MINUTES OF THE MEETING
THE AUDIT COMMITTEE
A meeting of the Audit Committee was held at New York Power Authority’s Niagara Power Project – Power Vista Visitor’s Center, Lewiston, NY and via videoconference at 123 Main Street, White Plains, NY at approximately 10:00 a.m.
The following Members of the Audit Committee were present:
Also in attendance were:
Terryl Brown Executive Vice President and General Counsel
Elizabeth McCarthy Executive Vice President and Chief Financial Officer
Donald Russak Senior Vice President Corporate Planning & Finance
James Pasquale Senior Vice President Marketing & Economic Development
Thomas Davis Vice President – Financial Planning & Budgets
Lesly Pardo Vice President – Internal Audit
Scott Scholten Vice President & Chief Risk Officer
Karen Delince Corporate Secretary
Brian McElroy Treasurer
Thomas Concadoro Vice President & Controller
Dennis Eccleston Chief Information Officer
Lorna Johnson Assistant Corporate Secretary
Sheila Baughman Senior Secretary, Corporate Secretary’s Office
Jamie Cote Manager, KPMG
Amanda Specce Senior Associate, KPMG
1. Approval of the Minutes of the Regular Meeting of July 27, 2010
The minutes of the Committee’s Regular Meeting of July 27, 2010 were adopted.
2. KPMG 2010 Audit Plan
Mr. Jamie Cote, Senior Manager at KPMG presented an overview of the 2010 Audit Plan. He named the members of the KPMG Audit Team: Ken Deon (Partner), Darin Kempke (Concurring Review Partner), Dean Bell and Emily Sheik (GASB 52 Resource), Chris Halstead (Manager), Rahul Naroola (IRM Manager) and introduced Amanda Specce (Senior Associate ) who was present. Mr. Cote stated that in order to reduce audit risk, KPMG obtains an understanding of tone at the top, internal control structure and significant accounts and performed detailed procedures to mitigate audit risk to an acceptable level. The process involves considering significant audit risks and issues such as, current economic conditions, new accounting pronouncements, fuel and purchase power and interest rate derivatives, management judgments and accounting estimates, debt obligations and the Authority’s business risk.
Two new accounting pronouncements will be implemented: Governmental Accounting Standards Board Statement No. 53 (“GASB 53”) related to derivative instruments and GASB Statement No. 51, (“GASB 51”), which is related to intangible assets. This should have a negligible impact on the Authority this year as most of the requirement are already being met as part of the current accounting process. The fuel purchase power derivatives as well as interest rate derivatives will be looked at to make sure there is a proper determination of fair value. The KPMG team will also be looking at the accounting and disclosure requirements required by GASB 53. Revenue recognition is also a significant area that is examined. The team also looks at the assumptions and methodologies for significant estimates and reviews a sample of journal entries to make sure they are appropriate and supported by good business practices. With respect to debt obligations, the team looks at compliance with accounting related covenants and other business risks such as transactions with New York State.
Mr. Cote added the KPMG team makes site visits and looks at material inventory to make sure the quantity on hand is correctly reported. He noted the importance of having a code of conduct in place, controls to ensure the Authority is compliant with laws and regulations, a good information reporting system, and an effective internal audit department and controls over the safeguarding of assets entity wide. It is also very important to have a Board that is independent of management in order to have strong governance.
Mr. Cote ended by saying that in order to mitigate fraud risks, the KPMG team reviews journal entries and internal controls designed to detect and prevent fraudulent activities. KPMG also conducts management interviews. KPMG has been in the field at the Authority’s White Plains Office since October 11.
In response to questions by Trustee Eugene Nicandri and Chairman Patrick Curley, Mr. Cote said:
· KPMG looks particularly closely at procedures performed manually since they are more subject to human error.
· The team uses computer system auditing techniques to set parameters for examining journal entries. Some entries may be selected if, for example, they are above certain thresholds over a million dollars or end in 999. Entries that are posted after midnight or entered by certain people may be worth examining as well. KPMG looks for certain key words used in the description. KPMG sets different parameters based upon what may be considered risks.
· The term “independent of management” means no one on the Board is a member of management.
· KPMG sets their audit procedures based on their consideration of internal and external pressures facing the Authority. Examples of external pressure may be pressure from the state for more contributions and pressure from customers for lower rates.
· KPMG will issue a report under OMG Circular A-1333 on whether the Authority is complying with significant federal award requirements if the Authority expends over $500,000 in Federal awards. The audit of federal awards is triggered if $500,000 or more is spent irrespective of the size of the award.
· The team does not audit ancillary entities such as the Economic Development Power Allocation Board (“EDPAB”) but they will look at EDPAB minutes in order to understand the economic development programs since EDPAB makes recommendations to the Board of Trustees.
· The team reads newspapers and they get press clips to understand the pressures faced by the Authority.
3. Internal Audit Activity Report
Mr. Lesly Pardo highlighted the following Internal Audit (“IA”) activities:
· As of September 30, 2010, Internal Audit had completed 20 audits and projects.
· Six audits are in progress as of September 30th.
· Approximately 74% of the audits in the audit plan are completed or in progress.
· Sixteen audit reports have been issued and 46 recommendations to improve internal controls or enhance operational efficiency have been made.
· All recommendations were accepted by management and are being actively tracked for proper implementation.
· Management continues to cooperate fully with all audits.
· There is a three year audit plan for Economic Development Programs job commitment to determine the reliability of the actual job numbers reported by the customers.
· The three year audit plan for Economic Development Programs will cover the three major programs: 1) Replacement & Expansion Customers, 2) Traditional Power for Jobs customers, and 3) the Energy Cost Savings Benefit customers.
· The three year plan will audit any customers that have not been audited the past three years.
· Pages 7 through 12 provide a summary of audit reports issued since the last Audit Committee report in July 2010, including the overall audit objectives and findings and/or recommendations.
In response to a question from Trustee Nicandri, Mr. Pardo said the Authority’s electronic records are backed up and stored off site and a disaster recovery plan has been examined and tested.
4. Risk Policy and Procedure Update
Mr. Scott Scholten presented the energy risk management policy and procedure update. There had been gaps identified in the Authority’s previous policy and procedures. The policy that sets forth the overarching objectives were adopted at by the Trustees at the September meeting. The objectives established by the policy are:
· There will be no hedging except when it relates to core Authority activities (generation and customer loads).
· The Authority will not enter into hedge transaction unless there is a certainty that volumes are going to be there.
· The prime objective is to constrain potentially unfavorable outcomes to within acceptable limits.
The procedures were adopted by the Executive Risk Management Committee (“ERMC”) the prior week. The Committee is comprised of 5 members and chaired by the CFO. The procedures define the composition, responsibility and voting of the ERMC. They also define commercial objectives for containing exposure to market volatility, specifically by codifying ERMC ratified tolerance limits for NYPA net revenues; customer bill impacts; unsecured credit extended to counterparties; and NYPA collateral-posting requirements.
Next set of controls establishes clear separation of duties and delineation of responsibilities for: authorization of transactions (ERMC); execution of transactions (Front Office); monitoring risk quantification and control (Middle Office); and confirmation and accounting of transactions (Back Office).
The procedures define permissible hedge instruments and actionable commodities (e.g., generation fuels, electric energy, electric capacity, and emissions); establish trade limits for individuals authorized to execute transactions; specify standards for risk quantification, monitoring, and reporting; define credit and collateral management procedures for: initial credit thresholds for counterparties; metrics and procedures for monitoring counterparty default risk; collateral tracking and reconciliation; and payment authorizations; mandate annual employee compliance attestation and establish enforcement provisions for non-compliance.
KPMG had reviewed the procedures prior to the ERMC’s adoption and made recommendation. Some of the recommendations regarding clarifying some of the language and others dealt with elevating the procedures to leading practice standards. These recommendations are being implemented including the recommendation that the policy be reviewed by the Trustees annually.
In response to a question by Trustee Nicandri, Mr. Scholten said that the Authority monitors the risks involved with customer default separately from how it monitors credit risks associated with counterparties to long-term hedges (i.e., the Authority enters into transactions to secure market price of energy that will be delivered one year, two years, and sometimes longer in the future. Until there is a settlement, the Authority has exposure, which it may choose to limit with long-term hedge transactions).
5. Motion to Conduct Executive Session
Trustee Nicandri made a motion that the Authority conduct an Executive Session pursuant to Section 105(1)(f) 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 carried, an Executive Session was held.
6. Motion to Resume Meeting in Open Session
Trustee Nicandri made a motion to resume the meeting in Open Session. Upon motion made and carried, the meeting resumed in Open Session.
7. Next Meeting
The next regular meeting of the Audit Committee is to be determined.
On motion made and seconded, the meeting was adjourned at approximately 10:50 a.m.