Shiningbank Energy Income Fund
TSX : SHN.UN

Shiningbank Energy Income Fund

November 03, 2006 09:00 ET

Shiningbank Energy Announces Third Quarter 2006 Financial Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 3, 2006) - Shiningbank Energy Income Fund (TSX:SHN.UN) (the "Fund"), today announced its financial results for the three months ended September 30, 2006. Production for the third quarter rose 7% to 22,805 barrels of oil equivalent per day (boe/d) where natural gas is converted to barrels of oil equivalent on the basis of 6 mcf per boe. Revenues, funds flow and net earnings all decreased over the comparable period in 2005 due mainly to lower gas prices. The accompanying table provides additional highlights.



---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Financial
($ thousands except
per Trust Unit
amounts)
Oil and natural gas
sales $ 94,066 $ 111,763 (16) $ 293,120 $ 275,124 7
Earnings before
future
income taxes 4,177 28,259 (85) 34,523 58,163 (41)
Future income tax
recovery (11,500) (2,736) 320 (29,252) (5,988) 389
Net earnings 15,677 30,995 (49) 63,775 64,151 (1)
Funds flow from
operations 51,577 67,721 (24) 167,379 158,583 6
Funds flow from
operations per
weighted average
Trust Unit 0.71 1.11 (36) 2.39 2.79 (14)
Distributions to
unitholders 55,190 45,750 21 159,841 120,875 32
Distributions per
Trust Unit 0.69 0.69 - 2.22 2.07 7
Long term debt 357,564 202,923 76 357,564 202,923 76
Unitholders' equity 997,362 744,769 34 997,362 744,769 34
---------------------------------------------------------------------------
Operations
Daily production
Oil (bbl/d) 2,281 2,282 - 2,246 2,321 (3)
Natural gas
(mmcf/d) 105.2 97.5 8 103.4 88.7 17
Natural gas liquids
(bbl/d) 2,988 2,716 10 2,856 2,959 (3)
Oil equivalent
(boe/d) 22,805 21,252 7 22,343 20,063 11
Average prices
(including
hedging)
Oil ($/bbl) $ 71.41 $ 69.55 3 $ 67.58 $ 60.82 11
Natural gas
($/mcf) $ 6.46 $ 9.26 (30) $ 7.29 $ 8.09 (10)
Natural gas
liquids ($/bbl) $ 60.60 $ 56.04 8 $ 58.29 $ 48.84 19
Oil equivalent
($/boe) $ 44.89 $ 57.18 (21) $ 48.01 $ 50.04 (4)
---------------------------------------------------------------------------
Unit Trading
Units traded
(thousands) 26,213 17,649 49 70,728 36,140 96
Value traded
($ thousands) $ 540,899 $ 424,168 28 $ 1,613,821 $ 823,056 96
Unit price
High $ 23.30 $ 26.18 $ 29.52 $ 26.18
Low $ 16.78 $ 21.50 $ 16.78 $ 19.60
Close $ 17.67 $ 25.86 $ 17.67 $ 25.86
Units outstanding,
end of period
(thousands) 85,738 67,676 85,738 67,676
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The following discussion and analysis of the operating and financial results of Shiningbank Energy Income Fund ("Shiningbank" or the "Fund") for the three and nine month periods ended September 30, 2006. This information is provided as of November 2, 2006. The third quarter and nine month results have been compared with the corresponding periods in 2005. This discussion and analysis should be read in conjunction with the Fund's audited consolidated comparative financial statements for the years ended December 31, 2005 and 2004, together with the accompanying notes, and the Annual Information Form ("AIF") for the year ended December 31, 2005. These documents and additional information about the Fund are available on SEDAR at www.sedar.com.

Non-GAAP Measures

Management believes that funds flow and operating netbacks are useful supplemental measures. All references to funds flow throughout this discussion and analysis are based on funds flow from operations, which management uses to analyze operating performance and leverage. Funds flow as presented is not intended to represent operating cash flow or operating profits, nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with Canadian generally accepted accounting principles ("GAAP"). The Fund considers funds flow a key measure of performance as it demonstrates the Fund's ability to generate the cash flow necessary to fund future distributions and capital investments and repay indebtedness. Operating netback, which is calculated as average unit sales price less royalties, transportation costs and operating costs, represents the cash margin for product sold, calculated on a boe basis. The Fund considers operating netback a key measure as it indicates the relative performance of crude oil and natural gas assets. Funds flow and operating netback as presented do not have any standardized meanings prescribed by Canadian GAAP and therefore may not be comparable with the calculations of similar measures for other entities.

Forward-Looking Statements

This discussion and analysis contains forward-looking statements relating to future events. In some cases, forward-looking statements can be identified by such words as "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" or similar expressions. These statements represent management's best projections, but undue reliance should not be placed upon them as they are derived from numerous assumptions. These assumptions are subject to known and unknown risks and uncertainties, including the business risks discussed in both the Management Discussion and Analysis and the AIF for the year ended December 31, 2005, which may cause actual performance and financial results to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted.

Barrel of Oil Equivalent

Barrel of oil equivalent (boe) volumes are reported at 6:1 with 6 mcf = 1 bbl. The 6:1 boe conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. While it is useful for comparative measures, it may not accurately reflect individual product values and may be misleading if used in isolation.

Reporting Currency

All figures are in Canadian dollars unless otherwise noted.

Recent Developments

Effective September 6, 2006, Shiningbank acquired Find Energy Ltd. ("Find") for consideration of $348.5 million, funded through the issuance of 17,260,137 Trust Units and the assumption of $60.9 million of net debt.

On September 26, 2006, Shiningbank announced that it had entered into a transaction with Rider Resources Ltd. ("Rider") whereby Rider will spin-off substantially all of its undeveloped land and certain properties to a new exploration company (the ownership of which will be transferred to the shareholders of Rider) and Shiningbank will acquire Rider and substantially all of its developed properties. Total consideration is approximately $496 million, including the assumption of approximately $92 million of net debt. The transaction is expected to close in December 2006.

On October 31, the federal government announced its intention to change the way that royalty trusts and income funds are taxed. The proposed changes are not yet enacted and accordingly, there was no impact on the Fund's September 30, 2006 financial statements. If the proposals are enacted as currently written, they will result in taxation of distributions at the Trust level at a rate of 31.5% effective January 1, 2011. As Shiningbank is an existing trust, there will be no impact on cash flow in the four-year transition period. The Fund is currently assessing the proposals and the potential implications to the Fund.



Results of Operations

Production Volumes

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Oil (bbl/d) 2,281 2,282 - 2,246 2,321 (3)
Natural gas (mmcf/d) 105.2 97.5 8 103.4 88.7 17
Natural gas liquids
(bbl/d) 2,988 2,716 10 2,856 2,959 (3)
Oil equivalent (boe/d) 22,805 21,252 7 22,343 20,063 11
---------------------------------------------------------------------------
Natural gas % of
production 77% 76% 1 77% 74% 3
---------------------------------------------------------------------------


Daily production for the third quarter averaged 22,805 boe/d, up 7% from the same period last year. For the nine months ended September 30, 2006, daily production volumes averaged 22,343 boe/d, 11% higher than 2005. The increase was primarily due to the acquisitions of Blizzard Energy Inc. ("Blizzard"), which closed on August 2, 2005, and Find, which closed on September 6, 2006. The Blizzard assets contributed 16% to third quarter 2006 production and 18% to production year to date. The Find assets contributed 7% to third quarter 2006 production and 3% to production year to date. Production growth was partially offset by the natural declines of producing properties, which are estimated to average 15% per year, and by fourth quarter 2005 dispositions which averaged 300 boe/d. Oil and NGL production was lower than in the year to date 2005 comparative period due to natural declines. Production for the remainder of 2006 is anticipated to average 26,000 to 26,500 boe/d including the Find acquisition. The proposed acquisition of Rider will add approximately 8,800 boe/d effective upon closing in early December 2006.



Pricing - Including Hedging Activity

---------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Average prices -
including hedging
Oil ($/bbl) $ 71.41 $ 69.55 3 $ 67.58 $ 60.82 11
Natural gas ($/mcf) $ 6.46 $ 9.26 (30) $ 7.29 $ 8.09 (10)
Natural gas liquids
($/bbl) $ 60.60 $ 56.04 8 $ 58.29 $ 48.84 19
Oil equivalent
($/boe) $ 44.89 $ 57.18 (21) $ 48.01 $ 50.04 (4)
---------------------------------------------------------------------------
Benchmark prices
WTI (US$/bbl) $ 70.48 $ 63.19 12 $ 68.22 $ 55.40 23
AECO natural gas
($/mcf) $ 6.03 $ 8.17 (26) $ 7.19 $ 7.41 (3)
---------------------------------------------------------------------------


Natural Gas

Shiningbank's realized natural gas price averaged $6.46/mcf for the quarter, 30% lower than third quarter 2005. Year to date, the average price was 10% lower at $7.29. Hedging activity increased the realized gas price by $0.18/mcf for the quarter and $0.12/mcf year to date. This compares with a 2005 hedging loss of $0.14/mcf for the quarter and $0.06/mcf for the nine month period. Shiningbank has historically received a premium gas price to AECO benchmark monthly prices, but this was reduced in first quarter 2006 due to a reduction in daily versus monthly index gas prices. This variation did not occur in the second or third quarter and is not expected in the remainder of 2006, but could occur again in periods of rapidly weakening daily prices. Natural gas prices are expected to recover this winter and futures prices for 2007 are currently over $7.50/mcf.

Oil and Natural Gas Liquids

Realized oil prices for the quarter averaged $71.41/bbl, up 3% from third quarter 2005. Realized oil prices for the first nine months were $67.58/bbl, up 11% from the same period in 2005. Hedging had no effect on the price for either time period. This compares with 2005 hedging losses of $2.01/bbl for the quarter and $1.08/bbl year to date.

The benchmark West Texas Intermediate price averaged 12% higher for the quarter and 23% year to date; however, the relative strength of the Canadian dollar moderated the impact of the higher US dollar prices. Oil prices are expected to remain high in US dollar terms, with futures prices currently averaging over US$65.00/bbl for 2007.

NGL prices were also strong reflecting high oil prices. The quarterly average NGL price was 8% higher than in third quarter 2005 at $60.60/bbl, and 19% higher year to date at $58.29/bbl. Shiningbank's NGL prices typically average approximately 80% of Edmonton par oil prices. In third quarter 2006, the Fund's NGL prices averaged 85%, slightly higher than usual due to strong demand for NGL for use as diluent in the transportation of heavy oil.

Hedging

Shiningbank maintains an active hedging program designed to reduce the variability of funds flow and stabilize distributions. Under the Fund's hedging policy, not more than one-half of production volumes of any commodity can be hedged at any one time. Gains and losses from hedging activities are recorded when they are realized and are included in oil and natural gas sales unless a particular hedge is considered ineffective for accounting purposes. Currently, Shiningbank has the following hedging contracts in place, all of which are considered effective for accounting purposes:



Period Commodity Volume Price
---------------------------------------------------------------------------
April 1, 2006
- October 31, 2006 Gas 5,000 GJ/d $7.50/GJ floor
$12.00/GJ ceiling
May 1, 2006
- October 31, 2006 Gas 10,000 GJ/d $5.50/GJ floor
$9.75/GJ ceiling
July 1, 2006
- March 31, 2007 Gas 5,000 GJ/d $6.00/GJ floor
$10.05/GJ ceiling
July 1, 2006
- March 31, 2007 Gas 5,000 GJ/d $6.25/GJ floor
$10.50/GJ ceiling
July 1, 2006
- October 31, 2006 Gas 5,000 GJ/d $6.47/GJ

September 1, 2006
- December 31, 2006 Gas 10,000 GJ/d $6.65/GJ

November 1, 2006
- March 31, 2007 Gas 5,000 GJ/d $8.55/GJ floor
$11.50/GJ ceiling
December 1, 2006
- March 31, 2007 Gas 5,000 GJ/d $6.75/GJ floor
$9.70/GJ ceiling
January 1, 2007
- December 31, 2007 Gas 10,000 GJ/d $6.50/GJ floor
$9.00/GJ ceiling
July 1, 2006
- December 31, 2006 Oil 500 bbl/d US$55.00/bbl floor
US$89.10/bbl ceiling
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Revenues

Three months ended September 30,
---------------------------------------------------------------------------
% of % of
(000s) 2006 Revenue 2005 Revenue
---------------------------------------------------------------------------
Oil $ 14,982 16 $ 15,024 13
Natural gas 60,752 64 84,486 76
Natural gas liquids 16,661 18 14,004 12
Other income (loss) (120) - (40) -
Gas hedging 1,791 2 (1,288) (1)
Oil hedging - - (423) -
---------------------------------------------------------------------------
$ 94,066 100 $ 111,763 100
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Nine months ended September 30,
---------------------------------------------------------------------------
% of % of
(000s) 2006 Revenue 2005 Revenue
---------------------------------------------------------------------------
Oil $ 41,430 14 $ 39,217 14
Natural gas 202,542 69 197,417 72
Natural gas liquids 45,449 16 39,457 14
Other income (loss) 281 - 1,037 -
Gas hedging 3,418 1 (1,324) -
Oil hedging - - (680) -
---------------------------------------------------------------------------
$ 293,120 100 $ 275,124 100
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The accompanying table demonstrates the net effect of price and volume
variances on revenues.

Sales Variance Analysis (Including Hedging Activity)

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
(000s) 2006/2005 2006/2005
---------------------------------------------------------------------------
Oil and natural gas liquids
Volume increase (decrease) $ 1,396 $ (2,622)
Price increase 1,642 11,507
---------------------------------------------------------------------------
Net increase $ 3,038 $ 8,885
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Natural gas
Volume increase $ 6,555 $ 32,598
Price decrease (27,210) (22,731)
---------------------------------------------------------------------------
Net increase (decrease) $(20,655) $ 9,867
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Royalties

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Total royalties, net
(000s) $ 16,971 $ 23,320 (27) $ 53,406 $ 58,924 (9)
As a % of revenue 18.0% 20.9% (14) 18.2% 21.4% (15)
Per boe $ 8.09 $ 11.93 (32) $ 8.76 $ 10.76 (19)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Royalty expense consists of royalties paid to provincial governments, freehold landowners and overriding royalty owners. The royalty rate decreased by 14% in the third quarter and 15% year to date due to production from the Sousa area where the Fund has lower royalty rates, combined with several one-time recoveries. The Fund expects royalty rates to average 20% for the remainder of 2006, including the effect of the Find properties which have slightly higher royalty rates.



Transportation Costs

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Transportation costs
(000s) $ 1,557 $ 1,400 11 $ 4,389 $ 3,642 21
Per boe $ 0.74 $ 0.72 3 $ 0.72 $ 0.66 9
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Transportation costs increased 3% on a boe basis from third quarter 2005 and 9% year to date due to higher transportation costs related to the Blizzard properties. Transportation costs are expected to average $0.75/boe for the remainder of 2006.



Operating Costs

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Operating costs
(000s) $ 17,238 $ 14,034 23 $ 50,436 $ 39,755 27
Per boe $ 8.22 $ 7.18 14 $ 8.27 $ 7.26 14
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Operating costs on a boe basis increased 14% from third quarter 2005 and 14% year over year due to industry cost pressures, higher fuel and power costs together with workover costs at Sousa in the first quarter. The increases were partially offset by the Blizzard properties which have lower operating costs. Operating costs are expected to decline to $7.50/boe for the remainder of 2006 with lower operating cost properties from Find contributing to the reduction in this rate in the fourth quarter.



Operating Netbacks

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
($/boe) 2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Oil and natural gas
sales $ 44.89 $ 57.18 (21) $ 48.01 $ 50.04 (4)
Other income (loss) (0.06) (0.02) 200 0.05 0.19 (74)
Royalties (8.09) (11.93) (32) (8.76) (10.76) (19)
Transportation costs (0.74) (0.72) 3 (0.72) (0.66) 9
Operating costs (8.22) (7.18) 14 (8.27) (7.26) 14
---------------------------------------------------------------------------
Operating netbacks $ 27.78 $ 37.33 (26) $ 30.31 $ 31.55 (4)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Total operating netbacks decreased 26% quarter over quarter and 4% year to date due mainly to lower natural gas prices and higher operating costs. This decrease was partially offset by lower royalty costs.



General and Administrative Costs

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
General and
administrative
costs (000s) $ 2,362 $ 2,101 12 $ 7,231 $ 6 ,028 20
Per boe $ 1.13 $ 1.07 6 $ 1.19 $ 1.10 8
Per average Trust
Unit $ 0.03 $ 0.03 - $ 0.10 $ 0.11 (9)
--------------------------------------------------------------------------


General and administrative costs increased 6% on a boe basis from third quarter 2005 and 8% year over year due to higher activity levels related to acquisitions and development activities, higher costs due to additional regulatory requirements and significant pressure on salaries and benefits in a very competitive environment for staff. General and administrative costs are expected to be approximately $1.50/boe for full year 2006, including incremental costs from the Find acquisition compared to $1.34/boe for 2005.



Interest on Long Term Debt

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Interest on long
term debt (000s) $ 4,263 $ 2,617 63 $ 10,202 $ 6,392 60
Per boe $ 2.03 $ 1.34 51 $ 1.67 $ 1.17 43
Per average Trust
Unit $ 0.06 $ 0.04 50 $ 0.15 $ 0.11 36
---------------------------------------------------------------------------


Interest expense per average Trust Unit increased 50% from third quarter 2005 and 36% for the nine month period. The increase was due to higher debt levels resulting from an active development program, the Find acquisition and higher interest rates. Shiningbank is currently in compliance with all external debt covenants. All of Shiningbank's debt is floating rate bank debt. Interest expense for the remainder of 2006 is expected to be approximately $1.75/boe.




Depletion, Depreciation and Accretion

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Depletion,
depreciation and
accretion (000s) $ 46,337 $ 38,451 21 $ 129,629 $ 98,455 32
Per boe $ 22.09 $ 19.67 12 $ 21.25 $ 17.98 18
---------------------------------------------------------------------------


Depletion, depreciation and accretion per boe rose 12% for the third quarter and 18% for the nine month period. The increase was primarily related to the acquisition of Outlook Energy Corp. ("Outlook") in the second quarter of 2005, the Blizzard acquisition in third quarter 2005 and the Find acquisition in September 2006.



Trust Unit Incentive Compensation

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Trust Unit incentive
compensation (000s) $ 940 $ 643 46 $ 2,856 $ 1,865 53
Per boe $ 0.45 $ 0.33 36 $ 0.47 $ 0.34 38
---------------------------------------------------------------------------


During third quarter 2006, three new issues aggregating 80,000 Trust Unit rights were granted (2005 - four issues totalling 80,000 Trust Unit rights). Eight new issues of rights aggregating 981,000 (2005 - 847,500) have been granted during the year. The fair value of rights issued was determined using a Black-Scholes model and will be brought into income over the vesting period of the rights. The total third quarter 2006 expense of $940,000 (2005 - $643,000) represented the fair value of rights issued during 2003 through to third quarter 2006. During the first nine months of 2006, the total expense was $2.9 million (2005 - $1.9 million). All of these costs are "non-cash" costs and are not deducted in determining distributions to unitholders.



Internalization of Management Contract

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Internalization of
management contract
(000s) $ 123 $ 368 (67) $ 371 $ 1,104 (66)
Per boe $ 0.06 $ 0.19 (68) $ 0.06 $ 0.20 (70)
---------------------------------------------------------------------------


Effective October 9, 2002, the Fund internalized its management by acquiring all of the shares of Shiningbank Energy Management Inc., the former manager of the Fund. Prior to the acquisition, the Fund paid a fee equal to 3.25% of net operating income, a fee equal to 1.5% of the purchase price of acquisitions and a quarterly scheduled dividend in accordance with the terms of a management agreement. The acquisition eliminated all future fees and dividends.

Of the total purchase price of $20.6 million, $11.0 million was deferred, representing Exchangeable Shares subject to escrow provisions which are being amortized into income over specific vesting periods through 2007. During third quarter 2006, $123,000 (2005 - $368,000) was expensed, representing the amortization of these escrowed Exchangeable Shares. During the first nine months of 2006, $371,000 was expensed (2005 - $1.1 million).



Taxes

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Capital and large
corporations
taxes (000s) $ 98 $ 570 (83) $ 77 $ 796 (90)
Future income tax
recovery (000s) $ (11,500) $ (2,736) 320 $ (29,252) $ (5,988) 389
Per boe $ (5.43) $ (1.11) 389 $ (4.79) $ (0.94) 410
---------------------------------------------------------------------------


The Fund is obligated to pay provincial capital taxes in its operating entities. Under the Fund's structure, payments are made from Shiningbank Energy Ltd. to the Fund. These payments provide the mechanism for transferring income to unitholders along with tax benefits and future tax liabilities. Current income taxes are not presently payable by the Fund or its operating entities. First quarter 2006 provisions for federal large corporations tax were reversed in second quarter reflecting recently introduced changes to the Tax Act. Future income taxes were also lower mainly due to lower tax rates enacted in the second quarter of 2006.



Earnings

The following table sets out changes in earnings before and after income
taxes.

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Earnings before
future income
taxes (000s) $ 4,177 $ 28,259 (85) $ 34,523 $ 58,163 (41)
Per Trust Unit
- basic $ 0.06 $ 0.46 (87) $ 0.49 $ 1.02 (52)
Per Trust Unit
- diluted $ 0.06 $ 0.46 (87) $ 0.49 $ 1.01 (51)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net earnings (000s) $ 15,677 $ 30,995 (49) $ 63,775 $ 64,151 (1)
Per Trust Unit
- basic $ 0.21 $ 0.51 (59) $ 0.91 $ 1.13 (19)
Per Trust Unit
- diluted $ 0.21 $ 0.50 (58) $ 0.90 $ 1.11 (19)
---------------------------------------------------------------------------

Distributions to Unitholders

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
(000s except per
Trust Unit amounts) 2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Funds flow from
operations $ 51,577 $ 67,721 (24) $ 167,379 $ 158,583 6
Capital expenditures (23,692) (24,690) (4) (100,519) (50,422) 99
Asset retirement
expenditures (454) 32 (1,519) (1,837) (878) 109
Working capital
adjustments 27,759 2,687 933 94,818 13,592 598
---------------------------------------------------------------------------
Distributions to
unitholders $ 55,190 $ 45,750 21 $ 159,841 $ 120,875 32
---------------------------------------------------------------------------
Distributions per
Trust Unit $ 0.69 $ 0.69 - $ 2 .22 $ 2 .07 7
---------------------------------------------------------------------------
Trust Units
outstanding,
end of period 85,738 67,676 27 85,738 67,676 27
---------------------------------------------------------------------------
Payout ratio 107% 68% 95% 76%
---------------------------------------------------------------------------


Total distributions to unitholders increased 21% from third quarter 2005 and 32% year over year. The increases were attributable to improved funds flow due mainly to higher production volumes. The increase in the number of Trust Units outstanding and higher capital expenditures partially offset the higher funds flow. The Fund paid out 107% of its funds flow for third quarter 2006 and 95% year to date (2005 - 68% third quarter, 76% year to date). Due to the timing of the Find acquisition, distributions for the production months of August (paid October 15) and September (paid November 15) were paid on the Trust Units issued to the former shareholders of Find, yet funds flow from the Find properties were only recorded effective September 6, 2006. Synchronizing the distribution with the funds flow would have resulted in a 99% payout ratio for the third quarter and 93% year to date. Accumulated Trust Unit distributions since inception total $850.1 million.

On a per Trust Unit basis, distributions increased 7% for the first nine months of 2006 compared to 2005 and remained consistent with the third quarter of 2005. Distributions in fourth quarter 2005 were increased to $0.30 per Trust Unit from $0.23 per Trust Unit which had been paid since June 2003. This increase reflected stable production performance and strength in natural gas prices. Due to the weakening in natural gas prices in 2006, distributions were decreased to $0.25 per Trust Unit for the distribution paid on April 15, 2006 with a further decrease to $0.23 per Trust Unit for the distribution payable on August 15, 2006. Future distributions are subject to change as dictated by commodity prices, operations and future business development.

Funds Flow from Operations

The following table reconciles a non-GAAP measure, funds flow from operations, to the nearest GAAP measure, cash flow from operating activities.



Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
(000s) 2006 2005 % 2006 2005 %
---------------------------------------------------------------------------
Cash flow from
operating
activities $ (7,269) $ 20,627 (135) $ 107,230 $ 124,151 (14)
Change in non-cash
working capital 58,392 47,126 24 58,312 33,554 74
Asset retirement
expenditures 454 (32) (1,519) 1,837 878 109
---------------------------------------------------------------------------
Funds flow from
operations $ 51,577 $ 67,721 (24) $ 167,379 $ 158,583 6
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Quarterly Financial Information
(000s except per September 30, June 30, March 31, December 31,
Trust Unit amounts) 2006 2006 2006 2005
---------------------------------------------------------------------------
Oil and natural gas sales $ 94,066 $ 93,011 $ 106,043 $ 144,539
Earnings before future income
taxes 4,177 9,797 20,549 49,336
Per Trust Unit - basic 0.06 0.14 0.30 0.72
- diluted 0.06 0.14 0.30 0.71
Net earnings 15,677 23,896 24,202 50,085
Per Trust Unit - basic 0.21 0.35 0.35 0.73
- diluted 0.21 0.35 0.35 0.72
Funds flow from operations 51,577 53,349 62,453 94,181
Per weighted average
Trust Unit 0.71 0.78 0.91 1.38
Distributions to unitholders 55,190 49,956 54,695 61,391
Per Trust Unit 0.69 0.73 0.80 0.90
Payout ratio 107% 94% 88% 65%
---------------------------------------------------------------------------

September 30, June 30, March 31, December 31,
2005 2005 2005 2004
---------------------------------------------------------------------------
Oil and natural gas sales $ 111,763 $ 83,222 $ 80,139 $ 82,453
Earnings before future
income taxes 28,259 17,015 12,889 13,974
Per Trust Unit - basic 0.46 0.31 0.24 0.26
- diluted 0.46 0.31 0.23 0.25
Net earnings 30,995 18,781 14,375 88,038
Per Trust Unit - basic 0.51 0.34 0.26 1.62
- diluted 0.50 0.34 0.26 1.60
Funds flow from operations 67,721 46,353 44,509 47,220
Per weighted average
Trust Unit 1.11 0.85 0.81 0.87
Distributions to unitholders 45,750 37,628 37,497 37,390
Per Trust Unit 0.69 0.69 0.69 0.69
Payout ratio 68% 81% 84% 79%
---------------------------------------------------------------------------


Quarterly fluctuations primarily result from production increases due to acquisitions, volumes added through the Fund's development drilling program, and changes in realized commodity prices which can be extremely volatile.

Volume increases occurred through the acquisition of Outlook in second quarter 2005, the acquisition of Blizzard in third quarter 2005, and again with the Find acquisition in third quarter 2006. The Fund's development drilling program strives to replace natural declines on the production base, with results affected by such factors as field conditions, availability of drilling and production equipment and drilling success. Shiningbank's drilling success rate in the first nine months of 2006 was 98%.

Natural gas prices have been strong through the past eight quarters with a sharp increase in third and fourth quarter 2005 followed by a return to more normal levels in 2006. Third quarter 2006 natural gas prices declined substantially and, while strong relative to historical levels, they have weakened significantly from earlier in 2006 and late 2005 due to a surplus of natural gas inventories. Oil prices increased substantially in late 2004 and continued to rise in 2005 and 2006 although prices have weakened early in fourth quarter 2006. Distributions per Trust Unit increased 7% for year to date 2006 from the same period in 2005 based on overall production growth and the strength in pricing for oil and NGL. The increase in funds flow was used to fund capital expenditures and to pay distributions on a greater number of Trust Units outstanding.

Costs for Development Activities

A total of $23.7 million was spent on drilling and new facilities during third quarter 2006 and $100.5 million year to date 2006, compared with $24.7 million and $50.4 million, respectively, for the same periods in 2005. Funds flow contributed $7.5 million of the year to date expenditures, with the balance funded by bank debt, proceeds from the Fund's Distribution Reinvestment Plan ("DRIP") and working capital drawdown. The third quarter expenditures were funded substantially by bank debt, proceeds from the DRIP and working capital drawdown.

A total of 151 wells (92.9 net) were drilled in the first nine months of 2006, of which 128 (86.2 net) were successful gas wells, 20 (4.6 net) were successful oil wells, one (0.1 net) was a service well and two (2.0 net) were dry and abandoned.

In the remainder of 2006, the Fund plans to spend an additional $35 to $40 million, inclusive of potential spending relating to the Rider acquisition, on drilling, tie-ins, new facilities and maintenance capital. This will be funded through a combination of bank debt, proceeds from the DRIP and funds flow.

Liquidity and Capital Resources

Shiningbank's ability to grow depends on access to bank lines of credit and periodic issues of new equity to fund acquisitions. Smaller acquisitions through the course of a year may be funded by a combination of bank debt, funds flow and proceeds from the DRIP. Equity is issued to fund single large acquisitions, or to pay down bank debt accumulated following a number of smaller acquisitions. When the proceeds of an equity issue are greater than acquisition costs, the excess is used to reduce bank debt.

Long Term Debt

The Fund currently has a $480 million revolving credit facility, which was increased from $365 million in September 2006, of which $357.6 million was drawn at September 30, 2006. The revolving period extends to April 25, 2007, at which time the facility, unless renewed, reverts to a two-year term with principal payments, if necessary, commencing on July 26, 2007. The facility is secured by a $600 million floating charge debenture on all assets of Shiningbank together with supporting debentures and guarantees from the Fund's material subsidiaries and affiliates. Borrowings under the facility bear interest at an annual rate ranging from the banks' prime rate to the banks' prime rate plus 0.95%, depending on the Fund's total debt to funds flow ratio or, at Shiningbank's option, the bankers' acceptance rate plus a stamping fee. At September 30, 2006, the debt to annualized funds flow ratio was 1.7:1. This ratio is unusually high as a result of the inclusion of the Find debt at quarter-end without a corresponding quarter of funds flow. This effect will be normalized in the fourth quarter, however, a similar effect is expected to occur from the Rider acquisition which is expected to close in early December 2006.

Unitholders' Equity

A total of 51,002 Trust Units were issued during the third quarter (291,714 year to date) under the Trust Unit Rights Incentive Plan and the DRIP.

When equity is raised in a public equity issue, the intended use of proceeds is specified in the related prospectus. Each major equity issue has been undertaken to acquire properties or to reduce debt incurred from prior acquisitions. In all cases, the proceeds were used according to the purpose specified.

As of November 2, 2006, the Fund had 85,756,582 Trust Units, 260,100 non-escrowed Exchangeable Shares and 75,775 escrowed Exchangeable Shares outstanding. The remaining Exchangeable Shares held in escrow will be released in October 2007. Exchangeable Shares are not eligible for distributions until they are exchanged for Trust Units at the discretion of the holder. The exchange rate was initially one Trust Unit for each Exchangeable Share. The exchange rate increases with each distribution by an amount equal to the per unit distribution divided by the 10-day weighted average trading price of the Trust Units preceding the record date for that distribution. As of September 30, 2006, the exchange rate was 1.54775 Trust Units for each Exchangeable Share.



Contractual Obligations
Payments Due by Period
---------------------------------------------------------------------------
Less than 1-3 4-5 After
(000s) Total 1 Year Years Years 5 Years
---------------------------------------------------------------------------
Long term debt
principal(1) $ 357,564 $ - $ 357,564 $ - $ -
Operating leases 12,088 2,561 5,998 3,498 31
Pipeline transportation 2,575 1,139 1,436 - -
---------------------------------------------------------------------------
Total obligations $ 372,227 $ 3,700 $ 364,998 $ 3,498 $ 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Assumes that the revolving credit facility is not renew ed in April
2007.


Shiningbank has ongoing capital commitments in the ordinary course of business for development drilling, equipment and facilities. These are funded through a combination of funds flow, proceeds from the DRIP, debt financing and periodic equity financing.

Critical Accounting Estimates

The Fund makes numerous accounting estimates in its financial statements in order to provide timely information to users. A critical accounting estimate is one that requires management to make assumptions about matters that are highly uncertain at the time the estimate is made and, if a different estimate was used, financial results would be materially different. The following estimates are considered critical:

Reserves

The Fund must estimate its oil and gas reserves. Reserves are evaluated and reported on annually by independent petroleum reserve evaluators who use various subjective factors and assumptions, including forecasts of costs based on geological and engineering data, projected future rates of production, and timing and amounts of future development costs. Although reserves are estimated, management believes the estimates are reasonable based on information available at the time the estimates were prepared. Management, the Fund's internal engineers, and the Environment, Health, Safety and Reserve Committee of the Board of Directors of Shiningbank Energy Ltd. all review the estimates reported by the independent reserve evaluators.
As new information becomes available, changes are made to the reserve estimates and future development cost estimates. Historically, the Fund has had no significant changes to these estimates, with the exception of adjusting reserves for acquisitions and divestitures and the results of new drilling. Future actual results could vary greatly from the estimates made, resulting in material changes to the depletion calculation and the asset impairment test.

Asset Retirement Obligations

The Fund's estimated asset retirement obligations are based on estimated timing and costs to abandon and restore properties and facilities.

Related Party Transactions

During the nine months ended September 30, 2006, Shiningbank incurred $174,000 for legal services (2005 - $830,000) provided by a firm in which a current director is a partner, none of which was outstanding at September 30, 2006. These payments were made in the normal course of operations, on commercial terms, and therefore were recorded at cost.



Consolidated Balance Sheets
September 30, December 31,
(unaudited) ($ thousands) 2006 2005
---------------------------------------------------------------------------

Assets
Current assets
Accounts receivable $ 73,033 $ 76,945
Prepaid expenses 9,510 6,747
---------------------------------------------------------------------------
82,543 83,692
Fixed assets
Petroleum and natural gas properties and
equipment 2,061,114 1,539,488
Accumulated depletion and depreciation (633,174) (505,150)
---------------------------------------------------------------------------
1,427,940 1,034,338
Goodwill 131,740 51,124
Other assets 499 426
---------------------------------------------------------------------------
$ 1,642,722 $ 1,169,580
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities and Unitholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 77,709 $ 78,332
Trust Unit distributions payable 39,444 40,950
---------------------------------------------------------------------------
117,153 119,282
Long term debt (note 2) 357,564 199,129
Future income taxes 139,077 83,829
Asset retirement obligation 31,566 30,348
Unitholders' equity
Trust Units (note 4) 1,350,516 996,855
Exchangeable Shares (note 4) 4,619 4,248
Contributed surplus (note 4) 5,768 3,364
Deficit (363,541) (267,475)
---------------------------------------------------------------------------
997,362 736,992
---------------------------------------------------------------------------
Commitments and contingencies (note 7)
Subsequent events (note 9)
$ 1,642,722 $ 1,169,580
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See selected accompanying notes to the interim financial statements


Consolidated Statements of Earnings and Deficit

(unaudited) ($ thousands, Three months ended Nine months ended
except per Trust September 30, September 30,
Unit amounts) 2006 2005 2006 2005
---------------------------------------------------------------------------
Revenues
Oil and natural gas
sales $ 94,066 $ 111,763 $ 293,120 $ 275,124
Royalties 16,971 23,320 53,406 58,924
---------------------------------------------------------------------------
77,095 88,443 239,714 216,200
Expenses
Transportation 1,557 1,400 4,389 3,642
Operating 17,238 14,034 50,436 39,755
General and
administrative 2,362 2,101 7,231 6,028
Interest on long term
debt 4,263 2,617 10,202 6,392
Depletion, depreciation
and accretion 46,337 38,451 129,629 98,455
Trust Unit incentive
compensation (note 4) 940 643 2,856 1,865
Internalization of
management contract 123 368 371 1,104
---------------------------------------------------------------------------
72,820 59,614 205,114 157,241
---------------------------------------------------------------------------
Earnings before taxes 4,275 28,829 34,600 58,959
Capital and large
corporations taxes 98 570 77 796
Future income tax
recovery (11,500) (2,736) (29,252) (5,988)
---------------------------------------------------------------------------
Net earnings $ 15,677 $ 30,995 $ 63,775 $ 64,151
Deficit, beginning of
period (324,028) (241,414) (267,475) (199,445)
Distributions to
unitholders (55,190) (45,750) (159,841) (120,875)
---------------------------------------------------------------------------

Deficit, end of period $ (363,541) $ (256,169) $ (363,541) $ (256,169)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net earnings per Trust
Unit (note 4)
Basic $ 0.21 $ 0.51 $ 0.91 $ 1.13
Diluted $ 0.21 $ 0.50 $ 0.90 $ 1.11
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See selected accompanying notes to the interim financial statements


Consolidated Statements of Cash Flows

Three months ended Nine months ended
September 30, September 30,
(unaudited) ($ thousands) 2006 2005 2006 2005
---------------------------------------------------------------------------
Operating activities
Net earnings $ 15,677 $ 30,995 $ 63,775 $ 64,151
Items not requiring cash
Depletion, depreciation
and accretion 46,337 38,451 129,629 98,455
Internalization of
management contract 123 368 371 1,104
Trust Unit incentive
compensation 940 643 2,856 1,865
Gain on sale of other
assets - - - (1,004)
Future income tax
recovery (11,500) (2,736) (29,252) (5,988)
---------------------------------------------------------------------------
Funds flow from
operations 51,577 67,721 167,379 158,583
Asset retirement
expenditures (454) 32 (1,837) (878)
Change in non-cash
working capital (note 5) (58,392) (47,126) (58,312) (33,554)
---------------------------------------------------------------------------
(7,269) 20,627 107,230 124,151
---------------------------------------------------------------------------
Financing activities
Increase in long term
debt 78,221 (4,509) 158,435 20,776
Distributions to
unitholders (55,190) (45,750) (159,841) (120,875)
Issue of Trust Units 1,078 98,408 6,108 104,764
---------------------------------------------------------------------------
24,109 48,149 4,702 4,665
Change in non-cash
working capital (note 5) 6,595 6,040 (1,506) 6,209
---------------------------------------------------------------------------
30,704 54,189 3,196 10,874
---------------------------------------------------------------------------
Investing activities
Property acquisitions (909) (1,942) (6,516) (3,275)
Corporate acquisitions (1,340) (47,659) (1,340) (79,019)
Capital expenditures (23,692) (24,690) (100,519) (50,422)
Proceeds on sale of
properties - 5 - (51)
Proceeds on sale of other
assets - - - 1,336
---------------------------------------------------------------------------
(25,941) (74,286) (108,375) (131,431)
Change in non-cash
working capital (note 5) 2,506 (530) (2,051) (3,594)
---------------------------------------------------------------------------
(23,435) (74,816) (110,426) (135,025)
---------------------------------------------------------------------------
Change in cash $ - $ - $ - $ -
Cash, beginning of period - - - -
---------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See selected accompanying notes to the interim financial statements


Notes to the Consolidated Financial Statements
For the periods ended September 30, 2006 and 2005
(Tabular amounts are in $ thousands, except Trust Units and per Trust Unit
amounts)


1. Significant Accounting Policies

The interim consolidated financial statements of Shiningbank Energy Income Fund ("Shiningbank" or the "Fund") have been prepared by management using Canadian generally accepted accounting principles and follow the same accounting principles and methods of computation as the audited annual consolidated financial statements for the year ended December 31, 2005 unless otherwise disclosed. The disclosures provided below are incremental to those included with the audited annual consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and the notes thereto in the Fund's 2005 financial report.

2. Long Term Debt

Shiningbank Energy Ltd. (the "Corporation") maintains a $480 million revolving credit facility (increased from $365 million in September 2006) with a syndicate of Canadian chartered banks of which $357.6 million was drawn at September 30, 2006. Borrowings under the credit facility bear interest at an annual rate ranging from the banks' prime rate to the banks' prime rate plus 0.95%, depending on the total debt to funds flow ratio, or, at the Corporation's option, the bankers' acceptance rate plus a stamping fee. The credit facility is secured by a $600 million floating charge debenture on all assets of the Corporation together with supporting debentures and guarantees from the Fund's material subsidiaries and affiliates. The revolving period extends to April 25, 2007, at which time the credit facility, unless renewed, reverts to a two-year term with the principal payments, if necessary, commencing on July 26, 2007.

3. Business Acquisition

Acquisition of Find Energy Ltd.

Effective September 6, 2006, the Corporation acquired Find Energy Ltd. ("Find") pursuant to a take-over bid for $348.5 million. The acquisition was accounted for by the purchase method and the results of operations of Find are included in the accounts from the closing date. The following allocation of net assets acquired is a preliminary calculation which is subject to change.



---------------------------------------------------------------------------
Fair value of Shiningbank Trust Units issued $ 347,101
Related fees and expenses 1,365
---------------------------------------------------------------------------
Cost of acquisition $ 348,466
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Debt and working capital deficiency $ (60,889)
Future income taxes (84,500)
Asset retirement obligation (4,198)
Goodwill 80,616
Petroleum and natural gas properties and equipment 417,437
---------------------------------------------------------------------------
Total consideration $ 348,466
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. Trust Units

(a) Authorized

300,000,000 Trust Units

(b) Issued

Number Amount
---------------------------------------------------------------------------
Balance, December 31, 2005 68,186,198 $ 996,855
Issued on acquisition (note 3) 17,260,137 347,101
Issued for cash under Distribution
Reinvestment Plan 177,049 4,290
Issued on exercise of rights 114,665 1,851
Less: Commissions and issue costs (33)
Transfer from contributed surplus on
exercise of rights 452
---------------------------------------------------------------------------
Balance, September 30, 2006 85,738,049 $ 1,350,516
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(c) Exchangeable Shares (1)

Number Amount
---------------------------------------------------------------------------
Balance, December 31, 2005 184,326 $ 4,248
Amortization of deferred portion 371
---------------------------------------------------------------------------
Balance, September 30, 2006 184,326 $ 4,619
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Exchange ratio, September 30, 2006 1.54775
---------------------------------------------------------------------------
Trust Units issuable upon conversion of
non-escrowed shares 285,291
Trust Units issuable upon conversion of
151,549 escrowed shares 234,560
---------------------------------------------------------------------------
Total Trust Units issuable upon
conversion of all shares 519,851
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Exchangeable Shares are non-transferable.


(d) Trust Unit Rights Incentive Plan

At September 30, 2006, there were 2,673,002 (2005 - 1,896,667) rights
outstanding, of which 1,002,002 (2005 -- 537,500) were exercisable at a
weighted average exercise price of $13.56 (2005 - $13.16).


Weighted Average
Rights Number Exercise Price
---------------------------------------------------------------------------
Balance, December 31, 2005 1,855,000 $ 16.74
Granted 981,000 $ 28.07
Exercised (114,665) $ 16.14
Forfeited (48,333) $ 24.24
---------------------------------------------------------------------------
Balance before reduction of exercise price 2,673,002 $ 20.79
Reduction of exercise price (1.14)
---------------------------------------------------------------------------
Balance, September 30, 2006 2,673,002 $ 19.65
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The following table summarizes information about Trust Unit rights
outstanding and exercisable at September 30, 2006:

Rights Outstanding Rights Exercisable
---------------------------------------------------------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of Exercise September Contractual Exercise September Exercise
Prices 30, 2006 Life (Yrs) Price 30, 2006 Price
---------------------------------------------------------------------------
$ 8.00 to $14.99 899,501 6.3 $ 12.28 744,501 $ 11.76
$ 15.00 to $20.99 847,501 8.4 $ 18.87 244,168 $ 18.58
$ 21.00 to $28.99 926,000 9.3 $ 27.53 13,333 $ 22.38
---------------------------------------------------------------------------
$ 8.00 to $28.99 2,673,002 8.0 $ 19.65 1,002,002 $ 13.56
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Shiningbank recorded Trust Unit incentive compensation expense of $2.9
million for the nine months ended September 30, 2006 (2005 -- $1.9 million)
and $940,000 for the quarter (2005 - $643,000) for rights issued between
2003 and 2006. This expense is related to costs reported in general and
administrative expenses on the statement of earnings and deficit.

The following table reconciles the movement in the contributed surplus
balance:

Amount
---------------------------------------------------------------------------
Balance, December 31, 2005 $ 3,364
Trust Unit incentive compensation 2,856
Net benefit on rights exercised (1) (452)
---------------------------------------------------------------------------
Balance, September 30, 2006 $ 5,768
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Upon exercise, the net benefit is reflected as a reduction of
contributed surplus and an increase to unitholders' equity.


The $5.9 million fair value of the 981,000 rights issued during the nine months ended September 30, 2006 - $6.06 per right (2005 - $4.67 per right) was estimated using a Black-Scholes option-pricing model with the following assumptions: risk-free interest rates of 4.0% to 4.6% (2005 -- 3.8% to 4.2%), volatility of 60%, life of 10 years, and a dividend yield rate of 10% representing the difference between the anticipated distribution and the anticipated reduction in the strike price. Users are cautioned that the assumptions made are estimates of future events and actual results could differ materially from those estimated.

(e) Per Trust Unit amounts

For the nine months ended September 30, 2006, the weighted average number of Trust Units and non-escrowed Exchangeable Shares outstanding was 70,159,480 (2005 - 56,797,492) and for the three months ended September 30, 2006 was 73,149,561 (2005 -- 60,895,421). In computing diluted net earnings per Trust Unit, the dilutive effect of unit rights and escrowed Exchangeable Shares added 422,796 Trust Units (2005 -- 811,028) for the nine months, and 318,529 (2005 -- 848,169) for the quarter to the weighted average number of Trust Units outstanding.



5. Other Cash Flow Disclosures

Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Change in non-cash operating
working capital
Business acquisitions
(note 3) $ (60,889) $ (44,252) $ (60,889) $ (44,748)
Accounts receivable (13,200) (19,973) 3,912 (13,235)
Prepaid expenses (2,970) (2,850) (2,763) (2,835)
Accounts payable and accrued
liabilities 18,667 19,949 1,428 27,264
---------------------------------------------------------------------------
$ (58,392) $ (47,126) $ (58,312) $ (33,554)
---------------------------------------------------------------------------
Change in non-cash financing
working capital
Distributions payable to
unitholders $ 6,595 $ 6,040 $ (1,506) $ 6,209
---------------------------------------------------------------------------
Change in non-cash investing
working capital
Accounts payable for capital
accruals $ 2,506 $ (530) $ (2,051) $ (3,594)
---------------------------------------------------------------------------
Cash payments
Cash payments made for taxes $ 98 $ 28 $ 694 $ 120
Cash payments made for
interest $ 5,287 $ 2,785 $ 10,029 $ 6,486
---------------------------------------------------------------------------


6. Financial Instruments

At September 30, 2006, Shiningbank held certain derivative financial
instruments which are not recognized on the consolidated balance sheets.
The estimated market value at September 30, 2006, had the contracts been
settled at that time, would have been a gain of $5.1 million.



Period Commodity Volume Price
---------------------------------------------------------------------------
April 1, 2006 - October 31, $7.50 /GJ floor
2006 Gas 5,000 GJ/d $12.00/GJ ceiling
May 1, 2006 - October 31,
2006 Gas 10,000 GJ/d $5.50 /GJ floor
$9.75/GJ ceiling
July 1, 2006 - March 31,
2007 Gas 5,000 GJ/d $6.00 /GJ floor
$10.05/GJ ceiling
July 1, 2006 - March 31,
2007 Gas 5,000 GJ/d $6.25 /GJ floor
$10.50/GJ ceiling
July 1, 2006 - October 31,
2006 Gas 5,000 GJ/d $ 6.47 /GJ
September 1, 2006 - December
31, 2006 Gas 10,000 GJ/d $ 6.65 /GJ
November 1, 2006 - March 31,
2007 Gas 5,000 GJ/d $8.55 /GJ floor
$11.50/GJ ceiling
July 1, 2006 - December 31,
2006 Oil 500 bbl/d US$55.00/bbl floor
US$89.10/bbl ceiling
---------------------------------------------------------------------------

Subsequent to September 30, 2006, Shiningbank entered into two additional
hedge contracts.

Period Commodity Volume Price
---------------------------------------------------------------------------
December 1, 2006 - March 31,
2007 Gas 5,000 GJ/d $6.75/GJ floor
$9.70/GJ ceiling
January 1, 2007 - December
31, 2007 Gas 10,000 GJ/d $6.50 /GJ floor
$9.00/GJ ceiling
---------------------------------------------------------------------------


7. Commitments and Contingencies

The following is a summary of the Fund's contractual obligations and
commitments as at September 30, 2006:


Payments Due by Period
---------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
---------------------------------------------------------------------------

Operating leases $ 12,088 $ 2,561 $ 5,998 $ 3,498 $ 31
Pipeline transportation 2,575 1,139 1,436 - -
---------------------------------------------------------------------------
Total obligations $ 14,663 $ 3,700 $ 7,434 $ 3,498 $ 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Fund is involved in litigation and claims arising in the normal course of operations. Management is of the opinion that any resulting settlements would not materially affect the Fund's financial position or reported results of operations.

8. Related Party Transactions

During the nine months ended September 30, 2006, Shiningbank incurred $174,000 for legal services (2005 - $830,000) provided by a firm in which a current director is a partner, none of which was outstanding at September 30, 2006. These payments were made in the normal course of operations, on commercial terms, and therefore were recorded at cost.

9. Subsequent Events

On September 26, 2006, Shiningbank announced that it had entered into an agreement whereby the Corporation would acquire the majority of Rider Resources Ltd.'s producing oil and natural gas assets pursuant to a Plan of Arrangement (the "Arrangement"). Total consideration is approximately $496 million, including the assumption of approximately $92 million of net debt. The Arrangement is expected to close in December 2006.

On October 31, the federal government announced its intention to change the way that royalty trusts and income funds are taxed. The proposed changes are not yet enacted and accordingly, there was no impact on the Fund's September 30, 2006 financial statements. If the proposals are enacted as currently written, they will result in taxation of distributions at the Trust level at a rate of 31.5% effective January 1, 2011. As Shiningbank is an existing trust, there will be no impact on cash flow in the four-year transition period. The Fund is currently assessing the proposals and the potential implications to the Fund.

Shiningbank Energy Income Fund is a natural gas focused energy trust founded in 1996. The Fund purchases, develops and operates producing properties for the direct benefit of its unitholders. Shiningbank has one of the highest weightings of natural gas production in the energy trust sector at 77%.

Shiningbank is listed on the Toronto Stock Exchange under the symbol SHN.UN.


Contact Information

  • Shiningbank Energy Ltd.
    David M. Fitzpatrick
    President and C.E.O.
    (403) 268-7477 or Toll Free: 1-866-268-7477
    or
    Shiningbank Energy Ltd.
    Bruce K. Gibson
    Vice President, Finance and C.F.O.
    (403) 268-7477 or Toll Free: 1-866-268-7477
    or
    Shiningbank Energy Ltd.
    Debbie Carver
    Investor Relations Coordinator
    (403) 268-7477 or Toll Free: 1-866-268-7477
    (403) 268-7499 (FAX)
    Email: irinfo@shiningbank.com
    Website: www.shiningbank.com