in cost of purchased power, changes in interest income,
and general operational exposures.
The target level for this reserve shall be set at the sum of 6 months operating expenditures less
depreciation and less purchase power costs plus the sum of next year's total principal and interest
payments.
1
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3.0 Water Utility Reserve Classifications
Restricted For Debt Service: This reserve is established to maintain compliance with bond
covenants.
The target level for this reserve shall be set at the level specified by bond covenants
Unrestricted Designated Reserve: This reserve is established to address the short-term financial
variability inherent in operating a Water Utility. Potential sources of this variability include but
are not limited to: risks associated with natural disasters, reduction in overall customer usage,
changes in total system usage resulting from the actions of large customers, failure to achieve
budgeted levels of net income, changes in interest income, and general operational exposures.
The target level for this reserve shall be set at the sum of 6 months operating expenditures less
depreciation plus the sum of next year's total principal and interest payments.
4.0 Year-end Reserve Balances
If the year-end reserve balances are above their target levels after the completion of the year-end
audit, the Utilities Commission shall consider optimal uses of the excess reserves through any of
the following but not limited to: debt reduction, retention for reserve fund growth for future
needs, or use for rate stabilization or reduction.
If the year-end reserve balances are below their target levels after the completion of the year-end
audit, the Utilities Commission shall consider the balances and plan for their replenishment to
target levels in a timely manner.
Adopted May 11, 2010
Elk Rider Municpal 'Utilities - Reserves Policy 5/2011
Unrestricted
Designated
Reserves
Restricted
For Debt
Service
Unrestricted
Reserves
ERMU Electric
Description Annual Ave Monthly
2011 Budgeted Expenditures $ 27,917,903 $ 2,326,492
2011 Budgeted Interest Expense $ 272,764 $ 22,730
2011 Budgeted Depreciation $ 2,330,000 $ 194,167
2011 Budgeted Purchased Power Costs $ 19,771,039 1,G4 587,;
2011 Budgeted P&I $ 983,720 $ 81,977
2010 Peak Monthly Purchased Power Cost $ 2,278,219 $ 1,529,851
2010 Audited Cash Balances $ 7,311,517
2011 Calculated Reserves $ 3,755,770
2011 Proposed Calculated Reserves -peak mo 2010 $ 6,033,989
2011 Proposed Calculated Reserves -avg mo 2011 $ ,,5`'` ,35'i
2012 Proposed Calculated Reserves - avg mo 2010 I $ 5,285,621
2011 Calculated Reserves $ 724,500
2011 Proposed Calculated Reserves $ 724,500
2011 Calculated Reserves $ 2,831,247
2011 Proposed Calculated Reserves $ 553,028
2011 Proposed Calculated Reserves $ 118~,6firt
2011 Proposed Calculated Reserves $ 1,301,396
Elk River Municpal Utilities - Reserves Policy 5/2011
Unrestricted
Designated
Reserves
Restricted
For Debt
Service
Unrestricted
Reserves
ERMU Water
Description Annual Ave Monthly
2010 Budgeted Expenditures $ 2,292,980 $ 191,082
2011 Budgeted Interest Expense $ 131,139 $ 10,928
2011 Budgeted Depreciation $ 1,019,700 $ 84,975
2010 Budgeted P&I $ 626,491 $ 52,208
2010 Audited Cash Balances $ 2,793,142
2011 Calculated Reserves $ 1,197,562
2011 Proposed Calculated Reserves $ 1,197,562
2011 Calculated Reserves $ _ NI
2011 Proposed Calculated Reserves $ - NF
2011 Calculated Reserves $ 1,595,581
2011 Proposed Calculated Reserves $ 1,595,581