4.2a ERMUSR 04-11-2023Eli River
Municipal tilities
MANAGEMENT POLICY
Section:
Management
Category:
Administration Policies
Policy Reference:
Policy Title:
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
Management Investment Policy.
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
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ERMU Management Policy —A.10 Financial Reserves Policy
interest payments, plus one month budgeted average purchase power cost. The balance above
this target level shall be unrestricted.
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.
POLICY HISTORY:
Adopted
May 11, 2010
Revised
May 10, 2011
*Moved
November 12, 2019
Revised
July 14, 2020
*As part of the Policy Manual Initiative, authority of this Financial Reserves Policy was
delegated to management on November 12, 2019, and the policy was moved to the
Management Policy Manual.
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