MINUTES OF THE MEETING
THE AUDIT COMMITTEE
A meeting of the Audit Committee was held via videoconference at SUNY-Jefferson Community College, 1220 Coffeen St., Watertown, New York, the St. Lawrence-FDR Power Project, 830 Barnhart Island Rd., Massena, New York; and 123 Main St., White Plains, New York at approximately 10:00 a.m.
The following Members of the Audit Committee were present:
Also in attendance were:
Gil Quiniones Chief Operating Officer
Terryl Brown Executive Vice President and General Counsel
Elizabeth McCarthy Executive Vice President and Chief Financial Officer
Thomas Davis Vice President – Energy Risk and Assessment
Lesly Pardo Vice President – Internal Audit
Karen Delince Corporate Secretary
Denise D’Ambrosio Principal Attorney I
Brian McElroy Treasurer
Angela Graves Deputy Corporate Secretary
Thomas Concadoro Director – Accounting
Michael Saltzman Director – Media Relations
Dennis Eccleston Chief Information Officer
Mary Jean Frank Associate Corporate Secretary
Lorna Johnson Assistant Corporate Secretary
Sheila Baughman Senior Secretary, Corporate Secretary’s Office
Ken Deon Managing Partner, KPMG
Chris Halstead Manager, KPMG
1. Approval of the Minutes of the Regular Meeting of February 23, 2010 and the
Special Meeting of March 23, 2010
The minutes of the Committee’s Regular Meeting of February 23, 2010 (with a spelling correction noted by Trustee Curley) and Special Meeting of March 23, 2010 were adopted.
2. KPMG Management Letter
Mr. Thomas Concadoro provided an overview of the KPMG Management Letter prepared in connection with its audit of the Authority’s 2009 Financial Statements. The Management Letter made the following recommendations:
· The Authority should require a formal response from each business unit regarding the appropriateness of SAP user access and implement a formal annual review process for Ceridian user access. Management response: IT will request a formal acknowledgement from each business unit as to the adequacy of SAP access, whether or not any changes are required. IT will also request in writing an annual review of Ceridian user accounts. The request will be made to the payroll manager to acknowledge in writing that Ceridian access is appropriate as required by work assignment.
· The Authority should evaluate the potential benefit of implementing an automated system to review segregation of duties within SAP. Management response: The Authority will initiate an effort (to be completed by September 30, 2010) to review and redesign SAP security roles by function. Once complete, the Authority will evaluate the cost vs. benefit of using an automated tool to review segregation of duties within SAP.
· The Authority should continue with its current initiative to revisit its ERM policies and procedures and make the required updates and improvements using leading industry practices. Management response: This year, the Authority will initiate and complete an updated and more comprehensive ERM Policy that will embody elements of leading energy risk management practices. The initiative will also supplement the ERM Policy by updating and enhancing the detailed and supplemental information provided by the Authority’s existing risk management procedures. The ERM Policy will reference or incorporate the procedure documents.
· The Authority should implement a formal review of its service organizations’ SAS 70 reports to verify that it can rely on the controls of the third party and document the mapping of the service organizations’ users consideration controls outlined in each SAS 70 report. Management response: The Authority will implement a formal review of the SAS 70 reports in 2010.
In response to a question from Committee Chairman Curley, Mr. Ken Deon explained that KPMG looked at the Authority’s internal controls in designing audit procedures for the financial statements, but that it did not express an opinion on the effectiveness of the Authority’s internal controls. He explained that such an opinion is only required for a public company that is subject to Securities and Exchange Commission oversight. Responding to a question from Ms. Elizabeth McCarthy, Mr. Deon said that KPMG is required to communicate material weakness and significant deficiencies in the Authority’s internal controls to management and the Audit Committee and they had found none during their audit.
3. Interim Results for the Six Months Ended June 30, 2010
Mr. Thomas Concadoro presented the highlights of the Authority’s financial statements for the first six months of the year:
- Net income through June 30 was $81 million, $13 million less than at June 30, 2009. The Poletti shutdown in January, as well as lower water flows at the hydro plants, accounted for much of the decrease in the Authority’s operating revenues. This was offset by lower purchased-power and fuel costs, primarily due to lower prices. Non-operating expenses had a significant impact on the bottom line due to higher voluntary contributions to New York State.
In response to a question from Committee Chairman Curley, Mr. Concadoro said that all of the money transferred to the State Treasury in 2010 has been in the form of direct contributions and not loans.
The interim financial statements need to be filed by September 30 with banking and rating agencies, but will probably be filed even sooner than that. Highlights from the footnotes to the financial statements included:
- The Authority uses financial derivative instruments to manage the impact of interest rate, energy price and fuel cost changes on its earnings and cash flows. In June 2008, GASB issued GAS No. 53, Accounting and Financial Reporting for Derivative Instruments, which establishes accounting and reporting requirements for derivative instruments and which is effective for the Authority’s 2010 calendar year. The adoption of GAS No. 53 did not have a significant impact on the Authority’s financial results.
- The Power for Jobs and Energy Cost Savings Benefits Programs were scheduled to expire on May 15, 2010; they were extended to June 2, 2010, when they expired. There are several legislative proposals to replace the programs, none of which have been enacted into law. The Authority made a voluntary contribution of $12.5 million to the State Treasury in March 2010 to support the Power for Jobs Program, bringing the total of such voluntary contributions to $461.5 million.
- By legislation signed into law on May 25, 2010, the Authority, as deemed feasible and advisable by its Trustees, was authorized to make a voluntary contribution to the State for State Fiscal Year 2010-11 in the amount of $65 million. In June 2010, the Authority’s Trustees approved the payment of a voluntary contribution of $40 million to the State. As of June 30, 2010, the payment had not yet been made and thus is not reflected as a contribution to the State in the statement of revenues, expenses and changes in net assets as of June 30, 2010. The Authority’s Trustees have not yet acted on the remaining $25 million voluntary contribution.
- Temporary retirement incentive legislation was enacted into law in June. Part A of the incentive targets employees who are at least 50 years old with a minimum of 10 years of service to receive an additional month of pension credit (not to exceed 36 months) for each year of eligible service, while Part B enables public employees to retire without penalty at 55 years of age with a minimum of 25 years of service. The footnotes will be updated for the Trustees’ authorization at a Special Meeting on July 22 for the Authority to participate in Part B for all eligible Authority employees and Part A for certain employees at the Charles Poletti Power Project.
- As of June 30, 2010, no further action had been taken to increase the rates for certain Authority hydropower customers; the Authority’s Trustees had deferred an increase scheduled to take place on May 1, 2009 at their March 2009 meeting.
4. Results of OSC Overtime Audit
The Office of the State Comptroller (“OSC”) recently completed an audit of the Authority’s overtime controls for the period 2007-09. The report issued as a result of the audit was positive, with the audit finding that the Authority’s overtime costs were necessary and that overtime was distributed equitably, with supervisors in place to determine that the overtime work was in fact taking place. OSC did comment that they thought the Authority could reduce its overtime if it added staff and accelerated its training programs.
5. Internal Audit Activity Report
Mr. Lesly Pardo presented an overview of Internal Audit’s (“IA”) activity for the first half of 2010. He said that as of June 30, 14 audits had been completed, including 10 financial/internal control; 3 information technology and 1 special project. Six audits were in progress as of June 30. Approximately 54% of the audits included in the 2010 Audit Plan have been completed or are in progress. Mr. Pardo said that 7 audit reports containing 31 recommendations had been issued and that 6 reports were under review as of June 30. All of the recommendations in the audit reports had been accepted by management and the accepted recommendations are being actively tracked. 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.
IA staff also completed two special investigations conducted with Ethics Office staff. One involved an allegation brought by a North Country landowner against a St. Lawrence salaried employee that the employee had used Authority assets and intellectual property and conducted private business during Authority time. The investigation substantiated the allegation and management took disciplinary action against the employee. The other investigation involved a referral from the New York State Inspector General’s Office regarding an anonymous complaint that a salaried employee was constantly using Authority e-mail and phone for personal business. The investigation found no evidence to support the allegation.
In response to a question from Trustee Nicandri, Mr. Pardo said that IA uses an external CPA firm to audit Economic Development Customer Job Reports, including Power for Jobs customers. He said that this is an ongoing process, with approximately 100 companies audited in 2009-10. Responding to another question from Trustee Nicandri, Ms. Terryl Brown said that current Power for Jobs customers will have to reapply for the program and update their employment numbers at that time. A discussion ensued about the appropriate sample number for future Power for Jobs audits and Mr. Pardo said that he would provide a description of the sample to the Audit Committee members for their review and comment.
6. Updated Internal Audit Policy
Mr. Pardo presented proposed amendments to the Authority’s Internal Audit policy.
On motion made and seconded, the amendments to the policy were unanimously approved.
7. Next Meeting
Chairman Curley and Trustees Nicandri agreed that the next regular meeting of the Committee would be held immediately following the 9:00 a.m. Governance Committee on Tuesday, October 26, 2010.
On motion made and seconded, the meeting was adjourned at approximately 11:40 a.m.