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HomeMy WebLinkAboutCAO 05-18cty of PICKERING Report to Planning & Development Committee Report Number: CAO 05.18 Date: June 18, 2018 From: Tony Prevedel Chief Administrative Officer Subject: Veridian Corporation Proposed Merger with Whitby Hydro Energy Corporation - File: L-1000-005-16 Recommendation: 1, That the amalgamation of Veridian Corporation ("Veridian Holdco") and Whitby Hydro Energy Corporation ("Whitby Holdco") be approved and authorized on the general terms and conditions set out in this Report; Z That the amalgamation of Veridian Connections Inc. ("Veridian LDC") and Whitby Hydro Electric Corporation ("Whitby LDC") be approved and authorized on the general terms and conditions set out in this Report; 3. That, to give effect to the amalgamations, the Mayor and City Clerk are hereby arlthorized to execute the Merger Participation Agreement and Shareholders' Agreement substantially in the form provided to Council under separate cover, subject to such modifications as are acceptable to the Chief Administrative Officer; 4. That the Mayor and City Clerk are hereby authorized to execute such other agreements, documents and instruments as are required to implement the amalgamations, and to give effect to the above -noted Merger Participation Agreement and Shareholders' Agreement, on such terms as are acceptable to the Director, Finance & Treasurer and the Director, Corporate Services & City Solicitor; and 5. That the appropriate City of Pickering officials be authorized to take the necessary actions as indicated in this report. Executive Summary: Veridian, the local electricity distribution company for Pickering, Ajax, Clarington and Belleville, is proposing to merge with Whitby Hydro, if the merger is approved, Pickering will become a shareholder in a new, larger electricity distribution company with the combined assets and customer base of Veridian and Whitby Hydro. This transaction represents an opportunity for Veridian's shareholders, and value for its customers. The proposed merger will result in hydro rate stability for Veridian's existing customers. The merger also provides Pickering with an opportunity for enhanced revenues that are sustainable on an ongoing basis. At the same time, the merged company will be positioned to improve the reliability of its services. One of the strengths of the proposed merger is that there will be no single controlling shareholder. This ensures that each municipal shareholder's voice will be heard, and that a consensus approach will be required to effect any changes to governance, dividend policy or promissory notes. The Report CAO 05-18 June 25, 2018 Subject: Proposed Merger with Whitby Hydro Energy Corporation Page 2 merger transaction represents a balance between the need of the merged business to fund its operations and the need of the municipal shareholders for an acceptable return on investment. If the merger is approved by all the municipal shareholders, and ultimately by the Ontario Energy Board, the new utility will be in a better position to ensure that: • Electricity rates will remain stable and affordable, to the extent possible in Ontario's regulatory landscape. • Pickering and the other municipal shareholders should see an increase in their return on investment, projected to be $13.6 million over 17 years. • The new organization will have deeper financial resources to undertake new and innovative energy-related investments. Ontario's electricity sector has been characterized by mergers of smaller providers. Utility mergers have been successful in lowering both the cost of living and the cost of doing business, resulting in better service for all stakeholders. Across Ontario, over 40 percent of all customers are currently served by municipally merged companies. Financial Implications: Veridian is the City's largest investment. The City's annual budget includes $3.1 million from its Veridian investment, consisting of $1.9 million in dividends and $1.23 million in promissory note interest. From a financial strategy perspective, this investment serves to protect the City from the impact of catastrophic financial events. When evaluating the proposed merger, staff sought to ensure that the Veridian financial safety net remains intact for Pickering. The business case prepared for the utilities by Grant Thornton LLP concluded that a merger was in the best interest of the utilities and their shareholders and it is estimated Pickering will receive an additional $8.53 million over 17 years. The Veridian shareholders hired Deloitte LLP to conduct a peer review of Grant Thornton's business case. Deloitte LLP analyzed the business case and, based on their recommendations, City staff negotiated improvements to the merger terms which will result in an additional $5,070,000 in dividend income to Pickering over the 17 -year period. Discussion: On April 10, 2018, Veridian Corporation ("Veridian Holdco") delivered a presentation to City Council proposing a merger with Whitby Hydro Energy Corporation ("Whitby Holdco"). Key elements of the business deal presented by Veridian focussed on increased efficiencies of scale which will enable the mitigation of future rate increases and secure longterm dividends for its shareholders. The proposed deal is encapsulated in a Merger Participation Agreement and Shareholders' Agreement. Report CAO 05-18 June 25, 2018 Subject: Proposed Merger with Whitby Hydro Energy Corporation Page 3 Merger Participation Agreement The Merger Participation Agreement ("MPA") sets out the basis on which the parties agree to merge Veridian Holdco and Whitby Holdco, as well as their respective regulated local distribution companies, Verdian Connections inc. ("Veridian LDC" and Whitby Hydro Electric Corporation ("Whitby LDC"). The current Veridian and Whitby Hydro shareholders will be signatories to the MPA, along with Veridian Holdco, Whitby Holdco, Veridian LDC and Whitby LDC. Key provisions of the MPA are outlined in Attachment No. 1. Key provisions include: • Shareholdings -- Pickering will own 27.88 percent of the shares of the merged holding corporation ("Merged Holdco"). Equity ownership levels are agreed and will not be adjusted at closing. The pre and post -merger share structure is set out in Attachment No. 2. • Representations and Warranties — The representations and warranties provided by each municipality are restricted to fundamental matters such as valid existence and proper authorization. The merging utilities each provide fuller representations and warranties regarding their respective assets and operations. The municipalities backstop the representations and warranties provided by their respective utility by providing an indemnity for breach, subject to a deductible and cap on liability. • 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. Shareholders' Agreement The current Veridian and Whitby Hydro shareholders will be signatories to the Shareholders' Agreement, along with Merged Holdco and Merged LDCco. The terms of the Shareholders` Agreement, which is the condition of merger dosing referred to above, are outlined in Attachment No. 1. Key provisions include: • Shareholder Approvals — Certain significant matters require the special approval of shareholders holding 213 of outstanding shares. The breadth of items that must be submitted to the shareholders for approval is wider than under Veridian's current Shareholders' Agreement. o 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 Shareholders' Agreement. Report CAO 05-18 'June 25, 2018 Subject: Proposed Merger with Whitby Hydro Energy Corporation Page 4 • 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. • Governance Review — The Shareholders' Agreement provides that a governance review will take place 3 years following closing, and every 4 years thereafter. The review will include consideration of moving to a fully independent board for Merged Holdco, but does not require such a change. • Dividend Policy Principles — Dividend policy principles form an integral part of the Shareholders' Agreement 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 target of 52.5 percent was negotiated by all the parties to strike an appropriate balance between (i) the municipal shareholders' need for revenues and (ii) the merged company's need for working capital. The 52.5 percent dividend target is a projected higher rate than compared to a "no -merge" scenario and is in the market range of dividend rates for LDCs. While this target represents a projected increase in dividends over time, is at a level that still allows re -investment into the corporate group for additional future growth and maintains stability over electricity distribution rates. A higher dividend rate might well decrease re -investment potential and associated opportunity for growth, as well as place upwards pressure on electricity distribution rates (to the detriment of the customers). • Promissory Notes —The form of note is an integral part of the Shareholders' Agreement and cannot be changed except with the special shareholder approval described above, Interest rates are set for a 10 -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. • Liquidity Provisions — The Shareholders' Agreement includes a right of first refusal, but such rights cannot be acted on during the 18 -month period following closing. Implications of the Merger The City of Pickering is the largest shareholder in Veridian Corporation, with 41 percent of the company's issued and outstanding shares. In addition to its share ownership, the City holds $25.069 million of Veridian promissory notes. The total value of the City's investment is presented below: December 31, 2017 Book Value Shares $81,505,144 Promissory Notes .25,069,000 Total Investment $106,574,144 Report CAO 05-18 June 25, 2018 Subject: Proposed Merger with Whitby Hydro Energy Corporation Page 5 Veridian is the City's largest investment. The City's annual budget includes $3.1 million from its Veridian investment, consisting of $1.9 million in dividends and $1.23 million in promissory note interest. From a financial strategy perspective, this investment serves to protect the City from the impact of major catastrophic financial events. It represents the ultimate "rainy day" fund for the City. The City is dependent upon Veridian revenues to pay day-to-day operating expenses. When evaluating the proposed merger, staff sought to ensure that the Veridian financial safety net remains intact for Pickering. An important component of staffs due diligence was the business case peer review. A business case was prepared by Grant Thornton LLP on behalf of merging companies, to study 3 possible scenarios: (i) stand-alone operation; (ii) outright sale; and (iii) merger. The business case conclusion was that a merger was in the best interests of the utilities and their shareholders. The Veridian shareholders hired Deloitte LLP to conduct a peer review of Grant Thornton's business case. The Deloitte LLP consulting team has staff with a strong utilities background with many years' experience. They were able to review and analyze the hydro merger business case. The Deloitte peer review focused on the following factors as they relate to the business case: (i) assessing the reasonableness of the assumptions; (ii) whether the business case analysis supports the conclusions reached; and (iii) whether the business case presents a fair and reasonable case for moving forward with the merger. The business case executive summary states that "the proposed merger would result in risk mitigation and post -merger cost savings that would benefit shareholders and ratepayers and therefore generally supports moving forward with the merger." The financial benefits of the merger are presented below: Projected Revenues for Pickering Over 17 Years an $ Millions) (November, 2017) (November, 2017) (March, 2018) Business Case Post -Peer Stand-alone Merged Review $38.10 15.80 $53.90 $49.40 $54.47 13.03 13.03 $52,43 $07.50 The 17 -year period used in the business case reflects current company forecasts and expected rate filings. Under the stand-alone scenario, over the 17 -year period, the projected revenue for the City is $53.90 million. Under the business case merger model, the City's expected revenue is $62.43 million, or an increase of $8.53 million. The increase in return is based on higher anticipated profits from the merged business entity. During the peer review process, municipal staff asked Deloitte to test the fairness and reasonableness of the dividend payout ratio. Their research and recommendations indicated that the dividend payout ratio could be increased to a Report CAO 05-18 June 25, 2018 Subject: Proposed Merger with Whitby Hydro Energy Corporation Page 6 higher level. Staff then proceeded to negotiate a higher ratio of 52.5 percent, which should result in additional revenues over the 17 year study period. As shown above, anticipated future dividend payments represent the largest component of future earnings. To help protect this important revenue stream, staff were able to strengthen the dividend policy principles of the Shareholders' Agreement. Under the MPA, the promissory note interest rate will be locked -in fora 1I0 -year period, The 10 year lock -in on the note interest rate is intended to give the merged corporation a chance to build, and to establish itself, rather than to have all profits distributed to the note holders. In a rising interest rate environment, locking in interest rates for 10 years would probably not be the best financial strategy for the municipal note holder. However, the MPA does allow the municipality the flexibility to redeem their promissory notes by providing 60 days' written notice. When the merger transaction is closed pursuant to the MPA, there is an opportunity for financial gain or loss through a financial mechanism called "Closing Adjustments." These closing adjustments reflect the change in each organization's assets and liabilities between the time the parties sign the various agreements and the actual closing date, after approval by the Ontario Energy Board. These adjustments and the corresponding dollar value will not be determined until after the entities are merged and the audited financial statements for each organization are produced. It is estimated that the closing adjustments dollar value will be approximately $200,000. The text of the MPA and the Shareholders' Agreement will be delivered to Council under separate cover. The agreements contain commercially sensitive information and, pursuant to the Municipal Freedom of Information and Protection of Privacy Act (Ontario), they must be kept in confidence until such time as the proposed merger is submitted to the Ontario Energy Board for the required regulatory approval. Attachments: 1. Summary of Merger Participation Agreement and Shareholders' Agreement 2. Ownership Pre and Post -Merger Prer: d By: Prepared By: Paul Bi Director, Car.. rate Services & City Solicitor PB:ks Stan Karwows i Director, Finance & Treasurer Report CAO 05-18 June 25, 2018 Subject: Proposed Merger with Whitby Hydro Energy Corporation Page 7 Recommended for the consideration of Pickering City Council Tony Prevedel, P.Eng, Chief Administrative Officer Gke4tg 5, zie Potential Merger: Veridian Corporation, and Whitby Hydro Energy Corporation Summary of Merger Participation Agreement and Shareholders` Agreement r Merger Participation Agreement WHITBY zi c PICKERING Clarington LEGAL AGREEMENTS SUMMARY Merger Participation Agreement General • Al! five municipalities along with Veridian Corporation and Whitby Hydro Energy Corporation (the "Holdcos") and Veridian Connections Inc. and Whitby Hydro Electric Corporation (the "LDCs") are parties to the Merger Participation Agreement ("MPA") • 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 AJi5- PIGKERING CIarington LEGAL AGREEMENTS SUMMARY Merger Participation Agreement 4 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 — 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 i0Jax PICKERING vw. w..�o - e...e. nr u�r t-.� (lari on LEGAL AGREEMENTS SUMMARY 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 Shareholders). If the adjustment is significant, payments will be in annual tranches to minimize cash flow impact. WHITBY /:x A]c PICKERING � .r.. ta� C'lar. ing(oft 5 LEGAL AGREEMENTS SUMMARY Merger Participation Agreement Signing deliverables Prior to the parties entering into the MPA, at least the following will need to be delivered: • Directors' resolutions of the LDCs and the Holdcos approving the transactions • By-law or resolution of each shareholder's council approving the transactions 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 • Officer's certificates WHITBY i1J�x PICKERING C1ato11 vn *..n�q _rwpw �,gy rhr Ln+r is LEGAL AGREEMENTS SUMMARY Merger Participation Agreement Closing Conditions • Representations/warranties remain true • Parties have complied with all obligations, covenants and agreements • Municipal councils' approval obtained • 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 . Iiike PICKERING ur th tar Clarington 7 LEGAL AGREEMENTS SUMMARY 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 / DEB approvals and public statements • Maintain confidentiality WHITBY AJ►0x PICKERING n �.. nwio r•a•ort (•_ gy m�LnAx CYarlrgton LEGAL AGREEMENTS SUMMARY 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 municipality's share of the aggregate enterprise value of the amalgamated corporation; and - No maximum aggregate liability for claims involving fraud, gross negligence or fraudulent misrepresentation WHITBY ..A5C PICKERING Ciaringt n Shareholders' Agreement WHITBY ."4/.- iiPJCKER1NG 1`_97rhrLaar CJaringtnn LEGAL AGREEMENTS SUMMARY Shareholders' Agreement General - All five municipalities along with the New Holding Company and the New LDC are party to the Shareholders' Agreement ("USA") 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 J�x PICKERING ey ilre Lake U riri toii 1-1 LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 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. W H1TBY PICKERING J p fns L eka a:iii foit i2 LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 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 i%ia.Y PICKERING Glaringtori LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 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 Jar PICKERING (Arington 14 LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 15 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. VIIHITBVJ7x PICKERING en iwi�ip tasD.. �.. ei �,�,('�' CJarir oil LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 16 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. • The board's recommendations at each governance review would be brought to the shareholders 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. IVITTBY .�{;r" x P1CKER1NG Ciarington LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 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 A{ 7ax PICKERING Claciwgton 17 LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 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 . ,r7X PICKE RING 1 Darin ton v.*wno - ewyn�w (' �•�he LnLx "[ 18 LEGAL AGREEMENTS SUMMARY Shareholders' Agreement 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 %bx PICKERING ar r�r �b Glaris -won 19 Veridian Ownership 121,000 Customers D Pickering ■ Ajax ' Clarington Belleville Merge Co Ownership 162,500 Customers �f. c Pickering ■ Ajax Clarington G Belleville Whitby