Fairborne Energy Trust
TSX : FEL.UN

Fairborne Energy Trust

August 10, 2006 00:15 ET

Fairborne Energy Trust Announces Second Quarter 2006 Financial and Operating Results: Cash Flow Increases 6% Over Previous Quarter

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2006) - Fairborne Energy Trust (TSX:FEL.UN):



SECOND QUARTER HIGHLIGHTS
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Financial ($thousands, except
per unit amounts)
Petroleum and natural gas revenue 50,914 48,807 105,703 96,241
Funds generated from operations 30,340 23,760 58,964 49,054
Per unit - basic $0.65 $0.47 $1.26 $0.95
Per unit - diluted $0.57 $0.47 $1.11 $0.91
Net income 13,881 2,719 24,740 7,627
Per unit - basic $0.30 $0.05 $0.53 $0.15
Per unit - diluted $0.28 $0.05 $0.51 $0.14
Exploration and development
expenditures 8,290 28,101 37,522 78,526
Acquisitions, net of dispositions - (36,453) - (36,453)
Working capital deficit 3,199 7,758 3,199 7,758
Bank indebtedness 147,202 124,580 147,202 124,580
------------------------------------------------------------------------
------------------------------------------------------------------------

Operations (Units as noted)
Production
Natural gas (Mcf per day) 43,441 47,077 44,948 48,048
Crude oil (bbls per day) 2,607 2,558 2,591 2,801
Natural gas liquids (bbls per day) 432 422 408 410
-------------------------------------
Total (BOE per day) (1) 10,280 10,826(1) 10,491 11,219(1)
Average sales price
Natural gas ($ per Mcf) 7.74 7.55 8.38 7.37
Crude oil ($ per bbl) 74.34 61.20 69.43 55.30
Natural gas liquids ($ per bbl) 51.94 45.29 51.64 46.55
Netback per BOE ($ per BOE)
Petroleum and natural gas sales 54.43 49.54 55.67 47.40
Royalties (7.04) (10.10) (10.00) (10.27)
Transportation (1.00) (0.71) (1.58) (0.47)
Operating expenses (9.82)(2) (8.28) (9.23) (8.24)
-------------------------------------
Operating netback 36.57 30.45 34.86 28.42
Wells drilled (gross) 4 6 29 22
Undeveloped land (net acres) 182,034 200,903 182,034 200,903
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Fairborne's 2005 production includes properties disposed of to
Fairquest Energy Limited on June 1, 2005.
(2) Second quarter 2006 included $1.52 per BOE of incremental costs for
a gas plant turnaround


SECOND QUARTER HIGHLIGHTS

- Cash flow increased 6% to $30.3 million ($0.65 per unit) from $28.6 million in the first quarter.

- Second quarter payout ratio of 61% (67% including exchangeables).

- Realized gas price was $7.74 per Mcf for the second quarter, representing a 29% premium to daily index AECO prices.

- Average operating netback increased 10% from the first quarter to $36.57 per BOE.

- Production of 10,280 BOE per day was reduced by previously announced outages and major gas plant turnarounds at West Pembina and the Peace River Arch.

- Capital expenditures of $8.3 million were financed from funds generated from operations after distributions to unitholders.

- Net debt was reduced by $3.5 million during the second quarter to $150.4 million at June 30, 2006.

- Monthly distributions through October are expected to remain at $0.13 per unit based on our forecast production, current hedging position and the outlook for commodity prices.

OPERATIONS UPDATE

Production for the second quarter of 2006 averaged 10,280 BOE per day, reflecting a number of scheduled and unscheduled interruptions which negatively impacted production. Unscheduled outages included Nova sales line interruptions impacting the Trust's Clive, Wood River and Haynes areas and third party plant interruptions which restricted production from the Saddle Hills area. In addition, major gas plant turnarounds occurred at the West Pembina gas plant (25 days) where the Trust owns a 23% working interest and the Progress plant (27 days) where the Trust processes natural gas from certain Peace River Arch properties. The turnaround at the West Pembina facilities impacted oil and natural gas production from several areas including Columbia/Harlech, West Pemina Nisku and the Brazeau Belly River Unit.

Second quarter cash flow increased 6% from the previous quarter to $30.3 million allowing the Trust to maintain monthly distributions to unitholders at $0.13 per unit. Fairborne continued to realize strong oil and natural gas prices during the second quarter as a direct result of the Trust's light oil premiums, high heat content natural gas and active hedging strategy. The Trust realized an oil price of $74.34 per bbl and a natural gas price of $7.74 per Mcf for the quarter. The Trust's gas price represented a 29% premium to the AECO daily index.

Capital expenditures in the second quarter totaled $8.3 million which included $3.6 million for drilling and completions, $3.9 million for facilities and pipeline construction and $0.6 million for land and seismic. The Trust participated in drilling a total of four (1.2 net) wells resulting in four (1.2 net) natural gas wells. In addition, the Trust earned an interest in two (0.7 net) oil wells and five (1.0 net) natural gas wells drilled by industry partners under farmout arrangements.

The Trust's net debt at the end of the quarter was $150.4 million with $180 million of available credit facilities. Subsequent to June 30, 2006, the Trust obtained a $20 million non-revolving, non-extendable term facility which was utilized to purchase a partner's interest in the Trust operated Wild River 8-14 well.

OUTLOOK FOR 2006

Overall Trust production has now reached 11,000 BOE per day. As a result of ongoing outages at third party facilities and the extended delay in start up of sour processing capacity at a third party facility in the Gordondale area on the Peace River Arch, the Trust has reduced its expected third and fourth quarter average production volumes to between 11,000 and 11,200 BOE per day and between 11,600 and 11,800 BOE per day respectively. Full year average 2006 production is now estimated to be approximately 11,000 BOE per day.

To improve predictability of cash flow and protect stability of distributions to unitholders, the Trust has increased its hedging position with approximately 31% of third quarter natural gas volumes and 29% of crude oil and NGL production hedged at floor prices of $8.98 per Mcf and US$65.47 per bbl respectively. For the fourth quarter of 2006, the Trust has approximately 41% of natural gas volumes and 28% of crude oil and NGL production hedged at floor prices of $9.32 per Mcf and US$65.00 per bbl respectively. Moving into the first quarter of 2007, the Trust has approximately 38% of natural gas volumes hedged at a floor price of $9.70 per Mcf and 31% of crude oil and NGL production at a floor price of US$64.22 per bbl. With a comfortable level of price protection on natural gas and based on the current outlook for commodity prices, the Trust expects to maintain a monthly distribution of $0.13 per unit through the third quarter of 2006.

The Trust will commence its 2006 Coal Bed Methane ("CBM") drilling program for the Horseshoe Canyon Coals during the month of August with plans to drill 20 to 25 wells, all of which should be on production by the end of the fourth quarter 2006. Current CBM production remains constant from our last update in the fall of 2005 averaging approximately 125 Mcf per day per well for gross CBM production of 9.2 MMcf per day. The Trust's strategy of building major infrastructure including compression and pipelines at its Clive property over the last 18 months provides the Trust with the ability to handle significant additional CBM volumes with minimal additional capital required beyond the cost to drill and complete CBM wells.

The Trust currently has five rigs active with an additional five wells undergoing completion operations. In addition, the Trust has 300 BOE per day behind pipe and five wells drilled and awaiting completion.

The Trust's capital expenditure program during the second half of 2006 is expected to be approximately $28 million including plans to drill 37 gross (23.5 net) wells. The capital program is based on expected cash flows and the current commodity market outlook. Drilling plans include between four and six followup/delineation wells to the recent Harlech gas/condensate discoveries, 20 to 25 CBM wells, six wells at Westerose, and three oil wells at Haynes and Brazeau.

SUMMARY

While natural gas prices continued the downward trend that began in the first quarter of 2006, crude oil remains at near all time highs. Through prudent capital and balance sheet management, aided by our hedging program, Fairborne has successfully maintained an active operational program, and consistent distributions to unitholders.

The Trust continues to be well positioned to meet the goal of increasing production through internal growth projects while maintaining a strong financial position and stable distributions to unitholders. In addition to our drilling based strategy, we continue to look for accretive acquisitions in our core operating areas that would provide additional production, cash flow, reserve growth and undeveloped land to utilize our strong technical staff for organic growth opportunities.

"signed"

STEVEN R. VANSICKLE

President and CEO

August 9, 2006

Calgary, Alberta



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") was prepared at, and is dated, August 9, 2006. This MD&A is provided by the management of Fairborne Energy Trust ("Fairborne" or the "Trust") to review second quarter 2006 activities and results as compared to the previous year, and should be read in conjunction with the unaudited interim consolidated financial statements including selected notes for the six months ended June 30, 2006 and audited consolidated financial statements including notes for the year ended December 31, 2005 and 2004. Additional information relating to Fairborne, including Fairborne's annual information form, is available on SEDAR at www.sedar.com.

Nature of Business: Fairborne Energy Ltd. was incorporated as a private company and commenced active operations in June, 2002. In 2003, Fairborne Energy Ltd. became a publicly traded company. Effective June 1, 2005, Fairborne Energy Ltd. was reorganized resulting in two new entities, Fairquest Energy Limited ("Fairquest"), a publicly traded exploration-focused company, and Fairborne Energy Trust, an open-ended unincorporated investment trust. If the context requires, reference herein to "Fairborne" also includes a reference to Fairborne Energy Ltd. prior to the reorganization.

The Trust maintains its head office in Calgary and is engaged in the business of developing, acquiring and producing crude oil and natural gas in Western Canada. Fairborne follows a strategy of balancing risk and reward by focusing on opportunities by geographic area and prospect type. The Trust's mandate is to generate stable, monthly distributions while maintaining a solid production base.

Forward Looking Statements: This MD&A contains forward-looking statements. Management's assessment of future plans and operations, production estimates and expected production rates, levels of distributions on Trust Units and the payout ratio, cash available for distribution and its availability for capital expenditures and distributions, expected commodity prices, expected royalty rates, transportation costs and operating costs, capital expenditures, and methods of financing capital expenditures may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, the Trust's actual results may differ materially from those expressed in, or implied by, the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhausted. Additional information on these and other factors that could effect the Trust's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), or at the Trust's website (www.fairbornetrust.com). Furthermore, the forward looking statements contained in this MD&A are made as at the date of this MD&A and the Trust does not undertake any obligation to update publicly or to revise any of the included forward looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Non-GAAP Terms: This document contains the terms "funds generated from operations", "distributable cash/cash available for distribution", "payout ratio" and "netbacks" which are non-GAAP terms. The Trust uses these measures to help evaluate its performance. The Trust considers corporate netbacks a key measure as it demonstrates its profitability relative to current commodity prices. The Trust considers funds generated from operations, distributable cash/cash available for distribution and payout ratio key measures as they demonstrate Fairborne's ability to generate funds necessary to repay debt, make distributions to Unitholders and to fund future growth through capital investment. Funds generated from operations should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian GAAP as an indicator of Fairborne's performance. Fairborne's determination of funds generated from operations, distributable cash/cash available for distribution and payout ratio may not be comparable to that reported by other companies. The reconciliation between net income and funds generated from operations can be found in the statement of cash flows in the financial statements with funds generated from operations calculated before non-cash working capital and asset retirement expenditures. Fairborne also presents funds generated from operations per unit whereby per unit amounts are calculated using weighted average units outstanding consistent with the calculation of income per unit.

BOE Conversions: Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel and is based on an energy equivalent conversion method application at the burner tip and does not necessarily represent an economic value equivalency at the wellhead.

COMPARATIVE INFORMATION - TRUST OPERATIONS COMMENCING JUNE 1, 2005

Fairborne Energy Trust ("Fairborne" or the "Trust") is an open-ended, unincorporated investment trust governed by the laws of the Province of Alberta. The Trust was established as part of a Plan of Arrangement involving Fairborne Energy Ltd., Fairborne Energy Trust, Fairquest Energy Limited ("Fairquest") and security holders of Fairborne Energy Ltd. ("Plan of Arrangement") that became effective June 1, 2005. Pursuant to the Plan of Arrangement, Fairborne Energy Ltd. was reorganized resulting in two new entities, Fairquest, a publicly traded exploration-focused company, and Fairborne Energy Trust.

The conversion to a Trust has been accounted for on a continuity of interest basis and accordingly, the interim consolidated financial statements for 2006 and 2005 reflect the financial position, results of operations and cash flows as if the Trust had always carried on the business formerly carried on by Fairborne Energy Ltd. Specifically, the comparative financial statements for the six months ended June 30, 2005 reflect the results of operations and cash flows of Fairborne Energy Ltd. and its subsidiaries prior to the Plan of Arrangement (June 1, 2005). As a result of the conversion to a trust, certain information for prior periods may not be directly comparable.



SECOND QUARTER 2006 RESULTS

Production
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005(1) Change 2006 2005(1) Change
------------------------------------------------------------------------
Natural gas
(Mcf per day) 43,441 47,077 -8% 44,948 48,048 -6%
Crude oil
(bbls per day) 2,607 2,558 2% 2,591 2,801 -7%
Natural gas liquids
(bbls per day) 432 422 2% 408 410 -
------------------------------------------------------------------------

Total (BOE per day) 10,280 10,826(1) -5% 10,491 11,219(1) -6%
Natural gas % of
production 70% 72% -3% 71% 71% -
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Fairborne's 2005 production includes properties disposed of to
Fairquest Energy Limited on June 1, 2005.


Fairborne's second quarter production averaged 10,280 BOE per day consisting of 43.4 MMcf per day of natural gas and 3,039 bbls per day of crude oil and NGL's. Second quarter production was 4% lower than the preceding quarter (10,705 BOE per day) due to outages on the Nova gas pipeline as well as turnarounds on two major gas facilities. Comparatively, 2005 volumes include production from natural gas properties subsequently disposed to Fairquest effective June 1, 2005 (approximately 1,000 BOE per day). Excluding production associated with Fairquest properties, the Trust's production has increased marginally compared to the prior year on both a quarter-over-quarter and year to date basis.

Fairborne's second quarter natural gas production of 43.4 MMcf per day (Q1 2006 - 46.5 MMcf per day) reflects restricted gas sales from the Trust's Clive, Woodriver and Haynes areas due to interruptions on the Nova pipeline as well as restricted production from Columbia/Harlech, West Pembina and Brazeau due to turnarounds on two major natural gas facilities.

Crude oil and NGL production of 3,039 bbls per day remained consistent with the first quarter of 2006 (2,959 bbls per day) as well as the second quarter of 2005 (2,980 bbls per day). Crude oil and NGLs account for 30% of second quarter production reflecting the Trust's primary focus on natural gas properties.



Commodity Prices & Hedging Activities
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Average Prices
Natural gas ($ per Mcf) 7.74 7.55 3% 8.38 7.37 14%
Crude oil ($ per bbl) 74.34 61.20 21% 69.43 55.30 26%
Natural gas liquids ($ per bbl) 51.94 45.29 15% 51.64 46.55 11%
------------------------------------------------------------------------
BOE ($ per BOE) 53.77 49.07 10% 55.08 47.07 17%
------------------------------------------------------------------------
Benchmark Prices
WTI -Edmonton par
(Cdn$ per bbl) 78.89 66.40 19% 74.15 64.21 15%
AECO (Cdn$ per Mcf)
Monthly Index 6.27 7.38 -15% 7.77 7.03 11%
AECO (Cdn$ per Mcf)
Daily Index 6.01 7.36 -18% 6.76 7.13 -5%
------------------------------------------------------------------------
------------------------------------------------------------------------


Hedging - Physical Sales Contracts

The Trust's risk management strategy is based on the following objectives:

- provide greater certainty and stability to distributions;

- protect unitholder return on investment;

- reduce risk exposure in budgeted annual funds flow projections; and

- help ensure transaction economics on acquisitions.

NATURAL GAS

During the second quarter of 2006, index prices for natural gas decreased 25% in the daily spot market and 48% in the monthly spot market compared to the first quarter of 2006. The continued decline in natural gas prices can be attributed to record storage inventories due to one of the warmest winters on record in North America as well as reduced demand levels following the high prices in the latter half of 2005. Despite downward movement in natural gas markets, Fairborne continues to realize above-average natural gas prices due to the higher heat content of the Trust's production and an active risk management program.

An average of 19,266 Mcf per day was hedged during the second quarter of 2006 representing 44% of the Trust's natural gas production under set price physical sales contracts. Risk management activities during the second quarter increased the Trust's realized natural gas price by $1.80 per Mcf to $7.74 per Mcf, a 29% premium to the daily AECO index. On a year to date basis, the Trust's risk management activities increased its realized natural gas price by $1.40 per Mcf to $8.38 per Mcf, a 24% premium to the daily AECO index.



The following table summarizes the outstanding physical sales contracts
for natural gas, including contracts entered into after June 30, 2006:

------------------------------------------------------------------------
Average Average
Floor Floor Ceiling Ceiling
Volume Price Volume Price
Period (Mcf per day) ($ per Mcf) (Mcf per day) ($ per Mcf)
------------------------------------------------------------------------
Q3 2006 15,596 8.98 1,835 10.98
Q4 2006 21,317 9.32 18,267 11.26
Q1 2007 20,110 9.70 17,367 12.41
Q2 2007 4,570 8.87 4,570 8.87
Q3 2007 4,570 8.87 4,570 8.87
Q4 2007 4,570 8.87 4,570 8.87
------------------------------------------------------------------------
------------------------------------------------------------------------
Mcf factor = 1.09


In addition to the above price contract summary, the Trust has fixed the AECO basis at US$0.86 per mmbtu for the period August 1, 2006 to September 30, 2006 on a volume of 5,000 mmbtu per day.

CRUDE OIL

Contrary to natural gas, crude oil prices continued to strengthen in the second quarter of 2006 due to threats of supply disruptions and limited global excess production capacity. Going forward, continued strength in the crude oil pricing environment is expected.

During the second quarter of 2006 the Trust had an average of 500 bbls per day of crude oil hedged representing 19% of the second quarter crude oil production under set price contracts. Risk management activities during the quarter decreased the realized crude price by $1.14 per bbl. However, in the second quarter, Fairborne continued to sell light oil as condensate realizing an average premium of US$6.67 per bbl. This premium more than offset the decreased realized price due to risk management activities for an overall increase in the realized crude oil price of $6.21 per barrel to $74.34 per bbl for the second quarter of 2006. For the six month period ending June 30, 2006, the Trust realized a price of $69.43 per bbl which was reduced by $0.58 per bbl due to risk management activities.



The following table summarizes the outstanding physical sales contracts
on crude oil, including contracts entered into after June 30, 2006:

------------------------------------------------------------------------
Average Average
Floor Floor Ceiling Ceiling
Volume Price Volume Price
Period (bbls per day) (US$/bbl) (bbls per day) (US$/bbl)
------------------------------------------------------------------------
Q3 2006 800 65.47 500 70.80
Q4 2006 800 65.00 800 71.03
Q1 2007 900 64.22 - -
Q2 2007 500 70.50 - -
------------------------------------------------------------------------
------------------------------------------------------------------------


Petroleum and Natural Gas Revenue
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
($thousands except as noted) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Natural gas 30,612 32,364 -5% 68,210 64,081 6%
Crude oil 17,639 14,244 24% 32,565 28,039 16%
Natural gas liquids 2,042 1,738 17% 3,817 3,453 11%
Other income 621 461 35% 1,111 668 66%
------------------------------------------------------------------------
Total 50,914 48,807 4% 105,703 96,241 10%
------------------------------------------------------------------------
------------------------------------------------------------------------


Fairborne reported $50.9 million of revenue for the second quarter of 2006 and $105.7 million for the six months ended June 30, 2006. Second quarter revenue reflected the impact of reduced production and natural gas prices compared to the preceding first quarter of 2006, for which the Trust reported revenues of $54.8 million. Compared to the prior year, stronger commodity prices offset lower production levels for an overall increase in revenue of 4% for the second quarter and 10% for the six months ended June 30.



Royalties
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Royalties, net
($thousands) 6,588 9,950 -34% 18,983 20,855 -9%
As a % of sales 12.9% 20.4% -37% 18.0% 21.7% -17%
Per BOE $7.04 $10.10 -30% $10.00 $10.27 -3%
------------------------------------------------------------------------
------------------------------------------------------------------------


The Trust reported $6.6 million of royalties for the second quarter of 2006 representing a rate of 12.9%. The significant decrease in royalties during the quarter was attributable to Fairborne's premium gas price as well as crown royalty credits received on 2005 natural gas production. Due to the Trust's risk management program, Fairborne's realized gas price was well in excess of the reference prices utilized in calculating crown royalties. In addition, crown royalty credits of $2.6 million were received in June 2006 relating to 2005 crown cost deductions and capital cost allowance. Fairborne expects 2006 royalties to average between 21% and 23% based on market reference prices.



Transportation
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Transportation costs ($thousands) 930 697 33% 3,005 964 212%
Per BOE $1.00 $0.71 41% $1.58 $0.47 236%
------------------------------------------------------------------------
------------------------------------------------------------------------


Transportation costs of $930,000 for the second quarter of 2006 include clean oil trucking, trucking of natural gas liquids, certain third party fuel charges and transportation and fuel costs associated with usage of natural gas pipelines. Second quarter transportation costs are lower than the preceding first quarter of 2006 ($2.1 million) which included adjustments for third party fuel charges on the Trust's Columbia/Harlech property.

Comparatively, from January to June 1, 2005, Fairborne's natural gas sales contracts were paid net of transportation, therefore the Trust did not record transportation expenses for its natural gas production. Effective June 1, 2005, Fairborne entered into a contract for transportation of its natural gas and became directly responsible for payment of transportation costs.



Operating Costs
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Operating costs ($thousands) 9,182 8,165 12% 17,517 16,741 5%
Per BOE $9.82 $8.28 19% $9.23 $8.24 12%
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating costs of $9.2 million for the second quarter of 2006 ($9.82 per BOE) included $1.4 million ($1.52 per BOE) of incremental costs for a major turnaround conducted at the West Pembina gas plant. Excluding turnaround costs, operating costs of $8.30 per BOE for the second quarter 2006 were comparable to the second quarter of 2005 ($8.28 per BOE) and marginally lower than the immediately preceding first quarter of 2006 ($8.65 per BOE).



Operating Netbacks
------------------------------------------------------------------------
Three months ended June 30, 2006 2005
------------------------------------------------------------------------
Crude Natural BOE BOE
oil Gas NGLs Production Production
($ per ($ per ($ per ($ per ($ per
bbl) Mcf) bbl) BOE) BOE) Change
------------------------------------------------------------------------
Petroleum and
natural gas sales 74.34 7.74 51.93 53.77 49.07 10%
Other income - 0.16 - 0.66 0.47 40%
Royalties (15.77) (0.64) (7.93) (7.04) (10.10) -30%
Transportation (0.21) (0.22) - (1.00) (0.71) 41%
Operating expenses (9.62) (1.66) (8.66) (9.82) (8.28) 19%
------------------------------------------------------------------------
Operating netback 48.74 5.38 35.34 36.57 30.45 20%
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Six months ended June 30, 2006 2005
------------------------------------------------------------------------
Crude Natural BOE BOE
oil Gas NGLs Production Production
($ per ($ per ($ per ($ per ($ per
bbl) Mcf) bbl) BOE) BOE) Change
------------------------------------------------------------------------
Petroleum and
natural gas sales 69.43 8.38 51.63 55.08 47.07 17%
Other income - 0.14 - 0.59 0.33 79%
Royalties (15.05) (1.37) (10.09) (10.00) (10.27) -3%
Transportation (0.18) (0.36) - (1.58) (0.47) 236%
Operating expenses (9.26) (1.54) (8.79) (9.23) (8.24) 12%
------------------------------------------------------------------------
Operating netback 44.94 5.25 32.75 34.86 28.42 23%
------------------------------------------------------------------------
------------------------------------------------------------------------


The Trust's operating netback of $36.57 per BOE for the second quarter of 2006 was 10% higher than the first quarter of 2006 and 20% higher than the prior year with higher BOE prices and reduced royalties offsetting increased operating costs for the period.



General and Administrative ("G&A") Expenses
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
($thousands except as noted) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
G&A expenses, net of recoveries 2,023 1,428 42% 3,406 2,660 28%
Trust Unit compensation costs 1,390 185 651% 2,358 585 303%
------------------------------------------------------------------------
Total G&A expenses 3,413 1,613 112% 5,764 3,245 78%
------------------------------------------------------------------------
G&A expenses, per BOE $2.16 $1.45 49% $1.79 $1.31 37%
Compensation costs, per BOE $1.49 $0.19 684% $1.24 $0.29 328%
------------------------------------------------------------------------
------------------------------------------------------------------------


Fairborne recorded $2.0 million of G&A expenses, net of recoveries for the second quarter of 2006. G&A expenses have increased from the immediately preceding quarter (Q1 2006 - $1.4 million) primarily due to lower overhead recoveries associated with a substantially reduced capital expenditure program in the second quarter. Compared to the prior year, G&A expenses continue to rise with increased costs associated with regulatory compliance and the attraction and retention of staff as well as reduced overhead recoveries on capital expenditures.

Pursuant to the Plan of Arrangement, effective June 1, 2005, Fairborne is reimbursed by Fairquest for a portion of G&A expenditures under the Technical Services Agreement. For the three months ended June 30, 2006, $768,000 was credited to G&A expenses as a recovery under this Agreement with $1.2 million recorded for the six months ended June 30, 2006 (June 1 to June 30, 2005 - $39,000).

Compensation expense of $1.4 million for the second quarter of 2006 and $2.4 million for the six months ended June 30, 2006 included amortization of the fair value of Units anticipated to be issued pursuant to the Trust Incentive Plan implemented in June 2005. Comparatively, compensation expense in 2005 is primarily amortization for stock options of Fairborne Energy Ltd. issued prior to the Plan of Arrangement with one month amortization under the Trust Incentive Plan.



Interest Expense
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Interest expense ($thousands) 2,075 1,184 75% 3,615 2,125 70%
Per BOE $2.22 $1.20 85% $1.90 $1.05 81%
------------------------------------------------------------------------
------------------------------------------------------------------------


Borrowing rates continued to rise in the second quarter of 2006 resulting in interest expense of $2.1 million, up from $1.5 million in the first quarter of 2006. Compared to the prior year, interest expense has increased as a result of higher debt levels and higher interest rates.



Depletion, Depreciation and Accretion (DD&A)
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Depletion, depreciation and
accretion ($thousands) 17,519 16,351 7% 35,024 33,140 6%
Per BOE $18.73 $16.60 13% $18.44 $16.32 13%
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion and depreciation of capital assets and accretion of asset retirement obligations for the second quarter of 2006 totaled $17.5 million which was consistent with the first quarter of 2006. On a BOE basis, DD&A of $18.73 per BOE in the second quarter was 3% higher than the first quarter of 2006 ($18.17 per BOE) and 13% higher than the second quarter of 2005. The increase in DD&A is due to an increase in Fairborne's depletable base as a result of capital spending and accounting for exchangeable shares, whereby the conversion of exchangeable shares results in an increase to depletable assets.



Taxes
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
($thousands except as noted) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Future (reduction) (3,848) 335 n/a (5,809) 3,532 n/a
Capital (recovery) (224) 135 n/a 213 354 n/a
------------------------------------------------------------------------
Total taxes (4,072) 470 n/a (5,596) 3,886 n/a
------------------------------------------------------------------------
Per BOE $(4.35) $0.48 n/a $(2.95) $1.91 n/a
------------------------------------------------------------------------
------------------------------------------------------------------------


Fairborne recorded a future tax recovery of approximately $3.8 million for the second quarter of 2006 with a $5.8 million recovery booked for the first six months of 2006. The future tax recovery results from additional interest deductions associated with Fairborne's new Trust structure as well as reductions in rates for both federal and provincial taxes. The future rate reductions were enacted during the second quarter of 2006.

The elimination of the federal Large Corporations Tax enacted during the second quarter of 2006 with a January 1, 2006 effective date, resulted in a $224,000 recovery of 2006 capital taxes which had been recorded during the first quarter. The Trust continues to incur provincial capital taxes on its Saskatchewan properties.

Non-controlling interest

As a result of the Plan of Arrangement, Fairborne issued 7.0 million exchangeable shares of a subsidiary of the Trust to former shareholders of Fairborne Energy Ltd. The exchangeable shares are listed on the Toronto Stock Exchange (trading symbol: FXL), trade separately from the Trust Units and represent a non-controlling interest to the Trust. Holders of exchangeable shares do not receive cash distributions from the Trust. The exchangeable shares are recorded as a non-controlling interest and are allocated a pro rata share of net income as required by Canadian accounting standards.



Net Income and Funds Generated from Operations
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
($thousands except as noted) 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
Funds generated from
operations 30,340 23,760 28% 58,964 49,054 20%
Per unit - basic $0.65 $0.47 38% $1.26 $0.95 33%
Per unit - diluted $0.57 $0.47 21% $1.11 $0.91 22%
Net Income 13,881 2,719 411% 24,740 7,627 224%
Per unit - basic $0.30 $0.05 500% $0.53 $0.15 253%
Per unit - diluted $0.28 $0.05 460% $0.51 $0.14 264%
------------------------------------------------------------------------
------------------------------------------------------------------------


Fairborne reported funds generated from operations of $30.3 million ($0.65 per unit) for the second quarter of 2006, up 6% from the preceding quarter and 28% from the prior year. On a year-to-date basis, funds generated from operations of $59 million increased 20% from the prior year.

Net income of $13.9 million ($0.30 per unit) for the second quarter of 2006 reflected the increase in funds generated from operations as well as future income tax recoveries associated with the new Trust structure and tax rate reductions.



LIQUIDITY AND CAPITAL RESOURCES

Capital Expenditures
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
($thousands) 2006 2005 2006 2005
------------------------------------------------------------------------
Exploration and development
Land and lease acquisitions 587 469 1,615 1,675
Geological and geophysical 17 454 1,729 475
Drilling, completions and
workovers 3,557 12,307 20,370 38,838
Well equipment and facilities 3,918 14,762 13,515 37,309
Corporate assets 211 109 293 229
------------------------------------------------------------------------
8,290 28,101 37,522 78,526
Acquisitions, net of dispositions - (36,453) - (36,453)
Conversion of exchangeable shares 684 - 13,084 -
------------------------------------------------------------------------
Total 8,974 (8,352) 50,606 42,073
------------------------------------------------------------------------
------------------------------------------------------------------------


The Trust's exploration and development program was substantially reduced from $29.2 million in the first quarter of 2006 to $8.3 million in the second quarter, with second quarter capital expenditures financed entirely from funds generated from operations after distributions to unitholders. Prior to the Trust conversion in June 2005, Fairborne's capital expenditure program was considerably more aggressive than the Trust's program, with capital spending in 2006 substantially lower than 2005.

Second quarter capital spending included $0.6 million on land and seismic, $3.6 million on drilling and completions and $3.9 million on well equipment and facilities. During the second quarter, the Trust participated in drilling a total of four (1.2 net) natural gas wells. In addition, the Trust earned an interest in two (0.7 net) oil wells and five (1.0 net) natural gas wells drilled by industry partners under farmout arrangements.

The conversion of exchangeable shares to Trust units was recorded as a $0.7 million acquisition of petroleum and natural gas assets for the second quarter with $13.1 million recorded for the six months ended June 30, 2006. The addition to petroleum and natural gas assets is based on the market value of Trust Units issued on conversion and the carrying value of the non-controlling interest.

Working Capital and Bank Indebtedness

At June 30, 2006, the Trust had net debt of $150.4 million which included bank indebtedness of $147.2 million and a working capital deficit of $3.2 million. Consistent distributions and a reduced capital expenditure program in the second quarter contributed to a reduction in net debt compared to the end of the preceding quarter (March 31, 2006 - $153.9 million).

The Trust's credit facilities at June 30, 2006 include a $165 million extendible revolving term credit facility and a $15 million demand operating credit facility for a total available facility of $180 million. Subsequent to June 30, 2006, the Trust obtained a $20 million non-revolving, non-extendable term facility which was utilized to help finance a property acquisition completed in July 2006. The new facility is payable in full on October 31, 2006 with security provided consistent with the Trust's existing credit facilities. Interest payable on amounts drawn under the facilities is at the prevailing bankers' acceptance rates plus stamping fees, lenders' prime rate or LIBOR rates plus applicable margins, depending on the form of borrowing by the Trust. The margins and stamping fees vary from 1.5% to 2.75% depending on the form of borrowing.

The Trust expects to finance planned capital expenditures for the last six months of 2006 from funds generated from operations after distributions to unitholders and available credit facilities, based on expected production levels and the current outlook for commodity prices.

Unitholders' Equity

The Trust is authorized to issue an unlimited number of Trust units. During the six months ended June 30, 2006, 790,528 exchangeable shares were converted into 850,113 Trust Units. At June 30, 2006, the exchange ratio for the retraction of exchangeable shares into Trust Units was 1:1.10312.



The following table provides a summary of outstanding Trust units,
exchangeable shares and units under Trust Incentive Plans at the dates
indicated:

------------------------------------------------------------------------
July 31, June 30, December 31,
(thousands) 2006 2006 2005
------------------------------------------------------------------------
Trust units 47,524 47,432 46,400
Exchangeable shares 4,739 4,821 5,612
Trust incentive plans
Restricted units (1) 518 517 562
Performance units (1), (2) 638 637 323
Weighted average trust units
Basic n/a 46,887 47,174
Diluted n/a 53,349 48,858
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) The number of Trust units that may be issued pursuant to the
Restricted Units and Performance Units will be increased for
accumulated distributions.
(2) The number of Trust units that may be issued pursuant to the
Performance Units is dependent on a payout multiplier which is based
on the relative return on Trust Units as compared to trust units of
members of a selected peer group. Depending on the payout
multiplier, the number of Trust Units issuable may range between
zero and two Trust Units per Performance Unit.


Distributable Cash and Distributions

Management monitors the Trust's distribution payout policy with respect to forecast net cash flow, debt levels and capital expenditures. Fairborne's current distribution policy targets the use of approximately 60% of cash available for distribution to Unitholders, excluding exchangeable shares which do not receive distributions. Depending upon various factors including commodity prices and capital budgets, it is expected that the remaining 40% of cash available for distribution will fund a portion of the Trust's annual capital expenditure program, including minor property acquisitions.

The Trust's monthly distributions of $0.13 per unit in 2006 represented a payout ratio of 61% of cash available for distribution (excluding exchangeables) for the second quarter and 62% of cash available for distribution (excluding exchangeables) for the six months ended June 30, 2006.



------------------------------------------------------------------------
Three months Six months
ended ended
June 30, June 30,
($thousands except as noted) 2006 2006
------------------------------------------------------------------------
Funds generated from operations (1) 30,340 58,964
Cash withheld (11,902) (22,315)
------------------------------------------------------------------------
Cash distributions declared 18,438 36,649
------------------------------------------------------------------------
Cash distributions per unit per month $0.13 $0.13
------------------------------------------------------------------------
Payout ratio 61% 62%
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Funds generated from operations before changes in non-cash working
capital and asset retirement obligations.


COMMITMENTS

Fairborne has entered into a three year contractual agreement with a third party drilling company for the use of one of their drilling rigs. The commitment is scheduled to commence in the fourth quarter of 2006 with an annual commitment of $4.3 million.

BUSINESS ENVIRONMENT AND RISK

The business risks the Trust is exposed to are those inherent in the oil and gas industry as well as those governed by the individual nature of Fairborne's operations. Geological and engineering risks, the uncertainty of discovering commercial quantities of new reserves, commodity prices, interest rate and foreign exchange risks, competition and government regulations - all of these govern the business and influence the controls and management at the Trust. Fairborne manages these risks by:

- attracting and retaining a team of highly qualified and motivated professionals who have a vested interest in the success of the Trust;

- operating properties in order to identify and capitalize on opportunities;

- employing risk management instruments to minimize exposure to fluctuation in commodity prices, interest rate and foreign exchange rates;

- maintaining a strong financial position; and

- maintaining strict environmental, safety and health practices.



QUARTERLY FINANCIAL INFORMATION

The following is a summary of selected financial information for the
quarterly periods indicated:

------------------------------------------------------------------------
Q2 Q1 Q4 Q3
2006 2006 2005 2005
------------------------------------------------------------------------
Financial ($thousands, except per
unit amounts)
Petroleum and natural gas sales 50,914 54,789 68,751 61,656
Funds generated from operations 30,340 28,624 40,783 35,406
Per unit - basic $0.65 $0.62 $0.89 $0.78
Per unit - diluted $0.57 $0.54 $0.77 $0.67
Net Income 13,881 10,859 20,444 15,482
Per unit - basic $0.30 $0.23 $0.43 $0.34
Per unit - diluted $0.28 $0.23 $0.36 $0.33
Total assets 499,826 522,482 499,920 458,603
Working capital deficit (surplus) 3,199 (35) (1,373) (984)
Bank indebtedness 147,202 153,933 136,302 128,548
------------------------------------------------------------------------
------------------------------------------------------------------------
Operations
Average production
Natural gas (Mcf per day) 43,441 46,472 46,886 49,412
Crude oil (bbls per day) 2,607 2,575 2,770 2,684
Natural gas liquids (bbls per day) 432 384 438 402
----------------------------------
Total (BOE per day) 10,280 10,705 11,022 11,321
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Q2 Q1 Q4 Q3
2005 2005(1) 2004(1) 2004(1)
------------------------------------------------------------------------
Financial ($thousands, except per
unit amounts)
Petroleum and natural gas sales 48,807 47,434 41,976 35,391
Funds generated from operations 23,760 25,294 21,569 19,784
Per unit - basic $0.47 $0.51 $0.47 $0.48
Per unit - diluted $0.47 $0.48 $0.46 $0.44
Net Income 2,719 4,908 4,158 3,463
Per unit - basic $0.05 $0.10 $0.09 $0.08
Per unit - diluted $0.05 $0.09 $0.08 $0.08
Total assets 451,849 480,089 434,830 379,450
Working capital deficit 7,758 16,823 20,839 25,393
Bank indebtedness 124,580 106,513 77,219 69,698
------------------------------------------------------------------------
------------------------------------------------------------------------
Operations
Average Production
Natural gas (Mcf per day) 47,077 49,030 43,480 32,569
Crude oil (bbls per day) 2,558 3,047 2,892 3,038
Natural gas liquids (bbls per day) 422 398 495 348
----------------------------------
Total (BOE per day) 10,826 11,617 10,633 8,814
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Amounts shown prior to the effective date of the Plan of Arrangement
are in respect of Fairborne Energy Ltd. and per unit numbers are per
common share.



INTERIM CONSOLIDATED BALANCE SHEETS

(unaudited)
------------------------------------------------------------------------
June 30, December 31,
($thousands) 2006 2005
------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 219 $ 217
Accounts receivable 50,733 67,055
Prepaid expenses and deposits 2,885 2,911
------------------------------------------------------------------------
53,837 70,183
Capital assets (Note 1) 429,819 413,567
Goodwill 16,170 16,170
------------------------------------------------------------------------
$ 499,826 $ 499,920
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 50,870 $ 62,778
Distributions payable 6,166 6,032
------------------------------------------------------------------------
57,036 68,810
Bank indebtedness (Note 2) 147,202 136,302
Non-controlling interest (Note 3) 26,339 27,598
Asset retirement obligations (Note 4) 11,791 11,386
Future income taxes 50,105 51,465
Unitholders' Equity
Unitholders' capital (Note 5) 213,371 199,022
Contributed surplus (Note 5) 2,312 1,758
Retained earnings (deficit) (8,330) 3,579
------------------------------------------------------------------------
207,353 204,359
------------------------------------------------------------------------
$ 499,826 $ 499,920
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements



INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(DEFICIT)

(Unaudited)
------------------------------------------------------------------------
For the three months For the six months
($thousands except ended June 30, ended June 30,
per unit amounts) 2006 2005 2006 2005
------------------------------------------------------------------------
Revenue
Petroleum and natural gas $ 50,914 $ 48,807 $ 105,703 $ 96,241
Royalties (6,588) (9,950) (18,983) (20,855)
Transportation (930) (697) (3,005) (964)
------------------------------------------------------------------------
43,396 38,160 83,715 74,422
Expenses
Operating 9,182 8,165 17,517 16,741
General and administrative 3,413 1,613 5,764 3,245
Interest 2,075 1,184 3,615 2,125
Trust conversion costs - 6,912 - 6,912
Depletion, depreciation and
accretion 17,519 16,351 35,024 33,140
------------------------------------------------------------------------
32,189 34,225 61,920 62,163
------------------------------------------------------------------------
Income before taxes 11,207 3,935 21,795 12,259
Taxes (reduction)
Future (3,848) 335 (5,809) 3,532
Capital (224) 135 213 354
------------------------------------------------------------------------
(4,072) 470 (5,596) 3,886
------------------------------------------------------------------------
Net income before
non-controlling interest 15,279 3,465 27,391 8,373
Non-controlling interest 1,398 746 2,651 746
------------------------------------------------------------------------
Net income 13,881 2,719 24,740 7,627
Retained earnings (deficit),
beginning of period (3,773) 31,440 3,579 26,532
Distributions (18,438) - (36,649) -
Plan of Arrangement - (36,212) - (36,212)
Reclassification of deficit
pursuant to Plan of
Arrangement - 6,832 - 6,832
------------------------------------------------------------------------
Retained earnings (deficit),
end of period $ (8,330) $ 4,779 $ (8,330) $ 4,779
------------------------------------------------------------------------
------------------------------------------------------------------------
Net income per unit (Note 5)
Basic $ 0.30 $ 0.05 $ 0.53 $ 0.15
Diluted $ 0.28 $ 0.05 $ 0.51 $ 0.14
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.



INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
($thousands) 2006 2005 2006 2005
------------------------------------------------------------------------
Cash provided by (used in):
Operating activities
Net income $ 13,881 $ 2,719 $ 24,740 $ 7,627
Items not involving cash:
Depletion, depreciation
and accretion 17,519 16,351 35,024 33,140
Compensation expense 1,390 185 2,358 585
Trust conversion costs - 3,424 - 3,424
Future tax (reduction) (3,848) 335 (5,809) 3,532
Non-controlling interest 1,398 746 2,651 746
Asset retirement
expenditures (115) (61) (265) (224)
------------------------------------------------------------------------
30,225 23,699 58,699 48,830
Change in non-cash working
capital 7,812 (5,233) 8,917 (682)
------------------------------------------------------------------------
38,037 18,466 67,616 48,148
------------------------------------------------------------------------
Financing activities
Distributions to unitholders (18,402) - (36,515) -
Bank indebtedness (6,731) 28,067 10,900 57,361
Issuance of common shares,
net of costs - 198 - 214
Buy-out of stock options - (9,805) - (9,805)
------------------------------------------------------------------------
(25,133) 18,460 (25,615) 47,770
------------------------------------------------------------------------
Investing activities
Capital expenditures (8,290) (28,101) (37,522) (78,526)
Change in non-cash working
capital (4,614) (8,826) (4,477) (17,417)
------------------------------------------------------------------------
(12,904) (36,927) (41,999) (95,943)
------------------------------------------------------------------------
Change in cash and cash
equivalents - (1) 2 (25)
Cash and cash equivalents,
beginning of period 219 217 217 241
------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 219 $ 216 $ 219 $ 216
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash interest paid $ 1,872 $ 1,226 $ 3,353 $ 2,125
Cash taxes paid $ - $ 169 $ 213 $ 1,036
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


SELECTED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended June 30, 2006 (unaudited)

(tabular amounts are stated in thousands and thousands of dollars except per unit amounts)

The interim consolidated financial statements of Fairborne Energy Trust (the "Trust" or "Fairborne") have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the year ended December 31, 2005. The disclosure which follows is incremental to the disclosure included with the annual financial statements. These interim consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2005.

FORMATION OF FAIRBORNE ENERGY TRUST:

Fairborne is an open-end, unincorporated investment trust governed by the laws of the Province of Alberta. The Trust was established as part of a Plan of Arrangement entered into by Fairborne Energy Ltd., Fairborne Energy Trust, Fairquest Energy Limited ("Fairquest") and security holders of Fairborne Energy Ltd. (the "Plan of Arrangement") that became effective June 1, 2005.

The conversion to a Trust has been accounted for on a continuity of interest basis and accordingly, the interim consolidated financial statements for 2006 and 2005 reflect the financial position, results of operations and cash flows as if the Trust had always carried on the business formerly carried on by Fairborne Energy Ltd. Due to the conversion to a trust, certain information included in the financial statements for prior periods may not be directly comparable.

As a result of the Plan of Arrangement, Fairquest and Fairborne have joint interests in certain properties and undeveloped land. In addition, the companies have entered into farm-in agreements whereby Fairquest received an option to farm-in on 83,000 net acres of Fairborne exploratory lands. As at June 30, 2006, accounts receivable included $6.6 million (December 31, 2005 -- $12.4 million) due from Fairquest. In addition, Fairborne charged Fairquest $769,000 during the three months ended June 30, 2006 and $1.2 million during the six months ended June 30, 2006 (June 1 to 30, 2005 -$39,000) under the technical services agreement. These amounts have been recorded as a reduction to the Trust's general and administrative costs.



1. CAPITAL ASSETS

------------------------------------------------------------------------
June 30, December 31,
2006 2005
------------------------------------------------------------------------
Petroleum and natural gas properties and
equipment $ 584,939 $ 534,449
Corporate assets 3,392 3,099
Other assets 3,275 3,275
------------------------------------------------------------------------
591,606 540,823
Accumulated depletion and depreciation (161,787) (127,256)
------------------------------------------------------------------------
$ 429,819 $ 413,567
------------------------------------------------------------------------
------------------------------------------------------------------------


As at June 30, 2006, costs of acquiring unproved properties in the amount of $21.1 million (December 31, 2005 - $22.5 million) were excluded from the depletion calculation. Included in the Trust's petroleum and natural gas properties and equipment is $6.2 million (December 31, 2005 - $6.5 million) relating to asset retirement obligations, net of accumulated depletion.

2. BANK INDEBTEDNESS

At June 30, 2006 the Trust had a $165 million extendible revolving term credit facility and a $15 million demand operating credit facility available from a syndicate of Canadian chartered banks, subject to the banks' semi-annual valuation of the Trust's petroleum and natural gas properties. The extendible revolving term facility is available on a revolving basis until May 31, 2007 (364 day facility) at which time it may be extended, at the lenders option. If the revolving period is not extended, the undrawn portion of the facility will be cancelled and the amount outstanding will convert to a 365 day non-revolving term facility. The amounts outstanding under the non-revolving term facility are required to be repaid at the end of the term facility being May 31, 2008. Interest payable on amounts drawn under the facilities is at the prevailing bankers' acceptance rates plus stamping fees, lenders' prime rate or LIBOR rates plus applicable margins, depending on the form of borrowing by the Trust. The margins and stamping fees vary from 0% to 1.5% depending on financial statement ratios and the form of borrowing. The credit facilities are secured by a general security agreement and a first ranking floating charge on the assets of the Trust and by a guarantee and subordination provided by Fairborne Energy Ltd. and all related partnerships and subsidiaries in respect of the Trust's obligations.

Under the terms of the credit facilities and subordination agreements related thereto, any present or future indebtedness of the subsidiaries of the Trust, including the notes owed from Fairborne Energy Ltd. to the Trust, are subordinate to the amounts owing under the credit facilities. Under the terms of the credit facilities and subordination agreements, the Trust is restricted from making distributions when: (i) a default or event of default under the credit facilities has occurred and is continuing ; and (ii) outstanding loans under the credit facilities exceeds the borrowing base set by the lenders.

Subsequent to June 30, 2006, the Trust obtained a $20 million non-revolving, non-extendable term facility to finance a property acquisition completed in July 2006. The facility is payable in full on October 31, 2006 with security provided consistent with the Trust's existing credit facilities. Interest payable on amounts drawn under the facilities is at the prevailing bankers' acceptance rates plus stamping fees, lenders' prime rate or LIBOR rates plus applicable margins, depending on the form of borrowing by the Trust. The margins and stamping fees vary from 1.5% to 2.75% depending on the form of borrowing.

3. NON-CONTROLLING INTEREST

The following table sets forth a reconciliation of the non-controlling interest for the six months ended June 30, 2006:



------------------------------------------------------------------------
Number of
Exchangeable
Shares Amount
------------------------------------------------------------------------
Balance, beginning of period 5,612 $ 27,598
Non-controlling interest net income - 2,651
Converted to Trust Units (791) (3,910)
------------------------------------------------------------------------
Balance, end of period 4,821 $ 26,339
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2006, the exchange ratio for the retraction of exchangeable
shares into Trust Units was 1:1.10312.

4. ASSET RETIREMENT OBLIGATIONS

The following table sets forth a reconciliation of the asset retirement
obligations for the six months ended June 30, 2006:

------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Balance, beginning of period $ 11,386
Liabilities incurred 177
Liabilities settled (265)
Accretion expense 493
------------------------------------------------------------------------
Balance, end of period $ 11,791
------------------------------------------------------------------------
------------------------------------------------------------------------


5. UNITHOLDERS' CAPITAL

a) Trust Units of Fairborne Energy Trust

The following table sets forth a reconciliation of the Trust Units
issued and outstanding for the six months ended June 30, 2006:

------------------------------------------------------------------------
Number Amount
------------------------------------------------------------------------
Balance, beginning of period 46,400 $ 199,022
Issued on conversion of exchangeable shares 850 12,545
Issued under trust incentive plan 182 1,804
------------------------------------------------------------------------
Balance, end of period 47,432 $ 213,371
------------------------------------------------------------------------
------------------------------------------------------------------------


During the period January 1 to June 30, 2006, 790,528 exchangeable shares were converted into 850,113 Trust Units. The market value of Trust Units issued on conversion was $12.5 million resulting in a reduction in non-controlling interest of $3.9 million, an increase in capital assets of $13.1 million and a future tax liability of $4.5 million.



b) Per unit amounts

The following table summarizes the weighted average Trust units used in
calculating net income per unit:

------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Basic 46,614 48,112 46,887 50,408
Restricted units 646 93 628 47
Performance units 654 54 538 27
Exchangeable shares 5,318 2,231 5,296 1,116
Stock options - 792 - 1,432
Warrants - 552 - 1,009
------------------------------------------------------------------------
Diluted 53,232 51,834 53,349 54,039
------------------------------------------------------------------------
------------------------------------------------------------------------


c) Trust incentive plans

The following table sets forth a reconciliation of the Trust Incentive
Plan activity for the six months ended June 30, 2006:

------------------------------------------------------------------------
Number of Number of
Restricted Performance
Units Units Total
------------------------------------------------------------------------
Balance, beginning of period 562 323 885
Issued 130 318 448
Exercised (165) - (165)
Cancelled (10) (4) (14)
------------------------------------------------------------------------
Balance, end of period 517 637 1,154
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercisable, end of period - - -
------------------------------------------------------------------------
------------------------------------------------------------------------
Equivalent Trust units,
end of period (1) 552 675 1,227
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) including additional Trust units to be issued for accumulated
distributions earned under the Trust Incentive Plan.


Restricted Units vest annually over a three-year period and, upon vesting, entitle the holder to receive the number of Trust Units designated by the Restricted Units plus the value of accumulated distributions on the vested Restricted Units. Performance Units vest on the third anniversary of the date of grant and actual payouts will be determined based on the performance of the Trust compared to its peers. Performance factors range from zero to 2.0 times the initial Performance Unit grant. Performance Units also receive additional trust units equal to the value of accumulated distributions paid to unitholders during the vesting period.

The weighted average fair value of restricted and performance units granted during the period was $15.03 per unit and $15.05 per unit respectively. The estimated fair value of units granted is amortized through compensation expense over the vesting period with a corresponding increase in contributed surplus.



d) Contributed surplus

The following table sets forth a reconciliation of contributed surplus
for the six months ended June 30, 2006:

------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Balance, beginning of period $ 1,758
Restricted and performance units issued 2,384
Restricted and performance units exercised (1,804)
Trust incentive plan grants cancelled (26)
------------------------------------------------------------------------
Balance, end of period $ 2,312
------------------------------------------------------------------------
------------------------------------------------------------------------


6. FINANCIAL INSTRUMENTS

The Trust has a price risk management program whereby the Trust sells
forward a portion of its future production through physical sales
contracts with customers.

The following table summarizes the natural gas physical sales contracts
outstanding at June 30, 2006:

------------------------------------------------------------------------
Remaining Term Volume Price Settlement Index
------------------------------------------------------------------------
AECO Collars
Jul 1,2006 CDN$9.00/GJ
- Sep 30,2006 2,000 GJs/day - CDN$10.07/GJ AECO C Daily
Oct 1,2006 CDN$8.50/GJ
- Mar 31,2007 2,500 GJs/day - CDN$13.22/GJ AECO C Daily
Oct 1,2006 CDN$8.50/GJ
- Mar 31,2007 5,000 GJs/day - CDN$11.20/GJ AECO C Daily
Nov 1,2006 CDN$9.00/GJ
- Mar 31,2007 2,500 GJs/day - CDN$13.00/GJ AECO C Daily
Nov 1,2006 CDN$9.00/GJ
- Mar 31,2007 2,000 GJs/day - CDN$10.30/GJ AECO C Daily
Jan 1,2007 CDN$9.00/GJ
- Mar 31,2007 2,000 GJs/day - CDN$11.65/GJ AECO C Daily
Jan 1,2007 CDN$9.00/GJ
- Mar 31,2007 3,000 GJs/day - CDN$10.55/GJ AECO C Daily

AECO Participating Swaps
Jul 1,2006 CDN$9.41/GJ
- Sep 30,2006 2,000 GJs/day Floor + 50% Partic. AECO C Daily
Jul 1,2006 CDN$7.15/GJ
- Sep 30,2006 5,000 GJs/day Floor + 50% Partic. AECO C Daily
Jul 1,2006 CDN$7.73/GJ
- Sep 30,2006 4,000 GJs/day Floor + 50% Partic. AECO C Monthly
Nov 1,2006 CDN$9.15/GJ
- Mar 31,2007 3,000 GJs/day Floor + 50% Partic. AECO C Daily

AECO Puts
Apr 1,2006
- Oct 31,2006 4,000 GJs/day CDN$10.52/GJ Floor AECO C Daily

AECO Swaps
Oct 1,2006
- Mar 31,2007 2,000 GJs/day CDN$9.20/GJ N/A
------------------------------------------------------------------------
------------------------------------------------------------------------


The following table summarizes the crude oil physical sales contracts
outstanding at June 30, 2006:

------------------------------------------------------------------------
Remaining Term Volume Price Settlement Index
------------------------------------------------------------------------
Crude Oil Collars
Jul 1,2006
- Dec 31,2006 500 bbls/day US$65.00 - US$70.80 WTI
Oct 1,2006
- Dec 31,2006 300 bbls/day US$65.00 - US$71.30 WTI

Crude Oil Puts
Jul 1,2006
- Sep 30,2006 300 bbls/day US$70.00 Floor WTI
Jan 1,2007
- Mar 31,2007 500 bbls/day US$70.00 Floor WTI
Jan 1,2007
- Mar 31,2007 400 bbls/day US$70.00 Floor WTI
------------------------------------------------------------------------
------------------------------------------------------------------------


7. COMMITMENTS

Fairborne has entered into a three year contractual agreement with a third party drilling company for the use of one of their drilling rigs. The commitment is scheduled to commence in the fourth quarter of 2006 with an annual commitment of $4.3 million.

Forward Looking Statements: This document contains forward-looking statements. Management's assessment of future plans and operations, production estimates and expected production rates, levels of distributions on Trust Units and the payout ratio, cash available for distribution and its availability for capital expenditures and distributions, expected commodity prices, expected royalty rates, transportation costs and operating costs, capital expenditures, and methods of financing capital expenditures may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, the Trust's actual results may differ materially from those expressed in, or implied by, the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhausted. Additional information on these and other factors that could effect the Trust's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), or at the Trust's website (www.fairbornetrust.com). Furthermore, the forward looking statements contained in this document are made as at the date of this document and the Trust does not undertake any obligation to update publicly or to revise any of the included forward looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

BOE Conversions: Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel and is based on an energy equivalent conversion method application at the burner tip and does not necessarily represent an economic value equivalency at the wellhead.

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