HomeMy WebLinkAboutCS 07-03
REPORT TO FINANCE &
OPERATIONS COMMITTEE
Report Number: CS 07-03
Date: January 22, 2003
From:
Gillis A. Paterson
Director, Corporate Services & Treasurer
Subject:
Veridian Corporation
Recommendation:
1.
That Report CS 07-03 of the Director, Corporate Services be received and
that;
2.
the Council of the City of Pickering confirm that Veridian Corporation and its
wholly owned subsidiaries continue to operate on a for-profit basis;
3.
the attached Resolution (see Attachment 1) be passed by the Council of the City
of Pickering, and the Mayor and the Clerk of the City of Pickering be authorized
to execute the attached Certificate of Passing of Resolution (see Attachment 2)
and to take any other actions necessary as required to give effect to the direction
of Council; and,
4.
the appropriate officials be given authority to give effect thereto.
Executive Summary: Under Bill 210, the Electricity Pricing Conservation and
Supply Act, 2002, passed by the Provincial Legislature on December 9, 2002, the
Councils of municipalities with local electrical distribution companies (LDCs) (mainly
former municipal electric utility commissions, PUCs) have 90 days to pass a Resolution
confirming whether they wish their corporation to continue to operate in a for-profit
manner.
This action by the Province would appear to be purely political in that it is designed to
deflect attention on this subject away from the Province and all provincial electrical
companies. It is the municipal LDCs that bear the total cost of this "price freeze" by the
Province which is exempt. Unfortunately, under Bill 210, it also appears that municipal
councils across the Province of Ontario will have no choice but to pass a Resolution to
continue to operate on a for-profit basis. To do otherwise would be tantamount to
discarding the investment the ratepayers have, through the former Pickering Hydro
Electric Commission and more recently Veridian, built up over many years. This
Resolution must be passed by Council and filed with the appropriate authorities by
March 7, 2003. Failure to do so will result, under Bill 210, in the default action of
Report CS 07-03
Date: January 22, 2003
Subject: Veridian Corporation
Page 2
Veridian Connections being forced to operate on a not for-profit basis, which once
taken, is irrevocable. Not for-profit removes all options for now and the future. This is
yet another uniquely negative and financially costly feature of Bill 210. Passing the
Resolution will keep all future options open for the City and Veridian.
Financial Implications: Under Bill 210 Council approval of the above
Recommendations and the attached Resolution will provide the best possible protection
for the City of Pickering's investment in Veridian Corporation and its subsidiaries. It is
recommended that Council approve the continued operation of Veridian Connections as
a for-profit corporation as to do otherwise would significantly reduce the value of
Veridian resulting in a huge decrease in the value of our investment. The actions by
the Province to date have already resulted in an estimated loss in the City's
equity in Veridian of approximately $16 million. The potential capital loss of a
minimum of approximately $41 million to a maximum of $60 million, or
approximately $1,500 per housing unit, to the ratepayers of the City of Pickering,
the ultimate owners, would appear to far outweigh any minor savings resulting
from a possible reduction in the charges for the distribution portion (approx. 25
percent) of the total electricity bill.
Background: In 1999 the Province, under Bill 35, forced municipalities to set up
their local PUC as a company under the Ontario Business Corporations Act. Under this
new regime Veridian had to pay taxes and debt retirement "fees" to the Province and
the Province approved rate increases to cover these cost increases. Now it appears
they have changed their mind (see Attachment 3 Provincial Press Release). Bill 210,
the Electricity Pricing, Conservation and Supply Act, 2002, was passed by the
Provincial government on December 9, 2002 in an attempt to address concerns about
the rising cost of electricity in the newly deregulated regime for the production and
distribution of electricity in Ontario.
This action effectively stopped electrical deregulation and dismantled everything the
Provincial government was trying to accomplish and they and the LDCs had
accomplished to date. It was also designed to deflect the focus of any further
discussion regarding the cost of electricity to the homeowner onto the municipalities as
owners of the local distribution companies. The Councils of the municipalities owning
their former utility are now faced with the task of taking action to protect their
ratepayer's equity. To do otherwise would result in an immediate estimated drop in the
City's equity in Veridian of approximately $82 million to less than $41 million, a
decrease over 50 per cent. This loss equates to approximately $1,500 per household.
According to the attached analysis, the potential savings per household would be very
roughly $2 per month or $24 per year should the not for-profit alternative be chosen.
As a result it would take over 60 years to offset the loss in the value of Veridian. This
Report CS 07-03
Date: January 22, 2003
Subject: Veridian Corporation
Page 3
results in a "catch 22" situation for the City and its ratepayers. Protecting this
investment by passing the Resolution does not result in a rate increase.
Furthermore, the interest payable by Veridian on the Promissory Notes the City holds,
representing the ratepayers capital contributions over the years, is a revenue source for
the City. This revenue in the amount of approximately $1.8 million has been included in
the City's annual Current Operating Budget to assist in keeping property taxes as low
as possible. When it was first introduced in 2001 it offset a potential 7.6 percent tax
increase in that year that would have occurred without this revenue. In addition, this is
the very real potential for dividend income in future years that could produce additional
revenue for capital projects or to assist in mitigating future property tax increases.
The Bill effectively locks in municipalities, allowing them no way to turn without
significant financial loss except to pass the "for-profit" Resolution. Which is,
again in effect, a conformation of the status quo. However, one would not be able to
readily tell that from anything published so far. To protect its investment the City must
pass the Resolution.
I should also mention that none of the foregoing applies to the Province and its
electrical production, distribution and transmission businesses. They will continue to
earn a profit at the highest rate allowable, as is currently the case for all Hydro One
Network Inc. customers.
On another note, back in the late 1990's during the days of provincial "downloading" of
services, local services realignment (LSR) and "revenue neutrality" there was some
discussion that the forthcoming electrical deregulation and the interest and possible
dividends, as well as proceeds from sales of utilities, could assist municipalities in
offsetting some of these costs. The municipalities responded exactly as expected. A
few years later even this possibility is removed from the realm of municipal financial
planning and potential revenue.
On Wednesday, January 22, 2003, I participated in a conference call hosted by the law
firm of Borden, Ladner Gervais LLP in which the Treasurers of several dozen
municipalities from Kenora, to Windsor to eastern Ontario participated with
representatives of the Association of Municipalities of Ontario (AMO) in a discussion on
Bill 210. It appears that all municipalities participating are or will be making the same
decision as Pickering for the same reasons over the next few weeks. While a couple of
Treasurers could not confirm the directions their Councils might take, it appeared the
collective actions would be unanimous, i.e to continue to operate on a for-profit basis. I
think anyone faced with this decision under these conditions would arrive at no other
conclusion.
There is no room on the fence upon which one can sit. Doing nothing produces the
same result as voting for not for-profit. I have concluded that the legislation has been
designed to literally force municipalities to vote for-profit as the only option. To do
otherwise is so financially punitive to municipalities as to be unacceptable.
Report CS 07-03
Date: January 22, 2003
Subject: Veridian Corporation
Page 4
Rather than continue to comment, for further information please refer to the attached
correspondence, dated January 22, 2003 from John Wiersma, President and CEO,
Veridian Corporation (see Attachment 4). I have also attached a copy of the slide
presentation presented by Veridian Corporation; its legal counsel and its financial
advisors at a recent shareholders meeting (see Attachment 5).
Attachments:
1.
2.
3.
4.
Resolution of the Council of the City of Pickering
Certificate of Passing of Resolution
Provincial Press Release, December 9, 2002
Correspondence from the President and CEO,
January 22, 2003
Slide Presentation
Veridian Corporation dated
5.
Prepared I Approved I Endorsed By:
Approved I Endorsed By:
~
'-Gillis A. Paterson
Director, Corporate Services & Treasurer
-s---::: .
/
GAP:vw
Attachments
Copy: Chief Administrative Officer
-""
Recommended for the consideration of
Pickering City Council
"
,3
ATTACHMENT#--L TO REPORT#1áD7-03
CitJ¡ (J~
RESOLUTION OF COUNCIL
DATE
MOVED BY
SECONDED BY
WHEREAS Section 142 of the Electricity Act, 1998, required municipalities to convert
their existing hydro-electric commissions into corporations incorporated under the
Business Corporations Act (Ontario) before November 7,2000.
WHEREAS the Council of the Corporation of the City of Pickering, together with the
Councils of the Corporation of the Municipality of Clarington and the Corporation of the
Town of Ajax, after significant negotiation and review, decided to merge their
hydro-electric commissions and to form Veridian Corporation and its subsidiaries to
effect such merger.
WHEREAS Veridian Corporation and its subsidiaries, Veridian Connections Inc. and
Veridian Energy Inc., were incorporated under the Business Corporations Act,
(Ontario), as required pursuant to Section 142 of the Electricity Act, 1998 and were
established effective as of November 1, 1999.
WHEREAS subsequent to the formation of Veridian Corporation and its subsidiaries,
and with the approval of the Ontario Energy Board, Veridian Corporation and its
subsidiaries acquired the electricity distribution systems and related assets of the
successor corporations to Brock Hydro-Electric Commission, Port Hope Hydro-Electric
Commission and Uxbridge Hydro-Electric Commission.
WHEREAS Veridian Corporation and its subsidiaries, with the approval of the Ontario
Energy Board, merged with the successor corporations of the Belleville electricity
distribution and retail businesses effective September 28, 2001.
WHEREAS Veridian Corporation is owned by the municipalities of Ajax, Belleville,
Clarington and Pickering and Veridian Corporation and its subsidiaries continue to
operate as a highly efficient utility for the benefit of the electricity customers and
taxpayers of Ajax, Belleville, Clarington and Pickering.
WHEREAS on December 9, 2002 Bill 210, the Electricity Pricing, Conservation and
Supply Act, 2002 ("the Act") received third reading, Royal Assent and came into force.
WHEREAS the Act amends the Electricity Act, 1998, by adding Section 159.1, which
provides that each municipality that beneficially owns voting securities in a corporation
incorporated under Section 142 of the Electricity Act, 1998, and that is licensed under
the Ontario Energy Board Act, 1998 to distribute electricity, may within 90 days after
Section 159.1 comes into force, pass a resolution affirming that the corporation should
continue to be incorporated as provided in Section 142(1) of the Electricity Act, 1998.
WHEREAS the Act also provides several consequences of failure to pass the required
resolution and submit the necessary certificate certifying the passing of the resolution,
which consequences include a prohibition against declaring or paying dividends for the
benefit of any person; a prohibition against any disposition of the assets or liabilities of
the electricity distribution corporation; prohibitions against entering into certain
contractual arrangements; and an application being deemed to have been made to the
Ontario Energy Board for a rate order that incorporates a 0% return on common equity
which effectively converts the distribution corporation into a not-for-profit business.
WHEREAS Veridian Connections Inc. is a licensed electricity distributor that was
incorporated as provided in Section 142(1) of the Electricity Act, 1998 and is owned by
the municipalities of Ajax, Belleville, Clarington and Pickering, through their direct
ownership of Veridian Corporation, the parent corporation of Veridian Connections Inc.
WHEREAS the ownership of Veridian Connections Inc. has consistently ensured that
the electricity customers and taxpayers of Ajax, Belleville, Clarington and Pickering
receive efficient electrical services at competitive rates.
NOW THEREFORE BE IT RESOLVED BY THE COUNCIL OF THE CITY OF
PICKERING:
THAT the Council of the Corporation of the City of Pickering affirms that Veridian
Corporation and its wholly-owned subsidiaries Veridian Connections Inc., an electricity
distributor licensed under the Ontario Energy Board Act, 1998 and Veridian Energy Inc.,
its affiliate should each continue to be incorporated as a corporation under the Business
Corporations Act (Ontario) as provided in Subsection 142(1) of the Electricity Act, 1998
and to operate on a for-profit basis.
THAT the Mayor and Clerk are authorized to prepare and file with the Minister of
Energy the necessary certificate required under Section 159.1 of the Electricity Act,
1998 as provided for in the Act.
"f~~_TO REPORT # CS ð7-cJ3
January 16, 2003
CERTIFICATE OF PASSING OF RESOLUTION
UNDER SECTION 159.1 OF THE ELECTRICITY ACT, 1998
Name of Municipality
City of Pickering
Name of Local Distribution Company
Veridian Connections Inc.
Direct and Indirect Beneficial Ownership of and voting Rights in Local Distribution
company. Specify shareholders and % of ownership at each level of the corporate
structure (see subsection 159.1(3) of Act). If there is insufficient space on this form,
attached additional pages(s).
Veridian Connections Inc. is 100% owned by Veridian Corporation.
Veridian Corporation's shareholders and % ownership:
Town of Ajax
City of Belleville
Municipality of Clarington
City of Pickering
32.1%
13.3%
13.6%
41.0%
100.0%
Attached is a copy of the resolution passed by the municipality affirming that
Veridian Connections Inc., the local distribution company, shall continue to operate
on a for profit basis.
The municipality affirms that the 2003 projected return on common equity to be
earned by the local distribution company, on which the rates approved by the
Ontario Energy Board for implementation effective from March 1, 2002 are based,
is 1.1 %. Veridian Connections Inc. filed rate increases in 2001 and 2002 which
implemented two of three phases of rate adjustments to increase distribution revenues
towards a market based rate ofretum of9.88% on common equity.
Provide details of all financial arrangements involving the municipality and the
local distribution company. If there is insufficient space on this form, attach
additional page(s).
Date of Description of Term Principal Annual
Arrangement Arrangement Amount Interest
Payable
28-Sept-0 I
Promissory I-Nov-06
Note issued by Veridian
Connections Inc.
$17,974,000.00
$1,366,024.00
7.60%
Wayne Arthurs, Mayor
Signature
Date
Bruce Taylor, Clerk
Signature
Date
::ODMA\PCDOCS\CClì384541 \1
News :: Ontario Ministry of Energy
ATTACHMENT #..â... TO REPORT #. CS 0"1 ~ð_1
Energy
News
NEWS RELEASE
9 December, 2002
Ontario Legislature Passes Legislation to Lower Hydro Bills
Queen's Park - The Ernie Eves government's legislation that lowers hydro bills for families
across the province has passed third and final reading, Energy Minister John Baird announced
today.
"Our government is moving as quickly as possible to provide relief to families, small
businesses and fanners throughout Ontario," said Baird. "It is our expectation now that the
Ontario legislature has passed the Electricity Pricing, Conservation and Supply Act, 2002, the
vast majority of electricity refund cheques will be mailed out before the end of the year."
The legislation protects consumers by:
. Lowering and freezing the price of electricity at 4.3 cents per kilowatt hour retroactive
to December 1, 2002, for families, small businesses, fanners and other designated
groups such as universities, schools, hospitals, condominiums, apartment buildings,
group homes, seniors homes and charities.
. Providing refunds of the difference between what these customers paid since May, and
what they would have paid at a frozen price of 4.3 cents per kilowatt hour.
. Capping at current levels the price consumers pay for the delivery of electricity.
. Directing that until March 31, 2003, no one in Ontario will have their power cut off
because of failure to pay their hydro bill, retroactive to November 11, 2002.
. Moving local hydro companies to non-profit status unless municipal councils decide by
resolution that they will continue to operate for-profit. ,
. Offering measures, including tax incentives and tax holidays, to promote conservation,
encourage alternative fuels and support clean energy production.
"It is important that we move forward with these tax incentives to help increase the supply of
electricity and encourage conservation," said Finance Minister Janet Ecker.
As part of the government's Action Plan to Lower Your Hydro Bill, last week Minister Baird
appointed Sal Badali, FCA, to review all the items on consumers' electricity bills and make
recommendations on a standard, province-wide bill that is clear and easy to understand.
Badali will make a progress report to Minister Baird within 30 days.
"Our government will try to further protect consumers by pressuring the federal government
to remove the GST from electricity bills, including the debt retirement charge," said Baird. "It
is common sense during the cold winter months that electricity is a necessity of life, just like
groceries, and should not be subject to provincial or federal taxes."
http://www.energy.gov.on.caJindex. cfm ?fuseaction=english.news&body=yes&news - id= 11
1/2412003
ATTACHMENT # -#- TO REPORT # ~ 7'- Û.3
MEMORANDUM
V ERIO IAN
CORPORATION
To: Gil Patterson
From: John Wiersma
Date: January 22, 2003
c:
Re:
Status Quo/Not for Profit Option to be Exercised Under Bill 210
As you know City Council will be considering the Status Quo/Not for Profit Option for Veridian
Connections Inc., Veridian Corporation's regulated electric distribution subsidiary. For greater
clarity these options are described as follows:
Status Quo
The Status Quo is based on the current distribution rate freeze imposed by the Provincial
Government under Bill 210 until the year 2006.
While the third rate increment due March 1, 2003 would have brought Veridian Connections Inc. to
profitability at close to the allowable ROE (return on common equity) of 9.98%, the Status Quo
provides a very small ROE at the rate of 1.1 % during the rate freeze period with the anticipation of
achieving the target ROE of 9.98% after the rate freeze is over. The ROE under this scenario is
hardly what one would expect from a highly profitable company and obviously the shareholders
albeit involuntarily are making a significant sacrifice in maintaining distribution rates as low as
possible.
Not for Profit Option
This option provides a 0% ROE and involves rolling back rates to achieve this level of ROE and
placing the City's investment in Veridian and Veridian Connections Inc.'s sustainability at severe
risk.
Choices Available to the City
City Council obviously has a great responsibility to act in the best interest of the public by ensuring:
.
That the City's legacy investment in Veridian Corporation retains value;
.
That the City's returns on invested debt and equity provide for solid cash flows to mitigate
the pressure on property taxes;
Date:
Memo re:
January 22,2003
Status Quo/Not for Profit Option to be Exercised Under Bill 210
Page 2
.
That Veridian Corporation is operated on a solid fmancial basis, which is respected by the
Bond Rating Agencies and the Financial Institutions so that Veridian Corporation can
attract capital for the servicing requirements of a growing community.
The Province of Ontario has clearly placed municipal shareholders across the Ontario in a
precarious position. If nothing is done their investment is at significant risk and their utility's
operation is unsustainable. If they select the status quo which is dubbed as the for profit option it
has the optics of lack of sensitivity to consumers. If they do nothing which defaults into the not for
profit option they put the municipal investment in their utility and their utility at risk and they don't
exercise their due diligence as Councillors who are entrusted with municipal assets.
The Impacts of Doing Nothing - The Not for Profit Option
.
There is no provision in Bill 210 to go back to a for-profit utility. If no action is taken the future
of Veridian Connections Inc. is irreversible.
.
Rates have to be adjusted so that there is no return on equity for Veridian Connections Inc. and
there is no opportunity to pay dividends to the shareholders to be used for municipal capital
reserves or operating budgets.
.
Bill 210 prevents the shareholders from selling or leasing their interest in Veridian Connections
Inc.
.
The market value of Veridian Corporation would be reduced from $180 million to $87 million
or depending on the interpretation of this provision to $35 million (Report by Dr. Lawrence
Murphy, Henley International Inc. dated January 16,2003).
With third party debt obligations of $30 million, this devaluation puts the subordinated
promissory notes to the municipalities in the amount of $61- million at severe risk.
.
The value loss and cash flow loss mean significant adjustments in municipal fiscal plans and
write down of share value.
.
Veridian's Bond Rating will suffer multiple notch reductions, increasing third party borrowing
costs by an estimated $2.3 million and increasing the prudential level prudential support, which
must be provided to support power purchases from the Independent Market Operator.
.
Interest coverage ratios will make it difficult to sustain the interest on external debt and the
promissory notes to shareholders.
Date:
Memo re:
January 22,2003
Status Quo/Not for Profit Option to be Exercised Under Bill 210
Page 3
.
With no return on equity there will be no retained earnings to rebuild the current infrastructure
and build new infrastructure for new development. Access to development charges where made
discontinued by the Province of Ontario when utilities were incorporated as Ontario Business
Corporation Act Companies.
.
While municipal shareholders are invited to operate with no return the other two large service
providers owned by the Province of Ontario were relieved of 50% of their debt, which must be
repaid by consumers and they are able to operate at a return of 10% (Hydro One) or market
based rates (OPG) set by the Independent Market Operator. The example illustrates this further
for the not for profit option for a residential customer. .
Average Monthly Service Provider Cost %of Mode of Operation
Residential Bill (832 kWh) Total Bill
Distribution Veridian 0% return on equity
Connections Inc. $17.60 22.6
Transmission Hydro One 8.63 11.1 10.0% return on equity
IMO Independent Cost Based Rates
Market Operator 5.15 6.6 Set by Ontario Energy Board
Debt Reduction Provincial Established by Provincial
Government 5.81 7.5 Government
Energy Ontario Power Determined by Independent
Genera tion * 35.69 45.8 Market Operator*
Total 72.88 93.4
GST Federal Set by Federal Government
Government 5.10 6.5
Total 77.98 100.0
* Please note that Ontario Power Generation is the dominant generator in the province but not the only one.
The charges in the example are frozen at 4.3 cents per kWh until 2006 and subsidized by the Province of Ontario, The
Independent Market Operator bases Ontario Power Generation prices on the clearing prices established by the market.
The Status Quo - For Profit Option
.
There are no restrictions as to how Veridian Connections Inc. wants to operate other than the
distribution rate freeze which has been put in place until 2006 and thereafter the market based
rate of return of 9.98% for rate setting purposes as established by the Ontario Energy Board.
Veridian Connections Inc. can set its rates at the Ontario Energy Board's maximums or a lower
rate at its option.
.
While the distribution rate freeze results in loss in value of some $38 million, Veridian
Connections Ine. remains sustainable and is not likely to adversely affected by reductions in the
bond rating.
Date:
Memo re:
January 22, 2003
Status Quo/Not for Profit Option to be Exercised Under Bill 210
Page 4
.
The integrity of the promissory notes and the ability to pay the interest on those notes will be
protected.
.
The municipality's cash flows for taxation stabilization purposes will be protected.
.
The municipality's investment and its ability to sell Veridian Connections Inc. will be protected.
.
The sustainability of the utility in terms of its ability to raise the capital for the replacement and
expansion of infrastructure for the City of Pickering's growth will be protected.
.
Customers have already been protected through the 4-year freeze on electricity distribution and
transmission rates and the electricity commodity charges.
Summary
Veridian Corporation has retained Ms. Linda Bertoldi of Borden Ladner Gervais LLP for legal
counsel with respect to the options. It has also retained Dr. Lawrence Murphy a highly respected
economist with Henley International as well as Mr. David Southam with RDII Utility Consulting for
a second opinion on the fmancial issues.
All three parties strongly advise the shareholder to take the election to stay with status quo. They
warn of severe adverse consequences if no action is taken.
Respectfully since there is only one viable option I request the shareholders to act as expeditiously as
possible within the context of their own processes to support the status quo.
ATTACHMENT#...£... TO REPORT#~} -03
Veridian Shareholder
Information Meeting
Bill 210 Options
a
rate as per the status quo with
ibÚtion rate freeze for four
years.
Oshawa Holiday Inn
January 19, 2003
This requires a special col11Jcil resolution by
councils who hold more than 50% of the
shares,
Bill 210 Options
Bill 210- Decision Making Phases
To operate as a not for profit corporation
This requires no action by the shareholders but
has some serious implications with respect to
shareholder value and future options with respect
to divestiture.
Council Information Meeting -January 19, 2003
'. '"',,
If is. not to be confused with the public utility
model, which generated net income for
infi:astructure development,
VER!D!,\N
'tlS with each council independently at the
'dian Oflice -January 21- 28, 2003
Bill 210 - Decision Making Phases
Phase
FormalCounciJ Decision -February, 2003
Deadline for Council Decisions
March 9, 2003
1
OUTLINE OF MAJOR ISSUES
BORDEN
LADNER
GERVAIS
""Y'"
P.t~t "dT""~"k",,"
1.
Restructuring Overview since 1995
EVOLUTION OF ELECTRICITY
RESTRUCTURING IN ONTARIO:
The Beginning
ONTARIO ELECTRICITY
Market Design Committee, 1998.1999
Energy Competition Act, 1998 (Bill 35)
jurisdietlons.
Issued reports
recommendatio
market operatio
implementation i
development
1.
I
Energy Competition Act, 1998 (Bill 35)
Energy Competition Act, 1998 (Bill 35)
New Regulatory Regime
New Regulatory Regime
An Act to Promote Efficiency in the
Municipal Electricity Sector and to
Protect Consumers. from Unjustified Rate
y Bill 100
1.
2
Electricity Pricing, Conservation and
Supply Act, 2002 (Bil/210)
Reliable Energy and Consumer
Protection Act, 2002 (Bill 58)
);> Bill 58
Electricity Pricing, Conservation and
Supply Act, 2002 (Bil/210)
VERIDIAN'S ESTIMATED REBATES
MUo"'ea"ty
Appointment of Mr. Sal Badali, FCA,
Deloitte Consulting December 2, 2002
2.
Formation ofVeridian Corporation
and its Subsidiaries
:.- Appointment of Mr. Sal B
Consulting, December 2, 2
. Mandate to review
of families,
including h
presented;
. Will be recommending
electricity bill.
1.
3
Corporate History
Transfer Bylaws
Transfer Bylaws
1.
Corporate Structure
Transfer Bylaws
Capital Structure of Veridian Corporation
4
1.
Capital Structure of Veridian Corporation
.
.
Veridian Corporation Shareholders'
Agreement
Prineipal Features
. Election of Direetors
. Ajax 4
Belleville
Clarington
Regulatory and Rate Approvals
(Rural)
g)
28
Capital Structure of Veridian Corporation
Regulatory and Rate Approvals
Financial Relationship with Shareholders
5
Financial Relationship with Shareholders
.,. Payments made
(prepaid interest unti
. 1999-$6milllon(
. 2000 - $6 million (
. 2001 - $1.8 million (Belleville)
30
Financial Relationship with Shareholders
32
4.
Financial Sustainability and
Shareholder Value
1.
Financial Relationship with Shareholders
3.
Bill 210 Requirements for
Municipalities
4.
Financial Sustainability and
Shareholder Value
6
Direct and Indirect Consequences of
Failing to Pass the Resolution
Significant R tions on Veridian Connections
Inc. and its S olders:
. Restrictions ancial PIa
:, nds from Veridlan Co
:, ebt owed to
. or holding
of munieipal
. Restrictions on Asset or Sha~
:, munlelpallty (or holding company)
Veridian Connections Ine,
:, Veridlan Conneetions Inc, may
substantially all of Its assets
substantially all of its employees
Direct and Indirect Consequences of
Failing to Pass the Resolution
order, Veridian
B refie
March 9, 2003
at an amount which is
2000
X continues
Implications of Passing the Resolution
. Passing the resolution and
certificate to the Minis
control of Veridian Cor
subsidiaries
as owner to sell, lease, merge will be preserved
. Municipalities will maintain ability to establish
Veridian Connections Inc. rates and returns within
restrictions imposed by 8ill210
municipal eontrol will be maintained
1.
Direct and Indirect Consequences of
Failing to Pass the Resolution
Direct and Indirect Consequences of
Failing to Pass the Resolution
Implications of Passing the Resolution
7
1.
5.
Council Resolution & Certificate
Resolution - Procedural Issues under the
Municipal Act, 2001
5.
Council Resolution & Certificate
RESOLUTION OF THE COUNCIL OF THE
CORPORATION OF THE TOWN OF AJAX
PROPOSED FORM OF RE
. included in inform
. modelled on resoluti air
Mississauga and other munl
. same form of resoluti
f Ajax, Belleville,
ing
44
RESOLUTION OF THE COUNCIL OF THE
CORPORATION OF THE TOWN OF AJAX
- Cont'd
RESOLUTION OF THE COUNCIL OF THE
CORPORATION OF THE TOWN OF AJAX
- Cont'd
5,
7,
S"pply
.
8
RESOLUTION OF THE COUNCIL OF THE
CORPORATION OF THE TOWN OF AJAX
- Cont'd
SAMPLE RESOLUTION AND
CERTIFICATE
10.
10,
11
SAMPLE RESOLUTION AND
CERTIFICATE - Cont'd
SAMPLE RESOLUTION AND
CERTIFICATE - Cont'd
by Vendian Corporation,
Direct and Indirect Beneficial Owners '
ocal Distrib company. Specify
hip a level of the corp
tion 1 fAct).
space on this form, a
SAMPLE RESOLUTION AND
CERTIFICATE - Cont'd
1.
9
IMPACT OF BILL 210 ON VERIDIAN
AND ITS CUSTOMERS
Prepared by Henley International Inc.
January 16, 2003
THE SCHEDULE OF RATE CHANGES
BILL 210 IMPACT ON RATES
RATE DETERMINATION BY THE OEB
THE SCHEDULE OF RATE CHANGES (Cont'd)
PROCEDURE FOR ESTIMATING RATE IMPACTS
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PROCEDURE FOR ESTIMATING RATE IMPACTS
IMPACT ON CONSUMERS
IMPACT ON VERIDIAN FINANCIAL CAPACITY
1.92
IMPACTS ON CONSUMERS AND VERIDIAN
SUMMARY OF IMPACTS ON VERIDIAN
CONCLUSIONS
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ROil Utility Consulting &
Technologies Inc.
Presentation to:
VI: H,j [) ¡AN
C{)f\I'ORAfJ{)N
Shareholders' Meeting
January 16, 2003
Key Questions
1. What is the impact of not-for-profit status on the
value of the utility?
2. What is the rate impact of not-for-profit versus
for-profit?
3. What is the impact on dividends to
shareholders?
Analytical Findings
Rate impacts - Not for Profit
. Not-for-profit Is defined in Bill 210 as zero percent per annum
allowed retum on equity.
. Assuming Vendian eontlnued to make its interest payments on
munielpal promissory notes, average total bills for customers
served by Veridian throughout its service territory would
decrease by about 5.2 percent compared to current levels.
Rate impact - For Profit (final one MBRR in 2003)
. This is for Illustrative purposes had the government not
intervened with a distribution rate freeze,
. Totai bills for eustomers served by Vendian throughout Its
service territory would have inereased by about 2,1 pereent
eompared to current levels.
Introduction
ROil Utility Consulting & Technologies Inc. has
been retained to provide quantitative financial
answers to some key questions regarding the
Ontario government's November 11, 2002
electricity announcement, and its impact on
Veridian Connections Inc.
Analytical Findings
. Firm value impacts of for-profrt versus not-for-profit:
Analytical Findings
. Impact on dividends to municipal shareholders:
According to management's estimates, Bill 210 will have a
slgnifieant Impact on dividends to munielpal shareholders, as
follows:
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Synopsis
. The impact of a not-far-profit decision under Bill 210
results in large financial losses to Veridian's
municipal shareholders. Municipalities have little
choice but to affirm a for-profit position to avojd
significant erosion in their shareholder value.
Synopsis
. The not-far-profit option results in a further reduction
in shareholder value in the amount of 74 million
dollars.
Recommended Key Action Step:
. Verldlan should advise its municipal shareholders to pass a
resolution, pursuant to Bill 210, to keep Vendian for-profit.
. This needs to be done as quickly as possible following the
promulgation of the regulations, as only 90 days are available
from the date Bill 210 receives Royal Assent until the utility will
be deemed to be not-for-profit.
. Bill 210 received Royal Assent on December 9,2002, meaning
a for-profit resolution must be passed by the eounell of eaeh
municipal shareholder and submitted to the Minister of Energy
by about Friday, March 7, 2003,
Synopsis
. The distribution rate cap will result in a reduction of
shareholder value of between 11.1 and 30 million
dollars, depending upon when (minimum 41 months)
and if the fjnal one-third of of MBRR is implemented,
The loss is associated wjth foregoing an average
2.1 % rate jncrease on March 1, 2003.
Synopsis
. The total impact of Bill 210 and opting for a not-for-
profit scenario is a devaluation of Veridian
Connections Inc. from $191 million to as little as
$94.3 million, a loss of more than 50 percent of
shareholder value.
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