Feb 03, 2025 Finance and Audit Committee Meeting

[00:00:04]

UH, GOOD MORNING.

MEMBERS OF

[1. Call General Session to Order]

I HEREBY CALL THIS MEETING TO OF THE, UH, COMMITTEE TO ORDER.

UH, THE MEETING IS BEING, UH, WEBCAST LIVE TO THE PUBLIC ON NARCOTIC'S WEBSITE.

I HAVE CONFIRMED THAT A QUORUM IS PRESENT IN PERSON.

BEFORE MOVING ON TO TODAY'S BUSINESS.

I'LL HIGHLIGHT TO COMMITTEE MEMBERS THAT THE ANTITRUST ADMONITION AND SECURITY MAP WERE INCLUDED WITH THE POSTED MEETING MATERIALS.

THE FIRST ORDER OF BUSINESS ON TODAY'S AGENDA IS ITEM TWO.

NOTICE OF PUBLIC COMMENT, IF ANY.

TODAY'S MEETING WAS POSTED PUBLICLY ON JANUARY 27TH, 2025, AND PROVIDED INSTRUCTIONS FOR THE PUBLIC FOR COMMENTING IN PERSON.

AS WE UNDERSTAND IT, NO ONE HAS EXPRESSED AN INTEREST IN C*M.

IS THAT STILL CORRECT, CHAD? THAT IS CORRECT.

CHAIR.

OKAY.

THANK YOU.

SO,

[3. December 2, 2024 General Session Meeting Minutes]

DOES ANYONE HAVE ANY COMMENTS OR WISH TO MAKE A MOTION? I MOVE TO APPROVE.

I GUESS I'LL HAVE TO SECOND IT, AND SINCE WE'RE THE ONLY TWO, WE'LL DEEM THOSE APPROVED.

UH, THE NEXT

[4.1 Review of Committee Charter]

WE HAVE TWO SUB ITEMS. FIRST IS AGENDA ITEM 4.1, THE REVIEW OF THIS COMMITTEE'S CHARTER.

UH, THERE ARE NO, UH, REVISIONS CURRENTLY PROPOSED FOR 2025, BUT, UH, UH, PEGGY, I UNDERSTAND YOU MAY HAVE A COUPLE OF, UH, RECOMMENDATIONS IN THIS REGARD, OR YOU WANNA WAIT TILL LATER.

UH, UH, THERE'S JUST A FEW THINGS I WANTED TO TALK ABOUT LIKE THAT WE'LL TALK ABOUT LATER.

OKAY, THAT SOUNDS GOOD.

THE NEXT IS AGENDA ITEM 4.2,

[4.2 Internal Audit Department Charter]

UH, PENNY IS GONNA PRESENT REVISIONS TO THE CHARTER PROPOSED FOR 2025.

THIS IS A VOTING ITEM FOR THE COMMITTEE, BUT DOES NOT REQUIRE BOARD FINAL APPROVAL.

SO, PENNY, GOOD MORNING.

OKAY.

UM, WHILE THE CHARTER IS THE SAME AS IN PRIOR YEARS, THE, UM, IT HAS BEEN REORGANIZED TO INCLUDE THE MANDATE, WHICH IS REQUIRED BY THE NEW GLOBAL AUDIT STANDARDS.

UH, THE MANDATE INCLUDES THE FUNCTION, AUTHORITY, AND ROLE AND RESPONSIBILITIES, AND THE STANDARDS BECAME EFFECTIVE IN JANUARY.

SO BASICALLY ALL OF THE INFORMATION WAS IN THE PRIOR CHARTERS.

WE JUST HAD TO REORGANIZE IT A BIT TO CREATE THE MANDATE.

SO WE DO HAVE, UM, THE RED LINE VERSION AND THE CLEAN VERSION.

SO ARE THERE ANY QUESTIONS ON THAT? I HAVE A COUPLE OF RECOMMENDATIONS, UM, REGARDING SOME OF THE USE OF DEFINITIONS IN THE CHARTER.

IF, IF YOU LOOK AT THE WAY, UH, FINANCE AND AUDIT COMMITTEE IS DEFINED AS USING THE WORD COMMITTEE, UM, THAT'S OKAY.

BUT THEN YOU GO DOWN TO AUTHORITY AND THEN IT SAYS F AND A, WHICH AUTHORIZES INTERNAL AUDITORS FUNCTION WITH THE POWERS THAT'S AUTHORIZED.

BUT F AND A IS NOT DEFINED ANYWHERE.

OKAY.

SO WHAT I WOULD DO IS RECOMMEND CHANGING F AND A TO COMMITTEE C THERE COMMITTEE.

OKAY.

I THINK THAT WAS, OTHER THAN THAT, IT LOOKED LIKE, UM, YOU KNOW, YOU, YOU BROUGHT IT IN TO COMPLIANCE WITH GLOBAL, THE NEW GLOBAL INTERNAL AUDIT STANDARDS.

YES.

WITH THAT ALL, DO YOU HAVE ANY COMMENTS? NO.

OKAY.

OKAY.

UH, I'LL ENTERTAIN A MOTION TO APPROVE THESE.

I MOVE TO APPROVE AND I'LL SECOND IT.

SO WE'LL DEEM THOSE TO BE APPROVED.

I WILL MAKE THOSE CHANGES AND GET THE HARD COPY TO YOU.

OKAY.

SO WE APPROVED WITH THE CHANGES? YES.

OKAY.

JUST TO MAKE SURE.

UH, THANK YOU.

THE NEXT IS AGENDA ITEM

[5.1 Handling of Complaints Regarding Financial Matters]

THERE ARE THREE SUB ITEMS, UH, THAT ARE NON-VOTING ITEMS THAT RICHARD SHIELD WILL WALK US THROUGH.

AGENDA ITEMS 5.1 IS A HANDLING OF COMPLAINTS REGARDING FINANCIAL MATTERS.

5.2 IS A POLICY ON HIRING FORMER EMPLOYEES OF THE INDEPENDENT AUDITOR, AND 5.3 IS A POLICY ON THE INDEPENDENT AUDITOR SELECTION.

RICHARD, THE FLOOR IS YOURS.

THANK YOU.

RICHARD SHIELD, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER, AND CHIEF RISK OFFICER.

I HAVE THESE THREE TO RUN THROUGH.

ITEM 5.1, HANDLING COMPLAINTS REGARDING FINANCIAL MATTERS.

I GOT IT.

UH, NO CHANGES FROM PREVIOUS YEARS.

SO THIS IS, UH, JUST AN UPDATE.

ANY QUESTIONS ON EMPLOYEE COMPLAINTS? OKAY, NEXT ITEM

[5.2 Policy on Hiring Former Employees of the Independent Auditor]

POLICY ON HIRING FORMER EMPLOYEES OF THE INDEPENDENT AUDITOR.

UH, ONCE AGAIN IS CONSISTENT WITH LAST YEAR.

THERE WERE NO, UM, WE DID NOT ENTERTAIN HIRING ANY EMPLOYEES OF THE, OF OUR EXTERNAL AUDITOR.

ANY QUESTIONS? OKAY, 5.3.

[5.3 Policy on Independent Auditor Selection]

I DID WANNA TALK ABOUT THIS FOR JUST A SECOND.

SO WE HAVE OUR NEXT REQUIRED, UH, RFP IS FOR 2026.

THIS YEAR IS 2025.

WE'LL SEE THE MANDATORY AUDIT AUDITOR ROTATION.

SO WHEN WE VISIT IN APRIL, WE SHOULD HAVE THAT CONVERSATION WITH BAKER

[00:05:01]

WE CAN TALK ABOUT THE REPLACEMENT PARTNER AT THAT TIME.

OKAY.

AND THAT WILL BE EFFECTIVE FOR JANUARY 1ST, 2026, IS THAT CORRECT? THEY'LL BEGIN THE AUDIT.

UH, THERE'S, THERE'S FIELD WORK THAT OCCURS IN OCTOBER OF 2025.

UHHUH FOR THAT AUDIT.

SO WE'LL, WE'LL HAVE THE NEW AUDITOR IN PLACE BEFORE.

OKAY.

SO THE NEW AUDITOR WOULD BE ENGAGED THIS YEAR FOR THE AUDIT FOR 2025.

2025.

OKAY.

THAT'S HELPFUL.

NOW, ANY QUESTIONS OF THAT? OKAY.

NO VOTING ITEMS FOR ANY OF THESE THREE SINCE THERE ARE NO CHANGES.

OKAY.

NEXT, WE'LL MOVE ON TO, OR DID YOU HAVE ANYTHING ELSE TO OFFER ON THESE THREE? I DID NOT, NO.

OKAY.

THANK YOU.

UH, THE NEXT

[6.1 Forecast Adequacy of the Budgeted System Administration Fee Rate]

THERE ARE TWO NON-VOTING DISCUSSION ITEMS. FIRST IS AGENDA ITEM 6.1, FORECAST ADEQUACY OF THE BUDGETED SYSTEM ADMINISTRATION FEE.

UH, RICHARD IS GONNA DO THAT, AND THEN WE'LL MOVE TO LESLIE AND SHE WILL TALK ABOUT THE, UH, REVIEW OF THE FINANCIAL INSTITUTIONS OR MARKET PARTICIPANTS.

RICHARD, YOU'LL TAKE THE FIRST ITEM.

THANK YOU.

ITEM 6.1 IS OUR ANNUAL COMMUNICATION TO MARKET PARTICIPANTS, UH, DELIVERED HERE AT F AND A, UH, TO INDICATE WHETHER OR NOT WE ANTICIPATE AN INCREASE TO THE SYSTEM ADMINISTRATION FEE RATE FOR THE UPCOMING FISCAL YEAR.

SO FOR 2026, WE DO NOT ANTICIPATE AN INCREASE TO THE SYSTEM ADMINISTRATION FEE RATE.

OKAY.

ANY QUESTIONS? LESLIE, IF

[6.2 Review of Financial Institutions that are Market Participants]

THANK YOU.

GOOD MORNING, LESLIE SWANSON.

THIS ITEM IS AN ANNUAL DISCLOSURE.

UM, IT'S FOR, UH, FINANCIAL INSTITUTIONS THAT ARE ALSO MARKET PARTICIPANTS.

IF A FINANCIAL INSTITUTION IS A MARKET PARTICIPANT, ERCOT WILL HAVE A CONFIDENTIALITY AGREEMENT IN PLACE WITH THE FINANCIAL INSTITUTION, WHICH IS DONE TO ENSURE THAT THERE IS NO COMPETITIVE ADVANTAGE TO FINANCIAL INSTITUTION IN THE MARKET.

THERE HAVE BEEN NO CHANGES SINCE LAST YEAR.

AND THEN FINALLY, THIS SLIDE IS JUST DONE FOR TRANSPARENCY SO THAT YOU GUYS KNOW ALL OF THE QUALIFIED FINANCIAL INSTITUTIONS THAT ERCOT DOES BUSINESS WITH.

ANY QUESTIONS? ANY QUESTIONS? OKAY.

THANK YOU, LESLIE.

SO I THINK WE'LL

[7.1 Recommendation regarding Financial Corporate Standard]

THERE ARE TWO SUB ITEMS THAT ARE VOTING ITEMS. AGENDA ITEM 7.1 IS A REC RECOMMENDATION REGARDING THE FINANCIAL CORPORATE STANDARD.

YES, THIS ONE IS THE FINANCIAL CORPORATE STANDARD.

UH, THIS STANDARD'S OBJECTIVE IS TO MAINTAIN FINANCIAL INTEGRITY, AND IT SETS, SETS THE FRAMEWORK FOR ERCOT LIQUIDITY, DEBT, AND BUDGET.

AND THIS IS REVIEWED ANNUALLY BY THE FNA COMMITTEE.

THE ONLY CHANGE THAT WE HAVE THIS YEAR IS FOR, UM, UPDATING THE MOODY'S RATING TO REFLECT THE UPGRADE THAT WE RECEIVED LAST YEAR.

AND AGAIN, WE'RE RES WE'RE REQUESTING A VOTE FROM THE FNA TO RECOMMEND APPROVAL TO THE BOARD.

OKAY.

UH, THANK YOU, LESLIE.

DO I HEAR A MOTION? I, I MOVE TO APPROVE.

OKAY.

THANK YOU.

I SECOND.

AND, UH, WE WILL NAME THOSE APPROVED.

UH, AND MOVE

[7.2 Recommendation regarding Investment Corporate Standard]

LESLIE, YOU'RE CONTINUING.

GREAT.

THIS ONE IS THE INVESTMENT CORPORATE STANDARD.

THIS ONE OUTLINES THE OBJECTIVES FOR THE INVESTMENTS, UM, WHICH ARE PRESERVATION OF PRINCIPLE LIQUIDITY, AND THEN RETURN ON INVESTMENT.

THE ONLY CHANGE IN THIS ONE IS A MINOR FORMATTING UPDATE.

UM, AND AGAIN, WE ARE REQUESTING A VOTE ON THIS ONE AS WELL.

OKAY.

I'LL ENTERTAIN A MOTION.

I MOVE TO APPROVE.

THANK YOU.

YEAH, I SECOND IT.

WE'LL DEEM THAT THE FINANCIAL CORPORATE STANDARD IS REGARDING, UH, RECOMMENDATION REGARDING THE INVESTMENT CORPORATE STANDARD IS APPROVED.

UH, NEXT UP ARE

[8.1 Review 2024 Financial Summary]

UH, RICHARD WILL PRESENT THE FIRST COMMITTEE BRIEF AT AGENDA ITEM 8.1, THE REVIEW OF THE 2024 FINANCIAL SUMMARY.

ALL RIGHT, ITEM 8.1, REVIEW OF THE 2024 FINANCIAL SUMMARY.

[00:10:04]

WE DON'T EXPECT, UH, ANY SIGNIFICANT CHANGES TO THIS NUMBER BETWEEN NOW AND WHEN WE PRESENT THE FINANCIAL STATEMENTS.

THERE'S ANOTHER ABOUT 300,000 IN EXPENSES COMING THROUGH THAT WE HAVE IN OUR FINAL CLOSE OF THE YEAR, WHICH OCCURRED AFTER THESE MATERIALS WERE CREATED.

THE TOP LINE NUMBER OF 96.8 MILLION FAVORABLE TO BUDGET IS LITTLE CHANGED FROM THE PRIOR BOARD OF 93.9 MILLION.

THE DETAILS OF THAT THOUGH DID SHIFT.

WE EXPECTED 70.3 MILLION IN FAVORABLE INTEREST INCOME.

UH, THAT NOW STANDS AT 64.5 MILLION.

UH, STAFFING MANAGEMENT IS FAVORABLE BY 14.9 MILLION.

WE EXPECTED THAT I BELIEVE AT 13 MILLION OR SO.

AND THEN WE HAD THE, THE KNOWN ITEMS OF THE INSURANCE PREMIUMS AT 5 MILLION FAVORABLE AND LEGAL SERVICES INCREASED TO 4.9 MILLION FAVORABLE.

OKAY, ALL ON THE VARIANCE TO BUDGET.

WE HAVE A NUMBER OF ITEMS. THE SYSTEM ADMINISTRATION FEE, WELL, LEMME START FROM THE TOP.

OF COURSE.

WE HAVE THE 96.8 MILLION YEAR END FAVORABLE TO BUDGET.

WITHIN THERE WE HAVE THE, UM, PRELIMINARY RESULTS, UH, ON THE REVENUES, 64.3 MILLION.

CURRENTLY, WE ANTICIPATE THAT A 73.2 MILLION IN THE PREVIOUS BOARD MEETING.

THE PRIMARY DRIVER THERE IS INTEREST RATE VOLATILITY.

SO WE EXPERIENCED A DECLINE IN INTEREST RATES THROUGH THE END OF THE YEAR.

ADDITIONALLY, WE HAD A 0.4 MILLION MOVE IN DEPARTMENT REVENUES FROM 1.4 TO 1 MILLION DRIVEN BY, UH, DECLINE IN ANTICIPATED INSPECTION REVENUES.

AND THEN THE SYSTEM ADMINISTRATION, UH, MOVED FROM A POSITIVE 1.5 TO, UM, AN UNFAVORABLE 1.2 MILLION ON THE EXPENDITURE SIDE.

UH, ONCE AGAIN, IT'S PRIMARILY, UH, THE USUAL SUSPECTS, UH, FOR THIS, THIS GROUPING.

SO WE HAVE A VARIANCE TO BUDGET OF 32.5 MILLION.

THE PREVIOUS BOARD, WE SHOWED THIS AT 20.7 MILLION.

SO THERE WERE SOME SIGNIFICANT MOVES AND I'LL WALK Y THROUGH THOSE.

WE HAD ON THE OTHER EXPENDITURES PIECE, WHICH IS THE PRIMARY MOVER, WE HAVE A MOVEMENT OF 1.4 MILLION IN OUTSIDE LEGAL SERVICES, UH, RELATED TO WINTER STORM, MUR AND PANDA, WHICH WERE NOT NEEDED TO BE EXPENDED.

SO AN ADDITIONAL FAVORABLE VARIANCE THERE.

WE HAD 1.6 MILLION IN FACILITIES EXPENDITURES, WHICH WERE NOT UNDERTAKEN IN 2024.

THOSE ARE BEING ROLLED INTO, UH, AN OFFICIAL PROJECT AND PART OF THEM ARE DELAYED.

UH, THEY'RE RELATED TO THE BLUE BUILDING AT THE TAYLOR CAMPUS.

AND THE FUTURE OF THAT BUILDING IS UNDER CONSIDERATION.

COMMON INFRASTRUCTURE.

WE SAW A SWING OF 1.5 MILLION, UH, THAT WAS PREVIOUSLY, UH, SHOWN AT 3.8 MILLION.

AND IT MOVED TO, UM, IT MOVED FROM AN UNFAVORABLE 3.8 TO AN UNFAVORABLE 2.3.

AND THAT WAS PRIMARILY DUE TO TIMING ON YEAR END HARDWARE DELIVERIES.

THEN SOME SMALLER ITEMS, TELECOM AND OUTSIDE SERVICES AND STUDIES MADE UP THE REST OF THE OTHER EXPENDITURES PIECE.

RESOURCE MANAGEMENT.

UH, WE HAD A COUPLE OF THINGS HAPPENING HERE.

WE HAD ONGOING HEALTHCARE SAVINGS, WHICH WE'VE TALKED ABOUT PREVIOUSLY.

IT'S BEEN A VERY FAVORABLE YEAR.

IN ADDITION, WE HAD SOME UNEXPECTED ATTRITION TO FORECAST, UH, 10 HEAD COUNT, UH, VERSUS WHAT WE HAD ORIGINALLY PROJECTED THROUGH YEAR END AND A NUMBER OF PROJECT MOVEMENTS WHEN WE WERE LOOKING AT PROJECT EXPENDITURES.

THAT WAS UNFAVORABLE 1.3 AND THAT WAS FAVORABLE 1.9, PRIMARILY DRIVEN BY TEST DATA MANAGEMENT AND THE SERVICENOW PROJECTS.

UH, AND THAT'S TIMING ON THOSE TWO PROJECTS.

ANY QUESTIONS ON THAT SLIDE? IT'S A BUSY SLIDE.

YEAH.

RICHARD, CAN YOU ELABORATE A LITTLE BIT ABOUT THE TAYLOR BLUE BUILDING? ARE WE, THE WAY YOU SAID IT MADE ME THINK WE MAYBE WERE RECONSIDERING WHAT WAS RECOMMENDED IS, IS YEAH, THERE, THERE, THERE ARE A COUPLE OF RECOMMENDATIONS ON THE BOARD FOR HOW TO APPROACH THAT BUILDING, AND WE WANTED TO GIVE IT SOME MORE TIME AND CONSIDER THAT BEFORE WE MADE A MAJOR CHILLER AND, UH, FACILITY INVESTMENT FOR THE BLUE BUILDING.

OKAY.

THANK YOU.

OKAY.

UH, ANY QUESTIONS ON THIS? AND AGAIN, THESE ARE 12 MONTH D PRELIMINARY 12 MONTH NUMBERS, CORRECT? THE, THESE ARE PRELIMINARY.

UM, I'M NOT EXPECTING A MOVEMENT OF, UH, OVER HALF A MILLION BETWEEN THESE NUMBERS AND THE FINALS THAT WE'LL HAVE AT THE FINANCIAL STATEMENTS.

AND I HAVE ONE, UM, PROCESS QUESTION, AND THAT IS, IF YOU HAVE AN INSURANCE RECOVERY, WHERE WOULD THAT BE RECORDED? THAT'S GONNA BE AN OFFSET TO OUTSIDE LEGAL SERVICE EXPENSES.

SO WHEN WE, YES.

OKAY.

GOOD.

ANY OTHER QUESTIONS? OKAY, WITH THAT, WE'LL MOVE ON TO ANY OTHER COMMENTS, RICHARD? UH, NO, THE REST, THE REST OF THE, UH, PRESENTATIONS ARE RELATIVELY STRAIGHTFORWARD.

OKAY.

LESLIE, UH,

[8.2 Periodic Report on Investments]

[00:15:01]

THANK YOU.

THE INVESTMENT, UH, BRIEF.

WE ARE IN COMPLIANCE WITH THE INVESTMENT CORPORATE STANDARD AND THE ONLY, UH, CONTINUING CHANGE ON THIS IS THAT THE, UH, RATES ARE CONTINUING TO DECREASE.

UM, BUT THE FED MET LAST WEEK AND HELD RATES FLAT, SO WE'LL CONTINUE TO UPDATE YOU GUYS ON THAT AS, AS RATES CHANGE.

ANY QUESTIONS ON THE INVESTMENT BRIEF? ANY QUESTIONS? OKAY.

AND THE

[8.3 Periodic Report on Debt Compliance]

AND THE UPDATE FROM LAST MEETING IS THAT WE DID MAKE OUR PAYMENT ON OUR PRINCIPAL PAYMENT ON OUR PRIVATE PLACEMENT AT THE END OF THE YEAR.

AND THEN I DID HAVE ONE ADDITIONAL UPDATE IS THAT WE RENEWED OUR REVOLVER AT THE END OF THE YEAR, UM, EFFECTIVE 12 31 20 24.

ANY QUESTIONS? OKAY.

ANY QUESTIONS? I DON'T HEAR ANY AT THIS POINT, SO THANK YOU, LESLIE.

THE NEXT IS A AGENDA ITEM

[9. Future Agenda Items]

DUE TO THE TIMING OF THE BOARD PRESENTATIONS, WE HAVE PENCILED IN A SPECIAL SESSION BETWEEN THE SEPTEMBER AND THE DECEMBER BOARD TO CONSIDER, UM, F AND A MEETING.

SORRY TO CONSIDER THE INTERNAL AUDIT PLAN.

SO THAT'S REFLECTED HERE.

IF THAT CHANGES, WE'LL UPDATE THIS.

OKAY.

AND THAT'S JUST FOR THE COMMITTEE, CORRECT? THAT'S JUST FOR C, THE F AUDIT COMMITTEE? YES.

I, YEAH, I MISSPOKE IT AS THE COMMITTEE ONLY.

OKAY.

ANY QUESTIONS ON FUTURE ITEMS? OKAY, THANK YOU RICHARD.

I BELIEVE THAT TAKES US TO THE, WELL.

THE NEXT IS OTHER BUSINESS.

DOES ANY, UH, COMMITTEE MEMBER HAVE ANY OTHER BUSINESS THAT THEY'D LIKE TO RAISE OR ANYONE FROM MANAGEMENT LIKE TO RAISE AN ISSUE? OKAY.

UH, WITH THAT WE'RE GOING TO, UH, TRANSITION TO EXECUTIVE SESSION.

[Convene Executive Session]

THERE ARE NO VOTING ITEMS ANTICIPATED FROM THE EXECUTIVE SESSION.

SO THE GENERAL SESSION WILL BE ADJOURNED, UH, AND THE WEBCAST WILL BE CONCLUDED.