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Putting new fuel in income trusts

One of Canada’s leading authorities on income trusts brings out a new recommendation ... and uncovers a potential scam.

In a tax-challenged income trust market in which no new trusts appear and weaker trusts disappear, the rich really do get richer. The survivors scoop up the resources abandoned by the trusts that fall by the wayside.

But that doesn’t mean the market has settled. Some of those survivors may stumble. If so, can suitable replacements be found?

One of Canada’s top trust advisories has done just that. The Income Trust Guide published by the Money Reporter told its readers to sell one of the country’s best-known oil and gas royalty trusts, Shiningbank Energy Income Fund (TSX-SHN.UN). In its place, AltaGas Income Trust (TSX-ALA.UN) is a buy.

Here’s how it came about.

Running out of gas

Both of these oil and gas royalty trusts were born well before the incomse trust boom struck some five years ago. They took advantage of the government’s original policy of building a trust structure that would lure investment into Canada’s oil and gas industry.

Of the two, Shiningbank is the richer and more famous trust. With over three-quarters of its properties in natural gas, it has historically delivered the goods, with high distributions, high yields and high payout ratios.

But over the course of 2007, the trust has been running out of gas. Not literally: it still has a full portfolio of properties. But its momentum has slowed, and it can’t seem to get up again.

Like all income trusts, Shiningbank took a temporary hit in the wake of the government’s Halloween announcement of the tax on distributions. Plummeting natural gas prices dealt it a second blow.

But when natural gas prices recovered, Shiningbank didn’t. At least not enough to make it more than a hold, according to the Income Trust Guide.

And now it’s a sell. Its replacement also deals in natural gas, but in a very different way.

Like a utility

AltaGas lets other companies find and extract natural gas. It has 6,000 kilometres of gathering lines that wend their way from natural gas sites to the company’s 69 processing facilities. AltaGas then ships the processed gas to the distributor who gets it into the truck of the guy who puts it in your furnace.

AltaGas supplies this gas on long-term fixed-fee contracts, which means its revenues are fairly well assured. In that way, it’s like a utility. It also means that the spot price of natural gas isn’t going to make big ripples in its results.

There’s another way in which AltaGas resembles a utility. It’s a wholesale reseller of electrical power. Some of the power comes from (what else?) gas-fired generation plants, some from power purchase agreements.

Although these two firms are different kinds of natural gas companies, a comparison of recent results is instructive. In the last quarter, AltaGas generated revenues of $428 million and earnings of $24.6 million — for Shiningbank, the comparative figures are $101.4 million and $3.2 million, respectively.

In the new world of trusts, a little stability doesn’t hurt. According to this advisory, that’s just what you get with AltaGas. The Income Trust Guide has two more “Best Buys” for the month of June. They are CI Financial Income Fund (TSX-CIX.UN) and Enbridge Income Fund (TSX-ENF.UN).

It also has a warning.

Hang up immediately

There’s a shadowy scheme centering around the units of another oil and gas royalty trust, Pengrowth Energy Trust (TSX-PGF.UN).

Holders of this trust’s units, says the Income Trust Guide, “are likely to receive notice, either by phone or mail, of what’s called a mini-tender for Pengrowth units.” Watch out; this is not a good deal.

If you own Pengrowth units and are contacted about the tender by anyone other than your regular adviser, adds the Income Trust Guide, “the best thing you can do is hang up immediately.”

Mini-tenders seek to take advantage of investors by sidestepping the protection provided by Canadian and U.S. securities laws. The presentation may sound “official” and “authorized,” but it isn’t

Here are the facts on this mini-tender. On May 25, Pengrowth announced that a company called TRC Capital Corporation had made an unsolicited mini-tender to purchase as many as two million Pengrowth units. The price offered is, however, significantly lower than the market price. Obviously, if TRC can acquire a hefty collection of units at below-market prices, it will make a killing.

The trick (and it is nothing less than a trick) is to make investors believe that the tender has Pengrowth’s approval, and that there is no other choice but to sell.

Pengrowth also warned unitholders that the TRC document detailing the offer contains a disclosure entitled “United States Federal Income Tax Considerations” which is incorrect. The claim is made that Pengrowth is classified as a corporation for U.S. federal income tax purposes. It is not.

There’s been quite enough upheaval in the income trust market without dubious schemes like this.

Doesn’t the word “trust” mean anything anymore?