Types of Reserves

1. Types of Reserves • Operating reserve (O&M reserve, or working capital reserve) • Established to allow utility to withstand cash-flow fluctuations, often based on time between delivery of services and payment for those services • Typically 45 to 90 days of O&M expenses (1/8 to ¼ of annual O&M budget)

2. Types of Reserves (continued) • Capital reserve (repair and replacement reserve) • Established to replace system assets that wear out or become obsolete • Many different (but related) criteria • typical year of rate-funded capital projects • greater than or equal to annual depreciation expense (1.5 times depreciation is a good target) • 1% to 2% of total original cost of utility assets • total system replacement cost divided by assumed useful life of the system

3. Types of Reserves (continued) • Contingency fund (emergency fund) • Largest capital item to be replaced, or cost to replace most critical facilities • May not be needed…establish line of credit for emergencies with lending institution • Funds required until emergency funding can be arranged

4. Types of Reserves (continued) • Bond reserve/debt reserve (restricted reserves) • Often legally required by covenants and indentures of most revenue bonds, and may be required by some general obligation bonds • Typically the lesser of maximum annual debt service on all outstanding senior parity bonds, or 120% of total annual debt service, or 10% of its bond issue amount