Strategic, extraordinary cost and working capital reserves

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Unplanned events like catastrophes, unexpected major equipment failures, or sudden business interruptions – they can hardly be predicted.

But there can be preparation. And that’s a reason the Central Arizona Project has reserve funds – specifically strategic and working capital reserves. In short, strategic reserves are for unplanned events — not a specific purpose. Working capital reserves are for normal operating purposes.

Yet it’s a bit more complex than this. So let’s keep it simple.

What is a strategic reserve?

A strategic reserve would cover unknown or unplanned events and are not for a specific purpose such as damage to the canal from a natural disaster or a major equipment failure.

This strategic reserve includes operating, capital, and contingency reserves:

  • Operating reserve: In the event of a business interruption, CAP could be prevented from making water deliveries.  If this were to happen, revenue from deliveries would cease to be received.  The operating reserve pays the operating bills while money is not being received.
  • Capital reserve: The capital reserve provides funds to pay for the catastrophic equipment failure while keeping other capital projects proceeding.
  • Contingency reserve: The contingency reserve is for large and unexpected legal, medical or property costs.

What is a working capital reserve? 

A working capital reserve is for normal operating purposes. Like saving for a monthly mortgage payment — while paychecks are coming 2-3 times a month – so also cash receipts and cash spending may not sync up and can leave gaps when cash is needed to make payments that are due. 

A working capital reserve is used to smooth out these timing differences in revenues and spending within each year. 

Why have them? Business essentials, for one

CAP is essentially an entity with one function: reliable deliveries of water.  If that operation is impacted, CAP has to rely on its own reserves to get through the rough time. CAP doesn’t have other functions or business from which to borrow, nor assets to mortgage. Instead, CAP relies on its own resources during these “down days.”

Strategic and working capital reserves support business needs to allow the water utility to deliver water reliably, 24/7/365.

Some examples:

  • Normal cash fluctuation throughout the year for variable  items such as property taxes, federal debt payment and power costs;
  • Major repairs or replacements to CAP infrastructure;
  • Funds to continue operations in the event of a catastrophic event, such as those possibly affecting employees, contractors, or materials and supplies.

Fund sources: Water rates and capital charges not included

CAP operations and federal repayment are paid through water rates or capital charges paid by customers.  Funds for strategic and working capital reserves do not come from water rates or capital charges.

Instead, funds come from:

  • Tax revenues that were not utilized for other needs.
  • Interest on investments at the state treasurer.

If used, how are they replaced? 

  • The cost of the repair and capital expenditures would be added to water delivery rates.
  • Strategic and working capital reserves would be reimbursed for what was used to cover the expenditures of the event.
  • Reimbursement could be smoothed over time to allow for more stable water delivery rates.

For 2020, the CAWCD Board of Directors approved the strategic reserve target of $153 million and the working capital reserve target of $53 million. As a public entity, CAP does not make a profit and has a responsibility to provide a reliable water supply at a reasonable, cost-of-service price.

We hope this helps explain why the strategic and working capital reserves exists to help Central Arizona Project make reliable deliveries of Colorado River water to central and southern Arizona.