Aug 2004AgendaAgenda
Introductory Comments Review Budget Schedule
Review Operating Budget Process and Assumptions
Review Project Process and Assumptions
Input, Questions and Wrap-up
Aug 2004Budget Schedule
September 1 - Public Meeting on 2005 Budget - Input from Public September 20 - Finance and Audit Committee meeting to review
preliminary budget (Special meeting) September 23 - Financial Briefing with PUCT Staff (Tentative) October 7 - Finance and Audit Committee meeting to review draft budget
(Special meeting) October 12 - Public Meeting on Proposed 2005 Budget October 14 - Meeting with PUCT staff on Proposed 2005 Budget October 19 - Finance and Audit Committee Recommendation to Board at
monthly meeting November 16 - Board Approval of 2005 Budget November 23 - Preliminary PUCT Filing Review (if needed) November 30 - PUCT Filing
Aug 2004AgendaAgenda
Introductory Comments Review Budget Schedule
Review Operating Budget Process and Assumptions
Review Project Process and Assumptions
Input, Questions and Wrap-up
Aug 2004
ERCOT - ANNUAL BUDGET PROCESS
TAC (Stakeholders) F&A Committee Board of Directors PUCTERCOT
Gather PrelimData for Major
Assumptions (e.g.,Mwh projections,
major capitalprojects)
High-level PrelimBudget Review by
Finance(target est July)
Gather Detail Datafrom Cost Center& Project Mgrs
DataComplete?
Proposed BudgetReviewed by
ERCOT Officers(target approval
est August)
Proposed BudgetApproved by
ERCOT Officers?
Proposed BudgetReviewed by
Finance & AuditCommittee(target est
September)
Proposed BudgetApproved by F&A
Committee?
Proposed BudgetReviewed by
Board of Directors(target approval
est October)
Proposed BudgetApproved by Board
of Directors?
RequiresIncrease to $/
Mwh Fee?
File Fee Case w/PUCT & Request
Approval of Increaseto $/Mwh Fee (target120 days prior to new
fee effective date)
PUCT ApprovalOrder Received
within 120 days ofeffective date?
Request InterimOrder to Allow FeeIncrease PendingResolution of Fee
Case
Implement New $/Mwh Fee
Effective 120 daysafter filing w/
PUCT
NO
YES
YES
NO
YES
YES
NO
YES
YES
NONO
July 2004
NO
Note: Diagram does not show all iterativecommunications among ERCOT, market participants,
the F&A Committee, the Board and/or the PUCT.
Maintain $/MwhFee Level
Analyze systemenhancement andProtocol change
recommendationsfrom RMS, WMS,ROS, POS, etc.
Makerecommendations(with TAC priorityand ranking) to
Board of Directors
RecommendationsApproved by Board
of Directors?
Provideproject
specificationsto ERCOT
YES
NO
TAC - TechnicalAdvisory Committee
START HERE
Stakeholderrequests/inputs Hold Public
Meeting(target month of
September)
Review ProposedBudget with PUCTStaff prior to Fee
Filing (est October)
Project and OtherRequests (e.g.,
Orders)
Review of Detail
Aug 2004Budget Process
ERCOT Revenue RequirementsOperating ExpensesDebt Service ObligationsRevenue-funded Portion of Capital Investment
Most of Revenue Requirements recovered through the ERCOT System Administrative Fee
ERCOT System Administrative Fee assessed to Qualified Scheduling Entities
Aug 2004Major Budget Assumptions
Operating ExpensesLabor
Staff to perform long-term, base operating activityReevaluate staffing needs and reallocate resources across the
organization as necessaryMerit pool estimated at an average of 3-5%Adjust loading for benefits to reflect changes effective in 2004
Consultants and contractorsReview use of all consultants and contractors to ensure appropriate
balance between ERCOT staff and consultants is maintainedHire to perform highly specialized tasks and to provide short-term
assistance during times of peak resource demand
Aug 2004Major Budget Assumptions
Operating Expenses (continued)
Hardware and software support and maintenance costsBase on actual historical spendingRule of thumb 15% - 20% of original acquisition cost
Facilities costs Base on actual historical spendingProtect investment in facilitiesComplete TCC Phase 2 in late-2004 or early-2005
Employee expensesBase on actual historical spending
Aug 2004Major Budget Assumptions
Capital ExpendituresAssumed $35 million capital programProject funding consistent with ERCOT’s
Financial PolicyNo Texas Nodal implementation costsProcess of project identification and prioritization
described in detail later in the presentation
Aug 2004Major Budget Assumptions
Debt Service ObligationsFavorable financial variance realized in 2004, if
any, used to reduce debt obligationsMaintain investment grade creditPrincipal and interest payments as contracted on
Senior NotesTerm NoteRevolving Credit Facility
Aug 2004Major Budget Assumptions
RevenueApproximately 98% of ERCOT revenue
requirements recovered through the ERCOT System Administrative Fee
No changes to the other miscellaneous fees collected by ERCOTWide-area network feesNon-ERCOT load serving entity feesGeneration interconnection study feesMembership feesOther
Aug 2004Organizational StructureOrganizational Structure
ERCOT
Corporate Market SystemAdministration Operations Operations
* Executive Organization * CMO Administration * COO Administration* Finance * Wholesale PM * Market Operations Support* General Counsel * Settlement Metering * Operations Support* Human Resources * Load Profiling and Data Aggregation * System Operations* NERC Compliance * Settlements and Billing * System Planning* Stakeholder Services * REP/ESI-ID Of Record * Resource Planning* Corporate Communications * Renewables and TCR * Technology Services Administration* Market Rules * Retail PM * System Engineering and Administration* Project Management * Retail Documentation and Reporting * IT Operations* Corporate Applications * Retail Testing and Quality Control * Facilities
* Retail Client Services * Network* Wholesale Client Services * EMMS Development* Market Technology Service * Cyber Security* Data Warehousing * Physical Security* Development & Architecture * EMMS Production* Transaction Services* Web and Data Services* Settlement and Billing* Data Management* IT Delivery
FTE=74 FTE=231
FTE=530
FTE=225
Aug 2004Non-project Outside Services
Non-project outside services include:Production supportAudit feesLegal feesRetail Switch notificationsSecurity guard servicesDefault QSE paymentsCustodial servicesIndependent board member feesProject support
Aug 2004HW & SW Maintenance & Support
Annual support and maintenance costs are approximately 15-20% of the initial purchase price of the hardware item or software license$150 million approximate investment in software
systems $55 million approximate investment in hardware
systems
Aug 2004Outstanding DebtOutstanding Debt
Senior Notes Principal outstanding: $136,363,000 Interest rate: Coupon rate 6.17% (effective rate 6.3%) Term: 12 years, with $ 13,637,000 payable annually
beginning May 2004 (average life of 7 years) Final payment due: May 15, 2014 Issue date: May 15, 2002
Aug 2004Outstanding Debt
Term Note Available capacity: $50,000,000 Principal outstanding at Sept 1: $35,000,000 Interest rate: Floating at LIBOR + 37.5bp or Prime -
reset monthly/quarterly (curr = 2.1%) Term: 4.5 years, with equal payments due annually
beginning November 1, 2005 Final payment due: November 1, 2008 Issue date: May 7, 2004
Aug 2004Outstanding DebtOutstanding Debt
Revolving Credit Facility Available capacity: $50,000,000 Principal outstanding at Sept 1: -0- Interest rate: Floating at LIBOR + 37.5bp or Prime
reset monthly/quarterly Term: 2 years, matures May 6, 2006 Issue date: May 7, 2004
Aug 2004Debt ServiceDebt Service
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04(est.)
Debt Outstanding 40,000 95,741 150,000 150,000 176,363 (1)
Interest expense - 1,471 5,327 8,533 8,700 Principal payment - - - - 13,637 Total - 1,471 5,327 8,533 22,337
Cash interest paid 1,283 4,275 6,159 9,363 9,400 (2)
Notes: (1) Recognizes first payment under the Senior Notes of $13.6 million and assumes Term Loan balance of $40.0 million at year end.(2) Cash interest paid reflects the total interest dollars paid, whether capitalized or expensed.
Aug 2004Estimated 2005 Debt ServiceEstimated 2005 Debt Service
Estimated Range of 2005 Interest Expense 8,500 10,500 Estimated Range of 2005 Principal payment 23,673 26,173 Estimated Range of 2005 Debt Service 32,173 36,673
Dec-05
Notes: (1) Range of the expected increase in debt service from 2004 to 2005 is currently estimated between $10 million and $14 million.(2) Actual debt service obligations in 2005 will depend on many factors including pace and extent of capital investment and variances realized on operating expenses during 2004 and 2005.
Aug 20042002-2005 MWH Trends
0
50
100
150
200
250
300
Mil
lion
MW
H's
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
2002 Actual 2003 Actual 2004 Budget and Projected 2005 Budget
2.5% increase in 2005 over 2004 Actual and Projected
Prepared by ERCOT Planning Department Using: Trend analysis 10-year growth rates for annual energy Result compared to summation of individual TDSP forecasts with minor
discrepancy
Aug 2004Administrative Fee SensitivityAdministrative Fee Sensitivity
$0.01of Administrative Fee equals: $3 million of operating expense
$3 million / 297,000,000 MWH = $0.01 / MWH
$7.5 million of capital spending 60% leverage (40% equity funding * $7.5 million = $3
million)
6.8 GWH 2.3 percent deviation from MWH expected Calculations ($3 million / $0.44 per MWH = 6.8 GWH.
6.8 GWH / 297 GWH = 2.3%)
Aug 2004AgendaAgenda
Introductory Comments Review Budget Schedule
Review Operating Budget Process and Assumptions
Review Project Process and Assumptions
Input, Questions and Wrap-up
Aug 2004AgendaAgenda
Project Request Process
Project Budgeting Process
Annual Budgeting & Prioritization
Questions
Aug 2004Process for Market Requests
BoD
TAC
PRSWMS RMS ROS
CMWG
QSE PM WG
DS TF
TFTX Set
WG
TTPT WG
TD WG
PAR
SCRPRR
*Subcommittee will identify if this request requires a change to protocols. If no, then submitted via SCR
*Any system change that does not require a change to the protocols will be submitted via SCR
Note:
SCRs – need to be submitted to TAC. They have to be submitted through a sub-committee.
PRRs – need to be submitted to PRS. They can be initiated from sub-committees, working committees or submitted directly to PRS (ex: from ERCOT).
Sub Committee
Working Committee
Aug 2004Internal ERCOT Requests
Is it an enhancement? Improves operations Fulfills regulatory obligations Supports strategic goals/objectives Positive cost benefit
Complete a project request? Complete a request Obtain manager or director sponsorship Submit to CART for prioritization and rank
Is it a fix? Addresses a system error
Submit as a
SIR/SPR
Submit as a
project request
Aug 2004Overview of Project Requests
ERCOTPMO
ERCOTPMO
ERCOT
PM Process
ERCOT
PM Process
PUCTMarket
Participants ERCOT
Program Management Office• Overall Management of:
Project portfolioProject budgets, priorities and approvals
Project Management Process• Management of:
Project delivery Project resources, costs, timelines
Initiation of Project Requests• PUCT Rulings• System Change Requests (SCRs)• Protocol Revision Requests (PRRs)• Project Requests (PRs)
Aug 2004Annual Prioritization Process
Priority categories are high, medium, and low, with subcategories of high, medium, and low, which result in the following priorities:
High-High (1.1), High-Medium (1.2), High-Low (1.3), Medium-High (2.1), Medium-Medium (2.2), Medium-Low (2.3), Low-High (3.1), Low-Medium (3.2), Low-Low (3.3)
High – Critical to continued operations and reliability of the market, or in response to legal requirements. (Assumes that current services or functions provided are below acceptable level.)
Medium – Important to improve service or efficiency of operations of the market. (Assumes that the current services or functions provided are tolerable but not up to the desired state or target.)
Low – Recommended to further automate operations or improve efficiencies of services currently provided by the market. (Assumes that the current services or functions provided are acceptable but action is needed to prevent degradation of services.)
The subcategories (H/M/L) prioritized the projects within the category in terms of the value/impact to the market.
Aug 20042005 Project Budget Timeline
8/19 – ERCOT completed internal prioritization process
8/27 – PRS Prioritization Meeting
September – Combined Prioritized list goes to TAC
October - Finance & Audit Committee
November Board of Directors
Aug 2004Major Projects for 2005
EMMS Release 4A (2004 Carry Over)
PUCT Market Monitoring and EDW (2004 Carry Over)
EMMS Release 5
Texas SET 2.1
Aug 2004AgendaAgenda
Introductory Comments Review Budget Schedule
Review Operating Budget Process and Assumptions
Review Project Process and Assumptions
Input, Questions and Wrap-up