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For the Alternative Energy Trusts, we have made some adjustments to our long
term views as to the timing of expected debt repayment schedules, capital
expenditure (CapX) programs, and taxation. As a result, in some cases, the change
in yearly cash flow resulted in small changes to our targets. Note that we do not
expect these trusts to be materially affected by the general recession due to their
largely contracted businesses.
We are becoming more bullish on the Trust sector. The Alternative Power Trusts
have sold off 27% over the last 12 months as investors shied away from the sector
in favour of cash or more liquid, large-cap names. As investors re-enter smallercap
sectors, we feel that yields provided by the Trusts will become very attractive.
We are not expecting any DPU adjustments in this space for 2009; however we do
expect some adjustments to mitigate the impact of taxation for some names, but
believe this is currently reflected in the individual yields. We are upgrading to a
BUY rating, from Hold, for both EPCOR Power L.P. and Innergex Power.
With market volatility reduced and expectations for the maintenance of DPU
levels until the time of taxation, we feel total returns justify a BUY rating at
this time.
Company Specific Share Price Performance
Alternative energy development is a capital-intensive process; as such, companies
in this sector typically fall into one of three categories: (1) early-stage development
companies with little or no cash generation; (2) developers in need of financing; or
(3) operators focused on growth through acquisition. With access to private and
public capital scaled back dramatically, it is easy to reconcile poor absolute and
relative share price performance for this group over the past year. To a large
extent, this has been a perfect storm for alternative energy equities; the credit crisis
has coincided with a broad-based economic recession and much lower fossil fuel
prices. We still consider alternative energy the optimal long-term answer for
escalating power demand, but motivation to pursue alternative energy
solutions is arguably curbed with oil prices retreating to US$40 per barrel.
To varying degrees, share prices in this space have collapsed across the board, but
investors are advised to remain selective as focus has shifted to lower risk profiles.
We suggest that investors focus their attention towards companies with flexible
balance sheets (i.e., low leverage and abundant liquidity) and current operating
cash flows. The market's preoccupation with global credit concerns outweighs
company-specific fundamentals for the time being.
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