Essex Power Corporation

Transcription

1 Financial Statements of Essex Power Corporation Consolidated Financial Statements Year ended December 31, 2016 (Expressed in thousands of dollars)

2 April 28, 2017 Independent Auditor s Report To the Shareholders of Essex Power Corporation We have audited the accompanying consolidated financial statements of Essex Power Corporation and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2016 and December 31, 2015 and the consolidated statements of comprehensive income, changes in equity and cash flowsfor the years ended December 31, 2016 and December 31, 2015, and the related notes, which comprise 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 International Financial Reporting Standards, 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 audits. We conducted our audits 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 in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP 245 Ouellette Avenue, Suite 300, Windsor, Ontario, Canada N9A 7J4 T: , F: PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

3 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Essex Power Corporation and its subsidiaries as at December 31, 2016 and December 31, 2015 and its statements of comprehensive income and changes in equity and its cash flows for the years ended December 31, 2016 and December 31, 2015 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants 2

4 Consolidated Statements of Financial Position Assets Note December 31, 2016 December 31, 2015 Current assets Cash and cash equivalents 5 3,359 5,646 Accounts receivable 6 9,920 8,705 Unbilled revenue 6,631 6,626 Income taxes receivable Materials and supplies Prepaid expenses Total current assets 21,470 21,842 Non-current assets Property, plant and equipment 7 58,159 55,662 Intangible assets 8 6,265 5,942 Goodwill 1,769 1,623 Deferred assets 708 1,041 Deferred tax assets 9 1,069 1,062 Total non-current assets 67,970 65,330 Total assets 89,440 87,172 Regulatory balances 10 39,824 42,323 Total assets and regulatory balances 129, ,495 See accompanying notes to the financial statements.. 2

5 Consolidated Statements of Financial Position Liabilities Note December 31, 2016 December 31, 2015 Current liabilities Bank indebtedness Accounts payable and accrued liabilities 11 16,740 13,909 Long-term debt due within one year 12 5,290 6,542 Obligation under finance lease due within one year Income tax payable Deferred revenue 3,603 2,525 Customer deposits 1,441 1,444 Dividend payable 1,701 1,653 Total current liabilities 29,573 26,360 Non-current liabilities Long-term debt 12 18,265 16,896 Obligation under finance lease Post-employment benefits 14 3,417 3,289 Non-hedging financial derivatives Deferred tax liabilities 9 2,975 2,832 Total non-current liabilities 25,010 23,414 Total liabilities 54,583 49,774 Equity Share capital 15 19,667 19,667 Retained earnings 15,609 13,604 Accumulated other comprehensive income Total equity 36,099 34,094 Total liabilities and equity 90,682 83,868 Regulatory balances 10 38,582 45,627 Total liabilities, equity and regulatory balances 129, ,495 See accompanying notes to the financial statements. On behalf of the Board: Director Director 3

6 Statements of Comprehensive Income Note December 31, 2016 December 31, 2015 Revenue Sale of energy 72,553 59,140 Distribution revenue 10,803 13,763 Utilismart fees 5,762 6,045 Other 16 4,625 5,203 93,743 84,151 Operating expenses Cost of energy purchased 74,762 61,785 Operating expenses 17 13,890 14,854 Depreciation and amortization 4,150 4,102 92,802 80,741 Income from operating activities 941 3,410 Finance income Finance costs 18 (989) (1,030) Income before income taxes 19 2,492 Income tax expense - current Income tax expense (recovery) - future (279) Net (loss) income for the year (1,140) 2,402 Net movement in regulatory balances, net of tax 10 4, Net income for the year and net movement in regulatory balances 3,185 3,371 Other comprehensive loss Items that will not be reclassified to profit or loss Remeasurements of post-employment benefits 14 - (338) Tax on remeasurements Other comprehensive loss for the year - (227) Total comprehensive income for the year 3,185 3,144 See accompanying notes to the financial statements. 4

7 Consolidated Statements of Changes in Equity Share capital Retained earnings Accumulated other comprehensiv e income Total Balance at January 1, ,667 11,886 1,050 32,603 Net Income and net movement in regulatory balances - 3,371-3,371 Other comprehensive loss - - (227) (227) Dividends - (1,653) - (1,653) Balance at December 31, ,667 13, ,094 Share capital Retained earnings Accumulated other comprehensive income Total Balance at January 1, ,667 13, ,094 - Regulatory adjustments Net Income and net movement in regulatory balances - 3,185-3,185 Other comprehensive loss Dividends - (1,701) - (1,701) Balance at December 31, ,667 15, ,099 See accompanying notes to the financial statements. 5

8 Consolidated Statements of Cash Flows Year ended December 31, 2016 and Operating activities Net Income and net movement in regulatory balances 3,185 3,371 Adjustments for Depreciation and amortization 4,178 4,102 Amortization of deferred revenue (102) (19) Post-employment benefits (Gains) losses on disposal of property, plant and equipment (19) 105 Unrealized gain on non-hedging financial derivatives (118) (3) Decrease in deferred charges Net finance costs Income tax expense 1, Change in non-cash operating working capital 1,206 4,255 Net movement in regulatory balances (4,325) (969) Regulatory adjustments (net) Income tax paid (1,258) (328) Interest paid (989) (1,030) Interest received Net cash from operating activities 4,667 11,561 Investing activities Purchase of property, plant and equipment and intangibles (6,979) (9,034) Contributions received from customers 1,180 1,001 Net cash used in investing activities (5,799) (8,033) Financing activities Bank indebtedness Dividends paid (1,653) (1,607) Redemption of preferred shares (146) - Proceeds from long-term debt 1,584 3,000 Repayment of long-term debt (1,467) (1,843) Net cash from financing activities (1,155) (450) Change in cash and cash equivalents (2,287) 3,078 Cash and cash equivalents, beginning of year 5,646 2,568 Cash and cash equivalents, end of year 3,359 5,646 See accompanying notes to the financial statements. 6

9 1. Reporting entity Essex Power Corporation (the Corporation ) serves as the holding company for Essex Powerlines Corporation, Essex Power Services Corporation, Essex Energy Corporation and its subsidiaries, providing corporate services and direction in the areas of finance, new business development and marketing, and is incorporated under the laws of Ontario, Canada. The Corporation is located in Oldcastle, Ontario. The address of the Corporation s registered office is 2199 Blackacre Drive, Suite 200, Oldcastle, ON N0R 1L0. Essex Powerlines Corporation ( Powerlines ) delivers electricity and related energy services to over 29,000 residential and commercial customers in Amherstburg, LaSalle, Leamington and Tecumseh. The shareholders of Essex Power Corporation include the Town of Amherstburg, the Town of LaSalle, the Municipality of Leamington and the Town of Tecumseh. Essex Energy Corporation and its subsidiaries, Utilismart Corporation and its subsidiaries, provide software solutions and data services for Utilities, Municipalities, Industrial, Commercial and Residential consumers and offering multiple hosted, managed MDM offerings, without the use of any special hardware or software licenses. In addition, this company provides solar PV systems to a broad range of customers. The Ontario government enacted the Energy Competition Act, 1998 to introduce competition to the Ontario electricity market. Under the terms of the legislation, the Ontario Energy Board (OEB) will regulate industry participants by issuing licenses for the right to generate, transmit, distribute or retail electricity. These licenses will require compliance with established market rules and codes. This legislation applies to Essex Powerlines Corporation only. The consolidated financial statements are for the Corporation as at and for the year ended December 31, 2016, and represent the Corporation and its subsidiaries as identified in Note 3a below. 2. Basis of presentation (a) Statement of compliance The Corporation's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ( IASB ) and with interpretations of the International Financial Reporting Issues Committee. The financial statements were approved by the Board of Directors on April 26, (1)

10 (b) Basis of measurement These financial statements have been prepared on the historical cost basis, unless otherwise stated. (c) Functional and presentation currency These financial statements are presented in Canadian dollars, which is the Corporation's functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand. (d) Use of estimates and judgements (i) Assumptions and estimation uncertainty The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and liabilities. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected. Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustment is included in the following notes: (i) (ii) (iii) (iv) (ii) Judgements Note 3(c) measurement of unbilled revenue Note 3(e) estimation of useful lives of its property, plant and equipment and intangible assets Note 3(k) recognition and measurement of regulatory balances Note 14 measurement of defined benefit obligations: key actuarial assumptions Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognized in the financial statements is included in note 13 -leases- whether an arrangement contains a lease. (e) Rate regulation Powerlines is regulated by the Ontario Energy Board ( OEB ), under the authority granted by the Ontario Energy Board Act, Among other things, the OEB has the power and responsibility to approve or set rates for the transmission and distribution of electricity, providing continued rate protection for electricity consumers in Ontario, and ensuring that transmission and distribution companies fulfill obligations to connect and service customers. The OEB may also prescribe license requirements and conditions of (2)

11 service to local distribution companies ( LDCs ), such as Powerlines, which may include, among other things, record keeping, regulatory accounting principles, separation of accounts for distinct businesses, and filing and process requirements for rate setting purposes. Powerlines is required to bill customers for the debt retirement charge set by the province. Powerlines may file to recover uncollected debt retirement charges from Ontario Electricity Financial Corporation ( OEFC ) once each year. (e) Rate regulation (continued) Rate setting Distribution revenue For the distribution revenue included in sale of energy, Powerlines files a Cost of Service ( COS ) rate application with the OEB usually every five years where rates are determined through a review of the forecasted annual amount of operating and capital expenditures, debt and shareholder s equity required to support Powerlines business. Powerlines estimates electricity usage and the costs to service each customer class to determine the appropriate rates to be charged to each customer class. The COS application is reviewed by the OEB and interveners and rates are approved based upon this review, including any revisions resulting from that review. In the intervening years an Incentive Rate Mechanism application ( IRM ) is filed. An IRM application results in a formulaic adjustment to distribution rates that were set under the last COS application. The previous year s rates are adjusted for the annual change in the Gross Domestic Product Implicit Price Inflator for Final Domestic Demand ( GDP IPI-FDD ) net of a productivity factor and a stretch factor determined by the relative efficiency of an electricity distributor. As a licensed distributor, Powerlines is responsible for billing customers for electricity generated by third parties and the related costs of providing electricity service, such as transmission services and other services provided by third parties. Powerlines is required, pursuant to regulation, to remit such amounts to these third parties, irrespective of whether Powerlines ultimately collects these amounts from customers. Powerlines last filed a COS application on September 28, 2009 for rates effective May 1, 2010 to April 30, The GDP IPI-FDD for 2016 is 2.1%, the Corporation s productivity factor is 0% and the stretch factor is 0.15%, resulting in a net adjustment of 1.95% to the previous year s rates. Powerlines has decided to next apply to have rates rebased by August 2017 for rates effective May 1, In the interim, Powerlines will continue to file annual IRMs to adjust rates. (3)

12 2. Basis of presentation (continued) Electricity rates The OEB sets electricity prices for low-volume consumers twice each year based on an estimate of how much it will cost to supply the province with electricity for the next year. All remaining consumers pay the market price for electricity. Powerlines is billed for the cost of the electricity that its customers use and passes this cost on to the customer at cost without a mark-up. 3. Significant accounting policies The accounting policies set out below have been applied consistently in all years presented in these financial statements. (a) Basis of consolidation These consolidated financial statements include the accounts of the following corporations: (i)essex Powerlines Corporation (ii)essex Energy Corporation (iii) ASI SPE 106 Inc. (iv)essex Power Services Corporation (vi)utilismart Corporation (vii)wattsworth Analysis Inc. (viii)enerconnect (ix)enermajica Subsidiaries are entities controlled by the Corporation. The financial statements of the subsidiaries are included in these consolidated financial statements from the date on which control commences until the date on which control ceases. All inter-company accounts and transactions have been eliminated. (b) Financial instruments All financial assets are classified as loans and receivables and all financial liabilities are classified as other liabilities. These financial instruments are recognized initially at fair value plus any directly attributable transaction costs. Subsequently, they are measured at amortized cost using the effective interest method less any impairment for the financial assets as described in note 3(g). Cash and cash equivalents are measured at fair value. The Corporation holds interest rate swaps and measures them at fair value. (4)

13 3. Significant accounting policies (continued) Hedge accounting has not been used in the preparation of these financial statements. (c) Revenue recognition Sale and distribution of electricity Revenue from the sale and distribution of electricity is recognized as the electricity is delivered to customers on the basis of cyclical meter readings and estimated customer usage since the last meter reading date to the end of the year. Revenue includes the cost of electricity supplied, distribution, and any other regulatory charges. The related cost of power is recorded on the basis of power used. For customer billings related to electricity generated by third parties and the related costs of providing electricity service, such as transmission services and other services provided by third parties, the Corporation has determined that it is acting as a principal for these electricity charges and, therefore, has presented electricity revenue on a gross basis. Customer billings for debt retirement charges are recorded on a net basis as the Corporation is acting as an agent for this billing stream. Unbilled revenue Unbilled revenue is recorded based on an estimated amount of electricity delivered and not yet billed. The estimate is calculated by using the customers actual consumption data up to the year end to arrive at the unbilled revenue accrual. Other revenue The Company provides services relating to the construction and maintenance of powerlines and related electrical distribution structures and equipment. Revenue from these services is generally recognized upon completion of the work performed. For larger projects, the Company recognizes revenue on the percentage of completion basis. Amounts received in advance of these milestones are presented as deferred revenue. Certain customers and developers are required to contribute towards the capital cost of construction of distribution assets in order to provide ongoing service. Cash contributions are recorded as deferred revenue. When an asset other than cash is received as a capital contribution, the asset is initially recognized at its fair value, with a corresponding amount recognized as deferred revenue. The deferred revenue, which represents the Corporation's obligation to continue to provide the customers access to the supply of electricity, is amortized to income on a straight-line basis over the useful life of the related asset. (5)

14 3. Significant accounting policies (continued) Government grants and the related performance incentive payments under CDM programs are recognized as revenue in the year when there is reasonable assurance that the program conditions have been satisfied and the payment will be received. (d) Materials and supplies Materials and supplies, the majority of which is consumed by the Corporation in the provision of its services, is valued at the lower of cost and net realizable value, with cost being determined on a weighted average cost basis and includes expenditures incurred in acquiring the materials and supplies and other costs incurred in bringing them to their existing location and condition. (e) Property, plant and equipment Items of property, plant and equipment ( PP&E ) used in rate-regulated activities and other items of PPE are measured at cost less accumulated depreciation. Items of PP&E contributed by customers are measured at fair value, less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes contracted services, materials and transportation costs, direct labour, overhead costs, borrowing costs and any other costs directly attributable to bringing the asset to a working condition for its intended use. Borrowing costs on qualifying assets are capitalized as part of the cost of the asset based upon the weighted average cost of debt incurred on the Corporation s borrowings. Qualifying assets are considered to be those that take in excess of 12 months to construct. When parts of an item of PP&E have different useful lives, they are accounted for as separate items (major components) of PP&E. When items of PP&E are retired or otherwise disposed of, a gain or loss on disposal is determined by comparing the proceeds from disposal, if any, with the carrying amount of the item and is included in profit or loss. Major spare parts and standby equipment are recognized as items of PP&E. The cost of replacing a part of an item of PP&E is recognized in the net book value of the item if it is probable that the future economic benefits embodied within the part will flow to the Corporation and its cost can be measured reliably. In this event, the replaced part of PP&E is written off, and the related gain or loss is included in profit or loss. The costs of the day-to-day servicing of PP&E are recognized in profit or loss as incurred. (6)

15 3. Significant accounting policies (continued) (e) Property, plant and equipment (continued) The need to estimate the decommissioning costs at the end of the useful lives of certain assets is reviewed periodically. The Corporation has concluded it does not have any legal or constructive obligation to remove PP&E. Depreciation is calculated to write off the cost of items of PP&E using the straight-line method over their estimated useful lives, and is generally recognized in profit or loss. Depreciation methods, useful lives, and residual values are reviewed at each reporting date and adjusted prospectively if appropriate. Land is not depreciated. Construction-in-progress assets are not depreciated until the project is complete and the asset is available for use. The estimated useful lives are as follows: Years Buildings and fixtures 50 Land Indefinite Computer hardware, and other equipment 5-10 Office equipment 5-10 Utility Equipment and trucks 7-10 Distribution Equipment Solar Generation (f) Intangible assets Intangible assets used in rate-regulated activities and other intangible assets are measured at cost less accumulated amortization. Computer software that is acquired or developed by the Corporation, including software that is not integral to the functionality of equipment purchased which has finite useful lives, is measured at cost less accumulated amortization. Payments to obtain rights to access land ("land rights") are classified as intangible assets. These include payments made for easements, right of access and right of use over land for which the Corporation does not hold title. Land rights are measured at cost less accumulated amortization. (7)

16 3. Significant accounting policies (continued) Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, from the date that they are available for use. Amortization methods and useful lives of all intangible assets are reviewed at each reporting date and adjusted prospectively if appropriate. The estimated useful lives are: Years Computer software 5 Customer relationships 15 Leasehold improvements 15 MSP Development costs 10 Land rights 50 (g) Impairment (i) Financial assets measured at amortized cost A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss is calculated as the difference between an asset s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Interest on the impaired assets continues to be recognized through the unwinding of the discount. Losses are recognized in profit or loss. An impairment loss is reversed through profit or loss if the reversal can be related objectively to an event occurring after the impairment loss was recognized. (ii) Non-financial assets The carrying amounts of the Corporation's non-financial assets, other than materials and supplies and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or CGU ). The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. (8)

17 3. Significant accounting policies (continued) (h) Goodwill In assessing value in use the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. For other assets, an impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the tangible and intangible assets acquired, less liabilities assumed, based on their fair values. When the Corporation enters into a business combination, the acquisition method of accounting is used. Goodwill is not amortized but is instead tested for impairment annually or more frequently, if events or changes in circumstances indicate that the asset might be impaired. Impairment The Corporation tests goodwill for possible impairment on an annual basis as of December 31, of each year and at any other time if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No impairment exists at December 31, (i) Customer deposits Customer deposits represent cash deposits from electricity distribution customers and retailers to guarantee the payment of energy bills. Interest is paid annually on customer deposits at a rate of prime business rate less 2%. Deposits are refundable to customers who demonstrate an acceptable level of credit risk as determined by the Corporation in accordance with policies set out by the OEB or upon termination of their electricity distribution service. (9)

18 3. Significant accounting policies (continued) (j) Provisions A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (k) Regulatory balances Regulatory deferral account debit balances represent costs incurred in excess of amounts billed to the customer at OEB approved rates. Regulatory deferral account credit balances represent amounts billed to the customer at OEB approved rates in excess of costs incurred by the Corporation. Regulatory deferral account debit balances are recognized if it is probable that future billings in an amount at least equal to the deferred cost will result from inclusion of that cost in allowable costs for rate-making purposes. The offsetting amount is recognized in net movement in regulatory balances in profit or loss or OCI. When the customer is billed at rates approved by the OEB for the recovery of the deferred costs, the customer billings are recognized in revenue. The regulatory debit balance is reduced by the amount of these customer billings with the offset to net movement in regulatory balances in profit or loss or OCI. The probability of recovery of the regulatory deferral account debit balances is assessed annually based upon the likelihood that the OEB will approve the change in rates to recover the balance. The assessment of likelihood of recovery is based upon previous decisions made by the OEB for similar circumstances, policies or guidelines issued by the OEB, etc. Any resulting impairment loss is recognized in profit or loss in the year incurred. When the Corporation is required to refund amounts to ratepayers in the future, the Corporation recognizes a regulatory deferral account credit balance. The offsetting amount is recognized in net movement in regulatory balances in profit or loss or OCI. The amounts returned to the customers are recognized as a reduction of revenue. The credit balance is reduced by the amount of these customer repayments with the offset to net movement in regulatory balances in profit or loss or OCI. (10)

19 3. Significant accounting policies (continued) (l) Post-employment benefits (i) Pension plan The Corporation provides a pension plan for all its full-time employees through Ontario Municipal Employees Retirement System ( OMERS ). OMERS is a multi-employer pension plan which operates as the Ontario Municipal Employees Retirement Fund ( the Fund ), and provides pensions for employees of Ontario municipalities, local boards and public utilities. 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. To the extent that the Fund finds itself in an under-funded position, additional contribution rates may be assessed to participating employers and members. (i) Pension plan (continued) OMERS is a defined benefit plan. However, as OMERS does not segregate its pension asset and liability information by individual employers, there is insufficient information available to enable the Corporation to directly account for the plan. Consequently, the plan has been accounted for as a defined contribution plan. The Corporation is not responsible for any other contractual obligations other than the contributions. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss when they are due. (ii) Post-employment benefits, other than pension The Corporation provides some of its retired employees with life insurance and medical benefits beyond those provided by government sponsored plans. The obligations for these post-employment benefit plans are actuarially determined by applying the projected unit credit method and reflect management s best estimate of certain underlying assumptions. Remeasurements of the net defined benefit obligations, including actuarial gains and losses and the return on plan assets (excluding interest), are recognized immediately in other comprehensive income. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized immediately in profit or loss. The last actuarial valuation was done as of December 31, (m) Leased assets Leases, where the terms cause the Corporation to assume substantially all the risks and rewards of ownership, are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. (11)

20 3. Significant accounting policies (continued) Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. All other leases are classified as operating leases and the leased assets are not recognized on the Corporation s statement of financial position. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. (n) Finance income and finance costs Finance income is recognized as it accrues in profit or loss, using the effective interest method. Finance income comprises interest earned on cash and cash equivalents and dividend income. Finance costs comprise interest expense on borrowings, net interest expense on post-employment benefits and impairment losses on financial assets. (o) Income taxes The income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case, it is recognized in equity. Powerlines is currently exempt from taxes under the Income Tax Act (Canada) and the Ontario Corporations Tax Act (collectively the Tax Acts ). Under the Electricity Act, 1998, the Corporation makes payments in lieu of corporate taxes to the Ontario Electricity Financial Corporation ( OEFC ). These payments are calculated in accordance with the rules for computing taxable income and taxable capital and other relevant amounts contained in the Tax Acts as modified by the Electricity Act, 1998, and related regulations. Prior to October 1, 2001, the Corporation was not subject to income or capital taxes. Payments in lieu of taxes are referred to as income taxes. Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. All corporations other than Essex Powerlines Corporation follow the tax allocation basis of accounting for income taxes whereby income tax expense is recorded in the year the income and expenses are recognized for accounting purposes regardless of when the related taxes are actually paid or recovered. (12)

21 Deferred tax is recognized in respect of temporary differences between the tax basis of assets and liabilities and their carrying amounts for accounting purposes. Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted, at the reporting date. 4. Standards issued but not yet adopted Future accounting changes There are new standards, amendments to standards and interpretations which are not yet effective for the year ended December 31, 2016 and have not been applied in preparing these financial statements. The Corporation is still evaluating the adoption of the following new and revised standards along with any subsequent amendments. Revenue Recognition In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers ( IFRS 15 ), which replaces existing revenue recognition guidance, including IAS 18 Revenue and IFRIC 18 Transfers of Assets from Customers ( IFRIC 18 ). IFRS 15 replaces IAS 11 Construction Contracts, IAS 18 Revenue and various interpretations and establishes principles regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The standard requires entities to recognize revenue for the transfer of goods or services to customers measured at the amounts an entity expects to be entitled to in exchange for those goods or services. In July 2015, the IASB announced a one-year deferral of the effective date of IFRS 15 to annual periods beginning on or after January 1, The Corporation is assessing the impact of IFRS 15 on its results of operations, financial position, and disclosures. Financial Instruments In July 2014, the IASB issued a new standard, IFRS 9 Financial Instruments, which will replace IAS 39 Financial Instruments: Recognition and Measurement. The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments. The issuance of IFRS 9 is part of the first phase of this project. IFRS 9 is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exceptions. The Corporation is assessing the impact of IFRS 9 on its results of operations, financial position, and disclosures. Property, Plant, and Equipment and Intangible Assets (13)

22 In May 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment and IAS 38 Intangible Assets, which are effective for years beginning on or after January 1, The amendments clarify when revenue-based depreciation methods are permitted. The Corporation is assessing the impact of the amendments on its results of operation, financial positions, and disclosures. Leases In January 2016, IASB issued IFRS 16 to establish principles for the recognition, measurement, presentation, and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. IFRS 16 replaces IAS 17 and it is effective for annual periods beginning on or after January 1, 2019 and will be applied retrospectively with some exceptions. Early adoption is permitted if IFRS 15 has been adopted. The Corporation is assessing the impact of IFRS 16 on its results of operations, financial positions, and disclosures. All of the above standards or amendments relate to the measurement and disclosure of financial assets and liabilities. The extent of the impact on adoption of these standards and amendments has not yet been determined. 5. Cash and cash equivalents (bank indebtedness) Restricted bank balances, held for customer deposits 1,159 1,159 Unrestricted bank balances 2,200 4,487 Bank indebtedness (527) --- 2,832 5, Accounts receivable Trade receivables 9,072 7,761 Other trade receivables Billable work ,920 8,705 (14)

23 7. Property, plant and equipment Land and Distribution Other fixed Construction buildings equipment assets -in-progress Total Cost or deemed cost Balance at January 1, ,239 47,477 10, ,154 Reclassification 48 (48) Adjustments arising from OEB Audit Additions 42 4,493 1,285 5,820 Transfers --- (617) (61) (334) (1,012) Disposals/retirements (12) (148) (160) Balance at December 31, ,317 51,524 12, ,169 Balance at January 1, ,190 42,525 8, ,296 Additions 49 5,110 2, ,016 Transfers Disposals/retirements --- (158) (158) Balance at December 31, ,239 47,477 10, ,154 Accumulated depreciation Balance at January 1, ,142 2, ,492 Adjustments arising from OEB Audit (12) (3) (145) --- (160) Depreciation 42 1,653 1, ,697 Disposals/retirements --- (19) (19) Balance at December 31, ,773 3, ,010 Balance at January 1, ,653 1, ,043 Depreciation 41 1, ,502 Disposals/retirements --- (53) (53) Balance at December 31, ,142 2, ,492 Carrying amounts At December 31, ,219 46,751 8, ,159 At December 31, ,171 44,335 8, ,662 At December 31, 2016 land and buildings with a carrying amount of 2,219 (December 31, ,171) are subject to a general security agreement. Included in computer equipment is assets under finance lease with a cost of 713,550 ( ,300) and a net book value of 578,598 ( ,910). (15)

24 8. Intangible assets Computer Customer Leasehold MSP Land Total Software Relationships Improvements Costs Cost or deemed cost Balance at January 1, ,373 5, ,091 Prior period adjs MIFRS OEB audit Additions 1, ,597 Balance at December 31, ,175 5, ,895 Balance at January 1, ,366 5, ,069 Additions 1, ,022 Balance at December 31, ,373 5, ,091 Accumulated depreciation Balance at January 1, ,987 2, ,149 Depreciation 1, ,481 Balance at December 31, ,110 2, ,630 Balance at January 1, ,755 1, ,545 Depreciation 1, ,604 Balance at December 31, ,987 2, ,149 Carrying amounts At December 31, ,065 2, ,265 At December 31, ,386 3, ,942 (16)

25 9. Income tax expense Reconciliation of effective tax rate Income before taxes 19 2,492 Canada and Ontario statutory Income tax rates 26.5% 26.5% Expected tax provision on income at statutory rates Increase (decrease) in income taxes resulting from: Other 1,154 (570) Income tax expense 1, Significant components of the Corporation s deferred tax balances Deferred tax assets (liabilities): Property, plant and equipment (1,135) (2,984) Post-employment benefits 76 1,050 Other (847) 164 (1,906) (1,770) Net deferred tax asset (liabilities) split as follows: Deferred tax asset 1,069 1,062 Deferred tax liability (2,975) (2,832) (17)

26 10. Regulatory balances Reconciliation of the carrying amount for each class of regulatory balances Regulatory deferral account - debit balances January 1, 2016 Regulatory adjustments Additions Recovery/ reversal December 31, 2016 Remaining recovery/ reversal years Group 1 deferred accounts 1,542 (171) 2,899-4,270 Extraordinary event costs Regulatory settlement account 11,618 (11,833) 3,930 1,631 5,346 1 Other regulatory accounts 29, ,121 42,323 (12,002) 7,300 2,203 39,824 Regulatory deferral account - debit balances January 1, 2015 Regulatory adjustments Additions Recovery/ reversal December 31, 2015 Remaining recovery/ reversal years Group 1 deferred accounts 9,980 - (7,794) (644) 1,542 Extraordinary event costs Regulatory settlement account 5,254 - (1,724) 8,088 11, Other regulatory accounts 24,608 - (977) 5,449 29,080 39,925 - (10,495) 12,893 42,323 Regulatory deferral account - credit balances January 1, 2016 Regulatory adjustments Additions Recovery/ reversal December 31, 2016 Remaining recovery/ reversal years Group 1 deferred accounts (4,264) 731 (1,004) - (4,537) Regulatory transition to IFRS (623) (735) - - (1,358) Regulatory settlement account (10,051) 11,961 (3,892) - (1,982) 1 Other regulatory accounts (29,184) 266 (324) (622) (29,864) Income tax (1,505) (841) (45,627) 12,223 (4,556) (622) (38,582) (18)

27 10. Regulatory balances (continued) Regulatory deferral account - credit balances January 1, 2015 Regulatory adjustments Additions Recovery/r eversal December 31, 2015 Remaining recovery/ reversal years Group 1 deferred accounts (10,142) - 5,915 (37) (4,264) Extraordinary event costs (623) (623) Regulatory settlement account (7,166) - (5) (2,880) (10,051) 1-3 Other regulatory accounts (25,603) (3,782) (29,184) Income tax (645) - (860) - (1,505) (44,179) - 5,251 (6,699) (45,627) The regulatory balances are recovered or settled through rates approved by the OEB which are determined using estimates of future consumption of electricity by its customers. Future consumption is impacted by various factors including the economy and weather. The Corporation has received approval from the OEB to establish its regulatory balances. Typically, settlement of the Group 1 deferral accounts is done, as required, through application to the OEB. EPL plans to recover its Group 1 Deferral and Variance accounts in a COS application for 2018 rates. The approved account balances will be moved to the regulatory settlement account as required by the regulator. The OEB requires the Corporation to estimate its income taxes when it files a COS application to set its rates. As a result, the Corporation has recognized a regulatory deferral account for the amount of deferred taxes that will ultimately be recovered from/paid back to its customers. This balance will fluctuate as the Corporation s deferred tax balance fluctuates. Regulatory balances attract interest at OEB prescribed rates, which are based on Bankers' Acceptances threemonth rate plus a spread of 25 basis points. In 2016 the rate was between 1.10% and 1.10%. Group 1 deferred accounts are comprised of variances between amounts charged by the Independent Electricity System Operator for the operation of wholesale electricity market and the cost of electricity, the amounts from Hydro One for network line and transformation charges and amounts billed to customers. Extraordinary event costs represent costs incurred to restore services following storms in Regulatory settlement accounts represent amounts collected from customers through rates. These amounts will be held until approved by the Ontario Energy Board to be refunded to or recovered from customers. (19)

28 Other regulatory accounts represent amounts for costs incurred by the Corporation to serve customers that have been enrolled by a commodity retailer and for miscellaneous other costs that will be recovered from customers. Regulatory transition to IFRS represents changes in estimates and other variances arising from the transition to IFRS which will be held until approved by the Ontario Energy Board to be refunded to or recovered from customers. Income tax represents an amount of a future tax liability which will be refunded to customers through future rates. 11. Accounts payable and accrued liabilities Accounts payable energy purchases 8,535 2,860 Debt retirement charge payable to OEFC Payroll payable Other 7,752 10,422 16,740 13,909 (20)

29 12. Long-term debt Related party long-term loan payable is repayable as approved by the Board of Directors not to exceed 20% of the principal lending amount if funds are available as determined each March. Interest is payable at a stated interest rate of 4.0%. The agreement expires December 31, The debt is owing to two of the four shareholders of the parent company as follows: Municipality of Leamington 2,150 2,150 Town of Tecumseh 1,545 1,545 3,695 3,695 Banker s acceptance - TD Canada Trust has a 5 year term ending November 4, 2018, and is repayable with interest only payments at an effective interest rate of 5.03% 3,300 3,300 Fixed rate loan - TD Canada Trust is a 10 year term loan with a 10 year amortization schedule, repayable in blended monthly payments of 40, bearing an interest rate of 4.99%. Loan matures November 9, ,515 4,757 Fixed rate loan - TD Canada Trust is a 10 year term loan with a 10 year amortization schedule, repayable in blended monthly payments of 62, bearing an interest rate of 4.48%. Loan matures November 9, ,036 2,674 Fixed rate loan - TD Canada Trust is a 5 year term loan with a 17 year amortization schedule, repayable in blended monthly payments of 10, bearing an interest rate of 2.47%. Loan matures October 24, ,622 1,704 Fixed rate loan - TD Canada Trust is a 5 year term loan with a 19 year amortization schedule, repayable in monthly payments of 10 bearing an interest rate of 2.47%. Loan matures October 19, ,822 1,902 Floating rate loan - TD Canada Trust, is a 5 year term with a 10 year amortization schedule, repayable in monthly principal payments of 12, bearing an interest rate of prime plus 1%. Loan matures in December ,031 1,178 Fixed rate Loan - TD Canada Trust is a 5 year term loan with a 20 year amortization schedule, repayable in blended monthly payments of 16 bearing an interest rate of 2.42%. Loan matures on October 26, ,862 2,980 Floating rate loan - TD Canada Trust, is a 5 year term loan with a 10 year amortization schedule repayable in monthly principal payments of 12, bearing a floating interest rate of prime plus 1%. Loan matures in November 3, ,108 1,248 Fixed rate Loan - TD Canada Trust, repayable in monthly principal payments of 5 bearing an interest rate of prime plus 1%. Loan matures on August Floating rate loan TD Canada Trust, is a 5 year term loan with a 20 year amortization schedule repayable in blended monthly payments of 5, bearing a floating interest rate of 2.19%. Loan matures in December 2, ,000-23,555 23,438 Less: Current portion of long-term debt 5,290 6,542 18,265 16,896 (21)