The Art of Compromise

Canada’s engagement in Afghanistan appears to be receding as a potential election catalyst after Stephane Dion, leader of the official opposition Liberal Party, said his party would support Canada staying in Central Asia for two years longer than scheduled but not in a combat role.

Dion said his party is committed to ending Canada’s combat role as scheduled in 2009 and won’t “abandon the people of Afghanistan.”

Dion listed conditions for Liberal support of the extension of the original February 2009 deadline: The North Atlantic Treaty Organization (NATO) secures troops to rotate into Kandahar to allow Canadian troops to be deployed in areas of training and reconstruction; the government secures more equipment, such as helicopters and unmanned aerial vehicles; and the government immediately notifies NATO that Canada will end its military presence in Kandahar as of Feb. 1, 2011, with Canadian troops to be completely out of Afghanistan by July 1, 2011.

Last Friday, the government presented a confidence motion outlining the active combat role Canada should play in Afghanistan until 2011. The government’s motion recommends extending the combat mission in Afghanistan to the end of 2011, provided Canada can secure more equipment and convince its allies to commit roughly 1,000 more troops by next February. The motion also calls for an increasing emphasis on training Afghan national security forces so that they can take over responsibility for the country’s security.
 
The Liberal position will take the form of amendments to the government’s motion; if it doesn’t get enough support in the House of Commons, the minority government will fall. The New Democratic Party wants an immediate withdrawal, and the Bloc Quebecois wants troops out of Afghanistan by February 2009 at the latest. But simple math and Liberal officials’ assertions that the party will vote as a bloc virtually guarantee Afghanistan won’t be the straw that breaks the minority government’s back.

Other Straws

The House of Commons began debate Monday on a government motion calling on the Senate to pass the Tackling Violent Crime Act, and Prime Minister Stephen Harper said he would ask Gov. General Michaelle Jean to dissolve Parliament–and trigger an election–if the Senate doesn’t act by March 1.

Harper’s gambit may conflict with a federal law passed last year fixing election dates. Under the law introduced by the Harper government, the next federal election is slated for October 2009 unless the opposition parties defeat the government before then.

Confidence motions are basically about the government of the day retaining the confidence of the House, not the Senate. But there’s nothing in the fixed-election law that prevents the prime minister from asking the governor general to dissolve Parliament.

And Finance Minister Jim Flaherty will table the minority Conservative government’s annual budget on Feb. 26. The New Democratic Party and the Bloc Quebecois have already indicated they’ll oppose it, but Dion is playing the wait-and-see game.

The legislative process will include four days of debate on the budget motion and any opposition motions. The first confidence vote will fall on the second day of debate, when members of Parliament will vote on the first set of amendments.

Carney Gets in the Game

New Bank of Canada (BoC) Gov. Mark Carney, in Tokyo for a meeting of finance ministers and central bankers of G-7 nations, indicated that he’ll cut interest rates in coming months because slowing export growth threatens Canada’s economy. The next interest rate decisions are scheduled for March 4 and April 22. Carney’s statement basically affirms market expectations, but the loonie has come down a bit on anticipation of lower rates.

“The effects of the slowing US economy will lead to additional downward pressure on Canada’s export growth,” Carney said. “I’m comfortable with the statement that additional monetary stimulus is likely to be required in the near term.”
 
Canada’s key lending rate was lowered Jan. 22 to 4 percent, and the BoC will cut it to 3.25 percent by June, according to the median forecast in a Bloomberg survey.

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 and Gas

Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) announced that production at the Syncrude facility is back up to 180,000 barrels per day (bpd), 66,000 bpd net to the trust. Most of the units shut down because of instrument freeze-ups since Jan. 29 have returned to operation; Syncrude is working on bringing the remaining units back up. Canadian Oil Sands Trust is a buy up to USD40.

NAL Oil & Gas Trust (TSX: NAE-U, OTC: NOIGF) is paying CAD115 million–CAD86.25 million in cash and 2.35 million units–for two private oil and gas companies, Tiberius Exploration and Spear Exploration.

NAL has worked out an arrangement with strategic partner The Manufacturers Life Insurance Company (MLI) to contribute the assets of the acquired companies to a limited partnership owned on a 50/50 basis between NAL and MLI. The total acquisition cost to NAL of its 50 percent interest in the acquired properties will be approximately CAD57.5 million—around CAD28.75 million in cash and 2.35 million trust units.

In a separate transaction, NAL recently purchased assets in the Steelman/Elswick area from a third private company for CAD6.75 million in cash. NAL currently operates these properties. The acquisitions will add 2.1 million barrels of oil equivalent (boe) reserves in NAL’s largest core area.

The aggregate January production from the properties to be acquired was 925 boe per day (boe/d). The new properties will contribute primarily light oil production from the Tilston formation, along with associated natural gas and natural gas liquids. Royalties are expected to be less than 16 percent, and operating costs are in the CAD7.50-per-boe range.

The Steelman/Elswick assets will contribute approximately 75 boe/d of light oil production. NAL Oil & Gas Trust is a buy up to USD14.

Provident Energy Trust (NYSE: PVX, TSX: PVE-U), planning for its post-2011 future, is considering selling its stakes in BreitBurn Energy Partners (NSDQ: BBEP) and BreitBurn GP LLC as part of a review of its US operations. Provident will also assess the possible sale of BreitBurn Energy Co, also known as Devco.

Provident owns about 22 percent of BreitBurn Energy Partners, including units held by the general partner, of which Provident indirectly owns about 96 percent. Provident owns about 96 percent of Devco. Provident Energy Trust is a buy up to USD14.

Gas/Propane

Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) reported a 10 percent increase in seasonally adjusted sales for its fiscal third quarter (the period ending Dec. 31, 2007) from CAD417.2 million to CAD459.4 million. Distributable cash grew by 16 percent year-over-year to CAD42.5 million (39 cents Canadian per unit) from CAD36.5 million (34 cents Canadian per unit).

Distributions to unitholders were up 20 percent to CAD33 million (30 cents Canadian per unit) from CAD27.5 million (26 cents Canadian per unit). Margins per customer were up during the period because of low commodity prices; for the third consecutive quarter, margin per new customer exceeded projections by 11 percent for the period ended Dec. 31.

Energy Savings added 99,000 customers during its third quarter, consistent with first and second fiscal 2008 quarters but a 52 percent jump from the comparable period of fiscal 2007. The additions continue Energy Savings’ shift in customer growth from Canada to the US.

Fiscal fourth quarter 2008 customer additions are likely to lag previous quarters, and total additions for fiscal 2008 will probably come in below forecast. But management has affirmed gross margin and distributable cash growth guidance of between 15 percent and 20 percent.

Results for its fiscal fourth quarter could be impacted by negative regulatory developments: On Feb. 7, 2008, the attorney general of Illinois filed a complaint against Illinois Energy Savings Corp, a wholly owned subsidiary of the fund, alleging deceptive practices by agents in the sale of Energy Savings contracts to Illinois customers.

Energy Savings continues to assess its options in light of Canada’s decision to tax income trusts at the entity level and will provide updates as necessary. Energy Savings Income Fund is a buy up to USD18.

Business Trusts

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) reported operating revenue increased by 2.6 percent compared to the same period a year earlier to CAD858.7 million (USD860.1 million) because of growth in a range of services including Internet access.

Internet revenue grew by CAD6.4 million, or 7.7 percent, year-over-year, with high-speed subscribers increasing by 17.1 percent. Bell Aliant completed its rollout of fiber-to-the-node (FTTN) broadband technology in the quarter, bringing the total number of homes passed to 188,000 at the end of December.

Local and long-distance revenue declined by CAD8.3 million (2.3 percent) and CAD2 million (1.7 percent), respectively. Bell Aliant reported a decline of 42,282 local access lines during the fourth quarter.

Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 1.7 percent to CAD370.2 million. Capital expenditures rose 9.9 percent to CAD144.1 million for the quarter and 4.9 percent to CAD543 million for 2007.

The fund reported distributions of CAD89.5 million (70.5 cents Canadian per unit), up 5.2 percent from the same quarter in 2006. The fund also announced it would boost distributions to CAD0.2417 per unit per month (CAD2.90 per unit per year) beginning with the February payment.

For the full year, revenue rose to CAD3.37 billion with EBITDA of CAD1.45 billion, operating income of CAD515.4 million and net income of CAD584.3 million. For 2008, Bell Aliant is projecting CAD3.37 billion to CAD3.44 billion in operating revenue and CAD720 million to CAD740 million in distributable cash. Bell Aliant Regional Communications Income Fund is a buy up to USD33.

New Flyer Industries (TSX: NFI-U, OTC: NFYIF) has completed the restatement of its third quarter and 2007 year-to-date results to bring them in line with current regulations. The restatement shows a CAD6.4 million reduction in net income.

The changes resulted from the application of technical accounting rules, not changes relating to the company’s operational performance. Cash from operating activities, financing activities, and investing activities didn’t require adjustment.

The restatement resulted in an increase in identifiable assets of CAD87.3 million and an increase to liabilities of CAD44.3 million, with an offsetting decrease assigned to goodwill of CAD43 million as of July 12. Hold New Flyer Industries.

Real Estate Trusts

RioCan REIT (TSX: REI-U, OTC: RIOCF) earned CAD65.1 million (32 cents Canadian per unit) during the fourth quarter, up from CAD43.4 million (22 cents Canadian per unit) a year ago. For 2007, RioCan reported net earnings of CAD32.4 million (16 cents Canadian per unit) compared to net earnings of CAD163.8 million (83 cents Canadian per unit) in 2006.

Funds from operations (FFO) were up 13 percent to CAD87.5 million (42 cents Canadian per unit) from CAD77.1 million (39 cents Canadian per unit) during the fourth quarter of 2006. FFO for the year ended Dec. 31, 2007, was up 10 percent to CAD314.6 (CAD1.51 per unit) from CAD286.6 (CAD1.45 per unit) in 2006.

Fourth quarter 2007 rental revenue was up 9 percent to CAD165.2 million from CAD151.2 million. Full-year 2007 rental revenue was up 12 percent to CAD648.9 million from CAD580.5 million in 2006. Portfolio occupancy at the end of 2007 was 97.6 percent.

RioCan’s net earnings for the three and 12 months ended Dec. 31, 2007, include noncash charges for future income tax recovery of CAD13 million and future income tax expense of CAD144 million, respectively. These noncash charges have no impact on RioCan’s cash flows or distributions and relate to RioCan’s future income tax liabilities as a result of passage of Canada’s 2007-08 federal budget, which includes a provision to tax income trusts beginning in 2011.

The provision won’t apply to an entity that meets specific defined requirements under the legislation for the REIT exemption; RioCan intends to take the necessary steps to qualify for the REIT exemption prior to 2011. RioCan REIT is a buy up to USD25.