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Home My WebLink AboutCAO-005-18 Clarington CAO REPORT If this information is required in an alternate accessible format, please contact the Accessibility Coordinator at 905-623-3379 ext. 2131. Report To: General Government Committee Date of Meeting: May 28, 2018 Report Number: CAO-005-18 Resolution: GG-307-18 File Number: By-law Number: 2018-055 Report Subject: Veridian and Whitby Hydro Merger Recommendations: 1. That Report CAO-005-18 be received; and 2. That Council pass the by-law attached to this Report (Attachment 1) in order to approve the proposed amalgamations between (1) Veridian Corporation and Whitby Hydro Energy Corporation, and (2) Veridian Connections Inc. and Whitby Hydro Electric Corporation. Municipality of Clarington Report CAO-005-18 Page 2 Report Overview This report is intended to inform Council in relation to the proposed merger of Veridian Corporation and Whitby Hydro Energy Corporation. It is staff's recommendation that the merger be approved by Clarington Council. 1 . Background 1.1 In late 2015, Veridian Corporation, Oshawa Power and Utilities Corporation and Whitby Hydro Energy Corporation began discussions to identify the potential benefits of a merger that would create value for all shareholders and customers, as well as position the combined entity for the future. 1.2 On March 1, 2017, the parties jointly announced that Oshawa PUC had amicably withdrawn from future merger discussions and only Veridian and Whitby Hydro would proceed to the next stages of a proposed merger. 1.3 Over the next 14 months, both utility companies, their Boards, management teams, steering committees, consultants, accounting firms and lawyers have worked through the details of the proposed merger with the five shareholder municipalities (represented by their CAOs, Treasurers, consultants and lawyers). As could be expected with a merger of this magnitude, complexity and varying opinions and positions, the negotiated agreements (merger participation agreement and shareholders' agreement) are a combination of good business and legal practices that are intended to increase benefits to customers and shareholders. 1.4 On January 15, 2018, representatives from Veridian made a confidential verbal presentation to Council regarding the proposed merger. Attachment 2 to this Report is a copy of a letter dated January 11, 2018 from the Chair of Veridian Corporation that sets out some of the rationale in support of the proposed merger. 1.5 On April 16, 2018, representatives from Veridian appeared before General Government Committee and presented an overview the proposed merger. A copy of their "Presentation to Municipal Shareholders" is attached to this Report (Attachment 3). 2. Discussion Disclosure 2.1 In an undated letter (received May 3, 2018) from Michael Angemeer, President and CEO of Veridian Corporation, and John Sanderson, President and CEO of Whitby Hydro Energy Corporation, the utilities indicated that while they recognize the shareholder municipalities' interest in maintaining openness and transparency, some information relating to the proposed merger must be protected from disclosure and discussion in open public meetings "until such time as the bases and criteria ... for Municipality of Clarington Report CAO-005-18 Page 3 confidential treatment are no longer applicable". A copy of this letter, which sets out the legal basis for the request, is attached to this Report (Attachment 4). 2.2 Given the Municipality's legal obligation to maintain the confidentiality of some merger- related records, the following documents are provided to Council in confidence: x Opinion Memorandum dated May 3, 2018 from Aird & Berlis LLP respecting the Municipality's disclosure rights and obligations for merger-related records (Attachment 5) x Fairness Opinion prepared by Grant Thornton dated November 10, 2017 (Attachment 6) x Independent Assessment of Project Synergies prepared by Navigant dated August 28, 2017 (Attachment 7) x Business Case dated November 2017 (Attachment 8) x Peer Review Summary Report prepared by Deloitte LLP dated April 9, 2018 (Attachment 9) x Proposed Merger Participation Agreement dated May 18, 2018 (Attachment 10) x Proposed Shareholders' Agreement dated May 18, 2018 (Attachment 11) x Letter from Michael Angemeer dated May 18, 2018 setting out the 5 year EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) on Veridian's non- regulated businesses which Michael Angemeer undertook to provide to Council at the April 16, 2018 GGC meeting (Attachment 12) Business Case 2.3 There are 3 main financial benefits which will result from this merger: x Customers - rate stability and modest savings in distribution rates x Merged company - greater scale and efficiency to be able to invest in innovative energy services x Municipal shareholders - increased annual revenues Municipality of Clarington Report CAO-005-18 Page 4 2.4 Expected revenue for Clarington is as follows: Revenue Type Merged Standalone (Annual verage over 7 7 years Dividends $1.06M $0.74M Promissory Note Interest $0.25M $0.31 M Total 1 $1.31 M $1.05M 2.5 It is forecasted that Clarington, on average over the next 17 years, will receive an additional $260,000 per year. Business Case Peer Review 2.6 Veridian's presentation to GGC on April 16, 2018 made reference to the fact that all Veridian shareholders (Pickering, Ajax, Belleville and Clarington) had engaged an independent firm "to prepare a Peer Review Report on the entire merger process to date." The firm was Deloitte LLP and it produced a Peer Review Summary Report dated April 9, 2018 (Attachment 9 — Confidential). 2.7 The shareholders were seeking a review of all aspects and assumptions in the business case supporting the proposed merger and an opinion on whether the business case presented a commercially reasonable basis for the shareholders to move forward with the merger. Deloitte's Peer Review included a review of the reasonableness of the assumptions, analysis and conclusions of the business case, benchmarking, and scenario sensitivity to determine impact on shareholders, ratepayers, and the new merged companies. It included recommendations in a number of areas of interest to Veridian shareholders. These recommendations factored into the negotiations of the Merger Participation Agreement and the Shareholder Agreement. 2.8 The key components reviewed were: x Dividend Policy x Affco (non-regulated) dividend strategy x Closing Adjustments x Promissory Notes Interest Rate Reset x Framework for Affco (non-regulated) Investments 2.9 The Peer Review indicated that relative to a standalone scenario, overall the proposed merger would result in risk mitigation and post-merger costs savings that would benefit shareholders and ratepayers. Deloitte therefore generally supported moving forward with the proposed merger. Municipality of Clarington Report CAO-005-18 Page 5 2.10 Using the information provided in the Peer Review, amendments were made to the legal agreements to address several matters including the following: x Higher dividend payout ratio to maximize shareholder dividends/cash returns without impeding the business of the merged company. x Establishment of a non-regulated dividend policy. x Determination of a closing adjustment mechanism. x Clarity and principles regarding the overall process of non-regulated business investments, including transparency on identification and feasibility of investments, governance process and delegation of authority. x Revision of promissory note provisions to provide maximum liquidity by allowing any shareholder to independently redeem their promissory notes, with reasonable notice, in whole or in part. Legal Agreements (a) Merger Participation Agreement 2.11 The Merger Participation Agreement (MPA) sets out the basis on which the parties agree to merge Veridian and Whitby Hydro and their respective regulated local distribution companies (LDCs) to form a merged LDC (Merged LDCCo). 2.12 The current Veridian and Whitby Hydro shareholders will be signatories to the MPA, along with Veridian, Whitby Hydro and the LDCs. The terms of the MPA are outlined in more detail in Attachment 13 to this Report. Key provisions include: x Shareholdings — Clarington will own 9.25% of the shareholdings in the merged holding corporation (Merged HoldCo). Equity ownership levels are agreed and will not be adjusted at closing. x Representations and Warranties —The representations and warranties provided by each municipality are restricted to fundamental matters such as valid existence and proper authorization. The municipalities backstop the representations and warranties provided by their respective utility by providing an indemnity for breach, but subject to a deductible and cap on liability. x Closing Conditions —Among other things, conditions to close include approval by the Ontario Energy Board (OEB) and the delivery of a shareholders' agreement, in the form attached to the MPA, executed by all of the shareholders. 2.13 MPA is substantially in its final form other than the dollar amounts for adjustment items and some of the schedules. Municipality of Clarington Report CAO-005-18 Page 6 (b) Shareholders' Agreement 2.14 The current Veridian and Whitby Hydro shareholders will be signatories to the Shareholders' Agreement (SA), along with Merged HoldCo and Merged LDCCo. The terms of the SA are outlined in more detail in Attachment 13 to this Report. Key provisions include: x Shareholder Approvals — Certain significant matters require the special approval of shareholders holding 2/3 of outstanding shares. The breadth of items that must be returned to the shareholders for approval is wider than under Veridian current arrangements. Exceptions requiring approval of 2/3 of shares PLUS 4 out of 5 in number of shareholders: * No shareholder may amend its promissory note without the agreement of all of the other shareholders, except if any proposed amendment is in the context of a proposed amalgamation or consolidation; and * Any amendment to the SA. x Governance — The Merged Holdco board will consist of 11 directors, 5 of whom will be the shareholders' Mayors (or designates). The remaining 6 will be independent directors. The boards of Merged LDCCo and the affiliates will consist of independent directors. x Governance Review — The SA provides that a governance review will take place 3 years following closing, and every 4 years thereafter. The review will include consideration of, but not require, moving to a fully independent board for Merged HoldCo. x Dividend Policy Principles — Dividend policy principles form an integral part of the SA and cannot be changed except with the special shareholder approval described above. The principles specify a target dividend, but the board retains discretion to determine specific dividend amounts subject to certain factors such as financial ratios and debt obligations. The dividend policy principles include covenants that protect future dividend payments. x Promissory Notes — The form of note is an integral part of the SA and cannot be changed except with the special shareholder approval described above. Interest rates are set for a ten-year period at the deemed long-term interest rate prescribed by the OEB in its most recent cost of capital parameter update. On the tenth anniversary, the annual interest rate will be adjusted to such OEB deemed long term rate in effect at that time, and then adjusted to such rate in effect at the earlier of the 5 year anniversary or the date on which Merged LDCCo files a cost of service application. Municipal shareholders have the option of demanding repayment of the notes at any time if higher rates of return are available on other investments. Municipality of Clarington Report CAO-005-18 Page 7 x Liquidity Provisions — The SA includes a right of first refusal, but such rights cannot be acted on during the 18 month period following closing. 2.15 Perhaps the most significant issue that had to be negotiated in the SA was the dividend ratio. The agreed upon ratio of 52.5% is a level of target dividend that still allows re- investment into the affiliates for additional future growth and maintains stability over electricity distribution rates. Conversely, a higher dividend rate would decrease the re- investment and associated opportunity for growth, as well as place upwards pressure on electricity distribution rates. The management and boards of both Veridian and Whitby Hydro believe there is a significant opportunity for the merged company to provide services to their customers through the affiliate businesses in addition to the regulated LDC. The regulated nature of the distribution business provides a steady stream of cashflows to both entities' shareholders. However, regulated returns have begun to slip slightly over the last few years and there is less of an opportunity for growth in those cashflows. The goal of the non-regulated investments would be to grow the invested capital such that the dividends from these investments could one day exceed those from the distribution business. The targeted ratio is a projected higher rate than compared to a "no-merge" scenario and is in the market range of dividend rates for LDCs. In the broader context, the dividend target for the first 3 years of the merged company's operation is an absolute dollar target, following which 52.5% takes effect. Considering this over a 10 year period means that the annual dividend rate for the first ten years may actually average over 60%. 2.16 At the April 16, 2018 GGC, Veridian was asked whether the SA would be amended to remove the requirement for unanimous shareholder approval of a future merger if the promissory notes had to change. This issue has been addressed in the manner described above (promissory notes may be amended without the agreement of all other shareholders if it is done as part of a proposed amalgamation or consolidation). 2.17 All parties have agreed to the current wording in the SA. 3. Concurrence 3.1 This Report has been reviewed by the Municipal Solicitor, Director of Finance and Director of Corporate Services who concur with the recommendations. 4. Conclusion 4.1 There has been a rigorous analysis of all aspects of the proposed merger that has involved both utility companies, their Boards, management teams, steering committees, consultants, accounting firms and lawyers, as well as representatives (CAOs, Treasurers, consultants and lawyers) of all five shareholder municipalities. All of this analysis suggests that the merger of Veridian and Whitby Hydra will provide significant benefits to the customers and shareholders of both entities. Staff therefore support proceeding with the proposed merger. Municipality of Clarington Report CAO-005-18 Page 8 4.2 It is therefore respectfully recommended that Council pass the by-law attached to this Report (Attachment 1). 4.3 If the Boards of both utilities and the Councils of all 5 shareholder municipalities approve the proposed merger, the MPA will be executed, a MAAD (Mergers, Acquisitions, Amalgamations and Divestitures) application will be made to the Ontario Energy Board and, if approved, the amalgamation will proceed. 5. Strategic Plan Application 5.1 Not applicable. Submitted by: Andrew C. Allison, B. Comm, LL.B, CAO Staff Contact: Andrew Allison, CAO, aallison@clarington.net Interested parties to be notified of Council's decision: Michael Angemeer, Veridian Corporation John Sanderson, Whitby Hydro Energy Corporation Troy MacDonald, Grant Thornton LLP Ron Clark, Aird & Berlis LLP Bernadette Corpuz, Borden Ladner Gervais LLP Clerk, City of Pickering Clerk, Town of Ajax Clerk, City of Belleville Clerk, Town of Whitby Attachments: Attachment 1 - Proposed By-law approving the mergers Attachment 2 - Letter dated January 11, 2018 from the Chair of Veridian Corporation Attachment 3 - Presentation to Municipal Shareholders dated March 2018 Attachment 4 - Undated letter from Michael Angemeer and John Sanderson Attachment 5 - Disclosure Opinion from Aird & Berlis LLP dated May 3, 2018 (Confidential) Attachment 6 - Grant Thornton Fairness Opinion dated November 10, 2017 (Confidential) Attachment 7 - Navigant Independent Assessment of Project Synergies dated August 28, 2017 (Confidential) Attachment 8 - Business Case dated November 2017 (Confidential) Attachment 9 - Deloitte LLP Peer Review Summary Report dated April 9, 2018 (Confidential) Municipality of Clarington Report CAO-005-18 Page 9 Attachment 10 - Merger Participation Agreement dated May 18, 2018 (Confidential) Attachment 11 - Shareholders Agreement dated May 18, 2018 (Confidential) Attachment 12 - Letter from Michael Angemeer dated May 18, 2018 (Confidential) Attachment 13 - Summary of Legal Agreements Attachment 1 to Municipality of Clarington Report CAO-005-18 THE CORPORATION OF THE MUNICIPALITY OF CLARINGTON BY-LAW 2018- A by-law respecting the Amalgamations Between (1) Veridian Corporation and Whitby Hydro Energy Corporation, and (2) Veridian Connections Inc. and Whitby Hydro Electric Corporation WHEREAS The Corporation of the Municipality of Clarington (the "Municipality") is a shareholder of Veridian Corporation ("Veridian Holdco"); AND WHEREAS Veridian Holdco is the sole shareholder of Veridian Connections Inc. ("Veridian LDC"); AND WHEREAS Veridian Holdco and Whitby Hydro Energy Corporation ("Whitby Holdco") intend to amalgamate (the "Holdco Amalgamation") pursuant to section 174 of the Business Corporations Act (Ontario) (the "OBCA") to form an amalgamated entity ("Merged Holdco"); AND WHEREAS subsequent to the Holdco Amalgamation, Veridian LDC and Whitby Hydro Electric Corporation ("Whitby LDC") intend to amalgamate pursuant to section 174 of the OBCA (the "LDC Amalgamation", and together with the Holdco Amalgamation, the "Amalgamations") to form an amalgamated entity ("LDC Mergeco"); AND WHEREAS in order to facilitate the Amalgamations, Veridian LDC, Whitby Holdco, Veridian Holdco, Whitby LDC, The Corporation of the Town of Ajax, The Corporation of the City of Belleville, the Municipality, The Corporation of the City of Pickering, and The Corporation of the Town of Whitby intend to enter into a merger participation agreement (the "Merger Participation Agreement"), substantially in the form of a draft merger participation agreement (the "Draft Merger Participation Agreement") previously presented to the Municipality for review; AND WHEREAS pursuant to section 2.3(1) of the Merger Participation Agreement, Veridian Holdco is required to enter into an amalgamation agreement with Whitby Holdco substantially in the form of the agreement attached as Schedule 2.3(1)to the Merger Participation Agreement (the "Holdco Amalgamation Agreement"); AND WHEREAS subsection 176(4) of the OBCA provides that an amalgamation agreement is adopted when the shareholders of each amalgamating corporation have approved of the amalgamation by a special resolution of the holders of the shares of each class or series entitled to vote thereon; AND WHEREAS pursuant to section 185 of the OBCA, a holder of shares of any class or series entitled to vote on the resolution approving an amalgamation may dissent, in which case such shareholder, in addition to any other right the shareholder may have, is entitled to be paid by Attachment 1 to Municipality of Clarington Report CAO-005-18 the corporation the fair value of the shares held by the shareholder subject to compliance with the dissent procedure contained in section 185 of the OBCA; AND WHEREAS the Municipality declares that it is not exercising such right of dissent in connection with the Amalgamations and waives its right to receive notice of a meeting of shareholders pursuant to subsection 176(2)of the OBCA in connection with the Amalgamations; AND WHEREAS pursuant to section 2.3(2) of the Merger Participation Agreement, Veridian LDC is required to enter into an amalgamation agreement with Whitby LDC substantially in the form of the agreement attached as Schedule 2.3(2) to the Merger Participation Agreement (the "LDC Amalgamation Agreement"); AND WHEREAS after the Amalgamations have taken place, Merged Holdco, LDC Mergeco, The Corporation of the Town of Ajax, The Corporation of the City of Belleville, the Municipality, The Corporation of the City of Pickering, and The Corporation of the Town of Whitby intend to enter into a unanimous shareholders' agreement governing the affairs of Merged Holdco and LDC Mergeco (the "Unanimous Shareholders' Agreement"), substantially in the form of a unanimous shareholders' agreement (the "Draft Unanimous Shareholders' Agreement") previously presented to the Municipality for review; NOW THEREFORE BE IT RESOLVED THAT: (a) The Municipality approves the Amalgamations; (b) The terms and conditions of the Merger Participation Agreement, the Unanimous Shareholders' Agreement and the transactions contemplated thereby are reasonable and fair to the Municipality; (c) The Municipality, Veridian Holdco and Veridian LDC are authorized to enter into the Merger Participation Agreement, substantially in the form of the Draft Merger Participation Agreement; (d) Veridian Holdco is authorized to enter into the Holdco Amalgamation Agreement, substantially in the form set out in Schedule 2.3(1) to the Merger Participation Agreement; (e) Veridian LDC is authorized to enter into the LDC Amalgamation Agreement, substantially in the form set out in Schedule 2.3(2) to the Merger Participation Agreement; (f) The Municipality is authorized to enter into the Unanimous Shareholders' Agreement, substantially in the form of the Draft Unanimous Shareholders' Agreement; (g) The execution and delivery by the Municipality of the Merger Participation Agreement and the Unanimous Shareholders' Agreement and the performance by it of its obligations thereunder, substantially in the form and on the terms set out in the Draft Merger Participation Agreement and Draft Unanimous Shareholders' Agreement is authorized and Attachment 1 to Municipality of Clarington Report CAO-005-18 approved, the execution of such agreements in accordance with the provisions of the paragraph immediately below being conclusive evidence of such determination; (h) The Mayor and Clerk are authorized and directed, for and in the name of and on behalf of the Municipality, to execute and deliver the Merger Participation Agreement and the Unanimous Shareholders' Agreement, substantially in the form and on the terms set out in the Draft Merger Participation Agreement and the Draft Unanimous Shareholders' Agreement; and (i) The Mayor and Clerk are authorized and directed, for and in the name of and on behalf of the Municipality, to execute and deliver all such other agreements, amendments, instruments, certificates, resolutions and other documents, including a resolution of the shareholders of Veridian Holdco approving the Amalgamations, and to do all such other acts and things may be necessary or advisable in connection with the Merger Participation Agreement, with the Unanimous Shareholders' Agreement, or to carry out the intention of the foregoing resolution. By-law passed this 11 th day of June, 2018. Adrian Foster, Mayor Anne Greentree, Municipal Clerk 55 Taunton Road East Ajax,ON UT 3V3 Tel: 905-427-9870 Ext.: 2200 VERI D IAN Fax: 905-619-0210 C O R f email: mangemeer@veridian.on.ca ORATION January 11, 2018 Clarington Municipal Council Delivered electronically Re: Proposed Merger of Veridian Corporation and Whitby Hydro Dear Council Members, I am pleased to provide you with a detailed summary of the proposed merger of Veridian Corporation and Whitby Hydro. The merger will enable the creation of a new, stronger, and more sustainable electricity distribution and innovative electricity services company. The new company will be publicly owned with the municipalities of Ajax, Belleville, Clarington, Pickering and Whitby being the shareholders. While we continue to work on the underlying documents, thus far the business case for the creation of this new merged company demonstrates substantial benefits for shareholders, significant value to ratepayers, and future opportunities for the companies and their employees. The Board of Veridian Corporation voted unanimously to ratify the business case and we recommend it to our shareholders for approval. Attached is a summary of the business case as well as the full business case for your review and consideration. We wish to draw your attention to several compelling factors identified by the business case: 1. Our ratepayers will share in the cost savings achieved by creating an energy services company with greater size, scope and rate base. This will create a modest decrease in distribution rates and importantly help us limit future rate increases. 2. The proposed new company will be able to protect current distributions to shareholders and in fact provide an increased dividend to each municipality over the long-term. 3. The new company will be owned by five municipalities instead of four. For the reasons we already know, there is great benefit to maintaining local, publicly-held influence over the company. We wish that to continue. The power to make your community better. Veridian Connections is a wholly owned subsidiary of Veridian Corporation 4. The electrical utility sector is experiencing unprecedented change. The proposed merger will allow us to take advantage of new technologies and provide innovative services demanded by changing customer expectations. Veridian shareholders will ❑-EHMD:RP ®-I®EHMEMEMEH®J HD=EHEDEEDEM HERI[BIDF®RP SD strengths. The merged company would be more robust, more nimble and more efficient than either individual company. Our Board believes strongly that continued municipal ownership and influence, as a larger, stronger utility, provides the best opportunity for a situation that benefits ratepayers, the municipalities and the company and its employees for the long-run. Many of the benefits outlined above also apply directly to Whitby Hydro. Their Board too, has ratified the merger and recommended its approval to their municipal shareholders. We share with them a passion for excellent customer service, reliability, a belief in the future for publicly-owned utilities and a desire to be leaders in innovative energy solutions for our customers today and into the future. We hope that you see that passion and dedication in the months of hard work that has led us to this mutually-beneficial conclusion. We look forward to your questions and your thoughtful deliberations as we respectfully ask for your approval to proceed with this very positive opportunity. Sincerely, V� Mayor Adrian Foster Chair of the Board of Veridian Corporation �~ �_. '+ - �. _� � �,: 4 � � / � • � ti f'+ �- �� -� , , , .` - � -� 4 ��-a- �� •� _� _ � ��. - : � � � Jx'C �, - � � �� rrC t '�i / i �� . * �. �� s ------------------------------- --------------- --------------- ------------------------------- --------------- -------------------------- --------------- ------------------------------ ------------------------------- --------------- --------------- ------------------------------- --------------- -------------------------------- --------------- ---------------- WHITBY A� PICKERING ONinniu CANADA Sy tAc LwF. 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Non-regulated ®ELI DEI] 0 00 O 00 000 WHITBY rX PIC ER1NG WHITBY rX P1C ER1NG VERI DIAN C 0 R P 0 R A T 1 0 N The power to make your community better. Rob Ford Chief Administrative Officer, Town of Ajax 65 Harwood Ave. S. Ajax, ON LIS 2H9 Rick A. Kester Chief Administrative Officer, City of Belleville 169 Front Street Belleville, ON K8N 2Y8 Andy Allison Chief Administrative Officer, Municipality of Clarington 40 Temperance Street Bowmanville, ON LIC 3A6 Tony Prevedel Chief Administrative Officer, City of Pickering One The Esplanade Pickering, ON L1V 6K7 Matthew L. Gaskell Chief Administrative Officer, Town of Whitby 575 Rossland Road East Whitby, ON LIN 2M8 Dear Sirs: The Town of Ajax, the City of Belleville, the Municipality of Clarington, the City of Pickering and the Town of Whitby (collectively, the "Municipalities") have been and are currently involved in negotiations with each other and with Veridian Corporation ("Veridian") and Whitby Hydro Energy Corporation ("Whitby Hydro") with respect to the merger of Veridian and Whitby Hydro and their affiliates. The terms and conditions of the merger are set out in a draft Merger Participation Agreement among the Municipalities, Veridian and Whitby Hydro (and Veridian Connections Inc., the regulated electricity distributor that is a subsidiary of Veridian, and Whitby Hydro Electric Corporation, the regulated electricity distributor that is a subsidiary of Whitby Hydro). VERI DIAN C 0 R P 0 R A r 1 0 N The power to make your community better. A schedule to the draft Merger Participation Agreement is a form of Shareholders Agreement between the Municipalities, the merged entity and the merged regulated distribution subsidiary to be entered into following regulatory approval of the merger, expected in the latter part of 2018. Under the existing Veridian Shareholder Agreement and Whitby Hydro shareholder direction, the merger itself, and the execution and delivery of the draft Merger Participation Agreement and the Shareholders Agreement, are subject to the approval of Ajax, Belleville, Clarington, and Pickering, as shareholders of Veridian, and Whitby, as shareholder of Whitby Hydro. While recognizing the Municipalities' interest in maintaining openness and transparency, both the Municipal Freedom of Information and Protection of Privacy Act and the Municipal Act, 2001, recognize that certain matters and information and positions, plans, procedures, criteria and instructions relating to negotiations involving municipalities and third parties dealing with municipalities may be protected from disclosure and discussion in open public meetings. In light of the above, Veridian and Whitby Hydro hereby identify the Merger Participation Agreement and Shareholders Agreement as information that falls under the following categories: 1. records that reveals a trade secret or commercial, financial or labour relations information, supplied in confidence, the disclosure of which could reasonably be expected to, (a) prejudice significantly the competitive position or interfere significantly with the contractual or other negotiations of Veridian and Whitby Hydro; (b) result in similar information no longer being supplied to Veridian, Whitby Hydro and the Municipalities where it is in the public interest that similar information continue to be so supplied; and (c) result in undue loss or gain to Veridian, Whitby Hydro and the Municipalities; 2. positions, plans, procedures, criteria or instructions to be applied to negotiations carried on or to be carried on by or on behalf of the Municipalities; 3. information including the proposed plans, policies or projects of the Municipalities, the disclosure of which could reasonably be expected to result in premature disclosure of a pending policy decision or undue financial benefit or loss to a person; and VERI DIAN CORPORATION "V--f The power to make your community better. 4. records and instructions relating to matters that are being negotiated by the Municipalities in relation to which; (a) he record contains positions, plans, procedures, criteria or instructions, (b) the positions, plans, procedures, criteria or instructions are intended to be applied to negotiations, (c) the negotiations are being carried on currently, or will be carried on in the future, and (d) the negotiations are being conducted by or on behalf of the Municipalities; 5. records containing information disclosure of which could reasonably be expected to result in: (a) premature disclosure of a pending policy decision, and (b) undue financial benefit or loss to a person. Therefore, Veridian and Whitby Hydro request that the Merger Participation Agreement and the Shareholders Agreement, and related information, other than that contained in the Business Case identified as available for disclosure to the public, be kept confidential, not be disclosed to the public, and not be considered or discussed by members of the respective Councils of the Municipalities other than in closed meetings, until such time as the bases and criteria identified above for such confidential treatment are no longer applicable. Sincerely, 7 Michael C. Angemeer, P. Eng. John Sanderson President& CEO President& CEO Veridian Corporation Whitby Hydro Energy Corporation 32439367.3 Y Potential Merger: Veridian Corporation - T and =- Whitby Hydro E •. �� _ Corporation f Summary of Merger Participation Agreement x and 4f _ May 3, 2018 EELLEVILLE Merger Participation Agreement 4— WHITBY L�Jaxe PIC ER]NGClaFftW l �___ LEGAL AGREEMENTS SUMMARY 3 Merger Participation Agreement General ❑ All five municipalities along with Veridian Corporation and Whitby Hydro Energy Corporation (the [HoldcosE[LID❑GA/eridian Connections Inc. and Whitby EIEW @FIAIP1E11RLSF4DfiZ❑Hdl-I1LDCs ❑ are parties to the 0 Hl.1HLJ3 DUIFLSD\ME$ ❑LFF-P H❑1VIIM PA❑ The MPA is separated into eight sections: ❑ Article 1 : Definitions ❑ Article 2: Amalgamation ❑ Article 3: Closing Deliveries ❑ Article 4: Closing Conditions ❑ Article 5: Representations and Warranties ❑ Article 6: Covenants ❑ Article 7: Indemnification ❑ Article 8: General Provisions WHITBY Qj- axe PICKERING � Clarington ___ LEGAL AGREEMENTS SUMMARY 4 Merger Participation Agreement Valuation / Ownership ❑ Equity ownership of the New Holding Company (that will be formed by the amalgamation of the Holdcos) as set out in MPA are based on valuations agreed between the parties, and would have the New Holding Company owned as follows (rounded): ❑ Ajax ❑ 22% ❑ Belleville El 9% ❑ Clarington ❑ 9% ❑ Pickering ❑ 28% ❑ Whitby ❑ 32% ❑ The New Holding Company will own the New LDC (that will be formed by the amalgamation of the LDCs) and any non-regulated affiliate companies (e.g. , service providers, renewables companies, etc) WHITBY Qj- axe PICKERING Claringon ___ LEGAL AGREEMENTS SUMMARY 5 Merger Participation Agreement Post-Closing Adjustment Mechanism ❑ Audited financial statements to be prepared as of date of closing ❑ Mechanism included to allow challenges regarding accuracy of audited statements ❑ Both sides to prepare comparison of certain metrics as of the closing date against target values including: ❑ Working Capital ❑ Total Debt ❑ Net Fixed Assets ❑ Net Regulatory Assets ❑ New Contracts ❑ Net Other Assets and Liabilities ❑ Net Non-Balance Sheet Valuation Amounts; and ❑ if necessary, a Special Adjustment for the cost of any work (relating to identified diligence issues) that is not completed prior to closing ❑ Any post-closing adjustment will be paid by the New Holding Company to the applicable Shareholder(s). If the adjustment is significant, payments will be in annual tranches to minimize cash flow impact. WHITBY QJ_ axe PICKERING � Clarington ___ LEGAL AGREEMENTS SUMMARY 6 Merger Participation Agreement Signing deliverables Prior to the parties entering into the MPA, at least the following will need to be delivered: ❑ Directors AHVROXNZA/LR [the LDCs and the Holdcos approving the transactions ❑ By-00 [U 1R +UEI EDUHERR❑❑FLMSSl9RELEIMHMD EF\kR�/ Closing Deliverables The following items, among others, will be delivered at the time of the amalgamation: ❑ Signed Shareholders[Agreement ❑ Documents required by statute to effect the amalgamations ❑ Share certificates, minute books, corporate records, etc. ❑ Third party consents ❑ 2 I I L RMCertificates WHITBY LlJaxe PIC ER1NG ci.-WftuW,n LEGAL AGREEMENTS SUMMARY 7 Merger Participation Agreement Closing Conditions ❑ Representations/warranties remain true ❑ Parties have complied with all obligations, covenants and agreements ❑ Municipal FR❑❑F01DSSIBZ1DHG ❑ Third party consents have been obtained ❑ No material adverse change, or change in credit rating/ability to pay debt ❑ Competition Act approval ❑ Ontario Energy Board approval ❑ No adverse tax consequences WHITBY Qj- axe PICKERING � Clarington ___ LEGAL AGREEMENTS SUMMARY 8 Merger Participation Agreement Representations and Warranties ❑ Wide range of representations/warranties on a number of matters ❑ Some representations/warranties are absolute, and some are only made to the knowledge of each LDC/Holdco ❑ Disclosure Schedules may qualify representations/warranties Covenants Amongst other covenants, in the period between signing the MPA and Closing the transactions the parties will: ❑ Prepare Transition Plan ❑ Complete tasks to address outstanding due diligence items ❑ Conduct business in the ordinary course/not make any major changes without consent ❑ Obtain necessary third party consents ❑ Use commercially reasonable efforts to satisfy closing conditions ❑ Allow continued access for due diligence purposes ❑ Co-operate on transition planning, Competition Act / OEB approvals and public statements ❑ Maintain confidentiality WHITBY AJ —xe PICKERING Clarrington oNTAH— • r—A— LEGAL AGREEMENTS SUMMARY 9 Merger Participation Agreement Indemnification ❑ Municipalities each to provide indemnity for breach of representations, warranties and covenants under the MPA. Most representations, warranties and covenants have a survival period of 18 months and so cease to be a basis for an indemnity claim after 18 months. ❑ Minimum threshold (and deductible) of $500,000 for a claim by Whitby and $1 ,000,000 for a claim by veridian shareholders (cannot claim if damages are less than such amount) ❑ Shareholder(s) suffering damage must seek to mitigate and seek to recover from insurance first ❑ Maximum liability will be the agreed percentage (e.g., 15%) of the P ❑E FLSD DU-lLR 1WH❑ aggregate enterprise value of the amalgamated corporation; and ❑ No maximum aggregate liability for claims involving fraud, gross negligence or fraudulent misrepresentation WHITBY Qj- axe PICKERING � Clarington ___ EI [IDLHEIRGOHLY E]UHFP HEW WHITBYLlJaxe PIC ER1NG ClaFftW l LEGAL AGREEMENTS SUMMARY 11 6 IIDLIHEIFC IIU+IP HEA/V General All five municipalities along with the New Holding Company and the New LDC are party to the 6 ❑DLH❑ ❑ J+-P H❑ AJSA❑ Separated into twelve Articles ❑ Article 1 : Definitions and General Provisions ❑ Article 2: Business of the Corporations ❑ Article 3: Corporate Affairs of the Corporations ❑ Article 4: Representations, Warranties and Covenants ❑ Article 5: Pre-Emptive Rights ❑ Article 6: Transfer of Shares ❑ Article 7: Closing of Purchase Transaction ❑ Article 8: Non-Competition and Confidentiality ❑ Article 9: Sale of Surplus Assets ❑ Article 10: Books, Records and Right to Information ❑ Article 11 : Term ❑ Article 12: Promissory Notes ❑ Article 13: Further General Provisions WHITBY AJ --f PICKERING Clarrington I oNTAR • r-A- LEGAL AGREEMENTS SUMMARY 12 6 IIDLIHEIFC ❑ H❑W Business of the Corporations ❑ New Holding Company will hold all shares in the New LDC and Affiliates and, as shareholder, will have certain supervisory and directive powers, but it will not carry on any business directly ❑ New LDC will engage in the regulated distribution business ❑ Affiliates will engage in business activities as authorized by their boards (other than regulated distribution), such as energy services, generation, storage, combined heat and power, etc. Standards of Service ❑ New LDC required to provide services in accordance with industry standards and so that all service areas enjoy common standards and derive equal benefits. Matters Requiring Shareholder Approval ❑ List of matters included in USA for which the agreed super-majority shareholder approval is required (i.e. , approval of shareholders holding two-thirds of shares) ❑ Includes changes to New Holding Company constating documents or corporate structure, certain types of large or otherwise important business transactions by any of New Holding Company, New LDC or Affiliates, exceeding specified financial ratios, changing director compensation and various other matters. WHITBY AJ�xe PICKERING Cla RgWH oNTARI • r-AOA LEGAL AGREEMENTS SUMMARY 13 6 IIDLIHEIFC IIU+IP HEA/V Board of Directors ❑ New Holding Company The New Holding Company board will consist of eleven Directors, of which five will be Mayors, or their designates, and six will be Independent Directors. The initial six Independent Directors will include four recommended by the existing Veridian board and two by the existing Whitby Hydro board. Replacement Independent Directors will be selected by a Nominating Committee of the New Holding Company which will be comprised of Independent Directors ❑The Chair of the New Holding Company board to be chosen from the Independent Directors. ❑Two of the Independent Directors of the New Holding Company (other than Chair of the board) will also be appointed to the New LDC board. Two of the Independent Directors of the New Holding Company (other than Chair of the board) will also be appointed to the each Affiliate board. No Independent Directors of New Holding Company will be appointed to BOTH the New LDC and Affiliate boards. The terms for the Independent Directors to be three years with maximum of three terms. Terms will be staggered initially to avoid excessive Board turnover in any year. WHITBY AJ�xe PIC E RI N G Clarington LEGAL AGREEMENTS SUMMARY 14 6 IIDLIHEIFC IIU+IP HEA/V Board of Directors ❑ New LDC The New LDC Board will consist of seven directors including two Independent Directors that also serve on the New Holding Company board and five Independent Directors. The initial five Independent Directors will be nominated by Whitby Hydro (one director), Veridian (two directors) and a third party consultant (two directors). Replacement Independent Directors will be recommended by the New LDC board for approval by the New Holding Company. Chair to be chosen annually by the complete New LDC board from the Independent Directors (excluding those that also serve on the New Holding Company board). Term of Independent Directors to be three years with maximum of three terms. Terms will be staggered to avoid excessive turnover in any particular year. WHITBY Qj- axe PICKERING � Clarington ___ LEGAL AGREEMENTS SUMMARY 15 6 IIDLIHEIFC IIU+IP HEA/V Board of Directors ❑Affiliates The initial Affiliate Boards will consist of two Independent Directors that also serve on the New Holding Company board and , initially, three other Independent Directors. The three initial Independent Directors will be nominated by Whitby Hydro (one director) and Veridian (two directors). Replacement Independent Directors will be recommended by the Affiliate boards for approval by the New Holding Company. Chair to be chosen annually by the complete Affiliate board from the Independent Directors (excluding those that also serve on the New Holding Company board). Term of Independent Directors to be three years with a maximum of three terms. Terms will be staggered. Affiliate board composition must comply with OEB Affiliates Relationship Code Flexibility to permit an increase in size of Affiliate Boards if the New Holding Company board concludes that business conditions warrant this. WHITBY Qj- axe PICKERING � Clarington ___ LEGAL AGREEMENTS SUMMARY 16 6 IIDLIHEIFC IIU+IP HEA/V Governance Review The initial board of the New Holding Company would include the Mayors, or their designates, in addition to six Independent Directors. However, the USA specifies that after three years, and every four years thereafter, a governance review would be undertaken. The Governance Review would involve the following process: ❑The board of New Holding Company would engage support required for the process; ❑The scope of the governance review would be confirmed by such board, but is expected to be broad and will consider moving to a fully independent New Holding Company board. The process would involve engaging all stakeholders (shareholders, directors and management) to get their perspective. 7 11H1ERD RP P H❑ F❑❑R+U�D❑FHLLHaH❑ ❑R❑C{EH[E19R❑❑dV LVHVLIDL.H❑ next annual general meeting for a vote and each recommendation can be voted on independently; ❑Shareholder approval for governance changes would require approval of shareholders holding two-thirds of all shares of the New Holding Company. WHITBY Qj- axe PIC E R I N G � Clarinngton ___ LEGAL AGREEMENTS SUMMARY 17 6 IIDLIHEIFC IIU+IP HEA/V Dividend Policy Principles ❑ USA sets target levels for New Holding Company dividends to shareholders ❑ Targets are fixed amounts for the first three years and thereafter are based on a fixed percentage of net income ❑ The board of the New Holding Company has necessary discretion to ensure targets can be achieved without jeopardizing viability of the business or breaching applicable laws Representations and Warranties ❑ All shareholders give basic representations and warranties such as that their shares are not encumbered and the USA is duly authorized, executed and delivered WHITBY QJ- axe PICKERING � Clarington ___ LEGAL AGREEMENTS SUMMARY 18 6 IIDLIHEIFC IIU+IP HEA/V Restrictions on Transfer or Issuance of Shares ❑ Any proposed transfer of shares to another shareholder or to a third party cannot be initiated until at least 18 months after closing of the amalgamations ❑ Each municipality has a Right of First Refusal on any proposed sale of shares to a third party. ❑ The shareholders will also have standard anti-dilution rights. ❑ If certain shareholders together propose to sell a majority of all of the issued shares in the New Holding Company, then the other shareholders have a right to pro rata participation in such transaction. Non-Competition and Confidentiality ❑ During the term of the USA and for a period of two years after a shareholder ceases to be a shareholder it cannot compete with the business of the New LDC in Ontario. ❑ Shareholders must keep confidential the information of the New Holding Company, New LDC and Affiliates. WHITBY QJ_ axe PICKERING � Clarington ___ LEGAL AGREEMENTS SUMMARY 19 6 IIDLIHEIFC IIU+IP HEA/V Sale of Surplus Assets and Sale of Distribution Assets ❑ Right of first offer given to municipal shareholder in whose legal boundaries the surplus assets (i.e. , land and buildings) are located ❑ If New LDC wants to sell all distribution assets in a particular municipality, that municipal shareholder will have a right of first offer to purchase such assets Promissory Notes ❑ Each promissory note to rank equally ❑ Shareholder can unilaterally demand repayment of a note at any time ❑ Notes cannot be amended without approval of other shareholders Amendments ❑ Amendments to the USA can be made with the approval of 4 of 5 shareholders holding at least two-thirds of all issued shares Dispute Resolution ❑ Disputes to be settled by arbitration WHITBY AJ -xf PICKERING Clarrington I oNTAH • r-A-