Creative Energy Vancouver Platforms Inc. (formerly Central Heat Distribution Limited)

Transcription

1 B-7 Creative Energy Vancouver Platforms Inc. Financial Statements

2 April 24, 2015 Independent Auditor s Report To the Board of Directors of Creative Energy Vancouver Platforms Inc. We have audited the accompanying financial statements of Creative Energy Vancouver Platforms Inc., which comprise the balance sheet as at and the statements of earnings, retained earnings and cash flows for the year then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of 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 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

3 Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Creative Energy Vancouver Platforms Inc. as at and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises. Other matters The financial statements of Creative Energy Vancouver Platforms Inc. (formerly known as Central Heat Distribution Limited) for the year ended December 31, 2013 were audited by another auditor who expressed an unmodified opinion on those financial statements dated February 26, As part of our audit of the 2014 financial statements, we also audited the adjustments described in note 8 that were applied to amend the 2013 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2013 financial statements of the company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2013 financial statements taken as a whole. Chartered Accountants

4 Balance Sheet As at (Restated - note 8) Assets Current assets Cash - 3,346 Accounts receivable 3,522,280 3,581,734 Inventory 179, ,077 Prepaid expenses 47,570 52,367 Income taxes recoverable 178, ,496 3,928,060 4,029,020 Defined benefit assets (note 8) 602, ,510 Property, plant and equipment (note 3) 23,892,614 24,035,804 Construction-in-progress 754, ,890 Franchise and other intangible assets (note 4) - 51,284 Future income taxes (note 12) 2,745,500 2,603,372 31,923,236 31,385,880 Liabilities Current liabilities Bank indebtedness 186,580 - Accounts payable and accrued liabilities (note 7) 2,496,344 3,272,484 Fuel cost liability (note 12) 549, ,392 Bank loans (note 5) 17,310,463 16,780,046 20,542,714 20,725,922 Derivative financial instruments (note 5(c)) 300, ,566 Future income taxes liability 2,779,100 2,639,372 23,622,239 23,610,860 Shareholders Equity Capital stock (note 6) 16,192 16,192 Retained earnings 8,284,805 7,758,828 Contingency (note 11) 8,300,997 7,775,020 31,923,236 31,385,880 Approved by the Board of Directors Director Director The accompanying notes are an integral part of these financial statements.

5 Statement of Earnings For the year ended (Restated - note 8) Revenue Steam sales 7,241,719 6,931,468 Sundry 247, ,857 7,489,686 7,202,325 Cost of goods sold Fuel, power and water 14,852,045 13,561,801 Fuel cost recovery (13,423,777) (12,089,025) Salaries and wages 1,428,204 1,404,147 Other operating and maintenance 400, ,064 Taxes other than income taxes - net of recoveries 586, ,676 Cost of sales 3,843,685 3,694,663 Gross margins 3,646,001 3,507,662 Expenses General and administrative 524, ,156 Management and office wages 772, ,683 Employee benefits 195,872 (77,797) Interest on bank loans 603, ,530 Loss on disposal of assets 51,585-2,148,598 1,486,572 Earnings before other income, amortization and income taxes 1,497,403 2,021,090 Other income Mark to market (loss) gain on interest swap agreements (note 5(c)) (54,859) 237,338 Amortization 871, ,543 Earnings before income taxes 570,829 1,400,885 Provision for (recovery of) income taxes Current 47,252 47,288 Future (2,400) 3,000 44,852 50,288 Net earnings for the year 525,977 1,350,597 The accompanying notes are an integral part of these financial statements.

6 Statement of Retained Earnings For the year ended (Restated - note 8) Retained earnings - Beginning of year As previously reported 7,758,828 8,593,249 Change in accounting policy - (1,684,800) As restated 7,758,828 6,908,449 Net earnings for the year 525,977 1,350,597 Dividends paid - net of refunded taxes - (464,470) Refundable taxes of investment income - (35,748) Retained earnings - End of year 8,284,805 7,758,828 The accompanying notes are an integral part of these financial statements.

7 Statement of Cash Flows For the year ended (Restated - note 8) Cash flows from operating activities Net earnings for the year 525,977 1,350,597 Items not affecting cash Amortization 871, ,543 Future income tax (recovery) expense (2,400) 3,000 Pension expense 5,800 (260,600) Loss on disposal of assets 51,585 - Unrealized gain on interest rate swaps 54,859 (237,338) 1,507,536 1,713,202 Change in non-cash operating working capital Accounts receivable 59,454 (1,180,637) Inventory 4,633 5,113 Prepaid expenses 4, ,189 Income tax recoverable 28,729 47,288 Accounts payable and accrued liabilities (776,036) 1,169,243 Fuel costs liability (124,065) (1,308,081) 705, ,317 Cash flows from financing activities Advances from bank loans 530,417 1,796,936 Payments of dividends and refundable taxes - (500,218) 530,417 1,296,718 Cash flows from investing activities Purchase of property, plant and equipment - (16,500) Costs incurred on construction-in-progress (1,165,291) (1,457,182) Pension plan contribution (260,100) (449,610) (1,425,391) (1,923,292) Decrease in cash (189,926) (27,257) Cash - Beginning of year 3,346 30,603 (Bank indebtedness) cash - End of year (186,580) 3,346 The accompanying notes are an integral part of these financial statements.

8 1 Nature of operations Creative Energy Vancouver Platforms Inc. (formerly known as "Central Heat Distribution Limited") (the Company) is primarily engaged in the sale of steam to residential and commercial customers in Vancouver, British Columbia, and is subject to the regulation of the British Columbia Utilities Commission ("the BCUC"). The BCUC exercises statutory authority over such matters as construction and operation of facilities, accounting practices, revenue rates, and contractual agreements with customers. On March 21, 2014 the Company was acquired by Creative Energy Canada Platforms Corp. The Company is governed by a "cost-of-service" regulation, under which the Company is allowed an approved fair return for providing services. The Company must apply to the BCUC to change rates charged to customers. The BCUC reviews a rate application and decides whether a rate change is justified, based on an examination of energy resource alternatives, the revenue requirements of a utility, and a fair return to shareholders. The Company also has ancillary non-utility operations which are not subject to regulated rates of return. 2 Significant accounting policies These financial statements are prepared in accordance with Canadian accounting standards for private enterprises (ASPE). The Company's significant accounting policies are as follows: Accounts receivable Accounts receivable are measured at fair value on origination. At year-end, the Company assesses whether there are any indications that the carrying amount of the receivables may be impaired. For purposes of impairment testing, each individually significant receivable is assessed individually. The balance of the receivables is grouped on the basis of similar credit risk characteristics. When there is an indication of impairment, the Company determines whether there has been a significant adverse change in the expected timing or amount of future cash flows. When the Company identifies a significant adverse change, it reduces the carrying amount of the receivable to the higher of the amount that could be realized by selling the receivable at the balance sheet date and the present value of the cash flows expected to be generated by holding the receivable. When the extent of impairment of a previously written down receivable decreases and the decrease can be related to an event occurring after the impairment was recognized, the impairment loss is reversed to the extent of the improvement. Inventory Inventory of fuel is reported at the lesser of cost and estimated net realizable value using the first-in, first-out cost flow assumption. (1)

9 Property, plant and equipment Property, plant and equipment are stated at cost of acquisition including allocated overhead, less accumulated amortization. The Company capitalizes a portion of its administrative overhead to reflect the costs of planning, supervision and control related directly to the acquisition and installation of its assets. In addition, the Company capitalizes interest costs incurred during the period of construction related to major expansion projects. Amortization is provided on a straight-line basis at the following annual rates: Buildings 1.5% Distribution and other plant equipment 1.5% - 5% Office and shop equipment 5% - 20% Transportation equipment 15% Contributions received from customers for steam service connections are deferred and amortized on the same basis that the related equipment is amortized. The amount amortized reduces amortization expense each year. The balance sheet amount is stated at cost net of accumulated amortization, and is presented as a reduction of the cost of related property, plant and equipment. Asset retirement obligations The Company recognizes a future asset retirement obligation as a liability in the year in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition, construction, development and/or normal use of the assets based on the best estimate of the expenditure required to settle the obligation. The Company concurrently recognizes a corresponding increase in the carrying amount of the related long-lived asset that is amortized over the life of the asset. The amount of the asset retirement obligation is estimated using the expected cash flow approach that reflects a range of possible outcomes discounted at a risk-free interest rate based on management s best estimate. Subsequent to the initial measurement, the asset retirement obligation is adjusted at the end of each year to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. Changes in the obligation due to the passage of time are recognized in income as an operating expense using the interest method. Changes in the obligation due to changes in estimated cash flows are recognized as an adjustment of the carrying amount of the related long-lived asset that is amortized over the remaining life of the asset. The fair value of future removal and site restoration costs for the Company are not readily determinable. In addition, there is a reasonable expectation that such costs would be recoverable through future approved rates. Accordingly, no provision has been made for such costs. Any such costs will be recognized when reasonably determinable. Construction in progress Construction in progress represents the costs incurred by the Company in respect to property, plant and equipment being constructed by the Company, which are incomplete at the year-end date. (2)

10 Franchise and other intangible assets All costs related to the initial organization and other franchise costs are capitalized and amortized on a straightline basis over their estimated useful lives. The carrying value of these assets is reviewed on a periodic basis and any impairment in value is written off at that time. Revenue recognition The Company recognizes revenue from steam sales at approved tariff rates when the steam has been delivered to the customer and an invoice has been rendered, assuming collection is considered reasonably assured. The Company recognizes rental revenue at the end of each month of the lease period, assuming collection is considered reasonably assured. Recoverable fuel costs The Company recovers from its customers the costs of the fuel that it uses to produce steam, in accordance with regulation. Aggregate fuel costs that will be recoverable through future billings are shown as a current asset. Billings to customers in respect to fuel costs which exceed aggregate actual fuel costs incurred, representing an obligation to customers, are presented as a current liability. Related party transactions Monetary related party transactions and non-monetary related party transactions that have commercial substance are measured at the exchange amount when they are in the normal course of business, except when the transaction is an exchange of a product or property held for sale in the normal course of operations. Where the transaction is not in the normal course of operations, it is measured at the exchange amount when there is a substantive change in the ownership of the item transferred and there is independent evidence of the exchange amount. All other related party transactions are measured at the carrying amount. Income taxes The Company uses the future income taxes method of accounting for income taxes. Under the future income taxes method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. To the extent that the Company does not consider it more likely than not that a future tax asset or portion thereof will be recovered it provides a valuation allowance. (3)

11 Impairment of long-lived assets The Company tests the recoverability of long-lived assets, including property, plant and equipment, construction in progress, and franchise and other intangible costs, whenever events or changes indicate the carrying amount may not be recoverable based upon estimates using factors such as asset utilization, business climate and future discounted cash flows expected to result from the use of the related assets or to be realized on sale. The Company's policy is to write down assets to the estimated net recoverable amount using discounted expected cash flows, in the period when it is determined to be likely that the carrying amount of the asset will not be recovered. Employee benefit plans The Company has a defined benefit pension plan covering certain of its employees. Defined benefit pension plan costs are determined using actuarial methods. The actuarial determination of the accrued benefit obligations for pension benefits uses the projected unit credit funding method. Under this method, the actuarial liability is the present value of prospective benefits prorated by credited service and is determined as a single sum based on the projected salary of the member. The Company accrues its obligations under the defined benefit plan as the employees render the services necessary to earn the pension benefits. The measurement date of the plan assets and the accrued benefit obligation coincides with the Company's fiscal year end. The most recent actuarial funding valuation of the pension plan was as of December 31, 2013 and the next required valuation will be as of December 31, Pension plan expense is charged to Employee benefits and includes: a) Cost of pension plan benefits provided in exchange for employee services rendered during the period; b) Past service costs arising from plan amendments are recognized immediately in the year; and c) Finance cost for the period is the net interest on the defined benefit liability. Finance cost for a defined benefit asset is a credit. Finance cost is generally determined by multiplying the defined benefit liability (asset) at the start of the period by the discount rate used in determining the defined benefit obligation at the start of the period. (4)

12 d) Re-measurement and other items for the period comprise the aggregate of: i) The difference between the actual return on plan assets and the return calculated using the discount rate referred to in (c) above ii) iii) iv) Actuarial gains and losses The effect of any valuation allowance in the case of a net defined benefit asset Past service costs and v) Gains and losses arising from settlements and curtailments. Use of estimates The preparation of the financial statements in conformity with ASPE 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 revenue and expenses during the year. Items subject to such estimates and assumptions include the carrying amounts of property, plant and equipment; provisions for impairment of accounts receivable; future income taxes; mark to market value of derivative financial instruments; fuel cost liability; and assets and obligations related to employee future benefits. Actual results could differ from those estimates. Financial instruments a) Initial measurement Financial instruments are measured at fair value on origination or acquisition, adjusted by, in the case of financial instruments that will not be subsequently measured at fair value, financing fees and transaction costs. All other transaction costs are recognized in net income in the period incurred. When the Company issues a financial instrument that contains both a liability and an equity element, it measures the equity component as zero and allocates the entire proceeds to the liability component. b) Subsequent to initial recognition Investments in equity instruments that are quoted in an active market and free standing derivatives that are not designated in a qualifying hedging relationship are measured at fair value without any adjustment for transaction costs that may be incurred on sale or other disposal. Changes in fair value are recognized in net income in the period incurred. Investments in equity instruments that are not quoted in an active market are measured at cost, less any reduction for impairment. Other financial instruments are measured at amortized cost. (5)

13 c) Impairment: At year-end, the Company assesses whether there are any indications that a financial asset measured at cost or amortized cost may be impaired. For purposes of impairment testing, each individually significant asset is assessed individually; the balance of the assets are grouped on the basis of similar credit risk characteristics. When there is an indication of impairment, the Company determines whether a significant adverse change has occurred during the period in the expected timing or amount of future cash flows from the financial asset. When there has been a significant adverse change, the carrying value of the asset is reduced to the highest of: i) The present value of expected cash flows; ii) iii) The amount that could be realized by selling the asset; and The amount that could be realized by exercising its right to any collateral held as security. When the extent of impairment decreases and the decrease can be related to an event occurring after the impairment was recognized, the impairment is reversed to the extent of the improvement in the period the reversal occurs. New accounting standard adopted during the year The Accounting Standards Board (AcSB) has issued new Section 3462, Employee Future Benefits, in Part II of the Chartered Professional Accountants of Canada (CPA Canada) Handbook - Accounting, replacing Section The new standard has been adopted as of January 1, 2014, and had a significant impact to the measurement, recognition and disclosure in our financial statements. The option for an entity to defer the recognition of gains and losses on its defined benefit plans to future periods using the deferral and amortization approach has been eliminated. As a result of this transition, the Company has switched from an actuarial valuation for accounting purposes to an actuarial valuation for funding purposes. See note 8 for further details. (6)

14 3 Property, plant and equipment Cost Accumulated amortization Land 566, , ,525 Buildings 2,138, ,114 1,454,451 1,475,476 Distribution and other plant equipment 37,201,558 15,530,386 21,671,172 21,929,110 Transportation equipment 131, ,444 25,798 11,897 Office and shop equipment 335, , ,168 53,796 Net 40,372,783 16,480,169 23,892,614 24,035,804 The balance of distribution and other plant equipment at is net of an amount of 922,397 ( ,397) related to costs of contributions in aid of construction and of 253,217 ( ,059) representing accumulated amortization of these costs. 4 Franchise and other intangible assets Franchise and other intangible assets consists of organization and franchise costs with finite useful lives of 100 years and are presented net of accumulated amortization as follows: Net Cost Accumulated depreciation Net Net Intangible assets ,284 During the year, the Company wrote off 86,056 (year ended December 31, nil) of costs capitalized and associated accumulated depreciation of 35,634 (year ended December 31, nil) relating to intangible assets. (7)

15 5 Bank loans Revolving demand loan (a) 3,230,000 2,510,000 Non-revolving term loan (b) 4,080,463 4,270,046 Non-revolving term loan (c) 10,000,000 10,000,000 17,310,463 16,780,046 a) The Company maintains a bank operating line of credit, advances under which bear interest at the bank's prime lending rate plus 0.3% per annum and is repayable on demand. The facility has an authorized limit of 3,500,000 (2013-3,500,000). The principal balance due at was 3,230,000 (2013-2,510,000). b) The Company maintains a bank operating loan with principal available to a maximum of 4,192,221. The loan bears interest at a rate equal to the bank's prime lending rate plus 0.5% per annum, and matures on August 31, Blended monthly payments of 28,000 including interest are required. At December 31, 2014, the principal balance of the operating loan was 4,080,463 (2013-4,270,046). Although the loan matures on August 31, 2015, the Company is likely to renew the loan before it matures. c) The Company maintains a non-revolving bank loan with an authorized limit of 10,000,000. Advances under the facility bear interest at the bank's prime lending rate plus 0.5% per annum. Monthly payments of interest are required. The loan matures on August 31, Although the loan matures on August 31, 2015, the Company is likely to renew the loan before it matures. During the year ended December 31, 2009, the Company entered into two interest rate swap transactions with the lending bank, in respect to the non-revolving bank loan described above. In the first swap effective February 6, 2009 with a maturity date of February 6, 2019, the Company swapped 5,000,000 of its non-revolving bank loan to a fixed annual interest rate and stamping fee of 4.52%. In the second swap effective April 30, 2009 with a maturity date of April 30, 2014, the Company swapped the remaining 5,000,000 of its non- revolving bank loan to a fixed annual interest rate and stamping fee of 3.69%. The Company did not designate any interest rate swaps as hedges and did not apply hedge accounting for the year ended. The swap had a fair value of 300,425 ( ,566) at December 31, 2014 which is recorded as a derivative financial instrument on the balance sheet. During the year, the Company recorded a mark to market loss of 54,859 ( gain of 237,338) on the swap agreement. The borrowings above are secured by a General Security Agreement including a floating charge on all assets of the Company, and a collateral mortgage in the amount of 13,000,000, which includes a first fixed charge on the lands and buildings of the Company. (8)

16 As at, the Company was not in compliance with certain debt covenants relating to the above noted credit facilities. Subsequent to year-end, the lender provided a waiver letter for the covenants that were not in compliance; therefore, the loan remains in good standing with the lender. 6 Capital stock Authorized 250,000 common shares with no par value Issued ,385 common shares 16,192 16,192 7 Accounts payable and accrued liabilities Included in accounts payable and accrued liabilities are government remittances payable of 314,976 ( ,410) relating to federal and provincial sales taxes, payroll taxes, health taxes, workers safety insurance premiums and utility taxes. 8 Pension plan The Company maintains a defined benefit pension plan covering twenty-two of its employees. The most recent actuarial valuation of the plan as at December 31, 2013 indicated that the actuarial present value of the defined benefit obligation was 4,636,500 and the market value of pension fund assets was 5,239,300, resulting in a defined benefit asset of 602,800. The next actuarial valuation of the plan must be performed as of December 31, The Company reported pension expense (income), included in Employee Benefits expense, of 5,800 during the 2014 year ( (260,600)). The Company contributed an amount of 260,100 to the plan during the 2014 year ( ,610). Employee contributions to the plan during the 2014 year were 17,600 ( ,100). (9)

17 Information about the Company's defined benefit pension is as follows: Pension expense Current service costs 253, ,500 Finance cost (18,500) (43,400) Remeasurement and other items (228,800) (439,700) 5,800 (260,600) The Company measures its defined benefit obligations and the fair value of plan assets for funding purposes as at December 31 of each year. Additional information about the defined benefit plan is as follows: Defined benefit obligation (4,636,500) (4,532,500) Fair value of plan assets 5,239,300 4,881,010 Funded status (plan deficit) 602, ,510 Effective January 1, 2014, the Company adopted Section 3462 (Part II ASPE Handbook) - Employee Future Benefits. The Company applied these Sections retrospectively, by restating prior periods, as required by Part II of the ASPE Handbook, Section Accounting Changes. The following transitional adjustments were recorded: 2013 Net income - December 31, as stated 830,697 Transition to employee future benefit Section ,900 Net income - December 31, as restated 1,350,597 Transition to employee future benefit Section 3462 Retained earnings opening January 1, 2013 adjustment (1,684,800) Net income - December 31, change 519,900 Net transaction change reflected in retained earnings to December 31, 2013 (1,164,900) Accrued pension asset - as stated 1,513,410 Transition to employee future benefits Section 3462 (1,164,900) Accrued pension asset - as restated 348,510 (10)

18 Under Section 3462, certain re-measurement items relating to employee future benefit obligations require immediate recognition in the period in which they arise, and are recognized directly to income. 9 Financial risks and concentration of risk The significant financial risks to which the Company is exposed are credit risk, liquidity risk and interest rate risk. There have been no changes to the risk exposures from prior year. Credit risk Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss. The Company has minimal concentration of credit risk in respect to its accounts receivable due to the large number of similarly sized accounts. Individual account credit risk is limited because most customers are significant in size and dependent on delivery of the Company's steam product. Liquidity risk Liquidity risk is the risk that the Company will be unable to fulfill its obligations on a timely basis or rate risk. There have been no changes to the risk exposures from prior year. at a reasonable cost. The Company manages liquidity risk associated with the debt obligations described in note 5 by limiting its debt level relative to asset value, and through its ability to refinance such debt based on its credit history and net asset position. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company maintains certain debt instruments, as described in note 5, in respect to which the interest rates are variable. As described in note 5(c), the Company has entered into interest rate swap arrangements with its bank to mitigate that risk in respect to a portion of its debt. Concentration of risk A substantial portion of the Company's fuel costs is supplied by one supplier which accounted for 86% of fuel costs ( %). 10 Related party transactions Since the acquisition of the Company, the prior Energy Services Agreement with a Joint Venture under common control with the Company no longer exists. However, as a result of the acquisition, the Company provides energy to several buildings which are related parties. The amount of energy sold and the amount billed for recovery of installation service costs to these related parties during the 2014 year totaled 572,800 ( nil) and 123,002 ( nil), respectively. The amount of receivables from related parties under common control included in accounts receivable as at is 469,830 ( nil). These transactions are measured at the exchange amount which is the amount of consideration established by BCUC. (11)

19 11 Contingency In the 1999 year, the City of Vancouver ("the City") filed a Writ of Summons and a Statement of Claim against the Company in respect to a dispute over the calculation of fees payable by the Company to the City for the years between 1974 and The amount of the claim was 1,454,485. The Company is disputing the claim and has filed a statement of defense. A trial which was originally set for October 2, 2006 was adjourned at the request of the City. In exchange for the Company agreeing to an adjournment, the City has agreed to forego any claim it might have to interest after October 2, The ultimate liability to the Company, if any, arising from this action is not presently determinable and will be recorded at the time of that determination. 12 Financial statement effects of rate regulation Rate regulation may affect the accounting for a transaction or event. Regulatory assets represent certain costs, incurred in the current or prior periods, expected to be recovered from customers in future periods through the revenue rate-setting process. Regulatory liabilities represent future reductions or limitations of increases in revenues associated with amounts expected to be refunded to customers as a result of the rate-setting process. The Company recognizes a regulatory asset with respect to future income tax liabilities which it expects to recover from customers in future periods. The Company recovers from its customers the costs of the fuel it uses to produce steam, in accordance with a formula determined by regulation. The fuel cost liability represents the cumulative excess of billings to customers in respect to fuel costs over actual fuel costs incurred. In the absence of rate regulation, the Company would have a similar obligation to provide credits to its customers, as the obligation is not dependent on the rate-setting process. Consequently, the fuel cost liability is not considered a regulatory liability. (12)