Accrete Energy Inc.
TSX : GZ

Accrete Energy Inc.

August 14, 2008 17:00 ET

Accrete Energy Inc. Announces Second Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2008) - Accrete Energy Inc. (the "Corporation") (TSX:GZ) is pleased to announce results of its operations for the second quarter ended June 30, 2008.



Highlights
$ Thousands except 3 Months
production/day and Ending 3 Months
common shares June 30, Ending June
information 2008 30, 2007 % Change
----------------------------------------------------------------------------
Total revenue 15,744 11,149 41%

Funds flow from operations (1)
Total 7,739 5,692 36%
Per share basic 0.48 0.35 37%

Net income
Total 2,781 1,789 55%
Per share basic 0.17 0.11 55%
Per share diluted 0.16 0.11 45%

Common shares outstanding 16,271,802 16,497,902 -1%

Debt, net of working capital 54,280 54,755 -1%

Operational:
Sales 15,744 11,149 41%
Royalties 3,898 2,581 51%
Operating costs 1,609 1,370 17%
Net Back (2) 10,237 7,198 42%
Net Back/ bbl (2) 44.36 28.66 55%

General and administrative 1,462 819 79%
General and administrative 6.33 3.26 94%
$/bbl

Volumes:
Natural gas (mcf/d) 10,081 10,591 -5%
Oil (bbl/d) 79 114 -31%
NGL's (bbl/d) 777 882 -12%
Total Boe/d 2,536 2,760 -8%

Wells Drilled (Gross):
Oil 0 0 -
Gas 1 2 -50%
D&A 0 0 -
Total 1 2 -50%

Capital Expenditures 4,434 5,695 -22%

Notes:
(1)(2) Accrete's definition of funds flow from operations and/or netbacks
may not be comparable to that reported by other companies. See the
caption Non GAAP Measures.


President's Message

Accrete Energy is pleased to announce its Second Quarter 2008 financial and operational results.

Accrete Energy Inc. ("Accrete"") is also pleased to announce its pending sale to Pengrowth Energy Trust ("Pengrowth") and the resultant creation of a newly formed junior oil and gas company to be called Argosy Energy Inc. ("Argosy").

In June, 2004, Accrete was formed as an exploration and development entity with a mandate to exploit key properties and, subsequently, rationalize mature properties in a defined time frame so as to maximize shareholder value. Accordingly, on December 7, 2007, GMP Securities was engaged as Accrete's financial advisor to determine strategic alternatives to create liquidity from mature assets while allowing future upside from exploitation properties. The strategic alternatives discussed were a reorganization of Accrete to allow the distribution of cash flow from the Harmattan assets to shareholders or, alternatively, a restructuring and sale of Accrete with Harmattan properties as its only asset. The Board of Directors were advised that both alternatives were achievable.

With rising commodity prices over the first half of 2008, there was a marked increase in merger and acquisition activity throughout the oil and gas industry. In light of these improved market conditions, the Board of Directors determined that the restructuring and sale of Accrete was the best alternative and requested that GMP approach a select group of industry participants based on size, proximity to and familiarity with the Harmattan asset.

Subsequent to the end of the second quarter of 2008, on June 13th, a non-binding Letter of Intent was entered into with Pengrowth whereby Pengrowth would purchase Accrete with only the Harmattan asset and specified debt of approximately $25 MM under a Plan of Arrangement. Under the proposed Plan of Arrangement, each Accrete shareholder will receive 0.237 of a Pengrowth trust unit for every one share of Accrete. With liquidity in junior oil and gas companies a concern in the investment community and the most common excuse for sub-NAV trading, this proposal allows Accrete shareholders the opportunity to convert their interest in this mature property to highly liquid Pengrowth units. In addition to Pengrowth trust units, each shareholder will also receive one share in Argosy for every four shares of Accrete.Argosy will continue to exploit the balance of Accrete's former land base. These lands include the Claresholm/Granum areas where the Company has identified approximately 70 locations for light oil and sweet natural gas and the Saxon area which has potential for prolific reserves in the lower Mannville formation and exposure to the Montney play. Shareholders will also have the right to participate in a financing to ensure continued participation in development of these prospects.

Management and Directors are excited about this new opportunity and have signed lock-up agreements in favour of a successful outcome at the meeting of shareholders scheduled for mid-September. As always, we are committed to low cost exploration and development operations to ensure maximum returns to our shareholders. It is our hope that our Accrete shareholders will continue their loyal support with Argosy.

On behalf of the Board of Directors

Peter Salamon, President

Respectfully,

Peter Salamon, President

Management Discussion and Analysis

The following discussion and analysis was prepared on August 13, 2008 and is management's assessment of Accrete's historical financial and operating results and should be read in conjunction with the audited financial statements and related notes for the years ended, December 31, 2007 and 2006.

The financial data presented has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and measurement currency is the Canadian dollar.

Additional information may be found on the Company's web site at www.accrete-energy.com and on the SEDAR web site at www.sedar.ca .

Accrete was established on June 1, 2004 and is a Calgary based, natural gas focused exploitation and development company that operates exclusively in Alberta.

Accrete has production and a focused inventory of drilling prospects primarily in the Harmattan, Claresholm and Saxon areas.

Accrete's shares trade on the Toronto Stock Exchange ("TSX") under the symbol GZ.

Forward-Looking Statements

Some of the statements contained herein including, without limitation, financial and business prospects and financial outlooks may be forward-looking statements which reflect management's expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as "may", "will", "should", "could", "anticipate", "believe", "expect", "intend", "plan", "potential", "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risk and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. Readers should refer to the section entitled "Risks" in this Management Discussion and Analysis for further information with regards to operational and business risks that may affect the company's results.

Although the forward-looking statements contained herein are based upon what management believes to be reasonable assumptions, management cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by law.

Forward-looking statements and other information contained herein concerning the oil and gas industry and Accrete's general expectations concerning this industry are based on estimates prepared by management using data from publicly available industry sources as well as from reserve reports, market research and industry analysis and on assumptions based on data and knowledge of this industry which Accrete believes to be reasonable. However, this data is inherently imprecise, although generally indicative of relative market positions, market shares and performance characteristics. While Accrete is not aware of any misstatements regarding any industry data presented herein, the industry involves risks and uncertainties and is subject to change based on various factors.

Non GAAP Measures

The forgoing contains the term "cash flow from operations" and "netbacks" which should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") as an indicator of the Company's performance. Accrete's definition of cash flow from operations and/or netbacks may not be comparable to that reported by other companies.

The Company evaluates its performance based on net earnings, net back and cash flow. The Company considers cash flow and netbacks key measures as they illustrate the Company's ability to meet obligations necessary to repay debt and fund future growth through capital investment. Cash flow per share is presented in this discussion using the weighted average shares outstanding in a manner consistent with that used to calculate earnings per share.

Field netbacks are calculated by deducting royalties and operating costs from revenues and corporate netbacks are calculated by deducting general and administrative expense from operating netbacks

The following reconciles cash flow from operating activities, the most comparable GAAP measure to these measures:



$ Thousands 3 Months Ended 6 Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Funds flow provided by operating
activities 8,186 4,766 15,894 11,287
Net changes in non-cash working
capital (447) 926 (603) (1,179)
----------------------------------------------------------------------------
Funds flow 7,739 5,692 15,291 10,108
----------------------------------------------------------------------------

The following table reconciles field and corporate netback to income before
taxes the most comparable GAAP measure:

$ Thousands 3 Months Ended 6 Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Income before income taxes 3,690 2,468 6,351 3,429
Depletion, depreciation and
accretion 3,350 3,326 7,125 6,447
Stock based compensation cost 48 233 150 333
Unrealized (Gain)/Loss on held for
trading derivative instruments 640 (335) 1,636 (101)
Realized (Gain)/Loss on held for
trading derivative instruments 409 - 409 -
Interest expense 638 687 1,450 1,242
----------------------------------------------------------------------------
Corporate netback 8,775 6,379 17,121 11,350
----------------------------------------------------------------------------
General and administrative expenses 1,462 819 2,330 1,683
---------------------------------------
Field netback 10,237 7,198 19,451 13,033
---------------------------------------


The reader is cautioned that the use of the term boe's ("barrels of oil equivalent") may be misleading particularly when used in isolation. A boe conversion of 6 mcf to 1 boe may not represent a value equivalency at the wellhead.

As the determination of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of these financial statements requires the use of estimates and assumptions which have been made using careful judgment. In the opinion of management, the unaudited interim financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized in the financial statements.

Business Environment

The level of natural gas in storage had risen in 2007 so that record levels had been achieved by year end. The fear of a resultant oversupply caused the sales price for natural gas to decrease. Exploration and development activities had slowed down somewhat by the end of 2007 because of the low prices and because of uncertainty surrounding the introduction of a new Crown Royalty regime in Alberta. High natural gas prices overseas, on the other hand, caused LNG shipments to be diverted away from North America and that, in turn, further exacerbated the effect on the diminishing North American natural gas supply.

Cold weather in the consuming regions especially during the first quarter of 2008 resulted in large withdrawals from storage to feed the increased demand for natural gas for heating and power generation. This, together with reduced supply, resulted in an increase in the price of natural gas. Natural gas prices were also affected by the record oil prices and moved upward in concert with them.

Oil prices remained volatile because of geopolitical tension overseas but trended upward to record levels as a result of strong world wide demand and a weakening US dollar.

The effect of a strong Canadian dollar negatively affected pricing of all commodities somewhat because they are customarily priced in US dollars.

In the 4th quarter of 2007, the government of Alberta introduced a new Crown Royalty regime that is scheduled to be implemented in 2009. Uncertainty still surrounds the treatment of solution gas production.



Financial Information

Total Revenue Net Income Net Income Net Income
($ thousands) ($ thousands) Basic $/Share Diluted $/Share
----------------------------------------------------------------------------
2008
First Quarter 14,007 1,992 0.12 0.11
Second Quarter 15,744 2,781 0.17 0.16
----------------------------------------------------------------------------
Total 29,751 4,773 0.29 0.27
----------------------------------------------------------------------------
2007
First Quarter 10,647 930 0.06 0.05
Second Quarter 11,149 1,789 0.11 0.11
Third Quarter 11,499 677 0.04 0.04
Fourth Quarter 11,876 2,359 0.14 0.12
----------------------------------------------------------------------------
Total 45,171 5,755 0.35 0.32
----------------------------------------------------------------------------
2006
First Quarter 9,821 1,585 0.10 0.10
Second Quarter 9,182 1,390 0.09 0.08
Third Quarter 9,583 743 0.05 0.05
Fourth Quarter 10,736 257 0.02 0.01
----------------------------------------------------------------------------
Total 39,322 3,975 0.26 0.24
----------------------------------------------------------------------------


Increasing commodity prices caused total revenues to increase significantly in 2008. Commodity prices had declined from record highs following the hurricane season late in 2005 until the 4th quarter of 2007. They did pick up slightly in the 4th quarter of 2007 but the increases in the 1st quarter of 2008 really reversed the trend. In fact, the Company realized $10.87/mcf for natural gas for the 2nd quarter and $8.31/mcf for the 1st quarter 2008 versus $ 7.31/mcf for the 2nd quarter $7.56/mcf for the 1st quarter and$6.62/mcf for the final quarter of 2007.

Overall, volumes were down and costs were up in the 2ond quarter 2008 but this did not offset the tremendous increase in commodity prices.

The Harmattan gas plant was shut in for three weeks from mid April to the end of the first week in May 2008. As a result, the average volumes produced at Harmattan slipped from 6,006 Mcf/d for the 1st quarter to 5,043 mcf/d for the 2ond quarter in 2008. As well, the Company sold its interests in the Pouce Coupe areas in May and that resulted in a decrease in average sales for the 2ond quarter from 366 mcf/d in the 1st quarter to 156 mcf/d for the 2ond quarter of 2008 for that area. Average Edson production declined from 517 mcf/d for the 1st quarter to 370 mcf/d for the 2ond quarter 2008 because of the interruptible nature of the processing arrangement there.

Claresholm production increased because the Company bought out one of its partners in May this was offset in part by a shut in for a few days for the annual turn around at the plant.

The Company took the occasion of the shut in of the Harmattan gas plant to do its annual turn around at the Harmattan facility. This additional cost in the period coupled with the lower volumes because of the shut in caused operating costs at Harmattan to increase for the 2ond quarter of 2008. The Company performed the annual turn around at the Claresholm plant during the 2ond quarter. This increased average costs for the quarter. These annual plant turn arounds had the affect of increasing corporate operating costs from $5.32 /bbl for the 1st quarter to $6.97/bbl for the 2ond quarter of 2008.

The Company has financed its capital programs with a combination of debt and cash flow. Debt levels came down during 2008 because the capital expenditures decreased from $5,624,000 for the 1st quarter to $4,434,000 whilst cash flow increased from $7,551,000 for the 1st quarter to $7,739,000 for the 2ond quarter of 2008. This had the affect of reducing interest expense.

The corporate tax rate decreased from 32.12% in 2007 to 29.5% in 2008 and that had a positive effect on after tax net income.

The Company estimates that at June 30, 2008 that it has 330 net barrels of oil equivalent per day behind pipe. This is comprised of 110 barrels at Harmattan, 60barrels at Claresholm, 90 barrels at Edson and 70 barrels at Ansell.



Operational Activities

Production

3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Oil (bbl/d) 79 114 93 127
NGL (bbl/d) 777 882 861 925
----------------------------------------------------------------------------
Total Oil/NGL
(bbl/d) 856 996 954 1,052
Gas (mcf/d) 10,081 10,591 10,684 9,971
----------------------------------------------------------------------------
Total (boe/d) 2,536 2,760 2,735 2,714
----------------------------------------------------------------------------

Natural Gas Production (mcf/d)

Area 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Atlee-Buffalo 46 36 43 29
Claresholm 4,291 3,617 4,228 2,920
Harmattan 5,043 6,229 5,524 6,372
Edson 370 389 443 424
Pouce Coupe 156 320 261 226
Saxon 175 - 185 -
----------------------------------------------------------------------------
Total 10,081 10,591 10,684 9,971
----------------------------------------------------------------------------

Crude Oil Sales (bbl/d)

Area 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Claresholm 11 - 5 -
Harmattan 68 114 88 127
Edson - - - -
Pouce Coupe - - - -
Saxon - - - -
----------------------------------------------------------------------------
Total 79 114 93 127
----------------------------------------------------------------------------

Natural Gas Liquids Sales (bbl/d)

Area 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Atlee-Buffalo - - - -
Claresholm 73 39 74 27
Harmattan 690 837 766 889
Edson 12 6 19 8
Pouce Coupe 1 0 1 1
Saxon 1 - 1 -
----------------------------------------------------------------------------
Total 777 882 861 925
----------------------------------------------------------------------------


Production at Harmattan decreased as a result of normal production declines offset, in part by drilling activity. In addition, the Harmattan gas plant was shut in for three weeks from mid April to the end of the first week in May 2008. As a result, the average volumes produced at Harmattan slipped from 6,006 Mcf/d for the 1st quarter to 5,043 mcf/d for the 2ond quarter in 2008.

Production at Claresholm increased due to drilling activity, the addition of a natural gas liquids storage facility and the purchase of a partner's interest in production in the area. These gains were offset in part by natural production declines and a shut in for turnaround for a few days during the 2ond quarter.

The Company sold its interests in the Pouce Coupe areas in May and that resulted in a decrease in average sales for the 2ond quarter from 366 mcf/d in the 1st quarter to 156 mcf/d for the 2ond quarter of 2008 for that area. Average Edson production declined from 517 mcf/d for the 1st quarter to 370 mcf/d for the 2ond quarter 2008 because of the interruptible nature of the processing arrangement there.



Product Prices

Natural Gas Prices ($/mcf)

Area 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Atlee-Buffalo 9.69 6.67 9.10 7.04
Claresholm 11.34 7.44 10.05 7.61
Harmattan 10.44 7.23 9.12 7.33
Edson 11.67 7.52 9.83 7.69
Pouce Coupe 9.31 7.25 8.39 7.27
Saxon 11.79 - 10.42 -
----------------------------------------------------------------------------
Average Price 10.87 7.31 9.52 7.43
----------------------------------------------------------------------------


Cold weather in the consuming regions during the first half of 2008 resulted in large withdrawals from storage to feed the increased demand for natural gas for heating and power generation. This, together with reduced supply, and record high prices for oil resulted in an increase in the market price of natural gas.



Crude Oil Sales Prices ($/bbl)

Area 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------

Atlee-Buffalo - - - -
Claresholm 121.65 - 121.65 -
Harmattan 122.52 72.26 105.18 68.20
Edson - - - -
Pouce Coupe - - - -
Saxon - - - -
----------------------------------------------------------------------------
Average Price 122.40 72.26 106.12 68.20
----------------------------------------------------------------------------


Crude oil prices received by the Company moved upwards with world oil
prices.

Natural Gas Liquids (NGL) Sales Prices ($/bbl)
Area
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------

Atlee-Buffalo - - - -
Claresholm 105.20 73.99 93.79 84.91
Harmattan 62.90 39.09 54.26 38.39
Edson 106.19 59.05 92.05 53.48
Pouce Coupe 111.85 279.51 102.99 63.76
Saxon 131.26 - 118.62 -
----------------------------------------------------------------------------
Average Price 67.70 40.78 58.60 39.91
----------------------------------------------------------------------------


Natural gas liquid prices moved in tune with natural gas and oil prices. Harmattan natural gas liquids include a significant amount of ethane, which does not receive a very high price relative to other liquids produced.



Revenue
Total Sales
($ thousands)
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Oil 875 753 1,802 1,566
NGL 4,788 3,271 9,188 6,684
Gas 9,974 7,044 18,512 13,405
Processing 107 81 249 141
----------------------------------------------------------------------------
Total 15,744 11,149 29,751 21,796
----------------------------------------------------------------------------


Natural Gas Sales Revenue
($ thousands)
Area
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------

Atlee-Buffalo 41 22 71 37
Claresholm 4,429 2,449 7,733 4,022
Harmattan 4,792 4,096 9,166 8,459
Edson 392 266 794 589
Pouce Coupe 132 211 399 298
Saxon 188 - 349 -
----------------------------------------------------------------------------
Total 9,974 7,044 18,512 13,405
----------------------------------------------------------------------------


Crude Oil Sales Revenue
($ thousands)
Area
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------

Atlee-Buffalo - - - -
Claresholm 118 - 118 -
Harmattan 757 753 1,684 1,562
Edson - - 4
Pouce Coupe - - - -
Saxon - - - -
----------------------------------------------------------------------------
Total 875 753 1,802 1,566
----------------------------------------------------------------------------


Natural Gas Liquids (NGL) Sales
Revenue
($ thousands)
Area
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------

Atlee-Buffalo - - - -
Claresholm 699 258 1,255 415
Harmattan 3,950 2,976 7,576 6,178
Edson 118 34 314 78
Pouce Coupe 10 3 18 13
Saxon 11 - 25 -
----------------------------------------------------------------------------
4,788 3,271 9,188 6,684
----------------------------------------------------------------------------


Revenues increased because of increased commodity prices offset in part by
a decrease in production volumes.

Processing Revenue
Area
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------

Atlee-Buffalo - - - -
Boltan - - - -
Claresholm 23 - 88 -
Harmattan 84 81 161 141
Edson - - - -
Pouce Coupe - - - -
Saxon - - - -
----------------------------------------------------------------------------
Total 107 81 249 141
----------------------------------------------------------------------------


Processing fees are charged to third parties utilizing Accrete facilities.

Royalties
($ thousands)
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Total Total Total Total
Area $ Rate $ Rate $ Rate $ Rate
----------------------------------------------------------------------------
Atlee-
Buffalo 6 6% 1 5% 9 4% (5) (14%)
Claresholm 1,170 22% 487 18% 1,991 22% 895 20%
Harmattan 2,577 27% 2,180 28% 4,981 27% 4,945 31%
Edson 55 11% (151) (50%) 116 10% (15) (2%)
Pouce
Coupe 55 39% 64 30% 142 34% 88 28%
Saxon 35 17% - - 53 17% - -
----------------------------------------------------------------------------
Total 3,898 25% 2,581 23% 7,292 25% 5,908 27%
----------------------------------------------------------------------------


For the 2nd quarter 2008, crown royalties were $3,087,000 and $5,645,000 for the year to date ($1,813,000 $4,305,000 respectively in 2007). Total gross overriding royalties were $710,000 for the 2nd quarter and $1,430,000 year to date ($637,000 and $1,362,000 in 2007), and freehold royalties for the 2nd quarter totaled $101,000 and $217,000 for the year to date ($131,000 and $241,000 in 2007). Variations in royalties are generally as a result of relatively minor adjustments.



Production and Transportation Expenses
($ thousands except per boe information)

3 Months 3 Months 6 Months 6 Months

Ended Ended Ended Ended

June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Total $/boe Total $/boe Total $ $/boe Total $/boe
Area $ $ $
----------------------------------------------------------------------------
Atlee-
Buffalo 13 18.49 21 37.38 17 13.24 23 25.44
Claresholm 303 4.17 140 2.41 518 3.63 262 2.81
Harmattan 1,110 7.63 1,036 5.73 2,057 6.36 2,302 6.12
Edson 116 17.13 86 13.20 224 13.22 162 11.24
Pouce
Coupe 39 15.38 87 17.80 139 17.07 106 15.22
Saxon 28 10.15 - - 53 9.23 - -
----------------------------------------------------------------------------
Total 1,609 6.97 1,370 5.45 3,008 6.04 2,855 5.81
----------------------------------------------------------------------------


The Company did its annual turn arounds at the Claresholm and Harmattan plants during the 2ond quarter 2008 and during the 3rd quarter last year. Therefore operating costs were higher than the same quarter last year. The Company operates the Claresholm gas facility and therefore is able to manage its processing costs for that area. On the other hand, Harmattan gas is processed by a 3rd party processor therefore costs are higher.

Edson, Pouce Coupe and Saxon have relatively few wells and, as such, the Company can not realize economies of scale that it can at Claresholm and Harmattan. Atlee-Buffalo accounts for minor production volumes and is a property that is not operated by the Company.



Field and Corporate Netbacks

Field Netback
($/boe)
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Area 2008 2007 2008 2007
----------------------------------------------------------------------------

Atlee-Buffalo 35.99 0.49 39.15 22.52
Claresholm 52.23 35.64 46.89 35.28
Harmattan 40.51 37.97 35.75 37.32
Edson 50.43 56.50 45.70 36.80
Pouce Coupe 19.70 12.98 16.90 16.51
Saxon 49.81 - 44.65 -
----------------------------------------------------------------------------
Field Netback 44.36 28.66 39.07 26.53
----------------------------------------------------------------------------


Field netbacks for the first quarter increased because of higher product prices offset by higher operating costs that resulted from plant turnarounds.



Corporate Netback
($ thousands)
3 3 6 6
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Area 2008 2007 2008 2007
----------------------------------------------------------------------------
Field Netback 10,237 7,198 19,451 13,033
General and Administrative 1,462 819 2,330 1,683
----------------------------------------------------------------------------
Corporate Netback 8,775 6,379 17,121 11,350
----------------------------------------------------------------------------


Corporate netbacks for the first quarter increased because of higher field net backs.



General and Administrative Expense
($ thousands)
3 3 6 6
Months Months Months Months

Ended Ended Ended Ended

June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Salary & Benefits 828 545 1,469 1,177
General Office Expenses 742 447 1,120 887
----------------------------------------------------------------------------
G& A before recoveries 1,570 992 2,589 2,064
Recoveries (108) (173) (259) (381)
----------------------------------------------------------------------------
Net G&A Expense 1,462 819 2,330 1,683
----------------------------------------------------------------------------


General and administrative expenses increased because of consulting expenses incurred in reviewing various strategic corporate alternatives and office rental costs.

Staffing levels remained constant with 2007. General and administrative expenses are recovered through billings to participants in company operated projects in accordance with standard industry practice. The decrease in recoveries relates to the amount and type activity incurred in the respective quarters.

Interest Expense

Accrete used its operating line of credit and funds flow to fund its 2008 capital program. At June 30, 2008, Accrete's bank indebtedness was $52 million compared to $49 million at June 30, 2007. As a result, interest expense for the first half of 2008 was $1,450 versus $1,242 in the equivalent period in 2007 even though interest rates were slightly lower.

Stock-Based Compensation

The Company has accounted for its employee stock options granted using the fair value method. The fair value of all options granted to June 30, 2008 was estimated to be $4,486,000 ($2.43 per option granted). This value is charged to stock based compensation cost over the vesting period.

A total of $178,000 was incurred in the 1st half 2008. Of this, $149,000 was charged to expense ($333,000 in the 1st half 2007) and $29,000 ($ - in the 1st half 2007) was capitalized.

A total of $59,000 was incurred in the 2nd quarter 2008. Of this, $48,000 was charged to expense ($233,000 in the 2nd quarter 2007) and $11,000($ - in the 2nd quarter 2007) was capitalized.

A total of $119,000 was incurred in the 1st quarter 2008. Of this, $101,000 was charged to expense ($100,000 in the 1st quarter 2007) and $18,000($ - in the 1st quarter 2007) was capitalized.

No employee stock options were granted during the 1st half of 2008.

Depletion Depreciation & Accretion

Depletion, depreciation and accretion of the asset retirement obligation for the six month period ended June 30, 2008 totaled $7,125,000 or $14.31/Boe. This compares to charges of $6,447,000 or $13.06/boe for the equivalent 6 month period in 2007. The increase resulted from relatively minor revisions to reserves.

Costs of $9,622,000 relating to unproved properties have been excluded from costs subject to depletion for the 6 month period ended June 30, 2008. This included the costs of undeveloped land such as that at Ansell and Saxon that have been purchased at land sales for future exploitation.

Income Taxes

For the six month period ended June 30, 2008, the company recorded an income tax provision of $1,578,000 as compared to an income tax provision of $710,000 for the same period last year. The income tax provision for the six month period ended June 30, 2007 was relatively small relative to that recorded in 2008 due to the effect of rate reductions booked in the period.

Accrete has approximately $78.4 million of income tax pools at June 30, 2008 and does not anticipate being cash taxable in 2008.

Funds Flow

Funds flow from operations for the six months ended June 30, 2008 was $15,291,000 ($0.94 per share) versus $10,108,000 ($0.61 per share) for the equivalent period last year.



Capital Expenditures

Capital expenditures for the six months ended June 30, 2008:

($ thousands) 3 Months 3 Months 6 Months
Ended Ended Ended
March 31, June 30, June 30,
2008 2008 2008
----------------------------------------------------------------------------
$
Drilling and Completions 4,606 1,140 5,746
Geological and Geophysical 340 234 574
Equipping and Tie-Ins 309 1,026 1,335
Land 359 834 1,193
Property Acquisitions and
Dispositions (net) - 1,199 1,199
Office Equipment 10 1 11
----------------------------------------------------------------------------
Total Cash Expenditures 5,624 4,434 10,058

Allowance for future restoration
expenditures 79 21 100
----------------------------------------------------------------------------
Total 5,703 4,455 10,158
----------------------------------------------------------------------------


During the first half the Company drilled 6 wells (3.8 net), comprising 6 (3.8 net) gas wells. A success rate of 100% was achieved.



Liquidity and Capital Resources

$
(thousands)
2008 Exploration and development program funding

Cash, Beginning of Year -
Cash flow from operations 15,291
Change in non-cash working capital (1,141)
Decrease in Bank Debt (4,092)
Cash, end of period -
----------------------------------------------------------------------------
Net capital expenditures 10,058
----------------------------------------------------------------------------


Accrete intends to fund its capital expenditure program from internally generated cash flow, debt, sales of non core property and new equity on favorable terms.

At June 30, 2008 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $70,000,000. A covenant to the Revolving Operating Demand Loan facility requires that the Company maintain a working capital ratio exclusive of bank indebtedness of at least 1 to 1. For purposes of this calculation, the undrawn availability under the facility is added to current assets.

This facility bears interest at bank prime plus one quarter percent and has no specific terms of repayment aside from the bank's right of demand and periodic review.

Success in its focus areas means that additional funds will be raised through additional bank debt, sale of non-core properties or additional share issuances or all of these measures to expedite or expand the drilling program.

Commodity prices and production volumes have a large impact on the ability of the Company to generate adequate cash flow. A prolonged decrease in commodity prices would negatively affect cash flow from operations and would also likely result in a reduction in the amount of cash flow and bank loan available for investment. This condition may also affect the availability of funds through the public equity market which may be accessed if funds are available on favorable terms.

See the caption entitled "Risks" for further items that could affect liquidity.

Risk Management

The Company adopted the provisions of CICA Sections 3855, Financial Instruments - Recognition and Measurement, 3861, Financial Instruments - Presentation and Disclosure, 3865 Hedges and 1530 Comprehensive Income, on January 1, 2007. These sections address the classification, recognition and measurement of financial instruments and hedges in the financial statements and the inclusion of other comprehensive income. These sections were adopted on a prospective basis without retrospective restatement of prior periods and there was no material impact on the Company's financial statements on adoption.

Currently, the Company does not use hedge accounting, and, as a result, the adoption of CICA Section 3865 has no material impact on the financial statements.

The Company has used financial instruments that are derivative contracts classified as "held for trading" to manage volatility of natural gas prices. The Company had no such contracts at December 31, 2006 but entered into two "costless collars" during the first quarter of 2007. The contracts expired on October 31, 2007 and a gain of $209,000 was recorded.

There were no such contracts open at December 31, 2007 but subsequent to that, the Company entered into a financial costless collar based 3,000 Gj/d of natural gas for the period from April 1, 2008 to October 31, 2008 with a put price of $6.635/Gj and a call price of $7.365/Gj. This financial instrument derivative contract has been classified as "held for trading". The Company elected to mark-to-market its financial contracts which resulted in an unrealized pre tax loss of $1,636,000 being recorded in the 1st half of 2008.

Outlook

On July 23, 2008, the Company announced that it had entered into a definitive agreement with Pengrowth Corporation, administrator of Pengrowth Energy Trust ("Pengrowth") pursuant to which Pengrowth will acquire all of the Company's interest in the Harmattan area through the acquisition of all of the common shares of the Company. The balance of the properties will be acquired by a new company. Pursuant to a Plan of Arrangement, Accrete shareholders will receive .273 of a trust units of Pengrowth and .25 of a common share of the new company for each common share that they hold. The closing for the Plan of Arrangement is scheduled for early September. The amount of trust unit received by Accrete shareholders will increase in the event that closing takes place after the record date for the trust's September distribution.

The Plan of Arrangement will require the approval of 66 2/3 % of the votes cast by the shareholders of Accrete. The Plan of Arrangement will also require the approval of a majority of Accrete shareholders excluding Accrete shareholders who participate in the incentive plans of Accrete and will receive a "collateral benefit "within the meaning of securities legislation. Officers, directors and certain employees of Accrete, holding collectively approximately 22% of the outstanding common shares of Accrete, have agreed to vote in favour of the Arrangement. The Arrangement is also subject to customary regulatory and court approvals, including the listing approvals of the Toronto Stock Exchange and the New York Stock Exchange for the issuance of the Pengrowth trust units.

Sensitivities

The Company's performance is affected by factors such as changes in production volumes, commodity prices and interest rates.

The following table illustrates the impact on cash flows and net earnings as a result of changes in commodity prices and interest rates based on forecast cash flows and capital expenditures of between $26 and $30 Million for 2008:



$ Thousand Cash Flow Pre Tax
Earnings
----------------------------------------------------------------------------
Impact on the year ended December 31, 2008
Change in Canadian crude oil by $1/ bbl 35 25
Change in field gate price of Natural Gas
by $1/ mcf 4,718 3,303
Change in Natural Gas Liquids price by $1/ bbl 223 156
Change of 1% in prime interest rates 645 452


Critical Accounting Estimates

There are no changes from those described in the Management's Discussion and Analysis for the year ended December 31, 2007.

Risks

There are no changes to the risks to which the Company is exposed from those disclosed in the Management's Discussion and Analysis for the year ended December 31, 2007.

Changes in Legislation

Alberta Royalty Review

On October 25, 2007, the Government of Alberta released its New Royalty Framework ("NRF") which is to be the basis of royalty regulations that are to become effective on January 1, 2009. The NRF proposes a regime that would have Alberta Crown Royalty rates based on production rates, well depths and commodity prices. At this time, the detailed and specific information that is necessary to calculate the impact of the proposed regulations on natural gas royalties is not available and accordingly, the Company cannot thoroughly evaluate the impact on the Company's operations.

Greenhouse Gas and Air Emissions Legislation

The Federal Government released on April 26, 2007, its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan"), also known as ecoACTION and which includes the Regulatory Framework for Air Emissions. This Action Plan covers not only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products. Regarding large industry and industry related projects, the Government's Action Plan intends to achieve the following: (i) an absolute reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing mandatory targets; and (ii) air pollution from industry is to be cut in half by 2015 by setting certain targets. New facilities using cleaner fuels and technologies will have a grace period of three years. In order to facilitate companies' compliance with the Action Plan's requirements, while at the same time allowing them to be cost-effective, innovative and adopt cleaner technologies, certain options are provided. These are: (i) in-house reductions; (ii) contributions to technology funds; (iii) trading of emissions with below-target emission companies; (iv) offsets; and (v) access to Kyoto's Clean Development Mechanism.

On March 8, 2007, the Alberta Government introduced Bill 3, the Climate Change and Emissions Management Amendment Act, which intends to reduce greenhouse gas emission intensity from large industries. Bill 3 states that facilities emitting more than 100,000 tonnes of greenhouse gases a year must reduce their emissions intensity by 12% starting July 1, 2007; if such reduction is not initially possible the companies owning the large emitting facilities will be required to pay $15 per tonne for every tonne above the 12% target. These payments will be deposited into an Alberta-based technology fund that will be used to develop infrastructure to reduce emissions or to support research into innovative climate change solutions. As an alternate option, large emitters can invest in projects outside of their operations that reduce or offset emissions on their behalf, provided that these projects are based in Alberta. Prior to investing, the offset reductions offered by a prospective operation must be verified by a third party to ensure that the emission reductions are real. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict the impact of those requirements on the Company and its operations and financial condition. Bill 3 does not currently have an impact on the Company as it does not own any facilities emitting in excess of 100,000 tonnes per year.

Disclosure Controls and Internal Controls Over Financial Reporting

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to Accrete's management as appropriate to allow timely decisions regarding required disclosure. Accrete's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the interim filings, that the Company's disclosure controls and procedures are effective to provide reasonable assurance that material information related to the Company is made known to them by others within the Company. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable assurance that the objective of the control system is met.

Management acknowledges that there is a lack of segregation of duties within several of the Company's processes due to its small size. Management has identified the specific functions with the potential to compromise the Company's overall control objectives. Appropriate compensating controls have been implemented to management's satisfaction in response to the identified risks.

Accrete's Chief Executive Officer and Chief Financial Officer are required to cause the Company to disclose herein any change in the Company's internal controls over financial reporting that occurred during the Company's most recent interim period that has materially affected, or is reasonably likely to affect, the Company's internal controls over financial reporting. During 2006, 2007 and 2008, Accrete engaged external consultants to assist in documenting and assessing the Company's internal controls over financial reporting.

No material changes in the Company's internal controls were identified during the year ended December 31, 2007 or during the interim period ending June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

Contractual Obligations

The Company has committed to a term drilling program with a major drilling contractor. The Company is obligated to utilize the contractor's rig for a period of 200 days for a one year period that commenced August 15, 2007. The Company has estimated that at June 30, 2008 that it has approximately 70 days left to fulfill this contract. The Company is currently negotiating an extension. Should it be unsuccessful in such negotiations, a liability of up to $500,000 could be incurred.

The Company rents a compressor for $26,495 per month on a month to month basis.

The Company has entered into various commitments related to the leasing of office premises and office equipment. The payments due under such leases are as follows:



Contractual
Obligations 2008 2009 2010 2011 2012 Thereafter

($ thousands) $ $ $ $ $ $
----------------------------------------------------------------------------

Office Premises 562 708 708 741 808 879

Office equipment 9 2 1 - - -
----------------------------------------------------------------------------
571 710 709 741 808 879
----------------------------------------------------------------------------


The current office lease expired early in 2008. Accordingly, the Company negotiated leases for new office space. The increase in the commitment for office premises reflects the dramatic increase in prices for suitable office space.

At December 31, 2007 the Company's credit facility comprises a revolving Operating Demand Loan facility with a credit limit of $70,000,000 that bears interest at bank prime plus one quarter percent.

This facility has no specific terms of repayment aside from the bank's right of demand and periodic review and is secured by a general assignment of book debts, a $100,000,000 debenture with a first floating charge over all assets with a negative pledge and an undertaking to provide fixed charges on the Company's major producing reserves at the request of the bank.

New Accounting Standards

The Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3031 "Inventories", Section 3863 "Financial Instruments - Disclosures" and Section 1535 "Capital Disclosures" on January 1, 2008. The adoption of these standards has had no material impact on the Company's Net Earnings or Cash Flows. Additional information on the effects of the implementation can be found in the notes to the Company's interim financial statements.

As of January 1, 2009, the Company will be required to adopt CICA Handbook Section 3064 "Goodwill and Intangible Assets", which defines the criteria for the recognition of intangible assets. The adoption of this standard should have no material impact on the Company's financial statements.

On February 13, 2008, Canada's Accounting Standards Board confirmed January 1, 2011 as the effective date for the convergence of Canadian GAAP to International Financial Reporting Standards. The Canadian Securities Administrators are in the process of examining changes to securities rules that may occur. Accrete Energy Inc. has not determined the impact of this initiative because it is still in its early stages.


Transactions With Related Parties

The Corporation has not entered into any transactions with related parties, nor did it have any balances outstanding with related parties at year end.

Off Balance Sheet Arrangements

The Corporation has not entered into any off-balance sheet transactions.

Subsequent Event

On July 23, 2008, the Company announced that it had entered into a definitive agreement with Pengrowth Corporation, administrator of Pengrowth Energy Trust ("Pengrowth") pursuant to which Pengrowth will acquire all of the Company's interest in the Harmattan area through the acquisition of all of the common shares of the Company. The balance of the properties will be acquired by a new company. Pursuant to a Plan of Arrangement, Accrete shareholders will receive .273 of a trust unit of Pengrowth and .25 of a common share of the new company for each common share that they hold. The closing for the Plan of Arrangement is scheduled for early September. The amount of trust unit received by Accrete shareholders will increase in the event that closing takes place after the record date for the trust's September distribution.

The Plan of Arrangement will require the approval of 66 2/3 % of the votes cast by the shareholders of Accrete. The Plan of Arrangement will also require the approval of a majority of Accrete shareholders excluding Accrete shareholders who participate in the incentive plans of Accrete and will receive a "collateral benefit "within the meaning of securities legislation. Officers, directors and certain employees of Accrete, holding collectively approximately 22% of the outstanding common shares of Accrete, have agreed to vote in favour of the Arrangement. The Arrangement is also subject to customary regulatory and court approvals, including the listing approvals of the Toronto Stock Exchange and the New York Stock Exchange for the issuance of the Pengrowth trust units.

The Plan of Arrangement, if approved, will still allow Accrete shareholders exposure to the long life production revenue from the Harmattan property through the ownership of Pengrowth trust units and at the same time will provide them the opportunity to participate directly in the growth opportunities inherent in the Claresholm and Saxon areas.



Accrete Energy Inc.
Balance Sheets
(unaudited)

June 30, December 31,
($ Thousands) 2008 2007
----------------------------------------------------------------------------

ASSETS
Current assets
Accounts receivable 7,964 6,912
Prepaid expenses 2,040 1,796
Future income tax (Note 7) 483 -
----------------------------------------------------------------------------
10,487 8,708
Property and equipment (note 3) 122,839 119,742
----------------------------------------------------------------------------
133,326 128,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities 11,294 11,139
Fair value of derivative financial instruments
(notes 2 and 8) 1,636 -
Bank indebtedness (note 4) 51,837 55,928
----------------------------------------------------------------------------
64,767 67,067

Asset retirement obligation (note 6) 2,147 1,982
Future income tax (note 7) 10,241 8,181
----------------------------------------------------------------------------
77,155 77,230
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share capital (note 5) 36,142 36,142
Contributed surplus (note 5) 3,759 3,581
Retained Earnings 16,270 11,497
----------------------------------------------------------------------------
56,171 51,220
----------------------------------------------------------------------------
133,326 128,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (note 10)

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Income and Comprehensive Income
(unaudited)

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
($ Thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue
Petroleum and natural gas revenue 15,744 11,149 29,751 21,796
Royalties (3,898) (2,581) (7,292) (5,908)
Realized loss on derivative
instruments (409) - (409) -
Unrealized gain/(loss) on
derivative instruments (640) 335 (1,636) 101
10,797 8,903 20,414 15,989
Expenses

Production expenses 1,373 1,190 2,616 2,565
Transportation expenses 236 180 392 290
General and administrative, net
of recoveries 1,462 819 2,330 1,683
Interest expense 638 687 1,422 1,242
Stock based compensation cost (note 5) 48 233 178 333
Depletion, depreciation and accretion 3,350 3,326 7,125 6,447
----------------------------------------------------------------------------
7,107 6,435 14,063 12,560
----------------------------------------------------------------------------
Income before income taxes 3,690 2,468 6,351 3,429
Future income taxes (note 7) (909) (679) (1,578) (710)
----------------------------------------------------------------------------
Net income and comprehensive income 2,781 1,789 4,773 2,719
----------------------------------------------------------------------------

Income per share:
Basic 0.17 0.11 0.29 0.17
Diluted 0.16 0.11 0.28 0.16

See accompanying notes to financial statements


Accrete Energy Inc.
Statements of Retained Earnings, Comprehensive Income and Accumulated Other
Comprehensive Income
(unaudited)

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
($ Thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Retained Earnings:
Retained Earnings, beginning of period 13,489 6,671 11,497 5,741
Net income for the period 2,781 1,789 4,773 2,719
-------------------------------------
Retained Earnings, end of period 16,270 8,460 16,270 8,460
-------------------------------------
-------------------------------------

Comprehensive Income:
Net income for the period 2,781 1,789 4,773 2,719
Other comprehensive income - - - -
-------------------------------------
Comprehensive income 2,781 1,789 4,773 2,719
-------------------------------------
-------------------------------------
Accumulated other comprehensive income:
Accumulated other comprehensive income,
beginning of year
- - - -
Changes during the period - - - -
-------------------------------------
Accumulated other comprehensive
income, end of year
- -
-------------------------------------
-------------------------------------
See accompanying notes to financial statements


Accrete Energy Inc.
Consolidated Statements of Cash Flows
(Unaudited)

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
($ Thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by (used in): $ $ $ $
Operating Activities
Net income for the period 2,781 1,789 4,773 2,719
Items not affecting cash:
Stock based compensation cost 59 233 178 333
Future income taxes 909 679 1,578 710
Unrealized (gain)/loss on
derivative financial instruments 640 (335) 1,636 (101)
Depletion, depreciation and
accretion 3,350 3,326 7,125 6,447
----------------------------------------------------------------------------
7,739 5,692 15,290 10,108
Change in non-cash working capital
(note 9) 447 (926) 603 1,179
----------------------------------------------------------------------------
8,186 4,766 15,893 11,287
----------------------------------------------------------------------------
Investing Activities
Property and equipment additions (3,235) (5,695) (8,859) (24,787)
Net acquisitions and dispositions (1,199) (1,199)
Change in non-cash working capital
(note 9) (2,510) (7,371) (1,744) 1,011
----------------------------------------------------------------------------
(6,944) (13,066) (11,802) (23,776)
----------------------------------------------------------------------------
Financing Activities

Bank debt (1,242) 8,300 (4,091) 12,489
----------------------------------------------------------------------------
(1,242) 8,300 (4,091) 12,489

Increase (decrease) in cash
Cash - beginning of period - - - -
Cash - end of period - - - -
----------------------------------------------------------------------------

Supplemental Information :
Interest Paid 638 687 1,422 1,242
----------------------------------------------------------------------------
----------------------------------------------------------------------------



Accrete Energy Inc.

Notes to the Consolidated Financial Statements
For the period ended June 30, 2008
(Unaudited)


1. Significant Accounting Policies

Accrete Energy Inc. ("Accrete") is engaged in the exploration, development and production of petroleum and natural gas in Alberta. The Company's wholly owned subsidiary, 1406415 Alberta Ltd., incorporated on June 6th, 2008, has not commenced operations.

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiary and have been prepared by Management in accordance with Canadian generally accepted accounting principles, following the same accounting policies and methods of computation as the audited financial statements of Accrete Energy Inc. for the year ended December 31, 2007 except as disclosed in Note 2. These unaudited interim financial statements should be read in conjunction with the audited financial statements of Accrete Energy Inc. for the year ended December 31, 2007.

2. Change In Accounting Policies

Effective January 1, 2008, the Company adopted CICA Handbook Section 3862, Financial Instruments - Disclosure, CICA Handbook Section 3863, Financial Instruments - Presentation and CICA Handbook Section 3031, Inventories and CICA Handbook Section 1535 "Capital Disclosures".

The adoption of Handbook Sections 3862, 3863 and 3031 had no impact on the Company's financial results. The new disclosure as required by Handbook Sections 1535 and 3062 is presented in the notes to the interim financial statements.



3. Property and Equipment

As at As at
June 30, December 31,
2008 2007
($ thousands) $ $
----------------------------------------------------------------------------

Petroleum and natural gas properties and
equipment 162,778 152,631
Furniture, fixtures and other 139 129
----------------------------------------------------------------------------
162,917 152,760
Less: Accumulated depletion and depreciation 40,078 33,018
----------------------------------------------------------------------------
122,839 119,742
----------------------------------------------------------------------------


At June 30, 2008 costs of $9,622,000 ($9,509,000 at December 31, 2007) with respect to unproved properties have been excluded from costs subject to depletion. At June 30, 2008 a total of $2,708,000 of future development costs were included in the depletion calculation (2007 - $2,700,000). Direct salary costs related to geological and geophysical personnel in the amount of $139,000 ($136,000 in 207) and capitalized stock based compensation of $29,000 have been charged to petroleum and gas properties. No other salary or overhead charges have been capitalized.

4. Bank Indebtedness

At June 30, 2008 the Company's credit facility comprises a Revolving Operating Demand Loan facility with a credit limit of $70,000,000 that bears interest at bank prime plus one quarter percent.

This facility has no specific terms of repayment aside from the bank's right of demand and periodic review and is secured by a general assignment of book debts, a $100,000,000 debenture with a first floating charge over all assets with a negative pledge and an undertaking to provide fixed charges on the Company's major producing reserves at the request of the bank.

A covenant to the Revolving Operating Demand Loan facility requires that the Company maintain a working capital ratio of at least 1 to 1 exclusive of bank indebtedness. For purposes of this calculation, the undrawn availability under the facility is added to current assets.

5. Share Capital

Authorized:

An unlimited number of common voting shares and an unlimited number of preferred shares issuable in series for which the directors may fix, among other things, the rights, privileges, restrictions, conditions, voting rights, rates, method of calculation and dates of payment of dividends and terms of redemption, purchase and conversion if any, and any other provisions.



Issued and outstanding:

Number of
Common Voting Shares Shares $ Thousands
----------------------------------------------------------------------------
Balance, December 31, 2005 15,232,936 29,618
Exercise of Stock Options 16,666 74
Issued on private placement - flow
through shares 1,248,300 10,486
Share issuance costs, net of tax (460)
----------------------------------------------------------------------------
Balance, December 31, 2006 16,497,902 39,718
Normal Course Issuer Bid (226,100) (544)
Tax effect of flow through shares (3,041)
Share issuance costs, net of tax 9
----------------------------------------------------------------------------
Balance, December 31, 2007 16,271,802 36,142
----------------------------------------------------------------------------
Balance June 30, 2008 16,271,802 36,142
----------------------------------------------------------------------------


The tax deductions related to the $10,486,000 of flow through shares issued in 2006 were renounced to flow through shareholders and booked to the accounts in February 2007.

The following reconciles the common shares used in calculating net earnings per common share:



June 30,
2008 2007
Weighted average common voting shares outstanding
- basic 16,271,802 16,497,902
Effect of dilutive stock options 1,096,087 1,063,451
----------------------------------------------------------------------------
Weighted average common shares outstanding
- diluted 17,367,889 17,561,353
----------------------------------------------------------------------------


Stock Options

Under the terms of the Accrete Energy Inc. 2004 Incentive Stock Option Plan, as amended, (the "plan"), directors, officers, employees and consultants (the "Participant(s)") are eligible to be granted options to purchase common shares. The plan provides for granting up to 1,926,394 common shares. The maximum number of option shares that may be reserved for issuance to any one Participant under the plan cannot exceed 5% of the issued and outstanding common shares. The exercise price under the plan is defined by the plan to be the closing price on the principal stock exchange on which the common shares are traded on the last business date preceding the date of grant or if the common shares did not trade on that date, the weighted average price for the five trading days preceding the date of grant.

The vesting of stock options is determined by the board of directors and the term, as also determined by the board of directors cannot exceed five years from the date of grant of such options. A Participant's entitlement under the plan ceases upon ceasing to be a Participant. If such cessation is involuntary, then the vested and unvested options can be exercised for a period of ninety days after such date. Where a Participant is terminated for cause, the Participant may only exercise those options that have become vested. Where a Participant is terminated by the company without cause, the Participant is entitled to exercise stock options that have vested during the notice period or in the event of compensation being paid in lieu of notice, for 21 days after ceasing to be a Participant. Options granted under the plan are not assignable and no financial assistance is extended to optionees.

The board of directors is empowered to amend the plan. Any amendment to the plan is subject to the receipt of necessary regulatory approvals and any amendment required by applicable law or regulatory policy to be approved by shareholders does not become effective until so approved.

The following table summarizes information about stock options outstanding at June 30, 2008:



Weighted
Average
Remaining Number Exercise
Options Contractual Exercisable Price
Grant Price Outstanding Life (Vested) ($/Share)
----------------------------------------------------------------------------
$ 1.00 (1) 926,845 .9 Years 926,845 .50
$ 2.30 (2) 40,000 1.3 Years 40,000 .05
$ 2.60 (2) 395,000 1.4 Years 395,000 .56
$ 2.89 (2) 5,000 1.4 Years 5,000 .01
$ 3.12 (2) 40,000 1.4 Years 40,000 .07
$ 5.20 (1) 375,000 3.6 Years 250,000 1.05
$ 5.26 (1) 50,000 3.2 Years 16,667 .14
$ 6.91 (2) 10,000 3.2 Years 3,333 .04
$ 7.01 (2) 5,000 1.9 Years 5,000 .02
----------------------------------------------------------------------------
1,846,845 2.0 Years 1,681,845 2.44
----------------------------------------------------------------------------

(1) Five year term, vest equally over a three year period commencing on the
date of grant.
(2) Five year term, vest equally over a three year period commencing on the
first anniversary of the date of grant.


Options outstanding:

Balance, December 31, 2005 1,465,845
Granted 10,000
Exercised and Forfeited (50,000)
----------------------------------------------------------------------------
Balance, December 31, 2006 1,425,845
Granted 430,000
Forfeited (9,000)
----------------------------------------------------------------------------
Balance, December 31, 2007 1,846,845
----------------------------------------------------------------------------
Balance, June 30, 2008 1,846,845
----------------------------------------------------------------------------


The Company has accounted for its employee stock options granted using the fair value method. The fair value of all options granted to June 30, 2008 was estimated to be $4,486,000 ($2.43 per option granted). This value is charged to stock based compensation cost over the vesting period.

A total of $178,000 was incurred in the 1st half 2008. Of this, $149,000 was charged to expense ($333,000 in the 1st half 2007) and $29,000 ($ - in the 1st half 2007) was capitalized.

A total of $59,000 was incurred in the 2ond quarter 2008. Of this, $48,000 was charged to expense ($233,000 in the 2ond quarter 2007) and $11,000($ - in the 2ond quarter 2007) was capitalized.

A total of $119,000 was incurred in the 1st quarter 2008. Of this, $101,000 was charged to expense ($100,000 in the 1st quarter 2007) and $18,000($ - in the 1st quarter 2007) was capitalized.

The assumptions used in calculating the fair value include a volatility factor ranging from 31% to 52%, a weighted average risk free interest rate of 3.7% to 4.5%, and a weighted average expected life of the options of 4 to 5 years.



Contributed Surplus

($ thousands) 6 Months Ended Year Ended
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Balance, beginning of year 3,581 3,414
Stock Based Compensation 178 707
Normal Course Issuer Bid - (540)
----------------------------------------------------------------------------
Balance, end of year 3,759 3,581
----------------------------------------------------------------------------


Normal Course Issuer Bid

On March 27, 2007, the Company announced that the Toronto Stock Exchange had approved a normal course issuer bid (the "NCIB) whereby the Company may acquire a maximum of 1,000,000 common voting shares by way of the NCIB prior to its expiry on March 22, 2008.

A total of 226,100 common voting shares were acquired during 2007 at prices ranging from $3.90 to $5.05 per share. Shares purchased pursuant to the NCIB were cancelled and returned to treasury.



6. Asset Retirement Obligation

Asset retirement obligation comprises:

Six Months Ended Year Ended
June 30, December 31,
($ thousands) 2008 2007
----------------------------------------------------------------------------
Balance, beginning of year 1,982 1,663
Liabilities incurred 100 197
Liabilities settled - -
Dispositions - -
Accretion expense 65 122
----------------------------------------------------------------------------
Balance, end of year 2,147 1,982
----------------------------------------------------------------------------


The total future asset retirement obligation was estimated based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows to settle the asset retirement obligation is approximately $4,016,000(2007 $3,501,000) which will be incurred over the next twenty five years. A credit adjusted risk-free rate of 7% (2007 7%) and an inflation rate of 2% (2007 2%) was used to calculate the fair value of the obligations.

7. Income Taxes

At June 30, 2008, the Company's exploration and development expenditures and undepreciated capital costs total $78,683,000. These costs may be carried forward indefinitely to reduce future taxable income. The following reconciles the difference between income tax recorded and the expected income tax expense obtained by applying the expected income tax rate to earnings before taxes:



($ thousands) Three Months Six months
Ended Ended
June 30, June 30,
2008 2007 2008 2007
$ $ $ $
-------------------------------------
Income/(Loss) before income taxes 3,690 2,468 6,351 3,429
Statutory Rate 29.5% 32.12% 29.5% 32.12%
Expected income tax recovery at
the combined federal and provincial
statutory rate 1,089 793 1,874 1,101
Stock based compensation cost 14 75 44 107

Tax-rate adjustments (197) (189) (349) (494)
Other 3 - 9 (4)
-------------------------------------
Future income tax expense 909 679 1,578 710
-------------------------------------

The following table summarizes the tax effect of temporary differences:

($ thousands)
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Future income tax assets (liabilities):
Carrying value of capital assets in excess of
tax basis (11,091) (9,112)
Asset retirement obligation 537 495
Share issue costs 140 263
Attributed crown royalty income 173 173
Unrealized loss on derivative financial
instruments 483 -
----------------------------------------------------------------------------
(9,758) (8,181)
----------------------------------------------------------------------------
Current future tax asset 483 -
Non-current future income tax liability (10,241) (8,181)
----------------------------------------------------------------------------
(9,758) (8,181)
----------------------------------------------------------------------------


8. Financial Instruments

Financial instruments consist primarily of accounts receivable, accounts payable and accrued liabilities and bank debt. There are no significant differences between the carrying value of these instruments and their estimated fair value.

A portion of the Company's accounts receivable are from joint venture partners in the oil and gas business and are subject to normal industry credit risk. Purchasers of the Company's petroleum and natural gas products are subject to an internal credit review designed to mitigate the risk of non-payment and the carrying value reflects management's assessment of the associated credit risks.

The Company is exposed to fluctuations in commodity prices that are based in foreign currency.

The Company did not enter into any such contracts that would have mitigated its exposure to foreign currency but it did enter into various contracts that were intended to reduce its exposure to fluctuations in commodity prices during 2007. These were derivative contracts classified as "held for trading".
These contracts expired on October 31, 2007. The realized gain for 2007 from these contracts was $209,000.

There were no such contracts open at December 31, 2007 but subsequent to that, the Company entered into a financial costless collar based 3,000 Gj/d of natural gas for the period from April 1, 2008 to October 31, 2008 with a put price of $6.635/Gj and a call price of $7.365/Gj.



9. Supplemental Cash Flow Information

Change in non-cash working capital comprises:
(Thousands)

3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
$ $ $ $
----------------------------------------------------------------------------
Accounts receivable (1,226) (1,148) (1,052) 1,768
Prepaid expenses (321) (146) (244) 537
Accounts payable and accrued
liabilities (516) (7,003) 155 (115)
----------------------------------------
Change in non-cash working capital (2,063) (8,297) (1,141) 2,190
----------------------------------------------------------------------------
Relating to:
Investing activities (2,510) (7,371) (1,744) 1,011
Operating activities 447 (926) 603 1,179
----------------------------------------------------------------------------
(2,063) (8,297) (1,141) 2,190
----------------------------------------------------------------------------


10. Commitments

The Company has entered into an agreement with a major drilling contractor. The Company is obligated to utilize the contractor's rig for a period of 200 days during the one year term of the agreement that commenced August 15, 2007. The Company has estimated that at June 30, 2008 that it has approximately 70 days left to fulfill this contract. The Company is currently negotiating an extension. Should it be unsuccessful in such negotiations, a liability of up to $500,000 could be incurred.

The Company has entered into various commitments related to the leasing of office premises and office equipment. The payments due under such leases are as follows:



Contractual obligations
($ thousands) 2008 2009 2010 2011 2012 Thereafter

----------------------------------------------------------------------------

Office Premises 562 708 708 741 808 879

Office equipment 9 2 1 - - -
----------------------------------------------------------------------------
571 710 709 741 808 879
----------------------------------------------------------------------------


11. Capital Structure

The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business.

The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets.

The Company's capital structure is comprised of shareholder's equity, bank indebtedness and working capital. In order to maintain or adjust the capital structure, the Company may from time to time issue shares and adjust its capital spending to manage its current and projected debt levels.

The Company monitors capital based on the ratio of net debt to annualized funds flow. This ratio is calculated as net debt, defined as outstanding bank indebtedness plus or minus working capital, divided by funds flow from operations before changes in non cash working capital for the most recent calendar quarter, annualized (i.e. multiplied by four). The Company's strategy is to maintain a ratio that is in keeping with that of its industry peer group. The ratio may increase at certain times as a result of acquisitions or extremely low commodity prices. The Company prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors including current and forecast prices, successful capital deployment and general industry conditions in order to manage the ratio. The annual and updated budgets are approved by the Company's Board of Directors.

The Company's share capital is not subject to external restrictions, however the bank debt facility is based on petroleum and natural gas reserves. The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future. There were no changes in the Company's approach to capital management during the period.

12. Fair value of Financial Instruments

The Company's financial instruments as at June 30, 2008 and December 31, 2007 include cash and cash equivalents, accounts receivable, derivative contracts, accounts payable and accrued liabilities and bank indebtedness. The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to their short-terms to maturity.

The fair value of derivative contracts is determined by reference to market information provided by the Company's bank.

Bank debt bears interest at a floating market rate and accordingly the fair market value approximates the carrying value.

13. Financial Risk Management

The Company has exposure to the following risks from its use of financial instruments:

- Credit risk

- Liquidity risk

- Market risk

This note presents information about the Company's exposure to each of the above risks, the Company's objectives, policies and processes for measuring and managing risk, and the Company's management of capital. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Board has implemented and monitors compliance with risk management policies. The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company's activities.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from joint venture partners and petroleum and natural gas marketers. As at June 30, 2008 the Company's receivables consisted of $151,000 (2007 - $888,000) from joint venture partners, $6,490,000 (2007 - $4,377,000) of receivables from petroleum and natural gas marketers and $1,323,000 (2007 - $1,647,000) of other trade receivables.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. The Company's policy to mitigate credit risk associated with these balances is to establish marketing relationships with large purchasers. The Company historically has not experienced any collection issues with its petroleum and natural gas marketers. Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling, in addition further risk exists with joint venture partners as disagreements occasionally arise that increase the potential for non-collection. The Company does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners. The Company collects cash advances from joint venture partners to the extent possible and it does have the ability to withhold production from them in certain cases in the event of non-payment.

The carrying amount of accounts receivable represents the maximum credit exposure. The Company does not have an allowance for doubtful accounts as at June 30, 2008 and December 31, 2007 and did not provide for any doubtful accounts nor was it required to write-off any receivables during the period ended June 30 or the year ended December 31, 2008.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking harm to the Company's reputation.

The Company prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary. Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate the capital expenditure program, the Company has a revolving operating demand loan facility, as outlined in note 4 that is at least reviewed annually by the lender. The Company also attempts to match its payment cycle with collection of petroleum natural gas revenues on the 25th of each month.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the Company's net earnings or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. The Company utilizes both financial derivatives and physical delivery sales contracts to manage market risks. All such transactions are conducted in accordance with the risk management policy that has been approved by the Board of Directors.

Commodity price risk

Commodity price risk is the risk that the fair value or future funds flow will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by not only the relationship between the Canadian and United States dollar, as outlined above, but also world economic events that dictate the levels of supply and demand. The Company has attempted to mitigate commodity price risk through the use of various financial derivative and physical delivery sales contracts. The Company's banking agreement limits the volumes that the Company can contract by way of commodity contracts to 50% of the Company's production.

The Company entered into various contracts that were intended to reduce its exposure to fluctuations in commodity prices during 2007. These were derivative contracts classified as "held for trading". These contracts expired on October 31, 2007. The realized gain for 2007 from these collars was $209,000.

There were no such contracts open at December 31, 2007 but subsequent to that, the Company entered into a financial costless collar based 3,000 Gj/d of natural gas for the period from April 1, 2008 to October 31, 2008 with a put price of $6.635/Gj and a call price of $7.365/Gj. This financial instrument derivative contract has been classified as "held for trading". The Company elected to mark-to-market its financial contracts which resulted in an unrealized before tax loss of $640,000 being recorded in the 2nd quarter 2008, and $1,636,000 in 2008. The realized losses in the 2nd quarter and year to date are $409,000.

The unrealized gain or loss from financial contracts has been included on the income statement with changes in the fair value included in petroleum and natural gas sales.

Interest rate risk

Interest rate risk is the risk that future funds flow will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate fluctuations on its bank debt which bears a floating rate of interest As at June 30, 2008, if interest rates had been 1% lower with all other variables held constant, pre tax net earnings for the six month period would have been $370,000 higher, due to lower interest expense. An equal an opposite impact would have occurred to pre tax earnings had interest rates been 1% higher.

14. Subsequent Event

On July 23, 2008, the Company announced that it had entered into a definitive agreement with Pengrowth Corporation, administrator of Pengrowth Energy Trust ("Pengrowth") pursuant to which Pengrowth will acquire all of the Company's interest in the Harmattan area through the acquisition of all of the common shares of the Company. The balance of the properties will be acquired by a new company. Pursuant to a Plan of Arrangement, Accrete shareholders will receive .273 of a trust unit of Pengrowth and .25 of a common share of the new company for each common share that they hold. The closing for the Plan of Arrangement is scheduled for early September. The amount of trust unit received by Accrete shareholders will increase in the event that closing takes place after the record date for the trust's September distribution.

The Plan of Arrangement will require the approval of 66 2/3 % of the votes cast by the shareholders of Accrete. The Plan of Arrangement will also require the approval of a majority of Accrete shareholders excluding Accrete shareholders who participate in the incentive plans of Accrete and will receive a "collateral benefit "within the meaning of securities legislation. Officers, directors and certain employees of Accrete, holding collectively approximately 22% of the outstanding common shares of Accrete, have agreed to vote in favour of the Arrangement. The Arrangement is also subject to customary regulatory and court approvals, including the listing approvals of the Toronto Stock Exchange and the New York Stock Exchange for the issuance of the Pengrowth trust units.

Additional Information

Additional information regarding the Company and its business operations, including the annual information form ("AIF") is available on the Company's web site at accrete-energy.com and on SEDAR.com. Copies of such information may also obtained by contacting the Company at Accrete Energy Inc., 2100, 500 - 4th Avenue S.W., Calgary, Alberta T2P 2V6 or by e-mail at investor@accrete-energy.com.

Contact Information

  • Accrete Energy Inc.
    Peter Salamon
    President
    Email: investor@accrete-energy.com
    or
    Accrete Energy Inc.
    2100, 500 - 4th Avenue S.W.
    Calgary, Alberta T2P 2V6
    Website: accrete-energy.com