June 25, 2001
Edmonton, Alberta
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Table
of Contents - Part 2
Statement of Investment Returns
Financial Statements
List of Investments
Alberta Heritage Savings Trust Fund Contact Information
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to Part 1
To the Minister of Revenue
I have audited the Statement of Investment
Returns of the Alberta Heritage Savings Trust Fund for the year ended March
31, 2001. This statement is the responsibility of the Fund's management. My
responsibility is to express an opinion on this statement based on my audit.
I conducted my audit in accordance with
Canadian generally accepted auditing standards. Those standards require that
I plan and perform an audit to obtain reasonable assurance whether the
statement is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall presentation.
In my opinion, this statement presents
fairly, in all material respects, the investment returns of the Fund for the
year ended March 31, 2001 in accordance with the disclosed basis of
accounting as described in Note 2 to the statement.
[original signed]
Peter Valentine, FCA
Auditor General
Edmonton, Alberta
May 18, 2001
Notes to the Statement of
Investment Returns of the
Transition Portfolio and Endowment Portfolio
Note 1 Authority and Purpose
The Alberta Heritage Savings Trust Fund operates
under the authority of the Alberta Heritage Savings Trust Fund Act (the
"Act"), Chapter A-27.01, Revised Statutes of Alberta 1980, as amended.
Note 2 Significant Accounting
Policy
Rates of return have been calculated using
the time-weighted method with monthly valuations.
The rate of return on investment measures the
total proceeds received from an investment per dollar initially invested.
Total proceeds include cash distributions (interest and dividend payments)
and capital gains or losses (realized and unrealized). The investment
industry uses time-weighted rates of return when comparing the returns of
funds with other funds or indices. The time-weighted rate of return is
designed to minimize the effect that the size and timing of cash flows has
on the internal rate of return, since the pattern of cash flows vary
significantly among funds.
According to the Alberta Heritage Savings
Trust Fund Business Plan, the performance of both the Transition Portfolio
and the Endowment Portfolio are to be measured on a market value basis.
Investment returns for the project loans are based on cost values.
Note 3 Equities
The 2001 investment return for equities held in
the Transition Portfolio are for the seven months ended October 31, 2000. All
equities held in the Transition Portfolio were sold by November 2, 2000.
Note 4 Approval of Statement
The Statement of Investment Returns has been
approved by the Deputy Minister of Revenue.
Note 5 Government
Restructuring
On March 15, 2001, the government announced
new ministry structures. As a result, responsibility for the Fund was
transferred to the Ministry of Revenue.
Auditor's Report
To the Minister of Revenue
I have audited the balance sheet of the Alberta
Heritage Savings Trust Fund as at March 31, 2001 and the statements of
operations and changes in financial position for the year then ended. These
financial statements are the responsibility of the Fund’s management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with
Canadian generally accepted auditing standards. Those standards require that I
plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In my opinion, these financial statements
present fairly, in all material respects, the financial position of the Fund
as at March 31, 2001 and the results of its operations and the changes in its
financial position for the year then ended in accordance with Canadian
generally accepted accounting principles.
[original signed]
Peter Valentine, FCA
Auditor General
Edmonton, Alberta
May 18, 2001
Statement of Operations
Statement of Changes
in Financial Position
Note 1 Authority and Mission
The Alberta Heritage Savings Trust Fund
operates under the authority of the Alberta Heritage Savings Trust Fund Act
(the Act), Chapter A-27.01, Revised Statutes of Alberta 1980, as amended.
The preamble to the Act describes the mission
of the Fund as follows:
"To provide prudent stewardship of the
savings from Alberta’s non-renewable resources by providing the greatest
financial returns on those savings for current and future generations of
Albertans."
Investments of the Fund are held in an
Endowment Portfolio and a Transition Portfolio. The Endowment Portfolio has
the objective of maximizing long term financial returns. The Transition
Portfolio has the objective of providing income support to the Government’s
consolidated fiscal plan over the short term to medium term. The Fund’s
business plan provides that all assets in the Transition Portfolio will be
transferred to the Endowment Portfolio by March 31, 2003.
Note 2 Summary of Significant
Accounting Policies and Reporting Practices
These financial statements are prepared in
accordance with Canadian generally accepted accounting principles.
The accounting policies of significance to the
Fund are as follows:
(a) Portfolio investments
Fixed income securities, mortgages, equities
and real estate investments held directly by the Fund or by pooled
investment funds are recorded at cost. Cost includes the amount of
applicable amortization of discount or premium using the straight-line
method over the life of the investments.
Investments in loans are recorded at cost
less any unearned revenue and allowance for credit loss. Where there is no
longer reasonable assurance of timely collection of the full amount of
principal and interest of a loan, a specific provision for credit loss is
made and the carrying amount of the loan is reduced to its estimated
realizable amount. Investments are recorded as of the trade date.
The cost of disposals is determined on the
average cost basis.
Where there has been a loss in value of an
investment in fixed-income securities, mortgages, equities and real estate
that is other than a temporary decline, the investment is written down to
recognize the loss. The written down value is deemed to be the new cost.
(b) Investment Income
Investment income is recorded on the accrual
basis where there is reasonable assurance as to its measurement and
collectability. When a loan becomes impaired, recognition of interest income
in accordance with the terms of the original loan agreement ceases. Any
subsequent payments received on an impaired loan are applied to reduce the
loan’s book value.
Gains and losses arising as a result of
disposal of investments are included in the determination of investment
income. Income and expense from derivative contracts are included in
investment income.
(c) Foreign Currency
Foreign currency transactions are translated
into Canadian dollars using average rates of exchange, except for hedged
foreign currency transactions which are translated at rates of exchange
established by the terms of the forward exchange contracts. Exchange
differences on unhedged transactions are included in the determination of
investment income.
(d) Investment Valuation
Fair value is the amount of consideration
agreed upon in an arm’s length transaction between knowledgeable, willing
parties who are under no compulsion to act. Fair values of investments held
either directly by the Fund or by pooled investment funds are determined as
follows:
(i) Public fixed income securities and
equities are valued at the year-end closing sale price, or the average of
the latest bid and ask prices quoted by an independent securities
valuation company.
(ii) Mortgages, provincial corporation
debentures and private fixed-income securities are valued based on the net
present value of future cash flows. These cash flows are discounted using
appropriate interest rate premiums over similar Government of Canada
benchmark bonds trading in the market.
(iii) The fair value of private equities is
estimated by management.
(iv) Real estate investments are reported
at their most recent appraised value, net of any liabilities against the
real property. Real estate properties are appraised annually by qualified
external real estate appraisers.
(v) Fair values of loans are not reported
due to there being no organized financial market for the instruments and
it is not practical within constraints of timeliness or cost to estimate
the fair values with sufficient reliability.
(vi) The fair values of deposits,
receivables, accrued interest and payables are estimated to approximate
their book values.
(vii) The fair values of investments and
any other assets and liabilities denominated in a foreign currency are
translated at the year-end exchange rate.
(e) Valuation of Derivative Contracts
Derivative contracts include equity and bond
index swaps, interest rate swaps, forward foreign exchange contracts, equity
index futures contracts and cross-currency interest rate swaps. As disclosed
in Note 4, the value of derivative contracts is included in the fair value
of pooled investment funds. The estimated amount receivable or payable from
derivative contracts at the reporting date is determined by the following
methods:
(i) Equity and bond index swaps are valued
based on changes in the appropriate market based index net of accrued
floating rate interest.
(ii) Interest rate swaps are valued based
on discounted cash flows using current market yields.
(iii) Forward foreign exchange contracts
and equity index futures contracts are based on quoted market prices.
(iv) The value of cross-currency interest
rate swaps is included with the value of the underlying security.
Cross-currency fixed to fixed interest rate swaps are valued at quoted
prices based on discounted cash flows using current market yields.
Cross-currency fixed to floating interest rate swaps are valued at the
principal amount plus accrued interest.
Note 3 Risk Management
Income and financial returns of the Fund are
exposed to credit risk and price risk. Credit risk relates to the possibility
that a loss may occur from the failure of another party to perform according
to the terms of a contract. Price risk is comprised of currency risk, interest
rate risk and market risk. Currency risk relates to the possibility that the
investments will change in value due to future fluctuations in foreign
exchange rates. Interest rate risk relates to the possibility that the
investments will change in value due to future fluctuations in market interest
rates. Market risk relates to the possibility that the investments will change
in value due to future fluctuations in market prices.
The Standing Committee on the Alberta
Heritage Savings Trust Fund reviews and approves the business plan of the
Fund. In order to earn an optimal financial return at an acceptable level of
risk, the 2000-2001 business plan limits investments of the Transition
Portfolio to include only fixed-income securities other than securities
transferred from the previous structure and proposes the following asset mix
policy for the Endowment Portfolio:
Fixed income securities 30% to 50%
Equities 70% to 50%
Risk is reduced through asset class
diversification, diversification within each asset class, quality and duration
constraints on fixed income instruments, and restrictions on amounts exposed
to countries designated as emerging markets. Controls are in place respecting
the use of derivatives (see Note 4). Forward foreign exchange contracts may be
used to manage currency exposure in connection with securities purchased in
foreign currency (see Note 4).
Note 4 Derivative Contracts
Derivative contracts are financial contracts,
the value of which is derived from the value of underlying assets, indices,
interest rates or currency rates. The Fund uses derivative contracts held
indirectly through pooled investment funds to enhance return, manage exposure
to interest rate risk and foreign currency risk and for asset mix management
purposes. The notional value of a derivative contract represents the amount to
which a rate or price is applied in order to calculate the exchange of cash
flows.
(i) A swap is a contractual agreement between
two counter-parties to exchange a series of cash flows based on a notional
amount. An equity or bond index swap involves the exchange of a floating
interest rate cash flow for one based on the performance of a market index.
For interest rate swaps, parties generally exchange fixed and floating rate
interest cash flows based on a notional amount. Cross-currency interest rate
swaps are contractual obligations in which the principal amounts of Canadian
fixed-income securities denominated in foreign currency are exchanged for
Canadian currency amounts both initially and at maturity. Over the term of
the cross-currency swap, counter-parties exchange fixed to fixed and fixed
to floating interest rate cash flows in the swapped currencies. There are
underlying securities supporting all swaps. Leveraging is not allowed.
(ii) Foreign exchange contracts are
contractual agreements to exchange specified currencies at an agreed upon
exchange rate and on an agreed settlement date in the future.
(iii) A stock index futures contract is an
agreement to receive or pay cash based on changes in the level of the
specified stock index.
The following is a summary of the Fund’s
proportionate share of the notional amount and fair value of derivative
contracts held by pooled funds at March 31, 2001:
All derivative contracts mature within one year
except for bond index swaps, cross-currency swaps and interest rate swaps with a
notional value of $294,850,000 (March 31, 2000: $446,467,000) that mature
between 1 and 3 years and $208,033,000 (March 31, 2000: $206,111,000) that
mature over 3 years.
Note 5 Fund Equity
By no later than 2003, all assets of the
Transition Fund will be transferred to the Endowment Fund. For the year ended
March 31, 2001, the Lieutenant Governor in Council approved the transfer of
assets with a book value of not less than $1.2 billion and not more than $2.4
billion. Commencing in 2001-02, the Lieutenant Governor in Council has approved
an increase in the transfer of assets from the Transition Fund to the Endowment
Fund of not more than $3.6 billion.
Section 8(2) of the Alberta Heritage Savings
Trust Fund Act (the Act) states that the net income of the Heritage Fund
less any amount retained in the Fund to maintain its value shall be transferred
to the General Revenue Fund annually in a manner determined by the Provincial
Treasurer. Section 11(5) of the Act states that for fiscal years subsequent to
1999 and until the accumulated debt is eliminated in accordance with the Fiscal
Responsibility Act, the Provincial Treasurer is not required to retain any
income in the Heritage Fund to maintain its value, but may retain such amounts
as the Provincial Treasurer considers advisable.
Note 6 Net Income
Investment income is comprised of interest,
dividends, amortization of discount and premiums, swap income, security lending
income and realized gains and losses, net of write-downs, on investments. The
Fund’s share of income earned from externally and internally managed
investment pools is net of administrative expenses incurred by the pools. (see
Note 7).
Investment income from the Endowment portfolio
includes a net gain from disposal of investments totalling $243,668,000 (2000:
$405,831,000). Investment income from the Transition portfolio includes a net
loss of $52,426,000 (2000: $4,922,000 net gain).
Note 7 Administrative Expenses
Administrative expense includes investment
management, cash management, safekeeping costs and other expenses charged on a
cost-recovery basis directly from the Department of Treasury. The Fund’s total
administrative expense for the year, including amounts deducted directly from
investment income of pooled funds is as follows:
Note 8 Comparative Figures
Certain 2000 figures have been reclassified to
conform to 2001 presentation.
Note 9 Approval of Financial
Statements
These financial statements were approved by the
Deputy Minister of Revenue.
Note 10 Government Restructuring
On March 15, 2001, the government announced new
ministry structures. As a result, responsibility for the Fund was transferred to
the Ministry of Revenue.
Schedule of
Endowment Portfolio Investments
- Schedule 1
Notes to Schedule 1
The majority of the Endowment portfolio
investments are held in pooled investment funds established and administered by
the Provincial Treasurer. Pooled investment funds have a market based unit value
that is used to allocate income to participants and to value purchases and sales
of pool units. As at March 31, 2001, the Fund’s percentage ownership, at
market, in pooled investment funds is as follows:
(a) The Consolidated Cash Investment Trust Fund
is managed with the objective of providing competitive interest income to
depositors while maintaining appropriate security and liquidity of depositors’
capital. The portfolio is comprised of high quality short-term and mid-term
fixed- income securities with a maximum term-to- maturity of five years. As at
March 31, 2001, securities held by the Fund have an average effective market
yield of 5.09% per annum (2000: 5.42% per annum).
(b) As at March 31, 2001, short-term corporate
securities have an average effective market yield of 5.4% per annum. The
Government of Canada guaranteed security has an average effective market yield
of 5.5% per annum and matures on June 1, 2006.
(c) The Canadian Dollar Public Bond Pool is
managed with the objective of providing above average returns compared to the
total return of the Scotia Capital Universe Bond Index over a four- year period
while maintaining adequate security and liquidity of participants’ capital.
The excess return is achieved through management of portfolio duration and
sector rotation. The portfolio is comprised of high quality Canadian
fixed-income instruments and debt related derivatives. As at March 31, 2001,
securities held by the Pool have an average effective market yield of 5.75% per
annum (2000: 6.39% per annum) and the following term structure based on
principal amount: under 1 year – 5% (2000: – 9%); 1 to 5 years – 36%
(2000: – 35%); 5 to 10 years – 29% (2000: – 29%); 10 to 20 years – 15%
(2000: – 15%); over 20 years – 15% (2000: – 12%).
The following is a summary of the Alberta
Heritage Savings Trust Fund’s investment in the Canadian Dollar Public Bond
Pool as at March 31, 2001:
(d) The Private Mortgage Pool is managed with the
objective of providing investment returns higher than attainable from the Scotia
Capital Universe Bond Index over a four-year period or longer. The portfolio is
comprised primarily of high quality commercial mortgage loans (95.7%) and
provincial bond residuals (4.3%). To limit investment risk, mortgage loans are
restricted to first mortgage loans, diversified by property usage and geographic
location, and include a small portion of NHA insured loans. As at March 31,
2001, securities held by the Pool have an average effective market yield of
7.14% per annum (2000: 7.66% per annum) and the following term structure based
on principal amount: under 1 year – 10% (2000: – 7%); 1 to 5 years – 25%
(2000: – 28%); 5 to 10 years – 22% (2000: – 29%); 10 to 20 years – 25%
(2000: – 22%) and over 20 years – 18% (2000: – 14%).
(e) The Floating Rate Note Pool is managed with
the objective of generating floating rate income needed for the swap obligations
in respect of structured investments in foreign equities, domestic equities and
domestic bonds. Through the use of interest rate swaps, the Pool provides
investment opportunities in high quality floating- rate instruments with
remaining term-to-maturity of ten years or less. As at March 31, 2001,
securities held by the Pool have an average effective market yield of 5.49% per
annum (2000: 5.64% per annum).
(f) The Domestic Passive Equity Pooled Fund is
managed on a passive approach with the objective of providing investment returns
comparable to the Toronto Stock Exchange (TSE) 300 Index. A portion of the
portfolio is comprised of both publicly traded Canadian equities and structured
investments replicating the TSE 100 Index and the TSE 60 Index. The other
portion of the portfolio fully replicates the TSE 300. The Pool’s investment
in units of the Floating Rate Note Pool (see Schedule 1e) are used as the
underlying securities to support the index swaps of the pool.
(g) The Canadian Pooled Equity Fund is managed
with the objective of providing competitive returns comparable to the total
return of the Toronto Stock Exchange 300 Index while maintaining maximum
preservation of participants’ capital. The portfolio is comprised of publicly
traded equities in Canadian corporations. Risk is reduced by prudent security
selection and sector rotation.
(h) The External Managers Fund is comprised of
numerous portfolios which are managed by numerous external managers with
expertise in Canadian small and large stock market capitalization companies,
United States, and International equity markets. The international equity market
consists of non-North American investments in Europe, Australia, the Far East,
Pacific Basin and Emerging Markets. The objective of the Fund is to provide
investment returns higher than the total return of the applicable Morgan
Stanley, Standard and Poor’s and Toronto Stock Exchange indices over a four-
year period. The portfolio is comprised of publicly traded equity securities on
Canadian and approved foreign markets. Risk is reduced through manager style and
market diversification.
The following is a summary of the Alberta
Heritage Savings Trust Fund’s investment in the External Managers Fund, by
geographic region, as at March 31, 2001:
The following is a summary of the assets and
liabilities of the External Managers Fund as at March 31, 2001:
(i) The Private Equity Pool (98) is managed with
the objective of providing investment returns higher than attainable from the
TSE 300 Index over a five to ten year period. The portfolio is comprised of
equity investments in institutionally-sponsored private equity pools. Risk is
reduced by avoiding direct investments in private companies and by limiting
holdings in any single pool. The Private Equity Pool is in the process of
orderly liquidation.
(j) The Private Real Estate Pool is managed with
the objective of providing investment returns comparable to the Russell Canadian
Property Index over a four-year period or longer. Real estate is held through
intermediate companies which have issued to the Pool, common shares and
participating debentures secured by a charge on real estate. Risk is reduced by
investing in properties that provide diversification by geographic location, by
property type and by tenancy. As real estate returns are positively correlated
to inflation and negatively correlated to returns from fixed income securities
and equities, the Pool provides diversification from the securities market with
opportunities for high return.
(k) Where fair value is less than cost, in
management’s best judgement, and based on market trends, the fair value will
likely recover overtime.
Schedule of
Transition Portfolio Investments
- Schedule 2
Notes to Schedule 2
(a) See Schedule 1, note (a).
(b) Fixed-income instruments are managed with the
objective of providing a market rate of return higher than the benchmark
consisting of 50% of the Scotia Capital 91-day T-Bill Index and 50% of the
Scotia Capital Short-term Bond Index. Any excess return is achieved through
management of portfolio duration as well as through issuer mix. As at March 31,
2001, fixed-income securities held have an average effective market yield of
5.01% per annum for securities maturing within a year (2000: 5.81% per annum),
and 5.10% per annum for securities maturing between 1 and 35 years (2000: 6.36%
per annum). As at March 31, 2001, the securities have the following term
structure based on principal amount: under 1 year - 32% (2000: – 16%); 1 to 5
years – 58% (2000: – 64%); over 5 years – 10% (2000: – 20%). As at March
31, 2001, securities with a fair value of $277,333,000 (2000: $492,316,000) were
loaned to certain borrowers. The loans were secured by marketable securities
with a fair value of $297,697,000 (2000: $522,480,000). During the term of the
loans, the Fund retains the right to receive income on the securities loaned, in
addition to the fees earned.
(c ) As at March 31, 2001, Provincial corporation
debentures have an average effective market yield of 7.84% per annum (2000:
8.02% per annum). The maturity profile based on expected repayments is as
follows: under 1 year - $145,765,000; 1 to 5 years - $23,695,000; and over 5
years - $80,927,000.
(d) Under the terms of the loans to Ridley Grain,
11% Participating First Mortgage Bonds due July 31, 2015, interest is compounded
semi-annually and payable annually to the extent of available cash flow and any
shortfall is to be deferred and capitalized. The principal of $91,245,000 and
unpaid interest is repayable on or before July 31, 2015. Unpaid interest at
March 31, 2001 amounted to $55,125,291 (2000: $55,125,291).
Grain throughput volumes are the main determinant
of profitability of the grain terminal and its ability to service its loan from
the Province, and therefore the value is sensitive to changes in grain
throughput volumes. Grain throughputs are difficult to forecast because they are
dependent
in part upon port allocation decisions of the
Canadian Wheat Board and other factors such as crop size and composition.
Accordingly, due to uncertainty of the grain throughput volumes, income from the
participating bonds is recognized when it is measurable and collectable.
(e) The principal amount of the Vencap loan,
amounting to $52,588,000, is due July 2046 and bears no interest. Investment in
the loan is recorded at cost. Cost includes the present value of the anticipated
loan repayment amounting to $1 million at December 31, 1995 plus accumulated
amortization on the discount.
(f) During the year, $2,400,000,000 was
transferred from the Transition Portfolio to the Endowment Portfolio in
accordance with the investment provisions of the Alberta Heritage Savings
Trust Fund Act.
The following unaudited schedules present the ten
largest investments in the pools where the Endowment Portfolio’s holdings were
greater than 5% and the ten largest issues that are directly held in the
Transition Portfolio. For a detailed listing of all investments please call
(780) 427-3035.
The following schedules present this detail:
Alberta Heritage
Savings Trust Fund Contact Information
Alberta Heritage Savings Trust Fund
Room 304, 9515-107 Street
Edmonton, Alberta T5K 2C3
Phone: (780) 427-4414
Alberta Heritage Savings Trust
Fund Standing Committee
Chairman: Mr. Drew Hutton
Deputy Chairman: Mr. Richard Magnus
Members:
Mr. Bill Bonner
Ms. Debby Carlson
Mr. Robert Fischer
Mr. Mel Knight
Mr. Rob Lougheed
Mr. Richard Marz
Mr. George VanderBurg
Committee Clerk to the Standing
Committee
Mrs. Diane Shumyla
Investment Operations Committee
Chairman: Peter Kruselnicki*, Deputy
Minister of Finance
Members:
Carl H. Otto, Carl Otto Associates Inc.
Robert L. Phillips, R.L. Phillips Investments
Inc.
Roger S. Smith, Vice-President (Research and
External Affairs) and Professor of Economic Analysis, University of
Alberta
John D. Watson, Vice-President, Finance and Chief
Financial Officer, Alberta Energy Company Ltd.
Secretary
Alex Fowlie, Ministerial Projects and Liaisons,
Alberta Finance
Investment Manager
Paul Pugh, Chief Investment Officer, Investment
Management Division, Alberta Revenue
Auditor
Auditor General of Alberta
* Effective in May 2001, the chairman is Eric
McGhan, Deputy Minister of Revenue.
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