**Exhibit 99.2**

 

**CONSOLIDATED FINANCIAL STATEMENTS ANDAUDITORS’ REPORT TO SHAREHOLDERS**

** **

**For the Fiscal Year Ended December 31, 2007**

 

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Management’sReport

 

Managements’ Responsibility OnFinancial Statements

 

Management is responsible forthe preparation of the accompanying consolidated financial statements and forthe consistency therewith of all other financial and operating data presentedin this annual report. The consolidated financial statements have been preparedin accordance with the accounting policies detailed in the notes thereto. InManagement’s opinion, the consolidated financial statements are in accordancewith Canadian generally accepted accounting principles, have been preparedwithin acceptable limits of materiality, and have utilized supportable,reasonable estimates.

 

To ensure the integrity of ourfinancial statements, we carefully select and train qualified personnel. Wealso ensure our organizational structure provides appropriate delegation ofauthority and division of responsibilities. Our policies and procedures arecommunicated throughout the organization including a written ethics andintegrity policy that applies to all employees including the chief executiveofficer and chief financial officer.

 

The Board of Directors approvesthe consolidated financial statements. Their financial statement relatedresponsibilities are fulfilled mainly through the Audit Committee. The AuditCommittee is composed entirely of independent directors, and includes at leastone director with financial expertise. The Audit Committee meets regularly withmanagement and the external auditors to discuss reporting and control issuesand ensures each party is properly discharging its responsibilities. The AuditCommittee also considers the independence of the external auditors and reviewstheir fees.

 

The consolidated financialstatements have been audited by Deloitte & Touche LLP, independentauditors, in accordance with generally accepted auditing standards on behalf ofthe shareholders.

 

Management’s Report On InternalControl Over Financial Reporting

 

Management is responsible forestablishing and maintaining an adequate system of internal control overfinancial reporting. Internal control over financial reporting is a processdesigned to provide reasonable assurance that all assets are safeguarded,transactions are appropriately authorized and to facilitate the preparation ofrelevant, reliable and timely information. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Management has assessed the effectiveness of the Trust’sinternal control over financial reporting as defined in Rule 13a-15 underthe US Securities Exchange Act of 1934. The assessment was based on theframework in Internal Control – Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Management concluded thatthe Trust’s internal control over financial reporting was effective as of December 31,2007. The Trust’s internal control over financial reporting as of December 31,2007 has been audited by Deloitte & Touche LLP, the Trust’sIndependent Registered Chartered Accountants, who also audited the Trust’sconsolidated financial statements for the year ended December 31, 2007.

 

 
| /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 8,2008

 

1

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Report of IndependentRegistered Chartered Accountants

 

TO THE BOARD OF DIRECTORS OF ARCRESOURCES LTD. AND UNITHOLDERS OF ARC ENERGY TRUST:

 

We have audited the internalcontrol over financial reporting of ARC Energy Trust and subsidiaries (the “Trust”)as of December 31, 2007, based on the criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Trust’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management Report on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on the Trust’sinternal control over financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting, assessingthe risk that a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal controlover financial reporting is a process designed by, or under the supervision of,the company’s principal executive and principal financial officers, or personsperforming similar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherentlimitations of internal control over financial reporting, including thepossibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis. Also, projections of any evaluation of the effectiveness of theinternal control over financial reporting to future periods are subject to therisk that the controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion, the Trustmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2007, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, inaccordance with Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated financial statements as of and for the year ended December 31,2007 of the Trust and our report dated February 8, 2008 expressed anunqualified opinion on those financial statements and included a separatereport titled Comments by Independent Registered Chartered Accountants onCanada-United States of America Reporting Difference referring to changes inaccounting principles.

 

 

/s/ “Deloitte & ToucheLLP”

 

Independent RegisteredChartered AccountantsCalgary, CanadaFebruary 8, 2008

 

2

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Comments by IndependentRegistered Chartered Accountants on Canada-United States of America Reporting Difference

 

The standards of the PublicCompany Accounting Oversight Board (United States) require the addition of anexplanatory paragraph (following the opinion paragraph) when there are changesin accounting principles that have a material effect on the comparability ofthe Trust’s financial statements, such as the changes described in Notes 3 and22 to the consolidated financial statements. Although we conducted our auditsin accordance with both Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (United States), ourreport to the Board of Directors of ARC Resources Ltd. and Unitholders of ARCEnergy Trust, dated February 8, 2008, is expressed in accordance withCanadian reporting standards which do not require a reference to such changesin accounting principles in the auditors’ report when the changes are properlyaccounted for and adequately disclosed in the financial statements.

 

 

/s/ “Deloitte & ToucheLLP”

 

Independent Registered CharteredAccountantsCalgary, CanadaFebruary 8, 2008

 

Report of IndependentRegistered Chartered Accountants

 

TO THE BOARD OF DIRECTORS OF ARCRESOURCES LTD. AND UNITHOLDERS OF ARC ENERGY TRUST:

 

We have audited theaccompanying consolidated balance sheets of ARC Energy Trust and subsidiaries(the “Trust”) as at December 31, 2007 and 2006, and the relatedconsolidated statements of income and deficit, comprehensive income andaccumulated other comprehensive loss 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 basedon our audits.

 

We conducted our audits inaccordance with Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (United States).These standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of ARC Energy Trust and subsidiaries as at December 31,2007 and 2006, and the results of their operations and their cash flows for theyears then ended in accordance with Canadian generally accepted accountingprinciples.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Trust’s internal control over financial reporting as of December 31,2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated formerly February 8,2008 expressed an unqualified opinion on the Trust’s internal control overfinancial reporting.

 

 

/s/ “Deloitte & ToucheLLP”

 

Independent RegisteredChartered AccountantsCalgary, CanadaFebruary 8, 2008

 

3

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ConsolidatedBalance Sheets

As at December 31

 
| **(CDN$ millions)**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Assets                                                |       |     |       |     |       |
| Current assets                                        |       |     |       |     |       |
| Cash                                                  |       | $        | 7.0        |     | $          | 2.8 |   |
| Accounts receivable                                   |       | 162.5    |       | 129.8    |       |
| Prepaid expenses                                      |       | 15.0     |       | 18.4     |       |
| Risk management contracts (Note 11)                   |       | 13.1     |       | 25.7     |       |
| Future income taxes (Note 13)                         |       | 4.0      |       | —   |       |
|                                                  |       | 201.6    |       | 176.7    |       |
| Reclamation funds (Note 5)                            |       | 26.1     |       | 30.9     |       |
| Risk management contracts (Note 11)                   |       | 4.7      |       | —   |       |
| Property, plant and equipment (Note 6)                |       | 3,143.0  |       | 3,093.8  |       |
| Long-term investment (Note 7)                         |       | —   |       | 20.0     |       |
| Goodwill                                              |       | 157.6    |       | 157.6    |       |
| Total assets                                          |       | $        | 3,533.0    |     | $          | 3,479.0 |   |
|                                                  |       |     |       |     |       |
| Liabilities                                           |       |     |       |     |       |
| Current liabilities                                   |       |     |       |     |       |
| Accounts payable and accrued liabilities (Note 8)     |       | $        | 180.6      |     | $          | 162.1 |   |
| Distributions payable                                 |       | 42.1     |       | 40.9     |       |
| Risk management contracts (Note 11)                   |       | 57.6     |       | 34.4     |       |
|                                                  |       | 280.3    |       | 237.4    |       |
| Risk management contracts (Note 11)                   |       | 28.2     |       | —   |       |
| Long-term debt (Note 9)                               |       | 714.5    |       | 687.1    |       |
| Accrued long-term incentive compensation (Note 19)    |       | 12.1     |       | 14.6     |       |
| Asset retirement obligations (Note 10)                |       | 140.0    |       | 177.3    |       |
| Future income taxes (Note 13)                         |       | 316.2    |       | 434.2    |       |
| Total liabilities                                     |       | 1,491.3  |       | 1,550.6  |       |
|                                                  |       |     |       |     |       |
| Commitments And Contingencies (Note 21)               |       |     |       |     |       |
|                                                  |       |     |       |     |       |
| Non-controlling Interest                              |       |     |       |     |       |
| Exchangeable shares (Note 14)                         |       | 43.1     |       | 40.0     |       |
|                                                  |       |     |       |     |       |
| Unitholders’ Equity                              |       |     |       |     |       |
| Unitholders’ capital (Note 15)                   |       | 2,465.7  |       | 2,349.2  |       |
| Contributed surplus (Note 18)                         |       | 1.7      |       | 2.4      |       |
| Deficit (Note 16)                                     |       | (465.9   | )          | (463.2   | )          |
| Accumulated other comprehensive loss (Notes 3 and 16) |       | (2.9     | )          | —   |       |
| Total unitholders’ equity                        |       | 1,998.6  |       | 1,888.4  |       |
| Total liabilities and unitholders’ equity        |       | $        | 3,533.0    |     | $          | 3,479.0 |   |

 

Seeaccompanying notes to the consolidated financial statements

 

4

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ConsolidatedStatements Of Income And Deficit

For the years ended December 31

 
| **(CDN$ millions, except per unit amounts)** | ** ** | **2007** | ** **   | **2006** | ** ** |
|-----------------------------------------------------------------------|------------|----------|--------------|----------|------------|
| Revenues                                                              |       |     |         |     |       |
| Oil, natural gas, and natural gas liquids                             |       | $        | 1,251.6      |     | $          | 1,230.5 |   |
| Royalties                                                             |       | (219.4   | )            | (222.3   | )          |
|                                                                  |       | 1,032.2  |         | 1,008.2  |       |
| Gain (loss) gain on risk management contracts (Note 11)               |       |     |         |     |       |
| Realized                                                              |       | 14.1     |         | 29.3     |       |
| Unrealized                                                            |       | (55.9    | )            | (4.6     | )          |
|                                                                  |       | 990.4    |         | 1,032.9  |       |
|                                                                  |       |     |         |     |       |
| Expenses                                                              |       |     |         |     |       |
| Transportation                                                        |       | 16.4     |         | 14.5     |       |
| Operating                                                             |       | 218.4    |         | 195.4    |       |
| General and administrative                                            |       | 49.1     |         | 47.1     |       |
| Interest on long-term debt (Note 9)                                   |       | 36.9     |         | 31.8     |       |
| Depletion, depreciation and accretion (Notes 6 and 10)                |       | 371.5    |         | 360.0    |       |
| (Gain) loss on foreign exchange (Note 12)                             |       | (69.4    | )            | 4.2      |       |
|                                                                  |       | 622.9    |         | 653.0    |       |
|                                                                  |       |     |         |     |       |
| Gain on sale of investment (Note 7)                                   |       | 13.3     |         | —   |       |
| Capital and other taxes                                               |       | —   |         | (0.3     | )          |
| Future income tax recovery (Note 13)                                  |       | 121.3    |         | 87.1     |       |
| Net income before non-controlling interest                            |       | 502.1    |         | 466.7    |       |
| Non-controlling interest (Note 14)                                    |       | (6.8     | )            | (6.6     | )          |
| Net income                                                            |       | $        | 495.3        |     | $          | 460.1 |   |
|                                                                  |       |     |         |     |       |
| Deficit, beginning of year                                            |       | $        |  (463.2 | )        | $          |  (439.1 | ) |
| Distributions paid or declared (Note 17)                              |       | (498.0   | )            | (484.2   | )          |
| Deficit, end of year (Note 16)                                        |       | $        |  (465.9 | )        | $          |  (463.2 | ) |
|                                                                  |       |     |         |     |       |
| Net income per unit (Note 20)                                         |       |     |         |     |       |
| Basic                                                                 |       | $        |  2.39   |     | $          |  2.28 |   |
| Diluted                                                               |       | $        |  2.39   |     | $          |  2.27 |   |

 

Seeaccompanying notes to the consolidated financial statements

 

5

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ConsolidatedStatements of Comprehensive Income and Accumulated Other Comprehensive Loss

For the years ended December 31

 
| **($CDN millions)**                                                                                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                      |       |     |       |     |       |
| Net income                                                                                                                                |       | $        | 495.3      |     | $          | 460.1 |   |
|                                                                                                                                      |       |     |       |     |       |
| Other comprehensive loss, net of tax                                                                                                      |       |     |       |     |       |
| Loss on financial instruments designated as cash flow hedges (1)                                                                          |       | (7.4     | )          | —   |       |
| Gains and losses on financial instruments designated as cash flow  hedges in prior periods realized in net income in the current year (2) |       | (0.3     | )          | —   |       |
| Net unrealized losses on available-for-sale reclamation funds’  investments (3)                                                      |       | (0.1     | )          | —   |       |
| Other comprehensive loss                                                                                                                  |       | (7.8     | )          | —   |       |
| Comprehensive income                                                                                                                      |       | $        | 487.5      |     | $          | 460.1 |   |
|                                                                                                                                      |       |     |       |     |       |
| Accumulated other comprehensive income, beginning of year                                                                                 |       | —   |       | —   |       |
| Application of initial adoption                                                                                                           |       | 4.9      |       | —   |       |
| Other comprehensive loss                                                                                                                  |       | (7.8     | )          | —   |       |
| Accumulated other comprehensive loss, end of year (Note 16)                                                                               |       | $        |  (2.9 | )        | —     |   |
|                                                                                                                                           |            |          |            |          |            |  |  |  |

 

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(1)          Amount is net of tax recoveryof $2.7 million for the year ended December 31, 2007.

 

(2)          Amount is net of tax liabilityof $0.1 million for the year ended December 31, 2007.

 

(3)          Nominal future income taximpact.

 

Seeaccompanying notes to consolidated financial statements.

 

6

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ConsolidatedStatements Of Cash Flows

For the years ended December 31

 
| **(CDN$ millions)**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                              |       |     |       |     |       |
| Cash Flows From Operating Activities                              |       |     |       |     |       |
| Net income                                                        |       | $        | 495.3      |     | $          | 460.1 |   |
| Add items not involving cash:                                     |       |     |       |     |       |
| Non-controlling interest (Note 14)                                |       | 6.8      |       | 6.6      |       |
| Future income tax recovery (Note 13)                              |       | (121.3   | )          | (87.1    | )          |
| Depletion, depreciation and accretion (Notes 6 and 10)            |       | 371.5    |       | 360.0    |       |
| Non-cash loss on risk management contracts (Note 11)              |       | 55.9     |       | 4.6      |       |
| Non-cash (gain) loss on foreign exchange (Note 12)                |       | (69.6    | )          | 4.5      |       |
| Non-cash trust unit incentive compensation (Notes 18 and 19)      |       | 3.5      |       | 11.9     |       |
| Gain on sale of investment (Note 7)                               |       | (13.3    | )          | —   |       |
| Expenditures on site restoration and reclamation (Note 10)        |       | (18.2    | )          | (10.6    | )          |
| Change in non-cash working capital                                |       | (5.7     | )          | (16.0    | )          |
|                                                              |       | 704.9    |       | 734.0    |       |
| Cash Flows From Financing Activities                              |       |     |       |     |       |
| Issuance of long-term debt under revolving credit facilities, net |       | 104.2    |       | 162.7    |       |
| Repayment of senior secured notes                                 |       | (5.8     | )          | (6.8     | )          |
| Issue of trust units                                              |       | 3.7      |       | 14.4     |       |
| Trust unit issue costs                                            |       | —   |       | (0.2     | )          |
| Cash distributions paid (Note 17)                                 |       | (388.4   | )          | (389.6   | )          |
| Payment of retention bonuses                                      |       | (1.0     | )          | (1.0     | )          |
| Change in non-cash working capital                                |       | 0.4      |       | —   |       |
|                                                              |       | (286.9)  |       | (220.5   | )          |
| Cash Flows From Investing Activities                              |       |     |       |     |       |
| Corporate acquisitions, net of cash received (Note 4)             |       | —   |       | (16.6    | )          |
| Acquisition of petroleum and natural gas properties               |       | (43.7    | )          | (117.4   | )          |
| Proceeds on disposition of petroleum and natural gas properties   |       | 1.2      |       | 2.1      |       |
| Capital expenditures                                              |       | (396.5   | )          | (362.7   | )          |
| Long-term investment (Note 7)                                     |       | 33.3     |       | (20.0    | )          |
| Net reclamation fund withdrawals (contributions) (Note 5)         |       | 4.7      |       | (7.4     | )          |
| Change in non-cash working capital                                |       | (12.8    | )          | 11.3     |       |
|                                                              |       | (413.8   | )          | (510.7   | )          |
| Increase in Cash                                                  |       | 4.2      |       | 2.8      |       |
| Cash, Beginning of Year                                           |       | 2.8      |       | —   |       |
| Cash, End of Year                                                 |       | $        | 7.0        |     | $          | 2.8 |   |

 

Seeaccompanying notes to the consolidated financial statements

 

7

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Notesto the Consolidated Financial Statements

 

December 31, 2007 and 2006

 

(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 “TrustIndenture”) that has been amended from time to time, most recently on May 15,2006. Computershare Trust Company of Canada was appointed as Trustee under theTrust Indenture. The beneficiaries of the Trust are the holders of the Trustunits.

 

The Trust was created for thepurposes of issuing Trust units to the public and investing the funds so raisedto purchase a royalty in the properties of ARC Resources Ltd. (“ARC Resources”)and ARC Oil & Gas Fund (“ARC Oil & Gas”). The Trust Indenturewas amended on June 7, 1999 to convert the Trust from a closed-end to anopen-ended investment Trust. The current business of the Trust includes theinvestment in all types of energy business-related assets including, but notlimited to, petroleum and natural gas-related assets, gathering, processing andtransportation assets. The operations of the Trust consist of the acquisition,development, exploitation and disposition of these assets and the distributionof the net cash proceeds from these activities to the unitholders.

 

2.   Summary of Accounting Policies

 

The consolidated financialstatements have been prepared by management following Canadian generallyaccepted accounting principles (“GAAP”). These principles differ in certainrespects from accounting principles generally accepted in the United States ofAmerica (“US GAAP”) and to the extent that they affect the Trust, thesedifferences are described in Note 22. The preparation of financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingencies at thedate of the financial statements, and revenues and expenses during thereporting year. Actual results could differ from those estimated.

 

In particular, the amountsrecorded for depletion, depreciation and accretion of the petroleum and naturalgas properties and for asset retirement obligations are based on estimates ofreserves and future costs. By their nature, these estimates, and those relatedto future cash flows used to assess impairment, are subject to measurementuncertainty and the impact on the financial statements of future periods couldbe material.

 

PRINCIPLES OF CONSOLIDATION

 

The consolidated financialstatements include the accounts of the Trust and its subsidiaries. Anyreference to “the Trust” throughout these consolidated financial statementsrefers to the Trust and its subsidiaries. All inter-entity transactions havebeen eliminated.

 

REVENUE RECOGNITION

 

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

 

TRANSPORTATION

 

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

 

JOINT VENTURE

 

The Trust conducts many of itsoil and gas production activities through joint ventures and the financialstatements reflect only the Trust’s proportionate interest in such activities.

 

8

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DEPLETION AND DEPRECIATION

 

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

 

(a)          total estimated proved reservescalculated in accordance with National Instrument 51-101, Standards ofDisclosure for Oil and Gas Activities;

 

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

 

(c)          relative volumes of petroleumand natural gas reserves and production, before royalties, converted at theenergy equivalent conversion ratio of six thousand cubic feet of natural gas toone barrel of oil.

 

UNIT BASED COMPENSATION

 

The Trust established a TrustUnit Incentive Rights Plan (the “Rights Plan”) for employees, independentdirectors and long-term consultants who otherwise meet the definition of anemployee of the Trust. The exercise price of the rights granted under the Planmay be reduced in future periods in accordance with the terms of the Plan. TheTrust accounts for the rights using the fair value method, whereby the fairvalue of rights is determined on the date on which fair value can initially bedetermined. The fair value is then recorded as compensation expense over theperiod that the rights vest, with a corresponding increase to contributedsurplus. When rights are exercised, the proceeds, together with the amountrecorded in contributed surplus, are recorded to unitholders’ capital.

 

WHOLE TRUST UNIT INCENTIVE PLANCOMPENSATION

 

The Trust has established aWhole Trust Unit Incentive Plan (the “Whole Unit Plan”) for employees,independent directors and long-term consultants who otherwise meet thedefinition of an employee of the Trust. Compensation expense associated withthe Whole Unit Plan is granted in the form of Restricted Trust Units (“RTUs”)and Performance Trust Units (“PTUs”) and is determined based on the intrinsicvalue of the Whole Trust Units at each period end. The intrinsic valuationmethod is used as participants of the Whole Unit Plan receive a cash payment ona fixed vesting date. This valuation incorporates the period end Trust unitprice, the number of RTUs and PTUs outstanding at each period end, and certainmanagement estimates. As a result, large fluctuations, even recoveries, incompensation expense may occur due to changes in the underlying Trust unitprice. In addition, compensation expense is amortized and recognized inearnings over the vesting period of the Whole Unit Plan with a correspondingincrease or decrease in liabilities. Classification between accrued liabilitiesand other long-term liabilities is dependent on the expected payout date.

 

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

 

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

 

CASH EQUIVALENTS

 

Cash equivalents includeshort-term investments, such as money market deposits or similar typeinstruments, with an original maturity of three months or less when purchased.

 

RECLAMATION FUNDS

 

Reclamationfunds hold investment grade assets and cash and cash equivalents. In accordancewith Section 3855, investments are categorized as either held-to-maturityor available-for-sale assets, which are initially measured at fair value.Held-to-maturity investments are subsequently measured at amortized cost usingthe effective interest method. Available-for-sale investments are subsequentlymeasured at fair value with changes in fair value recognized in othercomprehensive income, net of tax. Section 3855 became effective January 1,2007 as described in Note 3.

 

Investments carried atamortized cost are subject to impairment losses in the event of a non-temporarydecline in market value.

 

9

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PROPERTY, PLANT AND EQUIPMENT(“PP&E”)

 

The Trust follows the full costmethod of accounting. All costs of exploring, developing and acquiringpetroleum and natural gas properties, including asset retirement costs, arecapitalized and accumulated in one cost centre as all operations are in Canada.Maintenance and repairs are charged against income, and renewals andenhancements that extend the economic life of the PP&E are capitalized.Gains and losses are not recognized upon disposition of petroleum and naturalgas properties unless such a disposition would alter the rate of depletion by20 per cent or more.

 

IMPAIRMENT

 

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

 

Impairmentis recognized if the carrying amount of the PP&E exceeds the sum of theundiscounted cash flows expected to result from the Trust’s proved reserves.Cash flows are calculated based on third party quoted forward prices, adjustedfor the Trust’s contract prices and quality differentials.

 

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

 

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

 

GOODWILL

 

The Trust must record goodwillrelating to a corporate acquisition when the total purchase price exceeds thefair value for accounting purposes of the net identifiable assets andliabilities of the acquired company. The goodwill balance is assessed forimpairment annually at year-end or as events occur that could result in animpairment. Impairment is recognized based on the fair value of the reportingentity (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 Trustto the identifiable assets and liabilities as if the Trust had been acquired ina business combination for a purchase price equal to its fair value. The excessof the fair value of the consolidated trust over the amounts assigned to theidentifiable assets and liabilities is the fair value of the goodwill. Anyexcess of the book value of goodwill over this implied fair value of goodwillis the impairment amount. Impairment is charged to earnings in the period inwhich it occurs.

 

Goodwill is stated at cost lessimpairment and is not amortized.

 

ASSET RETIREMENT OBLIGATIONS

 

The Trust recognizes an AssetRetirement Obligation (“ARO”) in the period in which it is incurred when areasonable estimate of the fair value can be made. On a periodic basis,management will review these estimates and changes, if any, to the estimatewill be applied on a prospective basis. The fair value of the estimated ARO isrecorded as a long-term liability, with a corresponding increase in the carryingamount of the related asset. The capitalized amount is depleted on aunit-of-production basis over the life of the reserves. The liability amount isincreased each reporting period due to the passage of time and the amount ofaccretion is charged to earnings in the period. Revisions to the estimatedtiming of cash flows or to the original estimated undiscounted cost would alsoresult in an increase or decrease to the ARO. Actual costs incurred uponsettlement of the ARO are charged against the ARO to the extent of theliability recorded.

 

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INCOME TAXES

 

The Trust follows the liabilitymethod of accounting for income taxes. Under this method, income taxliabilities and assets are recognized for the estimated tax consequencesattributable to differences between the amounts reported in the financialstatements of the Trust and the Trust’s corporate subsidiaries and theirrespective tax base, using substantively enacted future income tax rates. Theeffect of a change in income tax rates on future tax liabilities and assets isrecognized in income in the period in which the change occurs. Temporarydifferences arising on acquisitions result in future income tax assets andliabilities.

 

BASIC AND DILUTED PER TRUST UNITCALCULATIONS

 

Basic net income per unit iscomputed by dividing the net income by the weighted average number of trustunits outstanding during the period. Diluted net income per unit amounts arecalculated based on net income before non-controlling interest divided bydilutive trust units. Dilutive trust units are arrived at by taking weightedaverage trust units and trust units issuable on conversion of exchangeableshares, and giving effect to the potential dilution that would occur if rightswere exercised at the beginning of the period. The treasury stock methodassumes that proceeds received from the exercise of in-the-money rights and theunrecognized trust unit incentive compensation are used to repurchase units atthe average market price.

 

DERIVATIVE FINANCIAL INSTRUMENTS

 

The Trust is exposed to marketrisks resulting from fluctuations in commodity prices, foreign exchange ratesand interest rates in the normal course of operations. A variety of derivativeinstruments are used by the Trust to reduce its exposure to fluctuations incommodity prices, foreign exchange rates, and interest rates. The fair valuesof these derivative instruments are based on an estimate of the amounts thatwould 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 beendesignated as effective hedges for accounting purposes.

 

For transactions that do notqualify for hedge accounting, the Trust applies the fair value method ofaccounting by recording an asset or liability on the Consolidated Balance Sheetand recognizing changes in the fair value of the instruments in the statementof income for the current period.

 

For derivative instruments thatdo qualify as effective accounting hedges, policies and procedures are in placeto ensure that the required documentation and approvals are in place. Thisdocumentation specifically ties the derivative financial instruments to theiruse, and in the case of commodities, to the mitigation of market price riskassociated with cash flows expected to be generated. When applicable, the Trustalso identifies all relationships between hedging instruments and hedged items,as well as its risk management objective and the strategy for undertaking hedgetransactions. This would include linking the particular derivative to specificassets and liabilities on the Consolidated Balance Sheet or to specific firmcommitments or forecasted transactions. Where specific hedges are executed, theTrust assesses, both at the inception of the hedge and on an ongoing basis,whether the derivative used in the particular hedging transaction is effectivein offsetting changes in fair value or cash flows of the hedged item. Foraccounting treatment of gains or losses on derivative instruments that qualifyas effective accounting hedges refer to Note 3 – Hedges.

 

FOREIGN CURRENCY TRANSLATION

 

Monetary assets and liabilitiesdenominated in a foreign currency are translated at the rate of exchange ineffect at the Consolidated Balance Sheet date. Revenues and expenses aretranslated at the period average rates of exchange. Translation gains andlosses are included in income in the period in which they arise.

 

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NON-CONTROLLING INTEREST

 

The Trust must recordnon-controlling interest when exchangeable shares issued by a subsidiary of theTrust are transferable to third parties. Non-controlling interest on theConsolidated Balance Sheet is recognized based on the fair value of theexchangeable shares upon issuance plus the accumulated earnings attributable tothe non-controlling interest. Net income is reduced for the portion of earningsattributable to the non-controlling interest. As the exchangeable shares areconverted to Trust units, the non-controlling interest on the ConsolidatedBalance Sheet is reduced by the cumulative book value of the exchangeableshares and Unitholders’ capital is increased by the corresponding amount.

 

3.   New Accounting Policies

 

Effective January 1, 2007,the Trust adopted six new accounting standards that were issued by the CanadianInstitute of Chartered Accountants (“CICA”): Handbook Section 1530,Comprehensive Income, Section 3855, Financial Instruments – Recognitionand Measurement, Section 3861, Financial Instruments – Disclosure andPresentation, Section 3865, Hedges, Section 3251, Equity and Section 1506,Accounting Changes. These new accounting standards have been adoptedprospectively and, accordingly, comparative amounts for prior periods have notbeen restated. The standards provide requirements for the recognition,measurement and disclosure of financial instruments, the use of hedgeaccounting and the presentation of equity.

 

COMPREHENSIVE INCOME

 

Section 1530 introducesComprehensive Income, which consists of Net Income and Other ComprehensiveIncome (Loss) (“OCI”). Comprehensive Income includes changes in Unitholders’Equity from transactions and other events with non-owner sources, and OCIincludes unrealized gains and losses on financial assets classified asavailable-for-sale and changes in the fair value of the effective portion ofcash flow hedging instruments that qualify for hedge accounting. These itemsare excluded from Net Income calculated in accordance with GAAP. TheConsolidated Statements of Comprehensive Income includes Accumulated OtherComprehensive Income (Loss) (“AOCI”), and the changes in these items during theyear ended December 31, 2007. Cumulative changes in OCI are included inAOCI, which is presented as a new category within Unitholders’ Equity on theConsolidated Balance Sheet.

 

FINANCIAL INSTRUMENTS – RECOGNITION ANDMEASUREMENT

 

Section 3855 establishesstandards for recognizing and measuring financial assets, financial liabilitiesand non-financial derivatives. Under this standard, all financial instrumentsare required to be measured at fair value on initial recognition. Measurementin subsequent periods depends on whether the financial instrument has beenclassified as held-for-trading, available-for-sale, held-to-maturity, loans andreceivables, or other financial liabilities.

 

a. Held-for-trading

 

Financial assets andliabilities designated as held-for-trading are subsequently measured at fairvalue with changes in those fair values recognized immediately in Net Income.With the exception of risk management contracts that qualify for hedgeaccounting, the Trust classifies all risk management contracts asheld-for-trading. Cash is also classified as held-for-trading.

 

b. Available-for-sale assets

 

Available-for-sale financialassets are subsequently measured at fair value with changes in fair valuerecognized in OCI, net of tax. Amounts recognized in OCI for available-for-salefinancial assets are transferred to net income when the asset is derecognizedor when there is an other than temporary asset impairment. A portion of theTrust’s reclamation fund is classified as available-for-sale financial assets.

 

c. Held-to-maturity investments,loans and receivables and other financial liabilities

 

Held-to-maturity investments,loans and receivables, and other financial liabilities are subsequentlymeasured at amortized cost using the effective interest method. The Trustclassifies a portion of its reclamation fund investments to held-to-maturity,accounts receivables to loans and receivables, and accounts payable,distributions payable and long-term debt to other financial liabilities.

 

The Section allows anentity to designate any financial instrument as held-for-trading, which bycharacteristic and intended use may be classified under another category. TheTrust has chosen not to make any such designations.

 

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Transaction costs are expensedas incurred for financial instruments excluding long-term debt. The Trust haselected to capitalize costs incurred relating to debt issuances and to amortizethese costs over the term of the associated debt using the effective interestrate method.

 

The Trust has elected January 1,2003 as the effective date to identify and measure embedded derivatives infinancial and non-financial contracts that are not closely related to the hostcontracts. No adjustments were required for embedded derivatives on adoption ofthis standard.

 

FINANCIAL INSTRUMENTS – DISCLOSURE ANDPRESENTATION

 

Section 3861 establishesstandards for enhancing financial statement users’ understanding of thesignificance of financial instruments to an entity’s financial position, performanceand cash flows. It establishes standards for presentation of financialinstruments and non-financial derivatives, and identifies the information thatshould be disclosed about them. This section sets forth standards on thepresentation and classification of financial instruments between liabilitiesand equity, the classification of related interest, dividends, losses andgains, and the circumstances in which financial assets and liabilities areoffset. The standard outlines required disclosures surrounding factors thataffect the amount, timing and certainty of an entity’s future cash flowsrelating to financial instruments. Disclosure of information about the natureand extent of an entity’s use of financial instruments, the business purposesthey serve, the risks associated with them and management’s policies forcontrolling those risks are also required.

 

HEDGES

 

Section 3865 specifies thecriteria that must be satisfied in order for hedge accounting to be applied andthe accounting for fair value and cash flow hedges. Hedge accounting isdiscontinued prospectively when the derivative no longer qualifies as aneffective hedge, or the derivative is terminated or sold, or upon the sale orearly termination of the hedged item. The Trust has currently designated itsfinancial electricity contracts and treasury rate lock contracts as effectivecash flow hedges. The Trust assesses, both at the inception of the hedge and onan ongoing basis, whether the derivative used in the particular hedgingtransaction is effective in offsetting changes in cash flows of the hedgeditem.

 

In a cash flow hedgingrelationship, the effective portion of the change in the fair value of thehedging derivative is recognized in OCI while the ineffective portion isrecognized in Net Income. When hedge accounting is discontinued, the amountspreviously recognized in AOCI are reclassified to Net Income during the periodswhen the variability in the cash flows of the hedged item affects Net Income.Gains and losses on derivatives are reclassified immediately to Net Income whenthe hedged item is sold or early terminated.

 

When hedge accounting isapplied to a derivative used to hedge an anticipated transaction and it isdetermined that the anticipated transaction will not occur within theoriginally specified time period, hedge accounting is discontinued and theunrealized gains and losses are reclassified from AOCI to Net Income.

 

EQUITY

 

Section 3251 establishesstandards for the presentation of equity and changes in equity during the reportingperiod. This section specifies that changes in equity for the period arisingfrom Net Income, OCI, other changes in deficit, changes in contributed surplus,and changes in unitholders’ capital must be presented separately.

 

IMPACT

 

As a result of these changes inaccounting policies, on January 1, 2007 the Trust recorded $4.9 million toapplication of initial adoption in AOCI to reflect the opening fair value ofits cash flow hedges, net of tax, which was previously not recorded on theconsolidated financial statements. The Trust has also recorded an increase of$7 million to its risk management asset and an increase of $2.1 million to itsfuture income tax liability.

 

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ACCOUNTING CHANGES

 

Section 1506 permitsvoluntary changes in accounting policy only if they result in financialstatements that provide more reliable and relevant information. Changes inpolicy are applied retrospectively unless it is impractical to determine theperiod or cumulative impact of the change. Corrections of prior period errorsare applied retrospectively and changes in accounting estimates are appliedprospectively by including these changes in Net Income. In addition, disclosureis required for all future accounting changes when an entity has not applied anew source of GAAP that has been issued but is not yet effective.

 

FUTURE ACCOUNTING CHANGES

 

On December 1, 2006, theCICA issued three new accounting standards: Section 1535, CapitalDisclosures, Section 3862, Financial Instruments – Disclosures, and Section 3863,Financial Instruments – Presentation. These new standards will be effective on January 1,2008.

 

Section 1535 specifies thedisclosure of an entity’s objectives, policies and processes for managingcapital, quantitative data about what the entity regards as capital, whetherthe entity has complied with any capital requirements, and if it has notcomplied, the consequences of such non-compliance. This Section isexpected to have minimal impact on the Trust’s financial statements.

 

Sections3862 and 3863 specify standards of presentation and enhanced disclosures onfinancial instruments. These Sections will require the Trust to increasedisclosure on the nature and extent of risks arising from financial instrumentsand how the entity manages those risks.

 

In February 2008, the CICAissued Section 3064, Goodwill and Intangible Assets, replacing Section 3062,Goodwill and Other Intangible Assets and Section 3450, Research andDevelopment Costs. The new Section will be effective on January 1,2009. Section 3064 establishes standards for the recognition, measurement,presentation and disclosure of goodwill and intangible assets subsequent to itsinitial recognition. Standards concerning goodwill are unchanged from thestandards included in the previous Section 3062. The Trust is currentlyevaluating the impact of the adoption of this new Section, however does notexpect a material impact on its consolidated financial statements.

 

4.   Corporate Acquisitions

 

On December 6, 2006 theTrust 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 andequipment, with a nominal amount applied against working capital items.

 

5.   Reclamation Funds

 
| ** **                                              | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **Unrestricted**                | ** ** | **Restricted**                  | ** ** | **Unrestricted** | ** ** | **Restricted** | ** ** |
| Balance, beginning of year                              |       | $24.8                           |       |                            | $6.1       |   |   | $23.5 |   |   | $— |   |   |
| Contributions                                           |       | 6.2                             |       |                            | 5.9        |   |   | 6.0 |   |   | 6.1 |   |   |
| Reimbursed expenditures (1)                             |       | (17.5                           | )          |                            | (0.6       | ) |   | (5.7 | ) |   | — |   |   |
| Interest earned on funds                                |       | 1.1                             |       |                            | 0.3        |   |   | 1.0 |   |   | — |   |   |
| Net unrealized losses on available-for-sale investments |       | (0.2                            | )          |                            | —     |   |   | — |   |   | — |   |   |
| Balance, end of year (2)                                |       | $14.4                           |       |                            | $11.7      |   |   | $24.8 |   |   | $6.1 |   |   |

 

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(1) Amountdiffers from actual expenditures incurred by the Trust due to timingdifferences and discretionary reimbursements.

 

(2) Asat December 31, 2007 the unrestricted reclamation fund held $1.5 millionin cash and cash equivalents ($15 million at December 31, 2006), with thebalance held in investment grade assets.

 

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An unrestricted reclamationfund was established to fund future asset retirement obligation costs. Inaddition, the Trust has created a restricted reclamation fund associated withthe Redwater property acquired in 2005. Contributions to the restricted andunrestricted reclamation funds and interest earned on the balances have beendeducted from the cash distributions to the unitholders. The Board of Directorsof ARC Resources has approved voluntary contributions to the unrestrictedreclamation fund over a 20-year period that currently results in minimum annualcontributions of $6 million ($6 million in 2006) based upon properties owned asat December 31, 2007. Contributions to the restricted reclamation fundwill vary over time and have been disclosed in Note 21. Contributions for bothfunds are continually reassessed to ensure that the funds are sufficient tofinance the majority of future abandonment obligations. Interest earned on thefunds is retained within the funds.

 

For the year ended December 31,2007 no amounts relating to available-for-sale reclamation fund assets wereclassified from accumulated other comprehensive loss into the statement ofincome.

 

6.   Property, Plant and Equipment

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Property, plant and equipment, at cost |       | $        | 5,065.0    |     | $          | 4,655.3 |   |
| Accumulated depletion and depreciation |       | (1,922.0 | )          | (1,561.5 | )          |
| Property, plant and equipment, net     |       | $        | 3,143.0    |     | $          | 3,093.8 |   |

 

The calculation of 2007depletion and depreciation included an estimated $549 million ($547 million in2006) for future development costs associated with proved undeveloped reservesand excluded $173.7 million ($108.9 million in 2006) for the book value ofunproved properties.

 

The Trust performed a ceilingtest calculation at December 31, 2007 to assess the recoverable value ofproperty plant and equipment (PP&E). Based on the calculation, the value offuture net revenues from the Trust’s reserves exceeded the carrying value ofthe Trust’s PP&E at December 31, 2007. The benchmark prices used inthe calculation were as follows:

 
| ** **              | ** ** | **WTI Oil** | ** ** | **AECO Gas**  | ** ** | ** **  | ** ** |
|-------------------------|------------|------------------|------------|--------------------|------------|-------------|------------|
| **Year ($US/bbl)** | ** ** | **(CDN$/mmbtu)** | ** ** | **Exchange Rates** | ** ** | **USD/CAD** | ** ** |
| 2008                    |       | 92.00            |       | 6.75               |       | 1.00        |       |
| 2009                    |       | 88.00            |       | 7.55               |       | 1.00        |       |
| 2010                    |       | 84.00            |       | 7.60               |       | 1.00        |       |
| 2011                    |       | 82.00            |       | 7.60               |       | 1.00        |       |
| 2012                    |       | 82.00            |       | 7.60               |       | 1.00        |       |
| 2013                    |       | 82.00            |       | 7.60               |       | 1.00        |       |
| 2014                    |       | 82.00            |       | 7.80               |       | 1.00        |       |
| 2015                    |       | 82.00            |       | 7.97               |       | 1.00        |       |
| 2016                    |       | 82.02            |       | 8.14               |       | 1.00        |       |
| 2017                    |       | 83.66            |       | 8.31               |       | 1.00        |       |
| 2018                    |       | 85.33            |       | 8.48               |       | 1.00        |       |
| Remainder (1)           |       | 2.0              | %          | 2.0                | %          | 1.00        |       |

 

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(1) Percentage change represents the change in each yearafter 2018 to the end of the reserve life.

 

7.   Long-term Investment

 

During the year the Trust soldits equity investment in a private oil sands company for proceeds of $33.3million, resulting in a gain on sale of investment of $13.3 million. Theoriginal investment was purchased in 2006 for $20 million. The investment inthe shares of the private company was considered to be a related partytransaction due to common directorships of the Trust, the private company andthe manager of a private equity fund that held shares in the private company.In addition, certain directors and officers of the Trust had minor direct andindirect shareholdings in the private company.

 

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8.   Accounts Payable and Accrued Liabilities

 
| ** **                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Trade accounts payable                                      |       | $32.5    |       |     | $39.0      |   |   |
| Accrued liabilities                                         |       | 127.7    |       |     | 108.8      |   |   |
| Current portion of accrued long-term incentive compensation |       | 18.2     |       |     | 11.5       |   |   |
| Interest payable                                            |       | 2.2      |       |     | 1.8        |   |   |
| Retention bonuses                                           |       | —   |       |     | 1.0        |   |   |
| Total accounts payable and accrued liabilities              |       | $180.6   |       |     | $162.1     |   |   |

 

The current portion of accruedlong-term incentive compensation represents the current portion of the Trust’sestimated liability for the Whole Unit Plan as at December 31, 2007 (seeNote 19). This amount is payable in 2008.

 

9.   Long-term Debt

 
| ** **                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Revolving credit facilities                       |       |     |       |     |       |   |   |
| Syndicated credit facility – CDN denominated |       | $344.9   |       |     | $196.6     |   |   |
| Syndicated credit facility – US denominated  |       | 154.1    |       |     | 228.4      |   |   |
| Working capital facility                          |       | —   |       |     | 1.1        |   |   |
| Senior secured notes                              |       |     |       |     |       |   |   |
| 5.42% USD Note                                    |       | 74.1     |       |     | 87.4       |   |   |
| 4.94% USD Note                                    |       | 17.8     |       |     | 28.0       |   |   |
| 4.62% USD Note                                    |       | 61.8     |       |     | 72.8       |   |   |
| 5.10% USD Note                                    |       | 61.8     |       |     | 72.8       |   |   |
| Total long-term debt outstanding                  |       | $714.5   |       |     | $687.1     |   |   |

 

REVOLVING CREDIT FACILITIES

 

During 2007, the Trust renewedits $800 million secured, annually extendible, financial covenant-based threeyear syndicated credit facility. The revolving credit facility’s security is inthe form of a floating charge on all lands and assignments and a negativepledge on petroleum and natural gas properties. The Trust also has in place a$25 million demand working capital facility.

 

Borrowings under the creditfacility bear interest at bank prime (six per cent at December 31, 2007and December 31, 2006) or, at the Trust’s option, Canadian dollar bankers’acceptances or U.S. dollar LIBOR loans, plus a stamping fee. At the option ofthe Trust, the lenders will review the credit facility each year and determinewhether they will extend the revolving period for another year. In the eventthat the credit facility is not extended at anytime before the maturity date, theloan balance will become repayable on the maturity date. The maturity date ofthe current credit facility is April 15, 2010. All drawings under thefacility are subject to stamping fees that vary between 60 bps and 110 bpsdepending on certain consolidated financial ratios.

 

The working capital facilityallows for maximum borrowings of $25 million and is due and payable immediatelyupon demand by the bank. The facility is secured and is subject to the samecovenants as the syndicated credit facility.

 

5.42 PER CENT AND 4.94 PER CENT SENIORSECURED USD NOTES

 

These senior secured notes wereissued in two separate issues pursuant to an Uncommitted Master ShelfAgreement. The US$18 million senior secured notes were issued in 2002, bearinterest at 4.94 per cent, have a remaining final term of 2.8 years (remainingaverage term of 1.8 years) and require equal principal repayments of US$6million over a three year period commencing in 2008. The US$75 million seniorsecured notes were issued in 2005, bear interest at 5.42 per cent, have aremaining final term of 10 years (remaining weighted average term of 6.6 years)and require equal principal repayments over an eight year period commencing in2010.

 

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4.62 PER CENT AND 5.10 PER CENT SENIORSECURED USD NOTES

 

These notes were issued on April 27,2004 via a private placement in two tranches of US$62.5 million each. The firsttranche of US$62.5 million bears interest at 4.62 per cent and has a remainingfinal term of 6.3 years (remaining weighted average term of 3.9 years) andrequire equal principal repayments over a six year period commencing 2009.Immediately following the issuance, the Trust entered into interest rate swapcontracts that 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 aremaining final term of 8.3 years (remaining weighted average term of 6.4years). Repayments of the notes will occur over a five year period commencingin 2012.

 

DEBT COVENANTS

 

The following are thesignificant financial covenants governing the revolving credit facilities:

 

·                  Long-termdebt and letters of credit not to exceed three times annualized net incomebefore non-cash items and interest expense;

 

·                  Long-term debt, lettersof credit, and subordinated debt not to exceed four times annualized net incomebefore non-cash items and interest expense; and

 

·                  Long-term debt andletters of credit not to exceed 50 per cent of unitholders’ equity andlong-term debt, letters of credit, and subordinated debt.

 

In the event that the Trustenters into a material acquisition whereby the purchase price exceeds 10 percent of the book value of the Trust’s assets, the ratios in the first twocovenants above are increased to 3.5 and 5.5 times respectively, while thethird covenant is increased to 55 per cent for the subsequent six month period.As at December 31, 2007, the Trust had $4.8 million in letters of credit($4.7 million in 2006), no subordinated debt, and was in compliance with allcovenants.

 

The payment of principal andinterest are allowable deductions in the calculation of cash available fordistribution to unitholders and rank ahead of cash distributions payable tounitholders. Should the properties securing this debt generate insufficientrevenue to repay the outstanding balances, the unitholders have no directliability.

 

During 2007, theweighted-average effective interest rate under the credit facility was 5.5 percent (5.3 per cent in 2006).

 

Amounts due under the workingcapital facility and the senior secured notes in the next 12 months have notbeen included in current liabilities as management has the ability and intentto refinance this amount through the syndicated credit facility.

 

Interest paid during 2007 was$1.8 million less than interest expense. The difference between interest paidand interest expense in 2006 was nominal.

 

10. Asset Retirement Obligations

 

The total future assetretirement obligations were estimated by management based on the Trust’s netownership interest in all wells and facilities, estimated costs to reclaim and abandon the wells and facilitiesand the estimated timing of the costs to be incurred in future periods. The Trust has estimated the net present value of its totalasset retirement obligations to be $140 million as at December 31, 2007 ($177.3 million in 2006) based on a total futureundiscounted liability of $1.29 billion ($1.04 billion in 2006). At December 31,2007 management estimates that these payments are expected to be made over thenext 51 years with the bulk of payments being made in years 2048 to 2058. At December 31,2006 management had estimated that the expenditures would be made over 61 yearswith 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 6.6 per cent(6.5 per cent in 2006) and an inflation rate of 2.0 per cent (2.0 per cent in2006) were used to calculate the present value of the asset retirementobligations. During the year, no gains or losses were recognized on settlementsof asset retirement obligations.

 

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The following table reconcilesthe Trust’s asset retirement obligations:

 
| ** **                                                         | ** ** | **2007** | ** **  | **2006** | ** ** |
|--------------------------------------------------------------------|------------|----------|-------------|----------|------------|
| Balance, beginning of year                                         |       | $        | 177.3       |     | $          | 165.1 |   |
| Increase in liabilities relating to  corporate acquisitions        |       | —   |        | 4.9      |       |
| Increase in liabilities relating to  development activities        |       | 3.8      |        | 2.8      |       |
| (Decrease) increase in liabilities relating  to change in estimate |       | (34.4    | )           | 4.0      |       |
| Settlement of liabilities during the year                          |       | (18.2    | )           | (10.6    | )          |
| Accretion expense                                                  |       | 11.5     |        | 11.1     |       |
| Balance, end of year                                               |       | $        |  140.0 |     | $          |  177.3 |   |
|                                                                    |            |          |             |          |            |  |  |  |  |

 

11.         FinancialInstruments

 

The Trust is exposed to anumber of financial risks that are part of its normal course of business. TheTrust has a risk management program in place that includes financialinstruments as disclosed in this note. ARC’s risk management program isoverseen by an experienced risk management committee based on guidelinesapproved by the board of directors. The objective of the risk managementprogram is to mitigate the Trust’s exposure to the following financial risks:

 

COMMODITY PRICE RISKS

 

The Trust’s operational resultsand financial condition, and therefore the amount of distributions paid tounitholders, are dependent on the commodity prices received for oil and naturalgas production and the price paid for electricity. Commodity prices havefluctuated widely during recent years and are determined by weather, economicand, in the case of oil prices, geopolitical factors. Any movement in commodityprices could have an effect on the Trust’s financial condition and therefore onthe distributions to unitholders. ARC manages the risks associated with changesin commodity prices by entering into risk management contracts.

 

VARIATIONS IN INTEREST RATES

 

The Trust has both fixed andvariable interest debt. Changes in interest rates could result in a significantincrease or decrease in the amount the Trust pays to service variable interestdebt, potentially impacting distributions to unitholders. Changes in interestrates could also result in fair value risk on the Trust’s senior secured notes.This risk is mitigated due to the fact that the Trust does not intend to settleits fixed rate debt prior to maturity. ARC manages the risk associated withchanges in interest rates by entering into financial swaps in order to lock infavorable fixed or floating rates.

 

VARIATIONS IN FOREIGN EXCHANGE RATES

 

World commodity prices arequoted in U.S. dollars, therefore the price received by Canadian producers isaffected by the Canadian/U.S. dollar exchange rate that may fluctuate overtime. Variations in the exchange rate of the Canadian dollar could havesignificant positive or negative impact on distributions to unitholders. ARChas initiated certain risk management contracts to mitigate these risks.

 

CREDIT RISK

 

The Trust is exposed to creditrisk with respect to its accounts receivable and risk management contracts.Most of the Trust’s accounts receivable relate to oil and natural gas sales andare exposed to typical industry credit risks. The Trust manages this creditrisk by entering into sales contracts with only established entities andreviewing its exposure to individual entities on a regular basis. The Trustminimizes credit risk on risk management contracts by entering into agreementswith counterparties that are of investment grade.

 

18

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The Trust has a legal right tooffset asset and liability positions with some of its counterparties. Insituations where there is a legal right to offset, balances are still showngross on the Consolidated Balance Sheet as it is not the Trust’s intention tonet settle. Only in situations of credit default would these asset andliability positions be shown net on the Consolidated Balance Sheet.

 

Maximum credit risk iscalculated as the total positive value of accounts receivable and riskmanagement contracts at the balance sheet date less any liability amounts wherethere is a legal right to offset, to the extent that there are positive valueaccounts receivable or risk management contracts with the same counterparty. Thefollowing table details the Trust’s maximum credit risk as at December 31:

 
| ** **                | ** ** | **2007** | ** **  | **2006** | ** ** |
|---------------------------|------------|----------|-------------|----------|------------|
| Trade accounts receivable |       | $        | 159.5       |     | $          | 129.8 |   |
| Risk management contracts |       | 6.8      |        | 21.9     |       |
| Maximum credit exposure   |       | $        |  166.3 |     | $          |  151.7 |   |
|                           |            |          |             |          |            |  |  |  |  |

 

While the Trust is exposed tothe above credit losses due to the potential non-performance of itscounterparties, the Trust considers the risk of this remote.

 

FINANCIAL INSTRUMENTS

 

Financial Instruments of theTrust carried on the Consolidated Balance Sheet are carried at cost with theexception of reclamation fund assets classified as-available-for-sale and riskmanagement contracts, which are carried at fair value. Except for those itemsnoted in the table below there were no significant differences between thecarrying value of financial instruments and their estimated fair values, at December 31:

 
| ** **                                                    | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                                    | ** ** | **2007**                | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Reclamation fund assets classified as available-for-sale  (1) |       | $                       | 8.1        |                | $          | 5.2 |   | $ | 8.1 |   | $ | 5.2 |   |
| Reclamation fund assets classified as held-to-maturity  (1)   |       | 18.0                    |       | 25.7                |       | 17.8 |   | 27.7 |   |
| Senior secured notes (2)                                      |       | 215.5                   |       | 261.0               |       | 226.1 |   | 257.0 |   |
|                                                               |            |                         |            |                     |            |  |  |  |  |  |  |  |  |

 

----

(1)              Fair value obtained from thirdparties, determined directly by reference to quoted market prices.

 

(2)              Fair value calculated as thepresent value of future principal and interest payments discounted at the Trust’scredit adjusted risk free rate.

 

RISK MANAGEMENT CONTRACTS

 

The Trust uses a variety ofderivative instruments to reduce its exposure to fluctuations in commodityprices, foreign exchange, interest rates and power. The Trust considers all ofthese transactions to be effective economic hedges, however, the majority ofthe Trust’s contracts do not qualify as effective hedges for accountingpurposes.

 

Following is a summary of allrisk management contracts in place as at December 31, 2007 that do notqualify for hedge accounting:

 

19

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FINANCIAL WTI CRUDE OIL CONTRACTS

 
| ** **           | ** ** | ** **     | ** ** | **Volume** | ** ** | **Bought Put** | ** ** | **Sold Put** | ** ** | **Sold Call** | ** ** | **Bought Call** | ** ** |
|----------------------|------------|----------------|------------|------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|----------------------|------------|
| **Term**             | ** ** | **Contract**   | ** ** | **bbl/d**  | ** ** | **US$/bbl**         | ** ** | **US$/bbl**       | ** ** | **US$/bbl**        | ** ** | **US$/bbl**          |       |
| Jan 08 – Mar 08 |       | Collar         |       | 2,000      |       | 92.50               |       | —            |       | 110.00             |       | —               |       |
| Jan 08 – Mar 08 |       | Collar         |       | 2,000      |       | 92.50               |       | —            |       | 105.00             |       | —               |       |
| Jan 08 – Mar 08 |       | Covered Collar |       | 2,000      |       | 90.00               |       | —            |       | 105.00             |       | 120.00               |       |
| Jan 08 – Mar 08 |       | Bought Put     |       | 500        |       | 84.00               |       | —            |       | —             |       | —               |       |
| Jan 08 – Mar 08 |       | 3 - Way Collar |       | 1,000      |       | 84.00               |       | 69.00             |       | 105.00             |       | —               |       |
| Jan 08 – Mar 08 |       | Put Spread     |       | 500        |       | 83.00               |       | 68.00             |       | —             |       | —               |       |
| Jan 08 – Mar 08 |       | 3 - Way Collar |       | 1,000      |       | 79.00               |       | 66.00             |       | 105.00             |       | —               |       |
| Jan 08 – Jun 08 |       | 3 - Way Collar |       | 1,000      |       | 65.00               |       | 52.50             |       | 82.50              |       | —               |       |
| Jan 08 – Jun 08 |       | 3 - Way Collar |       | 1,000      |       | 65.00               |       | 52.50             |       | 85.00              |       | —               |       |
| Jan 08 – Jun 08 |       | Collar         |       | 1,000      |       | 65.00               |       | —            |       | 85.00              |       | —               |       |
| Jan 08 – Dec 08 |       | 3 - Way Collar |       | 1,000      |       | 70.00               |       | 55.00             |       | 90.00              |       | —               |       |
| Jan 08 – Dec 08 |       | 3 - Way Collar |       | 1,000      |       | 67.50               |       | 52.50             |       | 85.00              |       | —               |       |
| Jan 08 – Dec 08 |       | Collar         |       | 1,000      |       | 67.50               |       | —            |       | 85.00              |       | —               |       |
| Jan 08 – Dec 08 |       | 3 - Way Collar |       | 2,000      |       | 61.50               |       | 50.00             |       | 85.00              |       | —               |       |
| Jan 08 – Dec 08 |       | 3 - Way Collar |       | 1,000      |       | 61.30               |       | 50.00             |       | 85.00              |       | —               |       |
| Jan 08 – Dec 08 |       | 3 - Way Collar |       | 2,000      |       | 61.00               |       | 50.00             |       | 85.00              |       | —               |       |
| Apr 08 – Jun 08 |       | Collar         |       | 2,000      |       | 90.00               |       | —            |       | 110.00             |       | —               |       |
| Apr 08 – Jun 08 |       | Put Spread     |       | 500        |       | 85.00               |       | 70.00             |       | —             |       | —               |       |
| Apr 08 – Jun 08 |       | Put Spread     |       | 500        |       | 85.00               |       | 69.00             |       | —             |       | —               |       |
| Apr 08 – Jun 08 |       | Put Spread     |       | 500        |       | 84.00               |       | 68.00             |       | —             |       | —               |       |
| Apr 08 – Jun 08 |       | Put Spread     |       | 1,000      |       | 79.00               |       | 66.00             |       | —             |       | —               |       |
| Jul 08 – Dec 08 |       | Collar         |       | 2,000      |       | 85.00               |       | —            |       | 107.50             |       | —               |       |
| Jan 09 – Dec 09 |       | 3 - Way Collar |       | 5,000      |       | 55.00               |       | 40.00             |       | 90.00              |       | —               |       |

 

FINANCIAL AECO NATURAL GAS OPTIONCONTRACTS

 
| ** **           | ** ** | ** **     | ** ** | **Volume** | ** ** | **Bought Put** | ** ** | **Sold Put** | ** ** | **Sold Call** | ** ** |
|----------------------|------------|----------------|------------|------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| **Term**             | ** ** | **Contract**   | ** ** | **GJ/d**   | ** ** | **CDN$/GJ**         | ** ** | **CDN$/GJ**       | ** ** | **CDN$/GJ**        | ** ** |
| Apr 08 – Oct 08 |       | Collar         |       | 10,000     |       | 7.00                |       | —            |       | 9.00               |       |
| Apr 08 – Oct 08 |       | 3 - Way Collar |       | 10,000     |       | 7.00                |       | 5.75              |       | 9.00               |       |

 

FINANCIAL NYMEX NATURAL GAS CONTRACTS

 
| ** **           | ** ** | ** **     | ** ** | **Volume**  | ** ** | **Bought Put** | ** ** | **Sold Put** | ** ** | **Sold Call** | ** ** |
|----------------------|------------|----------------|------------|-------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|
| **Term**             | ** ** | **Contract**   | ** ** | **mmbtu/d** | ** ** | **US$/mmbtu**       | ** ** | **US$/mmbtu**     | ** ** | **US$/mmbtu**      | ** ** |
| Jan 08 – Mar 08 |       | 3 - Way Collar |       | 10,000      |       | 9.25                |       | 6.25              |       | 10.00              |       |
| Jan 08 – Mar 08 |       | Collar         |       | 20,000      |       | 8.50                |       | —            |       | 10.00              |       |
| Jan 08 – Mar 08 |       | Collar         |       | 5,000       |       | 7.85                |       | —            |       | 9.40               |       |
| Jan 08 – Mar 08 |       | Collar         |       | 5,000       |       | 8.25                |       | —            |       | 9.25               |       |
| Jan 08 – Mar 08 |       | Collar         |       | 5,000       |       | 8.00                |       | —            |       | 9.00               |       |
| Apr 08 – Oct 08 |       | 3 - Way Collar |       | 10,000      |       | 8.00                |       | 6.00              |       | 9.60               |       |
| Apr 08 – Oct 08 |       | 3 - Way Collar |       | 10,000      |       | 7.80                |       | 6.20              |       | 9.50               |       |
| Nov 08 – Mar 09 |       | Collar         |       | 20,000      |       | 8.50                |       | —            |       | 11.00              |       |

 

20

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FINANCIAL BASIS SWAP CONTRACT: RECEIVENYMEX (LAST 3 DAY); PAY AECO (MONTHLY)

 
| ** **           | ** ** | ** **   | ** ** | **Volume**  | ** ** | **Basis Swap** | ** ** |
|----------------------|------------|--------------|------------|-------------|------------|---------------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **mmbtu/d** | ** ** | **US$ /mmbtu** | ** ** |
| Jan 08 – Oct 08 |       | Basis Swap   |       | 50,000      |       | (1.1930             | )          |
| Nov 08 – Oct 10 |       | Basis Swap   |       | 50,000      |       | (1.0430             | )          |

 

ENERGY EQUIVALENT SWAP

 
| **Term**                                                           | ** ** | **Contract** | ** ** | **Volume**  | ** ** | **Swap**       | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|-------------|------------|----------------|------------|
| Financial WTI Crude Oil Purchase Contract                          |       |         |       |        |       |           |       |
| Apr 08 – Oct 08                                               |       | Swap         |       | 1,000 bbl/d |       | 73.95 CDN$/bbl |       |
|                                                               |       |         |       |        |       |           |       |
| Financial AECO Natural Gas Sales Contract |       |         |       |        |       |           |       |
| Apr 08 – Oct 08                                               |       | Swap         |       | 10,000 GJ/d |       | 7.10 CDN$/GJ   |       |

 

FINANCIAL FOREIGN EXCHANGE CONTRACTS

 
| ** **           | ** ** | ** **   | ** ** | **National**    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **          | ** ** | ** **        | ** ** |
|----------------------|------------|--------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------------|------------|-------------------|------------|
| ** **           | ** ** | ** **   | ** ** | **Volume**      | ** ** | **Swap**     | ** ** | **Swap**     | ** ** | **Bought Put** | ** ** | **Sold Put** | ** ** |
| **Term**             | ** ** | **Contract** | ** ** | **MM US$** | ** ** | **CDN$/US$** | ** ** | **US$/CDN$** | ** ** | **CDN$/US$**        | ** ** | **CDN$/US$**      | ** ** |
| USD Option Contracts | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **          | ** ** | ** **        | ** ** |
| Jan 08 – Dec 08 |       | Put Spread   |       | 12.0            |       | —       |       | —       |       | 1.0750              |       | 1.0300            |       |

 

USD LONG-TERM PRINCIPAL DEBT REPAYMENTCONTRACTS

 
| ** **               | ** ** | ** **   | ** ** | **Notional**          | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **        | ** ** |
|--------------------------|------------|--------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|----------------------|------------|-------------------|------------|
| ** **               | ** ** | ** **   | ** ** | **Volume**            | ** ** | **Swap**           | ** ** | **Swap**           | ** ** | **Bought Call** | ** ** | **Sold Put** | ** ** |
| **Settlement Date** | ** ** | **Contract** | ** ** | **MM US$ ** | ** ** | **CDN$/US$ ** | ** ** | **US$/CDN$ ** | ** ** | **CDN$/US$ **   | ** ** | **CDN$/US$**      | ** ** |
| December 17, 2012   |       | Forward      |       | 9.38                  |       | 0.9324             |       | (1.0725            | )          | —               |       | —            | ** ** |
| April 27, 2013      |       | Forward      |       | 10.42                 |       | 0.9454             |       | (1.0578            | )          | —               |       | —            | ** ** |
| April 27, 2013      |       | Forward      |       | 12.50                 |       | 0.9430             |       | (1.0604            | )          | —               |       | —            |       |
| December 15, 2013   |       | Forward      |       | 9.38                  |       | 0.9520             |       | (1.0504            | )          | —               |       | —            |       |
| April 27, 2014      |       | Forward      |       | 10.42                 |       | 0.9743             |       | (1.0264            | )          | —               |       | —            |       |
| April 27, 2014      |       | Forward      |       | 12.50                 |       | 0.9615             |       | (1.0400            | )          | —               |       | —            |       |
| December 15, 2014   |       | Forward      |       | 9.38                  |       | 0.9825             |       | (1.0178            | )          | —               |       | —            |       |
| April 27, 2015      |       | Forward      |       | 12.50                 |       | 0.9825             |       | (1.0178            | )          | —               |       | —            |       |
| December 15, 2015   |       | Forward      |       | 9.40                  |       | 0.9980             |       | (1.0020            | )          | —               |       | —            |       |
| April 27, 2016      |       | Forward      |       | 12.50                 |       | 1.0180             |       | (0.9823            | )          | —               |       | —            |       |
| December 15, 2017   |       | Forward      |       | 9.40                  |       | 1.0184             |       | (0.9819            | )          | —               |       | —            |       |
| December 15, 2016   |       | Collar       |       | 9.40                  |       | —             |       | —             |       | 1.0600               |       | 1.0000            |       |

 

FINANCIALINTEREST RATE CONTRACTS (1)(2)

 
| ** **           | ** ** | ** **   | ** ** | **Principal**   | ** ** | **Fixed Annual** | ** ** | **Spread on**        | ** ** |
|----------------------|------------|--------------|------------|-----------------|------------|-----------------------|------------|---------------------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **MM US$** | ** ** | **Rate (%)**     | ** ** | **3 Mo. LIBOR** | ** ** |
| Jan 08 – Apr 14 |       | Swap         |       | 30.5            |       | 4.62                  |       | 38  bps                   |       |
| Jan 08 – Apr 14 |       | Swap         |       | 32.0            |       | 4.62                  |       | (25.5 bps                 | )          |

 

----

(1)              Starting in 2009, the notionalamount of the contracts decreases annually until 2014. The Trust pays thefloating interest rate based on a three month LIBOR plus a spread and receivesthe fixed interest rate.

 

(2)              Starting in 2009 a mutual putexists where both parties have the right to call on the other party to pay thethen current mark-to-market value of the contract.

 

21

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Following is a summary of allrisk management contracts in place as at December 31, 2007 that qualifyfor hedge accounting:

 

FINANCIAL ELECTRICITY CONTRACTS (3)(4)

 
| ** **           | ** ** | ** **   | ** ** | **Volume** | ** ** | **Swap**     | ** ** |
|----------------------|------------|--------------|------------|------------|------------|--------------|------------|
| **Term**             | ** ** | **Contract** | ** ** | **MWh**    | ** ** | **CDN$/MWh** | ** ** |
| 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        |       |

 

----

(3)             Contracted volume is based on a24/7 term.

(4)              Includes margin provision on 5MWh per year if contract value exceeds $30M. If exercised a letter of creditwould be issued for values in excess of $30 million.

 

USD NOTE TREASURY RATE LOCKS

 
| ** **               | ** ** | **Principal**         | ** ** | **Interest**      | ** ** |
|--------------------------|------------|-----------------------|------------|-------------------|------------|
| **Settlement Date** | ** ** | **MM US$ ** | ** ** | **Rate (%)** | ** ** |
| February 15, 2008   |       | 125.0                 |       | 4.8082            | (5)        |

 

----

(5)              Rate is based on 10 year USTreasury Bond.

 

During the year the Trustentered into treasury rate lock contracts in order to manage the Trust’sinterest rate exposure on future debt issuances. These contracts have beendesignated as effective accounting hedges on their respective contract datesand hedge accounting has been applied. The unrealized fair value loss on thesecontracts of $7.4 million has been recorded on the Consolidated Balance Sheetat December 31, 2007 with the movement in the fair value recorded in OCI,net of tax. Ineffectiveness as at December 31, 2007 is nominal and wascalculated by considering the present value of future cash flows on theoriginal treasury rate lock contract and the rate effective on the contract at December 31,2007. The maximum expected term for which the Trust is hedging its interestrate risk exposure is 10 years, which is the expected term of the future debtissuance. It is expected that a $0.8 million fair value loss will bereclassified to Net Income within the next 12 months.

 

The Trust’s fixed price electricitycontracts are intended to manage price risk on electricity consumption. Allfixed price electricity contracts were designated as effective accountinghedges on their respective contract dates. A realized gain of $0.4 million onthe electricity contracts has been included in operating costs ($3.4 milliongain in 2006). The unrealized fair value gain on the electricity contracts of$4 million has been recorded on the Consolidated Balance Sheet at December 31,2007 with the movement in fair value recorded in OCI, net of tax. The fairvalue movement as at December 31, 2007 amounts to an unrealized loss of $3million. $1.9 million of this gain is expected to be recognized in income overthe next 12 months.

 

The Trust has entered intointerest rate swap contracts to manage the Company’s interest rate exposure ondebt instruments. Prior to 2007, these contracts were designated as effectiveaccounting hedges on the contract date. At January 1, 2007 the Trustelected to cease applying hedge accounting to these contracts.

 

The following table reconcilesthe movement in the fair value of the Trust’s financial risk managementcontracts that have not been designated as effective accounting hedges:

 
| ** **                                     | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Fair value, beginning of year (1)              |       | $                               |  (8.7 | )                               | $          |  (4.1 | ) |
| Fair value, end of year (1) (2)           |       | (64.6                           | )          | (8.7                            | )          |
| Change in fair value of contracts in the  year |       | (55.9                           | )          | (4.6                            | )          |
| Realized gains in the year                     |       | 14.1                            |       | 29.3                            |       |
| (Loss) gain on risk management contracts  (1)  |       | $                               | (41.8      | )                               | $          | 24.7 |   |

 

----

(1)              For 2007 the fixed priceelectricity and treasury rate lock contracts that were accounted for aseffective accounting hedges were excluded. For 2006 the fixed price electricitycontract and interest rate swap contracts that were accounted for as effectiveaccounting hedges were excluded.

 

(2)              Intrinsic value of riskmanagement contracts not designated as effective accounting hedges equals aloss of $47.6 million at December 31, 2007 ($5.3 million loss in 2006).

 

22

----

 

The following table reconcilesthe movement in the fair value of the Trust’s financial electricity andtreasury rate lock contracts that have been designated as effective accountinghedges:

 
| ** **                                         | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Fair value, beginning of year                      |       | $                               | 7.0        |                            | $          | (0.2 | ) |
| Fair value, end of year                            |       | (3.4                            | )          | 7.0                             |       |
| Change in fair value of contracts in the  year (3) |       | $                               | (10.4      | )                               | $          | 7.2 |   |

 

----

(3)              In 2006 fair value amountsrelating to risk management contracts that qualified for hedge accounting werenot recorded on the Consolidated Balance Sheet.

 

At December 31, 2007, thefair value of the contracts that were not designated as accounting hedges was aloss of $64.6 million. The Trust recorded a loss on risk management contractsof $41.8 million in the Statement of Income for the year ended 2007 ($24.7million gain in 2006). This amount includes the realized and unrealized gainsand losses on risk management contracts that do not qualify as effectiveaccounting hedges.

 

The fair values of all riskmanagement contracts are determined using published price quotations in anactive market through a valuation model. Significant inputs into this modelinclude forward curves on commodity prices, interest rates and foreign exchangerates.

 

12.   Gain (Loss) On Foreign Exchange

 

Thefollowing is a summary of the total gain (loss) on US$ denominatedtransactions:

 
| ** **                                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized gain (loss) on US$ denominated  debt             |       | $        | 64.6       |     | $          | (7.1 | ) |
| Realized gain on US$ denominated debt  repayments           |       | 5.0      |       | 2.6      |       |
| Total non-cash gain (loss) on US$ denominated  transactions |       | 69.6     |       | (4.5     | )          |
| Realized cash (loss) gain on US$ denominated  transactions  |       | (0.2     | )          | 0.3      |       |
| Total foreign exchange gain (loss)                               |       | $        | 69.4       |     | $          | (4.2 | ) |

 

13.   Income Taxes

 

In 2007, Income Trust taxlegislation was passed resulting in a two-tiered tax structure subjectingdistributions to the federal corporate income tax rate plus a deemed 13 percent provincial income tax at the Trust level commencing in 2011. Currently,distributions paid to unitholders, other than returns of capital, are claimedas a deduction by the Trust in arriving at taxable income whereby tax iseliminated at the Trust level and is paid by the unitholders. As a result, thefuture tax position of the Trust, the parent entity, is now required to be reflectedin the consolidated future income tax calculation. The Trust recorded a $24.7million one time increase in earnings and a corresponding decrease to itsfuture income tax liability as a result of timing differences within the Trustthat had not been previously recognized.

 

On October 30, 2007, theFinance Minister announced a reduction of the corporate income tax rate from22.1 per cent to 15 percent by 2012. The reductions will be phased in between2008 and 2012. Legislation enacting the measures received Royal Assent on December 14,2007. The reduction in the general corporate tax rate will also apply to thetaxation of Income Trusts, reducing the combined federal and deemed Provincialtax rate for distributions to 28 per cent in 2012.

 

23

----

 

The tax provision differs fromthe amount computed by applying the combined Canadian federal and provincialstatutory income tax rates to income before future income tax recovery asfollows:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Income before future income tax recovery        |       | $        | 380.8      |     | $          | 379.6 |   |
| Canadian statutory rate (1)                     |       | 34.3     | %          | 34.5     | %          |
| Expected income tax expense at statutory  rates |       | 130.6    |       | 130.9    |       |
| Effect on income tax of:                        |       |     |       |     |       |
| Net income of the Trust                         |       | (163.6   | )          | (138.0   | )          |
| Effect of change in corporate tax rate          |       | (41.3    | )          | (62.2    | )          |
| Initial recognition of Trust tax pools          |       | (24.7    | )          | —   |       |
| Unrealized (gain) loss on foreign exchange      |       | (10.4    | )          | 1.2      |       |
| Change in estimated pool balances               |       | (7.0     | )          | (10.0    | )          |
| Non-taxable portion of gains/losses             |       | (2.1     | )          | —   |       |
| Resource allowance                              |       | —   |       | (10.7    | )          |
| Non-deductible crown charges                    |       | —   |       | 1.2      |       |
| Other non-deductible items                      |       | (2.8     | )          | 0.5      |       |
| Future income tax recovery                      |       | $        | (121.3     | )        | $          | (87.1 | ) |

 

----

(1)              The statutory rate consists ofthe combined Trust and Trust’s subsidiaries statutory tax rate

 

The net future income taxliability comprises the following:

 
| ** **                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Future tax liabilities:                                       |       |     |       |     |       |
| Capital assets in excess of tax value                         |       | $        | 371.6      |     | $          | 509.8 |   |
| Long-term debt                                                |       | 11.9     |       | 4.0      |       |
| Future tax assets:                                            |       |     |       |     |       |
| Asset retirement obligations                                  |       | (36.1    | )          | (52.1    | )          |
| Risk management contracts                                     |       | (16.7    | )          | (2.5     | )          |
| Accrued long-term incentive compensation                      |       | (7.8     | )          | (7.7     | )          |
| Non-capital losses                                            |       | (3.8     | )          | (5.3     | )          |
| Attributed Canadian royalty income                            |       | (4.6     | )          | (10.4    | )          |
| Cumulative eligible capital and deductible  share issue costs |       | (1.6     | )          | (1.6     | )          |
| Other comprehensive loss                                      |       | (0.7     | )          | —   |       |
| Net future income tax liability                               |       | $        | 312.2      |     | $          | 434.2 |   |
| Current portion of net future income tax  liability           |       | $        | (4.0       | )        | $          | — |   |
| Long-term portion of net future income tax  liability         |       | $        | 316.2      |     | $          | 434.2 |   |

 

The petroleum and natural gasproperties and facilities owned by the Trust have an approximate tax basis of$1.84 billion ($1.58 billion in 2006) available for future use as deductionsfrom taxable income. Included in this tax basis are estimated non-capital losscarry forwards of $13.8 million ($18.2 million in 2006) that expire in theyears 2010 through 2026. The following is a summary of the estimated Trust’stax pools:

 

The 2006 comparative tax poolshave been restated to include the tax pools of the Trust and of the Trust’ssubsidiaries. The 2006 tax pools disclosed in the prior year for the Trust’ssubsidiaries were $1.03 billion. In addition, the Trust itself had anapproximate tax basis of $545.1 million as at December 31, 2006.

 

24

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| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Canadian oil and gas property expenses |       | $        | 816.5      |     | $          | 734.0 |   |
| Canadian development expenses          |       | 326.1    |       | 285.9    |       |
| Canadian exploration expenses          |       | 52.5     |       | 27.7     |       |
| Undepreciated capital cost             |       | 460.2    |       | 389.0    |       |
| Non-capital losses                     |       | 13.8     |       | 18.2     |       |
| Provincial tax pools                   |       | 161.1    |       | 104.5    |       |
| Other                                  |       | 10.3     |       | 16.8     |       |
| Estimated tax basis                    |       | $        | 1,840.5    |     | $          | 1,576.1 |   |
|                                        |            |          |            |          |            |  |  |  |

 

No current income taxes werepaid or payable in both 2007 and 2006.

 

14.   Exchangeable Shares

 

The ARC Resources exchangeableshares (“ARL Exchangeable Shares”) were issued on January 31, 2001 at$11.36 per exchangeable share as partial consideration for the Startech EnergyInc. acquisition. The issue price of the exchangeable shares was determinedbased on the weighted average trading price of Trust units preceding the dateof announcement of the acquisition. The ARL Exchangeable Shares had an exchangeratio of 1:1 at the time of issuance.

 

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

 

ARL Exchangeable Shares(thousands):

 
| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of year                         |       | 1,433    |       | 1,595    |       |
| Exchanged for Trust units                          |       | (123     | )          | (162     | )          |
| Balance, end of year                               |       | 1,310    |       | 1,433    |       |
| Exchange ratio, end of year                        |       | 2.24976  |       | 2.01251  |       |
| Trust units issuable upon conversion, end  of year |       | 2,947    |       | 2,884    |       |

 

The non-controlling interest onthe Consolidated Balance Sheet consists of the fair value of the exchangeableshares upon issuance plus the accumulated earnings attributable to thenon-controlling interest. The net income attributable to the non-controllinginterest on the Consolidated Statement of Income represents the cumulativeshare of net income attributable to the non-controlling interest based on theTrust units issuable for exchangeable shares in proportion to total Trust unitsissued and issuable at each period end.

 

Following is a summary of thenon-controlling interest for 2007 and 2006:

 
| ** **                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Non-controlling interest, beginning of year                       |       | $        | 40.0       |     | $          | 37.5 |   |
| Reduction of book value for conversion to  Trust units            |       | (3.7     | )          | (4.1     | )          |
| Current year net income attributable to  non-controlling interest |       | 6.8      |       | 6.6      |       |
| Non-controlling interest, end of year                             |       | $        | 43.1       |     | $          | 40.0 |   |
| Accumulated earnings attributable to  non-controlling interest    |       | $        | 34.1       |     | $          | 27.3 |   |

 

25

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15.   Unitholders’ Capital

 

The Trust is authorized toissue 650 million Trust units of which 210.2 million units were issued andoutstanding as at December 31, 2007 (204.3 million as at December 31,2006).

 

The Trust has in place aDistribution Reinvestment and Optional Cash Payment Program (“DRIP”) inconjunction with the Trust’s transfer agent to provide the option forunitholders to reinvest cash distributions into additional Trust units issuedfrom treasury at a five per cent discount to the prevailing market price withno additional fees or commissions.

 

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

 
| ** **                                                | ** ** | **2007**             | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                                | ** ** | **Number of**   | ** ** | ** ** | ** ** | **Number of** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Trust Units** | ** ** | **$**      | ** ** | **Trust Units** | ** ** | **$** | ** ** |
| ** **                                                | ** ** | **(thousands)**      | ** ** | ** ** | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
| Balance,  beginning of year                               |       | 204,289              |       | 2,349.2    |       | 199,104 |   | 2,230.8 |   |
| Issued for cash                                           |       | —               |       | —     |       | 1 |   | — |   |
| Issued on conversion of ARL exchangeable shares (Note 14) |       | 261                  |       | 3.7        |       | 310 |   | 4.1 |   |
| Issued on exercise of employee rights (Note 18)           |       | 131                  |       | 2.1        |       | 978 |   | 18.4 |   |
| Distribution reinvestment program                         |       | 5,551                |       | 110.7      |       | 3,896 |   | 96.1 |   |
| Trust unit issue costs                                    |       | —               |       | —     |       | — |   | (0.2 | ) |
| Balance, end of year                                      |       | 210,232              |       | 2,465.7    |       | 204,289 |   | 2,349.2 |   |

 

16.   Deficit and Accumulated Other Comprehensive Loss

 

The deficit balance is composedof the following items:

 
| ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Accumulated earnings                             |       | $        | 2,191.1    |     | $          | 1,695.8 |   |
| Accumulated distributions                        |       | (2,657.0 | )          | (2,159.0 | )          |
| Deficit                                          |       | $        | (465.9     | )        | $          | (463.2 | ) |
| Accumulated other comprehensive loss             |       | (2.9     | )          | —   |       |
| Deficit and accumulated other comprehensive loss |       | $        | (468.8     | )        | $          | (463.2 | ) |

 

The accumulated othercomprehensive loss balance is composed of the following items:

 
| ** **                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized losses on financial instruments designated as cash flow  hedges     |       | $        | (2.8       | )        | $          | — |   |
| Net unrealized loss on available-for-sale reclamation funds’  investments |       | (0.1     | )          | —   |       |
| Accumulated other comprehensive loss, end of year                              |       | $        | (2.9       | )        | $          | — |   |

 

26

----

 

17.   Reconciliation of Cash Flow from Operating Activities andDistributions

 

Distributions are calculated inaccordance with the Trust Indenture. To arrive at distributions, cash flow fromoperating activities is reduced by reclamation fund contributions includinginterest earned on the funds, a portion of capital expenditures and, whenapplicable, debt repayments. The portion of cash flow from operating activitieswithheld to fund capital expenditures and to make debt repayments is at thediscretion of the Board of Directors.

 
| ** **                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flow from operating activities                                 |       | $        | 704.9      |     | $          | 734.0 |   |
| Deduct:                                                             |       |     |       |     |       |
| Cash withheld to fund current year capital expenditures             |       | (193.4   | )          | (236.7   | )          |
| Reclamation fund contributions and interest earned on fund balances |       | (13.5    | )          | (13.1    | )          |
| Distributions (1)                                                   |       | 498.0    |       | 484.2    |       |
| Accumulated distributions, beginning of year                        |       | 2,159.0  |       | 1,674.8  |       |
| Accumulated distributions, end of year                              |       | $        | 2,657.0    |     | $          | 2,159.0 |   |
| Distributions per unit (2)                                          |       | $        | 2.40       |     | $          | 2.40 |   |
| Accumulated distributions per unit, beginning of year (3)           |       | $        | 18.63      |     | $          | 16.23 |   |
| Accumulated distributions per unit, end of year (3)                 |       | $        | 21.03      |     | $          | 18.63 |   |

 

----

(1)               Distributions include non-cashamounts of $110 million ($94 million in 2006) relating to the distributionreinvestment program.

 

(2)               Distributions and per trustunit reflect the sum of the per trust unit amounts declared monthly tounitholders.

 

(3)               Accumulated distributions pertrust unit reflect the sum of the per trust unit amounts declared monthly tounitholders since the inception of the Trust in July 1996.

 

18.   Trust Unit Incentive Rights Plan

 

The Trust Unit Incentive RightsPlan (the “Rights Plan”) was established in 1999 and authorized the Trust togrant up to 8,000,000 rights to its employees, independent directors andlong-term consultants to purchase Trust units, of which 7,866,088 were grantedto December 31, 2007. The initial exercise price of rights granted underthe Rights Plan could not be less than the market price of the Trust units asat the date of grant and the maximum term of each right was not to exceed tenyears. In general, the rights have a five year term and vest equally over threeyears commencing on the first anniversary date of the grant. In addition, theexercise price of the rights is to be adjusted downwards from time to time bythe amount, if any, that distributions to unitholders in any calendar quarterexceeds 2.5 per cent (ten per cent annually) of the Trust’s net book value ofproperty, plant and equipment (the “Excess Distribution”), as determined by theTrust.

 

During 2007, 2006 and 2005, theTrust did not grant any rights as the Rights Plan was replaced with a WholeUnit Plan during 2004 (see Note 19). The existing Rights Plan will be in placeuntil the remaining 0.2 million rights outstanding as at December 31, 2007are exercised or cancelled.

 

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

 
| ** **                                 | ** ** | **2007**        | ** ** | **2006**      | ** ** |
|--------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                 | ** ** | ** **      | ** ** | **Weighted**  | ** ** | ** ** | ** ** | **Weighted** |   |
| ** **                                 | ** ** | **Number**      | ** ** | **Average**   | ** ** | **Number** | ** ** | **Average** |   |
| ** **                                 | ** ** | **of Rights**   | ** ** | **Exercise**  | ** ** | **of Rights** | ** ** | **Exercise** |   |
| ** **                                 | ** ** | **(thousands)** | ** ** | **Price ($)** | ** ** | **(thousands)** | ** ** | **Price ($)** |   |
| Balance, beginning of year                 |       | 369             |       | 9.47          |       | 1,349 |   | 10.22 |   |
| Exercised                                  |       | (131            | )          | 10.77         |       | (978 | ) | 12.19 |   |
| Cancelled                                  |       | —          |       | —        |       | (2 | ) | 10.07 |   |
| Balance before reduction of exercise price |       | 238             |       | 9.41          |       | 369 |   | 10.40 |   |
| Reduction of exercise price (1)            |       | —          |       | (0.91         | )          | — |   | (0.93 | ) |
| Balance, end of year                       |       | 238             |       | 8.50          |       | 369 |   | 9.47 |   |

 

----

(1)               The holder of the right has theoption to exercise rights held at the original grant price or a reducedexercise price.

 

27

----

 

All rights outstanding areexercisable and have a remaining contractual life of 0.4 years.

 

The Trust recorded a nominalamount of compensation expense for the year ($2.5 million in 2006) for the costassociated 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 havebeen cancelled and 2,419,239 rights have been exercised to December 31,2007.

 

The following table reconcilesthe movement in the contributed surplus balance for 2007 and 2006:

 
| ** **                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of year          |       | $        | 2.4        |     | $          | 6.4 |   |
| Compensation expense                |       | —   |       | 2.5      |       |
| Net benefit on rights exercised (1) |       | (0.7     | )          | (6.5     | )          |
| Balance, end of year                |       | $        | 1.7        |     | $          | 2.4 |   |

 

----

(1)               Upon exercise, the net benefitis reflected as a reduction of contributed surplus and an increase tounitholders’ capital.

 

19.   Whole Trust Unit Incentive Plan

 

In March 2004, the Boardof Directors, upon recommendation of the Compensation Committee, approved a newWhole Trust Unit Incentive Plan (the “Whole Unit Plan”) to replace the existingTrust 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 valueof a specified number of underlying notional trust units. The Whole Unit Planconsists of Restricted Trust Units (“RTUs”) for which the number of trust unitsis 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 theend of three years.

 

Upon vesting, the planparticipant receives a cash payment based on the fair value of the underlyingtrust units plus notional accrued distributions. The cash compensation issued upon vesting of the PTUs isdependent upon the future performance of the Trust compared to its peers basedon a performance multiplier. The performance multiplier is based on thepercentile rank of the Trust’s Total Unitholder Return. The cash compensationissued upon vesting of the PTUs may range from zero to two times the value ofthe PTUs originally granted.

 

The fair value associated withthe RTUs and PTUs is expensed in the statement of income over the vestingperiod. As the value of the RTUs and PTUs is dependent upon the trust unitprice, the expense recorded in the statement of income may fluctuate over time.

 

The Trust recorded non-cashcompensation expense of $3.2 million and $0.3 million to general andadministrative and operating expenses, respectively, and capitalized $0.7million to property, plant and equipment in the twelve months ended December 31,2007 for the estimated cost of the plan ($8.2 million, $1.1 million, and $1.8million for the twelve months ended December 31, 2006). The non-cashcompensation expense was based on the December 31, 2007 unit price of$20.40 ($22.30 in 2006), accrued distributions, a weighted average performancemultiplier of 1.7 (2.0 in 2006), and the number of units to be issued onmaturity.

 

The following table summarizesthe RTU and PTU movement for the twelve months ended December 31, 2007 and2006:

 
| ** **                 | ** ** | **2007**                 | ** ** | **2006**                 | ** ** |
|----------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **Number of  RTUs** | ** ** | **Number of  PTUs** | ** ** | **Number of  RTUs** | ** ** | **Number of  PTUs** | ** ** |
| ** **                 | ** ** | **(thousands)**          | ** ** | **(thousands)**          | ** ** | **(thousands)** | ** ** | **(thousands)** | ** ** |
| Balance, beginning of year |       | 648                      |       | 683                      |       | 479 |   | 391 |   |
| Vested                     |       | (286                     | )          | (110                     | )          | (180 | ) | — |   |
| Granted                    |       | 422                      |       | 362                      |       | 373 |   | 303 |   |
| Forfeited                  |       | (38                      | )          | (32                      | )          | (24 | ) | (11 | ) |
| Balance, end of year       |       | 746                      |       | 903                      |       | 648 |   | 683 |   |

 

28

----

 

The following table reconcilesthe change in total accrued compensation liability relating to the Whole UnitPlan:

 
| ** **                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of year            |       | $        | 26.1       |     | $          | 15.0 |   |
| Change in liabilities in the year     |       |     |       |     |       |
| General and administrative expense    |       | 3.2      |       | 8.2      |       |
| Operating expense                     |       | 0.3      |       | 1.1      |       |
| Property, plant and equipment         |       | 0.7      |       | 1.8      |       |
| Balance, end of year                  |       | $        | 30.3       |     | $          | 26.1 |   |
| Current portion of liability (Note 8) |       | 18.2     |       | 11.5     |       |
| Long-term liability                   |       | $        | 12.1       |     | $          | 14.6 |   |

 

During the year $12.7 millionin cash payments were made to employees relating to the Whole Unit Plan ($5.2million in 2006).

 

20. Basic and Diluted Per TrustUnit Calculations

 

Net income per trust unit hasbeen determined based on the following:

 
| ** **                                                    | ** ** | **2007**        | ** ** | **2006**        | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
|                                                          |       | **(thousands)** | ** ** | **(thousands)** |       |
| Weighted average trust units (1)                              |       | 207,287         |       | 201,554         |       |
| Trust units issuable on conversion of exchangeable shares (2) |       | 2,947           |       | 2,884           |       |
| Dilutive impact of rights (3)                                 |       | 174             |       | 711             |       |
| Dilutive trust units and exchangeable shares                  |       | 210,408         |       | 205,149         |       |

 

----

(1)               Weighted average trust unitsexclude trust units issuable for exchangeable shares.

 

(2)               Diluted trust units includetrust units issuable for outstanding exchangeable shares at the period endexchange ratio.

 

(3)               All outstanding rights weredilutive and therefore have been included in the diluted unit calculation forboth 2007 and 2006.

 

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

 

21.   Commitments and Contingencies

 

Following is a summary of theTrust’s contractual obligations and commitments as at December 31, 2007:

 
| ** **                            | ** ** | **Payments Due by Period ($millions)** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------|------------|
|                                  |       | **2008**                                                   | ** ** | **2009-2010** | ** ** | **2011-2012** | ** ** | **Thereafter** | ** ** | **Total** |   |
| Debt repayments (1)                   |       | 5.9                                                        |       | 540.8 |   | 51.5 |   | 116.3 |   | 714.5 |   |
| Interest payments (2)                 |       | 11.0                                                       |       | 20.2 |   | 15.5 |   | 13.7 |   | 60.4 |   |
| Reclamation fund contributions (3)    |       | 5.8                                                        |       | 10.2 |   | 8.9 |   | 71.9 |   | 96.8 |   |
| Purchase commitments                  |       | 10.1                                                       |       | 4.1 |   | 4.0 |   | 6.0 |   | 24.2 |   |
| Operating leases (4)                  |       | 6.2                                                        |       | 8.9 |   | 12.4 |   | 88.1 |   | 115.6 |   |
| Risk management contract premiums (5) |       | 13.2                                                       |       | 2.3 |   | — |   | — |   | 15.5 |   |
| Total contractual obligations         |       | 52.2                                                       |       | 586.5 |   | 92.3 |   | 296.0 |   | 1,027.0 |   |

 

----

(1)               Long-term and short-term debt,excluding interest.

 

(2)               Fixed interest payments onsenior secured notes.

 

(3)               Contribution commitments to a restrictedreclamation fund associated with the Redwater property acquired in 2005.

 

(4)               Includes an available optionexpiring February 2008 to reduce a portion of office lease commitments.

 

29

----

 

(5)               Fixed premiums to be paid infuture periods on certain risk management contracts.

 

The above noted risk managementcontract premiums are part of the Trust’s commitments related to its riskmanagement program. In addition to the above premiums, the Trust has commitmentsrelated to its risk management program (see Note 11). As the premiums are partof the underlying risk management contract, they have been recorded at fairmarket value at December 31, 2007 on the balance sheet as part of riskmanagement contracts.

 

The Trust enters intocommitments for capital expenditures in advance of the expenditures being made.At a given point in time, it is estimated that the Trust has committed tocapital expenditures equal to approximately one quarter of its capital budgetby means of giving the necessary authorizations to incur the capital in afuture period. The Trust’s 2008 capital budget has been approved by the Boardat $395 million. This commitment has not been disclosed in the commitment tableas it is of a routine nature and is part of normal course of operations foractive oil and gas companies and trusts.

 

The Trust is involved inlitigation and claims arising in the normal course of operations. Management isof the opinion that pending litigation will not have a material adverse impacton the Trust’s financial position or results of operations and therefore thefollowing table does not include any commitments for outstanding litigation andclaims.

 

The Trust has certain salescontracts with aggregators whereby the price received by the Trust is dependentupon the contracts entered into by the aggregator. This commitment has not beendisclosed in the commitment table as it is of a routine nature and is part ofnormal course of operations.

 

22. Differences BetweenCanadian and United States Generally Accepted Accounting Principles

 

The consolidated financialstatements have been prepared in accordance with Canadian GAAP, which differsin some respects from US GAAP. Any differences in accounting principles as theypertain to the accompanying consolidated financial statements are immaterialexcept as described below:

 

The application of US GAAPwould have the following effect on net income as reported for the years ended December 31,2007 and December 31, 2006.

 
| ** **                                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income as reported for Canadian GAAP                                        |       | $        | 495.3      |     | $          | 460.1 |   |
| Adjustments:                                                                    |       |     |       |     |       |
| Depletion and depreciation (a)                                                  |       | 13.7     |       | 15.8     |       |
| Unit based compensation (b)                                                     |       | (0.4     | )          | (1.6     | )          |
| Non-controlling interest (d)                                                    |       | 6.8      |       | 6.6      |       |
| Effect of applicable income taxes on the above adjustments and rate  change (h) |       | 11.7     |       | (0.3     | )          |
| Deferred income tax expense (i)                                                 |       | (0.1     | )          | —   |       |
| Net income under US GAAP before adoption of accounting policy                   |       | 527.0    |       | 480.6    |       |
| Cumulative adjustment related to change in accounting policy (b)                |       | —   |       | (2.6     | )          |
| Net income under US GAAP                                                        |       | $        | 527.0      |     | $          | 478.0 |   |
|                                                                            |       |     |       |     |       |
| Net income per Trust unit (Note 20)                                             |       |     |       |     |       |
|                                                                            |       |     |       |     |       |
| Before cumulative adjustment related to change in accounting policy             |       |     |       |     |       |
| Basic (e)                                                                       |       | $        | 2.51       |     | $          | 2.35 |   |
| Diluted (e)                                                                     |       | $        | 2.50       |     | $          | 2.34 |   |
|                                                                            |       |     |       |     |       |
| After cumulative adjustment related to change in accounting policy              |       |     |       |     |       |
| Basic (e)                                                                       |       | $        | 2.51       |     | $          | 2.34 |   |
| Diluted (e)                                                                     |       | $        | 2.50       |     | $          | 2.33 |   |
|                                                                            |       |     |       |     |       |
| Comprehensive income:                                                           |       |     |       |     |       |
| Net income under US GAAP                                                        |       | $        | 527.0      |     | $          | 478.0 |   |
| Other comprehensive (loss) income                                               |       | (6.6     | )          | 4.5      |       |
| Comprehensive income (c)                                                        |       | $        | 520.4      |     | $          | 482.5 |   |

 

30

----

 

The application of US GAAPwould have the following effect on the Consolidated Balance Sheets as reported:

 
| ** **                                        | ** ** | **2007**     | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|--------------|------------|----------|------------|
| ** **                                        | ** ** | **Canadian** | ** ** | **US**   | ** ** | **Canadian** | ** ** | **US** | ** ** |
| ** **                                        | ** ** | **GAAP**     | ** ** | **GAAP** | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| Property, plant  and equipment (a)                |       | $            | 3,143.0    |     | $          | 3,039.9 |   | $ | 3,093.8 |   | $ | 2,977.0 | ** ** |
| Accounts payable and accrued liabilities (i)      |       | (180.6       | )          | (181.0   | )          | (162.1 | ) | (162.1 | ) |
| Risk management contracts (c)                     |       | (68.0        | )          | (68.0    | )          | (8.7 | ) | (3.5 | ) |
| Trust unit rights liability (b),(f)               |       | —       |       | (2.5     | )          | — |   | (3.6 | ) |
| Future income taxes/Deferred income taxes (h)     |       | (312.2       | )          | (277.2   | )          | (434.2 | ) | (412.3 | ) |
| Non-controlling interest (d)                      |       | (43.1        | )          | —   |       | (40.0 | ) | — |   |
| Temporary equity (b), (d), (f), (g)               |       | —       |       | (3,973.7 | )          | — |   | (3,822.1 | ) |
| Unitholders’ capital (g)                     |       | (2,465.7     | )          | —   |       | (2,349.2 | ) | — |   |
| Contributed surplus (b), (f)                      |       | (1.7         | )          | —   |       | (2.4 | ) | — |   |
| Deficit (g)                                       |       | 465.9        |       | 2,000.1  |       | 463.2 |   | 1,990.7 |   |
| Accumulated other comprehensive loss (income) (c) |       | 2.9          |       | 2.9      |       | — |   | (3.7 | ) |
|                                                   |            |              |            |          |            |  |  |  |  |  |  |  |  |

 

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

 

(a)          The Trust performs animpairment test that limits net capitalized costs to the discounted estimatedfuture net revenue from proved and risked probable oil and natural gas reservesplus the cost of unproved properties less impairment, using forward prices. ForCanadian GAAP the discount rate used must be equal to a risk free interestrate. Under US GAAP, companies using the full cost method of accounting for oiland gas producing activities perform a ceiling test on each cost centre usingdiscounted estimated future net revenue from proved oil and gas reserves usinga discount rate of 10 per cent. Prices used in the US GAAP ceiling tests arethose in effect at year-end. The amounts recorded for depletion anddepreciation have been adjusted in the periods following the additionalwrite-downs taken under US GAAP to reflect the impact of the reduction ofdepletable costs.

 

A US GAAP difference also existsrelating to the basis of measurement of proved reserves that is utilized in thedepletion calculation. Under US GAAP, depletion charges are calculated byreference to proved reserves estimated using constant prices. Under CanadianGAAP, depletion charges are calculated by reference to proved reservesestimated using future prices.

 

(b)         On January 1, 2006, the Trust adopted Statement ofAccounting Standards (“SFAS”) 123R, “Share-Based Payment” using the modifiedprospective application of this standard and adopted the fair value method ofaccounting for the rights plan for all rights granted under the plan.

 

Previously, under US GAAP, therights plan was accounted for as a variable award under APB 25 and wasintrinsically valued at each reporting period. Under SFAS 123R, rights grantedunder the rights plan are considered liability awards and must be fair valuedat each reporting date. On adoption of SFAS 123R, the Trust recorded a chargeof $2.6 million for the cumulative effect of this 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 atrust 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 inproportion to the requisite service period rendered at January 1, 2006 andthe previously recognized compensation expense for all outstanding rights,respectively.

 

Changes in fair values betweenperiods are charged or credited to net income with a corresponding change inthe trust unit rights liability.

 

Under Canadian GAAP, the rightsplan is treated as an equity award with the initial fair value calculated upongrant date. The fair value is then recorded to compensation expense andcredited to contributed surplus over the vesting period of the rights. Upon anyrights exercises, the fair value recorded in contributed surplus isreclassified to unitholders’ capital.

 

The Trust’sWhole Unit Plan is also accounted for in accordance with FAS 123R. UnderCanadian GAAP the plan is intrinsically valued. There is, however, no US GAAPdifference as terms of the plan result in the fair value of the plan equalingthe intrinsic value.

 

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(c)          US GAAP requires that allderivative instruments (including derivative instruments embedded in othercontracts), as defined, be recorded on the Consolidated Balance Sheet as eitheran asset or liability measured at fair value and requires that changes in fairvalue be recognized currently in earnings unless specific hedge accountingcriteria are met. Hedge accounting treatment under US GAAP allows unrealizedgains and losses to be deferred in other comprehensive income (for theeffective portion of the hedge) until such time as the forecasted transactionoccurs, and requires that a company formally document, designate, and assessthe effectiveness of derivative instruments that receive hedge accountingtreatment. Prior to January 1, 2007 under Canadian GAAP, derivativeinstruments that met these specific hedge accounting criteria were not recordedon the Consolidated Balance Sheet and the related unrealized gains and losseswere not recorded on the Consolidated Statement of Income and Deficit.

 

On January 1, 2007, theTrust adopted CICA Handbook Section 3865 – Hedges. As a result, there areno longer US and Canadian GAAP differences relating to hedge accounting thataffect the Trust as at December 31, 2007.

 

The Trust formally documentsand designates all hedging relationships and verifies that its hedginginstruments were effective in offsetting changes in actual prices and ratesreceived by the Trust. Hedge effectiveness is monitored and any ineffectivenessis reported in the Consolidated Statement of Income and Deficit.

 

A reconciliation of thecomponents of accumulated other comprehensive income related to all derivativepositions is as follows:

 
| ** **                                                                         | ** ** | **2007**  | ** ** | **2006**           | ** ** |
|------------------------------------------------------------------------------------|------------|-----------|------------|--------------------|------------|
| ** **                                                                         | ** ** | **Gross** | ** ** | **After Tax** | ** ** | **Gross** | ** ** | **After Tax** | ** ** |
| Accumulated other comprehensive gain (loss), beginning of year                     |       | 5.2       |       | 3.7                |       | (1.2 | ) | (0.8 | ) |
| Unrealized (losses) gains on financial instruments designated as cash  flow hedges |       | (8.6      | )          | (6.5               | )          | 6.4 |   | 4.5 |   |
| Net unrealized losses on available-for-sale reclamation funds’  investments   |       | (0.2      | )          | (0.1               | )          | — |   | — |   |
| Accumulated other comprehensive (loss) gain, end of year                           |       | $         | (3.6       | )                  | $          | (2.9 | ) | $ | 5.2 |   | $ | 3.7 |   |
|                                                                                    |            |           |            |                    |            |  |  |  |  |  |  |  |  |

 

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

 

(e)          Under Canadian GAAP, basic netincome per unit is calculated based on net income after non-controllinginterest divided by weighted average trust units and diluted net income perunit is calculated based on net income before non-controlling interest dividedby dilutive trust units. Under US GAAP, as the exchangeable shares areclassified in the same manner as the trust units with no non-controllinginterest treatment, basic net income per unit is calculated based on net incomedivided by weighted average trust units and the trust unit equivalent of theoutstanding exchangeable shares. Diluted net income per unit is calculatedbased on net income divided by a sum of the weighted average trust units, thetrust unit equivalent of the outstanding exchangeable shares, and the dilutiveimpact of rights.

 

(f)            Under Canadian GAAP,compensation expense relating to the rights plan is credited to contributedsurplus. For US GAAP compensation expense relating to the rights plan iscredited to Trust units rights liability. Once the rights are exercised thisamount is classified to temporary equity.

 

(g)         Under US GAAP, as the Trust Units are redeemable at theoption of the unitholder, the Trust Units must be recorded at their redemptionamount and presented as temporary equity in the Consolidated Balance Sheet. Theredemption amount is determined based on the lower of the closing market priceon the balance sheet date or 90 percent of the weighted average trading pricefor the 10 day trading period commencing on the balance sheet date of the TrustUnits and the Trust Unit equivalent of the exchangeable shares outstanding.Under Canadian GAAP, all Trust Units are classified as permanent equity. As at December 31,2007 and 2006, the Trust has classified $4.0 billion and $3.8 billion,respectively, as temporary equity in accordance with US GAAP. Changes inredemption value between periods are charged or credited to deficit. For theperiod ended December 31, 2007 $38 million was charged to deficit ($1.4billion credited for the year ending December 31, 2006).

 

(h)         During 2007, legislation was passed whereby distributionspaid by the Trust will be subject to tax beginning in 2011. As a result, thedeferred tax position of the Trust, the parent entity, is now required to bereflected in the consolidated deferred income tax calculation for US andCanadian GAAP purposes. A one time recovery of $21.9 million was booked for USGAAP purposes relating to ceiling test write-downs made in prior periods whichwere not previously income tax affected at the Trust level. An additionaldeferred income tax expense of $6.5 million has also been recorded due to thedecrease in the deferred income tax rate in a taxable entity. The remainingamount, $3.7 million is relating to deferred income tax expense recorded onDD&A adjustments for ceiling test writedowns taken in prior periods underUS GAAP.

 

(i)             Effective January 1, 2007,the Trust adopted Financial Accounting Standards Board (FASB) Interpretation No. 48(FIN 48), “Accounting for 

 

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Uncertainty in Income Taxes”.FIN 48 is an interpretation of SFAS 109, “Accounting for Income Taxes” andprescribes a comprehensive model for recognizing, measuring, presenting anddisclosing uncertain tax positions that the Trust has taken or expects to takein its income tax returns. Upon the adoption of FIN 48, the Trust recorded acharge to deficit of $0.3 million, with a corresponding increase in itsaccounts payable.

 

During 2007, the Trust recordedan additional charge of $0.1 million for uncertain tax positions for thecurrent year including accrued interest and penalties, which were nominal. Asat December 31, 2007, the total amount of our unrecognized tax benefitswas approximately $1 million, all of which, if recognized, would affect the Trust’seffective tax rate.

 

The income tax filings aresubject to audit by taxation authorities. The following tax years remainedsubject to examination as at December 31, 2007, all of which are inCanadian jurisdictions: (i) ARC Energy Trust – 2000 to date, (ii) ARCResources Ltd. – 2000 to date and (iii) ARC Oil & Gas Fund – 2000to date. We do not anticipate any material changes to the unrecognized taxbenefits previously disclosed within the next twelve months.

 

(j)             In 2007 and 2006, the FASBissued new and revised standards, all of which were assessed by Management tobe not applicable to the Trust with the exception of the following:

 

·                  In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements, to increaseconsistency and comparability in fair value measurements and to expand theirdisclosures. The new standard includes a definition of fair value as well as aframework for measuring fair value. The standard was set to be effective forfiscal periods beginning after November 15, 2007. On December 14,2007, the FASB issued proposed FSP FAS 157-b to defer Statement 157’s effectivedate for all nonfinancial assets and liabilities, except those items recognizedor disclosed at fair value on an annual or more frequently recurring basis,until years beginning after November 15, 2008. This standard should beapplied prospectively, except for certain financial instruments where it mustbe applied retroactively as a cumulative-effect adjustment to the balance ofopening retained earnings in the year of adoption. The Trust is currentlyevaluating the impact of this standard on its financial statements.

 

·                  On February 15,2007, the FASB issued Statement No. 159, The Fair Value Option forFinancial Assets and Liabilities (SFAS 159). FAS 159 provides an entity theoption to report selected financial assets and liabilities at fair value andestablishes new disclosure requirements for assets and liabilities to which thefair value option is applied. The standard is effective for fiscal periodsbeginning after November 15, 2007. The standard requires prospectiveapplication except when an entity elects the fair value option for itemsexisting as of the date of adoption; the difference between the carrying amountand the fair value should be included in a cumulative effect adjustment to theopening balance of retained earnings. The Trust is currently evaluating theimpact of this standard on its financial statements.

 

·                  In December 2007,FASB issued Statement No. 141(R), Business Combinations and Statement No. 160,Non-controlling Interests in Consolidated Financial Statements. Thesestatements require: more assets and liabilities assumed to be measured at fairvalues as of the acquisition date; liabilities related to contingentconsideration to be remeasured at fair value in each subsequent reportingperiod; an acquirer in pre-acquisition periods to expense all acquisition-relatedcosts; and non-controlling interests in subsidiaries initially to be measuredat fair value and classified as a separate component of equity. SFAS 141(R) and160 are effective for fiscal years beginning on or after December 15,2008. The standard should be applied prospectively, with the exception ofcertain adjustments for income taxes. Statement 160 requires the entity toapply the presentation and disclosure requirements retroactively to comparativefinancial statements.

 

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