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Investors block first energy trust switch
By Gary Park For Petroleum News
Canadian energy income trusts have received a short, sharp message from investors: Move carefully and don’t be in a hurry to revert to corporate ranks because of the federal government’s plans to change the tax rules for trusts.
A simmering revolt among investors blocked True Energy Trust’s bid to rejoin the traditional corporate sector, but stopped short of overthrowing a majority of the trust’s board.
It was the first test of the mood among investors since Ottawa announced last October that trusts would lose their tax sheltered status in 2011.
True’s directors decided their entity, which produces about 20,000 barrels of oil equivalent per day, would be better off reverting to the corporate ranks.
In particular, they were motivated by True’s dismal showing as the worst-performing among 35 members of the Standard & Poor’s/Toronto Stock Exchange energy trust index over the past year.
True posted a net loss of C$234 million in 2006, against earnings of C$13.9 million in 2005, although cash flow edged up to C$90.4 million or C$1.79 per trust unit from C$87.1 million or C$3.47 million per unit.
But the trust’s units have slumped from a high of C$17.65 in mid-April 2006 to just over C$5.85 at the end of March, forcing it to twice cut cash distributions as commodity prices dropped.
Conversion defeated at annual meeting At True’s three-hour annual meeting, 52 percent of unit holders opposed the conversion plan that needed 66 percent support to be implemented.
However, a majority of investors voted to retain the current board of directors instead of a slate presented by the dissident group.
“The question that got clearly answered today is when should a trust become a corporation,” said True chief executive officer Paul Baay.
“Shareholders are telling us that the time is certainly not now and that they still want (cash) distributions.
“It really was a 50:50 vote. We’ve got half the people telling us they want distributions and we’ve got the other half saying we want you to spend capital and drill up these lands,” he said.
Baay said the board will now explore a new strategic course, including deciding what distributions unit holders will be paid in the future.
“The board is going to have to come to a balance that makes sense to people,” he said.
What he won’t do is resign as a result of the vote because the board retains the backing of unit holders, Baay said.
True had argued that making the move to a dividend-paying corporate structure would facilitate investment and development of its assets in southeastern Saskatchewan and central Alberta.
Dissidents: no advantage in being first For the dissidents, Richard Lewanski told the meeting that there is no advantage to being the first trust to make the switch.
“We feel the conversion is premature and an excuse to create the new stock options and warrant plans for the current board and management,” he said, referring to a disputed plan to institute a new award of share options.
Happy that the conversion and stock options were defeated, Lewanski said his group would still have “liked to change the board and the direction of the company and we’re still hopeful of a change at the board level.”
Critics of the True proposal said there was no sense in converting when the federal tax rules are not known and given that the new taxes will not be imposed until 2011.
The only argument in favor, according to some analysts, would be a plan by a trust to embark on large-scale acquisitions that would be turned down by the federal government.
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