INNERGEX POWER INCOME FUND

Transcription

1 PROSPECTUS No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons authorized to sell such securities. The securities offered herein have not been and will not be registered under the United States Securities Act of 1933, as amended, and, subject to certain exceptions, may not be offered or sold within the United States or to U.S. persons. See Plan of Distribution. Initial Public Offering June 16, 2003 INNERGEX POWER INCOME FUND $146,022,670 14,602,267 Trust Units This prospectus qualifies the distribution of 14,602,267 trust units to be issued and sold by Innergex Power Income Fund (the Fund ). Each trust unit of the Fund (the Trust Units ) represents an equal undivided beneficial interest in the Fund. The Fund has been established to indirectly acquire and own interests in seven hydroelectric power generating facilities (the Facilities ), of which six are located in the Province of Québec and one is located in the Province of Ontario, and to indirectly acquire loans relating to some of the Facilities. Following completion of the offering and other transactions contemplated hereunder, IHI Hydro Inc. ( IHI ) and Régime de rentes du Mouvement Desjardins ( Desjardins ) will own 7.8% and 2.7%, respectively, of the issued and outstanding Trust Units. Furthermore, Caisse de dépôt et placement du Québec will acquire an interest in the Fund to own 8.2% of the issued and outstanding Trust Units. In the context of said other transactions, a total of 3,755,000 units will be issued for a total consideration of $37,550,000. See The Investments Acquisition of Interests in Innergex Holding LP and Innergex GP and Acquisition of IHI Loans. Innergex Management Inc. (the Manager ) will administer the Fund and manage the Facilities and the investments of the Fund in relation thereto. The Manager will also provide management services to Innergex GP Inc. ( Innergex GP ), the general partner of Innergex, société en commandite, and supervise the operation of the Facilities by Innergex GP. The Toronto Stock Exchange has conditionally approved the listing of the Trust Units under the symbol IEF.UN, subject to the Fund fulfilling all the applicable requirements of the Toronto Stock Exchange. The Fund will make monthly cash distributions of its income to the maximum extent possible. The initial distribution to holders of Trust Units of record on July 31, 2003 is expected to be paid on or about August 25, 2003 in respect of the period from Closing to July 31, The terms of the offering were established through negotiation between the Fund, the Manager and BMO Nesbitt Burns Inc., TD Securities Inc., CIBC World Markets Inc., Desjardins Securities Inc., RBC Dominion Securities Inc., and Scotia Capital Inc. (collectively, the Underwriters ). The Manager is the promoter of the Fund. The Trust Units will not be obligations of, or interests in, any person other than the Fund. There is currently no market through which the Trust Units may be sold and purchasers may not be able to resell securities purchased under this prospectus. Investment in the Trust Units is subject to certain risks that should be considered by prospective purchasers. See Risk Factors. The Fund is not a trust company and is not registered under applicable legislation governing trust companies, as it does not carry on or intend to carry on the business of a trust company. The Trust Units are not deposits within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of that act or any other legislation. Provided that the Fund qualifies as a mutual fund trust or is a registered investment, the Trust Units will be qualified investments for trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans and deferred profit sharing plans under the Income Tax Act (Canada). Provided that the Fund qualifies as a mutual fund trust and complies with the restrictions on the ownership of foreign property, or is a registered investment, the Trust Units will not be foreign property within the meaning of the Income Tax Act (Canada). See Eligibility for Investment and Certain Canadian Federal Income Tax Considerations.

2 Price: $10.00 per Trust Unit Price to the Public Underwriters Fee Net Proceeds to the Fund (1) Per Trust Unit... $10.00 $0.525 $9.475 Total Offering... $146,022,670 $7,666,190 $138,356,480 (1) Before deduction of expenses related to the offering, estimated at $4 million, which, together with the Underwriters fee, will be paid by the Fund out of the proceeds of the offering. The Underwriters, as principals, conditionally offer the Trust Units, subject to prior sale, if, as and when issued, sold and delivered by the Fund hereunder and accepted by the Underwriters in accordance with the conditions contained in the Underwriting Agreement referred to under Plan of Distribution and subject to the approval of certain legal matters on behalf of the Fund and the Manager by McCarthy Tétrault LLP and on behalf of the Underwriters by Borden Ladner Gervais LLP. In connection with this offering, the Fund may be considered a connected issuer of TD Securities Inc. and Desjardins Securities Inc. under applicable securities laws. A portion of the proceeds from the sale of Trust Units offered hereby will be used indirectly to acquire a portion of the equity interest in Innergex, société en commandite and a portion of the equity interest in Innergex GP Inc. held by IHI Hydro Inc., an affiliate of TD Securities Inc. A portion of the proceeds from the sale of Trust Units offered hereby will also be used indirectly to acquire, from an affiliate of Desjardins Securities Inc., a participation in a loan made to IHI Hydro Inc. See Plan of Distribution. Subscriptions will be received subject to rejection or allotment, in whole or in part, and the right is reserved to close the subscription books at any time, without notice. Book entry certificates representing the Trust Units will be issued in registered form to The Canadian Depository for Securities Limited ( CDS ) or its nominee and will be deposited with CDS on the date of issue of the Trust Units, which is expected to occur on or about June 27, 2003, or such later date as the Manager and the Underwriters may agree, but in any event not later than July 4, Holders of Trust Units will not be entitled to receive physical certificates representing their ownership. See Details of the Offering. ii

3 TABLE OF CONTENTS Page SUMMARY...1 GLOSSARY...7 INNERGEX POWER INCOME FUND...11 Innergex Power Income Fund Innergex Power Trust Innergex Holding LP Operating Partnerships Brief History of Innergex GP Summary Table of Facilities Structure of the Fund Fund s Objectives and Strategy INDUSTRY OVERVIEW...16 Independent Power Generation Overview Canada Hydroelectric Power Generation Process THE FACILITIES...21 General St-Paulin Facility Chaudière Facility Portneuf Facilities Montmagny Facility Batawa Facility THE INVESTMENTS...28 Acquisition of Interests in Innergex Holding LP and Innergex GP Acquisition of IHI Loans Acquisition of Trent-Severn Power Corporation Acquisition of Innergex Montmagny LP Limited Partnership Units Consents and Approvals INDEPENDENT ENGINEER S REPORTS...30 Cumming Cockburn Limited Earth Tech Inc DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS OF THE FACILITIES...33 Innergex LP Trent-Severn Power Corporation Outlook FINANCIAL FORECAST OF THE FUND...39 TRUSTEES, MANAGEMENT AND OPERATIONS...58 Trustee of the Fund IPT Trustees The Manager Innergex GP The Management Agreement The Administration Agreement The Services Agreement DESCRIPTION OF THE FUND...63 General Activities Trustee Certain Restrictions on Trustee s Powers Trust Units Issuance of Trust Units Cash Distributions Redemption at the Option of Unitholders Repurchase of Trust Units Meetings of Unitholders Limitation on Non-Resident Ownership Page Amendments to the Fund Trust Indenture Term of the Fund Take-over Bids Information and Reports DESCRIPTION OF IPT General Trustees/Governance Audit Committee Restrictions on IPT Trustees Powers Redemption Right Distributions Unit Certificates Meetings of Unitholders Conflicts of Interest DESCRIPTION OF INNERGEX HOLDING LP General Partnership Agreement DESCRIPTION OF OPERATING PARTNERSHIPS Innergex LP Trent-Severn Power LP Innergex Montmagny LP FINANCING OF IPT IPT Notes RESERVE ACCOUNT PRO FORMA CAPITALIZATION OF THE FUND CONFLICTS OF INTEREST AND FIDUCIARY DUTIES RISK FACTORS USE OF PROCEEDS DETAILS OF THE OFFERING Book Entry Form and Depository Service Transfer of Trust Units Payment of Distributions Rating of Trust Units PLAN OF DISTRIBUTION CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS Status of the Fund Taxation of the Fund Taxation of IPT Taxation of the Operating Partnerships and Innergex Holding LP Taxation of Unitholders PROMOTER AND INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS EXPERTS AUDITORS, REGISTRAR AND TRANSFER AGENT LEGAL PROCEEDINGS MATERIAL CONTRACTS PURCHASERS STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION FINANCIAL STATEMENTS...F-1 CERTIFICATE OF THE FUND AND PROMOTER... C-1 CERTIFICATE OF THE UNDERWRITERS... C-2 iii

4 FORWARD-LOOKING STATEMENTS AND EBITDA Certain statements in this prospectus may constitute forward-looking statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund, Innergex Power Trust or the Facilities or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this prospectus, such statements use words such as may, will, expect, believe, plan or other similar terminology. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this prospectus. These forward-looking statements involve a number of risks and uncertainties. References to EBITDA are to earnings before provisions for income taxes, amortization, interest on long-term debt and loss on derivative financial instruments. EBITDA is not an earnings measure recognized by generally accepted accounting principles in Canada ( GAAP ) and does not have a standardized meaning prescribed by GAAP. Therefore, EBITDA may not be comparable to similar measures presented by other issuers. ELIGIBILITY FOR INVESTMENT In the opinion of McCarthy Tétrault LLP, counsel for the Fund, and Borden Ladner Gervais LLP, counsel for the Underwriters, provided that the Fund qualifies as a mutual fund trust or is a registered investment within the meaning of the Tax Act, the Trust Units will be qualified investments under the Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans (collectively, the Plans ) and for registered education savings plans. Provided that the Fund is a mutual fund trust and complies with restrictions on the ownership of foreign property, or is a registered investment, the Trust Units will not constitute foreign property for Plans or other persons subject to tax under Part XI of the Tax Act. Registered education savings plans are not subject to the foreign property rules. iv

5 SUMMARY The following summary is qualified by and should be read in conjunction with the more detailed information appearing elsewhere in this prospectus. Reference is made to Glossary for the meaning of certain defined terms. The disclosure contained in this prospectus assumes that the steps and transactions described under the heading The Investments have been completed. The Fund: Innergex Power Income Fund The Fund is an unincorporated open-ended trust established under the laws of the Province of Québec to indirectly acquire and own interests in seven hydroelectric power generating facilities, all of which have been commissioned within the last 10 years, and of which six are located in the Province of Québec and one is located in the Province of Ontario, and to indirectly acquire the IHI Loans relating to some of the Facilities. See Description of the Fund. Simplified Structure of the Fund Unitholders Innergex Power Income Fund Loans 100% IHI Hydro Inc. Innergex GP 75% 75.1% 100% Innergex Holding LP 24.9% 10% 25% 90% Innergex LP 100% Interest in Montmagny Facility Interest in Batawa Facility Interest in Chaudière Facility, Portneuf Facilities and St-Paulin Facility 1

6 Fund s Objectives and Strategy: The Manager: Management Agreement: Administration Agreement: Services Agreement: The Fund s objectives are to provide, on a per Trust Unit basis, a stable and sustainable flow of Distributable Cash and to increase, where prudent, the amount of Distributable Cash per Trust Unit. The Fund s objectives will be achieved by maintaining the current operating practices of the Facilities as well as, whenever possible, conducting operational enhancements to maximize their profitability, and by acquiring other facilities in accordance with established acquisition guidelines. See Innergex Power Income Fund Fund s Objectives and Strategy. The Manager will administer the Fund under the Administration Agreement and will, under the Management Agreement, manage and administer the investments and assets of IPT. The Manager will also provide management services to Innergex GP in respect of the operation of the Facilities. Principals of the Manager have been engaged in the development, acquisition, construction, ownership and operation of hydroelectric power generating facilities since 1990 in the Province of Québec, since 1998 in the Province of Ontario and since 2001 in the Province of British Columbia. The employees of the Manager are currently supervising the operation of the Facilities to be indirectly acquired by the Fund. See Trustees, Management and Operations The Manager. Pursuant to the Management Agreement, the Manager will provide management services to IPT. The Management Agreement will have an initial term of 20 years and will be renewable thereafter for successive periods of five years unless terminated in accordance with its terms. The Management Agreement provides for the reimbursement of operating expenses incurred by the Manager in the provision of services thereunder up to a maximum annual amount as well as for an annual performance incentive fee based on increases in the amount of Distributable Cash per Trust Unit. See Trustees, Management and Operations The Management Agreement. Pursuant to the Administration Agreement, the Manager will provide the Fund with administrative and support services. The Administration Agreement will have an initial term of 20 years and will be renewable thereafter for successive periods of five years unless terminated in accordance with its terms. The Administration Agreement provides for the reimbursement of operating expenses, up to a maximum annual amount of $ 101,000, and reasonable expenses incurred by the Manager in the provision of services thereunder. See Trustees, Management and Operations The Administration Agreement. Pursuant to the Services Agreement, the Manager will provide management services to Innergex GP in order to ensure that the Facilities are operated in accordance with prudent industry practice and an annual operating plan to be developed by the Manager and approved by the trustees of IPT. The Services Agreement will have an initial term of 20 years and will be renewable thereafter for successive periods of 5 years unless terminated in accordance with its terms. The Services Agreement provides for the reimbursement of operating and reasonable out-of-pocket expenses incurred by the Manager in the provision of services thereunder. See Trustees, Management and Operations The Services Agreement. 2

7 Summary Table of Facilities The Fund will indirectly hold interests in the following Facilities: Facilities Installed Capacity (MW) Expected Annual Production (GW-hr) 1 Electricity Purchaser 2 Commercial In-Service Date Expiry of PPA St-Paulin Hydro-Québec November 29, Chaudière Hydro-Québec March 14, PN Hydro-Québec May 3, PN Hydro-Québec May 3, PN Hydro-Québec May 3, Montmagny Hydro-Québec May 23, Batawa Ontario Electricity Financial Corporation December 20, Total As confirmed by Earth Tech Inc. in respect of the Batawa Facility and by Cumming Cockburn Limited for the other Facilities. See Independent Engineer s Reports. Hydro-Québec currently holds a credit rating of A from DBRS, A+ from S&P and A1 from Moody s whereas Ontario Electricity Financial Corporation is not rated. However, the Ministry of Energy of the Province of Ontario has stated that the Province of Ontario, which currently holds a credit rating of AA from DBRS, AA from S&P and Aa2 from Moody s, will honour Ontario Electricity Financial Corporation s obligations under the PPAs to which Ontario Electricity Financial Corporation is a party. The expected annual generation of the Portneuf Facilities is established taking into account amounts to be received from Hydro-Québec as virtual energy payments pursuant to the PPA based on deemed generation as per historical water flows of the Portneuf River following the decision of Hydro- Québec to complete a partial diversion of the Portneuf River. See The Facilities Portneuf Facilities. 3

8 The Offering Offering: 14,602,267 Trust Units. Issuer: Innergex Power Income Fund. Amount: $146,022,670 Price: $10.00 per Trust Unit. Use of Proceeds: The net proceeds to the Fund from the sale of the Trust Units hereunder and from the other transactions contemplated hereunder are estimated to be approximately $172 million, after deducting the fees payable to the Underwriters and the estimated expenses related to the offering. The net proceeds, together with the proceeds of the Term Loan, will be used as follows: (i) approximately $93 million to indirectly acquire interests in the Facilities; (ii) approximately $119 million to indirectly acquire the IHI Loans; and (iii) approximately $10 million to be deposited in the Reserve Account. See Use of Proceeds, The Investments, The Facilities and Reserve Account. Trust Units: Each Trust Unit represents an equal undivided beneficial interest in the distributions and net assets of the Fund. Each Trust Unit is transferable and entitles the holder thereof to participate equally in distributions of the Fund and to one vote at meetings of Unitholders. Trust Units are not subject to future calls or assessments. See Description of the Fund. Trustees and Governance: National Bank Trust Inc. will act as the sole trustee of the Fund. IPT has seven trustees, a majority of whom are unrelated to the Manager (as such term is defined in the Toronto Stock Exchange Company Manual). The Fund Trust Indenture, the IPT Trust Indenture and the Management Agreement will contain mechanisms dealing with possible conflicts of interest between the Fund, IPT and the Manager. See Trustees, Management and Operations, Description of IPT and Conflicts of Interest and Fiduciary Duties. Distribution Policy: The Fund Trust Indenture provides that Distributable Cash will consist of all amounts received by the Fund including the income, interest, dividends, return of capital or other amounts, if any, from investments held by the Fund, as well as any release from the Reserve Account, less amounts that may be paid by the Fund in connection with any cash redemptions or repurchases of Trust Units and amounts which the Manager or the IPT Trustees may reasonably consider necessary for payment of costs and expenses required for the operation of the Fund and for reasonable reserves. The policy of the Fund will be to distribute all Distributable Cash. Monthly distributions will be payable to Unitholders of record as of the last business day of each month and are expected to be paid to Unitholders on or about the 25 th day of the following month. The initial distribution to Unitholders of record on July 31, 2003 is expected to be paid to Unitholders on or about August 25, 2003, for the period from Closing to July 31, See Description of the Fund Cash Distributions. Risk Factors: An investment in the Trust Units is subject to a number of risks, including: (i) tax matters; (ii) plant performance, resource availability and constancy; (iii) equipment failure; (iv) dependence upon Hydro-Québec and OEFC; (v) dependence on IHI; (vi) change in laws, regulatory regime and permits; (vii) dependence on IPT; (viii) labour relations; (ix) force majeure; (x) financial leverage; (xi) capital resources; (xii) industry conditions; (xiii) reliance on the Manager and potential conflicts of interest; (xiv) delays in distributions; (xv) fluctuating distributions; (xvi) nature of Trust Units; (xvii) Unitholder limited liability; (xviii) absence of prior public market; (xix) litigation against Innergex LP; (xx) insurance limits; and (xxi) Reserve Account. See Risk Factors. 4

9 Tax Considerations: Stability Rating of Trust Units: Reserve Account: In computing income for tax purposes for a particular taxation year, each Unitholder is required to include its pro rata share of the Fund s income that was paid or payable in that year by the Fund to the Unitholder. Generally, all other amounts received by Unitholders will not be included in the Unitholders income for income tax purposes, but will reduce the adjusted cost base of the Unitholders Trust Units. The Manager anticipates that a substantial portion of the annual distributions during the first three taxation years of the Fund will not be included in the income of Unitholders but will be required to be deducted from the adjusted cost base of their Trust Units. Prospective purchasers should consult their tax advisors regarding the tax implications of an investment in Trust Units. See Certain Canadian Federal Income Tax Considerations. Standard & Poor s Inc. ( S&P ) has assigned a stability rating of SR-2 (positive outlook) to the Trust Units. Issuers rated SR-2 are considered by S&P to have a very high level of cash distribution stability relative to other rated Canadian income funds. See Details of the Offering - Rating of Trust Units. A Reserve Account holding an amount of approximately $10 million will be available to the Fund for distribution to the Unitholders, in the discretion of the IPT Trustees, (a) of which approximately $6 million will be used to levelize distributions over approximately the first eight years of the life of the Fund taking into account the Manager s current interval estimates of Distributable Cash, the yearly increase in the price for delivered energy payable by Hydro-Québec and Ontario Electricity Financial Corporation under the PPAs and projected increase in operating costs, such that, provided the Fund makes no acquisitions, it is expected that the Distributable Cash will remain at the same level throughout this period and (b) of which approximately $4 million will be used in the event that the Distributable Cash is less than the anticipated amount of distributions by the Fund for any period. See Reserve Account. 5

10 Summary of Consolidated Financial Forecast of the Fund The following table sets out selected forecasted consolidated financial data of the Fund for the 12-month period ending June 30, 2004 and has been derived from the Consolidated Statements of Forecasted Net Income and Forecasted Distributable Cash of the Fund and notes and assumptions thereto contained in this prospectus. Some of the assumptions used in the preparation of the forecast, although considered reasonable by the Manager at the time of preparation, inevitably will not materialize as forecasted and unanticipated events and circumstances will occur subsequent to the date of the forecast. Accordingly, actual results achieved for the forecast period will vary from the forecasted results and the variations may be material. There is no representation that the financial forecast will be realized in whole or in part. Important factors that could cause actual results to vary materially from the forecast are disclosed under Risk Factors. See also Outlook Discussion and Analysis of Results of Operations of the Facilities. Twelve-month period ending June 30, 2004 Revenues... $23,254,341 Operating expenses... 3,306,829 Income before the following... 19,947,512 General and administration expenses... 1,193,000 Interest expense 3,000,000 Amortization 6,213,252 Investment income (422,575) Provision for income taxes Current 6,000 Future 97,000 Non-controlling interest 130,611 Net income 9,730,224 Add: Amortization 6,213,252 Future income taxes 97,000 Non-controlling interest 130,611 Release from Reserve Account 1,231,110 Less: Allocation for major maintenance account ,000 Distributions to non-controlling interest 161,725 Distributable Cash for the period... $16,980,472 Distributable Cash per Trust Unit $

11 GLOSSARY In this prospectus, unless the context otherwise requires: Administration Agreement means the agreement between the Manager and the Fund to be entered into as of the date of Closing and pursuant to which the Manager will agree to provide administrative services to the Fund; affiliate means an affiliate within the meaning of the Securities Act (Québec); Batawa Facility means the 5 MW hydroelectric power generating facility located on the Trent-Severn Waterway near Trenton, Province of Ontario; Bromptonville Facility has the meaning ascribed thereto under Innergex Power Income Fund Brief History of Innergex GP ; business day means any day that is not a Saturday, Sunday or civic or statutory holiday in either the Province of Québec or the Province of Ontario; CCL Report means the independent engineer s report dated as of May 23, 2003 prepared by Cumming Cockburn Limited in respect of the Facilities (other than the Batawa Facility); CCRA means the Canada Customs and Revenue Agency; Chaudière Facility means the 24 MW hydroelectric power generating facility located on the Chaudière River near Lévis, Province of Québec; Closing means the closing of the offering of Trust Units hereunder, which is expected to occur on or about June 27, 2003, but which may occur on such other date, not later than July 4, 2003, as may be agreed between the Manager and the Underwriters; CPI means the Statistics Canada Consumer Price Index for the Montreal Urban Community all items (Statistics Canada, CANSIM, Matrix 9940); CPI for Canada means the Statistics Canada Consumer Price Index for Canada all items; Desjardins means Régime de rentes du Mouvement Desjardins; Distributable Cash means all amounts received by the Fund including amounts paid on the IPT Units or IPT Notes, as the case may be, held by the Fund (which may include amounts released from the Reserve Account) and the income, interest, dividends, return of capital or other amounts, if any, from other permitted investments held by the Fund, less amounts that may be paid by the Fund in connection with any cash redemptions or repurchases of Trust Units and amounts which the Manager or the IPT Trustees may reasonably consider necessary for payment of any costs or expenses required for the operation of the Fund and reasonable reserves; Earth Tech Report means the independent engineer s report dated as of May 26, 2003 prepared by Earth Tech Inc. in respect of the Batawa Facility; EBITDA is defined as earnings before provisions for income taxes, amortization, interest on long-term debt and loss on derivative financial instruments. EBITDA is not a measure of performance under Canadian generally accepted accounting principles. The Manager uses this performance measure for assessing operating performance of the Facilities; emphyteusis or emphyteutic lease has the meaning ascribed thereto under The Facilities St-Paulin Facility ; Facilities means the St-Paulin Facility, the Chaudière Facility, the Portneuf Facilities, the Montmagny Facility and the Batawa Facility; Fiducie Hydrex I means the trust created pursuant to the laws of the Province of Québec on November 25, 1996 by and between Comité de retraite des assurances collectives du Mouvement Desjardins du Québec (now Régime de rentes du Mouvement Desjardins), Régime Complémentaire de retraite de la Société de Transport de la Communauté Urbaine de Montréal (1992), Régime Complémentaire de retraite de la Société de Transport de la Communauté Urbaine de Montréal (Syndicat du Transport de Montréal) (C.S.N.), as settlors, and Claude Dalphond and Michel Parent, as trustees, for the purpose of holding units in Innergex LP; 7

12 Fiducie Hydrex II means the trust created pursuant to the laws of the Province of Québec on November 25, 1996 by and between Comité de retraite de l Université McGill, as settlor, and R. Ian McKinnon, as trustee, for the purpose of holding units in Innergex LP; Forecast Period means the 12-month period ending June 30, 2004; Fund means Innergex Power Income Fund, an unincorporated open-ended trust established under the laws of the Province of Québec and, unless the context otherwise requires, includes IPT and other entities owned, directly or indirectly, by IPT; Fund Trust Indenture means the trust indenture made as of October 25, 2002 between National Bank Trust Inc. and the settlors of the Fund pursuant to which the Fund was established, as the same may be amended, supplemented or restated from time to time; gigawatt or GW means one million kilowatts of electrical power; gigawatt hour or GW-hr means one million kilowatt hours of electrical power; Hydro Bromptonville has the meaning ascribed thereto under Innergex Power Income Fund Brief History of Innergex GP ; IHI means IHI Hydro Inc., a wholly-owned subsidiary of TD Capital Group Limited; IHI Loans means collectively, the loans granted to, or assumed by, IHI in respect of the Chaudière Facility (original principal amount of $41,388,881), the St-Paulin Facility (original principal amount of $10,572,000) and the Portneuf Facilities (original principal amount of $45 million) which loans will be acquired by IPT upon Closing; Innergex GP means Innergex GP Inc., formerly known as Innergex Inc., a company incorporated under the laws of the Province of Québec and the general partner of Innergex LP prior to Closing. Following the completion of the transactions contemplated under The Investments, Innergex GP will also be the General Partner of Innergex Holding LP; Innergex Holding LP means Holding Innergex, société en commandite / Innergex Holding, Limited Partnership, a limited partnership to be created prior to Closing pursuant to the laws of the Province of Québec; Innergex LP means Innergex, société en commandite, a limited partnership created pursuant to the laws of the Province of Québec; Innergex Montmagny LP means Innergex Montmagny, Limited Partnership, a limited partnership created pursuant to the laws of the Province of Québec; Innergex II means the trust created pursuant to the laws of the Province of Québec in December 2001 for the purposes of developing, constructing, managing and owning assets and property in connection with the generation, transmission and sale of electricity as well as all of its related entities. The unitholders of this trust are: Desjardins, Capital d Amérique CDPQ inc., Sun Life Assurance Company of Canada (formerly Clarica Life Insurance Company), TD Capital Group Limited, Kruger Inc. Pension Plan, Corner Brook Pension Plan, Scott Paper Ltd. Pension Plan, Gilles Lefrançois, Michel Letellier, Richard Blanchet and François Hébert; IPT means Innergex Power Trust, an unincorporated open-ended trust to be established prior to Closing by the IPT Trust Indenture under the laws of the Province of Québec; IPT Notes means the notes issued by IPT from time to time in accordance with the Note Indenture, either as Series 1 Notes or Series 2 Notes; IPT Series 1 Notes means the Series 1 Notes of IPT to be issued to the Fund at Closing; IPT Series 2 Notes means the Series 2 Notes of IPT to be issued exclusively to holders of IPT Units or IPT Series 1 Notes as full or partial payment of the redemption price of IPT Units or the principal amount of IPT Series 1 Notes; IPT Trust Indenture means the trust indenture between the IPT Trustees and the settlors of IPT pursuant to which IPT will be established, as the same may be amended, supplemented or restated from time to time; IPT Trustees means the trustees of IPT as appointed by the Manager or elected by the holders of IPT Units pursuant to the direction of the Unitholders, as applicable, from time to time; IPT Units means the units of IPT, each of which represents an equal undivided beneficial interest in the distributions and the net assets of IPT, and includes a fraction of a unit of IPT; 8

13 kilowatt or kw means 1,000 watts of electrical power; kilowatt hour or kw-hr means an hour during which one kilowatt of electrical power has been continuously produced; a kw-hr can be best visualized as the amount of electricity consumed by ten 100-watt light bulbs burning for one hour; Management Agreement means the agreement between the Manager and IPT to be entered into as of the date of Closing and pursuant to which the Manager will provide management services to IPT; Manager means Innergex Management Inc., a corporation created pursuant to the laws of Canada; megawatt or MW means 1,000 kilowatts of electrical power; megawatt hour or MW-hr means 1,000 kilowatt hours of electrical power; Montmagny Facility means the 2.1 MW hydroelectric power generating facility located on the Du Sud River in Montmagny, Province of Québec; Note Indenture means the note indenture between IPT and National Bank Trust Inc., as trustee thereunder, pursuant to which IPT will issue the IPT Notes, as the same may be amended, supplemented or restated from time to time; OEFC means Ontario Electricity Financial Corporation; Operating Partnerships means Innergex LP, Innergex Montmagny LP and Trent-Severn Power LP; Ordinary Resolution means a resolution passed by more than 50 percent of the votes cast, either in person or by proxy, at a meeting of holders of units, at which a quorum was present, called for the purpose of approving such resolution, or approved in writing by holders of more than 50 percent of votes represented by the units entitled to be voted on such resolution; PN-1 Facility means the 8.0 MW hydroelectric power generating facility located 4 km upstream from the confluence with the St-Lawrence River on the Portneuf River in Sainte-Anne-de-Portneuf, Province of Québec; PN-2 Facility means the 9.9 MW hydroelectric power generating facility located 10.5 km upstream from the confluence of the St-Lawrence River on the Portneuf River in Sainte-Anne-de-Portneuf, Province of Québec; PN-3 Facility means the 8.0 MW hydroelectric power generating facility located 30 km upstream from the confluence of the St-Lawrence River on the Portneuf River in Longue-Rive, Province of Québec; Portneuf Facilities means collectively, PN-1 Facility, PN-2 Facility and PN-3 Facility; PPA means power purchase agreement; Record Date means the last Business Day of each calendar month; Régie means the Régie de l Énergie created pursuant to an Act respecting the Régie de l Énergie (Québec); Reserve Account means, collectively, the two accounts described under Reserve Account ; run-of-the-river means a mode of operation of a hydroelectric power generating facility where there is a continuous discharge of water from the facility with no long term storage and release of water; Services Agreement means the agreement between the Manager and Innergex GP pursuant to which the Manager will provide management services to Innergex GP as well as supervision services for the operation of the Facilities; Special Resolution means a resolution passed by 66 2/3% or more of the votes cast, either in person or by proxy, at a meeting of holders of units, at which a quorum was present, called for the purpose of approving such resolution, or approved in writing by holders of 66 2/3% or more of votes represented by the units entitled to be voted on such resolution; St-Paulin Facility means the 8.0 MW hydroelectric power generating facility located on Rivière-du-Loup near Shawinigan, Province of Québec; Tax Act means the Income Tax Act (Canada), as amended; Term Loan means the $50 million term loan to be entered into by IPT; terawatt hour or TW-hr means one billion kilowatt hours of electrical power; 9

14 Trent-Severn Power LP means Trent-Severn Power, Limited Partnership, a limited partnership to be created prior to Closing pursuant to the laws of the Province of Ontario; Trust Units means the units of the Fund, each of which represents an equal undivided beneficial interest in the distributions and the net assets of the Fund, and includes a fraction of such a unit of the Fund; Trustee means the trustee of the Fund, which will initially be National Bank Trust Inc.; Underwriters means BMO Nesbitt Burns Inc., TD Securities Inc., CIBC World Markets Inc., Desjardins Securities Inc., RBC Dominion Securities Inc. and Scotia Capital Inc.; Underwriting Agreement has the meaning ascribed thereto under Plan of Distribution ; Unitholders means the holders of Trust Units from time to time; and Winter means the period from December 1 to March

15 INNERGEX POWER INCOME FUND Innergex Power Income Fund The Fund is an unincorporated open-ended trust established under the laws of the Province of Québec. The Fund has been established to indirectly acquire and own interests in seven hydroelectric power generating facilities and to indirectly acquire and hold loans relating to some of the Facilities. The Fund will indirectly acquire, through IPT, interests in Innergex LP which will own five of these facilities as well as interests in Innergex Montmagny LP, which will own the Montmagny Facility, and Trent-Severn Power LP, which will own the Batawa Facility. Unless the context otherwise indicates, this prospectus gives effect to the transactions described under The Investments. The Fund will own at Closing all of the IPT Units and all of the IPT Notes. The Manager will administer the Fund and manage IPT. The Fund will make monthly distributions of Distributable Cash payable to Unitholders of record on each Record Date. Distributions are expected to be paid to Unitholders on or about the 25 th day of the following month with the first of such distributions expected to be paid on or about August 25, 2003, for the period from Closing to July 31, The head office and principal business office of the Fund is located at 1111 Saint-Charles Street West, East Tower, Suite 1255, Longueuil, Québec, J4K 5G4. Innergex Power Trust IPT is an unincorporated open-ended trust established under the laws of the Province of Québec. IPT is a limited purpose trust and its activities are restricted to the conduct of the business of, and the ownership, operation and lease of assets and property in connection with the generation, accumulation, transmission, distribution, purchase and sale of electricity, making investments and holding other direct or indirect rights in companies or other entities involved in the business of the generation, accumulation, transmission, distribution, purchase and sale of electricity and engaging in all activities ancillary or incidental thereto. Innergex Holding LP Innergex Holding LP is a limited partnership established under the laws of the Province of Québec to indirectly own equity in power generating facilities. Upon Closing, Innergex GP will be the general partner of Innergex Holding LP. IPT and IHI will own 75.1% and 24.9% respectively of the then outstanding limited partnership units of Innergex Holding LP. Operating Partnerships Innergex LP is a limited partnership established in 1993 under the laws of the Province of Québec to carry on the business of generation, accumulation, transmission, distribution, purchase and sale of electricity and other activities ancillary thereto and, in connection with such business, to own, operate and lease assets and property, to make investments and hold other direct or indirect rights and to engage in all activities ancillary and incidental thereto. Upon Closing, the general partner of Innergex LP will be Innergex GP. Innergex Holding LP will own 90% of the then outstanding limited partnership units of Innergex LP while Innergex GP will directly own the remaining 10% participation. Innergex LP owns the Chaudière Facility, the Portneuf Facilities and the St-Paulin Facility. Trent-Severn Power LP is a limited partnership established under the laws of the Province of Ontario to carry on, or caused to be carried on, the business of generation, purchase and sale of electricity and other activities ancillary thereto and, in connection with such business, to own, operate and lease assets and property, to make investments and hold other direct or indirect rights and to engage in all activities ancillary and incidental thereto. Upon Closing, Trent-Severn Power Corporation, a company incorporated under the laws of the Province of Ontario, which will be an indirect wholly-owned subsidiary of Innergex Holding LP, will be the general partner of Trent-Severn Power LP. Trent-Severn Power LP will own the Batawa Facility. IPT will own directly 75% of the then outstanding limited partnership units of Trent-Severn Power LP while Trent-Severn Power Corporation will own the remaining 25% of such units. 11

16 Innergex Montmagny LP is a limited partnership established in 2000 under the laws of the Province of Québec to carry on the business of generation, accumulation, transmission, distribution, purchase and sale of electricity and other activities ancillary thereto and, in connection with such business, to own, operate and lease assets and property, to make investments and hold other direct or indirect rights and to engage in all activities ancillary and incidental thereto. The general partner of Innergex Montmagny LP is Innergex Montmagny Inc., a company incorporated under the laws of the Province of Québec which will be, at Closing, a wholly-owned subsidiary of Innergex GP. IPT will directly and indirectly own all of the then outstanding limited partnership units of Innergex Montmagny LP. Innergex Montmagny LP owns the Montmagny Facility. Brief History of Innergex GP Innergex GP was established in 1990, at the initiative of Gilles Lefrançois, to participate in the bid process of the Government of Québec entitled APR-91 targeting the development of small scale hydroelectric power generating facilities. After having successfully secured the rights to develop sites, Innergex LP was created in 1993 and initiated the development of the St-Paulin Facility, followed by the Portneuf Facilities and the Chaudière Facility. The initial partners of Innergex LP were Innergex GP and, indirectly, McGill University Pension Fund, Comité de retraite et des assurances collectives du Mouvement Desjardins (now Desjardins) and Fiducie Globale des régimes complémentaires de retraite de la Société de Transport de la Communauté urbaine de Montréal. Joint development efforts of Innergex LP and Kruger Inc. resulted in the rehabilitation of a dam and the construction and commissioning in 1997 of a 9.9 MW hydroelectric power generating facility located on the Saint-François River in Bromptonville, Province of Québec (the Bromptonville Facility ), owned by Hydro Bromptonville Inc. ( Hydro Bromptonville ) on a site adjacent to a paper mill owned by Kruger Inc. Prior to Closing, Innergex LP will sell its 49% equity interest in Hydro Bromptonville and the proceeds of such sale will be distributed to the existing partners of Innergex LP prior to Closing. In 1996, IHI acquired an equity interest in Innergex LP and, in part consideration thereof, assumed the loans that were provided to Innergex LP for the construction and operation of the Portneuf Facilities and the St- Paulin Facility and was required to make a capital contribution in an amount equal to the project financing of the Chaudière Facility. In 2000, IHI made such contribution with funds borrowed for this purpose. IHI intends to retain a 24.9% equity interest in Innergex Holding LP, which in turn will own 90% of all of the limited partnership units of Innergex LP. Upon Closing, IPT will purchase the IHI Loans and will become a creditor of IHI. See The Investments. In December 2000, Innergex LP acquired, through Innergex Montmagny LP, the assets of Hydro Montmagny Inc. 12

17 Facilities Summary Table of Facilities The Fund will indirectly hold interests in the following Facilities: Installed Capacity (MW) Expected Annual Production (GW-hr) 1 Electricity Purchaser 2 Commercial In- Service Date Expiry of PPA St-Paulin Hydro-Québec November 29, Chaudière Hydro-Québec March 14, PN Hydro-Québec May 3, PN Hydro-Québec May 3, PN Hydro-Québec May 3, Montmagny Hydro-Québec May 23, Batawa Ontario Electricity Financial Corporation December 20, Total As confirmed by Earth Tech Inc. in respect of the Batawa Facility and by Cumming Cockburn Limited for the other Facilities. See Independent Engineer s Reports. Hydro-Québec currently holds a credit rating of A from DBRS, A+ from S&P and A1 from Moody s whereas Ontario Electricity Financial Corporation is not rated. However, the Ministry of Energy of the Province of Ontario has stated that the Province of Ontario, which currently holds a credit rating of AA from DBRS, AA from S&P and Aa2 from Moody s, will honour Ontario Electricity Financial Corporation s obligations under the PPAs to which Ontario Electricity Financial Corporation is a party. The expected annual generation of the Portneuf Facilities is established taking into account amounts to be received from Hydro-Québec as virtual energy payments pursuant to the PPA based on deemed generation as per historical water flows of the Portneuf River following the decision of Hydro-Québec to complete a partial diversion of the Portneuf River. See The Facilities Portneuf Facilities. 13

18 Structure of the Fund The following chart illustrates the structural and contractual relationships among various entities comprising the Fund at Closing, upon completion of the transactions described under The Investments. Unitholders Trust Units Administration Agreement Manager Management Agreement Fund IHI Services Agreement Loans 24.9% 40.47% VNP shares Innergex GP 59.53% VNP shares 100% NVP shares IPT 75.1% Innergex Holding LP 100% 100% 10% Innergex Montmagny Inc. Trent-Severn Power Corporation 90% 1% 99% 75% 25% Innergex Montmagny LP (Montmagny Facility) Trent-Severn Power LP (Batawa Facility) Innergex LP (Chaudière Facility; Portneuf Facilities; and St- Paulin Facility) 14

19 Fund s Objectives and Strategy The Fund s objectives are to ensure and enhance the stability and sustainability of Distributable Cash per Trust Unit to Unitholders and, when possible, to increase the amount of Distributable Cash per Trust Unit by enhancing current operational practices of the Facilities and by making additional investments in electricity generating facilities. Fund s Operating Strategy The Facilities generate electricity using hydroelectric power exclusively and serve the provincial power grids in Québec and Ontario. The Facilities are currently being operated by Innergex LP. Upon Closing, the Fund, indirectly through IPT and Innergex GP, will retain the services of the Manager to assist in meeting the Fund s objectives. The officers of the Manager have been engaged in the development, acquisition, construction, ownership and operation of hydroelectric power generating facilities since 1990 in the Province of Québec, since 1998 in the Province of Ontario and since 2001 in the Province of British Columbia. They have been involved in the development, construction and operation of the Facilities since their commissioning (other than the Montmagny Facility which was indirectly acquired by Innergex LP in December 2000). They have a proven track record of profitable growth as an operator experiencing compounded annual growth rates of 31.0% and 11.5% in revenues and installed capacity, respectively, for the Facilities from fiscal year 1996 (or the commissioning or acquisition date, if later) to fiscal year The employees of the Manager will be responsible for the management and contract administration of the Facilities and the supervision of the operation of the Facilities while the employees of Innergex GP will be responsible for the operation and maintenance of the Facilities. Acquisition and Investment Strategy The Fund may, where practical and economical, expand its operations by acquiring or otherwise investing in additional power generating facilities. The Fund will acquire or invest in such facilities only if the Fund believes that the acquisition or investment will likely result in an increase in Distributable Cash per Trust Unit, will also meet the Fund s acquisition and investment guidelines and is in accordance with the Fund s purpose. Such acquisitions may be financed by the issuance of Trust Units, from the cash flows of the Fund or through indebtedness. It is expected that any future acquisition will be made by the Fund through one or more of its direct or indirect subsidiaries. Future facilities may be located in any region where profitable opportunities exist, although the Manager expects these opportunities will mostly be in Canada and the United States. In sourcing potential opportunities, the Fund benefits from the experience of the principals of the Manager. The principals of the Manager have, in the past, successfully identified and developed or acquired a series of power generating projects and are expected to continue to review and evaluate a significant number of opportunities in the future. In the context of the creation of Innergex II, the team of specialists in hydroelectric power generation was expanded to include specialists in wind energy and other forms of power generation. Innergex II has received financing commitments which the Manager believes could support the construction of a number of projects which could potentially serve as a pool for future acquisitions to be considered by the Fund. In light of the privileged relationship between the Fund and Innergex II, a cooperation agreement will be entered into upon Closing between Innergex II and the Fund whereby Innergex II will grant a right of first offer to the Fund in respect of any of its power generating projects which it wishes to sell, or intends to offer, to a third party purchaser. However, this right of first offer shall not apply to an existing or future project partner of Innergex II who has negotiated such a right of first offer with Innergex II with respect to a project and has indicated in writing to Innergex II that it intends to exercise the right of first offer in respect of an offer by Innergex II to sell its interest in said project. The cooperation agreement will also provide for the granting by the Fund to Innergex II of a right of first offer in respect of any of the Facilities which the Fund wishes to sell. The cooperation agreement will further confirm that all development activities will be conducted by Innergex II and will also provide that, if Innergex II acquires power generating assets from a third party that are acquired by the Fund within a specified period, Innergex II will not be entitled to any remuneration but only to the reimbursement of its costs and expenses incurred in relation thereto. Continued deregulation and projected increases in the demand for electricity may result in an increase in divestitures by electrical utilities or some other power producers and industrial customers, and in increased construction of power generating facilities, thereby enabling the Manager to present the Fund with opportunities that meet the Fund s acquisition and investment guidelines. 15

20 Acquisition and Investment Guidelines The following guidelines will be used in the review and evaluation of possible acquisitions and other investments by the Fund: (a) each facility will be acquired, or an investment therein will be made, only if the Fund believes that the acquisition or investment will result in an increase in Distributable Cash per Trust Unit; (b) facilities in respect of which long term PPAs with major electrical utilities exist will be preferred and, in other cases, free market electricity price and exchange rate assumptions used in acquisition or investment evaluations will be obtained from a recognized independent source; (c) the acquisition of, or investment in, each facility will be subject to prior due diligence and based on an independent engineering report confirming the condition or development of the facility and the technical assumptions used in the acquisition or investment evaluation; (d) the expected useful life of each facility and associated structures will, with regular maintenance and upkeep, be long enough for an investment therein to conform with the Fund s objectives of providing long-term and stable distributions of annual Distributable Cash per Trust Unit; and (e) the acquisition of, or investment in, each facility will be reviewed by the unrelated IPT Trustees (as such term is defined in the Toronto Stock Exchange Company Manual) and approved by a majority thereof. All acquisitions or investments must be made in accordance with the Fund Trust Indenture. See Description of the Fund. INDUSTRY OVERVIEW Independent Power Generation In the traditional market structure of the electricity industry, vertically-integrated monopoly utilities have generated, transmitted and distributed electricity to customers. Rapid growth in electricity demand, rising electricity rates, technological advances and environmental concerns have led to the implementation by governmental authorities of strategies and measures to restructure the electricity industry within their respective jurisdictions, which, among other things, have encouraged the generation of electricity from independent power producers. In the independent power generation sector, electricity is generated from a number of sources, including: (i) water; (ii) natural gas; (iii) waste products, such as biomass (e.g., waste wood from forest products operations) and landfill gas; (iv) geothermal sources, such as heat or steam; (v) sun; and (vi) wind. While traditional regulated utilities continue to dominate North American electricity generating markets, it is recognized that independent power producers will play an increasingly important role in the supply of electricity needs in the future. In recent years, governmental authorities and other policymakers have increasingly recognized the benefits of power generated by independent power producers, especially where such power is produced from renewable or waste resources or at higher efficiencies than conventional utility-owned generation facilities. Overview Canada Provincial governments have legislative authority over the generation, transmission and distribution of electricity in Canada. The movement toward restructuring the Canadian electricity industry has been uneven, as each province has determined its policy in this area based on its assessment of its unique regional circumstances and issues. During the 1980 s, many provinces, most notably British Columbia, Alberta, Ontario, Québec, Nova Scotia and Newfoundland, began actively seeking new generation capacities from independent power producers. These arrangements are typically structured under long-term PPAs at defined rates providing a defined cash flow stream to independent power producers that reflects the projected long-term value of the capacity and electricity to the purchasing utility. 16

21 While the amount of electricity generated in Canada by independent power producers selling to the utilities has been relatively modest to date, electricity planners have recognized, in recent years, the benefits of independent power projects, and it is expected that independent power producers will play an increasingly important role in the supply of Canada s electricity needs in the future. Québec In anticipation of a significant increase in demand for Québec generated electricity, the Québec Government, through Hydro-Québec, began seeking generating capacity from independent power producers in the early 1990 s and committed to a number of long-term agreements to buy electricity from third parties, typically under the terms of a PPA. Hydro-Québec, a Québec Crown corporation, is one of the largest electricity utilities in North America. Under its incorporation statute, Hydro-Québec is given broad powers to generate, supply and deliver electric power throughout Québec. Hydro-Québec is currently purchasing all the electric power produced by independent power producers in Québec, other than the electricity used by said producers in their own operations. During 2001, the generation capacity of all independent power producers having entered into PPAs with Hydro-Québec totalled approximately 430 MW. Under the initial term of its current PPAs, Hydro-Québec expects to purchase approximately 430 MW of electric power annually until In July 2001, the Régie approved a call for tenders and contract award procedure as well as a code of ethics on conducting calls for tenders presented by Hydro-Québec. Hydro-Québec launched a call for tenders in January 2002 in connection with the allocation of new capacity to independent power producers in order to meet capacity needs of 1,200 MW and anticipated energy requirements of 4.1 TW-hr for On October 4, 2002, Hydro-Québec announced the results of its call for tenders and selected projects for the installation of a 600 MW natural gas power generating facility and an addition of 600 MW of hydroelectric power generating facilities to current facilities of Hydro-Québec Production. In addition, on April 29, 2002, Hydro-Québec Production launched a call for tenders for small hydroelectric power generating facilities covering 9 sites having a combined potential of 69 MW. Bids were submitted on 7 of these sites and the successful bidders were announced on November 29, On April 15, 2003, Hydro-Québec Distribution launched its call for tenders A/O to purchase 100 MW of power generated from biomass and bids must be submitted by October 15, Moreover, on May 12, 2003 Hydro-Québec Distribution launched another call for tenders A/O for an initial block of 1,000 MW of wind power and bids must be submitted by June 15, These calls for tenders are also governed by the code of ethics on conducting calls for tenders and contract award procedure approved by the Régie in July Regulatory Framework Since December 1996, the Régie has provided a regulatory framework for energy distribution. As a result, electricity rates in Québec are subject to its approval. Hydro-Québec s transmission and distribution activities are subject to the conventional form of regulation based on the cost of service for those activities. As for power generation, the Act respecting the Régie de l énergie (Québec) states that the Québec Government shall dictate the initial conditions for establishing supply rates, which represent the energy portion of any customer s bill. An Act to amend the Act respecting the Régie de l énergie and other legislative provisions (Québec) (the Act ) was adopted in June The Act modifies the jurisdiction of the Régie with respect to electric power rates, introduces more competition into the electricity market, renders the mode of operation of the Régie more flexible and broadens its funding sources. The Act establishes the procedure for setting the rates and conditions applicable to the transmission and distribution of electric power. The cost of electric power over the heritage electric pool (approximately 165 TW-hr) will be determined by way of tender solicitations governed by a procedure and a code of ethics which has been submitted to the Régie s approval. As was the case with respect to the January 2002 call for tenders, future supply contracts will be awarded on the basis of the lowest tendered price and other factors such as the applicable transmission costs. Compliance with the tender solicitation procedure and code of ethics will be monitored by the Régie, and supply contracts entered into by Hydro-Québec will require the prior approval of the Régie. 17

22 Ontario In 1987, Ontario Hydro, with the support of the then Ontario Ministry of Energy, developed policies to encourage the addition of new generating capacity by independent power producers. In connection with this policy initiative, Ontario Hydro entered into a number of long term PPAs with independent power producers. As of December 31, 2001, there were approximately 90 facilities owned and operated by independent power producers in the Province of Ontario which generated power from a variety of energy sources, such as water, natural gas and biomass. In May 1996, the Government of Ontario s Advisory Committee on Competition in Ontario s Electricity System issued a report to the Ontario Government that recommended the introduction of competition for the supply of power to the wholesale and retail markets. On April 1, 1999, as mandated by the Electricity Act, 1998, Ontario Hydro was separated into five entities: Ontario Power Generation Inc., a power generating company; Hydro One Inc., a power transmission and distribution company; the Ontario Electricity Financial Corporation, to manage and retire Ontario Hydro's debt and other liabilities such as its long-term obligations under existing power purchase agreements with nonutility generators such as independent power producers; the Electrical Safety Authority; and, an independent electricity market operator (IMO) to oversee the safe and reliable operation of Ontario's transmission grid, ensure security of supply in Ontario, operate the spot market for electricity and schedule and dispatch generating units for electricity supplied through the Ontario grid. The Ontario Energy Board is charged with regulation of Ontario s electricity industry, including licensing and rate setting. On May 1, 2002, the Ontario electricity market officially opened to wholesale and retail competition, with open access to transmission and distribution systems, implementation of the IMO Market Rules and the requirement for Ontario Power Generation Inc. to reduce its share of power generation in Ontario's market. With open access, generators can sell power under private contracts or through the spot market, and the IMO will administer, schedule, dispatch and, in certain circumstances, settle the purchase and sale of that power. As Ontario s largest transmission system owner, Hydro One Inc. was mandated to increase intertie capacity with neighbouring jurisdictions to Ontario. With increased intertie capacity, imports and exports of power are facilitated and Ontario will play a more prominent role in the North American electricity market. In fall 2002, factors such as unseasonably hot temperatures in the summer and supply constraints, resulting in high prices and reliance on imports, led the Ontario Government to reassess the implementation of Ontario s new electricity market system. Through the Electricity Pricing, Conservation and Supply Act, 2002, of December 2002, the commodity price of electricity for low-volume consumers and certain designated electricity consumers (e.g., schools and hospitals) has been capped at 4.3 /kwh. Although this legislative change effectively eliminates a significant portion of retail competition, it does not address the wholesale market, the PPAs managed by OEFC or the IMO s bid and offer or settlement process for generators. The Electricity Pricing, Conservation and Supply Act, 2002, of December 2002, also provides certain tax incentives to power generators that expand or build electricity generating facilities using alternative or renewable sources of energy. Having experienced the outcome of constrained capacity and high demand in Ontario, the Ontario Government announced in April 2003 its intention to take immediate steps to increase electricity reserves in the province and reduce Ontario s reliance on expensive imports, commencing with the OEFC securing new short-term power generation for the summer and fall of

23 British Columbia British Columbia Hydro and Power Authority, a government-owned utility ( BC Hydro ), is the main generator, transmitter and distributor of electricity in British Columbia. There are also a number of investorowned utilities in the province. The largest, Aquila Networks Canada (British Columbia) Ltd. ( Aquila ), serves approximately 125,000 customers in the southeastern area of the province. BC Hydro is the third largest electric utility in Canada with approximately 11,100 MW of power generating capacity, approximately 80% of the province s generating capacity. The remaining capacity is provided by Aquila, large and small industrial selfgenerators, and independent power producers. Independent power producers account for approximately 2% or 3% of the market in terms of production, almost all of which is sold to or through either BC Hydro or Aquila. BC Hydro has a green power initiative which includes the purchase of energy from independent power producers whose projects meet certain green criteria. BC Hydro entered into PPAs with independent power producers in 2001/02 and has recently prequalified 30 proposals (primarily small hydroelectric projects) under its 2002/03 Green Power Generation procurement program which is expected to lead to further PPAs with independent power producers by the end of BC Hydro s target for its 2002/03 program is to acquire up to 800 gigawatt hours of power per year. The Government of British Columbia announced a new energy plan for the province on November 25, 2002 and is in the initial stages of implementing aspects of the plan which relate to the electricity sector. The plan includes a number of significant initiatives relevant to independent power producers. Under the plan, public ownership of BC Hydro s generation, transmission and distribution assets will continue. However, BC Hydro is being reorganized and a new government-owned entity, to be regulated by the British Columbia Utilities Commission (the BCUC ), is being formed to plan, manage and operate BC Hydro s transmission assets to improve access to the transmission system for all generators and marketers. In addition, BC Hydro will no longer build new generation facilities. Instead, all new generation is to be built by private developers and BC Hydro will be limited to undertaking efficiency improvements at existing facilities. BC Hydro s generation division, which will operate as a separate line of business from its distribution division, will continue to supply electricity to the distribution division at low, historical costs under terms to be determined by the BCUC. The distribution division will acquire new power on a least cost basis from all potential resources (including independent power producers, customer owned generation, power imports and conservation and energy efficiency), subject to regulatory oversight by the BCUC. The distribution division is to pursue a voluntary goal of acquiring 50% of new supply from clean energy sources over the next ten years. Independent power producers will also now be permitted to serve all or part of the electricity needs of large industrial customers in the province. Hydroelectric Power Generation Process Hydroelectric power is generated by harnessing the force created as water falls from a higher elevation of the headpond to the lower elevation of the downstream tailrace. The difference in elevation between the headpond and the tailrace is referred to as head or operating head. The energy in the moving water is ultimately converted into electric energy. The water generally flows through an intake pipe or tunnel (known as the penstock) to a turbine, which is essentially a water wheel. The turbine spins a shaft attached to a generator which converts the mechanical energy of the spinning shaft into electricity. The electricity is then sent through a transformer where its characteristics are adjusted so that it can be sent along the transmission system. The water, after going through the turbine, exits the generating station through the draft tube and the tailrace where it rejoins the main stream of the river. There are three principal types of hydraulic turbines: - Kaplan: generally used where there is a low operating head (the difference in elevation between the intake waterlevel and tailrace waterlevel), varying from a few meters to 30 meters. - Francis: generally used with a medium head, i.e. approximately 10 meters to 200 meters. - Pelton: generally used where there is a very large head, usually greater than 200 meters. 19

24 Pictured below is a schematic diagram of a typical run-of-the-river hydroelectric power generating station using a Kaplan-type turbine: Advantages of Hydroelectric Power Generation Reliability The equipment involved in producing hydroelectric power has relatively few moving parts. This results in long life and low maintenance requirements. Unplanned outage rates for hydroelectric units are among the lowest in the electricity generation industry. Low Operating Costs Other than water royalties or license fees paid to governmental authorities, hydroelectric facilities have minimal fuel costs and therefore minimize the volatility of their cost structures compared to fossil-fueled plants. As well, most facilities can be operated remotely by a single person from a centralized control centre. As a result of these factors and of the low maintenance requirement and reliability of hydroelectric equipment, operating expenses for hydroelectric facilities are comparatively low and predictable compared to other types of electricity generation facilities. High Operational Flexibility Hydroelectric facilities can adjust quickly to changes in demand and, depending on the flow of the river or headponds, a hydroelectric facility may service both the base power requirements of its customers as well as their peak power requirements. Environmentally Preferred Hydroelectric generation produces virtually no greenhouse gas emissions or emissions that create acid rain, both of which have significant negative impacts on the environment. Hydroelectric generation creates none of the thermal, chemical, radioactive, water and air pollution produced by fossil-fueled and nuclear facilities during the power generation process. Instead of producing substantial amounts of residual wastes during the power generation process, hydroelectric generation simply returns the water to the river. Low Environmental Impact Small hydroelectric generating facilities, defined as facilities with less than 10 MW, are typically run-of-the-river facilities which do not have significant reservoir capacity. This reduces the potentially harmful effect of upstream flooding and other environmental impact that may change the flow of water within a given area. Factors Affecting Performance The performance of hydroelectric facilities is primarily affected by available water flows, which can be estimated based on the hydrological information available for a particular site. Hydrology is usually measured using gauges which record water flows over a period of time. This information is then generalized to permit production estimates. Notwithstanding the typical accuracy of hydrological estimates, revenues at hydroelectric facilities are significantly affected by low and high water flows within the watercourses on which the facilities are located. Low water flows typically result in a decrease in power production from a hydroelectric facility, as can extremely high water flows if they result in severe flooding which damages facilities. Available water flows are affected by climatic factors such as precipitation and temperature. 20