Maple Leaf Memo
The Liberals have a chance to topple Prime Minister Stephen Harper Thursday, though more by procedural curiosity than any matter of substance. The Canadian parliamentary system includes what’s called an “allotted day,” during which an opposition party–this week, the Liberal Party–is able to call for a vote on any issue, such as no confidence in the government.
The Conservatives aren’t likely to go down that way, though. Recent polling data suggest a wide-open race, with a lot of jockeying. Harper dreams of running a majority government but has lost ground lately in the push to get support above the 40 percent threshold, considered a key marker for achieving majority control. Even after a 2007 budget proposal heavy on largesse, voters aren’t sold on handing over the whiskey and the keys just yet.
For their part, the Liberals have stopped their slide in Quebec, and a message seems to be falling into their laps. Not a few weeks ago, Stephane Dion was a mystery man, a blank slate upon whom local media stuck easy stories about his difficulty with English (he’s a native French speaker), his professorial bearing, and his eventual demise and replacement.
Lo and behold, the gift that keeps on giving…er, if you have to run a political campaign against his party, Jim Flaherty.
It’s not all him, and it’s not just the income trust tax issue. But the Finance Dept’s now-obvious mishandling of the matter and the similarly flawed interest expense revisions are fertile material for comics, e-zine editors and those otherwise interested in competent government.
“The change in the tax rules brought the whole income trust market to people’s attention, and a number of investors looked at them much more closely,” observed UE Waterheater Income Fund CEO Roger Rossi during a conference call discussing his company’s takeover by US-based Alinda Capital Partners. Alinda Capital took a look and decided to offer CD23 per unit for UE, a huge premium to Friday’s CD15.71 closing price.
Earlier Monday, UE announced the acquisition of Edmonton, Alberta-based security monitoring company Voxcom Income Fund for about CD108.5 million (CD13.25 per unit) in cash. UE rents and services water-heating units and other home-comfort devices and recently expanded its operations to include home security systems. The Voxcom deal is yet another indication of this particular trust’s ability to grow its business and increase shareholder value.
Contrary to the impressions fostered by Cassandras such as Jack Mintz and Diane Urquhart, income trusts serve legitimate, productive purposes. We’ve said for years to focus investment decisions on strong, sustainable businesses, not the dodgy stuff converted to take advantage of the tax benefits of the trust structure or the chum hiding under a dazzling initial public offering circular rising along with an otherwise healthy tide.
As many US-based private capital shops are discovering, there are a lot of Canadian businesses generating significant cash flow. And right now there’s an entire sector full of them, a bargain bin at the Pick ’n Save.
The income trust tax issue, in and of itself, won’t win Canada’s Liberals an election.
Stephane Dion took a walk down Bay Street Monday and said the Liberals would change the income trust tax if elected by reducing it to 10 percent and making it refundable to Canadian investors. That’s a good start. Events continue to play out in his favor; it’s hard to imagine Canadians being pleased with the spate of foreign takeovers and what the deals say about a tax policy that’s now proven to be a big mistake.
They threw it together without contemplating its ramifications–a sign of haste, a lack of understanding, or both. They seem to have repeated the process for the interest expense revision. Though the Liberals will almost certainly hold their fire Thursday, there will be plenty of opportunities to catalyze an election campaign, perhaps over Harper’s handling of Canada’s involvement in Afghanistan or his stewardship of the environment.
“Many Canadians already know that the Conservatives fail to see the importance of investing in social programs and have failed to meet the challenge of the environment,” Dion said in a speech. “It is becoming clearer that the Conservatives’ incompetence includes the mismanagement of the Canadian economy.”
The full text of Dion’s speech is available here.
Harper played his best card with the budget, and Dion is still at the table. Is he a slow-playing shark?
The income trust tax proposal began as a broken campaign promise,
evolved to a relatively isolated case of investor outrage and is
maturing into a key count on an incompetence indictment for the
minority government.
The Roundup
Oil and Gas
Harvest Energy Trust (HTE.UN, NYSE: HTE) has announced its intended cash distributions for April, May and June of 2007, saying it will continue to pay 38 cents Canadian per unit per month. This quarterly distribution declaration is based on forecast commodity price levels and operating performance consistent with the current environment.
Harvest also announced that it’s amended its distribution reinvestment plan to make it available to US-based unitholders. Effective with the distribution payable June 15, 2007, US unitholders may now elect to direct their monthly distributions to the purchase of additional trust units at a price equivalent to 95 percent of the market price of the trust units calculated as the weighted average trading price of the trust units on the Toronto Stock Exchange for the period commencing on the second business day following the record date applicable to such distribution payment and the second business day immediately prior to the distribution payment date.
The full text of the plan and the enrollment forms will be mailed to Harvest’s US registered unitholders and will be made available at www.harvestenergy.ca or by contacting Harvest toll free at 866-666-1178. Harvest Energy Trust rates a hold.
Electric Power
Algonquin Power Income Fund’s (APF.UN, AGQNF) bid for Clean Power Income Fund (CLE.UN, CEANF) was trumped yesterday by Macquarie Power & Infrastructure Income Fund. Macquarie’s CD6.39 per unit/CD226 million offer tops the CD5.47 per unit/CD208 million deal Algonquin struck with Clean in February. Algonquin has until April 18 to match or top Macquarie’s offer.
Clean Power is attractive to Macquarie because its assets would expand Macquarie’s portfolio to include wind, water and biomass power-generation facilities. Clean Power owns 15 generating plants in Quebec, Ontario, Alberta, British Columbia and four US states with a total capacity of 303 megawatts. Macquarie Power & Infrastructure is managed by a subsidiary of Australia-based Macquarie Bank. Its recent moves in Canada include the acquisition of a 45 percent interest in Leisureworld, a long-term care provider in Ontario.
Macquarie had Clean Power on its radar soon after the fund undertook its strategic review but hesitated in making a bid because of concerns about the prevailing market climate. Macquarie noted that during the past two years power assets were being bought at high yields but very low internal rates of return. That’s changed in 2007, as internal rates of return have begun to surpass immediate yield. After the Clean Power/Algonquin process, Macquarie decided the Clean Power assets were in fact attractive.
Algonquin will receive a CD1.7 million payment, plus expenses, from Clean Power if Algonquin opts not to exercise its right to match or better the Macquarie bid. Algonquin Power Income Fund remains a buy up to USD9.
Gas/Propane
AltaGas Income Trust (ALA.UN, ATGFF) is building a natural gas pipeline from the Noel region of British Columbia to an expanded Pouce Coupe gas-processing facility in northwest Alberta in a project expected to cost CD90 million. AltaGas said last week that the planned pipeline would transport 90 million cubic feet of gas per day from Noel to the Pouce Coupe processing facility, at which AltaGas plans to add an equal amount of processing capacity. The plant currently processes about 8 million cubic feet of sweet gas per day.
The Noel region has significant potential for reserves of sour gas. The Pouce Coupe facility will use acid gas injection to minimize the emissions that result from gas processing. The planned project follows a contract for gas gathering and processing capacity with Devon Canada Corp, which plans to drill wells within the gathering area of the pipeline system. The projects are subject to provincial and federal regulatory approvals and expected to begin construction in mid-2007 with gas to flow by April 2008. Buy AltaGas Income Trust up to USD26.
Business Trusts
The Keg Royalties Income Fund (KEG.UN, KRIUF) reported total first quarter 2007 sales of CD106.9 million for its operating unit Keg Restaurants, up 10.2 percent from CD97 million for the 13 weeks ended April 2, 2006. Royalty pool sales for the fund for the quarter increased 12 percent to CD105.2 million, up from CD94 million for the same quarter a year ago.
The increases reflect success with new restaurants added to the royalty pool on Jan. 1, 2007, as well as strong same-store sales growth. Same-store sales increased by 8.1 percent in Canada and by 3.8 percent in the US. Total consolidated same-store sales increased by 7.6 percent for the quarter. The Keg Royalties Income Fund rates a hold.