2004 Performance
2004 FINANCIAL AND OPERATING STATS
Message to Unitholders
On July 1, 2004, the Alberta Government passed legislation limiting the liability of investors who own units in income and royalty trusts. ARC played a major role in lobbying the government for this legislation which gives unitholders of trusts similar liability protection to that enjoyed by shareholders of corporations. Ontario passed similar legislation later in the year. This legislation was very important to the trust sector since many institutions were not able invest in our equity without this legislated protection. The lack of legislated liability protection was also cited as the major reason trusts were not included in the main stock market index which drives many fund managers equity holdings.
In response to the legislated liability protection for unitholders of trusts, on January 26, 2005, Standard and Poors (“S&P”) announced that income funds and royalty trusts would become eligible for inclusion in the S&P/TSX Composite Index. Of particular importance was the fact that trusts will be included in a new “Super Composite Index” rather than a sub-index. This decision is particularly significant since it removes the last major obstacle that prevented certain institutional investors from investing in our sector. As ARC is one of the largest trusts, it will be one of the first to be added to the index (expected to occur by mid-2005). Pending index inclusion coupled with ARC’s strong reputation and high quality asset base, we believe, has already resulted in buying support for our units by new institutional investors.
As the trust sector in Canada continues to grow, it is essential entities such as ARC have access to investor capital on the basis of merit and not have restrictions imposed on certain segments of the investment community. We believe the developments in 2004 and early 2005 relating to our sector remove such restrictions, which should bode well for our access to capital in the future. We are confident that the discussions with the federal government regarding the foreign ownership issue can be resolved in a manner which does not restrict our access to future foreign investment.
Risk Management
A fundamental component of ARC’s business plan is a comprehensive risk management program to mitigate the impact of material fluctuations in commodity prices in order to allow us to provide stable distributions to unitholders. As we entered 2004, most analysts were forecasting oil prices to be in the mid to upper US$20 range. At that level, analyst estimates included distribution cuts in 2004 for all trusts including ARC. At the same time, ARC had the opportunity to hedge its oil in the low to mid US$30 range which would have allowed us to maintain our distribution of $0.15 per unit. Accordingly, we hedged approximately 50 per cent of our oil production at these levels using a variety of derivative instruments which protected the downside while limiting our ability to participate in any upside which may exist.
As we all now know, the oil price in 2004 was at its highest level in history, well above expectations for even the most bullish forecaster. As a result, ARC incurred significant hedge losses in 2004. In response to what we believe is a new pricing paradigm that includes a much wider potential range for prices going forward, ARC has modified its go-forward hedging strategy to include much greater use of “floors”. This is comparable to buying insurance where for a known cost we can guarantee a minimum price while still participating in all of the upside above that price. We elected to unwind a number of our 2005 commodity and foreign exchange hedges late in 2004 and re-hedge using floors for the commodity contracts and swap arrangements for the foreign exchange hedges. As a result, our 2005 hedge program includes a blend of instruments which will protect our current level of distributions while exposing us to p" highlights2004.htm? investorrelations en-CA>Click here to find out.