AltaGas Income Trust is an income trust that has interests in

AltaGas Income Trust is an income trust that has interests in natural gas extraction and transmission along with coal-fired, gas-fired, and hydro power generation; natural gas field gathering and processing; and energy services. The entity also provides services including natural gas and natural gas liquids marketing, gas transportation, and the wholesale marketing of power. Its objective is to ensure stable cash flows that can be used to pay out a steady distribution to its unitholders. Income trusts are investment vehicles that hold income-producing assets. Income trusts generally pay a monthly cash distribution to their unitholders, which is one of the primary reasons that investors would purchase units.

Instructions

Access the financial statements for AltaGas Income Trust for the year ended December 31, 2009, from the entity’s website or from SEDAR (www.sedar.com) and answer the following questions.

(a) For the period 2005 to 2009, what have been AltaGas’s distributions per unit, the net income per unit, and the funds from operations per unit? Compare the amounts each year and comment. Why would the trust provide all this information on a per-unit basis? Are the distributions sustainable?

(b) Review the statement of cash flows for the two years 2008 and 2009. What are the total cash flows from (or used by) operations, investing activities, and financing activities? What sources of cash are available to fund the annual distributions and capital investments? Do you think that the distributions are sustainable?

(c) Using information from Note 21 and the statement of cash flows only, determine the 2009 balances for accounts receivable, inventory, accounts payable and accrued liabilities, customer deposits, and deferred revenues, starting with the December 31, 2008 balances. Compare with the actual amounts for December 31, 2009, and explain any differences.

(d) Using the net book value of capital assets at December 31, 2008, as the opening balance and items from the statement of cash flows, statement of earnings, and related note disclosures, try to reconcile the opening and closing balance for capital assets for 2009.

(a)       Information from this schedule was taken from page 8 (or page 100) of the AltaGas’ annual report and

$thousands, except for per unit information	2009	2008	2007	2006	2005
Distributions per unit	$2.16	$2.125	$2.065	$1.995	$1.85
Net income per unit	$1.80	$2.38	$1.90	$2.06	$1.67
Funds from operations per unit	$2.58	$3.15	$2.84	$2.91	$2.39

As can be seen from the above schedule, the distributions per unit have been increasing each year from 2005 to 2009, even though this is not true for the net income per unit or the funds from operation per unit.  Net income and funds from operations both declined in 2007, and again in 2009.  Also, we see that the net income per unit is less than the distributions per unit for 2005, 2007 and 2009.  However, the funds from operations per unit is significantly higher than distributions per unit for every year.

The trust provides per unit information since trusts generally are designed to pay out a substantial portion of earnings on a monthly basis.

In order to determine if these payouts are sustainable, we would also need to understand the amount of capital that is required to be reinvested in the trust.

(b)

In thousand of $	2009	2008
Cash inflow from operations (1)	184,146	205,155
Distributions paid (2)	(168,666)	(144,348)
Cash used in investing activities (3)	(464,092)	(432,660)
Cash provided by financing activities (excluding distributions paid) (4)	434,047	377,706
Net change in cash and cash equivalents	(14,565)	5,853
Cash from operations less distributions (1) + (2) = (5)	15,480	60,807
Cash from operations less distributions less capital expenditures (5) + (3)	(448,612)	(371,853)
New long term debt issued	311,212	233,985
New units issued	130,719	144,071

Once the distributions were subtracted from the operating cash flow, there was only $15,480 thousand and $60,807 thousand for 2009 and 2008 respectively, available to cover capital investments. Once the capital investments are subtracted from this net amount, there is a deficit of $448.6 million (for 2009) and $371.9 million (for 2008) that must be funded from outside sources. 

In 2008, the trust issued new long term debt of $233,985 thousand and new units (equity) of $144,071 for a total of $378,056 to make up this 2008 deficit.  And in 2009, the trust issued debt of $295,080 thousand and units of $130,719 thousand for a total of $425,799 thousand to make up a portion of this 2009 deficit.

Based on the current information, the distributions at this level are not currently sustainable since the trust has to issue debt or equity in order to finance capital expenditures. 

It appears that the company is still raising outside financing in the form of debt and equity (units) to increase its operating capacity.  For the distributions to be sustainable in the future, this new operating capacity that the trust has invested in over 2008 and 2009 will have to immediately generate enough positive cash flows to cover interest and distributions to the unit holders.  In addition, operating cash flows should be sufficient to cover necessary capital expenditures.  Since the trust has issued new units, the total distributions in 2010 will be higher as these new unit holders will be entitled to distributions also. 

(c)

In thousands $	2008 balance	Changes as per cash flow	Calculated 2009 balance	Actual 2009 balance	Difference
Accounts receivable	220,280	(41,744)	178,536	203,673	25,137
Inventory	775	626	1,401	1,401	0
Accounts payable and accrued liabilities	198,232	(75,057)	123,175	158,319	35,144
Customer deposits	24,017	6,661	30,678	30,678	0
Deferred revenue	2,777	(2,777)	0	0	0

There were differences for accounts receivable and accounts payable and accrued liabilities.  As indicated in Note 21, footnote 1, the company made an acquisition during 2009 which caused some of the differences.  The cash flows related to the acquisition are included as investing activities.  In looking at the acquisition disclosure in note 3, we find that current assets of $22,120 thousands and current liabilities of $31,292 thousands were acquired. 

(d)

In thousands of $	$
Opening balance for capital assets	1,436,686
Amortization from income statement	(64,157)
Purchases of capital assets from statement of cash flows	242,970
Adjustment re capital costs payable that have been deducted from additions in the statement of cash flow and from payables – see note 21	20,996
Proceeds on sale
Capital assets as part of business acquisition – note 3	224,179
Asset retirement obligation – new (note 12)	742
Calculated balance	1,861,416
Unreconciled difference	(4,321)
Closing balance as per statement of financial position	1,857,095

From the statement of cash flow we see that there is a gain on sale of asset, but there is no information as to whether or not this relates to capital assets.  Also, there are no proceeds that are disclosed related to disposals of assets.  The unreconciled difference cannot be explained.