June 17, 2019 Special Council as Shareholder of GMHI Agenda · 2019-06-19 · accomplishments and...

Monday, June 17, 2019 City of Guelph Council as Shareholder of GMHI Agenda Page 1 of 2

Special City Council as Shareholder of Guelph Municipal Holdings Inc. Annual General Meeting Agenda

Monday, June 17, 2019 – 6:00 p.m. Council Chambers, Guelph City Hall, 1 Carden Street Please turn off or place on non-audible all electronic devices during the meeting. Please note that an electronic version of this agenda is available on guelph.ca/agendas. Guelph City Council and Committee of the Whole meetings are streamed live on guelph.ca/live. Open Meeting – 6:00 p.m. Disclosure of Pecuniary Interest and General Nature Thereof

Authority to move into closed meeting That the Council of the City of Guelph now hold a meeting that is closed to the public, pursuant to the Municipal Act, to consider: a proposed or pending acquisition or disposition of land by the municipality; and advice that is subject to solicitor-client privilege, including communications necessary for that purpose. Confirmation of Minutes -June 18, 2018 Closed Meeting of GMHI

GMHI-2019-01 Guelph Municipal Holdings Inc. - District Energy Assets - Update

Section 239 (2)(i) of the Municipal Act related to a trade secret or scientific, technical, commercial, financial or labour relations information, supplied in confidence to the municipality or local board, which, if disclosed, could reasonably be expected to prejudice significantly the competitive position or interfere significantly with the contractual or other negotiations of a person, group of persons, or organization;

Open Meeting – 6:30 p.m. Closed Meeting Summary

Monday, June 17, 2019 City of Guelph Council as Shareholder of GMHI Agenda Page 2 of 2

Confirmation of Minutes: That the minutes of the open Council as Shareholder of Guelph Municipal Holdings Inc. held June 18, 2018 be confirmed as recorded and without being read. Presentation: Trevor Lee, Chief Executive Officer, Guelph Municipal Holdings Inc. Max Cananzi, President, Alectra Utilities Inc. Jane Armstrong, Director (Guelph), Alectra Board of Directors GMHI-2019-02 2018 GMHI Audited Financial Statements and

Report from KPMG Recommendation: 1. That the Audit Findings report of the auditor, KPMG LLP, in respect of the 2018

financial statements of Guelph Municipal Holdings Inc. (consolidated) and its subsidiaries be received.

2. That the 2018 financial statements for Guelph Municipal Holdings Inc. be received.

GMHI-2019-03 Appointment of KPMG LLP as Auditors for 2019

Recommendation:

That KPMG LLP be appointed as auditor for Guelph Municipal Holdings Inc. for its 2019 fiscal year.

Special Resolutions

Adjournment

June 18, 2018 Guelph City Council as Shareholder of GMHI Meeting Page 1

Minutes of Guelph City Council as Shareholder of Guelph Municipal Holdings Inc. (GMHI)

Held in the Council Chambers, Guelph City Hall on Monday, June 18, 2018 at 6:01 p.m.

Attendance Council: Mayor C. Guthrie Councillor J. Hofland

Councillor P. Allt Councillor M. MacKinnon Councillor B. Bell Councillor L. Piper Councillor C. Billings Councillor M. Salisbury Councillor C. Downer Councillor A. Van Hellemond Councillor D. Gibson Councillor K. Wettstein Councillor J. Gordon

Staff: Mr. D. Thomson, Chief Administrative Officer Mr. T. Lee, Deputy CAO of Corporate Services

Mr. S. Stewart, Deputy CAO of Infrastructure, Development and Enterprise Mr. C. Cooper, City Solicitor/General Manager, Legal and Realty Services Mr. S. O’Brien, City Clerk Ms. D. Black, Council Committee Coordinator

Also Present: Mr. P. Sardana, Chief Executive Officer of Envida and GHESI/Chief Financial

Officer of GMHI Ms. J. Armstrong, Chair of GHESI Call to Order (6:01 p.m.)

Mayor Guthrie called the meeting to order. Authority to Resolve into a Closed Meeting of Council 1. Moved by Councillor Van Hellemond

Seconded by Councillor Bell That the Council of the City of Guelph now hold a meeting that is closed to the public, pursuant to Section 239 (2) (c) and (f) of the Municipal Act with respect to a proposed or pending acquisition or disposition of land by the municipality; and advice that is subject to solicitor-client privilege, including communications necessary for that purpose.

Voting In Favour: Mayor Guthrie, Councillors Allt, Bell, Downer, Gordon, Hofland, MacKinnon, Salisbury, Van Hellemond and Wettstein (10) Voting Against: (0)

Carried Councillors Billings, Gibson and Piper arrived at the meeting at 6:03 p.m. Closed Meeting (6:04 p.m.)


Disclosure of Pecuniary Interest and General Nature Thereof There were no disclosures. The following matters were considered: Confirmation of Minutes for the closed Council as Shareholder of Guelph Municipal Holdings Inc. meeting of June 28, 2017. GMHI-2018.02 District Energy Assets – Update Rise and recess from Closed Meeting (6:40 p.m.) Attendance Council: Mayor C. Guthrie Councillor J. Gordon

Councillor P. Allt Councillor J. Hofland Councillor B. Bell Councillor M. MacKinnon Councillor C. Billings Councillor L. Piper Councillor C. Downer Councillor A. Van Hellemond Councillor D. Gibson Councillor K. Wettstein

Absent: Councillor M. Salisbury Staff: Mr. D. Thomson, Chief Administrative Officer Mr. T. Lee, Deputy CAO, Corporate Services

Mr. S. Stewart, Deputy CAO, Infrastructure, Development and Enterprise Mr. C. Cooper, City Solicitor/General Manager, Legal, Realty and Risk Services Mr. P. Cartwright, General Manager, Guelph Innovation District Ms. B. Swartzentruber, Executive Director, Strategy Innovation and

Intergovernmental Services Ms. G. van den Burg, Project Coordinator, Guelph Municipal Holdings Inc. Ms. D. Evans, General Manager, Culture Tourism and Community Investment Mr. S. O’Brien, City Clerk Ms. D. Black, Council Committee Coordinator

Also Present: Mr. P. Sardana, Chief Executive Officer, GHESI and Envida /Chief Financial

Officer, GMHI Ms. J. Armstrong, Chair, GHESI Board of Directors Open Meeting (6:49 p.m.) Mayor Guthrie called the meeting to order.


Closed Meeting Summary Mayor Guthrie spoke regarding the matters addressed in closed and identified the following:

Confirmation of Minutes: Council as Shareholder of GMHI, Closed Session – June 28, 2018 These minutes were adopted by Council.

GMHI-2018.02 District Energy Assets – Update

Staff were given direction on this matter.

Disclosure of Pecuniary Interest and General Nature Thereof There were no disclosures. Confirmation of Minutes

2. Moved by Councillor Piper

Seconded by Councillor Van Hellemond

That the minutes of the Council as Shareholder of GMHI AGM Meeting held June 28, 2017 be confirmed as recorded and without being read.

Voting in Favour: Mayor Guthrie, Councillors Allt, Bell, Billings, Downer, Gibson, Gordon, Hofland, MacKinnon, Piper, Van Hellemond and Wettstein (12) Voting Against: (0)

Carried Items for Discussion GMHI Report of Activities Presentation: Derrick Thomson, CEO, Guelph Municipal Holdings Inc. provided a summary of accomplishments and progress made in 2017.

GMHI-2018.03 Outstanding Governance Matters Related to Guelph

Hydro/Alectra Inc. Merger 3. Moved by Councillor Billings Seconded by Councillor Downer

1. That staff proceed with an application-based process for selecting a Guelph representative for the Alectra Inc. Board of Directors in accordance with the selection criteria in ATT-2 to Report GMHI-2018-03.

2. That staff report back to Council in closed session by Q1 2019 with a

recommended individual for appointment to the Alectra Inc. Board of Directors, at which time the name of the individual will be released to the public following approval by the Alectra Inc. Board of Directors.


3. That the Guelph Hydro Electric Systems Inc. Board of Directors be dissolved following the conclusion of all transactions related to the Guelph Hydro/ Alectra Inc. merger, anticipated in Q2 2019.

4. That the Strategies and Options Committee be formally dissolved. Voting in Favour: Mayor Guthrie, Councillors Allt, Bell, Billings, Downer, Gibson, Gordon, Hofland, MacKinnon, Piper, Van Hellemond and Wettstein (12) Voting Against: (0)

Carried GMHI-2018.04 GMHI Special and Long-term Dividends 4. Moved by Councillor Allt Seconded by Councillor Downer

That City Council, as Shareholder of Guelph Municipal Holdings Inc., (GMHI) direct GMHI to direct Guelph Hydro Electric Systems Inc. to declare and pay a one-time Special Dividend to its sole shareholder, GMHI, in the amount of $18,500,000 in accordance with Section 2.4 of the Merger Participation Agreement.


Carried Referral 5. Moved by Councillor Bell Seconded by Councillor Gibson

That the decision regarding the GMHI Special and Long-term Dividends be referred to the next term of Council.

Voting in Favour: Mayor Guthrie, Councillors Bell, Billings, Gibson, and Van Hellemond (5) Voting Against: Councillors Allt, Downer, Gordon, Hofland, MacKinnon, Piper and Wettstein (7)

Defeated Motion 6. Moved by Councillor Allt Seconded by Councillor Hofland

1. That the one-time, special GMHI dividend resulting from the merger with Alectra Inc. be allocated to City Reserves and Reserve Funds and programs as follows:


City Building Reserve Fund (159) – 45 per cent Efficiency, Innovation, and Opportunity Reserve Fund (351) – 45 per cent Community Investment Program– 10 per cent

2. That any future increase in the annual dividend received from Alectra Inc. by

way of GMHI be directed to the annual tax supported transfer to the City’s capital reserve funds in accordance with the Council-approved Capital Allocation Policy.

Amendment 7. Moved by Councillor Gibson Seconded by Councillor Bell

That the one-time, special GMHI dividend resulting from the merger with Alectra Inc. be allocated to City Reserves and Reserve Funds and programs as follows: City’s Infrastructure Reserve Fund – 100 per cent.

Voting in Favour: Mayor Guthrie, Councillors Bell, Billings, Gibson, and Van Hellemond (5) Voting Against: Councillors Allt, Downer, Gordon, Hofland, MacKinnon, Piper and Wettstein (7)

Defeated Main Motion 8. Moved by Councillor Allt Seconded by Councillor Hofland

1. That the one-time, special GMHI dividend resulting from the merger with Alectra Inc. be allocated to City Reserves and Reserve Funds and programs as follows: City Building Reserve Fund (159) – 45 per cent Efficiency, Innovation, and Opportunity Reserve Fund (351) – 45 per cent Community Investment Program– 10 per cent.

2. That any future increase in the annual dividend received from Alectra Inc. by

way of GMHI be directed to the annual tax supported transfer to the City’s capital reserve funds in accordance with the Council-approved Capital Allocation Policy.

It was requested that the clauses be voted on separately. Clause 1 9. Moved by Councillor Allt Seconded by Councillor Hofland


1. That the one-time, special GMHI dividend resulting from the merger with Alectra Inc. be allocated to City Reserves and Reserve Funds and programs as follows: City Building Reserve Fund (159) – 45 per cent Efficiency, Innovation, and Opportunity Reserve Fund (351) – 45 per cent Community Investment Program– 10 per cent

Voting in Favour: Mayor Guthrie, Councillors Allt, Downer, Gordon, Hofland, MacKinnon, Piper and Wettstein (8) Voting Against: Councillors Bell, Billings, Gibson, and Van Hellemond (4)

Carried Clause 2 10. Moved by Councillor Allt Seconded by Councillor Hofland

2. That any future increase in the annual dividend received from Alectra Inc. by way of GMHI be directed to the annual tax supported transfer to the City’s capital reserve funds in accordance with the Council-approved Capital Allocation Policy.


Carried Envida Report of Activities Presentation: Pankaj Sardana, CFO, GMHI GHESI Report of Activities Presentation: Jane Armstrong, Chair, GHESI Board of Directors provided introductory remarks. Pankaj Sardana, CFO, GMHI provided highlights of the GHESI report of activities. The Mayor also shared information from Alectra’s Annual General Meeting. GMHI-2018.05 2017 Audited Financial Statements and Notes 11. Moved by Councillor Piper Seconded by Councillor MacKinnon

1. That the Audit Findings Report of the auditor, KPMG LLP, in respect of the 2017 financial statements for GMHI (consolidated) and its subsidiaries be received.

2. That the 2017 financial statements for GMHI (both consolidated and non-

consolidated) and its subsidiaries be received;



Carried GMHI-2018.06 Appointment of KPMG LLP as Auditors for 2018

12. Moved by Councillor Van Hellemond Seconded by Councillor Downer

That KPMG LLP be appointed as auditor for GMHI and its subsidiaries for 2018.


Carried GMHI-2018.07 2018 Appointment/Re-appointment of Director(s) 13. Moved by Councillor Gibson Seconded by Councillor Van Hellemond

That Derrick Thomson be reappointed as the director of GMHI for a one-year term ending at the AGM to be held in June 2019.


Carried Derrick Thomson thanked staff and the GMHI board members for their hard work and progress made in 2017. Councillor Wettstein thanked Jane Armstrong for her efforts and hard work, especially during the transition phase. Mayor Guthrie also thanked everyone involved. Adjournment (8:26 p.m.)

14. Moved by Councillor Bell

Seconded by Councillor Piper

That the meeting be adjourned. Carried


Minutes to be confirmed at the Council as Shareholder of GMHI AGM to be held in June, 2019.

_______________________________ Mayor Guthrie

___________________________ Stephen O’Brien - City Clerk

GMHI Shareholder MeetingJune 17, 2019

2

GMHI Director Opening Remarks

Order of Business

GMHI/GMHI Development Corporation

Rise and Report on GMHI‐2019‐01

Report on Activities

• Annual Report

• Next Steps

Alectra Report on Activities

2018 GMHI Consolidated Audited Financial Statements

Appointment of the Auditor

3

GMHI Report on ActivitiesAnnual Report

A Year in Review ‐ Accomplishments

• Pre‐merger Amalgamated Envida with GHESI on July 1, 2018 Selection of Guelph representative to the Alectra Board of Directors

Decommissioning of Hanlon Creek Business Park District Energy Node almost complete

Alectra Inc. is assisting with the conversion of the remaining contracts by continuing to operate the systems until January 1, 2021

4

GMHI Report on ActivitiesAnnual Report

A Year in Review ‐ Accomplishments

• Post‐merger Options for decommissioning the Downtown District Node remain under

review GMHI received $18.5 million upon amalgamation, of which $12‐$15 million

is anticipated to flow through to the City as a special dividend Annual dividend from Alectra estimated to be $3.6 million of which

approximately $2.9 million would be passed to the City for 2019 City of Guelph and the community received $30K from AlectraCares

Sponsorship program and dedicated funds to:o Innovation Challenge – Global Capital 2019: Capital Exchangeo Energize Guelph: Reusable Water Bottle Vending Machineso Energize Guelph: Park Activation Stationso My World, My Choice Mentorship program

• Next Steps GMHI/DevCo Amalgamation and Governance Structure

• Pre-Merger Activities- MADDS application filed with OEB in March, 2018- Joint Guelph/Alectra Integration Teams formed in May, 2018

• 10 Team formed covering all aspects of the Corporation: Operations, Customer Service, IT, Finance….

- Integration teams successfully develop Day 1 readiness plans in July, 2018

- MADDs application approved in October, 2018- Final organizational structure for Guelph Centre communicated in

November, 2018- Guelph Centre Leadership appointments begin in December and in

place early in the new year- $3 million in annual dividends paid to GMHI in respect of 2018


• Post-Merger Activities- GMHI receives $18.5 million one-time special dividend on January

1, 2019 - GHESI Board of Directors dissolved on merger close January 1,

2019- Guelph representative appointed on Alectra Board on

January 2, 2019• Jane Armstrong, former Board Chair of GHESI appointed

- Day 1 readiness plans a success – merger closes without incident

- All employees on Alectra IT network- 1st Alectra Town Hall meeting in Guelph held in January - a big

success, employees shown a welcome video created by Alectraemployees, branded clothing handed out

- Produced special Guelph edition of employee magazine, alectraUS

- GHESI 2018 Audited Financial Statements approved by AlectraUtilities Board April, 2019



• Post-Merger Activities (cont’d)- GRE&T Centre launched in Guelph

• Alectra announced inaugural GRE&T Centre Advisory Committee on May 28, 2019• Advisory Committee held kick-off meeting on May 31, 2019• Pilot projects and community engagement activities initiated• Initial team mobilized

- Achieved “Caring Company” designation from Imagine Canada for corporate giving program – first utility in Ontario

- Launched alectraCARES Employee Volunteer Program- City of Guelph community receives $30,000 from alectraCARES

sponsorship program

Questions and vote

Page 1 of 1

Staff

Report

To City Council as Shareholders of Guelph Municipal Holding

Inc.

Date Monday, June 17, 2019

Subject 2018 GMHI Audited Financial Statements and Report from

KPMG

Report Number GMHI-2019-02

Recommendation

1. That the Audit Findings Report of the auditor, KPMG LLP, in respect of the 2018

financial statements for GMHI (consolidated) and its subsidiaries be received.

2. That the 2018 Consolidated Financial Statements for GMHI be received.

Attachments

Attachment 1 - GMHI Audit Findings Report

Attachment 2 - GMHI Audited Financial Statements

Trevor Lee

Chief Financial Officer

Guelph Municipal Holdings Inc.

519-822-1260 ext. 2281

[email protected]

-

Guelph Municipal Holdings Inc. Audit Findings Report for the year ended December 31, 2018

Prepared May 17, 2019 for the Board Meet ing

kpmg.ca/audi t

stemple

Typewritten Text

GMHI-2019-02 Attachment - 1

Table of contents

EXECUTIVE SUMMARY 1

CRITICAL ACCOUNTING ESTIMATES 7

TECHNOLOGY IN THE AUDIT 8

SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES 9

SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES 10

FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE 11

ADJUSTMENTS AND DIFFERENCES 12

APPENDICES 13

APPENDIX 1: REQUIRED COMMUNICATIONS 14

APPENDIX 2: AUDIT QUALITY AND RISK MANAGEMENT 15

The contacts at KPMG in connection with this report are:

Matthew Betik Lead Audit Engagement Partner Tel: 519-747-8245 [email protected] Dale Percival Audit Manager Tel: 519-747-8398 [email protected] Tony Italiano Tel: 905-523-2227 [email protected]

KPMG Audit Findings Report | 1

Executive summary

Purpose of this report*

The purpose of this Audit Findings Report is to assist you, as a member of the Board, in your review of the results of our audit of the financial statements of Guelph Municipal Holdings Inc. as at and for the year ended December 31, 2018.

Finalizing the audit

As of May 17, 2019, we have completed the audit of the financial statements, with the exception of certain remaining procedures, which include amongst others:

Receipt of signed engagement letter Completing our final tie in of the financial statements and note disclosures Receiving the signed management representation letter Completing our discussions with the Board of Directors Obtaining evidence of the Board’s approval of the financial statements

We will update the audit committee, and not solely the Chair (as required by professional standards), on significant matters, if any, arising from the completion of the audit, including the completion of the above procedures. Our auditors’ report will be dated upon the completion of any remaining procedures.

*This Audit Findings Report should not be used for any other purpose or by anyone other than the Audit, Committee and Board of Directors. KPMG shall have no responsibility or liability for loss or damages or claims, if any, to or by any third party as this Audit Findings Report has not been prepared for, and is not intended for, and should not be used by, any third party or for any other purpose.


Executive summary

Materiality

Materiality has been determined based on total assets. We have determined materiality to be $2,700,000.

See page 4.

Audit risks and results

Our audit is risk-focused. In planning of our audit, we identified a number of financial reporting risks, and other areas of focus. These have been addressed during our audit.

See pages 5-6

Critical accounting estimates

Overall, we are satisfied with the reasonableness of critical accounting estimates.

The critical areas of estimates relate to: employee future benefits, useful lives of property, plant and equipment, and regulatory assets and liabilities.

See page 7

Significant accounting policies and practices

During the year, the Company adopted IFRS 15 and IFRS 9. KPMG noted no issues with the adoption, and noted no material impacts from the new standards on the financial statements of Guelph Municipal Holdings Inc.

See pages 9-10.

Adjustments and differences

See page 12 and Appendix 1.

We did not identify differences that remain uncorrected.


Executive summary

Control and other observations

We did not identify any control deficiencies that we determined to be significant deficiencies in ICFR.

Independence

We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the financial statements in Canada.


Materiality

Materiality determination Comments Amount

Benchmark Based on opening total assets. This benchmark is consistent with the prior year. $223,764,000

Materiality Determined to plan and perform the audit and to evaluate the effects of identified misstatements on the audit and of any uncorrected misstatements on the financial statements. The corresponding amount for the prior year’s audit was $2,700,000.

$2,700,000

% of Benchmark The corresponding percentage for the prior year’s audit was 1.18%. 1.21%

Audit Misstatement Posting Threshold (AMPT) Threshold used to accumulate misstatements identified during the audit. The corresponding amount for the previous year’s audit was $135,000.

Different threshold used to accumulate reclassification misstatements.

$135,000

$360,000 for reclassification

Materiality represents the level at which we think misstatements will reasonably influence users of the financial statements. It considers both quantitative and qualitative factors.

To respond to aggregation risk, we design our procedures to detect misstatements at a lower level of materiality.

We report to the Audit Committee:

Corrected audit misstatements

Uncorrected audit misstatements


Audit risks and results

Professional requirements Why is it significant?

Fraud risk from revenue recognition This is a presumed fraud risk. However, the audit team has rebutted this presumption due to the majority of revenues being driven directly from the purchases of hydro with little judgment over revenue recognition required by management.

Fraud risk from management override of controls. This is a presumed fraud risk. We have not identified any specific additional risks of management override relating to this audit.

Our response and significant findings

Our audit methodology incorporated the required procedures in professional standards to address the risk of management

override of controls. We performed testing of unusual journal entries and adjusting entries, performed retrospective review over significant estimates,

and evaluated significant unusual transactions. Further, we evaluated the entity’s accounting policy choices to ensure they not include possible bias in management’s judgements.

Nothing significant was identified to report.


Audit risks and results We identified other areas of focus for our audit. Significant findings from the audit regarding other areas of focus are as follows:

Other areas of

focus Our response and significant findings

Property, plant and equipment

Identified and evaluated the operating effectiveness of internal controls over capitalization of costs.

Tested a sample of capital additions.

Reviewed and evaluated the process for allocating overhead to constructed assets.

Performed calculations of depreciation expense.

Employee future benefits

Communicated with management’s actuarial specialists. We used the work of RSM Canada in our audit of the accounts and disclosures.

Assessed the reasonableness of underlying data and assumptions used.

Revenue and unbilled revenue

Performed an analysis of revenue based on approved/market rates and power sold/purchased. Specifically for unbilled revenue, performed analysis based on billing cycles and rates and power sold in later months of the year (i.e. November and December 2018).

Compared billings in subsequent months (i.e. January and February 2019) to substantiate the unbilled amounts.

Envida Community Energy Inc.

During the year Envida was amalgamated with Guelph Hydro Electric Systems Inc. (GHESI). As this was a transaction within the consolidated group, there was no impact on the consolidated financial statements.

Subsequent Event Effective January 1, 2019, GHESI was acquired by a third party, Alectra. As this transaction occurred outside of the fiscal year, there is no impact on the recognition, measurement or presentation of assets and liabilities.

Disclosure has been made within the notes to the financial statements of the transaction.


Critical accounting estimates

Under IFRS (IAS 1.125), management is required to disclose information in the financial statements about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to carrying amounts of assets and liabilities within the next financial year. Generally, these are considered to be “critical accounting estimates.”

We have summarized our assessment of the subjective areas.

Asset / liability Balance ($’000s) KPMG comment

Employee future benefits

$10,626

Estimates are made for the discount rate and other actuarial assumptions. Management has sought the advice of its actuaries in determining these amounts. There were no indicators of management bias noted.

Estimated useful lives of property, plant, and equipment

The estimate of remaining service life has a direct impact on annual depreciation expense. Management has used rates as determined by asset study. There were no indicators of management bias noted.


Technology in the audit

We have utilized technology to enhance the quality and effectiveness of the audit.

Areas of the audit where Technology and D&A routines were used

Tool Our results and insights

Journal Entry Analysis KPMG utilized IDEA to evaluate the completeness of the journal entry population through a rollforward of all accounts. We further utilized CAATs to analyze journal entries and apply criteria to identify potential high risk journal entries for further testing Completeness of the detailed information provided was verified. Further, CAATs were used to identify any entries posted by inappropriate/unauthorized users and entries with unexpected account combinations. Evidence was obtained that these entries were appropriate.



Initial selections

The following new significant accounting policies and practices were selected and applied during the period:

IFRS 9 – Financial Instruments

IFRS 15 – Revenue from contracts with customers

Changes

Changes to significant accounting policies and practices and the impact on the financial statements are disclosed in Note 3 to the financial statements.

We would like to discuss the following matters:

IFRS 9

The Company determined there were no material differences to the measurement of its financial instruments on adoption of IFRS 9, and accordingly recorded no adjustment to opening equity as a result.

IFRS 9 has combined the classification and measurement models under IAS 39 into a single combined model where financial assets are classified into one of three primary categories: amortized cost; fair value through other comprehensive income (“FVOCI”) or fair value through profit and loss (“FVTPL”). The classifications applied by management is disclosed in note 3 to the financial statements. The accounting under each of these categories is the same as IAS 39 except that under IAS 39 changes in the fair value of investments in equity instruments measured at FVOCI always affect profit and loss when the asset is impaired or derecognized, and loans and receivables measured at FVOCI can impact profit and loss differently than those measured at Amortized Cost.

IFRS 9 introduced a single expected credit loss impairment model that applies to all financial instruments in scope. The ELC model differs from the IAS 39 incurred loss model in that a loss event need not occur before an impairment loss is recognized. Typically, GHESI exhibits a high collection rate on receivables. Management has recorded an allowance of $185,000 and have concluded the adoption of the new expected credit losses model will not materially impact this allowance.

The accounting policy and practice is considered appropriate.



Changes

IFRS 15 The standard was adopted using the full retrospective method, without practical expedients. Management has concluded that the adoption did not result in a significant difference between the point of risk and rewards transfer for the sale of hydro utility

services under IAS 18, and the point of transfer of control under IFRS 15, and that the estimate of variable considerations remains consistent under both standards. As a result, no transitional adjustments have been recorded.

As part of their analysis, it was determined that contributions in aid of construction received from customers are within the scope of IFRS 15. This excludes amounts received from developers and municipalities given they are not considered hydro utility services customers. o Under the existing standard, contributions are recognized into revenue over the term of the asset life on a straight-line basis after the asset has been

constructed. IFRS 15 instead requires revenue to be recognized over the term of the contract with the customer, given they would simultaneously receive and consume the benefits of the ongoing connection to the company’s electricity distribution system over this term.

o The company’s contracts with its customers do not have an end date as they will continue as long as the customer wants the service. In order to determine an amortization period, the company analyzed the customer contributions received from its commercial customers for the last several years. The average annual contributions were determined to be low dollar value, the company proposes to continue to recognize the revenue over the life of the related asset resulting in no difference between IFRS 15 and the current revenue recognition practice.

Management has amended the accounting policy note to include a more detailed description as to how the performance obligations are satisfied and why the method used provides a faithful depiction of the transfer of goods or services.

As required under IFRS 15.113, revenue from contracts should be presented separately from other sources of revenue. Currently, revenue is presented on several lines on the Statement of Comprehensive Income and is disaggregated further, by type, within the notes to the financial statements. Since the company has an insignificant amount of revenue from other sources, the current level of disaggregation is appropriate under IFRS 15. Should this change, then further disaggregation would be required to meet the requirements of the standard. However, to ensure compliance with IFRS 15.114, management has added additional disclosure in the financial statements to disaggregate revenue by customer type.

The accounting policy and practice is considered appropriate.


Financial statement presentation and disclosure

The presentation and disclosure of the financial statements are, in all material respects, in accordance with the Company’s relevant financial reporting framework. Misstatements, including omissions, if any, related to disclosure or presentation items are in the management representation letter. We also highlight the following:

Form, arrangement, and content of the financial statements

Appropriate

Application of accounting pronouncements issued but not yet effective

No concerns at this time regarding future implementation.

Effective for the period beginning January 1, 2019 will be the following standards: − IFRS 16 – Leases - In January 2016, the final version of IFRS 16 “Leases” was released. The provisions of this standard, requiring companies to bring most leases on-balance sheet, is effective for years beginning or after January 1, 2019. The Company has completed its assessment of the quantitative implications arising from the application of this standard and determined the impact to be $17,000.


Adjustments and differences

Adjustments and differences identified during the audit have been categorized as “Corrected adjustments” or “Uncorrected differences”. These include disclosure adjustments and differences.

Corrected adjustments

The management representation letter includes all adjustments identified as a result of the audit, communicated to management and subsequently corrected in the financial statements.

Corrected differences identified:

Dr. Current income tax expense $59,161

Dr. Deferred income tax expense $389,000

Cr. Income tax payable $59,161

Cr. Deferred income taxes $389,000 To record tax adjustments

Uncorrected differences

We did not identify differences that remain uncorrected.

Appendices

Appendix 1: Required communications

Appendix 2: Audit Quality and Risk Management


Appendix 1: Required communications

In accordance with professional standards, there are a number of communications that are required during the course of and upon completion of our audit. These include:

Auditors’ Report Management representation letter

The conclusion of our audit is set out in our draft auditors’ report as attached

In accordance with professional standards, copies of the management representation letter are provided to the Audit Committee. The management representation letter is attached.

CPAB Audit Quality Insights Report (October 2018) (formerly the “Big Four Firm Public Report”)


KPMGAudit quality

and riskmanagement

Independence,integrity, ethicsand objectivity

Personnelmanagement

Acceptance &continuance of

clients /engagements

Engagementperformance

standards

Independentmonitoring

Other riskmanagement

quality controls

Appendix 2: Audit Quality and Risk Management

KPMG maintains a system of quality control designed to reflect our drive and determination to deliver independent, unbiased advice and opinions, and also meet the requirements of Canadian professional standards. Quality control is fundamental to our business and is the responsibility of every partner and employee. The following diagram summarizes the six key elements of our quality control system.

Visit our Audit Quality Resources page for more information including access to our most recent Audit Quality Report.

Other controls include:

Before the firm issues its audit report, the Engagement Quality Control Reviewer reviews the appropriateness of key elements of publicly listed client audits

Technical department and specialist resources provide real-time support to audit teams in the field

We conduct regular reviews of engagements and partners. Review teams are independent and the work of every audit partner is reviewed at least once every three years.

We have policies and guidance to ensure that work performed by engagement personnel meets applicable professional standards, regulatory requirements and the firm’s standards of quality.

All KPMG partners and staff are required to act with integrity and objectivity and comply with applicable laws, regulations and professional standards at all times.

We do not offer services that would impair our independence.

The processes we employ to help retain and develop people include:

Assignment based on skills and experience

Rotation of partners Performance evaluation Development and training Appropriate supervision and coaching

We have policies and procedures for deciding whether to accept or continue a client relationship or to perform a specific engagement for that client.

Existing audit relationships are reviewed annually and evaluated to identify instances where we should discontinue our professional association with the client.

kpmg.ca/audit

KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”).

KPMG member firms around the world have 174,000 professionals, in 155 countries.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.

© 2018 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with

KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Consolidated Financial Statements of

GUELPH MUNICIPAL HOLDINGS INC. Year ended December 31, 2018 (Expressed in thousands of dollars)

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Typewritten Text

GMHI-2019-02 Attachment - 2

KPMG LLP 115 King Street South 2nd Floor Waterloo ON N2J 5A3 Canada Tel 519-747-8800 Fax 519-747-8830

INDEPENDENT AUDITORS’ REPORT

To the Shareholder of Guelph Municipal Holdings Inc.

Opinion We have audited the consolidated financial statements of Guelph Municipal Holdings Inc. (the Entity), which comprise:

the consolidated balance sheet as at December 31, 2018

the consolidated statement of comprehensive income for the year then ended

the consolidated statement of changes in equity for the year then ended

the consolidated statement of cash flows for the year then ended

and notes to the consolidated financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2018, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.

We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

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In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Entity‘s financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit 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.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represents the underlying transactions and events in a manner that achieves fair presentation.

Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

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Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

Chartered Professional Accountants, Licensed Public Accountants

Waterloo, Canada May 28, 2019

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GUELPH MUNICIPAL HOLDINGS INC. Consolidated Balance Sheet December 31, 2018, with comparative information for 2017 (Expressed in thousands of dollars) 2018 2017 (Restated Note 27) Assets Current assets:

Cash $ 26,905 $ 21,576 Accounts receivable (note 22) 14,227 14,505 Unbilled revenue 15,885 14,487 Income taxes recoverable - 3,058 Inventory (note 6) 1,918 2,081 Assets held-for-distribution (note 7) - 306 Other current assets 490 728 Total current assets 59,425 56,741

Property, plant and equipment (note 8) 171,850 166,268 Intangible assets (note 9) 352 544 Deferred income taxes (note 10) 6,020 7,199 Total non-current assets 178,222 174,011 Total assets $ 237,647 $ 230,752

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GUELPH MUNICIPAL HOLDINGS INC. Consolidated Balance Sheet December 31, 2018, with comparative information for 2017 (Expressed in thousands of dollars) 2018 2017 (Restated Note 27) Liabilities and Shareholder’s Equity Current liabilities:

Accounts payable and accrued liabilities $ 22,551 $ 21,822 Income taxes payable 219 - Provision for liabilities and charges – current portion (note 11) - 50 Deferred credits - budget billing 1,235 1,951 Customer deposits - current portion (note 12) 2,837 3,188 Total current liabilities 26,842 27,011 Provision for liabilities and charges – long-term portion (note 11) - 456 Senior unsecured debentures (note 15) 94,360 94,321 Employee future benefits (note 14) 10,626 11,374 Customer deposits - long-term portion (note 12) 6,424 6,418 Deferred revenue 27,273 23,113 Total non-current liabilities 138,683 135,682

Total liabilities 165,525 162,693

Shareholder’s equity:

Share capital (note 21) 67,530 67,530 Accumulated other comprehensive loss (329) (1,114) Retained earnings 4,921 1,643 72,122 68,059

Commitments and contingencies (note 20) Guarantees (note 23) Total liabilities and shareholder’s equity $ 237,647 $ 230,752 The accompanying notes are an integral part of these consolidated financial statements. On behalf of the Board:

Director Director

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GUELPH MUNICIPAL HOLDINGS INC. Consolidated Statement of Comprehensive Income (Loss) Year ended December 31, 2018, with comparative information for 2017 (Expressed in thousands of dollars) 2018 2017 Revenue:

Electricity sales $ 234,516 $ 220,389 Other services 851 884 235,367 221,273

Cost of electricity sold 202,500 200,284 32,867 20,989 Other operating revenue (note 16) 4,530 3,733 Net operating revenue 37,397 24,722 Expenses:

Operations and maintenance 14,319 13,972 General and administrative 11,866 11,492 Other provision expense (note 11) (506) (34) Impairment of property, plant and equipment - 128 25,679 25,558

Earnings (loss) before the undernoted 11,718 (836) Financial and other expenses (income):

Interest on notes payable, less amounts capitalized 4,575 4,580 Interest income (493) (310) Other 309 125 4,391 4,395

Earnings (loss) before undernoted 7,327 (5,231) Income tax expense (recovery): (note 10)

Provision for payments in lieu of corporate taxes 970 (1,437) Deferred income taxes 1,179 (5,472) 2,149 (6,909)

Net income from operations for the year 5,178 1,678 Other comprehensive income: Actuarial gains (losses) on employee future benefit plans 785 (559) Total comprehensive income for the year $ 5,963 $ 1,119 The accompanying notes are an integral part of these consolidated financial statements.

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GUELPH MUNICIPAL HOLDINGS INC. Consolidated Statement of Changes in Equity (In thousands of Canadian dollars) Year ended December 31, 2018, with comparative information for 2017 Accumulated other Share Comprehensive Retained capital income (loss) earnings Total Balance at January 1,2017 $ 67,530 $ (555) $ 1,865 $ 68,840 Restated (note 26) Dividends - - (1,900) (1,900) Total comprehensive income (loss) for the year - (559) 1,678 1,119 Balance at December 31, 2017 $ 67,530 $ (1,114) $ 1,643 $ 68,059 Restated (note 26) Dividends - - (1,900) (1,900) Total comprehensive income for the year - 785 5,178 5,963 Balance, December 31, 2018 $ 67,530 $ (329) $ 4,921 $ 72,122 The accompanying notes are an integral part of these consolidated financial statements.

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GUELPH MUNICIPAL HOLDINGS INC. Consolidated Statement of Cash Flows Year ended December 31, 2018, with comparative information for 2017 (Expressed in thousands of dollars) 2018 2017 Cash flows from operating activities:

Total comprehensive income for the year $ 5,963 $ 1,119 Adjustments for:

Income tax expense (recovery) 2,432 (7,094) Depreciation and amortization 7,594 7,422 Impairment of property, plant and equipment - 128 Amortization of deferred revenue (778) (664) Interest income (493) (310) Interest expense 4,884 4,705 Gain on disposal of property, plant and equipment (122) (17)

19,480 5,289 Change in:

Accounts receivables 146 8,036 Unbilled revenue (1,398) 1,918 Inventory 163 (183) Other current assets 238 (58) Accounts payable and accrued liabilities 861 (4,888) Provision for liabilities and charges (506) (34) Deferred credits - budget billing (716) 1,045 Employee future benefits (748) 1,077

(1,960) 6,913 Income taxes refunded 2,024 800 Net cash from operating activities 19,544 13,002

Cash flows from investing activities:

Purchase of property, plant and equipment (12,829) (13,336) Purchase of intangible assets (33) (106) Proceeds from disposal of property, plant and equipment 427 17 (12,435) (13,425)

Cash flows from financing activities:

Contributions in aid of construction 4,938 1,305 Net change in customer deposits (345) 1,352 Dividends paid (1,900) (1,900) Interest paid (4,966) (4,783) Interest received 493 310 (1,780) (3,716)

Increase (decrease) in cash 5,329 (4,139) Cash, beginning of year 21,576 25,715 Cash, end of year $ 26,905 $ 21,576 The accompanying notes are an integral part of these consolidated financial statements.

GUELPH MUNICIPAL HOLDINGS INC. Notes to Consolidated Financial Statements Year ended December 31, 2018 (Expressed in thousands of dollars)

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1. Reporting entity:

Guelph Municipal Holdings Inc. (the “Corporation” or “GMHI”) is wholly-owned by the City of Guelph. GMHI was incorporated on August 16, 2011 under the laws of the Province of Ontario, Canada. The address of the Corporation’s registered office is 395 Southgate Drive, Guelph, Ontario.

The principal activity of the Corporation, via its wholly-owned subsidiary, Guelph Hydro Electric Systems Inc. (“GHESI”), is to distribute electricity to the residents and businesses in the City of Guelph and the Village of Rockwood under a license issued by the Ontario Energy Board (“OEB”). GHESI is regulated by the OEB and adjustments to GHESI’s distribution rates require OEB approval.

On July 1, 2018, Envida Community Energy Inc. (“Envida”) and GHESI were amalgamated. Prior to the amalgamation, Envida transferred its district energy assets that distribute thermal energy to a sister company, GMHI Development Corporation. As a result of this amalgamation, and the Corporation’s ownership of GMHI Development Corporation, the Corporation continued to own generation assets that produce electricity and district energy assets that distribute thermal energy.

These financial statements are presented on a consolidated basis and include the following subsidiaries: Guelph Hydro Electric Systems Inc. and GMHI Development Corporation. Hereafter, for purposes of these notes, unless specifically referenced, any and all references to rate regulation or regulatory activities of the Corporation imply the activities of the Corporation’s regulated subsidiary, GHESI.

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 adopted by the International Accounting Standards Board ("IASB") and interpretations as issued by the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB.

(b) Approval of the financial statements:

The financial statements were approved by the Board of Directors on May 28, 2019.

(c) Basis of measurement:

The financial statements have been prepared on the historical cost basis except for the following:

(i) Where held, financial instruments at fair value through profit or loss, including those held for trading, are measured at fair market value.

(ii) Contributed assets are initially measured at fair market value.

The methods used to measure fair values are discussed further in note 3 (b) and note 20.

GUELPH MUNICIPAL HOLDINGS INC. Notes to Consolidated Financial Statements, continued Year ended December 31, 2018 (Expressed in thousands of dollars)

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2. Basis of presentation (continued):

(d) 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.

(e) Use of estimates and judgments:

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 periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in these financial statements is included in the following notes:

(i) Note 22(a) – Receivables: allowance for impairment

(ii) Note 8 – Property, plant and equipment: impairment, useful lives and the identification of significant components of property, plant and equipment

(iii) Note 10 – Income taxes: utilization of tax losses

(iv) Note 14 – Employee future benefits: measurement of the defined benefit obligation

(v) Note 20 – Commitments and contingencies

(vi) Note 22 – Financial instruments and risk management: valuation of long-term debt.

(f) Rate regulation:

Effect of rate-setting regulations on the Corporation's activities and on these financial statements:

GHESI is regulated by the OEB, under the authority granted by the Ontario Energy Board Act (1988). Among other things, the OEB has the power and responsibility to approve or set rates for the transmission and distribution of electricity, to provide continued rate protection for rural and remote electricity consumers, and to ensure that distribution companies fulfill obligations to connect and service customers. In its capacity to approve or set rates, the OEB has the authority to specify regulatory accounting treatments that may differ from IFRS for enterprises operating in a non-rate regulated environment.


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2. Basis of presentation (continued):

On August 15, 2016, GHESI filed its 2017 electricity distribution rates application using the OEB’s 4th Generation IRM as the basis for its application. The OEB rendered its Decision on December 8, 2016 which approved a distribution rate increase of 1.6% for all customers.



The continuing restructuring of Ontario’s electricity industry and other regulatory developments, including current and possible future consultation between the OEB and interested stakeholders may affect the distribution rates that GHESI may charge and the costs that GHESI may recover, including the balance of its regulatory assets.

3. Changes in accounting policies:

(a) IFRS 15 Revenue from Contracts with Customers (“IFRS 15”)

The Corporation adopted IFRS 15 with a date of initial application on January 1, 2018. IFRS 15 replaces pre-existing revenue recognition guidance, including IAS 18 Revenue and IFRIC 18 Transfers of Assets from Customers. The scope of IFRS 15 excludes lease contracts and financial instruments.

IFRS 15 provides a five-step model that applies to contracts with customers and specifies that revenue is recognized at a point in time or over time, depending on when the entity has satisfied its performance obligation(s) to its customers. Where the Corporation has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the performance to date, the Corporation has elected to adopt the B16 practical expedient under IFRS 15. This practical expedient permits the recognition of revenue in an amount to which the Corporation has a "right to invoice". The right to invoice represents the fair value of the consideration received or receivable.

The Corporation is also required to determine the transaction price of each of its contracts with its customers. In making such determination, the Corporation assesses the impact of any variable consideration in the contract, due to factors such as, but not limited to: discounts or penalties; the existence of any significant financing component; and any non-cash consideration in the contract. The Corporation has determined that there are no variable considerations that will have a significant impact on the transaction price of the services provided.


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3. Changes in accounting policies (continued)

(a) IFRS 15 Revenue from Contract with Customers (“IFRS 15”) (continued)

Prior to the implementation of IFRS 15, contributions from customers and developers were initially recorded as deferred revenue when received and recognized as revenue on a straight-line basis over the useful life of the asset. The Corporation has assessed the impact of contributions from customers under IFRS 15 and has determined that there is no change to the existing accounting treatment. However, contributions from developers are not within the scope of IFRS 15, as they do not give rise to a contract with the customer. As such, the Corporation has developed an accounting policy for the recognition of cash contributions from developers as, currently, there is no specific guidance on accounting for these contributions. Refer to Note 3(a) for a description of such accounting policy.

The Corporation adopted IFRS 15 using the modified retrospective approach. The adoption of IFRS 15 resulted in no quantitative impact to the Balance Sheet and Statement of Comprehensive Income. Refer to Note 4(a) for details on the Corporation's accounting policies for revenue recognition.

(b) IFRS 9 Financial Instruments (“IFRS 9”)

The Corporation adopted IFRS 9 with a date of initial application on January 1, 2018. IFRS 9 replaced IAS 39 - Financial Instruments: Recognition and Measurement ("IAS 39"). The Corporation adopted IFRS 9 retrospectively. Despite the retrospective adoption of IFRS 9, the Corporation is not required, upon initial application, to restate comparative figures.

IFRS 9 covers three broad topics: Classification and Measurement; Impairment; and Hedging. Hedging is not applicable to the Corporation. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 Financial Instruments: Disclosures.

(i) Classification and measurement

At initial recognition, the financial assets of the Corporation are measured at fair value including transaction costs except for accounts receivable which are initially recognized at the transaction price. Financial assets are subsequently measured at either amortized cost; fair value through Other Comprehensive Income ("OCI"); or fair value through profit or loss based on the cash flow characteristics of the assets and the business models under which they are managed.

The Corporation's assets are held for collection of contractual cash flows that represent payments of principal and interest and, accordingly, are subsequently measured at amortized cost. A gain or loss is recognized in the Statement of Comprehensive Income when the asset is derecognized or impaired.


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3. Changes in accounting policies (continued)

(b) IFRS 9 Financial Instruments (“IFRS 9”) (continued)

The impact of IFRS 9 on the classification and measurement of the Corporation's financial instruments is set out below.

Financial instrument IAS 39 Measurement IFRS 9 Measurement Basis Cash Loans and receivables Amortized cost Accounts receivables Loans and receivables Amortized cost Unbilled revenue Loans and receivables Amortized cost

Due from related parties Loans and receivables Amortized cost Accounts payable and accrued liabilities

Financial liability – amortized cost


Customer deposits liability Financial liability – amortized cost


Due to related parties Financial liability – amortized cost


Senior unsecured debentures Financial liability – amortized cost


(ii) Impairment

The standard introduces a new single model for the measurement of impairment losses on all financial assets. The IFRS 9 expected credit loss (“ECL”) model replaces the current “incurred loss” model of IAS 39. The incurred loss model under IAS 39 recognizes impairment when there is objective evidence of deterioration in the credit quality of the asset. Under IFRS 9, ECL will be recognized in the profit or loss before a loss event has occurred, which could result in earlier recognition of credit losses compared to IAS 39.

Impairment of the Corporation’s financial assets is assessed on a forward-looking basis. The Corporation applies the simplified approach to its accounts receivable which requires expected lifetime losses to be recognized from initial recognition of the receivables and on an ongoing basis.

The Corporation assesses all information available in the measurement of the ECLs associated with its assets carried at amortized cost.

The measurement of ECLs for accounts receivable is based on management's judgment. This is determined using a provision matrix based on historical observed default rates and incorporated macroeconomic factors such as GDP growth forecast, inflation rates, unemployment rates, and customer-specific assessments. As the Corporation is not required to restate comparatives, ECLs are not included in unbilled revenue for prior year comparative amounts. The adoption of IFRS 9 did not have an impact on the financial statements.


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4. Significant accounting policies:

The accounting policies set out below have been applied consistently in all years presented in these financial statements.

(a) Revenue recognition:

Revenue for the Corporation is recognized as electricity is delivered to customers and is recorded on the basis of regular meter readings and estimated customer usage since the last meter reading date to the end of the year. The related cost of power is recorded on the basis of power used.

The Corporation is licensed by the OEB to distribute electricity. As a licensed distributor, the Corporation 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. The Corporation is required, pursuant to regulation, to remit such amounts to these third parties, irrespective of whether the Corporation ultimately collects these amounts from customers. The Corporation has determined that it is acting as a principal for electricity distribution and, therefore, has presented electricity revenue on a gross basis. Revenue attributable to the delivery of electricity is based upon OEB-approved distribution rates and includes the amounts billed to customers for electricity, including the cost of electricity supplied, distribution charges, and any other regulatory charges. Revenue is recognized as electricity is delivered and consumed by customers. Electricity revenue is recorded on the basis of regular meter readings and estimates of customer usage since the last meter reading dare to the end of the year. The Corporation satisfies its performance obligation to the customer over time, which is to use reasonable diligence in providing a regular and uninterrupted supply of electricity over the contract term.

Capital contributions received from electricity customers and developers to construct or acquire property, plant, and equipment for the purpose of connecting a customer to a network are recorded as deferred revenue. The deferred revenue is initially recorded at fair value of the capital contribution, and is recognized as revenue on a straight-line basis over the estimated lives of the contracts with customers. Non-refundable cash contributions from developers result in the Corporation having an obligation to provide goods and services with respect to the assets constructed or acquired, these contributions are considered deferred revenue and recognized on a straight-line basis over the estimated economic lives of the assets to which the contribution.

Conservation and Demand Management (“CDM”) program funding from the Independent Electricity System Operator (“IESO”) is recognized on a net basis when there is reasonable assurance that the funding will be received, and the related conditions are met. “Net Basis” is used when the funding relates to an expense item, and, as such, the operating expenses are netted against other income. The corporation records its CDM revenues and expenses in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.


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4. Significant accounting policies (continued):

The measurement of unbilled revenue is based on an estimate of the amount of electricity delivered to customers but not yet billed. These accrual amounts are presented as unbilled revenues under IFRS 15. The Corporation assesses the unbilled revenues for impairment in accordance with IFRS 9.

(b) Financial instruments

Financial assets and financial liabilities are initially recognized at fair value plus directly attributable transaction costs and are subsequently measured at amortized cost under IFRS 9.

Financial instruments at fair value

Financial instruments, which are disclosed at fair value, are classified using a three-level hierarchy. Each level reflects the inputs used to measure the fair values of the disclosed financial liabilities, and are as follows:

(i) Level 1 – inputs are unadjusted quoted prices included of identical instruments in active markets;

(ii) Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and

(iii) Level 3 – inputs for the liabilities that are not based on observable market data (unobservable inputs)

The Corporation’s fair value hierarchy is classified as Level 1 for loans and borrowings on debentures. The classification for disclosure purposes has been determined in accordance with generally accepted pricing models.

(c) Inventory:

Inventory is valued at the lower of cost and net realizable value, with cost being determined on an average cost basis, and items considered major spare parts are recorded as capital assets.

(d) Property, plant and equipment:

Items of property, plant and equipment are measured at cost or deemed cost established on the transition date, or, where the item is transferred from customers, its fair value, less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, 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 and are based on the Corporation’s average cost of borrowing.


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(d) Property, plant and equipment (continued):

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

The cost of replacing a part of an item of property, plant and equipment 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 property, plant and equipment is written off, and the related gain or loss is included in profit or loss. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred.

Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful life of each part or component of an item of property, plant and equipment. Land is not depreciated. Construction-in-progress assets are not amortized until the project is complete and in service.

The estimated useful lives are as follows: Buildings and fixtures 15 - 50 years Distribution lines 40 – 70 years Distribution transformers 35 – 55 years Distribution meters 30 years Smart meters 15 years General office equipment 5 - 10 years Electricity generation equipment 10 - 15 years District energy equipment 10 - 50 years Computer equipment 5 years Major tools 5 - 15 years Data acquisition system 5 years Trucks and rolling stock 5 - 10 years Other capital assets 10 - 25 years

Depreciation methods, useful lives, and residual values are reviewed at each reporting date.

(e) Intangible assets:

(i) Computer software:

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 and accumulated impairment losses.


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(e) Intangible assets (continued):

(ii) Amortization:

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.

The estimated useful lives for the current and comparative years are:

Computer software 5 years

Amortization methods and useful lives of all intangible assets are reviewed at each reporting date.

(f) Impairment:

(i) Non-financial assets:

The carrying amounts of the Corporation's non-financial assets 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 recoverable amount of the asset 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"). The Corporation has determined that it is a single cash-generating unit. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 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 cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss.

For assets, impairment recognized in prior periods is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. 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.


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4. Significant accounting policies (continued): (g) Provisions and contingencies:

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.

An assessment of the likelihood of a contingent event, such as events arising from legal proceedings and other losses, requires management’s judgement regarding the probability of a loss occurring. Actual results may differ from those estimates.

Decommissioning or dismantling:

When there is a legal or constructive obligation to remove and dispose of property, plant and equipment at the end of its useful life, a provision is recorded to cover such future removal and disposal costs.

(h) Employee future 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. In this case, GHESI and its employees could face the prospect of higher contributions until the funded status of the Fund is restored.

GHESI may only fully recover additional contribution amounts in distribution rates if increased contribution rates are factored into GHESI’s rebasing rates applications before the OEB.

(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 cost of these benefits is expensed as earned by employees through employment service. The accrued benefit obligations and the current service costs are actuarially determined by applying the projected unit credit method and reflect management’s best estimate of certain underlying assumptions.


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4. Significant accounting policies (continued): (h) Employee future benefits (continued):

Any actuarial gains (losses) will require a re-measurement of the net defined benefit liability or asset and will be recognized as other comprehensive income or loss in the year that it is known.

(i) Deferred revenue and assets transferred from customers:

Certain customers and developers are required to contribute towards the capital cost of construction in order to provide ongoing service. Cash contributions are initially recorded as current liabilities. Once the distribution system asset is completed or modified as outlined in the terms of the contract, the contribution amount is transferred to contributions in aid of construction.

When an asset is received as a capital contribution, the asset is initially recognized at its fair value, with the corresponding amount recognized as contributions in aid of construction.

The contributions in aid of construction account, which represents the Corporation's obligation to continue to provide the customers access to the supply of electricity, is reported as deferred revenue, and is amortized to income on a straight-line basis over the terms of the agreement with the customer or the economic useful life of the acquired or contributed asset, which represents the period of ongoing service to the customer.

(j) Leased assets:

Leases with terms under which the Corporation assumes 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. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are treated as operating leases and the leased assets are not recognized on the Corporation’s balance sheet. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease.

(k) 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 on regulatory assets.

Finance costs comprise interest expense on borrowings, finance lease obligations, regulatory liabilities and unwinding of the discount on provisions and impairment losses on financial assets.


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(l) 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.

Under the Electricity Act, 1998, the Corporation makes payments in lieu of corporate taxes to the OEFC. These payments are calculated in accordance with the rules for computing taxable income and taxable capital and other relevant amounts contained in the Income Tax Act (Canada) and the Corporations Tax Act (Ontario) 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 is the tax payable on the taxable income 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.

Deferred tax is recognized using the balance sheet method. Under this method, deferred income taxes reflect the net tax effects of temporary differences between the tax basis of assets and liabilities and their carrying amounts for accounting purposes, as well as for tax losses available to be carried forward to future years that are likely to be realized. Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates, at the reporting date, that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the date of enactment or substantive enactment.

(m) Business combinations:

Acquisitions of business combinations are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair value of: assets conveyed, liabilities incurred or assumed; and the equity instruments issued by the corporation in exchange for control of the acquired business.

IFRS 3, Business Combinations, does not apply to combinations of entities or businesses under common control. The Corporation used judgement to apply the predecessor value method, which involves accounting for the assets and liabilities of the acquired business using existing carrying values. The approach is:

(i) the acquired assets and liabilities are acquired at their existing carrying values rather than at fair value; and

(ii) no goodwill is recorded.


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5. Future accounting changes

(a) IFRS 16 Leases ("IFRS 16")

IFRS 16 is effective for periods beginning on or after January 1, 2019, although early application is permitted if IFRS 15 has also been applied. In January 2016, the IASB issued IFRS 16, which replaces the IAS 17 Leases and related interpretations ("IAS 17"). IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that represents those transactions. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between the operating and finance leases. Short-term leases, which are defined as those that have a lease term of 12 months or less and leases of low-value assets are exempt. Under the new standard, a lessee recognizes a right of use asset and a lease liability. The right of use asset is depreciated, similar to other non- financial assets and the liability accrues interest. The lease liability is initially measured as the present value of the lease payments over the lease term, discounted at the rate implicit in the lease.

The Corporation will adopt IFRS 16 on January 1, 2019 using the modified retrospective approach. The Corporation has assessed the quantitative impact of adopting IFRS 16 at January 1, 2019 to be an increase of $17 in total assets and total liabilities for the right-of-use assets and the lease liabilities.

6. Inventory:

The amount of inventories consumed by the Corporation and recognized as an expense during 2018 was $229 (2017 - $250).


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7. Non-current assets classified as held-for-distribution:

2018 2017 Solar panels $ - $ 306

$ - $ 306

In 2018, Envida and the City of Guelph agreed to the sale of 8 solar photovoltaic systems located on 8 different City of Guelph owned properties. The sale had a total transfer value of $255 which was paid February 13, 2018. The valuation was calculated as outlined in the existing contracts between the two parties using the expected future cash flows for the remaining term of the related Micro FIT contracts. The prescribed discount rate outlined in the original contracts for valuation purposes was 11%.


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8. Property, plant and equipment:

(a) Cost or deemed cost:

Land Electricity Other Construction and Distribution generation fixed -in- buildings equipment equipment assets Progress Total

Balance at January 1, 2017 $ 22,193 $ 157,815 $ 1,020 $ 13,909 $ 5,361 $ 200,298 Additions 708 7,600 - 1,278 3,866 13,452 Transfers - 5,362 - - (5,362) - Disposals/retirements - - - (65) - (65) Impairment of property, plant and equipment (17) - (111) - - (128) Reclassification to assets - - - (363) - (363) held-for-distribution Balance at December 31, 2017 $ 22,884 $ 170,777 $ 909 $ 14,759 $ 3,865 $ 213,194

Land Electricity Other Construction and Distribution generation fixed -in- buildings equipment equipment assets Progress Total

Balance at January 1, 2018 $ 22,884 $ 170,777 $ 909 $ 14,759 $ 3,865 $ 213,194 Additions 31 7,379 - 1,084 4,456 12,950 Transfers - 3,865 - - (3,865) - Disposals/retirements - - - (54) - (54) Balance at December 31, 2018 $ 22,915 $ 182,021 $ 909 $ 15,789 $ 4,456 $ 226,090

(b) Accumulated depreciation:

Land Electricity Other Construction and Distribution generation fixed -in- buildings equipment equipment assets Progress Total Balance at January 1, 2017 $ 4,811 $ 26,640 $ 601 $ 7,801 $ - $ 39,853 Depreciation charge for the year 875 5,047 83 1,190 - 7,195 Disposals/retirements - - - (65) - (65) Reclassification to assets - - - (57) - (57) held-for-distribution Balance at December 31, 2017 $ 5,686 $ 31,687 $ 684 $ 8,869 $ - $ 46,926

Land Electricity Other Construction and Distribution generation fixed -in- buildings equipment equipment assets Progress Total Balance at January 1, 2018 $ 5,686 $ 31,687 $ 684 $ 8,869 $ - $ 46,926 Depreciation charge for the year 764 5,322 37 1,245 - 7,368 Disposals/retirements - - - (54) - (54) Balance at December 31, 2018 $ 6,450 $ 37,009 $ 721 $ 10,060 $ - $ 54,240


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8. Property, plant and equipment (continued):

(c) Carrying amounts:

Land Electricity Other Construction and Distribution generation fixed -in- buildings equipment equipment assets Progress Total December 31, 2017 $ 17,198 $ 139,090 $ 225 $ 5,890 $ 3,865 $ 166,268 December 31, 2018 $ 16,465 $ 145,012 $ 188 $ 5,729 $ 4,456 $ 171,850

(d) Borrowing costs:

During the year, borrowing costs of $121 (2018 - $116) were capitalized as part of the cost of property, plant and equipment.

(e) Allocation of depreciation and amortization:

The depreciation of property, plant and equipment and the amortization of intangible assets has been allocated to profit or loss as follows:

Distribution Administration expenses expenses Total December 31, 2017: Depreciation of

property, plant and equipment $ 7,110 $ 85 $ 7,195

Amortization of intangible assets - 227 227

$ 7,110 $ 312 $ 7,422

Distribution Administration expenses expenses Total December 31, 2018: Depreciation of

property, plant and equipment $ 7,240 $ 128 $ 7,368

Amortization of intangible assets - 226 226

$ 7,240 $ 353 $ 7,594


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8. Property, plant and equipment (continued):

f) Impairment of fixed assets:

Accumulated Cost Depreciation Total Eastview Landfill Generation $ 128 $ - $ 128 Impairment of fixed assets as at December 31, 2017 $ 128 $ - $ 128

(i) Results of 2017 assessment:

At December 31, 2017, due to the proposed purchase of the Envida shares by GHESI, the company tested for impairment on the Eastview cash generating unit and the Southgate Solar cash generating unit. The recoverable amount of the two CGUs was estimated to be the value in use represented by the net present value of the before tax net cash flows from the two operations. The cash inflows were estimated using the remaining term of the contract with the IESO. The cash outflows were projected over this same period. All cash flows were valued using a discount rate of 6.5%. At December 31, 2017 it was determined that the net book value of the Company’s Eastview CGUs exceeded the recoverable amount which resulted in the Company recognizing $128 in impairment charges.


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9. Intangible assets:

(a) Cost or deemed cost: Computer Land software rights Total Balance at January 1, 2017 $ 1,294 $ 25 $ 1,319 Additions in 2017 106 - 106 Balance at December 31, 2017 1,400 25 1,425 Additions in 2018 33 - 33 Balance at December 31, 2018 $ 1,433 $ 25 $ 1,458

(b) Accumulated amortization: Computer Land software rights Total Balance at January 1, 2017 $ 653 $ - $ 653 Amortization charges in 2017 227 - 227 Balance at December 31, 2017 880 - 880 Amortization charges in 2018 201 25 226 Balance at December 31, 2018 $ 1,081 $ 25 $ 1,106

(c) Carrying amounts:

Computer Land software rights Total Balance at December 31, 2017 $ 519 $ 25 $ 544

Balance at December 31, 2018 $ 352 $ - $ 352


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10. Income taxes:

The income tax expense varies from amounts which would be computed by applying the Corporation’s combined statutory income tax rate as follows:

2018 2017 Basic rate applied to earnings before income tax $ 2,059 $ (1,386) Increase (decrease) in income tax resulting from:

Non-deductible transaction costs and other permanent items 27 405 Re-assessment of tax treatment of smart meters (46) - Adjustment to prior year’s taxes 155 14 Valuation allowance on deferred tax asset - (5,929) Impact of amalgamation with Envida (68) - Other 22 (13)

Income tax expense (recovery) $ 2,149 $ (6,909)

Effective rate applied to profit before income taxes 29.3% 132.1%

Significant components of the Corporation’s deferred tax balances are as follows:

2018 2017 Deferred tax assets (liabilities): Property, plant and equipment $ (6,427) $ (4,103) Cumulative eligible capital 501 521 Employee benefits 2,815 3,014 Deferred Revenue - Contributed Capital 7,227 6,125 Non-capital loss carry forwards 1,892 5,143 Valuation allowance on deferred tax asset - (3,603) Other 12 102

Net deferred tax asset $ 6,020 $ 7,199 At December 31, 2018, based on substantively enacted income tax rates, deferred tax assets of $3,603 (2017 - $3,603) have not been recorded. These deferred tax assets relate to unused non-capital loss carry-forwards, available to reduce taxable income in future years. Deferred income tax assets related to these unused tax losses will be recorded when taxable income is generated or management makes the assessment that it is more likely than not that the Company will generate taxable income sufficient to realize the benefit of these unused deductions.


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At December 31, 2018, a deferred tax asset of $6,020 (2017 - $7,199) has been recorded. The utilization of this tax asset is dependent on future taxable profits in excess of profits arising from the reversal of existing taxable temporary differences.

11. Provision for liabilities and charges

Opening balance, January 1, 2018 $ 506

Provisions reversed during the year (506)

Closing balance, December 31, 2018 -

Less: current portion -

Provision for liabilities and charges, long-term $ -

The onerous contract provision relates to the Hanlon Creek Business Park system. The provision was expected to be utilized over the next 17 years. In 2018, the Corporation entered into an agreement with all its customers of the Hanlon Creek Business Park to retrofit their heating and cooling systems, so they are no longer dependent on district energy, effectively cancelling all of the onerous district energy contracts that were in place. The estimated costs of these conversions are approximately $1.4 million.

12. Customer deposits:

Customer deposits represent cash deposits from electricity distribution customers and retailers, as well as construction deposits.

Deposits from electricity distribution customers are refundable to customers demonstrating 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.

Construction deposits represent cash prepayments for the estimated cost of capital projects recoverable from customers and developers. Upon completion of the capital project, these deposits are transferred to contributions in aid of construction.

Customer deposits comprise:

2018 2017 Customer deposits $ 5,678 $ 4,066 Construction deposits 3,583 5,540 Total customer deposits $ 9,261 $ 9,606


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13. Pension agreement:

The Corporation provides a pension plan for its employees through the Ontario Municipal Employees Retirement System (“OMERS”). OMERS is a multi-employer pension plan which operates as the Ontario Municipal Employee Retirement Fund (the “Fund”) and provides pensions for employees of Ontario municipalities 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. The Corporation uses defined contribution plan accounting as it is only liable for contributions to the Plan. The Corporation’s contribution for employees’ current service for the year ended December 31, 2018 was $1,330 (2017 - $1,296).

14. Employee future benefits: Components of employee future benefits recognized are as follows:

2018 2017

Post-retirement benefits - accrued benefit liability $ 10,153 $ 10,856 Accrued sick leave benefit 473 518

$ 10,626 $ 11,374

Post-retirement benefits: The Corporation pays certain medical and life insurance benefits on behalf of some of its retired employees. The Corporation recognizes these post-retirement costs in the period in which employees’ services were rendered. The accrued benefit liability at December 31, 2018 of $10,153 was based on an actuarial valuation completed in 2018 using an updated discount rate of 4.0%. The accrued benefit liability at December 31, 2017 of $10,856 and the expense for the year ended December 31, 2017, were based on an actuarial valuation completed in 2016, using a discount rate of 3.5%.

Changes in the present value of the defined benefit unfunded obligation and the accrued benefit liability:

2018 2017 Defined benefit obligation, beginning of year $ 10,856 $ 9,764

Current service cost 254 223 Interest cost 375 375 Re-measurement of obligation (1,069) 745 Benefits paid during the year (263) (251) Accrued benefit liability, end of year $ 10,153 $ 10,856


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14. Employee future benefits (continued): Components of net benefit expense recognized are as follows: 2018 2017 Current service cost $ 254 $ 223 Interest cost 375 375 Net benefit expense recognized $ 629 $ 598

In 2018, $440 of the corporation’s net benefit costs were charged as an operational expense and the remaining $189 was capitalized. In 2017, $418 of the corporation’s net benefit costs were charged as an operational expense and the remaining $180 was capitalized.

The significant actuarial assumptions used in the valuation are as follows (weighted average):

2018 2017 Accrued benefit obligation:

Discount rate 4.00% 3.50%

Benefit cost for the year: Withdrawal rate 1% 1%

Assumed health care cost trend rates: Initial health care cost trend rate 6% 5% 2018 and thereafter 6% 6%

The approximate effect on the accrued benefit obligation of the entire plan and the estimated net benefit expense of the entire plan if the health care trend rate assumption was increased or decreased by 1%, and all other assumptions were held constant, is as follows:

Defined Benefit Periodic Obligation Benefit Cost 1% increase in health care trend rate $ 11,792 $ 704 1% decrease in health care trend rate 8,838 501

Historical information Amounts for the current and previous year, for the entire plan, are as follows:

2018 2017 Defined benefit obligation $ 10,153 $ 10,856 Experience adjustments (1,069) (745)


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14. Employee future benefits (continued):

The main actuarial assumptions utilized for the valuation are as follows:

General inflation - future general inflation levels, as measured by the changes in the Consumer Price Index, were assumed 2.0% in 2018, and thereafter (2017 - 2.0%).

Discount (interest) rate - the discount rate used to determine the present value of future liabilities and the expense for the year ended December 31, 2018, was 4.0% (2017 - 3.50%).

Historical information

Salary levels - future general salary and wage levels were assumed to increase at 3.3% (2017 -3.3%) per annum.

Medical costs - medical costs were assumed to increase 6.0% for 2018, 5% for 2019, and 6% thereafter.

Dental costs - dental costs were assumed to increase 6% for 2018, 5% for 2019, and 6% thereafter.

Accrued sick leave benefit:

The Corporation allows regular employees the equivalent of one and one-half days per month sick time credit to be applied in case of illnesses or accidents not covered by Workers’ Compensation. A maximum of eighteen days sick time credit is accrued to each employee’s credit each year and is reduced by the amount of sick time utilized each year. At the end of the year, the remaining credit, if any, is added to each employee’s sick time credit accumulation. Employees can accumulate sick time credit up to a capped amount of 200 days with the following exception. Any employee on payroll at the date the cap went into effect (May 2, 2013), did not lose any credit for accumulated sick time exceeding 200 days. These employees had their sick time capped individually at the level of the sick time accumulation accrued when the cap came into effect. Any unused sick time credit is forfeited when employment ceases with the Corporation. As at December 31, 2018, the estimated value of the expected future payments to be made because of unused sick time credits amounts to $473 (2017 - $518).


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15. Long-term debt:

(a) Senior unsecured debentures

The Series “A” senior unsecured debentures have a maturity date of December 6, 2030 and have an interest rate of 5.264% per annum. Interest is payable in equal semi-annual installments, in arrears, on June 6 and December 6 each year commencing June 6, 2011 until maturity. The debentures were issued on December 6, 2010. The debentures are represented by a single Global Debenture Certificate registered in the name of CDS & Co. In order to put the debentures in place, the Corporation incurred debt issuance costs in the amount of $500.

The Series “B” senior unsecured debentures have a maturity date of September 25, 2045 and have an interest rate of 4.121% per annum. Interest is payable in equal semi-annual installments, in arrears, on March 25 and September 25 each year commencing March 25, 2016 until maturity. The debentures were issued on September 25, 2015. The debentures are represented by a single Global Debenture Certificate registered in the name of CDS & Co. In order to put the debentures in place, the Corporation incurred debt issuance costs in the amount of $393.

2018 2017 Senior unsecured debentures, maturity 2030 $ 65,000 $ 65,000 Senior unsecured debentures, maturity 2045 30,000 30,000 Less: cost of debt issuance (640) (679) Senior unsecured debentures, net proceeds $ 94,360 $ 94,321

Effective January 1, 2019, due to GHESI’s merger with Alectra Utilities Corporation “AUC”, AUC assumed all debts, liabilities and obligations of GHESI, as Issuer, under both Series A and Series B senior unsecured debentures as if it were the original Issuer thereunder. Other than AUC being the Issuer under both of these Debentures, all terms and conditions of each remain in full force and effect, without amendment.

Subsequent to the above noted event, Alectra Inc. assumed all debt, liabilities and obligations of AUC, as Issuer, under both Series A and Series B senior unsecured debentures as if it were the original Issuer thereunder. Other than Alectra Inc. being the Issuer under both of these Debentures, all terms and conditions of each remain in full force and effect, without amendment.


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16. Other revenue:

Other revenue comprises:

2018 2017 Late payment charges $ 133 $ 167 Pole and other rental income 359 348 Collection and other service charges 262 395 Waterworks revenue 1,502 1,443 Storm water revenue 187 179 Amortization of customer contributions 777 664 Shared Services 8 176 Conservation and Demand Management Performance Bonus 990 218 Miscellaneous 312 143

Total other income $ 4,530 $ 3,733

17. Employee benefits:

2018 2017 Salaries and wages $ 10,708 $ 9,193 Contributions to multi-employer plan 1,330 1,296 Expenses related to defined benefit plans 629 598

$ 12,667 $ 11,087

18. Finance income and expense:

2018 2017 Interest income on bank deposits $ (493) $ (310) Finance income (493) (310) Interest expense on long-term debt 4,696 4,696 Interest adjustment re: capitalized borrowing costs (121) (116) Interest expense on deposits 109 28 Other 200 97 4,884 4,705

Net finance costs recognized in profit or loss $ 4,391 $ 4,395


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19. Related party transactions:

a) Parent and ultimate controlling party:

The sole shareholder of the Corporation is the City of Guelph. The City produces financial statements that are available for public use.

b) Key management personnel:

The key management personnel of the Corporation has been defined as members of its board of directors and executive management team members and is summarized in the table below.

2018 2017 Directors’ fees $ 89 $ 119 Salaries and other short-term benefits 3,765 2,601 Post-employment benefits 81 56

$ 3,935 $ 2,776

c) Transactions with ultimate parent (the City):

The following summarizes the Corporation’s related party transactions, recorded at the exchange amounts and balances with the City for the year ended December 31:

2018 2017 Revenue:

Energy sales (at commercial rates) $ 7,116 $ 7,980 Energy sales (solar & district energy) 76 87 Waterworks revenue 1,502 1,443 Storm water revenue 187 179 Street light maintenance 366 464

Expenses: Other 71 53 Rent, percentage rent, land lease 25 54 Property taxes 359 344

Balances: Accounts receivable 877 377 Accounts payable and accrued charges 29 43

d) Transactions with subsidiaries of the City:

A listing of the various entities under the control of the City is set out on the City's website.

The Corporation’s transactions with subsidiaries of the City consist of sales of electricity at market rates.


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20. Commitments and contingencies:

From time to time, the Corporation may be involved in various litigation matters arising in the ordinary course of its business. As at the end of 2018, there were no litigation matters facing the Corporation.

General Liability Insurance:

The Corporation is a member of the Municipal Electric Association Reciprocal Insurance Exchange (“MEARIE”). MEARIE is a pooling of public liability insurance risks of many of the electrical utilities in Ontario. All members of the pool are subjected to assessment for losses experienced by the pool for the years in which they were members on a pro-rata basis based on the total of their respective service revenues. As at December 31, 2018, no assessments have been made.

In November 2004, Envida entered into a renewable energy supply contract with the OEFC. In November 2005, the agreement was assigned by the OEFC to the IESO. Under this agreement, Envida has agreed to supply contract energy up to a maximum amount for twenty years at a price fixed by the contract.

In 2012, the renewable supply agreement with the IESO was amended by re-setting the capacity to be delivered under the contract. The amended agreement sets the contract capacity of the landfill generator to 2.5 MW for the seven contract-years, and 1.7 MW for each contract-year thereafter.

In September 2004, Envida entered into a land lease and gas utilization agreement with the City.

In 2018, GHESI (formerly Envida) and the City modified this agreement, where now on an annual basis GHESI agrees to pay the City based on the following formula:

(a) $5 in advance of each fiscal year, for the use of the lands and access lands; and

(b) 10% of Envida’s annual EBIT

In June 2011, Envida commenced supplying the IESO with electrical energy under a twenty-year Feed-in-Tariff power purchase agreement. The electrical energy is produced by a roof-top mounted array of photovoltaic solar panels. The IESO will purchase all energy produced by photovoltaic array. The price that the IESO pays for the electrical energy is fixed by the contract.

21. Share capital:

2018 2017 Authorized: Unlimited number of common shares Issued:

67,530 common shares $ 67,530 $ 67,530


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22. Financial instruments and risk management:

Cash is measured at fair value. The carrying values of accounts receivable, and accounts payable and accrued charges 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 fair value of the $65,000 senior unsecured debenture at December 31, 2018 was $76,328 (2017 - $79,061) and the fair value of the $30,000 senior unsecured debenture at December 31, 2018 was $30,183 (2017 - $32,910). The fair value is calculated based on the present value of future principal and interest cash flows, discounted at the current rate of interest at the reporting date. The interest rate used to calculate fair value at December 31, 2018 was 3.467% (2017 - 3.206%) on the $65,000 debenture and was 4.083% (2017 - 3.567%) on the $30,000 debenture.

The Corporation’s activities provide for a variety of financial risks, particularly credit risk, market risk and liquidity risk.

The Corporation’s activities provide for a variety of financial risks, particularly credit risk, market risk and liquidity risk.

(a) Credit risk:

Financial assets carry credit risk that a 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 located in the City. No single customer accounts for revenue in excess of 10% of total revenue.

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 the statement of comprehensive income. Subsequent recoveries of receivables previously provisioned are credited to the statement of comprehensive income. The balance of the expected credit losses at December 31, 2018 is $185 (2017 - $160). An impairment loss of $150 (2017 - $44) was recognized during the year. The Corporation’s credit risk associated with accounts receivable is primarily related to payments from ratepayers. At December 31, 2018, approximately $380 (2017 - $349) was considered greater than 60 days past due. The Corporation has 56,637 customers, the majority of whom are residential customers. Credit risk is managed through collection of security deposits from customers in accordance with directions provided by the OEB. As at December 31, 2018, the Corporation held security deposits amounting to $5,678 (2017 - $5,540).


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22. Financial instruments and risk management (continued):

(a) Credit risk (continued):

Accounts receivable and respective aging is provide as follows: 2018 2017 Accounts receivable 14,281 13,957 Unbilled revenue 15,885 14,487 Other 139 467 Regulatory (8) 241 30,297 29,152 Less: Expected credit losses (185) (160) Total accounts receivable, net 30,112 28,992 0-30 days 29,693 28,361 30-60 days 224 442 61-90 days 150 96 Greater than 91 days 230 253 30,297 29,152 Less: expected credit losses (185) (160) Total accounts receivable, net 30,112 28,992

(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.

The Corporation estimates that a 1% increase in interest rates at December 31, 2018 would have increased interest expense on the long-term debt by $950 (2017 - $950), assuming all other variables remained constant. A 1% decrease in the interest rate would have an equal but opposite effect.

(c) 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.

Up to December 13, 2018, the Corporation, through its parent company Guelph Municipal Holdings Inc. Centralized Banking Agreement, had access to a $20,000 credit facility. The Corporation monitors cash balances daily to ensure that a sufficient level of liquidity is on


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hand to meet financial commitments as they come due. As at December 13, 2018, no amounts had been drawn under this $20,000 credit facility (2017 – $ 0).

As part of the $20,000 credit facility, The Corporation had a bilateral facility for $5,000 (the “LC” facility) for the purpose of issuing letters of credit mainly to support the prudential requirements of the IESO, of which $4,000 has been drawn and posted with the IESO (2017 - $4,000).

In preparation for GHESI’s merger with Alectra Utilities Corporation (AUC) on January 1st, 2019, the Corporation’s Centralized Banking Agreement was dismantled by their financial institution on December 13th, 2018. To ensure the Corporation was not at risk, the financial institution maintained GHESI’s credit facility until December 31st when the merger with AUC was completed.

The majority of accounts payable, as reported on the balance sheet, are due within 30 days.

(d) 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, 2018, shareholder’s equity amounted to $55,004 (2017 - $64,632) and long-term debt amounted to $94,360 (2017 - $94,321).


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23. Guarantees:

GHESI has a Connection and Cost Recovery Agreement with Hydro One Networks Inc. (Networks) for the supply of two additional breaker positions at the Campbell transformer station (cost $599), and the installation of a new metal clad switchgear to the two existing idle windings at Cedar TS (transformer station) with eight new feeder positions (cost $5,582). The costs of the connections are debts owed to Networks that will be forgiven provided that GHESI meets or exceeds the specific load requirement and the incremental transformation connection revenue received by Networks. Networks has confirmed that GHESI has met all load requirements on June 30th, 2017, the 10th Anniversary true-up date and no future true-ups or payments will be required going forward.

GHESI has another Connection and Cost Recovery Agreement with Networks for the line connection associated with the Arlen municipal transformer station. The $1,688 cost of the connection is a debt owed to Networks that will be forgiven provided that GHESI meets or exceeds the specific load requirement and the incremental transformer connection revenue received by Networks. Networks has confirmed that on November 30th, 2017, the 5th Anniversary true-up date, GHESI had met the load requirement and no true-up payment was required. GHESI expects to meet the conditions of the guarantee for the next 5 years and does not anticipate an additional payment will be required to Networks.

24. Events after the reporting period:

On January 1, 2019, the Corporation amalgamated with Alectra. The previous shareholders of GHESI, GMHI, own 4.6% of Alectra Inc., the parent of Alectra Utilities Corporation. The accounting and valuation for the amalgamation is still being finalized. Consequently, disclosures regarding the amalgamation cannot be determined.


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25. Amalgamation of subsidiary

GHESI purchased the shares of Envida Community Energy Inc. from their parent, GMHI. Consideration for the purchase was done by transferring additional shares of GHESI to GMHI. The share issued was equal to the fair market value of the Envida shares which was determined to be nominal ($1) due to Envida having a deficit equity value.

On July 1, 2018, Envida and GHESI were amalgamated which resulted in the following non-regulated assets being transferred into GHESI; Southgate Rooftop Solar Facility, Eastview Landfill Gas Generating Station and the Stone Road Mall Electric Vehicle Charging Station. In addition, GHESI inherited approximately $7,900 of tax losses that were held by Envida, which will be used to offset future income taxes payable.

For the six months ended, December 31, 2018, Envida contributed revenue of $292 and a profit of $118 to GHESI’s results.

The following table summarizes the recognized amounts of assets acquired and liabilities assumed at the date of acquisition:

Property, plant and equipment $ 762 Cash 634 Trade receivables 76 Inventories 14 Trade and other payables (117) Loans and other borrowings (intercompany) (2,002) _____________________________________________________________________________ Total identifiable net liabilities acquired $ (633)

26. Prior period adjustment

The corporation has restated its 2017 financial statements to amend its adjustment to unbilled revenue. The impact of the adjustment was an increase of $1,706 to unbilled revenue and retained earnings at both January 1, 2017 and December 31, 2017. There was no impact to comprehensive loss for the year ended December 31, 2017.

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Staff

Report

To City Council as Shareholders of Guelph Municipal Holding

Inc.

Date Monday, June 17, 2019

Subject Appointment of KPMG LLP as Auditors for 2019

Report Number GMHI-2019-03

Recommendation

That KPMG LLP be appointed as auditors for GMHI for its 2019 fiscal year.

Trevor Lee

Chief Financial Officer

Guelph Municipal Holdings Inc.

519-822-1260 ext. 2281

[email protected]

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June 17, 2019 Special Council as Shareholder of GMHI Agenda · 2019-06-19 · accomplishments and...

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