| What
is the Fund Codes ?
The Fund Codes are APVF Series I - APV 100 and APVF Series
II - APV 200
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What is the business proposition
for the Algonquin Power Venture Fund?
The Province of Ontario has faced a hydroelectricity shortage
for many years, especially during peak electrical demand periods.
This shortage commonly results in the import of substantial
electrical power from outside the province, principally the
U.S.A., to augment local production.
Since 1987, Ontario Hydro has entered into long-term power
purchase agreements with independent power producers. More than
120 such independent producers now operate in Ontario.
The role for new independent power production in the Province’s
hydroelectric marketplace will continue to grow as a result
of the historic shortages in generation capacity. The new Liberal
government has also stated its desire for more private investment
in the power generation sector.
Independent power production is characterized by a proven market,
low risk and predictable cash flows.
Shortages are likely to be an even greater threat because the
new Liberal government in the Province plans to shutter coal-fired
hydroelectric power plants by 2007 for environmental reasons.
Closure of these coal-fired facilities alone will result in
the loss of 7,500 megawatts of electricity.
In addition, continuing difficulties with the fleet of nuclear
power generating stations in Ontario is aggravating the generating
capacity shortfall. This particular situation was highlighted
during the August, 2003 blackout that impacted much of the Province
of Ontario.
For independent power producers, the Algonquin Power Venture
Fund provides debt investment to support the development of
independent power projects to meet consumer demand.
For investors, the Venture Fund provides predictable yield
and long-term capital appreciation by investing in opportunities
in the electric power generation, distribution and infrastructure
sector in Ontario while simultaneously preserving employment
in the businesses in which it invests.
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The Algonquin Power Venture Fund
is a labour-sponsored investment fund. Explain please.
A labour-sponsored investment fund (LSIF) is a corporation
sponsored by labour organizations and is designed to allow investment
in small to mid-size Canadian businesses. The businesses that
receive the investment must have less than $50 million in assets
at the time of investment and fewer than 500 employees. Typically,
LSIFs specialize in certain sectors of activity such as high
technology or the life sciences as well as independent power
production, for example.
A LSIF is an investment vehicle to reduce risk and enhance
potential returns. A typical LSIF investor reduces the risk
exposure of venture capital by holding a diversified portfolio
of small to mid-size companies.
The Government of Canada offers a 15% tax credit on a maximum
LSIF investment of $5,000.00 annually. The Province of Ontario
offers an additional 15% tax credit on eligible LSIF investments
resulting in a total federal/provincial tax credit of 30%. LSIFs
are RSP-eligible.
The International Union of Allied, Novelty and Production Workers,
Local 905 sponsors the Algonquin Power Venture Fund.
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Exactly what do you mean by “independent
power production”?
Ontario Hydro began entering into long-term power purchase
agreements with independent power producers for the provision
of electric power in the late 1980s. Independent producers use
a variety of technologies to generate electric power including
small hydroelectric facilities, wind powered generation, landfill
gas and wood waste-powered facilities and natural gas co-generation.
These power generation facilities are independently owned and
typically have less than 100MW installed capacity.
Independent power producers sell their energy on a commodity
basis under long-term power purchase agreements into the Ontario
electricity grid. Stipulated rate power purchase agreements
allow accurate long-term financial projections. Once commissioned,
independent power projects produce energy on a predictable basis.
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How does the Algonquin Power
Venture Fund identify investment opportunities?
One of the Venture Fund’s principal competitive advantages
is the common management it shares with the well-known and established
Algonquin Power Income Fund (APIF). The size and market reputation
of the APIF results in approaches by third party developers
of independent power to solicit investment for the completion
of power projects. This common management presents opportunity
for a strong deal flow for the Venture Fund.
The APIF is an acknowledged leading consolidator in North America’s
deregulated electric power generation market since its inception.
The APIF has been granted an SR-2 (Very High) stability rating
on trust units by Standard & Poors as well as an A- rating
on Fund Bank Dept.
Unlike other investment funds, our managers are active participants
in the power generation industry, not just investment professionals.
Members of the Venture Fund’s Investment Committee have a combined
total of more than 30 years experience developing, financing
and operating electric power generation projects. across North
America and internationally. This active participation in the
hydro sector provides the in-depth knowledge and experience
necessary to identify and assess the potential of investment
opportunities.
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What is the risk associated with
the independent power industry?
First, there is active market demand for independent power
to alleviate shortages and reduce reliance on power purchases
from sources outside Ontario. Second, electricity is a commodity
sold to regulated public utilities typically with long-term
power purchase agreements. Third, the development of independent
power projects involves predictable risk that can be mitigated
by the use of experienced consultants and contractors. Fourth,
unlike high technology or life sciences companies, independent
power production does not face research, development or marketing
risks prior to successful product commercialization. Fifth,
the technology of independent power production is proven, relatively
simple and offers low operating costs and a virtually perpetual
asset life.
How does the yield potential
of independent power production differ from high technology
or life sciences businesses that are typical of LSIF investments?
Product commercialization for development projects in high
technology or the life sciences is often unpredictable. As a
result, equity investments may not provide regular yield.
Independent power production, on the other hand, does offer
a predictable development schedule. It is an established industry
using proven, reliable technology. It is expected that the Algonquin
Power Venture Fund will provide a large percentage of its financing
for independent power production through debt financing. Interest
paid by an independent operator during construction, plus operating
cash flows generated after construction completion, will deliver
predictable yield to the Venture Fund.
After project commissioning, independent power projects are
generally valued on the basis of simple discount analysis of
predicted future cash flows based on the sale of energy under
a long-term power purchase agreement.
Volatility and uncertainty often associated with venture capital
investments in high technology or the life sciences, for example,
are not typically associated with independent power production.
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Is an Initial Public Offering
likely once these independent power projects are up and running?
Often, LSIFs do look toward an IPO as an opportunity – or exit
strategy - to sell interests in a company. The Algonquin Power
Venture Fund is different.
It is anticipated that the Algonquin Power Income Fund, subject
to arm’s length negotiations, would be interested in purchasing
an interest held by the Venture Fund following completion of
an independent power project.
This unique exit strategy eliminates the uncertainty surrounding
capital market support for an IPO as well as timing constraints
typically imposed by LSIF investment horizons
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