No Treat, Just a Nasty Trick Tax Fairness and the Impact on Income Trusts

1
No Treat, Just a Nasty TrickTax Fairness and the
Impact on Income Trusts

• Canadian Association of Petroleum Production
  Accountants
• November 22, 2006

2
Different Legal Structures

• CORPORATION
• Growth oriented
• Explores and develops
• Produces oil and gas
• Generates cash flow
• Reinvests 95 - 100

• TRUST
• Yield oriented
• Acquires and develops
• Produces oil and gas
• Generates cash flow
• Distributes 60 - 80

Exploration / Reinvestment Cash
Distributions
Higher Risk Lower Risk
3
Current State of the WCSB

• A mature basin after 60 years of exploration
• Declining production of conventional oil and gas
• Smaller pools, lower productivity wells
• Higher finding and development costs
• Higher operating costs
• Highly competitive for opportunities, services
  and staff

4
Role of Energy Trusts
Pursue international opportunities and long life,
capital intensive projects such as oilsands.
Sell non-core assets to trusts.
Senior Producers
Flow through structure creates a lower cost of
capital. Acquisition and exploit mature pools.
Distribute excess cash to unit holders.
Trusts
Explore for, and develop new pools of oil and
gas. Sell the entire company to a trust.
Junior Producers
5
Pool Life Extension Alida, Sask
NAL Net Oil Production (bbls/d)
New 3D/ LWD Technology
3D Seismic
Horizontal Drilling
1989
2010
6
Tax Fairness Announcement

• Federal governments stated objectives
• Prevent further trust conversions
• Level the playing field for trusts and
  corporation
• Ensure that business pays its fair share of taxes
• New rules
• Corporate tax on new trusts immediately
• Four year holiday for existing trusts
• REITs exempted

7
Tax Impact on Investors
Greatest impact is on RRSP/RRIF holders,
generally retirees
8
Market Impact on Investors
-18.4
Market response value trusts like EPs
9
Impact on Energy Trust Valuations
Loss of 10.6 billion in value
10
Impact on NAL Unit Holders
Commodity Prices
Tax Changes
30 downward revision in price cost unit holders
422M
11
Not Just an Alberta Problem
Western Canada 22
Foreign 29
Central Canada 48
NAL Unit Holders across the country and south of
the border
12
No Undue Expansion

• Recent transactions
• Mission Oil Gas u Crescent Point
• Rider Resources u Shiningbank
• Conoco-Phillips? u Pengrowth
• Other property disposition packages

13
Planned Financings
Trilogy Energy cancelled a convertible debenture
offering, suspended its DRIP program and
initiated an issuer bid.
14
Existing Convertible Debentures
ITM In the money ATM At the money
15
Coalition of Canadian Energy Trusts

• Key issues with the new rules
• Material value erosion for all Trusts
• Reduced access to capital markets
• Limited ability to replace production
• Potential reduction in activity
• What are we hoping to accomplish?
• Full grandfathering
• Similar treatments to the REITs
• 10 year versus four year tax holiday
• Business as usual for acquisitions
• Rollovers on conversion to corporations

16
New Business Models for Energy Trusts

• Conversion to an EP corporation
• Tax sheltered blowdown of short life assets
• Combination EP / blowdown carve out
• Sell or consolidate
• Go private

17
Implications for NAL Well Adapt

• 4 years to evaluate implications and alternatives
• Most likely to convert to a corporation over time
• Attractive asset base
• Develop/add reserves - 100 million/year
• Focus on growth and running room
• Technical teams
• Land / seismic / exploration
• Reasonable tax pools - 460 million at September
  30
• Strong balance sheet

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How to Express Your Concern

• For more information on this issue
• Visit the CAIF website (www.caif.ca)
• Visit the CCET website (www.canadianincometrusts.c
  a)
• To express your views
• Contact your MP (www.canada.gc.ca/directories)
• Contact the Finance Minister (flaherty.j_at_parl.gc.c
  a)
• Contact the Prime Minister (pm_at_pm.gc.ca)