Energy Trust Structure

In an energy trust, the underlying asset is acquired by the operating company, typically using a combination of third party debt and funds received from the trust (through equity offerings and/or its own third party debt), in exchange for the grant of royalties, debt and shares. Net operating cash flow, generated from the sale of crude oil, natural gas and NGLs produced and other services provided, is passed on to the trust as distributable cash flow through a combination of payments under the royalties, interest and principal on the debt and dividends or capital repayment under the shares.

Distributable cash flow is available to unitholders, net of operating expenses, general and administrative expenses, capital expenditures, debt service and management fees. As energy trusts tend to have little or no taxable income at the corporate level, distributions paid from the trust structure tend to be higher than dividends received from comparable common equities.

Energy trusts do not have high retained earnings, as a substantial majority of operating cash flow is paid to unitholders. Therefore, a credit facility is established in order to fund, among other things, future acquisitions and development programs. To pay down debt, equity offerings are made periodically, having regard to the debt position from time to time and prevailing market conditions.