Maple Leaf Memo

Transformer

TransForce Income Fund faced a difficult choice.

Its units peaked in February 2006 above CAD19, traded just below CAD18 on Oct. 31, 2006, and slid along with the rest of the trust sector after Canadian Finance Minister Jim Flaherty’s destructive announcement that specified investment flow-throughs (SIFT) would be taxed at the entity level beginning in 2011.

Many trusts recovered the ground they lost in the market, but TransForce languished. The value of TransForce’s distribution wasn’t properly valued in comparison to other trusts, a perception acknowledged in the company’s March 28 statement announcing it would submit for unitholder ratification a plan of arrangement to convert back to a corporate form.

The vote on the plan of arrangement will be held May 12, 2008. President and CEO Alain Bédard, Jolina Capital and TransForce trustees, together holding more than 20 percent of the currently outstanding units, have said they’ll support the plan. The company board also recommends the conversion.

If it’s ratified, unitholders will exchange units for common shares of the new “TransForce Inc” on a 1-for-1 basis. Following the reorganization, there will be 86.6 million shares outstanding of TransForce Inc.

TransForce also announced its distribution for April, 13.25 cents Canadian per unit to be paid May 15 to unitholders of record as of April 30. Assuming approval of the conversion, the fund expects to pay a final distribution 6.625 cents Canadian per unit for the May 1-May 15, 2008, period to be paid on June 13, 2008, to all unitholders of record as of May 15, 2008.
 
The pressures on TransForce were rather unique. According to Statistics Canada, more than 70 percent of the Canadian trucking industry’s CAD55 billion total revenue is generated by carriers with less than CAD25 million in annual revenue. It’s a highly fragmented industry; acquisitions are the key to TransForce’s long-term growth.

But the higher costs of capital flowing from the new SIFT rules and the limited financial flexibility resulting from its commitment to distribute a large portion of its cash flow to unitholders hampered its strategic plan.

Management and the board concluded that a corporate structure allows TransForce greater flexibility to follow through on its goal to lead the consolidation of its industry.  

Bedard said in the March 28 statement that the company was “in advanced discussions regarding a number of highly strategic and complementary acquisition opportunities totaling more than CAD100 million, in a number of our operating segments. These acquisitions could be realized in the short term.”

Flexibility allows it to pursue new revenue streams as well as to reduce debt. But in an acknowledgment similar to one made by Trinidad Drilling upon its conversion announcement, TransForce also will pay a dividend. Its ability to compete in the financial markets is predicated on its willingness to pay out a significant portion of income to its owners.

TransForce Inc intends to establish a dividend policy under which it will declare annual dividends of 40 cents Canadian per share to be paid quarterly. The first dividend is expected to be announced Sept. 30, 2008.

The company converted to the income trust format in 2002 and subsequently quadrupled its revenue to CAD2 billion. It’s expanded its geographic reach and diversified its operations by completing more than 75 acquisitions. Those deals amounted to total revenue in excess of CAD1 billion.

In its time as a trust, TransForce distributed approximately CAD8 per unit, raising its monthly payout 10 times. The good news is TransForce Inc will be a high-dividend paying corporation.   

A reconstituted TransForce faces difficulties going forward—specifically, a slowdown in Canadian manufacturing activity—but the company’s status as an industry leader and its geographic and operational diversity leave it well positioned to withstand a slowdown. It will also be set up to grow revenue once business conditions normalize.

Ironically, those benefits accrued mostly during the company’s income trust existence. But for Flaherty, TransForce would continue its path as a growth-oriented, high-distribution-paying trust.   

Resources Equal Resilience

Statistics Canada reported Monday that Canada’s economy expanded by a greater-than-expected 0.6 percent during January, a happy result in the wake of December’s 0.7 percent contraction.

The solid GDP number reflects a forecast made here and in Canadian Edge that Canada wouldn’t suffer as much as it has during past US downturns because of the increasing global importance of its ample resources.

It’s an important indicator amid what seems a sea of negativity, but analysts still expect first quarter numbers to show an overall shrinkage.

Manufacturing, which has languished while resource-based sectors have flourished during this commodity bull, grew by 1.7 percent. Sixteen of the 21 sectors Statistics Canada follows showed gains for the month.

April Foolishness

Did the mock conversion of one long-term bear into rabid bull drive the US equity market to yet another triple-digit Tuesday?

The day’s big gains are more likely traceable to a decent set of manufacturing numbers and new equity offerings from Lehman Brothers and UBS, but this is fun to contemplate.  

The Roundup

Oil & Gas

Enerplus Resources (NYSE: ERF, TSX: ERF-U) is conducting a strategic review of its 15 percent stake in Total’s Joslyn oil sands project in Alberta. The process may lead to a sale of part or all of its non-operated interest.

Enerplus wants to focus on its fully-owned Kirby project and would initially use proceeds from any sale of the Joslyn stake to reduce bank debt. Because Enerplus operates Kirby, that project provides greater control over the timing and nature of capital expenditures.

Joslyn, which consists of both mining and steam-injection projects, may contain 2 billion barrels of oil. Enerplus’ stake is estimated to be worth CAD90 million to CAD150 million. Enerplus bought the Kirby leases in 2007 for CAD182.5 million. Enerplus Resources is a buy up to USD50.

Electric Power

Algonquin Power Income Fund’s (TSX: APF-U, OTC: AGQNF) trustees adopted a unitholder rights plan March 20 “to ensure the fair treatment of unitholders in connection with any takeover offer for the fund, and to provide the trustees and unitholders with additional time to fully consider any unsolicited takeover bid. The Rights Plan will also provide the trustees more time to pursue, if appropriate, other alternatives to maximize unitholder value.”

The move wasn’t made in response to any specific offer or proposal to buy the company. Algonquin Power Income Fund is a buy up to USD9.50.

Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) reported a 28 percent rise in distributable cash for 2007 to USD74 million from USD57.9 million in 2006. The boost was driven mainly by a full-year contribution from its Path 15 transmission line, which was acquired Sept. 15, 2006.

Atlantic distributed USD61.4 million during the year, for a payout ratio of 83 percent. For the three months ended Dec. 31, 2007, distributable cash was USD20.7 million, a 78 percent increase from USD11.6 million a year ago.

Adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) increased 11 percent to USD166.9 million for 2007. Adjusted EBITDA for the fourth quarter was down 5 percent to USD40.7 million compared to the fourth quarter of 2006.

Atlantic reported a project loss of USD113.4 million for 2007, including noncash charges related to the change in fair value of derivative instruments of USD128.4 million and a goodwill impairment charge of USD71.7 million. The net loss for the three months and year ended Dec. 31, 2007, was USD74.2 million (USD1.21 per unit) and USD149.2 million (USD2.43 per unit), respectively.

Excluding noncash charges related to changes in the fair value of derivative instruments and goodwill impairment charges, the net loss for the three months and year ended Dec. 31, 2007 would have been USD8.1 million (13 cents Canadian per unit) and USD29.1 million (47 cents Canadian per unit), respectively. Atlantic Power Corp is a buy up to USD12.

Gas/Propane

Trinidad Drilling (TSX: TDG, OTC: TDGCF) released a statement offering an explanation for the strange trading activity in its shares on Thursday, March 20, 2008, and Monday, March 24, 2008:

As previously announced, on March 10, 2008, the Corporation completed a reorganization with Trinidad Energy Services Income Trust whereby the entity converted from an income trust structure to the current corporate structure.

As a result of the change in structure, on March 11, 2008, Standard & Poor’s Canadian Index Operations announced that Trinidad would be removed from the S&P/TSX Income Trust and Capped Energy Trust Indices and would be added to the S&P/TSX Equity and Capped Equity, the S&P/TSX Equity Completion and the S&P/TSX Equity Small Cap Indices, effective after the close of market on Friday, March 14, 2008.

Trinidad confirms that it isn’t aware of any undisclosed material change or pending material change in its business or operations.

Trinidad Drilling is a buy up to USD14.

Business Trusts

Connors Bros Income Fund (TSX: CBF-U, OTC: CBICF) subsidiary Castleberry’s Food Co received approval from the US Food and Drug Administration (FDA) and the US Dept of Agriculture (USDA) to reopen its Augusta, Ga., factory following a temporary closure.

The closure was announced March 11 while Castleberry completed certain process modifications and answered questions from the FDA regarding the factory operations that were the focus of a botulism scare last summer that led to a CAD116 million recall. The factory is scheduled to begin production on March 31. Sell Connors Bros Income Fund.

Keystone North America (TSX: KNA-U, OTC: KYSNF) reported a USD1.9 million (7 cents per unit) loss for the fourth quarter, compared with a loss of USD2.9 million (16 cents per unit) a year ago. Revenue in the quarter was USD32.1 million, up from USD22.6 million.

Keystone noted the total number of deaths was significantly lower in the fourth quarter of 2007 compared to the same period in the prior year, primarily in December. For the year, Keystone earned USD5.4 million (22 cents per unit) on USD108.6 million in revenue. That compared with a loss of USD2.7 million (14 cents per unit) on USD85.6 million in revenue in 2006.

Keystone operates 199 funeral homes and 16 cemeteries across the US and Ontario. Hold Keystone North America.

Medical Facilities Corp (TSX: DR-U, OTC: MFCSF) reported net income of USD400,000 (0.2 cent per unit), down from USD5.4 million (17.3 cents per unit) in the fourth quarter of 2006. Revenue for the fourth quarter increased 11.5 percent to USD46.8 million from USD42 million a year ago. Hold Medical Facilities Corp.  

New Flyer Industries (TSX: NFI-U, OTC: NFYIF) reported that the members of the Communications Workers of America bargaining unit at its St. Cloud, Minn., facility ratified a new five-year collective bargaining agreement. The new agreement provides an average annual pay increase of 3.3 percent over the five-year term.

The St. Cloud bargaining unit represents 467 employees, approximately 30 percent of New Flyer’s total unionized workforce in the US and Canada. Hold New Flyer Industries.