Essex Power Corporation · 2017-08-23 · 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Essex

Financial Statements of

Essex Power Corporation

Consolidated Financial Statements

Year ended December 31, 2016(Expressed in thousands of dollars)

PricewaterhouseCoopers LLP245 Ouellette Avenue, Suite 300, Windsor, Ontario, Canada N9A 7J4T: +1 519 985 8900, F: +1 519 258 5457

“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

April 28, 2017

Independent Auditor’s Report

To the Shareholders ofEssex Power Corporation

We have audited the accompanying consolidated financial statements of Essex Power Corporationand its subsidiaries, which comprise the consolidated statement of financial position as atDecember 31, 2016 and December 31, 2015 and the consolidated statements of comprehensiveincome, changes in equity and cash flowsfor the years ended December 31, 2016 andDecember 31, 2015, and the related notes, which comprise a summary of significant accountingpolicies and other explanatory information.

Management’s responsibility for the consolidated financial statementsManagement is responsible for the preparation and fair presentation of these consolidatedfinancial statements in accordance with International Financial Reporting Standards, and forsuch internal control as management determines is necessary to enable the preparation ofconsolidated financial statements that are free from material misstatement, whether due to fraudor error.

Auditor’s responsibilityOur responsibility is to express an opinion on these consolidated financial statements based onour audits. We conducted our audits in accordance with Canadian generally accepted auditingstandards. Those standards require that we comply with ethical requirements and plan andperform the audit to obtain reasonable assurance about whether the consolidated financialstatements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the consolidated financial statements. The procedures selected depend on theauditor’s judgment, including the assessment of the risks of material misstatement of theconsolidated financial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’s preparation and fairpresentation of the consolidated financial statements in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control. An audit also includes evaluating the appropriatenessof accounting policies used and the reasonableness of accounting estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financialstatements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate toprovide a basis for our audit opinion.

2

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, thefinancial position of Essex Power Corporation and its subsidiaries as at December 31, 2016 andDecember 31, 2015 and its statements of comprehensive income and changes in equity and itscash flows for the years ended December 31, 2016 and December 31, 2015 in accordance withInternational Financial Reporting Standards.

Chartered Professional Accountants, Licensed Public Accountants

2

ESSEX POWER CORPORATIONConsolidated Statements of Financial Position(in thousands of dollars)

NoteDecember 31, 2016

$December 31, 2015

$

Assets

Current assetsCash and cash equivalents 5 3,359 5,646Accounts receivable 6 9,920 8,705Unbilled revenue 6,631 6,626Income taxes receivable 415 253Materials and supplies 708 135Prepaid expenses 437 477

Total current assets 21,470 21,842

Non-current assetsProperty, plant and equipment 7 58,159 55,662Intangible assets 8 6,265 5,942Goodwill 1,769 1,623Deferred assets 708 1,041Deferred 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 129,264 129,495

See accompanying notes to the financial statements.

.

3

ESSEX POWER CORPORATIONConsolidated Statements of Financial Position(in thousands of dollars)


$December 31, 2015

$

Liabilities

Current liabilitiesBank indebtedness 5 527 -Accounts payable and accrued liabilities 11 16,740 13,909Long-term debt due within one year 12 5,290 6,542Obligation under finance lease due within one

year 13 186 129Income tax payable 85 158Deferred revenue 3,603 2,525Customer deposits 1,441 1,444Dividend payable 1,701 1,653

Total current liabilities 29,573 26,360

Non-current liabilitiesLong-term debt 12 18,265 16,896Obligation under finance lease 13 155 81Post-employment benefits 14 3,417 3,289Non-hedging financial derivatives 198 316Deferred tax liabilities 9 2,975 2,832

Total non-current liabilities 25,010 23,414

Total liabilities 54,583 49,774

EquityShare capital 15 19,667 19,667Retained earnings 15,609 13,604Accumulated other comprehensive income 823 823

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 129,264 129,495


On behalf of the Board:

Director __________________________ Director

4

ESSEX POWER CORPORATIONStatements of Comprehensive IncomeYears ended December 31, 2016 and 2015(in thousands of dollars)


$December 31, 2015

$

RevenueSale of energy 72,553 59,140Distribution revenue 10,803 13,763Utilismart fees 5,762 6,045Other 16 4,625 5,203

93,743 84,151

Operating expensesCost of energy purchased 74,762 61,785Operating expenses 17 13,890 14,854Depreciation and amortization 4,150 4,102

92,802 80,741Income from operating activities 941 3,410Finance income 18 67 112Finance costs 18 (989) (1,030)Income before income taxes 19 2,492Income tax expense - current 9 353 369Income tax expense (recovery) - future 9 806 (279)Net (loss) income for the year (1,140) 2,402

Net movement in regulatory balances, net of tax 10 4,325 969

Net income for the year and net movement inregulatory balances 3,185 3,371

Other comprehensive lossItems that will not be reclassified to profit or loss

Remeasurements of post-employmentbenefits 14 - (338)

Tax on remeasurements 9 - 111Other comprehensive loss for the year - (227)Total comprehensive income for the year 3,185 3,144


5

ESSEX POWER CORPORATIONConsolidated Statements of Changes in EquityYears ended December 31, 2016 and 2015(in thousands of dollars)

Sharecapital

$

Retainedearnings

$

Accumulatedother

comprehensive income

$Total

$

Balance at January 1, 2015 19,667 11,886 1,050 32,603

Net Income and netmovement in regulatorybalances - 3,371 - 3,371

Other comprehensive loss - - (227) (227)Dividends - (1,653) - (1,653)Balance at December 31, 2015 19,667 13,604 823 34,094

Share capital$

Retainedearnings

$

Accumulatedother

comprehensiveincome

$Total

$

Balance at January 1, 2016 19,667 13,604 823 34,094-

Regulatory adjustments - 521 - 521Net Income and net

movement in regulatorybalances - 3,185 - 3,185

Other comprehensive loss - - -Dividends - (1,701) - (1,701)Balance at December 31, 2016 19,667 15,609 823 36,099


6

ESSEX POWER CORPORATIONConsolidated Statements of Cash FlowsYear ended December 31, 2016 and 2015(in thousands of dollars)

2016$

2015$

Operating activitiesNet Income and net movement in regulatory balances 3,185 3,371

Adjustments forDepreciation and amortization 4,178 4,102Amortization of deferred revenue (102) (19)Post-employment benefits 128 66(Gains) losses on disposal of property, plant and equipment (19) 105Unrealized gain on non-hedging financial derivatives (118) (3)Decrease in deferred charges 333 891Net finance costs 922 918Income tax expense 1,159 90

Change in non-cash operating working capital 1,206 4,255Net movement in regulatory balances (4,325) (969)Regulatory adjustments (net) 300 -Income tax paid (1,258) (328)Interest paid (989) (1,030)Interest received 67 112Net cash from operating activities 4,667 11,561

Investing activitiesPurchase of property, plant and equipment and intangibles (6,979) (9,034)Contributions received from customers 1,180 1,001Net cash used in investing activities (5,799) (8,033)

Financing activitiesBank indebtedness 527 -Dividends paid (1,653) (1,607)Redemption of preferred shares (146) -Proceeds from long-term debt 1,584 3,000Repayment of long-term debt (1,467) (1,843)Net cash from financing activities (1,155) (450)

Change in cash and cash equivalents (2,287) 3,078Cash and cash equivalents, beginning of year 5,646 2,568Cash and cash equivalents, end of year 3,359 5,646


ESSEX POWER CORPORATIONNotes to Consolidated Financial StatementsYears ended December 31, 2016 and 2015(in thousands of dollars)

(1)

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, 2017

.


(2)

(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) Note 3(c) – measurement of unbilled revenue

(ii) Note 3(e) – estimation of useful lives of its property, plant and equipment and intangible assets

(iii) Note 3(k) – recognition and measurement of regulatory balances

(iv) Note 14 – measurement of defined benefit obligations: key actuarial assumptions

(ii) Judgements

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, 1998. 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


(3)

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,

2011. 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, 2018.

In the interim, Powerlines will continue to file annual IRMs to adjust rates.


(4)

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.


(5)

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.


(6)


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 self-

constructed 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.


(7)


(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 50Land IndefiniteComputer hardware, and other equipment 5 - 10Office equipment 5 - 10Utility Equipment and trucks 7 - 10Distribution Equipment 15 - 50Solar Generation 15 - 25

(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.


(8)


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.


(9)


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.

(h) Goodwill

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, 2016.

(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.


(10)


(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.

‘


(11)


(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, 2014.

(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.


(12)


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.


(13)

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, 2018. 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


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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, 2016. 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)

2016 2015

Restricted bank balances, held for customer deposits $ 1,159 $ 1,159

Unrestricted bank balances 2,200 $ 4,487

Bank indebtedness (527) ---$ 2,832 $ 5,646

6. Accounts receivable

2016 2015

Trade receivables $ 9,072 $ 7,761Other trade receivables 721 851Billable work 127 93

$ 9,920 $ 8,705


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7. Property, plant and equipment

Land and Distribution Other fixed Constructionbuildings equipment assets -in-Progress Total

Cost or deemed costBalance at January 1, 2016 $ 2,239 $ 47,477 $ 10,874 $ 564 $ 61,154Reclassification 48 (48) --- --- ---Adjustments arising from OEB Audit --- 367 --- --- 367Additions 42 4,493 1,285 5,820Transfers --- (617) (61) (334) (1,012)Disposals/retirements (12) (148) --- --- (160)

Balance at December 31, 2016 $ 2,317 $ 51,524 $ 12,098 $ 230 $ 66,169

Balance at January 1, 2015 $ 2,190 $ 42,525 $ 8,199 $ 382 $ 53,296Additions 49 5,110 2,675 182 8,016Transfers --- --- --- --- ---Disposals/retirements --- (158) --- --- (158)

Balance at December 31, 2015 $ 2,239 $ 47,477 $ 10,874 $ 564 $ 61,154

Accumulated depreciationBalance at January 1, 2016 $ 68 $ 3,142 $ 2,282 $ --- $ 5,492Adjustments arising from OEB Audit (12) (3) (145) --- (160)Depreciation 42 1,653 1,002 --- 2,697Disposals/retirements --- (19) --- --- (19)

Balance at December 31, 2016 $ 98 $ 4,773 $ 3,139 $ --- $ 8,010

Balance at January 1, 2015 $ 27 $ 1,653 $ 1,363 $ --- $ 3,043Depreciation 41 1,542 919 --- 2,502Disposals/retirements --- (53) --- --- (53)

Balance at December 31, 2015 $ 68 $ 3,142 $ 2,282 $ --- $ 5,492

Carrying amountsAt December 31, 2016 $ 2,219 $ 46,751 $ 8,959 $ 230 $ 58,159At December 31, 2015 2,171 44,335 8,592 564 55,662

At December 31, 2016 land and buildings with a carrying amount of $2,219 (December 31, 2015 - $2,171) are

subject to a general security agreement. Included in computer equipment is assets under finance lease with a

cost of $713,550 (2015 - $391,300) and a net book value of $578,598 (2015 - $273,910).


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8. Intangible assets

Computer Customer Leasehold MSP Land Total

Software Relationships Improvements Costs

Cost or deemed costBalance at January 1, 2016 $ 6,373 $ 5,340 $ 131 $ 54 $ 193 $ 12,091Prior period adjs MIFRS OEB audit 207 --- --- --- --- 207Additions 1,595 --- --- --- 2 1,597

Balance at December 31, 2016 $ 8,175 $ 5,340 $ 131 $ 54 $ 195 $ 13,895

Balance at January 1, 2015 $ 5,366 $ 5,340 $ 131 $ 54 $ 178 $ 11,069Additions 1,007 --- --- --- 15 1,022

Balance at December 31, 2015 $ 6,373 $ 5,340 $ 131 $ 54 $ 193 12,091

Accumulated depreciationBalance at January 1, 2016 $ 3,987 $ 2,009 $ 127 $ 18 $ 8 $ 6,149Depreciation 1,123 345 3 6 4 1,481


Balance at January 1, 2015 $ 2,755 $ 1,663 $ 110 $ 13 $ 4 $ 4,545Depreciation 1,232 346 17 5 4 $ 1,604


Carrying amountsAt December 31, 2016 $ 3,065 $ 2,986 $ 1 $ 30 $ 183 $ 6,265At December 31, 2015 2,386 3,331 4 36 185 5,942


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9. Income tax expense

Reconciliation of effective tax rate

2016 2015

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 5 660Increase (decrease) in income taxes resulting from:

Other 1,154 (570)Income tax expense $ 1,159 $ 90

Significant components of the Corporation’s deferred tax balances

2016 2015

Deferred tax assets (liabilities):Property, plant and equipment $ (1,135) $ (2,984)Post-employment benefits 76 1,050Other (847) 164

$ (1,906) $ (1,770)

Net deferred tax asset (liabilities) split as follows:Deferred tax asset $ 1,069 $ 1,062Deferred tax liability (2,975) (2,832)


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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 83 - 4 - 87

Regulatory settlement account 11,618 (11,833) 3,930 1,631 5,346 1

Other regulatory accounts 29,080 2 467 572 30,121

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 83 - - - 83

Regulatory settlement account 5,254 - (1,724) 8,088 11,618 1-3

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) - 664 - (841)

(45,627) 12,223 (4,556) (622) (38,582)


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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) - 201 (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 three-

month 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 2010.

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.


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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

2016 2015

Accounts payable – energy purchases $ 8,535 $ 2,860Debt retirement charge payable to OEFC 122 277Payroll payable 331 350Other 7,752 10,422

$ 16,740 $ 13,909


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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,

2017. The debt is owing to two of the four shareholders of the parent company as follows:

2016

$

2015

$

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, 2019 4,515 4,757



matures November 9, 2019 2,036 2,674



matures October 24, 2020 1,622 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, 2020 1,822 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 2023 1,031 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, 2020 2,862 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, 2024 1,108 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 2025 564 -

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, 2021 1,000 -

23,555 23,438

Less: Current portion of long-term debt 5,290 6,542

18,265 16,896


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12. Long-term debt (continued)

At December 31, 2016, Essex Energy Corporation, one of the companies forming part of this consolidated

entity, did not meet a covenant related to the floating rate loans. The company’s bank has granted them a

waiver on December 22, 2016 with respect to the covenant violation.

As a result of the waiver being obtained, it is not the bank’s intention to exercise the demand feature and call all

outstanding loans within the next 12 months as a result of the covenant violation and under this assumption,

approximate long-term principal repayments over the next 5 years are as follows:

$

2017 5,2902018 4,9482019 5,3512020 5,8102021 1,178Thereafter 978

23,555

In addition to the Bankers Acceptances with TD Canada Trust, the Company has entered into an interest rate

swap agreement with TD Securities. This agreement is a “receive variable, pay fixed” swap agreement, which

effectively converts variable interest rates on Bankers Acceptances to the effective interest rates mentioned

above. Refer to note 22 for details on these swap instruments.


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13. Obligations under finance lease

The Company has lease commitments for certain computer equipment. Two of the obligations under finance

lease are non- interest bearing and one obligation bears interest at a rate of 2.25% per annum. Leased

computer equipment has been pledged as security. Future annual minimum lease payments are as follows:

$

2017 1862018 1082019 49

343

Less: Amounts representing interest 2

Total obligations 341

Less: Current portion 186

155

14. Post-employment benefits

(a) OMERS pension plan

The Corporation provides a pension plan for its employees through OMERS. The plan is a multi-employer,

contributory defined pension plan with equal contributions by the employer and its employees. In 2016, the

consolidated group made employer contributions of $542 to OMERS (2015- $526), of which $82 (2015 -

$115) has been capitalized as part of PP&E and the remaining amount of $460 (2015 - $441) has been

recognized in profit or loss. The Corporation estimates that a contribution of $540 to OMERS will be made

during the next fiscal year.

As at December 31, 2016, OMERS had approximately 470,000 members, of whom 60 are current

employees of the Corporation. The most recently available OMERS annual report is for the year ended

December 31, 2016, which reported that the plan was 93.4% funded, with an unfunded liability of

$6,200,000. This unfunded liability is likely to result in future payments by participating employers and

members.

(b) Post-employment benefits other than pension

The Corporation pays certain medical and life insurance benefits on behalf of some of its retired employees.

The Corporation recognizes these post-employment benefits in the year in which employees’ services were

rendered.


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Reconciliation of the obligation 2016 2015

Defined benefit obligation, beginning of year $ 3,289 $ 2,887Included in profit or loss

Current service cost 120 130Interest cost 123 103

3,532 3,120

Included in OCIActuarial (gains) losses arising from:

changes in demographic assumptions - 326changes in financial assumptions—discount rate - 12

- 338Benefits paid (115) (169)Defined benefit obligation, end of year $ 3,417 $ 3,289

Actuarial assumptions 2016 2015

General inflation 2.00% 2.00%Discount (interest) rate 3.75% 3.75%Medical Costs 7.00% 7.50%Dental Costs 4.50% 4.50%

(b) Post-employment benefits other than pension (continued)

A 1% increase in the assumed discount rate would result in the defined benefit obligation decreasing by

$332. A 1% decrease in the assumed discount rate would result in the defined benefits obligation increasing

by $391.

A 1% increase in the assumed trend rate would result in the defined benefit obligation increasing by $342. A

1% decrease in the assumed trend rate would result in the defined benefit obligation decreasing by $295.


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15. Share capital

2016 2015

Authorized:Unlimited number of common shares, Class A, votingUnlimited number of common shares, Class B, non-votingUnlimited number of special shares, Class A, non-voting

Issued:10,712,716 common shares, Class A, voting $ 10,713 $10,7138,073,035 common shares, Class B, non-voting 8,073 8,073881,459 special shares, Class A, non-voting 881 881

$ 19,667 $19,667

Dividends

The holders of the common and special shares are entitled to receive dividends as declared from time to time.The Corporation paid aggregate dividends in the year on the shares as follows: common $1,639 (2015 -$1,591), special $62 (2015 - $62) which amount to total dividends paid in the year of $1,701 (2015 - $1,653).

16. Other revenue

2016 2015

Rental revenue for joint use of poles $ 117 $ 115Billing services to ultimate shareholders 1,014 1,014Streetlight maintenance services to ultimate shareholders 263 225Solar Generation 1,861 1,183Deferred revenue recognized 102 18Loss from retirement of assets (85) (105)Other 1,353 2,753

$ 4,625 $ 5,203


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17. Operating expenses

2016 2015

Contract/consulting $ 2,122 $ 2,541Materials and supplies 774 1,675Salaries, wages and benefits 7,301 7,897Cost of billing services for ultimate shareholders 942 948Post-employment benefit plans 243 230Vehicles 126 157Other 2,382 1,406

$ 13,890 $ 14,854

18. Finance income and costs

2016 2015

Finance incomeInterest income on bank deposits $ 67 $ 112

Finance costsInterest expense on long-term debt 845 857Interest expense on customer deposits 3 3Other 141 170

989 1,030

Net finance costs recognized in profit or loss $ (922) $ (918)

19. Commitments and contingencies

From time to time, the Corporation is involved in various litigation matters arising in the ordinary course of its

business. The Corporation has no reason to believe that the disposition of any such current matter could

reasonably be expected to have a materially adverse impact on the Corporation’s financial position, results of

operations or its ability to carry on any of its business activities.


(27)

General Liability Insurance

The Company subscribes for liability insurance coverage under a self-insurance pool administered by the

Municipal Electric Association Reciprocal Insurance Exchange. Under the terms of this co-operative venture,

the Company as a pool member, in addition to its regular premiums, is contingently liable for any retroactive

reassessment if a deficit originates in a year in which they are a member. The contingent liability for

reassessment in respect of any year in which the Company is a pool member continues even where the

Company subsequently withdraws from the self-insurance pool. The Company will not, however, be subject to

reassessment for claims incurred in years in which they are not members of this self-insurance pool. As at

December 31, 2016 no assessments have been made.

Regulatory Assets/Liabilities

The regulatory assets and liabilities represent certain amounts receivable or refundable to future customers.

These amounts have been deferred for accounting purposes because it is probable that they will be recovered

or refunded in future rates. The Ontario Energy Board (OEB) regulates Essex Powerlines Corporation and

determines the amounts receivable and refundable to customers through an Incentive Rate Mechanism (IRM)

and/or a Cost of Service (COS) rate application rate proceedings.

As part of a recent OEB Decision and Order (EB-2014-0301, EB-2014-0072), the OEB ordered an audit of all

Essex Powerlines deferral and variance accounts (except smart meter accounts 1555 and 1556), procedures

and controls. The OEB issued a final audit report on March 21, 2017 which resulted in regulatory adjustments

and other reclassifications within regulatory balances.

Letter of Credit

A letter of credit in the amount of $2,900 has been issued by TD Canada Trust to the credit of the IndependentElectricity System Operator for the commodity purchases and market services provided. This letter of credit hasno term of expiry and is normally renewed annually.

Commitments

The Company has a long-term lease for the office premises supplied by Energy Place Inc. for which it is

committed to pay rent until August 2017. Minimum annual commitment for the next year is approximately as

follows:$

2017 47,606


(28)

The Company currently does not have any non-cancellable leases.

Contingencies

A Subsidiary Company has been named as a defendant in a law suit for wrongful dismissal in January 2013.

This litigation although on-going has remained dormant since early 2013. As well the Subsidiary Company has

been named in a breach of contract law suit filed by a software consulting firm in March 2013 which the

Subsidiary Company has filed a larger counterclaim in response. This litigation was legally agreed to in

November 2016 with a partial settlement payment of $20,000 made by the Subsidiary Company in November

2016 and a final settlement payment of $50,000 made in January 2017.


(29)

20. Related party transactions

(a) Parent and jointly controlling shareholders

The sole shareholders of the Corporation are the Towns of Amherstburg, LaSalle and Tecumseh,

and the Municipality of Leamington. The Towns and Municipality produce financial statements

that are available for public use.

(b) Outstanding balances with related parties

2016 2015Balances due to:Municipality of Leamington $ - $ 86Town of Tecumseh - 64

$ - $ 150

Balances due from:Town of Amherstburg 94 35Town of LaSalle 28 36Town of Tecumseh 107 32Municipality of Leamington 283 31

$ 512 $ 134

20. Related party transactions (continued)

All balances due from and due to related parties listed above are included within accounts

receivable and accounts payable respectively. Amounts are non-interest bearing with repayment

terms similar to other trade accounts receivable and accounts payable.

(c) Dividends payable to jointly controlling shareholders

As at December 31, 2016 dividends payable to the jointly controlling shareholders amounted to

$1,701 (2015 - $1,653).

(d) Transactions with jointly controlling shareholders

The Corporation had the following significant transactions with its ultimate parents, governmententities: the Towns of Amherstburg, LaSalle and Tecumseh, and the Municipality of Leamington.

The Corporation delivers electricity to these entities throughout the year for the electricity needs

of the Towns and Municipality. Electricity delivery charges are at prices and under termsapproved by the OEB. The Corporation also provides additional services to the Towns andMunicipality, including billing and customer care services. The total revenues related to these

services for 2016 were $1,014 (2015 - $1,014)..


(30)

(e) Key management personnel

The key management personnel of the Corporation have been defined as members of its board

of directors and senior management team members. The compensation paid or payable is as

follows:

2016 2015

Directors’ fees $ 76 $ 89Salaries and bonuses 1,090 801

$ 1,166 $ 890

21. Capital Management

The Corporation’s objectives are to maintain access to capital on a long-term basis at reasonablerates and to deliver reasonable financial returns to the shareholders. The Corporation’s capitalstructure consists of shareholders’ equity, retained earnings, long-term debt, and cash. The capital

structure as at December 31, 2016 and 2015 is as follows:

The Corporation is required by TD Canada Trust to maintain a funded debt to capitalization ratio notto exceed 60%. At December 31, 2016 the Corporation is in compliance with this covenant.

2016 2015

Long-term debt payable in one year 5,290 6,542Long-term lease obligation due in one year 186 129Long term debt 18,265 16,896Long term lease 155 81Bank overdraft 527 -Less: Cash 3,359 5,646

Net long-term debt 21,064 18,002

Common shares 19,667 19,667Retained earnings 15,609 13,604

Total equity 35,276 33,271

Total capital 56,340 51,273

Debt to capital ratio 37% 35%


(31)

22. Financial instruments and risk management

Fair value disclosure

The carrying values of cash and cash equivalents, accounts receivable, unbilled revenue, due from/to

related parties and accounts payable and accrued liabilities approximate fair value because of the

short maturity of these instruments. The carrying value of the customer deposits approximates fair

value because the amounts are payable on demand. The carrying value of the long- term debt

approximates fair value because all debt is at variable rates.

Financial risks

The Corporation understands the risks inherent in its business and defines them broadly as anything

that could impact its ability to achieve its strategic objectives. The Corporation’s exposure to a variety

of risks such as credit risk, interest rate risk, and liquidity risk, as well as related mitigation strategies

are discussed below.

(a) Credit risk

Financial assets carry credit risk that counterparty will fail to discharge an obligation which could

result in a financial loss. Financial assets held by the Corporation, such as accounts receivable,

expose it to credit risk. The Corporation earns its revenue from a broad base of customers in

different classes and as such, the Corporation does not rely on any one single customer for a

significant amount of its revenues. As of December 31, 2016 there were no significant balances

of accounts receivable owing from any single customer.

The carrying amount of accounts receivable is reduced through the use of an allowance for

impairment and the amount of the related impairment loss is recognized in profit or loss.

Subsequent recoveries of receivables previously provisioned are credited to profit or loss. The

balance of the allowance for impairment at December 31, 2016 is $193 (2015 - $188). An

impairment loss of $150 (2015 - $190) was recognized during the year.

The Corporation’s credit risk associated with accounts receivable is primarily related to payments

from distribution customers. At December 31, 2016, approximately $803 (2015 - $756) is

considered 60 or more days past due. The Corporation has over 29,000 customers, the majority

of whom are residential electric customers. Credit risk is managed through collection of security

deposits from customers in accordance with directions provided by the OEB. As at December 31,

2016, the Corporation holds security deposits in the amount of $1,172 (2015 $1,213).


(32)

(b) Market risk

Market risks primarily refer to the risk of loss resulting from changes in commodity prices, foreign

exchange rates, and interest rates. The Corporation currently does not have any material

commodity or foreign exchange risk. The Corporation is exposed to fluctuations in interest rates

as the regulated rate of return for the Corporation’s distribution business is derived using a

complex formulaic approach which is in part based on the forecast for long-term Government of

Canada bond yields. This rate of return is approved by the OEB as part of the approval of

distribution rates.

(c) Interest Rate Risk

The Company enters into derivative financial instruments in order to hedge its risk against interest

rate fluctuations. The Company has fixed its variable rate long-term Banker’s acceptance with

the following outstanding interest rate swap agreements:

Notional amount Interest rate Term of Agreement Repricing Period

$3,300 4.19% November 4, 2018 Monthly

As at December 31, 2016, the unrealized loss was $198 (2015 – $316).

A 1% variation the interest rate at December 31, 2016 would increase or decrease this loss by

$33, assuming all other variables remain constant.

(d) Liquidity risk

The Corporation monitors its liquidity risk to ensure access to sufficient funds to meet operational

and investing requirements. The Corporation’s objective is to ensure that sufficient liquidity is on

hand to meet obligations as they fall due while minimizing interest exposure. The Corporation has

access to $6,500 in credit facilities and monitors cash balances daily to ensure that a sufficient

level of liquidity is on hand to meet financial commitments as they become due. As at December

31, 2016, $2,189 had been drawn under the Corporation’s credit facilities.

The Corporation also has a bilateral facility for $2,900 (the “LC” facility) for the purpose of issuing

letters of credit mainly to support the prudential requirements of the IESO, of which none has

been drawn and posted with the IESO during 2016 or 2015.

The majority of accounts payable, as reported on the statement of financial position, are due

within 30 days. Customer deposits are due on demand. Scheduled repayments associated with

long-term debt is described within note 12.


(33)

(e) Capital disclosures

The main objectives of the Corporation, when managing capital, are to ensure ongoing access to

funding to maintain and improve the electricity distribution system, compliance with covenants

related to its credit facilities, prudent management of its capital structure with regard for

recoveries of financing charges permitted by the OEB on its regulated electricity distribution

business, and to deliver the appropriate financial returns.

The Corporation’s definition of capital includes shareholder’s equity and long-term debt. As at

December 31, 2016, shareholder’s equity amounts to $36,099 (December 31, 2015 - $34,094)

and long-term debt amounts to $23,555 (December 31, 2015 - $23,438).

Documents

Essex Power Corporation · 2017-08-23 · 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Essex