GENERAL QUESTIONS
1. What is an energy trust?
An energy trust is an investment vehicle that purchases royalties from its wholly-owned subsidiaries that own producing oil and gas properties. The trust receives income (which is essentially the subsidiaries' cash flow) and sells interests in the trust (trust units) to investors (unitholders). The trust units generate regular cash distributions for their unitholders.
2. What is the difference between investing in an energy trust and investing in a regular public corporation? Investing in an energy trust is much the same as investing in any other equity investment such as a regular public corporation. Provident's units trade on stock exchanges (in our case, the Toronto Stock Exchange and the New York Stock Exchange) just like the shares of any public company. And, as with the shares of any public company, the value of Provident's units can fluctuate.
The key difference between trusts and corporations is that trusts are structured so that they pay little or no corporate tax. Instead, they pay the bulk of their cash flow out to their unitholders in the form of distributions, so their income is taxed in the hands of individual unitholders rather than at the corporate level. The amount and frequency of distributions is set by the Board of Directors of the trust.
3. How much cash flow does Provident Energy Trust pay out in distributions?
In 2005, Provident paid out 74 percent of our net cash flow in the form of monthly distributions to unitholders. Unlike corporate dividends, which are taxed at the corporate and individual levels, trust distributions are paid out before they have been taxed.
4. What is Provident's growth strategy?
Provident's portfolio of three distinct business units (Canadian Oil & Gas Production, U.S. Oil & Gas Production, and Midstream) is unique among Canadian oil and gas income trusts. Each of our business units has the capacity to grow through both internal development and acquisitions.
With regards to internal development, Provident has internal growth opportunities within all three of our business units. In our Canadian Oil and Gas Production business unit, the best growth prospects exist in our internally-generated Southwest Saskatchewan gas play, and in the assets we own in the Rainbow, Alberta area, which we acquired in mid 2006. In our U.S Oil and Gas Production business unit, our best internal growth prospects are at our Orcutt field in Santa Barbara County in Southern California, where we have a high-potential thermal oil development prospect. And, in our Midstream business unit, we have a range of interesting growth opportunities, some based on the rapid growth of Alberta's oil sands and heavy oil industry. For example, we sell most of the condensate that Midstream extracts from natural gas to oil and gas producers in Alberta for use as a bitumen and heavy oil diluent in their operations. Condensate decreases the viscosity of bitumen and heavy oil, enabling these substances to flow easily through pipelines.
With regards to acquisitions, we go where the value is at any given time, and we are disciplined about turning down prospects that don't make sense for us. While we strive to build a balanced portfolio over time, we are entirely value-driven. Our acquisition strategy focuses on increasing per-unit cash flow and net asset value. We seek to acquire low-risk producing properties and energy infrastructure in the mature Western Canadian Sedimentary Basin and in similarly mature producing basins in the U.S. The oil and gas production assets that we acquire will meet with our acquisition criteria will fit well with our existing asset base and operational and marketing expertise.
5. What do the terms declaration date, ex-distribution date, record date, and distribution date mean?
- Declaration date - the date on which Provident's Board of Directors announces to the market that Provident will pay a distribution. This date is always early in the month.
- Ex-distribution date - the date by which investors must have purchased units in Provident to receive a distribution on the distribution date. The ex-distribution date is usually two days prior to the record date. If a buyer purchases Provident units one day before the ex-distribution date, that buyer will receive the current distribution. If a buyer purchases Provident units on or after the ex-distribution day, he or she will not receive the current distribution. If a unitholder wants to sell units, but still receive the next distribution, he or she must sell the units on or after the ex-distribution date so that his or her name remains on record for the distribution.
- Record date - the date on which Provident's transfer agent, Computershare Trust Company of Canada, looks at its records to determine Provident's unitholders of record. Only unitholders of record receive a distribution.
- Distribution date - the date Provident sends cash distributions to registered unitholders of record and brokers/banks/investment companies of record. Brokers/banks/investment companies are responsible for sending the cash distributions to their beneficial unitholders.
6. What does Reserve Life Index (RLI) mean?
RLI is a measure commonly used to represent the longevity of reserves. It is calculated by dividing the reserves base by the current annual production rate, which the result being the number of years that the reserve base could continue to produce at its current rate.
7. What does Economic Life Index (ELI) mean?
In Provident's case, ELI is a measure that blends the traditional RLI calculation that we use in our oil and gas production business units (Canadian Oil & Gas Production, and U.S. Oil and Gas Production) with a valuation of the future cash flow stream from our Midstream business unit. Provident believes that ELI is the best measure of our sustainability in that it takes into account all of our business units.
8. How much oil and gas does Provident produce?
Provident's 2005 production averaged approximately 33,782 barrels of oil equivalent per day (boed).
9. How do I calculate total return and current yield?
Total return is the sum of distributions and the incremental change in unit price since purchase (which may be positive or negative) divided by the original unit purchase price. For example, if the distribution for one year is $1.44 per unit ($0.12 per unit x 12 months), the incremental change in the unit price since purchase is $3.00 (let's say $14.00 now - $11.00 at purchase), and the original unit purchase price is $11.00, then the total return is 44 percent [($1.44 +$3.00) ÷ $11.00].
Current yield is the amount of the monthly distribution multiplied by 12 months, then divided by the current trading price of a trust unit.
10. How can I invest in Provident?
Provident's units and debentures are listed on the Toronto Stock Exchange (PVE.UN; PVE.DB; PVE.DBA) and the New York Stock Exchange (PVX). You must purchase trust units through a broker.
11. How can I transfer my units or change my address?
If you are a registered unitholder, you can transfer your units or change your address by contacting Computershare Trust Company of Canada, Provident's registrar and transfer agent, at:
If you are a beneficial unitholder, please contact your broker.
QUESTIONS OF INTEREST TO CANADIAN UNITHOLDERS
1. How does Canada Revenue Agency tax my distribution?
Canada Revenue Agency considers a portion of the cash distributions paid by Provident to be a Return on Capital. Under Canadian tax law, this portion is taxable as "Other Income" in the current tax year.
Canada Revenue Agency considers another portion of the cash distributions to be a Return of Capital. This portion is tax-deferred until such time that the unitholder sells his or her units. At that point (when the units are sold), the original cost of the units must be adjusted downward to account for the cumulative amount of distributions received as a Return of Capital. Upon disposition, the accumulated tax deferred distribution must then be treated as a capital gain.
For the 2005 tax year, 76.5 percent of the distribution that Provident paid to Canadian unitholders was considered to be a Return on Capital, while 23.5 percent was considered to be a Return of Capital.
Details of the tax treatment of distributions are outlined in Canada Revenue Agency's T3 form, which is mailed to unitholders in March of the year following the tax year.
2. How do I obtain my T3 form?
T3 forms are mailed to unitholders on or before March 31 each year so that they can file them along with their tax returns.
Computershare Trust Company of Canada (Provident's transfer agent) mails the forms directly to registered unitholders (i.e. those who have certificates in their own name, as opposed to having them in the name of a broker, bank, or investment company).
Computershare also mails the forms to the brokers, banks and investment companies who hold units on behalf of their beneficial unitholders. The brokers, banks or investment companies are then responsible for mailing the forms to their beneficial unitholders.
Computershare does not provide tax information to unitholders who hold their units within Registered Retirement Savings Plans (RRSPs).
Provident does not issue T3 forms directly to unitholders. If you have not received your T3 form by the end of March, please contact your brokerage firm or bank directly.
3. How should my monthly two percent premium distribution be treated for tax purposes?
Canadian unitholders who have elected to participate in the Premium Distribution Reinvestment Plan (DRIP) receive a two percent cash payment in addition to their regular monthly distribution. Because these funds are proceeds from the purchase and subsequent disposition of units issued through the DRIP, they must be reported as capital gains.
QUESTIONS OF INTEREST TO U.S. UNITHOLDERS 1. Is the distribution that Provident pays subject to a 15 percent withholding tax by the Government of Canada?
Yes. The tax treaty between Canada and the United States stipulates that U.S. unitholders are subject to a 15 percent withholding tax on the distributions that Provident pays out.
Provident advises U.S. investors to seek tax advice on the treatment of distributions in the United States, however, we do offer the following information: U.S. unitholders may elect to claim the 15 percent Canadian withholding tax as a deduction against income or, subject to certain restrictions, as a foreign tax credit against their U.S. tax liability. U.S. unitholders wishing to claim a foreign tax credit should complete an IRS Form 1116, Foreign Tax Credit, as an attachment to Form 1040.
Provident pays 100 percent of the distribution monthly and the withholding of the tax occurs at the brokerage firm for beneficial unitholders, and by Provident's transfer agent, (Computershare) for registered unitholders.
2. Why is the 15 percent Canadian withholding tax being applied to the distributions I receive from units I hold within my Individual Retirement Account (IRA)?
The Government of Canada changed the rules pertaining to non-resident withholding taxes. Effective January 1, 2005, the entire amount of distributions paid to U.S. unitholders is subject to a non-refundable 15 percent withholding tax. This tax applies to units held in both taxable and tax-exempt accounts such as IRAs.
3. Why is the tax treatment of the monthly distributions different for U.S. unitholders than for Canadian unitholders?
The difference in tax treatment between U.S. and Canadian unitholders is due to the differences between the Canadian Income Tax Act and the U.S. IRS Tax Code. The tax treatment for distributions received by U.S. unitholders is derived using U.S. tax rules, which permit the deduction of Crown royalties and accounting-based depletion. These deductions are not permitted under Canadian tax law. Because of the uncertainty in determining the magnitude of these deductions, Provident cannot provide U.S. unitholders with exact percentages for Return of Capital and Return on Capital until our fiscal year-end numbers have been finalized.
For the 2005 tax year, 94.35 percent of the distribution that Provident paid to U.S. unitholders was considered to be a qualified dividend, while 5.65 percent was considered to be a Return of Capital. The Return of Capital portion is tax-deferred until the holder disposes of the units, at which time the original cost base of the units should be adjusted downward by the cumulative amount of distributions received as a Return of Capital. The accumulated tax-deferred distribution is then treated as a capital gain upon disposition.
4. Does the distribution that Provident pays meet the requirements of a qualified dividend under the terms of the U.S. Jobs and Growth Reconciliation Act of 2003?
Yes. The distribution that Provident pays out meets the requirements of a qualified foreign issuer as specified in the Jobs and Growth Reconciliation Act. Based on the requirements of this legislation (which reduce the effective tax rate on qualified dividends to 15 percent), the taxable portion of the distribution paid by Provident is to be treated as a qualified dividend. For the 2005 tax year, 94.35 percent of the distributions paid to U.S. unitholders in 2005 was to be treated as a qualified dividend, while the remaining 5.65 percent was to be treated as a tax-deferred Return of Capital.
5. Why does Provident issue 1099 DIV forms rather than K-1 forms?
Provident has chosen to register in the United States as a dividend-paying corporation, as opposed to a Master Limited Partnership (MLP), and, as such, Provident unitholders receive 1099 DIV forms each year rather than K1 forms.
Each year, Provident's transfer agent, Computershare, sends IRS 1099 DIV forms directly to registered American unitholders (i.e. those who hold units in their own names). Each year, Computershare also sends IRS 1099 DIV forms to the brokers, banks or investment companies who hold units on behalf of their beneficial American unitholders.
Provident does not issue 1099DIV forms directly to unitholders. [top]
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