Agenda Board of Directors Finance and Audit Committee of Directors...Mar 09, 2017 · Audit...

Agenda Board of Directors • Finance and Audit Committee March 9, 2017 • 10:15 AM – 12:15 PM (ET)

ReliabilityFirst Corporation 3 Summit Park Drive, Suite 600 • Cleveland, OH 44131 Room: Ohio Conference Room Attire: Business Casual

Open Agenda

1. Call to Order 10:15 am Presenter: Patrick Cass, Chair

2. Appoint Secretary to Record MinutesPresenter: Patrick Cass, Chair

3. Antitrust StatementPresenter: Patrick Cass, Chair

4. Approve Finance and Audit Committee Meeting MinutesPresenter: Patrick Cass, Chair Reference: Draft Minutes for the November 30, 2016, Finance and Audit Committee

Meeting Action: Approve Minutes

5. Financial Update 10:20 am Presenter: Jill Lewton Description: Ms. Lewton will present the 2016 4th Quarter Statement of Activities. Reference: 2016 4th Quarter Statement of Activities Action: Information and Discussion

6. 2016 Financial Audit 10:25 am Presenter: Jill Lewton and Tara Leja, RSM US LLP Certified Public Accountants Description: Ms. Lewton and Ms. Leja will present the results of the 2016 financial

audit and periodic system review report. Reference: a) 2016 Financial Audit Presentation

b) RSM US LLP – 2016 Financial Report Draftc) RSM US LLP – Letter to Finance and Audit Committeed) RSM US LLP – Material Weakness and Significant Deficiencies Lettere) System Review Report

Action: Approve Audited Financial Statements

7. Working Capital and Investment Analysis 10:55 am Presenter: Jill LewtonDescription: Ms. Lewton will present an analysis on the working capital and investment

account. Reference: Working Capital and Investment Analysis Action: Information and Discussion

Finance and Audit Committee • Agenda

March 9, 2017

2

8. Operating Reserve Account Investment Strategy 11:00 am Presenter: Ray Palmieri and Rob Siewert, Glenmede Description: Mr. Palmieri and Mr. Siewert will present the enhanced cash investment

strategy. Reference: a) Enhanced Cash Strategy Description

b) Statement of Policy and Procedure for Investment of Corporate Funds

Action: Information and Discussion

9. Review President’s 2017 Disclosure Statement 11:25 am Presenter: Patrick Cass, ChairDescription: Mr. Cass will discuss the President’s 2017 Disclosure Statement. Reference: None Action: Information and Discussion

10. 2018 Business Plan and Budget 11:30 am Presenter: Jill LewtonDescription: Ms. Lewton will present an overview of the 2018 Business Plan and Budget. Reference: a) 2018 Business Plan and Budget Presentation

b) Working Capital and Operating Reserve PolicyAction: Recommend Board Approval of Operating Reserve

11. 2017 Finance and Audit Committee Planner 11:50 am Presenter: Ray Palmieri Description: Mr. Palmieri will discuss the progress of activities in the 2017 planner. Reference: 2017 Planner Action: Information and Discussion

12. Next Meeting 11:55 am May 31 • ReliabilityFirst, Cleveland, OH

Closed Agenda

13. Executive Session (Finance and Audit Committee and Accounting FirmRepresentative Only)

11:55 am

Presenter: Patrick Cass, Chair Description: The Committee will hold an executive session with a representative from

RSM US LLP. Action: Information and Discussion

14. Executive Session (Finance and Audit Committee Only) 12:05 pm Presenter: Patrick Cass, ChairDescription: The Committee will hold an executive session to discuss confidential topics. Action: Information and Discussion

15. Adjourn 12:15 pm

Finance and Audit Committee • Agenda

March 9, 2017

3

Roster • Audit Committee

Patrick Cass, Chair • Independent (2017) Lisa Barton • AEP (S • 2017) Deborah Hart • Morgan Stanley Capital Group, Inc. (AL • 2017) Sue Ivey • Exelon (L-LSE • 2019) Simon Whitelocke • ITC (AL • 2018)

Draft Minutes for the November 30, 2016, Finance and

Audit Committee Meeting

Separator Page

Draft Minutes Board of Directors • Finance and Audit Committee November 30, 2016 • Washington, DC

Renaissance DC Downtown Hotel 999 9th Street NW • Washington, DC 20001

Open Session

Call to Order – Chair Patrick Cass called to order a duly noticed open meeting of the Finance and Audit Committee (Committee) on November 30, 2016 at 3:15 pm (ET). A quorum was present, consisting of the following members of the Committee: Chair Patrick Cass; Lisa Barton; Deb Hart, Sue Ivey; and Simon Whitelocke. A list of others present during the Committee meeting is set forth in Attachment A. Appoint Secretary to Record Minutes – Chair Cass designated Jason Blake as the secretary to record the meeting minutes. Antitrust Statement – Chair Cass advised those present of the need to adhere to ReliabilityFirst’s Antitrust Compliance Guidelines. Minutes of the Meeting – Chair Cass presented the draft minutes for the August 24, 2016 meeting, which were included in the agenda package. Upon a motion duly made and seconded, the Committee approved the minutes as presented. Working Capital and Investment Analysis – Jill Lewton led a discussion on the Working Capital Analysis and Investment Account Analysis (included in the agenda package). She reported that as of October 31, 2016, ReliabilityFirst had approximately $7.1M in working capital and operating reserves. Ms. Lewton stated that $1.6M of the 2016 working capital will be added to the working capital reserve in 2017, as approved by the Board of Directors in the 2017 ReliabilityFirst Business Plan and Budget. Ms. Lewton then led a discussion on the investment account’s allocations and performance, reporting that the investment account increased approximately $33,848 during 2016 (as of October 31, 2016). She presented a list of ReliabilityFirst’s investments, including their ratings and maturity dates. Ray Palmieri then presented his findings in response to the Committee’s question regarding whether ReliabilityFirst’s investment policy should include limits on the amount invested in any one company. He discussed ReliabilityFirst’s investment policy, which includes no limitation on investment amounts in a particular company. He then discussed Glenmede’s enhanced cash portfolio strategy for ReliabilityFirst, which includes an investment limit of no more than 10% exposure to each individual investment, as well as: (1) short duration interest rate exposure; (2) corporate bond ratings of “A” or better; and (3) diversification of assets across major bond market sectors. Mr.

Minutes • November 30, 2016

Finance and Audit Committee

2

Palmieri stated that a Glenmede representative will discuss this strategy in further detail with the Committee during the March 2017 meeting.

Financial Update – Ms. Lewton presented the 2016 Third Quarter Statement of Activities submitted to NERC (included in the agenda package), which states that ReliabilityFirst is 5.48% under budget as of September 30, 2016. She reported the year-end budget projection as $881K (4.6%) under budget, noting that the major contributors were personnel expenses (3.62% under budget due to four vacant positions earlier in the year); travel (24% under budget); and professional services (25% under budget due to a reduction in the use of outside legal counsel and an unutilized Board of Director search fee). Mr. Palmieri stated that staff is evaluating how to improve budget projections to further reduce the percentage of budget underruns in the future. Ms. Lewton also discussed the financial status of the corporation’s major 2016 projects (included in the agenda package).

2017 Business Plan and Budget– Jill Lewton discussed a minor clarification that was made to the 2017 Business Plan and Budget (2017 BPB). In response to a recommendation by FERC staff, ReliabilityFirst and NERC submitted a filing with FERC to clarify that ReliabilityFirst used its penalty funds solely to reduce assessments (rather than to fund its reserves). Staff received approval from Chair Cass prior to filing this clarification. Going forward, staff plans to seek waiver of the Section NERC Rules of Procedure 1107.2 requirement that all penalty funds shall be applied as a general offset to the budget for the subsequent fiscal year. Finance and Audit Committee Charter, 2016 Planner, and Performance of Duties – Chair Cass led the annual review of the Committee’s Charter, and the Committee reviewed proposed clarifying revisions to the Charter (included in the agenda package). Upon a motion duly made and seconded, the Committee recommended Board approval of the proposed revisions to the Charter. Chair Cass also led the annual evaluation of the Committee’s performance of its specific duties set forth in the Charter, and the Committee concluded that it met all of its specific duties for 2016. As part of this discussion, Ms. Lewton presented an overview of ReliabilityFirst’s current and future anti-fraud initiatives. Upon a motion duly made and seconded, the Committee accepted the Finance and Audit Committee Charter Planner and Performance of Specific Duties for 2016. Chair Cass then led a discussion on the Finance and Audit Committee Charter Planner and Performance of Specific Duties for 2017. 2016 Financial Audit – Ms. Lewton led a discussion on the upcoming schedule for RSM US LLP, the independent auditing firm, to perform an independent audit of ReliabilityFirst’s 2016 financials.

Next Meeting – Chair Cass noted that the next Committee meeting will occur on March 9, 2017 in Cleveland, Ohio at the ReliabilityFirst offices. The Committee then went into closed session. All guests, except for ReliabilityFirst personnel and Mr. Thilly, excused themselves from the meeting at this time.

Minutes • November 30, 2016

Finance and Audit Committee

3

Closed Session

Confidential Corporate Matter – Mr. Blake discussed a recent internal issue regarding compliance with certain corporate policies, and the actions that staff has taken in response. Internal Control Evaluation – Mr. Palmieri provided an update on the Internal Control Evaluation of the corporation’s internal controls for financial reporting, which identified no fatal flaws. He reported that the Internal Control Evaluation is projected to be completed by year end (with testing of payroll and cash disbursements to be completed in December), and that staff has already implemented the majority of the internal control improvements. Additionally, he noted that staff is developing an anti-fraud program and a plan for the ongoing review and testing of internal controls.

Executive Session Executive Session (Finance and Audit Committee and Controller) – The Committee and Mr. Thilly held an executive session with Jill Lewton to discuss confidential matters relative to the financial activities being addressed by the company, staffing levels, and other matters.

Executive Session (Finance and Audit Committee Only) – Chair Cass and Committee members held an executive session to discuss confidential matters, including the results of its discussion with Ms. Lewton and other personnel and succession planning matters. The Committee also sought the observations and comments of Mr. Thilly.

Adjourn – Upon a motion duly made and seconded, Chair Cass adjourned the Committee meeting at 5:30 pm (ET).

As approved on this __ day of March, 2017 by the Finance and Audit Committee,

Jason Blake Corporate Secretary

Attachment A

Others Present During the Finance and Audit Committee Meeting

Ray Palmieri • ReliabilityFirst, Senior Vice President & Treasurer Jason Blake • ReliabilityFirst, General Counsel and Corporate Secretary Thomas Breene • WEC Energy Group Carl Dister • ReliabilityFirst Jill Lewton • ReliabilityFirst, Controller Jennifer Sterling • Exelon Roy Thilly • NERC Board of Trustees Bob Wargo • ReliabilityFirst

2016 4th Quarter Statement of Activities

Separator Page

Forward Together • ReliabilityFirst

January 20, 2017 Mr. Michael Walker North American Electric Reliability Corporation 3353 Peachtree Road, N.E. Suite 600, North Tower Atlanta, Georgia 30326

ReliabilityFirst’s 2016 4th Quarter Statement of Activities Variance Report - Unaudited

Dear Mr. Michael Walker:

As requested, the attached 2016 4th Quarter Statement of Activities (unaudited) provides a comparison of budgeted and actual expenses relative to the 2016 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 2016 4th Quarter Statement of Activities Variance Report - Unaudited

Significant Variances For the year ending December 31, 2016 ReliabilityFirst Corporation is $778K (4.02%) under budget. The major contributors to this variance are:

Budget Funding • Investment Income: $17K (100%) over budget for YTD

o The variance in Investment Income is due to the change in value of the company’s investment portfolio, which was not budgeted.

• Miscellaneous Income: $27K (100%) over budget for YTD o The variance in Miscellaneous Income is mainly due to the redemption of the corporate

credit card rewards as cash, which was not budgeted.

Budget Expenses • Personnel Expenses

o Employee Benefits: $246K (14%) under budget for YTD Employee Benefits is under budget as result of variances in Medical Benefits and Training. Medical Benefits is under budget due to personnel being below the approved staffing levels, along with the difference between the medical plans that were included in the budget and the plans that were actually selected by the employees. Training is under budget due to employees not taking advantage of training opportunities.

o Savings & Retirement Costs: $138K (7%) under budget for YTD Savings & Retirement Costs is under budget due to employees not taking full advantage of the company plan benefits, along with the year-end adjustment that was made to reduce the discretionary contribution amount for those employees who did not meet the plan requirements.

• Meeting Expenses o Meetings: $41K (19%) over budget for YTD

Meetings is over budget due to the increased costs associated with the Reliability, CIP V5, and Protection Systems Workshops.

o Travel: $200K (24%) under budget for YTD Travel expenses are under budget primarily due to travel activity being less than anticipated.


• Operating Expenses o Contract & Consultants: $55K (10%) under budget for YTD

Contracts & Consultants is under budget as a result of the scope of the vulnerability and penetration testing being less than originally anticipated, budgeting for compliance monitoring activities that did not occur, and not needing any advanced customization of SharePoint. These variances are offset by the costs associated with the expertise management services being conducted to elicit knowledge from key personnel and the financial internal controls evaluation, which were not budgeted.

o Office Costs: $74K (10%) under budget for YTD Office Costs is under budget as a result of having less upgrades for the compliance portal and the audit management software than anticipated.

o Professional Services: $115K (23%) under budget for YTD Professional Services is under budget due to the reduction in use of outside legal counsel, along with not needing to conduct a search for a new independent director.

• Fixed Assets o Computer Hardware & Software: $150K (112%) over budget for YTD

Computer Hardware & Software is over budget due to the costs associated with the redesign and development of the corporate internal and external websites that were not budgeted.

o Furniture & Fixtures: $40K (100%) under budget for YTD Furniture & Fixtures is under budget due to replacing all of the remaining office furniture in 2015 and not needing to replace any office furniture in 2016.

o Leasehold Improvements: $12K (100%) over budget for YTD Leasehold Improvements is over budget due to the replacement of the main office exit doors, as a result of a defect with the electronic locking devices.

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

(unaudited)From 01/01/2016 Through 12/31/2016

(in Whole Numbers)

2016 YTD Actual

2016 YTD Budget

YTD Variance Over/(Under)

%Variance

FundingAssessments 19,367,209 19,367,209 0 0.00%

Penalty Sanctions 748,250 748,250 0 0.00%Membership Dues 0 0 0 0.00%

Investment Income 17,322 0 17,322 0.00%Miscellaneous Income 27,076 0 27,076 0.00%

Total Funding 20,159,856 20,115,459 44,397 0.22%

Expenses Personnel Expenses

Salaries 11,355,487 11,427,306 (71,819) -0.63%Payroll Taxes 663,645 699,888 (36,243) -5.18%

Employee Benefits 1,540,443 1,786,698 (246,255) -13.78%Savings & Retirement Costs 1,722,125 1,860,244 (138,119) -7.42%

Total Personnel Expenses 15,281,700 15,774,136 (492,436) -3.12%

Meeting ExpensesMeetings 264,006 222,750 41,256 18.52%Travel 637,055 836,800 (199,745) -23.87%

Conference Calls 47,802 42,000 5,802 13.81% Total Meeting Expenses 948,863 1,101,550 (152,687) -13.86%

Operating ExpensesContracts & Consultants 484,749 540,110 (55,361) -10.25%

Rent & Utilities 518,422 534,619 (16,197) -3.03%Office Costs 642,742 717,182 (74,440) -10.38%

Professional Services 374,440 488,989 (114,549) -23.43%Miscellaneous 43,290 34,640 8,650 24.97%Depreciation 375,233 352,668 22,565 6.40%

Total Operating Expenses 2,438,876 2,668,208 (229,332) -8.59%

Non-Operating Expenses 67 2,483 (2,416) -97.31%

Total Expenses 18,669,507 19,546,377 (876,870) -4.49%

Net Change in Assets 1,490,350 569,082 921,268 161.89%

Fixed AssetsDepreciation (375,233) (352,668) (22,565) 6.40%

Computer Hardware & Software 283,278 133,500 149,778 112.19%Furniture & Fixtures 0 40,000 (40,000) -100.00%

Leasehold Improvements 11,500 0 11,500 0.00%Increase/(Decrease) in Fixed Assets (80,455) (179,168) 98,713 -55.10%

Total Budget(Expenses + Incr/(Decr) in Fixed Assets) 18,589,051 19,367,209 (778,158) -4.02%

Change in Working Capital(Total Funding less Total Budget) 1,570,805 748,250 822,555 109.93%

FTE 71.27 72.20 (0.93) -1.29%

WC - 12/31/2015 1,663,072 (590,176) 2,253,248Less: Adjustment for future liabilities (1,078,718) 0 (1,078,718)

Available Working Capital 584,354 (590,176) 1,174,530

Change to WC - 2016 1,570,805 748,250 822,555Other Adjustments to Reserves (158,007) (158,074) 67

Total Working Capital 1,997,152 0 1,997,152

Working Capital Reserve 645,255 645,255 0Operating Reserve 1,000,000 1,000,000 0

Total Working Capital and Operating Reserve 3,642,407 1,645,255 1,997,152

Confidential Agenda items - Intentionally omitted

Separator Page

Working Capital and Investment Analysis

Separator Page

Working Capital and

Investment AnalysisJill Lewton, Controller

March 9, 2017

Cleveland, OH


Working Capital and Operating Reserve Analysis

2

2016 Reserve level of $1.6M, included Operating Reserve of $1M and Working Capital Reserve of

$645K for assessment stabilization.

January 2017 Reserve level of $3.4M, includes Operating Reserve of $1M and Working Capital

Reserve of $2.4M for assessment stabilization, as approved in the 2017 Budget.


Investment Account Performance

3

June 30, 2016 October 31, 2016 January 31, 2017

Cash Value $187,787 $220,004 $520,204

Bond Market Value $4,700,738 $6,361,507 $6,056,243

Average Maturity 1.67 years 1.56 years 1.61 years

Effective Duration 1.60 years 1.50 years 1.55 years

Yield to Maturity .93% 1.14% 1.43%

Estimated Annual Income $43,717 $72,521 $86,604

Management Fee .25% .25% .25%


Investments

Securities

Bond

Rating

Maturity

Date

FHLMC AAA 3/8/2017

CISCO SYS INC A1 3/14/2017

WELLS FARGO A2 5/8/2017

BERKSHIRE HATHAWAY INC AA2 5/15/2017

FNMA AAA 6/12/2017

IBM CORP AA3 9/14/2017

BLACKROCK INC A1 9/15/2017

COMCAST CORP A3 11/15/2017

US TREASURY N/B AAA 11/15/2017

FHLB AAA 11/17/2017

JPMORGAN CHASE & CO A3 1/15/2018

TARGET CORP A2 1/15/2018

ORACLE CORP A1 4/15/2018

UNITED STATES TREASURY

NOTESAAA 6/30/2018

JOHN DEERE CAPITAL CORP A2 7/13/2018

BOEING CAPITAL CORP A2 8/15/2018

4

Securities

Bond

Rating

Maturity

Date

EMERSON ELECTRIC CO A2 10/15/2018

FNMA AAA 11/27/2018

CATERPILLAR INC A2 12/15/2018

TOYOTA MOTOR AA3 1/17/2019

WAL-MART STORES INC AA2 2/1/2019

FHLMC AAA 3/27/2019

WELLS FARGO & COMPANY A2 4/22/2019

APPLE INC AA1 5/6/2019

COMCAST CORP A3 7/1/2019

TOYOTA MOTOR AA3 7/18/2019

FHLMC AAA 8/1/2019

AMERICAN HONDA FINANCE

CORPA1 8/15/2019

PNC BANK A2 10/18/2019

AFLAC INCORPORATED A3 3/16/2020

PEPSICO INC A1 11/1/2020

GENERAL ELEC CAP CORP A2 2/11/2021

The securities listed in red are new investments as of February 17, 2017.


% of Individual Investments

Securities

% of Total

Market

ValueFHLMC 2.45%

CISCO SYS INC 3.84%

WELLS FARGO 2.30%

BERKSHIRE HATHAWAY INC 1.50%

FNMA 1.24%

IBM CORP 3.93%

BLACKROCK INC 3.78%

COMCAST CORP 1.90%

US TREASURY N/B 2.36%

FHLB 2.37%

JPMORGAN CHASE & CO 3.98%

TARGET CORP 2.39%

ORACLE CORP 3.86%

UNITED STATES TREASURY NOTES 2.34%

JOHN DEERE CAPITAL CORP 3.83%

BOEING CAPITAL CORP 2.81%

5

Securities

% of Total

Market

ValueEMERSON ELECTRIC CO 2.93%

FNMA 4.63%

CATERPILLAR INC 3.94%

TOYOTA MOTOR 2.32%

WAL-MART STORES INC 2.25%

FHLMC 3.94%

WELLS FARGO & COMPANY 1.54%

APPLE INC 3.87%

COMCAST CORP 1.67%

TOYOTA MOTOR 1.54%

FHLMC 4.58%

AMERICAN HONDA FINANCE CORP 3.79%

PNC BANK 3.09%

AFLAC INCORPORATED 3.09%

PEPSICO INC 3.82%

GENERAL ELEC CAP CORP 3.40%


Questions & Answers

Forward Together ReliabilityFirst

Confidential Agenda items - Intentionally omitted

Separator Page

b) Statement of Policy and Procedure for Investment of

Corporate Funds

Separator Page

of 3 Statement of Policy and Procedure for Investment of Corporate Funds Version 1, March 2, 2016

Statement of Policy and Procedure for Investment of

Corporate Funds

A. Policy for Investment of Corporate Funds

This policy applies to ReliabilityFirst’s investment of all corporate funds into fixed-income

instruments with a strategy to assure capital preservation while earning a market rate of return

without assuming undue risk to the principal. The primary objectives of investment activities shall

be, in their order of importance, preservation of capital, maintenance of liquidity, and yield. All

investment activity shall be under the general jurisdiction of the Finance and Audit Committee,

and all investments shall be registered in the name of the corporation.

Authorized Investments:

On a going forward basis, Authorized Investments shall not include corporations that are NERC

Registered Entities.

ReliabilityFirst is authorized to invest in the following investments as indicated (the “Authorized

Investments”):

A. Commercial Checking Account1 – Any bank rated A or Better by Standards & Poor’s.

B. Business Savings Account – Any bank rated A or Better by Standards & Poor’s.

C. Certificates of Deposit –Any bank rated A or Better by Standards & Poor’s. For banks not

rated, investments shall be limited to amounts within FDIC’s insurance limit.

D. U.S. Treasury Bills, Notes, and Bonds – No limitation on amount invested.

E. U.S. Government Agency obligations, participations, or other instruments – No limitation

on amount invested.

F. U.S. Domestic Corporate Bonds – A rated or better.

G. Other Investments – Between meetings of the Finance and Audit Committee, if deemed

advisable, other investments not specifically authorized by this policy may be invested in

if approved by both the Treasurer and the Finance and Audit Committee Chairman.

1 Checking Account funds may be invested in End-of Day Sweep Repurchase Agreements (“Repurchase

Agreements”). Repurchase Agreements are liquid overnight investments secured by the U.S. government. At the

end of the business day, any collected funds in excess of the target balance, are automatically swept into the

investment account. At the start of the next business day, invested funds are returned to the checking account with

any interest that was earned.


(Any such action shall be reviewed by the Finance and Audit Committee at its next

normally scheduled meeting.)

Quality Ratings:

All Authorized Investments shall meet the following requirements concerning quality ratings.2 For

maturities over one year, the minimum acceptable quality rating is A by Standard & Poor’s. For

short term securities, the minimum acceptable quality rating is the equivalent commercial paper

rating of A-1.

ReliabilityFirst shall use the quality ratings in effect as of the date of purchase of the security. If

a quality rating change occurs which disqualifies a security that is already held by ReliabilityFirst,

ReliabilityFirst must review the security for determination of possible sale.

Authorized Funds:

ReliabilityFirst is authorized to invest the following funds (the “Authorized Funds”) into the

Authorized Investments:

A. Operating Reserve;

B. Monetary Penalties Collected from Registered Entities pursuant to Section 215 of the

Federal Power Act; and

C. Other Funds as recommended by the Treasurer and approved by the Finance and Audit

Committee.

B. Procedure for Investment of Corporate Funds

The President & CEO and the Treasurer shall have the authority to invest the Authorized Funds

into the Authorized Investments that meet the applicable quality rating. The Treasurer is

responsible for selecting the appropriate Authorized Investment that meets the applicable quality

rating. The Treasurer shall determine the appropriate Authorized Investment based on relative

availability and maturities required. All other things being equal, the investment providing the

highest return will be preferred, and the Treasurer should attempt to invest the Authorized Funds

in those Authorized Investments that earn the highest return. The Treasurer shall provide a

quarterly report to the Finance and Audit Committee of all investment activity.

2 A quality rating is an appraisal of the underlying credit of an investment issued in a particular transaction.


The President & CEO and the Treasurer shall have the authority to liquidate, withdraw, or transfer

funds from or between the Authorized Investments. Any such action will be reviewed by the

Finance and Audit Committee at the next normally scheduled meeting during the quarterly

working capital and investment analysis discussion.

The Treasurer shall monitor and ensure that the investment portfolio remains sufficiently liquid to

meet all reasonably anticipated operating requirements. The Treasurer shall perform a quarterly

review of ReliabilityFirst’s investments, which shall include a working capital and investment

analysis and a periodic verification of the existence of the securities. The Treasurer shall provide

a quarterly report of his or her quarterly review to the Finance and Audit Committee.

2018 Business Plan and Budget Presentation

Separator Page

2018 Business Plan & Budget

Jill Lewton, Controller

March 9, 2017

Cleveland, OH


2018 Business Plan & Budget Schedule

2

Date Activity

April 26, 2017 Board of Directors conference call to approve first draft of Business

Plan & Budget (BP & B) for posting and to send to NERC

May 1, 2017 First draft of BP & B due to NERC

May 2017 30 day member comment period for first draft of BP & B

May 24, 2017 Meet with FERC to discuss BP & B

June 1, 2017 Board of Directors meeting to approve final BP & B

July 5, 2017 Final BP & B due to NERC

August 24, 2017 Final budget package to FERC


2018 Expectations

2018 Projection – as proposed in 2017 Budget

• 2018 Lower Range: 3.4%‒ Personnel Expense: 3.7%

• Salary Increase: 3%

• Medical/Dental Premiums: 15%/8%

‒ Meeting Expense: 1%

‒ Travel Expense: 3.5%

‒ Operating Expense: 1.5%

• 2018 Higher Range Increase to Address At-Risk Initiatives: 6.2%‒ Personnel Expense: 5.9%

• Salary Increase: 3%

• Medical/Dental Premiums: 15%/8%

• Hire 2 FTEs: CIP

‒ Meeting Expense: 1%

‒ Travel Expense: 3.5%

‒ Operating Expense: 1.5%

‒ Fixed Asset Additions:• Document/Data Management Application: $100,000

• Personal Computers: $100,000

What are the Committee’s expectations?

3


2018 Budget Expectations

Budget Assumptions

• Staffing‒ 3 new FTEs

• Personnel Expenses‒ Merit Increases: 3%

‒ Medical/Dental Premiums: 15%/8%

• Travel Expenses‒ no change

Additional Considerations

• Will not budget for a vacancy rate as the following staffing related expenses will not be

specifically budgeted and staffing has stabilized:‒ Internships

‒ Recruitment costs

‒ Relocation expenses

Assessments

• Goal is to track assessment stabilization strategy

2018 Budget Projection

• 5% to 7% increase

4


Assessment Stabilization Analysis

5

Actual

2017 2018 2019 2020 2021 2022

Projected % Budget Increase 2.8% 6.0% 4.9% 3.25% 3.25% 3.25%

Assessment % over prior year assessment 1% 2.0% 3.5% 4.0% 4.5% 4.5%

Total Assessment 19,560,881 19,952,099 20,650,422 21,476,439 22,442,879 23,452,808

Reduction in reserves for assessment stabilization - (1,309,451) (1,642,419) (1,535,782) (1,312,102) (1,069,072)

Working Capital Reserve at December 31 $2,778,288 $3,681,714 2,339,295 1,103,513 91,410 (677,662)

Assessment Forecast

• Assumptions

o Estimated $200,000 per year for penalties

o Actual expenses are $100,000 under budget

o 2018 reserve includes $1.9M of known penalties

• Variables That Will Directly Impact This Forecast

o Final Budget Amount

o Penalties Collected

o Prior Yearend Results

o Desired Annual Assessment Increases

Draft for discussion purposes only


Operating Reserve

Reserves across NERC and the regions vary between

$598K and $5.2M, including operating and assessment

stabilization funds

Operating Reserve is intended for uncertain, or

unbudgeted and unexpected expenditures.

Recommendation

• $1,000,000 Operating Reserve for 2018

Action

• Approve recommendation of $1,000,000 for the 2018 Operating

Reserve to be submitted for Board approval

6


Questions & Answers

Forward Together ReliabilityFirst

Working Capital and Operating Reserve Policy

Separator Page

of 2 Policy and Procedure on the Working Capital and Operating Reserve Version 1, March 3, 2016

Statement of Policy and Procedure

on the Working Capital and Operating Reserve

This policy governs the determination of the company’s annual working capital and operating

reserve requirements and the procedure for management to access these funds.

The amount of the company’s working capital and operating reserve fund shall be separately

identified and quantified each year in the business plan and budget submitted to and approved by

the Board of Directors, after notice to and recommendation of the Finance and Audit Committee.

All expenditures of the working capital and operating reserve fund are subject to all applicable

company policies and procedures, including procurement policies and delegations of authority,

and shall be reported in the budget variance reports prepared by management and included in the

quarterly Finance and Audit Committee agenda materials.

A. Working Capital

The company’s working capital requirement shall be the amount of cash necessary to satisfy

projected cash flow for daily operations, as detailed in the company’s business plan and budget.

The working capital will be controlled to enhance cash flow management of expenditures while

providing the capability to stabilize future annual assessments.

Reallocation of Funds from Unused Budgeted Funds

During the course of the year events may unfold such that some approved budgeted

expenditures may run below budgeted amounts or may not occur, therefore making

budgeted funds available to satisfy other resource needs based on changing priorities. In

the event such under runs occur, the unused budgeted funds may be reallocated to offset

other expenditures throughout the year.

The President & Chief Executive Officer and Treasurer shall have the authority to

reallocate the unused budgeted funds as they deem necessary. Managers shall have

authority to reallocate unused budgeted funds within their respective departments up to

$50,000 and shall report any reallocation to the Treasurer.

The Treasurer shall report any reallocation of unused funds in excess of $100,000 for any

one specific project or major activity to the Finance and Audit Committee at the next

regularly scheduled Finance and Audit Committee meeting.

B. Operating Reserve

ReliabilityFirst will maintain either 10% of the budgeted year’s expenses or a minimum of

$1,000,000 as its Operating Reserve. The amount of the Operating Reserve fund is determined and

recommended for approval by the Finance and Audit Committee during the annual budget

process. This Operating Reserve is set aside each year with the intention of providing for

of 2 Policy and Procedure on the Working Capital and Operating Reserve Version 1, March 3, 2016

uncertain, or unbudgeted and unexpected expenditures. The Operating Reserve is determined

based on the following:

(1) amounts for any anticipated expenditures where the specific amount and timing are

uncertain (“Anticipated Expenditures”); and

(2) amounts for any unbudgeted and unexpected expenditures that were not anticipated at

the time of preparation and approval of the business plan and budget (“Unknown

Expenditures”).

C. General Withdrawal and Reallocation Limitations

1. The President & CEO and the Treasurer are authorized to request approval to withdraw

funds from the Operating Reserve.

2. To withdraw funds from the Operating Reserve:

a. For expenditures less than $499,999, prior approval of the Finance and Audit

Committee is required.

b. For expenditures of $500,000 or more, approval by the Board of Directors is required,

after notice to and recommendation by the Finance and Audit Committee.

i. For expenditures of $500,000 or more for Unknown Expenditures, a filing with

the Federal Energy Regulatory Commission (the "Commission") is required for

the Commission's review and approval. A filing will be deemed approved if the

Commission does not act on it or issue a tolling order extending its time to act

within 30 days.

3. The limitation set forth in section C(2)(b) and C2(b)(i) apply if any amount allocated from

the Operating Reserve plus any reallocation of unused budgeted funds is, in the aggregate,

$500,000 or more for any one specific project or major activity in a department.

2017 Planner

Separator Page

Issued 3/09/2017

Finance and Audit Committee Charter Planner and Performance of Specific Duties for 2017

Required Activity Frequency Date Last

Performed

Activity Plan

Performance

Q1 Q2 Q3 Q4

3/9 5/31 9/27 11/29

The Integrity of ReliabilityFirst’s Financial Statements and Reporting

1. a. Become familiar with accounting and reporting principles and practices applied by RF in preparing financial statements.

Quarterly 3/9/2017

C X X X The material addressed during each Committee meeting enhances committee awareness of financial reporting.

b. Review emerging accounting and reporting issues and assess their impact on financial reporting.

Quarterly 3/9/2017

C X X X Accounting standard updates for revenue recognition, accounting for leases, and presentation of financial statements were included in the notes to the Financial Statements for the year ending December 31, 2016 audit report.

2. Review RF's policies and procedures with the Treasurer, the Controller, and the independent accountant to reasonably assess the adequacy of internal accounting and financial reporting controls.

Annually 3/9/2017

C RSM US LLP did not identify any deficiencies in internal control during the audit that were considered to be material weaknesses. Staff has reviewed policies and procedures and does not recommend any changes at this time.

3. Review the quarterly financial reports and projections submitted by ReliabilityFirst to NERC.

Quarterly 3/9/2017

C X

X X

Quarterly financial statements are reviewed during each regularly scheduled committee meeting.

4. Annual Audited Financial Statements These items were addressed in the notes to the Financial Statements and the required communications from the Independent Accountant to the Finance and Audit Committee that were included in the audit report package for the year ending December 31, 2016.

a. Review the annual audited financial statements with the Treasurer, the Controller, and the independent accountant, and approve for issuance.

Annually 3/9/2017 C

b. Obtain and review a report from the independent accountant regarding:

i. Significant accounting policies and practices adopted or changed during the year;

Annually 3/9/2017 C

ii. Significant estimates within the financial statements; Annually 3/9/2017 C

Issued 3/09/2017

iii. Consultations between management and other accounting or consulting firms regarding accounting or auditing matters;

Annually 3/9/2017 C The draft audit report and corresponding letters were reviewed, discussed, and approved by the committee during the March 9, 2017 committee meeting.

iv. Significant or unusual transactions occurring during the year;

Annually 3/9/2017 C

v. Other written communications such as any management letters, audit adjustments recorded, or schedule of unadjusted differences;

Annually 3/9/2017 C

vi. Significant deficiencies or material weaknesses in the design or operation of internal controls, and

Annually 3/9/2017

C

vii. Any fraud, whether or not material. Annually 3/9/2017 C

5. Meet in executive session as needed with Chief Executive Officer, Treasurer, Controller, Independent Accountant, and others.

Quarterly 3/9/2017 C X X X During the March 9, 2017, committee meeting the committee met in executive session with the Independent Accountant.

Independent Accountant Firm Qualifications, Performance, and Independence

6. a. Evaluate, appoint, and where appropriate, replace the independent accountant;

Annually 5/21/2014 X

b. Approve all audit and non-audit engagement fees and terms with the independent accountant;


c. Review, prior to the annual audit, the scope and general extent of the independent accountant’s audit plan.


d. The Committee may delegate to one or more Committee members the authority to pre-approve such non-audit services between regularly scheduled meetings provided that such approvals are reported to the full Committee at the next Committee meeting.


7. Discuss with the independent accountant, at least annually, all relationships between the independent accountant and ReliabilityFirst in order to assess the independent accountant’s independence.


8. a. Obtain and review a report, at least every three years, by the independent accountant describing: the firm’s internal quality-control procedures and any material issues raised by the most recent internal quality-control review, or peer review of the firm.

Every 3 Years 3/9/2017 C Every 3 years RSM US LLP goes through a

peer review. Their most recent peer

review was completed in October 2016, in

which, RSM US LLP received a peer review

rating of pass.

A copy of the report was included in the

March 9, 2017 committee meeting agenda

package.

b. Obtain and review a report describing any inquiry or investigation by governmental or professional authorities.


Issued 3/09/2017

Enterprise Risk Management Program and Internal Auditing

9. Review the need for any internal auditing services. Annually 8/24/2016 X Committee and staff has not identified any need for any additional audit services. As committed in the November 2016 committee meeting, the future looking controls testing plan will not be developed until the May 2017 committee meeting.

a. If a need is identified, agree with and approve the scope of effort and selection of auditor, with reporting of the results to the Committee.

As Needed 3/9/2017

C X

10. Review and advise the Board at least annually, with respect to ReliabilityFirst’s enterprise risk management program and its risk assessment including, but not limited to, the risk of fraud, operational risk, financial risk, and reputational risk.


11. Review with management ReliabilityFirst’s anti-fraud programs and controls.


Financial Matters

12. Review the terms of the Line of Credit annually and endorse for the Board to approve.

Annually 6/1/2016 X

13. Review all loans or capital leases entered into with principle amounts in excess of $250,000.

As Needed N/A

14. Review and endorse to the Board for approval, the amount of ReliabilityFirst’s operating reserve and the amount of working capital reserve funds used to stabilize assessments in the annual budget.

Annually 3/9/2017

C X During the March 9, 2017 committee meeting the committee reviewed and endorsed to the Board for approval the amount of the Company’s operating reserve.

15. Review and approve:

a. Management’s assumptions used in building the budget. Annually 3/9/2017 C X During the March 9, 2017 committee meeting the Committee reviewed and approved management’s assumptions used in building the budget.

b. The final draft annual budget and endorse the final draft to the Board for approval.

Annually 6/1/2016 X

16. Review and recommend for Board approval, changes as necessary to the Statement of Policy and Procedure for Investment of Corporate Funds.

Annually 3/9/2017 C Committee and staff have not identified any changes to the Statement of Policy and Procedure for Investment of Corporate Funds.

17. a. Review the investment performance. Quarterly 3/9/2017 C X X X Investment performance is reviewed during each regularly scheduled committee meeting.

b. Approve any changes to the Investment Manager. As Needed

c. Approve any changes to the investment allocations or types of investments made.

As Needed 8/24/2016 X

Issued 3/09/2017

Compliance with Legal and Regulatory Requirements

18. Review ReliabilityFirst’s IRS Form 990 and associated state tax reports before filing.

a. This will be performed by the Chair or another member of the Committee who is a designated financial expert.

Annually 6/1/2016 X

19. Advise the Board with respect to any material reports or inquiries received from regulators or governmental agencies.


20. a. Oversee the management of the process for confidential anonymous submission, receipt, retention, and treatment of concerns, or complaints received regarding questionable matters or breaches of ReliabilityFirst’s Code of Business Conduct and Ethics.

As Needed 11/30/2016 X

b. Report regularly to the Board on the treatment, investigation, outcome, or disposition of such concerns or complaints.

As Needed N/A X

21. Review the Committee Charter at least annually, and adopt such Committee Charter changes as the Committee deems appropriate, subject to approval by the Board.


22. Confirm annually that all charter duties have been effectively executed.


23. Report regularly to the Board of Directors with such recommendations as the Committee may deem appropriate.

Quarterly 3/9/2017 C X X X During each Board meeting the Chair provides the full board with a committee report.

24. Perform such other functions as may be required by law, ReliabilityFirst’s Certificate of Incorporation or Bylaws, or the Board.

As Needed

11/30/2016 X

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