PRT Forest Regeneration Income Fund
TSX : PRT.UN

PRT Forest Regeneration Income Fund

November 01, 2006 14:24 ET

PRT Announces Results for Third Quarter

VICTORIA, BRITISH COLUMBIA--(CCNMatthews - Nov. 1, 2006) - PRT Forest Regeneration Income Fund (TSX:PRT.UN) today announced results for its third quarter and nine months ended September 30, 2006. The Fund's interim financial report is enclosed as part of this release.

For the nine months ended September 30, 2006, the Fund reported net earnings of $5,289,000 ($0.55 per unit) and distributable cash flow of $6,912,000 ($0.72 per unit), compared with $4,442,000 ($0.59 per unit) and $5,039,000 ($0.66 per unit) respectively for 2005. Net earnings and distributable cash improved over the same period of 2005 due to the impact of the Pelton acquisition, with the increase in earnings partially offset by the effect of a one-time $0.04 per unit gain on the sale of property in 2005. Per unit figures were also impacted by the greater number of units outstanding in 2006.

For the three months ended September 30, 2006, the Fund reported net earnings of $294,000 ($0.03 per unit) and distributable cash flow of $90,000 ($0.01 per unit), compared with $356,000 ($0.05 per unit) and $105,000 ($0.01 per unit) respectively in 2005. Net earnings declined relative to the same period in 2005 due to crop mix changes, which resulted in a shift in the timing of seedling revenue in the current year to earlier quarters, and higher repair and maintenance expenditures. The Funds' third quarter results are typically lower than in other quarters, reflecting the seasonal nature of PRT's business. Further, the crop mix associated with recent acquisitions has resulted in a shift of some contract revenue recognition towards the first half of the year.

Year-to-date revenues have increased by 36%, to $39,379,000. This is attributable to higher contracted seedling volumes being produced at Pelton Reforestation Ltd. and Coldstream Nursery Ltd., which were acquired during 2005.

Margins in the nine month period decreased slightly as a result of the mix of crops, higher energy prices in 2006, and a higher cost structure at the Pelton nursery. Selling, general and administrative expenses were higher due to higher volumes and support costs for two additional nursery sites, but declined as a percentage of revenue reflecting acquisition leverage and a shift in the timing of certain expenditures.

Commenting on the quarter, President and CEO, John Kitchen said, "The integration of Pelton Reforestation, acquired last year, has generally gone well and we are very pleased by the customer response and the quality of seedling crops produced this year. These are quality assets, located in a desirable growing climate and market region. However, we have more work to do to realize on the potential synergies, and this will be our focus in the near term. Over the mid to long-term, we remain confident that the addition of PRT Pelton will become an even more important contributor to PRT's bottom line."

PRT is the largest producer of container grown forest seedlings in North America, operating 16 nurseries and managing approximately 220 million seedlings annually. Units of the Fund are listed for trading on the Toronto Stock Exchange under the trading symbol PRT.UN.

Conference Call and Taped Replay

The Fund will host a conference call to further discuss the matters contained in this press release. The call will take place on November 2, 2006 at 11:00 AM PST, 2:00 PM EST. To participate in this conference, please call 1-866-585-6398.

Persons unable to attend the conference call may listen to a recorded version by dialing 1-866-245-6755 and entering the pass code 364025. This option is available until November 9, 2006. A recorded web cast version of the call may also be accessed from the Fund's website at www.prtgroup.com.

Management's Discussion and Analysis

We are pleased to present the 2006 third quarter report for the PRT Forest Regeneration Income Fund. The Fund's operating results are highly seasonal, which is due to variations in activity levels throughout the year in completing annual seedling contracts, as well as the seasonal nature of silviculture services. This makes year-over-year comparisons (after adjusting for acquisitions) more relevant than sequential quarterly comparisons. Typically, the third quarter is the least active period in the annual cycle, with activities restricted to completion of summer harvest, tree planting contracts and routine crop maintenance.

This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations for future orders, the outlook for future energy prices, plans and opportunities for acquisitions, expectations for future production costs, expectations for future working capital needs, and other statements contained in this discussion that are not historical fact. Risks and uncertainties include, but are not limited to, future commodity prices, exchange rate risks, agricultural risks, the outlook for the forest industry, the risk that acquisitions may not be integrated as planned, and other risks identified from time to time in the Fund's annual report, annual information return, prospectus, and other filing documents. These documents are available in electronic form at www.sedar.com, or by contacting the Fund directly. Readers are cautioned not to place undue reliance on forward-looking statements.

This third quarter MD&A discussion is a supplement to, and should be read in conjunction with the Fund's annual MD&A filing for 2005.

Operating Results - first nine months of 2006 compared to first nine months of 2005

Year-over-year results in 2006 are significantly impacted by the Pelton Reforestation Ltd. acquisition, which occurred on October 1, 2005, and to a lesser extent by the Coldstream Nursery acquisition which closed on June 1, 2005.

Revenues in the period were $10.4 million higher than the same period of 2005, mainly due to the impact of additional volumes brought in through the two acquisitions last year. In 2006, PRT expects to produce approximately 220 million seedlings under contract, as compared to approximately 160 million in 2005 (excluding the Pelton acquisition).

Production costs in aggregate rose with the additional volume, and were higher as a percentage of revenues, at 61% as compared to 58% last year. Labour, material and energy costs were higher on a volume adjusted basis in the current period, attributable to the mix of crops, higher energy prices in 2006, and a higher cost structure at the Pelton nursery. PRT contracted forward approximately 1/2 of its anticipated natural gas needs for 2006 early in the year, as a strategy to reduce exposure to energy price swings, although at a higher average commodity price. This strategy is important as crops are generally grown under fixed price contracts. PRT has been taking advantage of recent weakness in natural gas commodity prices to purchase supplies for 2007.

Selling, general and administration costs were higher in the period, due to operating two additional sites in 2006, but this increase was offset somewhat by timing shifts in employee incentives to the fourth quarter of 2005. As a percentage of revenues, SG&A costs declined to 18% as compared to 19% due to the timing shift and the effect of operating leverage obtained with the acquisitions.

Interest costs increased by $0.1 million over the same period last year as a result of higher operating line requirements necessary to finance increased working capital investments due to revenue growth and invoice timing, working capital financing related to the Pelton acquisition, and marginally higher interest rates.

Depreciation and amortization charges were higher in 2006, due to an increase in the depreciable asset base related to the Pelton and Coldstream acquisitions, including intangible assets.

During the period, PRT disposed of certain surplus assets and recognized disposal gains of approximately $0.1 million. In the prior year period, PRT disposed of its Aldergrove, BC nursery site, and recorded a gain on the disposal of $0.5 million. The Aldergrove facility had been closed and its business was relocated to other PRT locations, particularly the Oregon nursery.

With the higher volumes and improved overhead leverage in 2006, pre-tax earnings improved to $5.0 million from $4.2 million in the first nine months of 2005, which included a $0.5 million nursery site disposal gain.

The tax recovery in the period increased due to the additional tax shelter created by higher interest payments between PRT and the Fund related to new notes issued in connection with the Fund's 2005 unit offering.

Net earnings for the period increased by $0.8 million, over the same period last year, with the increase moderated by the impact of the nursery site disposal gain which was included in 2005 earnings. Earnings per unit declined by $0.04 per unit with the one-time $0.04 per unit impact of the nursery disposal gain on last year's results, and the higher number of units outstanding in 2006.

The Fund determines distributable cash flow as cash flow from operating activities before changes in non-cash working capital items adjusted for seedling container depreciation (which provides a reserve for seedling container replacement), sustaining capital expenditures, long-term debt repayments from operating cash flow, gains or losses on asset sales, and such other reserves as the board of PRT may consider appropriate. Certain expense items, which are incurred as part of earnings enhancing capital projects, may be excluded from the determination of distributable cash flow if the overall project return meets the Company's internal investment hurdle rates and will be funded from external sources, such as term debt or equity financing. For example, in 2005, the proceeds from the sale of the Aldergrove property that were applied to pay down the term debt facility were excluded from this calculation, as the funds and repayment did not arise from or utilize normal course operating cash flows.

The Fund considers distributable cash flow as defined to be a useful measure of the free cash flow from operations available for making unitholder distributions, as it is determined from normal course operating cash flows after providing for the maintenance and replacement of PRT's underlying asset base, as well as providing for the repayment of debt taken out for expansionary capital spending.

The Fund calculates distributable cash as follows:



In $000's except Three months ended Nine months ended
per unit amounts September 30 September 30
2006 2005 2006 2005
----------------------------------------

Cash flow from operating
activities before net
change in non-cash working
capital items $ 765 $ 574 $8,965 $6,502

Cash flow adjustments:
Seedling container
depreciation (393) (256) (1,111) (753)
Repayments of long term
debt from operating cash flow (178) (131) (539) (281)
Sustaining capital expenditures (154) (82) (453) (429)
Reserve for sustaining capital
expenditures created in 2005
to fund current period capital
spending 50 - 50 -
--------------------------------------------------------------------------

Distributable cash $ 90 $ 105 $6,912 $5,039
Seasonal shortfall (excess) of
cash flow to distributions
declared, applied from (to)
working capital 2,070 1,556 (187) (58)
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Distributions declared $2,160 $1,661 $6,725 $4,981
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--------------------------------------------------------------------------
Distributable cash per unit $ 0.01 $ 0.01 $ 0.72 $ 0.66

Distributions per unit
declared from current
year's cash flow $ 0.23 $ 0.22 $ 0.67 $ 0.66

Distributions per unit
declared from prior
year's cash flow $ - $ - $ 0.03 $ -


Distributable cash flow for the nine month period was $1.9 million higher than in the corresponding period in 2005, primarily as a consequence of the combined impacts of the Pelton and Coldstream acquisitions and crop mix changes. The latter factor is a timing shift, which may result in some redistribution of revenues and earnings from the fourth quarter to the first two quarters. Per unit distributable cash flow increased to a lesser degree due to the greater number of units outstanding in 2006.

Operating Results - three months ended September 30, 2006 compared to three months ended September 30, 2005

Revenues in the third quarter were $8.8 million, which was 38% higher than in the same period of 2005. This was primarily due to increased contract volumes resulting from the Pelton and Coldstream acquisitions last year. Revenue in the quarter was also impacted by crop inventory adjustments, which are generally estimated at this time of the year. However, inventory estimation methods are conservative and actual values may vary by the completion of the crop cycle in the fourth quarter.

Production costs in the quarter were $2.1 million higher than in the same period of 2005. This was partially attributable to the higher contract volumes resulting from recent acquisitions. In addition, labour, material, energy, and repair and maintenance costs were higher on a volume adjusted basis in the current period, attributable to the mix of crops, higher energy prices this year, a higher cost structure at the Pelton nursery, and the timing of repair and maintenance project spending.

Selling, general and administration costs, as well as interest, depreciation and amortization were higher than the same period in 2005. These costs were all affected by the same factors outlined in the nine month discussion above.

As a result of the increased costs of production, crop inventory adjustments, and higher depreciation and amortization, the pre-tax loss in the third quarter of 2006 increased to $0.6 million as compared to $0.3 million in the same period of 2005.

In the current quarter, the tax recovery of $0.9 million was higher than in the same period of 2005, due to the additional tax shelter created by higher aggregate unitholder distributions in 2006.

Distributable cash flow in the quarter was comparable to 2005, as the impact of volume increases was offset by seasonal shifts in PRT's business this year caused by production cost expenditure timing.



Summary of Quarterly Results

-------------------------------------------------
2004
---------------------
January to
4th Q December 31
-------------------------------------------------
Operating Results
Revenues $8,593 $34,770

Net earnings $1,619 $ 4,921

Per Unit(1) $ 0.22 $ 0.67
Distributable cash $1,698 $ 6,085
Per Unit $ 0.21 $ 0.82

Distributions declared $1,702 $ 6,516
Per Unit $ 0.22 $ 0.88
-------------------------------------------------


------------------------------------------------------------------------
2005
-----------------------------------------------
January to
1st Q 2nd Q 3rd Q 4th Q December 31
------------------------------------------------------------------------
Operating Results
Revenues $8,838 $13,738 $6,361 $13,160 $42,097

Net earnings $1,345 $ 2,741 $ 356 $ 1,566 $ 6,008

Per Unit(1) $ 0.18 $ 0.36 $ 0.05 $ 0.20 $ 0.79
Distributable cash $1,216 $ 3,718 $ 105 $ 2,417 $ 7,456
Per Unit $ 0.16 $ 0.49 $ 0.01 $ 0.32 $ 0.98

Distributions declared $1,660 $ 1,660 $1,661 $ 1,805 $ 6,786
Per Unit $ 0.22 $ 0.22 $ 0.22 $ 0.22 $ 0.88
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----------------------------------------------------
2006
---------------------------
1st Q 2nd Q 3rd Q
----------------------------------------------------
Operating Results
Revenues $ 12,808 $17,767 $8,804

Net earnings $ 1,697 $ 3,298 $ 294
Per Unit(1) $ 0.18 $ 0.34 $ 0.03
Distributable cash $ 2,203 $ 4,620 $ 90
Per Unit $ 0.23 $ 0.48 $ 0.01

Distributions declared $ 2,407 $ 2,158 $2,160
Per Unit $ 0.25 $ 0.23 $ 0.23
----------------------------------------------------

Note 1: Basic and Fully Diluted

The above summarized financial data is presented in Canadian dollars, and
has been prepared in accordance with Canadian generally accepted accounting
principles, with the exception of distributable cash amounts. Distributable
Cash Flow is a term which does not have standardized meaning under Canadian
generally accepted accounting principles, and may not be comparable to
similar measures provided by other reporting entities.


Liquidity and Cash Flow

In the current quarter and nine months ending September 30, the Fund reported net increases in cash flow from operating activities before changes in working capital, of $0.2 million and $2.5 million respectively, relative to the corresponding periods last year. This is mainly attributable to the higher operating earnings in 2006. The third quarter increase was not as significant as more of the Fund's revenues and earnings were reported in the first two quarters this year, due to seasonal factors and crop mix changes in 2006. Cash flow from changes in non-cash working capital balances increased by a further $3.8 and $6.8 million in two periods of 2006, primarily due to invoicing and collection of year end unbilled revenue balances which were higher over the 2005 year end as compared to 2004, as well as reductions in deposits made last year related to the Pelton acquisition.

Distributions to unitholders were higher in both periods of 2006, due to the greater number of units outstanding in 2006 as well as the payment of a special $0.03 per unit "top-up" distribution during the first quarter from available 2005 distributable cash flow. No top-up distribution was declared in the prior year period. Excluding this, per unit distributions were slightly higher in 2006 due to an increase in the base monthly distribution from $0.073 to $0.075 per unit, effective with the March 2006 distribution declaration.

Capital expenditures (excluding acquisitions) were $0.4 million lower in the first nine months of 2006, at $2.4 million. The prior year was higher as a result of expansion of the Nevada nursery site, but this year-over-year impact was partially offset by higher seedling container purchases this year. In addition, in 2005 the Fund completed its acquisition of Coldstream Nursery Ltd. for a net cash outlay in the period of $1.4 million, and this was financed through a combination of term debt and vendor financing. Asset disposal proceeds in 2005 included $2.5 million received from the sale of the former Aldergrove nursery site

The Fund drew $0.2 million on its term debt facilities during the period, to refinance an instalment of the vendor financing associated with the Oregon nursery purchase in 2004. In the first nine months of 2005, the Fund drew $5.2 million on its facilities, approximately one-half of which was to finance the purchase of Coldstream and other capital expenditures, with the remainder drawn to refinance existing US dollar debt. Repayments of debt in 2006 consisted of scheduled amortization on term loans, and repayment of vendor financing associated with recent acquisitions. In the corresponding period of 2005, the Fund repaid $2.5 million of debt using the proceeds from the sale of the Aldergrove property, and repaid the US$2.0 million associated with the US dollar debt refinancing, in addition to scheduled amortization payments on term loans.

With reductions in non-cash working capital investments in 2006, PRT was able to make a $5.9 million reduction in its operating loan balance which had been drawn higher over the 2005 year end. In 2005, with more typical non-cash working capital changes, approximately $0.8 million was required to be drawn from the facility over the same period.

The Fund's long-term debt, lease, and other contractual obligations are as follows:



--------------------------------------------------------------------------
Payments Due by Period - $'000's
------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 Year years years 5 years
--------------------------------------------------------------------------
Long Term Debt 6,794 355 2,417 2,054 1,968
--------------------------------------------------------------------------
Operating Leases 6,588 795 1,581 1,497 2,715
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total Contractual Obligations 13,382 1,150 3,998 3,551 4,683
--------------------------------------------------------------------------


Financial Position

At September 30, 2006, working capital was $2.7 million compared to $3.6 million at the end of 2005, a decrease of $0.9 million. This was mainly a result of normal seasonal impacts. With existing credit lines the Fund's working capital position is expected to be adequate relative to its operating needs.

Property, plant and equipment was $49.3 million at September 30, 2006, a net decrease of $1.3 million since December 31, 2005. This decrease arose as current period capital expenditures were less than total depreciation charges.

Unitholders' equity at September 30, 2006 decreased $1.3 million since year end, to $76.0 million. This was due to distributions declared during the period exceeding net earnings. On an annual basis, distributable cash flow from the Fund is typically higher than reported earnings, due to depreciation and amortization charges exceeding required expenditures for asset replacement.

The Fund has one class of voting equity securities, of which 9,597,443 units are outstanding. Up to 560,572 units have been reserved for issuance under its Unit Option Plan, however to date no options have been granted. There are no other securities currently outstanding which may be converted into units of the Fund.

Outlook

Overall market conditions in the forest seedling nursery industry continue to be steady, but vary widely within individual operating regions. In BC for example, forest damage from the Mountain Pine Beetle and forest fires has led to robust demand for seedlings, while in Ontario, the forest industry is facing significant challenges and demand this year eased. PRT has positioned itself as a market leader in a number of key markets to help reduce the risk of such regional market fluctuations. Our 2006 marketing results benefited from this diversity, and we expect this will continue to be the case in 2007. With the contribution of our recent acquisitions, we expect to produce approximately 220 million seedlings this year, a record for our company.

Our current group of 16 nursery locations gives us the scope and capabilities to service a more concentrated forest industry. Our last three acquisitions have been timely, and have allowed us to take advantage of the strong markets in BC. They have also contributed to our strategy to gradually become less energy dependent, and give us the opportunity to adopt new technologies that can lead to more cost-effective seedling production.

We anticipate that with the contribution from the Pelton acquisition, and with continued organic growth in our remaining sites, we have the potential to further improve the Fund's operating results over the long-term. In the current year, we are dealing with the challenges of acquisition integration and higher energy costs, which when combined with the greater number of units outstanding will likely prevent us from achieving increased per unit distributable cash flow this year. Nevertheless, we remain optimistic about our long-term prospects, including our opportunity to achieve cash flow gains from these acquisitions and to further consolidate our fragmented industry, including our opportunity to take our expertise to new market areas where we can create value for our customers and unitholders alike.

On behalf of the Trustees and Management



Colin A.C. Dobell John Kitchen
Chairman & Trustee President and CEO
PRT Forest Regeneration Income Fund Pacific Regeneration Technologies Inc.

October 31, 2006


REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



Consolidated Balance Sheets (unaudited)
($000's)

As at September 30 As at December 31
2006 2005
--------------------------------------

Assets

Current assets
Cash $ 824 $ 697
Accounts receivable 6,547 10,261
Income taxes recoverable - 115
Inventories 1,544 2,097
Prepaid expenses & term deposit 455 733
Unbilled revenue 1,773 5,824
--------------------------------------------------------------------------
11,143 19,727

Property, plant and equipment 49,330 50,601
Long term investment 414 529
Intangibles 1,231 1,431
Goodwill 32,375 32,375
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$ 94,493 $ 104,663
--------------------------------------------------------------------------
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LIABILITIES

Current liabilities
Operating line $ 4,346 $ 10,203
Accounts payable and accrued liabilities 2,278 4,250
Distribution payable to Unitholders 720 697
Vendor financing - 135
Current portion of long-term debt 1,070 857
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8,414 16,142

Long-term debt 6,126 6,969

Future income taxes 3,975 4,246
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18,515 27,357
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UNITHOLDERS' EQUITY

Capital contributions 90,197 90,090

Cumulative net earnings 44,453 39,164

Cumulative distributions declared (58,672) (51,948)
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75,978 77,306
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$ 94,493 $ 104,663
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Consolidated Statements of Earnings and Cumulative Earnings (unaudited)
($000's)

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------------------------------------

Revenue $ 8,804 $ 6,361 $ 39,379 $ 28,937
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Expenses
Costs of production 6,023 3,877 23,865 16,686
Selling, general and
administration (note 6) 2,214 1,765 6,992 5,619
Foreign exchange loss (gain) 9 (18) (62) 53
--------------------------------------------------------------------------

Operating earnings before
the following 558 737 8,584 6,579

Interest expense 267 251 841 697
Depreciation 848 750 2,527 2,026
Amortization of intangibles 67 39 200 61
Equity in loss of investee 23 50 115 128
Gain on sale of property,
plant and equipment (11) (12) (90) (555)
--------------------------------------------------------------------------

Earnings (loss) before
income taxes (636) (341) 4,991 4,222

Recovery of income taxes 930 697 298 220
--------------------------------------------------------------------------

Net earnings $ 294 $ 356 $ 5,289 $ 4,442

Cumulative earnings
- beginning of the period 44,159 37,242 39,164 33,156
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Cumulative earnings
- end of period $ 44,453 $ 37,598 $ 44,453 $ 37,598
--------------------------------------------------------------------------
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Basic and diluted earnings
per Trust Unit $ 0.03 $ 0.05 $ 0.55 $ 0.59
--------------------------------------------------------------------------
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Weighted average number of
Trust Units outstanding 9,595,703 7,583,816 9,592,387 7,581,521
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Consolidated Statements of Cash Flows (unaudited)
($000's)

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------------------------------------

Cash flows from
operating activities
Net earnings $ 294 $ 356 $ 5,289 $ 4,442
Items not affecting cash
Depreciation (excluding
seedling containers) 848 750 2,527 2,026
Seedling container
depreciation included
in costs of production 393 256 1,111 753
Amortization of intangibles 67 39 200 61
Recovery of future income
taxes (895) (697) (271) (243)
Unrealized loss (gain)
on foreign exchange 46 (167) 84 (110)
Equity in loss of investment 23 49 115 128
Gain on sale of property,
plant and equipment (11) (12) (90) (555)
--------------------------------------------------------------------------
765 574 8,965 6,502

Net change in non-cash
working capital balances 5,731 1,937 6,787 (8)
--------------------------------------------------------------------------

6,496 2,511 15,752 6,494
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Cash flows from financing
activities
Distributions paid to
Unitholders (2,159) (1,661) (6,702) (5,024)
Issuance of Trust Units 41 28 107 72
Proceeds of long-term debt - - 174 5,172
Repayment of long-term debt (37) (131) (934) (5,261)
Repayment of vendor holdback - (612) (135) (612)
Increase (decrease) in
operating line (3,953) 210 (5,857) 788
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(6,108) (2,166) (13,347) (4,865)
--------------------------------------------------------------------------

Cash flows from
investing activities
Acquisition - - - (1,410)
Purchase of property,
plant and equipment (327) (318) (2,368) (2,792)
Proceeds on sale of property,
plant and equipment 11 11 90 2,582
--------------------------------------------------------------------------
(316) (307) (2,278) (1,620)
--------------------------------------------------------------------------

Increase in cash $ 72 $ 38 $ 127 $ 9

Cash - beginning of period 752 571 697 600

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

Cash - end of period $ 824 $ 609 $ 824 $ 609
--------------------------------------------------------------------------
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Notes to Financial Statements

1. Significant Accounting policies

These unaudited interim consolidated financial statements of the PRT Forest Regeneration Income Fund (The Fund) have been prepared in accordance with Canadian generally accepted accounting principles. The interim financial statements follow the same accounting policies and method of application as the most recent annual consolidated financial statements. As such, these statements should be read in conjunction with the Fund's most recent annual report.

The preparation of these unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and the operating results for the interim period presented are not necessarily indicative of the results expected for the full year.

The Company uses the temporal method of foreign currency translation to translate foreign currency denominated accounts and the accounts of its foreign subsidiary. Monetary items are translated at the rate of exchange in effect at the balance sheet date. Non-monetary items and revenue and expense items are converted at the historical exchange rate in effect at the time the transaction occurred. The Fund records realized and unrealized foreign exchange (gains) losses in the Statement of Earnings and Unitholders' Equity as "Foreign exchange (gain) loss", and identifies unrealized (gains) losses on the translation of non-cash monetary items as "Unrealized (gain) loss on foreign exchange" in the Statement of Cash Flows.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly the Fund's financial position as at September 30, 2006 and September 30, 2005, as well as its results of operations and cash flow for the three months ended September 30, 2006 and 2005 and the nine months ended September 30, 2006 and 2005.

2. Seasonality of operating results

Revenues and cash flow are affected by the Fund's subsidiary, Pacific Regeneration Technologies Inc.'s ("PRT's") seedling crop cycles and by the seasonality of PRT's customers' planting season. PRT recognizes revenue under contracts on a percentage completion basis with costs incurred as a base. Revenue from non-contracted goods and services is recognized when the goods are delivered or the service has been substantially rendered. As such, fluctuations between quarters occur depending upon the activities and expenditures in the quarter.

3. Capital Contributions

Capital contributions and units outstanding are:



Capital Three months ended Nine months ended
Contributions ($000's) September 30 September 30
2006 2005 2006 2005
---------------------------------------------
Capital Contributions
- Beginning of period $ 90,156 $ 71,102 $ 90,090 $ 71,058
Units issued under ESOP
program 41 28 107 72
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Capital Contributions
- End of period $ 90,197 $ 71,130 $ 90,197 $ 71,130
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------
Units outstanding
- Beginning of period 9,593,761 7,582,404 9,587,414 7,577,901
Units issued under ESOP
program 3,682 2,708 10,029 7,211
--------------------------------------------------------------------------
Units outstanding
- End of period 9,597,443 7,585,112 9,597,443 7,585,112
--------------------------------------------------------------------------
--------------------------------------------------------------------------


4. Distribution to Unitholders

As of September 30, 2006, the Fund declared distributions to Unitholders from current year operations of $6,725,000 (2005 - $4,981,000). Per unit distributions declared on account of current year operations are as follows:



Record Payment Taxable Non- Taxable
Date Date Interest Taxable Dividend Total
---------------------------------------------------------------------

01/31/2006 02/15/2006 $0.06856 $0.00444 $ - $0.07300
02/28/2006 03/15/2006 0.06734 0.00566 - 0.07300
03/31/2006 04/13/2006 0.06856 0.00444 0.00200 0.07500
04/28/2006 05/15/2006 0.06856 0.00444 0.00200 0.07500
05/31/2006 06/15/2006 0.06856 0.00444 0.00200 0.07500
06/30/2006 07/14/2006 0.06856 0.00444 0.00200 0.07500
07/31/2006 08/15/2006 0.06856 0.00444 0.00200 0.07500
08/31/2006 09/15/2006 0.06856 0.00444 0.00200 0.07500
09/29/2006 10/13/2006 0.06856 0.00444 0.00200 0.07500
-------------------------------------------
Total $0.61582 $0.04118 $0.01400 $0.67100
-------------------------------------------
-------------------------------------------


In addition, on March 31, 2006 the Fund made a special distribution of $287,719 (2005 - nil), or $0.03 per unit, in respect of additional distributable cash flow available from PRT's 2005 operating results, to Unitholders of record on March 15, 2006.

5. Segmented Information - Geographic Areas

The Company recorded revenues from customers located in the United States in the amount of $4,070,000 and $878,000 in the nine months and three months ending September 30, 2006 respectively ($3,896,000 and $911,000 in the nine months and three months ending September 30, 2005 respectively). In addition, as at September 30, 2006 the Fund's total capital assets located in the USA amounted to $4,921,000 (December 31, 2005 - $5,081,000).

6. Management Agreement and Management Fees

PRT has a Management Agreement with PMI whereby PMI provides management and administration services and strategic advice to PRT, as well as certain individuals to serve in executive positions. The fees under this agreement are reviewed and set annually, at a level necessary to achieve reimbursement, without profit, of PMI's internal costs and out of pocket expenses incurred in providing these services. Management fees are billed monthly in accordance with PMI's budgeted costs for the period. Management fees included in selling, general and administrative expenses totaled $908,000 and $323,000 for the nine months and three months ending September 30, 2006 respectively ($903,000 and $252,000 for the nine months and three months ending September 30, 2005 respectively). Effective January 1, 2005 PMI's operating results are consolidated into the Fund as a Variable Interest Entity.

7. Supplementary cash flow and non-cash investing and financing activities information



Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------
000's
Non-cash financing
activities
Vendor financing $ - $ - $ - $ 135

Non-cash investing
activities
Purchase of property,
plant and equipment $ - $ - $ - $ (135)


INFORMATION

Mailing Office
Pacific Regeneration Technologies Inc.
#101 - 1006 Fort Street
Victoria, BC
Canada, V8V 3K4
Tel: 250-381-1404
Fax: 250-381-0252

Registrar and Transfer Agent
Computershare Investor Services

World Wide Web
www.prtgroup.com

Market Information
Stock symbol: PRT.UN
Stock Exchange: Toronto

Investor Relations
Tel: 250-381-1404 ext. 227
Toll free: 1-866-553-8733
Email: investor_relations@prtgroup.com

PRT Forest Regeneration Income Fund
Board of Trustees
Colin A.C. Dobell
Allan D. Laird
George C. Stevens, Q.C.

Pacific Regeneration Technologies Inc.
Board of Directors and Officers
Colin A.C. Dobell, Chairman & Director
John Kitchen, President & CEO & Director
Allan D. Laird, Director
George C. Stevens, Q.C., Director
Christopher J. Worthy, Vice Chairman & Director
Robert A. Miller, V.P. Finance & Administration, CFO & Secretary
Herb Markgraf, V.P. Business Development
Robert Maxwell, V.P. Production



Contact Information

  • PRT Forest Regeneration Income Fund
    Robert Miller
    VP Finance/CFO
    (866) 553-8733 ext. 227
    Website: www.prtgroup.com