2010 Annual Report - City of Vernon

PAGE 68CITY OF VERNON 2010 ANNUAL REPORTHE CORPORATION OF THE CITY OF VERNONNotes to the Consolidated Financial StatementsYear Ended December 31, 201011. Expenses by Object (in thousands of dollars):2010 2009Salaries, wages & employment benefits $ 17,692 $ 16,892Contracted services 15,973 14,715Amortization of tangible capital assets 10,811 10,863Supplies, materials & other 6,369 6,286Debt servicing, bank charges & losses on disposal of assets 4,557 4,868Utilities, telephone & insurance 2,026 1,967$ 57,428 $ 55,59112. Natural Gas System Lease Agreements:The City has entered into an agreement with B.C. Gas Utility Ltd (now known as Terasen Gas Inc. andhereafter referred to as “Terasen”) which has resulted in the creation of the Natural Gas Legacy Fund.a) Capital Leases:Under the terms of the agreement, the City has entered into a 35-year capital leasecommencing December 1, 2002 for the natural gas distribution system within the Cityboundary. The City has prepaid $23,750,000 of the capital lease obligation and hasfinanced the prepayment through debenture debt. The remaining obligation, which isincluded in long-term debt, will be paid with annual lease payments of $127,884 includinginterest based on Terasen-approved pre-tax weighted average cost of capital of 9.25%.b) Operating Lease:The City has also entered into a 17-year operating lease that commenced December 1,2002 whereby the City leases back to Terasen the operation of the gas distributionsystem. Under the operating lease, Terasen is obligated to make annual lease paymentsto the City that are calculated by a formula specified in the agreement which is based onthe total annual revenue generated by the transaction. The lease revenue in 2010 was$2,376,238, ($2,327,361 in 2009). At the end of the 17-year term, Terasen has the optionof making a termination payment equal to the unamortized portion of the City’s$23,750,000 prepayment under the capital lease, which is estimated to be $12,214,000 ornegotiate a new 18-year operating lease with a continuation of the annual lease paymentswhich existed under the previous 17-year operating lease agreement.13. Long-term Agreements with the Regional District of North Okanagan and the District ofColdstream:The City has entered into a 10-year agreement with the Regional District of North Okanagan for theoperation of the entire water system owned by the Regional District. This agreement was entered intofollowing a successful alternate approval process. Subsequently, the City has entered into a 10-yearagreement with the District of Coldstream whereby the District operates that portion of the water systemthat is located within and east of the District boundary. This agreement was also subject to a successfulalternate approval process. Under these agreements, the City and the District are responsible for the dayto-dayoperation of the water system, and are wholly reimbursed by the Regional District for the operatingexpenses made to undertake these duties. The agreements expire January 31, 2013.