HYDRO ONE PENSION PLAN

2012 Report to MembersINVESTMENT RESULTS AND DISCUSSION

Table of contents

Introduction

Investment approach

2012 in review

Our pension fund: How it all works

Major investments

Accountable to members

1

2

3

5

6

8

INTRODUCTIONDESPITE CONTINUED UNCERTAINTY IN THE

GLOBAL ECONOMY, HYDRO ONE’S PENSION

FUND (THE “FUND”) DELIVERED VERY STRONG

RESULTS IN 2012, with an investment return of

9.2 per cent compared to 2.2 per cent in 2011.

Total Fund assets increased to $4.99 billion from

$4.68 billion the year before.

Encouraging as these results appear, a decrease in

already historically low interest rates continues to

be a challenge. In this year’s Report to Members,

Senior Vice President and Chief Investment and

Pension Officer, Robert Cultraro, and Chief

Administration Officer and Chief Financial Officer,

Sandy Struthers, explain why low interest rates are

an ongoing concern for investors around the world

and why the Company will continue to invest

prudently, staying focused on the long-term.

Investment approach:

Hydro One Inc.’s (the “Company”)

primary investment objective is to

invest the Fund assets in a way

that investment returns, along

with the anticipated contributions

from the Company and active

members, will be sufficient to

make benefit payments as they

fall due. To accomplish this

objective, investments are made

at an appropriate level of risk,

with consideration to the need to

secure benefits and the

Company’s ability to absorb

increases in future cash

contributions.

1HYDRO ONE PENSION PLAN – 2012 REPORT TO MEMBERS

2 HYDRO ONE PENSION PLAN – 2012 REPORT TO MEMBERS

2012 IN REVIEWHydro One’s Fund performed very well last year, with an investment return of 9.2 per cent. Whilesatisfied with these results, we remain cautious about interest rates, which could stay at low levelsfor some time, and about economic uncertainty in some of the major international economies,which could continue.

In this year’s update, Senior Vice President and Chief Investment and Pension Officer, RobertCultraro, and Chief Administration Officer and Chief Financial Officer, Sandy Struthers, explainthe relationship between low interest rates, fund performance and contributions, and also commenton some of the other challenges they see ahead for public sector pension plans in Ontario.

How did the Fund perform last year?

Robert Cultraro (RC): The Fund performed very well last year. Fund assets increased by $310million (after pensioner payments of $266 million), compared to $102.4 million in 2011 (after pensionerpayments of $256 million). Total Fund assets were $4.99 billion, compared to $4.68 billion in 2011.

Did low interest rates affect the performance of our Fund and contributions?

RC: Absolutely they did. The low interest rate environment may not have affected our investment return which, as I said earlier, was very good. What did happen last year was that our unfundedpension liabilities increased by about 20 per cent. This shortfall is directly related to the low interest-rateenvironment that we are currently experiencing. Over the last 80 years, interest rates have not been solow, for such a prolonged period.

Can you explain why pension liabilities would increase when interest rates decrease?

RC: Let’s say you don’t have a pension plan at work and you need to save for your retirement. Youdecide you want to retire in 30 years at the age of 65. To do that you need approximately $720,000(or $60,000 per year) to retire. To reach this goal, you need to put aside about $900 every month, atan annual interest rate of 5 per cent. However, if interest rates are lower, say at 4 per cent annually, you

Robert CultraroSENIOR VICE PRESIDENT AND

CHIEF INVESTMENT AND PENSION OFFICER

Sandy StruthersCHIEF ADMINISTRATION OFFICERAND CHIEF FINANCIAL OFFICER

would then need to save over $1,000 per month in order to achieve your retirement goal. A decrease of 1 per cent in interest rates results in about an 11 per cent increase in the amount you need to save. In otherwords, you’d need to save more each month in order to bridge the gap between your expected savingsand your actual savings.

In the world of pension funds, the gap between what the Company is committed to paying out for pensionbenefits down the road and what accumulates in the Fund through investments is called an unfundedliability. Low interest rates were directly responsible for the increase in the Company’s unfunded pensionliabilities last year. Furthermore, in the example provided, we have no control over interest rates used tovalue pension liabilities.

How are we responding to current market conditions?

RC: We continue to take a balanced and long-term approach to managing the assets of the Fund. We do this primarily by diversifying our investments, which is a way to manage risk under various marketconditions. The Asset Allocation chart in this Report shows how the Fund is currently diversified.

With approximately $5 billion in assets, is our Fund now on a sustainable footing?

Sandy Struthers (SS): We still have a substantial unfunded benefit obligation as a result of lowinterest rates, and so there continues to be cause for concern. To fulfill its commitment to overseeingthe plan, the Company increased its contributions to $163 million, from $152 million last year and$145 million the year before. Company contributions accounted for roughly 85 per cent of totalcontributions to the Fund in 2012, much the same as in the previous year.

Can you provide an update on what the Ontario government is planning for electricitysector pension plans?

SS: The government is very concerned about the sustainability of broader public sector pension plans,including the electricity sector. As a result they’re looking into the option of equal cost sharing. Recently, thegovernment negotiated agreements with four public sector unions which included measures to contain theirrising pension costs.

The government has made it clear that the current structure of funding and the effectiveness of planadministration need to be revisited and changes are required. We think we have been successful indemonstrating to them that our plan is run cost effectively, with strong returns and a sound investmentapproach. The government continues to believe it is necessary to make changes, but has indicated there

“”

3HYDRO ONE PENSION PLAN – 2012 REPORT TO MEMBERS

COMPANY CONTRIBUTIONS ACCOUNTED FOR ROUGHLY

85 PER CENT OF TOTALCONTRIBUTIONS TO THE FUND IN

2012, MUCH THE SAME AS IN THE PREVIOUS YEAR.

4 HYDRO ONE PENSION PLAN – 2012 REPORT

is some flexibility when public sector pension plans are able to demonstrate they have taken measures tocontain costs or shown progress in terms of cost sharing.

The Hydro One Pension Plan provides excellent benefits for its members – among the best in Canada. But low interest rates have increased the level of contributions required, as well as the cost required to pay for those benefits. Continued low interest rates will likely require us to make a significant increase in contributions for 2015 and beyond.

As Robert noted, the majority of the Plan’s funding comes from the employer. Hydro One recovers these cash funding costs through the electricity rates we charge our customers. When we go to apply forelectricity rates for 2015 and beyond, the Ontario Energy Board and the parties who oppose increasingelectricity rates will likely focus on our plan benefits and the increased pension costs as key drivers of higher electricity costs. To be successful in securing funding for our pension plan we need to be able todemonstrate that we’ve made progress in containing rising costs and moving closer to a shared contribution model.

What are the Company’s plans for managing the Fund going forward?

RC: We will continue to be responsible custodians of the Fund and its assets.

As mentioned, it takes a lot more money to fund the plan when interest rates are low. Until rates increase,this will continue to be the case. Going forward, we remain committed to our investment philosophy, andthat means standing by our decision to invest prudently in a range of asset classes. We will not shift thebalance in favour of short-term solutions because this would not be prudent over the long-term. Remember,our goal is two-fold: preserve capital and deliver on our commitments to our members.

PLAN ASSETS AND LIABILITIES(as at December 31, 2012)

Net assets$5.0 billion

Liabilities$5.6 billion

$0.6 billionfunding shortfall

2012 HIGHLIGHTS

2012 2011

9.19% Investment return 2.19%

$4.99 billion Total fund assets $4.68 billion

$310 million Increase in plan assets $102.4 million

$163 million Total company contributions $152 million

$26.9 million Total employee contributions $26.5 million

“WE CONTINUE TO TAKE A BALANCED AND LONG-TERM

HYDRO ONE PENSION PLAN – 2012 REPORT TO MEMBERS

WE HAVE A DEFINED BENEFIT PLAN FOR THE VAST MAJORITY OF OUR

EMPLOYEES. THE PLAN PROVIDES PENSION BENEFITS FOR MEMBERS

WHEN THEY RETIRE. THE AVERAGE RETIREMENT AGE IN 2012 WAS 58.6

YEARS. THESE NEW PENSIONERS WILL RECEIVE, ON AVERAGE, 29 YEARS’

WORTH OF PENSION BENEFITS, INCLUDING SPOUSAL BENEFITS.

OUR PENSION FUND: HOW IT ALL WORKS

Members make set contributions to the Fund during their working years. The Company also makescontributions in order to fully fund the Plan. Currently, members’ contributions account for approximately15 per cent of total contributions and the Company contributes the remaining 85 per cent.

As of December 31, 2012, there were 5,487 active members and 7,532 pensioners and disabled anddeferred members enrolled in the plan. Active members contributed $26.9 million to the Fund. TheCompany contributed a total of $163 million.

It starts with contributions

Step 1:

5

” APPROACH TO MANAGING THE ASSETS OF THE FUND.

PENSION CASH FLOW($ millions)

02 03 04 05 06 07 08 09 100

50

100

150

200

250

300

11 2012

Employees’ contribution

Benefits paid

Employer’s contribution

This chart shows that despite the $310million increase in Fund assets in 2012,the gap between contributions andbenefits paid (‘unfunded pensionliability’) increased. It also tracksmembers’ and the Company’s,contributions into the Fund during the past 10 years.

MAJOR INVESTMENTS

6 HYDRO ONE PENSION PLAN – 2012 REPORT TO MEMBERS

Plan administrators take total annual contributions and invest them according to the Company’s investmentpolicy, which allows for 60 per cent of total assets to be invested in equities, 35 per cent in fixed income and5 per cent in alternative types of investments.

For more information about specific companies and investment instruments held in the Fund last year, pleaserefer to the chart on page 6 (‘Major investments’).

ASSET CLASS RETURNS %

Canadian equities 9.13

U.S. equities 13.33

International equities 14.03

Global equities* n/a

Fixed income 4.26

Total fund return 9.19

* Not held for full year

ASSET MIX(as at December 31, 2012)

Canadian Equities 17%

U.S. Equities 13%

Private Equity 2%

International Equities 13%

Global Equities15%

Fixed Income35%

Alternatives5%

This chart shows how each of the asset classesof the Fund performed in 2012.

Plan administrators take total annual contributions and invest them according to the Company’s investmentpolicy, which allows for 60 per cent of total assets to be invested in equities, 35 per cent in fixed income and5 per cent in alternative types of investments.

For more information about specific companies and investment instruments held in the Fund last year, pleaserefer to the chart on page 6 (‘Major investments’).

Investing contributions to build assets

Step 2:

Bonds and real-return instruments(as at December 31, 2012) ($ millions)

Canadian and US Corporate bonds 507.6Government of Canada bonds 548.0Province of Ontario debentures and provincial bonds 576.4Cash equivalent and bank deposits 77.4Mortgages 15.2Canadian Treasury Bills 39.2

Corporate shares/units(as at December 31, 2012)

Security Name Shares Fair Value (000’s)

Toronto-Dominion Bank 708,700 59,353.63Bank of Nova Scotia 1,013,700 58,819.71Royal Bank of Canada 901,400 53,975.83Canadian Imperial Bank of Commerce 524,400 42,441.80Canadian National Railway Co. 416,700 37,640.51Roche Holding 164,001 32,825.07Suncor Energy Inc. 994,608 32,533.63Canadian Natural Resources Ltd. 1,071,700 30,801.58Potash Corp of Saskatchewan 724,300 29,319.66Rogers Communications Inc. 640,400 29,170.58Novartis 387,448 24,212.79Nestle SA 360,118 23,347.07Magna International Inc. 445,400 22,127.47Manulife Financial Corporation 1,597,370 21,580.47Cenovus Energy Inc. 647,400 21,551.95Vodafone Group 8,158,736 20,827.22Talisman Energy Inc. 1,750,260 19,690.43Oracle Corporation 589,170 19,546.73China Mobile Ltd. 1,621,500 18,799.37HSBC Holdings 1,791,674 18,759.08Telus Corporation 280,900 18,464.83EOG Resources Inc. 151,240 18,189.73Tesco 3,272,999 17,799.21Taiwan Semiconductor Manufacturing 955,000 16,317.33British American Tobacco 322,592 16,295.32General Electric Co. 759,730 16,019.89Shin-Etsu Chemicals Co. 258,400 15,562.61Schlumberger Ltd. 221,310 15,330.59Pepsico Inc. 219,180 15,046.55Barrick Gold Corporation 430,900 15,003.94Agrium Inc. 149,536 14,899.47Zurich Insurance Group 55,728 14,754.87Eni Eur 596,013 14,349.30Johnson & Johnson 202,500 14,134.21Standard Chartered 550,786 14,027.01Praxair Inc 124,370 13,553.76Philip Morris International 160,830 13,530.13Teck Resources Ltd. 367,500 13,445.96Total SA 259,818 13,305.18Microsoft Corporation 498,010 13,254.57Gildan Activewear Inc. 363,300 13,231.62Canadian Tire Corp Ltd. 189,800 13,168.32Glaxosmithkline 597,669 13,086.64Apple Inc. 24,399 12,949.48Toyota Motor Corporation 278,400 12,839.85CNOOC Ltd. 5,953,000 12,832.37Mitsubishi Corporation 672,029 12,745.88SAP 158,409 12,620.39Deutsche Post 562,110 12,249.13Transcanada Corporation 255,000 12,099.53

7HYDRO ONE PENSION PLAN – 2012 REPORT TO MEMBERS

The Senior Vice President and Chief Investment and PensionOfficer’s primary responsibility is to protect the Fund’s capitaland to be transparent in terms of reporting back to theCompany’s Board of Directors, and also to plan members.

This Report to Members update is part of the accountabilityprocess. The investment team also works in tandem with theCompany’s human resources and communications teams torespond to questions about the Fund as they arise and toensure that members understand the investment decisions thatare made by the Company on their behalf.

If you would like more information about yourdefined benefit pension plan, there are severaloptions available to you:

• ACTIVE PLAN MEMBERS: To help you estimate theamount you could receive from the pension plan whenyou retire or leave the Company, visit the MercerOneView portal atwww.merceroneview.com/HydroOne.

• PENSIONERS: Send us an email atPensionerRequests@HydroOne.com and we’d be pleased to answer your questions. Or call us at 1-877-550-3991 or 416-345-6045.

Accountable to members

8 HYDRO ONE PENSION PLAN – 2012 REPORT TO MEMBERS

Step 3:

Mailing AddressHydro One Inc.483 Bay StreetToronto, OntarioM5G 2P5