5.2. ERMUSR 04-14-2015 Elk 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:
April 14, 2015 5.2
SUBJECT:
2014 Year-End Reserve Balances
BACKGROUND:
The purpose for reserves to a public utility is to meet bond covenants and provide a financial
buffer to mitigate unforeseen or volatile operational costs. In 2010, the commission adopted a
financial reserves policy that defined the structure and formula on how financial reserves will be
calculated for the Electric Utility and Water Utility funds. This provides transparency to the
public on the purpose and levels of utility reserves.
DISCUSSION:
As defined by policy, the year-end reserve balances are to be reviewed after the completion of
the audit. These balances, if above their target levels, shall be unrestricted with a defaulting
designation as working capital. The commission shall then consider optimal use of these
unrestricted reserves.
ACTION REQUESTED:
Staff recommends that unrestricted reserve balances above target levels for the Electric Utility
fund be designated for electric service territory transfer costs, and for the Water Utility fund be
designated for future capital infrastructure costs.
ATTACHMENTS:
• ERMU Policy 8.20b—Financial Reserves
• Electric Fund and Water Fund Reserve Balances
•
IRIAIURE1 Page 1 of 1
Reliable Public
Power Provider P O W E R E D T O S E R V E
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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.
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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. 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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Elk River Municipal Utilities- Reserves Policy 4/2015 Proposed
ERMU Electric Fund-61
Description Annual Average Monthly
2015 Budgeted Expenditures $ 32,134,656 $ 2,677,888
2015 Budgeted Interest Expense $ 136,360 $ 11,363
2015 Budgeted Depreciation $ 2,300,000 $ 191,667
2015 Budgeted Purchased Power Cost $ 22,577,733 $ 1,881,478
2015 Budgeted Pricipal and Interest $ 999,868 n/a
2014 Peak Monthly Purchased Power Cost $ 2,452,877 $ 1,831,757
12015 Reserves 2014 Reserves
12014 Audited Cash Balances $ 12,097,110 $ 12,057,293
Unrestricted 2015 Calculated Reserves $ 6,441,627 1$ 5,975,622 1
Designated 2015 Proposed Calculated Reserves $ 6,441,627
Reserves
Restricted for 2015 Calculated Reserves $ 490,500 1 $ 647,000 1
Debt Service 2015 Proposed Calculated Reserves $ 490,500
Unrestricted 2015 Calculated Reserves $ 5,164,983 1 $ 5,434,671 1
Reserves 2015 Proposed Calculated Reserves $ 5,164,983
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Elk River Municipal Utilities- Reserves Policy 4/2015 Proposed
ERMU Water Fund-62
Description Annual Average Monthly
2015 Budgeted Expenditures $ 2,541,030 $ 211,753
2015 Budgeted Interest Expense $ 67,080 $ 5,590
2015 Budgeted Depreciation $ 1,130,000 $ 94,167
2015 Budgeted Pricipal and Interest $ 325,080 n/a
12015 Reserves 2014 Reserves
12014 Audited Cash Balances $ 3,681,481 $ 3,390,879
Unrestricted 2015 Calculated Reserves $ 997,055 1 $ 1,278,326
Designated 2015 Proposed Calculated Reserves $ 997,055
Reserves
Restricted for 2015 Calculated Reserves $ - I $ - I
Debt Service 2015 Proposed Calculated Reserves $ -
Unrestricted 2015 Calculated Reserves $ 2,684,426 1 $ 2,112,554 I
Reserves 2015 Proposed Calculated Reserves $ 2,684,426
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