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AGENDA - Special Council - 20050622SPECIAL COUNCIL BOREALIS NYBRO ELECTRIC NOLDINGS INC. ANNUAL SNAREHOLDER'S MEETING AGENDA NO.05-22 WEDNESDAY, TUNE 22, 2005 TANNERY ROOM TOWN NALL 6 PUBLIC RELEASE ut 17/06/05 TOWN OF AURORA SPECIAL COUNCIL BOREALIS HYDRO ELECTRIC HOLDINGS INC. ANNUAL SHAREHOLDER'S MEETING AGENDA NO. 05-22 Wednesday, June 22, 2005 I DECLARATIONS OF PECUNIARY INTEREST 11 APPROVAL OF AGENDA RECOMMENDED: THAT the content of the Agenda as circulated by the Corporate Services Department be approved as presented. III RECEIPT OF MINUTES Borealis Hydro Electric Holdings Inc., Annual Shareholder's Meeting (pg. 1) Minutes No. 04-21 held June 22, 2004 RECOMMENDED: THAT the Minutes of Meeting No. 04-21 be received for information. IV DETERMINATION OF ITEMS REQUIRING SEPARATE DISCUSSION V ADOPTION OF ITEMS NOT REQUIRING SEPARATE DISCUSSION Special Council Agenda No. 05-22 Wednesday, June 22, 2005 Page 2 of 4 VI DELEGATIONS VII CONSIDERATION OF ITEMS REQUIRING SEPARATE DISCUSSION Vlll READING OF BYLAWS RECOMMENDED: THAT the following listed by-law be given 1st, 2nd and 3rd readings, and enacted: 4680-05.0 BEING A BY-LAW to (pg. 39) Confirm Actions by Council Resulting From The Special Council Meeting - Wednesday, June 22, 2005. IX IN CAMERA None X ADJOURNMENT Special Council Agenda No. 05-22 Wednesday, June 22, 2005 Page 3 of 4 AGENDA ITEMS 1. Resignations of Mr. George Steeves and Mr. Jim Carey RECOMMENDED: THAT the resignations of Mr. George Steeves and Mr. Jim Carey be accepted. 2. Consolidated Financial Statements, December 31, 2004 Mr. Allister Byrne, FCA, Partner of Grant Thornton LLP, Auditors for the Town of Aurora, will be in attendance. RECOMMENDED: THAT the attached Consolidated Financial Statements, December 31, 2004, be accepted and signed by the Shareholder. a) Borealis Hydro Electric Holdings Inc. (pg. 4) Consolidated Financial Statements December 31, 2004 — Grant Thornton, Auditors' Report b) Aurora Hydro Connections Limited (pg. 20) Financial Statements December 31, 2004 — Grant Thornton, Auditors' Report 3. Appointment of Auditors for Borealis Hydro Electric Holdings Inc. RECOMMENDED: THAT Grant Thornton LLP be re -appointed as the auditors of Borealis Hydro Electric Holdings Inc. 4. Appointment of Directors for Borealis Hydro Electric Holdings Inc. RECOMMENDED: THAT, effective June 22, 2005, the current Board of Directors, in total, be removed with the thanks and appreciation of the Council for all their efforts, energies and results in the stewardship of Borealis Hydro Electric Holdings Inc. over the past years; and Special Council Agenda No. 05-22 Wednesday, June 22, 2005 Page 2 of 4 THAT, effective June 22, 2005, Mayor Jones and Mr. John Rogers, Chief Administrative Officer of The Corporation of the Town of Aurora be appointed as the sole Directors of Borealis Hydro Electric Holdings Inc. 5. Borealis Hydro Electric Holdings Inc. RECOMMENDED: THAT no consideration be given at this time to the ultimate retention or disposition of Borealis Hydro Electric Holdings Inc. until after the sale of the shares of Aurora Hydro Connections Limited to PowerStream Inc. has been finalized and concluded. SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 TOWN OFAURORA SPECIAL COUNCIL BOREALIS HYDRO ELECTRIC HOLDINGS INC. ANNUAL SHAREHOLDER'S MEETING NO. 04-21 Council Chambers Aurora Town Hall Tuesday, June 22, 2004 ATTENDANCE COMMITTEE MEMBERS Mayor Jones In the Chair; Councillors Buck, Hogg, Gaertner, Kean, Wallace and West. MEMBERS ABSENT Councillors Morris and Vrancic were absent. OTHER ATTENDEES Chief Administrative Officer, Treasurer and Administrative Co-ordinator/Deputy Clerk Mayor Jones called the meeting to order at 5:20 p.m. I DECLARATIONS OF PECUNIARY INTEREST There were no declarations of pecuniary interest under the Municipal Conflict of Interest Act. II APPROVAL OFAGENDA Moved by Councillor Wallace Seconded by Councillor Kean THAT the content of the Agenda as circulated by the Corporate Services Department be approved as presented. _ CARRIED III RECEIPT OF MINUTES Borealis Hydro Electric Holdings Inc., Annual Shareholder's Meeting Minutes No. 03-21, Tuesday, July 15, 2003 MovedbyCouncillorBuck SecondedbyCouncillorKean THAT the Minutes of Meeting No. 03-21 be received for information. CARRIED Mr. George Steeves, Chair of the Board of Directors of Borealis Hydro Electric Holdings Inc. introduced the Members of the Board and staff of Aurora Hydro Connections Limited, present. -1- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Special Council Meeting No, 04-21 Page 2 of 3 Borealis Hydra Electric Holdings Inc. Annual Shareholder's Meeting -Tuesday, June 22, 2004 IV DELEGATIONS Mr. John Sanderson, President and CEO of Aurora Hydro Connections Limited to present Council with an overview of the significant activities undertaken by Aurora Hydro in 2003 and current initiatives for 2004. Mr. John Sanderson, President and CEO of Aurora Hydro Connections Limited presented Council with an overview of the significant activities undertaken by Aurora Hydro In 2003 and current Initiatives for 2004. Councillor Hogg requested that Hydro staff Investigate and report back at the next annual shareholder meeting regarding alternate cost savings and the potential implementation of on-line services for Aurora Hydro. V CONSIDERATION OFITEMS REQUIRING SEPARATE DISCUSSION 1. Consolidated Financial Statements, December 31, 2003 Moved by Councillor Kean Seconded by Councillor Wallace THAT the attached Consolidated Financial Statements, December 31, 2003, as approved by the Board of Directors, and the accompanying Management DiscussionandAnalysis be received for Information. CARRIED 2. Memorandum from John Sanderson, President and CEO of Aurora Hydro Connections Limited Re: Appointment of Auditors for Borealis Hydro Electric Holdings Inc. Moved by Councillor Kean Seconded by Councillor Wallace THAT Grant Thornton LLP be re -appointed as the auditors of Borealis Hydro Electric Holdings Inc. CARRIED 3. Memorandum from John Sanderson, President and CEO of Aurora Hydro Connections Limited Re: Appointment of Directors for Borealis Hydro Electric Holdings Inc. Moved by Councillor Kean Seconded by Councillor Hogg THAT the Shareholder accept the nominations of Mr. Calvin White and Mr. Dan Sooley to be re -appointed to the Board of Directors for a 3-year term. CARRIED -2- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Special Council Meeting No. 04.21 Page 3 of 3 Borealis Hydro Electric Holdings Inc. Annual Shareholder's Meeting -Tuesday, June 22, 2004 _ VI READING OF BY-LAWS Moved by Councillor Hogg Seconded by Councillor Wallace THAT the following listed by-law be given 1st, 2nd and 3rd readings, and enacted: 4553-04.0 BEING A BY-LAW to Confirm Actions by Council Resulting From The Special Council Meeting - Tuesday, June 22, 2004. CARRIED VI ADJOURNMENT Moved by Councillor Kean THAT the meeting be adjourned at 6:00 p.m. CARRIED -3- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 -:IT ELM A -A [A:G :EN D, Borealis Hydro Electric Holdings Inc. Consolidated Financial Statements December 31, 2004 Grant Thornton T -4- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Contents Auditors' Report Page 1 Consolidated Statements of Earnings and Retained Earnings 2 Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Grant Thornton 8 3 4 5-13 -5- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Grant Thornton T Grant Thornton LLP Chartered Accountants Management Consultants Auditors' Report To the Directors of Borealis Hydro Electric Holdings Inc. We have audited the consolidated balance sheet of Borealis Hydro Electric Holdings Inc. as at December 31, 2004 and the consolidated statements of earnings and retained earnings and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit Includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2004 and the results of its operations and cash flows for year then ended in accordance with Canadian generally accepted accounting principles. Markham, Canada April 15, 2005 15 Allstate Parkway Suite 200 Markham, Ontario 1.3115134 T (416)366-0100 F.(905)476-8906 E Markham@GrantThomton.ca W www.GrantThomlon.ca Canadian Mombet of Grant Thornton International Grant Thornton LLP Chartered Accountants C Me SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Consolidated Statements of Earnings and Retained Earnings Year Ended December 31 2004 2003 Revenue Sale of power $ 28,483,233 $ 27,394,444 Distribution 5,900,850 - 6,899,605 34,384,083 33,294,049 Cost of power Power purchased 28,483,233 27,394,444 Gross margin 5,900,850 6,899.605 Other revenue 387,973 336.870 Expenses Operations and maintenance 753,797 872,707 Administration 1,369,738 1,556,648 Depreciation 1,559,725 1,545,571 Billing and collecting 815,837 813,970 4,499,097 4,788,896 Earnings before interest and income taxes 1,789,726 1,447,579 Interest on long term debt 923,360 923,360 Earnings before income taxes 866,366 524,219 Payment in lieu of income taxes (Note 14) 505,300 110,000 Net earnings $ 361,066 $ 414,219 Retained earnings, beginning of year as previously reported $ 1,757,296 $ 1,343,077 Change in accounting policy (Note 2) (127.405) (127405) 1,629,891 1,215,672 Net earnings 361.066 414,219 Retained earnings, end of year $ 1,990,957 $ 1,629,891 See accompanying notes to the consolidated financial statements. Grant Thornton 9z 2 -7- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Consolidated Balance Sheet December 31 2004 2003 Assets Current Cash and cash equivalents $ 1,961,845 $ 2,177,519 Receivables 3,347,759 2,913,893 Unbilled revenue 4,199,650 2,942,467 Inventory 423,921 501,230 Prepaids 192,880 196,650 Current portion of regulatory assets 1,369,000 11,495,055 8,731,759 Capital assets (Note 5) 20,757,031 21,427,373 Regulatory assets (Note 6) 1,627,629 3,092,460 Investment 8,760 9,240 $ 33,888,475 $ 33,260,832 Liabilities Current Payables and accruals $ 4,192,990 $ 3,156,809 Customer deposits 965,503 835,217 Payment in lieu of taxes payable 335,865 - Current portion due to developers (Note 7) 401,224 348,000 5,895,582 4,340,026 Long term customer deposits 286,476 881,774 Unearned capital contributions 415,978 876,830 Due to developers (Note 7) 22,829 283,306 Accrued employee future benefits obligation (Note 12) 155,053 127,405 Long term debt (Note 8) 12,736,000 12,736,000 19,511,918 19,245,341 Shareholder's Equity Share capital (Note 9) 12,385,600 12,385,600 Retained earnings 1,990,957 1,629,891 14,376,557 14,015,491 _ $ 33,888,475 $ 33,260,832 Commitment and contingent liabilities (Notes 15 and 16) On behalf of the Board See accompanying notes to the consolidated financial statements. Grant Thornton,9, SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Consolidated Statement of Cash Flows Year Ended December 31 2004 2003 Cash derived from (applied to) Operating Net earnings Items not affecting cash: Depreciation Amortization of Investment Net change in non -cash working capital balances (Note 10) Financing (Decrease) increase in unearned capital contributions (Decrease) increase in amount due to developers (Decrease) increase in long term customer deposits Increase in accrued employee future benefits obligation Investing Net additions in capital assets Net decrease (increase) in regulatory assets Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ 361,066 $ 414,219 1,614,167 1,624,366 480 480 1,975,713 2,039,065 (107,638) 1,824,256 1,868,075 3,863,321 (460,852) 604,176 (207,253) 631,306 (595,298) 208,898 27.648 (1,235,755) 1,444,380 (943,825) (2,626,236) 95,831 (897,974) (847,9941 (3,524,210 (215,674) 1,783,491 2.177.519 394,028 $ 1,961,845 $ 2,177,619 See accompanying notes to the consolidated financial statements. Grant Thornton a 4 i� SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 1. Nature of operations Borealis Hydro Electric Holdings Inc. (the Corporation) distributes electricity to the residents and businesses in the Town of Aurora under license issued by the Ontario Energy Board (OEB). The Corporation is wholly owned through a holding Corporation by the Town of Aurora. The Electricity Act, 1998 provides for a competitive marketplace in the sale of electricity. The Ontario Energy Board Act, 1998 (Ontario) (OEBA) conferred on the Ontario Energy Board (OEB) increased powers and responsibilities to regulate the electricity industry. These powers and responsibilities include the power to approve or fix rates for the transmission and distribution of electricity, the power to provide continued rate protection for rural and remote electricity consumers, and the responsibility for ensuring that distribution companies fulfil obligations to connect and service customers, The OEB may also prescribe license requirements and conditions to electricity distributors, which may include among other things, specified accounting records, regulatory accounting principles, separation of accounts for distinct businesses and filing and process requirements for rate setting purposes. 2. Change In accounting policy Effective January 1, 2004, the Corporation adopted the employee future benefits obligation policy. The Corporation is required to recognize a liability for the future benefits of certain employees when they are no longer providing active service. As a result of the adoption of this policy, the Corporation has decreased retained earnings as at January 1, 2004 by $127,405 and recorded a liability accrued employee future benefits obligation for the same amount. 3. Summary of significant accounting policies Principles of consolidation The consolidated financial statements Include the accounts of Aurora Hydro Connections Limited in which the Corporation has a controlling interest, after the elimination of all Inter -company transactions and balances. Cash and cash equivalents Cash and cash equivalents include cash on hand, bank balances, money market funds and bankers acceptance. Inventory Inventory consists of repair parts, supplies and materials for maintenance and future capital expansion and are valued at the lower of cost (determined on a first -in, first out basis) and net realizable value. Grant Thornton, 5 -10- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 3. Summary of significant accounting policies (continued) Rate -setting The electricity distribution business is subject to rate regulation by the OEB. The OEB has the general power to include or exclude costs, revenues, losses or gains in the rates of a specific period, resulting in a change In the timing of accounting recognition from that which would have applied in an unregulated company. This change in timing gives rise to the recognition of regulatory assets. These regulatory assets reflect the fact that revenue and expenses are recognized in the financial statements in different periods consistent with their inclusion in rates, as directed by the regulator, than would be the case for an enterprise that is unregulated. Specific regulatory assets recognized at December 31, 2004 are disclosed in Note 6. In a letter dated December 19, 2003, the Minister of Energy granted approval for distributors to make application to the OEB with regard to rate recovery of certain distribution regulatory assets whose inclusion in rates was delayed by the Electricity Pricing, Conservation and Supply Act, 2002. These distribution regulatory assets are expected to be recovered in distribution rates over four years, commencing April 1, 2004. The amount to be recovered will be subject to a yet to be determined OEB review and approval process. The Corporation continually assesses the likelihood of recovery of each of its regulatory assets and believes that it is probable that its regulatory assets will be factored into the setting of future rates. If future recovery through rates Is no longer considered probable, the appropriate carrying amount will be written off in the period that the assessment is made. The following regulatory treatments have resulted in accounting treatments differing from Canadian GAAP for enterprises operating in a non -regulated environment: • Market ready costs have been deferred in accordance with the criteria set out In the OEB Electricity Distribution Rate Handbook, the Accounting Procedures Handbook and In subsequent OEB guidelines. In the absence of such regulation, these costs would have been expensed when incurred under Canadian GAAP; • The Corporation has deferred certain retail settlement variance amounts under the provisions of Article 490 in the OEB Accounting Procedures Handbook; Revenue recognition Revenues attributable to the sale and delivery of electricity are based on OEB approved unbundled rates and are recognized as power is delivered to customers. The Corporation estimates the monthly revenue for the period based on customer's usage because customer meters are not generally read at the end of each month. Unbilled revenue Is recognized for customer usage not billed at December 31, 2004. Grant Thornton,4, -11- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 3. Summary of significant accounting policies (continued) Depreciation Capital assets are depreciated by the straight-line method over periods approximating their estimated useful lives as follows: Distribution system 15-35 years Other capital assets 5-10 years When capital assets are sold or scrapped, the cost of the asset and the related accumulated depreciation is removed from the accounts with the resulting net gain or loss being included in operations for the year. Contributions for capital construction Capital contributions are required contributions received from outside sources used to finance additions to capital assets. Earned contributions are treated as a "credit contra account' included in the determination of capital assets. The amount is subsequently depreciated by a charge to accumulated depreciation and a credit to depreciation expense, at an equivalent rate to that used for the depreciation of the related capital asset. Corporate Income and capital taxes Under the Electricity Act, 1998, the Corporation is required to make payments in lieu of corporate income taxes to the Ontario Electricity Financial Corporation (OEFC). These payments are calculated in accordance with the rules for computing income and taxable capital and other relevant amounts contained in the Income Tax Act (Canada) and the Corporation Tax Act (Ontario) as modified by the Electricity Act, 1998 and related regulations. The Corporation provides for payments in lieu of corporate Income taxes relating to its regulated business using the taxes payable method as directed by the OEB. Under the taxes payable method, no provisions are made for future income taxes as a result of temporary differences between the tax basis of assets and liabilities and their carrying amounts for accounting purposes. When unrecorded future income taxes become payable, it is expected that they will be included in the rates approved by the OEB and recovered from the customers of the company at that time. This regulation accounting treatment differs from Canadian generally accepted accounting principles for enterprises operating in a non -regulated environment. Pension plan 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 Employees Retirement Fund (the "Fund") and provides pensions for employees of Ontario municipalities, local boards, public utilities and school boards. The Fund is a contributory defined benefit pension plan financed by equal contributions from participating employers and their employees and by the Investment earnings of the Fund (Note 11). Grant Thornton 1% 7 -12- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 3. Summary of significant accounting policies (continued) Accrued employee future benefits obligation Employee future benefits provided by the Corporation Include life insurance benefits and voluntary exit incentive program liability. These plans provide benefits to certain employees when they are no longer providing active service. Employee future benefit expense is recognized in the period in which the employees render the services. Employee future benefits are recorded on an accrual basis. The accrued benefit obligations and current service cost are calculated using the projected benefits method pro rated on service and based on assumptions that reflect management's best estimate. The current service cost for a period Is equal to the actuarial present value of benefits attributed to employees' services rendered in the period. Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. Actuarial gains (losses) are amortized into expense on a straight-line basis over the average remaining service period of active employees to full eligibility. Capital assets retirement obligations Canadian generally accepted accounting principles require the Corporation to determine the fair value of the future expenditures required to settle legal obligations to remove capital assets on retirement. If reasonably estimable, a liability Is recognized equal to the present value of the estimated future removal expenditures. An equivalent amount Is capitalized as an inherent cost of the associated capital assets. Some of the Corporation's assets may have asset retirement obligations. As the Corporation expects to use the majority of its capital assets for an indefinite period, no removal date can be determined and, consequently, a reasonable estimate of the fair value of any asset retirement obligations has not been made at this time. Use of estimates In preparing the Corporation's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenditures during the year. Due to the inherent uncertainty in making estimates, actual results could differ from these estimates. 4. Related party transactions The Corporation had the following related parry transactions: Town of Aurora —shareholder Interest paid Rent Energy sales and services Grant Thornton 49 2004 2003 923,360 $ 923,360 100,034 97,120 700,839 675,159 -13- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 5. Capital assets 2004 2003 Accumulated Net Net Cost DDe reciation Book Value Book Value Distribution system $ 41,412,928 $ 20,920,711 $ 20,492,217 $ 21,096,627 Other capital assets 2,749,619 2,484,805 264,814 330.746 $ 44,162,547 $ 23,405,516 $ 20,757,031 $ 21,427,373 6. Regulatory assets 2004 2003 As described in Note 3, the Corporation has recorded the following regulatory assets: Retail services variance $ 2,542,148 $ 2,600,786 Market ready costs 454.481 491.674 2,996,629 3,092,460 Less: current portion (1,369,000) $ 1,627,629 $ 3,092,460 7. Due to developers For all agreements entered into on or after November 1, 2000, that require the construction of new facilities to the distribution system or increased capacity of existing distribution system facilities to connect new customers, the Distribution System Code requires the Corporation to perform an economic evaluation to determine if the future revenue will pay for the capital cost and on -going maintenance costs of the expansion project. If there is a shortfall between the present value of the projected costs and revenues then a capital contribution may be requested. The amount shown as 'Due to Developers' represents the difference between the developers' required capital contribution as determined by the economic evaluation and the cost of distribution assets installed and paid for by the developers. 8. Longterm debt The unsecured promissory note is payable to the Town of Aurora. The note bears interest at a simple annual rate equal to the rate of interest that the Corporation is, from time to time, permitted by the OEB to recover in its rates (currently 7.25% per annum). Interest is due and payable quarterly on the last day of March, June, September and December. Grant Thornton 0 -14- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 9. Share capital Authorized: 2004 2003 The Corporation is authorized to Issue an unlimited number of common shares. Issued: 1,000 shares 10. Supplemental cash flow information Net change in non -cash working capital balances Receivables Unbilled revenue Inventory Prepaids Payables and accruals Customers deposits Payments in lieu of income taxes payable Interest income Interest paid Payments In lieu of income tax payable 11. Pension agreements $ 12,385,600 $ 12,385,000 2004 2003 $ (433,866) $ 3,549,461 (1,257,183) (1,399.902) 77,309 187,489 3,770 - (44,502) 1,036,181 (971,533) 130,286 503,243 335,865 $ (107,638) $ 1,824,256 $ 19,101 $ 74,225 $ 923,360 $ 923,360 $ 162,239 $ 110,000 The Corporation makes contributions to the Ontario Municipal Employees Retirement Fund (OMERS), which is a multi -employer plan, on behalf of members of its staff, The plan is a defined benefit plan, which specifies the amount of the retirement benefit to be received by the employees based on the length of service and rates of pay. Effective January 2004, full contribution rates were made at rates ranging from 6% to 8.8% of employee contributory earnings, depending upon the level of earnings. As a result, the Corporation made contributions in 2004 totalling $97,209 for current service (2003 - $28,560). Grant Thornton 10 -15- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 12. Accrued employee future benefits obligations The Corporation pays certain benefits on behalf of its retired employees. The Corporation's defined benefit plan for the year ended December 31 is as follows: 2004 2003 Accrued benefit obligation, beginning of year $ 127,405 $ 123,906 Benefits paid (7,687) (6,536) Expense for the year 35.335 10,034 Accrued benefit obligation, end of year $ 155,053 $ 127,405 The significant actuarial assumptions adopted in measuring the accrued benefit obligation are as follows: Discount rate The accrued benefit obligation for the year ended December 31, 2004 was determined using an annual discount rate of 5.75%. This corresponds to the assumed Consumer Price Index ("CPI") rate plus an assumed real rate of return of 3.65%. Salary and wage levels Future general salary and wage levels were assumed to Increase at 3% per annum. General Inflation rates Future general inflation rates, as measured by changes in the CPI, were assumed at 2.2%. 13. Public liability insurance The Corporation is a member of the Municipal Electric Association Reciprocal Insurance Exchange (MEARIE), which was created on January 1, 1987. A reciprocal Insurance exchange may be defined as a group of persons formed for the purpose of exchanging reciprocal contracts of indemnity or inter -insurance with each other through the same attorney. MEARIE has provided general liability insurance to the Corporation of $20,000,000 per occurrence. Grant Thornton S 11 -16- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 14. Payment in lieu of income taxes The Corporation is required to compute and remit to the Ontario Electricity Financial Corporation owned by the Province of Ontario payments in lieu of income taxes (PILS). PILS are computed in accordance with rules for computing Income, capital and other taxes provided for in the Income Tax Act (Canada) and the Corporation Tax Act (Ontario) as modified by The Electricity Act,1998 and related regulations. 2004 2003 Income before provision for PILS $ 739,038 $ 458,142 Federal and Ontario statutory income tax rates 36.12% 36.60% Provision for PILS at statutory rate $ 266,940 $ 167.680 Increase (decrease) resulting from: Temporary differences Depreciation in excess of capital cost allowance 157,446 103,380 Deduction of Ontario capital tax (24,668) (39,280) Other 1,464 Reserves 72,259 70.033 Net temporary differences 206,501 134.133 Permanent differences: Ontario capital tax 68,293 70,000 Amortization of appraisal increment (66,889) (56,033) Large corporation tax 40,000 Adjustment to prior provision 29,065 - Other 1,390 - Loss carry forward (245,780) Net permanent differences 31.859 (191.81 Provision for PILS $ 505,300 $ 110,000 Future income taxes relating to the regulated businesses have not been recorded in the accounts as they are expected to be recovered through future revenues. 15. Commitment Purchasers of electricity in Ontario, through the Independent Electricity System Operator (IESO, formerly Independent Market Operator), are required to provide security to mitigate the risk of their default based on their expected activity in the market. The IESO could draw on these guarantees if the Corporation fails to make a payment required by default notice Issued by the IESO. The maximum potential payment Is the face value of the bank letters of credit. As at December 31, 2004, the Corporation provided prudential support using bank letters of credit of $2,591,187. Grant Thornton S 12 -17- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Borealis Hydro Electric Holdings Inc. Notes to the Consolidated Financial Statements December 31, 2004 16. Contingent liabilities A class action claiming $500 million In restitution payments plus interest was served on Toronto Hydro Electric Commission on November 18, 1998. The action was initiated against Toronto Hydro as the representative of the Defendant Class consisting of all municipal electrical utilities in Ontario that have charged late payment charges on overdue utility bills at any time after April 1, 1981. The claim Is that the late payment penalties resulting in the municipal electrical utilities receiving interest at effective interest rates in excess of 60% per year, which'is illegal under section 347(1)(b) of the Criminal Code. The Electricity Distributors Association is undertaking the defence of this class action. At this time it is not possible to quantify the effect, if any, on the financial statements of the Corporation, and as such no accrual of any potential liability has been recognized. The Corporation is defending a wrongful dismissal claim. The likely losses related to the matter remains uncertain at this time. 17. Subsequent event On March 24, 2005 the Corporation signed a share purchase agreement to sell all the common shares of Aurora Hydro Connections Limited to PowerStream Inc. Grant Thornton 13 am SPECIAL COUNCIL —BOREALIS HYDRO —SHAREHOLDER MEETING—JUNE 22,2005 Page 1 of 1 Somerville, Scott From: Tom Barrett [t.barrett@aurorahydro.on.ca] Sent: June S, 2005 2:13 PM To: Somerville, Scott Cc: John Sanderson Subject: FW: Aurora Hydro FS Scott, Here are the finals from Grant Thornton. Tom Barrett, B.Comm. C.A. Chief Financial Officer -----Original Message ----- From: Byrne, Allister[mailto:abyrne@grantthornton.ca] Sent: Tuesday, June 07, 2005 7:59 AM To: Tom Barrett Cc: Bunn, Mike Subject: Aurora Hydro FS Tom, Here are the f/s for distribution. Allister This e-mail is intended solely for the person or entity to which it is addressed and may contain confidential and/or privileged information. Any review, dissemination, copying, printing or other use of this e-mail by persons or entities other than the addressee is prohibited. If you have received this e-mail in error, please contact the sender immediately and delete the material from any computer. 08/06/2005 —19— SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Financial Statements December 31, 2004 Grant Thornton T -20- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Contents Auditors' Report Statements of Earnings and Retained Earnings Balance Sheet Statement of Cash Flows Notes to the Financial Statements Grant Thornton �rrr, Paae 1 2 3 4 5-13 -21- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Grant Thornton S Grant Thornton LLP Chartered Accountants Management Consultants Auditors' Report To the Directors of Aurora Hydro Connections Limited We have audited the balance sheet of Aurora Hydro Connections Limited as at December 31, 2004 and the statements of earnings and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2004 and the results of its operations and cash flows for year then ended in accordance with Canadian generally accepted accounting principles. Markham, Canada April 15, 2005 15 Allstate Parkway Suite 200 Markham, Ontario WR Set T (416)366-0100 F (905) 475-5906 E Markham®GrantThornton.ca W w ,GmntThomton.ca Coniston Member of Gram Thornton Imon atlonel Grant Thornton LLP Chartered Accountants -22- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Statements of Earnings and Retained Earnings Year Ended December 31 2004 2003 Revenue Sale of power $ 28,483,233 $ 27,394,444 Distribution 5,900,850 5,899,605 34,384,083 33,294,049 Cost of power Power purchased 28,483,233 27,394,44 Gross margin 5,900.850 5,899,605 Other revenue 387,973 336,870 Expenses Operations and maintenance 753,797 872,707 Administration 1,291,208 1,442,725 Depreciation 1,559,725 1,546,571 Billing and collecting 815,837 813,970 Management fee - 78,453 180,000 4,499,020 4,854,973 Earnings before interest and income taxes 1,789,803 1,381,502 Interest on long term debt 923,360 923,360 Earnings before income taxes 866,443 458,142 Payment in lieu of income taxes (Note 14) 505,300 110,00 Net earnings $ 361,143 $ 348,142 Retained earnings, beginning of year $ 1,757,219 $ 1,409,077 Change in accounting policy (Note 2) (127,405j (127,405 1,629,814 1,281,672 Net earnings 361,143 348,142 Retained earnings, end of year $ 1,990,957 $ 1,629,814 See accompanying notes to the financial statements, Grant Thornton 8 2 -23- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Balance Sheet December 31 2004 2003 Assets Current Cash and cash equivalents $ 1,961,845 $ 2,177,519 Receivables 3,347,759 2,913,893 Unbilled revenue 4,199,650 2,942,467 Inventory 423,921 501,230 Prepalds 192,880 196,650 Current portion of regulatory assets 1,369,000 11,495,055 8,731,759 Capital assets (Note 5) 20,757,031 21,427,373 Regulatory assets (Note 6) 1,627,629 3,092,460 Investment 8,760 9,240 $ 33,888,475 $ 33,260,832 Liabilities Current Payables and accruals $ 4,187,565 $ 3,156,809 Customer deposits 965,503 835,217 Due to related party (Note 4) 5,425 77 Payment in lieu of taxes payable 335,865 - Current portion due to developers (Note 7) 401,224 348,000 5,895,582 4,340,103 Long term customer deposits 286,476 881,774 Unearned capital contributions 415,978 876,830 Due to developers (Note7) 22,829 283,306 Accrued employee future benefits obligation 155,053 127,405 Longterm debt (Note 8) 12.736,000 12,736.000 19,511,918 19,245,418 Shareholder's Equity Share capital (Note 9) 12,385,600 12,385,600 Retained earnings 11990,957 1,629,814 14,376.557 14,015,414 $ 33,888,475 $ 33,260,832 Commitment and contingent liabilities (Notes 15 and 16) On behalf of the Board Director See accompanying notes to the financial statements. Grant Thornton; 7 -24- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Statement of Cash Flows Year Ended December31 2004 2003 Cash derived from (applied to) Operating Net earnings $ 361,143 $ 348,142 Items not affecting cash: Depreciation 1,614,167 1,624,366 Amortization of investment 480 480 1,975,790 1,972,988 Net change in non -cash working capital balances (Note 10) (107,715) 1,890,333 1,868,075 3,863,321 Financing (Decrease)increase in unearned capital contributions (460,852) 604,176 (Decrease)increase in amount due to developers (207,253) 631,306 (Decrease)increase in long term customer deposits (595,298) 208,898 Increase in accrued employee future benefits obligation 27,648 - (1,235,755) 1,444,380 Investing Net additions in capital assets (943,825) (2,626,236) Net decrease (increase) In regulatory assets 95,631 (897.974) (847,994) (3 524 210) Net increase (decrease) in cash and cash equivalents (215,674) 1,783,491 Cash and cash equivalents, beginning of year 2,177,519 394.028 Cash and cash equivalents, end of year $ 1,961,845 $ 2,177,519 See accompanying notes to the financial statements. Grant Thornton 4 -25- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 1. Nature of operations Aurora Hydro Connections Limited (the Corporation) distributes electricity to the residents and businesses in the Town of Aurora under license issued by the Ontario Energy Board (OEB). The Corporation is wholly owned through a holding Corporation by the Town of Aurora. The Electricity Act, 1998 provides for a competitive marketplace in the sale of electricity. The Ontario Energy Board Act, 1998 (Ontario) (OEBA) conferred on the Ontario Energy Board (OEB) Increased powers and responsibilities to regulate the electricity Industry. These powers and responsibilities Include the power to approve or fix rates for the transmission and distribution of electricity, the power to provide continued rate protection for rural and remote electricity consumers, and the responsibility for ensuring that distribution companies fulfil obligations,to connect and service customers. The OEB may also prescribe license requirements and conditions to electricity distributors, which may include among other things, specified accounting records, regulatory accounting principles, separation of accounts for distinct businesses and filing and process requirements for rate setting purposes. 2. Change In accounting policy Effective January 1, 2004, the Corporation adopted the employee future benefits obligation policy. The Corporation is required to recognize a liability for the future. benefits of certain employees when they are no longer providing active service. As a result of the adoption of this policy, the Corporation has decreased retained earnings as at January 1, 2004 by $127,405 and recorded a liability accrued employee future benefits obligation for the same amount. 3. Summary of significant accounting policies Cash and cash equivalents Cash and cash equivalents include cash on hand, bank balances, money market funds and bankers acceptance. Inventory Inventory consists of repair parts, supplies and materials for maintenance and future capital expansion and are valued at the lower of cost (determined on a first -in, first out basis) and net realizable value. Grant Thornton,19 -26- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 3. Summary of significant accounting policies (continued) Rate -setting The electricity distribution business is subject to rate regulation by the OEB. The OEB has the general power to include or exclude costs, revenues, losses or gains in the rates of a specific period, resulting in a change in the timing of accounting recognition from that which would have applied in an unregulated company. This change in timing gives rise to the recognition of regulatory assets. These regulatory assets reflect the fact that revenue and expenses are recognized in the financial statements in different periods consistent with their inclusion In rates, as directed by the regulator, than would be the case for an enterprise that is unregulated. Specific regulatory assets recognized at December 31, 2004 are disclosed in Note 6. In a letter dated December 19, 2003, the Minister of Energy granted approval for distributors to make application to the OEB with regard to rate recovery of certain distribution regulatory assets whose Inclusion in rates was delayed by the Electricity Pricing, Conservation and Supply Act, 2002. These distribution regulatory assets are expected to be recovered in distribution rates over four years, commencing April 1, 2004. The amount to be recovered will be subject to a yet to be determined OEB review and approval process. The Corporation continually assesses the likelihood of recovery of each of its regulatory assets and believes that it is probable that its regulatory assets will be factored into the setting of future rates. If future recovery through rates is no longer considered probable, the appropriate carrying amount will be written off in the period that the assessment is made. The following regulatory treatments have resulted in accounting treatments differing from Canadian GAAP for enterprises operating in a non -regulated environment: • Market ready costs have been deferred in accordance with the criteria set out in the OEB Electricity Distribution Rate Handbook, the Accounting Procedures Handbook and In subsequent OEB guidelines. In the absence of such regulation, these costs would have been expensed when Incurred under Canadian GAAP; • The Corporation has deferred certain retail settlement variance amounts under the provisions of Article 490 in the OEB Accounting Procedures Handbook; Revenue recognition Revenues attributable to the sale and delivery of electricity are based on OEB approved unbundled rates and are recognized as power is delivered to customers. The Corporation estimates the monthly revenue for the period based on customer's usage because customer meters are not generally read at the end of each month. Unbilled revenue is recognized for customer usage not billed at December 31, 2004. Grant Thornton 2 -27- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 3. Summary of significant accounting policies (continued) Depreciation Capital assets are depreciated by the straight-line method over periods approximating their estimated useful lives as follows: Distribution system 15 - 35 years Other capital assets 5 -10 years When capital assets are sold or scrapped, the cost of the asset and the related accumulated depreciation is removed from the accounts with the resulting net gain or loss being included in operations for the year. Contributions for capital construction Capital contributions are required contributions received from outside sources used to finance additions to capital assets. Earned contributions are treated as a "credit contra account' included in the determination of capital assets. The amount is subsequently depreciated by a charge to accumulated depreciation and a credit to depreciation expense, at an equivalent rate to that used for the depreciation of the related capital asset. Corporate income and capital taxes Under the Electricity Act, 1998, the Corporation is required to make payments in lieu of corporate income taxes to the Ontario Electricity Financial Corporation (OEFC). These payments are calculated in accordance with the rules for computing income and taxable capital and other relevant amounts contained In the Income Tax Act (Canada) and the Corporation Tax Act (Ontario) as modified by the Electricity Act, 1998 and related regulations. The Corporation provides for payments in lieu of corporate income taxes relating to its regulated business using the taxes payable method as directed by the OEB. Under the taxes payable method, no provisions are made for future Income taxes as a result of temporary differences between the tax basis of assets and liabilities and their carrying amounts for accounting purposes. When unrecorded future income taxes become payable, it is expected that they will be included in the rates approved by the OEB and recovered from the customers of the company at that time. This regulation accounting treatment differs from Canadian generally accepted accounting principles for enterprises operating in a non -regulated environment. Pension plan 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 Employees Retirement Fund (the "Fund') and provides pensions for employees of Ontario municipalities, local boards, public utilities and school boards. The Fund is a contributory defined benefit pension plan financed by equal contributions from participating employers and their employees and by the investment earnings of the Fund (Note 11). Grant Thornton S, 7 ISO SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 3. Summary of significant accounting policies (continued) Accrued employee future benefits obligation Employee future benefits provided by the Corporation include life insurance benefits and voluntary exit incentive program liability. These plans provide benefits to certain employees when they are no longer providing active service. Employee future benefit expense is recognized in the period in which the employees render the services. Employee future benefits are recorded on an accrual basis. The accrued benefit obligations and current service cost are calculated using the projected benefits method pro rated on service and based on assumptions that reflect management's best estimate. The current service cost for a period is equal to the actuarial present value of benefits attributed to employees' services rendered in the period. Past service costs from plan amendments are amortized on a straight- line basis over the average remaining service period of employees active at the date of amendment. Actuarial gains (losses) are amortized Into expense on a straight-line basis over the average remaining service period of active employees to full eligibility. Capital assets retirement obligations Canadian generally accepted accounting principles require the Corporation to determine the fair value of the future expenditures required to settle legal obligations to remove capital assets on retirement. If reasonably estimable, a liability is recognized equal to the present value of the estimated future removal expenditures. An equivalent amount is capitalized as an inherent cost of the associated capital assets. Some of the Corporation's assets may have asset retirement obligations. As the Corporation expects to use the majority of its capital assets for an indefinite period, no removal date can be determined and, consequently, a reasonable estimate of the fair value of any asset retirement obligations has not been made at this time. Use of estimates In preparing the Corporation's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenditures during the year. Due to the inherent uncertainty in making estimates, actual results could differ from these estimates. Grant Thornton:% a -29- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 4. Related party transactions 2004 2003 The Corporation had the following related party transactions: Borealis Hydro Electric Holdings Inc. - related Corporation Managementfee $ 78,453 $ 180,000 Town of Aurora - shareholder of parent Corporation Interest paid 923,360 923,360 Rent 100,034 97,120 Energy sales and services 700,839 675,159 Balances outstanding at December 31: Due to Borealis Hydro Electric Holdings Inc. (6,425) (77: 5. Capital assets 2004 2003 Accumulated Net Net Cost Depreciation Book Value Book Value Distribution system $ 41,412,928 $ 20,920,711 $ 20,492,217 $ 21,096,627 Other capital assets 2,749,619 2,484,805 264,814 330,746 $ 44,162,547 $ 23,405,516 $ 20,757,031 $ 21,427,373 6. Regulatory assets 2004 2003 As described in Note 3, the Corporation has recorded the following regulatory assets: Retail services variance $ 2,542,148 $ 2,600,786 Market ready costs 454,481 491,674 2,996,629 3,092,460 Less: current portion (1,369.000) - $ 1,627,629 $ 3,092,460 7. Due to developers For all agreements entered into on or after November 1, 2000, that require the construction of new facilities to the distribution system or increased capacity of existing distribution system facilities to connect new customers, the Distribution System Code requires the Corporation to perform an economic evaluation to determine If the future revenue will pay for the capital cost and on -going maintenance costs of the expansion project. If there is a shortfall between the present value of the projected costs and revenues then a capital contribution may be requested. Grant Thornton S 11 -30- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 7. Due to developers (continued) The amount shown as 'Due to Developers' represents the difference between the developers' required capital contribution as determined by the economic evaluation and the cost of distribution assets installed and paid for by the developers. 8. Long term debt The unsecured promissory note is payable to the Town of Aurora. The note bears interest at a simple annual rate equal to the rate of interest that the Corporation Is, from time to time, permitted by the OEB to recover in its rates (currently 7.25% per annum). Interest is due and payable quarterly on the last day of March, June, September and December. 9. Share capital 2004 2003 Authorized: The Corporation is authorized to issue an unlimited number of common shares. Issued: 1,000 shares $ 12,385,600 $ 12,385,000 10. Supplemental cash flow Information 2004 2003 Net change in non -cash working capital balances Receivables $ (433,866) $ 3,549,461 Unbilled revenue (1,257,183) (1,399,902) Inventory 77,309 187,489 Prepaids 3,770 (44,502) Due to related parties 5,348 66,077 Payables and accruals 1,030,756 (971,533) Customers deposits 130,286 503,243 Payments in lieu of income taxes payable 335.865 $ (107,715) $ 1,890,333 Interest income $ 19,101 $ 74,225 Interest paid $ 923,360 $ 923,360 Payments in lieu of Income tax payable $ 162,239 $ 110,000 Grant Thornton, 10 -31- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 11. Pension agreements The Corporation makes contributions to the Ontario Municipal Employees Retirement Fund (OMERS), which is a multi -employer plan, on behalf of members of its staff. The plan Is a defined benefit plan, which specifies the amount of the retirement benefit to be received by the employees based on the length of service and rates of pay. Effective January 2004, full contribution rates were made at rates ranging from 6% to 8.8% of employee contributory earnings, depending upon the level of earnings. As a result, the Corporation made contributions in 2004 totalling $97,209 for current service (2003 - $28,560). 12. Other post -employment benefit plans The Corporation pays certain benefits on behalf of its retired employees. The Corporation's defined benefit plan for the year ended December 31 is as follows: 2004 2003 Accrued benefit obligation, beginning of year $ 127,405 $ 123,906 Benefits paid (7,687) (6,535) Expense for the year 35,336 10,034 Accrued benefit obligation, end of year $ 155,053 $ 127,405 The significant actuarial assumptions adopted in measuring the accrued benefit obligation are as follows: Discount rate The accrued benefit obligation for the year ended December 31, 2004 was determined using an annual discount rate of 5.75%. This corresponds to the assumed Consumer Price Index ("CPI") rate plus an assumed real rate of return of 3.65%. Salary and wage levels Future general salary and wage levels were assumed to increase at 3% per annum. General Inflation rates Future general inflation rates, as measured by changes in the CPI, were assumed at 2.2%. Grant Thornton a 11 -32- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 13. Public liability insurance The Corporation is a member of the Municipal Electric Association Reciprocal Insurance Exchange (MEARIE), which was created on January 1, 1987. A reciprocal insurance exchange may be defined as a group of persons formed for the purpose of exchanging reciprocal contracts of indemnity or Inter -insurance with each other through the same attorney. MEARIE has provided general liability Insurance to the Corporation of $20,000,000 per occurrence. 14. Payment in lieu of Income taxes The Corporation is required to compute and remit to the Ontario Electricity Financial Corporation owned by the Province of Ontario payments in lieu of income taxes (PILS). PILS are computed in accordance with rules for computing income, capital and other taxes provided for in the Income Tax Act (Canada) and the Corporation Tax Act (Ontario) as modified by The Electricity Act,1998 and related regulations. 2004 2003 Income before provision for PILS $ 739,038 $ 458,142 Federal and Ontario statutory income tax rates 36.12% 36.60% Provision for PILS at statutory rate $ 266,940 $ 167,680 Increase (decrease) resulting from: Temporary differences Depreciation in excess of capital cost allowance 157,446 103,380 Deduction of Ontario capital tax (24,668) (39,280) Other 1,464 Reserves 72,259 70,033 Net temporary differences 206,501 134,133 Permanent differences: Ontario capital tax 68,293 70,000 Amortization of appraisal Increment (66,889) (56,033) Large corporation tax 40,000 Adjustment to prior provision 29,065 - Other 1,390 Loss carry forward (245,780) Net permanent differences 31,859 (191,813) Provision for PILS $ 505,300 $ 110,000 Future income taxes relating to the regulated businesses have not been recorded In the accounts as they are expected to be recovered through future revenues. Grant Thornton 12 -33- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Aurora Hydro Connections Limited Notes to the Financial Statements December 31, 2004 15. Commitment Purchasers of electricity in Ontario, through the Independent Electricity System Operator (IESO, formerly Independent Market Operator), are required to provide security to mitigate the risk of their default based on their expected activity in the market. The IESO could draw on these guarantees if the Corporation fails to make a payment required by default notice issued by the IESO. The maximum potential payment is the face value of the bank letters of credit. As at December 31, 2004, the Corporation provided prudential support using bank letters of credit of $2,591,187. 16. Contingent liabilities A class action claiming $500'million in restitution payments plus interest was served on Toronto Hydro Electric Commission on November 18, 1998. The action was initiated against Toronto Hydro as the representative of the Defendant Class consisting of all municipal electrical utilities in Ontario that have charged late payment charges on overdue utility bills at any time after April 1,1981. The claim is that the late payment penalties resulting in the municipal electrical utilities receiving interest at effective Interest rates in excess of 60% per year, which is illegal under section 347(1)(b) of the Criminal Code. The Electricity Distributors Association is undertaking the defence of this class action. At this time it Is not possible to quantify the effect, if any, on the financial statements of the Corporation, and as such no accrual of any potential liability has been recognized. The Corporation is defending a wrongful dismissal claim. The likely losses related to the matter remains uncertain at this time. 17. Subsequent event On March 24, 2005 the parent company, Borealis Hydro Electric Holdings Inc., signed a share purchase agreement to sell all the common shares of this Corporation to PowerStream Inc. Grant Thornton S 13 -34- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Page 1 of 1 Somerville, Scott From: Tom Barrett [t.barrett@aurorahydro.on.ca] Sent: June 8, 2005 2:13 PM To: Somerville, Scott Cc: John Sanderson Subject: FW: Aurora Hydro FS Scott, Here are the finals from Grant Thornton. Tom Barrett, B.Comm. C.A. Chief Financial Officer -----Original Message ----- From: Byrne, Allister [mailto:abyrne@grantthornton.ca] Sent: Tuesday, June 07, 2005 7:59 AM To: Tom Barrett Cc: Bunn, Mike Subject: Aurora Hydro FS Tom, Here are the f/s for distribution. Allister This e-mail is intended solely for the person or entity to which it is addressed and may contain confidential and/or privileged information. Any review, dissemination, copying, printing or other use of this e-mail by persons or entities other than the addressee is prohibited. If you have received this e-mail in error, please contact the sender immediately and delete the material from any computer. 08/06/2005 -35- SPECIAL COUNCIL —BOREALIS HYDRO —SHAREHOLDER MEETING—JUNE 22,2005 Page 1 of 2 Munro, Darlene From: suzanne@mfoa.on.ca Sent: June 8, 2005 1:33 PM To: Munro, Darlene Subject: MFOA event registration confirmation Municipal Finance Officers' Association of Ontario 512 King Street East Suite 306 Toronto, ON M5A 1M1 Phone: (416) 362-9001 Fax: (416) 362-9226 Meeting Confirmation ID:10030 Darlene Munro Accounting Supervisor Town of Aurora 100 John West Way,P,O. Box 1000 Aurora, ON L4G 6J1 Performance Measurement for Municipalities Wednesday, June 01, 2005 through Wednesday, June 01, 2005 Sheraton Parkway Thornhill Room 600 Highway 7 East Richmond Hill, Ontario Function Performance Measurement for Municipalities Quantity 1.0 Rate Amount $225.00 $225.00 Tax: $15.75 Total: $240.75 Payments: $0.00 Balance: $240.75 Sessions run from 9:00 a.m. to 4:30 p.m. Lunch will be served For more information please contact Suzanne Fich at 416-362-9001 ext. 225 email: suzannepmfoa.on.ca PLEASE REMIT ANY 08/06/2005 —36— SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Page 2 of 2 OUTSTANDING BALANCES TO: Municipal Finance Officers' Association 512 King Street East, Suite 306 Toronto Ontario M5A 1M1 REFUND POLICY: Refunds will be given for cancellations received in writing four working days prior to the seminar. We regret that refunds cannot be given after these dates. Please note that if you register for the seminar and do not attend, you are RESPONSIBLE FOR THE FULL REGISTRATION FEE. For more information, please contact Suzanne Fich at suzanneQq rnfoa.on.ca 08/06/2005 -37- SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 Page 1 of 1 Somerville, Scott From: Tom Barrett [t.barrett@aurorahydro.on.ca] Sent: June 8, 2005 2:13 PM To: Somerville, Scott Cc: John Sanderson Subject: FW: Aurora Hydro FS Scott, Here are the finals from Grant Thornton, Tom Barrett, B.Comm. C.A. Chief Financial Officer -----Original Message ----- From: Byrne, Allister [mailto:abyrne@grantthornton.ca] Sent: Tuesday, June 07, 200S 7:S9 AM To: Tom Barrett Cc: Bunn, Mike Subject: Aurora Hydro FS Tom, Here are the f/s for distribution. Allister This e-mail is intended solely for the person or entity to which it is addressed and may contain confidential and/or privileged information. Any review, dissemination, copying, printing or other use of this e-mail by persons or entities other than the addressee is prohibited. If you have received this e-mail in error, please contact the sender immediately and delete the material from any computer. 08/06/2005 2 SPECIAL COUNCIL -BOREALIS HYDRO -SHAREHOLDER MEETING-JUNE 22,2005 THE CORPORATION OF THE TOWN OFAURORA By-law Number 4680-05.0 BEING A BY-LAW to Confirm Actions by Council Resulting From The Special Council Meeting of June 22, 2005. THE COUNCIL OF THE CORPORATION OF THE TOWN OF AURORA HEREBY ENACTS AS FOLLOWS: THAT the action of the Council at its special meeting held on June 22, 2005 in respect to each motion, resolution and other action passed and taken by the Council at the said meeting is, except where prior approval of the Ontario Municipal Board is required, hereby adopted ratified and confirmed. 2. THAT the Mayor and the proper officers of the Town are hereby authorized and directed to do all things necessary to give effect to the said action or to obtain approvals where required and to execute all documents as may be necessary in that behalf and the Clerk is hereby authorized and directed to affix the corporate seal to all such documents. READ A FIRST AND SECOND TIME THIS 22"d DAY OF JUNE, 2005, READ A THIRD TIME AND FINALLY PASSED THIS 22"d DAY OF JUNE, 2005. T. JONES, MAYOR K. EWART, DEPUTY CLERK -39-