Thursday, September 27, 2007

Primewest Energy Trust -Bought for Nothing Down & No Income Taxes

The TAQA deal structure uses two corporations, both private, one to lend the funds and the other to own the equity. This permits the entire amount of cash flow to be pulled out of Primewest and directed thru the Canadian corporation to a non-resident entity to eliminate Canadian income tax. Flaherty has just signed an agreement with the US permitting interest payments to leave Canada without withholding taxes. His intention is to extend this agreement with other major tax jurisdictions. The withholding tax removal by Flaherty validates the use of debt by non-residents to purchase Canadian resident businesses.

Primewest - The First of the Majors to Go

The first of the large cap Canadian energy trusts is in process of being acquired by TAQA North Ltd. a subsidiary of Abu Dhabi National Energy Company for $C26.75 per unit. The update reviews the pricing of the deal and provides valuation parameters for Bonterra, Pengrowth, Canetic, Trilogy, Fairborne, Arc, PennWest, Enerplus and Crescent Point.

Our valuation approach has been to establish a lower end value based on the price a purchaser would pay for the proved plus probable reserves. This price is $2.50 per mcf for natural gas and $18 per bbl for conventional oil and $1 for undeveloped oil sands reserves. The Primewest transaction provides an arm’s length actual transaction for the large cap energy trusts to compare and validate our valuations. As an additional benchmark I consider the cash flow that was being used to pay distributions, which is now available to the purchaser to fund the before tax interest cost on borrowings should they decide finance the transaction. The cash flow from distributions is adjusted, if necessary for the potential need for distribution reductions. This number is supported by our revenue and cost per boe analysis which has been the backbone of our valuation methods for 3 years.

The estimated replacement cost values have been listed on a table accessible under Energy Trusts on the front page of These values have been available since Q4-06 following the release of the income trust taxation legislation.

On a replacement cost approach we valued PWI.UN at $23-$24 including the reserves acquired following the merger with Shiningbank. Just prior to the acquisition announcement units were trading at $20 which makes the offer appear to be at a large premium. Alberta oil and natural gas producer values declined last week following the announcement by the provincial government of a report recommending an substantial increase to crown royalty rates. As are result of the decline from the pending royalty review the offer from TAQA appears somewhat generous and the timing is very interesting.

TAQA is a foreign purchaser with government ownership that could run afoul of Canadian regulators. Primewest has been very active in the Canadian trust lobby with senior executive George Kesteven as the President of the Canadian Association of Income Funds. It was just a matter of time until one of the major Canadian energy trusts would enter into a sale transaction to escape the impact of the trust legislation. It is interesting that Primewest who have been an aggressive advocate against the trust tax are the first to go, giving the appearance they are testing the waters and just before a possible federal election.

On a mcf basis TAQA paid $2.15 or $13.30 per boe. Primewest reserves are 70% natural gas and by this measure they paid less than the $2.50 going rate. The distribution which was being paid to unit holders totals $435M annually and is at risk of a 30% reduction. Even at the reduced amount the distribution would fully pay the interest on a 6%, $5B loan. TAQA is buying Primewest for nothing down should they choose to borrow the funds or they can use the distributions for reinvestment.

By our estimates TAQA paid a 13% premium to our replacement cost value and on a free cash flow basis the deal was priced at a 6% cap rate. As a result of this transaction we are including a free cash flow based value using a 6% loan rate to determine how much debt the purchase price can support. This establishes an upper end value. The TAQA deal structure uses two corporations, both private, one to lend the funds and the other to own the equity. This permits the entire amount of cash flow to be pulled out of Primewest and directed thru the Canadian corporation to a non-resident entity to eliminate Canadian income tax. Flaherty has just signed an agreement with the US permitting interest payments to leave Canada without withholding taxes. His intention is to extend this agreement with other major tax jurisdictions. The withholding tax removal by Flaherty validates the use of debt by non-residents to purchase Canadian resident businesses.

Another interesting aspect of the deal is that Primewest is weighted to natural gas where prices have been weakest in comparison to oil. The purchasers have elected to buy the commodity with the weak price trend in expectation of better days ahead, if not this year then within 3-5 years. TAQA has deep enough pockets with $800B in assets to be patient with the $5B purchase of Primewest. There is also the uncertainty about the Alberta government’s review of crown royalties that could increase royalties by up to 50%. This is another risk that TAQA is prepared to accept. Despite reports in the Globe that TAQA is flush with cash and is overpaying for Primewest, the numbers do not support this conclusion. TAQA appears to know exactly what they are doing and have made a very good purchase that includes bargain priced reserves and an excellent management team.

We are in the process of updating the table on energy trust values which reconfirms the lower end value ranges and adds an estimated upper end cash flow based value. The buzz from the Primewest deal will likely fade setting the stage for another possible purchase. If unit prices approach the lower end replacement cost values accumulation is recommended.

Pennwest has agreed to buy Vault Energy Trust paying $14 per boe, $2.33 per mcf including land. Vault is 68% weighted to natural gas. The metrics on this transaction are attractive to Pennwest and supportive of our $2.50 per mcf natural gas value benchmark.

We will be updating the replacement cost and cash flow based values for all energy trusts and advising as updated.

Recommended Prices by Trust

As comparables, replacement cost values for PWT, ERF and CPG are $30, $48 and $17-18 respectively. Our next most favourably priced recommendations are Pennwest Energy (PWT.UN)at $30.25 or lower, Enerplus (ERF.UN) at $48 or lower, Crescent Point Energy Trust $20 or lower.

This also brings into play Peyto Energy (PEY.UN) with a replacement cost of $20 and current price of approx. $18.50

Bonterra Energy Trust (BNE.UN)

Replacement cost value is $25 per unit, and on a cash flow approach using a 6% cap rate they are valued at $30 per unit. Crown royalty costs jumped in Q2 due to retroactive adjustment, however they still have one of the lowest crown royalty rates in the energy trust sector. Recommended at $28 or lower.

Pengrowth Energy Trust (PGF.UN)

At $18 per boe, total enterprise value is $4B net of debt , approx. $17 per unit at replacement cost. On a cash flow distributions should be reduced by 75% which still allows for approx. $250-$300M of free cash flow providing firm support to the $17 per unit replacement cost. Recommended at $18 or less.

Canetic Energy Trust (CNE.UN)

Canetic made a several expensive acquisitions to quickly build reserves during 2004-2006 when reserves were expensive. This has increased their average FD&A to $25 per boe among the most expensive of the energy trusts. On a replacement cost Canetic is worth $10-$11. Free cash flow is thin and we expect up to 80% cut in distributions which is supporting the $15 value. Appreciation above the $15 level is expected to be limited.

Trilogy Energy Trust (TET.UN)

On a replacement cost Trilogy is worth $7.50 per unit and free cash flow provides a value as high as $12 per unit. There appears to be considerable upside appreciation based on the $8 price as of Sept-25-07

Fairborne Energy Trust (FEL.UN)

On a replacement cost Fairborne is worth $6 per unit and free cash flow provides a value of $4 per unit. FEL is expected to cut distributions by up to 80%.

Arc Energy Trust (AET.UN)

Replacement value $20 per unit and cash flow is $26. Cash flow value includes a reduction of distributions by 30%.

PennWest Energy Trust

On a replacement cost for conventional reserves PennWest is worth an estimated $30 plus up to $6 additional for the 1B bbls of potentially recoverable oil sands reserves. On a cash flow basis after reducing distributions by 30% their value is estimated at $40 per unit. The recent acquisition of Vault Energy added 27M boe of reserves at a favourable cost of $14 per boe included land leases and increases total reserves by 5%.

A complete list of energy trust with estimate replacement cost values is accessible from the front page of under Energy Trusts.


Canadian Energy Too Cheap to Ignore -

Jim Flaherty's Folly
- Diane Francis

The Abu Dhabi Put - The Motley Fool

Monday, September 24, 2007

Ralph Goodale rebuts Edmonton Journal editorial

The Edmonton Journal published an editorial earlier this month which said among other things:

The fact is that Conservative Finance Minister Jim Flaherty was right to level the tax field by changing the rules on income trusts, whatever you might think of his violating a Harper promise not to.


Business is better served by tax policy that creates a level playing field, is broadly applied and is predictable. This, Flaherty delivered. The opposition should look for another way of causing the Harper Conservatives grief.
Source: Edmonton Journal

The writer's opinion is based on what? The Harper Conservatives have released 18 pages of blacked out documents to back up their claims of tax leakage.

Here is real world research that doesn't support the Conservatives arguments.

Independent economists discredit govt tax leakage claims

The Inconvenient Truth About Trusts - Gordon Tait

Ralph Goodale thinks the Harper Conservatives have it wrong on Income Trusts and responds:


Dear editor:

Some commentators question why the Liberal Official Opposition is proposing an alternative to the policy on Income Trusts imposed by Stephen Harper’s Conservatives.

It wasn’t pretty, those commentators say, but let sleeping dogs lie.

But there are two strong reasons why this is not good advice.

First, the trouble surrounding this file resulted from deliberate Conservative deceitfulness which should not be rewarded with benign indifference.

In January of 2006, to buy votes during an election campaign, Mr. Harper solemnly promised never to impose a tax of any kind on Income Trusts. As the inevitable consequence of such a promise, there was a flurry of new investment activity.

Thousands of ordinary Canadians put millions of dollars into Income Trusts to provide responsibly for their retirements. Their only mistake was taking the Conservatives at their word.

As Stephen Harper likes to tell anyone who will listen, he is an economist – and always the smartest guy in any room – so he knew full well what the consequences of his profligate promise would be. The investment frenzy and the ensuing untenable situation did not take him by surprise. He set people up and then slapped them down. It was a cold political calculation.

His axe fell on Hallowe’en night, 2006, and billions of dollars in hard-earned savings evaporated.

Secondly, the massive new tax the Conservatives imposed was the policy equivalent of a badly designed nuclear attack. It was excessive and clumsy, not recommended by any experts in the field.

By contrast, our Liberal alternative is endorsed by a wide range of tax policy professionals.

We would lower the tax rate on trust entities from Mr. Harper’s punitive 31.5%, down to 10%. That tax would be refundable to all trust unitholders who are Canadian residents. And the remaining proceeds would be fairly shared with the provinces.

This Liberal plan would be quite sufficient to stop any “tax leakage” from federal or provincial Treasuries, which the Conservatives claim was their prime policy objective.

But our more measured approach is smarter because it would also foster a recovery in trust values up to two-thirds of what was lost because of Conservative opportunism, manipulation and overkill.

And we would minimize the sell-off of otherwise doomed Canadian trusts to foreign buyers which, as a result of Mr. Harper’s policy, is only worsening the hollowing-out of Canadian enterprise and shifting tax revenues to the
United States.

These are worthy policy objectives.

Yours sincerely,

Ralph Goodale, M.P. (Wascana)

Goodale is a former Liberal Minister of Finance (2003 – 2006). He is currently House Leader for the Official Opposition in the House of Commons.

Saturday, September 22, 2007

Green candidate says Finance Minister Jim Flaherty got it wrong on Income Trusts

Recently nominated Whitby-Oshawa Green Party candidate, Doug Anderson who will be running aginst finance minister Jim Flaherty, says Flaherty was wrong to impose a 31.5% tax on income trusts in his mini-budget last Fall.

"There was no public consultation leading up to that announcement," says Anderson, "and as the fallout emerges it is very evident that there were assumptions made which were clearly wrong."

"There have been two hugely damaging effects from this tax," says Anderson.

"Firstly, a large percentage of the money that had been invested in income trusts was retirement savings, so this tax has particurlay targeted seniors. The tax is especially heinous because the Conservatives had said only months earlier that they would not tax trusts," said Anderson.

"Secondly, the tax has reduced the equity value of these trusts which in turn has reduced their access to capital and has made them takeover targets, especially by foreigners."

Anderson cited a quote from a US investor newsletter that he received yesterday:

  • I think there's going to be a great Canadian Energy Trust Takeover Wave, and I want you to be on it. I know I'm on it, and I know our subscribers are on it. What about you?
  • I can say with the utmost confidence that we're going to see a number of multi-billion dollar takeouts. I'm not just talking about the little ones that have already happened -- I'm talking about billion-dollar ones.
  • Canada's "Conservative" party simply does not understand that there's a global economy out there with global capital markets.
  • Canada's Minister of Finance Jim Flaherty seems to think his job is to increase the cost of capital, as opposed to reducing it.

The principal assumption leading to the trust tax was that there was "tax leakage" but Anderson cited an extensive analysis from BMO Capital Markets which indicated that the pre-existing trust status where distributions were taxed as income in the hands of the unit holders would in fact yield considerably more tax revenue for the government than taxing the trusts themselves.

The opposition to the "Tax Fairness Plan", as Flaherty dubbed it, has been building steadily and a new advocacy group, "Canadian Association of Income Trust Investors" (CAITI) has been particularly vocal. It has placed large ads in numerous newspapers including, locally, Oshawa-Whitby This Week.

The CEO of CAITI is Brent Fullard and he is one of several people that Anderson has consulted on the issue.

"Canadians can be thankful that Brent has taken this issue out of the corporate boardrooms and made it into a public issue." said Anderson.

- 30 -

for further information contact:

Doug Anderson
Federal Councillor
Green Party of Canada
candidate, Whitby-Oshawa riding

John McCallum, the Liberal Party Finance critic, is visiting the Lower Mainland.

John McCallum, the Liberal Party Finance critic, is visiting the Lower Mainland. Details of a public event at which members can hear Mr McCallum speak on economic issues, and in particular the income trust issue, have been set.

Mr McCallum will be speaking at a Town Hall Meeting in Vancouver on Wednesday September 26th, 6pm (til 7:45pm) at St. Andrew's Wesley United Church, 1012 Nelson St., hosted by local Liberal MPs and CRIIA.

This will be an opportunity to discuss the income trust issue, and hear more about what can be done, and encourage him and the Liberal party to keep pursuing this issue.

Tuesday, September 18, 2007

Seymour Schulich speaks on Income Trusts

The Conservatives have committed the biggest blunder I've seen in 42 years of business involvement - Seymour Schulich, September 11, 2007

Who is Seymour Schulich?

Seymour Schulich is a Canadian, self-made billionaire whose career has spanned financial markets to the mining and oil industries. He is among Canada’s greatest Philanthropists having donated in excess of $200 million to universities, and endowing libraries, medical health centres, lecture and music halls. Over 650 scholarships are awarded annually to students in Schulich schools. He holds degrees in science (Chemistry), Business (MBA) and is a Chartered Financial Analyst (CFA). Seymour Schulich was awarded Canada’s highest civilian honour – the Order of Canada. Source: Chapters Indigo

Related: The lambs lie down on Bay Street

Garth Turner returns to Ontario and invites you to a Town Hall Meeting in Owen Sound

Garth Turner to host Owen Sound Town Hall meeting

MP wants voter input on federal issues – Income trusts, economy, real estate, Afghanistan, the environment

Voters, taxpayers and constituents in the Owen Sound region will get a rare chance on Thursday September27th to send a message directly to Parliament when outspoken MP Garth Turner hosts a public Town Hall meeting locally. While residents are free to raise any topic they wish, the Conservative government’s decisions to tax income trusts, and raise personal income tax – breaking specific promises by Prime Minister Stephen Harper – are likely to spark a hot debate.

The income trust move is believed to have cost more than two million investors, most of them seniors, more than $20 billion in lost retirement savings. That is the greatest private loss ever to result directly from one government action, and came as a shock to voters after Mr. Harper promised repeatedly in the last election campaign that he would never impose such a tax.

Turner says many homeowners and investors are also concerned abut the real estate meltdown in the United States, and the potential for that to affect people here. He will address those concerns in a presentation, “What every Homeowner and Investors must know.”

MP Turner, ousted by Stephen Harper last fall for his opposition to several Conservative positions, has been a champion of jilted investors, and will bring an action plan to the meeting for those anxious to know what their alternatives are. Turner joined the federal Liberal caucus in February, after sitting as an Independent member of Parliament for four months, for the west GTA riding of Halton.

“I have heard from many people in Ottawa, and across the country, very unhappy that their Conservative MPs, like Bruce-Grey-Owen Sound’s Larry Miller, have refused to call such a meeting,” Turner says. “They seem only too happy to hide in Ottawa these days where Mr. Harper has rewarded severely muzzled his caucus and taken actions which seriously call into question his stated goal of having an open and accountable government.”

Turner says Mr. Flaherty and Mr. Harper need to explain to Ottawa residents not only why income trusts were taxed, but also why so many Canadian companies have been purchased as a result recently by foreign firms. Garth Turner, a noted personal finance author before going to Parliament, says he is also concerned by the government’s move to raise income tax and bring in an inflationary budget with record spending which has increased loan and mortgage rates later this year. He said that is endangering the economy, as the United States falls into recession.

Attendance at the Owen Sound meeting is free, and all are welcome to attend.


Owen Sound, Ontario

Thursday, September 27th, 2007 at 7:00 pm
Owen Sound Legion – 1450 2nd Avenue West

A social ‘meet-&-greet’ event will precede the meeting, in the same location.

For more information contact:
Esther Shaye
(905) 693-0166

Saturday, September 15, 2007

Perpetuating the Big Lie

The Big Lie: If you repeat it frequently enough people will sooner or later believe it. Source: Wikipedia

Dan Miles is the Director of Communications in the office of the Federal Minister of Finance, Jim Flaherty. So it's no surprise that Dan Miles would attempt to spin a tale to make Jim Flaherty look good. Today's Regina Leader-Post quotes Mr. Miles:

"When he [Garth Turner] says the markets lost $25 billion in value following the income trust announcement on Oct. 31, 2006, he fails to mention the market subsequently recovered much of that value."

The problem is the market-based facts don't match the Department of Finance fantasy. Since Jim Flaherty announced a surprise 31.5% tax on October 31/06, Income Trusts continue to lag the broader market. Where is the 'value recovery' Dan Miles is talking about?

The following two charts tell essentially the same story:
  • The TSX index is up 12.1% since October 31/06.
  • The TSX Income Trust Index is down 10.5%, lagging the TSX by 22.6%.
  • REITS have fared somewhat better, only lagging the TSX by 13.0%. Notice that after the March Federal budget, REITS began their Flaherty-induced descent as well.
  • The most damage is in the TSX Energy Trust sector,down 16.3% and lagging the TSX by 28.4% since October 31st last year. This at a time when oil prices are nearing $80 US a barrel.

At best Dan Miles doesn't understand the issue or hopes nobody will verify his story. At worst he is a yet another practitioner of 'Big Lie' tactics.

You know the 'Big Lie' strategy I'm talking about, perpetuated by a failed politician from another era:
  • Never allow the public to cool off;
  • Never admit a fault or wrong;
  • Never concede that there may be some good in your enemy;
  • Never leave room for alternatives;
  • Never accept blame;
  • Concentrate on one enemy at a time and blame him for everything that goes wrong;
  • People will believe a big lie sooner than a little one; and
  • If you repeat it frequently enough people will sooner or later believe it. Source: Wikipedia
One thing is certain, and that is an informed voter can figure out what a DoF Director of Communication cannot. And that makes it easy to conclude who has a credibility deficit and who does not.


PerfChart ($TSX,$RTRE,$RTEN,$RTCM) Interactive Performance Comparison Chart

Critic's flipflop on trusts
- Leader Post