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Adventures in DRIPping
Looking at Utility DRIP Trusts

Robert D. Gibb

Last article began by looking at DRIPping income trusts and in particular business trusts. Unfortunately, because of low growth prospects, there appears to be little incentive for DRIPs in the business sector and at the time of writing only Arctic Glacier Income Fund (TSX: AG.UN) offered a plan.

This article will look at greater opportunities to DRIP in the Utility Income Trust Sector. There are currently five utility trusts offering DRIPs with SPPs or optional share purchase plan features. I suppose, technically we should call them UPPs or unit purchase plans but SPP is the more familiar term. A sixth company, KeySpan Facilities Income Fund (TSX: KEY.UN) has announced the introduction of a plan but I haven’t been able to confirm an SPP feature at this time.

There is more incentive in the utility trust sector to offer DRIPs with SPPs. According to Investor Relations at TransAlta:

The program is advantageous to us because it helps us to grow the TransAlta Cogen Limited Partnership allowing financing for further acquisitions. Moreover, with a DRIP program we have lower payouts required in the short term.

 While Fort Chicago says a DRIP plus SPP is,”…a cost effective way to raise modest amounts of capital."

Premium Distibution, Distribution ReInvestment and Optional Unit Purchase Plans

One thing that will be obvious on reading is that trust sector DRIPs generally have considerably higher minimum optional investment requirements than the more familiar equity DRIPs. There is one area where trust DRIPs might have an advantage.

Recently, many trusts have started to offer Premium Plans that vary from the normal DRIP or Distribution ReInvestment Plan. Essentially these plans offer two options to unit holders:

a.      With the more common distribution reinvestment plan distributions are reinvested in further shares or units. Many trusts offer a reinvestment discount, typically at 95% of the units trading price. If a unit normally trades at $10.00 any reinvestments are made at a unit price of $9.50.

b.      If distributions are received in cash the amount received in a premium plan is 102% of the normal distribution amount. Here the unit holder receives a premium of two percent on distributions.

The first option would appear to be the better choice over the long term.' What is interesting is how these plans work for beneficial owners or owners of units held in a brokerage account.

If your broker allows it, you are eligible to register your units in the premium plan versus the synthetic broker DRIP. At first glance this is a financial disadvantage to the owner while the broker will make money off the spread between the reinvestments of the 95% DRIP and 102% premium plans.

What is interesting though is that premium plans often allow beneficial unit holders to establish a DRIP outside their account while making fee free minimum optional cash payments by cheque through the broker. Long term this is to the advantage of the broker because of the spread previously mentioned. However, the owner can opt out of the premium plan voluntarily at any time. In effect, it is possible to establish a DRIP in some trusts without paying the usual fee to transfer the minimum number of units out of street name. This might be seen as an advantage to some persons.

I’m not advocating this action. However, it is an added degree of flexibility for DRIPpers. It is important to note that while a trust might offer a premium plan individual brokerages will vary in participation and companies offered. Visit each company’s Investor Relations web page to find the particular characteristics of their premium plan.

Enbridge Income Fund (TSX: ENF.UN) aims “to be a premier income fund in Canada with a low-risk profile focused on energy pipeline transportation assets”. The fund owns and operates natural gas and oil pipelines in British Columbia, Alberta and Saskatchewan. The fund has a 100% interest in Enbridge Pipelines ( Saskatchewan) Inc. and a half interest in the Canadian segment of the Alliance Pipeline.

Eligibility for enrolment in the plan requires 100 normal units. The plan invests monthly with a $100 minimum and $1,000 maximum. Units held in account can be sold through the plan.

Fort Chicago Energy Partners L.P. (TSX: FCE.UN) owns the other half interest in the Canadian portion of the Alliance Pipeline delivering natural gas to the Chicago area. They also own just less than 50% of the US Alliance Pipeline segment. They also have interests in end point fractionation, extraction and delivery systems in the Chicago area.

Fort Chicago requires only that you be a registered or beneficial holder of units to be eligible to enroll in the DRIP. Presumably this means one (1) unit only. The down side is that optional payment minimums are $1,000 in any given month. Reinvested distributions receive a 5% discount while shareholders wishing to receive cash are entitled to a 2% premium.

Inter Pipeline Fund (TSX: IPL.UN) is one of Canada 's largest petroleum transportation and product storage businesses. The fund's almost 5,000 kilometers of pipeline are consists of four crude oil feeder pipelines in southern Saskatchewan and Alberta transporting over 450,000 barrels per day of conventional crude oil, oil sands bitumen and gas plant condensate.

Product storage capacity is more than 1.2 million barrels. Inter Pipeline has an 85% interest in the Cold Lake Limited Partnership.

Again, one only needs to be a “registered” unitholder to be eligible for the plan. The minimum optional payment is $500 with the maximum not exceeding $100,000 in a calendar year. There is some confusion as the minimum indicated in the plan is only $500 in a year. However, the Computershare documents make it clear that any individual cheque must be at least $500. The plan offers a 5% discount on reinvested distributions unless units are purchased on the open market.

Pembina Pipeline Income Fund (TSX: PIF.UN) transports 700,000 barrels per day of light conventional and synthetic crude oil, condensate and natural gas liquids through 8,000 km of pipeline in Western Canada. With the addition of the Alberta Oil Sands Pipeline in late 2001, Pembina now participates in the development of Canada's extensive, long life oil sands resource.

Pembina offers a premium plan as well as a standard DRIP. Minimum optional remittances are $1,000 to a maximum $100,000 per calendar year.

TransAlta Power L.P. (TSX: TPW.UN) owns a 49.99 per cent interest in TransAlta Cogeneration, L.P., which owns interests in four gas-fired cogeneration facilities in Ontario and Alberta and in a coal-fired, mine-mouth facility in Alberta with a total generating capacity of 1,118 megawatts of electric power. This power is sold under long-term contracts to high-quality counterparties.

TransAlta Power L.P. also offers a premium plan with a minimum remittance of $1,000 to a maximum of $5,000 in any given month.

Current Events

Recently, ComputerShare Canada began charging brokerages an extra fee for establishing individual DRIPs after a group purchase. This, particularly, affected purchases made through MoneyPaper Magazine. Previously, MoneySaver subscribers were able to receive extra MoneyPaper member discounts on companies like BCE and Bank of Montreal because of their popularity. The action above has forced MoneyPaper to place DRIPs in the least popular category. Even at that, compared to Canadian discount brokers MoneyPaper offers about a 50% discount.

Individuals making a group purchase to split later are not being charged this fee that applies to brokerages only at this time.

Royal Bank of Canada (TSX: RY) has introduced a DRIP. Unfortunately, it does not include an optional stock purchase plan. Many of us have written to the Royal urging the adoption of an SPP.

Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 [email protected]. Robert Gibb is a retired school teacher. He gives seminars on dividend reinvestment plans. Mr. Gibb is a frequent contributor to Internet DRIP boards under the nickname OperaBob.