Thirst for yield drives wave of energy trusts

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Canada's much-loved income trusts got the boot long ago, but investors who like oil and gas and are thirsty for yield are quickly finding hope in a growing wave of energy trusts that cross the U.S border.

Since 2010, a handful of energy trusts have gone public in Canada. Much like the old income trusts, they pay out their cash flows to investors as distributions, offering their owners some much-needed yield in a rough interest rate environment. But the new class differs from their long-gone peers because their assets must be U.S. based, otherwise they would fall under the federal government's ban.

Eagle Energy Trust was the first to tap the Canadian market, raising $150-million in the fall of 2010. Then came Parallel Energy Trust a few months later, raising $342-million. In total, three have already gone public, raising over $700-million.

Now, a new wave is forming. Argent Energy Trust successfully closed its $212-million offering this past summer, and both Meranex Energy Trust and Crius Energy Trust are now out marketing their IPOs. The word on the street is that energy trust structure is being heavily pitched to more U.S. firms, so expect more to come should the latest deals close.

Yet the sector isn't simply seeing more of the same. The types of companies that qualify for the trust structure is also expanding. Typically, energy trusts raise money in Canada to acquire oil and gas properties south of the border. The latest deal for Crius is different. The firm markets and sells natural gas and electricity to both residential and small and medium-sized companies.

As the sector diversifies, deal makers are eyeing renewable energy assets as the next candidates for such trusts; those green firms have predictable cash flows that stem from stable power purchase agreements signed with different utilities.

"We don't know where this is going, but certainly right now people are focusing on yield," said Christian Gauthier, co-leader of Bennett Jones capital markets practice. Lawyers at Bennett Jones have worked on every energy trust that has come to Canada since 2010.

Although the Canadian government cracked down on income trusts when they began to rapidly spread through the Canadian economy, the U.S. doesn't have any similar fears – at least now yet, and regulators there don't see the structure as a way to dodge tax payments. Bennett Jones' co-head of tax Thomas Bauer said the tax treatment isn't that much different than that of a multinational company with a U.S. subsidiary.

"The structure fundamentally relies on well established rules," he said. "We're not relying on any perceived loopholes." Plus, the Canadian market already has real estate investment trusts who hold assets outside of Canada, such as Dundee International REIT, and that hasn't raised any red flags, he said.

U.S. firms, for their part, love the option of crossing the border. While IPOs worth $100-million to $300-million may seem like a solid size in Canada, they're puny south of the border and therefore get little attention from investors. By raising money in Canada, these firms get to market to investors who already understand the energy market, and they often get research coverage from Canadian investment banks once their deals are complete.

Canada is also known to have a much more efficient regulatory environment for IPOs. It can take months to get regulatory comments on a prospectus before launching marketing, Mr. Gauthier said, but in Canada the provincial regulators typically respond within 10 days.

While the opportunity is promising, these trusts need a stable market to be successful. Although Argent ultimately raised money, it initially launched in 2011 and pulled its deal because of bad conditions.