Wading in Dollars

12/10/2008 12:29 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of Canadian Edge, recommends a solid performer in the income trust sector.

Great Lakes Hydro Income Fund’s (TSX: GLH-U, OTC: GLHIF) origin as a trust goes back to the 1990s, well before the recent boom. As a result, in contrast to many more recently created and now-defunct trusts, it was constructed on conservative financial principles for long-term sustainability.

Great Lakes is the largest power trust in North America, with 1,021 megawatts of hydroelectric generating capacity in four distinct geographic regions: British Columbia, New England, Ontario, and Quebec. Solid conglomerate Brookfield Asset Management (NYSE: BAM) owns 50.1% of the shares and provides financial backing.

Great Lakes’ output is sold to large utilities and governments under contracts with an average duration of 14 years, translating into exceptionally steady revenue with basically no risk of default, even in a slowing economy. Third-quarter cash flow before noncash items nearly doubled on a 46% jump in revenue, driving the payout ratio based on distributable cash flow down to just 64.6% (and yielding 7.08%—Editor).

Thanks to low debt and ample cash reserves, management was more than able to continue paying the distribution without a hitch, as well as fund its capital projects. The ability to weather bad times without a hitch is the major attraction of Great Lakes Hydro shares in the current market.

But the trust promises to consistently grow revenue as well by investing in similar ultra-reliable projects. Management now believes it will be able to literally outgrow its 2011 tax liability, maintaining the same distribution in 2011 that it pays in 2010, whether it’s organized as a trust or corporation.

Over the past nine months, Great lakes invested $8.4 million (Canadian) in capital expenditures and another $1.9 million in “major” maintenance projects to boost production and better control costs. But management has also begun to look at acquisitions, particularly as a way to boost cash flow and help defer taxes starting in 2011. More growth is likely to come from higher rates in several areas as contracts are renegotiated more in line with tighter markets.

Financing remains very conservative. Refinancing needs are light over the next several years, and the trust has CAD23.3 million in the bank, with an additional CAD26 million in credit facilities.

It all adds up to an exceptionally steady investment. The shares are worth every cent of the premium they trade to other energy infrastructure trusts. Buy Great Lakes Hydro Income Fund up to US $20. (It closed Tuesday at $14.17—Editor.)

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