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HomeMy WebLinkAboutFIN-2022-194 - Kitchener Power Corp. - Annual Business Matters Financial Services Department www.kitchener.ca REPORT TO: Committee of the Whole DATE OF MEETING: April 25, 2022 SUBMITTED BY: Jonathan Lautenbach, Chief Financial Officer, 519-741-2200 ext. 7334 PREPARED BY: Sharon Gignac, Executive Assistant, 519-741-2200 ext. 7312 WARD(S) INVOLVED: N/A DATE OF REPORT: April 13, 2022 REPORT NO.: FIN-2022-194 SUBJECT: Kitchener Power Corp. Annual Business Matters RECOMMENDATION: THAT the audited financial statements of Kitchener Power Corp. for the year ended December 31, 2021 as audited by KPMG, LLP, and attached to report FIN-2022-194, be received; and further, That KPMG, LLP, be appointed as auditors of Kitchener Power Corp. for the ensuing fiscal year and Directors are authorized to set their remuneration. REPORT HIGHLIGHTS: Audited financial statements for Kitchener Power Corp. (KPC) are required to be provided to Council on an annual basis Approving the appointment of auditors for KPC is an annual requirement The KPC board is recommending that KPMG, LLP be appointed as auditors for another year This report supports the delivery of core services. BACKGROUND: The purpose of this report is to enable Council to consider routine annual business matters related to Kitchener Power Corp., including the receipt of the audited financial statements and the approval of auditors for the 2022 fiscal year. REPORT: The Kitchener Power Corp. financial statements and approval of the shareholders for the appointment of auditors for the ensuing fiscal year. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. The 2021 financial statements have been audited by KPMG, LLP and are at information. In addition, the Board of Directors of Kitchener Power Corp. has recommended that KPMG, LLP be retained for another year as auditors of the corporation. STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. FINANCIAL IMPLICATIONS: None at this time. COMMUNITY ENGAGEMENT: INFORM council / committee meeting. PREVIOUS REPORTS/AUTHORITIES: There are no previous reports/authorities related to this matter. APPROVED BY: Jonathan Lautenbach, CFO ATTACHMENTS: Attachment A KPC Consolidated Financial Statements 2021 Attachment B KPC Unconsolidated Financial Statements 2021 Attachment C Kitchener-Wilmot Hydro Inc. Financial Statements 2021 Financial Statements of Kitchener Power Corp. Consolidated Year ended December 31, 2021 (Expressed in thousands of dollars) KPMG LLP 115 King Street South 2nd Floor Waterloo ON N2J 5A3 Canada Tel 519-747-8800 Fax 519-747-8830 INDEPENDENT AUDITORSÓ REPORT To the Shareholders of Kitchener Power Corp. Opinion We have audited the consolidated financial statements of Kitchener Power Corp. (the Entity), which comprise: the consolidated statement of financial position as at December 31, 2021 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended and notes to the consolidated financial statements, including a summary of significant accounting policies (Hereinafter referred to as the Ðfinancial statementsÑ). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as December 31, 2021, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Ð AuditorsÓ Responsibilities for the Audit of the Financial Statements Ñ section of our auditorsÓ report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG Canada provides services to KPMG LLP. Page 2 Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the EntityÓs ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the EntityÓs financial reporting process. AuditorsÓ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditorsÓ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Page 3 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditorsÓ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditorsÓ report. However, future events or conditions may cause the Entity to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Chartered Professional Accountants, Licensed Public Accountants Waterloo, Canada April 11, 2022 KITCHENER POWER CORP. Consolidated Statement of Financial Position As at December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Assets Current assets 4 Cash$ 6,8616,079$ 5 Accounts receivable 15,70921,287 Unbilled revenue14,705 29,865 6 Inventory 2,4583,080 Prepaid expenses1,082 1,146 Income taxes receivable30 5 Total current assets46,263 56,044 Non-current assets: 7 267,581279,444 Property, plant and equipment 8 Intangible assets 8,07911,185 9 Deferred tax assets 211302 Investment in subsidiaries and associates893 838 Total non-current assets291,824 276,709 332,753338,087 Total assets 10 Regulatory deferral account debit balances 19,66125,396 $ 352,414363,483$ Total assets and regulatory assets 1 KITCHENER POWER CORP. Consolidated Statement of Financial Position Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Liabilities and Shareholder's Equity Current liabilities: Accounts payable and accrued liabilities$ 32,821$ 37,744 Income taxes payable - 3 2 17 Current portion of lease liabilities 42 - 13 Current portion customer deposits 8,530 8 ,945 Current portion of deferred revenue 1,185 1 ,069 Total current liabilities 42,578 4 7,790 Non-current liabilities: 11 Long-term debt 76,963 7 6,963 12 Employee future benefits 6,012 5 ,937 13 Long-term customer deposits 5,675 5 ,833 17 Long-term portion of lease liabilities 556 - Deferred revenue 44,451 3 9,759 9 Deferred tax liablilty 8,675 4 ,415 Total non-current liabilities 142,332 132,907 184,910 180,697 Total liabilities Shareholder's equity: 14 Share capital - common shares 66,389 6 6,389 Retained earnings 108,261 101,452 Accumulated other comprehensive loss-620-620 174,030 167,221 Total shareholder's equity Total liabilities and shareholder's equity 358,940 347,918 10 Regulatory deferral account credit balances779 2 ,276 Deferred taxes associated with regulatory accounts 3,764 2 ,220 27 Impact of COVID-19 pandemic $ 352,414363,483$ Total equity, liabilities and shareholder's equity The accompanying notes are an integral part of these financial statements. On behalf of the Board: Director __________________________ Director 2 KITCHENER POWER CORP. Consolidated Statement of Comprehensive Income Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Energy sales205,727$ 239,962$ Cost of energy sold208,472 245,909 (5,947)(2,745) Other operating revenue Distribution sales45,033 42,690 Other income 15 2,8733,319 Net operating revenue45,607 39,616 Expenses: Operations and maintenance11,552 11,405 Customer services5,674 5,313 Administration6,452 5,542 Amortization10,977 10,022 32,28234,655 Other Energy conservation program revenue(1,262) (727) Energy conservation program expense1,277 713 Net energy conservation programs15 (14) (132)(39) Finance income 16 Finance charges 16 2,9812,509 Net finance costs2,470 2,849 4,4998,467 Income before income taxes Income tax expense 9 907(520) Income for the year before movements 3,5928,987 in regulatory deferral account balances Net movement in regulatory deferral account balances related to profit or loss and the related deferred tax movement 10 6,8472,208 Income for the year and net movements in 10,43911,195 regulatory deferral account balances $ 10,43911,195$ Total comprehensive income for the year The accompanying notes are an integral part of these financial statements. 3 KITCHENER POWER CORP. Consolidated Statement of Changes in Equity Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Accumulated other Retained Share capitalTotal comprehensive earnings income (loss) Balance at January 1, 202066,389$ (620)$ 95,195$ 160,964$ Net income before other comprehensive income (loss)- - 10,439 10,439 Dividends- - (4,182) (4,182) Balance at December 31, 202066,389 (620) 101,452 167,221 Net income before other comprehensive income (loss)- - 11,195 11,195 Dividends- - (4,386) (4,386) Balance at December 31, 202166,389$ (620)$ 108,261$ 174,030$ The accompanying notes are an integral part of these financial statements. 4 KITCHENER POWER CORP. Consolidated Statement of Cash Flows Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) 20212020 Cash flows from operating activities: Total comprehensive income for the year11,195$ 10,439$ Adjustments to reconcile net income to cash provided by (used in) operations: Amortization 10,75211,690 Amortization of deferred revenue(1,140) (1,016) Gain on disposal of property, plant and equipment(51) (149) Income tax expense(520) 907 Income taxes paid353 (816) Interest on Lease Liability24 - Income from subsidiaries and associates(55) 425 Increase decrease in employee future benefits75 77 20,61921,571 Change in non-cash operating working capital: Accounts receivable(5,580) 1,802 Unbilled revenue15,159 (2,216) Inventory (134)(622) Prepaid expenses 20164 Accounts payable and accrued liabilities(4,923) 7,683 Other current liabilities(299) (303) Change in regulatory debit balances(5,735) (10,261) Change in regulatory credit balances47 654 Change in deferred tax 4,282 1,900 19,94523,964 Net cash from operating activities Cash flows from investing activities: Proceeds on disposals of property, plant and equipment370 151 Investments in subsidiaries and associates- (500) Purchase of property, plant and equipment(22,644) (21,356) Purchase of intangible assets(3,733) (4,565) (26,270)(26,007) Net cash used in investing activities Cash flows from financing activities: Net change in customer deposits(158) (355) Dividends paid out (4,182)(4,386) Change in contributed capital received5,832 4,390 Repayment of long-term debt- (607) Payment of lease liability(27) - (754)1,261 Net cash from financing activities (7,079)(782) Change in cash and cash equivalents 13,9406,861 Cash and cash equivalents, beginning of year $ 6,8616,079$ Cash and cash equivalents, end of year The accompanying notes are an integral part of these financial statements. 5 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 1. Reporting entity: Kitchener Power Corp. (the ÐCorporationÑ) 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 CorporationÓs 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, 2021. Mergers of the holding companies, Kitchener Power Corp. and Waterloo North Hydro Holding Corporation and the local distribution companies, Kitchener-Wilmot Hydro Inc. and Waterloo North Hydro Inc. were proposed in 2021. The proposals have been agreed to by the City of Kitchener and Township of Wilmot councils. A Mergers, Amalgamations, Acquisitions and Divestitures (MAADs) application was filed on February 4, 2022 seeking permission from the Ontario Energy Board (ÐOEBÑ) to proceed with the proposed merger. 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 25, 2022. (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 (ii) Contributed assets are initially measured at fair value. The methods used to measure fair values are discussed further in note 23. (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. 6 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (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 3(b) Î Determination of the performance obligation for contributions from customers and the related amortization period ii) Note 7 Î Property, plant and equipment iii) Note 9 Î Deferred tax assets iv) Note 12 Î Employee future benefits v) Note 18 Î Commitments and contingencies (e) Rate regulation: The Corporation is regulated by the Ontario Energy Board (ÐOEBÑ), under the authority granted by the Ontario Energy Board Act, 1998. Among other things, the OEB has the power and responsibility to approve or set rates for the transmission and distribution of electricity, providing continued rate protection for electricity consumers in Ontario, and ensuring that transmission and distribution companies fulfill obligations to connect and service customers. The OEB may also prescribe license requirements and conditions of service to local distribution companies (ÐLDCsÑ), 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. 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 7 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 2. Basis of presentation (continued): (e) Rate regulation (continued): 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. For the distribution revenue included in electricity sales, the Corporation files a ÐCost of ServiceÑ (ÐCOSÑ) 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 shareholderÓs equity required to support the CorporationÓs 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 (ÐIRMÑ) is filed. An IRM application results in a formulaic adjustment to distribution rates that were set under the last COS application. The previous yearÓs rates are adjusted for the annual change in the Gross Domestic Product Implicit Price Inflator for Final Domestic Demand (ÐGDP IPI-FDDÑ) net of a productivity factor and a Ðstretch factorÑ 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 filed a COS application on April 30, 2019 for rates effective January 1, 2020 to December 31, 2020. The GDP IPI-FDD for 2021 is 3.3%, the CorporationÓs productivity factor is 0% and the stretch factor is 0.15%, resulting in a net adjustment of 3.15% to the previous yearÓs rates. Electricity rates were impacted by the COVID-19 pandemic, distribution rates were unaffected, which has been discussed further in Note 27. (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. 8 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 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. (a) Financial instruments: At initial recognition, the Company measures its financial assets at fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Subsequent measurement of the financial asset depends on the classification determined on initial recognition. Financial assets are classified as either amortized cost, fair value through other comprehensive income or fair value through profit or loss, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are not reclassified subsequent to their initial recognition, unless the Company changes its business model for managing financial assets. Financial liabilities are initially measured at fair value, net of transaction costs incurred. They are subsequently carried at amortized cost using the effective interest rate method; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as an adjustment to interest expense over the period of the borrowings. The Corporation has not entered 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: Sale and distribution of electricity The performance obligations for the sale and distribution of electricity are recognized over time using an output method to measure the satisfaction of the performance obligation. The value of the electricity services transferred to the customer is determined on the basis of cyclical meter readings plus estimated customer usage since the last meter reading date to the end of the year and represents the amount that the Corporation has the right to bill. Revenue includes the cost of electricity supplied, distribution, and any other regulatory charges. The related cost of power is recorded on the basis of power used. For customer billings related to electricity generated by third parties and the related costs of providing electricity service, such as transmission services and other services provided by third parties, the Corporation has determined that it is acting as a principal for these electricity charges and, therefore, has presented electricity revenue on a gross basis. 9 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (b) Revenue recognition (continued): Capital contributions Developers are required to contribute towards the capital cost of construction of distribution assets in order to provide ongoing service. The developer is not a customer and therefore the contributions are scoped out of IFRS 15 Revenue from Contracts with Customers. Cash contributions, received from developers are recorded as deferred revenue. When an asset other than cash is received as a capital contribution, the asset is initially recognized at its fair value, with a corresponding amount recognized as deferred revenue. The deferred revenue, which represents the Corporation's obligation to continue to provide the customers access to the supply of electricity, is amortized to income on a straight-line basis over the useful life of the related asset. Certain customers are also required to contribute towards the capital cost of construction of distribution assets in order to provide ongoing service. These contributions fall within the scope of IFRS 15 Revenue from Contracts with Customers. The contributions are received to obtain a connection to the distribution system in order receive ongoing access to electricity. The Corporation has concluded that the performance obligation is the supply of electricity over the life of the relationship with the customer which is satisfied over time as the customer receives and consumes the electricity. Revenue is recognized on a straight-line basis over the useful life of the related asset. Other revenue Revenue earned from the provision of services is recognized as the service is rendered. Government grants and the related performance incentive payments under CDM programs are recognized as revenue in the year when there is reasonable assurance that the program conditions have been satisfied and the payment will be received. (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 (ÐPP&EÑ) 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 10 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (d) Property, plant and equipment (continued): determined under Canadian GAAP as the deemed cost at January 1, 2015, the transition date to IFRS. 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. 11 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (e) Intangible assets (continued): (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. (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 3-10 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 loss allowance for expected credit losses on financial assets measured at amortized cost is recognized at the reporting date. The loss allowance is measured at an amount equal to the lifetime expected credit losses for the asset. 12 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (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. 13 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (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. With the exception of Pension and OEB Forecast Accrual accounts (OPEBs), the rate for 2021 was 0.57%. Prior year rates from January to June 2020 were 2.18%, July to December 2020 were 0.57%. In 2021, OPEB rates were 2.03% for the period January to March, and 2.29% for the period April to December. In 2020, OPEBs were 2.88% for the period January to March, 2.48% for the period April to September and 2.03% for the period October to December. 14 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (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 (ÐOMERSÑ). OMERS is a multi-employer pension plan which operates as the Ontario Municipal Employees Retirement Fund (Ðthe FundÑ), 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 managementÓs 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. 15 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (j) 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: At inception of a contract, the Corporation assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Corporation assess whether: (a) The contract involves the use of an identified asset Î this may be specified explicitly or implicitly and should be physically distinct or represent substantially all the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; (b) The Corporation has the right to obtain substantially all the economic benefits from the use of the asset throughout the period of use; and (c) The Corporation has the right to direct the use of the asset. The Corporation has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Corporation has the right to direct the use of the asset if either the Corporation has the right to operate the asset, or the Corporation designed the asset in a way that predetermines how and for what purpose it will be used. The Corporation recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability, adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or the site on which it is locate, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful life of a right-of-use asset is determined on the same basis as those for property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. 16 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (l) 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. (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 ÐTax ActsÑ). Under the Electricity Act, 1998, the Corporation makes payments in lieu of corporate taxes to the Ontario Electricity Financial Corporation (ÐOEFCÑ). 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. 17 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 4. Cash: 20212020 Cash6,079$ 6,861$ 5. Accounts receivable: 20212020 Customer and other trade receivables21,027$ 15,667$ Trade receivables from related parties260 42 $ 15,70921,287$ 6. Inventory: The amount of inventories consumed by the Corporation and recognized as an expense during 2021 was $373 (2020 - $279). 7. Property, plant and equipment: (a) Cost or deemed cost: Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 202126,433$ 277,793$ 9,992$ 5,837$ -$ 320,055 Transfer to Intangible Assets1,380 2,316 1,099 17,849 601 23,245 Transfers692 19,982 28 (20,702) - - Disposals/Retirements(65) 11 (3,683) (230) - (3,967) Balance at December 31, 202128,440$ 300,102$ 7,436$ 2,754$ 601$ 339,333$ Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 202024,729$ 260,009$ 9,723$ 5,487$ -$ 299,948 Additions1,709 17,846 1,451 350 - 21,356 Disposals/Retirements(5) (62) (1,182) - - (1,249) Balance at December 31, 202026,433$ 277,793$ 9,992$ 5,837$ -$ 320,055$ 18 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 7. Property, plant and equipment (continued): (b) Accumulated depreciation: Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 20213,429$ 46,021$ 3,024$ -$ -$ 52,474 Depreciation charge758 8,818 1,467 - 20 11,063 Disposals/Retirements(65) 11 (3,594) - - (3,648) Balance at December 31, 20214,122$ 54,850$ 897$ -$ 20$ 59,889 Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 20202,718$ 37,766$ 2,853$ -$ -$ 43,337 Depreciation charge716 8,317 1,351 - - 10,384 Disposals/Retirements(5) (62) (1,180) - - (1,247) Balance at December 31, 20203,429$ 46,021$ 3,024$ -$ -$ 52,474 (c) Carrying amounts: Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total At December 31, 2021 $ 245,25224,318$ 6,539$ 2,754$ 581$ 279,444 At December 31, 202023,004$ 231,772$ 6,968$ 5,837$ -$ 267,581 (d) Leased plant and equipment: In May 2021, the Corporation entered into a lease agreement with Grand River Energy Solutions Corp., an associated company, for the construction and lease of solar PV roof-top equipment located at the CorporationÓs registered office. A right-of-use asset and corresponding lease liability of $601 were recorded. (e) Security: At December 31, 2021, the Corporation had zero properties subject to a general security agreement. (f) Borrowing costs: During the year, borrowing costs of $ nil (2020 - $ nil) were capitalized as part of the cost of property, plant and equipment. 19 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (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 Administration services conservation Other Total maintenance expense expense expense expense December 31, 2021: Depreciation of property, plant and equipment702$ 9$ -$ 2$ 10,350$ 11,063$ Amortization of intangible assets- - - - 627 627 $ 9702$ -$ 2$ 10,977$ 11,690$ Operations Customer Energy and Administration services conservation Other Total maintenance expense expense expense expense December 31, 2020: Depreciation of property, plant and equipment717$ 6$ -$ 7$ 9,654$ 10,384$ Amortization of intangible assets- - - - 368 368$ $ 6717$ -$ 7$ 10,022$ 10,752$ 8. Intangible assets: (a) Cost or deemed cost: Computer Land Software Rights Total Balance at January 1, 202110,938$ 8$ 10,946$ Additions3,733 - 3,733 Disposals(2,833) - (2,833) Balance at December 31, 202111,838$ 8$ 11,846$ Balance at January 1, 20206,373$ 8$ 6,381$ Transfers in from CIP4,565 - 4,565 Balance at December 31, 202010,938$ 8$ 10,946$ Included within Computer Software is $250 (2020 - $7,433) of intangible assets under development. 20 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 8. Intangible assets (continued): (b) Accumulated amortization: Computer Land Software Rights Total Balance at January 1, 20212,859$ 8$ 2,867$ Additions627 - 627 Disposals(2,833) - (2,833) Balance at December 31, 2021653$ 8$ 661$ Balance at January 1, 20202,491$ 8$ 2,499$ Additions368 - 368 Balance at December 31, 20202,859$ 8$ 2,867$ (c) Carrying amounts: Computer Land Software Rights Total At December 31, 2021 $ -11,185$ 11,185$ At December 31, 20208,079$ -$ 8,079$ 21 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 9. Income tax expense: Current tax expense: 2021 2020 Current period291$ 1,297$ Adjustment for prior periods(700) (332) $ 965(409)$ Deferred tax expense: 2021 2020 Original & reversal of temporary differences(20)$ (21)$ Recognition of previously unrecognized tax losses(91) (38) $ (59)(111)$ Reconciliation of effective tax rate: 2021 2020 Total comprehensive income for the year11,195$ 10,439$ Total income tax expense(520) 907 Comprehensive income before income taxes10,675 11,346 Income tax using the Corporation's statutory tax rate of 26.5%2,829 3,007 Temporary differences not benefitted(2,649) (1,768) Under (over) provided in prior periods(700) (332) $ 907(520)$ Significant components of the Corporation's deferred tax balances are as follows: 2021 2020 Deferred tax assets (liabilities): Plant and equipment(22,536)$ (16,989)$ Non-vested sick leave168 168 Employee benefits1,593 1,573 Intangible assets7 7 Loss carry-forward295 204 Ontario refundable tax credits6 14 Deferred revenue - contributed capital12,094 10,819 $ (4,204)(8,373)$ 22 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 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 the Recovery/ period 2020periodReversalOther2021(years) Regulatory deferral account debit balances Group 1 deferred accounts8,716$ (1,174)$ 1,657$ 231$ 9,430$ Note 1, Note 3 Regulatory asset recovery account773 281 (232) - 822 Note 1 Deferred tax asset8,375 5,826 - - 14,201 Note 2 LRAM1,728 874 (1,728) - 874 1 Other69 - - - 69 Note 2 Total amount related to regulatory deferral account debit balances $ 19,661 $ 5,807 $ (303) $ 231 $ 25,396 Remaining recovery/ Balances reversal arising in the Recovery/ period 2020periodReversalOther2021(years) Regulatory deferral account credit balances Group 1 deferred accounts1,718 (976) (754) 230 218 Note 1 Other558 3 - - 561 3 Year Total amount related to regulatory deferral account credit balances 2,276 (973) (754) 230 779 20212020 Movements in regulatory accounts Net change in regulatory deferral account debit and credit balances 10,2927,232 Less movement related to the balance sheet Deferred income tax (2,585)(5,826) Deferred revenue (860)802 Amounts moved to property, plant, equipment- - Net movement in regulatory deferral account balances related to profit or loss and the related deferral tax movement 6,8472,208 Note 1 KWHI has been approved for collection of these amounts in its 2021 filing for 2022 rates. 23 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 10. Regulatory deferral account balance (continued): Note 2 KWHI has not sought approval for the disposition of this amount as changes in underlying assumptions may reduce the amounts recorded in the account. KWHI may seek refunds in the future Note 3 In December 2020, KWHI was informed that beginning June 2015 charges were not included in the monthly power bill for one delivery point for Transmission Network Charges. KWHI has accrued a payable of $6 million, offset by a regulatory asset. These monies will be collected through an OEB approved rate rider in 2022 Note 4 COVID-19 Emergency Deferral The COVID-19 emergency deferral account comprises of four sub-accounts established to track incremental costs and lost revenues related to the COVID-19 pandemic: (i) Impacts from Complying with Government/OEB-initiated Customer Relief Programs, (ii) Bad Debt, (iii) Capital Related Revenue Requirement Impacts, and (iv) Other Costs and Savings. June 17, 2021, the OEB Staff released their report on the COVID-19 deferral accounts which introduces certain criteria to that need to be satisfied for amounts to be eligible for recovery. $69 has been recorded in the COVID-19 Emergency Deferral Account as at December 31, 2021 (2020 - $69). 11. Long-term debt: Effective August 1, 2000, the Corporation incurred unsecured promissory notes payable to the City of Kitchener and the Township of Wilmot and have an interest rate of 3.23% per annum. Interest is stthth payable in quarterly installments, in arrears, on March 31, June 30, September 30 and st December 31. 20212020 Senior unsecured debentures: City of Kitchener70,998$ 70,998$ Township of Wilmot5,965 5,965 Senior unsecured debentures, net proceeds76,963$ 76,963$ Less: current portion of long-term debt-$ -$ Total long-term debt76,963$ 76,963$ 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 employeesÓ services were rendered. The accrued benefit liability at December 31, 2021 of $6,012 was based on an actuarial valuation completed in 2020 using a discount rate of 3.1% (3.1% in 2020). 24 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 12. Employee future benefits (continued): Changes in the present value of the defined benefit unfunded obligation and the accrued benefit liability: 20212020 Defined benefit obligation, beginning of year5,937$ 5,858$ Current service cost191 192 Interest cost180 178 Benefits paid during the year(296) (291) Accrued benefit liability, end of year6,012$ 5,937$ Components of net benefit expense recognized are as follows: 20212020 Current service cost191$ 192$ Interest cost180 178 Net benefit expense recognized371$ 370$ Actuarial losses recognized in other comprehensive income: 20212020 Cumulative amount at January 1(620)$ (620)$ Cumulative amount at December 31(620)$ (620)$ 25 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 12. Employee future benefits (continued): The significant actuarial assumptions used in the valuation are as follows (weighted average): 20212020 Accrued benefit obligation: Discount rate3.1%3.1% Benefit cost for the year:Age Withdrawal rate18-293.50%3.50% 30-342.00%2.00% 35-391.7%1.7% 40-491.3%1.3% 50-541.0%1.0% Assumed health care cost trend rates: Initial health care cost trend rateHealth 4.7%4.4% Dental4.9%4.7% 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 rate218$ 27$ 1% decrease in health care trend rate(196)$ (23)$ 26 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (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 2021, and thereafter (2020 - 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, 2021, was 3.1% (2020 Î 3.1%). Salary levels - future general salary and wage levels were assumed to increase at 3.3% (2020 - 3.3%) per annum. Medical costs - medical costs were assumed to be 4.7% for 2021 (4.4% for 2020) Dental costs - dental costs were assumed to be 4.9% for 2021 (4.7% for 2020) 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: 20212020 Customer deposits5,623$ 6,424$ Construction deposits7,424 7,196 IESO deposit for energy conservation programs1,158 1,158 Total customer and IESO deposits14,205$ 14,778$ 27 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 14. Share capital: 20212020 Authorized: Unlimited number of common shares Issued: 20,000 common shares66,389$ 66,389$ Dividends: 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 $4,386 (2020 - $4,182). 15. Other operating revenue: Other income comprises: 20212020 Specific service charges1,748$ 1,875$ Deferred revenue1,140 1,016 Scrap sales 101187 Net gain on disposal of capital assets51 149 Non-Utility Operation4 - Retailer services39 48 Sundry (316)150 Total other income3,319$ 2,873$ 16. Finance income and expense: 20212020 Interest income on bank deposits39$ 132$ Finance income39 132 Interest expense on long-term debt2,472 2,496 Interest expense (recovery) on short-term debt(256) 271 Interest expense on BMO Letter of Credit123 123 Interest expense on deposits35 91 Interest expense on capital lease24 - Other -111 2,9812,509 Net finance costs recognized in profit or loss2,470$ 2,849$ 28 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 17. Lease Liabilities: The Corporation has entered into a lease agreement for solar PV roof-top equipment representing right- of-use assets (note 7). The right-of-use assets are recognized at the present value of the minimum lease payments, plus any extensions estimated to be exercised, with the corresponding equivalent lease liability recognized. The Corporation has determined the lease terms based on all available information as at the reporting date. Maturity Analysis - contractual undiscounted cash flows20212020 Less than one year42$ -$ One to five years228- More than five years799- Total undiscounted lease liabilities at December 31, 20211,069- Interest included on the liabilities included in the statement of financial position at December 31, 2021(471)- Lease Liabilities - current42- Lease Liabilities - non-current556$ -$ 18. Commitments and contingencies: Contractual Obligations KWHI entered into a lease agreement with Grand River Energy Solutions Corp for a rooftop solar PV system (see note 17 for details). 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 CorporationÓs 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, 2021, no assessments have been made. 29 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 19. Guarantees: Kitchener Power Corp. is the guarantor for a line of credit issued by the Canadian Imperial Bank of Commerce on behalf of Grand River Energy Solutions Corp. (GRE Corp). GRE Corp. is one third owned by each of Kitchener Power Corp., Waterloo North Hydro Holding Corporation and Cambridge & North Dumfries Energy Plus Inc.; each of which has guaranteed a maximum of $6 million in the event of default by GRE Corp. 20. 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 2021, the Corporation made employer contributions of $1,681 to OMERS (2020 - $1,723). The CorporationÓs net benefit expense has been allocated as follows: a) $439 (2020 - $449) capitalized as part of property, plant and equipment; b) $1,242 (2020 - $1,274) charged to net income. The Corporation estimates that a contribution of $1,721 to OMERS will be made during the next fiscal year. 30 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 21. Employee benefits: 20212020 Salaries, wages and benefits19,657$ 19,684$ CPP and EI remittances782 732 Contributions to OMERS1,681 1,723 Expenses related to defined benefit plans371 370 $ 22,50922,491$ 22. 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. 20212020 Directors' fees93$ 67$ Salaries and other short-term benefits1,106 1,061 Post employment benefits20 19 Other long-term benefits (OMERS)91 90 $ 1,2371,310$ (d) Transactions with parent: During the year the Corporation paid management and business development services to its parent in the amount of $ nil (2020 - $ 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. 31 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 22. Related party transactions (continued): (f) Transactions with ultimate parent (the City of Kitchener) In 2021, 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. Pre-merger costs paid by the City of Kitchener on behalf of KWHI and reimbursed in 2022 23. 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. 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 CorporationÓs 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, 2021, no customers accounted for more than 1% of total accounts receivable, $21,287. 32 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 23. Financial instruments and risk management (continued): (a) Credit risk (continued): 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, 2021 is $250 (2020 - $500). The allowance was decreased due to an expected decrease in Covid-19 related bad debt. An impairment gain of $127 (2020 loss of $793) was recognized during the year. This is due to lower than expected bad debt related to COVID-19 and a reduction of the allowance for bad debt from $500 to $250 resulting from the lessening of economic impacts caused by the pandemic The CorporationÓs credit risk associated with accounts receivable is primarily related to payments from distribution customers. At December 31, 2021, approximately $112 (2020 - $314) is considered 60 days past due. The Corporation has over 100 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, 2021, the Corporation holds security deposits in the amount of $14,205 (2020 - $14,778). (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 CorporationÓs distribution business is derived using a complex formulaic approach which is in part based on the forecast for long- term Government of Canada bond yields. This rate of return is approved by the OEB as part of the approval of distribution rates. The Corporation does not hold any long-term debt that is subject to market rates. Consequently a 1% increase or decrease in the interest rate at December 31, 2021 would have no financial impact. (c) Liquidity risk: The Corporation monitors its liquidity risk to ensure access to sufficient funds to meet operational and investing requirements. The CorporationÓs 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 $35,000 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, 2021, no amounts had been drawn under Bank of Montreal credit facility (2020 - $ nil). The Corporation also has a bilateral facility for $35,000 (the ÐLCÑ 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 (2019 - $35,000). The majority of accounts payable, as reported on the balance sheet, are due within 30 days. 33 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 23. Financial instruments and risk management (continued): (c) Liquidity risk (continued): The CompanyÓs currently available liquidity is also expected to be sufficient to address any reasonably foreseeable impacts that the COVID-19 pandemic may have on the CompanyÓs cash requirements. (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 CorporationÓs definition of capital includes shareholderÓs equity and long-term debt. As at December 31, 2021, shareholderÓs equity amounts to $174,830 (2020 - $167,221) and long- term debt amounts to $76,963 (2020 - $76,963). 24. Revenue from Contracts with Customers The Corporation generates revenue primarily from the sale and distribution of electricity to its customers. Other sources of revenue include performance incentive payments under CDM programs. 20212020 Revenue from Contracts with Customers252,110$ 284,230$ Other Revenue: CDM programs1,262 727 Other2,007 1,426 Total $ 286,383255,379$ In the following table, revenue from contracts with customers is disaggregated by type of customer. 20212020 Residential111,252$ 127,780$ Commercial137,661 153,515 Large Users1,565 1,346 Other1,632 1,589 Total Revenue252,110$ 284,230$ 34 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 25. Change in Accounting Policy The International Accounting Standards Board (IASB) has issued the following Standards, Interpretations and Amendments to Standards that were adopted by the Corporation effective January 1, 2021: a) Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS9, IAS 39, IFRS 7, IFRS 4, and IFRS 16) b) COVID-19 Related Rent Concessions (Amendment to IFRS 16) The amendments and clarifications did not have an impact on the financial statements. 26. Future accounting pronouncements: At the date of authorization of these financial statements, several new, but not yet effective, Standards and amendments to existing Standards, and Interpretations have been published by the IASB. None of these Standards or amendments to existing Standards have been adopted early by the Company and it is still to be determined if any will have a material impact on the Company's financial statements. (a) Property, Plant and Equipment - Proceeds before Intended Use (Amendments to IAS 16) On May 14, 2020, the IASB issued Property, Plant and Equipment - Proceeds before Intended Use (Amendments to IAS 16). The amendments clarify that proceeds from selling items before the related item of Property, Plant and Equipment is available for use should be recognized in profit or loss, together with the cost of producing those items. The amendments are effective for annual periods beginning on or after January 1, 2022. Early adoption is permitted. (b) Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37) On May 14, 2020, the IASB issued Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37). This amendment clarifies which costs are included as a cost of fulfilling a contract when determining whether a contract is onerous. The amendments are effective for annual periods beginning on or after January 1, 2022 and apply to contracts existing at the date when the amendments are first applied. Early adoption is permitted. 35 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 26. Future accounting pronouncements (continued): (c) Annual Improvements to IFRS Standards 2018 -2020 On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards 2018 -2020. The amendments are effective for annual periods beginning on or after January 1, 2022. Early adoption is permitted. IFRS 9 Financial Instruments Clarifies which fees are included for the purpose of performing the `10 per cent test' for derecognition of financial liabilities. IFRS 16 Leases Removes the illustration of payments from the lessor relating to leasehold improvements. The impact of adoption of these improvements is not expected to have an impact on the business. (d) Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) On February 12, 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements and an update to IFRS Practice Statement 2 Making Materiality Judgements to help companies provide useful accounting policy disclosures. The key amendments to IAS 1 include a requirement for companies to disclose their material accounting policies rather than their significant accounting policies; clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a companyÓs financial statements. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. (e) Definition of Accounting Estimate (Amendments to IAS 8) On February 12, 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS8). The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. 36 KITCHENER POWER CORP. - CONSOLIDATED Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 27. Impact of COVID-19 pandemic: On March 11, 2020, the World Health Organization declared that the COVID-19 outbreak was a global pandemic. In response, the Ontario Government implemented a number of emergency orders and/or other legislation to address the COVID related risks and support customers. On March 25, 2020, the OEB established a deferral account for regulatory balances to record the costs of changes to billing systems resulting from the Ontario GovernmentÓs TOU emergency order, other incremental costs and lost revenues associated with the COVID-19 pandemic. On June 17, 2021, the OEB Staff released their report on the COVID-19 deferral accounts which introduces certain criteria to that may need to be satisfied for amounts to be eligible for recovery. On December 22, 2020, the Ontario Government amended O. Reg. 95/05 Classes of Consumers and Determination of Rates, setting both the TOU rates for on-peak, mid-peak, and off-peak and tiered rates at the TOU off-peak rate of 8.5 cents per kWh. That regulatory amendment was effective through February 22, 2021. On February 23, 2021, residential and small business customers resumed paying TOU and tiered pricing under the RPP at prices that were set by the OEB. In light of the COVID-19 pandemic, new stay at home measures were introduced in Ontario on April 8, 2021 and the OEB ordered a ban on issuing disconnection notices to residential customers until May 6, 2021, which was extended until June 2, 2021. The Corporation extended its ban on disconnecting residential and low volume customers until the transition back into the OEBÓs annual recurring winter disconnection ban on November 15, 2020. On June 17, 2021, the OEB issued its report on the Regulatory Treatment of Impacts Arising from the COVID-19 Emergency. The Corporation has assessed the balances recorded in the deferral account and has made no changes as a result of the report. The financial impacts of COVID have been reflected in the financial statements. While the pandemic has resulted in incremental operating costs and lost revenues, the Company has evaluated the impact on the financial results as at and for the year ended December 31, 2021 and has determined that there was no material impact. The Company continues to monitor and assess the impact of COVID to the CompanyÓs financial results and operations. Potential adverse impacts of the pandemic include, but are not limited to changes in cash flows, working capital and debt requirements. 28. Comparative Figures: Certain comparative figures have been reclassified for conform with the current periodÓs presentation. 37 Financial Statements of Kitchener Power Corp. (Unconsolidated) Year ended December 31, 2021 (Expressed in thousands of dollars) KPMG LLP 115 King Street South 2nd Floor Waterloo ON N2J 5A3 Canada Tel 519-747-8800 Fax 519-747-8830 INDEPENDENT AUDITORSÓ REPORT To the Shareholders of Kitchener Power Corp. Opinion We have audited the non-consolidated financial statements of Kitchener Power Corp. (the Entity), which comprise: the non-consolidated statement of financial position as at December 31, 2021 the non-consolidated statement of comprehensive income for the year then ended the non-consolidated statement of changes in equity for the year then ended the non-consolidated statement of cash flows for the year then ended and notes to the non-consolidated financial statements, including a summary of significant accounting policies (Hereinafter referred to as the Ðfinancial statementsÑ). In our opinion, the accompanying financial statements present fairly, in all material respects, the non-consolidated financial position of the Entity as December 31, 2021, and its non- consolidated financial performance and its non-consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Ð AuditorsÓ Responsibilities for the Audit of the Financial Statements Ñ section of our auditorsÓ report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG Canada provides services to KPMG LLP. Page 2 Emphasis of Matter Î Basis of Preparation We draw attention to Note 2(a) to the separate financial statements which describes the basis of preparation used in these separate financial statements and the purpose of the financial statements. Our opinion is not modified in respect of this manner. Other Matter Î Consolidated Financial Statement The Entity has prepared a consolidated set of financial statements as at and for the year ended December 31, 2021 in accordance with relevant financial reporting framework on which we issued an auditorsÓ report addressed to the Shareholder of the Entity dated April 11, 2022. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the non-consolidated financial statements, management is responsible for assessing the EntityÓs ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the EntityÓs financial reporting process. AuditorsÓ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the non-consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditorsÓ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the non-consolidated financial statements. Page 3 As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the non-consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditorsÓ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditorsÓ report. However, future events or conditions may cause the Entity to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Chartered Professional Accountants, Licensed Public Accountants Waterloo, Canada April 11, 2022 KITCHENER POWER CORP. Statement of Financial Position As at December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Assets Current assets 4 Cash and cash equivalents$ 562$ 417 5 Accounts receivable 13 1 6 Total current assets 5 75 4 33 Non-current assets: 6 302 2 11 Deferred tax assets 7 Investment in subsidiaries and associates 173,255 1 66,639 Total non-current assets 1 73,557 1 66,850 $ 174,132$ 167,283 Total assets Note 20212020 Liabilities and Shareholder's Equity Current liabilities: Accounts payable and accrued liabilities$ 102$ 62 102 6 2 Total liabilities Shareholder's equity: 8 Share capital - common shares 66,389 6 6,389 Retained earnings 107,641 1 00,832 174,030 1 67,221 Total shareholder's equity $ 174,132$ 167,283 Total equity, liabilities and shareholder's equity The accompanying notes are an integral part of these unconsolidated financial statements. On behalf of the Board: Director __________________________ Director 1 KITCHENER POWER CORP. Statement of Comprehensive Income Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Revenue Income from subsidiaries and associates 7$ 10,55511,502$ Net operating revenue11,502 10,555 Expenses: Administration402 159 159402 Other Finance income(4) (5) Net finance income(4) (5) 10,40111,104 Income before income taxes Income tax recovery 6 (38)(91) $ 10,43911,195$ Total comprehensive income for the year The accompanying notes are an integral part of these unconsolidated financial statements. 2 KITCHENER POWER CORP. Statement of Changes in Equity Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Accumulated Share other Retained Total capital comprehensive earnings income (loss) Balance at January 1, 202066,389$ -$ 94,575$ 160,964$ Net income- 10,439 10,439 Dividends- (4,182) (4,182) Balance at December 31, 202066,389 - 100,832 167,221 Net income- 11,195 11,195 Dividends- (4,386) (4,386) Balance at December 31, 202166,389$ -$ 107,641$ 174,030$ The accompanying notes are an integral part of these financial statements. 3 KITCHENER POWER CORP. Statement of Cash Flows Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) 20212020 Cash flows from operating activities: Total comprehensive income for the year11,195$ 10,439$ Adjustments to reconcile net income to cash provided by (used in) operations: Income from subsidiaries(11,502) (10,555) Income tax recovery(91) (38) (154)(398) Change in non-cash operating working capital: Accounts receivable3 (5) Accounts payable and accrued liabilities40 57 (102)(355) Net cash from operating activities Cash flows from investing activities: Dividends received4,886 4,682 4,6824,886 Net cash from investing activities Cash flows from financing activities: Investments in subsidiaries- (500) Dividends paid out(4,386) (4,182) (4,682)(4,386) Net cash from financing activities (102)145 Change in cash and cash equivalents 519417 Cash and cash equivalents, beginning of year $ 417562$ Cash and cash equivalents, end of year The accompanying notes are an integral part of these unconsolidated financial statements. 4 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 1. Reporting entity: Kitchener Power Corp. (the ÐCorporationÑ) 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 Corp. (GRE Corp), a generation and renewable energy solutions company. It is located in the City of Kitchener. The address of the CorporationÓs 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, 2021, unconsolidated. Mergers of the holding companies, Kitchener Power Corp. and Waterloo North Hydro Holding Corporation and the local distribution companies, Kitchener-Wilmot Hydro Inc. and Waterloo North Hydro Inc. were proposed in 2021. The proposals have been agreed to by the City of Kitchener and Township of Wilmot councils. A Mergers, Amalgamations, Acquisitions and Divestitures (MAADs) application was filed on February 4, 2022 seeking permission from the Ontario Energy Board (ÐOEBÑ) to proceed with the proposed merger. 2. Basis of presentation: (a) Statement of compliance: The Corporation's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), with the exception that investments in subsidiary and associate companies are accounted for by the equity method. The financial statements were approved by the Board of Directors on March 25, 2022. (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 (ii) Contributed assets are initially measured at fair value The methods used to measure fair values are discussed further in note 12. (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. 5 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 2. Basis of presentation (continued): (d) 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. (e) Use of estimates and judgments: The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and liabilities. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future periods affected. 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 6 Î Income tax expense (ii) Note 7 Î Long term investments in subsidiaries and associates 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. (a) Financial instruments: At initial recognition, the Company measures its financial assets at fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Subsequent measurement of the financial asset depends on the classification determined on initial recognition. Financial assets are classified as either amortized cost, fair value through other comprehensive income or fair value through profit or loss, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are not reclassified subsequent to their initial recognition, unless the Company changes its business model for managing financial assets. Financial liabilities are initially measured at fair value, net of transaction costs incurred. They are subsequently carried at amortized cost using the effective interest rate method; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as an adjustment to interest expense over the period of the borrowings. The Corporation has not entered into derivative instruments. 6 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): 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) Impairment: (i) Financial assets: A loss allowance for expected credit losses on financial assets measured at amortized cost is recognized at the reporting date. The loss allowance is measured at an amount equal to the lifetime expected credit losses for the asset. (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. (c) 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. 7 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (d) 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. (e) Income taxes: The income tax expense is comprised of 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 ÐTax ActsÑ). Under the Electricity Act, 1998, the Corporation makes payments in lieu of corporate taxes to the Ontario Electricity Financial Corporation (ÐOEFCÑ). 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. 8 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 4. Cash: 20212020 Cash 562$ 417$ 5. Accounts receivable: 20212020 Accounts receivable13$ 16$ 6. Income tax expense: The current tax expense for 2021 is nil (2020 - nil). 20212020 Original & reversal of temporary differences(91)$ (38)$ $ (38)(91)$ Reconciliation of effective tax rate: 20212020 Profit for the period11,195$ 10,439$ Total income tax expense(91) (38) Profit excluding income tax11,104 10,401 Income tax using the Corporation's statutory tax rate2,943 2,756 Taxes associated with non-taxable equity income(3,042) (2,793) Other differences8 (1) $ (38)(91)$ Significant components of the Corporation's deferred tax balances are as follows: 20212020 Deferred tax assets (liabilities): Intangible assets7$ 7$ Loss carry-forward295 204 $ 211302$ 9 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 7. Long-term investments in subsidiaries and associates: The Company owns 100% of Kitchener-Wilmot Hydro Inc., a regulated distribution company, and Kitchener Energy Services Inc., an unregulated retail services company. The Company also owns 33% of GRE Corp., an unregulated company. Investment inInvestment inInvestment in Kitchener-WilmotGrand RiverKitchener EnergyTotal 2021Hydro Inc.Energy Corp.Services Inc.Investment Balance, beginning of year165,713$ 838$ 88$ 166,639$ Investment in associate- - Equity share of earnings11,425 55 22 11,502 Dividends issued(4,886) - - (4,886) Balance, end of year172,252$ 893$ 110$ 173,255$ 2020 Balance, beginning of year159,432$ 763$ 71$ 160,266$ Investment in associate- 500 - 500 Equity share of earnings10,963 (425) 17 10,555 Dividends issued(4,682) - - (4,682) Balance, end of year165,713$ 838$ 88$ 166,639$ 8. Share capital: 20212020 Authorized: Unlimited number of common shares Issued: 20,000 common shares66,389$ 66,389$ Dividends: 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 $4,386 (2020 - $4,182). 10 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 9. 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 CorporationÓs 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, 2021, no assessments have been made. 10. Guarantees: Kitchener Power Corp. is the guarantor for a line of credit issued by the Canadian Imperial Bank of Commerce on behalf of Grand River Energy Solutions Corp (GRE Corp). GRE Corp. is one third owned by each of Kitchener Power Corp., Waterloo North Hydro Holding Corporation and Cambridge & North Dumfries Energy Plus Inc.; each of which has guaranteed a maximum of $6 million in the event of default by GRE Corp. 11. Related party transactions: (a) Parent and ultimate controlling party: The Corporation is wholly-owned by the Corporation of the City of Kitchener and the Corporation of the Township of Wilmot. The City and the Township produce financial statements that are available for public use. (b) Entity with significant influence: The Corporation of the City of Kitchener exercises significant influence over the Corporation through its 92.25% ownership interest in the Corporation. (c) Key management personnel: The key management personnel of the Corporation is defined as members of its board of directors and is summarized below. 11 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 11. Related party transactions (continued): (d) Transactions with shareholders: During the year, the Corporation paid management and business development services to its shareholders in the amount of nil (2020 - nil). (e) Transactions with entity with significant influence: In the ordinary course of business, the Corporation may issue dividends to the shareholders. 20212020 Directors' remuneration62$ 67$ CPP remittances2 2 $ 6964$ 12. 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. 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 CorporationÓs exposure to a variety of risks such as interest rate risk, and liquidity risk, as well as related mitigation strategies are discussed below. (a) 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. (b) Liquidity risk: The Corporation monitors its liquidity risk to ensure access to sufficient funds to meet operational and investing requirements. The CorporationÓs objective is to ensure that sufficient liquidity is on hand to meet obligations as they fall due while minimizing interest exposure. 12 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 12. Financial instruments and risk management (continued): (c) Capital disclosures: The main objectives of the Corporation, when managing capital, are to ensure ongoing access to funding to deliver the appropriate financial returns. The CorporationÓs definition of capital includes shareholderÓs equity and long-term debt. As at December 31, 2021, shareholderÓs equity amounts to $174,030 (2020 - $167,221) and long- term debt amounts of nil (2020 - nil). 13. Future accounting pronouncements: At the date of authorization of these financial statements, several new, but not yet effective, Standards and amendments to existing Standards, and Interpretations have been published by the IASB. None of these Standards or amendments to existing Standards have been adopted early by the Company and it is still to be determined if any will have a material impact on the Company's financial statements. (a) Property, Plant and Equipment - Proceeds before Intended Use (Amendments to IAS 16) On May 14, 2020, the IASB issued Property, Plant and Equipment - Proceeds before Intended Use (Amendments to IAS 16). The amendments clarify that proceeds from selling items before the related item of Property, Plant and Equipment is available for use should be recognized in profit or loss, together with the cost of producing those items. The amendments are effective for annual periods beginning on or after January 1, 2022. Early adoption is permitted. (b) Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37) On May 14, 2020, the IASB issued Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37). This amendment clarifies which costs are included as a cost of fulfilling a contract when determining whether a contract is onerous. The amendments are effective for annual periods beginning on or after January 1, 2022 and apply to contracts existing at the date when the amendments are first applied. Early adoption is permitted. 13 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 13. Future accounting pronouncements (continued): (c) Annual Improvements to IFRS Standards 2018 -2020 On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards 2018 -2020. The amendments are effective for annual periods beginning on or after January 1, 2022. Early adoption is permitted. IFRS 9 Financial Instruments Clarifies which fees are included for the purpose of performing the `10 per cent test' for derecognition of financial liabilities. IFRS 16 Leases Removes the illustration of payments from the lessor relating to leasehold improvements. The impact of adoption of these improvements is not expected to have an impact on the business. (d) Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) On February 12, 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements and an update to IFRS Practice Statement 2 Making Materiality Judgements to help companies provide useful accounting policy disclosures. The key amendments to IAS 1 include a requirement for companies to disclose their material accounting policies rather than their significant accounting policies; clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a companyÓs financial statements. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. (e) Definition of Accounting Estimate (Amendments to IAS 8) On February 12, 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS8). The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. 14 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 13. Future accounting pronouncements (continued): (a) Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction - Amendments to IAS 12 Income Taxes. On May 7, 2021, the IASB issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). The amendments narrow the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision. The amendments are effective for annual periods beginning on or after January 1, 2023. Earlier adoption is permitted. 14. Impact of COVID-19 pandemic: On March 11, 2020, the World Health Organization declared that the COVID-19 outbreak was a global pandemic. In response, the Ontario Government implemented a number of emergency orders and/or other legislation to address the COVID related risks and support customers. On March 25, 2020, the OEB established a deferral account for regulatory balances to record the costs of changes to billing systems resulting from the Ontario GovernmentÓs TOU emergency order, other incremental costs and lost revenues associated with the COVID-19 pandemic. On June 17, 2021, the OEB Staff released their report on the COVID-19 deferral accounts which introduces certain criteria to that may need to be satisfied for amounts to be eligible for recovery. On December 22, 2020, the Ontario Government amended O. Reg. 95/05 Classes of Consumers and Determination of Rates, setting both the TOU rates for on-peak, mid-peak, and off-peak and tiered rates at the TOU off-peak rate of 8.5 cents per kWh. That regulatory amendment was effective through February 22, 2021. On February 23, 2021, residential and small business customers resumed paying TOU and tiered pricing under the RPP at prices that were set by the OEB. In light of the COVID-19 pandemic, new stay at home measures were introduced in Ontario on April 8, 2021 and the OEB ordered a ban on issuing disconnection notices to residential customers until May 6, 2021, which was extended until June 2, 2021. The Corporation extended its ban on disconnecting residential and low volume customers until the transition back into the OEBÓs annual recurring winter disconnection ban on November 15, 2020. On June 17, 2021, the OEB issued its report on the Regulatory Treatment of Impacts Arising from the COVID-19 Emergency. The Corporation has assessed the balances recorded in the deferral account and has made no changes as a result of the report. 15 KITCHENER POWER CORP. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 14. Impact of COVID-19 pandemic (continued): The financial impacts of COVID have been reflected in the financial statements. While the pandemic has resulted in incremental operating costs and lost revenues, the Company has evaluated the impact on the financial results as at and for the year ended December 31, 2021 and has determined that there was no material impact. 16 Financial Statements of Kitchener-Wilmot Hydro Inc. Year ended December 31, 2021 (Expressed in thousands of dollars) KPMG LLP 115 King Street South 2nd Floor Waterloo ON N2J 5A3 Canada Tel 519-747-8800 Fax 519-747-8830 INDEPENDENT AUDITORSÓ REPORT To the Shareholder of Kitchener-Wilmot Hydro Inc. Opinion We have audited the financial statements of Kitchener-Wilmot Hydro Inc. (the Entity), which comprise: the statement of financial position as at December 31, 2021 the statement of comprehensive income for the year then ended the statement of changes in equity for the year then ended the statement of cash flows for the year then ended and notes to the financial statements, including a summary of significant accounting policies (Hereinafter referred to as the Ðfinancial statementsÑ). In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Entity as December 31, 2021, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Ð AuditorsÓ Responsibilities for the Audit of the Financial Statements Ñ section of our auditorsÓ report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG Canada provides services to KPMG LLP. Page 2 Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the EntityÓs ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the EntityÓs financial reporting process. AuditorsÓ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditorsÓ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Page 3 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditorsÓ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditorsÓ report. However, future events or conditions may cause the Entity to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Chartered Professional Accountants, Licensed Public Accountants Waterloo, Canada April 11, 2022 KITCHENER-WILMOT HYDRO INC. Statement of Financial Position As at December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Assets Current assets 4 Cash $ 6,3635,412$ 5 15,68021,269 Accounts receivable Unbilled revenue14,705 29,865 6 Inventory 2,4583,080 Prepaid expenses1,082 1,146 Income taxes receivable30 - Total current assets45,578 55,512 Non-current assets: 7 Property, plant and equipment 267,581279,444 8 Intangible assets 8,07911,185 Total non-current assets290,629 275,660 331,172336,207 Total assets 10 Regulatory deferral account debit balances 19,66125,396 $ 350,833361,603$ Total assets and regulatory assets 2 KITCHENER-WILMOT HYDRO INC. Statement of Financial Position Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Liabilities and Shareholder's Equity Current liabilities: Accounts payable and accrued liabilities$ 32,718$ 37,670 Income taxes payable- 32 17 Current portion of lease liabilities 42 - 13 Current portion customer deposits 8,530 8 ,945 Current portion of deferred revenue 1,185 1 ,069 Total current liabilities 42,475 4 7,716 Non-current liabilities: 11 Long-term debt 76,963 7 6,963 12 Employee future benefits 6,012 5 ,937 13 Long-term customer deposits 5,675 5 ,833 17 Long term portion of lease liabilities 556 - Deferred revenue 44,451 3 9,759 9 Deferred tax liability 8,675 4 ,415 Total non-current liabilities 142,332 1 32,907 184,807 1 80,623 Total liabilities Shareholder's equity: 14 Share capital - common shares 63,689 6 3,689 Retained earnings 109,184 1 02,645 Accumulated other comprehensive loss(620)(620) Total shareholder's equity 172,253 1 65,714 357,060 3 46,337 Total liabilities and shareholder's equity 10 Regulatory deferral account credit balances 779 2 ,276 Deferred taxes associated with regulatory accounts 3,764 2 ,220 $ 361,603$ 350,833 Total equity, liabilities and shareholder's equity The accompanying notes are an integral part of these financial statements. On behalf of the Board: Director __________________________ Director 3 KITCHENER-WILMOT HYDRO INC. Statement of Comprehensive Income Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) Note 20212020 Energy sales205,727$ 239,962$ Cost of energy sold208,472 245,909 (5,947)(2,745) Other operating revenue Distribution revenue45,033 42,690 Other income15 2,9752,849 Net operating revenue45,137 39,718 Expenses: Operations and maintenance11,176 11,112 Customer services5,674 5,313 Administration6,041 5,376 Amortization10,977 10,022 31,82333,868 Other Energy conservation program revenue(1,262) (727) Energy conservation program expense1,277 713 Net energy conservation programs15 (14) Finance income (127)(35) 16 Finance charges16 2,9812,509 Net finance costs2,474 2,854 5,0558,780 Income before income taxes Income tax expense 938(437) 9 Income for the year before movements 4,1179,217 in regulatory deferral account balances and OCI Net movement in regulatory deferral account balances related to profit or loss and the related deferred tax movement 6,8472,208 10 $ 10,96411,425$ Total comprehensive income for the year The accompanying notes are an integral part of these financial statements. 4 KITCHENER-WILMOT HYDRO INC. Statement of Changes in Equity Year ended December 31, 2021, with comparative information for 2020 (In thousands of Canadian dollars) Accumulated other Retained Share capitalTotal comprehensive earnings income (loss) Balance at January 1, 202063,689$ (620)$ 96,363$ 159,432$ Net income before other comprehensive income- - 10,964 10,964 Dividends- - (4,682) (4,682) Balance at December 31, 202063,689 (620) 102,645 165,714 Net income before other comprehensive income- - 11,425 11,425 Dividends- - (4,886) (4,886) Balance at December 31, 202163,689$ (620)$ 109,184$ 172,253$ The accompanying notes are an integral part of these financial statements. 5 KITCHENER-WILMOT HYDRO INC. Statement of Cash Flows Year ended December 31, 2021, with comparative information for 2020 (Expressed in thousands of dollars) 20212020 Cash flows from operating activities: Total comprehensive income for the year11,425$ 10,964$ Adjustments to reconcile net income to cash provided by (used in) operations: Amortization11,690 10,752 Amortization of deferred revenue(1,140) (1,016) Gain on disposal of property, plant and equipment(51) (149) Income tax expense(437) 938 Income taxes paid353 (797) Interest on Lease liability24 - Increase in employee future benefits75 77 20,76921,939 Change in non-cash operating working capital: Accounts receivable(5,589) 1,797 Unbilled revenue15,160 (2,216) Inventory (134)(622) Prepaid expenses64 201 Accounts payable and accrued liabilities(4,952) 7,623 Other current liabilities(299) (303) Change in regulatory debit balances(5,735) (10,261) Change in regulatory credit balances47 654 Change in deferred tax 4,282 1,900 20,03024,295 Net cash from operating activities Cash flows from investing activities: Proceeds on disposals of property, plant and equipment370 151 Purchase of property, plant and equipment(22,644) (21,356) Purchase of intangible assets(3,733) (4,565) (25,770)(26,007) Net cash used in investing activities Cash flows from financing activities: Net change in customer deposits(158) (355) Dividends paid out(4,886) (4,682) Change in contributed capital received5,832 4,390 Repayment of long-term debt- (607) Payment of lease liability(27) - (1,254)761 Net cash from financing activities (6,994)(951) Change in cash and cash equivalents 13,3576,363 Cash and cash equivalents, beginning of year $ 6,3635,412$ Cash and cash equivalents, end of year The accompanying notes are an integral part of these financial statements. 6 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 1. Reporting entity: Kitchener-Wilmot Hydro Inc. (the ÐCorporationÑ) is a rate regulated, municipally owned hydro distribution company incorporated under the laws of Ontario, Canada. The Corporation is located in the City of Kitchener. The address of the CorporationÓs registered office is 301 Victoria Street South, Kitchener, Ontario, Canada. The Corporation delivers electricity and related energy services to residential and commercial customers in the City of Kitchener and the Township of Wilmot. The Corporation is wholly owned by Kitchener Power Corp., which is itself wholly owned by the Corporation of the City of Kitchener and the Corporation of the Township of Wilmot. The financial statements are for the Corporation as at and for the year ended December 31, 2021. Mergers of the holding companies, Kitchener Power Corp. and Waterloo North Hydro Holding Corporation and the local distribution companies, Kitchener-Wilmot Hydro Inc. and Waterloo North Hydro Inc. were proposed in 2021. The proposals have been agreed to by the City of Kitchener and Township of Wilmot councils. A Mergers, Amalgamations, Acquisitions and Divestitures (MAADs) application was filed on February 4, 2022 seeking permission from the Ontario Energy Board (ÐOEBÑ) to proceed with the proposed merger. 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 25, 2022. (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. (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. 7 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 2. Basis of presentation (continued): (d) Use of estimates and judgments (continued): 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 3(b) Î Determination of the performance obligation for contributions from customers and the related amortization period ii) Note 7 Î Property, plant and equipment iii) Note 9 Î Deferred tax assets iv) Note 12 Î Employee future benefits v) Note 17 Î Commitments and contingencies (e) Rate regulation: The Corporation is regulated by the Ontario Energy Board, under the authority granted by the Ontario Energy Board Act, 1998. Among other things, the OEB has the power and responsibility to approve or set rates for the transmission and distribution of electricity, providing continued rate protection for electricity consumers in Ontario, and ensuring that transmission and distribution companies fulfill obligations to connect and service customers. The OEB may also prescribe license requirements and conditions of service to local distribution companies (ÐLDCsÑ), 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. Rate setting: Distribution revenue and electricity rates The OEB sets electricity prices for low-volume consumers 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. 8 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 2. Basis of presentation (continued): (e) Rate regulation (continued): For the distribution revenue included in electricity sales, the Corporation files a ÐCost of ServiceÑ (ÐCOSÑ) rate application with the OEB every five years where rates are determined through a review of the forecasted annual amount of operating and capital expenses, debt and shareholderÓs equity required to support the CorporationÓs 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 (ÐIRMÑ) is filed. An IRM application results in a formulaic adjustment to distribution rates that were set under the last COS application. The previous yearÓs rates are adjusted for the annual change in the Gross Domestic Product Implicit Price Inflator for Final Domestic Demand (ÐGDP IPI-FDDÑ) net of a productivity factor and a Ðstretch factorÑ 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 filed a COS application on April 30, 2019 for rates effective January 1, 2020 to December 31, 2020. The GDP IPI-FDD for 2021 is 3.3%, the CorporationÓs productivity factor is 0% and the stretch factor is 0.15%, resulting in a net adjustment of 3.15% to the previous yearÓs rates for the 2021 rates. Electricity rates were impacted by the COVID-19 pandemic, distribution rates were unaffected, which has been discussed further in Note 26. 9 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 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. (a) Financial instruments: At initial recognition, the Company measures its financial assets at fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Subsequent measurement of the financial asset depends on the classification determined on initial recognition. Financial assets are classified as either amortized cost, fair value through other comprehensive income or fair value through profit or loss, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are not reclassified subsequent to their initial recognition, unless the Company changes its business model for managing financial assets. Financial liabilities are initially measured at fair value, net of transaction costs incurred. They are subsequently carried at amortized cost using the effective interest rate method; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as an adjustment to interest expense over the period of the borrowings. The Corporation has not entered 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: Sale and distribution of electricity The performance obligations for the sale and distribution of electricity are recognized over time using an output method to measure the satisfaction of the performance obligation. The value of the electricity services transferred to the customer is determined on the basis of cyclical meter readings plus estimated customer usage since the last meter reading date to the end of the year and represents the amount that the Corporation has the right to bill. Revenue includes the cost of electricity supplied, distribution, and any other regulatory charges. The related cost of power is recorded on the basis of power used. For customer billings related to electricity generated by third parties and the related costs of providing electricity service, such as transmission services and other services provided by third parties, the Corporation has determined that it is acting as a principal for these electricity charges and, therefore, has presented electricity revenue on a gross basis. 10 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (b) Revenue recognition (continued): Capital contributions Developers are required to contribute towards the capital cost of construction of distribution assets in order to provide ongoing service. The developer is not a customer and therefore the contributions are scoped out of IFRS 15 Revenue from Contracts with Customers. Cash contributions, received from developers are recorded as deferred revenue. When an asset other than cash is received as a capital contribution, the asset is initially recognized at its fair value, with a corresponding amount recognized as deferred revenue. The deferred revenue, which represents the Corporation's obligation to continue to provide the customers access to the supply of electricity, is amortized to income on a straight-line basis over the useful life of the related asset. Certain customers are also required to contribute towards the capital cost of construction of distribution assets in order to provide ongoing service. These contributions fall within the scope of IFRS 15 Revenue from Contracts with Customers. The contributions are received to obtain a connection to the distribution system in order receive ongoing access to electricity. The Corporation has concluded that the performance obligation is the supply of electricity over the life of the relationship with the customer which is satisfied over time as the customer receives and consumes the electricity. Revenue is recognized on a straight-line basis over the useful life of the related asset. Other revenue Revenue earned from the provision of services is recognized as the service is rendered. Government grants and the related performance incentive payments under CDM programs are recognized as revenue in the year when there is reasonable assurance that the program conditions have been satisfied and the payment will be received. (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 (ÐPP&EÑ) used in rate-regulated activities and acquired prior to January 1, 2014 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 11 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (d) Property, plant and equipment (continued): determined under Canadian GAAP as the deemed cost at January 1, 2014, the transition date to IFRS. 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. 12 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (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. (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 3-10 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 loss allowance for expected credit losses on financial assets measured at amortized cost is recognized at the reporting date. The loss allowance is measured at an amount equal to the lifetime expected credit losses for the asset. (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. 13 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (f) Impairment (continued): (ii) Non-financial assets (continued): 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. 14 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (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. With the exception of Pension and OEB Forecast Accrual accounts (OPEBs), the rate for 2021 was 0.57%. Prior year rates from January to June 2020 were 2.18%, July to December 2020 were 0.57%. In 2021, OPEB rates were 2.03% for the period January to March, and 2.29% for the period April to December. In 2020, OPEBs were 2.88% for the period January to March, 2.48% for the period April to September and 2.03% for the period October to December. 15 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (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 (ÐOMERSÑ). OMERS is a multi-employer pension plan which operates as the Ontario Municipal Employees Retirement Fund (Ðthe FundÑ), 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 managementÓs 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. (j) 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. 16 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 3. Significant accounting policies (continued): (k) Leased assets: At inception of a contract, the Corporation assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Corporation assess whether: i. The contract involves the use of an identified asset Î this may be specified explicitly or implicitly and should be physically distinct or represent substantially all the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; ii. The Corporation has the right to obtain substantially all the economic benefits from the use of the asset throughout the period of use; and iii. The Corporation has the right to direct the use of the asset. The Corporation has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Corporation has the right to direct the use of the asset if either the Corporation has the right to operate the asset, or the Corporation designed the asset in a way that predetermines how and for what purpose it will be used. The Corporation recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability, adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or the site on which it is locate, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful life of a right-of-use asset is determined on the same basis as those for property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. (l) 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. 17 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (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 ÐTax ActsÑ). Under the Electricity Act, 1998, the Corporation makes payments in lieu of corporate taxes to the Ontario Electricity Financial Corporation (ÐOEFCÑ). 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. 4. Cash: 20212020 Cash5,412$ 6,363$ 5. Accounts receivable: 20212020 Customer and other trade receivables21,009$ 15,588$ Trade receivables from related parties260 92 $ 15,68021,269$ 6. Inventory: The amount of inventories consumed by the Corporation and recognized as an expense during 2021 was $373 (2020 - $279). 18 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 7. Property, plant and equipment: (a) Cost or deemed cost: Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 202126,433 277,793 9,992 5,837 - 320,055 Additions1,380 2,316 1,099 17,849 601 23,245 Transfers692 19,982 28 (20,702) - - Disposals/Retirements(65) 11 (3,683) (230) - (3,967) Balance at December 31, 202128,440 300,102 7,436 2,754 601 339,333 Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 202024,729 260,009 9,723 5,487 - 299,948 Additions1,709 17,846 1,451 350 - 21,356 Disposals/Retirements(5) (62) (1,182) - - (1,249) Balance at December 31, 202026,433 277,793 9,992 5,837 - 320,055 (b) Accumulated depreciation: Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 20213,429 46,021 3,024 - - 52,474 Depreciation charge758 8,818 1,467 - 20 11,063 Disposals/Retirements(65) 11 (3,594) - - (3,648) Balance at December 31, 20214,122 54,850 897 - 20 59,889 Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total Balance at January 1, 20202,718 37,766 2,853 - - 43,337 Depreciation charge716 8,317 1,351 - - 10,384 Disposals/Retirements(5) (62) (1,180) - - (1,247) Balance at December 31, 20203,429 46,021 3,024 - - 52,474 19 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 7. Property, plant and equipment (continued): (c) Carrying amounts: Land and Distribution Other fixed Construction- Right-of-use buildings equipment assets in-progress assets Total At December 31, 2021 245,25224,318 6,539 2,754 581 279,444 At December 31, 202023,004 231,772 6,968 5,837 - 267,581 (d) Leased plant and equipment: In May 2021, the Corporation entered into a lease agreement with Grand River Energy Solutions Corp., an associated company, for the construction and lease of solar PV roof-top equipment located at the CorporationÓs registered office. A right-of-use asset and corresponding lease liability of $601 were recorded. (e) Security: At December 31, 2021, the Corporation had zero properties subject to a general security agreement. (f) Borrowing costs: During the year, borrowing costs of $ nil (2020 - $ nil) were capitalized as part of the cost of property, plant and equipment. (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 and Customer General and Energy maintenance services administration Conservation expense expense expense expense Other Total December 31, 2021: Depreciation of property, plant and equipment702$ 9$ -$ 2$ 10,350$ 11,063$ Amortization of intangible assets- - - - 627 627 $ 9702$ -$ 2$ 10,977$ 11,690$ December 31, 2020: Depreciation of property, plant and equipment717$ 6$ -$ 7$ 9,654$ 10,384$ Amortization of intangible assets- - - - 368 368 $ 6717$ -$ 7$ 10,022$ 10,752$ 20 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 8. Intangible assets: (a) Cost or deemed cost: Computer Software Land Rights Total Balance at January 1, 202110,938$ 8$ 10,946$ Additions3,733 - 3,733 Disposals(2,833) - (2,833) Balance at December 31, 202111,838$ 8$ 11,846$ Balance at January 1, 20206,373$ 8$ 6,381$ Additions4,565 - 4,565 Balance at December 31, 202010,938$ 8$ 10,946$ Included within Computer Software is $250 (2020 - $7,433) of intangible assets under development. (b) Accumulated amortization: Computer Software Land Rights Total Balance at January 1, 20212,859$ 8$ 2,867$ Additions627 - 627 Disposals(2,833) - (2,833) Balance at December 31, 2021653$ 8$ 661$ Balance at January 1, 20202,491$ 8$ 2,499$ Additions368 - 368 Balance at December 31, 20202,859$ 8$ 2,867$ (c) Carrying amounts: Computer Software Land Rights Total At December 31, 2021 $ -11,185$ 11,185$ At December 31, 20208,079$ -$ 8,079$ 21 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 9. Income tax expense: 20212020 Current period285$ 1,292$ Adjustment for prior periods(700) (332) $ 960(415)$ Deferred tax expense: 20212020 Original & reversal of temporary differences(20)$ (21)$ Change in unrecognized deductible temporary differences(2) (1) $ (22)(22)$ Reconciliation of effective tax rate: 20212020 Total comprehensive income for the year11,425$ 10,964$ Total income tax expense(437) 938 Comprehensive income before income taxes10,988 11,902 Income tax using the Corporation's statutory tax rate of 26.5%2,912 3,154 Temporary differences not benefitted(2,649) (1,884) Under (over) provided in prior periods(700) (332) $ 938(437)$ Significant components of the Corporation's deferred tax balances are as follows: 20212020 Deferred tax assets (liabilities): Plant and equipment(22,536)$ (16,989)$ Non-vested sick leave168 168 Employee benefits1,593 1,573 Ontario refundable tax credits6 14 Deferred revenue - contributed capital12,094 10,819 $ (4,415)(8,675)$ 22 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (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: Balances Remaining arising in the Recovery/ recovery/ reversal 2020periodReversalOther2021period (years) Regulatory deferral account debit balances Group 1 deferred accounts8,716$ (1,174)$ 1,657$ 231$ 9,430$ Note 1, Note 3 Regulatory asset recovery account773 281 (232) - 822 Note 1 Deferred tax asset8,375 5,826 - - 14,201 Note 2 LRAM1,728 874 (1,728) - 874 1 Year Other69 - - - 69 1 Year Total amount related to regulatory deferral account debit balances $ 19,661 $ 5,807 $ (303) $ 231 $ 25,396 Balances Remaining arising in the Recovery/ recovery/ reversal 2020periodReversalOther2021period (years) Regulatory deferral account credit balances Group 1 deferred accounts1,720$ (976)$ (754)$ 230$ 220$ Note 1 Regulatory asset recovery account- - - - - Note 1 Other556 3 - - 559 3 Year Total amount related to regulatory deferral account credit balances $ 2,276 $ (973) $ (754) $ 230 $ 779 20212020 Movements in regulatory accounts Net change in regulatory deferral account debit and credit balances$ 10,2927,232$ Less movement related to the balance sheet Deferred income tax (2,585)(5,826) Deferred revenue (860)802 Net movement in regulatory deferral account balances related to profit or loss and the related deferral tax movement $ 6,8472,208$ Note 1 KWHI has been approved for collection of these amounts in its 2021 filing for 2022 rates Note 2 KWHI has not sought approval for the disposition of this amount as changes in underlying assumptions may reduce the amounts recorded in the account. KWHI may seek refunds in the future Note 3 In December 2020, KWHI was informed that beginning June 2015 charges were not included in the monthly power bill for one delivery point for Transmission Network Charges. KWHI has accrued a payable of $6 million, offset by a regulatory asset. These monies will be collected through an OEB approved rate rider in 2022 23 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 10. Regulatory deferral account balance (continued): Note 4 COVID-19 Emergency Deferral The COVID-19 emergency deferral account comprises of four sub-accounts established to track incremental costs and lost revenues related to the COVID-19 pandemic: (i) Impacts from Complying with Government/OEB-initiated Customer Relief Programs, (ii) Bad Debt, (iii) Capital Related Revenue Requirement Impacts, and (iv) Other Costs and Savings. June 17, 2021, the OEB Staff released their report on the COVID-19 deferral accounts which introduces certain criteria that need to be satisfied for amounts to be eligible for recovery. $69 has been recorded in the COVID-19 Emergency Deferral Account as at December 31, 2021 (2020 - $69). 11. Long-term debt: Effective August 1, 2000, the Corporation incurred unsecured promissory notes payable to the Corporation of the City of Kitchener and the Corporation of the Township of Wilmot, that have an interest rate of 3.23% per annum. Interest is payable in quarterly installments, in arrears, on March 31, June 30, September 30 and December 31. 20212020 Senior unsecured debentures: City of Kitchener70,998$ 70,998$ Township of Wilmot5,965 5,965 Senior unsecured debentures, net proceeds76,963$ 76,963$ Less: current portion of long-term debt-$ -$ Total long-term debt76,963$ 76,963$ 24 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 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 employeesÓ services were rendered. The accrued benefit liability at December 31, 2021 of $6,012 was based on an actuarial valuation completed in 2019 using a discount rate of 3.1% (3.1% in 2020). Changes in the present value of the defined benefit unfunded obligation and the accrued benefit liability: 20212020 Defined benefit obligation, beginning of year5,937$ 5,858$ Current service cost191 192 Interest cost180 178 Benefits paid during the year(296) (291) Accrued benefit liability, end of year6,012$ 5,937$ Components of net benefit expense recognized are as follows: 20212020 Current service cost191$ 192$ Interest cost180 178 Net benefit expense recognized371$ 370$ Actuarial losses recognized in other comprehensive income: 20212020 Cumulative amount at January 1(620)$ (620)$ Recognized during the year (net of tax)- - Cumulative amount at December 31(620)$ (620)$ 25 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 12. Employee future benefits (continued): The significant actuarial assumptions used in the valuation are as follows (weighted average): 20212020 Accrued benefit obligation: Discount rate3.1%3.1% Benefit cost for the year:Age Withdrawal rate18-293.50%3.50% 30-342.00%2.00% 35-391.7%1.7% 40-491.3%1.3% 50-541.0%1.0% Assumed health care cost trend rates: Initial health care cost trend rateHealth 4.7%4.4% Dental4.9%4.7% 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 rate218$ 27$ 1% decrease in health care trend rate(196)$ (23)$ 26 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (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 2021, and thereafter (2020 - 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, 2021, was 3.1% (2020 Î 3.1%). Salary levels - future general salary and wage levels were assumed to increase at 3.3% (2020 - 3.3%) per annum. Medical costs - medical costs were assumed to be 4.7% for 2021 (4.4% for 2020) Dental costs - dental costs were assumed to be 4.9% for 2021 (4.7% for 2020) 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: 20212020 Customer deposits5,623$ 6,424$ Construction deposits7,424 7,196 IESO deposit for energy conservation programs1,158 1,158 Total customer deposits14,205$ 14,778$ 27 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 14. Share capital: 20212020 Authorized: Unlimited number of common shares Issued: 10,000 common shares63,689$ 63,689$ Dividends: 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 $4,886 (2020 - $4,682). 15. Other operating revenue: Other income comprises: 20212020 Specific service charges1,333$ 1,552$ Deferred revenue1,140 1,016 Scrap sales 101187 Net gain on disposal of capital assets51 149 Non-Utilitiy Operation4 - Retailer services39 48 Sundry 10995 Total other income2,849$ 2,975$ 16. Finance income and expense: 20212020 Interest income on bank deposits35$ 127$ Finance income 12735 Interest expense on long-term debt2,472 2,496 Interest expense (recovery) on short-term debt(256) 271 Interest expense on BMO letter of credit123 123 Interest expense on deposits35 91 Interest expense on capital lease24 - Other -111 2,9812,509 Net finance costs recognized in profit or loss2,474$ 2,854$ 28 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 17. Lease Liabilities: The Corporation has entered into a lease agreement for solar PV roof-top equipment representing right- of-use assets (note 7). The right-of-use assets are recognized at the present value of the minimum lease payments, plus any extensions estimated to be exercised, with the corresponding equivalent lease liability recognized. The Corporation has determined the lease terms based on all available information as at the reporting date. Maturity Analysis - contractual undiscounted cash flows20212020 Less than one year42$ -$ One to five years228- More than five years799- Total undiscounted lease liabilities at December 31, 20211,069- Interest included on the liabilities included in the statement of financial position at December 31, 2021(471)- Lease Liabilities - current42- Lease Liabilities - non-current556$ -$ 18. Commitments and contingencies: Contractual Obligations KWHI entered into a lease agreement with Grand River Energy Solutions Corp for a rooftop solar PV system (see note 17 for details). 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 CorporationÓs 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, 2021, no assessments have been made. 29 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 19. Guarantees: Guarantees are not applicable to the Corporation. 20. 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 2021, the Corporation made employer contributions of $1,681 to OMERS (2020 - $1,723). The CorporationÓs net benefit expense has been allocated as follows: (a) $439 (2020 - $449) capitalized as part of property, plant and equipment; (b) $1,242 (2020 - $1,274) charged to net income. The Corporation estimates that a contribution of $1,721 to OMERS will be made during the next fiscal year. 21. Employee benefits: 20212020 Salaries, wages and benefits19,657$ 19,684$ CPP and EI remittances782 732 Contributions to OMERS1,681 1,723 Expenses related to defined benefit plans371 370 $ 22,50922,491$ 30 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 22. Related party transactions: (a) Parent and ultimate controlling party: The sole shareholder of the Corporation is Kitchener Power Corp., which in turn 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. 20212020 Directors' fees93$ 67$ Salaries and other short-term benefits1,106 1,061 Post employment benefits20 19 Other long-term benefits (OMERS)91 90 $ 1,2371,310$ (d) 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 Corporation of the City of Kitchener at prices and under terms approved by the OEB. (e) Transactions with ultimate parent (the Corporation of the City of Kitchener): In 2021, 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. Pre-merger costs paid by the City of Kitchener on behalf of Kitchener-Wilmot Hydro Inc. and reimbursed in 2022 31 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 23. 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 (Corporation of the City of Kitchener and Corporation of the Township of Wilmot) approximates the carrying value due to the short term nature of the loan. 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 CorporationÓs 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, 2021, no customers accounted for more than 1% of total accounts receivable, $21,269. 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, 2021 is $250 (2020 - $500). The allowance was decreased due to an expected decrease in Covid-19 related bad debt. An impairment gain of $127 (2020 loss of $793) was recognized during the year. This is due to lower than expected bad debt related to COVID-19 and a reduction of the allowance for bad debt from $500 to $250 resulting from the lessening of economic impacts caused by the pandemic 32 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 23. Financial instruments and risk management (continued): (a) Credit risk (continued): The CorporationÓs credit risk associated with accounts receivable is primarily related to payments from distribution customers. At December 31, 2021, approximately $112 (2020 - $314) is considered 60 days past due. The Corporation has over 100 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, 2021, the Corporation holds security deposits in the amount of $14,205 (2020 - $14,778). (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 CorporationÓs distribution business is derived using a complex formulaic approach which is in part based on the forecast for long- term Government of Canada bond yields. This rate of return is approved by the OEB as part of the approval of distribution rates. The Corporation does not hold any long-term debt that is subject to market rates. Consequently a 1% increase or decrease in the interest rate at December 31, 2021 would have no financial impact. (c) Liquidity risk: The Corporation monitors its liquidity risk to ensure access to sufficient funds to meet operational and investing requirements. The CorporationÓs 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 $35,000 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, 2021, no amounts had been drawn under Bank of Montreal credit facility (2020 - $ nil). The Corporation also has a bilateral facility for $35,000 (the ÐLCÑ 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 (2020 - $35,000). The majority of accounts payable, as reported on the balance sheet, are due within 30 days. The CompanyÓs currently available liquidity is also expected to be sufficient to address any reasonably foreseeable impacts that the COVID-19 pandemic may have on the CompanyÓs cash requirements. 33 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 23. 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 CorporationÓs definition of capital includes shareholderÓs equity and long-term debt. As at December 31, 2021, shareholderÓs equity amounts to $172,253 (2020 - $165,714) and long- term debt amounts to $76,963 (2020 - $76,963). 24. Revenue from Contracts with Customers: The Corporation generates revenue primarily from the sale and distribution of electricity to its customers. Other sources of revenue include performance incentive payments under CDM programs 20212020 Revenue from Contracts with Customers252,110$ 284,230$ Other Revenue: CDM programs1,262 727 Other1,534 1,524 Total $ 286,481254,906$ In the following table, revenue from contracts with customers is disaggregated by type of customer. 20212020 Residential111,252$ 127,780$ Commercial137,661 153,515 Large Users1,565 1,346 Other1,632 1,589 Total Revenue252,110$ 284,230$ 34 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 25. Changes in accounting policies: The International Accounting Standards Board (IASB) has issued the following Standards, Interpretations and Amendments to Standards that were adopted by the Corporation effective January 1, 2021: a) Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS9, IAS 39, IFRS 7, IFRS 4, and IFRS 16) b) COVID-19 Related Rent Concessions (Amendment to IFRS 16) The amendments and clarifications did not have an impact on the financial statements. 26. Future accounting pronouncements: At the date of authorization of these financial statements, several new, but not yet effective, Standards and amendments to existing Standards, and Interpretations have been published by the IASB. None of these Standards or amendments to existing Standards have been adopted early by the Company and it is still to be determined if any will have a material impact on the Company's financial statements. (a) Property, Plant and Equipment - Proceeds before Intended Use (Amendments to IAS 16) On May 14, 2020, the IASB issued Property, Plant and Equipment - Proceeds before Intended Use (Amendments to IAS 16). The amendments clarify that proceeds from selling items before the related item of Property, Plant and Equipment is available for use should be recognized in profit or loss, together with the cost of producing those items. The amendments are effective for annual periods beginning on or after January 1, 2022. Early adoption is permitted. (b) Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37) On May 14, 2020, the IASB issued Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37). This amendment clarifies which costs are included as a cost of fulfilling a contract when determining whether a contract is onerous. The amendments are effective for annual periods beginning on or after January 1, 2022 and apply to contracts existing at the date when the amendments are first applied. Early adoption is permitted. 35 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 26. Future accounting pronouncements (continued): (c) Annual Improvements to IFRS Standards 2018 -2020 On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards 2018 -2020. The amendments are effective for annual periods beginning on or after January 1, 2022. Early adoption is permitted. IFRS 9 Financial Instruments Clarifies which fees are included for the purpose of performing the `10 per cent test' for derecognition of financial liabilities. IFRS 16 Leases Removes the illustration of payments from the lessor relating to leasehold improvements. The impact of adoption of these improvements is not expected to have an impact on the business. (d) Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) On February 12, 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements and an update to IFRS Practice Statement 2 Making Materiality Judgements to help companies provide useful accounting policy disclosures. The key amendments to IAS 1 include a requirement for companies to disclose their material accounting policies rather than their significant accounting policies; clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a companyÓs financial statements. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. (e) Definition of Accounting Estimate (Amendments to IAS 8) On February 12, 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS8). The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy. The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. 36 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 26. Future accounting pronouncements (continued): (f) Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction - Amendments to IAS 12 Income Taxes. On May 7, 2021, the IASB issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12). The amendments narrow the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision. The amendments are effective for annual periods beginning on or after January 1, 2023. Earlier adoption is permitted. 27. Impact of COVID-19 Pandemic On March 11, 2020, the World Health Organization declared that the COVID-19 outbreak was a global pandemic. In response, the Ontario Government implemented a number of emergency orders and/or other legislation to address the COVID related risks and support customers. On March 25, 2020, the OEB established a deferral account for regulatory balances to record the costs of changes to billing systems resulting from the Ontario GovernmentÓs TOU emergency order, other incremental costs and lost revenues associated with the COVID-19 pandemic. On June 17, 2021, the OEB Staff released their report on the COVID-19 deferral accounts which introduces certain criteria to that may need to be satisfied for amounts to be eligible for recovery. On December 22, 2020, the Ontario Government amended O. Reg. 95/05 Classes of Consumers and Determination of Rates, setting both the TOU rates for on-peak, mid-peak, and off-peak and tiered rates at the TOU off-peak rate of 8.5 cents per kWh. That regulatory amendment was effective through February 22, 2021. On February 23, 2021, residential and small business customers resumed paying TOU and tiered pricing under the RPP at prices that were set by the OEB. In light of the COVID-19 pandemic, new stay at home measures were introduced in Ontario on April 8, 2021 and the OEB ordered a ban on issuing disconnection notices to residential customers until May 6, 2021, which was extended until June 2, 2021. The Corporation extended its ban on disconnecting residential and low volume customers until the transition back into the OEBÓs annual recurring winter disconnection ban on November 15, 2020. On June 17, 2021, the OEB issued its report on the Regulatory Treatment of Impacts Arising from the COVID-19 Emergency. The Corporation has assessed the balances recorded in the deferral account and has made no changes as a result of the report. The financial impacts of COVID have been reflected in the financial statements. While the pandemic has resulted in incremental operating costs and lost revenues, the Company has evaluated the impact on the financial results as at and for the year ended December 31, 2021 and has determined that there was no material impact. 37 KITCHENER-WILMOT HYDRO INC. Notes to Financial Statements Year ended December 31, 2021 (Expressed in thousands of dollars) 27. Impact of COVID-19 Pandemic (continued): The Company continues to monitor and assess the impact of COVID to the CompanyÓs financial results and operations. Potential adverse impacts of the pandemic include, but are not limited to changes in cash flows, working capital and debt requirements. 28. Comparative Figures: Certain comparative figures have been reclassified for conform with the current periodÓs presentation. 38