2000 MESSAGE TO UNITHOLDERS | 2000 FINANCIAL AND OPERATING STATS • MESSAGE TO UNITHOLDERS Our results for 2000 were outstanding. Not only did ARC once again stand out as one of the top performing royalty trusts, we also rank among the top companies in the oil and gas sector overall. Unitholder distributions in 2000 increased to $2.01 per unit, a 49 percent increase over 1999, and the highest in our history. When combined with the growth in our trading price on the TSE, unitholders realized a total return on investment of 55 percent in 2000. While there is no question these results are exceptional, this is not a stand alone year for ARC. Our results over the past five years have generated a compound annual total return of 20 percent to those unitholders participating in our Dividend Reinvestment Plan. Over the same time period, the oil and gas royalty trust index and TSE oil and gas producers index averaged total annual returns of 13.7 and 7.8 percent, respectively. As important as this performance has been, we are equally proud of the leadership role we have played in the royalty trust sector, particularly with respect to the management of our capital structure and distribution policies. ARC Energy Trust has set standards and introduced innovations that have been widely modeled by other trusts in our industry. The past year marked our fifth year in business. ARC Energy Trust was founded in 1996 and we can now clearly look back at the objectives that were set at inception and measure our performance. Our fundamental objective was, and still remains, to deliver superior returns to our investors which is exactly what we have done. We are widely regarded as a leader in the royalty trust sector as a result of both our financial performance as well as our financial management. We have reacted to the different market cycles with strategies and policies which have resulted in stable distributions at the low end of the commodity price cycle and an exceptionally strong balance sheet at the high end of the cycle. Revisions in 2000 to our distribution policy result in a greater proportion of cash available for distribution to be used to fund capital programs. This will allow us to be less reliant on both debt and new equity in the future while at the same time enhancing the sustainability of ARC’s production and hence distributions. Our financial performance is a function of numerous factors, some of which are outside our control – commodity prices, for example. Our commitment to unitholders is to maintain stability in the areas within our control and to actively manage risk relating to those factors outside of our control. We have assembled a very high quality asset base with tremendous opportunities to continue to deliver superior returns over the long term and through the inevitable market cycles. OUR RECORD REMAINS • ARC has consistently outperformed both the TSE Oil and Gas Producers Index and the Royalty Trust Index. • ARC has delivered top quartile returns since inception despite having one of the most conservative distribution policies. • Commodity prices are cyclic in nature and we have delivered distribution stability in the down cycle of 1998/99 and record distributions in 2000. • We have developed a diverse base of long-life and uniquely high-quality assets. • The reserve life index stands at 12.1 years, up marginally from 12.0 years in 1999. • We have clearly demonstrated our ability to consistently grow through acquisitions. • We have assembled an exceptional technical team with a strong track record of optimizing our asset portfolio and creating value for unitholders. • We replaced over 400 percent of production in 2000. • Finding and development costs of $5.16 for 2000 are expected to be in the top quartile of all Canadian oil and gas companies. • ARC has grown to become one of Canada’s largest oil and gas royalty trusts and has excellent liquidity in the marketplace. We attribute our superior performance to our commitment to develop and maintain unique expertise within our organization which we believe is our strategic advantage. This expertise encompasses every aspect of our business and is a fundamental characteristic that defines who we are. Since inception, our philosophy has been to pursue what we describe as both strategic and opportunistic growth. Strategic growth relates to decisions we make based on an understanding of market cycles, capital market fundamentals, our capital structure and the type of opportunities that will enhance our existing asset base and operations. We see opportunistic growth as encompassing decisions and transactions that will add significant value, as compared to pursuing growth for the sake of growth. We aggressively search out opportunities which will enhance our already high quality asset base and add fundamental value for unitholders. In addition to optimizing our asset base, our expertise has been demonstrated in how we manage our business in terms of the changing industry environment. We assess our operations in terms of developments within the oil and gas industry, particularly changes in the acquisition market and commodity markets. This leads to a continual assessment of our financial position and policies and, when changes would benefit our unitholders, we revise our policies, as occurred this year with our distributions. We are considered a leader in the trust sector as we continually develop business strategies to seize strategic opportunities and actively manage each component of our operations in order to maximize value for our unitholders. ACHIEVING SUPERIOR PERFORMANCE In 2000, we were able to capitalize on high commodity prices in combination with acquisitions and production growth from our asset base. We increased production 23 percent to 27,355 barrels of oil equivalent per day (boe/d). Production of crude oil and natural gas liquids (NGL) increased 31 percent to 14,493 bbl/d, while natural gas was up 16 percent to more than 77 million cubic feet per day (mmcf/d). Our 2000 performance was significantly impacted by the strength of commodity prices. The price for West Texas Intermediate crude averaged US$30.35 per barrel (bbl), up from US$19.25 in 1999. Gas pricing saw similar growth rising to an average Cdn $4.92 per thousand cubic feet (mcf) at the AECO Hub in Alberta, up from $2.54 in 1999. This commodity price growth was a fundamental factor behind our exceptional returns. In 2000, we averaged a liquids price of $35.67 per bbl, while our gas price was $4.48 per mcf. This represents increases over 1999 of 55 and 76 percent, respectively. OPPORTUNISTIC ACQUISITIONS ADD VALUE ARC has a history of originating and completing significant transactions that have added significant value to the Trust. This is an area where we believe we have tremendous business expertise to add value for ARC unitholders. We typically work outside of the broad acquisition market to pursue assets that best fit our strategies and investment criteria, which allows us to identify unique opportunities. We are selective in our acquisitions which can best be seen in the high quality asset base we have assembled. In 1999, we acquired Starcor Energy Royalty Fund and Orion Energy Trust under very attractive terms at the bottom of the oil price cycle. To date, these are the only transactions of this kind completed among royalty trusts. Early in 2000, we acquired a package of two major and 11 minor producing oil and gas properties in Alberta and Saskatchewan. We added daily production of 5,000 boe, primarily light oil, for a very low cost of $4.88 per boe for established reserves. This added significant value for our unitholders at a time when rising commodity prices were beginning to put upward pressure on prices in the acquisition market. SUBSTANTIAL GROWTH WITH THE 2001 STARTECH ACQUISITION Our most innovative and largest acquisition to date was Startech Energy Inc., which was announced prior to year end. This $485 million acquisition, which became effective January 31, 2001, has added substantial value for unitholders. Daily production acquired totaled 15,700 boe and added established reserves of 58 million boe. The transaction added high quality properties with definite synergies with our current landholdings. As part of the transaction, we acquired Lougheed which is a significant oil field in southeast Saskatchewan and which we believe possesses material upside potential. At the same time, the higherrisk exploration plays, which are outside of our investment criteria, were left with Startech shareholders in a new company. This unique splitting of assets unlocked the respective value of the properties. For our unitholders, we were able to complete the acquisition under attractive terms at a price that we believe will be in the top quartile for acquisitions in 2001. For Startech shareholders, we were able to unlock existing value and allow them to retain the exploration upside. TECHNICAL EXPERTISE MAXIMIZES LONG-TERM RETURNS Among oil and gas trusts, ARC is one of the most aggressive in terms of the optimization and exploitation of its properties. Once we have purchased a property, we bring our technical expertise to bear in order to maximize its long-term value. We are continually working to improve the performance of our properties. We have a large inventory of development opportunities which we believe will allow us to substantially replace production for at least two years without additional acquisitions. Our paramount goal is to maintain or increase reserves and production and maximize returns to unitholders in the context of the prevailing commodity price environment. As a result, we develop properties to ensure that the long-term value is maximized versus potentially over capitalizing properties in search of near term production growth which often occurs among exploration and production companies. Our large inventory of development opportunities provides the flexibility to conduct programs cost-effectively and to pursue projects where the benefits will flow through most effectively to our unitholders on a long-term basis. Our development program in 2000 was just over $50 million, up from $24.2 million in 1999. This program, combined with acquisitions and minor property dispositions, resulted in ARC replacing over 400 percent of 2000 production at a net cost of $5.16 per boe for established reserves. With an average netback of $20.26 per boe, this resulted in a 2000 recycle ratio of 3.9. Extensive development was undertaken at Pembina, Midale and House Mountain. Through our acquisition early in the year, we established a major new core area in northern Alberta at Ante Creek. Our acquisition activities also expanded an important ARC operated gas property at Jenner, which saw extensive development drilling in 2000. As we proceed in 2001, the Startech acquisition has significantly expanded our development opportunities. We have already begun a thorough assessment of the properties and are preparing development plans for 2001 and beyond. MANAGING DISTRIBUTIONS The strategic management of distributions is a key objective for ARC. In the past year, we distributed our base level of $0.10 per unit per month plus unitholders received an additional $0.81 per unit primarily as a result of higher commodity prices. Total distributions for the year reached a record $2.01 per unit. However, as we have seen over the past several years, it is very difficult to predict oil or gas prices over the longer term. To allow us to better manage the level of distributions, an important revision was made to ARC’s distribution policy in October 2000. We are now reinvesting up to 20 percent of cash flow in operations and distributing the remainder to unitholders. Strategically, this provides the flexibility to fund between 65 and 100 percent of development expenditures, depending on commodity prices. We are confident that this new policy will allow us to sustain higher distributions over the long term. IN CLOSING We are absolutely committed to continuing our record as a top performer in the royalty trust sector and within the entire industry. We are confident that through our strategies and proven expertise we will continue to deliver fundamental value and superior returns to our unitholders. John P. Dielwart President and Chief Executive Officer • How do our 2000 numbers measure up?  Click here to find out. View another year: 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 | 1996