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  Sailing away from Westshore

BENJ GALLANDER and BEN STADELMANN

Friday, October 1, 2004

Westshore Terminals, the coal export facility in Vancouver that is one of the largest of its type in the world, has a strange and convoluted history. It started out as one of those huge government megaprojects, the kind that were popular around the world in the 1960s. Many turned out to be white elephants, symbols of a creaky era of Soviet-type central planning.

Eventually it became part of BCRIC, the 1979 effort in people's capitalism championed by British Columbia's Social Credit government. Recession and labour strife dogged the company, rendering the bold experiment a big fat failure. In its downtrodden state, it attracted the attention of Jimmy Pattison, the brilliant Canadian tycoon who was busy buying properties as if filling up a Monopoly board.

Pattison first bought a stake, then took the company private in a deal that was — how shall we say? — excellent for Jimmy, not so much for the folks on the receiving end.

Eventually Pattison spawned, in a complex structure, the Westshore Terminals Income Fund, which has since become a model for the income trust boom of recent years. Basically the way it works is: you got it, you sell a big chunk of it, you keep managing it. All the perquisites that come with running the show, while offloading a lot of the risk.

This was one of those cases where, if you can't beat them, you join them for the ride. One of us purchased the Westshore trust units for his RRSP in November 2002 at $4.41. Unlike many resource trusts, most of Westshore's distributions are considered taxable income, so it was a good choice for a tax-deferred account.

Since then it has been a veritable money-spinner, spitting out total distributions of $1.55. Sold this week at $8.94, that's a capital gain of $4.53 and a total return of $6.08, for a 138 percent profit in less than two years.

So why sell this golden goose? In the past year, distributions have been helped by a deal engineered with Fording and Teck Cominco. Westshore acquired a 9.1 percent interest in the consortium last year for $150 million, but when it was sold soon after, a tidy $16.4 million profit was added to the kitty.

As capital investments have been low, the portion of cash flow earmarked for distributions has risen from 85 percent to 90. All wonderful stuff, but realistically, how many more windfalls can be expected?

As Westshore's price has surged, its yield has dropped back to 6.3 percent. Income trusts generally prosper in a declining interest rate environment; rising rates are not normally friendly to their unit price. This is especially true for those with yields at the lower end of the spectrum.

Finally, coal, a deep contrarian pick a couple of years ago, has returned to respectability. Respectability? That's our cue to exit, stage left.


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