ARC2005_p7-62
3/16/05
G&A and Management Fees ($/boe)
11:06 PM
Page 34
GENERAL AND ADMINISTRATIVE EXPENSES AND TRUST UNIT INCENTIVE COMPENSATION Cash general and administrative expenses (“G&A”), net of overhead recoveries on operated properties increased to $21.4 million ($1.03 per boe) in the 2004 from $19.1 million ($0.96 per boe) in 2003. Increases in cash G&A expenses in total and per boe for 2004 relative to 2003 were the result of the Star acquisition and increasing costs to manage the business associated with increased staff levels. As well, due to unprecedented levels of activity for ARC and for the industry as a whole in 2004, the costs associated with hiring, compensating and retaining employees and consultants has risen. It is essential for the Trust to maintain competitive compensation levels to ensure that we continue to attract and retain the most qualified individuals.
1.60
1.20
0.80
A non-cash trust unit incentive compensation expense (“non-cash compensation expense”) of $8.1 million ($0.39 per boe) was recorded in 2004 compared to $3.5 million ($0.18 per boe) in 2003. This non-cash amount relates to both the Trust Unit Incentive Rights Plan (“Rights Plan”) and the Whole Trust Unit Incentive Plan.
0.40
00 01 02 03 04 Management Fees* G&A Expenses * Management contract terminated in 2002.
The $5.2 million non-cash expense for the Rights Plan was determined based upon the prospective adoption of a fair value calculation. Only the rights that were issued on or after January 1, 2003 are subject to valuation and expense in the statement of income. Previously, the Trust recorded compensation expense for the rights based on the intrinsic value methodology, which resulted in the expense amount being based on the underlying trust unit price at each period end. In accordance with CICA Handbook Section 3870, an entity may apply an intrinsic value methodology if it is impossible to estimate a fair value at grant date, and in particular, for situations where there is a declining exercise price which is subject to uncertainty. In the fourth quarter of 2004, the Trust adopted the fair value methodology of valuation of the rights based on certain assumptions and estimates. The Trust was enabled to determined fair value estimates given that the rights plan has now been discontinued, the remaining vesting period of rights is more determinable and there is more predictability regarding future distributions and future reductions in the rights exercise price. As the change in methodology qualifies as a change in estimate under accounting standards, the fair value methodology has been applied prospectively without restatement of prior periods. The Trust has estimated the fair value of the rights issued in 2003 and 2004 based on the following assumptions and estimates: 2004 Expected annual dividend
$ 1.80
Expected annual right’s exercise price reduction
$ 0.72
Expected volatility
13.2%
Risk-free interest rate Expected life of rights (years) Expected annual forfeitures (per cent)
3.7% 1.1 –
As at December 31, 2004, the fair value calculation resulted in cumulative expense of $8.7 million compared to the $10.2 million recorded as cumulative compensation expense to September 30, 2004, under the intrinsic value methodology. The $1.5 million was recorded as compensation recovery in the fourth quarter of 2004. The remaining future fair value of the rights of $3.7 million will be recognized in earnings over the remaining vesting period of the rights outstanding. In March 2004 the Board of Directors upon recommendation by the Compensation Committee, approved a new Whole Unit Plan to replace the existing Rights Plan for new awards granted subsequent to the first quarter of 2004. The new Whole Unit Plan will result in employees, officers and directors (the “plan participants”) receiving cash compensation in relation to the value of a specified number of underlying trust units. The Whole Unit Plan consists of Restricted Trust Units (“RTU’s”) for which the number of trust units is fixed and that will vest over a period of three years and Performance Trust Units (“PTU’s”) for which the number of trust units is variable and will vest at the end of three years. The Trust
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ARC ENERGY TRUST