Board Review of MRO 2021 Budget Brad Cox, Finance and Audit - - PowerPoint PPT Presentation

Brad Cox, Finance and Audit Committee Chair Sara Patrick, President and CEO Lam Chung, VP and Engineer for Strategy, Innovation, and Finance Gina Davis, Senior Accountant

Board Review

• f

MRO 2021 Budget

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MRO Budget Process Summary

Step One

Staff Develops a Preliminary Budget

• “Bottoms-up/Zero-

based” budget development with program managers and executives

• “Tops-down”

expectations from president and chief executive officer

• Reconcile

“bottoms-up” to “tops-down”

Step Two

Present Budget to MRO FAC

• Detailed review and

justification, includes all line items, contracts, etc.

• MRO FAC

recommends approval, distributes budget to board and committee chairs (conference call to review)

Step Three

Comment Period and Board Approval

• Budget is

circulated for comment to all stakeholders

• Budget is

considered at the second quarter board meeting

Step Four

Final Approval and Filing

• NERC Board

approves (or may have questions, concerns to address)

• Final approval of

NERC and RE BP&Bs are filed with FERC

Budget Process Update

MRO FAC hosted a budget review with the MRO Board on April 17

• MRO updated its budget assessments as a result of that call

MRO staff met with MRO FAC to review budget changes and posted a final draft to the MRO website

• The stakeholder comment period lasted through June 1 without further

comments reported

MRO and the other Regional staff presented their proposed budgets to FERC on May 20 and to the NERC FAC on June 4

• Other regions are experiencing similar budget feedback
• Neither FERC nor NERC FAC expressed any budget concerns

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Budget Highlights

Budget costs increase by 5 percent from $17.5 million to $18.4 million Assessments remain flat at $17 million

• Used reserves to respond to economic concerns

related to COVID-19

• Neutralized swing in assessments due to penalty and

working capital reserve changes

• Assessment stabilization adjustment of $1,428,951

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Regional Budget Comparisons

Regional budgets experience similar percent increases Most regions worked toward a low or flat assessment increase Average budget increase to the ERO is 2.25 percent Average assessment increase to the ERO is 0.55 percent

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Total FTEs 2020 2021 % Change NERC 82,657,034 82,859,791 0.25% MRO 66 17,540,969 18,412,202 5.0% NPCC 42.11 16,601,647 16,440,648

• 1.0%

RF 84.35 23,650,862 24,785,492 4.8% SERC 100 24,525,013 25,829,079 5.3% Texas RE 63 13,831,126 14,211,538 2.8% WECC 148.5 27,756,089 28,673,681 3.3% Weighted Average Increase ed Average In 206,562,740 211,212,431 2.25% 2020 2021 % Change NERC 72,011,373 72,011,373 0.0% MRO 16,983,251 16,983,251 0.0% NPCC 15,338,737 15,154,584

• 1.2%

RF 22,318,623 22,764,995 2.0% SERC 22,459,123 23,513,887 4.7% Texas RE 13,344,128 13,343,000 0.0% WECC (excluding WIRAB) 25,282,000 25,000,000

• 1.1%

Weighted Average Weighted 187,737,235 188,771,090 0.55% Budget Change Assessments Change

Budget Comparison 2018/2020/2021

2018 (Combined), $20,800,000 2018 (Combined), $18,900,000 2020 Budget $17,540,969 2020 Assessments $16,983,251 2021 Budget $18,412,202 2021 Assessments $16,983,251

$0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 Budget Assessments 2018 (Combined) 2020 2021 6

Budget Savings

2021 budget increases by $871K

• 2020 budget savings is $3.2 million (16 percent) in post-integration

savings

• 2021 budget is $2.4 million (11 percent) in post-integration savings

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Strategic Priorities for MRO

Innovate approaches to reduce risk

• Develop and deliver innovative and risk-based programs and tools
• Support innovation, initiatives, and the sharing of best-practices
• Promote registered entities’ strengths and expertise in identifying and mitigating reliability and security risks

Execute NERC-delegated functions

• Identify, prioritize, and mitigate risks to the bulk power system
• Conduct high quality execution of delegated functions, including oversight, analysis, and assessments
• Seek continuous improvement in effectiveness and efficiency

Align our efforts with others across the ERO Enterprise

• Support development and implementation of the ERO Enterprise Align project
• Collaborate across the ERO Enterprise to build strong consensus and information sharing around initiatives to

reduce reliability and security risk 8

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2020 and 2021 Budget Comparison

(In Whole Dollars) 2020 Budget 2021 Budget Variance 2021 Budget v 2020 Budget %Variance 2021 Budget v 2020 Budget Expenses Personnel Expenses Salaries 9,334,262 $ 10,059,263 $ 725,001 $ 7.77% Payroll Taxes 586,604 631,891 $ 45,287 7.72% Benefits 1,061,581 1,064,375 $ 2,794 0.26% Retirement Costs 1,500,244 1,528,209 $ 27,965 1.86% Total Personnel Expenses 12,482,691 $ 13,283,737 $ 801,046 $ 6.42% Meeting Expenses Meetings 175,900 $ 204,900 $ 29,000 $ 16.49% Travel 1,108,732 739,967 (368,765)

• 33.26%

Conference Calls

• Total Meeting Expenses

1,284,632 $ 944,867 $ (339,765) $

• 26.45%

Operating Expenses Consultants & Contracts 1,306,319 $ 1,339,701 $ 33,382 $ 2.56% Office Rent 774,000 1,168,700 $ 394,700 50.99% Office Costs 930,327 905,697 $ (24,630)

• 2.65%

Professional Services 528,000 519,500 $ (8,500)

• 1.61%

Miscellaneous

• Total Operating Expenses

3,538,646 $ 3,933,598 $ 394,952 $ 11.16% Total Direct Expenses 17,305,969 $ 18,162,202 $ 856,233 $ 4.95% Indirect Expenses Other Non-Operating Expenses

• $
• $
• $

0.00% (B) Total Expenses 17,305,969 $ 18,162,202 $ 856,233 $ 4.95% Fixed Assets Computer & Software CapEx 235,000 250,000 15,000 6.38% Furniture & Fixtures CapEx

• Equipment CapEx
• Leasehold Improvements
• (C) Inc(Dec) in Fixed Assets

235,000 $ 250,000 $ 15,000 $ 6.38% Total Budget (B + C)

Total Budget

17,540,969 $ 18,412,202 $ $ 871,233 4.97% FTEs 63.00 66.00 3.00

MRO Key Budget Assumptions

Personnel expense increases:

• Average 3 percent

─

Performed alignment of salaries and the incentive program to compete with market in 2020

─

Internal staff promotions awarded in 2020

• Addition of 3 FTEs (63 to 66)

Meeting expense decreases:

• MRO facilities will be used to host all outreach workshops with the exception of one offsite

workshop

• Utilizing historic cost trends to better estimate travel costs in 2021

Operating expense increases:

• Higher facility rent and maintenance costs as a result of an office expansion in 2020

Fixed asset increases:

• Cyclical capital purchases replacing end-of-life assets

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Budget Variance Summary

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Budget Increase: 5% Personnel: 6.42% increase Salary increase 3% FTEs increase to 66 in 2021 Meetings: 26.4% decrease

Planning one off-site workshop in the expanded MRO footprint Decreased travel costs better reflects historic trends

Operating: 11.2% increase

Facility expansion in 2020 leads to increased rent in 2021

Fixed Assets: 6.4% increase

Cyclical capital purchases replacing end-

• f-life assets

Cost Comparison by Program Area

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Program 2020 Budget 2021 Budget

Variance 2021 Budget v 2020 Budget %Variance 2021 Budget v Total 2020 Budget

Administrative Services

$ 5,940,557 $ 7,159,687 1,219,130 6.95%

Compliance

3,824,656 4,066,828 242,172 1.38%

Risk Assessment and Mitigation

3,485,135 3,490,210 5,075 0.03%

Reliability Assessments and Performance Analysis

2,100,356 1,998,894

• 101,462
• 0.58%

Training and Education

747,121 548,033

• 199,088
• 1.13%

Infrastructure Security

462,805 442,078

• 20,727
• 0.12%

Reliability Standards, Organization Registration and Certification

484,696 344,886

• 139,810
• 0.80%

Compliance Enforcement

472,507 344,072

• 128,435
• 0.73%

Situation Awareness

23,136 17,515

• 5,621
• 0.03%

TOTAL BUDGET

$ 17,540,969 $ 18,412,202 $ 871,233 4.97%

Cost Comparison by Program Area

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$- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000

Administrative Services Compliance Compliance Risk Assessment and Mitigation Reliability Assessments and Performance Analysis Training and Education Infrastructure Security Reliability Standards, Organization Registration and Certification Compliance Enforcement Situation Awareness

2020 Budget 2021 Budget

MRO FTE Trend

Increase to Accommodate Growth

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MRO FTE Trend

Total FTEs by Program Area

2014 Budget 2015 Budget 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget 2021 Budget

STATUTORY Operational Programs Standards and Registration and Certification 1.25 1.00 2.00 2.00 2.00 2.00 2.00

1.50

Compliance 11.25 10.50 11.00 10.00 10.00 16.00 16.00

18.00

Risk Assessment and Mitigation 6.25 7.00 7.00 9.00 11.00 15.00 16.00

16.00

Enforcement 3.75 4.50 3.00 3.00 3.00 3.00 3.00

2.00

Operations - Assessments, Event Analysis, Other 7.25 8.00 8.00 7.00 7.00 9.00 10.00

10.50

Cybersecurity Outreach 2.00 2.00

2.00

Total FTEs Operational Programs 29.75 31.00 31.00 31.00 33.00 47.00 49.00

50.00

Total FTEs Administrative Programs 11.00 11.50 12.00 12.00 12.00 12.00 14.00

16.00

Total FTEs 40.75 42.50 43.00 43.00 45.00 59.00 63.00

66.00

* 2018 Budget did not consider the SPP Transition.

2021 Budget Risks

Latent impacts of COVID-19

• During these uncertain times, it is difficult to predict the long-term impacts of

COVID-19

Development and deployment of the ERO Enterprise Align project

• More time is needed to assess the impact this tool will have on company

resources

2020 Office expansion

• Negotiations on a planned office expansion could result in an unplanned change

to building costs

• Costs related to delays as a result of COVID-19

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2021 Budget Risks

Implementation of emerging matters including directives from NERC/FERC

• Need for travel, meeting costs, systems, etc. to implement

Regional investments

• As ERO Enterprise develops centralized systems, improves coordination and

information sharing there could be additional investments by Regional Entities, i.e. SIEM tool

Large scale event

• Need for external resources, diversion of staff from other work, more travel, etc.

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Cash Management

Day-to-day cash requirements (short-term)

• MRO’s targeted reserves requirement shall be the amount necessary to satisfy projected annual cash

flow and cash balance requirements

• Reserves are held for future budget stabilization; significant, and relatively short-term, operating or

capital spending needs; or for unforeseen changes in operations that materially influence the

• rganization’s ability to meet its functions under delegated authority

MRO has $2.0m in credit line (intermediate) MRO can request special assessment approval from NERC/FERC (long-term)

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PP13: Reserves Policy

Policy and Procedure 13: Reserves

• MRO’s reserves are identified and quantified each year in the Business Plan and Budget
• MRO’s Business Plan and Budget is submitted first to the FAC for review and then to the

board

The FAC and board approved a 30-day reserve for the 2020 BP&B

• More of an art than a science
• An analysis is performed that establishes the targeted reserves amount

Budget process “resets” the targeted reserves at the current level of 30 days for the start of the budget year

• Adjustment to achieve stabilized assessment with 2021 budget expenditures will be an

increase of $1.4K

• Projected reserves balance at December 31, 2021 is $1.6 million

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Assessment Impacts

Reserve Analysis

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Beginning Working Capital (Deficit), January 1, 2020 4,769,485 Plus: Penalty Sanctions Non-current 1 360,504 Plus: 2020 MRO Assessment 16,983,251 Projected Annual Cashflow Less: 2020 Projected expenses & capital expenditures (17,540,969) Operation Expenses Projected Reserve (Deficit), December 31, 20202 4,572,271 Less: Targeted 30 day Operating Reserve, December 31, 2021 (($18,412,202 / 365 days) X 30 days) (1,513,332) To cover contingencies Plus: Projected Reserve, December 31, 2020 4,572,271 Projected Reserve 3,058,940 2021 Expenses and Capital Expenditures 18,412,202 2021 MRO Assessment (0% Increase over 2020) 16,983,251 Adjustment from reserves to achieve targeted 2021 MRO Assessment Portion of reserve related to penalties released as offset to U.S. assessments 360,504 Additional reserve adjustment 1,068,447 Total Assessment Stabilization Adjustment 1,428,951 Plus: Penalty Sanctions Current3

• Projected Reserve (Deficit), December 31, 2021

1,629,989 STATUTORY

Postretirement Medical Plan Funding

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MRO funding policy for the retiree medical plan includes a contributed amount to the MRO Retiree Medical Plan every fiscal year

• Funding is a level percent of payroll policy
• Level percent as of 2020 equals 1.86

2019 cash funding to plan was $145,723

• Plan costs equal $198,914 or $4,486 per participant

2020 cash funding to plan of $143,033

• Projected plan costs $279,227 or $5,941 per participant

Estimated 2021 cash funding equal $157,431

• Budgeted plan costs $295,980 or $5,103 per participant (6 percent benefit increase)

PP12: General Finance

Policy and Procedure 12: General Finance requires approval of:

1. the postretirement medical plan funding; 2. the reserves;

─ Currently staff has proposed 30 days as the targeted reserves ─ Reserves can be targeted at a different number of days; as noted, reserve setting is

more of an art than a science

─ Projected reserve balance held for future needs, including budget assessment

stabilization

3. the budget.

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BP&B Resolution

MRO staff is requesting that the board approve in the 2021 Budget funding in the amount of $295,980 for the MRO Postretirement Medical Plan. This amount is a 6% increase over the amount approved by the board for the 2020 Budget. MRO staff is requesting that the board approve a targeted operating reserves requirement of 30 days. This 30-day target is consistent with the 30-day target adopted by the board for the 2020 Budget. MRO staff is requesting that the board approve the proposed 2021 Business Plan and Budget as provided in your materials and summarized in the 2021 Business Plan & Budget Presentation. The Finance and Audit Committee met on May 7, 2020, and reviewed MRO staff's

• requests. The FAC voted unanimously to recommend that the MRO Board approve

MRO staff's requests as set forth in draft Resolution 20-008.

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