Maple Leaf Memo
A March 11 Financial Post story labeled Jerry Antoniuk, owner of Edmonton, Alberta-based Polar Ice, a “self-described thorn in the side of the package ice industry.” He certainly brought the heat to Arctic Glacier Income Fund in Canada and seems to have sparked a US Dept of Justice (DoJ) investigation as well as a lawsuit filed in a Minneapolis federal court.
In December 2007, an Alberta Court of Queen’s Bench judge ruled that Arctic Glacier “unlawfully interfered with the economic interests of Polar” and “specifically intended to injure Polar and not simply advance its own interests.” The judge awarded Antoniuk CAD50,000 in damages. Antoniuk told the Financial Post that he’s been in contact with the DoJ, which said it may use court documents from the Alberta civil case in its investigation.
Arctic Glacier was subsequently subpoenaed by the DoJ in connection with an antitrust investigation of Texas-based Reddy Ice and has now been named in several lawsuits filed by convenience store operators.
Responding to the DoJ investigation via a press release, Arctic Glacier CEO Keith McMahon said, “The company is in receipt of a subpoena requiring production of documents. The US Dept of Justice has requested cooperation in the production of any such documents and information located outside of the US that may assist in the investigation. Arctic Glacier plans to comply with the subpoena’s request for information and documents in the US and expects to cooperate in providing relevant information and documents that may be located in Canada.”
Arctic Glacier hasn’t yet responded to requests for comment on the suits filed in the US District Court for the District of Minnesota.
Arctic Glacier’s share in most of its markets is three to 10 times the size of its nearest competitor. But dominance–even monopoly dominance–won’t be enough for the DoJ or the Minnesota plaintiffs. Monopoly power alone, without some act of wrongful exclusion or other legally cognizable anti-competitive conduct, isn’t prohibited. US antitrust law doesn’t attack monopoly power obtained through “superior skill, foresight and industry.”
The Minnesota suits name Arctic Glacier, Reddy Ice and Ohio-based Home City Ice Co. Under US antitrust law, concerted conduct by multiple businesses is seen as more unambiguously negative and is judged more harshly by acts of single businesses.
The Sherman Antitrust Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” Conduct falls within the scope of this prohibition only if some form of agreement or concerted action can be proven.
Although the prohibition against multi-firm, anti-competitive behavior goes against agreements in restraint of trade, plaintiffs must prove more than that an agreement in some technical way restrains trade. Under US law, the scope of the prohibition is limited to those agreements where the restraint of trade is unreasonable. The Supreme Court, deciding Board of Trade of the City of Chicago v. US in 1918, held:
Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.
The major substantive allegation in the Minnesota lawsuits is that the defendants engaged in an “international conspiracy…with the purpose and effect of fixing prices” and “allocating markets and territories.” Overt price fixing is obviously anti-competitive and is per se conduct so clearly detrimental to competition that detailed analysis is unnecessary. Market allocation agreements are also proscribed by the antitrust laws.
The key here is “overt.” The DoJ raided Reddy Ice’s corporate headquarters in search of documents—evidence—that would support the existence of a conspiracy. And Arctic Glacier is cooperating with the production of documents; it’s important to note, again, that Arctic Glacier hasn’t yet been identified as a target of the DoJ investigation.
The thrust of US antitrust law—the statutory framework and the judicial decisions made in respect thereof—is more toward preserving competition than protecting consumers.
As even Antoniuk concedes, ice is something Joe Sixpack can make in his own refrigerator. When he goes to 7-Eleven, buying a bag of ice is a spur-of-the-moment decision. And the prime beneficiaries of such impulse buys are the convenience stores: Markups at the cash register are as much as 100 percent.
Here’s the controlling question (and it’s easy to imagine Chief Justice John Robert or any other member of the Supreme Court having fun asking it): Can a monopoly exist in a business the product of which can be made by anyone who owns a refrigerator?
The initial slide in the unit price following the revelation of the DoJ investigation priced in the threat, and without a paper trail establishing the existence of a conspiracy, it’s difficult to imagine this being anything more than a significant pain in the ice for Arctic Glacier.
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 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
Baytex Energy Trust (NYSE: BTE, TSX: BTE-U) reported net income of CAD41.4 million (48 cents Canadian per unit), up from CAD20 million (26 cents Canadian per unit) a year ago. Distributable cash flow, from which Baytex pays distributions, rose to CAD98.7 million (CAD1.10 per unit) from CAD63.5 million (79 cents Canadian per unit).
Revenue was CAD193 million, up from CAD135 million in the fourth quarter of 2006. Production in the fourth quarter averaged 39,304 barrels of oil equivalent per day (boe/d), up from 34,631 boe/d.
Baytex forecast 2008 average production of between 37,000 boe/d and 38,000 boe/d. Baytex also announced an 11 percent increase in its monthly distribution to 20 cents Canadian per unit from 18 cents Canadian. The first boosted payment will come April 15 to unitholders of record on March 31. Baytex Energy Trust is a buy up to USD22.
Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) raised its estimate of potential crude reserves by 41 percent. The Syncrude project may yield 12.7 billion barrels of synthetic crude, exceeding a year-end 2006 estimate of 9 billion barrels.
The higher estimate reflects expanded mine pit sizes in some areas and a new category of reserves that factors in undiscovered accumulations of oil. The higher expectations may lead to expansion plans that would push the project’s ultimate capacity beyond the currently planned 500,000 barrels a day.
Canadian Oil Sands owns 37 percent of Syncrude. Canadian Oil Sands Trust is a buy up to USD45.
Crescent Point Energy Trust (TSX: CPG-U, OTC: CPGCF) reported a fourth quarter net loss of CAD90.3 million (80 cents Canadian per unit); a year ago, the trust had net income of CAD6.9 million (10 cents Canadian per unit). Sales were CAD214.7 million, up from CAD101 million, but Crescent Point took a CAD125.3 million loss on financial instruments.
Crescent Point averaged 33,351 boe/d of production, up from 21,369 boe/d in the last quarter of 2006. The average realized price for its production was CAD69.99 per barrel of oil equivalent, up from CAD51.35 a year ago.
For 2007, Crescent Point lost CAD32.2 million (32 cents Canadian per unit) on CAD652.2 million in sales. In 2006, the trust reported net income of CAD68.9 million (CAD1.05 per unit) on CAD427.5 million in sales. Crescent Point Energy Trust is a buy up to USD28.
Harvest Energy Trust (NYSE: HTE, TSX: HTE-U) reported a net loss for the fourth quarter of CAD113.6 million (77 cents Canadian per unit), compared to net income of CAD1.5 million (1 cent Canadian per unit) a year ago. Cash flow from operations for the quarter dropped to CAD88 million (60 cents Canadian per unit) from CAD140.5 million (CAD1.16 per unit).
Revenue for the fourth quarter rose to CAD879.1 million from CAD682.7 million. Upstream production averaged 58,416 boe/d, down 8 percent from 63,436 boe/d.
For 2007, cash from operations for the year rose 26 percent to CAD641.31 million from CAD507.9 million. Harvest booked a 2007 net loss of CAD25.7 million (19 cents Canadian per unit) compared to net income of CAD136.1 million (CAD1.33 per unit). Revenue for the year was up 195 percent to CAD4.1 billion from CAD1.4 billion in 2006. Harvest Energy Trust is a buy up to USD24.
Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) reported net loss for the fourth quarter of CAD4.97 million (5 cents Canadian per unit), an improvement from a net loss of CAD687.25 million (80 cents Canadian per unit) a year ago. Funds flow for the quarter was CAD59.6 million (55 cents Canadian per unit), compared to CAD58.2 million (69 cents Canadian per unit).
Revenue for the quarter was CAD123.75 million, up from CAD104.17 million a year ago. Production in the quarter was 17.5 billion cubic feet equivalent (bcfe), up from 13.3 bcfe in the last quarter 2006. Paramount’s realized natural gas price decreased to CAD7.07 per thousand cubic feet equivalent (Mcfe) from CAD7.83 per Mcfe.
For 2007, Paramount lost CAD32.9 million (33 cents Canadian per unit) on CAD462.4 million in revenue. In 2006, the trust lost CAD18.9 million (22 cents Canadian per unit) on CAD420.8 million in revenue. The trust reported funds flow of CAD239.1 million (CAD2.44 per unit) for 2007, compared to CAD236.7 million (CAD2.82 per unit) in 2006.
Higher production levels were partially offset by higher operating, interest and general and administrative expenses. Paramount Energy Trust is a buy up to USD10.
Gas/Propane
Spectra Energy Income Fund (TSX: SP-U, OTC: SPFFF) has signed a deal to be taken private by Westcoast Energy, the fund’s sponsor, for CAD11.25 per unit (CAD274 million). Unitholders will vote on the deal in April. Hold Spectra Energy Income Fund pending completion of the deal.
Trinidad Energy Services Income Trust (TSX: TDG-U, OTC: TDGNF) reported fourth quarter net income of CAD17.9 million (21 cents Canadian per unit), down from CAD31.3 million (37 cents Canadian per unit) a year ago. Canadian drilling operations continued to decline during the period, and rising US revenue and margins couldn’t compensate.
Funds flow was CAD32.2 million (38 cents Canadian per unit), down from CAD54.7 million (65 cents Canadian per unit). Revenue declined to CAD145.8 million from CAD161.9 million. Canadian operations generated CAD63 million, approximately 43.2 percent of total revenue.
For 2007, Trinidad reported net income of CAD79.52 million (94 cents Canadian per unit), down from CAD123.71 million (CAD1.46 per unit) in 2006. Funds flow for the full year was CAD174.77 million (CAD2.06 per unit), compared to CAD196.92 million (CAD2.33 per unit). Revenue for 2007 increased to CAD629.68 million from CAD579.86 million in 2006.
Trinidad’s 2008 expansion plans will focus primarily outside Canada. Trinidad Energy Services Income Trust is a buy up to USD14.
Real Estate Trusts
Northern Property REIT (TSX: NPR-U, OTC: NPRUF) reported net income of CAD7.69 million (34 cents Canadian per unit) for fiscal 2007, compared to CAD16.26 million (85 cents Canadian per unit) in 2006. Revenue for the year was CAD104.42 million, up from CAD84.01 million in 2006.
Distributable income per unit (DIPU) rose 10 percent to CAD1.82 from CAD1.64. During the fourth quarter, DIPU increased 15 percent over fourth quarter 2006 levels to 45 cents Canadian.
The REIT reported vacancy loss at 3.8 percent for the year, consistent with prior years, and year-end commercial vacancy of 1.6 percent. Northern Property’s payout ratio was 77.2 percent of DIPU for 2007; it ticked up to 80.2 percent during the fourth quarter because the REIT boosted its distribution 7 percent to CAD1.48 per unit on an annualized basis.
Weighted average interest costs on its financing decreased to 5.39 percent from 5.55 percent in 2006. Debt to gross book value as of Dec. 31, 2007, was 53.8 percent. Northern Property REIT is a buy up to USD25.