By Roger Conrad and David Dittman
  April 3, 2007
  Maple Leaf Memo

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Canada’s Dept of Finance revealed last week revised draft legislation implementing the proposed entity-level tax on income trusts and other “specified investment flow through” entities (SIFTs).

Revisions since the original Dec. 21, 2006, proposal target loopholes that prevented most Canadian real estate investment trusts (REITs) from qualifying for the proposed exemption to the new tax. New language also incorporates the normal growth strictures described by the Finance Dept on Dec. 15, 2006.

Not much has really changed. There’s no extension of the four-year transition period, and there’s no exception for energy trusts. Assuming passage of this particular set of budget implementation legislation, the tax on distributions will hit trusts on the earlier of the 2011 tax year or any tax year in which a trust exceeds normal growth.

There’s still some work to be done on the normal growth guidelines; as it stands, there appears to be room for the Finance Dept to change the rules–and also grant transitional relief–at will.

The trust market is now left with very little uncertainty, and investors hate uncertainty. The biggest threat on the horizon is now realized, but the future tax on trusts has already been discounted into current prices. That means trusts’ market performance will be determined on operating results, broader economic conditions and other factors not already baked into unit values.

There will be no new trust issues. The universe is defined right now by a couple hundred trusts, and some of those will fall–converting back to the corporate form, going private or merging. We’ll be able to zero in on businesses as 2011 approaches, collecting solid distributions along the way and perhaps enjoying the good side of a premium takeover here and there.

We’ll be left with a set of high-quality, cash-paying businesses, regardless of structure.

The REITs

The proposed tax would be leveled against SIFTs; the draft legislation defines “SIFT” to include most publicly traded trusts and partnerships that hold significant investments in Canadian properties. But “qualifying REITs” have been specifically exempted from the tax. A qualifying REIT is one that satisfies the following conditions throughout a particular tax year:

• At no time does it hold any non-portfolio property other than qualified REIT properties;
• At least 95 percent of the trust’s revenues come from rent from real or immovable properties, interest, capital gains from dispositions of real or immovable properties, dividends and royalties;
• At least 75 percent of the trust’s revenue come from rent from real or immovable properties situated in Canada, mortgages on real or immovable properties situated in Canada, and taxable capital gains from dispositions of real or immovable properties situated in Canada; and
• At no time in the taxation year is the total fair market value of real or immovable properties situated in Canada, cash, or certain government debt, held by the trust less than 75 percent of the trust’s equity value.

All conditions must persist throughout a particular tax year; because conditions are measured annually, a REIT that misses one year could be restructured to qualify in a succeeding tax year.

REITs with operating components–like hotels and seniors housing facilities–won’t be qualifying REITs. Payments for the occupation or use of a hotel room or other similar lodging facility are explicitly excluded from the definition of “rent from real or immovable property.” But REITs operating in those spaces could remake themselves in order to meet the requirements of the exemption.

“Rent from real or immovable properties” includes rent and similar payments and also payments for ancillary services. Payments for any other types of services provided to the tenants of such properties, fees for managing or operating such properties, payments for the occupation of, use of, or right to use a room in a hotel, or other similar lodging facility and rent based on profits are specifically excluded.

The draft legislation allows a qualifying REIT to own securities in an internal management company if its revenues flow from the assets of the qualifying REIT.

Third-party management fees won’t be qualifying income for either the 95 percent or the 75 percent income tests. Those tests are determined based on revenue rather than profit; the December 21 language addressed income. 

Qualifying REITs will be allowed to own land, buildings and other depreciable property ancillary to the ownership or utilization of such buildings (like parking lots). The December 21 version banned ownership of property depreciable at more than 5 percent.

The April edition of Canadian Edge will take a look at Canadian REITs and how the new rules affect the ones we cover. Look for it Friday at www.canadianedge.com.

 The Roundup

We’ve compiled fourth quarter and full-year 2006 earnings news for Portfolio companies below, and we’ll have a summary of results for the How They Rate table with the April edition of Canadian Edge at noon Friday. 

Conservative Portfolio

Algonquin Power Income Fund (APF.UN, AGQNF) reported a 9.6 percent jump in operating profits for last year to CD31 million on revenues up nearly 5 percent to almost CD46 million. Costs declined slightly to CD16.7 million compared to the previous year.

Total power sold increased 11.5 percent to 678,505 megawatt hours (MWh) with Algonquin’s main region, Quebec, seeing a 14.3 percent rise to 305,656 MWh. New York and Ontario saw 32.1 percent and 21.1 percent rises in power sold, respectively.

For 2006, revenue grew 12.3 percent to CD201.4 million from CD179.3 million in 2005. Fourth quarter revenue was up to CD53.7 million from CD50.9 million in the fourth quarter of 2005. Net earnings in 2006 were CD28 million (39 cents Canadian per unit), up from CD21.8 million (31 cents Canadian per unit) in 2005.

Cash available for distribution in 2006 increased to CD67.5 million (93 cents Canadian per unit) compared to CD64.9 million (93 cents Canadian per unit) in 2005. Cash distributions in 2006 totaled 92 cents Canadian per unit, unchanged from 2005. Algonquin Power Income Fund is a buy up to USD9.

AltaGas Income Trust (ALA.UN, ATGFF) reported 2006 net income of CD114.5 million (CD2.06 per unit), a 27 percent increase from 2005. The trust earned CD27.3 million (49 cents Canadian per unit) during the fourth quarter, up from CD26.4 million (48 cents Canadian per unit) in the same 2005 period.

AltaGas realized higher prices on lower transmission costs and benefited from higher natural gas liquids fractionation spreads, increased processing volume and lower debt-service costs, trends that generally describe 2006 for the company.

AltaGas boosted its distribution twice during 2006 for a total increase of 6.3 percent. Net income surpassed distribution growth, and the trust looks prepared to sustain its results. Total debt as of Dec. 31, 2006, was CD265.5 million, down from CD269 million as of the end of 2005. Total debt-to-capitalization was 33.4 percent, down from 36 percent. AltaGas is a buy up to USD26.

Atlantic Power Corp (ATP.UN, ATPWF) reported operating income of CD14.6 million and net income of CD2.9 million for the fourth quarter of 2006. For the full year, the company generated revenue of CD242.9 million and operating income of CD57.2 million in 2006; the net loss for the year CD2.4 million, or 5 cents Canadian per income participating security (IPS).

Earnings before interest, taxes, depreciation and amortization (EBITDA) at Atlantic’s operating units increased 25 percent in the fourth quarter, driven by acquisitions completed late in 2005 and in mid-2006. For 2006, EBITDA was up 17 percent from 2005 levels. Atlantic generated CD11.6 million (25 cents Canadian per IPS) in distributable cash during the fourth quarter, down from CD20.6 million (54 cents Canadian per IPS) for the same period last year.

Distributions declared in the quarter were CD12.9 million (27 cents Canadian per IPS) for a payout ratio of 111 percent, up from 47 percent in the fourth quarter of 2005. The lower payout ratio in the fourth quarter of 2005 was due to the one-time add-back of a CD5.5 million estimated tax payable on an asset disposal.

The higher payout ratio in fourth quarter 2006 was due to a number of factors, including a decrease in distributions received from equity investments, revisions of income tax estimates for the full year of 2006 that were recorded in the fourth quarter, an increase in interest expense and lower realized gains on foreign currency transactions.

Distributable cash for 2006 amounted to CD57.9 million (CD1.45 per IPS) compared to CD48.7 million (CD1.53 per IPS) for 2005. Distributions declared for 2006 were CD43.4 million (CD1.04 per IPS) for a 75 percent payout ratio, up from 67 percent for 2005.

The higher payout ratio is a result of higher declared distributions per IPS and an increase in the number of IPSes outstanding over last year. Buy Atlantic Power Corp up to USD10.

Bell Aliant Regional Communications Income Fund (BA.UN, BLIAF) boosted its monthly distribution by 2.9 percent, as it reported operating revenues of CD852.2 million in the fourth quarter. For the three months ended December 31, Bell Aliant reported net earnings of CD163.1 million, or CD1.31 per unit. Operating revenues were up CD16.4 million, or 2 percent, over the same period last year.

The distribution increase to 23.5 cents Canadian from 22.83 cents Canadian per unit will begin with the February payout, on or about March 15. Bell Aliant is a buy up to USD30.

Boralex Power Income Fund (BPT.UN, BLXJF) reported best-ever net income of CD34 million, up 40 percent from CD24.3 million in 2005. Revenue from energy sales rose to CD115.2 million, compared to CD107.9 million a year earlier. Annual power generation by Boralex’s seven hydroelectric facilities was 22.3 percent above the historical average, driving a 12.7 percent rise in revenue from that segment.

The fund generated distributable cash of CD57 million and distributed CD53.2 million for a payout ratio of 93 percent. Fourth quarter revenue slipped to CD30 million from CD30.4 million, and net earnings declined to CD7.4 million, or 12 cents Canadian per unit, from CD8.8 million, or 15 cents Canadian per unit. Buy Boralex Power Income Fund up to USD9.

Keyera Facilities (KEY.UN, KEYUF) generated a 12 percent boost in net income to CD68.1 million for 2006. Full-year distributable cash flow came in at CD99.7 million, CD1.65 per unit figure, down slightly from CD1.67 in 2005. Distributable cash for the fourth quarter was CD27.7 million (45.7 cents Canadian per unit), up 13 percent from the same 2005 period.

Keyera’s two facilities segments grew 9 percent during 2006, driven primarily by 35 percent growth in the natural gas liquids infrastructure business. Planned maintenance work depressed numbers from the gathering and processing segment but was off just 2 percent. Marketing proved a drag as tighter margins in the third and fourth quarters led to a 36 percent contraction from 2005’s record numbers.

There will continue to be a great deal of drilling activity in the Western Canadian Sedimentary Basin in coming decades, and this trust is well positioned to take advantage. Buy Keyera Facilities up to USD18.

Northern Property REIT (NPR.UN, NPRUF) reported a 32 percent boost in revenue to CD84 million for 2006, up from CD63.5 million, on the strength of acquisition activity. Northern Property picked up a 960-bed seniors’ retirement portfolio spanning Alberta and British Columbia, expanding into strong, previously untapped markets. The REIT also added a net 467 multifamily units and 27,000 square feet of commercial space during 2006.

Net operating income increased 36.6 percent over 2005 levels to CD53.5 million. Rental market conditions for the REIT were sound in 2006, as multifamily market vacancy declined slightly to 2.9 percent. Northern Property has continued to add assets in 2007, spending an aggregate CD25.5 million for properties in British Columbia and Newfoundland.

The REIT maintained a 2006 payout ratio of 79.4 percent of funds from operations (FFO)–the most accurate measure of REIT health. Its 2006 debt to gross book value was 56.5 percent. Northern Property REIT is a buy up to USD23.

Pembina Pipeline Income Fund (PIF.UN, PMBIF) reported that fourth quarter revenue was up 13.4 percent from a year earlier at CD88.1 million and net operating profits rose 13 percent to CD55.6 million. Pembina said the year’s net operating was CD216.8 million.

Pembina, which has a network of conventional feeder pipelines and a growing presence in oil sands infrastructure and in midstream terminal, storage and hub services, said fourth quarter volume averaged 846,800 barrels per day. Capital spending was CD66.7 million, up from CD27 million in the year-ago quarter, and was up 112.5 percent for the full year at CD168.9 million. Buy Pembina Pipeline Income Fund up to USD16.

Primary Energy Recycling (PRI.UN, PYGYF) generated 2006 revenue of USD87.1 million, incurred USD81.1 million in operating expenses and reported operating income of USD6 million for the year. Higher commodity volumes and prices at its Harbor Coal unit hurt overall performance.

Primary Energy generated distributable cash of USD33.8 million and declared total distributions of USD36.2 million (USD1.13 per unit), resulting in an effective payout ratio of 107.1 percent for 2006. Buy Primary Energy Recycling up to USD9.50.

RioCan REIT (REI.UN, RIOCF) posted a 16 percent rise in fourth quarter earnings on higher rental revenue. Net earnings for the quarter ended December 31 amounted to CD43.4 million, or 22 cents Canadian per unit, up from CD37.3 million, or 19 cents Canadian per unit, in the same period last year.

RioCan owns and manages Canada’s largest portfolio of shopping centers, with ownership interests in a portfolio of 206 retail properties, including nine under development. Total rental revenue was CD151.2 million, compared with CD138.9 million a year ago, while FFO was CD77.1 million, up from CD66.5 million.

For the year, the REIT posted profits of CD163.8 million or 83 cents Canadian per unit, up 23 percent from CD132.6 million or 68 cents Canadian per unit in 2005. Total rental revenue for the 12-month period was CD580.5 million, versus CD563.7 million in 2005, and FFO increased to CD286.6 million from CD257.4 million. At the end of 2006, RioCan’s occupancy rate was 97.7 percent. Buy RioCan REIT up to USD23.

TimberWest Forest Corp (TWF.UN, TWTUF) reported that income slipped in the fourth quarter as weather and competitors on Canada’s Pacific Coast limited its log exports. The company also said it’s still looking for a buyer for its Elk Falls lumber mill on Vancouver Island, although an unnamed prospective purchaser is performing due diligence on the facility, which sells largely to the Japanese market.

TimberWest said it had net earnings of CD14.8 million in the fourth quarter, down from CD30.9 million in the same quarter the year before. Sales were CD110.6 million, down from CD132.8 million.

TimberWest stated that distributable cash in the fourth quarter was CD27.5 million, or 35 cents Canadian per stapled unit, compared with CD29.7 million, or 38 cents Canadian cents per unit, in the same three-month period of 2005. TimberWest said while weather-related curtailments were creating log shortages and increasing prices, local sawmills in British Columbia were using provisions in Canadian trade rules to limit its ability to export those logs. Buy TimberWest Forest Corp up to USD14.

Yellow Pages Income Fund (YLO.UN, YLWPF) reported a 174 percent jump in fourth quarter profit on the strength of recent acquisitions. Canada’s largest publisher of telephone directories said it earned a net profit of CD113 million (21 cents Canadian per unit) in the period, up from CD41 million (9 cents Canadian per unit) a year ago. Distributable cash for the quarter was up 31 percent to CD158 million, 15 percent on a per-unit basis. Revenue grew 35 percent to CD380 million.

Yellow Pages bought MTS Media from Manitoba Telecom in October for about CD275 million and scooped up Trader Classified Media’s book unit, including the Auto Trader and Home Renters’ Guide publications, for CD760 million last June.

The trust announced in February the purchase of the directories business of Bell Aliant Regional Communications Income Fund for CD330 million, boosting its total circulation to more than 30 million. The Bell Aliant unit generated 2006 sales of about CD65 million in 2006. Distributable cash per unit will rise “immediately” from 2006’s CD1.18 because of the deal, according to Yellow. Buy Yellow Pages Income Fund up to USD13.

Aggressive Portfolio

ARC Energy Trust (AET.UN, AETUF) reported a 56.6 percent drop in fourth quarter profits–from CD130.5 million in 2005 to CD56.6 million om 2006–on a 19.9 percent fall in revenue. Revenue was down to CD292.5 million from CD363.5 million a year ago.

For 2006, ARC generated revenue of CD1.23 billion and a profit of CD460.1 million, up 28.9 percent from CD356.9 million in 2005. The company spent CD365 million on exploration and development, adding 16 million barrels of oil equivalent (boe) and replacing 71 percent of 2006 production.

Production guidance for 2007 will be 63,000 barrels of oil per day. In accordance with the requirements of Canada’s National Instrument 51-101, ARC reported a proved reserve life index (RLI) of 9.8 years based on 2007 production guidance of 63,000 boe per day. The trust replaced 96 percent of annual production at a finding, development and acquisition (FD&A) cost of CD22.41 per boe.

Reserves per trust unit decreased slightly from 2005 to 2006 from 1.42 to 1.38 boe per unit on a proved plus probable basis and from 1.13 to 1.09 boe per unit on a proved basis. ARC’s 2006 year-end reserves are within 1 percent of year-end 2005 levels, with proved reserves of 226 million boe and proved plus probable reserves of 286 million boe. ARC Energy Trust is a buy up to USD22.

Enerplus Resources (ERF.UN, NYSE: ERF) experienced an 11 percent boost in cash flow for 2006, from CD774.6 million to CD863.7 million. Net income increased 26 percent to CD544.8 million, or 13 percent to CD4.48 per trust unit.

Cash distributions increased in 2006 by 23 percent to CD614.3 million, or 11 percent per unit, compared to 2005. Fourth quarter profits dipped to CD110.2 million from CD150.9 million for the same 2005 period as sales revenue fell on declining oil and gas prices.

Enerplus maintained a healthy 71 percent payout ratio. According to its required public disclosure, the trust sports one of the longest RLIs in the sector at 14 years on a proved plus probable basis; on a proved basis, RLI is 10.1 years.

FD&A costs for 2006 stood at CD23.19 per boe on a proved plus probable basis and CD28.82 per boe on a proved basis. Operating costs averaged CD8.02 per boe. Enerplus’ net debt to trailing 12-month cash flow ratio of 0.8 times reflects management’s conservative style. Buy Enerplus Resources up to USD50.

Newalta Income Fund’s (NAL.UN, NALUF) expansion into Ontario, Quebec and Atlantic Canada helped boost year-end earnings by 61 percent in 2006. Newalta earned CD75.6 million (CD2.11 per unit) for the year, up from CD46.9 million (CD1.66 per unit) in 2005. The diversification Newalta achieved via seven acquisitions in 2006 offset slower operations in Western Canada.

The acquisitions increased Newalta’s market share to 15 percent in the CD1.25 billion eastern Canadian industrial waste market, complementing its control of half the CD750 million Western Canada market share. Newalta now controls approximately 25 percent of the national waste management market. Newalta’s new Eastern division accounted for 32 percent of total assets in 2006, 21 percent of total revenue and 12 percent of net margin. The Western division includes oilfield, drill site and industrial business units.

The oilfield and drill site units brought in about 51 percent of Newalta revenues but suffered a CD1.5 million net margin decline in the fourth quarter because of a drop in commodity prices and corresponding drop in oil patch activity. Newalta’s oilfield division represents about 15 percent of the trust’s total revenue stream. The industrial unit, 16 percent of assets, generated 22 percent of total revenue. Newalta Income Fund is a buy up to USD30.

Paramount Energy Trust (PMT.UN, PMGYF) boosted production overall for 2006, but hedging only somewhat offset weak natural gas prices. Average daily production increased 5 percent to 153.4 million cubic feet (MMCF) per day 2006, but the trust recorded a 9 percent drop in cash flow to CD236.7 million (CD2.82 per unit) from CD260.2 million (CD3.47 per unit) for 2005.

Paramount realized an average gas price of CD7.52 per MCF 2006, down 6 percent from CD7.97. The trust’s average price before financial hedging and physical forward sales decreased 24 percent to CD6.61 per MCF in 2006 from CD8.71 in 2005, in line with the decrease in spot prices for the year. Paramount realized CD51 million of additional revenue and cash flow in 2006 from hedging activities. The trust’s total net debt to annualized fourth quarter cash flow measured 1.7 times as of Dec. 31, 2006.

Fourth quarter cash flow, down to CD58.2 million (69 cents Canadian per unit) from CD78.2 million (96 cents Canadian per unit), was crimped as cold weather forced downtime at several facilities. Paramount Energy Trust–a 30 percent distribution cut behind it–is a buy up to USD12.

Penn West Energy Trust’s (PWT.UN, NYSE: PWE) midsummer 2006 acquisition of Petrofund led to a 4 percent boost in fourth quarter revenue to CD578.5 million, but earnings fell by 49 percent on lower natural gas prices and higher depletion charges.

Net income was CD122.9 million, down from CD241.1 million. On a per-unit basis, net income was down 70 percent from CD1.46 to 44 cents Canadian. Full-year net income was CD665.6 million, or CD3.27 per unit, down 15 percent from CD577.2 million, or CD3.48 per unit, in 2005. Revenue was up 9 percent to CD2.1 billion from CD1.92 billion.

Production averaged 129,915 boe per day in the fourth quarter, up from 98,205 boe per day a year earlier; 45 percent of fourth quarter 2006 production was natural gas. Penn West spent CD159 million on capital programs, drilling 52 net wells in the fourth quarter with a 96 percent success rate. The distribution looks safe through the balance of 2007. Buy Penn West Energy Trust up to USD33.

Peyto Energy Trust (PEY.UN, PEYUF) reported fourth quarter revenue of CD110.7 million, off 13 percent from the CD127.6 million it generated in the same period in 2005. FFO for the last months of what was a tough 2006 declined 11 percent from CD86.6 million to CD77.4 million.

Peyto distributed 42 cents Canadian per unit in the fourth quarter for a payout ratio of 57 percent, up from 42 percent a year ago. For the full year, Peyto generated revenue of CD439 million, down 2 percent from CD431.7 in 2005. FFO came in at CD305.8 million, up 3 percent from 2005. The trust distributed CD1.66 per unit for a full-year payout ratio of 52 percent.

Operationally, Peyto boosted its RLI to 12 years on a proved producing basis and 20 years on a proved plus probable basis. Annual production grew 3 percent from 22, 219 boe per day in 2005 to 22,873 boe per day in 2006. The trust held combined operating and administrative costs to CD2.64 per boe. Peyto paid average FD&A costs of CD19.66 per boe on a total proved basis. The trust replaced 194 percent of total proved reserves during 2006.

In its discussion of fourth quarter and 2006 results, Peyto management renewed its commitment to delivering part of its income from production to investors, regardless of its organizational structure. The trust is focused on its internal exploration and development efforts, eschewing acquisitions as a means of growth. Maintaining relatively low FD&A costs and controlling costs led to improved internal rates of return in 2006; managed growth and sustainability continue to guide it. Peyto is a buy up to USD22.

Precision Drilling Trust (PD.UN, NYSE: PDS) reported sharply higher profits in the fourth quarter, but it saw its revenues fall 23 percent because of lower energy drilling. Precision said it earned CD127.4 million, or CD1.01 per trust unit, for the three months ended December 31. That compared with earnings of CD83.5 million, or 66 cents Canadian per unit, for the same 2005 period.

Revenue in the quarter was down 23 percent to CD328 million from CD427.9 million, with the contract drilling services division decreasing 28 percent to CD223 million and the completion and production services segment decreasing 13 percent to CD108 million. Equipment utilization declined significantly, while pricing held firm. Drilling rig operating days fell by 18 percent over the third quarter 2006 and 33 percent from the fourth quarter of 2005. Demand for services was hurt by the persistent decline in natural gas and oil prices.

For the full year, the company’s profits fell to CD579.6 million from CD1.6 billion, while annual revenues rose to CD1.43 billion from CD1.27 billion. During 2006, the downward trend in commodity prices, natural gas in particular, led to lower fourth quarter demand for all of Precision’s services in western Canada. To close out the fourth quarter, 3,595 new well licenses were issued in western Canada in December, the second-highest monthly total in 2006.

For January 2007, Precision‘s drilling rig operating day utilization was 66 percent compared to 83 percent in January 2006. Despite the slowdown in oil patch activity, Precision will keep adding more rigs during the next two years.

Western Canadian drilling activity is forecast to drop in 2007 for the first time in four years, falling about 15 percent to about 19,000 wells as producers weigh lower prices against higher costs to drill wells. Precision still plans to add 19 new drilling rigs–already contracted by oil and gas firms–for a total of 260 in Canada and the US by the end of 2008. Buy Precision Drilling up to USD30.

Trinidad Energy Services Income Trust (TDG.UN, TDGNF) posted a sharp increase in fourth quarter profit on acquisition-driven revenue increases. Trinidad earned CD31.3 million (37 cents Canadian per unit) during the fourth quarter, up from CD19.4 million (29 cents Canadian per unit) for the same 2005 period.

Additions to Trinidad’s drilling fleet in Canada and the US lifted revenue to CD161.9 million from CD106.4 million. For 2006, Trinidad reported a CD123.7 million profit, up from CD47.4 million, and CD579.9 million in revenue, up from CD288.3 million. Buy Trinidad Energy Services Income Trust up to USD14.

Vermilion Energy Trust (VET.UN, VETMF) generated FFO of CD89.6 million (CD1.27 per unit) in the fourth quarter of 2006, bringing full-year 2006 FFO to USD342.5 million (CD4.86 per unit) compared to USD278.2 million (CD4.08 per unit) in 2005. Average daily production for 2006 of 27,401 boe represented a 9 percent increase over 2005 levels. Production in the fourth quarter was up to 29,452 boe per day compared to 28,411 in the third quarter.

Vermilion completed work on processing facilities, gathering systems and pipeline connections for coal-bed methane and shallow gas in central Alberta that will add approximately 800 boe per day of natural gas during the first quarter of 2007. Vermilion acquired approximately 3,900 boe per day of light, sweet oil production in France, where Vermilion is the largest oil producer. The trust also moved forward with plans to drill the Aquitaine Maritime prospect offshore of France and should drill in the third quarter of 2007.

Vermilion replaced more than 200 percent of 2006 production through drilling and acquisitions. It expanded capacity at existing facilities, a wise bit of spending that helped in 2006 and will accommodate forward growth. Vermilion’s net debt at year-end 2006 was approximately CD355 million, resulting in a debt to trailing cash flow of approximately one time. The trust’s proved plus probable RLI at the end of 2006 increased to 11.5 from 11.4 years at the end of 2005. Vermilion Energy Trust is a buy up to USD30.