Veridian 2007 Annual Report

powering your community veridian corporation 2007 annual report

veridian corporation 2007 annual report

contents 2 message from the president 4 message from the chair 6 investing in infrastructure 10 investing in the environment 14 investing in communities 18 fast facts 19 management discussion & analysis 24 consolidated financial statements 36 board of directors

corporate vision We will be unsurpassed in providing innovative energy solutions that are the cornerstone for creating the sustainable communities of tomorrow.

corporate mission We commit to our: Customers – To provide reliable, efficient, sustainable energy solutions and services.

Employees – To provide a safe and inspiring work environment.

Shareholders – To provide optimal value and return on investment.

Communities – To promote economic growth.

Society – To make our world a better place in which to live.

on the cover: The images depicting vehicle-to-grid and solar technologies are representations that illustrate Veridian’s vision for the sustainable communities of tomorrow.

veridian corporation 2007 annual report

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message from the president

Since its inception, Veridian has taken the view that providing safe and reliable electricity is just the beginning of its responsibility to the communities it serves.

While we believe this is indeed what municipal Shareholders should expect from their local distribution company, we also think they should expect a whole lot more.

That’s why, every year, Veridian makes significant investments in the communities it serves. For example, we continually invest in our infrastructure, ensuring there is always a safe, reliable and sustainable source of electricity for all our customers, at a fair price. Through a $13.7 million capital expenditure plan established last year, for example, we continued to optimize our distribution system so that operational efficiencies translate into reasonable rates for our customers.

In 2007, Veridian’s distribution rates were increased by just 1.5 percent

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veridian corporation 2007 annual report

for the average residential customer, well below the rate of inflation.

In order to deliver a predictable and sustainable source of revenue back to our municipal Shareholders in the form of annual dividends, we also invest our money wisely. In 2007, I’m proud to say that return on Shareholder equity was 10.2 percent and that interest and dividend payments totalled $8.6 million. Our Shareholders invest these dividends in many different ways; and on page 15, we highlight what the City of Belleville is doing to reinvest its dividends back into the community in the form of a unique recruitment program for local doctors.

While our Shareholders invest in their communities, we too are committed to investing in ours.

And we do that in a number of ways — from investments in innovative electricity conservation programs to sponsorships of local community events to employeedriven fundraising events for local branches of the United Way. In 2007, Veridian employees raised over $42,000 for the United Way through a combination of payroll deductions and fundraising events.

We also invest in our employees, in their safety and in their wellbeing. To that end, in 2007, Veridian developed a number of programs designed to support employees’ community involvement efforts; and we created policies designed to help them contribute to a greener world.

When employees are offered health and well-being assistance, and when

they understand the fundamentals of workplace safety, everyone benefits. I believe these support systems help to explain why last year Veridian employees achieved another accident-free year, bringing to 1.8 million the number of hours worked without a lost time injury — a record we’ve maintained since February 2001.

It takes more than electricity to power our communities. It takes a willingness to work as partners with our customers. It takes a long-term commitment to economic growth that involves working together with the academic community and other partners to help develop and commercialize new technology. It takes a deep understanding of local environmental issues and global

climate change, as well as a willingness to work with all stakeholders as part of the solution.

Thank you to all our stakeholders, to our Board of Directors, and to our employees for their commitment to our vision. With their support, Veridian will be able to continue making a strong return on investment that enables local economic growth and creates stronger, more sustainable communities for years to come.

It takes more than electricity to power our communities.

Michael C. Angemeer, P. Eng. President and Chief Executive Officer Veridian Corporation

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message from the chair

The adage about the whole being stronger than the sum of its parts has particular relevance in the case of corporate governance.

Last year, I reported that the Board of Directors had begun to transform itself to ensure compliance with the Ontario Energy Board’s Affiliate Relationships Code.

The Corporation’s annual report reflected that transformation, insofar as it included more in-depth analysis of the Corporation’s activities in a style more akin to annual reports in the corporate world.

In 2007, our commitment to strong corporate governance continued, in tandem with the Board’s evolution into a more corporate-styled entity. To that end, together with the senior management team, we developed corporate vision and mission statements and affirmed our corporate values. Aligned with these,

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veridian corporation 2007 annual report

the Board created a framework for effective governance and began the process of structuring its elements.

Noteworthy among these elements is a Code of Conduct and Governance Practice, which was adopted by the Board during the year.

Work continues to complete other elements of the framework including such matters as the roles and responsibilities of directors, director education and development, the conduct of meetings, composition of the Board and assessment of its effectiveness. In its work on the framework, the Board is guided by Corporate Governance Guidelines (National Policy 58-201) and Disclosure of Governance Practices (National Instrument 58-101) adopted by the

Canadian Securities Administrators in 2005, as well as by governance practices of leading Canadian publicly traded corporations.

Our goals are to maintain a highperforming governance practice, to be recognized amongst the leaders in corporate governance, and to ensure that the strengths of each member of our Board of Directors are fully utilized and contribute to the overall success of the Corporation. Demonstrating their commitment to these pursuits, a number of our Board members enrolled in governance school, while others engaged in ongoing governance education through industry functions and community events.

By any measure, our standards for governance are high, and that is because we believe that good governance is the bedrock of a strong company. Every member of the Board is accountable for this outcome. As we perform our governance role, we strive to apply best practices, ensuring that our oversight enables the Corporation to pursue its vision, deliver on its mission and exhibit its values.

Beyond this, we are guided by our belief that strong governance must enable the interests of all stakeholders to be accounted for, be they financial, social, safety-related or environmental.

Ultimately, our role is to ensure that the communities in which Veridian

operates are well-served and that management’s decisions are taken with the best interests of the Corporation and its stakeholders in mind.

I am extremely confident that with the new governance framework that the Board has in place, Veridian will be able to meet the challenges that lie ahead as the electricity sector continues to evolve and that it will become a leading example of strong governance that other companies will decide to follow.

We believe that good governance is the bedrock of a strong company.

H. Glenn Rainbird, O.C. Chair, Board of Directors

veridian corporation 2007 annual report

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investing in infrastructure

It was Friday, March 30, 2007, and John Provost had a big problem.

The internal transformer that powers Motor Coach Industries (MCI) in Newcastle, Ontario — North America’s leading manufacturer of intercity coaches — had stopped working.

John called Veridian Connections and after a service call, was informed that this was not a straight-forward problem. Because the 30-year old transformer was owned by Motor Coach Industries, not by Veridian, Motor Coach Industries would need to decide if it wanted to purchase another transformer

or investigate other options with the help of Veridian.

Over the weekend, as a short-term solution and at great cost, John rented a portable transformer in order to keep MCI’s 40,000 squarefoot warehouse operating. By Monday, the power was restored and John called Veridian with his decision: Could Veridian help by coming up with a cost-effective solution that could also be implemented quickly?

Veridian’s Jack Guest and Ron McCosh called on Motor Coach and presented their best advice: a new

pole-mounted transformer could be installed outside the warehouse, but new electrical wiring would be required and a full safety inspection would need to be done first.

By May 9th, the Electrical Safety Authority completed its inspection; and by May 11th, the new transformer was installed and normal power was restored.

“We were extremely impressed with Veridian’s response to our transformer problem,” said John.

“Normally, this type of work can take between three and six months

to complete, but Veridian helped us to restore normal power within about one month. By bringing forward practical solutions and working quickly, they helped MCI save almost $100,000, which is what it would have cost had we continued to rely on the rental of a portable transformer. They’re a really professional team, and everything worked out just great.”

John Provost, Warehouse Supervisor, Motor Coach Industries, Newcastle, Ontario

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veridian corporation 2007 annual report

veridian corporation 2007 annual report

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investing in infrastructure

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n 2007, Veridian connected 2,921 new homes, most of them in subdivisions located in Ajax, Bowmanville, Pickering and Belleville.

And that’s just the beginning of the company’s infrastructure building story.

In keeping with its vision of providing innovative energy solutions, Veridian began work on a business plan for an ‘intelligent network’ — a network that is able to recognize power interruption problems right away, and can isolate and heal them automatically so that power is restored quickly. With a further $2 million investment committed in 2008, Veridian will become one of the leading utilities in Ontario to use

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intelligent networks. This investment bodes well for the future; the concept relies on the careful integration of existing and new technologies offering maximum flexibility for growth, whether through natural intensification, through adaptation into other non-contiguous Veridian service areas, or into other distribution networks should there be an expansion of the utility. With only minimal changes, Veridian’s intelligent network could quickly be deployed into new service areas, thereby ensuring that additional customers benefit quickly and seamlessly from this advanced technology.

In 2007, Veridian also expanded its line loss reduction program,

completing work in Belleville and beginning work in Bowmanville late in the year. Work in Bowmanville will be completed in 2008, to be followed in the year after by a third installation on a section of the Ajax distribution network. The goal of this program is to decrease the amount of electricity naturally lost during delivery to customers by adjusting distribution voltages to optimal levels. This re-balancing ultimately makes the distribution system more efficient and reduces costs to all Veridian customers.

Strength of supply is another area in which Veridian made strides during the year. With partners Hydro One and Whitby Hydro, a new high

voltage transformer station was commissioned, capable of supplying Veridian with 90 megawatts and increasing the supply to the Ajax and Pickering communities by almost one fifth. The new station will help to meet the early demands of the new community of Seaton in north-central Pickering and will lay the foundation for future growth well into 2012.

Veridian also invested close to $600,000 in distribution system power factor correction equipment, another part of the overall infrastructure optimization plan.

This will further reduce losses in the system and free up existing line capacity presently not available; and will allow the utility to supply

more electrical load without having to immediately build new lines.

The first community to benefit from the plan is Ajax.

Other types of technologies in which Veridian has made significant investments include smart meters and related communications systems. By year-end, 40,000 smart meters had been installed in Belleville, Port Hope, Uxbridge, Bowmanville, Newcastle, Orono, Beaverton, Cannington, Sunderland and Port Perry. An additional 40,000 meters will be installed in Pickering and Ajax in 2008, in support of the Province of Ontario’s plans for all homes and businesses to have smart meters by 2010.

Lastly, a $100,000 investment in new voice-recognition technology will make it simpler for customers without touchtone phones to get answers to their questions more quickly. This investment demonstrates Veridian’s commitment to service — a commitment that has driven a steady increase in customer satisfaction over the past five years. In 2007, customer satisfaction reached a new plateau of 93 percent, up from 87 percent in 2006, and bringing Veridian into the top quartile of utilities in Canada in terms of this important performance measure.

By year-end, 40,000 smart meters had been installed in Belleville, Port Hope, Uxbridge, Bowmanville, Newcastle, Orono, Beaverton, Cannington, Sunderland and Port Perry. veridian corporation 2007 annual report

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investing in the environment

Vandermeer Nursery is a family-run business that has been operating in south Ajax for over 45 years.

Water, soil, light and heat all contribute to the production of beautiful plants for the home and garden. At Vandermeer Nursery, the real secret to successful growing lies in balancing the requirements of healthy plants with those of a healthy bottom-line.

With more than 200,000 square feet of retail space and production greenhouses, the number of overhead lights, fans, pumps, and heaters needed to keep the plants

at Vandermeer Nursery thriving could become a real drain on the bottom-line; but thanks to a longstanding commitment to energy conservation, the Vandermeer family has learned how to make new trends in technology and conservation incentive programs work in its favour.

For example, by switching to high intensity T5 lighting, using high-efficiency motors to inflate the plastic walls that insulate the

greenhouses in winter and installing computer-controlled lighting and variable speed drive water pumps to draw water from their on-site ponds, the Vandermeers have whittled their electricity bill down significantly in the last year. Savings related to lighting costs alone have averaged about 50 percent.

“Just by retrofitting the T5 lights in our retail store area, we estimate a savings of up to $1,100 per year in electricity costs,” says owner John

Vandermeer. “We learned of this new Electricity Retrofit Incentive Program through our utility, Veridian.

They were a great asset in helping us to implement this energy saving program by explaining the details of the program and assisting us with the documentation. Veridian helped us in our continuing efforts to achieve our environmental goals while staying focused on our business.”

John Vandermeer, President, Vandermeer Nursery, Ajax, Ontario

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veridian corporation 2007 annual report

veridian corporation 2007 annual report

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investing in the environment

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hether it’s supporting the development of new environmentally-friendly technology or donating compact fluorescent light bulbs to local area food banks, Veridian’s commitment to the environment is woven into the very fabric of its operations.

Evidence of this commitment starts inside the organization with a series of employee benefits designed to help staff become full participants in the Province’s emerging ‘conservation culture’. For example, in 2007, interest-free loans were introduced as a way of helping employees who wish to purchase green ENERGY STAR rated computers, appliances or hybrid vehicles. A new public transit re-imbursement policy covering 25 percent of the cost of employees’ transit passes was also implemented.

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veridian corporation 2007 annual report

Veridian’s President also actively promotes new transportation technology and renewable energy by test-driving a plug-in hybrid solar vehicle — a hybrid car that helps reduce air pollution and gas consumption while making more efficient use of the electricity grid.

Veridian and the University of Ontario Institute of Technology (UOIT) are involved in ground-breaking research on the vehicle to grid (V2G) interface that will help plug-in vehicles provide more benefit to customers and the electricity grid once they become commonplace in a few years.

Externally, Veridian continued to take its energy conservation message and supporting programs into the community last year, partnering with Dunbarton High School in Pickering, for example, by providing Grade 9

students with special devices to help them learn about ‘phantom load’.

When Veridian learned that the students were studying electricity and conservation in their science class — part of a broader initiative called Wattwize that is sponsored by the Group Citizens Environment Watch — the utility donated several ‘watt readers’ to help the students with their class assignment. The students’ homework was to figure out where the phantom loads were in their homes and identify actions to eliminate them.

Residential customers also continued to benefit from Veridian’s expertise in energy conservation last year. Three new programs made available by the Ontario Power Authority (OPA) in 2006 are now offered in Veridian’s service

area. One of these programs is peaksaver ® — an award-winning energy conservation program that is gaining momentum across the province. Over 400 Veridian customers had their central air conditioners equipped with peaksaver load control devices prior to the 2007 air conditioning season. By the end of 2007, almost 900 customers were enrolled in the peaksaver program.

Other energy conservation programs made available to Veridian customers include The Great Refrigerator Roundup Program — a freezer and refrigerator reclamation program — and Every Kilowatt Counts Summer Savings — an electricity savings contest for residential customers that challenged participants to reduce

their electricity consumption by 10 percent between July 1st and August 31st. In 2007, over 20,600 customers met the Summer Savings electricity savings challenge and received rebates totalling close to $350,000.

The average rebate was $16.97 per customer. Veridian also continued to sponsor energy conservation workshops for local businesses and community events.

Since 2005, Veridian has not only invested human and intellectual capital to promote and expand the practice of energy conservation, it has also invested financially.

During this time, as a founding member of powerWISE®, and in collaboration with the Coalition of Large Distributors, Veridian invested over $2.8 million in conservation and demand management programs,

helping customers to reduce their electricity consumption by 18 million kilowatt-hours and averting 4,274 tonnes of CO2 emissions. As a team, the Coalition of Large Distributors, which represents approximately 40 percent of all electricity customers in the province, invested over $72 million, achieved 527 million kilowatt-hours in savings and averted close to 125,000 tonnes of CO2 emissions – enough to power 58,500 typical Ontario homes for one year. In acknowledgement of their leadership, the Coalition of Large Distributors has earned dozens of awards, and Veridian in particular was honoured last year with a Green Star Award for Business Leadership from Durham Region and with a Peakbuster Award from the Ontario Clean Air Alliance.

Veridian invested over $2.8 million in conservation and demand management programs, helping customers to reduce their electricity consumption by 18 million kilowatt-hours and averting 4,274 tonnes of CO2 emissions. veridian corporation 2007 annual report

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investing in communities

In 2007, Mayor Neil Ellis and Belleville municipal council made a ground-breaking decision that will change the fate of Belleville residents for years to come.

A Shareholder of Veridian Corporation since 1999, the City of Belleville receives annual dividend and interest payments from the Corporation. Last year, the Mayor and his Council decided to use Veridian’s $1.124 million dividend and interest payments to launch an innovative physician recruitment program designed to bring new

family physicians to Belleville in an attempt to provide every citizen of Belleville with access to primary care.

Dr. Jonathan Kerr is one of the first physicians to participate in the new program. Dr. Kerr is a family physician, and in return for a medical bursary of $25,000 to cover his six years of training at a Canadian institution of his choice, Dr. Kerr has agreed

to move to Belleville and practice in the area for five years. This landmark program can accommodate 20 family physicians at the present time, and Dr. Kerr is one of 18 currently enrolled who will begin serving the Belleville community in the years ahead.

“A strong community is a healthy community,” says Mayor Ellis.

“Council was very concerned about

the lack of primary care in Eastern Ontario and this solution seemed the most proactive way of meeting that challenge. It’s a good example of how the City’s investment in Veridian will pay long-term dividends and ultimately help to bolster Belleville’s economic fortunes.”

Dr. Jonathan Kerr and Mayor Neil Ellis at Quinte Health Care, Belleville General Hospital, Belleville, Ontario

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veridian corporation 2007 annual report

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investing in communities

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hether it’s delivering a healthy rate of return on investment to Shareholders or delivering muchneeded entertainment equipment to a local hospital, it’s clear there are many different ways to invest in one’s community.

In 2007, for example, Veridian employees reached out to help those in need by raising over $42,000 through payroll deductions and community events for the United Way. Since the company’s inception in 1999, Veridian and its employees

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veridian corporation 2007 annual report

have raised almost $250,000 for local United Way agencies. According to Jim Witty, Chair, United Way of Pickering/Ajax, Veridian employees share a keen interest in giving back.

“They have gone full-out for us since day one.”

Veridian’s human resource policies also help to support employees’ community involvement activities.

For example, a volunteer assistance policy matches 15 hours of volunteer time with a direct gift of $200 to employees’ charity of choice; another policy introduced last year

allows time-off for employees who wish to pursue volunteer activities in their community.

Beyond these employee contributions, Veridian provided direct support last year for United Way funded agencies such as Big Brothers and Sisters through the Bowling for Kids Sake, Golfing for Kids Sake and in-school mentoring campaigns. The utility also continued its support of local hospitals and schools, and of local community events and causes including: Belleville Public Library and Art Gallery Project,

Durham West Arts Centre, Town of Ajax ‘By the Lake’ Event, City of Pickering Communities in Bloom, and the Lancaster Ball.

Sponsorships are another way in which Veridian invests in the communities it serves. In 2007, the Corporation provided support for the Waterfront Festival (organized by the Belleville Chamber of Commerce), for local Boards of Trade and Chambers of Commerce, for local youth organizations and for veterans.

Small acts of kindness are an important aspect of Veridian’s culture; and last year, they came in the form of gifts of home entertainment equipment to Belleville Hospital — to help make patients’ days brighter — compact fluorescent light bulbs to Durham Sustain-Ability — to help promote energy conservation and sustainability through the We Have The Power campaign, and Christmas luncheons and dinners — to bring seasonal cheer to local area seniors.

Since the company’s inception in 1999, Veridian and its employees have raised almost $250,000 for local United Way agencies. veridian corporation 2007 annual report

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fast facts

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he following discussion and analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes of Veridian Corporation for the year ended December 31, 2007. The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles.

Vision, core businesses and strategy Veridian Corporation’s vision is to be a local, provincial and global leader in the provision of innovative energy solutions that are the cornerstone for creating the sustainable communities of tomorrow.

Veridian’s key business goals are to: • Achieve 50 percent growth by the year 2012 • Earn return on equity that exceeds regulated returns

• Be in the top 10 percent of utilities for customer satisfaction • Be in the top 25 percent of utilities for system reliability • Provide a service that customers find has high value and low cost • Achieve a low impact environmental profile • Achieve excellence in safety • Provide a workplace for employees that is engaging and rewarding

Veridian Corporation provides, through affiliated companies, energy related services to 109,000 customers located in nine municipalities in east central Ontario.

The core business is distribution of electricity and is provided through the wholly owned regulated subsidiary, Veridian Connections Inc. Ancillary businesses are operated within Veridian Energy Inc., a wholly owned unregulated subsidiary.

Veridian Connections Inc. is granted a distribution licence by the

Ontario Energy Board that entitles the local distribution company (“LDC”) the exclusive right to distribute electricity to all customers within Veridian’s prescribed service territories.

Veridian Energy Inc. operates the following businesses: • Water heater and equipment rentals • Fibre communications • Other non-regulated energy services

Although not restricted, this nonregulated business is concentrated to customers predominantly located within Veridian Connections Inc.’s licensed service area.

Veridian Corporation is owned by four Shareholders, the City of Pickering (41 percent), the Town of Ajax (32.1 percent), the Municipality of Clarington (13.6 percent) and the City of Belleville (13.3 percent).

Key performance drivers

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growth

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Growth is an important measure for Veridian’s success. The company has been able to economize on administrative and operational efficiencies that are derived from both natural customer growth and growth through acquisitions.

Customer growth over the last two years has averaged 2.3 percent.

Operating expenses, expressed in dollars per customer, have improved as a result of Veridian’s growth strategy. This improved operating efficiency benefits distribution customers. Distribution rates are approved by the Ontario Energy Board to recover operating and capital costs of the LDC. The capital costs to the LDC are determined based upon the LDC’s investment in distribution assets and a deemed

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* Reductions measured using Canadian Electricity Association SAIDI and SAIFI indices and by comparing 2007 results to three-year average historical performance.

Management Discussion and Analysis

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175 employees 109,000 customers 480 megawatts peak demand 93% overall customer satisfaction score 7% reduction in average length of power interruptions* 28% reduction in average frequency of power interruptions* 1.9% customer growth $8.9 million net income 10.2% return on invested capital $8.6 million interest and dividend payments to municipal shareholders $13.7 new capital investment $2.8 million invested in conservation and demand management 1.8 million hours with no lost-time injuries A (stable) credit rating

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management discussion and analysis

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returns for shareholders

Municipal Shareholders benefit from the distribution of Veridian earnings.

The Board of Directors of Veridian Corporation established a target of $45.2 million for interest and dividend payments for the period 2007 to 2011.

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reliability and service quality Reliability and service quality standards related to Veridian’s electricity distribution system are key performance measurements and these metrics remain high on the priority list for attention and development. These criteria are reported annually to the Ontario Energy Board and form a basis for corporate performance measurement.

Considerable portions of the service area are heavily treed and susceptible

safety Employee health and safety are key performance criteria for Veridian.

Corporate objectives are established setting no lost time accidents as the only acceptable level. There is alignment among all employees to achieve this standard. Veridian has accumulated more than 1.8 million hours of employee worked time without a lost time accident.

conservation and demand management In 2004, the Government of Ontario authorized the removal of an electricity distribution rate freeze that had been imposed in 2002, thereby permitting local distributors to attain a full commercial rate of return. Distributors were released to apply to the Ontario Energy Board for distribution rate increases in 2005, on the condition that one year of incremental revenue be invested in conservation and demand management activities.

Veridian sought and obtained Ontario Energy Board approval for its Conservation and Demand Management plan in late 2004.

The plan committed Veridian to an investment of $3.5 million in a combination of capital and operating expenses during the period of January 1, 2004 to September 30, 2007.

During 2005, Veridian acquired Gravenhurst Hydro Electric Inc. and Scugog Hydro Energy

Corporation, and assumed responsibility for the execution of the Conservation and Demand Management plans of each of these distributors. These acquisitions increased Veridian’s commitment to conservation and demand management spending to a total of $3.741 million by September 30, 2007.

In 2007, Veridian applied for and received regulatory approval for a one year extension to the scheduled completion date for its Conservation and Demand Management plan.

Approximately $977,000 of outstanding spending obligations have been carried into 2008.

Veridian has invested $2.764 million in a range of conservation and demand initiatives since 2004, providing for calculated life-cycle savings in electricity consumption of more than 115,198,000 kilowatthours.

Capability to deliver results resources Growth of the core electricity distribution system together with prudent investment in non-regulated businesses that earn returns for shareholders is the strategic direction for Veridian. Financial capital, human capital and internal process and systems developments are all necessary resources to support this growth.

financial capital Veridian’s debt to capitalization ratio at December 31, 2007 is 43 percent.

Most of the debt issued by the Corporation is in the form of promissory note debt in the amount of $60.8 million with conversion features. Should a large investment opportunity arise that is congruent with the shareholders’ needs, this debt would be converted to equity.

This flexibility provides a significant

level of debt capacity for the Corporation.

The Corporation is well positioned to raise additional debt to support strategic objectives of the Corporation. Management has assessed that there is sufficient debt capacity to meet all stated corporate strategic objectives.

human capital Veridian has a skilled and very stable work force. Training plans for employees are identified that are best suited to develop employees and ensure that skills are relevant to accomplishing objectives. Staff turnover at less than 2 percent is very low; management feels this is an indicator that employees find value and fulfillment in their employment with Veridian.

The number of employees approaching retirement at Veridian is increasing. Over 3 percent of the work force could take early retirement, with full pensions, as

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of December 31, 2008, and a further and environmental risk audits.

SXbcaXQdcX^] aTeT]dT $ 12 percent are eligible to retire with Management has determined a reduced pension. The Corporation that there are no outstanding # will address the aging demography recommendations from these audits " of the workforce through developing that would restrict Veridian’s ability ! succession plans that will meet the to achieve corporate strategic

skills loss related to this large number objectives. of potential retirements.

The operating and capital plans for ! " ! # ! $ ! % ! & Veridian has incentive the Corporation include acquisition compensation systems for executive, of key technology that will enhance management and union employees. performance in reliability, customer The incentives are linked to the service and cost efficiency. achievement of performance criteria that are aligned with the corporate Risk strategic objectives.

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internal processes and systems Internal audits of significant processes and systems are performed annually. Comprehensive internal audits of at least two systems are completed each year. Recent audits have been conducted and completed on revenue assurance, purchasing and disbursements, information systems security

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to interference from vegetation.

While an aggressive annual vegetation management program is in place, community standards and aesthetics can prevent a complete elimination of interference threats in many areas. Investment is now underway in automation as a precursor to an ‘intelligent network’ concept, with early spot programs allowing both automatic and remote restoration of power giving dramatic improvement in local performance.

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rate of return on the investment with debt and equity returns prescribed by the Ontario Energy Board.

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regulatory The Ontario Energy Board is a quasi-judicial tribunal. The Board is responsible for oversight and ensuring that electric monopoly utilities comply with Board decisions and orders. Veridian’s LDC subsidiary, Veridian Connections Inc. is subject to regulation by the Ontario Energy Board. The Board approves distribution rates and establishes

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veridian corporation 2007 annual report

veridian corporation 2007 annual report

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management discussion and analysis

codes that regulate the rate of return that Veridian Connections Inc. may earn. The interests of intervenors are argued before the Board and these interests, if supported, may have the impact of reducing the returns that Veridian Connections Inc. earns from distribution rates charged to customers.

credit risk Veridian and Ontario LDC’s are billing agents for a number of different organizations. In addition to billing customers for distribution of electricity charges, Veridian bills and collects on behalf of others, charges for the electricity commodity and other charges (Independent Electricity System Operator - IESO), transmission of electricity (Hydro One and IESO), and debt retirement charges (Ontario Electricity Financial Corporation). Veridian bears the entire credit risk for collection of these charges.

Veridian mitigates this risk by employing the maximum credit

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protection measures that are allowed by the Ontario Energy Board. Veridian’s customer base is diversified and as such, credit losses related to an industry segment downturn are not expected to have a material impact upon earnings.

Credit statuses of all accounts with particular emphasis on the largest accounts are reviewed regularly.

weather and equipment failure Veridian’s major asset rests in its power distribution system.

These distribution assets consist of overhead systems including, poles, lines and transformers and underground systems of cable and pad mounted transformers. Wind, ice, snow and extreme weather conditions can have damaging impacts particularly on the overhead distribution system. Underground systems are less susceptible to this risk. Most new assets added for customer growth are of underground design. Veridian follows

cyclical programs for vegetation management and equipment testing and inspection activities, as well as condition-based replacement programs, all designed to improve system performance, minimize premature failures, and improve resistance to adverse weather.

To help focus these activities and maximize the effectiveness of annual expenditures, specific work plans are developed using very localized performance statistics.

energy supply risk Veridian relies upon the provincially administered power grid for the supply of electricity. Legislation does not allow the Corporation to secure supply through long-term purchase contracts.

The Electricity Restructuring Act, 2004 outlines the mandate of the Ontario Power Authority to ensure an adequate, reliable and secure supply of electricity in Ontario for the medium and long term. Similarly, the Independent Electricity System

Operator is responsible for the operation and reliability of the power system. Veridian is also served via combinations of Hydro One owned transmission and distribution assets.

Consequently, there is significant electricity supply reliance upon these three organizations. To the extent that these three organizations are unable to fulfill their mandate, Veridian would be exposed to the risk associated with an inadequate supply or a decline in reliability.

Accounting estimates

Management uses judgement in assessing certain accounting estimates that are required to determine reported amounts for assets, liabilities, revenues and costs and related disclosure of contingencies. The following critical accounting estimates were used in the preparation of Veridian’s financial statements.

bad debt Accounts receivable and unbilled revenue totalled $51.7 million as at December 31, 2007. Past experience with the collection of accounts has been used to estimate amounts that may not be collected. An allowance of $520,000 is estimated as a reasonable amount of receivables that may not be collected.

employee future liability Veridian has commitments to pay for post retirement benefits for employees. Actuarial assumptions are employed for the valuation of this future liability. The assumptions were determined by management recognizing the recommendations of actuaries.

regulatory assets and liabilities Regulatory assets amount to $7.0 million and relate primarily to the costs of smart meter installations that are expected to be recovered from future rates. Management

believes that the costs allocated to these variance accounts meet parameters established by the Ontario Energy Board through generic hearings.

Regulatory liabilities of $18.2 million relate primarily to differences in wholesale costs charged and retail rates collected for commodity and transmission. These regulatory liabilities are expected to be returned to customers through rate adjustments approved by the Ontario Energy Board in 2008.

goodwill Accounting principles require that goodwill be assessed regularly for impairment. Management has reviewed the goodwill related to acquisitions and believes that the value ascribed to these amounts is not impaired. Management relies upon discounted cash flow projections and other fair market value evidence to support this review.

Outlook

Veridian expects continued strong customer growth. Approximately 1,900 new residential connections are forecast for 2008, with more than one-half of this growth taking place in the Municipality of Clarington.

Robust residential growth is also expected in the Town of Ajax and City of Pickering. The addition of large new business customers in the City of Belleville and the Town of Ajax in late 2007 will further support distribution revenue growth during the coming year.

Solid customer growth is projected to continue or even accelerate beyond 2008. A key factor influencing this growth potential is the pending development of the Seaton community, which is located in central Pickering. Seaton is being planned as a new, sustainable urban community that will house up to 70,000 people and provide 35,000 jobs. While development in this community has been anticipated for

some time, development planning work began in earnest following the August 2007 conveyance of approximately 615 hectares of land from the provincial government to four major developers.

Acquisition or merger opportunities may arise during 2008. Mergers or acquisitions by municipally owned local distribution companies will be exempt from a 33 percent transfer tax up to October 17, 2008.

Earnings in 2008 are expected to decline by 17.5 percent to $7.352 million, representing an overall net margin of 8.4 percent due to decreasing margins from non-regulated businesses, continuing customer conservation and minimal distribution rate increases.

An 8.4 percent return on equity is comparable to returns currently being approved by the Ontario Energy Board.

veridian corporation 2007 annual report

23

consolidated financial statements

2007

2006

assets

Veridian Corporation Consolidated Balance Sheet

Consolidated Financial Statements of Veridian Corporation Year ended December 31, 2007

December 31, 2007, with comparative figures for 2006

See accompanying notes to consolidated financial statements.

On behalf of the Board:

Chair, Board of Directors

Chartered Accountants, Licensed Public Accountants Toronto, Canada March 3, 2008

24

veridian corporation 2007 annual report

$ 21,261,437 $ 51,666,042 2,344,597 – 254,984 75,527,060

Long-term investments (note 4) Deferred charges Capital assets (note 5) Goodwill Future income taxes Regulatory assets (note 6)

263,377 – 131,398,612 8,923,249 135,000 6,502,110 $ 222,749,408

263,377 8,816 129,301,830 8,923,249 150,999 523,379 $ 2 08,684,645

$ 43,488,061 202,133 652,645 6,686,694 2,559,739

$ 38,451,962 414,209 – 626,970 2,870,985

10,680,589 57,111,691 1,391,115 160,375 169,225 69,512,995

liabilities and shareholders ’ equity

auditors’ report to the shareholders We have audited the consolidated balance sheet of Veridian Corporation as at December 31, 2007 and the consolidated statements of operations and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Corporation’s management.

Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards.

Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2007 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

Current assets: Cash and cash equivalents Accounts receivable (note 3) Inventory Amounts recoverable in lieu of corporate income taxes Prepaid expenses

Chair, Audit and Finance Committee

Current liabilities: Accounts payable and accrued liabilities Advance payments - construction deposits Amounts payable in lieu of corporate income taxes Regulatory liabilities, current (note 6) Developer obligations Current portion of amounts due to Hydro One Networks Inc. (note 9) Current portion of future income taxes

Long-term liabilities: Long-term debt (note 8) Regulatory liabilities (note 6) Amounts due to Hydro One Networks Inc. (note 9) Employee future benefits (note 10) Customer deposits and contractor obligations Future income taxes

Shareholders’ equity: Share capital (note 11) Contributed capital Retained earnings

Contingencies and guarantees (note 12) Lease commitments (note 13)

329,287 29,883 53,948,442

597,333 – 42,961,459

60,794,000 11,518,938 297,935 1,304,235 4,607,064 565,051 79,087,223

60,794,000 12,974,693 730,549 1,095,360 4,427,265 901,281 80,923,148

67,285,173 24,910 22,403,660 89,713,743

67,285,173 24,910 17,489,955 84,800,038

$ 222,749,408

$ 2 08,684,645

veridian corporation 2007 annual report

25

consolidated financial statements

Veridian Corporation Consolidated Statement of Operations and Retained Earnings Year ended December 31, 2007, with comparative figures for 2006

Revenue

2007

2006

$ 235,271,455 $ 223,302,423

Cost of power

191,960,210

180,366,542

Gross margin

43,311,245

42,935,881

Expenses: Operating and maintenance 5,501,926 Administration 13,461,382 Interest on long-term debt (note 8) 5,469,943 Amortization 11,115,000 35,548,251

Year ended December 31, 2007, with comparative figures for 2006 5,722,277 11,861,124 6,134,285 10,495,525 34,213,211

Operating income before undernoted

7,762,994

8,722,670

Other income (note 14)

6,878,200

6,823,343

Income before income taxes

14,641,194

15,546,013

Payments in lieu of corporate income taxes

(5,727,489)

(6,595,798)

8,913,705

8,950,215

Retained earnings, beginning of year

17,489,955

14,539,740

Dividends paid

(4,000,000)

(6,000,000)

Net income

Retained earnings, end of year See accompanying notes to consolidated financial statements.

$ 22,403,660

Veridian Corporation Consolidated Statement of Cash Flows

$ 17,489,955

2007

2006

Cash provided by (used in): Operating activities: Net income Items not affecting cash: Future income taxes Decrease (increase) in regulatory assets/liabilities Change in employee future benefits obligation Amortization of capital assets Amortization of deferred charges Gain on disposal of capital and other assets

Change in non-cash operating working capital (note 15)

$

Financing activities: Dividends paid Increase in customer deposits and contractor obligations Repayment of long-term debt Amounts due to Hydro One Networks Inc.

8,913,705 $

8,950,215

(320,231) (1,374,762) 208,875 11,598,198 – (27,458) 18,998,327 9,762,088 28,760,415

180,281 4,722,930 169,465 10,699,425 90,391 (238,966) 24,573,741 (16,572,939) 8,000,802

(4,000,000) 179,799 – (700,660) (4,520,861)

(6,000,000) 123,777 (14,500,000) 253,852 (20,122,371)

Investing activities: Capital assets additions, net of contributed capital (13,694,980) (16,066,252) Proceeds on disposal of capital and other assets 36,274 299,168 (13,658,706) (15,767,084) Increase (decrease) in cash and cash equivalents

10,580,848

(27,888,653)

Cash and cash equivalents, beginning of year

10,680,589

38,569,242

$ 21,261,437

$ 10,680,589

Cash and cash equivalents, end of year Supplemental cash flow information: Interest received Interest paid Amounts in lieu of corporate income taxes

$

1,121,303 $ 4,635,344 4,966,139

1,465,875 5,548,193 5,219,004

See accompanying notes to consolidated financial statements.

26

veridian corporation 2007 annual report

veridian corporation 2007 annual report

27

consolidated financial statements

Veridian Corporation (the “Corporation”) was incorporated on July 1, 1999 under the Ontario Business Corporations Act and was formed to conduct electricity distribution and non-regulated utility service ventures through its subsidiaries.

1. Significant accounting policies: (a) Basis of presentation: These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada and include the accounts of the Corporation and its wholly owned subsidiaries, Veridian Connections Inc. (“VCI”) and Veridian Energy Inc. The Corporation’s 42.3% interest in the First Source Energy Corporation (“First Source”) is accounted for using the equity method. Intercompany transactions and balances are eliminated on consolidation. (b) Revenue recognition: Revenue from the sale of electricity is recognized on the accrual basis, which includes an estimate of unbilled revenue representing electricity consumed by customers since the date of each customer’s last meter reading. Actual results could differ from estimates made of actual electricity usage.

Distribution service and other revenue are recognized as services are rendered. (c) Rate setting: VCI is regulated by the Ontario Energy Board (“OEB”) under authority of the Ontario Energy Board Act, 1998. The OEB is charged with the responsibility of approving or setting rates for the transmission and distribution of electricity and the responsibility for ensuring that distribution companies fulfill obligations to connect and service customers.

The OEB has the general power to include or exclude costs, revenues, losses or gains in the rates of a specific period, resulting in the change in the timing of accounting recognition from that, which would have applied in an unregulated company. Such change in the timing involves the application of rate regulated accounting, giving rise to the recognition of regulatory assets and liabilities. The Corporation’s regulatory assets represent certain amounts receivable from future customers and costs that have been deferred for accounting purposes because it is probable that they will be recovered in future rates. In addition, the Corporation has recorded regulatory liabilities which represent amounts for expenses incurred in different periods that would be the case had the Corporation been unregulated.

Specifically, the following accounting treatments have been applied:

28

veridian corporation 2007 annual report

(i)

Costs incurred in respect of the transition to competitive markets were approved in April 2006 for recovery through distribution rates.

(ii) An amount to represent the cost of funds used during construction and development has been applied based on the value of construction in progress. (iii) The Corporation does not record future income tax assets or liabilities for its regulated business activities to the extent that it is expected that the recovery or realization of these amounts will be included in future distribution rates. (iv) The Corporation has deferred certain pre-market opening cost of power variances and post-market opening retail settlement variances in accordance with Article 490 of the OEB’s Accounting Procedures Handbook. (d) Cash and cash equivalents: Cash and cash equivalents are defined as cash and bank term deposits or equivalent financial instruments with original maturities upon issue of less than 90 days. (e) Inventory: Inventory, which consists of parts and supplies acquired for internal construction or completion, is valued at the lower of cost and replacement cost. Cost is determined on a weighted moving average basis. (f) Capital assets: Capital assets are recorded at cost and include contracted services, materials, labour, engineering costs, overheads and an allowance for the cost of funds used during construction when applied. Certain assets may be acquired or constructed with financial assistance in the form of contributions from developers or customers. The OEB requires that such contributions, whether in cash or in-kind, be offset against the related asset cost.

Contributions in-kind are valued at their fair market value at the date of their contribution.

When identifiable assets, such as buildings, distribution station equipment and office equipment are retired or otherwise disposed of, their original cost and accumulated amortization are removed from the accounts and the related gain or loss is included in the operating results for the related fiscal period. The cost and related accumulated amortization of grouped assets, such as transmission and distribution system, is removed from the accounts at the end of their estimated service life.

Amortization of capital asset values is charged to operations on a straight-line basis over their estimated service lives at the following annual rates:

Land rights Buildings Distribution station equipment Transmission and distribution system Meters and water heaters Office equipment Computer hardware Computer software Fleet vehicles

2% 2% - 4% 3% - 33% 4% - 10% 10% 10% 20% 33.33% 12.5% - 33.33%

In the event that facts and circumstances indicate that capital assets may be impaired, an evaluation of recoverability is performed. For purposes of such an evaluation, the estimated future undiscounted cash flows associated with the asset are compared to the carrying amount of the asset to determine if a write-down is required. The impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value.

Construction in progress comprises capital assets under construction, assets not yet placed into service and pre-construction activities related to specific projects expected to be constructed.

An allowance for the cost of funds used during the construction period has been applied.

The rate applied is equal to the rate prescribed in each quarter by the OEB. The average rate for the current fiscal period in respect of long-term borrowings is 4.95% (2006 - 5.56%). (g) Goodwill: Goodwill is the cost of acquired local distribution companies and non-regulated businesses in excess of fair value of the net identifiable assets purchased and is evaluated for impairment on an annual basis, or more frequently if circumstances require. Goodwill impairment is assessed based on a comparison of the fair value of the assets acquired to the underlying carrying value of the those net assets, including goodwill, with any write-down of the carrying value of goodwill being charged to operations. The Corporation has determined that goodwill is not impaired. (h) Deferred charges: Deferred charges consist of deferred software charges and incorporation costs. Deferred software charges are capitalized as computer software when these are ready for use.

Incorporation costs are amortized over five years.

(i) Customer deposits and contractor obligations: Customers and contractors may be required to post security to obtain electricity or other services. Interest is paid on customer balances at rates established from time to time by the Corporation. (j) Pension and other post-employment benefits: The Corporation accounts for its participation in the Ontario Municipal Employees Retirement System (“OMERS”), a multi-employer public sector pension fund, as a defined contribution plan.

The Corporation actuarially determines the cost of other employment and postemployment benefits offered to employees. These unfunded plans are accounted for as defined benefit obligations. The Corporation applies the projected benefit method, prorated on service and based on management’s best estimate assumptions. Under this method, the projected post-retirement benefit is deemed to be earned on a pro-rata basis over the years of service in the attribution period commencing at date of hire, and ending at the earliest age the employee could retire and qualify for benefits. (k) Payments in lieu of corporate income taxes: Under the Electricity Act, 1998, the Corporation is required to make payments in lieu of corporate income taxes (“PILs”) to Ontario Electricity Financial Corporation. These payments are calculated in accordance with the rules for computing income and taxable capital and other relevant amounts contained in the Income Tax Act (Canada) and the Corporations Tax Act (Ontario) as modified by the Electricity Act, 1998, and related regulations.

The Corporation uses the asset and liability method of accounting for the tax effect of temporary differences between the carrying amount and tax basis of the Corporation’s assets and liabilities. Temporary differences arise when the realization of an asset or the settlement of a liability would give rise to either an increase or decrease in the Corporation’s income taxes payable in the year or a later period.

For its rate regulated business, no provision is made for future income taxes to the extent the future income taxes are expected to be included in the rates charged to customers in the future. Management believes that when unrecorded future income taxes become payable, or the assets are realized, it is expected that they will be included in rates approved by the OEB and recovered from customers at that time.

For its non-regulated businesses, future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future 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.

veridian corporation 2007 annual report

29

consolidated financial statements

1. Significant accounting policies (continued):

The Corporation has assessed the fair value of long-term investments that are considered available-for-sale financial instruments. The difference between the fair value and the carrying value of the investments is not significant and therefore no adjustment to other comprehensive income has been recorded during 2007 nor has the comparative consolidated financial statements been restated.

(l) Measurement uncertainty: The preparation of the Corporation’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Accounts receivable, unbilled revenue and regulatory assets are reported based on amounts expected to be recovered and an appropriate allowance for unrecoverable amounts. Inventory is recorded net of provisions for obsolescence. Due to inherent uncertainty involved in making such estimates, actual results reported in future years could differ from those estimates recorded in preparing these financial statements, including changes as a result of future decisions made by the OEB or the Minister of Energy. Amounts recorded for amortization of capital assets are based on estimates of useful service life. (m) Financial instruments: Effective for fiscal years beginning on or after October 1, 2006, new standards came into effect for the accounting of comprehensive income and the recognition and measurement of financial instruments.

Available-for-sale financial instruments are measured at fair value with revaluation gains and losses included in other comprehensive income. The comparative consolidated financial statements have not been restated.

Loans and receivables: Accounts receivable Unbilled revenue

(ii) Held-to-maturity investments: None

The Canadian Institute of Chartered Accountants (“CICA”) has issued new accounting standards: Section 3862, Financial Instruments - Disclosures, Section 3863, Financial Instruments Presentation, Section 1535, Capital Disclosures, Section 3031, Inventories, and Section 3064, Goodwill and Intangible Assets.

The Corporation is assessing the implications of these new standards, which are effective for fiscal periods beginning on or after January 1, 2008 and intends to adopt them in its next fiscal year.

(iii) Held-for-trading: None (iv) Available-for-sale: Long-term investments (excluding share investments that do not have a quoted market price) (v) Other liabilities: Accounts payable and accrued liabilities Long-term debt Customer deposits and contractor obligations

30

veridian corporation 2007 annual report

3. Accounts receivable:

2007

2006

Energy $ 18,622,884 $ 22,294,459 Unbilled revenue 31,266,592 30,656,008 Project expenditures recoverable from customers 1,574,691 1,981,061 Other 721,875 2,863,990

52,186,042 57,795,518 Less allowance for doubtful accounts

6. Regulatory assets and liabilities:

2007

2006

First Source, 42.3% equity position $ Other, at cost

217,753 $ 45,624

217,753 45,624

263,377

263,377

$

$

5. Capital assets:

2. Future new accounting pronouncements:

The Corporation categorizes its financial instruments as follows: (i)

4. Long-term investments:

520,000

$ 51,666,042

683,827

$ 57,111,691

Cost

Accumulated amortization

2007

Net book value

2006

Net book value

Land $ 1,799,137 $ – $ 1,799,137 $ 1,737,080 Land rights 690,059 316,906 373,153 383,304 Buildings 7,967,955 830,816 7,137,139 7,030,401 Distribution station equipment 25,407,478 12,970,369 12,437,109 12,998,285 Transmission and distribution system 247,273,884 121,117,984 126,155,900 119,597,458 Meters and water heaters 13,275,577 5,932,226 7,343,351 9,680,775 Office equipment 977,029 367,230 609,799 590,991 Computer hardware 1,299,607 657,447 642,160 594,166 Computer software 4,397,710 2,015,719 2,381,991 1,309,986 Fleet vehicles 7,874,420 5,770,829 2,103,591 1,011,503 Construction in progress 418,844 – 418,844 – Contributions in aid of construction (36,035,944) (6,032,382) (30,003,562) (25,632,119) $ 275,345,756

$ 143,947,144

$ 131,398,612

$ 129,301,830

During the year, $126,709 (2006 - $143,035) representing an allowance for the cost of funds used during construction was capitalized.

2007

Regulatory assets:

OEB costs, pension contributions and

other deferred costs (a) $ 1,042,733 $

Smart meter (b) 6,008,775 7,051,508 Less valuation allowance

Regulatory assets and liabilities can arise out of the rate making process.

549,398

$ 6,502,110

$

2006

1,048,672 – 1,048,672 525,293 523,379

Regulatory liabilities:

Conservation and demand management $ 127,392 $ 126,811

Smart meter (b) – 171,962

Post-market opening retail settlement variances (c) 16,921,602 12,128,916

Hydro One Networks Inc. low voltage 704,026 243,119

Balance of amounts approved to be refunded

to customers through distribution rates 452,612 930,855 18,205,632 13,601,663 Less amounts expected to be settled in the next year (d) 6,686,694

$ 11,518,938

626,970

$ 12,974,693

(a) The OEB approved the establishment of regulatory deferral accounts to record the Corporation’s incremental OEB cost assessments and pension costs that would otherwise have been charged to results of operations. The Corporation has recorded a valuation allowance against these deferral accounts. (b) The OEB approved the establishment of smart meter variance accounts to record revenue approved by the OEB for smart meters and related capital costs incurred by the Corporation.

Stranded costs associated with conventional meters, and incremental operating, maintenance, amortization, and administrative expenses directly related to smart meters are also included in these variance accounts.

veridian corporation 2007 annual report

31

consolidated financial statements

6. Regulatory assets and liabilities: (c) Post-market opening retail settlement variances are variances that have occurred since May 1, 2002 when the competitive electricity market was declared open and that have accumulated pursuant to direction from the OEB. In 2006, the OEB approved the disposition of the Corporation’s retail settlement variance accounts as of December 31, 2004. The postmarket opening retail settlement variances for 2006 are variances that have occurred since January 1, 2005. Specifically, these amounts include variances between the amount charged by the Independent Electricity System Operator (“IESO”) for the operation of the markets and grid, as well as various wholesale market settlement charges and transmission charges as compared to the amount billed to consumers based on the OEB approved wholesale market service rate. In the absence of rate regulated accounting, interest expense in 2007 would have been lower by $684,648 (2006 - $473,905).

The balance of amounts approved to be returned to customers through distribution rates reflects the total approved regulatory balances for recovery plus interest charged at an OEB approved rate less amounts recovered through distribution rates since April 1, 2004.

This amount is expected to be refunded over a period not expected to exceed two years commencing May 1, 2006.

Management continues to assess the likelihood of recovery of its regulatory assets and believes that it is probable that its regulatory assets and liability balances will be factored into setting of future rates. In the event that recovery from future rates is no longer considered probable or portions of amounts deferred are determined not be recoverable, such amounts will be expensed in the period this determination is made.

(d) The Corporation has proposed distribution rates for May 1, 2008 which includes amounts to be refunded to customers for over recovery of transmission network services. This over recovery of transmission network services is a result of retail charges to the Corporation from the IESO and Hydro One Networks Inc. (“HONI”) being less than the OEB approved rates charged to customers. The amount expected to be settled in the next year is $6,490,039.

The remaining amount of $196,655 expected to be settled in the next year is for OEB approved disposition of December 31, 2004 regulatory asset and liability balances which commenced to be recovered through the Corporation’s distribution rates from May 1, 2006 for a two year period.

7. Amounts available to offset future payments in lieu of corporate income taxes: The Corporation has unrecorded future income tax assets arising substantially from differences between accounting and tax bases for capital assets employed in its rate-regulated business amounting to $14,040,000 (2006 - $11,960,000) based on current tax rates. The benefit of these amounts will be recorded as they are realized and form part of the rates charged to the Corporation’s customers.

In the absence of rate regulated accounting, the Corporation’s provision for PILs would have been recognized on an accrual basis rather than under the taxes payable method. As a result, the provision for PILs would have been lower by approximately $2,080,000.

veridian corporation 2007 annual report

During 2005, the OEB rendered a decision to allow HONI to recover certain costs from embedded distributors and for this recovery to take place on a monthly basis commencing April 1, 2005.

The amount is expected to be recovered in full by April 30, 2010.

2007

2006

$ 60,794,000

The notes payable were renewed October 1, 2006 and are convertible on or before the maturity date at the option of the holder on the basis of one common share for each $1,000 of principal amount.

Interest on long-term debt comprises:

Interest on notes payable and loans $ Interest on regulatory liabilities, net of interest earned on regulatory assets Interest on customer deposits and other

Less allowance for funds used during construction $

4,620,344

2006

$ 5,429,828

756,618 501,912 219,690 345,580 5,596,652 6,277,320 126,709 5,469,943

Amounts were determined using an annual discount rate of 5.00%.

(iii) Salary levels: Future general salary and wage levels were assumed to increase at 3.30% per annum.

11. Share capital:

During 2007, the Corporation made contributions totalling $866,464 (2006 - $796,422) to OMERS.

The Corporation pays certain benefits on behalf of its retired employees. The Corporation recognizes these post-retirement costs in the period in which the employees render the services.

143,035

$ 6,134,285

Authorized:

Unlimited common shares Issued

2007

Number of shares Amount

10,000

$ 67,285,173

2006

Number of shares

Amount

10,000

$ 67,285,173

Information about the Corporation’s non-contributory defined benefit plan to fund life insurance benefits is as follows:

2007

Future general inflation levels, as measured by changes in the Consumer Price Index, are assumed at 2.10% for future years.

10. Employee benefits:

General inflation:

(b) Employee future benefits: $ 60,794,000

(i)

(ii) Interest (discount) rate:

The amount due to HONI by the Corporation is $627,222 (2006 ‑ $1,327,882). This amount is expected to be recovered through the Corporation’s distribution rates. The amount expected to be paid in fiscal 2008 is $329,287.

(a) Pensions:

7.6% notes payable to shareholders, due on November 1, 2009

The main actuarial assumptions employed for the valuations are as follows:

8. Long-term debt:

32

9. Amounts due to HONI:

2007

Accrued benefit liability recognized at January 1 $ Current service costs and interest expense on accrued benefit obligation Benefit payments

1,095,360

Accrued benefit obligation at December 31

1,304,235

$

$

289,103 (80,228)

2006

925,895 242,659 (73,194)

$ 1,095,360

The amounts presented are based upon an actuarial valuation performed as of December 31, 2007 with a measurement date of January 1, 2006. The next valuation is expected to be performed for the year ending December 31, 2009.

veridian corporation 2007 annual report

33

consolidated financial statements

12. Contingencies and guarantees:

14. Other income:

(c) Contractual obligation - HONI: The Corporation’s subsidiary, VCI, is party to a connection and cost recovery agreement with HONI related to the construction by HONI of a transformer station designated to meet VCI’s anticipated electricity load growth. Construction of the project was completed during 2007 and VCI anticipates connecting to the transformer station during 2008.

(a) Insurance claims: The Corporation is a member of the Municipal Electric Association Reciprocal Insurance Exchange (“MEARIE”) which was created on January 1, 1987. A reciprocal insurance exchange may be defined as a group of persons formed for the purpose of exchanging reciprocal contracts of indemnity or inter-insurance with each other. MEARIE provides general liability insurance to member electric utilities.

To the extent that the cost of the project is not recoverable from future transformation connection revenues, VCI is obliged to pay a capital contribution equal to the difference between these revenues and the construction costs allocated to VCI. The construction costs allocated to VCI for the project are estimated at $10,743,850. Based upon current load forecast estimates, VCI has estimated that there will be sufficient future transformation connection revenues to fund HONI’s estimated cost of construction for the project.

Final determination of the construction costs for the project is expected during 2008.

Insurance premiums charged to each member electric utility consist of a levy per $1,000 of service revenue subject to a credit or surcharge based on each electric utility’s claims experience. Insurance limits of $30 million per occurrence are covered by MEARIE.

16. Related party transactions:

Third party revenue - energy $ Late payment charge Customer charges Pole rentals Interest Gain on disposal of capital and other assets

$

2007

3,022,696 $ 573,032 1,628,943 500,562 1,125,509 27,458

2,697,104 545,427 1,398,572 482,372 1,460,902 238,966

6,878,200

6,823,343

$

The Corporation provides electricity and services to its principal shareholders, the Town of Ajax, the Municipality of Clarington, the City of Pickering and the City of Belleville (collectively, the “shareholders”). Electrical energy is sold to the shareholders at the same prices and terms as other electricity customers consuming equivalent amounts of electricity. The Corporation also provides street light and power line maintenance services to the shareholders on a contract basis. The charges for these services are at rates similar to those charged to other customers of maintenance services. A summary of amounts charged by the Corporation to the shareholders is as follows:

2006

Electrical energy and services

(b) Other claims: This action has been brought under the Class Proceedings Act. 1992. The plaintiff class seeks $500 million in restitution for amounts paid to Toronto Hydro and to other Ontario municipal electric utilities (“LDCs”) who received late payment penalties which constitute interest at an effective rate in excess of 60% per year, contrary to Section 347 of the Criminal Code. Pleadings have closed in this action. The action has not yet been certified as a class action and no discoveries have been held, as the parties were awaiting the outcome of a similar proceeding brought against Enbridge Gas Distribution Inc. (formerly Consumers Gas).

On April 22, 2004, the Supreme Court of Canada released a decision in the Consumers Gas case rejecting all of the defences which had been raised by Enbridge Gas Distribution Inc., although the Supreme Court of Canada did not permit the plaintiff class to recover damages for any period prior to the issuance of the statement of claim in 1994 challenging the validity of late payment penalties. The Supreme Court of Canada remitted the matter back to the Ontario Superior Court of Justice for determination of the damages. At the end of 2006, a mediation process resulted in the settlement of the damages payable by Enbridge Gas Distribution Inc. After the release by the Supreme Court of Canada of its 2004 decision in the Consumers Gas case, the plaintiffs in the LDC late payment penalties class action indicated their intention to proceed with the litigation against the LDCs. To date, no formal steps have been taken to move the action forward. The electric utilities intend to respond to the action if and when it proceeds on the basis that the LDCs’ situation may be distinguishable from that of Consumers Gas. The Corporation estimates it collected late payment penalties of $5,339,593 from and after 1994. No determination of the portion of these payments which may have constituted interest at an impermissible rate has been made.

34

veridian corporation 2007 annual report

(d) Payments in lieu of corporate income taxes: On March 22, 2007, the Province of Ontario released the 2007 Ontario Budget. The budget announced that new rules would be put in place to limit tax deductibility for interest paid by municipal electric utilities (“MEUs”) to municipalities. Interest eligible for deductibility for the Corporation and other Ontario MEUs would be consistent with OEB cost-of-capital rules.

As of February 29, 2008, regulations for these new rules were not released by the Minister of Finance. In the absence of the new regulation, the amount of additional tax liability related to excess interest cannot be determined. The Corporation and subsidiary, VCI, paid interest to municipalities of $4,620,344 during 2007 that may be subject to the new tax regulations.

13. Lease commitments: Future minimum lease payment obligations under operating leases are as follows:

$

9,762,088

$ 5,780,213

At December 31, 2007, accounts receivable include $802,314 (2006 - $1,231,799) due from the shareholders.

2006

17. Fair values of financial instruments: The carrying amounts of all financial instruments, except long-term debt, approximate fair value due to the immediate or short-term maturity of these financial instruments. It is not practicable to estimate the fair value of long-term debt as it is not publicly traded.

$ (16,572,939)

18. Comparative figures:

2008 $ 2009 2010 2011 2012 Thereafter

2007

Accounts receivable $ 5,445,649 $ (7,833,602) Amounts recoverable/payable in lieu of corporate income taxes 842,903 1,281,528 Other assets (1,039,241) 329,485 Accounts payable and accrued liabilities 5,036,099 (11,985,538) Advance payments - construction deposits (212,076) (121,213) Developer obligations (311,246) 1,756,401

6,213,800

2006

Interest on long-term debt includes interest of $4,620,344 (2006 - $4,620,344) on the notes payable to the shareholders.

15. Change in non-cash operating working capital:

$

2007

731,212 697,325 688,836 616,914 149,580 76,000

Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current year.

$ 2,959,867

veridian corporation 2007 annual report

35

Boards of Directors

board of directors

Veridian Corporation wholly owns Veridian Connections Inc. and Veridian Energy Inc. Together, they provide comprehensive energy services in the communities where they operate.

board of directors: Jim Abernethy Mayor, Municipality of Clarington Pat Brown Councillor, Town of Ajax Doug Dickerson Councillor, City of Pickering Howard Edmondson Retired employee, Canada Post Corporation

Neil Ellis Mayor, City of Belleville

Steve Parish Mayor, Town of Ajax

Adrian Foster Councillor, Municipality of Clarington

David Pickles Councillor, City of Pickering

James Macpherson Licensed trustee in bankruptcy

Glenn Rainbird, Chair Corporate director

Nancy Maxwell Business interiors consultant, SCI Interiors Ltd.

Ralph Sutton, Vice Chair Retired Manager, Bell Canada

Bill McLean Councillor, City of Pickering

Veridian Connections Inc. is a licensed electricity distributor serving over 109,000 customers in the Cities of Belleville and Pickering, the Towns of Ajax, Gravenhurst, Port Hope and Uxbridge, and the communities of Bowmanville, Newcastle, Orono, Beaverton, Cannington, Sunderland and Port Perry.

board of directors: Jim Abernethy Mayor, Municipality of Clarington

Bill McLean Councillor, City of Pickering

Jack Alexander J.W.A. Enterprises Inc., Electrical generation consultant

Brian Mountford Retired utility executive and consultant

36

veridian corporation 2007 annual report

Sylvain Trépanier Senior Manager, TD Bank Financial Group

Veridian Energy Inc. provides fibre optic communications and rental water heater services to residential and business customers in central and eastern Ontario.

The Boards of Directors of Veridian Corporation and Veridian Connections Inc. provide leadership to these entities by overseeing the companies’ operations, establishing business practices, policies and strategic goals, and helping to guide management decisions.

The Board of Directors of Veridian Corporation also fulfills these functions with respect to the Corporation’s other subsidiaries.

The Corporation’s Board met four times in 2007 and the Veridian Connections Inc. Board met four times.

Veridian Corporation member

board meetings

The following tables illustrate the attendance of Directors at meetings of the Boards of Directors and their Committees:

Veridian Connections Inc. committee meetings

member

board meetings

committee meetings

Glenn Rainbird (Chair)

5/5

Glenn Rainbird (Chair) (2)

4/4

Jim Abernethy (2 & 3)

5/5

Jim Abernethy (2 & 3)

4/4

Pat Brown (1)

5/5

4/5

Jack Alexander

3/4

Doug Dickerson (4)

5/5

2/2

Bruce Boyle (4)

4/4

1/2

Howard Edmondson

5/5

Pat Brown (1)

4/4

4/5

Neil Ellis (2 & 3)

5/5

James Mason

4/4 4/4

2/2

David Clark Executive Vice President, Corporate Services, Chief Financial Officer

board of directors:

Adrian Foster (1)

5/5

5/5

Glenn Rainbird, Chair Corporate director

James Macpherson (1 & 4)

4/5

6/7

Bill McLean (1, 2 & 3)

4/4

5/5

Nancy Maxwell (4)

5/5

2/2

Brian Mountford (4)

4/4

2/2

Bill McLean (1, 2 & 3)

5/5

5/5

Ralph Sutton

4/4

Steve Parish (2 & 3)

4/5

Sylvain Trépanier

4/4

David Pickles

3/5

Ralph Sutton (Vice Chair)

5/5

Sylvain Trépanier

5/5

Bruce Boyle Resident and business owner, Ajax

Glenn Rainbird, Chair Corporate director

Pat Brown Councillor, Town of Ajax

Ralph Sutton Retired Manager, Bell Canada

Ralph Sutton Retired Manager, Bell Canada

Jim Mason President, Pefco Ontario

Sylvain Trépanier Senior Manager, TD Bank Financial Group

Michael Angemeer President and Chief Executive Officer

Axel p. Starck Executive Vice President, Asset Services, Chief Operating Officer

Nancy Maxwell (Vice Chair) (4)

Rob Scarffe Executive Vice President, Veridian Connections Inc.

Nancy Maxwell, Vice Chair Business interiors consultant, SCI Interiors Ltd

Executive Team

member of: 1. Audit and Finance Committee 2. Human Resources and Compensation Committee 3. Nominating Committee 4. Governance Committee

Rob Scarffe Executive Vice President, Customer Services

George Armstrong Manager, Regulatory Affairs and Key Projects

Diana Hills-Milligan Executive Assistant and Public Affairs Officer

veridian corporation 2007 annual report

37

Paper logos to be added here by printer

Veridian Corporation 55 Taunton Road East, Ajax, ON L1T 3V3 905-427-9870 | 1-888-445-2881 www.veridian.on.ca

veridian is a proud member of

Veridian Corporation is a member of the Coalition of Large Distributors.

Centre for Energy Advancement through Technological Innovation