Overview of Financial Results & Hedge Report (Mongiardo/Ahern/Horowitz) Consideration of Adoption of Amendment to Swap Agreement (Falcone)

Transcription

1 PROPOSED FINANCE & AUDIT COMMITTEE AGENDA April 23, 2015 (9:00 A.M.) Uniondale I. Adoption of Minutes for March 26 th meeting II. III. IV. Overview of Financial Results & Hedge Report (Mongiardo/Ahern/Horowitz) Internal Audit Activities (Mitterway) Consideration of Adoption of Amendment to Swap Agreement (Falcone) V. Discussion of Results of RFP for Underwriters (Kane) VI. VII. VIII. Discussion of Transition of Power Supply and Fuel Management and Hedging Plan Implementation to PSEG ER&T (PSEG ER&T) Discussion of Status of Enterprise Risk Management Assessment (Protiviti) Executive Session (Pending Litigation)

2 LONG ISLAND POWER AUTHORITY MINUTES OF THE FINANCE AND AUDIT COMMITTEE MEETING HELD ON MARCH 26, 2015 The Finance and Audit Committee of the Long Island Power Authority (the Authority") was convened at 8:22 a.m. at LIPA Headquarters, Uniondale, NY, pursuant to legal notice given on March 23, 2015; and electronic notice posted on the Authority s website annually. The following Trustees of the Authority were present: Shelly Cohen, Committee Chair Elkan Abramowitz Mark Fischl Representing the Authority were John McMahon, Chief Executive Officer; Tom Falcone, Chief Financial Officer; Jon Mostel, General Counsel; Bobbi O Connor, Deputy General Counsel; Kenneth Kane, Managing Director of Finance and Budgeting; Donna Mongiardo, Controller; Corey Horowitz, Director of Power Supply Risk Management; Kathleen Mitterway, Director of Audit; Rick Shansky, Managing Director of Contract Oversight; and John Little, Director Strategic Planning & Rates. Todd Fowler. Representing KPMG were Mike Percent, Jessica DiGiamo Diaz and, by telephone, Representing PSEG LI were David Lyons, Director of Corporate Integration and Gary Ahern, Director of Finance. Committee Chair Cohen welcomed everyone to the Finance and Audit Committee meeting of the Long Island Power Authority Board of Trustees *** Committee Chair Cohen stated that the first item on the agenda is the adoption of the

3 2 minutes from the March 9, 2015 Committee meeting. Committee Chair Cohen made a motion to accept the minutes of the March 9, 2015 meeting, which was seconded. The minutes were approved unanimously. *** Committee Chair Cohen stated that next item on the agenda is the presentation of the 2014 Audit Results, which would be presented by KPMG, Todd Fowler. Mr. Fowler presented the 2014 Audit Results and took questions from the trustees. *** At approximately 8:23 a.m. Committee Chair Cohen stated that the Committee would adjourn to Executive Session with KPMG to discuss personnel matters. Chair Cohen stated that no votes would be taken and that the Committee would resume its public session afterward. After noting that no votes were taken in the Executive Session, the public portion of the meeting of the Finance and Audit Committee reconvened at approximately 8:35 a.m. *** Committee Chair Cohen stated that the next item on the agenda is the Consideration of Approval of the 2014 Financial Report, which would be presented by Mr. Falcone and Ms. Mongiardo. Ms. Falcone discussed the 2014 Financial Report for the Authority s Annual Report and then took questions from the trustees. A motion was made and seconded, and the Trustees unanimously adopted the following resolution:

4 APPROVAL OF 2014 FINANCIAL REPORT OF THE LONG ISLAND POWER AUTHORITY WHEREAS, Section 2800(1) of the Public Authorities Law ( PAL ) requires public authorities such as the Long Island Power Authority (the Authority ) to prepare an annual report; and WHEREAS, the Authority s annual report includes, among other things, a financial report, as defined under Section 2800(1)(a)(2) of PAL (the Financial Report ); and WHEREAS, the Authority has prepared its Financial Report, which, pursuant to Section 2800(3) of PAL, is subject to the approval of the Trustees; and WHEREAS, the Finance and Audit Committee has thoroughly reviewed the Authority s Financial Report: NOW, THEREFORE, BE IT RESOLVED, that the Finance and Audit Committee of the Authority s Board of Trustees hereby recommends that the Board of Trustees approve the 2014 Financial Report of the Long Island Power Authority, in the form presented at this meeting. *** Committee Chair Cohen stated that the next item on the agenda is the Overview of the Financial Results and Hedge Report, which would be presented by Ms. Mongiardo, Mr. Lyons, and Mr. Horowitz. Ms. Mongiardo, Mr. Lyons, and Mr. Horowitz then presented the overview of financial results and hedge report and took questions from the trustees. *** Committee Chair Cohen stated that the next item on the agenda is the Consideration of Approval of the Interest Rate Exchange Agreement Guidelines and Investment Guidelines, which would be presented by Mr. Falcone. Ms. Falcone discussed the Interest Rate Exchange Agreement Guidelines and Investment Guidelines and then took questions from the trustees. A motion was made and seconded, and the Trustees unanimously adopted the following resolution: 3

5 RECOMMENDATION OF APPROVAL OF MODIFICATIONS TO THE LONG ISLAND POWER AUTHORITY (1) GUIDELINES FOR THE USE OF INTEREST RATE EXCHANGE AGREEMENTS AND (2) INVESTMENT GUIDELINES WHEREAS, the Long Island Power Authority ( LIPA ) adopted the Long Island Power Authority Guidelines for the Use of Interest Rate Exchange Agreements (the Interest Exchange Agreement Rate Guidelines ), in 1998, as amended on December 13, 2007 and February 28, 2013, to provide rules for the use of interest rate exchange agreements, including the parameters for which these agreements shall be used; and WHEREAS, staff proposes the following material modifications to the Interest Rate Exchange Agreement Guidelines: (i) LIPA s Executive Risk Management Committee ( ERMC ) will no longer need to determine whether the Authority qualifies for an End- User exemption as provided in the CFTC regulations as such requirement was determined to not apply to the Authority; (ii) in place of an aggregate notional limit of $250 million for any single swap counterparty, the proposed Interest Rate Exchange Agreement Guidelines require the ERMC to evaluate swap counterparty termination exposure to avoid excessive concentrations of exposure to a single counterparty as measured by the aggregate current and potential termination values of swap transactions prior to the Authority entering into any such interest rate exchange agreements (such termination valuations taking into account the duration, terms, and interest rate and other characteristics of the swap in addition to the notional value); and (iii) removal of the collateral requirement of 102 percent of the market value of a swap, where applicable, recognizing that such requirements may be less than 102 percent depending upon the terms negotiated and the types of collateral provided by the counterparty; and WHEREAS, LIPA is required by Section 2925(6) of the Public Authorities Law, as amended, to periodically review, amend and adopt investment guidelines which detail the Authority s operative policy and instructions to officers and staff regarding the investing, monitoring and reporting of funds of the Authority; and WHEREAS, LIPA adopted the Long Island Power Authority Investment Guidelines (the Investment Guidelines ), in 2013; and WHEREAS, staff has proposed certain amendments to the Investment Guidelines as specifically detailed in the accompanying memorandum; and NOW THEREFORE BE IT RESOLVED, that the Finance and Audit Committee of the LIPA Board of Trustees ( Committee ) hereby recommends that the Board of Trustees approve and adopt the Guidelines for the Use of Interest Rate Exchange Agreements (amended as of March 26, 2015) in the form presented at this meeting to be effective immediately; and be it further RESOLVED, that the Committee hereby recommends that the Board of Trustees approve and adopt the Long Island Power Authority Investment Guidelines (amended as of March 26, 2015) in the form presented at this meeting to be effective immediately; and be it further 4

6 RESOLVED, that such Investment Guidelines are to be effective with respect to all Investment Securities, as defined in such Investment Guidelines, purchased after the date hereof. *** 5 Committee Chair Cohen stated that the next item on the agenda is the review of the Authority s debt management policy, which would be presented by Mr. Falcone Ms. Falcone discussed the authority s debt management policy and then took questions from the trustees. *** Committee Chair Cohen stated that the next item on the agenda is an update on the Authority s Internal Audit Activities, which would be presented by Ms. Mitterway. Ms. Mitterway gave an update on the Authority s Internal Audit Activities and then took questions from the trustees. *** Committee Chair Cohen stated that the next item on the agenda is a discussion of the Committee s draft annual report to the full Board of Trustees on the Committee s 2014 activities and this item would be presented by the Authority s General Counsel, Jon Mostel. Mr. Mostel discussed the draft annual report to the full Board of Trustees on the Committee s 2014 activities and then took questions from the trustees. At approximately 9:10 a.m. Committee Chair Cohen entertained a motion to adjourn, which was duly made and seconded.

7 Finance & Audit Committee Monthly Update April 23, 2015

8 LIPA Preliminary Consolidated Results March 2015 Current Month Year-to-Date Annual (in thousands) Actual Budget $ Var. % Var. Actual Budget $ Var. % Var. Budget Revenues $274,793 $255,684 $19, % $878,475 $913,303 ($34,828) -3.8% $3,599,685 Fuel and Purchased Power Costs 133, ,403 (13,082) -10.9% 456, ,700 43, % 1,604,422 Revenue Net of Fuel Costs $141,308 $135,281 $6, % $421,494 $412,602 $8, % $1,995,263 PSEG Long Island Operating and Managed Expenses PSEG Long Island Operating Expenses $26,594 $39,304 $12, % $120,399 $117,759 ($2,641) -2.2% $455,465 PSEG Long Island Managed Expenses 49,816 48,612 (1,205) -2.5% 139, ,315 6, % 574,201 Utility Depreciation 9,440 8,922 (518) -5.8% 26,926 26,700 (226) -0.8% 109,470 PILOTs - Revenue-Based Taxes 2,830 2,609 (222) -8.5% 8,654 8,465 (189) -2.2% 36,991 PILOTs - Property-Based Taxes 22,966 24,669 1, % 74,655 74,006 (649) -0.9% 297,906 LIPA Expenses LIPA Operating Expenses $6,179 $5,803 ($376) -6.5% $16,278 $16,914 $ % $65,730 LIPA Depreciation and Amortization 10,435 9,776 (659) -6.7% 31,299 29,327 (1,972) -6.7% 117,388 Interest Expense 31,347 31, % 93,804 95,189 1, % 375,561 Total Expenses $159,607 $171,463 $11, % $511,468 $514,674 $3, % $2,032,712 Other Income and Deductions 2,300 2,795 (495) -17.7% 7,902 8,386 (484) -5.8% 32,932 Grant Income 1, % 3,047 2, % 79,515 Change in Net Position ($14,397) ($32,582) $18, % ($79,025) ($91,270) $12, % $75,000 1

9 LIPA Managed Costs Variance Explanations March 2015 Current Month Year-to-Date Annual (in thousands) Actual Budget $ Var. % Var. Actual Budget $ Var. % Var. Budget LIPA Expenses LIPA Operating Expenses $6,179 $5,803 ($376) -6.5% $16,278 $16,914 $ % $65,730 LIPA Depreciation and Amortizations 10,435 9,776 (659) -6.7% 31,299 29,327 (1,972) -6.7% 117,388 Interest Expense 31,347 31, % 93,804 95,189 1, % 375,561 Total Expenses $47,961 $47,349 ($612) -1.3% $141,381 $141,430 $49 0.0% $558,679 Other Income and Deductions ($52) $452 ($504) % $844 $1,355 ($511) -37.7% $5,419 Grant Income 1, % 3,047 2, % 79,515 Total Income $1,550 $1,257 $ % $3,891 $3,771 $ % $84,934 LIPA s operating expenses, year to date, are under budget $636K due to lower professional services fees and lower salaries and benefits expense partially offset by the timing of higher Smart Grid expenses incurred. LIPA s depreciation and amortization expense, year to date, is $2M over budget due to the OMS and ERP system amortizations which were deferred in the budget. LIPA s interest expense, year to date, is $1.2M under budget due to lower than budgeted interest rates and the delayed timing of the 2015 bond issuance. LIPA s grant income, year to date, is favorable against the budget by $631K due to higher Smart Grid grant income proceeds received; however this was completely offset by higher expenses. 2

10 LIPA Managed Costs Professional Services March 2015 Professional Services Current Month Year-to-Date Annual Actual Budget $ Var. % Var. Actual Budget $ Var. % Var. Budget Engineering $40 $158 ($118) -74.7% $106 $575 ($469) -81.6% $1,700 Legal % (21) -2.4% 4,250 Financial Advisor/Cash Management (84) -80.0% (79) -25.1% 1,560 Accounting and Audit Services (134) -37.9% (182) -32.2% 1,702 Information Technology (40) -57.1% (135) -64.3% 840 Risk Management-Fuel & Insurance % (64) -29.2% 439 Superstorm Sandy Grant Administration % % 1, Program Grant Administration (91) 167 (258) % (241) -48.2% 2,000 Insurance Claim Administration (10) 108 (118) % (55) -16.9% 1,300 Miscellaneous (17) -63.0% (32) -39.5% 406 Total Professional Services $1,295 $1,483 ($188) -12.7% $3,317 $4,053 ($736) -18.2% $15,697 Deferred Rate Case Expenses n/m n/m 1,000 Grant Admin. Reimbursement % % 3,500 Insurance Claim Admin. Reimbursement n/m n/m 1,300 Total Professional Services, Net of Reimbursements $1,003 $1,191 ($188) -15.8% $2,442 $3,178 ($736) -23.2% $9,897 3

11 LIPA Liquidity Position (in thousands) February 28, Days cash March 31, Cash on deposit - Operating Liquidity Operating account $ 129,523 $ 161,021 Rate Stabilization Fund 150, ,417 Operating account - PSEG-LI 207, ,598 Construction Fund 291, ,537 Storm account-pseg-li 13,223 13,224 Days cash $ 792, days $ 792, days Available Credit Available 2015 General Revenue Notes - 125,000 Available Commercial Paper - - Available Senior Credit Facility 500, ,000 Total Available Credit 500, ,000 Total Cash and Available Credit $ 1,292, days $ 1,417, days Restricted cash on deposit FEMA - restricted 447, ,707 OPEB Funding account 22,308 22,310 UDSA 48,511 54,887 Total Restricted Funds $ 518,494 $ 524,904 4

12 PSEG-LI Operating Costs March 2015 (in thousands) Current Month Year to Date Annual Actual Budget (a) $ Var. % Var. Actual Budget (a) $ Var. % Var. Budget (a) PSEG Long Island Operating Expenses Transmission & Distribution $7,213 $11,304 $4, % $50,336 $34,905 ($15,431) -44.2% $136,525 Customer Services 6,524 7,598 1, % 23,722 22,940 (782) -3.4% 95,746 Business Services 7,521 13,360 5, % 30,762 39,504 8, % 131,502 Power Markets 399 1, % 1,109 3,029 1, % 12,239 Energy Efficiency & Renewable Energy 4,936 5,983 1, % 14,470 17,381 2, % 83,887 Total PSEG Long Island Operating Expenses $26,594 $39,304 $12, % $120,399 $117,759 ($2,641) -2.2% $459,899 (a) - Includes Rate Case costs that LIPA w ill defer and amortize over the period of the rate case (annual budget of $4.4M). T&D year-to-date variance driven by winter storm costs and transmission pipe cable failure costs. Business Services variance driven by timing of non-labor expenditures and lower than projected IT expenditures. Power Markets variance due to labor timing, and lower than projected non-labor expenditures. Energy Efficiency variance driven by program timing. 5

13 PSEG-LI Managed Costs March 2015 (in thousands) PSEG Long Island Managed Expenses Current Month Year to Date Annual Actual Budget $ Var. % Var. Actual Budget $ Var. % Var. Budget National Grid Power Supply Agreement $37,696 $38,032 $ % $113,402 $113,235 ($167) -0.1% $458,461 Nine Mile Point 2 O&M 2,557 2,284 (273) -12.0% 7,647 6,652 (995) -15.0% 28,431 Uncollectible Accounts 2,003 2, % 6,118 6, % 21,726 Storm Restoration 4,442 4,050 (392) -9.7% 4,442 12,149 7, % 48,597 NYS Conservation Assessment and ORPS 2,743 2,459 (283) -11.5% 8,476 8, % 21,463 Accretion of Asset Retirement Obligation % 931 1, % 4,611 Capitalized Interest 139 (912) (1,051) 115.2% (1,719) (2,737) (1,018) 37.2% (10,946) Interest on Customer Deposits (57) -97.3% % 703 Miscellaneous % % 1,154 Subtotal PSEG Long Island Managed Expenses $49,816 $48,612 ($1,205) -2.5% $139,452 $146,315 $6, % $574,201 Utility Depreciation $9,440 $8,922 ($518) -5.8% $26,926 $26,700 ($226) -0.8% $109,470 PILOTs - Revenue-Based Taxes 2,830 2,609 (222) -8.5% 8,654 8,465 (189) -2.2% 36,991 PILOTs - Property-Based Taxes 22,966 24,669 1, % 74,655 74,006 (649) -0.9% 297,906 Total PSEG Long Island Managed Expenses $85,052 $84,811 ($241) -0.3% $249,688 $255,486 $5, % $1,018,568 6

14 Revenue Variance Analysis March 2015 vs. Budget Current Month Year-to-Date Annual (in thousands) Actual Budget Var. Var. % Actual Budget Var. Var. % Budget Total Revenue $274,793 $255,684 $19, % $878,475 $913,303 ($34,828) -3.8% $3,599,685 Fuel and Purchased Power Cost 133, ,403 (13,082) -10.9% 456, ,700 43, % 1,604,422 Revenue Net of Fuel and Purchased Power Costs $141,308 $135,281 $6, % $421,494 $412,602 $8, % $1,995,263 Sales of Electricity (MWh) Residential 729, ,703 50, % 2,267,543 2,128, , % 9,562,411 Commercial & Industrial 823, ,550 39, % 2,329,251 2,331,399 (2,149) -0.1% 9,935,481 Public Authorities/Street Lighting 69,150 50,087 19, % 174, ,198 24, % 579,227 Total Sales of Electricity (MWh) 1,621,484 1,512, , % 4,771,611 4,610, , % 20,077,119 Revenue net of Fuel and Purchased Power Costs for the three months ending March were $8.9M higher than year-todate 2015 budget due to: Higher Delivery Revenue of $9.9M driven by weather impacts of $13.8M partially offset by a different sales mix between customer classes than budgeted resulting in a pricing impact of $3.1M partially and lower growth of $0.8M. This over-run is partially offset by lower NYS Assessment Revenue of $0.6M and lower Suffolk County Property Tax Recovery Revenue of $0.6M. 7

15 PSEG-LI Managed Costs Fuel and Purchased Power March 2015 Year to Date Favorable/ (Unfavorable) Fuel and Purchased Power Expenses Actual Budget Variance Variation due to: $456,981 $500,700 $43,720 Prices: 11.1% lower than assumed in the budget Actual average cost - $9.85 cents/kwh Budgeted average cost - $11.08 cents/kwh 57,804 Hedging Commodity Derivative Settlement Impact (1,173) Higher than Budgeted Sales Impact (12,911) Fuel and Purchased Power Expense Budget Variance $43,720 Fuel and purchased power costs were $44M lower than budget due to lower fuel costs driven by natural gas prices that were lower than assumed in the budget. The lower natural gas prices also reduced the cost of purchased power due to the reduced cost of energy purchases. Of the total variance, $57M can be attributed to lower fuel prices net of financials settlements from hedging activities partially offset by higher electricity demand of approximately $13M. 8

16 PSEG-LI Capital Costs March 2015 YTD Actual YTD Plan Variance IT $18,752,672 $16,679,999 ($2,072,672) Facilities 2,684 2,114,250 2,111,566 Business Services $18,755,356 $18,794,249 $38,894 Customer Operations $864,378 $2,705,866 $1,841,488 Blanket - Load Growth $2,614,352 $1,009,636 ($1,604,716) Blanket - Other 60, , ,866 Blanket - Regulatory 9,092,682 6,825,490 (2,267,192) Blanket - Reliability 22,608,218 31,977,497 9,369,279 Specific 7,818,519 42,341,618 34,523,099 T&D $42,194,016 $82,729,352 $40,535,336 Total $61,813,750 $104,229,467 $42,415,718 9

17 Long Island Power Authority and Subsidiaries Hedge Program Summary Report - as of March 31, 2015 Fuel and Purchase Power Cost Rate Graph Ref. Hedge Position Hedge Ratio %: Swaps, Options + FP Physical Contracts 64% 56% 45% 25% 2 Change from last Month, % 3% 0% 2% 0% Mark-to-Market ($ millions) Realized Mar-15 As of 2/28/2015 As of 3/31/ ($1.2) $5.4 ($66.9) $5.10 $0.00 * Net Present Value YTD Unrealized All Forward Periods, Unrealized* Collateral, Received / (Posted) All Forward Periods Comments on Recent Hedge Activities The graph at the top of this page presents the impact of the hedging program on monthly fuel and purchased power costs on a $/kwh basis. The monthly $/kwh cost without the hedge program is indicated by the green line. The blue line on the graph represents the $/kwh cost including monthly hedge P&L results. The gold line isolates the monthly hedge profit or loss on a $/kwh basis. For March 2015 LIPA's Hedging Program realized losses of $1.2M as noted above on Line Ref. #3, compared to a budgeted expected loss of $3.5M. With the inclusion of the March 2015 hedge settlements the delta between the budget expectations versus actual settlement is currently approximately -$1.2M year-to-date. Early March provided a last bout of wintry weather for the Midwest and Northeast and gas and power prices held firm for the early part of the month. Fuel prices began drifting lower through to the end of the month as more normal milder weather finally arrived into our region. The March 2015 realized hedging losses had a minor impact to the Power Supply Charge of approximately $0.0007/kWh. The total current hedge position mark-to-market ("MtM"), or unrealized value for all unsettled forward hedge positions at March 31, 2015 is - $66.9M as noted on Line Ref. #3 above. The MtM is $2.7M higher in value at the close of March in comparison to the value of open positions existing at the end of last month's settlement. Also, there was no collateral posted at March 31, 2015 as indicated on far right of Line Ref. # 3 above. As noted in last month's hedge report, the calculation for the Hedge Ratio data on Line Ref. #1 above has been revised to reflect a ratio that represents a composite percentage of fixed price fuel (fuel oils and gas) and fixed price power through the execution of financial derivative instruments, physical contracts and power from LIPA's share of Nine Mile Point 2 versus the forecasted LIPA load obligation. Physical contracts includes transacted physical fixed price fuel and power by LIPA's fuel manager as well as LIPA's long-term purchase power agreements (i.e. fixed price generation, nuclear, biomass and solar). The new presentation provides a more concise view on what portion of fuel and purchased power consumption is fixed priced versus total future load by calendar year. Additionally, the new Hedge Ratio is more in line with how the NYS investor owned utilities present their position to the NYS Department of Public Service. During the month of March PSEG Energy Resources & Trade LLC ("PSEG ER&T") executed additional hedges on LIPA's behalf. The end of March 2015 Hedge Ratios are indicated in Line Ref#1, while Line Ref #2 indicates the change in the Hedge Ratio by calendar year since last month. At the end of March 2015 the Hedge Ratio for the balance of 2015 (Apr-Dec) rose by 3% and is now at 64%. The Hedge Ratios for calendar years 2016 remains unchanged since last month at 56% while 2017 increased by 2% to 45%. Calendar 2018 remains unchanged since last month at 25%. The new hedges were required in accordance with value triggers designed in the new LIPA Hedge Plan which was approved by the Executive Risk Management Committee in January. 1

18 Long Island Power Authority and Subsidiaries Hedge Program Summary Report - as of March 31, 2015 Energy Risk Management Committee ("ERMC") Update Since last report, the ERMC convened a conference call meeting on April 1, 2015 which was facilitated by PSEG ER&T and PSEG which focused on a recommendation for the ERMC to consider a modification to the definition of the Winter Season associated with natural gas and natural gas basis in the approved LIPA Hedge Plan. PSEG ER&T explained that after analyzing the difference in the peak/non-peak winter price matrices in the hedge program, the practical aspects of using a one winter seasonal matrix became apparent since the winter seasonal strip is the norm in the marketplace for quoting and executing financial and physical gas and basis hedges, and the price disparity between the two was negligible. Based on PSEG ER&T's recommendation the ERMC unanimously approved the modification to the LIPA Hedge Plan. Changes in Counterparty Status There are currently 11 active counterparties available for financial commodity risk management activities. LIPA and PSEG ER&T are in various phases of the documentation process with several potential new counterparties. PSEG ER&T is working with LIPA's risk management group to identify appropriate creditworthy counterparties to add to LIPA's portfolio. The addition of new counterparties helps to reduce LIPA s counterparty credit risk and industry sector credit risk while further reducing its potential collateral exposure by spreading hedges across a larger group of entities. Also, PSEG ER&T has completed enabling agreements with several additional physical gas suppliers, adding to the portfolio of potential physical hedging counterparties. PSEG ER&T is also in discussions with several over-the-counter brokers and futures clearing brokers which could help to expand the universe of counterparties available to PSEG ER&T to manage LIPA's commodity risk management hedging program. LIPA Fuel Usage As mentioned earlier in the report, due to the with milder temperatures which finally entering our region in the second half of March, natural gas prices remained below the cost of residual fuel oil for a majority of the month. The actual fuel mix consumed at the LI generating fleet reverted back to a composition experience in March of 2012 and For March 2015 the LI generating fleet consumed 95% natural gas and 5% residual or distillate oil products. Looking at forward fuel prices for natural gas and various fuel oils, it is anticipated that natural gas will be the predominant economic fuel of choice through to December 2015 at the LI generating plants. Comments on Material Changes in Market Fundamentals NYMEX futures prices for oil, oil products and natural gas in the part of the forward curve were lower at the end of March versus the end of February. For example, natural gas prices for the balance of 2015 moved lower by 3.4% and Calendar 2016 fell by 2.5% since the end of last month. The back of the curve ( ) actually took the brunt of the hit declining almost 4% in comparison to prices at the end of February The milder weather during the latter part of March 2015 pushed NYMEX Natural Gas futures and spot gas prices lower during the month. This also impacted power prices in the region as well. NYMEX Crude Oil prices experienced greater volatility with $10.40/bbl price range in March 2015 with an intra-day low of $42.03/bbl mid-month to the high of $52.47/bbl several days before the end of the month due to an escalation in fighting in Yemen raised concern over the security of crude oil shipments in the Middle East. In addition, there were several other key drivers in the oil market in March including U.S. Dollar value fluctuation against foreign currencies. Also, the market is paying a lot of attention to the on-going nuclear negotiations with Iran and the prospect of the UN Security Council plus Germany willingness to lift oil-related sanctions against Iran who is holding at least 30M barrels of oil in storage which could hit the market. NYMEX Crude Oil prices wound up on the last day of March near the average of the monthly range at $47.60/bbl. The NYMEX Natural Gas Futures contract indicates the value of natural gas commodity at the Henry Hub in Louisiana. The NYMEX Natural Gas contract for March 2015 settled on February 25, 2015 at $2.894/dthm. This settlement was less than 1% or $0.028/dthm higher than the NYMEX February 2015 Natural Gas Futures contract settlement of $2.866/dthm. The total cost of base load gas, including the cost of NYMEX gas priced at Henry Hub and the cost of transportation of the gas to the New York City delivery point known as Transco Zone 6 NY (referred to as TZ6 NY basis) for the month of March 2015 declined by 41.8% from February March 2015 base load costs were lower as a result of significantly lower March 2015 TZ6 NY basis costs of $2.746/dthm which declined by 59.6% versus February 2015 TZ6 NY basis which settled at $6.80/dthm. The TZ6 NY basis component was the large contributor to lower base load gas costs for March 2015 versus February 2015 ($5.64/dthm versus $9.69/dthm) which is a typical pricing pattern from February to March as the winter weather subsides. 2

19 Long Island Power Authority and Subsidiaries Hedge Program Summary Report - as of March 31, 2015 March 2015 did see a moderation in TZ6 NY natural gas prices for both monthly base load gas and cash gas (additional gas supply purchased day-to-day based on plant dispatch needs) purchases. For a good portion of March 2015 TZ6 NY cash gas market prices remained under $3.00/dthm. For March we observed cash gas prices at TZ6 NY in a range from $2.51/dthm - $15.95/dthm. There were two days at the beginning of March where cash gas prices jumped into the mid-teens causing the monthly price range to be exceptionally wide again this month. However, the average TZ6 NY spot market price across the month averaged $3.67/dthm. If we remove the two days where prices were above $14/dthm the average is closer to $2.90/dthm. As stated in previous reports, during the winter months and peak summer month's weather is one of the key drivers in fuel and power prices. As we enter April and wave winter good-bye we expect natural gas and power prices to become less volatile due to declining heating demand and lack of cooling needs and electricity demand. NYMEX Henry Hub Natural Gas $/dthm During March 2015 the NYMEX prompt month futures contract for natural gas at Henry Hub Louisiana (April 2015) remained below the $3.00/dthm level. The NYMEX Natural Gas market traded in a range from $2.58/dthm to a high of $2.935/dthm. The natural gas monthly high price was experienced during the third week of March as some forecasters were predicting below-normal weather in the Northeast. The natural gas rally did not last long as temperatures failed to fully decline to forecasted levels and turned to more normal temperature levels in the Northeast. Additionally, above-normal weather in the balance of the U.S. also helped to push gas prices going into the end of March 2015 which wound up at $2.60/dthm. As we come to the end of the winter period and the beginning of the spring and summer season the market is going to pay more attention to EIA data associated with gas storage replenishment for next winter. Week-to-week gas production as well as summer weather forecasts will be factors affecting the market. March 2015 gas storage withdrawals totaled 249Bcf and leaving gas inventory at 1,461Bcf at the end of March, which represents a surplus of 628Bcf versus last year's corresponding level. In the EIA's April 7th Short-Term Energy Outlook, the EIA noted that the gas storage level at 1,461Bcf as of March 27, 2015 is now 75% higher than a year earlier, but 12% below the five-year ( ) average. April is typically the beginning of the injection season which runs through October. The EIA is now projecting natural gas inventories will end October 2015 at 3,781Bcf, a net injection of 2,310Bcf. If that were to happen it would be the fourth-highest injection season on record, but it would be 420Bcf lower than last year's net April- October 2014 injection. The market will keep an eye on the weekly EIA gas storage reports. In addition, attention will be paid to the Baker-Hughes rig count data. According to Baker-Hughes most recent rig count report issued on April 10, 2015 the number of U.S. rigs actively drilling for oil and natural gas fell to 988 rigs. The rig count is down 842 rigs from this time last year. The number of oil rigs fell to 760 which is 757 lower than last year, while natural gas rigs fall to 225, which is 85 less rigs than a year ago. The lower rig count is in direct response to the decline in global crude oil prices as well as a decline in NYMEX Natural Gas prices (see graph above). Despite the continued drop in gas rigs, production is still expected to grow. According to Bentek a globally recognized energy market analytics company, production will average 73.1 Bcf/day this year in the U.S., up from 68.5 Bcf/day a year ago. By comparison, U.S. gas production in 2008 averaged 54.1 Bcf/day when the rig count was at its highest level. There is consensus among commodity analyst that U.S. oil production will slow down the second half of 2015 and that gas production may continue to see modest increases due to shale gas production. 3

20 Internal Audit Update Finance & Audit Committee April 23, 2015

21 2014 LIPA Internal Audit Plan Status Audit Type LIPA Audit/Review Status Comments Expected Completion Date Three Audit Reports: 1. Reliability Metrics Report - Complete 2. OSHA Safety Metrics Report - Complete OSA Contract Standards Review quarterly and at year-end the development of Performance Metric statistics for compliance with the OSA. In - Progress 3. Customer Satisfaction and Financial Performance Metrics Report - Finalizing Management Action Plans 4/30/2015 OSA Contract Standards Review that the Contract Administration Manual is maintained by PSEG LI in compliance with the OSA. Complete Complete Complete OSA Contract Standards Review the processes established at LIPA that encompass the contract oversight function. Complete Complete Complete T&D Operations Review PSEG LI inventory control processes as described in Section 4.12 of the OSA including the warehouse cycle count process to ensure that inventory and capital items on hand are properly recorded, safeguarded and that losses are adjusted and investigated. Complete Complete Complete T&D Operations T&D Operations Power Supply LI Financial and IT Processes: Financial and IT Processes Financial and IT Processes Financial and IT Processes Financial and IT Processes Financial and IT Processes Review PSEG LI controls over capital construction projects. Focus on remediation of the findings of the Management Audit and compliance with FEMA grant requirements. Defer to 2015 Audit Plan PSEG LI Internal Audit Plan includes Fixed Asset Accounting and FEMA Audits. 2. LIPA IA will follow-up for report PSEG LI Internal Audit Plan includes Fixed Asset Accounting and FEMA Audits. 2. LIPA IA will follow-up for report Review PSEG LI reconciliation of the CWIP balance with a focus on the process to finalize project accounting. Defer to 2015 Audit Plan Review PSEG LI processes to monitor compliance with the provisions of Power Supply agreements. In - Progress FERC Conference scheduled for April 21, /30/2015 Review LIPA processes to manage and report Debt Covenant Defer to 2015 compliance. Audit Plan Fieldwork In-Progress 6/30/ PSEG LI Internal Audit Plan includes Financial Statement Close Audit. 2. LIPA IA will follow-up for report Defer to 2015 Review the LIPA Financial Statement Close Process. Audit Plan Review the LIPA IT System Back-up and Recovery processes to ensure that electronic data is safeguarded and systems can be recovered timely. Complete Complete Complete Review PSEG LI compliance with financial account reconciliation requirements in the OSA. Complete Complete Complete Identify and review PSEG-LI related party transactions for compliance with the OSA. In - Progress Fieldwork In-Progress 4/30/2015 Review the management of the implementation of three key IT systems by PSEG. (OMS, IVR, SAP) In - Progress 1. OMS Report - Complete 2. IVR - Not Reviewed 3. SAP Report - Finalizing Report 4/30/2015

22 2015 LIPA Internal Audit Plan Status Type Entity Audit/Review Expected Completion Date Financial and IT Processes PSEG LI PSEG LI Affiliate Transactions 2015 Annual Billing Rate Review 2nd Quarter Power Supply LI PSEG LI National Grid Generation Power Supply Agreement Capacity Charge Adjustment for Plant Additions True Up 2nd Quarter In Progress Financial and IT Processes PSEG LI Continuous Auditing Processes 3rd Quarter Status Power Supply LI PSEG LI Energy Resources & Trade - Fuel Procurement Process 3rd Quarter Financial and IT Processes PSEG LI Quarterly Sample of PSEG LI Accounts Payable Transactions 4th Quarter In Progress Financial and IT Processes PSEG LI Power Supply Invoice - Tier 1 Metric 4th Quarter Financial and IT Processes PSEG LI Storm Invoices 4th Quarter T&D Operations PSEG LI PSEG LI Capital Construction Project Management and Compliance with FEMA Grant Requirements 4th Quarter T&D Operations PSEG LI PSEG LI Construction Work-In-Progress Close Out Process 4th Quarter Enterprise Wide LIPA LIPA Enterprise Risk Management Project 2nd Quarter In Progress Financial and IT Processes LIPA LIPA Debt Covenant Compliance 2nd Quarter In Progress Financial and IT Processes LIPA LIPA Internal Control Documentation and Testing 3rd Quarter In Progress Financial and IT Processes LIPA/PSEG LI LIPA/PSEG LI Cyber Security/Data Protection 2nd Quarter Financial and IT Processes LIPA/PSEG LI LIPA/PSEG LI Financial Statement Close Process 3rd Quarter TBD PSEG LI Contingency - TBD 4th Quarter TBD LIPA Contingency - TBD 4th Quarter

23 FOR CONSIDERATION April 23, 2015 TO: FROM: REQUEST: The Finance and Audit Committee of the Board of Trustees John D. McMahon Recommendation for Approval of an Amendment to an existing Interest Rate Swap Requested Action The Finance and Audit Committee is requested to adopt a resolution recommending that the full Board authorize each of the Chief Executive Officer, Chief Financial Officer, or their respective designees, to execute and deliver an amendment to an existing International Swaps and Derivatives Association Swap Master Agreement with Merrill Lynch Capital Services, Inc. ( MLCS ). Background In 2004, the Long Island Power Authority (the Authority ) entered into an interest rate swap agreement with MLCS (the MLCS Swap ) with a notional value of $502,080,000. The MLCS swap became effective on July 1, 2004 and has a termination date of August 15, In connection with the MLCS Swap, the Authority and MLCS entered into a Credit Support Annex pursuant which each party agrees in certain circumstances to post collateral. The Authority has determined that it would be advantageous to amend a provision of such Credit Support Annex to change the definition of Threshold (which affects the amount of and circumstances in which collateral must be posted) as it relates to the Authority so that the Threshold for the Authority would be increased from $0 to $30 million if the lowest rating of the long-term, unsecured and unsubordinated debt of the Authority is BBB-, Baa3 or BBB- by S&P, Moody s or Fitch, respectively. This amendment would reduce the likelihood of the Authority having to provide collateral under such Credit Support Annex or reduce the amount of such collateral required if the lowest rating of such debt fell to such rating levels as compared to the current provision. Other less significant changes to the swap documentation will also be made. MLCS has agreed to this amendment without cost to the Authority and with no other changes to the material terms of the MLCS Swap. Recommendation Based upon the foregoing, staff recommends approval of the above-requested action by adoption of a resolution in the form of the draft resolution attached hereto.

24 RECOMMENDATION OF AUTHORIZATION TO EXECUTE AN AMENDMENT RELATED TO AN EXISTING INTEREST RATE SWAP WITH MERRILL LYNCH CAPITAL SERVICES, INC. RESOLVED, that consistent with the accompanying memorandum, the Finance and Audit Committee of the LIPA Board of Trustees hereby recommends that the Board of Trustees authorize each of the Chief Executive Officer, Chief Financial Officer, or their respective designees to execute and deliver an amendment to an existing International Swaps and Derivatives Association Swap Master Agreement with Merrill Lynch Capital Services, Inc. together with such schedules, confirmations and any and all other documents and instruments and to do any and all acts necessary or proper for carrying out the purposes of the proposed amendment. ***

25 April 23, 2015 TO: FROM: SUBJECT: The Finance and Audit Committee Kenneth Kane Briefing on Request for Proposals for firms to serve the Authority and its subsidiary, LIPA, ( LIPA ) as Underwriter and/or Swap Counterparty LIPA has an ongoing need for the services of bond underwriters and swap counterparties to finance its capital program and refinance outstanding bonds at a lower cost. Periodically, the Authority issues a Request for Proposals ( RFP ) to pre-qualify a pool of such firms. Then as financing needs arise the Authority seeks ideas and advice from its pre-qualified pool on how best to finance each transaction. This process results in the selection of one or more of the pre-qualified firms for each transaction. The Board approves the firms selected for each transaction alongside the approval of each individual bond financing. LIPA issued an RFP on February 20, 2015, seeking a pool of qualified firms to provide such services. The last such RFP was issued in January Respondents to the RFP were evaluated based on five separate categories of potential services that they might provide: senior managing underwriters for LIPA; senior managing underwriters for Utility Debt Securitization Authority (UDSA); co-managing underwriters; remarketing agents and/or broker dealers for variable-rate debt, notes, and commercial paper; and swap counterparties. The RFP was advertised in the New York State Contract Reporter, posted on the LIPA website and distributed to 527 firms, including 472 New York State Certified MWBE firms and 7 New York State Certified Service-Disabled Veteran Owned Business. On March 20, 2015, 36 firms responded to the RFP of which 12 were New York State Minority Business Enterprise (MBE), 3 were New York State Woman Business Enterprise (WBE) and 3 were New York State Service-Disabled Veteran Owned Businesses. Each of the proposals were evaluated by a selection committee comprised of LIPA staff members Kenneth Kane, Corey Horowitz, John Little and LIPA s financial advisors. The proposals were first reviewed for compliance with the terms of the RFP and then evaluated against the criteria set forth in the RFP. Based on the written submissions, the oral interviews (where needed to differentiate firms), and an assessment of LIPA s needs, the selection committee concluded that the pre-qualified pools set forth below possess the skills and experience necessary to fulfill the Authority s needs. In particular, the firms selected as senior managing underwriters offer LIPA and UDSA broad-based experience with large public power clients and securitization transactions. These firms demonstrated a superior understanding of LIPA s financing needs and presented high quality ideas related thereto.

26 LIPA Senior Managing Underwriters: Barclays Capital Inc. Citigroup Global Markets Inc. Goldman Sachs & Co. J.P. Morgan Securities, LLC Merrill Lynch, Pierce, Fenner & Smith Morgan Stanley & Co. LLC Ramirez & Co., Inc. - MBE Raymond James & Associates Inc RBC Capital Markets, LLC Siebert Brandford Shank & Co, LLC - MBE Wells Fargo Bank NA UDSA Senior Managing Underwriters: Barclays Capital Inc. BMO Capital Markets GKST Inc. Citigroup Global Markets Inc. Goldman Sachs & Co. J.P. Morgan Securities, LLC Merrill Lynch, Pierce, Fenner & Smith Morgan Stanley & Co. LLC RBC Capital Markets, LLC Wells Fargo Bank NA Co-Managing Underwriters: Academy Securities -SDVOB & MBE Barclays Capital Inc. BMO Capital Markets GKST Inc. Citigroup Global Markets Inc. Drexel Hamilton LLC -SDVOB First Tennessee Bank National Association Goldman Sachs & Co. J.P. Morgan Securities, LLC Jefferies LLC Key Banc Capital Markets Loop Capital Markets - MBE Merrill Lynch, Pierce, Fenner & Smith Morgan Stanley & Co. LLC Ramirez & Co., Inc. - MBE Raymond James & Associates Inc RBC Capital Markets, LLC Siebert Brandford Shank & Co, LLC - MBE TD Securities, LLC US Bancorp Wells Fargo Bank NA

27 Remarketing Agents/Broker Dealers Barclays Capital Inc. BMO Capital Markets GKST Inc. Citigroup Global Markets Inc. Goldman Sachs & Co. J.P. Morgan Securities, LLC Jefferies LLC Loop Capital Markets - MBE Merrill Lynch, Pierce, Fenner & Smith Morgan Stanley & Co. LLC Ramirez & Co., Inc. - MBE Raymond James & Associates Inc RBC Capital Markets, LLC Siebert Brandford Shank & Co, LLC - MBE TD Securities, LLC US Bancorp Wells Fargo Bank NA Swap Counterparties: Barclays Capital Inc. BMO Capital Markets GKST Inc. Citigroup Global Markets Inc. Goldman Sachs & Co. Morgan Stanley & Co. LLC Merrill Lynch, Pierce, Fenner & Smith PNC Capital Markets, LLC RBC Capital Markets, LLC TD Securities, LLC US Bancorp Wells Fargo Bank NA

28 Status of PSEG ER&T Operations 1

29 Our discussion today will focus on a status update on: Power Supply Management Contract Fuel Management Contract Middle Office Services Hedge Plan Contracts were: Signed in November 2013 Transitional activities during 2014 Parallel operations during Q Transition completed / full operations December

30 The PSEG Organization Provide support to LIPA 3

31 Power Supply Management Contract Daily forecast of: LIPA expected load Fuel consumption for LIPA generators Daily bidding and scheduling for least cost operations: Generators with various ISO s Transactions with various ISO s Cables with various ISO s ISO bill validation Communication with LIPA staff Negotiation of commodity contracts on LIPA s behalf Commodity hedging activities per ERMC direction Note: There are no contracts for energy or capacity between PSEG and LIPA 4

32 Fuel Management Contract Purchase of: Seasonal and daily oil needs Monthly and daily natural gas needs Coordination and communication with plant personnel Natural gas deliveries Fuel oil deliveries (truck and barges) Negotiation of commodity contracts on LIPA s behalf Negotiation of oil service, delivery and logistics contracts Validation of counterparty bills Communication with LIPA staff 5

33 Middle Office Services Credit Evaluate trading counterparty credit risk and manage credit limits Manage daily collateral posting Confirmations and trade compliance Verify new trades entered into trade capture system Monitor trading limits Pricing and Valuation Update market prices and value trade positions Contract Oversight Monitor compliance with ER&T LIPA contracts (incl. performance metrics) Monitor compliance with hedge plan 6

34 Hedge Plan Retained an independent hedge advisor to recommend plan Plan approved by LIPA Executive Risk Management Committee Tom Falcone, Ken Kane, Ben Chu, Corey Horowitz, John Little Key hedge plan features Time triggers Catastrophic triggers Value triggers Results in hedging starting four years out and gradually increasing until current year 7

35 Hedge Plan - Benchmarking By the current year, the plan results in LIPA being hedged ~50% to 75%, in line with industry Mandatory Advance & Maximum Allowable Hedge Volume Percentage Source: FCStone Hedge Survey - Gas to Electric - Spring

36 Enterprise Risk Management Program Development Project Update Finance & Audit Committee Meeting April 23, 2015

37 A Comprehensive ERM Program for LIPA Enterprise Risk Management (ERM) increases risk awareness, ensures the appropriate management of risks, and provides transparency Encourages a comprehensive perspective of risks by assessing existing risk and mitigation efforts at both LIPA and PSEG-LI Assists in efforts to prevent risk events from occurring or mitigating risk events when they are unavoidable or outside LIPA s control Formally identifies a risk owner for each high risk area. Risk owner responsibilities include: Continuous (year-round) monitoring of mitigation efforts impacting their risks Reporting on risks and mitigation efforts on a regular basis Fulfills key recommendations from the Northstar Operations Audit Report (Chapter 7 Enterprise Risk Management and Strategic Planning ) dated September 13,

38 Project Plan Phase I Enterprise Risk Assessment (ERA) Understand the Current Risk Assessment Process (February March 2015) Completed Met with key personnel (both LIPA and PSEG-LI) and reviewed existing materials and previous risk assessments to understand the existing risk management programs and the risk assessment process. Risk Identification (March April 2015) In Process Consult with management to identify risks with the greatest impact to both LIPA and PSEG-LI from an operational, strategic, reputational and financial perspective, and consolidate the risks into themes using a customized Risk Model (see attached Appendix A). Met with 23 total LIPA contacts and 13 total PSEG-LI contacts to date. Risk Prioritization (March April 2015) In Process Hold meetings with key members of Management (both LIPA and PSEG-LI) to prioritize and validate risks previously identified. Following this meeting, develop a report summarizing the results of the assessment and next steps, incorporating risk management activities identified. Work with Management to assign owners to each of the top risks to the organization in order to drive ownership of risk management activities and reporting. Enhance Risk Assessment Process (April May 2015) In Process Following the conclusion of the risk assessment, a review of the risk assessment approach will be undertaken, to determine the need for additional enhancements, and position the organization for ongoing risk assessment program. 3

39 Project Plan Phase II Enterprise Risk Management (ERM) Framework Understand Current State of Risk Management (April May 2015) In Process Based on result of activities from Phase I, follow up with key personnel and review existing materials to determine the maturity of existing processes used to manage risk. Recommend & Design ERM Program (April 2015 June 2015) In Process Create options and recommendations for the vision and design of an ERM program and work with LIPA and PSEG-LI to develop a detailed roadmap for implementation. 4