Conservative Holding Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) announced plans for its post-2010 future today. The trust will merge its operations with those of sister company Innergex Renewable Energy (TSX: INE, OTC: INGXF) to form a sizeable wind- and hydro-power producer with 326 megawatts (MW) of installed capacity.

The company will bring an additional 128 MW of renewable energy on line within two years. Approximately 73 percent of generation is hydro and 27 percent wind, with all output sold under long-term contracts with a weighted remaining average term of 17 years.

The new Innergex will be a renewable energy company on par with fellow Conservative Holding Brookfield Renewable Power (TSX: BRC-U, OTC: BRPFF). The deal is expected to boost distributable cash flow by 20 percent over the next 10 years, based on projects in operation and under development. The company will also be a takeover target, as conventional power producers look to stock up carbon neutral generation resources.

Under the terms of the deal, unitholders of the income fund will receive 1.46 shares of the new company per current share of the income fund. The new entity will pay a distribution at an annualized rate of 58 cents Canadian, which will be sustainable past 2011 when trust taxation kicks in.

For Innergex Power Income Fund unitholders, that means an effective reduction in distributions from an annualized rate of CAD1 per share to CAD0.85 per share. That’s a current yield of a little over 8.3 percent, compared to a current level of roughly 9.8 percent based on today’s trading.

Let me be clear that I don’t like dividend cuts. But Innergex’ moves today are nonetheless very positive and in fact have set the stage for robust returns going forward. The near-term reaction in the market has been neutral, indicating a reduction of at least that magnitude was expected. And in fact Innergex’ payout ratio had been averaging in the 90s, a level that would have been tough to maintain with the additional taxation.

More important, however, management has cleared up all uncertainty regarding its 2011 dividend. And it’s forged a much stronger company with this merger–one that will almost certainly boost distributions down the road if it’s not taken over at a hefty premium.

The key for trusts regarding post-2010 dividends is beating expectations, and Innergex has certainly done that. I’ll have a more in-depth write-up in the February Canadian Edge, which will publish Friday, February 5.

In the meantime, Innergex Power Income Fund remains a buy all the way up to USD12, where it would still trade for just 1.8 times book value.