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Background > Speaking Notes - December 20, 2006
(Check against delivery)
<Gordon Kerr, President and CEO, Enerplus Resources Fund>
Good morning. Thank you for joining us today, we sincerely appreciate your interest.
Yesterday a reporter wrote: “someone should encase income trust lobbyists in concrete and fling them off a bridge into deep water.” My first reaction was --- just how much concrete would it take for john?!
With more sober thought, I was disappointed to think that we would be vilified for asking to be heard in respect to a Government policy change that has such significant impact on our country and our investors. Given our knowledge and familiarity with the facts of energy income trusts, our voice must be heard. Canadians, such as the members of our coalition deserve to be heard by Government in a meaningful way.
Well Ladies and Gentlemen, to date we have not been heard in a meaningful way.
Despite Minister Flaherty’s comments made on Monday, and echoed by the Prime Minister, that “it’s over, the case is closed,” --- we are here to assure you it is not over.
Today we present the findings of a report we have compiled based upon the input of data and information received from members of the energy trust sector and other third parties.
We are challenging the government’s assertions in respect of the tax proposals as they relate to Canada’s energy sector.
Since our November 6th news conference when we issued a call for meaningful consultation with the government, we have been extremely busy on two fronts.
First, we under took the gathering of information and completed the document presented today. This report speaks to:
All of these contributions are threatened by the proposed tax changes.
Secondly, we have spent a considerable amount of time meeting with members of parliament of all party affiliations. Additionally, we have met with the media, investors, the Finance Department including the Minister of Finance as well as Senator Grafstein, Chair, Senate Banking, Trade and Commerce Committee. Our purpose was to elevate our call for meaningful consultation as well as to secure facts supporting the recommendations of the Finance Department to Government.
It is our view that the Finance Department did not do its homework. Here is what we have determined:
Ironically much of the data in our document required collection through a variety of sources – something we believe was not conducted by the Finance Department.
Our obvious conclusion – Government did not do its home work and as a result is making a major decision that will harm millions of Canadians based on insufficient information. If we’ve missed the updated analysis that has resulted in a complete reversal or policy, then we call upon the Government to make it readily available to all Canadians now.
Sue will highlight our findings contained in the report.
<Sue Riddell Rose, President and CEO, Paramount Energy Trust>
Let me start by re-iterating that it is our belief the Government is making decisions with inadequate information relative to the energy Trust sector and not in the best interest of Canadians and our economy.
Government is concerned that trusts cause federal tax leakage. This is not the case with Energy Trusts. Our members have definitely generated greater taxes both provincially and federally than would have occurred had they been structured as corporations. Through data we collected directly from our membership, our report shows that oil and gas producing trusts represent 16% of revenue from publicly-traded oil and gas entities but generate about 30% of tax revenue collected.
Our distributions generate tax from current personal income taxes from taxable Canadians, additional tax from compounding investment in tax-deferred accounts and a 15 to 25 % tax from foreign investors. The average dividend payout of publicly-traded energy corporations as a percentage of earnings is very low so little current tax is generated through corporate shareholders personal income tax. Further, the oil and gas industry is capital intensive. Capital spending on exploration, development and energy infrastructure, including the massive amounts required for the oil sands, generates tax pools which result in minimal corporate taxes being paid.
In the report that we released today we specifically discuss tax considerations; walking through the theoretical calculations that government put forward; then walking through the practical analysis to look at the actual tax situation. This analysis is corroborated by the data.
Unitholders across Canada are receiving millions of dollars in distributions from energy trusts. In fact, the majority of our Canadian unitholders reside in eastern Canada. Provincial governments across Canada share in the energy trust sector’s resource development, through personal taxes attributed to a unitholder’s province of residence. And, in petroleum producing areas, energy trusts are generating provincial royalties and contributing to the local economy through the purchase of goods and services, employment and the ripple effect that resource development has in the economy particularly in rural areas where trusts are active operators.
Government is concerned that trusts threaten Canada’s long-term economic growth. On the contrary, energy trusts are the ideal model to maximize the recovery from Canada’s mature conventional oil and gas fields. We are important contributors to the Canadian economy.
Investors in corporations target growth, but growth is increasingly difficult in Canada’s mature hydrocarbon basins. Despite record drilling activity, conventional oil production is declining and gas production is just staying flat at best, with the record number of new wells barely offsetting normal declines.
Energy trusts typically focus at maximizing production from oil and gas pools that many energy players have ignored in a quest for more lucrative opportunities. That effort requires capital, because oil and gas producers have to reinvest to keep production flat, let alone grow it. This need for capital reinvestment distinguishes energy trusts from many business trusts, which have much lower reinvestment needs. Energy trusts have methodically acquired, optimized and in many cases have grown production from mature oil and gas properties. The result – our members produce about 20% of Canada’s petroleum energy.
The energy trust model enhances the Canadian energy industry through our symbiotic relationship with the other players. From senior producers we buy and enhance mature assets. Junior oil and gas companies aggressively grow small oil and gas assets and as they mature, sell the assets to trusts. In Turn, the recapitalized junior proceeds to its next exploration opportunity.
Capital investment over the past 5 years by energy trusts has exceeded $35 billion through acquisitions. In addition, $15 billion have been invested to optimize production. Assets have been accumulated that fit the trust model. These assets and the business plan are well aligned with our unique investor base that is interested in income and low risk reinvestment for sustainability. the government’s proposed tax changes will force trusts back into a growth-oriented corporate model to which their unique asset bases, business plan and investor base don’t fit. Government is effectively deciding how businesses should do business.
We do not believe the Government has factored into their decision our unique role in Canada’s energy industry and has overlooked the value we provide Canadians.
Bill will outline potential impacts to the social fabric of western Canada.
Last fall the Conservative government took power with the strong support of independent minded Canadians from coast to coast who wanted a transparent, responsible and effective federal government. On October 31, 2006 Finance Minister Flaherty and the government took dead aim at many of these independent minded individuals and left a wake of destroyed hopes and dreams for many Canadians.
Through the tax proposal that Minister Flaherty introduced that night the Federal Government has created winners and losers. The proposal favours the minority of Canadians with defined benefit pension plans at the expense of the majority of Canadians who depend on contributions to self directed registered retirement savings plans for their golden years.
On October 31, 2006 the Conservative Government delivered a major blow to the investment portfolios of small retail investors. In a stated attempt to help average Canadians, the government has punished them. Independent Canadians who chose to invest in a vehicle that Prime Minister Harper pledged to protect have been cast aside and the Government has instead decided to court the minority with defined benefit pensions and to yield to pressure from large corporations and private equity interests. Quite a trade and quite a change for a party that emerged from the grassroots support of small town and rural independent Canadians.
Energy Trusts operate for the most part in rural communities throughout Canada. By optimizing production from mature oil and gas pools energy trusts extend the economic life of not only the pools but also of the communities that provide labour, goods and materials and services for our operations. Our employees work and are active in hundreds of communities throughout Canada. Collectively the trusts and our employees pay school taxes, local taxes and provincial taxes and tariffs that are necessary to provide Canadians, and especially rural Canadians, with the quality of life associated with small communities.
The Prime Minister recently commented on the potential for removing tax incentives available for mega projects such as the oil sands by saying that western Canadians had already been hit by the proposal to eliminate energy trusts. Does this imply that he has abandoned the notion of balance between conventional oil and gas optimization and oil sands development and the balance between small investors and deep pocketed institutional and private investors? Why is the government forcing industry and investors to choose between optimization and aggressive development, between utilizing existing infrastructure and building new infrastructure and between small town and boom town?
The model was working. There was room for both the large cap mega projects and the optimization projects of the energy trusts. And there was room for small investors looking for income and large investors looking for growth. In a rush to make policy and prevent future tax leakage has the Government compromised Canadians?
In the weeks since the announcement I have taken calls from Canadians from coast to coast who have had life savings eroded, who have had to alter their retirement plans and who feel abandoned by the government and by the investment community.
The Finance Department in Ottawa remains adamant that there is no room for a made in Canada solution that revitalizes mature oil and gas fields, that keeps rural communities vibrant and that provides a meaningful source of income for independent investors.
We believe we owe out it to our investors, our employees and the communities where they live to convince the Prime Minister and that the government that there is a middle ground and that middle ground is best reached through sincere consultation and a thorough review of the facts.
Now John will outline other critical issues that stem from the Minister’s actions and outline our conclusions and a go-forward plan.
<John Dielwart, President and CEO, ARC Energy Trust>
For those of you who have discussed the Government’s approach to trust with me know that I’m slightly annoyed …well maybe that’s a euphemism. We should never have been placed into such an untenable situation.
This Government does not understand energy trusts and our report shows this in spades. And, not even acknowledged in decision making by the government is the critical role we play for CO2 reduction and as a contributor to Canada’s world energy leadership.
Members of our Coalition are leaders for CO2 sequestration and the precious environmental capital being invested will simply not be available under proposed tax changes. Canada’s work towards the reduction of Green House Gas emissions will be materially impaired.
The Prime Minister has said he wants to make Canada an energy superpower. Damaging the energy trusts will reduce Canadian energy production and ultimately cause consumers to pay more for their energy. None of those outcomes are conducive to the energy superpower role Mr. Harper envisions for Canada.
Government has said, and departmental officials have leaked, that there is no precedent for treating energy flow-throughs as distinct and exempted from other resource industries. This is simply not accurate. The United States not only provided a 10-year transition period and a conversion option but explicitly exempted resource industries from tax measures. We need to be able to compete in a North American energy market.
Our conclusion is that energy trusts are different from other trusts. Exempting energy trusts from the proposed tax changes is the only sensible course of action for our members, unitholders and Canadians.
We will continue to press for meaningful consultation, and we emphasize meaningful.
We will vigorously continue our quest to preserve the energy trusts’ position in Canada’s vital energy industry. As our colleagues at the Canadian Association of Income Funds have done, we will pursue an aggressive public campaign to engage Canadians in this important issue and will announce our communication strategy in the coming weeks.
The case is not closed. This is an important issue to our nation. When Canadians begin to hear in plain language what their Government is proposing, we believe they will stand by our side.
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