Annual Report 2009 by Kiel Edge

HALDIMAND COUNTY UTILITIES INC.

ANNUAL REPORT 2009

TABLE OF CONTENTS HCUI CORPORATE STRUCTURE

2009 BOARD OF DIRECTORS

HALDIMAND COUNTY UTILITIES INC. HALDIMAND COUNTY HYDRO INC. HALDIMAND COUNTY ENERGY INC. HALDIMAND COUNTY GENERATION INC.

4 4 4 4

MANAGEMENT TEAM

MESSAGE FROM THE CHAIR

MESSAGE FROM THE PRESIDENT &CEO

MANAGEMENT DISCUSSION AND ANALYSIS

AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS

HCUI CORPORATE STRUCTURE

HALDIMAND COUNTY UTILITIES INC. Holding Company

HALDIMAND COUNTY ENERGY INC.

HALDIMAND COUNTY HYDRO INC.

HALDIMAND COUNTY GENERATION INC.

Services Company

Distribution Company

Generation Company

Haldimand County Utilities Inc. is the Holding Company for the Distribution, Services, and Generation Companies. The Corporation was formed in October 2000 following provincial government legislation, by amalgamating the former Hydro Electric Commissions of Dunnville, Haldimand and east portion of Nanticoke. Haldimand County holds 100% of the shares of the Holding Company, which in turn holds 100% of the shares of each of the Distribution, Services and Generation Companies.

2009 BOARD OF DIRECTORS Haldimand County Utilities Inc. Albert Marshall, Chair Councillor Buck Sloat, Vice-Chair Councillor Tony Dalimonte Peter D. Smuk Robert M. Hunsinger Mayor Marie Trainer

November 1, 2009 - Present April 1, 2005 – Present October 1, 2009 – Present July 1, 2007 – Present November 1, 2000 – October 31, 2009 December 1, 2003 – September 30, 2009

Haldimand County Hydro Inc. Albert Marshall, Chair Councillor Buck Sloat, Vice-Chair Councillor Tony Dalimonte Peter D. Smuk Alec Cowan Fred Moodie Brian Snyder Barbara Schmidt Robert M. Hunsinger Mayor Marie Trainer Craig R. Sitter

January 1, 2007 - Present April 1, 2005 – Present October 1, 2009 – Present August 24, 2005 – Present July 1, 2007 – Present November 1, 2009 - Present January 1, 2007 – Present July 1, 2009 – January 25, 2010 November 1, 2000 – October 31, 2009 December 1, 2003 – September 30, 2009 January 1, 2006 – March 13, 2009

Haldimand County Energy Inc. Albert Marshall, Chair Councillor Buck Sloat, Vice-Chair Councillor Tony Dalimonte Peter D. Smuk Robert M. Hunsinger Mayor Marie Trainer

November 1, 2009 - Present April 1, 2005 – Present October 1, 2009 – Present July 1, 2007 – Present January 1, 2004 – October 31, 2009 April 1, 2005 – September 30, 2009

Haldimand County Generation Inc. Albert Marshall, Chair Councillor Buck Sloat, Vice-Chair Robert M. Hunsinger

December 15, 2009 - Present January 1, 2007 – Present January 1, 2004 – October 31, 2009

MANAGEMENT TEAM President & CEO

Lloyd E. Payne, P. Eng., M.B.A.

Consumer Services Manager

R. Jane Albert

Engineering Manager

Ed Galinski, P. Eng.

Finance Manager

Jacqueline A. Scott

Operations Manager

Doug Curtiss, P. Eng.

MESSAGE FROM THE CHAIR Haldimand County Utilities and its subsidiary companies (collectively referred to as “HCU”) provide service to the second largest geographic area in Ontario. We have over 20,000 customers across an area of 1252 sq km (483 sq miles). This very large area combined with low customer density brings a number of distinct challenges. 2009 was a financial success for HCU. We saw a significant jump in our net income despite the tough economic times and reduced demand resulting from conservation efforts. It should be noted that this significant jump in net income is the result of a unique situation where Hydro One used our system to carry a substantial power load. The extraordinary revenue earned from this situation will not continue into 2010. This should not downplay the success of the HCU team in operating an efficient and effective utility. This success is also the result of the work and dedication of our employees at the HCU group of companies. A dividend in the amount of $515,808 was paid to the shareholder during 2009. Based upon the 2009 net income a dividend of $691,445 has been declared by the Board for payment in 2010. This will bring the total dividend payments since incorporation in 2000 to $3,057,562. This is an exciting time in the energy business. The industry was restructured in 2000 and in May of 2009 the “Green Energy and Green Economy Act, 2009” (Green Energy Act) was passed. This has significantly changed the responsibilities of municipal electric utilities. With the continued introduction of regulations under the act the full extent of these changes is not yet known. We accomplished good results with our conservation and demand management (“CDM”) programs. CDM have become a condition of our licence. The team at HCU has not only been providing these programs locally but because of their expertise Haldimand County Hydro has been providing leadership provincially in the development of these CDM programs. This Green Energy Act encourages and facilitates the development of distributed renewable generation which is already being deployed across our County and elsewhere. This act mandates that HCU make significant capital upgrades to our electrical distribution grid, “Smart Grid”. This mandated upgrading will have significant impact on HCU’s capital expenditures. The province’s plan to move to time of use rates is to encourage the shifting of electrical use to off peak time periods. To that end, we have installed 17,789 smart meters in Haldimand in 2009. We are continuing to develop and implement the infrastructure and support systems that will allow these meters to be read remotely and for the information to be processed and utilized. Customers continue to be billed in the normal way. We anticipate that we will begin the move to time of use billing in 2011. 6

A major initiative by the Ontario Energy Board involves subjecting each of the approximately 80 electrical distribution utilities in the province to detailed â&#x20AC;&#x153;Cost of Serviceâ&#x20AC;? regulatory scrutiny over a 4 year period. Haldimand completed this lengthy process with the results effective May 1, 2010. Haldimand County Energy Inc. continues the operation of the sentinel light rental program during 2009. Rental rates were last increased by 3% effective January 1, 2008 for the 1st time in 4 years. The corporation also provides water and sewer billing services to Haldimand County. Our capital programs continue to focus on safety and reliability across our service area. I would like to thank those individuals who serve on our various boards of Directors for their contribution towards our success. I would like to recognize three board members who left us during 2009, former Chair Bob Hunsinger, Mayor Marie Trainer and Craig Sitter. We are fortunate to have a great team of employees who show dedication to excellence, to workplace safety and to serving our customers. Thank you to them. Albert Marshall Chair

MESSAGE FROM THE PRESIDENT & CEO Haldimand County Hydro undertook itâ&#x20AC;&#x2122;s largest ever capital works during 2009 with a $7.0 million capital program, up from $4.6 and $2.9 million in 2008, and 2007 respectively. This included $2.8 million for the smart meter project. The installation of smart meters will have a profound impact on the company and our customers. Smart meters have the capability to measure how much electricity is used on an hourly basis and the time of day that it is used. Consumers will have the ability to save money when they shift consumption to periods of the day or week when electricity prices are lower. Time of use rates, to be implemented in 2011, will better reflect the actual cost of electricity which fluctuates from periods of low to high demand each day. Smart meters will also enable improved outage management and response capabilities as well as expedited access to operational data in order to facilitate more efficient operation of the distribution system. A new billing system commenced live operation on March 1, 2009, eleven months after the contract was awarded on April 3, 2008. This major undertaking was successfully completed without significant issues or impact to customer service. Haldimand County Hydro, in cooperation with the Ontario Power Authority, remains an active supporter and provider of energy conservation initiatives in our community. New in Haldimand County for 2009 was the Power Saving Blitz program through which 413 small businesses benefitted up to $1000 by having energy efficient lighting installed and which elicited the familiar comment â&#x20AC;&#x153;too good to be trueâ&#x20AC;?. Capital works during 2009 included completing the conversion to 27,600 volts of line sections on Central Lane, Dunnville as well as certain lines in the vicinity of Moulton Sherbrooke Townline Road. Both conversion projects were undertaken to improve reliability, voltage, and electrical efficiency by reducing electrical losses. New line was constructed along the lakeshore in the vicinity of Melville Lane in order to improve reliability and outage restoration times by eliminating back lot primary lines. The multi-year project started in 2007 to construct a new line between Jarvis Transformer station and Hagersville was completed early in 2009. On May 15, 2009 the Ontario Energy Board approved the sale of two line sections from Hydro One to Haldimand County Hydro as follows: part of the Argyle F2 feeder involving approximately 6.6 km of 8 kV line, excluding poles; and the single phase line along Onondaga Townline Road, between Greens Road and Haldimand Road 54 comprised of approximately 2.8 km of one phase 4.8 kV line, excluding poles These assets cost $123,960, including separation costs, and ownership of these line sections will improve operational efficiency and facilitate future elimination of certain charges from Hydro One. 8

A new 4 year collective agreement was signed with IBEW Local 636 commencing April 1, 2009 and expiring March 31, 2013. The distribution system maintenance and inspection program continued in 2009. It remains focused on reliability while recognizing the challenges of operating a distribution system with low customer density and rural geography. Significant activities included maintaining Dunnville Distribution Station, continuing with the inspection of off road distribution lines accessible only by track mounted aerial equipment, voltage regulator maintenance, and hydraulic recloser maintenance. The ongoing program to test all poles within Haldimand County resulted in replacement of 77 defective poles during the year. This program and the annual tree trimming program are positively impacting reliability of the electricity system for all customers. Tree trimming takes place on a 5 year cycle over which all of Haldimand County is covered and during 2009 the fourth year of the second cycle occurred with tree trimming in Dunn, South Cayuga, North Cayuga, and Rainham. The identification and removal of PCB contaminated transformers from the distribution system continued in 2009 with 12 of these transformers being removed from service. This removal activity will continue over the next five to ten year period, and will eliminate PCBs from the Haldimand County Hydro service territory. Haldimand County Hydro currently has five operating distribution substations (DSs) and one regulating station in service, most of which are approaching 50 years of age and nearing their end of life expectancy. As part of the Corporationâ&#x20AC;&#x2122;s long-term plan to remove DSs from service by converting the service territory to a higher voltage, Selkirk North DS was permanently removed from service in late 2009. As stations are removed from service they are screened for contaminants and remediated accordingly. In 2009 a record of site condition was submitted for the former Forest DS site in Dunnville. This leaves two sites out of service, requiring future environmental assessment and possible remediation â&#x20AC;&#x201C; the former Nanticoke DS and Selkirk North DS. A vacant property at 15 John Street in Hagersville was environmentally assessed and remediated in 2009 with a record of site condition submitted to the Ministry of the Environment in December 2009. As the electrical industry continues to evolve and adapt to the most recent round of legislative changes, I wish to commend the staff of Haldimand County Hydro for their determined focus on all aspects of customer service and vigilant attention to safety. They have done an outstanding job. Lloyd E. Payne, P. Eng., MBA President & CEO

MANAGEMENT DISCUSSION AND ANALYSIS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, related Note disclosures and Auditor’s Report, as at and for the year ended December 31, 2009. This discussion may contain forward looking statements that are subject to risks, uncertainties and assumptions based on information available as at the date of this report. Management does not intend to update this information and disclaims any legal obligation for actual results that vary from those implied.

HALDIMAND COUNTY UTILITIES INC. In response to the restructuring and deregulation of Ontario’s electricity industry, and pursuant to the Energy Competition Act (Ontario), 1998 (the “Electricity Act”), Haldimand County Utilities Inc. (the “Corporation”) was incorporated under the Ontario Business Corporations Act. The hydro-electric commissions of the former municipalities of Haldimand and Dunnville and divided City of Nanticoke transferred at book value, their assets and liabilities to the Corporation, effective November 1, 2000. The sole shareholder of the Corporation is the Municipality of Haldimand County (the “County”). The Electricity Act and its enabling regulations distinguish between, and require the separation of, regulated electricity businesses from non-regulated business activities. The Corporation is a holding company, which wholly owns the following subsidiaries: Haldimand County Hydro Inc. (“HCHI”), which distributes electricity to residents and businesses within the County. Haldimand County Energy Inc. (“HCEI”), which provides non-regulated water and sewer billing, collecting, and customer care services to the County, as well as sentinel light rentals to its customers. Haldimand County Generation Inc. (“HCGI”), which is currently an inactive company. The Corporation’s principal business is the regulated distribution of electricity by HCHI. The Consolidated Financial Statements include results for both the regulated and non-regulated business activities of its subsidiaries. The electricity distribution business of the Corporation represented approximately 99% (2008 99%) of consolidated assets and 99% (2008 - 99%) of consolidated revenue and other income at year-end. 10

The Corporation earns revenue from this business by charging its customers for the use of the distribution system. Such electricity distribution charges comprise a fixed monthly service charge combined with a variable (volumetric) charge based on electricity consumption (usage). The distribution rate charged is designed to recover the costs incurred by HCHI in delivering electricity to customers and a rate of return on deemed common equity, which is subject to the approval of the provincial regulator, the Ontario Energy Board (the “OEB”). The business distributes electricity through approximately 1,731 kilometres of distribution lines to approximately 20,900 residential and business customers. The distribution system serves most of the residents and businesses within the borders of the County, covering a service territory in the order of 1,252 square kilometres. At the end of 2009 there were 6 (2008 – 18) HCHI customers supplied from the lines of other electricity distributors; conversely, HCHI supplied 130 (2008 – 129) customers outside our service territory for other distributors. Such customer supply arrangements are referred to as “long term load transfers”, and the OEB, in accordance with their Distribution System Code, has proposed such arrangements be eliminated before June 30, 2014. 2009 Customers, Consumption and Distribution Revenue by Rate Class Rate Class

Residential General Service < 50 kW General Service 50 kW to 4999 kW Sentinel Lighting * Street Lighting * Unmetered Scattered Load * Total

No. of Customers 18,309 2,381 146 4 82 20,922

Consumption (kWh) % 168,226,691 42.6 57,269,262 14.5 165,815,591 42.0 467,767 0.1 2,312,050 0.6 481,502 0.1 394,572,863 100.0

Distribution Revenue ($) $ 7,584,893 $ 1,775,022 $ 3,779,738 $ 20,871 $ 85,892 $ 19,713 $ 13,266,129

% 57.2 13.4 28.5 0.2 0.6 0.1 100.0

* Sentinel Lights, Street Lights and Unmetered Scattered Loads are billed based on number of "connections", at 656, 2,878 and 84 respectively

ELECTRICITY DISTRIBUTION REGULATION The OEB has regulatory oversight of electricity matters in the Province, which includes the power to issue a distribution licence, mandatory for any entity owning or operating a distribution system. The OEB may prescribe licence requirements and conditions including, among other things, specified accounting records, regulatory accounting principles, separation of accounts for affiliate businesses and filing/process requirements for rate-setting purposes. The Ontario Energy Board Act, 1998 (the “Ontario Energy Board Act”) gave the OEB increased powers and responsibilities, including the power to approve or fix rates for the transmission and distribution of electricity, and the responsibility for ensuring that distribution companies fulfill obligations to connect and service customers. In its approval to set rates, the OEB has the authority to specify 11

regulatory treatments that may result in accounting treatments that differ from Canadian generally accepted accounting principles for enterprises operating in a non-rate regulated environment. The OEB has the general power to include or exclude costs, revenues, losses or gains in the rates of a specific period, resulting in a change in the timing of accounting recognition from that which would have applied in an unregulated company. Such change in timing involves the application of rate-regulated accounting, giving rise to the recognition of regulatory assets and liabilities. The Corporation’s regulatory assets represent amounts receivable from customers in the future and costs that have been deferred for accounting purposes because it is probable that they will be recovered in future rates. The Corporation’s regulatory liabilities represent costs with respect to non-distribution market related charges and variances in recoveries that are expected to be settled in future periods. Pursuant to industry regulation, HCHI is required to be the default billing and collecting agent for all electricity related charges for all electricity participants, which, in addition to its own electricity distribution service charges, include: Electricity Price and Related Rebates – the commodity cost of electricity, settled through the Independent Electricity System Operator (“IESO”), accruing to generators such as the provincially owned Ontario Power Generation Inc. (“OPGI”). The IESO is responsible for overseeing and operating the wholesale market as well as ensuring the reliability of the integrated power system. The commodity cost of energy for certain lowvolume and designated customers is based on the OEB’s Regulated Price Plan (“RPP”), which consists of a two-tiered pricing structure with seasonal thresholds. Unexpected shortfalls or overpayments associated with the RPP are temporarily financed by the Ontario Power Authority (“OPA”). Prices are reviewed every six months and may change based on an updated OEB forecast and any accumulated difference between the amount that customers paid for electricity and the amount paid to generators in the previous period. Customers who are not eligible for the RPP and wholesale customers pay the market price for electricity, and receive an adjustment for the difference between the market price and set prices paid to certain regulated and contract generators. Retail Network and Connection Transmission Rates – wholesale costs incurred by distributors in respect of transmission of electricity from generating stations to local areas. Retail transmission rates are regulated by the OEB. Wholesale Market Service Charge – wholesale market support costs charged to market participants such as the IESO fees and uplift charges. These charges are also regulated by the OEB.

Debt Retirement Charge (“DRC”) – provincial charge directed to the repayment of the stranded debt obligations of the former Ontario Hydro, which continue in the Ontario Electricity Financial Corporation (the “OEFC”), an agency of the Ontario government. These other non-distribution charges represent “pass through” charges and the Corporation must remit them to other industry participants regardless of whether such charges are ultimately collected from customers. With the exception of DRC, electricity distribution companies are exposed to losses for entire amounts billed to customers. As a market participant, HCHI is required to satisfy and maintain prudential requirements with the IESO, which include credit support with respect to outstanding market obligations in the form of a letter of credit. The Corporation collects cash and cash equivalent deposits from certain customers and retailers of electricity to reduce credit risk. It is also the policy of the Corporation to discontinue service for non-payment of customer accounts. In addition to the oversight role of the OEB, and the market monitoring and coordination role of the IESO, the OPA was created through the Electricity Restructuring Act, 2004 to ensure the long-term supply of electricity, facilitate load management and conservation, and assist with the stability of rates for RPP customers, among others. In 2009, the OPA continued to be responsible for coordinating the delivery and funding of conservation and demand management (“CDM”) programs. In 2007 HCHI entered into agreements with the OPA to deliver OPA-funded CDM programs during the years from 2007 to 2010. All programs are fully funded by the OPA and, as at December 31, 2009 HCHI has spent in the order of $297,000 (2008 - $166,000) on these programs. During 2009, HCHI received in the order of $42,000 on account of management fees and bonuses earned with respect to the delivery of the 2008 programs. Bill 150, the Green Energy and Green Economy Act, 2009 (the “Green Energy Act”), was enacted on May 14, 2009. On September 9, 2009, Schedules amending the Electricity Act and the Ontario Energy Board Act were proclaimed into force. This legislation and supporting regulations expedites the growth of clean, renewable sources of energy, strengthens the province’s commitment to energy conservation, and enables the development of a smart grid. The OPA launched the much-anticipated Feed-in Tariff (the “FIT”) program and began accepting FIT applications on October 1, 2009. The FIT program provides for 20 year contracts (40 years for waterpower) offering price guarantees for energy generated from renewable energy sources, including solar, wind, biogas, biomass, landfill gas and hydro. The FIT pricing schedule guaranteed payments range from 10.3 cents/kWh for landfill gas projects larger than 10 MW to 80.2 cents/kWh for residential solar rooftop projects 10 kW or smaller.

An amendment to the deemed licence conditions of the Ontario Energy Board Act requires that distributors provide priority connection access for qualified renewable energy generation facilities and prepare plans for approval by the OEB that identify expansion or reinforcement of the distribution system required to accommodate the connection of renewable energy generation facilities. The amendments to the Distribution System Code (“DSC”), finalized on October 21, 2009, revised the OEB’s approach to assigning cost responsibility between a distributor and a generator for the connection of renewable energy generation facilities. For generators that are connecting directly to a distribution system, connection asset costs will continue to be borne by the generators, while distributors will be required to fund all requested expansion costs up to a cap of $90,000/MW per project with generator paying the rest, and all renewable enabling improvements. On April 26, 2010, The Minister of Energy and Infrastructure issued a Minister’s Directive to the OEB to take steps to establish electricity CDM targets for Ontario’s electricity distributors, a further deemed licence condition. The Directive establishes two key CDM targets for distributors to meet over the next four years – the shaving of 1,330 MW of provincial peak demand and 6,000 GWh of reduced electricity consumption. The government has also directed the OPA to advise the OEB on assigning conservation targets. The Energy Conservation Responsibility Act, 2006 furthers the broad objectives of CDM by providing the framework for the installation of smart meters in all homes and small businesses in Ontario by the end 2010. These meters will be capable of measuring and reporting usage over predetermined periods, being read remotely, and when combined with communications systems will be capable of providing customers with access to information about their consumption. In 2007, the Province appointed the IESO as the smart meter entity that will oversee the collection and management of data. Local Distribution Companies (LDCs), including HCHI, are accountable for the development of smart meter infrastructure and related technology for communications to meet minimum requirements as defined in regulations, as well as the implementation of time of use (“TOU”) rates that are presently voluntary. The Corporation has installed 17,789 smart meters as of the end of 2009, representing 86% of the total number of smart meters required to be installed. Four communication tower stations were added throughout the County in 2009. As of the end of 2009, HCHI has spent in the order of $3.0 million of its budgeted $4.3 million for smart meter initiative expenditures. Until such time as HCHI is able to take an application to the OEB for the approval and recovery of these capital and operating costs, they are being accumulated in OEB-approved deferral accounts. In the interim, a smart meter funding adder in the amount of $1.00 per metered customer per month, effective April 1, 2009 ($0.26 cents effective April 1, 2006) has been included in rates to partially offset this significant investment. Rate recoveries totaling $337,000 have been received as of the end of 2009.

ELECTRICITY DISTRIBUTION RATES In 2006 the OEB commenced a process of establishing an Incentive Regulation Mechanism (“IRM”) multi-year electricity distribution rate-setting plan for the years 2007 to 2010, and subsequently extended to 2011. Incentive based regulation is a methodology to encourage utility management to be efficient in the running of their business, including benchmarking for the comparison of distributor costs (a continuation of the former comparators and cohorts review), a comprehensive electricity distribution rate design review, and service quality regulation review. The process includes a formulaic approach to establishing 2007 and subsequent rates with a rate rebasing approach to be staggered across all Ontario LDCs between 2008 and 2011. Rebasing is essentially a review of all utility costs, requiring the submission of a comprehensive full cost of service application based on a forward test year to set new distribution rates. The Corporation’s ability to continue to maintain and operate the distribution system reliably and safely in the future will depend on, among other things, the OEB allowing recovery of costs in respect of the Corporation’s maintenance program and capital expenditure requirements. On August 28, 2009 HCHI filed its cost of service rate rebasing application for rates to be effective May 1, 2010. On March 31, 2010 the OEB issued its Decision and Order, which followed on April 26, 2010 with its Rate Order with respect to that application. The Decision approved rates to recover a revenue requirement of $12,646,747. This revenue requirement reflects the OEB’s cost of capital report issued in December 2009 which reset the return on equity (“ROE”) formula resulting in a base ROE of 9.75%, which was further updated in February 2010 to 9.85%. The approach for setting 2008 and 2009 rates, under the 2nd generation IRM process, was based upon an OEB-approved formula that considered inflation less a productivity factor, utilizing existing Board-approved 2006 rate classifications, rates and charges. In October 2007, HCHI filed its application for 2008 distribution rates, to be effective May 1, 2008. This application provided for a 2.88% decrease to the distribution portion of the average residential bill. The OEB issued its Decision on March 18, 2008 and Order on April 22, 2008 approving the applied-for tariff of rates and charges. Similarly, in November 2008, HCHI filed its application for 2009 distribution rates, to be effective May 1, 2009. This application provided for a 1.89% increase to the distribution portion of the average residential bill. The OEB issued its Decision and Order on March 11, 2009 approving the applied-for tariff of rates and charges.

RESULTS OF OPERATIONS Year Ended December 31, 2009 compared to Year Ended December 31, 2008

Revenues

2009

2008

Distribution Services

$ 13,266,129

11,586,587

Other Operating Revenue

$ 1,442,046

2,224,810

$ 14,708,175

13,811,397

Distribution Services Distribution service revenues are primarily influenced by our distribution rates and the amount of electricity we distribute. Net distribution service revenues increased in 2009 in the order of $1,680,000 as compared to last year as a result of the combination of: (i) a new billing situation commencing in March 2009 with an embedded distributor, Hydro One Networks Inc. (“HONI”), and (ii) an overall reduction in load relating to regular customer classes. i. HONI chose not to upgrade certain of their wholesale meter points located within HCHI’s service territory, requiring HCHI to bill these as retail embedded supply points; as well, a portion of load of a large customer of HONI’s came online to HCHI’s system. In the absence of a distribution rate specific to this embedded distributor class, HCHI settled with HONI applying its general service 50 kW to 4999 kW rate class charges. The cost of service rate application for rates to be effective May 1, 2010 included a request for a new embedded distributor rate class which includes a substantially lower distribution wheeling service rate applicable to this class (versus the general service distribution volumetric rate). ii. This increase in distribution revenue however, was offset to some degree due to reduction in load across the regular rate classes. This volumetric (usage based) component of distribution revenue, excluding the HONI embedded load, comprised approximately 73% (2008 – 71%) of the total. Consumption decreased in 2009 to approximately 339 million kWh (2008 – 352 million kWh). The volume of electricity consumed by HCHI’s customers during any given period is governed by events largely outside HCHI’s control – primarily sustained periods of hot or cold weather, which increase the consumption of electricity, and sustained periods of moderate weather which decrease the consumption of electricity; economic activity and the effects of energy conservation. Accordingly, there can be no assurance that HCHI will earn the revenue requirement approved by the OEB.

Revenue from the sale of electricity is recorded on the basis of cyclical billings and also includes unbilled revenue accrued in respect of electricity delivered but not yet billed. The Corporation estimates the monthly revenue for the period based on wholesale power purchases because customer meters are not generally read at the end of each month. Services and other operating revenue are recognized as services are rendered. Other Operating Revenue includes various sources of revenue as listed in Note 9 accompanying the Consolidated Financial Statements. Total other operating revenues decreased in 2009 in the order of $783,000 as compared to 2008. Interest earned accounted for most of this revenue decrease. In 2008, a cumulative adjustment calculated back to May 2002, in the order of $956,000, on account of the carrying charges associated with the OEB deferred regulatory asset accounts was recognized. The Corporation continues to provide municipal water and sewer billing, collecting, and customer care services to the County. Pursuant to a formal agreement effective April 1, 2003, for the provision of these services between the County and the Corporation, this contract was renewed with no rate increase effective April 1, 2009 ($4.10 effective April 1, 2008). Due to the nature of these services, the agreement is with HCEI, the non-regulated retail services subsidiary, which has further entered into an agreement with HCHI for the provision of these services on behalf of HCEI. Pole rental revenue increased in the order of $50,000 due to increasing the accrual for one tenant that lagged two years in billings, and the addition of a new tenant in 2008 not previously accrued for. As noted above, OPA CDM fees in the order of $42,000 on account of the 2008 programs were recognized in 2009. Miscellaneous income includes the long-term load transfer amounts received from Hydro One Networks Inc. and Norfolk Power Distribution Inc. 2009 also includes short-term load transfer amounts with Hydro One Networks Inc. in the order of $106,000 due to feeder switching during the year. Expenses

2009

2008

Operating Expenses

$ 7,121,588

7,176,085

Amortization

$ 2,691,623

2,453,156

Interest Expense

697,784

792,245

$ 10,510,995

10,421,486

Operating Expenses include Distribution, Billing and Collecting, General Administration and Directors. Similar to 2008, expenditures necessary to operate and maintain the distribution system were budgeted to increase during 2009; however they were both slightly lower than the forecasted total. Significant operating activities, including departmental projects contributing to these expenses, include the following: a) HCHI continued with its Distribution System Maintenance and Inspection program in 2009. HCHI remains focused on reliability while recognizing the challenges in operating a distribution system with low customer density and rural geography. Maintenance was carried out while also managing the impact of disturbances. Significant maintenance activities included maintaining Dunnville Distribution Station, continuing with the inspection of off road distribution lines only accessible by track mounted aerial equipment, regular maintenance, and hydraulic recloser maintenance. b) HCHI has committed to the identification and removal of PCB contaminated transformers from its distribution system. In 2009, 12 of these transformers (2008 – 21) were removed from service. This removal activity will continue over the next five to ten year period, and will eliminate PCBs from HCHI’s service territory. c) The OEB regulates plant inspections as a requirement for all LDCs. HCHI’s program this year concentrated on the north area including the former Oneida and Seneca Townships within Haldimand County. This work includes the immediate repair of deficiencies accessible from the ground, wood pole integrity testing where required, and capturing GPS coordinates for each pole location. Major deficiencies are noted for further engineering work and the GPS coordinates are used to plot each pole on HCHI’s mapping and geographical information system (GIS). This GIS system, when fully populated, will enable future enhancements in HCHI’s asset management strategy. As of the 2009 year-end this program has identified and documented approximately 24,376 poles. d) As part of a five-year cycle, line clearing of trees continued in 2009. This work concentrated on the former townships of Dunn, South Cayuga, North Cayuga, and Rainham. Other specific areas where growth exceeded the five year schedule were also cleared. This program continues to be very effective in reducing tree-related power interruptions.

e) HCHI currently has five operating distribution substations (DSs) and one regulating station (RS) in service, most of which are approaching 50 years of age and nearing their end of life expectancy. i. As part of the Corporation’s long-term plan to remove DSs from service by converting the service territory to 27.6 kV, Selkirk North DS was permanently removed from service in late 2009 (part of 2009’s capital projects). As stations are removed from service the sites are screened for contaminants and remediated accordingly. ii. In 2009 a record of site condition was submitted for the former Forest Street DS site in Dunnville (remediated in 2008). This leaves two sites available for future testing and remediation – the former Nanticoke DS (removed from service in 2008) and the Selkirk North DS. iii. The former John Street DS site in Hagersville (removed from service in 2006) was tested and remediated in 2009. A record of site condition was completed in December 2009, and this vacant property located at 15 John Street was subsequently listed for sale. f) Transformer gas and oil analysis on all substation transformers was completed as part of the annual maintenance program. A number of these units are being monitored for moisture content. Moisture removal in the most severe cases will begin in the spring of 2010 with the use of a portable moisture removal system acquired for this purpose. g) In 2006 HCHI embarked on an effort to recycle and rebuild transformers to fulfill current and future requirements; that is, using parts of old units to build new units. This program continues to lower the purchase cost of transformers (compared with new units) and promotes environmental stewardship as it reuses materials that would normally enter the waste stream. The potentially hazardous nature of our business requires a strong focus on safety, which continued to be a top priority in 2009. HCHI’s focus in 2009 was to complete the development of a hazard recognition and risk assessment program. A pilot project to complete seven risk assessments to test the process was completed by the end of February 2010. The completion of this program represents a significant milestone in HCHI’s Health and Safety program. As part of HCHI’s cost of service rate application submitted in August 2009, a consultant was engaged to prepare a Distribution Asset Condition Assessment (“DACA”), which involved: Preparing an asset condition assessment of HCHI’s distribution assets divided into 10 asset groups; Completing a risk assessment for each of the asset groups and a corresponding health index for each group; Prioritizing recommendations to close data gaps; Recommending a capital program replacement plan for the next 20 years; 19

Reviewing HCHI’s maintenance practices; and Developing a methodology for prioritizing discretionary capital projects. The DACA characterized the condition of the distribution system and estimated the potential impact on expenditures over the next 20 year period. The methodology developed to prioritize capital projects was utilized in the preparation of 2010 budgets and will be a significant decision making tool in subsequent years. The Corporation employed 46 full-time employees as at the end of 2009 (2008 – 46), for a combined gross payroll, including employer portions of source deductions and employee group health benefit premiums in the order of $3.6 million (2008 - $3.6 million). There were no new staff positions created during 2009 (2008 – 0). The Line Supervisor position was vacant for 11 months during 2009, during which time a journeyperson Lineperson was stepped up to assume this supervisory role. This position was filled in December 2009. A Lineperson position became vacant in December 2009, and was filled in April 2010. The bargaining unit employees are represented by the International Brotherhood of Electrical Workers (“IBEW”) Union. The existing 39-month collective agreement expired on March 31, 2009 and collective bargaining commenced in the spring of 2009. A four year collective agreement, effective April 1, 2009 to March 31, 2013, was ratified on May 27, 2009. Increased payroll costs are a function of the 2% across the board wage increase effective April 1, 2009, and the 1% increase effective October 1, 2009 for all union and non-union employees. Amortization expense increased in 2009 in the order of $238,000 as compared to 2008. This increase is attributable to the placement of new assets in service, consistent with our ongoing capital works program including new projects, services, line extensions, routine replacement and enhancements of aging infrastructure, tools, shop and transportation equipment, and general administrative assets, net of capital contributions, in the order of $4.2 million (2008- $4.6 million). In 2009, net capital expenditures provided for the rebate of capital contributions, in the order of $108,000 (2008- $57,000), to developers on account of eligible subdivision agreements entered into after November 2000. The rebates are calculated using an economic evaluation model developed in accordance with the OEB’s Distribution System Code.

Capital Expenditures Net of Capital Contributions

Distribution Plant Assets Tools, Shop and Transportation Equipment General Administration Assets Sentinel Light Rental Units Total

$ $ $ $ $

2009 3,074,807 662,350 451,792 3,155 4,192,104

$ $ $ $ $

2008 3,969,155 102,398 811,410 6,080 4,889,043

General Administration Assets in 2008 included the development, configuration, testing and training costs associated with the Customer Information System (“CIS”) conversion from the Advanced Utility Billing CIS to the Harris Computer Systems Northstar CIS, which commenced in March 2008 culminating in a March 1, 2009 “go live” implementation. Transportation Equipment includes the carryover of a single bucket truck, budgeted in 2008, but not delivered until 2009. Interest expense decreased in 2009 in the order of $95,000 as compared to 2008. The Corporation’s primary sources of funding for capital expenditures are cash provided by operating activities, interest income and debt financing. The Corporation expected additional debt financing to be required during 2008 and entered into an Ontario Infrastructure Projects Corporation (“OIPC”) loan application in the fall of 2008. Approval for the OIPC loan application was obtained in April 2009 with the first draw down of funds, in the amount of $4.0 million on May 1, 2009. These funds, which were secured in the form of shortterm construction financing at rates throughout the year less than 1.0%, offset cash funds used for HCHI’s 2008 and 2009 capital programs. Cash was also used during the year to pay the balloon payment due in July 2009 on one of the existing debentures. Additional financing in the amount of $6.3 million was secured through the OIPC, and combined with the original advance of $4.0 million for conversion to long term debenture financing in May 2010, to offset cash funds used for the continuation of HCHI’s 2009 capital program. Results of Operations

2009

2008

Revenues

14,708,175

13,811,567

Expenses

10,510,995

10,421,486

Income before Income Taxes

4,197,180

3,390,081

Income Taxes

1,431,402

1,326,849

2,765,778

2,063,232

Net Income

The overall increase in total revenues in 2009 in the order of $897,000, combined with the increase in total expenses in 2009 in the order of $90,000 as compared to 2008, resulted in a net increase in net income before income taxes for the year. After providing for an increase in income taxes, and in particular current income taxes, net income in 2009 increased in the order of $702,000 as compared to 2008. The Corporation is currently exempt from taxes under the Income Tax Act (Canada) and the Corporations Tax Act (Ontario). However, the Corporation and each of its subsidiaries is a “municipal electric utility” (“MEU”) for purposes of the payments in lieu (“PILs”) regime contained in the Electricity Act, 1998. Accordingly, the Corporation makes payments in lieu of corporate income taxes to the OEFC (to be applied against certain debt obligations of the former Ontario Hydro). Commencing in 2008, the Corporation provides for PILs using the asset and liability method. Under this method, future 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.

Funds Generated from Operations Cash and cash equivalents increased to $7.6 million in 2009 (2008 - $3.6 million). The significant increase in cash flows from operating activities and financing activities exceeded the increase in investing in capital assets and regulatory assets.

Related Party Transactions The Corporation’s operations include the provision of electricity and services to its sole Shareholder. Electrical energy is sold to the County at the same prices and terms as other electricity customers in their rate class. Street lighting maintenance services are provided at cost. Water and sewer billing, collecting, and customer care services are provided pursuant to the agreements mentioned earlier, at rates based on the average cost to provide this service.

A summary of the reciprocal charges between the Corporation and the County is provided below. Summary of Reciprocal Charges Between the Corporation and the County Amounts Billed by the Corporation To the County Electrical Energy Distribution Service Revenue portion actually retained by HCHI Street Lighting Maintenance Water and Sewer Billing and Collecting Tree Trimming and Removals Supply, Install and Relocate poles Isolation at Caledonia Satellite Office Environmental Remediation - Forest St. DS Amounts Billed by the County To the Corporation Property Taxes Bank Service Charges - Debenture Handling

2009

2008

1,784,778

1,693,058

341,942

323,527

$ $ $ $ $ $

150,367 425,908 10,527 5,589 55,523

$ $ $ $ $

122,858 418,623 20,132 9,823 782

2009 $ $

45,105 3,295

2008 $ $

48,631 1,278

Dividends Dividends on common shares are declared at the discretion of the Board of Directors – subject to applicable law and based on direction from the Shareholder, the Board’s proposed dividend policy, and recommendations of Management with consideration for results of operations, financial condition and future outlook, cash requirements and industry practice. The Corporation declared and paid dividends in the amount of $515,808 in 2009 (2008 - $449,627) for total dividends paid to date since 2003 in the amount of $2,366,117 to its sole Shareholder, Haldimand County. Consistent with the Board’s proposed dividend policy of paying dividends based on 25% of the previous year’s net income, on April 28, 2010 the Board of Directors of the Corporation declared dividends in the amount of $691,445 to be paid in 2010. The book value of the County’s original investment of $19.1 million in 2000 has increased in the order of $12.0 million to $31.1 million as a result of operations, net of dividends paid to date, as of the end of 2009.

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying Consolidated Financial Statements of the Corporation, prepared in accordance with Canadian generally accepted accounting principles, including accounting principles prescribed by the OEB, are the responsibility of Management and have been approved by the Board of Directors (the “Board”). The significant accounting principles, including regulatory treatments, are disclosed in Note 2 to the Consolidated Financial Statements. Fulfilling this responsibility requires the preparation and presentation of consolidated financial statements and other data which necessarily involves the use of estimates and assumptions based on management’s best judgment, particularly when transactions affecting the current accounting period cannot be finalized with certainty until future periods. Accounts receivable, unbilled revenue and regulatory assets are reported based on amounts expected to be recovered. Management has exercised careful judgment where estimates were required; however, due to the uncertainty involved in making such estimates, actual results could differ from those estimates, including changes as a result of future decisions made by the OEB, the Minister of Energy or the Minister of Finance. Accordingly, these Consolidated Financial Statements reflect all information available to March 4, 2010. The Consolidated Financial Statements have been examined by Millard, Rouse & Rosebrugh, LLP, Licensed Public Accountants, external auditors of the Corporation. The Auditors’ report, which accompanies these statements, outlines the scope of their audit examination and states their opinion. Management maintains appropriate systems of internal controls designed to provide reasonable assurance that the assets of the Corporation are safeguarded, that transactions are properly authorized and that reliable financial information is relevant, accurate and timely. The internal control systems include formal corporate-wide policies and procedures and an organizational structure that provides a proper delegation of authority and segregation of responsibilities. The Board, through the Audit and Finance Committee, is responsible for ensuring that Management fulfils its responsibility for financial reporting, accounting systems and internal controls. The Audit and Finance Committee, which is comprised of the same Directors as the Corporation, meet with Management and the external auditors to review the Consolidated Financial Statements and recommends their approval to the Board.