Toronto and Calgary — Canada's largest oil and gas company was poised to transform the country's energy sector this week with a record $43-billion income trust that was shelved when Ottawa swept in with its surprise crackdown on trusts.
EnCana Corp. had secretly hired Canadian and U.S. investment bankers to help spin off a significant chunk of its business into the tax-friendly confines of an income trust, leaving only a portion as a conventional company, according to sources familiar with the deal. The massive trust conversion was to have been announced this week.
The prospect of EnCana transformation, on the heels of similar schemes by corporate icons BCE Inc. and Telus Corp., was the final straw for Finance Minister Jim Flaherty, sources say. As soon as he became aware of EnCana's plans, he had to act because the fear went beyond EnCana itself: As Mr. Flaherty explained, the biggest lesson of the BCE conversion was that once one major mover converted, others would fall like dominoes.
His controversial move also erased billions of dollars of Canadians' investments, and has now incited a rebellion in Prime Minister Stephen Harper's Alberta power base. A group of 35 energy trusts formed a coalition there yesterday and vowed to undermine the Conservatives if the sector is not spared from the new rules.
“I can tell you, if there is nothing done to offset the damage that they've done, we will personally — myself and other CEOs — will do everything in our power to see that there is a change in government, and it will start right here in Calgary,” said John Dielwart, chief executive of ARC Energy Trust and the coalition's chaiman. “It will happen in Alberta. This is not going to go away.”
The irony is that EnCana, an elephant in their very backyard, was one of the companies that may have helped bring the income-trust bonanza to an end. EnCana was born of the merger between PanCanadian Petroleum, a Canadian Pacific division, and Alberta Energy Corp., a former provincial Crown corporation.
Mr. Flaherty said the proposed conversions of telecom giants BCE and Telus triggered his decision, yet he acknowledged he was aware that “one or two” other companies of that size were pondering a similar transformation. He singled out the energy industry as a particular source of concern, and the timing of his unexpected announcement suggests Ottawa was aware EnCana was on the verge of converting.
“It was clear from the BCE people that they felt compelled to follow Telus,” Mr. Flaherty told The Globe and Mail's editorial board this week. “And that taught us a lesson, quite clearly and dramatically, that if other sectors imitate that sector we'll see a domino effect, and that is unhealthy for the Canadian economy, in our view.”
A spokesman for EnCana declined to comment on whether it had been pursuing a trust.
Ottawa is worried about lost tax revenue from trusts, and EnCana would have left a huge hole. The company's income-tax expense has been steadily rising in recent years as it has booked some of the biggest profits in Canadian corporate history, and this year it is on track to record the highest profit yet seen in the country. In the first nine months of 2006, EnCana made $5-billion (U.S.) and booked a tax expense of $1.5-billion on its income statement.
The Tories have promised there will be no exceptions to the rules, other than real-estate investment trusts. Current trusts have a four-year window to consider their options, and will be subject to a new tax in 2011 designed to level the playing field between trusts and regular companies. Companies like BCE and Telus, which had not yet converted, would be subject to the increased tax immediately.
Mr. Dielwart of ARC Energy conceded it will be challenging for the coalition to get a meeting with Mr. Flaherty, and even if it does, it might be fruitless. Yet he insisted the government cannot ignore the voice of this group, which collectively accounts for about 20 per cent of oil production in Western Canada, or one million barrels a day. The sector will argue it should be regarded as unique, and assert that the trust structure has made it more productive, counteracting one of Ottawa's biggest concerns.
“We've just found a government that has intruded into Canadian capital markets in an unprecedented manner,” he said. “If you start taking your power base for granted, you'll see what's what. You can be sure that the Alberta caucus will be hearing from us individually and as a group.”
Mr. Dielwart said he has voted for only the Conservative or Reform parties, yet insisted that if the energy-trust sector is not spared by the Harper government, he will cast his ballot for another party — and encourage others to do the same. He pointed out that several of the executives belonging to his coalition live in Mr. Harper's riding.
He is not alone in his anger.
“Flaherty will have to face Canadians and explain how his tax changes are worth the loss of $20-billion of their savings,” said George Kesteven, head of the Canadian Association of Income Funds and an executive at Calgary-based PrimeWest Energy Trust. “There are a great many very disappointed people.”
The income-trust lobby group plans to “mobilize the millions of Canadians who own trust units” to fight the government's plans, Mr. Kesteven promised.
Michael Chernoff, a former Calgary energy executive and a director of several companies, including EnCana, said the Conservatives will “absolutely” lose seats in Alberta.
“They have a lot of support elsewhere but this is the base of their support. Without Calgary, there's no way they could get close to forming the government,” said Mr. Chernoff, who would not comment on EnCana's plans.
Former British Columbia Conservative MP John Reynolds said he backs the Harper government's move as “the right thing” to do, but said he also supports the right of energy trusts to try and make their case for an exemption.
EnCana's conversion plans hit a roadblock in Ottawa at the same time the company's respected and politically connected founding CEO Gwyn Morgan was praising the Tories for shutting down trusts.
In airing views that he acknowledged will make him a pariah in Calgary's exclusive Petroleum Club, Mr. Morgan wrote in an opinion piece for The Globe and Mail: “It is fair to say that Canadian directors and management teams have increasingly been faced with shareholders who are demanding to know why their corporations were not converting to a trust. If, as Mr. Flaherty predicts, inaction would have resulted in ‘an income-trust economy,' then taking action is certainly in the longer term interest of Canadians.”
© The Globe and Mail
