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 Central Arizona Project (CAP) has two dedicated funding sources: working capital and strategic reserves. In short, working capital is for short-term, normal operating purposes. Strategic reserves are for unplanned events — not a specific purpose.

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

What is working capital? 

Working capital is for normal operating purposes.  – Cash receipts can be variable due to items like property taxes and capital charges.  Cash spending can be variable for power expenses and federal debt repayment.  Since the two do not sync up, they leave gaps when cash is needed to make payments that are due. 

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

What is a strategic reserve?

In the event that working capital were exhausted, a strategic reserve would cover unknown or unplanned events and is 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.

Why have them? Business essentials, for one

CAP has a key mission: 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.”

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

Some examples:

• Normal fluctuation between cash collection and spending throughout the year due to 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 reserves do not come from water rates or capital charges.

Instead, strategic reserves 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 may be added to water delivery rates or reimbursed by taxes.
• Reimbursement could be smoothed over time to allow for more stable water delivery rates.
• Strategic reserves would be brought back to the Board established target.

For 2026, the CAWCD Board of Directors approved the strategic reserve target of $181 million and the working capital target of $110 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 reserves and working capital exist to help CAP achieve its mission of making reliable deliveries of Colorado River water to central and southern Arizona.