Pengrowth to preserve tax flow through status, equivalent to Flaherty’s law firm

Pengrowth to keep structure as trust
Shaun Polczer, Calgary Herald
Published: Thursday, August 07, 2008

Pengrowth Energy Trust plans to maintain its corporate structure past a 2011 deadline to tax the royalty income vehicles, its chief executive said Wednesday.

With the federal government deadline to change the tax structure for trusts looming, CEO Jim Kinnear said Pengrowth would be able to employ some $3 billion worth of tax pools to shelter distributable income to unitholders for at least the next four years, until 2013.

"We believe there will remain strong demand for yield-based investments," he told a conference call to discuss second-quarter results.


"These pools can be used either to shelter income from the tax and can also be used to mitigate impacts to our unitholders beyond 2011."

One of Canada's largest royalty trusts, Pengrowth produces about 81,000 barrels a day.

During the second quarter, Pengrowth generated record cash flow of $267.9 million, or $1.08 per trust unit, compared with $250 million, or $1.02, in the same period of last year.

The trust paid back $168.2 million, or 68 cents per unit amounting to 63 per cent of cash generated in the quarter.

Nonetheless, Pengrowth lost $118.7 million on the heels of a $352.6-million hedging loss based on out of the money oil and gas contracts.

Kinnear described a "challenging" business environment characterized by the federal government's Oct. 31, 2006, tax decision followed by the Alberta government's September 2007 move to announce royalty hikes.

Brad Borggard, an oil and gas analyst with CIBC World Markets, said the question of what happens to trusts post-2011 is looming larger after the federal government in July clarified plans to allow trusts to convert back into corporations without penalty by 2013.

"The government is trying to be clear that they want them (trusts) to convert back," he said.

Barring a change in the ruling party, Borggard predicted the vast majority would convert back to corporations.

However, it might make sense for some outfits like Pengrowth to maintain the structure for as long as they can. With oil prices of $125 US, he predicted Pengrowth would become taxable in any event by 2013.

"If you have enough tax pools it can make sense if you stay on as a trust for a little longer," he added.

Pengrowth units rose 28 cents on the Toronto Stock Exchange on Wednesday to close at $17.48.

spolczer@theherald.canwest.com