4.2 ERMUSR 04-11-2017 Elk River
Municipal Utilities UTILITIES COMMISSION MEETING
TO: FROM:
ERMU Commission Troy Adams, P.E.—General Manager
MEETING DATE: AGENDA ITEM NUMBER:
April 11, 2017 4.2
SUBJECT:
2016 Year End Reserve Balance
ACTION REQUESTED:
Designate unrestricted reserve balances above target levels for Electric and Water funds.
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.
Staff recommends that unrestricted reserve balances above target levels for the Electric Utility
fund be designated for electric service territory transfer costs,the demand credit adjustment, and
capital infrastructure costs; and for the Water Utility fund be designated for future capital
infrastructure costs.
FINANCIAL IMPACT:
None
ATTACHMENTS:
• ERMU Policy A.10—Financial Reserves
• Electric Reserves Policy Calculation
• Water Reserves Policy Calculation
Page 1 of 1
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Elk River
Municipal Utilities
A.10—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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