Income trusts on DTNicholson's Wednesday-Night.com History

Business Trusts - Skeletons out of the Closet - Revisiting the Ghosts from Halloween Past

Thursday 01 November 2007 It has been one year since Finance Minister Jim Flaherty wreaked havoc on the income trust market by announcing a proposal to tax income trusts come 2011.

Saturday 27 October 2007 Some treats a year after Halloween bombshell
Nearly a year after federal Finance Minister Jim Flaherty's Halloween income-trust massacre, investors are still haunted by the Conservative government's promise-breaking move to tax the popular investment vehicles

Wednesday 26 September 2007 S&P/TSX Capped Energy Trust (RTEN : 171.37), Net Change: 2.41, % Change: 1.43% Kiss your Canadian Oil Sands good bye. The Abu Dhabi National Energy Company PJSC's (TAQA) $5 billion acquisition of PrimeWest Energy Trust (PWI.UN) is its third transaction in Canada in as little as five months. TAQA has so far spent $7.5 billion - $5 billion for PrimeWest, $540 million for Pioneer Canada in August and $2 billion in May for Pogo Producing’s (PPP) Northrock Resources unit. Management indicated in their conference call on Monday that they intend to have $20 billion invested in Canadian assets by 2012. While we believe the company will have to back away from the table to digestwhat it has already acquired in the short term, TAQA could be back as an acquirer of other royalty trusts in the next 12 months. Canaccord Adams Royalty Trusts and Income Funds Analyst Bruce McDonald says the PrimeWest acquisition value is more of a one-off bid and does not reflect industry pricing, but it does support the argument that there are potential buyers for royalty trusts and helps support a floor price to valuations. The Globe & Mail said that the reality is TAQA has a lower cost of capital, andlower return expectations, than conventional rivals. As long as that situation persists, TAQA is going to be a force in the Canadian oil & gas patch. Could Canadian Oil Sands Trust (COS.UN) be next?

Monday Sep 24, 2007 wed1334
At the top of today’s business news is the announcement that Abu Dhabi National Energy Co., the state-controlled power generator and oil producer, agreed to buy Canada’s PrimeWest Energy Trust for about $4 billion in the biggest-ever North American takeover by a United Arab Emirates company. We cannot help but connect the dotted lines to the decision of the Conservative government to go ahead with Bill C-52 without the amendments requested by the Canadian Association of Income Funds (CAIF).
The ramifications of this story will certainly figure in Wednesday’s debate whereupon Margaret will change hats.

Tuesday 11 September 2007 INCOME TRUSTS
CHIP REIT (HOT.UN) Pro Rated Distribution: In accordance with purchase agreement to acquire all the outstanding units and debentures of CHIP REIT by the BC Public Workers Pension, the Trust is paying a prorated distribution of $0.05387 per unit (record holder date of September 20, payment on September 25). The purchase agreement is to purchase the units of the Trust for $19.10 cash and the 6% debentures for $1,625.53/debenture in cash (plus accrued and unpaid interest).

Thursday 05 July 2007 rci TORONTO: IPOs DOWN BECAUSE OF INCOME TRUST CHANGE
The PricewaterhouseCoopers investment firm reports that numbers and value of Initial Public Offerings plummeted in the first half of the year, chiefly because of the Canadian government's changes in how income trusts are taxed. IPOs raised $855 million in new equity in the first half, down 79 per cent from the same period a year before. Thirty-seven IPOs were offered in Toronto, compared with 57 a year earlier. The investment firm says "...the momentum of income trusts [is] gone." The markets for IPOs sagged in the last quarter of 2006 after Ottawa announced that new income trusts would be taxed at the same rate as corporations.

Thursday 26 April 2007 Dion wrong on trusts Tax changes never win applause from people who lose tax advantages, even when such advantages are considered to be patently unfair.

Tuesday 13 March 2007 NBF YELLOW PAGES INCOME FUND (YLO.UN) $13.48 – REVIEW OF ALIANT DIRECTORY SERVICES PURCHASE AFTER COMING OFF RESTRICTION. RATING: OUTPERFORM. TARGET: $14.50. RISK RATING: LOW. INDUSTRY RATING: MARKET WEIGHT.
YPG announced on Feb. 19 that it was acquiring 87.14% of Aliant Directory Services (AliantDS) for $330 million from Bell Aliant Regional Communications Income Fund – YPG already owns 12.86% of AliantDS and has served as its managing partner. Synergies are expected to be limited to an estimated $1.8 million associated with YPG’s supply-chain management efficiencies. The full takeout of AliantDS adds the Maritimes to YPG’s virtually national monopolist footprint in Canada with the only geographic hole represented by Saskatchewan where SaskTel doesn’t appear to be a seller in the near term. Our target is based on our DCF and EV/EBITDA multiples of 12x 2007E and 11.5x our 2008E. On average, the peer group trades at EV/EBITDA multiples of 10.4x 2007E and 9.9x 2008E.

FAIRBORNE ENERGY TRUST (FEL.un) $9.02 – REUNITING WITH AN OLD FRIEND. RATING: SECTOR PERFORM. TARGET: $10.00. RISK RATING: ABOVE AVERAGE. INDUSTRY RATING: UNDERWEIGHT.
Fairborne announced that it would acquire Fairquest Energy, for $197 mln in trust units and assumed debt. Fairquest was originally spun out from Fairborne Energy in June 2005 with the creation of Fairborne Energy Trust. With the deal, Fairborne moves to a lower distribution model (45-50%) with a $0.09/unit distribution (was $0.13/unit) beginning with the March payment (we had previously assumed a cut to $0.10/unit in Q2). We are largely neutral on the deal – reserves (+2.4%) and NAV (+7.6%) accretion is offset by production (-3.1%) and cash flow (-1.4%) dilution. We believe the acquisition puts Fairborne in a better position to convert back to the corporate structure in four years if trusts are forced to pay tax. We are neutral on the deal from a financial perspective, and our estimates remain largely unchanged, we maintain a $10.00 target and Sector Perform.

OIL & GAS INCOME & ROYALTY TRUSTS: – P/CF AND P/NAV CURRENT MUTLIPLES VS. HISTORICAL TRENDS
As a follow-up to our comment yesterday, comparing P/CF and P/NAV multiples between the Oil & Gas Trust and E&P sectors, Part II of our valuation series today looks at current P/CF and P/NAV valuations versus historical trends. We extend this analysis to an individual look at each trust. The Oil & Gas Trust sector is currently trading at 1.2x P/NAV (after-tax), in line with the historical lows in late 2002 and well below the 1.5x historical average. Meanwhile, the sector is currently trading at 5.7x P/CF, again below the 6.1x historical average since 2000 – although multiples have rebounded following the initial panic reaction post the Oct. 31, 2006 announcement of the new tax on income trusts. Valuation multiples for our top picks, Focus (FET.un), Progress (PGX.un), Vermilion (VET.un) and Canadian Oil Sands (COS.un) are below historical averages – particularly on a P/NAV basis. In most cases, these trusts are trading at group average multiples, which is unwarranted given the premium nature of these trusts (among the best growth/lowest declines and highest rates of return in the sector). Further, the discounts on our higher risk/reward picks, Canetic (CNE.un) and Shiningbank (SHN.un) are evident and in our view, too punitive, given the improving go-forward prospects for both trusts.

Friday 02 February 2007

Security detail minds Flaherty after income trust threats
Finance Minister Jim Flaherty has been issued a protective detail after receiving death threats over his government's decision to tax income trusts.

globe Extra security measures protect Flaherty
....It prompted a selloff that undercut the trust sector's market value by more than $20-billion, sideswiping investors' retirement savings.

Budget won't include family income-splitting: sources
The Conservative government has ruled out income-splitting for families in its upcoming budget and will focus instead on tax cuts for individuals and businesses, The Canadian Press has learned.

Wednesday 31 January 2007

No change on income-trust decision, says finance minister
Finance Minister Jim Flaherty defended on Tuesday his government's decision to tax income trusts by arguing Canadian taxpayers would have had to start covering the loss of more than $1 billion a year in government tax revenues to the popular security as early as this spring.Tuesday 30 January 2007 RBC News
Flaherty more determined that trusts cause tax leakages. Federal Finance Minister Jim Flaherty, ahead of the parliamentary hearing Tuesday, suggested that trusts may be costing Canada as much as $1.3 billion annually in lost tax revenue, far more than the “conservative estimate” he provided last fall. “The more I look at this — and I spent a good part of the weekend reviewing it again — I am more convinced than ever that this was the right decision,” he said in an interview as Parliament resumed sitting Monday following a winter break.

In today's G&M’s, article on Flaherty and Trusts...apparently they will be providing their analysis, which the article appears to indicate that the Feds are NOT taking into consideration taxes that will eventually be paid by tax-deferred investors. An excerpt: Mr. Flaherty will release a special report on Tuesday detailing how Ottawa calculated tax leakage, the overriding premise behind the new tax. This is a long-standing request of income-trust lobbyists, who argue Finance should be required to subject its calculations to public review. He said he believes his testimony will help “reconciliation” on the matter. “In the longer run I really don't doubt that people in Canada will accept the need for the decision having been taken when it was.” Mr. Flaherty said he expects criticism of Finance's estimates, including the charge that Ottawa is not counting tax revenue it will receive on RRSP withdrawals “15 or 20 years” later. “My answer to that is going to be quite simply that my job is to deal with the obligations of the government today, to pay the benefits that we pay and to transfer the money to the provinces that we transfer now, not 20 years from now,” he said.

Thursday 18 January 2007 TORONTO: WHITE ROCK PRICE HIGHEST IN MONTHS
Whiterock Real Estate Investment Trust units touched their highest price in nine months on Wednesday. The rise followed news that the owner of office, industrial and retail properties announced it is looking for a buyer or merger partner. Whiterock units traded as high as $15.20 in early trading on the Toronto Stock Exchange. Later they gave up some of their gains and were at $14.60, up 51 cents or 3.6 per cent at midafternoon. The trust's units have rarely risen above $14.50 since they began trading in July 2005, except for a single day in April 2006 when they hit $15.88 in intraday trading. Whiterock's decision to put itself on the block comes at a time when property prices have continued to rise and demand for North American real-estate companies is strong.

Monday 15 January 2007 OIL & GAS INCOME & ROYALTY TRUSTS: REVIEWING DISTRIBUTION SAFETY AGAIN! Last Thursday (Jan. 11, 2006), in perhaps a surprise move, Focus cut its distribution and also moved toward the lower end of its capex guidance citing weaker commodity markets and a desire to preserve the longer-term sustainability of its model – perhaps a sign of things to come in the sector over the next couple months if commodity weakness continues and particularly as many 2007 capex budgets are premised on much higher prices than current prices suggest. What has us particularly concerned is unabated U.S. gas drilling rates, which along with U.S. gas production has showed no signs of slowing. Combined with lower demand from the warmer winter, very little dent has been made in U.S. storage levels through the winter. Which trusts could be next? Under our current 2007 commodity outlook (US$55/bbl WTI and Cdn$7.45/mcf AECO), we forecast monthly distribution cuts from Canetic (0.23/unit to $0.20/unit in Q2 2007), Fairborne ($0.13/unit to $0.10/unit in Q2 2007), Pengrowth ($0.25/unit to $0.22/unit in Q3 2007) and Shiningbank ($0.23/unit to $0.20/unit in Q2 2007). However, further commodity weakness below our price deck would also put distribution levels for Advantage, Trilogy and Vault under pressure, largely owing to higher debt levels. Overall, we are maintaining our small cap bias. They have outperformed once normal growth terms of the tax on trusts were released in mid-December and we expect them to continue to catch up as they were the most oversold post the Oct. 31, 2006 tax announcement. For balanced or oil-weighted exposure, we suggest Freehold (FRU.un) and NAL (NAE.un). For natural gas exposure, our top picks are Focus (FET.un) and Progress (PGX.un). Meanwhile, higher risk/reward picks include Canetic (CNE.un), Shiningbank (SHN.un) and Trilogy (TET.un) – potential distribution cuts on these three names appear to be priced in.

2006

The prime minister's job is to uphold what Stephen Harper has called "the long-term interests of the country," even at political cost in the short term.

Harper's flip-flop on income trusts is a prime example. As opposition leader a year ago, he hounded the Liberal government practically on a daily basis for halting tax rulings on companies converting to high-yield income trusts, demanding Paul Martin assure investors that trusts "are here to stay."

Relentless pressure from the Conservatives, along with an investor revolt on both Bay St. and Main St., forced the Liberals to relent, days before their defeat in the House. The leak of the botched announcement led to the holiday headline, "RCMP criminal probe" that sealed the Liberals' fate in the campaign.

In his campaign platform, Harper specifically pledged to "preserve income trusts by not imposing any new taxes on them."

Seldom has a campaign promise been so spectacularly broken as this one was after the close of markets on Tuesday, when Finance Minister Jim Flaherty announced a tax on distributions at the front end to recoup lost corporate tax revenues due to lower retained earnings.

On Wednesday, the Toronto Stock Exchange had its worst day in two years. The income- trust index lost $23 billion in market value in a single day. Bell Canada Enterprises, which had recently announced its intention to convert to a trust, lost $3.5 billion in market value. (The markets, however, bounced back a bit yesterday.)

Bell's recent announcement it was converting to a trust structure, following the lead of Telus, was clearly the tipping point. Both Flaherty and Harper said at the time they were following the situation closely. No one then realized just how closely.

In the long-term interest of the country, Harper did the right thing, levelling the playing field between corporations and trusts, and ensuring a higher proportion of earnings is reinvested, particularly in R&D.

In the short-term political interest of his minority government, the Harper brand has taken a major hit on integrity. His entire positioning was that he was new and different, that he would do what he said he would.

Well, he's not new and different anymore. He's just another politician, breaking a promise.

And he broke it with two core Conservative constituencies, senior citizens and the financial community. Retirees, who count on monthly distributions to supplement their pensions, took a huge hit on the value of their investments. Some might have gone into income trusts on the specifics of Harper's broken promise.

As for the markets, there's only one thing they hate more than uncertainty, and that's the rules changing in the middle of the game. It would have been one thing if Flaherty had allowed Bell and Telus to go ahead by grandfathering them out of the new tax rules, as even the NDP was suggesting. It's quite another to tell them that although they played by the rules, the rules were changing retroactively.

This isn't really about tax treatment - Ottawa's revenue leakage was in the hundreds of millions of dollars in a fiscal framework flush with billions in surplus cash. It's about the country's two largest phone companies, in the R&D intensive telco sector, joining the rush to what was becoming, in Flaherty's alarmist turn of phrase, "an income-trust economy."

With a major oil company and a bank rumoured to be joining the trend to trust conversion, Harper and Flaherty evidently decided after the Bell announcement that the time had come for Ottawa to step in.

In process terms, the secrecy held, and no one in the markets saw it coming. It was a very professional job. In packaging terms, the Tories spun the announcement as making corporations pay their share of taxes rather than putting additional demands on the shoulders of working Canadians. For good measure, they threw in income splitting for seniors. In political terms, in the House, the Conservatives carried the day, with the NDP and Bloc Quebecois supporting the move. Only the Liberals, who can't claim the moral high ground on this, shouted about "black Wednesday" and a "day of infamy." And Flaherty, in his best Jimmy Cagney manner, blew them off.

But the larger political question is whether Harper has lost the trust of voters who took him at his word on income trusts.

www.lianmacdonald.ca

© The Gazette (Montreal) 2006

Thursday 02 November 2006 BCE and Telus battered by trust worries Stocks hammered by a double digit fall after government changes stance on income trust taxation
Thursday 02 November 2006 maisonneuve.org MATTERS OF TRUST
The National, CTV News, the Globe, the Star and the Post lead, while La Presse (not available online) and the Citizen go inside with the fallout from Finance Minister Jim Flaherty’s announcement that the federal government will begin taxing income trusts. According to a separate piece in the Star, Flaherty’s surprise announcement led to a $24.5-billion tumble in market value on the Toronto Stock Exchange yesterday, with the income trust sector as a whole losing $20 billion and trust candidates BCE Inc. and Telus Corp. losing a combined $4.5 billion in shareholder value. The fallout naturally made its way into the House of Commons as well, reports the National. Acting Liberal leader Bill Graham described the government’s decision as an “economic bloodbath,” while former finance minister John McCallum called on Prime Minister Stephen Harper to fire Flaherty. However, the Post notes that with the qualified support of the Bloc and the NDP, “the government’s initiative has enough votes to pass in the Commons.”

Harper pledged during last winter’s election campaign that a Conservative government wouldn’t touch income trusts, and the reasoning behind the Tory decision to break the much-vaunted promise is fodder for speculation in today’s news cycle. According to the Globe, Flaherty was convinced to abandon the party’s position after BCE chairman Michael Sabia told the finance minister he was planning to transform the telecommunications giant into a $27-billion income trust. The Globe suggests it was Sabia’s announcement, coupled with rumors that others in the energy sector were considering following suit, that prompted “the federal government to accelerate its crackdown.” The Star cites University of Toronto economist Jack Mintz’s estimate that the government is currently losing $1.1 billion annually in tax revenue due to income trusts. La Presse, meanwhile, suggests Harper’s government made the move in order to prevent the annual loss from growing to $5 billion over the next five years. The Citizen notes that both BCE and Telus have put their plans of morphing into income trusts on hold.

Thursday 02 November 2006
Income trust decision not a broken promise, Harper says
Prime Minister Stephen Harper denied breaking a major election pledge with his government's surprise decision to tax income trusts, saying the party promised only to protect the incomes of Canada's seniors, not the profits of major Canadian corporations and foreign investors.
Wednesday Nov 1, 2006 Income Trust new Tax
Federal government announces plan to curb growing income-trust trend
Indexes expected to plunge
Income trusts and Canadian stock indices are expected to be walloped today after federal finance minister Jim Flaherty last night said he would introduce a tax to stem the number of companies converting into the tax-dodging structure.

Canadian Finance Minister Jim Flaherty has announced tougher new rules governing corporate income trusts to check their growing popularity. Mr. Flaherty says the trend could shift billions of dollars of the national tax burden onto individuals and away from corporations. Under existing rules, corporations that convert themselves into income trusts pay less federal tax, instead "distributing" high returns to the former shareholders who pay the tax. There have been $70 billion of such conversions recently, including that of Telus Corp., the country's second-biggest telephone company. Under the minister's new rules, there will be a new tax on the "distributions." Existing trusts will have a four-year period to adjust to the modification, and corporate taxes would be cut to discourage conversions.
Taxing trusts
Finance Minister Jim Flaherty announced late Tuesday that the government will impose a tax on income trust distributions, a move expected to upset markets and halt conversion plans by two of Canadaâ€™s biggest corporations.
cbc Flaherty imposes new tax on income trusts $70 billion of new trust conversions have been announced so far this year — something he said is hurting the economy.

November 1, 2006
K TRUST by Ceri Au
The pay day is over for income trusts. Just when Canada’s largest telecommunications companies, BCE and Telus, announced they too were jumping on the income trust bandwagon, Finance Minister Jim Flaherty dropped a financial bombshell. Announcing a new tax on income-trust distributions Flaherty has set the new Bay Street modus operandiits head. Previously, corporations could escape corporate taxes by converting into a trust. In short, companies paid little or no corporate tax, investors got more bang for their buck and the markets leaped for joy. Income trusts quickly became a favorite in many stock portfolios, especially for seniors, who relied on them to supplement their inflation-prone pensions. Their popularity was one reason the previous Liberal government backed away from bringing about similar reforms. But perhaps the most surprising thing about yesterday’s decision was that it contradicted a Tory election promise not to meddle with the income trust status quo. Now facing a sizeable backlash from investors, Flaherty claimed yesterday that the culture of the income trust was robbing government coffers of much-needed revenue, forcing the average Canadians to shoulder a bigger tax burden. In an interview with Peter Mansbridge on The National last night (not available online), Flaherty addressed concerns that the surprise announcement will cause volatility in the markets. He pointed to the 2011 date for implementing the taxes and the reality that countries like Australia implemented similar taxation schemes back in the 1980s. Furthermore, the new tax on income trusts will be coupled with a round of corporate tax cuts. Alas, not everyone is drinking Flaherty’s Kool-Aid. William Holland , CEO of the newly-minted income trust CI Financial, lashed out at the Tory plan for being “incredibly irresponsible.” Holland said his trust was formed after much deliberation and under the presumption that the rules would not suddenly be changed. Holland certainly won’t be alone on Bay Street today in feeling betrayed. But Flaherty looks to be picking his battles. With the vote-rich elderly demographic potentially miffed at the income loss, the kindly finance minister also moved yesterday to allow pensioners to split their taxable income. Brian Laghi in the Globe suggests that the timing of the income trust announcement is politically strategic, given that 2.5 million pensioners will now be finding extra cash in their pocket come next Spring—when many analysts think Canadians will again be headed to the ballot box. Corporate Canada may be upset and the Liberals may work the broken-promise angle, but the Tories are betting the discontent will likely subside by the time another election rolls around. Much like the markets themselves, this Tory regime has proven to be quite unpredictable. Only time will tell if their income trust gamble will prove to be a wise investment.
THE LEADS:
THE NATIONAL: “Money Moves: Ottawa clamps down on income trusts and seniors get a tax break ” CTV NEWS: “Tax Attack: Ottawa unveils new rules on income trusts
” GLOBE AND MAIL: “Income Trusts: Party’s over
” TORONTO STAR: “Ottawa slams the brakes on ‘unfair’ income trusts
” NATIONAL POST: “Income trust shake up
” LA PRESSE: “Ottawa stops the breach of tax dollars from income trusts
” OTTAWA CITIZEN: “Tories change rules to rein in income trusts
” (top non-local)

INCOME TRUSTS COMMENTS by National Bank Financial.
Last night Finance Minister Jim Flaherty announced that Ottawa will start taxing trusts in the same manner as corporations, effective immediately for new trusts and starting in the 2011 tax year for existing trusts. The Oil & Gas Income trusts that are most exposed are the interlisted trusts and those that have high foreign ownership. We believe that Advantage Energy, Enerplus, PennWest, Pengrowth and Provident will be the most negatively impacted by the Finance minister’s decision. The least impacted Oil & Gas Trusts are Crescent Point Energy, Vermillion, Shiningbank and Focus Energy. We note that Shiningbank Energy Income Trust is probably the safest trust in this group. We also note that our top picks in the sector Progress Energy, Shiningbank Energy and Canetic are also the least impacted. In the energy infrastructure group, we believe that those with lower levels of income and higher return on capital will be the l

2008

2006

Treasure hunters mine the trust bust

DON MACDONALD, The Gazette

Promises are good politics

ERIC BEAUCHESNE, CanWest News Service

Tories right this time about income trusts

The Gazette

Harper takes a hit

L. IAN MacDONALD, The Gazette