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HomeMy WebLinkAboutFIN-18-012 - 2017 Audited Consolidated Financial Statementsl Staff Repod KI'WHENER Financial Services Department www.kitchener.ca REPORT TO: Audit Committee DATE OF MEETING: June 11, 2018 SUBMITTED BY: Jonathan Lautenbach, Chief Financial Officer, 519-741-2200 ext 7334 PREPARED BY: Sheri Brisbane, Supervisor Financial Reporting, 519-741-2200 ext 7349 WARD (S) INVOLVED: All DATE OF REPORT: June 4, 2018 REPORT NO.: FIN -18-012 SUBJECT: 2017 Audited Consolidated Financial Statements RECOMMENDATION: THAT the 2017 Audited Consolidated Financial Statements of the City of Kitchener be approved. BACKGROUND: Staff is pleased to submit the 2017 Audited Consolidated Financial Statements of the City of Kitchener. A presentation of financial statement highlights will be given at the Audit Committee meeting on June 11. Representatives of the City's external auditors will also be in attendance to discuss the Audit Findings Report. REPORT: The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles for local governments as established by the Public Sector Accounting Board of the Chartered Professional Accountants of Canada. These financial statements are prepared on a full accrual basis and combine the results of the tax -based operations, enterprises, local boards, capital activity, and reserve fund activities. Local boards include The Centre in the Square Inc., Kitchener Public Library, Belmont Improvement Area, and Kitchener Downtown Improvement Area. The 2017 year end results for the tax -based operations and the enterprises were reported to Council in March. Please see Appendix A to this report for a reconciliation between the non -consolidated figures presented in March and the Audited Consolidated Financial Statements. ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: The recommendation of this report supports the achievement of the city's strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: None *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. 1-1 COMMUNITY ENGAGEMENT: INFORM — This report has been posted to the City's website with the agenda in advance of the council / committee meeting. The audited financial statements will be posted on the City website and notice will be provided to all residents through one of the widely distributed local newspapers in accordance with Section 295 (1) of the Municipal Act, 2001. ATTACHMENTS: • City of Kitchener Financial Report for the Year Ended December 31, 2017 • Audit Committee Presentation • Audit Findings Report for the year ended December 31, 2017 (KPMG) ACKNOWLEDGED BY: Jonathan Lautenbach, Chief Financial Officer and City Treasurer 1-2 Appendix A — Annual Surplus Reconciliation The annual surplus presented in the Audited Consolidated Financial Statements reconciles to the City of Kitchener year-end results provided to Finance & Corporate Services Committee on March 5, 2018 as follows: Year Ended Dec 31, 2017 Tax supported surplus (deficit) 1,416,487 Enterprise surplus (deficit) 4,948,549 Total operating surplus as presented in March 6,365,036 Consolidation Kitchener Public Library (137,914) The Centre in the Square 3,510,961 Kitchener Downtown Improvement Area 66,692 Belmont Improvement Area 5,001 Kitchener Power Corp. and its Affiliates 9,347,693 Kitchener Generation Corporation 3,407 12,795,840 Revenues not included in operating surplus Reserve fund revenue 32,523,632 Donated assets 582,657 Gain (loss) on sale of tangible capital assets (2,710,761) Othercapital revenue 17,464,750 47, 860, 278 Items in operating surplus, not in consolidated statements Net transfers to capital and reserves 62,767,610 Various PSAB adjustments 4,871,872 67,639,481 COK expenses not included in operating surplus Amortization of tangible capital assets (43,839,062) Othercapital expenses (25,542,129) Change in actuarial estimate for employee future benefits (3,661,739) Reserve fund expenses (8,788,986) (81,831,916) Annual surplus per Consolidated F/S 52,828,718 1-3 ro V Co El 0 ^ W 0 N W 1 � M cc (3) E L V O 4� L p 1-5 W a� O i +, O oc a� ul V V L.L Ca � LL Q 1-5 1-6 N � L O Coro._ m r > ro._ n O ._ .� m E 1-6 s 0 Ca V LL O O CL 4-j 4-j 4-j 4-j E E E E V) V) V) V) 1-7 N 0. 0 1 .-. 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c U � m m o m C7 � a ° y c � � C7 � � N N a � � U - T � � O � O C N N N N t0 a ° � m � Y U O OJ (0 O � N m E NZO N - (0 � Y � s � y C N N O N N y n N � C N C n � d T � Y E � N (0 y - c � d � ° m - n m y UO Y N O O N 9 > S " Q L O N � 0 - 0 � O � (0 F m a U € a Q - J J E c g a 0 0 a J � r (J U c Y Y F OO 1-37 Prepared by: ACCOUNTING DIVISION Financial Services Department Kitchener, Ontario, Canada we are As the largest municipality in Waterloo Region, Kitchener is situated in the heart of Southwestern Ontario, close to major highways - including Canada's super highway, 401 - that easily connects to London, Stratford and the Greater Toronto Area. Situated on the Grand River, Kitchener is the perfect destination for recreation and leisure activities, with a plethora of choices, including many parks, trails and natural areas. Downtown Kitchener is the heart of the arts and culture scene for Waterloo Region. Festivals and special events provide the opportunity to experience a variety of activities and cultural events, in celebration of our great diversity. i-1 Introductory Section Message from the Mayor City Council Organizational Structure Message from the City Treasurer Financial Section .u"le of Contents Consolidated Financial Statements Trust Funds Belmont Improvement Area Board of Management Kitchener Downtown Improvement Area Board of Management Kitchener Public Library The Centre in the Square Inc. Gasworks Enterprise Kitchener Generation Corporation Kitchener Power Corp. Statistical Section Financial and Statistical Review 2 3 4 5 20 42 48 54 63 75 88 92 99 136 2017 KITCHENER FINANCIAL REPORT 1 Message from the Mayor On behalf of city council, I am pleased to introduce the 2017 Annual Financial Report. Last year, I'm proud to say we advanced our vision for a city built on a diverse, dynamic economy and caring, innovative neighbourhoods. In 2017, City of Kitchener staff and council developed a list of strategic actions representing projects or ongoing programs and initiatives that reflect this vision to build our city with passion and purpose. Keeping our citizens front and centre, we made difficult decisions in order to deliver a balanced budget. We know it isn't just a strong economy or vibrant neighbourhoods that build our city. It's people who build great cities, through partnerships and collaboration, and working together for a common purpose. We are all citybuilders. The budgets passed during this term of council maintained funding for existing programs and services and also invested in new resources for the areas of our city that people have told us they value most: our parks, trails, and, of course, neighbourhoods. Strong neighbourhoods: We work alongside our tremendous neighbourhood associations, our community partners and our citizens to create the spaces, places and experiences that connect people with one another. Strong economy: Our four-year economic development strategy, Make it Kitchener, ensures our innovators and entrepreneurs, makers and manufacturers, developers and investors are all inspired to be citybuilders. Strong local government Strong financial leadership allows the city to support citizens as they take the lead in doing great things in our community. We are proud to produce reports like this each year, demonstrating the City of Kitchener's commitment to openness and transparency. This report provides a financial perspective on how we contributed to building our city in 2017. But, council and staff can't do it alone. If people are the citybuilders, I encourage the members of this community to be engaged and involved, not just at budget time, but every day. It matters. Talk to each other. Talk to your elected officials. Share your vision and play your part in building our city. 2 Kitchener City Council MAYOR Berry Vrbanovic WARD 1 Councillor WARD 2 Councillor WARD 3 Councillor WARD 4 Councillor WARD 5 Councillor Scott Davey Dave Schnider John Gazzola Yvonne Fernandes Kelly Galloway -Sea lock i WARD 6 Councillor WARD 7 Councillor WARD 8 Councillor WARD 9 Councillor WARD 10 Councillor Paul Singh Bil loannidis Zyg Janecki Frank Etherington Sarah Marsh 2017 KITCHENER FINANCIAL REPORT 3 1 ' WARD 1 Councillor WARD 2 Councillor WARD 3 Councillor WARD 4 Councillor WARD 5 Councillor Scott Davey Dave Schnider John Gazzola Yvonne Fernandes Kelly Galloway -Sea lock i WARD 6 Councillor WARD 7 Councillor WARD 8 Councillor WARD 9 Councillor WARD 10 Councillor Paul Singh Bil loannidis Zyg Janecki Frank Etherington Sarah Marsh 2017 KITCHENER FINANCIAL REPORT 3 OFFICE OF THE CHIEF ADMINISTRATIVE OFFICER Dan Chapman: Chief Administrative Officer COMMUNITY SERVICES Michael May: General Manager and Deputy CAO Bylaw Enforcement Corporate Customer Service Fire Neighbourhood Programs & Services Sport CORPORATE SERVICES Victoria Raab: General Manager Corporate Communications & Marketing Human Resources Legal Services Legislated Services Office of the Mayor and Council Technology Innovation & Services As of April 3, 2018 4 W, sunizational Structure DEVELOPMENT SERVICES Justin Readman: General Manager > Building > Economic Development > Engineering > Planning > Transportation Services FINANCIAL SERVICES Jonathan Lautenbach: Chief Financial Officer > Accounting > Asset Management > Financial Planning > Revenue > SAP Business Solutions > Supply Services INFRASTRUCTURE SERVICES Denise McGoldrick: General Manager > Facilities Management > Fleet > Operations - Roads & Traffic > Parks & Cemeteries > Utilities W Message from the City Treasurer I am pleased to present the Annual Financial Report for the City of Kitchener for the year ended December 31, 2017. This report communicates the 2017 financial results for the City of Kitchener to council, residents and other interested parties. These results demonstrate Kitchener's continued sound financial management and fiscal prudence. The financial statements and related information contained in this annual report are the responsibility of the management team of the City of Kitchener. Management has instituted a system of internal controls intended to safeguard assets and to provide accurate, timely and complete financial information for both internal decision-making and external reporting. The city has the following foundations in place to ensure appropriate financial controls and accountability are maintained, and to take a proactive approach to identify and address financial challenges. FOCUS ON EFFECTIVE AND EFFICIENT GOVERNMENT IN STRATEGIC PLANNING At the beginning of each new four-year term of council, the City of Kitchener develops a strategic plan to advance the vision, mission and goals for Kitchener. The 2015-2018 strategic plan was developed in collaboration with extensive community input. The plan is designed to ensure that over time, the public funds the city is entrusted to manage on behalf of citizens are allocated to top public priorities, invested effectively and spent efficiently. Simply stated, the strategic plan serves as the community's roadmap to take us from where we are today to where we want to go in the coming years. 2017 KITCHENER FINANCIAL REPORT 5 The 2015-2018 plan includes five key strategic priorities: Open We will be transparent and accountable to citizens, providing easy Government access to information, a great customer service experience, and meaningful opportunities to participate in the democratic process. Strong & Resilient We will work within a collaborative network of city -builders to create a Economy dynamic and prosperous Kitchener that is rich with employment opportunities and successful business ventures that can grow and thrive within the broader global economy. Safe & Thriving We will work with community partners to create complete, connected, Neighbourhoods safe and walkable neighbourhoods with a range of housing options. We will encourage people to come together, interact with one another and build relationships through inclusive programs, services, events and great public gathering places. Sustainable We will have well planned, managed and cost effective infrastructure Environment & systems that support long-term community needs for services, Infrastructure harnessing the benefits of nature through green infrastructure programs to create a healthy urban environment. Effective & We will deliver quality public services that meet the day-to-day needs of Efficient City the community in a reliable and affordable way, made possible through Services technology, innovation, employee engagement and a sound long-term financial plan. D A a In addition to the strategic plan, another priority of the CAO in 2017 was to review the organizational structure to ensure staff were best aligned to respond to emerging priorities and changes to allow optimal delivery of effective and efficient internal services and external services to our citizens. As a result of the organizational review, four themes emerged which guided the formation of the new structure: 1) increase the number of departments to allow for a more reasonable span of control; 2) place greater emphasis on development services; 3) place greater emphasis on corporate customer service; and, 4) streamline financial services needs to ensure continued success. The review resulted in moving from four departments to five, aligning like -functions more strategically: • Community Services • Infrastructure Services • Development Services • Corporate Services • Financial Services 2017 KITCHENER FINANCIAL REPORT 7 BUSINESS PLANNING AND BUDGET PROCESS The purpose of the business planning process is to manage and support the strategic plan to guide the medium-term course of the corporation. This involves the development, communication and facilitation of a process that engages council, the corporate leadership team, management and staff in establishing operational priorities that: • are driven by the objectives of the strategic plan, • meet the expectations of the community, • respond to emerging issues in a sustainable and affordable way. With this plan, the organization as a whole will be able to make progress on its strategic priorities, as well as maintain and continuously improve the city's core services. The business plan is updated annually and is comprised of a brief overview of each department. It contains a profile of the city's 44 core services delivered by those departments, service trends and future challenges, and a listing of project commitments by division identifying the primary link back to the strategic plan. The city implemented a comprehensive performance measurement framework to monitor and report on key results on an annual basis. In 2017, the city reported on 78 performance measures related to 22 different core services and has started collecting performance data for 22 additional core services that will be reported in 2018. In addition to the business planning process city council approves the annual budget, made up of three parts: operating, capital and reserves. The City of Kitchener is responsible for managing and investing the tax dollars and user fees its residents pay to meet the needs of the community and ensure all of the strategic priorities are addressed. City Council and staff are committed to striking a healthy balance between offering valued services and programs to residents, making strategic investments in community priorities, and keeping property taxes at a reasonable rate. To provide transparency in the budget process, budget information is posted on the city's website and budget meetings are held in a public forum. Citizens are able to provide their input through a number of channels, including by phone, letter, email, social media, or in person at a public delegation night. Management staff review their budgets regularly. Detailed variance reports are prepared and presented to council three times per year, at the end of April, August and December. These reports ensure departmental accountability for financial results and are a key tool to allow management to respond to financial pressures during the year. j EXTERNAL AUDIT As required by the Municipal Act, city council has appointed a public accounting firm, KPMG LLP, to express an independent audit opinion on management's consolidated financial statements. Their reports to the members of council, inhabitants and ratepayers of the Corporation of the City of Kitchener accompany the various financial statements in the financial section of this report. AUDIT COMMITTEE The audited consolidated financial statements are presented to the audit committee for approval. The committee provides a focal point for communications between council, the external auditor, the internal auditor and management, and facilitates an impartial, objective and independent review of management practices through the internal and external audit functions. 2017 KITCHENER FINANCIAL REPORT 9 FINANCIAL STATEMENT DISCUSSION AND ANALYSIS The City of Kitchener's consolidated financial statements have been prepared in accordance with reporting standards set by the Public Sector Accounting Board (PSAB) of the Chartered Professional Accountants of Canada. KPMG LLP have audited the financial statements and provided the accompanying auditors' report. The financial statements and auditors' report satisfy a legislated reporting requirement as set out in the Municipal Act of Ontario. The following financial statement discussion and analysis has been prepared by management and should be read in conjunction with the audited consolidated financial statements and financial and statistical review. There are four required financial statements: • statement of financial position; • statement of operations; • statement of change in net financial assets, and • statement of cash flow. The consolidated financial statements reflect the assets, liabilities, reserves, surpluses/deficits, revenue, and expenditures of city funds and governmental functions or entities. These functions and entities comprise a part of the combined city operations based upon control exercised by the city. The exception is the city's government business enterprises, which are accounted for on the modified equity basis of accounting. References to the "city" below include all activity for the consolidated entity. New Provincial Legislation in 2017 Ontario's Cap and Trade System (the "system") came into effect on January 1, 2017. As a natural gas supplier, the City of Kitchener is a mandatory participant in the system and must submit allowances to the Ministry of the Environment and Climate Change equal to the emissions of their gas customers for the compliance period. The gas delivery rates charged to the City of Kitchener's customers include an amount to cover the cost of complying with the system. Compliance with the system has led to increases in Gasworks user fees and charges, Gasworks expenses, trade receivables and inventory held for resale. 10 CONSOLIDATED STATEMENT OF FINANCIAL POSITION The Consolidated Statement of Financial Position highlights four key figures that together describe the financial position of a government: 1) cash resources, 2) net financial asset position, 3) non-financial assets that are normally held for service provision such as tangible capital assets, and 4) accumulated surplus (deficit). The statement is used to evaluate the City's ability to meet its financial obligations and commitments. The City's net financial asset balance is $221 million, an increase of $7 million from 2016. This balance is calculated as total financial assets less liabilities and represents the amount available to finance future operations. The increase year over year is due to changes in the various balance sheet accounts which are described in the paragraphs below. Millions $250 $200 $150 $100 $50 2013 2014 2015 2016 2017 Cash and cash equivalents The City's cash position is closely managed and remains adequate along with short- term investments to meet ongoing cash requirements. The cash position has decreased to $23 million from $39 million in 2016. The Consolidated Statement of Cash Flows summarizes the sources and uses of cash in both 2017 and 2016. Taxes receivable The decrease in Taxes receivable at yearend to $17 million from $21 million in 2016 is due to increased collection efforts and due to higher tax write-offs as the Assessment Review Board works to clear the backlog of appeals. 2017 KITCHENER FINANCIAL REPORT 11 Trade and other accounts receivable The amount in Trade and other accounts receivable has increased to $43 million from $29 million in 2016. This is due partially to utility receivables where rates increased over 2016 and due to the introduction of the cap and trade component on gas invoices. The City also had receivables from the Region of Waterloo and the School Boards due to significant tax adjustments late in the year whereby the City would typically owe these entities taxes collected on their behalf at yearend. Inventory for Resale The City holds certain inventory items for resale (primarily related to the Gasworks enterprise). This inventory has increased to $16 million from $9 million in 2016 due to a higher value of natural gas held and due to the City pre -purchasing allowances for the cap and trade system to be used as the City's customers consume natural gas in the future. Investments City of Kitchener invests in a manner that provides the highest return while protecting and preserving capital, maintaining liquidity to meet the daily cash flow demands and to conform to all legislation governing the investment of public funds. The balance in investments grew in 2017 to $164 million from $158 million in 2016. This increase relates primarily to increased reserve fund balances. Investment in Kitchener Power Corp. & Kitchener Generation Corporation The City's investment in both Kitchener Power Corp. and its affiliates and Kitchener Generation Corporation is made up of the City's initial investment and its share of net income since acquisition less dividends received. See Notes 6 and 7 to the Consolidated Financial Statements for further details. Deferred Revenue — Other Certain user fees and charges are collected for which the related services have yet to be performed. These are recorded under the classification Deferred revenue - other. Deferred revenue - other has increased by $9 million to $23 million in 2017. The increase relates to funds contributed by developers to move up the timing of capital projects. These funds will be returned by way of a reduction in the amount of development charges collected in the future from these developers. 12 Municipal Debt The City has three components that comprise the overall debt total. Debt has been issued to fund: • a portion of the tax -supported capital program • capital improvements to Enterprises, where the debt charges will be funded through user fees or external sources, such as the Parking Enterprise or the Kitchener Rangers • the Economic Development Investment Fund (EDIF) Millions $125 —$112 $103 $100 S94 $85 $78 $75 $66 $61 $55 $50 $43 $50 $22 $25 $2-Ch6. $19 $20 $18 $17 $18 $0 -11 2013 2014 2015 2016 2017 Tax Enterprise EDIF The City's capital investment philosophy ensures that any increases in debt charges from one year to the next do not exceed assessment growth (excluding the impact of the debt associated with EDIF). As well, the overall contribution from the tax base through taxes and debt charges will not increase more than assessment growth plus inflation from one year to the next. This philosophy has ensured that the impact on the taxpayer does not exceed inflation and that the City must prioritize projects to fit the funding available. The City created EDIF in 2004 as a $110 million commitment to invest in catalyst projects to strengthen the local economy and stimulate urban development in Downtown Kitchener. EDIF has funded major strategic investment projects including the University of Waterloo School of Pharmacy, Communitech Hub, and King Street streetscaping. These investments have had a remarkable positive impact on the City, increasing the City's recognition as a location for innovation, entrepreneurship, and a sought-after urban lifestyle. 2017 KITCHENER FINANCIAL REPORT 13 Municipal debt has decreased to $78 million from $85 million in 2016. The change in debt is a result of new debt issuance of $4.4 million offset by repayment of $11.4 million of existing debt. Debt is expected to decrease for the next number of years as the ten year EDIF program continues to be paid down. Employee Future Benefits Total employee future benefits include liabilities for future sick leave costs, post-retirement benefits and future Workplace Safety and Insurance Board (WSIB) payments. The liability has increased from $42 million in 2016 to $46 million in 2017. The increase relates to reduced interest rates used to calculate the present value of the liability, increases in salaries for employees entitled to sick leave, and due to broader coverages under WSIB. • Vehicles$15M($14M) ■ Computer Hardware& Softwa re $24M ($26M) Lea se h of d I mp rove me nts $2M ($2M) • Machineryand Equipment ■ Buildings $25M ($24M) $182M ($185M) ■ Linear Assets S601M (SS76M) Tangible Capital Assets As s ets u nder co nstruction $45M ($19M) Land $188M ($190M) ■ Land Improvements $29M ($29M) Tangible capital assets are recorded at cost which includes all amounts that are directly attributable to acquisition, construction, development or betterment of the asset. The cost less residual value of the tangible capital assets is amortized on a straight-line basis over their estimated useful lives ranging from 2 to 100 years. During 2017, the City acquired $95 million in tangible capital assets (2016 - $75 million). Amortization of assets was $46 million (2016 - $43 million). Refer to Note 13 and Schedule A of the Consolidated Financial Statements for a detailed breakdown of tangible capital asset activity for 2017. The net book value of tangible capital assets at December 31, 2017 is $1.11 billion, up from $1.07 billion in 2016. 14 Accumulated Surplus The City's accumulated surplus for fiscal 2017 is $1.34 billion (2016 - $1.28 billion). The accumulated surplus reflects the resources that have been built over time at the City and the balance includes items such as tangible capital assets, equity in Kitchener Power Corp. and Kitchener Generation Corporation and various reserves. Millions $70 - $60 $50 $40 $30 $20 - $10 1 $41 $37 $61 2013 2014 2015 2016 2017 Reserve Funds Reserve funds are included as part of accumulated surplus and these balances are disclosed in Note 14 to the financial statements. Reserve fund balances have increased during 2017 to $61 million (2016 - $55 million). Under the authority of the Municipal Act, the City and certain of its consolidated entities have established reserve funds to ensure future liabilities can be met, capital assets are properly maintained and sufficient financial flexibility exists to respond to economic cycles or unanticipated financial requirements. Council or the Boards of the consolidated entities are responsible for exercising discretion with respect to the use of reserve funds, subject to the terms of their respective policies, as well as statutory and legal requirements. Council's reserve policy contains guiding principles to ensure the reserves continue to support the financial goals and serve the highest priority needs of the City and its citizens. 2017 KITCHENER FINANCIAL REPORT 15 CONSOLIDATED STATEMENT OF OPERATIONS The Consolidated Statement of Operations reports the revenue collected by the City, the cost of providing municipal services and the resulting annual surplus/deficit. This year, overall assessment growth was 1.65%. While this new assessment creates revenue for the City, there is also a cost to provide services to new development. In addition, cost increases in excess of inflation, public demand for new services and unreliable revenue sources all place significant pressure on the City budget. The tax rate increase for 2017 operations was 1.73%. Millions $140 $120 $100 $80 $60 $40 $20 Taxation Gasworks Water, Other user fees Grants Other sewer & storm water 2017 Budget 2017 Actual 2016 Actual Revenue Revenue is received from the following sources: taxation; user fees from gasworks, water, sewer, storm water and other; grants and other. Kitchener is one of only two municipalities in Ontario that own and operate a natural gas utility. Gasworks revenue is $14 million higher than 2016 due to higher rates charged to customers as planned and due to the new cap and trade system that has the City collecting revenue to cover the cost of cap and trade allowances that must be remitted related to all gas consumed by its customers. 16 Water, sewer & storm water revenue is $6 million greater than in 2016 due to the approved increases in the user fee rates charged for these services. Grant revenue is greater than prior year due to Clean Water Wastewater Infrastructure funding and additional Federal Gas Tax funds earned in the year. Grant revenue is less than budget due to the deferral of certain Federal Gas Tax funded projects. These funds will be spent in future years as these eligible capital projects are completed. The `Other' category in the chart above includes contribution of tangible capital assets, investment income, penalties and interest on taxes, development charge revenue recognized, and share of net income of Kitchener Power Corp. and Kitchener Generation Corporation. Revenue is lower in this category for 2017 compared to 2016 due to significantly lower amounts of contributed assets to the City. Millions $80 $70 $60 $50 $40 $30 $20 $10 General Protection Transport- Environ- Recreation Other government services ation mental & cultural services services services 1d 2017 Budget U 2017 Actual -1 2016 Actual Expenses Gasworks The City of Kitchener is a diversified government institution and provides a wide range of services to its citizens including fire, roads, water, sewer, natural gas, libraries, and community services. Schedule B of the Consolidated Financial Statements breaks the expenses into major functional activities, consistent with legislated requirements. 2017 KITCHENER FINANCIAL REPORT 17 As is common with most Ontario municipalities, the City of Kitchener does not budget for amortization of tangible capital assets or gains and losses on disposal of assets. However, to provide a more meaningful comparison to actuals, the Council - approved budget has been adjusted to include amortization expense and other accounting adjustments mandated by the Public Sector Accounting Board to express the financial statements on an accrual basis. This provides greater clarity for all readers in assessing budget to actual variances. Environmental services expenses are $3 million under budget due to certain projects being delayed and due to water main break costs being less than anticipated. Gasworks expenses in 2017 were $15 million relates to higher commodity prices compared to 2016 purchase cap and trade allowances related to the customers. The lower Gasworks expenses compared associated with purchasing natural gas due to lower and lower than anticipated consumption. 18 higher than i and due to the gas consumed to budget relates commodity prices 1 2016. This requirement to by the City's to lower costs than expected =rialsand services $104M ($92 M) Debenture debt interest $3M ($3M) Grants and other $5M ($4M) ■ Amortization $46M ($43M) Loss/(Gain)on sale of a s s ets $1M ($-1M) ies,wages and l oyee benefits 52M ($147M) CONSOLIDATED STATEMENT OF CHANGE IN NET FINANCIAL ASSETS The Statement of Change in Net Financial Assets explains the difference between a municipality's surplus or deficit for the reporting year and its change in net financial assets in the same reporting year. This statement provides for the reporting of the acquisition of tangible capital assets and other significant items that impact the difference between the annual surplus/deficit and the change in net financial assets. CONSOLIDATED STATEMENT OF CASH FLOW The statement of cash flows reports changes in cash and cash equivalents resulting from operations, capital, investing and financing activities and shows how the City financed its activities during the year and met its cash requirements. LOOKING AHEAD Looking ahead to 2018, the City will continue to balance community priorities with affordable property tax rates and user fees. The in-depth business planning and budgeting processes help the City to manage these healthy pressures and make the right decisions between strategic investments and affordable tax rates for our citizens. Continuing to focus on building an even stronger financial position through lower debt levels and healthier reserve balances will allow the city to be resilient and flexible in responding to growth and change, not just in 2018 but for the years to come. ?1111_1�alfl� Jonathan Lautenbach, CPA, CGA Chief Financial Officer & City Treasurer June 11, 2018 2017 KITCHENER FINANCIAL REPORT 19 INDEPENDENT AUDITORS' REPORT To the Mayor and Members of Council, Inhabitants and Ratepayers of The Corporation of the City of Kitchener We have audited the accompanying consolidated financial statements of the Corporation of the City of Kitchener, which comprise the consolidated statement of financial position as at December 31, 2017, the consolidated statements of operations, change in net financial assets and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility 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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 20 Page 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Corporation of the City of Kitchener as at December 31, 2017, and its consolidated results of operations and its consolidated cash flows for the year then ended in accordance with Canadian public sector accounting standards. Chartered Professional Accountants, Licensed Public Accountants June 11, 2018 Waterloo, Canada 2017 KITCHENER FINANCIAL REPORT 21 THE CORPORATION OF THE CITY OF KITCHENER Consolidated Statement of Financial Position As at December 31, 2017 2017 2016 Financial assets Cash and cash equivalents $ 22,607,209 $ 38,577,079 Taxes receivable 16,877,835 20,598,155 Trade and other accounts receivable 43,404,844 28,851,877 Loans receivable (Note 4) 8,163,370 9,070,598 Inventory for resale 16,312,870 8,914,964 Investments (Note 5) 164,314,904 158,360,514 Investment in Kitchener Power Corp. and its affiliates (Note 6) 207,199,184 201,721,655 Investment in Kitchener Generation Corporation (Note 7) 3,019,238 3,251,490 481,899,454 469,346,332 Liabilities Accounts payable and accrued liabilities 76,142,394 75,794,240 Deferred revenue - obligatory reserve funds (Note 9) 38,044,861 38,400,547 Deferred revenue - other 23,134,881 14,005,912 Municipal debt (Note 10) 77,889,047 84,859,304 Employee future benefits Note 12 45,900,158 42,238,419 261,111,341 255,298,422 Net financial assets 220,788,113 214,047,910 Non-financial assets Tangible capital assets (Note 13) 1,111,359,528 1,065,060,311 Inventory of supplies h 2,508,729 2,568,188 Prepaid expenses 1,175,915 1,327,158 1,115,044,172 1,068,955,657 Accumulated surplus $ 1,335,832,285 $ 1,283,003,567 The accompanying notes are an integral part of these consolidated financial statements. 22 THE CORPORATION OF THE CITY OF KITCHENER Consolidated Statement of Operations For the Year Ended December 31, 2017 2017 2017 2016 Budget Revenue 39,436,600 38,931,568 46,897,128 Taxation $ 120,258,152 $ 119,727,010 $ 116,674,911 User fees and charges 33,900,222 31,305,220 30,012,049 Gasworks 88,660,989 88,514,388 74,320,186 Water, sewer and storm water 59,111,898 60,880,105 55,173,590 Other 49,402,170 49,425,542 46,447,844 Grants 14,015,473 12,907,930 6,111,316 Contributions of tangible capital assets 582,656 582,656 4,404,349 Investment income 6,851,13 7,928,699 7,518,318 Penalties and interest on taxes 3,100,0 3,247,419 3,250,779 Development charge revenue recognized 11,20*006 7,303,467 10,388,476 Share of net income of Kitchener Power Corp. and its affiliates (Note 6) ,347,693 ,347,693 9,593,078 Share of net income of Kitchener Generation Corporation (Note 7) - 3,407 24,480 Other ,100,117 4,088,761 5,899,048 Total revenue 65,637,279 363,957,077 339,806,375 Expenses General government Protection services Transportation services Environmental services Health services Social and family service Recreation and cultural se Planning and development Gasworks 40,368,176 39,436,600 38,931,568 46,897,128 47,268,313 45,291,230 37,143,087 37,804,616 35,100,204 33,900,222 31,305,220 30,012,049 2,159,474 2,295,627 2,257,225 2,440,496 2,661,773 2,722,141 69,504,379 69,846,801 68,495,718 13,590,084 13,123,204 13,160,042 74,981,716 67,386,205 52,183,999 Total expenses 320,984,762 311,128,359 288,154,176 Annual surplus 44,652,517 52,828,718 51,652,199 Accumulated surplus, beginning of year 1,283,003,567 1,283,003,567 1,231,351,368 Accumulated surplus, end of year (Note 14) $ 1,327,656,084 $ 1,335,832,285 $ 1,283,003,567 The accompanying notes are an integral part of these consolidated financial statements. 2017 KITCHENER FINANCIAL REPORT 23 THE CORPORATION OF THE CITY OF KITCHENER Consolidated Statement of Change in Net Financial Assets For the Year Ended December 31, 2017 2017 2017 2016 Budget Annual surplus $ 26,769,140 $ 52,828,718 $ 51,652,199 Amortization of tangible capital assets 46,188,121 46,188,121 42,657,709 Acquisition of tangible capital assets (76,529,775) (95,072,534) (75,104,330) Loss (gain) on disposals of tangible capital assets 349,072 740,630 (1,812,732) Proceeds on disposal of tangible capital assets 1,844,578 1,844,578 2,208,552 Acquisition of supplies of inventories - (6,173,446) (5,828,681) Acquisition of prepaid expenses - (205,620) (428,135) Consumption of supplies inventory - 6,232,893 5,868,774 Use of prepaid expenses - 356,863 374,693 Change in net financial assets (1,378,864) 6,740,203 19,588,049 Net financial assets, beginning of year 214,047,910 214,047,910 194,459,861 Net financial assets, end of year $ 212,669,046 $ 220,788,113 $ 214,047,910 The accompanying notes are an integral part of these consolidated financial statements. INIMbN, 24 THE CORPORATION OF THE CITY OF KITCHENER Consolidated Statement of Cash Flow For the Year Ended December 31, 2017 Investing 2017 2016 Operating 3,870,151 4,067,948 Annual surplus $ 52,828,718 $ 51,652,199 Items not involving cash (5,954,390) (19,330,302) Amortization 46,188,121 42,657,709 Gain on disposal of tangible capital assets 740,630 (1,812,732) Share of net income of Kitchener Power Corp. and its affiliates (9,347,693) (9,593,078) Share of net income of Kitchener Generation Corporation (3,407) (24,480) Change in employee future benefits 3,661,739 3,928,057 Contributions of tangible capital assets (582,656) (4,404,349) Change in non-cash assets and liabilities (94,489,878) (70,699,982) Taxes receivable 3,720,320 (981,361) Trade and other accounts receivable (14,552,967) 5,286,787 Loans receivables 907,228 1,240,805 Inventory of supplies 59,459 40,093 Inventory for resale (7,397,906) 837,800 Prepaid expenses 151,243 (53,442) Deferred revenue - obligatory reserve funds (355,686) 12,135,016 Deferred revenue - other 9,128,969 (371,490) Accounts payable and accrued liabilities 348,154 3,481,309 Net change in cash from operating activities 85,494,266 104,018,843 Investing Dividends received from Kitchener Power Corp. 3,870,151 4,067,948 Debt and equity payments received from Kitchener Generation Corporation 235,659 256,749 Net acquisition of investments (5,954,390) (19,330,302) Net change in cash from investing activities (1,848,580) (15,005,605) Financing Municipal debt issued 4,439,000 2,381,000 Municipal debt repaid (11,409,256) (11,057,352) Net change in cash from financing activities (6,970,256) (8,676,352) Capital Acquisition of tangible capital assets (94,489,878) (70,699,982) Proceeds on disposal of tangible capital assets 1,844,578 2,208,552 Net change in cash from capital activities (92,645,300) (68,491,430) Net change in cash and cash equivalents (15,969,870) 11,845,456 Cash and cash equivalents, beginning of year 38,577,079 26,731,623 Cash and cash equivalents, end of year $ 22,607,209 $ 38,577,079 The accompanying notes are an integral part of these consolidated financial statements. 2017 KITCHENER FINANCIAL REPORT 25 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 1. Summary of significant accounting policies These consolidated financial statements of The Corporation of the City of Kitchener (the "City") have been prepared by management in accordance with Canadian generally accepted accounting principles for local governments as established by the Public Sector Accounting Board of the Chartered Professional Accountants of Canada. The following is a summary of the significant accounting policies followed in the preparation of these financial statements: a. Basis of consolidation i. Consolidated entities These consolidated financial statements reflect the assets, liabilities, reserves, surpluses/deficits, revenues, and expenditures of those City funds and governmental functions or entities which have been determined to comprise a part of the aggregate City operations based upon control exercised by the City except for the City's government businesses which are accounted for on the modified equity basis of accounting. The following boards, municipal enterprises and utilities have been included in the consolidated financial statements: • Kitchener Public Library • Kitchener Downtown Improvement Area Board of Management • Belmont Improvement Area Board of Managemen • The Centre in the Square Inc. • Waterworks Enterprise • Gasworks Enterprise • Sewer Surcharge Enterprise • Storm Water Managemen - ter e • Building Enterprise • Golf Enterprise' • Parking Enterprise All inter -organizational and inter -fund transactions and balances have been eliminated ii. Government business enterprises Kitchener Generation Corporation and Kitchener Power Corp. and its affiliates are not consolidated but are accounted for on the modified equity basis which reflects the City of Kitchener's investment in the enterprises and its share of net income since acquisition. Under the modified equity basis, the enterprises' accounting principles are not adjusted to conform to those of the City, and inter - organizational transactions and balances are not eliminated. iii. Accounting for region and school board transactions The taxation, other revenue, expenditures, assets and liabilities, with respect to the operations of the school boards and the Regional Municipality of Waterloo, are not reflected in these consolidated financial statements. iv. Trust funds Trust funds and their related operations administered by the City are not consolidated, but are reported separately on the "Trust Funds Statement of Continuity and Balance Sheet" (see Note 3). 26 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 1. Summary of significant accounting policies (continued) b. Basis of accounting Accrual basis of accounting The consolidated financial statements are prepared using the accrual basis of accounting. The accrual basis of accounting recognizes revenues in the period in which the transactions or events occurred that gave rise to the revenues. Expenses are recognized in the period the goods and services are acquired and a liability is incurred or when an external transfer is due. Cash and cash equivalents Cash and cash equivalents include cash on hand and highly liquid investments with original maturity of 90 days or less as at the end of the year. iii. Trade and other accounts receivable Trade and other accounts receivable are reported net of any allowance for doubtful accounts. iv. Loans receivable Loans receivable are reported net of anyallowance ubtful accounts. Interest income is recorded as it accrues. When the value of any loan eivable i ntified as impaired, an allowance is set up to offset the carrying amount and any adjus a inc in materials and services expense in the period the impairment is recognized. v. Inventory for resale Inventory for resale is valu vi. Investments zable value on an average cost basis. Portfolio investments are carriedcost, net of accumulated amortization on premiums and discounts. Premiums and discounts are amorti ed on a straight line basis over the term to maturity. Interest income is recorded as it accrues. When the value of any portfolio investment is identified as impaired, the carrying amount is adjusted to the estimated realizable amount and any adjustments are included in investment income in the period,the impairment is recognized. vii. Deferred revenue Government transfers, contributions and other amounts are received from third parties pursuant to legislation, regulation or agreement and may only be used in the conduct of certain programs, in the completion of specific work or for the purchase of tangible capital assets. A requirement of the Public Sector Accounting Board of the Chartered Professional Accountants of Canada is that obligatory reserves be reported as deferred revenue. Obligatory reserves include development charges, recreational lands, building permits and gas tax funding. In addition, certain user charges and fees are collected for which the related services have yet to be performed. These are recorded under the classification Deferred revenue - other. Revenue is recognized in the period when the related expenses are incurred, services performed or the tangible capital assets are acquired. viii. Employee future benefits The contributions to a multi-employer, defined benefit pension plan are expensed when contributions are due. The costs of post-retirement benefits are recognized when the event that obligates the City occurs. Costs include projected future income payments, health care continuation costs and fees paid to independent administrators of these plans, calculated on a present value basis. 2017 KITCHENER FINANCIAL REPORT 27 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 1. Summary of significant accounting policies (continued) b. Basis of accounting (continued) viii. Employee future benefits (continued) The costs of post-retirement benefits are actuarially determined using the projected benefits method prorated on service and management's best estimate of retirement ages of employees, salary escalation, expected health care costs and plan investment performance. Liabilities are actuarially determined using discount rates that are consistent with the market rates of high quality debt instruments. Any gains or losses from changes in assumptions or experience are amortized over the average remaining service period for active employees. ix. Contaminated Sites Contaminated sites are defined as the result of contamination being introduced into air, soil, water or sediment of a chemical, organic, or radioactive material or live organism that exceeds an environment standard. This Standard relates to sites that are noqliabi tive use and sites in productive use where an unexpected event resulted in contamination. Aser 31, 2017, there was no liability recorded on the statement x. Non-financial assets Non-financial assets are not available to dischargand are held for use in the provision of services. They have useful lives that extend beyond the current year and are not intended for sale in the ordinary course of operations. The change in non-financial assets during the year, together with the excess of revenues over expensIrecoded des the consolidated change in net financial assets for the year. a. Tangible capital assets Tangible capital assets are a t which includes all amounts that are directly attributable to acquisition, construction, development or betterment of the asset. The cost less residual value of the tangible capital assets is amortized on a straight-line basis over their estimated useful lives as follows: Assets Amortization Period Land The original cost of land is not amortized Land Improvements 15 to 100 years Buildings & building improvements 15 to 50 years Leasehold improvement Over the useful life of the improvement or the lease term, whichever is shorter Machinery & equipment 3 to 20 years Computer hardware 5 years Computer software 2 to 10 years Linear assets 6 to 100 years Vehicles 5 to 16 years b. Contributions of tangible capital assets Tangible capital assets received as contributions are recorded at their fair value at time of receipt and are recorded as revenue. 28 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 1. Summary of significant accounting policies (continued) b. Basis of accounting (continued) x. Non-financial assets (continued) c. Leases Leases are classified as capital or operating leases. Leases which transfer substantially all the risks and benefits incidental of ownership are accounted for as capital leases. All other leases are accounted for as operating leases and the related lease payments are recorded as expenses when incurred. d. Inventory of supplies Inventories held for consumption are recorded at the to cost and replacement cost. e. Works of art and cultural and historic assets Works of art and cultural and historic asse re not recorded as assets in these financial statements. xi. Government transfers Government transfers are recognized in the financial st ents in the period in which the events giving rise to the transfer occur, providing the transfers are authorized, any eligibility criteria have been met and reasonable estimates of the amounts can be made. Government transfers and developer contributions -in-kind related to capital acquisitions are required to be recognized as revenue in the consolidated financial statements in the period in which the tangible capital assets are acquired. xii. Use of estimates Since precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgment. Actual results could differ from these estimates. 2. Operations of school boards and the Regional Municipality of Waterloo Further to Note 1 a) iii, the taxation, other revenues and requisitions for the school boards and the Regional Municipality of Waterloo are comprised of the following: School Region Total Boards Taxation and user charges $ 87,220,242 $ 243,261,729 $ 330,481,971 Share of payments in lieu of taxes 586 2,655,541 2,656,127 Share of linear properties 61,869 124,867 186,736 Amounts requisitioned $ 87,282,697 $ 246,042,137 $ 333,324,834 2017 KITCHENER FINANCIAL REPORT 29 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 3. Trust funds Trust funds administered by the City have not been included in the Consolidated Statement of Financial Position, nor have their operations been included in the Consolidated Statement of Operations. The trust funds under administration are comprised of cemetery perpetual care and prepaid interment funds totalling $14,707,650 (2016 - $14,029,550). 4. Loans receivable Loans receivable are made up of the following: 2017 2016 Major capital improvement loans receivable $ 7,502,617 $ 8,126,151 Loans receivable with forgiveness provisions 42,392 55,745 Minor capital improvement and other loans receivable 618,361 888,702 $ 8,163,370 $ 9,070,598 Major capital improvement loans are individual loans in excess of $500,000 when issued with no forgiveness provision built into the loan. These loans have repayment terms ranging from 10 to 12 years (2016 - 10 to 12 years). All major capital improvement loans are unsecured and bear interest at rates ranging from 1.53% to 1.95% (2016 - 1.53% to 1.9596). Forgivable loans are those initially offered with forgiveness provisions built into the agreement. All loans in this category are unsecured and have repayment terms of 5 years (2016 - 5 to 10 years). The forgiveness provisions range from 15% to 50% (2016 - 8% to 50&. The balances recorded are net of the allowance for forgiveness. Interest rates on these loans rang to 8% (2016 - 0% to 8%). Minor capital improvement and other loans receivab a comprise any loan receivable not fitting into the first two categories. There is a variety of terms related to these loans with payment terms ranging from 6 months to 25 years (2016 - 6 months to 25 years). The majority of these loans are secured by the asset the loan was granted to finance, but others are unsecured. The interest rates on these loans range from 0.0% to 12.9% (2016 - 0.0% to 12.996). 5. Investments Investments are made up of the following: 2017 2017 2016 2016 Cost Market Cost Market Value Value Guaranteed investment certificates $ 155,309,123 $ 157,281,753 $ 150,124,084 $ 151,937,572 Bonds and debentures 8,673,023 8,654,050 7,949,154 8,180,459 Common stock 332,758 514,227 287,276 468,924 $ 164,314,904 $ 166,450,030 $ 158,360,514 $ 160,586,955 30 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 6. Investment in Kitchener Power Corp. and its Affiliates Under the provincial government's Electricity Competition Act (Bill 35), Kitchener Power Corp., a holding company, along with its wholly owned subsidiaries, including Kitchener -Wilmot Hydro Inc., was incorporated on July 1, 2000. On August 1, 2000, under by-laws passed by the City and the Township of Wilmot, the net assets of the former Hydro -Electric Commission of Kitchener -Wilmot were transferred to the new corporation. The City took back a 92.25% share in the common shares of Kitchener Power Corp. and a 92.25% share in long-term notes payable by the affiliates for the assets transferred. Certain surplus property assets and cash funds were excluded from the transfer and turned over to the City and the Township. The investment is comprised of the following: AW 2017 2016 Kitchener Power Corp. common shares $ 61,244,208 $ 61,244,208 Kitchener -Wilmot Hydro Inc. long-term notes receivable 70,997,576 70,997,576 Share of net income and prior period adjustments duet&ange accountina policies since acquisition, net of dividends 74,957,400 69,479,871 The Kitchener -Wilmot Hydro Inc. notes are un There are no repayment terms and there is no i The following table provides condensed financial i $ 207,199,184 $ 201,721 terest at the rate of 4.88% (2016 - 4.8896). notes or the shares. with respect to Kitchener Power Corp.: 2017 2016 Current assets $ 72,120,000 $ 75,614,000 Non-current assets 235,287,000 225,417,000 Regulatory assets 10,073,000 4,487,000 Deferred taxes - 141,000 Total assets _ or 317,480,000 305,659,000 Current liabilities 36,890,000 39,059,000 Long-term debt 78,745,000 79,872,000 Regulatory liabilities 11,021,000 10,320,000 Other liabilities 42,856,000 34,378,000 Total liabilities 169,512,000 163,629,000 Net assets 147,968,000 142,030,000 Results of operations Revenues 251,127,000 277,930,000 Expenses (240,994,000) (267,531,000) Net income 10,133,000 10,399,000 City's share of net income - 92.25% $ 9,347,693 $ 9,593,078 2017 KITCHENER FINANCIAL REPORT 31 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 7. Investment in Kitchener Generation Corporation Under the provincial government's Business Corporation Act, Kitchener Generation Corporation was incorporated on December 9, 2011. Effective January 1, 2012, the City transferred the solar roof asset constructed on the surface of the Kitchener Operations Facility to Kitchener Generation Corporation in exchange for 100% of its common shares and interest bearing debt. The investment in Kitchener Generation Corporation is comprised of the following: 2017 2016 Kitchener Generation Corporation common shares $ 313,271 $ 336,837 Kitchener Generation Corporation long-term notes receivable 2,819,442 3,031,534 Share of net income since acquisition, net of dividends (113,475) (116,881) $ 3,019,238 $ 3,251,490 The notes receivable are unsecured and bear interest at the rate of 5.01%. To the extent that Kitchener Generation Corporation has positive annual cash flows after any dividend payment, the cash will be returned to the City as repayment of the outstanding debt and return of capital. The proportion to which they contribute is 90% debt, 10% equity. The following table provides condensed financial i respect to Kitchener Generation Corporation: 11 Ilk 2017 2016 Current assets $ 13,354 $ 4,883 Capital assets 3,019,272 3,251,524 Total assets 3,032,626 3,256,407 Current liabilities 13,387 4,916 Long-term debt 2,819,442 3,031,535 Total liabilities 2,832,829 3,036,451 Net assets 199,797 219,956 Results of operations Revenues 390,542 433,797 Expenses (387,135) (409,317) Net income 3,407 24,480 City's share of net income - 100% $ 3,407 $ 24,480 32 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 8. Insurance pool Liabilities include an amount of $6,347,875 (2016 - $4,746,320) which represents funds belonging to the Waterloo Region Municipalities Insurance Pool (the "Pool") and administered by the City on behalf of the Pool's members. The members entered an agreement in 1998 to purchase property damage and public liability insurance on a group basis and share a retained level of risk. The members pay an actuarially determined annual levy to fund insurance, prefund expected losses and contribute to a surplus. The Pool has purchased insurance to fund losses above a predetermined deductible and any losses above a predetermined total in any year. The City's share of Pool levies is 26.11% (2016 - 25.729,o) and its share of the Pool surplus as at May 31, 2017 was $1,136,398 (2016 - $1,066,337). The City's share of the PooI plus has not been included in the Consolidated Statement of Financial Position. 9. Deferred revenue - obligatory reserve funds Obligatory deferred revenue is comprised of the following: Development charges Federal gas tax Building Recreational land The continuity of obligatory deferred revenue is as fo Development Federal gas Recreational charges tax Building land Total Balance, January 1, 2017 $ 16,552,083 $ 5,749,009 $ 8,736,758 $ 7,362,697 $ 38,400,547 Collections 8,627,280 6,780,905 5,000 1,260,706 16,673,891 Interest earned 14,957 17,196 126,036 26,612 184,801 Contributions used (7,176,784) (7,753,943) (759,536) (1,524,115) (17,214,378) Balance, December 31, 2017 18,017,536 4,793,167 8,108,258 7,125,900 38,044,861 Balance, January 1, 2016 10,405,624 3,404,675 6,252,773 6,202,459 26,265,531 Collections 16,534,936 6,662,949 2,404,533 1,076,914 26,679,332 Interest earned - 18,208 92,452 92,569 203,229 Contributions used (10,388,477) (4,336,823) (13,000) (9,245) (14,747,545) Balance, December 31, 2016 $ 16,552,083 $ 5,749,009 $ 8,736,758 $ 7,362,697 $ 38,400,547 2017 KITCHENER FINANCIAL REPORT 33 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 10. Municipal debt The City has assumed responsibility for the payment of principal and interest charges on certain long-term debt issued by other municipalities. At the end of the year, the outstanding principal amount of this liability is $77,889,047 (2016 - $84,859,304). The annual principal repayments are: 2018 $ 11,022,151 2019 10,891,884 2020 10,047,731 2021 9,144,187 2022 11,230,113 2023 and thereafter 25,552,981 $ 77,889,047 The annual principal and interest payments required to service the long-term debt are within the annual debt repayment limit prescribed by the Ontario Ministry of Municipal Affairs and Housing. The long-term liabilities carry interest rates ranging from 1.25% to 5.20% (2016 - 1.15% to 5.7596). Interest charges for 2017 relating to municipal debt totalled $3,179,481 (2016 - $3,534,339). 11. Pension plan The City makes contributions to the Ontar Municipa Employees Retirement System (OMERS), which is a multi-employer plan, on behalf 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. Employee contributions are matched by the City. Contributions were required on account of current service in 2017 amounting to $10,390,276 (2016 - $10,095,019). The latest available report for the OMERS plan was as at December 31, 2017. At that time the plan reported a $5.4 billion actuarial deficit, based on actuarial liabilities of $93.6 billion and actuarial assets of $87.0 billion. Ongoing adequacy of the current contribution rates will need to be monitored and may lead to increased future funding requirements. As at December 31, 2017, the City has no obligation under the past service provisions of the OMERS agreement. 12. Employee future benefits The estimated liability for employee future benefits is comprised of the following: 2017 2016 Sick leave benefit plan $ 18,786,169 $ 17,714,432 Post-retirement benefits 17,942,289 16,387,087 Future payments to WSIB 9,171,700 8,136,900 $ 45,900,158 $ 42,238,419 34 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 12. Employee future benefits (continued) a. Sick leave benefit plan Under the sick leave benefit plan, unused sick leave can accumulate and certain employees may become entitled to cash payments when they leave the City's employment. The amount of benefits paid during the year were $1,638,157 (2016 - $1,273,695). A reserve fund to provide for this liability is included in accumulated surplus, in the amount of $5,019,687 (2016 - $5,287,741). Anticipated undiscounted payments to employees who are eligible to retire are: 2018 $ 2,378,852 2019 913,691 2020 1,322,105 2021 1,222,010 2022 975,159 2023 and thereafter 9,531,585 $ 16,343,402 The actuarial valuation of the future liaj;�ility fo eav ssumes a discount rate of 3.25% (2016 - 3.50%). The last actuarial valuation for this liability completed at December 31, 2017. The actuarial expense for the current year was $2, 9,894 (2016 - $2,656,186) and is comprised of the following items: "`, 2017 2016 Current period benefit cost $ 1,129,334 $ 1,091,144 Amortization of actuarial losses 795,085 795,085 Sick leave benefit expense 1,924,419 1,886,229 Sick leave benefit interest expense 785,475 769,957 Total expenses related to sick leave benefits $ 2,709,894 $ 2,656,186 As at December 31, 2017, the unamortized actuarial losses were $2,359,866 (2016 - $4,417,435) and are amortized over 10 to 13 years (2016 - 10 to 13 years). 2017 KITCHENER FINANCIAL REPORT 35 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 12. Employee future benefits (continued) b. Post-retirement benefits The City pays certain health, dental and life insurance benefits on behalf of its retired employees up to the age of 65 if they have at least ten years of service with the City. The amount of benefits paid during the year were $1,116,951 (2016 - $1,101,539). The City holds no reserve to meet this liability. The actuarial valuation of the future liability for post-retirement benefits assumes a discount rate of 3.25% (2016 - 3.75%) and inflation rates for benefit premiums of 4.0% to 6.5% (2016 - 4.0% to 7.496). The last actuarial valuation for this liability was completed at December 31, 2017. The actuarial expense for the year was $2,672,153 (2016 - $2,615104) and is comprised of the following items: A Adv 2017 2016 Current period benefit cost $ 1,121,128 $ 1,093,831 Amortization of actuarial losses 739,764 739,764 Post-retirement benefit expense 1,860,892 1,833,595 Post-retirement benefit interest ex ense tftX811,261 781,509 Total expenses related topost-retirement benefitsIL JR111111111k $ 2,672,153 $ 2,615,104 As at December 31, 2017, the unamortized actuarial losses were $3,851,874 (2016 - $4,683,875) and are amortized over 11 to 13 years (2016 - 11 to 13 years). c. WSIB The Workplace Safety and Insurance Board (WSIB) administers injured worker benefits payments on behalf of the City as a Schedule 2 employer. The amount of benefits paid during the year were $785,400 (2016 - $668, 600). A reserve fund to provide for this liability is included in accumulated surplus, in the amount of $2,226,495 (2016 - $1,463,983). The actuarial valuation of the future liability for WSIB assumes a discount rate of 3.25% (2016 - 3.2596). The last actuarial valuation for this liability was completed at December 31, 2016. The actuarial expense for the current year was $1,820,200 (2016 - $1,700,600) and is comprised of the following items: 2017 2016 Current period benefit cost $ 1,229,800 $ 1,216,100 Amortization of actuarial losses 203,600 186,700 WSIB benefit expense 1,433,400 1,402,800 WSIB benefit interest expense 311,200 297,800 Plan amendments 75,600 - Total expenses related to WSIB benefits $ 1,820,200 $ 1,700,600 As at December 31, 2017, the unamortized actuarial losses were $1,410,300 (2016 - $525,300) and are amortized over 11 years (2016 - 13 years). 36 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 13. Tangible capital assets The continuity schedule of tangible capital assets is presented in schedule A. Assets under construction having a value of $45,194,743 (2016 - $18,719,217) have not been amortized. Amortization of these assets will commence when the assets are put into service. Contributed tangible capital assets of $582,656 (2016 - $4,404,349) have been recognized at fair market value at the date of contribution. The contributed assets include land right of way as well as developer created linear assets such as water, sanitary, storm, and road assets. The write-down of tangible capital assets during the year was $nil (2016 - $nil). The amount of interest capitalized was $nil (2016 - $nil). 14. Accumulated surplus The accumulated surplus consists of individual fund surpluse,�leficits) and reserve funds as follows: 2017 KITCHENER FINANCIAL REPORT 37 2017 2016 Surplus: Invested in tangible capital assets $1,111,359,528 $1,065,060,311 Other (554,533) 518,199 Equity in Kitchener Power Corp. and it 207,199,184 201,721,655 Equity in Kitchener Generation Corporation 3,019,238 3,251,490 Employee future benefits (unfunded) (45,900,158) (42,238,419) Total surplus 1,275,123,259 1,228,313,236 Reserve funds set aside for specific purposes by Council for: Capital 24,845,538 28,793,325 Stabilization 15,563,634 6,212,167 Program specific 10,348,180 10,422,750 Corporate 8,249,804 7,500,643 59,007,156 52,928,885 Reserve funds set aside for specific purposes by consolidated entities: Kitchener Public Library 381,354 381,336 Kitchener Downtown Business Improvement Area 50,000 50,000 The Centre in the Square Inc. 1,270,516 1,330,110 1,701,870 1,761,446 Total reserve funds 60,709,026 54,690,331 Accumulated surplus $1,335,832,285 $1,283,003,567 2017 KITCHENER FINANCIAL REPORT 37 THE CORPORATION OF THE CITY OF KITCHENER Notes to the Consolidated Financial Statements For the Year Ended December 31, 2017 15. Contingent liabilities Legal actions have been undertaken against the City relating to a number of contract disputes and other matters. The outcome of these actions is not presently determinable. It is management's opinion that the City's insurance will adequately cover any potential liability arising from these contract disputes and other matters. Should any liability be determined and not covered by insurance it will be recognized in the period when it is determined. 16. Segmented information 17. 18. The City of Kitchener is a diversified municipal government institution that provides a wide range of services to its citizens, including fire, roads, water, sewer, storm sewer, gasworks, libraries, and community services. Segmented information has been presented in Schedule B by major functional classification of activities provided, consistent with the Consolidated Statement of Operations and provincially legislated requirements. For each reported segment, revenues and expenses represent both amounts that are directly attributable to the segment and amounts that are allocated on a reasonable b is. The accounting policies used in these segments are isten h those followed in the preparation of the consolidated financial statements as disclosed in Note 1. Budget figures, The budget figures reflected in these consolidated statements are those approved by Council at a meeting on January 23, 2017. Budget figures have anslated to reflect Public Sector Accounting Board standards. 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N r N V3 � V3 R y in W CO N a C U M N N O a) a a) Cl) •> f- f- Cl) Cl) 00 r fI N f, N LO O r E 4 M M M 00 N a) 4 4 N O f0 00 LO ro_ N N r N M f0 OM O M O LO W N 00 Cl) 00 M M C W V3 C y O a/ N-* U) ' CO ' ' W N: .U) M N It N • U W W W O LO O a) f0 L O Cl! LO M O M 00 M M W f- M O O N In 00 R 0 a) r W O N LO LO 00 CO CO N 00 00 WO N N O O W f- W f- W 00 f0 O O_ f- 00 Q y 1n 00 't 00 O a 00 O a W't Cl! y r_ 00 N N f- N Cl) in M N R � V3 V3 C y g v L ' O ' N ' ' ' a) r r r U) ' N O M U Cl) 00 a) 00 CO M M N N N r O N O00 N 1p O N 1p r Cl) N O O U> a) M r N W a W r N f0 O f0 W r rLO N O` ) M WO r O N 000 a M 00 Cl) � Cl) U) V3 V3 R a a) Cl) a) r 00 O ' O O W CO In O CO 00 N a) C E N f- N f- a) r 00 O M a't cc f� Cl!O a) 00 ao N O LO f� M 00f� cc , M r cc W In M y ow a/ f- a) N O N CO a N U) It 1n r a) N W W fl r cc Cl! 00 W U) a) Cl) W f- LO a r r f, 00 LO a) W 00 LO r M ao N Cl! N W M 00 > O r f0 Cl) Cl) f0 In 00 i0� N co .... M V3 V3 y (4 (4 w a y R N C m `0 0 NO a) .y. 3 0 cl .y. _ y U 0 a) O a) (0 r Na) o a (7 a)0 y m 0 0 0 0 Q oaIn x Q RR O E U ` RQ° O Q R OUmwo > 2 E L 20 o -2 °� a) o. w 2 o H `a) °' E Em oo E (2 U oU U o C C a y R a)a w O O y 7 N °) a) R 00 C ERRjC> 0o x E0_ N C0 Ra X > O> R > 0 O R X E OaR/ 0 U) U)U O U) 3 S WJy F 0 INDEPENDENT AUDITORS' REPORT To the Mayor and Members of Council, Inhabitants and Ratepayers of The Corporation of the City of Kitchener We have audited the accompanying financial statements of the Trust Funds of the Corporation of the City of Kitchener, which comprise the balance sheet as at December 31, 2017 and the statement of continuity for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 42 Page 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the balance sheet of the Trust Funds of the Corporation of the City of Kitchener as at December 31, 2017, and its results of operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. Chartered Professional Accountants, Licensed Public Accountants June 11, 2018 Waterloo, Canada 2017 KITCHENER FINANCIAL REPORT 43 CORPORATION OF THE CITY OF KITCHENER TRUST FUNDS Balance Sheet As at December 31, 2017 2017 2016 Assets Accounts receivable $ 111,721 $ 257,387 Interest 71,338 86,971 Investments (Note 2) Short-term 430,809 2,832,603 Long-term 14,093,782 10,852,589 14,707,650 14,029,550 Fund Balance Allk $14,707,650 $14,029,550 The accompanying notes are and integral part of these financial 44 CORPORATION OF THE CITY OF KITCHENER TRUST FUNDS Statement of Continuity For the Year Ended December 31, 2017 Receipts Perpetual care Interest earned 2017 2016 $ 397,885 $ 419,451 441,122 416,093 Other 129,008 194,913 968,015 1,030,457 Expenditures Transfer to cemeteries operations 289,915 274,663 289,915 274,663 Net change in fund 678,100 755,794 Balance, beginning of year 14,029,550 13,273,756 Balance, end of year ® $ 14,707,650 $ 14,029,550 The accompanying notes are and integral part of these financliftatements. 2017 KITCHENER FINANCIAL REPORT 45 CORPORATION OF THE CITY OF KITCHENER TRUST FUNDS Notes to the Financial Statements For the Year Ended December 31, 2017 1. Summary of significant accounting policies The Financial Statements have been prepared in accordance with Canadian generally accepted accounting principles for local government as recommended by the Public Sector Accounting Board of the Chartered Professional Accountants of Canada. The significant accounting policies are summarized below. a. Basis of Accounting Sources of financing and expenditures are reported on the accrual basis of accounting. The accrual basis of accounting recognizes receipts as they become available and measurable; expenditures are recognized as they are incurred and measurable as a result of receipt of goods or :services and the creation of a legal obligation to pay. 2. Investments The long-term investments of $14,093,782 (2016 - $10,852 reported o e Balance Sheet at cost, have a market value of $14,486,160 (2016 - $11,508,917). 3. Statement of Cash Flow A separate statement of cash flow is not presented, since ca ow from operating, investing and financing activities are readily apparent from the other financial staterrls. 46 I Z LL ♦F— v / N� I.V F— w W Z W 2 U F - LL 0} F— U w L� �04 N LL 0>i M Z 0�'� 00 Q U o W 0 A L U cn L° N C. al V al t 0 al L R W N al al C co N Go M W O M II �� n M n I 0 M M W M W cocD M M �D M M W O cD W n CD M CD M O� w T N M T T N M- O M O — N le O I-- &0 M M &0I e vl> M co n le M n M le— n N W N N n CO- le N c le M le w 00 Nle M� r r M T r O N O n O ' coo n cc v co le N ©m le N O W r O M le— le n M T n O M Go M W W M— M W O ,It M C T W n cD M cD M O T M M&0— N M W O— N— W W M T— T r N M co le N vl> NU) E �, �, �, r a) W v a)UU rnU '�U ° 0)o is o Con N � E 7 2ul 0 2 a� a) E m Q 30 o- IL E Lj 2 ii c o p O p N a 3: mo in U ii U W c9 ui ui d ti EA M N M n T m i n N Oo n N le le co N N N r N� co N M r r � ER N co co O n ' ' ' M N co O O O N M le N O W r O M le— le n M T n O M Go M W W M— M W O ,It M C T W n cD M cD M O T M M&0— N M W O— N— W W M T— T r N M co le N vl> NU) E �, �, �, r a) W v a)UU rnU '�U ° 0)o is o Con N � E 7 2ul 0 2 a� a) E m Q 30 o- IL E Lj 2 ii c o p O p N a 3: mo in U ii U W c9 ui ui d ti INDEPENDENT AUDITORS' REPORT To the Members of the Belmont Improvement Area Board of Management We have audited the accompanying financial statements of the Belmont Improvement Area Board of Management, which comprise the statement of financial position as at December 31, 2017, the statements of revenue and expenses and accumulated surplus and change in net financial assets for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 48 Page 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Belmont Improvement Area Board of Management as at December 31, 2017, and its results of operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. Chartered Professional Accountants, Licensed Public Accountants June 11, 2018 Waterloo, Canada 2017 KITCHENER FINANCIAL REPORT 49 BELMONT IMPROVEMENT AREA BOARD OF MANAGEMENT Statement of Financial Position As at December 31, 2017 Financial assets Cash Accounts receivable Financial liabilities 2017 2016 $ 44,930 $ 40,781 775 - 45,705 40,781 Accounts payable and accrued liabilities 7,098 7,764 Net financial assets 38,607 33,017 Non-financial assets Tangible capital assets (Note 2) Prepaid expenses 2,195 703 2,823 664 2,898 3,487 Net assets 41,505 36,504 Accumulated Surplus Accumulated net revenue Invested in tangible capital assets 39,310 2,195 33,681 2,823 Total accumulated surplus $ 41,505 $ 36,504 The accompanying notes are an integral part of these financial statements. 50 BELMONT IMPROVEMENT AREA BOARD OF MANAGEMENT Statement of Revenue and Expenses and Accumulated Surplus For the Year Ended December 31, 2017 The accompanying notes are an integrg'art of tff_ff financial statements. 2017 KITCHENER FINANCIAL REPORT 51 2017 2016 Revenue Assessments $ 40,235 $ 40,671 Other revenue 2,732 1,508 42,967 42,179 Expenses Streetscaping 3,231 2,320 Audit 1,808 1,808 Summer maintenance 7,282 5,267 Insurance 1,471 1,407 Winter maintenance 15,930 19,069 Advertising Miscellaneous Amortization 2,691 4,925 628 489 3,699 923 37,966 34,982 Net surplus for year Accumulated surplus, beginning of year 5,001 36,504 7,197 29,307 Accumulated surplus, end of year $ 41,505 $ 36,504 The accompanying notes are an integrg'art of tff_ff financial statements. 2017 KITCHENER FINANCIAL REPORT 51 BELMONT IMPROVEMENT AREA BOARD OF MANAGEMENT Statement of Change in Net Financial Assets For the Year Ended December 31, 2017 2017 2016 Net surplus for year $ 5,001 $ 7,197 Acquisition of tangible capital assets - (3,135) Amortization of tangible capital assets 628 923 Acquisition of prepaid expenses (39) (19) Change in net financial assets 5,590 4,966 Net financial assets, beginning of year 33,017 28,051 Net financial assets, end of year $ 38,607 $ 33,017 The accompanying notes are an integral part of these financial state 54 52 BELMONT IMPROVEMENT AREA BOARD OF MANAGEMENT Notes to Financial Statements For the Year Ended December 31, 2017 1. Summary of significant accounting policies The financial statements of the Belmont Improvement Area Board of Management are the representation of management and have been prepared in accordance with Canadian generally accepted accounting principles for local governments as recommended by the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants. Since precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgment. The following is a summary of the significant accounting policies followed in the preparation of these financial statements: a) Tangible capital assets Tangible capital assets are recorded at cost which includes all amounts that are directly attributable to acquisition, construction, development or betterment of the asset. The cost less residual value of the tangible capital assets is amortized on a straight-line basis over their estimated useful lives as follows: Assets Amortizn Period Awl Equipment 5 YearsF Annual amortization is charged in the year of acquisitidWnd in the year of disposal. Assets under construction are not amortized until the ass is av fo roductive use. Tangible capital assets received tribu are recorded at their fair value at time of receipt and are recorded as revenue. b) Accrual basis of accountin Revenue and expenses are reporfe on the accrual basis of accounting. The accrual basis of accounting recognizes revenue as it becomes available and measurable; expenses are recognized as they are incurred and measurable as a result of receipt of goods or services and the creation of a legal obligation to pay. 2. Tangible Capital Assets Opening balance Additions Amortization expense Accumulated Net Book Cost Amortization Value $ 9,237 $ (6,414) $ 2,823 (628) 628 Disposals - - - Endina balance 3. Statement of cash flow $ 9,237 $ 2.195 A separate statement of cash flow is not presented, since cash flow from operating, investing and financing activities are readily apparent from the other financial statements. 2017 KITCHENER FINANCIAL REPORT 53 54 KPMG LLP 115 King Street South 2nd Floor Waterloo ON N2J 5A3 Canada Tel 519-747-8800 Fax 519-747-8830 INDEPENDENT AUDITORS' REPORT We have audited the accompanying financial statements of Kitchener Downtown Improvement Area Board of Management, which comprise the statement of financial position as at December 31, 2017, the statements of revenue and expenses and accumulated surplus and changes in net financial assets for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Kitchener Downtown Improvement Area Board of Management as at December 31, 2017, and its results of operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. Chartered Professional Accountants, Licensed Public Accountants Waterloo, Canada April 25, 2018 2017 KITCHENER FINANCIAL REPORT 55 KITCHENER DOWNTOWN IMPROVEMENT AREA BOARD OF MANAGEMENT Statement of Financial Position Year ended December 31, 2017, with comparative information for 2016 Financial Liabilities Accounts payable and accrued charges 77,989 111,033 Due to the City of Kitchener (note 4) 34,361 46,560 112,350 157,593 Net financial assets 148,174 68,356 Non -Financial Assets Tangible capital assets (note 5) 57,833 77,552 Net assets $ 206,007 $ 145,908 Accumulated Surplus Reserve for rate stabilization Accumulated net revenue Invested in tangible capital assets $ 50,000 $ 50,000 98,174 18,356 57,833 77,552 Total accumulated surplus $ 206,007 $ 145,908 See accompanying notes to financial statements. RET Director Director 2017 2016 Financial Assets Cash $ 106,473 $ 84,423 Term deposits (note 2) 112,135 111,594 Accounts receivable 34,990 23,065 Prepaid expenses 6,926 6,867 260,524 225,949 Financial Liabilities Accounts payable and accrued charges 77,989 111,033 Due to the City of Kitchener (note 4) 34,361 46,560 112,350 157,593 Net financial assets 148,174 68,356 Non -Financial Assets Tangible capital assets (note 5) 57,833 77,552 Net assets $ 206,007 $ 145,908 Accumulated Surplus Reserve for rate stabilization Accumulated net revenue Invested in tangible capital assets $ 50,000 $ 50,000 98,174 18,356 57,833 77,552 Total accumulated surplus $ 206,007 $ 145,908 See accompanying notes to financial statements. RET Director Director KITCHENER DOWNTOWN IMPROVEMENT AREA BOARD OF MANAGEMENT Statement of Revenue and Expenses and Accumulated Surplus Year ended December 31, 2017, with comparative information for 2016 See accompanying notes to financial statements. 2017 KITCHENER FINANCIAL REPORT 57 Budget Actual Actual 2017 2017 2016 Revenue: Assessments $ 1,082,000 $ 1,082,021 $ 1,081,831 Interest - 396 1,195 Other income - 34,455 93,733 1,082,000 1,116,872 1,176,759 Expenses: Promotions and advertising 308,000 281,458 437,375 Salaries, wages and benefits 424,735 430,987 476,065 Administration 98,265 138,060 115,547 Meetings and seminars 5,000 5,074 7,696 Safety and beautification 160,000 142,224 136,265 Member relations 7,000 4,890 7,439 Amortization - 19,719 19,173 1,003,000 1,022,412 1,199,560 Net revenue (expense) before other items 79,000 94,460 (22,801) Net assessment write-offs (note 4) 34,000 34,361 46,560 Net revenue (expense) 45,000 60,099 (69,361) Accumulated surplus, beginning of year 145,908 145,908 215,269 Accumulated surplus, end of year $ 190,908 $ 206,007 $ 145,908 See accompanying notes to financial statements. 2017 KITCHENER FINANCIAL REPORT 57 KITCHENER DOWNTOWN IMPROVEMENT AREA BOARD OF MANAGEMENT Statement of Changes in Net Financial Assets Year ended December 31, 2017, with comparative information for 2016 See accompanying notes to financial statements. 58 2017 2016 Net revenue (expense) $ 60,099 $ (69,361) Acquisition of tangible capital assets - (25,002) Amortization of tangible capital assets 19,719 19,173 Change in net financial assets 79,818 (75,190) Net financial assets, beginning of year 68,356 143,546 Net financial assets, end of year $ 148,174 $ 68,356 See accompanying notes to financial statements. 58 KITCHENER DOWNTOWN IMPROVEMENT AREA BOARD OF MANAGEMENT Statement of Cash Flows Year ended December 31, 2017, with comparative information for 2016 Cash provided by (used in): Operating activities: Net revenue (expense) Item not involving cash: Amortization Changes in non-cash assets and liabilities: Accounts receivable Prepaid expenses Accounts payable and accrued liabilities Due to/from City of Kitchener Cash from operating activities Investing activities: Acquisition of tangible capital assets Redemption (purchase) of investments Cash used in investing activities Increase in cash Cash, beginning of year 2017 2016 $ 60,099 $ (69,361) 19,719 19,173 (11,925) 9,370 (59) (3,550) (33,044) 36,295 (12,199) 9,200 22,591 1,127 - (25,002) (541) 105,435 (541) 80,433 22,050 81,560 84,423 2,863 Cash, end of year $ 106,473 $ 84,423 See accompanying notes to financial statements. 2017 KITCHENER FINANCIAL REPORT 59 KITCHENER DOWNTOWN IMPROVEMENT AREA BOARD OF MANAGEMENT Notes to Financial Statements Year ended December 31, 2017 1. Summary of significant accounting policies: Kitchener Downtown Improvement Area Board of Management (the "Board") is established for the main purpose of revitalizing the Central Business District of the City of Kitchener. It is designated as a Business Improvement Area (BIA) through the Ontario Municipal Act and a City of Kitchener by-law enacted in 1977. The financial statements of the Board are the representation of management and have been prepared in accordance with Canadian generally accepted accounting principles for local governments, as recommended by the Public Sector Accounting Board (PSAB) of the Canadian Professional Accountants. Since precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgment. (a) Tangible capital assets: Tangible capital assets are recorded at cost which includes amounts that are directly attributable to acquisition, construction, development or betterment of the asset. The cost, less residual value, of the tangible capital assets, excluding land and landfill sites, are amortized on a straight-line basis over their estimated useful lives as follows: Asset Useful Life - Years Computers 4 years Furniture and fixtures 7 years Leasehold improvements 7 years Event equipment 10 years Annual amortization is charged in the year of acquisition and in the year of disposal. Assets under construction are not amortized until the asset is available for productive use. Tangible capital assets received as contributions are recorded at their fair value at the date of receipt and also are recorded as revenue. (b) Accrual basis of accounting: The accrual basis of accounting recognizes revenues as they become available and measurable; expenditures are recognized as they are incurred and measurable as a result of receipt of goods or services and the creation of a legal obligation to pay. KITCHENER DOWNTOWN IMPROVEMENT AREA BOARD OF MANAGEMENT Notes to Financial Statements, page 2 Year ended December 31, 2017 1. Summary of significant accounting policies (continued): (c) Revenue recognition: Revenues are recognized as follows: The Board Assessment revenue is recorded on an annual basis using the proportionate share of the total number of businesses for the year and an annually established rate per business. Revenue is recognized when assessed. Other revenues are recorded upon sale of goods or provision of service when collection is reasonably assured. 2. Term deposits: The term deposits consist of the following: Principal Maturity Rate $ 50,451 March 29, 2018 0.40% 50,903 April 6, 2018 0.80% 10,639 April 25, 2018 0.60% 3. Commitments: During 2016, the Board executed a new lease agreement. The lease expires on June 30, 2021. The Board is committed to the following minimum payments under the agreement: 2018 $ 35,538 2019 35,538 2020 35,538 2021 35,538 4. City of Kitchener: The Board receives assessment income from the City of Kitchener for its operations. During the year, assessment write-offs were incurred for $34,361 (2016 - $46,560). The 2016 amount was paid to the City of Kitchener in 2017. 2017 KITCHENER FINANCIAL REPORT 61 F - Z 5W G W 0 Q Z 5Q G LL 0 N� Ii Q 00 W Q W LQ r Z 5W G W 00 w /1 G Z 0-0 N 7 Z� O Ur- N CD Q a) N N E O M —co N W- -0 Z 'iu W U N COLL 0 C U(2) o -a HN L CU Y Z ,0 a�a�om T > N Y O O a)C O (6 O O E.N N N O U E Q (6 C O N E O E Q O C O N N 0 .0) O a) 0 -0O O-0 N C C) (6 O - N (6 Z C (6 C N_ ' a O Etf o 0-0 o E Q m - i N O (6 C _0 > 0- N CO O N C O O U) Q 0)N C U 'E C m 00-0 (A 00 U) m Ln (0 00 Ln LO O) O) rn (7 N V C6 N C6 (7 EA (0 =o V (A C) 00 O) 00 ii -i O) O) V N V O) V C (O V EA (0 00 V N_ LO O) V (Y V I- CC O) (O EA EA 0') V O) N I1- L(7 V I- (0 00 m EA (7 V C) LO CY) 00 O T- (0 C7 O) m (A LO (0 00 LO LO O) O) 1- (7 V C6 (O (7 00 N (0 V (A Q 0)N C U 'E C m 00-0 (A U) c Ln (0 00 Ln LO O) O) 1- - CO V C6 (O C6 00 N (0 =o V (A E M. U) c a E N N p > =o E E U ii -i W M. pal-Irm"gi 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 members of the Kitchener Public Library Board We have audited the accompanying financial statements of the Kitchener Public Library, which comprise the statement of financial position as at December 31, 2017 and the statements of revenues, expenses and accumulated net revenue, cash flows and changes in net financial assets for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 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. 2017 KITCHENER FINANCIAL REPORT 63 64 Page 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Kitchener Public Library as at December 31, 2017, and its results of operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. 4 P Chartered Professional Accountants, Licensed Public Accountants Waterloo, Canada March 21, 2018 KITCHENER PUBLIC LIBRARY Statement of Financial Position December 31, 2017, with comparative information for 2016 2017 2016 Assets Cash $ 1,333,546 $ 1,266,477 Accounts receivable 68,482 72,757 Investments 50,000 50,000 Endowment investments 100,000 - Prepaid expenses 25,325 - Due from City of Kitchener 144,461 168,419 1,721,814 1,557,653 Financial Liabilities Accounts payable and accrued liabilities 482,027 490,457 Deferred revenue (note 2) 758,433 685,860 1,240,460 1,176,317 Net financial assets 481,354 381,336 Non -Financial Assets Tangible capital assets (note 3) 6,125,603 6,363,535 $ 6,606,957 $ 6,744,871 Accumulated Surplus Invested in tangible capital assets Endowment investments Reserves See accompanying notes to financial statements. On behalf of the Board: Director Director 6,125,603 6,363,535 100,000 - 381,354 381,336 $ 6,606,957 $ 6,744,871 2017 KITCHENER FINANCIAL REPORT 65 KITCHENER PUBLIC LIBRARY Statement of Revenues, Expenses and Accumulated Net Revenue Year ended December 31, 2017, with comparative information for 2016 2017 Budaet 2017 2016 Revenues 8,639,863 8,555,081 8,499,175 Grants: 1,207,900 1,471,028 1,488,435 Province of Ontario $ 286,755 $ 286,755 $ 286,755 City of Kitchener: 183,150 206,857 188,987 Operating 10,611,172 10,611,172 10,423,548 Capital and special (note 4) - 627,144 1,068,083 Special grants (note 5) - 200,084 128,250 Fines 220,000 218,296 227,772 Endowment investment 9,850 7,689 5,914 contributions - 100,000 - Interest and miscellaneous 26,000 36,798 25,797 Partnerships 27,400 27,757 27,377 Room rental 32,000 37,773 33,896 Photocopy 35,000 40,994 35,949 11,238,327 12,186,773 12,257,427 Expenses Personnel costs (Schedule 1) 8,639,863 8,555,081 8,499,175 Resource materials 1,207,900 1,471,028 1,488,435 Equipment (Schedule 2) 247,500 692,934 619,634 Administrative(Schedule 3) 183,150 206,857 188,987 Facilities costs (Schedule 4) 756,564 753,621 727,277 Processing/bindery 117,000 119,881 118,469 Programs and publicity (Schedule 5) 76,500 67,979 54,217 General library equipment 9,850 7,689 5,914 Expenditures related to capital and special (note 4) - 249,533 413,158 Required expenditures related to special grants (note 5) - 200,084 128,250 11,238,327 12,324,687 12,243,516 Net revenue (deficit) - (137,914) 13,911 Accumulated net revenue, beginning of year 6,744,871 6,730,960 Accumulated net revenue, end of year $ 6,606,957 $ 6,744,871 See accompanying notes to financial statements. KITCHENER PUBLIC LIBRARY Statement of Cash Flows Year ended December 31, 2017, with comparative information for 2016 2017 2016 Operating activities Net revenue (deficit) $ (137,914) $ 13,911 Item not involving cash: Amortization 1,522,113 1,525,955 Change in non-cash operating working capital Accounts receivable 4,275 53,030 Prepaid expenses (25,325) - Due from City of Kitchener 23,958 98,315 Accounts payable and accrued liabilities (8,430) (86,552) Deferred revenue 72,573 52,392 Cash flows from operating activities 1,451,250 1,657,051 Capital activities: Acquisition of tangible capital assets (1,284,181) (1,539,794) Investing activities: Investments - (50,000) Endowment investments (100,000) - (100,000) (50,000) Increase in cash 67,069 67,257 Cash, beginning of year 1,266,477 1,199,220 Cash, end of year $ 1,333,549 $ 1,266,477 2017 KITCHENER FINANCIAL REPORT 67 KITCHENER PUBLIC LIBRARY Statement of Changes in Net Financial Assets Year ended December 31, 2017, with comparative information for 2016 Net financial assets, beginning of year 381,336 381,264 Net financial assets, end of year $ 481,354 $ 381,336 See accompanying notes to financial statements. .: 2017 2016 Excess of revenue over expenses $ (137,914) $ 13,911 Acquisition of tangible capital assets (1,284,181) (1,539,794) Amortization of tangible capital assets 1,522,113 1,525,955 Change in net financial assets, before the undernoted 100,018 72 Receipt of endowment investment (100,000) - Change in net financial assets 18 72 Restriction of endowment investment 100,000 - Net financial assets, beginning of year 381,336 381,264 Net financial assets, end of year $ 481,354 $ 381,336 See accompanying notes to financial statements. .: KITCHENER PUBLIC LIBRARY Notes to Financial Statements Year ended December 31, 2017 Kitchener Public Library (the "Board") was incorporated as a not-for-profit organization, without share capital, under the laws of Ontario. It is a Board of the City of Kitchener (the "City") and is dependent on the City for a significant portion of its operating and capital funding. The Board contributes to the community as a resource and a gateway with sources of information and works of imagination. The financial statements of the Board are the representation of management and have been prepared in accordance with Canadian generally accepted accounting principles for local governments, as recommended by the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants. Since precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgments. The following is a summary of the significant accounting policies followed in the preparation of these financial statements. 1. Significant accounting policies: (a) Accrual basis of accounting: The accrual basis of accounting recognizes revenues as they become available and measurable; expenditures are recognized as they are incurred and measurable as a result of receipt of goods or services and the creation of a legal obligation to pay. (b) Investments: Investments consist of bonds and are recorded at amortized cost. Discounts and premiums arising on the purchase of these investments are amortized over the term of the investments. When there has been a loss in value that is other than a temporary decline in value, the respective investment is written down to recognize the loss. (c) Endowment investments: Endowment investments recieved are recorded as financial assets which have the principal restricted for use. Income earned on the endowment is used for the purpose specified by the donor. Any unspent funds earned during the year are deferred for future use. 2017 KITCHENER FINANCIAL REPORT 69 KITCHENER PUBLIC LIBRARY Notes to Financial Statements (continued) Year ended December 31, 2017 1. Significant accounting policies (continued): (d) Tangible capital assets: Tangible capital assets are recorded at cost which includes amounts that are directly attributable to acquisition, construction, development or betterment of the asset. The cost, less residual value, of the tangible capital assets, excluding land are amortized on a straight-line basis over their estimated useful lives as follows: Furniture, fixtures and equipment Specialty and other equipment Computer Books and audio visual resources 2. Deferred revenue: 10-30 years 8 years 3-10 years 2-10 years Deferred revenue represents the annual Board's approval of the appropriation of unspent funds, and are subject to external restrictions as to how the funds are disbursed. These appropriations are included in required expenses and are subsequently charged directly to operations when spent. 70 D O) O (6 C00 N� Ii V O O p 0) O (6 NQ IMi N OM W CO 0 7 -O 0) 00 O U7 00 CO � C J M O W C.) � LO N } ^� co N m CB W � a) E LO M ZCO U WcuQ a) C-) � V E- LL V iL a� O � O y O � � H Y Z co a- >- ri D O) O (6 C00 000 V O O p 0) O (6 N OM N CO 0 7 -O 0) 00 O 00 00 CO 0 3 -O N LO r- M 0 (6 C > 0) LO Oro 00 LO M LO LO NC > 0) M O O 00 00 z � N z 000 � c+i co ( ER ER ER CLO O r- 0 � O U N CO V - 1- 0 0 00 0 O p a) N r- r- 00 r I- 00 N N O OO r- 3 N 0) N E 0 M V CO M 00 O E N 0 M LO M Ur r U E LO r Q m N M 1 1 O N M 0 O 1 (6 tll LO Ln N N N O 00 N (nN N 0 00 Ln CO O 00 Ln M ON V N Qcl M 0 - CO ER ER ER O (D � O IN M O ' O V LM IN Ln CO r- N Ln 0 M N - 0 Ln 00 V M N N N - O N N CO (n M M 0 O N Ln 0 N E E Q Q ER ER ER N 0 LO 0 -O C O (6 N OD CO M O O N jp :J r 00 r r V 00 0 M O O N N ;_, V 0 N 00 r- O 0 M N EIf C (V I- 0 r LO M M 00 N. E E C M (n O V 00 Ln 0 N Ln � r U E IN Ln � U E 6,6 (5 C -O O O O V N M O LO LO 6,6 (6 C -O O LO N O 000 C09 C09 000 O W (D O M N O Oro 00 O N m 0 M M O N ED O 00 N N M (n N N ER ER ER N CO N O N CO � O (6 tll LO Ln N N O 00 N tll N N 0 00 Ln CO O 00 Ln M ON V N Qcl M 0 MV CO ER ER ER ' N LO O ' O 0 O N O M M -O 00 LO V 000 -O N M r - Q 0 N N Q O V N LO N 0 O V O O V 0 O O C CO 00 N C CO C- 00 N LO 00 00 O r M M 0) O r- V O O r 0� O 0� LO 000 (n N N M 0 (V EA EA EA D ul c c > (6 (6 > (6 (6 O O m U c Q mU) c Q N 7 C _ Q 0) U N 3 C Q 0) U r O N E C a 0) 0) M O N E C a 0) 0) m U ii 0) O > m U ii 0) O > ti KITCHENER PUBLIC LIBRARY Notes to Financial Statements (continued) Year ended December 31, 2017 4. Capital and special grants: Each year, the City approves capital and special grants for the Board to purchase specific capital items. The capital grants approved for 2017 included $327,082 for general renovations, maintenance and upgrading of existing facilities, $279,262 for communication infrastructure and technology upgrades and $27,000 for KPL Accessibility Fund. The portion of these grants and previous year grants that are included in revenue in 2017, is $598,208 (2016 - $890,116). 5. Special grants: In 2017, the Board received various special non-recurring grants and donations totaling $271,432 (2016 - $182,235). The portion of these grants and previous year special grants that are included in revenue in 2017, is $200,084 (2016 - $128,250). The remainder is included in deferred revenue. 6. Pension plan: The Board makes contributions to the Ontario Municipal Employees Retirement Systems (OMERS), which is a multi-employer plan, on behalf 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 rate of pay. During the year, the Board incurred expenses equal to $596,824 (2016 - $596,969) for current service on behalf of its staff. 72 KITCHENER PUBLIC LIBRARY Schedules of Personnel, Equipment, Administrative, Facilities and Programs and Publicity Expenses Year ended December 31, 2017, with comparative information for 2016 2017 KITCHENER FINANCIAL REPORT 73 2017 2016 Schedule 1 - Personnel Personnel: Salaries $ 6,957,267 $ 6,893,901 Health benefits 450,844 450,786 Pension benefits 877,930 878,295 Employment insurance 129,962 151,142 WSIB 21,824 22,710 Sick leave reserve 70,000 66,000 Staff training 47,254 36,341 $ 8,555,081 $ 8,499,175 Schedule 2 - Equipment Equipment: Technology $ 241,148 $ 198,068 Equipment maintenance 21,238 16,117 Amortization 430,548 405,448 $ 692,934 $ 619,633 Schedule 3 - Administrative Administrative: Postage and delivery $ 7,347 $ 7,294 Insurance 18,835 18,466 Professional services 48,505 43,867 General business 55,063 49,096 Telephone 25,360 24,776 Stationery 51,747 45,488 $ 206,857 $ 188,987 Schedule 4 - Facilities Facilities: Facilities expenses $ 387,952 $ 370,296 Country Hills building 49,386 45,055 Main utilities 266,282 262,870 Forest Heights utilities 23,828 20,174 Pioneer Park building 23,129 25,111 Grand River Stanley Park building 3,044 3,771 $ 753,621 $ 727,277 2017 KITCHENER FINANCIAL REPORT 73 KITCHENER PUBLIC LIBRARY Schedule 5 - Programs and Publicity Year ended December 31, 2017, with comparative information for 2016 Programs and publicity: Promotional Public programs 74 2017 2016 $ 36,810 $ 27,687 31,169 26,530 $ 67,979 $ 54,217 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 Directors of The Centre In The Square Inc. We have audited the accompanying financial statements of The Centre In The Square Inc., which comprise the statement of financial position as at December 31, 2017, the statements of operations, changes in net financial assets and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 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. 2017 KITCHENER FINANCIAL REPORT 75 J'alm, mp� 76 Page 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of The Centre In The Square Inc. as at December 31, 2017, and its results of operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. Chartered Professional Accountants, Licensed Public Accountants Waterloo, Canada March 28, 2018 THE CENTRE IN THE SQUARE INC. Statement of Financial Position December 31, 2017, with comparative information for 2016 Non-financial assets Tangible capital assets (note 5) 11,853,760 2017 2016 51,494 Prepaid expenses 224,690 (restated — note 2) Net Assets 8,679,150 Financial assets: Cash $ 3,438,579 $ 3,885,724 Due from (to) The City of Kitchener 579,928 (42,392) Accounts receivable 203,233 163,118 Interest receivable 1,389 1,242 Costs to be recovered 366,072 162,429 Investments (note 3) 1,371,508 1,311,384 Total financial assets 5,960,709 5,481,505 Financial liabilities: Accounts payable and accrued liabilities 2,324,593 1,287,942 Deferred revenue (note 4) 2,652,048 3,141,323 4,976,641 4,429,265 Net financial assets 984,068 1,052,240 Non-financial assets Tangible capital assets (note 5) 11,853,760 8,401,280 Inventories (note 6) 61,758 51,494 Prepaid expenses 224,690 226,376 12,140,208 8,679,150 Net assets $ 13,124,276 $ 9,731,390 Accumulated Surplus Operating fund activities (note 7) Reserves - Capital (notes 8 and 12) Reserves - Performance Development (note 9) Reserves - Sustainability (notes 9 and 12) Reserves - Restricted (notes 10 and 12) Invested in tangible capital assets 508,111 765,447 203,538 62,686 558,867 501,977 11,853,760 8,401,280 Accumulated surplus $ 13,124,276 $ 9,731,390 See accompanying notes to financial statements. On behalf of the Board: Director Director 2017 KITCHENER FINANCIAL REPORT 77 THE CENTRE IN THE SQUARE INC. Statement of Operations Year ended December 31, 2017, with comparative information for 2016 Budget 2017 Actual 2017 Actual 2016 (restated - note 2) Revenues: Performances $ 6,363,021 $ 7,006,860 $ 6,613,377 Rent- Kitchener -Waterloo Symphony 105,320 98,170 105,855 Capital reserve fund surcharge (note 8) 315,000 330,202 309,753 Grants from The City of Kitchener- Operating 2,000,000 2,000,000 2,000,000 Grants from The City of Kitchener- Capital 3,232,969 2,655,965 219,294 Grants from other governments - Operating 17,700 40,993 21,150 Grants from other governments - Capital 1,206,208 1,006,552 121,365 Donations 2,000 10,240 15,619 Investment income 64,000 60,402 52,660 Sponsorships and memberships 170,630 102,293 104,117 Rent - Kitchener -Waterloo Art Gallery 97,240 97,240 95,520 Lottery revenue - 7,666 6,942 Other 172,225 216,914 134,282 Gain on investments - 44,712 3,565 Gain (loss) gain on sale of assets - 3,000 (32,975) Portion of operating gain for The City of Kitchener - (139,217) (62,060) Total revenue 13,746,313 13,541,992 9,708,464 Expenses: Direct: Performances 5,618,120 5,793,426 5,806,354 Operating: Administration 425,000 450,363 398,848 Marketing 101,050 114,123 174,263 Lottery expenses - 7,648 6,942 Occupancy 813,187 771,013 706,418 Salaries and wages 2,561,051 3,154,549 2,905,787 Recoveries - performances (568,458) (964,513) (1,004,214) Amortization 700,000 805,779 513,909 Write down of tangible capital assets 612,500 11,863 30,062 Reserves expenditures (note 12) 15,000 4,855 9,320 Total expenses 10,277,450 10,149,106 9,547,689 Excess of revenue over expenses 3,468,863 3,392,886 160,775 Accumulated surplus as previously stated, beginning of year 9,613,315 9,613,315 9,438,933 Prior period adjustment (note 2) 118,075 118,075 131,682 Accumulated surplus restated, beginning of year 9,713,390 9,731,390 9,570,615 Accumulated surplus, end of year $ 13,200,253 $ 13,124,276 $ 9,731,390 See accompanying notes to financial statements. 78 THE CENTRE IN THE SQUARE INC. Statement of Change in Net Financial Assets Year ended December 31, 2017, with comparative information for 2016 See accompanying notes to financial statements. 2017 KITCHENER FINANCIAL REPORT 79 2017 2016 (restated — note 2) Excess of revenue over expenses $ 3,392,886 $ 160,775 Acquisition of tangible capital assets (4,270,122) (292,690) Amortization of tangible capital assets 805,779 513,909 Write-downs of tangible capital assets 11,863 30,062 (59,594) 412,056 Net acquisition of supplies inventory (10,264) (2,936) Use (acquisition) of prepaid expenses 1,686 (59,550) (8,578) (62,486) Increase (decrease) in net financial assets (68,172) 349,570 Net financial assets, beginning of year 1,052,240 702,670 Net financial assets, end of year $ 984,068 $ 1,052,240 See accompanying notes to financial statements. 2017 KITCHENER FINANCIAL REPORT 79 THE CENTRE IN THE SQUARE INC. Statement of Cash Flows Year ended December 31, 2017, with comparative information for 2016 See accompanying notes to financial statements. :1 2017 2016 (restated — note 2) Operating activities: Excess of revenue over expenses $ 3,392,886 $ 160,775 Items not involving cash: Amortization 805,779 513,909 Write down of tangible capital assets 11,863 30,062 Change in non-cash operating working capital (327,427) 614,047 Cash provided by operating activities 3,883,101 1,318,793 Capital activities: Cash used to acquire tangible capital assets (4,270,122) (292,690) Investing activities: Investments (60,124) (765,908) Increase (decrease) in cash (447,145) 260,195 Cash, beginning of year 3,885,724 3,625,529 Cash, end of year $ 3,438,579 $ 3,885,724 See accompanying notes to financial statements. :1 THE CENTRE IN THE SQUARE INC. Notes to Financial Statements Year ended December 31, 2017 The mission of The Centre In The Square Inc. ("The Centre"), is to create memorable experiences. It is incorporated as a not-for-profit corporation without share capital, is exempt from income taxes under the Income Tax Act, and is a registered charity. The Centre is a governed by a Board of Directors and receives an operating grant from the City of Kitchener ("the City"). 1. Significant accounting policies: The financial statements of The Centre are the representation of management and have been prepared in accordance with Canadian generally accepted accounting principles for local governments, as recommended by the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants. Since precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgment. (a) Tangible capital assets: Tangible capital assets are recorded at cost which includes amounts that are directly attributable to acquisition, construction, development or betterment of the asset. The cost, less residual value, of the tangible capital assets, excluding land, are amortized on a straight- line basis over their estimated useful lives as follows: Asset Rate Building 9 - 100 years Equipment 4 - 50 years Computers 5 - 14 years Software 3 years Site 10 - 50 years (b) Accrual basis of accounting: The accrual basis of accounting, recognizes revenues as they become available and measurable; expenditures are recognized as they are incurred and measurable as a result of receipt of goods or services and the creation of a legal obligation to pay. (c) Inventories: Bar stock inventories are valued at the most recent replacement cost. Supplies inventories are valued at the lower of cost and net realizable value on a first -in, first -out basis. Net realizable value is defined as replacement cost. 2017 KITCHENER FINANCIAL REPORT 81 THE CENTRE IN THE SQUARE INC. Notes to Financial Statements, continued Year ended December 31, 2017 1. Significant accounting policies (continued): (d) Investments: Investments are recorded at the lower of cost or market value on a fund portfolio basis. Interest income and all expenses are fully accrued. (e) Deferred revenue: Performance revenue is recognized when the show occurs. Deferred gift certificate revenue is an estimate based upon gift certificate sales during the period from July 1 to December 31 of the current year. 2. Prior year adjustment: During the year, The Centre adjusted their accounting records for tangible capital assets that had previously been written off in error but are still in use as of December 31, 2017. This adjustment is applied retrospectively and is detailed below. Statement of Financial Position As previously Restated as at presented Restatements December 31, 2016 Tangible capital assets $ 8,283,205 $ 118,075 $ 8,401,280 Invested in tangible capital assets 8,283,205 118,075 8,401,280 Statement of Operations As previously Restated as at presented Restatements December 31, 2016 Amortization $ 500,302 $ 13,607 $ 513,909 Statement of Change in Net Financial Assets As previously Restated as at presented Restatements December 31, 2016 Excess of revenue over expenses $ 174,382 $ (13,607) $ 160,775 Amortization of tangible capital assets 500,302 13,607 513,909 Statement of Cash Flows As previously Restated as at presented Restatements December 31, 2016 Excess of revenue over expenses $ 174,382 $ (13,607) $ 160,775 Amortization of tangible capital assets 500,302 13,607 513,909 THE CENTRE IN THE SQUARE INC. Notes to Financial Statements, continued Year ended December 31, 2017 3. Investments: Investments consist of: Carrying value Market Carrying value Market 2017 2017 2016 2016 Shares $ 332,758 $ 514,227 $ 287,276 $ 468,924 Bonds 270,267 266,707 214,344 214,202 Cash 4,852 4,852 54,068 54,068 GIC 763,631 763,631 755,696 755,696 $ 1,371,508 $ 1,549,417 $ 1,311,384 $ 1,492,890 4. Deferred revenue: Deferred revenue consists of the following: 2017 2016 Sponsorships $ 24,167 $ 23,750 Performances 2,312,882 1,985,048 Gift certificates 41,015 46,069 Membership 6,346 2,897 Other 267,638 1,078,775 Lottery - 4,784 $ 2,652,048 $ 3,141,323 2017 KITCHENER FINANCIAL REPORT 83 V Z LW L1 Q A N W .� C _o O U r— CDCD Z C N N - E W O M A/ c N LL U Zc. 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Notes to Financial Statements, continued Year ended December 31, 2017 6. Inventories: Inventories consist of the following: Performances 5,618,120 2017 2016 Bar stock $ 56,952 $ 50,610 Supplies 425,000 4,806 884 Marketing $ 61,758 $ 51,494 7. Operating fund activities: - 7,648 6,942 Occupancy Budget Actual Actual Salaries and wages 2017 2017 2016 Revenues: (568,458) (964,513) (1,004,214) Performances $ 6,363,021 $ 7,006,860 $ 6,613,377 Rent - Kitchener -Waterloo Symphony 105,320 98,170 105,855 Grants from City of Kitchener 2,000,000 2,000,000 2,000,000 Grants, other Governments and Foundations 17,700 40,993 21,150 Donations - 7,913 13,403 Investment income 24,000 26,994 23,872 Sponsorships and memberships 170,630 102,293 104,117 Rent - Kitchener -Waterloo Art Gallery 97,240 97,240 95,520 Lottery revenue - 7,666 6,942 Other 172,225 216,914 134,282 Total revenue 8,950,136 9,605,043 9,118,518 Current fund expenditures: Direct: Performances 5,618,120 5,793,426 5,806,354 Operating: Administration 425,000 450,363 398,848 Marketing 101,050 114,123 174,263 Lottery expenses - 7,648 6,942 Occupancy 813,187 771,013 706,418 Salaries and wages 2,561,051 3,154,549 2,905,787 Recoveries - performances (568,458) (964,513) (1,004,214) Total current fund expenditures 8,949,950 9,326,609 8,994,398 Operating fund net revenues before amortization Transfer (to) from reserve funds Transfer (to) from the City of Kitchener 186 278,434 124,120 (186) (139,217) (62,060) - (139,217) (62,060) Fund balances, end of year $ - $ - $ - 2017 KITCHENER FINANCIAL REPORT 85 THE CENTRE IN THE SQUARE INC. Notes to Financial Statements, continued Year ended December 31, 2017 8. Capital Reserve Fund Surcharge: The Capital Reserve Fund represents the collection of a surcharge from sale of tickets. At the direction of the Board of Directors, expenditures from the Capital Reserve Fund are made to finance, in whole or in part, major capital items, replacements and major maintenance projects. In 2017, the Centre's Board of Directors approved transfers out of the Capital Reserve Fund for major capital asset projects $4,270,122 (2016 - ($292,690)). 9. Performance Development and Sustainability Reserve Funds: At the direction of the Board of Directors, transfers are made to and from the Performance Development Reserve and Sustainability Funds, equal to one-half of the annual operating net revenue. In 2017, The Centre's Board of Directors approved the transfer of the funds to the Sustainability Fund of $139,217 (2016 - $62,686) from the operating fund. 10. Restricted Fund: The Restricted Fund was set up by the Board of Directors of The Centre in 2000 by a transfer of investments from the Sustainability Reserve Fund in accordance with the Restricted Fund Policy. Income from this fund is to be used for capital requirements, special projects and/or new programming initiatives that help further The Centre's mandate. 11. 2017 budget: The original budgeted figures were approved by the Board of Directors at their meeting in August 2016 and included certain expenses and offsetting recoveries on a net basis. For purposes of presentation in these financial statements, these items have been shown as gross amounts. THE CENTRE IN THE SQUARE INC. Notes to Financial Statements, continued Year ended December 31, 2017 12. Schedule of reserve funds: Total Revenue Expenses: Professional fees Performance 1,635 - Total 4,076,166 4,855 Development Capital Sustainability Restricted Funds overexpenses - 4,012,786 Revenue: 56,890 4,071,311 Transfer to accumulated Donations and sundry $ - $ - $ - $ 2,327 $ 2,327 Grants from The City of Kitchener 2016 - 2,655,965 - - 2,655,965 Grants from the (4,270,122) Other transfers - - other governments - 1,006,552 - - 1,006,552 Ticket surcharge - 330,202 - - 330,202 Investment income - 17,067 1,635 14,706 33,408 Gain on investments - - - 44,712 44,712 Gain on sale of assets - 3,000 - - 3,000 Total Revenue Expenses: Professional fees - 4,012,786 - - 1,635 - 61,745 4,855 4,076,166 4,855 Excess of revenue overexpenses - 4,012,786 1,635 56,890 4,071,311 Transfer to accumulated surplus - tangible capital assets - (4,270,122) - - (4,270,122) Other transfers - - 139,217 - 139,217 Balance, beginning of year - 765,447 62,686 501,977 1,330,110 Balance, end of year $ - $ 508,111 $ 203,538 $ 558,867 $ 1,270,516 2017 KITCHENER FINANCIAL REPORT 87 INDEPENDENT AUDITORS' REPORT To the Mayor and Members of Council, Inhabitants and Ratepayers of The Corporation of the City of Kitchener We have audited the accompanying statement of operations and accumulated surplus of The Corporation of the City of Kitchener Gasworks Enterprise for the year ended December 31, 2017 ("the financial statement"). Management's Responsibility for the Financial Statement Management is responsible for the preparation and fair presentation of this financial statement in accordance with Canadian public sector accounting standards relevant to preparing such a financial statement, and for such internal control as management determines is necessary to enable the preparation of the financial statement that is free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statement is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement. The procedures selected depend on ourjudgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statement. Page 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statement presents fairly, in all material respects the results of operations and accumulated surplus of The Corporation of the City of Kitchener Gasworks Enterprise for the year ended December 31, 2017 in accordance with Canadian public sector accounting standards relevant to preparing such a financial statement. Chartered Professional Accountants, Licensed Public Accountants June 11, 2018 Waterloo, Canada 2017 KITCHENER FINANCIAL REPORT 89 THE CORPORATION OF THE CITY OF KITCHENER GASWORKS ENTERPRISE Statement of Operations and Accumulated Surplus For the Year Ended December 31, 2017 2017 2017 2016 Budget DELIVERY OPERATIONS Gas delivery 24,472,494 21,804,187 19,830,224 Revenue $ 40,057,792 $ 40,744,283 $ 42,881,159 Expenses 17,897,299 18,872,786 19,514,058 Balance, beginning of year 22,160,493 21,871,497 23,367,101 Other programs (414) (408) 1,138 (Customer service, Rental water heaters & Financing) (14,071,618) (14,071,618) (13,795,704) Revenue 9,657,862 10,088,625 9,993,685 Expenses 6,676,807 6,970,815 6,505,337 2,981,055 3,117,810 3,488,348 Dispatch Revenue 624,800 574,152 509,821 Expenses 624,800 574,152 509,821 SUPPLY OPERATIONS `I Revenue Expenses Excess of revenue over expenses Accumulated surplus - Supply Balance, beginning of year Interest revenue Add excess of revenue over expenses Other Balance, end of year 90 24,472,494 21,804,187 19,830,224 Excess of revenue over expenses VA X141,548 24,989,307 26,855,449 Accumulated surplus - Delivery (5,413,051) (3,464,350) (741,319) Balance, beginning of year 142,040,831 142,040,831 128,979,948 Interest revenue (414) (408) 1,138 Transfer to gas investment reserve (14,071,618) (14,071,618) (13,795,704) Add excess of revenue over qAMjjjWL 25,141,548 24,989,307 26,855,449 Balance, end of vear 153,110,347 152,958,112 142,040,831 SUPPLY OPERATIONS `I Revenue Expenses Excess of revenue over expenses Accumulated surplus - Supply Balance, beginning of year Interest revenue Add excess of revenue over expenses Other Balance, end of year 90 24,472,494 21,804,187 19,830,224 29,885,545 25,268,537 20,571,543 (5,413,051) (3,464,350) (741,319) 8,338,456 8,338,456 8,947,187 121,000 122,905 132,588 (5,413,051) (3,464,350) (741,319) - 1,743,552 - 3,046,405 6,740,563 8,338,456 THE CORPORATION OF THE CITY OF KITCHENER GASWORKS ENTERPRISE Statement of Operations and Accumulated Surplus For the Year Ended December 31, 2017 2017 2017 2016 Budget TRANSPORTATION OPERATIONS Revenue 8,230,125 7,290,586 7,255,795 Expenses 7,082,201 7,331,221 8,033,563 Excess of revenue over expenses 1,147,924 (40,635) (777,768) Accumulated surplus - Transportation (25) 109,110 (6,014) Balance, beginning of year (828,250) (828,250) (49,745) Interest revenue (12,010) (12,208) (737) Add excess of revenue over expenses 1,147,924 (40,635) (777,768) Other - 881,093 - Balance, end of year 307,664 - (828,250) CARBON OPERATIONS Revenue 9,721,524 9,116,117 - Expenses 9,721,549 9,007,007 6,014 Excess of revenue over expenses (25) 109,110 (6,014) Accumulated Surplus - Carbon Balance, beginning of year (6,014) (6,014) - Carbon interest - (89) - Add excess of revenue over expenses (25) 109,110 (6,014) Balance, end of year $ (6,039) $ 103,007 $ (6,014) 2017 KITCHENER FINANCIAL REPORT 91 MANAGEMENT REPORT Management's Responsibility for Financial Reporting The accompanying financial statements of Kitchener Generation Corporation are the responsibility of management and have been prepared in accordance with Canadian public sector accounting standards. The significant accounting policies followed by Kitchener Generation Corporation are described in the Significant Accounting Policies contained in Note 2 of the financial statements. The preparation of financial statements necessarily involves the use of estimates based on management's judgment, particularly when transactions affecting the current accounting period cannot be finalized with certainty until future periods. The financial statements have been prepared within reasonable limits of materiality and in light of information available up to June 11, 2018. Management maintained a system of internal controls designed to provide reasonable assurance that the assets were safeguarded and that reliable information was available on a timely basis. The system included formal policies and procedures and an organizational structure that provided for the appropriate delegation of authority and segregation of responsibilities. KITCHENER GENERATION CORPORATION On behalf of management, Jonathan Lautenbach, CPA, CGA Chief Financial Officer and City Treasurer June 11, 2018 Kitchener, Canada 'I KITCHENER GENERATION CORPORATION Statement of Financial Position As at December 31, 2017 (Unaudited) 2017 2016 Financial assets Accounts receivable $ 13,354 $ 4,883 13.354 4.883 Liabilities Due to The Corporation of the City of Kitchener 13,387 4,916 Long-term debt (Note 3) 2,819,442 3,031,535 2,832,829 3,036,451 Net financial debt (2,819,475) (3,031,568) Non-financial assets Tangible capital assets (Note 4) 3,019,272 3,251,524 Total non-current assets 3,019,272 3,251,524 Accumulated surplus (Note 51 $ 199.797 $ 219.956 The accompanying notes are an integral part of these financial 2017 KITCHENER FINANCIAL REPORT 93 KITCHENER GENERATION CORPORATION Statement of Operations For the Year Ended December 31, 2017 (Unaudited) 2017 2017 2016 Budget Revenue Sale of electricity $ 385,000 $ 390,542 $ 433,797 Total revenue 385.000 390.542 433.797 Expenses Maintenance 20,400 3,003 13,608 Amortization 232,252 232,252 232,252 Total expenses 252,652 235,255 245,860 Surplus before interest and provision for payments -in -lieu of corporate income taxes 132,34 155,287 187,937 Interest expense 151071C 151,880 163,457 Surplus before provision for payments -in -lieu of 1% corporate income taxes (20,623) 3,407 24,480 Provision for payments -in -lieu of corporate income taxes - - - Annual surplus $ '%Q,623) $ 3,407 $ 24,480 The accompanying notes are an integral part of these financial statements. 94 KITCHENER GENERATION CORPORATION Statement of Change in Net Financial Debt For the Year Ended December 31, 2017 (Unaudited) Annual surplus 2017 2016 3,407 $ 24,480 Change in share capital (23,566) (25,675) Amortization of tangible capital assets 232,252 232,252 Change in net financial debt 212,093 231,057 Net financial debt, beginning of year (3,031,568) (3,262,625) Net financial debt, end of year $ (2,819,475) $ (3,031,568) The accompanying notes are an integral part of these financial statements. 2017 KITCHENER FINANCIAL REPORT 95 KITCHENER GENERATION CORPORATION Statement of Cash Flow For the Year Ended December 31, 2017 (Unaudited) 2017 2016 Operating Annual surplus $ 3,407 $ 24,480 Items not involving cash Amortization 232,252 232,252 Change in non-cash assets and liabilities Trade and other accounts receivable (8,471) 1,152 Accounts payable and accrued liabilities 8,471 (1,135) Net change in cash from operating activities 235,659 256,749 Financing Change in contributed capital (23,566) (25,675) Change in long-term debt (212,093) 231,074 Net change in cash from financing activities 235,659 (256,749) Net change in cash and cash equivalents - - Cash and cash equivalents, beginning of year - - Cash and cash eauivalents. end of vear $ - $ - &MR The accompanying notes are an integral part of these KITCHENER GENERATION CORPORATION Notes to the Financial Statements For the Year Ended December 31, 2017 (Unaudited) 1. Incorporation On December 9, 2011 KITCHENER GENERATION CORPORATION (the company) was incorporated under the Business Corporation Act (Ontario). Effective January 1, 2012, The Corporation of the City of Kitchener transferred the solar roof asset constructed on the surface of the Kitchener Operations Facility to the Company in exchange for 100% of the Company's common shares and interest bearing debt. 2. Summary of significant accounting policies a. Basis of accounting The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles for local governments as established by the Public Sector Accounting Board of the Chartered Professional Accountants of Canada. b. Tangible capital assets Tangible capital assets are recorded at cost which includes all amounts that are directly attributable to acquisition, construction, development or betterment of the asset. The cost less residual value of the tangible capital asset is amortized on a straight-line basis over its estimated useful life of nineteen years. Revenue recognition The Company records revenue from the sale of electricity on the basis of regular meter readings and estimates of energy generation since the last meter reading to the end of the year. d. Use of estimates Since precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgments. Actual results could differ from these estimates. 3. Long-term debt Effective January 1, 2012 the Company incurred an unsecured promissory note payable to The Corporation of the City of Kitchener. For shareholder debt, payments are made annually including interest and principal. Interest is calculated at the fixed rate of 5.01 % per annum. Interest paid in 2017 amounted to $151,880 (2016 - $163,457). 4. Tangible capital assets Opening balance Additions Amortization expense Accumulated Net Book Cost Amortization Value $ 4,412,784 $ (1,161,260) $ 3,251,524 (232,252) (232,252) Disposals - - - Ending balance $ 4,412,784 $ (1,393,512) $ 3,019,272 2017 KITCHENER FINANCIAL REPORT 97 KITCHENER GENERATION CORPORATION Notes to the Financial Statements For the Year Ended December 31, 2017 (Unaudited) 5. Accumulated surplus The accumulated surplus consists of the following: 2017 2016 Share capital - common shares (Note 6) $ 313,271 $ 336,837 Retained earnings (113,474) (116,881) $ 199,797 $ 219,956 6. Share capital Authorized Unlimited common shares Issued 1,000 common shares I�t L" 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 Shareholders of Kitchener Power Corporation We have audited the accompanying consolidated financial statements of Kitchener Power Corporation, which comprise the consolidated statement of financial position as at December 31, 2017, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility 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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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. nn KPMG Canada provides services to KPMG LLP. 2017 KITCHENER FINANCIAL REPORT 77 191AT1 M11 Page 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Kitchener Power Corporation as at December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants Waterloo, Canada March 23, 2018 100 KITCHENER POWER CORP. Consolidated Statement of Financial Position As at December 31, 2017, with comparative information for 2016 (Expressed in thousands of dollars) Non-current assets: Property, plant and equipment 7 234,215 222,159 Intangible assets 8 890 1,174 Deferred tax assets 9 140 2,015 Investment in subsidiaries and associates 42 69 Total non-current assets 235,287 225,417 Total assets 307,407 301,031 Regulatory deferral account debit balances 10 10,073 4,487 Deferred taxes associated with regulatory accounts - 141 Total assets and regulatory assets $ 317,480 $ 305,659 2017 KITCHENER FINANCIAL REPORT 101 Note 2017 2016 Assets Current assets Cash 4 $ 29,045 $ 20,448 Accounts receivable 5 18,203 23,764 Unbilled revenue 21,854 27,589 Inventory 6 2,209 2,864 Prepaid expenses 809 949 Total current assets 72,120 75,614 Non-current assets: Property, plant and equipment 7 234,215 222,159 Intangible assets 8 890 1,174 Deferred tax assets 9 140 2,015 Investment in subsidiaries and associates 42 69 Total non-current assets 235,287 225,417 Total assets 307,407 301,031 Regulatory deferral account debit balances 10 10,073 4,487 Deferred taxes associated with regulatory accounts - 141 Total assets and regulatory assets $ 317,480 $ 305,659 2017 KITCHENER FINANCIAL REPORT 101 KITCHENER POWER CORP. Consolidated Statement of Financial Position Year ended December 31, 2017, with comparative information for 2016 (Expressed in thousands of dollars) Non-current liabilities: Long-term debt Note 2017 2016 Liabilities and Shareholders' Equity Long-term customer deposits 13 5,886 Current liabilities: Deferred revenue 29,118 23,772 Accounts payable and accrued liabilities 9 1,535 $ 26,057 $ 28,608 Income taxes payable 114,250 336 195 Current portion of long-term debt 11 1,127 1,080 Current portion customer deposits 13 8,638 8,592 Current portion of deferred revenue 732 584 Total current liabilities 36,890 39,059 Non-current liabilities: Long-term debt 11 78,745 79,872 Employee future benefits 12 5,213 5,035 Long-term customer deposits 13 5,886 5,571 Deferred revenue 29,118 23,772 Deferred tax liablilty 9 1,535 - Total non-current liabilities 120,497 114,250 Total liabilities 157, 387 153,309 Shareholders` equity: Share capital - common shares Retained earnings Accumulated other comprehensive loss Total shareholders` equity 14 66,389 66,389 81,857 75,886 (278) (245) 147,968 142,030 Total liabilities and shareholders` equity 305,355 295,339 Regulatory deferral account credit balances 10 11,021 10,320 Deferred taxes associated with regulatory accounts 1,104 - Total equi liabilities and shareholders` equity $ 317,480 $ 305,659 The accompanying notes are an integral part of these financial statements. Q<Nhalf of the Board: r DirectorDirector 102 KITCHENER POWER CORP. Consolidated Statement of Comprehensive Income Year ended December 31, 2017, with comparative information for 2016 (Expressed in thousands of dollars) Note 2017 2016 Energy sales $ 204,010 $ 232,647 Cost of energy sold 204,075 228,633 Administration (65) 4,014 Other operating revenue 8,552 8,721 Distribution sales 40,508 40,600 Other income 15 2,785 2,006 Net operating revenue 43,228 46,620 Expenses Operations and maintenance 10,674 9,174 Customer services 4,230 4,415 Administration 4,204 4,133 Amortization 8,552 8,721 Net movement in regulatory deferral account balances 27,660 26,443 Other Energy conservation - IESO program revenue (3,523) (2,443) Energy conservation - IESO program expense 3,523 2,443 Net energy conservation - IESO programs Finance income 16 (301) (234) Finance charges 16 4,109 4,145 Net finance costs 3,808 3,911 Income before income taxes 11,760 16,266 Income tax expense 9 1,823 1,999 Income for the year before movements in regulatory deferral account balances 9,937 14,267 Net movement in regulatory deferral account balances related to profit or loss and the related deferred tax movement 10 229 (3,868) Income for the year and net movements in regulatory deferral account balances 10,166 10,399 Other comprehensive loss 12 (33) - Total comprehensive income for the year $ 10,133 $ 10,399 The accompanying notes are an integral part of these financial statements. 2017 KITCHENER FINANCIAL REPORT 103 KITCHENER POWER CORP. Consolidated Statement of Changes in Equity Year ended December 31, 2017, with comparative information for 2016 (In thousands of Canadian dollars) Net income 10,166 10,166 Other comprehensive income (33) (33) Dividends (4,195) (4,195) Balance at December 31, 2017 $ 66,389 $ (278) $ 81,857 $ 147,968 The accompanying notes are an integral part of these financial statements. 104 Accumulated Share capital other Retained Total comprehensive earnings income (loss) Balance at January 1, 2016 $ 66,389 $ (245) $ 69,897 $ 136,041 Net income 10,399 10,399 Other comprehensive income - - - Dividends (4,410) (4,410) Balance at December 31, 2016 66,389 (245) 75,886 142,030 Net income 10,166 10,166 Other comprehensive income (33) (33) Dividends (4,195) (4,195) Balance at December 31, 2017 $ 66,389 $ (278) $ 81,857 $ 147,968 The accompanying notes are an integral part of these financial statements. 104 KITCHENER POWER CORP. Consolidated Statement of Cash Flows Year ended December 31, 2017, with comparative information for 2016 (Expressed in thousands of dollars) 2017 2016 Cash flows from operating activities: 5,561 (26) Total comprehensive income for the year $ 10,133 $ 10,399 Adjustments to reconcile net income to cash provided by (used in) operations: 655 681 Amortization 9,252 9,411 Amortization of deferred revenue (658) (480) Gain on disposal of property, plant and equipment (29) (54) Income tax expense 1,823 1,999 Income taxes paid (1,711) (2,209) Increase decrease in employee future benefits 178 135 Net cash from operating activities 18,988 19,201 Change in non-cash operating working capital Accounts receivable 5,561 (26) Unbilled revenue 5,735 (1,799) Inventory 655 681 Prepaid expenses 139 66 Accounts payable and accrued liabilities (2,551) 32 Other current liabilities 194 250 Change in regulatory assets (5,445) 574 Change in regulatory liabilities 1,834 3,450 Change in deferred tax 3,410 346 Net cash from operating activities 28,520 22,775 Cash flows from investing activities: Proceeds on disposals of property, plant and equipment 29 72 Purchase of property, plant and equipment (20,888) (25,776) Purchase of intangible assets (136) (710) Net cash used in investing activities (20,995) (26,414) Cash flows from financing activities: Net change in customer deposits 315 253 Investments in subsidiaries and associates 28 (69) Dividends paid out (4,195) (4,410) Change in contributed capital received 6,004 8,715 Repayment of long-term debt (1,080) (1,036) Net cash from financing activities 1,072 3,453 Change in cash and cash equivalents 8,597 (186) Cash and cash equivalents, beginning of year 20,448 20,634 Cash and cash equivalents, end of year $ 29,045 $ 20,448 The accompanying notes are an integral part of these financial statements. 2017 KITCHENER FINANCIAL REPORT 105 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 1. Reporting entity: Kitchener Power Corp. (the "Corporation") is a holding company for the affiliate companies, Kitchener -Wilmot Hydro Inc. and Kitchener Energy Services Inc., and is itself wholly owned by the Corporation of the City of Kitchener and the Corporation of the Township of Wilmot. The Corporation oversees the operations of Kitchener -Wilmot Hydro Inc., a regulated distribution company, and Kitchener Energy Services Inc., an unregulated retail services company. The Corporation also owns 33% of Grand River Energy Solutions Corp. (GRE), a generation and renewable energy solutions company. It is located in the City of Kitchener. The address of the Corporation's registered office is 301 Victoria Street South, Kitchener, Ontario, Canada. The financial statements are for the Corporation as at and for the year ended December 31, 2017 2. Basis of presentation: (a) Statement of compliance: The Corporation's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The financial statements were approved by the Board of Directors on March 23, 2018. (b) 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 value. (ii) Contributed assets are initially measured at fair value. The methods used to measure fair values are discussed further in note 22. (c) Functional and presentation currency: These financial statements are presented in Canadian dollars, which is the Corporation's functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand. 106 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 2. Basis of presentation (continued): (d) 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. Information about 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 7 — Property, plant and equipment ii) Note 9 — Deferred tax assets iii) Note 12 — Employee future benefits iv) Note 17 — Commitments and contingencies (e) Rate regulation The Corporation is regulated by the Ontario Energy Board ("OEB"), under the authority granted by the Ontario Energy Board Act, 1998. Among other things, the OEB has the power and responsibility to approve or set rates forthe transmission and distribution of electricity, providing continued rate protection for electricity consumers in Ontario, and ensuring that transmission and distribution companies fulfill obligations to connect and service customers. The OEB may also prescribe license requirements and conditions of service to local distribution companies ("LDCs"), such as the Corporation, which may include, among other things, record keeping, regulatory accounting principles, separation of accounts for distinct businesses, and filing and process requirements for rate setting purposes. The Corporation is required to bill customers for the debt retirement charge set by the province. The Corporation may file to recover uncollected debt retirement charges from Ontario Electricity Financial Corporation ("OEFC") once each year. Rate setting: Distribution revenue and electricity rates The OEB sets electricity prices for low-volume consumers twice each year based on an estimate of how much it will cost to supply the province with electricity for the next year. All low volume customers without a contract with an energy retailer are charged the OEB mandated rate for electricity. If a customer (regardless of volume) has a retailer agreement, then retailer rates are charged instead. All remaining consumers pay the market price for electricity. The Corporation is billed for the cost of the electricity that its customers use and passes this cost on to the customer at cost without a mark-up. 2017 KITCHENER FINANCIAL REPORT 107 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 2. Basis of presentation (continued): (e) Rate regulation (continued): Forthe distribution revenue included in electricity sales, the Corporation files a "Costof Service" ("COS") rate application with the OEB every four years where rates are determined through a review of the forecasted annual amount of operating and capital expenses, debt and shareholder's equity required to support the Corporation's business. The Corporation estimates electricity usage and the costs to service each customer class to determine the appropriate rates to be charged to each customer class. The COS application is reviewed by the OEB and intervenors and rates are approved based upon this review, including any revisions resulting from that review. In the intervening years an Incentive Rate Mechanism application ("IRM") is filed. An IRM application results in a formulaic adjustment to distribution rates that were set under the last COS application. The previous year's rates are adjusted for the annual change in the Gross Domestic Product Implicit Price Inflator for Final Domestic Demand ("GDP IPI -FDD") net of a productivity factor and a "stretch factor" determined by the relative efficiency of an electricity distributor. As a licensed distributor, 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 last filed a COS application on June 21, 2013 for rates effective January 1, 2014 to December 31, 2014. The GDP IPI -FDD for2017 is 1.9%, the Corporation's productivity factor is 0% and the stretch factor is 0.15%, resulting in a net adjustment of 1.75% to the previous year's rates. (f) Investments Investments in subsidiary companies, associates and other long-term investments are accounted for by the equity method. Dividends received are recorded as a reduction of the carrying value of these investments. 3. Significant accounting policies: The accounting policies set out below have been applied consistently in all years presented in these financial statements unless otherwise indicated. 108 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (a) Financial instruments: All financial assets are classified as loans and receivables and all financial liabilities are classified as other liabilities. These financial instruments are recognized initially at fair value plus any directly attributable transaction costs. Subsequently, they are measured at amortized cost using the effective interest method less any impairment for the financial assets as described in note 3(f). The Corporation does not enter into derivative instruments. Hedge accounting has not been used in the preparation of these financial statements. Cash equivalents include short-term investments with maturities of three months or less when purchased. (b) Revenue recognition: Electricity sales: Electricity sales are recognized as the electricity is delivered to customers and includes the amounts billed to customers for electricity, including the cost of electricity supplied, distribution, and any other regulatory charges. Electricity revenue 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. For customer billings related to electricity generated by third parties and the related costs of providing electricity service, such as transmission services and other services provided by third parties, the Corporation has determined that it is acting as a principal for these electricity charges and, therefore, has presented electricity revenue on a gross basis. Customer billings for debt retirement charges are recorded on a net basis as the Corporation is acting as an agent for this revenue stream. 2017 KITCHENER FINANCIAL REPORT 109 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (b) Revenue recognition (continued): Revenue from contracts with customers: Certain customers and developers are required to contribute towards the capital cost of construction of distribution assets in order to provide ongoing service. Cash contributions are initially recorded as deferred revenue. When an asset other than cash is received as a capital contribution, the asset is initially recognized at its fair value, with a corresponding amount recognized as deferred revenue. The deferred revenue, which represents the Corporation's obligation to continue to provide the customers access to the supply of electricity, is amortized to income on a straight-line basis over the economic useful life of the constructed or contributed asset, which represents the period of ongoing service to the customer. Rendering of services: Revenue earned from the provision of services is recognized as the service is rendered. Government grants Incentive payments to which the Corporation is entitled from the Independent Electricity System Operator ("IESO") are recognized as revenue in the period when they are determined by the IESO and the amount is communicated to the Corporation. (c) Inventory: Inventory, comprising material and supplies, the majority of which is consumed by the Corporation in the provision of its services, is valued at the lower of cost and net realizable value, with cost being determined on a weighted average cost basis, and includes expenditures incurred in acquiring the material and supplies and other costs incurred in bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less estimated selling expenses. (d) Property, plant and equipment: Items of property, plant and equipment ("PP&E") used in rate -regulated activities and acquired prior to January 1, 2015 are measured at deemed cost established on the transition date, less accumulated depreciation. All other items of PP&E are measured at cost, or, where the item is transferred from customers, its fair value, less accumulated depreciation. Consistent with IFRS 1, the Corporation elected to use the carrying amount as previously determined under Canadian GAAP as the deemed cost at January 1, 2015, the transition date to IFRS. 110 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (d) Property, plant and equipment (continued): Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self -constructed assets includes the cost of materials, direct labour, and any other costs directly attributable to bringing the asset to a working condition for its intended use. 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. Gains and losses on the disposal of an item of PP&E are determined by comparing the proceeds from disposal, if any, with the carrying amount of the item of PP&E and are recognized net within other income in profit or loss. Major spare parts and standby equipment are recognized as items of PP&E. The cost of replacing a part of an item of 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 calculated over the depreciable amount and 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. The depreciable amount is cost. Land is not depreciated. Construction -in -progress assets are not amortized until the projects are complete and in service. The estimated useful lives are as follows: Buildings 20-50 years Transformer station equipment 15-50 years Distribution station equipment 15-50 years Distribution system 25-60 years Meters 15-25 years SCADA equipment 15 years Other capital assets 3-10 years Depreciation methods, useful lives, and residual values are reviewed at each reporting date and adjusted prospectively if appropriate. (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. 2017 KITCHENER FINANCIAL REPORT 111 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (e) Intangible assets (continued): (ii) Land rights: Payments to obtain rights to access land ('land rights") are classified as intangible assets. These include payments made for easements, right of access and right of use over land for which the Corporation does not hold title. Land rights are measured at cost less accumulated amortization and accumulated impairment losses. (iii) Amortization: Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives are: Computer software 3-5 years Land rights 100 years Amortization methods and useful lives of all intangible assets are reviewed at each reporting date and adjusted prospectively if appropriate. (f) Impairment: (i) Financial assets: A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its current carrying amount (using prevailing interest rates), and the present value of the estimated future cash flows discounted at the original effective interest rate. Interest on the impaired assets continues to be recognized through the unwinding of the discount. All impairment losses are recognized in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost the reversal is recognized in profit or loss. 112 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (f) Impairment (continued): (ii) Non-financial assets: The carrying amounts of the Corporation's non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash -generating unit"). 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. An impairment loss in respect of goodwill is not reversed. For assets other than goodwill, 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. (g) Provisions: A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. 2017 KITCHENER FINANCIAL REPORT 113 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (h) Regulatory deferral accounts: Regulatory deferral account debit balances represent costs incurred in excess of amounts billed to the customer at OEB approved rates. These amounts have been accumulated and deferred in anticipation of their future recovery in electricity distribution rates. Regulatory deferral account credit balances represent amounts billed to the customer at OEB approved rates in excess of costs incurred by the Corporation. Regulatory deferral account debit balances are recognized if it is probable that future billings in an amount at least equal to the capitalized cost will result from inclusion of that cost in allowable costs for rate -making purposes. The offsetting amount is recognized in profit and loss. The debit balance is reduced by the amount of customer billings as electricity is delivered to the customer and the customer is billed at rates approved by the OEB for the recovery of the capitalized costs. Regulatory deferral account credit balances are recognized if it is probable that future billings in an amount at least equal to the credit balance will be reduced as a result of rate -making activities. The offsetting amount is recognized in profit and loss. The credit balance is reduced by the amounts returned to customers as electricity is delivered to the customer at rates approved by the OEB for the return of the regulatory account credit balance. The probability of recovery or repayment of the regulatory account balances are assessed annually based upon the likelihood that the OEB will approve the change in rates to recover or repay the balance. Any resulting impairment loss is recognized in profit and loss in the year incurred. Regulatory deferral accounts attract interest at OEB prescribed rates. The rates from January to September 2017 were 1.1 % and from October to December 2017 1.5% (2016 — 1.1 %). 114 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (i) 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. OMERS is a defined benefit plan. However, as OMERS does not segregate its pension asset and liability information by individual employers, there is insufficient information available to enable the Corporation to directly account for the plan. Consequently, the plan has been accounted for as a defined contribution plan. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in net income when they are due. (ii) Post -employment benefits, other than pension: The Corporation provides some of its retired employees with life insurance and medical benefits beyond those provided by government sponsored plans. The 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. Actuarial gains and losses arising from defined benefit plans are recognized immediately in other comprehensive income and reported in retained earnings. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in net income on a straight-line basis over the average period until the benefits become vested. In circumstances where the benefits vest immediately, the expense is recognized immediately in net income. 2017 KITCHENER FINANCIAL REPORT 115 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): Q) 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. When an asset is received as a capital contribution, the asset is initially recognized at its fair value, with the corresponding amount recognized as deferred revenue. Deferred revenue represents the Corporation's obligation to continue to provide customers access to the supply of electricity, and is amortized to income on a straight-line basis over the economic useful life of the acquired or contributed asset, which represents the period of ongoing service to the customer. (k) Leased assets: Leases, where the terms cause the Corporation to assume substantially all the risks and rewards of ownership, are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. All other leases are classified as operating leases and the leased assets are not recognized on the Corporation's balance sheet. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. (1) 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 charges comprise interest expense on borrowings, finance lease obligations, regulatory liabilities and unwinding of the discount on provisions and impairment losses on financial assets. Finance costs are recognized as an expense unless they are capitalized as part of the cost of qualifying assets. 116 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (m) 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. The Corporation is currently exempt from taxes under the Income Tax Act (Canada) and the Ontario Corporations Tax Act (collectively the "Tax Acts"). Under the Electricity Act, 1998, the Corporation makes payments in lieu of corporate taxes to the Ontario Electricity Financial Corporation ("OEFC"). These payments are calculated in accordance with the rules for computing taxable income and taxable capital and other relevant amounts contained in the 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, 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. 2017 KITCHENER FINANCIAL REPORT 117 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 4. Cash: 2017 2016 Cash $ 29,045 $ 20,448 5. Accounts receivable: 2017 2016 Customer and other trade receivables 17,985 23,695 Trade receivables from related parties 218 69 18,203 23,764 6. Inventory: The amount of inventories consumed by the Corporation and recognized as an expense during 2017 was $406 (2016 - $275). 118 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 7. Property, plant and equipment: 23,880 $ 181,825 $ 6,280 $ 4,672 $ 216,657 (a) Cost or deemed cost: 222 22,176 1,150 2,228 25,776 Transfers - Land and Distribution Other fixed Construction - (1,496) (499) buildings equipment assets in -progress Total Balance at January 1, 2017 $ 22,606 $ 203,502 $ 6,727 $ 6,900 $ 239,735 Additions 1,016 20,900 1,530 - 23,446 Transfers - - - (2,558) (2,558) Disposals/Retirements (24) 29 (1,166) - (1,161) Balance at December 31, 2017 $ 23,598 $ 224,431 $ 7,091 $ 4,342 $ 259,462 Land and Distribution Other fixed Construction - buildings equipment assets in -progress Total Balance at January 1, 2016 $ 23,880 $ 181,825 $ 6,280 $ 4,672 $ 216,657 Additions 222 22,176 1,150 2,228 25,776 Transfers - - - - - Disposals/Retirements (1,496) (499) (703) - (2,698) Balance at December 31, 2016 $ 22,606 $ 203,502 $ 6,727 $ 6,900 $ 239,735 (b) Accumulated depreciation: Land and Distribution Other fixed Construction - buildings equipment assets in -progress Total Balance at January 1, 2017 $ 829 $ 15,701 $ 1,046 $ - $ 17,576 Depreciation charge 656 6,969 1,207 - 8,832 Disposals/Retirements (24) 29 (1,166) - (1,161) Balance at December 31, 2017 $ 1,461 $ 22,699 $ 1,087 $ - $ 25,247 Land and Distribution Other fixed Construction - buildings equipment assets in -progress Total Balance at January 1, 2016 $ 1,501 $ 9,223 $ 522 $ - $ 11,246 Depreciation charge 824 6,978 1,209 - 9,011 Disposals/Retirements (1,496) (500) (685) - (2,681) Balance at December 31, 2016 $ 829 $ 15,701 $ 1,046 $ - $ 17,576 2017 KITCHENER FINANCIAL REPORT 119 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 7. Property, plant and equipment (continued) : (c) Carrying amounts: Land and Distribution Other fixed Construction - buildings equipment assets in -progress Total At December 31, 2017 $ 22,137 $ 201,732 $ 6,004 $ 4,342 $ 234,215 At December 31, 2016 $ 21,777 $ 187,801 $ 5,681 $ 6,900 $ 222,159 (d) Leased plant and equipment: The Corporation does not have leases for plant or equipment. (e) Security: At December 31, 2017, the Corporation had zero properties subject to a general security agreement. (f) Borrowing costs: During the year, borrowing costs of $ nil (2016 - $ nil) were capitalized as part of the cost of property, plant and equipment. 120 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 7. Property, plant and equipment (continued): (g) 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: Operations Customer Energy and services Administration conservation Other Total maintenance expense expense expense expense December 31, 2017: Depreciation of property, plant and equipment $ 685 $ 8 $ $ 7 $ 8,132 $ 8,832 Amortization of intangible assets - 420 420 $ 685 $ 8 $ - $ 7 $ 8,552 $ 9,252 Operations Customer Energy and services Administration conservation Other Total maintenance expense expense expense expense December 31, 2016: Depreciation of property, plant and equipment $ 677 $ 6 $ $ 7 $ 8,311 $ 9,001 Amortization of intangible assets - 410 410 $ 677 $ 6 $ - $ 7 $ 8,721 $ 9,411 8. Intangible assets: (a) Cost or deemed cost: 2017 KITCHENER FINANCIAL REPORT 121 Computer Software Land Rights Total Balance at January 1, 2017 Additions $ 2,390 136 $ 8 - $ 2,398 136 Balance at December 31, 2017 $ 2,526 $ 8 $ 2,534 Balance at January 1, 2016 Additions $ 1,680 710 $ 8 - $ 1,688 710 Balance at December 31, 2016 $ 2,390 $ 8 $ 2,398 2017 KITCHENER FINANCIAL REPORT 121 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 8. Intangible assets(continued): (b) Accumulated amortization: Computer Software Land Rights Total Balance at January 1, 2017 Additions $ 1,216 420 $ 8 - $ 1,224 420 Balance at December 31, 2017 $ 1,636 $ 8 $ 1,644 Balance at January 1, 2016 Additions $ 819 398 $ 5 2 $ 824 400 Balance at December 31, 2016 $ 1,217 $ 7 $ 1,224 (c) Carrying amounts: Computer Software Land Rights Total At December 31, 2017 At December 31, 2016 $ 890 $ 1,173 $ - $ 1 $ $ 890 1,174 9. Income tax expense: Current tax expense: 2017 2016 Current period Adjustment for prior periods $ 1,906 (55) $ 2,029 9 $ 1,851 $ 2,038 122 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 9. Income tax expense (continued): Deferred tax expense: 2017 KITCHENER FINANCIAL REPORT 123 2017 2016 Original & reversal of temporary differences $ (12) $ (36) Recognition of previously unrecognized tax losses (17) (3) $ (29) $ (39) Reconciliation of effective tax rate: 2017 2016 Total comprehensive income for the year $ 10,133 $ 10,399 Total income tax expense 1,823 1,999 Comprehensive income before income taxes 11,956 12,398 Income tax using the Corporation's statutory tax rate of 26.5% 3,169 3,286 Temporary differences not benefitted (1,291) (1,296) Under (over) provided in prior periods (55) 9 $ 1,823 $ 1,999 Significant components of the Corporation's deferred tax balances are as follows: 2017 2016 Deferred tax assets (liabilities): Plant and equipment $ (11,145) $ (6,063) Non -vested sick leave 144 167 Employee benefits 1,381 1,334 Intangible assets 7 7 Loss carry -forward 133 116 Deferred tax liability 1,535 - Deferred revenue - contributed capital 8,085 6,454 $ 140 $ 2,015 2017 KITCHENER FINANCIAL REPORT 123 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 10. Regulatory deferral account balance: The following is a reconciliation of the carrying amount for each class of regulatory deferral account balances: Remaining recovery/ Balances reversal arising in Recovery/ period 2016 the Deriod Reversal Other 2017 (vears) Regulatory deferral account debit balances Group 1 deferred accounts $ 3,362 $ 184 $ - $ 1,030 $ 4,576 Note 1 Regulatory asset recovery account 825 10 (41) - 794 Note 1 Smart meter recovery 13 - - 13 3 Deferred tax asset - 4,164 4,164 Other 287 239 526 3 Total amount related to regulatory deferral account debit balances $ 4,487 $ 4,597 $ (41) $ 1,030 $ 10,073 Remaining recovery/ Balances reversal arising in Recovery/ period 2016 the period Reversal Other 2017 (years) Regulatory deferral account credit balances Group 1 deferred accounts $ 9,443 $ 184 $ $ 1,030 $ 10,657 Note 1 Deferred tax liability 532 (532) - - Note 2 Other 345 19 - 364 3 Total amount related to regulatory deferral account credit balances $ 10,320 $ (329) $ $ 1,030 $ 11,021 2017 2016 Movements in regulatory accounts Net change in regulatory deferral account debit and credit balances $ 4,885 $ (3,847) Less movement related to the balance sheet Deferred income tax (4,697) (523) Deferred revenue 41 502 Amounts moved to property, plant, equipment - - Net movement in regulatory deferral account balances related to profit or loss and the related deferral tax movement $ 229 $ (3,868) 124 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 10. Regulatory deferral account balance (continued): Note 1 The Corporation expects to be approved for the collection of these amounts in its 2017 filing for 2018 rates. Note 2 The Corporation has not sought approval for the disposition of this amount as these amounts as changes in underlying assumptions may reduce the amounts recorded in the account. The Corporation may see refunds in the future. 11. Long-term debt: Effective August 1, 2000, the Corporation incurred unsecured promissory notes payable to the City of Kitchener and the Township of Wilmot, and have an interest rate of 4.88% per annum. Interest is payable in quarterly installments, in arrears, on March 31St, June 30th, September 301h and December 31 st Effective February 1, 2010, the Corporation incurred a ten year senior unsecured debenture payable to Ontario Infrastructure Projects Corporation. An initial payment of $7,000 was received February 1, 2010, followed by a second payment of $3 million on May 17, 2010. The debenture has an interest rate of 4.28%, and interest is payable in equal semi-annual installments, in arrears, on May 17th and November 17th each year commencing November 17, 2010 until maturity. 2017 2016 Senior unsecured debentures: City of Kitchener $ 70,998 $ 70,998 Township of Wilmot 5,965 5,965 Ontario Infrastructure Projects Corporation 2,909 3,989 Senior unsecured debentures, net proceeds $ 79,872 $ 80,952 Less: current portion of long-term debt $ (1,127) $ (1,080) Total long-term debt $ 78,745 $ 79,872 12. Employee future 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, 2017 of $5,213 was based on an actuarial valuation completed in 2016 using a discount rate of 3.9%. 2017 KITCHENER FINANCIAL REPORT 125 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 12. Employee future benefits (continued): Changes in the present value of the defined benefit unfunded obligation and the accrued benefit liability: 126 2017 2016 Defined benefit obligation, beginning of year $ 5,035 $ 4,900 Current service cost 166 156 Interest cost 194 188 Benefits paid during the year (227) (209) Actuarial loss recognized in other 45 - comprehensive income Accrued benefit liability, end of year $ 5,213 $ 5,035 Components of net benefit expense recognized are as follows: 2017 2016 Current service cost $ 166 $ 156 Interest cost 194 188 Net benefit expense recognized $ 360 $ 344 Actuarial losses recognized in other comprehensive income: 2017 2016 Cumulative amount at January 1 $ (245) $ (245) Recognized during the year (33) - Cumulative amount at December 31 (278) (245) Net benefit expense recognized $ (33) $ - 126 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 12. Employee future benefits (continued): The significant actuarial assumptions used in the valuation are as follows (weighted average): 2017 2016 Accrued benefit obligation: Discount rate 3.9% 3.9% Benefit cost for the year: Age Withdrawal rate 18-29 3.50% 2.75% 30-34 2.50% 2.25% 35-39 2.2% 2.0% 40-49 1.8% 1.5% 50-54 1.4% 1.5% Assumed health care cost trend rates: Initial health care cost trend rate Health 6.2% 6.4% Dental 4.5% 4.5% 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: Benefit Periodic Obligation Benefit Cost 1% increase in health care trend rate $ 186 $ 28 1% decrease in health care trend rate $ (149) $ (24) Historical Information Amounts for the current and previous year, for the entire plan, are as follows: 2017 2016 Defined benefit obligation $ 5,213 $ 5,035 Experience adjustments $ (33) $ - 2017 KITCHENER FINANCIAL REPORT 127 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 12. 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 at 2% in 2017, and thereafter (2016 - 2%). Discount (interest) rate - the discount rate used to determine the present value of future liabilities and the expense for the year ended December 31, 2017, was 3.9% (2016 — 3.9%). Salary levels - future general salary and wage levels were assumed to increase at 3.3% (2016 - 3.3%) per annum. Medical costs - medical costs were assumed to increase 6.4% for 2016, 6.2% for 2017, decreasing annually to 4.5% in 2025 and beyond. Dental costs - dental costs were assumed to be 4.5% for 2016, 4.5% for 2017 and thereafter. 13. Customer and IESO 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 who demonstrate an acceptable level of credit risk as determined by the Corporation in accordance with policies set out by the OEB or upon termination of their electricity distribution service. 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 deferred revenue. The Corporation delivers conservation and demand management programs for its customers on behalf of the IESO. Prepayments received from the IESO have been recorded and will be transferred to revenue as programs are delivered and the revenue is earned. The deposits comprise: 2017 2016 Customer deposits $ 7,664 $ 7,546 Construction deposits 5,702 5,459 IESO deposit for energy conservation programs 1,158 1,158 Total customer and IESO deposits $ 14,524 $ 14,163 128 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 14. Share capital: Authorized: Unlimited number of common shares Issued: 20,000 common shares Dividends: 2017 2016 $ 66,389 $ 66,389 The holders of the common shares are entitled to receive dividends as declared from time to time. The Corporation paid aggregate dividends in the year on common shares of $4,195 (2016 - $4,410). 15. Other operating revenue: Other income comprises: 2017 2016 Specific service charges $ 1,654 $ 1,223 Deferred revenue 658 480 Scrap sales 363 170 Net gain on disposal of capital assets 29 54 Retailer services 35 39 Sundry 46 40 Total other income $ 2,785 $ 2,006 16. Finance income and expense: 2017 2016 Interest income on bank deposits $ 301 $ 234 Finance income 301 234 Interest expense on long-term debt 3,911 3,957 Interest expense on BMO Letter of Credit 123 123 Interest expense on deposits 70 58 Other 5 7 4,109 4,145 Net finance costs recognized in profit or loss $ 3,808 $ 3,911 2017 KITCHENER FINANCIAL REPORT 129 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 17. Commitments and contingencies: Contractual Obligations There are no contractual obligations. General From time to time, the Corporation is involved in various litigation matters arising in the ordinary course of its business. The Corporation has no reason to believe that the disposition of any such current matter could reasonably be expected to have a materially adverse impact on the Corporation's financial position, results of operations or its ability to carry on any of its business activities. 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 LDCs 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, 2017, no assessments have been made. 18. Guarantees: Guarantees are not applicable to the Corporation. 19. Pension agreement: The Corporation provides a pension plan for its employees through OMERS. The plan is a multi- employer, contributory defined pension plan with equal contributions by the employer and its employees. In 2017, the Corporation made employer contributions of $1,600 to OMERS (2016 - $1,500). The Corporation's net benefit expense has been allocated as follows: a. $400 (2016 - $400) capitalized as part of property, plant and equipment; b. $1,200 (2016 - $1,100) charged to net income. The Corporation estimates that a contribution of $1,700 to OMERS will be made during the next fiscal year 20. Employee benefits: 2017 2016 Salaries, wages and benefits $ 18,426 $ 18,356 CPP and EI remittances 700 724 Contributions to OMERS 1,582 1,528 Expenses related to defined benefit plans 360 345 $ 21,068 $ 20,953 130 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 21. Related party transactions: (a) Parent and ultimate controlling party: The Corporation is wholly-owned by the Corporation of the City of Kitchener and the Corporation of the Township of Wilmot. The City and the Township produce financial statements that are available for public use. (b) Entity with significant influence: The Corporation of the City of Kitchener exercises significant influence over the Corporation through its 92.25% ownership interest in the Corporation. (c) Key management personnel: The key management personnel of the Corporation have been defined as members of its board of directors and executive management team members, and is summarized below. 2017 2016 Directors' fees $ 112 $ 104 Salaries and other short-term benefits 900 981 Post employment benefits 17 18 Other long-term benefits (OMERS) 74 79 $ 1,103 $ 1,182 (d) Transactions with parent: During the year the Corporation paid management and business development services to its parent in the amount of $ nil (2016 - $ nil) (e) Transactions with entity with significant influence: In the ordinary course of business, the Corporation delivers electricity to the Corporation of the City of Kitchener. Electricity is billed to the City of Kitchener at prices and under terms approved by the OEB. (f) Transactions with ultimate parent (the City of Kitchener) In 2017, the Corporation had the following significant transactions with its ultimate parent, a government entity: • Construction, contracted through Kitchener Wilmot Hydro Inc. • Streetlight maintenance services contracted through Kitchener Energy Services Inc. 2017 KITCHENER FINANCIAL REPORT 131 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 22. Financial instruments and risk management: Fair value disclosure Cash and cash equivalents are measured at fair value. The carrying values of receivables, 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 long term debt (senior unsecured debentures issued by the shareholders (City of Kitchener and Township of Wilmot) approximates the carrying value due to the short term nature of the loan. The fair value of the long term debt (senior unsecured debentures) issued by Ontario Infrastructure Projects Corporation at December 31, 2017 is $2,900 (2016 - $4,000). 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, 2017 was 4.28% (2016 — 4.28%). Financial risks The Corporation understands the risks inherent in its business and defines them broadly as anything that could impact its ability to achieve its strategic objectives. The Corporation's exposure to a variety of risks such as credit risk, interest rate risk, and liquidity risk, as well as related mitigation strategies are discussed below. (a) Credit risk: Financial assets carry credit risk that 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 of Kitchener and the Township of Wilmot. As of December 31, 2017, one customer accounted for more than 1 % of total accounts receivable. Totaling $207 (or 1.1%) out of a total accounts receivable of $18,329. The outstanding balance was paid in January 2018. 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 net income. Subsequent recoveries of receivables previously provisioned are credited to net income. The balance of the allowance for impairment at December 31, 2017 is $250 (2016 - $250). An impairment loss of $155 (2016 - $129) was recognized during the year. 132 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 22. Financial instruments and risk management (continued): (a) Credit risk (continued): The Corporation's credit risk associated with accounts receivable is primarily related to payments from distribution customers. At December 31, 2017, approximately $210 (2016 - $178) is considered 60 days past due. The Corporation has over 95 thousand customers, the majority of whom are residential. Credit risk is managed through collection of security deposits from customers in accordance with directions provided by the OEB. As at December 31, 2017, the Corporation holds security deposits in the amount of $14,500 (2016 - $14,200). (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. A 1% increase in the interest rate at December 31, 2017 would have increased interest expense on the long-term debt by $29 (2016 - $80), assuming all other variables remain 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. The Corporation has access to a $5,000 credit facility and monitors cash balances daily to ensure that a sufficient level of liquidity is on hand to meet financial commitments as they come due. As at December 31, 2017, no amounts had been drawn under BMO Bank of Montreal credit facility (2016, $ nil). The Corporation also has a bilateral facility for $35,000 (the "LC" facility) for the purpose of issuing letters of credit mainly to support the prudential requirements of the IESO, of which $35,000 has been drawn and posted with the IESO (2016 - $35,000). The majority of accounts payable, as reported on the balance sheet, are due within 30 days. 2017 KITCHENER FINANCIAL REPORT 133 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 22. Financial instruments and risk management (continued): (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, 2017, shareholder's equity amounts to $147,968 (2016 - $142,030) and long- term debt amounts to $78,745 (2016 - $79,872). 23. Future accounting pronouncements: The Company is evaluating the adoption of the following new and revised standards along with any subsequent amendments. Revenue Recognition The IASB has issued IFRS 15 Revenue from Contracts with Customers ("IFRS 15"). IFRS 15 replaces AS 11 Construction Contracts, AS 18 Revenue and various interpretations and establishes principles regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The standard requires entities to recognize revenue for the transfer of goods or services to customers measured at the amounts an entity expects to be entitled to in exchange for those goods or services. IFRS 15 is effective for annual periods beginning on or after January 1, 2018. The Corporation is assessing the impact of IFRS 15 on its results of operations, financial position and disclosures. Financial Instruments In July 2015, the IASB issued a new standard, IFRS 9 Financial Instruments, which will replace AS 39 Financial Instruments: Recognition and Measurement. The replacement of AS 39 is a multi -phase project with the objective of improving and simplifying the reporting for financial instruments. The issuance of IFRS 9 is part of the first phase of this project. IFRS 9 is effective for periods beginning on or after January 1, 2018 and must be applied retrospectively. The Corporation is assessing the impact of IFRS 9 on its results of operations, financial position, and disclosures. 134 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2017 (Expressed in thousands of dollars) 23. Future accounting pronouncements (continued): Leases In January 2016, the IASB issued IFRS 16 to establish principles for the recognition, measurement, presentation and disclosures of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. IFRS 16 replaces IAS17 and it is effective for annual periods beginning on or after January 1, 2019. The Corporation is assessing the impact of IFRS 16 on its results of operations, financial position and disclosures. 2017 KITCHENER FINANCIAL REPORT 135 FINANCIAL & STATISTICAL REVIEW As at December 31 (unaudited) 2017 2016 2015 2014 2013 1. DEMOGRAPHIC STATISTICS 1.15259 1.16901 1.18477 1.20310 1.23201 Population) 252,520 246,700 239,900 236,500 234,000 Households' 96,720 94,170 92,050 90,560 88,765 Area in acres2 33,797 33,802 33,802 33,802 33,802 2. TAXABLE ASSESSMENT ($000's) 1.39000 1.40000 1.43000 1.46000 1.49000 Residential and farm3 23,639,290 22,414,567 21,215,652 19,990,326 18,892,818 Commercial and industria13 3,525,281 3,390,259 3,291,854 3,177,397 3,059,552 Total 27,164, 571 25, 804, 826 24, 507, 506 23,167, 723 21, 952, 371 3. TAX RATES 1.19237 1.19650 1.19903 1.20656 1.22429 Residential and Farm Taxable Full 1.39000 1.50000 1.53000 1.56000 1.59000 City 0.36212 0.36742 0.37488 0.38135 0.39217 Region 0.61147 0.61359 0.61489 0.61875 0.62784 School Boards 0.17900 0.18800 0.19500 0.20300 0.21200 Total 1.15259 1.16901 1.18477 1.20310 1.23201 Commercial Taxable Full City 0.70613 0.71647 0.73101 0.74363 0.76474 Region 1.19237 1.19650 1.19903 1.20656 1.22429 School Boards 1.39000 1.40000 1.43000 1.46000 1.49000 Total 3.28850 3.31297 3.36004 3.41019 3.47903 Industrial Taxable Full City 0.70613 0.71647 0.73101 0.74363 0.76474 Region 1.19237 1.19650 1.19903 1.20656 1.22429 School Boards 1.39000 1.50000 1.53000 1.56000 1.59000 Total 3.28850 3.41297 3.46004 3.51019 3.57903 1. Source: Planning, Housing and Community Services Department, Regional Municipality of Waterloo 2. Source: Statistics Canada, 2016 Census Data (2017); 2011 Census Data (2013 to 2016) 3. 2013 to 2015 data has been restated to show Phase-in taxable assessment rather than Current assessment value. ti 5 4 3 2 1 0 Weighted Assessment Growth Final 2015: 1.51% Final 2016: 1.29% Final 2017: 1.65% 07 08 09 10 11 13 14 15 16 17 Year Cumulative Tax Rate & CPI 30 2.` 20 1E 10 0 07 09 09 10 11 12 13 1 1` 1r" 17 Year I--$-- City7ax Rate (%) Ontario ^ The 2011 tax rate increase has been restated to indicate what the tax rate increase would have been prior to the transfer of storm water management costs to a new user rate. Without this restatement, a decrease would have shown for 2011. 136 FINANCIAL & STATISTICAL REVIEW As at December 31 (unaudited) ($000-s) 2017 2016 2015 2014 2013 4. COLLECTION STATISTICS Total taxes billed 406,605 394,020 379,110 368,577 359,385 Total collections 405,060 389,608 382,899 365,882 359,339 Total collections as a % of current levy 100% 99% 101% 99% 100% Taxes receivable, net of allowance 16,878 20,598 19,617 22,706 20,610 Total receivable as a % of current levy 4% 5% 5% 6% 6% 5. CONSOLIDATED REVENUE Taxation and user charges 318,547 292,898 290,215 291,714 280,998 Grants 12,908 5,830 10,013 6,991 4,101 Share of net income of Kitchener Power Corp. and its affiliates 9,348 9,593 10,121 9,793 7,639 Development charge revenue recognized 7,303 10,388 11,044 8,076 6,892 Other 15,851 21,097 25,801 21,020 25,943 Total revenue 363,957 339,806 347,194 337,595 325,573 6. CONSOLIDATED EXPENSES Expenses by Function General government 39,436 38,932 31,273 37,797 36,033 Protection services 47,268 45,291 44,728 42,727 41,776 Transportation services 37,805 35,100 34,566 35,328 32,908 Environmental services 31,305 30,012 29,194 28,332 29,730 Health services 2,296 2,257 2,245 2,144 2,155 Social and family services 2,662 2,722 2,752 2,609 2,640 Recreation and cultural services 69,847 68,496 68,645 66,141 62,907 Planning and development 13,123 13,160 12,060 13,100 8,600 Gasworks 67,386 52,184 59,246 70,824 64,605 Total Expenses 311,128 288,154 284,709 299,002 281,354 Expenses by Object Salaries, wages and employee benefits 151,980 147,224 141,941 138,259 133,464 Materials and services 103,297 91,996 97,908 110,106 98,719 Debenture debt interest 3,179 3,534 3,869 3,740 3,941 Grants and other 5,295 4,214 3,031 4,192 3,879 Amortization 46,188 42,658 40,274 39,646 37,355 Loss/(Gain) on sale of assets 1,189 (1,472) (2,314) 3,059 3,996 Total Expenses 311,128 288,154 284,709 299,002 281,354 7. ANNUAL SURPLUS 52,829 51,652 62,485 38,593 44,219 2017 KITCHENER FINANCIAL REPORT 137 FINANCIAL & STATISTICAL REVIEW As at December 31 (unaudited) 2017 2016 2015 2014 2013 (Restated) 8. ANALYSIS OF LONG-TERM DEBT ($000's) Gross debt issued by the municipality 77,889 84,859 93,536 102,999 112,039 Less debt recoverable from municipal enterprises and consolidated boards 9,596 10,121 10,629 11,125 11,607 Less debt recoverable from other sources 7,252 8,587 9,870 11,105 12,292 Net debt to be repaid from property taxes 61,041 66,151 73,037 80,770 88,140 Net debt per capita ($'s) 242 268 304 342 377 Legal debt limit ($000's)4 294,301 296,556 288,323 281,852 305,717 Interest on long-term debt as a % of total expenditures 1.0% 1.2% 1.4% 1.3% 1.4% 9. ACCUMULATED SURPLUS ($000's) Reserves, reserve funds and deferred revenue - obligatory reserve funds 98,754 88,097 77,081 47,982 40,844 Unexpended capital financing 118,172 108,099 94,927 85,939 83,448 Accumulated surplus 1,335,832 1,283,004 1,231,351 1,176,249 1,137,656 10. NEW CONSTRUCTION Value of construction ($000's) 498,220 739,739 565,081 573,063 331,491 Number of building permits 2,503 3,158 2,749 2,559 2,307 Number of single family dwelling starts 300 840 614 504 348 11. NET FINANCIAL ASSETS ($000's) 220,788 214,048 194,460 187,392 176,202 4. The debt limit is based on the Financial Information Return from the second immediate preceding year Debt Per Capita S e00 400 300 200 100 0 2013 2014 2015 2016 2017 Year ■ Tax Supported ■ Non Jax Supported 138 New Construction 15000' 8 ) 8.00,000 600,000 400,000 200,000 0 2013 2014 2015 201: 2017 Year FINANCIAL & STATISTICAL REVIEW As at December 31 (unaudited) 12. PRINCIPAL CORPORATE TAXPAYERS 2017 Taxable Assessment Value ($000's) DREWLO HOLDINGS INC 355,081 CF/REALTY HOLDINGS INC 231,359 ONTREA INC. 223,132 EUROPRO (KITCHENER) GP INC 94,559 ONTARIO MINISTER OF ENERGY & INFRASTRUCTI. 84,685 VOISIN DEVELOPMENTS LIMITED 72,680 MORGUARD NAR (ONTARIO) HOLDINGS LIMITED 70,986 THE INCC CORP 69,290 KITCHENER HOUSING INC 66,606 HOMESTEAD LAND HOLDINGS LIMITED 66,492 STAMM INVESTMENTS LIMITED 60,098 STEEVES & ROZEMA ENTERPRISES LIMITED 49,006 CP REIT ONTARIO PROPERTIES LIMITED 47,498 BOARDWALK REIT PROPERTIES HOLDINGS LTD 47,461 KINGSWOOD DRIVE KITCHENER GP INC 46,572 2017 KITCHENER FINANCIAL REPORT 139