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Canadian trusts get jolt from analysts
Canada’s energy income trusts have been fingered as the worst culprits within their sector for overstating how much they have available for the cash distributions that have made them so popular among investors.
Standard & Poor’s analysts Kevin Hibbert and Ronald Charbon said in a new study that 23 of the 40 trusts they surveyed excluded capital spending from their distributable cash.
As a result, by sidestepping what they need to spend to maintain their businesses, the trusts are guilty of “materially overstating the amount of operating cash on hand,” the report said.
Hibbert said capital spending to sustain operations accounts for an average 22 percent of the cash generated by trust operations, yet 57 percent of the trusts examined excluded those costs in stating how much spare change they had for unit holders.
In an earlier phase of its study, S&P said that inconsistent definitions of available cash posed “risks” for investors.
The analysts said then that calculations of “distributable cash should be more thoughtful and the related disclosures significantly improved.”
They said some of the cash-generation calculations used by trusts don’t conform to generally accepted accounting principles and because of that distortions in available cash averaged 12 percent over two years. 250 Canadian income trusts The 250 income trusts in Canada carry a market value of C$180 billion — with energy trusts making up the largest chunk — and have posted returns of about 33 percent in the past three years compared with 20 percent for Canada’s benchmark S&P/TSX composite index.
Hibbert said the findings should force investors to pay closer attention to the way in which trusts support claims of their ability to pay out the cash expected by unit holders.
He said some investors have failed to “appreciate the financial reporting and disclosure nuances due to a tendency to take at face value the distributable cash and payout ratios that are reported by management.”
Other accountants and analysts have been waving warning flags in recent months about the accounting standards in the trust sector.
Independent analyst Harry Levant said some investors view trusts as “yield-based” investments carrying some kind of guarantee, then get upset when distributions are adjusted.
—Gary Park
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