GREAT LAKES POWER INC.
- ------------------------
2002 ANNUAL REPORT
GREAT LAKES POWER INC. is an independent power producer with operations and
developments located mainly in North America. Our power operations, which
operate under the name "Brascan Power", include 37 hydroelectric generating
stations and one natural gas-fired cogeneration plant with a combined generating
capacity of 1,636 megawatts. Our current operations generate on average 7,000
gigawatt hours of electricity annually and have water storage capacity of 1,767
gigawatt hours.
Our goal is to build long-term sustainable cash flow by investing in high
quality assets at attractive values, by actively working to increase returns on
capital invested in these assets and by continually pursuing opportunities for
future growth.
Great Lakes is a wholly owned subsidiary of Brascan Corporation
(TSX: BNN.A, NYSE: BNN).
HEAD OFFICE CONTENTS
GREAT LAKES POWER INC. 2002 Highlights 1
Suite 300, P.O. Box 762
BCE Place, 181 Bay Street Corporate Profile 2
Toronto, Ontario
M5J 2T3 Management's Discussion and Analysis 3
Telephone: 416-363-9491 Consolidated Financial Statements 9
Facsimile: 416-363-2856
Ten Year Review 21
Directors and Officers 21
2002 HIGHLIGHTS
FINANCIAL HIGHLIGHTS
millions, except per share amounts 2002 2001 2000
- ----------------------------------- ---------- ---------- ----------
OPERATING RESULTS
Net power revenue $ 326 $ 215 $ 178
Net income 167 131 116
FINANCIAL POSITION
Total assets(1) 3,500 2,930 2,642
Shareholders' equity(1) 1,374 1,299 1,249
---------- ---------- ----------
- --------------------
(1) At December 31
OPERATING HIGHLIGHTS 2002 2001 2000
- ----------------------- ---------- ---------- ----------
Total installed capacity (megawatts)(1) 1,636 991 905
Electricity generation (gigawatt hours)(2) 5,584 3,959 4,003
---------- ---------- ----------
- ------------------
(1) At 100%
(2) Proportionate
POWER OPERATIONS(1) GENERATING GENERATING INSTALLED
at December 31, 2002 STATIONS UNITS CAPACITY
- ------------------------- ----------- ----------- ----------
megawatts
ONTARIO
Great Lakes Power 12 22 331
Mississagi Power 4 8 488
Valerie Falls Power 1 2 10
Lake Superior Power 1 3 110
----------- ----------- ----------
18 35 939
QUEBEC
Lievre River Power 3 10 238
Pontiac Power 2 7 28
----------- ----------- ----------
5 17 266
NORTHEAST UNITED STATES
Maine Power 6 31 126
New Hampshire Power 6 21 31
----------- ----------- ----------
12 52 157
OTHER POWER OPERATIONS
Powell River Energy 2 7 82
Louisiana HydroElectric Power 1 8 192
----------- ----------- ----------
3 15 274
----------- ----------- ----------
TOTAL 38 119 1,636
=========== =========== ==========
- -----------------
(1) All operations are hydroelectric power generation, except for the Lake
Superior Power natural gas-fired cogeneration plant.
2002 ANNUAL REPORT 1
CORPORATE PROFILE
Great Lakes Power Inc. ("Great Lakes" or the "company") is an independent
electric power generation company with operations in Canada and the United
States. The company operates 38 power generating stations with a combined
generating capacity of 1,636 megawatts ("MW"). These stations include 37
hydroelectric generating facilities with an installed capacity of 1,526 MW and
one 110 MW natural gas-fired cogeneration plant. Great Lakes is also involved in
power transmission and distribution.
Great Lakes is a wholly owned subsidiary of Brascan Corporation ("Brascan").
Brascan operates in the real estate, power generation and financial sectors,
with investments in the resource sector. Brascan's common shares are listed on
the New York and Toronto stock exchanges.
Great Lakes is committed to expanding its power production base by acquiring
existing hydroelectric assets and developing greenfield sites.
Great Lakes conducts its power generating operations in Ontario, Quebec and the
northeast United States, with other power operations in British Columbia and
Louisiana. These operations are primarily wholly owned either directly or by the
Great Lakes Hydro Income Fund, in which the company owns a 50% interest.
The company's principal operating units are summarized below.
ONTARIO
Great Lakes Power includes a generating business with 12 hydroelectric stations
located on the Magpie, Michipicoten, Montreal and St. Mary's Rivers in northern
Ontario, having a combined generating capacity of 331 MW. Great Lakes Power also
includes a separate transmission and distribution business which has supplied
power to the city of Sault Ste. Marie and the Algoma District for almost 90
years.
Mississagi Power includes four hydroelectric generating stations in northern
Ontario located on the Mississagi River northeast of Sault Ste. Marie, with a
combined generating capacity of 488 MW. These facilities were acquired by the
company in May 2002.
Valerie Falls Power is a 65% owned 10 MW hydroelectric generating station
located on the Seine River in northwestern Ontario.
Lake Superior Power is a 110 MW natural gas-fired cogeneration station located
in Sault Ste. Marie, Ontario.
QUEBEC
Lievre River Power consists of three hydroelectric generating stations located
on the Lievre River in western Quebec with a combined generating capacity of 238
MW. This operation has four transmission interconnections with the Quebec power
grid and two with the Ontario power grid.
Pontiac Power includes two hydroelectric generating stations with a combined
generating capacity of 28 MW located on the Noire and Coulonge Rivers in western
Quebec. This operation also has a transmission interconnection with the Ontario
power grid.
NORTHEAST UNITED STATES
Maine Power consists of six hydroelectric generating stations having a combined
generating capacity of 126 MW located on the Penobscot River in northern Maine.
These facilities were acquired by the company in February 2002.
New Hampshire Power includes six hydroelectric generating stations with a
combined capacity of 31 MW located on the Androscoggin River in northern New
Hampshire. These facilities were acquired by the company in May 2002.
OTHER POWER OPERATIONS
Powell River Energy consists of two 50% owned hydroelectric generating stations
in southwestern British Columbia with a combined generating capacity of 82 MW.
These facilities were acquired by the company in February 2001.
Louisiana HydroElectric Power owns and operates a 192 MW run-of-the-river
hydroelectric generating station and sediment control facility on a diversion of
the lower Mississippi River in Louisiana. The company has a 75% residual
interest in this facility.
Great Lakes is completing a 30 MW hydroelectric generating station in British
Columbia and is also constructing three hydroelectric stations in southern
Brazil with a combined capacity of 61 MW.
2 GREAT LAKES POWER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATIONS REVIEW
SUMMARY
Production statistics for the company's power generating operations for 2002 and
2001 are shown below:
2002 2001
---------- ----------
POWER GENERATED (gigawatt hours)(1)
Ontario 2,531 1,793
Quebec 1,585 1,418
Northeast United States 558 --
Other Power Operations 910 748
------ ------
Total 5,584 3,959
====== ======
POWER REVENUE ($ millions)
Ontario $ 198 $ 182
Power purchases (14) (55)
------ ------
184 127
Quebec 80 69
Northeast United States 37 --
Other Power Operations 25 19
------ ------
Net Power Revenue $ 326 $ 215
====== ======
- ----------------
1. Power generation is calculated on a proportionate ownership basis.
The company's power operations generated 5,584 gigawatt hours ("GWh") of
electricity during 2002, up from 3,959 GWh in 2001 primarily due to new
acquisitions and a return to more normal precipitation levels after unusually
dry conditions in 2001.
ONTARIO
Power generated by the company's operations in Ontario increased by 41% to 2,531
GWh from 1,793 GWh in 2001. This reflected the acquisition of Mississagi Power
in May 2002 which generated 340 GWh during the balance of the year, and a return
to more normal hydrology and generation at the Great Lakes Power system.
Power generated by the company's operations in Ontario in 2002 compared to 2001
is shown below:
gigawatt hours 2002 2001
- --------------- ---------- ----------
Great Lakes Power - Generation 1,639 1,301
Mississagi Power 340 --
Valerie Falls Power 45 51
Lake Superior Power(1) 507 441
------ ------
2,531 1,793
====== ======
- --------------
1. Includes electricity equivalents of contracted gas sales.
Following the opening of the electricity market in the Province of Ontario to
competition on May 1, 2002, the company made a number of changes in response to
the new regulatory environment, including the termination of its power purchase
agreement with Ontario Power Generation ("OPG"). Great Lakes Power's operations
have been restructured into two separate businesses: a generation unit and a
regulated power transmission and distribution unit. The company continues to be
a distributor of power in its historical service area in the Algoma District and
sells electricity to the Public Utility Commission of Sault Ste. Marie and St.
Marys Paper under power sales agreements.
In May 2002, the company acquired four hydroelectric generating stations located
on the Mississagi River northeast of Sault Ste. Marie in northern Ontario from
OPG for $346 million. These stations have a combined generating capacity of 488
MW and are being operated in conjunction with the company's other 12
hydroelectric stations in this area.
In October 2002, the company acquired Duke Energy's 50% interest in the Lake
Superior Power co-generation plant in Sault Ste. Marie, Ontario, increasing its
ownership in this facility to 100%. The consideration for this acquisition was
$67 million, comprised of $30 million in cash and the assumption of $37 million
of debt. Lake Superior Power is operated in conjunction with the company's other
hydroelectric power stations in northern Ontario. All of its electricity
production is sold to Ontario Electricity Finance Corporation under a long-term
contract.
During 2002, the company substantially completed the 45 MW Robert A. Dunford
hydroelectric generating station on the Michipicoten River near Wawa in northern
Ontario, to be commissioned during the first quarter of 2003. This project,
named after a former Chairman of the company, has been completed on schedule and
under budget at a cost of $72 million. It replaces the older 28 MW High Falls
generating station with a larger, more efficient station with increased
peak-period generating capability.
QUEBEC
Power generated by the company's operations in Quebec increased by 12% to 1,585
GWh from 1,418 GWh in 2001. The increase is related to improved water levels at
Lievre River Power during the summer of 2002. Power generated by the company's
operations in Quebec in 2002 compared to 2001 is shown below:
gigawatt hours 2002 2001
- --------------- ---------- ----------
Lievre River Power 1,399 1,224
Pontiac Power 186 194
------ ------
1,585 1,418
====== ======
NORTHEAST UNITED STATES
The company's two power operations in the northeast United States, Maine Power
and New Hampshire Power, were acquired during 2002. These two new operations
generated 558 GWh during the year since their acquisition. These amounts were
below their long term averages due to lower precipitation levels in New England.
2002 ANNUAL REPORT 3
Power generated by the company's operations in northeast United States in 2002
is shown below:
gigawatt hours 2002
- ---------------- -------
Maine Power 477
New Hampshire Power 81
----
558
====
In February 2002, the company acquired Maine Power, an integrated power
generating and distributing system in northern Maine from Great Northern Paper
Inc. for US$156.5 million. This system includes six hydroelectric generating
stations located on the main and west branches of the Penobscot River with a
combined generating capacity of 126 MW, as well as an interconnection with the
New England Power Pool. Construction commenced in November 2002 on the expansion
of this interconnection from 20 MW of capacity to 150 MW for completion during
the first half of 2003. This will facilitate the transmission of Maine Power's
surplus generation into the New England Power Pool.
In May 2002, the company expanded its presence in the northeastern United States
with the acquisition of six hydroelectric generating stations in northern New
Hampshire from a local forest products company for US$32 million. These stations
located on the Androscoggin River are being operated in conjunction with the
company's six Maine Power stations.
The New Hampshire Power acquisition was made in conjunction with the purchase by
Nexfor Inc. ("Nexfor"), an affiliate of Brascan, of certain pulp and paper
facilities in that state. During the first quarter of 2003, the company expects
to start construction of a 25 MW cogeneration plant in Berlin, New Hampshire.
This station will provide electricity and steam for sale to Nexfor's pulp and
paper facilities and is expected to be completed in 2004.
OTHER POWER OPERATIONS
Power generated by the company's other power operations in North America
increased by 22% to 910 GWh from 748 GWh in 2001. This reflected improved water
flows on the lower Mississippi River which increased power generation at
Louisiana HydroElectric Power by 13%. Power generation at Powell River Energy,
which was acquired in February 2001, increased by 49% due to a return to normal
water levels and a full year of generation available to the company.
Power delivered by the company's other North American power operations in 2002
compared to 2001 is shown below:
gigawatt hours 2002 2001
- ----------------- -------- --------
Louisiana HydroElectric Power 639 566
Powell River Energy 271 182
--- ---
910 748
=== ===
During 2002, construction progressed on the 30 MW Pingston Creek hydroelectric
generating station near Revelstoke, B.C. Developed in a 50/50 joint venture with
Canadian Hydro Developers Inc., this project is expected to start production in
the first half of 2003. In August 2002, the partners signed a 20-year contract
to sell this station's power to BC Hydro. This project is expected to increase
the company's generating capacity in British Columbia and further enhance the
company's geographic diversification.
Development work continues on five new hydroelectric generating stations in
southern Brazil. Construction is under way on three of these stations: the 30 MW
Passo do Meio project in the State of Rio Grande do Sul, and the 16 MW Pedrinho
and 15 MW Salto Natal projects in the State of Parana, all of which are expected
to be completed in the first half of 2003.
INCOME ANALYSIS
Great Lakes' net income for 2002 increased to $167 million from $131 million in
2001.
Financial results for the year ended December 31, 2002 compared to 2001 are
shown in the following table:
millions, except per share amounts 2002 2001
- ----------------------------------- -------- --------
Revenues
Power revenue $340 $270
Power purchases (14) (55)
---- ----
Net power revenue 326 215
Investment & other income 92 105
---- ----
418 320
==== ====
Expenses
Interest 90 82
Operating & maintenance 60 37
Fuel purchases 18 21
Depreciation 40 27
Non-controlling interests 18 12
Income & other taxes 25 10
---- ----
251 189
---- ----
Net income $167 $131
==== ====
POWER REVENUE
Total power revenue for 2002 was $340 million compared with $270 million in
2001, an increase of 26% primarily due to the acquisitions of Mississagi Power,
Maine Power and New Hampshire Power and better hydrology and electricity prices.
Great Lakes strives to maximize the stability and predictability of power
generating revenues through the use of fixed price contracts to minimize the
impact of price fluctuations, and through diversification of watersheds and
water storage reservoirs to minimize fluctuation in generation levels.
Approximately 85% of the company's projected 2003 revenues is subject to fixed
price contracts or regulated revenue requirements. The remaining revenue is
generated through the sale of power on a wholesale basis. Due to the low cost of
hydroelectric power and the ability to increase generation during peak pricing
4 GREAT LAKES POWER INC.
periods, the company is able to generate attractive margins on its uncommitted
capacity. Great Lakes' long-term sales contracts have an average duration of 17
years, and its counterparties are almost exclusively customers with
long-standing credit history or investment grade ratings.
Ontario
Power operations in Ontario contributed $184 million of revenue in 2002 compared
to $127 in 2001. The main reasons for the increased revenues were the return to
long-term average generation at Great Lakes Power and the addition of Mississagi
Power. Correspondingly, generation in this region increased to 2,531 GWh from
1,793 GWh in 2001.
Quebec
Power operations in Quebec contributed $80 million of revenue in 2002 compared
to $69 million in 2001. The increase is attributed to improved generation at
Lievre River Power along with improved average prices, secured by long-term
contracts.
Northeast United States
The company acquired two power operations in the Northeast United States during
February and May of 2002. These operations contributed 558 GWh of generation and
$37 million in revenues during the balance of the year.
Other Power Operations
Other power operations include the results of Louisiana HydroElectric Power and
Powell River Energy. Revenue from other power operations totalled $25 million in
2002, compared with $19 million in 2001. The increase is a result of improved
water conditions on the lower Mississippi River, which increased generation at
Louisiana HydroElectric Power, combined with a full year of generation from
Powell River Energy.
POWER PURCHASES
The company had an obligation to serve all customers in its Great Lakes Power
service area in northern Ontario until May 1, 2002, the date when the
electricity market in Ontario opened to competition. As a result, the company
purchased power from OPG as required to supplement its own generation. After May
1, 2002, this obligation ceased and, as a result, supplemental power purchases
are no longer required.
INVESTMENT AND OTHER INCOME
Investment and other income for 2002 was $92 million compared with $105 million
in 2001. Investment and other income consists of dividend income from long-term
investments and the company's securities portfolio, and interest on loans
receivable. The decrease in investment and other income is attributed to lower
average interest rates in Canada and the United States, and decreased loans
receivable balances during the year.
EXPENSES
Total expenses for 2002 were $251 million compared with $189 in 2001. Total
expenses increased by 33% from 2001 as a result of the acquisitions of
Mississagi Power, Maine Power and New Hampshire Power and a full year of
expenses for Powell River Energy, which was acquired in February 2001.
Interest expense in 2002 was $90 million compared to $82 million in 2001.
Interest expense consists of the costs related to servicing property specific
borrowings and corporate term debt. The increase in interest expense is
attributable to additional debt incurred as a result of acquisitions. These
costs were partially offset by decreasing interest rates during the year.
Operating and maintenance costs increased to $60 million in 2002 compared with
$37 million in 2001. Operating and maintenance costs consist of labour,
materials and administrative support. The increase in operating and maintenance
costs is primarily attributable to the acquisitions in 2002.
Fuel purchases consist of the costs for natural gas required for the Lake
Superior Power cogeneration plant. Fuel purchases were $18 million in 2002
compared to $21 million in 2001. The decrease in fuel purchases is a result of
less gas purchased for resale in 2002.
Depreciation expense in 2002 was $40 million compared to $27 million in 2001.
The increase is attributable to the acquisitions in 2002 and 2001.
Non-controlling interests expense increased to $18 million in 2002 compared with
$12 million in 2001. Non-controlling interest consists of the allocation of
income associated with the non-controlling interests in the company's
consolidated entities. The increase is related to the higher earnings recorded
by the Great Lakes Hydro Income Fund (the "Income Fund"), which is 50% owned by
other investors.
Income and other taxes increased to $25 million in 2002 compared with $10
million in 2001. Income and other taxes consist of municipal and other
generation taxes on hydroelectric facilities and federal, provincial and state
income taxes. The increase in income and other taxes is primarily related to
municipal taxes on the assets acquired during the past two years, and increased
non-cash provisions for federal and provincial income taxes, which are accounted
for under the future liability method of accounting.
2002 ANNUAL REPORT 5
BALANCE SHEET ANALYSIS
The company's total assets increased during 2002 from $2,930 million to $3,500
million, due mainly to investments in additional generating capacity. Assets and
liabilities at December 31, 2002 and 2001 are summarized in the following table:
millions 2002 2001
- --------- ------- -------
Assets
Cash & cash equivalents $ 10 $ 10
Accounts receivable & other 186 336
Securities 590 706
Long-term investments 559 521
Power generating assets 2,155 1,357
------- -------
$ 3,500 $ 2,930
======= =======
Liabilities
Accounts payable & other $ 158 $ 92
Property specific borrowings 905 556
Corporate term debentures 593 596
Future income taxes 120 116
Non-controlling interests 350 271
Shareholders' equity 1,374 1,299
------- -------
$ 3,500 $ 2,930
======= =======
FINANCIAL ASSETS
The company's accounts receivable and other assets decreased to $186 million in
2002 from $336 million in 2001 due principally to the draw down of interest
bearing deposits with affiliates in order to finance investments in the
company's power generating operations.
The company's securities portfolio, which is comprised primarily of preferred
shares of affiliated Canadian companies, decreased from $706 million to $590
million in 2002. The composition of the company's securities portfolio by
business sector at December 31, 2002 and 2001 is summarized below:
millions 2002 2001
- --------- ------- -------
Property $ 160 $ 270
Natural resources 161 152
Financial services & diversified 199 214
Other 70 70
------- -------
$ 590 $ 706
======= =======
The book values of the company's long-term investments and the underlying
securities at December 31, 2002 and 2001 are shown below:
millions 2002 2001
- --------- ------- -------
Brascan Financial Corporation $ 195 $ 195
Noranda Inc. 146 146
Brascan Corporation 112 112
Other investments 106 68
------- -------
$ 559 $ 521
======= =======
Great Lakes holds a senior preferred share investment in Brascan Financial
Holdings Inc. which, together with Brascan, owns all of the common shares of
Brascan Financial Corporation ("Brascan Financial"), a Canadian-based financial
services company. Brascan's combined interest in Brascan Financial was increased
from 71% during 2002 as a result of Brascan's offer to purchase all of the
outstanding common shares of this company. Brascan Financial's results for the
two years ended December 31, 2002 are shown below:
millions 2002 2001
- --------- ------- -------
Total assets $ 4,334 $ 3,585
Shareholders' equity 2,844 2,660
Revenues 501 444
Net income 272 251
Great Lakes holds a senior preferred share investment in Noranda Equities Inc.
which, together with Brascan, owns 40% of the common shares of Noranda Inc.
("Noranda"). Noranda, a publicly listed company, is a major producer of mined
and refined base metals. Noranda's financial results for the two years ended
December 31, 2002 are shown below:
millions 2002 2001
- --------- ------- -------
Total assets $ 11,377 $ 12,141
Shareholders' equity 2,928 3,797
Revenues 6,090 6,152
Net income (loss) (700) (92)
Noranda's loss in 2002 reflects a charge of $630 million relating to the
writedown of its magnesium operations in Quebec.
Great Lakes owns a $112 million senior preferred share investment issued by a
wholly owned subsidiary of Brascan. Brascan's financial results for the two
years ended December 31, 2002 are shown below:
millions 2002 2001
- --------- ------- -------
Total assets $ 22,788 $21,929
Common equity 4,162 4,261
Revenues 4,810 1,269
Net income 130 311
The decrease in Brascan's net income in 2002 reflects its share of Noranda's
higher loss related to the writedown of its magnesium operations.
Other investments include primarily the company's shares of First Toronto
Investments Limited, a Brascan subsidiary which holds investments in equity
securities of Canadian corporations, primarily companies affiliated with
Brascan.
POWER GENERATING ASSETS
The depreciated cost of the company's power generating assets increased during
2002 from $1,357 million to $2,155 million.
Power generating assets in Canada increased by 50% from $911 million in 2001 to
$1,366 million in 2002. This increase is a result of the acquisition of
Mississagi Power and the remaining half interest in Lake Superior Power.
The acquisition in 2002 of Maine Power and New Hampshire Power resulted in the
ownership of power
6 GREAT LAKES POWER INC.
generating assets with a book value of $301 million at year end in the Northeast
United States region.
Other power operations increased 9% from $446 million in 2001 to $485 million in
2002. The increase is attributed to additional costs related to assets under
development and the increase in the company's investment in Louisiana
HydroElectric Power.
LIQUIDITY AND CAPITAL RESOURCES
The company's liquidity and capital requirements are affected primarily by the
results of operations, capital expenditures, debt service requirements and
working capital needs. The net cash provided by or used in operating, financing
and investing activities for 2002 and 2001 was as follows:
millions 2002 2001
- --------- ------- -------
Cash provided by (used in):
Operating activities $ 237 $ 183
Financing activities 347 122
Investing activities (584) (314)
Cash provided by operating activities increased during 2002 to $237 million
compared with $183 million in 2001 for the reasons discussed under "Income
Analysis".
Cash provided by financing activities increased during 2002 to $347 million
compared with $122 million in 2001. Financing activities in 2002 included
acquisition debt related to the acquisition of Mississagi Power, Maine Power and
New Hampshire Power, Income Fund financing and $33 million in a first property
specific bond financing for Valerie Falls.
In May 2002, the Income Fund issued 14.7 million units at $14.00 per unit. Fifty
percent of the units issued were subscribed for by Great Lakes. Gross proceeds
from the issue totaled $206 million.
Cash utilized in investing activities increased in 2002 to $584 million from
$314 million in 2001 primarily due to the acquisitions of Mississagi, Maine, New
Hampshire and the remaining half interest in Lake Superior for a total
investment of $713 million. This was offset by a decrease in deposit balances,
which were collected during the year in order to finance acquisitions.
LIABILITIES
Accounts payable and other increased to $158 million in 2002, compared to $92
million in 2001. The increase is related to increased working capital balances
relating to operations acquired during the year.
Great Lakes' borrowings includes property specific borrowings, corporate
debentures, bank credit facilities and bridge loan facilities provided by
Brascan.
At December 31, 2002, the company's total debt was $1,498 million, as detailed
in the following table:
AVERAGE Average
INTEREST Interest
millions 2002 RATE 2001 Rate
- -------- -------------- -------------
First Mortgage Bonds
Great Lakes Power Ltd. $ 316 5.8% $ 317 5.6%
Great Lakes Hydro
Income Fund 100 7.5% 100 7.5%
Other property
specific borrowings 489 6.3% 139 8.2%
------ ------
905 556
Corporate term debentures 593 7.4% 596 7.4%
------ ------
$1,498 $1,152
====== ======
The maturity schedule of the company's property specific borrowings is as
follows:
millions Annual Repayments
- -------- -----------------
2003 $ 483
2004 8
2005 235
2006 4
2007 2
Thereafter 173
------
$ 905
======
In addition to the above debt, the company has a commercial paper program with
an authorized amount of $100 million. The company's commercial paper is
currently rated R-1(low) by Dominion Bond Rating Service and A-2 by Standard &
Poor's.
CAPITAL BASE AND FINANCIAL POSITION
The company's capital base at December 31, 2002 of $1,374 million was comprised
of common equity with a book value of $1,126 million or $11.11 per share and a
further $248 million of subordinated convertible debentures. The convertible
debentures mature September 2013 and interest and principal may be paid by the
company in the form of its common shares. The debentures are therefore included
as part of the company's capital base.
The composition of the company's capital base at December 31, 2002 and 2001 is
summarized in the following table:
millions, except number of shares 2002 2001
- --------------------------------- ------- -------
Subordinated convertible
debentures $ 248 $ 248
Common shares 1,126 1,051
------- -------
$ 1,374 $ 1,299
======= =======
Regular dividends paid on the company's common shares in both 2002 and 2001
amounted to $64.9 million, representing an earnings payout ratio of 39% in 2002.
2002 ANNUAL REPORT 7
The company's policy is to distribute surplus operating cash flows not required
for investment in power generating facilities to its common shareholders in the
form of regular quarterly and special dividend payments.
BUSINESS ENVIRONMENT AND RISKS
Operating income from hydroelectric power generation fluctuates in relation to
the availability of water and the ability to generate and deliver power to
markets with the highest power rates. While changes in the level of
precipitation impact the amount of power generated by individual operations, the
diversified locations of the company's hydroelectric power stations across
several different watershed areas in Canada and the United States help to
balance the financial impact of these fluctuations.
Deregulated electricity markets in northeast Canada and the United States have
resulted in fluctuations in the price of power based on supply and demand
dynamics. This volatility in prices is managed through long-term fixed price
contracts on approximately 85% of the company's power production.
Counterparty credit risk is inherent in the company's long-term fixed price
contracts. The company manages this risk by entering into contracts with
counterparties that are either (i) investment grade or (ii) have an established
credit history.
The Ontario Government opened the Ontario electricity supply market to full
competition on May 1, 2002. Further government actions were announced in
November 2002, including the implementation of a 4.3 cent / kwh retail cap.
However, the price for power that generators, other than OPG, receive in the
wholesale market was not capped.
Regulatory changes may result in uncertain power markets in the short term,
which could impact the operating income from the company's power businesses.
Investment income from a substantial portion of the company's preferred
shareholdings varies generally with the amount invested, as the rate of return
is generally fixed. Income from other investments is sensitive to interest rate
changes; however, a similar offsetting sensitivity exists with a portion of the
company's debt.
OPERATING STRATEGY
The company's primary goal is to generate increased return on capital for its
shareholders.
The company is committed to expanding its power generating business by enhancing
and expanding its power production base. To achieve this objective, the company
has four strategic priorities: (i) increase and strengthen cash flow from the
generation business; (ii) expand its production base through the acquisition of
existing generating assets and development of greenfield sites; (iii) expand
access to new interconnected electricity markets in the United States through
the company's existing transmission interconnections between Ontario and Quebec,
and other planned and proposed interconnections with adjacent markets in the
United States, and (iv) position the company to market power in open access,
competitive markets, thereby optimizing the value of its generation portfolio
through the timing of power sales with peak pricing periods and securing
long-term contracts.
FORWARD-LOOKING STATEMENTS
The company's financial analysis and review contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "believe", "expect", "anticipate", "intend", "estimate" and other
expressions which are predictions of or indicate future events and trends and
which do not relate to historical matters identify forward-looking statements.
Reliance should not be placed on forward-looking statements because they involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results, performance or achievements of the company to differ materially
from anticipated future results, performance or achievements expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially from those set forth in the forward-looking
statements include general economic conditions, weather conditions, interest
rates, availability of equity and debt financing and other risks. The company
undertakes no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
8 GREAT LAKES POWER INC.
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT RESPONSIBILITY
TO THE SHAREHOLDERS
The attached financial statements and other financial information have been
prepared by the company's management which is responsible for their integrity
and objectivity. To fulfill this responsibility, the company maintains systems
of internal control and policies and procedures to ensure that its reporting
practices and accounting and administrative procedures are of high quality.
These policies and procedures are designed to provide relevant, reliable and
timely financial information. These statements have been prepared in conformity
with Canadian generally accepted accounting principles and, where appropriate,
reflect estimates based on judgments of management. Financial information
presented elsewhere in this Annual Report is consistent with that shown in the
accompanying consolidated financial statements.
Deloitte & Touche LLP, the independent auditors appointed by the shareholders,
have examined the financial statements of the company in accordance with
Canadian generally accepted auditing standards to enable them to express to the
shareholders their opinion on the financial statements. Their report as auditors
is set out below.
These statements have also been reviewed by the Board of Directors and by its
Audit Committee, which meets with the auditors and management to review the
activities of each and reports to the Board of Directors. The auditors have full
access to the Audit Committee and meet with the committee both with and without
the presence of management. The Board of Directors, through its Audit Committee,
oversees management's financial reporting responsibilities and is responsible
for reviewing and approving the financial statements.
/s/ Craig J. Laurie
- ------------------------------------------
Vice-President and Chief Financial Officer
February 7, 2003
AUDITORS' REPORT
TO THE SHAREHOLDERS OF GREAT LAKES POWER INC.
We have audited the consolidated balance sheets of Great Lakes Power Inc. as at
December 31, 2002 and 2001 and the consolidated statements of income, retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance as to whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- ----------------------------------
Toronto, Canada
February 7, 2003
2002 ANNUAL REPORT 9
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
December 31
millions
note 2002 2001
---- ------ ------
ASSETS
Cash and cash equivalents $ 10 $ 10
Accounts receivable and other 3 186 336
Securities 4 590 706
Long-term investments 5 559 521
Power generating assets 6 2,155 1,357
-- ------ ------
$3,500 $2,930
====== ======
LIABILITIES
Accounts payable and other $ 158 $ 92
Property specific borrowings 8 905 556
Corporate term debentures 9 593 596
FUTURE INCOME TAX LIABILITY 10 120 116
NON-CONTROLLING INTERESTS 11 350 271
SHAREHOLDERS' EQUITY 12 1,374 1,299
-- ------ ------
$3,500 $2,930
====== ======
</Table>
Approved by the Board:
/s/ Sidney A. Lindsay /s/ Edward C. Kress
- --------------------- -------------------
10 GREAT LAKES POWER INC.
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
Years ended December 31
millions, except per share amounts note 2002 2001
---- ---- ----
REVENUE
Power revenue $ 340 $ 270
Power purchases 14 55
Net power revenue 326 215
Investment and other income 92 105
----- -----
418 320
----- -----
EXPENSES
Interest 90 82
Operating and maintenance 60 37
Fuel purchases 18 21
Depreciation 40 27
Non-controlling interests 18 12
Income and other taxes 10 25 10
----- -----
251 189
----- -----
NET INCOME $ 167 $ 131
----- -----
DILUTED NET INCOME PER COMMON SHARE 13 $1.32 $1.04
----- -----
</Table>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<Table>
<Caption>
Years ended December 31
millions note 2002 2001
---- ---- ----
RETAINED EARNINGS
Balance, beginning of year $ 448 $ 398
Net income 167 131
Distributions to holders of common shares
and equivalents 12 (80) (81)
Adjustment for change in accounting policy 1 (8) --
Fund unit issue costs (4) --
----- -----
Balance, end of year $ 523 $ 448
===== =====
</Table>
2002 ANNUAL REPORT 11
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
Years ended December 31
millions 2002 2001
------ ------
CASH FLOW FROM OPERATIONS
Net income $ 167 $ 131
Add non-cash items
Depreciation 40 27
Hydrological provisions (3) (17)
Other 6 (5)
------ ------
CASH FLOW FROM OPERATIONS $ 210 $ 136
Net change in non-cash working capital 27 47
------ ------
Cash provided by operating activities 237 183
------ ------
FINANCING AND SHAREHOLDER DISTRIBUTIONS
Borrowings 405 249
Debt repayments (54) (110)
Issuance of fund units 103 78
Distributions:
-- Great Lakes Hydro Income Fund unitholders (27) (14)
-- Common shares and equivalents (80) (81)
------ ------
347 122
------ ------
INVESTING
Securities purchases (10) (107)
Securities sales 125 51
Long-term investments (36) 14
Loans and other receivables 171 (94)
Power generating assets (834) (178)
------ ------
(584) (314)
------ ------
CASH AND CASH EQUIVALENTS
Increase (decrease) -- (9)
Balance, beginning of year 10 19
------ ------
Balance, end of year $ 10 $ 10
====== ======
SUPPLEMENTARY INFORMATION
Interest paid $ 85 $ 84
Taxes paid $ 16 $ 15
====== ======
</Table>
12 GREAT LAKES POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS OPERATIONS
The company is incorporated under the laws of Ontario and develops, owns and
operates hydroelectric and other power generating facilities principally in
Canada and the United States. The company also conducts investment activities,
which include the receipt of interest and dividends on the company's financial
assets as well as gains realized on investment transactions.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include:
(i) the accounts of all subsidiaries and other controlled entities of Great
Lakes Power Inc. (the "company") including Great Lakes Power Limited, Great
Lakes Hydro Income Fund (the "Income Fund"), Lake Superior Power, Valerie
Falls Power, Hydro Pontiac Inc. ("Pontiac Power") and Highvale Power
Corporation; and
(ii) the accounts of incorporated and unincorporated joint ventures and
partnerships to the extent of the company's proportionate interest in their
respective assets, liabilities, revenue and expenses, including the
company's investment in Powell River Energy.
The company owns a 75% non-controlling residual interest in Louisiana
HydroElectric Power, which is equity accounted.
INVESTMENTS
Partly owned businesses, where the company is able to exercise significant
influence, are carried on the equity method. Interests in jointly controlled
entities are proportionately consolidated. Other long-term investments are
carried at the lower of cost and net realizable value.
The excess of acquisition costs over the underlying net book values of the
company's investment is evaluated for impairment in conjunction with the
evaluation of the carrying value of the investment. Management assesses the
recoverability of its investment as a whole based on a review of the expected
future operating income and cash flows of these investments on a discounted
basis.
REVENUE AND EXPENSE RECOGNITION
Revenue from the sale of electricity and steam is recorded based upon output
delivered at rates as specified under contract terms or prevailing market rates.
Electricity sales revenue is recognized when power is provided.
Investment income is recorded on the accrual basis, less a provision for
uncollectible interest, fees, commissions or other amounts.
The company maintains hydrological insurance which partially compensates for the
effect of variations in streamflow when measured against long-term averages.
Until May 1, 2002, the company was rate regulated and maintained provisions to
adjust for the effect of similar hydrology variations.
SECURITIES
Securities are carried at the lower of cost and their estimated net realizable
value with any valuation adjustments charged to income. This policy considers
the company's intent to hold an investment through periods where quoted market
values may not fully reflect the underlying value of that investment.
Accordingly, there are periods where the "fair value" or the "quoted market
value" may be less than cost. In these circumstances, the company reviews the
relevant securities to determine if it will recover its carrying value within a
reasonable period of time and adjust it, if necessary. The company also
considers the degree to which estimation is incorporated into valuations and any
potential impairment relative to the magnitude of the related portfolio.
LOANS RECEIVABLE
Loans and notes receivable are carried at the lower of cost and estimated
realizable value calculated based on expected future cash flows, discounted at
market rates for assets with similar terms.
FINANCING COSTS
Expenses related to the issuance of debt are amortized over the term of the
debt. Expenses related to the issuance of the company's shares are charged to
retained earnings. Interest on funds used in construction and on development
projects is capitalized.
INCOME TAXES
The company uses the asset and liability method in accounting for income taxes.
Under this method, future income tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and
liabilities, and measured using the enacted, or substantively enacted, tax rates
and laws that will be in effect when the differences are expected to reverse,
taking into account the organization of the company's financial affairs and its
impact on taxable income and tax losses.
FOREIGN EXCHANGE
Assets and liabilities denominated in foreign currencies are translated into
Canadian dollars at the rate of exchange in effect at the balance sheet date.
Revenues and expenses are translated at the weighted average rate for the year.
PENSION BENEFITS AND EMPLOYEE FUTURE BENEFITS
The cost of retirement benefits for the defined benefit plan and post-employment
benefits is recognized as
2002 ANNUAL REPORT 13
the benefits are earned by employees. The company uses the accrued benefit
method pro-rated on the length of service and management's best estimate
assumptions to value its pension and other retirement benefits. Assets are
valued at fair value for purposes of calculating the expected return on plan
assets. For the defined contribution plan, the company expenses payments based
on employee earnings.
DERIVATIVE FINANCIAL INSTRUMENTS
The company, principally through wholly owned Brascan Energy Marketing Inc.,
uses derivative financial instruments to manage commodity price risk associated
with the company's production, operating and risk management activities. Gains
and losses resulting from these instruments are included in income on the same
basis as the asset, liability or contract being hedged. Non-hedging activity is
subject to policy limits and any gains or losses recorded in investment and
other income on a fair value basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2002, the company adopted, without restatement of the prior
period comparative financial statements, the new accounting standards issued by
the Canadian Institute of Chartered Accountants ("CICA") on Business
Combinations and Goodwill and Other Intangible Assets.
This standard requires that all business combinations be accounted for using the
purchase method and establishes specific criteria for the recognition of
intangible assets separately from goodwill. Under the standards, goodwill will
no longer be amortized but will be subject to impairment tests on at least an
annual basis. During 2002, the company and its subsidiaries were required to
perform impairment tests on goodwill recorded as of January 1, 2002. As a
result, $8 million was recorded against opening retained earnings in relation to
the goodwill recorded on the acquisition of Powell River Energy.
Effective January 1, 2002, the company adopted the new CICA accounting
recommendations on the impairment of long-lived assets. When the carrying value
of a long-lived asset is less than its net recoverable amount as determined on
an undiscounted basis, an impairment loss is recognized to the extent that its
fair value, measured as the discounted cash flows over the life of the asset
when quoted market prices are not readily available, is below the asset's
carrying value.
FUTURE ACCOUNTING POLICY CHANGES
In November 2001, the CICA issued Accounting Guideline 13, Hedging Relationships
("AcG-13"), which will apply to fiscal years beginning on or after July 1, 2003.
The guideline sets out the criteria that must be met in order to apply hedge
accounting for derivatives and is based on many of the principles outlined in
the U.S. standard relating to derivative instruments and hedging activities.
Specifically, the guideline provides detailed guidance on (a) the
identification, designation, documentation and effectiveness of hedging
relationships, for purposes of applying hedge accounting; and (b) the
discontinuance of hedge accounting.
The CICA issued a draft Accounting Guideline,
Consolidation of Special-Purpose Entities on August 1, 2002. The proposed
guideline provides guidance on determining who is a primary beneficiary of the
special purpose entities and will therefore be required to consolidate the
special purpose entities.
The CICA issued a draft Accounting Guideline, Disclosure of Guarantees which
will require a guarantor to disclose significant information about guarantees it
has provided to third parties, without regard to its evaluation of whether it
will have to make any payments under the guarantees. This guideline is expected
to have effect for interim and annual periods ending on or after March 31, 2003.
The CICA issued a new standard, Asset Retirement Obligations, which requires the
recognition of a liability for obligations for asset retirements in the period
the liability is incurred. This standard will result in increasing the carrying
value of a company's liabilities and assets. The asset retirement obligation
will be amortized as an expense over the life of the asset. This guidance
applies to, for example, site restoration of a mine, oil or gas well or
landfill, nuclear plant decommissioning and removal of plant and equipment from
leased property on termination of the lease. The standard is effective for
fiscal years beginning on or after January 1, 2004.
The effects of these guidelines and standards are under review and have not been
determined at this time.
COMPARATIVE FIGURES
Certain of the prior year's figures have been reclassified to conform with the
2002 presentation.
14 GREAT LAKES POWER INC.
2. ACQUISITIONS
The company acquired interests in four power generating assets in 2002 and one
in 2001. All acquisitions have been accounted for using the purchase method of
accounting and the results of their operations have been included in these
consolidated financial statements from the date of acquisition.
MAINE POWER
In February 2002, the Income Fund completed the acquisition of the hydroelectric
generating system and related transmission facilities in northern Maine, USA
from Great Northern Paper Inc. ("GNP") for cash consideration of $242 million
and a promissory note of $7 million payable to GNP. The system consists of six
hydroelectric generating stations located on the Penobscot River with a combined
generating capacity of approximately 126 MW and eleven water storage dams.
The fair value assigned to the assets acquired was as follows:
millions 2002
- -------- ----
Power generating assets $ 251
Working capital (2)
-----
Net assets acquired $ 249
-----
Consideration paid $ 249
=====
NEW HAMPSHIRE POWER
In May 2002, the Income Fund completed the acquisition of a hydroelectric
generating system located in New Hampshire from American Tissue Inc. for cash
consideration of $50 million. The system consists of six hydroelectric stations
located on the Androscoggin River in New Hampshire,with a combined generating
capacity of approximately 31 MW.
The fair value assigned to the power generating assets acquired was equal to the
cash consideration paid.
MISSISSAGI POWER
In May 2002, the Income Fund completed the acquisition of a hydroelectric
generating system located in northern Ontario from Ontario Power Generation Inc.
and OPG-Mississagi River Inc. for cash consideration of $346 million. The system
consists of four hydroelectric stations located on the Mississagi River with a
combined generating capacity of approximately 488 MW and four water storage
dams.
The fair value assigned to the assets acquired was as follows:
millions 2002
- -------- ----
Power generating assets $ 345
Working capital 1
-----
Net assets acquired $ 346
-----
Consideration paid $ 346
=====
LAKE SUPERIOR POWER
In November 2002, the company acquired the 50% interest which it did not own in
the Lake Superior Power cogeneration station in northern Ontario for cash
consideration of $30 million.
The net assets acquired as a result of the acquisition and the consideration
given are as follows:
millions 2002
- -------- ----
Assets acquired
Current assets $ 6
Power generating assets 61
Liabilities assumed
Long term debt (37)
-----
Net assets acquired $ 30
-----
Consideration paid $ 30
=====
POWELL RIVER ENERGY
In February 2001, the Income Fund acquired a 50% indirect interest in the Powell
River Energy hydroelectric power generation and transmission facilities in
southwestern British Columbia for cash consideration of $58 million. The net
assets acquired as a result of the acquisition and the consideration given are
as follows:
millions 2001
- -------- ----
Assets acquired
Power generating assets $ 58
Goodwill 17
Liabilities assumed
Future income tax liability (17)
-----
Net assets acquired $ 58
-----
Consideration paid $ 58
=====
3. ACCOUNTS RECEIVABLE AND OTHER
The composition of accounts receivable and other is as follows:
millions 2002 2001
- -------- ---- ----
Demand deposits $ (14) $ 190
Coal royalty receivables 70 70
Trade receivables 85 29
Prepaid interest and other 45 47
----- -----
$ 186 $ 336
===== =====
The fair value of the company's accounts receivable and other approximates their
carrying values at December 31, 2002 and 2001 based on expected future cash
flows from these assets, discounted at market rates for assets with similar
terms and investment risks.
4. SECURITIES
The fair value of the company's securities at December 31, 2002 was $583 million
(2001 - $705 million). In determining fair values, quoted market prices are used
where available and, where not available, management estimates the amounts which
could be recovered over time or through a transaction with knowledgeable and
willing third parties under no compulsion to act.
2002 ANNUAL REPORT 15
The securities consist of 68% floating rate securities and 32% fixed rate
securities with an average yield at December 31, 2002 of 6.40%.
All financial and investment transactions with affiliated companies are at
normal market terms. Affiliated companies include Brascan and its subsidiaries
and equity accounted investees. At December 31, 2002, the carrying value of
securities and deposits with affiliated companies amounted to $536 million and
$(14) million, respectively (2001 - $660 million and $190 million). In 2002,
income from securities and loans with affiliated companies amounted to $39
million (2001 - $48 million).
5. LONG-TERM INVESTMENTS
Long-term investments include the company's direct and indirect interests in
Brascan Financial Corporation, Noranda Inc., Brascan Corporation and First
Toronto Investments Limited.
The book values of the company's long-term investments and the underlying
securities at December 31, 2002 and 2001 are shown below:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Brascan Financial Corporation $ 195 $ 195
Noranda Inc. 146 146
Brascan Corporation 112 112
Other investments 106 68
------ ------
$ 559 $ 521
====== ======
</Table>
6. POWER GENERATING ASSETS
The composition of the company's power generating assets at December 31, 2002
and 2001, by geographic area and asset type, is shown below:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
By geographic area:
Ontario $ 937 $ 471
Quebec 429 440
Northeast United States 304 --
Other 485 446
------ ------
$2,155 $1,357
====== ======
By asset type:
Generation $1,846 $ 1,017
Transmission 157 156
Distribution 69 65
Other 82 53
------ ------
2,154 1,291
Accumulated depreciation
and amortization (331) (264)
------ ------
1,823 1,027
Investment in Louisiana HydroElectric 332 330
------ ------
$2,155 $1,357
====== ======
</Table>
Power generating assets includes the cost of the company's 18 power generating
stations in Ontario, 5 hydroelectric generating stations in Quebec, 12
hydroelectric stations in the Northeast United States and 50%share of two Powell
River Energy hydroelectric generating stations, and the company's Highvale Power
coal assets.
The company's 75% residual interest in Louisiana HydroElectric Power's
hydroelectric generating station and sediment control works is shown on an
equity accounted basis. The financial accounts of Louisiana HydroElectric Power
for 2002 and 2001 are as follows:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Assets $1,604 $1,568
Property specific borrowings 1,273 1,261
Other liabilities 155 156
Operating revenues 209 187
Operating expenses 55 53
Net income 24 7
====== ======
</Table>
Depreciation is based on the service lives of the assets which are 60 years for
hydroelectric generation, 20 years for cogeneration and 40 years for
transmission, distribution and other.
The company's hydroelectric power facilities operate under various renewable
agreements for water rights which extend through the year 2008 for Great Lakes
Power, 2044 for Valerie Falls Power, 2019 and 2020 for Pontiac Power, 2019 for
Lievre River Power and 2031 for Louisiana HydroElectric Power. Substantially all
of the water rights for Powell River Energy are perpetual.
7. JOINT VENTURES
The following amounts represent the company's proportionate interest in
incorporated and unincorporated joint ventures reflected in the company's
accounts. (These amounts include Powell River Energy in 2001 and 2002 and Lake
Superior Power in 2001 only.)
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Assets $ 59 $ 125
Liabilities 56 84
Operating revenues 9 46
Operating expenses 8 31
Net income 1 10
Cash flows from operating activities 2 16
Cash flows from investing activities (1) (60)
Cash flows from financing activities (1) 37
====== ======
</Table>
16 GREAT LAKES POWER INC.
8. PROPERTY SPECIFIC BORROWINGS
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Great Lakes Power Limited
First Mortgage Bonds
Series 4 (US $105) $ 166 $ 167
Series 5 150 150
------ ------
316 317
====== ======
Great Lakes Power Trust
Credit Agreements 7 15
First Mortgage Bonds
Series 1 50 50
Series 2 25 25
Series 3 25 25
------ ------
107 115
====== ======
Other Power Operations
Property specific borrowings
Pontiac Power 62 63
Valerie Falls Power 33 --
Powell River Energy 38 47
Lake Superior Power 19 14
Mississagi Power 151 --
Great Lakes Hydro America (US $113) 179 --
------ ------
$ 905 $ 556
====== ======
</Table>
The US$105 million First Mortgage Bonds Series 4 bear interest at the rate of
6.57%, are due on June 16, 2003 and are secured by a charge on the company's
wholly owned power generating assets in northern Ontario.
The $150 million First Mortgage Bonds Series 5 bear interest at the rate of
4.58%, are due on June 16, 2003 and are secured by a charge on the company's
wholly owned power generating assets in northern Ontario. Through the use of an
interest rate swap, the company pays interest at a rate which varies with the
Banker's Acceptance ("B.A.") rate. These bonds replaced the $95 million First
Mortgage Bonds Series 3 bearing interest at a rate of 6.69%, which matured
December 31, 2001.
The Income Fund First Mortgage Bonds Series 1, 2 and 3 bear interest at 7.33%,
7.55% and 7.78%, respectively; and are due April 24, 2005, April 24, 2010 and
April 24, 2015, respectively. These Mortgage Bonds are secured by charges on all
present and future real and personal property of Great Lakes Power Trust, which
is wholly owned by the Income Fund.
The $62 million Pontiac Power mortgage loans bear interest at a blended rate of
10.52%, amortized monthly to a maturity of December 1, 2020 and are secured by
charges on the respective Pontiac Power generating assets.
The $33 million Valerie Falls First Mortgage Bond bears interest at 6.84%, with
interest only payments semi-annually for the first 20 years and blended
principal and interest payments for the remaining 20 years to a maturity of
December 20, 2042.
The company's proportionate share of the $75 million Powell River Energy first
mortgage bond bears interest at 6.92%, is due June 2009 and is secured by a
charge on the respective Powell River Energy operating assets.
The $19 million Lake Superior Power mortgage loan bears interest at 9.41%,
amortizes annually to December 29, 2006 and is secured by a charge on the
company's Lake Superior Power cogeneration assets. The $151 million Mississagi
Power mortgage loan bears interest at the 30-day Bankers Acceptance rate plus 60
basis points until March 3, 2003 and 80 basis points thereafter. The facility
matures on September 4, 2003.
The US$113 million Great Lakes Hydro America mortgage loan bears interest at US
prime plus 150 basis points and matures on January 30, 2005. The company has
established a US$100 million loan facility with Brascan, its principal
shareholder, which can be drawn down at any time, bearing interest at the prime
rate and secured by the company's residual interest in Louisiana HydroElectric
Power. At either party's option, the facility may be drawn down and converted
into a fixed-rate financing at 9.75% repayable in 2015.
Principal repayments on the company's outstanding property specific borrowings
due over the next five years and thereafter are as follows:
<Table>
<Caption>
millions Annual Repayments
- -------- -----------------
2003 $ 483
2004 8
2005 235
2006 4
2007 2
Thereafter 173
-----
$ 905
=====
</Table>
9. TERM DEBENTURES
<Table>
<Caption>
millions 2002 2001
- -------- ------ -------
Corporate debentures
Series 1 (US$175) $ 277 $ 278
Series 3 (US$200) 316 318
----- -----
$ 593 $ 596
===== =====
</Table>
The Series 1 debentures bear interest at the rate of 9.0% and are due in August
2004.
The Series 3 debentures bear interest at 8.3% and are due March 2005. Through
the use of an interest rate swap, the company pays interest at a rate which
varies with the LIBOR rate.
The fair value of the company's property specific borrowings and term debentures
is $1,520 million (2001 -- $1,167 million) based on current market prices for
debt with similar terms and risks.
2002 ANNUAL REPORT 17
10. FUTURE INCOME TAX LIABILITY
The difference between the statutory rate and the effective rate of tax is
attributable to the company's dividend income and equity earnings being taxed
prior to receipt by the company. The company's future income tax liability of
$120 million (2001 - $116 million) is comprised principally of temporary
differences relating to property, plant and equipment. This amount is net of a
future tax asset of $12 million (2001 - $21 million) relating to unused
non-capital losses.
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Net income $ 167 $ 131
Combined income tax rates 38% 41%
Statutory income tax rates applied
to accounting income 63 54
Non-deductible expenses 2 1
Non-taxable dividends (45) (54)
Recognition of the benefit of tax losses (16) (7)
------ ------
Provision for income taxes $ 4 $ (6)
====== ======
</Table>
11. NON-CONTROLLING INTERESTS
Non-controlling interests include preferred shares, limited partnership
interests and trust units owned by minority shareholders in the company's
consolidated subsidiaries, as follows:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Preferred shares issued by
consolidated subsidiaries $ 90 $ 90
Limited partnership interests of
consolidated subsidiaries 4 4
Trust units issued by
consolidated subsidiaries 256 177
------ ------
$ 350 $ 271
====== ======
</Table>
12. SHAREHOLDERS' EQUITY
The company is authorized to issue an unlimited amount of common shares, of
which the following were issued and outstanding:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
101,383,135 (2001 - 101,383,135)
Common shares $ 603 $ 603
Retained earnings 523 448
------ ------
1,126 1,051
Subordinated convertible debentures 248 248
------ ------
$1,374 $1,299
====== ======
</Table>
The subordinated convertible debentures mature September 30, 2013, bear interest
at the prime rate subject to a minimum of 6% and a maximum of 8%, and are
convertible at $10.00 per common share into 24.8 million common shares.
Principal and interest are payable at the company's option with common shares.
The company is authorized to issue an unlimited amount of preferred shares, none
of which are currently outstanding.
The following table summarizes the company's distributions to common
shareholders and equivalents:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Common share dividends $ 65 $ 65
Convertible debt interest 15 16
------ ------
$ 80 $ 81
====== ======
</Table>
13. OTHER INFORMATION
<Table>
<Caption>
millions, except per share amounts 2002 2001
- -------- ------ ------
Average diluted common
shares outstanding 126.2 126.2
Basic earnings per share $ 1.50 $ 1.13
====== ======
</Table>
The company's two largest customers accounted for 8% and 7%, respectively, of
total revenues in 2002 (2001 - 12% and 10%, respectively).
During 2002, no hydrological provisions (2001 - $7 million) were applied against
power purchase costs and a $3 million (2001 - $10 million) recovery of
hydrological provisions was included in revenue from power operations. At
December 31, 2002, hydrological provisions totalled nil (2001 - $3 million).
14. COMMITMENTS AND CONTINGENCIES
The company has entered into a power agency and guarantee agreement with the
Great Lakes Power Trust (the "Trust"), in which the company has a 50% indirect
interest, for a term of 20 years. This agreement requires the company to fund
any deficiency amount between a guaranteed price for energy and the actual
energy revenues earned by the Trust. The company is entitled to receive any
revenues in excess of the guaranteed amount. The cumulative net surplus amount
in 2002 was nil (2001 - $0.2 million).
In addition, the company agreed to provide to the Income Fund hydrology credit
facilities in the amount of $25 million for a period of 15 years, of which not
more than $8 million is permitted to be advanced during any given year. Of this
amount, Lievre River Power has $15 million available until 2014 and Mississagi
Power has $10 million available until 2019. These facilities bear interest at
market rates.
15. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the company in the management
of interest rate and commodity exposures primarily related to the generation of
electricity. It is the company's policy to restrict the use of derivative
financial instruments for trading or speculative purposes to within
predetermined limits.
The company formally documents relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking forward
electricity sale derivatives to specific periods in which the company
anticipates generating electricity for sale. The company also
18 GREAT LAKES POWER INC.
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in the fair values or cash flows of the hedged
items.
The company defers unrealized gains and losses on electricity commodity
contracts designated as hedges and records them as an adjustment to power
revenues when the underlying hedged transaction is recorded. Commodity contracts
not designated as hedges are recorded in accounts receivable or accounts payable
at fair value with changes in fair value recorded in power revenue.
<Table>
<Caption>
Notional Notional
Range of Amount Average Amount Average
Maturity Bought Rate Sold Rate
-------- -------- ------- -------- -------
Electricity 1 month 2,284 $56.58 6,270 $54.89
to GWh per GWh per
3 years MWh MWh
</Table>
As at December 31, 2002, contracts designated as hedges had a net fair value
determined based on quoted market rates of negative $33 million, consisting of
contracts with a positive mark-to-market of$38 million and contracts with a
negative mark-to-market of $71 million. The company manages credit risks by
entering into contracts with highly rated counterparties.
The company enters into interest rate swaps on its long term debt. The swap
agreements require the periodic exchange of payments without the exchange of the
notional principal amount on which the payments are based.
The company designates its interest hedge agreements as hedges of the underlying
debt. Interest expense is adjusted to include the payments made or received
under the interest rate swaps. The total notional amount of principal underlying
interest rate swap contracts in 2002 was $466 million (2001 - $468 million).
These contracts have maturities varying from one to three years, and have a
favourable replacement value of $8 million (2001 - $26 million).
In the event a designated hedged item is sold, extinguished or matures prior to
the termination of the related derivative instruments, any realized or
unrealized gain or loss on such derivative instruments is recognized in income.
In the event a derivative instrument in a designated hedge relationship is sold,
extinguished or matures prior to the termination of the related hedged item, any
realized or unrealized gain or loss is recognized in income on the same basis as
the underlying hedged item.
16. EMPLOYEE BENEFIT PLAN
The company offers a number of pension plans to its employees. The company's
obligations under its defined benefit pension plans are determined periodically
through the preparation of actuarial valuations. As of December 31, 2002, the
assets of the plans totalled $40 million (2001 - $37 million) and accrued
benefit obligation amounted to $43 million (2001 - $35 million) for a net
accrued benefit liability of $3 million (2001 - $2 million). The benefit plan
expense for 2002 was $0.3 million (2001 - $0.2 million). The investment rate of
return was 7% (2001 - 7%). The discount rate used was 6.75% with a rate of
compensation increase of 3.8%.
17. GEOGRAPHIC SEGMENTED INFORMATION
The company operates in Canada and the United States. Revenues by country are as
follows:
<Table>
<Caption>
millions 2002 2001
- -------- ------ -------
Canada $ 288 $ 258
United States 52 12
------ -------
$ 340 $ 270
====== =======
</Table>
Income by country is as follows:
<Table>
<Caption>
millions 2002 2001
- -------- ------ -------
Canada $ 181 $ 120
United States 35 12
Other unallocated income (expenses) (49) (1)
------ -------
$ 167 $ 131
====== ======
</Table>
Power generating assets by country are as follows:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Canada $1,519 $1,027
United States 636 330
------ -------
$2,155 $1,357
====== ======
</Table>
Depreciation expense from power generating assets by country is as follows:
<Table>
<Caption>
millions 2002 2001
- -------- ------ ------
Canada $ 34 $ 27
United States 6 --
------ -------
$ 40 $ 27
====== ======
</Table>
2002 ANNUAL REPORT 19
FOURTH QUARTER 2002 FINANCIAL RESULTS
The company's unaudited financial statements for the fourth quarter of 2002 and
2001 are set out in the following tables:
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
(unaudited)
Three months ended December 31
millions, except per share amounts 2002 2001
- ---------------------------------- ------- -------
REVENUE
Power revenue $ 78 $ 57
Power purchases -- 11
------ ------
Net power revenue 78 46
Investment and other income 22 25
------ ------
100 71
------ ------
EXPENSES
Interest 26 20
Operating and maintenance 17 10
Fuel purchases 6 3
Depreciation 10 7
Non-controlling interests -- 3
Income and other taxes 12 3
------ ------
71 46
------ ------
NET INCOME $ 29 $ 25
====== ======
DILUTED NET INCOME
PER COMMON SHARE $ 0.23 $ 0.20
====== ======
</Table>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<Table>
<Caption>
(unaudited)
Three months ended December 31
millions 2002 2001
- -------- ------- -------
RETAINED EARNINGS
Balance, beginning of period $ 526 $ 443
Net income 29 25
Distributions to unitholders
of common shares & equivalents (20) (20)
Adjustment for change
in accounting policy (8) --
Fund unit issue costs (4) --
------ ------
$ 523 $ 448
====== ======
</Table>
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
(unaudited)
Three months ended December 31
millions 2002 2001
- -------- ------- -------
CASH FLOW FROM OPERATIONS
Net income $ 29 $ 25
Add non-cash items
Depreciation 10 7
Hydrological provisions (3) (7)
Other 8 7
------ ------
CASH FLOW FROM OPERATIONS $ 44 $ 32
Net change in non-cash working capital 41 42
------ ------
Cash provided by operating activities 85 74
------ ------
FINANCING AND SHAREHOLDER DISTRIBUTIONS
Borrowings 32 177
Debt repayments 2 (104)
Issuance of funds units -- 78
Distributions:
-- Great Lakes Hydro Income
Fund unitholders (7) (5)
-- Common shares and equivalents (20) (20)
------ ------
7 126
------ ------
INVESTING
Securities purchases (10) (57)
Securities sales 67 40
Long-term investments (36) 14
Loans and other receivables (91) (152)
Power generating assets (51) (54)
------ ------
(121) (209)
------ ------
CASH AND CASH EQUIVALENTS
Increase (decrease) (29) (9)
Balance, beginning of period 39 19
------ ------
Balance, end of period $ 10 $ 10
====== ======
SUPPLEMENTARY INFORMATION
Interest paid $ 21 $ 22
Taxes paid $ 3 $ 4
====== ======
</Table>
20 GREAT LAKES POWER INC.
TEN YEAR REVIEW
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
------- ------ ------ ------ ------ ------- ------ ------ ------ ------
FINANCIAL RESULTS*
millions, except per share amounts
Gross revenues $ 432 $ 374 $ 361 $ 286 $ 292 $ 292 $ 268 $ 257 $ 261 $ 236
Power revenues 340 270 246 188 191 187 168 150 143 119
Net income 167 131 116 113 105 122 112 108 105 99
Common share dividends 65 65 65 65 65 65 61 60 56 295
Assets 3,500 2,930 2,642 2,405 2,256 2,236 2,347 2,110 2,001 1,919
Capital base 1,374 1,299 1,249 1,216 1,184 1,161 1,112 1,056 1,017 977
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PER COMMON SHARE(1)
Book value - Basic $11.11 $10.37 $ 9.87 $ 9.55 $ 9.23 $ 9.00 $ 8.52 $ 8.08 $ 7.69 $ 7.29
Net income - Diluted 1.32 1.04 0.92 0.90 0.83 0.97 0.89 0.86 0.84 0.79
Dividends 0.64 0.64 0.64 0.64 0.64 0.64 0.61 0.60 0.57 2.966
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
OPERATING RESULTS
Installed capacity (MW)(2) 1,636 991 905 899 653 642 640 610 601 491
Electricity generation (GWh)(3) 5,584 3,959 4,003 4,222 2,361 2,649 2,947 2,311 2,261 2,370
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- --------------------
* Certain financial results for 2002 have been restated to conform with the
2001 presentation.
(1) All share and per share amounts prior to 1998 reflect the two-for-one stock
split in March 1998.
(2) At 100%.
(3) Reflects proportionate ownership.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
JOHN E. BAHEN ROBERT A. DUNFORD EDWARD C. KRESS
Corporate Director Corporate Director Chairman
of the Corporation
ALEX G. BALOGH(1) HARRY A. GOLDGUT
Chairman Co-Chairman and SIDNEY A. LINDSAY(1)
Falconbridge Limited Chief Executive Officer President
of the Corporation Lindsay Consultants
JACK L. COCKWELL
Group Chairman J. BRUCE FLATT GEORGE S. TAYLOR(1)
Brascan Corporation President and Corporate Director
Chief Executive Officer
RONALD J. DANIELS Brascan Corporation
Dean, Faculty of Law
University of Toronto
- ------------
(1) Member of Audit Committee
CORPORATE OFFICERS
EDWARD C. KRESS COLIN L. CLARK CRAIG J. LAURIE
Chairman Senior Vice-President, Senior Vice-President and
Generation Chief Financial Officer
HARRY A. GOLDGUT
Co-Chairman and LAURENT CUSSON TREVOR D. KERR
Chief Executive Officer Senior Vice-President, Vice-President and
Marketing Treasurer
RICHARD LEGAULT
President and ALAN V. DEAN DONALD TREMBLAY
Chief Operating Officer Vice-President and Senior Vice-President,
Secretary Finance
2002 ANNUAL REPORT 21
GREAT LAKES POWER INC.
BCE Place, Suite 300
181 Bay Street, P.O. Box 762
Toronto, Ontario M5J 2T3
(Printed in Canada)