4.2 ERMUSR 04-08-2025Elk River
Municipal Utilities UTILITIES COMMISSION MEETING
TO:
FROM:
ERMU Commission
Melissa Karpinski — Finance Manager
MEETING DATE:
AGENDA ITEM NUMBER:
April 8, 2025
4.2
SUBJECT:
2024 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. 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 electric service territory transfer costs, and capital infrastructure costs;
and for the Water Utility fund to be designated for capital infrastructure costs (current and
future).
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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�i
Elk River
Municipal Utilities
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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130
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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131
4r,=.Z.__
Elk Riv
Municipal Utilities
COMMISSION POLICY
Section:
Governance
Category:
Delegation to Management Policies
Policy Reference:
Policy Title:
GA2
Financial Reserves
PURPOSE:
With this policy, the Commission sets forth its expectations for the General Manager concerning
the maintenance of ERMU's financial reserves.
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 ERMU's utility enterprises are credit 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 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
Revised July 14, 2020
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132
Elk River Municipal Utilities - Reserves Policy 4/2025
Proposed
ERMU Electric Fund - 61
Description
Annual
Average Monthly
2025 Budgeted Expenditures
$
46,041,727
$
3,836,811
2025 Budgeted Interest Expense
$
794,932
$
66,244
2025 Budgeted Depreciation
$
3,339,552
$
278,296
2025 Budgeted Purchased Power Cost
$
30,599,628
$
2,549,969
2025 Budgeted Pricipal and Interest
$
1,784,932
1
n/a
2024 Peak Monthly Purchased Power Cost
$
3,234,950
1 $
2,628,717
2025 Reserves 1 12024 Reserves
2024 Audited Cash Balances $ 14,793,957 1 1 $ 16,675,251
Unrestricted 12025 Calculated Reserves
Designated 12025 Proposed Calculated Reserves
Reserves
Restricted for 12025 Calculated Reserves
Debt Service 12025 Proposed Calculated Reserves
Unrestricted 12025 Calculated Reserves
Reserves 12025 Proposed Calculated Reserves
$ 9,988,709 $ 9,649,556
$ 9,988,709
$ 1,779,016 $ 1,779,016
$ 1,779,016
$ 3,026,233 $ 5,246,679
$ 3,026,233
133
Elk River Municipal Utilities - Reserves Policy 4/2025
Proposed
ERMU Water Fund - 62
Description
Annual
Average Monthly
2025 Budgeted Expenditures
$ 4,004,092
$ 333,674
2025 Budgeted Interest Expense
$ 38,117
$ 3,176
2025 Budgeted Depreciation
$ 1,325,866
$ 110,489
2025 Budgeted Pricipal and Interest
$ 103,117
1 n/a
2024 Audited Cash Balances
2025 Reserves
$ 9,961,189
Unrestricted
12025 Calculated Reserves
$
1,423,172
Designated
12025 Proposed Calculated Reserves
$
1,423,172
Reserves
Restricted for
2025 Calculated Reserves
$
-
Debt Service
12025 Proposed Calculated Reserves
$
-
Unrestricted
12025 Calculated Reserves
$
8,538,018
Reserves
12025 Proposed Calculated Reserves
$
8,538,018
2024 Reserves
$ 10,879,501
$ 1,330,447
$ 9,549,054
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