MINUTES OF THE MEETING
OF
THE
AUDIT COMMITTEE
February 24 2009
A meeting of the Audit Committee was
held at the Authority’s offices at the
The following Members of the Audit
Committee were present:
Trustee D. Patrick Curley (Chairman)
Trustee Elise M. Cusack
Trustee Jonathan F. Foster
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.
·
Footnotes:
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.
·
To
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