Integrating Financial Policies into Long-Term Financial Planning

Financial policies are a core component of leading best practices and serve as a foundation for long-term financial management. Cash reserve and debt management policies constitute some of the key financial policies and are critical aspect of the overall financial framework designed to promote financial strength and stability. Many utilities use these policies as benchmarks during the long-term financial planning process to project the financial needs of the organization for future years and avoid rate shock in any single year. The most recent events such as COVID-19 and drought in Colorado River have highlighted the importance of the existence of such policies even more. The objective of cash reserve policy is the maintain adequate flexibility in terms of cash balance while maintaining reserves required from a legal and operational perspectives. Cash reserve policy specifies the type of reserve, target levels, and events or conditions prompting the use of such reserves. Some of the common types of reserve utilities establish are, operating reserve, capital reserve, rate stabilization reserve, debt service reserve, etc. The objective of debt management policy is to specify the objectives and practices of debt management, to ensure that the organization has ability to repay its debt obligations, maintain appropriate level of financial flexibility, seek optimal financing option for capital, and manage interest rate risk. Debt policy describes the types of expenditures appropriate for debt financing, establishes guidance for use of debt proceeds, and sets parameters, such as Debt Service Coverage and Leverage, all in compliance with the governing principles. This session will highlight how financial policies, such as cash reserve and debt management policies, are integrated with the long-term financial planning process and are key in maintaining financial resilience in challenging times. The presenter will highlight examples of how these policies are used in Denver Water's long-term financial planning process.