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HomeMy WebLinkAboutCS 01/99 ........ ~\'I OF PIC ,,0 1-(' lIJ_~ ~ :I:ii. ~ ~ REPORT TO COUNCIL FROM: Gillis A. Paterson Director, Corporate Services & Treasurer DATE: November 30,1999 REPORT NUMBER: CS 01/99 SUBJECT: V cridian Corporation - Execution of Documents RECOMMENDATION: That Report CS 01/99 of the Director, Corporate Services & Treasurer be received and that: 1. the attached correspondence from the President and C.E.O. of Veridian be received by Council for its consideration in respect of this matter; 2. the attached Transfer By-Law be rcad three times and approved; - 3. the Mayor and the Town Clerk be authorized to execute the Merger Purchase Price and Amending Agreement in a fon1l as attached to this Report, as may be amended, to reflect and effect the intention of the Council and Veridian Corporation in it's approval of the Merger Agreement at it's meeting of June 29, 1999; 4. the attached Promissory Note be approved as to form; and, 5. the appropriate officials orthe Town of Pickering be authorized to give effect thereto. ORIGIN: Director, Corporate Services & Treasurer AUTHORITY: The Energy Competition Act (Bill 35), R.S.O. 1999, as amended The Electricity Act, R.S.O. 1998, as amended The Municipal Act, R.S.O. 1990, as amended Other relevant Legislation 0 r the Province of Ontario . ~I,~l' FINANCIAL IMPLICATIONS: / Approval and execution of these documents will complete the process providing for the payment of $2,844,00 by Veridian Corporation to the Town of Pickering on November 1 in each of the years 1999 and 2000. .- Also provided for in the Transfer By-Law is the transfer of two parcels of land to the Town of Pickering being lands on Brock Road and at the intersection of Sheppard Avenue and Whites Road as described in Schedule "f{" to the By-Law. Report to Council CS 01/99 Date: November 30, 1999 Subject: Veridian Corporation-- Exccution of Documents Page 2 ~ EXECUTIVE SUMMARY: . t,~t' These documents are being put forth as the final steps providing for the amalgamation of; the transfer of assets and liabilities of the three previous public utilities of Pickering, Ajax and Clarington to; and, the issuance of Promissory Notes by, the new corporation, Veridian and its subsidiaries, as approved by Council at its meeting of June 29, 1999. These documents have been subject to considerable discussion between your Treasurer and members of Veridian Corporation and changes have been made to better secure the Town's legal position as a major shareholder/owner. The Town's external solicitor has also reviewed these documents. Although each of the municipalities, Pickering, Ajax and Clarington own a share of Veridian, this report only addresses those matters pertaining to the Town of Pickering. BACKGROUND: These documents represent the last to be approved by Council to effect the transfer of assets and liabilities to the new amalgamated corporation, Veridian, as approved by Council at its meeting of June 29, 1999. At that meeting the Merger Agreement and the Shareholder's Agreement were approved. The following are to be approved at this time: Transfer By-Law .,.. Merger Purchase Price and Amending Agreement Form ofPr"omissory Note Also attached are several pieces of correspondence from the President and C.E.O. ofVeridian: Letter explaining the options available to Council in dealing with the Promissory Notes upon expiry on November" 1,2004 At the request of the Treasurcr, the Presidcnt of Veridian has provided a letter generally outlining the options available to Council upon expiry of the Promissory Notes. This is an information letter only, is not binding upon eithcr party and is not to be construed as indicative of any course of action Council may wish to follow at that time. Letter re Clarington Lands and Decommissioning Cleanup This letter is to explain to all sharcholders the intent of Veridian in regards to cleaning up and decommissioning certain lands in Clarington that are to be transferred to that Municipality. This is basically a "housekeeping" item. Letter re Equity in Ontario Hydro and Claims and Cleanup Against Ontario Hydro This letter is to explain the CUITent situation in regards to claims to equity in Ontario Hydro put forth by the former municipal electrical utilities in Ontario. There may be no value to these claims. Transfer Bv-Law .- The Transfer By-Law is the legal instrument by which each Municipality will transfer the assets, liabilities and employees (except for the excluded assets and excluded liabilities) of its hydro- electric commission (a "Commission") to Veridian Corporation, Veridian Connections Inc. or Veridian Energy Inc. (the "Corporations"). Report to Council CS 01/91) Date: November 30, 1999 Subject: Veridian Corporation - Execution of Documents Page 3 "... The principal provisions of the By-law are as follows: . Each Municipality's transfer by-law (the "By-law") is binding on the Municipality, its Commission, the Corporations and all other persons pursuant to the Electricity Act, 1998. . Pursuant to the authority granted under the Electricity Act, 1998 eaeh By-law shall be retroactively effective as and from November I, 1999. . All costs and expenses incurred or to be incurred by the Municipalities or the Commissions and all taxes incun'ed or payable in connection with the transfer of the assets of the Commissions will be borne by one or more of the Corporations. . The purchase price for the transferred assets is the fair market value of the assets as of November I, 1999. The fair market value of the assets will be determined by and independent valuator selected by the President and c.E.O. of Veridian Corporation. The payment of the purchase price ancl any adjustment thereto shall be made as described in the Merger Purchase Price and Amcnding Agreement. . Immediately following the transfer of the assets to the Corporations, eaeh Municipality shall transfer its shares of Veridian Connections lnc. and Veridian Energy Inc. in consideration of common shares ofVeridian Corporation in order to complete the holding company structure. ".. . The Mayor and the Clerk will be authorized to sign the Merger Purchase Price and Amending Agreement among the Municipalities and the Corporations. Men~er Purchase Price and Amendinl!: Al!:reement . The Merger Purchasc Price and Amending Agreement is an agreement among the Municipalities and thc Corporations, which sets out the method for determination and satisfaction of the purchase price for the assets of all the Commissions and any adjustment thereto. It also confirms the adj ustment to the equity allocation in HoldCo among the Municipalities based on the book value of the Commissions determined by audits effective Novcmbcr I, 1999 as set out in the mcrger agreement among the Municipalities dated June 29, I <Jl)<J. . This Agreement confirms that the Special Payment referred in the Merger Agreement will be satisficd by the prepaymcnt of interest with the Notes on November 1,1999 and September I, 2000. . Initially the fair market value of the assets shall be assumed to be the book value of the assets as at November I, 1999. The fair market value of the assets will eventually be determined by an independent valuator which will take into consideration the effect of the final government rules and regulations. Any adjustment to the purchase price would be made on a proportionate basis as determined by the relative equity allocation among the Municipalities determined as of November 1, 1999. - . The Promissory Notes issued to each of the Municipalities shall be considered equity for the purpose of the debt/equity allocation contained in the shareholders' agreement (the "Shareholders' Agreement") among the Municipalities and Veridian Corporation. The Shareholders' Agreement requires Veridian Corporation to obtain shareholder approval in order to assume greater than 60% debt as compared to equity calculated on a consolidated basis among the Corporalions. The effect of this provision is to permit Veridian Corporation to borrow additional funds up to 60% debt as compared to equity calculated on a consolidated basis, not taking into account the outstanding debt to the Municipalities, without being required to obtain shareholder approval. Report to Council CS 01/99 Date: November 30, 1999 Subject: Veridian Corporation - Execution of Documents Page 4 P- . Veridian Corporation may issue Promissory Notes convertible at the option of the holder. The issuance of convertible debt requires shareholder approval under the Shareholders' Agreement. . Notwithstanding Section 7 of the Merger Agreement a Transfer Agreement is not required. . Each Municipality must deal with its Promissory Notes from Veridian Corporation and Veridian Connections Inc. in the same manner, i.e. all Municipalities must agree to convert the Notes, etc. . Section 10 of the Merger Agreement i c ;lmended to reflect the valuation of the assets at fair market value which \vill initially be estimated to be book value until the fair market value can be determined. Promissory Note - The Merger Agreement approved by Council at its meeting of June 29, 1999 contemplated a special payment of $12 million in total to the three shareholding municipalities. Such payment was to be made in a tax efficient manner. Veridian, in discussions with its tax experts has determined that this would take the form of prepaid interest on Promissory Notes to be paid in equal instalments on November I, 1999 and November 1, 2000. This will allow for a tax deduction in the hands ofYcridian and the receipt ofa proportionate share of the $12 million by the municipalities. In the case of the Town of Pickering this amounts to $2,844,000 in each of the two years. The Promissory Notes willtot,il $52,964,000 with Pickering being issued $25,122,000. The Promissory Note issued to each Municipality by each of Veridian Corporation and Veridian Connections Inc. is evidence of the debt obligation of the respective corporation to each Municipality as part of the consideration for the assets of that Municipality's Commission transferrcd pursuant to the Transfer By-Law. The principal features of the form of Promissory Note are as follows: . The principal amount of each Promissory Note will be determined based upon the equity allocation of each Municipality and the determined percentage of debt as compared to equity to be issued by Veridian Corporation and Veridian COImections Inc. . The term of each note will be from November 1, 1999 to November 1,2003; . The rate of interest shall be 0%) for the first year and 7.6% for the remaining three years calculated annually. The interest will be prepaid in two installments (November 1, 1999 and September l, 2000) as set out in the Merger Purchase Price and Amending Agreement. . The obligation of the respective corporation to pay the principal amount to the Municipality will be subordinate to the obligation to pay any third party lender. .'~" . The principal amount of the notes shall be due on November 1,2003 unless the term of the note is extended in accordance with the terms of each note. - . Each note is convertible into common shares in the capital of the respective corporation as follows: o During the term of the note, the holder must provide notice of its intention not less than six months prior to the maturity date to convert the note on the maturity date. o the option to convert shall expire ifnot exercised by November 1, 2002. Report to Council CS 01/99 Date: November 30, 1999 Subject: Veridian Corporation-- Execution of Documents Page 5 ,... ~, :' . If the holder of the note does not elect to convert the note six months prior to the maturity date, the respective corporation may, at its option, extend the term of the note for a two year period. Additionally, the respective corporation may extend the note with respect to the entire principal amount or a fraction thereof and repay the balance on the Maturity Date. . The terms and conditions of the note for the extended period would be negotiated among the respective corporations and the Municipalities. In the event the terms could not be settled, the following terms would apply: o the rate of interest would be the lesser of (i) the cash of the Corporation available for the payment of interest and (ii) the rate paid on a 182 day Government of Canada Treasury Bill issued within five days of the Maturity Date of the Note, calculated and payable annually on the lirst day of November of each year during the extended term. . In the event a Municipality sells its shares in Veridian Corporation the Note shall remain due in accordance with its terms. In the event a Municipality should its shares during the term of the note, the issuer corporation would have the right to set off any amount owed against interest already paid to the respective selling Municipality. . Each note shall be non-negotiable and non-transferable except in accordance with the Merger Purchase Price and Amending Agreement discussed above. This is to ensure the same treatment of the notes ~lS hetween each Municipality. - . Each of the notes shall be subject to the adjustment provisions set out in the By-laws, the Merger Purchase Price ~lIld Amending Agreement and the Merger Agreement. ATTACHMENTS: Correspondence from the President & c.E.O. Veridian Corporation 1. Letter explaining the options available to Council in dealing with the Promissory Notes upon expiry on November I, 2004 2. Lettcr re Clarington Llnds and Decommissioning Cleanup 3. Lctter re Equity in Ontario Hydro and Claims and Cleanup Against Ontario Hydro Documents 4. Transfer By-Law 5. Merger Purchasc Price ,1Ild Amcnding Agreement 6. Form of Promissory Note p~~ ~ --e---~ .- Gillis A. Paterson, Director, Corporate Services & Treasurer ,~ GAP:vw Attachmcnts Copy: Thomas J. Quinn, Chief Administrative Officer Recommended for the considerati,oll"Of ] Pickering Town Council , "l / " --~~-I2~: