Problems with income trust disclosure

December 12, 2006

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Problems with income trust disclosure

Letter Summary:

From a review of financial literature, issuer marketing material, and various analyst reports, participants in the Income Trust sector place an extremely high emphasis on “distributable cash” and “payout ratios.” Both calculations are determined at the discretion of the entity’s management. We are of the view that, under current circumstances, these metrics are of little value in comparative analysis, or as a reasonable basis for investment decisions. Distributable cash can and, in many cases, does include borrowed funds that, all other things being equal, will reduce future cash payments to investors or result in a return of capital. Often, the maintenance capital expenditure estimate is insufficient to replace assets that are being depleted. Moreover, many Income Trusts return a portion of an investor’s initial investment with each cash distribution. For investors, it is vital to understand the mix of distributions between return on capital and return of capital.

Overview of the Council’s Comments:

we are of the view that the correct starting point for the analysis of Income Trust performance is the same as for any business entity, namely its net income. Each item that is deducted from revenue to reach the net income metric has been carefully considered by accounting standard setters. Thus, each adjustment made to net income is either an expense in the current year or an allocation or estimation of expenses that by the nature of the enterprise’s operations are spread out over several years (such as depreciation or amortization). By definition, GAAP means “generally accepted accounting principles”. Where an Income Trust disseminates distributable cash figures, it is the responsibility of management, as outlined under CSA rule 52-306 (Revised), to explain and disclose the rationale behind its use of non-GAAP metrics. If management cannot or does not provide sufficient disclosure for non-GAAP metrics then analysts and investors should be wary of using these metrics as a basis for analysis or investing.