Presentation by Jim Hogan, President and CEO - Chatham-Kent

ENTEGRUS INC.
TO:
Mayor and Members of Council
FROM:
Jim Hogan, President and CEO
DATE:
July 14, 2014
SUBJECT:
Entegrus Inc., 2013 Annual General Meeting
RECOMMENDATION
It is recommended that:
1.
The audited consolidated financial statement of Entegrus Inc. for the financial
year ended December 31, 2013 be approved and adopted in the form submitted to
the shareholders of the Corporation by the Directors of the Corporation.
2.
Each of the following persons to be appointed as Directors of Entegrus Inc.
Darrin Canniff (Chair)
Max Fantuz
Fred Hassan
Brian McKerlie
Paul House
Mayor Randy Hope (Municipal representative)
Councillor Doug Sulman (Municipal representative)
Brett Hodson (Corix Utility representative)
3.
Deloitte and Touche be appointed as the auditors for Entegrus Inc.
4.
That Council appoint a representative and that the representative (proxy) be
authorized to vote on the resolutions (Items 1 to 2 above) that are included in the
2013 Annual General Meeting of Entegrus Inc. on behalf of the Municipal
Shareholder.
BACKGROUND
As a result of Bill 35, the Energy Competition Act, 1998 enacted by the Province of
Ontario to introduce competition in the electricity market, it was necessary to incorporate
and reorganize the former Public Utilities Commissions within the Municipality.
Entegrus Inc. (“EI”) and its wholly owned subsidiaries Entegrus Powerlines Inc. (“EPI”)
and Entegrus Services Inc. (“ESI”) were incorporated on September 22, 2000 under the
Business Corporations Act – Ontario (“OBCA”). As part of the incorporation, the
1
Municipality transferred the electricity business and received a note receivable for
$23,523,000 and 2,000 shares valued at $23,691,000.
In 2005, Entegrus Inc. purchased all the shares of Middlesex Power Distribution
Corporation (“MPDC”). In 2008 the Municipality of Chatham-Kent sold an additional
10% of shares in EI to Corix Utility Inc. (“Corix”) and as such, the Municipality and
Corix are both shareholders of EI. In 2010 EI incorporated Entegrus Transmission Inc.
(“ETI”) to invest in transmission opportunities primarily in the south-western Ontario
region.
In 2011 EI filed an application with the Ontario Energy Board (“OEB”) to merge the two
distribution subsidiaries. Approval was granted with an effective date of January 1, 2012.
Shareholders of OBCA companies are entitled to elect directors, approve financial
statements and appoint the auditor for the Corporation. Such tasks are generally done at
the annual meeting of the shareholder.
The OBCA and the by-laws of the Corporation contain specific provisions relating to the
requirement for and holding of the annual general meeting. An annual meeting may be
held either in person or through telephone conference call. Since both shareholders of the
company are corporate entities, each shareholder must appoint a representative or proxy
to attend the meeting and vote the shareholder’s shares. The Ontario Business
Corporations Act specifically provides that a resolution signed by all shareholders is as
valid as if the resolution had been passed at a meeting of shareholders and that a written
resolution which deals with all matters required to be done at a meeting of shareholders
and signed by all shareholders satisfies the requirements of the Ontario Business
Corporations Act. Under this process, a formal shareholders meeting requiring formal
notice and attendance by the auditor is not required.
COMMENTS:
Financial Statement
A copy of the audited consolidated financial statement for EI as at December 31, 2013
were signed by the Deloitte LLP, the auditors, on April 25, 2014, and are attached to this
report. Representatives of EI and its subsidiaries will be present at the Council meeting
to address any questions or concerns with respect to the statements and the operations.
The financial statements have been approved by the Audit committee and then approved
by the Board of Directors at their meeting on April 15, 2014.
Operating Results
EI continues to have a strong focus on employee safety which starts from the top of the
organization. EI has a Board committee that meets on a quarterly basis to review the
annual health and safety plan and to review potential risks and accidents throughout the
2
year. In 2013 the Chair of the Health and Safety committee met with front line staff to
discuss health and safety issues and to observe some of their work habits.
The attention to health and safety is also at the leadership level as many of the Executives
and Management team perform site visits which increased by 33% in 2013.
The employees have been successful in continuing their progress through the IHSA’s
Zero Quest program as they achieved the Sustainability Level, which Entegrus has
become only the 8th utility to meet this standard. This achievement highlights the
knowledge and commitment by all employees on health and safety matters. The
successes of the programs are realized by having no lost time injuries as was achieved
during the past year.
EI is also focused on safety in the community by being a lead sponsor at the Children’s
Safety Village and bringing Rob Ellis and the Ontario Youth at Work Program to a local
high school to promote safety to the youth of our community. In 2013 the employees
once again participated in Fire Fest by providing electrical safety tips and allowing
individuals to ride in the bucket.
EI and the employees give back to the communities that we serve. The staff take part in
an annual Christmas fundraiser to provide donations to a number of charities such as No
Child without a Christmas, Outreach for Hunger and Salvation Army in Chatham and
Strathroy-Caradoc. The major employee initiative is Relay for Life, fight against cancer.
The employees participated and once again were recognized as a gold sponsor for raising
more than $10,000.
One of the strengths of EI is the dedicated employees that deliver exceptional service. EI
continues to promote the benefits of the People Plan, focusing on employee engagement
and to provide a rewarding and challenging work environment. EI employees
participated in the second employee survey late 2012 with the results being
communicated in 2013. Some of the programs implemented are; innovation program,
skip level interviews / meetings, building and courtyard renovations.
EPI continues to promote energy conservation programs. EPI is delivering 16
conservation programs in partnership with the Ontario Power Authority (“OPA”). A
focus on the low income customers resulted in 1,850 participants who saved over
2,250,000 kWhs. These results were four times greater than in 2012.
Many of the conservation programs are provided by local electricians, which services
were valued at close to $1,000,000 thereby increasing the local economy. These programs
resulted in the reduction of electricity use by customers of approximately 11,000,000
kWhs which is equal to the annual usage of 1,150 residential customers. Schedule 1
provides additional details on the conservation programs and results.
3
The conservation programs will continue to be a core function and activity at EI as the
customers experience increases in costs, with the expectation that these increases will be
minimized and in some cases their bills will be reduced.
Entegrus has an extensive capital program, with expenditures of approximately
$8,300,000, which includes the rebuild and modernization of portions of the distribution
system throughout the year. At various times, depending on our internal asset plan,
certain parts of the system are targeted and intensive multi-phase re-construction projects,
spanning years, can be seen in each of the communities we serve.
A major part of our capital work involves the elimination of the antiquated 4,000 volt
system and replacing it with a more modern 27,600 volt system. This conversion is key
to our asset revitalization strategy and allows Entegrus to more efficiently deploy
automated equipment and evolve the system to a smart grid over time. The end result is a
more robust and reliable system that will lower the instances and duration of power
outages.
The Entegrus crews once again helped out other utilities during a time of emergency.
Crews spent the Christmas Holidays at Kitchener-Wilmot Hydro and Toronto Hydro
during the ice storm.
ESI continues to market the data center. The 2013 new sales were minimal however a
number of key clients have been identified and the revenue for 2013 was above budget.
ESI introduced electronic billing in 2012 and were able to double the number of
customers to receive their bills electronically to 4,100. The call center received over
68,000 calls in 2012, down from 73,000 in 2011 when we completed time-of-use billing.
The OEB requires EI to meet a number of service quality standards; in every case EI has
exceeded the OEB targets. A summary of the service quality indicators is provided on
Schedule 2. In 2014 the OEB will require a more detailed summary of the level of
service when they introduce a score card.
ETI has been building the business case to invest in transmission assets. In 2013 ETI is
working towards having an exclusive partner to develop a transmission line east of
Chatham-Kent. The Ministry of energy released their Long Term Energy Plan, which
highlighted their plans for renewable generation and the opportunity for the transmission
investment to support the programs. ETI is also delivering on some additional revenue by
selling the gravel from the rail corridor.
EI being a regional distributor delivers electricity to 5 communities outside of The
Municipality of Chatham-Kent. EI now has:
• 25% of the their customers outside of the Municipality of Chatham-Kent
• 25% of their income is generated from outside of the Municipality of ChathamKent
• 15% of their employees work outside the Municipality of Chatham-Kent
4
The revenue earned from outside of the Municipality of Chatham-Kent and not from the
customers in The Municipality is due to three strategic investments;
• Purchase of three smaller utilities over the past few years
• The building of the Gold LEED certified data center. The anchor client is
increasing their number of racks space rentals and a second significant client is
being investigated.
• Investment in transmission assets in Chatham-Kent and surrounding areas.
Financial Results
EI in 2012 had declared total dividends of $2,535,000 of which $2,281,000 (Schedule 3
and 4) was paid to the Municipality of Chatham-Kent with $253,500 paid to Corix
Utility. Total dividends at the end of 2013 are approximately $16.1 M. Entegrus
declared a special dividend of $1,000,000 in early 2014. Therefore Entegrus is expected
to dividend out more than its 2014 earnings.
Reviewing the financial performance, EI reports the following;
1. Total assets of EI grew by $4,700,000 or 4.2%. The main driver is the investment
in capital assets.
2. Shareholder equity had a slight increase of $800,000 which is a result of an
aggressive dividend policy
3. Operating income increased by $1,000,000 or 4.4% for the year for two main
reasons:
a. Warmer weather
b. Regulatory charges
4. Operating costs decreased by $900,000.
a. Regulatory charges which was identified as an increase in revenue
b. The increase in distribution and general administration is due to
reallocation of depreciation expenses
5. Earnings before payment in lieu of taxes and net income are flat for the year
EI once again was able to meet all their financial commitments to the shareholders and
stakeholders, while making strategic investments in the core distribution business and
strategic investments to expand the scope of the company.
Prepared by:
Jim Hogan
President & CEO
Chris Cowell
Chief Financial & Reg. Officer
5
Schedule 1
Summary of Results to Date
Progress to Demand Target (kW)
Waterfall Chart - Progress to Energy Savings
Target (kWh)
12000
60000000
10000
50000000
8000
4,306
3,106
6000
4000
Savings in kWh
Savings in kW
14000
54,319,560
46,530,000
40000000
30000000
20000000
2000
10000000
0
Scenario 1
Scenario 2
Scenario
0
2011
2012
2013
2014
Year
Results
Pipeline
Forecast
Cogen
Program Contribution to Peak Demand Savings
Target
OPA Results
Pipeline
Program Contribution to Energy Savings
saveONenergy for Home (excluding peaksaver)
saveONenergy for Home
saveONenergy for Business (excluding DR3 and Retrofit)
saveONenergy for Business
Home Assistance Program
Retrofit
peaksaver PLUS
Process & Systems
DR3
Home Assistance Program
Retrofit
Forecast
Target
Conservation Demand Management
Scenario 1 - Results, Pipeline, Forecast
Summary
2011 OPA Results
Demand
Consumer
Appliance Retirement
Appliance Exchange
HVAC Incentives
Conservation Booklet
BiAnnual Retailer
Retailer Co-op
Residential Demand Response (switch/tstat)
Residential Demand Response (IHD)
Residential New Construction
Total
Business
Retrofit
Direct Install
Building Commissioning
New Construction
Energy Audit
Small Commercial Demand Response (switch/stat)
Small Commercial Demand Response (IHD)
DR3
Total
Industrial
Process & Systems
Monitoring & Targeting
Energy Manager
Retrofit
DR3
Total
Home Assistance Program
Home Assistance Program
Total
Pre-2011
Pre-2011
High Performance New Construction
Total
Adjustments to Results
Energy
2012 OPA Results
Demand
Energy
2013 OPA Results
Demand
Energy
Demand
2013 Forecast
Energy
24
1
318
9
12
-
177,841
2,558
569,794
136,065
212,360
84
-
18
4
182
2
11
130
-
119,701
7,322
303,127
10,104
195,530
1,996
-
130
-
60,625
608
106,514
9,330
49,713
499
-
363
1,098,703
347
637,780
208
112
48
-
520,887
136,640
659
711
201
68
4,149,424
782,496
984
160
658,186
980
4,932,904
70,196
141
246,600
-
-
11,069
105
24,652
-
4,609
-
81,265
246
271,252
-
4,609
124
218,000
18
18
228,459
228,459
89,943
89,943
46.49
46
695,564
695,564
1
1
10
10
111
1
112
(27)
707,984
2,786
710,770
(3,276)
-
9
2013 Pipeline
Demand
2014 OPA Results
Energy
5
30,775
-
-
133
265,074
-
-
421
84
8,531
644,524
-
-
227,289
644
948,903
-
-
233
93
70
1,569,388
397,747
10,683
502
134
1,912,518
246,949
-
396
1,977,818
636
65
1
3
-
-
77
110,276
-
77
110,276
-
-
2,159,467
2014 Pipeline
Demand Energy Demand
-
-
-
Energy
2014 Forecast
Demand
OPA Results
Energy
1
8,010
6
40,836
7
10,852
107
184,094
405
81
8,220
621,023
1,728
346
23,040
1,740,780
-
494
648,105
2,187
-
-
36
12
272,536
40,728
668
124
70
10,920
-
-
-
118
324,184
792
-
576
6,400,000
Demand
Energy
OPA Results + Pipeline
Demand
Energy
OPA Results + Pipeline +
Forecast
Demand
Energy
51
5
565
12
26
-
1,191,718.32
33,416
3,401,587
593,231
1,535,457
2,579
-
57
5
705
12
26
405
81
-
1,261,278.05
33,416
3,942,586
593,231
1,535,457
19,329
1,265,547
-
63
5
812
12
26
2,133
427
-
1,302,114.07
33,416
4,126,680
593,231
1,535,457
42,369
3,006,327
-
1,988,750
658
6,757,987
1,290
8,650,843
3,477
10,639,594
3,067,571
436,897
46,800
1,056
342
-
17,670,595
3,689,542
12,326
1,594
487
70
21,768,168
4,224,167
23,246
2,339
611
70
25,056,292
4,661,065
70,046
3,551,269
1,398
21,372,463
2,152
26,015,581
3,021
29,787,402
739,800
280,785
40,330
576
265
10
210
6,400,000
1,175,800
280,785
73,090
576
265
10
210
6,400,000
1,175,800
280,785
119,890
-
-
-
-
-
-
-
-
-
210
32,760
-
46,800
141
10
-
-
-
-
-
786
6,432,760
-
46,800
151
1,060,915
1,061
7,929,675
1,061
7,976,475
-
-
-
-
2
2
18,771
18,771
810,508
810,508
21
865,263
69
2,275,162
120
3,085,670
21
865,263
69
2,275,162
120
3,085,670
791
112
2
2,831,935
13,518
112
2
2,831,935
13,518
112
2
2,831,935
13,518
791
114
2,845,453
114
2,845,453
114
2,845,453
(27)
(15,034)
(27)
(15,034)
(27)
(15,034)
2,315
12,120
32,887,047
46,530,000
4,659
12,120
38%
47,701,681
46,530,000
103%
7,766
12,120
64%
54,319,560
46,530,000
117%
3
3
-
124
-
218,000
-
Indicates results related to demand response.
Scenario 1 assumes DR has no persistence.
-
-
-
-
51
51
Results (kW/kWh)
Target
% of OEB Target Achieved
As of 3/6/2014
19%
71%
Conservation Demand Management
Scenario 2 -Results, Pipeline Forecast
Summary
2011 OPA Results
Demand
Consumer
Appliance Retirement
Appliance Exchange
HVAC Incentives
Conservation Booklet
BiAnnual Retailer
Retailer Co-op
Residential Demand Response (switch/tstat)
Residential Demand Response (IHD)
Residential New Construction
Total
Business
Retrofit
Direct Install
Building Commissioning
New Construction
Energy Audit
Small Commercial Demand Response (switch/stat)
Small Commercial Demand Response (IHD)
DR3
Total
Industrial
Process & Systems
Monitoring & Targeting
Energy Manager
Retrofit
DR3
Total
Home Assistance Program
Home Assistance Program
Total
Pre-2011
Pre-2011
High Performance New Construction
Total
Adjustments to Results
Energy
2012 OPA Results
Demand
Energy
2013 OPA Results
Demand
Energy
2013 Pipeline
Demand
2013 Forecast
Energy
Demand
24
1
318
9
12
-
177,841
2,558
569,794
136,065
212,360
84
-
18
4
182
2
11
130
-
119,701
7,322
303,127
10,104
195,530
1,996
-
9
65
1
3
130
-
60,625
608
106,514
9,330
49,713
499
-
363
1,098,703
347
637,780
208
112
48
-
520,887
136,640
659
711
201
68
4,149,424
782,496
984
160
658,186
980
4,932,904
10
70,196
141
246,600
-
-
11,069
105
24,652
-
4,609
-
-
81,265
246
271,252
-
4,609
124
218,000
-
18
18
228,459
228,459
89,943
89,943
46.49
46
695,564
695,564
-
1
1
10
111
1
112
(27)
707,984
2,786
710,770
(3,276)
-
2014 OPA Results
Energy
5
30,775
-
-
133
265,074
-
-
432
86
8,531
644,524
-
-
227,289
657
948,903
-
-
233
93
70
1,569,388
397,747
10,683
502
134
1,912,518
246,949
396
1,977,818
636
2014 Pipeline
Demand Energy Demand
788
6,757,987
1,453
8,650,843
3,639
10,639,594
3,067,571
436,897
46,800
1,056
342
70
17,670,595
3,689,542
12,326
1,594
487
140
21,768,168
4,224,167
23,246
2,339
611
140
25,056,292
4,661,065
70,046
3,551,269
1,468
21,372,463
2,222
26,015,581
3,091
29,787,402
46,800
141
10
105
739,800
280,785
40,330
576
265
10
315
6,400,000
1,175,800
280,785
73,090
576
265
10
1,515
6,400,000
1,175,800
280,785
119,890
46,800
256
1,060,915
1,166
7,929,675
2,366
7,976,475
810,508
810,508
21
865,263
69
2,275,162
120
3,085,670
21
865,263
69
2,275,162
120
3,085,670
791
111
2
2,831,935
13,518
111
2
2,831,935
13,518
111
2
2,831,935
13,518
791
113
2,845,453
113
2,845,453
113
2,845,453
(27)
(15,034)
(27)
(15,034)
(27)
(15,034)
2,619
12,120
32,887,047
46,530,000
4,996
12,120
41%
47,701,681
46,530,000
103%
9,302
12,120
77%
54,319,560
46,530,000
117%
3
3
124
107
184,094
417
83
8,220
621,023
1,728
346
23,040
1,740,780
-
508
648,105
2,187
-
-
36
12
272,536
40,728
668
124
70
10,920
-
-
-
118
324,184
792
-
-
576
6,400,000
-
-
-
210
32,760
1,200
-
-
-
786
6,432,760
1,200
-
-
-
2
2
18,771
18,771
51
51
Energy
1,988,750
-
10,852
Demand
1,302,114.07
33,416
4,126,680
593,231
1,535,457
42,369
3,006,327
-
-
7
Energy
63
5
812
12
26
2,290
432
-
-
40,836
Demand
1,261,278.05
33,416
3,942,586
593,231
1,535,457
19,329
1,265,547
-
-
6
Energy
OPA Results + Pipeline + Forecast
57
5
705
12
26
562
86
-
2,159,467
8,010
Demand
OPA Results + Pipeline
1,191,718.32
33,416
3,401,587
593,231
1,535,457
2,579
-
-
77
-
110,276
-
218,000
-
-
Energy
1
110,276
-
-
Demand
OPA Results
51
5
565
12
26
130
-
77
-
-
Energy
2014 Forecast
Indicates results related to demand response.
Scenario 2 assumes DR has persistence.
-
-
-
-
Results (kW/kWh)
Target
% of OEB Target Achieved
As of 3/6/2014
22%
71%
Schedule 2
Total
Month
Forecast
Service Quality Index
Energy Usage
Demand
Consumption
Load Factor
Connection of new LV services
Number of residential customers connected
Number of commercial customers connected
Number of customers connected within 5 working days
Percent of customers connected within 5 working days
Connection of new HV Services
Number of customers connected
Number of customers connected within 5 working days
Percent of customers connected within 5 working days
Underground Locates
Number of cable locates requested
Number performed within 5 working days
Percent performed within 5 working days
Appointments
Number of appointments on customer premises made
Number of appointments kept at the appointed time
Percent of appointments kept at the appointed time
Telephone Accessibility
Number of general inquiry telephone calls answered
Number of general telephone calls answered within 30 seconds
Percent of general telephone calls answered within 30 seconds
Written Responses
Number of requests for written responses
Number of requests for written responses within 10 working days
Percent of requests for written responses within 10 working days
Emergency Response
Number of emergency calls
Number of calls responded to within 60 minutes
Percent of emergency calls responded to within 60 minutes
Comments
Electrical Consumption for the year finished within 1% of forecast
YTD
Forecast
Actual
Goal
Actual
136,274
148,529
196,199
194,743
81,051,239 80,968,779 968,003,172 959,361,836
79.9%
73.3%
56.3%
56.2%
6
1
7
100.0%
10
2
11
91.7%
135
45
177
98.3%
157
45
196
97.0%
90%
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
90%
139
125
90.0%
388
384
99.0%
4,961
4,465
90.0%
7601
7494
98.6%
90%
24
24
100.0%
20
20
100.0%
318
315
99.1%
308
306
99.4%
90%
4,157
3,097
74.5%
72,908
58,584
80.4%
65%
6
6
100.0%
302
302
100.0%
80%
460
446
97.0%
80%
38
31
81.6%
15
14
93.3%
544
473
86.9%
Loss of Supply Excluded
Total
Month
YTD
Month
Forecast Actual Forecast Actual Forecast
Goal
YTD
Actual
Forecast
Actual
Service Quality
SAIDI
0.0757 0.0053
1.2131 1.1972
0.2325
0.0053
1.6305
1.4905 1.6582
SAIFI
0.0746 0.0062
0.9774 0.9238
0.1620
0.0062
1.8949
1.2813 1.4489
CAIDI
1.0147 0.8637
1.2412 1.2959
1.4352
0.8637
0.8605
1.1633 1.1996
MAIFI
0.2117 0.2148
2.4983 3.3501
0.2209
0.2148
2.7796
3.9092 3.3508
Comments
The system operated well with both customer outage duration (SAIDI) and frequency (SAIFI) below the OEB target. These decreases coupled with an increase in momentary
outages (MAIFI) is an indication that the distribution system is being appropriately maintained and operating as designed. Having a higher momentary fault frequency indicates
that temporary faults are being properly cleared through reclosure action rather than resulting in a permanent outage
Service Quality Index
6
Schedule 3
7
Schedule 4
Entegrus Dividends
(Total)
thousa
$3,000
$2,500
$2,260
$2,460 $2,535
$2,320
$1,910
$2,000
$1,690
$1,500
$1,300
$1,090
$1,000
$500
$-
$500
$525 $635
$$2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Notes
• Entegrus dividends have steadily increased
• Over the last 5 years the dividends paid were 70% of net income for a dividend
yield of 5.0%, in the last 2 years the dividends paid were 90% of net income for a
dividend yield of 5.5%
• 2010 a special dividend was declared and paid
• 2011 dividends were increased by $200,000 to keep the Municipality of ChathamKent whole as a result of the decrease in the interest rate approved by the OEB
8
Consolidated Financial Statements of
ENTEGRUS INC.
(formerly Chatham-Kent Energy Inc.)
December 31, 2013
Management’s Responsibility for Financial Reporting
Entegrus Inc.’s management is responsible for the preparation and presentation of the financial
statements and all other information included in this annual report. Management is also responsible
for the selection and use of accounting principles that are appropriate in the circumstances, and for the
internal controls over the financial reporting process to reasonably ensure that relevant and reliable
information is produced. Financial statements are not precise in nature as they include certain
amounts based on estimates and judgment. Management has determined such amounts on a
reasonable basis in order to ensure that the financial statements are presented fairly, in all material
respects.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for
financial reporting and internal control over the financial reporting process. The Board of Directors
exercises this responsibility through its Audit Committee. This committee is comprised of four
directors of companies within the Entegrus group, two of whom are directors of the Entegrus Inc.
Board. This committee meets with management and the external auditors to ensure that management
responsibilities are properly discharged and to review the financial statements and other information
included in the annual report before they are presented to the Board of Directors for approval. The
financial statements have been approved by the Board of Directors on the recommendation of the
Audit Committee.
Deloitte LLP, an independent external audit firm, has been appointed by the audit committee and
engaged to examine the accompanying financial statements in accordance with generally accepted
auditing standards in Canada and provide an independent professional opinion. Their report is
presented with the financial statements.
___________________________________
Jim Hogan
President and CEO
____________________________________
Chris Cowell
Chief Financial Officer
TABLE OF CONTENTS
Independent Auditor’s Report . ..........................................................................................................1 - 2
Consolidated Balance Sheet .................................................................................................................. 3
Consolidated Statement of Earnings, Comprehensive Income and Retained Earnings … .................... 4
Consolidated Statement of Cash Flows .................................................................................................. 5
Notes to Consolidated Financial Statements .................................................................................. 6 - 23
Deloitte LLP
One London Place
255 Queens Avenue
Suite 700
London ON N6A 5R8
Canada
Tel: 519-679-1880
Fax: 519-640-4625
www.deloitte.ca
Independent Auditor’s Report
To the Chairman and Board Members of
Entegrus Inc.
We have audited the accompanying consolidated financial statements of Entegrus Inc. (formerly
Chatham-Kent Energy Inc.) which comprise the consolidated balance sheet as at December 31, 2013, and
the consolidated statements of earnings, comprehensive income and retained earnings and cash flows for
the year then ended, and a summary of significant accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Canadian generally accepted accounting principles, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor's judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Page | 1
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Entegrus Inc. as at December 31, 2013 and the results of its operations and its cash flows for
the year then ended in accordance with Canadian generally accepted accounting principles.
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
April 25, 2014
Page | 2
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Consolidated Balance Sheet
December 31, 2013
ASSETS
CURRENT
Cash and cash equivalents
Accounts receivable (Note 4)
Accounts receivable - unbilled revenue
Taxes receivable
Inventories
Prepaid expenses
CAPITAL ASSETS (Note 5)
OTHER
Computer software (Note 5)
Deferred assets (Note 6)
Goodwill
Intangible assets (Note 7)
Future income taxes (Note 16)
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
Taxes payable
Due to the Municipality of Chatham-Kent
Current portion of deferred revenue
Current portion of customer deposits
LONG-TERM
Note payable (Note 8)
Employee future benefits (Note 9)
Future income tax liability (Note 16)
Long-term portion of deferred revenue
Long-term portion of customer deposits
2013
$
2012
$
7,523,852
6,709,435
13,602,458
790,543
954,397
313,231
29,893,916
8,632,173
7,285,485
10,744,448
1,089,343
372,960
28,115,564
72,528,501
69,241,765
1,626,395
2,987,083
1,210,537
3,906,396
3,308,166
13,038,577
115,460,994
847,206
3,403,885
1,210,537
3,935,918
3,985,842
13,392,233
110,749,562
16,408,027
16,284,263
347,611
1,019,035
34,058,936
13,206,982
351,563
14,801,943
469,673
1,133,532
29,963,693
23,523,326
4,063,450
3,211,562
2,522,554
3,378,301
36,699,193
70,758,129
23,523,326
4,204,120
3,392,100
2,530,230
3,179,145
36,828,921
66,792,614
26,882,150
17,820,715
44,702,865
115,460,994
26,882,150
17,074,798
43,956,948
110,749,562
COMMITMENTS (Note 17)
SHAREHOLDERS' EQUITY
Share capital (Note 12)
Retained earnings
Page | 3
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Consolidated Statement of Earnings, Comprehensive Income and Retained Earnings
Year Ended December 31, 2013
2013
$
SERVICE REVENUE
Residential
General service
Street lighting
2012
$
39,727,793
68,754,517
995,200
109,477,510
2,508,152
111,985,662
3,433,386
115,419,048
38,875,311
63,887,377
958,820
103,721,508
(646,352)
103,075,156
3,183,117
106,258,273
96,951,040
18,468,008
88,648,371
17,609,902
2,354,597
2,407,632
2,882,967
23,705,572
2,748,962
22,766,496
OPERATING AND MAINTENANCE EXPENSE
Distribution
Regulatory
4,138,466
602,341
3,446,006
107,662
ADMINISTRATIVE EXPENSE
Billing and collection
General administration
Interest
4,523,660
4,230,065
1,607,325
4,565,959
3,787,859
1,531,257
4,066,222
19,168,079
4,809,352
18,248,095
4,537,493
4,518,401
Provision for payments in lieu of taxes (Note 16)
1,256,576
1,276,951
NET EARNINGS AND COMPREHENSIVE INCOME
3,280,917
3,241,450
17,074,798
(2,535,000)
17,820,715
16,293,348
(2,460,000)
17,074,798
Change in unbilled revenue
Retailer energy sales
COST OF POWER
GROSS MARGIN ON SERVICE REVENUE
SERVICE CONTRACT WITH MUNICIPALITY
OTHER OPERATING REVENUE
OPERATING INCOME
DEPRECIATION AND AMORTIZATION
EARNINGS BEFORE PAYMENTS IN LIEU OF TAXES
RETAINED EARNINGS, BEGINNING OF YEAR
LESS DIVIDENDS
RETAINED EARNINGS, END OF YEAR
Page | 4
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Consolidated Statement of Cash Flows
Year Ended December 31, 2013
2013
$
OPERATING ACTIVITIES
Net earnings
Adjustments for:
Depreciation of capital assets
Depreciation for computer software
Amortization of contributed capital
Gain on disposal of capital assets
Future income taxes
Employee future benefits
Change in long-term deferred revenue
Change in long-term customer deposits
Change in non-cash working capital items (Note 13)
2012
$
3,280,917
3,241,450
4,614,707
767,388
(277,238)
(95,573)
497,138
(140,670)
(7,676)
199,156
1,217,415
10,055,564
5,994,248
374,192
(250,385)
(696,807)
44,598
(63,614)
2,530,230
536,369
2,745,800
14,452,529
(215,873)
301,119
(127,185)
(7,165,513)
(1,421,433)
(8,628,885)
(207,234)
1,080,202
(906,058)
(11,025,451)
(265,653)
(11,320,642)
FINANCING ACTIVITY
Dividends paid
(2,535,000)
(2,460,000)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(1,108,321)
INVESTING ACTIVITIES
Change in deferred assets
Proceeds on disposal of capital assets
Additions to intangible assets
Additions to capital assets
Additions to computer software
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
8,632,173
7,523,852
671,887
7,960,286
8,632,173
See Note 13 for supplemental cash flow information
Page | 5
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
1. NATURE OF OPERATIONS
(a) Incorporation
Chatham-Kent Energy Inc. (“CKE”) and its wholly-owned subsidiaries, Chatham-Kent Hydro Inc.
(“CKH”) and Chatham-Kent Utility Services Inc., were incorporated on September 22, 2000 under
the Business Corporations Act (Ontario). On June 30, 2005, CKE purchased Middlesex Power
Distribution Corporation (“MPDC”) as a wholly-owned subsidiary. On October 5, 2010, ChathamKent Transmission Inc. was incorporated under the Business Corporations Act (Ontario) as a whollyowned subsidiary of CKE. Effective January 1, 2012, CKH and MPDC amalgamated to continue as
Chatham-Kent Hydro Inc.
Effective January 19, 2012, the names of CKE and its wholly-owned subsidiaries were amended as
follows:
Former Name
Chatham-Kent Energy Inc.
Chatham-Kent Hydro Inc.
Chatham-Kent Utility Services Inc.
Chatham-Kent Transmission Inc.
Amended Name
Entegrus Inc. (“the Company”)
Entegrus Powerlines Inc. (“EPI”)
Entegrus Services Inc. (“ESI”)
Entegrus Transmission Inc. (“ETI”)
The principal activity of EPI is to distribute electricity to certain customers within the Municipality of
Chatham-Kent, Middlesex County and the County of Elgin under a license issued by the Ontario
Energy Board (“OEB”). The principal activity of ESI is to provide billing and collection, financial,
data and administrative services. The principal activity of ETI is to develop electricity transmission
services in Ontario under a licence issued by the OEB.
The Company is owned 90% by the Municipality of Chatham-Kent (“the Municipality”) and 10% by
Corix Utilities (“Corix”).
(b) Rate-regulated entity
One of the Company’s subsidiaries, EPI, is a regulated electricity Local Distribution Company
(“LDC”) and has a distribution license that is regulated by the OEB. The OEB has regulatory
oversight of electricity matters in Ontario. The Ontario Energy Board Act, 1998 sets out the OEB’s
authority to issue a distribution licence which must be obtained by owners or operators of a
distribution system in Ontario. The OEB prescribes licence requirements and conditions including,
among other things, specified accounting records, regulatory accounting principles and filing process
requirements for rate-setting purposes.
The OEB’s authority and responsibilities include the power to approve and fix rates for the
transmission and distribution of electricity and the responsibility of ensuring the electricity
distribution companies fulfill obligations to connect and service customers.
Page | 6
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
1. NATURE OF OPERATIONS (continued)
EPI is required to charge its customers for the following amounts (all of which, other than the
distribution rates, represent a pass through of amounts payable to third parties):
•
•
•
•
•
Electricity Price – The electricity price represents the commodity cost of electricity;
Distribution Rate – The distribution rate is designed to recover the costs incurred by EPI in
delivering electricity to customers and the OEB allowed rate of return;
Global Adjustment – The difference between the rate paid to regulated and contracted
electricity generators and the spot market price;
Retail Transmission Rate – The retail transmission rate represents the wholesale costs
incurred by EPI in respect of the transmission of electricity from generating stations to the
local areas; and
Wholesale Market Service Charge – The wholesale market services charge represents the cost
of services provided by the Independent Electricity System Operator (“IESO”) and the
Ontario Power Authority to operate the wholesale electricity market and maintain the
reliability of the power grid.
In order to operate in the Ontario electrical industry all market participants, including EPI, are
required to satisfy and maintain prudential requirements with the IESO, which include credit support
with respect to outstanding market obligations in the form of obtaining a credit rating, letters of
credit, cash deposits or guarantees from third parties with prescribed credit ratings.
Market-based rate of return
Rates for EPI continue to be based on the pre-amalgamation service territories until its rates are
rebased in 2016. At that time, the Company will consider whether rate harmonization would provide
overall customer benefits and be in accordance with good rate-making practices.
The OEB approved the former CKH to revise rates effective May 1, 2010, which resulted in approved
rates that include a 9.85% rate of return on equity rebased at 2010 test year levels. The rate of return
of 9.85% was in accordance with the OEB’s cost of capital parameters at that time.
The OEB approved the former MPDC to revise rates effective May 1, 2006, which resulted in
approved rates that include a 9.0% rate of return on equity rebased at 2004 test year levels. The rate
of return of 9.0% was in accordance with the OEB’s cost of capital parameters at that time.
Incentive Rate Mechanism
Between rate basing years, the OEB regulates the rates of the Company under an Incentive Rate
Mechanism (“IRM”) regime. The process includes a mechanistic approach to establishing rates with
a rate rebasing approach (cost-of-service) every five years. The IRM rate setting process provides an
increase in rates for inflationary cost, partially offset by productivity and efficiency gains established
by the OEB.
The OEB allows for rate rebasing to be deferred for up to five years where there is a purchase or
merger of LDC’s. As a result of the amalgamation of CKH and MPDC, the OEB has approved the
deferral of rate rebasing of EPI to 2016.
Page | 7
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
1. NATURE OF OPERATIONS (continued)
Deferred assets
Electricity distributors are required to reflect certain prescribed costs on their balance sheet until the
manner and timing of distribution is determined by the OEB. These costs include:
• Settlement variance between amounts charged by the Company to customers (based on regulated
rates) and corresponding cost of non-competitive electricity service incurred by it in the
wholesale market administered by the IESO after May 1, 2002;
• Costs incurred to invest in and install a smart meter at all of our customer premises;
• Cost related to the Green Energy and Green Economy Act of 2009; and,
• Costs incurred and accumulated financial differences related to the Company’s transition to
International Financial Reporting Standards (“IFRS”).
2. ACCOUNTING CHANGES
a) Current changes in accounting policies
In July 2012, the OEB issued a letter to LDC’s that provided direction on permitted accounting
policies for depreciation expense and capitalization beginning in 2013. In this letter, the OEB stated
that it would require all LDC’s to adopt IFRS-compliant depreciation and capitalization accounting
policies effective January 1, 2013, regardless of whether the LDC had chosen to defer the adoption of
IFRS as permitted by the Accounting Standards Board (“AcSB”) of the Canadian Institute of
Chartered Accountants (“CICA”). The OEB also approved the use of a new variance account to
capture the financial differences arising as a result of adopting IFRS-compliant accounting policies
for depreciation and capitalization in 2013. This variance account is to be disposed of as part of the
LDC’s next rate rebasing. Therefore, there is no impact to net income as a result of these accounting
policy changes.
As such, the Company has adopted IFRS-compliant accounting policies for depreciation and
capitalization effective January 1, 2013. These policies were selected in accordance with IAS 16,
Property, Plant and Equipment. IAS 16 provides more definitive guidance with respect to cost
capitalization and componentization for depreciation purposes than that currently followed under
Canadian generally accepted accounting principles (“GAAP”).
Due to the absence of rate-regulated accounting guidance within Canadian GAAP, the Company
follows regulatory accounting guidance found under US GAAP. In accordance with US GAAP
Accounting Standards Codification Section 980, Regulated Operations, the Company will adopt these
changes prospectively with no retrospective restatement of prior periods. The effect of these changes
in the year ended December 31, 2013 was to increase Distribution and Regulatory expenses by
$510,540 and $602,341, respectively, and to decrease Depreciation and Amortization expense by
$1,112,881.
Page | 8
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
2. ACCOUNTING CHANGES (continued)
b) Future changes in accounting framework
On February 13, 2008, the AcSB confirmed that publicly accountable enterprises will be required to
adopt IFRS in place of Canadian GAAP for fiscal years beginning on or after January 1, 2011.
Subsequently, on September 10, 2010, the AcSB decided to permit rate-regulated entities and certain
affiliates to defer their IFRS adoption date to January 1, 2012. The Company is a qualifying entity
for purposes of this deferral and elected to use the deferral offered by the AcSB.
On March 30, 2012, the AcSB announced an additional one year deferral for qualifying entities with
rate-regulated activities. Further one year deferrals were announced by the AcSB in September 2012
and February 2013. The Company has elected to use all deferrals made available by the AcSB. As a
result, the Company’s IFRS adoption date is currently set at January 1, 2015.
3. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with Canadian GAAP and reflect the
following policies as set forth in the Accounting Procedures Handbook issued by the OEB under the
authority of the Ontario Energy Board Act, 1998:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries: EPI, ESI and ETI. All intercompany transactions are eliminated in full on consolidation.
Regulation
EPI is regulated under a distribution licence by the OEB and any power rate adjustments require OEB
approval. ETI is regulated under a transmission licence by the OEB. All other subsidiaries must
adhere to the Affiliate Relationship Code issued by the OEB.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances with the bank.
Unbilled revenue
Unbilled revenue is an estimate of customers’ consumption of power from the last meter read to
December 31.
Inventories
Inventories are valued at the lower of cost and net realizable value with cost being determined using
the weighted average method.
Page | 9
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Capital assets
Capital assets are recorded at cost. Depreciation is calculated on a straight-line basis over the useful
life of the asset as follows:
Buildings and fixtures
Distribution station equipment
Distribution system – overhead
Distribution system – underground
Distribution transformers
Distribution meters
General office equipment
Computer equipment
Rolling stock
Tools
System supervisory equipment
Automated mapping/facilities management
Services
Smart meters
Non-regulated generation assets
20 – 50 years
15 – 45 years
45 – 60 years
20 – 55 years
35 – 45 years
25 years
10 years
3 years
7 – 15 years
5 years
20 years
15 years
40 – 50 years
15 years
25 years
The Company recognizes work in process for larger capital projects that are not in service at the end
of the year. When the capital projects are completed, they are transferred to the appropriate capital
asset or computer software account. Depreciation on these assets will begin when they are placed in
service.
Impairment of long-lived assets
Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. An impairment loss is recognized when their
carrying value exceeds the total undiscounted cash flows expected from their use and eventual
disposition. The amount of the impairment loss is determined as the excess of the carrying value of
the asset over its fair value.
Contributions in aid of construction
Contributions in aid of construction consist of third party contributions toward the cost of
constructing the Company’s assets. Contributions received are recorded as an offset to capital assets
and amortized on a straight-line basis over 25 years.
Computer software
Computer software is stated at cost less accumulated depreciation. Depreciation is calculated on a
straight-line basis over useful lives ranging from 3 to 5 years.
Page | 10
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
Goodwill representing the excess of purchase price over fair value of the net identifiable assets of
acquired businesses is tested for impairment annually or more frequently when an event or
circumstance occurs that indicates that goodwill might be impaired. When the carrying amount
exceeds the fair value, an impairment loss is recognized in the statement of earnings in an amount
equal to the excess.
Deferred assets
Deferred assets consist of qualifying capital costs and related expenditures incurred in the preparation
for market opening, investments in smart meters and other expenditures that are not currently
recovered in rates. Also included in deferred assets are retail settlement variance accounts. These
variances are for non-competitive energy services which are a pass through for the Company.
Recovery of the deferred assets requires regulatory approval from the OEB.
Intangible assets
Intangible assets include land rights, deferred development costs and other assets. These assets are
capitalized at cost, which is comprised of directly attributable expenditures such as labour, legal and
consulting, engineering and overhead costs. The land rights and deferred development costs relate to
assets not currently in use and therefore, are not subject to amortization. Intangible assets are tested
for impairment on an annual basis or when events or changes in circumstances indicate that their
carrying value may not be recoverable.
Customer deposits
Customer deposits are recorded when received or paid. Deposits earn interest at a rate of prime less
2%.
Employment benefits other than pension
The Company provides its current and retired employees with life insurance and medical benefits
beyond those provided by government-sponsored plans. The cost of these benefits is actuarially
determined annually as at December 31. The cost is determined using the projected unit credit
method and assumptions including interest rates, salary escalation, retirement ages of employees,
mortality rates, and health care costs.
Asset retirement obligations
The Company recognizes the liability for a future asset retirement that results from acquisition,
construction, development or normal operations. The liability for an asset retirement is initially
recorded at its fair value in the year in which it is incurred and when a reasonable estimate of fair
value can be made. The corresponding cost is capitalized as part of the related asset and is amortized
over the asset’s useful life. In subsequent years, the liability is adjusted for changes resulting from
the passage of time and revisions to either the timing or the amount of the original estimate of the
undiscounted cash flows. The accretion of the liability to its fair value as a result of the passage of
time is charged to earnings.
Page | 11
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Unbilled revenue is a significant estimate that is
subject to material measurement uncertainty. Actual results could differ from those estimates.
Revenue recognition and cost of power
Service revenue is recorded on the basis of regular meter readings and estimated customer usage since
the last meter reading date to the end of the year. The related cost of power is recorded on the basis
of power used. Any discrepancies in the revenue collected and associated cost of power to distribute
are charged to deferred assets.
Payments in lieu of taxes
Under the Electricity Act, 1998, the Company is required to make payments-in-lieu of corporate taxes
to the Ontario Electricity Financial Corporation (“OEFC”). These payments are recorded in
accordance with the rules for computing income taxes and other relevant amounts contained in the
Income Tax Act (Canada) and the Corporation Tax Act (Ontario) and modified by the Electricity Act,
1998, and related regulations.
Regulated operations
The Company recognizes future income tax assets and liabilities in accordance with CICA Section
3465, Income Taxes. Section 3465 also contains guidance specific to rate-regulated enterprises that
requires the Company to recognize a regulatory asset or liability for the amount of future income
taxes expected to be recovered from or refunded to ratepayers and to present these amounts on a pretax basis in the financial statements. Accordingly, the Company has recorded a regulatory liability
that has been included in long-term liabilities and an associated future income tax asset of $3,211,562
(2012 - $3,282,682). The liability will be paid through future rate reductions.
Unregulated operations
Future income tax assets and liabilities are recognized for unused tax losses and temporary
differences between the tax basis of assets and liabilities and their carrying amounts for accounting
purposes. Future income tax assets and liabilities are measured using substantively enacted rates
expected to apply to taxable income in the years those temporary differences are expected to be
settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in
income in the period in which the change is substantively enacted. Future income tax assets are
recognized only to the extent that it is more likely than not that these assets will be realized.
Page | 12
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments
The AcSB decided that rate-regulated enterprises that are not public enterprises as defined in Section
1300, Differential Reporting, will not be required to apply Sections 3862, Financial Instruments –
Disclosures, and 3863, Financial Instruments – Presentation, and would continue to apply Section
3861, Financial Instruments – Disclosure and Presentation. Therefore, in accordance with this
decision, the Company continues to apply Section 3861.
Financial assets and financial liabilities are initially recognized at fair value and their subsequent
measurement is dependent on their classification as described below. Their classification depends on
the purpose, for which the financial instruments were acquired or issued, their characteristics and the
Company’s designation of such instruments. Settlement date accounting is used.
Classification
Cash and cash equivalents
Accounts receivable
Accounts payable and accrued liabilities
Due to the Municipality of Chatham-Kent
Current portion of customer deposits
Note payable
Long-term portion of customer deposits
Held for trading
Loans and receivables
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Held for trading
Held for trading financial assets are financial assets typically acquired for resale prior to
maturity or that are designated as held for trading. They are measured at fair value at the
balance sheet date. Fair value fluctuations including interest earned, interest accrued, gains
and losses realized on disposal and unrealized gains and losses are included in other income.
Financial liabilities designated as held for trading are those non-derivative financial liabilities
that the Company elects to designate on initial recognition as instruments that it will measure
at fair value through other interest expense. These are accounted for in the same manner as
held for trading assets. The Company has not designated any non-derivative financial
liabilities as held for trading.
Loans and receivables
Loans and receivables are accounted for at amortized cost using the effective interest method.
Other liabilities
Other liabilities are recorded at amortized cost using the effective interest method and include
all financial liabilities, other than derivative instruments.
Page | 13
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments (continued)
Effective interest method
The Company uses the effective interest method to recognize interest income or expense
which includes transaction costs or fees, premiums or discounts earned or incurred for
financial instruments.
4.
ACCOUNTS RECEIVABLE
Electrical energy
Other
Allowance for doubtful accounts
Net accounts receivable
2013
$
4,408,268
2,437,837
6,846,105
(136,670)
6,709,435
2012
$
3,937,174
3,485,307
7,422,481
(136,996)
7,285,485
Page | 14
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
5. CAPITAL ASSETS & COMPUTER SOFTWARE
Cost
$
Plant and distribution system:
Land
Buildings and fixtures
Substation
Station retirement obligation
Distribution system:
Overhead
Underground
Transformers
Meters
General office equipment
Computer equipment
Rolling stock
Tools
System supervisory equipment
Automated mapping facility
Services
Smart meters
Non-regulated generation assets
Work in process
2013
Accumulated
Depreciation
$
Net Book
Value
$
2012
Net Book
Value
$
1,650,503
933,643
5,599
4,063,835
6,730,425
1,005,248
15,000
3,961,420
6,729,154
761,392
15,000
Contributions in aid of construction
42,478,755
24,528,945
22,763,091
3,975,391
1,160,592
1,952,521
5,380,996
1,387,689
1,140,548
2,866,558
6,211,876
9,006,003
887,815
63,574
138,208,607
(7,372,472)
17,991,986
13,283,247
10,588,275
1,697,078
579,079
1,739,324
3,375,848
1,228,625
711,564
1,680,995
1,594,587
3,449,952
25,258
60,535,563
(2,227,929)
24,486,769
11,245,698
12,174,816
2,278,313
581,513
213,197
2,005,148
159,064
428,984
1,185,563
4,617,289
5,556,051
862,557
63,574
77,673,044
(5,144,543)
22,484,676
11,508,260
11,223,233
2,453,994
630,413
417,503
1,296,593
282,656
240,203
874,849
4,030,463
5,437,956
104,960
1,433,102
73,885,827
(4,644,062)
Capital assets
130,836,135
58,307,634
72,528,501
69,241,765
3,371,058
1,744,663
1,626,395
847,206
Computer software
4,063,835
8,380,928
1,938,891
20,599
Depreciation and amortization in the amount of $1,089,684 (2012 - $835,055) for rolling stock and
computer software is included with relevant cost centers.
Page | 15
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
6. DEFERRED ASSETS
Deferred assets and liabilities arise as a result of the rate-making process. Regulatory assets represent
future revenues associated with certain costs incurred in the current period or in prior periods that are
expected to be recovered from customers in future periods through the rate setting process.
Regulatory liabilities represent future reductions or limitations of increases in revenues associated
with amounts that are expected to be refunded to customers as a result of the rate setting process.
2013
$
2012
$
Costs
Retail settlement variance accounts
Renewable energy
Smart meters
Other deferred costs
Gross deferred assets
1,901,952
6,332
410,460
150,598
2,469,342
2,019,275
122,309
460,123
1,332,452
3,934,159
Amounts to be recovered (refunded)
Regulatory assets
Other deferred
Net deferred assets
517,741
2,987,083
(527,925)
(2,349)
3,403,885
a) Retail settlement variance accounts
These accounts represent the variance between the revenue collected, using OEB approved rates
for the non–competitive components of energy, and the corresponding cost of these noncompetitive charges. These variances will be held as a regulatory asset or liability, based on the
expectation that the amounts held from one year to the next for rate setting purposes will be
approved for collection from, or refund to, future customers. In the absence of regulatory
treatment, net earnings in the current year would have increased by $86,232 (2012 – decrease of
$305,629).
b) Renewable energy
The Company incurred renewable energy costs of $6,332 in 2013 (2012 - $1,764). These costs
related to the Green Energy and Green Economy Act, 2009 passed by the Ontario government. In
2009, the OEB approved a deferral account to collect these costs. In 2013, the Company
transferred $122,309 of previously incurred renewable energy costs to capital assets (2012 recovery of $24,981). In the absence of regulatory treatment, net earnings in the current year
would have decreased by $4,654 (2012 – increase of $17,064).
Page | 16
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
6. DEFERRED ASSETS (continued)
c) Smart meters
In July 2012, the Company applied for disposition of $3,716,441 in costs related to the
implementation of smart meters. Final OEB approval of this disposition was received in
November 2012. As part of this disposition, deferred costs of $2,856,550 were transferred to
capital assets in 2012. The remaining balance in this account represents legacy assets that, as
directed by the OEB, continue to be amortized over their original useful lives until the
Company’s rates are rebased in 2016. In the absence of regulatory treatment, net earnings in the
current year would have increased by $36,502 (2012 – decrease of $257,661).
d) Other deferred/transition costs
This balance includes costs and accumulated financial differences related to various ongoing
projects (such as IFRS transition and rate rebasing) that are not currently in rates. The Company
will apply for recovery of these costs in its next rate rebasing in 2016. At year-end, the balance
relating to these costs was $101,494 (2012 – $1,323,741). As well, the OEB has authorized
LDC’s to recover lost revenue relating to Conservation and Demand Management programs that
have resulted in decreased customer consumption and/or demand. Amounts claimed and subject
to future recovery are recorded in the Lost Revenue Adjustment Mechanism Variance Account
(“LRAMVA”). At the end of 2013, the LRAMVA balance was $166,872 (2012 – $92,218).
In the May 2010 rate approval by the OEB, the Company was instructed to record the value of the
savings resulting from the change to Harmonized Sales Tax effective July 1, 2010. This
represents a payable of $117,768 (2012 - $83,507).
In the absence of regulatory treatment, net earnings in the current year would have increased by
$868,662 (2012 – increase of $509,219).
e) Regulatory asset disposition
This balance represents the remaining amounts to be refunded to or recovered from ratepayers
arising from dispositions that have been approved by the OEB. The balance in the account is a
net debit of $517,741 (2012 – $527,925 credit). In the absence of regulatory treatment, net
earnings for the current year would have decreased by $768,564 (2012 – increase of $350,589).
7. INTANGIBLE ASSETS
Land rights
Deferred development costs
Other
2013
$
2,412,449
1,493,947
3,906,396
2012
$
2,339,197
1,511,985
84,736
3,935,918
Page | 17
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
8. NOTE PAYABLE
The note payable is due to the Municipality with no set repayment terms and interest payable monthly
at 5.87%. In 2013, interest expense recognized relating to this note payable was $1,380,819 (2012 $1,380,819).
9. EMPLOYEE FUTURE BENEFITS
The Company measures its accrued benefit obligation as at December 31 of each year. The Company
pays certain medical and life insurance benefits on behalf of its retired and current employees. The
accrued benefit liability at December 31, 2013 was $4,063,450 (2012 - $4,204,120). The most recent
actuarial valuation of the benefit plans for funding purposes was as of December 31, 2013 and the
next required valuation will be as of December 31, 2016.
Information about the Company’s defined benefit plan is as follows:
2013
$
Accrued benefit liability, beginning of year
Expense for the year
Employer contributions
Estimated accrued benefit liability, end of year
4,204,120
85,261
(225,931)
4,063,450
2012
$
4,267,734
209,386
(273,000)
4,204,120
The main actuarial assumptions employed for the valuation are as follows:
General inflation
Future inflation levels, as measured by changes in the Consumers Price Index (“CPI”), were assumed
to be 2.5% in 2013 and thereafter.
Interest (discount) rate
The present value of the future benefits, and the expense for the year ended December 31, 2013 was
determined using a discount rate of 4.12% (2012 – 4.41%). This corresponds to the OEB approved
non-arm’s length cost of debt rate for 2013.
Health costs
Health costs were assumed to increase at 8% per year for 10 years after the valuation date, and then at
the CPI rate plus 1% thereafter.
Dental costs
Dental costs were assumed to increase at the CPI rate plus 1% for 2013 and thereafter.
Page | 18
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
10. PENSION AGREEMENT
The Company provides a pension plan for its employees through the OMERS. OMERS is a multiemployer pension plan which operates as the Ontario Municipal Employees Retirement Fund (“the
Fund”) and provides pensions for employees of Ontario municipalities, local boards, public utilities,
and school boards. The Fund is a contributory defined benefit pension plan, which is financed by
equal contributions from participating employers and employees, and by the investment earnings of
the Fund. As there is insufficient information to apply defined benefit plan accounting, defined
contribution plan accounting has been used by the Company. The Company’s contribution for
employees’ current service in 2013 was $855,552 (2012- $736,439).
11. RELATED PARTY TRANSACTIONS
The Company provided the following services in the normal course of operations to the Municipality:
Billing and collection services - water/wastewater
Energy (at commercial rates)
Streetlight maintenance
2013
$
2,354,597
5,814,611
192,317
8,361,525
2012
$
2,407,632
5,346,067
190,764
7,944,462
The Municipality provided the following services in the normal course of operations to the Company:
Administrative services
Asset management
2013
$
627,482
245,443
872,925
2012
$
615,112
226,406
841,518
All related party transactions are recorded at the exchange amounts.
12. SHARE CAPITAL
2013
$
Authorized
Unlimited common shares
Issued
2,222 common shares
26,882,150
2012
$
26,882,150
Page | 19
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
13. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital items:
Accounts receivable
Accounts receivable - unbilled revenue
Taxes receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Taxes payable
Due to the Municipality of Chatham-Kent
Current portion of deferred revenue
Current portion of customer deposits
2013
$
576,050
(2,858,010)
(790,543)
134,946
59,729
3,201,045
(351,563)
1,482,320
(122,062)
(114,497)
1,217,415
2012
$
(2,677,945)
949,961
659,613
(315,119)
32,210
(710,592)
351,563
4,855,222
142,435
(541,548)
2,745,800
Payments in lieu of taxes of $1,985,132 (2012 - $221,174) and interest of $1,607,325 (2012 $1,511,723) were paid during the year.
14. FINANCIAL INSTRUMENTS
Fair value
The Company’s recognized financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities due to Municipality of Chatham-Kent, customer
deposits and note payable.
The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities and due to Municipality of Chatham-Kent approximate their carrying amounts due to their
short-term nature. As there is no secondary market for customer deposits, the calculation of their fair
value with appropriate reliability is impractical.
The Company has a long term promissory note payable with the Municipality in the amount of
$23,523,326. The promissory note was issued upon incorporation on September 22, 2000 with
interest at 7.04%. The interest rate on the promissory note payable changed to 5.87% effective
January 1, 2011. There is no “term length” associated with the promissory note.
In order to determine fair value of the note payable, comparison was made to the approved interest
rate from the OEB. The OEB approves the rate of return on the debt portion of “Cost of Capital” for
non-arm’s length transactions. An interest rate of 4.12% has been approved by the OEB through the
rate setting process for rates effective May 2013.
Using the OEB approved non-arm’s length cost of debt of 4.12% the annual interest expense would
be reduced by approximately $412,000.
Page | 20
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
14. FINANCIAL INSTRUMENTS (continued)
Credit risk
The Company is exposed to credit risk from its customers. The Company has a large number of
diverse customers for the most part minimizing concentration of risk. There are a select group of
manufacturing-based corporations that pose a significant increase in risk due to the current state of the
economy as well as the future outlook for the economy. Close monitoring of this sector is currently
being examined through internal and external credit rating resources. The Company continues to
utilize special payment arrangements and security deposits to reduce this risk to an acceptable level.
15. CAPITAL DISCLOSURES
The Company’s main objectives when managing capital are to:
•
•
ensure ongoing access to funding to maintain and improve the electricity distribution system
of LDC; and
maintain a capital structure comparable for regulated activities as approved by the OEB’s
deemed debt-to-equity structure in our rates.
As at December 31, 2013, the Company’s definition of capital includes shareholders’ equity and
long-term debt and has remained unchanged from December 31, 2012. As at December 31, 2013,
shareholders’ equity amounts to $44,702,865 (2012 - $43,956,948) and long-term debt amounts to
$23,523,326 (2012 - $23,523,326).
In 2013, the capital structure approved by the OEB in rates was 40% Equity, 56% Long-Term Debt
and 4% Short-Term Debt. The OEB-approved capital structure is unchanged from 2012. The
Company’s 2013 actual capital structure was 66% Equity (2012 - 65%) and 34% Long-Term Debt
(2012 - 35%).
Page | 21
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
16. PAYMENTS IN LIEU OF TAXES
The reconciliation between the combined Federal and Ontario statutory tax rate and the effective rate
of income tax taxes is as follows:
Earnings before payments in lieu of taxes
Statutory income tax rate (percent)
Statutory income tax rate applied to earnings
Increase / (decrease) resulting from:
Temporary differences between accounting
and tax basis of assets and liabilities
Permanent differences
Provision for income taxes
Effective rate of income tax (percent)
2013
$
2012
$
4,537,493
4,518,401
26.50%
26.50%
1,202,436
1,197,376
46,278
7,862
1,256,576
68,381
11,194
1,276,951
27.69%
28.26%
Future income taxes
The long-term future income tax asset of $3,308,166 (2012 - $3,985,842) includes the following:
Temporary differences related to capital assets and
deferred assets
Temporary differences related to employee future benefits
2013
$
2012
$
1,978,172
1,329,994
3,308,166
2,902,584
1,083,258
3,985,842
Page | 22
ENTEGRUS INC. (formerly Chatham-Kent Energy Inc.)
Notes to the Consolidated Financial Statements
December 31, 2013
16. PAYMENTS IN LIEU OF TAXES (continued)
The long-term future income tax liability of $3,211,562 (2012 - $3,392,100) includes the following:
Regulatory future income tax liability
Temporary differences related to capital assets and
deferred assets
Temporary differences related to employee future benefits
2013
$
2012
$
3,211,562
3,282,682
3,211,562
237,481
(128,063)
3,392,100
17. COMMITMENTS
The Company has entered into a Customer Agreement for the services of a data collection system,
data storage and access to specific software and systems. The terms of the agreement were extended
for five years commencing April 1, 2009. Annual payments are $88,963 (2012 - $84,350).
In 2013, the Company renewed an agreement with the Municipality of Strathroy-Caradoc to lease a
portion of the premises known as 351 Frances Street, Strathroy, Ontario until December 31, 2016.
The cost of the lease in 2013 was $62,535 (2012 - $62,535). In addition, the Company is required to
pay 60% of shared operating costs. For the year ended December 31, 2013, the Company’s share of
operating costs was $32,833 (2012 - $47,327).
In 2010, the Company renewed an agreement with the Municipality of Strathroy-Caradoc to provide
the services of billing of water services for a period of five years effective July 1, 2010. Contracts for
maintenance of streetlight and traffic lights as well as installation of water meters, locate services and
backhoe services are renewed annually. Revenue received for these services in 2013 was $420,855
(2012- $405,433).
Page | 23

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