Vault Energy Trust
TSX : VNG.UN

Vault Energy Trust

November 14, 2006 06:00 ET

Vault Energy Announces Third Quarter Financial and Operating Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 14, 2006) - Vault Energy Trust (TSX:VNG.UN) ("Vault" or the "Trust") announces its consolidated financial and operating results for the nine months ended September 30, 2006. Vault was created and commenced operations on June 22, 2005, subsequent to the reorganization of Chamaelo Energy Inc. ("Chamaelo") pursuant to a Plan of Arrangement. As Vault is a continuation of Chamaelo, these results reflect the operations of Vault for the nine months of fiscal year 2006 with income statement and cash flow statement comparatives being Chamaelo results from January 1, 2005 to June 21, 2005 and Vault results from June 22, 2005 to September 30, 2005. The balance sheet comparatives are Vault results as at December 31, 2005.

Vault's third quarter results are reflective of major turnarounds at a number of facilities including Wimborne as previously communicated to Unitholders. Third quarter highlights are as follows:

- Completed major turnaround at the Wimborne facility;

- Drilled 1 (1.0) net gas well with 100% success rate at Bigoray;

- Purchased gas plant and associated infrastructure for $1.1 million to augment operations in the Keho area;

- Sold non-core assets (undeveloped acreage) for proceeds of $1.1 million; and

- Distributions payable for the third quarter of 2006 totaled $0.345 per Trust Unit, comprised of $0.115 per Trust Unit paid on August 15, September 15 and October 13, 2006.

Vault continues to remain focused on strengthening its business and has adopted the following measures:

- 2007 Capital Budget has been approved at $25 million;

- Production guidance for 2007 is estimated at 7,000-7,200 Boe/d;

- Operating costs are targeted between $12.00-$12.50 per Boe/d;

- The cash distribution to be paid December 15, 2006 for unitholders of record on November 30, 2006 will be $0.085 per trust unit;

- Vault will optimize $460 million in estimated tax pools;

- The Premium Distribution Reinvestment Plan will be temporarily suspended, commencing with the November distribution payable December 15, 2006; and

- Vault will proceed with filing a normal course issuer bid.



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Three Months Ended Nine Months Ended
September 30, September 30,
FINANCIAL(1) 2006 2005 2006 2005
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($ thousands, except per
Trust unit amounts)

Oil and natural gas sales(1) 32,158 43,847 104,642 73,329

Funds flow from operations 9,102 21,188 40,180 25,714
per Trust unit - basic 0.26 0.66 1.18 1.24
per Trust unit - diluted 0.19 0.57 0.90 1.21

Net income (loss) (13,841) 10,671 (12,514) 5,909
per Trust unit - basic (0.40) 0.33 (0.37) 0.29
per Trust unit - diluted (0.40) 0.29 (0.37) 0.28

Distributions 12,105 11,072 35,478 18,399
Payout ratio 133% 52% 88% 72%

Capital expenditures 6,433 10,124 32,550 20,272

Bank debt 43,505 73,517 43,505 73,517

Working capital deficit(2) 24,659 10,978 24,659 10,978

Trust units outstanding(3)
weighted average - basic 34,927,274 32,005,779 34,108,776 20,709,303
- diluted 37,765,935 37,425,483 37,631,644 21,319,748

end of period - basic 35,288,668 32,096,990 35,288,668 32,096,990
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(1) Oil and natural gas sales are shown net of transportation costs.
(2) Working capital as at September 30, 2006 includes $4.1 million payable
to unitholders.
(3) Prior period per Trust unit amounts based on 2 Chamaelo shares for 1
Trust unit.


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Three Months Ended Nine Months Ended
September 30, September 30,
OPERATING(1) 2006 2005 2006 2005
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Number of producing days 92 92 273 273

Daily production
Oil and NGL - (bbls/d) 2,364 3,200 2,771 2,026
Natural gas - (mcf/d) 27,388 30,899 28,765 17,686
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Oil equivalent - (boe/d @6:1) 6,929 8,350 7,565 4,974

Sales price before physical
hedges(1)
Oil and NGL - ($/bbl) 77.07 68.95 71.23 63.66
Natural gas - ($/mcf) 5.87 9.16 6.36 8.41
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Oil equivalent - ($/boe @6:1) 49.52 60.31 50.28 55.84

Effect of physical hedges
Oil and NGL - ($/bbl) (4.04) (2.24) (2.84) (1.19)
Natural gas - ($/mcf) 0.59 (0.64) 0.38 (0.38)
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Oil equivalent - ($/boe @6:1) 0.93 (3.23) 0.39 (1.83)

Net sales price
Oil and NGL - ($/bbl) 73.03 66.71 68.39 62.47
Natural gas - ($/mcf) 6.46 8.52 6.74 8.03
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Oil equivalent - ($/boe @6:1) 50.45 57.08 50.67 54.01

Royalties
Oil and NGL - ($/bbl) 11.15 11.51 9.57 9.54
Natural gas - ($/mcf) 1.28 2.11 1.44 1.87
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Oil equivalent - ($/boe @6:1) 8.87 12.22 9.00 10.52

Production expenses
Oil and NGL - ($/bbl) 29.66 14.05 20.61 13.81
Natural gas - ($/mcf) 2.77 1.75 2.15 1.63
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Oil equivalent - ($/boe @6:1) 21.08 11.87 15.72 11.44

Operating netback
Oil and NGL - ($/bbl) 32.22 41.15 38.21 39.12
Natural gas - ($/mcf) 2.41 4.66 3.15 4.53
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Oil equivalent - ($/boe @6:1) 20.50 32.99 25.95 32.05
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(1) Sales prices are shown net of transportation costs.


MESSAGE TO UNITHOLDERS

RESULTS

Vault Energy announces the results for the quarter ended September 30th, 2006. It must be noted that the third quarter numbers are adversely affected by the significant turnarounds at various facilities in the quarter. Regularly scheduled maintenance was performed at the Wimborne, Bigoray, Pembina, and Keho facilities. As previously guided, the planned maintenance to the Wimborne facility had the greatest impact to our quarterly numbers, as it required Vault to shut-in approximately one third of total production for a two week period. It was also the most significant contributor to our operating costs. We are pleased to report that the Wimborne turnaround was completed on time and came in at $3.8 million (under the estimated budget of $5 million). I would like to take the opportunity to thank all of the employees and contractors at this time for a job well done.

The costs charged to the quarter for the Wimborne and other turnarounds significantly skew the financial statements from a comparative perspective and should not be viewed as indicative on a go forward basis. It should be understood that all charges incurred during the period must be accrued in and accounted for in that period in accordance with the generally accepted accounting principles.

Vault's production capacity is approximately 7,700-7,800 Boe/d with current production at 7,100-7,200 Boe/d primarily due to a number of operational production outages at our Chinchaga, Kyklo and Wimborne properties. We expect that the Wimborne and Kyklo production will be back on production in the near term while the Chinchaga production will be intermittent until the wells can be tied-in to an alternate facility sometime in late February or early March 2007.

2007 PATH FORWARD

Vault has approved its Capital Budget for 2007 and has set capital spending for the year at $25 million. Production is projected to be between 7,000-7,200 Boe/d for the year. Operating costs are targeted between $12.00 -$12.50 per Boe/d.

In conjunction with Vault's new Capital Budget and a lower commodity price environment, the November distribution to be paid December 15, 2006 for unitholders of record on November 30, 2006 (November distribution) will be $0.085 per Trust Unit. Vault will use its $460 million in estimated tax pools to optimize Unitholder value. In addition, Vault is temporarily suspending the Premium DRIP (Distribution Reinvestment Plan), commencing with the November distribution, as we believe it is currently dilutive to Unitholder value. As part of the strategic plan Vault will proceed with the filing of a normal course issuer bid to allow Vault to buy back undervalued units in the market place.

PROPOSED TAX CHANGES

On October 31st, 2006 the Honourable Jim Flaherty, Minister of Finance, announced changes to the Canadian tax system that has significantly impacted the Income Trust sector and the Canadian markets. As a result of this event, Vault joined the newly formed Canadian Coalition of Energy Trusts ("CCET") in an attempt to lobby Government to reconsider their decision. We will continue to keep Unitholders informed of these pending changes by posting information to our website at www.vaultenergy.com.

Vault will remain focused on our business and has taken action as outlined in the 2007 PATH FORWARD. Be assured that your management team and board are currently reviewing all materials pertinent to the proposed changes and are formulating appropriate business plans.

Sincerely,

Robert T. Jepson


Management's Discussion and Analysis

November 14, 2006

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the consolidated financial statements of Vault Energy Trust ("Vault" or the "Trust") as at and for the nine months ended September 30, 2006 and the audited consolidated financial statements for the year ended December 31, 2005. Barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil ("6:1") unless otherwise stated. The financial statements and financial data contained in the MD&A have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") in Canadian currency (except where noted as being in another currency).

Additional information related to the Trust, including the Trust Indenture, may be found on the SEDAR website at www.sedar.com.

This MD&A may contain forward-looking information that involves a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For this purpose, any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. Such risks and uncertainties include, but are not limited to: risks associated with the oil and gas industry (e.g. - operational risks in exploration, development and production; changes and/or delays in the development of capital assets; uncertainty of reserve estimates; uncertainty of estimates and projections relating to production and costs; commodity price fluctuations; environmental risks; and industry competition).

Management uses measures such as funds flow, payout ratio and operating netback as factors in evaluating performance. These measures do not have standardized meanings as prescribed by GAAP and as a result, may not be comparable to similar measures used by other companies. The determination of funds flow from operations is detailed on the Statement of Cash Flows.



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Three Months Ended Nine Months Ended
Summary of September 30, September 30,
Financial Results(1) 2006 2005 2006 2005
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($ thousands, except per Trust
unit amounts)

Oil and natural gas sales(2) 32,158 43,847 104,642 73,329

Funds flow from operations 9,102 21,188 40,180 25,714
per Trust unit - basic 0.26 0.66 1.18 1.24
per Trust unit - diluted 0.19 0.57 0.90 1.21

Net income (loss) (13,841) 10,671 (12,514) 5,909
per Trust unit - basic (0.40) 0.33 (0.37) 0.29
per Trust unit - diluted (0.40) 0.29 (0.37) 0.28

Total assets 516,200 504,144 516,200 504,144

Bank debt 43,505 73,517 43,505 73,517

Working capital deficit 24,659 10,978 24,659 10,978

Total long-term liabilities 139,206 78,743 139,206 78,743
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(1) Oil and natural gas sales are shown net of transportation costs.
(2) Prior period per Trust unit amounts based on 2 Chamaelo shares for 1
Trust unit.


Production

Daily production averaged 6,929 boe/d (2005 - 8,350 boe/d) and 7,565 boe/d (2005 - 4,974 boe/d) during the three and nine months ended September 30, 2006 respectively. This represents a 17% decrease and 52% increase compared to average production volumes for the same periods of 2005.

Incremental production from the June 2005 and December 2005 acquisitions added to the increase in year to date production for the first three quarters of 2006.

As previously disclosed, the facility maintenance turnaround at Wimborne in September which shut in production for two weeks had a significant adverse effect on Q3 production levels A turnaround of this scope and magnitude is required every three to four years to ensure proper safety and maintenance standards. In July and August, several facilities including Pembina, Bigoray, and Kyklo incurred turnarounds. Vault's production capacity is approximately 7,700-7,800 Boe/d with current production at 7,100-7,200 Boe/d primarily due to a number of operational production outages at Chinchaga, Kyklo and Wimborne properties. We expect that the Wimborne and Kyklo production will be back on full production in the near term while the Chinchaga production will be intermittent until the wells can be tied in to an alternate facility in Alberta sometime in late February or early March 2007.



Average daily production for the three and nine months ended September 30,
2006 is outlined below:

Three Nine
Months ended Months ended
September 30, September 30,
Average Daily Production 2006 2005 % Change 2006 2005 % Change
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Natural gas (mcf/d) 27,388 30,899 (11) 28,765 17,686 63
Oil (bbls/d) 1,982 2,604 (24) 2,349 1,722 36
Natural gas liquids
(bbls/d) 382 596 (36) 422 304 39
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Total (boe/d) 6,929 8,350 (17) 7,565 4,974 52
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Pricing

Our earnings, funds flow and financial condition are dependent on the prices received for our natural gas and crude oil production. Natural gas and crude oil prices have fluctuated widely during recent years. The average sales price as calculated includes prior period sales revenue from non operated properties.



Three Nine
Months ended Months ended
September 30, September 30,
Average Sales Price(1) 2006 2005 % Change 2006 2005 % Change
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Before effect of physical
hedges:
Oil ($/bbl) 77.96 72.21 8 71.12 65.50 9
NGL ($/bbl) 68.43 52.48 30 69.08 52.06 33
Natural gas ($/mcf) 5.87 9.16 (36) 6.36 8.41 (24)
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Average sales price ($/boe) 49.52 60.31 (18) 50.28 55.84 (10)
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Effect of physical hedges:
Oil ($/bbl) (4.04) (2.24) - (2.84) (1.19) -
NGL ($/bbl) - - - - - -
Natural gas ($/mcf) 0.59 (0.64) - 0.38 (0.38) -
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Average sales price ($/boe) 0.93 (3.23) - 0.39 (1.83) -
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Net sales price:
Oil ($/bbl) 73.92 69.97 6 68.28 64.31 6
NGL ($/bbl) 68.43 52.48 30 69.08 52.06 33
Natural gas ($/mcf) 6.46 8.52 (24) 6.74 8.03 (16)
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Average sales price ($/boe) 50.45 57.08 (12) 50.67 54.01 (6)
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(1) Net of oil and gas transportation costs


Three Months Nine Months
ended ended
September 30, September 30,
Average Benchmark Pricing 2006 2005 % Change 2006 2005 % Change
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Oil
West Texas Intermediate
US$/bbl 70.44 63.01 12 68.10 55.25 23
West Texas Intermediate
CDN$/bbl equivalent 78.89 75.61 4 76.95 67.40 14
Edmonton Par CDN$/bbl 79.73 77.21 3 76.06 68.55 11

Natural Gas
AECO Daily Spot Price
CDN$/mcf 5.62 9.30 (40) 6.39 7.85 (19)

Exchange Rates
US$/CDN$ Dollar Period-end 0.89 0.86 3 0.89 0.86 3
US$/CDN$ Dollar Average 0.89 0.83 7 0.88 0.82 7
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Commodity Price Risk Management

Currently, the Trust does not have any financial derivative instruments to hedge against future commodity price fluctuations. However, the Trust has entered into physical sales contracts which have provided some protection against downward movement in commodity prices.

The Trust will continue to monitor commodity prices and will implement price risk management programs as necessary to assist with the sustainability of distributions and growth of the organization given the risk inherent in the sale of oil and natural gas commodities.



A summary of the physical contracts are as follows:


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Upside Remaining
Product Volume Floor price Participation Term
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Jul 1, 2006 -
Natural gas 11,000 GJ/d $7.00/GJ 60% above $7.00/GJ Dec 31, 2006

Nov 1, 2006 -
Natural gas 4,000 GJ/d $7.50/GJ 61.75% above $7.50/GJ Mar 31, 2007

Jan 1, 2007 -
Natural gas 7,000 GJ/d $7.50/GJ 61% above $7.50/GJ Mar 31, 2007

Apr 1, 2007 -
Natural gas 2,500 GJ/d $7.00/GJ Max price $9.00/GJ Oct 31, 2007

Jul 1, 2006 -
Oil 1,000 bbls/d $61.50/bbl 50% above $61.50/bbl Dec 31, 2006

Jan 1, 2007 -
Oil 1,000 bbls/d $68.00/bbl 50% above $68.00/bbl Dec 31, 2007

Jul 1, 2006 -
Electricity 5 MW/h $60.75/MW N/A Dec 31, 2008
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Revenue

Crude oil and natural gas revenues, net of transportation was $32.2 million (2005 - $43.8 million) and $104.6 million (2005 - $73.3 million) in the three and nine months ending September 30, 2006. The increase in revenue for the nine months in 2006 is primarily due to the June 2005 and December 2005 acquisitions. In addition, oil prices have continued to remain strong, which has contributed to higher revenues. Natural gas revenues, net of transportation and physical hedges, were $16.3 million or 33% decrease from lower prices/volumes and $53.0 million or 36% increase from higher volumes respectively for the three and nine months period compared to last year. In the third quarter, oil and NGL revenues were $15.9 million or 19% decrease from lower volumes while nine months year to date were $51.6 million or 50% increase due to higher prices. The physical gas hedge contracts increased revenues in the three and nine months ending September 30, 2006 by $1.5 million and $3.0 million respectively.



For the Three Months Ended September 30, 2006

Analysis of Sales
Revenue(1) ($ thousands) Natural Gas Crude Oil NGLs Total
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2005 Sales Revenue $ 24,209 $ 16,766 $ 2,872 $ 43,847
Price Variance (5,845) (751) 855 (5,741)
Volume Variance (2,087) (2,730) (1,131) (5,948)
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2006 Sales Revenue $ 16,277 $ 13,285 $ 2,596 $ 32,158
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For the Nine Months Ended September 30, 2006

Analysis of Sales
Revenue(1) ($ thousands) Natural Gas Crude Oil NGLs Total
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2005 Sales Revenue $ 38,781 $ 30,225 $ 4,323 $ 73,329
Price Variance (6,250) 919 1,403 (3,928)
Volume Variance 20,390 12,432 2,419 35,241
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2006 Sales Revenue $ 52,921 $ 43,576 $ 8,145 $ 104,642
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(1) Net of oil and gas transportation costs and including the effect of
physical hedges.


Royalties

Royalties are paid to various government entities and other land and mineral rights owners. In the third quarter of 2006, oil and natural gas royalties totaled $5.7 million or 17% of revenues as compared to $9.4 million and 21% of revenues in the same period during 2005. For the nine months ended, oil and natural gas royalties totaled $18.6 million or 17% of revenues as compared to $14.3 million and 19% of revenues in the same period during 2005.

Production Expenses

Production expenses for the three and nine months ended September 30, 2006 were $13.4 million or $21.08/boe (2005 -$9.1 million or $11.87/boe) and $32.5 million or $15.72/boe (2005 - $15.5 million or $11.44/boe) respectively. In September, the cost of the Wimborne facility turnaround which shut down the plant for two weeks is estimated to be $3.8 million or $5.96/boe and $1.84/boe respectively for the three and nine months ended. Also included in the quarter is $1.1 million for turnaround costs at Pembina, Bigoray and Kyklo. The annual payment of property taxes are also reflected in the quarter. We continue to encounter increased production costs and cost pressures due to the competitive market for service providers and increased utilities and other routine costs. Production expenses on a go forward basis are expected to be approximately $12.50/boe.

Vault is committed to focusing efforts on opportunities that will improve operational efficiencies and reduce per boe production expenses to enhance operating netbacks.



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Three Months Ended Nine Months Ended
September 30, September 30,
Operating Netback(1) 2006 2005 2006 2005
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Oil and NGL ($/bbl)
Revenue 73.03 66.71 68.39 62.47
Royalties 11.15 11.51 9.57 9.54
Production expenses 29.66 14.05 20.61 13.81
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Operating Netback 32.22 41.15 38.21 39.12
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Natural gas ($/mcf)
Revenue 6.46 8.52 6.74 8.03
Royalties 1.28 2.11 1.44 1.87
Production expenses 2.77 1.75 2.15 1.63
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Operating Netback 2.41 4.66 3.15 4.53
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Combined ($/boe)
Revenue 50.45 57.08 50.67 54.01
Royalties 8.87 12.22 9.00 10.52
Production expenses 21.08 11.87 15.72 11.44
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Operating Netback 20.50 32.99 25.95 32.05
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(1) Revenue is shown net of oil and gas transportation costs and including
the effect of physical hedges.


The operating netback is a key indicator of the Trust's ability to generate funds flow for distribution and reinvestment. During the three and nine months ended September 30, 2006, Vault generated an operating netback of $20.50 (2005 - $32.99) and $25.95 (2005 - $32.05) on a per boe basis.

General and Administrative Expenses ("G&A")

Net G&A costs for the three and nine months ended totaled $1.8 million or $2.88/boe (2005 - $1.4 million or $1.85 per boe) and $5.7 million or $2.78/boe (2005 - $4.0 million or $2.97 per boe) respectively. G&A costs on both a gross and per BOE basis has increased in 2006 primarily because the Trust has added both technical and administrative staff to manage the increased asset and production base.

Interest Expense

The Trust incurred interest costs of $2.7 million or $4.20/boe (2005 - $2.0 million or $2.62/boe) for the three months ended September 30, 2006 and $7.1 million or $3.45/boe (2005 - $3.5 million or $2.58/boe) for the nine months ended September 30, 2006. Interest accruing to holders of the $55 million ($48.7 million remaining principal) 8% convertible debentures issued on April 27, 2005, and the $50 million ($50 million remaining principal) 7.2% convertible debentures issued May 2, 2006 have both contributed to an increase in interest expense. The Trust's average interest rate on bank credit facilities for the three and nine months ended was 6.9 % and 5.9 % respectively.

Depletion, Depreciation, Amortization and Accretion ("DDA&A")

DDA&A expense totaled $16.5 million or $25.83/boe (2005 - $12.2 million or $15.85/boe) and $51.4 million or $24.89/boe (2005 - $22.4 million or $16.46/boe) for the three and nine months ended September 30, 2006. The DDA&A rate reflects the higher cost of corporate and property acquisitions that took place during fiscal 2005 as well as the downward revision of reserves in the fourth quarter of 2005. During the three and nine months ended September 30, 2006, the provision for DDA&A includes $530,000 or $0.83/boe (2005 - $ 304,000 or $0.40 /boe) and $1.6 million or $0.77/boe (2005 - $830,000 or $0.62/boe) respectively for accretion of asset retirement obligations.

For the three months ended September 30, 2006, $207,000 or $0.32/boe (2005 - $ 98,000 or $0.13/boe) of accretion expense has been recognized in respect of the two convertible debentures issued on April 27, 2005 and May 2, 2006. During the nine months then ended, $501,000 or $0.24/boe (2005 - $170,000 or $0.13/boe) of accretion on convertible debentures was recognized (See note 4). In addition, amortization of $247,000 or $0.39/boe (2005 - $140,000 or $0.18/boe) and $602,000 or $0.29/boe (2005 - $140,000 or $0.10/boe) of deferred financing charges relating to the issue of these convertible debentures has been recognized for the three and nine months ended September 30, 2006.

Goodwill Impairment

Goodwill was recorded on the Capstone acquisition in 2004 when the purchase price was in excess of the fair values assigned to the assets acquired and liabilities assumed. To assess impairment at September 30, 2006, the fair value of the goodwill was determined and compared to the carrying value. As the carrying amount of the goodwill exceeds its fair value, a goodwill impairment of $4.2 million was recognized and charged to income in the period.

Unit Based Compensation

During the three and nine months ended September 30, 2006, $1.5 million and $3.0 million respectively was charged to income in respect of non-cash unit-based payments as compared to $702,000 and $3.3 million for the same periods in 2005. The Trust uses the fair value method of allocating value to Trust unit rights. The unit-based compensation recognized represents the amortization of this fair value to income over the vesting period with an offset to contributed surplus. In the second quarter an amount of $285,000 was recovered that was previously charged to unit based compensation. This recovery is the result of Chamaelo Energy Inc. retention payments being lower then originally estimated.

Taxes

Current income taxes for the three and nine months ended September 30, 2006 were $45,000 (2005 - $147,000) and $53,000 (2005 - $367,000). The decrease in the period is due to the elimination of the federal Large Corporation Tax effective January 1, 2006.

Future income taxes arise from differences between the accounting and tax bases of the operating company's assets and liabilities. Payments are made between the operating company and the Trust in our current structure, which ultimately transfers both income and future tax liability to our unitholders. Therefore, it is Vault's opinion that no cash income taxes are expected to be paid by the operating entities in the near future. As a result, the future income tax liability recorded on the balance sheet should be recovered through earnings over time.

For the nine months ended September 30, 2006, future tax recoveries of $4.1 million (2005 - recovery of $5.5 million) were realized which includes $2.1 million recovery due to enacted changes to statutory tax rates. In the third quarter, the future income tax expense was $1.6 million (2005 - recovery of $3.3 million) and includes prior period adjustments for the tax recoveries as calculated.

On October 31, 2006, the Minister of Finance announced proposed legislation that trusts will be taxed. Currently, the Trust does not pay tax on distributions as tax is paid by the unitholders. If enacted, the proposals would apply to the Trust effective January 1, 2011, however the legislation has not been enacted at this time. The Trust is currently assessing the proposals and the potential implications.

Funds flow and Net Income

Funds flow from operations for the three months ended September 30, 2006 was $9.1 million ($0.19 per diluted Trust unit) as compared to $21.2 million ($0.57 per diluted Trust unit) for the same period of 2005. For the nine months ended September 30, 2006, funds flow from operations was $40.2 million ($0.90 per diluted Trust unit) whereas for that same period in 2005 the funds flow from operations was $25.7 million ($1.21 per diluted Trust unit).

The Trust had a net loss respectively of $13.8 million (-$0.40 per diluted Trust unit) for the three months ended and $12.5 million (-$0.37 per diluted Trust unit) for the nine months ending September 30, 2006. This can be compared to a net income respectively of $10.7 million ($0.29 per diluted Trust unit) for the three months ended and $5.9 million ($0.28 per diluted Trust unit) for the nine months ending September 30, 2005.



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Three Months Ended Nine Months Ended
Capital Expenditures September 30, September 30,
($ thousands) 2006 2005 2006 2005
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Land 1,639 14 2,347 636
Drilling, completions
and workovers 4,005 7,118 19,387 14,268
Equipment 192 1,582 8,657 2,496
Geological and Geophysical 482 326 1,106 1,638
Other 115 1,084 1,053 1,234
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Capital expenditures 6,433 10,124 32,550 20,272
Property acquisitions 1,071 296 1,483 372,963
Dispositions (1,110) - (3,162) -
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Net Capital Expenditures 6,394 10,420 30,871 393,235
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For the three and nine months ended September 30, 2006, capital expenditures incurred total $6.4 million and $32.5 million respectively.

Distributable Cash

Distributions are paid monthly on the 15th day of each month with the record date being the last business day of the preceding calendar month or such other date as may be determined by the board of directors. A portion of funds flow is retained to fund acquisitions and development activity.

The Trust will monitor the payout level with respect to funds flow, debt levels and spending plans.

During the three and nine months ended September 30, 2006, Vault distributed $12.1 million or $0.35 per Trust unit and $35.5 million or $1.04 per Trust unit to unitholders. The resulting payout ratio for the three months ended September 30, 2006 is 133% and nine months then ended is 88%.



Three months Nine months
Reconciliation of Cash Available for ended ended
Distribution September 30, September 30,
($ thousands) 2006 2006
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Cash flow from operating activities 22,214 34,848
Change in non-cash working capital (13,112) 5,332
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Funds flow from operations 9,102 40,180
Cash withheld for acquisitions, capital
expenditures and debt repayment (1) (4,702)
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Cash available for distributions (2) 9,102 35,478
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Cash distributions paid 12,105 35,478
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---------------------------------------------------------------------------
Cash available for distribution per Trust unit
Payout ratio 133% 88%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Cash withheld for acquisition, capital expenditures and debt repayment
is a discretionary amount and represents the difference between funds
flow from operations and distributions.
(2) Cash available for distribution may differ from Distributions to
unitholders on the Consolidated Statements of Cash Flows due to the
timing of distribution announcements and the number of Trust units
outstanding on record dates.


Liquidity and Capital Resources

Bank debt totaled $43.5 million net which is comprised of $47.5 million outstanding on the credit facility and cash on account of $4.0 million. The working capital deficit was $24.7 million at September 30, 2006.

The Trust has, through its subsidiary, a credit agreement with a syndicate of Canadian banks to provide the Trust with $125,000,000 of total credit facilities. This is comprised of an extendible revolving term credit facility of $115,000,000 and a $10,000,000 operating facility each bearing interest at prime plus a premium ranging between 0% and 1.75% based on the Trust's debt to funds flow ratio. The credit facilities are secured by a $200,000,000 demand debenture on the assets of Vault Energy and have been renewed to June 29, 2007.

Under the terms of its trust indenture, the Trust is required to distribute all of its taxable income to unitholders. Distributions may be monthly or special and in cash or in trust units at the discretion of the Board of Directors. To the extent that additional cash distributions are paid and capital programs are not adjusted, debt levels may increase. In the event that a special distribution in the form of trust units is declared, the terms of the Trust Indenture require that the outstanding units be consolidated immediately subsequent to the distribution. The number of outstanding trust units would remain at the number outstanding immediately prior to the distribution of trust units and that portion of the Trust's taxable income would be allocated to the unitholders.



Quarterly Financial Information

Summary of
Quarterly
Results(1)
($ thousands) Q4/04 Q1/05 Q2/05(2) Q3/05(2) Q4/05 Q1/06 Q2/06 Q3/06
---------------------------------------------------------------------------

Production:
Oil and NGL
(bbls/d) 729 1,383 1,475 3,200 3,025 2,912 3,041 2,364
Gas (mcf/d) 5,926 10,323 11,611 30,899 29,363 29,428 29,502 27,388
---------------------------------------------------------------------------
Total BOE
(Gas 6:1) 1,717 3,104 3,410 8,350 7,919 7,817 7,958 6,929
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Oil and
natural gas
sales (3) 7,057 13,489 15,993 43,847 47,791 36,175 36,310 32,158

Cash flow
from
operations 3,494 6,902 (2,377) 21,188 26,761 15,578 15,499 9,102
per Trust
unit
- basic 0.30 0.50 (0.15) 0.66 0.82 0.47 0.45 0.26
per Trust
unit
- diluted 0.28 0.46 (0.15) 0.57 0.73 0.42 0.35 0.19

Net income
(loss) 441 1,479 (6,241) 10,671 4,573 (1,280) 2,607 (13,841)
per Trust
unit
- basic 0.04 0.10 (0.39) 0.33 0.14 (0.04) 0.08 (0.40)
per Trust
unit
- diluted 0.04 0.10 (0.39) 0.29 0.14 (0.04) 0.07 (0.40)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Eight quarters shown from the commencement of operations on June 1,
2004.
(2) Restated to reflect the change in treatment of restructuring costs.
(3) Oil and natural gas sales are shown net of transportation costs.


Trust Unit Information

The Trust is authorized to issue an unlimited number of Trust units. The Trust units are traded on the Toronto Stock Exchange under the symbol "VNG.UN". At December 31, 2005, Vault had 32,785,833 Trust units and 3,560,586 exchangeable shares outstanding.

As at September 30, 2006, the Trust had 35,288,668 Trust units and 2,261,255 exchangeable shares outstanding. The increase in Trust units from December 31, 2005 to September 30, 2006 is a result of 1,449,034 issued for exchangeable shares, 81,364 issued for warrants exercised, and 972,437 Trust units issued pursuant to the Distribution Reinvestment and Optional Purchase Plan ("DRIP").

Income Taxes

The following is a general discussion of the Canadian tax consequences of holding Vault Trust units as capital property. The summary is not exhaustive in nature nor is it intended to provide advice on legal or tax matters. Current and prospective investors should consult their own legal or tax counsel as to their particular circumstances.

Canadian Unitholders

The Trust qualifies as a mutual fund trust under the Income Tax Act (Canada) and accordingly, Trust units are qualified investments for RRSP's, RRIF's, RESP's and DPSP's. Each year the Trust is required to file an income tax return and any taxable income in the Trust is allocated to the unitholders.

In computing income, unitholders are required to include their pro-rata share of any taxable income earned by the Trust in that year. The adjusted cost base ("ACB") of an investor's trust unit equals the purchase price of the Trust unit less any non-taxable cash distributions received from the date the unit was purchased. Should an investor's ACB be reduced below zero, the extent to which the ACB is below zero will be deemed to be a capital gain to the unitholder and the ACB of the unit will be brought to $nil.

Critical Estimates

Management is required to make judgments, assumptions, and estimates in the application of generally accepted accounting principles that have a significant impact on the financial results of the Trust. The following summarizes the accounting policies that are critical to determining the company's financial results.

Oil and Natural Gas Reserves - The Trust's oil and natural gas reserves are evaluated and reported on by independent petroleum engineers. The estimates of reserves is a very subjective process as forecasts are based on engineering data, projected future rates of production, estimated future commodity prices and the timing of future expenditures, which are all subject to uncertainty and interpretation. Reserve estimates can have a significant impact on earnings, as they are a key component in the calculation of depletion. A downward revision to the reserve estimate could result in higher depletion and thus lower net earnings. In addition, estimated reserves are also used in the calculation of the impairment (ceiling) test.

Critical Accounting Policies

Full Cost Accounting - The Trust follows the full cost method of accounting whereby all costs related to the acquisition of, exploring for and developing oil and natural gas reserves are capitalized and charged against earnings. These costs, together with the estimated future costs to be incurred in developing proved reserves, are depleted or depreciated using the unit-of-production method based on the proved reserves before royalties as estimated by independent petroleum engineers. The costs of undeveloped properties are excluded from the costs subject to depletion and depreciation until it is determined whether proved reserves are attributable to the properties or impairment occurs. Oil and natural gas properties are evaluated each reporting period through an impairment test to determine the recoverability of capitalized costs. The carrying amount is assessed as recoverable when the sum of the undiscounted cash flows expected from proved reserves plus the cost of unproved interests, net of impairments, exceeds the carrying amount. When the carrying amount is assessed not to be recoverable, an impairment loss is recognized to the extent that the carrying amount exceeds the sum of the discounted cash flows from proved and probable reserves plus the cost of unproved interests, net of impairments.

The cash flows are estimated using expected future prices and costs and are discounted using a credit adjusted risk-free interest rate. Proceeds from the sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would result in a change in the depletion rate of 20% or more.

Goodwill - Goodwill, which represents the excess of purchase price over the fair value of net assets received in an acquisition, is tested for impairment on an annual basis in the fourth quarter. A goodwill impairment loss would be recognized when the carrying amount of goodwill exceeds its fair value. Should the test result in an impairment, it will be charged to income in the period of the impairment.

Asset Retirement Obligation - The Trust is required to provide for future abandonment and site reclamation costs. These costs are estimated based on existing laws, contracts or other policies and are presented as asset retirement obligation. The obligation is initially measured at fair value and subsequently adjusted for the accretion of discount and any changes to the underlying cash flows. The asset retirement cost is capitalized to oil and natural gas properties and equipment and amortized into earnings on a basis consistent with depletion and depreciation. The estimate of the asset retirement obligation involves estimates relating to the timing of abandonment, the economic life of the underlying asset and the costs associated with abandonment and site reclamation which are all subject to uncertainty and interpretation.

Exchangeable shares and Non-controlling Interests - Exchangeable shares in Vault Energy were issued pursuant to the Plan of Arrangement. The exchangeable shares are transferable and are retractable for Trust units. As such, they have been classified outside of equity as a non-controlling interest. Net income (loss) as reported is net of net income (loss) attributable to non-controlling interest.

Convertible debentures - Convertible debentures are initially recorded at the fair value of the obligation without the conversion feature. The difference between the principal amount and the fair value without the conversion feature is recorded in unitholders' equity as equity component of convertible debentures. The obligation is accreted through earnings using the effective interest rate method and the equity component of convertible debentures is increased as the debentures are converted for Trust units.

Risk Assessment

The acquisition, exploration and development of oil and natural gas assets involves many risks common to all participants in the oil and natural gas industry. Vault's exploration and development activities are subject to various business risks such as unstable commodity prices, interest rate and foreign exchange fluctuations, the uncertainty of replacing production and reserves on an economic basis, government regulations, taxes, safety and environmental concerns. As such, the funds flow paid to unitholders as well as the value of Vault's trust units are subject to such risks. While the management of Vault realizes these risks cannot be eliminated, they are committed to monitoring and mitigating these risks.

Reserves and Reserve Replacement

The recovery and reserve estimates on Vault's properties are estimates only and the actual reserves may be materially different from that estimated. The estimates of reserve values are based on a number of variables including price forecasts, projected production volumes and future production and capital costs. All of these factors may cause estimates to vary from actual results.

Vault's future oil and natural gas reserves, production, and funds flows to be derived therefrom are highly dependent on Vault successfully acquiring new reserves and developing existing reserves.

To mitigate this risk, Vault has assembled a team of experienced technical professionals who have expertise operating and exploring in areas which Vault has identified as the most prospective for increasing Vault's reserves on an economic basis.

To further mitigate reserve replacement risk, Vault has targeted a majority of its prospects in areas which have multi-zone potential, year-round access and lower drilling costs. Also, Vault employs advanced geological and geophysical techniques to increase the likelihood of finding additional reserves.

Reserves that Vault may have at any particular time and the production therefrom will decline over time as such existing reserves are exploited. A future increase in Vault's reserves will depend on its abilities to acquire suitable prospects or properties and discover new reserves. Acquisitions of oil and gas assets depend upon the assessment of value that Vault makes at the time of acquisition, which are subject to the risk of incorrect assessments. Vault mitigates acquisition risk by performing due diligence, review and obtaining approval from the Board of Directors for potential acquisitions. Where required, evaluations from independent reserve engineers are also obtained.

Operational Risks

Vault's operations are subject to the risks normally incidental to the operation and development of oil and natural gas properties and the drilling of oil and natural gas wells. Continuing production from a property, and to some extent the marketing of production therefrom, are largely dependent upon the ability of the operator of the property.

Commodity Price Risk

The Company's oil and natural gas production is marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. Operating results and financial condition of the Trust are impacted by prices it receives for its production.

Interest Rate Risk

Vault has exposure to movements in interest rates, particularly those charged on the revolving credit facility entered into at the time of the Plan of Arrangement.

Foreign Currency Risk

The Trust is exposed to foreign currency fluctuations as crude oil prices received are referenced to U.S. dollar denominated prices. Currently, Vault sells natural gas in Canadian currency; however, if that were to change then Vault would be subject to foreign exchange risk on selling this product in U.S. dollar denominated indices.

Mutual Fund Trust Status

Vault meets the requirements of a Mutual Fund Trust as prescribed by the Income Tax Act (Canada). On October 31, 2006, the Minister of Finance announced proposed legislation that trusts will be taxed. If enacted, the proposals would apply to the Trust effective January 1, 2011, however the legislation has not been enacted at this time. The Trust is currently assessing the proposals and the potential implications.

Safety and Environmental Risks

The oil and natural gas business is subject to extensive regulation pursuant to various municipal, provincial, national, and international conventions and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. Vault is committed to meeting and exceeding its environmental and safety responsibilities. Vault has implemented an environmental and safety policy that is designed, at a minimum to comply with current governmental regulations set for the oil and natural gas industry. Changes to governmental regulations are monitored to ensure compliance. Environmental reviews are completed as part of the due diligence process when evaluating acquisitions. Environmental and safety updates are presented and discussed at each Board of Directors' meeting. Vault maintains adequate insurance commensurate with industry standards to cover reasonable risks and potential liabilities associated with its activities as well as insurance coverage for officers and directors executing their corporate duties.

Regulatory Risk

On October 31, 2006, the Minister of Finance announced proposed legislation that trusts will be taxed. If this legislation passes, all existing trusts will be taxable commencing 2011 at a tax rate of 31.5%. Distributions and undistributed income will be taxable. Trust unitholders will be required to treat distributions as dividend income. This announcement resulted in a market value adjustment for the trust industry and on going change is possible until further information is available.

Credit Risk

Vault is exposed to credit risk from sales of oil and natural gas as well as from joint venture participants. These customers are in the oil and natural gas industry, which makes Vault subject to normal industry credit risk. In order to limit this risk, Vault selects financially sound counterparties to transact with and reviews its exposure to individual customers on a frequent basis.

Unitholder Liability

Previously, there has been some concern that trust unitholders may be held personally liable for the indebtedness of Vault. In Alberta in June 2004, there was legislation passed that provides statutory protection for unitholders which is similar to protection to shareholder of a corporation. Therefore, since Vault is registered in Alberta, the risk of Unitholder Liability is removed.

Additional information related to Vault, including the Annual Information Form (AIF), may be found on the SEDAR website at www.sedar.com.



VAULT ENERGY TRUST
Consolidated Balance Sheets
($ thousands)


September 30, 2006 December 31, 2005
---------------------------------------------------------------------------
(Unaudited)

Assets
Current assets:
Cash $ - $ 5,769
Accounts receivable 10,058 17,564
Prepaid expenses and deposits 1,209 2,074
---------------------------------------------------------------------------
11,267 25,407

Property, plant and equipment (Note 2) 500,769 511,069
Deferred financing charges (Note 4) 4,164 2,521
Goodwill - 4,179
---------------------------------------------------------------------------
$ 516,200 $ 543,176
---------------------------------------------------------------------------

Liabilities and Unitholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 31,868 $ 38,930
Distributions payable to unitholders 4,058 3,770
---------------------------------------------------------------------------
35,926 42,700

Capital lease obligation 234 166
Deferred credits (Note 14) 1,878 1,598
Revolving credit facility (Note 3) 43,505 81,500
Convertible debentures (Note 4) 94,716 46,616
Asset retirement obligation (Note 5) 30,510 29,560
Future income taxes 11,868 13,839
Non-controlling interest (Note 6) 14,480 24,856

Unitholders' equity:
Trust units/common shares (Note 7) 340,274 317,193
Contributed surplus (Note 9) 4,982 1,729
Equity component of convertible debentures
(Note 4) 4,701 2,301
Accumulated deficit (66,874) (18,882)
---------------------------------------------------------------------------
283,083 302,341
---------------------------------------------------------------------------
$ 516,200 $ 543,176
---------------------------------------------------------------------------
See accompanying notes to the consolidated statements

Approved by the Board of Directors:

Robert Jepson Sean Monaghan
President, Chairman of the Board of Directors
Chief Executive Officer and Director



VAULT ENERGY TRUST
Consolidated Statements of Income
($ thousands)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(Unaudited) 2006 2005 2006 2005
---------------------------------------------------------------------------
(Restated) (Restated)

Revenue:
Oil and
natural gas $ 33,329 $ 44,947 $ 108,428 $ 75,142
Transportation
expense (1,171) (1,100) (3,786) (1,812)
Royalties (5,650) (9,387) (18,563) (14,286)
---------------------------------------------------------------------------
26,508 34,460 86,079 59,044

Expenses:
Production 13,436 9,116 32,470 15,527
Plan of
arrangement costs - 247 - 8,145
General and
administrative 1,835 1,419 5,732 4,027
Interest 2,678 2,011 7,139 3,504
Depletion,
depreciation and
accretion 16,463 12,173 51,403 22,353
Goodwill impairment
(Note 8) 4,179 - 4,179 -
Unit based
compensation
(Note 9) 1,503 702 2,969 3,294
Foreign exchange (4) 13 (4) 13
---------------------------------------------------------------------------
40,090 25,681 103,888 56,863

---------------------------------------------------------------------------
Income (loss)
before taxes (13,582) 8,779 (17,809) 2,181
---------------------------------------------------------------------------

Taxes:
Current taxes 45 147 53 367
Future income tax
expense (recovery) 1,577 (3,315) (4,121) (5,469)
---------------------------------------------------------------------------
Net income (loss)
before non-
controlling
interest (15,204) 11,947 (13,741) 7,283
Non-controlling
interest (Note 6) 1,363 (1,276) 1,227 (1,374)
---------------------------------------------------------------------------
Net income (loss) $ (13,841) $ 10,671 $ (12,514) $ 5,909
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net Income (loss)
per Trust unit
(Note 10)
Basic (0.40) 0.33 (0.37) 0.29
Diluted (0.40) 0.29 (0.37) 0.28


Consolidated Statements of Accumulated (Deficit) Income

Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(Unaudited) 2006 2005 2006 2005
---------------------------------------------------------------------------
(Restated) (Restated)
Accumulated
(deficit) income,
beginning of
period (40,928) (11,745) (18,882) 344
Net (loss) income (13,841) 10,671 (12,514) 5,909
Accumulated cash
distributions (12,105) (11,072) (35,478) (18,399)
---------------------------------------------------------------------------
Accumulated deficit,
end of period (66,874) (12,146) (66,874) (12,146)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


VAULT ENERGY TRUST
Consolidated Statements of Cash Flows
($ thousands)

Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(Unaudited) 2006 2005 2006 2005
---------------------------------------------------------------------------
(Restated) (Restated)
Cash provided by
(used in):

Operating:
Net income
(loss) $ (13,841) $ 10,671 $ (12,514) $ 5,909
Items not
affecting
cash:
Depletion,
depreciation
and accretion 16,463 12,173 51,403 22,353
Goodwill
impairment 4,179 - 4,179 -
Amortization of
natural gas
sales contract (238) (308) (745) (970)
Unit-based
compensation 1,503 702 2,969 2,528
Future income
taxes 1,577 (3,315) (4,121) (5,469)
Non-controlling
interest (1,363) 1,304 (1,227) 1,374
Gas over bitumen
royalty adjustment 1,026 - 1,026 -
Asset retirement
expenditures (204) (39) (790) (11)
---------------------------------------------------------------------------
Cash flow from
operations 9,102 21,188 40,180 25,714
Net change in
non-cash
operating
working capital 13,112 (2,496) (5,332) 1,953
---------------------------------------------------------------------------
22,214 18,692 34,848 27,667
---------------------------------------------------------------------------

Financing:
Increase (decrease)
in revolving
credit facility (5,775) (6,991) (37,995) 60,552
Convertible
debenture issue,
net of costs (32) - 47,756 52,199
Increase (decrease)
in capital lease
obligation (5) 156 68 149
Trust units issued,
net of costs 4,345 (153) 8,173 260,964
Warrants exercised 212 20 474 1,940
Options exercised,
net of settled - - - 811
Distributions to
unitholders (12,105) (11,072) (35,478) (18,399)
Change in non-cash
financing working
capital 96 1,111 289 3,714
---------------------------------------------------------------------------
(13,264) (16,929) (16,713) 361,930
---------------------------------------------------------------------------

Investments:
Property
acquisitions (1,071) (296) (1,483) (372,963)
Property
dispositions 1,110 - 3,162 -
Capital
expenditures (6,433) (10,124) (32,550) (20,272)
Change in non-cash
investing working
capital (2,556) 4,967 6,967 3,638
---------------------------------------------------------------------------
(8,950) (5,453) (23,904) (389,597)
---------------------------------------------------------------------------

Change in cash - (3,690) (5,769) -
Cash, beginning of
period - 3,690 5,769 -
---------------------------------------------------------------------------

Cash, end of
period $ - $ - $ - $ -
---------------------------------------------------------------------------


Vault Energy Trust
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2006
(Tabular amounts in thousands of Canadian dollars, except per unit amounts)


Vault Energy Trust ("Vault" or the "Trust") is an open-ended, unincorporated investment trust governed by the laws of the province of Alberta pursuant to a Trust Indenture. Valiant Trust Company has been appointed trustee under the Trust Indenture. The beneficiaries of the Trust are the holders of the Trust units ("unitholders").

The Trust was formed on April 25, 2005, completed a private placement on April 27, 2005 and began active oil and gas operations through its subsidiary, Vault Energy Inc. ("Vault Energy") as part of a plan of arrangement ("Plan of Arrangement") on June 22, 2005 involving Chamaelo Energy Inc. ("Chamaelo"), a new exploration focused entity ("ExploreCo"), Vault Energy and the Trust.

While the Trust was created on June 22, 2005, these interim consolidated financial statements follow the continuity of interests basis of accounting as if the Trust was a continuation of Chamaelo. As Vault is a continuation of Chamaelo, these results reflect the operations of Vault for the first nine months of 2006 with income statement and cash flow statement comparatives being Chamaelo results from January 1, 2005 to June 21, 2005 and Vault results from June 22, 2005 to September 30, 2005. The balance sheet comparatives are Vault results at December 31, 2005.

Structure of the Trust

Vault 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" that became effective on June 22, 2005. The purpose of the Trust is to indirectly explore for, develop and hold interests in petroleum and natural gas properties, through investments in securities of subsidiaries and royalty interests in oil and natural gas properties. The business of the Trust is carried on by Vault Energy Inc. The Trust owns, directly and indirectly, 100% of the common shares (excluding the exchangeable shares - see note 6) of Vault Energy Inc. The activities of Vault Energy Inc. are financed through interest bearing notes from the Trust and third party debt as described in the notes to the financial statements. The convertible debentures are direct obligations of the Trust.

Pursuant to the terms of an agreement (the "NPI Agreement"), the Trust is entitled to a payment from Vault Energy Inc. each month equal to the amount by which 99% of the gross proceeds from the sale of production exceed 99% of certain deductible expenditures (as defined). Under the terms of the NPI Agreement, deductible expenditures may include amounts determined on a discretionary basis to fund capital expenditures, to repay third party debt, and to provide for working capital required to carry out the operations of Vault Energy Inc.

The Trustee may declare payable to the Trust Unitholders all or any part of the net income of the Trust earned from interest income on the notes and from the income generated under the NPI Agreement, and from any dividends paid on the common shares of Vault Energy Inc., less any expenses of the Trust including interest on the convertible debentures.

1. SIGNIFICANT ACCOUNTING POLICIES

The interim consolidated financial statements of Vault have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the audited consolidated financial statements of Vault for the period ended December 31, 2005. 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 consolidated financial statements and the notes thereto in Vault Energy Trust's annual report for the period ended December 31, 2005.



2. PROPERTY, PLANT AND EQUIPMENT

September 30, December 31,
Property, plant and equipment ($ thousands) 2006 2005
---------------------------------------------------------------------------
Oil and natural gas properties 586,731 549,336
Office and other equipment 3,657 2,639
---------------------------------------------------------------------------
Cost of oil and natural gas properties and
equipment 590,388 551,975
---------------------------------------------------------------------------
Accumulated depletion of oil and natural gas
properties (88,361) (40,531)
Accumulated depreciation of office and other
equipment (1,258) (375)
---------------------------------------------------------------------------
Accumulated depletion, depreciation and
accretion (89,619) (40,906)
---------------------------------------------------------------------------
Net property, plant and equipment 500,769 511,069
---------------------------------------------------------------------------
---------------------------------------------------------------------------


As at September 30, 2006, the cost of oil and natural gas properties includes $14,652,000 (2005 - $19,580,000) relating to properties from which there is no proved reserves and which have been excluded from costs subject to depletion and depreciation. During the nine months ended September 30, 2006, the provision for depletion, depreciation, and accretion includes $1,560,000 (2005 - $841,000) for accretion of asset retirement costs. The Trust capitalized $ 423,000 (2005 - $ 71,000) of general and administrative costs for this same period. Future development costs at September 30th were $21,842,000 in 2006 and $35,622,000 in 2005. These have been included in the calculation of depletion, depreciation, and accretion in their respective period.

The Trust performed an impairment (ceiling) test at September 30, 2006 to assess the recoverable value of the oil and natural gas properties. The oil and natural gas future prices are based on October 1, 2006 commodity price forecasts of the Trust's independent reserve evaluators. These prices have been adjusted for commodity price differentials specific to the Trust. Based on these assumptions, there was no impairment at September 30, 2006.

3. REVOLVING CREDIT FACILITY

Concurrent with the Plan of Arrangement, Vault Energy entered into a credit agreement with a syndicate of Canadian banks to provide the Trust with $125,000,000 of total credit facilities. This is comprised of an extendible revolving term credit facility of $115,000,000 and a $10,000,000 operating facility each bearing interest at prime plus a premium ranging between 0% and 1.75% based on the Trust's debt to cash flow ratio. The credit facilities are secured by a $200,000,000 demand debenture on the assets of Vault Energy and have been renewed to June 29, 2007. Should the facilities not be renewed they convert to 366-day non-revolving term facilities on the renewal date. Payment will not be required under the facilities for more than 365 days from the conversion date and, as such, the revolving credit facility has been classified as non-current. The effective interest rate as at September 30, 2006 was 6.7%.



September 30, December 31,
Credit Facility ($ thousands) 2006 2005
---------------------------------------------------------------------------
Revolving Term Credit Facility 47,500 81,500
Operating Line - -
---------------------------------------------------------------------------
Total 47,500 81,500
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. CONVERTIBLE DEBENTURES

On April 27, 2005, Chamaelo completed a bought deal private placement financing issuing 55,000 Series D subscription receipts at a price of $1,000 per Series D subscription receipt for aggregate gross proceeds of $55,000,000. Issue costs of $2,801,000 have been classified as deferred financing charges and will be amortized over the life of the debentures. For the nine months ended September 30, 2006, amortization of $338,000 has been expensed.

Pursuant to the Plan of Arrangement, each Series D subscription receipt was converted into one convertible debenture of the Trust. The convertible debentures have a face value of $1,000 per debenture and a maturity date of June 30, 2010. The convertible debentures pay interest semi-annually on June 30 and December 31 of each year at 8% per annum and are convertible into Trust units at a conversion price of $11.50 per Trust unit. Holders of convertible debentures have the option of redeeming them at a price of $1,050 per debenture after June 30, 2008 and on or before June 30, 2009 and thereafter until the maturity date at a price of $1,025 per debenture. The Trust may repay the convertible debentures in cash or through the issue of additional Trust units at 95% of the market price.

The debentures were initially recorded at the fair value of the obligation without the conversion feature. This fair value to make future payments of principal and interest was determined to be $52,400,000. The difference between the principal amount of $55,000,000 and the fair value of the obligation is $2,600,000 and has been recorded in unitholders' equity as the fair value of the conversion feature of the debentures. The following table shows the convertible debenture activities for the nine months ended September 30, 2006:



Equity
Number of Debt Component component
Convertible Debentures - 8% Debentures ($ thousands) ($ thousands)
---------------------------------------------------------------------------
Balance at January 1, 2006 48,671 46,616 2,301
Accretion - 286 -
---------------------------------------------------------------------------
Balance at September 30, 2006 48,671 46,902 2,301
---------------------------------------------------------------------------
---------------------------------------------------------------------------


On May 2, 2006, Vault closed a bought deal offering of $50,000,000 principle amount of convertible unsecured subordinated debentures. The convertible debentures have a face value of $1,000 per debenture, a maturity date of May 31, 2011 and a conversion price of $10.50 per Trust unit. These pay interest semi-annually at 7.2% per annum on May 31 and November 30 each year commencing on November 30, 2006. Holders of convertible debentures have the option of redeeming them at a price of $1,050 per debenture after May 31, 2009 and on or before May 31, 2010 and thereafter until the maturity date at a price of $1,025 per debenture. The Trust may repay the convertible debentures in cash or through the issue of additional Trust units at 95% of the market price. Issue costs of $2,200,000 have been classified as deferred financing charges and will be amortized over the life of the debentures. For the nine months ended September 30, 2006, amortization of $163,000 has been expensed.

The debentures were initially recorded at the fair value of the obligation without the conversion feature. This fair value to make future payments of principal and interest was determined to be $47,600,000. The difference between the principal amount of $50,000,000 and the fair value of the obligation is $2,400,000 and has been recorded in unitholders' equity as the fair value of the conversion feature of the debentures. The following table shows the convertible debenture activities for the nine months ended September 30, 2006:



Number of Debt Component Equity component
Convertible Debentures - 7.2% Debentures ($ thousands) ($ thousands)
---------------------------------------------------------------------------
Balance at January 1, 2006 - - -
Issued on May 2, 2006 50,000 47,600 2,400
Accretion - 214 -
---------------------------------------------------------------------------
Balance at September 30, 2006 50,000 47,814 2,400
---------------------------------------------------------------------------
---------------------------------------------------------------------------


5. ASSET RETIREMENT OBLIGATION

The Trust's asset retirement obligation results from net ownership interests in oil and natural gas properties including well sites, gathering systems and processing facilities. The Trust estimates the total undiscounted amount of cash flows (adjusted for inflation using a rate of 2%) required to settle its asset retirement obligation is approximately $112,300,000 (2005 - $112,000,000) which will be incurred during years ranging from 2006 to 2035. A credit-adjusted risk-free rate of 7% was used to calculate the fair value of the asset retirement obligation.



A reconciliation of the asset retirement obligations is provided below:

September 30, December 31,
Asset retirement obligation ($ thousands) 2006 2005
---------------------------------------------------------------------------
Balance, beginning of period 29,560 15,563
Liabilities acquired, net - 9,316
Liabilities incurred in period 181 897
Liabilities resulting from changes in
estimates - 2,394
Accretion expense 1,560 1,398
Liabilities settled in period (791) (8)
---------------------------------------------------------------------------
Balance, end of period 30,510 29,560
---------------------------------------------------------------------------
---------------------------------------------------------------------------


6. NON-CONTROLLING INTEREST

Vault Energy Inc. is authorized to issue an unlimited number of exchangeable shares. Exchangeable shares are convertible into Trust units based on the exchange ratio, which is adjusted monthly to reflect the distributions paid on the Trust units. Cash distributions are not paid on exchangeable shares, however the exchangeable shareholders do have the right to vote at the meetings of unitholders. The exchangeable shares must be exchanged for Trust units by June 22, 2008.

Pursuant to the Plan of Arrangement, former shareholders of Chamaelo had the option to receive 0.5 exchangeable shares of Vault Energy Inc. for each Chamaelo share held to a maximum of 5,000,000 exchangeable shares. As a result, 3,889,462 exchangeable shares were issued in exchange for 7,778,924 common shares of Chamaelo.

The following summarizes the exchangeable shares outstanding and the non-controlling interest ("NCI") as at September 30, 2006:



September 30, 2006 December 31, 2005
---------------------------------------------------------------------------
Exchangeable Non-controlling Exchangeable Non-controlling
Shares Interest ('000s) Shares Interest ('000s)
---------------------------------------------------------------------------
Balance,
beginning of
period 3,560,586 24,856 - -
Plan of
Arrangement - - 3,889,462 25,881
Retracted
for Trust
units (1,299,331) (9,149) (328,876) (2,214)
Net (loss)
income
attributable
to NCI (1,227) 1,189
---------------------------------------------------------------------------
Balance, end
of period 2,261,255 14,480 3,560,586 24,856
Exchange
ratio, end
of period 1.20219 1.07185
---------------------------------------------------------------------------
Trust units
issuable
upon
conversion,
end of
period 2,718,458 3,816,414
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Exchangeable share retractions are accounted for using the step acquisition
method of accounting. A summary of these acquisitions at September 30, 2006
is as follows:

September 30, December 31,
2006 2005
---------------------------------------------------------------------------
Acquisition of non-controlling interest ($ thousands) ($ thousands)
---------------------------------------------------------------------------
Retraction of exchangeable shares
reflected in property, plant and equipment 7,032 2,706
Future taxes on acquisition of exchangeable
shares (2,632) (923)
---------------------------------------------------------------------------
Excess of fair market value over book value 4,400 1,783
---------------------------------------------------------------------------
---------------------------------------------------------------------------


7. UNITHOLDERS' EQUITY

The Trust Indenture provides that an unlimited number of Trust units may be authorized and issued. Each Trust unit is transferable, carries the right to one vote and represents an equal undivided beneficial interest in any distributions from the Trust and in the assets of the Trust in the event of termination or winding-up of the Trust. All Trust units are of the same class with equal rights and privileges.



a) Trust units:
September 30, 2006 December 31, 2005

Number of Amount Number of Amount
Shares ('000s) Shares ('000s)
---------------------------------------------------------------------------
Balance, beginning of the period 32,785,833 315,612 28,079,786 107,745
Exercise of warrants - - 421,020 2,226
Exercise of options - - 680,200 5,280
Options repurchased by Trust - - (2,299)
Shares exchanged for exchangeable
shares - - (7,778,924) (25,881)
Share issue costs (net of future
taxes of $2,487) - - (5)
Future tax effect of $5.0 million
flow-through - -
share renunciation (1,695)
Shares cancelled on conversion to
Trust units - - (21,402,082)
Trust units issued on
cancellation of common shares - - 10,701,051
Plan of Arrangement - - (41,389)
Trust units issued in private
placement - - 21,156,000 275,028
Trust unit issue costs - - (14,174)
Trust units issued on conversion
of debentures - - 550,347 6,346
Trust units issued on retraction
of exchangeable shares 1,449,034 14,376 340,532 3,996
Trust units issued through
Distribution Re-investment
and Optional Purchase Plan 972,437 8,111 35,411 411
Trust units issued on exercise of
warrants 81,364 625 2,492 23
---------------------------------------------------------------------------
Balance, end of the period 35,288,668 338,724 32,785,833 315,612
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Warrants (note 7(b)) - 1,550 - 1,581
---------------------------------------------------------------------------
Total Unitholders' equity 35,288,668 340,274 32,785,833 317,193
---------------------------------------------------------------------------
---------------------------------------------------------------------------


On April 27, 2005, Chamaelo completed a bought deal private placement issuing 42,312,000 Series E subscription receipts in the capital of the Trust at a price of $6.50 per Series E subscription receipt for aggregate gross proceeds of $275,028,000.

Pursuant to the Plan of Arrangement, each Series E subscription receipt was converted into 0.5 Trust Units and 0.2 ExploreCo shares.

On May 26, 2004, Chamaelo completed a private placement financing for an aggregate of 3,250,000 units priced at $2.60 per unit for gross proceeds of $8,450,000. Each unit is comprised of one common share and one common share purchase warrant of Chamaelo. 3,209,000 of these units were issued to officers, directors, and employees of Chamaelo. Pursuant to the Plan of Arrangement resulting in the formation of the Trust, the shares and warrants were consolidated on a 2:1 basis.

The 667,626 warrants issued in connection with the corporate acquisition of Capstone are exercisable into 0.5 Trust units at any time commencing at issuance and ending April 12, 2007 at an exercise price of $8.50 per Trust unit. The exercise price declines with each distribution paid by the Trust. The fair value of the warrants at issue date was estimated at $600,000 using the Black-Scholes option pricing model with the following assumptions: Dividend yield - nil; expected volatility - 30%; risk-free interest rate - 3.16%; and expected life of 2.5 years.

Distribution Re-investment and Optional Purchase Plan and Premium Distribution Re-investment and Optional Purchase Plan.

The Trust has initiated a distribution reinvestment plan (the "Regular DRIP") and a premium distribution reinvestment plan (the "Premium DRIP"). The Regular DRIP permits eligible unitholders to direct their distributions to the purchase of additional units at 95 percent of the weighted average market price of Trust units for the 10-day trading period prior to a distribution payment date. The Premium DRIP permits eligible unitholders to elect to receive 102 percent of the cash the unitholder would otherwise have received on the distribution date. The additional cash distributed to the Premium DRIP unitholders is funded through the issuance of additional trust units in the open market. Participation in the Regular and Premium DRIP is subject to proration by the Trust. Unitholders who participate in either the Regular DRIP or the Premium DRIP are also eligible to participate in the Optional Unit Purchase Plan as defined in the plan.

Redemption Right

Unitholders may redeem their Trust units for cash at any time, up to a maximum of $250,000 in any calendar month, by delivering their unit certificates to the Trust, together with a properly completed notice of redemption. The redemption amount per Trust unit will be the lesser of 90 percent of the market price of the Trust units on the principal market on which they are traded during the 10 day trading period after the Trust units have been validly tendered for redemption and the closing market price on the principal market on which they are traded on the date which they were validly tendered for redemption, or if there was no trade of the Trust units on that date, the average of the last bid and ask prices of the Trust units on that date.

b) Warrants

As a result of the Plan of Arrangement, unexercised warrants of Chamaelo were converted into 0.5 warrants of the Trust and 0.2 warrants of ExploreCo. Warrants of the trust allow the holder to purchase units of the Trust at the specified warrant exercise price. The exercise price of each warrant is reduced as of the date of conversion by the cumulative cash distributions attributable to one Trust unit. As at September 30, 2006, the remaining warrants outstanding have been reduced in exercise price by $1.84 per warrant.



The following summarizes the warrants outstanding as at September 30, 2006:

Number of Average Amount
Warrants Warrants Price ($) ($ thousands)
---------------------------------------------------------------------------
Initially issued and balance
beginning of 2005 3,917,626 4.34 2,020
Exercised for shares (421,020) 4.56 (305)
---------------------------------------------------------------------------
Balance at June 22, 2005 3,496,606 4.31 1,715
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Trust warrants granted on
cancellation of share purchase
warrants 1,749,061 7.65 1,715
Plan of arrangement (132)
---------------------------------------------------------------------------
1,749,061 7.65 1,583
Exercised for Trust units (2,492) 8.13 (2)
---------------------------------------------------------------------------
Balance, at December 31, 2005 1,746,569 6.96 1,581
---------------------------------------------------------------------------
Exercised for Trust units (81,364) 6.78 (74)
---------------------------------------------------------------------------
Balance, at September 30, 2006 1,665,205 6.27 1,507
---------------------------------------------------------------------------
---------------------------------------------------------------------------


c) Trust Unit Rights Incentive Plan

On July 1, 2005, the Trust introduced its Trust Unit Rights Incentive Plan. The rights vest over three years, expire five years from the date of grant and have an exercise price that declines by the amount of distributions paid per Trust unit. The following table summarizes the rights outstanding at September 30, 2006:



Weighted Weighted Weighted
Average Average Average
Number of Original Reduced Years to
Rights Price ($) Price ($) Expiry
---------------------------------------------------------------------------
Balance, January 1, 2006 1,603,950 10.94 9.68 4.34
Rights granted 858,840 9.99 8.69 4.03
Rights cancelled (180,250) 10.00 8.89 4.14
---------------------------------------------------------------------------
Balance, September 30, 2006 2,282,540 9.93 8.79 4.24
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The following table summarizes information with respect to outstanding
rights as at September 30, 2006:

Number of Rights Weighted Weighted Weighted
Outstanding at Average Average Average Number of Rights
September 30, Exercise Reduced Years to Exercisable at
2006 Price ($) Price ($) Expiry September 30, 2006
---------------------------------------------------------------------------
1,242,670 10.56 9.01 3.82 -
33,075 12.35 10.86 3.90 -
183,025 13.27 11.89 3.94 -
53,730 10.67 9.54 4.14 -
4,800 9.82 9.02 4.40 -
765,240 8.30 7.89 4.69 -
---------------------------------------------------------------------------
2,282,540 9.93 8.79 4.24 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. GOODWILL IMPAIRMENT

Goodwill was recorded on the Capstone acquisition in 2004 when the purchase price was in excess of the fair values assigned to the assets acquired and liabilities assumed. To assess impairment at September 30, 2006, the fair value of goodwll was determined and compared to the carrying value. As the carrying amount of the goodwill exceeds its fair value, a goodwill impairment of $4.2 million was recognized and charged to income in the period.

9. UNIT BASED COMPENSATION

During the nine months ended September 30, 2006, $2,968,000 was charged to income in respect of unit based compensation cost. These charges comprise amortization of the fair value Trust unit rights as well as a one time adjustment relating to the payment of Chamaelo Energy Inc. stock option plan payouts which were lower than accrued at the time of the transaction.

On July 1, 2005, the Trust introduced its Trust Unit Rights Incentive Plan (the "Plan"). The Trust has granted 2,282,540 (Note 7(C)) rights to employees as of September 30, 2006. The rights vest over three years, expire five years from the date of grant and have an exercise price that declines by the amount of distributions paid per Trust unit. Under the terms of the Plan employees are not entitled to cash payments.



Vault Unit Rights Nine Months Ended

Unit Based Compensation ($ thousands) September 30, 2006
---------------------------------------------------------------------------
Amortization of Fair value 3,253
---------------------------------------------------------------------------
One Time Adjustment (1) (285)
---------------------------------------------------------------------------
Vault Unit based compensation expense 2,968
---------------------------------------------------------------------------

Contributed Surplus ($ thousands)
Balance, beginning of period 1,729
Amortization of fair value 3,253
---------------------------------------------------------------------------
Balance, end of period 4,982
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Difference between what was accrued for payouts under the Chamaelo
Energy Inc. stock option plan and what was actually paid in May 2006.


The fair value of each right granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:


---------------------------------------------------------------------------
Fair value per right $ 4.70
Risk-free rate 3.9%
Expected life 5.0
Expected forfeitures 10%
Expected volatility 27.0%
Dividend yield $ 1.38
---------------------------------------------------------------------------
---------------------------------------------------------------------------

10. PER TRUST UNIT INFORMATION

The weighted average number of Trust units outstanding for the
determination of basic and diluted per Trust unit amounts are as follows:


Three Months Ended Nine Months Ended
September 30, 2006 September 30, 2006
---------------------------------------------------------------------------
Basic 34,927,274 34,108,776
Dilution on account of:
Exchangeable Shares 2,545,333 3,077,928
Warrants 293,328 444,940
---------------------------------------------------------------------------
Diluted 37,765,935 37,631,644
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Trust unit rights and convertible debentures are anti-dilutive for the three and nine months ended September 30, 2006, and as a result, they have not been included in the table above. The if-converted method used to calculate dilution of certain dilutive instruments may cause differences in the diluted trust unit figures used to determine earnings per trust unit and funds flow per trust unit.

The weighted average and diluted calculations, as well as all per unit amounts presented, assume that the outstanding shares and dilutive instruments of Chamaelo have been consolidated to equivalent Trust units and dilutive instruments of Trust units as of the first period presented.



11. SUPPLEMENTAL INFORMATION

($ thousands) 2006 2005
---------------------------------------------------------------------------
Cash interest paid 4,291 2,347

Cash taxes paid 53 643
---------------------------------------------------------------------------
---------------------------------------------------------------------------

12. PHYSICAL CONTRACTS

Vault has entered into physical purchase and sales contracts as follows:

---------------------------------------------------------------------------
Upside Remaining
Product Volume Floor price Participation Term
---------------------------------------------------------------------------
Natural gas 11,000 GJ/d $ 7.00/GJ 60% above $7.00/GJ Jul 1, 2006 -
Dec 31, 2006
Natural gas 4,000 GJ/d $ 7.50/GJ 61.75% above $7.50/GJ Nov 1, 2006 -
Mar 31, 2007
Natural gas 7,000 GJ/d $ 7.50/GJ 61% above $7.50/GJ Jan 1, 2007 -
Mar 31, 2007
Natural gas 2,500 GJ/d $ 7.00/GJ Max price $9.00/GJ Apr 1, 2007 -
Oct 31, 2007
Oil 1,000 bbls/d $ 61.50/bbl 50% above $61.50/bbl Jul 1, 2006 -
Dec 31, 2006
Oil 1,000 bbls/d $ 68.00/bbl 50% above $68.00/bbl Jan 1, 2007 -
Dec 31, 2007
Electricity 5 MW/h $ 60.75/MW N/A Jul 1, 2006 -
Dec 31, 2008
---------------------------------------------------------------------------


13. FINANCIAL INSTRUMENTS

The Trust's financial instruments presented on the balance sheet consist of current assets, current liabilities, capital lease obligations, revolving credit facility and convertible debentures.

a) Fair values

The carrying value of current assets and current liabilities approximate their fair value due to the near term maturity of these instruments. Due to the revolving credit facility's floating interest rate, carrying value approximates fair value. Convertible debentures on the balance sheet are allocated between convertible debentures and equity component of convertible debentures. See note 4. The fair value of the remaining convertible debentures as at September 30, 2006 is $52,000,000 for the June 2005 issue and $49,750,000 for the May 2006 issue.

The estimated fair values have been determined based on available market information and appropriate valuation methods. The actual amounts realized may differ from these estimates.

b) Credit risk

A substantial portion of the Trust's accounts receivable are with customers and joint venture partners in the oil and gas industry and are subject to normal industry credit risks. The Trust manages this credit risk by entering into sales contracts with only highly rated entities and reviewing its exposure to individual entities on a regular basis.

c) Interest Rate Risk

The Trust is exposed to movements in interest rates. The revolving credit facility is a variable rate facility. The Trust is monitoring this risk by examining the interest rate forward market for opportunities to fix the rate on a portion of its variable rate debt. As at September 30, 2006, the Trust has not fixed the rate on any portion of the revolving credit facility.

d) Commodity price risk

Natural gas sales contract - This contract was acquired in conjunction with the purchase of certain oil and natural gas properties on November 30, 2004. At the date of the acquisition, the fair value of the contract was a liability of $2,962,000. This value was recorded as a liability and is being amortized over the life of the contract, which expires in October 2007.

Other than the natural gas sales contract and the physical sales contracts outlined in Note 12, the Trust's oil and natural gas production was marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs.

e) Currency Risk

The Trust is exposed to foreign currency fluctuations as crude oil prices received are referenced to U.S. dollar denominated prices. As at September 30, 2006, the Trust has not entered into any foreign currency derivatives with respect to oil and natural gas sales.

14. DEFERRED CREDITS

In October 2004, the Alberta Government passed amendments to the royalty regulations. The Government may reduce the royalty calculated if production has been constrained by the AEUB's objective to conserve bitumen. Included in deferred credits, the Trust recorded gas over bitumen royalty adjustments of $1,026,000 as at September 30, 2006.

15. COMMITMENTS

The Trust is committed to payments under an operating lease for office space and capital leases for leased vehicles as at September 30, 2006:



---------------------------------------------------------------------------
Minimum Commitments Each Year Total
------------------------------- Committed
($ thousands) 2006 2007 2008 2009 2010 After 2010 Total
---------------------------------------------------------------------------
Capital lease obligations 48 210 225 12 13 - 508
Operating lease obligation 155 1,435 1,509 1,551 1,554 4,769 10,973
---------------------------------------------------------------------------
203 1,645 1,734 1,563 1,567 4,769 11,481
---------------------------------------------------------------------------
---------------------------------------------------------------------------


16. SUBSEQUENT EVENTS

On October 31, 2006, the Minister of Finance announced proposed legislation that trusts will be taxed. If this legislation passes, all existing trusts will be taxable commencing 2011 at a tax rate of 31.5%. Distributions and undistributed income will be taxable. Trust unitholders will be required to treat distributions as dividend income. This announcement resulted in a market value adjustment for the trust industry and on going change is possible until further information is available. The Trust is currently assessing the proposals and the potential implications to the Trust.



CORPORATE INFORMATION


OFFICERS LEAD BANK


CIBC
Robert T. Jepson, BBA, PLM 309 8th Avenue SW
President, CEO Calgary, Alberta T2P 2P2


Rick P. Marshall, RET
VP Operations, COO TRANSFER AGENT


Greg Fisher, B.Mgt. Valiant Trust Company
VP Finance, CFO Suite 310, 606 - 4th Street SW
Calgary, Alberta T2P 1T1
Mark Kuhn, BS, MA, MBA
VP Exploitation and Business LEGAL COUNSEL
Development Gowling Lafleur Henderson LLP
1400, 700 - 2nd Street SW
Calgary, Alberta T2P 0S2

DIRECTORS

Sean M. Monaghan, CA, CBV
Chairman of the Board AUDITORS


Robert T. Jepson, BBA, PLM KPMG LLP
Director 1200, 205 - 5th Avenue SW
Calgary, Alberta T2P 4B9
Rick P. Marshall, RET
Director INDEPENDENT ENGINEERS


T.S. (Ted) Rozsa Sproule Associates Limited
Director 900, North Tower, Sun Life Plaza
140 4th Avenue SW
R. Shawn Kirkpatrick, MBA Calgary, Alberta T2P 3N3
Director


A.B. (Sandy) McArthur
Director


FORWARD LOOKING STATEMENTS

The Interim Report may contain forward-looking information that involves a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For this purpose, any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. Such risks and uncertainties include, but are not limited to: risks associated with the oil and gas industry (e.g. -operational risks in exploration, development and production; changes and/or delays in the development of capital assets; uncertainty of reserve estimates; uncertainty of estimates and projections relating to production and costs; commodity price fluctuations; environmental risks; and industry competition).


Contact Information

  • Vault Energy Trust
    Robert T. Jepson
    President & CEO
    (403) 444-9662
    or
    Vault Energy Trust
    Greg Fisher
    VP Finance & CFO
    (403) 444-9651
    or
    Vault Energy Trust
    Nicole Collard
    Investor Relations
    (403) 444-9657