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ERMU Management Policy – A.10 Financial Reserves Policy <br />______________________________________________________________________________ <br /> <br />______________________________________________________________________________ <br /> <br />Page 2 of 3 <br />Annual Debt Service Reserve Current year's principal and interest payment due on <br />outstanding debt <br />Operating Reserve Two months of budgeted operating expenses (including <br />purchased power) <br />Capital Reserve Average of the next five-year capital plan in the budget <br />Catastrophic Reserve Estimated current replacement cost of a substation <br /> <br />3.0 Water 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 />Restricted for Trunk/Capacity: This reserve is established to ensure water access charges and <br />trunk funds received are restricted to trunk/capacity related capital projects. <br />There is no target level for this reserve. Funds accumulate until needed for trunk/capacity <br />expansion projects. <br />Unrestricted Designated Reserve: This reserve is established to address the short-term financial <br />variability inherent in operating a Water Utility. Potential sources of this variability include but <br />are not limited to: failure to achieve budgeted levels of net income, reduction in overall <br />customer or system usage, general operational exposures, and risks associated with natural <br />disasters. <br />The target levels for the unrestricted, designated reserve shall be set as follows: <br />Annual Debt Service Reserve Current year's principal and interest payment due on <br />outstanding debt <br />Operating Reserve Two months of budgeted operating expenses <br />Capital Reserve Average of the next five-year capital plan in annual budget <br />Catastrophic Reserve Estimated replacement cost of a water treatment plant <br /> <br />4.0 Year-end Reserve Balances <br />If the year-end reserve balances are above their target levels after the completion of the year- <br />end audit, these balances shall be unrestricted with a defaulting designation as working capital. <br />The Utilities Commission shall then consider optimal uses of these unrestricted reserves <br />through any of the following but not limited to: working capital, designated for power costs <br />(electric fund only), debt reduction, retention for reserve fund growth for future needs, or use <br />for rate stabilization or reduction. <br />147