1999 MESSAGE TO UNITHOLDERS | 1999 FINANCIAL AND OPERATING STATS • MESSAGE TO UNITHOLDERS What a difference a year makes. Last year at this time, our industry was in the midst of the most protracted bear market ever experienced in the modern era of the oil and gas business with world oil prices at approximately $12.00 US per barrel (“Bbl”). At the time of this writing, world oil prices exceed $30.00 US per Bbl which represents the highest peacetime price since deregulation of the industry in Canada in 1986. While commodity price volatility is a fact of life in our industry, this extreme level of volatility over such a short time period is unusual and can have adverse consequences for many companies and investors in the oil and gas sector. However, such periods of volatility are also periods of opportunity. We believe that our unitholders will enjoy significant long-term benefits from a number of such opportunities that we have been able to exploit in this volatile environment. Since inception of ARC Energy Trust (the “Trust”) in 1996, we have repeatedly stated that “expertise is our advantage” which will allow us to fulfill our commitment to deliver superior returns to our investors. It is our view that the Trust’s performance in the volatile business environment in 1999 underscores this position: • The Trust outperformed the TSE Oil and Gas Producers Index on a total return basis by 46 percent (56 percent since inception) and the Royalty Trust Index by 10 percent (29 percent since inception). The Trust’s compound annual return since inception is approximately 12 percent as compared to minus two percent for the TSE Oil and Gas Producers Index and five percent for the Royalty Trust Index. • The Trust maintained its monthly distribution at $0.10 per unit through the entire downturn in oil prices and has had the most stable distributions in the sector over the past three years. • The Trust completed the acquisition of Orion Energy Trust (“Orion”) and Starcor Energy Royalty Fund (“Starcor”) at the bottom of the oil price cycle which significantly enhanced our asset base just prior to the dramatic increases in commodity prices. • With the strong recovery in the oil price in the second half of 1999, the Trust completed an equity issue, disposed of non-core assets and initiated a program of discretionary debt repayment which resulted in the Trust having one of the strongest balance sheets in the sector at December 31, 1999. • This exceptional performance in 1999 has solidified the Trust’s leadership position in the sector and has further advanced the Trust towards realizing its vision of becoming the premier conventional oil and gas royalty trust in Canada. ACQUISITION AND DISPOSITION ACTIVITY The most notable transactions in 1999 were the March 12 acquisitions of Starcor and Orion. These acquisitions increased production and reserves by 85 percent and 91 percent, respectively, while increasing the Trust’s reserve life index (“RLI”) from 11.6 to 11.8 years. The reserves were acquired for $5.13 per barrel of oil equivalent (“Boe”) based upon proved plus risked probable reserves. These opportunistically timed acquisitions with oil prices at all time lows added several new core areas to the Trust and increased the breadth of development and exploitation opportunities within our asset base. In addition to being accretive to unitholder distributions, the acquisitions had a dramatic impact on the Trust’s market capitalization which increased from approximately $175 million to $325 million at closing of the transactions. With our equity issue during the third quarter and strong recovery in the unit price, market capitalization at year-end was approximately $480 million. The increased size of the Trust allowed us to further develop our organizational resources and enhance our already strong managerial and technical expertise. The acquisition of the new properties and the increase in commodity prices during 1999 created the opportunity for the Trust to dispose of a number of small, non-core properties for total proceeds of $21.6 million during the year. The Trust will continue to optimize its portfolio of properties in the future to lower general and administrative costs by reducing our total property count, thereby allowing technical staff more time to concentrate on value-adding initiatives associated with our core properties. RESERVE ADDITIONS Capital expenditures during 1999 totalled $24.2 million, up from $10.5 million in 1998. Extensive development activity, which added significant production and reserves, was undertaken in Buick Creek, House Mountain, Progress and Valhalla. The Trust also initiated several highly successful drilling programs within its main core operated area of Pembina where a number of prolific vertical infill wells were drilled at Lindale and MIPA; follow-up drilling will continue in 2000. The Trust’s drilling and development activities and reserve revisions to its existing assets resulted in the addition of 3.8 million Boe of established reserves at a cost of $6.36 per Boe. The Trust’s capital program, in combination with the acquisitions and minor property disposition program, resulted in the Trust replacing 665 percent of its 1999 production at a net effective cost of $5.94 per Boe. This overall reserve replacement cost is well below industry oil and gas finding and development costs which were in the range of $7 to $12 per Boe. Since inception, the Trust’s all in reserve replacement cost has been $5.83 per Boe on a proved plus risked probable basis. The Trust’s ability to acquire high quality reserves at an attractive price has been the single most important factor setting it apart from the rest of the royalty trust sector and most full cycle oil and gas exploration and production companies. FINANCIAL AND OPERATING PERFORMANCE Production during 1999 was 17,741 Boe per day which was 74 percent greater than 1998 production of 10,225 Boe per day. During 1999, oil production increased 89 percent to 8,408 Bbl per day, natural gas production increased 76 percent to 66.5 million cubic feet (“Mmcf ”) per day and natural gas liquids production increased 33 percent to 2,687 Bbl per day. As a result of significantly increased production and commodity prices, revenue before royalties for the year increased 131 percent to $155.2 million. Cash flow during the year increased 169 percent to $80.8 million ($1.74 per unit) from $30.0 million ($1.17 per unit) in 1998. The average commodity prices for the year were $24.85 per Bbl for oil, $2.54 per thousand cubic feet (“Mcf ”) for gas and $17.43 per Bbl for natural gas liquids. On an oil equivalent basis, the average price was $23.97 per Bbl, which was 33 percent higher than 1998. The Trust’s operating netback for the year was $14.80 per Boe as compared to $10.38 per Boe in 1998. Operating costs for 1999 were $5.52 per Boe; general and administrative costs net of recoveries and reimbursements were $0.55 per Boe and management fees were $0.46 per Boe, resulting in overall costs of $6.53 per Boe. This compares to $6.23 per Boe for 1998. The Trust’s net income was $29.8 million for the year compared to a net loss of $14.1 million for 1998. The 1998 loss included the impact of a writedown in the book value of the Trust’s assets of $14.7 million which was attributable to the dramatic decrease in oil prices in 1998. CASH DISTRIBUTIONS AND DISTRIBUTION POLICY As previously stated, 1999 began with the lowest oil prices experienced in our industry in over 20 years. In mid-March, OPEC announced significant production cuts which resulted in a dramatic increase in world oil prices through the balance of the year. The Trust was able to maintain monthly distributions at $0.10 per unit through the entire oil price downturn and has delivered the most stable distributions of any oil and gas royalty trust during the past three years. This stability in distributions has been a major focus of ARC Financial Corporation (the “Manager”) and has resulted in the Trust positively differentiating itself from all of the other trusts. With the strength in commodity prices during the second half of 1999, the Board of Directors determined that a portion of the cash available for distribution in excess of the regular monthly distribution of $0.10 per unit would be paid to unitholders with the balance used to strengthen the financial position of the Trust through discretionary debt reduction. For the fourth quarter of 1999, 50 percent of the surplus cash available was distributed to unitholders and 50 percent was directed towards debt repayment. As a result, distributions to unitholders in 1999 totalled $1.35 per unit compared to $1.20 per unit in 1998; discretionary debt repayments from distributions in 1999 totalled $8.0 million ($0.15 per unit). In addition, at December 31, 1999, the Trust had accumulated an accrued undistributed working capital surplus of $6.1 million ($0.11 per unit), 50 percent of which will be paid out to unitholders in 2000 and 50 percent of which will be applied towards debt reduction. It is our intention to continue this policy of discretionary debt repayments during 2000 with the relative portions directed towards debt and unitholders reviewed on an ongoing basis and adjusted if deemed appropriate by the Board of Directors. John P. Dielwart President and Chief Executive Officer • How do our 1999 numbers measure up?  Click here to find out. View another year: 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 | 1996