EXHIBIT 4
---------
o ARC entered into an agreement to acquire all of the outstanding shares
and retire the debt of Star Oil & Gas Ltd. ("Star") for total
consideration of $710 million. The acquisition closed on April 16th,
2003 and as such will positively impact the Trust's second quarter
results.
o Concurrent with the acquisition, ARC entered into two agreements to
sell $78.2 million of the acquired Star assets. The last of the sales
closed in early May leaving ARC with a net purchase price of $631.8
million, for the 20,000 boe/d of production and 74.9 mmboe of
established reserves acquired.
Three Months Ended March 31
2003 2002
-------------------------------------------------------------------------------------------------------
FINANCIAL
($CDN thousands, except per unit and per boe amounts)
Revenue before royalties 176,629 100,864
Per unit (1) 1.34 0.90
Per boe 44.29 25.58
Cash flow (3) 102,506 49,194
Per unit (1) 0.78 0.44
Per boe 25.70 12.48
Net income 64,988 14,970
Per unit (1) 0.49 0.13
Cash distributions 59,340 43,229
Per unit 0.45 0.39
Working capital (deficit) (6,676) 3,625
Long-term debt 219,907 316,446
-------------------------------------------------------------------------------------------------------
OPERATING
Production
Crude oil (bbl/d) 21,065 21,196
Natural gas (mmcf/d) 117.31 113.90
Natural gas liquids (bbl/d) 3,696 3,631
Total (boe/d) 44,313 43,805
Average prices
Crude oil ($/bbl) 40.41 30.22
Natural gas ($/mcf) 8.04 3.61
Natural gas liquids ($/bbl) 39.99 20.17
Oil equivalent ($/boe) 44.29 25.58
-------------------------------------------------------------------------------------------------------
SUPPLEMENTAL
(thousands)
Trust units outstanding at end of period 136,187 110,984
Trust units issuable for Exchangeable shares 3,051 973
Total Trust units & Exchangeable shares at end of period 139,239 111,957
Weighted average Trust units & Exchangeable shares (2) 131,379 111,838
-------------------------------------------------------------------------------------------------------
TRUST UNIT TRADING STATISTICS
($CDN, except volumes)
High 12.34 13.18
Low 10.89 11.35
Close 11.59 13.14
Average daily volume 313,161 445,688
=======================================================================================================
(1) Per unit amounts (with the exception of per unit distributions) are based
on weighted average units.
(2) Includes Exchangeable shares converted at the end of period exchange ratio.
(3) Management uses cash flow (before changes in non-cash working capital) to
analyze operating performance and leverage. Cash flow as presented does not
have any standardized meaning prescribed by Canadian GAAP and therefore it
may not be comparable with the calculation of similar measures for other
entities. Cash flow as presented is not intended to represent operating
cash flows or operating profits for the period nor should it be viewed as
an alternative to cash flow from operating activities, net earnings or
other measures of financial performance calculated in accordance with
Canadian GAAP. All references to cash flow throughout this report are based
on cash flow before changes in non-cash working capital.
--------------------------------------------------------------------------------
MESSAGE TO UNITHOLDERS
--------------------------------------------------------------------------------
The highlight of the first quarter was the announcement of the $710 million
acquisition of Calgary-based Star Oil & Gas Ltd. This acquisition which closed
on April 16th, was an excellent opportunity for ARC to increase its portfolio of
high quality assets with substantial development potential and increase gas
production as a proportion of daily production to 55 per cent.
ARC's acquisition program focuses on high quality properties that complement our
existing asset base. Star's properties are among the best we have seen available
in the acquisition market. The Star properties are focused - six properties
account for 70 per cent of production. The properties are high working interest
with Star operating 70 per cent of its production. Star was a private company
whose assets were less aggressively developed than a public company therefore
Star's assets satisfied a key acquisition objective for the Trust that targets
properties with material, on-going development opportunities.
Despite funding this acquisition entirely through bank debt and convertible
debentures, ARC's balance sheet remains strong, viewed in conjunction with the
significant commodity xxxxxx the Trust has in place to protect future cash flow.
The debenture terms provide flexibility to ARC as the debentures can be redeemed
in full for cash at any time, redeemed for a combination of cash and units or
repaid in full by issuing units at maturity. The Trust will take an active
approach toward the repayment of the existing bank debt and convertible
debentures.
On February 25th, ARC completed the largest bought deal financing in its
history. The 12.5 million unit offering at a price of $11.50 per unit provided
net proceeds of $136.3 million. The proceeds of the issue were used to pay
outstanding debt incurred to fund expenditures and the acquisition of oil and
gas properties in late 2002 for approximately $71.1 million. This offering
provided the balance sheet strength required for the Star acquisition.
ARC's production operations and development activities have proceeded as planned
during the first quarter of 2003, with production ahead of forecast. With the
Star acquisition closed, ARC will review its overall capital program for 2003
for the combined asset base. We expect that a portion of our budgeted capital
development program for our existing assets will be deferred until 2004. Past
experience has shown that during the transition of ownership of assets of this
nature, development often occurs at a slower pace than forecast. Although the
combination of ARC and Star assets is approximately 63,000 boe/d (59,000 boe/d
2 ARC ENERGY TRUST
net of planned second quarter asset sales), production will likely decrease to
approximately 56,400 boe/d over the year as we complete the planned asset sales
and take time to implement updated development and optimization plans.
First quarter commodity prices were exceptionally strong with prices for the
balance of the year expected to be materially lower, especially for crude oil.
The cash surplus built up in the first quarter and ARC's hedging program
combined with current forward market prices, are expected to allow us to
maintain distributions at the current level through the balance of the year.
We constantly review our organization to ensure we have the strongest possible
team to pursue the business activities of the Trust. As part of this ongoing
review, I am pleased to announce that Xxxx Xxxxxx has joined ARC's Board of
Directors and will serve as Chairman of the Audit Committee. Xxxx is a chartered
accountant with extensive experience as a senior executive in the oil and gas
industry. In addition, Xxx Xxx Xxxxxxxxx has been appointed Chairman of the
Board of Directors and Xxxxxx XxXxxx has been appointed Vice-Chairman. The Board
would like to thank Xxxx for the strong leadership he has demonstrated as
Chairman of the Trust since inception in 1996. As Vice-Chairman, he will
continue to be in a strong leadership position as the Trust continues to pursue
its business opportunities.
/s/ Xxxx X. Xxxxxxxx
Xxxx X. Xxxxxxxx
DIRECTOR, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
ARC ENERGY TRUST 3
OPERATIONAL AND DEVELOPMENT ACTIVITIES
[GRAPHIC OMITTED]
CASH FLOW WAS A RECORD $103 MILLION
EARNINGS MORE THAN TRIPLED TO $65 MILLION
[GRAPHIC OMITTED]
42 PER CENT OF CASH FLOW WAS WITHHELD FROM DISTRIBUTIONS RESULTING IN ARC PAYING
100 PER CENT OF ITS $22 MILLION CAPITAL PROGRAM FROM CASH FLOW AND DEBT BEING
REDUCED BY $20 MILLION
[GRAPHIC OMITTED]
COMPLETED $136.3 MILLION NET EQUITY OFFERING WHICH REDUCED DEBT-TO-TRAILING 12
MONTH CASH FLOW TO 0/8 TIMES
--------------------------------------------------------------------------------
3 mos. YE 2002
ended Established % of
Mar. 31/03 Reserves Total RLI
Properties Mboe/d mmboe Reserves Years
--------------------------------------------------------------------------------
Northern AB & BC 12.2 46 25 10.5
SE Sask 9.1 43 23 12.8
SE AB & SW Sask 7.5 31 17 11.3
Central AB 8.7 30 16 9.4
Pembina 6.8 35 19 14.0
--------------------------------------------------------------------------------
Total 44.3 185 100 11.5
================================================================================
Note provincial references: AB is Alberta, BC is British Columbia, Sask is
Saskatchewan
In the first quarter, capital expenditures of $22.5 million were focused on
continued development at Ante Creek, Pembina and other core areas. The success
of the capital program contributed to record production of 43,380 boe/d, which
combined with a 933 boe/d carry-over resulted in total volumes of 44,313 boe/d.
ARC was not immune to an industry wide trend of increasing operating costs in
the first quarter. On a per boe basis, operating costs in 2003 are up 15 per
cent over the equivalent period last year. This increase is at the lower end of
the range for companies who have reported to date. XXX continues to focus on
cost control and as part of this initiative, ARC will be divesting of a number
of higher operating cost properties as part of an announced 4,000 boe/d
divestiture program.
NORTHERN ALBERTA AND BRITISH COLUMBIA
In the first quarter, nine xxxxx were drilled in the Ante Creek area. Eight of
the nine xxxxx were completed during the quarter, with the remaining well slated
for completion in the second quarter. Seven of the xxxxx were tied-in,
contributing to record production in the area of 3,643 boe/d. Beaverhill Lake
production (115 boe/d), from a property acquired in 2002, was tied-in to the
main Ante Creek infrastructure, reducing operating costs. Current production has
risen to the point where it is constrained by facility limitations which will be
addressed by the installation of additional compression later this year.
SOUTHEAST SASKATCHEWAN
Production at the Lougheed Unit was maintained at a constant production rate of
1,882 boe/d (net to ARC) as a result of positive response to waterflood
modifications and individual well optimizations. Further waterflood
modifications have received approval and work is scheduled to begin in the
second quarter. At
4 ARC ENERGY TRUST
Tatagwa, a horizontal well was drilled and completed and is now on production
with a second well to spud in the second quarter.
In the fourth quarter of 2002, ARC drilled and completed three new xxxxx in
Xxxxx. Activities in the first quarter of 2003 focused on tie-in of these new
xxxxx to the existing facilities and optimizing their production. In addition,
the conversion of a well to water disposal will allow additional volumes to be
produced at ARC's new and existing xxxxx.
SOUTHEAST ALBERTA & SOUTHWEST SASKATCHEWAN
At Xxxxxx and Xxxxxx, re-completion activities added approximately 1 mmcf/d of
production. Plans are underway for a spring and summer drilling program at
Jenner which will include up to 49 shallow and two deep drilling locations. At
Xxxxxx, four shallow gas xxxxx are planned as a follow-up to a successful 2002
farm-in program.
A successful Sawtooth horizontal oil well was drilled in Grassy Lake with
completion and first production scheduled to occur in the early part of the
second quarter of 2003.
CENTRAL ALBERTA
Re-completion programs at Youngstown, Medicine River and Sundre were undertaken
in the first quarter. Collectively, these programs added over 100 boe/d of
production. Based on the success of this program, additional re-completion
activities are slated for the second quarter. In addition two new horizontal
xxxxx were drilled and completed at Youngstown.
PEMBINA
In Westerose, ARC received regulatory approval to drill two Edmonton sand
shallow gas xxxxx as a follow-up to a successful well drilled in the fourth
quarter of 2002. This first well is now producing 500 mcf/d net to ARC.
In MIPA Block 8, approval was received to drill three vertical infill xxxxx. A
facility upgrade is under way which is designed to enable greater water
injection into the pool and ultimately increase production and reserves.
ACQUISITIONS AND DISPOSITIONS
To the end of the first quarter, the Trust completed $3.0 million of net minor
property acquisitions which included $0.9 million of acquisitions and minor
dispositions of $0.6 million agreed to in the fourth quarter of 2002. The
acquisitions were either in, or adjacent to areas where ARC already had an
interest. The $710 million Star Oil &
ARC ENERGY TRUST 5
Gas Ltd. acquisition closed April 16, 2003 and is discussed in detail in other
sections of this report.
CASH DISTRIBUTIONS AND UNITHOLDER RETURNS
[GRAPHIC OMITTED]
[BAR CHART - CASH DISTRIBUTIONS AND CASH FLOW]
First quarter distributions were $0.45 per unit. The 12-month trailing
distribution amount is $1.62.
Typically, ARC withholds up to 20 per cent of net cash flow to partially fund
its development and capital program. However, high commodity prices and above
budget production volumes contributed to record cash flow in the first quarter,
resulting in a payout ratio of 58 per cent. The high level of withholding
resulted in ARC paying 100 per cent of its $22.5 million capital program from
cash flow with the balance of cash flow withheld directed towards debt
reduction. This surplus first quarter cash flow will be available later in the
year, if required, to maintain stable distributions.
The combination of strong first quarter cash flow and proceeds from the equity
offering resulted in a very strong balance sheet which allowed the Trust to
finance the Star acquisition without issuing any additional equity. The purchase
of Star resulted in increased leverage with approximately $540 million of bank
debt post closing plus $320 million of convertible debentures. In order to bring
ARC's capital structure back in line with management's target of 80 per cent
equity 20 per cent debt and a debt to cash flow ratio of 1.0 times, cash flow
generated by production from the Star assets will be directed toward an
aggressive debt repayment program for the long-term benefit of the Trust.
Near-term property dispositions are also planned to further reduce debt.
Quarterly cash flow and cash distributions per unit were as follows:
--------------------------------------------------------------------------------
2003 2002
Per unit Q1 Q1
--------------------------------------------------------------------------------
Cash flow 0.78 0.44
Reclamation fund contributions (0.01) (0.01)
Capital expenditures funded by cash flow (0.15) (0.04)
Discretionary debt repayments (0.17) --
--------------------------------------------------------------------------------
Cash distributions $ 0.45 $ 0.39
================================================================================
6 ARC ENERGY TRUST
On April 17, 2003, the Trust announced that the May 15, 2003 distribution would
be $0.15 per trust unit and that subject to confirmation, the June and July
distributions are also expected to be $0.15 per trust unit.
PRICE RISK MANAGEMENT PROGRAM
[GRAPHIC OMITTED]
[BAR CHART - MONTHLY CASH DISTRIBUTIONS]
The Trust actively manages commodity price risk by entering into hedging
contracts to protect revenue from fluctuations in commodity prices. This risk
management program helps to provide stability for cash distributions to
unitholders, but could, in periods of high commodity prices, result in lost
opportunity for the Trust. During the first quarter, revenues would have been
$12.5 million higher had ARC been completely un-hedged. For the second quarter
of 2003, 51 per cent of crude oil and natural gas liquids are hedged at
US$26.24/bbl; 59 per cent is hedged in the third quarter at US$25.49/bbl; and,
53 per cent is hedged in the fourth quarter at US$25.68/bbl, based on current
commodity prices.
For April 2003, 33 per cent of ARC's natural gas is hedged at $5.58/mcf.
Currently, approximately 34 per cent of May to June gas is hedged at $5.89/mcf,
32 per cent of July to September gas is hedged at $5.68/mcf, 30 per cent of
October gas is hedged at $5.56/mcf, 10 per cent of winter gas is hedged at
$6.22/mcf and five per cent of summer 2004 gas is hedged at $4.93/mcf.
Prior to the closing of the Star acquisition, Star collapsed all of their
existing xxxxxx at a net after tax cost of $8.9 million.
TAXABILITY OF 2003 CASH DISTRIBUTIONS
The taxable portion of unitholder cash distributions for year 2003 is expected
to be approximately 60 to 70 per cent. The balance is considered return of
capital and tax deferred. Information that provides year-by-year taxability of
distributions may be found at the Investor Relations section of our website
xxx.xxxxxxxxxxxx.xxx.
--------------------------------------------------------------------------------
Return of Taxable
Capital Portion
---------------------------------------------
YTD (1)
Distribution $/unit % $/unit %
--------------------------------------------------------------------------------
2003 EST (2) $0.58(3) $0.20 35% $0.38 65%
2002 $1.58 $0.51 32% $1.07 68%
2001 $2.41 $0.77 32% $1.64 68%
2000 $1.86 $1.02 55% $0.84 45%
1999 $1.25 $0.99 79% $0.26 21%
1998 $1.20 $1.08 90% $0.12 10%
1997 $1.40 $1.09 78% $0.31 22%
1996 $0.81 $0.81 100% -- --
================================================================================
(1) Based on cash payments in the respective calendar year.
(2) Estimated taxable portion of 2003 distributions is 60 to 70 per cent.
(3) 2003 total distributions based on actual payments to April 15, 2003.
ARC ENERGY TRUST 7
Investors who wish to participate in the returns of the Trust on a more tax
effective basis, and who do not need monthly cash distributions, may want to
purchase ARC Resources Exchangeable shares which trade on the TSX under the
symbol ARX.
DISTRIBUTION RE-INVESTMENT AND OPTIONAL CASH PAYMENT PROGRAM
Registered unitholders may participate in ARC's Distribution Reinvestment Plan
("DRIP") by electing to reinvest cash distributions into new trust units.
Additionally, a registered unitholder may choose to make optional cash payments
of up to $3,000 per month to acquire additional trust units on each distribution
date. All DRIP unit purchases are made at prevailing market prices without any
additional fees or commissions. The DRIP plan is available to Canadian residents
only. Information and the DRIP form may be accessed at the Investor Relations
section of our website.
--------------------------------------------------------------------------------
Distribution Total
Ex-Distribution Date Record Date Payment Date Distribution
--------------------------------------------------------------------------------
December 27, 2002 December 31, 2002 January 15, 2003 0.13
January 29, 2002 January 31, 2002 February 17, 2003 0.15
February 26, 2003 February 28, 2003 March 17, 2003 0.15
March 27, 2003 March 31, 2003 April 15, 2003 0.15
April 28, 2003 April 30, 2003 May 15, 2003 0.15
May 28, 2003 May 31, 2003 June 16, 2003 0.15*
June 26, 2003 June 30, 2003 July 15, 2003 0.15*
July 29, 2003 July 31, 2003 August 15, 2003
August 27, 2003 August 31, 2003 September 15 2003
September 26, 2003 September 30, 2003 October 15, 2003
October 29, 2003 October 31, 2003 November 17, 2003
November 26, 2003 November 31, 2003 December 15, 2003
================================================================================
* Estimated
Unitholders electing to reinvest distributions or make optional cash payments to
acquire trust units from treasury under the DRIP plan resulted in an additional
93,085 trust units being issued in the quarter at an average price of $11.86 for
a total of $1.1 million in proceeds. In 2002, 242,496 trust units were issued at
an average price of $12.15 raising a total of $2.9 million under the DRIP plan.
ACQUISITION OF STAR OIL & GAS LTD.
On March 31, 2003, ARC entered into an agreement to acquire Star Oil & Gas Ltd.
("Star") for $710 million. As part of the transaction, ARC agreed to sell
certain producing properties and undeveloped acreage to third parties for $78.2
million, resulting in a net acquisition of $631.8 million. Net of the property
dispositions, approximately 75 per cent of Star's 20,000 boe/d of current
production is natural gas with just over half of the production coming from the
three largest fields.
8 ARC ENERGY TRUST
The Star acquisition enhances ARC's asset base and adds significant additional
development opportunities to maintain production without the need to complete
near-term acquisitions. Star's Xxxxxx property has proved reserves that
represent only 12 per cent ultimate recovery of estimated gas-in-place;
offsetting analogous properties suggest ultimate recovery could exceed 25 per
cent. Xxxxxx has up to 600 infill opportunities identified by independent
engineers, less than one-third of which were included in our evaluation.
The acquisition provides enhanced flexibility to maintain stable distributions
over an extended period of time and is highly accretive on a pro-forma basis
(removing the benefit of increased leverage). It is greater than 10 per cent
accretive on cash flow and production per unit; five per cent accretive to
proved reserves per unit; and, greater than 10 per cent accretive to net asset
value.
With Star, ARC purchased approximately 20,000 boe/d of production that includes
90 mmcfd of gas and 5,000 barrels per day of liquids. ARC's estimates include 64
mmboe of proved reserves (75 per cent natural gas) and 75 mmboe of established
reserves, 64 per cent of which are proved producing and 85 per cent proved. The
RLI on proved reserves on expected 2003 production is 9.2 years and 10.8 years
on established reserves. ARC purchased a large land base of 325,000 net
undeveloped acres and 311,521 net developed acres. The independent engineers
utilized at the time of the acquisition recognized more reserves than were
booked by ARC.
Ignoring the value of the undeveloped land, the purchase price equates to $9.93
per boe for proved reserves and $8.44 per boe for established reserves. We
believe this to be a very favorable purchase price for these high quality
assets. The proved undeveloped reserves require approximately $80 million of
capital. Including this capital, the purchase price is $11.20 per boe proved
reserves.
ARC financed the Star acquisition through a combination of bank debt and $320
million in convertible debentures issued to the Vendor of the assets. The
interest on the debentures is eight per cent per annum payable quarterly
commencing on June 30, 2003 and increases to 10 per cent per annum on June 30,
2005. The Trust can elect to redeem the debentures at $40 million per quarter,
commencing July 1, 2003, using a combination of cash (minimum 50 per cent) and
units (maximum of 50 per cent). The Trust can redeem the debentures for cash at
any time. As a result of the transaction, ARC's borrowing base increased to $650
million. ARC will dispose of approximately 4,000 boe/d of its existing asset
base to pay down the debt and the debentures.
ARC ENERGY TRUST 9
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
Management's discussion and analysis (MD&A) should be read in conjunction with
the unaudited interim consolidated financial statements for the three months
ended March 31, 2003 and the audited consolidated financial statements and MD&A
for the year ended December 31, 2002.
HIGHLIGHTS
Strong commodity prices and increased production volumes resulted in record cash
flow of $102.5 million ($0.78 per unit) in the first quarter of 2003 compared to
$49.2 million ($0.44 per unit) for the first quarter of 2002.
The Trust distributed $59.3 million in the quarter ($0.45 per unit) with the
remaining cash flow utilized to fund $22.5 million of net capital expenditures,
fund a $1.1 million contribution to the reclamation fund and reduce indebtedness
by $19.6 million.
The increase in revenue was partially offset by increases in royalties and
operating costs. Although royalties increased to $9.14/boe from $4.45/boe in
2002, they remained consistent as a percentage of pre-hedged revenue at 19.3 per
cent for the first three months of 2003. The operating costs increase is in line
with industry trends and is discussed further in the Netback section of this
report.
Net income of $65.0 million for the first quarter of 2003 ($15.0 million in the
first quarter of 2002) is also a record for the Trust. In addition to the
increases in cash flow, ARC experienced a foreign exchange gain on debt held in
U.S. dollars in the amount of $7.5 million primarily as a result of the
strengthening of the Canadian dollar in relation to the U.S. dollar.
Subsequent to the first quarter, ARC completed the acquisition of Star Oil & Gas
Ltd. ("Star") for $710 million. In conjunction with the acquisition, agreements
were executed to sell properties owned by Star for $78.2 million.
PRODUCTION
[GRAPHIC OMITTED]
[BAR CHART - PRODUCTION]
Production volumes during the first quarter of 2003 averaged 44,313 boe/d
compared to 43,805 boe/d for the same period in 2002. This represents a one per
cent increase from the first quarter of 2002. Volumes in 2003 benefited from a
carry-over of 933 boe/d from prior periods.
Volumes by quarter are shown below:
--------------------------------------------------------------------------------
2003 2002 2002 2002
Q1 Q4 Q3 Q2
--------------------------------------------------------------------------------
Oil (bbl/day) 21,065 20,256 20,809 20,366
Gas (mcf/day) 17,310 109,200 109,100 106,900
NGL (bbl/day) 3,696 3,355 3,408 3,527
--------------------------------------------------------------------------------
Total (boe/d) 44,313 41,808 42,394 41,713
================================================================================
10 ARC ENERGY TRUST
PRICES
[GRAPHIC OMITTED]
BAR CHART - AVERAGE SELLING PRICE]
First quarter prices for West Texas Intermediate (WTI) crude oil averaged
US$33.80 per barrel, 56 per cent higher than the US$21.67 per barrel realized
during the first quarter of 2002.
Natural gas prices also increased substantially in 2003 compared to 2002 with
AECO hub prices averaging $7.95/mcf for the first quarter, up 137 per cent from
$3.35/mcf for the same period in 2002.
The combined effect of the change in oil and gas prices resulted in a realized
price for the first quarter of $44.29/boe, up 73 per cent from the $25.58/xxx
realized in the first quarter of 2002.
HEDGING
ARC's first quarter 2003 prices include hedging losses of $0.06/mcf for natural
gas and $6.28/barrel for oil. This compares to hedging gains in the first
quarter of 2002 of $0.80/mcf for natural gas and $1.88/barrel for oil. In the
first quarter of 2003, the majority of ARC's natural gas xxxxxx were done with
the purchase of a "floor" while retaining 100 per cent of the upside. This
strategy maximized revenue for the Trust while providing price downside
insurance at a very low cost.
For 2003, ARC has hedged approximately 56 per cent of oil volumes and 35 per
cent of natural gas volumes utilizing a variety of contracts under which the
quantity and price of amounts hedged vary depending on the market price of the
commodity. For 2004, ARC has hedged approximately three per cent of oil
production and eight per cent of natural gas production (see Note 4 to the
Financial Statements - Financial Instruments for details on ARC's hedging
contracts).
REVENUE
Revenue, prior to hedging transactions, was $189.1 million ($176.6 million after
hedging) for the first quarter of 2003 compared to $88.9 million ($100.9 million
after hedging) for the first quarter of 2002. The increase in revenue relates
primarily to the increase in oil and gas prices.
OPERATING NETBACKS
Operating netbacks for the first quarter increased 89 per cent to $27.89/boe
from $14.72/boe for the same period last year. The increase is due to the rise
in commodity prices partially offset by increased royalties and operating costs.
Total royalties increased to $9.14/boe in the first quarter of 2003 as compared
to $4.45/boe in the first quarter of 2002. Royalties as a percentage of
pre-hedged
ARC ENERGY TRUST 11
revenue remained relatively unchanged in the first quarter at 19.3 per cent as
compared to 19.8 per cent for the same period in 2002.
Operating costs, net of processing income, increased by 15 per cent to $29.0
million ($7.26/boe) for the first quarter of 2003 from $25.3 million ($6.41/boe)
for the same period in 2002. Operating costs have been impacted by higher power
costs in the province of Alberta and increases in well service and work-over
costs. ARC continues to closely monitor costs on operated and non-operated
properties; the increase in operating costs per boe is in line with overall
industry trends.
[GRAPHIC OMITTED]
[BAR CHART - NETBACK]
The components of operating netbacks by quarter are shown below:
--------------------------------------------------------------------------------
2003 2002 2002 2002
$/Boe Q1 Q4 Q3 Q2
--------------------------------------------------------------------------------
Market price $47.43 $33.87 $29.86 $30.60
Cash hedging gain/(loss) (3.40) (2.99) (1.17) (1.36)
Non-cash hedging gain/(loss) 0.26 (0.30) 0.44 0.45
--------------------------------------------------------------------------------
Selling price 44.29 30.58 29.13 29.69
Royalties (9.14) (6.48) (5.51) (5.58)
Operating costs (7.26) (6.54) (6.54) (6.30)
--------------------------------------------------------------------------------
Operating netback 27.89 17.56 17.08 17.81
================================================================================
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, net of operating recoveries on operated
properties, increased in the first quarter 2003 to $4.0 million ($1.01/boe) from
$3.7 million ($0.94/boe) for the same period in 2002. The increase was due
primarily to costs associated with an increase in staff and changes to ARC's
employee benefit program. The Trust's G&A costs per boe are continuously
monitored internally by management and are benchmarked against other comparable
sized trusts. ARC did not capitalize any G&A in the first quarter of 2003 or
2002.
Prior to the internalization of the management contract in the third quarter of
2002, the Manager received three per cent of net operating revenue. In the first
quarter of 2002, management fees amounted to $1.8 million ($0.45/boe). There are
no management fees payable subsequent to the internalization that occurred on
August 28, 2002.
INTEREST EXPENSE
Interest expense increased 26 per cent to $3.8 million ($0.96/boe) for the first
quarter of 2003 from $3.0 million ($0.76/boe) for the same period in 2002. Net
proceeds of $136.3 million from a February 25, 2003 equity offering were
partially used to reduce debt.
12 ARC ENERGY TRUST
FOREIGN CURRENCY GAINS AND LOSSES
ARC has $65.0 million in U.S. denominated long-term debt that is subject to
changes in the Canadian/U.S. dollar exchange rate. The unrealized gains and
losses associated with the fluctuations in the exchange rate are recorded in
income based upon the change in foreign exchange rates between reporting
periods.
Due to the strengthening of the Canadian dollar in relation to the U.S. dollar
during the first quarter of 2003, XXX recorded a $7.5 million foreign exchange
gain compared to a loss of less than $0.1 million in the first quarter of 2002.
Of this amount, $7.4 million is an unrealized gain relating to the U.S. debt and
has no impact on cash flow.
DEPLETION, DEPRECIATION AND FUTURE SITE RECLAMATION EXPENSES
The depletion, depreciation and amortization (DD&A) rate of $10.72/boe for the
three months ended March 31, 2003 decreased slightly from $10.50/boe for the
first quarter of 2002 due to positive year end 2002 reserve revisions in the
evaluation of the Trust's reserves.
TAXES
Capital taxes for the first quarter of 2003 were $0.1 million compared to $0.4
million for the same period of 2002. The decrease from the previous year is due
to payments made in 2002 being applied to the 2003 year.
For the three months ended March 31, 2003, a future income tax provision of $3.1
million was deducted from income compared to a $7.2 million recovery for the
comparable period in 2002. The provision is a result of the excess cash flow in
the first quarter of 2003 that has not been distributed to unitholders. In the
Trust's structure, payments are made between ARC Resources Ltd. and the Trust,
transferring both income and future tax liability to individual unitholders. It
is XXX's opinion that income taxes will not be paid by ARC Resources Ltd. in the
future.
CAPITAL EXPENDITURES
Total capital expenditures, including net acquisitions, totaled $25.5 million in
the first quarter of 2003. This compares to $29.9 million for the first quarter
of 2002. The Trust's 2003 capital budget prior to the Star acquisition of $115
million was designed to replace production. ARC is currently re-forecasting
capital requirements for the remainder of 2003 with the objective of requesting
approval from the Board of Directors for an increase due to the Star
acquisition.
[GRAPHIC OMITTED]
[BAR CHART - CASH FLOW]
ARC ENERGY TRUST 13
A breakdown of capital expenditures by category for the last four quarters is
shown below:
--------------------------------------------------------------------------------
2003 2002 2002 2002
$ Millions Q1 Q4 Q3 Q2
--------------------------------------------------------------------------------
Geological & geophysical expenditures 1.0 0.6 0.6 0.5
Development drilling 17.1 21.0 12.0 13.6
Plant and facilities 4.2 4.3 3.1 2.9
Other capital expenditures 0.2 0.9 0.4 0.3
Producing property net acquisitions 3.0 61.9 46.0 9.3
--------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES 25.5 88.7 62.1 26.6
--------------------------------------------------------------------------------
Total capital expenditures
financed with cash flow 22.5 12.2 7.8 10.7
Total capital expenditures
financed with debt & equity 3.0 76.5 54.3 15.9
================================================================================
STAR OIL & GAS LTD. ACQUISITION
On April 16, 2003 ARC completed the acquisition of Star Oil and Gas Ltd. for
total consideration of $710 million, subject to final adjustments. In related
transactions, ARC entered into agreements to sell certain producing properties
and undeveloped acreage comprising part of the acquired assets to third parties
for $78.2 million. The net purchase price of approximately $631.8 was funded
through a combination of bank debt and the issuance to the Vendor of $320
million in special convertible debentures.
The special convertible debentures are convertible at anytime into the
underlying debentures, by the holders, and will be automatically converted into
the underlying debentures on the Trust securing a receipt for a final prospectus
for the distribution of the underlying debentures and on certain other events
and in any event by June 30, 2005. The special convertible debentures are
identical to the underlying debentures in respect of subordination, redemption
for cash, interest and rights of payment on maturity for Trust Units.
The underlying debentures have the following terms:
o Subordinate to senior debt.
o A coupon rate of 8 per cent per annum payable quarterly commencing on
June 30, 2003. The coupon will increase to 10 per cent per annum
commencing June 30, 2005.
o Maturity on June 30, 2008 can be satisfied by issuing Trust units.
o The Trust has the right to redeem in full with cash at any time or
redeem $40 million per quarter commencing June 30, 2003 using a
combination of cash (minimum of 50 per cent) and trust units (maximum
50 per cent).
o Holders of the debentures have a conversion privilege at $11.84 per
unit through June 30, 2005 and $11.38 after that date.
In conjunction with this transaction, ARC's bank and senior credit facilities
increased to $650 million. After the closing of the $78.2 million disposition
and receiving March 2003 revenue on April 25th, ARC's bank indebtedness was
approximately $500
14 ARC ENERGY TRUST
million, taking into account the March distribution payable to unitholders on
April 15, 2003.
The Trust's capital structure after the acquisition of Star is as follows:
--------------------------------------------------------------------------------
50% 100%
Debentures Debentures Debentures
Treated as Treated as Treated as
Notes Equity (5) Debt (6) Debt
--------------------------------------------------------------------------------
Long-term debt (millions) 1 $500 $660 $820
Production (boe/d) 2 63,000 63,000 63,000
Trailing 12-month cash flow (per boe) 3 $17.86 $17.86 $17.86
Estimated annualized cash flow (millions) 4 410 410 410
Debt to cash flow ratio - 1.2 1.6 2.0
Market capitalization of the
Trust (millions) - 1,600 1,600 1,600
Market capitalization including debentures - 1,920 1,760 1,600
Debt to total capitalization 6 21% 27% 34%
================================================================================
Notes:
1. Debt as at May 1, 2003.
2. Current production of the Trust.
3. Average cash flow per boe based on ARC's last four quarters of financial
results divided by production for that period.
4. Annualized cash flow estimated by multiplying production by trailing
12-month cash flow per boe.
5. Assumes debentures are treated as equity due to the Trust's ability to
issue units to satisfy the maturity obligation.
6. Assumes 50 per cent of debentures treated as debt due to ARC's elective
right to redeem the debentures for 50 per cent cash and 50 per cent units
commencing on July 1, 2003.
ARC plans to sell approximately 4,000 boe/d of non-core properties from its
existing asset base. This disposition is expected to close in the second or
third quarter of 2003 with proceeds directed towards debt reduction.
Because the Star acquisition was made without issuing additional trust units,
the cash flow from the properties acquired will be directed firstly to fund
ongoing capital expenditures of the Star properties and secondly to reduce debt
(in the form of debt or debenture repayment), until the Trust's long-term debt
obligations are less than 20 per cent of total capitalization.
Applying the above policy, the Trust announced second quarter 2003 distributions
at $0.15 per trust unit on April 17, 2003.
CAPITALIZATION AND FINANCIAL RESOURCES
--------------------------------------------------------------------------------
March 31, Dec 31, March 31,
$ Millions 2003 2002 2002
--------------------------------------------------------------------------------
Long-term debt $219.9 $337.7 $316.5
Less: working capital/(deficit) (6.7) (10.1) 3.6
--------------------------------------------------------------------------------
Net debt obligations 226.6 347.8 312.9
Units outstanding and issuable for
exchangeable shares (thousands) 139,239 126,444 111,957
Market price at end of period $11.59 $11.90 $13.14
Market value of Trust units &
exchangeable shares 1,613.8 1,504.7 1,471.1
--------------------------------------------------------------------------------
Total ARC capitalization 1,840.4 1,852.5 1,784.0
--------------------------------------------------------------------------------
Net debt as a percentage of total
capitalization 12.3% 18.8% 17.5%
Net debt obligation 226.6 347.8 312.9
Quarterly cash flow 102.5 61.5 49.2
Net debt to annualized cash flow 0.55 1.41 1.59
================================================================================
ARC ENERGY TRUST 15
Working capital at March 31, 2003 was a deficit of $6.7 million. Total long-term
debt outstanding was $219.9 million, with $400 million in credit facilities
available.
On February 25th, ARC completed an equity offering which raised $143.75 million
of gross proceeds ($136.3 million net) on the issuance of 12.5 million trust
units at $11.50 per trust unit. The net proceeds were used to repay outstanding
indebtedness incurred to fund development expenditures and the acquisition of
oil and gas properties, including the properties acquired in late 2002 for
approximately $71.1 million. In addition, the offering strengthened the Trust's
balance sheet which facilitated the Star acquisition.
Net debt decreased from December 31, 2002 due to the first quarter equity
offering and excess cash flow for the period.
CASH DISTRIBUTIONS
Total cash distributions of $0.45 per trust unit were made in the first quarter
of 2003 ($0.39 in first quarter 2002) for total cumulative distributions since
inception of $748.3 million ($11.09 per trust unit). In the first quarter of
2003, $59.3 million or 58 per cent of cash flow was distributed to unitholders.
The remaining 42 per cent ($43.2 million) was used to fund a portion of current
period capital expenditures ($22.5 million) and make contributions to the
reclamation fund ($1.1 million). The remaining $19.6 million was used to reduce
debt on an interim basis and may be used to stabilize future cash distributions.
Monthly cash distributions for the second quarter have been set at $0.15 per
unit subject to confirmation as commodity price fluctuations may occur.
ARC forecasts that approximately 60 to 70 per cent per cent of distributions
paid in 2003 will be taxable to unitholders, with the remainder treated as a tax
deferred return of capital.
16 ARC ENERGY TRUST
CONSOLIDATED BALANCE SHEET
As at March 31 and December 31 (unaudited)
($CDN thousands) 2003 2002
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 3,301 $ 835
Accounts receivable 66,168 49,631
Prepaid expenses 6,084 6,965
--------------------------------------------------------------------------------
75,553 57,431
Deposit for Star acquisition (Note 9) 40,000 --
Reclamation fund 14,053 12,924
Property, plant and equipment 1,382,908 1,397,563
--------------------------------------------------------------------------------
Total assets $ 1,512,514 $ 1,467,918
================================================================================
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 61,787 $ 51,454
Cash distributions payable 20,442 16,044
--------------------------------------------------------------------------------
82,229 67,498
Long-term debt (Note 3) 219,907 337,728
Site reclamation and abandonment 38,622 36,421
Commodity and foreign currency contracts (Note 4) 7,799 9,210
Retention bonuses 4,000 4,000
Future income taxes 147,466 144,395
--------------------------------------------------------------------------------
Total liabilities 500,023 599,252
================================================================================
UNITHOLDERS' EQUITY
Unitholders' capital (Note 5) 1,312,206 1,172,199
Exchangeable shares (Note 6) 33,496 35,326
Accumulated earnings 415,076 350,088
Accumulated cash distributions (Note 2) (748,287) (688,947)
--------------------------------------------------------------------------------
Total unitholders' equity 1,012,491 868,666
--------------------------------------------------------------------------------
Total liabilities and unitholders' equity $ 1,512,514 $ 1,467,918
================================================================================
See accompanying notes to consolidated financial statements.
Approval on behalf of the Board:
/s/ Xxx X. Xxx Xxxxxxxxx /s/ Xxxx X. Xxxxxxxx
XXX X. XXX XXXXXXXXX XXXX X. XXXXXXXX
DIRECTOR DIRECTOR
ARC ENERGY TRUST 17
CONSOLIDATED STATEMENT OF INCOME AND ACCUMULATED EARNINGS
For the three months ended March 31 (unaudited)
($CDN thousands, except per unit amounts) 2003 2002
--------------------------------------------------------------------------------
REVENUE
Oil, natural gas, natural gas liquids and
sulphur sales $ 176,629 $ 100,864
Royalties (36,439) (17,561)
--------------------------------------------------------------------------------
140,190 83,303
================================================================================
EXPENSES
Operating $ 28,959 $ 25,288
General and administrative 4,009 3,693
Management fee -- 1,780
Interest on long-term debt 3,825 2,991
Capital taxes 100 384
(Gain)/loss on foreign exchange (7,495) 24
Depletion, depreciation and amortization 42,734 41,379
--------------------------------------------------------------------------------
72,132 75,539
--------------------------------------------------------------------------------
Income before future income tax 68,058 7,764
Future income tax (expense) recovery (3,070) 7,206
--------------------------------------------------------------------------------
Net income 64,988 14,970
Accumulated earnings, beginning of period 350,088 282,195
--------------------------------------------------------------------------------
Accumulated earnings, end of period 415,076 297,165
================================================================================
--------------------------------------------------------------------------------
Net income per unit (Note 8)
Basic 0.49 0.13
Diluted 0.49 0.13
================================================================================
See accompanying notes to consolidated financial statements.
18 ARC ENERGY TRUST
CONSOLIDATED STATEMENT OF CASH FLOW
For the three months ended March 31 (unaudited)
($CDN thousands) 2003 2002
--------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 64,988 $ 14,970
Add items not involving cash:
Future income tax expense (recovery) 3,070 (7,206)
Depletion, depreciation and amortization 42,734 41,379
Amortization of commodity and foreign
currency contracts (883) 20
Unrealized (gain) loss on foreign exchange (7,403) 31
--------------------------------------------------------------------------------
Cash flow before changes in non-cash working capital 102,506 49,194
Change in non-cash working capital (7,223) (1,576)
--------------------------------------------------------------------------------
95,283 47,618
CASH FLOW FROM FINANCING ACTIVITIES
Borrowing (repayments) of long-term debt, net (110,418) 21,926
Issue of Trust units (Note 5) 145,615 2,308
Trust unit issue costs (Note 5) (7,438) (156)
Cash distributions paid (54,943) (41,080)
--------------------------------------------------------------------------------
(27,184) (17,002)
--------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Deposit for Star Acquisition (Note 9) (40,000) --
Acquisition of oil and gas properties (2,939) (2,198)
Proceeds on disposition of oil and gas properties (61) 399
Capital expenditures (21,089) (27,696)
Reclamation fund contributions and actual expenditures (1,544) (1,767)
--------------------------------------------------------------------------------
(65,633) (31,262)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 2,466 (646)
CASH, BEGINNING OF PERIOD 835 646
--------------------------------------------------------------------------------
CASH, END OF PERIOD 3,301 --
================================================================================
See accompanying notes to consolidated financial statements.
ARC ENERGY TRUST 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002 (unaudited)
(all tabular amounts in thousands, except per unit and volume amounts)
1. SUMMARY OF ACCOUNTING POLICIES
These interim financial statements follow the same accounting policies as
the most recent annual financial statements. The note disclosure
requirements for annual financial statements provide additional disclosure
that is required for interim financial statements. Accordingly, these
interim financial statements should be read in conjunction with the
financial statements included in the Trust's 2002 annual report.
2. RECONCILIATION OF CASH FLOW AND DISTRIBUTIONS
2003 2002
-------------------------------------------------------------------------------------------------------------
Cash flow before changes in non-cash working capital 102,506 49,194
Add (deduct):
Cash withheld to fund capital expenditures (20,243) (4,889)
Reclamation fund contributions and interest earned on fund (1,129) (1,113)
Current period accruals and cash withheld (21,794) 37
-------------------------------------------------------------------------------------------------------------
Cash distributions 59,340 43,229
Accumulated cash distributions, beginning of period 688,947 505,330
-------------------------------------------------------------------------------------------------------------
Accumulated cash distributions, end of period 748,287 548,559
=============================================================================================================
Cash distributions per unit 0.45 0.39
Accumulated cash distributions per unit, beginning of period 10.64 9.08
-------------------------------------------------------------------------------------------------------------
Accumulated cash distributions per unit, end of period 11.09 9.47
=============================================================================================================
Cash distributions per trust unit reflect the sum of the per trust unit
amounts paid monthly to unitholders.
3. LONG-TERM DEBT
The Trust has four revolving credit facilities which had a combined maximum
of $300 million at March 31, 2003 and US$65 million of Senior Secured Notes
(the "Notes"). In conjunction with the closing of the Star acquisition on
April 16, 2003, the revolving credit facilities were increased to $551
million for a combined maximum of $650 million including the Notes.
The lenders review the credit facilities by April 30th each year and
determine whether they will extend the revolving periods for another year.
In the event that the revolving periods are not extended, the loan balance
will become repayable over a two year term period with 20 per cent of the
loan balance payable on April 30, 2005 followed by three quarterly payments
of five per cent of the loan balance and a lump sum payment of 65 per cent
of the loan balance at the end of the term period. The lenders have
completed their review of the credit facility for 2003 with the next annual
review date being April 30, 2004.
20 ARC ENERGY TRUST
4. FINANCIAL INSTRUMENTS
The following derivative contracts were outstanding as at March 31, 2003.
Settlement of these contracts, which have no book value, would have
resulted in a net payment by the Trust of $10.8 million as at March 31,
2003.
Daily Average Contract Price
Commodity Contracts Quantity Prices ($) (1) Index Term
-------------------------------------------------------------------------------------------------------------
Crude oil fixed price 2,000 bbls 37.17 WTI April 2003 - June 2003
contracts 4,000 bbls 36.83 WTI July 2003 - September 2003
2,000 bbls 41.14 WTI October 2003 - December 2003
3,500 bbls 39.67 WTI January 2004 - March 2004
Crude oil fixed price contracts
(embedded exercise option)(2) 2,000 bbls 38.20 WTI July 2003 - December 2003
Crude oil fixed price contracts
(embedded put option) (3) 4,000 bbls 36.75 (29.34) WTI April 2003 - December 2003
Crude oil collared contracts
(embedded put option) (3) 6,000 bbls 38.84 - 44.08 (33.94) WTI April 2003 - June 2003
4,000 bbls 36.73 - 42.46 (30.86) WTI July 2003 - December 2003
Natural gas fixed price 50,823 GJ 5.49 AECO April 2003 - June 2003
contracts 44,823 GJ 5.20 AECO July 2003 - September 2003
39,823 GJ 5.02 AECO October 2003
10,000 GJ 7.00 AECO November 2003 - March 2004
=============================================================================================================
-------------------------------------------------------------------------------------------------------------
Average Average
Monthly Contract Contract
Foreign Currency Contracts Amount (US$000) Rate Term
-------------------------------------------------------------------------------------------------------------
Fixed rate foreign exchange contracts (sell) 8,118 1.5828 April 2003 - June 2003
7,304 1.5692 July 2003 - December 2003
2,867 1.5238 January 2004 - March 2004
=============================================================================================================
The Trust entered into a contract to fix the price of electricity on five
megawatts per hour ("MW/h") for the period April 17, 2001 through December
31, 2010 at a price of $63/MW/h. Settlement of this contract would have
required a net payment by the Trust of $4.6 million as at March 31, 2003.
In addition to the contracts described above, the following contracts, with
a liability book value of $7.8 million, were outstanding as at March 31,
2003. These contracts were acquired in conjunction with the Startech
acquisition at which time the market value of such contracts acquired was a
net liability of $33.1 million. Settlement of these contracts would have
resulted in a net payment by the Trust of $8.7 million as at March 31,
2003.
-------------------------------------------------------------------------------------------------------------
Daily Average Contract Price
Commodity Contracts Quantity Prices ($) (1) Index Term
-------------------------------------------------------------------------------------------------------------
Natural gas fixed price
contracts 4,000 GJ 2.71 AECO April 2003 - October 2004
=============================================================================================================
-------------------------------------------------------------------------------------------------------------
Average Average
Monthly Contract Contract
Foreign Currency Contracts Amount (US$000) Rate Term
-------------------------------------------------------------------------------------------------------------
Fixed rate foreign exchange contracts (sell) 1,500 1.4106 April 2003 - December 2003
=============================================================================================================
(1) Commodity contracts denominated in US$ have been converted to CDN$ at
the period end exchange rate.
(2) Counterparty has the option to exercise the contract on or before June
30, 2003.
(3) Counterparty may exercise a put option if index falls below the
specified price (as denoted in brackets) on a monthly settlement basis.
ARC ENERGY TRUST 21
5. UNITHOLDERS' CAPITAL
On February 25, 2003, the Trust issued 12,500,000 trust units at $11.50 per
unit for proceeds of $143.8 million ($136.3 million net of issue costs)
pursuant to a public offering prospectus dated February 14, 2003.
-------------------------------------------------------------------------------------------------------------
Number of
TRUST UNITS Trust Units $
-------------------------------------------------------------------------------------------------------------
Balance, beginning of period 123,305 1,172,199
Issued for cash 12,500 143,750
Issued on conversion of ARML exchangeable shares (Note 6) 56 671
Issued on conversion of ARL exchangeable shares (Note 6) 136 1,159
Issued on exercise of employee rights (Note 7) 97 761
Distribution reinvestment program 93 1,104
Trust unit issue costs -- (7,438)
-------------------------------------------------------------------------------------------------------------
Balance, end of period 136,187 1,312,206
=============================================================================================================
6. EXCHANGEABLE SHARES
-------------------------------------------------------------------------------------------------------------
Number of
ARML EXCHANGEABLE SHARES Shares $
-------------------------------------------------------------------------------------------------------------
Balance, beginning of period 2,206 28,088
Exchanged for trust units (53) (671)
-------------------------------------------------------------------------------------------------------------
Balance, end of period 2,153 27,417
Exchange ratio, end of period 1.08143 --
-------------------------------------------------------------------------------------------------------------
Trust units issuable upon conversion 2,329 27,417
=============================================================================================================
-------------------------------------------------------------------------------------------------------------
Number of
ARL EXCHANGEABLE SHARES Shares $
-------------------------------------------------------------------------------------------------------------
Balance, beginning of period 637 7,238
Exchanged for trust units (102) (1,159)
-------------------------------------------------------------------------------------------------------------
Balance, end of period 535 6,079
Exchange ratio, end of period 1.34954 --
-------------------------------------------------------------------------------------------------------------
Trust units issuable upon conversion 722 6,079
=============================================================================================================
7. UNIT BASED COMPENSATION PLAN
-------------------------------------------------------------------------------------------------------------
Number of Weighted Average
Rights Exercise Price
-------------------------------------------------------------------------------------------------------------
Balance, beginning of period 3,041 $ 10.64
Granted 30 11.59
Exercised (97) 7.84
Cancelled (112) 11.43
-------------------------------------------------------------------------------------------------------------
Balance before reduction of exercise price 2,862 10.71
Reduction of exercise price -- (0.19)
-------------------------------------------------------------------------------------------------------------
Balance, end of period 2,862 $ 10.52
=============================================================================================================
22 ARC ENERGY TRUST
The Trust has elected to continue to measure compensation cost associated
with new rights issued on or after January 1, 2002 based on the intrinsic
value of the award at the date of the grant and recognize that cost over
the vesting period. As the exercise price of the rights granted
approximates the market price of the trust units at the time of the grant
date, no compensation cost has been provided in the statement of income.
As it is not possible to determine the fair value of rights granted under
the plan, compensation cost for proforma disclosure purposes has been
determined based on the excess of the unit price over the exercise price at
the date of the financial statements. For the period ended March 31, 2003,
there would be no change in net income for the estimated compensation cost
associated with rights granted under the plan on or after January 1, 2002
as the adjusted exercise price of the rights exceeded the market price of
the trust units.
8. NET INCOME AND CASH FLOW PER TRUST UNIT
Net income and cash flow per trust unit are as follows:
-------------------------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------------------------------------
Net income
Basic (1) $ 0.49 $ 0.13
Diluted (2) 0.49 0.13
Cash flow before changes in non-cash working capital (3)
Basic (1) 0.78 0.44
Diluted (2) 0.78 0.44
=============================================================================================================
(1) Basic per unit calculations are based on the weighted average number of
trust units outstanding in 2003 of 131,378,771 (111,837,595 in 2002)
which includes outstanding exchangeable shares converted at the
period-end exchange ratio.
(2) Diluted calculations include 383,996 additional trust units in 2003
(693,454 additional trust units in 2002) for the dilutive impact of
employee rights. There were no adjustments to net income or cash flow
in calculating diluted per share amounts.
(3) Cash flow before changes in non-cash working capital is calculated by
adding future income tax expense/recovery, unrealized gain/loss on
foreign exchange, amortization of commodity and foreign currency
contracts, depletion, depreciation and amortization to net income.
9. SUBSEQUENT EVENT
Effective April 16, 2003, the Trust acquired all of the issued and
outstanding shares of Star Oil & Gas Ltd. ("Star"). The total purchase
price of $710 million has been financed through the issuance of $320
million of convertible debentures to the shareholders of Star and $390
million of long-term bank debt.
The convertible debentures are subordinated to senior debt and pay a
quarterly coupon commencing on June 30, 2003 of 8 per cent per annum to
March 31, 2005 and increasing to 10 per cent per annum from June 30, 2005
through to maturity on June 30, 2008. The Trust has the right to redeem the
debentures in full at any time with cash or the trust may redeem $40
million per quarter commencing on June 30, 2003 using a combination of cash
and trust units. The Trust has the right to satisfy payment at maturity by
issuing trust units. Holders of the convertible debentures can convert the
debentures into trust units at $11.84 per unit through June 30, 2005 and
$11.38 per unit after June 30, 2005 to maturity.
The transaction will be accounted for using the purchase method of
accounting with the total purchase price being allocated to the acquired
net assets based on their respective fair values. To the extent that the
total consideration paid exceeds the fair value of the net assets acquired,
goodwill will be recorded on the transaction. An allocation of the purchase
price has not yet been determined.
The Trust entered into related agreements to sell certain Star producing
assets and undeveloped acreage for $78.2 million. The proceeds of this
transaction, which closed on May 1, 2003, were applied to reduce the
long-term debt balance.
ARC ENERGY TRUST 23
--------------------------------------------------------------------------------
CORPORATE AND UNITHOLDER INFORMATION
--------------------------------------------------------------------------------
DIRECTORS EXECUTIVE OFFICE CORPORATE CALENDAR
Xxx X. Xxx Xxxxxxxxx (1)(3)(4)(5) ARC Resources Ltd. 2003
CHAIRMAN 0000, 000 - 0xx Xxxxxx X.X. July 17 Announcement of
Calgary, Alberta T2P 5E9 Q3 Distribution
Xxxxxx XxXxxx (1)(3)(4) Monthly Amounts
VICE-CHAIRMAN Telephone: (000) 000-0000
Toll Free: 0-000-000-0000 August 7 2003 Q2 Results
Xxxx X. Xxxxxxxx Xxxxxxxxx: (000) 000-0000
PRESIDENT AND CHIEF EXECUTIVE OFFICER Website: xxx.xxxxxxxxxxxx.xxx October 17 Announcement of
E-Mail: xx@xxxxxxxxxxxx.xxx Q4 Distribution
Xxxx X. Xxxxxxx (2)(4) Monthly Amounts
Xxxxxxxx X. Xxxxx (2)(3)
TRUSTEE AND TRANSFER
Xxxx X. Xxxxxx (1)(2) AGENT STOCK EXCHANGE LISTING
Computershare Trust Company of
Xxxxxxx X. Xxxxxxxx (1)(2) Canada The Toronto Stock Exchange
600, 000 - 0xx Xxxxxx X.X.
Xxxx Xxxxxxx (3)(4)(5) Calgary, Alberta T2P 3S8 Trading Symbols:
Telephone: (000) 000-0000 AET.UN (TRUST UNITS)
(1) MEMBER OF AUDIT COMMITTEE ARX (EXCHANGEABLE SHARES)
(2) MEMBER OF RESERVE AUDIT COMMITTEE
(3) MEMBER OF HUMAN RESOURCES AND
COMPENSATION COMMITTEE AUDITORS
(4) MEMBER OF BOARD GOVERNANCE COMMITTEE INVESTOR INFORMATION
(5) MEMBER OF MANAGEMENT ADVISORY COMMITTEE Deloitte & Touche LLP
CALGARY, ALBERTA Visit our website at
OFFICERS xxx.xxxxxxxxxxxx.xxx
Xxxx X. Xxxxxxxx or contact:
PRESIDENT AND CHIEF EXECUTIVE OFFICER ENGINEERING CONSULTANTS Investor Relations
(000) 000-0000 or
Xxxx X. Xxxxxx Xxxxxxx Xxxxxxxx Xxxx Associates 0-000-000-0000 (Toll Free)
VICE-PRESIDENT, ENGINEERING Ltd.
CALGARY, XXXXXXX
Xxxxx X. Xxxxx
VICE-PRESIDENT, BUSINESS DEVELOPMENT
Xxxxx X. Xxxxx LEGAL COUNSEL
VICE-PRESIDENT, LAND
Burnet Xxxxxxxxx & Xxxxxx LLP
Xxxxxx X. Xxxxxxxx CALGARY, ALBERTA
VICE-PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
Xxxxx Xxxxxxx
VICE-PRESIDENT, OPERATIONS
Xxxxx X. Xxx
CORPORATE SECRETARY
Xxxxx X. Xxxxxxx
TREASURER
[GRAPHIC OMITTED]
[LOGO - GOLD CHAMPION LEVEL REPORTER]
Canada's Climate Change Voluntary Challenge and Registry. The industry's
voluntary effort to reduce greenhouse gas emissions and document the efforts
year over year.
[GRAPHIC OMITTED]
[LOGO - 2003 MEMBER OF XXXX - STEWARDSHIP INITIATIVE]
Members commit to continuous improvement in the responsible management,
development and use of our natural resources; protection of our environment;
and, the health and safety of our workers and the general public.
