Document:

EX-4.2

 

Exhibit 4.2

MANAGEMENT’S DISCUSSION AND ANALYSIS

This MD&A has been prepared as of August 2, 2006.

     
The following discussion and analysis (“MD&A”) of
financial and operating results should be read in conjunction
with the unaudited interim consolidated financial statements for
the three and six months ended June 30, 2006 (contained in
this quarterly report) and the audited consolidated financial
statements and MD&A of Esprit Energy Trust for the year
ended December 31, 2005. All amounts are in Canadian
dollars unless otherwise noted. All references to
“Esprit” or the “Trust” refer to Esprit
Energy Trust and all references to the “Company” refer
to Esprit Exploration Ltd. The Trust is an open-ended investment
trust created pursuant to a trust indenture. The Company is a
subsidiary of the Trust.

     
Per barrel of oil equivalent (“boe”) amounts have been
calculated using a conversion rate of 6,000 cubic feet of
natural gas to one barrel (“bbl”) of oil. Boes may be
misleading, particularly if used in isolation. A boe conversion
ratio of 1 bbl:6,000 cubic feet is based on an energy
equivalency conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the wellhead.
References to “production volumes” or
“production” refer to average sales volumes.

     
References are made to terms commonly used in the oil and gas
industry that are not defined by generally accepted accounting
principles (“GAAP”) in Canada and are referred to as
non-GAAP measures. Such non-GAAP measures should not be
considered an alternative to, or more meaningful than GAAP
measures as indicators of the Trust’s financial or
operating performance. The non-GAAP measures presented are not
standardized measures and therefore may not be comparable with
the calculation of similar measures for other entities. The
following are descriptions of non-GAAP measures used in this
MD&A:

		
	 	     
    1. “Cash flow” equals cash flow from operations
    before changes in non-cash working capital. The Trust considers
    cash flow to be a key measure as it demonstrates the
    Trust’s ability to generate the cash necessary to pay
    distributions, repay debt and to fund future capital investment.
    Cash flow per unit is calculated using the same number of units
    for the period as used in the net earnings per unit calculations.
	 
	 	     
    2. “Net debt” equals bank loans and convertible
    debentures plus current liabilities minus current assets. Net
    debt is a useful measure of the Trust’s total leverage.
	 
	 	     
    3. “Net debt to cash flow ratio” equals the net
    debt (as defined above) divided by cash flow (as defined above).
    Net debt to cash flow ratio is a useful measure by which to
    compare the Trust’s financial leverage to those of its
    peers.
	 
	 	     
    4. “Operating netback” equals total revenue per
    boe less royalties per boe and operating costs per boe.
    Operating netbacks are a useful measure to compare the
    Trust’s operations with those of its peers.
	 
	 	     
    5. “Payout ratio” equals total distributions as a
    percentage of cash flow for the period. Payout ratio is a useful
    measure used by management to analyze the Trust’s
    efficiency and sustainability.
	 
	 	     
    6. “Finding and development costs” equals
    exploration and development capital plus the change in future
    development costs divided by reserve additions (including
    reserve revisions). Finding and development costs are used by
    management as a measure of the cost effectiveness of the Trust.
	 
	 	     
    7. “Finding, development and acquisition costs”
    equals all capital (including acquisitions) divided by reserve
    additions (including acquisitions and reserve revisions).
    Finding, development and acquisition costs are used by
    management as a measure of the cost effectiveness of the Trust.

     
This MD&A contains forward-looking or outlook information
with respect to the Trust. Certain information regarding Esprit
Energy Trust, including management’s assessment of future
plans and operations, constitutes forward-looking information or
statements under applicable securities law and necessarily
involve assumptions regarding factors and risks that could cause
actual results to vary materially, including, without
limitation, assumptions and risks associated with oil and gas
exploration, development, exploitation, production, marketing
and transportation, loss of markets, volatility of commodity
prices, currency fluctuations, imprecision of reserve estimates,
environmental risks, competition, incorrect assessment of the
value of acquisitions, failure to realize the anticipated
benefits of acquisitions and ability to access sufficient capital

1

 

from internal and external sources. Forward-looking statements
include, but are not limited to: Esprit’s guidance,
production performance, finding and operating costs, drilling
program completion and results and other statements containing
the words “expects”, “believes”,
“will”, “should” or similar such language.
The reader is cautioned that these factors and risks are
difficult to predict and that the assumptions used in the
preparation of such information, although considered reasonably
accurate by Esprit at the time of preparation, may prove to be
incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein
and the variations may be material. Readers are also cautioned
that the foregoing list of factors is not exhaustive.
Furthermore, the forward-looking statements contained in this
MD&A are made as of the date of this MD&A, and Esprit
does not undertake any obligation to update publicly or to
revise any of the included forward-looking statements, whether
as a result of new information, future events or otherwise. The
forward-looking statements contained herein are expressly
qualified by this cautionary statement.

IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE
SEC

     
In connection with the proposed merger of Esprit and Pengrowth,
Pengrowth intends to file relevant materials with the Securities
and Exchange Commission (the “SEC”) on a Registration
Statement on
Form F-10 (the
“Registration Statement”) to register the Pengrowth
units to be issued in connection with the proposed transaction.
Investors and unit holders are urged to read the Registration
Statement and any other relevant documents to be filed with the
SEC when available because they will contain important
information about Pengrowth and Esprit, the transaction and
related matters. Investors and unit holders will be able to
obtain free copies of the Registration Statement and other
documents filed with the SEC by Pengrowth through the web site
maintained by the SEC at www.sec.gov. In addition, investors and
unitholders will be able to obtain free copies of the
Registration Statement and such other documents when they become
available from Pengrowth by contacting Pengrowth Investor
Relations at investorrelations@pengrowth.com or by telephone at
403-233-0224 or toll
free at 1-888-744-1111.

VISION, CORE BUSINESS AND STRATEGY

     
Esprit is an oil and gas income trust with high quality assets
located in Alberta and Saskatchewan. Our solid base of natural
gas weighted reserves is complemented by experienced and
talented teams of professionals who are focused on creating
value for our unitholders.

     
Esprit is based on a sustainable business model. We apply
capital efficient plans to develop our existing assets and to
maximize their value. Our operations have been organized around
four key operating areas, each with a team dedicated to
executing its operating and capital plans and accountable for
its results.

     
We continually work to grow and enhance our existing asset base
with value-adding strategic acquisitions. Opportunities are
screened, analyzed and must meet both strategic and financial
benchmarks before being pursued.

     
At Esprit, we are committed to a high level of integrity.We have
great respect for the environment we operate in, the people in
whose communities we operate, our employees and other service
providers and all the stakeholders who invest in our Trust. We
strive to continually provide transparent, open and timely
information about our business.

		
		
    SUBSEQUENT EVENTS

     
On June 15, 2006, Esprit announced the acquisition of
Trifecta Resources Inc. (“Trifecta”), a private oil
and gas producer. The effective date of this acquisition was
July 5, 2006 and the total consideration paid was
approximately $102 million, funded from the Trust’s
existing credit lines. The acquisition is expected to add
approximately 1,500 boe per day to production through the second
half of 2006 and 4.9 million boe of proved plus probable
reserves. The assets included in the acquisition complement
Esprit’s existing asset base with the majority of the
assets located within the Trust’s key operating area of
greater Olds. The assets also include low-risk growth
opportunities that add to the Trust’s development inventory.

2

 

     
On July 24, 2006, Esprit announced that it had entered into
an agreement to combine with Pengrowth Energy Trust
(“Pengrowth”), creating a well-balanced, diversified
trust with high quality assets and excellent development
opportunities. Under the agreement, each Esprit unit will be
exchanged for 0.53 of a Pengrowth unit. In addition,
Esprit’s Board of Trustees intends to pay a $0.30 per
unit special distribution. This special distribution is expected
to be paid immediately prior to the closing of the transaction.
Including the special distribution, the total consideration to
be received by Esprit Unitholders represents a 26 percent
premium on the closing prices on July 21, 2006 for each of
the Esprit and Pengrowth units. The transaction is subject to
unitholder approval and regulatory approval and is expected to
close on or about September 28, 2006.

NET EARNINGS AND CASH FLOW

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	($ thousands except per unit amounts)	
	
    
    Net earnings

    	 	 	18,412	 	 	 	15,906	 	 	 	19,592	 	 	 	25,052	 	 	 	22,465	 	 	 	38,004	 	 	 	26,935	 
	
    
    Net earnings per unit — basic

    	 	 	0.28	 	 	 	0.28	 	 	 	0.30	 	 	 	0.38	 	 	 	0.35	 	 	 	0.57	 	 	 	0.55	 
	
    
    Net earnings per unit — diluted

    	 	 	0.27	 	 	 	0.27	 	 	 	0.29	 	 	 	0.37	 	 	 	0.34	 	 	 	0.55	 	 	 	0.53	 
	
    
    Cash flow

    	 	 	38,843	 	 	 	30,504	 	 	 	45,933	 	 	 	56,149	 	 	 	45,143	 	 	 	84,774	 	 	 	52,961	 
	
    
    Cash flow per unit — basic

    	 	 	0.58	 	 	 	0.54	 	 	 	0.69	 	 	 	0.86	 	 	 	0.70	 	 	 	1.28	 	 	 	1.09	 
	
    
    Cash flow per unit — diluted

    	 	 	0.53	 	 	 	0.52	 	 	 	0.63	 	 	 	0.78	 	 	 	0.64	 	 	 	1.16	 	 	 	1.04	 
	
    
    Basic weighted average units

    	 	 	66,462	 	 	 	56,802	 	 	 	66,388	 	 	 	65,521	 	 	 	64,533	 	 	 	66,424	 	 	 	48,576	 
	
    
    Diluted weighted average units

    	 	 	75,566	 	 	 	58,961	 	 	 	74,824	 	 	 	74,117	 	 	 	71,914	 	 	 	75,542	 	 	 	50,743	 
	
    
    Cash distributions per unit

    	 	 	0.45	 	 	 	0.42	 	 	 	0.45	 	 	 	0.45	 	 	 	0.42	 	 	 	0.90	 	 	 	0.84	 

     
Cash flow for the second quarter of 2006 was $38.8 million,
27 percent higher than the cash flow we generated in the
same quarter last year. The increased cash flow was largely a
result of increased production levels. Higher oil and natural
gas liquids prices also contributed to the increase, but were
partially offset by lower natural gas prices in the quarter.
Increased costs for royalties, operating, general and
administrative and interest costs further offset the impact of
production increases.

     
Compared to the previous quarter, cash flow was down by
15 percent, due in most part to lower natural gas prices.

     
Year-to-date cash flow
was $84.8 million, up 60 percent over the first six
months of 2005. Higher commodity prices and higher production
levels were the main drivers, partially offset again by higher
royalties, operating, general and administrative and interest
costs.

     
Net earnings for the second quarter of 2006 were
$18.4 million, a 16 percent increase compared to the
second quarter of 2005 and a six percent decrease from the
previous period. In addition to the items that affected our cash
flow, earnings were impacted by increased depletion,
depreciation and amortization and unit-based compensation costs.
A recovery of future income taxes resulting from a change in the
effective tax rate partially offset the increased costs.

     
Year-to-date net
earnings were $38.0 million, up 41 percent over the
first six months of 2005. In addition to the items that affected
our cash flow,
year-to-date earnings
were also impacted by increased depletion, depreciation and
amortization and unit-based compensation costs partially offset
by lower future income taxes.

3

 

     
More information on the items affecting cash flow and earnings
is provided in the detailed discussion below.

OIL AND NATURAL GAS REVENUE

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Oil and gas revenue ($ thousands)

    	 	 	77,658	 	 	 	57,940	 	 	 	88,274	 	 	 	105,526	 	 	 	83,761	 	 	 	165,931	 	 	 	100,997	 
	
    
    Production volumes

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Natural gas (mcf/d)

    	 	 	74,266	 	 	 	65,709	 	 	 	77,116	 	 	 	79,494	 	 	 	79,056	 	 	 	75,683	 	 	 	60,366	 
	 	
    
    Natural gas liquids (bbl/d)

    	 	 	1,858	 	 	 	1,357	 	 	 	1,768	 	 	 	1,725	 	 	 	1,424	 	 	 	1,813	 	 	 	1,334	 
	 	
    
    Oil (bbl/d)

    	 	 	3,004	 	 	 	1,216	 	 	 	2,818	 	 	 	2,840	 	 	 	2,159	 	 	 	2,912	 	 	 	807	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Total (boe/d)

    	 	 	17,240	 	 	 	13,525	 	 	 	17,439	 	 	 	17,814	 	 	 	16,759	 	 	 	17,339	 	 	 	12,202	 
	
    
    Sales prices(1)

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Natural gas ($/mcf)

    	 	 	7.29	 	 	 	7.56	 	 	 	9.48	 	 	 	10.97	 	 	 	8.60	 	 	 	8.40	 	 	 	7.40	 
	 	
    
    Natural gas liquids ($/bbl)

    	 	 	67.39	 	 	 	58.43	 	 	 	65.17	 	 	 	70.84	 	 	 	63.94	 	 	 	66.31	 	 	 	56.80	 
	 	
    
    Crude oil ($/bbl)

    	 	 	62.20	 	 	 	50.07	 	 	 	47.84	 	 	 	53.76	 	 	 	64.60	 	 	 	55.29	 	 	 	44.33	 

 

		
	(1) 	
    Sales prices are after hedging gains (losses)

     
Oil and natural gas revenue for the second quarter was
$77.7 million, an increase of $19.7 million or
34 percent from the same quarter last year. This increase
was driven by a combination of higher production volumes and
increased commodity prices. Higher production levels contributed
$16.7 million of the increased revenue in the second
quarter. The remaining $3.0 million of increased revenue
was due to higher commodity prices in the quarter. Natural gas
prices actually dropped in the quarter compared to the same
quarter last year, causing a reduction in revenue of
approximately $1.8 million. However this was more than
offset by higher oil and natural gas liquids prices.

     
Compared to the previous quarter, oil and gas revenue was down
12 percent. This variance is mostly due to lower natural
gas prices in the quarter, partially offset by stronger oil
prices. During the quarter, commodity prices remained volatile.
Oil prices rose strongly in the quarter reflecting increased
geo-political tension. On the other hand, natural gas prices
trended lower in the quarter, impacted by high storage levels
caused mainly by a warmer than usual winter.

     
Year-to-date oil and
gas revenue was $165.9 million, up $64.9 million or
64 percent on the first six months of 2005. Higher volumes
contributed $42.1 million to this increase while higher
commodity prices contributed $22.9 million.

		
		
    PRODUCTION

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Natural gas (mcf/d)

    	 	 	74,266	 	 	 	65,709	 	 	 	77,116	 	 	 	79,494	 	 	 	79,056	 	 	 	75,683	 	 	 	60,366	 
	
    
    Natural gas liquids (bbl/d)

    	 	 	1,858	 	 	 	1,357	 	 	 	1,768	 	 	 	1,725	 	 	 	1,424	 	 	 	1,813	 	 	 	1,334	 
	
    
    Oil (bbl/d)

    	 	 	3,004	 	 	 	1,216	 	 	 	2,818	 	 	 	2,840	 	 	 	2,159	 	 	 	2,912	 	 	 	807	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total (boe/d)

    	 	 	17,240	 	 	 	13,525	 	 	 	17,439	 	 	 	17,814	 	 	 	16,759	 	 	 	17,339	 	 	 	12,202	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Natural gas

    	 	 	72	%	 	 	81	%	 	 	74	%	 	 	74	%	 	 	79	%	 	 	73	%	 	 	82	%
	
    
    Natural gas liquids

    	 	 	11	%	 	 	10	%	 	 	10	%	 	 	10	%	 	 	8	%	 	 	10	%	 	 	11	%
	
    
    Oil

    	 	 	17	%	 	 	9	%	 	 	16	%	 	 	16	%	 	 	13	%	 	 	17	%	 	 	7	%
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total

    	 	 	100	%	 	 	100	%	 	 	100	%	 	 	100	%	 	 	100	%	 	 	100	%	 	 	100	%
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

4

 

     
We reported stable production volumes in the second quarter of
2006, with volumes averaging 17,240 boe per day for the quarter.
This was an increase of 27 percent from the same quarter
last year and was basically unchanged from the previous quarter.
Successful drilling at Greater Olds, Saskatchewan and Southern
Alberta combined with a strong optimization focus at Greater
Olds and Central Alberta offset natural declines.
Year-to-date production
was 17,339 boe per day, up 42 percent from the first six
months of 2005. The higher production level compared to the
previous year is due to several acquisitions completed in 2005
and the Trust’s successful drilling.

     
Esprit’s production mix continues to follow a trend of
increased oil weighting. For the second quarter of 2006, our
production was 72 percent natural gas, down from
74 percent in the previous quarter and 81 percent in
the second quarter of 2005.
Year-to-date production
was 73 percent natural gas weighted compared to
82 percent for the same period last year. The increased oil
production is mainly attributable to successful drilling and
acquisitions in our Saskatchewan and Southern Alberta operating
areas. Our production mix is expected to be further impacted by
the production associated with the Trifecta acquisition. This
incremental production is split 50 percent natural gas,
25 percent natural gas liquids and 25 percent light
oil.

		
		
    PRODUCTION BY KEY OPERATING AREA

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	(boe per day)	
	
    
    Greater Olds

    	 	 	8,106	 	 	 	6,377	 	 	 	7,983	 	 	 	7,688	 	 	 	7,392	 	 	 	8,045	 	 	 	6,995	 
	
    
    Southern Alberta

    	 	 	3,346	 	 	 	2,110	 	 	 	3,373	 	 	 	3,393	 	 	 	3,253	 	 	 	3,360	 	 	 	1,061	 
	
    
    Saskatchewan

    	 	 	1,206	 	 	 	371	 	 	 	952	 	 	 	760	 	 	 	601	 	 	 	1,080	 	 	 	341	 
	
    
    Central Alberta

    	 	 	4,527	 	 	 	4,460	 	 	 	5,112	 	 	 	5,492	 	 	 	5,452	 	 	 	4,817	 	 	 	3,671	 
	
    
    Minor Areas

    	 	 	55	 	 	 	207	 	 	 	19	 	 	 	481	 	 	 	61	 	 	 	37	 	 	 	134	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total

    	 	 	17,240	 	 	 	13,525	 	 	 	17,439	 	 	 	17,814	 	 	 	16,759	 	 	 	17,339	 	 	 	12,202	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

     
Our second quarter and
year-to-date production
of 17,240 and 17,339 boe per day respectively, were in line with
our expectations. We anticipate that the addition of the
Trifecta assets in the third quarter will further strengthen
Esprit’s asset base and we expect it to add production of
approximately 1,500 boe per day for the last half of 2006.

		
		
    PRICES AND PRODUCT MARKETING

		
		
    AVERAGE SELLING
    PRICE(1)

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Six Months	
	 	 	Three Months Ended		 	Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Natural gas ($/mcf)

    	 	 	7.29	 	 	 	7.56	 	 	 	9.48	 	 	 	10.97	 	 	 	8.60	 	 	 	8.40	 	 	 	7.40	 
	
    
    Natural gas liquids ($/bbl)

    	 	 	67.39	 	 	 	58.43	 	 	 	65.17	 	 	 	70.84	 	 	 	63.94	 	 	 	66.31	 	 	 	56.80	 
	
    
    Crude oil ($/bbl)

    	 	 	62.20	 	 	 	50.07	 	 	 	47.84	 	 	 	53.76	 	 	 	64.60	 	 	 	55.29	 	 	 	44.33	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total ($/boe)

    	 	 	49.50	 	 	 	47.08	 	 	 	56.24	 	 	 	64.39	 	 	 	54.33	 	 	 	52.87	 	 	 	45.73	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 

		
	(1) 	
    Price is after hedging gains (losses)

5

 

		
		
    AVERAGE BENCHMARK PRICING

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Six Months	
	 	 	Three Months Ended		 	Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Alberta Reference
    Price(1)
    (C$/GJ)

    	 	 	5.83	 	 	 	6.55	 	 	 	7.79	 	 	 	10.91	 	 	 	7.93	 	 	 	6.81	 	 	 	6.32	 
	
    
    AECO (30 day) natural gas (C$/GJ)

    	 	 	5.95	 	 	 	6.99	 	 	 	8.79	 	 	 	11.08	 	 	 	7.75	 	 	 	7.37	 	 	 	6.67	 
	
    
    NYMEX natural gas (US$/mmbtu)

    	 	 	6.82	 	 	 	6.80	 	 	 	9.08	 	 	 	12.85	 	 	 	8.25	 	 	 	7.95	 	 	 	6.56	 
	
    
    WTI crude oil (US$/bbl)

    	 	 	70.70	 	 	 	53.17	 	 	 	63.48	 	 	 	60.02	 	 	 	63.19	 	 	 	67.09	 	 	 	51.51	 
	
    
    US$/CDN$ exchange rate

    	 	 	1.12	 	 	 	1.24	 	 	 	1.15	 	 	 	1.17	 	 	 	1.20	 	 	 	1.14	 	 	 	1.24	 

 

		
	(1) 	
    Alberta Reference Price for second quarter 2006 is the expected
    price as June actual prices are not available at time of release

    
During the second quarter, natural gas prices continued to
decline from the high levels experienced at the end of 2005.
High natural gas storage levels, caused by a warmer than usual
winter, put downward pressure on natural gas prices. Benchmark
prices for natural gas dropped in the United States by
25 percent and 32 percent in Canada.

     
We received an average price for our natural gas in the quarter
of $7.29 per mcf ($6.68 per gigajoule
(“GJ”)) after hedging, a decrease of four percent over
the same quarter last year and a 23 percent decrease from
the previous quarter. Our price in the quarter was
$0.85 per GJ above the expected Alberta Reference Price in
the second quarter of $5.83 per GJ. The Alberta Reference
Price is the average plant gate price received by all Alberta
gas producers for their product and is published by the
Department of Energy of the Province of Alberta.

     
Year to date, our natural gas price averaged $8.40 per mcf
($7.69 per GJ) compared to an estimated Alberta Reference
Price of $6.81 per GJ for the same period and to an average
of $7.40 per mcf for the first six months of 2005.

     
During the second quarter of the year, we sold our natural gas
liquids for an average price of $67.39 per barrel. This was
an increase of 15 percent from the same quarter last year
and an increase of three percent from the previous quarter. Year
to date, our natural gas liquids price has averaged
$66.31 per barrel, an increase of 17 percent from the
same period last year. Prices for natural gas liquids have been
impacted by the movement of oil prices over these periods.

     
Our average oil price in the second quarter of 2006 was
$62.20 per bbl, an increase of 24 percent from the
same period last year and an increase of 30 percent from
the previous quarter. Year to date our oil price has averaged
$55.29 per barrel, a 25 percent increase from the same
period last year. Increased geo-political tension and limited
refining capacity were reflected in the higher oil prices
experienced during the quarter. Heavy oil differentials
narrowed, also having a positive impact on the price we received
for our oil.

     
Energy commodity prices can fluctuate due to changes in the
geo-political environment, weather conditions, supply
disruptions and variations in demand. We use commodity price
hedges to limit the volatility in our cash flow and, in turn,
provide stability to our distributions. We have a written policy
delegating certain authorities to management to manage commodity
price risk. The Board of Trustees regularly meets with
Esprit’s management to review our hedging strategy and the
hedges in place. In the case of a material acquisition, we may
use hedges on a larger portion of the acquired production to
protect the transaction economics.

     
For the first half of the year, our hedging activities increased
our oil and gas revenue by $6.9 million or $2.20 per
boe. This was made up of a gain of $7.5 million
($0.55 per mcf) for natural gas and a loss of
$0.6 million ($1.14 per barrel) for oil.

     
For the second half of the year, we have approximately
18 percent of our estimated annual natural gas production
and 22 percent of our estimated oil production hedged using
fixed price contracts. We also have eight percent of our natural
gas volumes protected by costless collars which provide downside
price protection

6

 

but also remove the benefit of prices above a specified level.
The estimated production level for 2006 includes forecast
production from the Trifecta assets acquired in the third
quarter of 2006. A portion of the hedges were put in place
following the Trifecta acquisition in order to protect the
economics of the transaction.

     
If all of Esprit’s commodity price risk management
contracts were closed out on June 30, 2006, the gain
resulting from the settlement would have been approximately
$5.9 million, made up of a gain of $12.9 million on
the natural gas contracts and a loss of $7.0 million on the
oil contracts. At August 2, 2006 the loss that would have
resulted from closing all of our contracts was
$10.9 million, made up of a loss of $0.8 million from
natural gas and a loss of $10.1 million from oil.

		
		
    NETBACK SUMMARY

     
In the second quarter, our operating netback was $29.16 per
boe, an increase of three percent compared to the same quarter
last year, and a decrease of 12 percent compared to the
previous quarter. Year to date, our operating netback was
$31.18 per boe, up 15 percent from the first six
months of 2005. Netbacks were higher than the previous year
comparatives largely due to higher commodity prices, partly
offset by higher royalty and operating and general and
administrative costs. Netbacks decreased from the previous
quarter due to lower sales prices, higher operating and general
and administrative costs partly offset by lower royalties.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	($/boe)	
	
    
    Price(1)

    	 	 	49.50	 	 	 	47.08	 	 	 	56.24	 	 	 	64.39	 	 	 	54.33	 	 	 	52.87	 	 	 	45.73	 
	
    
    Royalties

    	 	 	(10.89	)	 	 	(9.90	)	 	 	(13.76	)	 	 	(16.93	)	 	 	(11.37	)	 	 	(12.33	)	 	 	(10.13	)
	
    
    Operating costs

    	 	 	(9.07	)	 	 	(8.46	)	 	 	(8.86	)	 	 	(9.05	)	 	 	(9.40	)	 	 	(8.96	)	 	 	(8.07	)
	
    
    Transportation costs

    	 	 	(0.38	)	 	 	(0.45	)	 	 	(0.43	)	 	 	(0.45	)	 	 	(0.47	)	 	 	(0.40	)	 	 	(0.44	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Operating netback

    	 	 	29.16	 	 	 	28.27	 	 	 	33.19	 	 	 	37.96	 	 	 	33.09	 	 	 	31.18	 	 	 	27.09	 
	
    
    General and Administrative costs

    	 	 	(2.46	)	 	 	(1.59	)	 	 	(1.93	)	 	 	(1.47	)	 	 	(1.37	)	 	 	(2.20	)	 	 	(1.60	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Netback

    	 	 	26.70	 	 	 	26.68	 	 	 	31.26	 	 	 	36.49	 	 	 	31.72	 	 	 	28.98	 	 	 	25.49	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 

		
	(1) 	
    Price is after hedging gains (losses)

ROYALTIES

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Total royalties (net of ARTC) ($ thousands)

    	 	 	17,090	 	 	 	12,182	 	 	 	21,594	 	 	 	27,739	 	 	 	17,534	 	 	 	38,684	 	 	 	22,372	 
	
    
    As a % of oil and gas sales

    	 	 	22	 	 	 	21	 	 	 	25	 	 	 	26	 	 	 	21	 	 	 	23	 	 	 	22	 
	
    
    Per boe

    	 	 	10.89	 	 	 	9.90	 	 	 	13.76	 	 	 	16.93	 	 	 	11.37	 	 	 	12.33	 	 	 	10.13	 

     
For the second quarter of 2006, our royalty costs were
$17.1 million ($10.89 per boe) compared to
$12.2 million ($9.90 per boe) for the same period last
year and $21.6 million ($13.76 per boe) in the
previous quarter.
Year-to-date royalty
costs were $38.7 million ($12.33 per boe) compared to
$22.4 million ($10.13 per boe) in the first six months
of 2005, reflecting both increased production levels and
increased commodity prices. Royalty costs are directly impacted
by changes in commodity prices. Our per unit royalty costs
declined in the second quarter compared to the last two quarters
due to several non-recurring adjustments.

7

 

OPERATING COSTS

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended	 	Six Months Ended
	 	 	 	 	 
	 	 	Jun 30	 	Jun 30	 	Mar 31	 	Dec 31	 	Sep 30	 	Jun 30	 	Jun 30
	 	 	2006	 	2005	 	2006	 	2005	 	2005	 	2006	 	2005
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Operating expenses ($ thousands)

    	 	 	14,227	 	 	 	10,412	 	 	 	13,907	 	 	 	14,838	 	 	 	14,488	 	 	 	28,134	 	 	 	17,824	 
	
    
    Per boe

    	 	 	9.07	 	 	 	8.46	 	 	 	8.86	 	 	 	9.05	 	 	 	9.40	 	 	 	8.96	 	 	 	8.07	 

     
Operating costs for the second quarter of the year were
$14.2 million ($9.07 per boe) up from
$10.4 million ($8.46 per boe) in the same period last
year and $13.9 million ($8.86 per boe) in the previous
quarter. Year-to-date
operating costs were $28.1 million ($8.96 per boe)
compared to $17.8 million ($8.07 per boe) for the
first six months of 2005.

     
Over the past year, costs in the oil and gas sector have
increased significantly. Higher energy prices have increased the
range of economic opportunities and resulted in much higher
levels of overall industry activity. This in turn, has created
significant increases in the industry’s cost base. The
increase in our operating costs over the past year reflects this
higher cost structure. Recently, costs have begun to stabilize
however we do not expect them to be materially lower going
forward.

TRANSPORTATION COSTS

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Six Months	
	 	 	Three Months Ended		 	Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Transportation costs ($ thousands)

    	 	 	592	 	 	 	558	 	 	 	674	 	 	 	743	 	 	 	730	 	 	 	1,265	 	 	 	977	 
	
    
    Per boe

    	 	 	0.38	 	 	 	0.45	 	 	 	0.43	 	 	 	0.45	 	 	 	0.47	 	 	 	0.40	 	 	 	0.44	 

     
For the second quarter of 2006, our transportation costs were
$0.6 million ($0.38 per boe) compared to
$0.6 million ($0.45 per boe) for the same period last
year and $0.7 million ($0.43 per boe) in the previous
quarter. Year-to-date
transportation costs were $1.3 million ($0.40 per boe)
compared to $1.0 million ($0.44 per boe) in the first
six months of 2005. The lower transportation costs in 2006 were
achieved through transportation streamlining efforts. The Trust
incurs transportation costs which are defined as the costs
incurred to move a saleable quality product to the point of sale.

DEPLETION, DEPRECIATION & AMORTIZATION

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Depletion, depreciation and amortization ($ thousands)

    	 	 	25,559	 	 	 	15,821	 	 	 	25,173	 	 	 	26,270	 	 	 	22,506	 	 	 	50,732	 	 	 	26,008	 
	
    
    Per boe

    	 	 	16.29	 	 	 	12.85	 	 	 	16.04	 	 	 	16.03	 	 	 	14.60	 	 	 	16.17	 	 	 	11.77	 

     
For the first quarter of 2006, our depletion, depreciation and
amortization (DD&A) costs were $25.6 million
($16.29 per boe) compared to $15.8 million
($12.85 per boe) in the same quarter last year and
$25.2 million ($16.04 per boe) in the previous
quarter. Year-to-date
DD&A costs were $50.7 million ($16.17 per boe)
compared to $26.0 million ($11.77 per boe) for the
first six months of 2005. The calculation of these costs is
impacted by a number of factors; the most significant being the
cost of adding reserves to our asset base. The DD&A rate of
$16.17 per boe is reflective of Esprit’s historic
costs of acquiring, finding and developing oil and gas reserves
which have been impacted by increasing industry costs.

8

 

GENERAL AND ADMINISTRATIVE

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Six Months	
	 	 	Three Months Ended		 	Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    General and administrative costs ($ thousands)

    	 	 	3,862	 	 	 	1,957	 	 	 	3,037	 	 	 	2,414	 	 	 	2,109	 	 	 	6,899	 	 	 	3,529	 
	
    
    Per boe

    	 	 	2.46	 	 	 	1.59	 	 	 	1.93	 	 	 	1.47	 	 	 	1.37	 	 	 	2.20	 	 	 	1.60	 

     
General and administrative costs for the first quarter were
$3.9 million ($2.46 per boe) compared to
$2.0 million ($1.59 per boe) in the same period last
year and $3.0 million ($1.93 per boe) in the previous
quarter. Year-to-date
general and administrative costs were $6.9 million
($2.20 per boe) compared to $3.5 million
($1.60 per boe) for the first six months of 2005. A large
part of this increase is due to rising industry compensation and
retention costs and an increased staff level. The employment
market in Alberta remains very tight and Esprit needs to remain
competitive in order to retain and attract quality staff.

INTEREST AND FINANCING CHARGES

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Six Months	
	 	 	Three Months Ended		 	Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	($ thousands)	
	
    
    Interest on bank loans

    	 	 	1,842	 	 	 	1,124	 	 	 	1,865	 	 	 	1,618	 	 	 	1,294	 	 	 	3,706	 	 	 	2,008	 
	
    
    Interest on Debentures

    	 	 	1,579	 	 	 	—	 	 	 	1,536	 	 	 	1,589	 	 	 	1,138	 	 	 	3,115	 	 	 	—	 
	
    
    Amortization of Debenture issue costs

    	 	 	164	 	 	 	—	 	 	 	189	 	 	 	347	 	 	 	174	 	 	 	352	 	 	 	—	 
	
    
    Accretion of debt portion of
    Debentures(1)

    	 	 	92	 	 	 	—	 	 	 	98	 	 	 	100	 	 	 	71	 	 	 	191	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total interest and financing charges

    	 	 	3,677	 	 	 	1,124	 	 	 	3,688	 	 	 	3,655	 	 	 	2,677	 	 	 	7,364	 	 	 	2,008	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 

		
	(1) 	
    In accordance with generally accepted accounting principles, the
    fair value to the conversion feature of the Debentures is
    classified as equity and the remainder is classified as debt.
    Over the term of the Debentures, the debt portion will accrete
    up to the principal balance at maturity with the charge going to
    interest and financing expenses.

    
In the second quarter of the year, our interest expense was
$3.7 million, up $2.6 million from the same quarter
last year and relatively unchanged from the previous quarter.
Year-to-date interest
expenses were $7.4 million, up 267 percent from the same
period last year. In the third quarter of 2005, we issued
$100 million of 6.5 percent convertible unsecured
subordinated debentures. A large portion of the increase in
total interest and financing charges was due to the interest,
accretion and amortization of financing charges related to these
debentures. The increase in interest on bank loans was a result
of higher average bank debt compared to the same period in 2005
and a higher average interest rate. The increase in our average
bank debt is mostly due to the debt we assumed with the
acquisition of Resolute Energy Inc. in the second quarter of
2005. The average annual interest rate on the utilized portion
of the credit facility was 4.8 percent in the first half of
2006 compared to 3.5 percent in the same period last year.

UNIT-BASED COMPENSATION

     
During the quarter, we recorded unit-based compensation costs of
$2.7 million compared to $0.8 million for the same
quarter last year. Year to date, unit based compensation costs
have totaled $3.1 million compared to $1.2 million for
the first six months of 2005. The increased costs in the second
quarter of 2006 reflect changes in the calculation parameters
due to the proposed merger with Pengrowth.

9

 

INCOME TAXES

     
We did not pay any current income taxes in the first half of
2006, with the exception of Saskatchewan capital tax of
$0.3 million. During the second quarter, the federal
government announced the abolishment of Large Corporations Tax
effective January 1, 2006. In the second quarter, Esprit
reversed the amounts it had previously accrued for Large
Corporations Tax of approximately $0.3 million.

     
Future income taxes arise from differences between the
accounting and tax basis of the operating company’s assets
and liabilities. In the Trust structure, interest and net
profits interest payments are made between the operating company
and the Trust and ultimately paid to the unitholders in the form
of distributions. This mechanism transfers the majority of the
income and tax liability to the unitholders. It is therefore
expected that Esprit will not incur any cash income taxes in the
medium term under current commodity prices.

CAPITAL EXPENDITURES

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	 	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	($ thousands)	
	
    
    Exploration and development expenditures

    	 	 	15,424	 	 	 	18,334	 	 	 	15,428	 	 	 	25,261	 	 	 	25,334	 	 	 	30,852	 	 	 	28,788	 
	
    
    Acquisitions & dispositions

    	 	 	—	 	 	 	6,971	 	 	 	(16,000	)	 	 	181	 	 	 	99,745	 	 	 	(16,000	)	 	 	7,000	 
	
    
    Office & computer assets

    	 	 	703	 	 	 	246	 	 	 	162	 	 	 	145	 	 	 	150	 	 	 	865	 	 	 	328	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total

    	 	 	16,127	 	 	 	25,551	 	 	 	(410	)	 	 	25,587	 	 	 	125,229	 	 	 	15,717	 	 	 	36,116	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

     
During the second quarter of the year, we spent approximately
$16.1 million in capital expenditures. We had a fairly
active quarter with 14 gross (10 net) wells drilled
and several optimization projects. Year to date, we have spent
$31.7 million in capital and have received
$16.0 million from the disposition of non-core assets. Our
drilling program had an 86 percent success rate in the
quarter; 87 percent year to date.

     
In the quarter, we spent $15.4 million of exploration and
development capital which was focused mainly in our Olds, Berry
and southeast Saskatchewan areas. We also spent approximately
$0.7 million on office and computer assets which was
largely for leasehold improvements.

     
At Olds, we tied in the successful Viking well drilled in the
previous quarter and drilled a second Viking well. We are
currently evaluating the results on this well. We also
participated in two farm-out wells and one non-operated Pekisko
well in the quarter which were all successful. During the
quarter, we completed several optimization projects and
continued to make progress on the approvals for our deeper
Crossfield program planned for later in the year.

     
In Southern Alberta, we continued development drilling at our
Richdale Banff oil pool. We drilled one well during the quarter
and started another in late June. The first well was not
successful in the Banff zone but was successfully completed in a
shallower gas-producing zone. The Banff zone in the second well
has now been perforated and results to date appear encouraging.
During the quarter, we ran a
10-well re-completion
pilot at our Winnifred property, unfortunately this program was
not successful. We have identified a further 30 re-completion
opportunities at our Berry property. In addition, we drilled
four wells targeting the Mannville section in the quarter. Three
of these wells were successful and have now been cased and are
awaiting tie-in.

     
In Saskatchewan, we drilled two successful horizontal wells into
the Alida formation at our southeast Saskatchewan property.
Initial production rates from these wells totaled
650 barrels of oil per day and exceeded our expectations.

     
Optimization activity continued in our Central Alberta area.
During the quarter, we also drilled an unsuccessful well at
Beaverlodge and participated in a non-operated Blue-sky
re-completion and two successful non-operated wells.

10

 

LIQUIDITY AND CAPITAL RESOURCES

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	 		 	 	
	 	 	Jun 30		 	Jun 30		 	Mar 31		 	Dec 31		 	Sep 30		 	Jun 30		 	Jun 30	
	As at	 	2006		 	2005		 	2006		 	2005		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	($ thousands, except ratios)	
	
    
    Bank loans

    	 	 	141,830	 	 	 	133,814	 	 	 	135,231	 	 	 	144,239	 	 	 	148,691	 	 	 	141,830	 	 	 	133,814	 
	
    
    Working capital deficiency

    	 	 	13,900	 	 	 	18,299	 	 	 	13,318	 	 	 	20,785	 	 	 	16,470	 	 	 	13,900	 	 	 	18,299	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net debt

    	 	 	155,730	 	 	 	152,113	 	 	 	148,549	 	 	 	165,024	 	 	 	165,161	 	 	 	155,730	 	 	 	152,113	 
	 	
    
    (excluding debentures)

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Convertible debentures

    	 	 	94,057	 	 	 	—	 	 	 	93,964	 	 	 	93,866	 	 	 	97,254	 	 	 	94,057	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total net debt

    	 	 	249,787	 	 	 	152,113	 	 	 	242,513	 	 	 	258,890	 	 	 	262,415	 	 	 	249,787	 	 	 	152,113	 
	
    
    Bank loans to cash flow ratio

    	 	 	0.9	 	 	 	1.1	 	 	 	0.7	 	 	 	0.6	 	 	 	0.8	 	 	 	0.8	 	 	 	1.3	 
	
    
    Net debt (excluding debentures) to cash flow ratio

    	 	 	1.0	 	 	 	1.2	 	 	 	0.8	 	 	 	0.7	 	 	 	0.9	 	 	 	0.9	 	 	 	1.4	 
	
    
    Total net debt to cash flow ratio

    	 	 	1.6	 	 	 	1.2	 	 	 	1.3	 	 	 	1.2	 	 	 	1.5	 	 	 	1.5	 	 	 	1.4	 
	
    
    Outstanding units

    	 	 	66,494	 	 	 	64,523	 	 	 	66,416	 	 	 	66,358	 	 	 	64,573	 	 	 	66,494	 	 	 	64,523	 

     
On July 28, 2005, we issued $100 million of
6.5 percent convertible unsecured subordinated debentures
and received $96.0 million, net of issuance costs. These
Debentures pay interest semi-annually. They are convertible at
the option of the holder at any time and convert into fully paid
trust units at $13.85 per trust unit. The Debentures mature
on December 31, 2010. The net proceeds were used to fund
the acquisitions of Markedon Energy Ltd. and Monroe Energy Inc.

     
The Debentures have been classified as debt, net of the fair
value of the conversion feature which has been classified as
part of unitholders’ equity. The issue costs have been
recorded as a deferred asset and will be amortized over the term
of the Debentures. The debt portion will accrete up to the
principal balance at maturity. The accretion, amortization of
issue costs and the interest payable are expensed within
interest and financing charges on the consolidated statements of
earnings.

     
Esprit’s liquidity and capital requirements are met through
operating cash flow and existing credit facilities. During the
first six months of the year, cash flow exceeded distributions
and capital expenditures by approximately $9.3 million.

     
At June 30, 2006, our net debt, excluding debentures, was
$155.7 million and was made up of $141.8 million
outstanding on our senior credit facility and a working capital
deficiency of $13.9 million. This reflects a 1.0 times net
debt (excluding debentures) to cash flow ratio based on second
quarter annualized cash flow. Total net debt was $249.8 million
and, in addition to the bank loan and working capital
deficiency, includes $94.1 million of Debentures. This
represents a 1.6 times total net debt to cash flow ratio, based
on annualized second quarter 2006 cash flow.

     
In conjunction with the acquisition of Trifecta Resources Inc.,
we expanded our existing senior credit facility by
$50 million to $330 million. This credit facility was
used to fund the acquisition with total consideration of
approximately $102 million.

     
Future debt levels are primarily dependent on our cash flow,
distributions and capital program. The credit facility, together
with cash flow, is expected to be sufficient to meet
Esprit’s near term capital requirements and provide the
flexibility to pursue profitable growth opportunities. A
significant decline in oil and natural gas prices and/ or a
significant reduction in our oil and gas reserves could impact
our access to bank credit facilities and our ability to fund
operations and maintain distributions.

     
We do not have any off balance sheet financing arrangements.

11

 

OUTSTANDING TRUST UNIT DATA

     
Esprit’s trust units trade on the Toronto Stock Exchange
under the symbol EEE.UN.At August 2, 2006, we had
66,498,553 Trust units and 387,759 exchangeable shares
outstanding. A total of 492,473 units are issuable upon
conversion of the exchangeable shares using the exchange ratio
at July 17, 2006. During the first six months of 2006, a
total of 74,675 exchangeable shares have been exchanged for
trust units.

     
During the first six months of 2006, the trust units traded in
the range of $10.87 to $13.79 with an average daily trading
volume of approximately 317,000 units.

     
Esprit has a Performance Unit Incentive Plan that was created at
the time we reorganized into a trust. Under the Performance Unit
Incentive Plan, the trustees may grant up to five percent of the
number of Trust units outstanding from time to time to trustees,
officers, employees of, or providers of services to the Trust.
Currently there are 3.3 million performance units issuable
under the Performance Unit Incentive Plan. The majority of these
performance units vest over a period of three years. The number
of Trust units ultimately issued under the Performance Unit
Incentive Plan is dependant on our performance relative to our
peers and other performance criteria. The Trust granted 403,834
performance units (net of cancelled and exercised performance
units) during the first six months of 2006. We have recorded
compensation expense of $3.1 million ($1.7 million was
capitalized) and contributed surplus of $4.1 million in the
first half of 2006 based on the estimated fair value of the
outstanding performance units on the date of grant and our best
estimate of the performance factor applied in calculating the
number of Trust Units issuable under the plan.

CASH DISTRIBUTIONS

     
In the first six months of the year, we continued to pay
distributions of $0.15 per unit per month. We paid out a
total of 70 percent of the cash flow generated in the
period.

     
Our capital program is financed from the residual cash flow and
additional draw-downs on the bank facility if required. The key
drivers of our cash flow, as is generally the case with other
energy trusts, are commodity prices and production. Since
Esprit’s production is heavily weighted to natural gas
(72 percent in the quarter), natural gas prices have a
significant effect on our cash flow. In the event that oil and
natural gas prices are higher than anticipated and a cash
surplus develops in a quarter, the surplus may be used to
increase distributions, reduce debt, and/or increase the capital
program. In the event that oil and natural gas prices and/or
production are lower than expected, we may decrease
distributions, increase debt or decrease the capital program. We
regularly review our distribution policy in the context of the
current commodity price environment and production levels.

     
At Esprit, we pay distributions monthly to unitholders of record
on the last business day of the month. Distributions are paid on
the 15th of the following month or the following business
day where the 15th falls on a weekend. The Board of
Trustees determines the amount of the distribution after
considering factors such as the commodity price environment,
production levels and the amount of capital expenditures to be
funded from cash flow.

     
We expect that approximately 20 percent of the
year-to-date 2006
distributions will represent a tax efficient return of capital
to Canadian unitholders and will reduce the adjusted cost base
of the trust units held by unitholders. For unitholders resident
in the United States, taxability of distributions is calculated
using U.S. tax rules. The taxable portion of the monthly
distribution is calculated annually based on current and
accumulated earnings in accordance with U.S. tax law. In 2005,
65.28 percent of the 2005 distributions were dividends that
were “Qualifying Dividends”. The remaining
34.72 percent was a tax-deferred reduction to the cost of
the units for tax purposes.

OUTLOOK

     
The second quarter was another strong quarter for Esprit. A
combination of successful drilling and a focus on optimizing our
base production allowed us to maintain stable production. During
the quarter we announced the acquisition of Trifecta which we
believe further strengthens our asset base. The majority of the
acquired

12

 

assets are complementary to our existing asset base and are
expected to benefit from our operational expertise and control
of infrastructure in the area.

     
We believe that the proposed combination with Pengrowth is a
very positive step for the future of Esprit and for its
unitholders. The broader asset base, deeper inventory of
development opportunities and strong management team should
provide a solid future for unitholders.

QUARTERLY OPERATING RESULTS

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	2006		 	2005		 	2004	
	 	 	 		 	 		 	 	
	 	 	Q2		 	Q1		 	Q4		 	Q3		 	Q2		 	Q1		 	Q4		 	Q3(1)	
	 	 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	(In $ thousands of dollars, except per unit amounts)	
	
    
    Oil and gas revenue

    	 	 	77,658	 	 	 	88,274	 	 	 	105,526	 	 	 	83,761	 	 	 	57,940	 	 	 	43,057	 	 	 	44,856	 	 	 	46,851	 
	
    
    Net earnings

    	 	 	18,412	 	 	 	19,592	 	 	 	25,052	 	 	 	22,465	 	 	 	15,906	 	 	 	11,029	 	 	 	12,179	 	 	 	(185	)
	
    
    Net earnings per unit — basic

    	 	 	0.28	 	 	 	0.30	 	 	 	0.38	 	 	 	0.35	 	 	 	0.28	 	 	 	0.27	 	 	 	0.31	 	 	 	(0.01	)
	 	 	
    
     — diluted

    	 	 	0.27	 	 	 	0.29	 	 	 	0.37	 	 	 	0.34	 	 	 	0.27	 	 	 	0.27	 	 	 	0.29	 	 	 	(0.01	)
	
    
    Cash flow

    	 	 	38,843	 	 	 	45,933	 	 	 	56,149	 	 	 	45,143	 	 	 	30,504	 	 	 	22,458	 	 	 	23,791	 	 	 	13,880	 
	
    
    Cash flow per unit — basic

    	 	 	0.58	 	 	 	0.69	 	 	 	0.86	 	 	 	0.70	 	 	 	0.54	 	 	 	0.56	 	 	 	0.60	 	 	 	0.34	 
	 	
    
    — diluted

    	 	 	0.53	 	 	 	0.63	 	 	 	0.78	 	 	 	0.64	 	 	 	0.52	 	 	 	0.53	 	 	 	0.56	 	 	 	0.34	 

 

		
	(1) 	
    A loss was recorded in the period as a result of
    $8.3 million of transaction costs incurred relating to the
    transformation to a Trust.

OTHER INFORMATION ON THE TRUST

     
Other information concerning the Trust, including the Annual
Information Form, can be located at www.sedar.com under the
profile Esprit Energy Trust or at Esprit’s web site at
www.eee.ca

     
READER’S ADVISORY:

			
	 	• 	
    Certain comparative amounts have been reclassified to conform to
    current period presentation.
	 
	 	• 	
    In accordance with NI 51-101 all numbers stated in barrel of oil
    equivalent have been converted on the basis of 6 mcf equals 1
    boe, unless otherwise stated.

13EX-4.3

 

Exhibit 4.3

MANAGEMENT INFORMATION CIRCULAR

ANNUAL MEETING OF

UNITHOLDERS OF ESPRIT ENERGY TRUST

TO BE HELD ON MAY 11, 2006

March 15, 2006

 

 

Suite 900, 606 – 4th Street S.W.

Calgary, Alberta

T2P 1T1

NOTICE OF ANNUAL MEETING OF UNITHOLDERS

NOTICE IS HEREBY GIVEN that the annual meeting (the “Meeting”) of the holders (the “Unitholders”)
of trust units and special voting units (together, the “Trust Units”) of Esprit Energy Trust
(“Esprit”) will be held at 10:00 a.m. (local time) on May 11, 2006 in the Grand Lecture Theatre of
the Metropolitan Centre, 333 – 4th Avenue, S.W., Calgary, Alberta, Canada, for the following
purposes:

	1.	 	to receive the financial statements of Esprit for the year ended December 31, 2005 and
the auditors’ report thereon;
	 
	2.	 	to appoint auditors of Esprit for the ensuing year and authorize the board of trustees
to fix their remuneration;
	 
	3.	 	to elect trustees for the ensuing year; and
	 
	4.	 	to transact such other business as may be properly brought before the Meeting or any
adjournment thereof.

The specific details of the matters to be brought before the Meeting are set forth in the
accompanying Information Circular.

Unitholders who are unable to attend the Meeting in person are requested to complete, date and sign
the enclosed form of proxy and return it to Computershare Trust Company of Canada, Attention: Proxy
Department, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2Y1 at least 48 hours,
excluding Saturdays, Sundays and holidays, before the Meeting or any adjournment thereof.

If a Unitholder receives more than one proxy form because such Unitholder owns Trust Units
registered in different names or addresses, each proxy form should be completed and returned.

The Trust Unit transfer books will not be closed, but the Board of Trustees has fixed March 15,
2006 as the record date for the determination of Unitholders entitled to notice of and to vote at
the Meeting and at any adjournment thereof.

DATED at Calgary, Alberta as of March 15, 2006.

BY ORDER OF THE BOARD OF TRUSTEES

(signed) Stephen J. Savidant

Stephen J. Savidant

President and Chief Executive Officer

 

 

Esprit Energy Trust

ANNUAL MEETING OF UNITHOLDERS

INFORMATION CIRCULAR

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page
	 
	General Proxy Information
	 	 	1	 
	Solicitation of Proxies
	 	 	1	 
	Exercise of Discretion by Proxy Holders
	 	 	1	 
	Revocability of Proxies
	 	 	1	 
	Advice to Beneficial Holders of Trust Units
	 	 	1	 
	Record Date
	 	 	2	 
	Voting Trust Units and Principal Holders Thereof
	 	 	2	 
	Notice to Holders of Post-Arrangement Entitlements and Exchangeable Shares
	 	 	3	 
	Esprit Energy Trust and Esprit Exploration Ltd.
	 	 	4	 
	Business to be Acted Upon at the Meeting
	 	 	4	 
	Receipt of December 31, 2005 Financial Statements
	 	 	4	 
	Appointment of Auditors
	 	 	4	 
	Election of Trustees
	 	 	5	 
	Compensation of Trustees and Executive Officers
	 	 	9	 
	Summary Compensation
	 	 	9	 
	Trust Unit Rights/Stock Appreciation Rights
	 	 	10	 
	LTIP Awards
	 	 	10	 
	Trust Unit Ownership Guidelines for Executive Officers
	 	 	11	 
	Performance Unit Incentive Plan
	 	 	11	 
	Executive Employment Contracts and Change of Control Arrangements
	 	 	11	 
	Composition of the Human Resources and Corporate Governance Committee
	 	 	13	 
	Report on Executive Compensation
	 	 	13	 
	Performance Graph
	 	 	14	 
	Compensation of Trustees
	 	 	14	 
	Trust Unit Ownership Guidelines for Trustees
	 	 	15	 
	Equity Compensation Plan Information
	 	 	15	 
	Indebtedness of Trustees and Executive Officers
	 	 	15	 
	Interest of Insiders in Material Transactions
	 	 	15	 
	Statement of Corporate Governance Practices
	 	 	16	 
	Additional Information
	 	 	18	 
	Appendix “A” — Statement of Corporate Governance Practices
	 	 	A-1	 
	Appendix “B” — Mandate of the Board of Trustees
	 	 	B-1	 
	Appendix “C” — Mandate of the Board of Directors
	 	 	C-1	 
	Appendix “D” — Mandate of the Audit Committee
	 	 	D-1	 
	Appendix “E” — Mandate of the Human Resources and Corporate Governance Committee
	 	 	E-1	 

 

 

 1

GENERAL PROXY INFORMATION

This Information Circular is furnished to holders (the “Unitholders”) of trust units and
special voting units (“Trust Units” and “Special Voting Units”, respectively, and together, the
“Trust Units”) by the trustees (the “Board of Trustees”) of Esprit Energy Trust (“Esprit”) in
connection with the solicitation of proxies to be voted at the annual meeting of Unitholders of
Esprit (the “Meeting”) to be held at 10:00 a.m. on May 11, 2006 in the Grand Lecture Theatre of the
Metropolitan Centre, 333 – 4th Avenue, S.W., Calgary, Alberta, Canada, and at any adjournment
thereof, for the purposes set forth in the accompanying notice of meeting (the “Notice of
Meeting”).

Solicitation of Proxies

The enclosed proxy is solicited by and on behalf of the Board of Trustees of Esprit and management
of Esprit Exploration Ltd. The persons named in the enclosed proxy form are trustees of Esprit or
directors or senior officers of Esprit Exploration Ltd. A Unitholder desiring to appoint some
other person (who need not be a Unitholder) to represent him or her at the Meeting may do so either
by inserting such other person’s name in the blank space provided in the proxy form or by
completing another proper form of proxy.

In order to be used at the Meeting, the completed proxy form must be deposited at the offices of
Computershare Trust Company of Canada, Attention: Proxy Department, 100 University Avenue, 9th
Floor, Toronto, Ontario, M5J 2Y1 at least 48 hours, excluding Saturdays, Sundays and holidays,
before the Meeting or any adjournment thereof. Solicitation will be primarily by mail, but some
proxies may be solicited personally or by telephone, facsimile transmission or other electronic
means by trustees of Esprit or directors, officers or employees of Esprit Exploration Ltd. at a
nominal cost. The cost of solicitation will be borne by Esprit Exploration Ltd.

Exercise of Discretion by Proxy Holders

On any ballot taken at the Meeting, the nominees named in the enclosed form of proxy will vote or
withhold from voting the Trust Units in respect of which they have been appointed nominee in
accordance with the directions of the Unitholders appointing them. In the absence of such
direction, the Trust Units represented by valid instruments of proxy executed in favour of the
management designees and deposited in the manner described above will be voted “FOR” all matters
identified in the Notice of Meeting.

The enclosed proxy form confers discretionary authority upon the persons named therein in respect
of amendments or variations to matters identified in the Notice of Meeting and other matters which
may properly come before the Meeting or any adjournment thereof. At the time of printing of this
Information Circular, neither the Board of Trustees nor the directors and senior officers of Esprit
Exploration Ltd. know of any amendments, variations or other matters to come before the Meeting
other than the matters referred to in the Notice of Meeting. If any such amendment, variation or
other matter properly comes before the Meeting, the Trust Units represented by proxies in favour of
management will be voted on such matters in accordance with the best judgment of the person voting
the proxy.

Revocability of Proxies

A Unitholder who has given a proxy may revoke it either by (a) depositing an instrument in writing
executed by the Unitholder or by the Unitholder’s attorney authorized in writing (i) at the head
office of Esprit at any time up to and including the last business day preceding the day of the
Meeting, or any adjournment thereof, at which the proxy is to be used or (ii) with the chairman of
the Meeting on the day of the Meeting or an adjournment thereof, or (b) attending the Meeting in
person and registering with the scrutineers as a Unitholder personally present.

Advice to Beneficial Holders of Trust Units

The information set forth in this section is very important to you if you do not hold Trust Units
in your own name. Unitholders who hold Trust Units through a broker, financial institution,
trustee, nominee or other intermediary or otherwise (referred to herein as “Beneficial
Unitholders”) should note that only proxies deposited by Unitholders whose names appear on the
records of Esprit as registered Unitholders can be recognized and acted upon at the Meeting. If
Trust Units are listed in an account statement provided to a Unitholder by a broker, then, in
almost all cases, those Trust Units will not be registered in the Unitholder’s name on the records
of Esprit. Such Trust Units will more likely be registered under the name of the Unitholder’s
broker or an agent of that broker. In Canada, most of such Trust Units are registered under the
name of CDS & Co. (the registration name for The Canadian Depository for Securities, which acts as
nominee for

 

 

 2

many Canadian brokerage firms). Trust Units held by brokers or their agents or nominees can only be
voted (for or against resolutions) upon the instructions of the Beneficial Unitholder. Without
specific instructions, a broker and its agents and nominees are prohibited from voting Trust Units
for the broker’s clients. Therefore, Beneficial Unitholders should ensure that instructions
respecting the voting of their Trust Units are communicated to the appropriate person or that the
Trust Units are duly registered in their name.

Applicable Canadian regulatory policy requires brokers and other intermediaries to seek voting
instructions from Beneficial Unitholders in advance of meetings. Each broker or other intermediary
has its own mailing procedures and provides its own return instructions to clients, which should be
carefully followed by Beneficial Unitholders in order to ensure that their Trust Units are voted at
the Meeting. In some cases, the form of proxy supplied to a Beneficial Unitholder by its broker
(or the agent of the broker) is identical to the form of proxy provided to registered Unitholders.
However, its purpose is limited to instructing the registered Unitholder (the broker or agent of
the broker) how to vote on behalf of the Beneficial Unitholder. In Canada, the majority of brokers
now delegate responsibility for obtaining instructions from clients to the ADP Investor
Communications (“ADP”). In most cases, ADP mails a scannable voting instruction form (“VIF”) in
lieu of the form of proxy provided by Esprit, and asks Beneficial Unitholders to return the VIF to
ADP. Alternatively, Beneficial Unitholders can either call their toll-free telephone number to
vote their Trust Units, or access ADP’s dedicated voting web site at
www.proxyvotecanada.com to deliver their voting instructions. ADP then tabulates the
results of all instructions received and provides appropriate instructions respecting the voting of
Trust Units to be represented at the Meeting. A Beneficial Unitholder receiving a VIF from ADP
cannot use that form to vote Trust Units directly at the Meeting – the VIF must be returned to ADP
or, alternatively, instructions must be received by ADP well in advance of the Meeting in order to
have such Trust Units voted.

Although a Beneficial Unitholder may not be recognized directly at the Meeting for the purposes of
voting Trust Units registered in the name of his broker (or an agent of the broker), a Beneficial
Unitholder may attend the Meeting as proxyholder for the registered Unitholder and vote the Trust
Units in that capacity. A Beneficial Unitholder who wishes to attend the Meeting and indirectly
vote his Trust Units as proxyholder for the registered Unitholder, should enter his own name in the
blank space on the form of proxy provided to him and return the same to his broker (or broker’s
agent) in accordance with the instructions provided by such broker (or agent), well in advance of
the Meeting.

There are two types of Beneficial Unitholders: (i) those who object to their name being made known
to the issuers of the securities that they own (“OBOs” or “Objecting Beneficial Owners”); and (ii)
those who do not object to their name being made known to the issuers of the securities that they
own (“NOBOs” or “Non-Objecting Beneficial Owners”). Issuers, including Esprit, may request and
obtain a list of their NOBOs from intermediaries through their transfer agent, namely Computershare
Trust Company of Canada in the case of Esprit (the “Transfer Agent”). Esprit may obtain and use
this NOBO list for the distribution of proxy-related materials directly (not through ADP) to NOBOs.

This year, Esprit has decided to take advantage of those provisions of the Instrument that permit
it to directly deliver proxy-related materials to its NOBOs. As a result, NOBOs can expect to
receive a scannable VIF from the Transfer Agent. These VIFs are to be completed and returned to
the Transfer Agent in the envelope provided for that purpose or by facsimile. In addition, the
Transfer Agent provides for both telephone voting and internet voting as described in the VIF,
which contains complete instructions. The Transfer Agent will tabulate the results of the VIFs
received from NOBOs and will provide appropriate instructions at the Meeting with respect to the
Trust Units represented by the VIFs it receives.

Record Date

The Trust Unit books of Esprit will not be closed, but the Board of Trustees has fixed March 15,
2006 as the record date (the “Record Date”) for the determination of Unitholders entitled to
receive notice of and to vote at the Meeting and at any adjournment thereof. Unitholders of record
at the close of business on the Record Date are entitled to such notice and to vote at the Meeting.

Persons who are Beneficial Unitholders as of the Record Date will be entitled to vote at the
Meeting in accordance with the procedures established pursuant to National Instrument 54-101 of the
Canadian Securities Administrators.

Voting Trust Units and Principal Holders Thereof

Esprit is authorized to issue an unlimited number of Trust Units. As at March 15, 2006, there were
66,364,501 Trust Units outstanding. Each Trust Unit

 

 

 3

carries the right to one vote on any matter properly coming before the Meeting.

As of the date hereof, to the knowledge of the directors and senior officers of Esprit Exploration
Ltd., the only persons who beneficially own, directly or indirectly, or exercise control or
direction over, Trust Units carrying more than 10% of the voting rights attached to all issued and
outstanding Trust Units as at March 15, 2006 were:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	Name	 	Type of Ownership	 	Number of Trust Units	 	Percent of Trust Units
	CDS & Co.(1)
	 	Legal	 	59,426,634 Trust Units	 	 	89.5	%
	CEDE & Co.(1)
	 	Legal	 	6,787,030 Trust Units	 	 	10.2	%

Note:

			
	(1)	 	Beneficial ownership is not known to Esprit.

Notice to Holders of Post-Arrangement Entitlements and Exchangeable Shares

Pursuant to the Esprit Arrangement (as defined in the following section), Esprit issued
post-arrangement entitlements (“Post-Arrangement Entitlements”) to those former holders of common
shares of Esprit Exploration Ltd. who did not provide a declaration as to their residency. Each
Post-Arrangement Entitlement now entitles the holder thereof to receive the Trust Units to which
they would have been entitled to receive under the Esprit Arrangement upon contacting the Transfer
Agent. As at March 15, 2006, there were 35,372 Post-Arrangement Entitlements issued and
outstanding.

Each Post-Arrangement Entitlement entitles the holder to one vote at any meeting of the
Unitholders. Accordingly, this Information Circular, together with a form of proxy, has been
mailed to all holders of Post-Arrangement Entitlements. Holders of Post-Arrangement Entitlements
are invited to complete the form of proxy provided to Unitholders.

A holder of Post-Arrangement Entitlements who has submitted a proxy may revoke it at any time prior
to the exercise thereof in accordance with the instructions under “Revocability of Proxies” earlier
in this Information Circular.

Pursuant to the Esprit Arrangement (as defined in the following section), Esprit issued
exchangeable shares (the “Exchangeable Shares”) in the capital of Esprit Exploration Ltd. to
Canadian-resident prior holders of common shares of Esprit Exploration Ltd. who elected to receive
Exchangeable Shares under the Esprit Arrangement. Exchangeable Shares are the economic equivalent
of Trust Units. Under the terms of a voting and exchange trust agreement dated September 30, 2004
(the “Voting and Exchange Trust Agreement”) among the Trust, Esprit Exploration Ltd., Esprit
ExchangeCo Ltd. and Computershare Trust Company of Canada, as the trustee appointed thereunder (the
“Voting and Exchange Trustee”), the Trust has issued one Special Voting Unit to the Voting and
Exchange Trustee. The Special Voting Unit carries a number of votes exercisable at the Meeting
equal to the number of Trust Units into which the Exchangeable Shares are exchangeable on the
Record Date. As at March 15, 2006, there were 442,108 Exchangeable Shares issued and outstanding
which, in aggregate, were exchangeable into 535,021 Trust Units.

Each holder of an Exchangeable Share on the Record Date is entitled to direct the Voting and
Exchange Trustee to exercise that number of votes attached to the Special Voting Unit equal to the
number of Trust Units (rounded down to the nearest whole number) into which the Exchangeable Shares
of such holder are exchangeable. Alternatively, such holder is entitled to direct the Voting and
Exchange Trustee to give a proxy to such holder or his designee to exercise personally such votes
or to give a proxy to a designated agent or other representative of the management of Esprit or
Esprit Exploration Ltd. to exercise such votes. The Voting and Exchange Trustee will exercise each
vote attached to the Special Voting Unit only as directed by the holder and, in the absence of
instructions from a holder as to voting, will not exercise such votes. Only holders of
Exchangeable Shares of record on the Record Date are entitled to receive notice of and to vote at
the Meeting. Holders of Exchangeable Shares of record on the Record Date will be entitled to
direct the votes attached to the Special Voting Unit to the extent of the Exchangeable Shares
registered in their names included in the list of such holders of Exchangeable Shares prepared as
at the Record Date, even though such a holder may subsequently dispose of his or her Exchangeable
Shares. No one who acquires Exchangeable Shares after the Record Date shall be entitled to attend
or vote at the Meeting on the basis of such Exchangeable Shares.

 

 

 4

The Voting and Exchange Trustee has sent the Notice of Meeting to the holders of Exchangeable
Shares, together with the related meeting materials and a statement as to the manner in which the
holder may instruct the Voting and Exchange Trustee to exercise the votes attaching the Special
Voting Unit. Such instructions may be delivered by regular mail to Computershare Trust Company of
Canada at the address specified on the Notice of Meeting. In order to be valid such instructions
must be received by the Voting and Exchange Trustee at least 48 hours, excluding Saturdays, Sundays
and holidays, before the Meeting or any adjournment thereof.

A holder of Exchangeable Shares who has submitted instructions to the Voting and Exchange Trustee
with respect to the exercise of votes attached to the Special Voting Unit may revoke it at any time
prior to the exercise thereof in accordance with the instructions under “Revocability of Proxies”
earlier in this Information Circular.

ESPRIT ENERGY TRUST AND ESPRIT EXPLORATION LTD.

Esprit was established pursuant to a trust indenture made as of August 16, 2004 and
amended and restated September 30, 2004 and June 30, 2005 (the “Trust Indenture”). Esprit is an
unincorporated open-end mutual fund trust established under the laws of the Province of Alberta.
Esprit Exploration Ltd. is the corporation resulting from the amalgamation of the former Esprit
Exploration Ltd. and Esprit Acquisition Corp., which was effected on October 1, 2004 in connection
with a plan of arrangement involving Esprit, the former Esprit Exploration Ltd., Esprit Acquisition
Corp. and others (the “Esprit Arrangement”). The purpose of the Esprit Arrangement was to convert
the business of the former Esprit Exploration Ltd. from a corporate entity concentrating on growth
through investment of cash flow to a trust entity distributing a substantial portion of cash flow
to Unitholders and to create a stand-alone corporate entity, ProspEx Resources Ltd., concentrating
on growth through investment of cash flow. The Esprit Arrangement was approved by the shareholders
and optionholders of the former Esprit Exploration Ltd. at a special meeting held on September
27, 2004 and became effective on October 1, 2004.

Esprit was established to, among other things: (i) invest in securities of Esprit Exploration Ltd.;
(ii) invest in other securities and in any other investments as the Board of Trustees may determine
and borrow funds for that purpose; (iii) temporarily hold cash and short-term investments for the
purpose of making investments, paying the expenses and liabilities of Esprit Exploration Ltd.,
paying amounts payable by Esprit in connection with the redemption of any Trust Units, or making
distributions to Unitholders; and (iv) perform all acts necessary, incidental, ancillary or related
to any of the foregoing. Therefore, Esprit does not carry on any active business nor does it earn
active business income. The primary income of Esprit is earned through its subsidiary, Esprit
Exploration Ltd. Additional income may be earned through cash and short-term investments held by
Esprit. Esprit is administered by the Board of Trustees. Esprit is the sole holder of the common
shares of Esprit Exploration Ltd. Pursuant to an administration agreement dated August 16, 2004
and amended and restated June 30, 2005, Esprit has delegated to Esprit Exploration Ltd. the general
authority, responsibility and obligation to administer and manage all general and administrative
affairs of Esprit in accordance with the Trust Indenture.

BUSINESS TO BE ACTED UPON AT THE MEETING

Receipt of December 31, 2005 Financial Statements

The audited financial statements of Esprit for the financial year ended December 31, 2005 have been
forwarded to Unitholders, holders of Post-Arrangement Entitlements and holders of Exchangeable
Shares (collectively, the “Securityholders”). No formal action will be taken at the Meeting to
approve the financial statements. If any Securityholders have questions respecting the December
31, 2005 financial statements, the questions may be brought forward at the Meeting.

Appointment of Auditors

Securityholders will be asked at the Meeting to pass a resolution reappointing KPMG LLP, Chartered
Accountants, as auditors of Esprit to hold office until the next annual meeting of Unitholders or
until their successors are appointed, at remuneration to be fixed by the Board of Trustees. KPMG
LLP was appointed auditor of Esprit on August 16, 2004 upon its

 

 

 5

formation. For details concerning fees paid to KPMG LLP by Esprit and its predecessor prior to the
Esprit Arrangement, the former Esprit Exploration Ltd., and for details concerning the Audit
Committee of the Board of Trustees, see “Audit Committee Matters” in the annual information form of
Esprit dated March 31, 2006 (the “AIF”). See “Additional Information” for details as to obtaining
a copy of the AIF.

The resolution appointing auditors must be passed by a simple majority of the votes cast with
respect to the resolution by Securityholders present in person or by proxy at the Meeting. In the
absence of contrary instructions, the persons named in the accompanying form of proxy intend to
vote the securities represented thereby in favour of the ordinary resolution appointing KPMG LLP as
auditors of Esprit.

Election of Trustees

Esprit is required by the Trust Indenture to have a minimum of three and a maximum of eleven
trustees. There is a provision in the Trust Indenture which permits the Board of Trustees to
appoint additional trustees between annual meetings of Unitholders, provided that the total number
of trustees so appointed does not exceed, at any time, one-third of the number of trustees who held
office immediately after the preceding annual meeting of Unitholders. Persons elected to the Board
of Trustees are also required to be appointed to the board of directors of Esprit Exploration Ltd.
(the “Board of Directors”).

At the present time, Esprit has eight trustees. Securityholders will be asked at the Meeting to
pass a resolution electing eight trustees. The persons named below are the eight nominees of the
current Board of Trustees and management for election as trustees. All proposed nominees have
consented to be named in this Information Circular to stand for election and to serve as trustees
if elected. Each elected trustee is expected to hold office until the close of the next annual
meeting or until his successor is duly elected or appointed.

In the absence of contrary instructions, the persons named in the accompanying form of proxy intend
to vote the securities represented thereby in favour of the ordinary resolution electing each of
the nominees named below as trustees of Esprit. The Board of Trustees does not contemplate that
any of such nominees will be unable to serve as a trustee; however, if for any reason any of the
proposed nominees withdraw from standing for election or are unable to serve, proxies in favour of
management designees will be voted for another nominee in their discretion unless the
Securityholder has specified in his or her proxy that his or her securities are to be withheld from
voting on the election of trustees.

The table below sets out the name of each of the persons proposed to be nominated for election as a
trustee; his jurisdiction of residence; all positions and offices in Esprit and Esprit Exploration
Ltd. presently held by him; his current principal occupation and those other principal occupations
held by him in the previous five years; the period during which he has served as a trustee of
Esprit and a director of Esprit Exploration Ltd., and the number of Trust Units and Exchangeable
Shares that he has advised are beneficially owned by him, directly or indirectly, or over which
control or direction is exercised by him, as of March 15, 2006.

 

 

 6

	 	 	 	 	 
	 
	

	 	D. Michael G.
Stewart (54) of
Calgary, Alberta,
Canada has been a
member of the Board
of Trustees since
the creation of
Esprit on August
16, 2004. Mr.
Stewart has been a
director of Esprit
Exploration Ltd.
since 2002. Mr.
Stewart is the
principal of the
privately held
Ballinacurra Group
of investment
companies and has
been active in the
Canadian energy
industry for over
30 years. He
graduated from
Queen’s University
in 1973 with a
Bachelor of Science
with Honours degree
in Geological
Sciences.

During the 1993 to
2002 period, Mr.
Stewart held a
number of senior
executive positions
with Westcoast
Energy Inc.

Mr. Stewart serves
on the board of
directors of
Canadian Energy
Services Inc., the
managing partner of
Canadian Energy
Services L.P., and
a number of private
companies.

	 	Chairman of both the Board of Trustees and
the Board of Directors

5,750 Trust Units (1)(2)

15,000 Exchangeable Shares (1)(6)

	 
	

	 	Donald R. Gardner
(63) of Calgary,
Alberta, Canada,
has been a member
of the Board of
Trustees since the
creation of Esprit
on August 16, 2004.
Mr. Gardner has
been a director of
Esprit Exploration
Ltd. since his
retirement from the
Chief Financial
Officer position of
the former Esprit
Exploration Ltd. in
May, 2002, a
position he had
served in since
December 1999. Mr.
Gardner was also a
director of Esprit
Exploration Ltd.
from March 2000 to
December 2001. In
January 2003, Mr.
Gardner joined
Canadian Spirit
Resources Inc. as
Chief Financial
Officer. Mr.
Gardner’s career
includes positions
as Senior Vice
President and Chief
Financial Officer
of Rigel Energy
Corporation and
Treasurer of
Alberta Energy
Company Ltd.

Mr. Gardner
obtained a Bachelor
of Commerce degree
from the University
of Alberta in 1964
and a Master of
Science Degree in
Business
Administration from
the University of
British Columbia in
1973.

Mr. Gardner also
serves on the board
of directors of
Intermap
Technologies
Corporation and
Canadian Spirit
Resources Inc.

	 	Member, Audit Committee

Member, Human Resources and Corporate
Governance Committee

52,379 Trust Units (1)(3)

6,998 Exchangeable Shares (1)(6)

	 
	

	 	Paul B. Myers (43)
of Calgary,
Alberta, Canada, is
nominated for
election to the
Board of Trustees.
If elected, he will
also be appointed
to the Board of
Directors of Esprit
Exploration Ltd. Mr. Myers became
Executive Vice
President and Chief
Operating Officer
of Esprit
Exploration Ltd. in
September 2005.
Prior to Esprit, he
was with EnCana
Corporation for
approximately five
years, rising to
Vice President,
Gulf of Mexico and
Alaska.

Mr. Myers holds a
Bachelor of Science
from Lehigh
University, a
Masters of Science
in Geology from the
University of
Kansas and a
Masters of Business
Administration from
the University of
Calgary

	 	President and Chief Executive Officer
(4)

11,133 Trust Units (1)(5)

 

 

 

 7

	 	 	 	 	 
	 
	

	 	Douglas W. Palmer
(50) of Calgary,
Alberta, Canada has
been a member of
the Board of Trustees and a
director of Esprit
Exploration Ltd.
since February 9,
2005. Mr. Palmer
served on the board
of Calpine Natural
Gas Trust from 2003
to February 2005.
Prior to this Mr.
Palmer was Chief
Executive Officer
of Numac Energy
Ltd. from 1998 to
2001.

Mr. Palmer holds a
Bachelor of Science
degree in Chemical
Engineering from
the University of
Calgary and is a
member of the
Association of
Professional
Engineers,
Geologists and
Geophysicists of
Alberta.

	 	
Member, Audit Committee

Member, Human Resources and Corporate
Governance Committee

15,000 Trust Units (1)

	 
	

	 	John E. Panneton
(65) of Toronto,
Ontario, Canada,
has been a member
of the Board of
Trustees since the
creation of Esprit
on August 16, 2004.
Mr. Panneton has
been a director of
Esprit Exploration
Ltd. since 1998.
In 1998, he joined
Dundee Securities
Corporation as Vice
Chairman and
President. In
2003, Mr. Panneton
joined Goodman
Private Wealth
Management as
President and
continues to serve
as Vice Chairman of
Dundee Securities.
Prior to joining
Dundee Securities,
Mr. Panneton held
various positions
including Vice
Chairman of
McCarvill
Corporation and
President and Chief
Executive Officer
of CIBC Investment
Management
Corporation.

Mr. Panneton holds
a Bachelor of
Commerce degree
from Sir George
Williams University
(now Concordia
University) and
serves as a
director for
Viceroy Homes
Limited.

	 	Chairman, Human Resources and Corporate
Governance Committee

30,277 Trust Units (1)

	 
	

	 	W. Mark Schweitzer
(44) of Calgary,
Alberta, Canada has
been a member of
the Board of
Trustees and a
director of Esprit
Exploration Ltd.
since February 9,
2005. Mr.
Schweitzer is the
Executive
Vice-President and
Chief Financial
Officer of Superior
Plus Inc., the
wholly owned
subsidiary of the
Superior Plus
Income Fund. Mr.
Schweitzer has held
the position of
Chief Financial
Officer of Superior
Plus Inc. and its
subsidiaries for
the past 12 years.
From 1994 to 1998,
Mr. Schweitzer also
held the position
of Vice President
and Chief Financial
Officer at Norcen
Energy Resources
Ltd., the former
parent company of
Superior Plus.

Mr. Schweitzer has
a Bachelor of
Commerce degree
from Queen’s
University and is a
member of the
Canadian Institute
of Chartered
Accountants.

	 	Chairman, Audit Committee

16,250 Exchangeable Shares (1)(6)

	 

 

 

 8

	 	 	 	 	 
	 
	

	 	Eric L. Schwitzer (54)
of Vancouver, British
Columbia, Canada, has
been a member of the
Board of Trustees since
the creation of Esprit
on August 16, 2004. Mr.
Schwitzer has been a
director of Esprit
Exploration Ltd. since
October 2004. Mr.
Schwitzer has been a
managing partner of
Enterprise Capital
Management Inc. since
June 2003. From June
2002 to May 2003 he was
a consultant and
corporate director.
Prior thereto, he served
as Senior Vice
President, Strategic
Development, for
Westcoast Energy Inc.

Mr. Schwitzer obtained a
Bachelor of Science
degree in Mathematics
from McGill University
in 1972, a Masters of
Science degree in
Management from the
Massachusetts Institute
of Technology in 1975
and is a Chartered
Business Valuator.

Mr. Schwitzer serves as
a trustee and lead
director of Versacold
Income Fund and is on
the boards of SNP Health
Split Corp., SNP Split
Corp. and Pitchstone
Exploration Ltd., as
well as several private
companies.

	 	
Member, Audit Committee

Member, Human Resources and Corporate Governance
Committee

10,000 Trust Units (1)

	 
	

	 	Stephen B. Soules (54)
of Calgary, Alberta,
Canada, has been a
member of the Board of
Trustees since the
creation of Esprit on
August 16, 2004. Mr.
Soules has been a
director of Esprit
Exploration Ltd. since
October 2004. Mr.
Soules served as Senior
Vice President and Chief
Financial Officer of
Esprit Exploration Ltd.
from May 2002 to October
2004. Prior thereto, he
served as an advisor to
Burlington Resources
Canada Ltd. from
December 2001 to
February 2002 and as
Chief Financial Officer
of Canadian Hunter
Exploration Ltd. from
April 1997 to December
2001.

Mr. Soules holds a
Bachelor of Science from
the University of Guelph
and a Masters of
Business Administration
from the University of
Calgary.

Mr. Soules serves on the
board of directors of
the Galileo Educational
Network and the Calgary
Women’s Emergency
Shelter Endowment Trust.

	 	Executive Vice President and Chief Financial
Officer

26,896 Trust Units (1)

25,000 Exchangeable Shares (1)(6)

	 

Notes:

			
	(1)	 	The information as to Trust Units and Exchangeable Shares beneficially owned, not being
within the knowledge of Esprit, has been furnished by the respective individuals.
	 
	(2)	 	Includes 2,000 Trust Units held by Mr. Stewart’s spouse.
	 
	(3)	 	Includes 2,033 Trust Units held by Mr. Gardner’s spouse.
	 
	(4)	 	Mr. Myers has been appointed President and Chief Executive Officer of the Corporation
effective May 11, 2006.
	 
	(5)	 	Includes 1,133 Trust Units held by Mr. Myers’ spouse.
	 
	(6)	 	Each Exchangeable Share was exchangeable for 1.19495 Trust Units based on the exchange ratio
in effect for February, 2006. The exchange ratio increases each month reflecting the cash
distribution not paid on Exchangeable Shares. All Exchangeable Shares remaining outstanding
on October 1, 2007 will automatically be exchanged for Trust Units at the exchange ratio in
effect on such date.
	 
	(7)	 	All trustees of Esprit are currently also directors of Esprit Exploration Ltd.
	 
	(8)	 	The Audit Committee is a committee of the Board of Trustees. The Human Resources and
Corporate Governance Committee is a committee of the Board of Directors. Neither Esprit nor
Esprit Exploration Ltd. has an Executive Committee. In addition, neither Esprit nor Esprit
Exploration Ltd. has a Reserves Committee as matters relating to the oil and gas assets of
Esprit are dealt with by the entire Board of Directors.

 

 

 9

COMPENSATION OF TRUSTEES AND EXECUTIVE OFFICERS

Summary Compensation

Under applicable securities legislation, Esprit is required to disclose certain financial and other
information relating to the compensation of certain of its executive officers. Esprit, however,
does not carry on an active business; its primary business is to hold the securities of Esprit
Exploration Ltd., which owns and carries out all aspects of the business of Esprit. Esprit does
not have executive officers, rather these roles are discharged by the executive officers of Esprit
Exploration Ltd. Compensation is paid by Esprit Exploration Ltd. to its executive officers for
acting in such capacities, which involves the management of the business of Esprit Exploration Ltd.

The following table sets forth the compensation for: (i) the Chief Executive Officer, Chief
Financial Officer and Chief Operating Officer; and (ii) the three other executive officers serving
at December 31, 2005 whose total salary and bonus earned in 2005 exceeded $150,000 Compensation is
shown, where applicable, for services rendered during the financial years ended December 31, 2005,
2004 and 2003. The six executive officers of Esprit Exploration Ltd. described below are referred
to collectively as the “Named Executive Officers”.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Long-Term Compensation	 	 
	 	 	 	 	 	 	Annual Compensation	 	Awards	 	Payouts	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Trust Units	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Securities	 	Subject to	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Other Annual	 	Under	 	Resale	 	LTIP	 	All Other
	Name and Principal	 	 	 	 	 	Salary	 	Bonus	 	Compensation	 	Options/SARs	 	Restrictions	 	Payouts	 	Compensation
	Position	 	Year	 	($)	 	($)	 	($)(6)	 	Granted (#)	 	($)	 	($)	 	($)(7)
	Stephen J. Savidant(1)
	 	 	2005	 	 	 	290,000	 	 	Nil	 	Nil	 	Nil	 	Nil	 	Nil	 	 	15,241	 
	President and Chief
	 	 	2004	 	 	 	332,417	 	 	Nil	 	Nil	 	Nil	 	Nil	 	Nil	 	 	1,822,823	 
	Executive Officer
	 	 	2003	 	 	 	332,083	 	 	 	150,000	 	 	Nil	 	 	275,000	 	 	Nil	 	Nil	 	 	16,604	 
	 
	Stephen B. Soules
	 	 	2005	 	 	 	255,000	 	 	 	40,000	 	 	Nil	 	Nil	 	Nil	 	Nil	 	 	13,491	 
	Executive Vice President and
	 	 	2004	 	 	 	228,250	 	 	Nil	 	Nil	 	Nil	 	Nil	 	Nil	 	 	1,311,423	 
	Chief Financial Officer
	 	 	2003	 	 	 	217,916	 	 	 	100,000	 	 	Nil	 	 	212,500	 	 	Nil	 	Nil	 	 	10,896	 
	 
	Paul B. Myers(2)
	 	 	2005	 	 	 	76,154	 	 	 	53,333	 	 	Nil	 	Nil	 	Nil	 	Nil	 	 	104,039	 
	Executive Vice President, and
	 	 	2004	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	    N/A	 
	Chief Operating Officer
	 	 	2003	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	    N/A	 
	 
	Gregory A. Jerome(3)
	 	 	2005	 	 	 	170,833	 	 	 	48,000	 	 	Nil	 	Nil	 	Nil	 	Nil	 	 	59,283	 
	Vice President, Finance and
	 	 	2004	 	 	 	108,875	 	 	Nil	 	Nil	 	Nil	 	Nil	 	 	8,266	 	 	 	196,072	 
	Corporate Secretary
	 	 	2003	 	 	 	94,417	 	 	 	30,000	 	 	 	N/A	 	 	 	80,000	 	 	 	N/A	 	 	 	N/A	 	 	 	5,332	 
	 
	Patrick C. Connors(4)
	 	 	2005	 	 	 	182,500	 	 	 	48,000	 	 	Nil	 	Nil	 	Nil	 	Nil	 	 	45,044	 
	Vice President, Operations and
	 	 	2004	 	 	 	151,958	 	 	Nil	 	Nil	 	Nil	 	Nil	 	Nil	 	 	138,660	 
	Field Services
	 	 	2003	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	    N/A	 
	 
	Michael J. St. Clair(5)
	 	 	2005	 	 	 	167,500	 	 	 	48,000	 	 	Nil	 	Nil	 	Nil	 	Nil	 	 	39,116	 
	Vice President, Marketing and
	 	 	2004	 	 	 	141,904	 	 	Nil	 	Nil	 	Nil	 	Nil	 	Nil	 	 	107,971	 
	Risk Management
	 	 	2003	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	N/A	 	 	 	    N/A	 

			

	Notes:
	(1)	 	Mr. Savidant will be retiring as President and Chief Executive Officer effective May 11, 2006.
	 
	(2)	 	Mr. Myers became an officer of Esprit Exploration Ltd. on September 21, 2005 and has been
appointed as President and Chief Executive Officer effective May 11, 2006.
	 
	(3)	 	Mr. Jerome became an officer of Esprit Exploration Ltd. on February 27, 2003.

 

 

 10

 

			
	(4)	 	Mr. Connors became an officer of Esprit Exploration Ltd. on October 1, 2004.
	 
	(5)	 	Mr. St. Clair became an officer of Esprit Exploration Ltd. on October 1, 2004.
	 
	(6)	 	Where no amount is stated in this column, the Named Executive Officer did not receive
perquisites and other personal benefits that exceeded the lesser of $50,000 and 10% of total
annual salary and bonus for such Named Executive Officer. Where any individual personal
benefit or perquisite exceeds 25% of the total amount of perquisites and personal benefits
received by the Named Executive Officer, that item and the amount relating thereto will be
identified.
	 
	(7)	 	The amounts set forth under the column “All Other Compensation” include contributions made by
Esprit Exploration Ltd. to the Named Executive Officer under the Employee Unit Savings Plan
(or its predecessor) of Esprit Exploration Ltd., participation in which is available to all
employees of Esprit Exploration Ltd., amounts representing transaction bonuses associated with
the acquisition of Resolute Energy Inc., and amounts representing transaction and retention
bonuses associated with the completion of the Esprit Arrangement and amounts representing
signing bonuses.

Trust Unit Rights/Stock Appreciation Rights

No Trust Unit rights or options were granted to, or exercised by, the Named Executive Officers
during the financial year ended December 31, 2005 and the Named Executive Officers do not hold any
such rights or options.

LTIP Awards

The Esprit performance unit inventive plan (the “Performance Unit Incentive Plan”) described below
under “Performance Unit Incentive Plan” is considered a long-term incentive plan (“LTIP”) as it
provides compensation intended to motivate performance over a period greater than one financial
year.

The following performance units (“Performance Units”) were granted to the Named Executive Officers
during the financial year ended December 31, 2005 under the Performance Unit Incentive Plan.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Estimated Future Payouts Under
	 	 	 	 	 	 	Performance or	 	Non-Securities-Price-Based Plans
	 	 	Performance	 	Other Period	 	Threshold	 	Target	 	Maximum
	 	 	Units Granted	 	Until Maturation	 	(Number of	 	(Number of	 	(Number of Trust
	                Name	 	(#)	 	or Payout	 	Trust Units)	 	Trust Units)	 	Units)
	Stephen J. Savidant
	 	 	6,666	 	 	  1 year(1)	 	Nil	 	Nil	 	 	Nil	 
	 
	 	 	6,666	 	 	2 years	 	Nil	 	 	7,603	 	 	 	19,009	 
	 
	 	 	6,668	 	 	3 years	 	Nil	 	 	7,606	 	 	 	19,014	 
	Stephen B. Soules
	 	 	6,666	 	 	  1 year(1)	 	Nil	 	Nil	 	 	Nil	 
	 
	 	 	6,666	 	 	2 years	 	Nil	 	 	7,603	 	 	 	19,009	 
	 
	 	 	6,668	 	 	3 years	 	Nil	 	 	7,606	 	 	 	19,014	 
	Paul B. Myers
	 	 	15,000	 	 	  1 year(1)	 	Nil	 	 	17,109	 	 	 	42,773	 
	 
	 	 	10,000	 	 	2 years	 	Nil	 	 	11,406	 	 	 	28,516	 
	 
	 	 	5,000	 	 	3 years	 	Nil	 	 	5,703	 	 	 	14,258	 
	Gregory A. Jerome
	 	 	10,000	 	 	  1 year(1)	 	Nil	 	Nil	 	 	Nil	 
	 
	 	 	6,666	 	 	2 years	 	Nil	 	 	7,603	 	 	 	17,108	 
	 
	 	 	3,333	 	 	3 years	 	Nil	 	 	3,802	 	 	 	8,554	 
	Patrick C. Connors
	 	 	10,000	 	 	  1 year(1)	 	Nil	 	Nil	 	 	Nil	 
	 
	 	 	6,666	 	 	2 years	 	Nil	 	 	7,603	 	 	 	17,108	 
	 
	 	 	3,333	 	 	3 years	 	Nil	 	 	3,802	 	 	 	8,554	 
	Michael J. St. Clair
	 	 	10,000	 	 	  1 year(1)	 	Nil	 	Nil	 	 	Nil	 
	 
	 	 	6,666	 	 	2 years	 	Nil	 	 	7,603	 	 	 	17,108	 
	 
	 	 	3,333	 	 	3 years	 	Nil	 	 	3,802	 	 	 	8,554	 

Notes:

			
	(1)	 	The performance period related to these Performance Units expired with no cash or Trust Units
being issued in respect of such Performance Units.
	 
	(2)	 	Each of these awards were granted under the Performance Unit Incentive Plan as described
under “Performance Unit Incentive Plan” below. Payouts under the Performance Unit Incentive
Plan are determined based upon Esprit’s total Unitholder return relative to its peer group of
energy trusts and such payouts may be made, at Esprit’s option, in cash or Trust Units. As
Esprit’s current intention is to award payouts in Trust Units, the thresholds in the above
table are represented in numbers of Trust Units. Included in such numbers are awards of
additional Trust Units for the value of distributions paid on the Trust Units over the
applicable performance period.

 

 

11

Trust Unit Ownership Guidelines for Executive Officers

The Board of Trustees has established Trust Unit ownership guidelines for each of the executive
officers of the Corporation. The guideline level of ownership is 25,000 Trust Units for each of
the Chief Executive Officer, and the Chief Financial Officer and Chief Operating Officer within
three years of their appointment. All other executive officers are required under the ownership
guidelines to own at least 10,000 Trust Units within three years of appointment with increasing
requirements each year. As of the date hereof, all officers are in compliance with the Trust Unit
ownership guidelines.

Performance Unit Incentive Plan

The Esprit Performance Unit Incentive Plan is designed to advance the interests of Esprit by
providing the trustees of Esprit and directors, officers, employees of, or providers of services
to, Esprit Exploration Ltd. and any of its subsidiaries the opportunity to participate in the
creation of value in Esprit, thereby: (i) increasing the proprietary interests of such persons in
Esprit; (ii) aligning the interests of such persons with the interests of Unitholders generally;
(iii) encouraging such persons to remain associated with Esprit and its subsidiaries; and (iv)
furnishing such persons with an additional incentive for their efforts on behalf of Esprit and its
subsidiaries.

The Performance Unit Incentive Plan is a full-value unit plan using the value of Trust Units as the
basis for the granting of Performance Units. Each Performance Unit is equal in value to one Trust
Unit. The Board of Directors administers the plan and may designate which trustees of Esprit and
directors, officers, employees and consultants of Esprit Exploration Ltd. are to be granted
Performance Units. Eligible participants receive target level grants of Performance Units, which
are settled at the end of a maximum three year term for each grant (a “Performance Period”).
Grants of Performance Units are made at the beginning of the first year of the Performance Period
and payout determinations under the Performance Unit Incentive Plan are made after the end of the
Performance Period relating to such Performance Units. Vesting is based on time and performance
conditions. Employees must be employed at the end of each Performance Period to qualify for awards
under the Performance Unit Incentive Plan. Provision is made for the accelerated vesting of
Performance Units in the event of a change of control of Esprit.

Actual payouts from the Performance Units depend on performance against selected performance
measures (“Performance Measure”), which in turn determines a performance factor (“Performance
Factor”). The Performance Measure currently selected by the Board of Directors is relative total
Unitholder return (as compared against a peer group of Canadian oil and gas royalty trusts). A
target level of performance (“Performance Target”) is set for each grant. Actual performance
equaling the Performance Target will result in a Performance Factor of one (1.0). Actual
performance exceeding the Performance Target will result in a higher Performance Factor and
therefore higher than target level payouts. Actual performance below Performance Target will
result in a lower Performance Factor and therefore lower than target level payouts. Final awards
can therefore be larger or smaller than the target grant depending on Esprit’s actual performance
over each Performance Period. Performance Units are not assignable.

Payouts under the Performance Unit Incentive Plan equal the value of the Performance Factor
adjusted number of Performance Units multiplied by the market price of Trust Units at the end of
the Performance Period plus the value of the accumulated distributions on these Performance Units
over the Performance Period.

Payouts under the Performance Unit Incentive Plan may be in cash or Trust Units or some combination
thereof at the discretion of the Board of Directors. A number of Trust Units are reserved for
issuance under the Performance Unit Incentive Plan equal to 5% of the total of: (i) the number of
Trust Units issued and outstanding from time to time; and (ii) the number of Trust Units issuable
upon exchange of the Exchangeable Shares issued and outstanding from time to time. If any
Performance Unit expires or terminates for any reason without Trust Units having been issued in
respect thereof, the Trust Units issuable in respect thereof remain available for grant.

Executive Employment Contracts and Change of Control Arrangements

Each of Messrs. Savidant, Soules, Myers, Jerome, Connors and St. Clair has entered into an
employment agreement with Esprit Exploration Ltd. Pursuant to such employment agreements, each
individual is entitled to (i) an annual base salary; (ii) discretionary bonuses as determined by
the Board of Directors; (iii) participate in Esprit’s Employee Unit Savings Plan; and (iv)
participate in the granting from time to time of Performance Units under the Performance Unit
Incentive Plan.

 

12

In the event of change of control of Esprit or Esprit Exploration Ltd. where Mr. Savidant is
terminated by Esprit Exploration Ltd. within one year following the change of control or Mr.
Savidant terminates his employment within 90 days of the change of control, Mr. Savidant shall be
entitled to a sum of money equal to one year’s salary, bonus and benefits. Mr. Savidant may also
terminate his employment on 60 days notice and receive a retirement allowance equal to 50% of the
foregoing amounts plus an additional 1/12 of the retirement allowance for each month of service
past October 1, 2005, to a maximum retirement allowance of one year’s salary, bonus and benefits.

In the event of a change of control of Esprit or Esprit Exploration Ltd. where Mr. Soules is
terminated by Esprit Exploration Ltd. within one year following the change of control or Mr. Soules
terminates his employment within 90 days of the change of control, Mr. Soules shall be entitled to
a sum of money equal to one year’s salary, the average of his last two annual bonuses and one
year’s benefits, in each case multiplied by a service factor (being a factor of one during the
first two years of service after October 1, 2004, a factor of two for the next year of service and
a factor of two and one-half thereafter). Mr. Soules may terminate his employment on 60 days
notice and receive a retirement allowance equal to 50% of each of his salary, last annual
performance bonus and benefits, plus an additional 1/12 of the said retirement allowance
for each month of service past October 1, 2005, to a maximum retirement allowance of one and
one-half year’s salary, bonus and benefits.

In the event of a change of control of Esprit or Esprit Exploration Ltd. where Mr. Myers is
terminated by Esprit Exploration Ltd. within one year following the change of control or Mr. Myers
terminates his employment within 90 days of the change of control, Mr. Myers shall be entitled to a
sum of money equal to 1.5 times the total of his annual salary, the simple average of his most
recent two annual performance bonuses and the amount paid by the Corporation for all benefits and
perquisites.

In the event of a change of control of Esprit where Messrs. Connors, Jerome or St. Clair are
terminated by Esprit Exploration Ltd. within one year following the change of control, each of such
Named Executive Officers shall be entitled to a sum of money equal to one and one-half year’s
salary plus one additional month’s salary for each one year of completed service past October 1,
2004 (to a maximum of an additional six months salary), the average of his last two annual bonuses
and an amount of benefits equal to the number of months for which salary was paid in respect of the
change of control.

In addition, in the event of a change of control, each Named Executive Officer’s unvested
Performance Units granted under the Performance Unit Incentive Plan shall become fully vested and
be paid out based upon performance at the time.

In respect of the employment agreements of Messrs. Savidant, Soules and Myers, a change of control
occurs upon the happening of any of the following: (i) the acceptance by the holders of Trust
Units representing more than 35% of the Trust Units of any offer for all Trust Units; (ii) the
acquisition, by whatever means, of ownership or control of more than 35% of the Trust Units; (iii)
the sale by Esprit of all or substantially all of its assets; (iv) the approval by the Board of
Trustees or Unitholders to substantially liquidate the assets of Esprit or wind-up Esprit’s
business or significantly rearrange the affairs of Esprit in one or more transactions or series of
transactions; (v) individuals who were proposed as nominees to become members of the Board of
Trustees immediately prior to a meeting of Unitholders involving a contest for or an item of
business relating to the election of trustees, not constituting a majority of the Board of Trustees
following such election; (vi) the resignation of any three independent members of the Board of
Trustees on or about the same time; and (vii) any other event which in the opinion of the Board of
Trustees reasonably constitutes a change of control. Additionally, a change of control shall also
be deemed to have occurred upon a change of control in Esprit Exploration Ltd. in comparable
circumstances to those set out for the Trust.

In respect of the employment agreements of Messrs. Connors, Jerome and St. Clair, a change of
control occurs upon the happening of any of the following: (i) the acceptance by the holders of
Trust Units representing more than 35% of the Trust Units of any offer for all Trust Units,
provided that no change of control shall have occurred if upon completion of such transaction
individuals who were members of the Board of Trustees immediately prior to such transaction
constitute a majority of the Board of Trustees following such transaction; (ii) the acquisition, by
whatever means, of ownership or control of more than 35% of the Trust Units; (iii) the sale by
Esprit of all or substantially all of its assets; (iv) the approval by the Board of Trustees or
Unitholders to substantially liquidate the assets of Esprit or wind-up Esprit’s business or
significantly rearrange the affairs of Esprit in one or more transactions or series of
transactions; (v) individuals who were proposed as nominees to become members of the Board of
Trustees immediately prior to a meeting of Unitholders involving a contest for or an item of
business relating to the election of trustees,

 

13

not constituting a majority of the Board of Trustees following such election; and (vi) any other
event which in the opinion of the Board of Trustees reasonably constitutes a change of control.

Composition of the Human Resources and Corporate Governance Committee

The Human Resources and Corporate Governance Committee is a committee of the Board of Directors and
reports to that full board on, among other things, executive compensation matters.

The members of the Human Resources and Corporate Governance Committee for the year ended December
31, 2005 and presently are John E. Panneton (Chair), Donald R. Gardner, Eric L. Schwitzer and
Douglas W. Palmer (member since February 2005). Mr. Donald R. Gardner served as Chief Financial
Officer of Esprit Exploration Ltd. from December, 1999 until May, 2002.

Report on Executive Compensation

The Human Resources and Corporate Governance Committee monitored the executive compensation
arrangements for Esprit Exploration Ltd. and its subsidiaries during 2005 as well as approving an
overall “compensation philosophy” for the entire organization. In general, the Human Resources and
Corporate Governance Committee considers and makes recommendations to the Board of Directors
regarding the compensation arrangements for executive officers, including salaries, benefits, the
establishment of bonus targets and allocations of bonuses and grants of Performance Units under the
Performance Unit Incentive Plan, in each case taking into account information obtained by the Human
Resources and Corporate Governance Committee independently. The philosophy of the Human Resources
and Corporate Governance Committee is to attempt to ensure that the compensation of senior
executives provides a competitive base compensation package and a strong link between corporate
performance and compensation, in order to attract, retain and motivate highly qualified personnel.
By placing more emphasis on variable compensation, a greater portion of the compensation of the
executive officers is at risk and dependent upon increases in Esprit’s performance and Trust Unit
price.

     Base Salaries and Benefits

In determining the remuneration of the executive officers of Esprit Exploration Ltd., the Human
Resources and Corporate Governance Committee utilized industry assessments and competitive data for
comparable-sized trusts within the oil and gas sector, from industry surveys. The Human Resources
and Corporate Governance Committee considered the long-term interests and financial objectives of
Esprit as well as individual performance and achievement. The group life, short-term disability,
long-term disability, health and dental benefit plans of Esprit Exploration Ltd. are comparable to
industry peers and are available to all permanent employees.

     Bonuses

The annual cash bonus program of Esprit Exploration Ltd. is based on a set of performance targets
measured against both relative and absolute performance criteria. The Board of Directors approves
the performance criteria at the beginning of each financial year. The criteria include: production
growth; reserve replacement; finding, development and acquisition costs; pricing; operating costs
and general and administrative costs. The bonus program is available to reward those employees who
have made a contribution toward an increase in Unitholder value. The allocation of bonuses to the
executive officers and other employees of Esprit Exploration Ltd. is made by taking into account
salary and position and individual, team and department performance in relation to Esprit’s
industry peers. Subsequent to year end, a total of $1,200,000 was paid to employees under the cash
bonus program for recognition of corporate and individual performance in 2005.

     Performance Unit Incentive Plan

There were 526,901 Performance Units awarded under the Performance Unit Incentive Plan in 2005.
Future awards will be considered by the Board of Directors on the recommendation of the President
and Chief Executive Officer and the Human Resources and Corporate Governance Committee. Awards of
Performance Units under the Performance Unit Incentive Plan to the President and Chief Executive
Officer will be considered by the Board of Directors on the recommendation of the Human Resources
and Corporate Governance Committee. 2005 was the first year in which Performance Units were
granted. The outstanding Performance Units held by any given grantee are not a factor in
determining whether and how many new Performance Units are granted to that grantee.

     Employee Unit Savings Plan

An additional element of the compensation program of Esprit Exploration Ltd. is the employee unit
savings plan (the “EUSP”), which is available to all officers and employees. Each of the Named
Executive Officers participate in the EUSP.

 

14

Participants may contribute up to 5% of their monthly base salary to the EUSP. In 2005, Esprit
matched the participant’s contributions up to a maximum of 5% of the participant’s base salary.
All of Esprit Exploration Ltd.’s contributions are used to purchase Trust Units in a RRSP account
in the participant’s name. The participant’s contributions are used to purchase the Trust Units or
a variety of other investment options. If the participant does not have adequate room in his or
her RRSP then the units are purchased in a non-RRSP account. In determining contribution levels to
the EUSP, Esprit Exploration Ltd. considers the fact that it does not have a pension plan.
Effective January 1, 2006, Esprit Exploration Ltd. increased the matching component of its EUSP
such that Esprit will match 150% of each participant’s contributions up to a maximum of 6% of the
participant’s base salary.

Purchases of Trust Units with Esprit Exploration Ltd.’s contributions under the EUSP are made by a
trustee in the open market through the Toronto Stock Exchange. All or any portion of participant
contributions under the EUSP may, at the option of Esprit Exploration Ltd., be used to purchase
Trust Units directly from treasury at the then current market price, as an alternative to the
trustee purchasing Trust Units in the open market through the Toronto Stock Exchange.

The foregoing report on Executive Compensation is submitted by the Human Resources and Corporate
Governance Committee on behalf of the Board of Directors.

John E. Panneton (Chair)

Donald R. Gardner

Eric L. Schwitzer

Douglas W. Palmer

Performance Graph

The following graph and table compare the yearly percentage change (converted into a fixed
investment) in the cumulative Unitholder return on the Trust Units (assuming a $100 investment was
made on October 5, 2004 and assuming the reinvestment of distributions) with the cumulative total
return of the S&P TSX Composite Index for the period which commenced on October 5, 2004 and ended
on December 31, 2005, assuming reinvestment of dividends.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Cumulative Total Return
	 	 	October 5, 2004	 	December 31, 2004	 	December 31, 2005
	Esprit Energy Trust
	 	$	100	 	 	$	100	 	 	$	118	 
	S&P TSX Composite Index
	 	$	100	 	 	$	105	 	 	$	128	 

Compensation of Trustees

Each non-employee trustee of Esprit, other than the Chairman of the Board of Trustees, receives an
annual fee of $20,000. The Chairman of the Board of Trustees receives an aggregate annual fee of
$50,000. In addition, the Chairman of the Audit Committee receives an annual fee of $10,000 and
the Chairman of the Human Resources and Corporate Governance Committee receives an annual fee of
$7,000. Members of each committee, excluding the chair, receive an annual retainer of $3,000.

Each non-employee trustee of Esprit, receives a fee of $1,500 for each Board meeting attended and a
fee of $1,500 for each committee meeting attended. Non-employee trustees residing outside of
Calgary, Alberta also receive a $1,000 attendance fee per trip. Trustees are reimbursed for actual
expenses

 

15

reasonably incurred in connection with the performance of their duties as trustees.

For the fiscal year ended December 31, 2005, the aggregate compensation paid or payable to trustees
of Esprit and directors of Esprit Exploration Ltd. in respect of meetings of the Board of Trustees,
the Board of Directors and the committees thereof was $447,250.

Trust Unit Ownership Guidelines for Trustees

The Board of Trustees has established Trust Unit ownership guidelines for the trustees of Esprit.
The guideline level of ownership is 12,500 Trust Units for each trustee within three years of their
appointment. As at the date hereof, each of the trustees are in compliance with the Trust Unit
ownership guidelines.

EQUITY COMPENSATION PLAN INFORMATION

Under the Performance Unit Incentive Plan, the Board of Directors may from time to time
designate trustees of Esprit and directors, officers, employees of, or providers of services to,
Esprit Exploration Ltd. to whom Performance Units of Esprit may be granted
and the number of Performance Units to be granted to each. The following table sets forth certain
information with respect to equity compensation plans of the Trust under which Units are authorized
for issuance as at December 31, 2005.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Number of Units to	 	 	 	 	 	Number of Units
	 	 	be issued upon	 	Weighted-average	 	remaining available
	 	 	exercise of	 	exercise price of	 	for future issuance
	 	 	outstanding options,	 	outstanding options,	 	under equity
	Plan Category	 	warrants and rights	 	warrants and rights	 	compensation plans
	Equity compensation plans approved by Unitholders
	 	 	N/A	 	 	 	N/A	 	 	 	3,330,555	(1)
	Equity compensation plans not approved by Unitholders
	 	Nil	 	 	N/A	 	 	Nil
	Total
	 	 	N/A	 	 	 	N/A	 	 	 	3,330,555	(1)

			

	Note:
	(1)	 	As at December 31, 2005, an aggregate of 3,330,555 Trust Units were reserved for issuance
under the Performance Unit Incentive Plan, being a number equal to 5% of the number issued and
outstanding Trust Units at such time (including Trust Units issuable on the exchange of
Exchangeable Shares). Payouts under Performance Units granted under the Performance Unit
Incentive Plan are determined based upon performance results evaluated at the time of payout
against pre-selected Performance Measures, which payouts may be satisfied by Esprit through
the issuance of Trust Units. Therefore, the aggregate number of Trust Units issuable under
the terms of outstanding Performance Units may not be determined until the time of payout,
although under the terms of the Performance Unit Incentive Plan the aggregate number of Trust
Units issuable may not exceed the number reserved under the Performance Unit Incentive Plan at
such time.

INDEBTEDNESS OF TRUSTEES AND EXECUTIVE OFFICERS

Aggregate Indebtedness

The following table sets forth the aggregate indebtedness of all executive officers, directors,
employees and former executive officers, directors and employees to Esprit, Esprit Exploration Ltd.
or any of their subsidiaries outstanding as at March 15, 2006.

	 	 	 	 	 	 	 	 	 
	 	 	Aggregate Indebtedness ($)
	                Purpose	 	To Esprit or its Subsidiaries	 	To Another Entity
	Security purchases
	 	 	414,999.33	(1)	 	Nil
	Other
	 	Nil	 	Nil

			

	Note:
	(1)	 	The amount of indebtedness relates to loans granted to a former executive of Esprit
Exploration Ltd. who resigned in June 2000 for share purchases between 1993 and 1999. It is
no longer Esprit’s practice to make loans to its employees for purchase of shares.

INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS

Other than as discussed herein, there are no material interests, direct or indirect, of
trustees of Esprit, directors, executive officers or senior officers of Esprit Exploration Ltd., or
any Unitholder who beneficially owns, directly or indirectly, more than 10% of the outstanding
Trust Units or any known associate or affiliate of such persons, in any transaction since the
commencement of Esprit’s most

 

16

recently completed financial year or in any proposed transaction which has materially affected or
would materially affect Esprit or Esprit Exploration Ltd.

STATEMENT OF CORPORATE GOVERNANCE PRACTICES

The Board of Trustees and the Board of Directors (together, the “Board”) recognize that
effective corporate governance is critical to the continued and long-term success of Esprit by
helping to maximize Unitholder value over time. Esprit continues to update and modify its
governance practices, and has recently done so with respect to the matters addressed by National
Instrument 58-101 Disclosure of Corporate Governance Practices (“NI 58-101”) and National Policy
58-201 Corporate Governance Guidelines, as adopted by the Canadian Securities Administrators with
an effective date of June 30, 2005.

The governance policies and practices of Esprit have been developed under the guidance of the Human
Resources and Corporate Governance Committee of the Board of Directors. The Human Resources and
Corporate Governance Committee continuously reviews the governance policies and practices of Esprit
to ensure that Esprit complies with all applicable legal requirements.

A description of Esprit’s governance practices and policies with reference to the items set forth
in NI 58-101 is attached hereto as

 Appendix “A”.

Mandates and Composition of the Board

The Board of Trustees and Board of Directors are comprised of the same members. The Board of
Trustees and Board of Directors are each comprised of eight members, a size that Esprit believes is
commensurate with the complexity of Esprit’s business.

The Board of Trustees is responsible for the stewardship and the affairs of Esprit. The Board of
Trustees seeks to discharge such responsibility by reviewing and discussing Esprit’s investment in
Esprit Exploration Ltd., and monitoring the stewardship of the Board of Directors. The Board of
Trustees is responsible for establishing and maintaining a culture of integrity in the conduct and
affairs of Esprit, with the best interests of Esprit being the paramount concern. The
responsibilities and obligations of the Board of Trustees are set forth in a written mandate of the
Board of Trustees, a copy of which is attached hereto as Appendix “B”. The Board of Trustees
annually reviews its mandate and considers changes as appropriate.

The Board of Trustees is composed of eight members. Six of the eight persons nominated for
election to the Board of Trustees at the Meeting, Messrs. D. Michael G. Stewart, Donald R. Gardner,
John E. Panneton, Eric L. Schwitzer, W. Mark Schweitzer and Douglas W. Palmer are considered to be
independent trustees. For further information in this regard, see Appendix “A” hereto.

The Board of Directors’ fundamental objectives are to enhance and preserve long-term shareholder
value and, as a result, Unitholder value, and to ensure Esprit Exploration Ltd. meets its
obligations on an ongoing basis and that it operates in a reliable and safe manner. The mandate of
the Board of Directors, as prescribed by corporate statute, is to manage or supervise the
management of the business and affairs of Esprit Exploration Ltd., and to act honestly and in good
faith with a view to the best interests of Esprit Exploration Ltd. In performing its functions,
the Board of Directors also considers the legitimate interests its other stakeholders, such as
employees and communities, may have in Esprit Exploration Ltd. and Esprit. In broad terms, the
Board of Directors is involved in strategic planning, financial reporting, risk management and risk
mitigation, composition of senior management, communication planning and internal control
integrity. The responsibilities and obligations of the Board of Directors are set forth in a
written mandate of the Board of Directors, a copy of which is attached hereto as Appendix “C”. The
Board of Directors annually reviews its mandate and considers changes as appropriate.

The Board of Directors is composed of eight members. Persons elected to the Board of Trustees at
the Meeting will also be appointed to the Board of Directors. Six of the eight persons nominated
for election to the Board of Trustees at the Meeting, who if elected will also be appointed to the
Board of Directors, Messrs. D. Michael G. Stewart, Donald R. Gardner, John E. Panneton, Eric L.
Schwitzer, W. Mark Schweitzer and Douglas W. Palmer are considered to be independent directors.
For further information in this regard, see Appendix “A” hereto.

Committees of the Board and Composition

The standing committees of the Board of Trustees and Board of Directors are an integral part of
governance structure of Esprit as they facilitate effective board decision-making by providing

 

17

recommendations on matters within their respective responsibilities. The Board of Trustees has one
committee, the Audit Committee, and the Board of Directors has one committee, the Human Resources
and Corporate Governance Committee. Each committee consists of a minimum of three trustees or
directors, as applicable, and there is a requirement that all committee members shall be
independent. One member of each committee is designated as Chair. Each member of the Audit
Committee is required to be “financially literate” (i.e., possess the ability to read and
understand financial statements). The Boards give consideration to the periodic rotation of
membership of each committee and, from time to time as the Boards see fit, chairmanship of the
committees.

     Audit Committee

The Audit Committee has been established to assist the Board of Trustees of Esprit in carrying out
its oversight responsibility for Esprit’s and its subsidiaries’ and affiliates’ internal controls,
financial reporting and risk management processes. The Audit Committee has unrestricted access to
personnel and documents and is provided with the resources necessary to carry out its
responsibilities. The Audit Committee and the external auditors meet at least quarterly without
the presence of Esprit management to review any areas of material disagreement between management
and the external auditors or other issues of concern, including assessing the cooperation received
by the auditors in the conduct of their audit and their access to all requested records, data and
information. As necessary or desirable, any member of the Audit Committee may also request that
the external auditors be present at any other meetings of the Audit Committee.

The responsibilities and obligations of the Audit Committee are set forth in a written mandate, a
copy of which is attached hereto as Appendix “D”. The Audit Committee annually reviews its mandate
and considers changes as appropriate.

The Audit Committee is currently comprised of Messrs. W. Mark Schweitzer (Chair), Donald R.
Gardner, Eric L. Schwitzer and Douglas W. Palmer, each of whom is independent and financially
literate. The Chair of the Board of Trustees is ex officio a member of the Audit Committee.

A description of certain matters relating to the Audit Committee is set forth under the heading
“Audit Committee Matters” in the AIF, a copy of which is available on the Canadian System for
Electronic Document Analysis and Retrieval (SEDAR) website at
www.sedar.com.

     Human Resources and Corporate Governance Committee

The Human Resources and Corporate Governance Committee has been established to assist the Board of
Directors in reviewing and making recommendations to the Board of Directors in respect of (i) human
resource policies, practices and structures; (ii) matters related to corporate governance, (iii)
the nomination of candidates for election to the Board; and (iv) matters related to the
compensation of executive officers of the Corporation and members of the Board.

The responsibilities and obligations of the Human Resources and Corporate Governance Committee are
set forth in a written mandate, a copy of which is attached hereto as Appendix “E”. The Human
Resources and Corporate Governance Committee annually reviews its mandate and considers changes as
appropriate.

The Human Resources and Corporate Governance Committee is currently comprised of Messrs. John E.
Panneton (Chair), Donald R. Gardner, Eric L. Schwitzer and Douglas W. Palmer, each of whom is
independent. The Chair of the Board of Directors is ex officio a member of the Human Resources and
Corporate Governance Committee.

Meetings of the Board and the Committees

Each of the Board of Trustees and the Board of Directors meet in person at least five times
annually. In addition to regular quarterly meetings, once per year the Board of Trustees and Board
of Directors meet with the management team for two days of business discussions and strategy
planning. The Board of Trustees and Board of Directors hold additional unscheduled meetings from
time-to-time as business needs require. The Board of Trustees held 12 meetings in Esprit’s last
financial year, eight times in person and four times by telephone conference call. The Board of
Directors held 19 meetings in Esprit’s last financial year, 10 times in person and nine times
by telephone conference call.

Regular meetings of the committees are held throughout the year as required, and the Audit
Committee meets at least four times per year in conjunction with the review and approval of annual
and quarterly financial statements, management discussion and analysis and reports to Unitholders.
Each committee can hold unscheduled additional meetings from time to time as business needs require
or as may be requested by a member of the Board of Trustees or Board of Directors. The Audit
Committee held seven meetings in Esprit’s last

 

18

financial year, five times in person and two times by telephone conference call. The Human
Resources and Corporate Governance Committee held seven meetings in Esprit’s last financial year,
five times in person and two times by telephone conference call.

The following table reflects the attendance of each of the trustees/directors for the year ended
December 31, 2005 for meetings of the Board of Trustees and Board of Directors and committees of
which each was a member.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Number of Meetings Attended
	 	 	Board	 	Board	 	 
	 	 	of	 	of	 	 
	Trustee/Director	 	Trustees	 	Directors	 	Committee
	D. Michael G. Stewart
	 	 	12/12	 	 	 	19/19	 	 	 	13/14	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Donald R. Gardner
	 	 	11/12	 	 	 	19/19	 	 	 	14/14	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	John E. Panneton
	 	 	12/12	 	 	 	18/19	 	 	 	7/7	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Eric L. Schwitzer
	 	 	12/12	 	 	 	18/19	 	 	 	14/14	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	W. Mark Schweitzer(1)
	 	 	9/10	 	 	 	17/18	 	 	 	5/5	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Douglas W. Palmer(1)
	 	 	10/10	 	 	 	16/18	 	 	 	11/11	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Stephen J. Savidant
	 	 	12/12	 	 	 	19/19	 	 	 	N/A	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Stephen B. Soules
	 	 	12/12	 	 	 	19/19	 	 	 	N/A	 

			

	Note:
	(1)	 	Messrs. Schweitzer and Palmer were appointed to the Board of Trustees and Board of Directors
on February 16, 2005 and their attendance is for those meetings held after their appointment.

Code of Business Ethics

Esprit has adopted a Code of Business Ethics and Conduct (the “Code”), which applies to all
trustees of Esprit and directors, officers, employees and consultants of Esprit Exploration Ltd.
The Code affirms Esprit’s policy that the conduct of every trustee, director, officer, employee and
consultant is based upon the highest ethical standards. The Code also contains Esprit’s “whistle
blower” policy, which sets forth the procedure for individuals to make complaints regarding
accounting and financial reporting matters or any other matter on a confidential and anonymous
basis. Complaints regarding accounting and financial reporting matters are handled by the Chair of
the Audit Committee, an independent member of the Board of Trustees, and complaints other than
accounting and financial reporting matters are handled by the appropriate senior officer of Esprit.
Complaints relating to matters other than accounting and financial reporting but involving a
senior officer of Esprit Exploration Ltd. are handled by the Chairman of the Board of Trustees, who
is also an independent member of the board. Every trustee, director, officer employee and
consultant is required to sign and acknowledge their compliance with the Code. Each quarter,
management reports to the Audit Committee as to whether there has been any breaches of the Code or
reports under the “whistle blower” policy. A copy of the Code is available on the SEDAR website at
www.sedar.com.

ADDITIONAL INFORMATION

Additional information relating to Esprit is available on the SEDAR website at
www.sedar.com. Financial information of Esprit is provided in the comparative financial statements
and management discussion and analysis of Esprit for the most recently completed financial year.
Copies of the financial statements, management discussion and analysis and annual information form
of Esprit may be obtained from the Secretary of Esprit at Suite 900, 606 – 4th Street S.W.,
Calgary, Alberta T2P 1T1 or by facsimile at (403) 213-3735.

 

	APPENDIX “A”	 	STATEMENT OF CORPORATE GOVERNANCE PRACTICES

The governance practices of Esprit in relation to the disclosure requirements of NI 58-101, taking
into account the particular structure of Esprit, are set out below.

	 	 	 	 	 	 	 	 	 
	Governance Disclosure Guideline under NI 58-101	 	Governance Procedures at Esprit
	1.	 	Board of Trustees and Board of Directors	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	(a)	 	Disclose the identity of
Trustees/Directors who are independent.	 	Messrs. D. Michael G. Stewart, Donald R. Gardner, John E. Panneton,
Eric L. Schwitzer, W. Mark Schweitzer and Douglas W. Palmer are
independent Trustees/Directors.
	 
	 	 	 	 	 	 	 	 
	 	 	(b)	 	Disclose the identity of
Trustees/Directors who are not independent,
and describe the basis for that
determination.	 	Messrs. Savidant and Soules, current Trustees/Directors, and Mr.
Myers, a nominee for election as a Trustee/Director, are not
independent Trustees/Directors due to their positions as officers
of the Corporation.
	 
	 	 	 	 	 	 	 	 
	 	 	(c)	 	Disclose whether or not a majority of
Trustees/Directors are independent. If a
majority of Trustees/Directors are not
independent, describe what the Board does to
facilitate its exercise of independent
judgment in carrying out its
responsibilities.	 	A majority of the nominees to the Board of Trustees and Board of
Directors, specifically six of the eight members thereof, are
independent.
	 
	 	 	 	 	 	 	 	 
	 	 	(d)	 	If a Trustee or Director is presently a
trustee or director of any other issuer that
is a reporting issuer (or the equivalent) in
a jurisdiction or a foreign jurisdiction,
identify both the Trustee/Director and the
other issuer.	 	The following Trustees and Directors currently serve on the board
of the reporting issuers (or equivalent) listed below1:
	 

	 	 	 	 	 	D. Michael G. Stewart:
	 	Canadian Energy Services Inc. (managing
partner of Canadian Energy Services L.P.)
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Donald R. Gardner:
	 	Intermap Technologies Corporation

Canadian Spirit Resources Inc.
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	John E. Panneton:
	 	Viceroy Homes Limited
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Eric L. Schwitzer:
	 	Versacold Income Fund
	 

	 	 	 	 	 	 	 	SNP Health Split Corp.
	 

	 	 	 	 	 	 	 	SNP Split Corp.

Pitchstone Exploration Ltd.
	 
	 	 	 	 	 	 	 	 
	 	 	(e)	 	Disclose whether or not the independent
Trustees/Directors hold regularly scheduled
meetings at which members of management are
not in attendance. If the independent
Trustees/Directors hold such meetings,
disclose the number of meetings held during
the preceding 12 months. If the independent
Trustees/Directors do not hold such
meetings, describe what the board does to
facilitate open and candid discussion among
its independent Trustees/Directors.	 	Following each meeting, the Board conducts “in camera” sessions, at
which members of management are not in attendance. As such, the
number of in camera meetings held during the preceding 12 months is
equal to the number of Board meeting held during such time as set
forth under “Statement of Corporate Governance Practices — Meetings
of the Board and the Committees” in the Information Circular.

All of the members of the committees of the Board are independent
Directors/Trustees and management is not present for a portion of
each of such meetings. The number of committee meetings held
during the preceding 12 months is set forth under “Statement of
Corporate Governance Practices — Meetings of the Board and the
Committees” in the Information Circular.
	 
	 	 	 	 	 	 	 	 
	 	 	(f)	 	Disclose whether or not the chair of the
Board is independent. If the Board has a
chair or lead Trustee/Director who is an
independent Trustee/Director, disclose the
identity of the independent chair or lead
Trustee/Director, and describe his or her
role and responsibilities. If the Board has
neither a chair that is independent nor a
lead Trustee/Director that is independent,
describe what the Board does to provide
leadership for its independent
	 	Mr. D. Michael G. Stewart, the Chair of each of the Board of
Trustees and the Board of Directors, is independent. The role and
responsibilities of the Chair of the Board of Trustees and the
Board of Directors is described in the Chair’s position
description, which is available on the SEDAR website at www.sedar.com.

 

			
	1	 	Unless otherwise indicated, all issuers noted
above are reporting issuers in one or more Canadian Jurisdictions.

 

 

A-2

	 	 	 	 	 	 	 
	 

	 	
	 	Trustees/Directors.

	 
	 

	 	(g)
	 	Disclose the attendance record of each
Trustee/Director for all Board meetings held
since the beginning of the issuer’s most
recently completed financial year.
	 	The attendance record of each Trustee/Director for all Board
meetings held during the year ended December 31, 2005 is disclosed
under “Statement of Corporate Governance Practices — Meetings of
the Board and the Committees” in the Information Circular.
	 
	 	 	 	 	 	 
	2.	 	Mandates of the Board of Trustees and the Board
of Directors	 	 
	 
	 	 	 	 	 	 
	 	 	Disclose the text of the Boards’ written
mandates. If the Board does not have a
written mandate, describe how the Board
delineates its role and responsibilities.	 	The mandate of the Board of Trustees is attached as Appendix “B” to
the Information Circular. The mandate of the Board of Directors is
attached as Appendix “C” to the Information Circular.
	 
	 	 	 	 	 	 
	3.	 	Position Descriptions	 	 
	 
	 	 	 	 	 	 
	 

	 	(a)
	 	Disclose whether or not the Board has
developed written position descriptions for
the chair and the chair of each Board
committee. If the Board has not developed
written position descriptions for the chair
and/or the chair of each Board committee,
briefly describe how the board delineates
the role and responsibilities of each such
position.
	 	The Boards have developed written position descriptions for the
Chair of the Board of Trustees and Board of Directors and the Chair
of each committee of the Board, specifically the Audit Committee
and the Human Resources and Corporate Governance Committee.
	 
	 	 	 	 	 	 
	 

	 	(b)
	 	Disclose whether or not the Board and
CEO have developed a written position
description for the CEO. If the Board and
CEO have not developed such a position
description, briefly describe how the Board
delineates the role and responsibilities of
the CEO.
	 	The Board has developed a written position description for the CEO.
	 
	 	 	 	 	 	 
	4.	 	Orientation and Continuing Education	 	 
	 
	 	 	 	 	 	 
	 

	 	(a)
	 	Briefly describe what measures the Board
takes to orient new trustees regarding (i)
the role of the Board, its committees and
its Trustees/Directors, and (ii) the nature
and operation of the issuer’s business.
	 	Senior management of Esprit oversees an orientation program for new
Trustees and Directors, which provides an overview of Esprit’s
history and development, a discussion regarding personnel matters,
an examination of Esprit’s assets and financial position, and a
review of the Trust’s strategy and execution, as well as
significant issues facing the business.

Esprit has developed a Board manual containing Esprit’s public
disclosure documents, meeting minutes, written policies and
guidelines and relevant business and operational information. The
manual is updated as required.
	 
	 	 	 	 	 	 
	 

	 	(b)
	 	Briefly describe what measures, if any,
the Board takes to provide continuing
education for its Trustees/Directors. If
the Board does not provide continuing
education, describe how the board ensures
that its Trustees/Directors maintain the
skill and knowledge necessary to meet their
obligations as Trustees/Directors.
	 	Esprit undertakes ongoing education efforts that include regular
briefings from management on industry and market developments. The
Board is also provided with information and briefings on new
regulations and legislation respecting accounting and forecast
standards and reporting and disclosure requirements. Furthermore,
each director has a budget for external educational initiatives.
	 
	 	 	 	 	 	 
	5.	 	Ethical Business Conduct	 	 
	 
	 	 	 	 	 	 
	 

	 	(a)
	 	Disclose whether or not the Board has
adopted a written code for the
Trustees/Directors, officers and employees.
If the Board has adopted a written code: (i)
disclose how a person or company may obtain
a copy of the code; (ii) describe how the
Board monitors compliance with its code, or
if the Board does not monitor compliance,
explain whether and how the Board satisfies
itself regarding compliance with its code;
and (iii) provide a cross-reference to any
material change report filed since the
beginning of the issuer’s most
	 	The Board has developed a Code of Business Ethics and Conduct,
which is available on the SEDAR website at www.sedar.com. The Code
of Business Ethics and Conduct, including the manner in which the
Board monitors compliance with the code, is described under
“Statement of Corporate Governance Practices — Code of Business
Ethics” in the Information Circular.

 

 

A-3

	 	 	 	 	 	 	 
	 

	 	 	 	recently completed financial year that pertains
to any conduct of a trustee or executive
officer that constitutes a departure from the code.	 	 
	 
	 	 	 	 	 	 
	 

	 	(b)
	 	Describe any steps the Board takes to
ensure Trustees/Directors’ independent
judgment in considering transactions and
agreements in respect of which a
Trustee/Director or executive officer has
material interest.
	 	Esprit’s Code of Business Ethics and Conduct provides that
Trustees/Directors should not enter into any transaction or engage
in any practice directly or indirectly, which would tend to
influence him or her to act in any manner other than in the best
interests of the Corporation.

In those circumstances where a Trustee/Director has a direct or
indirect interest in a material contract or material transaction
which involves the Corporation, the Director is subject to the
requirements of the Canada Business Corporations Act and further
required by the Code of Business Ethics and Conduct to declare
their interest and abstain from voting on the contract or
transaction.
	 
	 	 	 	 	 	 
	 

	 	(c)
	 	Describe any other steps the Board takes
to encourage and promote a culture of
ethical business conduct.
	 	Officers and employees of Esprit are required, upon commencement of
their employment, to certify compliance with Code of Business
Ethics and Conduct. Esprit also conducts reference checks on new
employees and conducts thorough interviews prior to hiring any new
employees.
	 
	 	 	 	 	 	 
	6.	 	Nomination of Trustees/Directors	 	 
	 
	 	 	 	 	 	 
	 

	 	(a)
	 	Describe the process by which the Board
identifies new candidates for Board
nomination.
	 	The Human Resources and Corporate Governance Committee serves as
the nominating committee of the Board. The Human Resources and
Corporate Governance Committee identifies potential candidates and
reviews the qualifications of potential candidates for the Board.
In particular, the Human Resources and Corporate Governance
Committee assesses, among other factors, industry experience,
functional expertise, financial literacy and expertise, board
experience and diversity of background. The Human Resources and
Corporate Governance Committee also considers potential conflicts
arising in connection with potential candidates for the Board.
Upon such review, and after conducting appropriate due diligence,
the Human Resources and Corporate Governance Committee makes
recommendations on candidates to the Board.
	 
	 	 	 	 	 	 
	 

	 	(b)
	 	Disclose whether or not the Board has a
nominating committee composed entirely of
independent Trustees/Directors. If the
Board does not have a nomination committee
composed entirely of independent
Trustees/Directors, describe what steps the
Board takes to encourage an objective
nomination process.
	 	The Human Resources and Corporate Governance Committee of the Board
of Directors serves as the nominating committee of the Board and is
composed of four independent Directors.
	 
	 	 	 	 	 	 
	 

	 	(c)
	 	If the Board has a nomination committee,
describe the responsibilities, powers and
operation of the nominating committee.
	 	The Human Resources and Corporate Governance Committee has been
established to assist the Board of Directors in reviewing and
making recommendations to the Board of Directors in respect of,
among other things, the nomination of candidates for election to
the Board. The Human Resources and Corporate Governance Committee
is composed of three independent Directors.

For further information concerning the responsibilities, powers and
operation of the Human Resources and Corporate Governance
Committee, see “Statement of Corporate Governance Practices -
Committees of the Board and Composition” and the text of the
mandate of the Human Resources and Corporate Governance Committee
attached as Appendix “E” to the Information Circular.
	 
	 	 	 	 	 	 
	7.	 	Compensation	 	 
	 
	 	 	 	 	 	 
	 

	 	(a)
	 	Describe the process by which the Board
determines the compensation for the issuer’s
Trustees/Directors and officers.
	 	The Human Resources and Corporate Governance Committee serves as
the compensation committee of the Board. The Human Resources and
Corporate Governance Committee is responsible for the Corporation’s
approach to human resource issues, including the compensation of
Trustees/Directors and officers and makes recommendations to the
Board

 

 

A-4

	 	 	 	 	 	 	 
	 

	 	 	 	 	 	of Directors in those matters. In serving this function, the
Human Resources and Corporate Governance Committee surveys the
compensation levels of Esprit’s peers on an ongoing basis and
obtains the advice of industry consultants from time to time.
	 
	 	 	 	 	 	 
	 

	 	(b)
	 	Disclose whether or not the Board has a
compensation committee composed entirely of
independent Trustees/Directors. If the
Board does not have a compensation committee
composed entirely of independent
Trustees/Directors, describe what steps the
Board takes to ensure an objective process
for determining such compensation.
	 	The Human Resources and Corporate Governance Committee of the Board
of Directors serves as the compensation committee of the Board and
is composed of four independent Directors.
	 
	 	 	 	 	 	 
	 

	 	(c)
	 	If the Board has a compensation
committee, describe the responsibilities,
powers and operation of the compensation
committee.
	 	The Human Resources and Corporate Governance Committee has been
established to assist the Board of Directors in reviewing and
making recommendations to the Board of Directors in respect of,
among other things, matters related to the compensation of
executive officers of the Corporation and members of the Board.
The Human Resources and Corporate Governance Committee is composed
of four independent Directors.

For further information concerning the responsibilities, powers and
operation of the Human Resources and Corporate Governance
Committee, see “Statement of Corporate Governance Practices -
Committees of the Board and Composition” and the text of the
mandate of the Human Resources and Corporate Governance Committee
attached as Appendix “E” to the Information Circular.
	 
	 	 	 	 	 	 
	 

	 	(d)
	 	If a compensation consultant or advisor
has, at any time since the beginning of the
issuer’s most recently completed financial
year, been retained to assist in determining
compensation for any of the issuer’s
Trustees/Directors and officers, disclose
the identity of the consultant or advisor
and briefly summarize the mandate for which
they have been retained. If the consultant
or advisor has been retained to perform any
other work for the issuer, state that face
and briefly describe the nature of the work.
	 	Esprit did not retain any compensation consultant or advisor during
the year ended December 31, 2005.
	 
	 	 	 	 	 	 
	8.	 	Other Board Committees	 	 
	 
	 	 	 	 	 	 
	 	 	If the Board has standing committees other
than the audit, compensation and nominating
committees, identify the committees and
describe their function.	 	The Board does not have any standing committees other than the Audit Committee and the Human Resources and Corporate Governance
Committee. The Human Resources and Governance Committee also
serves the functions normally performed by a Compensation and
Nominating Committee.
	 
	 	 	 	 	 	 
	9.	 	Assessments	 	 
	 
	 	 	 	 	 	 
	 	 	Disclose whether or not the Board, its
committees and individual Trustees/Directors
are regularly assessed with respect to their
effectiveness and contribution. If
assessments are regularly conducted,
describe the process used for the
assessments. If assessments are not
regularly conducted, describe how the Board
satisfies itself that the Board, its
committees, and its individual trustees are
performing effectively.	 	The Human Resources and Corporate Governance Committee reviews the
effectiveness of the Board, its committees and individual
Trustees/Directors.

Under the direction of the Human Resources and Corporate Governance
Committee, Esprit has developed a Board effectiveness questionnaire
which is completed on an annual basis. The Human Resources and
Corporate Governance Committee reviews recommendations arising out
of the questionnaire and implements such changes arising therefrom
as it considers appropriate.

 

 

	 	 	 
	APPENDIX “B”

	 	MANDATE OF THE BOARD OF TRUSTEES

The term “Trust” herein shall refer to Esprit Energy Trust and the term “Board” shall refer to the
board of Trustees of the Trust.

The Board is responsible for the stewardship of the affairs of the Trust. The Board seeks to
discharge such responsibility by reviewing and discussing the Trust’s investments, and in
particular the Trust’s interest in Esprit Exploration Ltd. (“Esprit”), and monitoring the
stewardship of Esprit by Esprit’s board of directors.

The Board is responsible for establishing and maintaining a culture of integrity in the conduct of
the affairs of the Trust. The best interests of the Trust must be paramount at all times.

DUTIES OF TRUSTEES

The Board discharges its responsibilities directly and through an Audit Committee comprised of
certain of its members. The Board’s primary role is of overseeing the affairs of the Trust and its
principal duties include, but are not limited to the following categories:

Oversight of Trust

	1.	 	The Board has the responsibility for the overall management of the Trust, including
strategy and operations to ensure the long term success of the Trust and to maximize total
unitholder return.
	 
	2.	 	The Board’s responsibility includes ensuring that the Trust operates in accordance with
the terms of the Trust Indenture dated August 16, 2004 pursuant to which the Trust was
created, the Amended and Restated Trust Indenture dated September 30, 2004 and June 30, 2005,
and any further amendments or restatements thereof (collectively the “Trust Indenture”).
	 
	3.	 	The Board retains the responsibility for managing its own affairs by giving its
approval for its composition, the selection of the Chair of the Board, candidates nominated
for election to the Board, committee and committee chair appointments, committee mandates and
trustee compensation.
	 
	4.	 	The Board may delegate to committees or otherwise in accordance with the Trust
Indenture matters it is responsible for, including the approval of financial results, the
oversight of internal control systems and the approval of continuous disclosure documents, but
the Board retains its oversight function and ultimate responsibility for these matters and all
other delegated responsibilities.
	 
	5.	 	The Board is responsible for reviewing and approving material transactions involving
the Trust and those matters which the Board is required to approve under the Trust Indenture
including the establishment of the Trust’s distribution policy, the payment of distributions,
the purchase and issuance of units, acquisitions and dispositions of material assets by the
Trust and material expenditures by the Trust.

Monitoring of Performance of Esprit and Other Financial Reporting Matters

	1.	 	The Board will review and question the strategies and plans of Esprit. The Board is
responsible for considering appropriate measures it may take as an investor in Esprit if the
performance of Esprit falls short of its goals or if other special circumstances warrant.
	 
	2.	 	The Board may, in accordance with the Trust Indenture, delegate operational related
matters relating to Esprit to the board of directors of Esprit and has done so by virtue of an
Administration Agreement dated September 30, 2004 and, in respect of such delegation, the
Board shall monitor and oversee compliance with the terms of such Administration Agreement by
Esprit.
	 
	3.	 	The Board shall be responsible for approving the annual audited financial statements
and the notes thereto and management’s discussion and analysis accompanying such financial
statements and any press releases related thereto.

 

 

B-2

	4.	 	The Board shall be responsible for approving the quarterly unaudited financial
statements and the notes thereto and management’s discussion and analysis accompanying such
financial statements and any press releases related thereto.

Policies and Procedures

	1.	 	The Board is responsible for:

	 	(a)	 	approving and monitoring compliance with all significant policies and procedures by
which the Trust is operated;
	 
	 	(b)	 	approving policies and procedures designed to ensure that the Trust operates at all
times within applicable laws and regulations and to the highest ethical and moral
standards;
	 
	 	(c)	 	enforcing obligations of the trustees respecting confidential treatment of the
Trust’s proprietary information and Board deliberations; and
	 
	 	(d)	 	ensuring that individual trustees are appropriately prepared for meetings of the
Board and maintain an acceptable attendance record.

Communications and Reporting

	1.	 	The Board is responsible for:

	 	(a)	 	overseeing the accurate reporting of the financial performance of the Trust to
unitholders, other security holders and regulators on a timely and regular basis;
	 
	 	(b)	 	overseeing that the financial results are reported fairly and in accordance with
generally accepted accounting standards and related legal disclosure requirements;
	 
	 	(c)	 	ensuring the integrity of the internal control and management information systems
of the Trust;
	 
	 	(d)	 	taking steps to ensure the timely disclosure of any other developments that have a
significant and material impact on the Trust;
	 
	 	(e)	 	reporting annually to unitholders on its stewardship for the preceding year;
	 
	 	(f)	 	reviewing periodically the investor relations and communications strategy of the
Trust; and
	 
	 	(g)	 	overseeing the Trust’s implementation of systems which accommodate feedback from
unitholders. Unitholders wishing to communicate directly with the independent directors
may send private and confidential correspondence to Esprit Energy Group, suite 900, 606-4th
Street S.W., Calgary, Alberta, T2P 1T1, Attention: Chairman. Such correspondence will be
delivered, unopened, to the Chairman of the Board of Trustees.

 

 

	 	 	 
	APPENDIX “C”

	 	MANDATE OF THE BOARD OF DIRECTORS

Policy Statement

The Board of Directors (the “Board”) of Esprit Exploration Ltd. (the “Corporation”) has the
responsibility to oversee the conduct of the business of the Corporation and to oversee the
activities of management who are responsible for the day-to-day conduct of the business of the
Corporation.

Recognizing that the Corporation is wholly owned by Esprit Energy Trust (the “Trust”) and, pursuant
to the Administration Agreement dated September 30, 2004 between the Trust and the Corporation, the
Corporation has the responsibility to carry on the business of the Trust, the Board has adopted
this Mandate in furtherance of discharging its duties under such Administration Agreement.

Composition and Operation

The Board is to be constituted of a majority of individuals who qualify as unrelated directors. An
unrelated director is one who is independent of management and is free from any interest and any
business or other relationship which could or could reasonably be perceived to materially interfere
with the director’s ability to act with a view to the best interests of the Corporation or the
Trust other than interests and relationships arising from securityholdings of the Trust or the
Corporation.

The Board operates by delegating certain of its authorities to management and by reserving certain
powers to itself. The Board retains the responsibility of managing its own affairs including
selecting its Chairman, constituting committees of the full Board and determining compensation for
the directors. Subject to the Articles and By-Laws of the Corporation and the Canada Business
Corporations Act, the Board may constitute, seek the advice of and delegate powers, duties and
responsibilities to committees of the Board.

Responsibilities

The Board’s fundamental objectives are to enhance and preserve long-term shareholder and, as a
result, total unitholder return, to ensure the Corporation meets its obligations on an ongoing
basis (including payments on the outstanding notes from the Corporation to the Trust) and that the
Corporation operates in a reliable and safe manner. In performing its functions, the Board should
also consider the legitimate interests its other stakeholders such as employees, customers and
communities may have in the Corporation and the Trust. In broad terms, the stewardship of the
Corporation involves the Board in strategic planning, financial reporting, risk management and
mitigation, composition of senior management, communication planning and internal control
integrity.

Specific Duties

	1.	 	Legal Requirements

	 	(a)	 	The Board has the oversight responsibility for meeting the Corporation’s legal
requirements and for properly preparing, approving and maintaining the Corporation’s
documents and records.
	 
	 	(b)	 	The Board has the statutory responsibility to:

	 	(i)	 	manage the business and affairs of the Corporation;
	 
	 	(ii)	 	act honestly and in good faith with a view to the best interests of the
Corporation;
	 
	 	(iii)	 	exercise the care, diligence and skill that responsible, prudent people would
exercise in comparable circumstances; and
	 
	 	(iv)	 	act in accordance with its obligations contained in the Canada Business
Corporations Act and the regulations thereto, the Articles and By-Laws of the
Corporation, and other relevant legislation and regulations.

	 	(c)	 	The Board has the statutory responsibility for considering the following matters
(where applicable) as a full Board which in law may not be delegated to management or to a
committee of the Board:

 

 

C-2

	 	(i)	 	any submission to the shareholders of a question or matter requiring the
approval of the shareholders;
	 
	 	(ii)	 	the filling of a vacancy among the Directors;
	 
	 	(iii)	 	the issuance of securities;
	 
	 	(iv)	 	the declaration of dividends;
	 
	 	(v)	 	the purchase, redemption or any other form of acquisition of shares issued by
the Corporation;
	 
	 	(vi)	 	the payment of a commission to any person in consideration of his/her
purchasing or agreeing to purchase shares of the Corporation from the Corporation or
from any other person, or procuring or agreeing to procure purchasers for any such
shares;
	 
	 	(vii)	 	the approval of management proxy circulars; and
	 
	 	(viii)	 	the approval of any take-over bid circular or directors’ circular.

	2.	 	Independence
	 
	 	 	The Board shall have the responsibility to:

	 	(a)	 	implement appropriate structures and procedures to permit the Board to function
independently of management;
	 
	 	(b)	 	implement a system which enables an individual director to engage an outside
advisor at the expense of the Corporation in appropriate circumstances; and
	 
	 	(c)	 	provide an orientation and education program for newly appointed members of the
Board.

	3.	 	Corporate Governance
	 
	 	 	The Board shall, with the assistance of the Human Resources and Corporate Governance Committee,
develop and maintain the Corporation’s approach to corporate governance.
	 
	4.	 	Strategy Determination
	 
	 	 	The Board shall:

	 	(a)	 	adopt and annually review a strategic planning process and approve the corporate
strategic plan, which takes into account, among other things, the opportunities and risks
of the business; and
	 
	 	(b)	 	annually review operating and financial performance results relative to established
strategy, budgets and objectives.

	5.	 	Managing Risk
	 
	 	 	The Board has the responsibility to understand the principal risks of the business in which the
Corporation is engaged, to achieve a proper balance between risks incurred and the potential
return to shareholders and, as a result, unitholders, and to confirm that there are systems in
place which effectively monitor and manage those risks with a view to the long-term viability of
the Corporation.
	 
	6.	 	Appointment, Training and Monitoring of Senior Management
	 
	 	 	The Board shall:

	 	(a)	 	appoint the Chief Executive officer (“CEO”) and senior officers, approve (upon
recommendations from the Human Resources and Corporate Governance Committee) their
compensation, and monitor the CEO’s performance against a set of mutually agreed corporate
objectives directed at maximizing shareholder value;
	 
	 	(b)	 	ensure that a process is established that adequately provides for succession
planning including the appointment, training and monitoring of senior management; and
	 
	 	(c)	 	establish limits of authority delegated to management.

 

 

C-3

	7.	 	Reporting and Communication
	 
	 	 	The Board has the responsibility to:

	 	(a)	 	verify that the Corporation has in place policies and programs to enable the
Corporation, for and on behalf of the Trust, to communicate effectively with the Trust’s
unitholders, other stakeholders and the public generally;
	 
	 	(b)	 	verify that the financial performance of the Corporation and the Trust is reported
to unitholders of the Trust, other security holders and regulators on a timely and regular
basis;
	 
	 	(c)	 	verify that the financial results are reported fairly and in accordance with
generally accepted accounting standards;
	 
	 	(d)	 	verify the timely reporting of any other developments that have a significant and
material impact on the value of the Corporation; and
	 
	 	(e)	 	report annually to unitholders of the Trust on its stewardship of the affairs of
the Corporation for the preceding year.

	8.	 	Monitoring and Acting
	 
	 	 	The Board has the responsibility to:

	 	(a)	 	oversee the Corporation’s compliance with applicable audit, accounting and
reporting requirements;
	 
	 	(b)	 	verify that the Corporation operates at all time within applicable laws and
regulations to the highest ethical and moral standards;
	 
	 	(c)	 	approve and monitor compliance with significant policies and procedures by which
the Corporation is operated;
	 
	 	(d)	 	monitor the Corporation’s progress towards its goals and objectives and to revise
and alter its direction through management in response to changing circumstances;
	 
	 	(e)	 	take such action as it determines appropriate when performance falls short of its
goals and objectives or when other special circumstances warrant; and
	 
	 	(f)	 	verify that the Corporation has implemented adequate internal control and
information systems which ensure the effective discharge of its responsibilities.

	9.	 	Disclosure of Oil and Gas Activities
	 
	 	The Board shall have the responsibility to oversee and review the evaluation and reporting of
the Corporation’s oil and gas activities in accordance with the Corporate Reserves Policy and
Practices and in executing its responsibilities thereunder shall appoint and maintain direct
contact with the independent reserves evaluators of the oil and gas assets of the Corporation,
review the Corporation’s procedures for providing information to the independent reserves
evaluators and review and approve filings relating to disclosure of its oil and gas activities
prescribed by National Instrument 51-101 in a timely manner to ensure compliance with National
Instrument 51-101.
	 
	10.	 	Environmental, Health and Safety Matters
	 
	 	The Board shall review the effectiveness and adequacy of safety and environmental control,
reporting, training and response procedures which may include:

	 	(a)	 	discussing the Corporation’s safety and environmental policies with management;
	 
	 	(b)	 	discussing safety and environment standards with management in relation to current
regulations;
	 
	 	(c)	 	reviewing the Corporation’s procedures for identifying, controlling, reporting and
responding to safety and environmental incidents;
	 
	 	(d)	 	monitoring the Corporation’s safety and environmental training and staff evaluation
practices;
	 
	 	(e)	 	reviewing the Corporation’s system of record keeping and obtaining base-line
environmental data;

 

 

C-4

	 	(f)	 	reviewing the Corporation’s methods of evaluating compliance with the Corporation’s
policies and regulatory requirements and discussing the results with management; and
	 
	 	(g)	 	reviewing the Corporation’s accounting and reporting of environmental costs,
liabilities and contingencies.

	11.	 	Other Activities

	 	(a)	 	The Board shall prepare and distribute the schedule of Board meetings for each
upcoming year.
	 
	 	(b)	 	The Board may perform any other activities consistent with this mandate, the
By-Laws of the Corporation and any other governing laws as the Board determines necessary
or appropriate.

 

 

	 	 	 
	APPENDIX “D”

	 	MANDATE OF THE AUDIT COMMITTEE

Policy Statement

It is the policy of Esprit Energy Trust (the “Trust”) to establish and maintain an Audit Committee,
composed entirely of independent trustees, to assist the Board of Trustees (the “Board”) in
carrying out their oversight responsibility for the Trust’s and its subsidiaries and affiliates
(collectively “Esprit”) internal controls, financial reporting and risk management processes. The
Audit Committee will be provided with resources commensurate with the duties and responsibilities
assigned to it by the Board including administrative support. If determined necessary by the Audit
Committee, it will have the discretion to institute investigations of improprieties, or suspected
improprieties within the scope of its responsibilities, including the standing authority to retain
special counsel or experts.

Composition of the Committee

	1.	 	The Audit Committee shall consist of at least three trustees. The Board shall appoint
the members of the Audit Committee and may seek the advice and assistance of the Human
Resources and Corporate Governance Committee of its subsidiary Esprit Exploration Ltd. (the
“Corporation”) in identifying qualified candidates. The Board shall appoint one member of the
Audit Committee to be the Chair of the Audit Committee.
	 
	2.	 	Each trustee appointed to the Audit Committee by the Board shall be an outside trustee
who is unrelated. An outside, unrelated trustee is a trustee who is independent of management
and is free from any interest, any business or other relationship which could, or could
reasonably be perceived, to materially interfere with the director’s ability to act with a
view to the best interests of the Corporation, other than interests and relationships arising
from shareholding. In determining whether a director is independent of management, the Board
shall make reference to the then current legislation, rules, policies and instruments of
applicable regulatory authorities.
	 
	3.	 	Each member of the Audit Committee shall be “financially literate”. In order to be
financially literate, a director must be, at a minimum, able to read and understand basic
financial statements, and at least one member shall have “accounting or related financial
management expertise”, meaning the ability to analyze and interpret a full set of financial
statements, including the notes attached thereto, in accordance with Canadian generally
accepted accounting principles.
	 
	4.	 	A trustee appointed by the Board to the Audit Committee shall be a member of the Audit
Committee until replaced by the Board or until his or her resignation.
	 
	5.	 	The Chairman shall be an ex officio member of the Committee.

Meetings of the Committee

	1.	 	The Audit Committee shall convene a minimum of four times each year at such times and
places as may be designated by the Chair of the Audit Committee and whenever a meeting is
requested by the Board, a member of the Audit Committee, the auditors, or a senior officer of
the Corporation. Meetings of the Audit Committee shall correspond with the review of the
quarterly financial statements and management discussion and analysis.
	 
	2.	 	Notice of each meeting of the Audit Committee shall be given to each member of the
Audit Committee and to the auditors, who shall be entitled to attend each meeting of the Audit
Committee and shall attend whenever requested to do so by a member of the Audit Committee.
	 
	3.	 	Notice of a meeting of the Audit Committee shall:

	 	(a)	 	be in writing;
	 
	 	(b)	 	state the nature of the business to be transacted at the meeting in reasonable
detail;
	 
	 	(c)	 	to the extent practicable, be accompanied by copies of documentation to be
considered at the meeting; and
	 
	 	(d)	 	be given at least two business days prior to the time stipulated for the meeting or
such shorter period as the members of the Audit Committee may permit.

 

 

D-2

	4.	 	A quorum for the transaction of business at a meeting of the Audit Committee shall
consist of a majority of the members of the Audit Committee. However, it shall be the
practice of the Audit Committee to require review, and, if necessary, approval of certain
important matters by all members of the Audit Committee.
	 
	5.	 	A member or members of the Audit Committee may participate in a meeting of the Audit
Committee by means of such telephonic, electronic or other communication facilities, as
permits all persons participating in the meeting to communicate adequately with each other. A
member participating in such a meeting by any such means is deemed to be present at the
meeting.
	 
	6.	 	In the absence of the Chair of the Audit Committee, the members of the Audit Committee
shall choose one of the members present to be Chair of the meeting. In addition, the members
of the Audit Committee shall choose one of the persons present to be the Secretary of the
meeting.
	 
	7.	 	The Chairman of the Board, senior management of the Corporation and other parties may
attend meetings of the Audit Committee; however the Audit Committee (i) shall meet with the
external auditors independent of management as necessary, in the sole discretion of the
Committee, but in any event, not less than quarterly; and (ii) may meet separately with
management.
	 
	8.	 	Minutes shall be kept of all meetings of the Audit Committee and shall be signed by the
Chair and the Secretary of the meeting.

Duties and Responsibilities of the Committee

	1.	 	The Audit Committee’s primary duties and responsibilities are to:

	 	(a)	 	identify and monitor the management of the principal risks that could impact the
financial reporting of Esprit;
	 
	 	(b)	 	monitor and, as required, evaluate the integrity of Esprit’s financial reporting
process and system of internal controls regarding financial reporting and accounting
compliance;
	 
	 	(c)	 	monitor the independence and performance of Esprit’s external auditors;
	 
	 	(d)	 	deal directly with the external auditors to approve external audit plans, other
services (if any) and fees;
	 
	 	(e)	 	directly oversee the external audit process and results (in addition to items
described in Section 4. below);
	 
	 	(f)	 	provide an avenue of communication among the external auditors, management of the
Corporation and the Board;
	 
	 	(g)	 	ensure that an effective “whistle blowing” procedure exists to permit stakeholders
to express any concerns regarding accounting or financial matters to an appropriately
independent individual;
	 
	 	(h)	 	ensure that an appropriate Code of Conduct is in place and understood by employees,
directors and trustees of Esprit.

	2.	 	The Audit Committee shall have the authority to:

	 	(a)	 	inspect any and all of the books and records of Esprit;
	 
	 	(b)	 	discuss with the management of the Corporation, its subsidiaries and affiliates and
senior staff of the Corporation, any affected party and the external auditors, such
accounts, records and other matters as any member of the Audit Committee considers
necessary and appropriate;
	 
	 	(c)	 	engage consultants, independent counsel and other advisors as it determines
necessary to carry out its duties; and
	 
	 	(d)	 	set and pay the compensation for any advisors employed by the Audit Committee.

	3.	 	The Audit Committee shall, at the earliest opportunity after each meeting, report to
the Board the results of its activities and any reviews undertaken and make recommendations to
the Board as deemed appropriate.
	 
	4.	 	The Audit Committee shall:

	 	(a)	 	review the annual audit plan with the Trust’s external auditors and with management
of the Corporation;

 

 

D-3

	 	(b)	 	discuss with management of the Corporation and the external auditors any proposed
changes in major accounting policies or principles, the presentation and impact of
significant risks and uncertainties and key estimates and judgements of management that may
be material to financial reporting;
	 
	 	(c)	 	review with management of the Corporation and with the external auditors
significant financial reporting issues arising during the most recent fiscal period and the
resolution or proposed resolution of such issues;
	 
	 	(d)	 	review any problems experienced or concerns expressed by the external auditors in
performing an audit, including any restrictions imposed by management of the Corporation or
significant accounting issues on which there was a disagreement with management of the
Corporation;
	 
	 	(e)	 	review with senior management of the Corporation the process of identifying,
monitoring and reporting the principal risks affecting financial reporting;
	 
	 	(f)	 	review audited annual financial statements and related documents in conjunction
with the report of the external auditors and obtain an explanation from management of the
Corporation of all significant variances between comparative reporting periods;
	 
	 	(g)	 	consider and review with management of the Corporation, the internal control
memorandum or letter containing the recommendations of the external auditors and the
Corporation’s management’s response, if any, including an evaluation of the adequacy and
effectiveness of the internal financial controls of Esprit and subsequent follow-up to any
identified weaknesses;
	 
	 	(h)	 	review with management of the Corporation and the external auditors the quarterly
unaudited financial statements and management discussion and analysis before release to the
public;
	 
	 	(i)	 	before release, review and if appropriate, recommend for approval by the Board, all
public disclosure documents containing audited or unaudited financial information,
including any prospectuses, annual reports, annual information forms, management discussion
and analysis and press releases; and
	 
	 	(j)	 	oversee, any of the financial affairs of Esprit and, if deemed appropriate, make
recommendations to the Board, external auditors or management.

	5.	 	The Audit Committee shall:

	 	(a)	 	evaluate the independence and performance of the external auditors and annually
recommend to the Board the appointment of the external auditor or the discharge of the
external auditor when circumstances are warranted;
	 
	 	(b)	 	consider the recommendations of management of the Corporation in respect of the
appointment of the external auditors;
	 
	 	(c)	 	pre-approve all non-audit services to be provided to Esprit by its external
auditors’;
	 
	 	(d)	 	approve the engagement letter for non-audit services to be provided by the external
auditors or affiliates, together with estimated fees, and considering the potential impact
of such services on the independence of the external auditors;
	 
	 	(e)	 	when there is to be a change of external auditors, review all issues and provide
documentation related to the change, including the information to be included in the Notice
of Change of Auditors and documentation required pursuant to applicable securities
legislation and the planned steps for an orderly transition period; and
	 
	 	(f)	 	review all reportable events, including disagreements, unresolved issues and
consultations, as defined by applicable securities policies, on a routine basis, whether or
not there is to be a change of external auditors.

	6.	 	The Audit Committee shall:

	 	(a)	 	review with management of the Corporation at least annually, the financing strategy
and plans of Esprit; and
	 
	 	(b)	 	review all securities offering documents (including documents incorporated therein
by reference) of Esprit.

 

 

D-4

	7.	 	The Audit Committee shall review the amount and terms of any insurance to be obtained
or maintained by Esprit with respect to risks inherent in its operations and potential
liabilities incurred by the trustees, directors or officers of the Corporation in the
discharge of their duties and responsibilities.
	 
	8.	 	The Audit Committee shall review the appointments of the Chief Financial Officer of the
Corporation and any key financial managers who are involved in the financial reporting
process.
	 
	9.	 	The Audit Committee shall enquire into and determine the appropriate resolution of any
conflict of interest in respect of audit or financial matters, which are directed to the Audit
Committee by any member of the Board, a unitholder of the Trust, the external auditors, or
senior management of the Corporation.
	 
	10.	 	The Audit Committee shall periodically review with management of the Corporation the
need for an internal audit function.
	 
	11.	 	The Audit Committee shall review Esprit’s accounting and reporting of environmental
costs, liabilities and contingencies.
	 
	12.	 	The Audit Committee shall establish and maintain procedures for:

	 	    (a)	 	the receipt, retention and treatment of complaints received by Esprit regarding
accounting controls, or auditing matters; and
	 
	 	    (b)	 	the confidential, anonymous submission by employees of Esprit of concerns regarding
questionable accounting or auditing matters.

	13.	 	The Audit Committee shall review and approve Esprit’s hiring policies regarding
employees and former employees of the present and former external auditors.
	 
	14.	 	The Audit Committee shall review with Esprit’s legal counsel as required but at least
annually, any legal matter that could have a significant impact on the Esprit’s financial
statements, and any enquiries received from regulators, or government agencies.
	 
	15.	 	The Audit Committee shall assess, on an annual basis, the adequacy of this Mandate and
the performance of the Audit Committee.

 

 

	 	 	 
	APPENDIX “E”

	 	HUMAN RESOURCES AND CORPORATE GOVERNANCE COMMITTEE MANDATE

Policy Statement

It is the policy of Esprit Energy Trust (the “Trust”) and Esprit Exploration Ltd. (the
“Corporation”, and together with the Trust, “Esprit”) to establish and maintain a Human Resources
and Corporate Governance Committee (the “Committee”), composed entirely of independent directors,
to assist the board of directors of the Corporation (the “Board of Directors”) and the board of
trustees of the Trust (the “Board of Trustees”, and together with the Board of Directors, the
“Boards”) in carrying out their responsibilities for: (1) ensuring that the mission and strategic
direction of Esprit is reviewed annually and that the Boards and each of their committees carry out
their functions in accordance with due process; (2) assessing the effectiveness of each of the
Boards, each committee of the Boards, and the contribution of each individual director and trustee;
(3) addressing governance issues; (4) identifying, recruiting, nominating, endorsing, recommending
appointment of, and orienting new directors; and (5) examining the Corporation’s human resources
and compensation policies and processes. If deemed necessary by the Committee, it will have the
discretion to investigate and conduct reviews of any human resources or compensation matter
including the standing authority to retain experts and, with approval of the Board of Directors,
special counsel.

Composition of Committee

	1.	 	The Committee shall consist of a minimum of three directors. The Board of Directors
shall appoint the members of the Committee. The Board of Directors shall appoint one member
of the Committee to be the Chair of the Committee.
	 
	2.	 	Each director appointed to the Committee by the Board of Directors shall be an outside
trustee who is unrelated. An outside, unrelated director is a director who is independent of
management and is free from any interest, any business or other relationship which could, or
could reasonably be perceived, to materially interfere with the director’s ability to act with
a view to the best interests of the Corporation, other than interests and relationships
arising from shareholding. In determining whether a director is independent of management,
the Board shall make reference to the then current legislation, rules, policies and
instruments of applicable regulatory authorities.
	 
	3.	 	A director appointed by the Board of Directors to the Committee shall be a member of
the Committee until replaced by the Board of Directors or until his or her resignation.
	 
	4.	 	The Chairman of the Board of Directors shall be an ex officio member of the Committee.

Meetings of the Committee

	1.	 	The Committee shall convene at such dates, times and places as may be designated or
approved by the Chair of the Committee whenever a meeting is requested by the Board of
Directors, a member of the Committee, or the CEO. The Committee shall convene a minimum of
three times per year.
	 
	2.	 	Notice of each meeting shall be given to each member of the Committee and the CEO, who
shall each be entitled to attend each meeting of the Committee and shall attend whenever
requested to do so by a member of the Committee.
	 
	3.	 	Notice of a meeting of the Committee shall:

	 	(a)	 	be in writing;
	 
	 	(b)	 	state the nature of the business to be transacted at the meeting in reasonable
detail;
	 
	 	(c)	 	to the extent practicable, be accompanied by copies of documentation to be
considered at the meeting; and
	 
	 	(d)	 	be given at least two business days prior to the time stipulated for the meeting or
such shorter period as the members of the Committee may permit.

 

 

E-2

	4.	 	A quorum for the transaction of business at a meeting of the Committee shall consist of
a majority of its members (excluding the Chairman of the Board of Directors). However, it
shall be the practice of the Committee to require review, and, if necessary, approval of
certain important matters by all members of the Committee.
	 
	5.	 	Any member of the Committee may participate in a meeting of the Committee by means of
such telephonic, electronic or other communication facilities as permit all persons
participating in the meeting to communicate adequately with each other, and a member
participating in such a meeting by any such means is deemed to be present at the meeting.
	 
	6.	 	In the absence of the Chair of the Committee, the members of the Committee shall choose
one of the members present to be Chair of the meeting.
	 
	7.	 	The Secretary of the Corporation shall be the Secretary of the meeting or,
alternatively, the members of the Committee may choose one of the persons present to be the
Secretary of the meeting.
	 
	8.	 	The CEO, Chairman and, by invitation, other parties may attend meetings of the
Committee; however, the Committee may meet separately at any time.
	 
	9.	 	Minutes shall be kept of all meetings of the Committee and shall be signed by the Chair
and the Secretary of the meeting.
	 
	10.	 	Minutes of Committee meetings will be sent to all Board of Directors members. Reports
on the conduct of the meetings will be made to the Board of Directors.

Duties and Responsibilities of the Committee

	1.	 	The Committee shall report regularly to the Board of Directors and bring its
recommendations to the full Board of Directors and, where appropriate, the Board of Trustees
for their approval.
	 
	2.	 	The Committee will review and make recommendations to the Board of Directors in respect
of:

	 	(a)	 	human resource policies, practices and structures (to monitor consistency with
Esprit’s goals and near and long-term strategies, support of operational effectiveness and
efficiency, and maximization of human resources potential);
	 
	 	(b)	 	compensation policies and guidelines;
	 
	 	(c)	 	management incentive and perquisite plans and any non-standard remuneration plans;
	 
	 	(d)	 	senior management, executive and officer appointments and their compensation;
	 
	 	(e)	 	management succession plans, management training and development plans, termination
policies and termination arrangements;
	 
	 	(f)	 	the Corporation’s senior human resource (organizational) structure;
	 
	 	(g)	 	compensation matters relating to the directors and trustees; and
	 
	 	(h)	 	such other matters, including matters related to corporate governance, as the
Committee may deem appropriate or as may be referred to it from time to time by the Board
of Directors or Board of Trustees.

	3.	 	In carrying out its governance and nominating responsibilities, the Committee shall:

	 	(a)	 	on an ongoing basis, identify the competencies and skills most desirous in
potential new Trustees and maintain a list of potential candidates who possess those
skills;
	 
	 	(b)	 	in the event of a vacancy occurring on either of the Boards, however caused, the
Committee shall within a reasonable period of time, conduct an appropriate search and
determine an appropriate candidate, obtain the consent of the candidate to act as a
director and trustee and recommend to the Board of Trustees a candidate for appointment as
a director and/or trustee to fill the vacancy;
	 
	 	(c)	 	based upon consideration of his or her performance in office and any other factors
considered relevant, recommend to the Board of Trustees whether an individual should be
nominated for election or re-election at any annual meeting of unitholders at which he or
she is eligible to be elected a trustee;
	 
	 	(d)	 	review the need for and qualifications of nominees recommended by unitholders for
election as trustees;

 

 

E-3

	 	(e)	 	make recommendations to the Board of Trustees regarding continuing tenure of
trustees and/or directors, in accordance with policies that may be determined from time to
time by the Board of Trustees;
	 
	 	(f)	 	notwithstanding subparagraphs (a) through (d), the Board of Trustees may direct the
Committee to give consideration to other nominations or may propose, appoint, elect or
nominate any person to fill any vacancy on either of the Boards or the Committee;
	 
	 	(g)	 	in the event of a vacancy occurring on a committee of either of the Boards, however
caused, the Committee shall recommend to the relevant Board a person or persons for
appointment as a member to fill such vacancy;
	 
	 	(h)	 	make recommendations from time to time to the Boards concerning such other matters,
including matters related to corporate governance, as the Committee may deem appropriate or
as may be referred to it from time to time by either of the Boards.
	 
	 	(i)	 	annually review and evaluate the role of the Boards and their Committees and the
methods and processes by which the Boards fulfill their duties and responsibilities,
including the methods and processes for evaluating effectiveness.
	 
	 	(j)	 	monitor and review annually the corporate Code of Business Ethics and Conduct
Policy, the Corporate Disclosure Policy, and corporate guidelines for maintaining
confidentiality, and recommend changes and action required to deal with breaches of policy
or guidelines; and
	 
	 	(k)	 	with respect to the training and development of the Boards:

	 	(i)	 	approve any training and development experiences funded by the Corporation for
the Boards as a whole or for individual directors; and
	 
	 	(ii)	 	monitor and assess the value of any training programs and recommend changes.

	4.	 	In carrying out its human resources and compensation duties and responsibilities, the
Committee shall:

	 	(a)	 	annually assess and make a recommendation to the Board of Directors with regard to
the competitiveness and appropriateness of the compensation package of the CEO, all other
officers of the Corporation and such other key employees of the Corporation or any other
subsidiaries of the Trust as may be identified by the CEO and approved by the Committee
(collectively, the “Designated Employees”);
	 
	 	(b)	 	annually review the performance goals and criteria for the CEO and evaluate the
performance of the CEO against such goals and criteria and recommend to the Board of
Directors the amount of regular and incentive compensation to be paid to the CEO;
	 
	 	(c)	 	annually, review and make a recommendation to the Board of Directors regarding the
CEO’s performance evaluation of Designated Employees and his recommendations with respect
to the amount of regular and incentive compensation to be paid to such Designated
Employees;
	 
	 	(d)	 	review and make a recommendation to the Board of Directors regarding any employment
contracts or arrangements with each of the Designated Employees, including any retiring
allowance arrangements or any similar arrangements to take effect in the event of a
termination of employment;
	 
	 	(e)	 	periodically, review the compensation philosophy statement of the Corporation and
make recommendations for changes to the Board of Directors as considered necessary;
	 
	 	(f)	 	from time to time, review and make recommendations to the Board of Directors in
respect of the design, benefit provisions, investment options and text of applicable
pension, retirement and savings plans or related matters;
	 
	 	(g)	 	annually, in conjunction with the Corporation’s general and administrative budget,
review and make recommendations to the Board of Directors regarding compensation guidelines
for the forthcoming budget period;
	 
	 	(h)	 	when requested by the CEO, review and make recommendations to the Board of
Directors regarding short term incentive or reward plans and, to the extent delegated by
the Board of Directors, approve awards to eligible participants;
	 
	 	(i)	 	when requested by the CEO, review and make recommendations to the Boards regarding
performance unit incentive plans or any other long term incentive plans and to the extent
delegated by the Board of Directors, approve grants to participants and the magnitude and
terms of their participation;

 

 

E-4

	 	(j)	 	as required, fulfill the obligations assigned to the Committee pursuant to any
other employee benefit plans approved by the Board of Directors;
	 
	 	(k)	 	annually, prepare or review the report on executive compensation required to be
disclosed in the Corporation’s information circular or any other human resource or
compensation matter required to be publicly disclosed by the Corporation;
	 
	 	(l)	 	periodically, but at least every third year, review and make a recommendation to
the Boards regarding the compensation of directors and trustees;
	 
	 	(m)	 	review and make recommendations to the Board of Directors regarding any material
outside community or professional service or outside Board of Directors opportunities being
considered by Designated Employees prior to their acceptance of such positions; and

	5.	 	In addition to the foregoing, the Committee shall undertake on behalf of the Board of
Directors such other initiatives as may be necessary or desirable to assist the Board of
Directors in discharging its responsibility to ensure that appropriate human resources
development, performance evaluation, compensation and succession planning programs are in
place and operating effectively.
	 
	6.	 	The Committee shall consider any other matter properly referred to the Committee by
either of the Boards, a director or trustee, or the CEO, for review, recommendation or
decision.
	 
	7.	 	The Committee will review its mandate annually and recommend any changes to the Board
of Directors.

The Committee shall have the authority to engage and compensate any outside advisors that it
determines to be necessary to permit it to carry out its duties, and, if deemed necessary by the
Committee, meet separately with such advisors.

 

 

Suite 900,
606 – 4th Street S.W.

Calgary, Alberta, Canada

T2P 1T1

Telephone: (403) 213-3700

Facsimile: (403) 213-3735

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