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)

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

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

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