**Exhibit99.3**

** **

**MANAGEMENT’SREPORT**

The consolidatedfinancial statements of the Trust are the responsibility of management and theBoard of Directors of the Trust. They have been prepared by management inaccordance with Canadian generally accepted accounting principles.

In fulfillingtheir responsibilities, management has developed and maintains a system ofinternal controls designed to safeguard assets from loss or unauthorized useand ensure the accuracy of the financial records. The consolidated financialstatements necessarily include certain estimates which are made afterconsideration of the information available and using careful judgments.

The Board ofDirectors exercises its responsibilities for financial controls through anAudit Committee which is comprised of directors who are not employees of theTrust. The Committee meets with management and the external auditors to satisfythem that the responsibilities of the respective parties are properlydischarged and to review the consolidated financial statements before they arepresented to the Board for approval.

The unitholdershave appointed Deloitte & Touche LLP, as the independent auditors of theTrust and, in that capacity, they have examined the consolidated financialstatements for the year ended December 31, 2006. The Auditors’ Report to theunitholders is presented herein.

 

 

 

 
|                                                  | ****                        |
|--------------------------------------------------|-----------------------------|
| J. Paul Charron, CA                              | David J. Broshko, CA        |
| President, Chief  Executive Officer and Director | Vice President, Finance and |
|                                             | Chief Financial Officer     |

 

March 21, 2007

1

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**AUDITORS’REPORT**

**To theUnitholders of Canetic Resources Trust:**

We have audited the consolidated balance sheets ofCanetic Resources Trust (the “Trust”) as at December 31, 2006 and 2005 and theconsolidated statements of earnings, deficit and cash flows for the years thenended.  These consolidated financialstatements are the responsibility of the Trust’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadiangenerally accepted auditing standards. Those standards require that we plan and perform an audit to obtainreasonable assurance whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financialstatements present fairly, in all material respects, the financial position ofCanetic Resources Trust as at December 31, 2006 and 2005 and the results of itsoperations and its cash flows for the years then ended in accordance withCanadian generally accepted accounting principles.

The Trust is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis of designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Trust’s internal control over financialreporting. Accordingly we express no such opinion.

On March 21, 2007,we reported separately to the Unitholders of Canetic Resources Trust on ouraudit of the consolidated financial statements for the same period, prepared inaccordance with Canadian generally accepted accounting principles but did notinclude Note 15, Differences Between Canadian and United States GenerallyAccepted Accounting Principles.
|                  |                       |
|------------------|-----------------------|
| Calgary, Alberta | Chartered Accountants |
| March 21, 2007   |                  |

 

**Commentsby Independent Registered Chartered Accountants onCanada - United States of America Reporting Difference:**

The standards ofthe Public Company Accounting Oversight Board (United States) require theaddition of an explanatory paragraph (following the opinion paragraph) whenthere are changes in accounting principles that have a material effect on thecomparability of the Canetic Resources Trust’s financial statements, such asthe change described in Note 15 to the financial statements.  Our report to the unitholders, dated March21, 2007, is expressed in accordance with Canadian reporting standards which donot require a reference to such a change in accounting principles in the auditors’report when the change is properly accounted for and adequately disclosed inthe financial statements.
|                  |                       |
|------------------|-----------------------|
| Calgary, Alberta | Chartered Accountants |
| March 21, 2007   |                  |

 

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CONSOLIDATED BALANCE SHEETS
| **As at December 31 ($CDN thousands)** | ** ** | **2006**  | ** **   | **2005**     | ** ** |
|-----------------------------------------------------------------|------------|-----------|--------------|--------------|------------|
|                                                            |       |      | *** *** | *** *** |       |
| **ASSETS**                                                      |       |      | ** **   | ** **   |       |
| **Current  Assets**                                             |       |      | ** **   | ** **   |       |
| Accounts receivable                                             | ** ** | $         | 261,498      |         | $          | 140,907 |   |
| Prepaid expenses and deposits                                   | ** ** | 34,647    |         | 11,630       |       |
|                                                            | ** ** | 296,145   |         | 152,537      |       |
|                                                            |       |      |         |         |       |
| Property, plant  and equipment, net of amortization *(Note 4)*  | ** ** | 4,597,654 |         | 1,317,917    |       |
| Goodwill *(Note 2)*                                             | ** ** | 922,024   |         | 87,954       |       |
| Deferred  financing charges, net of amortization                | ** ** | 8,996     |         | 689          |       |
| Deferred costs                                                  | ** ** | —    |         | 12,000       |       |
| Financial  derivative asset *(Note 12)*                         | ** ** | 6,157     |         | —       |       |
| Total assets                                                    | ** ** | $         | 5,830,976    |         | $          | 1,571,097 |   |
|                                                            |       |      |         |         |       |
| **LIABILITIES  AND UNITHOLDERS’ EQUITY**                   |       |      |         |         |       |
| **Current  Liabilities**                                        |       |      |         |         |       |
| Accounts payable and accrued liabilities                        | ** ** | $         | 260,206      |         | $          | 157,368 |   |
| Income taxes payable *(Note 3)*                                 | ** ** | 10,979    |         | —       |       |
| Distributions payable                                           | ** ** | 51,933    |         | 17,834       |       |
| Convertible debentures *(Note 6)*                               | ** ** | 1,697     |         | —       |       |
| Financial derivative liability***(Note 12)*                     | ** ** | 1,124     |         | 22,965       |       |
|                                                            | ** ** | 325,939   |         | 198,167      |       |
|                                                            |       |      |         |         |       |
| Bank debt *(Note 5)*                                            | ** ** | 1,289,678 |         | 309,146      |       |
| Convertible  debentures***(Note 6)*                             | ** ** | 258,959   |         | 16,289       |       |
| Other long-term  liabilities*(Note 9)*                          | ** ** | 7,272     |         | —       |       |
| Financial  derivative liability***(Note 12)*                    | ** ** | —    |         | 8,763        |       |
| Future income  taxes***(Note 11)*                               | ** ** | 250,339   |         | 202,110      |       |
| Asset retirement  obligations***(Note 7)*                       | ** ** | 191,874   |         | 68,235       |       |
|                                                            | ** ** | 2,324,061 |         | 802,710      |       |
|                                                            |       |      |         |         |       |
| Non-controlling  interest***(Note 8)*                           | ** ** | —    |         | 3,804        |       |
| Commitments and  guarantees*(Note  14)*                         |       |      |         |         |       |
| * *                                                        |       |      |         |         |       |
| **UNITHOLDERS’  EQUITY**                                   |       |      |         |         |       |
| Capital *(Note 8)*                                              | ** ** | 4,224,470 |         | 1,087,459    |       |
| Convertible debentures***(Note 6)*                              | ** ** | 6,584     |         | —       |       |
| Contributed surplus (Note 9)                                    | ** ** | —    |         | 40,836       |       |
| Deficit *(Note 10)*                                             | ** ** | (724,139  | **)**        | (363,712     | )          |
|                                                            | ** ** | 3,506,915 |         | 764,583      |       |
| Total  liabilities and unitholders’ equity                 | ** ** | $         | 5,830,976    |         | $          | 1,571,097 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

** **

Approved on behalfof the Board of Directors:

** **

** **
| Jack C. Lee            | J. Paul Charron                                     |
|------------------------|-----------------------------------------------------|
| Chairman of the  Board | President, and Chief Executive Officer and Director |

 

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CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
| **Years ended December 31 ($CDN thousands except per unit amounts)** | ** ** | **2006**  | ** **   | **2005**     | ** **   |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------|--------------|--------------|--------------|
|                                                                                                              |       |      | *** *** | *** *** | *** *** |
| **REVENUE**                                                                                                       |       |      | ** **   | ** **   | ** **   |
| Petroleum and natural gas sales                                                                                   | ** ** | $         | 1,407,754    |         | $            | 800,249 |   |
| Royalty expense                                                                                                   | ** ** | (258,260  | )            | (175,723     | )            |
|                                                                                                              | ** ** | 1,149,494 |         | 624,526      |         |
|                                                                                                              |       |      |         |         |         |
| **EXPENSES**                                                                                                      |       |      |         |         |         |
| Operating                                                                                                         | ** ** | 252,142   |         | 129,646      |         |
| Transportation                                                                                                    | ** ** | 18,968    |         | 9,897        |         |
| General and administrative                                                                                        | ** ** | 53,983    |         | 45,372       |         |
| Interest on bank debt                                                                                             | ** ** | 53,809    |         | 13,752       |         |
| Interest on convertible debentures                                                                                | ** ** | 8,627     |         | 4,357        |         |
| Depletion, depreciation and amortization                                                                          | ** ** | 645,203   |         | 233,693      |         |
| Accretion of asset retirement obligations                                                                         | ** ** | 11,410    |         | 4,560        |         |
| (Gain) loss on financial derivatives***(Note 12)*                                                                 | ** ** | (86,906   | )            | 100,792      |         |
|                                                                                                              | ** ** | 957,236   |         | 542,069      |         |
|                                                                                                              |       |      |         |         |         |
| Earnings before  taxes                                                                                            | ** ** | 192,258   |         | 82,457       |         |
| Capital taxes                                                                                                     | ** ** | 11,836    |         | 8,036        |         |
| Current income  taxes***(Note 11)*                                                                                | ** ** | 5,567     |         | —       |         |
| Future income  tax*(recovery) expense**(Note 11)*                                                                 | ** ** | (48,246   | )            | 8,573        |         |
|                                                                                                              |       |      |         |         |         |
| **NET  EARNINGS**                                                                                                 | ** ** | 223,101   |         | 65,848       |         |
| ** **                                                                                                        |       |      |         |         |         |
| Deficit,  beginning of year                                                                                       | ** ** | (363,712  | )            | (221,083     | )            |
| Distributions  declared                                                                                           | ** ** | (583,528  | )            | (208,477     | )            |
| Deficit, end of  year                                                                                             | ** ** | $         | (724,139     | )            | $            | (363,712 | ) |
|                                                                                                              |       |      |         |         |         |
| Net earnings per  unit *(Note  13)*                                                                               |       |      |         |         |         |
| Basic                                                                                                             | ** ** | $         | 1.08         |         | $            | 0.74 |   |
| Diluted                                                                                                           | ** ** | $         | 1.06         |         | $            | 0.73 |   |
| Weighted average  units outstanding***(Note 13)*                                                                  |       |      |         |         |         |
| Basic                                                                                                             | ** ** | 206,081   |         | 89,331       |         |
| Diluted                                                                                                           | ** ** | 210,397   |         | 90,591       |         |

 

*See accompanying notes to consolidated financialstatements*

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CONSOLIDATEDSTATEMENTS OF CASH FLOWS
| **Years ended December 31 ($CDN thousands)**                | ** ** | **2006**   | ** **   | **2005**     | ** **   |
|--------------------------------------------------------------------------------------|------------|------------|--------------|--------------|--------------|
|                                                                                 |       |       | *** *** | *** *** | *** *** |
| **OPERATING ACTIVITIES**                                                             |       |       | ** **   | ** **   | ** **   |
| Net earnings                                                                         |       | $          | 223,101      |         | $            | 65,848 |   |
|                                                                                 |       |       |         |         |         |
| Adjustments for:                                                                     |       |       |         |         |         |
| Unit-based  compensation                                                             |       | 14,049     |         | 27,166       |         |
| Depletion,  depreciation and amortization                                            |       | 645,203    |         | 233,693      |         |
| Accretion of  asset retirement obligations                                           |       | 11,410     |         | 4,560        |         |
| Unrealized  (gain) loss on financial derivatives                                     |       | (95,371    | )            | 20,635       |         |
| Future income  tax (recovery) expense                                                |       | (48,246    | )            | 8,573        |         |
| Asset retirement costs  incurred                                                     |       | (16,877    | )            | (6,293       | )            |
| Changes in non-cash  operating working capital                                       |       | (50,778    | )            | (7,812       | )            |
|                                                                                 |       | 682,491    |         | 346,370      |         |
|                                                                                 |       |       |         |         |         |
| **FINANCING ACTIVITIES**                                                             |       |       |         |         |         |
| ** **                                                                           |       |       |         |         |         |
| Proceeds from  bank debt                                                             |       | 546,409    |         | 25,301       |         |
| Proceeds from  issuance of units, net of issue costs                                 |       | 437,001    |         | 9,788        |         |
| Proceeds from  issuance of convertible debentures, net of deferred financing charges |       | 220,800    |         | —       |         |
| Distributions to  unitholders                                                        |       | (538,703   | )            | (207,474     | )            |
| Changes in  non-cash financing working capital                                       |       | —     |         | 1,231        |         |
|                                                                                 |       | 665,507    |         | (171,154     |         |
|                                                                                 |       |       |         |         |         |
| **INVESTING ACTIVITIES**                                                             |       |       |         |         |         |
| ** **                                                                           |       |       |         |         |         |
| Acquisition of  petroleum and natural gas properties                                 |       | (56,285    | )            | (13,554      | )            |
| Disposition of  petroleum and natural gas properties                                 |       | 17,168     |         | 4,610        |         |
| Acquisitions,  net of cash acquired                                                  |       | (933,458   | )            | —       |         |
| Capital  expenditures                                                                |       | (375,423   | )            | (166,272     | )            |
|                                                                                 |       | (1,347,998 | )            | (175,216     |         |
| **Cash beginning and end of year**                                                   |       | $          | —       | ** **   | **$**        | **—** | ** ** |
|                                                                                 |       |       |         |         |         |
| **The Trust paid the following  cash amounts:**                                      |       |       |         |         |         |
| Interest paid                                                                        |       | $          | 60,875       |         | $            | 19,994 |   |
| Capital taxes paid                                                                   |       | $          | 34,494       |         | $            | 4,033 |   |

 

*See accompanying notes to consolidated financialstatements.*

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**NOTESTO THE CONSOLIDATED**

**FINANCIALSTATEMENTS**

Years ended December 31, 2006 and 2005 *(tabularamounts in $CDN thousands, except for unit amounts)*

1.  SIGNIFICANT ACCOUNTING POLICIES

**BASIS OF PRESENTATION**

Theseconsolidated financial statements include the accounts of Canetic ResourcesTrust and its direct and indirect wholly owned subsidiaries and partnerships(collectively, “Canetic” or the “Trust”). The consolidated financial statements have been prepared by managementin accordance with Canadian Generally Accepted Accounting Principles.  A reconciliation between Canadian GenerallyAccounting Principles and United States of America Generally AcceptedAccounting Principles is disclosed in Note 15. The preparation of consolidated financial statements in conformity withCanadian Generally Accepted Accounting Principles requires management of theTrust to make estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying notes.  Actual results could differ from thoseestimated.  The consolidated financialstatements have, in management’s opinion, been properly prepared using carefuljudgment and within the framework of the following significant accountingpolicies.

Inparticular the amounts recorded for depletion and depreciation of property,plant and equipment, the impairment tests and asset retirement obligations arebased on estimates of proven reserves, production rates, future crude oil andnatural gas prices, future costs and other relevant assumptions.  By their nature, these estimates are subjectto measurement uncertainty and changes in such estimates may impact thefinancial statements in future periods.

**PETROLEUM AND NATURAL GAS PROPERTIES**

TheTrust follows the full-cost method of accounting for petroleum and natural gasoperations, whereby all costs related to the exploration and development ofpetroleum and natural gas reserves are capitalized.  Such costs include land acquisition costs,costs of drilling both productive and non-productive wells, well equipment,flowline and plant costs, geological and geophysical expenses and overheadexpenses directly related to exploration and development activities.  Gains or losses on sales of properties arerecognized only when crediting the proceeds to the recorded costs would resultin a change of 20 percent or more in the depletion and depreciation rate.

Capitalizedcosts are depleted using the unit-of-production method based on estimatedproved reserves of petroleum and natural gas before royalties as determined byindependent petroleum engineers.  Costsrelating to unproved properties are excluded from costs subject to depletionand depreciation until it is determined whether or not proved reserves exist orif impairment occurs.  Proved natural gasreserves and production are converted to equivalent volumes of crude petroleumbased on the approximate relative energy content ratio of six thousand cubicfeet of natural gas to one barrel of crude oil.

TheTrust places a limit on the aggregate carrying value of the Trust’s petroleumand natural gas properties, all of which are in one cost centre (Canada).  An impairment loss exists when the carryingamount of the Trust’s petroleum and natural gas properties exceeds theestimated undiscounted future net cash flows associated with the Trust’s provedreserves.  If an impairment loss isdetermined to exist, the costs carried on the balance sheet in excess of thediscounted future net cash flows associated with the Trust’s proved andprobable reserves are charged to earnings. Reserves are determined pursuant to National Instrument 51-101.

**GOODWILL**

TheTrust recognizes goodwill on corporate acquisitions when the total purchaseprice exceeds the fair value of net identifiable assets and liabilities of theacquired entity.  Goodwill is testedannually at year-end for impairment or as events occur that could result inimpairment.  Impairment is recognizedbased on the fair value of the reporting entity (consolidated Trust) comparedto the book value of the Trust.  If thefair value of the Trust is less that the book value, impairment is measured byallocating the fair value to the identifiable assets and liabilities as if theTrust had been acquired in a business combination for its fair value. Theexcess of the fair value over the amounts assigned to the identifiable assetsand liabilities is the fair value of the goodwill. Any excess of the book valueover

6

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thisimplied fair value of goodwill is the impairment amount. Impairment is chargedto earnings in the period in which it occurs. Goodwill is stated at cost lessimpairment and is not amortized.

**HEDGING RELATIONSHIPS**

TheTrust follows Accounting Guideline 13 — Hedging Relationships, which deals withthe identification, designation, documentation and effectiveness of hedgingrelationships for the purpose of applying hedge accounting.  Where hedge accounting does not apply, anychanges in the fair value of the financial derivative contracts relating to afinancial period can either reduce or increase net earnings and net earningsper trust unit for that period.  TheTrust enters into numerous financial instruments to manage commodity price andforeign exchange risk.  The Trust haselected to not apply hedge accounting and to follow the fair value accountingmethod for all derivative instruments.

**ASSET RETIREMENT OBLIGATIONS**

TheTrust recognizes as a liability the estimated fair value of the futureretirement obligations associated with property, plant and equipment (“PP&E”).The fair value is capitalized and amortized over the same period as theunderlying asset.  The Trust estimatesthe liability based on the estimated costs to abandon and reclaim its netownership interest in all wells and facilities and the estimated timing of the coststo be incurred in future periods. This estimate is evaluated on a periodicbasis and any adjustment to the estimate is prospectively applied. As timepasses, the change in net present value of the future retirement obligation isexpensed through accretion. Retirement obligations settled during the periodreduce the future retirement liability. No gains or losses on retirementactivities were realized, due to settlements approximating the estimates.

**JOINTVENTURES**

Aportion of the Trust’s development and production activities are conducted jointlywith others.  These financial statementsreflect only the Trust’s proportionate interest in such activities.

**REVENUERECOGNITION**

Revenueassociated with sales of crude oil, natural gas and natural gas liquids (“NGLs”)is recognized when title passes to the purchaser, normally at the pipelinedelivery point for natural gas and NGLs and at the wellhead for crude oil.

**DEPRECIATION**

Officefurniture and equipment is depreciated on a declining-balance method at annualrates of 10 percent to 33 percent.

**UNIT AWARD INCENTIVE PLAN**

The Trust has a UnitAward Incentive Plan for directors, officers, employees and consultants of theTrust.  Under the terms of the plan, aholder may elect, subject to consent of the Trust, to receive cash upon vestingin lieu of the number of rights held. Compensation expense associated with rights granted under the plan ismeasured at the date of grant or at the date of the financial statements forunexercised rights.  Compensation expenseon unexercised rights is determined on the rights as the excess of the marketprice over the exercise price of the rights at the end of each reporting periodand is deferred and recognized in income over the vesting period of therights.  See *Note 9* for adescription of the plan.

**INCOME TAXES**

TheTrust is a taxable entity under the Canadian Income Tax Act (the “Act”) and istaxable only on income that is not distributed or distributable to theunitholders.  As the Trust distributesall of its taxable income (if any) to the unitholders and meets therequirements of the Act applicable to the Trust, no provision for income taxhas been made in the Trust.

7

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The Trust follows theliability method of accounting for income taxes.  Under this method, income tax liabilities andassets are recognized for the estimated tax consequences attributable todifferences between the amounts reported in the financial statements of theTrust’s corporate subsidiaries and their respective tax bases, using enactedand substantively enacted income tax rates, expected to apply at the time wherethe differences are expected to reverse. The effect of a change in income tax rates on future income taxliabilities and assets is recognized in earnings in the period that the changeoccurs.

**CASH**

The Trust considers allhighly liquid investments with an original maturity of 90 days or less at thetime of purchase to be cash equivalents. These cash equivalents primarily consist of funds on deposit undervarious terms or Banker’s Acceptances utilized to fix the interest rate on bankdebt. Cash and cash equivalents are stated at cost which approximates fairvalue.

**PER UNIT INFORMATION**

Basic earnings per unitare calculated using the weighted average number of units outstanding duringthe year adjusted for the impact of units to be issued on the conversion ofexchangeable shares.  Diluted earningsper unit are calculated using the treasury stock method to determine thedilutive effects of unit options and the “if converted” method is used todetermine the dilution impact of the convertible debentures.  The treasury method assumes that proceedsfrom the exercise of “in-the-money” unit options and exercise of theconvertible debentures are used to re-purchase units at the prevailing marketrate.

2.  STARPOINT ARRANGEMENT

Acclaim EnergyTrust (“Acclaim”) and StarPoint Energy Trust (“StarPoint”) merged on January 5,2006 pursuant to a Plan of Arrangement (“Arrangement”), which resulted in thecreation of Canetic.  Each Acclaimunitholder received 0.8333 of a Canetic trust unit for each trust unit theyowned and each StarPoint unitholder received one Canetic trust unit for eachtrust unit they owned.  Unitholders inboth Acclaim and StarPoint also received common shares and warrants in a newpublicly-listed junior exploration company, TriStar Oil & Gas Ltd. (“TriStar”),which was formed with assets from both Acclaim and StarPoint.  Each Acclaim unitholder received 0.0833 of aTriStar common share for each trust unit they owned and each StarPointunitholder received 0.1000 of a TriStar common share for each trust unit theyowned.  In addition, each Acclaimunitholder received 0.0175 of a TriStar warrant for each trust unit they ownedand each StarPoint unitholder received 0.0210 of a TriStar warrant for eachtrust unit they owned.

The merger wasaccounted for as an acquisition of StarPoint by Acclaim using the purchasemethod of accounting.
| **($000s)**                               | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| Current assets                            |       | 124,803    |       |
| Property, plant  and equipment            |       | 2,511,746  |       |
| Goodwill                                  |       | 834,070    |       |
| Accounts payable  and accrued liabilities |       | (144,777   | )          |
| Distributions  payable                    |       | (22,662    | )          |
| Long-term debt                            |       | (434,123   | )          |
| Financial  derivative liability           |       | (57,785    | )          |
| Convertible  debentures - liability       |       | (53,199    | )          |
| Convertible  debentures - equity          |       | (8,691     | )          |
| Future income  taxes                      |       | (96,476    | )          |
| Asset retirement  obligations             |       | (54,343    | )          |
|                                      |       | 2,598,563  |       |
| Consideration  was comprised of:          |       |       |       |
| Issuance of  106,242,000 units of Canetic |       | 2,562,563  |       |
| Transaction  costs                        |       | 36,000     |       |
|                                      |       | 2,598,563  |       |

 

8

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3.  SAMSON ACQUISITION

OnAugust 31, 2006, Canetic completed the share acquisition of a private oil andgas company (“Samson”) for total consideration of $955.1 million.

Thetransaction was financed with bank debt and a $690.0 million bought dealfinancing which was completed on August 24, 2006.  Under the bought deal financing, Caneticissued 20,769,000 units at a price of $22.15 per unit and $230.0 millionprincipal amount of convertible extendible unsecured subordinated debentures.

Theacquisition was accounted for using the purchase method of accounting asfollows:
| **($000s)**                               | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| Cash                                      |       | 57,635     |       |
| Current assets                            |       | 76,803     |       |
| Property, plant  and equipment            |       | 942,864    |       |
| Accounts payable  and accrued liabilities |       | (60,035    | )          |
| Income taxes  payable                     |       | (43,946    | )          |
| Asset retirement  obligations             |       | (18,228    | )          |
|                                      |       | 955,093    |       |
| Consideration  was comprised of:          |       |       |       |
| Cash                                      |       | 951,314    |       |
| Transaction costs                         |       | 3,779      |       |
|                                      |       | 955,093    |       |

 

4.  PROPERTY, PLANT AND EQUIPMENT
| **($000s)**                             | ** ** | **2006**      | ** ** | **2005**  | ** ** |
|-----------------------------------------|------------|---------------|------------|-----------|------------|
| Property, plant  and equipment, at cost |       | **5,879,523** |       | 1,955,472 |       |
| Accumulated  depletion and depreciation |       | **1,281,869** |       | 637,555   |       |
|                                    | ** ** | **4,597,654** |       | 1,317,917 |       |

 

Costsrelating to unproved properties of $295 million (2005 - $42.5 million) wereexcluded from costs subject to depletion and depreciation.

Animpairment test calculation was performed on the Trust’s property, plant andequipment at December 31, 2006 and 2005 in which the estimated undiscountedfuture net cash flows associated with the proved reserves exceeded the carryingamount of the Trust’s property, plant and equipment.

Thefollowing table outlines benchmark prices used in the impairment test:
| ** **              | ** ** | **WTI**       | ** ** | **Exchange** | ** ** | **AECO**       | ** ** |
|-------------------------|------------|---------------|------------|--------------|------------|----------------|------------|
| **Year**                | ** ** | **($US/bbl)** | ** ** | **Rate**     | ** ** | **($CDN/mcf)** | ** ** |
| 2007                    |       | 63.87         |       | 0.87         |       | 7.46           |       |
| 2008                    |       | 64.41         |       | 0.87         |       | 8.02           |       |
| 2009                    |       | 60.21         |       | 0.87         |       | 7.74           |       |
| 2010                    |       | 57.68         |       | 0.87         |       | 7.67           |       |
| 2011 - 2021             |       | 61.74         |       | 0.87         |       | 8.67           |       |
| Thereafter (inflation%) |       | 2.0           | %          | 0.0          | %          | 2.0            | %          |

 

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5.  BANK DEBT

Canetic has anunsecured, covenant based, extendible revolving credit facility of $1.6 billionincluding a $50.0 million working capital facility with a syndicate offinancial institutions.  Canetic may drawunder the credit facility by way of:

a)             Prime rate loans in Canadiandollars;

b)            U.S. base rate loans in U.S.dollars;

c)             Canadian and U.S. dollar Banker’sAcceptances;

d)            London Inter-Bank Offered Rate (“LIBOR”)loans in U.S. dollars; and

e)             Letters of Credit to be issued inCanadian or U.S. dollars.

At December 31,2006, Canetic has prime rate loans and Canadian Banker’s Acceptancesoutstanding.  The lenders review thecredit facility each year and determine whether they will extend the revolvingfacilities to another year.  In the eventthe credit facility is not extended at anytime before the maturity date, thefacility balance will become due and payable on the maturity date.

The creditfacility is available on a revolving basis with a maturity date of May 31,2009.  On a annual basis, Canetic mayrequest the maturity date be extended by one year.  Prime rate and U.S. base rate loans bearinterest at the lenders’ prime rate.  Therate charged on the other amounts drawn is based upon rates and fees outlinedin the lending agreement.  The effectiveinterest rate on the credit facility for the year ended December 31, 2006 was5.13 percent (2005 - 4.00 percent).

6.  CONVERTIBLE DEBENTURES

In connection withthe acquisition of Samson (Note 3), Canetic issued $230 million, 6.5%extendible unsecured, subordinated debentures, convertible into units at theoption of the holder any time prior to maturity at a conversion price of$26.55.  The debentures have a face valueof $1,000 per debenture, a coupon of 6.5% and a maturity date of December 31,2011.  The Trust may redeem thedebentures in whole or in part at a redemption price of $1,050 per debentureafter December 31, 2009 and at a redemption price of $1,025 per debenture afterDecember 31, 2010 before the maturity date. The value of the conversion feature was determined to be $2.5 million;therefore, $227.5 million of the convertible debentures has been disclosed as aliability and $2.5 million has been allocated to unitholders’ equity.  There were no conversions of these debenturesin 2006.

The StarPoint 9.4%extendible, unsecured, subordinated debentures are convertible into trust unitsat the option of the holder at any time prior to maturity at a conversion priceof $16.02.  The debentures have a facevalue of $1,000 per debenture, a coupon of 9.4% and a maturity date of July 31,2008.  The Trust may redeem thedebentures in whole or in part at a redemption price of $1,050 per debentureafter July 31, 2006 and at a redemption price of $1,025 per debenture afterJuly 31, 2007 before maturity.  During2006, $3.6 million of the 9.4% debentures were converted which resulted in theissuance of 225,000 trust units.

The Starpoint 6.5%extendible, unsecured, subordinated debentures are convertible into trust unitsat the option of the holder at any time prior to maturity at a conversion priceof $18.96.  The debentures have a facevalue of $1,000 per debenture, a coupon of 6.5% and a maturity date of July 31,2010.  The Trust may redeem thedebentures in whole or in part at a redemption price of $1,050 per debentureafter July 31, 2008 and at a redemption price of $1,025 per debenture afterJuly 31, 2009.  During 2006, $26.1million of 6.5% debentures were converted which resulted in the issuance of1,373,000 trust units.

On June 15, 2004,Acclaim issued $75.0 million, 8% convertible, extendible, unsecured,subordinated debentures.  The debenturesare convertible into units at the option of the holder at any time prior tomaturity at a conversion price of $15.56. The debentures have a face value of $1,000 per debenture, a coupon of8.0% and a maturity date of August 31, 2009. The Trust may redeem the debentures in whole or in part at a redemptionprice of $1,050 per debenture after August 31, 2007 and at a redemption priceof $1,025 per debenture after August 31, 2008 before the maturity date.  During 2006, $5.5 million of 8% debentureswere converted resulting in the issuance of 354,000 trust units.

10

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In December 2002,Acclaim issued $45.0 million, 11% convertible, extendible, unsecured,subordinated debentures.  The debenturesare convertible into units at the option of the holder at any time prior tomaturity at a conversion price of $11.24 per unit.  The debentures have a face value of $1,000per debenture, a coupon of 11% and a maturity date of December 31, 2007.  The Trust may redeem the debentures in wholeor in part at a redemption price of $1,025 per debenture before the finalmaturity date.  During 2006, $1.0 millionof 11% debentures were converted which resulted in the issuance of 90,000 trustunits.

In connection withthe Arrangement, the fair value of the conversion feature of the 6.5% and 9.4%convertible debentures of $8.7 million was classified as equity.  The fair value of the debentures uponacquisition and the allocation between liabilities and equity was determinedbased on the market price of the convertible debentures and an option pricingmodel.  During 2006, $4.6 million wasreclassified to capital upon conversion of the 6.5% and 9.4% debentures.
| ** **                  | ** ** | **9.4%**       | ** ** | **6.5%**       | ** ** | **8%**         | ** ** | **11%**        | ** ** | **6.5%**       | ** ** | ** ** | ** ** |
|-----------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|------------|------------|
| **($000s)**                 | ** ** | **(CNE.DB.A)** | ** ** | **(CNE.DB.B)** | ** ** | **(CNE.DB.C)** | ** ** | **(CNE.DB.D)** | ** ** | **(CNE.DB.E)** | ** ** | **Total**  | ** ** |
|                        |       |           |       |           |       |           |       |           |       |           |       |       |       |
| Balance,  December 31, 2004 |       | —         |       | —         |       | 72,901         |       | 6,562          |       | —         |       | 79,463     |       |
| Converted to  units         |       | —         |       | —         |       | (59,330        | )          | (3,844         | )          | —         |       | (63,174    | )          |
| Balance,  December 31, 2005 |       | —         |       | —         |       | 13,571         |       | 2,718          |       | —         |       | 16,289     |       |
| Acquisition of  StarPoint   |       | 9,255          |       | 43,944         |       | —         |       | —         |       | —         |       | 53,199     |       |
| Acquisition of  Samson      |       | —         |       | —         |       | —         |       | —         |       | 227,470        |       | 227,470    |       |
| Converted to  units         |       | (3,633         | )          | (26,123        | )          | (5,525         | )          | (1,021         | )          | —         |       | (36,302    | )          |
| Balance,  December 31, 2006 |       | 5,622          |       | 17,821         |       | 8,046          |       | 1,697          |       | 227,470        |       | 260,656    |       |

 

The followingtable reconciles the number of units to be issued on conversion of theremaining balance of the convertible debentures:
| **(000s)**                                         | ** ** | **9.4%**       | ** ** | **6.5%**       | ** ** | **8%**         | ** ** | **11%**        | ** ** | **6.5%**       | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|------------|------------|
| **Units Available Upon Conversion** | ** ** | **(CNE.DB.A)** | ** ** | **(CNE.DB.B)** | ** ** | **(CNE.DB.C)** | ** ** | **(CNE.DB.D)** | ** ** | **(CNE.DB.E)** | ** ** | **Total**  | ** ** |
|                                               |       |           |       |           |       |           |       |           |       |           |       |       |       |
| Balance,  December 31, 2004                        |       | —         |       | —         |       | 5,401          |       | 672            |       | —         |       | 6,073      |       |
| Converted to  units                                |       | —         |       | —         |       | (4,395         | )          | (394           | )          | —         |       | (4,789     | )          |
| Balance,  December 31, 2005                        |       | —         |       | —         |       | 1,006          |       | 278            |       | —         |       | 1,284      |       |
| Adjustment to  conversion ratio                    |       | —         |       | —         |       | (135           | )          | (36            | )          | —         |       | (171       | )          |
| Acquisition of  StarPoint                          |       | 576            |       | 2,313          |       | —         |       | —         |       | —         |       | 2,889      |       |
| Acquisition of  Samson                             |       | —         |       | —         |       | —         |       | —         |       | 8,663          |       | 8,663      |       |
| Converted to  units                                |       | (225           | )          | (1,373         | )          | (354           | )          | (90            | )          | —         |       | (2,042     | )          |
| Balance, December 31,  2006                        |       | 351            |       | 940            |       | 517            |       | 152            |       | 8,663          |       | 10,623     |       |

 

The fair value of the convertible debentures atDecember 31, 2006, based on quoted market value was $258.8 million (December31, 2005 - $25.4 million).

7.  ASSET RETIREMENT OBLIGATIONS

Total future asset retirement obligations wereestimated by management based on the Trust’s net ownership interest in allwells and facilities, estimated costs to reclaim and abandon the wells andfacilities and the estimated timing of the costs to be incurred in futureperiods.  The Trust has estimated the netpresent value of its total asset retirement obligations to be $191.9 million(December 31, 2005 - $68.2 million) based on a total future liability of $603.3million (December 31, 2005 - $216.5 million). The costs are expected to be incurred over an average period of 15 years.  The estimated liability has been computedusing an inflation rate of 2.0 percent and discounted using a credit adjustedrisk free rate of 8 percent.

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The following tablereconciles Canetic’s asset retirement obligations:
| **Asset Retirement Obligations ($000s)** | ** ** | **2006**    | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|----------|------------|
| Balance, beginning of  year                             | ** ** | **68,235**  |       | 58,649   |       |
| Acquisition of  StarPoint*(Note 2)*                     | ** ** | **54,343**  |       | —   |       |
| Acquisition of Samson*(Note 3)*                         | ** ** | **18,228**  |       | —   |       |
| Additions                                               | ** ** | **3,117**   |       | 1,551    |       |
| Change in estimates                                     | ** ** | **53,418**  |       | 9,768    |       |
| Settlement of  liabilities during year                  | ** ** | **(16,877** | **)**      | (6,293   | )          |
| Accretion expense                                       | ** ** | **11,410**  |       | 4,560    |       |
| **Balance, end of year**                                | ** ** | **191,874** |       | 68,235   |       |

 

8.  CAPITAL

Authorizedcapital of the Trust is comprised of an unlimited number of units and anunlimited number of special voting units. There are no special voting unitsoutstanding.  Each unitholder can requestredemption of trust units at a price calculated as the lesser of 90 percent ofthe market price during the 10 days after the date units are tendered and theclosing market price on the date units are tendered.  Cash payments for units tendered are limitedto $100,000 per month.  The Trust mayissue notes for redemption in excess of cash payments.
| ** **                                      | ** ** | **2006**              | ** ** | **2005**                | ** **    |
|-------------------------------------------------|------------|-----------------------|------------|-------------------------|---------------|
| **a) Trust Units**                    | ** ** | **Units (000s)** | ** ** | **Amount ($000s)** | ** **    | **Units**(1) (000s) | ** ** | **Amount ($000s)** | ** ** |
| Balance, beginning of  year                     | ** ** | **91,583**            | ** ** | **$**                   | **1,087,459** |   | 86,313 |   | $ | 1,003,294 |   |
| Issued:                                         |       |                  |       |                    |          |   |   |   |   |
| Bought deal financing,  net of costs *(Note 3)* | ** ** | **20,769**            | ** ** | **437,001**             |          | — |   | — |   |
| Pursuant to equity  offerings, net of costs     | ** ** | **—**            | ** ** | **—**              |          | — |   | (350 | ) |
| Employee Unit Savings  Plan                     | ** ** | **274**               | ** ** | **6,184**               |          | 89 |   | 1,646 |   |
| Distribution  reinvestment plan                 | ** ** | **2,470**             | ** ** | **44,825**              |          | 456 |   | 8,492 |   |
| Issued pursuant to  Arrangement *(Note 2)*      | ** ** | **106,242**           | ** ** | **2,562,563**           |          | — |   | — |   |
| Properties contributed  to TriStar *(Note 2)*   | ** ** | **—**            | ** ** | **(5,000**              | **)**         | — |   | — |   |
| Conversion of  debentures                       | ** ** | **2,042**             | ** ** | **36,302**              |          | 3,990 |   | 63,174 |   |
| Conversion of  debentures - equity portion      | ** ** | **—**            | ** ** | **4,636**               |          | — |   | — |   |
| Conversion of  exchangeable shares              | ** ** | **358**               | ** ** | **3,804**               |          | 357 |   | 4,033 |   |
| Unit Award Incentive  Plan                      | ** ** | **2,058**             | ** ** | **46,696**              |          | 378 |   | 7,170 |   |
| **Balance, end of year**                        | ** ** | **225,796**           | ** ** | **4,224,470**           |          | 91,583 |   | 1,087,459 |   |
|                                                 |            |                       |            |                         |               |  |  |  |  |  |  |

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(1)*All disclosures of Acclaimunits up to the merger January 5, 2006 have been restated using the exchangeratio of 0.8333 of a Canetic unit for each Acclaim unit.*
| ** **                                      | ** ** | **Units (000s)** | ** ** | **Amount ($000s)** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| **b) Exchangeable Shares**            | ** ** | **(Note 1)**     | ** ** | ** **              | ** ** |
| Balance, December 31,  2004                     |       | 673                   |       | 7,837                   |       |
| Shares exchanged                                |       | (357                  | )          | (4,033                  | )          |
| Adjustment to  exchange ratio for distributions |       | 42                    |       | —                  |       |
| Balance, December 31,  2005                     |       | 358                   |       | 3,804                   |       |
| Shares exchanged                                |       | (358                  | )          | (3,804                  | )          |
| **Balance, December 31, 2006**                  | ** ** | **—**            | ** ** | **—**              | ** ** |

 

Pursuantto the Arrangement, all exchangeable shares were exchanged into units.

**c)  Distribution Reinvestment Plan**

Canadianunitholders may elect to reinvest their cash distributions into additionalunits of the Trust.  During 2006,2,470,000 units (2005 — 456,000 units) were issued with $44.8 million (2005 -$8.5 million) being credited to capital.

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9.  UNIT-BASEDCOMPENSATION PLAN

On January 5,2006, the Board of Directors of Canetic approved a Restricted Trust Unit (“RTU”)and Performance Trust Unit (“PTU”) incentive plan (the “Plan”).  Under the terms of the Plan, both RTUs andPTUs may be granted to directors, officers, employees of, and consultants andservice providers to the Trust or its subsidiaries.  The number of trust units issued pursuant tothe Plan are adjusted for the value of the distributions from the time of thegranting to the time when the trust units are issued.  PTUs are also adjusted based on the Trust’sperformance relative to the performance of a group of comparable publiclytraded oil and gas royalty trusts and other performance criteria determined bythe Board of Directors.

Thefollowing table summarizes the activity for the RTUs and PTUs:
| ** **                     | ** ** | **Number of RTUs** | ** ** | **Number of PTUs** | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **(000s)**                   | ** ** | **(000s)**                   | ** ** |
| Balance,  December 31, 2004    |       | 909                          |       | 312                          |       |
| Granted                        |       | 375                          |       | 231                          |       |
| Exercised                      |       | (378                         | )          | —                       |       |
| Forfeited                      |       | (102                         | )          | (50                          | )          |
| Balance,  December 31, 2005    |       | 804                          |       | 493                          |       |
| Granted                        |       | 1,035                        |       | 2,021                        |       |
| Exercised                      |       | (804                         | )          | (927                         | )          |
| Forfeited                      |       | (119                         | )          | (201                         | )          |
| **Balance, December 31, 2006** | ** ** | **916**                      | ** ** | **1,386**                    | ** ** |

 

All RTUs and PTUsvested on January 5, 2006 pursuant to the Arrangement.  At that time, 2,152,000 units were issued toholders of RTUs and PTUs.  Compensationexpense in 2005 reflects the full vesting of the RTUs and PTUs that occurred onJanuary 5, 2006.  The intrinsic value ofvested rights of $40.8 million was included in Contributed Surplus at December31, 2005.  The Trust recorded unit-basedcompensation expense of $14.3 million and $2.5 million to general andadministrative and operating expenses, respectively, and capitalized $3.4million to property, plant and equipment for the year-ended December 31, 2006to reflect the change in fair value (based on the period end price of theunits) of the RTUs and PTUs ($23.8 million, $4.2 million and $11.0 million forthe year-ended December 31, 2005).

Other long-termliabilities consist of the long-term portion of the Trust’s estimated liabilityfor the Plan as at December 31, 2006. The amount of $7.3 million is payable in 2008 and 2009.

Canetic paid $2.8million in taxes related to the payment of RTUs and PTUs (2005 - $0.8 million).

**EMPLOYEEUNIT SAVINGS PLAN**

The Trust has asavings plan whereby the employees can place up to 5 percent of their annualbase salary and the Trust will match up to 10 percent of their annual basesalary.   All amounts are then investedin units of the Trust by way of market purchases or issuances fromTreasury.  During 2006, 274,000 (2005 —89,000) units were issued from Treasury under the Employee Unit Savings Planwith $6.2 million (2005 - $1.6 million) being credited to capital *(Note 8)*.  The Trust matching portion is included ingeneral and administrative expenses as a compensation expense to the employee.

10.  DEFICIT

Deficitconsists of accumulated earnings and accumulated distributions for the Trustsince inception as follows:
| **($000s)**                | ** ** | **2006**       | ** ** | **2005** | ** ** |
|----------------------------|------------|----------------|------------|----------|------------|
| Accumulated  earnings      | ** ** | **384,970**    | ** ** | 161,869  |       |
| Accumulated  distributions | ** ** | **(1,109,109** | **)**      | (525,581 | )          |
|                       | ** ** | **(724,139**   | **)**      | (363,712 | )          |

 

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The table below shows the cumulative distributions tounitholders:
| **Distributions on issued units**(1) | ** ** | **$/Unit** | ** ** | **Amount ($000s)** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------|------------|
| Year ended  December 31, 2002                       |       | 0.585      |       | 19,025                  |       |
| Year ended  December 31, 2003                       |       | 2.340      |       | 121,338                 |       |
| Year ended  December 31, 2004                       |       | 2.340      |       | 176,741                 |       |
| Year ended  December 31, 2005                       |       | 2.340      |       | 208,477                 |       |
| Three months  ended March 31, 2006                  |       | 0.690      |       | 138,634                 |       |
| Three months  ended June 30, 2006                   |       | 0.690      |       | 139,567                 |       |
| Three months  ended September 30, 2006              |       | 0.690      |       | 149,918                 |       |
| Three months  ended December 31, 2006               |       | 0.690      |       | 155,409                 |       |
| **Year  ended December 31, 2006**                   | ** ** | **2.760**  | ** ** | **583,528**             | ** ** |
| **Accumulated distributions**                       | ** ** | ** ** | ** ** | **1,109,109**           | ** ** |

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(1) All disclosures of per unit amounts of Acclaim upto the merger January 5, 2006 have been restated using the exchange ratio of0.8333 of a Canetic unit for each Acclaim unit.

11.  INCOME TAXES

**THE TRUSTAND OTHER NON-CORPORATE ENTITIES**

TheTrust is an inter vivos trust for income tax purposes.  Accordingly, the Trust is taxable on anytaxable income that is not allocated to the unitholders.  The Trust intends to allocate all taxableincome to the unitholders.  Should theTrust incur any income taxes, the funds available for distribution will bereduced accordingly.

TheTrust had no taxable income in 2006 or 2005.

TheTrust also owns interests directly or indirectly in various non-corporateentities which are considered flow-through entities for tax purposes.  These entities are designed to allocate 100percent of their taxable income to the Trust and therefore do not recognizefuture income taxes on differences between the carrying value and the tax valueof their net assets.

TheTrust and other non-corporate entities had the following tax pools:
| **($000s)**                            | ** ** | **2006**    | ** ** | **2005** | ** ** |
|----------------------------------------|------------|-------------|------------|----------|------------|
| Canadian oil and  gas property expense | ** ** | **383,570** |       | 8,460    |       |
| Undepreciated  capital cost            | ** ** | **36,537**  |       | 69,915   |       |
| Canadian  development expense          | ** ** | **6,090**   |       | 5,961    |       |
| Canadian  exploration expense          | ** ** | **2,562**   |       | —   |       |
| Share issue  costs                     | ** ** | **—**  |       | 10,868   |       |
|                                   | ** ** | **428,759** |       | 95,204   |       |

 

**PROPOSED TAX ON INCOME TRUSTS**

On October 31,2006, the Canadian federal government proposed a new tax on certaindistributions of publicly traded income and royalty trusts.  The intent of these proposals is toultimately tax income earned in the trust structure on an equal basis as incomeearned in a corporation.  If enacted, theseprovisions will be directly applicable to Canetic beginning in 2011 at a statutoryrate of 31.5 percent.  The new tax willnot apply until 2011 provided Canetic does not exceed the Department of Finance’spublished guidelines on normal growth and expansion.  It is expected that Canetic can issue up to$4.5 billion of new equity before 2011 without exceeding these guidelines.

The proposedchanges are not substantively enacted at the present time.  Draft legislation was released on December21, 2006 and circulated for comment.  Weare unable to predict the timing of enactment or whether the final legislationwill implement the proposals as they currently exist.  No amounts in respect of these proposals arereflected in the future income tax accounts.

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If enacted, theFund would be treated as a taxable entity and would recognize future income taxassets and liabilities at substantively enacted tax rates based on thedifferences between the accounting and tax basis of its assets and liabilities.

**CORPORATESUBSIDIARIES**

The Trust hasrecorded a net future income tax liability associated with the corporatesubsidiaries as at December 31, relating to the following:
| **($000s)**                                          | ** ** | **2006**    | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|-------------|------------|----------|------------|
| Capital assets  in excess of tax value               | ** ** | **324,135** |       | 233,103  |       |
| Asset retirement  obligations                        | ** ** | **(48,173** | **)**      | (18,703  | )          |
| Financial  derivatives                               | ** ** | **1,912**   |       | (10,976  | )          |
| Finance expense  charged to unitholders’ equity | ** ** | **—**  |       | (1,314   | )          |
| Tax losses  carried forward                          | ** ** | **(81,037** | **)**      | —   |       |
| Deferred  partnership income                         | ** ** | **53,502**  |       | —   |       |
|                                                 | ** ** | **250,339** |       | 202,110  |       |

 

AtDecember 31,  the corporate subsidiarieshad the following tax pools:
| **($000s)**                            | ** ** | **2006**      | ** ** | **2005** | ** ** |
|----------------------------------------|------------|---------------|------------|----------|------------|
| Canadian oil and  gas property expense | ** ** | **227,939**   |       | 181,042  |       |
| Undepreciated  capital cost            | ** ** | **468,695**   |       | 123,218  |       |
| Canadian  development expense          | ** ** | **279,573**   |       | 103,711  |       |
| Canadian  exploration expense          | ** ** | **404**       |       | 8,414    |       |
| Non-capital  losses                    | ** ** | **276,270**   |       | —   |       |
| Share issue  costs                     | ** ** | **48**        |       | 3,797    |       |
|                                   | ** ** | **1,252,929** |       | 420,182  |       |

 

Non-capital lossesmay be carried forward and are fully deductible against taxable income infuture years.  They are subject to expiryafter seven, ten or twenty years depending upon the taxation year in which thelosses arose.  At December 31, 2006 theTrust had $276 million of non-capital loss available for carry-forward. $56million of these losses will expire if unused at various times between 2007 and2015. $220 million of these losses are scheduled to expire in 2026.

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Income tax expense varies from amounts that would becomputed by applying Canadian federal and provincial income tax rates asfollows:

**Tax Rate Reconciliation**
| **($000s)**                           | ** ** | **2006**    | ** ** | **2005** | ** ** |
|---------------------------------------|------------|-------------|------------|----------|------------|
| Net Earnings  before taxes            | ** ** | **192,258** |       | 82,457   |       |
| Statutory income  tax rate            | ** ** | **35.25**   | **%**      | 38.12    | %          |
|                                  |       |        |       |     |       |
| Expected income  tax expense          | ** ** | **67,771**  |       | 31,433   |       |
| Add (deduct) the  tax effect of:      |       |        |       |     |       |
| Non-deductible crown charges          | ** ** | **25,529**  |       | 15,454   |       |
| Non-deductible compensation expense   | ** ** | **4,952**   |       | 10,356   |       |
| Net income attributed to the Trust    | ** ** | **(67,642** | **)**      | (31,693  | )          |
| Resource allowance                    | ** ** | **(28,781** | **)**      | (13,720  | )          |
| Change in tax rates                   | ** ** | **(32,118** | **)**      | (3,257   | )          |
| Amended returns and pool balances     | ** ** | **(9,690**  | **)**      | —   |       |
| Other                                 | ** ** | **(2,700**  | **)**      | —   |       |
|                                  | ** ** | **(42,679** | **)**      | 8,573    |       |
| Future income  tax (recovery) expense | ** ** | **(48,246** | **)**      | 8,573    |       |
| Current income  tax                   | ** ** | **5,567**   |       | —   |       |
| Total income tax  (recovery) expense  | ** ** | **(42,679** | **)**      | 8,573    |       |

 

12.  FINANCIAL INSTRUMENTS

TheTrust’s financial instruments recognized on the consolidated balance sheetsinclude accounts receivable, financial derivatives, current liabilities andbank debt.  The fair values of financialinstruments other than bank debt approximates their carrying amounts due to theshort-term nature of these instruments. The carrying value of bank debt approximates its fair value due to floatinginterest terms.

TheTrust is exposed to the commodity price fluctuations of crude oil and naturalgas and to fluctuations in the Canada/US dollar exchange rate.  The Trust manages this risk by entering intovarious derivative financial instruments.

TheTrust is exposed to credit risk due to the potential non-performance ofcounterparties to the above financial instruments.  The Trust mitigates this risk by dealing onlywith larger, well-established commodity marketing companies and with majornational chartered banks.

TheTrust is exposed to interest rate risks as a result of its floating rate bankdebt.

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The Trust has enteredinto the following financial contracts and fixed price physical contracts for2006 and future years:
| **Future  Commodity Contracts**                | ** ** | ** **         | ** ** | ** **                           |
|------------------------------------------------|------------|--------------------|------------|--------------------------------------|
| **Daily  Quantity**                            | ** ** | **Contract Price** | ** ** | **Term**                             |
| **Natural Gas - Collars (AECO)**               |       |               |       |                                 |
| 10,000 Gj/d                                    |       | Cdn $8.00 - $14.50 |       | November 1, 2006 -  March 31, 2007   |
| 5,000 Gj/d                                     |       | Cdn $8.00 - $15.60 |       | November 1, 2006 -  March 31, 2007   |
| 10,000 Gj/d                                    |       | Cdn $9.00 - $15.00 |       | November 1, 2006 -  March 31, 2007   |
| 20,000 Gj/d                                    |       | Cdn $7.00 - $11.10 |       | November 1, 2006 -  March 31, 2007   |
| 10,000 Gj/d                                    |       | Cdn $8.00 - $12.08 |       | November 1, 2006 -  March 31, 2007   |
| 10,000 Gj/d                                    |       | Cdn $7.50 - $12.05 |       | November 1, 2006 -  March 31, 2007   |
| 10,000 Gj/d                                    |       | Cdn $8.00 - $12.75 |       | November 1, 2006 -  March 31, 2007   |
| 10,000 Gj/d                                    |       | Cdn $7.50 - $14.00 |       | January 1, 2007 - March  31, 2007    |
| 10,000 Gj/d                                    |       | Cdn $7.50 - $14.20 |       | January 1, 2007 - March  31, 2007    |
| 5,000 Gj/d                                     |       | Cdn $7.00 - $12.45 |       | January 1, 2007 - March  31, 2007    |
| 5,000 Gj/d                                     |       | Cdn $7.35 - $11.00 |       | April 1, 2007 - October  31, 2007    |
| 5,000 Gj/d                                     |       | Cdn $7.50 - $11.00 |       | April 1, 2007 - October  31, 2007    |
| 5,000 Gj/d                                     |       | Cdn $7.50 - $11.40 |       | April 1, 2007 - October  31, 2007    |
| 5,000 Gj/d                                     |       | Cdn $7.50 - $11.45 |       | April 1, 2007 - October  31, 2007    |
| 10,000 Gj/d                                    |       | Cdn $7.00 - $9.04  |       | April 1, 2007 - October  31, 2007    |
| 10,000 Gj/d                                    |       | Cdn $7.00 - $9.00  |       | April 1, 2007 - October  31, 2007    |
| 10,000 Gj/d                                    |       | Cdn $7.00 - $9.50  |       | April 1, 2007 - October  31, 2007    |
| 20,000 Gj/d                                    |       | Cdn $6.00 - $9.00  |       | April 1, 2007 - October  31, 2007    |
| 10,000 Gj/d                                    |       | Cdn $6.50 - $9.25  |       | April 1, 2007 - October  31, 2007    |
| 20,000 Gj/d                                    |       | Cdn $7.00 - $11.00 |       | November 1, 2007 -  March 31, 2008   |
| 10,000 Gj/d                                    |       | Cdn $7.00 - $10.65 |       | November 1, 2007 -  March 31, 2008   |
| 10,000 Gj/d                                    |       | Cdn $7.00 - $10.70 |       | November 1, 2007 -  March 31, 2008   |
| 5,000 Gj/d                                     |       | Cdn $7.00 - $11.10 |       | November 1, 2007 -  March 31, 2008   |
| 5,000 Gj/d                                     |       | Cdn $7.00 - $11.15 |       | November 1, 2007 -  March 31, 2008   |
| 20,000 Gj/d                                    |       | Cdn $7.00 - $11.30 |       | November 1, 2007 -  March 31, 2008   |
| 20,000 Gj/d                                    |       | Cdn $7.00 - $12.00 |       | November 1, 2007 -  March 31, 2008   |
| **Natural Gas - Fixed Price Contracts (AECO)** |       |               |       |                                 |
| 5,000 Gj/d                                     |       | Cdn $8.47          |       | January 1, 2007 -  December 31, 2007 |
| 20,000 Gj/d                                    |       | Cdn $7.00          |       | April 1, 2007 - October  31, 2007    |
| 10,000 Gj/d                                    |       | Cdn $7.14          |       | April 1, 2007 - October  31, 2007    |
| 10,000 Gj/d                                    |       | Cdn $7.265         |       | April 1, 2007 - October  31, 2007    |
| 5,000 Gj/d                                     |       | Cdn $7.95          |       | April 1, 2007 - October  31, 2007    |
| **Crude Oil - Collars (WTI)**                  | ** ** | ** **         | ** ** | ** **                           |
| 1,000 bbl/d                                    |       | US $50.00 - $77.00 |       | January 1, 2007 -  December 31, 2007 |
| 1,000 bbl/d                                    |       | US $53.00 - $77.00 |       | January 1, 2007 -  December 31, 2007 |
| 2,000 bbl/d                                    |       | US $60.00 - $77.00 |       | January 1, 2007 -  December 31, 2007 |
| 1,000 bbl/d                                    |       | US $60.00 - $80.05 |       | January 1, 2007 -  December 31, 2007 |
| 1,000 bbl/d                                    |       | US $65.00 - $96.50 |       | January 1, 2007 -  December 31, 2007 |
| 1,000 bbl/d                                    |       | US $60.00 - $85.55 |       | January 1, 2008 -  December 31, 2008 |
| 1,000 bbl/d                                    |       | US $65.00 - $79.25 |       | January 1, 2008 - December  31, 2008 |
| 1,000 bbl/d                                    |       | US $65.00 - $79.70 |       | January 1, 2008 -  December 31, 2008 |
| 1,000 bbl/d                                    |       | US $65.00 - $81.50 |       | January 1, 2008 -  December 31, 2008 |
| 1,000 bbl/d                                    |       | US $60.00 - $90.15 |       | January 1, 2008 -  December 31, 2008 |
| **Crude Oil - Fixed Price Contracts (WTI)**    |       |               |       |                                 |
| 3,500 bbl/d                                    |       | Cdn $70.70         |       | January 1, 2007 -  December 31, 2007 |
| 4,500 bbl/d                                    |       | Cdn $64.58         |       | January 1, 2007 -  December 31, 2007 |
| 500 bbl/d                                      |       | Cdn $72.20         |       | January 1, 2008 - June  30, 2008     |
| 1,000 bbl/d                                    |       | US $48.12          |       | January 1, 2006 -  December 31, 2007 |
| 500 bbl/d                                      |       | US $48.08          |       | January 1, 2006 -  December 31, 2007 |

 

Theestimated fair value of financial derivative instruments is based on quotedmarket prices.

17

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| **($000s)**                                      | ** ** | **2006**    | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|-------------|------------|----------|------------|
| Realized loss on  financial derivatives          |       | **8,465**   |       | 80,157   |       |
| Unrealized  (gain) loss on financial derivatives |       | **(95,371** | **)**      | 20,635   |       |
| (Gain) loss on  financial derivatives            | ** ** | **(86,906** | **)**      | 100,792  |       |

 

13.  NET EARNINGS PER UNIT

Net earnings per unit hasbeen calculated based on the following:
| **(000s)**                                                       | ** ** | **2006**    | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|----------|------------|
| Weighted average units outstanding                               | ** ** | **206,081** |       | 88,720   |       |
| Units issuable on conversion of exchangeable shares              | ** ** | **—**  |       | 611      |       |
| Basic weighted average units and exchangeable shares outstanding | ** ** | **206,081** |       | 89,331   |       |
| Dilutive impact of convertible debentures(1)                     | ** ** | **1,968**   |       | —   |       |
| Dilutive impact of RTU’s and PTU’s                     | ** ** | **2,348**   |       | 1,260    |       |
| Diluted weighted average units outstanding                       | ** ** | **210,397** |       | 90,591   |       |

----

(1) Of the convertible debentures issued, the series CNE.DB.A and CNE.DB.Ewere anti-dilutive.

Basicnet income per unit has been calculated based on net income divided by weightedaverage trust units.  Diluted net incomeper unit has been calculated based on net income before interest on dilutiveconvertible debentures divided by dilutive trust units.

14.  COMMITMENTS AND GUARANTEES

Inaddition to financial derivative commitments, the Trust has the followingcommitments:
| **($000s)**            | ** ** | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009**  | ** ** | **2010**   | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|------------------------|------------|-----------|------------|----------|------------|----------|------------|-----------|------------|------------|------------|----------|------------|----------------|------------|
| Bank debt              |       | 1,289,678 |       | —   |       | —   |       | 1,289,678 | ** ** | **—** |       | —   |       | —         |       |
| Convertible debentures |       | 260,656   |       | 1,697    |       | 5,622    |       | 8,046     |       | 17,821     |       | 227,470  |       | —         |       |
| Office lease           |       | 24,659    |       | 6,415    |       | 6,295    |       | 6,295     |       | 3,231      |       | 2,423    |       | —         |       |
| Pipeline contract      |       | 6,116     |       | 636      |       | 802      |       | 814       |       | 877        |       | 823      |       | 2,164          |       |
| Total                  |       | 1,581,109 |       | 8,748    |       | 12,719   |       | 1,304,833 |       | 21,929     |       | 230,716  |       | 2,164          |       |

 

15.  DIFFERENCESBETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The Trust’s consolidatedfinancial statements have been prepared in accordance with Canadian generallyaccepted accounting principles (“Canadian GAAP”).  These principles, as they pertain to theTrust’s consolidated financial statements differ from generally acceptedaccounting principles in the United States of America (“U.S. GAAP”) as follows:

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The application ofU.S. GAAP would have the following effects on net earnings as reported:

 
| ** **                                                                | ** ** | **2006**     | ** **   | **2005**   | ** ** |
|---------------------------------------------------------------------------|------------|--------------|--------------|------------|------------|
|                                                                      |       |         |         |       |       |
| Net earnings as  reported for Canadian GAAP                               | ** ** | **$**        | **223,101**  |       | $          | 65,848 |   |
| Adjustments:                                                              |       |         |         |       |       |
| Depletion, depreciation and amortization (Note a)                         | ** ** | **(732,379** | **)**        | 12,353     |       |
| Unit-based compensation (Note f)                                          | ** ** | **(2,021**   | **)**        | —     |       |
| Non-cash interest on debentures (Note e)                                  | ** ** | **2,070**    | ** **   | ** ** | ** ** |
| Unrealized loss on financial derivatives (Note b)                         | ** ** | **—**   |         | 2,818      |       |
| Effect of applicable income taxes on the above  adjustments               | ** ** | **205,190**  |         | (5,783     | )          |
| Net earnings  (loss) and comprehensive income  - U.S.  GAAP (Note d) |       | **$ **  | **(304,039** | **)**      | $     | 75,236 |   |
| Net earnings per  unit                                                    |       |         |         |       |       |
| Basic                                                                     | ** ** | **$**        | **(1.48**    | **)**      | $          | 0.84 |   |
| Diluted                                                                   | ** ** | **$**        | **(1.48**    | **)**      | $          | 0.83 |   |
|                                                                      |       |         |         |       |       |
| Weighted average  number of trust units outstanding                       |       |         |         |       |       |
| Basic                                                                     | ** ** | **206,081**  |         | 89,331     |       |
| Diluted                                                                   | ** ** | **206,081**  |         | 90,591     |       |

 

The application of U.S.GAAP would have the following effects on the balance sheets as reported:
| ** **                                        | ** ** | **Canadian** | ** ** | **Increase**   | ** ** | **U.S.**      | ** ** |
|---------------------------------------------------|------------|--------------|------------|----------------|------------|---------------|------------|
| ** **                                        | ** ** | **GAAP**     | ** ** | **(Decrease)** | ** ** | **GAAP**      | ** ** |
| **December  31, 2006**                            | ** ** | ** **   |       |           | ** ** | ** **    | ** ** |
| Assets:                                           | ** ** | ** **   |       |           | ** ** | ** **    | ** ** |
| Property, plant and equipment (Note a)            |       | $            | 4,597,654  |           | $          | (777,534      | )          | **$** | **3,820,120** | ** ** |
|                                              |       |         |       |           | ** ** | ** **    | ** ** |
| Liabilities:                                      |       |         |       |           | ** ** | ** **    | ** ** |
| Accounts payable and accrued liabilities (Note f) |       | 260,206      |       | 2,768          | ** ** | **262,974**   | ** ** |
| Convertible debentures (Note e)                   |       | 260,656      |       | 4,514          | ** ** | **265,170**   | ** ** |
| Future income taxes                               |       | 250,339      |       | (225,702       | )          | **24,637**    | ** ** |
|                                              |       |         |       |           | ** ** | ** **    | ** ** |
| Temporary equity  (Note c)                        |       | —       |       | 3,103,011      | ** ** | **3,103,011** | ** ** |
|                                              |       |         |       |           | ** ** | ** **    | ** ** |
| Unitholders’  equity:                        |       |         |       |           | ** ** | ** **    | ** ** |
| Capital (Note c)                                  |       | 4,224,470    |       | (4,224,470     | )          | **—**    | ** ** |
| Convertible debentures (Note e)                   |       | 6,584        |       | (6,584         | )          | **—**    | ** ** |
| Deficit (Note c)                                  |       | (724,139     | )          | 568,929        | ** ** | **(155,210**  | **)**      |
|                                              |       |         |       |           | ** ** | ** **    | ** ** |
| **December  31, 2005**                            |       |         |       |           |       |          |       |
| Assets:                                           |       |         |       |           |       |          |       |
| Property, plant and equipment (Note a)            |       | $            | 1,317,917  |           | (45,902    | )             | **$**      | **1,272,015** | ** ** |
| Liabilities:                                      |       |         |       |           | ** ** | **—**    | ** ** |
| Future income taxes                               |       | 202,110      |       | (15,803        | )          | **186,307**   | ** ** |
| Non-controlling  interest (Note c)                |       | 3,804        |       | (3,804         | )          | **—**    | ** ** |
| Temporary equity  (Note c)                        |       | —       |       | 2,090,829      | ** ** | **2,090,829** | ** ** |
| Unitholders’  equity:                        |       |         |       |           | ** ** | **—**    | ** ** |
| Capital (Note c)                                  |       | 1,087,459    |       | (1,087,459     | )          | ** **    | ** ** |
| Contributed surplus (Note c)                      |       | 40,836       |       | (40,836        | )          | **—**    | ** ** |
| Deficit (Note c)                                  |       | $            | (363,712   | )              | $          | (988,829      | )          | **$** | **(1,352,541** | **)** |

 

19

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**a)****              Property, plant andequipment and depletion, depreciation and amortization:**

Under U.S. GAAP, the book value of petroleum andnatural gas properties, net of deferred income taxes, is limited to the presentvalue of after tax future net cash flows from proven reserves, discounted at 10percent (based on prices and costs at the balance sheet date), plus the lowerof cost and fair value of unproven properties.

Under Canadian GAAP, an impairment loss arises whenthe book value of the petroleum and natural gas properties exceeds theundiscounted future cash flow from proved reserves calculated using forecastprices and costs.  If an impairment lossis determined to exist, the impairment is measured as the amount by which thenet book value of the petroleum and natural gas properties exceeds the futurediscounted cash flow from proved plus probable reserves at forecast prices andcosts.

Forthe year ended December 31, 2006, depletion, depreciation and amortizationcalculated under U.S. GAAP was $732.4 million ($520.0 million net of tax)higher than depletion, depreciation and amortization calculated under CanadianGAAP.  This amount was comprised of aceiling test impairment totaling $739.1 million ($524.7 million net of tax)reduced by depletion, depreciation and amortization totaling $6.7 million ($4.8million net of tax) relating to differences arising in prior years. For theyear ended December 31, 2005, depletion, depreciation and amortizationcalculated under U.S. GAAP was $12.4 million ($7.6 million net of tax) lowerthan depletion, depreciation and amortization calculated under Canadian GAAPand there was no ceiling test impairment under U.S. GAAP in 2005.

**b)****              Financial derivativesand unrealized loss on financial derivatives:**

EffectiveJanuary 1, 2004, the Trust prospectively adopted CICA Accounting Guideline — 13“Hedging Relationships” (“AcG-13”) and Emerging Issues Committee Abstract 128 “Accountingfor Trading, Speculative or Non-hedging Derivative Financial Instruments”. Thiseffectively eliminates U.S. GAAP differences relating to financial instrumentsthat do not qualify for hedge accounting for future periods. The Trust entersinto numerous financial instruments to manage commodity price and foreignexchange risk that do not qualify as hedges under the new accounting guideline.The Trust has elected to not apply hedge accounting to any of its financialinstruments for both Canadian and U.S. GAAP.

Uponadoption of AcG-13 the Trust recorded in 2005, $2.8 million ($1.7 million netof tax) of a deferred financial derivative loss, which was amortized intoearnings under AcG-13. Because this amount was required to be expensed underU.S. GAAP prior to 2005, an adjustment for this amount was made during the 2005year.

**c)****              Temporary equity:**

TheTrust issues units and exchangeable shares that are redeemable at the option ofthe unitholder. Under Canadian GAAP, all Trust units are classified asunitholders’ equity and all exchangeable shares are classified asnon-controlling interest. For U.S. GAAP, Trust units and exchangeable sharesthat are redeemable at the option of the unitholder are valued at theirredemption value and presented as temporary equity. The redemption value of thetrust units and exchangeable shares is based on the trading value of the unitsat the balance sheet date. Changes in redemption value are charged or creditedto accumulated earnings. As contributed surplus relates to trust units, it hasalso been reclassified to temporary equity.

20

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**d)****              Comprehensiveincome:**

Comprehensive income isrecognized and measured under U.S. GAAP pursuant to Statement of FinancialAccounting Standard (SFAS) 130, “Reporting Comprehensive Income”. This standarddefines comprehensive income as all changes in equity other than thoseresulting from investments by owners and distributions to owners. Comprehensiveincome is comprised of two components, net income and other comprehensiveincome (“OCI”). OCI refers to amounts that are recorded as an element ofshareholders’ equity but are excluded from net income because thesetransactions or events were attributed to changes from non-owner sources.Comprehensive income is equivalent to net income in 2006 and 2005.

**e)****              ConvertibleDebentures:**

Under Canadian GAAP, certain of the Trust’sconvertible debentures were classified as debt with a portion, representing thevalue associated with the conversion feature, being allocated to equity underCanadian GAAP.  In addition, underCanadian GAAP a non-cash interest expense representing the effective yield ofthe debt component is recorded in the consolidated statement of earnings with acorresponding credit to the convertible debenture liability balance to accretethat balance to the full principal due on maturity.

Under U.S. GAAP, the convertible debentures in theirentirety are classified as debt.  Thedifference between the fair value and the face value of the debentures isamortized over the life of the debentures using the effective yield method.

**f)****                Unit-BasedCompensation:**

The Trust has a Unit Award Incentive Plan fordirectors, officers, employees and consultants of the Trust.  Under the terms of the plan, a holder mayelect, subject to consent of the Trust, to receive cash upon vesting in lieu ofthe number of rights held.  UnderCanadian GAAP, compensation expense associated with rights granted under theplan is measured at the date of exercise or at the date of the financialstatement for unexercised rights. Compensation expense on unexercised rights is determined on the rightsas the excess of the market price over the exercise price of the rights at theend of each reporting period and is deferred and recognized in income over thevesting period of the rights.

U.S. GAAP, SFAS 123R “Share Based Payments” eliminatesthe ability to account for share-based compensation using APB 25, “Accountingfor Stock Issued to Employees” and generally requires instead, that suchtransactions be accounted for using a fair-value-based method.  The methodology for determining the fairvalue of equity instruments issued in exchange for employee services prescribedby SFAS 123R differs from that prescribed by Canadian GAAP.  Under U.S. GAAP, the Trust unit liability iscalculated based on the RTUs’ and PTUs’ fair value at each reporting date untilthe date of settlement.  Compensationcost for each period is based on the change in the fair value of the RTUs andPTUs for each reporting period.  When theRTUs and PTUs vest, the amounts recorded as a trust unit rights liability, arerecorded to mezzanine equity.

For the period ended December 31, 2005, the Trustrecorded share-based compensation using APB 25, and for the 2006 fiscal yearthe Trust used SFAS 123R.  In 2005 therewere no differences under Canadian GAAP and APB 25.

The Trust adopted SFAS 123R using the modifiedprospective approach.  As at and duringthe year ended December 31, 2006 the Trust has recorded additional unit-basedcompensation expense totaling $2 million, additional PP&E totaling $1million and an additional liability totaling $3 million under U.S. GAAPrelating to difference in methodology in determining the fair value of certainequity instruments.  As the Trust adoptedSFAS 123R using the modified prospective approach, prior periods have not beenrestated, as required by the standard. SFAS 123R, under the modified prospective approach, requires thecumulative impact of a change in an accounting policy to be presented in thecurrent years statement of earnings.  Asno PTUs were outstanding as at December 31, 2005, there was no impact ofadopting SFAS 123R.

21

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Additionaldisclosures required under U.S. GAAP:
| ** **                                   | ** ** | **2006**    | ** **  | **2005** | ** ** |
|----------------------------------------------|------------|-------------|-------------|----------|------------|
|                                         | ** ** | ** **  |        |     |       |
| Components of  accounts receivable           | ** ** | ** **  |        |     |       |
| Trade                                        | ** ** | **$**       | **86,813**  |     | $          | 38,571 |   |
| Accruals                                     | ** ** | **168,376** |        | 85,606   |       |
| Other accruals                               | ** ** | **6,309**   |        | 16,731   |       |
|                                         | ** ** | **$**       | **261,498** |     | $          | 140,908 |   |
|                                         | ** ** | ** **  |        |     |       |
| Components of  prepaid expenses and deposits | ** ** | ** **  |        |     |       |
| Prepaid expenses                             | ** ** | **$**       | **3,101**   |     | $          | 828 |   |
| Prepaid interest                             | ** ** | **3,949**   |        | —   |       |
| Prepaid inventory                            | ** ** | **6,131**   |        | —   |       |
| Funds on deposit                             | ** ** | **21,466**  |        | 10,802   |       |
|                                         | ** ** | **$**       | **34,647**  |     | $          | 11,630 |   |
|                                         | ** ** | ** **  |        |     |       |
| Components of  accounts payable              | ** ** | ** **  |        |     |       |
| Accounts payable                             | ** ** | **$**       | **125,230** |     | $          | 43,498 |   |
| Capital accrual                              | ** ** | **59,100**  |        | 31,028   |       |
| Operating accrual                            | ** ** | **42,080**  |        | 28,233   |       |
| Other liabilities                            | ** ** | **33,796**  |        | 54,609   |       |
|                                         | ** ** | **$**       | **260,206** |     | $          | 157,368 |   |

 

RECENT ACCOUNTINGPRONOUNCEMENTS

In September 2006,the FASB issued SFAS No. 158, Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans — an amendment of SFAS Nos. 87, 88, 106and 132R. This statement requires the an entity to recognize in itsconsolidated balance sheet the over-funded or under-funded status of itsdefined benefit plans as an asset or liability and to recognize changes in thatfunded status in the year in which the changes occur through comprehensiveincome. This statement also requires that the entity measure the funded statusof a plan as of December 31 rather than September 30 as previouslypermitted. The adoption of this standard at December 31, 2006 had noimpact on the Trust’s financial statements.

In September 2006,the U.S. Securities and Exchange Commission released Staff Accounting BulletinNo. 108, Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements (SAB 108), whichprovides interpretive guidance on the SEC’s views regarding the process ofquantifying materiality of financial statement misstatements. SAB 108 waseffective for fiscal years ending after November 15, 2006, with earlyapplication for the first interim period ending after November 15, 2006.The adoption of this standard at December 31, 2006 had no impact on theTrust’s financial statements.

In June 2006, theEITF finalized Issue 06-3, How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement. The TaskForce reached a consensus that this EITF applied to any tax assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer and may include, but is not limitedto sales, use, value added, and some excise taxes. The EITF concluded that thepresentation of taxes within the scope of this issue may be either gross(included in revenues and costs) or net (excluded from revenues and costs) andis an accounting policy decision that should be disclosed by the Trust.  The Trust is considering the effect ofadoption of EITF 06-03.

SFAS No. 151,Inventory Costs, was issued by the FASB in November 2004. This statement amendsAccounting Research Bulletin No. 43, to clarify that abnormal amounts ofidle facility expense, freight, handling costs and wasted materials should berecognized as current-period charges, and it also requires that allocation offixed production overheads be based on the normal capacity of the relatedproduction facilities. This statement was adopted by the Trust onJanuary 1, 2006 and it did not have a material impact on the Trust’sfinancial statements.

22

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In June 2006, theFASB issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes. This interpretation clarifies the criteria for recognizing incometax benefits under FASB Statement No. 109, Accounting for Income Taxes,and requires additional financial statement disclosures about uncertain taxpositions. The interpretation is effective beginning January 1, 2007. TheTrust is currently evaluating this interpretation and does not expect amaterial impact on its financial statements.

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements. This Statementdefines fair value, establishes a framework for measuring fair value in generallyaccepted accounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, and where applicable simplifies andcodifies related guidance within GAAP and does not require any new fair valuemeasurements. The Statement is effective for fiscal years beginningJanuary 1, 2008. Provisions of the Statement are to be appliedprospectively except in limited situations. The Trust does not expect theinitial adoption of this Statement to have a material impact on its financialstatements.

In June 2005, theFASB issued SFAS 154, Accounting Changes and Error Corrections, which replacesAPB Opinion 20 and FASB Statement 3. Statement 154 changes the requirements for the accounting and reportingof a change in accounting principle. Opinion 20 previously required that most voluntary changes in accountingprinciple be recognized by including the cumulative effect of the newaccounting principle in net income of the period of the change.  Statement 154 now requires retrospectiveapplication of changes in accounting principle to prior period financialstatements, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. The adoption of this standard at January 1, 2006 had no impact on theTrust’s financial statements.

In February 2006,FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments — anamendment of SFAS 133 and 140.  Thisstatement amends SFAS 133, Accounting for Derivative Instruments and HedgingActivities, and SFAS 140, Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities. This Statement resolves issues addressed in SFAS 133 ImplementationIssue No. D1, Application of Statement 133 to Beneficial Interests inSecuritized Financial Assets.  TheStatement a) permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation, b) clarifies which interest-only strips and principal-only stripsare not subject to the requirements of SFAS 133, c) establishes a requirementto evaluate interests in securitized financial assets to identify interests thatare freestanding derivatives or that hybrid financial instruments that containan embedded derivative requiring bifurcation, d) clarifies that concentrationsof credit risk in the form of subordination are not embedded derivatives, ande) amends SFAS 140 to eliminate the prohibition on a qualifying special-purposeentity from holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.  This Statement is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006 with early adoption permitted.  The Trust is considering the effect ofadoption of SFAS 155.

In December 2004,the FASB issued Statement 153, Exchanges of Nonmonetary Assets, an amendment ofAPB Opinion 29, Accounting for Nonmonetary Transactions.  This amendment eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance.  Under Statement153, if a nonmonetary exchange of similar productive assets meets acommercial-substance test and fair value is determinable, the transaction mustbe accounted for at fair value resulting in the recognition of a gain orloss.  This statement is effective fornonmonetary transactions in fiscal periods that begin after June 15, 2005 Theadoption of this standard at January 1, 2006 had no impact on the Trust’sfinancial statements.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities — Including an Amendment of FASB Statement No. 115.”  This pronouncement permits entities to usethe fair value method to measure certain financial assets and liabilities byelecting an irrevocable option to use the fair value method at specifiedelection dates.  After election of theoption, subsequent changes in fair value would result in the recognition ofunrealized gains or losses as period costs during the period the changeoccurred.  SFAS No. 159 becomes effectiveas of the beginning of the first fiscal year that begins after November 15,2007, with early adoption permitted. However, entities may not retroactively apply the provisions of SFAS No.159 to fiscal years preceding the date of adoption.  We are currently evaluating the impact ofSFAS No. 159 may have on our financial position, results of operations and cashflows.

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