5.1. ERMUSR 05-10-2011 - Laserfiche WebLink

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Elk Ri 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. 1 - _ _ __