MINUTES OF THE MEETING
THE AUDIT COMMITTEE
A meeting of the Audit Committee was
held at the Authority’s offices at the
The following Members of the Audit Committee were present:
Also in attendance were:
Michael J. Townsend Acting Chairman
Eugene L. Nicandri Trustee (via videoconference)
Gil Quiniones Chief Operating Officer
Joseph Del Sindaco Executive Vice President and Chief Financial Officer
Donald Russak Senior Vice President – Corporate Planning and Finance
Lesly Pardo Vice President – Internal Audit
Anne Cahill Corporate Secretary
Angela Graves Deputy Corporate Secretary
Denise D’Ambrosio Principal Attorney I
Thomas Concadoro Director – Accounting
Dennis Eccleston Chief Information Officer
Mary Jean Frank Associate Corporate Secretary
Lorna Johnson Assistant Corporate Secretary
David Milkosky Partner, Ernst & Young
Randy Nelson Principal, Ernst & Young
Louis Roberts Audit Senior Manager, Ernst & Young
1. Minutes of the Regular Meeting of July 10, 2008
The minutes of the Committee’s Regular Meeting of July 10, 2008 were adopted.
2. Year-End 2008 Financial Statements Summary
Mr. Thomas Concadoro presented the highlights of the Authority’s 2008 financial statements. He pointed out the following:
· Management’s Discussion and Analysis (“MD&A”) mentioned:
n Comparison of operating results for 2008 and 2007 noting items that resulted in an increase in net income from $235 million to $299 million (including higher market-based sales and higher production at Flynn.
n Accomplishments such as the Governor’s approval of the Alcoa contract extension and additional funding of the Other Post-Employment Benefits (“OPEB”) obligation.
n The State’s $544 million request for significant voluntary contributions ($226 million) and asset transfers ($318 million) and the related Trustee actions in January and early February 2009.
n Economic conditions resulting in downgrades of bond insurers. The Authority has been able to redeem $72 million of auction rate securities with tax-exempt commercial paper in this environment.
· Changes of significance in the Authority’s balance sheets include:
n Redemption of $72 million in auction-rate securities and $47 million of Series 1998 A Revenue Bonds.
n Shift in risk management hedging positions from an asset of $53 million to an obligation of $123 million, primarily due to decreases in market prices.
n $167 million decrease in decommissioning fund to $812 million. The decrease is significant but has no impact on the Authority’s liability to Entergy (limited to the funds in the decommissioning fund).
n Debt/equity ratio continued to decrease to 0.83 to 1 (the Authority’s lowest total debt-to-equity ratio since it implemented proprietary accounting in 1982).
· Statement of revenues, expenses and changes in net assets:
n Labels on income statement were changed to bring them more in line with Government Accounting Standards Board (“GASB”) #34. Net Operating Revenue is renamed “Operating Income” and Net Revenues are renamed “Net Income and Change in Net Assets.”
n The $60 million payment to the State in April 2008 appears as a separate line item “Contributions to State” and is classified as a non-operating expense. Voluntary contributions made in prior years were related to the Power for Jobs (“PFJ”) program. As a program cost, these contributions were classified as operating expenses.
· Statement of cash flows:
n Net cash provided by operating activities increased by 37% to $448 million consistent with the increase in operating income.
n Accounting Policies [Note B(8)]: GASB’s “Accounting and Financial Reporting for Derivative Instruments” requires fair market reporting, effectiveness testing and expanded disclosures starting in 2010.
n Long-term Debt [Note F]: Redemption of $72 million in auction-rate securities and $47 million of Series 1998 A Revenue Bonds.
n Post-employment Benefits [Note I]: Updated to include the biannual actuarial evaluation as of January 1, 2008 and additional funding of $125 million to OPEB Trust Fund in 2008. Discloses potential increase in future contributions to New York State Retirement System due to decline in financial markets.
n Nuclear Plant Divestiture and Related Matters [Note K]: Footnote includes disclosure that the proposed spinoff of Entergy’s nuclear plants would not constitute a terminating event for the value-sharing agreements with Entergy.
· Commitments and contingencies:
n PFJ [Note M(3)]: Latest developments in claim of two PFJ customers regarding implementation of PFJ rebate and restitution calculations (including the Authority receiving permission to appeal to the Court of Appeals in December 2008).
n Street Lighting [Note M(4b)]: Settlement of New York City’s claim for a refund for street-lighting service.
n New York State Budget Matters and Other Issues [Note M(7)]: Updated to reflect the severe budget problems facing the State and the request for significant assistance in the amount of $544 million, including voluntary contributions ($226 million) and temporary asset transfers ($318 million). Note references Trustee actions in January and early February 2009, as well as the fact that a future voluntary contribution ($107 million) and a future temporary asset transfer ($103 million) will require Trustee reaffirmation prior to payment.
n Regional Greenhouse Gas Initiative [Note M(10)]: Disclosure of initiative and that the potential cost going forward could be significant.
Mr. Joseph Del Sindaco said that the overwhelming majority of the $123 million in risk-management obligations listed as an Authority liability would be passed on to its customers. He also noted that the restricted funds in the nuclear decommissioning fund posed no risk to the Authority.
Responding to a question from Trustee Eugene Nicandri about the largest single
annual increase in contributions the Authority had been required to make to the
Responding to a question from Trustee Jonathan Foster regarding OPEB costs, Mr. Concadoro said that the Authority has an actuarial liability of more than $300 million, including prior service costs, which are being amortized over 20 years from the initial implementation of accrual accounting for OPEBs.
In response to a question from Chairman D. Patrick Curley, Ms. Denise D’Ambrosio said that the Court of Appeals had granted the Authority permission to appeal in the case involving PFJ rebate and restitution calculations.
3. Summary of 2008 Annual Audit of Financial Statements
Mr. David Milkosky of Ernst & Young LLP (“E&Y”) said that E&Y had described its 2008 audit approach to the Audit Committee at an earlier meeting. He said that:
· E&Y will issue an unqualified opinion on the Authority’s 2008 Financial Statements.
· E&Y found no irregularities to report to the Audit Committee.
· E&Y will issue reports on:
¨ Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards.
¨ The Authority’s investments
in accordance with the State of
¨ The Authority’s Compliance
with the State of
· E&Y found no instances of material fraud in its audit and no differences in policy or adjustments.
· There were no significant accounting policy changes at the Authority during the 2008 fiscal year.
· There were no disagreements with management and no significant recorded or unrecorded audit adjustments noted.
· E&Y will obtain the standard letter of representation from Authority management.
· E&Y is not aware of any Authority consultations with other accountants.
· No significant audit issues were discussed with management.
· E&Y is not aware of any fraud or illegal acts that require communication.
· No material weaknesses in internal control were identified.
· The significant accounting policies of the Authority are described in Note B to the financial statements.
· The Authority did not apply any alternative account treatments within generally accepted accounting principles.
In response to a question
from Chairman Curley, Mr. Milkosky said that E&Y cannot speak to the
enforceability of the Memorandum of Understanding for the temporary transfer of
restricted assets to the State of
Mr. Louis Roberts of E&Y presented the following overview of the audit’s findings and observations. The Authority:
· Recognizes revenue when services are delivered and uses an acceptable method for accruing revenues.
· Properly applies the guidance provided in Statement of Financial Accounting Standard (“SFAS”) 71, Regulatory Accounting.
· Invests its funds in accordance with the applicable provisions of the Bond Resolution and the Authority’s investment guidelines, which in turn comply with the New York State Comptroller’s investment guidelines for public authorities.
· Appropriately uses a specialist firm to value its fuel inventory on hand at year’s end.
· Uses a consistent, conservative method of estimating bad debts based on the aging of accounts receivable.
· States capital assets at original cost.
· Capitalizes interest on amounts borrowed to finance construction to the project prior to completion.
· Assesses impairment when any indicators of impairment are present, in accordance with applicable accounting standards.
· Applies the appropriate accounting guidance to account for and report on derivatives.
· Follows industry practice in establishing environmental reserves.
· Appropriately uses an actuary to estimate the liability related to other post-retirement benefits.
· Has a consistent and conservative methodology for estimating its self-insurance liability.
· Books depreciation expenses appropriately when a project is completed and the asset is placed into service.
Mr. Roberts said that the Authority will be subject to the requirements of Government Accounting Standards Board Statement No. 53, Accounting and Financial Reporting for Derivative Instruments for the calendar year 2010.
4. Motion to Conduct an Executive Session
“Mr. Chairman, I move that the Authority conduct an executive session pursuant to Section 105 of the Public Officers Law of the State of New York to discuss matters leading to the appointment, employment, promotion, discipline, suspension, dismissal or removal of a particular person or corporation.” Upon motion made and seconded, an Executive Session was held.
5. Motion to Resume Meeting in Open Session
“Mr. Chairman, I move to resume the meeting in Open Session.” Upon motion made and seconded, the meeting resumed in open session.
6. 2008 Internal Audit Activity Report
Mr. Lesly Pardo presented an overview of Internal Audit’s (“IA”) activity for 2008. He said that as of December 31, 40 audits (out of 42 in the 2008 Audit Plan) had been completed, including 19 financial, 10 information technology and 11 operational. Two audits (Records Management and Market and Pricing Analysis) were in progress as of December 31. One audit (Information Technology Legal and Regulatory Compliance) was rescheduled to 2009 and is currently in process. Two audits were added to the 2008 plan (White Plains Office Data Center and E&Y Information Technology Audit Support) and two were postponed (Energy Service Programs – Financial Audit and EMS). Mr. Pardo said that 36 audit reports containing 73 recommendations had been issued and that 2 reports were under review as of December 31. All of the recommendations in the audit reports had been accepted by management. By December 31, 50 recommendations had been implemented and are being actively tracked, with 23 scheduled to be implemented in 2009. To ensure that issues raised in the audits are properly addressed, implementation of critical recommendations is being verified by observation and testing rather than reliance on verbal confirmation. Mr. Pardo also said that IA had received full cooperation and support from management and that IA staff were given full and unrestricted access to all documents, records and personnel necessary to perform their work.
In response to a question from Trustee Foster, Mr. Pardo said that the Internal Audit department has 10 people on staff.
7. 2009 Internal Audit Plan
In presenting the 2008 Audit Plan, Mr. Pardo said that IA had identified 141 auditable entities in the Authority’s audit universe. A risk assessment was then conducted for each of these entities based on financial, operational, strategic, public perception and confidence dispersion (the time between audits) risk factors. The audits identified were then ranked on their risk level, as well as requests by management and staff input. High-risk auditable entities such as Fuels Operations, New York Independent System Operator (“NYISO”) Settlements, Customer Revenues, Generation Resource Management and some Information Technology functions are audited on a one- or two-year cycle. Facility Finance and Administration functions are audited on a two-year cycle. Other major financial systems/functions such as Intrusion Prevention, SAP Applications, Accounts Payable, Payroll, Investments and Purchasing are audited every two to three years. Auditable entities with high perception or visibility risk, such as Travel and Living Expenses and Energy Services Programs, are audited at least every two years. Low-risk auditable entities are audited every four to five years.
Mr. Pardo said that the 2009 Audit Plan envisions 43 audits (18 financial, 10 information technology and 15 operational) and that 12 of the audits will be conducted at the operating facilities. Audits for NYISO Energy Settlements, Fuels Operations, Energy Services Programs, Enterprise Risk Management and various NERC-CIP compliance issues are scheduled. Other notable audits include Accounts Payable, Capital Planning, Physical Security Programs, Environmental Compliance, Business Continuity Plan, Headquarters Procurement and Energy Management System (IT audit). Work on Economic Development Job Commitment audits will continue, along with the usual support to E&Y, Ethics Office and Office of the Inspector General activities.
Trustee Foster suggested that more focus be placed on audits dealing with capital markets, hedging, derivatives and interest-rate management in the 2009 audit plan, given what’s happening in the world. He asked Mr. Pardo to come back to the Audit Committee at their next meeting to update them on how such issues would be addressed.
8. Performance of Agreed-Upon Procedures by Ernst
& Young LLP Regarding the Grant Agreement
Between NYPA and Seaway Private Equity Corp.
Ms. Anne Cahill presented the highlights of staff’s recommendations to the Committee, as follows:
· In 2005, the Authority entered into an agreement to fund a local aquarium development project in St. Lawrence County. Following the aquarium sponsors’ failure to raise the necessary additional matching funds, the Authority agreed to use $10 million of the previously pledged funds toward investments in St. Lawrence County for businesses developing new technology or environmental projects that would directly or indirectly promote job development.
· To effectuate the foregoing, the Trustees adopted a resolution on September 20, 2005, authorizing the Authority to negotiate and execute an agreement(s) and other documents with a local development corporation (“LDC”) to provide up to $10 million of funding. Subsequently, on March 8, 2006, the Authority entered into a Grant Agreement with Seaway Private Equity Corporation (“SPEC“), an LDC, which contained a form capital commitment agreement for SPEC to use in its investments. Four months later, an Amended and Restated Grant Agreement was executed between the Authority and SPEC that included an amended and restated form of capital commitment agreement. These amended and restated agreements clarified the earlier agreement by allowing SPEC greater flexibility in its funding of business development firms and project criteria. Specifically, the intent of the amendments was to clarify the definition of Qualified Business Development Firm (“QBDF”) and allow SPEC to invest in multiple QBDFs upon Authority approval and to invest in entities that are not new technology firms or projects upon a two-thirds vote of its entire Board.
date, SPEC has executed capital commitment agreements with two QBDFs: Golden Technology Management (“Golden”) and
North Bay Technology Management (“
· Of the Authority’s $10 million allocation for this 12-year Grant Agreement, through February 10, 2009, SPEC has funded six qualified investments totaling $3,674,566 of the $9.75 million available for such investments, and has expended $190,073 of the remaining $250,000 for administrative and legal fees.
· Under the Amended and Restated Grant Agreement, the Authority has the right to review SPEC’s records and accounts, which SPEC is required to maintain as they pertain to activities under the agreement. The Authority has determined that a review of SPEC’s activities to date should be undertaken.
· To that end, the Authority asked E&Y to provide a proposal to review SPEC’s investment activities under the Grant Agreement and the capital commitment agreements. This proposal is attached as Exhibit “A.”
· The Agreement for Accounting Services between the Authority and E&Y (Agreement No. 4500089614) provides, in relevant part, that non-audit services by E&Y must be preapproved by the Authority’s Audit Committee before work commences. E&Y’s fee for performing this work, which will be determined on an hourly basis in accord with the applicable compensation schedule, is estimated to be $50,000.
In response to a question from Trustee Elise Cusack, Ms. Cahill said that the Authority wants to see whether the funding it has provided has been appropriately invested.
Upon motion made and seconded, the
Committee authorized E&Y services in conjunction with a review of SPEC’s
activities under the Amended and Restated Grant Agreement and the capital
commitment agreements with Golden and
Power Authority of the
Summary of Agreed-Upon Procedures
Such procedures will include, but not be limited to:
1. General Procedures
A. Obtain the IRS ruling letter to support SPEC’s incorporation as a 501(c)(3) not-for-profit organization.
B. Obtain a listing of expenditures from SPEC and identify any investment in
a Qualified Investment
C. Inquire as to the retention policy followed by SPEC with respect to source documents supporting the expenditures incurred.
D. Obtain the listing expenditures from SPEC and compare the same to the requisitions to NYPA. Identify any differences.
E. Inquire as to whether there were any investments in new companies not based on renewable energy or environmental technologies. For all investments in new companies not based on renewable energy or environmental technologies, obtain a resolution of the Board of Trustees of SPEC that indicates that a vote of two-thirds of the entire Board approved the investment.
2. SPEC Investment Transactions
For each SPEC Investment, perform the following:
A. Obtain the quarterly unaudited financial statements and audited financial statement, prepared in accordance with generally accepted accounting principles, for the periods including and subsequent to the date of the investment.
B. Identify the location of the respective company’s headquarters and its principal business.
C. Obtain the certification by Golden Technology Management, LLC (“Golden”)
D. Obtain a copy of the signed investment agreement.
E. Determine whether the investment was matched by a Qualified Private Investor on a basis of $1 invested by SPEC for each $2 invested by Qualified Private Investors. Summarize the matching terms for each SPEC Investment.
3. Administrative Transactions
A. Obtain a listing of all payments made with the grant funding to Golden
B. Obtain a listing of payments made to SPEC for establishing SPEC corporate structures and any other operating expenses paid by the grant. Select 25 transactions and determine that:
1. Transactions were properly documented with original vendor invoices, purchase orders, approved contracts and other original source documents.
4. Site Visits
A. Visit each company that was invested in and interview the chief financial officer or other executive and make the following inquiries:
1. How long has the company been in business?
2. What is the nature of the company’s current projects that are in process?
3. How many employees does the company have?
4. How many employees have been hired since SPEC’s investment in the company?
5. Who are on the company’s board of directors?
6. Does the company have any joint ventures?
7. Do you have any knowledge of fraud or suspected fraud?
8. Does the company have any significant claims against it?
5. Status Reporting/AUP Report
A. The E&Y engagement team will meet with the Authority Project Manager regularly to provide status updates and discuss results of testing. E&Y will prepare an “Agreed-Upon Procedures” report
9. Other Business
Mr. Concadoro advised the Committee that E&Y’s audit contract ends this year. Chairman Curley said that the Audit Committee would like staff to develop a Request for Proposals (“RFP”) for audit services for the next 3-5 years, asking staff to show the Committee a draft of the last RFP. He added that the Committee would like to see proposals from at least two accounting firms other than E&Y. Mr. Bellis said that the Authority had traditionally sought audit proposals from top-tier firms, but that last time proposals were also sought from some second-tier firms and none had responded. Mr. Concadoro explained that this was primarily due to the fact that utility accounting is very specialized and the large firms had more experience conducting these audits. In response to a question from Trustee Foster, Mr. Concadoro said that the Authority’s previous auditing firm had been Pricewaterhouse Coopers. Responding to another question from Trustee Foster, Mr. Del Sindaco said that E&Y has performed satisfactorily. Trustee Foster said that he has been quite impressed with E&Y’s work for the Authority.
Chairman Curley said that the Committee wanted staff to provide the Committee with a five-year analysis of hedging and derivatives by May, saying that the Committee was also going to look at enterprise risk analysis. Trustee Foster said that the Committee was looking for input as to whether hedging and derivatives were helping or hurting the Authority.
10. Next Meeting
Chairman Curley and Trustees Cusack and Foster agreed that the next regular meeting of the Committee would be held at 10:30 a.m. on Thursday, July 16, 2009. They also agreed that a special meeting of the Committee might need to be held toward the end of May to review the financial audit RFP responses.
Upon motion duly made and seconded, the meeting was adjourned at approximately 11:55 a.m.