MINUTES OF THE MEETING
OF
THE
AUDIT COMMITTEE
February 23 2010
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:
Trustee D. Patrick Curley (Chairman) (Buffalo)
Trustee Elise M. Cusack (Buffalo)
Trustee Jonathan F. Foster (New York City)
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.
·
Footnotes:
¨ 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 |
Alternative Methods |
|
Accounting
for rate regulation (old FAS 71) |
Deferred
charges Regulatory
assets and liabilities |
ASC
Topic 980, Regulated Operations |
None |
|
Revenue
recognition Billed
and unbilled |
Receivables Revenue |
SAB 101 FASB
Concept 5 and 6 |
None |
|
Derivatives
– energy and interest rate |
Purchased
power costs Interest/financing
cost |
ASC
Topic 815, Derivatives and Hedging |
None |
|
Cash and
investments |
Cash and
investments Investment
income |
GASB 31 GASB 3 |
None |
|
Capital
assets |
Capital
assets, depreciation |
GASB 34 |
Other
depreciation methods |
|
Asset
retirement obligations |
Other
assets Other
liabilities |
ASC
Topic 410, Asset Retirement and Environmental Obligations |
None |
·
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.)
|
Accounting Area |
Literature Guidance Summary |
Financial Statement Accounts
Affected |
|
Self-insurance
accruals Claims and damages Environmental reserves |
ASC Top
450, Contingencies |
Deferred
credits and other Operating
expense |
|
Asset
retirement obligations |
ASC
Topic 410 |
Deferred
charges, long-term receivables and other Deferred
credits and other |
|
Energy
derivatives Interest
rate derivatives |
ASC
Topic 815 |
Deferred
regulatory assets – hedging Risk
management obligations |
|
OPEB |
GASB 45 |
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
counterparties.
-- 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.
·
Investments:
-- 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
agreements.
Fraud
·
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).
KPMG Reports
·
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.
BACKGROUND
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”
DISCUSSION
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.