Crescent Point’s use of financial derivatives, including swaps, costless collars and put options, reduces the volatility of the selling price of its crude oil and natural gas production. This provides a measure of stability to the Trust’s cash flows and distributions over time.

The Trust’s derivatives portfolio extends out 3½ years from the current quarter.

The CICA Handbook section 3855 “Financial Instruments – Recognition and Measurement”, gives guidelines for mark to market accounting for financial derivatives.  Financial derivatives that have not settled during the current quarter are marked to market each quarter. The change in mark to market from the previous quarter represents a gain or loss that is recorded on the income statement as Unrealized Hedging Gains (Losses).  As such, if benchmark oil and natural gas prices rise during the quarter, the Trust records an Unrealized Hedging Loss based on the change in price multiplied by the volume of oil and natural gas hedged. If prices fall during the quarter, the Trust records an Unrealized Hedging Gain.  The prices used to record the actual gain or loss are subject to an adjustment for volatility, then the resulting gain (asset) or loss (liability) is discounted to a present value using a risk-free rate.

The chart below shows historical quarterly Net Income for the Trust⁽¹⁾ and Unrealized Hedging Gains (Losses). This is a graphical representation of the impact on Net Income due to the accounting treatment of the Trust’s hedge portfolio.

The Trust’s underlying physical reserves are not marked to market each quarter, hence no gain or loss associated with price changes is recorded; the Trust realizes the benefit/detriment of any price increase/decrease in the period which the physical sales occur.

The Trust’s financial results should be viewed with the understanding that the future gain or loss on financial derivatives is recorded in the current period’s results, while the future value of the underlying physical sales is not. 

The chart below shows the Trust’s historical Net Income⁽¹⁾ excluding the impacts of Unrealized Hedging Gains (Losses).

(1) excluding the future tax impacts in the first and second quarters of 2007 due to changes in the Trust’s structure and to changes in income trust taxation legislation