Hold Boralex

Shares of Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) took a hard hit last week. The reason: A decision to “temporarily” halt electricity production at its wood residue thermal power stations at Seneterre and Dolbeau.

The move is in response to increasingly tight supplies of wood waste. That’s a consequence of the sharp scaling back of timber production in North America, due to the growing depression in US homebuilding.

My main question about Boralex’ move is how much of its wood water problem was taken into account by management this spring when it cut the trust’s distribution. That appears to have been answered Friday, as the trust issues a press release affirming the current dividend rate. To quote:

The difficulties the sawmill industry in Quebec is currently experiencing and the potential repercussions on our supplies and our liquidity were taken into consideration back in February 2008 when it was decided to reduce distributions.

Management went on to state it “has sufficient reserves to maintain its distributions.”

The current plan is to shut Seneterre Sept. 21 to Nov. 15. The Dolbeau plant continues to produce steam at this time, though electricity output has ceased for the time being. Management expects to have sufficient inventory to resume operations in time for the December to March period, when cash flows are strongest.

The announcement that Boralex’ distribution is secure for now is welcome news indeed. Given the current fear-driven psychology of the market, it’s not surprising the shares would fall so sharply on news of a potential threat to the distribution. I also don’t expect them to rebound immediately to the USD5 range they held for so many months.

Since Canadian trusts started facing headwinds two years ago, I’ve had a no-tolerance rule for fundamental weakness. Basically, that means selling any trust showing deteriorating earnings or some other vulnerability to the stress tests hitting this market: tight credit conditions, the weakening US economy and higher raw material costs, as well as restricted ability for trusts to issue new shares in the wake of the “Tax Fairness Act.”

I bent my rule with Boralex last spring for three reasons. First, its parent and operator Boralex Inc (TSX: BLX) remains very healthy. That’s even despite a sizeable exposure to wood waste-powered plants. Second, power production is an extremely steady business and Boralex’ sales are to very recession-resistant big buyers. Third, the spring dividend cut seemed to be very conservative and took into account trouble at the wood waste operation.

The company’s announcement Friday seems to indicate all three are still true. Consequently, I recommend aggressive investors stick with Boralex Power Income Fund. I’m not, however, recommending “doubling down” on it.

This remains a highly problematic market with plenty of pitfalls. It’s absolutely essential to stay balanced in your portfolio. That basically means letting your bets ride, particularly in securities such as Boralex where there are some business concerns.