4.2 ERMUSR 04-14-2020UTILITIES COMMISSION MEETING
TO:FROM:
ERMU Commission Melissa Karpinski –Finance Manager
MEETING DATE: AGENDA ITEM NUMBER:
April 14, 2020 4.2
SUBJECT:
2019 Year End Reserve Balances
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, which has since moved over to management 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. Additionally, this policy is consistent with Governance Policy G.4i2 Financial Reserves
which was adopted by the commission in 2017.
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 capital infrastructure costs and the Energy Adjustment Clause (EAC), to
be capped at $500,000;and for the Water Utility fund to be designated for future capital
infrastructure costs.
FINANCIAL IMPACT:
None
ATTACHMENTS:
ERMU Policy – A.10 – Financial Reserves Policy
ERMU Policy – G.4i2 – Financial Reserves
Electric Reserves Policy Calculation
Water Reserves Policy Calculation
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A.10 Financial Reserves Policy
1.0Purpose 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. Theirreserve balances shall be
classified as either Restricted for Debt ServiceorUnrestricted Designated Reserve.
The target levels for these reserves shall be determined by the criteria herein.Thesetarget 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
Policy (policy number 8.20a).
2.0Electric 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 atthe 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 atthe sum of 6 months operating expenditures less
depreciation and lesspurchase power costs,plus the sum of
interest payments, plus one month budgeted average purchase power cost. The balance above
this target level shall be unrestricted.
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3.0Water 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 The balance
above this target level shall be unrestricted.
4.0Year-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 theirreplenishment to
target levels in a timely manner.
Adopted May 11, 2010
Revised May 10, 2011
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156
COMMISSION POLICY
Section:Category:
GovernanceDelegation to Management Policies
Policy Reference:Policy Title:
G.4i2Financial Reserves
PURPOSE:
With this policy, the Commission sets forth its expectations for the General Manager concerning
the maintenance of
POLICY:
The General Manager shall ensure that ERMU maintains cash reserves for its electric and water
utility enterprises that are reasonable, prudent and necessary to:
1. Meet or exceed the requirements of all bond covenants
2. Demonstrate to rating agencies and investors that ERMUcredit worthy
3. Provide liquidity that is adequate, along with other risk-management measures, to ensure
ongoing operation of the utility systems
4. Stabilize revenue requirements and customer rates
5. Manage the level of debt by funding a portion of the capital investments
In addition, the General Manager shall prepare for Commission approval and, upon approval,
implement a Management Financial Reserves Policy that sets forth the designated reserve funds
to be maintained, along with their purposes and methods for determining appropriate target levels
and requirements for internal controls, monitoring and reporting. Designated reserve funds may
include, but are not limited to reserves restricted for debt service and unrestricted designated
reserves.
POLICY HISTORY:
Adopted December 12, 2017
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157
1,261,3595,751,003
8,267,086
Reserves
15,279,447
$$$$
2019
n/a
54,815
252,557
3,175,823
2,125,6542,234,593
Monthly
$$$$$
657,782
3,030,6781,785,7382,784,0878,368,1758,368,1751,261,3591,261,3596,513,7476,513,747
38,109,87525,507,84916,143,281
Reserves
$$$$$$$$$$$$$
ProposedAnnualAverage2020
158
Cost
4/2020
Cost
Power
Interest
61
Policy
Power
ReservesReservesReserves
Expense
and
Purchased
Balances
Fund
ReservesReservesReserves
ExpendituresInterestDepreciationPurchasedPricipal
CalculatedCalculatedCalculated
Cash
Reserves
Monthly
Electric
BudgetedBudgetedBudgetedBudgetedBudgetedPeakAuditedCalculatedProposedCalculatedProposedCalculatedProposed
ERMU
Description 20202020202020202020201920192020202020202020
Utilities
Municipal
for
Service
River
Elk
Unrestricted2020Designated2020ReservesRestrictedDebtUnrestrictedReserves
6,718,1511,145,7705,572,381
Reserves
$$$$
2019
n/a
2,029
258,378101,320
Monthly
$$$
Proposed
24,345
295,345
6,466,8646,466,864
3,100,5361,215,8397,692,3851,225,5211,225,521
Reserves
$$$$$$$$$$$
AnnualAverage2020
159
4/2020
Interest
Policy
ReservesReservesReserves
62
Expense
and
Balances
Fund
ReservesReservesReserves
ExpendituresInterestDepreciationPricipal
Calculated
CalculatedCalculated
Cash
Reserves
Water
BudgetedBudgetedBudgetedBudgetedAuditedCalculatedProposedCalculatedProposed
CalculatedProposed
ERMU
Description 20202020202020202019202020202020202020202020
Utilities
Municipal
for
Service
River
Elk
UnrestrictedDesignatedReservesRestrictedDebtUnrestrictedReserves