EXHIBIT 99.2
                                                                   ------------


M A N A G E M E N T ' S   R E P O R T


MANAGEMENT'S RESPONSIBILITY ON FINANCIAL STATEMENTS

Management is responsible for the preparation of the accompanying  consolidated
financial  statements and for the consistency  therewith of all other financial
and operating data presented in this annual report. The consolidated  financial
statements  have been  prepared  in  accordance  with the  accounting  policies
detailed  in the notes  thereto.  In  Management's  opinion,  the  consolidated
financial  statements  are  in  accordance  with  Canadian  generally  accepted
accounting   principles,   have  been  prepared  within  acceptable  limits  of
materiality, and have utilized supportable, reasonable estimates.

To ensure the integrity of our financial  statements,  we carefully  select and
train qualified personnel. We also ensure our organizational structure provides
appropriate  delegation  of  authority  and division of  responsibilities.  Our
policies and procedures are communicated  throughout the organization including
a written ethics and integrity  policy that applies to all employees  including
the chief executive officer and chief financial officer.

The Board of Directors approves the consolidated  financial  statements.  Their
financial statement related  responsibilities  are fulfilled mainly through the
Audit  Committee.  The Audit  Committee  is composed  entirely  of  independent
directors,  and includes at least one director with  financial  expertise.  The
Audit Committee  meets  regularly with management and the external  auditors to
discuss  reporting  and  control  issues and  ensures  each  party is  properly
discharging  its  responsibilities.  The Audit  Committee  also  considers  the
independence of the external auditors and reviews their fees.

The  consolidated  financial  statements have been audited by Deloitte & Touche
LLP,  independent  auditors,  in accordance  with generally  accepted  auditing
standards on behalf of the shareholders.




MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for  establishing  and maintaining an adequate system
of internal  control over  financial  reporting.  During the past year, we have
directed  efforts to improve and document our internal  control over  financial
reporting.  Internal control over financial  reporting is a process designed to
provide reasonable assurance that all assets are safeguarded,  transactions are
appropriately  authorized  and  to  facilitate  the  preparation  of  relevant,
reliable and timely information. Because of its inherent limitations,  internal
control  over  financial  reporting  may not  prevent or detect  misstatements.
Management has assessed the  effectiveness  of the company's  internal  control
over financial reporting based on the criteria in Internal Control - Integrated
Framework  issued by the Committee of Sponsoring  Organizations of the Treadway
Commission  (COSO) and  concluded  that the  company's  internal  control  over
financial  reporting  was  effective  as of  December  31,  2006.  Management's
assessment  of  the  effectiveness  of  the  company's  internal  control  over
financial  reporting  as of December  31,  2006 has been  audited by Deloitte &
Touche LLP, as reflected in their report for 2006.





/s/ John P. Dielwart                             /s/ Steven W. Sinclair
------------------------                         --------------------------
JOHN P. DIELWART                                 STEVEN W. SINCLAIR
President and Chief Executive Officer            Senior Vice-President Finance
                                                 and Chief Financial Officer

Calgary, Alberta
February 14, 2007

<PAGE>

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS


To the Board of Directors and Unitholders of ARC Energy Trust:

We have  audited the  accompanying  consolidated  balance  sheets of ARC Energy
Trust and  subsidiaries  (the "Trust") as of December 31, 2006 and 2005 and the
related  consolidated  statements  of income and deficit and cash flows for the
years then ended.  These  financial  statements are the  responsibility  of the
Trust's  management.  Our  responsibility  is to  express  an  opinion on these
financial statements based on our audits.

With respect to the financial  statements for the year ended December 31, 2006,
we conducted our audit in accordance with Canadian  generally accepted auditing
standards and the standards of the Public Company  Accounting  Oversight  Board
(United  States).  With respect to the financial  statements for the year ended
December 31, 2005, we conducted our audit in accordance with Canadian generally
accepted auditing  standards.  Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of  material  misstatement.  An audit  includes  examining,  on a test
basis,  evidence  supporting  the  amounts  and  disclosures  in the  financial
statements. An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating the overall
financial  statement  presentation.  We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial statements present fairly, in all
material respects,  the financial position of ARC Energy Trust and subsidiaries
as of December 31, 2006 and 2005, and the results of their operations and their
cash flows for the years  then  ended in  conformity  with  Canadian  generally
accepted accounting principles.

We have also audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the  effectiveness of the Trust's
internal control over financial reporting as of December 31, 2006, based on the
criteria  established in Internal  Control--Integrated  Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated  February  14, 2007  expressed  an  unqualified  opinion on  management's
assessment of the  effectiveness of the Trust's internal control over financial
reporting  and an  unqualified  opinion  on the  effectiveness  of the  Trust's
internal control over financial reporting.


/s/ DELOITTE & TOUCHE LLP
Independent Registered Chartered Accountants

Calgary, Canada
February 14, 2007




COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCE

The standards of the Public Company Accounting  Oversight Board (United States)
require  the  addition  of an  explanatory  paragraph  (following  the  opinion
paragraph) when there is a change in accounting  principles that has a material
effect on the  comparability of the Trust's financial  statements,  such as the
change  described  in Note 22 to the  consolidated  financial  statements.  Our
report to the Board of Directors  and  Unitholders  dated  February 14, 2007 is
expressed in accordance with Canadian reporting  standards which do not require
a reference to such a change in accounting  principles in the auditors'  report
when the change is  properly  accounted  for and  adequately  disclosed  in the
financial statements.



/s/ DELOITTE & TOUCHE LLP
Independent Registered Chartered Accountants

Calgary, Canada
February 14, 2007

<PAGE>


REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS


To the Board of Directors and Unitholders of ARC Energy Trust:

We  have  audited  management's   assessment,   included  in  the  accompanying
Management's  Report on Internal  Control Over  Financial  Reporting,  that ARC
Energy Trust and  subsidiaries  (the  "Trust")  maintained  effective  internal
control over  financial  reporting  as of December 31, 2006,  based on criteria
established in Internal  Control--Integrated  Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.  The Trust's management
is  responsible  for  maintaining  effective  internal  control over  financial
reporting and for its assessment of the  effectiveness of internal control over
financial   reporting.   Our   responsibility  is  to  express  an  opinion  on
management's  assessment  and an opinion on the  effectiveness  of the  Trust's
internal control over financial reporting based on our audit.

We conducted our audit in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United  States).  Those standards  require that we
plan and  perform  the  audit to  obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained in all
material  respects.  Our audit included  obtaining an understanding of internal
control over financial reporting,  evaluating management's assessment,  testing
and evaluating the design and operating  effectiveness of internal control, and
performing   such  other   procedures  as  we   considered   necessary  in  the
circumstances.  We believe that our audit  provides a reasonable  basis for our
opinions.

A company's internal control over financial reporting is a process designed by,
or under the  supervision of, the company's  principal  executive and principal
financial  officers,  or persons performing similar functions,  and effected by
the company's  board of directors,  management,  and other personnel to provide
reasonable  assurance  regarding the reliability of financial reporting and the
preparation of financial  statements for external  purposes in accordance  with
generally  accepted  accounting  principles.  A company's internal control over
financial  reporting includes those policies and procedures that (1) pertain to
the  maintenance of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions of the assets of the company;  (2)
provide  reasonable  assurance that  transactions  are recorded as necessary to
permit  preparation  of  financial  statements  in  accordance  with  generally
accepted  accounting  principles,  and that  receipts and  expenditures  of the
company are being made only in accordance with authorizations of management and
directors  of the  company;  and (3)  provide  reasonable  assurance  regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the  company's  assets  that could have a material  effect on the  financial
statements.

Because  of  the  inherent  limitations  of  internal  control  over  financial
reporting,  including  the  possibility  of  collusion  or improper  management
override of controls,  material  misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the  effectiveness of the internal  control over financial  reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion,  management's  assessment that the Trust  maintained  effective
internal  control over  financial  reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated   Framework   issued  by  the   Committee   of   Sponsoring
Organizations  of the  Treadway  Commission.  Also in our  opinion,  the  Trust
maintained, in all material respects, effective internal control over financial
reporting  as of  December  31,  2006,  based on the  criteria  established  in
Internal  Control--Integrated  Framework  issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited,  in accordance with Canadian  generally accepted auditing
standards and the standards of the Public Company  Accounting  Oversight  Board
(United States),  the consolidated  financial statements as of and for the year
ended  December 31, 2006 of the Trust,  and our report dated  February 14, 2007
expressed an unqualified  opinion on those financial  statements and included a
separate report titled Comments by Independent Registered Chartered Accountants
on Canada-United  States of America Reporting  Difference referring to a change
in accounting policy.


/s/ DELOITTE & TOUCHE LLP
Independent Registered Chartered Accountants

Calgary, Canada
February 14, 2007

<PAGE>

CONSOLIDATED BALANCE SHEET

As at December 31

(CDN$ millions)                                               2006        2005
-------------------------------------------------------------------------------
ASSETS
Current assets
   Cash and cash equivalents                            $      2.8   $        -
   Accounts receivable                                       129.8        123.0
   Prepaid expenses                                           18.4         14.0
   Commodity and foreign currency contracts (Note 11)         25.7          3.1
                                                             176.7        140.1
-------------------------------------------------------------------------------
Reclamation funds (Note 4)                                    30.9         23.5
Property, plant and equipment (Note 5)                     3,093.8      2,930.0
Long-term investment (Note 6)                                 20.0           --
Goodwill                                                     157.6        157.6
-------------------------------------------------------------------------------
Total assets                                            $  3,479.0   $  3,251.2
-------------------------------------------------------------------------------

LIABILITIES
Current liabilities
   Accounts payable and accrued liabilities (Note 7)    $    162.1   $    148.6
   Cash distributions payable                                 40.9         39.8
   Commodity and foreign currency contracts (Note 11)         34.4          7.2
                                                             237.4        195.6
-------------------------------------------------------------------------------
Long-term debt (Note 8)                                      687.1        526.6
Other long-term liabilities (Note 9)                          14.6         12.4
Asset retirement obligations (Note 10)                       177.3        165.1
Future income taxes (Note 13)                                434.2        515.9
-------------------------------------------------------------------------------
Total liabilities                                          1,550.6      1,415.6
-------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (Note 21)

NON-CONTROLLING INTEREST
   Exchangeable shares (Note 14)                              40.0         37.5

UNITHOLDERS' EQUITY
   Unitholders' capital (Note 15)                          2,349.2      2,230.8
   Contributed surplus (Note 18)                               2.4          6.4
   Deficit (Note 16)                                        (463.2)      (439.1)
-------------------------------------------------------------------------------
Total unitholders' equity                                  1,888.4      1,798.1
-------------------------------------------------------------------------------
Total liabilities and unitholders' equity               $  3,479.0   $  3,251.2
===============================================================================

See accompanying notes to the consolidated financial statements.


/s/ Mac H. Van Wielingen                         /s/ Fred Dyment
---------------------------                      -------------------------
MAC H. VAN WIELINGEN                             FRED DYMENT
Director                                         Director

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT

For the years ended December 31

(CDN$ millions, except per unit amounts)                    2006          2005
-------------------------------------------------------------------------------
REVENUES
   Oil, natural gas, and natural gas liquids         $   1,230.5   $   1,165.2
   Royalties                                              (222.3)       (235.3)
-------------------------------------------------------------------------------
                                                         1,008.2         929.9
   Gain (loss) on commodity and foreign currency
   contracts (Note 11)
    Realized                                                29.3         (87.6)
    Unrealized                                              (4.6)         --
-------------------------------------------------------------------------------
                                                         1,032.9         842.3
-------------------------------------------------------------------------------

EXPENSES
   Transportation                                           14.5          14.3
   Operating                                               195.4         142.2
   General and administrative                               47.1          42.8
   Interest on long-term debt (Note 8)                      31.8          16.9
   Depletion, depreciation and accretion
   (Notes 5 and 10)                                        360.0         264.5
   Loss (gain) on foreign exchange (Note 12)                 4.2          (6.4)
-------------------------------------------------------------------------------
                                                           653.0         474.3
-------------------------------------------------------------------------------
Income before taxes                                        379.9         368.0
Capital and other taxes                                     (0.3)         (3.9)
Future income tax recovery (expense) (Note 13)              87.1          (1.6)
-------------------------------------------------------------------------------
Net income before non-controlling interest                 466.7         362.5
Non-controlling interest (Note 14)                          (6.6)         (5.6)
-------------------------------------------------------------------------------
Net income                                                 460.1         356.9

Deficit, beginning of year                           $    (439.1)  $    (419.4)
Distributions paid or declared (Note 17)                  (484.2)       (376.6)
-------------------------------------------------------------------------------
Deficit, end of year (Note 16)                       $    (463.2)  $    (439.1)
-------------------------------------------------------------------------------

Net income per unit (Note 20)
   Basic                                             $       2.28  $       1.90
   Diluted                                           $       2.27  $       1.88
-------------------------------------------------------------------------------


See accompanying notes to the consolidated financial statements.

<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31

----------------------------------------------------------------------------------------------------
(CDN$ millions)                                                                  2006         2005
----------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                                   $  460.1      $  356.9
 Add items not involving cash:
   Non-controlling interest (Note 14)                                             6.6           5.6
Future income tax (recovery) expense (Note 13)                                  (87.1)          1.6
Depletion, depreciation and accretion (Notes 5 and 10)                          360.0         264.5
   Non-cash loss on commodity and foreign currency contracts (Note 11)            4.6            --
   Non-cash loss (gain) on foreign exchange (Note 12)                             4.5          (6.3)
   Non-cash trust unit incentive compensation (Notes 18 and 19)                  11.9          17.2
   Expenditures on site restoration and reclamation (Note 10)                   (10.6)         (4.9)
Change in non-cash working capital                                              (16.0)        (17.9)
----------------------------------------------------------------------------------------------------
                                                                                734.0         616.7
----------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt under revolving credit facilities, net               162.7         258.2
Issuance of senior secured notes                                                 --            86.8
Repayment of senior secured notes                                                (6.8)        (32.5)
Issue of trust units                                                             14.4         259.7
Trust unit issue costs                                                           (0.2)        (12.2)
Cash distributions paid, net of distribution reinvestment (Note 17)            (389.6)       (318.3)
Payment of retention bonus (Note 9)                                              (1.0)         (1.0)
Change in non-cash working capital                                               --            (0.2)
----------------------------------------------------------------------------------------------------
                                                                               (220.5)        240.5
----------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Corporate acquisitions, net of cash received (Note 3)                           (16.6)       (505.0)
Acquisition of petroleum and natural gas properties                            (117.4)        (93.8)
Proceeds on disposition of petroleum and natural gas properties                   2.1           2.5
Capital expenditures                                                           (362.7)       (257.9)
Long-term investment (Note 6)                                                   (20.0)         --
Net reclamation funds contributions (Note 4)                                     (7.4)         (2.2)
Change in non-cash working capital                                               11.3          (5.2)
----------------------------------------------------------------------------------------------------
                                                                               (510.7)       (861.6)
----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  2.8          (4.4)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                       --           4.4
----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                       $    2.8      $     --
----------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to the consolidated financial statements.

<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 (all tabular  amounts in CDN$  millions,  except per
unit and volume amounts)


1.   STRUCTURE OF THE TRUST

ARC Energy Trust (the  "Trust")  was formed on May 7, 1996  pursuant to a Trust
indenture (the "Trust Indenture") that has been amended from time to time, most
recently on May 15, 2006.  Computershare  Trust Company of Canada was appointed
as Trustee under the Trust  Indenture.  The  beneficiaries of the Trust are the
holders of the Trust units.

The Trust was created for the purposes of issuing Trust units to the public and
investing  the funds so raised to purchase a royalty in the  properties  of ARC
Resources Ltd. ("ARC  Resources")  and ARC Sask Energy Trust ("ARC Sask").  The
Trust  Indenture  was  amended  on June 7, 1999 to  convert  the  Trust  from a
closed-end to an open-ended investment Trust. The current business of the Trust
includes  the  investment  in  all  types  of  energy  business-related  assets
including,  but not  limited to,  petroleum  and  natural  gas-related  assets,
gathering,  processing and  transportation  assets. The operations of the Trust
consist of the acquisition,  development, exploitation and disposition of these
assets and the  distribution of the net cash proceeds from these  activities to
the unitholders.


2.   SUMMARY OF ACCOUNTING POLICIES

The  consolidated   financial  statements  have  been  prepared  by  management
following Canadian generally accepted  accounting  principles  ("GAAP").  These
principles  differ in certain  respects from  accounting  principles  generally
accepted  in the United  States of America  ("US  GAAP") and to the extent that
they  affect  the  Trust,  these  differences  are  described  in Note 22.  The
preparation of financial  statements  requires management to make estimates and
assumptions  that affect the reported amounts of assets and liabilities and the
disclosure  of  contingencies  at the  date of the  financial  statements,  and
revenues and expenses  during the reporting  year.  Actual results could differ
from those estimated.

In particular,  the amounts recorded for depletion,  depreciation and accretion
of  the  petroleum  and  natural  gas  properties  and  for  asset   retirement
obligations  are based on  estimates  of reserves  and future  costs.  By their
nature, these estimates,  and those related to future cash flows used to assess
impairment,  are  subject  to  measurement  uncertainty  and the  impact on the
financial statements of future periods could be material.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Trust and its
subsidiaries.  Any  reference  to "the  Trust"  throughout  these  consolidated
financial statements refers to the Trust and its subsidiaries. All inter-entity
transactions have been eliminated.

REVENUE RECOGNITION

Revenue  associated  with the sale of crude oil,  natural  gas, and natural gas
liquids  ("NGLs") owned by the Trust are recognized  when title passes from the
Trust to its customers.

TRANSPORTATION

Costs paid by the Trust for the  transportation  of natural gas,  crude oil and
NGLs from the wellhead to the point of title transfer are  recognized  when the
transportation is provided.

JOINT VENTURE

The Trust conducts many of its oil and gas production  activities through joint
ventures and the financial  statements  reflect only the Trust's  proportionate
interest in such activities.

<PAGE>

DEPLETION AND DEPRECIATION

Depletion  of  petroleum  and  natural  gas  properties  and   depreciation  of
production equipment are calculated on the unit-of-production basis based on:

(a)  total  estimated  proved  reserves  calculated in accordance with National
     Instrument 51-101, Standards of Disclosure for Oil and Gas Activities;

(b)  total  capitalized  costs,  excluding  undeveloped  lands,  plus estimated
     future development costs of proved undeveloped reserves,  including future
     estimated asset retirement costs; and

(c)  relative  volumes of petroleum  and natural gas  reserves and  production,
     before royalties,  converted at the energy equivalent  conversion ratio of
     six thousand cubic feet of natural gas to one barrel of oil.

UNIT BASED COMPENSATION

The Trust  established a Trust Unit  Incentive  Rights Plan (the "Rights Plan")
for employees,  independent  directors and long-term  consultants who otherwise
meet the  definition  of an employee of the Trust.  The  exercise  price of the
rights  granted  under the Plan may be reduced in future  periods in accordance
with the terms of the Plan.  The Trust  accounts  for the rights using the fair
value  method,  whereby the fair value of rights is  determined  on the date on
which fair value can initially be  determined.  The fair value is then recorded
as  compensation  expense  over  the  period  that  the  rights  vest,  with  a
corresponding  increase to contributed surplus. When rights are exercised,  the
proceeds,  together  with the  amount  recorded  in  contributed  surplus,  are
recorded to unitholders' capital.

WHOLE TRUST UNIT INCENTIVE PLAN COMPENSATION

The Trust has  established a Whole Trust Unit  Incentive  Plan (the "Whole Unit
Plan") for  employees,  independent  directors  and long-term  consultants  who
otherwise meet the definition of an employee of the Trust. Compensation expense
associated with the Whole Unit Plan is granted in the form of Restricted  Trust
Units ("RTUs") and Performance  Trust Units ("PTUs") and is determined based on
the intrinsic  value of the Whole Trust Units at each period end. The intrinsic
valuation  method is used as participants of the Whole Unit Plan receive a cash
payment on a fixed vesting date.  This  valuation  incorporates  the period end
Trust unit price,  the number of RTUs and PTUs  outstanding at each period end,
and  certain  management  estimates.  As a  result,  large  fluctuations,  even
recoveries,  in compensation expense may occur due to changes in the underlying
Trust unit price. In addition, compensation expense is amortized and recognized
in earnings over the vesting period of the Whole Unit Plan with a corresponding
increase or decrease in liabilities. Classification between accrued liabilities
and other long-term liabilities is dependent on the expected payout date.

The Trust  charges  amounts  relating to head office  employees  to general and
administrative  expense,  amounts  relating  to field  employees  to  operating
expense and amounts relating to geologists and geophysicists to property, plant
and equipment.

The Trust has not  incorporated an estimated  forfeiture rate for RTUs and PTUs
that will not vest.  Rather,  the Trust accounts for actual forfeitures as they
occur.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include short-term investments,  such as money market
deposits or similar type instruments, with an original maturity of three months
or less when purchased.

RECLAMATION FUNDS

Reclamation  funds hold  investment  grade assets which are carried at cost and
are subject to  impairment  in the event of a  non-temporary  decline in market
value.

LONG-TERM INVESTMENT

Investments  are recorded and carried at cost and are subject to  impairment in
the event of a non-temporary decline in market value.

PROPERTY, PLANT AND EQUIPMENT ("PP&E")

The Trust follows the full cost method of  accounting.  All costs of exploring,
developing and acquiring petroleum and natural gas properties,  including asset
retirement  costs,  are  capitalized  and accumulated in one cost centre as all
operations are in Canada.  Maintenance  and repairs are charged against income,
and renewals  and  enhancements  that extend the economic  life of the PP&E are
capitalized.  Gains and losses are not recognized upon disposition of petroleum
and natural gas  properties  unless such a disposition  would alter the rate of
depletion by 20 per cent or more.

IMPAIRMENT

The Trust places a limit on the aggregate  carrying value of PP&E, which may be
amortized against revenues of future periods.

Impairment is recognized if the carrying  amount of the PP&E exceeds the sum of
the  undiscounted  cash  flows  expected  to  result  from the  Trust's  proved
reserves. Cash flows are calculated based on third party quoted forward prices,
adjusted for the Trust's contract prices and quality differentials.

<PAGE>

Upon  recognition  of  impairment,  the Trust would then  measure the amount of
impairment by comparing the carrying  amounts of the PP&E to an amount equal to
the  estimated  net present  value of future cash flows from proved plus risked
probable reserves. The Trust's risk-free interest rate is used to arrive at the
net present value of the future cash flows. Any excess carrying value above the
net  present  value of the  Trust's  future  cash flows  would be recorded as a
permanent impairment and charged against net income.

The cost of unproved  properties is excluded from the impairment test described
above and subject to a separate impairment test. In the case of impairment, the
book value of the impaired  properties  are moved to the  petroleum and natural
gas depletable base.

GOODWILL

The Trust must record  goodwill  relating to a corporate  acquisition  when the
total purchase price exceeds the fair value for accounting  purposes of the net
identifiable  assets and  liabilities  of the  acquired  company.  The goodwill
balance is assessed for impairment annually at year-end or as events occur that
could result in an impairment. Impairment is recognized based on the fair value
of the reporting entity  (consolidated Trust) compared to the book value of the
reporting entity. If the fair value of the consolidated  Trust is less than the
book  value,  impairment  is  measured  by  allocating  the  fair  value of the
consolidated  Trust to the identifiable  assets and liabilities as if the Trust
had been acquired in a business  combination  for a purchase price equal to its
fair  value.  The excess of the fair value of the  consolidated  trust over the
amounts assigned to the  identifiable  assets and liabilities is the fair value
of the  goodwill.  Any excess of the book value of goodwill  over this  implied
fair value of  goodwill  is the  impairment  amount.  Impairment  is charged to
earnings in the period in which it occurs.

Goodwill is stated at cost less impairment and is not amortized.

ASSET RETIREMENT OBLIGATIONS

The Trust recognizes the fair value of an Asset Retirement  Obligation  ("ARO")
in the period in which it is incurred  when a  reasonable  estimate of the fair
value can be made. On a periodic basis,  management will review these estimates
and changes,  if any, to the estimate will be applied on a  prospective  basis.
The fair value of the estimated ARO is recorded as a long-term liability,  with
a  corresponding  increase in the  carrying  amount of the related  asset.  The
capitalized amount is depleted on a  unit-of-production  basis over the life of
the reserves.  The liability  amount is increased each reporting  period due to
the passage of time and the amount of  accretion  is charged to earnings in the
period.  Revisions  to the  estimated  timing of cash flows or to the  original
estimated undiscounted cost would also result in an increase or decrease to the
ARO.  Actual costs incurred upon  settlement of the ARO are charged against the
ARO to the extent of the liability recorded.  Any difference between the actual
costs  incurred  upon  settlement  of the  ARO and the  recorded  liability  is
recognized as a gain or loss in the Trust's earnings in the period in which the
settlement occurs.

INCOME TAXES

The Trust follows the liability  method of accounting  for income taxes.  Under
this method, income tax liabilities and assets are recognized for the estimated
tax  consequences  attributable to differences  between the amounts reported in
the  financial  statements  of the  Trust's  corporate  subsidiaries  and their
respective tax base, using  substantively  enacted future income tax rates. The
effect of a change in income tax rates on future tax  liabilities and assets is
recognized  in income  in the  period in which  the  change  occurs.  Temporary
differences  arising  on  acquisitions  result in future  income tax assets and
liabilities.

The Trust is a taxable  entity under the Income Tax Act (Canada) and is taxable
only on income that is not distributed or distributable to the unitholders.  As
the Trust  distributes  all of its taxable income to the  unitholders and meets
the  requirements  of the Income Tax Act (Canada)  applicable to the Trust,  no
provision for income taxes has been made in the Trust.

BASIC AND DILUTED PER TRUST UNIT CALCULATIONS

Basic  net  income  per unit is  computed  by  dividing  the net  income by the
weighted average number of trust units outstanding  during the period.  Diluted
net  income  per  unit  amounts  are  calculated  based  on net  income  before
non-controlling  interest divided by dilutive trust units. Dilutive trust units
are arrived at by taking weighted  average trust units and trust units issuable
on  conversion  of  exchangeable  shares,  and giving  effect to the  potential
dilution  that would occur if rights were  exercised  at the  beginning  of the
period.  The treasury  stock method  assumes that  proceeds  received  from the
exercise  of  in-the-money  rights and any  unrecognized  trust unit  incentive
compensation are used to repurchase units at the average market price.

DERIVATIVE FINANCIAL INSTRUMENTS

The Trust is exposed to market risks  resulting from  fluctuations in commodity
prices,  foreign  exchange  rates and  interest  rates in the normal  course of
operations. A variety of derivative instruments are used by the Trust to reduce
its exposure to fluctuations in commodity  prices,  foreign exchange rates, and
interest rates. The fair values of these derivative instruments are based on an
estimate of the amounts  that would have been  received or paid to settle these
instruments prior to maturity. The Trust considers all of these transactions to
be effective economic hedges, however, the majority of the Trust's contracts do
not qualify or have not been  designated  as  effective  hedges for  accounting
purposes.

For  derivative  instruments  that do qualify as effective  accounting  hedges,
policies and procedures are in place to ensure that the required  documentation
and approvals are in place. This documentation specifically ties the derivative
financial  instrument  to their  use,  and in the case of  commodities,  to the
mitigation  of market  price risk  associated  with cash flows  expected  to be
generated. When applicable, the Trust also identifies all relationships between
hedging instruments and hedged items, as well as its risk management  objective
and the strategy for undertaking hedge transactions. This would include linking
the  particular   derivative  to  specific   assets  and   liabilities  on  the
consolidated  balance  sheet or to  specific  firm  commitments  or  forecasted
transactions.  Where specific hedges are executed, the Trust assesses,  both at
the inception of the hedge and on an ongoing basis, whether the derivative used
in the particular  hedging  transaction  is effective in offsetting  changes in
fair value or cash flows of the hedged item.

<PAGE>

Realized and unrealized  gains and losses  associated with hedging  instruments
that have been  terminated  or cease to be  effective  prior to  maturity,  are
deferred on the  consolidated  balance  sheet and  recognized  in income in the
period in which the underlying hedged transaction is recognized.

For transactions  that do not qualify for hedge  accounting,  the Trust applies
the fair value method of  accounting  by recording an asset or liability on the
consolidated  balance  sheet and  recognizing  changes in the fair value of the
instruments in the statement of income for the current period.

FOREIGN CURRENCY TRANSLATION

Monetary  assets  and  liabilities   denominated  in  a  foreign  currency  are
translated at the rate of exchange in effect at the consolidated  balance sheet
date.  Revenues and  expenses are  translated  at the period  average  rates of
exchange.  Translation gains and losses are included in income in the period in
which they arise.

NON-CONTROLLING INTEREST

The Trust must record non-controlling  interest when exchangeable shares issued
by a subsidiary of the Trust are transferable to third parties. Non-controlling
interest on the  consolidated  balance  sheet is  recognized  based on the fair
value of the  exchangeable  shares upon issuance plus the accumulated  earnings
attributable  to the  non-controlling  interest.  Net income is reduced for the
portion  of  earnings  attributable  to the  non-controlling  interest.  As the
exchangeable shares are converted to Trust units, the non-controlling  interest
on the  consolidated  balance sheet is reduced by the cumulative  book value of
the  exchangeable   shares  and  Unitholders'   capital  is  increased  by  the
corresponding amount.


3.   CORPORATE ACQUISITIONS

On December 6, 2006 the Trust completed a minor  corporate  acquisition for net
cash consideration of $16.6 million. There was no goodwill recognized with this
acquisition.  Substantially  all  of  the  consideration  was  applied  against
property,  plant and equipment,  with a nominal amount applied  against working
capital items.

The following acquisitions were completed in 2005:

Redwater And North Pembina Cardium Unit

On December 16,  2005,  the Trust  acquired  all of the issued and  outstanding
shares of three legal  entities,  3115151  Nova Scotia  Company,  3115152  Nova
Scotia Company and 3115153 Nova Scotia Company which together hold the Redwater
and North Pembina  Cardium Unit assets  (collectively  "Redwater and NPCU") for
total consideration of $462.8 million. The allocation of the purchase price and
consideration paid were as follows:

NET ASSETS ACQUIRED
------------------------------------------------------------------------------
Working capital deficit                                          $     (0.6)
Property, plant and equipment                                         729.5
Asset retirement obligations                                          (70.7)
Future income taxes                                                  (195.4)
Total net assets acquired                                        $    462.8
------------------------------------------------------------------------------


CONSIDERATION PAID
------------------------------------------------------------------------------
Cash consideration and fees paid                                 $    462.8
Total consideration paid                                         $    462.8
------------------------------------------------------------------------------

The  acquisition  of  Redwater  and  NPCU has  been  accounted  for as an asset
acquisition pursuant to EIC-124.

In addition to consideration paid, the Trust committed to making  contributions
to a restricted reclamation fund as detailed in Note 21.

The future  income tax  liability on  acquisition  was based on the  difference
between  the fair value of the  acquired  net assets of $463.4  million and the
associated tax basis of $93.3 million.

These consolidated  financial statements incorporate the operations of Redwater
and NPCU from December 16, 2005.

<PAGE>

ROMULUS EXPLORATION INC.

On June 30, 2005, the Trust acquired all of the issued and  outstanding  shares
of  Romulus  Exploration  Inc.  ("Romulus")  for total  consideration  of $42.2
million.  The allocation of the purchase price and  consideration  paid were as
follows:

Net Assets Acquired
-------------------------------------------------------------------------------
Working capital deficit                                             $    (1.4)
Property, plant and equipment                                            62.5
Asset retirement obligations                                             (0.4)
Future income taxes                                                     (18.5)
-------------------------------------------------------------------------------
Total net assets acquired                                           $    42.2
-------------------------------------------------------------------------------


Consideration Paid
-------------------------------------------------------------------------------
Cash and fees paid                                                  $    42.2
Total consideration paid                                            $    42.2
-------------------------------------------------------------------------------

The  acquisition  of Romulus  has been  accounted  for as an asset  acquisition
pursuant to EIC-124.

The future  income tax  liability on  acquisition  was based on the  difference
between  the fair  value of the  acquired  net  assets of $44  million  and the
associated tax basis of $9 million.

These consolidated  financial statements  incorporate the operations of Romulus
from June 30, 2005.

4.   RECLAMATION FUNDS

<TABLE>
<CAPTION>
                                                     2006                                         2005
==================================================================================================================
                                       Unrestricted        Restricted              Unrestricted        Restricted
==================================================================================================================
<S>                                     <C>                <C>                     <C>                 <C>
Balance, beginning of year              $    23.5          $      -                $    21.3            $    -
Contributions                                 6.0               6.1                      6.0                 -
Reimbursed expenditures (1)                  (5.7)                -                     (4.6)                -
Interest earned on funds                      1.0                 -                      0.8                 -
Balance, end of year                    $    24.8          $    6.1                $    23.5            $    -
==================================================================================================================
</TABLE>
(1)  Amount  differs  from  actual  expenditures  incurred  by the Trust due to
     timing differences and discretionary reimbursements.

An  unrestricted   reclamation  fund  was  established  to  fund  future  asset
retirement  obligation  costs. In addition,  the Trust has created a restricted
reclamation  fund  associated  with the  Redwater  property  acquired  in 2005.
Contributions to the restricted and unrestricted reclamation funds and interest
earned on the balances have been deducted  from the cash  distributions  to the
unitholders.  The Board of Directors of ARC  Resources  has approved  voluntary
contributions to the  unrestricted  reclamation fund over a 20-year period that
currently results in minimum annual  contributions of $6 million ($6 million in
2005) based upon properties owned as at December 31, 2006. Contributions to the
restricted reclamation fund will vary over time and have been disclosed in Note
21. Contributions for both funds are continually  reassessed to ensure that the
funds are sufficient to finance the majority of future abandonment obligations.
Interest earned on the funds are retained within the funds.

5. PROPERTY, PLANT AND EQUIPMENT

===============================================================================
                                                      2006             2005
===============================================================================
Property, plant and equipment, at cost             $  4,655.3       $  4,142.0
Accumulated depletion and depreciation               (1,561.5)        (1,212.0)
Property, plant and equipment, net                 $  3,093.8       $  2,930.0
===============================================================================

The calculation of 2006 depletion and  depreciation  included an estimated $547
million ($488 million in 2005) for future  development  costs  associated  with
proved undeveloped reserves and excluded $108.9 million ($58.9 million in 2005)
for the book value of unproved properties.

<PAGE>

The Trust  performed a ceiling test  calculation at December 31, 2006 to assess
the  recoverable  value of property  plant and equipment  (PP&E).  Based on the
calculation,  the present value of future net revenues from the Trust's  proved
plus  probable  reserves  exceeded  the  carrying  value of the Trust's PP&E at
December  31,  2006.  The  benchmark  prices  used in the  calculation  were as
follows:

===============================================================================
                                   WTI Oil        AECO Gas         USD/CAD
Year                              ($US/bbl)     (CDN$/mmbtu)     Exchange Rates
===============================================================================
2007                                62.00           7.20            0.87
2008                                60.00           7.45            0.87
2009                                58.00           7.75            0.87
2010                                57.00           7.80            0.87
2011                                57.00           7.85            0.87
2012                                57.50           8.15            0.87
2013                                58.50           8.30            0.87
2014                                59.75           8.50            0.87
2015                                61.00           8.70            0.87
2016                                62.25           8.90            0.87
2017                                63.50           9.10            0.87
-------------------------------------------------------------------------------
Remainder (1)                         2.0%           2.0%           0.87
===============================================================================
(1)  Percentage change represents the change in each year after 2017 to the end
     of the reserve life.


6. LONG-TERM INVESTMENT

During the year the Trust  entered into an equity  investment  in a private oil
sands company in the amount of $20 million. The investment in the shares of the
private  company has been  considered to be a related party  transaction due to
common  directorships  of the Trust,  the private  company and the manager of a
private equity fund that holds shares in the private  company.  The $20 million
investment was part of a $325 million private placement of the private company.
In addition,  certain directors and officers of the Trust have minor direct and
indirect shareholdings in the private company.


7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

===============================================================================
                                                       2006              2005
===============================================================================
Trades payable                                      $  39.0           $  33.0
Accrued liabilities                                   108.8             109.2
Current portion of accrued long-term
  incentive compensation                               11.5               3.6
Interest payable                                        1.8               1.8
Retention bonuses                                       1.0               1.0
-------------------------------------------------------------------------------
Total accounts payable and accrued liabilities      $ 162.1          $  148.6
===============================================================================

The current portion of accrued long-term incentive compensation represents the
current portion of the Trust's estimated liability for the Whole Unit Plan as
at December 31, 2006 (see Note 19). This amount is payable in 2007.


8. LONG-TERM DEBT

===============================================================================
                                                      2006             2005
===============================================================================
Revolving credit facilities
   Syndicated credit facility                       $ 425.0          $ 254.6
   Working capital facility                             1.1              3.8
Senior secured notes
   5.42% USD Note                                      87.4             87.4
   4.94% USD Note                                      28.0             35.0
   4.62% USD Note                                      72.8             72.9
   5.10% USD Note                                      72.8             72.9
-------------------------------------------------------------------------------
Total long-term debt outstanding                    $ 687.1          $ 526.6
===============================================================================

REVOLVING CREDIT FACILITIES

During  2006,  the  Trust  entered  into  a  $572  million  secured,   annually
extendible, financial covenant-based three year syndicated credit facility that
expires in March 2009 and a $25 million demand working  capital  facility.  The
revolving  credit facility is extendible  annually,  security is in the form of
floating  charges on all lands and assignments and negative pledges on specific
petroleum and natural gas properties.

<PAGE>

Borrowings under the facility bear interest at bank prime (6.0 per cent and 5.0
per cent at December 31, 2006 and December 31, 2005,  respectively)  or, at the
Trust's option,  Canadian or U.S. dollar bankers'  acceptances  plus a stamping
fee. The lenders  review the credit  facility each year and  determine  whether
they will extend the revolving  periods for another year. In the event that the
credit  facility is not extended at anytime  before the maturity date, the loan
balance will become  repayable on the maturity  date.  The maturity date of the
current credit facility is March 24, 2009.

The working capital  facility allows for maximum  borrowings of $25 million and
is due and payable immediately upon demand by the bank. The facility is secured
and is subject to the same covenants as the syndicated credit facility.

Various borrowing  options exist under the revolving credit facility  including
prime rate advances,  bankers' acceptances and LIBOR based loans denominated in
either Canadian or U.S. dollars. All drawings under the facility are subject to
stamping  fees  that  vary  between  65 bps and 115 bps  depending  on  certain
consolidated financial ratios.

5.42 Per Cent and 4.94 Per Cent Senior  Secured USD Notes These senior  secured
notes were issued in two  separate  issues  pursuant to an  Uncommitted  Master
Shelf  Agreement.  The US$24 million  Senior secured notes were issued in 2002,
bear  interest  at 4.94 per  cent,  have a  remaining  final  term of 3.8 years
(remaining  average term of 2.3 years) and require equal principal  payments of
US$6  million over a four year period  commencing  in 2007.  The US$75  million
Senior secured notes were issued in 2005,  bear interest at 5.42 per cent, have
a remaining  final term of 11 years  (remaining  weighted  average  term of 7.6
years)  and  require  equal  principal  repayments  over an eight  year  period
commencing in 2010.

4.62 Per Cent and 5.10 Per Cent  Senior  Secured  USD Notes  These  notes  were
issued on April 27,  2004 via a private  placement  in two  tranches of US$62.5
million each.  The first tranche of US$62.5  million bears interest at 4.62 per
cent and has a remaining final term of 7.3 years  (remaining  weighted  average
term of 4.9 years) and require equal principal  repayments over a 6 year period
commencing  2009.  Immediately  following the issuance,  the Trust entered into
interest rate swap contracts which  effectively  changed the interest rate from
fixed to floating  (see Note 11). The second  tranche of US$62.5  million bears
interest  at  5.10  per  cent  and has a  remaining  final  term  of 9.3  years
(remaining  weighted  average term of 7.4 years).  Repayments of the notes will
occur over a five year period commencing in 2012.

Debt Covenants The following are the significant  financial covenants governing
the revolving credit facilities:

o    Long-term debt and letters of credit not to exceed three times  annualized
     net income before non-cash items and interest expense;

o    Long-term debt,  letters of credit,  and  subordinated  debt not to exceed
     four  times  annualized  net income  before  non-cash  items and  interest
     expense; and

o    Long-term  debt  and  letters  of  credit  not to  exceed  50 per  cent of
     unitholders'   equity  and  long-term   debt,   letters  of  credit,   and
     subordinated debt.

In the event that the Trust  enters  into a material  acquisition  whereby  the
purchase price exceeds 10 per cent of the book value of the Trust's assets, the
ratios in the first two  covenants  above are  increased  to 3.5 and 5.5 times,
respectively. As at December 31, 2006, the Trust had $4.7 million in letters of
credit ($4.4 million in 2005), no subordinated debt, and was in compliance with
all covenants.

The  payment  of  principal  and  interest  are  allowable  deductions  in  the
calculation of cash available for distribution to unitholders and rank ahead of
cash distributions payable to unitholders.  Should the properties securing this
debt  generate  insufficient  revenue to repay the  outstanding  balances,  the
unitholders have no direct liability.

During 2006,  the  weighted-average  effective  interest  rate under the credit
facility was 5.3 per cent (3.3 per cent in 2005).

Amounts due under the working capital  facility and the senior secured notes in
the next 12 months have not been included in current  liabilities as management
has the ability and intent to  refinance  this  amount  through the  syndicated
credit facility.

Interest  paid  during the period did not differ  significantly  from  interest
expense.


9. OTHER LONG-TERM LIABILITIES

==============================================================================
                                                           2006         2005
==============================================================================
Accrued long-term incentive compensation                $  14.6      $  11.4
Retention bonuses                                          -            1.0
Total other long-term liabilities                       $  14.6      $  12.4
==============================================================================

The accrued long-term incentive  compensation  represents the long-term portion
of the Trust's  estimated  liability for the Whole Unit Plan as at December 31,
2006 (see Note 19). This amount is payable in 2008 through 2009.

<PAGE>

The retention bonuses arose upon  internalization of the management contract in
2002.  The final  retention  payment will occur in August 2007 and therefore is
classified as a current liability as at December 31, 2006.


10. ASSET RETIREMENT OBLIGATIONS

The total future asset  retirement  obligations  were  estimated by  management
based on the  Trust's  net  ownership  interest  in all wells  and  facilities,
estimated  costs to  reclaim  and  abandon  the  wells and  facilities  and the
estimated  timing of the costs to be incurred in future periods.  The Trust has
estimated the net present value of its total asset retirement obligations to be
$177.3  million as at  December  31, 2006  ($165.1  million in 2005) based on a
total future  undiscounted  liability of $1,042.6  million  ($603.4  million in
2005).  These  payments are expected to be made over the next 61 years with the
bulk of payments being made in years 2017 to 2021 and 2057 to 2067. The Trust's
weighted  average credit  adjusted risk free rate of 6.5 per cent (5.6 per cent
in 2005) and an inflation rate of 2.0 per cent (2.0 per cent in 2005) were used
to calculate the present value of the asset retirement obligations.  During the
year, no gains or losses were  recognized on  settlements  of asset  retirement
obligations.

The following table reconciles the Trust's asset retirement obligations:

===============================================================================
                                                               2006       2005
===============================================================================
Balance, beginning of year                                  $ 165.1    $  73.0
Increase in liabilities relating to corporate acquisitions      4.9       71.1
Increase in liabilities relating to development activities      2.8        5.1
Increase in liabilities relating to change in estimate          4.0       15.6
Settlement of liabilities during the year                     (10.6)      (4.9)
Accretion expense                                              11.1        5.2
-------------------------------------------------------------------------------
Balance, end of year                                        $ 177.3    $ 165.1
===============================================================================


11. FINANCIAL INSTRUMENTS

The Trust is exposed to a number of financial risks that are part of its normal
course of  business.  The Trust has a risk  management  program  in place  that
includes financial  instruments as disclosed in this note. The objective of the
risk  management  program is to mitigate the Trust's  exposure to the following
financial risks:


   Credit Risk

Most of the Trust's accounts receivable relate to oil and natural gas sales and
are exposed to typical  industry  credit  risks.  The Trust manages this credit
risk by entering  into sales  contracts  with only highly  rated  entities  and
reviewing its exposure to individual  entities on a regular basis. With respect
to  counterparties  to  financial  instruments  the Trust  partially  mitigates
associated  credit  risk  by  limiting   transactions  to  counterparties  with
investment grade credit ratings.

   Volatility of Oil and Natural Gas Prices

The Trust's  operational  results and  financial  condition,  and therefore the
amount  of  distributions  paid to  unitholders  are  dependent  on the  prices
received for oil and natural gas production. Oil and gas prices have fluctuated
widely  during  recent years and are  determined by economic and in the case of
oil prices, political factors. Supply and demand factors, including weather and
general economic  conditions as well as conditions in other oil and natural gas
regions impact prices. Any movement in oil and natural gas prices could have an
effect on the Trust's financial condition and therefore on the distributions to
unitholders.  ARC may  manage the risk  associated  with  changes in  commodity
prices by entering into oil or natural gas price derivative  contracts.  To the
extent  that ARC engages in risk  management  activities  related to  commodity
prices, it will be subject to credit risks associated with  counterparties with
which it contracts.

   Variations in Interest Rates and Foreign Exchange Rates

Increases  in interest  rates  could  result in a  significant  increase in the
amount  the Trust  pays to  service  variable  interest  debt,  resulting  in a
decrease in distributions  to unitholders.  World oil prices are quoted in U.S.
dollars and the price received by Canadian  producers is therefore  affected by
the Canadian/U.S. dollar exchange rate that may fluctuate over time. Variations
in the exchange rate of the Canadian dollar could have significant  positive or
negative impact on future  distributions.  ARC has initiated certain derivative
contracts to attempt to mitigate these risks. To the extent that ARC engages in
risk  management  activities  related to  foreign  exchange  rates,  it will be
subject to credit risk associated with  counterparties with which it contracts.
The  increase  in  the  exchange  rate  for  the  Canadian  dollar  and  future
Canadian/U.S.  exchange rates will impact future  distributions  and the future
value of the Trust's reserves as determined by independent evaluators.

FINANCIAL INSTRUMENTS

Financial  instruments of the Trust carried on the  consolidated  balance sheet
consist mainly of cash and cash equivalents,  accounts receivable,  reclamation
funds, current liabilities, other long-term liabilities,  commodity and foreign
currency  contracts and long-term  debt.  Except as noted below, as at December
31, 2006 and 2005, there were no significant  differences  between the carrying
value of these  financial  instruments  and their  estimated  fair value due to
their short-term nature.

<PAGE>

The  fair  value  of  the  US$224  million  fixed  rate  senior  secured  notes
approximated CDN$257 million as at December 31, 2006 and will vary with changes
in  interest  rates (2005 - US$230  million  outstanding  approximated  CDN$269
million).

DERIVATIVE CONTRACTS

Following is a summary of all derivative  contracts in place as at December 31,
2006 in order to mitigate the risks discussed above:

<TABLE>
<CAPTION>
FINANCIAL WTI CRUDE OIL CONTRACTS
=============================================================================================================================
                                                                   Volume         Bought Put      Sold Put       Sold Call
Term                                             Contract          (bbl/d)        (US$/bbl)      (US$/bbl)       (US$/bbl)
=============================================================================================================================
<S>                                      <C>                     <C>            <C>            <C>              <C>
Jan 07 - Feb 07                                Bought Put           1,000          62.50               -              -
Jan 07 - Jun 07                                Put Spread           1,000          75.00           62.70              -
Jan 07 - Jun 07                                Put Spread           1,000          75.00           65.00              -
Jan 07 - Dec 07                                Put Spread           1,000          75.00           60.00              -
Jan 07 - Dec 07                            3 - Way Collar           2,500          65.00           52.50          80.00
Jan 07 - Dec 07                                Put Spread           2,500          65.00           52.50              -
Jan 07 - Dec 09                            3 - Way Collar           5,000          55.00           40.00          90.00
Jul 07 - Dec 07                                Put Spread           1,000          65.00           55.00              -
=============================================================================================================================

<CAPTION>
FINANCIAL AECO NATURAL GAS CONTRACTS
=============================================================================================================================
                                                                    Volume         Bought Put      Sold Put       Sold Call
Term                                              Contract          (GJ/d)         (CDN$/GJ)      (CDN$/GJ)       (CDN$/GJ)
=============================================================================================================================
<S>                                      <C>                     <C>            <C>            <C>              <C>
Jan 07 - Mar 07                                     Collar          10,000          7.25               -            9.00
Jan 07 - Mar 07                                     Collar          10,000          7.50               -            9.50
Jan 07 - Mar 07                                     Collar          10,000          8.00               -           12.00
Jan 07 - Mar 07                                     Collar          20,000          8.50               -           12.35
Jan 07 - Mar 07                             3 - Way Collar          10,000          8.00            5.50           11.90
Apr 07 - Oct 07                             3 - Way Collar          10,000          7.25            5.25            9.00
Apr 07 - Oct 07                             3 - Way Collar          10,000          7.50            5.50            9.50
Apr 07 - Oct 07                             3 - Way Collar          30,000          7.00            5.00            8.65
=============================================================================================================================

<CAPTION>
FINANCIAL NYMEX NATURAL GAS CONTRACTS
=============================================================================================================================
                                                                    Volume         Bought Put      Sold Put       Sold Call
Term                                             Contract           (mmbtu/d)     (US$/mmbtu)    (US$/mmbtu)     (US$/mmbtu)
=============================================================================================================================
<S>                                      <C>                     <C>            <C>            <C>              <C>
Jan 07 - Mar 07                                    Collar           5,000          8.50                -           10.25
Jan 07 - Mar 07                                    Collar           10,000         8.25                -           10.00
Jan 07 - Mar 07                                    Collar           10,000         10.00               -           13.65
=============================================================================================================================

<CAPTION>
FINANCIAL NATURAL GAS AECO (MONTHLY) TO NYMEX (LAST 3 DAY) BASIS CONTRACTS
=============================================================================================================================
                                                                                                   Volume         Basis Swap
Term                                             Contract                                         (mmbtu/d)      (US$/mmbtu)
=============================================================================================================================
<S>                                              <C>                                              <C>            <C>
Jan 07 - Mar 07                                     Swap                                           40,000         (1.3125)
Apr 07 - Oct 08                                     Swap                                           50,000         (1.1160)
Nov 08 - Oct 10                                     Swap                                           50,000         (1.0430)
=============================================================================================================================

<CAPTION>
FINANCIAL FOREIGN EXCHANGE CONTRACTS (1)
=============================================================================================================================
                                                       Volume         Swap            Swap           Bought Put     Sold Put
Term                                 Contract          (MM US$)       (CDN$/US$)      (US$/CDN$)     (CDN$/US$)    (CDN$/US$)
=============================================================================================================================
<S>                                <C>                <C>             <C>            <C>              <C>          <C>
USD Sales Contracts
Jan 07 - Dec 07                          Swap            192            1.1379         0.8788              -             -

USD Option Contracts
Jan 07 - Dec 07                    Put Spread            12                  -              -           1.125         1.100
Jan 07 - Dec 07                    Put Spread            12                  -              -           1.128         1.098
=================================================================================================================================
</TABLE>
(1)  Contracted volume is a total notional volume for the entire term.

<PAGE>

<TABLE>
<CAPTION>
FINANCIAL ELECTRICITY CONTRACTS (2)
=====================================================================================================
                                                                      Volume                Swap
Term                            Contract                              (MWh)              (CDN$/MWh)
=====================================================================================================
<S>                             <C>                                   <C>                <C>
Jan 07 - Dec 07                     Swap                               20.0                 64.63
Jan 08 - Dec 08                     Swap                               15.0                 60.17
Jan 09 - Dec 09                     Swap                               15.0                 59.33
Jan 10 - Dec 10                     Swap                               5.0                  63.00
=====================================================================================================
</TABLE>
(2) Contracted volume is based on a 24/7 term.

<TABLE>
<CAPTION>
FINANCIAL INTEREST RATE CONTRACTS (3)
======================================================================================================
                                                    Principal        Fixed Annual        Spread on
Term                             Contract           (MM USD)           Rate (%)         3 Mo. LIBOR
======================================================================================================
<S>                              <C>                <C>              <C>                <C>
Jan 07 - Apr 14                      Swap              30.5              4.62            38.5 bps
Jan 07 - Apr 14                      Swap              32.0              4.62           (25.5 bps)
======================================================================================================
</TABLE>
(3)  Starting in 2009, the notional amount of the contracts  decreases annually
     until 2014.  The Trust pays the floating  interest rate based on the three
     month LIBOR plus a spread and receives the fixed interest rate.

The Trust has  designated  its fixed price  electricity  and interest rate swap
contracts as effective accounting hedges as at January 1, 2004. A realized gain
of $3.4 million  ($0.3  million gain in 2005) on the  electricity  contract has
been  included  in  operating  costs.  The fair  value  unrealized  gain on the
electricity  contract of $7.0 million has not been recorded on the consolidated
balance sheet at December 31, 2006 ($0.2 million loss in 2005). A realized loss
of $0.4  million  for the year on the  interest  rate swap  contracts  has been
included  in  interest  expense  ($0.5  million  gain in 2005).  The fair value
unrealized loss on the two interest rate swap contracts of $1.8 million has not
been  recorded  on the  consolidated  balance  sheet at  December  31, 2006 ($1
million loss in 2005).

None  of the  Trust's  commodity  and  foreign  currency  contracts  have  been
designated  as effective  accounting  hedges.  Accordingly,  all  commodity and
foreign currency contracts have been accounted as assets and liabilities in the
consolidated balance sheet based on their fair values.

The following  table  reconciles  the movement in the fair value of the Trust's
financial   commodity  and  foreign  currency  contracts  that  have  not  been
designated as effective accounting hedges:

                                                             2006        2005
===============================================================================
Fair value, beginning of year (1)                         $ (4.1)      $  (4.1)
Fair value, end of year                                     (8.7)         (4.1)
-------------------------------------------------------------------------------
Change in fair value of contracts in the year (1)           (4.6)            -
Realized gains (losses) in the year                          29.3        (87.6)
-------------------------------------------------------------------------------
Gain (loss) on commodity and foreign currency
  contracts (1)                                           $  24.7      $ (87.6)

Commodity and foreign currency contracts asset            $  25.7      $   3.1
Commodity and foreign currency contracts liability        $ (34.4)     $  (7.2)
===============================================================================
(1)  Excludes  the fixed price  electricity  contract  and  interest  rate swap
     contracts that were accounted for as effective accounting hedges.

The Trust  recorded a net gain on commodity and foreign  currency  contracts of
$24.7 million in the statement of income for 2006 ($87.6 million loss in 2005).
This amount includes the realized and unrealized gains and losses on derivative
contracts that do not qualify as effective accounting hedges.  During the year,
$4.6 million in unrealized losses ($ nil in 2005) and $29.3 million in realized
cash gains ($87.6 million loss in 2005) on contracts was recognized  during the
year.


12. GAIN (LOSS) ON FOREIGN EXCHANGE

The following is a summary of the total gain (loss) US$ denominated
transactions:

                                                             2006       2005
===============================================================================
Unrealized (loss) on US$ denominated debt                   $ (7.1)    $ (4.2)
Realized gain on US$ denominated debt repayments               2.6       10.5
-------------------------------------------------------------------------------
Total non-cash (loss) gain on US$ denominated transactions    (4.5)       6.3
Realized cash gain on US$ denominated transactions             0.3        0.1
-------------------------------------------------------------------------------
Total foreign exchange (loss) gain                          $ (4.2)    $  6.4
===============================================================================

<PAGE>

13. INCOME TAXES

The tax  provision  differs  from the amount  computed by applying the combined
Canadian  federal and  provincial  statutory  income tax rates to income before
future income tax recovery as follows:

===============================================================================
                                                            2006        2005
===============================================================================
Income before future income tax expense and recovery    $  379.6    $  364.1
-------------------------------------------------------------------------------
Canadian statutory rate                                     34.5%       37.6%
-------------------------------------------------------------------------------
Expected income tax expense at statutory rates             130.9       137.0
Effect on income tax of:
   Net income of the Trust                                (138.0)     (111.7)
   Effect of change in corporate tax rate                  (62.2)       (4.9)
   Resource allowance                                      (10.7)      (20.0)
   Change in estimated pool balances                       (10.0)          -
   Unrealized loss (gain) on foreign exchange                1.2        (1.6)
   Non-deductible crown charges                              1.2         1.3
   Other non-deductible items                                0.5         1.5
-------------------------------------------------------------------------------
Future income tax (recovery) expense                    $  (87.1)   $    1.6
===============================================================================

The net future income tax liability is comprised of the following:

===============================================================================
                                                            2006        2005
===============================================================================
Future tax liabilities:
   Capital assets in excess of tax value                $  509.8    $  569.8
   Long-term debt                                            4.0           -
Future tax assets:
   Non-capital losses                                       (5.3)       (1.5)
   Asset retirement obligations                            (52.1)      (45.7)
   Accrued long-term incentive compensation                 (7.7)          -
   Commodity and foreign currency contracts                 (2.5)       (1.4)
   Attributed Canadian royalty income                      (10.4)       (5.3)
   Cumulative eligible capital and deductible
   share issue costs                                        (1.6)          -
-------------------------------------------------------------------------------
Net future income tax liability                         $  434.2    $  515.9
===============================================================================

The petroleum and natural gas properties  and  facilities  owned by the Trust's
subsidiaries have an approximate tax basis of $1,031 million ($788.4 million in
2005) available for future use as deductions  from taxable income.  Included in
this tax basis are estimated  non-capital  loss carry forwards of $18.2 million
($13.1  million  in 2005)  that  expire in the years  2008  through  2026.  The
following is a summary of the estimated Trust's subsidiaries' tax basis:

===============================================================================
                                                             2006        2005
===============================================================================
Canadian oil and gas property expenses                  $   200.1    $   88.6
Canadian development expenses                               285.9       201.3
Canadian exploration expenses                                27.7        22.7
Undepreciated capital cost                                  389.0       352.2
Non-capital losses                                           18.2        13.1
Provincial tax pools                                        104.5       104.5
Other                                                         5.6         6.0
Estimated tax basis                                     $ 1,031.0    $  788.4
===============================================================================

In  addition  to the above tax basis for the  Trust's  subsidiaries,  the Trust
itself has an  approximate  tax basis of $545.1 million as at December 31, 2006
($555.4 million in 2005).

On October 31, 2006, the Federal Government  announced tax proposals pertaining
to taxation of distributions paid by publicly traded income trusts.  Currently,
distributions paid to unitholders,  other than returns of capital,  are claimed
as a  deduction  by the Trust in  arriving  at taxable  income  whereby  tax is
eliminated  at the Trust level and is paid by the  unitholders.  The  proposals
would result in a two-tiered tax structure whereby distributions would first be
subject to a 31.5 per cent tax at the Trust level  commencing  in 2011 and then
unitholders  would be subject tax on the  distribution  as if it were a taxable
dividend  paid by a taxable  Canadian  corporation.  If enacted,  the proposals
would  apply to the Trust  effective  January 1, 2011.  The Trust is  currently
assessing various  alternatives  with respect to the potential  implications of
the tax proposals; however, until the legislation is enacted in final form, the
Trust  will not  arrive at a final  conclusion  with  respect  to future  Trust
structure and  implications to the Trust. As the tax proposals had not yet been
substantively  enacted as of December  31,  2006,  the  consolidated  financial
statements do not reflect the impact of the proposed taxation.

No current income taxes were paid or payable in 2006.

<PAGE>

14. EXCHANGEABLE SHARES

The ARC Resources  exchangeable shares ("ARL Exchangeable  Shares") were issued
on January 31, 2001 at $11.36 per exchangeable  share as partial  consideration
for the Startech Energy Inc.  acquisition.  The issue price of the exchangeable
shares was  determined  based on the weighted  average  trading  price of Trust
units  preceding  the  date  of  announcement  of  the  acquisition.   The  ARL
Exchangeable Shares had an exchange ratio of 1:1 at the time of issuance.

The Trust is authorized to issue an unlimited number of ARL Exchangeable Shares
which can be  converted  (at the option of the holder)  into Trust units at any
time.  The number of Trust units  issuable  upon  conversion  is based upon the
exchange  ratio  in  effect  at the  conversion  date.  The  exchange  ratio is
calculated  monthly based on the cash  distribution paid divided by the ten day
weighted  average unit price  preceding  the record date and  multiplied by the
opening  exchange  ratio.   The  exchangeable   shares  are  not  eligible  for
distributions  and, in the event that they are not converted,  any  outstanding
shares are  redeemable by the Trust for Trust units on August 28, 2012. The ARL
Exchangeable Shares are publicly traded.

===============================================================================
ARL EXCHANGEABLE SHARES (thousands)                        2006         2005
===============================================================================
Balance, beginning of year                                1,595        1,784
Exchanged for Trust units                                  (162)        (189)
-------------------------------------------------------------------------------
Balance, end of year                                      1,433        1,595
Exchange ratio, end of year                             2.01251      1.83996
-------------------------------------------------------------------------------
Trust units issuable upon conversion, end of year         2,884        2,935
===============================================================================

The non-controlling  interest on the consolidated balance sheet consists of the
fair  value of the  exchangeable  shares  upon  issuance  plus the  accumulated
earnings  attributable  to  the  non-controlling   interest.   The  net  income
attributable to the non-controlling  interest on the consolidated  statement of
income  represents  the  cumulative  share of net  income  attributable  to the
non-controlling  interest  based on the Trust units  issuable for  exchangeable
shares in  proportion  to total Trust units  issued and issuable at each period
end.

Following is a summary of the non-controlling interest for 2006 and 2005:

===============================================================================
                                                             2006         2005
===============================================================================
Non-controlling interest, beginning of year               $  37.5      $ 35.9
Reduction of book value for conversion to Trust units       (4.1)        (4.0)
Current year net income attributable to non-
  controlling interest                                       6.6          5.6
-------------------------------------------------------------------------------
Non-controlling interest, end of year                     $ 40.0       $ 37.5
Accumulated earnings attributable to non-controlling
  interest                                                $ 27.3       $ 20.7
===============================================================================

15. UNITHOLDERS' CAPITAL

The Trust is authorized to issue 650 million Trust units of which 204.3 million
units were issued and  outstanding as at December 31, 2006 (199.1 million as at
December 31, 2005).

The Trust has in place a  Distribution  Reinvestment  and Optional Cash Payment
Program  ("DRIP") in conjunction with the Trusts' transfer agent to provide the
option for unitholders to reinvest cash  distributions  into  additional  Trust
units issued from treasury at a five per cent discount to the prevailing market
price with no additional fees or commissions.

The Trust is an open ended mutual fund under which  unitholders  have the right
to request  redemption  directly from the Trust.  Units tendered by holders are
subject  to  redemption  under  certain  terms  and  conditions  including  the
determination  of the redemption price at the lower of the closing market price
on the date units are tendered or 90 per cent of the weighted  average  trading
price  for the 10 day  trading  period  commencing  on the  tender  date.  Cash
payments for units  tendered for  redemption  are limited to $100,000 per month
with  redemption  requests in excess of this amount  eligible to receive a note
from ARC Resources Ltd.  accruing interest at 4.5 per cent and repayable within
20 years.

<PAGE>

<TABLE>
<CAPTION>
                                                                          2006                            2005
=========================================================================================================================
                                                              Number of                      Number of
                                                              Trust Units                    Trust Units
                                                              (thousands)         $          (thousands)          $
=========================================================================================================================
<S>                                                           <C>             <C>            <C>             <C>
Balance, beginning of year                                      199,104        2,230.8          185,822        1,926.4
Issued for cash                                                       1              -            9,000          239.8
Issued on conversion of ARL exchangeable shares (Note 14)           310            4.1              333            4.0
Issued on exercise of employee rights (Note 18)                     978           18.4            1,500           24.0
Distribution reinvestment program                                 3,896           96.1            2,449           48.8
Trust unit issue costs                                                -           (0.2)               -          (12.2)
-------------------------------------------------------------------------------------------------------------------------
Balance, end of year                                            204,289        2,349.2          199,104        2,230.8
=========================================================================================================================
</TABLE>


16. DEFICIT

The deficit balance is composed of the following items:

==============================================================================
                                                          2006           2005
==============================================================================
Accumulated earnings                                $  1,695.8    $   1,235.7
Accumulated cash distributions                        (2,159.0)      (1,674.8)
-------------------------------------------------------------------------------
Deficit                                             $   (463.2)   $    (439.1)
==============================================================================

During  the year,  presentation  changes  were made to combine  the  previously
reported  Accumulated Earnings and Accumulated Cash Distribution figures on the
balance sheet into a single Deficit balance.  The Trust has  historically  paid
cash distributions in excess of accumulated  earnings as cash distributions are
based on cash flow generated in the current period while  accumulated  earnings
are  based on cash flow  generated  in the  current  period  less a  depletion,
depreciation,  and accretion expense recorded on the original property,  plant,
and equipment investment and other non-cash charges.


17. RECONCILIATION OF CASH FLOW AND DISTRIBUTIONS

Cash  distributions  are calculated in accordance with the Trust Indenture.  To
arrive at cash distributions,  cash flow from operating activities adjusted for
changes in non-cash  working capital and  expenditures on site  restoration and
reclamation,  is reduced by reclamation funds contributions  including interest
earned on the fund and a portion of capital  expenditures.  The portion of cash
flow withheld to fund capital expenditures is at the discretion of the Board of
Directors.

<TABLE>
<CAPTION>
======================================================================================================
                                                                              2006           2005
======================================================================================================
<S>                                                                       <C>            <C>
Cash flow from operating activities                                       $   734.0      $   616.7
Change in non-cash working capital                                             16.0           17.9
Expenditures on site reclamation and restoration                               10.6           4.9
------------------------------------------------------------------------------------------------------
Cash flow from operating activities after the above adjustments               760.6          639.5
Deduct:
   Cash withheld to fund current period capital expenditures                 (263.2)        (256.1)
   Reclamation fund contributions and interest earned on fund balances        (13.2)         (6.8)
------------------------------------------------------------------------------------------------------
Cash distributions (1)                                                        484.2          376.6
------------------------------------------------------------------------------------------------------
Accumulated cash distributions, beginning of year                           1,674.8        1,298.2
Accumulated cash distributions, end of year                               $ 2,159.0      $ 1,674.8
------------------------------------------------------------------------------------------------------
Cash distributions per unit (2)                                           $    2.40      $    1.99
Accumulated cash distributions per unit, beginning of year                    16.23          14.24
Accumulated cash distributions per unit, end of year                      $   18.63      $   16.23
======================================================================================================
</TABLE>
(1)  Cash  distributions  include  non-cash  amounts  of $94.6  million  ($58.3
     million in 2005).  These amounts relate to the  distribution  reinvestment
     program.
(2)  Cash  distributions  per Trust unit  reflect the sum of the per Trust unit
     amounts declared monthly to unitholders.

18. TRUST UNIT INCENTIVE RIGHTS PLAN

The Trust Unit  Incentive  Rights Plan (the "Rights  Plan") was  established in
1999 and authorized the Trust to grant up to 8,000,000 rights to its employees,
independent  directors and long-term  consultants to purchase  Trust units,  of
which  7,866,088 were granted to December 31, 2006. The initial  exercise price
of rights granted under the Rights Plan could not be less than the market price
of the Trust units as at the date of grant and the  maximum  term of each right
was not to exceed ten years.  In general,  the rights have a five year term and
vest equally over three years  commencing on the first  anniversary date of the
grant.  In  addition,  the  exercise  price  of the  rights  is to be  adjusted
downwards  from  time to time by the  amount,  if any,  that  distributions  to
unitholders  in any  calendar  quarter  exceeds  2.5 per  cent  (ten  per  cent
annually) of the Trust's net book value of property,  plant and equipment  (the
"Excess Distribution"), as determined by the Trust.

<PAGE>

During the 2006 and 2005, the Trust did not grant any rights as the Rights Plan
was  replaced  with a Whole Unit Plan during 2004 (see Note 19).  The  existing
Rights Plan will be in place until the remaining 0.4 million rights outstanding
as at December 31, 2006 are exercised or cancelled.

A summary of the  changes  in rights  outstanding  under the Rights  Plan is as
follows:

<TABLE>
<CAPTION>
                                                             2006                                2005
===============================================================================================================
                                                                    Weighted                         Weighted
                                                     Number         Average             Number       Average
                                                    of Rights       Exercise           of Rights     Exercise
                                                   (thousands)      Price ($)         (thousands)    Price ($)
===============================================================================================================
<S>                                                 <C>            <C>                 <C>           <C>
Balance, beginning of year                            1,349          10.22               3,009         10.92
Granted                                                   -              -                   -             -
Exercised                                              (978)         12.19              (1,500)        11.60
Cancelled                                                (2)         10.07                (160)        10.99
---------------------------------------------------------------------------------------------------------------
Balance before reduction of exercise price              369          10.40               1,349         11.10
Reduction of exercise price (1)                           -          (0.93)                  -         (0.88)
Balance, end of year                                    369           9.47               1,349         10.22
===============================================================================================================
</TABLE>
(1)  The  holder of the right has the  option to  exercise  rights  held at the
     original grant price or a reduced exercise price.

A summary of the plan as at December 31, 2006 is as follows:

<TABLE>
<CAPTION>
===========================================================================================================
                                                      Number                                Number of
                                     Adjusted        of Rights          Remaining            Rights
Exercise Price                       Exercise       Outstanding      Contractual Life      Exercisable
At Grant Date ($)                    Price ($)      (thousands)      of Rights (years)     (thousands)
===========================================================================================================
<C>                                  <C>            <C>              <C>                   <C>
12.58                                  9.11              32               0.4                   32
12.29                                  9.40             328               1.4                  328
15.42                                 13.27               9               2.2                    3
-----------------------------------------------------------------------------------------------------------
12.40                                  9.47             369               1.3                  363
===========================================================================================================
</TABLE>

The Trust  recorded  compensation  expense of $2.5  million  for the year ($6.5
million in 2005) for the cost  associated  with the  rights.  Of the  3,013,569
rights  issued on or after  January  1, 2003 that  were  subject  to  recording
compensation  expense,  357,999 rights have been cancelled and 2,318,222 rights
have been exercised to December 31, 2006.

The  Trust  used  the  Black-Scholes  option-pricing  model  to  calculate  the
estimated  fair value of the  outstanding  rights issued on or after January 1,
2003.  Subsequent to the initial  valuation,  the Trust used a binomial lattice
model and observed immaterial valuation differences.  The following assumptions
were used to arrive at the estimate of fair value as at December 31, 2004:

===============================================================================
                                                                         2004
===============================================================================
Expected annual right's exercise price reduction                         0.72
Expected volatility                                                      13.2%
Risk-free interest rate                                                   3.7%
Expected life of option (years)                                           1.1
Expected forfeitures                                                        0%
===============================================================================

Prior to 2004, the Trust recorded compensation expense on its Rights Plan using
the intrinsic method. In 2004, the Trust adopted the fair value method.  Use of
the fair value prior to 2004 would have resulted in an immaterial impact to the
Trust.

The following table reconciles the movement in the contributed  surplus balance
for 2006 and 2005:

===============================================================================
                                                           2006           2005
===============================================================================
Balance, beginning of year                               $  6.4         $  6.5
Compensation expense                                        2.5            6.5
Net benefit on rights exercised (1)                        (6.5)          (6.6)
-------------------------------------------------------------------------------
Balance, end of year                                     $  2.4         $  6.4
===============================================================================
(1)  Upon exercise,  the net benefit is reflected as a reduction of contributed
     surplus and an increase to unitholders' capital.

<PAGE>

19. WHOLE TRUST UNIT INCENTIVE PLAN

In March 2004, the Board of Directors,  upon recommendation of the Compensation
Committee,  approved a new Whole  Trust Unit  Incentive  Plan (the  "Whole Unit
Plan") to replace the existing Trust Unit Incentive  Rights Plan for new awards
granted  subsequent  to March 31, 2004.  The new Whole Unit Plan will result in
employees,  officers and directors  (the "plan  participants")  receiving  cash
compensation  in  relation  to the value of a  specified  number of  underlying
notional  trust units.  The Whole Unit Plan consists of Restricted  Trust Units
("RTUs")  for  which the  number  of trust  units is fixed and will vest over a
period of three years and Performance Trust Units ("PTUs") for which the number
of trust units is variable and will vest at the end of three years.

Upon vesting,  the plan  participant  receives a cash payment based on the fair
value of the underlying  trust units plus notional accrued  distributions.  The
cash compensation  issued upon vesting of the PTUs is dependent upon the future
performance  of  the  Trust  compared  to  its  peers  based  on a  performance
multiplier.  The performance  multiplier is based on the percentile rank of the
Trust's Total Unitholder Return.  The cash compensation  issued upon vesting of
the PTUs may range  from  zero to two  times  the value of the PTUs  originally
granted.

The fair value  associated  with the RTUs and PTUs is expensed in the statement
of  income  over  the  vesting  period.  As the  value  of the RTUs and PTUs is
dependent upon the trust unit price,  the expense  recorded in the statement of
income may fluctuate over time.

The Trust  recorded  compensation  expense of $8.2  million and $1.1 million to
general  and  administrative   and  operating   expenses,   respectively,   and
capitalized $1.8 million to property,  plant and equipment in the twelve months
ended December 31, 2006 for the estimated cost of the plan ($8.8 million,  $1.9
million,  and $1.4 million for the twelve months ended December 31, 2005).  The
compensation  expense was based on the  December  31, 2006 unit price of $22.30
($26.49 in 2005), accrued distributions,  a performance multiplier ranging from
1.9 to 2.0 for the various series (2.0 in 2005),  and the number of units to be
issued on maturity.

The following  table  summarizes the RTU and PTU movement for the twelve months
ended December 31, 2006 and 2005:

<TABLE>
<CAPTION>
                                                     2006                              2005
=========================================================================================================
                                         Number of          Number of       Number of        Number of
                                           RTUs               PTUs            RTUs             PTUs
                                        (thousands)       (thousands)     (thousands)       (thousands)
=========================================================================================================
<S>                                    <C>                <C>             <C>              <C>
Balance, beginning of year                  479                391             224              128
Vested                                     (180)                 -             (78)               -
Granted                                     373                303             367              305
Forfeited                                   (24)               (11)            (34)             (42)
---------------------------------------------------------------------------------------------------------
Balance, end of year                        648                683             479              391
=========================================================================================================
</TABLE>

The  following  table  reconciles  the  change  in total  accrued  compensation
liability relating to the Whole Unit Plan:

===============================================================================
                                                           2006          2005
===============================================================================
Balance, beginning of year                            $    15.0      $   2.9
Change in liabilities in the year
   General and administrative expense                       8.2           8.8
   Operating expense                                        1.1           1.9
   Property, plant and equipment                            1.8           1.4
-------------------------------------------------------------------------------
Balance, end of year                                  $    26.1      $   15.0
-------------------------------------------------------------------------------
Current portion of liability (Note 7)                      11.5          3.6
-------------------------------------------------------------------------------
Long-term liability                                   $    14.6      $   11.4
===============================================================================

During the year $5.2 million in cash payments  were made to employees  relating
to the Whole Unit Plan ($1.6 million in 2005).


20. BASIC AND DILUTED PER TRUST UNIT CALCULATIONS

Net income per Trust unit has been determined based on the following:

===============================================================================
(thousands)                                                 2006          2005
===============================================================================
Weighted average trust units (1)                         201,554       188,237
Trust units issuable on conversion of
  exchangeable shares (2)                                  2,884         2,935
Dilutive impact of rights (3)                                711         1,372
-------------------------------------------------------------------------------
Dilutive trust units and exchangeable shares             205,149       192,544
===============================================================================
(1)  Weighted average Trust units exclude trust units issuable for exchangeable
     shares.
(2)  Diluted  trust  units  include  trust  units   issuable  for   outstanding
     exchangeable  shares at the period end exchange ratio. (3) All outstanding
     rights were dilutive and therefore  have been included in the diluted unit
     calculation for both 2006 and 2005.

<PAGE>

Basic  net  income  per unit  has been  calculated  based on net  income  after
non-controlling  interest divided by weighted average trust units.  Diluted net
income per unit has been calculated based on net income before  non-controlling
interest divided by dilutive trust units.

21. COMMITMENTS AND CONTINGENCIES

Following is a summary of the Trust's  contractual  obligations and commitments
as at December 31, 2006:

<TABLE>
<CAPTION>
                                                               PAYMENTS DUE BY PERIOD
====================================================================================================================
                                                2007        2008-2009       2010-2011      Thereafter       Total
====================================================================================================================
<S>                                            <C>          <C>             <C>            <C>             <C>
Debt repayments (1)                              8.0          451.2           53.1            174.8          687.1
Interest payments (2)                           11.3           21.5           18.1             20.8           71.7
Reclamation fund contributions (3)               6.0           11.1            9.5             76.2          102.8
Purchase commitments                            12.6            8.4            3.4              6.8           31.2
Operating leases                                 5.3            9.9            5.0                -           20.2
Derivative contract premiums (4)                12.4            3.3              -                -           15.7
Retention bonuses                                1.0              -              -                -            1.0
--------------------------------------------------------------------------------------------------------------------
Total contractual obligations                   56.6          505.4           89.1            278.6          929.7
====================================================================================================================
</TABLE>
(1)  Long-term and short-term debt, excluding interest.
(2)  Fixed interest payments on senior secured notes.
(3)  Contribution  commitments to a restricted reclamation fund associated with
     the Redwater  property  acquired in 2005. (4) Fixed premiums to be paid in
     future periods on certain commodity derivative contracts.

The  above  noted  derivative   contract  premiums  are  part  of  the  Trust's
commitments  related to its risk management  program.  In addition to the above
premiums, the Trust has commitments related to its risk management program (see
Note 11). As the premiums are part of the underlying derivative contract,  they
have been  recorded  at fair market  value at December  31, 2006 on the balance
sheet as part of commodity and foreign currency contracts.

The Trust enters into  commitments  for capital  expenditures in advance of the
expenditures  being made.  At a given point in time,  it is estimated  that the
Trust has committed to capital  expenditures equal to approximately one quarter
of its capital budget by means of giving the necessary  authorizations to incur
the  capital in a future  period.  The  Trust's  2007  capital  budget has been
approved by the Board at $360 million.  This  commitment has not been disclosed
in the  commitment  table as it is of a  routine  nature  and is part of normal
course of operations for active oil and gas companies and trusts.

The Trust is involved in litigation  and claims arising in the normal course of
operations.  Management is of the opinion that pending litigation will not have
a material  adverse  impact on the  Trust's  financial  position  or results of
operations and therefore the following  table does not include any  commitments
for outstanding litigation and claims.

The Trust has  certain  sales  contracts  with  aggregators  whereby  the price
received  by the Trust is  dependent  upon the  contracts  entered  into by the
aggregator.  This commitment has not been disclosed in the commitment  table as
it is of a routine nature and is part of normal course of operations.


22.  DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
     ACCOUNTING PRINCIPLES

The  consolidated  financial  statements  have been prepared in accordance with
Canadian GAAP,  which differs in some respects from US GAAP. Any differences in
accounting  principles  as  they  pertain  to  the  accompanying   consolidated
financial statements are immaterial except as described below:

The  application  of US GAAP would have the  following  effect on net income as
reported for the twelve months ended December 31, 2006 and 2005.

<PAGE>

<TABLE>
<CAPTION>
                                                                                                2006               2005
=============================================================================================================================
<S>                                                                                         <C>                <C>
Net income as reported for Canadian GAAP                                                    $   460.1          $  356.9
Adjustments:
   Depletion and depreciation (a)                                                                15.8              15.6
   Unit based compensation (b)                                                                   (1.6)             (7.3)
   Non-controlling interest (d)                                                                   6.6               5.6
   Effect of applicable income taxes on the above adjustments (h)                                (0.3)             (5.3)
-----------------------------------------------------------------------------------------------------------------------------
Net income under US GAAP before cumulative catch-up adjustment related to change
   in accounting policy                                                                     $   480.6          $  365.5
Cumulative catch-up adjustment related to change in accounting policy under SFAS 123R (b)        (2.6)                -
Net income under US GAAP                                                                        478.0             365.5
-----------------------------------------------------------------------------------------------------------------------------
Net income per Trust unit (Note 20)
Before cumulative catch-up adjustment related to change in accounting policy
-----------------------------------------------------------------------------------------------------------------------------
   Basic (e)                                                                                $    2.35          $   1.91
   Diluted (e)                                                                              $    2.34          $   1.90

After cumulative catch-up adjustment related to change in accounting policy
-----------------------------------------------------------------------------------------------------------------------------
   Basic (e)                                                                                $    2.34          $   1.91
   Diluted (e)                                                                              $    2.33          $   1.90
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income under US GAAP                                                                    $   478.0          $  365.5
Unrealized gain (loss) on derivative instruments, net of applicable income taxes (c)              4.5               1.6
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive income (c)                                                                    $   482.5          $  367.1
=============================================================================================================================
</TABLE>

The application of US GAAP would have the following effect on the consolidated
balance sheets as reported:

<TABLE>
<CAPTION>
                                                                              2006                                 2005
==============================================================================================================================
                                                                 Canadian          US            Canadian            US
                                                                   GAAP           GAAP             GAAP             GAAP
==============================================================================================================================
<S>                                                            <C>               <C>            <C>            <C>
Property, plant and equipment (a)                              $   3,093.8       $  2,977.0     $ 2,930.0      $   2,797.4
Commodity and foreign currency contracts (c)                          (8.7)            (3.5)         (4.1)            (5.3)
Trust Unit Rights Liability (b)                                          -             (3.6)            -                -
Future income taxes (h)                                             (434.2)          (412.3)       (515.9)          (491.8)
Non-controlling interest (d)                                         (40.0)               -         (37.5)               -
Temporary equity (b), (d), (f), (g)                                      -         (3,822.1)            -         (5,078.0)
Unitholders' capital (g)                                          (2,349.2)               -      (2,230.8)               -
Contributed surplus (b), (f)                                          (2.4)               -          (6.4)               -
Deficit (g)                                                          463.2          1,990.7         439.1          3,351.3
Accumulated other comprehensive loss (gain) (c)                          -             (3.7)            -              0.8
==============================================================================================================================
</TABLE>

The above noted differences between Canadian GAAP and US GAAP are the result of
the following:

(a)  The Trust performs an impairment test that limits net capitalized costs of
     property,  plant and  equipment  to the  discounted  estimated  future net
     revenue from proved and risked  probable oil and natural gas reserves plus
     the cost of unproved properties less impairment, using forward prices. For
     Canadian GAAP the discount rate used must be equal to a risk free interest
     rate.  Under US GAAP,  companies  using the full cost method of accounting
     for oil and gas producing  activities  perform a ceiling test on each cost
     centre using  discounted  estimated future net revenue from proved oil and
     gas reserves  using a discount rate of 10 per cent.  Prices used in the US
     GAAP ceiling tests are those in effect at year-end.  The amounts  recorded
     for depletion and depreciation have been adjusted in the periods following
     the  additional  write-downs  taken under US GAAP to reflect the impact of
     the reduction of depletable costs.

(b)  On January 1, 2006 the Trust  adopted  Statement of  Accounting  Standards
     ("SFAS")  123R,  "Share-Based  Payment"  using  the  modified  prospective
     application  of this  standard  and  adopted  the  fair  value  method  of
     accounting for the Rights Plan for all rights granted under the plan.

Previously,  under US GAAP,  the Rights  Plan was  accounted  for as a variable
award under APB 25 and was intrinsically valued at each reporting period. Under
SFAS 123R, rights granted under the Rights Plan are considered liability awards
and must be fair valued at each reporting date. As a result of this change, the
Trust  recorded  $2.6 million to  cumulative  effect of a change in  accounting
policy which represented the difference between the intrinsic value of the plan
at  December  31,  2005 and the fair value at  January 1, 2006.  The Trust also
recorded a trust unit rights  liability of $16.5 million and an increase to the
deficit of $13.9 million, representing the fair value of all outstanding rights
in proportion to the requisite  service period  rendered at January 1, 2006 and
the previously  recognized  compensation  expense for all  outstanding  rights,
respectively.

<PAGE>

Changes in fair value  between  periods  are  charged or credited to net income
with a corresponding change in the trust unit rights liability.

Under  Canadian  GAAP,  the Rights Plan is treated as an equity  award with the
initial fair value  calculated upon grant date. The fair value is then recorded
to  compensation  expense and credited to contributed  surplus over the vesting
period of the rights.  Upon any rights  exercises,  the fair value  recorded in
contributed surplus is reclassified to unitholders' capital.

The Trust's Whole Unit Plan is also accounted for in accordance  with FAS 123R.
Under Canadian GAAP the plan is intrinsically  valued. There is, however, no US
GAAP  difference  as  terms of the plan  result  in the fair  value of the plan
equaling the intrinsic value.

(c)  US GAAP requires that all  derivative  instruments  (including  derivative
     instruments  embedded in other contracts),  as defined, be recorded on the
     consolidated  balance  sheet as either an asset or  liability  measured at
     fair value and requires that changes in fair value be recognized currently
     in earnings  unless  specific  hedge  accounting  criteria are met.  Hedge
     accounting  treatment allows unrealized gains and losses to be deferred in
     other comprehensive  income (for the effective portion of the hedge) until
     such  time as the  forecasted  transaction  occurs,  and  requires  that a
     company  formally  designate,  document,  and assess the  effectiveness of
     derivative  instruments  that receive hedge  accounting  treatment.  Under
     Canadian  GAAP,  derivative  instruments  that meet these  specific  hedge
     accounting criteria are not recorded on the consolidated balance sheet. In
     addition, unrealized gains and losses on effective hedges are not recorded
     in the financial statements.  The Trust formally documented and designated
     all hedging  relationships and verified that its hedging  instruments were
     effective in offsetting changes in actual prices and rates received by the
     Trust.  Hedge  effectiveness  is  monitored  and  any  ineffectiveness  is
     reported in the consolidated statement of income.

US GAAP requires  that  financial  instruments  be carried at fair value in the
financial  statements.  The Trust  carries its  reclamation  fund assets at the
lower of cost and market as  described in Canadian  GAAP.  At December 31, 2006
the carrying  value and fair value of the  reclamation  fund assets varied by a
nominal amount.

A reconciliation  of the components of accumulated other  comprehensive  income
related to all derivative positions is as follows:

<TABLE>
<CAPTION>
                                                                          2006                         2005
===========================================================================================================================
                                                                   Gross       After Tax         Gross      After Tax
===========================================================================================================================
<S>                                                              <C>           <C>             <C>          <C>
Accumulated other comprehensive loss, beginning of year          $   (1.2)     $  (0.8)        $  (3.6)     $  (2.4)
Reclassification of net realized gains into earnings                 (2.9)        (2.1)           (0.8)        (0.5)
Net change in fair value of derivative instruments                    9.3          6.6             3.2          2.1
---------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive gain (loss), end of year         $    5.2      $   3.7         $  (1.2)     $  (0.8)
===========================================================================================================================
</TABLE>

(d)  Under   Canadian  GAAP,   ARL   Exchangeable   Shares  are  classified  as
     non-controlling  interest  to reflect a minority  ownership  in one of the
     Trust's  subsidiaries.  As these  exchangeable  shares must  ultimately be
     converted  into Trust Units,  the  exchangeable  shares are  classified as
     temporary equity along with the Trust Units for US GAAP purposes using the
     exchange ratio.

(e)  Under Canadian GAAP,  basic net income per unit is calculated based on net
     income after  non-controlling  interest  divided by weighted average trust
     units and  diluted net income per unit is  calculated  based on net income
     before non-controlling  interest divided by dilutive trust units. Under US
     GAAP, as the exchangeable  shares are classified in the same manner as the
     trust units with no non-controlling  interest treatment,  basic net income
     per unit is  calculated  based on net income  divided by weighted  average
     trust units and the trust unit equivalent of the outstanding  exchangeable
     shares.  Concurrently,  diluted net income per unit is calculated based on
     net income divided by a sum of the weighted average trust units, the trust
     unit equivalent of the outstanding  exchangeable  shares, and the dilutive
     impact of rights.

(f)  Under Canadian GAAP,  compensation  expense relating to the Rights Plan is
     credited to contributed  surplus. In the current year for US GAAP purposes
     all amounts  credited to contributed  surplus are classified as trust unit
     rights liability.  In prior year, because the plan was accounted for as an
     equity  award  under  US  GAAP,  contributed  surplus  was  classified  as
     temporary equity.

(g)  Under US GAAP,  as the Trust  Units are  redeemable  at the  option of the
     unitholder,  the Trust Units must be recorded at their  redemption  amount
     and presented as temporary equity in the  consolidated  balance sheet. The
     redemption amount is determined with reference to the trading value of the
     Trust Units and the Trust Unit  equivalent of the  exchangeable  shares at
     each  balance  sheet  date.  Under  Canadian  GAAP,  all  Trust  Units are
     classified  as permanent  equity.  As at December  31, 2006 and 2005,  the
     Trust has  classified  $3.8  billion and $5.1  billion,  respectively,  as
     temporary  equity in accordance with US GAAP.  Changes in redemption value
     between  periods are  charged or credited to deficit.  For the years ended
     2006 and 2005,  $1.4  billion was  credited  and $1.4 billion was charged,
     respectively.

(h)  Relates to the future income tax effect of all US GAAP adjustments made on
     the income statement.

<PAGE>

(i)  In 2006 and 2005, the FASB and the CICA issued new and revised  standards,
     all of which were assessed by Management to be not applicable to the Trust
     with the exception of the following:

o  In June  2006,  the  FASB  issued  Interpretation  No.  48,  Accounting  for
   Uncertainty  in Income Taxes - an  interpretation  of FASB Statement No. 109
   (FIN 48). This interpretation  prescribes a more likely than not recognition
   threshold   and  a  measurement   attribute  for  the  financial   statement
   recognition  and measurement of a tax position taken or expected to be taken
   in a tax return.  FIN 48 also provides  guidance on  de-recognition of a tax
   position,  classification  of a liability  for  unrecognized  tax  benefits,
   accounting for interest and penalties,  accounting in interim  periods,  and
   expanded  income tax  disclosures.  FIN 48 is  effective  for  fiscal  years
   beginning  after  December 15, 2006.  The Trust is currently  evaluating the
   impact of this interpretation on its financial statements.

o  In September  2006, the SEC staff issued Staff  Accounting  Bulletin No. 108
   (SAB 108) in order to  address  the  observed  diversity  in  quantification
   practices with respect to annual financial  statements.  In SAB 108, the SEC
   staff  establishes  an approach  that requires  quantification  of financial
   statement  errors  based on the  effects of the error on each of the Trust's
   financial statements and the related financial statement  disclosures.  This
   model is commonly  referred to as a "dual  approach"  because it essentially
   requires  quantification  of errors  under both the "iron  curtain"  and the
   "roll-over methods". The iron curtain method focuses primarily on the effect
   of  correcting  the  period-end  balance  sheet  with less  emphasis  on the
   reversing effects of prior year errors on the income statement in the period
   of correction.  The roll-over  method  focuses  primarily on the impact of a
   misstatement  on the income  statement,  including the  reversing  effect of
   prior year misstatements,  but can lead to the accumulation of misstatements
   in the balance sheet.  The provisions of SAB 108 are effective for the first
   year ending  after  November 15,  2006.  The Trust's  2006 annual  financial
   statements have not been impacted by this bulletin.

o  In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to
   increase  consistency and  comparability  in fair value  measurements and to
   expand their  disclosures.  The new standard  includes a definition  of fair
   value as well as a  framework  for  measuring  fair value.  The  standard is
   effective for fiscal periods beginning after November 15, 2007 and should be
   applied  prospectively,  except for certain  financial  instruments where it
   must be applied  retrospectively  as a  cumulative-effect  adjustment to the
   balance of opening retained  earnings in the year of adoption.  The Trust is
   currently   evaluating   the  impact  of  this  standard  on  its  financial
   statements.

o  In February 2006, the FASB issued SFAS No.155, Accounting for Certain Hybrid
   Financial  Instruments.   This  standard  is  effective  for  all  financial
   instruments  acquired or issued after  January 1, 2007.  Among other things,
   SFAS  No.  155  simplifies  the  accounting  for  certain  hybrid  financial
   instruments by permitting  fair value  accounting  for any hybrid  financial
   instrument that contains an embedded derivative that otherwise would require
   bifurcation.  The Trust is currently  evaluating the impact of this standard
   on its financial statements.

o  In January 2005, the CICA approved Handbook Sections 3855, 3861, 3862, 3863,
   "Financial  Instruments",  3865, "Hedges" and 1530,  "Comprehensive Income".
   The new standard is intended to harmonize  Canadian  GAAP with US GAAP.  The
   new standard is effective for the Trust in the first quarter of 2007 and the
   Trust is currently  evaluating  the impact of this standard on its financial
   statements.