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Eli River <br />Municipal tilities <br />MANAGEMENT POLICY <br />Section: <br />Management <br />Category: <br />Administration Policies <br />Policy Reference: <br />Policy Title: <br />A.10 <br />Financial Reserves Policy <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 for Debt Service or Unrestricted Designated Reserve. <br />The target levels for these reserves shall be determined by the criteria herein. These target <br />levels and target criteria will be reviewed annually, modified by Utilities Commission to support <br />the long-term goals of ERMU, and adopted with the annual budget. Unless otherwise specified <br />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 <br />financial variability inherent in operating an Electric Utility. Potential sources of this variability <br />include but are not limited to: risks associated with natural disasters, reduction in overall <br />customer usage, changes in total system load resulting from the actions of large customers, <br />failure to achieve budgeted levels of net income, changes in cost of purchased power, changes <br />in interest income, and general operational exposures. <br />The target level for this reserve shall be set at the sum of 6 months operating expenditures less <br />depreciation and less purchase power costs, plus the sum of next year's total principal and <br />Page 1 of 2 <br />HM <br />