**Exhibit 99.1**

 

 

# **Management, Audit,Finance and Risk Committee, and Auditor Reports**

 

#### **Management’s Responsibility for the FinancialStatements and Report on Internal Control over Financial Reporting**

 

Thepreparation and presentation of the Company’s Consolidated Financial Statementsand the overall quality of the Company’s financial reporting are theresponsibility of management. The financial statements have been prepared inaccordance with Canadian generally accepted accounting principles (GAAP) andnecessarily include estimates, which are based on management’s best judgments.Information contained elsewhere in the Annual Report is consistent, whereapplicable, with that contained in the financial statements.

 

Managementis also responsible for establishing and maintaining a system of internalcontrols over financial reporting to provide reasonable assurance that assetsare safeguarded and that reliable financial information is produced forpreparation of financial statements. Management conducted an evaluation of theeffectiveness of the system of internal control over financial reporting basedon the framework in Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on thisevaluation, management concluded that the Company’s system of internal controlover financial reporting was effective as at December 31, 2008.

 

Dueto its inherent limitations, internal control over financial reporting may notprevent or detect misstatements on a timely basis. Also, projections of anyevaluation of the effectiveness of internal control over financial reporting tofuture periods are subject to the risk that the controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policiesor procedures may deteriorate.

 

Deloitte & Touche LLP, the Company’sIndependent Registered Chartered Accountants, expressed an unqualified opinionon the effectiveness of the Company’s internal control over financial reportingas of December 31, 2008. Deloitte & Touche LLP also audited theCompany’s Consolidated Financial Statements for the year ended December 31,2008.

 

TheBoard of Directors is responsible for overseeing management’s performance ofits responsibilities for financial reporting and internal control. The Board ofDirectors exercises this responsibility with the assistance of the Audit,Finance and Risk Committee of the Board of Directors.

 

 
|                                       |       |                                                       |
|---------------------------------------|------------|-------------------------------------------------------|
| ** **                            | ** ** | ** **                                            |
| ** **                            | ** ** | ** **                                            |
| **Ron A. Brenneman**                  | ** ** | **E. F. H. Roberts**                                  |
| ** **                            | ** ** | ** **                                            |
| President and Chief Executive Officer |       | Executive Vice-President and Chief Financial  Officer |
|                                  |       |                                                  |
| February 23, 2009                |       | February 23, 2009                                |

 

 
| **** | 2008 Annual Report **PETRO-CANADA** | **61** |
|------|-------------------------------------|--------|

 

 

#### **Audit,Finance and Risk Committee of the Board of Directors**

 

TheAudit, Finance and Risk Committee (the Committee), which is composed of notfewer than three (currently five) independent directors, assists the Board ofDirectors in the discharge of its responsibility for overseeing management’sperformance of the financial reporting and internal control responsibilities.The Committee reviews the annual and quarterly Consolidated FinancialStatements, accounting policies and the overall quality of the Company’sfinancial reporting, and the financial information contained in prospectusesand in reports filed with regulatory authorities, as required. The Committeealso reviews and makes recommendations to the Board of Directors regardingfinancial matters and oversees the process that management has in place toidentify business risks. The Committee members are all independent pursuant toNational Instrument 52-110 (NI 52-110), NYSE Corporate Governance Standards andthe Sarbanes-Oxley Act of 2002 (SOX), and are financially literate, with onemember who has been recognized as a “financial expert” in accordance with SOXrequirements.

 

Withrespect to the external auditors, the Committee reviews and approves the termsof engagement, the scope and plan for the external audit, and reviews theresults of the audit and the Reports of the Independent Registered CharteredAccountants. The external auditors report to the Committee. The Committeediscusses the external auditors’ independence from management and the Companywith the external auditors and receives written confirmation of theirindependence. The Committee also recommends to the Board of Directors theexternal auditors to be appointed by the shareholders and approves in advancefees for the external auditors’ services.

 

Withrespect to the contract auditor’s engagement to provide internal auditservices, the Committee reviews the engagement contract, reviews and approvesthe scope and plan for the internal audit, receives periodic reports andreviews significant findings and recommendations. The contract auditor reportsto the Committee.

 

Seniormanagement, the external auditors and the contract auditor attend all Audit,Finance and Risk Committee meetings and each is provided with the opportunityto meet privately with the Committee.

 

** **

** **

**Paul D. Melnuk**

 

Chairman of the Audit, Finance and Risk Committee

 

February 23, 2009

 

 
| **62** | **PETRO-CANADA**2008 Annual Report |  |
|--------|------------------------------------|--|

 

 

#### **Reportof Independent Registered Chartered Accountants**

 

*To the Board of Directors andShareholders of Petro-Canada:*

 

Wehave audited the internal control over financial reporting of Petro-Canada andsubsidiaries (the “Company”) as of December 31, 2008, based on criteriaestablished in Internal Control – Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’s Responsibility for theFinancial Statements and Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008, basedon the criteria established in Internal Control – Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

Wehave also audited, in accordance with Canadian generally accepted auditingstandards and the standards of the Public Company Accounting Oversight Board(United States), the Consolidated Financial Statements as at and for the yearended December 31, 2008 of the Company and our report dated February 23,2009 expressed an unqualified opinion on those financial statements andincluded a separate report titled Comments by Independent Registered CharteredAccountants on Canada-United States of America Reporting Difference referringto changes in accounting principles.

 

 

 

Independent Registered Chartered Accountants

 

Calgary, Canada

 

February 23, 2009

 

 
| **** | 2008 Annual Report **PETRO-CANADA** | **63** |
|------|-------------------------------------|--------|

 

 

#### **Reportof Independent Registered Chartered Accountants**

 

*To the Board of Directors and Shareholders ofPetro-Canada:*

 

Wehave audited the accompanying Consolidated Balance Sheet of Petro-Canada andsubsidiaries (the “Company”) as at December 31, 2008 and 2007, and therelated Consolidated Statements of Earnings, Comprehensive Income, RetainedEarnings and Cash Flows for each of the three years in the period ended December 31,2008. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with Canadian generally accepted auditingstandards and the standards of the Public Company Accounting Oversight Board(United States). These standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

Inour opinion, these Consolidated Financial Statements present fairly, in allmaterial respects, the financial position of Petro-Canada and subsidiaries asat December 31, 2008 and 2007 and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2008 in conformity with Canadian generally accepted accounting principles.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2008, based on the criteriaestablished in Internal Control – Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission and our report dated February 23,2009 expressed an unqualified opinion on the Company’s internal control overfinancial reporting.

 

 

 

Independent Registered Chartered Accountants

 

Calgary, Canada

 

February 23, 2009

 

 

#### **C**ommentsby Independent Registered Chartered Accountants on Canada-United States ofAmerica Reporting Difference

 

Thestandards of the Public Company Accounting Oversight Board (United States)require the addition of an explanatory paragraph when there are changes inaccounting principles that have a material effect on the comparability of theCompany’s financial statements, such as the changes described in Note 3 to theConsolidated Financial Statements. Although we conducted our audits inaccordance with both Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (United States), ourreport to the board of directors and shareholders on the Consolidated FinancialStatements of Petro-Canada, dated February 23, 2009, is expressed inaccordance with Canadian reporting standards which do not require a referenceto such changes in accounting principles in the auditors’ report when thechange is properly accounted for and adequately disclosed in the financialstatements.

 

 

 

Independent Registered Chartered Accountants

 

Calgary, Canada

 

February 23, 2009

 

 
| **64** | **PETRO-CANADA**2008 Annual Report |  |
|--------|------------------------------------|--|

 

 

# **ConsolidatedStatement of Earnings**

*(statedin millions of Canadian dollars, except per share amounts)*

 
| *For the years ended December 31,*                                               | ** ** | **2008**   | ** ** | 2007       |   | 2006   |   |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|--------|--------|--------|
| **Revenue**                                                                           |       | ** ** | ** ** |       |   |   |   |
| Operating                                                                             | ** ** | **$**      | **27,585** | ** ** | $      | 21,710 |   | $ | 18,911 |   |
| Investment  and other income**(expense)*(Notes 6  and 8)*                             | ** ** | **200**    | ** ** | (460       | )      | (242   | )      |
| ** **                                                                            |       | **27,785** | ** ** | 21,250     |   | 18,669 |   |
| ** **                                                                            |       | ** ** | ** ** |       |   |   |   |
| **Expenses**                                                                          |       | ** ** | ** ** |       |   |   |   |
| Crude oil  and product purchases                                                      | ** ** | **14,507** | ** ** | 10,291     |   | 9,649  |   |
| Operating,  marketing and general*(Note 7)*                                           | ** ** | **3,877**  | ** ** | 3,552      |   | 3,180  |   |
| Exploration*(Note 17)*                                                                | ** ** | **587**    | ** ** | 490        |   | 339    |   |
| Depreciation,  depletion and amortization*(Notes 7, 9 and 17)*                        | ** ** | **2,155**  | ** ** | 2,091      |   | 1,365  |   |
| Unrealized  (gain) loss on translation of foreign currency denominated long-term debt | ** ** | **664**    | ** ** | (246       | )      | (1     | )      |
| Interest                                                                              | ** ** | **242**    | ** ** | 165        |   | 165    |   |
| ** **                                                                            |       | **22,032** | ** ** | 16,343     |   | 14,697 |   |
| **Earnings from Continuing Operations Before Income Taxes**                           | ** ** | **5,753**  | ** ** | 4,907      |   | 3,972  |   |
| *** ***                                                                          |       | ** ** | ** ** |       |   |   |   |
| **Provision for Income Taxes*****(Note 10)*                                           |       | ** ** | ** ** |       |   |   |   |
| Current                                                                               | ** ** | **2,629**  | ** ** | 1,797      |   | 2,073  |   |
| Future*(Note 13)*                                                                     | ** ** | **(10**    | **)**      | 377        |   | 311    |   |
| ** **                                                                            |       | **2,619**  | ** ** | 2,174      |   | 2,384  |   |
| **Net Earnings from Continuing Operations**                                           | ** ** | **3,134**  | ** ** | 2,733      |   | 1,588  |   |
| **Net Earnings from Discontinued Operations*****(Note 5)*                             | ** ** | **–** | ** ** | –     |   | 152    |   |
| **Net Earnings**                                                                      | ** ** | **$**      | **3,134**  | ** ** | $      | 2,733  |   | $ | 1,740 |   |
| *** ***                                                                          |       | ** ** | ** ** |       |   |   |   |
| **Earnings per Share from Continuing Operations*****(Note 11)*                        |       | ** ** | ** ** |       |   |   |   |
| Basic                                                                                 | ** ** | **$**      | **6.47**   | ** ** | $      | 5.59   |   | $ | 3.15 |   |
| Diluted                                                                               | ** ** | **$**      | **6.43**   | ** ** | $      | 5.53   |   | $ | 3.11 |   |
| *** ***                                                                          |       | ** ** | ** ** |       |   |   |   |
| **Earnings per Share*****(Note 11)*                                                   |       | ** ** | ** ** |       |   |   |   |
| Basic                                                                                 | ** ** | **$**      | **6.47**   | ** ** | $      | 5.59   |   | $ | 3.45 |   |
| Diluted                                                                               | ** ** | **$**      | **6.43**   | ** ** | $      | 5.53   |   | $ | 3.41 |   |

 

 

# **Consolidated Statement of Comprehensive Income**

*(statedin millions of Canadian dollars)*

 
| *For the years ended December 31,*            | ** ** | **2008** |      | 2007   |   | 2006   |   |
|----------------------------------------------------|------------|----------|-----------|--------|--------|--------|--------|
| Net  earnings                                      | ** ** | **$**    | **3,134** |   | $      | 2,733  |   | $ | 1,740 |   |
| Other  comprehensive income (loss), net of tax     |       |     |      |   |   |   |   |
| Change in  foreign currency translation adjustment | ** ** | **214**  |      | (260   | )      | 363    |   |
| **Comprehensive income**                           | ** ** | **$**    | **3,348** |   | $      | 2,473  |   | $ | 2,103 |   |

 

See accompanying Notes to Consolidated Financial Statements

 

 
| **** | Consolidated Financial Statements**PETRO-CANADA** | **65** |
|------|---------------------------------------------------|--------|

 

 

# **ConsolidatedStatement of Cash Flows**

*(statedin millions of Canadian dollars)*

 
| *For the years ended December 31,*                                                                 | ** ** | **2008**   | ** ** | 2007       |   | 2006   |   |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|--------|--------|--------|
| **Operating Activities**                                                                                |       | ** ** | ** ** |       |   |   |   |
| Net  earnings                                                                                           | ** ** | **$**      | **3,134**  | ** ** | $      | 2,733  |   | $ | 1,740 |   |
| Less: Net  earnings from discontinued operations                                                        | ** ** | **–** | ** ** | –     |   | 152    |   |
| Net  earnings from continuing operations                                                                | ** ** | **3,134**  | ** ** | 2,733      |   | 1,588  |   |
| Items not  affecting cash flow from continuing operating activities:                                    |       | ** ** | ** ** |       |   |   |   |
| Depreciation,  depletion and amortization*(Notes 7, 9 and 17)*                                          | ** ** | **2,155**  | ** ** | 2,091      |   | 1,365  |   |
| Future  income taxes *(Note 13)*                                                                        | ** ** | **(10**    | **)**      | 377        |   | 311    |   |
| Accretion  of asset retirement obligations*(Note 22)*                                                   | ** ** | **79**     | ** ** | 70         |   | 54     |   |
| Unrealized  (gain) loss on translation of foreign currency denominated long-term debt                   | ** ** | **664**    | ** ** | (246       | )      | (1     | )      |
| Gain on  sale of assets *(Notes 6 and 8)*                                                               | ** ** | **(4**     | **)**      | (81        | )      | (30    | )      |
| Unrealized  losses related to Buzzard derivative contracts *(Note 27)*                                  | ** ** | **–** | ** ** | –     |   | 259    |   |
| Other                                                                                                   | ** ** | **91**     | ** ** | 9          |   | 18     |   |
| Exploration  expenses*(Notes 13 and 17)*                                                                | ** ** | **369**    | ** ** | 290        |   | 123    |   |
| Settlement  of Buzzard derivative contracts*(Note 27)*                                                  | ** ** | **–** | ** ** | (1,481     | )      | – |   |
| (Increase)  decrease in non-cash working capital related to continuing operating  activities*(Note 12)* | ** ** | **44**     | ** ** | (423       | )      | (79    | )      |
| Cash flow  from continuing operating activities                                                         | ** ** | **6,522**  | ** ** | 3,339      |   | 3,608  |   |
| Cash flow  from discontinued operating activities*(Note 5)*                                             | ** ** | **–** | ** ** | –     |   | 15     |   |
| Cash flow  from operating activities                                                                    | ** ** | **6,522**  | ** ** | 3,339      |   | 3,623  |   |
| ** **                                                                                              |       | ** ** | ** ** |       |   |   |   |
| **Investing Activities**                                                                                |       | ** ** | ** ** |       |   |   |   |
| Expenditures on property, plant and  equipment and exploration*(Notes 13 and 17)*                       | ** ** | **(6,344** | **)**      | (3,988     | )      | (3,435 | )      |
| Proceeds  from sale of assets*(Notes 5 and 8)*                                                          | ** ** | **250**    | ** ** | 183        |   | 688    |   |
| Increase in  other assets                                                                               | ** ** | **(29**    | **)**      | (121       | )      | (50    | )      |
| Decrease in  non-cash working capital related to investing activities*(Note 12)*                        | ** ** | **739**    | ** ** | 279        |   | 59     |   |
| Cash flow  used in investing activities                                                                 | ** ** | **(5,384** | **)**      | (3,647     | )      | (2,738 | )      |
|                                                                                                    |       | ** ** | ** ** |       |   |   |   |
| **Financing Activities**                                                                                |       | ** ** | ** ** |       |   |   |   |
| Increase (decrease) in short-term  notes payable*(Note 20)*                                             | ** ** | **(109**   | **)**      | 109        |   | – |   |
| Proceeds  from issue of long-term debt*(Note 20)*                                                       | ** ** | **1,482**  | ** ** | 995        |   | – |   |
| Repayment  of long-term debt*(Note 20)*                                                                 | ** ** | **(998**   | **)**      | (7         | )      | (7     | )      |
| Proceeds  from issue of common shares*(Note 23)*                                                        | ** ** | **21**     | ** ** | 37         |   | 44     |   |
| Purchase of  common shares*(Note 23)*                                                                   | ** ** | **–** | ** ** | (839       | )      | (1,011 | )      |
| Dividends  on common shares*(Note 26)*                                                                  | ** ** | **(320**   | **)**      | (255       | )      | (201   | )      |
| Cash flow  from (used in) financing activities                                                          | ** ** | **76**     | ** ** | 40         |   | (1,175 | )      |
| **Increase (Decrease) in Cash and Cash Equivalents**                                                    | ** ** | **$**      | **1,214**  | ** ** | $      | (268   | )      | $ | (290 | ) |
| **Cash and Cash Equivalents at Beginning of Year**                                                      | ** ** | **$**      | **231**    | ** ** | $      | 499    |   | $ | 789 |   |
| **Cash and Cash Equivalents at End of Year*****(Note 15)*                                               | ** ** | **$**      | **1,445**  | ** ** | $      | 231    |   | $ | 499 |   |

 

# **See accompanying Notes toConsolidated Financial Statements**

 

 
| **66** | **PETRO-CANADA**Consolidated Financial Statements |  |
|--------|---------------------------------------------------|--|

 

 

# **ConsolidatedBalance Sheet**

*(statedin millions of Canadian dollars)*

 
| *As at December 31,*                                      | ** ** | **2008**   | ** ** | 2007       |   |
|----------------------------------------------------------------|------------|------------|------------|------------|--------|
| **Assets**                                                     |       | ** ** | ** ** |       |   |
| **Current Assets**                                             |       | ** ** | ** ** |       |   |
| Cash and  cash equivalents*(Note 15)*                          | ** ** | **$**      | **1,445**  | ** ** | $      | 231 |   |
| Accounts  receivable*(Note 14)*                                | ** ** | **2,844**  | ** ** | 1,973      |   |
| Income  taxes receivable                                       | ** ** | **–** | ** ** | 280        |   |
| Inventories*(Notes 3 and 16)*                                  | ** ** | **1,289**  | ** ** | 668        |   |
| Future  income taxes*(Notes 10 and 13)*                        | ** ** | **25**     | ** ** | 26         |   |
| ** **                                                     |       | **5,603**  | ** ** | 3,178      |   |
| **Property, Plant and Equipment, Net*****(Notes 8, 13 and 17)* | ** ** | **23,485** | ** ** | 19,497     |   |
| **Goodwill ***(Note 18)*                                  | ** ** | **852**    | ** ** | 731        |   |
| **Other Assets*****(Note 19)*                                  | ** ** | **437**    | ** ** | 446        |   |
| ** **                                                     |       | **$**      | **30,377** | ** ** | $      | 23,852 |   |
| **Liabilities and Shareholders’ Equity**                  |       | ** ** | ** ** |       |   |
| **Current Liabilities**                                        |       | ** ** | ** ** |       |   |
| Accounts  payable and accrued liabilities                      | ** ** | **$**      | **3,186**  | ** ** | $      | 3,512 |   |
| Income  taxes payable                                          | ** ** | **1,018**  | ** ** | –     |   |
| Short-term  notes payable*(Note 20)*                           | ** ** | **–** | ** ** | 109        |   |
| Current  portion of long-term debt*(Note 20)*                  | ** ** | **3**      | ** ** | 2          |   |
| ** **                                                     |       | **4,207**  | ** ** | 3,623      |   |
| **Long-Term Debt*****(Note 20)*                                | ** ** | **4,746**  | ** ** | 3,339      |   |
| **Other Liabilities*********(Notes 13 and 21)*                 | ** ** | **1,240**  | ** ** | 717        |   |
| **Asset Retirement Obligations*****(Note 21)*                  | ** ** | **1,527**  | ** ** | 1,234      |   |
| **Future Income Taxes ***(Notes 3, 10 and 13)*            | ** ** | **3,182**  | ** ** | 3,069      |   |
| ** **                                                     |       | ** ** | ** ** |       |   |
| **Commitments and Contingent Liabilities*****(Note 28)*        |       | ** ** | ** ** |       |   |
| **Shareholders’ Equity**                                  |       | ** ** | ** ** |       |   |
| Common  shares*(Note 23)*                                      | ** ** | **1,388**  | ** ** | 1,365      |   |
| Contributed  surplus*(Note 23)*                                | ** ** | **22**     | ** ** | 24         |   |
| Retained  earnings                                             | ** ** | **14,062** | ** ** | 10,692     |   |
| Accumulated  other comprehensive income (loss)                 |       | ** ** | ** ** |       |   |
| Foreign  currency translation adjustment                       | ** ** | **3**      | ** ** | (211       | )      |
| ** **                                                     |       | **15,475** | ** ** | 11,870     |   |
| ** **                                                     |       | **$**      | **30,377** | ** ** | $      | 23,852 |   |

 

# **ConsolidatedStatement of Retained Earnings**

*(statedin millions of Canadian dollars)*

 
| *For the years ended December 31,*                           | ** ** | **2008**   | ** ** | 2007       |   | 2006   |   |
|-------------------------------------------------------------------|------------|------------|------------|------------|--------|--------|--------|
| **Retained Earnings at Beginning of Year**                        | ** ** | **$**      | **10,692** | ** ** | $      | 8,557  |   | $ | 7,018 |   |
| Cumulative  effect of adopting new accounting standards*(Note 3)* | ** ** | **556**    | ** ** | 8          |   | – |   |
| Net  earnings                                                     | ** ** | **3,134**  | ** ** | 2,733      |   | 1,740  |   |
| Dividends  on common shares*(Note 26)*                            | ** ** | **(320**   | **)**      | (255       | )      | (201   | )      |
| Excess cost  for normal course issuer bid*(Note 23)*              | ** ** | **–** | ** ** | (351       | )      | – |   |
| **Retained Earnings at End of Year**                              | ** ** | **$**      | **14,062** | ** ** | $      | 10,692 |   | $ | 8,557 |   |

 

See accompanying Notes to Consolidated Financial Statements

 

Approved on behalf of the Board of Directors

 
|                      |       |                       |
|----------------------|------------|-----------------------|
| ** **           | ** ** | ** **            |
| **Ron A. Brenneman** | ** ** | **Brian F. MacNeill** |
| Director             |       | Director              |
|                 |       |                  |

 

 
| **** | Consolidated Financial Statements**PETRO-CANADA** | **67** |
|------|---------------------------------------------------|--------|

 

 

# **Notes toConsolidated Financial Statements**

# ** **

*(stated in millions of Canadian dollars, unlessotherwise stated)*

 

 

### **Note 1**   Summary of Significant Accounting Policies

 

a)      Basis ofPresentation

 

The Consolidated Financial Statements includethe accounts of Petro-Canada and all subsidiary companies (the “Company”) andare prepared in accordance with Canadian generally accepted accountingprinciples (GAAP). Differences between Canadian and United States GAAP areexplained in Note 30.

 

Substantially all of the Company'sexploration and development activities are conducted jointly with others. Onlythe Company's proportionate interests in such activities are reflected in theConsolidated Financial Statements.

 

The preparation of the Consolidated FinancialStatements requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues, expenses and thedisclosure of contingencies. Such estimates primarily relate to unsettledtransactions and events as of the date of the financial statements.Accordingly, actual results may differ from estimated amounts as futureconfirming events occur. Significant estimates used in the preparation of thefinancial statements include, but are not limited to, asset retirementobligations, income taxes, employee future benefits, the estimates of oil andnatural gas reserves and related depreciation, depletion and amortization, andthe valuation of goodwill.

 

b)      Revenue Recognition

 

Revenue from the sale of crude oil, naturalgas, natural gas liquids, purchased products and refined petroleum products isrecorded when title passes to the customer. Revenue represents the Company'sshare and is recorded net of royalty payments to governments and other mineralinterest owners. Inter-segment sales are accounted for at market values andincluded, for segmented reporting, in revenues of the segment making thetransfer and expenses of the segment receiving the transfer; these amounts areeliminated on consolidation.

 

International operations conducted pursuantto Exploration and Production Sharing Agreements (EPSAs) are reflected in theConsolidated Financial Statements based on the Company's working interest insuch operations. Under the EPSAs, the Company and other non-governmentalpartners, if any, pay all exploration costs and a pro-rata share of costs todevelop and operate the concessions. Each EPSA establishes specific terms forthe Company to recover these costs (Cost Recovery Oil) and to share in theproduction profits (Profit Oil). Cost Recovery Oil is determined in accordancewith a formula that is generally limited to a specified percentage ofproduction during each fiscal year. Profit Oil is that portion of productionremaining after deducting Cost Recovery Oil and is shared between the jointventure partners and the government of each country. Cost Recovery Oil, ProfitOil and amounts in respect of all income taxes payable by the Company under thelaws of the respective country are reported as sales revenue. All othergovernment stakes, other than income taxes, are considered to be royaltyinterests.

 

c)      TransportationCosts

 

Transportation costs incurred to transportcrude oil, natural gas and refined petroleum products to customers, which areincluded in operating, marketing and general expenses, are recognized when theproduct is delivered and the service is provided.

 

d)      Foreign CurrencyTranslation

 

Monetary assets and liabilities aretranslated into Canadian dollars at rates of exchange in effect at the balancesheet date. With the exception of items pertaining to self-sustainingoperations, all property, plant and equipment and related depreciation,depletion and amortization are translated at rates of exchange in effect whenthe assets were acquired. All other assets, liabilities, revenue and expenseitems are translated into Canadian dollars at rates of exchange in effect atthe respective transaction dates. The resulting exchange gains or losses areincluded in earnings.

 

 
| **68** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

**Note 1****   Summary of SignificantAccounting Policies*****continued***

 

d)      Foreign CurrencyTranslation *continued*

 

The Company's International business segmentand the U.S. Rockies upstream operations included in the North American NaturalGas business segment are operated on a self-sustaining basis. Assets andliabilities of these operations, including associated long-term debt, aretranslated into Canadian dollars at period end exchange rates, while revenuesand expenses are converted using average rates for the period. Gains and lossesfrom the translation into Canadian dollars are presented as a separatecomponent of other comprehensive income (loss) on the Consolidated Statement ofComprehensive Income.

 

e)      Income Taxes

 

The Company follows the liability method ofaccounting for income taxes. Under this method, future income taxes arerecognized, using substantively enacted income tax rates, based on thetemporary differences between the carrying amounts of assets and liabilitiesreported in the financial statements and their respective tax bases. The effectof a change in income tax rates on future income tax assets and liabilities isrecognized in income in the period the change occurs.

 

f)       Earnings Per Share

 

Basic earnings per share are calculated bydividing the net earnings available to common shareholders by theweighted-average number of common shares outstanding. Diluted earnings pershare reflect the potential dilution that would occur if stock options, excludingstock options with a cash payment alternative (CPA), were exercised. Thetreasury stock method is used in calculating diluted earnings per share, whichassumes that any proceeds received from the exercise of in-the-money stockoptions would be used to purchase common shares at the average market price forthe period. A liability and expense is recorded for stock options with a CPA.Accordingly, the potential issuance of common shares associated with thesestock options is not included in the calculation of diluted earnings per share.

 

g)      Cash and CashEquivalents

 

Cash and cash equivalents are comprised ofcash in banks, less outstanding cheques, and short-term investments with amaturity of 90 days or less when purchased.

 

h)      Sale of AccountsReceivable

 

The transfers of accounts receivable areaccounted for as sales, other than the retained interest, when the Company hassurrendered control over the transferred receivables and received proceeds.Gains or losses are recognized as other income or expenses and are dependentupon the purchase discount as well as the previous carrying amount of thereceivables transferred, which is allocated between the receivables sold andthe retained interest, based on their relative fair values at the date of the transfer.Fair value is determined based on the present value of future expected cashflows.

 

i)       Inventories

 

Inventories are stated at the lower of costand net realizable value. Cost of crude oil and refined petroleum products isdetermined on a “first-in, first-out” (FIFO) basis (Note 3). Cost of otherinventory is determined on an average cost basis. Costs include direct andindirect expenditures incurred in bringing an item or product to its existingcondition and location.

 

j)       Investments

 

Investments in companies over which theCompany has significant influence are accounted for using the equity method.

 

 
|  | Notes to Consolidated Financial Statements**PETRO-CANADA** | **69** |
|--|------------------------------------------------------------|--------|

 

 

**Note 1****   Summary of SignificantAccounting Policies*****continued***

 

k)      Property, Plant andEquipment

 

Investments in exploration and developmentactivities, including *in situ* oilsands activities, are accounted for using the successful efforts method. Underthis method, the acquisition cost of unproved acreage is capitalized. Costs ofexploratory wells are initially capitalized pending determination of provedreserves. Costs of wells, which are assigned proved reserves, remaincapitalized, while costs of unsuccessful wells are charged to earnings. All otherexploration costs, including geological and geophysical costs, are charged toearnings as incurred. Development costs, including the cost of all wells, arecapitalized.

 

Acquisition, exploration and development ofoil sands mining activities are capitalized when costs are recoverable anddirectly result in an identifiable future benefit.

 

The interest cost of debt attributable to theconstruction of major new facilities is capitalized during the constructionperiod until the facilities are substantially complete. The amount of interestcapitalized for the period is the product of the average accumulatedcapitalized costs, the Company's average corporate debt to equity ratio, andthe weighted-average interest rate applicable to all borrowings outstandingduring the period. Capitalized interest cannot exceed the actualinterest incurred.

 

Producing properties and significant unprovedproperties, including oil sands properties (both mining and *in situ*) and other plant and equipment, are assessedannually, at minimum, or as economic events dictate, for potential impairment.Impairment is assessed by comparing the estimated net undiscounted future cashflows to the carrying value of the asset. If required, the amount by which thecarrying value of the asset exceeds its fair value is recorded as an impairmentin depreciation, depletion and amortization expense.

 

Maintenance and repair costs, includingplanned major maintenance, are expensed as incurred, and improvements thatincrease capacity or extend the useful lives of assets are capitalized.

 

l)       Depreciation,Depletion and Amortization

 

Depreciation and depletion of capitalizedcosts of oil and gas producing properties, including *in situ*oil sands properties, are calculated using the unit of production method.Development and exploration drilling and equipment costs of oil and gasproducing properties, including wells, gathering facilities, and centralprocessing facilities of *in situ*oil**sands activities, are depleted over the remaining proveddeveloped reserves. Proved property acquisition costs are depleted over theremaining proved reserves.

 

Depreciation and depletion of capitalizedcosts of oil sands mining properties are calculated using the unit ofproduction method. Acquisition costs are depleted over proved and probablereserves. All other oil sands mining assets, including extraction and upgradingfacilities, are depleted over proved reserves.

 

Depreciation of other plant and equipment isprovided on either the unit of production method or the straight line method,as appropriate. Straight line depreciation is based on the estimated servicelives of the related assets, which range from three to 25 years.

 

Costs associated with significant developmentprojects are not depleted until commencement of commercial production.

 

Depreciation, depletion and amortizationrates for all capitalized costs associated with all of the Company's activitiesare reviewed, at least annually, or when events or conditions occur that impactcapitalized costs, reserves or estimated service lives.

 

 
| **70** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

**Note 1****   Summary of SignificantAccounting Policies*****continued***

 

m)     Asset RetirementObligations

 

The fair values of estimated asset retirementobligations are recorded as liabilities when incurred and the associated costis capitalized as part of the cost of the related asset. Over time, theliabilities are accreted for the change in their present value and the initialcapitalized costs are depreciated over the useful lives of the related assets.The associated accretion is recorded in operating, marketing and generalexpense and the depreciation is included in depreciation, depletion andamortization expense. Changes in the estimated obligation resulting fromrevisions to the estimated timing or amount of undiscounted cash flows arerecognized as a change in the asset retirement obligation and related asset.Actual expenditures incurred are charged against the accumulated obligation.

 

n)      Goodwill

 

Acquisitions are accounted for using thepurchase method. Under this method, identifiable assets and liabilities arerecorded at fair value as of the date of acquisition. Goodwill, which is notamortized, is the excess of the purchase price over such fair value and isassigned to the appropriate reporting units.

 

The carrying value of goodwill is assessedfor impairment annually at year end, or more frequently as economic eventsdictate, by comparing the fair value of the reporting unit to its carryingvalue, including goodwill. If the fair value of the reporting unit is less thanits carrying value, a goodwill impairment is recognized as the excess of thecarrying value of the goodwill over the fair value of the goodwill.

 

o)      Stock-Based Compensation

 

The Company maintains stock option, stockappreciation rights (SARs), performance share units (PSUs) and deferred shareunits (DSUs) plans as described in Note 24.

 

The Company accounts for stock optionsgranted prior to 2003 based on the intrinsic value at the grant date, whichdoes not result in a charge to earnings because the exercise price was equal tothe market price at the grant date.

 

Stock options granted in 2003 are accountedfor using the fair value method. Fair values are determined, at the grant date,using the Black-Scholes option-pricing model. The compensation expenseassociated with these options is charged to earnings over the vesting periodwith a corresponding increase in contributed surplus. When stock options areexercised, consideration paid and the associated contributed surplus arecredited to common shares.

 

Stock options granted subsequent to 2003, allof which provide the holder the right to exercise the stock option or surrenderthe option for a cash payment, are accounted for based on the intrinsic valueat each period end. A liability and expense are recorded over the vestingperiod in the amount by which the then current market price exceeds the optionexercise price. When stock options are surrendered for cash, the cashsettlement paid reduces the outstanding liability. When stock options areexercised for common shares, consideration paid by the stock option holder andthe previously recognized liability associated with the stock options arerecorded as common shares.

 

SARs, which entitle the holder to receive acash payment equal to the difference between the stated exercise price and themarket price of the Company's shares on the date of surrender, are accountedfor based on the intrinsic value at each period. A liability and expense arerecorded over the vesting period in the amount by which the then current marketprice exceeds the exercise price of the SARs.

 

The compensation cost for a stock-based awardthat is attributable to an employee who is eligible to retire at the grant dateis recognized on the grant date if the employee can retire from the Company atany point and the ability to exercise the award does not depend on continuedservice. The compensation expense associated with stock-based awards granted toemployees who will become eligible to retire during the vesting period isrecognized over the period from the grant date to the date the employee becomeseligible to retire.

 

 
|  | Notes to Consolidated Financial Statements**PETRO-CANADA** | **71** |
|--|------------------------------------------------------------|--------|

 

 

**Note 1****  ****Summary of Significant Accounting Policies*****continued***

 

o)      Stock-BasedCompensation *continued*

 

PSUs are accounted for on a mark-to-marketbasis over the term of the PSUs whereby a liability and expense are recorded basedon the number of PSUs outstanding, the current market price of the Company'sshares and the Company's current total shareholder return relative to a peergroup of North American industry competitors.

 

DSUs are accounted for on a mark-to-marketbasis whereby a liability and expense are recorded each period based on thenumber of DSUs outstanding and the current market price of the Company'sshares.

 

p)      Employee FutureBenefits

 

The Company's employee future benefitprograms consist of both defined benefit and defined contribution pensionplans, as well as other post-retirement benefits as described in Note 25.

 

The costs of pensions and otherpost-retirement benefits are actuarially determined using the projected benefitmethod, pro-rated based on service and using management's best estimate ofexpected plan investment performance, discount rates, salary escalation,retirement ages of employees and expected health and dental care costs. For thepurpose of calculating the expected return on plan assets, those assets aremeasured at fair value. The accrued benefit obligation is discounted using amarket rate of interest at the end of the year on high quality corporate debtinstruments. The excess of the cumulative unamortized net actuarial gain orloss over 10% of the greater of the accrued benefit obligation and the fairvalue of plan assets at the beginning of the year is amortized over the averageremaining service life of active employees.

 

Company contributions to the definedcontribution plan are expensed as incurred.

 

q)      FinancialInstruments

 

All financial instruments are initiallyrecognized at fair value on the balance sheet. The Company has classified eachfinancial instrument into one of the following categories: held-for-tradingfinancial assets and liabilities, loans and receivables, held-to-maturityfinancial assets, and other financial liabilities. Subsequent measurement offinancial instruments is based on their classification.

 

Held-for-trading financial assets andliabilities are subsequently measured at fair value with changes in those fairvalues recognized in net earnings.

 

Loans and receivables, held-to-maturityfinancial assets and other financial liabilities are subsequently measured atamortized cost using the effective interest method.

 

The Company classifies cash and cashequivalents as held-for-trading financial assets, accounts receivable as loansand receivables, and accounts payable and accrued liabilities, short-term notespayable and long-term debt as other financial liabilities.

 

The Company combines transaction costs andpremiums or discounts directly attributable to the issuance of long-term debtwith the fair value of the debt and amortizes these amounts to earnings usingthe effective interest method.

 

The Company classifies financial instrumentsthat are derivative contracts as held-for-trading financial assets andliabilities unless designated as effective hedges.

 

r)       Hedging andDerivatives

 

The Company may use derivative contracts tomanage its exposure to market risks resulting from fluctuations in foreignexchange rates, interest rates and commodity prices. These derivative contractsare not used for speculative purposes. The Company maintains a system ofcontrols that includes a policy covering the authorization, reporting andmonitoring of derivative activity.

 

 
| **72** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

**Note 1****  ****Summary of Significant Accounting Policies*********continued***

 

r)       Hedging andDerivatives *continued*

 

Derivative contracts that are not designatedas hedges for accounting purposes are recorded on the Consolidated BalanceSheet at fair value with any resulting gain or loss recognized in investmentand other income (expense) on the Consolidated Statement of Earnings.

 

The Company formally documents all derivativecontracts designated as hedges, the risk management objective and the strategyfor undertaking the hedge.

 

For designated cash flow hedges, the portionof the gain (loss) on the hedging item that is deemed to be effective isrecognized in other comprehensive income (loss), net of tax, on theConsolidated Statement of Comprehensive Income, and is then reclassified to theConsolidated Statement of Earnings inthe same period or periods during which the hedged item affects net earnings.The portion of the gain (loss) that is deemed to be ineffective is recognizedimmediately in net earnings in the period in which it occurs.

 

For designated fair value hedges, both thehedging item and the underlying hedged item are measured at fair value. Changesin the fair value of both items are recognized immediately in net earnings inthe period in which they occur.

 

The Company assesses, both at inception andover the term of the hedging relationship, whether the derivative contractsused in the hedging transactions are highly effective in offsetting changes inthe fair value or cash flows of hedged items. If a derivative contract ceasesto be effective or is terminated, hedge accounting is discontinued. Any gains(losses) relating to terminated cash flow hedges included in othercomprehensive income (loss) are typically reclassified to net earnings in theperiod in which the cash flow hedge is terminated.

 

 

### **Note 2**   InternationalFinancial Reporting Standards

 

During2008, the Canadian Accounting Standards Board (AcSB) confirmed that publiclyaccountable enterprises will be required to adopt International FinancialReporting Standards (IFRS) in place of Canadian GAAP for interim and annualreporting purposes. The required changeover date is for fiscal years beginningon or after January 1, 2011. At this time, the impact on the Company'sConsolidated Financial Statements is not reasonably determinable.

 

 

### **Note 3**   Changes in Accounting Policies

 

On January 1,2008, the Company adopted Canadian Institute of Chartered Accountants (CICA)Handbook Section 1535, *Capital Disclosures*;Section 3031, *Inventories*; Section 3862,*Financial Instruments — Disclosures*; andSection 3863, *Financial Instruments —Presentation*.

 

Asa result of adopting CICA Section 1535, *CapitalDisclosures*, the Company now discloses details about its capitalmanagement strategy (Note 26).

 

Asa result of adopting CICA Section 3031, *Inventories*,the Company now assigns costs to its crude oil and refined petroleum productsinventories on a FIFO basis. Previously, costs were assigned to theseinventories on a “last-in, first-out” (LIFO) basis. In accordance with thetransitional provisions of this new accounting standard, the Company haselected to adjust 2008 opening retained earnings by the difference in themeasurement of 2008 opening inventory and has not restated prior periodamounts. As such, the following balance sheet categories were impacted on January 1,2008:

 

 
|  | Notes to Consolidated Financial Statements**PETRO-CANADA** | **73** |
|--|------------------------------------------------------------|--------|

 

 

### **Note 3**   Changes in Accounting Policies***continued*

 
| ** **                     | ** ** | **Increase** | ** ** |
|--------------------------------|------------|--------------|------------|
| Inventories                    | ** ** | **$**        | **812**    | ** ** |
| Future  income taxes liability | ** ** | **256**      | ** ** |
| Retained  earnings             | ** ** | **556**      | ** ** |
|                                |            |              |            |  |

 

Asa result of adopting CICA Section 3862,*Financial Instruments —Disclosures*, the Company has expanded its financial risks andfinancial instruments disclosures (Note 27).

 

Thereis no other material impact on the Consolidated Financial Statements foradoption of these new standards.

 

 

### **Note 4**   Segmented Information from ContinuingOperations

 

TheCompany is an integrated oil and gas company with activities spanning both theupstream and downstream sectors of the industry. The Company conducts itsbusiness through five major operating business segments along with SharedServices. Upstream activities are conducted through four business segments,which include North American Natural Gas, Oil Sands, East Coast Canada andInternational. Downstream operations comprise the fifth business segment.

 

Upstreamoperations include the exploration, development, production, transportation andmarketing of crude oil, natural gas and natural gas liquids and oil sands. TheNorth American Natural Gas segment includes activity in Western Canada, theU.S. Rockies, the Mackenzie Delta/Corridor, and Alaska. The Oil Sands segmentincludes interests in the Syncrude oil sands mining operation, the MacKay River*in situ* oil sands operation, and theFort Hills oil sands project. The East Coast Canada segment comprises activityoffshore Newfoundland and Labrador, and includes interests in the Hibernia,Terra Nova, White Rose and Hebron oilfields. The International segment includesactivity in the United Kingdom (U.K.), the Netherlands, Trinidad and Tobago,Libya and Syria.

 

TheDownstream business segment includes the purchase and sale of crude oil, therefining of crude oil products and the distribution and marketing of these andother purchased products.

 

Financialinformation by business segment is presented in the following table as thougheach segment was a separate business entity. Inter-segment transfers ofproducts, which are accounted for at market value, are eliminated onconsolidation. Shared Services includes investment income, interest expense,gains or losses on foreign currency translation, including unrealized gains orlosses on foreign currency denominated long-term debt, and general corporaterevenue and expenses. Shared Services assets are principally cash and cashequivalents and other general corporate assets.

 

Eliminationsincludes sales between segments and unrealized inter-segment profits and losseson inventories. These figures were previously included in Shared Services.

 

 
| **74** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

### **Note 4**   Segmented Information from Continuing Operations *continued*

 
| ** **                                                                            | ** ** | **Upstream**                                  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                            | ** ** | **North American Natural Gas** | ** ** | **Oil Sands** | ** ** |
| ** **                                                                            | ** ** | **2008**                                      | ** ** | 2007 | ** ** | 2006 | ** ** | **2008** | ** ** | 2007 | ** ** | 2006 | ** ** |
| **Revenue**1                                                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Sales to  customers                                                                   | ** ** | **$**                                         | **1,931**  |   | $ | 1,347 |   | $ | 1,504 | ** ** | **$** | **1,915** |   | $ | 611 |   | $ | 592 |   |
| Investment  and other income (expense)2                                               | ** ** | **(121**                                      | **)**      | 66 |   | 6 | ** ** | **10** |   | (2 | ) | – |   |
| Inter-segment  sales                                                                  | ** ** | **421**                                       |       | 324 |   | 349 | ** ** | **1,510** |   | 1,065 |   | 822 |   |
| Segmented  revenue                                                                    | ** ** | **2,231**                                     |       | 1,737 |   | 1,859 | ** ** | **3,435** |   | 1,674 |   | 1,414 |   |
| **Expenses**                                                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Crude oil  and product purchases3                                                     | ** ** | **461**                                       |       | 240 |   | 256 | ** ** | **1,796** |   | 524 |   | 425 |   |
| Inter-segment  transactions                                                           | ** ** | **7**                                         |       | 10 |   | 5 | ** ** | **40** |   | 13 |   | 31 |   |
| Operating,  marketing and general                                                     | ** ** | **545**                                       |       | 491 |   | 462 | ** ** | **913** |   | 595 |   | 508 |   |
| Exploration                                                                           | ** ** | **147**                                       |       | 192 |   | 150 | ** ** | **13** |   | 28 |   | 21 |   |
| Depreciation,  depletion and amortization                                             | ** ** | **575**                                       |       | 584 |   | 402 | ** ** | **202** |   | 149 |   | 128 |   |
| Unrealized  (gain) loss on translation of foreign currency denominated long-term debt | ** ** | **–**                                    |       | – |   | – | ** ** | **–** |   | – |   | – |   |
| Interest                                                                              | ** ** | **–**                                    |       | – |   | – | ** ** | **–** |   | – |   | – |   |
| ** **                                                                            |       | **1,735**                                     |       | 1,517 |   | 1,275 | ** ** | **2,964** |   | 1,309 |   | 1,113 |   |
| **Earnings (loss) from continuing operations before income taxes**                    | ** ** | **496**                                       |       | 220 |   | 584 | ** ** | **471** |   | 365 |   | 301 |   |
| **Provision for income taxes**                                                        |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Current                                                                               | ** ** | **118**                                       |       | 183 |   | 351 | ** ** | **97** |   | (13 | ) | (53 | ) |
| Future                                                                                | ** ** | **34**                                        |       | (154 | ) | (172 | ) | **40** |   | 62 |   | 109 |   |
| ** **                                                                            |       | **152**                                       |       | 29 |   | 179 | ** ** | **137** |   | 49 |   | 56 |   |
| **Net earnings (loss) from continuing operations**                                    | ** ** | **$**                                         | **344**    |   | $ | 191 |   | $ | 405 | ** ** | **$** | **334** |   | $ | 316 |   | $ | 245 |   |
| **Capital and exploration expenditures from continuing operations**                   |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Property,  plant and equipment and exploration expenditures                           | ** ** | **$**                                         | **1,023**  |   | $ | 866 |   | $ | 788 | ** ** | **$** | **1,063** |   | $ | 779 |   | $ | 377 |   |
| Other  assets                                                                         | ** ** | **–**                                    |       | 7 |   | 5 | ** ** | **29** |   | 69 |   | 1 |   |
| ** **                                                                            |       | **$**                                         | **1,023**  |   | $ | 873 |   | $ | 793 | ** ** | **$** | **1,092** |   | $ | 848 |   | $ | 378 |   |
| **Cash flow from (used in) continuing operating activities**                          | ** ** | **$**                                         | **1,055**  |   | $ | 725 |   | $ | 651 | ** ** | **$** | **622** |   | $ | 512 |   | $ | 499 |   |
| **Total assets from continuing operations**                                           | ** ** | **$**                                         | **4,605**  |   | $ | 4,119 |   | $ | 4,151 | ** ** | **$** | **4,566** |   | $ | 3,659 |   | $ | 2,885 |   |

 

1       There were nocustomers that represented 10% or more of the Company's consolidated revenuesfor the periods presented.

2       Investment andother income (expense) for the International segment includes $nil (2007 – $535million; 2006 – $259 million) of losses related to the Buzzard derivativecontracts (Note 27).

3       Downstream crudeoil and product purchases account for substantially all of the Downstreaminventories recognized as an expense for the periods presented.

 

 
|  | Notes to Consolidated Financial Statements**PETRO-CANADA** | **75** |
|--|------------------------------------------------------------|--------|

 

 

### **Note 4**   Segmented Information from Continuing Operations *continued*

 
| ** **                                                                            | ** ** | **Upstream**                                 | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                            | ** ** | ***International & Offshore*** | ** ** |
| ** **                                                                            | ** ** | **East Coast Canada**              | ** ** | ** ** | **International** | ** ** |
| ** **                                                                            | ** ** | **2008**                                     | ** ** | 2007 | ** ** | 2006 | ** ** | ** ** | **2008** | ** ** | 2007 | ** ** | 2006 | ** ** |
| **Revenue**1                                                                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |
| Sales to  customers                                                                   | ** ** | **$**                                        | **2,605**  |   | $ | 2,708 |   | $ | 2,004 | ** ** | ** ** | **$** | **4,892** |   | $ | 3,697 |   | $ | 2,464 |   |
| Investment  and other income (expense)2                                               | ** ** | **20**                                       |       | (18 | ) | – | ** ** | ** ** | **164** |   | (549 | ) | (283 | ) |
| Inter-segment  sales                                                                  | ** ** | **789**                                      |       | 477 |   | 298 | ** ** | ** ** | **12** |   | – |   | – |   |
| Segmented  revenue                                                                    | ** ** | **3,414**                                    |       | 3,167 |   | 2,302 | ** ** | ** ** | **5,068** |   | 3,148 |   | 2,181 |   |
| **Expenses**                                                                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |
| Crude oil  and product purchases3                                                     | ** ** | **770**                                      |       | 736 |   | 452 | ** ** | ** ** | **–** |   | – |   | – |   |
| Inter-segment  transactions                                                           | ** ** | **8**                                        |       | 8 |   | 9 | ** ** | ** ** | **–** |   | – |   | – |   |
| Operating,  marketing and general                                                     | ** ** | **254**                                      |       | 228 |   | 245 | ** ** | ** ** | **460** |   | 526 |   | 350 |   |
| Exploration                                                                           | ** ** | **1**                                        |       | 13 |   | 12 | ** ** | ** ** | **426** |   | 257 |   | 156 |   |
| Depreciation,  depletion and amortization                                             | ** ** | **389**                                      |       | 410 |   | 237 | ** ** | ** ** | **663** |   | 640 |   | 323 |   |
| Unrealized  (gain) loss on translation of foreign currency denominated long-term debt | ** ** | **–**                                   |       | – |   | – | ** ** | ** ** | **–** |   | – |   | – |   |
| Interest                                                                              | ** ** | **–**                                   |       | – |   | – | ** ** | ** ** | **–** |   | – |   | – |   |
| ** **                                                                            | ** ** | **1,422**                                    |       | 1,395 |   | 955 | ** ** | ** ** | **1,549** |   | 1,423 |   | 829 |   |
| **Earnings (loss) from continuing operations before income taxes**                    | ** ** | **1,992**                                    |       | 1,772 |   | 1,347 | ** ** | ** ** | **3,519** |   | 1,725 |   | 1,352 |   |
| **Provision for income taxes**                                                        |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                                               | ** ** | **647**                                      |       | 653 |   | 434 | ** ** | ** ** | **2,163** |   | 848 |   | 1,248 |   |
| Future                                                                                | ** ** | **(23**                                      | **)**      | (110 | ) | (21 | ) |   | **(328** | **)** | 503 |   | 310 |   |
| ** **                                                                            | ** ** | **624**                                      |       | 543 |   | 413 | ** ** | ** ** | **1,835** |   | 1,351 |   | 1,558 |   |
| **Net earnings (loss) from continuing operations**                                    | ** ** | **$**                                        | **1,368**  |   | $ | 1,229 |   | $ | 934 | ** ** | ** ** | **$** | **1,684** |   | $ | 374 |   | $ | (206 | ) |
| **Capital and exploration expenditures from continuing operations**                   |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |
| Property,  plant and equipment and exploration expenditures                           | ** ** | **$**                                        | **276**    |   | $ | 159 |   | $ | 256 | ** ** | ** ** | **$** | **2,115** |   | $ | 762 |   | $ | 760 |   |
| Other  assets                                                                         | ** ** | **–**                                   |       | 2 |   | – | ** ** | ** ** | **–** |   | – |   | – |   |
|                                                                                  | ** ** | **$**                                        | **276**    |   | $ | 161 |   | $ | 256 | ** ** | ** ** | **$** | **2,115** |   | $ | 762 |   | $ | 760 |   |
| **Cash flow from (used in) continuing operating activities**                          | ** ** | **$**                                        | **1,850**  |   | $ | 1,491 |   | $ | 1,129 | ** ** | ** ** | **$** | **2,380** |   | $ | 220 |   | $ | 840 |   |
| **Total assets from continuing operations**                                           | ** ** | **$**                                        | **2,149**  |   | $ | 2,345 |   | $ | 2,465 | ** ** | ** ** | **$** | **8,277** |   | $ | 5,180 |   | $ | 6,031 |   |

 

1       There were nocustomers that represented 10% or more of the Company's consolidated revenuesfor the periods presented.

2       Investment and otherincome (expense) for the International segment includes $nil (2007 – $535million; 2006 – $259 million) of losses related to the Buzzard derivativecontracts (Note 27).

3       Downstream crudeoil and product purchases account for substantially all of the Downstreaminventories recognized as an expense for the periods presented.

 

 
| **76** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

### **Note 4**   Segmented Information from Continuing Operations *continued*

 
| ** **                                                                            | ** ** | **Downstream** | ** ** | **Shared Services** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------|------------|--------------------------|------------|
| ** **                                                                            | ** ** | **2008**       | ** ** | 2007                     | ** ** | 2006 | ** ** | **2008** | ** ** | 2007 | ** ** | 2006 | ** ** |
| **Revenue**1                                                                          |       |           | ** ** |                     |       |   |   |   | ** ** |   |   |   |   |
| Sales to  customers                                                                   | ** ** | **$**          | **16,242** | ** **               | $          | 13,347 |   | $ | 12,347 | ** ** | **$** | **–** | ** ** | $ | – |   | $ | – |   |
| Investment  and other income (expense)2                                               | ** ** | **38**         | ** ** | (12                      | )          | 19 | ** ** | **89** | ** ** | 55 |   | 16 |   |
| Inter-segment  sales                                                                  | ** ** | **15**         | ** ** | 18                       |       | 15 | ** ** | **–** | ** ** | – |   | – |   |
| Segmented  revenue                                                                    | ** ** | **16,295**     | ** ** | 13,353                   |       | 12,381 | ** ** | **89** | ** ** | 55 |   | 16 |   |
| **Expenses**                                                                          |       |           | ** ** |                     |       |   |   |   | ** ** |   |   |   |   |
| Crude oil  and product purchases3                                                     | ** ** | **11,580**     | ** ** | 8,787                    |       | 8,517 |   | – | ** ** | – |   | – |   |
| Inter-segment  transactions                                                           | ** ** | **2,692**      | ** ** | 1,853                    |       | 1,439 |   | – | ** ** | – |   | – |   |
| Operating,  marketing and general                                                     | ** ** | **1,761**      | ** ** | 1,525                    |       | 1,495 | ** ** | **(56** | **)** | 187 |   | 120 |   |
| Exploration                                                                           | ** ** | **–**     | ** ** | –                   |       | – | ** ** | **–** | ** ** | – |   | – |   |
| Depreciation,  depletion and amortization                                             | ** ** | **325**        | ** ** | 299                      |       | 262 | ** ** | **1** | ** ** | 9 |   | 13 |   |
| Unrealized  (gain) loss on translation of foreign currency denominated long-term debt | ** ** | **–**     | ** ** | –                   |       | – | ** ** | **664** | ** ** | (246 | ) | (1 | ) |
| Interest                                                                              | ** ** | **–**     | ** ** | –                   |       | – | ** ** | **242** | ** ** | 165 |   | 165 |   |
| ** **                                                                            |       | **16,358**     | ** ** | 12,464                   |       | 11,713 | ** ** | **851** | ** ** | 115 |   | 297 |   |
| **Earnings (loss) from continuing operations before income taxes**                    | ** ** | **(63**        | **)**      | 889                      |       | 668 | ** ** | **(762** | **)** | (60 | ) | (281 | ) |
| **Provision for income taxes**                                                        |       |           | ** ** |                     |       |   |   |   | ** ** |   |   |   |   |
| Current                                                                               | ** ** | **(294**       | **)**      | 232                      |       | 141 | ** ** | **(102** | **)** | (106 | ) | (48 | ) |
| Future                                                                                | ** ** | **231**        | ** ** | 28                       |       | 54 | ** ** | **41** | ** ** | 49 |   | 31 |   |
| ** **                                                                            |       | **(63**        | **)**      | 260                      |       | 195 | ** ** | **(61** | **)** | (57 | ) | (17 | ) |
| **Net earnings (loss) from continuing operations**                                    | ** ** | **$**          | **–** | ** **               | $          | 629 |   | $ | 473 | ** ** | **$** | **(701** | **)** | $ | (3 | ) | $ | (264 | ) |
| **Capital and exploration expenditures from continuing operations**                   |       |           | ** ** |                     |       |   |   |   | ** ** |   |   |   |   |
| Property,  plant and equipment and exploration expenditures                           | ** ** | **$**          | **1,834**  | ** **               | $          | 1,396 |   | $ | 1,229 | ** ** | **$** | **33** | ** ** | $ | 26 |   | $ | 24 |   |
| Other  assets                                                                         | ** ** | **–**     | ** ** | 30                       |       | 22 |   | – | ** ** | 13 |   | 22 |   |
| ** **                                                                            |       | **$**          | **1,834**  | ** **               | $          | 1,426 |   | $ | 1,251 | ** ** | **$** | **33** | ** ** | $ | 39 |   | $ | 46 |   |
| **Cash flow from (used in) continuing operating activities**                          | ** ** | **$**          | **464**    | ** **               | $          | 994 |   | $ | 835 | ** ** | **$** | **151** | ** ** | $ | (603 | ) | $ | (346 | ) |
| **Total assets from continuing operations**                                           | ** ** | **$**          | **10,057** | ** **               | $          | 7,989 |   | $ | 6,649 | ** ** | **$** | **734** | ** ** | $ | 563 |   | $ | 464 |   |

 
| 1 | There  were no customers that represented 10% or more of the Company's consolidated  revenues for the periods presented.                                                                                   |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | Investment  and other income (expense) for the International segment includes $nil (2007 –  $535 million; 2006 – $259 million) of losses related to the Buzzard  derivative contracts (Note 27). |
| 3 | Downstream  crude oil and product purchases account for substantially all of the  Downstream inventories recognized as an expense for the periods presented.                                               |

 

 
| **** | Notes to Consolidated Financial Statements **PETRO-CANADA** | **77** |
|------|-------------------------------------------------------------|--------|

 

###  

### **Note 4**   Segmented Information from Continuing Operations *continued*

 
| ** **                                                                            | ** ** | **Eliminations** |       | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | **2008**         | ** ** | 2007             | ** ** | 2006 |   |   | **2008** | ** ** | 2007 | ** ** | 2006 | ** ** |
| **Revenue**1                                                                          |       |             | ** ** |             |       |   |   |   | ** ** |   |   |   |   |
| Sales to  customers                                                                   | ** ** | **$**            | **–** | ** **       | $          | – |   | $ | – |   | **$** | **27,585** | ** ** | $ | 21,710 |   | $ | 18,911 |   |
| Investment  and other income (expense)2                                               | ** ** | **–**       | ** ** | –           |       | – |   | **200** | ** ** | (460 | ) | (242 | ) |
| Inter-segment  sales                                                                  | ** ** | **(2,747**       | **)**      | (1,884           | )          | (1,484 | ) | **–** | ** ** | – |   | – |   |
| Segmented  revenue                                                                    | ** ** | **(2,747**       | **)**      | (1,884           | )          | (1,484 | ) | **27,785** | ** ** | 21,250 |   | 18,669 |   |
| **Expenses**                                                                          |       |             | ** ** |             |       |   |   |   | ** ** |   |   |   |   |
| Crude oil  and product purchases3                                                     | ** ** | **(100**         | **)**      | 4                |       | (1 | ) | **14,507** | ** ** | 10,291 |   | 9,649 |   |
| Inter-segment  transactions                                                           | ** ** | **(2,747**       | **)**      | (1,884           | )          | (1,484 | ) | **–** | ** ** | – |   | – |   |
| Operating,  marketing and general                                                     | ** ** | **–**       | ** ** | –           |       | – |   | **3,877** | ** ** | 3,552 |   | 3,180 |   |
| Exploration                                                                           | ** ** | **–**       | ** ** | –           |       | – |   | **587** | ** ** | 490 |   | 339 |   |
| Depreciation,  depletion and amortization                                             | ** ** | **–**       | ** ** | –           |       | – |   | **2,155** | ** ** | 2,091 |   | 1,365 |   |
| Unrealized  (gain) loss on translation of foreign currency denominated long-term debt | ** ** | **–**       | ** ** | –           |       | – |   | **664** | ** ** | (246 | ) | (1 | ) |
| Interest                                                                              | ** ** | **–**       | ** ** | –           |       | – |   | **242** | ** ** | 165 |   | 165 |   |
| ** **                                                                            |       | **(2,847**       | **)**      | (1,880           | )          | (1,485 | ) | **22,032** | ** ** | 16,343 |   | 14,697 |   |
| **Earnings (loss) from continuing operations before income taxes**                    | ** ** | **100**          | ** ** | (4               | )          | 1 |   | **5,753** | ** ** | 4,907 |   | 3,972 |   |
| **Provision for income taxes**                                                        |       |             | ** ** |             |       |   |   |   | ** ** |   |   |   |   |
| Current                                                                               | ** ** | **–**       | ** ** | –           |       | – |   | **2,629** | ** ** | 1,797 |   | 2,073 |   |
| Future                                                                                | ** ** | **(5**           | **)**      | (1               | )          | – |   | **(10** | **)** | 377 |   | 311 |   |
| ** **                                                                            |       | **(5**           | **)**      | (1               | )          | – |   | **2,619** | ** ** | 2,174 |   | 2,384 |   |
| **Net earnings (loss) from continuing operations**                                    | ** ** | **$**            | **105**    | ** **       | $          | (3 | ) | $ | 1 |   | **$** | **3,134** | ** ** | $ | 2,733 |   | $ | 1,588 |   |
| **Capital and exploration expenditures from continuing operations**                   |       |             | ** ** |             |       |   |   |   | ** ** |   |   |   |   |
| Property,  plant and equipment and exploration expenditures                           | ** ** | **$**            | **–** | ** **       | $          | – |   | $ | – |   | **$** | **6,344** | ** ** | $ | 3,988 |   | $ | 3,434 |   |
| Other  assets                                                                         | ** ** | **–**       | ** ** | –           |       | – |   | **29** | ** ** | 121 |   | 50 |   |
| ** **                                                                            |       | **$**            | **–** | ** **       | $          | – |   | $ | – |   | **$** | **6,373** | ** ** | $ | 4,109 |   | $ | 3,484 |   |
| **Cash flow from (used in) continuing operating activities**                          | ** ** | **$**            | **–** | ** **       | $          | – |   | $ | – |   | **$** | **6,522** | ** ** | $ | 3,339 |   | $ | 3,608 |   |
| **Total assets from continuing operations**                                           | ** ** | **$**            | **(11**    | **)**            | $          | (3 | ) | $ | 1 |   | **$** | **30,377** | ** ** | $ | 23,852 |   | $ | 22,646 |   |
|                                                                                       |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| 1 | There  were no customers that represented 10% or more of the Company's consolidated  revenues for the periods presented.                                                                                   |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | Investment  and other income (expense) for the International segment includes $nil (2007  – $535 million; 2006 – $259 million) of losses related to the Buzzard  derivative contracts (Note 27). |
| 3 | Downstream  crude oil and product purchases account for substantially all of the  Downstream inventories recognized as an expense for the periods presented.                                               |

 

 
| **78** | **PETRO-CANADA**Notes to Consolidated Financial  Statements |  |
|--------|-------------------------------------------------------------|--|

 

 

### **Note 4**   Segmented Information from Continuing Operations *continued*

###  

#### **Geographic Information from Continuing Operations**

 
| ** ** | ** ** | **2008**     | ** ** | 2007              | ** ** | 2006       | ** ** |
|------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** ** | ** ** | **Revenues** | ** ** | **Total  Assets** | ** ** | Revenues   | ** ** | Total  Assets | ** ** | Revenues | ** ** | Total  Assets | ** ** |
| Canada     | ** ** | **$**        | **22,317** | ** **        | **$**      | **19,942** |       | $ | 17,897 |   | $ | 17,020 |   | $ | 16,295 |   | $ | 14,736 |   |
| Foreign1   | ** ** | **5,468**    | ** ** | **10,435**        |       | 3,353      |       | 6,832 |   | 2,374 |   | 7,910 |   |
| ** ** | ** ** | **$**        | **27,785** | ** **        | **$**      | **30,377** |       | $ | 21,250 |   | $ | 23,852 |   | $ | 18,669 |   | $ | 22,646 |   |

 

1  Foreigntotal assets include $2,767 million relating to assets in the U.K. (2007 –$3,185 million; 2006 – $3,692 million).

 

 

### **Note 5**   Discontinued Operations

###  

In January 2006,the Company completed the sale of its producing assets in Syria for netproceeds of $640 million, resulting in a gain on sale of$134 million.

 

Theaccounting for discontinued operations results in a reduction of theConsolidated Statement of Earnings balances as follows:

 
| ** **                                                 | ** ** | **2008**   | ** ** | 2007   | ** ** | 2006   | ** ** |
|------------------------------------------------------------|------------|------------|------------|--------|------------|--------|------------|
| **Revenue**                                                |       |       |       |   |       |   |       |
| Operating                                                  | ** ** | **$**      | **–** |   | $          | – |       | $ | 34 |   |
| Investment  and other income (expense)1                    | ** ** | **–** |       | – |       | 134    |       |
| ** **                                                 |       | **–** |       | – |       | 168    |       |
| **Expenses**                                               |       |       |       |   |       |   |       |
| Operating,  marketing and general                          | ** ** | **–** |       | – |       | 6      |       |
| ** **                                                 |       | **–** |       | – |       | 6      |       |
| Earnings  from discontinued operations before income taxes | ** ** | **–** |       | – |       | 162    |       |
| Provision  for income taxes                                | ** ** | **–** |       | – |       | 10     |       |
| Net earnings  from discontinued operations                 | ** ** | **$**      | **–** |   | $          | – |       | $ | 152 |   |

 

1  2006investment and other income (expense) includes the gain on sale of $134million.

 

 

### **Note 6**   Investment and Other Income (Expense)

###  

Investmentand other income (expense) consists of the following amounts:

 
| ** **                                                 | ** ** | **2008**   | ** ** | 2007   | ** ** | 2006 | ** ** |
|------------------------------------------------------------|------------|------------|------------|--------|------------|------|------------|
| Foreign  exchange gains (losses)                           | ** ** | **$**      | **128**    |   | $          | (10  | )          | $ | (41 | ) |
| Gain on  sale of assets*(Note 8)*                          | ** ** | **4**      |       | 81     |       | 30   |       |
| Losses  related to Buzzard derivative contracts*(Note 27)* | ** ** | **–** |       | (535   | )          | (259 | )          |
| Gain (loss)  on Downstream derivative contracts            | ** ** | **24**     |       | (26    | )          | 2    |       |
| Other                                                      | ** ** | **44**     |       | 30     |       | 26   |       |
| Total  investment and other income (expense)               | ** ** | **$**      | **200**    |   | $          | (460 | )          | $ | (242 | ) |

 

 
| **** | Notes to Consolidated Financial Statements **PETRO-CANADA** | **79** |
|------|-------------------------------------------------------------|--------|

 

** **

### **Note 7**   Fort Hills Project

###  

#### **Project Status**

#### ** **

In November 2008,the Company and its partners, UTS Energy Corporation (UTS) and Teck ComincoLimited (Teck), announced that the preliminary results from the Fort Hillsproject front-end engineering and design (FEED) work suggest that estimatedcosts have risen considerably and, therefore, a final investment decision (FID)on both the mining and upgrading portions of the project will be deferred untila cost estimate consistent with the current market environment can beestablished. As a result, the Company has recognized an $87 million ($64million after-tax) impairment charge on certain property, plant and equipmentand expenses of $129 million ($92 million after-tax) to reflect the terminationor suspension of some agreements for the receipt of goods and services.

 

Theimpairment charge is included in depreciation, depletion and amortizationexpense and the goods and services agreements termination expenses are includedin operating, marketing and general expense, both on the Consolidated Statementof Earnings.

 

#### **Increase in Working Interest**

#### ** **

In November 2007,the Company finalized an agreement to acquire an additional 5% working interestin the Fort Hills project, bringing the Company's total working interest to60%. To pay for this incremental investment, the Company is funding$375 million of expenditures in excess of its working interest. Theacquisition cost was discounted using the Company's estimated cost of debt atthe time of acquisition and an estimated payout pattern for the funding. Thispayout pattern was revised in December 2008 due to the deferral of theFID. At December 31, 2008, $349 million of the discounted acquisition costwas outstanding, with $43 million (December 31, 2007 – $18 million)recorded in accounts payable and accrued liabilities and $306 million (December 31,2007 – $329 million) recorded in other liabilities.

 

 

### **Note8 **Sale of Assets

###  

In August 2008,the Company completed the sale of its pre-development assets in Denmark, whichare a part of the Company's International business segment, for net proceeds of$140 million, resulting in a gain on sale of $107 million ($82 millionafter-tax) (Note 18).

 

In June 2008,the Company completed the sale of its Minehead assets in Western Canada, whichare a part of the Company's North American Natural Gas business segment,resulting in a loss on sale of $153 million ($112 million after-tax).

 

Thegains and losses on the sales of these assets are included in investment andother income (expense) on the Consolidated Statement of Earnings.

 

 

### **Note9 **Asset Write-Downs

###  

In December 2007, the Companyrecognized a $150 million ($97 million after-tax) impairment expense due to awrite-down of its coal bed methane assets in the U.S. Rockies' Powder RiverBasin. The assets were written down to management's best estimate of fair valuebased on a discounted future cash flow valuation. These assets form part of theCompany's North American Natural Gas business segment.

 

The impairment expense is included indepreciation, depletion and amortization expense on the Consolidated Statementof Earnings.

 

 
| **80** | **PETRO-CANADA**Notes to Consolidated Financial  Statements |  |
|--------|-------------------------------------------------------------|--|

 

 

### **Note 10**    Income Taxes

###  

Thecomputation of the provision for income taxes is as follows:

 
| ** **                                                                                                    | ** ** | **2008**   | ** ** | 2007       | ** ** | 2006   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|--------|------------|
| Earnings  from continuing operations before income taxes                                                      | ** ** | **$**      | **5,753**  | ** ** | $          | 4,907  |       | $ | 3,972 |   |
| Add  (deduct):                                                                                                |       |       | ** ** |       |       |   |       |
| Non-deductible  royalties and other payments to provincial governments, net                                   | ** ** | **–** | ** ** | –     |       | 61     |       |
| Resource  allowance                                                                                           | ** ** | **–** | ** ** | –     |       | (158   | )          |
| Non-taxable  foreign exchange                                                                                 | ** ** | **448**    | ** ** | (126       | )          | (1     | )          |
| Other                                                                                                         | ** ** | **(33**    | **)**      | (26        | )          | (24    | )          |
| Earnings  from continuing operations as adjusted before income taxes                                          | ** ** | **$**      | **6,168**  | ** ** | $          | 4,755  |       | $ | 3,850 |   |
| Canadian  federal income tax rate                                                                             | ** ** | **38.0**   | **%**      | 38.0       | %          | 38.0   | %          |
| Income tax  on earnings from continuing operations as adjusted at Canadian federal income  tax rate           | ** ** | **$**      | **2,344**  | ** ** | $          | 1,807  |       | $ | 1,463 |   |
| Provincial  income taxes                                                                                      | ** ** | **295**    | ** ** | 372        |       | 295    |       |
| Federal –  abatement and other credits                                                                   | ** ** | **(452**   | **)**      | (446       | )          | (262   | )          |
| Current  income tax increase due to Canadian federal and provincial reassessments and  proposed reassessments | ** ** | **38**     | ** ** | –     |       | 70     |       |
| Future  income tax decrease due to Canadian rate changes                                                      | ** ** | **(26**    | **)**      | (155       | )          | (63    | )          |
| Future  income tax increase (decrease) due to foreign rate changes                                            | ** ** | **3**      | ** ** | (36        | )          | 242    |       |
| Future income  tax decrease due to ratification of Libya EPSAs                                                | ** ** | **(230**   | **)**      | –     |       | – |       |
| Higher  foreign income tax rates                                                                              | ** ** | **691**    | ** ** | 622        |       | 627    |       |
| Income tax  credits and other                                                                                 | ** ** | **(44**    | **)**      | 10         |       | 12     |       |
| Provision  for income taxes                                                                                   | ** ** | **$**      | **2,619**  | ** ** | $          | 2,174  |       | $ | 2,384 |   |
| Effective  income tax rate on earnings from continuing operations before income taxes                         | ** ** | **45.5**   | **%**      | 44.3       | %          | 60.0   | %          |

 

Theprovision for income taxes is comprised of:

 
| ** **                        | ** ** | **2008**  | ** ** | 2007       |   | 2006   | ** ** |
|-----------------------------------|------------|-----------|------------|------------|--------|--------|------------|
| Current                           |       |      | ** ** |       |   |   |       |
| Canadian                          | ** ** | **$**     | **428**    | ** ** | $      | 257    |       | $ | 801 |   |
| Foreign                           | ** ** | **2,201** | ** ** | 1,541      |   | 1,272  |       |
| Future                            |       |      | ** ** |       |   |   |       |
| Canadian                          | ** ** | **265**   | ** ** | 443        |   | 62     |       |
| Foreign*(Note 13)*                | ** ** | **(275**  | **)**      | (67        | )      | 249    |       |
| Total  provision for income taxes | ** ** | **$**     | **2,619**  | ** ** | $      | 2,174  |       | $ | 2,384 |   |

 

The provisions for current and future income taxes include taxrecoveries (expenses), which are largely due to future income tax recoveries onratification of the Libya EPSAs and changes to income tax rates. These amountshave been allocated to the business segments as follows:

 
| ** **                          | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **2008** | ** ** | 2007   | ** ** | 2006   | ** ** |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|------------|--------|------------|--------|------------|
| North  American Natural Gas         | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **$**    | **–** |   | $          | 8      |       | $ | 6 |   |
| Oil Sands                           | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **2**    |       | 62     |       | 44     |       |
| *International & Offshore* |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |     |       |   |       |   |       |
| East Coast  Canada                  | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **2**    |       | 52     |       | 37     |       |
| International1* (Note 13)*     | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **227**  |       | 30     |       | (306   | )          |
| Downstream                          | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **2**    |       | 34     |       | 41     |       |
| Shared  Services2                   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **(18**  | **)**      | 5      |       | (71    | )          |
| ** **                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | **$**    | **215**    |   | $          | 191    |       | $ | (249 | ) |
| 1                                   | Included in the International's  $227 million income tax recovery for 2008 is a $230 million future income tax  recovery recognized on ratification of the Libya EPSAs. Included in  International's $306 million income tax expense for 2006 is a $242 million  increase in the future income tax provision due to an increase in the U.K.  supplemental corporate income tax rate and the resulting impact of qualifying  capital expenditures being deducted at the increased rate. |
| 2                                   | Included in the Shared Services'  $71 million income tax expense for 2006 is a $70 million increase in the  provision for current income taxes due to the Quebec government enacting  retroactive tax legislation.                                                                                                                                                                                                                                                                     |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |          |            |        |            |        |            |  |  |  |  |

 

 
| **** | Notes to Consolidated Financial Statements **PETRO-CANADA** | **81** |
|------|-------------------------------------------------------------|--------|

 

 

**Note 10****                  ****Income Taxes*****continued***

 

The following table summarizes thetemporary differences that give rise to the net future income tax assets andliabilities:

 
| ** **                                          | ** ** | **2008**   | ** ** | 2007       |   |
|-----------------------------------------------------|------------|------------|------------|------------|--------|
| Future  income tax liabilities                      | ** ** | ** ** | ** ** |       |   |
| Property,  plant and equipment                      | ** ** | **$**      | **3,346**  | ** ** | $      | 3,626 |   |
| Partnership  income1                                | ** ** | **473**    | ** ** | 362        |   |
| Other  assets                                       | ** ** | **71**     | ** ** | 78         |   |
| Future  income tax assets                           | ** ** | ** ** | ** ** |       |   |
| Asset  retirement obligations and other liabilities | ** ** | **(577**   | **)**      | (495       | )      |
| Inventories                                         | ** ** | **–** | ** ** | (256       | )      |
| Other                                               | ** ** | **(156**   | **)**      | (272       | )      |
| Net future  income tax liability                    | ** ** | **3,157**  | ** ** | 3,043      |   |
| Less:  Current future income tax asset              | ** ** | **(25**    | **)**      | (26        | )      |
| Future  income tax liability                        | ** ** | **$**      | **3,182**  | ** ** | $      | 3,069 |   |

 

1         Taxable income for certain Canadianupstream activities is generated by a partnership and the related taxes will beincluded in current income taxes in the next year.

 

Deferred distribution taxesassociated with International business operations have not been recorded. Basedon current plans, repatriation of funds in excess of foreign reinvestment willnot result in material additional income tax expense.

 

Complex income tax issues, whichinvolve interpretations of continually changing regulations, are encountered incomputing the provision for income taxes. Management believes that adequateprovisions have been made for all such outstanding issues and that theresolution of these issues would not materially affect the financial positionor results of operations of the Company.

 

 

**Note 11****                  ****Earnings per Share**

 

The weighted-average number of commonshares outstanding used in the calculations of basic and diluted earnings pershare from continuing operations and earnings per share, assuming that alldilutive outstanding stock options were exercised, was:

 
| *(millions)*                                                         | ** ** | **2008**  | ** ** | 2007  |   | 2006  |   |
|----------------------------------------------------------------------|------------|-----------|------------|-------|--------|-------|--------|
| Weighted-average  number of common shares outstanding – basic   | ** ** | **484.1** | ** ** | 489.0 |   | 503.9 |   |
| Effect of  dilutive stock options                                    | ** ** | **3.6**   | ** ** | 5.0   |   | 6.0   |   |
| Weighted-average  number of common shares outstanding – diluted | ** ** | **487.7** | ** ** | 494.0 |   | 509.9 |   |

 

There were no stock options, notincluding stock options with a CPA (Note 1 (f)), excluded from the dilutedearnings per share from continuing operations and earnings per sharecalculations. Stock options are excluded when the exercise price exceeds theaverage share price in a respective period.

 

 
| **82** | **PETRO-CANADA**Notes to Consolidated Financial  Statements |  |
|--------|-------------------------------------------------------------|--|

 

 

**Note 12****                  ****CashFlow Information**

 

**Changes in Non-Cash Working Capital**

 

Non-cash working capital is comprisedof current assets and current liabilities, other than cash and cash equivalentsand the current portion of long-term debt.

 

The (increase) decrease in non-cash working capital iscomprised of:

 
| ** **                                          | ** ** | **2008**   | ** ** | 2007       |   | 2006   |   |
|-----------------------------------------------------|------------|------------|------------|------------|--------|--------|--------|
| **Operating activities from continuing operations** |       | ** ** | ** ** |       |   |   |   |
| Accounts  receivable                                | ** ** | **$**      | **(871**   | **)**      | $      | (373   | )      | $ | 17 |   |
| Inventories                                         | ** ** | **(621**   | **)**      | (36        | )      | (36    | )      |
| Accounts  payable and accrued liabilities           | ** ** | **(326**   | **)**      | 77         |   | 365    |   |
| Income  taxes payable                               | ** ** | **1,298**  | ** ** | (302       | )      | (60    | )      |
| Current  portion of long-term liabilities and other | ** ** | **564**    | ** ** | 211        |   | (365   | )      |
| ** **                                          |       | **$**      | **44**     | ** ** | $      | (423   | )      | $ | (79 | ) |
| **Investing activities**                            |       | ** ** | ** ** |       |   |   |   |
| Accounts  payable and accrued liabilities           | ** ** | **$**      | **762**    | ** ** | $      | 120    |   | $ | 138 |   |
| Other  liabilities                                  | ** ** | **(23**    | **)**      | 159        |   | (79    | )      |
| ** **                                          |       | **$**      | **739**    | ** ** | $      | 279    |   | $ | 59 |   |

#### ** **

#### **Cash Payments**

#### ** **

Cash payments from continuing operations forinterest and income taxes were as follows:

 
|          | ** ** | **2008** | ** ** | 2007       |   | 2006  |   |
|---------------|------------|----------|------------|------------|--------|-------|--------|
| Interest      | ** ** | **$**    | **274**    | ** ** | $      | 186   |   | $ | 194 |   |
| Income  taxes | ** ** | **$**    | **1,475**  | ** ** | $      | 2,074 |   | $ | 2,149 |   |

###  

 

**Note 13****                  ****Libya Exploration andProduction Sharing Agreements**

###  

On June 19,2008, the Company signed six new EPSAs with the Libya National Oil Corporation(NOC) to convert its existing concession agreements and old EPSA into new EPSAIV agreements. The new EPSAs were ratified as of the signing, with an effectivedate of January 1, 2008. Earnings on properties covered by the oldagreements were adjusted based on the financial terms of the new EPSAs for theperiod from January 1, 2008 until ratification. The new EPSAs have anexpected duration of 30 years and enable the Company to implement jointly withthe NOC the redevelopment of major fields and conduct a 100% operatedexploration program in the Libya Sirte Basin.

 

Aspart of the ratification, the Company agreed to pay a signature bonus of $1billion US in several instalments, with the first instalment of $500 million USpaid on July 17, 2008 and the remaining instalments to be paid through2013.

 

Thiscost was discounted to $954 million based on this payout schedule using theCompany's estimated cost of debt at the time of acquisition. At December 31,2008, $554 million of the discounted signature bonus cost was outstanding, with$30 million recorded in accounts payable and accrued liabilities and $524million recorded in other liabilities.

 

Netearnings for the year ended December 31, 2008 includes a $230 millionfuture income tax recovery, which the Company recognized on ratification of thenew EPSAs on June 19, 2008.

 

 
|  | Notes to Consolidated Financial Statements**PETRO-CANADA** | **83** |
|--|------------------------------------------------------------|--------|

 

 

### **Note 14**                   Securitization Program

 

On June 24,2004, the Company entered into a securitization program, expiring on June 24,2009, to sell an undivided interest of eligible accounts receivable up to $500million to a third party on a revolving and fully serviced basis. The serviceliability has been estimated to be insignificant.

 

Duringthe year ended December 31, 2008, the Company suspended all sales ofreceivables to the program and remitted all funds for receivables previouslysold. As at December 31, 2008, there were no outstanding receivables soldunder the program. As at December 31, 2007, $480 million of outstanding accountsreceivable had been sold under the program for net proceeds of$479 million.

 

 

**Note 15****                  ****Cash and Cash Equivalents**

 
| ** **              |       | **2008**  |      | 2007   |   |
|-------------------------|------------|-----------|-----------|--------|--------|
| Cash                    | ** ** | **$**     | **204**   |   | $      | 47 |   |
| Short-term  investments | ** ** | **1,241** |      | 184    |   |
| ** **              |       | **$**     | **1,445** |   | $      | 231 |   |

###  

 

### **Note 16**                   Inventories

 
| ** **                                         | ** ** | **2008** | ** ** | 2007   | ** ** |
|----------------------------------------------------|------------|----------|------------|--------|------------|
| Crude oil and refined petroleum products*(Note 3)* | ** ** | **$**    | **1,111**  |   | $          | 484 |   |
| Materials  and supplies                            | ** ** | **178**  |       | 184    |       |
| ** **                                         |       | **$**    | **1,289**  |   | $          | 668 |   |

 

 

**Note 17****                  ****Property, Plant andEquipment**

 
|                                |   | **2008**   |       |                                                             |       | 2007            |       | **2008  ** |             | 2007                                                         |   |
|-------------------------------------|--------|------------|------------|------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------------|--------------------------------------------------------------|--------|
|                                |   | **Cost**   | ** ** | **Accumulated  Depreciation,  Depletion and  Amortization** | ** ** | **Net **   | ** ** | Cost                 |             | Accumulated  Depreciation,  Depletion and  Amortization |   | Net  |   | Expenditures on  Property, Plant and  Equipment1 |   |
| North American Natural Gas          |   | **$**      | **8,210**  | ** **                                                       | **$**      | **4,141**       | ** ** | **$**                | **4,069 **  | ** **                                                   | $      | 7,310 |   | $ | 3,536 |   | $ | 3,774  |   | **$** | **925  ** |   | $ | 736 |   |
| Oil Sands                           |   | **5,317**  | ** ** | **1,124**                                                        | ** ** | **4,193 ** | ** ** | 4,359                |             | 1,011                                                        |   | 3,348  |   | **1,058  ** |   | 759 |   |
| *International & Offshore* |   | ** ** | ** ** | ** **                                                       | ** ** | ** **      | ** ** |                 |             |                                                         |   |   |   | ** ** |   |   |   |
| East Coast Canada                   |   | **4,308**  | ** ** | **2,389**                                                        | ** ** | **1,919 ** | ** ** | 4,059                |             | 2,003                                                        |   | 2,056  |   | **276  ** |   | 155 |   |
| International                       |   | **7,568**  | ** ** | **2,045**                                                        | ** ** | **5,523 ** | ** ** | 5,689                |             | 1,605                                                        |   | 4,084  |   | **1,849  ** |   | 626 |   |
| Downstream                          |   | **10,971** | ** ** | **3,270**                                                        | ** ** | **7,701 ** | ** ** | 9,174                |             | 3,000                                                        |   | 6,174  |   | **1,834  ** |   | 1,396 |   |
| Shared Services                     |   | **556**    | ** ** | **476**                                                          | ** ** | **80 **    | ** ** | 542                  |             | 481                                                          |   | 61  |   | **33  ** |   | 26 |   |
|                                |   | **$**      | **36,930** | ** **                                                       | **$**      | **13,445**      | ** ** | **$**                | **23,485 ** | ** **                                                   | $      | 31,133 |   | $ | 11,636 |   | $ | 19,497  |   | **$** | **5,975  ** |   | $ | 3,698 |   |

 

1       Explorationexpenses, excluding general and administrative and geological and geophysicalexpenses, of $369 million (2007 – $290 million; 2006 – $123 million)are reported in expenditures on property, plant and equipment and explorationunder investing activities on the Consolidated Statement of Cash Flows.

 

Property, plant and equipment netcost includes asset retirement costs of $787 million (December 31,2007 – $591 million).

 

Interest capitalized during 2008amounted to $37 million (2007 – $30 million; 2006 – $51 million).

 

 
| **84** | **PETRO-CANADA**Notes to Consolidated Financial  Statements |  |
|--------|-------------------------------------------------------------|--|

 

 

**Note 17****                  ****Property, Plant andEquipment*****continued***

 

Costs of work in progress and assetsunder construction, which are not currently being depreciated or depleted, wereas follows:

 
| ** **                          |       | **2008**   | ** ** | 2007       |   |
|-------------------------------------|------------|------------|------------|------------|--------|
| North  American Natural Gas         | ** ** | **$**      | **51**     | ** ** | $      | 21 |   |
| Oil Sands                           | ** ** | **1,538**  | ** ** | 1,039      |   |
| *International & Offshore* |       | ** ** | ** ** |       |   |
| East Coast  Canada                  | ** ** | **225**    | ** ** | 120        |   |
| International                       | ** ** | **829**    | ** ** | 323        |   |
| Downstream                          | ** ** | **751**    | ** ** | 2,151      |   |
| ** **                          |       | **$**      | **3,394**  | ** ** | $      | 3,654 |   |

 

Asat December 31, 2008, capital leases at a net cost of $52 million (December 31,2007 – $56 million) and $18 million (December 31, 2007 –$21 million) are included in the assets of East Coast Canada and OilSands, respectively (Note 20).

 

 

### **Note 18**                   Goodwill

 

The following table summarizes the changes ingoodwill:

 
| ** **                     | ** ** | **2008**                              | ** ** | ** **        | 2007       |      |
|--------------------------------|------------|---------------------------------------|------------|-------------------|------------|-----------|
| ** **                     | ** ** | **North  American  Natural Gas** | ** ** | **International** | ** ** | **Total** | ** ** | ** ** | North  American  Natural Gas |   | International |   | Total |   |
| Goodwill at  beginning of year | ** ** | **$**                                 | **144**    | ** **        | **$**      | **587**   | ** ** | **$** | **731** | ** ** | ** ** | $ | 169 |   | $ | 632 |   | $ | 801 |   |
| Foreign  exchange              | ** ** | **34**                                | ** ** | **102**           | ** ** | **136**   | ** ** | ** ** | (25 | ) | (45 | ) | (70 | ) |
| Other1                         | ** ** | **–**                            | ** ** | **(15**           | **)**      | **(15**   | **)** | ** ** | – |   | – |   | – |   |
| Goodwill at  end of year       | ** ** | **$**                                 | **178**    | ** **        | **$**      | **674**   | ** ** | **$** | **852** | ** ** | ** ** | $ | 144 |   | $ | 587 |   | $ | 731 |   |

 

1      Other represents the carrying amount ofgoodwill related to the pre-development assets in Denmark sold during 2008(Note 8).

 

 

### **Note 19**                   Other Assets

 
| ** **                        | ** ** | **2008** | ** ** | 2007       |   |
|-----------------------------------|------------|----------|------------|------------|--------|
| Investments                       | ** ** | **$**    | **88**     | ** ** | $      | 81 |   |
| Accrued  pension asset*(Note 25)* | ** ** | **142**  | ** ** | 168        |   |
| Other  long-term assets           | ** ** | **207**  | ** ** | 197        |   |
| ** **                        | ** ** | **$**    | **437**    | ** ** | $      | 446 |   |

 

 
|  | Notes to Consolidated Financial Statements**PETRO-CANADA** | **85** |
|--|------------------------------------------------------------|--------|

 

###  

### **Note 20**                   Long-TermDebt

 
| ** **                                       | ** ** | Maturity   | ** ** | **2008**   | ** ** | 2007       | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Debentures  and notes                            |       |       |       |       |       |       |       |
| 6.80%  unsecured senior notes ($900 million US)  |       | 2038       | ** ** | **$**      | **1,090**  | ** ** | $          | – |   |
| 5.95%  unsecured senior notes ($600 million US)  |       | 2035       | ** ** | **719**    | ** ** | 577        |       |
| 5.35%  unsecured senior notes ($300 million US)1 |       | 2033       | ** ** | **320**    | ** ** | 248        |       |
| 7.00%  unsecured debentures ($250 million US)    |       | 2028       | ** ** | **296**    | ** ** | 237        |       |
| 7.875%  unsecured debentures ($275 million US)   |       | 2026       | ** ** | **332**    | ** ** | 267        |       |
| 9.25%  unsecured debentures ($300 million US)    |       | 2021       | ** ** | **365**    | ** ** | 294        |       |
| 6.05%  unsecured senior notes ($600 million US)  |       | 2018       | ** ** | **729**    | ** ** | –     |       |
| 5.00%  unsecured senior notes ($400 million US)2 |       | 2014       | ** ** | **485**    | ** ** | 391        |       |
| 4.00%  unsecured senior notes ($300 million US)1 |       | 2013       | ** ** | **351**    | ** ** | 275        |       |
| Syndicated  credit facilities                    |       | 2013       | ** ** | **–** | ** ** | 995        |       |
| Capital leases*(Note 17)*3                       |       | 2009-2022  | ** ** | **62**     | ** ** | 57         |       |
| ** **                                       |       | ** ** |       | **4,749**  | ** ** | 3,341      |       |
| Current  portion                                 | ** ** | ** ** |       | **(3**     | **)**      | (2         | )          |
| ** **                                       |       | ** ** |       | **$**      | **4,746**  | ** ** | $          | 3,339 |   |

 

1       In anticipation of issuing these senior notes, theCompany entered into interest rate derivatives, which resulted in effectiveinterest rates of 6.073% for the 5.35% notes due in 2033 and 4.838% for the4.00% notes due in 2013. These derivatives were settled in 2003.

2       These senior noteswere issued by PC Financial Partnership, a wholly-owned finance subsidiary ofPetro-Canada. Petro-Canada has fully and unconditionally guaranteed thesesenior notes.

3       The Company isparty to one transportation and one time-charter agreement that are accountedfor as capital leases and have implicit rates of interest of 14.65% and 11.90%,respectively. The aggregate remaining repayments under the transportation andtime-charter agreements are $62 million, including the following amountsin the next five years: 2009 – $3 million; 2010 – $3 million; 2011 –$4 million; 2012 – $4 million; and 2013 – $5 million.

 

Intereston long-term debt and short-term notes payable, net of capitalized interest,was $234 million in 2008 (2007 – $151 million; 2006 –$152 million). Interest is paid semi-annually. All debentures and seniornotes are repayable in full upon maturity.

 

Exceptas discussed in footnote 1 above, the fixed interest rate on all debentures andsenior notes approximates the effective interest rate.

 

During the year, the Company filed a finalshelf prospectus for the offering of up to $4 billion US of debt securitieswith the securities commission or equivalent regulatory authority in each ofthe provinces and territories of Canada and the United States. The Companycompleted a public offering of debt securities under this prospectus in theform of $600 million US 6.05% 10-year unsecured senior notes due May 15,2018 and $900 million US 6.80% 30-year unsecured senior notes due May 15,2038. The net proceeds of this offering were used to repay the Company'sshort-term notes payable and indebtedness outstanding under its syndicatedcredit facilities. The balance was added to the Company's working capital tofund future capital expenditures.

 

At December 31,2008, the Company had in place revolving, committed syndicated creditfacilities totalling $3,570 million (December 31, 2007 – $2,200 million),which mature in 2013, and revolving bilateral demand credit facilities of $777million (December 31, 2007 – $1,500 million). During 2008, the Company haddrawings on its syndicated credit facilities and its demand credit facilitiesin the form of Canadian and U.S. dollar Bankers' Acceptances. However, as of December 31,2008, the Company had repaid all amounts previously drawn on its syndicated anddemand credit facilities. The weighted-average interest rate for Bankers'Acceptances outstanding over the course of 2008 was 4.7% (2007 – 5.1%) for thesyndicated credit facilities and 4.4% (2007 – 5.0%) for the demand creditfacilities. At December 31, 2008, a total of $348 million of the creditfacilities was used for letters of credit and overdraft coverage.

 

Subsequentto December 31, 2008, the Company put in place a bilateral committedcredit facility in the amount of $244 million.

 

 
| **86** | **PETRO-CANADA**Notes to Consolidated Financial  Statements |  |
|--------|-------------------------------------------------------------|--|

 

 

### **Note 21   **Other Liabilities

 
| ** **                                 | ** ** | **2008** | ** ** | 2007   | ** ** |
|--------------------------------------------|------------|----------|------------|--------|------------|
| Fort Hills  purchase obligation *(Note 7)* | ** ** | **$**    | **306**    |   | $          | 329 |   |
| Libya EPSAs signature bonus *(Note 13)*    | ** ** | **524**  |       | – |       |
| Post-retirement  benefits *(Note 25)*      | ** ** | **206**  |       | 193    |       |
| Other long-term  liabilities               | ** ** | **204**  |       | 195    |       |
| ** **                                 |       | **$**    | **1,240**  |   | $          | 717 |   |

 

 

### **Note 22**    AssetRetirement Obligations

 

Assetretirement obligations are recorded for obligations where the Company will berequired to retire tangible long-lived assets such as well sites, offshoreproduction platforms, natural gas processing plants and marketing sites.

 

The following table summarizes the changes in the asset retirementobligations:

 
| ** **                                         | ** ** | **2008**  | ** ** | 2007       | ** ** |
|----------------------------------------------------|------------|-----------|------------|------------|------------|
| Asset  retirement obligations at beginning of year | ** ** | **$**     | **1,283**  | ** ** | $          | 1,237 |   |
| Obligations  incurred                              | ** ** | **219**   | ** ** | 74         |       |
| Changes in  estimates                              | ** ** | **67**    | ** ** | 5          |       |
| Obligations  settled                               | ** ** | **(67**   | **)**      | (56        | )          |
| Accretion  expense                                 | ** ** | **79**    | ** ** | 70         |       |
| Foreign  exchange                                  | ** ** | **(7**    | **)**      | (47        | )          |
| Asset  retirement obligations at end of year       | ** ** | **1,574** | ** ** | 1,283      |       |
| Less:  Current portion                             | ** ** | **(47**   | **)**      | (49        | )          |
| ** **                                         |       | **$**     | **1,527**  | ** ** | $          | 1,234 |   |

 

Indetermining the fair value of the asset retirement obligations, the estimatedcash flows of new obligations incurred during the year have been discounted at7.5% (2007 – 6.5%). The total undiscounted amount of the estimated cash flowsrequired to settle the obligations is $5,389 million (2007 – $4,136 million).The obligations will be settled on an ongoing basis over the useful lives ofthe operating assets, which extend up to 50 years in the future. The currentportion of asset retirement obligations is included in accounts payable andaccrued liabilities.

 

 

### **Note 23   **Shareholders’ Equity

 

#### **Authorized**

 

The authorized share capital is comprised ofan unlimited number of:

 

a)     Preferred shares issuable in series designated as SeniorPreferred Shares

 

b)     Preferred shares issuable in series designated as JuniorPreferred Shares

 

c)     Common shares without par value

 

 
| **** | Notes to Consolidated Financial Statements**PETRO-CANADA** | **87** |
|------|------------------------------------------------------------|--------|

 

 

### **Note 23   **Shareholders’ Equity *continued*

 

#### **Issuedand Outstanding**

 

Changes in common shares and contributed surplus were as follows:

 
| ** **                                                   | ** ** | **2008**        | ** ** | ** ** | 2007       |                     |
|--------------------------------------------------------------|------------|-----------------|------------|------------|------------|--------------------------|
| ** **                                                   | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Contributed  Surplus** | ** ** | ** ** | Shares |   | Amount |   | Contributed  Surplus |   |
| Balance at  beginning of year                                | ** ** | **483,459,119** | ** ** | **$**      | **1,365**  | ** **               | **$** | **24** | ** ** | ** ** | 497,538,385 |   | $ | 1,366 |   | $ | 469 |   |
| Issued  under employee stock-option and share purchase plans | ** ** | **1,138,348**   | ** ** | **23**     | ** ** | **(2**                   | **)** | ** ** | 1,918,734 |   | 43 |   | (1 | ) |
| Repurchased  under normal course issuer bid                  | ** ** | **–**      | ** ** | **–** | ** ** | **–**               | ** ** | ** ** | (15,998,000 | ) | (44 | ) | (444 | ) |
| Balance at  end of year                                      | ** ** | **484,597,467** | ** ** | **$**      | **1,388**  | ** **               | **$** | **22** | ** ** | ** ** | 483,459,119 |   | $ | 1,365 |   | $ | 24 |   |

 

TheCompany has a normal course issuer bid (NCIB) program for the repurchase of itsoutstanding common shares. This program was renewed in June 2008 torepurchase up to 24 million outstanding common shares during the period from June 22,2008 to June 21, 2009, subject to certain conditions. During 2008, theCompany did not repurchase any common shares. During 2007, the Companyrepurchased 15,998,000 common shares at an average price of $52.42 per commonshare for a total cost of $839 million, with the excess of the purchaseprice over the carrying amount of the shares repurchased recorded as a $444million reduction of contributed surplus and a $351 million reduction ofretained earnings.

 

 

### **Note 24**    Stock-BasedCompensation

###  

#### **StockOptions**

#### ** **

TheCompany maintains a stock option plan whereby options can be granted toofficers and certain employees for up to 57 million common shares. Stockoptions have a term of 10 years if granted prior to 2004 and seven years ifgranted subsequent to 2003. All stock options vest over periods of up to fouryears and are exercisable at the market prices for the shares on the dates thatthe options were granted.

 

In2004, the Company amended the option plan to provide the holder of stockoptions granted subsequent to 2003 the alternative to exercise these options asa CPA. Where the CPA is chosen, vested options can be surrendered forcancellation in return for a direct cash payment from the Company based on theexcess of the then current market price over the option exercise price.

 

Changes in the number of outstanding stock options were as follows:

 
| ** **                    | ** ** | **2008**       | ** ** |
|-------------------------------|------------|----------------|------------|
| ** **                    | ** ** | **Number**     | ** ** | **Weighted-Average  Exercise Price***(dollars)* | ** ** |
| Balance at  beginning of year | ** ** | **21,035,064** | ** ** | **$** | **34** | ** ** |
| Granted                       | ** ** | **3,486,200**  | ** ** | **47** | ** ** |
| Exercised  for common shares  | ** ** | **(1,138,348** | **)**      | **17** | ** ** |
| Surrendered  for cash payment | ** ** | **(897,604**   | **)**      | **35** | ** ** |
| Forfeited                     | ** ** | **(347,410**   | **)**      | **47** | ** ** |
| Expired                       | ** ** | **(4,000**     | **)**      | **13** | ** ** |
| Balance at  end of year       | ** ** | **22,133,902** | ** ** | **$** | **37** | ** ** |

 

 
| **88** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

### **Note 24**    Stock-Based Compensation *continued*

 

#### **Stock Options *continued***

 

|                          |   | 2007       |   |                                             | 2006   |       |
|-------------------------------|--------|------------|--------|--------------------------------------------------|--------|------------|
|                          |   | Number     |   | Weighted-Average  Exercise Price*(dollars)* |   |       | Number |   | Weighted-Average  Exercise Price*(dollars)* |   |
| Balance at  beginning of year |   | 20,714,733 |   | $                                                | 31     |       | 18,361,617 |   | $ | 24 |   |
| Granted                       |   | 3,347,800  |   | 44                                               |   | 4,911,600  |   | 52 |   |
| Exercised  for common shares  |   | (1,918,734 | )      | 19                                               |   | (2,177,881 | ) | 20 |   |
| Surrendered  for cash payment |   | (800,685   | )      | 34                                               |   | (119,710   | ) | 31 |   |
| Forfeited                     |   | (307,550   | )      | 44                                               |   | (260,643   | ) | 41 |   |
| Expired                       |   | (500       | )      | 52                                               |   | (250       | ) | 18 |   |
| Balance at  end of year       |   | 21,035,064 |   | $                                                | 34     |       | 20,714,733 |   | $ | 31 |   |

 

The following stock options were outstanding as at December 31,2008:

 
| Options Outstanding                         |    |      | Options Exercisable |                            |
|--------------------------------------------------|---------|-----------|--------------------------|---------------------------------|
| Range of  Exercise Prices  (*dollars*) |    | Number    |                     | Weighted-Average  Life*(years)* |   | Weighted-Average  Exercise Price*(dollars)* |   |   | Number |   | Weighted-Average  Exercise Price*(dollars)* |   |
| $                                                | 8 to 13 |      | 680,888                  |                            | 0.8 |   | $ | 10 |   | 680,888 |   | $ | 10 |   |
| 14 to 19                                         |    | 2,742,356 |                     | 2.6                             |   | 18 |   | 2,742,356 |   | 18 |   |
| 20 to 25                                         |    | 2,723,190 |                     | 3.8                             |   | 25 |   | 2,723,190 |   | 25 |   |
| 26 to 31                                         |    | 2,028,459 |                     | 2.1                             |   | 29 |   | 2,028,459 |   | 29 |   |
| 32 to 37                                         |    | 2,987,009 |                     | 3.1                             |   | 34 |   | 2,151,909 |   | 34 |   |
| 38 to 43                                         |    | 3,278,300 |                     | 5.0                             |   | 44 |   | 855,975 |   | 44 |   |
| 44 to 49                                         |    | 3,477,850 |                     | 6.1                             |   | 47 |   | 48,350 |   | 48 |   |
| 50 to 57                                         |    | 4,215,850 |                     | 4.1                             |   | 52 |   | 2,136,200 |   | 52 |   |
| $                                                | 8 to 57 |      | 22,133,902               |                            | 3.9 |   | $ | 37 |   | 13,367,327 |   | $ | 30 |   |

 

During2008, the Company recorded compensation (recovery) expense of $(125) million(2007 – $69 million; 2006 – $31 million) relating to options with a CPAand compensation expense of $nil (2007 – $1 million; 2006 – $10 million)relating to the 2003 stock options, which had been fully expensed by December 31,2007.

 

#### **Stock Appreciation Rights (SARs)**

#### ** **

Commencing2007, the Company approved the issuance of SARs to certain employees, whichentitle the holder to receive a cash payment equal to the difference betweenthe stated exercise price and the market price of the Company’s common shareson the date of surrender. The vesting period and other terms are similar to theterms of the Company’s existing stock option plan. At the time of grant, theexercise price approximated the market price. The following SARs have beengranted:

 
| ** **                    | ** ** | **2008**      | ** ** | ** **                                           | **2007**   | ** ** |
|-------------------------------|------------|---------------|------------|------------------------------------------------------|------------|------------|
| ** **                    | ** ** | **Number**    | ** ** | **Weighted-Average  Exercise Price***(dollars)* | ** ** | ** ** | Number | ** ** | Weighted-  Average  Exercise Price*(dollars)* | ** ** |
| Balance at  beginning of year | ** ** | **3,659,450** | ** ** | **$**                                                | **44**     |       | – |   | $ | – |   |
| Granted                       | ** ** | **4,107,330** | ** ** | **47**                                               |       | 3,786,500  |   | 44 |   |
| Exercised                     | ** ** | **(139,680**  | **)**      | **44**                                               |       | –     |   | – |   |
| Forfeited                     | ** ** | **(419,746**  | **)**      | **47**                                               |       | (127,050   | ) | 44 |   |
| Balance at  end of year       | ** ** | **7,207,354** | ** ** | **$**                                                | **46**     |       | 3,659,450 |   | $ | 44 |   |

 

 
| **** | Notes to Consolidated Financial Statements**PETRO-CANADA** | **89** |
|------|------------------------------------------------------------|--------|

 

 

### **Note 24**    Stock-Based Compensation *continued*

 

#### **Stock Appreciation Rights (SARs) *continued***

 

The following SARs were outstanding as at December 31, 2008:

 
| Options Outstanding                   |     |      | Options Exercisable |                              |
|--------------------------------------------|----------|-----------|--------------------------|-----------------------------------|
| Range of  Exercise  Prices*(dollars)* |     | Number    |                     | Weighted-Average  Life  (*years*) |   | Weighted-Average  Exercise Price*(dollars)* |   |   | Number |   | Weighted-Average  Exercise Price*(dollars)* |   |
| $                                          | 24 to 40 |      | 88,200                   |                              | 6.8 |   | $ | 33 |   | – |   | $ | – |   |
| 41 to 45                                   |     | 3,165,424 |                     | 5.1                               |   | 44 |   | 718,135 |   | 44 |   |
| 46 to 50                                   |     | 3,771,780 |                     | 6.1                               |   | 47 |   | 15,875 |   | 49 |   |
| 51 to 55                                   |     | 85,200    |                     | 5.8                               |   | 54 |   | 18,425 |   | 54 |   |
| 56 to 60                                   |     | 96,750    |                     | 6.0                               |   | 58 |   | 12,500 |   | 57 |   |
| $                                          | 24 to 60 |      | 7,207,354                |                              | 5.7 |   | $ | 46 |   | 764,935 |   | $ | 45 |   |

 

During 2008, the Company recorded compensation (recovery) expense of$(15) million (2007 – $17 million) relating to SARs.

 

#### **Performance Share Units (PSUs)**

#### ** **

The Company maintains a plan for PSUs for officers and other seniormanagement employees. Under this plan, notional share units are awarded andsettled in cash at the end of a three-year period based upon the Company’sshare price at that time, the value of notional dividends applied during theperiod and the Company’s total shareholder return relative to a peer group ofNorth American industry competitors.

 

Changes in the number of outstanding PSUswere as follows:

 
| ** **                    | ** ** | **2008**      | ** ** | 2007      | ** ** |
|-------------------------------|------------|---------------|------------|-----------|------------|
| ** **                    | ** ** | **Number**    | ** ** | Number    | ** ** |
| Balance at  beginning of year | ** ** | **1,166,044** | ** ** | 1,482,986 |       |
| Granted                       | ** ** | **254,169**   | ** ** | 247,476   |       |
| Redeemed                      | ** ** | **(584,137**  | **)**      | –    |       |
| Forfeited                     | ** ** | **(7,704**    | **)**      | (564,418  | )          |
| Balance at  end of year       | ** ** | **828,372**   | ** ** | 1,166,044 |       |

 

PSUshave a three-year performance period, such that those outstanding at the end of2008 are related to PSUs issued in 2006, 2007 and 2008 (2006 grant – 346,667;2007 grant – 236,652; 2008 grant – 245,053). During 2008, the Company recordedcompensation (recovery) expense relating to PSUs of $(5) million (2007 –$4 million; 2006 – $(4) million).

 

#### **Deferred Share Units (DSUs)**

#### ** **

The Company maintains a plan for DSUs whereby executive officers areawarded DSUs and/or can elect to receive all or a portion of their annualincentive compensation in the form of DSUs. Under this plan, notional shareunits are issued for the elected amount, which is based on the then currentmarket price of the Company’s common shares. Upon termination or retirement,the units are settled in cash, which includes an amount for the value ofnotional dividends earned over the period the units were outstanding.

 

The Company’s Board of Directors receives a portion of their compensationin the form of DSUs and can also elect to receive all or a portion of theirremaining compensation in the form of DSUs. Under the Director program,notional share units are issued and settled in cash or common shares, includingthe value of notional dividends, upon ceasing to be a Director.

 

During 2008, the Company recorded compensation (recovery) expenserelating to DSUs of $(16) million (2007 – $4 million; 2006 –$2 million).

 

 
| **90** | **PETRO-CANADA** Notes to Consolidated Financial Statements |  |
|--------|-------------------------------------------------------------|--|

 

 

### **Note 25   **Employee Future Benefits

###  

The Company maintains pension plans with defined benefit and definedcontribution provisions and provides certain health care and life insurancebenefits to its qualifying retirees. The actuarially determined cost of thesebenefits is accrued over the estimated service life of employees. The definedbenefit provisions are generally based upon years of service and average salaryduring the final years of employment. Certain defined benefit options requireemployee contributions and the balance of the funding for the registered plansis provided by the Company, based upon the advice of an independent actuary.The accrued benefit obligations and the fair value of plan assets are measuredfor accounting purposes at December 31 of each year. The most recentactuarial valuation of the pension plan for funding purposes was as of December 31,2007 and the next required valuation will be as of December 31, 2010.

 

The defined contribution plan provides for anannual contribution of 5% to 8% of each participating employee’spensionable earnings.

 

#### **Benefit Plan Expense**

 
|                                                                                                                                            |       | Pension Plans |       |       | Other Post-Retirement  Plans |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------|------------------------------|------------|
| ** **                                                                                                                                      |       | **2008**      |       | 2007       |                         | 2006       | ** ** | ** ** | **2008** |   | 2007 |   | 2006 |   |
| (a)   Defined benefit plans                                                                                                           |       |          |       |       |                         |       |   |   |   | ** ** |   |   |   |   |
| Employer  current service cost                                                                                                                  | ** ** | **$**         | **40**     | ** ** | $                            | 43         |   | $ | 40 | ** ** | ** ** | **$** | **6** | ** ** | $ | 5 |   | $ | 4 |   |
| Interest  cost                                                                                                                                  | ** ** | **95**        | ** ** | 90         |                         | 86         | ** ** | ** ** | **13** | ** ** | 12 |   | 11 |   |
| Actual  return on plan assets                                                                                                                   | ** ** | **222**       | ** ** | (8         | )                            | (154       | ) |   | **–** | ** ** | – |   | – |   |
| Actuarial  losses (gains)                                                                                                                       | ** ** | **(187**      | **)**      | (42        | )                            | 43         | ** ** | ** ** | **(33** | **)** | 13 |   | – |   |
| Elements of  employee future benefit plan expense before adjustments to recognize the long-term  nature of employee future benefit plan expense | ** ** | **$**         | **170**    | ** ** | $                            | 83         |   | $ | 15 | ** ** | ** ** | **$** | **(14** | **)** | $ | 30 |   | $ | 15 |   |
| Difference  between actual and expected return on plan assets                                                                                   | ** ** | **(333**      | **)**      | (104       | )                            | 55         | ** ** | ** ** | **–** | ** ** | – |   | – |   |
| Difference  between actual and recognized actuarial losses in year                                                                              | ** ** | **236**       | ** ** | 86         |                         | 8          | ** ** | ** ** | **35** | ** ** | (11 | ) | 2 |   |
| Amortization  of transitional (asset) obligation                                                                                                | ** ** | **(7**        | **)**      | (6         | )                            | (5         | ) |   | **2** | ** ** | 2 |   | 2 |   |
| ** **                                                                                                                                      |       | **$**         | **66**     | ** ** | $                            | 59         |   | $ | 73 | ** ** | ** ** | **$** | **23** | ** ** | $ | 21 |   | $ | 19 |   |
| (b)   Defined contribution plans                                                                                                      | ** ** | **27**        | ** ** | 22         |                         | 18         |   |   |   | ** ** |   |   |   |   |
| Total  expense                                                                                                                                  | ** ** | **$**         | **93**     | ** ** | $                            | 81         |   | $ | 91 | ** ** | ** ** | **$** | **23** | ** ** | $ | 21 |   | $ | 19 |   |
|                                                                                                                                            | ** ** | ** **    | ** ** |       |                         |       | ** ** | ** ** | ** ** | ** ** |   |   |   |   |
| **Benefit Plan Funding**                                                                                                                        | ** ** | ** **    | ** ** |       |                         |       | ** ** | ** ** | ** ** | ** ** |   |   |   |   |
|                                                                                                                                            | ** ** | ** **    | ** ** |       |                         |       | ** ** | ** ** | ** ** | ** ** |   |   |   |   |
|                                                                                                                                            |       | Pension Plans |       |       | Other Post-Retirement  Plans |       |
| ** **                                                                                                                                      |       | **2008**      |       | 2007       |                         | 2006       | ** ** | ** ** | **2008** |   | 2007 |   | 2006 |   |
| Defined  contribution                                                                                                                           | ** ** | **$**         | **27**     |       | $                            | 22         |   | $ | 18 |   |   |   |   |   |   |   |   |
| Defined  benefit                                                                                                                                | ** ** | **$**         | **40**     |       | $                            | 99         |   | $ | 96 | ** ** | ** ** | **$** | **10** |   | $ | 10 |   | $ | 10 |   |
|                                                                                                                                            | ** ** |          | ** ** | ** ** |                         |       |
| **Financial Status of Defined Benefit Plans**                                                                                                   | ** ** | ** **    |       |       |
| ** **                                                                                                                                      | ** ** | ** **    |       |       |
|                                                                                                                                            | ** ** | Pension Plans | ** ** | ** ** | Other Post-Retirement  Plans |       |
|                                                                                                                                            | ** ** | **2008**      | ** ** | 2007       | ** **                   | ** ** | **2008** |   | 2007 |   |
| Fair value  of plan assets                                                                                                                      | ** ** | **$**         | **1,232**  | ** ** | $                            | 1,502      | ** ** | ** ** | **$** | **–** |   | $ | – |   |
| Accrued  benefit obligation                                                                                                                     | ** ** | **1,639**     | ** ** | 1,784      | ** **                   | ** ** | **231** |   | 255 |   |
| Funded  status – plan deficit1                                                                                                             | ** ** | **(407**      | **)**      | (282       | )                            |       | **(231** | **)** | (255 | ) |
| Unamortized transitional (asset) obligation                                                                                                     | **(5**     | **)**         | (12        | )          |                         | **9**      |   | 11 |   |
| Unamortized  net actuarial losses                                                                                                               | ** ** | **554**       |       | 462        |                         |       | **16** |   | 51 |   |
| Accrued  benefit asset (liability)                                                                                                              |       | **$**         | **142**    |       | $                            | 168        |   |   | **$** | **(206** | **)** | $ | (193 | ) |
|                                                                                                                                                 |            |               |            |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

1       Thepension and other post-retirement plans included in the financial statusinformation are not fully funded.

 

 
| **** | Notes to Consolidated Financial Statements**PETRO-CANADA** | **91** |
|------|------------------------------------------------------------|--------|

 

 

### **Note 25   **Employee Future Benefits *continued*

###  

#### **Reconciliation of Plan Assets**

 
|                                            |       | Pension Plans |       | Other  Post-Retirement Plans |       |
|-------------------------------------------------|------------|---------------|------------|------------------------------|------------|
| ** **                                      |       | **2008**      |       | 2007                         | ** ** | **2008** |   | 2007 |   |
| Fair value  of plan assets at beginning of year | ** ** | **$**         | **1,502**  |                         | $          | 1,486 | ** ** | **$** | **–** |   | $ | – |   |
| Contributions                                   | ** ** | **40**        | ** ** | 99                           | ** ** | **10** |   | 9 |   |
| Benefits  paid                                  | ** ** | **(85**       | **)**      | (83                          | )          | **(10** | **)** | (9 | ) |
| Actual  return on plan assets                   | ** ** | **(222**      | **)**      | 8                            |       | **–** |   | – |   |
| Other                                           | ** ** | **(3**        | **)**      | (8                           | )          | **–** |   | – |   |
| Fair value  of plan assets at end of year       | ** ** | **$**         | **1,232**  | ** **                   | $          | 1,502 | ** ** | **$** | **–** |   | $ | – |   |

#### ** **

#### **Reconciliation of Accrued Benefit Obligation**

 
|                                             |       | Pension Plans |      | Other  Post-Retirement Plans |       |
|--------------------------------------------------|------------|---------------|-----------|------------------------------|------------|
| ** **                                       |       | **2008**      |      | 2007                         | ** ** | **2008** |   | 2007 |   |
| Accrued benefit obligation at  beginning of year | ** ** | **$**         | **1,784** |                         | $          | 1,786 | ** ** | **$** | **255** |   | $ | 235 |   |
| Current service cost                             | ** ** | **40**        |      | 43                           | ** ** | **6** |   | 5 |   |
| Interest cost                                    | ** ** | **95**        |      | 90                           | ** ** | **13** |   | 12 |   |
| Benefits paid                                    | ** ** | **(85**       | **)**     | (83                          | )          | **(10** | **)** | (9 | ) |
| Actuarial losses (gains)                         | ** ** | **(187**      | **)**     | (42                          | )          | **(33** | **)** | 12 |   |
| Other                                            | ** ** | **(8**        | **)**     | (10                          | )          | **–** | ** ** | – |   |
| Accrued benefit obligation at end  of year       | ** ** | **$**         | **1,639** |                         | $          | 1,784 | ** ** | **$** | **231** |   | $ | 255 |   |

#### ** **

#### **Defined Benefit and Other Post-Retirement PlansAssumptions**

 
| ** **                                                |       | **2008** |   | 2007 |   | 2006  |   |
|-----------------------------------------------------------|------------|----------|--------|------|--------|------------|--------|
| Year-end  obligation discount rate1                       | ** ** | **6.3%** |   | 5.3% |   | 5.0%  |   |
| Accrued benefit  obligation discount rate1                | ** ** | **6.3%** |   | 5.3% |   | 5.0%  |   |
| Long-term  rate of return on plan assets                  | ** ** | **7.5%** |   | 7.5% |   | 7.5%  |   |
| Rate of  compensation increase, excluding merit increases | ** ** | **3.3%** |   | 3.3% |   | 3.0%  |   |

1       Assumptionused in both pension and other post-retirement plans.

 

#### **Assumed Health and Dental Care Cost Trend Rates**

 
|                                                              |       | Trend Rates at  December 31, |   |
|-------------------------------------------------------------------|------------|-----------------------------------|--------|
| ** **                                                        |       | **2008**                          |   | 2007 |   | 2006 |   |
| Dental care  cost trend rate1                                     | ** ** | **4.0%**                          |   | 4.0% |   | 3.5% |   |
| Health care  cost trend rate                                      | ** ** | **8.0%**                          |   | 8.0% |   | 8.0% |   |
| Health care  cost trend rate declines to                          | ** ** | **4.5%**                          |   | 4.5% |   | 4.5% |   |
| Year from  which the health care cost trend rate remains constant | ** ** | **2017**                          |   | 2017 |   | 2014 |   |

 

1       Dentalcare cost trend rate assumed to remain constant.

 

#### **Sensitivity Analysis**

#### ** **

Assumedhealth care cost trend rates have a significant effect on the amounts reportedfor the health care plans. A one percentage-point change in assumed health carecost trend rates would have the following effects for 2008:

 
|                             |   | Increase |   | Decrease |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Total service  and interest cost |   | $        | 3      |     | $      | (2 | ) |
| Accrued  benefit obligation      |   | $        | 27     |     | $      | (24 | ) |

 

 
| **92** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

### **Note 25   **Employee Future Benefits *continued*

###  

#### **Plan Assets**

 
|             |       | Percentage of Plan  Assets  at December 31, |   |
|------------------|------------|--------------------------------------------------|--------|
| *Asset Category* | ** ** | **2008**                                         |   | 2007 |   |
| Equity           | ** ** | **56%**                                          |   | 61% |   |
| Bonds            | ** ** | **44%**                                          |   | 39% |   |
| ** **       |       | **100%**                                         |   | 100% |   |

###  

### **Note 26**  Capital Management

###  

TheCompany’s capital management strategy is designed to maintain financialstrength and flexibility to support profitable growth in all businessenvironments. The Company’s capital consists of debt, which is comprised oflong-term debt and short-term notes payable, and shareholders’ equity. TheCompany measures financial strength and flexibility using two key measures:debt-to-cash flow from operating activities, the key short-term measure, anddebt-to-debt plus equity, the key long-term measure. These are calculated asfollows:

 
| ** **                                                        |       | **2008**   |       | 2007   |   |
|-------------------------------------------------------------------|------------|------------|------------|--------|--------|
| Long-term  debt                                                   | ** ** | **$**      | **4,746**  |   | $      | 3,339 |   |
| Add:  Current portion of long-term debt                           | ** ** | **3**      |       | 2      |   |
| Total  long-term debt                                             | ** ** | **$**      | **4,749**  |   | $      | 3,341 |   |
| Add:  Short-term notes payable                                    | ** ** | **–** |       | 109    |   |
| **Debt (A)**                                                      | ** ** | **$**      | **4,749**  |   | $      | 3,450 |   |
| Shareholders’  equity                                        | ** ** | **15,475** |       | 11,870 |   |
| **Debt plus equity (B)**                                          | ** ** | **$**      | **20,224** |   | $      | 15,320 |   |
| **Cash flow from operating activities (C)**                       | ** ** | **$**      | **6,522**  |   | $      | 3,339 |   |
| **Debt-to-cash flow from operating activities**(A/C)*****(times)* | ** ** | **0.7**    |       | 1.0    |   |
| **Debt-to-debt plus equity (A/B)**                                | ** ** | **23.5**   | **%**      | 22.5   | %      |

 

At December 31,2008, the debt-to-cash flow from operating activities ratio was within the Company’slong-term range of no more than 2.0 times. Debt-to-debt plus equity wasbelow the long-term range of 25% to 35%, providing the financial flexibility tofund the Company’s capital program and profitable growth opportunities. TheCompany may exceed long-term ranges for short periods of time, but always withthe goal to return back within the long-term ranges.

 

Financialcovenants associated with the Company’s various banking and debt arrangementsare reviewed regularly and controls are in place to maintain compliance withthese covenants. The Company complied with all financial covenants for theyears ended December 31, 2008 and 2007.

 

TheCompany’s priority uses of cash are to fund the capital program and profitablegrowth opportunities, and then to return cash to shareholders through dividendsand a share repurchase program.

 

TheCompany regularly reviews its dividend strategy to ensure the alignment of thedividend policy with shareholder expectations, and financial and growthobjectives. Consistent with this objective, on July 23, 2008, the Companydeclared a 54% increase in its quarterly dividend to $0.20 per common sharecommencing with the dividend paid on October 1, 2008. In June 2008,the Company renewed its NCIB program for the repurchase of its common sharesfrom June 22, 2008 to June 21, 2009, entitling the Company torepurchase up to 5% of its outstanding common shares, subject to certainconditions (Note 23). Due to an increasing capital program, the Company did notrepurchase any of its shares in 2008.

 

Giventhe recent turmoil in financial markets, the Company continues to monitor itscapital management strategy and make adjustments as appropriate. The Company’scapital management strategy has not changed significantly from the prior year.

 

 
| **** | Notes to Consolidated Financial Statements**PETRO-CANADA** | **93** |
|------|------------------------------------------------------------|--------|

 

###  

### **Note 27**    FinancialRisks and Financial Instruments

###  

**Financial Risks**

 

TheCompany is exposed to a number of financial risks in the normal course of itsbusiness operations, including market risks resulting from fluctuations incommodity prices, interest rates and foreign currency exchange rates, as wellas credit risks and liquidity risks.

 

a)     Market Risks

 

TheCompany monitors its exposure to market fluctuations and may use derivativecontracts to manage these risks as it considers appropriate. The Company doesnot use derivative contracts for speculative purposes.

 

#### ***CommodityPrice Risk***

#### ** **

TheCompany is exposed to commodity price risk as fluctuations in crude oil ornatural gas prices could have a material adverse effect on its financialcondition, as well as on the value and amount of the Company’s reserves. Pricesfor crude oil and natural gas fluctuate in response to changes in supply anddemand, market uncertainty and a variety of other factors beyond the Company’scontrol.

 

Themargins realized from the Company’s refined petroleum products are alsoaffected by factors such as crude oil price fluctuations due to the impact onrefinery feedstock costs, third-party refined product purchases and the demandfor refined petroleum products. The Company’s ability to maintain productmargins in an environment of higher feedstock costs depends on its ability topass higher costs on to customers. The Company enters into derivative contractsto reduce exposure in its Downstream operations to these margin fluctuations,including margins on fixed price product sales, and short-term pricefluctuations on the purchase of foreign and domestic crude oil and refined petroleumproducts. The Company’s exposure to these margin fluctuations is limited.

 

#### ***InterestRate Risk***

#### ** **

TheCompany is exposed to interest rate risk as changes in market interest ratesaffect the fair values of fixed-interest rate liabilities and the cash flows ofboth floating-interest rate liabilities and future borrowings. Senior notes,debentures and capital leases all bear interest at fixed rates. Drawings on thesyndicated and demand credit facilities bear interest at floating rates. TheCompany regularly reviews the mix of floating and fixed-rate debt forconsistency with its financing objectives. Interest rate risk from the Company’sfinancial instruments is not significant.

 

#### ***ForeignCurrency Exchange Risk***

#### ** **

Petro-Canadaand its Canadian subsidiaries’ functional currency is Canadian (Cdn) dollars,while crude oil, one of the Company’s primary products, is priced by referenceto U.S. dollar benchmark prices. Therefore, Cdn/U.S. dollar exchange ratefluctuations can have a significant impact on the Company’s revenues, crude oiland product purchases, and associated financial instruments.

 

TheCompany is also exposed to foreign currency exchange risk from itsself-sustaining foreign operations whose functional currency is different fromPetro-Canada’s functional currency. Gains and losses from the translation offinancial instruments within these self-sustaining foreign operations intoCanadian dollars are presented as a separate component of other comprehensiveincome (loss) on the Consolidated Statement of Comprehensive Income.

 

 
| **94** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

### **Note 27**    Financial Risks and FinancialInstruments *continued*

###  

**FinancialRisks*continued***

 

TheCompany’s outstanding U.S. dollar-denominated long-term debt (Note 20)partially mitigates the exposure to Cdn/U.S. dollar exchange rate fluctuationscreated from its U.S. dollar-denominated cash flows and other associatedfinancial instruments. In addition, the Company may hold a significant amountof U.S. dollar cash and cash equivalents to meet immediate capital and/oroperating funding requirements, and may have significant accounts receivable,other assets, accounts payable and accrued liabilities and other liabilitiesbalances denominated in U.S. dollars. These can create additional exposure toforeign currency exchange risk. At December 31, 2008, the Company had thefollowing U.S. dollar-denominated financial instruments:

 
| *** ***                              | * *   | ***2008****($US* | *)*        |
|-------------------------------------------|------------|------------------|------------|
| Cash and  cash equivalents                | ** ** | **$**            | **473**    | ** ** |
| Accounts  receivable                      | ** ** | **1,287**        | ** ** |
| Other  assets                             | ** ** | **11**           | ** ** |
| Accounts  payable and accrued liabilities | ** ** | **(338**         | **)**      |
| Long-term  debt                           | ** ** | **(3,953**       | **)**      |
| Other  liabilities                        | ** ** | **(493**         | **)**      |
| ** **                                | ** ** | **$**            | **(3,013** | **)** |

 

Inrespect of the Company’s U.S. dollar-denominated financial instruments above, a10% change in the Cdn/U.S. dollar exchange rate (1.2246 as at December 31,2008) would change net earnings by approximately $338 million and othercomprehensive income (loss) by approximately $32 million. The Company does nothave significant financial instruments denominated in otherforeign currencies.

 

b)     Credit Risk

 

TheCompany is exposed to credit risk on its financial assets from itscounterparties’ abilities to fulfil their obligations to the Company. TheCompany manages this risk through the establishment of credit policies andlimits, which are applied in the selection of counterparties. The Companyensures that it has no significant concentrations of credit risk and ensuresthat no customers represent more than 10% of the Company’s consolidatedrevenues for any period.

 

TheCompany’s maximum exposure to credit risk at December 31, 2008 is equal tothe carrying amount of its financial assets recorded on the ConsolidatedBalance Sheet. The Company carries sufficient provisions to cover its expectedlosses arising from credit risk associated with all financial assets. Theseprovisions are not significant.

 

c)     Liquidity Risk

 

TheCompany is exposed to liquidity risk from the potential inability to generateor obtain sufficient cash in a timely and cost-effective manner to dischargeits financial liabilities as they come due. The Company manages liquidity riskby forecasting cash flows to identify financing requirements, by maintainingcommitted and demand credit facilities, and by maintaining access to additionalfinancing at competitive rates through capital markets and highly ratedfinancial institutions. Any debt issued by the Company is managed in accordancewith specified liquidity and maturity profiles.

 

TheCompany’s financial capacity and flexibility remain strong despite the recentturmoil in the financial markets. This is due to the Company’s continuingability to generate cash flow, access existing cash balances and accesssignificant credit facility capacity requiring no near-term refinancing.

 

 
| **** | Notes to Consolidated Financial Statements**PETRO-CANADA** | **95** |
|------|------------------------------------------------------------|--------|

 

 

### **Note 27**    Financial Risks and FinancialInstruments *continued*

###  

**FinancialRisks*continued***

 

Thetiming of undiscounted cash outflows related to financial liabilities is asfollows:

 
|                                                             |   | Within 1 year |   | 1 to 5 years |   | Thereafter |   |
|------------------------------------------------------------------|--------|---------------|--------|--------------|--------|------------|--------|
| Accounts  payable and accrued liabilities and other liabilities1 |   | $             | 3,186  |         | $      | 900        |   | $ | – |   |
| Long-term  debt2                                                 |   | 316           |   | 1,265        |   | 9,267      |   |
|                                                             |   | $             | 3,502  |         | $      | 2,165      |   | $ | 9,267 |   |

 

1       Other liabilitiesincludes the Fort Hills purchase obligation (Note 7) and the Libya EPSAssignature bonus (Note 13).

 

2       Includesdebentures, senior notes, capital leases and related interest.

 

#### **Derivative Contracts**

#### ** **

TheCompany enters into forward contracts and options to reduce****exposureto Downstream margin fluctuations, including margins on fixed-price productsales, and short-term price fluctuations on the purchase of foreign anddomestic crude oil and refined petroleum products.

 

TheCompany’s outstanding derivative contracts and their related fair values at December 31,2008 were as follows:

 
|                 |   | Quantity   |   |     |     | Average Price |   |       |   |
|----------------------|--------|------------|--------|----------|----------|---------------|--------|------------|--------|
| * *             |   | *(MMbbls)* |   | Maturity | * * | *($US/bbl)*   |   | Fair Value |   |
| Crude oil  purchases |   | 1.5        |   | 2009     |     | $             | 44.22  |       | $      | 3 |   |
| Crude oil  sales     |   | 1.3        |   | 2009     |     | $             | 39.44  |       | (8     | ) |
|                 |   |       |   |     |     |          |   | $          | (5     | ) |

 

Thefair value positions of outstanding derivative contracts were recorded on theConsolidated Balance Sheet as follows:

 
| ** **                                |       | **December 31,  2008** |   | December 31,  2007 |   |
|-------------------------------------------|------------|-----------------------------|--------|-------------------------|--------|
| Accounts  receivable                      | ** ** | **$**                       | **1**  |                    | $      | 1 |   |
| Accounts  payable and accrued liabilities | ** ** | **$**                       | **(6** | **)**                   | $      | – |   |

 

Thefair value of these derivative contracts is based on quotes provided bybrokers, which represents an approximation of amounts that would be received orpaid to counterparties to settle these instruments prior to maturity. TheCompany plans to hold all derivative contracts outstanding at December 31,2008 to maturity. Gains and losses on these derivative contracts are recordedin investment and other income (expense) (Note 6).

 

Inrespect of the Company’s outstanding derivative contracts above, a $10 US/bblchange in the price of crude oil would change net earnings by approximately$0.5 million.

 

 
| **96** | **PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|--------|------------------------------------------------------------|--|

 

 

### **Note 27**    Financial Risks and FinancialInstruments *continued*

###  

#### **DerivativeContracts *continued***

#### ** **

During2004, the Company entered into a series of derivative contracts for the futuresale of Dated Brent crude oil in connection with its acquisition of an interestin the Buzzard field in the U.K. sector of the North Sea. Some derivativecontracts matured from July 1, 2007 to December 31, 2007. Allremaining outstanding derivative contracts were settled in December 2007.This resulted in the following:

 
|                                    |   | 2007  |   |
|-----------------------------------------|--------|-------|--------|
| Unrealized  losses at beginning of year |   | $     | (1,481 | ) |
| Net losses  during the year             |   | (535  | )      |
| Maturities1                             |   | 291   |   |
| Settlement2                             |   | 1,725 |   |
|                                    |   | $     | – |   |

 

1       Derivativecontracts that matured from July 1, 2007 to December 31, 2007resulted in realized losses of $291 million ($193 million after-tax).

 

2       All remainingoutstanding derivative contracts were settled, which resulted in realizedlosses of $1,725 million ($1,145 million after-tax).

 

#### **Financial Instruments**

#### ** **

The fair values of financial instruments recorded on the ConsolidatedBalance Sheet are as follows:

 
| ** **                                          |       | **2008**            |       | 2007           |       |
|-----------------------------------------------------|------------|---------------------|------------|----------------|------------|
| ** **                                          | ** ** | **Carrying Amount** | ** ** | **Fair Value** |       | Carrying Amount |   | Fair Value |   |
| Held-for-trading  financial assets                  |       |                |       |           |       |   |   |   |   |
| Cash and  cash equivalents                          | ** ** | **$**               | **1,445**  | ** **     | **$**      | **1,445** |   | $ | 231 |   | $ | 231 |   |
| Loans and  receivables                              |       |                |       |           |       |   |   |   |   |
| Accounts  receivable1                               | ** ** | **2,756**           | ** ** | **2,756**      |       | 1,931 |   | 1,931 |   |
| Other  assets                                       | ** ** | **32**              | ** ** | **32**         |       | 34 |   | 34 |   |
| Other  financial liabilities (not held-for-trading) |       |                |       |           | ** ** |   |   |   |   |
| Accounts  payable and accrued liabilities           | ** ** | **(3,186**          | **)**      | **(3,186**     | **)**      | (3,512 | ) | (3,512 | ) |
| Short-term  notes payable                           | ** ** | **–**          | ** ** | **–**     | ** ** | (109 | ) | (109 | ) |
| Long-term  debt                                     | ** ** | **(4,749**          | **)**      | **(3,868**     | **)**      | (3,341 | ) | (3,495 | ) |
| Other  liabilities                                  | ** ** | **(909**            | **)**      | **(906**       | **)**      | (380 | ) | (380 | ) |
| ** **                                          | ** ** | **$**               | **(4,611** | **)**          | **$**      | **(3,727** | **)** | $ | (5,146 | ) | $ | (5,300 | ) |

 

1       Accountsreceivable on the Consolidated Balance Sheet at December 31, 2008 includes$88 million (December 31, 2007 — $42 million) of prepaid expenses.

 

Thefair values of held-for-trading financial assets, loans and receivables andaccounts payable and accrued liabilities equal or approximate their carryingamounts. The fair values of debentures, senior notes and capital leases arebased on publicly quoted market values for instruments with similar terms andrisks. The fair values of the Fort Hills purchase obligation and the LibyaEPSAs signature bonus obligation, included in other liabilities, reflect expectedpayout patterns and the Company’s estimated cost of debt at year end.

 

 
| **** | Notes to Consolidated Financial Statements**PETRO-CANADA** | **97** |
|------|------------------------------------------------------------|--------|

 

 

### **Note 28**               Commitments and Contingent Liabilities

** **

#### **Commitments**

 
|                                   |   | 2009  |   | 2010   |   | 2011  |   | 2012  |   | 2013   |   | Thereafter |   | Total  |   |
|----------------------------------------|--------|-------|--------|--------|--------|-------|--------|-------|--------|--------|--------|------------|--------|--------|--------|
| Operating  leases                      |   | $     | 484    |   | $      | 372   |   | $     | 144    |   | $      | 123        |   | $      | 90     |   | $ | 869 |   | $ | 2,082 |   |
| Transportation  agreements             |   | 197   |   | 196    |   | 136   |   | 119   |   | 111    |   | 677        |   | 1,436  |   |
| Product  purchase/delivery obligations |   | 3,361 |   | 1,871  |   | 1,371 |   | 1,219 |   | 699    |   | 4,212      |   | 12,733 |   |
| Exploration  work commitments          |   | 381   |   | 186    |   | 105   |   | 85    |   | – |   | 12         |   | 769    |   |
| Other  long-term obligations           |   | 661   |   | 1,013  |   | 587   |   | 239   |   | 234    |   | 1,052      |   | 3,786  |   |
|                                   |   | $     | 5,084  |   | $      | 3,638 |   | $     | 2,343  |   | $      | 1,785      |   | $      | 1,134  |   | $ | 6,822 |   | $ | 20,806 |   |

#### ** **

**Contingent Liabilities**

** **

The Company is involved in litigationand claims in the normal course of operations. In addition, the Company mayprovide indemnifications, in the normal course of operations, that are oftenstandard contractual terms to counterparties in certain transactions, such aspurchase and sale agreements. The terms of these indemnifications will varybased upon the contract, the nature of which prevents the Company from making areasonable estimate of the maximum potential amounts that may be required to bepaid. Management is of the opinion that any resulting settlements relating tothe litigation matters or indemnifications would not materially affect thefinancial position or results of operations of the Company.

 

**Note 29****              ****Variable Interest Entities**

** **

CICA Accounting Guideline 15, *Consolidation of Variable Interest Entities*(VIEs), providescriteria for the identification of VIEs and further criteria for determiningwhat entity, if any, should consolidate them. Entities in which equityinvestors do not have the characteristic of a controlling financial interest ordo not have sufficient equity at risk for the entity to finance its activitieswithout additional subordinated financial support are subject to consolidationby a company if that company is deemed the primary beneficiary. The primarybeneficiary is the party that is subject to a majority of the risk of loss fromthe VIEs’ activities, or is entitled to receive a majority of the VIEs’residual returns, or both. The Company has determined that certain retaillicensee and wholesale marketer agreements would constitute VIEs, even thoughthe Company has no ownership in these entities. The Company, however, is notthe primary beneficiary and, therefore, consolidation is not required. Incertain of the retail licensee arrangements, the Company has provided loanguarantees. Management is of the opinion that the Company’s maximum exposure toloss from these arrangements would not be significant.

 

 
| **98****     PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|------------------------------------------------------------------------------------------------|--|

 

 

**Note 30****              ****Generally AcceptedAccounting Principles in the United States**

** **

The application of United States GAAP would have thefollowing effects on net earnings as reported:

 
|                                                                                                                 | ** ** | Notes  | ** ** | **2008**   | ** ** | 2007       | 1      | 2006   | 1      |
|----------------------------------------------------------------------------------------------------------------------|------------|--------|------------|------------|------------|------------|--------|--------|--------|
| Net  earnings from continuing operations, as reported in the Consolidated  Statement of Earnings                     | ** ** |   |       | **$**      | **3,134**  | ** ** | $      | 2,733  |   | $ | 1,588 |   |
| Adjustments,  before income taxes                                                                                    |       |   |       | ** ** | ** ** |       |   |   |   |
| Inventories                                                                                                          |       | (a)    |       | **–** | ** ** | 187        |   | (2     | )      |
| Accounting  for income taxes                                                                                         |       | (b)    |       | **(9**     | **)**      | 14         |   | 8      |   |
| Capitalization  of interest and related amortization                                                                 |       | (d)    |       | **42**     | ** ** | 19         |   | 47     |   |
| Stock-based  compensation                                                                                            |       | (g)    |       | **45**     | ** ** | (31        | )      | (24    | )      |
| Exploration  mining costs                                                                                            |       | (c)    |       | **(19**    | **)**      | (6         | )      | – |   |
| Income  taxes on above items                                                                                         | ** ** |   |       | **(25**    | **)**      | (41        | )      | 8      |   |
| Net  earnings from continuing operations, as adjusted before cumulative effect of  change in accounting policy       | ** ** |   |       | **3,168**  | ** ** | 2,875      |   | 1,625  |   |
| Net  earnings from discontinued operations                                                                           | ** ** |   |       | **–** | ** ** | –     |   | 152    |   |
| Net  earnings, as adjusted before cumulative effect of change in accounting policy                                   | ** ** |   |       | **3,168**  | ** ** | 2,875      |   | 1,777  |   |
| Cumulative  effect of change in accounting policy, net of tax                                                        |       | (g)    |       | **–** | ** ** | –     |   | (14    | )      |
| Net  earnings, as adjusted                                                                                           | ** ** |   |       | **$**      | **3,168**  | ** ** | $      | 2,875  |   | $ | 1,763 |   |
|                                                                                                                 |       |   |       | ** ** | ** ** |       |   |   |   |
| Earnings  from continuing operations, as adjusted before cumulative effect of change in  accounting policy per share |       |   |       | ** ** | ** ** |       |   |   |   |
| Basic                                                                                                                | ** ** |   |       | **$**      | **6.54**   | ** ** | $      | 5.88   |   | $ | 3.22 |   |
| Diluted                                                                                                              | ** ** |   |       | **$**      | **6.50**   | ** ** | $      | 5.82   |   | $ | 3.19 |   |
| Earnings,  as adjusted before cumulative effect of change in accounting policy per share                             |       |   |       | ** ** | ** ** |       |   |   |   |
| Basic                                                                                                                | ** ** |   |       | **$**      | **6.54**   | ** ** | $      | 5.88   |   | $ | 3.53 |   |
| Diluted                                                                                                              | ** ** |   |       | **$**      | **6.50**   | ** ** | $      | 5.82   |   | $ | 3.49 |   |
| Earnings,  as adjusted per share                                                                                     |       |   |       | ** ** | ** ** |       |   |   |   |
| Basic                                                                                                                | ** ** |   |       | **$**      | **6.54**   | ** ** | $      | 5.88   |   | $ | 3.50 |   |
| Diluted                                                                                                              | ** ** |   |       | **$**      | **6.50**   | ** ** | $      | 5.82   |   | $ | 3.46 |   |

 

1 Prior periodfigures have been restated as a result of the Company adopting a FIFO inventoryvaluation basis (Note (a))*.*

 

The application of United States GAAP would have thefollowing effects on comprehensive income as reported:

 
|                                                                                                    | ** ** | Notes      | ** ** | **2008**   | ** ** | 2007       |   | 2006   |   |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|--------|--------|--------|
| Comprehensive  income, net of tax, as reported on the Consolidated Statement of  Comprehensive Income   | ** ** | ** ** |       | **$**      | **3,348**  | ** ** | $      | 2,473  |   | $ | 2,103 |   |
| Adjustments  to net earnings, net of tax                                                                | ** ** | ** ** |       | **34**     | ** ** | (1         | )      | 7      |   |
| Adjustments  to other comprehensive income (loss), net of tax                                           |       |       |       | ** ** | ** ** |       |   |   |   |
| Additional  pension liability                                                                           |       | (f)        |       | **(44**    | **)**      | (52        | )      | 42     |   |
| Unrealized  gain (loss) on translation of foreign currency denominated additional  capitalized interest |       | (d)        | ** ** | **(7**     | **)**      | (20        | )      | 6      |   |
| Comprehensive  income, net of tax, as adjusted                                                          | ** ** | ** ** |       | **$**      | **3,331**  | ** ** | $      | 2,400  |   | $ | 2,158 |   |

** **

** **
|  | Notes to Consolidated Financial Statements**PETRO-CANADA     ****99** |
|--|------------------------------------------------------------------------------------------------|

 

 

**Note 30****              ****Generally AcceptedAccounting Principles in the United States***continued*

** **

The application of United States GAAP would have thefollowing effects on the Consolidated Balance Sheet as reported:

 
| ** **                                     |       |               |       | **December 31, 2008** | ** ** | December 31,  2007 |       |
|------------------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------|------------|
|                                           | ** ** | Notes              | ** ** | **As Reported**            | ** ** | **United States  GAAP** | ** ** | As Reported |   | United States GAAP | 1 |
| Current assets                                 |       | (a)                |       | **$**                      | **5,603**  | ** **              | **$**      | **5,603** | ** ** | $ | 3,178 |   | $ | 3,990 |   |
| Property,  plant and equipment, net            |       | (b, c, d)          | ** ** | **23,485**                 | ** ** | **24,106**              | ** ** | 19,497 |   | 20,112 |   |
| Goodwill                                       |       | (b)                | ** ** | **852**                    | ** ** | **831**                 | ** ** | 731 |   | 710 |   |
| Other  assets                                  |       | (f, h)             | ** ** | **437**                    | ** ** | **411**                 | ** ** | 446 |   | 384 |   |
| Current  liabilities                           |       | (g)                | ** ** | **4,207**                  | ** ** | **4,229**               | ** ** | 3,623 |   | 3,705 |   |
| Long-term debt                                 |       | (h)                | ** ** | **4,746**                  | ** ** | **4,862**               | ** ** | 3,339 |   | 3,445 |   |
| Other liabilities                              |       | (f, g)             | ** ** | **1,240**                  | ** ** | **1,679**               | ** ** | 717 |   | 1,056 |   |
| Asset retirement obligations                   | ** ** | ** **         | ** ** | **1,527**                  | ** ** | **1,527**               | ** ** | 1,234 |   | 1,234 |   |
| Future income taxes                            |       | (a, b, c, d, f, g) | ** ** | **3,182**                  | ** ** | **3,190**               | ** ** | 3,069 |   | 3,324 |   |
| Common shares                                  | ** ** | ** **         | ** ** | **1,388**                  | ** ** | **1,388**               | ** ** | 1,365 |   | 1,365 |   |
| Contributed surplus                            |       | (e)                | ** ** | **22**                     | ** ** | **793**                 | ** ** | 24 |   | 795 |   |
| Retained earnings                              |       | (e)                | ** ** | **14,062**                 | ** ** | **13,720**              | ** ** | 10,692 |   | 10,872 |   |
| Accumulated other comprehensive  income (loss) |       | (d, f)             | ** ** | **$**                      | **3**      | ** **              | **$**      | **(437** | **)** | $ | (211 | ) | $ | (600 | ) |

 

1 Prior period figures have beenrestated as a result of the Company adopting a FIFO inventory valuation basis(Note (a)).

 

The Company’s Consolidated FinancialStatements have been prepared in accordance with Canadian GAAP, which differ insome respects from those applicable in the United States. The following are thesignificant differences in accounting principles as they pertain to theaccompanying Consolidated Financial Statements:

 
| a)     |   | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | The Company adopted CICA Section 3031,  *Inventories,*on January 1, 2008,  valuing inventory on a FIFO basis and electing to adjust 2008 opening  retained earnings in accordance with transitional provisions of the new  accounting standard (Note 3). The Company also adopted this inventory valuation  policy for United States GAAP, which requires retrospective accounting  treatment for this change in accounting policy. As a result, the Company has  restated certain prior year comparative figures. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| b)     |   | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | The liability method followed by  the Company differs from United States GAAP due to the application of  transitional provisions upon adoption and the use of substantively enacted  versus enacted rates.                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| c)     |   | Property, Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Under Canadian GAAP, exploration costs  for mining properties are capitalized when such costs have the  characteristics of property, plant and equipment. Under United States GAAP,  exploration costs for mining properties are expensed until proved and  probable reserves have been established by a feasibility study.                                                                                                                                                                                                  |

 

 
| **100****     PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|-------------------------------------------------------------------------------------------------|--|

 

 

**Note 30****              ****Generally AcceptedAccounting Principles in the United States***continued*

** **
| d)     |   | Interest Capitalization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | The Company capitalizes interest  attributable to the construction of major new facilities under both Canadian  and United States GAAP, but uses different capitalization methodologies under  each. Under United States GAAP, the amount of interest capitalized for the  period is the product of the average accumulated capitalized costs and the  weighted-average interest rate applicable to all borrowings outstanding  during the period. However, under Canadian GAAP, the amount of interest  capitalized is calculated using the same formula except that the average  accumulated capitalized costs are first multiplied by the Company’s average  corporate debt to equity ratio. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| e)     |   | Contributed Surplus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | In prior years, the Company  transferred $1,122 million from contributed surplus to the accumulated  deficit. United States GAAP does not  permit these transfers. As a result of this difference, under United States  GAAP, the excess of the purchase price over the carrying amount of shares  repurchased under the Company’s NCIB program has been recorded as a reduction  of contributed surplus. Under Canadian GAAP, this excess cost has been  recorded as a reduction of both contributed surplus and retained earnings.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| f)     |   | Pensions and Other Post-Retirement  Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | United States GAAP requires the  Company to recognize the overfunded or underfunded status of its defined  benefit post-retirement plans, measured as the difference between the fair  value of plan assets and the accrued benefit obligation, as an asset or  liability on its balance sheet. Changes to the funding status in the year are  recorded through other comprehensive income (loss), net of tax. Canadian GAAP  currently does not require the Company to recognize the funded status of  these plans on the Consolidated Balance Sheet.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| g)     |   | Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | United States GAAP requires  compensation costs related to share-based awards classified as liabilities to  be recognized as an expense at fair value with re-measurement to fair value  each period. Under Canadian GAAP, the Company recognizes compensation cost  for stock options, which provides the holder the right to exercise the stock  option or surrender the option for cash payment based on the intrinsic value  at each period end.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| h)     |   | Deferred Financing Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | The Company adopted CICA  Section 3855, *Financial Instruments —  Recognition and Measurement*,**on  January 1, 2007. As a result, transaction costs and premiums or  discounts directly attributable to the issuance of long-term debt are now  added to the fair value of the debt upon initial recognition. Previously,  these amounts were deferred and presented as assets. This is still the  prescribed treatment under United States GAAP.                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| i)     |   | Cash Flow Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | The application of United States  GAAP would not have a material effect on cash flow from total operating,  investing, or financing activities on the Consolidated Statement of Cash  Flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| j)     |   | Fair Value Measurements and Fair  Value Option                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | The Financial Accounting Standards  Board (FASB) issued Statement 157, *Fair Value Measurements*,  and Statement 159, *Fair Value Option for  Financial Assets and Financial Liabilities*, both effective for the  Company’s 2008 fiscal year. The application of these Statements did not have  a significant impact on the Company’s Consolidated Financial Statements under  United States GAAP.                                                                                                                                                                                                                                                                                        |

 

 
|  | Notes to Consolidated Financial Statements**PETRO-CANADA     ****101** |
|--|-------------------------------------------------------------------------------------------------|

 

**Note 31****              ****Recent Accounting Pronouncements**

** **

**Canadian**

** **

***Goodwill and Intangible Assets***

** **

The AcSB has issued CICA Section 3064,*Goodwill and Intangible Assets*, and as aresult has withdrawn CICA Section 3062, *Goodwill andOther Intangible Assets*,**and CICA Section 3450,*Research and Development Costs*. This newstandard reinforces the principle-based approach to the recognition of costs asassets in accordance with the AcSB’s definition of an asset. This standard iseffective for fiscal years beginning on or after January 1, 2009. There isno material impact on the Company’s Consolidated Financial Statements.

 

***Business Combinations***

** **

In January 2009, the AcSB issuedCICA Section 1582, *Business Combinations*,which replaces the existing Section 1581 of the same name. This standardmandates that all future business combinations be accounted for as a purchaseby one party of another, and that all assets, liabilities, contingentconsideration and non-controlling interest of the acquiree be recorded at fairvalue. Gains on bargain purchases are to be recognized in net earnings, and allacquisition costs expensed. This standard is equivalent to the IFRS on businesscombinations. This standard is effective for fiscal years beginning on or afterJanuary 1, 2011, with early application permitted, and will likely impactfuture Consolidated Financial Statements should the Company engage in businesscombinations.

 

**United States**

** **

***Business Combinations***

** **

In December 2007, the FASBissued Revised Statement 141R, *Business Combinations*.This standard is identical to CICA Section 1582, *BusinessCombinations*, except that it is effective for fiscal years beginningafter December 15, 2008. As with CICA Section 1582, *Business Combinations*, this standard will likely impactfuture Consolidated Financial Statements should the Company engage in businesscombinations.

 

 

***End of Financial Statements***

 

 
| **102****     PETRO-CANADA**Notes to Consolidated Financial Statements |  |
|-------------------------------------------------------------------------------------------------|--|