Maple Leaf Memo
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At the top of all company earnings-results conference calls, the emcee will remind investors that the discussion is likely to include predictions about the future of the business and that they shouldn’t assume anything will happen for certain.
Forward-looking statements are part-and-parcel of earnings calls. There are no guarantees, but it’s nice to know how executives are thinking.
Of particular interest since Oct. 31, 2006, are trusts’ plans to deal with the new tax on distributions. The possibilities for coping include converting (or reconverting) to traditional corporate status, reinvesting most capital back into the business; becoming a high-dividend paying corporation; or staying the course as an income trust. External influences—would-be acquirers and privateers—can also shape what happens, but those trusts asserting some control over their respective fates have basically three choices.
But an interesting little nugget made its way out of Acadian Timber Income Fund’s first quarter earnings conference call last week. Among other alternatives, the forestry outfit is exploring preserving the tax-advantaged status of its distributions by recasting itself as a real estate investment trust (REIT). According to CEO Reid Carter, Acadian is already engaged in negotiations with the Canadian federal government.
Government ratification seems likely, as Acadian would be one of the few forestry companies in North America unable to make distributions directly to unitholders on a tax-advantaged basis. The government’s Tax Fairness Plan excludes REITs, and many observers anticipated other trusts would try to squeeze their businesses into the definition. Toronto-based Acadian is the first to try.
“Acadian has opened discussions with the Canadian government to consider Acadian for qualification as a REIT for the purpose of taxation,” the firm said.
As things stand, Acadian will be at a competitive disadvantage to TimberWest Forest Corp, the distributions of which aren’t harmed by the proposed tax, and other forestry companies based in the US. American forestry companies qualify for REIT status.
Acadian, which commenced operations Jan. 31, 2006, generated net sales of CD26.9 million during the first quarter of 2007 on consolidated log sales volume of 482,600 cubic meters (m3). Consolidated log volumes in the first quarter of 2006 were 341,000 m3, resulting in net sales of $19.4 million. The first quarter of 2006 consisted of a two-month period from commencement of operations to March 31, 2006.
Net income of CD9.6 million for the first quarter was 39 percent higher than year-ago figures; a 36 percent earnings margin was consistent with the first quarter of 2006. The first quarter typically generates approximately 45 percent of annual sales and cash flow. Carter expects demand for Acadian’s hardwood and softwood products to remain stable through the balance of 2007.
Damn The Torpedoes
Penn West Energy Trust, the second-largest energy trust behind Canadian Oil Sands, plans to remain an income trust for at least the next four years until federal tax changes are expected to kick in. And it may continue in its current form beyond 2011.
CEO Bill Andrew made the commitment (remember, it’s a “forward-looking statement” and won’t necessarily become true) during Penn West’s first quarter conference call. Andrew provided no specifics on how the trust could survive as such beyond 2011 but was certain it wouldn’t become a conventional corporation any time soon.
“We have no intention of modifying the structure of this company certainly prior to 2011,” said Andrew. “And we believe that we can extend the structure longer than 2011.”
Andrew said Penn West could become a dividend-paying corporation post-2011, noting it would be a challenge to maintain payouts at a level unitholders have become accustomed to. Bottom line: Penn West will be an income trust until it’s not.
Penn West’s first quarter net income dropped 33 percent to CD96 million (40 cents Canadian per unit) on higher depletion costs stemming from the Petrofund Energy Trust acquisition.
Penn West earned CD144 million (87 cents Canadian per unit) a year ago. First quarter production averaged 128,447 barrels of oil equivalent per day, up from 96,713 in the first three months of 2006. Gross revenue was CD582.4 million, up from CD433.9 million a year earlier. The trustees plan to maintain a 34-cent-Canadian per-unit per-month distribution through 2007.
The Roundup
Oil & Gas
Enerplus Resources (ERF.UN, NYSE: ERF) reported net income of CD107.9 million (88 cents Canadian per unit), down from CD127.3 million (CD1.08 per unit) during the first quarter of 2006. (Enerplus realized CD19 million in the first quarter of 2006 from an asset sale.) Cash flow from operating activities came in at CD193.2 million (CD1.57 per unit), compared to CD189.3 million (CD1.60 per unit) a year ago.
Natural gas accounted for 53 percent of Enerplus’ first quarter production, level with the year-ago figure. Enerplus’ average selling price of CD7.21 per thousand cubic feet (MCF) for the first quarter was down 13 percent from CD8.33 the previous year. Production volumes averaged approximately 86,000 barrels of oil equivalent per day (BOE/d), up slightly over the first quarter of 2006 and in line with 2007 full year guidance of 85,000 BOE/d.
Cash flow from operations was slightly ahead of last year at CD193.2 million, compared to CD189.3 million in the first quarter of 2006. Monthly cash distributions to unitholders were 42 cents Canadian per unit, consistent with levels for the past 19 months. Operating costs ran ahead of guidance at CD8.53 per BOE, but Enerplus still expects full year 2007 operating costs of CD8.45 per BOE.
A year-long decrease in industrywide capital expenditures has started to push drilling and oilfield services costs down. The payout ratio for the quarter was 82 percent, compared to 79 percent for the first quarter of 2006. Debt-to-cash flow held steady at a 0.8 times.
Success in Enerplus’ Bakken operations has prompted the trust to shift CD30 million from the planned capital expenditure program for conventional Canadian projects to US-based oil development. Enerplus Resources is a buy up to USD50.
NAL Oil & Gas Trust (NAE.UN, NOIGF) reported first quarter net income of CD16.7 million (21 cents Canadian per unit), down from CD24.6 million (33 cents Canadian per unit) a year ago.
The trust generated funds from operations of CD54.2 million (69 cents Canadian per unit), compared to CD57.7 million (77 cents Canadian per unit) a year ago. NAL declared 48 cents Canadian per unit in distributions for a 69 percent payout ratio, a reduction from 74 percent for the first quarter of 2006.
Production averaged 19,422 BOE/d during the first quarter, exceeding first quarter guidance. NAL realized an average crude oil price of CD61.60 per barrel, up CD60.60 from the first quarter of 2006.
NAL’s realized natural gas price was lower by 12 percent during the first quarter of 2007 because of the late arrival of winter weather. On a BOE basis, NAL’s realized price of CD53.17 during the quarter was 5 percent lower than the previous year.
Net debt at the end of the quarter was CD227 million, representing a ratio of 1.05 times the last 12 months’ cash flow. Sell NAL Oil & Gas Trust.
Pengrowth Energy Trust (PGF.UN, NYSE: PGH) reported a net loss of CD69.8 million (29 cents Canadian per trust unit) in the first quarter of 2007, compared to net income of CD66.3 million (41 cents Canadian per trust unit) in the same period last year.
Pengrowth generated distributable cash of CD199.4 million, up from CD140.9 million in the first quarter of 2006. Distributions paid totaled CD183.5 million (75 cents Canadian per unit), for a payout ratio of 92 percent.
Daily production in the first quarter of 2007 increased 53 percent, compared to the first quarter of 2006, and reached 90,068 BOE/d. Capital expenditures for the quarter amounted to CD96.9 million. Pengrowth intends to dispose of CD300 million to CD450 million of noncore properties.
In the first quarter, Pengrowth completed asset sales with two parties for proceeds of approximately CD75 million, prior to adjustments and a further CD154 million in dispositions were closed subsequent to quarter end. The proceeds were used to partially repay a CD600 million credit facility. Pengrowth Energy Trust is a hold.
PrimeWest Energy Trust (PWI.UN, NYSE: PWI) generated funds from operations during the first quarter of CD93.8 million (CD1.04 per unit), compared to CD101.3 million (CD1.25 per unit) in the first quarter of 2006. Distributions were 75 cents Canadian per unit for a payout ratio of approximately 72 percent.
First quarter 2007 production averaged 41,748 BOE/d. PrimeWest expects full-year 2007 production volumes to average between 39,000 and 40,000 BOE/d, including the planned divestiture of approximately 1,000 BOE/d in the second quarter of 2007.
On Jan. 11, 2007, PrimeWest issued 6.42 million units for net proceeds of CD142.4 million and Series III Convertible Unsecured Subordinated Debentures, which bear interest at 6.5 percent for net proceeds of CD192 million. Net debt to annualized first quarter 2007 funds flow from operations was approximately 1.9 times March 31, 2007. Hold PrimeWest Energy Trust.
Provident Energy Trust (PVE.UN, NYSE: PVX) is acquiring Capitol Energy Resources for CD508 million (USD457 million), including CD41 million in debt. Capitol produced about 4,400 BOE/d in April. Provident’s offer works out to CD113,000 per barrel of daily production and CD33.34 per barrel of proven reserves.
Capitol’s biggest oil field is the Dixonville Monty C pool near Dixonville, Alberta, which Provident said is expected to become its largest operating area. The trust said production from the pool, with reserves estimated to be 30 million BOE, could be boosted using specialized techniques. Buy Provident Energy Trust up to USD13.
Shiningbank Energy Income Fund (SHN.UN, SBKEF) reported first quarter funds from operations totaled CD60 million, down 4 percent from the first quarter of 2006 but up 13 percent from the fourth quarter of 2006. The payout ratio for the quarter was 61 percent of funds flow.
Operating costs of CD8.26 per BOE were 1 percent higher than a year ago because of delays bringing production online and general industry cost pressures. Production was 24,788 BOE/d, up 14 percent from last year’s first quarter.
The first quarter brought a reprieve from the low gas prices that had lingered through the second half of 2006. After a warm December and January across much of North America, a blast of cold weather in February led to a major drawdown on North American storage and prices recovered somewhat.
Shiningbank’s average price of CD7.78 per MCF was down 12 percent from the first quarter of 2006 but up 8 percent from CD7.19 in the fourth quarter of 2006. Shiningbank Energy Income Fund is a hold.
Vermilion Energy Trust (VET.UN, VETMF) reported a decline in funds from operations to CD75.9 million (CD1.06 per unit) in the first quarter of 2007 from CD89.6 million (CD1.27 per unit) because of higher income taxes. Recorded production of 29,090 BOE/d represents an increase of 11 percent, compared to 26,241 BOE/d in the first quarter of 2006. Production volumes were 1 percent lower than fourth quarter 2006 production of 29,452 BOE/d primarily because of production interruptions in France.
Vermilion distributed 51 cents Canadian per unit during the quarter, for a payout ratio of 44 percent. Net debt at the end of the first quarter was approximately CD346 million, equivalent to 1.1 times annualized first quarter cash flow. Buy Vermilion Energy Trust up to USD31.
Electric Power
Boralex Power Income Fund (BPT.UN, BLXJF) generated revenue of CD33.9 million for the first quarter of 2007; earnings before interest, taxes, depreciation and amortization (EBITDA) amounted to CD21.8 million, compared to $22.3 million in the first quarter of 2006. The fund also reported net earnings of $12.7 million for the first three months of 2007. Basic and diluted net earnings per unit amounted to 21 cents Canadian for the first quarter of 2007, compared to 22 cents Canadian in 2006.
Total hydroelectric power generation was 13.5 percent above the historical average but 8.2 percent lower than the first quarter of 2006. Hydroelectric reported revenue from energy sales of CD13.9 million and EBITDA of CD11.8 million. The wood-residue thermal power stations reported revenue of CD11.9 million in the first quarter of 2007, up CD600,000, and EBITDA of CD7.8 million, an increase of 18 percent from CD6.6 million in the first quarter of 2006.
The natural gas cogeneration power station generated revenue of CD8.1 million in the first quarter of 2007, down 3.4 percent year over year. The decrease is partly due to a breakdown in one of its two turbines late in the quarter. The facility is now operating normally.
Boralex continues to solicit proposals leading to a potential sale of or merger, as announced March 2, 2007. Boralex Power Income Fund is a buy up to USD9.50.
Business Trusts
A&W Revenue Royalties Income Fund (AW.UN, AWRRF) reported same-store sales increased 3.6 percent over the same quarter of 2006. Total royalty income increased by 5.3 percent, resulting from the same-store sales increase plus the increased number of restaurants in the royalty pool. Total sales increased by CD6.4 million to CD128.1 million.
Cash generated in the quarter to pay distributions and dividends increased by 7.4 percent to CD3.5 million. Distributable cash increased from 24.7 cents Canadian for the first quarter in 2006 to 25.9 cents Canadian in the first quarter of 2007. A&W Revenue Royalties Income Fund is a hold.
Big Rock Brewery Income Trust (BR.UN, BRBMF) reported net income of CD834,972 for the first quarter, down from CD1.1 million a year ago because of a noncash CD328,600 charge for unit-based compensation. Net income per unit decreased to 14 cents Canadian for the quarter compared to 18 cents Canadian in the same quarter last year.
Distributions declared were CD1.9 million (33 cents Canadian per unit). Sales revenue decreased by CD247,402, or 3 percent, from CD8,319,702. Cost of sales was basically flat quarter over quarter at CD3.3 million. Selling expenses decreased by 25 percent to CD620,485.
Beginning in mid-2006, Big Rock cut back its marketing and sales programs focused on giveaways used as incentives for premium beer purchases. Hold Big Rock Brewery Income Trust.
Chemtrade Logistics Income Fund (CHE.UN, CGIFF) reported EBITDA of CD11 million during the first quarter, down from CD15.7 million a year ago, on revenue of CD128.7 million. Cash available for distribution was CD6.6 million (20 cents Canadian per unit), down from CD11.6 million (35 cents Canadian per unit). The net loss for the quarter of CD500,000 compares to net earnings of CD3.8 million in the same 2006 period.
Healthy product demand was offset during the first quarter by the planned maintenance shutdown of Chemtrade’s two largest acid regeneration plants, costs associated with the cessation of production of powder SHS at the Leeds, SC, plant in December 2006, and higher input costs in the manufacture of liquid SHS. <b>Buy Chemtrade Logistics up to USD9.
Home Equity Income Fund</b> (HEQ.UN) reported new mortgage originations of CD25.6 million in the first quarter, up 20.1 percent over the same period of 2006. Originations, higher interest rate compounding and lower repayments resulted in portfolio growth of CD81.1 million, or 14.7 percent, since the first quarter of 2006. The portfolio has now grown to CD632.1 million.
Net income amounted to CD1.1 million. Excluding the impact of the new accounting requirements for derivatives, adjusted net income of CD2.1 million increased by 77.7 percent compared to 2006. Adjusted net income per unit increased by 75.5 percent to 15.1 cents Canadian per unit.
Distributable cash per unit was 30.3 cents Canadian, an increase of 17.5 percent. The trailing four-quarter payout was 86.9 percent March 31, 2007. Hold Home Equity Income Fund.
Sleep Country Canada Income Fund (Z.UN, SLPCF) reported a 23.6 percent increase in sales to CD79.9 million in the first quarter of 2007 from CD64.6 million in the same 2006 period. EBITDA increased 11.6 percent to CD7.5 million from CD6.7 million. Sleep Country Canada Income Fund is a buy up to USD23.
Sun Gro Horticulture Income Fund (GRO.UN, SGHRF) generated distributable cash of CD6.6 million (30 cents Canadian per unit), compared to CD6.5 million (30 cents Canadian per unit) a year ago. Distributable cash paid to unitholders was consistent in both quarters at 22.5 cents Canadian per unit.
Revenue for the three months ended March 31, 2007, was CD66.7 million, up 15 percent from a year ago. Sales volumes increased by 5 percent over the first quarter of 2006, driven mainly by Sun Gro’s recently acquired California operations.
Operating income reached CD6.7 million, up from CD6 million in the first quarter of 2006. First quarter net earnings were CD4.8 million (22 cents Canadian per unit), up from CD4.1 million (19 cents Canadian per unit). Hold SunGro Horticulture Income Fund.
Wajax Income Fund (WJX.UN, WJXFF) reported an 11 percent boost in first quarter earnings to CD18.7 million (CD1.13 per unit) from CD16.9 million (CD1.02 per unit) on basically flat revenue. Distributable cash increased to CD1.17 per unit from CD1.11.
On April 5, 2007, the fund amended its bank credit facility by increasing the amount of the facility by CD45 million to CD175 million and extending the term to Dec. 31, 2011, from June 8, 2008. This increased facility allows more debt capacity to fund working capital growth and acquisitions. Hold Wajax Income Fund.