Trigen-Philadelphia Energy Corporation

VEOLIA ENERGY PHILADELPHIA, INC.

(Formerly TRIGEN-PHILADELPHIA ENERGY CORPORATION)

A REPORT ON THE STEAM COST RATE

FOR

THE TWELVE MONTHS ENDED JUNE 30, 2011

Prepared By The

Pennsylvania Public Utility Commission

Bureau of Audits

Report Date:January 10, 2013

Docket No. D-2012-2296421

VEOLIA ENERGY PHILADELPHIA, INC

Contents

Page

FINANCIAL REVIEW

Independent Auditor’s Report1

Statement OfSteamCosts and Related

Steam Cost Rates Billed For theTwelve Months

Ended June 30, 20112

Statement Of Over/(Under) Collections

(Section 1307(e)) For The Twelve Months

Ended June 30, 20113

Notes to the Financial Statements4

BACKGROUND AND OPERATIONAL REVIEW

Background6

Disposition Of Prior Year’s Audit Finding7

Current Year’s Audit Findings:

Finding No. 1-Veolia Energy Philadelphia, Inc.Incorrectly

Charged Customers$38,794 In Interest.8

Finding No. 2-Veolia Energy Philadelphia, Inc.Understated Oil

Costs By $26,785.9

ACKNOWLEDGEMENTS10

FINANCIAL REVIEW

/ COMMONWEALTH OF PENNSYLVANIA
PENNSYLVANIA PUBLIC UTILITY COMMISSION
P.O. BOX 3265, HARRISBURG, PA 17105-3265 / IN REPLY PLEASE REFER TO OUR FILE

INDEPENDENT AUDITOR’S REPORT

To The Pennsylvania Public Utility Commission

We have audited Veolia Energy Philadelphia, Inc.’s Statement of SteamCosts and Related Steam Cost Rates Billed for the Twelve Months Ended June 30, 2011 and the Statement of Over/Under Collections (Section 1307(e)) for the Twelve Months Ended June 30, 2011. These statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the specified statements are free of material misstatement. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements referred to above. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.

The accompanying statements were prepared for the purpose of complying with the rules and regulations of the Pennsylvania Public Utility Commission and are not intended to be a complete presentation of the Company’s revenues and expenses.

In our opinion, the accompanying statements of Veolia Energy Philadelphia, Inc. present fairly, in all material respects, the cost of steam and the over/under collections resulting from the Company’s application of the Steam Cost Rate in accordance with the provisions of its Schedule of Rates as approved by the Pennsylvania Public Utility Commission.

M. Carl Lesney, CPA

Director

Bureau of Audits

VEOLIA ENERGY PHILADELPHIA, INC.

Statement Of SteamCosts And Related Steam Cost Rates Billed

For The Twelve Months Ended June 30, 2011 *

Month / Total
SteamCosts
(Note 1) / Steam Cost
Rates Billed
(Note 2)
July 2010 / $2,798,874 / $9.603/MLB
August / 2,707,595 / 9.082
September / 2,504,303 / 8.553
October / 2,483,379 / 7.202
November / 4,659,254 / 6.286
December / 8,588,407 / 7.473
January 2011 / 10,958,576 / 13.780
February / 7,758,870 / 17.285
March / 4,657,454 / 12.048
April / 4,873,919 / 9.944
May / 2,174,637 / 8.605
June / 2,657,907 / 7.402
Total / $56,823,175

Components Of Total SteamCosts

Cost Of Natural Gas Consumed$ 3,000

Delivered Cost Of Oil Consumed16,219,899

Fuel Hedging Activity (Gain)/Loss 66,550

Purchased Steam Expense42,829,724

Net Cost Of Water Purchases1,611,969

Cost Of Electricity1,549,739

Total Steam Costs $ 62,280,881

Economic Development and Load

Stabilization Rider Steam Costs (Note 3) (5,457,706)

Recoverable Steam Costs $ 56,823,175

* As reported to the Commission at Docket No. M-2011-2255147.

Notes to the Financial Statements are an integral part of this report.

VEOLIA ENERGY PHILADELPHIA, INC.

Statement Of Over/(Under) Collections (Section 1307(e))

For The Twelve Months Ended June 30, 2011 *

Month / Steam Cost Rate Revenues
(Note 4) / Steam Cost Rate Expenditures
(Note 5) / Over/(Under)
Collections
(Note 6)
July 2010 / $ 1,329,152 / $ 1,776,173 / $ (447,021)
August / 1,113,933 / 1,805,110 / (691,177)
September / 1,074,738 / 1,445,206 / (370,468)
October / 992,801 / 1,294,577 / (301,776)
November / 1,206,419 / 2,966,280 / (1,759,861)
December / 2,237,687 / 5,959,329 / (3,721,642)
January 2011 / 6,700,676 / 6,786,229 / (85,553)
February / 8,199,405 / 3,693,419 / 4,505,986
March / 4,357,815 / 1,808,005 / 2,549,810
April / 2,967,324 / 2,404,392 / 562,932
May / 1,703,036 / 539,654 / 1,163,382
June / 863,526 / 1,666,587 / (803,061)
Total / $ 32,746,512 / $ 32,144,961 / $ 601,552

* As reported to the Commission at Docket No. M-2011-2255147.

Notes to the Financial Statements are an integral part of this report.

Arithmetic differences are due to rounding

VEOLIA ENERGY PHILADELPHIA, INC

Notes To The Financial Statements

1 - Total Steam Costs

Total Steam Costs for production and purchase of steam include the following:

The delivered cost of natural gas and oil consumed at Schuylkill and Edison stations.

Fuel hedging activity losses. Gains from this activity are an offset to costs.

The cost of steam purchased from the Grays Ferry Cogeneration Partnership

and rental boilers.

Water and sewer costs at Schuylkill and Edison stations, less water sales revenues received from the Grays Ferry Cogeneration Partnership.

The cost of electricity at Schuylkill station.

2 - Steam Cost Rates Billed

The Steam Cost Rates (SCR) Billed are based on the projected cost of water, sewer and electricity for the twelve months ending each August 31, plus the actual unit cost of fossil fuels and purchased steam incurred in the month proceeding the billing month. The rates also include a component designed to refund or recoup experienced net over or under collections and prior period adjustments (the “E” factor). Net overcollections are refunded with interest calculated at established rates.

3 - Economic Development and Load StabilizationRider Steam Costs

These steam costs are attributed to the steam provided to customers under the Economic Development and Load Stabilization Rider. The tariff rider is available to enable the Company to retain customers who have multiple energy options. The Company has the discretion to determine if it is in the best interests of the Company and the Company’s steam system to supply load under this rider. Currently, the Company is supplying steam and chilled water to one customer under this rider. The costsincurred with supplying the steam provided under thisrider are excluded from SCR recoverable costs.

VEOLIA ENERGY PHILADELPHIA, INC.

Notes To The Financial Statements (continued)

4 - Steam Cost Rate Revenues

Steam Cost Rate Revenues are derived by multiplying the applicable sales volumes billed by the SCR rate in effect, exclusive of the “E” factor.

5 - Steam Cost Rate Expenditures

Steam Cost Rate Expenditures are the total allowable costs for the production and purchase of steam (See Note 1) in excess of the amount of those costs recoverable through the base fuel rate ($7.782 per thousand pounds of steam sold) included in the Company’s approved tariff.

6 - Over/(Under) Collections

Over/(Under) Collections are the differences between SCR Revenues and SCR Expenditures. They represent the over collected steam costsrefundable (with appropriate interest) to, or under collected steam costs recoverable from, consumers through subsequent SCRs. There is no interest charged to consumers on an under collected balance. Differences arise for two primary reasons:

Variations between the actual month-to-month volumes billed to customers and the estimates used to determine the SCR rate.

Variations between the actual SCR expenses incurred and the projected expenses used to determine the SCR rate.

BACKGROUND

AND

OPERATIONAL REVIEW

VEOLIA ENERGY PHILADELPHIA, INC

Background

This background section was developed substantially from data and documentation made available by Veolia Energy Philadelphia, Inc. (Veolia Energy Philadelphia or Company) and is presented solely for informational purposes.

Veolia Energy Philadelphia (formerly Trigen - Philadelphia Energy Corporation or Trigen -Philadelphia), an indirect subsidiary of Veolia Energy North America Holdings Inc. (Veolia Energy NA), serves approximately 300 customers located within the City of Philadelphia. The Company’s service territory covers 4.5 square miles with 33 miles of steam distribution system. The system has a total steam generation capacity in excess of 4.7 million pounds of steam capacity and provides steam to customers for air conditioning purposes to produce approximately 7,000 tons of chilled water.

Veolia Energy Philadelphia’s principal source of steam is the Grays Ferry Cogeneration Partnership (GFCP), a 170-megawatt gas or oil-fired cogeneration facility with 2.6 million pounds per hour of steam capacity. GFCP is operated by Philadelphia United Power Corporation, which is also owned by Veolia Energy NA.Veolia Energy Philadelphia has a Pennsylvania Public Utility Commission approved affiliated interest agreement covering this relationship. Veolia Energy Philadelphia purchased approximately 86% of their total steam send out in the fiscal year ended June, 30, 2011 from GFCP. Veolia Energy Philadelphia also owns and operates two steam production plants (Schuylkill and Edison) with the combined capacity to produce 2.1 million pounds of steam per hour. The principal source of the steam produced by Veolia Energy Philadelphia is from the Schuylkill plant, which has two oilfired boilers and one dualfuel boiler. The oilfired boilers at the Edison Plantare used for system reliability, peaking and back-up purposes.

Veolia Energy Philadelphia has gone through several ownership changes since late 2004.Trigen Energy Corporation (TEC), Trigen-Philadelphia’s parent company, has owned and operated community energy systems and cogeneration facilities in the United States and Canada. On April 30, 2005, TEC’s parent company, Suez Energy North America, Inc., entered into a merger agreement with Thermal North America, Inc. (TNAI). The merger was completed on June 28, 2005, resulting in TNAI’s 100 percent ownership of TEC’s District Heating and Cooling Systems, including Trigen-Philadelphia and the “Trigen” name. In late 2007, Trigen-Philadelphia was acquired by Veolia Energy NA, an indirect subsidiary of Veolia Environment S.A., a company headquartered in Paris, France (NYSE Symbol: “VE”). At the beginning of Year 2011, Trigen-Philadelphia Energy Corporation was renamed Veolia Energy Philadelphia, Inc.

VEOLIA ENERGY PHILADELPHIA, INC

Disposition of Prior Year’sAudit Finding

Our previous audit of Veolia Energy Philadelphia (then doing business as Trigen-Philadelphia Energy Corporation)for the twelve months ended June 30, 2010 disclosed the following finding:

Finding- The Company Incorrectly Charged $103,561 In Interest To The Customers.

In their Steam Cost Rate (SCR) filing dated July 31, 2009 for the SCR that became effective September 1, 2009, Veolia Energy Philadelphia, incorrectly netted a negative applicable interest in the amount of $103,561 against the net current period over collection of fuel costs when calculating the amount of fuel costs to be refunded to the ratepayers in the subsequent period. The Company essentially charged their customers interest calculated on prior period under collections which reduced the current period over collection. The Company’s tariff (Pa PUC No. 4, page no. 23) reads: “customers shall not be liable for interest on net under collections.”

Recommendation

We recommended that the interest amount of $103,561 be refunded to the customers through an adjustment to the E-factor component of the SCR beginning September 1, 2012.

Disposition

Veolia Energy Philadelphiaincluded a refund adjustment of $103,561 in its SCRfiling at Docket Number M-2012-2317193,which became effective September1, 2012.

VEOLIA ENERGY PHILADELPHIA, INC

Current Year’s Audit Findings

Finding No. 1-Veolia Energy Philadelphia, Inc.Incorrectly Charged Customers $38,794 In Interest.

In their Steam Cost Rate (SCR) filing dated August 1, 2011for the SCR that became effective September 1, 2011, Veolia Energy Philadelphia,incorrectly netted a negative applicable interest amountagainst the net current period over collection of fuel costs when calculating the amount of fuel costs to be refunded to the ratepayers in the subsequent period.By netting the negative interest against the net current period over collection, the Company essentially charged their customers interest on prior period under collections which reduced the current period over collection.

Veolia Energy Philadelphia reported that they had overcollected $601,552 from customers in the current period on their 1307(e) reconciliation statement for the twelve month period ended June 30, 2011.The Company additionally reported that the applicable net interest for the current period was a negative $38,794,which represents interest calculated on under collections and also means that the amount is due to the Company if the Company’s SCR Tariff Rider permitted the recovery of interest on under collections. The interest is calculated on each month’s over or under collected fuel cost at the maximum monthly mortgage interest rateand then netted for the twelve month period. The Company’s tariff (Pa PUC No. 4, page no. 23) reads: “customers shall not be liable for interest on net under collections.” Our interpretation is that the Company should only include interest in theE-factor rate calculation when it ispositive or payable to the customers. Therefore, the negative net applicable interest should not have been included in the E-factor calculation.

Recommendation

We recommend that the interest amount of $38,794 be refunded to the customers through the E-factor component of the SCR beginning September 1, 2012.

Auditor Note

Veolia Energy Philadelphia agreed with the recommendation and included a refund adjustment of $38,794 in its SCR Filing at Docket Number M-2012-2317193, which became effective September 1, 2012.

VEOLIA ENERGY PHILADELPHIA, INC

Current Year’s Audit Findings (continued)

Finding No. 2- Veolia Energy Philadelphia, Inc. UnderstatedOil Costs By $26,785.

Veolia Energy Philadelphia understated its oil costs by $26,785 for the SCR reconciliation period ended June 30, 2011. Due to the corporate accounting methods of the parent corporation, Veolia North America, Veolia Energy Philadelphia closes the books on the 25th of the month. For purposes of the annual SCR reconciliation, the Company estimates the final 5 days of its costs and books these estimates as an accrual. The accrual is then reversed and the actual costs are booked in the subsequent month.

At June 30, 2010, the Company had over-estimated its oil costs by $62,754, which was reflected in the SCR reconciliation filing for the period ended June 30, 2010. In the subsequent month of July, the Company made an accounting error when reversing the estimated cost accrual and booking the actual cost which resulted in the $26,785 understatement of oil costs. This error remained undetected for the balance of the SCR filing period ending June 30, 2011.

Recommendation:

We recommend that the Company perform additional reviews of their accruals and subsequent adjustments to ensure that its accounting records accurately reflect its actual operating activity. We further recommend that the Company recoup the understated cost amount of $26,785 through the E-Factor component rate of its next SCR period beginning September 1, 2013.

Auditor Note:

Veolia Energy Philadelphia agrees with the recommendation and will perform additional reviews of its accounting adjustments. The Company will make the adjustment to its E-Factor component rate beginning September 1, 2013.

ACKNOWLEDGEMENTS

We wish to express our appreciation to the officers and staff of Veolia Energy Philadelphia Inc. for the cooperation and assistance given us during the course of our examination. The audit was conducted by Gerville J. Brown.