November 02, 2006 08:00 ET

Eveready Income Fund Comments on Government Plan to Tax Income Trusts

EDMONTON, ALBERTA--(CCNMatthews - Nov. 2, 2006) - Eveready Income Fund (TSX:EIS.UN) ("Eveready") - As most Unitholders are aware, on October 31, 2006, the federal Minister of Finance ("MOF") announced a new tax plan that affects the future level of taxation of income trusts. The new tax plan effectively imposes a tax on trusts the same as corporations, beginning in 2011.

"We are very disappointed in the federal Government's position on this matter," comments Rod Marlin, Eveready's President and Chief Executive Officer. "Not only does this announcement come at a cost to our Unitholders and create an enormous amount of uncertainty in the capital markets, the announcement also contradicts earlier statements made by the federal Government."

Eveready believes from a valuation perspective it has been excessively penalized by this announcement. Historically trusts have traded at a higher 2007 EV/EBITDA valuation ("the 2007 multiple") than corporations because of the tax advantage of trusts compared to corporations. Although, this valuation differential was evident in the broader trust market this has not been the case in the oil and gas service trust sector. Prior to the MOF's announcement, the 2007 multiple for oil & gas service trusts compared to oil and gas service corporations was almost identical.

Eveready believes the reason for the lower 2007 multiple for oil & gas service trusts is that several of the trusts' earnings are dependent on shallow gas exploration. The recent lower natural gas prices discourage shallow gas exploration, thus reducing the earnings of the trusts dependent on shallow gas exploration. Eveready believes it has been unfairly compared to other oil and gas service trusts with a higher dependence on shallow gas exploration. The demand for our services, which are principally provided in industrial maintenance, production services, and deep gas exploration remains high creating a strong outlook for our fourth quarter and for 2007.

"It is also important to note that come 2011, the cash drain on Eveready will not increase to 31.5% of cash flow which is the effective tax rate on trusts announced by the federal Government", comments John M. Stevens, Eveready's Senior Vice President and Chief Financial Officer. "Eveready has a very large capital pool that will shelter a significant percentage of our currently anticipated cash taxes payable."

Mr. Stevens adds "We believe we have an advantage over other trusts and corporate peers until 2011. We currently have approximately 33% participation in our DRIP and a large percentage of these Fund units are held inside tax sheltered vehicles such as RRSPs. We have stated in the past our distribution policy is to maintain an annual payout ratio of approximately 75% to 85%. Given the finite nature of the federal Government's announcement we may need to consider increasing the payout ratio to take advantage of the trust deferral structure until 2011. We believe that the flexibility afforded by the high participation in the DRIP will ensure we have capital to support our organic growth initiatives. We also believe that we will have an advantage over our corporate peers in pursuing business acquisitions because of the tax deferral available on the cash flow from these acquisitions until 2011."

Eveready management will continue to monitor these proposed tax changes and the opportunities they will present.

Eveready is a growth oriented income fund that provides industrial and oilfield services; health, safety, and environmental services; and oilfield equipment rental services to the energy, resource, and manufacturing sectors. The units of Eveready trade on the Toronto Stock Exchange under the trading symbol "EIS.UN".

This press release contains forward-looking statements subject to various risk factors and uncertainties, which may cause the actual results, performances or achievements of Eveready to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, further proposed or actual changes to the manner in which trusts are taxed, continued uncertainty or changing viewpoints in the financial markets regarding the valuation of income trusts, fluctuations in the income of the Fund as well as in the amount of the Fund's capital pool available to offset any cash taxes payable, fluctuations in the participation level of the Fund's unithholders in the DRIP, fluctuations in the market for oil and gas and related products and services, political and economic conditions, the demand for services provided by Eveready, industry competition and Eveready's ability to attract and retain both customers and key personnel.

Contact Information

  • Eveready Income Fund
    Rod Marlin
    President & CEO
    (780) 451-6075
    (780) 451-2142 (FAX)
    Eveready Income Fund
    John M. Stevens
    Senior Vice President & CFO
    (780) 451-6075
    (780) 451-2142 (FAX)
    Website: www.evereadyincomefund.com