20180718Idaho Letter.pdf

Avista Corp. i-i I C i: lV E D
1411 East Mission P.O. Box3727
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July 18, 2018
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Diane Hanian, Secretary
Idaho Public Utilities Commission
Statehouse Mail
W. 472 Washington Street
Boise, Idaho 83720
Joint Application of Hydro One Limited and Avista Corporation for Order Authorizing
Proposed Transaction Docket Nos. AVU-E-L7-09 and AVU-G-17-}5Update on Recent
Changes in Hydro One Management
Dear Ms. Hanian:
By this leffer, Avista and Hydro One wish to advise the Idaho Public Utilities Commission (the
"Commission") and all parties of recent developments concerning the management of Hydro
One, to reaffirm our commitment to the transaction, and to reiterate our request for timely
approval of the transaction. Avista and Hydro One believe that all of the reasons previously
stated in support of the merger remain equally true today, and that approval is in the public
interest. As discussed below, extensive safeguards have been incorporated into the agreed-upon
commitments in the Settlement Stipulation filed on April 13, 2018, to protect and insulate Avista
and its customers from any change in management at Hydro One. The structural safeguards were
designed to withstand the test of time, and the inevitable changes in management.
Avista and Hydro One request that this letter be made part of the official record in this case.
Recent DeveloDment Concerning Changes in Management
On July 11,2018, Hydro One, on behalf of itself and its wholly-owned subsidiary, Hydro One
Inc. ("HOI"), announced that following an approach by Hydro One to the Province of Ontario
(the "Province"), they have entered into an agreement for the purpose of the orderly replacement
of the board of directors of Hydro One and HOI and the retirement of Mayo Schmidt as the chief
executive officer effective July 1 I , 201 8 (the "July 20 I 8 Agreement"). Attachment A is a copy
of the July 2018 Agreement. Highlights include:
Consistent in principle with the ability of the Province to remove the entire board of
directors pursuant to Section 4.7 of the Governance Agreement, each of the current
directors of Hydro One will resign and be replaced by nominees identified as set out
below.
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The new board of directors will initially consist of l0 members. Consistent with the
Governance Agreement, the Province will nominate four replacement directors and
the remaining six nominees will be identified through an Ad Hoc Nominating
Committee comprised of representatives of Hydro One's largest shareholders other
than the Province.
The new board of directors will be responsible for appointing a new chief executive
officer who will also be appointed as the eleventh member of the replacement board
of directors.
Hydro One has agreed to consult with the Province in respect of future matters of
executive compensation.
The replacement directors will serve until Hydro One's next annual meeting or until
they otherwise cease to hold office.
Paul Dobson, Hydro One's chief financial officer, has been appointed as acting chief
executive officer until such time as the replacement board of directors, once
constituted, can appoint a new chief executive officer.
Hydro One has committed to completing the transition process to a new board of directors by
August 15,2018.
During Doug Ford's campaign to become Premier of the Province, Premier Ford and his
Progressive Conservative Party, which secured a majority of the seats in the Provincial
legislature during the June 7,2018 election, promised to remove Hydro One's CEO and board of
directors. As with any general election, it was unclear up to the election day which party would
win and whether that party would win a majority of seats. Further, it was unclear how the
winning party would execute or implement its agenda. In the interest of securing an orderly
resolution of this issue, Hydro One entered into negotiations with the new government on
Thursday, July 5. Hydro One believes that the July 2018 Agreement reached with the Province,
which provides for an orderly transition of the board of directors and CEO succession, is in the
best interests of Hydro One and its various stakeholders and provides stability and clarity to
Hydro One's governance and management structure going forward.
Hvdro One Accountabilitv Act.2018
On Monday, July 16,2018, the new Provincial government introduced the Urgent Priorities Act,
20l8,which, if passed, would enact the Hydro One Accountability Act,20l8. The Hydro One
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Accountability Act (Attachment B), if passed, will not apply to Avista if Avista becomes a
subsidiary of Hydro One. The Act's definition of "subsidiary" excludes subsidiaries
"incorporated in a jurisdiction outside Canada."
If passed, the Hydro One Accountability Act, 2018 would require the board of Hydro One to
establish a new compensation framework for the Board of Directors, CEO, and other executives
in consultation with the Province and the other five largest shareholders. The Act would also
give the Management Board of Cabinet authority to approve this compensation framework and
any amendments to it as well as to issue directives governing the compensation of the directors,
CEO, and other executives.
The Hydro One Accountability Act also would amend the Ontario Energt Board Act, 1998 to
require the Ontario Energy Board to exclude any amount in respect of compensation paid to the
Chief Executive Officer and executives from consumer rates for Hydro One or its subsidiaries. In
addition, the Act would require Hydro One to annually publish on its website a record of the total
compensation of executives as prescribed by regulation. The Act would also require Hydro One
to publish on its website any proposed changes to its compensation frameworks for the board,
CEO, or other executives at least 30 days prior to the date on which it seeks Management Board
of Cabinet approval for those changes pursuant to the Act. The Act would also provide the
Crown and Hydro One with immunity from civil liability with respect to certain actions.
This legislation has no impact on (l) Hydro One's contractual commitment to proceed with its
acquisition of Avista, (2) the settlement stipulations Hydro One negotiated with parties in
Oregon, Washington, Idaho, Montana, and Alaska, or (3) the authority of Avista's state
regulators to continue to regulate Avista if the merger with Hydro One is consummated.
Moodv's Julv 16.2018 Report
On July 16, 2018, Moody's Investors Service ("Moody's) published its "Credit Outlook"
report. This is a report which Moody's publishes twice a week outlining its outlook on credit
implications of current events. The July l6 report includes a section on Hydro One entitled
"Hydro One's Board and CEO Are Forced Out, a Credit Negative." The report concludes that
"Ontario's willingness to force out the current board clearly demonstrates that the utility is not
immune to direct political interference, a credit negative." The report also concludes that if the
Province follows through on its promise to reduce some customer rates by lZYo, and that
reduction reduces Hydro One's revenue and cash flow, it would be materially credit negative for
Hydro One. Reiterating previous statements by Moody'sl,the report states that Hydro One's
I See Rating Action: Moody's downgrades Hydro One Inc. to Baal from A,3; rating outlook stable (20 Jun 2018);
and Rating Action: Moody's Affirms Hydro One's senior unsecured A,3 ratings; outlook changed to negative (19 Jul
2017).
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completion of the acquisition of Avista is credit negative for both Hydro One and Hydro One
Inc. Finally, the report notes that Hydro One will be following an established process for
establishment of a new board.
The report comments that the change in the board of directors may make it more difficult to
complete the Avista transaction in the next few months. Avista and Hydro One agree that the
change may result in modest delays in obtaining regulatory approvals but continue to believe that
approvals will be forthcoming because the transaction is in the interests of Avista's ratepayers
and the public.
The publication of this Credit Outlook does not change Moody's credit rating of Hydro One Inc
Governance and Financial Rinq-Fencins Effectivelv Separate Avista From Hydro One
Hydro One, Avista, and all parties (collectively, the "Parties") filed a Settlement Stipulation on
April 13,2018. The Parties negotiated numerous commitments designed to provide governance
and financial ring-fencing between Avista and Hydro One. Certain of these merger
commitments were developed to ensure that Avista cannot be subjected to political interference
or influence by the Province.
First, Avista will have a nine-member board separate from Hydro One that will govern Avista's
management and operations. Three of the five Avista directors selected by Hydro One (not by
the Province) must be independent under NYSE rules. Further, those three directors must be
residents of the Pacific Northwest. Two of the four directors selected by Avista must be
independent under NYSE rules. See Stipulation Commitment No. 3.
Second, Avista's CEO must be selected by Avista's board -- not Hydro One or the Province. See
Stipulation Commitment No. 2.
Third, Olympus Equity LLC's three-member board must include one independent director. See
Stipulation Commitment No. 43.
Fourth, Avista's executive management will remain in place and must be selected by Avista's
board -- not Hydro One. See Stipulation Commitment No. 2.
Fifth, Avista's employees will be retained. See Stipulation Commitment Nos. 9, l0
Sixth, Hydro One is required to provide Avista with enough equity so that Avista can access debt
on reasonable terms. See Stipulation Commitment No. 34. Therefore, neither Hydro One, nor
the Province, can deprive Avista of its capital and assets.
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Seventh, Avista will continue to have its own credit ratings. Hydro One is required to provide
Avista with sufficient equity to ensure that Avista's credit ratings remain investment grade. See
Stipulation Commitment No. 36. Therefore, again, neither Hydro One, nor the Province, can
deprive Avista of its capital and assets.
Eighth, Avista will be prohibited from issuing dividends if certain financial metrics relating to
the equity floor, credit ratings and debt coverage are not met. Basically, this operates to keep
retained earnings at the Avista level where they will improve Avista's financial strength. See
Stipulation Commitment No. 38. This too prevents Hydro One from depriving Avista of its
capital and assets.
Ninth, several of the Stipulation commitments protect Avista from being drawn into bankruptcy
proceedings that are not in the best interest of Avista and its customers. Avista will issue a
single share of preferred stock referred to as the Golden Share to an independent third party. The
vote of this share will be required to place Avista into voluntary bankruptcy. See Stipulation
Commitment No. 42. Further, Avista's entry into voluntary bankruptcy would require the
consent of a two-thirds majority of all of its directors, including the affirmative vote of a
majority of the Independent Directors at Avista, which would have to include the affirmative
vote of at least two Avista-designated Independent Directors. See Stipulation Commitment No.
43. Hydro One and Avista must also provide a non-consolidation opinion to confirm the
effectiveness of the ring-fencing measures to prevent the substantive consolidation of the assets
and liabilities of Avista with those of the entities above it in the corporate chain of ownership.
See Stipulation Commitment No. 44. The corporate structure also includes Olympus Equity
LLC, a bankruptcy-remote special purpose entity that will have no debt. See Stipulation
Commitment No. 45. Therefore, neither Hydro One, nor the Province, can obtain Avista's
capital and assets through a bankruptcy proceeding unless that would be in the best interests of
Avista's customers.
Tenth, Avista's utility assets can be pledged only for the benefit of Avista, not Hydro One. See
Stipulation Commitment No. 46. Therefore, neither Hydro One, nor the Province, can strip
Avista of its capital and assets.
Additional Commitment based on Recent Events
In light of the recent events discussed earlier and consistent with the Hydro One Accountability
Act, 2018, Avista and Hydro One have agreed upon an additional commitment to provide further
protection to Avista's employees, such that Avista will be able to continue to recruit and retain
the most highly qualified employee talent base for our customers:
Avista Employee Compensation: Any decisions regarding Avista employee
compensation shall be made by the Avista Board consistent with the terms of the Merger
Agreement between Hydro One and Avista, and current market standards and prevailing
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practices of relevant U.S. electric and gas utility benchmarks. The determination of the
level of any compensation (including equity awards) approved by the Avista Board with
respect to any employee in accordance with the foregoing shall not be subject to change
by Hydro One or the Hydro One Board.
This additional commitment is new and has not been shared with the other parties to this
proceeding. Should any of the parties have concerns with it, we ask that those parties provide
any concerns in subsequent reply comments.
Hydro One and Avista also acknowledge that, given recent events in Ontario, additional time
may be necessary to understand the implications of those events to Avista. We also acknowledge
that additional, or modified commitments related to Avista governance may be necessary to
alleviate any lingering concems that the province of Ontario could affect Avista and its
operations. We remain open to addressing those concerns in a manner that satisfies your and our
needs.
Subsequent Reporting of Developments
Hydro One and Avista will file reports in this docket (until the docket is closed) whenever a
significant event occurs or statement is made by the Province's new leadership that provides
further new insight regarding the future of Hydro One's executive leadership and/or Board.
Hydro One will file reports regarding any additional legislation that is proposed or statements
made during the Province's legislative session, commenced on July ll, regarding Hydro One's
executive leadership and Board.
Hydro One, Avista, and the other parties in this docket have included governance and financial
ring-fencing in the Settlement Stipulation that will protect Avista and its customers. Even
though Hydro One's CEO and Board are in the process of being replaced, that does not change
anything with respect to Avista as established by the Parties in their Settlement Stipulation.
Conclusion
Hydro One and Avista, along with the rest of the parties, developed the Sefflement Stipulation to
ensure that Avista could not be negatively impacted in any way by any of the events described in
the previous sections. Hydro One is legally obligated to comply with the settlements it has
reached in Washington, Montana, Oregon, Idaho, and Alaska. As a result, all of the protections
described above that have been built into the Settlement Stipulation to ensure that Avista will
continue as a financially sound, stand-alone utility will bind Hydro One regardless of political
developments (e.g., Avista's independent board, financial ring-fencing, capital support) and
change in management. Furtherrnore, through the Settlement Stipulation in this proceeding and
the settlements in other jurisdictions, Hydro One and Avista have committed that none of the
commitments in the settlements can be amended without approval from Avista's state regulators.
See Stipulation CommitmentNo. l.
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Finally, the Settlement Stipulation in this docket confirms that the Commission will continue to
regulate Avista as it always has to ensrue that Avista's customers are proteeted and continue to
pay fair, just, and reasonable rates. See Stipulation Commitment Nos. 20-33.
We trust that this information will prove helpful as the Commission deliberates in this matter.
Si Y'
J. Christie
Vice President, External Affairs and Chief Customer Officer
& Chief Legal
Hydro Limited
Attachments:
Attachment A: July I l, 201 8 Agreement
Attachment B: Hydro One Accountability Act, 2018
Cc: all parties
7lP age
Hydro One lnc.
483 Boy Street
8th Floor Soulh Tower
Toronlo, Ontorio MsG 2P5
www.HydroOne.com
hydro}n"
Dovid F. Denison
Choir of the Boord
July 1 1,2018
Her Majesty The Queen in Right of Ontario
as represented by the tt/inistry of Energy, Northern Development and Mines
900 Bay Street
4th Floor, Hearst Block
Toronto, ON M7A 2E1
Attention: The Honourable Greq Rickford. Minister
Dear Sirs/Mesdames:
Re: Hydro One Limited Governance Arrangements and Related Matters
This letter agreement (the "Agreement") sets out the agreement between Hydro One Limited
("Hydro One") and the Province (as defined below) with respect to the process to facilitate the
orderly replacement of the entire Board of Directors of Hydro One, the retirement of Hydro
One's Chief Executive Officer, and related governance and compensation matters. This
Agreement is effective as of the date hereof and shall be a legal and binding agreement
enforceable against each of the parties hereto in accordance with the terms hereof.
Removal and Replacement of the Board of Directors
1. The Hydro One Board of Directors (the "Board"), led by the Chair of the Board and with the
cooperation of the Province, will facilitate the orderly resignation of all of the fourteen (14)
existing directors on the Board (the "Directors") and their replacement on a future effective
date to be mutually agreed upon by the Province and Hydro One as soon as reasonably
practicable and, in any event, by no laterthan August 15,2018, through an expedited
process as follows:
a. Promptly following your acceptance of this Agreement, and in any event within five
(5) Business Days hereof, the Chair of the Board shall coordinate the establishment
of an Ad Hoc Nominating Committee consistent with the process set out in the
Governance Agreement comprised of one representative of each of the five largest
beneficial owners of Voting Securities of Hydro One, excluding the Province, or if one
of such five beneficial owners of Voting Securities is not willing to provide a
representative to serve on the committee, then the four representatives from the four
of the five largest beneficial owners of Voting Securities shall form the committee, or
if two of such five beneficial owners of Voting Securities are not willing to provide a
representative to serve on the committee, then the three representatives from the
three of the five largest beneficial owners of Voting Securities shall form the
committee, or if three or more of such five beneficial owners of Voting Securities are
Attachment A - Letter Agreement Dated July 11, 2018 l of 8
not willing to provide representatives to serve on the committee, then one
representative of each of the three largest beneficial owners of Voting Securities who
is willing to provide a representative to serve on the committee.
b. Following the establishment of the Ad Hoc Nominating Committee, the Province and
the Ad Hoc Nominating Committee, acting reasonably, shall identify, nominate and
confirm a slate of ten (10) replacement Director nominees to be appointed to the
Board (the "Replacement Directors"). Following their appointment to the Board, the
Replacement Directors shall increase the size of the Board to eleven (11) members
upon the appointment of a Replacement CEO, which Replacement CEO shall be
appointed to the new Board pursuant to section 13 of this Agreement and consistent
with the Governance Agreement. ln accordance with the Governance Agreement,
the Province shall be entitled to nominate the number of nominees that is equal to
40% of the Replacement Directors to be elected (being four nominees) and the Ad
Hoc Nominating Committee shall be entitled to nominate the remaining 60% of the
Replacement Directors to be elected (being six nominees). The Province and the Ad
Hoc Nominating Committee will work expeditiously to identify, nominate, confirm and
appoint all of the Replacement Directors as soon as reasonably practicable and, in
any event, by August 15,2018. The Replacement Directors (and each of them, as
applicable) must meet the requirements set out in section 4.2 of the Governance
Agreement, as applicable.
c. Following the identification and nomination of all of the Replacement Directors and,
in any event, by August 15, 2018, the existing Chair of the Board shall call a meeting
of the Board at which the existing Board shall accept the resignations of each of the
existing Directors and fillthe vacancies created by such resignations with the
Replacement Directors in a sequential manner as contemplated by section 4.6.2(a)
of the Governance Agreement. For greater certainty, the requirements to provide a
Removal Notice or call and hold a Removal Meeting under the Governance
Agreement are waived in connection with the replacement of the existing Directors
with the Replacement Directors in the manner contemplated under this section 1.
d. Prior to the appointment of the Replacement Directors, the Province may designate
one or more of its nominees for Replacement Directors to act as a liaison with Hydro
One, the current Chair and the Ad Hoc Nominating Committee with respect to the
identification, nomination, confirmation and appointment process for the
Replacement Directors outlined in this Agreement.
e. Once all of the Replacement Directors have been appointed to fill all of the vacancies
created on the Board in accordance with section 1.c of this Agreement, the newly
appointed Board shall then appoint a new Chair of the Board in accordance with
section 3.2 of the Governance Agreement and in consultation with the Province.
2. Each of the Replacement Directors nominated and appointed to the Board pursuant to
section 1 of this Agreement shall serve on the Board until the earlier of the 2019 annual
meeting of shareholders of Hydro One or until his or resignation or his or her successor is
elected or appointed in accordance with the Governance Agreement and the OBCA.
3. Each of the existing Directors shall be entitled to receive all remuneration, benefits, awards
and other entitlements previously granted, awarded or earned on or prior to June 30, 2018,
including all payments relating to director deferred share units acquired in lieu of cash board
Attachment A - Letter Agreement Dated July 11,2018 2 of 8
fees on or prior to June 30, 2018 (plus dividend equivalents), without modification,
amendment or derogation, and shall not be required to forfeit, return or have clawed back
any previously granted, earned or awarded remuneration, benefits, awards or other
entitlements. For greater certainty, the existing Directors' rights to indemnity under
applicable law, the by-laws or other constating documents of any Hydro One Entity or any
agreement between an existing Director and any Hydro One Entity and to coverage under
and to contribution and indemnification pursuant to any directors' and officers' insurance
policies of any Hydro One Entity shall continue following their resignation and retirement in
accordance with their respective terms. Hydro One and the Province acknowledge and
agree that, with immediate effect as of the date of this Agreement, the Board has voluntarily
agreed to reduce the compensation of the existing Directors to the levels that existed as of
December 31,2017 pursuant to the then-existing director compensation policies, and the
Board shall pass a resolution fixing such rate of compensation for the Directors with effect
from and after the date hereof. lt is further acknowledged and agreed that each of the
existing Directors has voluntarily agreed to forego any further remuneration, beneflts,
awards or other compensation for his or her service as a Director following June 30, 2018
through to the effective date of resignation and retirement from the Board. For greater
certainty, nothing under this section 3 shall prevent the replacement Board of Hydro One
appointed under sections 1 and 2 of this Agreement from, following their appointment to the
Board, determining the remuneration of the directors of Hydro One going forward in
accordance with section 2.3(c) of the Governance Agreement.
4. The director deferred share units (plus dividend equivalents) referred to in section 3 above
may be cash-settled based on the June 29,2018 closing price of the Hydro One common
shares on the Toronto Stock Exchange (the "TSX"), provided that the closing price of such
common shares on another date as soon as practicable after June 29,2018 may be used to
the extent required or deemed advisable by Hydro One in its discretion. Director deferred
share units will continue to accrue dividends until their date of settlement pursuant to the
terms of the applicable plan.
5. The existing Directors shall not be required to meet or maintain any share ownership
requirements of Hydro One from and after their resignation and retirement from the Board
6. Each of the existing Directors, the Province, and Hydro One (on behalf of itself and its
affiliates) shall execute mutual releases, including non-disparagement provisions, in form
satisfactory to each of them, with effect upon each Director's resignation from the Board and
subject to the payment of amounts owed to them in accordance with this Agreement in their
capacity as Directors. For greater certainty,(i) the Province's non-disparagement
commitments shall apply to all officialgovernment publications, communications or
statements (written or oral and in any medium whatsoever) and (ii) such release shall not
release any rights of the Directors to the compensation, indemnification and insurance
contemplated under section 3 hereof.
Retirement of Hydro One Chief Executive Officer
7. Mayo Schmidt ("Mr. Schmidt"), the current President and Chief Executive Officer of Hydro
One, shall retire pursuant to his employment agreement with Hydro One dated August 20,
2015, as amended (the "Employment Agreement") and Hydro One's existing Long Term
lncentive Plan first adopted on August 31,2015, as amended to-date (the "Plan")) as an
employee and officer of Hydro One and each other applicable Hydro One Entity and resign
as a director of Hydro One and each other applicable Hydro One Entity, effective as of 5:00
Attachment A - Letter Agreement Dated July 11,2018 3 of 8
p.m. (Toronto time) on July 11,2018 (the "Retirement Date"). Mr. Schmidt's Retirement as
President and Chief Executive Officer of Hydro One shall be approved by the Board in
accordance with section 11 of the Employment Agreement and subseclion 12.2(c) of the
Plan.
8. ln connection with such Retirement, Mr. Schmidt shall be entitled to receive all
remuneration, benefits, awards and other entitlements previously granted, awarded or
earned through to the Retirement Date as more particularly set out below in accordance with
the terms of his Employment Agreement, the Plan and all other applicable compensation
plans and policies of Hydro One in effect as of the date hereof. The Province acknowledges
and agrees that a statement of all such remuneration, benefits, awards and other
entitlements payable to Mr. Schmidt in connection with his Retirement on or after the
Retirement Date based on achievement of target performance and a specified price per unit
for the Awards, together with the presentation thereof that would be expected to appear in
Hydro One's 2019 management information circular, has been separately provided to you
(the "Retirement Compensation"). Hydro One represents and warrants that the
information contained in the Retirement Compensation is accurate and complete in all
material respects and reflects all compensation payable to Mr. Schmidt in connection with
his Retirement. The parties further acknowledge and agree with respect to the Retirement
Compensation that:
a. Mr. Schmidt shall receive the following amounts from Hydro One, as set out in the
Retirement Compensation:
i. base salary prorated to the Retirement Date;
ii. the target short-term incentive plan ("ST!P") bonus for the 2018 fiscal year
prorated to the Retirement Date;
iii. the release of his benefit allowance prorated to the Retirement Date;
iv. the release of his accrued pension benefits, deferred share units ("DSUs")
(plus dividend equivalents), and employee share ownership plan ("ESOP")
common shares of Hydro One as of the Retirement Date, in accordance with
the existing terms of the applicable STIP, DSU and ESOP policies and plans
of Hydro One; and
v. a onetime lump sum cash payment of $400,000 in lieu of all post-retirement
benefits and allowances as provided in his contract or otherwise.
b. The Awards (as such term is defined in the Plan) previously granted to Mr. Schmidt
pursuant to the Plan, consisting of Restricted Share Units and Performance Share
Units (as such terms are defined under the Plan), as well as the DSUs, may be cash-
settled at target levels at a specified price per unit. The DSUs will continue to accrue
dividend equivalents until their date of settlement pursuant to the terms of the Plan;
the RSUs and PSUs shall cease to accrue dividend equivalents after the Retirement
Date. All Options will be cancelled on the Retirement Date for no consideration.
Attachment A - Letter Agreement Dated July 11,2018 4 of 8
c. Payments made to Mr. Schmidt shall be subject to applicable withholding tax, shall
be paid without interest and, in the event of Mr. Schmidt's death, shall be made to his
successors and assigns including the estate, heirs, executors, trustees,
administrators and/or personal legal representatives of Mr. Schmidt, as applicable.
d. ln no case shall the amounts paid pursuant to this section 8 exceed the aggregate
amount of the remuneration, benefits, awards and other entitlements set out in the
Retirement Compensation. For greater certainty, other than the payment referred to
in section 8.a.v above, all such remuneration, benefits, awards and other
entitlements represent recognized obligations of Hydro One as at the Retirement
Date.
e. For greater certainty, Mr. Schmidt's existing rights to indemnity under applicable law,
the by-laws or other constating documents of any Hydro One Entity or any
agreement between Mr. Schmidt and any Hydro One Entity and to coverage under
and to contribution and indemnification pursuant to any directors' and officers'
insurance policies of any Hydro One Entity shall continue following his Retirement
and resignation, as applicable, as an employee, officer and director of Hydro One
and each other applicable Hydro One Entity, in accordance with their respective
terms.
9. Mr. Schmidt shall not be required to meet or maintain any share ownership requirements of
Hydro One from and after the Retirement Date.
10. The Province shall take no action or failto take any action whatsoever, the result of which
would or could reasonably be expected to, directly or indirectly, result in any modification,
amendment, derogation from or supplement to any of Mr. Schmidt's existing arrangements
relating to his Retirement Compensation as specified under this Agreement.
1 1. Mr. Schmidt shall not be entitled to receive the Separation Package (as such term is defined
in the Employment Agreement) or any other severance payment, retiring allowance, change
of control payment or any other compensation in connection with his Retirement on the
Retirement Date except as set out in the Retirement Compensation, and any amounts paid
in excess of the aggregate Retirement Compensation shall be repayable by Mr. Schmidt (or
his successors and assigns, as applicable) to Hydro One.
12. Mr. Schmidt, the Province, and Hydro One (on behalf of itself and its affiliates) shall execute
a mutual release, including non-disparagement provisions, in form satisfactory to each of
them with effect upon Mr. Schmidt's Retirement and resignation as an employee, officer and
director of Hydro One and each other applicable Hydro One Entity. The Province's non-
disparagement commitments shall apply to all official government publications,
communications or statements (written or oral and in any medium whatsoever).
13. The Replacement Directors appointed to the Board in accordance with sections 1 and 2 of
this Agreement shall, following their appointment, identify, select and appoint a replacement
President and Chief Executive Officer of Hydro One (the "Replacement CEO") in
accordance with section 3.3 of the Governance Agreement, which CEO shall also serve as
one of the Replacement Directors. The existing Board shall appoint an acting President and
Chief Executive Officer, in consultation with the Province, for the interim period from Mr.
Schmidt's Retirement Date until the appointment and election of the Replacement CEO by
the Replacement Directors.
Attachment A - Letter Agreement Dated July 11,2018 5 of 8
Hydro One Executive Management Team
14. The Province acknowledges and agrees that, for greater certainty, the terms and conditions
of employment of Hydro One's executive leadership team other than Mr. Schmidt (the
"Executives") under their respective employment agreements, the Plan, all related Award
Agreements under the Plan, and the other compensation plans and policies of Hydro One
remain in full force and effect from and after the date hereof. The Province further agrees
that the Executives shall remain entitled to receive, and the Province shall take no action
that would require or result in the forfeiture, return or claw back (other than in accordance
with Hydro One's policies) of, any remuneration, benefits, awards or other entitlements
(whether vested or unvested) granted, earned or awarded prior to the date of cessation of
employment of such Executives with Hydro One. For greater certainty, the foregoing does
not address any severance entitlements of such Executives, under contract or otherwise.
15. The parties acknowledge and agree that the replacement Board of Hydro One appointed
under sections 1 and 2 of this Agreement shall be responsible for determining the
compensation of executives of Hydro One in accordance with the Governance Agreement
and the other compensation plans and policies of Hydro One in effect from time to time, and
nothing in this Agreement shall limit the actions that the Replacement Directors may take in
carrying out their duties and responsibilities in this regard, provided that it is the intention of
the parties that the Province, as the single largest shareholder of Hydro One, shall be
consulted in a manner to be discussed and agreed upon between the Province and the
replacement Board appointed under sections I and 2 of this Agreement on future matters
relating to Hydro One's executive compensation arrangements.
General Provisions
17. Defined Terms: Unless otherurise defined, capitalized terms used in this Agreement shall
have the respective meanings ascribed to such terms in the Governance Agreement dated
as of November 5, 2015 between Hydro One and Her Majesty The Queen in Right of
Ontario (the "Province", "you" or "your"), as represented by the Minister of Energy (the
"Governance Agreement").
18. Non-Disparaqement: The Province shall not, directly or indirectly, on its own behalf or on
behalf of any other person, take, engage in or authorize any action or make any statement
(written or oral and in any medium whatsoever) in any official government publication,
communication or statement that (i) defames, criticizes, ridicules, disparages or is
derogatory or otherwise would reasonably be expected to be deleterious or damaging to any
Attachment A - Letter Agreement Dated July 11,2018 6 of 8
16. Reaffirmation: By entering into this Agreement, the Province ratifies and reatfirms its
obligations under the Governance Agreement and agrees that, except as specifically set out
in this Agreement with respect to the subject matter hereof, (i) the execution, delivery and
effectiveness of this Agreement or any other documents delivered in connection herewith
shall not amend, modify or operate as a waiver or forbearance of any right, power,
obligation, remedy or provision under the Governance Agreement, and (ii) such agreement
shall continue in full force and effect. Until each existing Director resigns as contemplated in
this Agreement, such existing Director shall remain a director of Hydro One (unless such
Director otherwise resigns, dies or is replaced) and shall be entitled to take such actions as
a director as it determines to be appropriate, consistent with his or her fiduciary duties and
the principles set out in section 4.7.4 of the Governance Agreement, provided such actions
are not inconsistent with the terms of this Agreement.
of the directors, officers, employees, agents and/or representatives of Hydro One or any
other Hydro One Entity or encourages the making of such statements or the taking of such
actions by someone else, or (ii) is inconsistent with the provisions of this Agreement. Hydro
One agrees not to, directly or indirectly, on its or any other Hydro One Entity's own behalf or
on behalf of any other person, take, engage in or authorize any action or make any
statement (written or oral and in any medium whatsoever) that defames, criticizes, ridicules,
disparages or is derogatory or otherwise would reasonably be expected to be deleterious or
damaging to the Province in connection with the actions or matters contemplated by this
Agreement, or encourages the making of such statements or the taking of such actions by
someone else. Nothing in this section 18 shall prevent or restrict (i) any statement made in
the Legislative Assembly of Ontario or communications in any form by elected officials who
are not members of the government, or (ii) any party from making statements that are
truthful if and to the extent required by applicable law or legal process.
19. Public Announcement: Each of Hydro One and the Province shall publicly announce the
entering into of this Agreement promptly following the execution hereof, provided that the
parties shall consult with each other with respect to the timing and content of any press
releases, announcements or public statements relating to this Agreement or the subject
matter hereof, having regard to the Province's governmental responsibilities and policy
objectives as contemplated in sections 2.2.1(d) and 2.2.2 of the Governance Agreement, on
the one hand, and the obligations of Hydro One as a reporting issuer subject to applicable
securities laws and the rules of the TSX, on the other hand. For clarity, nothing in this
Agreement shall restrict Hydro One from repeating in its public disclosure documents filed
with securities regulatory authorities any statements or disclosure (in substance) previously
made in accordance with this section 19 and this section 19 is subject to each party's
overriding obligation to make disclosure or filings required from time to time under applicable
laws or stock exchange rules, as applicable.
20. Governinq Law: This Agreement shall be interpreted and enforced in accordance with, and
the respective rights and obligations of the parties shall be governed by, the laws of the
Province of Ontario and the federal laws of Canada applicable therein.
21. Enurement: Assiqnment: This Agreement shall enure to the benefit of and be binding upon
the parties and their respective successors and permitted assigns. This Agreement may not
be assigned by either party except with the prior written consent of the other party.
22. Entire Aqreement: Amendments: This Agreement, together with the Governance
Agreement, constitute the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements, understandings, negotiations and
discussions, whether written or oral. There are no conditions, covenants, agreements,
representations, warranties or other provisions, express or implied, collateral, statutory or
otherwise, relating to the subject matter hereof except as provided herein. This Agreement
may be amended only by an instrument in writing executed by each of the parties hereto.
23. Counterparts: This Agreement may be executed and delivered in any number of
counterparts, with the same effect as if all parties had signed and delivered the same
document, and all counterparts shall be construed together to be an original and will
constitute one and the same agreement.
Attachment A - Letter Agreement Dated July 11,2018 7 of 8
The foregoing is acknowledged, accepted and agreed to this 11th day of July, 2018.
Yours very truly,
HYDRO ONE LIMITED
By:"David Denison"
Name: David F. Denison
Title: Chair of the Board of Directors
HER MAJESTY THE QUEEN IN RIGHT
OF ONTARIO AS REPRESENTED BY
THE MINISTER OF ENERGY,
NORTHERN DEVELOPMENT AND
MINES, AND MINISTER OF
INDIGENOUS AFFA!RS
By "Greg Rickford"
The Honourable Greg Rickford
Attachment A - Letter Agreement Dated July 11,2018 8 of 8
2
SCHEDULE I
HYDRO ONE ACCOUNTABILITY ACT,20I8
INrERpREr,r\ToN
Definitions
I ln this Act,
"Chief Executive Officer" means the person holding the position of President and Chief Executive Offrcer of Hydro One
Limited; ("chef de la direction")
"compensation" means anything paid or provided, directly or indirectly, to or for the benefit of a person who performs duties
and functions that entitle the person to be paid, and includes salary, benetits, perquisites and all forms of non-discretionary
and d iscretionary payments ; ("16mun6ration")
"executive" means any person who holds the office of executive vice-president, vice-president, chief administrative officer
chief operating officei, chief financial officer, chief information offiber, chief legal'offi..., chief human resources officei
or chiefcorporate developrnent officer, or holds any other executive position or office, regardless ofthe title ofthe position
or ofTice; ("cadre sup6rieur")
"Minister" means the Minister of Energy, Northern Development and Mines or such other member of the Executive Council
as may be assigned the administration of this Act under the Executive Council Act: ("ministre")
"subsidiary" has the same rneaning as in the Business Corporations Act,bul does not include a subsidiary incorporated in a
j urisdiction outside Canada. ("fi liale")
ExECt;lvE AND DTRECToR CoMpENSATtoN
Compensation framework
2 (l) The board of directors of Hydro One Limited shall, within six months of the day this subsection comes into force,
establish a new compensation framework for the board, the Chief Executive Officer and other executives in consultation with
the Covernment of Ontario and the other five largest shareholders of Hydro One Limited.
Severance entitlements
(2) For greater certainty, the compensation frarnework must include policies governing the severance and other entitlements
of the Chief Executive Officer and other executives in connection with any termination of their employnent with Hydro One
Lirnited.
Management Boa rd approval
(3) The compensation lramework established by Hydro One Limited under subsection (l), and any amendments to the
framework, are not effective until they are approved by the Management Board of Cabinet.
Directives
3 ( I ) The Management Board of Cabinet may issue directives,
(a) goveming the compensation of the directors and the Chief Executive Officer and other executives of Hydro One
[,imited, irrcluding, without being limited to, directives restricting the total annual compensation payable to such
persons; and
(b) governing the developrnent, form, manner and timing of the compensation framework provided for in subsection 2 (l)
and any amendments to that framework.
Compliance
(2) Hydro One Limited and its board of directors shall comply with every directive made under subsection (l).
Publication
(3) Every directive made under subsection ( I ),
(a) shall be made available to the public on request; and
(b) shall be publicly posted on at least one Government of Ontario website.
Status
(4) Part III (Regulations) ofthe Legislation 4ct, 2006 does not apply with respect to directives made under subsection (1).
Same, subsidiaries
4 Sections 2 and 3 apply, with necessary rnodifications, to each of Hydro One Limited's subsidiaries.
Attachment B - Hydro One Accountability Act, 2018 Page 1 of 3
Expiry
5 Sections 2, 3 and 4 cease to have effect on January I , 2023.
TERMINAI.ION OIT RIGH,TS AND CRowN IMMUNITY
No cause of action
6 (l) No cause of action arises against the Crown or any current or former member of the Executive Council or any current
or former employee or agent of or adviser to the Crown, or against Hydro One Limited or any of its subsidiaries, or any of
their current or former officers, directors, employees or agents, as a direct or indirect result of,
(a) the enactnrent, operation, administration or repeal ofany provision ofthis Act;
(b) anything done or not done under this Act;
(c) anything related in any way to the involvement of the Government of Ontario in compensation matters, or other
aspects of the corporate governance, of Hydro One Limited or any of its subsidiaries;
(d) any alleged misrepresentation within the meaning of applicable securities laws in any prospectus, document or other
public staternent related in any way to the involvement of the Government of Ontario in compensation matters at
Hydro One Limited or any of its subsidiaries; or
(e) any adverse market consequences or diminishment in the value of any securities in Hydro One Limited, or any of its
subsidiaries, or any other investment, resulting from the enactment of this Act, anything done or not done in order to
comply with this Act or the involvement of the Govemment of Ontario in the corporate governance of Hydro One
Limited or any of its subsidiaries.
Proceedings barred
(2) No proceeding, including but not limited to any proceeding for a remedy in contract, restitution, tort, misfeasance, bad
faith, trust or fiduciary obligation, and any remedy under applicable securities laws or any other statute, that is directly or
indirectly based on or related to anything referred to in subsection (l) may be brought or maintained against the Crown or
any aurrent or former member of the Executive Council or any current or former employee or agent of or adviser to the
Crown. or against Hydro One Limited or any of its subsidiaries, or any of their current or former officers, directors,
employees or agents.
Application
(3) Subsection (2) applies to any action or other proceeding claiming any remedy or relief, including specific performance,
injunction, declaratory relief, any form ofcompensation or damages, or any other remedy or relief, and includes a proceeding
to enforce a judgment or order made by a court outside of Canada.
Retrospective effect
(4) Subsections (2) and (3) apply regardless of whether the cause of action on which the proceeding is purportedly based
arose before, on or after the day this subsection contes into force.
Proceedings set aside
(5) Any proceeding referred to in subsection (2) or (3) conrmenced before the day this subsection comes into force shall be
deemed to have been dismissed, without costs, on the day this subsection comes into force.
GsNnRnl
Salary disclosure
7 (l) Despite any other Act or agreement, not later than March 3l of each year, Hydro One Limited shall publish on its
public website a record of the total annual compensation paid in the previous year by Hydro One Limited to or in respect of
executives provided for in the regulations made under subsection (3).
Publication of proposed compensation changes
(2) The board of directors of Hydro One Limited shall publish on its website any proposed changes to its compensation
frameworks for the board, the Chief Executive Officer or other executives at least 30 days prior to the date on which it seeks
approval from the Management Board of Cabinet under subsection 2 (3).
Regulations
(3) The Lieutenant Governor in Council may make regulations governing the application of this section, including, without
being lirnited to,
(a) providing for executives or categories ofexecutives whose compensation must be published under subsection (l);
(b) requiring and specifying additional information to be published:
(c) providing for the contents ofthe notice required under subsection (2);
Attachment B - Hydro One Accountability Act, 2018 Page 2 of 3
4
(d) requiring and governing the application of this section, with necessary modification, to executives of subsidiaries of
Hydro One Lirnited.
Information and reports
8(l) TheMinistermayrequestHydroOneLimitedandsuchotherpersonsandentitiesastheMinisterconsidersappropriate
to give the Minister information the Minister considers necessary for the purpose of administering the provisions of this Act,
including infornration that,
(a) discloses the financial or other details of any ernployment agreement or other contract with any director, Chief
Executive Officer or other executive in respect of their employment by Hydro One Limited or any of its subsidiaries;
or
(b) discloses anything related to the compensation paid, payable or available to a director, Chief Executive Officer or
other executive of Hydro One Limited or any of its subsidiaries.
Compliance
(2) A person or entity who receives a request from the Minister for information or a report shall comply with the request.
Authorization
(3) The Minister may directly or indirectly collect personal information that the Minister is authorized to collect under this
Act, and use it for the purpose of administering the provisions of this Act.
No notice to individual required
(4) Subsection 39 (2) of the l;reedon tf Information and Protection of Privacy Act does not apply with respect to any
personal infbrmation collected under this section.
Regulations
9 (l) The Lieutenant Governor in Council may make any regulations that the Lieutenant Governor in Council considers
necessary or desirable for carrying out the purposes, provisions and intent of this Act.
Same
(2) Without limiting the generality of subsection ( I ), the Lieutenant Govemor in Council may make regulations defining or
clarifuing the meaning of any word or expression used in this Act but no1 otherwise defined.
Ontario Energy Bourd Act, 1998
l0 Section 78 of the Ontqrio Energy Boord Act, 1998 is amended by adding the following subsection:
Same, Hydro One executive compensation
(5.0.2) In approving or fixing just and reasonable rates for Hydro One Limited or any of its subsidiaries, the Board shall not
include any amount in respect of compensation paid to the Chief Executive Officer and executives, within the meaning of the
H),dro One Accountability AcL 201 8, of Hydro One Limited.
REPEAL, Co*lmtNCuMENT z\rr*D SrtonT Tlrle
Repeal
ll (l) Subject to subsection (2), this Act is repealed on a day to tre named by proclamation of the Lieutenant
Governor.
(2) A proclamation may provide for the repeal of different provisions of this Act on different dates.
Commencement
12 (l) Subject to subsection (2), the Act set out in this Schedule comes into force on the day the Urgent Priorities Act,
2018 receives Royal Assent.
(2) Sections I to l0 come into force on a day to be named by proclamation of the Lieutenant Governor.
Short title
l3 The short title of the Act set out in this Schedule is the Hydro One Accountability Act, 2018.
Attachment B - Hydro One Accountability Act, 2018 Page 3 of 3
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that I have this 18th day of July, 2018, served the foregoing letter
regarding an Update on Recent Events in the Merger Case Nos. AVU-E-17-091AVU-G-
17-05, upon the following parties, by sending a copy via electronic mail:
Diane Hanian, Secretary
ldaho Public Utilities Commission
47 2 W . Washington Street
Boise, lD 83720-5983
diane. hanian@puc. idaho.qov
Brandon Karpen
Deputy Attorneys General
ldaho Public Utilities Commission
472W. Washington
Boise, lD 83720-0A74
brandon. karpen@puc. idaho. gov
Danielle Franco-Malone
Schwerin Campbell Barnard
lglitzin & Lavitt LLP
18 W. Mercer St., Suite 400
Seattle, WA 98119
[e-mail]
Larry Crowley
The Energy Strategies lnstitute, lnc
5549 S. Cliffsedge Ave
Boise, lD 83716
[e-mail]
Dr. Don Reading
6070 Hill Road
Boise, lD 83703
dreading@mindsprinq. com
Norman M. Semanko
Parsons Behle & Latimer
800 West Main Street, Suite 1300
Boise, lD 83702
[e-mail]
[e-mail]
Brad M. Purdy
Attorney at Law
2019 N 17th Street
Boise, lD 83702
[e-mail]
Peter J. Richardson
Richardson Adams PLLC
515 N. 27th Street
Boise, lD 83702
peter@richardson adams. com
Ronald L. Williams
Williams Bradbury, P.C.
P. O. Box 388
802 W. Bannock St., Suite 900
Boise, lD 83702
ron@williamsbrad burv. eom
Ben Otto
ldaho Conservation League
710 N. 6th St.
Boise, lD 83702
botto@ id a h oconServ-ati o n. o_tq
Dean Miller
3620 E Warm Springs Ave
Boise, lD 83716
Deanj miller@cableone. net
Paul Kimball
Sr. Regulatory Analysist