Like many income trusts, Consumers' Waterheater Income Fund's business model is based on steady, consistent cash flow - in this case, the monthly rental payments that 1.4 million Ontario households make on their gas water heaters.
When the company was created in 2002 to buy Direct Energy's rental portfolio of water heaters, it caught the wave of excitement for income trust issues, and its price reflected that enthusiasm.
Considered a very safe trust with a steadily growing business from new home construction, the units rose from the $10 initial offering, and were above $16 when Ottawa's 2006 Halloween tax decision sliced the legs out from under most trusts.
It climbed back over $18 a few months later, as takeover rumours echoed through the income trust community.
Recently, however, CWIF has slumped to new lows below $4, after the company chopped its distribution in half in September.
The main problem? Unexpected and heated competition.
While the company once had a captive market of about 40 per cent of Ontario's gas-using households to itself, aggressive competitors such as National Home Services, a division of privately owned National Energy Corp., have been making door-to-door pitches, and getting many customers to switch suppliers.
CWIF has been hampered in stemming the loss of business because - when times were better - it signed an agreement with the federal Competition Bureau that prevented it from charging "termination fees" when customers move to another supplier. That restriction (which CWIF agreed to in return for the right to increase prices beyond the rate of inflation) doesn't expire until 2012.
At the same time, a decline in housing starts, prompted by the downturn in the economy, has cut down on new installations.
The bottom line is that the number of CWIF clients is shrinking, and the company has to find a way to fight this attrition.
The main ammunition in the fight, said chief financial officer Stephen Bower, is a communications campaign designed to persuade customers to stick with CWIF and Direct Energy, which handles service on the rental units. Phone calls and flyers underline the company's message that its customer service is superior, and that there may be hidden costs and problems in locking in with another supplier.
But there are other issues dampening the company's unit value.
A promising new ancillary business - installing "submeters" that measure electrical use in individual apartment and condominium units - was stopped in its tracks for several months this year because of regulatory issues at the Ontario Energy Board.
The company also has $275-million in debt maturing early in the new year, and it has not yet spelled out how it will refinance.
Analyst Tony Courtright of Scotia Capital said he expects CWIF to be able to get new financing, but in a "worst case" scenario, the distributions might have to be cut further to pay down the debt.
The best case for the company, Mr. Courtright said, would see a stabilization of the water heater business so that its customer base is no longer shrinking sharply, with some new growth emerging from the submetering arm.
In the short term, however, he expects there to be further selling pressure on the units as investors engage in tax-loss selling before the end of the year.
One institutional investor that has abandoned much of its CWIF investment is the Bissett Income Fund, which once held more than 1 per cent of the company's units but sold off four-fifths of its holdings in the second and third quarters of this year.
Bissett fund manager Leslie Lindquist said she was concerned that competitors have taken "a real nasty bite out of CWIF's lunch" and the company was having trouble defending itself.
Still, she acknowledged, at the current rock-bottom price "it is very good value, as long as they find a way to retain their existing asset base ... and as long as they can refinance their debt at favourable rates."
Analyst Sam La Bell at Veritas Investment Research is among those who think the CWIF units are underpriced. Even with a further modest decline in its customer base owing to competition, the intrinsic value of the company is about $6.45 a share, he said, thanks to the very strong cash flow. At anything below $5.50 a unit, he rates it a "buy."
In the meantime, "the market is going to punish them just for cutting the distribution and because there is so much uncertainty around this competitive threat and how long it will last," Mr. La Bell said.
The era of CWIF as a "steady low-risk stock" is over, he said. "It's not a safety stock as it was in the past."
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The business
How it works
Customers pay monthly fees for the rental of water heaters owned by the Consumers' Waterheater Income Fund. In most cases, partner Direct Energy gets 35 per cent of the fees, as payment for handling the servicing of the equipment.
Markets
Ontario consumers have traditionally rented gas water heaters. CWIF has rental units in about 40 per cent of the households connected to the gas system, about 1.4 million in total. The other big player is Reliance Home Comfort, formerly UE Waterheater Income Fund. The new competition includes National Home Services and LivClean.
How it has expanded
Over the years, CWIL has bought the water-heater-rental businesses of Toronto Hydro, Thunder Bay Hydro, and Festival Hydro (Southwestern Ontario).
Other business
In 2008, CWIL bought Stratacon Inc., which installs "submeters" that measure electricity use in individual apartment and condominium units. Regulatory confusion has slowed growth, but Ontario's new environmental laws could dramatically enlarge the market.
Richard Blackwell
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By the numbers
Revenue: $134.9-million in first three quarters of 2009
Profit: $12.4-million in first three quarters
Distributions: 64.8 cents a unit (annualized)
Long term debt: $327-million (at Sept. 30)
Market cap: $183.2-million