Document:

<PAGE>
                                                                    Exhibit 10.1

                              CONSULTING AGREEMENT

         AGREEMENT dated as of September 5, 2006 by and between INTERACTIVE
SYSTEMS WORLDWIDE INC., a Delaware corporation with its principal place of
business at 2 Andrews Drive, West Paterson, New Jersey 07424 ("ISWI") and
VINCENT CALDWELL ("Consultant") residing at 2610 West Morrison Avenue, Tampa,
Florida 33629.

         In consideration of the mutual covenants contained herein, the parties
agree as follows:

         1. Retention. Upon the terms and conditions hereinafter set forth, ISWI
hereby retains Consultant as an independent consultant on a non-exclusive basis,
to perform the consulting services herein described. Consultant, as an
independent contractor, shall assist ISWI in marketing its SportXction(TM)
software (the "Services"). Consultant agrees to use his best efforts, skills and
abilities in the performance of the Services hereunder and to promote the best
interests of ISWI, including but not limited to, setting up and/or attending, as
required, meetings with potential customers, assisting in negotiations and
attempts to conclude transactions, and providing marketing assistance and
support both before and after any agreements with potential customers are
signed. Consultant shall perform such Services during the Term (as hereinafter
defined) and for so long as Consultant is receiving any fees pursuant to Section
4(a) hereof and/or ISWI has obligations to any such customers.

         2. Term. The term of this Agreement shall be a period commencing on
September 5, 2006 and ending on March 5, 2007 (the "Term"). This Agreement shall
automatically terminate upon the death of the Consultant.

         3. Type of Services. The precise Services to be performed by Consultant
may be designated or assigned to Consultant from time to time by the Chairman of
the Board of ISWI.

         4. Fee.

         (a) During the Term, Consultant shall be paid a total fee of $45,000
payable at the rate of $7,500 per month.

         (b) ISWI shall not be obligated to pay any expenses paid or incurred by
Consultant in connection with the performance by Consultant of the Services,
including but not limited to travel and entertainment expenses unless agreed to
in advance by ISWI.

         (c) Consultant shall pay all Federal, state and local income, social
security, medicare, and any other taxes payable with respect to all compensation
or fees paid to Consultant hereunder. Consultant shall be responsible for his
own health and accident insurance.

<PAGE>

         5. Proprietary Information Agreement. Consultant has previously signed
a Proprietary Information Agreement, which agreement shall remain in full force
and effect.

         6. No Agency. It is understood that Consultant is an independent
contractor and shall not be considered ISWI's agent for any purposes whatsoever.
Consultant is not granted any right or authority to assume or create any
obligation or liability, express or implied, on ISWI's behalf, or to bind ISWI
in any manner or thing whatsoever, nor shall Consultant promote or have
discussions with any other person, firm or entity on behalf of or with respect
to ISWI or its products without ISWI's prior written consent.

         7. Terms of Agreements with Customers. ISWI reserves the right to
determine all terms and conditions of any proposed arrangements or agreements
with any potential customers, and to accept or reject any proposal submitted for
any reason in its absolute discretion.

         8. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof, shall be governed
by the laws of the State of New Jersey without regard to principles of conflicts
of law, and cannot be modified except by an agreement in writing executed by
ISWI and the Consultant.

         9. Survival. The provisions of Sections 8, 9, 10, 11 and 12 and the
Proprietary Information Agreement shall survive termination of this Agreement by
expiration of the Term or otherwise.

         10. Arbitration. In the event Consultant and ISWI have any dispute
concerning any aspect of this Agreement, such dispute shall be settled by
arbitration in New York, NY in accordance with the rules of the American
Arbitration Association or any successor thereto.

         11. Assignment by Consultant. The agreement of Consultant to render
Services hereunder is personal in nature and may not be assigned or transferred
by Consultant.

         12. Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by certified or registered
mail, return receipt requested, by recognized national courier for next day
delivery, in either such case to the addresses stated above or by facsimile to
the facsimile number listed below such party's signature.

         13. Invalidity. If any provision of this Agreement shall be held
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and shall not in any manner effect or render invalid or
unenforceable any other provision of this Agreement, and this Agreement shall be
carried out as if such invalid or unenforceable provisions were not contained
herein.

                                       2
<PAGE>

         IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.

                                              INTERACTIVE SYSTEMS WORLDWIDE INC.

                                              By: /s/ Bernard Albanese
                                                  ------------------------------
                                                  Name:  Bernard Albanese
                                                  Title: President
                                                  Fax:   973-256-8211

                                              Consultant

                                              /s/ Vincent Caldwell
                                              ----------------------------------
                                              Vincent Caldwell
                                              Fax: 727-812-3305

                                       3exv4w9

 

Exhibit 4.9

FORM 51-102F3

MATERIAL CHANGE REPORT

	1.	 	Name and Address of Company:
	 
	 	 	Pengrowth Energy Trust

2900, 240 – 4th Avenue S.W.

Calgary, AB T2P 4H4
	 
	2.	 	Date of Material Change:
	 
	 	 	July 24, 2006
	 
	 	 	(subject to the conditions described herein, closing will occur on October 2, 2006)
	 
	3.	 	News Release:
	 
	 	 	News releases setting out information relating to the material change described herein were
disseminated through Canada NewsWire and filed on SEDAR on July 24, 2006 and August 25,
2006.
	 
	4.	 	Summary of Material Change:
	 
	 	 	Pengrowth Energy Trust (“Pengrowth”), Pengrowth Corporation, Esprit Energy Trust (“Esprit”)
and Esprit Exploration Ltd. (“Esprit Ltd.”) have entered into a combination agreement dated July
23, 2006, as amended (the “Combination Agreement”), providing for the combination of
Pengrowth and Esprit into a single trust to continue under the name Pengrowth Energy Trust
(the “Merger”). Closing of the Merger is subject to the
approval of 662⁄3% of the unitholders
of Esprit who vote at a meeting to be held on September 26, 2006 and receipt of customary
regulatory approvals. Provided that the approval of Esprit unitholders is received on
September 26, 2006, Pengrowth anticipates that all necessary regulatory approvals will be
obtained and that closing will occur on October 2, 2006. Alternative closing dates of November 2, 2006 and
December 4, 2006 are also permitted under the Combination
Agreement.
	 
	 	 	A material change report has previously been filed by Pengrowth with respect to the subject
matter of this material change on August 2, 2006. Please refer to that Material Change
Report for additional information regarding this material change.
	 
	5.	 	Full Description of Material Change:
	 
	 	 	Pengrowth, Pengrowth Corporation, Esprit and Esprit Ltd. have entered into the Combination
Agreement, providing for the combination of Pengrowth and Esprit into a single trust to
continue under the name Pengrowth Energy Trust. Closing of the Merger is subject to the
approval of 662⁄3% of the unitholders of Esprit who vote at a meeting to be held on September
26, 2006 and receipt of customary regulatory approvals. Provided that the approval of
Esprit unitholders is received on September 26, 2006, Pengrowth anticipates that all
necessary regulatory approvals will be obtained and that closing will occur on October 2,
2006. Alternative closing dates of November 2, 2006 and
December 4, 2006 are also permitted under the Combination
Agreement.
	 
	 	 	A material change report has previously been filed by Pengrowth with respect to the subject
matter of this material change on August 2, 2006. Please refer to that Material Change
Report for additional information regarding this material change.
	 
	 	 	Alternative closing dates of November 2, 2006 and
December 4, 2006 are also permitted under the Combination
Agreement.

 

-2-

	 	 	Nature of Business Acquired
	 
	 	 	Esprit is an open-ended unincorporated investment trust governed by the laws of the Province
of Alberta. Esprit has two material subsidiaries, Esprit Ltd. and Esprit Exchangeco Ltd.,
both of which are incorporated pursuant to the laws of Alberta. Esprit indirectly acquires
and holds interests in petroleum and natural gas properties through Esprit Ltd., which is a
Calgary based oil and gas company with a natural gas focus on the western side of the
Western Canadian Sedimentary Basin. The key areas of focus for Esprit Ltd. include Greater
Olds, Berry/Winnifred, Peace River Arch, Saskatchewan, Central Alberta and Southern Alberta.
The Greater Olds area represents 44 percent of Esprit’s production and has a proved plus
probable reserve life index of 15.4 years and is 100 percent owned and operated and is
covered entirely by 3D seismic.
	 
	 	 	Pengrowth has agreed to offer substantially all employees of Esprit and its subsidiaries
continued employment with Pengrowth on terms and conditions substantially similar to their
current terms and conditions of employment with Esprit. Also pursuant to the Merger,
Pengrowth will increase the size of its board of directors by one member and Mr. Michael
Stewart, presently chairman of the board of trustees of Esprit, will join the board of
directors of Pengrowth Corporation.
	 
	 	 	As a result of the Merger with Esprit, Pengrowth will acquire significant additional
reserves and production. As at December 31, 2005, Esprit had 66.7 million boe of proved
plus probable reserves (on a company interest before royalties basis using forecast pricing)
and approximately 16,752 to 17,350 boe per day of current production. Pursuant to the
acquisition of Trifecta Resources Inc. on July 5, 2006, Esprit’s reserves and production
were increased by 4.9 million boe of proved plus probable reserves and 750 boe per day of
production (on a company interest before royalties basis using forecast pricing). In
addition, the acquisition by Esprit of Trifecta added 30,000 gross (22,200 net) acres of
undeveloped land to Esprit, bringing Esprit’s total undeveloped land position to
approximately 300,000 net acres.
	 
	 	 	The foregoing information was derived form Esprit’s press release issued on February 15,
2006 regarding its 2005 reserves and Esprit’s material change report dated June 26, 2006.
	 
	 	 	The Merger is anticipated to be accretive to unitholders of
Pengrowth in terms of reserves, distributable cash flow and
production on a per trust unit basis.
	 
	 	 	Effect on Financial Position
	 
	 	 	Pursuant to the Merger, Pengrowth will acquire all of the assets of Esprit in exchange for
Pengrowth assuming the liabilities of Esprit and issuing 0.53 of a Pengrowth trust unit
(“Pengrowth Trust Unit”) for each issued and outstanding Esprit trust unit (“Esprit Unit”).
As of August 31, 2006, Esprit had 66,518,161 issued and outstanding Esprit Units, including
1,489,000 Esprit Units currently held by Pengrowth. Prior to the
closing of the Merger, Esprit will issue an additional 502,756 Esprit
Units pursuant to the conversion of certain outstanding securities. Pursuant to the Merger, Pengrowth will
issue an aggregate of approximately 34,731,916 Pengrowth Trust Units to the former holders
of Esprit Units (net of the Pengrowth Trust Units that will be issued to Pengrowth in
consideration for its Esprit Units, which will be cancelled immediately following the
Merger).
	 
	 	 	Accordingly, upon completion of the Merger and assuming the number of Esprit Units and
Pengrowth Trust Units issued and outstanding at August 31, 2006 are unchanged at the time of
the closing of the Merger, Pengrowth will have approximately
195,797,487 Pengrowth Trust
Units and 15,038 Pengrowth Class A trust units (“Pengrowth Class A Units” and together with
Pengrowth Trust Units, the “Pengrowth Units”) issued and
outstanding, with the current unitholders of Pengrowth holding
approximately 161,065,571 Pengrowth
Trust Units and all of the Pengrowth Class A Units representing approximately 82% of the
issued and outstanding Pengrowth Units, and former holders of
Esprit will hold approximately 34,731,916 Pengrowth Trust Units representing approximately
18% of the issued

 

-3-

	 	 	and outstanding Pengrowth Units. In addition, if the Esprit
Debentures (defined below) were to be converted into Pengrowth Trust Units, approximately
3,676,753 additional Pengrowth Trust Units would be issued.
	 
	 	 	As at August 31, 2006 Esprit had $259 million of bank indebtedness pursuant to a credit
facility with a syndicate of four Canadian chartered banks. Pursuant to the Merger,
Pengrowth expects to repay this indebtedness using its credit facilities.
	 
	 	 	Pursuant to the Merger, Pengrowth will also assume Esprit’s $96 million aggregate principal
amount of 6.5 percent convertible unsecured subordinated debentures due 2010 (“Esprit
Debentures”) in accordance with their terms. As a result of the Merger, holders of Esprit
Debentures will have the option of redeeming their Esprit Debentures at a price equal to 101
percent of the principal amount plus any accrued interest, or conversion to Esprit Units at
a price of $13.85 per Esprit Unit subject to adjustment for a special distribution to be
declared by Esprit prior to completion of the Merger.
	 
	 	 	Financial Statements
	 
	 	 	The audited comparative consolidated financial statements and notes thereto of Esprit for
the years ended December 31, 2005 and 2004, together with the report of the auditors are
attached as Schedule “A” to the Material Change Report and the unaudited comparative
financial statements of Esprit for the six months ended June 30, 2006 are attached as
Schedule “B” to this Material Change Report. A reconciliation of the consolidated financial
statements of Esprit for the years ended December 31, 2005 and 2004 to United States
generally accepted accounting principles, together with the auditors’ report and the
reconciliation of the unaudited interim consolidated financial statements of Esprit for the
six months ended June 30, 2006 to United States generally accepted accounting principles is
attached as Schedule “C” to the Material Change Report.
	 
	 	 	The unaudited pro forma combined financial statements of Pengrowth after giving effect to
the Merger, including a pro forma balance sheet as at June 30, 2006, a pro forma
consolidated statement of income for the six months ended June 30, 2006 and a pro forma
consolidated statement of income for the year ended December 31,
2005 (including a reconciliation of such statements to United States
generally accepted accounting principals), are attached as
Schedule “D” to this Material Change Report.
	 
	 	 	Caution Regarding Engineering Terms
	 
	 	 	When used herein, the term “boe” means barrels of oil equivalent on the basis of one boe
being equal to one barrel of oil or NGLs or 6,000 cubic feet of natural gas (6 mcf: 1 bbl).
Barrels of oil equivalent may be misleading, particularly if used in isolation. A
conversion ratio of six mcf of natural gas to one boe is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead.
	 
	 	 	The term “reserve life index” refers to the number of years determined by dividing the
aggregate of the proved plus probable reserves of a property by the estimated annual
production using estimated production for the year 2006 as a reference.
	 
	 	 	Caution Regarding Forward-Looking Information
	 
	 	 	This material change report contains forward-looking statements within the meaning of
securities laws, including the “safe harbour” provisions of the Securities Act (Ontario) and
the United States Private Securities Litigation Reform Act of 1995. Forward-looking
information is often, but not

 

-4-

	 	 	always, identified by the use of words such as “anticipate”, “believe”, “expect”, “plan”,
“intend”, “forecast”, “target”, “project”, “may”, “will”, “should”, “could”, “estimate”,
“predict” or similar words suggesting future outcomes or language suggesting an outlook.
Forward-looking statements in this material change report include, but are not limited to,
statements with respect to: benefits of the Merger, synergies, business strategy and
strengths, acquisition criteria, capital expenditures, reserves, reserve life indices,
estimated production, remaining producing reserve lives, net present values of future net
revenue from reserves, commodity prices and costs, exchange rates, the impact of contracts
for commodities, development plans and programs, tax effect and treatment, abandonment and
reclamation costs, government royalty rates and expiring acreage. Statements relating to
“reserves” are deemed to be forward-looking statements, as they involve the implied
assessment, based on certain estimates and assumptions that the reserves described exist in
the quantities predicted or estimated and can profitably be produced in the future.
	 
	 	 	Forward-looking statements and information are based on current beliefs as well as
assumptions made by and information currently available to Pengrowth concerning anticipated
financial performance, business prospects, strategies and regulatory developments. Although
management considers these assumptions to be reasonable based on information currently
available to it, they may prove to be incorrect.
	 
	 	 	By their very nature, forward-looking statements involve inherent risks and uncertainties,
both general and specific, and risks that predictions, forecasts, projections and other
forward-looking statements will not be achieved. We caution readers not to place undue
reliance on these statements as a number of important factors could cause the actual results
to differ materially from the beliefs, plans, objectives, expectations and anticipations,
estimates and intentions expressed in such forward-looking statements. These factors
include, but are not limited to: the volatility of oil and gas prices; production and
development costs and capital expenditures; the imprecision of reserve estimates and
estimates of recoverable quantities of oil, natural gas and liquids; Pengrowth’s ability to
replace and expand oil and gas reserves; environmental claims and liabilities; incorrect
assessments of value when making acquisitions; increases in debt service charges; the loss
of key personnel; the marketability of production; defaults by third party operators;
unforeseen title defects; fluctuations in foreign currency and exchange rates; inadequate
insurance coverage; compliance with environmental laws and regulations; changes in tax laws;
the failure to qualify as a mutual fund trust; and Pengrowth’s ability to access external
sources of debt and equity capital. Further information regarding these factors may be
found under the heading “Business Risks” in our management’s discussion and analysis for the
year ended December 31, 2005, under “Risk Factors” herein and in other recent filings with
the Securities and Exchange Commission and Canadian securities regulatory authorities.
	 
	 	 	The foregoing list of factors that may affect future results is not exhaustive. When
relying on our forward-looking statements to make decisions, investors and others should
carefully consider the foregoing factors and other uncertainties and potential events.
Furthermore, the forward-looking statements contained in this material change report are
made as of the date of this material change report and Pengrowth does not undertake any
obligation to up-date 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 in this material change report are expressly qualified by this
cautionary statement.
	 
	6.	 	Reliance on Subsection 7.1(2) or (3) of National Instrument 51-102:
	 
	 	 	Not Applicable.

 

-5-

	7.	 	Omitted Information:
	 
	 	 	Not Applicable.
	 
	8.	 	Executive Officer:
	 
	 	 	Mr. James S. Kinnear, Chairman, President and Chief Executive Officer, is knowledgeable
about the material change and may be reached at (403) 233-0224.
	 
	9.	 	Date of Report:
	 
	 	 	Dated at Calgary, Alberta, this 8th day of September, 2006.

 

 

SCHEDULE “A”

Audited comparative financial statements and notes thereto of Esprit

for the years ended December 31, 2005 and 2004, together with the notes thereto and the report of

the auditors thereon

 

AUDITOR’S REPORT

TO THE UNITHOLDERS OF ESPRIT ENERGY TRUST

We have audited the consolidated balance sheets of Esprit Energy
Trust as at December 31, 2005 and 2004 and the consolidated
statements of earnings and retained earnings (deficit) and
cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Trust’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally
accepted auditing standards. Those standards require that we
plan and perform an audit to obtain reasonable assurance whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Trust as at December 31, 2005 and 2004 and the results of
its operations and its cash flows for the years then ended in
accordance with Canadian generally accepted accounting
principles.

		
	 	
    
	 	
    Chartered Accountants
	 	
    Calgary, Canada
	 	
    February 14, 2006

 

 

ESPRIT ENERGY TRUST

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

	 	 	 	 	 	 	 	 	 	 
	 	 	December 31,		 	December 31,	
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	 	 	(Restated	
	 	 	 	 	note 3)	
	 	 	(Stated in thousands	
	 	 	of dollars)	
	
    ASSETS
	
    
    Current assets

    	 	 	 	 	 	 	 	 
	 	
    
    Accounts receivable

    	 	$	43,433	 	 	$	22,973	 
	 	
    
    Prepaid expenses

    	 	 	7,684	 	 	 	2,773	 
	 	 	 	 	 	 	 
	 	 	 	51,117	 	 	 	25,746	 
	
    
    Property, plant and equipment, net (Note 7)

    	 	 	763,191	 	 	 	359,662	 
	
    
    Goodwill (Note 4)

    	 	 	147,622	 	 	 	—	 
	
    
    Deferred financing charges, net

    	 	 	3,933	 	 	 	—	 
	 	 	 	 	 	 	 
	 	 	$	965,863	 	 	$	385,408	 
	 	 	 	 	 	 	 
	 
	
    LIABILITIES
	
    
    Current liabilities

    	 	 	 	 	 	 	 	 
	 	
    
    Accounts payable and accrued liabilities

    	 	$	61,954	 	 	$	36,264	 
	 	
    
    Unitholder distributions payable

    	 	 	9,948	 	 	 	5,620	 
	 	 	 	 	 	 	 
	 	 	 	71,902	 	 	 	41,884	 
	
    
    Bank loans (Note 8)

    	 	 	144,239	 	 	 	86,875	 
	
    
    Convertible debentures (Note 9)

    	 	 	93,866	 	 	 	—	 
	
    
    Asset retirement obligations (Note 10)

    	 	 	24,059	 	 	 	11,006	 
	
    
    Future income taxes (Note 14)

    	 	 	113,982	 	 	 	19,356	 
	 	 	 	 	 	 	 
	 	 	 	448,048	 	 	 	159,121	 
	 	 	 	 	 	 	 
	
    
    Non-controlling interest (Note 12)

    	 	 	6,280	 	 	 	15,731	 
	 	 	 	 	 	 	 
	
    
    UNITHOLDERS’ EQUITY

    	 	 	 	 	 	 	 	 
	
    
    Unitholders’ capital (Note 11)

    	 	 	617,862	 	 	 	298,726	 
	
    
    Equity component of convertible debentures (Note 9)

    	 	 	2,090	 	 	 	—	 
	
    
    Contributed surplus

    	 	 	2,638	 	 	 	—	 
	
    
    Accumulated cash distributions (Note 6)

    	 	 	(114,125	)	 	 	(16,788	)
	
    
    Retained earnings (deficit)

    	 	 	3,070	 	 	 	(71,382	)
	 	 	 	 	 	 	 
	
    
    Total unitholders’ equity

    	 	 	511,535	 	 	 	210,556	 
	 	 	 	 	 	 	 
	 	 	$	965,863	 	 	$	385,408	 
	 	 	 	 	 	 	 

Commitments (Note 15)

	 	 	 
	
    
    

    	 	
    
	
    
    D. Michael G. Stewart

    	 	
    W. Mark Schweitzer
	
    
    Trustee

    	 	
    Trustee

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DEFICIT)

	 	 	 	 	 	 	 	 	 	 
	 	 	For the Year Ended	
	 	 	December 31,	
	 	 	 	
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	(Stated in thousands of	
	 	 	dollars, except per unit	
	 	 	amounts)	
	
    
    Revenue

    	 	 	 	 	 	 	 	 
	 	
    
    Oil and gas

    	 	$	287,834	 	 	$	184,649	 
	 	
    
    Royalties

    	 	 	(67,645	)	 	 	(44,549	)
	 	 	 	 	 	 	 
	 	 	 	220,189	 	 	 	140,100	 
	 	 	 	 	 	 	 
	
    
    Expenses

    	 	 	 	 	 	 	 	 
	 	
    
    Operating

    	 	 	47,149	 	 	 	35,092	 
	 	
    
    Depletion, depreciation and amortization

    	 	 	74,784	 	 	 	44,877	 
	 	
    
    General and administrative

    	 	 	8,052	 	 	 	5,014	 
	 	
    
    Interest and financing

    	 	 	8,340	 	 	 	3,233	 
	 	
    
    Accretion of asset retirement obligation (Note 10)

    	 	 	1,198	 	 	 	902	 
	 	
    
    Unit-based compensation (Note 11b)

    	 	 	2,638	 	 	 	1,835	 
	 	
    
    Plan of Arrangement and other

    	 	 	849	 	 	 	8,497	 
	 	 	 	 	 	 	 
	 	 	 	143,010	 	 	 	99,450	 
	
    
    Earnings before income taxes and non-controlling interest

    	 	 	77,179	 	 	 	40,650	 
	 	 	 	 	 	 	 
	
    
    Income taxes (Note 14)

    	 	 	 	 	 	 	 	 
	 	
    
    Current

    	 	 	1,121	 	 	 	772	 
	 	
    
    Future

    	 	 	(822	)	 	 	11,085	 
	 	 	 	 	 	 	 
	 	 	 	299	 	 	 	11,857	 
	
    
    Earnings before non-controlling interest

    	 	 	76,880	 	 	 	28,793	 
	
    
    Non-controlling interest (Note 12)

    	 	 	2,428	 	 	 	694	 
	 	 	 	 	 	 	 
	
    
    Net earnings for the year

    	 	 	74,452	 	 	 	28,099	 
	 	 	 	 	 	 	 
	
    
    Deficit, beginning of year

    	 	 	(71,382	)	 	 	(99,481	)
	
    
    Retained earnings (deficit), end of year

    	 	$	3,070	 	 	$	(71,382	)
	 	 	 	 	 	 	 
	
    
    Net earnings per unit

    	 	 	 	 	 	 	 	 
	 	
    
    Basic

    	 	 	1.31	 	 	 	0.70	 
	 	
    
    Diluted

    	 	 	1.28	 	 	 	0.68	 

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	 	 	 	 	 	 	 	 	 	 
	 	 	For the Year Ended	
	 	 	December 31,	
	 	 	 	
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	(Stated in thousands of	
	 	 	dollars, except for per unit	
	 	 	amounts)	
	
    
    OPERATIONS

    	 	 	 	 	 	 	 	 
	
    
    Net earnings for the year

    	 	$	74,452	 	 	$	28,099	 
	
    
    Items not involving cash

    	 	 	 	 	 	 	 	 
	 	
    
    Depletion, depreciation and amortization

    	 	 	74,784	 	 	 	44,877	 
	 	
    
    Unit-based compensation

    	 	 	2,638	 	 	 	1,624	 
	 	
    
    Accretion of asset retirement obligation

    	 	 	1,198	 	 	 	902	 
	 	
    
    Accretion of convertible debentures

    	 	 	172	 	 	 	—	 
	 	
    
    Amortization of deferred financing charges

    	 	 	522	 	 	 	—	 
	 	
    
    Future income taxes

    	 	 	(822	)	 	 	11,085	 
	 	
    
    Non-controlling interest

    	 	 	2,428	 	 	 	694	 
	
    
    Asset retirement expenditures

    	 	 	(1,118	)	 	 	(504	)
	 	 	 	 	 	 	 
	 	 	 	154,254	 	 	 	86,777	 
	
    
    Changes in non-cash working capital from operations

    	 	 	(3,076	)	 	 	8,762	 
	 	 	 	 	 	 	 
	 	 	 	151,178	 	 	 	95,539	 
	
    
    FINANCING

    	 	 	 	 	 	 	 	 
	 	
    
    Distributions

    	 	 	(97,336	)	 	 	(16,788	)
	 	
    
    Change in unitholder distributions payable

    	 	 	4,328	 	 	 	5,620	 
	 	
    
    Increase in bank loans

    	 	 	32,277	 	 	 	16,556	 
	 	
    
    Issuance of convertible debentures, net of issue costs

    	 	 	95,545	 	 	 	—	 
	 	
    
    Plan of arrangement costs and other

    	 	 	(341	)	 	 	(10,507	)
	 	
    
    Issuance of shares on exercise of stock options

    	 	 	—	 	 	 	19,115	 
	 	
    
    Payment of $0.22 per share on Plan of Arrangement

    	 	 	—	 	 	 	(36,091	)
	 	
    
    Debt assumed by ProspEx

    	 	 	—	 	 	 	10,655	 
	 	 	 	 	 	 	 
	 	 	 	34,473	 	 	 	(11,440	)
	
    
    INVESTMENTS

    	 	 	 	 	 	 	 	 
	 	
    
    Exploration and development expenditures

    	 	 	(79,383	)	 	 	(122,419	)
	 	
    
    Property dispositions

    	 	 	278	 	 	 	37,644	 
	 	
    
    Office equipment

    	 	 	(623	)	 	 	(153	)
	 	
    
    Corporate acquisitions (Note 4)

    	 	 	(107,205	)	 	 	—	 
	 	
    
    Other

    	 	 	24	 	 	 	207	 
	 	 	 	 	 	 	 
	 	 	 	(186,909	)	 	 	(84,721	)
	
    
    Changes in non-cash working capital

    	 	 	1,258	 	 	 	622	 
	 	 	 	 	 	 	 
	 	 	 	(185,651	)	 	 	(84,099	)
	 	 	 	 	 	 	 
	
    
    Change in cash

    	 	 	—	 	 	 	—	 
	
    
    Cash, beginning of year

    	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 
	
    
    Cash, end of year

    	 	$	—	 	 	$	—	 
	 	 	 	 	 	 	 
	
    
    Supplementary cash flow information

    	 	 	 	 	 	 	 	 
	 	
    
    Cash taxes paid

    	 	$	902	 	 	$	1,035	 
	 	
    
    Interest paid

    	 	$	7,756	 	 	$	3,149	 

See accompanying notes to consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		
	1.	
    BASIS OF PRESENTATION

Esprit Energy Trust (the “Trust”) was established on
October 1, 2004 pursuant to a Plan of Arrangement (the
“Arrangement”) involving the Trust, Esprit Exploration
Ltd. (the “Company”) and ProspEx Resources Ltd.
(“ProspEx”). Under the Arrangement, the Company
transferred certain producing and exploratory oil and gas assets
to ProspEx and each Esprit Exploration Ltd. shareholder received
0.25 of either a Class A Trust Unit, Class B
Trust Unit or an exchangeable share of the Company,
depending on residency and elections; 0.20 of a ProspEx common
share; and a payment of $0.22 per share.

Pursuant to the terms of an agreement (the “NPI
Agreement”), the Trust is entitled to a payment from the
Company each month equal to the amount by which 99 percent
of the gross proceeds from the sale of production exceed
99 percent of certain deductible expenditures (as defined).
Under the terms of the NPI Agreement, deductible expenditures
may include amounts, determined on a discretionary basis, to
fund capital expenditures, to repay third party debt and to
provide for working capital required to carry out the operations
of the Company. The Trustee may declare payable to the
Trust Unitholders all or any part of the net income of the
Trust earned from interest income on the notes and from the
income generated under the NPI Agreement, and from any dividends
paid on the common shares of the Company, less any expenses of
the Trust (including interest on the convertible debentures).

The consolidated financial statements, prior to the Arrangement,
include the Company and its subsidiaries. Upon completion of the
Arrangement, the consolidated financial statements have been
prepared on a continuity of interests basis with the Trust as
the successor to the Company.

The 2005 consolidated financial statements reflect the results
of the Trust and its subsidiaries. The comparative figures for
2004 reflect the results of operations and cash flows of the
Company and its subsidiaries for the period from January 1,
2004 to September 30, 2004 and the results of operations of
the Trust and its subsidiaries for the period from
October 1, 2004 to December 31, 2004. Due to the
conversion into a trust, certain information included in the
consolidated financial statements for prior periods may not be
comparable. The term “units” has been used to identify
trust units issued on or after October 1, 2004 as well as
the common shares outstanding prior to the conversion on
October 1, 2004.

		
	2.	
    SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with
Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reported period. Actual results may differ from these
estimates.

		
		
    (A)     CONSOLIDATION

The consolidated financial statements include the accounts of
the Trust and its subsidiaries. A substantial portion of the oil
and gas activities are conducted jointly with others and the
consolidated financial statements reflect only the Trust’s
proportionate interest in such activities.

		
		
    (B)     CAPITAL ASSETS

The Trust follows the full cost method of accounting for
exploration and development expenditures whereby all costs
relating to the acquisition of, exploration for and development
of oil and gas reserves are capitalized. Such costs include
lease acquisition, geological and geophysical, lease rentals on
undeveloped properties, drilling both productive and
non-productive wells, production equipment and overhead charges
directly related to acquisition, exploration and development
activities. Proceeds received from disposals of properties and
equipment are credited against capitalized costs unless the
disposal would alter the rate of depletion and depreciation by
more than 20 percent, in which case a gain or loss on
disposal is recorded.

All costs of acquisition, exploration and development of oil and
gas reserves, associated tangible plant and equipment costs, and
estimated costs of future development of proved undeveloped
reserves are depleted and depreciated by the unit of production
method based on estimated proved reserves before royalties as
determined by independent engineers. Oil and gas reserves are
converted to equivalent units using their relative energy
content. Costs of unproved properties

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

are excluded from costs subject to depletion until it is
determined whether or not proved reserves are attributable to
the properties or impairment has occurred.

Oil and gas assets are evaluated in each reporting period to
determine that the costs are recoverable and do not exceed the
fair value of the properties. The costs are assessed to be
recoverable if the sum of the undiscounted cash flow expected
from the production of proved reserves and the lower of cost and
market of unproved properties exceed the carrying value of the
oil and gas assets. If the carrying value of the oil and gas
assets is not assessed to be recoverable, an impairment loss is
recognized to the extent that the carrying value exceeds the sum
of the discounted cash flows expected from the production of
proved and probable reserves and the lower of cost and market of
unproved properties. The cash flow is estimated using future
product prices and costs and is discounted using the risk-free
rate.

Amortization of capital assets not related to oil and gas assets
is calculated using the declining balance method at rates
ranging from 20 to 50 percent per annum. Leasehold
improvements are amortized using the straight-line method over
the terms of the respective leases.

		
		
    (C)     GOODWILL

The Trust records goodwill relating to a corporate acquisition
when the total purchase price exceeds the fair value for
accounting purposes of the net identifiable assets and
liabilities of the acquired company. The goodwill balance is
assessed for impairment annually at year-end or as events occur
that could result in an impairment. Impairment is recognized
based on the fair value of the Trust compared to the book value
of the Trust. If the fair value is less than the book value,
impairment is measured by allocating the fair value of the
consolidated Trust to the identifiable assets and liabilities as
if the Trust had been acquired in a business combination for a
purchase price equal to its fair value. The excess of the fair
value of the consolidated Trust over the amounts assigned to the
identifiable assets and liabilities is the fair value of the
goodwill. Any excess of the book value of the goodwill over this
implied fair value of goodwill is the impairment amount.
Impairment is charged to earnings in the period in which it
occurs. Goodwill is stated at cost less impairment and is not
amortized.

		
		
    (D)     REVENUE
    RECOGNITION

Revenue associated with sale of crude oil, natural gas and
natural gas liquids is recognized when title passes to the
purchaser, normally at the pipeline delivery point for natural
gas and at the wellhead for crude oil.

		
		
    (E)     ASSET RETIREMENT
    OBLIGATION

The Company records the fair value of legal obligations
associated with the retirement of long-lived tangible assets,
such as producing well sites and natural gas processing plants,
in the period in which they are incurred and a corresponding
increase in the carrying amount of the related long-lived asset.
The liability accretes until the Company expects to settle the
retirement obligation. The asset retirement costs are depleted
using the unit of production method. Actual costs to retire
tangible assets are deducted from the liability as incurred.

		
		
    (F)     INCOME TAXES

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

The Company follows the liability method of accounting for
future income taxes. Under this method, future income tax assets
and liabilities are determined based on differences between the
amounts reported in the financial statements and the tax basis
of the assets and liabilities, and are measured using the
currently enacted, or substantively enacted, tax rates and laws
expected to apply when these differences reverse. A valuation
allowance is recorded against any future income tax asset if it
is more likely than not that the asset will not be realized.

		
		
    (G)     UNIT-BASED
    COMPENSATION

Stock options granted on or after January 1, 2003 were
accounted for based on the fair value method. The fair value was
measured at the grant date and charged to earnings over the
vesting period. Consideration paid on exercise of options is
credited to share capital. As part of the Arrangement, all stock
options were exercised or cancelled in 2004 resulting in a
charge to earnings in 2004 for all amounts not previously
expensed.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

The Trust’s Performance Unit Incentive Plan is described in
Note 11 (b). Units granted under the plan are accounted for
using the fair value method. The fair value is measured at the
grant date and charged to earnings over the vesting period with
a corresponding increase in contributed surplus.

		
		
    (H)     FOREIGN CURRENCY

Monetary assets and liabilities denominated in foreign
currencies are translated into Canadian dollars at the exchange
rates in effect at the balance sheet date. Revenue and expenses
are translated at the monthly average exchange rate. Translation
gains or losses are included in earnings in the year incurred.

		
		
    (I)     FINANCIAL
    INSTRUMENTS

The Company uses certain derivative financial instruments to
manage its commodity price, foreign currency and interest rate
exposures. These financial instruments are entered into solely
for hedging purposes and are not used for trading or other
speculative purposes. These instruments are not recognized in
the financial statements on inception. Gains or losses arising
from financial instruments on commodity prices and foreign
currency are recognized as adjustments to the related revenue
accounts when the gain or loss is realized.

		
	3.	
    CHANGES IN ACCOUNTING POLICIES

		
		
    (A)     EXCHANGEABLE
    SECURITIES — NON-CONTROLLING INTEREST

In 2004, the Trust adopted the classification provisions of EIC
151 “Exchangeable Securities Issued by Subsidiaries of
Income Trusts”. The exchangeable shares of the Company are
presented as a non-controlling interest on the consolidated
balance sheet as they fail to meet the non-transferability
criteria necessary in order for classification as equity.
Holders of exchangeable shares do not receive distributable cash
from the Trust. Rather, on each distribution payment date, the
number of trust units into which one exchangeable share is
exchangeable is increased on a cumulative basis in respect of
the distribution. A non-controlling interest charge has been
made to net earnings equivalent to the non-controlling
interests’ proportionate share of the Trust’s
consolidated net earnings with a corresponding increase to the
non-controlling interest on the balance sheet.

In accordance with the transitional provisions of the revised
abstract, at June 30, 2005, the Trust retroactively adopted
step acquisition accounting for exchangeable share redemptions.
Each redemption of exchangeable shares is treated as a step
acquisition requiring the exchangeable shares to be transferred
to equity at the market value of the units then issued. At
June 30, 2005 the retroactive application for all
exchangeable shares which had been converted to date resulted in
an increase in property plant and equipment of $2.8 million
($1.9 million at December 31, 2004), an increase in
unitholders’ capital of $1.9 million
($1.2 million at December 31, 2004) and an increase in
future income taxes of $0.9 million (2004 —
$0.6 million). The retroactive application of step
acquisition accounting for the redemptions had no significant
impact on current or prior period earnings and accordingly, the
adjustment as a result of the changes has been recorded in the
current period. Cash flow was not impacted by the change.

		
		
    (B)     HEDGING
    RELATIONSHIPS

In 2004, the Trust prospectively adopted Accounting Guideline
No. 13 as issued by the Canadian Institute of Chartered
Accountants. This guideline addresses the conditions necessary
for a transaction to qualify for hedge accounting, the formal
documentation required to enable the use of hedge accounting and
the requirements to assess the effectiveness of hedging
relationships. Also during 2004, an amended pronouncement of the
Emerging Issues Committee of the Canadian Institute of Chartered
Accountants became effective, requiring financial instruments
that are not designated as hedges to be recorded at fair value
on the balance sheet, with changes in fair value recognized in
earnings. To date, the only derivative financial instruments
used by the Trust are commodity price contracts which are
designated as hedges by the Trust. The adoption of this
guideline did not have a material impact on the Trust’s
financial position or results of operations.

		
	4.	
    ACQUISITIONS

On April 29, 2005, the Trust acquired all of the issued and
outstanding shares of Resolute Energy Inc.
(“Resolute”) on the basis of 0.338 units of the
Trust for each Resolute share resulting in the issuance of
24.1 million trust units. Total consideration, including
the value of the units issued, transaction costs and
distributions to former Resolute

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

shareholders, was $308.3 million. The Resolute acquisition
was accounted for using the purchase method of accounting with
the results of operations being included from the date of the
acquisition.

On August 9, 2005, the Trust acquired all of the issued and
outstanding shares of two private oil and gas companies
(Markedon Energy Ltd. (“Markedon”) and Monroe Energy
Inc. (“Monroe”)) for consideration of
$100.2 million. The acquisitions were accounted for using
the purchase method of accounting with the results of operations
being included from the date of the acquisitions.

The table below summarizes the allocation of the purchase prices
to the net assets of the acquisitions:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Resolute		 	Markedon		 	Monroe		 	Total	
	 	 	 		 	 		 	 		 	 	
	 	 	 	 	($ thousands)		 	 
	
    
    Fair value of trust units issued

    	 	 	301,332	 	 	 	—	 	 	 	—	 	 	 	301,332	 
	
    
    April distribution on trust units issued to former Resolute
    shareholders

    	 	 	3,371	 	 	 	—	 	 	 	—	 	 	 	3,371	 
	
    
    Cash

    	 	 	—	 	 	 	70,243	 	 	 	28,210	 	 	 	98,453	 
	
    
    Transaction costs

    	 	 	3,629	 	 	 	1,340	 	 	 	412	 	 	 	5,381	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total cost of acquisitions

    	 	 	308,332	 	 	 	71,583	 	 	 	28,622	 	 	 	408,537	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Allocated as follows:

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net working capital, including $13.3 million of cash

    	 	 	10,878	 	 	 	(1,845	)	 	 	(254	)	 	 	8,779	 
	
    
    Debt assumed

    	 	 	(36,000	)	 	 	—	 	 	 	—	 	 	 	(36,000	)
	
    
    Asset retirement obligation

    	 	 	(11,339	)	 	 	(853	)	 	 	(48	)	 	 	(12,240	)
	
    
    Future income taxes

    	 	 	(65,112	)	 	 	(20,597	)	 	 	(8,701	)	 	 	(94,410	)
	
    
    Goodwill

    	 	 	118,019	 	 	 	20,293	 	 	 	9,310	 	 	 	147,622	 
	
    
    Property, plant and equipment

    	 	 	291,886	 	 	 	74,585	 	 	 	28,315	 	 	 	394,786	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total cost of acquisitions

    	 	 	308,332	 	 	 	71,583	 	 	 	28,622	 	 	 	408,537	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

The above amounts are estimates made by management based on
currently available information. Amendments may be made to the
purchase allocations as the cost estimates and tax balances are
finalized.

		
	5.	
    TRANSFER OF NET ASSETS TO PROSPEX

Pursuant to the Arrangement, certain undeveloped land, seismic,
producing oil and gas assets and liabilities were transferred to
ProspEx on October 1, 2004. At the time of the transfer,
ProspEx and the Trust were related parties. The assets and
liabilities were transferred at the following net book values:

	 	 	 	 	 
	 	 	($ thousands)	
	
    
    Property, plant and equipment

    	 	 	38,843	 
	
    
    Future tax asset

    	 	 	8,353	 
	
    
    Long-term debt

    	 	 	(10,655	)
	
    
    Asset retirement obligation

    	 	 	(3,492	)
	 	 	 	 
	
    
    Net assets transferred

    	 	 	33,049	 
	 	 	 	 

In addition to the net assets transferred, $70 million of
tax pools were transferred to ProspEx.

As part of the Arrangement, the Company incurred
$8.5 million in payments to employees and officers,
including termination, retention and transaction bonus payments.
These costs have been reflected as a Plan of Arrangement expense
in the statement of earnings. All other direct costs of the
restructuring in the amount of $10.6 million were charged
to unitholders’ capital.

In conjunction with the Arrangement, the Trust and ProspEx
entered into an administrative and technical services agreement
pursuant to which the Trust provided certain administrative and
technical services to ProspEx until March 31, 2005.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	6.	
    RECONCILIATION OF DISTRIBUTIONS

	 	 	 	 	 	 	 	 	 
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	($ thousands except	
	 	 	per unit amounts)	
	
    
    Cash distributions during the period

    	 	 	97,337	 	 	 	16,788	 
	
    
    Accumulated cash distributions, beginning of period

    	 	 	16,788	 	 	 	—	 
	 	 	 	 	 	 	 
	
    
    Accumulated cash distributions, end of period

    	 	 	114,125	 	 	 	16,788	 
	 	 	 	 	 	 	 
	
    
    Cash distributions per unit(1)

    	 	 	1.71	 	 	 	0.42	 
	
    
    Accumulated cash distributions per unit, beginning of period

    	 	 	0.42	 	 	 	—	 
	
    
    Accumulated cash distributions per unit, end of period

    	 	 	2.13	 	 	 	0.42	 
	 	 	 	 	 	 	 

 

		
	(1) 	
    Represents the sum of the distributions declared on each trust
    unit during the year.

		
	7.	
    PROPERTY, PLANT AND EQUIPMENT

	 	 	 	 	 	 	 	 	 
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	($ thousands)	
	
    
    Oil and gas properties

    	 	 	1,123,915	 	 	 	646,224	 
	
    
    Other capital assets

    	 	 	5,581	 	 	 	4,959	 
	 	 	 	 	 	 	 
	 	 	 	1,129,496	 	 	 	651,183	 
	
    
    Less accumulated depletion, depreciation and amortization

    	 	 	(366,305	)	 	 	(291,521	)
	 	 	 	 	 	 	 
	
    
    Total capital assets, net

    	 	 	763,191	 	 	 	359,662	 
	 	 	 	 	 	 	 

At December 31, 2005, oil and gas assets included
$23.0 million (2004 — $7.0 million) relating
to unproved properties which have been excluded from the
depletion calculation. Future development costs related to
proved undeveloped reserves of $81.3 million
(2004 — $59.9 million) are included in the
depletion calculation.

In 2005, the Trust capitalized $3.4 million
(2004 — $3.7 million) of overhead directly
related to acquisition, exploration and development activities.

In 2004, the Company sold to an unrelated third party certain
coalbed methane and shallow gas properties for cash
consideration of $37.7 million.

At December 31, 2005, the Trust applied a ceiling test to
its oil and gas assets using expected future market prices of:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	2006		 	2007		 	2008		 	2009		 	2010		 	Thereafter	
	 	 	 		 	 		 	 		 	 		 	 		 	 	
	
    
    Natural gas ($ per thousand cubic feet)(1)

    	 	 	10.14	 	 	 	9.96	 	 	 	9.95	 	 	 	8.39	 	 	 	7.86	 	 	 	+2.0%/yr	 
	
    
    Natural gas liquids ($ per barrel)(1)

    	 	 	60.10	 	 	 	60.57	 	 	 	58.56	 	 	 	56.33	 	 	 	55.11	 	 	 	+2.0%/yr	 
	
    
    Crude oil ($ per barrel)(2)

    	 	 	66.55	 	 	 	67.07	 	 	 	64.84	 	 	 	62.37	 	 	 	61.02	 	 	 	+2.0%/yr	 

 

		
	(1) 	
    Weighted average plantgate price
	 
	(2) 	
    Weighted average wellhead price

A ceiling test surplus existed at December 31, 2005 and
2004.

		
	8.	
    BANK LOANS

The Trust executed an amended and restated credit agreement
August 2005, which increased the Trust’s credit facility by
$30 million to $280 million (2004 —
$150 million). The credit agreement provides for an
extendible revolving term and is secured by a $500 million
(2004 — $250 million) demand debenture and a
first floating charge on all petroleum and natural gas assets of
the Trust. The interest rate paid on the utilized portion of the
facility for the year ended December 31, 2005 was
approximately 3.5 percent (2004 —
3.4 percent). The facility is fully revolving until
May 31, 2006 and may be extended at the mutual agreement of
the Trust and its lenders for an additional year. If the credit
facility is not extended, a balloon payment is required on
June 1, 2007.

The Trust has no debt denominated in a foreign currency.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	9.	
    CONVERTIBLE DEBENTURES

On July 28, 2005, the Trust issued $100 million
principal amount of 6.5 percent convertible extendible
unsecured subordinated debentures for net proceeds of
$96 million. The Debentures bear interest from the date of
issue, which is paid semi-annually in arrears on June 30
and December 31 of each year. The Debentures are
convertible at the option of the holder at any time into fully
paid trust units at a conversion price of $13.85 per unit.
The Debentures mature on December 31, 2010. After
December 31, 2008, the Trust may elect to redeem all or a
portion of the outstanding debentures at a price of
$1,050 per debenture or $1,025 per debenture after
December 31, 2009. At December 31, 2005, the principal
amount outstanding on the Debentures is $95.9 million.

The Debentures have been classified as debt, net of the fair
value of the conversion feature at the date of issue, which has
been classified as part of unitholders’ equity. The fair
value of the conversion feature was calculated using an option
pricing model. The debt portion will accrete up to the principal
balance over the term of the Debentures. Issue costs have been
classified as deferred financing charges and are being amortized
over the term of the Debentures. The accretion of the debt
portion, amortization of issue costs and the interest paid are
expensed within “Interest and financing” in the
consolidated statement of earnings. If Debentures are converted
into units, that portion of the value of the conversion feature
within unitholders’ equity will be reclassified to trust
units along with the principal amount converted.

The following table sets forth a reconciliation of the Debenture
activity:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Debt		 	Equity		 	 
	 	 	Portion		 	Portion		 	Total	
	 	 	 		 	 		 	 	
	 	 	($ thousands)	
	
    
    July 28, 2005 Issuance

    	 	 	97,820	 	 	 	2,180	 	 	 	100,000	 
	
    
    Accretion

    	 	 	171	 	 	 	—	 	 	 	171	 
	
    
    Conversion to trust units

    	 	 	(4,125	)	 	 	(90	)	 	 	(4,215	)
	 	 	 	 	 	 	 	 	 	 
	
    
    Balance, December 31, 2005

    	 	 	93,866	 	 	 	2,090	 	 	 	95,956	 
	 	 	 	 	 	 	 	 	 	 

		
	10.	
    ASSET RETIREMENT OBLIGATION

The Trust has recorded the fair value of legal obligations
associated with the retirement of all of its long-lived tangible
assets, including its producing well sites and natural gas
processing plants. The estimation of these costs is based on
engineering estimates using current costs and technology and in
accordance with current legislation and industry practice.

	 	 	 	 	 	 	 	 	 
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	($ thousands)	
	
    
    Balance, beginning of year

    	 	 	11,006	 	 	 	13,489	 
	
    
    Transfer to ProspEx

    	 	 	—	 	 	 	(3,492	)
	
    
    Increase in liability from acquisitions

    	 	 	12,240	 	 	 	—	 
	
    
    Liabilities incurred

    	 	 	875	 	 	 	611	 
	
    
    Liabilities settled

    	 	 	(1,118	)	 	 	(504	)
	
    
    Accretion expense

    	 	 	1,198	 	 	 	902	 
	
    
    Revisions in estimated cash flows

    	 	 	(142	)	 	 	—	 
	 	 	 	 	 	 	 
	
    
    Balance, end of year

    	 	 	24,059	 	 	 	11,006	 
	 	 	 	 	 	 	 

The Trust used a credit adjusted, risk-free annual discount of
seven percent and an inflation rate of two percent per annum to
calculate the present value of the obligations. Undiscounted
expenditures of $86.8 million are expected to be made over
the next 45 years.

		
	11.	
    UNITHOLDERS’ CAPITAL AND EXCHANGEABLE SHARES

Effective June 30, 2005, the Trust eliminated its dual
trust unit structure. All trust units have the same rights to
vote, receive distributions and participate in the assets of the
Trust upon any wind-up
or dissolution. There are no residency restrictions on the trust
units. Prior to this, the capital structure of the Trust
consisted of Class A trust units and Class B

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

trust units. The Class A and Class B trust units had
the same rights to vote, receive distributions and participate
in the assets of the Trust upon any
wind-up or dissolution.
Class A trust units had no residency restrictions whereas
the Class B trust units could only be held by Canadian
residents.

		
	 	
    (A)     ISSUED AND
    OUTSTANDING

A summary of unitholders’ capital for the years ended
December 31, 2005 and 2004 is as follows:

	 	 	 	 	 	 	 	 	 
	 	 	Number		 	Amount	
	 	 	 		 	 	
	 	 	(Thousands)		 	($ thousands)	
	
    
    Balance at December 31, 2004

    	 	 	40,183	 	 	 	298,726	 
	
    
    Plan of Arrangement and trust unit issuance costs

    	 	 	—	 	 	 	(338	)
	
    
    Fair value of trust units issued on acquisition of Resolute

    	 	 	24,078	 	 	 	301,332	 
	
    
    Units issued on conversion of exchangeable shares

    	 	 	1,797	 	 	 	12,521	 
	
    
    Step purchase on exchangeable shares

    	 	 	—	 	 	 	1,406	 
	
    
    Units issued on conversion of 6.5% convertible debentures

    	 	 	300	 	 	 	4,215	 
	 	 	 	 	 	 	 
	
    
    Total trust units as at December 31, 2005

    	 	 	66,358	 	 	 	617,862	 
	 	 	 	 	 	 	 

		
	 	
    (B)  TRUST PERFORMANCE UNIT INCENTIVE PLAN AND
    STOCK OPTIONS

In accordance with the Arrangement, all outstanding stock
options of the Company vested upon the completion of the
Arrangement. $1.0 million, being the unexpensed portion of
the fair value of the outstanding options, was expensed in the
third quarter of 2004. In accordance with the Arrangement, the
options outstanding at September 30, 2004 were converted
into options to acquire Class B trust units and options to
acquire common shares of ProspEx. All options were exercised
within 30 days of the closing of the Arrangement. The
continuity of the option plan is as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	2004	
	 	 	2005		 	Weighted Average	
	 	 	Performance		 	 	
	 	 	Units		 	Options		 	Exercise Price	
	 	 	 		 	 		 	 	
	 	 	(Thousands)		 	(Thousands)		 	($/unit)	
	
    
    Outstanding at beginning of year

    	 	 	—	 	 	 	11,079	 	 	 	2.63	 
	
    
    Granted

    	 	 	527	 	 	 	40	 	 	 	2.81	 
	
    
    Exercised

    	 	 	—	 	 	 	(9,510	)	 	 	2.35	 
	
    
    Cancelled

    	 	 	(62	)	 	 	(1,609	)	 	 	4.15	 
	 	 	 	 	 	 	 	 	 	 
	
    
    Outstanding at end of year

    	 	 	465	 	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 

The Trust has implemented a Performance Unit Incentive Plan (the
“Plan”). Under the Plan, the Trustees may grant up to
5 percent of the number of units outstanding (including
trust units issuable upon the exchange of exchangeable shares)
from time to time to Trustees, officers, employees of, or
providers of services to the Trust. Performance units will vest
over a period of one to three years and result in the issuance
of trust units (the actual number of units is determined by a
performance factor). The performance factor is established based
on the Trust’s performance relative to its peers.

As at December 31, 2005, 464,651 (2004 — Nil)
performance units were issued and outstanding. The fair value of
performance units is estimated at the time they are granted and
expensed over the vesting period. During the fourth quarter of
2005, the performance factor assumption on performance units
vesting on January 1, 2006 was reduced from 1.0 to 0.25.
For 2005, unit-based compensation expense of $2.7 million
(2004 — $1.8 million) was recorded in the
statement of earnings with a corresponding increase to
contributed surplus. The contributed surplus balance is
transferred to unitholders’ equity when the units are
ultimately issued.

		
	 	
    (C)  PER UNIT AMOUNTS

Basic per unit amounts are calculated using the weighted average
number of units outstanding during the period. Diluted per unit
amounts include the dilutive effect of convertible debentures
and exchangeable shares using the “if-converted”
method. The dilutive effect of performance units is including
using the fair value method and the dilutive effect of stock
options is included using the treasury stock method. An
adjustment to the numerator of earnings per share amount was
required in the diluted calculation to provide for the earnings
($2.4 million) attributable to the non-

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

controlling interest and the interest on the convertible
debentures ($2.7 million). The following table summarizes
the trust units used in calculating net earnings per unit.

Basic per unit amounts are calculated using the weighted average
number of units outstanding during the period. Diluted per share
amounts are calculated based on the treasury stock method, which
assumes that any proceeds obtained on the exercise of stock
options would be used to purchase trust units at the average
price during the period. The weighted average number of units
outstanding is then adjusted by this amount. The following table
summarizes the trust units used in calculating net income per
unit.

	 	 	 	 	 	 	 	 	 
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	(Thousands)	
	
    
    Weighted average number of units outstanding — basic

    	 	 	56,869	 	 	 	40,023	 
	
    
    Effect of performance units

    	 	 	310	 	 	 	469	 
	
    
    Trust units issuable on conversion of exchangeable shares

    	 	 	1,772	 	 	 	558	 
	
    
    Trust units issuable on conversion of debentures

    	 	 	3,016	 	 	 	—	 
	 	 	 	 	 	 	 
	
    
    Weighted average number of units outstanding — diluted

    	 	 	61,967	 	 	 	41,050	 
	 	 	 	 	 	 	 

		
	12.	
    NON-CONTROLLING INTEREST

Upon Esprit’s conversion to a Trust on October 1,
2004, Canadian residents were issued exchangeable shares of a
subsidiary, rather than trust units, if they so elected.
Exchangeable shares of the subsidiary are exchangeable at any
time, based on the exchange ratio, into trust units at the
option of the holder. The exchange ratio is increased monthly
based on the cash distributions paid and the volume-weighted
average market trading price over the five days ending on the
distribution record date. Cash distributions are not paid on
exchangeable shares. Exchangeable shares are classified as
non-controlling interest on the balance sheet and their portion
of net earnings is reflected as non-controlling interest on the
statement of earnings.

On October 1, 2007, the Trust will issue trust units in
exchange for all remaining outstanding exchangeable shares based
on the then applicable exchange ratio. The following table
summarizes the exchangeable shares exchanged for trust units
during the year ended December 31, 2005:

	 	 	 	 	 	 	 	 	 
	 	 	Number of		 	 
	Exchangeable shares	 	Shares		 	Amount	
	 	 	 		 	 	
	 	 	(Thousands)		 	($ thousands)	
	
    
    Issued on October 1, 2004

    	 	 	2,443	 	 	 	18,066	 
	
    
    Exchanged for trust units

    	 	 	(395	)	 	 	(3,029	)
	
    
    Non-controlling interest in net earnings

    	 	 	—	 	 	 	694	 
	 	 	 	 	 	 	 
	
    
    Balance, December 31, 2004

    	 	 	2,048	 	 	 	15,731	 
	
    
    Exchanged for trust units

    	 	 	(1,581	)	 	 	(11,879	)
	
    
    Non-controlling interest in net income

    	 	 	—	 	 	 	2,428	 
	 	 	 	 	 	 	 
	
    
    Balance, December 31, 2005

    	 	 	467	 	 	 	6,280	 
	 	 	 	 	 	 	 
	
    
    Exchange ratio, December 31, 2005

    	 	 	1.16760	 	 	 	 	 
	
    
    Trust units issuable upon conversion

    	 	 	545	 	 	 	 	 
	 	 	 	 	 	 	 

The exchangeable shares of the subsidiary are accounted for in
accordance with EIC 151 “Exchangeable Securities Issued by
Subsidiaries of Income Trusts”. The exchangeable shares are
presented as a non-controlling interest because they fail to
meet the non-transferability criteria necessary in order for
them to be classified as equity. Holders of exchangeable shares
do not receive distributable cash from the Trust. Rather, on
each distribution payment date, the number of trust units into
which each exchangeable share is exchangeable is increased on a
cumulative basis in respect of the distribution. A
non-controlling interest charge has been made to net earnings
equivalent to the exchangeable shareholders’ proportionate
share of the Trust’s consolidated net income with a
corresponding increase to the non-controlling interest on the
balance sheet.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	13.	
    FINANCIAL INSTRUMENTS

The Trust enters into commodity price derivative contracts to
reduce the impact of volatile commodity prices. The following
contracts were in place December 31, 2005:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Notional		 	Physical/		 	 	 	 
	Natural Gas Contracts	 	Volumes		 	Financial		 	Term	 	Price	
	 	 	 		 	 		 	 	 	 	
	 	 	(GJ/d)		 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	($/GJ)	
	
    
    AECO Fixed Price

    	 	 	20,000	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	 	 	 	 	 	 	9.76	 
	
    
    AECO Fixed Price

    	 	 	2,500	 	 	 	Physical	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2005	 	 	 	 	 	 	 	 	9.00	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	7.00	 	 	
    -	 	 	9.00	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	7.00	 	 	
    -	 	 	9.50	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	7.50	 	 	
    -	 	 	10.00	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	7.50	 	 	
    -	 	 	10.50	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	7.50	 	 	
    -	 	 	11.00	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	7.50	 	 	
    -	 	 	12.45	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	8.00	 	 	
    -	 	 	14.00	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	8.00	 	 	
    -	 	 	15.20	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Mar. 31, 2006	 	 	9.00	 	 	
    -	 	 	16.70	 
	
    
    AECO Fixed Price

    	 	 	17,500	 	 	 	Physical	 	 	
    Jan. 1, 2006	 	
    -	 	
    Jan. 31, 2006	 	 	 	 	 	 	 	 	12.3075	 
	
    
    AECO Fixed Price

    	 	 	7,500	 	 	 	Physical	 	 	
    Feb. 1, 2006	 	
    -	 	
    Feb. 28, 2006	 	 	 	 	 	 	 	 	15.18	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Apr. 1, 2006	 	
    -	 	
    Oct. 31, 2006	 	 	7.50	 	 	
    -	 	 	10.10	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Apr. 1, 2006	 	
    -	 	
    Oct. 31, 2006	 	 	8.00	 	 	
    -	 	 	10.25	 
	
    
    AECO Fixed Price

    	 	 	12,500	 	 	 	Financial	 	 	
    Apr. 1, 2006	 	
    -	 	
    Oct. 31, 2006	 	 	 	 	 	 	 	 	8.87	 
	
    
    AECO Fixed Price

    	 	 	2,500	 	 	 	Physical	 	 	
    Apr. 1, 2006	 	
    -	 	
    Oct. 31, 2006	 	 	 	 	 	 	 	 	9.05	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	
    Apr. 1, 2006	 	
    -	 	
    Oct. 31, 2006	 	 	9.50	 	 	
    -	 	 	13.00	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Notional		 	 	 	 	 	 
	Crude Contracts	 	Volumes		 	Type		 	Term	 	Price	
	 	 	 		 	 		 	 	 	 	
	 	 	(Bbl/d)		 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	(Cdn. $/bbl)	
	
    
    WTI Nymex Fixed Price

    	 	 	650	 	 	 	Financial	 	 	
    Nov. 1, 2005	 	
    -	 	
    Oct. 31, 2008	 	 	 	 	 	 	 	 	71.50	 

As at December 31, 2005, the Trust would have realized a
loss of approximately $6.0 million (2004 — gain
of $4.3 million) were all commodity hedging contracts
closed out.

The carrying value of accounts receivable, deposits and accounts
payable and accrued liabilities and distributions payable
approximate their fair value due to their demand nature or
relatively short periods to maturity. The fair value of the bank
loan approximates its carrying value as it bears interest at a
floating rate. The fair value of the convertible debentures is
approximately $105.3 million.

A substantial portion of the Trust’s accounts receivable
are with customers and joint venture partners in the oil and gas
industry and are subject to normal industry credit risks. The
Trust has no significant concentration of credit risk.
Purchasers of oil, gas and natural gas liquids are subject to an
internal credit review to minimize the risk of non-payment.
Commodity price derivative contracts are with counterparties
that have investment grade credit ratings thereby mitigating
credit risk.

The Trust is exposed to foreign currency fluctuations as oil
prices received are referenced to US dollar denominated prices
and natural gas and natural gas liquids prices are influenced by
US dollar denominated markets.

The Trust is exposed to a floating rate of interest on all of
its bank loans.

The Trust has no instruments in place at December 31, 2005
(2004 — Nil) to manage the foreign currency and
interest rate exposures.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	14.	
    FUTURE INCOME TAXES

The provision for future income taxes differs from the amount
computed by applying the combined statutory Canadian Federal and
Provincial tax rates to earnings before taxes. The reasons for
these differences are as follows:

	 	 	 	 	 	 	 	 	 	 
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	($ thousands except	
	 	 	where noted)	
	
    
    Earnings before income taxes and non-controlling interest

    	 	 	77,179	 	 	 	40,650	 
	
    
    Rate

    	 	 	37.62	%	 	 	38.62	%
	 	 	 	 	 	 	 
	
    
    Computed expected provision for future income taxes

    	 	 	29,035	 	 	 	15,699	 
	
    
    Increase (decrease) in taxes resulting from:

    	 	 	 	 	 	 	 	 
	 	
    
    Non-deductible Crown payments, net of ARTC

    	 	 	11,384	 	 	 	8,824	 
	 	
    
    Resource allowance

    	 	 	(14,122	)	 	 	(8,429	)
	 	
    
    Net income of the Trust and other

    	 	 	(28,019	)	 	 	(5,902	)
	 	
    
    Non-deductible unit-based compensation

    	 	 	993	 	 	 	627	 
	 	
    
    Effect of change in tax rate

    	 	 	(93	)	 	 	251	 
	 	
    
    Valuation allowance

    	 	 	—	 	 	 	15	 
	 	 	 	 	 	 	 
	 	 	 	(822	)	 	 	11,085	 
	
    
    Capital taxes

    	 	 	1,121	 	 	 	772	 
	 	 	 	 	 	 	 
	
    
    Income tax expense

    	 	 	299	 	 	 	11,857	 
	 	 	 	 	 	 	 

The components of the future income tax asset at
December 31, 2005 and 2004 are as follows:

	 	 	 	 	 	 	 	 	 	 
	 	 	2005		 	2004	
	 	 	 		 	 	
	 	 	($ thousands)	
	
    
    Tax assets:

    	 	 	 	 	 	 	 	 
	 	
    
    Loss carryforwards and other

    	 	 	7,581	 	 	 	55,381	 
	 	
    
    Asset retirement obligation

    	 	 	8,089	 	 	 	3,700	 
	 	
    
    Share issue costs

    	 	 	231	 	 	 	333	 
	 	 	 	 	 	 	 
	 	 	 	15,901	 	 	 	59,414	 
	
    
    Tax liabilities:

    	 	 	 	 	 	 	 	 
	 	
    
    Capital assets

    	 	 	126,338	 	 	 	75,225	 
	 	 	 	 	 	 	 
	 	 	 	(110,437	)	 	 	(15,811	)
	
    
    Valuation allowance

    	 	 	(3,545	)	 	 	(3,545	)
	 	 	 	 	 	 	 
	
    
    Future tax (liability) asset

    	 	 	(113,982	)	 	 	(19,356	)
	 	 	 	 	 	 	 

The Trust meets criteria qualifying it for income tax treatment
permitting a tax deduction for distributions paid to the unit
holders in addition to other deductions available in the Trust.
At December 31, 2005, the book amounts of the Trust’s
assets and liabilities exceed the tax basis by $3.2 million.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	15.	
    COMMITMENTS

The Company has committed to certain payments over the next five
years as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	2006		 	2007		 	2008		 	2009		 	2010	
	 	 	 		 	 		 	 		 	 		 	 	
	 	 	($ thousands)	
	
    
    Bank loan(1)

    	 	 	—	 	 	 	144,316	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Convertible debentures(2)

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	95,850	(2)
	
    
    Pipeline transportation

    	 	 	2,090	 	 	 	1,482	 	 	 	1,182	 	 	 	—	 	 	 	—	 
	
    
    Operating leases

    	 	 	362	 	 	 	403	 	 	 	435	 	 	 	443	 	 	 	479	 
	
    
    Software licenses

    	 	 	562	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	3,014	 	 	 	146,201	 	 	 	1,617	 	 	 	443	 	 	 	96,329	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 

		
	(1) 	
    The credit facility may be extended at the mutual agreement of
    the Trust and its lenders in May 2006. The Trust intends to
    extend the terms of this agreement on an ongoing basis. If the
    facility is not extended, a balloon payment is required on
    June 1, 2007. Additional details regarding the Trust’s
    bank loans debt are described in Note 8.
	 
	(2) 	
    As described in Note 9, the Debentures mature on
    December 31, 2010. The Trust has the option to settle the
    Debentures with either cash or trust units.

 

 

 

SCHEDULE “B”

Unaudited comparative consolidated financial statements of Esprit

for the six months ended June 30, 2006, together with the notes thereto

 

ESPRIT ENERGY TRUST

CONSOLIDATED BALANCE SHEETS

	 	 	 	 	 	 	 	 	 	 
	 	 	June 30,		 	December 31,	
	 	 	2006		 	2005	
	 	 	 		 	 	
	 	 	(Unaudited)	
	 	 	(Stated in thousands	
	 	 	of dollars)	
	
    ASSETS
	
    
    Current assets

    	 	 	 	 	 	 	 	 
	 	
    
    Accounts receivable

    	 	$	29,086	 	 	$	43,433	 
	 	
    
    Prepaid expenses

    	 	 	6,291	 	 	 	7,684	 
	 	 	 	 	 	 	 
	 	 	 	35,377	 	 	 	51,117	 
	
    
    Property, plant and equipment, net

    	 	 	734,061	 	 	 	763,191	 
	
    
    Goodwill

    	 	 	147,622	 	 	 	147,622	 
	
    
    Deferred financing charges, net

    	 	 	3,581	 	 	 	3,933	 
	 	 	 	 	 	 	 
	 	 	$	920,641	 	 	$	965,863	 
	 	 	 	 	 	 	 
	 
	
    LIABILITIES
	
    
    Current liabilities

    	 	 	 	 	 	 	 	 
	 	
    
    Accounts payable and accrued liabilities

    	 	$	39,304	 	 	$	61,954	 
	 	
    
    Unit holder distributions payable

    	 	 	9,973	 	 	 	9,948	 
	 	 	 	 	 	 	 
	 	 	 	49,277	 	 	 	71,902	 
	
    
    Bank loan (Note 2)

    	 	 	141,830	 	 	 	144,239	 
	
    
    Convertible debentures (Note 3)

    	 	 	94,057	 	 	 	93,866	 
	
    
    Asset retirement obligations (Note 4)

    	 	 	25,206	 	 	 	24,059	 
	
    
    Future income taxes

    	 	 	106,668	 	 	 	113,982	 
	 	 	 	 	 	 	 
	 	 	 	417,038	 	 	 	448,048	 
	
    
    Non-controlling interest (Note 5)

    	 	 	4,019	 	 	 	6,280	 
	
    
    UNITHOLDER’S EQUITY

    	 	 	 	 	 	 	 	 
	
    
    Unit holder’s capital (Note 6)

    	 	 	623,592	 	 	 	617,862	 
	
    
    Equity component of convertible debentures (Note 3)

    	 	 	2,090	 	 	 	2,090	 
	
    
    Contributed surplus (Note 6)

    	 	 	6,716	 	 	 	2,638	 
	
    
    Deficit

    	 	 	(132,814	)	 	 	(111,055	)
	 	 	 	 	 	 	 
	
    
    Total unit holder’s equity

    	 	 	499,584	 	 	 	511,535	 
	 	 	 	 	 	 	 
	 	 	$	920,641	 	 	$	965,863	 
	 	 	 	 	 	 	 

Subsequent events (Note 11)

See accompanying notes to consolidated financial statements

 

 

CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DEFICIT)
 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	June 30		 	June 30	
	 	 	 		 	 	
	 	 	2006		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 	
	 	 	(Unaudited)	
	 	 	(Stated in thousands of dollars, except per unit amounts)	
	
    
    Revenue

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Oil and gas

    	 	$	77,658	 	 	$	57,940	 	 	$	165,931	 	 	$	100,997	 
	 	
    
    Royalties

    	 	 	(17,090	)	 	 	(12,182	)	 	 	(38,684	)	 	 	(22,372	)
	 	
    
    Other income

    	 	 	559	 	 	 	—	 	 	 	1,449	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	61,127	 	 	 	45,758	 	 	 	128,696	 	 	 	78,625	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Expenses

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Operating

    	 	 	14,227	 	 	 	10,412	 	 	 	28,134	 	 	 	17,824	 
	 	
    
    Transportation

    	 	 	592	 	 	 	558	 	 	 	1,265	 	 	 	977	 
	 	
    
    Depletion, depreciation and amortization

    	 	 	25,559	 	 	 	15,821	 	 	 	50,732	 	 	 	26,008	 
	 	
    
    General and administrative

    	 	 	3,862	 	 	 	1,957	 	 	 	6,899	 	 	 	3,529	 
	 	
    
    Interest and financing (Note 9)

    	 	 	3,677	 	 	 	1,124	 	 	 	7,364	 	 	 	2,008	 
	 	
    
    Accretion of asset retirement obligation

    	 	 	433	 	 	 	323	 	 	 	871	 	 	 	516	 
	 	
    
    Unit-based compensation

    	 	 	2,711	 	 	 	802	 	 	 	3,141	 	 	 	1,232	 
	 	
    
    Other

    	 	 	—	 	 	 	788	 	 	 	—	 	 	 	804	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	51,061	 	 	 	31,785	 	 	 	98,406	 	 	 	52,898	 
	
    
    Earnings before income taxes and non-controlling interest

    	 	 	10,066	 	 	 	13,973	 	 	 	30,290	 	 	 	25,727	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Income taxes

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Capital tax (recovery)

    	 	 	(5	)	 	 	349	 	 	 	307	 	 	 	445	 
	 	
    
    Future (reduction)

    	 	 	(8,579	)	 	 	(2,922	)	 	 	(8,515	)	 	 	(2,852	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	(8,584	)	 	 	(2,573	)	 	 	(8,208	)	 	 	(2,407	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Earnings before non-controlling interest

    	 	 	18,650	 	 	 	16,546	 	 	 	38,498	 	 	 	28,134	 
	
    
    Non-controlling interest (Note 5)

    	 	 	238	 	 	 	640	 	 	 	494	 	 	 	1,199	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net earnings for the period

    	 	 	18,412	 	 	 	15,906	 	 	 	38,004	 	 	 	26,935	 
	
    
    Deficit, beginning of period

    	 	 	(121,329	)	 	 	(94,033	)	 	 	(111,055	)	 	 	(88,170	)
	
    
    Distributions paid or declared (Note 8)

    	 	 	(29,897	)	 	 	(23,703	)	 	 	(59,763	)	 	 	(40,595	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Deficit, end of period

    	 	$	(132,814	)	 	$	(101,830	)	 	$	(132,814	)	 	$	(101,830	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net earnings per unit — basic

    	 	 	0.28	 	 	 	0.28	 	 	 	0.57	 	 	 	0.55	 
	 	 	
    
     — diluted

    	 	 	0.27	 	 	 	0.27	 	 	 	0.55	 	 	 	0.53	 

See accompanying notes to consolidated financial statements

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	June 30		 	June 30	
	 	 	 		 	 	
	 	 	2006		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 	
	 	 	(Unaudited)	
	 	 	(Stated in thousands of dollars)	
	
    
    OPERATIONS

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Net earnings for the period

    	 	$	18,412	 	 	$	15,906	 	 	$	38,004	 	 	$	26,935	 
	
    
    Items not involving cash

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Depletion, depreciation and amortization

    	 	 	25,559	 	 	 	15,821	 	 	 	50,732	 	 	 	26,008	 
	 	
    
    Unit-based compensation

    	 	 	2,711	 	 	 	802	 	 	 	3,141	 	 	 	1,232	 
	 	
    
    Accretion of asset retirement obligation

    	 	 	433	 	 	 	323	 	 	 	871	 	 	 	516	 
	 	
    
    Accretion of convertible debentures

    	 	 	92	 	 	 	—	 	 	 	191	 	 	 	—	 
	 	
    
    Amortization of deferred financing charges

    	 	 	164	 	 	 	—	 	 	 	352	 	 	 	—	 
	 	
    
    Future income taxes

    	 	 	(8,579	)	 	 	(2,922	)	 	 	(8,515	)	 	 	(2,852	)
	 	
    
    Non-controlling interest

    	 	 	238	 	 	 	640	 	 	 	494	 	 	 	1,199	 
	
    
    Asset retirement expenditures

    	 	 	(187	)	 	 	(66	)	 	 	(496	)	 	 	(77	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	38,843	 	 	 	30,504	 	 	 	84,774	 	 	 	52,961	 
	
    
    Changes in non-cash working capital from operations

    	 	 	3,546	 	 	 	(329	)	 	 	(4,224	)	 	 	(4,132	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	42,389	 	 	 	30,175	 	 	 	80,550	 	 	 	48,829	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    FINANCING

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Distributions

    	 	 	(29,897	)	 	 	(23,703	)	 	 	(59,763	)	 	 	(40,595	)
	 	
    
    Change in unit holder distributions payable

    	 	 	12	 	 	 	3,393	 	 	 	25	 	 	 	3,405	 
	 	
    
    Increase (decrease) in bank loans

    	 	 	6,599	 	 	 	17,934	 	 	 	(2,409	)	 	 	24,225	 
	 	
    
    Plan of arrangement costs and other

    	 	 	—	 	 	 	(136	)	 	 	—	 	 	 	(251	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	(23,286	)	 	 	(2,512	)	 	 	(62,147	)	 	 	(13,216	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    INVESTMENTS

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Exploration and development expenditures

    	 	 	(15,424	)	 	 	(18,334	)	 	 	(30,852	)	 	 	(28,788	)
	 	
    
    Property dispositions

    	 	 	—	 	 	 	—	 	 	 	16,000	 	 	 	—	 
	 	
    
    Office equipment and other

    	 	 	(703	)	 	 	(246	)	 	 	(865	)	 	 	(304	)
	 	
    
    Corporate acquisitions

    	 	 	—	 	 	 	(6,971	)	 	 	—	 	 	 	(7,000	)
	
    
    Changes in non-cash working capital from investments

    	 	 	(2,976	)	 	 	(2,112	)	 	 	(2,686	)	 	 	479	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	(19,103	)	 	 	(27,663	)	 	 	(18,403	)	 	 	(35,613	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Change in cash

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Cash, beginning of period

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Cash, end of period

    	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Supplementary cash flow information

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Cash taxes paid

    	 	$	260	 	 	$	245	 	 	$	740	 	 	$	585	 
	 	
    
    Interest paid

    	 	$	5,003	 	 	$	1,124	 	 	$	6,873	 	 	$	1,996	 

See accompanying notes to consolidated financial statements

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(unaudited)

(stated in thousands of dollars, unless otherwise
indicated)

		
	1.	
    BASIS OF PRESENTATION

The unaudited interim consolidated financial statements include
the accounts of the Trust and its subsidiaries and have been
prepared by management in accordance with accounting policies
generally accepted in Canada. The unaudited interim consolidated
financial statements have been prepared following the same
accounting policies and methods of computation as the audited
consolidated financial statements for the fiscal year ended
December 31, 2005. The disclosures included below are
incremental to those included with the annual consolidated
financial statements. These interim consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto in the Trust’s
annual report for the year ended December 31,2005. Certain
comparative amounts have been reclassified to conform with
current year’s presentation.

		
	2.	
    BANK LOAN

Effective July 5, 2006, the Trust has amended and restated
its credit facility with a syndicate of four Canadian chartered
banks. The credit facility has been increased from
$280 million to $330 million. The credit agreement
provides for an extendible revolving term and is secured by a
$500 million demand debenture and a first floating charge
on all petroleum and natural gas assets of the Trust. The
interest rate paid on the utilized portion of the facility for
the quarter was approximately 5.0 percent (2005 —
3.5 percent). The facility is fully revolving until
May 31, 2007 and may be extended at the mutual agreement of
the Trust and its lenders for an additional year. If the credit
facility is not extended, a balloon payment is required on
June 1, 2008.

The Trust has no debt denominated in a foreign currency.

		
	3.	
    CONVERTIBLE DEBENTURES

On July 28, 2005, the Trust issued $100 million
principal amount of 6.5 percent convertible unsecured
subordinated debentures for net proceeds of $96 million.
The Debentures bear interest from the date of issue, which is
paid semi-annually in arrears on June 30 and
December 31 in each year. Debentures have a face value of
$1,000 and are convertible at the option of the holder at any
time into fully paid trust units at a conversion price of
$13.85 per unit. The Debentures mature on December 31,
2010. After December 31, 2008, the Trust may elect to
redeem all or a portion of the outstanding Debentures at a price
of $1,050 per debenture or $1,025 per debenture after
December 31, 2009. At June 30,2006,the principal
amount outstanding on the Debentures is $95.9 million.

The Debentures have been classified as debt net of the fair
value of the conversion feature at the date of issue, which has
been classified as part of unitholders’ equity. The debt
portion will accrete up to the outstanding principal balance at
maturity. Issue costs have been classified as deferred financing
charges and are being amortized over the term of the Debentures.
The accretion of the debt portion, amortization of issue costs
and the interest cost are expensed within “Interest and
financing” in the consolidated statement of earnings. If
Debentures are converted into units, that portion of the value
of the conversion feature within unit holders’ equity will
be reclassified to trust units along with the principal amount
converted.

The following table sets forth a reconciliation of the Debenture
activity for the six-month period ended June 30, 2006:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Debt		 	Equity		 	 
	 	 	Portion		 	Portion		 	Total	
	 	 	 		 	 		 	 	
	 	 	($ thousands)	
	
    
    Balance, December 31, 2005

    	 	$	93,866	 	 	$	2,090	 	 	$	95,956	 
	
    
    Accretion

    	 	 	191	 	 	 	—	 	 	 	191	 
	
    
    Conversion to trust units

    	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 
	
    
    Balance, June 30, 2006

    	 	$	94,057	 	 	$	2,090	 	 	$	96,147	 
	 	 	 	 	 	 	 	 	 	 

		
	4.	
    ASSET RETIREMENT OBLIGATION

The Trust has recorded the fair value of legal obligations
associated with the retirement of all of its long lived
tangible assets, including its producing well sites and natural
gas processing plants. The estimation of these costs is based on

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

engineering estimates using current costs and technology and in
accordance with current legislation and industry practice.

	 	 	 	 	 	 	 	 	 
	 	 	Six Months Ended		 	Twelve Months Ended	
	 	 	June 30, 2006		 	December 31, 2005	
	 	 	 		 	 	
	 	 	($ thousands)	
	
    
    Balance, beginning of period

    	 	$	24,059	 	 	$	11,006	 
	
    
    Increase in liability from acquisitions

    	 	 	—	 	 	 	12,240	 
	
    
    Liabilities incurred

    	 	 	128	 	 	 	875	 
	
    
    Liabilities settled

    	 	 	(496	)	 	 	(1,118	)
	
    
    Accretion expense

    	 	 	871	 	 	 	1,198	 
	
    
    Revisions in estimated cash flows

    	 	 	644	 	 	 	(142	)
	 	 	 	 	 	 	 
	
    
    Balance, end of period

    	 	$	25,206	 	 	$	24,059	 
	 	 	 	 	 	 	 

The Trust used a credit adjusted, risk-free annual discount rate
of seven percent and an inflation rate of two percent per annum
to calculate the present value of the obligations. Undiscounted
expenditures of $91.7 million are expected to be made over
the next 45 years.

		
	5.	
    NON-CONTROLLING INTEREST

Upon the conversion to a Trust on October 1, 2004, Canadian
residents were issued exchangeable shares of the Company, rather
than trust units, if they so elected. Exchangeable shares of the
Company are exchangeable at the option of the holder at any
time, based on the exchange ratio, into trust units at the
option of the holder. The exchange ratio is increased monthly
based on the cash distributions paid and the volume-weighted
average market trading price over the five days ending on the
distribution record date. Cash distributions are not paid on
exchangeable shares. Exchangeable shares are classified as
non-controlling interest on the balance sheet and their portion
of net earnings is reflected as non-controlling interest on the
statement of earnings. Upon conversion, that portion of the
noncontrolling interest represented by the exchangeable shares
exchanged for trust units is removed from the non-controlling
interest and added to unitholders’ capital. At
June 30, 2006, there were 392,243 exchangeable shares
outstanding which could be exchanged for 491,837 trust units.

On October 1, 2007, the Trust will issue trust units in
exchange for all remaining outstanding exchangeable shares based
on the then applicable exchange ratio.

The following table summarizes the changes in the
non-controlling interest during the period:

	 	 	 	 	 	 	 	 	 
	 	 	June 30,		 	December 31,	
	 	 	2006		 	2005	
	 	 	 		 	 	
	 	 	($ thousands)	
	
    
    Non-controlling interest, beginning of period

    	 	$	6,280	 	 	$	15,731	 
	
    
    Exchanged for trust units

    	 	 	(2,755	)	 	 	(11,879	)
	
    
    Current period net earnings attributable to non-controlling
    interest

    	 	 	494	 	 	 	2,428	 
	 	 	 	 	 	 	 
	
    
    Non-controlling interest, end of period

    	 	$	4,019	 	 	$	6,280	 
	 	 	 	 	 	 	 

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	6.	
    UNITHOLDERS’ CAPITAL

		
	     (A)	
    ISSUED AND OUTSTANDING

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	June 30, 2006		 	December 31, 2005	
	 	 	 		 	 	
	 	 	Number		 	 	 	Number		 	 
	 	 	of Units		 	Amount		 	of Units		 	Amount	
	 	 	 		 	 		 	 		 	 	
	 	 	($ thousands, number of units — thousands)	
	
    
    Balance, beginning of period

    	 	 	66,358	 	 	$	617,862	 	 	 	40,183	 	 	$	298,726	 
	
    
    Plan of Arrangement and trust unit issuance costs

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(338	)
	
    
    Fair value of trust units issued on acquisition of Resolute
    Energy Inc. 

    	 	 	—	 	 	 	—	 	 	 	24,078	 	 	 	301,332	 
	
    
    Units issued on conversion of exchangeable shares

    	 	 	90	 	 	 	2,755	 	 	 	1,797	 	 	 	12,521	 
	
    
    Step purchase on exchangeable shares

    	 	 	—	 	 	 	2,565	 	 	 	—	 	 	 	1,406	 
	
    
    Units issued on conversion of convertible debenture

    	 	 	—	 	 	 	—	 	 	 	300	 	 	 	4,215	 
	
    
    Units issued on exercising of performance units (Note 7)

    	 	 	46	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Transfer to equity from contributed surplus

    	 	 	—	 	 	 	410	 	 	 	—	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Balance, end of period

    	 	 	66,494	 	 	$	623,592	 	 	 	66,358	 	 	$	617,862	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

		
	     (B)	
    PER UNIT AMOUNTS

Basic per unit amounts are calculated using the weighted average
number of units outstanding during the period. Diluted per unit
amounts include the dilutive effect of convertible debentures
and exchangeable shares using the “if-converted”
method. The dilutive effect of performance units is included
using the fair value method. An adjustment to the numerator of
diluted earnings per share calculation was required to provide
for the earnings ($0.2 million and $0.5 million for
the three and six-month periods ended June 30, 2006)
attributable to the non-controlling interest and the interest on
the convertible debentures ($1.6 million and
$3.1 million for the three and six-month periods ended
June 30, 2006).

The following table summarizes the trust units used in the per
unit calculations:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	June 30,		 	June 30,	
	 	 	 		 	 	
	 	 	2006		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 	
	 	 	(Number of units — thousands)	
	
    
    Weighted average number of units outstanding — basic

    	 	 	66,462	 	 	 	56,802	 	 	 	66,424	 	 	 	48,576	 
	
    
    Effect of performance units

    	 	 	1,675	 	 	 	146	 	 	 	1,668	 	 	 	88	 
	
    
    Trust units issuable on conversion of exchangeable shares

    	 	 	508	 	 	 	2,013	 	 	 	529	 	 	 	2,079	 
	
    
    Trust units issuable on conversion of debentures

    	 	 	6,921	 	 	 	—	 	 	 	6,921	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Weighted average number of units outstanding — diluted

    	 	 	75,566	 	 	 	58,961	 	 	 	75,542	 	 	 	50,743	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

		
	     (C)	
    CONTRIBUTED SURPLUS

The following is a schedule outlining the components within
contributed surplus:

	 	 	 	 	 	 	 	 	 
	 	 	June 30,		 	December 31,	
	 	 	2006		 	2005	
	 	 	 		 	 	
	 	 	($ thousands)	
	
    
    Contributed surplus, beginning of period

    	 	$	2,638	 	 	$	—	 
	
    
    Unit based compensation

    	 	 	4,488	 	 	 	2,638	 
	
    
    Conversion of performance units

    	 	 	(410	)	 	 	—	 
	 	 	 	 	 	 	 
	
    
    Contributed surplus, end of period

    	 	$	6,716	 	 	$	2,638	 
	 	 	 	 	 	 	 

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	7.	
    UNIT BASED COMPENSATION PLAN

	 	 	 	 	 
	 	 	(Number of	
	 	 	units — thousands)	
	 	 	 	
	
    
    Balance, December 31, 2005

    	 	 	465	 
	
    
    Granted

    	 	 	663	 
	
    
    Exercised

    	 	 	(46	)
	
    
    Cancelled

    	 	 	(214	)
	 	 	 	 
	
    
    Balance, June 30, 2006

    	 	 	868	 
	 	 	 	 

The Trust has implemented a Performance Unit Incentive Plan (the
“Plan”). Under the Plan, the Trustees may grant up to
five percent of the number of units outstanding (including trust
units issuable upon the exchange of exchangeable shares) from
time to time to Trustees, officers, employees of, or providers
of services to the Trust. Performance units will vest over a
period of one to three years and result in the issuance of a
number of trust units (the actual number of units is determined
by a performance factor). The performance factor is established
based on the Trust’s performance relative to its peers. The
maximum number of units issuable under the PUIP are
approximately two million units.

The fair value of performance units is estimated at the time
they are granted and expensed over the vesting period. The fair
value of the performance units granted for the three and
six-month periods ended June 30,2006,was approximately
$2.3 million and $3.9 million respectively. For the
three and six-month periods ended June 30,2006,unit-based
compensation expense of $2.7 million and $3.1 million,
respectively (2005 — $0.8 million and
$1.2 million) was recorded in the statement of earnings.
The Trust has capitalized $1.7 million of unit-based
compensation in the current period. Previously the Trust did not
record capitalization of its unit-based compensation. A
corresponding increase to contributed surplus was recorded for
the amounts related to unit-based compensation. The contributed
surplus balance is transferred to equity when the units are
ultimately issued.

		
	8.	
    DISTRIBUTIONS

The Trust pays distributions to the unitholders of record at the
end of each month. Payments are made on the 15th day of the
following month or the next business day where such date falls
on a weekend or holiday. For the three-month period ended
June 30, 2006, the Trust declared distributions of
$0.15 per unit per month.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended		 	Six Months Ended	
	 	 	June 30,		 	June 30,	
	 	 	 		 	 	
	 	 	2006		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 	
	 	 	($ thousands, except per unit amounts)	
	
    
    Cash distributions

    	 	$	29,897	 	 	$	23,703	 	 	$	59,763	 	 	$	40,595	 
	
    
    Accumulated cash distributions, beginning of period

    	 	 	143,991	 	 	 	33,680	 	 	 	114,125	 	 	 	16,788	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Accumulated cash distributions, end of period

    	 	$	173,888	 	 	$	57,383	 	 	$	173,888	 	 	$	57,383	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Cash distributions per unit(1)

    	 	$	0.45	 	 	$	0.42	 	 	$	0.90	 	 	$	0.84	 
	
    
    Accumulated cash distributions per unit, beginning of period

    	 	 	2.58	 	 	 	0.84	 	 	 	2.13	 	 	 	0.42	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Accumulated cash distributions per unit, end of period

    	 	$	3.03	 	 	$	1.26	 	 	$	3.03	 	 	$	1.26	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

 

		
	(1) 	
    Represents the sum of the distributions declared on each trust
    unit during the period.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	9.	
    INTEREST AND FINANCING

The following is a schedule outlining the components within
interest and financing charges:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months		 	Six Months Ended	
	 	 	Ended June 30,		 	June 30,	
	 	 	 		 	 	
	 	 	2006		 	2005		 	2006		 	2005	
	 	 	 		 	 		 	 		 	 	
	 	 	($ thousands)	
	
    
    Interest on bank loans

    	 	$	1,842	 	 	$	1,124	 	 	$	3,706	 	 	$	2,008	 
	
    
    Interest on Debentures

    	 	 	1,579	 	 	 	—	 	 	 	3,115	 	 	 	—	 
	
    
    Amortization of Debenture issue costs

    	 	 	164	 	 	 	—	 	 	 	352	 	 	 	—	 
	
    
    Accretion on debt portion of Debentures

    	 	 	92	 	 	 	—	 	 	 	191	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Total interest and financing charges

    	 	$	3,677	 	 	$	1,124	 	 	$	7,364	 	 	$	2,008	 
	 	 	 	 	 	 	 	 	 	 	 	 	 

		
	10.	
    FINANCIAL INSTRUMENTS

		
	     (A)	
    COMMODITY CONTRACTS

The Trust enters into commodity price derivative contracts to
reduce the impact of volatile commodity prices. The following
contracts were in place at June 30, 2006:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Notional		 	Physical/		 	 	 	 
	Natural Gas Contracts	 	Volumes		 	Financial		 	Term		 	Average Price	
	 	 	 		 	 		 	 		 	 	
	 	 	GJ/d		 	 	 	 	 	 
	
    
    AECO Fixed Price

    	 	 	12,500	 	 	 	Financial	 	 	 	Apr. 1/06 - Oct. 31/06	 	 	 	$8.87	 
	
    
    AECO Fixed Price

    	 	 	2,500	 	 	 	Physical	 	 	 	Apr. 1/06 - Oct. 31/06	 	 	 	$9.05	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	 	Apr. 1/06 - Oct. 31/06	 	 	 	$7.50 - 10.10	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	 	Apr. 1/06 - Oct. 31/06	 	 	 	$8.00 - 10.25	 
	
    
    AECO Collar

    	 	 	2,500	 	 	 	Financial	 	 	 	Apr. 1/06 - Oct. 31/06	 	 	 	$9.50 - 13.00	 
	
    
    AECO Fixed Price

    	 	 	7,500	 	 	 	Financial	 	 	 	Nov. 1/06 - Mar. 31/07	 	 	 	$9.64	 
	
    
    AECO Fixed Price

    	 	 	5,000	 	 	 	Financial	 	 	 	Apr. 1/07 - Oct. 31/07	 	 	 	$8.36	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Notional	 	 	 	 	 	 
	Crude Contracts	 	Volumes	 	Type	 	Term	 	Price
	 	 	 	 	 	 	 	 	 
	 	 	bbl/d	 	 	 	 	 	($Cdn./bbl)
	
    
    WTI Nymex Fixed Price — CAD

    	 	 	650	 	 	 	Financial	 	 	 	Nov. 1/05 - Oct. 31/08	 	 	 	$71.50	 
	
    
    WTI Nymex Fixed Price — CAD

    	 	 	350	 	 	 	Financial	 	 	 	Nov. 1/06 - Oct. 31/08	 	 	 	$79.35	 

As at June 30, 2006, the Trust would have realized a gain
of approximately $5.9 million (2005 —
$1.5 million) had all commodity hedging contracts been
closed out.

		
		
    (B)     FAIR VALUE OF FINANCIAL
    INSTRUMENTS

The carrying value of accounts receivable, prepaid expenses,
accounts payable and accrued liabilities and unitholder
distributions payable approximate their fair value due to their
demand nature or relatively short periods to maturity. The fair
value of the bank loan approximates its carrying value as it
bears interest at a floating rate. The fair value of the
convertible debentures outstanding at June 30, 2006, was
approximately $96.1 million.

A substantial portion of the Trust’s accounts receivable
are with customers and joint venture partners in the oil and gas
industry and are subject to normal industry credit risks. The
Trust has no significant concentration of credit risk.
Purchasers of oil, gas and natural gas liquids are subject to an
internal credit review to minimize the risk of non-payment.
Commodity price derivative contracts are with counterparties
that have investment grade credit ratings thereby mitigating
credit risk.

The Trust is exposed to foreign currency fluctuations as oil
prices received are referenced to U.S. dollar denominated prices
and natural gas and natural gas liquids prices are influenced by
U.S. dollar denominated markets.

The Trust has no instruments in place at June 30, 2006,
(2005 — Nil) to manage the foreign currency and
interest rate exposures.

 

 

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)

		
	11.	
    SUBSEQUENT EVENTS

		
		
    (A)     ACQUISITION

On July 5, 2006, the Trust announced that it had closed the
acquisition of Trifecta Resources Inc. (“Trifecta”), a
private oil & gas producer, for consideration of
approximately $102 million. The Trust financed the
acquisition of Trifecta by drawing on the Trust’s credit
facility.

		
		
    (B)     AGREEMENT TO MERGE

On July 24, 2006, Pengrowth Energy Trust
(“Pengrowth”) a senior oil and gas royalty trust
listed on the TSX and NYSE (ticker symbols PGF.UN and PGH
respectively),and the Trust announced that they have entered
into an Agreement (“the Agreement”) providing for the
combination of Pengrowth and the Trust (“the
Combination”). Under terms of the Agreement, each unit of
the Trust would be exchanged for 0.53 of a Pengrowth unit. The
Board of Trustees of the Trust intends to declare a one time
special distribution of $0.30 per unit of the Trust,
payable prior to closing of the Combination. The Combination is
subject to the approval of
662/3 percent
of the Trust’s unitholders at a meeting to be held on
September 26,2 006. The Combination is expected to be
effective on or about September 28, 2006.

 

 

 

SCHEDULE “C”

Reconciliation of the consolidated financial statements of Esprit for the years ended

December 31, 2005 and 2004 to United States generally accepted accounting principles,

together with the auditors’ report and the reconciliation of the unaudited interim consolidated

financial statements of Esprit for the six months ended June 30, 2006

to United States generally accepted accounting principles.

 

AUDITORS’ REPORT ON RECONCILIATION TO UNITED STATES
GAAP

To the Unitholders of Esprit Energy Trust

On February 14, 2006, we reported on the consolidated
balance sheets of Esprit Energy Trust as at December 31,
2005 and 2004 and the consolidated statements of earnings and
retained earnings (deficit) and cash flows for the years
then ended. In connection with our audits conducted in
accordance with Canadian generally accepted auditing standards
of the aforementioned consolidated financial statements, we also
have audited the related supplemental note entitled
“Differences between Canadian and United States Generally
Accepted Accounting Principles” attached hereto. This
supplemental note is the responsibility of the Trust’s
management. Our responsibility is to express an opinion on this
supplemental note based on our audits.

In our opinion, such supplemental note, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.

(signed) “KPMG LLP”

Chartered Accountants

Calgary, Canada

August 21, 2006

 

 

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES

(Tabular amount are stated in thousands of dollars except unit
and per unit information)

The consolidated financial statements of Esprit Energy Trust
(“Esprit” or “the Trust”) have been prepared
in accordance with Canadian GAAP, which differs in some respects
from U.S. GAAP. Any differences in accounting principles as
they pertain to the consolidated financial statements are
immaterial except as described below. Items required for
financial disclosure under U.S. GAAP may be different from
disclosure standards under Canadian GAAP; any such differences
are not reflected here.

The application of U.S. GAAP would have the following
effect on net income as reported for the 6 months period
ended June 30, 2006 and years ended December 31, 2005
and 2004:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	6 months ended		 	Year ended		 	Year ended	
	 	 	June 30,		 	December 31,		 	December 31,	
	 	 	2006		 	2005		 	2004	
	 	 	 		 	 		 	 	
	 	 	(unaudited)		 	 	 	 
	
    
    Net income as reported for Canadian GAAP

    	 	$	38,004	 	 	$	74,452	 	 	$	28,099	 
	
    
    Adjustments:

    	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Depletion and depreciation (a)

    	 	 	1,430	 	 	 	3,749	 	 	 	3,229	 
	 	
    
    Unrealized gain/(loss) on derivative instruments (c)

    	 	 	11,925	 	 	 	(10,300	)	 	 	4,300	 
	 	
    
    Non-controlling interest (e)

    	 	 	494	 	 	 	2,428	 	 	 	694	 
	 	
    
    Non-cash interest expense on debentures (g)

    	 	 	191	 	 	 	171	 	 	 	—	 
	 	
    
    Reversal of unit based compensation expense under
    Canadian GAAP (b)

    	 	 	3,141	 	 	 	—	 	 	 	—	 
	 	
    
    Cumulative effect of change in accounting policy under
    SFAS No. 123R (b)

    	 	 	(825	)	 	 	—	 	 	 	—	 
	 	
    
    Stock based compensation under U.S. GAAP (b)

    	 	 	(439	)	 	 	—	 	 	 	—	 
	 	
    
    Effect of applicable income taxes on the above adjustments

    	 	 	(4,490	)	 	 	2,202	 	 	 	(2,830	)
	 	 	 	 	 	 	 	 	 	 
	
    
    Net earnings and comprehensive income under U.S. GAAP

    	 	$	49,431	 	 	$	72,702	 	 	$	33,492	 
	 	 	 	 	 	 	 	 	 	 
	
    
    Weighted average units for U.S. GAAP (000’s)

    	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    — Basic

    	 	 	66,953	 	 	 	58,641	 	 	 	40,581	 
	 	
    
    — Diluted

    	 	 	75,542	 	 	 	61,967	 	 	 	41,050	 
	
    
    Net earnings per unit under U.S. GAAP

    	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    — Basic

    	 	$	0.74	 	 	$	1.24	 	 	$	0.83	 
	 	
    
    — Diluted

    	 	$	0.70	 	 	$	1.22	 	 	$	0.82	 

 

 

The application of U.S. GAAP would have the following
effect on the consolidated balance sheets as reported at
June 30, 2006, December 31, 2005, and
December 31, 2004:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	June 30, 2006		 	December 31, 2005		 	December 31, 2004	
	 	 	 		 	 		 	 	
	 	 	Canadian		 	 	 	Canadian		 	 	 	Canadian		 	 
	 	 	GAAP		 	U.S. GAAP		 	GAAP		 	U.S. GAAP		 	GAAP		 	U.S. GAAP	
	 	 	 		 	 		 	 		 	 		 	 		 	 	
	 	 	(unaudited)		 	 	 	 	 	 	 	 
	
    
    Assets

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Derivative assets — current (c)

    	 	$	—	 	 	$	11,433	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	4,300	 
	
    
    Property, plant and equipment, net (a)

    	 	 	734,061	 	 	 	702,784	 	 	 	763,191	 	 	 	735,351	 	 	 	359,662	 	 	 	331,159	 
	
    
    Deferred financing charges, net (g)

    	 	 	3,581	 	 	 	—	 	 	 	3,933	 	 	 	—	 	 	 	—	 	 	 	—	 
	 
	
    
    Liabilities

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Derivative liabilities

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    — current (c)

    	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,245	 	 	 	—	 	 	 	—	 
	 	
    
    — non-current (c)

    	 	 	—	 	 	 	5,508	 	 	 	—	 	 	 	755	 	 	 	—	 	 	 	—	 
	
    
    Performance unit liability (b)

    	 	 	—	 	 	 	4,146	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Convertible debentures (g)

    	 	 	94,057	 	 	 	92,204	 	 	 	93,866	 	 	 	91,852	 	 	 	—	 	 	 	—	 
	
    
    Future income taxes

    	 	 	106,668	 	 	 	112,581	 	 	 	113,982	 	 	 	116,605	 	 	 	19,356	 	 	 	25,219	 
	
    
    Non-controlling interest (e)

    	 	 	4,019	 	 	 	—	 	 	 	6,280	 	 	 	—	 	 	 	15,731	 	 	 	—	 
	
    
    Temporary equity (b)

    	 	 	—	 	 	 	732,829	 	 	 	—	 	 	 	846,994	 	 	 	—	 	 	 	493,372	 
	 
	
    
    Unitholders’ Equity

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    Unitholders’ capital (d)

    	 	 	623,592	 	 	 	—	 	 	 	617,862	 	 	 	—	 	 	 	298,726	 	 	 	—	 
	
    
    Equity component of convertible debentures (g)

    	 	 	2,090	 	 	 	—	 	 	 	2,090	 	 	 	—	 	 	 	—	 	 	 	—	 
	
    
    Contributed surplus (b)

    	 	 	6,716	 	 	 	—	 	 	 	2,638	 	 	 	2,638	 	 	 	—	 	 	 	—	 
	
    
    Deficit

    	 	 	(132,814	)	 	 	(266,365	)	 	 	(111,055	)	 	 	(370,199	)	 	 	(88,170	)	 	 	(297,151	)

The above noted differences between Canadian GAAP and
U.S. GAAP are the result of the following:

		
	(a)	
    Under Canadian GAAP, the Trust performs an impairment test that
    limits capitalized costs to the discounted estimated future net
    revenue from proved and risked probable oil and natural gas
    reserves plus the cost of unproved properties less impairment,
    using forward prices. The discount rate used is equal to the
    risk free interest rate. Under U.S. GAAP, entities using
    the full cost method of accounting for oil and gas producing
    activities perform a ceiling test on each cost centre using
    discounted estimated future net revenue from proved oil and gas
    reserves using a discount rate of 10 per cent. Prices used in
    the U.S. GAAP ceiling tests are those in effect at
    year end.

		
	 	
     Where the amount of a ceiling test write-down under Canadian
    GAAP differs from the amount of the write-down under
    U.S. GAAP, the charge for depreciation and depletion under
    US and Canadian GAAP will differ in subsequent years. The amount
    recorded for depletion and depreciation have been adjusted in
    the periods following the ceiling test write-downs taken in 1999
    and 2001 under U.S. GAAP.

		
	(b)	
    Under Canadian GAAP, the Company follows the fair value method
    of accounting for unit-based compensation in respect of options
    granted on or after January 1, 2003. U.S. GAAP,
    SFAS 123 “Accounting for Stock-Based
    Compensation” determines compensation expense using the
    same method and as such there is no difference between Canadian
    and U.S. GAAP in respect of options granted on or after
    January 1, 2003 and prior to adoption of SFAS 123R.
    The compensation expense associated with options granted prior
    to January 1, 2003 is disclosed

 

 

		
		
    on a pro forma basis. Because all options were either exercised
    or cancelled in 2004, there is no pro forma expense disclosed
    for December 31, 2005 and June 30, 2006.

	 	 	 	 	 	 
	Year ended December 31,	 	2004	
	 	 	 	
	
    
    Net earnings for the year under U.S. GAAP

    	 	$	33,492	 
	
    
    Compensation expense related to options granted prior to
    January 1, 2003

    	 	 	809	 
	 	 	 	 
	
    
    Pro forma net earnings under U.S. GAAP

    	 	$	32,683	 
	 	 	 	 
	
    
    Pro forma net earnings per unit under U.S. GAAP

    	 	 	 	 
	 	
    
    Basic

    	 	$	0.81	 
	 	
    
    Diluted

    	 	$	0.80	 

		
	 	
     Effective January 1, 2006, the Trust adopted
    SFAS No. 123 (revised 2004), “Share-Based
    Payment”, (“SFAS No. 123R”) which is a
    revision of SFAS No. 123, “Accounting for
    Stock-based Compensation”. SFAS No. 123R requires
    all share-based payments to employees, including grants of
    employee stock options, be recognized in the financial
    statements based on their fair values. Liability classified
    awards, such as the Trust’s performance units, are
    re-measured to fair value at each balance sheet date until the
    award is settled rather than being treated as an equity
    classified award on the grant date as required under
    SFAS 123 and Canadian GAAP. The Trust has adopted this
    standard by applying the modified prospective method. As a
    result of the adoption of SFAS No. 123R, the Trust has
    recorded a performance unit liability of $3.4 million which
    represents the fair value of all outstanding performance units
    at January 1, 2006, in proportion to the requisite service
    period rendered to that date. In addition, contributed surplus
    and net earnings have been reduced by $2.6 million and
    $0.8 million respectively, representing previously
    recognized compensation cost for all outstanding performance
    units and an expense to record the cumulative effect of a change
    in accounting principle. Changes in fair value between periods
    are charged or credited to earnings with a corresponding change
    in the performance unit liability.

		
	(c)	
    U.S. GAAP requires that all derivative instruments
    (including derivative instruments embedded in other contracts),
    as defined, be recorded on the consolidated balance sheet as
    either an asset or liability measured at fair value and requires
    that changes in fair value be recognized in earnings unless
    specific hedge accounting criteria are met. The Trust has not
    designated any items as hedges for U.S. GAAP purposes.
	 
	(d)	
    The trust units are redeemable at the option of the holder based
    on the lesser of 95% of the average market trading price of the
    trust units for the 10 trading days after the date the trust
    units were tendered for redemption or the closing market price
    of the trust units on that date. Trust units can be redeemed to
    a cash limit of $100,000 per month or a greater limit at the
    discretion of the Trustees.

		
	 	
     Redemption in excess of the cash limit shall be satisfied first
    by way of a distribution in specie of the pro-rata share of
    securities held by the Trust on the date the trust units were
    tendered for redemption, and second by issuance of unsecured
    subordinated notes bearing interest at a rate determined by the
    Trustees at the time of issuance.
	 
	 	
     Under U.S. GAAP, as the trust units and exchangeable
    shares are redeemable at the option of the unitholder, the trust
    units must be valued at their redemption amount and presented as
    temporary equity in the consolidated balance sheet. The
    redemption value of the units and shares is determined with
    respect to the trading value of the units. Under Canadian GAAP,
    the trust units are classified as permanent equity. As of
    June 30, 2006 and December 31, 2005 and 2004, the
    Trust has classified $732.8 million, $847.0 million
    and $493.4 million, respectively, as temporary equity in
    accordance with U.S. GAAP. Changes in redemption value
    between periods are charged or credited to retained earnings
    (deficit).
	 
	 	
     On October 1, 2004, Esprit Exploration Ltd. converted to a
    trust. Prior to the trust conversion there were no redeemable
    equity instruments outstanding.

		
	(e)	
    Under Canadian GAAP, exchangeable shares are classified as
    non-controlling interest to reflect a minority ownership in one
    of the Trust’s subsidiaries. As these exchangeable shares
    must ultimately be converted into units, the exchangeable shares
    are classified as temporary equity along with the units for
    U.S. GAAP purposes and step acquisitions of the
    non-controlling interest recorded for Canadian GAAP purposes are
    reversed for US GAAP purposes.

 

 

		
	(f)	
    Under the Canadian GAAP, basic net income per unit is calculated
    based on net income after non-controlling interest divided by
    the weighted average number of units and diluted net income per
    unit is calculated based on net income before non-controlling
    interest and interest on convertible debentures divided by the
    dilutive number of units. Under U.S. GAAP, the exchangeable
    shares are classified in the same manner as trust units and as
    such there is no non-controlling interest. Basic net income per
    unit is calculated based on net income divided by the weighted
    average number of units and the unit equivalent of the
    outstanding exchangeable shares. Diluted net income per unit is
    calculated based on net income before interest on convertible
    debentures divided by the sum of the weighted average units, the
    unit equivalent of the outstanding exchangeable shares, and the
    dilutive impact of stock options and convertible debentures.
	 
	(g)	
    Under Canadian GAAP, the Trust’s convertible debentures are
    classified as debt with a portion, representing the estimated
    fair value of the conversion feature at the date of issue, being
    allocated to unitholders’ equity. Issue costs for the
    debentures are classified as deferred financing charges. In
    addition, under Canadian GAAP a non-cash interest expense
    representing the effective yield of the equity component is
    recorded in the consolidated statements of earnings with a
    corresponding credit to the convertible debenture liability
    balance to accrete that balance to the principal due on maturity.

		
	 	
     Under U.S. GAAP, the convertible debentures, in their
    entirety, are classified as debt net of the issue costs that are
    recorded as deferred financing charges. The non-cash interest
    expense recorded under Canadian GAAP would not be recorded under
    U.S. GAAP.

		
	(h)	
    In 2005 and 2004 certain transportation costs incurred by the
    Trust were presented net of the revenues under Canadian GAAP.
    During 2006 the Trust reclassified these costs to operating
    expenses. Revenues and operating expenses would have been
    increased by $2.4 million for the year ended 2005 and
    $2.4 million for the year ended 2004 for this
    reclassification.
	 
	(i)	
    The subtotal line within cash flows from operations would not be
    presented in a cash flow statement prepared under U.S. GAAP.
	 
	(j)	
    New accounting pronouncements:

			
	 	•	
    In 2004, FASB issued FAS 153 “Exchange on Non-monetary
    Assets”. This statement is an amendment of APB Opinion
    No. 29 “Accounting for Non-monetary
    Transactions”. Based on the guidance in APB Opinion
    No. 29, exchanges of non-monetary assets are to be measured
    based on the fair value of the assets exchanged. Furthermore,
    APB Opinion No. 29 previously allowed for certain
    exceptions to this fair value principle. FAS 153 eliminates
    APB Opinion No. 29’s exception to fair value for
    non-monetary exchanges of similar productive assets and replaces
    this with a general exception for exchanges of non-monetary
    assets which do not have commercial substance. Under
    FAS 153, a non-monetary exchange is defined as having
    commercial substance when the future cash flows of an entity are
    expected to change significantly as a result of the exchange.
    The provisions of FAS 153 are effective for non-monetary
    asset exchanges which occur in fiscal periods beginning after
    June 15, 2005 and are to be applied prospectively. Earlier
    application is permitted for non-monetary asset exchanges which
    occur in fiscal periods beginning after the issue date of
    FAS 153. The adoption of FAS 153 as at January 1,
    2006 did not have an impact on the Trust.

 

 

 

SCHEDULE “D”

Unaudited pro forma combined financial statements of Pengrowth

after giving effect to the Merger

 

 

COMPILATION REPORT ON PRO FORMA FINANCIAL STATEMENTS

The Board of Directors of Pengrowth Corporation, as

     Administrators of Pengrowth Energy
Trust

We have read the accompanying unaudited pro forma consolidated
balance sheet of Pengrowth Energy Trust as at June 30, 2006
and unaudited pro forma consolidated statements of income for
the six months then ended and for the year ended
December 31, 2005, and have performed the following
procedures:

		
	1.	
    Compared the figures in the columns captioned “Pengrowth
    Energy Trust” to the unaudited consolidated financial
    statements of the Trust as at June 30, 2006 and for the six
    months then ended, and the audited consolidated financial
    statements of the Trust for the year ended December 31,
    2005, respectively, and found them to be in agreement.
	 
	2.	
    Compared the figures in the columns captioned “Esprit
    Energy Trust” to the unaudited consolidated financial
    statements of Esprit Energy Trust as at June 30, 2006 and
    for the six months then ended, and the audited consolidated
    financial statements of Esprit Energy Trust for the year ended
    December 31, 2005, respectively, and found them to be in
    agreement.
	 
	3.	
    Made enquiries of certain officials of the Trust who have
    responsibility for financial and accounting matters about:

			
	 	(a)	
    the basis for determination of the pro forma adjustments; and
	 
	 	(b)	
    whether the pro forma financial statements comply as to form in
    all material respects with the published requirements of
    Canadian securities legislation.

     
The officials:

			
	 	(a)	
    described to us the basis for determination of the pro forma
    adjustments, and
	 
	 	(b)	
    stated that the pro forma financial statements comply as to form
    in all material respects with the published requirements of
    Canadian securities legislation.

		
	4.	
    Read the notes to the pro forma financial statements, and found
    them to be consistent with the basis described to us for
    determination of the pro forma adjustments.
	 
	5.	
    Recalculated the application of the pro forma adjustments to the
    aggregate of the amounts in the columns captioned
    “Pengrowth Energy Trust” and “Esprit Energy
    Trust” as at June 30, 2006 and for the six months then
    ended, and for the year ended December 31, 2005, and found
    the amounts in the column captioned “Pro Forma Pengrowth
    Energy Trust” to be arithmetically correct.

A pro forma financial statement is based on management
assumptions and adjustments which are inherently subjective. The
foregoing procedures are substantially less than either an audit
or a review, the objective of which is the expression of
assurance with respect to management’s assumptions, the pro
forma adjustments, and the application of the adjustments to the
historical financial information. Accordingly, we express no
such assurance. The foregoing procedures would not necessarily
reveal matters of significance to the pro forma financial
statements, and we therefore make no representation about the
sufficiency of the procedures for the purposes of a reader of
such statements.

signed “KPMG LLP”

Chartered Accountants

Calgary, Canada

August 22, 2006

 

 

COMMENTS FOR UNITED STATES READERS ON DIFFERENCES BETWEEN
CANADIAN AND UNITED STATES REPORTING STANDARDS

The above report, provided solely pursuant to Canadian
requirements, is expressed in accordance with standards of
reporting generally accepted in Canada. To report in conformity
with United States standards on the reasonableness of the pro
forma adjustments and their application to the pro forma
consolidated financial statements requires an examination or
review substantially greater in scope than the review we have
conducted. Consequently, we are unable to express any opinion in
accordance with standards of reporting generally accepted in the
United States with respect to the compilation of the
accompanying unaudited pro forma financial information.

signed “KPMG LLP”

Chartered Accountants

Calgary, Canada

August 22, 2006

 

 

PENGROWTH ENERGY TRUST

PRO FORMA CONSOLIDATED BALANCE SHEET

As at June 30, 2006

(Unaudited)

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Pro Forma	
	 	 	Pengrowth		 	Esprit		 	 	 	 	 	Pengrowth	
	 	 	Energy Trust		 	Energy Trust		 	Adjustments		 	 	 	Energy Trust	
	 	 	 		 	 		 	 		 	 	 	 	
	
    
    ASSETS

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    CURRENT ASSETS

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Cash

    	 	$	1,197	 	 	$	—	 	 	 	 	 	 	 	 	 	 	$	1,197	 
	 	
    
    Accounts receivable

    	 	 	117,578	 	 	 	29,086	 	 	 	 	 	 	 	 	 	 	 	146,664	 
	 	
    
    Prepaid expenses

    	 	 	—	 	 	 	6,291	 	 	 	 	 	 	 	 	 	 	 	6,291	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	118,775	 	 	 	35,377	 	 	 	 	 	 	 	 	 	 	 	154,152	 
	 
	
    
    REMEDIATION TRUST FUNDS

    	 	 	8,999	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	8,999	 
	
    
    DEFERRED CHARGES

    	 	 	6,539	 	 	 	3,581	 	 	 	2,319	 	 	 	2(f)	 	 	 	12,439	 
	
    
    LONG TERM INVESTMENTS

    	 	 	26,990	 	 	 	—	 	 	 	(19,990	)	 	 	2(f)	 	 	 	7,000	 
	
    
    GOODWILL

    	 	 	182,835	 	 	 	147,622	 	 	 	(45,583	)	 	 	2(f)	 	 	 	284,874	 
	
    
    PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS

    	 	 	2,081,403	 	 	 	734,061	 	 	 	732,377	 	 	 	2(f)	 	 	 	3,547,841	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	$	2,425,541	 	 	$	920,641	 	 	 	 	 	 	 	 	 	 	$	4,015,305	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    LIABILITIES AND UNITHOLDERS’ EQUITY

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    CURRENT LIABILITIES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Accounts payable and accrued liabilities

    	 	$	103,866	 	 	$	39,304	 	 	 	40,198	 	 	 	2(e)(f)	 	 	$	183,368	 
	 	
    
    Distributions payable to unitholders

    	 	 	80,437	 	 	 	9,973	 	 	 	20,107	 	 	 	2(e)(f)	 	 	 	110,517	 
	 	
    
    Due to Pengrowth Management Limited

    	 	 	3,424	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	3,424	 
	 	
    
    Note payable

    	 	 	20,000	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	20,000	 
	 	
    
    Other liabilities

    	 	 	8,198	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	8,198	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	215,925	 	 	 	49,277	 	 	 	 	 	 	 	 	 	 	 	325,507	 
	 
	
    
    CONTRACT LIABILITIES

    	 	 	10,767	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	10,767	 
	
    
    CONVERTIBLE DEBENTURES

    	 	 	—	 	 	 	94,057	 	 	 	4,391	 	 	 	2(f)(g)	 	 	 	98,448	 
	
    
    LONG-TERM DEBT

    	 	 	488,310	 	 	 	141,830	 	 	 	 	 	 	 	 	 	 	 	630,140	 
	
    
    ASSET RETIREMENT OBLIGATIONS

    	 	 	187,925	 	 	 	25,206	 	 	 	(2,171	)	 	 	2(f)	 	 	 	210,960	 
	
    
    FUTURE INCOME TAXES

    	 	 	91,764	 	 	 	106,668	 	 	 	212,389	 	 	 	2(f)	 	 	 	410,821	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	994,691	 	 	 	417,038	 	 	 	 	 	 	 	 	 	 	 	1,686,643	 
	 
	
    
    NON-CONTROLLING INTEREST

    	 	 	—	 	 	 	4,019	 	 	 	(4,019	)	 	 	2(c)	 	 	 	—	 
	 
	
    
    TRUST UNITHOLDERS’ EQUITY

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Trust Unitholders’ capital

    	 	 	2,533,040	 	 	 	623,592	 	 	 	272,418	 	 	 	2(d)(f)	 	 	 	3,429,050	 
	 	
    
    Contributed surplus

    	 	 	4,905	 	 	 	6,716	 	 	 	(6,716	)	 	 	 	 	 	 	4,905	 
	 	
    
    Equity component of convertible debentures

    	 	 	—	 	 	 	2,090	 	 	 	(288	)	 	 	2(f)(g)	 	 	 	1,802	 
	 	
    
    Deficit

    	 	 	(1,107,095	)	 	 	(132,814	)	 	 	132,814	 	 	 	 	 	 	 	(1,107,095	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	1,430,850	 	 	 	499,584	 	 	 	 	 	 	 	 	 	 	 	2,328,662	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	$	2,425,541	 	 	$	920,641	 	 	 	 	 	 	 	 	 	 	$	4,015,305	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

See accompanying notes to the pro forma consolidated financial
statements.

 

 

PENGROWTH ENERGY TRUST

PRO FORMA CONSOLIDATED STATEMENT OF INCOME

Six Months Ended June 30, 2006

(Unaudited)

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Pro Forma	
	 	 	Pengrowth		 	Esprit		 	 	 	 	 	Pengrowth	
	 	 	Energy Trust		 	Energy Trust		 	Adjustments		 	 	 	Energy Trust	
	 	 	 		 	 		 	 		 	 	 	 	
	 	 	(Stated in thousands of dollars)	
	
    
    REVENUES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Oil and gas sales

    	 	$	575,428	 	 	$	165,931	 	 	 	 	 	 	 	 	 	 	$	741,359	 
	 	
    
    Processing and other income

    	 	 	7,205	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	7,205	 
	 	
    
    Royalties, net of incentives

    	 	 	(110,625	)	 	 	(38,684	)	 	 	(272	)	 	 	3(a)	 	 	 	(149,581	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	472,008	 	 	 	127,247	 	 	 	 	 	 	 	 	 	 	 	598,983	 
	 	
    
    Interest and other income

    	 	 	696	 	 	 	1,449	 	 	 	 	 	 	 	 	 	 	 	2,145	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    NET REVENUE

    	 	 	472,704	 	 	 	128,696	 	 	 	 	 	 	 	 	 	 	 	601,128	 
	 
	
    
    EXPENSES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Operating

    	 	 	112,020	 	 	 	28,134	 	 	 	 	 	 	 	 	 	 	 	140,154	 
	 	
    
    Transportation

    	 	 	3,539	 	 	 	1,265	 	 	 	 	 	 	 	 	 	 	 	4,804	 
	 	
    
    Amortization of injectants for miscible floods

    	 	 	16,507	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	16,507	 
	 	
    
    Interest

    	 	 	12,289	 	 	 	7,364	 	 	 	1,725	 	 	 	3(c)	 	 	 	21,378	 
	 	
    
    General and administrative

    	 	 	17,517	 	 	 	10,040	 	 	 	 	 	 	 	 	 	 	 	27,557	 
	 	
    
    Management fee

    	 	 	7,558	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	7,558	 
	 	
    
    Foreign exchange (gain) loss

    	 	 	(9,120	)	 	 	—	 	 	 	 	 	 	 	 	 	 	 	(9,120	)
	 	
    
    Depletion and depreciation

    	 	 	138,883	 	 	 	50,732	 	 	 	44,991	 	 	 	3(b)	 	 	 	234,606	 
	 	
    
    Accretion

    	 	 	7,231	 	 	 	871	 	 	 	 	 	 	 	 	 	 	 	8,102	 
	 	
    
    Unrealized loss on commodity contracts

    	 	 	3,389	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	3,389	 
	 	
    
    Other expenses

    	 	 	4,777	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	4,777	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	314,590	 	 	 	98,406	 	 	 	 	 	 	 	 	 	 	 	459,712	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    NET INCOME BEFORE TAXES AND NON-CONTROLLING INTEREST

    	 	 	158,114	 	 	 	30,290	 	 	 	 	 	 	 	 	 	 	 	141,416	 
	 
	
    
    INCOME TAX EXPENSE (REDUCTION)

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Capital

    	 	 	11	 	 	 	307	 	 	 	 	 	 	 	 	 	 	 	318	 
	 	
    
    Future

    	 	 	(18,348	)	 	 	(8,515	)	 	 	(500	)	 	 	3(d)	 	 	 	(27,363	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	(18,337	)	 	 	(8,208	)	 	 	 	 	 	 	 	 	 	 	(27,045	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    NET INCOME BEFORE NON-CONTROLLING INTEREST

    	 	 	176,451	 	 	 	38,498	 	 	 	 	 	 	 	 	 	 	 	168,461	 
	 
	
    
    NON-CONTROLLING INTEREST

    	 	 	—	 	 	 	494	 	 	 	(494	)	 	 	2(c)	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    NET INCOME

    	 	$	176,451	 	 	$	38,004	 	 	 	 	 	 	 	 	 	 	$	168,461	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    NET INCOME PER TRUST UNIT

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
    
    Basic

    	 	$	1.10	 	 	$	0.57	 	 	 	 	 	 	 	 	 	 	$	0.86	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
    
    Diluted

    	 	$	1.10	 	 	$	0.55	 	 	 	 	 	 	 	 	 	 	$	0.86	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

See accompanying notes to the pro forma consolidated financial
statements.

 

 

PENGROWTH ENERGY TRUST

PRO FORMA CONSOLIDATED STATEMENT OF INCOME

Year Ended December 31, 2005

(Unaudited)

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Pro Forma	
	 	 	Pengrowth		 	Esprit		 	 	 	 	 	Pengrowth Energy	
	 	 	Energy Trust		 	Energy Trust		 	Adjustments		 	 	 	Trust	
	 	 	 		 	 		 	 		 	 	 	 	
	 	 	(Stated in thousands of dollars)	
	
    
    REVENUES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Oil and gas sales

    	 	$	1,151,510	 	 	$	290,283	 	 	 	 	 	 	 	 	 	 	$	1,441,793	 
	 	
    
    Processing and other income

    	 	 	15,091	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	15,091	 
	 	
    
    Royalties, net of incentives

    	 	 	(213,863	)	 	 	(67,645	)	 	 	(500	)	 	 	3(a)	 	 	 	(282,008	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	952,738	 	 	 	222,638	 	 	 	 	 	 	 	 	 	 	 	1,174,876	 
	
    
    Interest and other income

    	 	 	2,596	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	2,596	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
    
    NET REVENUE

    	 	 	955,334	 	 	 	222,638	 	 	 	 	 	 	 	 	 	 	 	1,177,472	 
	 
	
    
    EXPENSES

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Operating

    	 	 	218,115	 	 	 	47,149	 	 	 	 	 	 	 	 	 	 	 	265,264	 
	 	
    
    Transportation

    	 	 	7,891	 	 	 	2,449	 	 	 	 	 	 	 	 	 	 	 	10,340	 
	 	
    
    Amortization of injectants for miscible floods

    	 	 	24,393	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	24,393	 
	 	
    
    Interest

    	 	 	21,642	 	 	 	8,340	 	 	 	2,798	 	 	 	3(c)	 	 	 	32,780	 
	 	
    
    General and administrative

    	 	 	30,272	 	 	 	10,690	 	 	 	 	 	 	 	 	 	 	 	40,962	 
	 	
    
    Plan of Arrangement and other

    	 	 	—	 	 	 	849	 	 	 	 	 	 	 	 	 	 	 	849	 
	 	
    
    Management fee

    	 	 	15,961	 	 	 	—	 	 	 	 	 	 	 	 	 	 	 	15,961	 
	 	
    
    Foreign exchange (gain) loss

    	 	 	(6,966	)	 	 	—	 	 	 	 	 	 	 	 	 	 	 	(6,966	)
	 	
    
    Depletion and depreciation

    	 	 	284,989	 	 	 	74,784	 	 	 	107,775	 	 	 	3(b)	 	 	 	467,548	 
	 	
    
    Accretion

    	 	 	14,162	 	 	 	1,198	 	 	 	 	 	 	 	 	 	 	 	15,360	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	610,459	 	 	 	145,459	 	 	 	 	 	 	 	 	 	 	 	866,491	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    NET INCOME BEFORE TAXES AND NON-CONTROLLING INTEREST

    	 	 	344,875	 	 	 	77,179	 	 	 	 	 	 	 	 	 	 	 	310,981	 
	 
	
    
    INCOME TAX EXPENSE (REDUCTION)

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Capital

    	 	 	6,273	 	 	 	1,121	 	 	 	 	 	 	 	 	 	 	 	7,394	 
	 	
    
    Future

    	 	 	12,276	 	 	 	(822	)	 	 	(811	)	 	 	3(d)	 	 	 	10,643	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	18,549	 	 	 	299	 	 	 	 	 	 	 	 	 	 	 	18,037	 
	 
	
    
    NET INCOME BEFORE NON-CONTROLLING INTEREST

    	 	 	326,326	 	 	 	76,880	 	 	 	 	 	 	 	 	 	 	 	292,944	 
	 
	
    
    NON-CONTROLLING INTEREST

    	 	 	—	 	 	 	2,428	 	 	 	(2,428	)	 	 	2(c)	 	 	 	—	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    NET INCOME

    	 	$	326,326	 	 	$	74,452	 	 	 	 	 	 	 	 	 	 	$	292,944	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	
    
    NET INCOME PER TRUST UNIT

    	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
    
    Basic

    	 	$	2.08	 	 	$	1.31	 	 	 	 	 	 	 	 	 	 	$	1.53	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
    
    Diluted

    	 	$	2.07	 	 	$	1.28	 	 	 	 	 	 	 	 	 	 	$	1.51	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

See accompanying notes to the pro forma consolidated financial
statements.

 

 

PENGROWTH ENERGY TRUST

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As at and for the six months ended June 30, 2006 and for
the year ended December 31, 2005

(Tabular dollar amounts are stated in thousands of dollars
except per trust unit amounts)

		
	1.	
    BASIS OF PRESENTATION

		
	 	
    The accompanying unaudited pro forma consolidated balance sheet
    as at June 30, 2006 and the pro forma consolidated
    statements of income for the six months ended June 30, 2006
    and the year ended December 31, 2005 have been prepared for
    inclusion in the information circular describing the proposed
    merger of Esprit Energy Trust (“Esprit”) and Pengrowth
    Energy Trust (“Pengrowth”).
	 
	 	
    On July 24, 2006, Pengrowth and Esprit announced that they
    had entered into an agreement (the “Combination
    Agreement”) providing for the combination of Pengrowth and
    Esprit (the “Merger” or “Combination”).
    Pursuant to the Merger, Pengrowth will acquire all of the
    property, assets and undertakings of Esprit, including the
    shares, units, royalties, notes or other interests in the
    capital of Esprit, in exchange for Pengrowth assuming the
    liabilities and obligations of Esprit and issuing Pengrowth
    trust units in consideration. Pengrowth will maintain one unit
    in Esprit and Esprit will become a subsidiary of Pengrowth.
	 
	 	
    The pro forma financial statements have been prepared by
    management in accordance with Canadian generally accepted
    accounting principles. The pro forma consolidated balance sheet
    gives the effect of the transaction and assumptions described
    herein as if they occurred as at the date of the balance sheet.
    The pro forma consolidated statements of earnings give effect to
    the transactions and assumptions described herein as if they
    occurred at the beginning of the respective periods. In the
    opinion of management, the pro forma consolidated financial
    statements include all the necessary adjustments for the fair
    presentation of the ongoing entity. In preparing these pro forma
    consolidated financial statements, no adjustments have been made
    to reflect the possible operating synergies and administrative
    cost savings that could result from combining the operations of
    Esprit and Pengrowth. The pro forma consolidated financial
    statements may not be indicative of the results that actually
    would have occurred if the events reflected therein had been in
    effect on the dates indicated or of the results which may be
    obtained in the future.
	 
	 	
    The accounting principles used in the preparation of the pro
    forma consolidated financial statements are consistent with
    those used in the unaudited interim consolidated financial
    statements of Pengrowth as at and for the six months ended
    June 30, 2006 and the audited consolidated financial
    statements of Pengrowth as at and for the year ended
    December 31, 2005. The pro forma consolidated financial
    statements have been prepared from information derived from, and
    should be read in conjunction with, the audited consolidated
    financial statements of Esprit and Pengrowth as at and for the
    year ended December 31, 2005 and the unaudited consolidated
    financial statements of Esprit and Pengrowth as at and for the
    six months ended June 30, 2006.

		
	2.	
    PRO FORMA TRANSACTIONS, ASSUMPTIONS AND ADJUSTMENTS (AS AT
    JUNE 30, 2006)

		
	 	
    The unaudited pro forma consolidated balance sheet gives effect
    to the following transactions, assumptions and adjustments:

			
	 	(a)	
    Through the Combination, the assets of Esprit were acquired by
    Pengrowth on the basis of 0.53 units of Pengrowth for each
    Esprit unit.
	 
	 	(b)	
    For the purposes of the purchase price determination, Pengrowth
    has used a unit price of $25.80 per unit, being the weighted
    average market price of Pengrowth Class A and Class B
    Trust Units on the days surrounding the announcement of the
    Combination.
	 
	 	(c)	
    The unaudited pro forma consolidated financial statements
    reflect that all of the Esprit exchangeable shares will be
    exchanged for Esprit trust units prior to the Combination. As at
    June 30, 2006, 392,243 Esprit exchangeable shares are
    exchangeable into 491,837 Esprit trust units.
	 
	 	(d)	
    On June 30, 2006 Esprit had 65,496,000 Trust Units
    outstanding, assuming the exchange of the Esprit Exchangeable
    shares and excluding 1,489,000 Esprit units held by Pengrowth,
    and all Esprit Trust Units were assumed to be exchanged for
    Pengrowth Trust Units under the Combination, resulting in
    the issuance of 34,713,000 Pengrowth Trust Units.
	 
	 	(e)	
    The unaudited pro forma consolidated balance sheet includes
    $40,198,000 in costs expected to be incurred by Esprit and
    Pengrowth for severance, professional, advisory and other
    transaction costs. These costs have been included in accounts
    payable. In addition, $20,107,000 for the special distribution
    to Esprit unitholders has been included in unitholder
    distributions payable. The Esprit Board of Directors is
    permitted to declare a special distribution of up to $0.30 per
    Esprit unit to Esprit unitholders. The Esprit Board of Directors
    has advised that they intend to declare the special distribution.
	 
	 	(f)	
    The transaction has been accounted for using the purchase price
    method with the allocation as follows:

         
Consideration:

	 	 	 	 	 
	
    
    Pengrowth trust units issued

    	 	$	896,010	 
	
    
    Esprit units held by Pengrowth prior to Combination

    	 	 	19,990	 
	
    
    Transaction costs (Note 2e)

    	 	 	5,042	 
	 	 	 	 
	 	 	$	921,042	 
	 	 	 	 

 

 

         
Allocated as follows:

	 	 	 	 	 
	
    
    Property, plant and equipment

    	 	$	1,466,438	 
	
    
    Goodwill

    	 	 	102,039	 
	
    
    Deferred hedging gain

    	 	 	5,900	 
	
    
    Bank debt

    	 	 	(141,830	)
	
    
    Convertible debentures

    	 	 	(100,250	)
	
    
    Asset retirement obligations

    	 	 	(23,035	)
	
    
    Future income taxes

    	 	 	(319,057	)
	
    
    Working capital acquired, including costs incurred in Esprit
    prior to closing of $55,263 (Note 2e)

    	 	 	(69,163	)
	 	 	 	 
	 	 	$	921,042	 
	 	 	 	 

		
	 	
     The allocation of the purchase price is based on preliminary
    estimates of fair value and may be revised as additional
    information becomes available.

			
	 	(g)	
    The convertible debentures, including the equity component for
    the conversion feature, have been recorded at their estimated
    fair value.

		
	3.	
    PRO FORMA TRANSACTIONS, ASSUMPTIONS AND ADJUSTMENTS (FOR THE
    SIX MONTHS ENDED JUNE 30, 2006 AND THE YEAR ENDED
    DECEMBER 31, 2005)

		
	 	
    The unaudited pro forma consolidated statements of earnings for
    the six month period ended June 30, 2006 and for the year
    ended December 31, 2005 give effect to the transactions and
    adjustments referred to in note 2 effective January 1,
    2006 and January 1, 2005 respectively, and the following:

			
	 	(a)	
    Pengrowth has claimed the maximum credit available under the
    Alberta Royalty Tax Credit (“ARTC”) program,
    therefore; royalties have been adjusted to remove ARTC claimed
    by Esprit.
	 
	 	(b)	
    Depletion, depreciation and amortization expense has been
    increased to reflect the effect of the pro forma adjustment to
    the carrying value of property, plant and equipment and other
    assets based on the combined reserves and production of
    Pengrowth and Esprit.
	 
	 	(c)	
    Interest expense has been increased to reflect the additional
    interest on the $5.0 million of transaction costs and
    $55.3 million of liabilities incurred in Esprit prior to
    closing.
	 
	 	(d)	
    The provision for future income taxes has been decreased to give
    effect to the pro forma adjustments.
	 
	 	(e)	
    As described in note 2, the allocation of the purchase
    price is based on preliminary estimates of fair value and may be
    revised as additional information becomes available. For
    purposes of preparing the unaudited pro forma consolidated
    statement of income, no assumptions were made in testing for
    impairment of goodwill.

		
	4.	
    PRO FORMA TRUST UNITS OUTSTANDING

	 	 	 	 	 	 	 	 	 
	 	 	Number of	
	 	 	weighted average	
	 	 	Trust Units	
	 	 	 	
	For the six months ended June 30, 2006	 	Basic		 	Diluted	
	 	 	 		 	 	
	
    
    Trust units held by Pengrowth unitholders

    	 	 	160,372	 	 	 	161,008	 
	
    
    Pengrowth trust units issued to Esprit unitholders

    	 	 	34,713	 	 	 	34,713	 
	
    
    Pengrowth trust units issueable on conversion of convertible debt

    	 	 	—	 	 	 	3,668	 
	 	 	 	 	 	 	 
	 	 	 	195,085	 	 	 	199,389	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 
	 	 	Number of	
	 	 	weighted average	
	 	 	Trust Units	
	 	 	 	
	For the year ended December 31, 2005	 	Basic		 	Diluted	
	 	 	 		 	 	
	
    
    Trust units held by Pengrowth unitholders

    	 	 	157,127	 	 	 	157,914	 
	
    
    Pengrowth trust units issued to former Esprit unitholders

    	 	 	34,713	 	 	 	34,713	 
	
    
    Pengrowth trust units issueable on conversion of convertible debt

    	 	 	—	 	 	 	3,668	 
	 	 	 	 	 	 	 
	 	 	 	191,840	 	 	 	196,295	 
	 	 	 	 	 	 	 

		
	 	
    In calculating diluted earnings per unit, interest and accretion
    on convertible debentures of $3.3 million was added back to
    net income for the six months ended June 30, 2006 and
    interest and accretion on convertible debentures of
    $2.9 million was added back to net income for the year
    ended December 31, 2005.

 

 

		
	5.	
    APPLICATION OF UNITED STATES GENERALLY ACCEPTED ACCOUNTING
    PRINCIPLES

		
	 	
    The application of United Stated generally accepted accounting
    principles (“US GAAP”) would have the following effect
    on the pro forma consolidated statements of income:

	 	 	 	 	 	 	 	 	 
	 	 	Pro Forma	
	 	 	 	
	 	 	June 30, 2006		 	December 31, 2005	
	 	 	 		 	 	
	
    
    Net Income per pro forma statement of earnings

    	 	$	168,461	 	 	$	292,944	 
	 
	
    
    Net income adjustments under US
    GAAP(1)

    	 	 	18,939	 	 	 	15,087	 
	 	 	 	 	 	 	 
	 
	
    
    Net Income under US GAAP

    	 	$	187,400	 	 	$	308,031	 
	 
	
    
    Other comprehensive income adjustments under US
    GAAP(1)

    	 	 	3,594	 	 	 	(25,470	)
	 	 	 	 	 	 	 
	 
	
    
    Net income and comprehensive income under US GAAP

    	 	$	190,994	 	 	$	282,561	 
	 	 	 	 	 	 	 

         

			
	 	(1)	
    These adjustments reflect those made in the June 30, 2006
    and December 31, 2005 US GAAP reconciliations of
    Pengrowth.

		
	 	
    The application of United Stated generally accepted accounting
    principles (“US GAAP”) would have the following effect
    on the pro forma consolidated balance sheet, as at June 30,
    2006:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Pro Forma		 	Increase		 	Pro Forma	
	 	 	Cdn GAAP		 	(Decrease)(1)		 	US GAAP	
	 	 	 		 	 		 	 	
	
    
    ASSETS

    	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Current portion of unrealized foreign exchange gain

    	 	$	—	 	 	$	266	 	 	$	266	 
	 	
    
    Deferred charges

    	 	 	12,439	 	 	 	(345	)	 	 	12,094	 
	 	
    
    Property, plant and equipment and other assets

    	 	 	3,547,841	 	 	 	(180,889	)	 	 	3,366,952	 
	 
	
    
    LIABILITIES

    	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Other liabilities

    	 	$	8,198	 	 	$	1,279	 	 	$	9,477	 
	 	
    
    Current portion of unrealized hedging loss

    	 	 	—	 	 	 	11,856	 	 	 	11,856	 
	 	
    
    Deferred hedging loss

    	 	 	—	 	 	 	2,094	 	 	 	2,094	 
	 	
    
    Convertible debentures

    	 	 	98,448	 	 	 	1,802	 	 	 	100,250	 
	 
	
    
    TRUST UNITHOLDERS’ EQUITY

    	 	 	 	 	 	 	 	 	 	 	 	 
	 	
    
    Accumulated other comprehensive income

    	 	$	—	 	 	$	(14,559	)	 	$	(14,559	)
	 	
    
    Equity component of convertible debentures

    	 	 	1,802	 	 	 	(1,802	)	 	 	—	 
	 	
    
    Deficit

    	 	 	(1,107,095	)	 	 	(181,638	)	 	 	(1,288,733	)

         

			
	 	(1)	
    These adjustments reflect those made in the June 30, 2006
    US GAAP reconciliation of Pengrowth.

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}]]