Thunder Energy Trust
TSX : THY.UN

Thunder Energy Trust

November 09, 2005 09:22 ET

Thunder Energy Trust Announces Results from its Initial Quarter of Operations

CALGARY, ALBERTA--(CCNMatthews - Nov. 9, 2005) - Thunder Energy Trust (TSX:THY.UN) today released results for third quarter 2005, its initial quarter of operations. Due to timing of the Trust's creation, results are for the period July 7 to September 30, 2005. For reporting purposes, the 2004 results presented are for Thunder Energy Inc. and therefore, are not directly comparable with results for Thunder Energy Trust.

Quarterly results

Production for the period averaged 11,574 boe/d, comprised of 44,680 mmcf/d of natural gas and 4,128 bbls/d of crude oil and natural gas liquids. Distributions declared totaled $19.1 million or $0.45/unit ($0.15/unit per month), and represented 55% of total cash flow. Based on Thunder's unit price of $12.25 this represents a current yield of 14.7%.

Drilling activity

Third quarter drilling activity resulted in 16 gas wells (10.8 net), two oil wells (1.0 net) and five dry holes (2.7 net) for an 81% success rate. Capital spending totaled $21.2 million. Based on test rates, the program added approximately 800 boe/d of initial capacity, of which 140 boe/d came on stream in October and early November. The remaining production adds are expected later in the fourth quarter and early 2006. Procurement costs for the program were consistent with historical results and current expectations with the estimate at less than $24,000 per boe/d, excluding capital spending of approximately $5.6 million related to projects initiated in the second quarter.

Whiskey Creek update

After experiencing plant restrictions, production re-commenced at Thunder's Whiskey Creek property from one well in late August. An attempt to bring a second well on stream in late September proved unsuccessful due to well and facility configuration from the base well bore to plant inlet. A third well is scheduled for tie-in and facility installation in December.

Capacity at Whiskey Creek remains significant at 650-800 boe/d, however, additional design work and capital is required to match wells and facilities to current flow conditions. Thunder is reviewing a number of options to handle the gas/liquid flow rates, with the ultimate expectation of steady production flow. As the property is in a sensitive area, timelines for facility alterations can be lengthy. Thunder will continue to produce this property under the current flow conditions, which allows for restricted "intermittent" flow.

Consolidation of the Trust

In the face of challenging human resource issues within industry, the Trust has successfully staffed key positions with highly skilled and dedicated personnel. After bringing three companies together and organizing many talents new to these assets, time for consolidation was warranted. Integration of systems, assets, and people is near complete.

Release of guidance for 2006

Technical reviews and internal re-engineering of all producing properties, and the 2006 capital forecast will be complete by early December. Guidance for 2006 is scheduled for release by mid-December 2005.

"Our monthly distribution remains stable at $0.15 per unit into next year based on our ongoing drilling program, low procurement costs, and high operating netbacks" said Stuart Keck, President and CEO. "We began operations with an inventory of more than 100 drillable locations. Our technical teams have continued to cultivate opportunities, which will drive our program of low-risk drilling for at least the next 15 months."


Calgary-based Thunder Energy Trust began trading on the TSX on July 12, 2005. Thunder was created through a Plan of Arrangement with three oil and gas companies, the largest being Thunder Energy Inc. which at the time was the 15th largest publicly-traded oil and gas company in Canada. The Trust has a diverse base of oil and gas properties in Western Canada and a business plan emphasizing low-risk drilling and exploitation aimed at maintaining stable production and sustaining the Trust over the long term.

Forward-looking Statements

This press release may contain forward-looking statements including expectations of future production, cash flow and earnings. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), commodity price and exchange rate fluctuation and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Additional information on these and other factors that could affect the Trust's operations or financial results are included in the Trust's reports on file with Canadian securities regulatory authorities.

Note: Boe means barrel of oil equivalent on the basis of 1 boe to 6,000 cubic feet of natural gas. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 1 boe for 6,000 cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boepd means barrel oil equivalent per day.



HIGHLIGHTS

Financial Three Months
Ended Sept 30 %
($000s, except per unit data) 2005 2004 Change
------------------------------------------------------------------------
Petroleum and natural gas sales 65,866 28,245 133
Funds from operations 35,037 15,908 120
per unit (1) - basic 0.79 0.32 147
- diluted 0.79 0.31 155
Net income 7,718 3,542 118
per unit (1) - basic 0.18 0.07 157
- diluted 0.17 0.07 143
Distributions declared 19,114 - 100
per unit(1) 0.45 - 100
Payout ratio(2) 55% - 100
Capital expenditures
Oil & gas 21,228 23,648 (10)
Debt including working capital
deficiency 148,432 97,240 53
Average units(1) outstanding
- basic 44,083 50,259 (12)
Average units(1) outstanding
- diluted 44,392 51,254 (13)
------------------------------------------------------------------------

Three Months
Ended Sept 30 %
Operations 2005 2004 Change
------------------------------------------------------------------------
Daily production
Natural gas (mcf/d) 44,680 38,883 15
Oil and NGLs (bbls/d) 4,128 1,293 219
Barrels of oil equivalent (boe/d) 11,574 7,774 49
Average sale prices
Natural gas ($/mcf) 9.13 6.13 49
Oil and NGLs ($/bbl) 69.90 44.27 58
Operating netback 39.37 33.70 17
Wells drilled - gross (net)
Gas 16 (10.8) 18 (17.6)
Oil 2 (1.0) -
CBM - 21 (20.6)
Dry 5 (2.7) 1 (1.0)
Total 23 (14.5) 40 (39.2)
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The term "units" has been used to identify both the trust units and
exchangeable shares of the Trust issued on or after July 7, 2005 as
well as the common shares of the corporation outstanding prior to
the conversion on July 7, 2005.
(2) The payout ratio is calculated using distributions divided by the
funds from operations.


MANAGEMENT'S DISCUSSION AND ANALYSIS

Statements made throughout this quarterly report may contain forward-looking statements including expectations of future production, cash flow and earnings. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses; health, safety and environmental risks); and commodity price and exchange rate fluctuations. Additional information on these and other factors that could affect Thunder Energy Trust's ("Thunder Trust" or the "Trust") operations or financial results are included in the Trust's reports on file with Canadian securities regulatory authorities.

The following discussion and analysis as provided by the management of the Trust should be read in conjunction with the unaudited interim consolidated financial statements for the three and nine months ended September 30, 2005 and 2004 and the audited consolidated financial statements and management's discussion and analysis of Thunder Energy Inc. ("Thunder Energy") for the year ended December 31, 2004. This management's discussion and analysis was prepared as of November 8, 2005.

Basis of presentation - The financial data presented below has been prepared in accordance with Canadian generally accepted accounting principles. The reporting and the measurement currency is the Canadian dollar.

Non-GAAP measurements - This management's discussion and analysis ("MD&A") contains the term funds from operations to analyze operations and leverage. The term distributable cash is also used to present the amount of cash that the Trust distributes to unitholders. Neither distributable cash nor funds from operations presented have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and; therefore, may not be comparable with the calculation of similar measures for other entities. Distributable cash and funds from operations as presented are not intended to represent net earnings for the period nor should they be viewed as an alternative to net income as determined in accordance with GAAP. The reconciliation between net earnings and funds from operations can be found in the consolidated statements of cash flows in the unaudited interim financial statements. The Trust also presents funds from operations per unit whereby per unit amounts are calculated using weighted average units outstanding consistent with the calculation of earnings per unit.

BOE presentation - The term barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. The BOE conversion ratio used by the Company of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.

Corporate Reorganization

Effective July 7, 2005, Thunder Energy Inc. ("Thunder Energy"), Mustang Resources Inc. ("Mustang") and Forte Resources Inc. ("Forte") entered into a business combination resulting in the conversion into an energy trust through a Plan of Arrangement. The reorganization resulted in the shareholders of Thunder Energy receiving trust units in the new oil and natural gas energy trust, Thunder Energy Trust, and common shares in two new publicly-listed companies: Ember Resources Inc. ("Ember"), a coal bed methane company, and Alberta Clipper Energy Inc. ("Clipper") an exploration and production company. An additional exploration and production company was created, Valiant Energy Inc. ("Valiant"), which owns certain Forte exploration assets and undeveloped lands.

Shareholders of Thunder Energy received common shares of Ember and Clipper and at their election, either units of the Trust or exchangeable shares which may be exchanged into units of the Trust.

Specifically, shareholders of the respective companies, after the consolidation of shares, received:

For each Thunder Energy common share owned:

(a) 0.5 trust units or exchangeable shares

(b) 0.3333 common shares of Clipper

(c) 0.3333 common shares of Ember

For each Mustang common share owned:

(a) 0.55 trust units or exchangeable shares

(b) 0.3666 common shares of Clipper

(c) 0.0833 common share of Ember

For each Forte common share owned:

(a) 0.175 trust units or exchangeable shares

(b) 0.3333 common shares of Valiant

One-time costs related to the transaction have been included in the financial statements for the periods ended September 30, 2005. External costs related to the reorganization have been included as a capital cost. Internal costs including $3.3 million in retention and severance and $5.4 million of stock-based compensation expense related to the wind-up of the stock option plan have been charged to results of operations of the Trust. The costs related to the reorganization incurred by Mustang and Forte were reflected in the financial statements of those Companies prior to the transaction date.

The financial statements of the Trust have been prepared on a continuity of interest basis which recognized the Trust as the successor to Thunder Energy. Accordingly, the consolidated financial statements for periods prior to July 7, 2005 reflect the financial position, results of operations and cash flows as if the Trust had always carried on the business formerly carried on by Thunder Energy. The nine months ended September 30, 2005 reflect the results of operations and cash flows of Thunder Energy and its subsidiaries for the period January 1, 2005 to July 6, 2005 and the results of operations and cash flows of the Trust and its subsidiaries for the period July 7, 2005 to September 30, 2005. Due to the conversion into an energy trust, certain information included in the MD&A for prior periods may not be directly comparable.

The term "units" has been used to identify both trust units issued on or after July 7, 2005 as well as common shares of Thunder Energy outstanding prior to the conversion on July 7, 2005.

Results of Operations

Oil and gas revenue for the third quarter increased 133% to $65.9 million compared with the same period in 2004. For the nine months ended September 30, 2005, revenue increased 46% to $127.9 million. The growth in both periods was due to higher production volumes related to the Mustang and Forte acquisitions, partially offset by the transfer of properties to Ember and Clipper, and higher commodity prices. Quarter over quarter, the Trust's average natural gas price increased 49%, and average oil and NGL price rose 58%. Year over year natural gas prices averaged 20% higher, while the average oil and NGLs price increased 57%.



Oil and Gas Revenue ($000s)

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Gross revenue 65,866 28,245 127,945 87,360
Transportation expenses (1,982) (1,008) (4,800) (3,228)
-------------------------------------------
Net revenue 63,884 27,237 123,145 84,132
-------------------------------------------
-------------------------------------------


Oil and Gas Revenue ($000s, net of transportation expenses)

Crude Oil
Natural Gas and NGLs Total
---------------------------------
Three months ended September 30, 2004 21,960 5,277 27,237
Effect of change in product prices 11,950 9,700 21,650
Effect of change in sales volumes 3,428 11,569 14,997
---------------------------------
Three months ended September 30, 2005 37,338 26,546 63,884
---------------------------------
---------------------------------

Nine months ended September 30, 2004 69,760 14,372 84,132
Effect of change in product prices 14,213 13,149 27,362
Effect of change in sales volumes 2,216 9,435 11,651
---------------------------------
Nine months ended September 30, 2005 86,189 36,956 123,145
---------------------------------
---------------------------------


Production

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Crude oil (bbls/d) 3,833 1,098 1,960 1,153
NGLs (bbls/d) 295 195 205 160
-------------------------------------------
Total oil and NGLs (bbls/d) 4,128 1,293 2,165 1,313
Natural gas (mcf/d) 44,680 38,883 40,301 38,997
-------------------------------------------
Total boe (boe/d) 11,574 7,774 8,882 7,813
-------------------------------------------
-------------------------------------------


Transportation expenses for the third quarter were 3% of revenue compared with 4% in the same period in 2004. Year-to-date transportation expenses remained steady at 4% of revenues compared with 2004. These costs relate to transporting natural gas on the main natural gas pipelines and oil trucking charges. In the past, these amounts were offset against revenue and not disclosed separately. Prior periods have been restated to reflect this change in presentation.



Average Commodity Prices

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Natural gas
NYMEX ($US/mmbtu) 8.17 5.83 7.15 5.84
AECO ($/mmbtu) 9.37 6.08 7.88 6.40
-------------------------------------------
-------------------------------------------
Trust price before
transportation ($/mcf) 9.50 6.33 8.17 6.73
Transportation ($/mcf) (0.37) (0.20) (0.33) (0.22)
-------------------------------------------
Trust price at the
wellhead ($/mcf) 9.13 6.13 7.84 6.51
-------------------------------------------
-------------------------------------------
Crude oil ($/bbl)
WTI ($US/bbl) 63.19 43.88 55.40 39.11
Edmonton posted 76.51 56.25 67.91 50.82
-------------------------------------------
-------------------------------------------
Trust price before
transportation 71.13 46.87 64.56 42.46
Transportation (1.23) (2.60) (2.05) (2.53)
-------------------------------------------
Trust price at
the wellhead 69.90 44.27 62.51 39.93
-------------------------------------------
-------------------------------------------

Cdn/US $ average
exchange rate 1.202 1.307 1.220 1.328
-------------------------------------------
-------------------------------------------


Royalties increased for both the quarter and year-to-date due to the increased production arising from the acquisitions of Mustang and Forte. Royalties also increased quarter over quarter due to stronger commodity prices. A 2004 gas cost allowance refund received in the second quarter of 2005 offset the royalty increase for the nine-month period.



Royalties ($000s)

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Crown 10,539 3,878 17,275 13,668
Freehold and other 2,483 992 4,697 2,935
-------------------------------------------
Gross royalties 13,022 4,870 21,972 16,603
ARTC (125) (125) (366) (375)
-------------------------------------------
Net royalties 12,897 4,745 21,606 16,228
-------------------------------------------
-------------------------------------------


Royalty Rates (as a % of revenue, net of transportation expenses)

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Crown 16.5 14.2 14.0 16.2
Freehold and other 3.9 3.6 3.8 3.5
-------------------------------------------
Gross royalties 20.4 17.8 17.8 19.7
ARTC (0.2) (0.5) (0.3) (0.4)
-------------------------------------------
Net royalties 20.2 17.3 17.5 19.3
-------------------------------------------
-------------------------------------------


Operating costs for the quarter increased 21% to $8.51/boe from the same period in 2004, and were up 26% to $8.18/boe year over year. These increases reflect higher costs in the industry as a whole, and the Trust's increased presence in Northeast British Columbia and Northern Alberta which have higher operating costs.



Operating Costs

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Operating costs ($000s) 9,059 5,022 19,827 13,878
Per boe ($) 8.51 7.02 8.18 6.48
-------------------------------------------
-------------------------------------------

Operating netbacks represent on a per boe basis the operating profit
margin on the sale of petroleum and natural gas commodities.

Operating Netback Per boe ($)

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Selling price 60.00 38.08 50.79 39.30
Royalties, net of ARTC (12.11) (6.63) (8.91) (7.58)
Operating costs (8.51) (7.02) (8.18) (6.48)
-------------------------------------------
Operating netback 39.38 24.43 33.70 25.24
-------------------------------------------
-------------------------------------------


General and administrative expenses (G&A) increased over prior periods due to higher staffing levels with the increased size of the Trust's operations and one-time retention and severance costs of $3.3 million related to the Plan of Arrangement. On a per boe basis, quarterly net G&A was $1.49 before the non-recurring costs. Year-to-date, G&A was $1.37/boe without the one-time expense.



G&A Expenses

Three months ended Nine months ended
September 30 September 30
($000s) 2005 2004 2005 2004
-------------------------------------------
Gross G&A expenses 2,719 1,928 6,710 5,197
Capitalized G&A (405) (448) (1,214) (1,345)
Recoveries from joint
operations
Capital (158) (513) (1,083) (1,925)
Operating (565) (334) (1,094) (955)
-------------------------------------------
Net G&A expenses 1,591 633 3,319 972
Non-recurring retention
and severance 3,300 - 3,300 -
-------------------------------------------
Net G&A & non-recurring
expense 4,891 633 6,619 972
-------------------------------------------
-------------------------------------------

Per boe ($)
Gross G&A expenses 2.55 2.70 2.77 2.43
Capitalized G&A (0.38) (0.63) (0.50) (0.63)
Recoveries from joint
operations
Capital (0.15) (0.72) (0.45) (0.90)
Operating (0.53) (0.47) (0.45) (0.45)
-------------------------------------------
Net G&A expenses 1.49 0.88 1.37 0.45
Non-recurring retention
and severance 3.10 - 1.36 -
-------------------------------------------
Net G&A & non-recurring
expense 4.59 0.88 2.73 0.45
-------------------------------------------
-------------------------------------------


Effective July 1, 2005, the Trust changed its accounting policy for G&A expenses in order to better reflect the cost of bringing assets on production. Formerly Thunder Energy expensed all indirect G&A expenses related to acquisition, exploration and development activities. Under the new policy, certain salaries and benefits related to these activities will be included in the full cost pool and depleted. The effect of this change in accounting policy has been recorded retroactively with restatement of prior periods. The effect of the adoption is presented below as increases (decreases):



Balance sheet ($000s) As at December 31, 2004
------------------------------------------------------------------------
Property and equipment 4,160
Future income tax liability (1,722)
Retained earnings (2,438)
-------------------------
-------------------------


Income statement Three Months Ended Nine Months Ended
($000s, except per unit data) September 30, 2004 September 30, 2004
------------------------------------------------------------------------
General and administrative
expenses (448) (1,345)
Depreciation, amortization
and accretion expense 94 300
Future tax expense 137 405
Net income impact 217 640
Net income per unit
- basic $ 0.00 $ 0.02
- diluted $ 0.01 $ 0.02
---------------------------------------
---------------------------------------


Interest expense rose 110% over third quarter 2004 and 48% for the nine-month period due to higher average debt levels following the assumption of debt from Mustang and Forte.



Interest Expense
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Interest expense ($000s) 1,625 772 3,501 2,369
Average revolving demand
bank debt outstanding
($000s) 144,397 81,357 117,500 77,212
Effective annualized
interest rate for
the period (%) 4.5 3.7 4.0 4.1
-------------------------------------------
-------------------------------------------


Depletion, depreciation and accretion (DD&A) expenses increased $8.96/boe over third quarter 2004 and $6.68/boe year-to-date. The increases were due to the acquisition of Mustang and Forte, offset by the transfer of Ember and Clipper assets, the reduction in Thunder Energy's proved reserves at December 31, 2004 and the rising trend in general industry costs. Accretion and DD&A on the asset retirement obligation increased due to the assumption of liabilities from Mustang and Forte and a revision to the Trust's liability estimate in the third quarter.



DD&A

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
DD&A ($000s) 22,650 8,804 45,105 25,516
Per boe ($) 21.27 12.31 18.60 11.92
-------------------------------------------
-------------------------------------------


Stock-based compensation expense increased in the third quarter to $6.1 million and to $7.9 million for the nine-month period as compared to $1.0 million and $1.8 million in the comparative periods. In the quarter, $5.4 million of stock-based compensation related to the exercise of options vested on July 7, 2005. An additional $0.6 million was apportioned to Ember ($0.2 million) and Clipper ($0.4 million). The amounts allocated were based on the relative reserve values of the proved and probable oil and natural gas reserves (discounted at 10 percent) as determined by independent reserve engineers.

Provision for income taxes

The Trust is a taxable entity under the Income Tax Act (Canada) and is taxable only on income that is not distributed or distributable to the unitholders. To the extent that cash distributions represent taxable distributions to the unitholders, the distributions will reduce the Trust's future income tax expense.

Funds from operations increased 120% over third quarter 2004 to $35.0 million, and were up 41% year-to-date to $70.8 million. This growth stemmed from higher commodity prices and increased production volumes related to the acquisitions of Forte and Mustang.



Funds from Operations

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Funds from operations
($000s) 35,037 15,908 70,804 50,247
Per unit - basic ($) 0.79 0.32 1.65 1.19
- diluted ($) 0.79 0.31 1.59 1.16
-------------------------------------------
-------------------------------------------



Net income increased 118% quarter over quarter to $7.7 million due to higher production volumes and strong commodity prices, offset by higher G&A and non-cash expenses, DD&A and stock-based compensation. Year-to-date, net income remained steady at $15.6 million, primarily due to increasing prices for oil and NGLs and natural gas and higher production volumes offset by non-recurring costs related to the acquisitions of Mustang and Forte.



Net Income

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Net Income ($000s) 7,718 3,542 15,582 15,361
Per unit - basic ($) 0.18 0.07 0.36 0.37
- diluted ($) 0.17 0.07 0.35 0.36
-------------------------------------------
-------------------------------------------


Capital expenditures related to oil and gas for the year to date aggregated $63.9 million and included the cost of drilling 16 gas wells (10.8 net), two oil wells (1.0 net) and five dry holes (2.7 net). The table below breaks out the capital expenditures by category:



Capital Expenditures ($000s)
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------
Land and rentals 357 4,714 2,659 7,560
Seismic 206 1,056 4,243 4,875
Conventional drilling and
completions 10,721 9,830 31,971 23,714
Well equipping and tie-in 5,507 2,889 16,021 7,912
Facility and gas gathering 4,068 2,728 4,890 4,428
Other, including capitalized
G&A 369 398 1,270 1,569
-------------------------------------------
Total conventional capital
expenditures 21,228 21,615 61,054 50,058
CBM drilling, completion
and facilities - 2,033 2,884 9,803
-------------------------------------------
Total capital expenditures 21,228 23,648 63,938 59,861
-------------------------------------------
-------------------------------------------


Corporate Restructuring

On July 7, 2005, and in conjunction with the Plan of Arrangement issued on June 5, 2005, Thunder Energy amalgamated with Mustang and Forte to form the Trust, two exploration companies, Clipper and Valiant, and a coal-bed methane company Ember. The amalgamation was accounted for as a business combination with Thunder Energy being deemed the acquirer of Mustang and Forte, net of the Valiant assets. Consequently the Trust has accounted for Mustang and Forte as acquisitions under the purchase method of accounting. Certain Mustang assets acquired by Thunder Energy were transferred to Clipper. As the former Thunder Energy shareholder group had the majority of the voting control of Clipper, Ember and the Trust (including its subsidiaries), the transfer of assets and liabilities from Thunder Energy to Clipper and Ember was accounted for at Thunder Energy's net book value; the transfer of the Mustang assets to Clipper was at fair value, being Thunder Energy's acquisition cost.

The consideration for the Mustang acquisition was 1.1 trust units for each Mustang share resulting in 9,607,144 million trust units and 996,832 exchangeable shares being issued post share consolidation of 0.5. The value assigned to each Trust unit was $8.50 based on the closing Thunder Energy share price at July 6, 2005. The value of the transaction was $157.9 million net of the $22.4 million reduction for the conveyance of certain assets and liabilities to Clipper. The results of Mustang have been included in the financial statements commencing on the acquisition date, and the preliminary allocation of the purchase price is as follows:



Mustang's net assets acquired ($000s)
------------------------------------------------------------------------
Current assets 10,523
Property and equipment 159,846
Goodwill 67,794
Current liabilities (36,895)
Asset retirement obligations (5,019)
Future income tax liability (38,386)
---------
157,863
---------
Value of units and exchangeable shares of Trust issued 157,863
---------
---------


The consideration for the Forte acquisition was 0.35 trust units for each Forte share resulting in 6,474,980 trust units and 927,665 exchangeable shares being issued post share consolidation of 0.5. The value assigned to each Thunder trust unit was $8.50 based on closing Thunder Energy share price on July 6, 2005. The value of the transaction was $126.9 million net of the $33.9 million reduction for the conveyance of certain assets and liabilities to Valiant prior to the amalgamation. The results of Forte have been included in the financial statements commencing on the acquisition date, and the preliminary allocation of the purchase price is as follows:



Forte's net assets acquired ($000s)
------------------------------------------------------------------------
Current assets 13,577
Property and equipment 122,821
Goodwill 61,840
Current liabilities (36,751)
Asset retirement obligations (7,596)
Future income tax liability (26,962)
----------
126,929
----------
----------

Value of units and exchangeable shares of Trust issued 126,929
----------
----------


In conjunction with the Arrangement, Thunder Energy transferred certain assets and undeveloped land to Ember and Clipper. At the time of the transaction the companies were related, and consequently, the assets were transferred to Ember and Clipper at their carrying values.



The preliminary values transferred to Ember were as follows:

Ember net assets transferred ($000s)
------------------------------------------------------------------------
Property and equipment 16,431
Future income tax asset 10,808
Asset retirement obligations (1,487)
----------
Net assets transferred 25,752
Cash paid 5,000
----------
Net assets transferred and reduction in capital 20,752
----------
----------

The preliminary values transferred to Clipper were as follows:

Clipper net assets transferred ($000s)
------------------------------------------------------------------------
Property and equipment 28,847
Future income tax asset 9,479
Accounts payable (1,000)
Asset retirement obligations (1,841)
----------
Net assets transferred 35,485
Cash paid 5,000
----------
Net assets transferred and reduction in capital 30,485
----------
----------


In conjunction with the Arrangement, all outstanding stock options of Thunder Energy vested and option holders had the right to exercise their options until August 5, 2005 after which time the options expired. As a result, a stock-based compensation expense of $5.4 million has been charged to the earnings of the Trust. An amount of stock-based compensation was apportioned based on the relative reserve values of the proven and probable oil and natural gas reserves (discounted at 10 percent) as determined by independent reserve engineers.

Liquidity

For the nine months ended September 30, 2005, capital expenditures of $63.9 million, site restoration and abandonment costs of $0.8 million, cash distributions to unitholders of $12.7 million and an increase in working capital deficit from the acquisition of Mustang and Forte of $49.5 million were funded by funds from operations of $70.8 million, $11.5 million in proceeds from the issuance of trust units and exchangeable shares resulting from the exercise of stock options, and an increase of $44.6 million in net debt including working capital.

On July 7, 2005, in conjunction with the Plan of Arrangement, the Trust entered into a new credit facility with a syndicate of chartered banks consisting of a $160.0 million revolving term credit facility. The credit facility is available on a revolving basis and is subject to extension of that date annually with the agreement of the lenders. The credit facilities are secured by the Trust's assets and are subject to semi-annual review at which time the lenders may redetermine the borrowing base.

Financial Instruments

The Trust assumed certain forward sales contracts upon its amalgamation with Forte. These contracts were marked to market at July 7, 2005 with a corresponding liability recognized in the allocation of the purchase price. Subsequent losses as the contracts are settled are applied against this liability. At September 30, 2005, the market value of the hedges is $1.1 million which is equal to the remaining liability recorded at the time of acquisition. These contracts were as follows:



Volume Price Delivery
Product Per Day $ Cdn Point Term
------------------------------------------------------------------------
April 1, 2005 to
Natural Gas 500 mcf/d 7.00 AECO October 31, 2005
January 1, 2005 to
Crude Oil 500 bbls/d 58.30 WTI December 31, 2005
March 1, 2005 to
Crude Oil 200 bbls/d 61.67 WTI December 31, 2005


Asset Retirement Obligations

Thunder Energy adopted Section 3110 of the CICA Handbook on January 1, 2004. The new standard required the Company, and now the Trust, to accrue its asset retirement obligations which result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. A reconciliation of the asset retirement obligations is provided below:



Asset Retirement Obligations ($000s)

Three months Ended Nine months Ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------

Balance, beginning of
period $ 13,975 $ 11,967 $ 13,417 $ 10,352
Liabilities incurred in
the period 581 475 937 1,650
Liabilities assumed due
to business combination
- Forte 7,596 - 7,596 -
Liabilities assumed due
to business combination
- Mustang 5,019 - 5,019 -
Revision (135) - (135) -
Liabilities released due
to dispositions (3,328) - (3,328) -
Liabilities settled in
the period (431) (110) (800) (110)
Accretion expense 590 251 1,161 691
-------------------------------------------
Balance, end of period $ 23,867 $ 12,583 $ 23,867 $ 12,583
-------------------------------------------
-------------------------------------------


Distributable Cash and Distributions

Management monitors the Trust's distribution payout policy with respect to forecasted net cash flow, debt levels and capital expenditures. In the third quarter, 55% of cash flow was distributed to unitholders. The Trust expects to distribute between 50% to 60% of its annual cash flow to unitholders in the near term, under the current commodity price environment, and retain the remaining cash flow for capital expenditures and debt repayment. Exchangeable shares are convertible into trust units of the Trust based on the exchange ratio, which is adjusted monthly to reflect that distributions are not paid on the exchangeable shares and cash flow related to the exchangeable shares is retained by the Trust for additional capital expenditures or debt repayment. The key drivers of the Trust's cash flow, as is generally the case with other energy trusts, are commodity prices and production.

The amount of distributable cash of the Trust is calculated in accordance with the Trust's indenture. Distributable cash is not a measure under GAAP and there is no standard measure of distributable cash. Distributable cash, as presented, may not be comparable to similar measures presented by other trusts.



Distributable Cash

Three months ended Nine months ended
September 30 September 30
($000s, except per unit amounts) 2005 2005
----------------------------------------
Funds from operations 35,037 70,804
Cash withheld to fund capital
operations 15,923 51,690
Cash distributions payable 6,419 6,419
Cash distributions paid 12,695 12,695
----------------------------------------
Accumulated cash distributions
and payable, end of period 19,114 19,114
Cash distributions payable
per unit 0.15 0.15
Cash distributions paid per unit 0.30 0.30
----------------------------------------
Accumulated cash distributions
and payable per unit,
end of period 0.45 0.45
----------------------------------------
----------------------------------------


Management believes with current commodity prices, forecasted cash distributions of $0.15 per trust unit and forecasted fourth quarter production, the Trust will meet its cash flow distribution target of between 50% and 60% of cash flow in the fourth quarter.

Tax Treatment of Distributions

The Trust has provided to unitholders general comments regarding the taxability of distributions but does not intend to provide legal or tax advice. Trust unitholders, exchangeable shareholders, or potential investors should seek their own legal or tax advice in this regard.



Quarterly Information ($000s, except per unit data)(3)
2003 2004
--------------------------------------
Q4 Q1 Q2 Q3

Petroleum and natural gas sales 25,207 28,232 30,883 28,245
Funds from operations 13,794 15,455 18,885 15,909
Per unit ($)
Basic 0.44 0.49 0.43 0.32
Diluted 0.42 0.47 0.42 0.31
Net income 2,152 5,899 5,920 3,542
Per unit ($)
Basic 0.07 0.19 0.13 0.07
Diluted 0.07 0.18 0.13 0.07




2004 2005
--------------------------------------
Q4 Q1 Q2 Q3

Petroleum and natural gas sales 29,049 29,350 32,729 65,866
Funds from operations 15,525 16,599 19,168 35,037
Per unit ($)
Basic 0.31 0.32 0.37 0.79
Diluted 0.30 0.31 0.36 0.79
Net income 1,410 3,243 4,621 7,718
Per unit ($)
Basic 0.03 0.06 0.09 0.17
Diluted 0.03 0.06 0.09 0.17
--------------------------------------

Due to the conversion into an energy trust, certain information included
in the MD&A for prior periods may not be directly comparable.

(3) The effect of the change in accounting policy regarding the
capitalization of general and administrative expenses has been
applied retroactively with restatement of prior periods.


CONSOLIDATED BALANCE SHEETS
(unaudited)


September 30, December 31,
($000s) 2005 2004
-------------------------------
(Restated -
note 2)
Assets

Current
Cash $ - $ 21
Accounts receivable 36,630 23,728
Prepaid expenses 3,133 953
-------------------------------
39,763 24,702
Property and equipment (Notes 2, 3) 669,334 410,242
Goodwill (Notes 3, 4) 175,082 45,448
-------------------------------
$ 884,179 $ 480,392
-------------------------------
-------------------------------


Liabilities and Unitholders' Equity

Current
Bank indebtedness $ 4,802 $ 1,568
Distributions payable 6,419 -
Accounts payable and accrued liabilities 40,454 47,581
Revolving demand loan 136,520 82,896
-------------------------------
188,195 132,045

Capital lease obligations - 94
Stock-based compensation liability (Note 6) 614 -
Asset retirement obligations (Note 5) 23,867 13,417
Future income taxes 159,882 68,656
-------------------------------
372,558 214,212


Unitholders' equity
Unitholders' capital (Note 6) 394,591 189,573
Exchangeable shares (Note 6) 43,768 -
Contributed surplus (Note 6) 3,025 2,836
Accumulated cash distributions (19,114) -
Accumulated earnings 89,351 73,771
-------------------------------
511,621 266,180
-------------------------------
$ 884,179 $ 480,392
-------------------------------
-------------------------------
See accompanying notes


CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED EARNINGS
(unaudited)

Three Months Ended Nine Months Ended
September 30 September 30
($000s, except per unit data) 2005 2004 2005 2004
-------------------------------------------
(Restated - (Restated -
note 2) note 2)
Revenue
Petroleum and natural
gas sales $ 65,866 $ 28,245 $ 127,945 $ 87,360
Royalties, net of ARTC (12,897) (4,745) (21,606) (16,228)
Transportation expenses (1,982) (1,008) (4,800) (3,228)
-------------------------------------------
Petroleum and natural gas
sales, after royalties and
transportation 50,987 22,492 101,539 67,904
-------------------------------------------


Expenses
Operating 9,059 5,022 19,827 13,878
General and administrative 4,891 633 6,619 972
Stock-based compensation 6,111 975 7,901 1,814
Interest 1,625 772 3,501 2,369
Depletion, depreciation and
accretion 22,650 8,804 45,104 25,516
-------------------------------------------
44,336 16,206 82,952 44,549
-------------------------------------------

Income before taxes 6,651 6,286 18,587 23,355
Provision for income taxes
(Note 7) (1,067) 2,744 3,005 7,994
-------------------------------------------
Net income for the period 7,718 3,542 15,582 15,361
Accumulated earnings
Beginning of period 81,633 68,821 73,769 57,961
Retroactive application of
change in accounting policy
(Note 2) - - - (959)
-------------------------------------------
End of period $ 89,351 $ 72,363 $ 89,351 $ 72,363
-------------------------------------------
-------------------------------------------

Units and Shares outstanding
(weighted average)
Units 40,755 50,259 39,567 42,051
Units and Exchangeable
Shares (Basic) 44,083 43,033
Units and Exchangeable
Shares (Diluted) 44,392 51,254 44,519 43,233

Net income per unit and share
Units and Exchangeable
Shares (Basic) $ 0.18 $ 0.07 $ 0.36 $ 0.37
Units and Exchangeable
Shares (Diluted) $ 0.17 $ 0.07 $ 0.35 $ 0.36
-------------------------------------------
-------------------------------------------
See accompanying notes


CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Three Months Ended Nine Months Ended
September 30 September 30
($000s) 2005 2004 2005 2004
-------------------------------------------
(Restated - (Restated -
note 2) note 2)

Operating Activities
Net income for the period $ 7,718 $ 3,542 $ 15,582 $ 15,361
Add items not requiring cash:
Stock-based compensation 6,111 975 7,901 1,814
Depletion, depreciation
and accretion 22,650 8,804 45,104 25,516
Future income taxes (1,442) 2,587 2,217 7,556
-------------------------------------------
Funds from operations 35,037 15,908 70,804 50,247
Site restoration and
abandonment (432) (110) (801) (110)
Changes in non-cash working
capital related to
operating activities
(Note 9) 7,254 (4,465) (19,488) (487)
-------------------------------------------
Cash provided by operating
activities 41,859 11,333 50,515 49,650
-------------------------------------------

Financing Activities
Issue of units and shares
for cash, net of costs 10,672 179 11,506 1,871
Increase (decrease) in
bank indebtedness 1,846 989 3,234 191
Increase in revolving
demand loan 28,562 8,100 53,624 11,808
Cash distributions paid (12,695) - (12,695) -
Cash received on Plan of
Arrangement (Note 3) 10,000 - 10,000 -
-------------------------------------------
Cash provided by financing
activities 38,385 9,268 65,669 13,870
-------------------------------------------

Investing Activities
Expenditures on property
and equipment (21,228) (23,648) (63,938) (59,861)
Assumption of working
capital deficit on
business acquisition
(Note 3,4) (49,546) (25) (49,546) (5,415)
Deferred transaction costs 2,312 - - -
Business acquisition costs
(Note 4) - - - (1,049)
Changes in non-cash
working capital related
to Investing activities
(Note 9) (11,782) 3,072 (2,721) 2,805
-------------------------------------------
Cash used in investing
activities (80,244) (20,601) (116,205) (63,520)
-------------------------------------------
Net change in cash position - - (21) -
-------------------------------------------
Cash - beginning of period - - 21 -
-------------------------------------------
- end of period $ - $ - $ - $ -
-------------------------------------------
-------------------------------------------
See accompanying notes


SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Formation and Financial Presentation

Thunder Energy Trust (the "Trust") is an open-ended, unincorporated investment trust governed by the laws of the province of Alberta. The Trust was established as part of a Plan of Arrangement (the "Arrangement"), which became effective on July 7, 2005.

The Arrangement gave effect to the transaction completed with Thunder Energy Inc. ("Thunder Energy"), Mustang Resources Inc. ("Mustang") and Forte Resources Inc. ("Forte") to combine the entities to create a new oil and gas Trust, two exploration-focused production companies: Alberta Clipper Energy Inc. ("Clipper") and Valiant Energy Inc. ("Valiant"); and a resource-based coal bed methane company, Ember Resources Inc. ("Ember"). As a result of the combination, shareholders of Thunder Energy received 0.5 trust units or exchangeable shares of the Trust, 0.3333 common shares of Clipper and 0.3333 common shares of Ember after the units of the Trust were consolidated on a 1:2 basis, and the common shares of Clipper and Ember were consolidated on a 1:3 basis.

The conversion of Thunder Energy to a Trust has been accounted for on a continuity of interest basis. Accordingly, the consolidated financial statements for 2004 reflect the financial position, results of operations and cash flows as if the Trust had always carried on the business formerly carried on by Thunder Energy. The nine months ended September 30, 2005 reflect the results of operations and cash flows of Thunder Energy and its subsidiaries for the period January 1 to July 6, 2005 and the results of operations and cash flows of the Trust and its subsidiary for the period July 7 to September 30, 2005. The comparative figures are the results of Thunder Energy Inc. and its subsidiaries. Due to the conversion into an energy trust, certain information included in the financial statements for prior periods may not be directly comparable.

The term "units" has been used to identify both the trust units and exchangeable shares of the Trust issued on or after July 7, 2005 as well as the common shares of the corporation outstanding prior to the conversion on July 7, 2005.

1. Summary of Accounting Policies

The unaudited interim consolidated financial statements of the Trust have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP), using the same accounting policies as those set out in Note 2 to the consolidated financial statements of Thunder Energy for the year ended December 31, 2004 except as noted below. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004.

2. Change in Accounting Policies

Effective July 1, 2005, the Trust changed its accounting policy for general and administrative (G&A) expenses in order to better reflect the cost of bringing assets on production. Formerly Thunder Energy expensed all indirect G&A expenses related to acquisition, exploration and development activities. Under the new policy, certain salaries and benefits related to these activities are being included in the full cost pool and depleted. The effect of this change in accounting policy has been recorded retroactively with restatement of prior periods. The effect of the adoption is presented below as increases (decreases):



Balance sheet ($000s) As at December 31, 2004
------------------------------------------------------------------------
Property and equipment 4,160
Future income tax liability (1,722)
Retained earnings (2,438)
------------------------
------------------------


Income statement Three Months Ended Nine Months Ended
($000s, except per unit data) September 30, 2004 September 30, 2004
------------------------------------------------------------------------
General and administrative
expenses (448) (1,345)
Depreciation, amortization
and accretion expense 94 300
Future tax expense 137 405
Net income impact 217 640
Net income per unit
- basic $ 0.00 $ 0.02
- diluted $ 0.01 $ 0.02
------------------------------------------
------------------------------------------


3. Plan of Arrangement

On July 7, 2005, and in accordance with the Plan of Arrangement issued on June 5, 2005, Thunder Energy amalgamated with Mustang and Forte to form the Trust, two exploration companies, Clipper and Valiant, and a coal-bed methane company, Ember. The amalgamation was accounted for as a business combination with Thunder Energy being deemed the acquirer of Mustang and Forte, net of the Valiant assets. Consequently the Trust has accounted for Mustang and Forte as acquisitions under the purchase method of accounting. Certain Mustang assets acquired by Thunder Energy were transferred to Clipper. As the former Thunder Energy shareholders had the majority of the voting control of Clipper, Ember and the Trust (including its subsidiaries), the transfer of assets and liabilities from Thunder Energy to Clipper and Ember was accounted for at Thunder Energy's net book value; the transfer of the Mustang assets to Clipper was at fair value, being Thunder Energy's acquisition cost.

The consideration for the Mustang acquisition was 1.1 trust units for each Mustang share resulting in 9,607,144 million trust units and 996,832 exchangeable shares being issued post share consolidation of 0.5. The value assigned to each Trust unit was $8.50 based on the closing Thunder Energy share price at July 6, 2005. The value of the transaction was $157.9 million, net of the $22.4 million reduction for the conveyance of certain assets and liabilities to Clipper. The results of Mustang have been included in the financial statements commencing on the acquisition date. The preliminary allocation of the purchase price is as follows:



Mustang's net assets acquired ($000s)
------------------------------------------------------------------------
Current assets $ 10,523
Property and equipment 159,846
Goodwill 67,794
Current liabilities (36,895)
Asset retirement obligations (5,019)
Future income tax liability (38,386)
--------------
$ 157,863
--------------
--------------

Value of units and exchangeable shares of Trust issued $ 157,863
--------------
--------------


The consideration for the Forte acquisition was 0.35 trust units for each Forte share resulting in 6,474,980 trust units and 927,665 exchangeable shares being issued post share consolidation of 0.5. The value assigned to each Trust unit was $8.50 based on closing Thunder Energy share price on July 6, 2005. The value of the transaction was $126.9 million, net of the $33.9 million reduction for the conveyance of certain assets and liabilities to Valiant prior to the amalgamation. The results of Forte have been included in the financial statements commencing on the acquisition date. The preliminary allocation of the purchase price is as follows:



Forte's net assets acquired ($000s)
------------------------------------------------------------------------
Current assets $ 13,577
Property and equipment 122,821
Goodwill 61,840
Current liabilities (36,751)
Asset retirement obligations (7,596)
Future income tax liability (26,962)
--------------
$ 126,929
--------------
--------------

Value of units and exchangeable shares of Trust issued $ 126,929
--------------
--------------


In conjunction with the Plan of Arrangement, Thunder Energy transferred certain assets and undeveloped land to Ember and Clipper. At the time of the transaction the companies were related, and consequently, the assets were transferred to Ember and Clipper at their carrying values which, for the assets acquired by Thunder Energy from Forte and Mustang, was fair market value.



The preliminary values transferred to Ember were as follows:

Ember net assets transferred ($000s)
------------------------------------------------------------------------
Property and equipment $ 16,431
Future income tax asset 10,808
Asset retirement obligations (1,487)
--------------
Total assets transferred 25,752
Cash paid 5,000
--------------
Net assets transferred and reduction in capital $ 20,752
--------------
--------------

The preliminary values transferred to Clipper were as follows:

Clipper net assets transferred ($000s)
------------------------------------------------------------------------
Property and equipment $ 28,847
Future income tax asset 9,479
Accounts payable (1,000)
Asset retirement obligations (1,841)
--------------
Total assets transferred 35,485
Cash paid 5,000
--------------
Net assets transferred and reduction in capital $ 30,485
--------------
--------------


In conjunction with the Plan of Arrangement, all outstanding stock options of Thunder Energy vested and option holders had the right to exercise their options until August 5, 2005 after which time the options expired. As a result, a stock-based compensation expense of $5.4 million has been charged to the earnings of the Trust. An amount of stock-based compensation was apportioned to Ember and Clipper based on the relative reserve values of the proven and probable oil and natural gas reserves (discounted at 10 percent) as determined by independent reserve engineers.

4. Business Combination

On April 30, 2004, Thunder Energy acquired all of the issued and outstanding common shares of Impact Energy Inc. ("Impact") on the basis of 0.22222 common shares of Thunder Energy for each common share of Impact. The value per common share issued was calculated as the average Thunder Energy closing share price five days before and five days after the announcement of the acquisition. Thunder Energy issued 18,100,317 common shares as consideration and incurred $1.1 million in transaction costs. This transaction was accounted for by the purchase method, based on fair values as follows:



Impact's net assets acquired ($000s)
------------------------------------------------------------------------
Current assets, including cash of $14 $ 2,692
Property and equipment 120,727
Goodwill 45,448
Current liabilities (8,912)
Asset retirement obligations (778)
Future income tax liability (22,226)
-----------
$ 136,951
-----------
-----------

Value of common shares of Thunder Energy issued $ 135,835
Acquisition costs 1,116
-----------
Total consideration $ 136,951
-----------
-----------


5. Asset Retirement Obligations

The Trust's asset retirement obligations result from net ownership interest in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Trust estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations to be approximately $51.0 million which will be incurred between 2005 and 2034. The majority of the costs will be incurred between 2010 and 2034. A credit adjusted risk-free rate of nine percent and an inflation rate of 1.5 percent were used to calculate the fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided below:

Three Months Ended Nine Months Ended
Asset retirement September 30 September 30
obligations ($000s) 2005 2004 2005 2004
------------------------------------------------------------------------
Balance, beginning of
period $ 13,975 $ 11,967 $ 13,417 $ 10,352
Liabilities incurred in
the period 581 475 937 1,650
Liabilities assumed due to
business combination
- Forte 7,596 - 7,596 -
Liabilities assumed due to
business combination
- Mustang 5,019 - 5,019 -
Revision (135) - (135) -
Liabilities released due
to dispositions (3,328) - (3,328) -
Liabilities settled in
the period (431) (110) (800) (110)
Accretion expense 590 251 1,161 691
--------------------------------------------
Balance, end of period $ 23,867 $ 12,583 $ 23,867 $ 12,583
--------------------------------------------
--------------------------------------------


6. Unitholders' Capital

Nine Months Ended
September 30
------------------------------------------------------------------------
Trust Units of Thunder Energy Trust
(including the conversion of Number of units
Exchangeable Shares) (000s) $ Thousands
------------------------------------------------------------------------
Trust units outstanding (see (a) below) 42,738 394,591
Trust units issuable on conversion of
exchangeable shares (see (b) below) 3,199 43,768
-------------------------------
Balance September 30, 2005 45,937 438,359
-------------------------------
-------------------------------


(a) Trust Units of Thunder Energy Trust

Nine Months Ended
September 30
------------------------------------------------------------------------
Number of units
Trust Units (000s) $ Thousands
------------------------------------------------------------------------
Balance December 31, 2004 - -
Issued for common shares 24,246 174,050
Issued on Forte acquisition 6,475 111,033
Issued on Mustang acquisition 9,607 143,021
Reduction of capital, Ember conveyance - (20,752)
Reduction of capital, Clipper conveyance - (30,485)
Issued for cash on exercise of
stock options 1,921 26,366
Exchangeable shares converted 489 9
Unit issue costs - (8,651)
-------------------------------
Balance September 30, 2005 42,738 394,591
-------------------------------
-------------------------------


(b) Exchangeable Shares of Thunder Energy Trust

Nine Months Ended
September 30
------------------------------------------------------------------------
Number of units
Exchangeable Shares (000s) $ Thousands
------------------------------------------------------------------------
Balance December 31, 2004 - -
Issued for common shares 1,758 13,030
Issued on Forte acquisition 927 15,896
Issued on Mustang acquisition 997 14,842
Exchanged for trust units (483) -
-------------------------------
Balance September 30, 2005 3,199 43,768
-------------------------------
-------------------------------


Exchangeable shares accrue notional distributions in-kind and are convertible into trust units at the shareholder's option. Exchangeable shares are non-transferable and are ultimately required to be exchanged for units of the trust.

The exchangeable shares are not transferable and are not entitled to cash distributions. The exchange ratio increases on a monthly basis. The increase in Exchange ratio is calculated by multiplying the Thunder Energy Trust distribution per unit by the exchange ratio immediately prior to Record Date and dividing by the weighted average trading price per unit of THY.UN on the TSX for the 5 trading days preceding the Record Date. A holder of Thunder Energy Inc. Exchangeable Shares can exchange all or a portion of their holdings into Thunder Energy Trust Units, at any time by giving notice to their investment advisor or the Trust Agent. The exchange ratio to convert each exchangeable share to a Trust Unit was 1.00000 at the beginning of the period, 1.01214 effective on August 15, 2005 and 1.02360 effective on September 15, 2005. If the 3.2 million exchangeable shares outstanding at September 30 2005 were exchanged at that time, 3.3 million Trust Units would have been issued.



(c) Common Shares of Thunder Energy Inc.

Nine Months Ended
September 30
------------------------------------------------------------------------
Number of shares
Common shares (000s) $ Thousands
------------------------------------------------------------------------
Balance December 31, 2004 51,663 189,573
Issued for cash on exercise of stock options 51 156
Tax effect of flow-through shares - (3,375)
-------------------------------
Balance March 31, 2005 51,714 186,354
Issued for cash on exercise of stock options 380 696
-------------------------------
Balance June 30, 2005 52,094 187,050
Issued for cash on exercise of stock options 5 30
Effect of exchange and consolidation ratios (8,088) -
Exchanged for trust units (40,328) (174,050)
Exchanged for exchangeable shares (3,683) (13,030)
-------------------------------
Balance September 30, 2005 - -
-------------------------------
-------------------------------


In December 2004, the Company issued 1,000,000 flow-through shares at $10 per share. The tax credits associated with expenditures to be funded by this offering were renounced under the look-back rule in the first quarter; therefore, the future tax liability was booked as at March 31, 2005.

As at July 7, 2005, there were 52,098,883 common shares and stock options to acquire an aggregate of 3,781,163 common shares outstanding.



Number of stock
options Weighted average
Stock-based compensation (000s) exercise price
------------------------------------------------------------------------
Balance December 31, 2004 4,354 $ 6.11
Granted 10 8.43
Cancelled (143) 7.90
Exercised (51) 3.31
-------------------------------
Balance March 31, 2005 4,170 6.09
Cancelled (4) 7.06
Exercised (380) 1.87
-------------------------------
Balance June 30, 2005 3,786 6.51
Cancelled (1,865) 7.90
Exercised (1,921) 5.16
-------------------------------
Balance September 30, 2005 - $ -
-------------------------------
-------------------------------


(d) Trust Unit Incentive Plan

Effective July 7, 2005, in accordance with the Plan of Arrangement, the Trust approved a Restricted Unit and Performance Unit incentive plan (the "Plan"). Under the terms of the Plan, both Restricted and Performance Units ("RTUs and PTUs") may be granted to directors, officers, employees, consultants and service providers (the "Plan Participants") to the Trust and any of its subsidiaries.

RTUs of the Trust vest evenly over three years, commencing on the first anniversary date of grant, with the number of Trust Units issued adjusted for the value of the distributions from the time of the granting to the time when the Trust Units are issued. PTUs vest on the third anniversary date of the grant, adjusted for the value of the distributions, plus a further upward or downward adjustment based on the Trust's performance relative to the performance of a group of comparable publicly traded oil and gas royalty trusts.

Upon vesting and at management's option, the Plan participant is entitled to receive either the units granted plus accumulated distributions or the cash payment based on the fair value of the underlying trust units plus notional accrued distributions. As such, the fair value associated with the RTUs and PTUs is expensed in the statement of earnings over the vesting period. As the value of the RTUs and PTUs is dependent upon the trust unit price, the expense recorded in the statement of income may vary from period to period.

For the nine months ended September 30, 2005, the Trust recorded a compensation liability relating to the Plan of $0.6 million. The compensation liability was based on the September 30, 2005 unit closing price of $13.56, distributions of $0.15 per unit in July, August and September, and management's estimate of the number of RTUs and PTUs to be issued on maturity. No estimate has been made for forfeitures. The following table summarizes the RTU and PTU movement for the nine months ended September 30, 2005.



RTUs PTUs
------------------------------------------------------------------------
Balance December 31, 2004 - -
Granted 240,303 59,133
-------------------------------
Balance September 30, 2005 240,303 59,133
-------------------------------
-------------------------------


7. Income Taxes

The Trust is a taxable entity under the Income Tax Act (Canada) and is taxable only on income that is not distributed or distributable to the unitholders. To the extent that cash distributions represent taxable distributions to the unitholders, the distributions will reduce the Trust's future income tax expense. Income taxes recorded in the consolidated statements of income and accumulated earnings differ from the tax calculated by applying the combined Canadian corporate federal and provincial income tax rate to income before taxes as follows:



Three Months Ended Nine Months Ended
September 30 September 30
Income taxes ($000s) 2005 2004 2005 2004
------------------------------------------------------------------------
Statutory income tax rate
for the period 37.75% 38.74% 37.75% 38.99%
Computed income tax expense $ 2,511 $ 2,435 $ 7,017 $ 9,106
Add (deduct) income tax
effect of:
Non-deductible Crown charges,
net of ARTC 1,798 756 2,939 3,729
Resource allowance (1,784) (997) (3,421) (4,153)
Tax rate adjustments (53) (46) (979) (1,900)
Stock-based compensation 2,307 380 2,983 707
Estimated taxable
distribution (6,342) - (6,342) -
Other 121 59 20 67
--------------------------------------------
Future income tax (1,442) 2,587 2,217 7,556
Large corporation tax 375 157 788 438
--------------------------------------------
Provision for income taxes $ (1,067) $ 2,744 $ 3,005 $ 7,994
--------------------------------------------
--------------------------------------------


8. Financial Instruments

The Trust assumed certain forward sales contracts upon its amalgamation with Forte. These contracts were entered into with Forte's marketers of crude oil and natural gas products to hedge its oil and gas price risk. These contracts were marked to market at $2.2 million at July 7, 2005 and subsequent realized losses have been applied against this recorded liability. At September 30, 2005, the market value of the hedges is $1.1 million which is equal to the remaining liability recorded at the time of acquisition. These contracts were as follows:



Volume Price Delivery
Product Per Day $ Cdn Point Term
------------------------------------------------------------------------
Natural Gas 500 mcf/d 7.00 AECO April 1, 2005 to
October 31, 2005
Crude Oil 500 bbls/d 58.30 WTI January 1, 2005 to
December 31, 2005
Crude Oil 200 bbls/d 61.67 WTI March 1, 2005 to
December 31, 2005


The above contracts are physical contracts that are intended to be settled financially each month as part of the process by which the Trust is paid for its production and sales.



9. Supplemental Cash Flow Information

Supplemental cash flow Three Months Ended Nine Months Ended
information September 30 September 30
($000s) 2005 2004 2005 2004
------------------------------------------------------------------------
Changes in non-cash working
capital:
Accounts receivable $(22,441) $ (1,806) $(12,902) $ (4,494)
Prepaid expenses (2,561) (912) (2,180) (655)
Accounts payable and accrued
liabilities 20,474 1,325 (7,127) 7,467
--------------------------------------------
$ (4,528) (1,393) $(22,209) $ 2,318
--------------------------------------------

Changes in non-cash working
capital
Operating activities $ 7,254 $ (4,465) $(19,488) $ (487)
Investing activities (11,782) 3,072 (2,721) 2,805
--------------------------------------------
$ (4,528) $ (1,393) $(22,209) $ 2,318
--------------------------------------------
--------------------------------------------


10. Related Party Transactions

During the period, the Trust incurred expenditures of $0.9 million for general corporate legal fees to a legal firm of which a director is a partner. The legal fees include transaction costs of $0.8 million relating to the Plan of Arrangement and the remainder is included in general and administrative expense.

11. Comparative Amounts

Certain comparative amounts have been reclassified to conform to the presentation adopted for the current period.

12. Measurement Uncertainty

The amounts recorded for depletion and depreciation of property and equipment, the asset retirement obligations and the ceiling test calculation are based on estimates of proven reserves, production rates, oil and natural gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be significant.

Contact Information

  • Thunder Energy Trust
    Stuart Keck
    President & C.E.O.
    (403) 294-1635
    or
    Thunder Energy Trust
    Brent Kirkby
    Vice President, Finance and C.F.O.
    (403) 294-1635
    (403) 232-1317 (FAX)
    Website: www.thunderenergy.com