NAFTA–Who Needs Whom?

We’ll get to the fun stuff in a moment (a week worthy of both a “Scam” and a “Gate”), but because it’s come up largely in the US Democratic presidential nomination battle–and has assumed an even more distinct Canadian flavor in the last several days–let’s talk about the North American Free Trade Agreement (NAFTA).

Barack Obama and Hillary Clinton have both said they’re prepared to pull out of NAFTA if the trade agreement isn’t reworked. “We will opt out of NAFTA unless we renegotiate it and we renegotiate on terms that are favorable to all of America,” Clinton said during an Ohio debate with Obama last week.

Obama also said he would make sure the US renegotiates the deal, using “the hammer of a potential opt-out as leverage.” The candidates agree that core labor and environmental standards should be changed.

Canada’s Prime Minister Stephen Harper was quick to respond to the Democrats’ election-year protectionism. “I would caution about jumping to conclusions about what a future president may do,” Harper said in the House of Commons following the Ohio debate. “If a future president actually did want to open up NAFTA, Mr. Speaker, which I highly doubt, then Canada would obviously have some things we would want to discuss.”

New discussions on NAFTA’s particulars would certainly be colored by Canada’s position as the US’ most important energy trading partner. Our friends up north would be in a strong negotiating position. Although the US share is falling as Asia consumes more and more resources, most of Canada’s energy exports still go to the US. And Canada is still the largest foreign source for US energy imports.

For 2006, Canada exported to the US 2.3 million barrels per day of oil and petroleum products (11 percent of US supply), 3.6 trillion cubic feet of natural gas (16 percent of US supply) and 41.2 billion kilowatt hours of electricity (1 percent of US supply).

David Emerson, Canada’s trade minister, said in a Financial Times report, “NAFTA has been kind of a foundation of integrating the North American energy market. If you reopen [NAFTA] for one or two issues, you cannot avoid reopening it across a range of issues.”

“It’s our assessment that more than 7 million jobs in the US depend on Canada-US free trade,” Emerson told the FT. “It seems the case that when [US politicians] talk about NAFTA they are talking about globalization, with NAFTA being the proxy for globalization.”

The FT reported, in the same story, this comment from an unnamed Canadian diplomat: “If NAFTA is ripped up, then the Chinese can buy more of our oil; there’s no further obligation on the part of Canada to sell its oil to the US.”

CTV reported last week that an official from the Obama campaign contacted the Canadian Embassy in Washington, DC, to say that the candidate’s public stance on NAFTA was simply political rhetoric designed to court voters in Ohio, a critical state in the nomination process and a place hard-hit by job losses in recent years. The Obama campaign denied the CTV report, saying that such a discussion never took place.

But several days after that denial, after the Ohio debate, after Harper’s comments in the House of Commons, a memo prepared by a Canadian diplomat for the prime minister’s office surfaced. It detailed the diplomat’s version of what Austan Goolsbee, a University of Chicago professor and Obama’s top economic policy advisor, said during a different meeting that had in fact taken place at the Canadian consulate in Chicago.

The memo’s author, Joseph DeMora, a political and economic affairs consular officer, wrote that Professor Goolsbee assured them that Obama’s public NAFTA position was “more reflective of political maneuvering than policy” and “should be viewed as more about political positioning than a clear articulation of policy plans.”

According to the Associated Press, the memorandum also reads, “On NAFTA Goolsbee suggested that Obama is less about fundamentally changing the agreement and more in favor of strengthening/clarifying language on labor mobility and environment and trying to establish these as more ‘core’ principles of the agreement.”

The Canadian Embassy in Washington has issued a statement backing Obama’s version of the meeting between Goolsbee and Canadian officials.

“There was no intention to convey, in any way, that Sen. Obama and his campaign team were taking a different position in public from views expressed in private, including about NAFTA,” the embassy statement said. “We deeply regret any inference that may have been drawn to that effect.”

The Canadian government also said it’s reached out to US presidential candidates to make its pro-NAFTA case, so the Goolsbee meeting wasn’t unique.

“We do have diplomatic representatives posted in many places in the US, and these representatives are actively talking to decision makers in the US, and that includes people who are involved on the campaigns,” Tristan Landry, a spokesman for the Canadian Embassy in Washington, told ABC News.

“At no point did any member of a presidential campaign call the Canadian ambassador or any official working for this embassy to discuss NAFTA. That is simply not true,” he said.

And now, if you’re a political junky on either side of the border, this is where the fun starts: It’s now been widely reported (here, here and here) that Ian Brodie, Harper’s chief of staff, leaked the memo.  

Harper opposes renegotiation, and his political sympathies no doubt lie with presumptive Republican nominee John McCain, who favors NAFTA and wouldn’t fiddle with it. Obama seemed to be peaking, as he did heading into the Virginia and Wisconsin presidential primaries in February. The memo leak stalled his poll-measured momentum in Ohio.

From Harper’s perspective, if he undercuts the credibility of the leader in the Democratic race, hurts him in a state that could put him over the top, draws out the race to the detriment of the eventual nominee and the Democrats, it’s less likely that NAFTA gets opened up.

Harper, surviving atop what’s now the longest-serving minority government in Canadian history, is one of the shrewdest politicians in North America. He has the brass to instruct his Finance Minister, Jim Flaherty, to table a take-it-or-leave-it budget. (Stephane Dion said he never expected the government to entertain amendments and then caved; see below.) And he’s managed to move bribery allegation news (Cadscam, according to the Financial Post’s Diane Francis) into the Harper-files-libel-suit-against-the-Liberals phase. And now NAFTAGate (according to the National Review’s Byron York) has further obscured his own ethical concerns.

Harper played the “I’m just a caveman” part before Parliament, saying he was amused by the suggestion “we are so all powerful that we could interfere in the American election and pick their president for them. This government doesn’t claim that kind of power. I certainly deny any allegation that this government has attempted to interfere in the American election.”

Harper has proven his skills with the tomato can Dion; perhaps he hungers for a stiffer fight.

Budget Vote

Harper’s minority government won the second of three parliamentary votes on its 2008 budget. Rejection of the budget or any component would bring down the government and trigger elections.

Canadian legislators voted 202-7 against the opposition Liberal Party’s amendment. Lawmakers rejected an amendment from the Bloc Quebecois last week. A final vote on the budget is scheduled to take place Wednesday.

As far as Canada is concerned, MLM is absolutely a single-issue party. Harper and his minority government is the first domino that must fall in order for changes to the 2011 tax on income trust distributions to be made. 

The Green Party called for a public inquiry into the dubious claim of tax leakage in December 2007. And last Friday, the Liberals sent to Canada’s auditor general a letter calling for an investigation into the basis for the minority government’s unproven allegation that income trusts cause tax leakage.

The Liberals have said they would reduce the tax to 10 percent, among other adjustments.

There’s more at the Canadian Association of Income Trust Investors Web site.

Speaking Engagements

It’s time: Vegas, baby! Neil, Elliott and I will head to the desert paradise May 12-15, 2008, for the Las Vegas Money Show at Mandalay Bay. Go to http://www.lasvegasmoneyshow.com or call 800-970-4355 and refer to priority code 010583 to do the “what happens here stays here” thing as my guest.

The Roundup

Oil & Gas

Enerplus Resources (NYSE: ERF, TSX: ERF-U) reported fourth quarter 2007 net income of CAD98.7 million (76 cents Canadian per unit), down from CAD110.2 million (89 cents Canadian per unit) a year ago. The decrease was caused by higher costs, hedging losses and the fluctuating Canadian dollar.

Oil and gas sales were CAD389.8 million, up from CAD369.5 million in the fourth quarter of 2006. Royalties paid increased to CAD73.2 million from CAD66.2 million, and commodity derivative instrument losses widened to CAD48.8 million from CAD5.4 million. Operating expenses were CAD8.53 per barrel of oil equivalent (boe), flat with CAD8.52 a year ago, but general and administrative expenses increased to CAD1.94 per boe from CAD1.88 per boe in the fourth quarter of 2006. Interest and foreign exchange expenses rose to CAD1.70 per boe from CAD1.02 per boe.

Production for the quarter averaged 80,959 boe/day, a decline of 7 percent from 87,092 boe/day in the same quarter of 2006. Average selling price for the quarter per boe was CAD52.33, up 13 percent from CAD46.11 a year ago on stronger crude prices.

For fiscal 2007, the company reported net income of CAD339.7 billion (CAD2.66 per unit), down from CAD544.8 billion (CAD4.47 per unit) in 2006. Net revenues for the full year declined to CAD1.22 billion from CAD1.30 billion. Oil and gas sales were CAD1.52 billion, down from CAD1.57 billion.

Enerplus forecast 2008 average daily production of approximately 98,000 boe/day and expects to spend CAD580 million on capital projects, up 50 percent from 2007; CAD475 million will go to conventional oil and gas production, with a slight bias toward oil over natural gas. Enerplus Resources is a buy up to USD50. 

Gas/Propane

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) reported fourth quarter net income of CAD31.8 million (55 cents Canadian per unit), a 16 percent increase from CAD27.3 million (49 cents Canadian per unit) a year ago. That figure includes a CAD6.1 million income tax recovery. Excluding the noncash tax recovery, fourth quarter net income was CAD25.7 million. Fourth quarter revenue was off slightly to CAD336.5 million from CAD367.4 million.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were CAD40.3 million (70 cents Canadian per unit) in the fourth quarter, compared to CAD44.5 million (79 cents Canadian per unit) in the same quarter in 2006. Cash from operations was CAD59.8 million (CAD1.03 per unit) for fourth quarter 2007, up from CAD36.6 million (65 cents Canadian per unit) for the same period in 2006. Funds from operations (FFO) were CAD37.8 million (65 cents Canadian per unit) for fourth quarter 2007, compared to CAD41.4 million (74 cents Canadian per unit) for the same period in 2006.

Full-year 2007 net income was CAD108.8 million (CAD1.89 per unit), down from CAD114.5 million (CAD2.06 per unit). Excluding one-time tax items, net income was CAD108.1 million, up slightly from CAD107.9 million. Revenue increased to CAD1.4 billion from CAD1.36 billion.

EBITDA for full-year 2007 was CAD173.7 million (CAD3.03 per unit), compared to CAD173.1 million (CAD3.12 per unit) in 2006. Cash from operations for full-year 2007 was CAD183.3 million (CAD3.19 per unit), up from CAD146.9 million (CAD2.65 per unit) in 2006. FFO for the year were CAD162.9 million (CAD2.84 per unit), up from CAD161.7 million (CAD2.91 per unit) in 2006.

Total debt as of Dec. 31, 2007, was CAD220.7 million, compared to CAD265.5 million at Dec. 31, 2006. The trust’s debt-to-total capitalization ratio was 27.4 percent versus 33.4 percent at the end of 2006. AltaGas Income Trust is a buy up to USD28.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) reported net earnings of CAD40 million (64 cents Canadian per unit) for the fourth quarter of 2007, up from CAD14.9 million (24 cents Canadian per unit) a year ago. Revenues in the quarter were CAD436.2 million compared to CAD340.7 million for the same quarter last year.

Net earnings for 2007 were CAD14.5 million (24 cents Canadian per unit) compared to CAD68.1 million (CAD1.10 per unit) in 2006; during the second quarter of 2007, the company recorded a CAD80 million noncash future income tax expense related to the pending tax on income trusts. Revenues for 2007 were CAD1.47 billion, up from CAD1.36 billion in 2006.

Cash flow from operating activities in 2007 was CAD119.8 million. Distributions totaled CAD90.2 million (CAD1.48 per unit). Fourth quarter distributions were CAD23 million (37.5 cents Canadian per unit). Distributable cash flow was CAD143.5 million in 2007 (CAD2.35 per unit), up 42 percent from 2006. Fourth quarter distributable cash flow was CAD41.4 million (68 cents Canadian per unit).

The full-year payout ratio for 2007 was 63 percent; for the fourth quarter, it was 55 percent. Cash flow contribution from gathering and processing was CAD87.4 million, up 19 percent from last year. The natural gas liquids (NGL) infrastructure contribution was CAD46.8 million, up 4 percent, and the contribution from Keyera’s marketing business was CAD41.9 million, 70 percent higher than in the previous year.

Keyera recently announced an 8 percent increase in its monthly distribution from 12.5 cents Canadian per unit per month to 13.5 cents Canadian. Keyera Facilities Income Fund is a buy up to USD20. 

Trinidad Energy Services Income Trust (TSX: TDG-U, OTC: TDGNF) will report before the market open March 11. We previously reported its fourth quarter and full-year 2007 announcement date as Feb. 28. Trinidad Energy Services Income Trust is a buy up to USD14.

Business Trusts

GMP Capital Trust (TSX: GMP-U, OTC: GMCPF) reported fourth quarter net income of CAD23.8 million (38 cents Canadian per unit), down from CAD30.6 million (48 cents Canadian per unit) a year ago. Revenue in the period was CAD101.5 million, down from CAD103.6 million. Distributable cash was CAD29.3 million (46 cents Canadian per unit), down from CAD36 million (58 cents Canadian per unit) a year earlier.

Full-year 2007 net income was CAD146.1 million, a 22 percent increase from 2006, on revenue of CAD473.9 million, which was up 33 percent. Distributable cash for 2007 was CAD171.7 million (CAD2.73 per unit), up from CAD131.5 million (CAD2.20 per unit) in 2006. GMP’s payout ratio for the fourth quarter was 88 percent. GMP Capital Trust is a buy up to USD25.

TransForce Income Fund (TSX: TIF-U, OTC: TIFUF) generated fourth quarter revenue of CAD493.5 million, up from CAD456.8 million a year ago, but took a CAD56 million goodwill writedown that left it with a CAD30.9 million loss for the period. Operating income was CAD61.1 million, down from CAD65.8 million a year ago.

Cash flow from operating activities was CAD51.1 million, down from CAD55.9 million during the fourth quarter of 2006. Distributable cash was CAD49.8 million, down from CAD60.7 million. TransForce’s payout ratio rose to 155.9 percent in the fourth quarter, up from 90.3 percent a year ago.

Full-year 2007 revenue increased to CAD1.9 billion from CAD1.8 billion in 2006. Operating income for the 12 months ended Dec. 31, 2007, was up 1 percent to CAD243 million from CAD241.7 million in 2006. The full year payout ratio was 97 percent, up from 81.9 percent in 2006. Hold TransForce Income Fund.