Serious but Not Desperate

In early July, 13 Canadian securities dealers polled by Reuters expected a 25-basis-point overnight interest rate hike by the Bank of Canada (BoC) on Sept. 5.

Yesterday, a new survey of that baker’s dozen revealed a new sentiment: Eleven (two hadn’t yet issued forecasts) now anticipate the Canadian central bank will hold rates steady in response to recent market activity.

Markets up north have suffered the same volatility, and the depth and breadth of subprime’s reach is still unknown. But the BoC won’t cut rates because domestic economic fundamentals are still strong.

Though its mission statement describes a broader mandate, the BoC is first and foremost an inflation fighter, with a targeted range of 1 percent to 3 percent. The most recent measure puts the current rate at 2.2 percent.

Unless and until there’s a decisive signal that the global credit crunch/liquidity crisis will stall growth, the BoC will hold off on cutting and could even bump rates later in the year.

Other central bankers haven’t been as shy; the US Federal Reserve Open Market Committee cut its discount rate by 50 basis points before local markets opened Aug. 17 and is widely expected to cut again the next time it meets. There’s no question of subprime’s disastrous impact here, only how long and deep the shaft will be.

Central banks in Europe, Asia and the US injected more cash into the markets Aug. 21 as commercial banks clamored for money.

The European Central Bank placed EUR275 billion (USD370.6 billion) in its normal weekly refinancing. The Bank of Japan lent another 800 billion yen (USD7.01 billion), which followed a trillion-yen injection (USD8.71 billion) Aug. 20. And the Reserve Bank of Australia lent banks 4.57 billion Australian dollars (USD3.64 billion). The Bank of England, meanwhile, lent 314 million pounds (USD622.3 million) directly to an institution–the first time it’s made an emergency loan since the start of the subprime crisis and the resulting credit crunch.

The US Fed pumped in another USD3.75 billion Aug. 21, the latest in a series of cash transfusions that have topped more than USD100 billion since last week.

Our colleague Neil George wryly noted the inconsistency of the wealthy (most loudly articulated by Jim Cramer in a now-notorious rant–thanks to American Public Media’s Marketplace, Comedy Central’s The Daily Show and YouTube) pining for a bailout even after financial elites pushed stricter bankruptcy rules onto less-advantaged (both financially and politically) consumers.

I read an interesting bit in the Financial Times in which the commentator said that rich folks like socialism for them–easy money, support and bailouts. But for the poor, they like capitalism, including foreclosure and limited bankruptcy rights. And I’m beginning to see why.

Neil’s sentiment is mirrored here.

Ominous but Not Provocative

Russia’s move on the North Pole is largely symbolic; there’s a framework in place to determine rightful territorial claims. And there’s a rational argument that Russia was simply trying to determine its rights within the meaning of that framework, an expedition to define legally justifiable boundaries.

The drama of the move to plant the Russian tricolor at the North Pole was actually artificially enhanced: A 13-year-old boy from Finland noticed an eerie similarity between footage of the Russian expedition’s two submersibles descending and the early moments of James Cameron’s cinematic melodrama Titanic. Putin basically runs the Russian broadcaster Rossiya, which sent images of mini-submarines descending to the ocean floor around the world in its report about the mission.

Russia has argued that the Lomonosov Ridge, an underwater mountain, is an extension of the Russian landmass. This, it argues, justifies its claim to a triangular area up to the pole, giving it rights under the United Nations Law of the Sea Convention.

Under Article 76 of the convention, a state can claim a 200-nautical-mile exclusive zone and beyond that up to 150 nautical miles of rights on the seabed. The baseline from which these distances are measured depends on where the continental shelf ends.

Russia lodged a formal claim in 2001, but the United Nations (UN) Commission on the Limits of the Continental Shelf told it to resubmit the claim.

Global warming has given renewed impetus to the race for control of the Arctic, which is said to include 25 percent of the world’s undiscovered oil and gas reserves. Melting ice sheets could open up the fabled Northeast Passage for the first time. The route could become navigable to commercial traffic within eight years.

Despite growing concerns regarding the way Moscow uses its energy for political advantage, Russian scientists have repeatedly pledged that there’s no intention to grab any part of the Arctic.

“A unilateral annexation of the area by Russia is impossible,” said Viktor Posyolov of the Russian Institute of Ocean Geology, which has led the Arctic exploration. “We will strictly abide by the UN convention.”

Humorous but Not Serious

Canadian Prime Minister Stephen Harper has long sought to make his country a player on the world stage. He took a giant step forward last night.

Harper earned the wrath of Comedy Central pundit Stephen Colbert on last night’s The Colbert Report (the ts are silent: “col-bear re-pore”) for asserting Canada’s claims to North Pole territory. Click the preceding link, scroll to “Most Recent Videos” and select “Smokin’ Pole: The Fight for Arctic Riches.”

The Roundup

All Canadian Edge Portfolio recommendations have now reported results for the period ending June 30, 2007.

Here’s the news from the last group to reveal the numbers; we’ll provide a bit more context in the September issue of CE.

On the whole, operational results have been strong. Many, including most energy trusts, took sizable hits to the bottom line because of noncash charges related to passage of the 2007 Canadian federal budget, which included legislation enacting the 2011 tax on trust distributions. We’ll explain why they booked the charges this period and what it means for the long term in the Canadian Currents section of the coming issue of Canadian Edge.

Conservative Portfolio

AltaGas Income Trust (ALA.UN, ATGFF) reported second quarter net income of CD13.1 million (23 cents Canadian per unit), down from CD29.9 million (54 cents Canadian per unit) in the same quarter 2006. Excluding a CD14.5 million noncash charge related to passage of the Tax Fairness Plan, net income was CD27.6 million (48 cents Canadian per unit), up from CD23.3 million (42 cents Canadian per unit) a year ago.

Funds from operations were CD39.2 million (69 cents Canadian per unit), compared with CD35.7 million (65 cents Canadian per unit) a year ago. Quarterly revenues rose to CD341.8 million from CD299.6 million in the second quarter of 2006.

AltaGas also boosted its monthly cash distribution to 17.5 cents Canadian per unit from 17 cents Canadian per unit payable on Sept. 17, 2007, to unitholders of record on Aug. 27, 2007. AltaGas Income Trust is a buy up to USD26.

Arctic Glacier Income Fund (AG.UN, AGUNF) reported second quarter sales of CD79.8 million, a 32 percent increase from the same period in 2006. Most of the gain was attributable to acquisitions completed in 2006 and the first quarter of 2007.

Sales in previously serviced markets increased CD700,000, or 1 percent, compared to the same quarter in 2006. The stronger Canadian dollar decreased reported sales by CD1.5 million.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were CD27.3 million, up 33 percent from a year ago. Net income increased 31 percent to CD11.7 million (30 cents Canadian per unit).

Acquisitions fueled a 14 percent increase in distributable cash to a second quarter high of CD18.5 million; on a per-unit basis, distributable cash decreased to 48 cents Canadian from 54 cents Canadian because of seasonal factors, as well as the timing of acquisitions of California Ice and Happy Ice during the last half of the second quarter of 2006.

The fund declared distributions to unitholders totaling CD10.6 million (28 cents Canadian per unit) during the quarter. Arctic Glacier’s total long-term debt, excluding convertible debentures, was CD177.4 million as of June 30, compared to CD186.1 million on Dec. 31, 2006. The fund’s net debt to EBITDA ratio on June 30, 2007, was 2.6-to-1.

Arctic Glacier Income Fund is a buy up to USD14.

Atlantic Power Corp (ATP.UN, ATPWF) reported a net loss of CD24.2 million (39 cents Canadian per unit). Not including the mark-to-market losses and the noncash gain at Onondaga, the net loss for the quarter would have been CD10 million (16 cents Canadian per unit); net income year-to-date would have been CD7.3 million (12 cents Canadian per unit).

Distributable cash was CD17.4 million (28 cents Canadian per unit), down from CD21.1 million (54 cents Canadian per unit) in the year-ago period. Atlantic declared distributions of CD16.3 million (27 cents Canadian per unit), for a payout ratio of 87 percent. Atlantic attributed the decrease to “routine fluctuations in the timing of working capital and the timing of semi-annual debt payments at the Path 15 Project.”

Adjusted EBITDA at its facilities increased 9 percent to CD34.6 million, driven by the new contribution from the Path 15 transmission line, increased generation and efficiency, as well as lower maintenance expenses. Atlantic generated project income of CD2.7 million in the second quarter, which included noncash mark-to-market losses of CD24.2 million related to changes in the fair value of the Chambers power purchase agreement (PPA).

The company also recognized a CD10 million noncash gain associated with a settlement of firm gas transportation contracts at the Onondaga project. Excluding noncash items, project income was CD16.9 million for the quarter. Buy Atlantic Power Corp up to USD12.

Northern Property REIT (NPR.UN, NPRUF) recorded a net loss for the second quarter ended off CD10.9 million, compared with net earnings of CD4.1 million for the three months ended June 30, 2006, because of a CD16 million, noncash charge based on the real estate investment trust’s (REIT’s) share of the temporary differences between the accounting and tax basis of its assets and liabilities.

The charge has no impact on cash flows or distributions. It relates to Northern Property’s future income tax liabilities as a result of passage of the Tax Fairness Plan.

Favorable rental market conditions and a seasonal decline in operating costs resulted in a 13.4 percent increase in total property rental revenue to CD24.2 million from CD21.4 million a year ago. Net operating income increased by 16 percent to CD16 million.

Distributable income increased by 16.4 percent from CD8.1 million (41.7 cents Canadian per unit) a year ago to CD9.4 million (46.4 cents Canadian per unit). The REIT’s payout ratio for the first six months of 2007 was 80.6 percent.

Northern Property’s debt stood at 58.7 percent of gross book value as of June 30. The REIT closed on 281 residential units and 182 seniors’ units during the second quarter and has followed up with 263 residential units, 53 seniors’ units and 237,000 square feet of commercial space thus far in the third quarter. Northern Property REIT is a buy up to USD25.

Aggressive Portfolio

Advantage Energy Income Fund (AVN.UN, NYSE: AAV) reported earnings of CD4.5 million (4 cents Canadian per unit) in its first quarter, down from CD23.9 million (38 cents Canadian per unit), as operating costs increased along with production volumes. Revenue before royalties increased to CD125.1 million from CD80.8 million.

Advantage reduced its payout ratio to 83 percent from 127 percent a year ago. Funds from operations climbed to CD62.6 million (54 cents Canadian per unit) from CD42.3 million (62 cents Canadian per unit) the same period a year ago. Production volumes grew by 48 percent year-over-year to 27,115 barrels of oil equivalent per day (boe/d) on the Ketch Resources acquisition, which closed June 23, 2006.

Natural gas production increased 55 percent to 109 million cubic feet per day (MMcf/d) compared to 70.3 MMcf/d a year ago. Crude oil and natural gas liquids production increased 36 percent to 8,952 barrels per day (bbls/d) compared to 6,593 bbls/d in the second quarter of 2006.

Advantage currently has approximately 54 percent of its net natural gas production hedged for summer at an average floor price of CD7.08 per thousand cubic feet (mcf) and an average ceiling of CD8.09 per mcf. Fourteen percent of net crude oil production has been hedged for the same period at an average floor of USD65 per barrel (bbl) and a ceiling of USD90.

For the winter months and extending into the spring of 2008, Advantage has 28 percent of net natural gas production hedged at a floor price of CD8.85 per mcf and a ceiling of CD10.19 per mcf. Advantage Energy Income Fund is a buy up to USD14.

Newalta Income Fund (NAL.UN, NALUF) reported a 70 percent decline in net earnings to CD6.7 million and a 37 percent slide in EBITDA to CD15.5 million for the second quarter. Revenue improved 16 percent from a year ago to CD111.6 million on the strength of acquisitions completed during the second half of 2006.

Wet weather in the quarter slowed activity in Newalta’s western waste and recovered crude operations, and weak natural gas prices depressed drill site activity. Acquisitions drove solid margin growth in its eastern segment.

Funds from operations decreased 47 percent in the second quarter to CD12.2 million. Cash available for distribution declined 56 percent to CD8.5 million.

Newalta’s debt to EBITDA ratio as of June 30 was 1.69-to-1. Newalta Income Fund is a buy up to USD30.