Boralex Power – BPT.UN

ABOUT BORALEX
Created in February 2002, Boralex Power Income Fund (the “Fund”) is an unincorporated open-ended trust that indirectly owns ten power generating stations with a total installed capacity of 190.0 MW. Eight of these power stations are located in Quebec (Canada) and two are in the State of New York (United States).

•The Fund owns seven hydroelectric power stations – five in Quebec and two in the United States – with a total installed capacity of 96.4 MW.
•In Quebec, the Fund owns two wood residue-fired facilities – a thermal power station and a cogeneration plant – with a total installed capacity of 62.6 MW. The cogeneration plant also produces 1,780,000 thousand pounds of steam annually.
•The Fund also owns the only natural gas-fired cogeneration plant in Quebec, which has an installed capacity of 31.0 MW and approximately 862,000 thousand pounds of steam annually.

FINANCIAL HIGHLIGHTS
-14% Yield
-expected 2008 payout ratio of 95%
-trading at approximately 30% below it’s book value.
-estimated 2008 PE – 11.5X
-estimated 2009 PE – 11.6X
-Trading at 6.5X cash flow.
-Current Ratio of 2.11
-TDWaterhouse rates them a high risk HOLD and have a one year target price of $6
-DBRS Stability Rating of STA-2(low)
-S&P Stability Rating of SR-2/stable
-DBRS Long-Term Debt Rating of BBB
-Have long term power purchase agreements at all 10 of their locations with contracts expiring between 2012 and 2035.
-Distributions are tax friendly. Approximately 48% of the distribution is return of capital, 31% dividend income, 18% taxable income, 3% capital gains.
-They are a small player in the power generation industry (225 million market cap) and trading below their book value. If they are able to resolve some of their biomass and hydrology issues they would become an attractive takeover candidate.

RISKS
-2007 was a very rough year for BPT.UN. The fund has suffered a number of setbacks in addition to the general malaise of the power generation industry. As a result they have seen their unit price plummeted from a 52 week high of about $11 to it’s current price of around $5.
-In order to increase their financial flexibility and maintain their emergency cash reserves the distribution was recently cut by 22% from 90 cents a unit to 70 cents a unit.
-The weak results in 2007 were primarily caused by the following 3 issues: a weakening U.S dollar, problems sourcing a cheap supply of biomass fuel and below average hydrology. How will these issues affect their results in 2008?

WEAK US DOLLAR
I believe that the weakening of the U.S dollar will continue in 2008 however, I’m not anticipating as large of a move as in 2007.

BIOMASS SUPPLY
Two of their power stations are fueled using wood residue from the forestry industry. As the forestry industry has been devastated in Quebec it’s becoming increasingly difficult, and expensive to obtain an affordable and reliable supply of fuel.

HYDROLOGY
This is anyone’s guess. Like the weather we won’t know until it happens. It may be below average again in 2008 or it may be above however, over time it should revert to the mean.

[As always please do your own research and consult your own financial advisor before making any decisions.]