A Republican will sit in Ted Kennedy’s Seat. President Obama is floating a “spending freeze” that has left-leaning pundits either a. comparing him to Herbert Hoover, or b. invoking “1937!” but still comparing him to the Republican who preceded FDR.

Meanwhile, in Alberta, provincial liberals have proposed an industry-friendly reduction in oil and gas royalty rates at a time when Premier Ed Stelmach–leader of Alberta’s Tories–is plunging in the polls because of his mishandling of the province’s most important economic issue. Stelmach’s political difficulties–he’s getting squeezed from left and right on a position that was flawed from the start–are likely to result in a royalty-rate reduction that could be announced by the end of January.

OK, Stelmach’s Tories are losing ground not to the liberals but to a newer, younger, dazzlingly named conservative rival, the Wildrose Alliance, so it’s not quite as topsy-turvy as what’s going on stateside. But the potential consequences for potential natural gas producers in Alberta are much clearer.

A provincial energy ministry “competitive review” instigated by the premier is said to be on the way to his desk; Stelmach ordered the study last summer when the reality of the economic downturn and the potential for unconventional natural gas production essentially forced a reevaluation of Alberta’s energy industry. Companies that left Alberta for British Columbia and Saskatchewan may have cause to return.

A January 12 report by Energy Navigator found that an energy company drilling an unconventional shale gas well in Alberta must pay the province CAD165 in royalties before it shows CAD100 in profit. On the other hand, in British Columbia, which revised its royalty structure to attract producers and encourage natural gas production, a company drilling the same unconventional well must pay the government only CAD36 in royalties before it shows a profit of CAD100.

That Alberta oil and gas producers could be looking at more favorable royalty structures is, obviously, a positive; every little bit that helps the bottom line counts. However, at this point the folks who have to manage these companies would settle for predictability. The current Alberta regime’s handling of the royalty structure has sowed mistrust among industry players and among investors.

As one industry executive put it to the National Post, “The industry and the investment community feel there’s a substantial lack of credibility with regards to past measures that have been put in place that are short-term in nature and don’t really address a solution for Alberta to remain competitive.”

Under Stelmach’s watch Alberta raised royalty rates just as signs of recession were popping up in 2007. This initial mistake was followed by five adjustments. The market’s been confused by his government’s inconsistency and would welcome a definitive resolution.

This is one clear time when the policy’s been wrong from the start, efforts to mitigate the initial error have been insufficient, and the people who made the decisions should and probably would lose their jobs but for the fact that the next provincial election is two years off.

Central Banker Speaks

It’s a rather bland statement on its face. But Bank of Canada (BoC) Governor Mark Carney’s observation that changes in the way governments manage foreign currency reserves will lead to increased demand for and purchases of Canadian assets would certainly be bullish if it comes to fruition.

In a recent interview with the Financial Times Carney said, “There’s no question that reserves continue to grow, that reserve management strategies are becoming a little more broad in their asset classes and some of that will be reflected in purchases of Canadian assets.” 

Canada’s top central banker discussed several issues with the FT, among them President Obama’s approach to bank regulation, US debt, Paul Volcker, and a double-dip recession.

Here are excerpts compiled by the FT from the videotaped interview (italics ours to distinguish questions from answers):

President Obama seems to be embracing the notion that too big to fail is a real concern, and that they need to be able to break banks up. Is that the right approach?

Certainly we need to build a system that’s robust to failure and it’s important to have the ultimate sanction of the market for financial institutions. All of us found ourselves in a position over the past couple of years where firms had to be saved in order to ensure some measure of function in the system. That has to be rectified.

How worried are you about the US deficit and debt right now?

The fiscal response of G20 nations as a whole has been extraordinary, and it is entirely reasonable that debt-to-GDP in the G20 will go from about 70 per cent, as it is right now, to about 120 per cent or more over the course of the next four or five years. That is a major move, and it will require consolidation of fiscal positions in the US and other major economies. Those decisions need to start to be taken in the near future.

Paul Volcker, who seems to be having a lot of influence on the White House’s financial reform at the moment, has been very outspoken in his view that banks should not be engaged in proprietary trading. Is he right?

Mr Volcker has an important point, but where do you draw the line between proprietary businesses and market-making businesses?

How much of a restriction would you put on proprietary trading in banks that we know pose a real systemic risk if they fail?

The devil is in the detail. I’ve had discussions with Mr Volcker on this issue. But it’s got to be an engaged debate, so I’m not going to give you a blanket answer.

Which side are you on?

Well, we start from two principles. One is you have to have a system that’s robust to failure, so we have to move to a system where institutions can fail in an orderly fashion. Secondly, as a central bank, what we care deeply about is that markets function and that we can enlarge the number of markets that are continuously open. We might not have liked what equity prices were during 2008-09, but at least we always knew what they were and you always could transact. You couldn’t transact in a host of derivative markets and you had challenges in repo markets for anything other than the most liquid government securities. That’s totally unacceptable. So we have to work to make these markets open. That means we’re going to need firms that are market-makers.

Is double-dip recession a fear?

It’s certainly not our base case expectation. It always sounds odd, but central bankers talk in terms of positive risk. There is a possibility of more momentum in emerging markets for longer, and a faster return to growth in major economies. That’s not our base case, but things could go more right than expected.

Volcker’s Rise and Financial Reform

A little more than a month ago we took an uncharacteristically aggressive swipe at President Obama and his administration’s approach to the longer-term issues exposed by the global financial crisis and recession.

Well, Paul Volcker is indeed ascendant, but this could be as much for show as for substance–particularly as his sudden prominence (he stood at the president’s shoulder when the announcement of the “Volcker Rule” was made while Treasury Secretary Timothy Geithner was off in the wings) occurs so soon following Senator-elect Scott Brown’s stunning win in Massachusetts.  

Reuters’ Felix Salmon identifies four Democratic proposals for financial regulatory reform and paints a gloomy picture of prospects for eventual passage of a bill that does anything other than preserve the status quo.

At the bottom of his post he directs us to a more nuanced version by Tim Fernholz of the The American Prospect. This is a little “inside baseball” with a leftward spin for sure, but it’s no less illustrative of the fact that a system of checks and balances conceived in the late 18th century doesn’t easily bend to the vicissitudes of a general public riled up by information churned out of a 24-hour, seven-days-a-week news cycle.

And Fernholz says there are really only two Democratic proposals–so only one too many instead of three.

Act Now

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The Roundup

Earnings season is still in the early stages but will soon gather steam. Early numbers out of the S&P 500 suggest cost-cutting is still driving bottom-line results; outside of the financial sector–the fourth quarter of 2008 looks great about now to investor relations shills for banks about to report 2009 numbers–there’s little sign of meaningful top-line growth.

The first set of numbers from CE Portfolio recommendations will begin to trickle out next week after MLM goes to press–Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) releases fourth-quarter and full-year 2009 results Wednesday, February 3.

Conservative Holdings

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) has finalized its year-end top-up distribution for 2009: Unitholders of record Dec. 31, 2009, will receive CAD0.20 per unit, payable on January 31.

In addition, management announced that it will enter into a five-year power purchase agreement with First Wind, a Lackawanna, NY-based producer.  Just Energy will bid and schedule the energy output from First Wind’s Steel Winds I facility into the New York Independent System Operator market.

One of the largest urban wind-power developments in the US, Steel Winds’ eight turbines can generate more than 50 million kilowatt hours electricity a year, enough to power about 9,000 New York homes. Financial terms have yet to be revealed. Just Energy Income Fund is a buy up to USD14.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) will convert to a corporation in December 2010. Management already took a significant step toward the new reality when it cut the fund’s monthly distribution from CAD0.0875 to CAD0.055. Here’s the relevant portion of the January 19 press release:

The Fund’s new monthly distribution is $0.055 per unit or $0.66 per unit annually. This distribution level, based on the Fund’s current portfolio, is expected to result in an average payout ratio of approximately 70 to 75% of distributable cash over a five-year period. Based on the Fund’s current portfolio and outlook, management expects this distribution profile to be sustainable through 2014. Approximately 40% of distributions to unitholders in 2010 are expected to be tax-deferred as a return of capital. The Fund currently intends to execute its conversion into a dividend-paying corporation in December 2010.

The plan is to continue to focus on regulated or contractually defined core infrastructure businesses. Management intends to diversify its portfolio this year, however, and has approximately CAD100 million at its disposal. The reduced payout leaves another CAD20 million in free cash.

Management forecasts for 2010 operations were cautiously optimistic across all lines, with particular hope reserved for the fund’s hydro and biomass facilities. Revenues from the Cardinal natural gas cogeneration facility, the three renewables facilities and the LeisureWorld retirement community should continue to expand; costs will also rise as Macquarie converts to a corporation, implements new accounting standards and pursues its growth goals. But cash flow is expected to rise. Macquarie Power & Infrastructure Income Fund is a buy up to USD8.

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–February 26
• Artis REIT (TSX: AX-U, OTC: ARESF)–March 16 (confirmed)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–March 29 (confirmed)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–February 3 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–February 12
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–February 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–February 24 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–March 4
• Colabor Group (TSX: GCL, OTC: COLFF)–February 25
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–February 24
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–February 12
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–March 16
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–February 5
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–February 18 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–March 2 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–March 2
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–March 3
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–February 9 (confirmed)
• TransForce (TSX: TFI, OTF: TFIFF)–February 25 (confirmed)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–February 12

Aggressive Holdings

Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF), in an updated investor presentation published to its website last week, provided some clues about the timing of its conversion to a corporation; management will look to maximize its time as an income trust, as suggested by its observation that it sees “value in the tax efficiency provided by the trust structure through 2010,” and is therefore likely to make its transaction effective as close to Jan. 1, 2011, as possible.

Management will announce specifics later in the year, when it has “better clarity on future gas prices and capital requirements for growth and new venture opportunities.” Importantly, Paramount acknowledges that its current investor base is “largely yield-focused.” Paramount Energy Trust is a buy up to USD6.

• Ag Growth International (TSX: AG-U, OTC: AGGZF)–March 16
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–February 11
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–February 19
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–March 2 (confirmed)
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–February 26
• Newalta (TSX: NAL, OTC: NWLTF)–March 5
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–March 10
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–February 18
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–March 10 (confirmed)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–March 11
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–February 26
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–February 12

Oil and Gas

Advantage Oil & Gas (TSX: AAV, NYSE: AAV) updated investors on first-half 2010 production last week, announcing that it expects to average 24,200 to 25,200 barrels of oil equivalent per day (boe/d) of output for the first six months of the year. Second-quarter production should tick up to 25,500 boe/d when efforts to boost output at its Montney natural gas asset come to fruition.

Advantage has concentrated much of its capital on the Glacier shale play; a projected weighting of 68 percent natural gas should tip further toward 70 percent as Advantage approaches its target of 50 million cubic feet per day there.

Management forecast funds from operations of USD107 million for the six months ending June 30, based on USD5.53 per million British thermal unit/CAD5.45 per thousand cubic feet natural gas prices, USD80.46 for the per barrel price of West Texas Intermediate crude and a Canadian dollar at USD0.98. Advantage Oil & Gas is a buy up to USD7.

NAL Oil & Gas Trust (TSX: NAE-U, OTC: NOIGF), in conjunction with an update on 2010 production plans, stated that “management continues to assess alternatives for corporate conversion and reiterates that the company plans to maintain a yield oriented business model post conversion.” NAL expects to convert in late 2010 or early 2011 in order to maximize its time under the income trust tax shield and push out the viability of its CAD1.2 billion of available tax pools.

Management plans to focus 80 percent of a CAD175 million capital budget on the Cardium oil play in central Alberta. The trust expects to produce 29,500 to 30,500 boe/d, with a 50-50 split between oil and gas. After realizing some success with recent cost-cutting efforts, management expects operating expenses to be in line with 2009 levels at CAD11 to CAD11.50 per boe. NAL Oil & Gas Trust is a buy up to USD15.

Gas/Propane

Parkland Income Fund (TSX: PKI-U, OTC: PJIUF) announced that Canada’s competition commissioner has approved the company’s proposed purchase of petroleum distributor Bluewave Energy LP. Management stated in the Dec. 21, 2009, press release announcing the Bluewave deal that it intends to maintain its current monthly distribution rate of 10.5 cents Canadian per unit.

Although no decision has been made, Parkland will likely convert in 2011 “barring a significant event which might trigger earlier conversion.” Following the Bluewave acquisition Parkland will have approximately CAD50 million to CAD75 million within the “normal growth” rules described in the Tax Fairness Act. Parkland Income Fund is a buy up to USD12.

Superior Plus Corp (TSX: SPB, OTC: SUUIF) bought Griffith Holdings, an Upstate New York retail and wholesale propane, heating oil and motor fuels distributor with 27 branches, 26 bulk storage facilities and three storage terminals, for USD125 million. Griffith has 20 million gallons of storage capacity and a fleet of 400 delivery and service vehicles.

Management expects the transaction to add approximately CAD0.05 per share to adjusted operating cash flow based on 2010 forecasts. Superior Plus Corp is a buy up to USD13.

Real Estate Trusts

Cominar REIT (TSX: CUF-U, OTC: CMLEF) has agreed to buy Overland Realty Ltd (TSXV: OVL, OTC: OVLFF) for CAD70.9 million, or CAD0.82 per share, in cash.

Halifax, Nova Scotia-based Overland owns seven office, three retail, six industrial and mixed-use buildings and one land lease that cover a total area of approximately 603,000 square feet in the Maritimes region of Canada. Cominar REIT is a buy up to USD18.

Food and Hospitality

Imvescor (TSX: IRG, OTC: IRGIF) announced last week a delay in filing its annual financial statements, certifications of filings, related management discussion and analysis and annual information form for the period ended Oct. 25, 2009, with securities regulatory authorities by the January 22 deadline.

The delay is the result of the accounting complexities created from the combination of PDM Royalties Income Fund and Imvescor. Management anticipates making the required filings by January 29. Imvescor is a sell.