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
© Copyright 2025 ExpyDoc