Updated 6 November 2024
Note to readers:
On 6 November the Standing Committee on the Alberta Heritage Savings Trust Fund (AHSTF) will be holding its annual public meeting at 6:30 p.m. in the Rocky Mountain Room, 2nd Floor of the Queen Elizabeth II Building in Edmonton. The annual public meeting is open to members of the public either in person or via social media including Facebook. I attended the last two meetings in person and have been able to raise important questions of policy. In the 2022 meeting (transcript here), I was the only member of the public present in person. In 2023, I was pleased that there were nine members of the public raising uncomfortable questions which generally were deflected by officials of Alberta Treasury Board and Finance (TBF) and senior Alberta Investment Management Corporation (AIMCo) executives (2023 transcript here). Given the importance of the Heritage Fund to the finances of the province and given the major changes to the Fund initiated by the Smith government, principally changes to allow the reinvestment of the investment income of the Fund, it is vital that members of the public show up to learn more about the operations of the fund. Hopefully some of my subscribers will show up in person or via other means to watch the proceedings.
AIMCO’s record
Before examining arguments for greater disclosure and plausible arguments against public disclosure, it is instructive to look to the record of AIMCo and the Heritage Fund between 2011 and today. If AIMCo and the AHSTF’s investment performance was sterling, one might be inclined to defer to the wisdom of the defenders of the investment status quo, namely no need to disclose. Unfortunately, this is not the case.
This part focusses on the Alberta Growth Mandate energy sector investments and the 2020 investment losses of both the AHSTF and public sector pension funds arising from a Volatility Trading Strategy (VOLTs).
In April 2016, I wrote a paper for the Institute of Public Economics’ policy series about the corporatization project of AIMCo (Alberta Investment Management Corporation. An Examination of a Corporatization Project: Preliminary Assessment). It was called a “preliminary assessment” since had about five years of performance data and judging investment is best done over a longer term. My report:
shows the major beneficiaries of the transformation appear to be
the senior managers and particularly the senior executives of AIMCo, whose pay
has increased significantly. Unfortunately, there were no clear, public performance
standards established for AIMCo as a whole and therefore no public assessment
or debate of the success of the AIMCo corporatization project.
Alberta Growth Mandate
In 2015, the new NDP government did not undertake a specific review of this agency as the demands facing a cabinet without previous experience were formidable- other more important fish to fry, like a royalty review and climate leadership.
To demonstrate that the new government was doing something concrete to stem job losses and perhaps unintentionally the bankruptcy of junior oil companies, the Alberta Growth Mandate (AGM) was announced in the October 2015 budget by NDP Finance Minister Joe Ceci. The Heritage Fund’s investment managers (AIMCo) would use some of the fund’s assets “to focus a prudent but significant portion of our province’s Heritage Fund to directly invest in Alberta’s growth.” Three percent of the Heritage Fund – up to about $540 million – “will be targeted to growth-oriented companies in Alberta.”
The criteria for AGM’s investment, disclosed months after the Budget, consisted of the following:
- Creates jobs in Alberta
- Builds new infrastructure in Alberta
- Diversifies Alberta’s economy
- Supports Alberta’s growth
- Connects Alberta’s companies to export markets
- Develops subject matter expertise within Alberta
Ceci noted:
While continuing the mandate of the fund to maximize returns for future generations of Albertans, we are announcing today that we have mandated the Alberta Investment Management Corporation to focus a prudent but significant portion of our province’s Heritage Fund to directly invest in Alberta’s growth (emphasis added).
AIMCo was then to play an influential, although underappreciated, role in the NDP’s first budget. Additionally, AIMCo seemingly ingratiated itself to rookie Finance Minister Ceci to be used as a “prudent investor” in Alberta “growth companies”, given the recession Alberta was experiencing because of, you guessed it, low oil prices.
As Ceci said in Budget 2015, “(P)rofessionals with expertise in business development and investment, not politicians will make decisions in the best interest of Albertans with a focus on growth, diversification and jobs” (emphasis added). Several months after the announcement a memorandum of understanding was published to shield the government from investment blow-back if matters went south and shield AIMCo from political interference. Independence of government was a part of the logic for creating AIMCo initially- that a corporation at arm’s length with a blue-chip corporate board of directors, would insulate investment managers from politicians’ nefarious plans.
What transpired over four years was a disastrous investment record of oilpatch casualties and with no final accounting. Incredibly at a time when the oilpatch was experienced a deep hollowing out, AIMCo doubled down on the struggling industry with almost two-thirds of “growth investments” in oil companies and oil services companies. Ironically, the investee companies were led by executives and directors who had financially supported the Wildrose, Alberta PCs, and the UCP (before 2017) both corporately and individually.
In March 2020 Abpolecon.ca surfaced concerns that the Alberta Growth Mandate was heavily invested in junior oil and gas companies and oil servicing firms.
This use of public sector pension funds raises important public policy and governance issues: what percentage of the pension fund’s assets are held in these high-risk assets? What was the nature of the information and rationale provided to the (pension) board members of the AGM investments? And, given recent changes to the relationship between the government (Minister of Finance), AIMCo, pension boards, and new funds like the Teachers’ Pension Fund and WCB funds, how are the ultimate beneficiaries supposed to view these types of investments?
As Chart 1 shows a chilling two-thirds of the AGM’s assets were in oil and gas by 31 March 2019.
Alberta Growth MandateIn April 2020, Progress Report released an comprehensive 57-page Report Alberta’s Failed Oil and Gas Bailout on how AIMCo invested more than billion dollars of pensioners and Albertans money into risky oil and gas companies with more than $3 billion in environmental liabilities and how the people running those companies got rich through huge salaries, share buybacks, dividends and conservative political connections. The authors Jim Storrie, Duncan Kinney, and Regan Boychuk noted the absence of profitability of the conventional oil and gas sector reflected among other things in the failure of many companies to pay municipal taxes. Particularly concerning were the clean up liabilities on these firms. The report then went through methodically the investee companies, the companies’ compensation of executives and directors as well as the political donations of these companies corporately and individually.
Below is a listing of the AGM investments at the end of March 2019, the last public disclosure of the investment in this mandate.
AGM list of investments AGM list of investments
Below is a listing of the Energy company investments as at 31 March 2020, their original book value and share price.
| Table 1- Estimated Value at 31 March 2020 where applicable | |||||||
| Company Name | Commitment ($millions) | Instrument | Price when Committed | Price 31 March 2020 | Price as percentage of Commitment | Price to Exercise | Estimated Value ($millions) |
| Calfrac Well Services | 6.5 | Equity | 1.73 | 0.21 | 12% | N/a | 0.8 |
| Calfrac Well Services | 39.9 | Debt with Warrants | 2.64 | 0.21 | 8% | $4.14 per common share at any time prior to June 10, 2019- expired -Out of the money | 39.9 |
| Pine Cliff Energy | 6.1 | Interest Bearing Notes/Warrants | 1.13 | 0.065 | 6% | Common Share for $1.38 until August 10, 2018- 6.75 %. Coupon (8% effective interest rate). Expired Out of the money. Promissory Notes mature 31 October 2020 with a 7.65 % coupon rate | 6.1 |
| Journey Energy | 6.1 | Interest Bearing Notes/Warrants | 1.81 | 0.38 | 21% | 945,454 warrants priced at $2.75/share exercised on 2 March 2017. | 6.5 |
| Calfrac Well Services | 1.6 | Equity | 3.99 | 0.065 | 2% | N/a | 0.0 |
| Savanna Energy Subsidiary of Total Energy Services Inc. | 45.7 | Debt with warrants and Equity | N/a | Na | N/a | N/a | 45.7 |
| Pine Cliff Energy | 0.2 | Equity | 1.11 | 0.065 | 6% | N/a | 0.0 |
| Savanna Energy- Subsidiary of Total Energy Services Inc. | 0.4 | Equity | N/a | Na | N/a | N/a | N/a |
| Razor Energy | 7.2 | Loan Facility/Common Shares | 2.7 | 0.125 | 5% | Effective interest rate of 13 %.. AGM received about 245,790 common shares. | 7.23 |
| Perpetual Energy | 10.1 | Debt and Equity | 1.76 | 1.27 | 72% | Heritage Fund/AGM received an estimated 1.2 million warrants a period of up to three years, at exercise price of $2.34/share/ Expired out of the money. | 10.1 |
| Journey Energy | 2.6 | Warrant Exercise | 2.82 | 0.38 | 13% | Convertible into common shares of Journey exercise price of $2.75 per warrant Warrant out of money |
0.4 |
| Whitecap Resources | 8.7 | Interest Bearing Notes | 9.73 | 1.13 | 12% | 31 May 2017 of senior secured notes tottalled $200 million interest rate 3.54 %. | 8.7 |
| Razor Energy | 0.7 | Equity | 3.11 | 0.125 | 4% | N/a | 0.0 |
| Ikkuma Resources/Pieradae | 8.9 | Debt with Warrants | 1.98 | 0.17 | 9% | N/a | N/a |
| Ember Resources | 9.3 | Loan Facility/Common Shares | Not publicly traded | N/a | N/a | ||
| Kinder Morgan Canada | 29.1 | Credit Facility | Sold to federal government in August 2018 | 29.1 | |||
| Trident Exploration Corp | 12.3 | Debt | In receivership July 2019 | 0.0 | |||
| Western Energy Services | 43.8 | Loan Facility/Common Shares | 1.33 | 0.2 | 15% | 9.1 million common shares purchased by AIMCo in October 2017 at $1.25/share. Assume AGM purchased one-fifth or 1.82 million shares valued at 0.4-million | 44.2 |
| Enerflex | 4.2 | Interest Bearing Notes | 14.56 | 5.42 | 37% | N/a | 4.2 |
| Razor Energy | 3 | Loan Facility/Common Shares | 1.52 | 0.125 | 8% | Additional $15-million from AIMCo. Estimated 204,825 shares received by AGM | 3.25 |
| Journey Energy | 4.1 | Equity | 1.72 | 0.38 | 22% | N/a | 0.9 |
| Wolf Midstream | 8.3 | Loan Facility/Common Shares | Not publicly traded | N/a | N/a | ||
| Ikkuma Resources/Pieradae | 3.5 | Debt | 1.98 | 0.17 | 9% | N/a | 3.5 |
| Total Commitments Valued | 235.4 | 210.6 | |||||
| Sources: 2018-19 Annual Report Alberta Heritage Savings Trust Fund, p. 9, corporations’ annual reports and financial statements.Share prices © 2022 Morningstar. | |||||||
In March 2020 the UCP shut the mandate down. In a disingenuous segment in the AHSTF’s annual report, the minister wrote that the program had been wound down with “all the investments meeting the investment criteria.” Since ministers don’t have time to write annual reports, we can surmise that TBF and AIMCo officials were quite happy to close the file by declaring victory.
Below is a brief synopsis of some of the AGM’s weakest energy investments.
Trident Exploration
The only investee company to be forced into bankruptcy before March 2020 was Trident Exploration. Trident received $12.3 million in debt financing from the AGM in August 2017 and went bankrupt in May 2019. At the time of its bankruptcy, Trident owed unsecured creditors $18.9-million, and secured creditors AIMCo (the AGM and various pension funds) $60.3 million and ATB $5.65-million. Significantly, it was not Trident’s largest secured creditors, ATB or AIMCo that initiated the bankruptcy but the Orphan Well Association. Trident was one of a number of companies which had been forced into bankruptcy because its producing wells could not support the requirement to remediate orphan or inactive wells.
In its report to the Court, trustee in bankruptcy PricewaterhouseCoopers LIT noted that Trident faced asset retirement obligations of $407-million against which $268.5-nillion in oil and gas sales proceeds produced a deficit of $138.7-million (para 4.5). At 30 April 2021 there was $1-million available for distribution (para. 9.2). The receiver reported a settlement was reached between the Alberta Energy Regulator, the Orphan Well Association and ATB which was not made public. ATB’s original security was in the form of a demand debenture of $259-million “providing for first ranking charge over all assets and properties of the Company” (para 9.9). The Receiver noted it believed it would complete its outstanding duties by the end of September 2022.
It is clear that under any “risk/reward target” the Trident Exploration investment was a disaster for all concerned including Alberta taxpayers. In 2022, at the Public Meeting of the Heritage Fund Standing Committee of the Legislative Assembly, Ms. Lau, AIMCo ‘s then Co- Chief Investment Officer answered a question about Trident as follows:
Ms Lau: I will quickly address that. Well, thanks for the question. Trident was one of the investments we invested in as a loan program with orphan well sites we did in 2016 and even earlier. I don’t have the exact date. It was a situation that investment did not turn out as great, as it did. This asset rode down to zero. But alongside all the other investments we have made in any programs or any portfolios where it is sitting, there are circumstances where not necessarily all investments will work out as it is expected. That’s why the key for our portfolio and to build our portfolio is to ensure a diversified portfolio, not to make too much of a concentration risk or a bet. Sixty million dollars of our portfolio, probably out of the AIMCo total asset mix of close to $150 billion – we were very mindful when making such a decision to have the right diversification and right sizing for any investment. As such, having any asset that we need to write down was never a good moment and it’s unfortunate, but at the same time we were having all the effort to mitigate any risk with the diversification or the construction of a portfolio as we build.
The Chair: Do you want to follow up on that?
Dr. Ascah: So what you’re saying is that – if I understand the word “all” – all did not meet the risk-reward return, because you’re saying that Trident is getting zero. Unless the unstated risk-reward target is negative or losses, I don’t see how that statement in that report is truthful, which is very, very serious because, to me at least, it’s signed by the minister, AIMCo presumably looks at it, as does the department. I’m just, quite frankly, shocked that we have claims that are made in the heritage fund report that aren’t true. Do you have a comment on that?
Mr. Epp: Quite frankly, we are not prepared for that question.
The Chair: Maybe we can get a written response later if that’s possible. Okay. All right. We’ll get a written response to that question. (Alberta Hansard, 27 October 2022, HS-221).
The Committee is still waiting for answers on this question.
Perpetual Energy, Sequoia Resources
The AGM bought debt and warrants of Perpetual on Friday, February 17, 2017.
Background
Perpetual shares had been trading as high as high as $45 in July of 2014 but there began a quick descent. In November 2015 its shares traded at $12 eventually falling to one dollar in February 2016. In September 2016, Perpetual sold some of its assets to an Alberta-numbered company whose principals were Messrs. Yang and Wang. Prior to a share exchange and asset transfer, Perpetual and associated companies had completed a complex legal reorganization.
The central problem with the impugned September 2016 sale of Perpetual’s assets was the evaluation of environmental liabilities. Perpetual’s quarterly statements for June 30, 2016 showed total decommissioning liabilities of $170-million with only $3 million in current provisions. But the balance sheet value of exploration and evaluation was only $55-million with $332-million in plant and equipment. At that time, Perpetual had only $16.6-million in borrowing capacity left. Moreover, the financial statements record “In April 2016, the lenders completed a discretionary review of Perpetual’s borrowing base which resulted in a reduction to the available capacity under Perpetual’s reserve-based credit facility from $20 million to $6 million.” In short, Perpetual was quickly becoming un-bankable (Note 7, June 30, 2016, financial statements).
From Perpetual’s 2017 annual report we know:
On March 14, 2017, a $45 million senior secured term loan facility (the “Term Loan”) with Alberta Investment Management Corporation (“AIMCo.”) was closed, bearing annual interest at 8.1% and maturing in March 2021. The initial draw on the Term Loan was $35 million with the remaining $10 million drawn on October 5, 2017. In addition, for no additional consideration, 5.4 million warrants were issued which entitle AIMCo. to acquire common shares on a one for one basis for a period of up to three years, at an exercise price of $2.34/share.
The financing relationship provides for a CAD $45 million debt-with-warrants financing, and the agreement by AIMCo to purchase 2,571,500 units of Perpetual (“Units”) at a price of CAD $1.75 per Unit for gross proceeds of approximately CAD $4.5 million, with each Unit consisting of one common share of Perpetual and 0.21 of a common share purchase warrant of Perpetual (a “Warrant”). The debt-with-warrants component consists of a second lien senior secured term loan to Perpetual, repayable four years following the date of closing and bearing interest at 8.1% per annum, as well as 120 Warrants for every $1,000 committed under the Second Lien Facility, resulting in the issuance of 5,400,000 additional Warrants.” (See https://www.aimco.ca/insights/perpetual-energy-announcement)
According to AIMCo’s release “Perpetual is positioned to grow and prosper throughout the dynamic cycles of the energy business.”
Prior to the AIMCo transaction, in the second quarter of 2016. Perpetual repurchased and cancelled $114.0 million of outstanding 2018 Senior Notes and $100.4 million of outstanding 2019 Senior Notes through the exchange of 4.4 million Tourmaline Oil (TOU) and cash payments of $3.9 million for accrued interest. The fair market value of TOU shares exchanged was $130.5 million based on an average closing price of $29.64 per share for TOU. Included in the exchange were $81.6 million 2018 Senior Notes and $57.0 million 2019 Senior Notes, a portion held by directors and officers of the Company or entities controlled by them. The company recorded a “net gain on the security swap of $81.3 million, representing the difference between the carrying amount of senior notes cancelled of $212.0 million ($214.4 million principal amount) and the fair market value of TOU shares exchanged of $130.5 million, (Note 11, 2017 audited financial statements, pp, 52-53).
Just a month prior to the AIMCo investment Perpetual entered into a series of transactions involving exchanges of securities in which the directors and officers of the company held a significant portion of the exchanged debt. The Company exchanged $17.4- million of 2018 Senior Notes and 2019 Senior Notes for $17.4 million new 8.75% senior notes with a maturity date of January 23, 2022. In a note to the financial statements “Included in the exchange were $3.7 million 2018 Senior Notes and $4.3 million 2019 Senior Notes held by directors and officers of the Company or entities controlled by them.” The new notes bore a higher interest rate for one year than the existing notes but otherwise had the same features as the existing notes.
In April 2017, after AIMCo’s March $45-million investment which included both AGM and pension funds, Perpetual was able to redeem $27.1 million of its 8.75% senior notes maturing March 15, 2018 for cash and exchanged the remaining $0.5 million for the issuance of an equal amount of 2022 Senior Notes. Coincidentally these notes matured the same month that Sequoia went into receivership.
Given the above questions about its financial situation and self-dealing of directors and officers, it is remarkable AIMCo decided to invest $45 million of Heritage Fund assets and other public pension funds in this venture. It is clear that this investment never met the risk-reward target. Yet the Heritage Fund statements claim the “mandate was eliminated as all investments exceeded AIMCo’s risk/return targets.”
PWC as receiver
What makes this story especially intriguing and sordid is the eight-year legal battle between the PricewaterhouseCoopers PWC- LIT Receiver for Sequoia Resources against Susan Riddell Rose and Perpetual Energy. An affidavit filed by PWC LIT in February 2018 which began the PWC -Perpetual-Riddell Rose litigation contained an 16 August 2016 PowerPoint presentation from Perpetual management to its board calling for $10-million in operating cost reductions and to reduction in asset retirement obligation costs by $50-nillion from year end 2016. In addition, a sale of more than $50-million in assets was to be crystallized. From the same PowerPoint, lawyers from Burnet, Duckworth & Palmer LLP recommended a legal manoeuvre to restructure assets for sale to what the law firm referred to as an “arms-length Canadian resident purchaser.”
The assets to be sold were ironically labelled “Goodyear” assets and the disclosure to the board gives the asset retirement obligations as “$123MM vs. $35 MM.” The presentation also revealed that of the 2,221 “net wells” only 584 were “net producing” with 910 shut in and 727 abandoned. The package also informed the board that the company was running low on inventory of parts and chemicals, “unmanned at select facilities which increases risks in a material pipeline break or spill, …crane inspections, PSVs, general maintenance, chemical inhibition programs, water crossing inspections, fugitive emissions are overdue.”
How much AIMCo knew of these troubles or the Alberta Energy Regulator is unclear. In Perpetual’s 2018 Annual Report, it was reported that management expects that the Company is “more likely than not” to be completely successful.
This continuing legal battle is recounted in “Sequoia Resources- Abuse of Process brought to a halt in “common sense” Court of Appeal decision.” The litigation became more interesting when CNRL. Cenovus and Torsen Energy Ltd. supported the receiver PWC.
In a Globe and Mail report, Jeffrey Jones summarized the gist of the initial transaction.
The asset purchase, for which Sequoia paid $1, was the first and largest of several for the ill-fated company. Rather than transferring the assets to the buyer, which would have required the Alberta Energy Regulator to rule on its suitability for taking the liabilities, Perpetual transferred the shares in a subsidiary to Sequoia’s directors, Wentao Yang and Harold Wang. The AER has acknowledged this gap existed.
According to an affidavit from CNRL executive Ron Laing “If such transactions to avoid liabilities become routine, all participants in Alberta’s oil and gas industry would be pressured to adopt similar strategies, thus incentivizing insolvency and causing the regulatory regime to spiral into obsolescence.” This, CNRL and the others feared would put more pressure on the Orphan Well Association leaving remaining companies to fund a growing deficit.
But this story was far from over for AIMCo and probably the AGM.
In July, 2021, Perpetual reached an agreement with its AIMCo for the settlement of principal and all interest owing on the Term Loan contingent upon closing of a new financing which substantially reduced Perpetual’s net debt. In return for a payment of approximately $38.5 million in cash, AIMCo’s clients, possibly including the AHSTF, will receive 700,000 Rubellite common shares, the issuance of a new $2.7 million second lien term loan bearing interest at 8.1% annually and maturing December 31, 2024, and up to a total of $4.5 million in contingent payments over the three-year period in the event that Perpetual’s annual average realized oil and natural gas prices exceed certain thresholds (Perpetual Annual Report 2021, p. 10). As part of the Second Lien Loan Settlement, the Term Loan lender committed to fully exercise the arrangement warrants it received under the Plan of Arrangement associated with its approximately 4.0% equity ownership of Perpetual. In addition, the Term Loan lender agreed to subscribe for $4.5 million of the Non-Brokered Private Placement and upon completion of the transaction owned approximately 8.3% of the Rubellite common shares. Nothing was ever simple with Riddell Rose and Perpetual.
On September 3, 2021, upon completion of the Plan of Arrangement, Perpetual’s agreement with its Term Loan lender for the settlement of principal and all interest owing on the Term Loan was accounted for as being effective. Perpetual extinguished the previous Term Loan in exchange for the payment of approximately $38.5 million in cash (reflected as current Term Loan payable on the statement of financial position), the delivery by Perpetual of the AIMCo Bonus Shares at a value of $1.4 million, the issuance of a new $2.7 million second lien Term Loan bearing interest at 8.1% annually and maturing December 31, 2024 and up to an aggregate $4.5 million in contingent payments over the three year period ended June 30, 2024 depending on annual average realized oil and natural gas prices exceeding certain thresholds.
From the standpoint of AIMCo as an investment manager, the amount of time dealing with investment bankers, lawyers, and Perpetual management (ATB Capital Markets, another government owned enterprise advised Perpetual) has consumed enormous time and effort and money. For Alberta taxpayers and public pension plan members this type of investment draws parallels to the imbroglios of the Getty-Johnson years with Gainers, AGT-NovaTel, Chembiomed and a whole host of investment situations cleaned up at losses to the ALberta taxpayers under the Klein years. Needless to say a very unproductive use of scare human and financial resources
The details come in a 295-page Notice special meeting of shareholders held on August 31, 2021 which included a Notice of originating application to the Court of Queen’s Bench of Alberta and a management information circular with respect to that plan of arrangement involving Perpetual and Rubellite Energy and shareholders of Perpetual Energy Inc. In the document it is disclosed that
The Perpetual Second Lien Term Loan Repayment and Credit Facility Perpetual has reached an agreement with AIMCo (the “AIMCo Debt Settlement Agreement”) for the settlement of its $45 million second lien term loan principal and outstanding interest for the payment of approximately $38.5 million in cash, a new second lien term loan of approximately $2.7 million (the “New Second Lien Term Loan”), delivery by Perpetual of 680,485 Rubellite Common Shares valued at $2.00 per share, and up to approximately $4.5 million in potential contingent payments in the event that Perpetual’s annual average realized oil and natural gas prices exceed certain thresholds (the “Second Lien Loan Settlement”). The New Second Lien Term Loan bears interest at 8.1% annually, which Perpetual may elect to pay-in-kind and will mature on December 31, 2024. Subject to the restrictions in the First Lien Credit Facility (as defined below), Perpetual will have the ability to prepay any or all of the New Second Lien Term Loan at any time without penalty.
As part of the Second Lien Loan Settlement, subject to the terms of the AIMCo Debt Settlement Agreement, AIMCo has committed to fully exercise the Rubellite Warrants it will receive pursuant to the Arrangement associated with its approximate 4.0% ownership of Perpetual and to subscribe for $4.45 million of the Non-Brokered Private Placement.
First Lien Credit Facility will have a borrowing limit of $17.0 million, reduced from the current borrowing limit of $20 million upon completion of the Financings, and will cease to revolve on November 30, 2022 unless the revolving period is further extended for an additional six months subject to approval by the syndicate. If not extended, all outstanding advances will be repayable on May 31, 2023.
On 16 May 2024, PWC and Perpetual entered into a court approved settlement. According to Perpetual’s convoluted press release, the Alberta Court of King’s Bench has approved the previously announced settlement agreement with PricewaterhouseCoopers Inc., LIT in its capacity as trustee in bankruptcy (the “Trustee”) of Sequoia Resources Corp. (“Sequoia”) related to the Sequoia litigation (the “Settlement”). PWC would receive $10-million held in escrow and some type of security arrangement for another $19.9-million. In what has to be a win for the company and its lawyers the release added: “The Company and Board of Directors are pleased to put this matter behind us and move forward to unlock Perpetual’s inherent value potential.”
Since 1 November 2014 Perpetual’s share price has fallen 98.55 per cent. Since the initial commitment the shares have fallen from $1.75 to 40 cents. In September 2021 Rubellite Energy shares were trading at about 2.15 and while the shares have traded as high as $4.93 in June 2022 after the Russia-Ukraine war boosted oil prices. The shares are now trading about $2 a share. Since the AHSTF or AIMCo in general does not release its list of investment, we don’t know how much money has been made, or lost on the company as well as associated fees charged to the funds.
Calfrac Well Services and Western Energy Services (WES)
AIMCo’s second committed investment was to Calfrac in December 2015. On 22 December 2015 AIMCo through the AGM made a $6.5 million commitment in equity investment as part of a bought deal private placement of 20,370,370 common shares for total gross proceeds of $27,500,000. Share issuance costs for the transaction were $2,306 million, resulting in net proceeds of $25,194,000. (Calfrac Annual Report 2015, p. 59.) In September 2017, AIMCo invested in a related energy services company called Western Energy Services. The nature of the cross-ownership begins with Ronald Mathison who was chairman of Western Energy in March 2021 and a director of Western since 2010. Mathison, before a massive share and debt reorganization announced in February 2022 owned directly and indirectly 20 per cent of Western shares in March 2021 (Management Proxy circular, p. 6). At the same time AIMCo held 19.3 per cent of this penny stock company. Mathison’s ownership has now been diluted to 2.03 per cent (Redefinitiv). G2S2 a Halifax based privately held investment holding company “focused on creating value across a variety of businesses with a long-term horizon. G2S2 is controlled by George & Simé Armoyan”. George Armoyan is on Calfrac’s board. G2S2 also owned 15.85 per cent of Western Energy Services. Matco investments a company controlled by Mathison now owns 6.72 per cent of Western’s outstanding shares.
Ronald Mathison gave $20-million to the University of Calgary’s business school in 2018 when his companies
were receiving investments from the AGM Source: CBC.ca
Calfrac’s 15 March 2021 management proxy circular disclosed Armoyan owned 11,516,498 shares of the company.
In March 2016, the Financial Post highlighted up to 100,000 job losses in the oilpatch. Calfrac Well Services Ltd was cutting another 500 jobs from its North American operations, bringing its total number of layoffs in the region during this downturn to 2,300.
Three months later, on 10 June 2016, AIMCo/AGM made a $39.9 million commitment in Debt with Warrants. According to its 2106 annual report Calfrac “closed a $200.0 million second lien senior secured term loan financing with Alberta Investment Management Corporation (AIMCo). The proceeds were used to pay down all of its borrowings under its credit facilities and its bank loan in Argentina (Calfrac Annual Report 2016, p. 7). The term loan matures on September 30, 2020, and bears interest at 9 percent per annum, payable quarterly.” (Calfrac Annual Report 2016, p. 57.) The annual report also disclosed that $998 million of debt would be maturing in 2020- (Calfrac Annual Report 2016, p. 58).
On December 6, 2016, Calfrac closed a bought deal private placement of 21,055,000 common shares for total gross proceeds of $60-million with net proceeds of $56.6-million (Calfrac Annual Report, 2016, p. 57). This new issuance reflected the desire of creditors to see some of Calfrac’s massive debt paid down. Reflecting poor operating conditions in the oilpatch, on September 27, 2017, the Company amended and extended its credit facilities to June 1, 2020. The amendment included a voluntary reduction in the total facilities from $300 million to $275-million.
In 2018, Calfrac was able to repay “in full the remaining $196.5 million principal amount of its second lien senior secured term loan facility with Alberta Investment Management Corporation (Calfrac Annual Report, 2018, p. 6.) The agreement with AIMCo gave the Company the right to prepay the loan prior to June 10, 2018 with a nominal prepayment premium.
In July 2020, sensing a good opportunity to pounce on a undervalued asset, the American Wilks Brothers attempted to take the company over. According to Rod Nickel and Jeff Lewis, reporting in The Globe and Mail:
Ten years ago, Canadian oil field services firm Calfrac Well Services commanded a $2.1-billion market value and was poised for U.S. expansion.
But by last month, Calfrac’s market value had collapsed to just $23-million and it deferred an interest payment on debt that does not mature for six years. The Texas billionaire Wilks brothers, already its top shareholder, scooped up more of the company’s debts in June, a regulatory filing showed, preparing to salvage what they can from restructuring.
The Canadian industry has borrowed heavily to survive a series of catastrophes, and is facing $6-billion in refinancing in the next six months, the Bank of Canada said in May.
This year’s maturing energy debts are the most on record for the fourth year in a row and a more than 40-per-cent increase over 2019, according to Refinitiv data. They are an existential threat for some companies during the worst industry crisis in decades, while others with stronger credit ratings may buy time in exchange for higher rates that hobble bottom lines.
Companies have two main options as unaffordable debts mature – swap debt for equity or persuade noteholders to extend maturity, said Kevin Fougere, partner in law firm Torys LLP….
‘GRINDING HALT’
For Calfrac, 19.8-per-cent owned by the Wilks brothers, its story moved from riches to rags so fast that it could not afford even an US$18-million interest payment.
Calfrac, which provides fracking, coiled tubing and cementing services on wells, went public in 2004 as prices began ascending vertigo-inducing heights.
Prices crashed in 2014 and, two years later, the company cut 500 jobs. Even so, in 2017, Calfrac moved into the U.S. Permian basin.
After years of profit, losses began in 2015 and have continued, excluding one-time items.
This year’s price collapse has led Canadian producers to curtail output and to scrap drilling plans, hurting service companies such as Calfrac.
“Everything came to a grinding halt, and they got caught before they could start to clean up the leverage,” said Rafi Tahmazian, senior portfolio manager at Canoe Financial, Calfrac’s sixth-largest shareholder.
Peer Trican Well Service, by contrast, has taken a cautious approach, Mr. Tahmazian said.
Calfrac cut operating expenses by 23 per cent from 2014-19, while revenue dropped 35 per cent. Trican chopped expenses by 69 per cent as revenue plunged 74 per cent, including the sale of some businesses, according to Refinitiv data.
In June, after Calfrac missed the interest payment, it said it would work with advisors to examine its options. Dan Wilks acquired about one-quarter of Calfrac’s second-lien debt for US$18.4-million, the filing showed, giving his Wilks Brothers investment group added sway over the company’s future.
Efforts to reach Wilks Brothers were unsuccessful. Dan Wilks has also acquired stakes in hard-hit U.S. service firms.
Since deferring its interest payment on US$432-million in debt, Calfrac has 30 days, barring an extension, to pay or work out another solution before a default that could result in restructuring through bankruptcy, Stifel FirstEnergy analyst Ian Gillies said.
Calfrac president Lindsay Link declined to comment on options during its delayed quarterly conference call on June 25.
“We do not believe a return to normal activity levels will occur in the near term,” he said. In a statement, the company said it has the ability and capacity to make the interest payment (emphasis added).
At the end of March 2021, Geoffrey Morgan of the Financial Post reported that Calfrac was cancelling $1-million in bonds that AIMCo had bought in the midst of a contentious proxy battle between Calfrac and the Wilks brothers. The Toronto Stock Exchange approved the request. AIMCo had bought the bonds which give the holder the opportunity to convert the debt into shares during the contested proxy battle. Calfrac and AIMCo claimed the purchase was “not material” to the recapitalization of the company. However, the previous August a management circular showed AIMCo’s bond purchase would have rendered its votes ineligible at a special shareholders’ meeting because the holdings would have rendered AIMCo a “related party.” At the meeting AIMCo voted for Calfrac debt restructuring proposal. When this problem was discovered and AIMCo’s votes subtracted Calfrac only received 39 per cent support for the restructuring. AIMCo claimed the mistake was the transfer agent while maintaining it was able to vote in all aspects of the transaction. When the oversight was discovered, AIMCo agreed to cancel the transaction to remedy the situation. AIMCo only became aware of the situation on 19 February 2021. This issue again raises questions about the competence and monitoring of a key investment of AIMCo.
Western Energy Services
Perhaps the most dubious investment of all was in Western Energy Services a company closely related through Mathison’s cross-ownership with Calfrac. Western Energy Services (WES) share price was $1.33 a share in September 2017 at the time of the commitment. In the two years preceding AIMCo’s investment the company had lost $224 million on revenue of $351-million. Its share price had fallen from $3.88 in January 2016 to $1.33 at the time of the 22 September 2017 investment. $43.8-million equity and loan facility of $43.8-million or 10.8 per cent of the total Alberta Growth Mandate portfolio was a questionably large investment which was leveraged up with other AIMCo managed funds to a total of $226-million.
According to a 21 February 2018 news release a lending agreement provided WES with a whopping $215.0 million “second lien secured term loan facility.” The loan facility was used after December 31, 2017, to repay a portion of the Company’s outstanding 7⅞% senior unsecured notes. Remarkably the interest rate was set at one-quarter of one per cent (25 basis points) in spite of its second lien position and its dreadful operating and financial performance. In connection with the loan facility, Western issued 7.1 million warrants to purchase common shares of Western, at an exercise price of $1.77 per common share, which to expire on October 17, 2020. In addition, AIMCo on behalf of its funds bought 9.1 million common shares of Western at a price of $1.25 per share in a private placement, for proceeds of $11.4 million to Western. In total, AIMCo had invested $226.4 million in Western, with the AGM holding about 19 per cent of the loan, warrants, and common shares. At 31 March 2020 the warrants would have been worthless and the common shares one-fifth of the original purchase value. How this investment met AIMCo’s risk-reward test stretches credulity.
In March 2020 WES’s shares were trading at 22 cents a share and are currently trading at about three cents after taking into account a share consolidation of 120 to 1 which took place on 2 August 2022. Disposition of the investment would have been a good move in March 2020 but it would still have crystallized the heavy losses in share value. It is very unlikely that by March 2020 this investment met AIMCo’s risk-reward target.
The Savanna-Total- WES- AIMCo litigation
During the year ended December 31, 2017, one of AIMCo’s other AGM investee companies, Savanna a subsidiary of Total Energy Services, received a statement of claim from WES for payment of a termination fee in the amount of $20 million. Savanna terminated the agreement on March 28, 2017 following the acquisition by Total Energy Services of over 50% of the outstanding common shares of Savanna in accordance with the terms and conditions of the agreement. Western claimed Savanna was not entitled to terminate the agreement and breaching the agreement. According to Total’s financial statements “Savanna has filed a statement of defense and has received legal advice that Western’s claim is without merit.”
Separately from this was a claim by AIMCo against Total and Savanna in which AIMCo claims that Savanna had refused to pay a $6 million change of control penalty to AIMCo.
Further twists in the saga continue. On 18 May 2022 AIMCo announced it had acquired an additional 2-billion common shares of Western representing 49.25 per cent of issued and outstanding common shares. This agreement followed a debt restructuring agreement. According to the release, AIMCo converted $100,000,000 of principal amount of indebtedness outstanding under its original the credit agreement of October 2017, into 2,000,000,000 Common Shares at a conversion price of $0.05 per share (the “Debt Conversion”). For undisclosed reasons the shares will be held by Seibu Investments Ltd., a private holding company wholly owned and controlled by AIMCo and a “joint actor of AIMCo in connection with the Debt Conversion.”
Prior to the conversion, AIMCo entered into an “investor rights agreement” with Western, G2S2 Capital Inc, Armco Alberta Inc., Matco Investments Ltd. and Ronald P. Mathison who had been the long-term chair of both WES and Calfrac. Under the agreement, Western “granted” AIMCo the right to nominate two directors for election to the board of Western as long as AIMCo, controlled, directly or indirectly by AIMCo, 30% or more of the outstanding shares, and under which G2S2, Armco, Matco and Mathison (or their affiliates) agreed not to oppose the nominees to WES’s board. The new board members are Colleen Cebuliak a AIMCo’s former chief compliance officer and Trent Boehm who was the former Vice Chair at GMP Capital after a long stint at FirstEnergy Capital.
Besides the poor investment of these three companies, the other energy companies also performed poorly.
The table below shows the ten year share price performance of AM investees to 1 November 2024.
10 year stock performanceVolatility Tradings Strategy (VOLTs)
At about the same time the AGM was being wound down, a global pandemic sent shockwaves through the world’s financial system. As a result global financial markets were extremely volatile as edgy institutional investors managed through a high degree of policy uncertainty. As Alberta taxpayers and public sector pensioners learned with horror from U.S. sources were the losses that AIMCo had incurred as a result of its VOLTs strategy.
Below is a summary of Abpolecon.ca’s analysis of the situation.
There is a lot that can go wrong when provincial agencies manage tens of billions of dollars. Recent reports from The Globe and Mail and Progress Alberta show that a potential $5 billion hit to Heritage Fund and pension fund asset values may have occurred over the past several months and years.
Institutional Investor‘s Leanna Orr broke the story on 21 April entitled “Aimco’s $3 Billion Volatility Trading Blunder.” The story contains damaging details of how highly complex investment strategies which might have a “minus-infinity potential,” according to one quantitative hedge fund manager who “frequently trades with the likes of AIMCo.” Orr also reported “AIMCo’s derivative-based “portable alpha” overlays — may have exacerbated the bleeding, according to one of the sources.”
The New York-based investment media outlet also noted that only a handful of institutional investors run their own “volatility trading strategies in house,” with the vast majority of them Canadian. Orr added that David Triska, a portfolio manager at AIMCo, claimed credit in a Linked-In profile for the complex trading program.
The complexity of these investment strategies are reflected in arcane historical and mathematical relationship including “historical options data, volatility surface estimation, and methodology inspired by at least three types of stochastic volatility.”
The Globe and Mail article reported AIMCo entered a contract or “volatility-related investment strategy,” based on an exchange of payments between AIMCo (on behalf of its pension funds and, possibly the Heritage Fund) and a counterparty, normally a large foreign owned bank or asset manager. Under this strategy, when equity markets are volatile AIMCo would pay the counterparty; if equity market conditions were placid, AIMCo would receive payments. Regrettably, market conditions in February and March of this year caused the derivative contract to move into an extreme payment (“out-of-the money”) position.
AIMCo CEO Kevin Uebelein disputed some of the news reports. In a public message on 30 April he stated he was “accountable for the performance” of AIMCo, and felt “responsible for setting the record straight.” Uebelein explained that the extent of losses “to date are approximately $2.1 billion of the $118.8 billion of assets managed on behalf of our clients.” The final tally of losses “will not be finalized until the strategy is completely wound down, which should occur by mid-June.”
AIMCo’s CEO stressed the unusual magnitude of equity price volatility, noting the importance of portfolio diversification. While AIMCo may have its own views on asset allocation and diversification strategies, the boards of the pension plan actually set the strategic asset allocation.
Uebelein went on saying “AIMCo takes full responsibility for the investment losses incurred by this strategy.” Further, “AIMCo’s Board and Management share the frustration and disappointment of our clients, their beneficiaries, and all Albertans.”
To reassure Albertans, beneficiaries and clients, Uebelein announced that AIMCo’s Board has initiated a “thorough review of the situation” using “AIMCo’s internal audit capabilities…and outside, third party experts.” There was no mention in the letter about Progress Alberta’s report which suggested there could be up to $1.1 billion in potential losses lurking in the books of pension funds and the Heritage Fund. Uebelein concluded: “I am fully focussed on one thing: making any and all changes to ensure AIMCo is stronger and that we avoid a repeat of this outcome, regardless of market turmoil” (emphasis added).
This statement “regardless of market turmoil” is a very high bar to satisfy and begs the question who is responsible and what are the consequences of not meeting this high bar. For example, does AIMCo’s value-added incentive system have a clawback provision when returns are significantly lower than the set benchmarks, notwithstanding market turbulence?
Government silence
To date, the government minister responsible for AIMCo, Treasury Board President, Travis Toews has not said anything. AIMCo spokesman, Denes Nemeth, acknowledged to the Toronto newspaper, “extreme market volatility” and observed that no “internal or external rules or regulations related to the risk it can take on as a fund manager acting on behalf of pensioners and government accounts,” were breached.
On Thursday, 24 April, Jessica Goodwin, a spokesperson for Finance Minister Toews advised National Post reporter columnist Barbara Shecter that AIMCo would be doing a “review and providing updates to the Minister.”
On 9 July AIMCo’s board of directors issued a summary of results of its own review of the “VOLTS investment strategy.” VOLTS stands for Volatility Trading Strategy. The seven page summary report, dated 30 June, was posted on AMICo’s website.
Board’s mandate
Three priorities, set by the Board during its 14 May announcement, were to:
- limit the damage from the volatility trading strategy;
- confirm that no other investment strategies could generate substantial losses in very unusual circumstances; and
- undertake a comprehensive review of the volatility trading strategy to identify lessons learned and corresponding enhancements to AIMCo’s investment and risk management processes….(to) be shared with AIMCo’s clients and shareholder with a target completion of mid-June.”
Except for the release of the Zavn and KPMG reports, the Board was able to state the first two priorities were accomplished.
Input into Summary Report
The Board report relied on input from AIMCo’s Internal Audit department, its Chief Legal Officer (an interesting resource), as well as Barbara Zahn and the senior partners of KPMG’s Financial RIsk Management team. “Separately, AIMCo’s CEO provided the Board with changes he believes are called for” (emphasis added).
Board’s findings
The report’s summary was written for a financially literate reader familiar with words and phrases like: tail risk, variance swap, implied versus actual volatility risk premium, non-linear returns, confidence intervals, value at risk, deep tail risk, volatility term structure risk premium strategy, extreme volatility events. Some or all of the forgoing terms may or may not be familiar to deputy finance ministers or finance ministers and hopefully are familiar to AIMCo’s directors.
The summary seems to absolve the board of responsibility where it states “the Board took action to:
1. mitigate further VOLTS losses and, on management’s recommendation, approve a plan to wind down VOLTS and permanently close the strategy, fixing losses at $2.1 billion.
2. undertake a review of other value-added strategies to identify any with potential for outsized losses. This review confirmed that there were no other strategies with potential for outsized losses akin to VOLTS.
3. launch a comprehensive review of all aspects of VOLTS,determine changes to management processes and governance necessary to prevent any reoccurrence of a similar outcome.”(Page 2)
In receiving input from the Chief Legal Officer and Internal Audit, the Board finds that after commencing a strategy to profit from low volatility in 2013, the investment managers began to expand the program. While the Board report referred to high volatility events like Black Monday in 1987, it failed to remember that the Global Financial Crisis when Lehman went down in September 2008 was only five years before the VOLTS strategy launched.
The first insight from the report is that the “legacy risk system” to measure and monitor risk did not “does not do a good job of assessing risk in a strategy like VOLTS with nonlinear returns, especially when nonlinearity appears largely outside the confidence interval.” While the limitations of the risk management system had been recognized. By January 2020 the Risk Management team had modelled the risks and “called for increased attention to the very low probability but nonetheless extreme tail risk of VOLTS.” Unfortunately by the time March arrived and the Public Equities group began to take action but according to the report “it was too late.”
The “results” of the review suggest that the “first and second line of defence”- investment management (the Chief Investment Officer) and Risk Management (Chief Risk Officer) “was unsatisfactory.” In addition, the Board found that risk governance controls, involving “collaboration and risk culture”was unsatisfactory. Finally the Board found that “escalation of analytics” to senior management and the Board on the extreme tail risk was “incomplete” and tardy.
Transparency
As shown, the AGM actually allowed legislators the opportunity to delve into specific investments made by AIMCo. While investment managers don’t like to discuss specific investments but prefer to speak about diversification and allocation, annual disclosure until 2020 permitted the public and legislators to ask questions about the conduct of this investment strategy. Getting clear answers is another matter.
Transparency may be one solution that may keep investment managers on their toes. In a NBER Working Paper “The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market” (NBER Working Paper No. 19417), authors Paul Asquith, Thom Covert, and Parag Pathak studied the impact of 2002 changes to bond trading disclosure rules. The authors found a reduction in bond trading and lower price dispersion. The authors point out that increased transparency may change the relative bargaining positions of investors and dealers, allowing investors to obtain fairer prices at the expense of dealers. While this review is not definitive it may suggest for improved legislative oversight and pension fund board governance oversight more information may improve the relative “bargaining position” of legislators over investment officials. Moreover, the disclosure of the companies favoured with AIMCo commitments also allow a flashlight to be shone on the darker recesses of the intersection between politics, finance, and the energy sector.
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