suppl
Filed
pursuant to General Instruction II.L. of
Form F-10; File No. 333-146928
To the Amended and Restated Short Form Base Shelf
Prospectus Dated December 5, 2007
|
|
New
Issue |
December 14,
2007 |
PENGROWTH ENERGY
TRUST
Up to 25,000,000
Trust Units
We are hereby qualifying for distribution (the
Offering) up to 25,000,000 of our trust units (the
Trust Units).
Investing in the Trust Units of Pengrowth Energy Trust
(the Trust) involves risks. See
Risk Factors, which begins on page 20 of the
Prospectus.
We, Pengrowth Corporation (the Corporation), our
administrator, and Pengrowth Management Limited, our manager,
have entered into an equity distribution agreement dated
December 14, 2007 (the Equity Distribution
Agreement) with SG Americas Securities, LLC
(SGAS) and FirstEnergy Capital Corp.
(FCC, and together with SGAS, the
Underwriters) relating to the Trust Units
offered by this prospectus supplement (the Prospectus
Supplement) and the accompanying amended and restated
short form base shelf prospectus dated December 5, 2007 to
which it relates, as amended or supplemented (the
Prospectus). In accordance with the terms of the
Equity Distribution Agreement, and except as noted below, we may
distribute up to 25,000,000 Trust Units from time to time
through the Underwriters, as our agents for the distribution of
the Trust Units. See Plan of
Distribution.
Our outstanding Trust Units are listed and posted for
trading on the Toronto Stock Exchange (the TSX)
under the symbol PGF.UN and the New York Stock
Exchange (NYSE) under the symbol PGH. On
December 13, 2007, the closing price of the
Trust Units on the TSX was Cdn.$18.32 per Trust Unit
and the closing price of the Trust Units on the NYSE was
U.S.$18.02 per Trust Unit. The TSX has conditionally
approved the listing of the Trust Units qualified by this
Prospectus Supplement. Listing is subject to our fulfilling all
of the requirements of the TSX on or before October 14,
2009. The NYSE has authorized, upon official notice of issuance,
the listing of the Trust Units offered hereunder.
Sales of Trust Units, if any, under this Prospectus
Supplement and the accompanying Prospectus may be made in
transactions that are deemed to be at-the-market
distributions as defined in National Instrument
44-102
Shelf Distributions (NI
44-102),
including sales made directly on the TSX, NYSE or other existing
trading markets for the Trust Units in the United States.
The Trust Units will be distributed at market prices
prevailing at the time of the sale of such Trust Units. As
a result, prices may vary as between purchasers and during the
period of distribution. See Plan of
Distribution.
We will pay the Underwriters compensation for their services in
acting as agents in the sale of Trust Units pursuant to the
terms of the Equity Distribution Agreement. We will pay FCC
compensation equal to 3% of the gross proceeds from the sales
made on the TSX and will pay SGAS compensation equal to 2.5% of
the gross proceeds from the sales made in the United States,
including on the NYSE. We estimate that the total expenses that
we will incur for the Offering, excluding compensation payable
to the Underwriters under the terms of the Equity Distribution
Agreement, will be approximately U.S.$734,000 (approximately
Cdn.$750,000). We have agreed to provide indemnification and
contribution to the Underwriters against certain liabilities,
including liabilities under applicable securities legislation in
Canada and the United States Securities Act of 1933, as
amended. See Plan of Distribution.
No underwriter or dealer involved in an at-the-market
distribution, no affiliate of such an underwriter or
dealer and no person or company acting jointly or in concert
with such an underwriter or dealer has over-allotted, or will
over-allot, Trust Units in connection with the distribution
or effect any other transactions that are intended to stabilize
or maintain the market price of the Trust Units. See
Plan of Distribution.
Neither the United States Securities and Exchange Commission
(the SEC) nor any state securities commission has
approved or disapproved of these Trust Units nor passed
upon the accuracy or adequacy of this Prospectus Supplement or
the accompanying Prospectus. Any representation to the contrary
is a criminal offence.
(cover page continued)
We are permitted, under a multi-jurisdictional disclosure
system adopted by the United States, to prepare this Prospectus
Supplement and the Prospectus in accordance with Canadian
disclosure requirements. You should be aware that such
requirements are different from those of the United States. Our
financial statements incorporated herein by reference have been
prepared in accordance with Canadian generally accepted
accounting principles (Canadian GAAP) and are
subject to Canadian auditing and auditor independence standards.
Thus, they may not be comparable to financial statements of
United States companies or trusts. Information regarding the
impact upon our financial statements of significant differences
between Canadian and United States generally accepting
accounting principles is contained in the notes to our annual
consolidated financial statements and in the reconciliation of
our financial statements to United States generally accepted
accounting principles, both of which are incorporated by
reference in this Prospectus Supplement and in the
Prospectus.
Your ability to enforce civil liabilities under the United
States federal securities laws may be affected adversely by the
fact that we are formed under the laws of the Province of
Alberta, Canada, most of the directors and all the officers of
the Corporation and most of the experts named in this Prospectus
Supplement and the Prospectus are residents of Canada, and a
substantial portion of our assets and all or a significant
portion of the assets of those persons are located outside the
United States.
The SEC permits United States oil and natural gas companies, in
their filings therewith, to disclose only proved reserves net of
royalties and interests of others that geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Canadian securities laws
permit oil and natural gas companies, in their filings with
Canadian securities regulators, to disclose reserves prior to
the deduction of royalties and interests of others, and to
disclose probable reserves. Probable reserves are of a higher
risk and are generally believed to be less likely to be
recovered than proved reserves. Certain reserve information
included herein and in the documents incorporated by reference
herein to describe our reserves, such as probable
reserve information, is prohibited in filings with the SEC by
U.S. oil and natural gas companies.
If you are a United States holder (as defined herein), you
should be aware that the purchase, holding or disposal of the
Trust Units may subject you to tax consequences both in the
United States and Canada. This Prospectus Supplement and the
accompanying Prospectus may not describe these tax consequences
fully. You should read the tax discussion in this Prospectus
Supplement and the accompanying Prospectus fully and obtain
independent tax advice as necessary.
On October 31, 2006, the Minister of Finance (Canada)
announced proposed tax measures, which will materially and
adversely change the manner in which Pengrowth is taxed and will
also change the character of the distributions to you for
Canadian federal income tax purposes (the SIFT
Rules). On June 22, 2007, the SIFT Rules became law
when Bill C-52 received Royal Assent. It is expected that the
SIFT Rules will apply to Pengrowth and holders of its
Trust Units (Unitholders) commencing in 2011,
provided that Pengrowth does not exceed the limits on
normal growth prior to that time. See
Recent Developments Changes to Tax
Legislation Affecting Pengrowth and its Unitholders
and Risk Factors The SIFT
Rules are expected to materially and adversely affect Pengrowth,
our Unitholders and the value of the Trust Units
in the Prospectus.
S-ii
IMPORTANT
NOTICE ABOUT INFORMATION IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS
This document is in two parts. The first part is this Prospectus
Supplement, which describes the specific terms of the
Trust Units we are offering and also adds to and updates
certain information contained in the Prospectus and the
documents incorporated by reference into this Prospectus
Supplement or the Prospectus. The second part, the Prospectus,
gives more general information.
You should rely only on the information contained in, or
incorporated by reference into, this Prospectus Supplement and
the Prospectus and on the other information included in the
registration statement of which this Prospectus Supplement and
the accompanying Prospectus form a part. We have not, and the
Underwriters have not, authorized anyone to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the Underwriters are not, making an offer to sell these
Trust Units in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing
in this Prospectus Supplement and the Prospectus, as well as
information we previously filed with the securities regulatory
authority in each of the provinces of Canada and with the SEC
that is incorporated by reference into this Prospectus
Supplement or the Prospectus, is accurate as of their respective
dates only. Our business, financial condition, results of
operations and prospects may have changed since those dates.
S-iii
TABLE OF
CONTENTS
|
|
|
|
|
Page
|
|
|
|
S-1
|
|
|
S-1
|
|
|
S-2
|
|
|
S-3
|
|
|
S-4
|
|
|
S-4
|
|
|
S-4
|
|
|
S-6
|
|
|
S-6
|
|
|
S-8
|
|
|
S-8
|
|
|
S-8
|
|
|
S-9
|
|
|
S-21
|
|
|
S-21
|
|
|
S-21
|
DEFINITIONS
AND OTHER MATTERS
All dollar amounts in this Prospectus Supplement and the
Prospectus are expressed in Canadian dollars, except where
otherwise indicated. References to $ or
Cdn.$ are to Canadian dollars and references to
U.S.$ are to United States dollars.
Unless otherwise indicated, all financial information included
and incorporated by reference in this Prospectus Supplement and
the Prospectus was determined using Canadian generally accepted
accounting principles, which we refer to as Canadian
GAAP. U.S. GAAP means generally accepted
accounting principles in the United States. The financial
statements incorporated by reference herein have been prepared
in accordance with Canadian GAAP, which differs from
U.S. GAAP. Therefore, the financial statements incorporated
by reference in this Prospectus Supplement and the accompanying
Prospectus may not be comparable to financial statements
prepared in accordance with U.S. GAAP. You should refer to
the respective notes to our comparative consolidated financial
statements or the related U.S. GAAP reconciliation for a
discussion of the principal differences between financial
results calculated under Canadian GAAP and under U.S. GAAP.
FORWARD
LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus,
including certain documents incorporated by reference, contain
forward-looking statements within the meaning of securities
laws, including the safe harbour provisions of
Canadian securities legislation and the United States Private
Securities Litigation Reform Act of 1995. Forward-looking
information is often, but not always, identified by the use of
words such as anticipate, believe,
expect, plan, intend,
forecast, target, project,
guidance, may, will,
should, could, estimate,
predict or similar words suggesting future outcomes
or language suggesting an outlook. Forward-looking statements in
this Prospectus Supplement and the Prospectus, including certain
documents incorporated by reference, include, but are not
limited to, statements with respect to: the use of proceeds from
any offering made under this Prospectus Supplement and the
Prospectus, benefits and synergies resulting from
Pengrowths corporate and asset acquisitions, business
strategy and strengths, goals, focus and the effects thereof,
acquisition criteria, capital expenditures, reserves, reserve
life indices, estimated production, production additions from
Pengrowths 2007 development program, the impact on
production of divestitures in 2007, remaining producing reserves
lives, operating expenses, royalty rates, net present values of
future net revenue from reserves, commodity prices and costs,
exchange rates, the impact of contracts for commodities,
development plans and programs, tax horizon, future income
taxes, taxability of distributions, the impact of proposed
changes to Canadian tax legislation or U.S. tax
legislation, abandonment and reclamation costs, government
royalty rates (including estimated increase in royalties paid
and estimated decline in net present value of reserves and 2009
cash flows) and expiring acreage. Statements relating to
reserves are forward-looking statements, as they
involve the implied assessment, based on certain estimates and
assumptions that the reserves described exist in the quantities
predicted or estimated and can profitably be produced in the
future.
Forward-looking statements and information are based on
Pengrowths current beliefs as well as assumptions made by,
and information currently available to, Pengrowth concerning
anticipated financial performance, business prospects,
strategies, regulatory developments, future oil and natural gas
commodity prices and differentials between light, medium
S-1
and heavy oil prices, future oil and natural gas production
levels, future exchange rates, the proceeds of anticipated
divestitures, the amount of future cash distributions paid by
Pengrowth, the cost of expanding our property holdings, our
ability to obtain equipment in a timely manner to carry out
development activities, our ability to market our oil and gas
successfully to current and new customers, the impact of
increasing competition, our ability to obtain financing on
acceptable terms, and our ability to add production and reserves
through our development and exploration activities. Although
management considers these assumptions to be reasonable based on
information currently available to it, they may prove to be
incorrect.
By their very nature, forward-looking statements involve
inherent risks and uncertainties, both general and specific, and
risks that predictions, forecasts, projections and other
forward-looking statements will not be achieved. We caution
readers not to place undue reliance on these statements as a
number of important factors could cause the actual results to
differ materially from the beliefs, plans, objectives,
expectations and anticipations, estimates and intentions
expressed in such forward-looking statements. These factors
include, but are not limited to: the volatility of oil and gas
prices; production and development costs and capital
expenditures; the imprecision of reserve estimates and estimates
of recoverable quantities of oil, natural gas and liquids;
Pengrowths ability to replace and expand oil and gas
reserves; environmental claims and liabilities; incorrect
assessments of value when making acquisitions; increases in debt
service charges; the loss of key personnel; the marketability of
production; defaults by third party operators; unforeseen title
defects; fluctuations in foreign currency and exchange rates;
inadequate insurance coverage; compliance with environmental
laws and regulations; changes in tax and royalty laws; the
failure to qualify as a mutual fund trust; and Pengrowths
ability to access external sources of debt and equity capital.
Further information regarding these factors may be found under
the heading Risk Factors in this Prospectus
Supplement and the Prospectus, under the heading Risk
Factors in the AIF, under the heading
Business Risks in our Managements
Discussion and Analysis for the year ended December 31,
2006, and in Pengrowths most recent consolidated financial
statements, management information circular, quarterly reports,
material change reports and news releases.
Readers are cautioned that the foregoing list of factors that
may affect future results is not exhaustive. When relying on our
forward-looking statements to make decisions with respect to
Pengrowth, investors and others should carefully consider the
foregoing factors and other uncertainties and potential events.
Furthermore, the forward-looking statements contained in this
Prospectus Supplement and the Prospectus including any document
incorporated by reference herein or therein are made as of the
date of such document and Pengrowth does not undertake any
obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
applicable law. The forward-looking statements contained in this
Prospectus Supplement and the Prospectus, including the
documents incorporated by reference, are expressly qualified by
this cautionary statement.
As of the date of this Prospectus Supplement and the Prospectus,
Pengrowth no longer uses terms such as funds generated
from operations, funds generated from operations per
trust unit, distributable cash and
distributable cash per trust unit to analyze
operating performance, leverage and liquidity except where a
reference is made to distributable cash pursuant to the
Trust Indenture. Certain documents previously prepared by
Pengrowth containing these terms are incorporated by reference
in this Prospectus Supplement and the Prospectus. These terms
are not measures recognized by Canadian GAAP and do not have
standardized meanings prescribed by Canadian GAAP. As a result,
these measures may not be comparable to similar measures
presented by other issuers. Investors are cautioned that
funds generated from operations, funds
generated from operations per trust unit,
distributable cash and distributable cash per
trust unit should not be construed as an alternative to
net earnings, cash flow from operating activities or other
measures of financial performance calculated in accordance with
Canadian GAAP. These measures are intended to provide the reader
of the financial statements with a measure of the funds
available to be distributed under the trust indenture of the
Trust, to help with comparisons within the oil and gas industry
in relation to the performance of oil and gas assets and to
facilitate the understanding of the results of our operations
and financial position.
Pengrowth has substituted the above non-GAAP terms with certain
Canadian GAAP measures such as distributions paid or
declared, cash flow from operating activities
and net income. Distributions paid or declared
include amounts paid or declared during a calendar year which
relates to the twelve month production period commencing January
through December wherein the related distributions are paid
March through February of the following year. Cash flow from
operating activities will be used instead of distributable cash
with the main difference being that cash flow from operating
activities is determined after non-cash working capital changes.
S-2
Pengrowth will continue to use the term operating
netbacks, and may continue to use the term payout
ratio, which terms do not have standardized meanings under
Canadian GAAP and therefore may not be comparable with the
calculation of a similar measure by other entities.
Historically, payout ratio was calculated as distributions paid
or declared divided by Distributable Cash; however,
Pengrowths payout ratio will now be calculated as
distributions paid or declared divided by cash flow from
operating activities. This reflects the proportion of cash flow
paid out to Unitholders and not re-invested in the business.
Where Pengrowth uses the term payout ratio in this context, it
will ensure that the basis on which it has been calculated is
clear, and any historical ratios provided for comparative
purposes are presented on the same basis.
PRESENTATION
OF FINANCIAL AND
OIL AND GAS RESERVES PRODUCTION INFORMATION
The SEC generally permits oil and gas companies, in their
filings with the SEC, to disclose only proved reserves after the
deduction of royalties and interests of others which are those
reserves that a company has demonstrated by actual production or
conclusive formation tests to be economically producible under
existing economic and operating conditions. National Instrument
51-101
Standards of Disclosure for Oil and Gas Activities
(NI
51-101)
of the Canadian Securities Administrators (other than
Québec) imposes oil and gas disclosure standards for
Canadian public issuers engaged in oil and gas activities. NI
51-101
permits oil and gas issuers, in their filings with Canadian
securities regulators, to disclose not only proved reserves but
also probable reserves, and to disclose reserves and production
on a gross basis before deducting royalties. Probable reserves
are of a higher risk and are less likely to be accurately
estimated or recovered than proved reserves. Because we are
permitted to disclose reserves in accordance with Canadian
disclosure requirements, we have disclosed in this Prospectus
and in the documents incorporated by reference reserves
designated as Probable. If required to be prepared
in accordance with U.S. disclosure requirements, the
SECs guidelines would prohibit reserves in these
categories from being included. Moreover, in accordance with
Canadian practice, we have determined and disclosed estimated
future net cash flow from our reserves using both escalated and
constant prices and costs; for the constant prices and costs
case, prices and costs in effect as of December 31, 2006
were held constant for the economic life of the reserves. The
SEC does not permit the disclosure of estimated future net cash
flow from reserves based on escalating prices and costs and
generally requires that prices and costs be held constant at
levels in effect at the date of the reserve report. Additional
information prepared in accordance with United States Statement
of Financial Accounting Standards No. 69 Disclosures
About Oil and Gas Producing Activities relating to our oil
and gas reserves is set forth in our Supplementary Oil and Gas
Information SFAS 69 (Unaudited), which is
incorporated in the Prospectus by reference. Unless otherwise
stated, all of the reserves information contained in this
Prospectus Supplement and the Prospectus, including the
documents incorporated in the Prospectus by reference, has been
calculated and reported in accordance with NI 51-101.
S-3
The financial statements included or incorporated by reference
in this Prospectus Supplement and the Prospectus are in Canadian
dollars, unless otherwise indicated. The following table sets
forth, for each period indicated, the high and low exchange
rates, the average of such exchange rates during such period,
and the exchange rate at the end of such period, based on the
daily noon rate of exchange as reported by the Federal Reserve
Bank of New York. These rates are set forth as United States
dollars per Cdn.$1.00 and are the inverse of the rates quoted by
the Federal Reserve Bank of New York for Canadian dollars per
U.S.$1.00. On December 13, 2007, the noon exchange rate was
Cdn.$1.00 equals U.S.$0.9788.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(U.S.$)
|
|
|
(U.S.$)
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
High
|
|
|
0.8437
|
|
|
|
0.8528
|
|
|
|
0.8528
|
|
|
|
0.7872
|
|
Low
|
|
|
1.0041
|
|
|
|
0.9100
|
|
|
|
0.9100
|
|
|
|
0.8690
|
|
Average
|
|
|
0.9051
|
|
|
|
0.8831
|
|
|
|
0.8847
|
|
|
|
0.8282
|
|
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form F-10
relating to the Trust Units, of which this Prospectus
Supplement and the Prospectus form a part. This Prospectus
Supplement does not contain all of the information contained in
the registration statement, certain items of which are contained
in the exhibits to the registration statement as permitted by
the rules and regulations of the SEC. For further information
about Pengrowth and the Trust Units, please refer to the
registration statement.
We file annual and quarterly financial information and material
change reports and other material with the SEC and with the
securities commission or similar regulatory authority in each of
the provinces of Canada. Under the
multi-jurisdictional
disclosure system adopted by the United States, documents and
other information that we file with the SEC may be prepared in
accordance with the disclosure requirements of Canada, which are
different from those of the United States. You may read and copy
any document that we have filed with the SEC from the SECs
public reference room at 100 F Street, N.E.,
Washington, D.C. 20549 by paying a fee. You should call the
SEC at
1-800-SEC-0330
or access its website at www.sec.gov for further information
about the public reference room. You may read and download some
of the documents we have filed with the SECs Electronic
Data Gathering and Retrieval (EDGAR) system at www.sec.gov. You
may read and download any public document that we have filed
with the securities commissions or similar authorities in each
of the provinces of Canada at www.sedar.com.
DOCUMENTS
INCORPORATED BY REFERENCE
Information has been incorporated by reference in the
Prospectus from documents filed with securities commissions or
similar authorities in Canada and with the SEC in the
United States. Copies of the documents incorporated by
reference may be obtained on request without charge from the
secretary of the Corporation at 2900, 240
4th Avenue S.W., Calgary, Alberta T2P 4H4 (telephone:
1-800-223-4122)
and are also available electronically at www.sedar.com. For the
purpose of the Province of Québec, this Prospectus
Supplement and the Prospectus contain information to be
completed by consulting the permanent information record. A copy
of the permanent information record may be obtained from the
secretary of the Corporation at the above-mentioned address and
telephone number and is also available electronically at
www.sedar.com.
The following documents of the Trust filed with securities
commissions or similar authorities in each of the provinces of
Canada and the SEC are incorporated by reference into the
Prospectus:
|
|
|
|
(a)
|
the annual information form of the Trust dated March 30,
2007 for the year ended December 31, 2006 (AIF);
|
|
|
|
|
(b)
|
the management information circular dated May 1, 2007 for
the annual and special meeting of Unitholders held on
June 11, 2007 (Information Circular);
|
|
|
|
|
(c)
|
managements discussion and analysis for the year ended
December 31, 2006;
|
|
|
(d)
|
the comparative consolidated annual financial statements as at
and for the year ended December 31, 2006, together with the
notes thereto and the report of the auditors thereon, including
the auditors report on internal control over financial
reporting;
|
S-4
|
|
|
|
(e)
|
managements discussion and analysis for the period ended
September 30, 2007;
|
|
|
(f)
|
the comparative consolidated interim financial statements as at
and for the nine months ended September 30, 2007, together
with the notes thereto;
|
|
|
(g)
|
the business acquisition report dated October 31, 2006
filed in connection with the Esprit Merger (as defined in the
Prospectus);
|
|
|
(h)
|
the business acquisition report dated March 16, 2007 filed
in connection with the CP Acquisition (as defined in the
Prospectus);
|
|
|
(i)
|
the disclosure of the Trusts oil and gas producing
activities prepared in accordance with
SFAS No. 69 Disclosure about Oil and
Gas Producing Activities, which was filed on SEDAR under
the category Other on October 12, 2007; and
|
|
|
(j)
|
the reconciliation of the comparative consolidated interim
financial statements of the Trust as at and for the six months
ended June 30, 2007 to United States generally accepted
accounting principles, which was filed on SEDAR under the
category Other on October 12, 2007 and, for the
sole purpose of the presentation of the foregoing
reconciliation, we also incorporate by reference in the
Prospectus the Trusts managements discussion and
analysis for the period ended June 30, 2007 and the
comparative consolidated interim financial statements as at end
for the six months ended June 30, 2007, together with the
notes thereto.
|
Any annual information form, audited consolidated financial
statements (together with the auditors report thereon) and
related managements discussion and analysis, information
circular, material change reports, business acquisition reports
and any interim comparative unaudited consolidated financial
statements and related managements discussion and analysis
subsequently filed by us with the securities commissions or
similar regulatory authorities in the relevant provinces and
territories of Canada after the date of the Prospectus and prior
to the termination of the distribution of the Trust Units
under this Prospectus Supplement shall be deemed to be
incorporated by reference into the Prospectus. In addition, to
the extent that any document or information incorporated by
reference into the Prospectus is included in any report on
Form 6-K,
Form 40-F,
Form 20-F,
Form 10-K,
Form 10-Q
or
Form 8-K
(or any respective successor form) that is filed with or
furnished to the SEC after the date of this Prospectus
Supplement, such document or information shall be deemed to be
incorporated by reference as an exhibit to the registration
statement of which this Prospectus Supplement forms a part. In
addition, we may incorporate by reference into the Prospectus
information from documents that we file with or furnish to the
SEC pursuant to Section 13(a) or 15(d) of the United States
Securities Exchange Act of 1934, as amended.
Any statement contained in this Prospectus Supplement, the
Prospectus or in a document (or part thereof) incorporated or
deemed to be incorporated by reference in the Prospectus shall
be deemed to be modified or superseded to the extent that a
statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated by
reference herein modifies or supersedes such statement. The
modifying or superseding statement need not state that it has
modified or superseded a prior statement or include any other
information set forth in the document that it modifies or
supersedes. The making of a modifying or superseding statement
is not to be deemed an admission for any purposes that the
modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an
omission to state a material fact that is required to be stated
or that is necessary to make a statement not misleading in light
of the circumstances in which it was made. Any statement so
modified or superseded shall not be deemed, except as so
modified or superseded, to be incorporated by reference in the
Prospectus or to constitute a part of this Prospectus Supplement.
Upon a new annual information form and related annual financial
statements and the accompanying managements discussion and
analysis being filed by us with, and where required, accepted
by, the applicable securities regulatory authorities during the
currency of this Prospectus Supplement, the previous annual
information form and all annual financial statements, interim
financial statements and the accompanying managements
discussion and analysis, material change reports and information
circulars filed prior to the commencement of our financial year
in which the new annual information form is filed shall be
deemed no longer to be incorporated by reference into the
Prospectus for purposes of future offers and sales of
Trust Units hereunder. Upon interim consolidated financial
statements and the accompanying managements discussion and
analysis being filed by us with the applicable securities
regulatory authorities during the currency of this Prospectus
Supplement, all interim consolidated financial statements and
the accompanying managements discussion and analysis filed
prior to the new interim consolidated financial statements shall
be deemed no longer to be incorporated in the Prospectus for
purposes of future offers and sales of Trust Units under
this Prospectus Supplement.
S-5
You should rely only on the information contained in, or
incorporated by reference into, this Prospectus Supplement and
the Prospectus and on the other information included in the
registration statements of which this Prospectus Supplement and
the Prospectus form a part. We have not authorized anyone to
provide you with different or additional information. We are not
making an offer of these Trust Units in any jurisdiction
where the offer is not permitted by law.
An investment in the Trust Units is subject to a number of
risks. In addition to the other information contained in, and
incorporated by reference into, this Prospectus Supplement and
the Prospectus, you should carefully consider the risk factors
set forth under the heading Risk Factors,
which begins on page 20 of the Prospectus.
Reduction
in Monthly Distribution
On October 15, 2007, Pengrowth reduced its monthly cash
distribution to Cdn.$0.225 per Trust Unit. This distribution
represented a reduction of 10% or $0.025 from Pengrowths
monthly distribution of $0.25 per Trust Unit for the first three
quarters of 2007. See Distributions
Historical Distributions in the Prospectus.
Asset
Rationalization Program
Pengrowth completed asset sales for proceeds of approximately
$451 million ($437 million net of adjustments) for the
first nine months of 2007. The proceeds were used to partially
repay the $600 million bridge facility. Pengrowth expects
to realize additional proceeds of approximately $25 million
bringing the total for 2007 to approximately $476 million
from non-core property dispositions.
Changes
to Royalty Legislation Affecting Pengrowth and its
Unitholders
The Government of Alberta receives royalties on the production
of natural resources from lands in which it owns the mineral
rights. On October 25, 2007, the Government of Alberta
unveiled a new royalty regime. The new regime will introduce new
royalties for conventional oil, natural gas and bitumen
effective January 1, 2009 that are linked to price and
production levels and will apply to both new and existing
conventional oil and gas activities and oil sands projects.
Royalties payable pursuant to petroleum and natural gas leases
with the Government of Alberta are ad valorem royalties,
assessed on a sliding scale where the rate changes depending on
oil or natural gas prices and the level of production. Royalties
to the Crown in right of the Province of Alberta (the
Crown) currently are 30 and 35 percent in the
case of old and new conventional oil, respectively, 5 to
35 percent in the case of natural gas and from 15 to
50 percent in the case of natural gas liquids.
Under the new royalty regime, the royalty formula for
conventional oil will operate on a sliding rate formula
containing separate elements that account for oil price and well
production and specialty royalty programs will be eliminated
along with old and new tiers. Royalty
rates for conventional oil will range up to 50 percent,
with rate caps once the price of conventional oil reaches
Cdn.$120 per barrel. A significant portion of Pengrowths
production and reserves are derived from mature fields such as
Judy Creek Beaverhill where enhanced oil recovery (EOR)
techniques are employed. Currently, enhanced oil recovery (EOR)
receives an incentive in the form of a reduced royalty. The
Government of Alberta has indicated that these incentives are to
be maintained.
Under the new royalty regime, natural gas royalties will be set
by a sliding rate formula sensitive to price and well production
and vintages will be eliminated along with certain specialty
royalty programs, though a form of deep gas royalty holiday will
be retained and lower royalty rates will be applied over a wider
price range for wells with less productivity. Royalty rates for
natural gas will range from five percent to 50 percent with
rate caps once the price of natural gas reaches $16.59/GJ
(gigajoule). A shallow rights reversion program will also be
implemented that will result in the reversion to the Crown in
Alberta of mineral rights to undeveloped geological formations
above developed zones. Royalties for natural gas liquids will be
set at 40 percent for pentanes and 30 percent for
butanes and propane.
The implementation of the proposed changes to the royalty regime
in Alberta is subject to certain risks and uncertainties. The
significant changes to the royalty regime require new
legislation, changes to existing legislation and regulations and
development of proprietary software to support the calculation
and collection of royalties. Additionally, certain proposed
changes contemplate further public and/or industry consultation.
There may be modifications introduced to the proposed royalty
structure prior to the implementation thereof.
S-6
Approximately 79% of Pengrowths 2007 total royalties are
paid to the Crown in Alberta. Approximately 21% of
Pengrowths 2007 royalties are either paid to freehold
landowners, which are not impacted by the royalty changes, or
paid to other Provinces. It is anticipated that the new royalty
regime will result in a 7 to 19 percent increase in the
royalties paid by Pengrowth as compared to the current royalty
structure. This increase is expected to result in a decline in
the net present value, discounted at 10 percent, of the
future net revenues associated with (i) Pengrowths
proved reserves of 1 percent; and
(ii) Pengrowths proved plus probable reserves of
4 percent, in both cases using current commodity price
assumptions of GLJ Petroleum Consultants Ltd., independent
qualified reserves evaluators. The new royalty regime is not
expected to impact the quantity of Pengrowths reserves, as
compared to the current royalty structure. It is anticipated
that the new royalty regime will result in a 2 to 7 percent
decline in Pengrowths cash flow for 2009, the first year
in which the royalty changes take effect, as compared to the
current royalty structure. The higher end of the range reflects
the impact of the royalty on new higher rate wells. The lower
end of the range reflects the impact on the existing wells which
tend to produce at a lower rate. The changes to the royalty
regime may impact Pengrowths future allocation of capital
among petroleum and natural gas projects within and outside of
Alberta. See Risk Factors Changes in
government regulations that affect the crude oil and natural gas
industry could adversely affect Pengrowth and reduce our
distributions to our Unitholders in the
Prospectus.
Credit
Facility
On June 17, 2007, the Trust entered into a new
$1.2 billion extendible revolving term credit facility
syndicated among eleven financial institutions. For details of
the credit facility, see Material Debt
Credit Facility in the Prospectus.
Private
Placement of U.S. Unsecured Notes
On July 26, 2007, the Trust completed a
U.S.$400 million private placement of 6.35% senior
unsecured notes to a group of U.S. investors, which are due in
2017. Interest on these notes is payable semi-annually. See
Material Debt Senior Unsecured
Notes in the Prospectus.
U.S.
DRIP
On July 25, 2007, Pengrowth filed a registration statement
with the SEC to expand its distribution reinvestment and trust
unit purchase plan (DRIP) to permit Unitholders
resident in the United States to participate in the DRIP. The
enhanced DRIP permits Unitholders to elect to reinvest their
cash distributions in additional Trust Units at a 5%
discount to the weighted average closing price of the
Trust Units on the TSX for the 20 trading days immediately
preceding the cash distribution date. In addition, pursuant to
the DRIP, Unitholders may purchase additional Trust Units
for cash of up to Cdn.$1,000 (U.S.$900) per month under the same
terms.
Changes
to Tax Legislation Affecting Pengrowth and its
Unitholders
On October 31, 2006, the Minister of Finance (Canada)
announced proposed tax measures which will materially and
adversely change the manner in which Pengrowth is taxed and will
also change the character of the distributions to you for
Canadian federal income tax purposes. On June 22, 2007, the
SIFT Rules became law when Bill C-52 received Royal Assent. It
is expected that the SIFT Rules will apply to Pengrowth and its
Unitholders commencing in 2011, provided that Pengrowth does not
exceed the limits on normal growth prior to that
time. The SIFT Rules will subject the Trust to trust level
taxation, which will materially reduce the amount of cash
available for distributions to the Unitholders. Based on the
existing Canadian federal income tax rates and tax rate on
account of provincial taxes, the Trust estimates that the SIFT
Rules will, commencing on January 1, 2011, reduce the
amount of cash available to the Trust to distribute to its
Unitholders by an amount equal to 31.5% multiplied by the amount
of the pre-tax income distributed by the Trust. The Trusts
future net revenues associated with the reserves contained in
the AIF do not reflect the impact of the SIFT Rules thereon and,
after taking the SIFT Rules into account, such values will be
adversely affected. Pengrowths AIF in respect of the year
ended December 31, 2007 will include the impact of the SIFT
Rules on the future net revenues associated with
Pengrowths reserves. Under proposed amendments to Canadian
federal income tax legislation, the rate of tax applicable to
Pengrowth in 2011 will be reduced from 31.5% to 29.5% and to 28%
in 2012 and thereafter.
Taxability
of Distribution of U.S. Residents
Distributions paid to U.S. residents are treated as
partnership distributions for U.S. federal tax purposes and are
currently subject to a 15 percent Canadian withholding tax
to the extent that such amounts represent a distribution of
Pengrowths income. On September 21, 2007, Canada and
the United States signed the fifth protocol of the Canada-
S-7
United States Tax Convention which proposes to increase the
amount withheld by the Canadian government from 15 percent
to 25 percent on distributions of income. The increase will
become effective no earlier than January 1, 2010. Residents
of the U.S. should consult their individual tax advisors on the
impact of any additional withholding tax and changes to tax
laws. The fifth protocol must still be ratified in Canada and
the U.S. prior to becoming effective.
The net proceeds from the Offering are not determinable in light
of the nature of the distribution. The net proceeds of any given
distribution of Trust Units through the Underwriters in an
at-the-market distribution will represent the gross
proceeds after deducting the applicable compensation payable to
the Underwriters under the Equity Distribution Agreement and the
expenses of the distribution. The net proceeds will be used for
general business purposes.
CONSOLIDATED
CAPITALIZATION
Other than the U.S.$400 million private placement of
6.35% senior unsecured notes to U.S. investors, which
are due in 2017 (see Material Debt Senior
Unsecured Notes in the Prospectus), there have been no
material changes in our Trust Unit or debt capitalization
since June 30, 2007.
Sales of Trust Units will be made in transactions that are
deemed to be at-the-market distributions as defined
in
NI 44-102,
including sales made directly on the TSX, NYSE or other existing
trading markets for the Trust Units in the United States.
Subject to the terms and conditions of the Equity Distribution
Agreement and upon instructions from us, an Underwriter or agent
thereof will use its commercially reasonable efforts to sell the
Trust Units directly on the NYSE or another existing
trading market for the Trust Units in the United States
and/or on
the TSX. We will instruct the Underwriters as to the number of
Trust Units to be sold by the Underwriters. Pursuant to the
Decision Document (as defined herein), the number of
Trust Units sold on the TSX pursuant to the Equity
Distribution Agreement on any trading day will not exceed 25% of
the trading volume of the Trust Units on the TSX on that
day. We, or the Underwriters, may suspend the offering of
Trust Units upon proper notice and subject to other
conditions.
We will file on SEDAR a report disclosing the number and average
price of Trust Units distributed on the TSX by us pursuant
to this Prospectus Supplement as well as gross proceeds,
commission and net proceeds within seven calendar days after the
end of each month in which sales are made on the TSX with
respect to sales during the prior month. We will also disclose
the number and average price of Trust Units sold, as well
as the gross proceeds, commission and net proceeds from sales
hereunder in our annual and interim financial statements and
managements discussion and analysis.
We will pay the Underwriters compensation for their services in
acting as agents in the sale of Trust Units pursuant to the
terms of the Equity Distribution Agreement. We will pay FCC
compensation equal to 3.0% of the gross proceeds from the sales
made on the TSX and will pay SGAS compensation equal to 2.5% of
the gross proceeds from the sales made in the United States,
including on the NYSE. We estimate that the total expenses that
we will incur for the Offering, excluding compensation payable
to the Underwriters under the terms of the Equity Distribution
Agreement, will be approximately U.S.$734,000 (approximately
Cdn.$750,000).
Settlement for sales of Trust Units will occur on the third
trading day following the date on which any sales are made, or
on such other date as is industry practice for regular-way
trading, in return for payment of the net proceeds to us.
In connection with the sale of the Trust Units on our
behalf, SGAS will be deemed to be an underwriter
within the meaning of the United States Securities Act of
1933, as amended, and FCC will be an underwriter as defined
in applicable securities legislation in Canada, and the
compensation paid to the Underwriters will be deemed to be
underwriting commissions or discounts. We have agreed to provide
indemnification and contribution to the Underwriters against
certain civil liabilities, including liabilities under the
United States Securities Act of 1933, as amended, and
applicable securities legislation in Canada.
The offering of Trust Units pursuant to the Equity
Distribution Agreement will terminate upon the earlier of
(i) the sale of all Trust Units subject to the
agreement by the Underwriters and (ii) termination of the
agreement. We may terminate the Equity Distribution Agreement in
our sole discretion at any time by giving notice to the
Underwriters. Each of the Underwriters may terminate the Equity
Distribution Agreement under the circumstances specified in the
agreement and in its sole discretion at any time by giving
notice to us.
S-8
No underwriter or dealer involved in an at-the-market
distribution, no affiliate of such an underwriter or
dealer and no person acting jointly or in concert with such an
underwriter or dealer has over-allotted, or will over-allot,
Trust Units in connection with the distribution or effect
any other transactions that are intended to stabilize or
maintain the market price of the Trust Units.
The TSX has conditionally approved the listing of the
Trust Units qualified by this Prospectus Supplement.
Listing is subject to us fulfilling all of the requirements of
the TSX on or before October 14, 2009. The NYSE has
authorized, upon official notice of issuance, the listing of the
Trust Units offered hereunder.
CERTAIN
INCOME TAX CONSIDERATIONS
Canadian
Federal Income Tax Considerations
In the opinion of Bennett Jones LLP, counsel to Pengrowth, the
following summary fairly describes, as of the date hereof, the
principal Canadian federal income tax considerations pursuant to
the Income Tax Act (Canada) (the Tax
Act) generally applicable to a Unitholder, who, for
the purposes of the Tax Act and at all material times, holds
Trust Units as capital property. Generally, the
Trust Units will constitute capital property to a
Unitholder provided such Unitholder does not hold such
Trust Units in the course of carrying on a business and has
not acquired such Trust Units in one or more transactions
considered to be an adventure or concern in the nature of trade.
Certain Unitholders who are residents of Canada (a
Resident) and who might not otherwise be considered
to hold their Trust Units as capital property may, in
certain circumstances, be entitled to have the Trust Units
treated as capital property by making an irrevocable election in
accordance with subsection 39(4) of the Tax Act. Unitholders who
do not hold their Trust Units as capital property should
consult their own tax advisors.
This summary is not applicable to a Unitholder that is a
financial institution, as defined in the Tax Act for
purposes of the mark-to-market rules, or to a Unitholder an
interest in which would be a tax shelter investment
as defined in the Tax Act. Any such Unitholder should consult
its own tax advisor with respect to Trust Units issued
under this Prospectus or any Prospectus Supplement.
This summary is based upon the provisions of the Tax Act in
force as of the date hereof, all specific proposals to amend the
Tax Act that have been publicly announced by or on behalf of the
Minister of Finance (Canada) (Finance) prior to the
date hereof (the Proposed Amendments),
counsels understanding, based on publicly available
published materials, of the current administrative policies and
assessing practices of the Canada Revenue Agency (the
CRA) and representations of Pengrowth as to certain
factual matters.
This summary is not exhaustive of all possible Canadian federal
income tax considerations and, except for the Proposed
Amendments, does not take into account any changes in the law,
whether by legislative, regulatory or judicial action, or any
changes in the administrative policies and assessing practices
of the CRA, nor does it take into account provincial,
territorial or foreign tax legislation or considerations, which
may differ significantly from those discussed herein.
Counsel has been advised by Pengrowth and has assumed for the
purpose of the description of tax considerations that follow
that Pengrowth will qualify as a mutual fund trust
as defined in the Tax Act at all relevant times.
This summary is of a general nature only and is not intended
to be legal or tax advice to any particular Unitholder.
Consequently, Unitholders should consult their own tax advisors
for advice with respect to the income tax consequences relating
to the ownership of Trust Units, based on their own
particular circumstances, including the application and effect
of the income and other tax laws of any country, province,
territory, state or local tax authority.
SIFT
Rules
On October 31, 2006, Finance announced proposed changes to
the manner in which certain flow-through entities and the
distributions from such entities are taxed. On December 15,
2006, Finance released guidelines on normal growth for income
trusts and other flow-through entities (the
Guidelines). On June 22, 2007, Bill C-52
received Royal Assent. Bill C-52 includes legislative provisions
to implement the October 31, 2006 proposals (hereinafter
referred to as the SIFT Rules). The summary which
follows is based on the general information found in the
background paper issued by Finance at the time of the
October 31, 2006 announcement (which is not legislation),
the Guidelines, and Bill C-52. The SIFT Rules apply a tax on
certain income earned by a specified investment
flow-through entity (SIFT), as well as taxing
the taxable distributions received by unitholders from such
entities as dividends. The SIFT Rules, as discussed
S-9
below, are generally applicable to Pengrowth and its Unitholders
after 2010, provided that Pengrowth does not exceed limits on
normal growth prior to that time.
Pursuant to the SIFT Rules, Pengrowth will constitute a SIFT
and, as a result, Pengrowth and the Unitholders will be subject
to the SIFT Rules. It is assumed for the purposes of this
summary that Pengrowth will be characterized as a SIFT trust.
Subject to the undue expansion issue discussed
below, for income trusts the units of which were publicly traded
as of October 31, 2006, such as Pengrowth, there is a four
year transition period and the background paper to the SIFT
Rules also indicates that the application date of 2011 is
subject to the possible need to foreclose inappropriate new
avoidance techniques. The SIFT Rules indicate that, as an
example, while there is now no intention to prevent existing
income trusts from normal growth prior to 2011, any
undue expansion of an existing income trust (such as
might be attempted through the insertion of a disproportionately
large amount of additional capital) would cause a termination of
the transition period. The Guidelines indicate that no change
will be recommended to the 2011 date in respect of any SIFT
whose equity capital grows as a result of issuances of new
equity (which includes trust units, debt that is convertible
into trust units, and potentially other substitutes for such
equity), before 2011, by an amount that does not exceed the
greater of $50 million and an objective safe
harbour amount based on a percentage of the SIFTs
market capitalization as of the end of trading on
October 31, 2006 (measured in terms of the value of a
SIFTs issued and outstanding publicly-traded units, not
including debt, options or other interest that were convertible
into units of the SIFT). For the period of November 1, 2006
to the end of 2007, the Guidelines provide that a SIFTs
safe harbour will be 40% of the October 31, 2006 benchmark
and for each of calendar 2008, 2009 and 2010 the Guidelines
provide that a SIFTs safe harbour will be 20% of the
October 31, 2006 benchmark. Pengrowth has advised counsel
that the aggregate of the offering of Units pursuant to this
Prospectus and all previous equity issuances determined in
accordance with the Guidelines and all currently contemplated
issuances of such equity will not exceed the applicable limit of
40% equity growth for the period extending from November 1,
2006 to December 31, 2007, or 20% equity growth for any
relevant calendar year thereafter, and thus should not, by
itself, cause Pengrowth to be subject to the SIFT Rules prior to
2011. It is therefore assumed, for the purposes of this summary,
that Pengrowth will not be subject to the SIFT Rules until
January 1, 2011. However, under the SIFT Rules, in the
event that Pengrowth issues additional Units or convertible
debentures (or other equity substitutes) on or before 2011,
Pengrowth may become subject to the SIFT Rules prior to 2011.
No assurance can be provided that the SIFT Rules will not
apply to Pengrowth prior to 2011.
Taxation
of Pengrowth
Subject to the SIFT Rules, Pengrowth is subject to taxation in
each taxation year on its income for the year, including net
realized taxable capital gains, less the portion thereof that is
paid or payable in the year to Unitholders and which is deducted
by Pengrowth in computing its income for the purposes of the Tax
Act. An amount will be considered to be payable to a Unitholder
in a taxation year only if it is paid in the year by Pengrowth
or the Unitholder is entitled in that year to enforce payment of
the amount. The taxation year of Pengrowth is the calendar year.
Pengrowth will be required to include in its income for each
taxation year income from net profits interests held by it,
including the Royalty. Pengrowth will also be required to
include in its income all interest that accrues to it to the end
of the year or becomes receivable or is received by it before
the end of the year, except to the extent that such interest was
included in computing its income for a preceding taxation year.
Other types of income from Pengrowths investments,
including its oil and gas facilities, are generally required to
be included in income on an accrual basis. Provided that
appropriate designations are made by Pengrowth, all dividends
which would otherwise be included in its income as dividends
received on shares owned by Pengrowth, including the shares of
the Corporation, will be deemed to have been received by
Unitholders and not to have been received by Pengrowth.
In computing its income, Pengrowth may deduct reasonable
administrative costs and management fees, capital cost allowance
in respect of its oil and natural gas facilities in an amount
generally equal to the lesser of the prescribed rate and the net
leasing income attributable to such property and other expenses
incurred by it for the purpose of earning income. Pengrowth will
be entitled to deduct the costs incurred by it in connection
with the issuance of Trust Units on a five-year,
straight-line basis (subject to proration for short taxation
years). Pengrowth may deduct up to 10% annually on a declining
balance basis of its cumulative Canadian oil and gas property
expense (COGPE) (subject to proration for short
taxation years). If Pengrowths cumulative COGPE is less
than zero at the end of a taxation year, such negative amount
must be included in Pengrowths income. Pengrowths
cumulative COGPE will be reduced as a result of a sale of
property by the Corporation which is subject to the Royalty
where proceeds of disposition thereof become receivable by
Pengrowth.
S-10
The Trust Indenture provides that Computershare will be
required to claim the maximum permissible deductions for the
purposes of computing the income of Pengrowth pursuant to the
Tax Act to the extent required to reduce the taxable income of
Pengrowth to nil or to the extent desirable in the best
interests of Unitholders. Therefore, Computershare may choose
not to claim all deductions in computing income and taxable
income to the maximum extent permitted by the Tax Act in order
to utilize losses from prior taxation years. As a result of such
deductions from income, it is expected that Pengrowth will not
be liable for any material amount of income tax under the Tax
Act, subject to the SIFT Rules. However, counsel can provide no
assurance in that regard, especially in view of the SIFT Rules.
Under the SIFT Rules, on the basis that Pengrowth is a SIFT,
once it becomes subject to the SIFT Rules (which is anticipated
to be, subject to any undue expansion, deferred
until January 1, 2011), Pengrowth will no longer be able to
deduct any part of the amounts payable to Unitholders in respect
of non-portfolio earnings which means:
(i) income from businesses it carries on in Canada or from
its non-portfolio properties, other than taxable dividends,
(exceeding any losses for the taxation year from businesses or
non-portfolio properties); and (ii) taxable capital gains
from its dispositions of non-portfolio properties (exceeding its
allowable capital losses from the disposition of such
properties). Non-portfolio properties include:
(i) Canadian real and resource properties if the total fair
market value of such properties is greater than 50% of the
equity value of the SIFT itself; (ii) a property that the
SIFT (or a non-arms length person or partnership) uses in
the course of carrying on a business in Canada; and
(iii) securities of a subject entity if the SIFT holds
securities of the subject entity that have a fair market value
greater than 10% of the subject entitys equity value or if
the SIFT holds securities of the subject entity or its
affiliates that have a total fair market value greater than 50%
of the SIFTs equity value. A subject entity includes
corporations resident in Canada, trusts resident in Canada, and
Canadian resident partnerships. It is expected that the majority
of Pengrowths assets will be non-portfolio properties for
this purpose. Income which a SIFT is unable to deduct will be
taxed in the SIFT at rates of tax comparable to the combined
federal and provincial corporate tax rate. For 2011, the SIFT
Rules state that the combined tax rate would be 31.5%. The SIFT
Rules do not change the tax treatment of distributions that are
paid as returns of capital. Under the Proposed Amendments, the
rate of tax applicable to SIFTs (including Pengrowth) will be
29.5% in 2011 and 28% in 2012 and thereafter.
Taxation
of Unitholders Resident in Canada
A Unitholder who is a Resident for purposes of the Tax Act will
generally be required to include in its income for a particular
taxation year the portion of the net income of Pengrowth for a
taxation year, including taxable dividends and net realized
capital gains, that are paid or payable to the Unitholder in
that particular taxation year. Income of a Unitholder from the
Trust Units will be considered to be income from property.
Any loss of Pengrowth for the purposes of the Tax Act cannot be
allocated to and treated as a loss of a Unitholder.
Provided that appropriate designations are made by Pengrowth,
such portions of its net taxable capital gains and taxable
dividends as are paid or payable to a Unitholder will
effectively retain their character as taxable capital gains and
taxable dividends, respectively, and will be treated as such in
the hands of the Unitholder for purposes of the Tax Act. See
Certain Income Tax Considerations Canadian
Federal Income Tax Considerations Taxation of
Capital Gains and Capital Losses in this Prospectus
Supplement.
The non-taxable portion of net realized capital gains of
Pengrowth that is paid or payable to a Unitholder in a year will
not be included in computing the Unitholders income for
the year and will not reduce the adjusted cost base of the
Unitholders Trust Units. Any other amount in excess
of the net income of Pengrowth that is paid or payable by
Pengrowth to a Unitholder in a year will generally not be
included in the Unitholders income for the year. However,
where any such other amount is paid or payable to a Unitholder,
other than as proceeds of disposition of Trust Units or
fractions thereof, the adjusted cost base of the
Trust Units held by such Unitholder will generally be
reduced by such amount. To the extent that the adjusted cost
base to a Unitholder of a Trust Unit is less than zero at
any time in a taxation year, such negative amount will be deemed
to be a capital gain of the Unitholder from the disposition of
the Trust Unit in that year. The amount of such capital
gain will be added to the adjusted cost base of such
Trust Unit.
Notwithstanding the foregoing, pursuant to the SIFT Rules,
commencing in 2011, taxable distributions from Pengrowth
received by Unitholders and paid from the Pengrowths
after-tax non-portfolio earnings will generally be deemed to be
received as taxable dividends from a taxable Canadian
corporation. Such dividends will be subject to the
gross-up and
dividend tax credit provisions in respect of Unitholders who are
individuals. Under the SIFT Rules, the dividends deemed to be
paid by Pengrowth will be deemed to be eligible
dividends and individual Unitholders will therefore
benefit from the enhanced
gross-up and
dividend tax credit rules of the Tax Act. Such dividends
received by corporations resident in Canada will be eligible for
full deduction as tax free inter-corporate dividends and
potentially subject to a
331/3%
refundable tax under Part IV of the Tax Act.
S-11
A Unitholder that throughout the relevant taxation year is a
Canadian-controlled private corporation, as defined
in the Tax Act, may be liable to pay an additional refundable
tax of
62/3%
on certain investment income, including taxable capital gains
and certain income from Pengrowth. Distributions which are
treated as dividends in the hands of Canadian-controlled
private corporations will generally be eligible for the
full dividends received deduction but will be subject to a
331/3%
refundable tax under Part IV of the Tax Act.
Upon the disposition or deemed disposition by a Unitholder of a
Trust Unit, whether on redemption or otherwise, the
Unitholder will generally realize a capital gain (or a capital
loss) equal to the amount by which the proceeds of disposition
are greater (or less) than the aggregate of the
Unitholders adjusted cost base of the Trust Unit and
any reasonable costs of disposition.
Taxation
of Capital Gains and Capital Losses
One half of any capital gain realized by a Unitholder who is a
Resident for purposes of the Tax Act on a disposition or deemed
disposition of Trust Units, and the amount of any net
taxable capital gains designated by Pengrowth in respect of a
Unitholder, will be included in the Unitholders income
under the Tax Act in the year of disposition or designation, as
the case may be, as a taxable capital gain. One half of any
capital loss (an allowable capital loss) realized by
a Unitholder upon a disposition or deemed disposition of
Trust Units may be deducted against any taxable capital
gains realized by the Unitholder in the year of disposition. To
the extent that the Unitholders allowable capital losses
exceed the Unitholders taxable capital gains for the year,
the excess may be carried over and applied against taxable
capital gains in any of the three preceding taxation years or in
any subsequent taxation year, to the extent and under the
circumstances described in the Tax Act.
Taxable capital gains realized by a Unitholder that is an
individual may give rise to minimum tax depending on such
Unitholders circumstances. A Unitholder that is a
Canadian-controlled private corporation as defined
in the Tax Act may be liable to pay additional refundable tax of
62/3%
on certain investment income, including taxable capital gains.
Unitholders to whom these rules might apply should consult their
own tax advisors.
Taxation
of Tax Exempt Unitholders
Subject to the specific provisions of any particular plan, and
provided that Pengrowth continues to qualify as a mutual
fund trust for the purposes of the Tax Act, the
Trust Units will be qualified investments for trusts
governed by registered retirement savings plans, registered
retirement income funds, registered education savings plans and
deferred profit sharing plans as defined in the Tax Act
(referred to herein as Exempt Plans). Such Exempt
Plans will generally not be liable for tax in respect of any
distributions received from Pengrowth or any capital gain
realized on the disposition of any Trust Units.
In certain circumstances, the Trust Indenture permits
Pengrowth to distribute Royalty Units or other property as an
in specie redemption of Trust Units. Exempt Plans
should contact their own tax advisors with regard to the
acquisition of Royalty Units and other assets on the redemption
of Trust Units to determine whether such property
constitutes a qualified investment for such Exempt Plans having
regard to their own circumstances. Certain negative tax
consequences may arise where an Exempt Plan acquires or holds a
non-qualified investment.
Taxation
of Unitholders who are Non-Residents of Canada
Where Pengrowth makes distributions to a Unitholder who is not a
Resident and is not deemed to be a Resident for purposes of the
Tax Act (referred to herein as a Non-Resident
Unitholder), the same general considerations as those
discussed above with respect to a Unitholder who is a Resident
will apply, as above, except that any distribution of income of
Pengrowth to a Non-Resident Unitholder will be subject to
Canadian withholding tax at the rate of 25% unless such rate is
reduced under the provisions of a convention between Canada and
the Unitholders jurisdiction of residence. For example,
Non-Resident Unitholders resident in the United States for
purposes of the Canada-United States Income Tax Convention,
1980 (the Canada-U.S. Convention) will
generally be entitled to have the rate of withholding reduced to
15% of the amount of any income distributed.
Pursuant to the SIFT Rules, amounts in respect of
Pengrowths income payable to Non-Resident Unitholders that
are not deductible to Pengrowth will be treated as a taxable
dividend from a taxable Canadian corporation. Such dividends
will be subject to Canadian withholding tax at a rate of 25%,
unless such rate is reduced under the provisions of a convention
between Canada and the Non-Resident Unitholders
jurisdiction of residence. A Non-Resident Unitholder resident in
the United States who is entitled to claim the benefit of the
Canada-U.S. Convention generally will be entitled to have
the rate of withholding reduced to 15% of the amount of such
dividend. Although the SIFT Rules may not increase
S-12
the tax payable by Non-Resident Unitholders in respect of
dividends deemed to be paid by Pengrowth, it is expected that
the imposition of tax at the Pengrowth level under the SIFT
Rules will materially reduce the amount of cash available for
distributions to Unitholders.
On September 21, 2007, Canada and the United States signed
the fifth protocol (the Fifth Protocol) of the
Canada-U.S. Income Tax Convention, 1980 (the
Canada U.S. Convention). The Fifth
Protocol must still be ratified in Canada and the
U.S. prior to becoming effective. If ratification occurs in
2007, the Fifth Protocol will, subject to some exceptions
discussed below, come into force on January 1, 2008. If
ratification does not occur in 2007, the Fifth Protocol will
come into force when the ratification procedures have been
completed in Canada and the U.S. The Fifth Protocol contains new
Article IV(7)(b), a treaty benefit denial rule, which would
increase the Canadian withholding tax on Pengrowths
distributions (which for the purposes of this paragraph includes
deemed dividends pursuant to the SIFT Rules) to Non-Resident
Unitholders who are residents of the U.S. for the purposes
of the Canada-U.S. Convention. Article IV(7)(b) will
not come into force until the first day of the third calendar
year that ends after the Fifth Protocol is in force.
Article IV(7)(b) generally denies benefits under the
Canada-U.S. Convention in circumstances where (i) a
Unitholder who is a resident of the U.S. for the purposes
of the Canada-U.S. Convention receives an amount, such as a
distribution, from an entity that is a resident of Canada, such
as Pengrowth, (ii) Pengrowth is treated as a fiscally
transparent entity for U.S. federal income tax purposes,
which is the case inasmuch as Pengrowth is treated as a
partnership for U.S. federal income tax purposes, and
(iii) the tax treatment of the amount (or distribution)
received by the U.S. Resident Unitholder would, for
U.S. federal income tax purposes, be different if Pengrowth
were not treated as fiscally transparent for U.S. federal
income tax purposes. The effect of Article IV(7)(b) is that
the Canadian withholding tax rate on distributions of income
would be 25% instead of 15%. Returns of capital would still be
subject to a 15% Canadian withholding tax and such rate is not
modified by the Fifth Protocol.
The portion of any distribution which is not otherwise subject
to withholding tax under the Tax Act are, and will be under the
SIFT Rules, subject to a Canadian withholding tax of 15%. If a
subsequent disposition of a Trust Unit results in a capital
loss to a Non-Resident Unitholder, a refund of the 15% Canadian
withholding tax is available in limited circumstances, subject
to the filing of a special Canadian tax return.
A disposition or deemed disposition of Trust Units will not
give rise to a capital gain subject to tax under the Tax Act to
a Non-Resident Unitholder provided that the Trust Units
held by the Unitholder are not taxable Canadian
property for the purposes of the Tax Act. Trust Units
will not constitute taxable Canadian property to a Non-Resident
Unitholder unless: (i) the Non-Resident Unitholder holds or
uses, or is deemed to hold or use, the Trust Units in the
course of carrying on business in Canada; (ii) the
Trust Units are designated insurance property,
as defined in the Tax Act, of the Non-Resident Unitholder;
(iii) at any time during the
60-month
period that ends immediately before the disposition of the
Trust Units the Non-Resident Unitholder or persons with
whom the Non-Resident Unitholder did not deal at arms
length or any combination thereof, held 25% or more of the
issued Trust Units; or (iv) Pengrowth is not a mutual
fund trust on the date of disposition.
Non-Resident Unitholders are urged to consult their own tax
advisors having regard to their own particular circumstances.
U.S.
Federal Income Tax Considerations
The following discussion is a summary of certain United States
federal income tax consequences of the ownership and disposition
of Trust Units. This discussion is based on the
U.S. Internal Revenue Code of 1986, as amended (the
Code), administrative pronouncements, judicial
decisions, existing and proposed Treasury regulations, and
interpretations of the foregoing, all as of the date hereof. All
of the foregoing authorities are subject to change (possibly
with retroactive effect), and any such change may result in
United States federal income tax consequences to a Unitholder
that are materially different from those described below. No
rulings from the United States Internal Revenue Service (the
IRS) have been or will be sought with respect to the
matters described below, and consequently, the IRS may not take
a similar view of the consequences described below.
The following discussion does not purport to be a full
description of all United States federal income tax
considerations that may be relevant to a United States holder
(as defined below) in light of such Unitholders particular
circumstances and only addresses Unitholders who hold
Trust Units as capital assets within the meaning of
Section 1221 of the Code. Furthermore, this discussion does
not address the United States federal income tax considerations
applicable to Unitholders subject to special rules, such as
persons that are not United States holders, certain financial
institutions, real estate investment trusts, regulated
investment companies, insurance companies, persons subject to
the alternative
S-13
minimum tax, traders in securities that elect to use a
mark-to-market method of accounting, dealers in securities or
currencies, persons holding Trust Units in connection with
a hedging transaction, straddle, conversion
transaction or other integrated transaction, Unitholders whose
functional currency is not the United States dollar
and U.S. expatriates. In addition, except as otherwise
indicated, this discussion does not include any description of
any estate and gift tax consequences, or the tax laws of any
state, local or foreign government that may be applicable.
As used herein, the term United States holder means
a beneficial owner of a Trust Unit that is (i) an
individual citizen or resident of the United States, (ii) a
corporation or other entity taxable as a corporation organized
in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation without regard
to the source or (iv) a trust if a United States court has
primary supervision over its administration and one or more
United States persons have the authority to control all
substantial decisions of the trust, or if the trust has a valid
election in effect under applicable Treasury Regulations to be
treated as a United States person.
If a partnership (or an entity taxable as a partnership for
United States federal income tax purposes) holds our
Trust Units, the United States federal income tax treatment
of a partner generally will depend on the status of the partner
and the activities of the partnership. A United States person
that is a partner of a partnership (or an entity taxable as a
partnership for United States federal income tax purposes)
holding our Trust Units should consult its own tax advisors.
UNITED STATES HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
REGARD TO THE APPLICATION OF UNITED STATES FEDERAL INCOME TAX
LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR
FOREIGN TAXING JURISDICTION.
Classification
of Pengrowth Energy Trust as a Partnership
We have elected under applicable Treasury Regulations to be
treated as a partnership for United States federal income tax
purposes. Although there is no plan or intention to do so, we
have the right to elect under applicable Treasury Regulations to
be treated as a corporation for United States federal income tax
purposes, if such election were determined to be beneficial.
A partnership generally is not treated as a taxable entity and
incurs no United States federal income tax liability. Instead,
as discussed below, each partner in an entity treated as a
partnership for tax purposes is required to take into account
its allocable share of items of income, gain, loss and deduction
of the partnership in computing its United States federal income
tax liability, regardless of whether cash or other distributions
are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of any cash distributed
is in excess of the partners adjusted basis in its
partnership interest (see Certain Income Tax
Considerations United States Federal Income Tax
Considerations Tax Consequences of Trust Unit
Ownership in this Prospectus Supplement). Each
Unitholder will be treated as a partner in the Trust for United
States federal income tax purposes.
Section 7704 of the Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations.
However, an exception (the Qualifying Income
Exception) exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every
taxable year consists of qualifying income.
Qualifying income includes interest (from other than a financial
business), dividends, rents from real property, oil and gas
royalty income, gains from the sale of oil and gas properties,
and gains derived from the exploration, development, mining or
production, processing, refining, transportation or the
marketing of oil and gas. Royalty income received by the Trust
from Pengrowth should be treated as qualifying income. We
believe that less than 10 percent of our income for the
current year will not be qualifying income and that we have met
the qualifying income exception since we first elected to be
treated as a partnership for United States federal income tax
purposes in 1997. We expect that we will continue to meet the
qualifying income exception in 2007 and thereafter. However, no
assurance can be given that the qualifying income exception will
in fact be met.
Possible
Classification as a Corporation; PFIC Rules
If we fail to meet the Qualifying Income Exception (other than a
failure which is determined by the IRS to be inadvertent and
which is cured within a reasonable time after discovery), we
will be treated as if we transferred all of our assets (subject
to liabilities) to a newly formed corporation (on the first day
of the year in which we fail to meet the Qualifying Income
Exception) in return for stock in that corporation, and then
distributed that stock to our owners in liquidation of their
interests in us. That deemed transfer and liquidation would
likely be taxable to United States holders. Thereafter, we would
be treated as a corporation for federal income tax purposes.
United States holders would be required to file IRS
Form 926 to report the deemed transfer and any other
transfers made to the Trust while it is treated as a corporation.
S-14
If we were treated as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction
would not be passed through to United States holders. Instead,
United States holders would be taxed upon the receipt of
distributions, either pursuant to the passive foreign investment
company (PFIC) rules discussed below or, if those
rules are not applicable (or if the United States holder makes
certain elections pursuant to those rules), as either taxable
dividend income (to the extent of our current or accumulated
earnings and profits calculated by reference to our tax basis in
our assets without regard to the price paid for Trust Units
by subsequent United States holders) or (in the absence of
earnings and profits) a nontaxable return of capital (to the
extent of the United States holders tax basis in its
Trust Units) or taxable capital gain (after the United
States holders tax basis in the Trust Units is
reduced to zero). If we were treated as a corporation, it is
possible that we would be considered a PFIC, in which case
special rules (discussed below), potentially quite adverse to
United States holders, would apply.
Consequences of Possible PFIC Classification
A non-United
States entity treated as a corporation for United States federal
income tax purposes will be a PFIC in any taxable year in which,
after taking into account the income and assets of the
corporation and certain subsidiaries pursuant to the applicable
look through rules, either (1) at least
75 percent of its gross income is passive
income (the income test) or (2) at least
50 percent of the average value of its assets is
attributable to assets that produce passive income or are held
for the production of passive income (the assets
test).
We currently believe that, if classified as a corporation, we
would not be a PFIC. Because PFIC status is fundamentally
factual in nature, generally cannot be determined until the
close of the taxable year in question and is determined
annually, no assurance can be given that, if we were a
corporation, we would not be now, and would not be in the
future, a PFIC.
If we were classified as a PFIC, for any year during which a
United States holder owns Trust Units, the United States
holder would generally be subject to special rules (regardless
of whether we continue to be a PFIC) with respect to
(1) any excess distribution (generally, any
distribution received by the United States holder on
Trust Units in a taxable year that is greater than
125 percent of the average annual distributions received by
the United States holder in the three preceding taxable years
or, if shorter, the United States holders holding period
for the Trust Units) and (2) any gain realized upon
the sale or other disposition of Trust Units. Under these
rules:
|
|
|
|
|
the excess distribution or gain will be allocated ratably over
the United States holders holding period;
|
|
|
|
the amount allocated to the current taxable year and any year
prior to the first year in which we were a PFIC will be taxed as
ordinary income in the current year;
|
|
|
|
the amount allocated to each of the other taxable years in the
United States holders holding period will be subject to
tax at the highest rate of tax in effect for the applicable
class of taxpayer for that year; and
|
|
|
|
an interest charge for the deemed deferral benefit will be
imposed with respect to the resulting tax attributable to each
such other taxable year.
|
A United States holder would also generally be subject to
similar rules with respect to distributions to us by, and
dispositions by us of the stock of, any direct or indirect
subsidiary of the Trust that is also a PFIC.
Certain elections may be available to a United States holder if
we were classified as a PFIC. We will provide United States
holders with information concerning the potential availability
of such elections if we determine that we are or will become a
PFIC.
The discussion below is based on the assumption that we will be
treated as a partnership for United States federal income tax
purposes.
Tax
Consequences of Trust Unit Ownership
Flow-through
of Taxable Income
Each United States holder will be required to report on its
income tax return its allocable share (based on the percentage
of Trust Units owned by that United States holder) of our
income, gains, losses and deductions for the taxable year of the
Trust ending with or within the taxable year of the United
States holder without regard to whether corresponding cash
distributions are received by such United States holder.
Consequently, a United States holder may be allocated income
from the Trust even if it has not received a cash distribution
from us.
S-15
We intend to make available to each United States holder, within
75 days after the close of each calendar year, a Substitute
Schedule K-1
containing its share of our income, gain, loss and deduction for
the preceding Trust taxable year.
We treat the Royalty between us and Pengrowth as a royalty
interest for all legal purposes, including United States federal
income tax purposes. The Royalty Indenture in some respects
differs from more conventional net profits interests
as to which the courts and the IRS have ruled regarding the
U.S. federal income tax treatment as a royalty, and as a
result the propriety of such treatment is not free from doubt.
It is possible that the IRS could contend, for example, that the
Trust should be considered to have a working interest in the
properties of Pengrowth. If the IRS were successful in making
such a contention, the United States federal income tax
consequences to United States holders could be different,
perhaps materially worse, than indicated in the discussion
herein, which generally assumes that the Royalty Indenture will
be respected as a royalty.
Treatment
of Distributions
Distributions by us to a United States holder generally will not
be taxable to the United States holder for federal income tax
purposes to the extent of its tax basis in its Trust Units
immediately before the distribution. Cash distributions in
excess of a United States holders tax basis generally will
be considered to be gain from the sale or exchange of the
Trust Units, taxable in accordance with the rules described
under Certain Income Tax Considerations
United States Federal Income Considerations
Disposition of Trust Units below.
Basis of
Trust Units
A United States holders initial tax basis for its
Trust Units will be the amount paid for the
Trust Units. That basis will be increased by its share of
our income and decreased (but not below zero) by distributions
to it from us, by the United States holders share of our
losses and deductions, and by its share of our expenditures that
are not deductible in computing our taxable income and are not
required to be capitalized. See Certain Income Tax
Considerations United States Federal Income Tax
Considerations Disposition of Trust Units
Recognition of Gain or Loss in this
Prospectus Supplement.
Limitations
on Deductibility of Losses
There are limitations on the ability of a United States holder
to deduct any losses we generate from our activities under the
basis limitation rules, the at-risk rules and the passive
activity loss rules. Special passive activity loss rules apply
to a publicly-traded partnership such as the Trust, and preclude
passive activity losses generated by us from being used against
passive income generated by other passive activities or against
portfolio income generated by us.
United States holders should consult their own tax advisors as
to the applicability to them of such loss limitations.
Limitations
on Interest Deductions
The deductibility of a non-corporate taxpayers
investment interest expenses is generally limited to
the amount of such taxpayers net investment
income. Investment interest expense includes
(i) interest on indebtedness properly allocable to property
held for investment and (ii) the portion of interest
expense incurred to purchase or carry an interest in a passive
activity to the extent attributable to portfolio income. The
computation of a United States holders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or own
Trust Units. Net investment income includes gross income
from property held for investment and amounts treated as
portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected
with the production of investment income, but generally does not
include gains attributable to the disposition of property held
for investment.
Foreign
Tax Credits
Subject to certain limitations set forth in the Code, United
States holders may elect to claim a credit against their United
States federal income tax liability for net Canadian income
tax withheld from distributions received in respect of the
Trust Units that is not refundable to the United States
holder. Subject to these limitations, United States holders will
also be entitled to claim a foreign tax credit for any Canadian
income taxes paid by us. The rules and limitations relating to
the determination of the foreign tax credit are complex and
prospective purchasers are urged to consult their own tax
advisors to determine whether or to what extent they would be
entitled to such credit. United States persons that do not elect
to claim foreign tax credits may instead claim a deduction for
their share of Canadian income taxes paid by us or withheld from
distributions by us.
S-16
Functional
Currency
Because our functional currency is the Canadian dollar, a United
States holder will be required to translate our items of income
and deduction, which will be initially determined by us in the
Canadian dollar, into United States dollars prior to including
its share thereof on its United States federal income tax
return. Under regulations that have been recently proposed by
the United States Treasury Department, a United States holder
who owns directly and indirectly less than five percent of the
Trust Units can elect not to take into account as
additional income foreign currency translation income or loss
(which would be ordinary income or loss) in respect of certain
of our financial assets and liabilities on the receipt of
certain distributions and upon certain dispositions. The
proposed Treasury Regulations state that the IRS will consider
positions consistent with the proposed regulations to be
reasonable interpretations of the Code until the proposed
regulations are finalized. There can be no assurance as to the
time at which any regulations will be finalized or as to the
effect of any such regulations.
Tax
Treatment of Trust Operations
Accounting
Method and Taxable Year
We use the year ending December 31 as our taxable year and have
adopted the accrual method of accounting for United States
federal income tax purposes.
Depletion
Under the Code, a United States holder may deduct in its United
States federal income tax return a cost depletion allowance with
respect to the Royalty Units issued by Pengrowth to the Trust.
United States holders must compute their own depletion allowance
and maintain records of the adjusted basis of the royalty units
for depletion and other purposes. We, however, intend to furnish
each United States holder with information relating to this
computation.
Cost depletion is calculated by dividing the adjusted basis of a
property by the total number of units of oil or gas expected to
be recoverable therefrom and then multiplying the quotient by
the number of units of oil and gas sold during the year. Cost
depletion, in the aggregate, cannot exceed the initial adjusted
basis of the property. In this connection, we intend to utilize
a tax election, known as a Section 754 election and
discussed below, which will allow purchasers of Trust Units
to be entitled to depletion deductions based upon their purchase
price for the Trust Units.
The depletion allowance must be computed separately by each
United States holder for each oil and gas property, within the
meaning of Section 614 of the Code. The IRS is currently
taking the position that a single net profits interest carved
from multiple properties is a single property for depletion
purposes. The Royalty Indenture burdens multiple properties.
Accordingly, although it may be modified to take into account
subsequent acquisitions, we intend to take the position that the
properties subject to the Royalty Indenture constitute a single
property for depletion purposes and the income from the net
profits interest will be royalty income qualifying for an
allowance for depletion. This result is not clear, however, and
we would change this position if it should be determined that a
different method of computing the depletion allowance is
required by law.
Depreciation
The tax basis of the various depreciable assets of the Trust
will be used for purposes of computing depreciation and cost
recovery deductions and, ultimately, gain or loss on the
disposition, of such assets.
Valuation
of Our Properties
Certain of the United States federal income tax consequences of
the ownership and disposition of Trust Units will depend in
part on our estimates of the relative fair market value of our
assets. Although we may consult from time to time with
professional appraisers regarding valuation matters, we will
make many of the relative fair market value estimates. These
estimates are subject to challenge and will not be binding on
the IRS or the courts. If the estimates of fair market value are
later found to be incorrect, the character and amount of items
of income, gain, loss or deductions previously reported by
United States holders might change, and United States holders
might be required to adjust their tax liability for prior years
and incur interest and penalties with respect to those
adjustments.
Section 754
Election
We have made the election permitted by Section 754 of the
Code. That election is irrevocable without the consent of the
IRS. The election generally requires us, in the case of a sale
of the Trust Units in the secondary market, to adjust the
S-17
purchasers tax basis in the assets of the Trust pursuant
to Section 743(b) of the Code to reflect the
purchasers purchase price of its Trust Units. The
Section 743(b) adjustment belongs to the purchaser and not
to other partners.
A Section 754 election is advantageous if the
purchasers tax basis in its Trust Units is higher
than its share of the Trusts aggregate tax basis in the
assets of the Trust immediately prior to the purchase. In such a
case, as a result of the election, the purchaser would have a
higher tax basis in its share of the Trusts assets for
purposes of calculating, among other things, depletion and
depreciation. Conversely, a Section 754 election is
disadvantageous if the purchasers tax basis in such
Trust Units is lower than its share of the Trusts
aggregate tax basis immediately prior to the transfer. Thus, the
fair market value of the Trust Units may be affected either
favorably or adversely by the election.
Disposition
of Trust Units
Recognition
of Gain or Loss
Gain or loss will be recognized on a sale of Trust Units
equal to the difference between the amount realized and the
United States holders tax basis for the Trust Units
sold. Subject to the discussion of recapture income, the gain or
loss recognized by a United States holder on the sale or
exchange of Trust Units will generally be taxable as
capital gain or loss, and will be long-term capital gain or loss
if such United States holders holding period of the
Trust Units exceeds one year. In the case of a
non-corporate United States holder, any such long-term capital
gain may be subject to tax at a reduced rate. Certain
limitations apply to the deductibility of capital losses.
A portion of any amount realized on a sale or exchange of
Trust Units (which portion could be substantial) will be
separately computed and taxed as ordinary income under
Section 751 of the Code to the extent attributable to the
recapture of depletion or depreciation deductions. Ordinary
income attributable to depletion deductions and depreciation
recapture could exceed net taxable gain realized upon the sale
of the Trust Units and may be recognized even if there is a
net taxable loss realized on the sale of the Trust Units.
Thus, a United States holder may recognize both ordinary income
and a capital loss upon a taxable disposition of
Trust Units.
The IRS has ruled that a person who acquires interests in an
entity, such as the Trust, which is treated as a partnership for
United States federal income tax purposes in separate
transactions at different prices must combine those interests
and maintain a single adjusted tax basis. Upon a sale or other
disposition of less than all of those interests, a portion of
that tax basis must be ratably allocated to the interests sold
and retained using an equitable apportionment
method. Although the ruling is unclear as to how the holding
period of these interests is determined once they are combined,
regulations allow a seller of such an interest who can identify
the interest sold with an ascertainable holding period to elect
to use that holding period. Thus, according to the ruling, a
United States holder will be unable to select high or low basis
Trust Units to sell as would be the case with corporate
stock but, according to the regulations, may designate
Trust Units sold for purposes of determining the holding
period of the Trust Units sold. A United States holder
electing to use this approach must consistently use that
approach for all subsequent sales and exchanges of
Trust Units. It is not clear whether the ruling applies to
us because, similar to corporate stock, separate interests in us
are readily ascertainable and maybe evidenced by separate
certificates. A United States holder considering the purchase of
additional Trust Units or the sale of Trust Units
purchased in separate transactions should consult its own tax
advisor regarding the application of this ruling and the
regulations.
Allocations
between Transferors and Transferees
In general, in reporting tax information for United States
holders our taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be
subsequently apportioned among the United States holders in
proportion to the number of Trust Units owned by each of
them on the first business day of the month (the
allocation date). However, gain or loss realized on
a sale or other disposition of our assets other than in the
ordinary course of business, and other extraordinary items, will
be allocated among the United States holders on the allocation
date in the month in which that gain or loss is recognized.
Notification
Requirements
A United States holder that sells or exchanges Trust Units
is required to notify us in writing of that sale or exchange
within 30 days after the sale or exchange and in any event
by no later than January 15 of the year following the calendar
year in which the sale or exchange occurred. We are required to
notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these
reporting requirements do not apply with respect to a sale by an
individual who is a citizen of the United States and who effects
the sale or exchange through a broker. Additionally, a
transferor and a transferee of Trust Units will be required
to furnish statements to the IRS, filed with its income tax
return
S-18
for the taxable year in which the sale or exchange occurred,
that allocates the consideration paid for the Trust Units.
We will provide this information to you in the event of a
transfer. Failure to satisfy these reporting obligations may
lead to the imposition of substantial penalties.
Constructive
Termination
We will be considered to have been terminated for United States
federal income tax purposes if there is a sale or exchange of
50% or more of the total Trust Units within a
12-month
period. A termination of the Trust will result in a decrease in
tax depreciation available to the United States holders
thereafter and in the closing of our taxable year for all United
States holders. In the case of a United States holder reporting
on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may result in
more than 12 months taxable income or loss of the
Trust being includable in its taxable income for the year of
termination. New tax elections would have to be made by us,
including a new election under Section 754 of the Code.
Adverse tax consequences could ensue if we were unable to
determine that the termination had occurred. Finally, a
termination of the Trust could result in taxation of the Trust
as a corporation if the Qualifying Income Exception were not met
in the short taxable years caused by termination. See
Certain Income Tax Considerations United
States Federal Income Tax Considerations
Classification of the Trust as a Partnership in this
Prospectus Supplement.
Treatment
of Trust Unit Lending and Short Sales
The special rules of the Code that apply to securities lending
transactions do not, by their terms, apply to interests in a
partnership. Accordingly, a United States holder whose
Trust Units are loaned to a short seller to
cover a short sale of Trust Units may be considered as
having disposed of ownership of those Trust Units. If so,
it would no longer be a partner with respect to those
Trust Units during the period of the loan and may recognize
gain or loss from the disposition. As a result, during this
period, any of our income, gain, deduction or loss with respect
to those Trust Units would not be reportable by the United
States holder and any cash distributions received by the United
States holder with respect to those Trust Units would be
fully taxable as ordinary income. United States holders desiring
to assure their status as owners of Trust Units and avoid
the risk of gain recognition resulting from the application of
these rules should modify any applicable brokerage account
agreements to prohibit their brokers from borrowing or loaning
their Trust Units.
The Code also contains provisions affecting the taxation of
certain financial products and securities, including interests
in entities such as the Trust, by treating a taxpayer as having
sold an appreciated interest, one in which gain
would be recognized if it were sold, assigned or otherwise
terminated at its fair market value, if the taxpayer or related
persons enter into an offsetting notional principal contract, or
a futures or forward contract with respect to the interest on
substantially identical property. Moreover, if a taxpayer has
previously entered into a short sale, an offsetting notional
principal contract or a futures or forward contract with respect
to the interest, the taxpayer will be treated as having sold
that portion if the taxpayer or a related person then acquires
the interest or substantially identical property. The Secretary
of Treasury is authorized to issue regulations that treat a
taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Disposition
of Trust Units by Redemption
The tax consequences of a redemption of Trust Units are
complex and depend in part upon whether some or all of a United
States holders Trust Units are redeemed. The tax
consequences of a redemption of all of a United States
holders Trust Units should generally be the same as
discussed above under Certain Income Tax
Considerations United States Federal Income Tax
Considerations Disposition of
Trust Units Recognition of Gain or
Loss herein. United States holders contemplating a
redemption of some or all of their Trust Units should
consult their tax advisors.
Uniformity
of Trust Units
Because we cannot match transferors and transferees of
Trust Units, we must maintain uniformity of the economic
and tax characteristics of the Trust Units to a purchaser
of these Trust Units. In the absence of such uniformity, we
may be unable to comply completely with a number of federal
income tax requirements.
A lack of uniformity, however, can result from a literal
application of Treasury regulations concerning the maintenance
of capital accounts, including with respect to certain equity
based compensation plans and distribution reinvestment programs
maintained by us. If any non-uniformity were required by the
IRS, it could have a negative impact on the ability of United
States holders to claim that any portion of the distributions
they receive from us represents a return of tax basis rather
than taxable income and or the value of the Trust Units.
S-19
Tax-Exempt
Organizations
Employee benefit plans (including individual retirement accounts
(IRAs) and other retirement plans) and most other
organizations exempt from federal income tax (each, a
TEO) are subject to federal income tax on unrelated
business taxable income (UBTI). Because we expect
substantially all income of the Trust to be royalty income,
rents from real property or interest, none of which is UBTI, a
TEO should not be taxable on any income generated by ownership
of the Trust Units except as described in the next
paragraphs.
The Royalty Indenture is in several respects unusual and there
is no clear United States income tax guidance regarding its
treatment. It is possible that the IRS could contend that some
or all of our income under the Royalty Indenture does not
qualify as royalty income, but should instead be treated as
income from a working interest and UBTI. In addition, the
classification of certain facilities owned by us as real
property or personal property is a determination subject to
uncertainty. If such facilities were determined to be personal
property for United States federal income tax purposes, the rent
derived therefrom would be UBTI to a TEO. Prospective purchasers
of Trust Units that are TEOs are encouraged to consult
their tax advisors regarding the foregoing.
Finally, if the Trust finances with indebtedness an acquisition
of any property to be held to produce income, income derived
from such property in whole or in part will be UBTI to a TEO.
Furthermore, if a TEO acquires Trust Units with
indebtedness, then a portion of any interest, rents from real
property and royalty income received by the TEO attributable to
the Trust Units will be treated as UBTI and thus will be
taxable to a TEO.
Administrative
Matters
Trust Information
Returns
We are currently not required to file a United States federal
income tax return, since we have no gross income derived from
sources within the United States or gross income which is
effectively connected with the conduct of a trade or business
within the United States. However, the IRS may require a United
States holder to provide statements or other information
necessary for the IRS to verify the accuracy of the reporting by
the United States holder on its income tax return of any items
of our income, gain, loss, deduction, or credit. If we were to
file a United States tax return in future tax years, the filing
would change the manner in which we provide tax information to
the United States holders and special procedures would also
apply to an audit of such tax return by the IRS.
Registration
as a Tax Shelter
The Code requires that tax shelters be registered
with the Secretary of the Treasury. The temporary Treasury
Regulations interpreting the tax shelter registration provisions
of the Code are extremely broad. It is arguable that the Trust
is not subject to the registration requirement on the basis that
it will not constitute a tax shelter. However, we have
registered as a tax shelter with the Secretary of the Treasury
because of the absence of assurance that we will not be subject
to tax shelter registration and in light of the substantial
penalties which otherwise might be imposed if we failed to
register and it were subsequently determined that registration
was required. The IRS has issued the Trust the following tax
shelter registration number: 99068000003.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE TRUST OR THE CLAIMED TAX BENEFITS HAVE
BEEN REVIEWED, EXAMINED, OR APPROVED BY THE IRS.
A United States holder who sells or otherwise transfers
Trust Units must furnish the tax shelter registration
number to the transferee. The penalty for failure of the
transferor of a Trust Unit to furnish the registration
number to the transferee is $100 for each such failure.
Reportable
Transactions
Under Treasury regulations, certain taxpayers participating
directly or indirectly in a reportable transaction
must disclose such participation to the IRS. The scope and
application of these rules is not completely clear. An
investment in the Trust may be considered participation in a
reportable transaction if, for example, the Trust
recognizes certain significant losses in the future and the
Trust does not otherwise meet certain applicable exemptions. If
an investment in the Trust constitutes participation in a
reportable transaction, the Trust and each United
States holder may be required to file IRS Form 8886 with
the IRS, including attaching it to their United States federal
income tax returns, thereby disclosing certain information
relating to the Trust to the IRS. In addition, the Trust may be
required to disclose Trust reportable transactions and to
maintain a list of Unitholders and to furnish this list and
certain other information to the IRS upon its
S-20
written request. United States holders are urged to consult
their own tax advisors regarding the applicability of these
rules to their investment in the Trust.
Foreign
Partnership Reporting
A United States holder who contributes more than U.S.$100,000 to
the Trust (when added to the value of any other property
contributed to the Trust by such person or a related person
during the previous 12 months) in exchange for
Trust Units, may be required to file Form 8865, Return
of United States Persons With Respect to Certain Foreign
Partnerships, in the year of the contribution. There may be
other circumstances in which a United States holder is required
to file Form 8865.
Certain legal matters relating to Canadian law in connection
with the Trust Units offered hereby will be passed upon on
our behalf by Bennett Jones LLP, Calgary, Alberta and on behalf
of the Underwriters by Blake, Cassels & Graydon LLP,
Toronto, Ontario. Certain legal matters relating to United
States law in connection with the Trust Units offered
hereby will be passed upon on our behalf by Paul, Weiss,
Rifkind, Wharton & Garrison LLP, New York, New York
and on behalf of the Underwriters by Vinson & Elkins
L.L.P., New York, New York.
As of the date hereof, the partners and associates of Bennett
Jones LLP beneficially own, directly or indirectly, less than 1%
of the Trust Units, respectively. As of the date hereof,
the directors and officers of GLJ, as a group, beneficially own,
directly or indirectly, less than 1% of the Trust Units.
AUDITORS,
TRANSFER AGENT AND REGISTRAR
The auditors of the Trust are KPMG LLP, Chartered Accountants in
Calgary, Alberta. The transfer agent and registrar for the
Trust Units is Computershare Trust Company of Canada
at its principal offices in the cities of Montreal, Toronto,
Calgary and Vancouver in Canada and Computershare
Trust Company, Inc. at its principal offices in the cities
of New York, New York and Denver, Colorado in the United
States.
S-21