agenda finance and audit committee finance and...david goulding frederick w. gorbet suzanne keenan...

Agenda Finance and Audit Committee February 6, 2019 | 10:45-11:15 a.m. Pacific (Please note the Schedule may be adjusted real-time should meetings conclude early and/or extend past their scheduled end time.) westdrift Manhattan Beach, Autograph Collection 1400 Park View Avenue Manhattan Beach, California 90266 Conference Room: Loftlight – Lobby Introduction and Chair’s Remarks NERC Antitrust Compliance Guidelines and Public Announcement* Agenda Items

1. Minutes*— Approve a. November 6, 2018 Meeting

2. 2018 Year-End Unaudited Results of Operations* — Review and Recommend Board Acceptance a. NERC 2018 Unaudited Results

b. Combined ERO Enterprise 2018 Unaudited Results

c. Regional Entity Reports

3. Annual Review of Committee Mandate* — Review 4. Other Business 5. Adjournment

*Background materials included.

Antitrust Compliance Guidelines I. General It is NERC’s policy and practice to obey the antitrust laws and to avoid all conduct that unreasonably restrains competition. This policy requires the avoidance of any conduct that violates, or that might appear to violate, the antitrust laws. Among other things, the antitrust laws forbid any agreement between or among competitors regarding prices, availability of service, product design, terms of sale, division of markets, allocation of customers or any other activity that unreasonably restrains competition.

It is the responsibility of every NERC participant and employee who may in any way affect NERC’s compliance with the antitrust laws to carry out this commitment.

Antitrust laws are complex and subject to court interpretation that can vary over time and from one court to another. The purpose of these guidelines is to alert NERC participants and employees to potential antitrust problems and to set forth policies to be followed with respect to activities that may involve antitrust considerations. In some instances, the NERC policy contained in these guidelines is stricter than the applicable antitrust laws. Any NERC participant or employee who is uncertain about the legal ramifications of a particular course of conduct or who has doubts or concerns about whether NERC’s antitrust compliance policy is implicated in any situation should consult NERC’s General Counsel immediately.

II. Prohibited Activities Participants in NERC activities (including those of its committees and subgroups) should refrain from the following when acting in their capacity as participants in NERC activities (e.g., at NERC meetings, conference calls and in informal discussions):

∑ Discussions involving pricing information, especially margin (profit) and internal cost information and participants’ expectations as to their future prices or internal costs.

∑ Discussions of a participant’s marketing strategies.

∑ Discussions regarding how customers and geographical areas are to be divided among competitors.

∑ Discussions concerning the exclusion of competitors from markets.

∑ Discussions concerning boycotting or group refusals to deal with competitors, vendors or suppliers.

∑ Any other matters that do not clearly fall within these guidelines should be reviewed with NERC’s General Counsel before being discussed.

III. Activities That Are Permitted From time to time decisions or actions of NERC (including those of its committees and subgroups) may have a negative impact on particular entities and thus in that sense adversely impact competition. Decisions and actions by NERC (including its committees and subgroups) should only be undertaken for the purpose of promoting and maintaining the reliability and adequacy of the bulk power system. If you do not have a legitimate purpose consistent with this objective for discussing a matter, please refrain from discussing the matter during NERC meetings and in other NERC-related communications.

You should also ensure that NERC procedures, including those set forth in NERC’s Certificate of Incorporation, Bylaws, and Rules of Procedure are followed in conducting NERC business.

In addition, all discussions in NERC meetings and other NERC-related communications should be within the scope of the mandate for or assignment to the particular NERC committee or subgroup, as well as within the scope of the published agenda for the meeting.

No decisions should be made nor any actions taken in NERC activities for the purpose of giving an industry participant or group of participants a competitive advantage over other participants. In particular, decisions with respect to setting, revising, or assessing compliance with NERC reliability standards should not be influenced by anti-competitive motivations.

Subject to the foregoing restrictions, participants in NERC activities may discuss:

∑ Reliability matters relating to the bulk power system, including operation and planning matters such as establishing or revising reliability standards, special operating procedures, operating transfer capabilities, and plans for new facilities.

∑ Matters relating to the impact of reliability standards for the bulk power system on electricity markets, and the impact of electricity market operations on the reliability of the bulk power system.

∑ Proposed filings or other communications with state or federal regulatory authorities or other governmental entities.

∑ Matters relating to the internal governance, management and operation of NERC, such as nominations for vacant committee positions, budgeting and assessments, and employment matters; and procedural matters such as planning and scheduling meetings.

NERC Antitrust Compliance Guidelines 2

DRAFT Minutes Finance and Audit Committee Meeting November 6, 2018 | 9:00-9:45 a.m. Eastern

Grand Hyatt Atlanta in Buckhead 3300 Peachtree Road NE Atlanta, GA 30305

Call to Order and Chair’s Remarks Ms. Jan Schori, Chair, called to order a duly noticed open meeting of the Finance and Audit Committee (the “Committee”) of the Board of Trustees (“Board”) of the North American Electric Reliability Corporation (“NERC” or the “Company”) on November 6, 2018, at 9:00 a.m. Eastern, and a quorum was declared present. The agenda is attached as Exhibit A.

Present at the meeting were:

Committee Members Board of Trustee Members Jan Schori, Chair Janice B. Case Robert G. Clarke Kenneth W. DeFontes, Jr. David Goulding Frederick W. Gorbet Suzanne Keenan George S. Hawkins Roy Thilly Robin E. Manning

James B. Robb, President and Chief Executive Officer

NERC Staff Charles A. Berardesco, Senior Vice President, General Counsel, and Corporate Secretary Tina Buzzard, Associate Director Scott Jones, Senior Vice President, Chief Financial and Administrative Officer, and Corporate Treasurer Mark G. Lauby, Senior Vice President and Chief Reliability Officer Janet Sena, Senior Vice President and Director of Policy and External Affairs Andy Sharp, Controller Michael Walker, Senior Vice President and E-ISAC Chief of Staff

Chair’s Remarks Ms. Schori welcomed the participants to the meeting.

NERC Antitrust Compliance Guidelines Ms. Schori directed the participants’ attention to the NERC Antitrust Compliance Guidelines included in the agenda, and indicated that all questions regarding antitrust compliance or related matters should be directed to Mr. Berardesco.

Agenda Item 1a Finance and Audit Committee Meeting February 6, 2019

Finance and Audit Committee Meeting 2 Draft Minutes – November 6, 2018

Minutes Upon motion duly made and seconded, the minutes from the August 15, 2018 meeting were approved as presented to the Committee. Fourth Quarter Calendar of FAC Responsibilities Mr. Sharp reviewed the Third Quarter Unaudited Financial Statements for NERC and for the ERO Enterprise, referencing the materials included in the advance agenda package. He noted that in the third quarter, NERC funding was on budget and expenditures were under budget, largely due to the timing of expenditures versus budget. NERC projects to be on budget for funding and slightly over budget for expenditures by the end of 2018, largely due to costs associated with the SPP dissolution. Mr. Sharp also noted that projected operating reserve usage was higher than expected for 2018, but that borrowing costs were lower than expected. Mr. Sharp also reviewed the projected year-end reserves for 2018. Mr. Sharp noted that seven Regional Entities were under budget in the third quarter; one region, MRO, was over budget due to costs associated with the SPP RE transition. The combined ERO Enterprise was under budget for the third quarter and is projected to be approximately 1.8 percent under budget at year end. Mr. Sharp reviewed the combined 2018 ERO Enterprise operating reserves. After discussion, and upon motion duly made and seconded, the Committee recommended the Third Quarter Unaudited Financial Statements for acceptance by the Board. 2019 Business Plan and Budget Status Mr. Sharp noted that the Federal Energy Regulatory Commission had approved the 2019 Business Plans and Budgets. Ms. Schori thanked the Committee and the MRC Business Plan and Budget Input Group for their work during the annual budget process. Schedule for 2020 Business Plan and Budget Mr. Sharp reviewed the tentative 2020 ERO Enterprise Business Plan and Budget Schedule, which had been included in the advance agenda package. Overview of Internal Controls Ms. Schori noted that the Committee requested a presentation on NERC’s accounting and financial internal controls to better understand the practices NERC has in place and to aid the Committee in executing its financial oversight duties. Mr. Sharp then provided a presentation on NERC’s accounting and financial controls. He noted that NERC relies on several sources of guidance for implementing its internal control framework, including guidance from the Committee of Sponsoring Organizations of the Treadway Commission, internal and external auditors, Regional Entities and other companies, and through continuing education. He described the following elements of NERC’s internal control environment:

• Tone at the top, including Committee oversight and management support of controls; • Compliance oversight, including external auditors and internal audit and risk management;

Finance and Audit Committee Meeting 3 Draft Minutes – November 6, 2018

• Corporate policies, including the code of conduct and internal financial policies; • Accounting process documentation; • Segregation of duties among accounting department staff; • Accounting systems, including systems currently used by NERC and systems that will be used by

NERC beginning in 2019; and • Reporting and management oversight, including current monthly management reports.

Mr. Sharp reviewed key corporate policies, accounting process documents, the approach to segregation of duties, key business systems and reporting and management oversight. He provided an overview of upcoming activities, including an update of accounting process documents in connection with a new accounting system and a review of system and process environments by Internal Audit. Following discussion, Ms. Schori requested that NERC staff provide an annual review of internal controls for the Committee, to include updates on policies that have changed in the prior year, issues that have been identified, and other matters of interest. Mr. Jones expressed his thanks to Mr. Walker, as the former CFO, and former Controller Susan Turpen, for their work in creating and implementing the original internal controls structure and process documentation. Adjournment There being no further business, and upon motion duly made and seconded, the meeting was adjourned. Submitted by,

Charles A. Berardesco Corporate Secretary

Summary of Unaudited Results For the Year Ending December 31, 2018

Table of Contents Page

I. Executive Summary Year-to-Date Actual Results 2

II. Detailed Operating Results Variances by Revenue and Expense Category 3 Variances by Department / Program 5

III. Supplemental Schedules Schedule 1 – Reserves 6 Schedule 2 – IT Projects 7 Schedule 3 – E-ISAC & CRISP 10

Agenda Item 2a Finance and Audit Committee Meeting February 6, 2019

Summary of Results as of December 31, 2018 2

Executive Summary

FUNDING

• Revenues o Third-party funding was under budget due to lower CRISP revenues. CRISP billings

were higher in 2018, but contractor expenses were under budget, resulting in a year-end true-up of CRISP revenue (adjustment to match revenue with expenses).

o Testing and continuing education revenues were below budget due to lower activity.

EXPENDITURES

• Expenses (excluding depreciation) o Contracts and Consultants was under budget primarily due to lower contractor costs

in the CRISP program. • Fixed Asset Additions

o Under budget due primarily to the IT department reducing fixed asset spending to accommodate higher spending in software and other costs.

• NERC was under budget in total by 2.8%. Excluding the impacts of CRISP, NERC was 1.2% under budget for the year.

OPERATING RESERVE INCREASE (INCREASE)

• Actual reserve increase from operations was higher than budget by $1.7 million.

OverFUNDING Actual Budget (Under)

Revenues 72.1$ 72.4$ (0.3)$ Funding from Reserves Assessment Stabilization Reserve 0.6 0.6 -

TOTAL FUNDING 72.7$ 73.0$ (0.3)$

EXPENDITURESExpenses (excluding Depreciation) 68.5$ 69.2$ (0.7)$ Fixed Asset Additions 2.6 3.9 (1.3)

TOTAL EXPENDITURES 71.1$ 73.1$ (2.0)$

RESERVE INCREASE (DECREASE) 1.6$ (0.1)$ 1.7$

Year-to-Date Actual Results($ millions)


Detailed Operating Results

Total NERC (including CRISP)

Variances by Revenue and Expense Category

Following is a brief summary of variances by major categories:

• Meeting, Travel, and Conference Call Expense o Meeting expenses were over budget due to higher attendance at workshops and

conferences, which were substantially offset by increased revenues for these events. • Contracts and Consultants Expense

o Under budget due to lower costs from the CRISP program contractor and lower than expected spending in several departments. This was partially offset by unbudgeted costs for SPP RE transition work and a cyber-security supply chain risk study.

• Fixed Asset Additions (excluding depreciation) o Under budget due primarily to the IT department reducing fixed asset spending to

accommodate higher spending in software and other costs.

YTD Actual YTD Budget YTD

Over (Under) %

Over (Under) TOTAL FUNDING 72,674,868$ 72,981,221$ (306,353)$ (0.4%)

EXPENDITURESPersonnel 41,326,984$ 40,969,105$ 357,879$ 0.9%Meetings, Travel, and Conference Calls 3,659,871 3,395,100 264,771 7.8%Contracts and Consultants 12,483,751 13,724,185 (1,240,434) (9.0%)Rent and Facilities 2,955,432 3,091,804 (136,372) (4.4%)Office Costs, Professional, and Misc.* 7,894,725 7,942,084 (47,359) (0.6%)Other Non-Operating Expenses 151,341 138,878 12,463 9.0%Fixed Asset Additions* 2,625,596 3,874,000 (1,248,404) (32.2%)

TOTAL EXPENDITURES 71,097,699$ 73,135,156$ (2,037,457)$ (2.8%)

RESERVE INCREASE (DECREASE) 1,577,169$ (153,935)$ 1,731,104$ (1124.6%)

FTEs 191.1 199.3 (8.2) (4.1%)

* Excludes depreciation expense


CONTRACTS and CONSULTANTS YTD Actual YTD Budget YTD

Over (Under) Reliability Standards 100,000$ -$ 100,000$ Compliance Assurance 43,750 50,000 (6,250) Compliance Analysis, Registration and Certification - - - Compliance Enforcement 42,131 - 42,131 Reliability Assessment and System Analysis 192,500 525,000 (332,500) Reliability Risk Management 1,821,797 1,867,525 (45,728) E-ISAC 1,026,960 1,100,200 (73,240) Training, Education, and Personnel Certification 448,740 598,900 (150,160) General and Administrative and Executive 94,946 80,000 14,946 Legal and Regulatory - - - Policy and External Affairs 24,225 20,000 4,225 Information Technology 2,046,484 2,123,966 (77,482) Human Resources 611,676 640,000 (28,324) Finance and Accounting 370,502 427,000 (56,498)

TOTAL (excluding CRISP) 6,823,712$ 7,432,591$ (608,880)$ CRISP 5,660,040 6,291,594 (631,554)

TOTAL (including CRISP) 12,483,751$ 13,724,185$ (1,240,434)$


Variances by Department / Program

• Reliability Standards: Under budget primarily due to reduced personnel costs resulting from the reallocation of resources to other departments.

• Compliance Assurance: Over budget mainly because of additional personnel costs resulting from the reallocation of resources from other departments.

• Compliance Enforcement: Over budget largely due to higher personnel costs due to lower than budgeted attrition, CMEP licensing and hosting costs (funded from the IT department budget), and unbudgeted SPP RE transition costs.

• Reliability Assessment and System Analysis: Under budget primarily because of lower

than budgeted spending in contracts and consultants.

• Information Technology: Under budget, mainly due to lower fixed asset spending, which was partially offset by higher personnel costs due to a lower attrition rate, as well as CMEP and other costs that were funded by IT and charged to program areas.

• CRISP: Under budget primarily due lower than budgeted costs from the program

contractor, as well as lower than expected software and personnel expenses.

DIRECT EXPENSES and NET FIXED ASSETS YTD Actual YTD Budget YTD

Over (Under) Reliability Standards 2,966,471$ 3,293,666$ (327,195)$ Compliance Assurance 4,866,918 4,520,550 346,369 Compliance Analysis, Registration and Certification 2,561,118 2,748,762 (187,644) Compliance Enforcement 4,311,995 3,894,123 417,872 Reliability Assessment and System Analysis 3,781,922 4,105,476 (323,554) Reliability Risk Management 7,766,572 7,654,264 112,307 E-ISAC 7,180,329 7,357,222 (176,893) Training, Education, and Personnel Certification 1,423,730 1,706,574 (282,844) General and Administrative and Executive 7,750,004 7,874,321 (124,317) Legal and Regulatory 2,969,870 2,914,377 55,494 Policy and External Affairs 2,483,605 2,221,826 261,779 Information Technology 10,652,295 11,266,626 (614,331) Human Resources 1,487,049 1,704,459 (217,410) Finance and Accounting 4,286,782 4,008,326 278,456 TOTAL (excluding CRISP) 64,488,660$ 65,270,572$ (781,912)$ CRISP 6,609,039 7,864,584 (1,255,545) TOTAL EXPENSES and NET FIXED ASSETS 71,097,699$ 73,135,156$ (2,037,457)$


SUPPLEMENTAL SCHEDULE 1

Beginning Budgeted Budgeted Other Net Financing Ending

Reserve Account Balance (1) Funding Uses Funding (Uses) (2) Activity (3) Balance

Operating Contingency 3,680,094$ 600,000$ (231,393)$ 1,922,784$ (717,274)$ 5,254,212$

Future Obligations 3,015,787 - (480,457) - - 2,535,330$

Assessment Stabilization 2,671,000 - (600,000) - - 2,071,000$

System Operator 477,484 77,458 - 26,200 - 581,142

CRISP 500,000 - - - - 500,000 Total Reserves 10,344,365$ 677,458$ (1,311,850)$ 1,948,984$ (717,274)$ 10,941,683$

NOTES:

Year-End Actual Reserves

(2) The column Other Funding (Uses) primarily reflects the net impact of normal operations. For example, under normal circumstances, if NERC was tracking well under budget in actual expenditures, this would reflect additional funds into the reserve account. It also reflects the increase or decrease in working capital during the period.

(3) Net financing activity in 2018 reflects principal debt repayments for borrowings originated in 2015 and 2016. NERC did not make the budgeted borrowings for 2017 and 2018 in light of a favorable working capital position. Not making the 2017 borrowing saved $483K in working capital in 2018 and contributed to the higher operating contingency reserve. The savings from the 2018 borrowing decision will be realized in 2019.

(1) Some 2018 beginning balances have been adjusted from the 12/31/2017 variance report balances as the result of a reconciliation to the final audited balance sheet.



Expected

Project Actual Expected Over (Under)

Projects in Progress Budget (1) Spend Spend Budget

CMEP Technology Project (2017-2020) 5,103,000$ 1,678,935$ 5,103,000$ -$

Entity Registration - CORES (2018-2019) 1,200,000 575,897 1,200,000 -

Actual

Project Actual Over (Under)

Projects Completed in 2018 Budget (1) Spend Budget

NERC.com Phase 2 300,000$ 281,530$ (18,471)$

E-ISAC Document Management 215,000 215,000 -

SPP RE Transition - 460,983 460,983

CFR Enhancements 122,700 122,700 -

E-ISAC Portal Enhancements 743,475 667,524 (75,951)

NOTES:

IT Projects

(1) The Project Budget noted above usually corresponds to the approved business case for each project and funds for each project are drawn from the available budget. In some projects, business cases may not be prepared, particularly when a project is smaller and/or may be in response to a FERC order. * Some of these projects span multiple years, so the amounts above do not represent a single budget year expenditure.

* The amounts noted above do not include internal labor and reflect only external (consultant) costs of the projects.


SUPPLEMENTAL SCHEDULE 2 (continued)

CMEP Technology Project (Started May 2017 / Planned Completion Dec 2020) This project will provide registered entities, Regional Entities, and NERC the ability manage the compliance and enforcement processes and data in a single ERO Enterprise system. Today, those processes and related data are managed across three separate systems that have to be synchronized (webCDMS, CITS, and CRATS). Entity Registration - CORES (Started Dec 2017 / Planned Completion Dec 2019) NERC is undertaking an effort to both standardize and modernize the Entity Registration process. The discovery phase of the Centralized Organization Registration Entity System (CORES) project includes the capture of Region-specific needs, variations, and exceptions in the registration process. CORES will be a centralized entity registration process, which will require the retirement of registration in CDMS, CITS, and CRATS. The Joint Registration Organization (JRO) portion of the project will be combined with the CORES production release in 2019. NERC.com Phase 2 (Started May 2017 / Completed Feb 2018) In response to feedback from stakeholders, this project was a first step to improve the usability and search capability of the public NERC.com website. The project also enhanced the stability of the NERC.com platform with a technology upgrade from SharePoint 2010 to SharePoint 2016 in Azure. E-ISAC Document Management (Started Apr 2018 / Completed Oct 2018) NERC launched the Document Management Program to provide a secure and efficient method of creating, collaborating, storing, and disseminating the vast amount of information produced at NERC. The E-ISAC was the final business unit to be implemented. SPP RE Transition (Started Mar 2018 / Completed Nov 2018) Due to the SPP RE dissolution, NERC assessed the changes required to applications that contained SPP RE data and the reassignment/classification of such information. The inventory required the mapping utility, functionality, migration, and support efforts by both Region and entity. Activities included facilitated discussions with IT and business owners of impacted applications to capture and document high-level, as well as more detailed, requirements necessary to support the transition of registered entities from SPP RE to MRO and SERC. CFR Enhancements (Started Sep 2018 / Completed Dec 2018) This project is an enhancement to the Coordinated Functional Requirement (CFR) functionality, which is going to update the standard requirements that appear in the system, as well as performance improvement.


E-ISAC Portal Enhancements (Started Jan 2018 / Completed Dec 2018) As requested by and prioritized by the Member Executive Committee (MEC), certain enhancements were made to the E-ISAC portal during 2018 related to areas such as email notifications, user communities, and STIX-TAXII.



YTD AnnualFUNDING Actual Budget Over (Under)

Assessments 14,297,524$ 14,297,524$ -$ Other Funding 7,131,561 7,553,073 (421,512)

TOTAL FUNDING 21,429,086$ 21,850,597$ (421,512)$

EXPENDITURESPersonnel Expense 5,603,291$ 6,004,182$ (400,891)$ Meeting Expense 825,893 418,000 407,893 Operating Expenses (excluding Depreciation) 7,339,251 8,549,624 (1,210,373) Fixed Assets (excluding Depreciation and Fixed Asset Allocation) 20,932 250,000 (229,068) Total Direct Costs (excluding Depreciation and Allocations) 13,789,368$ 15,221,806$ (1,432,438)$ Indirect Expense Allocation 6,308,060 6,519,415 (211,355) Fixed Asset Allocation (360,308) 109,377 (469,684)

TOTAL EXPENDITURES (excluding Depreciation, including Allocations) 19,737,120$ 21,850,597$ (2,113,477)$

RESERVE INCREASE (DECREASE) 1,691,966$ -$ 1,691,966$

E-ISAC and CRISPSummary of Activity

TOTAL E-ISAC (including CRISP)



(continued)


Assessments 1,371,768$ 1,371,768$ -$ Other Funding 6,601,419 7,348,144 (746,725)

TOTAL FUNDING 7,973,187$ 8,719,912$ (746,725)$

EXPENDITURESPersonnel Expense 734,800$ 944,070$ (209,270)$ Meeting Expense 82,114 48,000 34,114 Operating Expenses (excluding Depreciation) 5,792,126 6,772,514 (980,389) Fixed Assets (excluding Depreciation and Fixed Asset Allocation) - 100,000 (100,000) Total Direct Costs (excluding Depreciation and Allocations) 6,609,039$ 7,864,584$ (1,255,545)$ Indirect Expense Allocation 913,279 841,215 72,065 Fixed Asset Allocation (52,165) 14,113 (66,278)

TOTAL EXPENDITURES (excluding Depreciation, including Allocations) 7,470,153$ 8,719,912$ (1,249,759)$

RESERVE INCREASE (DECREASE) 503,034$ -$ 503,034$


Assessments 12,925,757$ 12,925,757$ -$ Other Funding 530,142 204,929 325,213

TOTAL FUNDING 13,455,899$ 13,130,686$ 325,213$

EXPENDITURESPersonnel Expense 4,868,492$ 5,060,112$ (191,621)$ Meeting Expense 743,779 370,000 373,779 Operating Expenses (excluding Depreciation) 1,547,126 1,777,110 (229,984) Fixed Assets (excluding Depreciation and Fixed Asset Allocation) 20,932 150,000 (129,068) Total Direct Costs (excluding Depreciation and Allocations) 7,180,329$ 7,357,222$ (176,893)$ Indirect Expense Allocation 5,394,781 5,678,200 (283,419) Fixed Asset Allocation (308,143) 95,263 (403,406)

TOTAL EXPENDITURES (excluding Depreciation, including Allocations) 12,266,967$ 13,130,686$ (863,719)$

RESERVE INCREASE (DECREASE) 1,188,932$ -$ 1,188,932$

CRISP

E-ISAC (excluding CRISP)

NERC Summary of Unaudited Results for 2018Scott Jones, Senior Vice President, Chief Financial and Administrative OfficerFinance and Audit Committee MeetingFebruary 6, 2019

RELIABILITY | ACCOUNTABILITY2

• Total funding is slightly under budget CRISP revenue, after true-ups, is lower than budget. CRISP program

contractor costs were under budget, contributing to an adjustment to CRISP revenue.

• Total expenditures were $2.0M (2.8%) under budget Lower-than-expected spending for contracts and consultants Less-than-budgeted costs from PNNL for CRISP Excluding CRISP, NERC’s total expenses were under budget 1.2%

• Net impact was $1.6M increase in operating reserves Loan principal payments were $483k less than budgeted, contributing to

larger reserve increase

Summary of 2018 Unaudited Results


• Total reserves balance is $11.0M Operating Contingency Reserve (OCR) – $5.3M Assessment Stabilization Reserve (ASR) – $2.1M Future Obligation Reserve – $2.5M System Operator Reserve – $581k CRISP Reserve – $500k

2018 Year-End Reserves


• Operating Contingency Reserve ($5.3M) Began year with $3.7M Budgeted $600k transfer from ASR Budgeted use of $231k Generated $1.9M from under budget spending in operations Used $717k for loan principal payments

• Assessment Stabilization Reserve ($2.1M) Began year with $2.7M Used $600k for budgeted offset to assessments

OCR and ASR Details in 2018


• Financial audit by Grant Thornton will begin in March• Auditor’s report and findings will be presented to FAC in May• Adjustments between budget presentation and accounting

guidance for audit, primarily for leases and capitalized labor on IT projects (no effect on operating reserves)

Next Steps

Agenda Item 2b Finance and Audit Committee Meeting February 6, 2019

Combined ERO Enterprise (NERC and Regional Entities) Summary of Unaudited Results December 31, 2018 The ERO Enterprise was under budget $7.8M (4.0%) for combined expense and fixed asset (capital) spending. The budget variances ranged from 50.7% under budget to 15.9% over budget.

• FRCC was over budget $352k (4.7%) largely as a result of unbudgeted retention bonuses.

• MRO was over budget $1.9M (15.9%), which is attributable primarily to higher personnel andoperating expenses associated with the SPP RE transition. MRO’s total transition cost is $2.2million, an increase from the originally projected $1.5 million. This will not impact the 2018 or2019 assessments since transition costs have been funded through the transfer of SPP REassessments to MRO; however, the transferred SPP RE assessments exceeded $2.2 million andthus impacts the year-end working capital balance. A reassessment of funding will take placewhen the 2020 business plan and budget is created to determine the management of excessfunding.

• NPCC was under budget $688k (4.6%) mainly as a result of staff retirements, cost controls in travel and meetings expenses, and contract negotiations for office costs.

• SPP RE was under budget $5.5M (50.7%), which is attributable to changing operations associatedwith the dissolution of SPP RE (CMEP activities ended on June 30, 2018 and the RegionalDelegation Agreement terminated on August 31, 2018). Excess funding and working capital of$5.4M, as well as approximately $465k in penalty monies, were transferred to MRO and SERC byDecember 31, 2018.

Entity $ %

NERC 71,097,699$ 73,135,157$ (2,037,458)$ (2.8%)FRCC 7,866,174 7,514,110 352,064 4.7%MRO 13,592,158 11,726,736 1,865,422 15.9%NPCC 14,419,307 15,106,968 (687,661) (4.6%)

RF 20,886,485 21,383,900 (497,415) (2.3%)SERC 17,302,829 17,182,868 119,961 0.7%

SPP RE 5,323,660 10,793,195 (5,469,535) (50.7%)Texas RE 11,343,290 12,656,959 (1,313,669) (10.4%)

WECC 26,984,989 27,097,344 (112,355) (0.4%)

188,816,591$ 196,597,237$ (7,780,646)$ (4.0%)

Total Budget (Total Expenses plus the Increase (Decrease) in Fixed Assets) 2018 YTD

Actual 2018 YTD

Budget Over (Under)

Summary of Unaudited December 31, 2018 Results – ERO Enterprise (NERC and Regional Entities Combined) 2

• Texas RE was under budget $1.3M (10.4%) due to staff vacancies and lower-than-expected benefits, travel, contracts and consultants, utility, IT, and professional services costs.

Variances by Expense and Fixed Asset Categories Personnel Expenses For the ERO Enterprise, personnel expenses, consisting of salaries, payroll taxes, benefits, and retirement costs, were collectively under budget $1.9M (1.5%), ranging from 42.8% under budget to 17.3% over budget. All entities in the ERO Enterprise were under budget in FTEs.

• FRCC was over budget $526k (8.9%) primarily due to unbudgeted retention bonuses. This is

partially offset by a higher than budgeted attrition rate, a 2018 new budgeted position that has not been filled, and lower-than-budgeted education expenses, medical expenses, and retirement costs.

• MRO was over budget $1.5M (17.3%) predominately due to increased personnel costs related to the SPP RE transition.

• SPP RE was under budget $2.3M (42.8%), which is attributable to the loss of SPP RE staff throughout 2018 (open positions were not filled), the conclusion of CMEP activities on June 30, 2018, and the retention of only four SPP RE employees to complete wind-down activities for the period of July 1 to August 31, 2018, the date of the Regional Delegation Agreement termination.

• Texas RE was under budget $841k (8.4%) as a result of staff vacancies that were not filled until later in December, broker negotiations that allowed actual costs for health benefits to remain flat, lower-than-budgeted education reimbursement and training costs, and lower participation in savings and retirement plans.

Projected2018 2018 Year-End 2018 2018 Over % of

Entity Actual Budget $ % Variance Actual Budget (Under) Budget

NERC 41,326,984$ 40,969,106$ 357,878$ 0.9% 0.0% 191.1 199.3 (8.2) (4.1%)FRCC 6,404,647 5,878,792 525,855 8.9% 0.0% 21.7 30.6 (8.9) (29.1%)MRO 10,042,832 8,564,796 1,478,036 17.3% 0.0% 48.4 49.0 (0.6) (1.3%)NPCC 9,478,519 9,820,771 (342,252) (3.5%) 0.0% 36.5 36.9 (0.3) (0.9%)

RF 17,378,075 17,928,990 (550,915) (3.1%) 0.0% 74.0 76.2 (2.2) (2.9%)SERC 12,497,785 12,937,387 (439,602) (3.4%) 0.0% 68.3 75.0 (6.8) (9.0%)

SPP RE 3,011,934 5,268,929 (2,256,995) (42.8%) 0.0% 17.8 32.3 (14.5) (44.8%)Texas RE 9,118,104 9,958,819 (840,715) (8.4%) 0.0% 56.0 60.0 (4.0) (6.7%)

WECC 20,032,902 19,871,269 161,633 0.8% 0.0% 132.4 143.0 (10.6) (7.4%)

129,291,782$ 131,198,859$ (1,907,077)$ (1.5%) 0.0% 646.1 702.2 (56.2) (8.0%)

* Represents equivalent full time positions from a budget and actual financial perspective and does not necessarily represent headcount.

FTEs*Personnel Expenses

Over (Under)


Travel, Meeting, and Conferencing Expenses For the ERO Enterprise, travel, meeting, and conferencing expenses were collectively under budget $1.4M (13.4%).

• NERC was over budget $265k (7.8%) due to higher attendance at workshops and conferences, which is substantially offset by increased revenues for these events.

• FRCC was under budget $54k (21.6%) largely because of reduced staff travel in the reliability assessments department and meeting expenses in the training and compliance departments.

• MRO was under budget $286k (38.2%) due to (1) fewer face-to-face working group meetings; (2) reduced staff travel due to an increase in the use of MRO’s facilities to host meetings; and (3) staff resources being shifted temporarily to SPP-related travel.

• NPCC was under budget $295k (24.1%) mainly from streamlining the NPCC Spring and Fall Compliance and Standards Workshops from a three-day format to a two-day format, and continuing efforts to (1) hold meetings onsite or at member facilities and (2) limit the number of attendees at offsite meetings and encourage participation via teleconference when available.

• RF was under budget $64k (6.0%) largely due to travel activity being less than budgeted.

• SERC was under budget $196k (21.4%) primarily because various meetings were cancelled due to weather or deferred to next year, and lower compliance-related travel due to the use of contractors in lieu of FTEs.

• SPP RE was under budget $437k (78.3%) as a result of the loss of SPP RE personnel throughout the year and the completion of SPP RE CMEP activities at the end of the second quarter.

• Texas RE was under budget $113k (26.6%) because of cost savings efforts for workshops and lower-than-expected travel expenses due to local audits and cancelled or rescheduled meetings.

• WECC was under budget $269k (12.0%) primarily due to reduced meetings and less-than-anticipated meeting attendance and conference call usage.

2018 2018 Entity

Budget Meeting Travel Conferencing Actual $ %

NERC 3,395,100$ 312,876$ (69,143)$ 21,038$ 3,659,871$ 264,771$ 7.8%FRCC 252,241 (14,209) (39,742) (458) 197,832 (54,409) (21.6%)MRO 749,380 (4,412) (281,739) - 463,229 (286,151) (38.2%)NPCC 1,224,550 (91,706) (197,441) (6,083) 929,320 (295,230) (24.1%)

RF 1,064,025 11,970 (63,808) (11,548) 1,000,639 (63,386) (6.0%)SERC 917,569 (50,083) (128,534) (17,414) 721,538 (196,031) (21.4%)

SPP RE 558,500 (69,651) (367,588) - 121,261 (437,239) (78.3%)Texas RE 423,651 (9,928) (99,341) (3,539) 310,843 (112,808) (26.6%)

WECC 2,231,994 (225,127) (13,580) (30,238) 1,963,049 (268,945) (12.0%)

10,817,010$ (140,270)$ (1,260,916)$ (48,242)$ 9,367,582$ (1,449,428)$ (13.4%)

Over (Under)

Meeting, Travel, and Conferencing Expenses


Operating Expenses For the ERO Enterprise, operating expenses, consisting of consultants and contracts expenses, office rent, office costs, professional services, miscellaneous costs, and depreciation expense, were collectively under budget $166k (0.3%).

• MRO was over budget $371k (13.7%) due to the impact of the SPP RE transition.

• RF was over budget $131k (5.1%) primarily due to (1) higher depreciation as a result of last year’s expenditures for the corporate internal and public websites, and office improvements being more than budgeted, and (2) unbudgeted contracts and consultant costs associated with a data warehouse project.

• SERC was over budget $660k (19.2%) mainly because of (1) contractors being used in lieu of FTEs; (2) lease of additional office space; (3) increased IT-related purchases and office supply and maintenance costs; and (4) legal fees associated with employment matters and a review of SERC bylaws.

• SPP RE was under budget $881k (66.7%), which is mainly attributable to the completion of audit activities and termination of all contracts on June 30, 2018.

• Texas RE was under budget $366k (15.2%) due to (1) lower-than-anticipated utility and maintenance expenses; (2) savings from contractor consolidation for studies and surveys; and (3) lower-than-anticipated IT and legal professional services.

Indirect Expense Allocation NPCC and WECC allocate overhead to their non-statutory functions, and SPP RE receives an allocation of overhead from SPP, Inc. Year-to-date, NPCC allocated $38k (9.0%) less than expected due to lower administrative services expenses. SPP RE’s allocation from SPP, Inc. was $2.1M (56.4%) less than expected, primarily because actual SPP, Inc. corporate overhead costs were below the budget amount due to the dissolution of SPP RE. WECC allocated $30k (5.5%) less than budgeted primarily due to higher labor float in the non-statutory area.

2018 Contracts & Professional 2018 Entity

Budget Consultants Office Rent Office Costs Services Miscellaneous Depreciation Actual $ %

NERC 26,352,372$ (1,240,434)$ (136,372)$ 162,837$ (236,947)$ 26,751$ 1,506,749$ 26,434,956$ 82,584$ 0.3%FRCC 1,368,922 72,214 (92,928) (17,429) 13,496 - (13,174) 1,331,101 (37,821) (2.8%)MRO 2,704,390 241,971 7,344 (112,988) 258,687 - (23,955) 3,075,449 371,059 13.7%NPCC 4,632,100 130,776 (26,771) (98,646) (50,150) (3,800) (14,883) 4,568,626 (63,474) (1.4%)

RF 2,566,710 56,047 20,997 1,008 (15,157) 1,230 66,814 2,697,649 130,939 5.1%SERC 3,435,978 346,768 158,622 178,437 127,240 (5,550) (145,554) 4,095,941 659,963 19.2%

SPP RE 1,320,088 (820,405) - (3,589) (57,129) - - 438,965 (881,123) (66.7%)Texas RE 2,412,989 (91,438) (107,517) (18,464) (158,318) - 10,085 2,047,337 (365,652) (15.2%)

WECC 5,687,896 (93,162) 41,440 (28,588) (28,819) - 46,538 5,625,305 (62,591) (1.1%)

50,481,445$ (1,397,663)$ (135,185)$ 62,578$ (147,097)$ 18,631$ 1,432,620$ 50,315,329$ (166,116)$ (0.3%)

Operating Expenses

Over (Under)


Fixed Asset (Capital) Additions For the ERO Enterprise, fixed asset (capital) additions (excluding the reversal of depreciation expense) were under budget $1.1M (20.9%).

• NERC was under budget $1.3M (32.2%), due primarily to the IT department reducing fixed asset spending to accommodate higher spending in software and other costs.

• FRCC was under budget $95k (74.4%) largely because of (1) fewer enhancements being made to compliance software and (2) indirect computer and software expenses being less than anticipated along with reduced allocations to statutory functions because of reduced FTEs.

• MRO was over budget $279k (97.3%) due to the impacts of the SPP RE transition.

• NPCC was under budget $39k (34.1%) mainly because no new functionality was added for the CDAA and CITS tools and the timing of scheduled software development projects, which included the continued roll out of NPCC’s document management system.

• RF was over budget $53k (26.7%) primarily as a result of costs associated with the redesign and development of the corporate extranet site and leasehold improvements for some minor office modifications.

• SERC was under budget $50k (14.5%) due to limited CUG development costs and expensing of computer purchases previously budgeted as fixed assets, which is partially offset by expenses for CRISP and leasehold improvements for new office space.

• Texas RE was over budget $16k (52.0%), which is attributable to software renewals being higher than expected.

• WECC was over budget $30k (44.0%) primarily due to the unbudgeted purchase of video conferencing equipment to increase effectiveness of web and telephone-based meetings.

2018 Equipment Leasehold Allocation of 2018

Entity

Budget CapEx Improvements Fixed Assets Actual $ %

NERC 3,874,000$ (151,708)$ -$ (946,697)$ (150,000)$ -$ 2,625,595$ (1,248,405)$ (32.2%)FRCC 127,337 (60,000) - (34,735) - - 32,602 (94,735) (74.4%)MRO 286,170 (23,032) 85,319 4,900 211,336 - 564,693 278,523 97.3%NPCC 115,000 (39,223) - - - - 75,777 (39,223) (34.1%)

RF 197,500 18,802 6,644 - 27,315 - 250,261 52,761 26.7%SERC 345,002 (210,842) 22,789 65,499 72,631 - 295,079 (49,923) (14.5%)

SPP RE - - - - - - - - 0.0%Texas RE 30,000 15,591 - - - - 45,591 15,591 52.0%

WECC 69,301 3,135 - 27,002 - 357 99,795 30,494 44.0%

5,044,310$ (447,277)$ 114,752$ (884,031)$ 161,282$ 357$ 3,989,393$ (1,054,917)$ (20.9%)

Fixed Asset Additions (Excludes Depreciation)

Over (Under)Computer &

Software CapEx

Furniture and Fixtures

CapEx


Working Capital and Operating Reserves (excluding CRISP) The ERO Enterprise began the 2018 year with approximately $5.5M more in reserves than anticipated in the 2018 budget. This was primarily because of favorable budget variances from the 2017 year.

For the end of 2018, the ERO Enterprise budgeted the reduction of $1.3M in reserves while actually generating $4.5M. This resulted in the unanticipated addition of $5.8M in total reserves.

The combined effect of higher balances at the beginning of the year and adding additional reserves during 2018 resulted in a combined year-to-date reserve balance of $37.4M, which is $11.4M more than was anticipated in the 2018 budget.

Entity Actual Budget Over

(Under)NERC 9,844,365$ 7,478,733$ 2,365,632$ FRCC 1,321,468 1,134,625 186,843 MRO 2,384,548 1,818,473 566,075 NPCC 5,017,751 4,499,893 517,858

RF 4,457,805 3,759,627 698,178 SERC 1,359,722 686,729 672,993

SPP RE 725,236 775,930 (50,694) Texas RE 2,422,616 2,352,967 69,649

WECC 5,418,773 4,894,555 524,218 32,952,284$ 27,401,532$ 5,550,752$

2018 Beginning Reserve Balances


(Under)NERC 597,318$ (1,454,543)$ 2,051,861$ FRCC (860,168) (508,447) (351,721) MRO 1,975,635 644,184 1,331,451 NPCC 88,127 (626,181) 714,308

RF 412,588 568,611 (156,023) SERC 1,587,929 1,013,271 574,658

SPP RE (725,237) (775,930) 50,693 Texas RE 263,917 (1,107,973) 1,371,890

WECC 1,128,656 899,706 228,950 4,468,765$ (1,347,302)$ 5,816,067$

2018 Change in Reserve Balances


The ERO Enterprise began the 2019 budget year with $7.3M in additional reserves above what was planned in the combined budgets.


(Under)NERC 10,441,683$ 6,024,190$ 4,417,493$ FRCC 461,300 626,178 (164,878) MRO 4,360,183 2,462,657 1,897,526 NPCC 5,105,878 3,873,712 1,232,166

RF 4,870,393 4,328,238 542,155 SERC 2,947,651 1,700,000 1,247,651

SPP RE (1) - (1) Texas RE 2,686,533 1,244,994 1,441,539

WECC 6,547,429 5,794,261 753,168 37,421,049$ 26,054,230$ 11,366,819$

2018 Year-End Reserve Balances

Entity

2018 Year-End

Actual Balance

2019BeginningBudgetedBalance

Over(Under)

NERC 10,441,683$ 8,453,020$ 1,988,663$ FRCC 461,300 1,629,719 (1,168,419) MRO 4,360,183 1,762,886 2,597,297 NPCC 5,105,878 4,453,571 652,307

RF 4,870,393 4,318,238 552,155 SERC 2,947,651 2,328,184 619,467

Texas RE 2,686,533 1,314,649 1,371,884 WECC 6,547,429 5,838,401 709,028

37,421,050$ 30,098,668$ 7,322,382$

2018 Ending Reserves vs 2019 Beginning Reserves

Combined ERO Enterprise Summary of Unaudited Results 2018Scott Jones, Senior Vice President, Chief Financial and Administrative OfficerFinance and Audit Committee MeetingFebruary 6, 2019


• Combined ERO Enterprise was under budget $7.8M (4.0%) Personnel expenses were slightly under budget (-1.5%) predominately due

to staff vacancies Meeting and travel expenses were under budget (-13.4%) mainly due to

meeting cost savings efforts, reduced or rescheduled meetings, and lower-than-expected travel activity

Operating expenses were slightly under budget (-0.3%) Fixed assets were under budget (-20.9%) primarily due to lower spending

Summary of 2018 Unaudited Results (by expense)


• NERC and five Regional Entities were under budget NERC (-2.8%) – lower operating and fixed asset expenses NPCC (-4.6%) – lower personnel, meetings, travel, and operating expenses RF (-2.3%) – lower personnel and travel expenses SPP RE (-50.7%) – lower expenses overall due to dissolution of operations Texas RE (-10.4%) – lower personnel, travel, and operating expenses WECC (-0.4%) – lower meeting expenses

• Three Regional Entities were over budget FRCC (+4.7%) – higher personnel expenses MRO (+15.9%) – higher personnel and operating expenses SERC (+0.7%) – higher operating expenses

Summary of 2018 Unaudited Results(by Region)


• $33.0M – Total reserves as of January 1, 2018 Started $5.5M over combined budgets

• $37.4M – Total reserves as of December 31, 2018 Starting 2019 with $7.3M more than expected

2018 Year-End Reserves

FRCC Regional Entity Division Unaudited Budget to Actual

Variance Comparison as of December 31, 2018

Summary

For the twelve months ending December 31, 2018, FRCC is $352K under budget.

Total Funding – On Budget

Workshop funding is $5K unfavorable to budget due to less participation in the SOS trainingevent than originally anticipated.

Interest income is $5K favorable due to a reclassification from expense to income in 2018.

Total Expenses – Unfavorable Variance $434K

Personnel Expenses (Actual - $526K over budget)o The unfavorable variance is primarily due to unbudgeted retention bonuses partially

offset by a higher than budgeted attrition rate, a 2018 new budgeted position that has notbeen filled and lower than budgeted education expenses, medical expenses, andretirement costs.

Meeting Expenses (Actual - $54K under budget)o The favorable variance is primarily due to a reduction in staff travel in the reliability

assessments department and meeting expenses in the training and compliancedepartments.

Operating Expenses (Actual - $38K under budget)o The favorable variance is primarily due to the following:

$93K lower rent expense due to a decrease in allocated rent costs and lower thanthe budgeted lease obligations

$32K due to decreased software costs $13K due to decreased depreciation in line with the variance in capital

expenditures The favorable variance is partially offset by consulting costs which are $104K

over budget due to increased use of consultants resulting from a higher thanbudgeted attrition and additional legal and accounting expenses which are $14Kover budget.

Total Fixed Asset Expense – Favorable Variance $82K

Software CapEx (Actual - $60K under budget)

Agenda Item 2c Finance and Audit Committee Meeting February 6, 2019

o The favorable variance is primarily due to fewer enhancements to the Compliance software

Computers CapEx (Actual - $35K under budget) o The favorable variance is primarily due to indirect computer and equipment expenses

being less than anticipated along with reduced allocations to statutory for reduced FTEs

1

Sue Clarke, Vice President Finance and Administration P: 651.855.1707 F: 651.855.1712

E: [email protected] January 22, 2019

Mr. Scott Jones Mr. Andy Sharp North American Electric Reliability Corporation (NERC) RE: Unaudited Midwest Reliability Organization (MRO) 2018 Fourth Quarter Statement of Activity and

Cash Flow through December 31, 2018

Dear Mr. Jones and Mr. Sharp:

MRO prepared the 2018 fourth quarter variance report using NERC’s guidelines for reporting.

1. MRO has not had any formal changes to its 2018 budget as approved by FERC. The assessment funding projection for 2018 is reported as the assessment funding amount in MRO’s FERC-approved 2018 budget (refer to Table 2).

2. The budget amounts of expenses and fixed assets for this reporting period match the budget amounts approved by FERC.

3. MRO’s year-end projected expenses are expected to be higher than budgeted. Over-budget variances are quantified and explained for each cost category primarily related to the SPP RE transition (refer to Table 1).

The following tables address the above reporting guidelines: Table 1: Preliminary Year-End Expenses (Combined) Table 2: Preliminary Unaudited FERC-Approved 2018 Budget Table 3: Preliminary SPP RE Transition Costs

The budget-to-actual variances greater than $10,000 and 10 percent are explained below.

Personnel Expenses (Variance of $1,478,036 (17.3%) over budget) • MRO’s FERC-approved budget for Personnel Expenses is over budget by 2.9 percent due to

organization changes that have occurred • 83.3 percent or $1,231,552 of the variance is directly related to the SPP RE transition and will be

funded by an assessment from SPP RE

mailto:[email protected]

2

Meeting Expenses (Variance of $286,151 (38.2%) under budget) MRO’s FERC-approved budget for Meeting Expenses is under budget due to: (1) fewer face-to-face working group meetings; (2) reduced staff travel due to an increase in the use of MRO’s facilities to host meetings; and (3) staff resources being shifted temporarily to SPP-related travel.

Operating Expenses (Variance of $371,058 (13.7%) over budget) • MRO’s FERC-approved budget for Operating Expenses is under budget by 4.6 percent • SPP RE transition-related Operating Expenses were $495,634, funded by an assessment from

SPP RE

Budget Outlook • The preliminary unaudited FERC-approved 2018 budget is under budget by 2.7 percent • The 2018 combined budget exceeds MRO’s FERC-approved budget by $1,865,421 or 15.9

percent

The 2018 FERC-approved budget does not include transition costs of $2.2 million, an increase from the originally projected $1.5 million, related to the SPP RE dissolution. This will not impact the 2018 assessments since transition costs have been funded through a transfer of SPP RE assessments to MRO; however, the transferred assessment exceeded $2.2 million and thus impacts the year-end working capital balance. A reassessment of funding will take place when the 2020 business plan and budget is created to determine the management of excess funding.

If you have any questions regarding this report, please contact me.

Thank you,

Sue Clarke Sue Clarke Vice President Finance and Administration

Cc: Sara Patrick, MRO President and CEO

3

(In Whole Dollars)Unaudited 2018 End Of Year

2018 Budget

2018 Variance %

FundingERO Funding

ERO Assessments 10,730,104$ 10,730,104$ - Penalty Sanctions 142,000 142,000 -

Total ERO Funding 10,872,105$ 10,872,104$ $ -

Federal GrantsMembership Dues - - - Testing Fees - - - Services & Software - - - Workshops - - - Interest - - - Miscellaneous/Transitional Funding 4,695,689 1,498,816 3,196,873

Total Funding 15,567,794$ 12,370,920$ 3,196,873$

ExpensesPersonnel Expenses

Salaries 7,613,052$ 6,250,448$ 1,362,604 Payroll Taxes 500,779 391,324 109,455 Benefits 686,325 663,221 23,104 Retirement Costs 1,242,676 1,259,803 (17,127)

Total Personnel Expenses 10,042,832$ 8,564,796$ 1,478,036$ 17.3%

Meeting ExpensesMeetings 89,538$ 93,950$ (4,412)Travel 373,691 655,430 (281,739)Conference Calls - - -

Total Meeting Expenses 463,229$ 749,380$ (286,151)$ -38.2%

Operating ExpensesConsultants & Contracts 777,098$ 535,127$ 241,971 Office Rent 741,044 733,700 7,344 Office Costs 515,025 628,013 (112,988)Professional Services 488,237 229,550 258,687 Miscellaneous - - - Depreciation 554,045 578,000 (23,955)

Total Operating Expenses 3,075,448$ 2,704,390$ 371,058$ 13.7%

Total Direct Expenses 13,581,509$ 12,018,566$ 1,562,943$ 13.0%

Indirect Expenses

Other Non-Operating Expenses -$ -$ -

Total Expenses 13,581,509$ 12,018,566$ 1,562,943$

Change in Assets 1,986,285$ 352,354$ 1,633,930$

Fixed AssetsDepreciation (554,045) (578,000) 23,955 Computer & Software CapEx 263,138 286,170 (23,032)Furniture & Fixtures CapEx 85,319 - 85,319 Equipment CapEx 4,900 - 4,900 Leasehold Improvements 211,336 - 211,336

Inc(Dec) in Fixed Assets 10,648$ (291,830)$ 302,478$ -103.6%

Total Budget (B + C) 13,592,157$ 11,726,736$ 1,865,421$ 15.9%

Change in Working Capital (A-B-C) 1,975,637$ 644,184$ 1,331,452$

Head Count 53.50 57.00 (3.50)FTEs 48.36 49.00 (0.64)

Beginning WC-1/1/18 2,384,548$ 1,818,473$ 566,075 Change to WC-2018 1,975,637 644,184 1,331,453

Working Capital at December 31 ,2018 4,360,185$ 2,462,657$ 1,897,528$

Midwest Reliability OrganizationStatement of Activity

From 1/1/2018 to 12/31/2018TABLE 1: PRELIMINARY YEAR-END EXPENSES (COMBINED)

4

(In Whole Dollars)Unaudited

2018 End Of Year

2018 Budget

2018 Variance %

FundingERO Funding

ERO Assessments 10,730,104$ 10,730,104$ - Penalty Sanctions 142,000 142,000 -

Total ERO Funding 10,872,104$ 10,872,104$ $ -

Federal GrantsMembership Dues - - - Testing Fees - - - Services & Software - - - Workshops - - - Interest - - - Miscellaneous/Transitional Funding - - -

Total Funding 10,872,104$ 10,872,104$ $ -


Salaries 6,614,072$ 6,250,448$ 363,624 Payroll Taxes 430,599 391,324 39,275 Benefits 622,550 663,221 (40,671)Retirement Costs 1,144,059 1,259,803 (115,744)

Total Personnel Expenses 8,811,280$ 8,564,796$ 246,484$ 2.9%

Meeting ExpensesMeetings 71,531$ 93,950$ (22,419)Travel 314,357 655,430 (341,073)Conference Calls - - -

Total Meeting Expenses 385,887$ 749,380$ (363,493)$ -48.5%

Operating ExpensesConsultants & Contracts 572,468$ 535,127$ 37,341 Office Rent 732,091 733,700 (1,610)Office Costs 459,328 628,013 (168,685)Professional Services 261,884 229,550 32,334 Miscellaneous - - - Depreciation 554,045 578,000 (23,955)

Total Operating Expenses 2,579,815$ 2,704,390$ (124,575)$ -4.6%

Total Direct Expenses 11,776,982$ 12,018,566$ (241,584)$ -2.0%

Indirect Expenses

Other Non-Operating Expenses -$ -$ -$

Total Expenses 11,776,982$ 12,018,566$ (241,584)$

Change in Assets (904,878)$ (1,146,462)$ 241,583.80$

Fixed AssetsDepreciation (554,045) (578,000) 23,955 Computer & Software CapEx 176,002 286,170 (110,168)Furniture & Fixtures CapEx - - - Equipment CapEx 4,900 - 4,900 Leasehold Improvements 9,340 - 9,340

Inc(Dec) in Fixed Assets (363,803)$ (291,830)$ (71,973)$ 24.7%

Total Budget (B + C) 11,413,180$ 11,726,736$ (313,556)$ -2.7%

Change in Working Capital (A-B-C) (541,076)$ (854,632)$ 313,556$

Head Count 42.50 45.00 (2.50)FTEs 43.19 45.00 (1.81)

Beginning WC-1/1/18 2,384,548$ 1,818,473$ 566,075 Change to WC-2018 (541,076) (854,632) 313,556

Working Capital at December 31 ,2018 1,843,472$ 963,841$ 879,631$


From 1/1/2018 to 12/31/2018TABLE 2: PRELIMINARY (Unaudited) FERC-APPROVED BUDGET

5

(In Whole Dollars)Unaudited 2018 End Of Year

Transitional2018

Transitional2018

Variance %Funding

ERO FundingERO Assessments -$ -$ - Penalty Sanctions - - -

Total ERO Funding -$ -$ $ -

Federal GrantsMembership Dues - - - Testing Fees - - - Services & Software - - - Workshops - - - Interest - - - Miscellaneous/Transitional Funding 4,695,689 1,498,816 3,196,873

Total Funding 4,695,689$ 1,498,816$ 3,196,873$


Salaries 998,980$ 555,596$ 443,384 Payroll Taxes 70,180 34,784 35,396 Benefits 63,775 58,952 4,823 Retirement Costs 98,616 111,984 (13,368)

Total Personnel Expenses 1,231,552$ 761,316$ 470,236$ 61.8%

Meeting ExpensesMeetings 18,007$ -$ 18,007 Travel 59,334 45,000 14,334 Conference Calls - - -

Total Meeting Expenses 77,342$ 45,000$ 32,342$ 71.9%

Operating ExpensesConsultants & Contracts 204,630$ 100,000$ 104,630 Office Rent 8,953 - 8,953 Office Costs 55,697 340,000 (284,303)Professional Services 226,354 87,500 138,854 Miscellaneous - - - Depreciation - - -

Total Operating Expenses 495,634$ 527,500$ (31,866)$ -6.0%

Total Direct Expenses 1,804,527$ 1,333,816$ 470,711$ 35.3%

Indirect Expenses

Other Non-Operating Expenses -$ -$ -$

Total Expenses 1,804,527$ 1,333,816$ 470,711$

Change in Assets 2,891,162$ 165,000$ 2,726,162$

Fixed AssetsDepreciation - - - Computer & Software CapEx 87,135 45,000 42,135 Furniture & Fixtures CapEx 85,319 60,000 25,319 Equipment CapEx - - - Leasehold Improvements 201,996 60,000 141,996

Inc(Dec) in Fixed Assets 374,451$ 165,000$ 209,451$ 126.9%

Total Budget (B + C) 2,178,978$ 1,498,816$ 680,162$ 45.4%

Change in Working Capital (A-B-C) 2,516,712$ -$ 2,516,712$

Head Count 11.00 12.00 (1.00)FTEs 5.17 4.00 1.17

Beginning WC-1/1/18 -$ -$ - Change to WC-2018 2,516,712 - 2,516,712

Working Capital at December 31 ,2018 2,516,712$ -$ 2,516,712$


From 1/1/2018 to 12/31/2018TABLE 3: PRELIMINARY SPP RE TRANSITION COSTS (TRANSITIONAL)

January 18, 2019 North American Electric Reliability Corporation 3353 Peachtree Road NE Suite 600, North Tower Atlanta, GA 30326 Attention: Mr. Scott Jones Subject: NPCC Regional Entity Division Variance Comparison and Fourth Quarter 2018 Statement of Activities Dear Scott: The variance comparison for the period ended December 31, 2018 is included along with Northeast Power Coordinating Council, Inc.’s unaudited Fourth Quarter 2018 Statement of Activities. Please do not hesitate to contact me via email at [email protected] or via telephone at (212) 840-1070 should you have any comments or questions with regard to the materials provided. Sincerely,

Jessica Hala Jessica Hala Senior Manager, Finance and Accounting Enclosures cc: Mr. Christopher Weir, CPA – NPCC Treasurer Mr. Edward A. Schwerdt – NPCC President & CEO Ms. Jennifer Budd Mattiello – NPCC Senior Vice President & COO ERO Finance Group

mailto:[email protected]

1

NPCC Regional Entity Division Budget to Actual

Variance Comparison as of December 31, 2018

TOTAL EXPENSES

For the year ended December 31, 2018, the NPCC Regional Entity Division is $688k or -4.55% under budget based on invoices received to date. Areas that were under budget include Personnel Expenses, Meeting Expenses and Office Costs. The continuing and much appreciated volunteerism within the NPCC membership contributed to NPCC achieving its reliability objectives while staying under budget. Based on emerging areas of focus within 2018, NPCC successfully reprioritized resources to fulfill all of its responsibilities under its Regional Delegation Agreement. Under budget total expenses at year end were driven primarily by cost controls in Travel and Meetings expenses and contract negotiations in Office Costs.

INCOME

• Penalty Sanctions (Actual income of $75k remitted to NPCC from July 1, 2016 through June 30, 2017 was applied to reduce 2018 assessments to NPCC U.S. load serving entity designees.) No penalty sanctions were received from July 1, 2017 through June 30, 2018. All penalties remitted from July 1, 2018 through June 30, 2019 will be applied to reduce 2020 assessments to NPCC U.S. load serving entity designees.

• Interest Income (Actual income of 27$k at year end, not included in budget) NPCC accounts for but has not budgeted for interest income for operating fund investments as returns on U.S. treasury securities fund have been negligible and corporate money market fund returns have been minimal. With the current trend toward rising interest rates, NPCC could experience greater returns on operating cash in the future.

o NPCC allocated $27k as a portion of total interest income (93%) to the Regional Entity Division

consistent with the ratio of Regional Entity (RE) to Criteria Services (CS) Division 2018 funding. A common system of accounts, with divisional separation, is used for both RE and CS revenue tracking and financial reporting.

EXPENSES

• Personnel Expenses (Variance of $342k under budget at year end) o NPCC is currently fully staffed. Vacancies resulting from the departure of seasoned professionals were

filled through a combination of in-house promotions, resource re-allocations and the retention of less seasoned successors, with the net result of lower than budgeted salaries and related personnel expenses.

2

• Meeting Expenses (Variance of $295k under budget at year end) o Cost savings resulted from streamlining NPCC Spring and Fall Compliance and Standards Workshops

from a three day format to a two day format. Efforts to hold more meetings onsite, at member facilities or conduct numerous NPCC webinars where effective and pragmatic for NPCC registered entities, will continue. Additionally, NPCC continues to limit the number of attendees sent to off-site meetings and encourages participation via webinar and teleconference when available.

• Consultants and Contracts (Variance of $131k over budget at year end) o Over budget variance of $131k is related to unbudgeted risk assessment initiatives including increased

probabilistic assessments, a gas supply disturbance study and a tie benefits study. These important risk-assessing initiatives and associated resource needs had not been identified prior to the June 2017 approval of the 2018 NPCC Business Plan and Budget.

• Office Costs (Variance of $99k under budget at year end)

o Lower negotiated office internet rates and cell phone contracts resulted in significant cost savings.

• Fixed Assets (Variance of $39k under budget at year end) o Under budget variance is based on no new functionality added for the CDAA and CITS tools through the

end of the year and the timing of scheduled software development projects, which included the continued roll out of NPCC’s document management system.

• Net Change in Assets (Variance of $690k under budget at year end)

o Under budget net change in assets is a result of variance in total expenses.

• Change in Working Capital (Variance of $714k under budget at year end) o Under budget change in working capital is a result of variance in total budget.

(Unaudited) Submitted January 18, 2019

2018 YTD Actual

2018 YTD Budget

2018 YTD Actual

Variance from Budget %

Funding Assessments 14,341,787 14,341,787 - Penalties 75,000 75,000 - Testing - - - Services & Software - - - Workshop Fees 63,449 64,000 (551) Interest 27,198 - 27,198 Miscellaneous - - - Total Funding 14,507,434 14,480,787 26,647 0.18%

Expenses Personnel Expenses Salaries 6,845,678 7,107,599 (261,921) Payroll Taxes 411,369 411,441 (72) Employee Benefits 1,474,950 1,476,378 (1,427) Savings & Retirement 746,522 825,353 (78,831)Total Personnel Expenses 9,478,519 9,820,770 (342,251) -3.48% Meeting Expenses Meetings 261,344 353,050 (91,706) Travel 637,059 834,500 (197,441) Conference Calls 30,917 37,000 (6,083)Total Meeting Expenses 929,320 1,224,550 (295,230) -24.11% Operating Expenses Consultants & Contracts 2,008,416 1,877,640 130,776 Rent & Improvements 783,929 810,700 (26,771) Office Costs 566,114 664,760 (98,646) Professional Services 909,850 960,000 (50,150) Miscellaneous 46,200 50,000 (3,800) Depreciation 254,117 269,000 (14,883)Total Operating Expenses 4,568,626 4,632,100 (63,474) -1.37%

Indirect Expense Allocation (378,818) (416,453) 37,635 -9.04%

Other Non-Operating Expenses - - - n/a

Total Expenses 14,597,648 15,260,967 (663,319) -4.35%Net Change in Assets (90,214) (780,180) 689,966 -88.44%

Fixed Assets Depreciation (254,117) (269,000) 14,883 Computer & Software CapEx 75,777 115,000 (39,223) Furniture & Fixtures CapEx - - - Equipment CapEx - - - Leasehold Improvements - - - Incr(Dec) in Fixed Assets (178,340) (154,000) (24,340) 15.81%

Total Budget (Expenses plus Incr(Dec) in Fixed Assets) 14,419,307 15,106,967 (687,660) -4.55%Change in Working Capital (Total Funding less Total Budget) 88,127 (626,180) 714,307 -114.07%

Equivalent Full Time Employees 36.53 36.86 (0.33) Headcount 39.00 39.00 -

Beginning Total Reserves - 1/1/18 5,017,751 4,499,893 517,858 Change to Reserves - YTD 2018 88,127 (626,180) 714,307

Projected Total Reserves at 12/31/18 5,105,878 3,873,713 1,232,165

Northeast Power Coordinating Council, Inc. - Regional Entity DivisionStatement of Activities, Fixed Assets and Change in Working Capital

(Unaudited)For the Period Ended December 31, 2018

Forward Together • ReliabilityFirst

January 22, 2019 Mr. Scott Jones North American Electric Reliability Corporation 3353 Peachtree Road, N.E. Suite 600, North Tower Atlanta, Georgia 30326

ReliabilityFirst’s 2018 4th Quarter Statement of Activities Variance Report - Unaudited

Dear Mr. Scott Jones:

As requested, the attached 2018 4th Quarter Statement of Activities (unaudited) provides a comparison of budgeted and actual expenses relative to the 2018 ReliabilityFirst Corporation’s Budget. For more information, please contact me at 216.503.0600 or [email protected]. Very truly yours, RELIABILITYFIRST CORPORATION

Jill S. Lewton Jill S. Lewton

Controller

Jill S. Lewton Controller

3 Summit Park Drive, Suite 600 Cleveland, OH 44131 Office: 216.503.0600

[email protected]


ReliabilityFirst’s 2018 4th Quarter Statement of Activities Variance Report - Unaudited

Significant Variances For the year ending December 31, 2018 ReliabilityFirst Corporation is $497k (2.33%) under budget. The major contributors to this variance are:

Budget Funding • Investment Income: 38K (76%) over budget for YTD o Investment Income is over budget due to the growth in value of the company’s investment

portfolio.

Budget Expenses • Personnel Expenses o Personnel Expenses: $551K (3%) under budget for YTD

Personnel Expenses are primarily under budget due to personnel being below the approved staffing levels. ReliabilityFirst had four open positions at year end and is actively pursuing qualified candidates.

• Meeting Expenses o Travel: $64K (9%) under budget for YTD

Travel is under budget due to the travel activity being less than budgeted.

• Operating Expenses o Contracts & Consultants: $56K (14%) over budget for YTD

Contracts and Consultants is primarily over budget due to the costs associated with the data warehouse project, which were not budgeted.

• Depreciation o Depreciation: $67K (18%) over budget for YTD

Depreciation expense directly correlates to current and prior years fixed asset activities. Therefore, as a result of last year’s expenditures for the corporate internal and public websites, and office improvements being more than budgeted, more depreciation is being recorded than budgeted.


• Fixed Assets o Computer Hardware & Software: $19K (10%) over budget for YTD

Computer Hardware & Software is primarily over budget due to the costs associated with the redesign and development of the corporate extranet site.

o Furniture & Fixtures: $7K (100%) over budget for YTD Furniture and Fixtures is over budget due to the purchase of a workstation for additional office space.

o Leasehold Improvements: $27K (100%) over budget for YTD Leasehold Improvements is over budget due to the completion of some minor office modifications.

Reserves • Working Capital Reserve

The Working Capital Reserve of $3,318,239 will be utilized to satisfy projected cash flow for daily operations and to stabilize and minimize volatility in future years’ assessments. This amount is slightly less than what was projected in the 2018 Business Plan and Budget as a result of utilizing a small amount of working capital to fund daily operations in 2017.

• Operating Reserve The Operating Reserve of $1,000,000 has been designated with the intention of providing for any unbudgeted and unexpected expenditures for the organization.

ReliabilityFirst CorporationStatement of Activities, Fixed Assets and Change in Working Capital

(unaudited)From 01/01/2018 Through 12/31/2018

(in Whole Numbers)

2018Actual

2018Budget

YTD Variance Over/(Under)

%Variance

FundingAssessments 20,147,707 20,147,707 0 0.00%

Penalty Sanctions 1,912,877 1,912,877 0 0.00%Investment Income 88,147 50,000 38,147 76.29%

Miscellaneous Income 6,593 0 6,593 0.00%Total Funding 22,155,325 22,110,584 44,741 0.20%

Expenses Personnel Expenses

Salaries 12,725,182 12,975,641 (250,459) -1.93%Payroll Taxes 757,062 765,357 (8,295) -1.08%

Employee Benefits 1,914,058 2,049,655 (135,597) -6.62%Savings & Retirement Costs 1,981,773 2,138,337 (156,564) -7.32%

Total Personnel Expenses 17,378,075 17,928,990 (550,915) -3.07%

Meeting ExpensesMeetings 312,345 300,375 11,970 3.99%Travel 649,442 713,250 (63,808) -8.95%

Conference Calls 38,852 50,400 (11,548) -22.91% Total Meeting Expenses 1,000,639 1,064,025 (63,386) -5.96%

Operating ExpensesContracts & Consultants 446,179 390,132 56,047 14.37%

Rent & Utilities 540,592 519,595 20,997 4.04%Office Costs 832,725 831,717 1,008 0.12%

Professional Services 396,088 411,245 (15,157) -3.69%Miscellaneous 41,926 40,696 1,230 3.02%Depreciation 440,139 373,325 66,814 17.90%

Total Operating Expenses 2,697,651 2,566,710 130,941 5.10%

Non-Operating Expenses 0 0 0 0.00%

Total Expenses 21,076,364 21,559,725 (483,361) -2.24%

Net Change in Assets 1,078,961 550,859 528,102 95.87%

Fixed AssetsDepreciation

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