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______________________________________________________________________________ <br /> <br />Page 1 of 3 <br /> <br /> <br /> <br /> <br />MANAGEMENT POLICY <br /> <br />Section: Category: <br />Management Administration Policies <br />Policy Reference: Policy Title: <br />A.10 Financial Reserves Policy <br /> <br />1.0 Purpose and Summary <br />In order to maintain stable rates and provide reliable services, Elk River Municipal Utilities <br />(ERMU) requires financial buffers in the form of reserves to mitigate changes in costs or <br />operational performance. For ERMU there are two utility funds, the Electric Utility and the <br />Water Utility. These funds shall have separate reserves. Their reserve balances shall be <br />classified as either Restricted or Unrestricted Designated. This policy, and the target levels and <br />criteria herein, are intended for use as a guide only. <br />The target levels for these reserves shall be determined by the criteria herein. These target <br />levels and associated criteria will be reviewed annually, modified by Utilities Commission to <br />support the long-term goals of ERMU, and adopted with the annual budget. Unless otherwise <br />specified by bond covenants, these reserve balances shall be invested consistent with ERMU’s <br />Management Investment Policy. <br />2.0 Electric Utility Reserve Classifications <br />Restricted for Debt Service: This reserve is established to maintain compliance with bond <br />covenants. <br />The target level for this reserve shall be set at the level specified by bond covenants. <br />Unrestricted Designated Reserve: This reserve is established to address the short-term financial <br />variability inherent in operating an Electric Utility. Potential sources of this variability include <br />but are not limited to: failure to achieve budgeted levels of net income, reduction in overall <br />customer or system usage, changes in cost of purchased power, general operational exposures, <br />and risks associated with natural disasters. <br />The target levels for the unrestricted, designated reserve shall be set as follows: <br />146