Great Lakes Hydro Income Fund
TSX : GLH.UN

July 06, 2009 15:25 ET

Great Lakes Hydro Income Fund Announces Strategic Repositioning, Proposed Acquisition of 15 Hydroelectric Facilities, and $380 Million Offering of Subscription Receipts

GATINEAU, QUEBEC--(Marketwire - July 6, 2009) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

Great Lakes Hydro Income Fund ("GLHIF" or the "Fund") (TSX:GLH.UN) today announced that the Board of Trustees has approved a strategic repositioning which is expected to significantly enhance and expand the Fund's renewable power platform and position it for growth and continued value-creation over the long term.

The repositioning includes a number of strategic initiatives, whereby the Fund will become Brookfield Asset Management Inc.'s ("Brookfield") dedicated platform for Canadian contracted renewable power generating assets while solidifying the Fund's position as one of the largest Canadian renewable power businesses and continuing its focus on stable cash flows based on high-quality, long-life renewable power assets. The key initiatives include:

- The acquisition of substantially all of Brookfield's Canadian renewable power generation business not already owned by the Fund;

- Increasing the market capitalization of the Fund to approximately $1.6 billion;

- Planned conversion to a corporation by January 2011;

- Continued focus on stable cash flows based on high-quality, long-life renewable power assets;

- The Fund being positioned to maintain its $1.25 annual distribution per trust unit (a yield of 8.3% at the issue price) with an improved payout ratio supporting future portfolio and dividend growth;

- Brookfield, through its subsidiary Brookfield Renewable Power Inc. ("BRPI"), will purchase 50% of the newly issued units at closing of the Transaction (described below), increasing its capital invested in the Fund to $1.0 billion and maintaining its 50.01% ownership and;

- GLHIF changing its name to Brookfield Renewable Power Fund following the successful completion of the Transaction.

As part of this strategic repositioning, the Fund will indirectly acquire from BRPI, 15 operating hydroelectric facilities with a total installed capacity of 387 MW and one soon-to-be-constructed wind power project (collectively, the "Projects"), and BRPI has agreed to increase the price the Fund currently receives for generation output from its existing Lievre Power and Mississagi Power assets to reflect increases in power prices since the contracts were originally entered into (collectively, the "Transaction"). The additional cash flow resulting from the Transaction is expected to position the Fund to maintain its current distributions and finance expansion over time. The Transaction is subject to approval by a majority of the votes of unitholders other than BRPI and those persons who are promoters, directors, officers or other insiders of the Fund or BRPI and their associates and affiliates ("Minority Unitholders").

The total consideration payable by the Fund to BRPI in connection with the Transaction is $945 million, which will be satisfied by (i) $365 million in cash, payable out of the net proceeds of a $185 million bought-deal offering of subscription receipts (the "Offering") and the net proceeds of a $195 million concurrent private placement of subscription receipts (the "Private Placement"); (ii) a $200 million senior unsecured note of the Fund to be issued to BRPI; and (iii) the issuance to BRPI of 25,562,500 trust units of the Fund at a price equal to the weighted average price of the Subscription Receipts issued in the Offering and the Private Placement (representing an aggregate of $380 million). Details of the financing of the Transaction are provided below under "Details of the Offering".

In connection with the proposed Transaction, S&P and DBRS have re-affirmed the Fund's stability ratings of SR-2 (stable) and STA-2 (high), respectively.

Transaction Approval

The Transaction is a "related party transaction" within the meaning of Multilateral Instrument 61-101 ("MI 61-101"). As such, the Transaction is subject to approval by Minority Unitholders, and must be the subject of an independent valuation. A special committee of the Board of Trustees, each of whom is independent of BRPI and Brookfield (the "Independent Committee") has unanimously approved the Transaction. PricewaterhouseCoopers LLP was formally engaged by the Independent Committee to provide an independent valuation (the "Formal Valuation") in accordance with the requirements of MI 61-101 for use by the Independent Committee. The Formal Valuation was one factor, among others, that the Independent Committee considered in assessing the merits of the Transaction. Based upon and subject to the scope of review, major assumptions and restrictions and qualifications contained in the Formal Valuation, PricewaterhouseCoopers LLP gave its opinion dated July 6, 2009 that, as of June 19, 2009, the fair market value of the acquired assets (consisting of the shares of the various entities that own the Projects and the increase in the price BRPI pays the Fund for power it purchases from the Fund's Lievre and Mississagi hydroelectric facilities) was in the range of $905 million to $1.0 billion, with a calculated mid-point of $952.5 million. The Formal Valuation was provided for the use and purpose of the Independent Committee only and should not be construed as a recommendation to invest in or divest of trust units.

The Transaction is subject to customary closing conditions and the receipt of all necessary regulatory approvals, including Minority Unitholder approval at a special meeting expected to take place on or about August 19, 2009. The record date for determining unitholders entitled to receive notice and to vote at the meeting is July 6, 2009. An information circular is expected to be mailed to unitholders in late July. The Transaction is expected to close in the third quarter of 2009.

Benefits of the Transaction:

The proposed Transaction is consistent with the Fund's strategy to own and operate high-quality, long-life renewable power assets backed by long-term contracted cash flows from creditworthy counterparties. The anticipated benefits to the Fund include:

- Sizable acquisition of unique renewable power facilities underpinned by long duration Power Purchase Agreements ("PPAs");

- Expands renewable platform to 42 hydroelectric facilities and two wind farms with a combined capacity of nearly 1,700 MW and anticipated long-term average annual generation of more than 6,500 GWh;

- Enhances the Fund's financial and distribution profile by increasing distributable cash flow by approximately $100 million annually, positioning the Fund to maintain its current $1.25 annual distribution per trust unit and improving the payout ratio to approximately 80%, with approximately $35 million in annual cash flow available for reinvestment in growth; and

- Increases the Fund's market capitalization to more than $1.6 billion and increases its asset base to more than $3 billion, supporting greater liquidity and institutional interest going forward.

"In the decade since its inception, the Fund has provided its unitholders with a very strong track record founded on high-quality assets and cash flow stability," said Richard Legault, President and Chief Executive Officer of the Fund. "We believe this transaction builds on that history of performance while opening the door to new opportunities and investors, and positions the Fund for continued growth and success in the rapidly-expanding renewable power market," added Mr. Legault.

About the Projects

The Fund intends to acquire indirectly a total of 15 operating hydroelectric stations and one wind power project under development:

Great Lakes Power Limited ("GLPL")

GLPL generates electricity from its 12 wholly-owned hydroelectric generating stations located on the Magpie, Michipicoten, Montreal and St. Mary's Rivers in the Algoma region of Northern Ontario. The GLPL facilities have a total installed capacity of approximately 349 MW and expected total annual energy generation of 1,593 GWh. Many of the facilities have been recently constructed or modernized and, as a result, they have low operating costs, high-reliability and long-expected asset life, giving them a sustainable competitive advantage and the ability to generate long-term, stable cash flows. BRPI will guarantee to the Fund an initial fixed price for each MWh of energy produced and delivered by the GLPL facilities (escalated at 40% of CPI annually until at least 2029). Effective on closing of the Transaction, the Fund is expected to generate annual revenues of approximately $108 million based on the long-term average generation of the GLPL facilities.

Hydro-Pontiac

Hydro-Pontiac operates the Waltham and Coulonge hydroelectric stations located in Quebec on the Noire and Coulonge Rivers, respectively, with a combined installed capacity of 28 MW and expected annual energy generation of 192 GWh. All of the power produced at these facilities is sold under two PPAs with Hydro-Quebec, expiring in 2020 and 2019, respectively. Effective on closing of the Transaction, BRPI will guarantee to Hydro-Pontiac the price of energy produced and delivered by the Hydro-Pontiac facilities following the expiry of the PPAs with Hydro-Quebec until at least 2029 at the prevailing rate applicable to the GLPL facilities at that time.

Valerie Falls

The Valerie Falls generating station, located near Atikokan, Ontario, was built in 1994 on a diversion of the Seine River. It has an installed capacity of 10 MW and expected annual generation of 47 GWh. Valerie Falls sells all its generation to the Ontario Electricity Financial Corporation under a PPA expiring in 2044.

Gosfield Wind

Gosfield is a soon-to-be-constructed wind project in Essex County in southwestern Ontario. The project is expected to have an installed capacity of 50 MW and an expected annual generation of 149 GWh. All power produced by Gosfield Wind will be sold at a fixed price to the Ontario Power Authority under a PPA that expires 20 years following the commercial operation date of the project, currently expected to be in 2010. Gosfield Wind is expected to benefit from a $10/MWh incentive from the Canadian Federal Government's ecoEnergy Program for Renewable Energy for ten years. The construction of Gosfield Wind, scheduled to begin later this year, is expected to provide the Fund with a significant amount of accelerated capital cost allowance.

Gosfield Wind has an approximate construction cost of $147 million, the substantial majority of which will be represented by fixed-price equipment supply and construction services contracts. Pursuant to a turbine supply contract, Siemens is expected to supply twenty-two 2.3 MW turbines and M.A. Mortenson Company, an experienced contractor of wind farms, is expected to lead the construction of balance of plant infrastructure and installation of the turbines. Equity required to fund the project is expected to be provided by operating cash flow.

Lievre and Mississagi Rate Increase

In connection with the Transaction, the price the Fund receives for power generated at the Fund's Lievre Power and Mississagi Power hydroelectric facilities will also be increased. Effective on closing of the Transaction, the current Power Agency and Guarantee Agreement ("PAGA") between BRPI and Lievre Power L.P. (entered into in 1999) will be amended to increase the price (from a guaranteed price in 2008 of $40/MWh for 1,065,000 MWh of generation and $32/MWh for generation in excess of that amount) to $68 for each MWh generated from the Fund's Lievre facilities (excluding the Cedar Dam facility) until the Lievre PAGA expires in December 2019.

Effective on closing of the Transaction, the master power purchase agreement ("PPA") between Brookfield Energy Marketing Inc. and Mississagi Power Trust (entered into in 2002) will be amended to increase the price (from a price that in 2008 was $59/MWh) to $68/MWh for all power generated by the Fund's Mississagi Power facilities for the remaining term of the Mississagi PPA expiring in December 2022.

Each of the Lievre PAGA and Mississagi PPA will maintain existing inflation-linked price escalation provisions.

Corporate Conversion and a Focus on Dividend Stability and Growth

The Fund's management and Board of Trustees have concluded that as a result of the SIFT (specified investment flow-through) Rules, there is diminishing value associated with the trust structure after 2011 and that the best opportunity for creating value for unitholders would be to convert to a corporate entity. By converting into a dividend paying corporation, management believes that the Fund will benefit from increased tax planning certainty, better access to capital markets to fund its future growth, and improved liquidity for its equity investors. The Fund intends to convert into a corporation on or before January 1, 2011, subject to obtaining unitholder approval. With the completion of the proposed Transaction, the Fund expects to be well-positioned to maintain its current cash distributions after its conversion to a corporation. With a significantly lower payout ratio, the Fund expects to offer greater stability and the ability to finance future acquisitions without having to raise additional equity.

Details of the Offering

In connection with the proposed Transaction, the Fund has entered into an agreement with a syndicate of underwriters led by Scotia Capital Inc. and CIBC World Markets Inc., to sell, on a bought-deal basis, an aggregate of 12,242,500 Subscription Receipts at a price of $15.10 per Subscription Receipt, each representing the right to receive one trust unit of the Fund on closing of the Transaction, for total gross proceeds of $185 million. The Offering is expected to close on or about July 24, 2009.

Concurrent with the closing of the Offering, certain investors, including certain existing unitholders of the Fund, have agreed to purchase an aggregate of 13,320,000 Subscription Receipts on a private placement basis at a price of $14.65 per Subscription Receipt for aggregate proceeds of $195 million pursuant to subscription agreements with the Fund dated July 6, 2009. The Subscription Receipts issued to private placement purchasers will be subject to resale restrictions under applicable securities laws. The Private Placement was conducted by a syndicate of agents co-led by Scotia Capital Inc. and CIBC World Markets Inc.

The net proceeds of the Offering and the Private Placement will be used to partially fund the Transaction. On closing of the Transaction, BRPI will also acquire 25,562,500 trust units of the Fund at a price equal to the weighted average price of the Subscription Receipts issued in the Offering and the Private Placement representing a total amount of $380 million. BRPI currently holds 50.01% of the issued and outstanding trust units, assuming the exchange of all of its Class B voting exchangeable shares of Great Lakes Power Holding Corporation into trust units. Following closing of the Transaction, BRPI will continue to hold its 50.01% ownership interest in the Fund, on a fully-exchanged basis, and the Fund will indirectly own 100% of the Projects.

Closing of the Transaction is subject to closing of the Offering and Private Placement, as well as regulatory and Minority Unitholder approval.

The Fund will apply to list the Subscription Receipts on the TSX.

This news release shall not constitute an offer of securities for sale in the United States. The units of the Fund offered will not be and have not been registered under the United States Securities Act of 1933, as amended, and may not be offered or sold into the United States absent registration or an exemption from registration. There shall not be any public offering of the units of the Fund in the United States.

About Great Lakes Hydro Income Fund

Great Lakes Hydro Income Fund (www.greatlakeshydro.com) is a premier Canadian income fund and one of the largest power income funds in North America with 1,260 megawatts of power generating capacity and average annual production of 4,539 gigawatt hours.

Great Lakes Hydro Income Fund produces electricity exclusively from environmentally friendly and renewable resources. The Fund indirectly owns or holds interests in 27 high quality hydroelectric generating stations and one wind farm in four distinct geographic regions across North America: Quebec, Ontario, British Columbia and New England.

Brookfield Renewable Power, which comprises all the power operations of Brookfield Asset Management, owns 50.01% of the Fund's outstanding units on a fully exchanged basis.

Great Lakes Hydro Income Fund units are listed for trading on the Toronto Stock Exchange under the symbol GLH.UN.

Forward Looking Information

Certain information regarding the Fund contained herein may constitute forward-looking statements. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other statements that are not statements of fact. The words "will" and "expected" which are predictions of or indicate future events, trends or prospects and which do not relate to historical matters identify forward-looking statements. Forward looking statements in this press release include statements regarding the closing of the Offering, the Private Placement and the Transaction, the planned conversion to a corporation, their impact on the business, operations, financial condition and tax position of the Fund and the intention of the Fund to seek further acquisitions. Although the Fund believes that the Fund's anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, it can give no assurance that such expectations will prove to have been correct. The reader should not place undue reliance on forward looking statements and information as such statements and information involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information.

Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include: the risk that the definitive agreements for the acquisition are not entered into or that the acquisition does not close, other risks associated with the acquisition and achieving the anticipated benefits, economic and financial conditions, the behaviour of financial markets including fluctuations in interest and exchange rates, risks of equipment failure and other risks and factors detailed from time to time in the company's Annual Information Form filed with the securities regulators in Canada under the heading "Risk Factors". We caution that the foregoing list of important factors that may affect future results is not exhaustive. Except as required by law, the Fund undertakes no obligation to publicly update or revise any forward looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.

Contact Information