IR | Frequently Asked Questions | On Energy Trusts
   

1. What is an energy trust?

An energy trust is an entity created to pay out the cash flow generated from oil and natural gas assets in the form of cash distributions to unitholders.

2. What is a distribution?

A distribution is the cash payment each unitholder is paid by the Trust on a regular basis, typically monthly or quarterly. Distributions are calculated by determining the amount of net cash flow the Trust’s operating company has generated from the sale of oil and gas, after the deduction of certain expenses. (see question 4). This income is paid to the Trust, and is then divided by the number of units outstanding to calculate a per-unit distribution amount.

3. Why are there two categories of distributions, and what do they mean?

Energy trust investments in Canada offer considerable tax advantages. The Trust's tax pools provide a tax shelter, enabling the Trust to return distributions to unitholders in two ways: as a return of capital, and as a return on capital, or investment income. The tax-pool sheltered portion is deemed a return of capital and is taxed as a capital gain when a unitholder sells his/her Trust Units. Capital distributions have 2 advantages: the tax payment is deferred until the units are sold, and a capital gains tax applies. Non-sheltered distributions are deemed a return of investment income and are taxed at a unitholder's marginal tax rate. The capital/income ratio of cash distributions is determined by the size and availability of the Trust's tax pools.

For Canadian unitholders of Vermilion Energy Trust, Computershare Trust Company of Canada will prepare and provide a T3-Statement of Investment Income for Canadian income tax purposes at the end of each calendar year.

Unitholders who are not residents of Canada for income tax purposes are encouraged to seek advice on distribution taxation from a qualified tax advisor in his/her country of residence. Monthly distributions paid to non-residents of Canada are typically subject to a 25% withholding tax, according to the Income Tax Act of Canada. This withholding rate may be reduced under the provisions of the tax treaty between Canada and a unitholders' country of residence.

4. How is energy trust income calculated?

Revenue from the sale of oil and natural gas less (Operating Expenses + Capital Expenditures + Interest + Principal Repayment + General and Administrative Expenses) divided by the number of Trust Units outstanding = Unitholder Distributions.

5. What is a distribution date, distribution record date and ex-distribution date, and why are they important?

A distribution date is the date the trust sends cash distributions (in the form of a cheque) to registered trust unitholders directly, or to the brokerage or investment companies that manage the beneficial trust unitholders’ account(s). This usually occurs on the 15th day of the month. (If the 15th falls on a Saturday, Sunday or statutory holiday, the distribution date becomes the first business day before the 15th.)

A distribution record date is the last day of each month. To qualify and receive a cash distribution, a unitholder must have purchased his/her Trust Units two business days prior to the distribution record date. (This two-business-day time period allows for enrolment information paperwork to flow between the financial institution where the unitholder purchased the Trust Units and the transfer agency that manages unitholder administration on behalf of the trust.)

An ex-distribution date is two business days prior to the distribution record date, unitholders who have purchased their Trust Units before the ex-distribution date are entitled to the declared distribution paid on the 15th of the following month.

6. What are the key differences between purchasing units in an oil and gas energy trust and purchasing shares in an oil and gas company?

 

   
Energy Trust Common Equity
Majority of cash flow is distributed to unitholders Majority of cash flow is reinvested back into the company to fund growth
Structured to reduce corporate tax and maximize the value going directly to unitholders Dividends may be issued to shareholders, but are usually low
Investors seek high yields, in the form of “distributions,” which are payments the trust makes on a regular basis Investors primarily seek increases in share price (capital appreciation)
The trust structure effectively minimizes or eliminates corporate tax The company is subject to corporate tax on business profits, and shareholders are subject to tax on share price appreciation (capital gains) and on dividend income
     
   

7. How does the level of risk compare between these two types of investments?

While energy trusts differ from equity investments in many respects, the level of investment risk is very similar. The primary factor influencing the performance of oil and gas energy trusts is the pricing for crude oil and natural gas, which is sensitive to supply and demand factors, as well as political and economic uncertainty. Because unitholders receive distributions that are derived from the trust’s net cash flow, the distributions will rise and fall with the prices the trust obtains for its oil and gas.

Other key risk factors include the quality of the asset base of the trust operating company. This includes reserves and their estimated producing life (reserve life), their decline rate (the rate at which current production levels are depleting these reserves), and the ability of the trust’s management to replace these reserves through effective operational development plans and strategic acquisitions. The level of debt a trust carries and the current interest rate environment are other important risk factors to consider.

Despite these factors, over the past few years, the Canadian oil and gas energy trust sector has outperformed conventional oil and gas producers.