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Frequently Asked Questions

Understanding ARC Energy Trust

The following FAQs are provided to assist in answering questions you may have regarding ARC Energy Trust. If you have any further questions please do not hesitate to contact us.

Corporate Conversion 2011?

ARC will be converting to a corporation on January 1, 2011. A unitholder meeting is planned for December 15, 2010 to approve the conversion. At this time, it is our intention to execute our dividend policy consistent with our existing distribution policy and we will continue to focus on long-term, risk managed value creation, which is the corner-stone of our business plan. Currently, ARC has accumulated approximately $2.2 billion in tax pools that will help to reduce or potentially eliminate corporate taxes for the initial period post conversion. Delaying the conversion until the end of 2010 allows us to preserve the maximum amount of our tax pools. Information on the conversion will be mailed to all unitholders prior to the planned unitholder meeting.

International Financial Reporting Standards (IFRS)

ARC is converting to IFRS and will report under IFRS beginning Q1/2011. For more information please reference the presentation below.

International Financial Reporting Standards

What are the common characteristics of Royalty Trusts?

  • Regular cash distributions.
  • Ownership of energy assets with long-term returns tied to future energy prices.
  • Tax-efficient treatment of distributions.
  • Limited amount of capital deducted from cash distributions.
  • Lower risk development/exploration than traditional oil and gas companies.
  • Increasing market liquidity.
  • Trade as an equity on the stock market.

What are the risks of investing in a Royalty Trust?

  • Fluctuating commodity prices.
  • Sensitivity to rising interest rates.
  • Reserves decline on a continuing basis, overall Trust reserves may increase year over year
  • Asset acquisitions may not be accretive and cause dilution for existing unitholders.
  • Cash flow may decline due to rising costs and/or fall falling production, however not necessarily on a per unit basis.
  • Management may be unable to replace production and reserves economically.

What are the distinguishing characteristics of ARC?

  • ARC has achieved one of the highest levels of profitability on average over its history compared with its peers.
  • ARC has no management, acquisition or disposition fees.
  • ARC has a clearly defined strategy to maintain its status as the premier conventional Canadian oil and gas trust as measured by quality of assets, management expertise and investor returns.
  • ARC adheres to a measurably different business model that enables it to re-invest a portion of its cash flow into its properties thereby keeping debt levels low and the balance sheet strong.
  • ARC has an ongoing risk management program to protect against falling commodity prices.
  • ARC has outperformed the S&P/TSX Composite Index and the Oil and Gas Exploration & Producers’ Index since its inception in 1996.

What is a Cash Distribution?

A cash distribution is the net cash flow that is derived from Royalty income paid to the trust and issued to unitholders on a regular basis. Cash flow generated from oil and gas properties is the production revenue less operating costs, royalties, general and administration expenses, interest charges and any taxes payable by ARC Resources Ltd. Unitholders receive monthly cash distributions of which a portion is deemed return of capital and a portion is taxable as other income.

What is ARC's Reserve Life Index (RLI) and what does it measure?

ARC’s current RLI is over 14 years. The RLI is calculated by dividing the total established reserves by the annual production volume (either current year annual production or the independent engineering evaluator’s forecast of the first year’s production). This provides a simplified representation of the number of years of reserve life remaining if production remained constant at that rate. The actual productive life of the reserves is significantly longer as production declines over time. A long RLI normally underscores high quality assets.

Why does ARC have a hedging program?

ARC is committed to actively managing its commodity price and foreign exchange exposure. ARC's hedging activities are conducted by an internal Risk Management Committee, which has the following objectives as its mandate:

  • Protect unitholder return on investment;
  • Provide for minimum monthly cash distributions to unitholders;
  • Employ a portfolio approach to hedging by entering into a number of small positions that build upon each other;
  • Participate in commodity price upturns to the greatest extent possible, while limiting exposure to price downturns; and
  • Ensure profitability of specific oil and gas properties that are more sensitive to changes in market conditions.

ARC's commodity and foreign currency hedging transactions are undertaken with financially sound, credit worthy counterparties to reduce exposure to risk. All contracts require approval of the companies Risk Management Committee prior to execution.