Andrew Willis and Paul Waldie
Toronto Star
May 2, 2002

Ontario Premier Ernie Eves, under pressure to alter the controversial Hydro One initial public offering, is already working with Bay Street on a possible alternative that could result in an income trust.

Comments by Ontario Energy Minister Chris Stockwell, who raised the possibility Tuesday of revising the Hydro One plan, were dismissed in some quarters. But sources said yesterday Mr. Eves is seriously considering scrapping the IPO and opting instead for an income trust model.

Indeed, Ontario provincial government officials have been working for days on an alternative, the sources said.

"The Premier wants to show a different approach, to show that he’s listening, then acting on what he hears," said a financier working with Mr. Eves.

"Here, there’s now heightened public sensitivity to the possibility of rate increases, to the ownership of Hydro One and to the issue of funding the company in the future."

"An income trust could be a really good structure, and [provincial Energy Minister] Chris Stockwell really likes the idea," the source said.

Under an income trust, the government would continue to own Hydro One but would sell units to investors who would receive a portion of the company’s cash flow. The units would trade on the Toronto Stock Exchange. The trust would likely have a defined lifetime of between 25 and 40 years, after which the cash would flow to the government.

The idea has been under consideration for several days and was first raised in a recent letter to Mr. Stockwell from Calvin Stiller, head of Canadian Medical Discoveries Fund Inc., who is a director of several real estate investment trusts.

Mr. Stiller is also chairman of the Ontario Research and Development Fund, which the province created in 1997 to invest $500-million in research projects.

Mr. Eves himself yesterday said he would rethink the future of Hydro One.

"I’m not doing this [selling Hydro One] so some guy on Bay Street can get a bonus before he goes on summer vacation," he told reporters.

Mr. Eves has been under pressure to revise the Hydro One privatization ever since an Ontario court ruled last month that the government did not have the authority to sell the utility. Shares in Hydro One were expected to go on sale in June in the largest initial public offering in Canadian history.

The government is appealing the ruling and plans to change the privatization legislation.

Last week, Mr. Eves said he was committed to the Hydro privatization and promised to hold public hearings on the issue. Those hearings began Tuesday in London, Ont., but Mr. Stockwell cancelled the meeting before it began when the crowd became unruly.

Mr. Stiller was supposed to discuss the income trust idea at the hearing.

Dozens of companies have created income trusts or investment trusts, including TrizecHahn Corp., which is about to reorganize itself into two investment trust. BCE Inc. also spun out a $385-million trust that contains stakes in Bell Canada’s local phone networks.

Government advisers are working from the notion that Hydro One might generate $500-million to $600-million annually.

If the income trust was structured to offer investors a 7.5- to 10-per-cent annual yield, a financier working on the concept projects raising $6-billion or more through an income trust offering. The Hydro One IPO was expected to raise between $5-billion and $5.5-billion.

Sources familiar with the project said an income trust would also impose financial discipline on Hydro One’s management.

Tom Adams of Energy Probe, an environmental group that supports Hydro One’s privatization, says the income trust idea hasn’t been thoroughly discussed.