DBRS Confirms ARC Energy Trust at STA-5 (high)

Dominion Bond Rating Service (“DBRS”) has today confirmed the stability rating of ARC Energy Trust (“ARC” or the “Trust”) at STA-5 (high), which is the highest rating assigned to a conventional oil and gas trust. ARC continues to focus on sustaining production through internal development of its high-quality asset base. Additional development and growth opportunities exist in waterflood, tight oil and gas, and coalbed methane.

Reflective of the high-quality assets and low risk exploitation strategy, ARC has consistently replaced most of its production internally (70% in 2004), reducing its reliance on external reserve purchases. In addition, the Trust maintains one of the strongest financial profiles among its peers, with a debt-to-capitalization at 18% and annualized debt-to-cash flow at 0.6 times in H1 2005 (0.50 times in 2004). The Trust’s net production cost at Cdn$9.12/boe (including transportation) in 2004 is lower than the Cdn$10/boe average for DBRS-rated peers, and is supported by strong operational management, and through the sale of higher operating cost properties. Although decreased in 2004 as a result of natural reserve decline, proved reserve life index (RLI) at 9.6 years remains above peer average of approximately 8.3 years. The Trust continues to actively hedge its commodity exposure with about 48% of net production hedged for 2005. ARC’s management policy allows it to hedge up to 55% of its net production volumes.

Limitations include declining per unit reserves since 2001 (average decline of 7% per year) due to natural decline, combined with some dilution resulting from acquisitions in a competitive market. However, the decline rate at 7% compares very favourably to most of its peers that generally experience nearly twice the decline. The Trust distributed 76% of operating cash flow in 2004, within management’s maximum payout of 80%. Although this payout remains high in the context of a strong pricing environment, ARC’s strong balance sheet provides support for current levels. Due to the high payout of cash flow, which is typical of the trust structure, free cash flow after distributions has not been sufficient to finance the capital program, requiring some external financing. However, due to the strong pricing environment in 2005, cash flow is expected to fully fund distributions and the Cdn$270 million capital program. Going forward, DBRS expects that ARC will maintain its strong financial profile.