Annual Report - 2001 - ARC Resources Ltd.

PAGE 52
MANAGEMENT’S DISCUSSION AND ANALYSIS
TAXES
Capital taxes paid or payable by ARC based on debt and equity levels at the
end of the year amounted to $1.8 million in 2001 versus $0.2 million in 2000. The increase
is a direct result of ARC becoming a much larger corporation in 2001.
As a result of the Startech acquisition, a future income tax liability of $203
million was set up. This liability is due to the difference between the purchase price of the
Startech assets and the amount of tax pools at the date of the acquisition. A future income
tax recovery of $28 million in 2001 has left a future income tax liability of $175 million at
December 31, 2001. The future tax liability was recorded in accordance with Canadian
GAAP, which states that a future liability must be recorded when a corporation purchases
assets with tax pools less than the associated purchase price. In the Trust’s structure,
payments are made between ARC Resources and the Trust transferring both income and
future tax liability from ARC Resources to the individual unitholders. Therefore, it is the
opinion of the Manager, that no cash income taxes will be paid by ARC Resources but
rather a higher percentage of distributions will be taxable due to the purchase of Startech
compared to an asset purchase under which ARC Resources would have tax pools equal
to the purchase price. The important point with the Startech acquisition is that the tax
pools as a percentage of the purchase price closely approximated the percentage of
existing tax pools to the value of the Trust and ARC Resources’ assets immediately prior
to the acquisition and, as such, there is no expected future increase in the taxable portion
of distributions relative to what existed prior to the acquisition.
At year-end 2001, the Trust had $657.4 million ($430.2 million in 2000) in
income tax pools which will be utilized to reduce the taxable portion of future cash
distributions. In addition, ARC Resources had $203.6 million of income tax pools as at
December 31, 2001 which will be utilized to minimize, and potentially eliminate, future
corporate income taxes.
DEPLETION, DEPRECIATION AND FUTURE SITE RECLAMATION EXPENSES
The 2001 depletion, depreciation and amortization (DD&A) rate increased to
$10.49/boe from $6.23/boe in 2000. The DD&A rate includes a provision for future site
reclamation and abandonment of $0.59/boe in 2001 compared to $0.61/boe in 2000. The
increase in the DD&A rate in 2001 reflects the accounting treatment for the Startech
acquisition. Assets to be depleted were increased by $203 million for potential future
income taxes and $33 million for deferred hedging losses that would have been incurred
had ARC collapsed the hedges at closing.
It is not anticipated ARC Resources will pay taxes in the future and therefore
the future income tax liability will be brought into income over time, offsetting the higher
DD&A rate. In 2001, the tax recovery was $1.79/boe for an effective net DD&A rate of
$8.70/boe.
ARC ENERGY TRUST AR 2001