Financial Leverage Ratios

($ millions)	2006	2005
Net debt to cash from operating activities (times)	1.1	1.7
Net debt to total capitalization (%)	25	33

Cash from operating activities, including a $22 million reduction in working capital requirements, totalled $1.1 billion, or $2.45 per Unit compared with the prior year in which changes in working capital reduced cash from operating activities to $0.9 billion, or $2.07 per Unit. Cash from operating activities was more than sufficient to fund investing activities of $523 million and Unitholder distributions of $512 million for the year. Investing activities consisted mainly of $300 million of capital expenditures and $171 million of Canadian Arctic acquisition costs, net of the $28 million of conventional asset sales proceeds. Cash balances increased year-over-year by $265 million after equity proceeds of approximately $250 million and repayment of $92 million owing on the Trust’s credit facilities. Approximately $237 million of the cash balance was utilized on January 2, 2007 to satisfy the cash portion of the purchase of Talisman’s 1.25% indirect working interest in Syncrude.

A Unitholder distribution schedule pertaining to the year ended December 31 is included in Note 15 to the audited Consolidated Financial Statements. The Trust historically has used debt and equity financing to the extent cash from operating activities was insufficient to fund distributions, capital expenditures, mining reclamation trust contributions, acquisitions and working capital changes from financing and investing activities.

In response to the recently proposed income trust tax changes, the larger asset base resulting from the recent acquisition from Talisman, and the completion of the Stage 3 project, the Trust has adjusted its financing strategy and correspondingly increased its net debt target from $1.2 billion to $1.6 billion. The increase in the net debt level should reduce the cost of capital and position the Trust to accelerate fuller payout of free cash flow before the new tax rules take effect in 2011.

The Trust has two debt tranches maturing in 2007: $195 million of medium term notes, which matured on January 15, 2007, and US$70 million of Senior Notes maturing on May 15, 2007. The Trust intends to refinance both of these issues using its committed long-term bank credit facilities as part of its $1.6 billion target net debt level and does not intend to repay the maturities with free cash flow. As at December 31, 2006, unutilized operating credit facilities amounted to $824 million. Including the Talisman acquisition, our current net debt level approximates our target of $1.6 billion.

Debt covenants do not specifically limit the Trust’s ability to pay distributions and are not expected to influence the Trust’s liquidity in the foreseeable future. Aside from the typical covenants relating to restrictions on Canadian Oil Sands’ ability to sell all or substantially all of its assets or to change the nature of its business, financial covenants restrict total debt-to-total book capitalization at an amount less than 0.55 to 1.0. With a current net debt-to-book capitalization of approximately 25%, a significant increase in debt or decrease in equity would be required to negatively impact the Trust’s financial flexibility under these covenants.

The Trust’s cash from operating activities includes funding for Canadian Oil Sands’ other operating obligations, namely its share of Syncrude’s pension and reclamation funding. In 2006, the actual pension funding and reclamation expenditures (including contributions to the reclamation account shown as investing activities) of $32 million compared to the related accruals of $44 million included in the income statement for pension expense and ARO. In 2007, based on preliminary information, the Trust’s funding requirements related to its share of Syncrude’s pension liability are expected to increase by up to $10 million over 2006 levels. Such additional funding will be confirmed when Syncrude’s actuarial valuation is completed in the second quarter of 2007. We do not anticipate a significant difference in our actual reclamation funding in 2007 over amounts paid in 2006. Actual 2007 reclamation funding requirements (including contributions to the reclamation account) are not expected to differ materially from the ARO accretion expense recorded in the income statement.

Also as part of its financing strategy, the Trust has suspended its DRIP as of January 31, 2007. The DRIP provided cost-effective equity to support our financing plan for the Stage 3 expansion. The Trust no longer requires this source of funding; however, it may reinstate the DRIP to fund future investing activities, if required.

In the first quarter of 2006, Canadian Oil Sands extended its $840 million operating credit facilities. An overview of the key facilities terms can be found in Note 7 to the audited Consolidated Financial Statements.

In the fourth quarter of 2006, Standard & Poor’s downgraded the Trust’s credit rating to BBB with a stable outlook from BBB+ with a negative outlook. We do not expect this change to have a significant impact on the Trust’s ability to finance its operations.

A key benchmark used to evaluate the Trust’s performance is return on average productive capital employed (“ROCE”), which is a measure of the returns the Trust realizes on its assets in productive use. In calculating ROCE, we exclude major expansion projects  not yet used in production. In 2006, the Stage 3 Upgrader Expansion capital was put into production, and therefore was considered productive capital for half a year in 2006. The Trust’s ROCE declined in 2006 over 2005 reflecting the higher capital employed without a commensurate increase in net income. While production volumes and revenues increased as a result of Stage 3 coming on-stream at the end of August, the financial benefit was partially offset by higher costs, including Crown royalties. The lower return on average Unitholders’ equity in 2006 compared to the prior year reflects the build in Unitholders’ equity since net income exceeded distributions, net of the DRIP, paid in the year. As net income did not increase commensurately with the equity rise, return on average Unitholders’ equity declined.  Based on our 2007 Outlook in this report, ROCE is expected to decline to approximately 12%.