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“We believe the energy trust sector is a major contributor to INCREASED productivity, as productivity is not measured by how much you spend, but how well you spend it.”

ARC is proud of its investment in the local economies in western Canada. Since inception, ARC’s cumulative capital spending in western Canada is $1.3 billion. ARC has distributed a total of $2.2 billion in cumulative distributions to its unitholders since 1996 out of $3.1 billion of cash flow. ARC has paid out $1.1 billion in royalties to the provinces it operates in since 1996 and contributed $932 million in operating costs to the economy. All of these contributions add positively to the Canadian economy at large through job creation both in small and large communities, money re-invested by unitholders into the purchase of goods and services and directed to other investments, and monies distributed to people across Canada in the form of distributions, which they in turn use to stimulate the economy in their provinces and communities. Operationally and financially, 2006 was a record year. We successfully executed a $365 million capital program, drilled 294 gross wells (220 net wells) on our properties and brought 10,000 boes of production on stream. The success of the program was demonstrated by ARC raising its production guidance three times during 2006, with production averaging a record 63,056 boe per day. Continued high commodity prices in 2006 were reflected on ARC’s financial performance with revenue before hedging of $1.2 billion, cash flow of $760 million, distributions of $484 million and net income of $460 million – all new highs for the Trust. Despite all of this, 2006 was one of the most challenging years of our existence. While our business fundamentals remain strong, the Government’s decision to impose a punitive tax on trusts destroyed a billion dollars of value in the hands of our investors. Despite our strong operating results and record cash flow, total unitholder return for the year was a loss of eight per cent as our unit price plunged following the Government’s announcement.


The Government’s decision was made without an in-depth understanding of the role that energy trusts play in the Canadian economy. When you look at the October 31st announcement and examine the reasons the Finance Minister provided for his actions, they do not apply to energy trusts: • There is no firm evidence that tax leakage is occurring from energy trusts and in fact there is strong evidence that Federal and Provincial Government tax revenues are being enhanced by energy trusts. Oil and gas companies have historically paid little tax, but all trust investors pay tax (either now, or in the future in the case of units held in tax deferred accounts) on the distributions they receive. • There is irrefutable evidence that the energy trust sector has demonstrated enhanced productivity when managing mature assets. We believe that the energy trust sector is a major contributor to INCREASED productivity, as productivity is not measured by how much you spend, but how well you spend it. • The Federal Government stated that “Canada stands alone in its treatment of income trusts” – this is simply not true. The United States eliminated “flow-through entities” in 1987, but provided a ten year transition period and exempted resource industries from the measures. Today, there is a strong and growing energy MLP (“Master Limited Partnership”) sector in the United States that controls much of the United States’ energy infrastructure. Over the past two years, we have seen the birth in the United States of Energy LLC’s (“Limited Liability Corporations”), which have been designed to replicate the Canadian energy trust model and conform to United States tax law. • Trusts have played a significant role in bringing Canadian oil and gas reserves under Canadian management and ownership

Message to Unitholders


Annual Report

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