5.1. ERMUSR 06-12-2012 Elk River �.
Municipal Utilities
13069 Orono Parkway
P.O.Box 430
Elk River,MN 55330
(763) 441-2020
UTILITIES COMMISSION MEETING
TO: FROM:
Elk River Municipal Utilities Commission Theresa Slominski—Finance Director
John Dietz
Daryl Thompson
Allan Nadeau
MEETING DATE: AGENDA ITEM NUMBER:
June 6, 2012 5.1 Review Reserves Balances and Policy
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$11,724,470, with $9,104,896 for
Electric and $2,619,574 for Water, 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, $5,407,463; Reserve Restricted for Debt
Service, $724,500; and Unrestricted Reserves, $2,972,933. The Reserve Classifications and
respective calculated amounts for the Water Department are Unrestricted Designated Reserves,
$1,121,283; Reserve Restricted for Debt Service, $0; and Unrestricted Reserves, $1,498,292.
The current reserves policy is attached which defines the various classifications and specifies the
target calculations. A graph for each department showing the target reserves and the actual
projected cash balances is also attached. The Unrestricted Reserves have a defaulting
designation as working capital, per the policy. As part of the review process the Unrestricted
Reserve balances shall be considered by the Commission for optimal uses. (This would be the
$2,972,933 for the electric department and the $1,498,292 for the water department.) Per
discussion last year, the electric department was to use $1,000,000 of these reserves to offset
Power Cost Adjustments (PCAs) that were anticipated to be passed along from our power
Rp, „, rrWERED Si NATURE
Reliable Public
Power Provider FoWEnen to SERVE
supplier and therefore provide rate relief to our customers, and the water department reserves
were allocated for future capital projects. These are still very appropriate uses of these balances.
ACTION REQUESTED:
Per policy, the optimal uses of the Unrestricted Reserves for both departments should be
considered by the Commission.
P O W E R E D BY
3 INATUPEI
Reliable Public
Power Provider P o,-F P E r T ^ s e a„F
Elk River
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, plus one month budgeted average purchase power cost. The balance above
this target level shall be unrestricted.
1
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. The balance
above this target level shall be unrestricted.
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, these balances shall be unrestricted with a defaulting designation as working capital. The
Utilities Commission shall then consider optimal uses of these unrestricted reserves through any
of the following but not limited to: working capital, designated for power costs (electric fund
only), 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
Revised May 10, 2011
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