We have a decent idea now of the downside risk, quite a change from the uncertainty unleashed with Lehman Brothers’ collapse. For awhile, into early 2009, nobody really had any idea how bad things would get.

We’re still in recession, but “the change in the change” in many data sets suggests it’s not getting as bad as fast.

And now we’re seeing strong companies take advantage of opportunities to position themselves for long-term growth, the latest example being Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF).

Ag Growth announced late Sunday that it will convert to a corporation via a plan of arrangement with Benachee Resources, a subsidiary of Tahera Diamond Corp (TSX: TAH, OTC: TAHEF). Unitholders will vote on the proposal, which has the unanimous approval of the Ag Growth board, in June.

Ag Growth unitholders will receive one common share of Benachee in exchange for every trust unit of Ag Growth held on the effective date of the conversion. Benachee will change its name to Ag Growth Industries Corp.

The new Ag Growth will operate the existing businesses of Ag Growth and its subsidiaries, and the existing trustees and management of Ag Growth will become the board and management of the new Ag Growth. The new Ag Growth is not acquiring any additional business carried on by Benachee, which will be transferred to Tahera Diamond.

The most significant aspect of the transaction is that the post-conversion Ag Growth will continue to pay a CAD0.17 per share dividend on a monthly basis.

Ag Growth had expressed its intention to remain an income trust as long as possible until the provisions of the Tax Fairness Act take effect Jan. 1, 2011, but, as CEO Rob Stenson noted in a conference call Monday, the status of capital markets over the preceding year “caused reflection on the prudence” of continuing to wait.

Converting now has down-the-line benefits, but the No. 1 factor driving management’s somewhat surprising announcement was access to capital. The company is focused on growing international revenue, but even maintaining spending levels to facilitate organic growth requires too much debt. Ag Growth had to get out from under the (temporarily relaxed) capital restrictions included with the Tax Fairness Plan.

The 17-cents-a-month dividend also provides certain tax advantages for Canadian investors, which will clearly make it an even more attractive listing; in effect, Canadian holders will get a distribution increase because less will be withheld by the government. That’s a nice combination, particularly in light of the fact that Ag Growth is also posting solid numbers during this recession.

Management had boosted the distribution four times during its income trust days, the most recent adjustment coming last August. That move was made with an eye on future conversion–management set the amount fully intending at the time to maintain it once the company became a fully taxable corporation.

Reaction to the announcement has been extremely positive.

Source: Bloomberg

Much of the strength in the unit price is based on the fact that Ag Growth makes products that are defensive in a weak economic environment–portable and stationary grain-handling, conditioning and storage equipment such as augers, belt conveyors, drying and aeration equipment, as well as storage bins. It also makes livestock containment and feeding equipment.

All farms require much of this equipment at various stages throughout the crop cycle, and their low prices relative to other capital equipment such as tractors and combines mean Ag Growth’s revenue stream is safe. Most of Ag Growth’s products, which cost between CAD3,000 and CAD30,000, must be replaced soon after failure to avoid interruption of the farming process.

Converting now will allow Ag Growth greater access to capital as it pursues an aggressive growth strategy, much of which is focused on expanding its international presence. About two-thirds of the company’s 2008 sales were to US-based customers, a market supported by federal legislation mandating the use of corn-based ethanol in gasoline. But developing countries are also investing more in grain infrastructure–Mr. Stenson noted that Ag Growth hopes to generate 30 percent of sales from overseas markets over the long term. Geographic diversification has long been a strategic goal for the company, reflected by its presence in the Commonwealth of Independent States, the Middle East, Africa and South America.

Adapting to a corporate structure will allow Ag Growth to retain some cash flow to grow the business. And, as Mr. Stenson said, Ag Growth, and business trusts generally, lost the relative advantage of low capital costs once the Canadian government made its Oct. 31, 2006 decision to begin taxing trusts at the entity level.

At the end of the day, Ag Growth’s structure no longer fit with its long-term strategic plan. Management basically had to take advantage of an opportunity to efficiently convert. The transaction is a one-for-one rollover that will allow unitholders to defer any tax consequences. The new Ag Growth will also enjoy the benefits of more than CAD300 million in tax losses Tahera built up since its now-mothballed Jericho mine project opened in 2006.

Ancillary benefits of the deal include the potential for more involvement by foreign investors, an expanded shareholder base and greater liquidity. That Ag Growth remains committed to a CAD2.04 annual dividend is a sure sign of the fundamental strength of the agriculture industry as well as management’s faith in its ability to execute.

Printing Press Update

Following up its Tuesday rate cut–another 25 basis points to 0.25 percent, bringing the cumulative cutting to 425 basis points since December 2007–the Bank of Canada (BoC) will release its April Monetary Policy Report (MPR) Thursday. The MPR will include the general outline of the BoC’s approach to so-called quantitative easing.

The BoC will describe measures it could take to stimulate lending and achieve its inflation target, after running out of room to cut its benchmark interest rate.

The central bank said in March that it would provide a framework for “credit and quantitative easing” as a supplement to its quarterly Monetary Policy Report.

The expectation is the BoC will name the tools at its disposal without necessarily committing to use them. Options include the purchase of government bonds, asset-backed securities and corporate bonds as well as an expansion of existing liquidity facilities.

In its statement describing the rate cut decision, the BoC noted that economic conditions had deteriorated more rapidly than it anticipated in January:

In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank’s January Monetary Policy Report Update, with weaker-than-expected activity in all major economies. Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual. The economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011. Given significant restructuring in a number of sectors, potential growth has been revised down. The recovery will be importantly supported by the Bank’s accommodative monetary stance.

Quotable

“Some people call our financial system in Canada boring. Boring is the new sexy in financial institutions.” — Canadian Finance Minister Jim Flaherty, speaking at a financial literacy education summit in Chicago Monday.

Speaking Engagements

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The Roundup

Oil & Gas

Enerplus Resources (TSX: ERF-U, NYSE: ERF) announced last Friday that it’s deferring development of the Kirby Oil Sands project. Enerplus will finish several aspects of the buildout that should leave it ready to start it up again “at a later date.”

Enerplus noted that although Kirby has significant long-term value “the current cost structures, commodity price environment and our cost of capital do not offer a sufficient economic return for additional investment toward project sanctioning at this time.” Enerplus Resources is a buy up to USD20.

Pengrowth Energy Trust (TSX: PGF-U, NYSE: PGH) reported that production at the Sable Offshore Energy Project in Nova Scotia has been restored after a temporary shut-in due to an April 7 “operational incident.”

ExxonMobil (NYSE: XOM), the operator of the project, has completed the necessary repairs and production resumed April 12. Pengrowth holds an 8.4 percent non-operated working interest in the field. Pengrowth’s net working interest production at Sable is approximately 6,800 barrels of oil equivalent per day. Pengrowth Energy Trust is a hold.

Suncor Energy (TSX: SU, NYSE: SU) has received approval from the US Federal Trade Commission on its CAD18.4 billion acquisition of Petro-Canada (TSX: PCA, NYSE: PCX). The companies’ operations in the US are relatively insignificant; the deal must still be sanctioned by Canada’s Competition Bureau.

The companies have no operational overlap in the US. Suncor runs a refining and gasoline retailing business in Colorado, and Petro-Canada has an unconventional natural gas production business in the Rocky Mountain region. The biggest potential regulatory snag will involve retail gasoline sales in Ontario, where both companies have extensive service-station networks. Suncor Energy, an emerging non-conventional oil giant, is a hold.

Gas/Propane

Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF) and Universal Energy Group agreed to extend the 30-day exclusive negotiating window on the proposed combination of the companies until Thursday.

Energy Savings has offered CAD255 million for Universal, which markets natural gas to customers in Ontario, British Columbia and Michigan and owns an ethanol production facility in Saskatchewan. Energy Savings Income Fund is a buy up to USD10.

Energy Services

Eveready (TSX: EIS, OTC: EVRDF) has had its credit facility renewed by a syndicate of lenders, though the amount available on the line has been reduced by CAD5 million to CAD95 million. The credit spreads applicable to its revolver and term facilities will increase by between 200 and 225 basis points.

The effective interest rate on Eveready’s revolver and term facilities will be 5.41 percent.

During the first quarter Eveready reduced the amount outstanding on the facility by nearly CAD25 million; the outstanding balance was CAD45 million as of March 31. Sell Eveready.

Precision Drilling Trust (TSX: PD-U, NYSE: PDS) has agreed to sell about CAD380 million of securities to the Alberta government to cover the cost of the Grey Wolf acquisition.

The provincial government will buy CAD175 million in senior unsecured notes, 35 million trust units at CAD3 per and warrants to acquire an additional 15 million. The arrangement will allow Precision to repay a CAD296 million loan at 17 percent that it used for its CAD1.2 billion purchase of US driller Grey Wolf in December.

The investment will be made through the Alberta Investment Management Corp. The province is trying to boost drilling in the province amid predictions resource income will slump to about CAD5.9 billion this year from CAD12.3 billion in 2008.

Precision also plans to raise CAD103 million in a rights offering to allow unitholders to bolster their stake in the company at CAD3 a share; the senior notes will pay 10 percent over eight years. Sell Precision Drilling Trust.

Energy Infrastructure

InterPipeline (TSX: IPL-U, OTC: IPPLF) is investing CAD72 million to upgrade its capacity on the Bow River pipeline system and allow shipment of segregated crude oil streams south from Hardisty, Alberta, to refineries in Montana. Inter Pipeline has commitments from producers to ship 30,000 barrels per day from Hardisty under a seven-year take-or-pay contract.

The expansion project is expected to be completed in early 2010 and could add CAD16.5 million to cash flow. InterPipeline will fund the work through its existing credit line, which has CAD325 million available. InterPipeline is a buy up to USD10.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) has priced a private placement of CAD97 million of long-term senior unsecured notes to a group of US- and Canada-based institutional investors. The notes bear interest at 8.06 percent and mature on May 1, 2016.

Proceeds will be used to repay CAD90 million of existing long-term debt when it matures October 1, 2009. Keyera Facilities Income Fund is a buy up to USD20.