MINUTES OF THE MEETING
THE AUDIT COMMITTEE
A meeting of the Audit Committee was held via videoconference at the Authority’s offices at 501 Seventh Avenue, New York, New York and 95 Perry Street, Buffalo, New York at approximately 9:32 a.m.
The following Members of the Audit Committee were present:
Also in attendance were:
Eugene L. Nicandri Trustee
Gil Quiniones Chief Operating Officer
Terryl Brown Executive Vice President and General Counsel
Elizabeth McCarthy Executive Vice President and Chief Financial Officer
Donald Russak Senior Vice President – Corporate Planning and Finance
Lesly Pardo Vice President – Internal Audit
Karen Delince Corporate Secretary
Angela Graves Deputy Corporate Secretary
Thomas Concadoro Director – Accounting
Dennis Eccleston Chief Information Officer
Mary Jean Frank Associate Corporate Secretary
Ken Deon Managing Partner, KPMG
Jamie Cote Senior Manager, KPMG
Bryan Mahoney Manager, KPMG
1. Minutes of the Regular Meeting of January 26, 2010
The minutes of the Committee’s Regular Meeting of January 26, 2010 were adopted.
2. Year-End 2009 Financial Statements Summary
Mr. Thomas Concadoro presented the highlights of the Authority’s 2009 financial statements. He pointed out the following:
· Management’s Discussion and Analysis (“MD&A”) mentioned the following operating results:
Comparison of operating results for 2009 and 2008 noting items that resulted in a decrease in net income from $299 million to $253 million.
¨ Significant line-item variances on income statement substantially offset due to pass-through of majority of variances in purchased power, fuel and delivery service costs to Southeastern New York (“SENY”) customers.
¨ Decrease of $590 million in operating revenues reflects lower market-based sales due to lower prices and pass-through of lower purchased-power and fuel costs. During 2009, the benefits of lower energy and fuel prices were passed through to SENY customers through lower billings. Higher delivery service costs charged by the Authority’s service provider were also passed through as an increase.
¨ Lower prices also resulted in lower market-based sales, which had a negative impact on net income. Sales of Niagara and Small Clean Power Plant (“SCPP”) energy were highlighted as significant.
¨ Decrease of $249 million in fuel expenses due to lower natural gas and oil prices combined with lower generation at Poletti and Small Clean Power Plants (“SCPPs”). Decrease of $337 million in purchased-power expenses due to lower market prices on energy purchases; average purchase price for market purchases decreased by 21%, from $66 per MWh to $52 per MWh.
¨ Decrease of $18 million in operations and maintenance expenses due to lower voluntary contribution to New York State related to Power for Jobs ($12.5 million) combined with lower expenses at the 500 MW plant (2008 compressor replacement.
¨ Increase of $9 million in depreciation expenses due to lower depreciation for Poletti in its last full year of operation.
¨ Decrease of $32 million in non-operating revenues reflects unrealized loss on investments in 2009 ($13 million) due to a change in mark-to-market compared to unrealized gain in 2008 ($24 million).
¨ Increase of $11 million in non-operating expenses reflects lower interest rates on variable-rate debt offset by higher voluntary contribution.
· Changes of significance in the Authority’s balance sheets include:
¨ Decrease in current assets ($100 million) reflects impact of contribution to New York State in early 2009.
¨ Increase in non-current assets of $337 million primarily due to temporary asset transfers reflected as a long-term loan receivable.
¨ Increase in restricted funds of $124 million primarily due to appreciation in the nuclear decommissioning fund; this is offset 100% by an increase in the related liability to Entergy (limited to the funds in the decommissioning fund).
¨ Long-term debt decreased by $129 million during 2009 primarily due to scheduled maturities. Debt/equity ration continued to decrease to 0.72 to 1 (lowest since 1982) in 2009 from 0.83 to 1 in 2008.
¨ Increase in cash flows from operations to $491 million in 2009 vs. $448 million in 2008.
¨ Net generation of 27.3 million MWh was slightly higher in 2009, with increases at Niagara and St. Lawrence offsetting decreases at the fossil fuel plants.
¨ Economic conditions and steps Authority has taken to assist customers, including Alcoa agreement and withdrawal of scheduled hydropower rate increase in May 2009.
¨ Temporary asset transfers and increasing contributions made to New York State pursuant to budget legislation.
In response to a question from Trustee Eugene Nicandri, Mr. Concadoro said that in 2010 depreciation expenses would not be greatly affected by the closure of the Poletti plant because there had been little Poletti depreciation in 2009, as the retirement had been planned. Responding to a question from Audit Committee Chairman D. Patrick Curley, Mr. Concadoro said that the Authority’s cash flow comprised net income plus depreciation plus amortization and other non-cash items.
¨ Accounting Policies [Note 2]: Expanded disclosure regarding the effects of rate regulation and the associated accounting. Continues to reference new Government Account Standards Board (“GASB”) pronouncement “Accounting and Financial Reporting for Derivative Instruments” establishing accounting and reporting requirements for derivative instruments. This pronouncement requires fair market reporting, effectiveness testing and expanded disclosures starting in 2010. Incorporates new charts reflecting capital asset activity in detail for 2009 and 2008 based on GASB requirements. Reformatted and expanded disclosures regarding risk management and derivative activities in accordance with Financial Accounting Standards (“FAS”) No. 161. Fair values reflect an increase in unrealized losses ($30 million) primarily due to medium-term hedging positions taken to support New York City Governmental Customers.
¨ Commitments and Contingencies –
§ Competition (Note 11a) includes disclosure of Alcoa agreement and withdrawal of scheduled rate increases in response to economic conditions. Also, includes proposal to assist Buffalo waterfront development.
§ New York City Governmental Customers (Note 11b) highlights customer election of sharing option for variable-cost variations for 2010.
§ Power for Jobs (Note 11c) expanded to include extension of program through May 2010 and unfavorable Court of Appeals decision in October 2009.
§ New York State Budget and Other Matters (Note 11g) updated to reflect 2009 contributions and temporary asset transfers. Expanded to include County of Niagara lawsuit challenging the legality of contributions and transfers and seeking rebates for certain customers receiving hydropower.
In response to a question from Vice Chairman Foster, Ms. McCarthy said that the Authority’s new Enterprise Risk group was working to identify and put together a mitigation plan for risks throughout the organization. She said that work is ongoing to analyze different solutions for the Authority’s energy risk program.
Responding to a question from Audit Committee Chairman Curley, Mr. Concadoro said that the Authority uses the generally accepted definition for net assets, that is, assets less liabilities. Ms. McCarthy added that the financial statements look at how the Authority’s net assets at the beginning of 2009 were affected by what happened throughout the year.
Responding to a question from Vice Chairman Foster, Ms. Terryl Brown said that a new complaint had been filed in the lawsuit filed by Niagara County against the Authority, as well as a request to depose the individual Trustees.
In response to a question from Audit Committee Chairman Curley, Mr. Concadoro said that page 33 of the Financial Statements contained a very detailed disclosure of the Authority’s derivative swaps. As of December 31, 2008, there was an unrealized loss of $123 million for these instruments, while at year-end 2009 the unrealized loss was $153 million. He said that there had been some medium-term hedging toward the end of 2009, and that the volumes had been relatively large. The combination of increased volumes and market price decreases near year-end 2009 accounted for most of the $30 million change in fair value. Ms. McCarthy added that due to their length, the market value for these swaps may change, but that they were done at the request of the Authority’s New York City Governmental Customers and were integrated into the Authority’s cost-recovery mechanism. She said that the Executive Risk Committee and the Enterprise Risk group were working with Internal Audit and KPMG to improve controls in this area in terms of capturing, valuing and presenting these transactions. Mr. Russak added that the swaps were one way of mitigating cost swings for the Authority’s New York City Governmental Customers.
3. Summary of 2009 Annual Audit of Financial Statements
Mr. Ken Deon of KPMG discussed the following:
Audit results – all audit test work was substantially completed as of February 19, 2010.
· Scope and audit testing consistent with that discussed in January 2010 presentation of 2009 Audit Plan.
· Scope focused on:
- Derivatives (purchased power and financial) (KPMG brought their subject-matter experts to examine these transactions)
- New York Independent System Operator, Southeastern New York and wholesale revenues/receivables.
- Long-term debt, including compliance with covenants.
- Nuclear liabilities (decommissioning trust and liabilities – investments and offsetting assets).
- Litigation/contingencies (risk management).
· No material misstatements identified.
· No corrected or uncorrected adjustments identified (how well management performed in closing books).
· No significant deficiencies or material weaknesses in internal controls identified.
· KPMG to issue unqualified opinion.
· Went very smoothly for a first-year audit; complete cooperation from management and staff.
· Completing the audit by this date for year-end 2009 was a very good result for a government or private entity.
KPMG responsibilities under Generally Accepted Auditing Standards –
· Audit planned and performed to obtain reasonable (but not absolute) assurance about whether financial statements are free of material misstatement, whether caused by error or fraud; no responsibility to detect immaterial misstatements.
· Considered internal controls in order to determine auditing procedures for purpose expressing opinion on financial statements. Audit does not include examining internal controls’ effectiveness and does not provide assurance on internal controls. However, internal control test work did not identify any deficiencies in internal controls over financial reporting that KPMG considers to be material weaknesses.
Mr. Jamie Cote of KPMG discussed the following:
· KPMG reviewed accounting policies used by Authority management to prepare financial statements and found them to be appropriate.
Significant Accounting Policies
Financial Statement Accounts Affected
Literature Guidance Summary
Accounting for rate regulation (old FAS 71)
Regulatory assets and liabilities
ASC Topic 980, Regulated Operations
Billed and unbilled
FASB Concept 5 and 6
Derivatives – energy and interest rate
Purchased power costs
ASC Topic 815, Derivatives and Hedging
Cash and investments
Cash and investments
Capital assets, depreciation
Other depreciation methods
Asset retirement obligations
ASC Topic 410, Asset Retirement and Environmental Obligations
· KPMG reviewed accounting estimates used by Authority management to prepare financial statements and evaluated key factors and assumptions used by management and found such factors and assumptions to be reasonable. (In the case of Other Post-Employment Benefits (“OPEB”), KPMG’s actuaries reviewed the Authority’s actuarial reports and found them to be reasonable.)
Literature Guidance Summary
Financial Statement Accounts Affected
Claims and damages
ASC Top 450, Contingencies
Deferred credits and other
Asset retirement obligations
ASC Topic 410
Deferred charges, long-term receivables and other
Deferred credits and other
Interest rate derivatives
ASC Topic 815
Deferred regulatory assets – hedging
Risk management obligations
Miscellaneous receivables and other
Deferred charges, long-term receivables and other
Audit Risks and Issues – key audit risks/account balances and primary procedures to address risk:
· Derivatives – valuation associated with energy price and interest rate fluctuations:
-- Verification of external pricing sources and confirmations/statements from
-- Review of risk management policies by KPMG Financial Risk
Management professionals who work with energy companies.
· Revenue – appropriate revenue recorded as power is delivered:
-- Confirmation of receivables and detailed testing of SENY/wholesale revenue (sample of customers).
-- Confirmation of revenue/receivables with NYISO.
· Nuclear decommissioning liabilities – reporting and receipt of information and accounting for decommissioning trust and liabilities:
-- Review of financial statements for completeness and accuracy of trust
assets and obligations.
· Management judgments and accounting estimates:
-- Appropriate methodologies and assumptions in assessing exposures/liabilities (accruals).
-- Reviewed methodology, assumptions (and third-party statements, where
Applicable) for reasonableness of amounts set up as reserves/liabilities.
-- Refer to detailed listing of significant judgments and estimates.
· Manual journals and non-recurring transactions:
-- Appropriate accounting for existence and accuracy of unusual non-recurring transactions.
-- Selection and review of material journals, large and unusual entries, frequency, management approvals, etc.
-- Appropriate accounting for investments in accordance with Board-approved guidelines (as required by the Public Authorities Law and Office of the State Comptroller regulations).
-- Fair-market-value testing of all investments.
-- Review of sample of investments for compliance with Board-approved policies.
· Debt obligations:
-- Compliance with accounting covenants (nothing significant found).
-- Review of debt compliance calculations in accordance with terms of
· During the course of the audit, KPMG has undertaken, or will undertake prior to report issuance, fraud discussions with the following members of the Authority’s senior management staff:
n The members of the Audit Committee
n Richard Kessel, President and Chief Executive Officer
n Terryl Brown – Executive Vice President and General Counsel
n Elizabeth McCarthy – Executive Vice President and Chief Financial Officer
n Joseph Del Sindaco – former Executive Vice President and Chief Financial Officer
n Donald Russak – Senior Vice President – Corporate Planning and Finance
n Arnold Bellis – former Vice President and Controller
n Thomas Concadoro – Director of Accounting
· In addition, KPMG designed audit procedures and conducted walkthroughs of significant account balances to identify potential instances of fraud and sampled journal entries using computer-assisted auditing techniques.
· Based on KPMG’s inquiries and testing, no financial statement fraud came to their attention for the year ended December 31, 2009.
In response to a question from Vice Chairman Foster, Mr. Cote said that KPMG had worked with Internal Audit staff during the audit.
Mr. Brian Mahoney of KPMG discussed the following:
Other Required Communications
· There were no audit adjustments for the year ended December 31, 2009.
· There were no disagreements with management on financial accounting and reporting matters.
· KPMG encountered no difficulties in dealing with management while performing the audit.
· Significant written communications between KPMG and management include:
-- Engagement letter/contract
-- Management representation letter
-- Forthcoming management letter
· Other information in documents containing audited financial statements:
-- KPMG report does not extend beyond financial information identified in it
and KPMG has no obligation to perform any procedures to corroborate other information contained in these documents (i.e., Management’s Discussion and Analysis (“MD&A”).
-- KPMG has, however, read the other information included in the Authority’s MD&A and no matters came to its attention that cause KPMG to believe that such information is materially inconsistent with the information, or manner of its presentation, appearing in the financial statements.
· KPMG is in compliance with Public Authorities Accountability Act with regard to non-audit services.
· KPMG is independent in accordance with AICPA Standards and Governmental Audit Standards (Yellow Book Requirements).
· Audit opinion on Authority’s financial statements as of and for year ended December 31, 2009 (draft of which is presented to Audit Committee today).
· Accountant’s report on investment compliance with New York State guidelines.
· Required communications to Audit Committee (some of which are included in this presentation).
· Auditor’s report on internal control over financial reporting and on compliance with other matters.
· Management letter.
Responding to a question from Vice Chairman Foster, Mr. Cote said that KPMG’s management letter will include suggested process improvements in the areas of derivatives and Information Technology internal controls. Mr. Deon said that the Authority was to be commended on the fact that the audit was completed in less than two months from the end of the audit year.
4. Motion to Conduct an Executive Session
“Mr. Chairman, I move that the Audit Committee conduct an executive session pursuant to Section 105 of the Public Officers Law in connection with discussions relating to matters concerning employment.” On 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.” On motion made and seconded, the meeting resumed in open session.
6. Amendments to Audit Committee Charter
Ms. Brown presented the highlights of staff’s recommendations to the members of the Audit Committee, as follows.
Recent amendments to the Public Authorities Law made by Chapter 506 of the Laws of 2009 (“Chapter 506”), which prompted the January 2010 changes to the Authority’s By-Laws, also require changes to the Audit Committee Charter. The Charter, which was in the process of being reviewed by the Authority and a consultant, was, therefore, reconsidered in light of the requirements of Chapter 506. The revisions reflect: (1) the requirements of Chapter 506; and (2) certain changes recommended by the Authority’s consultant that were approved by the Authority’s senior management. The proposed amended Audit Committee Charter is attached as Exhibit “A”
Article V(2) of the Authority’s By-Laws, as amended on January 26, 2010, requires an Audit Committee that consists of three eligible Trustees who are independent members, who possess the necessary skills to understand the duties and functions of the Audit Committee and who are familiar with corporate financial and accounting practices. It specifies that the Audit Committee is responsible for: recommending to the Trustees the hiring of a certified independent accounting firm for the Authority; establishing the compensation to be paid to the accounting firm; providing direct oversight of the performance of the independent audit performed by the accounting firm hired for such purposes and performing such other responsibilities as the Trustees shall from time to time assign to it.
Accordingly, amendments to the Audit Committee Charter would implement the following changes:
· Reference to the Inspector General has been eliminated.
· Committee membership is determined by the Board of Trustees.
· Committee member terms have been changed from four to five years to coincide with the Trustee term of office.
· A Committee member must be familiar with corporate financial and accounting practices and understand the duties and function of the Audit Committee.
· In addition to advising the Trustees on the selection of the certified independent accountant, the Committee must now establish the compensation to be paid to the accounting firm.
· The Committee is charged with direct oversight of the performance of the independent audit firm.
· Language regarding risk management has been added.
AUDIT COMMITTEE CHARTER
The purpose of the Audit Committee (“Committee”) is to: recommend to the Board of Trustees the hiring of a certified independent accounting firm for the Authority; establish the compensation to be paid to the accounting firm; provide direct oversight of the performance of the independent audit conducted by the accounting firm hired for such purposes; provide direct oversight of the internal audit function; and perform such other responsibilities as the Trustees shall assign to it.
B. MEMBERSHIP AND ORGANIZATION
(1) Committee Composition
The Committee shall be comprised of three independent members of the Board of Trustees who shall possess the necessary skills to understand the duties and functions of the Committee and be familiar with corporate finance and accounting. Committee members and the Committee Chair shall be selected by a vote of the Board of Trustees.
Committee members shall serve for a period of five years subject to their term of office under the Public Authorities Law § 1003. Committee members may be reelected to serve for additional periods of five years subject to their term of office. A Committee member may resign his or her position on the Committee while continuing to serve as a Trustee. In the event of a vacancy on the Committee due to death, resignation or otherwise, a successor will be selected to serve in the manner and for the term described above.
A Committee member may be removed if he or she is removed as a Trustee for cause, subject to Public Authorities Law § 2827, or is no longer eligible to serve as a Committee member.
(4) Meetings and Quorum
The Committee shall hold regularly scheduled meetings at least three times per year. A Committee member may call a special meeting of the Committee individually, or upon the request of the Authority’s President and Chief Executive Officer, Chief Operating Officer, Executive Vice President and General Counsel, Chief Risk Officer, Chief Financial Officer, Controller, or head of the Office of Internal Audit (“OIA”).
In addition, the Committee: (1) shall meet at least three times a year with the head of the OIA for the purpose of reviewing audit activities, audit findings, management’s responses, remedial action plans, and providing the OIA with an opportunity to discuss items and topics of relevant to the Audit Committee; (2) shall meet at least twice a year with the Authority’s independent accountants to discuss the audit work plans, objectives, results and recommendations; and (3) may meet independently with the Authority’s President and Chief Executive Officer, Chief Operating Officer, Executive Vice President and General Counsel, Chief Risk Officer, Chief Financial Officer, Controller, or head of the OIA on matters or issues and items within the Committee’s purview as it deems necessary. These meetings may be held as part of a regular or special meeting in the Committee’s discretion.
An agenda shall be prepared and distributed to each Committee member prior to each meeting and minutes shall be prepared in accordance with the New York Open Meetings Law. A majority of those present, but no less than two Committee members, at a regular or special meeting of the Committee shall constitute a quorum for the purposes of conducting the business of the Committee and receiving reports.
Any meeting of the Committee may be conducted by video conferencing.
To the extent permitted by law, the Committee may hold meetings or portions of meetings in executive session.
C. FUNCTIONS AND POWERS
The Committee shall have the following responsibilities:
(1) General Powers
The Committee may call upon the resources of the Authority to assist the Committee in the discharge of its oversight functions. Such assistance may include the assignment of Authority employees to assist the Committee, and the retention of external advisors subject to the requirements of the Public Authorities Law and the Authority’s Expenditure Authorization Procedures.
The Committee may direct any Authority employee to make oral or written reports to the Committee on issues and items within the Committee’s purview.
The Committee may direct the Authority’s internal auditors to conduct special audits of items and issues of concern to the Committee.
(2) Accounting, Financial Reporting, and Oversight of Independent Accountants and Controller
The Committee shall seek to enhance the integrity, quality, reliability and accuracy of the Authority’s financial statements and accompanying notes, and shall oversee the relationship with the Authority’s independent accountants. To accomplish this objective, the Committee shall:
a. Provide advice to the Trustees on the selection, engagement, compensation, evaluation and discharge of the independent accountants.
b. Review and discuss as necessary the Authority’s financial statements including any material changes in accounting principles and practices with the independent accountants, the Controller, or members of Authority management.
f. Assure the independence of the independent accountants by approving any non-audit work for the Authority and examining the accountant’s relationship with the Authority.
g. Report to the Trustees on any matters relevant to the audit process or independent accountant communications, and make such recommendations as the Committee deems appropriate.
(3) Risk Management, Internal Controls and Oversight of the OIA
The Committee shall seek to enhance the Authority’s risk management infrastructure, and ensure timely and effective identification and mitigation of critical business risks. To accomplish these objectives the Committee shall:
e. Report at least annually to the Board of Trustees on matters relating to the internal audit function and enterprise-wide risk management infrastructure, and make such recommendations as the Committee deems appropriate.
7. Next Meeting
Chairman Curley and Trustees Cusack and Foster agreed that the next regular meeting of the Committee would be held at 10:00 a.m. on Tuesday, July 27, 2010.
On motion made and seconded, the meeting was adjourned at approximately 10:48 a.m.