Fairborne Energy Trust
TSX : FEL.UN

Fairborne Energy Trust

November 09, 2006 00:10 ET

Fairborne Energy Trust Announces Third Quarter 2006 Financial and Operating Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 9, 2006) - Fairborne Energy Trust (TSX:FEL.UN)



THIRD QUARTER HIGHLIGHTS
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Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
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Financial ($thousands,
except per unit amounts)
Petroleum and natural gas revenue 48,845 61,656 154,548 157,897
Funds generated from operations 27,825 35,406 86,789 84,460
Per unit - basic $0.58 $0.78 $1.84 $1.78
Per unit - diluted (1) $0.51 $0.67 $1.62 $1.61
Net income 10,439 15,482 35,179 23,109
Per unit - basic $0.22 $0.34 $0.75 $0.49
Per unit - diluted $0.22 $0.33 $0.73 $0.49
Exploration and development
expenditures 15,423 18,576 52,945 97,102
Acquisitions, net of dispositions 22,380 (3,543) 22,380 (44,498)
Working capital deficit (surplus) 2,395 (984) 2,395 (984)
Bank indebtedness 177,595 128,548 177,595 128,548
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Operations (Units as noted)
Average production
Natural gas (Mcf per day) 45,966 49,412 45,291 48,508
Crude oil (bbls per day) 2,604 2,684 2,595 2,762
Natural gas liquids
(bbls per day) 376 402 397 407
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Total (BOE per day) (2) 10,640 11,321 10,541 11,253(2)
Average sales price
Natural gas ($ per Mcf) 6.88 9.20 7.87 8.00
Crude oil ($ per bbl) 73.25 70.88 70.72 60.40
Natural gas liquids ($ per bbl) 48.51 52.40 50.64 48.50
Netback per BOE ($ per BOE)
Petroleum and natural gas sales 49.90 59.20 53.70 51.39
Royalties (6.44) (12.44) (8.79) (11.01)
Transportation (1.07) (1.04) (1.41) (0.67)
Operating expenses (9.88) (9.20) (9.45) (8.57)
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Operating netback 32.51 36.52 34.05 31.14
Wells drilled (gross) 25 26 54 48
Undeveloped land (net acres) 176,100 195,759 176,100 195,759
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(1) Includes adjustment for Trust units to be issued under Trust Incentive
Plans as well as on the retraction of exchangeable shares.
(2) Fairborne's 2005 production includes properties disposed of to
Fairquest Energy Limited on June 1, 2005.


THIRD QUARTER HIGHLIGHTS

- Cash flow of $27.8 million in the third quarter ($0.51 per unit diluted)

- With 34% of natural gas under price contracts, the Trust's realized gas price was $6.88 per Mcf for the third quarter, representing a 22% premium to daily AECO prices.

- Production of 10,640 BOE per day was reduced by 350 BOE per day for the quarter as a result of unscheduled outages at a number of third party facilities in the Peace River Arch area.

- Solid cash flow provided stability for monthly distributions to unitholders at $0.13 per unit, representing a payout ratio of 67% (73% including exchangeables).

- Capital expenditures of $15.4 million resulted in 14.4 working interest gas wells.

- Net debt at the end of the third quarter was $180 million.

- Current net debt is approximately $84 million after issuing $100 million in convertible debentures on October 31, 2006.

- Operating costs were $9.88 per BOE.

- Average operating netback decreased 11% from the second quarter to $32.51 per BOE.

- Fourth quarter monthly distributions 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 third quarter of 2006 averaged 10,640 BOE per day, an increase of 4% over the preceding quarter. Third quarter production was reduced by a number of unscheduled interruptions which included the Nova sales line and several third party operated facilities which restricted production from the Saddle Hills, Gordondale and Westerose areas. In aggregate, these interruptions reduced quarterly production by approximately 350 BOE per day. Interruptions have continued into October and although we are confident that over the long term they will be remedied, the near term is less certain. As a result of this near term uncertainty, we have factored continued interruptions into our estimate of fourth quarter production and are forecasting an average rate within the range of 10,500 to 10,800 BOE per day.

Third quarter cash flow decreased 8% from the previous quarter to $27.8 million mainly as a result of lower natural gas prices. Fairborne continued to realize strong natural gas prices relative to AECO daily index prices during the third quarter as a direct result of the Trust's high heat content natural gas and active hedging strategy. The Trust realized an average oil price of $73.25 per bbl and an average natural gas price of $6.88 per Mcf for the quarter. The Trust's gas price represented a 22% premium to the AECO daily index.

Capital expenditures in the third quarter totaled $15.4 million which included $11.2 million for drilling and completions, $3.2 million for facilities and pipeline construction and $0.9 million for land and seismic. The Trust participated in drilling a total of 25 (14.4 net) natural gas wells.

During the third quarter, drilling in the Columbia/Harlech area resulted in 4 (0.7 working interest) gas wells that targeted the Viking sandstone reservoir (2,900m), and were all drilled to the Nordegg/Rock Creek formations (3,300m) to test exploratory targets in the lower Cretaceous. These wells will be tied in during the fourth quarter through short tie ins to existing facilities and one major pipeline (11.5 kms) that is currently being constructed on the south side of the Brazeau river. Production profiles from Viking wells typically exhibit high initial flows (2 to 3 MMcf per day) with steep initial declines over the first six months of production after which declines follow a pattern of between 5% to 15%.

The Trust's 2006 Coal Bed Methane (CBM) drilling program has been completed in the Clive area and facility and pipeline construction is ongoing. Wet weather during September/October delayed the online date for the majority of new wells by approximately 45 days. Current CBM production has increased from our last update and is now 10.3 MMcf per day (approximately 128 Mcf per day per well). The building of major infrastructure including compression and pipelines at the Clive property over the last 18 months provides the Trust with the ability to handle significant additional CBM volumes with minimal additional capital investment.

The Trust's net debt at the end of the quarter was $180 million with $200 million of available credit facilities. Subsequent to the end of the quarter the Trust successfully completed a convertible debenture financing for gross proceeds of $100 million. These funds were applied directly to our existing bank debt with current debt at approximately $84 million, which represents a trailing debt to cash flow of 0.75 times based on third quarter results.

To improve predictability of cash flow and protect stability of distributions to unitholders, the Trust has increased its hedging position with approximately 51% of fourth quarter natural gas volumes and 31% of crude oil and NGL production hedged at floor prices of $9.08 per Mcf and US$65.00 per bbl respectively. On an annualized basis for 2007, the Trust has 20% of its natural gas production hedged at an average floor price of $9.36 per Mcf and 25% of its crude oil and NGL production hedged at an average floor price of US$70.50. With a comfortable level of price protection on natural gas, and based on the current outlook for commodity prices, the Trust expects to maintain monthly distributions of $0.13 per unit through the fourth quarter of 2006.

On October 31, 2006, the federal government announced proposals regarding the taxation of distributions paid by income trusts. Management is assessing the proposals and the potential implications to the Trust.

SUMMARY

During the third quarter, crude oil prices began to decline while natural gas prices continued their downward trend begun in the first quarter of 2006. 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 maintaining production through internal growth projects with 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 and reserve growth as well as undeveloped land to utilize our strong technical staff for organic growth opportunities.

Steven R. VanSickle

President and Chief Executive Officer

November 8, 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, November 8, 2006. This MD&A is provided by the management of Fairborne Energy Trust ("Fairborne" or the "Trust") to review third 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 nine months ended September 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, the effect of infrastructure interruptions, timing of tie-in of wells, 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 cash flow from operating activites and funds generated from operations can be found in the section entitled "Distributable Cash and Distributions" 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 is an open-ended, unincorporated investment trust that was established as part of a Plan of Arrangement whereby 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 nine months ended September 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.



THIRD QUARTER 2006 RESULTS

Production
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Three months ended Nine months ended
September 30, September 30,
2006 2005 Change 2006 2005(1) Change
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Natural gas (Mcf per day) 45,966 49,412 -7% 45,291 48,508 -7%
Crude oil (bbls per day) 2,604 2,684 -3% 2,595 2,762 -6%
Natural gas liquids
(bbls per day) 376 402 -6% 397 407 -2%
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Total (BOE per day) 10,640 11,321 -6% 10,541 11,253(1) -6%
Natural gas % of
production 72% 73% -1% 72% 72% -
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(1) Fairborne's 2005 production includes properties disposed of to
Fairquest on June 1, 2005.


Fairborne's third quarter production averaged 10,640 BOE per day, an increase of 4% from the preceding second quarter (10,280 BOE per day). Compared to the prior year, the Trust's third quarter production decreased by 6% on both a quarter-over-quarter and year to date basis. Overall, the Trust was negatively impacted by unscheduled interruptions on the Nova pipeline and in several third party operated facilities which restricted production from the Trust's Saddle Hills, Gordondale and Westerose areas.

Natural gas production of 46.0 MMcf per day in the third quarter increased 6% from 43.4 MMcf per day for the second quarter of 2006. Second and third quarter production reflected restricted gas sales due to interruptions on the Nova pipeline as well as restricted production due to turnarounds at third party operated natural gas facilities.

Crude oil and NGL production of 2,980 bbls per day decreased marginally compared to the same quarter in 2005 (3,086 bbls per day) as well as the immediately preceding second quarter of 2006 (3,039 bbls per day).



Commodity Prices & Hedging Activities
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Three months ended Nine months ended
September 30, September 30,
2006 2005 Change 2006 2005 Change
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Average Prices
Natural gas ($ per Mcf) 6.88 9.20 -25% 7.87 8.00 -2%
Crude oil ($ per bbl) 73.25 70.88 3% 70.72 60.40 17%
Natural gas liquids
($ per bbl) 48.51 52.40 -7% 50.64 48.50 4%
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BOE ($ per BOE) 49.36 58.83 -16% 53.13 51.05 4%
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Benchmark Prices
AECO Daily Index
(Cdn$ per Mcf) 5.62 9.27 -39% 6.38 7.85 -19%
AECO Monthly Index
(Cdn$ per Mcf) 6.03 8.15 -26% 7.19 7.42 -3%
WTI Edmonton par
(Cdn$ per bbl) 79.63 78.11 -2% 76.01 68.85 10%
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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 third quarter of 2006, AECO spot prices for natural gas continued to decline. AECO prices decreased 7% in the daily spot market and 4% in the monthly spot market compared to the second quarter of 2006. Current storage levels in the North American market are in excess of 3.4 TCF and continue to put downward pressure on natural gas prices. Despite weakness in natural gas markets, Fairborne continues to realize above-index natural gas prices due to the higher heat content of the Trust's production and an active risk management program.

An average of 15,596 Mcf per day was hedged during the third quarter of 2006 representing 34% of the Trust's natural gas production under set price physical sales contracts. Risk management activities during the third quarter increased the Trust's cash flow by $4.6 million which had an effect of increasing the Trust's realized natural gas price by $1.09 per Mcf to $6.88 per Mcf, a 22% premium to the daily AECO index. On a year to date basis, the Trust's risk management activities have increased cash flow by $16 million improving the realized natural gas price by $1.29 per Mcf to $7.87 per Mcf, a 23% premium to the daily AECO index.

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




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Average Average
Floor Floor Ceiling Ceiling
Volume Price Volume Price
Period (Mcf per day) ($ per Mcf) (Mcf per day) ($ per Mcf)
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Q4 2006 23,731 9.08 20,681 10.75
Q1 2007 22,395 9.61 19,653 11.98
Q2 2007 4,570 8.87 4,570 8.87
Q3 2007 4,570 8.87 4,570 8.87
Q4 2007 3,964 9.16 3,964 9.16
Q1 2008 3,656 9.34 3,656 9.34
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Mcf factor = 1.09



CRUDE OIL

Crude oil prices declined in the third quarter of 2006 as supply/demand fundamentals began to override the continued threats of supply disruptions and limited global excess production.

During the third quarter of 2006, the Trust had an average of 800 bbls per day of crude oil hedged, representing 31% of crude oil production under fixed price contracts. Risk management activities, including option costs for puts purchased during the quarter decreased the Trust's realized crude price by $0.43 per bbl. Compared to the prior year, the Trust's realized crude oil price of $73.25 per bbl for the third quarter represented an increase of 3% from the third quarter of 2005. On a year to date basis, the Trust realized a price of $70.72 per bbl, a 17% increase compared to the same nine month period in 2005.

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




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Average Average
Floor Floor Ceiling Ceiling
Volume Price(a) Volume Price
Period (bbls per day) (US$/bbl) (bbls per day) (US$/bbl)
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Q4 2006 800 65.00 800 71.03
Q1 2007 900 64.22 - -
Q2 2007 500 70.50 - -
Q3 2007 500 70.68 500 70.68
Q4 2007 500 70.98 500 70.98
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(a) Floor price is inclusive of option costs.


Petroleum and Natural Gas Revenue
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Three months ended Nine months ended
September 30, September 30,
($thousands) 2006 2005 Change 2006 2005 Change
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Natural gas 29,095 41,837 -30% 97,305 105,918 -8%
Crude oil 17,546 17,500 - 50,111 45,539 10%
Natural gas liquids 1,676 1,937 -13% 5,493 5,390 2%
Other income 528 382 38% 1,639 1,050 56%
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Total 48,845 61,656 -21% 154,548 157,897 -2%
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Fairborne's revenue of $48.8 million for the third quarter of 2006 decreased marginally from the second quarter of 2006 ($50.9 million) primarily due to weakened commodity prices for both oil and natural gas. Third quarter revenue has decreased 21% from the same quarter in 2005 as a result of lower production and lower commodity prices. On a year to date basis, revenues of $154.5 million are comparable to the prior year with lower 2006 production offset by higher average realized commodity prices.



Royalties
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Three months ended Nine months ended
September 30, September 30,
2006 2005 Change 2006 2005 Change
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Royalties, net ($thousands) 6,306 12,957 -51% 25,289 33,812 -25%
As a % of sales 12.9% 21.0% -39% 16.4% 21.4% -23%
Per BOE $ 6.44 $ 12.44 -48% $ 8.79 $ 11.01 -20%
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Consistent with the preceding second quarter, the Trust reported a royalty rate of 12.9% for the third quarter of 2006. The low rate in 2006 is attributable to lower effective royalty rates with increased allowable operating cost and gas cost allowance deductions as well as Fairborne's premium gas price. Due to the Trust's risk management program, Fairborne's realized gas price in the third quarter of 2006 remained well in excess of the reference prices utilized in calculating crown royalties. Fairborne expects 2006 royalties to average between 18% and 20% based on new allowable cost deductions and market reference prices.




Transportation
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Three months ended Nine months ended
September 30, September 30,
2006 2005 Change 2006 2005 Change
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Transportation costs
($thousands) 1,047 1,084 -3% 4,052 2,048 98%
Per BOE $ 1.07 $ 1.04 3% $ 1.41 $ 0.67 110%
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Transportation costs of $1.0 million ($1.07 per BOE) for the third 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. Third quarter transportation costs remain consistent with second quarter 2006 costs of $0.9 million ($1.00 per BOE) and third quarter 2005 costs of $1.1 million ($1.04 per BOE).

For the nine months ended September 30, transportation costs have increased in 2006 compared to 2005. The Trust did not record transportation costs for its natural gas production until June 1, 2005 as Fairborne's natural gas sales contracts were paid net of transportation. Beginning 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
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Three months ended Nine months ended
September 30, September 30,
2006 2005 Change 2006 2005 Change
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Operating costs
($thousands) 9,671 9,581 1% 27,188 26,322 3%
Per BOE $ 9.88 $ 9.20 7% $ 9.45 $ 8.57 10%
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Operating costs for the third quarter 2006 of $9.7 million ($9.88 per BOE) were approximately $0.80 per BOE higher than expected due to additional costs for turnarounds at the West Pembina gas plant that began in the second quarter. 2006 operating costs also reflect the continued upward pressure of industry service costs including substantial increases in power and fuel costs.



Operating Netbacks
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Three months ended September 30, 2006 2005
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Crude Natural BOE BOE
oil Gas NGLs Production Production
($ per ($ per ($ per ($ per ($ per
bbl) Mcf) bbl) BOE) BOE) Change
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Petroleum and
natural gas sales 73.25 6.88 48.51 49.36 58.83 -16%
Other income - 0.12 - 0.54 0.37 46%
Royalty expense (9.39) (0.87) (10.61) (6.44) (12.44) -48%
Transportation
expense (0.06) (0.24) - (1.07) (1.04) 3%
Operating expenses (10.44) (1.61) (10.94) (9.88) (9.20) 7%
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Operating netback 53.36 4.28 26.96 32.51 36.52 -11%
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Nine months ended September 30, 2006 2005
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Crude Natural BOE BOE
oil Gas NGLs Production Production
($ per ($ per ($ per ($ per ($ per
bbl) Mcf) bbl) BOE) BOE) Change
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Petroleum and
natural gas sales 70.72 7.87 50.64 53.13 51.05 4%
Other income - 0.13 - 0.57 0.34 68%
Royalty expense (13.14) (1.20) (10.25) (8.79) (11.01) -20%
Transportation
expense (0.14) (0.32) - (1.41) (0.67) 110%
Operating
expenses (9.66) (1.56) (9.47) (9.45) (8.57) 10%
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Operating
netback 47.78 4.92 30.92 34.05 31.14 9%
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The Trust's operating netback of $32.51 per BOE for the third quarter of 2006 was 11% lower than the preceding second quarter of 2006 ($36.57 per BOE) and 11% lower than the prior year with lower BOE prices and reduced royalties partially offset by increased operating costs for the period.



General and Administrative ("G&A") Expenses
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Three months ended Nine months ended
($thousands except September 30, September 30,
as noted) 2006 2005 Change 2006 2005 Change
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G&A expenses, net of
recoveries 1,398 1,228 14% 4,804 3,888 24%
Trust Unit compensation
costs 1,389 760 83% 3,747 1,345 179%
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Total G&A expenses 2,787 1,988 40% 8,551 5,233 63%
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G&A expenses, per BOE $ 1.43 $ 1.19 20% $ 1.67 $ 1.26 33%
Trust Unit compensation
costs, per BOE $ 1.42 $ 0.73 95% $ 1.30 $ 0.44 195%
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G&A expenses, net of recoveries decreased from $2.0 million in the second quarter to $1.4 million for the third quarter of 2006. Higher overhead recoveries from operated capital expenditure programs accounted for the majority of this decrease. On a year to date basis, G&A costs per BOE have increased by 33% representing increased costs associated with regulatory compliance and the attraction and retention of staff as well as reduced overhead recoveries associated with comparatively lower exploration and development expenditures.

Pursuant to the Technical Services Agreement entered into with Fairquest in connection with the completion of the Plan of Arrangement, effective June 1, 2005, Fairborne is reimbursed by Fairquest for a portion of G&A expenditures. For the three months ended September 30, 2006, $781,000 was credited to G&A expenses as a recovery under this agreement with $2.0 million recorded for the nine months ended September 30, 2006 (June 1 to September 30, 2005 - $434,000).

Trust Unit compensation expense of $1.4 million for the third quarter of 2006 and $3.7 million for the nine months ended September 30, 2006 includes amortization of the fair value of Units anticipated to be issued pursuant to the Trust Incentive Plan implemented in June 2005.



Interest Expense
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Three months ended Nine months ended
September 30, September 30,
2006 2005 Change 2006 2005 Change
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Interest expense
($thousands) 2,608 1,223 113% 6,223 3,348 86%
Per BOE $ 2.66 $ 1.17 127% $ 2.16 $ 1.09 98%
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Fairborne recorded $2.6 million in interest expense for the third quarter of 2006, up from $2.1 million in the preceding second quarter as a result of increases in both debt levels and borrowing rates. Similarly, interest expense for the three and nine months ended September 30, 2006 has increased compared to the prior year consistent with higher debt levels and rising interest rates.



Depletion, Depreciation and Accretion ("DD&A")
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Three months ended Nine months ended
September 30, September 30,
2006 2005 Change 2006 2005 Change
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Depletion, depreciation
and accretion
($thousands) 18,577 17,258 8% 53,601 50,398 6%
Per BOE $ 18.98 $ 16.57 15% $ 18.63 $ 16.41 14%
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Fairborne recorded $18.6 million in depletion and depreciation of capital assets and accretion of asset retirement obligations during the third quarter of 2006. On a BOE basis, DD&A of $18.98 per BOE in the third quarter was 1% higher than the second quarter rate of $18.73 per BOE. Compared to the prior year, DD&A expenses have increased by 8% for the third quarter and 6% on a year to date basis. The increase in DD&A from 2005 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, with no corresponding increase in reserves.



Taxes
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Three months ended Nine months ended
September 30, September 30,
($thousands except as noted) 2006 2005 Change 2006 2005 Change
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Future (reduction) (3,604) (250) n/a (9,413) 3,282 n/a
Capital (recovery) (10) 177 n/a 203 531 n/a
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Total taxes (3,614) (73) n/a (9,210) 3,813 n/a
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Per BOE $ (3.69)$ (0.07) n/a $ (3.20) $ 1.24 n/a
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Fairborne recorded a future tax recovery of $3.6 million in the third quarter of 2006 and $9.4 million for the nine months ended September 30, 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 beginning January 1, 2006, which was enacted during the second quarter of 2006 eliminates the Trust's liability for federal capital taxes; however, the Trust continues to incur provincial capital taxes on its Saskatchewan properties.

On October 31, 2006, the federal government announced proposals regarding the taxation of distributions paid by Trusts. Management is assessing the proposals and the potential implications to the Trust. See "Business Environment and Risks".

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; however, the conversion ratio is adjusted monthly to reflect accumulated distributions. 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.

During the nine months ended September 30, 2006, 974,664 exchangeable shares were converted into Trust Units. At September 30, 2006, the exchange ratio for the retraction of exchangeable shares into Trust Units was 1:1.13387.



Net Income and Funds Generated from Operations
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Three months ended Nine months ended
September 30, September 30,
($thousands except as noted) 2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Funds generated from
operations(1) 27,825 35,406 -21% 86,789 84,460 3%
Per unit - basic $ 0.58 $ 0.78 -26% $ 1.84 $ 1.78 3%
Per unit - diluted $ 0.51 $ 0.67 -24% $ 1.62 $ 1.61 1%
Net Income 10,439 15,482 -33% 35,179 23,109 52%
Per unit - basic $ 0.22 $ 0.34 -35% $ 0.75 $ 0.49 53%
Per unit - diluted $ 0.22 $ 0.33 -33% $ 0.73 $ 0.49 49%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) See "Distributable Cash and Distributions".


Fairborne reported funds generated from operations of $27.8 million ($0.58 per unit) for the third quarter of 2006 compared to $30.3 million in the immediately preceding second quarter and $35.4 million for the third quarter of the prior year, reflecting the continued decrease in commodity prices. On a year to date basis, funds generated from operations of $86.8 million was consistent with the prior year at $84.5 million.

Net income of $10.4 million ($0.22 per unit) for the third quarter of 2006 reflected the decrease in funds generated from operations partially offset by future income tax recoveries associated with the new Trust structure and tax rate reductions.



LIQUIDITY AND CAPITAL RESOURCES

Capital Expenditures
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($thousands) 2006 2005 2006 2005
---------------------------------------------------------------------------
Exploration and development
Land and lease acquisitions 917 868 2,539 2,543
Geological and geophysical - 139 1,722 614
Drilling, completions and
workovers 11,237 7,829 31,607 46,667
Well equipment and facilities 3,196 7,915 16,711 45,224
Corporate assets 73 1,825 366 2,054
---------------------------------------------------------------------------
15,423 18,576 52,945 97,102

Acquisitions, net of dispositions 22,380 (3,543) 22,380 (44,498)
Conversion of exchangeable shares 2,670 3,616 15,754 8,118
---------------------------------------------------------------------------
Total 40,473 18,649 91,079 60,722
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During the third quarter, Fairborne's exploration and development expenditures totaled $15.4 million with an additional $22.4 million spent to acquire an increased working interest in the Trust's Wild River property. Third quarter capital expenditures were financed through a combination of bank indebtedness and funds generated from operations after distributions to unitholders.

Third quarter capital spending was focused on drilling and completion activities with the Trust participating in drilling a total of 25 (14.4 net) natural gas wells. In addition to drilling and completion expenditures of $11.2 million, third quarter spending also included $0.9 million on land and seismic, and $3.2 million on well equipment and facilities.

The conversion of exchangeable shares to Trust units was recorded as a $2.7 million acquisition of petroleum and natural gas assets for the third quarter with $15.8 million recorded for the nine months ended September 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.

The Trust expects to finance planned capital expenditures for the remainder of 2006 from funds generated from operations after distributions to unitholders and from proceeds of the debentures issued on October 31, 2006.

Working Capital and Bank Indebtedness

At September 30, 2006, the Trust had bank indebtedness of $177.6 million (June 30, 2006 - $147.2 million) and a working capital deficit of $2.4 million (June 30, 2006 - $3.2 million). During the third quarter, the Trust utilized bank credit facilities to finance a $22.4 million property acquisition as well as capital expenditures in excess of cash generated from operations after distributions.

The Trust's credit facilities at September 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. In addition, the Trust had a $20 million non-revolving, non-extendable term facility which was obtained during the third quarter to provide flexibility to complete the property acquisition. The $20 million facility was repaid and the facility was cancelled in October, 2006.

Subsequent to the end of the third quarter, Fairborne issued $100 million of Convertible Unsecured Subordinated Debentures for net proceeds of approximately $95.5 million. The debentures bear interest at a rate of 6.5% per annum, which is payable semi-annually in arrears on December 31 and June 30 of each year commencing June 30, 2007. The debentures mature on December 31, 2011 and can be converted into trust units of Fairborne at any time at the option of the holders at a conversion price of $13.50 per unit. Net proceeds from the issue of the debentures was initially used to reduce the outstanding indebtedness of the Trust, which gives the Trust the financial flexibility to fund future exploration and development activities.

Unitholders' Equity

The Trust is authorized to issue an unlimited number of Trust units. During the nine months ended September 30, 2006, 1,057,234 Trust Units were issued on the conversion of 974,664 exchangeable shares. At September 30, 2006, the exchange ratio for the retraction of exchangeable shares into Trust Units was 1:1.13387.

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



---------------------------------------------------------------------------
October 31, September 30, December 31,
(thousands) 2006 2006 2005
---------------------------------------------------------------------------
Trust units 47,655 47,653 46,400
Exchangeable shares 4,635 4,637 5,612
Trust incentive plans
Restricted units (1) 498 505 562
Performance units (1), (2) 629 637 323
Weighted average trust units
Basic n/a 47,101 47,174
Diluted n/a 53,569 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 60-70% 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 30-40% 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 resulted in a payout ratio within the targeted range. Monthly distributions in 2006 represented a payout ratio of 67% of cash available for distribution (excluding exchangeables) for the third quarter and 64% of cash available for distribution (excluding exchangeables) for the nine months ended September 30, 2006. For tax purposes, all 2006 distributions are expected to be taxable as a return on capital with no return of capital.



---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($thousands except as noted) 2006 2006
---------------------------------------------------------------------------
Cash flow from operating activities 29,969 97,585
Change in non-cash working capital (3,202) (12,119)
Asset retirement expenditures 1,058 1,323
---------------------------------------------------------------------------
Funds generated from operations 27,825 86,789
Cash withheld (9,272) (31,587)
---------------------------------------------------------------------------
Cash distributions declared 18,553 55,202
---------------------------------------------------------------------------
Cash distributions per unit per
month $0.13 $0.13
---------------------------------------------------------------------------
Payout ratio 67% 64%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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.

SUBSEQUENT EVENTS

On October 31, 2006, pursuant to a public offering, Fairborne issued Convertible Unsecured Subordinated Debentures for gross proceeds of $100 million (net proceeds estimated to be approximately $95.5 million). The debentures bear interest at a rate of 6.5% per annum, which is payable semi-annually in arrears on December 31 and June 30 of each year commencing June 30, 2007. The debentures mature on December 31, 2011 and can be converted into trust units of Fairborne at any time at the option of the holders at a conversion price of $13.50 per unit.

Net proceeds from the issue of the debentures will be used to reduce the outstanding indebtedness of the Trust, to fund exploration and development activities and for general corporate purposes.

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, changes in law and government regulations - all of these govern the businesses 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.

On October 31, 2006 Federal Finance Minister Jim Flaherty (the "Finance Minister") announced a proposal to apply a tax at the trust level on distributions of certain income from publicly traded mutual fund trusts at rates of tax comparable to the combined federal and provincial corporate tax and to treat such distributions as dividends to the unitholders. The Finance Minister said existing trusts would have a 4 year transition period and would not be subject to the new rules until 2011. Until such rules are passed into law it is uncertain what the impact of such rules will be to the Trust and its Unitholders. However, assuming such proposals are ultimately enacted in the form proposed, the implementation of such proposals would be expected to result in adverse tax consequences to the Trust and certain of its Unitholders which would be materially different than the consequences previously described in our disclosure documents and would impact cash distributions from the Trust.



QUARTERLY FINANCIAL INFORMATION

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

---------------------------------------------------------------------------
Q3 Q2 Q1 Q4
2006 2006 2006 2005
---------------------------------------------------------------------------
Financial ($thousands, except
per unit amounts)
Petroleum and natural gas sales 48,845 50,914 54,789 68,751
Funds generated from operations 27,825 30,340 28,624 40,783
Per unit - basic $0.58 $0.65 $0.62 $0.89
Per unit - diluted $0.51 $0.57 $0.54 $0.77
Net Income 10,439 13,881 10,859 20,444
Per unit - basic $0.22 $0.30 $0.23 $0.43
Per unit - diluted $0.22 $0.28 $0.23 $0.36
Total assets 514,681 499,826 522,482 499,920
Working capital deficit (surplus) 2,395 3,199 (35) (1,373)
Bank indebtedness 177,595 147,202 153,933 136,302
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operations
Average production
Natural gas (Mcf per day) 45,966 43,441 46,472 46,886
Crude oil (bbls per day) 2,604 2,607 2,575 2,770
Natural gas liquids (bbls per
day) 376 432 384 438
Total (BOE per day) 10,640 10,280 10,705 11,022
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Q3 Q2 Q1 Q4
2005 2005 2005(a) 2004(a)
---------------------------------------------------------------------------
Financial ($thousands, except
per unit amounts)
Petroleum and natural gas sales 61,656 48,807 47,434 41,976
Funds generated from operations 35,406 23,760 25,294 21,569
Per unit - basic $0.78 $0.47 $0.51 $0.47
Per unit - diluted $0.67 $0.47 $0.48 $0.46
Net Income 15,482 2,719 4,908 4,158
Per unit - basic $0.34 $0.05 $0.10 $0.09
Per unit - diluted $0.33 $0.05 $0.09 $0.08
Total assets 458,603 451,849 480,089 434,830
Working capital deficit (surplus) (984) 7,758 16,823 20,839
Bank indebtedness 128,548 124,580 106,513 77,219
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operations
Average production
Natural gas (Mcf per day) 49,412 47,077 49,030 43,480
Crude oil (bbls per day) 2,684 2,558 3,047 2,892
Natural gas liquids (bbls per
day) 402 422 398 495
Total (BOE per day) 11,321 10,826 11,617 10,633
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(a) 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)

---------------------------------------------------------------------------
September 30, December 31,
($thousands) 2006 2005
---------------------------------------------------------------------------

Assets
Current assets
Cash and cash equivalents $ 219 $ 217
Accounts receivable 42,970 67,055
Prepaid expenses and deposits 3,296 2,911
---------------------------------------------------------------------------
46,485 70,183
Capital assets (Note 1) 452,026 413,567
Goodwill 16,170 16,170
---------------------------------------------------------------------------
$ 514,681 $ 499,920
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 42,685 $ 62,778
Distributions payable 6,195 6,032
Bank indebtedness (Note 2) 12,595 -
---------------------------------------------------------------------------
61,475 68,810
Bank indebtedness (Note 2) 165,000 136,302
Non-controlling interest (Note 3) 26,357 27,598
Asset retirement obligation (Note 4) 11,044 11,386
Future income taxes 47,409 51,465

Unitholders' Equity
Unitholders' capital (Note 5) 216,307 199,022
Contributed surplus (Note 5) 3,533 1,758
Retained earnings (deficit) (16,444) 3,579
---------------------------------------------------------------------------
203,396 204,359
---------------------------------------------------------------------------
Commitments (Note 7)
Subsequent Event (Note 8)
$ 514,681 $ 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 nine months
($thousands except per unit ended September 30, ended September 30,
amounts) 2006 2005 2006 2005
---------------------------------------------------------------------------
Revenue
Petroleum and natural gas $ 48,845 $ 61,656 $ 154,548 $ 157,897
Royalties (6,306) (12,957) (25,289) (33,812)
Transportation (1,047) (1,084) (4,052) (2,048)
---------------------------------------------------------------------------
41,492 47,615 125,207 122,037
Expenses
Operating 9,671 9,581 27,188 26,322
General and administrative 2,787 1,988 8,551 5,233
Interest 2,608 1,223 6,223 3,348
Trust conversion costs - - - 6,912
Depletion, depreciation and
accretion 18,577 17,258 53,601 50,398
---------------------------------------------------------------------------
33,643 30,050 95,563 92,213
---------------------------------------------------------------------------
Income before taxes 7,849 17,565 29,644 29,824
Taxes (reduction)
Future (3,604) (250) (9,413) 3,282
Capital (10) 177 203 531
---------------------------------------------------------------------------
(3,614) (73) (9,210) 3,813
---------------------------------------------------------------------------
Net income before
non-controlling interest 11,463 17,638 38,854 26,011
Non-controlling interest 1,024 2,156 3,675 2,902
---------------------------------------------------------------------------
Net income 10,439 15,482 35,179 23,109
Retained earnings (deficit),
beginning of period (8,330) (214) 3,579 26,532
Distributions (18,553) (15,047) (55,202) (20,040)
Plan of Arrangement - - - (36,212)
Reclassification of deficit
pursuant to Plan of
Arrangement - - - 6,832
---------------------------------------------------------------------------
Retained earnings (deficit),
end of period $(16,444) $ 221 $ (16,444) $ 221
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net income per unit (Note 5)
Basic $ 0.22 $ 0.34 $ 0.75 $ 0.49
Diluted $ 0.22 $ 0.33 $ 0.73 $ 0.49
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.


INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

---------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
($thousands) 2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by (used in):
Operating activities
Net income $ 10,439 $ 15,482 $ 35,179 $ 23,109
Items not involving cash:
Depletion, depreciation and
accretion 18,577 17,258 53,601 50,398
Compensation expense 1,389 760 3,747 1,345
Trust conversion costs - - - 3,424
Future tax (reduction) (3,604) (250) (9,413) 3,282
Non-controlling interest 1,024 2,156 3,675 2,902
Asset retirement expenditures (1,058) (551) (1,323) (775)
---------------------------------------------------------------------------
26,767 34,855 85,466 83,685
Change in non-cash working
capital 3,202 (4,854) 12,119 (5,536)
---------------------------------------------------------------------------
29,969 30,001 97,585 78,149
---------------------------------------------------------------------------
Financing activities
Distributions to unitholders (18,524) (15,017) (55,039) (15,017)
Bank indebtedness 30,393 3,968 41,293 61,329
Issuance of common shares, net
of costs - - - 214
Buy-out of stock options - - - (9,805)
---------------------------------------------------------------------------
11,869 (11,049) (13,746) 36,721
---------------------------------------------------------------------------
Investing activities
Capital expenditures (15,423) (18,576) (52,945) (97,102)
Acquisition of petroleum and
natural gas properties (22,380) - (22,380) -
Disposition of petroleum and
natural gas properties - 3,543 - 3,543
Change in non-cash working
capital (4,035) (3,919) (8,512) (21,336)
---------------------------------------------------------------------------
(41,838) (18,952) (83,837) (114,895)
Change in cash and cash
equivalents - - 2 (25)
Cash and cash equivalents,
beginning of period 219 216 217 241
---------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 219 $ 216 $ 219 $ 216
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Cash interest paid $ 2,422 $ 1,112 $ 5,775 $ 3,237
Cash taxes paid $ 27 $ 178 $ 240 $ 1,214
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


SELECTED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the nine months ended September 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 September 30, 2006, accounts receivable included $8.5 million due from Fairquest (December 31, 2005 - $12.4 million). In addition, Fairborne charged Fairquest $781,000 during the three months ended September 30, 2006 (2005 - $395,000) and $2.0 million during the nine months ended September 30, 2006 (June 1 to September 30, 2005 - $434,000) under the technical services agreement. These amounts have been recorded as a reduction to the Trust's general and administrative costs.



1. CAPITAL ASSETS
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------------------------------------------------------------------
Petroleum and natural gas properties and
equipment $ 624,984 $ 534,449
Corporate assets 3,465 3,099
Other assets 3,689 3,275
---------------------------------------------------------------------------
632,138 540,823
Accumulated depletion and depreciation (180,112) (127,256)
---------------------------------------------------------------------------
$ 452,026 $ 413,567
---------------------------------------------------------------------------
---------------------------------------------------------------------------


As at September 30, 2006, costs of acquiring unproved properties in the amount of $21.4 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 $6.0 million (December 31, 2005 - $6.5 million) relating to asset retirement obligations, net of accumulated depletion.

2. BANK INDEBTEDNESS

At September 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.

In addition at September 30, 2006, the Trust had a $20 million non-revolving, non-extendable term facility with interest and security terms consistent with the Trust's other credit facilities. The $20 million facility was drawn to fund an acquisition and was repaid and the facility cancelled in October 2006.



3. NON-CONTROLLING INTEREST

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

---------------------------------------------------------------------------
Number of
Exchangeable
Shares Amount
---------------------------------------------------------------------------
Balance, beginning of period 5,612 $ 27,598
Non-controlling interest net income - 3,675
Converted to Trust Units (975) (4,916)
---------------------------------------------------------------------------
Balance, end of period 4,637 $ 26,357
---------------------------------------------------------------------------
---------------------------------------------------------------------------

At September 30, 2006, the exchange ratio for the retraction of
exchangeable shares into Trust Units was 1:1.13387.

4. ASSET RETIREMENT OBLIGATIONS

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

---------------------------------------------------------------------------
Amount
---------------------------------------------------------------------------
Balance, beginning of period $ 11,386
Liabilities incurred 236
Liabilities settled (1,323)
Accretion expense 745
---------------------------------------------------------------------------
Balance, end of period $ 11,044
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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 nine months ended September 30, 2006:

---------------------------------------------------------------------------
Number Amount
---------------------------------------------------------------------------
Balance, beginning of period 46,400 $ 199,022
Issued on conversion of exchangeable shares 1,057 15,313
Issued under trust incentive plans 196 1,972
---------------------------------------------------------------------------
Balance, end of period 47,653 $ 216,307
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During the period January 1 to September 30, 2006, 974,664 exchangeable shares were converted into 1,057,234 Trust Units. The market value of Trust Units issued on conversion was $15.3 million resulting in a reduction in non-controlling interest of $4.9 million, an increase in capital assets of $15.8 million and a future tax liability of $5.4 million.



b) Per unit amounts

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

---------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------
Basic 47,523 45,543 47,101 47,583
Restricted units 684 526 647 206
Performance units 537 299 538 118
Exchangeable shares 5,259 6,486 5,283 2,906
Stock options - - - 955
Warrants - - - 673
---------------------------------------------------------------------------
Diluted 54,003 52,854 53,569 52,441
---------------------------------------------------------------------------
---------------------------------------------------------------------------

c) Trust incentive plans

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

---------------------------------------------------------------------------
Number of Number of
Restricted Performance
Units Units Total
---------------------------------------------------------------------------
Balance, beginning of period 562 323 885
Issued 139 323 462
Exercised (177) - (177)
Forfeited (19) (9) (28)
---------------------------------------------------------------------------
Balance, end of period 505 637 1,142
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Exercisable, end of period - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Equivalent Trust units, end of period (1) 540 695 1,235
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(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 $14.03 per unit and $15.03 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 nine months ended September 30, 2006:

---------------------------------------------------------------------------
Amount
---------------------------------------------------------------------------
Balance, beginning of period $ 1,758
Restricted and performance units issued 3,778
Restricted and performance units exercised (1,972)
Trust incentive plan grants forfeited (31)
---------------------------------------------------------------------------
Balance, end of period $ 3,533
---------------------------------------------------------------------------
---------------------------------------------------------------------------


6. FINANCIAL INSTRUMENTS

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



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

---------------------------------------------------------------------------
Settlement
Remaining Term Volume Price Index
---------------------------------------------------------------------------
Crude Oil Collars
Oct 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
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
Apr 1, 2007 - Jun 30, 2007 500 bbls/day US$77.00 Floor WTI
Crude Oil Swaps
Jul 1, 2007 - Sep 30, 2007 500 bbls/day US$70.68 WTI
Oct 1, 2007 - Dec 31, 2007 500 bbls/day US$70.98 WTI
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

---------------------------------------------------------------------------
Settlement
Remaining Term Volume Price Index
---------------------------------------------------------------------------
AECO Collars
Oct 1, 2006 - Dec 31, 2007 2,500 GJs/day CDN$8.25/GJ - AECO C Daily
CDN$9.75/GJ
Oct 1, 2006 - Mar 31, 2007 2,500 GJs/day CDN$8.50/GJ - AECO C Daily
CDN$13.22/GJ
Oct 1, 2006 - Mar 31, 2007 5,000 GJs/day CDN$8.50/GJ - AECO C Daily
CDN$11.20/GJ
Nov 1, 2006 - Mar 31, 2007 2,500 GJs/day CDN$9.00/GJ - AECO C Daily
CDN$13.00/GJ
Nov 1, 2006 - Mar 31, 2007 2,000 GJs/day CDN$9.00/GJ - AECO C Daily
CDN$10.30/GJ
Jan 1, 2007 - Mar 31, 2007 2,000 GJs/day CDN$9.00/GJ - AECO C Daily
CDN$11.65/GJ
Jan 1, 2007 - Mar 31, 2007 3,000 GJs/day CDN$9.00/GJ - AECO C Daily
CDN$10.55/GJ
AECO Participating Swaps
Nov 1, 2006- Mar 31, 2007 3,000 GJs/day CDN$9.15/GJ AECO C Daily
Floor + 50%
Partic.
AECO Puts
Oct 1, 2006 - Oct 31, 2006 4,000 GJs/day CDN$10.52/GJ AECO C Daily
Floor

AECO Swaps
Oct 1, 2006 - Dec 31, 2006 5,000 GJs/day CDN$7.72/GJ N/A

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

Apr 1, 2007 - Oct 31, 2007 2,500 GJs/day CDN$8.10/GJ N/A

Apr 1, 2007 - Oct 31, 2007 2,500 GJs/day CDN$8.11/GJ N/A

AECO Basis
Oct 1, 2006 - Oct 31, 2006 5,000 GJs/day NYMEX LD less NYMEX Last Day
$US0.81/MMbtu
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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.

8. SUBSEQUENT EVENT

On October 31, 2006, pursuant to a public offering, Fairborne issued Convertible Unsecured Subordinated Debentures for gross proceeds of $100 million (net proceeds estimated to be $95.5 million). The debentures bear interest at a rate of 6.5% per annum, which is payable semi-annually in arrears on December 31 and June 30 of each year commencing June 30, 2007. The debentures mature on December 31, 2011 and can be converted into trust units of Fairborne at any time at the option of the holders at a conversion price of $13.50 per unit.

Advisories

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, the effect of infrastructure interruptions, timing of tie-in of wells, 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.



Unitholder Information

FAIRBORNE ENERGY TRUST DIRECTORS OFFICERS

3400, 450 - 1st Street SW Robert B. Hodgins Steven R. VanSickle
Calgary, Alberta T2P 5H1 Investor and Corporate President
Telephone (403) 290-7750 Director and Chief Executive
Fax (403) 290-7751 Officer
Johannes J. Nieuwenburg
Chairman David L. Summers
C1 Energy Ltd. Chief Operating
AUDITORS Officer

KPMG LLP Michael E.J. Phelps Aaron G. Grandberg
Chairman Vice President Finance
RESERVE EVALUATORS Dornoch Capital Inc. and Chief Financial
Officer
GLJ Petroleum Consultants Steven R. VanSickle
Ltd. President and CEO Shaun E. Alspach
Fairborne Energy Trust Vice President
Sproule Associates Limited Business Development
Richard A. Walls
BANK President and CEO David S. Cymbalisty
Fairquest Energy Limited Vice President
Royal Bank of Canada Engineering
National Bank of Canada Rodney D. Wimer
Bank of Nova Scotia President F. Tom Park
Alberta Treasury Branch Mazama Capital Partners Vice President
Marketing
LEGAL COUNSEL GENERAL INFORMATION

Unitholders and Gary M. Poirier
Burnet, Duckworth & Palmer interested investors are Vice President
LLP encouraged to visit Production
our web site: http://
McCarthy Tetrault LLP www.fairbornetrust.com David E.T. Pyke
Historical public Vice President
STOCK EXCHANGE LISTING documents, corporate Land and Contracts
information, latest
The Toronto Stock Exchange presentation material James E. Young
Trading Symbol: FEL.UN and press releases are Vice President
Exchangeable Shares: FXL all available. Exploration
Filings also available
CORPORATE GOVERNANCE at: www.sedar.com

A system of corporate
governance for Fairborne
has been established to
provide the Board of
Directors, management and
unitholders of the Trust
with effective governance.
A more detailed discussion
of corporate governance is
available in the
Information Circular for
the Annual Meeting of
Unitholders.



Contact Information