Back in 2000, when the stock markets were in the final throes of their frenzy over technology stocks, Robert Toole was putting together a team and founding a firm with a focus on energy, Creststreet Capital Corp. At the time, market interest in resources-related stocks was stone cold.

“We could see that energy was going to become an increasingly scarce commodity as global demand increased, and that the days of cheap energy were over,” says Toole, founder, managing director and chief investment strategist of Toronto-based Creststreet. “We saw energy as a favourable investment sector over a long time frame.”

Creststreet has benefited from the collapse of the tech boom and the shift in the market’s attention to overlooked and undervalued resources commodities, energy in particular. Since inception, Creststreet has raised some $640 million, with about two-thirds of that invested in oil and gas opportunities, and the remaining third invested in renewable energy (primarily wind-power projects). Creststreet has issued nine flow-through limited partnerships, with an average after-tax total return of 158% for investors in the highest tax bracket.

“It’s challenging to structure a high-quality, flow-through share investment portfolio, and you need expertise in analysing the properties and investment teams, and [in] developing relationships with companies and investment dealers,” says Toole, who previously headed the resources group of a Canadian merchant bank and has 18 years’ experience in the resources industry, including a stint as chief financial officer of Borneo Gold Corp.

The 2006 Creststreet flow-through partnership was launched in January and was capped at $40 million, even though there was at least $100 million of investor demand, says Toole, who is also president of subsidiary Creststreet Asset Management Ltd.

“There is strong demand in Canada for high-quality tax-sheltered products, but the ability to structure them is constrained by the supply of projects,” he says. “If you want to maintain performance, you have to restrict the size of the offering. Smaller fund size has resulted in superior performance.”

Although some competitors have responded to the tight supply of deals by diversifying into flow-through deals in the mining sector, Creststreet has been creating opportunities in wind power, with managing director Eric McFadden key to developing this area.

In 2003, Creststreet launched Canada’s first wind-power flow-through fund, Creststreet Power & Income Fund LP, a $42.5-million offering that gave investors an 83% tax deduction — thanks to the Canadian renewable and conservation expense, a flow-through deduction introduced in 2002 that is similar to the Canadian exploration expense available to investors in traditional oil and gas flow-through shares. The proceeds were used to build wind farms in Nova Scotia and Quebec.

In July 2005, there was a $57.4-million treasury issue to pay down the construction loan. The units are listed on the Toronto Stock Exchange and have began monthly income distributions.

A separate firm, Creststreet Windpower Development LP, raised $12 million in 2004 to develop seven more wind-generated energy projects across Canada. As these projects mature, they will be funded through their own limited-partnership financings.

For example, Creststreet Kettles HiIl Windpower LP is in the construction phase of an Alberta wind-power project to be completed this fall. The partnership raised $40 million last summer to finance the phase of construction eligible for CRCE deductions, including purchase and installation of five test wind turbines.

When all the wind-power projects reach operating stage, Toole’s plan is that they will be purchased by the publicly listed Creststreet Power & Income Fund and folded into its portfolio of revenue-generating projects. Early-stage investors will receive units in Creststreet Power & Income Fund, which offers ongoing distribution income, as well as the liquidity advantages of a publicly listed income trust.

“We have investments in wind projects across Canada that are in the pre-construction phase but capable of advancing to construction in two or three years,” he says.

Hannah Reid, an investment advisor with National Bank Financial Ltd. in Ottawa, says Creststreet’s products are useful for investors looking to invest in alternative energy. The fact that the wind-power flow-through shares convert into an income trust trading on the TSX gives clients a choice of liquidity or ongoing income after reaping the tax advantages of flow-through shares.

Toole says the major challenge is obtaining environmental permits for development and power-purchase agreements from local utilities. Wind-power projects must be close to a connection to the power grid, as it can cost $1 million per kilometre to build the infrastructure to connect power from a wind farm. Toole says competition has intensified now that wind power is an accepted power source.

@page_break@Creststreet manages Creststreet Mutual Funds Ltd., a multi-class family of funds including Creststreet Resource Fund, into which the limited partnerships are rolled to provide liquidity. As of May 31, that fund boasted a 28% three-year average annual compound return.

In 2004, Creststreet introduced Creststreet Managed Income Fund and Creststreet Managed Equity Index Fund to allow investors to transfer into non-energy assets that offer portfolio diversification and meet income needs on a tax-deferred basis.

As of May 31, Creststreet Managed Income Fund had a one-year gain of 19.2%; Managed Equity Index Fund was up 13.63%.

Creststreet Energy Hedge Fund LP, launched in May 2005, is sold by offering memorandum to high net-worth investors; it employs short and long strategies.

Earlier this year, Creststreet RSP Energy Hedge Fund was launched. It is structured as a trust, vs a limited partnership, to be RRSP-eligible.

“Over the long-term, energy is a good place to be, but the commodity cycle comes and goes,” says Toole. “We employ a short/long strategy to generate returns no matter where we are in the cycle.” IE