ALL COUNCIL MEETING City of Waterloo Township of Woolwich and Township of Wellesley Wednesday, June 7, 2017 6:00 P.M

THIS ALL COUNCIL MEETING WILL BE AUDIO RECORDED.

ALL COUNCIL MEETING City of Waterloo Township of Woolwich and Township of Wellesley Wednesday, June 7, 2017 6:00 P.M.

Forbes Family Hall – RIM Park Manulife Financial Sportsplex and Healthy Living Centre 2001 University Avenue East Waterloo, Ontario N2K 4K4

AGENDA

All Council Meeting Page 1 of 114 Wednesday, June 7, 2017 1. APPOINTMENT OF CHAIR

2. DISCLOSURE OF PECUNIARY INTEREST AND THE GENERAL N ATURE THEREOF

3. STAFF REPORTS

a) Title: Strategic Options – Waterloo North Hydro Inc. Page 4 Report No.: WWWCAO2017-001 Prepared By: Tim Anderson, CAO City of Waterloo David Brenneman, CAO Township of Woolwich Rik Louwagie, CAO Township of Wellesley

Presentations: David Petras, Waterloo North Hydro Holding Corporation Board Member John Rockx, KPMG - Partner, Advisory Services

Recommendations: 1. That the Councils of the City of Waterloo, the Township of Woolwich and the Township of Wellesley approve report WWWCAO2017-001.

2. That the divesture of municipal ownership of Waterloo North Hydro Inc. be eliminated as one of the options for consideration in the strategic options and in the public consultation process.

3. That the Evaluation Criteria be adopted as guiding principles when considering the strategic options with respect to Waterloo North Hydro Inc.

b) Title: Waterloo North Hydro – Public Engagement Plan Page 103 Report No.: WWWCAO2017-002 Prepared By: Tim Anderson, CAO, City of Waterloo David Brenneman, CAO, Township of Woolwich Rik Louwagie, CAO, Township of Wellesley

Presentations: Tony Iavarone, Communications & Marketing Director, City of Waterloo Brad Witzel, Executive Officer to the CAO, City of Waterloo

All Council Meeting Page 2 of 114 Wednesday, June 7, 2017 Recommendations: 1. That the Councils of the City of Waterloo, the Township of Woolwich and the Township of Wellesley approve report WWWCAO2017-002.

2. That the Councils approve the staff proposed Waterloo North Hydro – Public Engagement Plan.

4. QUESTIONS

5. ADJOURNMENT

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STAFF REPORT Chief Administrative Officers

Title: Strategic Options – Waterloo North Hydro Inc. Report Number: WWWCAO2017-001 Authors: Tim Anderson, CAO City of Waterloo David Brenneman, CAO Township of Woolwich Rik Louwagie, CAO Township of Wellesley Meeting Type: Joint Council Meeting Council/Committee Date: June 7, 2017 File: N/A Attachments: Appendix A – Strategic Options Report to Shareholders; Memo from WNH Holding Corp. Chair, Mr. Tim Jackson Appendix B - KPMG WNH Review of Strategic Options Report Appendix C - WNH as an Industry Influencer Ward No.: All Wards (Waterloo, Woolwich and Wellesley)

Recommendation:

1. That the Councils of the City of Waterloo, the Township of Woolwich and the Township of Wellesley approve report WWWCAO2017-001.

2. That the divesture of municipal ownership of Waterloo North Hydro Inc. be eliminated as one of the options for consideration in the strategic options and in the public consultation process.

3. That the Evaluation Criteria be adopted as guiding principles when considering the strategic options with respect to Waterloo North Hydro Inc.

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The councils of the City of Waterloo (March 27), the Township of Woolwich (March 28) and the Township of Wellesley (March 28) each approved a Notice of Motion/ Resolution giving direction to the Holdco Board of Directors to undertake the necessary discussions and analysis to prepare a comprehensive review of the sector changes and options currently being undertaken or being considered throughout the Province, and the applicability of such options as it relates to the Waterloo North Hydro LDC regulated business. The three Councils also directed City and Township staff along with the Holdco Board of Directors of Waterloo North Hydro to develop evaluation criteria for the options that will include continued community ownership of the LDC.

This report addresses the comprehensive review prepared by KPMG for the Holdco Board of Directors and the development of evaluation criteria. In addition, staff will provide details around the public engagement strategy to be undertaken. A separate report will address the public engagement strategy.

C. Technology Implications There are no technology implications associated with this report.

D. Legal Considerations Legal issues have been addressed to the satisfaction of City of Waterloo Legal Counsel.

E. Link to Strategic Plan City of Waterloo: • Corporate Excellence – Ensure balance consideration of social, cultural, economic and environmental factors when making fiscally responsible practice/policies. • Corporate Excellence – Maximize public service excellence. Township of Woolwich: • Healthy Community – Social Capital/Civic Engagement – Provide regular forums and different methods that will encourage public consultation and feedback. • Fiscally Responsible and Sustainable Community – Expand Financial Sustainability/Best Practices – Explore collaboration and partnership opportunities that make fiscal sense and ensure best value for taxpayers. • Best Managed and Governed Municipality – Commit to maintaining high standards for municipal service delivery. Township of Wellesley: • Healthy Communities and Environments – Maintains our community’s healthy lifestyle and safe environment and directly relates to the strategic

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objective to ensure long-term and short term financial sustainability of the Township. • Public Engagement and Partnerships – Encourage communication with Township residents by keeping them informed, connected and engaged.

F. Previous Reports on this Topic City of Waterloo: • CAO2017-008 Waterloo North Hydro – Notice of Motion (March 27, 2017) Township of Woolwich: • Direction to Waterloo North Hydro Holding Company – Strategic Options (March 28, 2017) Township of Wellesley: • Potential Waterloo North Hydro Comprehensive Review of Sector Changes and Options (March 28, 2017)

G. Approvals

Name Signature Date Author: Tim Anderson, CAO City of Waterloo Author: David Brenneman, CAO Township of Woolwich Author: Rik Louwagie, CAO Township of Wellesley Finance: Keshwer Patel, CFO City of Waterloo Finance: Richard Petherick, Treasurer Township of Woolwich Finance: Theresa Bisch, Treasurer Township of Wellesley

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Strategic Options – Waterloo North Hydro Inc.

1. Background

As per direction from the Municipal Shareholders, Waterloo North Hydro Holding Corporation, engaged the accounting firm of KPMG LLP in April 2017 to provide an independent assessment of the strategic options available in respect of Waterloo North Hydro Inc. (“WNH” or the “LDC”), its wholly-owned electricity distribution subsidiary and to also provide an estimate of the fair market value of the LDC.

Specifically, KPMG has completed an analysis of the following strategic options:

• Stand-Alone – continuing to operate WNH on a stand-alone basis with ongoing municipal shareholder ownership. • Potential Divestiture – the implications of a potential sale of the LDC and the impact of a sale on WNH‘s customers and the broader Waterloo Region community. • Merger – potential merger of WNH with one or more regional local distribution companies. KPMG has examined, on a preliminary basis, the prospects associated with four specific potential merger scenarios. • Acquisition by WNH – growth and expansion through an LDC acquisition.

The following is a summary of the key findings, observations and issues outlined in the attached report (Appendix A):

2. Overview of the Ontario LDC Sector

The restructuring of the Ontario electricity market which initially started in 1998, has resulted in the consolidation of the number of LDCs in Ontario from 307 to less than 70 LDCs as of December 2016. Between 1999 and 2001, this consolidation was accomplished primarily through the acquisition of LDCs by Hydro One Networks Inc. (HONI) and consolidation of a number of geographically clustered LDCs into larger LDCs such as Veridian Connections, Horizon Utilities and PowerStream.

The Province of Ontario remains concerned about the current structure of the LDC sector, which includes customer bases ranging from 1,225 (Hydro 2000) to over 1.2 million (HONI). The Province believes that the fragmented structure of the sector results in higher costs, through higher Operations, Maintenance &

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Administration (OM&A) costs, duplication of equipment and facilities, and additional requirements for regulatory oversight. Accordingly, the Province continues to take steps to encourage voluntary LDC consolidation: a permanent holiday from the Transfer Tax for mergers and acquisitions involving only publicly-owned utilities and allowing LDCs to keep operating cost savings for a period of time up to 10 years after a merger.

Recently PowerStream, Enersource and Horizon merged and then purchased Hydro One Brampton to form Alectra which will serve almost a million customers. Energy+ acquired Brant County Power. Other LDCs are also involved in merger/sale talks: Veridian and Whitby Hydro, Entegrus and St. Thomas Energy, Midland Power and Newmarket Tay Hydro, Kenora Hydro and Thunder Bay Hydro. Toronto Hydro, Guelph Hydro and others are also currently considering their strategic options.

The electricity grid is undergoing significant transformation to become clean, distributed and intelligent. This transformation is being driven primarily by the ever increasing cost of power, disruptive technologies and climate change policies. Declining costs of distributed energy resources such as solar and battery storage and rising customer empowerment challenge the status-quo.

LDCs are the operators of Ontario’s electricity distribution grid that links central generation and the transmission system with local customers. By leveraging their existing customer relationships, expertise, brand recognition, and knowledge of their local distribution networks, LDCs are uniquely positioned as the most efficient and cost-effective service provider to lead the transition to a cleaner, more distributed and more intelligent grid.

Looking to the future, there will continue to be significant changes in the energy landscape that will continue to transform the utility business model. There will be a shift away from the largely one-way power system, relying principally on large centralized generation plants and conventional transmission and distribution infrastructure, toward a highly networked ecosystem of two-way power flows and digitally enabled intelligent grid architecture. This rapidly unfolding energy landscape will present challenges as well as opportunities that will require new strategies and approaches.

3. Profile of Waterloo North Hydro Inc.

Waterloo North Hydro Inc. distributes electricity to over 56,000 residential, commercial and industrial customers servicing over 672 square kilometres of territory. WNH is ranked the 13th largest LDC in the Province based on customer count. WNH owns and operates a local distribution network consisting of over 21,000 poles, 7,600 transformers and approximately 1,700 km of overhead and underground feeder lines. The network has three transmission connected transformer stations and ten distribution substations. WNH transforms electrical

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power purchased from the Independent Electricity System Operator at its local transformer stations to primary distribution voltages and distributes this power to customers through its distribution network. In 2016, WNH distributed 1,490.0 GWh to its customers.

WNH has a workforce consisting of 124 full-time employees working out of their 104,000 square foot administrative office and service centre located at 526 Country Squire Road, in the Township of Woolwich, just north of the City of Waterloo.

The business and affairs of each of WNH Holdco and WNH are governed by their respective Boards, each consisting of nine directors. Both Boards are comprised of the mayors of the three Municipal Shareholders, a councillor from the City of Waterloo, and five independent members from the business and academic communities.

4. Valuation

KPMG estimates the indicative enterprise value of WNH based upon the multiple of rate base approach and a review of observed multiples of rate base from recent transactions in the Ontario LDC sector as of December 31, 2016 to be from a low of $285.0 million to a high of $350.0 million. Shareholders’ equity ranges from a low of $212.1 million to a high of $277.1 million - this is the amount of cash the shareholders would receive after paying off commercial debt. This valuation shows that the shareholders of WNH own an asset that not only produces a stable revenue stream on an annual basis but also appreciates in value over time. KPMG notes that the enterprise value of WNH may change in the future based on corporate operating performance, market conditions, the impact of regulatory changes and other factors.

Rate Base is defined as the net book value of all the assets used by an LDC to distribute electricity to its customers. Such assets include transformer stations, distribution substations, poles, wires, transformers, meters, vehicles, computers and office equipment. Rate Base also includes an allowance for working capital which is calculated as 7.5% of the sum of cost of power and operating, maintenance and administration expenses. Rate base is one of the standard methodologies used to provide a valuation of a utility since it is employed by the Ontario Energy Board to determine the return on capital that a utility should earn in the rate setting process.

5. Stand-Alone Option

Under this option, WNH would continue to be owned and operated by its current Municipal Shareholders. The utility has proven to be a profitable asset - in 2016 WNH earned a net profit from operations of $8.4 million and returned $5.3 million in interest and dividend payments to the three municipal shareholders. These

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returns have been used to offset municipal property tax increases and to build up reserves to fund special infrastructure projects. Any change to the dividend or interest payments would likely result in a tax increase in the shareholder municipalities to balance the budget. From 2000, (when the three municipalities assumed ownership) to 2016, the utility provided $57.2 million in interest and dividends to the Holding Company, of which $55.3 million was distributed to the shareholders. In addition, the utility grew shareholder equity from $26.9 million to $90.5 million during this period for a total value of $120 million. Under this scenario, municipal shareholders can expect that the ownership of electricity distribution assets is aligned with local economic development goals and WNH would also continue to engage in community sponsorship activities. This option provides the shareholder with continued high degree of control over the quality and type of service provided to the community, responsiveness to the needs of customers in the service area and continued investment in asset planning and asset renewal.

WNH is a growing utility and is well managed by its Board and Senior Management and has a highly experienced and skilled workforce. The utility has experienced growth of 3.0% to 4.0% per year in the past; however, growth is forecasted to level off in the near future to 2.0% a year. The utility will continue to be profitable and shareholder returns are expected to be at the OEB allowable Return on Equity levels of 8.0% to 9.0% per year despite increasing pressures from the regulator. The flow of interest and dividend payments would continue under this option.

Stand-Alone is considered to be a feasible option since WNH has sufficient size, scale and management depth to operate successfully on an independent basis.

6. Divestiture Option

Under this option, the Municipal Shareholders would divest some or all of their equity interests in WNH. There would likely be considerable interest in an acquisition of WNH from various parties. Potential purchasers would include HONI and larger Ontario LDCs such as Toronto Hydro, Alectra Utilities, London Hydro and Veridian, however, most of these municipally-owned purchasers would prefer a merger transaction rather than an outright cash purchase due to the amount of capital required to purchase the shares of WNH, and their limited ability to receive cash equity injections from their municipal shareholders. Potential purchasers could also be Ontario based pension funds who have significant cash resources and are interested in stable long terms return on both debt and equity. These would be the same reasons that the municipal shareholders would also consider retaining the investment in the LDC.

Recent sales show attractive premiums between 1.40 and 1.67 of rate base - Hydro One in most cases has been the acquirer. It appears from recent Hydro One rate filings that future rate increases for customers in the acquired utilities

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will be significant, outstripping any financial windfall enjoyed by their municipal shareholders. In addition, the shareholders would not be able to influence asset additions and planning, regional economic initiatives and the timing of planned rates applications.

Under this scenario, loans to WNH Inc. from the municipal shareholders would be repaid and the shareholders would not receive annual dividends and interest. As noted earlier, these totalled $5.5 million in 2016 to the three municipal shareholders and are part of the municipalities’ balanced budget. Additionally, in the current low interest rate environment, it is unlikely that the shareholders will be able to invest the capital received at comparable yields. At year end December 31, 2016, the audited financial statements of the LDC indicate shareholder loans payable totalled $33.5 million with an additional $1.0 million loan from WNH HoldCo. The senior loan / debt bears an interest rate of 6% per annum and the junior debt bears interest at a rate of 1.125% per annum above the Ontario Energy Board (OEB) debt interest rate.

In addition to the above financial considerations of stable long terms returns, growth in equity for the shareholders over the years, reliance on the dividend and interest stream to balance the budget, it should also be noted that Waterloo North Hydro Inc. is a leader in the industry as summarised in Appendix B. WNH Inc. ranks in the top quartile (17th) among 72 utilities for efficiency; is a founding member in GridSmartCity (GSC), a cooperative to provide synergies to buying and utility efficiencies. WNH Inc is also a founding member of Utility Standards Forum that provides and updates engineering standards used in the design, construction and maintenance of electrical distribution assets.

In consideration of all the above factors, councils of the City of Waterloo (March 27th) and the Townships of Woolwich and Wellesley (March 28th, 2017), approved a motion, stating “That this Council directs that City and Township staff along with the Waterloo North Hydro Holdco Board of Directors to develop evaluation criteria; and further that this Council signals that a desirable evaluation criteria for the options will include continued community ownership of the LDC”.

This report formalises the above council direction to staff with respect to the public engagement process and decision making on the municipal ownership of this community asset.

7. Merger Option

A key principle behind a merger is to create shareholder value over and above that of the sum of the two companies, and including the cost of the merger. One of the benefits of a merger is the expectation that total operating costs on a post-merger basis will be lower, and that these savings can be passed on to the customers of all LDCs participating in the merger through lower distribution rates than would otherwise have occurred on a Stand-Alone basis.

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A merger of two or more utilities presents the greatest opportunity to enhance shareholder return and provide additional flexibility to respond to operating and regulatory pressures in the future. Utilities that complement each other’s strengths have obvious benefits that enable the companies to take advantage of economies of scale.

A successful merger among utilities in the electrical distribution business is dependent upon the following key factors:

• Potential benefits to customers and the community • Similar Shareholder/Management philosophy and culture • Similar operating and engineering practices and standards • Contiguous service territory where possible • Fair distribution of Shareholder Control • Complementary strengths and weaknesses

There are many different merger partners and scenarios for WNH. For purposes of this report, KPMG has prepared a preliminary high-level analysis of four potential merger scenarios for WNH as follows: • Scenario One – A two-party merger of WNH and Energy+ (formerly Cambridge North Dumfries Hydro and Brant County Power). • Scenario Two – A two-party merger of WNH and Guelph Hydro • Scenario Three – A three-party merger of WNH with Guelph Hydro and Energy+. • Scenario Four – A four-party merger of WNH with Guelph Hydro, Energy+ and Kitchener-Wilmot Hydro.

The following charts show the ownership percentage under each scenario based on the relative rate base of each utility as of December 31, 2015 based upon data published in the 2015 OEB Yearbook:

Scenario One Scenario Two

Energy+ WNH Guelph WNH 43% 57% Hydro 58% 42%

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Scenario Three Scenario Four

KW Guelph Hydro WNH Hydro WNH 28% 29% 40% 29%

Guelph Energy+ Hydro Energy+ 31% 21% 22%

A merger of three or more utilities would result in no shareholder being able to control the new company since no shareholder would hold a majority stake. A merger of Waterloo North Hydro with Energy + or with Guelph Hydro would result in WNH being the majority shareholder. However, a merger with Kitchener- Wilmot Hydro would see KW Hydro as the majority partner. This latter scenario may not be a desirable option if control is an important issue.

As the financial metrics (distribution revenue, net income, cash flow, dividend distribution, and debt equity ratio) are different for each utility, the impact of any potential merger would need a further detailed analysis specific to the utility in consideration.

8. LDC Acquisition Option

Under this option, WNH would continue as a Stand-Alone LDC, and would pursue the acquisition of smaller local LDCs that are geographically close to its service territory. There would be an opportunity to realize operational synergies and reduced operating costs for the benefit of the shareholders (in the short term) and existing customers (in the long term). However, an acquisition would require a cash outlay for at least the equity portion of the target LDC, including any premium paid above book value. WNH could also partner with one or more LDCs to consummate an acquisition of significant size.

Successful acquisitions are dependent on the following key principles:

• Willing sellers • Injection of cash from shareholders • A purchase price that is fair

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Given the capital investment required, WNH would be limited to target utilities of a smaller size with a rate base less than $50 million. Of the 72 utilities in the province, 35 utilities are potential candidates for an acquisition. However, the reality is that most of them are not for sale, some are poor investment choices due to size, geography and their high cost of servicing and others that would be asking for too high a purchase price. It appears that acquisitions will not be a feasible strategy at this time.

9. Evaluation Criteria

City and Township staff along with the Board of Directors of Waterloo North Hydro Holdco developed the following evaluation criteria that can used as guiding principles when the strategic alternatives are evaluated by the shareholders. These considerations are grouped under primary criteria and secondary criteria. Primary criteria can be used to assess a potential consolidation option. Secondary criteria can be used in the due diligence phase to determine fit prior to consummating a transaction.

Primary Evaluation Criteria:

• Impact on Customer Rates – rates should decrease or at least be maintained within inflationary levels. * • Shareholder/Management Philosophy and Culture – similar operating philosophy and culture are desirable. • Reliability and Service Levels – response time and customer service metrics should improve. * • Financial Return to the shareholder – Interest and dividend payments should increase or at least be maintained at existing levels. * • Synergies and Operational Efficiency – synergies and economies of scale should result in an overall increase in efficiency as measured by the cost per customer metric. * • Manageable Debt Levels – the new entity should not have higher debt levels than the combined individual debt levels. • Corporate Profitability – should increase and be optimized at the regulated rate of return. • Shareholder Value – the new entity should be more valuable (enterprise value) than the sum of the individual LDCs. • Customer/Community Sentiment – should be perceived by customers and the community as offering better service and better value. • Local Control – may be diminished and should be assessed against shareholders’ comfort level. * • Economic Development – support for economic development should be maintained. *

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Secondary Criteria: • Governance – Board composition with respect to independent directors being a majority of the Board. • Rate Harmonization – when and how would rate harmonization affect customers? • Local Presence – would facilities be maintained in the service territory to serve customers? • Job Retention and Impact on Employees – maintaining local employment opportunities and minimizing negative impacts on existing employees are desirable. * • Industry Visibility – a larger LDC (top 10) would have a stronger voice and greater influence when lobbying for changes with the Provincial Government and the Regulator. • Allocation of Consolidation Savings – the regulator allows savings that are achieved during the first ten years to be retained by the shareholders. How much will shareholders keep versus how much will be shared with customers? • Valuations and Ownership Interest – a common valuation methodology to determine relative ownership share is desirable. • Future Growth Prospect of Partners – future growth levels in the customer base can have an impact on capital expenditures and relative valuations. • Management Expertise – would the new entity have the management staff with the required skills and expertise necessary for a successful implementation?

Summarised Criteria for public engagement For the purpose of the public engagement, staff recommend that a shortened and balanced criteria outlined below, be used to engage and seek public feedback. Items asterisked above have been included in the summary criteria.

Customer focussed Citizen focussed Impact on Customer Rates – Financial Return to the municipalities distribution rate only Reliability and Service Levels Local Control Synergies & Operational Efficiency savings Economic Development Job Retention and Impact on Employees

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10. Conclusion

The Province of Ontario continues to encourage voluntary consolidation of the LDC sector. The sector has become increasingly complex over the past 20 years due to increased regulatory, political, financial, technological and environmental demands.

It can be concluded that Waterloo North Hydro is well managed. The utility has a solid customer base and its level of profitability and efficiency is comparable to similar sized utilities in the province. Rates charged to customers are competitive and service levels exceed OEB standards. Waterloo North Hydro can survive and grow on its own; however, a merger or acquisition with the right partner(s) can enhance shareholder returns and service quality.

The Divestiture Option provides an immediate financial windfall; however, this option would result in the loss of the current dividend and interest stream received from WNH. In addition future distribution rates may be at risk of a significant increase which could pose challenges for future economic growth.

The Merger Option represents a feasible option for WNH that would result in the Municipal Shareholders becoming partners in a larger regional LDC (“MergeCo”), which is consistent with the Province’s objective of industry consolidation while at the same time preserving ongoing interest and dividend streams. However, control over the LDC could be diluted and the current interest and dividend streams may change.

The Growth through LDC Acquisition Option envisions WNH’s purchase of another LDC to generate synergies and reduce operating costs. While WNH has some excess borrowing capacity to invest in a small to mid-sized LDC, the pursuit of larger LDCs would necessitate partnering with one or more organizations to share the financial costs.

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Appendix A Strategic Options Report to Shareholders. Memo from WNH Holding Corp. Chair, Mr. Tim Jackson

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WATERLOO NORTH HYDRO HOLDING CORPORATION

526 Country Squire Rd. Waterloo ON N2J 4G8 Telephone 519-886-5090 Tim Jackson Fax 519-886-8592 Chair, WNH Holding Corporation and www.wnhydro.com Chair, Options Discussion Working Group

May 23, 2017

Mayor Dave Jaworsky Mayor Sandy Shantz Mayor Joe Nowak City of Waterloo Township of Woolwich Township of Wellesley 100 Regina St S., 24 Church Street West 4639 Lobsinger Line Waterloo City Centre Elmira On N3B 2Z6 St. Clements On N0B 2M0 Waterloo On N2K 4A8

Dear Mayors:

Subject: STRATEGIC OPTIONS REPORT TO SHAREHOLDERS

Background

Given the level of activity that has been occurring across the Province in recent months with respect to mergers and acquisitions (M&A) of local distribution companies (LDCs), the municipal shareholders of Waterloo North Hydro (WNH) are considering the strategic options available to them with respect to their investment in WNH and the long-term viability of the utility.

The councils of the City of Waterloo (March 27), the Township of Woolwich (March 28) and the Township of Wellesley (March 28) each approved a Notice of Motion giving direction to the Holdco Board of Directors to undertake the necessary discussions and analysis to prepare a comprehensive review of the sector changes and options currently being undertaken or being considered throughout the Province, and the applicability of such options as it relates to the Waterloo North Hydro LDC regulated business.

The three Councils also directed City and Township staff along with the Holdco Board of Directors of Waterloo North Hydro to develop evaluation criteria for the options that will include continued community ownership of the LDC.

The three Councils also directed City and Township staff along with the Holdco Board of Directors of Waterloo North Hydro to develop a Public Engagement Strategy to determine the Waterloo North Hydro Customer sentiment as it relates to the future of Waterloo North Hydro.

This report addresses the comprehensive review prepared by KPMG for the Holdco Board of Directors and the development of evaluation criteria.

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Pursuant to the resolutions, the Board established a committee – the Options Discussion Working Group comprising of Tim Jackson, Chair of the Waterloo North Hydro Holdco Board, with Board Directors Jeff Henry and David Petras, along with Rene Gatien and Albert Singh as management resources. In addition, Tim Martin, the Chair of Waterloo North Hydro Wiresco Board, was invited to participate as a resource from the LDC Board. Specifically, the following are the undertakings requested by the shareholders:

1. Provide a comprehensive review of sector changes and options being considered throughout the Province as it applies to WNH.

2. In collaboration with shareholders’ staff, develop a Public Engagement Strategy to determine customer sentiment as it relates to the future of WNH.

3. In collaboration with shareholders’ staff, develop evaluation criteria to assess the strategic options being considered.

The Options Discussion Working Group had several meetings on these matters and reported the results of these discussions to the Waterloo North Hydro Holdco Board for endorsement.

Sector and Options Review

In April 2017, WNH requested KPMG to provide a comprehensive review of strategic options and valuations with respect to acquisitions, divestiture and mergers in light of recent M&A activities and regulatory changes. Their report is appended for your review.

The following is a summary of the key findings, observations and issues outlined in the report:

Utility Valuation

KPMG estimates the indicative enterprise value of WNH based on the balance sheet as of December 31, 2016 to be from a low of $285.0 million to a high of $350.0 million. This valuation is based upon the multiple of rate base approach and a review of observed multiples of rate base from recent transactions in the Ontario LDC sector. Shareholders’ equity ranges from a low of $212.1 million to a high of $277.1 million - this is the amount of cash the shareholders would receive after paying off commercial debt. This valuation shows that the shareholders of WNH own an asset that not only produces a stable revenue stream on an annual basis but also appreciates in value over time. KPMG notes that the enterprise value of WNH may change in the future based on corporate operating performance, market conditions, the impact of regulatory changes and other factors.

Divestiture Option

The municipal shareholders of WNH have expressed the desire to retain community ownership of the LDC, which would not happen under a divestiture scenario. Recent

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All Council Meeting Page 19 of 114 Wednesday, June 7, 2017 sales of LDC do show attractive premiums: between 1.40 and 1.67 of rate base - Hydro One in most cases has been the acquirer. However, it appears from recent Hydro One rate filings that rate increases for customers in the acquired utilities will be significant. Thus while a divestiture would generate a short-term win fall there would be negative long-term ramifications for customers therefore we do not consider divestiture a viable alternative at this time.

Stand-Alone Option

Waterloo North Hydro is a growing utility and is well managed by its Board and senior management. The utility has experienced growth of 3.0% to 4.0% per year in the past; however, growth is forecasted to level off in the near future to 2.0% a year. The utility will continue to be profitable and shareholder returns are expected to be at the OEB allowable levels of 8.0% to 9.0% per year despite pressures from the regulator. Stand- Alone is considered to be a feasible option since WNH has sufficient size, scale and management depth to operate successfully on an independent basis.

Acquisitions

Successful acquisitions are dependent on the following key principles:  Willing sellers;  Injection of cash from shareholders;  A purchase price that is fair.

Given the capital investment required, WNH would be limited to target utilities of a smaller size with a rate base less than $50 million. Of the 72 utilities in the province, 35 utilities are potential candidates for an acquisition. However, the reality is that most of them are not for sale, some are poor investment choices due to size, geography and their high cost of servicing and others that would be asking for too high a purchase price. Centre Wellington Hydro appears to be the only logical acquisition target for WNH and they are currently not on the market - acquisitions will not be a feasible strategy at this time.

Mergers A key principle behind a merger is to create shareholder value over and above that of the sum of the two companies, and including the cost of the merger. Becoming bigger in itself is not a goal, it is a means to an end; companies should be striving to become better at serving their customers, shareholders and employees.

Synergy takes the form of improving revenue/service enhancements and cost savings. By merging, companies hope to benefit from the following:

 Reduction of overhead costs  Improved customer service  Staff reductions or reduced growth in staffing levels  Economies of scale  Acquisition of new technology  Improved industry visibility

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All Council Meeting Page 20 of 114 Wednesday, June 7, 2017 A merger of two or more utilities presents the greatest opportunity to enhance shareholder return and provide additional flexibility to respond to operating and regulatory pressures in the future. Utilities that complement each other’s strengths have obvious benefits that enable the companies to take advantage of economies of scale.

A successful merger among utilities in the electrical distribution business is dependent upon the following key factors:

 Potential benefits to customers and the community  Similar Shareholders/Management philosophy and culture  Similar operating and engineering practices and standards  Contiguous service territory where possible  Fair distribution of Shareholder Control  Complementary strengths and weaknesses

Based on the above criteria, the following utilities could be considered as possible merger partners:

 Energy +  Kitchener Wilmot Hydro  Guelph Hydro  Centre Wellington Hydro

Evaluation Criteria

The Board of Directors is suggesting the following criteria be considered when the strategic alternatives are evaluated by the shareholders. These considerations are grouped under primary criteria and secondary criteria. Primary criteria can be used to assess a potential consolidation option. Secondary criteria can be used in the due diligence phase to determine fit and culture prior to consummating a transaction.

Primary Criteria

 Impact on Customer Rates – rates should decrease or at least be maintained within inflationary levels.

 Shareholder/Management Philosophy and Culture – similar operating philosophy and culture are desirable.

 Reliability and Service Levels – response time and customer service metrics should improve.

Page 4

All Council Meeting Page 21 of 114 Wednesday, June 7, 2017  Financial Return to the Shareholders – Interest and dividend payments should increase or at least be maintained at existing levels.

 Synergies and Operational Efficiency – synergies and economies of scale should result in an overall increase in efficiency as measured by the cost per customer metric.

 Manageable Debt Levels – the new entity should not have higher debt levels than the combined individual debt levels.

 Corporate Profitability – should increase and be optimized at the regulated rate of return.

 Shareholder Value – the new entity should be more valuable (enterprise value) than the sum of the individual LDCs.

 Customer/Community Sentiment – should be perceived by customers and the community as offering better service and better value.

 Local Control – may be diminished and should be assessed against shareholders’ comfort level.

 Economic Development – support for economic development should be maintained.

Secondary Criteria:

 Governance – Board composition with respect to independent directors being a majority of the Board.

 Rate Harmonization – when and how would rate harmonization affect customers?

 Local Presence – would facilities be maintained in the service territory to serve customers?

 Job Retention and Impact on Employees – maintaining local employment opportunities and minimizing negative impacts on existing employees are desirable.

 Industry Visibility – a larger LDC (top 10) would have a stronger voice and greater influence when lobbying for changes with the Provincial Government and the Regulator.

 Allocation of Consolidation Savings – the regulator allows savings that are achieved during the first ten years to be retained by the shareholders. How much will shareholders keep versus how much will be shared with customers?

 Valuations and Ownership Interest – a common valuation methodology to determine relative ownership share is desirable.

 Future Growth Prospect of Partners – future growth levels in the customer base can have an impact on capital expenditures and relative valuations. Page 5

All Council Meeting Page 22 of 114 Wednesday, June 7, 2017  Management Expertise – would the new entity have the management staff with the required skills and expertise necessary for a successful implementation??

Conclusion

The Board of Waterloo North Hydro Holding Corporation recommends the following:

1. That the KPMG report be forwarded to the City of Waterloo, the Township of Wellesley and the Township of Woolwich for shareholder review, and for inclusion in the Joint Council Agenda for June 7, 2017.

2. That the Shareholders proceed with the Public Engagement Strategy to determine customer sentiment as it relates to the future of Waterloo North Hydro.

3. That the above evaluation criteria be submitted to staff of the shareholders to assist in developing evaluation criteria for consideration at the June 7, 2017 joint council meeting.

Sincerely,

Tim Jackson, Chair Chair, Waterloo North hydro Holding Corporation

c.c. Tim Anderson, CAO David Brenneman, CAO Rik Louwagie, CAO Keshwer Patel, CFO Richard Petherick, Treasurer Theresa Bisch, Treasurer

Rene Gatien, CEO, Waterloo North Hydro

Page 6

All Council Meeting Page 23 of 114 Wednesday, June 7, 2017 21 Chief Administrative Officers

Appendix B KPMG WNH Review of Strategic Options Report

All Council Meeting Page 24 of 114 Wednesday, June 7, 2017 Review of Strategic Options

Waterloo North Hydro Holding Corporation

May 23, 2017

All Council Meeting Page 25 of 114 Wednesday, June 7, 2017 Table of Contents Page

Executive Summary 4

Overview of the Ontario Local Electricity Distribution Sector 7

Profile of Waterloo North Hydro Inc. 23

Analysis of Stand-Alone LDC Option 30

Analysis of Divestiture Option 38

Analysis of LDC Merger Option 47

Analysis of LDC Acquisition Option 70

Conclusions 74

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BCP Brant County Power MergeCo A merger of WNH with one or more other LDCs into a single LDC CAGR Compounded Annual Growth Rate MEU Municipal Electric Utility CDM Conservation and Demand Management MOU Memorandum of Understanding CPA Canada Canadian Institute of Chartered Professional Accountants Municipal Shareholders City of Waterloo (73.2%), the Township of Wellesley (6.6%) and the Township of DER Distributed Energy Resources Woolwich (20.2%)

Energy+ Energy+ Inc., which services Cambridge, OEB Ontario Energy Board North Dumfries and parts of Brant County OEFC Ontario Electricity Finance Corporation Engagement Letter Engagement letter dated March 13, 2017 wherein KPMG has been engaged by WNH OPG Ontario Power Generation HoldCo PAC Premier’s Advisory Council Guelph Hydro Guelph Hydro Electric Systems Inc. PILs Payments-in-Lieu-of-Tax HEPC Hydro-Electric Power Corporation

IBEW International Brotherhood of Electrical Workers ROE Return on Equity

IRM Incentive Rate Mechanism RRFE Renewed Regulatory Framework for Electricity Distributors KPMG KPMG Corporate Finance Inc. / KPMG LLP WACC Weighted Average Cost of Capital KW Hydro Kitchener-Wilmot Hydro Distribution Inc. WNH HoldCo Waterloo North Hydro Holding Company LDC Local Distribution Company WNH or Company Waterloo North Hydro Inc. MAADs Merger, acquisition, amalgamation and divestitures

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This report has been provided in accordance with the terms of our engagement letter (the “Engagement Letter”) wherein KPMG Corporate Finance Inc. / KPMG LLP (collectively “KPMG”) has been engaged by Waterloo North Hydro Holding Corporation (“WNH HoldCo”) to provide an independent assessment of the strategic options available in respect of Waterloo North Hydro Inc. (“WNH” or the “Company”), its wholly-owned electricity distribution subsidiary. This report is subject to the terms and conditions contained in the Engagement Letter and the qualifications and restrictions described herein. In preparing this report, we have necessarily relied upon financial and other information supplied and representations made to us by representatives of WNH HoldCo and WNH. We have not independently verified the accuracy or completeness of the information or conducted an audit, nor are we providing any other form of assurance. The procedures we performed do not constitute an audit, examination, or review in accordance with the standards established by the Canadian Institute of Chartered Professional Accountants (“CPA Canada”), and we have not otherwise verified the information we obtained or presented in this report. This report is provided as of the date hereof and KPMG disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting the information provided in this report that may come or be brought to KPMG’s attention after the date hereof. Without limiting the foregoing, in the event that there is a material change in any fact or matter affecting the content of this report after the date hereof, KPMG reserves the right to change, modify, or withdraw this report. This report, together with all attachments, has been provided solely for the exclusive use of WNH HoldCo and may not be used or relied upon by any other party. Neither KPMG, its affiliates, nor its respective partners, directors, officers, employees, counsel or agents will have any liability to WNH HoldCo or WNH, their shareholders or any other parties resulting from the use of this report by them in making any decisions in respect of WNH. This report is private and confidential and is not intended for general circulation or publication, nor is to be reproduced or used for any purpose, other than to assist WNH HoldCo with the specific matters discussed herein, without our prior written permission in each specific instance. We will not assume any responsibility or liability for damages or losses incurred by WNH HoldCo or WNH, their respective shareholders, officers, directors or councillors, or by any other parties as a result of the circulation, publication, reproduction or use of this report contrary to the provisions outlined herein. Any use which a party makes of this report, or any reliance on or decisions to be based on it, are the responsibility of such party. KPMG does not accept any responsibility for damages, if any, suffered by any party as a result of decisions made or actions taken based on the contents of this report. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no professional services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. KPMG LLP, a limited liability partnership formed pursuant to the laws of Canada, is the Canadian member firm of KPMG International.

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Executive Summary

All Council Meeting Page 29 of 114 Wednesday, June 7, 2017 Overview of Assignment – Review of Specific Strategic Options

KPMG Corporate Finance Inc. / KPMG LLP (“KPMG”) was engaged to assist Waterloo North Hydro Holding Corporation (“WNH HoldCo”) in assessing certain strategic options in respect of its 100% owned subsidiary, Waterloo North Hydro Inc. (“WNH” or the “Company”). Specifically, KPMG has completed an analysis of the following strategic options: I. Stand-Alone Operation of WNH - The Board of WNH HoldCo is interested in identifying the implications of continuing to operate WNH on a stand-alone basis with ongoing municipal shareholder ownership. II. Potential Divestiture of WNH - The Board of WNH HoldCo is interested in identifying the implications of a potential divestiture of WNH. Accordingly, KPMG has commented on the potential value of WNH in a sale transaction and the level of market interest and expected premium over rate base. As well, KPMG has analyzed the probable impact of a sale on WNH‘s customers and the Waterloo community. III. Potential Merger of WNH with other local distribution companies (“LDCs”) - The Board of WNH HoldCo is interested in identifying the implications of a potential merger of WNH with one or more regional local distribution companies. Accordingly, KPMG has commented, from a generic basis, on the implications of a merger transaction with one or more municipally-owned LDCs. Moreover, KPMG has examined, on a preliminary or high-level basis, the prospects associated with four specific potential merger scenarios for WNH. IV. Growth Through an LDC Acquisition by WNH - The Board of WNH HoldCo is interested in identifying the possible implications associated with the continuation of the Company’s traditional electricity distribution operations, plus WNH’s expansion through an LDC acquisition. This report also provides an overview of the Ontario electricity distribution sector as well as a profile of the operations of WNH.

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All Council Meeting Page 32 of 114 Wednesday, June 7, 2017 Backgrounder (1)

Introduction – Prior to the restructuring of the Ontario electricity market in 1998, the structure of the sector reflected historical factors dating from the late 1800s / early 1900s when the first hydroelectric facilities were built at Niagara Falls. Municipalities in Southwestern Ontario were dependent on this energy for growth, and the Ontario government created the Hydro-Electric Power Corporation (“HEPC”) in 1906 to transmit (and later generate) power from Niagara Falls. Over time, HEPC added its own generation facilities throughout the Province. HEPC was renamed Ontario Hydro in 1974. – Under this structure, municipalities could create their own electricity distribution utilities, with generation and transmission of power provided by HEPC/Ontario Hydro. The number of such municipal utilities peaked at 393 in 1923. Little changed over the following decades until 1996 when a provincially appointed committee (the Macdonald Committee) was charged with reviewing the market. The Committee recommended that the Province’s municipal electric distribution utilities (307 remaining at that point) be merged into geographically contiguous regions to allow for improved efficiencies and economies of scale. – The Macdonald Committee’s findings led to the implementation of the Energy Competition Act (1998). Initial legislated requirements included the transfer of municipal electric utility (“MEU”) assets and operations into separate municipally-owned corporations and the introduction of a payment-in-lieu-of-taxes regime on corporate profits. – The complexity and implications of industry restructuring as initiated by Bill 35 in November 1998 has resulted in the consolidation of the number of MEUs in Ontario from 307 participants in 1996 to less than 70 participants in December 2016. In calendar years 1999, 2000 and 2001, this consolidation was accomplished primarily through the acquisition of MEU’s by existing industry participants and through the amalgamation of a number of geographically clustered MEU’s into larger industry participants. The most active consolidator was Hydro One Networks, which purchased 88 MEU’s between 1999 and 2001. Since 2001, other consolidators have included existing LDCs such as Veridian Connections, Horizon Utilities and PowerStream. – The map on the following page highlights the LDCs currently in operation in Southwestern Ontario. Hydro One Networks is the largest electricity distributor in terms of number of customers and size of service territory, with Alectra Utilities representing the second largest electricity utility in terms of number of customers.

Source: CIBC World Markets, KPMG analysis

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Backgrounder (2)

Southwestern Ontario LDC Map

Source: OEB

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LDC’s in Ontario – The largest LDCs in Ontario at December 31, 2015, in terms of number of customers, were as follows:

Ontario LDCs by Number of Customers - December 31, 2015

Rank Entity Name Number of Customers Percentage 1 Hydro One Networks 1,257,016 24.9% 2 Alectra Utilities 958,279 19.0% 3 Toronto Hydro Electric System Limited 758,311 15.0%

4 Hydro Ottawa Limited 323,919 6.4% 5 London Hydro Inc. 153,947 3.0% 6 Veridian Connections Inc. 118,481 2.3% 7 Kitchener-Wilmot Hydro Inc. 92,404 1.8%

8 EnWin Utilities Ltd. 87,212 1.7% 9 Oakville Hydro Electricity Distribution Inc. 67,387 1.3% 10 Burlington Hydro Inc. 66,656 1.3%

11 Energy+ 63,164 1.2% 12 Oshawa PUC Networks Inc. 55,949 1.1% 13 Waterloo North Hydro Inc. 55,416 1.1% 14 Guelph Hydro Electric Systems 53,789 1.1%

15 Niagara Peninsula Energy 52,770 1.0% All other LDCs 890,039 17.6% Total 5,054,739 100.0%

Source: OEB 2015 Yearbook of Electricity Distributors. Customer counts do not include street light and unmetered scattered load customers. – The Ontario electricity distribution sector is regulated by the Ontario Energy Board (“OEB”). The OEB has issued numerous policy directives over the past 18 years, some of which are described in the following pages. The volume and diversity of regulatory requirements have put a significant strain on management resources, particularly for smaller LDCs.

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Provincial Consolidation Initiatives – The Province of Ontario remains concerned about the current structure of the Ontario electricity distribution sector, which includes the continued operation of less than 70 municipally-owned LDCs, which have customer bases ranging from 1,225 (Hydro 2000) to over 1.257 million (Hydro One Networks). The Province believes that the fragmented structure of the sector results in higher costs, through higher OM&A costs, duplication of equipment and facilities, and additional requirements for regulatory oversight. The Province is also concerned that LDCs have varying capabilities that affect their capacity to meet evolving customer needs and adopt new, “smarter” distribution technologies. – Increasingly, the electricity distribution business is being driven by scale to achieve efficient operating platforms and deploy technology and service standards that meet customer expectations. The current large number of LDCs creates the potential for achieving additional scale and synergies in OM&A, equipment and facilities, and regulatory oversight through further consolidation. – Accordingly, the Province continues to take steps to encourage voluntary LDC consolidation. The Province has already implemented a permanent holiday from the Transfer Tax for mergers and acquisitions involving only publicly-owned utilities. Recently, Transfer Taxes have been reduced, albeit not eliminated, for LDCs who enter into transactions with private-sector purchasers, and eliminated entirely for LDCs with less than 30,000 customers, from 2016 to 2018. – The Province remains concerned, however, that expensive and hard-to-service rural areas will be left out of any series of voluntary transactions. Hence, additional initiatives to encourage municipal consolidation may be tied to specific measures to create a number of large regional utilities. Each of these regional utilities would cover all customers in a given area of the Province. – In 2012, at the request of the Ministry of Energy, a Blue Ribbon Panel (better know as the Sector Review Panel) conducted extensive stakeholder consultations to explore and ultimately recommend a comprehensive consolidation framework for the Ontario LDC sector. Following the release of the report in December 2012, the Minister of Energy communicated that the consolidation recommended by the report would not be forced; however, the industry is expected to rationalize to achieve anticipated savings in excess of $1.2 billion (estimated net present value of savings minus transaction costs) during the first ten years after consolidation. – During 2013 and 2014, Hydro One Networks has been a catalyst for further industry consolidation and has aggressively submitted unsolicited offers to purchase additional municipally-owned LDCs.

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Premier’s Advisory Council Report – November 2014 – On November 13, 2014, the Premier’s Advisory Council (“PAC”) on Government Assets issued its initial Phase I report, entitled: “Retain & Gain: Making Ontario’s Assets Work Better for Taxpayers and Consumers”. This report made a series of recommendations relating to the Beverage & Alcohol Sector (LCBO and The Beer Store) and the Electricity Sector (Hydro One Transmission, Hydro One Networks, Hydro One Brampton, and Ontario Power Generation). – As it relates to the Electricity Sector in particular, the report contained the following recommendations: – The Province should retain the transmission business at this time given its current policy role. – Hydro One should, over time, work to realize operational savings. – Hydro One should separate its distribution assets from the rest of its business. – Hydro One’s distribution assets should be used as a catalyst to encourage much needed consolidation and modernization of the electricity distribution system. – As it relates to Hydro One Networks, the report contains the following recommendations: – Private sector capital, rather than public funds, should be used to support the required consolidation of LDCs. – The Province should dilute its interest in Hydro One Brampton by merging with some other LDCs, including possibly with other GTA entities, based upon a pre-agreed business plan to bring in private capital to help grow and modernize the electricity sector. – The Province should dilute its interest in the remaining Hydro One Networks distribution company to a minority interest (40% to 45%) by bringing in private capital. The PAC’s preference is to keep the distribution business whole to ensure a better outcome for customers and taxpayers. – Transaction agreements should contain provisions to protect against specific undesirable changes in the future ownership of these businesses. – Any transactions should not create further upward pressure on distribution rates. – The current barriers and incentives, such as Transfer Taxes and other taxes, which impede consolidation should be reviewed during a later phase.

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Premier’s Advisory Council Report – April 2015 – On April 16, 2015, the PAC on Government Assets issued its final report, entitled: “Striking the Right Balance: Improving Performance and Unlocking Value in the Electricity Sector in Ontario”. Building upon the initial November 2014 report, this report made a series of detailed recommendations relating to the Electricity Sector. – In particular, the report contained the following key recommendations: – The Province should monetize up to 60% of Hydro One (excluding Hydro One Brampton) through an IPO. The government should indicate its intention to retain its remaining share interest after selling down to 40%, and the balance of shares should be widely held with no other individual shareholder having more than a 10% holding. – The Province should proceed immediately with a sale or merger of its interest in Hydro One Brampton Networks Inc. to or with Enersource Corporation, PowerStream Holdings Inc. and Horizon Holdings Inc., intended to catalyze consolidation in the Greater Toronto and Hamilton area and to strengthen competition in the electricity distribution sector by increasing the number of LDCs with the capacity to drive further consolidation. – The Province should amend the Transfer Tax rules and Departure Tax rules that apply when municipal electricity utilities leave the payment-in-lieu-of-taxes regime on a time-limited basis (i.e. a three year tax holiday from 2016 to 2018) and implement these changes as quickly as possible. – The mandate and powers of the Ontario Energy Board should be strengthened to ensure that changes in industry structure do not put upward pressure on rates. – The Province, Hydro One management, and unions should finalize agreements on pensions and labour costs in advance of the Hydro One IPO to address issues raised by the Leech Report and the Ontario Energy Board with respect to pensions and compensation.

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Recent Consolidation Activity – Shown below are various transactions that have either been completed or announced in recent years.

Completed Transactions Closing Soon

- Enersource, PowerStream, Horizon - HONI acquisition of Peterborough merger and acquisition of Hydro One Utilities and Orillia Power Brampton (formation of Alectra)

- Energy+ acquisition of Brant County

Power - Hydro One IPO (three tranches)

Consolidation is Happening Transactions in Progress Considering Strategic Options - Veridian – Whitby Hydro merger - Toronto Hydro - St. Thomas Energy sale / merger - Guelph Hydro - Midland Power sale - Waterloo North Hydro - Kenora Hydro / Thunder Bay Hydro - Various others merger

- Collus PowerStream sale

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Payments-in-Lieu-of-Tax (“PILs”) – Municipally and provincially-owned electric utilities do not pay federal income tax; instead, they are required to make payments-in-lieu- of-tax or PILs to the Province of Ontario. – As set out in the Electricity Act, PILs are to be dedicated to the repayment of the outstanding debt held by the Ontario Electricity Finance Corporation (“OEFC”). – The OEFC was established by the Electricity Act to manage the financial risks and liabilities of the former Ontario Hydro, including managing the payments, assets and liabilities of Ontario Hydro that were not transferred to the successor corporations of Ontario Hydro, and to provide ongoing financial assistance to these entities. Transfer Taxes – Section 94 (1) of the Electricity Act provides for a Transfer Tax equal to 33% of the fair market value of “electricity property” transferred by a municipal electric utility or a municipality. The amount of the transfer tax is reduced by the amount of PILs that an LDC has already paid and the purpose of the Transfer Tax is to repay the outstanding debt held by OEFC. – In 2009, the Ontario government introduced a permanent holiday from this Transfer Tax for sales of municipally-owned LDCs to other entities exempt from tax under 149 (1) of the Income Tax Act (Canada). Such entities include other municipally-owned LDCs. The permanent exemption took effect for transfers after October 16, 2009, and followed a series of temporary holidays that were introduced to encourage LDC consolidation. This permanent Transfer Tax exemption has removed an ongoing barrier to consolidation, although it has resulted in limited additional transaction activity. – The Transfer Tax exemptions introduced did not apply on the sale of LDCs to private-sector utilities. In a few instances, privately-owned companies such as Fortis, in order to reduce the effect of the Transfer Tax, have structured transactions in the form of lease arrangements with an option to buy. Since the Transfer Tax is reduced by any PILS paid to date, the impact of the Transfer Tax on a sale to a private-sector utility should decrease over time. Departure Taxes – The Departure Tax is a separate tax that is triggered at the time when greater than 10% of the shares of an LDC become owned by an entity that is not municipally-owned. Specifically, the tax regime of the LDC transitions from the PILs regime to the federal income tax regime, and the LDC is subject to a one-time payment of income taxes on the recapture and capital gains that would arise from the re- valuation of all assets and liabilities, for opening income tax purposes, to their current fair market values.

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Transfer Taxes and Departure Taxes (continued) – The Province of Ontario’s 2015 budget created a three-year change in normal Transfer Taxes and Departure Taxes (for 2016 to 2018) as follows:

Transaction Transfer and Departure Taxes

LDC under 30,000 customers, sale to Private Sector No Transfer Taxes, but triggering of Departure Taxes Investor LDC over 30,000 customers, sale to Private Sector 22% Transfer Tax less PILS paid to date, plus Investor Departure Taxes LDC of any size, sale to another LDC (i.e. a PIL- Exempt from Transfer Taxes and Departure Taxes paying purchaser)

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Overview of Financial Issues – All-in electricity rates in Ontario have been rising at rates greater than inflation over the past decade and a half as a result of a variety of factors. These factors include: – Increases in regulated rates for Ontario Power Generation’s (“OPG”) nuclear and hydroelectric generating stations; – Increases in contracted rates for non-OPG nuclear and other contracted generators; – The legislated incorporation of municipally-owned electric utilities and the creation of an OEB rate-setting mechanism that incorporates the formal recovery of a rate of return on municipally-held debt and equity; – The introduction of corporate taxes / PILs on LDC earnings effective October 1, 2001; – The introduction of the HST on electricity charges effective July 1, 2010; – Reduced energy consumption and kW demand due to conservation and demand management (“CDM”) efforts; – Annual adjustments under IRM are less than the rate of inflation; – Increases in transmission and distribution charges as a result of the need for the repair and renewal of electricity networks, the implementation of Smart Meters and associated data management systems, the connection of renewable energy generation, and general increases in regulatory and other costs, including IESO charges; – The construction of new clean energy plants (natural-gas fired combined cycle) to supply additional capacity in parallel with the phase-out of coal-fired generation; and – The impact of IESO contracts for renewable power (solar and wind) at above-market rates and the consequential effect of these renewable energy technologies on Ontario’s IESO-controlled electricity market. – The rapid increase in electricity rates has resulted in additional political sensitivity to power costs. As a result, on March 2, 2017, the Province announced measures to reduce the cost of power to households and some small businesses. Specifically, beginning in May 2017, Ontario's Fair Hydro Plan would provide households, some small businesses and farms with a 17% reduction to the cost of power; coupled with an 8% PST rebate announced in January 2017, the cost of power is being reduced by approximately 25% for affected users. As part of Ontario's Fair Hydro Plan, rate increases over the next four years would be held to the rate of inflation for all users.

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Overview of Key Regulatory Issues Affecting Strategic Options – Rate-Setting Approach Associated with Distributor Consolidation: The OEB set out its rate-setting approach associated with distributor consolidation (the “MAADs Policy”) in July 2007. This policy governs M&A transactions where either: – A distributor sells or otherwise disposes of its distribution system to another distributor; or – A distributor amalgamates with another distributor. – The OEB’s MAADs policy notes that a consolidated entity will be able to retain any achieved savings for a sufficient amount of time to provide a reasonable opportunity to offset at least the costs of a transaction. Furthermore, flexibility is permitted when a consolidated entity enters into a further transaction prior to the end of the deferral period. The policy notes that it is not appropriate for a distributor to recover an acquisition premium or net consolidation losses in whole or in part through distribution rates while retaining the realized benefits of the transaction over the deferral period. Finally, rate harmonization is better examined at the time of rebasing, when the consolidated entity will apply for its combined revenue requirement. – The OEB will use the “no harms" test to determine whether it will approve a MAADs application. The OEB will assess whether a transaction will have an adverse effect on customers in terms of the factors identified in the Board’s objectives in the OEB Act. – Affiliate Relationship Code: The OEB sets out minimum standards of conduct and service levels for LDCs in a series of industry codes. The Affiliate Relationship Code has precedence over all other codes and establishes standards and conditions for interactions between distributors and their affiliates. The provisions of the code are intended to minimize the potential for an electricity distributor to cross-subsidize competitive or non-monopoly activities, protect the confidentiality of consumer information collected by an electricity distributor, and ensure that there is no preferential access to regulated services. Specific standards are set out with respect to: degree of separation from affiliates; sharing of services and resources; transfer pricing; financial transactions with affiliates; equal access to services; and confidentiality of customer information. – Rate-Setting Process: The regulatory approach used by the OEB to set rates continues to evolve. In October 2012, the OEB released its Renewed Regulatory Framework for Electricity Distributors (“RRFE”) which will guide the OEB and LDCs in the rate- setting process effective from May 1, 2014 and beyond. In contrast to the previous incentive rate-setting regime, the RRFE allows significant customization of approach, potentially reducing regulatory predictability and consistency and increasing complexity and cost. The approach is also designed to promote the achievement of four performance outcomes to the benefit of existing and future customers: (1) customer focus; (2) operational effectiveness; (3) public policy responsiveness; and (4) financial performance.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 18 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 43 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Conservation and Demand Management Conservation and Demand Management Overview – In March 2014, the Ontario government directed the OEB to implement the second phase of CDM targets for electricity distributors. The key terms of the Minister of Energy ’s directive to the OEB include: – Six year term, commencing January 1, 2015 and ending December 31, 2020. – The OEB must, without a hearing, amend the licenses of each LDC to require that: – Distributors make province-wide IESO-funded programs or LDC-specific CDM programs that are funded by the IESO available to all customer classes over this period; – Conservation programs be designed to achieve reductions in electricity consumption (i.e., expressed as kWh); – Distributors use a combination of province-wide and LDC-specific CDM programs to achieve the targets; and, – Distributors make the details and results of their LDC-specific CDM programs available to other distributors upon request. – The OEB is to annually review and publish the verified results of each LDC’s CDM efforts and report on the progress of each LDC with respect to meeting its targets. – CDM shall include activities aimed at reducing electricity consumption and reducing the draw on the electricity grid, such as energy efficiency upgrades, geothermal heating, solar heating and small scale (i.e., <10 MW) behind-the-meter customer generation. Activities and programs related to an LDC’s investment in new infrastructure or any measures an LDC uses to maximize the efficiency of its new or existing infrastructure are excluded activities, as are activities promoted through different government programs, such as the FIT program. – Lost revenues associated with CDM are not to act as a disincentive, meaning that reductions in electricity consumption that are not otherwise reflected in distribution rates will be recoverable through the rate-setting process. – The 2015 to 2020 net energy savings target for WNH is 82.4 GWh, with a total CDM program budget of $21.2 million. CDM program costs and administrative structures are outside of the costs considered for rate-setting purposes by the OEB, and are fully funded by the IESO.

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– Smart Grid entails the application of intelligent electricity infrastructure that uses technology such as sensors, monitoring, communications, automation and computers to improve the flexibility, reliability and efficiency of the electricity system. Smart Grid generally facilitates: – Empowering customers to better manage their electricity use and take advantage of conservation and small-scale generation. – Allowing more renewable electricity generation, such as wind and solar power, to connect to the electricity grid. – Assisting LDCs identify and fix outages more quickly, including automatic troubleshooting and repair functions, allowing the grid to self-correct in case of outages or asset failures. – Providing businesses with opportunities to provide innovative products and services to a growing market, resulting in economic growth. – The first step in the development of a Smart Grid was the installation of Smart Meters across Ontario, to achieve conservation and demand management objectives. Smart meters provide the hourly demand data and capability for information flow that is also the necessary foundation for Smart Grid implementation. – The Province’s desire for a Smart Grid appears to be driven by the following: – Conservation-first policy. Demand response and conservation objectives, which are enabled by Smart Grid technologies, are to be reflected in generation resource planning, fuel mix, and distributor regional planning for both gas and electric utilities. – The desire to promote distributed “green energy” such as solar and wind generation. – The desire to give Ontario companies an edge in emerging technology fields (e.g. green energy, smart grid technology, distributed generation) and drive economic growth.

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– Distributed energy resources (“DER”) represents smaller power-generation systems for homes, businesses and communities that have arisen in recent years, often in response to environmental concerns and/or the desire of end-use customers to reduce the cost of their power requirements. Power from DER is generally consumed on-site or distributed locally through low or medium voltage community networks1. – The growth of DER is expected to force change to the business models of power utilities, as customers will begin to reduce their traditional power consumption from the central grid in favour of locally produced or self-produced power. These customers will continue to rely on the grid for their emergency or peak use supply of power, leaving utilities with the prospect of maintaining their costly distribution networks while revenues from energy consumption declines. – Various technological advances in recent years (e.g. lower cost solar power generation, improved power storage technologies) are assisting in the growth of DER. – In US markets, it is projected that the 2020’s will witness a tipping point when power from rooftop solar photo-voltaic installations will become cheaper than power from the electricity grid. When married with improved power storage technologies, DER represents a potentially disruptive technology to the traditional electricity transmission and distribution industries. – LDCs need to adapt to the rise of DER and work with regulators to transition their business models to one that is based more on fixed connectivity and capacity charges and less on variable consumption charges. In addition, net metering and virtual net metering will accelerate the pace towards more DER initiatives. In Ontario, this process has been occurring as LDCs have applied to the OEB to shift a higher percentage of their total distribution revenues to fixed monthly charges from variable consumption-related charges. – Similar to most industries, the pace of technological innovation will force change in the power distribution sector. LDCs will need to adapt to these changes, be flexible, stay close to their customers, and become innovative in order to survive in the decades ahead.

1Distributed Energy: Disrupting the Utility Business Model. Bain & Company, April 17, 2013.

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Conclusions re: the Current LDC Environment – The current environment of the Ontario electricity distribution sector is characterized by a number of key issues as follows: – As outlined in the previous pages, the sector has become increasingly complex over the past 18 years due to increased regulatory, political, financial, technological and environmental demands. The level of complexity is not expected to decrease in future years. – Management teams at smaller Ontario LDC’s (under 20,000 customers) can become overwhelmed by the diverse demands placed upon them by the regulatory, political, economic and technological environment. – The Province continues to encourage further consolidation of LDCs on a voluntary basis. The provincial target is generally a reduction to 8 to 12 regional LDCs. – Private-sector equity investment in the LDC sector continues to be limited due to tax barriers. – From 2013 to 2017, Hydro One Networks aggressively approached many municipalities in Ontario with unsolicited offers to purchase their LDCs, and it was successful in acquiring a number of LDCs over this time period. Some additional consolidation activity has also occurred between other LDCs. – Announced in 2015 and completed in January 2017, a new mega-utility was formed through the merger of PowerStream, Horizon and Enersource. The merged utility, Alectra, subsequently acquired Hydro One Brampton in February 2017, thereby becoming the second largest LDC in Ontario with over 960,000 customers. – LDCs are increasingly being tasked with implementing, at the local level, many of the Province’s energy conservation and clean power generation policy initiatives. – Technological advances are also impacting the traditional power distribution industry, and will continue to force change upon the industry. LDCs will need to adapt their business models and be responsive to these technological advances.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 22 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 47 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Profile of Waterloo North Hydro Inc.

All Council Meeting Page 48 of 114 Wednesday, June 7, 2017 Overview (1)

Overview of Waterloo North Hydro Holding Corporation – Waterloo North Hydro Holding Corporation is a holding company owned by the City of Waterloo (73.2%), the Township of Wellesley (6.6%) and the Township of Woolwich (20.2%). These three shareholders are referred to herein as the “Municipal Shareholders”. WNH HoldCo owns 100% of the shares of Waterloo North Hydro Inc., which is the electricity distributor that services the area encompassed by the City of Waterloo, the Township of Wellesley and the Township of Woolwich. – The following chart shows the ownership structure of WNH HoldCo and its associated companies:

Township of Wellesley City of Waterloo Township of Woolwich

6.6% 73.2% 20.2%

Waterloo North Hydro Holding Corporation

100%

Waterloo North Hydro Inc. (Regulated LDC)

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Overview of Waterloo North Hydro Inc. – Waterloo North Hydro Inc. is the local distribution company for the City of Waterloo, the Township of Wellesley and the Township of Woolwich. The electric utility operated as a Commission or Board of three municipalities since 1905. WNH was formed under the Business Corporations Act. (Ontario) on May 1, 2000 to operate the local electricity distribution business for the City of Waterloo, the Township of Wellesley and the Township of Woolwich as required under the Electricity Competition Act, 1998. WNH is a wholly- owned subsidiary of WNH HoldCo. – The core business of WNH is electricity distribution within a service territory of 672 square kilometers (65 square km of urban area and 607 square km of rural area). As at December 31, 2016, WNH distributed electricity to approximately 49,800 residential customers and 6,400 commercial / industrial customers. The Company had one large use customer – the University of Waterloo. – WNH owns and operates a local distribution network consisting of over 21,000 poles, 7,600 transformers and approximately 1,700 km of overhead and underground feeder lines. The network has three transformer stations and 10 distribution substations. WNH transforms electrical power purchased from the Independent Electricity System Operator at its local transformer stations to primary distribution voltages and distributes this power to customers through its distribution network. – In 2016, WNH distributed 1,490.0 GWh to its customers. Line losses of ~3.4% of power purchases are slightly below industry average and reflect a distribution system that is of good design and working efficiently. WNH is still in the process of converting its distribution substations to 27.6 kV. – WNH operates from a 104,000 square foot administrative office and service center located at 526 Country Squire Road just north of the City of Waterloo. This building was constructed during 2010 and 2011 and was completed for occupancy in December 2011. The administrative office and service center has received LEED Silver certification. – WNH has a workforce consisting of 124 full-time employees, including personnel involved with CDM activities. – The business and affairs of each of WNH HoldCo and WNH are governed by their respective Boards, each consisting of nine directors. Both Boards are comprised of the mayors of the three Municipal Shareholders, a councilor from the City of Waterloo, and five independent members from the business and academic communities.

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– Summarized below are some key statistical, operational and financial metrics of WNH:

Metric 2016 2015

Statistical measures

Service territory in square kilometers 672 672

Number of customers 56,200 55,416 Total line kilometers 1,727 1,618

Operational measures

MWh distributed 1,490,000 1,458,000

Peak demand (MW) 291.4 269.4

Number of employees 124 133

Financial measures (millions) Total revenues $223.3 $203.8

Distribution and other revenues $35.8 $33.4

Year-end rate base $219.6 $218.8

Net book value of equity $90.2 $85.0

Net income from operations (*) $8.0 $7.0 (*) Net income from operations, excluding unrealized gains and losses from derivatives, net of tax.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 27 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 52 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Current Capital Structure

Current Capital Structure – WNH’s capital structure at December 31, 2016 consisted of $107.4 million of debt and $90.2 million of book equity. A summary of the Company’s capital structure over the past six years is presented in the following table: Capital Structure of WNH Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 ($ 000's) 2011 2012 2013 2014 2015 2016 Long-term debt - third parties $ 35,184 38,394 50,570 61,814 67,427 71,621 Short-term debt - third parties - 11,897 3,881 4,416 5,787 1,287

Shareholder loans payable to WNH HoldCo 33,513 33,513 33,513 33,513 34,513 34,513 Total debt 68,697 83,804 87,964 99,743 107,727 107,421

Book value of equity 74,831 78,396 82,239 83,059 84,969 90,162

Total capital $ 143,528 162,200 170,203 182,803 192,696 197,584

Debt to Capital Ratio 47.9% 51.7% 51.7% 54.6% 55.9% 54.4% Borrowing capacity - invest in rate base $ 43,549 33,790 35,394 24,846 19,727 27,822 – WNH’s debt to capital ratio was 54.4% at December 31, 2016. The Company has a bank covenant that limits its capital structure to a maximum ratio of 60% debt to total capital. Based on this bank covenant, WNH has additional borrowing capacity of $27.8 million, assuming that the new borrowings are invested in capital projects that increase the Company’s rate base. As noted in the table above, WNH’s debt to capital ratio has stabilized around 54% to 56% in recent years. – Shareholder loans of $34.5 million are payable to WNH HoldCo, which in turn has shareholder loans of $33.5 million that are payable to the three Municipal Shareholders.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 28 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 53 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017

– e Other Items

Other Items of Note – WNH has consistently delivered a high level of Service Quality and Performance during the 2011 to 2015 period, as outlined in its annual Scorecard filed with the OEB. – WNH’s Scorecard also highlights the industry trend of increasing pressure on LDC costs. WNH’s Total Cost per Customer increased from $695 in 2011 to $762 in 2015, a compounded annual growth rate (“CAGR”) of 2.33%, and the Total Cost per Km of Line also increased from $23,717 per km in 2011 to $26,109 per km in 2015, a CAGR of 2.43%. Increases in these two Scorecard metrics are consistent with the cost profiles of urban service areas, customer densification, and the implementation of higher cost distribution technologies. – While WNH’s financial profile remains strong, the ratio of total debt to equity has increased from 0.92 to 1.33 during the 2011 to 2015 period. Although the ratio remains below the deemed 1.50 leverage target established by the OEB for rate-setting purposes (based on a 60/40 debt to equity ratio), the trend reflects the impact of the Company’s dividend policy (50% pay-out of the previous year’s net income) and the significant capital investments required to renew aging distribution assets and meet new customer growth. – As per the OEB’s 2015 Yearbook of Electricity Distributors, WNH was the 13th largest electrical distribution utility in Ontario, with 55,416 customers at December 31, 2015. – Approximately 65% of WNH‘s employees are unionized pursuant to a four-year collective bargaining agreement with the International Brotherhood of Electrical Workers (“IBEW”). The current collective bargaining agreement extends through March 31, 2020.

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All Council Meeting Page 55 of 114 Wednesday, June 7, 2017 Overview

Stand-Alone LDC Operational Overview – Under this option, WNH would continue to be owned and operated by its current Municipal Shareholders. – The Stand-Alone LDC option provides the current shareholders with a continuing high degree of control over the quality and type of service provided to the community. WNH will remain highly responsive to the needs of existing and new customers within its service area. – Utility asset planning and asset renewal plans will continue to be assessed on a long-term basis, with close integration with the asset plans of neighbouring LDCs such as Energy+ Inc. (formerly Cambridge and North Dumfries Hydro Inc.) and Kitchener-Wilmot Hydro Inc. – Municipal Shareholders may perceive that the ownership of electricity distribution assets is aligned with local economic development goals. – The flow of annual dividends and interest payments would continue under the Stand-Alone LDC option consistent with the existing policies of the Board of Directors. WNH would also continue to engage in community sponsorship activities. – Other factors that are critical to the success of WNH are likely to remain substantially unchanged and include: – Power Supply & Reliability; – Health, Safety and Wellness; – Customer Service; – Employee Relations; – Environmental Sustainability; – Productivity & Cost Reduction; – Organizational Effectiveness; – Regulatory Compliance; and, – System Aesthetics.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 31 (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. All Council Meeting Page 56 of 114 Wednesday, June 7, 2017 Financial Implications to Shareholders (1) Dividend Stream – Effective for the 2012 year forward, the Board of WNH established a new dividend policy whereby 50.0% of WNH’s Net Income from Operations for the prior year is paid to WNH HoldCo once WNH’s financial statements have been audited and approved by the Board. Actual cash dividends are typically paid to WNH HoldCo in the month of April, which in turn makes a corresponding dividend payment to the Municipal Shareholders. – Based on its dividend policy, dividends have been ranged from $3.1 million and $3.8 million per year over the five year period 2012 to 2016. Interest Payments – As at December 31, 2016, WNH has $34.5 million of shareholder loans payable to WNH HoldCo. These shareholder loans consist of Senior Notes with a 6.00% interest rate, Junior Notes with a variable interest rate equal to the OEB’s deemed interest rate on long- term debt plus 1.125% (currently at 5.665%), and a short-term loan bearing interest at prime less 30 basis points. Historical interest payments have ranged from $2.0 million to $2.1 million per year. – The following table presents WNH’s historical dividend and interest payments to WNH HoldCo.:

Summary of Dividend and Interest Paid by WNH to WNH HoldCo Years Ended December 31 ------Actual ------($ 000's) 2012 2013 2014 2015 2016 Dividend and Interest Payments to WNH HoldCo Dividends $ 3,063 3,776 3,640 3,567 3,515 Interest 2,083 2,083 2,083 2,108 1,985 Total $ 5,146 5,859 5,723 5,675 5,500

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© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 33 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 58 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017

Implications to Customers

Distribution Rates – WNH last filed a full cost of service application with the OEB to set its rates for the period January 1, 2016 to December 31, 2016. These 2016 OEB-approved rates were increased slightly through an Incentive Rate Mechanism (“IRM”) application in 2017, which results in a formulaic adjustment to distribution rates to reflect inflation less a productivity / efficiency factor. Under the Stand-Alone LDC option, WNH’s 2021 cost of service rate application will need to be submitted to the OEB during the first half of calendar 2020 in order to be approved in advance of the proposed January 1, 2021 effective date. – Future distribution rates of WNH will be dependent on: (1) WNH’s ability control its OM&A costs; (2) capital additions, net of contributed capital, made during the incentive rate-setting period (2017 to 2020, inclusively) that will be transferred to rate base in 2021; (3) projected capital expenditures in the 2021 test year; (4) the OEB’s permitted rates of return on debt and equity in 2021; and, (5) new government policy initiatives. Customer Service and Reliability – Overall, WNH has strong customer service and system reliability metrics under the Stand-Alone Option. – It is unlikely that the OEB will alter its customer-centric focus over WNH’s next incentive rate-setting period due to expected increases in average electricity bills arising from increasing energy production from renewable energy generation. – The consequences of potential extreme weather events in the future may challenge cost control and efficiency efforts for all LDCs. However, we note that WNH is party to a mutual aid agreement with ten GridSmart City member LDCs, which mitigates its potential cost exposure and enhances the base of emergency response and restoration resources.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 34 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 59 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Operational, Capital and Regulatory Issues Operational Risks and Opportunities – The Ontario electricity industry continues to evolve quickly. Changes are often arising faster than resources are available. – The Stand-Alone LDC model makes the implementation of comprehensive human resource systems, business intelligence software, and the general adoption of business processes that evolve with technological advancement more difficult due to the lack of scale. CIS and enterprise-wide systems require periodic updates, adding to the anticipated pressure on rates. Despite this limitation, WNH has successfully deployed a new CIS and a new Outage Management System at a modest cost. – There are opportunities for WNH to continue to partner with one or more LDCs to share services, thereby realizing cost savings, operational efficiencies and greater depth of expertise. WNH is a member of the GridSmartCity Cooperative. Collectively, the 13 member LDCs represent 637,000 customers which brings considerable resources and scale to address operational risks and opportunities. Network Infrastructure and Capital Risks and Opportunities – WNH has accessed public debt/capital markets on a cost effective basis in the past and can do so again if the need arises in the future. WNH has made significant investments in its distribution system in prior years and does not have a major infrastructure deficit which cannot be funded from future operations. – On a Stand-Alone basis, it is unlikely that WNH could acquire a large LDC without the participation of one or more partners. As previously noted, WNH’s debt to capital ratio is 54.4% compared to an industry guideline target of 60%. Regulatory Risks and Opportunities – Rate regulation by the OEB is becoming more complex and more burdensome. – Provincial energy policies regarding CDM, smart grid, and distributed generation may have negative consequences for the traditional regulatory model by reducing customer load and changing the way that the distribution system is used by customers. Further regulatory responses are likely to be required, and include the introduction of distribution rates that reduce free riders on the distribution system (i.e., use the system but do not pay the costs) and mitigating stranded costs arising from by-pass. Regional planning requirements may impose lengthier processes and limit WNH’s control over the nature and timing of capital asset additions and transmission line connections.

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Other Considerations

Governance and Control – Subject to internally-driven changes, the existing composition of the Boards of WNH HoldCo and WNH will continue in the present form. Both Boards will include positions for the three mayors plus one City of Waterloo councillor. – Changes in municipal leadership may alter the de facto governance relationship, possibly challenging the current positive relationship with Municipal Shareholders. – Municipal owners tend to be less risk tolerant than providers of private capital. Risk aversion may result in a narrowing of the opportunities pursued, particularly by utility affiliates, that are the natural offset or hedges to the risks faced by the regulated distribution business. – Municipal election cycles can potentially politicize rate application processes and long-term strategic and asset planning. Employees and Management – Many LDCs face industry-wide human resource issues arising from an aging workforce, attrition, poaching of skilled trades by other LDCs, the time required to train and certify skilled trades personnel, and the need to enhance current staffing levels to meet new regulatory requirements and to increase the level of bench strength for some technical and management positions. – The average age of WNH’s workforce is relatively young such that, except for an aging senior management team, the Company does not have many pressing human resource issues at present. – Strong relationships with IBEW may be challenged by settlements with other LDCs at higher rates. Feasibility in Current Environment – The Stand-Alone LDC Option remains a viable option for the foreseeable future; however, WNH is vulnerable to cost pressures in evidence throughout the sector and may not fully benefit from economies of scale. – The Ontario government remains committed to LDC consolidation. The preference is for voluntary mergers or divestitures; however, the Province may impose other measures that could act as a catalyst to drive further consolidation, regional or otherwise.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 36 (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. All Council Meeting Page 61 of 114 Wednesday, June 7, 2017 Analysis of Stand-Alone Option

– Some of the pros and cons of the Stand-Alone LDC option are summarized below:

Pros Cons

■ Existing shareholders continue to have a high degree of control ■ Regulatory burden is increasing, as are the associated costs. over the quality and type of service provided to the community. Rapid technological change (e.g. net metering) is also occurring.

■ Ownership of electricity distribution assets may be aligned with ■ Inconsistent with the commitment of the provincial local economic development goals. government to voluntary industry consolidation.

■ The ongoing receipt of interest income on shareholder notes and ■ Municipal shareholders are typically less risk tolerant and dividends from the utility contribute to the municipal revenue less willing to permit the LDC to pursue complementary base and are redeployed in the community. activities outside of the regulated utility.

■ Continuation of a long-term view with respect to asset ■ Municipal election cycles can potentially politicize LDC affairs maintenance, planning and proactive engagement with other and impact on Board composition. regional utilities. No significant infrastructure deficit exists.

■ Management currently has excellent relationships with Municipal ■ Human resource issues arising from an aging senior Shareholders and unionized employees. management team and the lack of breadth in some management functions may be challenging to address cost effectively.

■ Relatively low-cost utility with excellent Service Quality ■ Limited economies of scale and continued cost pressures performance. Also, WNH is a member of the GridSmartCity could impact on future distribution rates. Possible higher Cooperative which brings considerable resources and scale to costs per customer for future IT investments and compliance address operational risks and opportunities. with future regulatory directives.

■ Diversified customer base and service territory that continues to ■ The future dividend and interest stream received from experience customer growth. Anticipated growth rates and ownership of the LDC may provide a lower return than if other capital plans are financeable by WNH’s projected cash flows. strategic options were pursued (e.g. a sale or merger).

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 37 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 62 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Analysis of Divestiture Option

All Council Meeting Page 63 of 114 Wednesday, June 7, 2017 Overview

Divestiture Overview – Under this option, WNH’s Municipal Shareholders would divest of some or all of their equity interests in WNH. – There would likely be considerable interest in an acquisition of WNH from various parties. Bona fide purchasers with significant scale, financial resources and industry insight would include: – Larger Ontario LDCs such as Toronto Hydro, Alectra Utilities, London Hydro and Veridian. Most of these municipally-owned purchasers would prefer a merger transaction rather than an outright cash purchase due to the amount of capital required to purchase the shares of WNH, and their limited ability to receive cash equity injections from their municipal shareholders. – Ontario-based pension funds (possibly), who have significant cash resources and are interested in stable long-term returns on both debt and equity investments. Pension funds often can employ innovative tax structures to reduce their long-term tax liabilities. – Hydro One, which is now a publicly-listed company. – At present, private investors, including Hydro One, and pension funds, are at a disadvantage when acquiring more than a 10% equity interest in Ontario LDCs with greater than 30,000 customers due to the triggering of Transfer Taxes and/or Departure Taxes in the hands of the selling LDC or municipal shareholder. In essence, an offer from a private investor must be significantly higher than a competing offer from an Ontario LDC to offset the incremental Transfer Tax and Departure Tax liability payable by the vendor. However, the Transfer Tax disadvantage is gradually disappearing due to the cumulative amount of PILs paid by Ontario LDCs, which reduces the Transfer Tax liability. – Ontario legislation has not yet eliminated the bias that favours industry consolidation among existing Ontario LDCs whereby transactions are exempt from Transfer Taxes. There is a similar bias against out-of-province LDC purchasers at present. – There continues to be some “pent-up” demand for the acquisition of Ontario LDCs.

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– Summarized below are some of the pros and cone of WNH as an acquisition target:

Pros Cons

■ WNH has a sizeable service territory to generate future growth. ■ Development restrictions on agricultural lands within the service territory of WNH limits the prospects for traditional customer growth in the long-term.

■ Strategically located within an hour’s drive of approximately 20 ■ Current legislative restrictions (e.g. Transfer Tax and other LDCs within Southwestern Ontario / the GTA, and Departure Tax) limit the number of potential purchasers for centrally located for strategic consolidations within this WNH. Furthermore, only Hydro One Networks and a few geographical region. LDCs have the financial capacity to make a cash offer for the shares of WNH.

■ WNH has lower operating costs relative to Hydro One Networks ■ WNH currently has higher residential rates relative to some and some GTA-area LDCs. This would facilitate reductions to local LDCs. This reduces the opportunity for easily realizing distribution rates on a post-harmonization basis. lower distribution rates on a post-harmonization basis.

■ Current regulatory environment that permits the retention of ■ Regulatory process applies a “no harms” test to assess if an operating cost savings generated during the first ten years after acquisition should be approved. Included in this assessment an acquisition / merger. is a general assessment of future customer rates.

■ WNH is the 13th largest LDC in Ontario, thereby providing ■ The OEB is sensitive to the alignment of actual and deemed immediate scale to any purchaser. capital structure, suggesting that debt levels materially in excess of deemed levels may not be sustainable.

■ Financial synergies available as WNH has a capital structure of ■ Costs associated with a purchase, including the purchase approximately 54.4% debt versus the 60.0% deemed ratio for price premium, professional fees, and Transfer Taxes are not rate-setting purposes. recoverable through future distribution rates.

■ Increased interest in the stable and moderate investment returns offered by LDCs due to the low investment returns of alternative investments.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 40 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 65 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Financial Implications to Shareholders Dividend Stream – Shareholders would no longer receive dividends, which have ranged from $3.1 million to $3.8 million over the period 2012 to 2016. – Municipal shareholders may be challenged to redeploy equity capital currently invested in the LDC, which currently earns a return on equity (“ROE’) of 9.19% for rate-making purposes. Shareholder Loans and Interest Payments – Municipal Shareholder loans totaling some $34.5 million at December 31, 2016 would be repaid. – The junior notes bear interest at a rate of 1.125% above the deemed debt cost allowed in rates by the OEB. The current OEB deemed debt cost reflected in rates is 4.54%. The senior notes bear interest at a Board-approved rate of 6.00%. – Interest received by shareholders from the notes has ranged from $2.0 million to $2.1 million over the last five years through December 31, 2016. Interest income from these securities would no longer be received following a sale of WNH. – In the current low rate environment, shareholders may be challenged to reinvest the capital currently placed in the shareholder notes at comparable yields without increasing the risk profile of the investment. Tax Implications – The 22% Transfer Tax and the Departure Tax would not be payable if the buyer of WNH is another municipally-owned utility. However, the Transfer Tax and the Departure Tax would be payable if the buyer of WNH is a private-sector entity, such as Hydro One or a pension fund. Valuation of LDC – As previously discussed, KPMG prepared a high-level indicative value analysis of WNH and calculated that the Company’s enterprise value (i.e., the combined value of debt and equity) fell in the approximate range of $285.0 million to $350.0 million as at December 31, 2016. The indicative value was based upon the multiple of rate base approach and a review of observed multiples of rate base from recent transactions in the Ontario LDC sector. After deducting third party debt, the fair market value of the WNH’s shares and shareholder loans fell in the range of $212.1 million to $277.1 million. We note that the enterprise value of WNH may change in the future based on corporate operating performance, market conditions, the impact of regulatory changes and other factors.

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Distribution Rates – Distribution rates for the year ending December 31, 2017 would not change as a result of a divestiture. – The ten-year projected rate profile could differ materially from the Stand-Alone LDC Option. The planned cost of service rate filing to support the increase in 2021 distribution rates (i.e. effective January 1, 2021) may be deferred for up to ten years after the date of sale pursuant to the OEB’s MAADs Policy. – The acquirer would have to demonstrate that any new rate increases are in the normal course and do not result from the inclusion of transaction costs or the purchase price premium in rates. – In the long-term, under the divestiture option, the future distribution rates for WNH customers would gravitate to the distribution rates of the purchaser. These rates differ for each potential purchaser of WNH, and would need to be considered in the sale process. Customer Service and Reliability – These metrics are not expected to change dramatically pursuant to an acquisition of WNH. – If there is a reasonable expectation that an acquisition will have adverse consequences on customer service and reliability, the acquisition would not likely be approved by the OEB, as “harm” would likely be viewed to arise from the transaction. – This concern will be mitigated if the acquirer is an existing LDC or Hydro One, as these entities have significant understanding of and experience with operating an LDC in the Ontario context. Other Customer Considerations – By divesting of WNH, shareholders would no longer be able to influence the messaging from the LDC relating to costs, asset additions and planning, regional economic initiatives, and the timing of planned rates applications. – Shareholder revenues from LDC dividends and interest payments will no longer be available to potentially reduce user fees for municipal services or fund other municipal programs.

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Governance and Control – Divestiture is an inflection point for the existing governance and control mechanisms for the LDC. The new owner is likely to adopt certain existing internal control functions in the short to medium term but, over time, these processes will evolve to reflect the new owner’s values and process preferences. The Board of Directors of WNH is likely to change and may not include elected municipal officials. Depending on the buyer, local participation on the Board may decline over time. – There is a risk that the existing cordial, responsive and functional relationship that currently exists between management of WNH and the Municipal Shareholders may change. Employees and Management – A change in ownership may have an adverse effect on the relationship with employees, unionized and non-unionized, as a new owner would be actively looking to reduce costs (and retain the associated benefits) over the potential 10-year rate harmonization deferral period. – An acquisition by a non-contiguous utility or by a financial buyer would not necessarily result in the additional economies of scale and scope that could otherwise help to address the lack of bench strength in certain areas or other human resource issues relating to an aging senior management team. Feasibility in Current Environment – Divestiture to a buyer who plans to run the LDC as a stand-alone entity does little to achieve the LDC consolidation objectives of the Province. If the initial acquisition is part of a series of planned transactions, this concern will be reduced. – Sale to another LDC is consistent with the Province’s objective of industry consolidation.

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Out-of-Pocket Costs – Out-of-pocket costs incurred by a purchaser cannot generally be recovered in future rates and must be “repaid” by cost savings and synergies realized by the new owner over the rate deferral period, assuming the MAADs policy is adopted for use. – One-time vendor-side professional fees and other costs associated with a sale of the shares of WNH would likely fall in the range of $300,000 to $800,000, excluding internal management time and potential severance and other closing costs that may be pushed back to the vendor. The professional fee range was based upon expected legal and accounting advisory time and effort and assumes a normal OEB review and approval process. – A sale of WNH could also trigger certain one-time costs that would, if not negotiated away, need to be paid by the Company prior to closing or that could reduce the net proceeds paid for the shares of WNH. Among the issues that could trigger one-time costs are: – costs to remediate environmental liabilities associated WNH’s real properties and equipment. Management has indicated that there are no significant known environmental liabilities; however, WNH still owns 10 substation sites that may require some environmental remediation costs. A thorough due diligence process by a purchaser could uncover a few “unknown” environmental issues; however, we note that WNH has completed low-level environmental assessments on most of its properties and is not aware of any issues. – potential break fees associated with an early termination of WNH’s long-term debt with third party lenders. WNH has long-term debt with SWAP arrangements that mature between 2021 and 2037. While none of these debt obligations are repayable upon a change in control of WNH, a purchaser may seek to pay-out existing debt obligations at closing to stream-line its own financing arrangements. The cost of these potential break fees could be a point of negotiation during a sale transaction. – costs to terminate existing operating and IT agreements with third parties. While not a direct cost to WNH, a purchaser may reduce its purchase price in order to pay for one-time termination charges associated with existing contractual agreements and IT relationships that it does not want to continue. Management has advised that these costs would not be significant. – A sale of WNH may also create an opportunity to extract certain assets that may not be required by the purchaser. In particular, a pre-sale conveyance of redundant substation sites to Municipal Shareholders could be undertaken if the Municipal Shareholders desired these redundant sites / assets.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 45 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 70 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Analysis of Divestiture Option

– Some of the pros and cons of the Divestiture option are summarized below:

Pros Cons

■ The enterprise value of WNH was calculated between $285.0 ■ Loss of direct control over the LDC as Municipal million and $350.0 million based on the multiple of rate base Shareholders would no longer be able to influence messaging approach. After deducting third party debt, the Municipal from the LDC relating to costs, asset additions and planning, Shareholders would receive between $212.1 million to $277.1 regional economic initiatives, and the timing of future rate million of cash proceeds (assuming no Transfer Taxes or applications. Departure Taxes would be payable).

■ Proceeds of sale combined with the repayment of shareholder ■ Loss of the annual interest and dividend stream from WNH notes will allow for the redeployment of capital into other may leave Municipal Shareholders hard pressed to redeploy municipal infrastructure and services. capital to earn comparable returns on assets of similar risk.

■ Municipal shareholders are able to focus their attention on other ■ Unless a divestiture is part of a broader strategic regional key municipal and regional issues, including land use and consolidation initiative, local support may be limited. regional transportation planning.

■ Municipal shareholders will no longer be held accountable by ■ May result in less constructive relationship with the voters for the financial and operational performance of the LDC, municipality and other LDCs with whom WNH works with when costs and rates are often driven by policy choices of the closely. Inability to participate as owners in the future growth provincial government. prospects of WNH.

■ A sale of WNH to Hydro One or another LDC is consistent with ■ Other than Hydro One, few LDCs are likely to have the the LDC consolidation preferences of the Ontario government. financial resources to acquire WNH at current market prices.

■ Customers may benefit over the long-term if the purchaser is ■ If Hydro One Networks is the purchaser, distribution rates able to achieve lower rates through the realization of synergies, might be at risk of a significant increase in the long-term after cost savings, and the achievement of economies of scale. the expiry of an initial multi-year freeze on rates.

■ A sale of WNH to a non-municipally owned LDC could trigger Transfer Taxes and/or Departure taxes.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 46 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 71 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Analysis of LDC Merger Option

All Council Meeting Page 72 of 114 Wednesday, June 7, 2017 Overview of Merger Option

Merger Overview Due to its geographical position, there are many potential merger candidates for WNH. A merger of WNH with one or more other LDCs into a single LDC (referred to herein as “MergeCo”) could assist the merging LDCs in meeting a number of key objectives, such as: – Facilitating immediate growth in the size of utility operations to better achieve economies of scale and scope. – Relieving cost pressures facing each of the utilities individually, facilitating a lower cost of operation. – Proactively addressing the Provincial government’s policy objective of consolidating the electricity distribution business in Ontario, and does so in a way that can address local preferences and goals. – Enhancing the financial position of MergeCo and enables access to financial resources to meet continued rate base growth. – Ensuring that current Municipal Shareholders have the opportunity to maintain an ownership interest in their LDCs, ensuring that dividend and interest payments continue, and that invested capital does not have to be redeployed at potentially lower rates or in investments with higher risk. – Allowing system reliability and customer service metrics to be maintained or improved, consistent with the Renewed Regulatory Framework of the OEB. – Systematically addressing any human resource challenges currently facing the utilities individually. – Facilitating the adoption of industry best practices across a larger service area at a lower average cost.

The following pages discuss some of the issues associated with a merger transaction involving WNH.

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Merger Overview Every merger scenario is different as it involves different merger partners. However, key considerations to analyze in a proposed merger scenario should include the following: – Governance of MergeCo on a post-merger basis – Impact of the merger on future customer distribution rates, including the ability to meet the OEB’s “no harms” test – Opportunities for operating synergies and capital investment savings to reduce future distribution rates – The relative ownership interests of each partner in MergeCo – The impact on future Interest and Dividend streams to Municipal Shareholders – Whether any taxes (e.g. transfer taxes, departure taxes, PILs) would be triggered by the proposed merger – Impact on existing employees and Human Resources in general – Impact on the communities serviced, including an ongoing local presence – The ability of the merger to drive efficiencies of scale and scope – The similarity of corporate culture – The similarity of information technology systems and operating practices – The existence of corporate liabilities (e.g. environmental, legal, embedded debt restrictions) – The future growth prospects of the merger partners The following pages address some of the topics listed above on a “generic” merger basis. Each merger transaction has different merger partners, and the considerations listed above will need to be considered in the context of each specific merger scenario being analyzed. The second half of this chapter on Mergers examines, on a preliminary high-level basis, the prospects associated with four specific potential merger scenarios for WNH.

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Overview – Potential Ownership Structure Potential Ownership Structure – Although various corporate structures are possible, the post-merger ownership structure could easily be structured such that the current holding companies of each merging LDC will hold a portion of the shares in MergeCo. This ownership structure allows the existing governance structure of each holding company to remain in place if so desired. The merging LDCs would amalgamate into MergeCo, which would have one Board of Directors. The composition of MergeCo’s Board of Directors would need to be negotiated. – A new shareholders’ agreement would need to be executed between the corporate shareholders of MergeCo. – The relative share ownership percentages in MergeCo would need to be negotiated between the holding companies based on the relative values of the merging LDCs. An example of a typical post-merger corporate structure involving two merging LDCs is presented below.

WNH Holdco Other Municipal Holdco

A% B%

MergeCo (Combined LDC)

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 50 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 75 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Implications to Customers and Rates Distribution Rates – One of the benefits of a merger is the expectation that total operating costs on a post-merger basis will be lower, and that these savings can be passed on to the customers of all LDCs participating in the merger through lower distribution rates than would otherwise have occurred on a Stand-Alone basis. – The OEB has a “no harms“ test that requires that no stakeholders will be negatively impacted by transactions such as a merger of one or more LDCs. In particular, all the current customers of a merger would be expected to benefit, albeit at different rates, from the synergies realized by a proposed merger. – In analyzing a potential merger, it is important to assess, at an early stage in the merger process, the extent of differences in existing distribution rates, by customer class, between the merging partners. If the anticipated synergies cannot sufficiently reduce the current rates of all customers subject to the merger, some creativity will be required in order to pass the OEB’s “no harms” test. Customer Service and Reliability – Existing customer service levels are likely to be maintained and enhanced. – Management and staff continuity ensures the preservation of institutional memory regarding service levels and local service preferences. – The merger creates a larger pool of key skilled trades, which may improve outage and emergency response and restoration performance, improving system reliability and minimizing customer disruptions. Other Customer Considerations – Elimination of costly duplication of resources and improved economies of scale likely to help mitigate upward pressure on customer rates. – Preservation of lower-cost rates vs. other utilities likely to contribute to economic growth within the merged service area. – Asset planning, capital investment profiles and operational solutions employed by MergeCo will continue to reflect local priorities. – Existing levels of accountability and transparency may be reduced after a merger.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 51 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 76 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Financial Implications to Shareholders (1) Dividend Stream to WNH – A merger would result in the harmonization of the dividend policies of the merging LDCs. WNH’s current dividend policy of paying out 50% of the prior year’s operating net income may not be consistent with the dividend policy of potential merger partners. A common dividend pay-out policy will need to be implemented for all Municipal Shareholders. – Over the longer-term, dividends to all Municipal Shareholders would grow as the rate base and profitability of MergeCo increases over time. Shareholder Loans / Interest Payments – WNH currently pays interest on its junior and senior notes at rates that are higher than the OEB’s current prescribed interest rate of 3.72% for long-term debt. This higher interest pay-out could be at risk to WNH unless all Municipal Shareholders of MergeCo agree to pay a higher interest rate on shareholder loans. – In a merger, there could be some pressure to replace shareholder loans with third party debt. At a minimum, a merger would necessitate the harmonization of the interest rates payable on all shareholder loan balances of MergeCo. Interest rates may gravitate to the long-term interest rates permitted by the OEB for rate-setting purposes. Debt Capacity – The combined debt capacity of MergeCo would be greater than that of WNH on a stand-alone basis. Furthermore, the risk profile of MergeCo’s debt would likely be lower due to the larger size and diversified nature of MergeCo.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 52 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 77 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Financial Implications to Shareholders (2) Relative Values of Merging LDCs – In a merger transaction, the fair market value of each merging LDC will need to be determined by an independent party so that the relative share ownership percentages in MergeCo can be determined. The relative share ownership percentages in MergeCo would typically be negotiated between the merging LDCs and their holding companies / Municipal Shareholders. – The discounted cash flow (“DCF”) approach is typically used to value LDCs and their relative value contribution to MergeCo. The DCF approach discounts the projected unlevered after-tax cash flows of an LDC for a number of years into the future, and incorporates the estimated residual value or terminal value of the LDC at the end of the projection period. Future cash flows are discounted by the LDC’s estimated weighted average cost of capital (“WACC”) and the OEB’s deemed capital structure. The DCF approach captures the projected growth of an LDC in terms of growth in rate base and cash flow. – For regulated utilities, rate base is the key financial metric from which distribution revenues, net income and cash flows are derived. Accordingly, the relative financial contribution of merging LDCs is often measured based on the ratio of relative rate base or a multiple of rate base. Rate base multiples may vary to account for LDC-specific factors such as projected growth rate, LDC size, projected capital program, profitability, customer mix, and the extent of service territory that is available for future development. – A common approach to measuring the relative financial contributions in a merger is based on relative rate base or a similar metric. However, pre-merger adjustments / dividends are typically made to ensure that the merging LDCs have the same debt to equity structure (i.e. 60%/40%) prior to the merger. Other typical normalization adjustments (e.g. excess or deficient investment in net working capital, existence of redundant assets and liabilities) are also considered to ensure consistency between merging LDCs. Enterprise value incorporates these latter normalization adjustments into the relative valuation process. If the amount of LDC debt is not harmonized pre-merger, then the relative fair market value of shares or equity (i.e. , Enterprise Value less outstanding debt) of the merging LDCs becomes a relevant metric for assessing relative share ownership percentages in MergeCo. – In conclusion, there is considerable latitude in determining the relative share ownership positions in MergeCo. Specifically, if pre- merger dividends are paid out to equalize the debt to equity ratios of the merging LDCs, then capitalized rate base value / enterprise value are better indicators of the relative opening equity values in MergeCo. If no pre-merger debt to equity equalization dividends are paid out in order to preserve MergeCo’s excess borrowing capacity, then share value is a better indicator of the relative opening equity values in MergeCo. – The relative share ownership percentages in MergeCo will vary depending on who the merger partner(s) are, so each merger scenario requires a separate analysis.

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Financial Implications to Shareholders (3) Tax Implications – Transfer Taxes and Departure Taxes could be triggered if WNH merges with one or more LDCs that are not municipally-owned. In general, the merger of WNH with another municipally-owned LDC should not trigger any taxes.

Operating Synergies / Cost Savings – One of the primary drivers of LDC mergers is the ability for MergeCo to realize operating synergies / cost savings from integrating the operations of the merging LDCs. The extent of these operating synergies / cost savings is dependent upon the size and specific operating parameters of the LDCs that are merging. In general, these operating cost savings, net of dis-synergies, approximate 10% to 15% of the combined annual operating and maintenance costs of the merging LDCs, when the LDCs are of a similar size. – These operating cost savings can be retained by the LDCs / shareholders for a period of time up to 10 years after a merger, after which the benefit of the operating cost savings are passed on to customers through lower rates. – Financial savings can also be realized through reduced capital expenditures. For example, one customer billing system can be purchased to service the customers of MergeCo, rather than separate customer billing systems for each of the merging LDCs had they continued to operate independently. – Dis-synergies may also arise if operating costs are not carefully monitored. Wages and benefits tend to gravitate to the higher rates, and IT integration costs (e.g. the harmonization of billing systems, accounting systems, GIS systems etc.) can be expensive. Severance costs should also be managed carefully through attrition and re-deployment of personnel, and redundant facilities disposed of if deemed to be redundant.

FMV Implications of Increasing LDC Size – In theory, the fair market value of MergeCo would typically be equal to or slightly higher than the sum of the individual fair market values of each of the merging LDCs as calculated on a Stand-Alone basis. The potential for a slight increase in fair market value on a post-merger basis would result from the larger size and reduced risk profile of MergeCo, whose operations would be more diversified and more attractive to large potential investors.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 54 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 79 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Operational, Capital and Regulatory Impacts Operational Risks and Opportunities – Mergers facilitate the standardization of operating and technology systems across a broader footprint. – Eliminates the potential duplication of control room facilities without impairing system performance and reliability. – Regional electricity planning and investment is aligned with the approach for other infrastructure, including transportation. – Facilitates more proactive adoption of industry best practices in operating processes, at a lower average cost per customer.

Capital Risks and Opportunities – A merger does not change the combined capacity to fund future rate base growth. – A merged entity will have an improved platform from which to address financial issues, in particular, access to a wider number of sources of low-cost debt capital.

Regulatory Risks and Opportunities – Proactively addresses the consolidation preferences of the Government of Ontario. – A larger entity would have an improved ability to respond to the increasingly complex and burdensome regulatory requirements of the OEB. MergeCo would be better able to represent its interests in the regulatory policy development context and would likely possess deeper regulatory skill sets, potentially resulting in improved regulatory outcomes. – MergeCo would be better positioned to implement the Government of Ontario’s agenda with respect to conservation and demand management via the utilization of province-wide and utility-designed CDM programs, funded by the IESO. – MergeCo would be better positioned to present its interests to the Government of Ontario and would have greater influence over Government of Ontario policies.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 55 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 80 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Other Considerations (1)

Governance and Control – Merger allows for the preservation of the existing governance structure at the holding company level and continued ownership of a larger regional utility. – Merger allows for the continued incorporation of local preferences and objectives in utility decision making.

Employees and Management – Amalgamation of the management, staff and skilled trades may help mitigate the human resource issues faced by the merging utilities individually, enhancing the depth of skills available at all levels of the merged organization and potentially assisting with issues relating to an aging workforce and employee succession. Harmonization of unions may result as well. – Larger organization post-merger will provide more opportunities for career growth and advancement. – MergeCo would possess the required skills and expertise needed if further mergers are contemplated in the future. – Some transitional issues may result from the mixing of different corporate cultures from one or more LDCs.

Feasibility in the Current Environment – Voluntary consolidation is consistent with the Government’s policy approach to industry consolidation. – Municipal Shareholders may be better positioned to consider additional LDC mergers and/or cash acquisitions of small and medium- sized LDCs due to the large size of MergeCo and improved access to incremental equity and debt capital.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 56 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 81 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Other Considerations (2)

Other Considerations – Due to its increased size and larger employee workforce, MergeCo would be better positioned to invest in non-regulated business opportunities, which would provide additional non-regulated revenue streams for shareholders. – Transitional challenges of a merger may include negative publicity due to job reductions, employee resistance to change, the mixing of different corporate cultures, and changes to LDC Board governance.

Harmonizing Operating Policies and Procedures in MergeCo – The harmonization of operational matters would need to be addressed in MergeCo. Some of these items include: – the harmonization of employee salaries, wages and benefits; – the harmonization of accounting policies for items such as the capitalization and amortization of property, plant and equipment; the measurement of other post-employment benefit liabilities etc.; – the rationalization of existing banking institutions and long-term debt providers; – the harmonization of dividend policies and interest rates on shareholder loans; and, – the transition to common IT systems which could represent a considerable undertaking and could take a number of years to implement.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 57 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 82 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Analysis of Pros and Cons of a Merger Pros Cons

■ Existing Municipal Shareholders continue to have an ownership ■ Municipal Shareholders of each LDC will have a diminished influence interest – albeit a smaller interest in a larger entity. over MergeCo, and reduced governance responsibilities. There will be a reduced level of control over the larger LDC.

■ Dividend and interest will continue to be received by each Municipal ■ Reduced control over the amount of distributions paid to Municipal Shareholder. More stable prospects for net income and dividends due Shareholders due to the harmonization of interest rates and dividend to the larger size and reduced risk of MergeCo. policies. WNH would likely see a reduction in the current interest rates paid on its shareholder loans.

■ Potential merger synergies should reduce customer rates over the ■ Pursuant to the OEB’s “no harms” test, customers of all merging LDCs long-run. The estimated benefit to WNH customers would need to be should benefit from a proposed merger. However, the harmonization assessed based on the existing distribution rates of the potential of distribution rates may not provide the same level of benefit to all merger candidate, and the expected synergies that could be achieved customers of the merging LDCs. Creative solutions may be required through the merger. and can be implemented over a 10-year timeframe to ensure that the customers and shareholders of all LDCs benefit from a merger to a similar extent.

■ Merger may result in additional transaction potential due to larger ■ Municipal Shareholders may not wish to consider additional LDC regional footprint and reduced influence by any one municipality. transactions. Potential for a clash of corporate cultures.

■ Larger customer base would allow MergeCo to be better positioned to ■ The fundamental long-term demographic growth and economic take advantage of economies of scale and scope. prospects of each respective LDC’s service area may not change with a merger.

■ Low operating cost profile relative to many Ontario LDCs could be ■ One-time merger costs and integration costs will be incurred. These preserved and enhanced post merger, reducing pre-merger cost costs are not recoverable in utility rates, but must be recovered from pressures. operating synergies and cost savings during the rate deferral period.

■ Net merger synergies / cash savings can be retained by the ■ One-time merger and integration costs are front-loaded and may shareholders for up to ten years after a merger pursuant to the OEB’s reduce the attractiveness of the option, particularly if the full ten-year MAADs policy. retention of merger synergies cannot be achieved.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 58 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 83 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Overview – Steps in the Merger Process A merger between two or more LDCs would likely involve the following key process steps: – Municipal Shareholder direction to the Holdco Boards of the merging LDCs to negotiate the terms of a Memorandum of Understanding (“MOU”) – Execution of an MOU outlining the key terms of the proposed LDC merger. The MOU would contain key principles for the development of a business case for the proposed merger. – Creation of a joint Steering Committee (and selection of appropriate members) to guide and manage the merger process. – Preparation of business case and communication plans for the proposed merger. – Selection of independent experts for each of the following areas: (i) business valuation of each utility; (ii) technical evaluation of each utility; (iii) an environmental review of each of utility; and (iv) legal review of key agreements. – Due diligence carried out jointly and independently by the Steering Committee and the Boards of each utility on governance, finances, legal, labour and regulatory requirements. – Due diligence review and approval of the Merger Business Case by each Board. – Municipal shareholder approval in principle obtained and start of public consultation. –Legal firm and accounting firm to complete agreements and provide tax advice, as required. – Begin process of compiling an application to the OEB seeking merger approval. – Due diligence review of Draft Agreements by the Boards of all merging utilities. – Completion of public consultation process. – Final municipal shareholder approvals obtained and a MADDs application filed with the OEB seeking merger approval. – Receipt of OEB’s decision, pursuant to the MAADs policy. If approved, proceed with closing of the merger.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 59 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 84 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Review of Four Potential Merger Scenarios Merger Scenarios: There are many different merger partners and scenarios for WNH. For purposes of this report, we have prepared a preliminary high- level analysis of four potential merger scenarios for WNH as follows: – Scenario One – A two-party merger of WNH and Energy+ Inc. (“Energy+”). Energy+ is the LDC that services the communities of Cambridge, North Dumfries and parts of Brant County. This merger would result in an LDC with a combined base of over 118,000 customers. WNH and Energy+ have a similar number of customers and have contiguous service territories. – Scenario Two – A two-party merger of WNH and Guelph Hydro Electric Systems Inc. (“Guelph Hydro”). This merger would result in an LDC with a combined base of over 109,000 customers. – Scenario Three – A three-party merger of WNH with Guelph Hydro and Energy+ Inc. This merger would result in an LDC with a combined base of over 172,000 customers. – Scenario Four – A four-party merger of WNH with Guelph Hydro, Energy+ and Kitchener-Wilmot Hydro Distribution Inc. (“KW Hydro”). This merger would result in a large regional LDC with a combined base of approximately 265,000 customers. Under this scenario, MergeCo would become the fifth largest LDC in Ontario in terms of number of customers. For each of the four merger scenarios described above, we have presented a summary of key operating and financial data and the size of MergeCo in terms of number of customers.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 60 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 85 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario One – Merger with Energy+ – Scenario One – A two-party merger of WNH and Energy+. Energy+ is the LDC that services the communities of Cambridge, North Dumfries and parts of Brant County. This merger would create the sixth largest LDC in Ontario with a combined base of over 118,000 customers. WNH and Energy+ have a similar number of customers and have contiguous service territories. – Energy+ is in the process of filing a cost of service application for setting rates for the year beginning on January 1, 2018. This cost of service filing will harmonize the customer rates of Energy+ with those of Brant County Power (“BCP”), which was acquired by Energy+ in 2014. The net impact of this cost of service filing on future customer rates is not yet known. – The geographic footprint of the combined service territory of MergeCo is presented as the area outlined in red in the map below. – Individually, WNH and Energy+ are the 13th and 11th largest LDCs, respectively, based on the number of customers.

Ontario LDCs by Number of Customers - December 31, 2015 Rank Entity Name Number of Customers Percentage 1 Hydro One Networks 1,257,016 24.9% 2 Alectra Utilities Corporation 958,329 19.0% 3 Toronto Hydro Electric System Limited 758,311 15.0% 4 Hydro Ottawa Limited 323,919 6.4% 5 London Hydro Inc. 153,947 3.0% 6 MergeCo (WNH + Energy+) 118,580 2.3% 7 Veridian Connections Inc. 118,481 2.3% 8 Kitchener-Wilmot Hydro Inc. 92,404 1.8% 9 EnWin Utilities Ltd. 87,212 1.7% 10 Oakville Hydro Electricity Distribution Inc. 67,387 1.3% 11 Burlington Hydro Inc. 66,656 1.3% 12 Oshawa PUC Networks Inc. 55,949 1.1% 13 Guelph Hydro Electric Systems Inc. 53,789 1.1% 14 Niagara Peninsula Energy Inc. 52,770 1.0% 15 Thunder Bay Hydro Electricity Distribution Inc. 50,614 1.0% 16 Greater Sudbury Hydro Inc. 47,298 0.9% 17 Whitby Hydro Electric Corporation 41,798 0.8% 18 Brantford Power Inc. 39,127 0.8% 19-66 Other LDC's 711,152 14.1% Total 5,054,739 100.0%

Source: OEB 2015 Yearbook of Electricity Distributors. Customer counts do not include street light and unmetered scattered load customers.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 61 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 86 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario One – Combined Statistics Summarized below are some of the key statistics of each LDC for calendar 2015, as well as the totals for MergeCo. Also presented below is a summary of the relative rate base of each of WNH and Energy+ as at December 31, 2015, based upon data published in the 2015 OEB Yearbook. Metric as per Relative Rate Base OEB 2015 Yearbook WNH Energy+ Total

Statistical Measures

Service territory (km2) 672 562 1,234

Population served (2011) 160,278 172,310 332,588

Number of customers 55,416 63,164 118,580

Total line kilometers 1,618 1,718 3,336

Operational Measures

MWh distributed 1,458,000 1,757,000 3,215,000 Energy+ WNH Average peak demand (MW) 233.7 285.1 518.8 43% Number of employees 133 133 266 57%

Financial Measures (millions)

Total revenues $201.2 $217.2 $418.4

Distribution revenues $34.5 $34.3 $68.8

Estimated rate base – Dec 31, 2015 $218.5 $167.0 $385.5

Net income* $7.0 $5.7 $12.7

(*) Net income from operations, excluding unrealized gains and losses from derivatives, net of tax.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 62 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 87 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario Two – Merger with Guelph Hydro – Scenario Two – A two-party merger of WNH and Guelph Hydro. This merger would result in an LDC with a combined base of over 109,000 customers, which would be the seventh largest LDC in Ontario. – The geographic footprint of the combined service territory of MergeCo under Scenario Two is presented as the area outlined in red in the map below. – Individually, WNH and Guelph Hydro are the 13th and 14th largest LDCs, respectively, based on the number of customers.

Ontario LDCs by Number of Customers - December 31, 2015 Rank Entity Name Number of Customers Percentage 1 Hydro One Networks 1,257,016 24.9% 2 Alectra Utilities Corporation 958,329 19.0% 3 Toronto Hydro Electric System Limited 758,311 15.0% 4 Hydro Ottawa Limited 323,919 6.4% 5 London Hydro Inc. 153,947 3.0% 6 Veridian Connections Inc. 118,481 2.3% 7 MergeCo (WNH and Guelph Hydro) 109,205 2.2% 8 Kitchener-Wilmot Hydro Inc. 92,404 1.8% 9 EnWin Utilities Ltd. 87,212 1.7% 10 Oakville Hydro Electricity Distribution Inc. 67,387 1.3% 11 Burlington Hydro Inc. 66,656 1.3% 12 Energy+ (including BCP) 63,164 1.2% 13 Oshawa PUC Networks Inc. 55,949 1.1% 14 Niagara Peninsula Energy Inc. 52,770 1.0% 15 Thunder Bay Hydro Electricity Distribution Inc. 50,614 1.0% 16 Greater Sudbury Hydro Inc. 47,298 0.9% 17 Whitby Hydro Electric Corporation 41,798 0.8% 18 Brantford Power Inc. 39,127 0.8% 18-66 Other LDC's 711,152 14.1% Total 5,054,739 100.0%

Source: OEB 2015 Yearbook of Electricity Distributors. Customer counts do not include street light and unmetered scattered load customers.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 63 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 88 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario Two – Combined Statistics Summarized below are some of the key statistics of each LDC for calendar 2015, as well as the totals for MergeCo. Also presented below is a summary of the relative rate base of each of WNH and Guelph Hydro as at December 31, 2015, based upon data published in the 2015 OEB Yearbook.

Metric as per OEB 2015 Yearbook WNH Guelph Hydro Total Relative Rate Base Statistical Measures

Service territory (km2) 672 93 765

Population served (2011) 160,278 125,557 285,835

Number of customers 55,416 53,789 109,205

Total line kilometers 1,618 1,133 2,751

Operational Measures MWh distributed 1,458,000 1,772,000 3,230,000 Guelph WNH Average peak demand (MW) 233.7 263.0 496.7 Hydro 58% Number of employees 133 124 257 42% Financial Measures (millions)

Total revenues $201.2 $231.7 $432.9

Distribution revenues $34.5 $30.1 $64.6

Estimated rate base – Dec 31, 2015 $218.5 $159.2 $377.7

Net income* $7.0 $2.6 $9.6

(*) Net income from operations, excluding unrealized gains and losses from derivatives, net of tax.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 64 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 89 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario Three – Merger with Guelph Hydro and Energy+ – Scenario Three – A three-party merger of WNH with Guelph Hydro and Energy+. Energy+ is the LDC that services the communities of Cambridge, North Dumfries and parts of Brant County. This merger would result in an LDC with a combined base of over 172,000 customers. The combined LDC would rank as the fifth largest LDC in Ontario in terms of number of customers. – The geographic footprint of the combined service territory of MergeCo under Scenario Three is presented as the areas outlined in red in the map below. – Individually, WNH, Guelph Hydro and Energy+ are the 13th, 14th and 11th largest LDCs in Ontario, respectively, based on the number of customers serviced.

Ontario LDCs by Number of Customers - December 31, 2015 Rank Entity Name Number of Customers Percentage 1 Hydro One Networks 1,257,016 24.9% 2 Alectra Utilities Corporation 958,329 19.0% 3 Toronto Hydro Electric System Limited 758,311 15.0% 4 Hydro Ottawa Limited 323,919 6.4% 5 MergeCo (WNH + Energy+ (including BCP) + Guelph Hydro) 172,369 3.4% 6 London Hydro Inc. 153,947 3.0% 7 Veridian Connections Inc. 118,481 2.3% 8 Kitchener-Wilmot Hydro Inc. 92,404 1.8% 9 EnWin Utilities Ltd. 87,212 1.7% 10 Oakville Hydro Electricity Distribution Inc. 67,387 1.3% 11 Burlington Hydro Inc. 66,656 1.3% 12 Oshawa PUC Networks Inc. 55,949 1.1% 13 Niagara Peninsula Energy Inc. 52,770 1.0% 14 Thunder Bay Hydro Electricity Distribution Inc. 50,614 1.0% 15 Greater Sudbury Hydro Inc. 47,298 0.9% 16 Whitby Hydro Electric Corporation 41,798 0.8% 17 Brantford Power Inc. 39,127 0.8% 18-65 Other LDC's 711,152 14.1% Total 5,054,739 100.0%

Source: OEB 2015 Yearbook of Electricity Distributors. Customer counts do not include street light and unmetered scattered load customers.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 65 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 90 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario Three – Combined Statistics Summarized below are some of the key statistics of all three LDCs for calendar 2015, as well as the totals for MergeCo. Also presented below is a summary of the relative rate base of each of WNH, Guelph Hydro and Energy+ as at December 31, 2015, based upon data published in the 2015 OEB Yearbook.

Metric as per Guelph Relative Rate Base OEB 2015 Yearbook WNH Hydro Energy+ Total

Statistical Measures

Service territory (km2) 672 93 562 1,327

Population served (2011) 160,278 125,557 172,310 458,145 Number of customers 55,416 53,789 63,164 172,369 Guelph Total line kilometers 1,618 1,133 1,718 4,469 Hydro WNH Operational Measures 29% MWh distributed 1,458,000 1,772,000 1,757,000 4,987,000 40%

Average peak demand (MW) 233.7 263.0 285.1 781.8

Number of employees 133 124 133 390

Financial Measures (millions)

Total revenues $201.2 $231.7 $217.2 $650.1 Energy+ Distribution revenues $34.5 $30.1 $34.3 $98.9 31% Est. rate base – Dec 31, 2015 $218.5 $159.2 $167.0 $544.7

Net income* $7.0 $2.6 $5.7 $15.3

(*) Net income from operations, excluding unrealized gains and losses from derivatives, net of tax.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 66 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 91 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario Four – Merger with Guelph Hydro, Energy+ and KW Hydro – Scenario Four – A four-party merger of WNH with Guelph Hydro, Energy+ and KW Hydro. This merger would result in a large regional LDC with a combined base of approximately 265,000 customers. Under this scenario, MergeCo would become the fifth largest LDC in Ontario in terms of number of customers. – The geographic footprint of the combined service territory of MergeCo under Scenario Four is presented as the areas outlined in red in the map below. The service territory would encompass all of Waterloo County plus parts of Wellington County and Brant County, with a total service territory of 1,736 square kilometers. – Individually, WNH, Guelph Hydro, Energy+ and KW Hydro are the 13th, 14th,11th and 7th largest LDCs in Ontario, respectively, based on the number of customers. Ontario LDCs by Number of Customers - December 31, 2015

Rank Entity Name Number of Customers Percentage 1 Hydro One Networks 1,257,016 24.9% 2 Alectra Utilities Corporation 958,329 19.0% 3 Toronto Hydro Electric System Limited 758,311 15.0% 4 Hydro Ottawa Limited 323,919 6.4% 5 MergeCo (WNH + Energy+ (including BCP) + KWH + Guelph Hydro) 264,773 5.2% 6 London Hydro Inc. 153,947 3.0% 7 Veridian Connections Inc. 118,481 2.3% 8 EnWin Utilities Ltd. 87,212 1.7% 9 Oakville Hydro Electricity Distribution Inc. 67,387 1.3% 10 Burlington Hydro Inc. 66,656 1.3% 11 Oshawa PUC Networks Inc. 55,949 1.1% 12 Niagara Peninsula Energy Inc. 52,770 1.0% 13 Thunder Bay Hydro Electricity Distribution Inc. 50,614 1.0% 14 Greater Sudbury Hydro Inc. 47,298 0.9% 15 Whitby Hydro Electric Corporation 41,798 0.8% 16 Brantford Power Inc. 39,127 0.8% 18-64 Other LDC's 711,152 14.1% Total 5,054,739 100.0%

Source: OEB 2015 Yearbook of Electricity Distributors. Customer counts do not include street light and unmetered scattered load customers.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 67 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 92 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Scenario Four – Combined Statistics Summarized below are some of the key statistics of all four LDCs for calendar 2015, as well as the totals for MergeCo. Also presented below is a summary of the relative rate base of each of WNH, Guelph Hydro, Energy+ and KW Hydro as at December 31, 2015 based upon data published in the 2015 OEB Yearbook.

Metric as per Guelph OEB 2015 Yearbook WNH Hydro Energy+ KW Hydro Total Relative Rate Base

Statistical Measures

Service territory (km2) 672 93 562 409 1,736

Population served (2011) 160,278 125,557 172,310 254,241 712,386

Number of customers 55,416 53,789 63,164 92,404 264,773 KW Hydro WNH Total line kilometers 1,618 1,133 1,718 1,918 6,387 Operational Measures 29% 28% MWh distributed 1,458,000 1,772,000 1,757,000 1,787,000 6,774,000

Average peak demand (MW) 233.7 263.0 285.1 284.7 1,066.5

Number of employees 133 124 133 182 572 Guelph Financial Measures (millions) Energy+ Total revenues $201.2 $231.7 $217.2 $244.6 $894.7 Hydro 22% Distribution revenues $34.5 $30.1 $34.3 $39.6 $138.5 21% Est rate base – Dec 31, 2015 $218.5 $159.2 $167.0 $224.2 $768.9

Net income* $7.0 $2.6 $5.7 $11.1 $26.4

(*) Net income from operations, excluding unrealized gains and losses from derivatives, net of tax.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 68 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 93 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Conclusion – Merger Option

– WNH is geographically positioned such that it could partner with a number of proximate LDCs in a merger transaction. Operating synergies and cost savings are typically enhanced when the merging LDCs are reasonably close from a geographical perspective. – The Merger Option represents a feasible option for WNH that would result in the Municipal Shareholders of WNH becoming partners in a larger regional LDC, which is consistent with the Province’s objective of industry consolidation. This option offers ongoing investment income (dividends and interest) to the Municipal Shareholders of WNH and ongoing participation in future LDC growth, albeit on a diluted basis. Operating synergies and cost savings would be expected to repay any one-time merger costs and reduce future distribution rates for customers. Complicated issues requiring further analysis and negotiation under any specific merger proposal would include the relative equity stakes in MergeCo and the ability to achieve an equitable sharing of the benefits from the future harmonization of customer distribution rates on a post-merger basis.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 69 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 94 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Analysis of LDC Acquisition Option

All Council Meeting Page 95 of 114 Wednesday, June 7, 2017 Overview

LDC Acquisition Option – Under this option, WNH would continue as a Stand-Alone LDC, and WNH HoldCo / WNH would pursue the acquisition of smaller local LDCs. – WNH could pursue the acquisition of one or more LDCs that are geographically close to the Company’s service territory. The acquisition of a local LDC would be driven by the opportunity to realize operational synergies and reduced operating costs for the benefit of the shareholders (in the short term) and existing customers (in the long term). – An LDC acquisition would require a cash outlay for at least the equity portion of the target LDC, including any premium paid above book value, with the balance of the purchase price financed by leveraging the rate base of the target LDC to the OEB-deemed level of 60%. Due to the significant cash outlay required for an LDC acquisition, WNH would likely need to partner with one or more LDCs to consummate an acquisition of significant size. – A merger with a local LDC may prove to be a preferred option as such a transaction can be concluded with little or no cash investment required by either party. The municipal shareholders of both LDCs would continue to own a smaller ownership interest in the larger combined LDC, based on the ratio of the relative fair market values of the two LDCs before the merger. After the merger, the combined LDC could pursue operational synergies and reduce operating costs for the benefit of all customers.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 71 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 96 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Analysis of LDC Acquisition Option – Some of the pros and cons of the LDC Acquisition Option are summarized below:

Pros Cons

■ An acquisition provides the opportunity to generate operating ■ WNH’s debt to capital ratio was 54.4% at December 31, synergies and cost savings that can be retained by the acquiring 2016. WNH has additional borrowing capacity of shareholders in the short-term and by the customer base of both approximately $27.8 million, assuming that the new LDCs over the longer-term. Allows for increasing the scale and borrowings are invested in capital projects / LDC acquisitions scope of personnel and capabilities. that increase the Company’s rate base (rather than pay for rate base premia). Completing an acquisition may constrain WNH’s debt capacity and flexibility for future capital projects.

■ Allows for the creation of a larger regional LDC that may be ■ Potential LDC targets have limited incremental borrowing more attractive in further LDC consolidation transactions. capacity that could be used to finance an acquisition.

■ Acquired service territory may offer growth and opportunities for ■ Pursuant to the OEB’s “no harms” test, customers of both additional capital investment in rate base . LDCs must benefit from a proposed merger. However, the harmonization of distribution rates may not provide the same level of benefit to all customers of the LDCs.

■ Local support should be strong as the acquisition of either target ■ One-time acquisition costs, integration costs and rate base would be seen as a strategic regional consolidation initiative. premiums are not recoverable through utility rates, but can only be recovered from operating synergies and cost savings

during a rate harmonization deferral period of up to 10 years.

■ A purchase of another LDC by WNH is consistent with the LDC ■ The sale of an LDC generally attracts multiple interested consolidation preferences of the Ontario government. purchasers, and the purchase prices paid are currently high when measured against the target’s rate base.

■ Customers may benefit over the long-term if WNH is able to achieve lower rates through the realization of synergies and the achievement of economies of scale.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 72 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 97 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Conclusions – LDC Acquisition Option LDC Acquisition Option – Every LDC acquisition opportunity is unique and, if pursued following a rigorous risk / reward analysis, should also be analyzed in terms of its impact on the financial, managerial, labour and reputational resources of WNH. The primary driver of an LDC acquisition should be the ability to create operational synergies and cost savings that are retained by the acquiring shareholder in the short term and the customers of both LDCs over the long term. – Partnering with one or more LDCs to share core utility services, share costs or acquire other LDCs may provide an alternative cost- effective method to reduce WNH’s operating costs and customer rates over the long-term. These partnering opportunities may also align with WNH’s current areas of expertise. – WNH has some incremental borrowing capacity in the short-term that could be used to finance an LDC acquisition. However, the Company’s financial resources and flexibility might become constrained over the longer-term due to WNH’s continued investment in capital assets and its requirement to pay 50% of annual LDC earnings to Municipal Shareholders as dividends. The Municipal Shareholders could convert their $33.5 million of shareholder loans into WNH equity to facilitate a larger LDC acquisition; however, this would reduce the annual stream of interest payments to the Municipal Shareholders. – Pursuing a large LDC acquisition that requires a significant capital investment would require partnering with one or more parties.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 73 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 98 are registeredof 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017 Conclusions

All Council Meeting Page 99 of 114 Wednesday, June 7, 2017 Findings The Ontario electricity distribution sector has become increasingly complex over the past 20 years due to increased regulatory, political, financial, technological and environmental demands. The level of complexity is not expected to decrease in future years. The current environment creates ongoing cost pressures and stresses on all LDCs and on smaller LDCs in particular. The Province of Ontario continues to encourage voluntary consolidation of the LDC sector. Hydro One Networks and other LDCs are actively pursuing acquisitions and/or mergers to expand their operations and reduce operating costs. WNH is the 13th largest LDC in Ontario with over 56,000 customers. While WNH can continue to operate independently as it has in the past, industry pressure will continue to build over time. The Stand-Alone LDC Option is considered to be a feasible option. WNH has sufficient size, scale and management depth to operate successfully on an independent basis. Some near-term management succession issues exist however, and there are concerns over the long-term pressures of operating WNH on a stand-alone basis due to the Province’s desire for industry consolidation. The Divestiture Option is a feasible option that results in the monetization of the ownership interest in WNH, providing an immediate financial benefit to the Municipal Shareholders, who would no longer be exposed to the risks and challenges of owning and managing a regulated business. However, this option would result in the loss of the current dividend and interest stream received from WNH. Other than Hydro One Networks, there are few potential LDC purchasers who would have sufficient financial resources to complete an acquisition of WNH at current market prices. Depending on the buyer, the long-term distribution rates of WNH may be at risk of a significant increase which could pose challenges for future economic growth. Also, depending on the buyer, Transfer Taxes and/or Departure Taxes may also be triggered by a sale, thereby reducing the net proceeds to the Municipal Shareholders. The Merger Option represents a feasible option for WNH that would result in the Municipal Shareholders of the Company becoming partners in a larger regional LDC (“MergeCo”), which is consistent with the Province’s objective of industry consolidation. WNH is geographically positioned such that it could partner with a number of proximate LDCs in a merger transaction, which is important since operating synergies are typically enhanced when the merging LDCs are reasonably close from a geographical perspective. The Merger Option offers ongoing investment income (dividends and interest) to the Municipal Shareholders of WNH and ongoing participation in future LDC growth, albeit on a diluted basis. Operating synergies would be expected to repay any one-time merger costs and reduce future distribution rates for customers. Complicated issues requiring further analysis and negotiation under any specific merger proposal would include the relative equity stakes in MergeCo and the ability to achieve an equitable sharing of the benefits from the future harmonization of customer distribution rates on a post-merger basis. The Growth through LDC Acquisition Option envisions WNH’s purchase of another LDC to generate synergies and reduce operating costs. While WNH has some excess borrowing capacity to invest in a small to mid-sized LDC, the pursuit of larger LDCs would necessitate partnering with one or more organizations to share the financial costs.

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 75 All Council (“KPMGMeeting International”), a Swiss entity. All rights reserved. The KPMG namePage and logo 100 are registered of 114 trademarks or trademarks of KPMG International.Wednesday, June 7, 2017

. kpmg.ca

© 2017 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Appendix C WNH as an industry influencer

WNH as an industry influencer

The utility ranks in the top quartile (17th) among 72 utilities for efficiency as measured by the 2015 Ontario Energy Board (OEB) Yearbook for controllable cost per customer. In 2016, WNH received a 92% customer satisfaction score in a national utility survey ahead of the national average of 84% and the provincial average of 74%.

WNH continues to reinvest in its infrastructure and invest in Smart Grid components. In 2016, WNH made upgrades to its GIS (Geographical Information Systems), implemented an OMS (Outage Management System) and started the implementation of a new CIS (Customer Information System) compliant to new standards that went live in Q1 2017. WNH invested $120.0 million over the past five years (2012 to 2016) and is projecting to spend $91.5 million over the next five years (2017 to 2021) in electrical distribution assets.

WNH is a founding member in GridSmartCity (GSC); a Cooperative with 13 similar size LDCs. GSC was formed to provide synergies through a cooperative approach to buying and utility efficiencies. GSC provides the scale of 637,000 customers, the 4th largest group in the Province behind HONI, Toronto Hydro and Alectra. The cooperative has been successful in significantly reducing the cost of purchasing group insurance and electrical materials.

WNH is also a founding member of Utility Standards Forum (USF), a consortium of 53 LDCs in the Province including HONI, Toronto Hydro and Alectra that provides and updates engineering standards used in the design, construction and maintenance of electrical distribution assets such as poles, transformers and wires for both overhead and underground systems. USF has also expanded its mandate to include forums for Information Technology and Regulatory matters.

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STAFF REPORT Chief Administrative Officers

Title: Waterloo North Hydro – Public Engagement Plan Report Number: WWWCAO2017-002 Authors: Tim Anderson, CAO City of Waterloo David Brenneman, CAO Township of Woolwich Rik Louwagie, CAO Township of Wellesley Meeting Type: Joint Council Meeting Council/Committee Date: June 7, 2017 File: N/A Attachments: Appendix A – Public Engagement Process Ward No.: All Wards (Waterloo, Woolwich and Wellesley)

Recommendation:

1. That the Councils of the City of Waterloo, the Township of Woolwich and the Township of Wellesley approve report WWWCAO2017-002.

2. That the Councils approve the staff proposed Waterloo North Hydro – Public Engagement Plan.

A. Executive Summary The City of Waterloo, the Township of Woolwich and the Township of Wellesley jointly own Waterloo North Hydro Holding Corporation (Holdco). The City of Waterloo owns 73.2%, The Township of Woolwich owns 20.2% and The Township of Wellesley owns 6.6%. Holdco owns 100% of Waterloo North Hydro Inc., the local electricity distribution company (LDC). Waterloo North Hydro Inc. provides distributed electricity to over 56,000 residential, commercial and industrial customers servicing over 672 square kilometres of territory as highlighted in Appendix A – Waterloo North Hydro Service Area Map.

The councils of the City of Waterloo (March 27), Township of Woolwich (March 28) and Township of Wellesley (March 28) each approved a resolution giving direction to the Holdco Board of Directors to undertake the necessary discussions and analysis to prepare a comprehensive review of the sector changes and options currently being undertaken or being considered throughout

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the Province, and the applicability of such options as it relates to our own Waterloo North Hydro LDC regulated business.

Upon completion of this comprehensive review, it was agreed that staff and Holdco Board representatives would report the findings back to the councils. Additionally, staff would provide details around the public engagement strategy to be undertaken. In light of the significance of this review and the limited internal resources, the shareholders and the Holdco Board of Directors believe it is important to secure additional external professional assistance. Waterloo North Hydro Holdco retained NATIONAL Public Relations to assist with the public engagement process. They are a highly respected agency that possesses a great deal of experience in both pubic engagement and working in the LDC sector. Waterloo North Hydro is a valuable community asset, one worthy of a robust and fulsome public discussion. The public engagement process is provided for Council approval. The comprehensive review of the strategic options prepared by KPMG will also be presented to the three councils on June 7, 2017.

B. Financial Implications There are no direct financial implications to the City of Waterloo, Township of Woolwich or Township of Wellesley as a result of this motion and the public engagement exercises to be conducted. The cost to undertake the comprehensive review and public engagement process is estimated to be $50,000 to $75,000 and will be borne by the Waterloo North Hydro Holdco entity. Staff believes this to be a very worthwhile investment towards understanding the Waterloo North Hydro customers sentiment as it relates to the future of our Waterloo North Hydro community asset and the options currently being undertaken or being considered throughout the Province. The Waterloo North Hydro asset is a significant community asset with net profit from operations of $8.4 million (2016), annual combined dividend and interest income allocation to the shareholders of $5.3 million (2016) and a high level indicative enterprise value (i.e., the combined value of debt and equity) in the approximate range of $285 million to $350 million as at December 31, 2016. The indicative value is based upon the multiple of rate base approach and a review of observed multiples of rate base from recent transactions in the Ontario LDC sector and is subject to change in the future based on corporate operating performance, market conditions, the impact of regulatory changes and other factors (KPMG Review of Strategic Options – May 23, 2017).

C. Technology Implications There are no technology implications associated with this report.

D. Legal Considerations Legal issues have been addressed to the satisfaction of City of Waterloo Legal Counsel.

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E. Link to Strategic Plan City of Waterloo: • Corporate Excellence – Ensure balanced consideration of social, cultural, economic and environmental factors when making fiscally responsible practise/policies. • Corporate Excellence – Maximize public service excellence. Township of Woolwich: • Healthy Community – Social Capital/Civic Engagement – Provide regular forums and different methods that will encourage public consultation and feedback. • Fiscally Responsible and Sustainable Community – Expand Financial Sustainability/Best Practices – Explore collaboration and partnership opportunities that make fiscal sense and ensure best value for taxpayers. • Best Managed and Governed Municipality – Commit to maintaining high standards for municipal service delivery. Township of Wellesley: • Healthy Communities and Environments - maintain our community’s healthy lifestyle and safe environment and directly relates to the strategic objective to ensure long-term and short term financial sustainability of the Township. • Public Engagement and Partnerships – Encourage communication with Township residents by keeping them informed, connected and engaged.

G. Approvals

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Waterloo North Hydro – Public Engagement Plan

1.0 Current LDC landscape

Ontario’s electricity market is undergoing unprecedented change as municipalities across the province consider potential transaction options for their local electricity distribution companies. The province’s goal is to create a less fragmented electricity sector that will be well-positioned to achieve greater efficiencies, invest more in system infrastructure upgrades and lower distribution costs for customers.

Against this backdrop of provincial change, the City of Waterloo, the Township of Woolwich and the Township of Wellesley – the three Waterloo North Hydro shareholders – are launching an asset review process to ensure the municipalities are receiving maximum benefit for the shared utility. As of March 2017, the initial options being reviewed by the Waterloo North Hydro Holding Corporation are merger, sale, acquisition and standalone.

With residents being the true shareholders of the community asset, the shareholders of Waterloo North Hydro are launching a communications and public engagement campaign from June to September 2017 to educate and seek actionable input from community members.

This plan outlines the proposed engagement and communications activities for the campaign, Talk Hydro: Discussing the Future of Waterloo North Hydro.

2.0 Background

• Asset Review: Given the provincial landscape, the municipal shareholders directed Waterloo North Hydro Holding Corporation Board of Directors to launch an asset review to explore options for the utility. • Municipal Partners: The asset review – and engagement initiative - will involve all three municipal owners: City of Waterloo (73.2 per cent), Township of Woolwich (20.2 per cent) and Township of Wellesley (6.6 per cent). • Current perception of WNH: Waterloo North Hydro is viewed by the three municipal shareholders as a valuable, efficient and well-run operation. It is a community asset. • Regional Utilities: Other utilities in the south western Ontario region are exploring potential transaction options, such as Guelph Hydro. Cambridge and North Dumfries Hydro Inc. recently acquired Brant County Power and later became Energy+.

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• Proposed Key Dates: o March 27-28: Asset review announced. o May 18: Waterloo North Hydro shareholders meeting. o June 7: Joint municipal council meeting with City of Waterloo, Township of Woolwich and Township of Wellesley. o June 8: Talk Hydro microsite launch. o Late June: Public information centres (PIC) . Tuesday June 20, 2017 City of Waterloo PIC . Wednesday June 28, 2017 Township of Woolwich PIC . Thursday June 29, 2017 Township of Wellesley PIC . Friday June 30, 2017 launch of virtual PIC (@talkhydro.ca) o July/August: Stakeholder outreach; community engagement activities. o Early September: Engagement report delivered to municipal councils. o September: Waterloo North Hydro Holding Corporation Board of Directors and municipal councils review engagement report and make decision regarding next steps.

3.0 Objectives

Public participation goals: o Provide the public with balanced and objective information to assist them in understanding the issue, alternatives, opportunities and/or solutions. o Obtain public feedback on evaluation criteria, analysis and alternatives. o Ensure communication is; . Transparent and Accountable. . Authentic. . Accessible. . Inclusive. . Clear Language and Messages. . Timely. . Public Interest.

Community Engagement: 1. Public Input: Seek meaningful public input on the evaluation criteria. 2. Public Education: Inform and educate the public about the proposed evaluation criteria and reviewed options. 3. Understand Purpose: Raise awareness of the purpose for the asset review. 4. Maintain Integrity: Design a process with integrity that engages residents through multiple channels. 5. Mitigate Risks: Identify, mitigate and manage risks that could adversely impact the engagement process. 6. Trust and Reputation: Maintain customer and public trust, while protecting the reputations of the utility and shareholders.

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Communications: 1. Inform and Educate: Raise awareness of the asset review process and the Talk Hydro community engagement activities. 2. Drive Participation: Drive traffic and engagement to the Talk Hydro microsite and in- person public information centres.

4.0 Target Audiences:

TARGET AUDIENCE DESIRED OUTCOME Residents of the City of Waterloo, • Informed about the asset review – Township of Woolwich and Township and what’s being considered at this of Wellesley (the Waterloo North Hydro initial stage. Customers) • Informed about the advantages and disadvantages of each considered option. • Encouraged to participate in engagement activities to provide input on evaluation criteria. Waterloo North Hydro Employees • Informed about the asset review – and what’s being considered at this early stage. • Employees feel their voices have been heard and they know where to seek answers to their questions.

Municipal Councils in Shareholder • Know where to direct constituent Communities inquiries. • Well informed with key messages and background information. • Councillors feel informed and know where to get the latest information. • Councillors encourage public participation in the process. Community Stakeholder Groups in • Where appropriate and applicable Shareholder Municipalities inform about the asset review – and • Examples; what’s being considered at this o Chamber of Commerce initial stage. Greater Kitchener- • Informed about the advantages and Waterloo disadvantages of each option. o Economic Development • Provide input on the evaluation Committees criteria. o Uptown Waterloo BIA • Share information and encourage o St. Jacobs BIA participation with their respective o Downtown Elmira BIA networks.

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5.0 Community Engagement:

APPROACH DETAILS Inform and engage At this initial phase, inform the public about the purpose of the asset review, the advantages and disadvantages of the considered options and seek input on the evaluation criteria. Ask questions specific to this initial Design and activate an engagement phase in the process framework that asks the community to respond to key questions specific to this initial phase, such as the evaluation criteria. Engage on what’s relevant to residents Encourage people to be part of a values-based conversation; frame the conversation to deter residents from jumping ahead in the process and drawing conclusions about decisions that have not been made. One size does not fit all Activate an engagement plan that connects with people through multiple channels – digital and in-person touchpoints. Take it on the road Meet people where they congregate to seek input from a broad base of residents from shareholder municipalities.

6.0 Digital Communications:

APPROACH DETAILS Talk Hydro website The Talk Hydro website will serve as the hub for all digital communications. It will provide residents from the shareholder municipalities an opportunity to learn more about the process, provide input on the evaluation criteria and seek answers on key questions through the public Q&A feature (Have Your Say). Social Media: Leverage existing social media Facebook and Twitter channels managed by shareholder municipalities and Waterloo North Hydro; drive traffic to the Talk Hydro website through the social media channels; digital engagement activities

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APPROACH DETAILS through social media channels. Facebook Events For each public information centre, create Facebook Event pages to invite community members to attend; promote through Twitter. Monitoring and Engagement Monitor relevant online conversations – assess and engage in relevant conversations by directing traffic to the Talk Hydro website where people can get more information and ask questions.

7.0 Communications – Informing Residents and Driving Participation:

APPROACH DETAILS Earned, owned and paid strategy An integrated earned, owned and paid media strategy to reach diverse demographics through multiple communications channels. Digital and traditional channels With inclusivity and accessibility as goals of the public engagement exercise, ensure traditional communications tactics, such as printed advertisements and posters, are included to ensure shareholder municipalities reach residents who may not use digital channels. Leverage customer and municipal Leverage Waterloo North Hydro’s relationships relationship with its customers to communicate important campaign messages; leverage shareholder municipalities’ relationships with residents and community stakeholders. Establish benchmark At this initial phase, establish a benchmark through the first engagement report, which will be delivered in September; continue to measure public opinion if the process progresses to further stages.

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8.0 Community Engagement & Communications Activities:

ACTIVITY DETAILS TIMING Local Op-Ed Spokesperson (or spokespeople) to write an op-ed Week of June that coincides with the launch of the asset review 5-9 and community engagement campaign.

Pitch op-ed to Waterloo Record and community newspapers.

Repurpose op-ed for digital/blog posts. Bookmark/Flyer High-level handout, or bookmark, to raise Week of June awareness of the asset review and Talk Hydro 5-9 website; distribute at events and municipal facilities. Communications Prepare and distribute communications toolkits to Week of June Toolkit municipal councillors and other key stakeholders 5-9 that include background information, schedule of engagement activities, bookmarks/flyers, key messages/talking points and suggested tweets/Facebook posts. News Release – Issue a news release to launch the community June 7/8 Engagement engagement process. Launch Talk Hydro Talk Hydro website goes live, including Q&A feature; June 8 Microsite Launch ongoing updates throughout campaign. Waterloo North Create and post banners on the home pages to June 8 to Hydro and drive traffic to the Talk Hydro website. September Municipal Websites Media Relations At each key milestone of the asset review process, June 7 to spokespeople to be available for media interviews; September messaging to include a call to action for people to visit the microsite and/or attend public information centres.

Explore opportunity for spokesperson to appear on call-in program on 570 News. Social Media Ongoing messages on Facebook and Twitter to June 8 to drive traffic to Talk Hydro website (Waterloo North September Hydro and shareholder municipalities’ channels).

Facebook Event pages for public information centres.

Targeted Facebook and Twitter posts to launch engagement campaign and for public information

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ACTIVITY DETAILS TIMING centres – targeted to residents in shareholder municipalities. Municipal Ask city and township councillors who are active on June 8 to Councillors’ social media to post links to the Talk Hydro website September Social Media and inform residents of public information centres. Channels Send information through email distribution lists. Municipal Digital Leverage the shareholder municipalities’ own digital June 8 to Screens and screens and bulletin boards to raise awareness of September Bulletin Boards the campaign, website and public information centres.

• Waterloo to post information on its digital sign at the corner of Erb and Father David Bauer Drive and within facilities including City Centre, WMRC and RIM Park. • Woolwich to post information on its digital sign at the Woolwich Memorial Complex and through electronic bulletin boards. • Wellesley to post information on its digital sign at the St. Clements Community Centre and Wellesley Arena. Waterloo North Enclose an insert in print copies of hydro bills, or Bill cycle - Hydro Customer messages on digital bills, which raises awareness of TBD Bills the asset review and opportunities for residents to engage in the process.

Talk Hydro Using the content from the website, design and Week of June Brochure distribute print brochures at municipal and other 12 facilities (e.g. seniors homes) to reach residents who may not use digital channels.

Downloadable version posted on website. Talk Hydro Create posters to raise awareness of the website Week of June Posters and public information centres. Posters to be placed 12 at municipal facilities and seniors/retirement homes. Advertisements To drive traffic to website and public information Week of June centres, produce and place advertisements with 19 online and print news outlets. Public Public information centres in Waterloo, Wellesley Waterloo Information and Woolwich. (June 20) Centres Two sessions for each public information centre – Woolwich afternoon and evening. (June 28)

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ACTIVITY DETAILS TIMING Media advisories ahead of public information Wellesley centres; invite media to attend sessions. (June 29) Virtual Public After the public information centres, launch a digital June 30 Information version on the Talk Hydro website; use the same Centre presentation and engagement questions for those residents who couldn’t attend the above PIC’s. Pop-up Setup booths/displays at large-scale community June to August Community events to inform residents and seek input on the Engagement evaluation criteria. Potential events;

• City of Waterloo 25th Annual Service Centre Open House (June 10) • A Taste of Woolwich (June 17) • Township of Wellesley Canada 150th Celebration (June 23) Stakeholder Schedule initial stakeholder meetings with industry July to August Outreach and community organizations to inform them on the process and to gather preliminary feedback on the presented options. As a next step, the shareholder municipalities will develop a list of suggested organizations for meetings. From an awareness perspective, as part of the initial stakeholder outreach meetings, request that organizations (e.g. Chamber of Commerce) send information about the engagement opportunities to their networks. Waterloo North Hydro could create a standard email/letter for organizations to easily distribute to their members. Waterloo North Waterloo North Hydro to consult largest customers July to August Hydro – Large (approx. top 10) in terms of usage. Customer Outreach Public Opinion To establish a benchmark, conduct public opinion July or August Polling polling for residents in Waterloo, Wellesley and Woolwich. The public opinion survey would include approximately three to five questions focused on rating the evaluation criteria.

Recommend conducting public opinion poll later in process when there is increased public awareness about the asset review. Engagement Deliver report with key findings from all community September Report engagement activities.

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APPENDIX A

WATERLOO NORTH HYDRO SERVICE AREA MAP

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