Citadel Stable S-1 Income Fund
TSX : CSR.UN

Citadel Stable S-1 Income Fund

August 26, 2005 16:16 ET

Citadel Stable S-1 Income Fund: 2nd Quarter Report 2005

CALGARY, ALBERTA--(CCNMatthews - Aug. 26, 2005) - Citadel Stable S-1 Income Fund (TSX:CSR.UN):

For the period from December 6, 2004, date of inception, to June 30, 2005 (unaudited)



Investment Highlights
June 30, 2005 March 31, 2005
------------------------------------------------------------------------
Net Asset Value per Unit $ 9.29 $ 9.02
Market Price per Unit $ 9.35 $ 9.65
Trading Premium (Discount) 0.6% 7.0%
Quarterly Distributions per Unit $ 0.1749 $ 0.07(1)
Market Capitalization ($ millions) $ 540.0 $ 555.6
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) First monthly distribution had a record date of February 28, 2005
and was paid March 15, 2005


Investment Manager Report

At the end of March 2005, rising interest rate and inflation concerns dominated the income trust market which resulted in a sell-off similar to that experienced in the spring of 2004. Like 2004, the sell-off was short lived as positive year over year funds flow and declining bond yields boosted income trust valuations. With continued strength in oil and natural gas prices, the energy trust sector delivered a strong 8.6% total return in the second quarter of 2005, while real estate investment trusts surpassed the energy trusts with a 9.3% total return. As a result, the S&P/TSX Income Trust index produced a total return of 7.7% over the second quarter of 2005, again outperforming the S&P/TSX Composite index's return of 3.6%. On a net asset value basis, Citadel Stable S-1 generated a 4.9% total return. However, on a unit price basis, Citadel Stable S-1's unit price weakened resulting in a negative 1.3% total return for the second quarter.

During the second quarter, Citadel Stable S-1 took advantage of the market weakness and acquired a number of new investments, reducing its cash position from 27% at March 31, 2005 to 15% at June 30, 2005. The Fund enhanced its weightings primarily in pipeline/energy investments and ongoing business trusts.

With favorable market sentiment returning to the income trust sector in the second quarter and into the third quarter of 2005, Citadel Stable S-1 expects to achieve its investment objectives in 2005 with maintenance of its current distribution level and SR-1 stability rating.

Management's Discussion & Analysis (August 18, 2005)

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements for the period ended June 30, 2005.

The net asset value of the Fund closed the second quarter at $9.29 per unit up from $9.02 at the end of the first quarter as portfolio valuations recovered. Despite the improved net asset value, the Fund's market price declined to $9.35 per unit down from $9.65 per unit at March 31, 2005. Throughout the quarter, the Fund's investment manager continued to invest proceeds from the Fund's initial public offering, reducing the Fund's cash position from $141.2 million at March 31, 2005 to $78.2 million at June 30, 2005.

Total revenue for the Fund's first full quarter of operations was $10.9 million compared to $5.9 million for the period from February 15, 2005 to March 31, 2005. Administrative and investment manager fees and trailer fees, both of which are calculated in reference to the Fund's net asset value, were $1.5 million and $0.5 million respectively. General and administration costs were $0.15 million over the quarter. After total expenses of $2.2 million, the Fund generated net investment income of $8.7 million or $0.15 per unit for the quarter. For the second quarter of 2005, the Fund paid monthly distributions of $0.0583 per unit for a total of $0.1749 per unit.



Portfolio Holdings
----------------------------------------------
Oil & Gas Royalty Trusts 14%
Ongoing Business Trusts 24%
Real Estate Investment Trusts 17%
Cash & Term Deposits 15%
Pipeline/Energy Investments 12%
Power Generation Investments 18%
----------------------------------------------


Total results of operations were $25.8 million or $0.45 per unit for the quarter, driven by $17.1 million of unrealized gains on the Fund's portfolio and $8.7 million of net investment income.



Citadel Stable S-1 Income Fund
Statement of Net Assets

(Unaudited)

As at June 30, 2005
------------------------------------------------------------------------
Assets
Investments, at market $ 458,669,012
Cash and term deposits 78,161,169
Revenue receivable 3,533,371
Prepaid expenses 61,849
Accounts receivable 42,626
------------------------------------------------------------------------
540,468,027
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities
Accounts payable 519,758
Distributions payable 3,366,864
------------------------------------------------------------------------
3,886,622
------------------------------------------------------------------------
Net Assets $ 536,581,405
------------------------------------------------------------------------
------------------------------------------------------------------------
Units outstanding 57,750,674
------------------------------------------------------------------------
------------------------------------------------------------------------
Net asset value per unit $ 9.29
------------------------------------------------------------------------
------------------------------------------------------------------------


Citadel Stable S-1 Income Fund
Statement of Operations

(Unaudited)

Period from
December 6, 2004,
date of
Three months ended inception, to
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Revenue
Investment income $ 10,908,871 $ 16,757,635
------------------------------------------------------------------------
10,908,871 16,757,635
------------------------------------------------------------------------
Expenses
Administrative and investment
manager fees 1,538,129 2,302,324
Trailer fees 519,756 807,647
General and administration costs 145,988 195,933
------------------------------------------------------------------------
2,203,873 3,305,904
------------------------------------------------------------------------
Net investment income 8,704,998 13,451,731
Net realized gain (loss) on sale
of investments (49,351) (67,705)
Net change in unrealized gain
(loss) on investments 17,125,227 (8,939,134)
------------------------------------------------------------------------
Total results of operations $ 25,780,874 $ 4,444,892
------------------------------------------------------------------------
------------------------------------------------------------------------
Results of operations per unit:
Net investment income $ 0.15 $ 0.23
Net realized gain (loss) on sale
of investments - -
Net change in unrealized gain (loss)
on investments 0.30 (0.16)
------------------------------------------------------------------------
$ 0.45 $ 0.07
------------------------------------------------------------------------
------------------------------------------------------------------------


Citadel Stable S-1 Income Fund
Statement of Changes in Net Assets
(Unaudited)

Period from
December 6, 2004,
date of
Three months ended inception, to
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Net Assets - beginning of period $ 519,310,229 $ -
Operations:
Net investment income 8,704,998 13,451,731
Net realized gain (loss) on
sale of investments (49,351) (67,705)
Net change in unrealized gain
(loss) on investments 17,125,227 (8,939,134)
------------------------------------------------------------------------
25,780,874 4,444,892
------------------------------------------------------------------------
Unitholder Transactions:
Distributions to unitholders (10,090,248) (14,057,025)
Issuance of trust units, net 1,580,550 546,193,538
------------------------------------------------------------------------
(8,509,698) 532,136,513
------------------------------------------------------------------------
Net Assets - end of period $ 536,581,405 $ 536,581,405
------------------------------------------------------------------------
------------------------------------------------------------------------
Distributions per unit $ 0.1749 $ 0.2449
------------------------------------------------------------------------
------------------------------------------------------------------------


Citadel Stable S-1 Income Fund
Statement of Investments
(Unaudited)

As at June 30, 2005
------------------------------------------------------------------------
% of
Cost Market Market
------------------------------------------------------------------------
Ongoing Business Trusts
Bell Nordiq Income Fund $ 3,802,154 $ 4,267,900
Chemtrade Logistics Income Fund 9,674,342 9,135,000
Clearwater Seafoods Income Fund 7,628,400 5,877,000
CML Healthcare Income Fund 7,740,000 8,171,500
Custom Direct Income Fund 9,082,200 8,418,000
Grandby Industries Income Fund 8,551,098 6,546,200
Great Lakes Carbon Income Fund 12,555,305 12,924,285
KCP Income Fund 9,924,870 10,887,000
Noranda Income Fund 17,790,500 16,185,000
Priszm Canadian Income Fund 9,371,285 8,766,030
Spinrite Income Fund 11,219,100 12,440,000
Sun Gro Horticulture Income Fund 9,540,300 8,888,000
Yellow Pages Income Fund 14,703,250 16,028,250
------------------------------------------------------------------------
131,582,804 128,534,165 23.9%
------------------------------------------------------------------------
Power Generation Investments
Algonquin Power Income Fund 11,006,834 10,820,925
Atlantic Power Corporation 23,582,600 22,680,000
Boralex Power Income Fund 11,725,350 11,050,000
Calpine Power Income Fund 4,374,949 4,004,000
Innergex Power Income Fund 8,947,899 8,892,000
Northland Power Income Fund 13,440,750 13,267,300
Transalta Power, L.P. 19,681,727 18,715,000
TransCanada Power, L.P. 7,908,142 8,454,600
------------------------------------------------------------------------
100,668,251 97,883,825 18.2%
------------------------------------------------------------------------
Real Estate Investment Trusts
Dundee Reit 21,477,114 21,392,000
Firm Capital Mortgage
Investment Trust 8,823,500 8,050,000
H&R Reit 8,117,500 8,296,000
Retirement Residences Reit 16,005,828 14,725,800
RioCan Reit 7,940,920 8,600,000
Summit Reit 22,006,000 22,561,000
TGS North American Reit 9,784,393 7,500,000
------------------------------------------------------------------------
94,155,255 91,124,800 17.0%
------------------------------------------------------------------------
Oil & Gas Royalty Trusts
Acclaim Energy Trust 11,728,953 11,351,600
Baytex Energy Trust 9,721,894 8,896,800
Bonavista Energy Trust 5,806,400 6,208,000
Esprit Energy Trust 9,026,000 8,358,000
Ketch Resources Trust 9,821,104 7,980,000
NAL Oil & Gas Trust 11,613,060 11,685,000
Paramount Energy Trust 10,628,013 10,750,000
Viking Energy Royalty Trust 10,970,960 10,903,200
------------------------------------------------------------------------
79,316,384 76,132,600 14.2%
------------------------------------------------------------------------
Pipeline/Energy Investments
AltaGas Income Trust 10,798,255 10,722,750
Energy Savings Income Fund 9,366,500 10,500,000
Fort Chicago Energy Partners
Class "A" 7,874,000 8,066,200
Inter Pipeline Fund 18,580,580 19,560,000
Keyera Facilities Income Fund 15,117,240 15,985,422
Superior Plus Income Fund 148,875 159,250
------------------------------------------------------------------------
61,885,450 64,993,622 12.1%
------------------------------------------------------------------------
Investments 467,608,144 458,669,012 85.4%
Cash and Term Deposits 78,161,169 78,161,169 14.6%
------------------------------------------------------------------------
Total $ 545,769,313 $ 536,830,181 100.0%
------------------------------------------------------------------------
------------------------------------------------------------------------


Citadel Stable S-1 Income Fund
Notes to the Financial Statements
(Unaudited)


THE TRUST

Citadel Stable S-1 Income Fund (the "Fund" or "Citadel Stable S-1") is a closed-end investment trust, established under the laws of Alberta pursuant to a Declaration of Trust dated December 6, 2004. The Fund commenced operations on February 15, 2005 with the completion of its initial public offering. The Fund does not have a fixed termination date but may be terminated at any time upon not less than 90 day's written notice to the Administrator with prior approval of the unitholders.

The Fund's investment objectives are to provide unitholders with stable and sustainable monthly cash distributions and to maintain a Standard & Poor's (S&P) SR-1 stability rating. This rating signifies S&P's assessment that the Fund's units have the highest level of distribution sustainability and the lowest level of distribution variability in relation to other rated Canadian income funds.

SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include estimates and assumptions by management. Actual results may differ from these estimates. Significant accounting policies employed include:

a) Cash and cash equivalents consists of cash on hand and short term bankers' acceptances with maturities of less than 90 days on acquisition.

b) Investments are stated at market values based on closing market quotations. Average cost is used to compute realized and unrealized gains or losses on investments. Transactions are recorded on the trade date.

c) The Fund qualifies as a unit trust within the meaning of the Income Tax Act (Canada). Provided the Fund distributes to its unitholders its income for tax purposes, the Fund will not generally be liable for income tax under Part I of the Canadian Income Tax Act.

d) Dividend income is recorded on the ex-dividend date, distribution income is recognized on the ex-distribution date and interest is recognized as earned.

UNITHOLDERS' CONTRIBUTION

The authorized capital of the Fund consists of an unlimited number of trust units which are transferable non-redeemable units of beneficial interest.

The Fund issued 153,415 units for administrative and investment manager fees and 19,013 units under its distribution reinvestment plan during the second quarter of 2005.

The Fund has a mandatory repurchase program whereby units offered for sale at a discount to the Fund's net asset value per unit of greater than 5% are repurchased for cancellation. This program is subject to a maximum of 1.25% of the total number of units outstanding at the beginning of each calendar quarter. During the quarter ended June 30, 2005, no units were repurchased for cancellation.

ADMINISTRATIVE AND INVESTMENT MANAGER FEES

Stable Yield Management Inc. is the administrator of the Fund and Bloom Investment Counsel, Inc. is the investment manager of the Fund. The administrator and the investment manager are entitled to fees totaling 1.1% of the average weekly net asset value of the Fund, payable in units monthly in arrears. During the quarter ended June 30, 2005, the Fund recorded an expense of $1,538,129 in respect of these fees.

TRAILER FEES

A trailer fee is paid to investment dealers calculated and payable quarterly in arrears at an annual rate of 0.4% of the net asset value of the Fund held by unitholders in accounts with investment dealers. During the quarter ended June 30, 2005, the Fund recorded an expense of $519,756 in respect of the trailer fee.



CORPORATE INFORMATION

Administrator
Stable Yield Management Inc.
Suite 3500, 350 7th Avenue S.W.
Calgary, Alberta T2P 3N9
Telephone: (403) 261-9674
Fax: (403) 261-8670
Website: www.citadelfunds.com

Investment Manager
Bloom Investment Counsel, Inc.
Suite 1710, 150 York Street
Toronto, Ontario M5H 3S5

Trustee
Computershare Trust
Company of Canada
6th Floor, 530 8th Avenue S.W.
Calgary, Alberta T2P 3S8

Stock Exchange Listing
Toronto Stock Exchange
Trust units: CSR.un


Contact Information

  • Citadel Stable S-1 Income Fund
    Joe MacDonald
    Executive Vice President, Sales and Marketing
    1-877-261-9674
    Website: www.citadelfunds.com