Vermilion Energy Trust - Third Quarter Results for the Period Ended September 30, 2007



    CALGARY, Nov. 5 /CNW/ - Vermilion Energy Trust ("Vermilion") (TSX -
VET.UN) is pleased to report interim operating and unaudited financial results
for the period ended September 30, 2007.

    
    Third Quarter Highlights:

    -   Recorded production of 32,172 boe/d in the third quarter of 2007, an
        increase of 4.1% compared to 30,916 boe/d in the second quarter of
        2007. Higher volumes in Australia and the Netherlands offset declines
        in Canada and France. Australian production came in below capacity
        due to platform downtime associated with scheduled facilities
        modifications.

    -   Generated fund flows from operations of $98.8 million ($1.36 per
        unit) in the third quarter of 2007, compared to $85.1 million
        ($1.18 per unit) in the second quarter of 2007. Australian shipments
        were higher than produced volumes in the quarter, which combined with
        a slight reduction in operating costs, account for the higher
        operating netbacks in Australia.

    -   Distributed $0.51 per unit during the quarter, bringing cumulative
        distributions to $9.52 since 2003. Vermilion's distributions as a
        percentage of fund flows from operations was 34% before the impact of
        the DRIP compared to 40% in the second quarter of 2007. For the
        nine months ended September 30, 2007, the total net distributions
        (after DRIP), capital expenditures, reclamation fund contributions
        and asset retirement costs incurred represented 77% of fund flows
        from operations.

    -   Completed the Phase 2 expansion of the Wandoo B Platform in
        Australia. Production from the Wandoo Field is currently running near
        full capacity, at approximately 8,000 boe/d, and will be subject to
        normal declines in the fourth quarter.

    -   Completed the 2007 CBM drilling program in central Alberta adding
        17 wells (13.7 net) in the third quarter. All the well tie-ins are
        expected to be completed in the fourth quarter of 2007.

    -   Drilled the Harlingen 10 well and the DeBlesse well in the
        Netherlands. These two wells should be completed and tied-in before
        year-end 2007. The Harlingen 11 well is currently drilling.

    -   Drilled the Orca 1 well on the Aquitaine Maritime prospect offshore
        France. The well encountered a sealing element and the target Aptian
        formation as was indicated on seismic, however, no hydrocarbons were
        discovered. The rig has been released and all aspects of the program
        will be reviewed. No additional drilling on this prospect is
        anticipated in the 2008 capital program.

    -   Vermilion increased its investment in Verenex Energy Inc. ("Verenex")
        by $30 million through participation in a financing announced by
        Verenex on July 9, 2007. Vermilion currently owns approximately
        18.5 mm shares of Verenex, representing approximately 41.8% of that
        Company's outstanding shares.

    -   Vermilion continues to generate positive performance, generating
        year-to-date returns to the unitholders of 8.4% through the first
        nine months of 2007.

    -   Vermilion's Board of Directors was recently recognized in
        Canadian Business Magazine's annual governance survey as one of
        Canada's top ten boards out of 275 companies surveyed, based on
        independence, accountability, disclosure and share performance.
    

    Conference Call and Webcast Details
    -----------------------------------
    Vermilion will discuss these results in a conference call to be held on
Monday, November 5, 2007. The conference call will begin at 9:00 AM MST -
11:00 AM EST. To participate, you may call toll free 1-800-732-9307 or
1-416-644-3416 (Toronto area). The conference call will also be available on
replay by calling 1-877-289-8525 or 1-416-640-1917 (Toronto area) using pass
code 21250268 followed by the pound "No." key. The replay will be available
until midnight eastern time on November 12, 2007. You may also listen to the
webcast by clicking
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2048420.

    
    HIGHLIGHTS

    Financial ($000 CDN           Three Months Ended       Nine Months Ended
     except unit and             Sept 30,    Sept 30,    Sept 30,    Sept 30,
     per unit amounts)              2007        2006        2007        2006
    -------------------------------------------------------------------------
    Petroleum and natural gas
     revenue                  $  187,939  $  167,301  $  501,609  $  462,350
    Fund flows from operations    98,757      93,482     259,796     252,944
      Per unit, basic(1)            1.36        1.33        3.58        3.60
    Capital expenditures          51,720      35,709     123,518      99,514
    Acquisitions, including
     acquired working capital
     deficiency                       14     178,232     129,239     190,035
    Net debt                                             454,712     359,955
    Reclamation fund
     contributions and asset
     retirement costs incurred     1,221       3,801       2,438       5,743
    Cash distributions per unit     0.51        0.51        1.53        1.53
    Cash distributions total      33,949      32,773     100,825      97,677
      Less DRIP                    9,501       4,007      26,185      12,680
      Cash distributions net      24,448      28,766      74,640      84,997
      % of fund flows from
       operations distributed
       gross                         34%         35%         39%         39%
      % of fund flows from
       operations distributed
       net                           25%         31%         29%         34%
    Total net distributions,
     capital expenditures,
     reclamation fund
     contributions and asset
     retirement costs
     incurred                 $   77,389  $   68,276  $  200,596  $  190,254
      % of fund flows from
       operations                    78%         73%         77%         75%
    Trust units outstanding(1)
      Adjusted basic                                  73,584,337  70,858,917
      Diluted                                         76,675,661  74,296,459
    Weighted average trust
     units outstanding(1)
      Adjusted basic                                  72,668,093  70,228,281
      Diluted                                         75,222,465  72,677,574
    Unit trading
      High                                            $    39.25  $    36.59
      Low                                             $    30.33  $    26.51
      Close                                           $    36.40  $    32.85
    -------------------------------------------------------------------------
    Operations
    Production
      Crude oil (bbls/d)          18,222      16,075      16,775      13,588
      Natural gas liquids
       (bbls/d)                    1,643       1,161       1,482       1,234
      Natural gas (mcf/d)         73,835      67,047      74,875      71,324
      Boe/d (6:1)                 32,172      28,411      30,737      26,709
    Average reference price
      WTI ($US/bbl)           $    75.38  $    70.48  $    66.23  $    68.22
      Brent ($US/bbl)              74.87       69.49       67.13       66.96
      AECO ($CDN/mcf)               5.18        5.64        6.55        6.40
      NIP 2006 Netherlands
       (Euro/GJ)                    5.03        6.31        5.18        6.14
      Foreign exchange rate
       ($US/$CDN)                   0.96        0.89        0.91        0.88
      Foreign exchange rate
       (Euro/$CDN)                  0.70        0.70        0.67        0.71
    Average selling price
      Crude oil and natural
       gas liquids ($CDN/bbl)      79.27       77.65       71.24       77.33
      Natural gas ($CDN/mcf)        6.34        7.16        7.17        7.68
    Netbacks per boe (6:1)
      Operations netback           41.04       44.45       39.52       43.70
      Cash flow netback            33.37       35.74       30.97       34.70
      Operating costs              10.16       10.03       10.15        9.32
    -------------------------------------------------------------------------
    (1) Includes trust units issuable for outstanding exchangeable shares
        based on the period end exchange ratio
    

    The above table includes non-GAAP measurements which may not be
comparable to other companies. Please see "Non-GAAP Measures" under MD&A
section for further discussion.

    OUTLOOK

    Vermilion's production in the fourth quarter of 2007 is expected to be
slightly below volumes reported in the third quarter, as facilities work in
Canada and in the Netherlands will offset higher volumes in Australia.
Accordingly, Vermilion anticipates full year production for 2007 will come in
at the low end of the guidance range, near 31,000 boe/d.
    The Board of Directors has approved a $182 million capital program for
2008, approximately 73% of which will target Vermilion's international
operations. Of note is that approximately $50 million of this program is
related to drilling two wells in the Wandoo Field in Australia. Approximately
$10 million of the Wandoo drilling capital is designated for long lead time
items, while $40 million will be contingent on Vermilion's ability to access a
rig. The earliest a rig could realistically be expected to be available is in
the third quarter of 2008, and accordingly no volumes are attributed to this
capital in Vermilion's 2008 forecast. Preliminary estimates indicate potential
well productivity of approximately 1,000 boe/d per well, which would boost
Vermilion's 2009 volumes.
    The base capital program of approximately $132 million should be
sufficient to substantially offset estimated production declines of
approximately 15%. It should also be noted that approximately $25 million of
the 2008 capital program is targeting non-producing items including seismic,
reservoir studies, land and well permitting. These expenditures, while not
contributing to short term production growth, will help ensure Vermilion's
future success.
    In Canada, Vermilion anticipates a reduced capital program in 2008 due to
weak natural gas markets. The current gas price environment does not provide
robust economics for CBM drilling. Most of the anticipated drilling program
will be directed towards maintaining Vermilion's land holdings. While Drayton
Valley drilling economics do not fare any better, recompletion economics
remain robust, and will be the focus of 2008 activities. The reduced capital
program in Canada in 2008 will result in an estimated production decline of
approximately 10% as compared to 2007 production levels.
    In 2008, Canadian production will represent approximately 35% of
Vermilion's total volumes. Alberta's new royalty framework, based on current
commodity prices and production profile would marginally reduce Vermilion's
cash flow by less than 2% in 2009.
    In France, the return of the Ambes pipeline to full service, anticipated
by mid-year 2008, will allow the resumption of a robust workover and
recompletion program in Southern France. Current plans include the drilling of
one well on the west end of the Parentis Field as well as a new injection well
and a near-field exploration well on a concession acquired in 2006. Vermilion
also plans to run 3D seismic programs covering portions of the Cazaux and
Chaunoy fields acquired in 2006.
    Netherlands activities in 2008 will focus on the permitting of new wells
to commence drilling in 2009, regular workovers and facilities maintenance,
and the acquisition of seismic for future exploration and development work.
With the completion of the wells drilled in 2007, and the elimination of
seasonal curtailment under the new Gasterra contract, Netherlands volumes are
anticipated to remain stable in 2008 compared to 2007 volumes.
    In Australia, activities will focus on the preparation to commence an
attic oil infill drilling program in the second half of 2008. The drilling
will target the interception of the oil column in the Wandoo field higher
above the oil-water contact to improve the recovery of oil from this field.
Vermilion will benefit from a full year of production from 100% of the Wandoo
Field in 2008, whereas during the first half of 2007 the Trust's interest was
only 60%. Accordingly, average production volumes in Australia in 2008 are
expected to be 10-15% higher than the average for 2007 including the impact of
natural reservoir declines.
    Vermilion holds a 41.8% equity interest in Verenex and continues to be
pleased with the company's results to date. Verenex plans to drill 10-12 wells
in Libya in 2008, further enhancing the reserve base that has already been
established in its first year of drilling. While the ultimate valuation of
Verenex will depend on the future success of its drilling program, Vermilion
is confident that its investment in Verenex will reap strong rewards for
unitholders.
    Vermilion continues to manage its rich portfolio of assets in a manner
that will provide long-term stability, positive unit price performance and
exposure to potentially high-impact opportunities. Vermilion's Board of
Directors was recently recognized in Canadian Business Magazine's annual
governance survey as one of Canada's top ten boards out of 275 companies
surveyed, based on independence, accountability, disclosure and share
performance. The top ten companies include Canada's "flagship" corporations
such as SNC-Lavalin Group Inc., Nexen Inc., Telus Corp. and the Royal Bank of
Canada. Vermilion is proud to be associated with companies of this stature. We
recognize and appreciate the loyalty, commitment and trust of our unitholders,
and look to provide superior rewards for all our stakeholders.

    MANAGEMENT'S DISCUSSION AND ANALYSIS
    ------------------------------------
    The following is management's discussion and analysis (MD&A) dated
November 1, 2007 of Vermilion's operating and financial results for the three
and nine months ended September 30, 2007 compared with the corresponding
periods in the prior year. This discussion should be read in conjunction with
the unaudited interim consolidated financial statements for the three and nine
month periods ended September 30, 2007 and the Trust's audited consolidated
financial statements for the years ended December 31, 2006 and 2005, together
with accompanying notes, as contained in the Trust's 2006 Annual Report.

    NON-GAAP MEASURES

    This report includes non-GAAP ("Generally Accepted Accounting
Principles") measures as further described herein. These measures do not have
standardized meanings prescribed by GAAP and therefore may not be comparable
with the calculations of similar measures for other entities.
    "Fund flows from operations" represents cash flows from operating
activities before changes in non-cash operating working capital and asset
retirement costs incurred. Management considers fund flows from operations and
per unit calculations of fund flows from operations (see discussion relating
to per unit calculations below) to be key measures as they demonstrate the
Trust's ability to generate the cash necessary to pay distributions, repay
debt, fund asset retirement costs and capital investments. Management believes
that by excluding the temporary impact of changes in non-cash operating
working capital, fund flows from operations provides a useful measure of the
Trust's ability to generate cash that is not subject to short-term movements
in operating working capital. As fund flows from operations also excludes
asset retirement costs incurred, it assists management in assessing the
ability of the Trust to fund current and future asset retirement costs. The
most directly comparable GAAP measure is cash flows from operating activities.
Fund flows from operations appears as a separate caption on the Trust's
consolidated statements of cash flows and is reconciled to cash flows from
operating activities below.

    
    ($000's)
    -------------------------------------------------------------------------
                                  Three Months Ended       Nine Months Ended
                                 Sept 30,    Sept 30,    Sept 30,    Sept 30,
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Fund flows from
     operations               $   98,757  $   93,482  $  259,796  $  252,944
      Changes in non-cash
       operating working
       capital                    15,384     (32,371)     40,795     (39,279)
      Asset retirement costs
       incurred                   (1,221)       (559)     (2,438)     (1,363)
    -------------------------------------------------------------------------
    Cash flows from operating
     activities               $  112,920  $   60,552  $  298,153  $  212,302
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    "Acquisitions, including acquired working capital deficiency" is the sum
of "Acquisitions of petroleum and natural gas properties" and "Corporate
acquisition, net of cash acquired" as presented in the Trust's consolidated
statements of cash flows plus any working capital deficiencies acquired as a
result of those acquisitions. Management considers acquired working capital
deficiencies to be an important element of a property or corporate
acquisition.
    "Net debt" is the sum of long-term debt and working capital and is used
by management to analyze the financial position and leverage of the Trust.
    "Cash distributions per unit" represents actual cash distributions paid
per unit by the Trust during the relevant periods.
    "Cash distributions net" is calculated as actual cash distributions paid
or payable for a given period less proceeds received by the Trust pursuant to
the Distribution Reinvestment Plan ("DRIP"). Cash distributions both before
and after DRIP are reviewed by management and are also assessed as a
percentage of fund flows from operations to analyze how much of the cash that
is generated by the Trust is being used to fund distributions.
    "Total net distributions, capital expenditures, reclamation fund
contributions and asset retirement costs incurred" is calculated as the
addition of net cash distributions as determined above plus the following
amounts for the relevant periods from the Trust's consolidated statements of
cash flows: "Drilling and development of petroleum and natural gas
properties", "Contributions to reclamation fund" and "Asset retirement costs
incurred." This measure is reviewed by management and is also assessed as a
percentage of fund flows from operations to analyze the amount of cash that is
generated by the Trust that is available to repay debt and fund potential
acquisitions.
    "Netbacks" are per-unit of production measures used in operational and
capital allocation decisions.
    "Adjusted basic trust units outstanding" and "Adjusted basic weighted
average trust units outstanding" are used in the per unit calculations on the
Highlights schedule of this document and are different from the most directly
comparable GAAP figures in that they include amounts related to outstanding
exchangeable shares at the period end exchange ratio. As the exchangeable
shares will eventually be converted into units of the Trust, management
believes that their inclusion in the calculation of basic rather than only
diluted per unit statistics provides meaningful information.
    "Diluted trust units outstanding" is the sum of "Adjusted basic trust
units outstanding" plus outstanding awards under the Trust's Unit Rights
Incentive Plan and the Trust Unit Award Incentive Plan, based on current
performance factor estimates.

    FORWARD-LOOKING INFORMATION

    This document contains forward-looking financial and operational
information as to the Trust's internal projections and expectations relating
to future events or performance. In some cases, forward-looking information
can be identified by terminology such as "may", "will", "should", "expects",
"projects", "anticipates" and similar expressions. These statements represent
management's expectations concerning future operating results or the economic
performance of the Trust and are subject to a number of risks and
uncertainties that could materially affect results. These risks include, but
are not limited to future commodity prices, exchange rates, interest rates,
geological risk, reserves risk, political risk, product demand and
transportation restrictions, which may cause actual performance and financial
results in future periods to differ materially from any projections of future
performance or results expressed by such forward-looking statements.
Accordingly, readers are cautioned that events or circumstances could cause
results to differ materially from those predicted.

    OPERATIONAL ACTIVITIES

    Certain natural gas volumes have been converted on the basis of six
thousand cubic feet of gas to one barrel equivalent of oil. Barrels of oil
equivalent (boe's) may be misleading, particularly if used in isolation. A
barrel of oil equivalent ("boe") is based on a conversion rate of six thousand
cubic feet of natural gas to one barrel of oil and is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.

    Canada
    ------
    In Canada, the Trust participated in the drilling of 21 wells (17.2 net)
resulting in 20 standing wells (16.2 net) awaiting further evaluation and
tie-in and one dry well (1.0 net). Most of these wells were drilled as part of
Vermilion's Central Alberta CBM and shallow gas program (17 wells, 13.7 net)
with one drilled in the Drayton Valley area (0.4 net). The CBM wells will be
tied-in during the fourth quarter of 2007. Vermilion has scheduled a plant
turnaround for the Eta Lake plant in the Drayton Valley area during the fourth
quarter, which will reduce production by approximately 300 boe/d for
approximately one month.

    France
    ------
    The drilling of the Orca 1 well on the Aquitaine Maritime permit offshore
France was a significant focus during the third quarter of 2007. The Orca 1
well was drilled to a total depth of 7,547 feet reaching the primary target.
The well encountered all key stratigraphic markers, including a significant
seal section, and a porous reservoir, but did not uncover any trace of
hydrocarbon in the structure. Vermilion will review the results from the
Orca 1 well to assess the prospectivity of the remaining structures on the
Aquitaine Maritime permit and the adjacent Aquila permit.

    Netherlands
    -----------
    Vermilion commenced drilling the first well of a three well program in
the Netherlands in July 2007. The first well, targeting the development of a
tight chalk reservoir at Harlingen has been successfully completed and will be
tied in upon completion of facility modifications at the Harlingen Gas
Treatment Centre. A second well, at DeBlesse is scheduled for completion in
the fourth quarter of 2007 and the third well, a dual-lateral well at
Harlingen is currently drilling. Work is proceeding on plans to install new
compression, to reduce horsepower consumption and to release some fuel gas to
the sales line.

    Australia
    ---------
    Vermilion completed the second phase of the Wandoo B platform expansion
during the quarter. The initial review and assessment of the proposed 'attic
oil' drilling opportunity was completed in the quarter, indicating the
potential for a number of future infill wells. This drilling program is
scheduled to begin in the second half of 2008, subject to the successful
procurement of a rig and requisite services.

    PRODUCTION

    Average production in Canada during the third quarter of 2007 was
4,084 bbls/d of oil and NGL's and 45.6 mmcf/d of natural gas compared to
4,091 bbls/d of oil and NGL's and 49.6 mmcf/d of natural gas in the second
quarter of 2007. Third quarter total production of 11,686 boe/d was 5% below
second quarter 2007 production of 12,351 boe/d, due to normal declines and
several 3rd party plant turnarounds. Fourth quarter production is expected to
be lower than third quarter levels due to normal declines and scheduled plant
maintenance.
    Production in France averaged 9,002 boe/d in the third quarter of 2007
compared to 9,221 boe/d in the second quarter of 2007 reflecting normal
declines and limited workover activity in the Aquitaine Basin. Production
volumes are anticipated to average approximately 8,800 boe/d in the fourth
quarter of 2007. The resumption of the Ambes terminal and Ambes pipeline to
full service, expected in the second half of 2008, should allow the resumption
of normal drilling and workover activity in the Aquitaine Basin.
    Production in the Netherlands averaged 4,529 boe/d in the third quarter
of 2007 compared to 3,904 boe/d in the second quarter of 2007. Second quarter
2007 volumes were reduced due to seasonal curtailment by the purchaser,
Gasterra. A new contract with Gasterra, entered into on July 1, 2007 removed
all curtailments on Vermilion's production resulting in higher volumes in the
third quarter. Fourth quarter 2007 volumes will be impacted by the temporary
shutdown of the Harlingen Gas Treatment Centre to allow the installation of
new compressor facilities, and are expected to average approximately
3,800 boe/d.
    Australia production averaged 6,955 boe/d in the third quarter of 2007,
compared to 5,440 boe/d during the second quarter of 2007. Due to the
scheduled platform shutdown at the beginning of the third quarter, the full
impact of the Wandoo acquisition, which closed on June 20, 2007, was not
realized in the third quarter volumes. Fourth quarter volumes will approach
the full production capacity of approximately 8,000 boe/d.

    
    Production
    -------------------------------------------------------------------------
                        Three Months Ended         Nine Months Ended
                           Sept 30, 2007              Sept 30, 2007
                       Oil  Natural               Oil  Natural
                    & NGLs      Gas    Total   & NGLs      Gas    Total
                   (bbls/d) (mmcf/d)  (boe/d) (bbls/d) (mmcf/d)  (boe/d)   %
    -------------------------------------------------------------------------
    Canada           4,084    45.61   11,686    4,093    47.62   12,030   39
    France           8,804     1.19    9,002    8,568     1.17    8,763   29
    Netherlands         22    27.04    4,529       46    26.09    4,394   14
    Australia        6,955        -    6,955    5,550        -    5,550   18
    -------------------------------------------------------------------------
    Total           19,865    73.84   32,172   18,257    74.88   30,737  100
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                        Three Months Ended         Nine Months Ended
                           Sept 30, 2006              Sept 30, 2006
                       Oil  Natural               Oil  Natural
                    & NGLs      Gas    Total   & NGLs      Gas    Total
                   (bbls/d) (mmcf/d)  (boe/d) (bbls/d) (mmcf/d)  (boe/d)   %
    -------------------------------------------------------------------------
    Canada           4,042    40.69   10,823    4,098    40.66   10,875   41
    France           9,254     1.30    9,472    6,885     1.37    7,113   26
    Netherlands          7    25.06    4,183       11    29.29    4,893   18
    Australia        3,933        -    3,933    3,828        -    3,828   15
    -------------------------------------------------------------------------
    Total           17,236    67.05   28,411   14,822    71.32   26,709  100
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    CAPITAL EXPENDITURES

    Drilling and development capital spending in the first nine months of 2007
totalled $123.5 million compared to $99.5 million spent in the first nine
months of 2006.

    ($000's)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Land                   $    1,326   $    1,181    $   2,398   $    1,952
    Seismic                         -          634          335        1,404
    Drilling and
     completion                34,356        7,771       64,081       37,689
    Production equipment
     and facilities            13,209       19,563       38,805       41,756
    Recompletions                  47        3,933        8,022        8,082
    Other                       2,782        2,627        9,877        8,631
    -------------------------------------------------------------------------
                               51,720       35,709      123,518       99,514
    Acquisitions                   14      178,232      129,239      190,035
    -------------------------------------------------------------------------
    Total                  $   51,734   $  213,941    $ 252,757   $  289,549
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    FINANCIAL REVIEW

    The Trust generated fund flows from operations of $98.8 million
($1.36 per unit) in the third quarter of 2007, a 16% increase above the
$85.1 million ($1.18 per unit) recorded in the second quarter of 2007 and 6%
higher than the $93.5 million ($1.33 per unit) in the third quarter of 2006.
The improved results compared to the second quarter of 2007 reflect the impact
of the Australia acquisition which closed in June 2007. Vermilion's production
in the fourth quarter of 2007 is expected to be slightly below volumes
reported in the third quarter, as facilities work in Canada and in the
Netherlands will offset higher volumes in Australia.
    The Trust's distributions in the third quarter of 2007 totalled
$33.9 million ($0.51 per unit) representing 34% of fund flows from operations
before the impact of the Trust's distribution reinvestment program ("DRIP"),
which generated $9.5 million of cash as unitholders reinvested their monthly
distributions in additional trust units. Cash distributions net of the DRIP as
a percentage of fund flows from operations was 25% in the third quarter of
2007. The total of net distributions (after DRIP), capital expenditures,
reclamation fund contributions and asset retirement costs incurred represented
78% of fund flows from operations in the third quarter of 2007 as compared to
67% in the second quarter of 2007. Vermilion's net debt increased to
$454.7 million at the end of the third quarter, reflecting the Wandoo
acquisition in the second quarter of 2007 that was financed using the Trust's
credit facilities and a $30 million investment in additional shares of Verenex
Energy Inc. The net debt is equivalent to 1.2 times the annualized third
quarter fund flows from operations.

    REVENUE

    Total revenue in the first nine months of 2007 was $501.6 million
($187.9 million in the quarter) compared to $462.4 in the first nine months of
2006 ($167.3 million in the quarter). Vermilion's combined crude oil & NGL
price was $71.24 per boe in the first nine months of 2007 ($79.27 per boe in
the quarter), a decrease of 8% over the $77.33 per boe reported in the first
nine months of 2006 ($77.65 per boe in the quarter). The natural gas price
realized in the first nine months of 2007 was $7.17 per mcf ($6.34 per mcf in
the quarter) compared to $7.68 per mcf realized a year ago ($7.16 per mcf in
the quarter), a 7% decrease year-over-year. Although commodity prices were
relatively consistent in the first nine months of 2007 compared to 2006,
increased production in Canada and France, coupled with the acquisition of the
remaining 40% interest in the Wandoo Field offshore Australia in the second
quarter of 2007 resulted in increased production year over year generating
higher revenue.

    
    ($000's except per boe and per mcf)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Crude oil & NGL's      $  144,871   $  123,139   $  355,107   $  312,882
    Per boe                $    79.27   $    77.65   $    71.24   $    77.33
    Natural gas                43,068       44,162      146,502      149,468
    Per mcf                $     6.34   $     7.16   $     7.17   $     7.68
    -------------------------------------------------------------------------
    Petroleum and natural
     gas revenue           $  187,939   $  167,301   $  501,609   $  462,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    DERIVATIVE INSTRUMENTS

    Vermilion continues to manage its risk exposure through prudent commodity
and currency economic hedging strategies. Vermilion has the following
financial collars and puts in place at September 30, 2007:

    Risk Management: Oil               Funded Cost  bbls/d           US$/bbl
    -------------------------------------------------------------------------
    Collar - WTI
      2007                             US$1.00/bbl     500   $60.00 - $77.30
      Q4 2007                          US$0.50/bbl     500   $60.50 - $75.25
      Q4 2007                          US$0.50/bbl     500   $63.35 - $75.00
      Q4 2007                          US$0.50/bbl     500   $63.00 - $79.00
      Q1 2008                          US$0.50/bbl     500   $63.00 - $79.05
      Q2 2008                          US$0.50/bbl     500   $64.30 - $76.00
    Put - WTI
      2007                             US$1.27/bbl     250            $57.05
    Collar - BRENT
      Q4 2007                          US$0.70/bbl     500   $60.00 - $89.00
      Q4 2007                          US$0.50/bbl     500   $62.90 - $80.00
      Q4 2007                          US$0.25/bbl     500   $67.00 - $81.00
      Q1 2008                          US$0.25/bbl     500   $68.42 - $83.00
      Q1 2008                          US$0.25/bbl     500   $69.25 - $82.00
      Q2 2008                          US$0.50/bbl     500   $64.00 - $80.10
      Q2 2008                          US$0.25/bbl     500   $67.20 - $82.00
      Q3 2008                          US$0.25/bbl     500   $66.40 - $82.00
      Q3 2008                          US$0.25/bbl     500   $66.60 - $82.00
      Q4 2008                                    -     500   $68.20 - $81.00
    Call Spread - BRENT
      2009 - 2011                      US$5.73/bbl     700   $65.00 - $85.00
    -------------------------------------------------------------------------

    Risk Management: Natural Gas       Funded Cost    GJ/d             C$/GJ
    -------------------------------------------------------------------------
    Collar
      October 2007                        $0.02/GJ   2,500     $6.50 - $9.00
      October 2007                        $0.10/GJ   2,500     $5.00 - $6.72
    -------------------------------------------------------------------------
    

    The impact of Vermilion's economic hedging program increased cash
netbacks by $0.06 per boe in the first nine months of 2007 (gain of $0.01 per
boe for the quarter). This compares to a hedging cost of $0.11 in the first
nine months of 2006 (cost of $0.17 per boe in the quarter).

    ROYALTIES

    Total royalties decreased to $8.15 per boe or 14% of sales in the first
nine months of 2007 ($10.18 per boe, 16% in the quarter), compared with $9.22
per boe or 15% of sales in the first nine months of 2006 ($8.29 per boe, 13%
in the quarter). In Australia, royalties are reduced by capital reinvestment
in the country. For 2007, Vermilion's capital program in Australia was active
resulting in the Trust paying royalties at a much reduced rate over 2006 when
the capital program was minimal. Also contributing to the decline is the
impact of lower gas prices in Canada where royalties are paid on a sliding
scale relative to pricing. In France, royalties for the most part are
calculated on a unit of production basis and rates do not react to price
changes and therefore royalties were basically unchanged on a boe basis in
France. Production in the Netherlands is not subject to royalty.

    
    ($000's except per boe and per mcf)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Crude oil & NGL's      $   25,856   $   17,714   $   50,714   $   52,159
    Per boe                $    14.15   $    11.17   $    10.17   $    12.89
    Natural gas                 4,270        3,945       17,702       15,050
    Per mcf                $     0.63   $     0.64   $     0.87   $     0.77
    -------------------------------------------------------------------------
    Combined               $   30,126   $   21,659   $   68,416   $   67,209
    -------------------------------------------------------------------------
    Per boe                $    10.18   $     8.29   $     8.15   $     9.22
    -------------------------------------------------------------------------
    

    OPERATING COSTS

    Operating costs increased to $10.15 per boe in the first nine months of
2007 ($10.16 per boe in the quarter) from $9.32 per boe in the first nine
months of 2006 ($10.03 per boe in the quarter). Cost of operations in
Australia are up due to increased labour costs and diesel purchases for gas
lift purposes partially offset by a one time recovery of excise taxes. In
Canada, the significant activity levels in the industry combined with
increased energy costs, have placed upward pressure on costs across the board.
In France, operating costs increased due to the higher cost assets associated
with the acquisition of Vermilion Emeraude Rep SAS. In addition, the oil spill
at the Ambes terminal early in 2007 has increased both operating and
transportation costs in France. These cost increases will be mitigated once
the terminal returns to operation which is expected to occur in mid-2008. In
the Netherlands, operating costs per barrel have remained consistent.

    
    ($000's except per boe and per mcf)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Crude oil & NGL's      $   17,675   $   15,677   $   52,523   $   36,675
    Per boe                $     9.67   $     9.89   $    10.54   $     9.06
    Natural gas                12,392       10,530       32,676       31,298
    Per mcf                $     1.82   $     1.71   $     1.60   $     1.61
    -------------------------------------------------------------------------
    Combined               $   30,067   $   26,207   $   85,199   $   67,973
    -------------------------------------------------------------------------
    Per boe                $    10.16   $    10.03   $    10.15   $     9.32
    -------------------------------------------------------------------------
    

    TRANSPORTATION

    Transportation costs are a function of the point of legal transfer of the
product and are dependent upon where the product is sold, product split,
location of properties as well as industry transportation rates that are
driven by supply and demand of available transport capacity. For Canadian gas
production, legal title transfers at the intersection of major pipelines
(referred to as "the Hub") whereas the majority of Vermilion's Canadian oil
production is sold at the wellhead. The majority of Vermilion's transportation
costs are comprised of shipping charges incurred in the Aquitaine Basin in
France where oil production is usually transported by tanker from the Ambes
terminal in Bordeaux to Donges, France. In Australia, oil is sold at the
Wandoo B Platform and in the Netherlands gas is sold at the plant gate,
resulting in no transportation costs relating to Vermilion's production in
these countries.
    France has experienced increased transportation costs as a result of the
oil spill at the Ambes terminal as Vermilion is currently transporting some of
its production to port by truck. In the first quarter of 2007 the costs were
offset by a one-time insurance recovery of one million Euros. Transportation
costs in the third quarter of 2007 reflect the expected quarterly costs
through the rest of the year.

    
    ($000's except per boe)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Transportation         $    6,304   $    2,766   $   16,919   $    7,706
    Per boe                $     2.13   $     1.06   $     2.02   $     1.06
    -------------------------------------------------------------------------

    GENERAL AND ADMINISTRATION EXPENSES

    General and administration expenses in the first nine months of 2007
increased to $1.78 per boe ($1.55 per boe in the quarter) compared to $1.70
per boe in the first nine months of 2006 ($2.12 per boe in the quarter). The
increase per boe is primarily a result of increased staffing levels combined
with increased staff retention costs. Also contributing to the increase are
consulting costs incurred in France as a result of the oil spill.

    ($000's except per boe)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    General and
     administration        $    4,584   $    5,529   $   14,967   $   12,406
    -------------------------------------------------------------------------
    Per boe                $     1.55   $     2.12   $     1.78   $     1.70
    -------------------------------------------------------------------------
    

    UNIT BASED COMPENSATION EXPENSE

    A non-cash trust unit compensation expense of $1.56 per boe was recorded
in the first nine months of 2007 ($1.25 per boe in the quarter) compared to
$2.03 per boe in the first nine months of 2006 ($1.27 per boe in the quarter).
This non-cash amount relates to the value attributable to long-term incentives
granted to officers, directors and employees under the Trust Unit Rights
Incentive Plan and the Trust Unit Award Incentive Plan.
    In September 2006, the Board of Directors approved a new long-term
incentive plan for certain employees not eligible to participate in the Trust
Unit Award Incentive Plan, which provides for cash payments based on the
market value of a trust unit. The cash consideration paid upon vesting is
dependent upon the future performance of the Trust compared to its peers based
on a performance factor that may range from zero to two times the number of
notional units originally granted.
    Compensation expense recognized is based on the closing market price of a
trust unit and is remeasured at each reporting date. The total expense is
amortized over the relevant vesting periods and the amount payable is recorded
as a liability until settlement. The expense associated with this unit based
compensation plan is excluded from unit compensation expense on the statements
of earnings and the table below.

    
    ($000's except per boe)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Unit compensation
     expense               $    3,704   $    3,321   $   13,120   $   14,779
    -------------------------------------------------------------------------
    Per boe                $     1.25   $     1.27   $     1.56   $     2.03
    -------------------------------------------------------------------------

    INTEREST EXPENSE

    Interest expense increased to $1.87 per boe in the first nine months of
2007 ($2.14 per boe in the quarter) from $1.37 per boe in the first nine
months of 2006 ($1.65 per boe in the quarter). Debt levels are higher in 2007
primarily stemming from the Australia acquisition at the end of the second
quarter of 2007. The Trust's interest rates have remained relatively steady
over the year.

    ($000's except per boe)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Interest               $    6,345   $    4,320   $   15,693   $   10,006
    -------------------------------------------------------------------------
    Per boe                $     2.14   $     1.65   $     1.87   $     1.37
    -------------------------------------------------------------------------
    

    DEPLETION, DEPRECIATION AND ACCRETION EXPENSES

    Depletion, depreciation and accretion expenses increased to $18.08 per
boe in the first nine months of 2007 ($18.07 per boe in the quarter) compared
to $15.96 per boe in the first nine months of 2006 ($17.32 per boe in the
quarter). The increase is due mainly to the increase of finding and
development costs in Canada and France and the increase in the asset
retirement obligation resulting primarily from the 2006 acquisition in France
and the 2007 Australia acquisition.

    
    ($000's except per boe)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Depletion, depreciation
     and accretion         $   53,475   $   45,276   $  151,699   $  116,378
    -------------------------------------------------------------------------
    Per boe                $    18.07   $    17.32   $    18.08   $    15.96
    -------------------------------------------------------------------------
    

    TAXES

    The Trust's current tax provision has decreased to $3.97 per boe in the
first nine months of 2007 ($3.44 per boe in the quarter) from $5.78 per boe in
the first nine months of 2006 ($4.96 per boe in the quarter). It is the
opinion of management that no cash income taxes in Canada are expected to be
paid by the operating company in the near future, and as such, much of the
future income tax liability recorded on the balance sheet related to Canadian
operations will be recovered through earnings over time.
    On June 22, 2007, the Canadian federal government passed legislation that
enacted a tax on publicly traded income trusts as originally announced on
October 31, 2006. The changes do not take effect until January 1, 2011,
provided the Trust experiences only "normal growth" and no "undue expansion"
before then. The government has defined "normal growth" parameters, relative
to the market capitalization of the Trust's issued and outstanding
publicly-traded trust units as of October 31, 2006. For the period from
November 1, 2006 to December 31, 2007, a trust's permitted or "safe harbour"
growth amount will be 40% of the October 31, 2006 market capitalization
benchmark and for each of the years 2008 through and including 2010 will be
20% of the benchmark, cumulatively allowing growth of up to 100% until 2011.
In addition, we understand that trusts may be able to issue equity to retire
debt existing on October 31, 2006 without eroding their safe harbour limits.
Vermilion's estimated market capitalization as defined by the government, was
$2.4 billion at October 31, 2006 and outstanding indebtedness was
approximately $400 million.
    Our interpretation suggests that Vermilion may be able to largely
mitigate the contemplated distribution tax. Currently, Vermilion's foreign
operations generate after tax cash flow and subsequently declare and pay
dividends which do not attract additional taxes when received in Canada. We
anticipate being able to flow through this dividend income to unitholders as
part of the normal distributions paid and not attract the distribution tax on
that portion of distributions made up of this dividend income. In addition,
Vermilion increased the return on capital or taxable portion of its
distribution for 2006 to 100% in order to preserve the tax basis it would have
utilized to declare a portion of the 2006 distribution as a return of capital
or tax deferred. The Trust expects that it will continue with this practice
through 2010 to preserve the tax basis during the interim period prior to the
implementation of the new rules. Under the legislation the portion of the
distribution that represents a return of capital will not attract the
distribution tax. This analysis is a general assessment of the impact on
Vermilion and is not meant to be exhaustive or definitive.
    Applying this legislation resulted in the recognition of future income
taxes related to timing differences in Vermilion Energy Trust, the parent
entity, whereas previously such differences were only recognized in relation
to subsidiaries of the Trust. The related impact on the Trust's consolidated
future income tax provision and future income tax liability related to this
legislation was not material.

    
    ($000's except per boe)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Current                $   10,186   $   12,962   $   33,332   $   42,145
    -------------------------------------------------------------------------
    Per boe                $     3.44   $     4.96   $     3.97   $     5.78
    -------------------------------------------------------------------------

    FOREIGN EXCHANGE

    A foreign exchange gain of $1.71 per boe was recorded in the first nine
months of 2007 ($0.89 per boe in the quarter) compared with a gain of $0.01
per boe in the first nine months of 2006 ($0.43 per boe in the quarter). The
Canadian dollar reached parity against the US dollar and strengthened against
the Euro in the third quarter of 2007. The foreign exchange gain results
mainly from the translation of future income taxes and the asset retirement
obligations in Vermilion's foreign jurisdictions.

    ($000's except per boe)
    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                              Sept 30,     Sept 30,     Sept 30,     Sept 30,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Foreign exchange
     (gain)                $   (2,634)  $   (1,142)  $  (14,310)  $      (53)
    -------------------------------------------------------------------------
    Per boe (gain)         $    (0.89)  $    (0.43)  $    (1.71)  $    (0.01)
    -------------------------------------------------------------------------
    


    EARNINGS

    Net earnings in the first nine months of 2007 decreased to $121.0 million
or $1.84 per unit from $129.3 million or $2.03 per unit in 2006. The decline
in earnings is primarily due to the impact of increased operating,
transportation, interest, depletion, depreciation and accretion expenses.

    LIQUIDITY AND CAPITAL RE

SOURCES As at September 30, 2007 the Trust had an unsecured covenant based credit facility consisting of a revolving term loan in the amount of $625 million. The revolving period under the term loan is expected to expire in June 2008 and may be extended for an additional period of up to 364 days at the option of the lenders. If the lenders convert the revolving credit facility to a non-revolving credit facility, the amounts outstanding under the facility become repayable 24 months after the end of the revolving period. Various borrowing options are available under the facility including prime rate based advances and bankers' acceptance loans. The amount available to the Trust under this facility is reduced by a US$15 million letter of credit associated with the Trust's operations. In July 2007, Vermilion purchased 2.1 million shares in Verenex Energy Inc. ("Verenex") for total consideration of CDN $30 million as part of a CDN $115 million bought-deal financing announced by Verenex. After reflecting these additional shares, Vermilion owns 18.5 million shares representing 41.8% of the outstanding shares of Verenex. RECLAMATION FUND Vermilion has established a reclamation fund for the ultimate payment of environmental and site restoration costs on its asset base. The reclamation fund is funded by Vermilion Resources Ltd. and its operating subsidiaries. Contribution levels to the reclamation fund are reviewed on a regular basis and are adjusted when necessary to ensure reclamation obligations associated with the Trust's assets will be substantially funded when the costs are forecast to be incurred. ASSET RETIREMENT OBLIGATION At September 30, 2007, Vermilion had recorded an asset retirement obligation of $133.7 million for future abandonment and reclamation of its properties compared to $127.5 million as at December 31, 2006. The increase is due mostly to the additional obligation related to the Australia acquisition and accretion expense, partially offset by the impact of foreign exchange. DISTRIBUTIONS Vermilion maintained monthly distributions at $0.17 per unit for the first nine months of 2007 distributing a total of $100.8 million compared to $97.7 million for the same period in 2006. Vermilion has maintained its distributions at $0.17 per month since its conversion to a trust, resulting in 56 continuous months of distributions at this level. Since inception, the Trust has paid out $579.2 million in distributions to unitholders as compared to unitholders capital of $368.5 million. Sustainability of Distributions ------------------------------- ($000's) ------------------------------------------------------------------------- Three Nine Months Months Year Year Ended Ended Ended Ended Sept 30, Sept 30, Dec 31, Dec 31, 2007 2007 2006 2005 ------------------------------------------------------------------------- Cash flows from operating activities $112,920 $298,153 $306,033 $245,116 Net earnings $ 48,640 $121,037 $146,923 $158,471 Distributions declared $ 33,949 $100,825 $130,638 $126,190 Excess of cash flows from operating activities over cash distributions declared $ 78,971 $197,328 $175,395 $118,926 Excess of net earnings over cash distributions declared $ 14,691 $ 20,212 $ 16,285 $ 32,281 ------------------------------------------------------------------------- Excess of cash flows from operating activities over cash distributions declared and net earnings over cash distributions declared are used to fund capital expenditures, asset retirement costs, reclamation fund contributions and debt repayments. UNITHOLDERS' EQUITY During the first nine months of 2007, approximately 2.0 million units were issued pursuant to the conversion of exchangeable shares, the Trust's bonus plan, the Trust's unit based compensation programs and unitholders' participation in the distribution reinvestment plan. Unitholders' capital increased during the same period by $34.2 million as a result of the issuance of those units and by $13.3 million as a result of contributed surplus transfer related to unit based compensation plans. NON-CONTROLLING INTEREST - EXCHANGEABLE SHARES The Trust has recorded non-controlling interest attributed to the issued and outstanding exchangeable shares. Non-controlling interest on the consolidated balance sheet represents the book value of exchangeable shares plus accumulated earnings attributable to the outstanding exchangeable shares. The reduction in net income represents the net income attributable to the exchangeable shareholders for the period. As the exchangeable shares are converted to trust units, Unitholders' capital is increased for the fair value of the trust units issued. As the exchangeable shares are exchanged for trust units over time, the non-controlling interest will decrease and eventually will be nil when all exchangeable shares have been exchanged for trust units on or before January 22, 2013. As at September 30, 2007 there were 4.5 million exchangeable shares outstanding at exchange ratio of 1.53425 whereby 6.8 million trust units would be issuable upon conversion. The exchangeable shares can be converted into trust units or redeemed by the shareholder for trust units at any time. Vermilion may redeem all outstanding exchangeable shares on or before January 22, 2013 and may redeem the exchangeable shares at any time if the number of exchangeable shares outstanding falls below 500,000 shares. Vermilion may issue cash or trust units upon redemption of exchangeable shares and it is the intention to issue trust units upon redemption. CRITICAL ACCOUNTING ESTIMATES The Trust's financial and operating results contain estimates made by management in the following areas: i. Capital expenditures are based on estimates of projects in various stages of completion; ii. Revenues, royalties and operating costs include accruals based on estimates of management; iii. Fair value of derivative instruments are based on estimates that are subject to fluctuation of commodity prices and foreign exchange rates; iv. Depletion, depreciation and accretion are based on estimates of oil and gas reserves that the Trust expects to recover in the future; v. Asset retirement obligations are based on estimates of future costs and the timing of expenditures; and vi. The future recoverable value of capital assets and goodwill are also based on estimates that the Trust expects to realize. RECENTLY ADOPTED ACCOUNTING STANDARDS On January 1, 2007 the Trust adopted Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, "Comprehensive Income"; Section 3855, "Financial Instruments"; Section 3861, "Financial Instruments - Presentation and Disclosure"; and Section 3865, "Hedges". These standards require that entities categorize financial instruments and measure certain financial instruments at fair value. In addition, these standards introduce the concept of comprehensive income within Canadian GAAP and establish new guidance relating to hedge accounting. As a result of adopting Section 3855, the Trust's investments in marketable securities are now measured at fair value whereas previously they were carried at cost. Gains and losses associated with these securities are reflected in net earnings in the period in which they arise. Transaction costs and discounts are now added to the fair value of long-term debt on initial recognition whereas previously these amounts were deferred and amortized using the straight-line method over the term of the debt. Unamortized amounts were included in prepaid expenses and other on the consolidated balance sheet. The Trust does not currently use hedge accounting and accordingly risk management related derivatives continue to be accounted for at fair value with the associated gains and losses reflected in net earnings. As the Trust does not have any other comprehensive income, net earnings equals comprehensive income. In accordance with the transitional provisions, prior periods have not been restated as a result of adopting these standards. The cumulative effect of the adoption of these new standards had the following impact on the Trust's consolidated balance sheet as at January 1, 2007: Increase (Decrease) ------------------------------------------------------------------------- Prepaid expenses and other $ (2,431) Long-term investments $ 4,704 Reclamation fund $ 2,436 Long-term debt $ (2,431) Future income taxes $ 1,375 Retained earnings $ 5,765 ------------------------------------------------------------------------- There was no other material impact on the consolidated financial statements relating to the adoption of these standards. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2006 the CICA issued Section 1535, "Capital Disclosures" which establishes disclosure standards about an entity's capital structure and how it is managed. Section 3862, "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation" were also issued in December 2006 and establish standards for the presentation of financial instruments and non-financial derivatives and require additional disclosure to enable users to evaluate the significance and risks relating to financial instruments on an entity's financial position. These three sections are effective for fiscal years beginning on or after October 1, 2007. The Trust does not anticipate that the adoption of these standards will have an impact on its results of operations and financial position. In June 2007, the CICA issued Section 3031, "Inventories." This section enhances the guidance relating to the determination of inventory cost and effectively harmonizes the Canadian standard with the International Financial Reporting Standards equivalent. This section applies to interim and annual financial statements for fiscal years beginning on or after January 1, 2008. The Trust does not anticipate that the adoption of this standard will have a material impact on its results of operations and financial position. In June 2007, the CICA amended Section 1400, "General Standards of Financial Statement Presentation," to require an assessment and potential disclosure of an entity's ability to continue as a going concern. The new requirements are effective for interim and annual periods beginning on or after January 1, 2008. These amendments will not impact the Trust's consolidated financial statements. In September 2007, the Accounting Standards Board ("AcSB") issued a bulletin relating to the transition to International Financial Reporting Standards ("IFRS") from Canadian GAAP and based on work undertaken to date, no significant impediments to adopting IFRS by the proposed transition date have been identified. The AcSB expects to be in a position to confirm by March 31, 2008 whether the transition date for adopting IFRS will be January 1, 2011. OFF BALANCE SHEET ARRANGEMENTS The Trust has certain lease agreements that are entered into in the normal course of operations. All leases are operating leases and accordingly no asset or liability value has been assigned in the balance sheet as of September 30, 2007. The Trust uses a variety of options including funded and costless collars and puts to manage the risk associated with fluctuating commodity prices on the sale of crude oil and natural gas. The Trust does not obtain collateral or other security to support its financial derivatives as the majority of these instruments are with the Trust's banking syndicate. The Trust has not entered into any guarantee or off balance sheet arrangements that would adversely impact the Trust's financial position or results of operations. DISCLOSURE CONTROLS AND PROCEDURES There was no change in Vermilion's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect its internal control over financial reporting. NETBACKS (6:1) Three Months Nine Months Ended September 30, 2007 Ended September 30, 2007 ------------------------------------------------------------------------- Oil & Natural Oil & Natural Trust Financial NGLs Gas Total NGLs Gas Total Information $/bbl $/mcf $/boe $/bbl $/mcf $/boe ------------------------------------------------------------------------- Canada Price $ 73.80 $ 5.76 $ 48.26 $ 68.73 $ 6.93 $ 50.81 Realized hedging gain or loss - 0.06 0.24 (0.01) - 0.01 Royalties (13.58) (1.01) (8.69) (12.70) (1.36) (9.69) Transportation 0.25 (0.15) (0.49) (0.25) (0.13) (0.61) Operating costs (11.07) (1.69) (10.48) (11.45) (1.34) (9.19) ------------------------------------------------------------------------- Operating netback $ 49.40 $ 2.97 $ 28.84 $ 44.32 $ 4.10 $ 31.33 ------------------------------------------------------------------------- France Price $ 75.65 $ 7.22 $ 74.94 $ 72.05 $ 7.24 $ 71.42 Realized hedging gain or loss (0.29) - (0.28) 0.22 - 0.22 Royalties (5.06) (0.29) (4.99) (5.02) (0.24) (4.94) Transportation (7.13) - (6.97) (6.38) - (6.23) Operating costs (7.87) (4.12) (8.24) (8.60) (3.64) (8.90) ------------------------------------------------------------------------- Operating netback $ 55.30 $ 2.81 $ 54.46 $ 52.27 $ 3.36 $ 51.57 ------------------------------------------------------------------------- Netherlands Price $ 77.48 $ 7.29 $ 43.88 $ 72.45 $ 7.60 $ 45.87 Operating costs - (1.95) (11.61) - (1.98) (11.77) ------------------------------------------------------------------------- Operating netback $ 77.48 $ 5.34 $ 32.27 $ 72.45 $ 5.62 $ 34.10 ------------------------------------------------------------------------- Australia Price $ 87.05 $ - $ 87.05 $ 71.83 $ - $ 71.83 Royalties (26.02) - (26.02) (16.35) - (16.35) Operating costs (11.15) - (11.15) (12.94) - (12.94) ------------------------------------------------------------------------- Operating netback $ 49.88 $ - $ 49.88 $ 42.54 $ - $ 42.54 ------------------------------------------------------------------------- Total Trust Price $ 79.27 $ 6.34 $ 63.50 $ 71.24 $ 7.17 $ 59.78 Realized hedging gain or loss (0.13) 0.04 0.01 0.10 - 0.06 Royalties (net) (14.15) (0.63) (10.18) (10.17) (0.87) (8.15) Transportation (3.11) (0.09) (2.13) (3.05) (0.08) (2.02) Operating costs (9.67) (1.82) (10.16) (10.54) (1.60) (10.15) ------------------------------------------------------------------------- Operating netback $ 52.21 $ 3.84 $ 41.04 $ 47.58 $ 4.62 $ 39.52 ------------------------------------------------------------------------- General and adminis- tration (1.55) (1.78) Interest (2.14) (1.87) Foreign exchange (0.54) (0.93) Current and capital taxes (3.44) (3.97) ------------------------------------------------------------------------- Cash flow netback $ 33.37 $ 30.97 ------------------------------------------------------------------------- Depletion, depreciation and accretion (18.07) (18.08) Future income taxes 3.45 2.35 Other income or loss (0.20) - Foreign exchange 1.43 2.64 Non-controlling interest - exchangeable shares (1.68) (1.48) Equity in affiliate (0.23) (0.18) Unrealized gain or loss on derivative instruments (0.38) (0.23) Fair value of stock compensation (1.25) (1.56) ------------------------------------------------------------------------- Earnings netback $16.44 $ 14.43 ------------------------------------------------------------------------- Three Nine Months Months Ended Ended Sept Sept 30/06 30/06 --------------------------------- Trust Financial Total Total Information $/boe $/boe --------------------------------- Canada Price $ 51.33 $ 53.79 Realized hedging gain or loss 0.34 0.21 Royalties (9.38) (10.19) Transportation (0.78) (0.72) Operating costs (9.17) (9.06) --------------------------------- Operating netback $ 32.34 $ 34.03 --------------------------------- France Price $ 72.12 $ 74.66 Realized hedging gain or loss (0.89) (0.76) Royalties (4.84) (5.20) Transportation (2.28) (2.87) Operating costs (7.87) (7.01) --------------------------------- Operating netback $ 56.24 $ 58.82 --------------------------------- Netherlands Price $ 52.89 $ 50.58 Operating costs (13.59) (11.45) --------------------------------- Operating netback $ 39.30 $ 39.13 --------------------------------- Australia Price $ 91.16 $ 86.23 Royalties (22.39) (25.71) Operating costs (13.78) (11.65) --------------------------------- Operating netback $ 54.99 $ 48.87 --------------------------------- Total Trust Price $ 64.00 $ 63.41 Realized hedging gain or loss (0.17) (0.11) Royalties (net) (8.29) (9.22) Transportation (1.06) (1.06) Operating costs (10.03) (9.32) --------------------------------- Operating netback $ 44.45 $ 43.70 --------------------------------- General and adminis- tration $ (2.12) $ (1.70) Interest (1.65) (1.37) Foreign exchange 0.02 (0.15) Current and capital taxes (4.96) (5.78) --------------------------------- Cash flow netback $ 35.74 $ 34.70 --------------------------------- Depletion, depreciation and accretion (17.32) (15.96) Future income taxes 1.62 2.41 Other income or loss - - Foreign exchange 0.41 0.16 Non-controlling interest - exchangeable shares (1.67) (1.60) Equity in affiliate 0.05 (0.01) Unrealized gain or loss on derivative instruments 0.81 0.07 Fair value of stock compensation (1.27) (2.03) --------------------------------- Earnings netback $ 18.37 $ 17.74 --------------------------------- The above table includes non-GAAP measurements which may not be comparable to other companies. Please see "Non-GAAP Measures" under MD&A section for further discussion. Consolidated Balance Sheets ($000's unaudited) September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Assets Current Cash and cash equivalents (Note 15) $ 106,364 $ 26,950 Accounts receivable 97,256 120,573 Crude oil inventory 8,787 4,898 Derivative instruments (Note 10) 396 1,624 Prepaid expenses and other 7,670 13,473 ------------------------------------------------------------------------- 220,473 167,518 Derivative instruments (Note 10) 6,246 4,656 Long-term investments (Notes 2 and 13) 60,687 27,152 Goodwill 19,840 19,840 Reclamation fund (Notes 2 and 4) 57,281 56,357 Capital assets 1,308,758 1,187,316 ------------------------------------------------------------------------- $ 1,673,285 $ 1,462,839 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities Current Accounts payable and accrued liabilities $ 159,226 $ 139,672 Distributions payable to unitholders 11,347 11,000 Derivative instruments (Note 10) 2,294 - Income taxes payable 11,913 13,419 ------------------------------------------------------------------------- 184,780 164,091 Long-term debt (Note 5) 490,405 358,236 Asset retirement obligation (Note 4) 133,707 127,494 Future income taxes (Notes 2 and 14) 192,573 224,631 ------------------------------------------------------------------------- 1,001,465 874,452 ------------------------------------------------------------------------- Non-controlling interest - exchangeable shares (Note 7) 64,151 51,780 ------------------------------------------------------------------------- Unitholders' Equity Unitholders' capital (Note 6) 368,526 321,035 Contributed surplus (Note 6) 29,619 30,513 Retained earnings 209,524 185,059 ------------------------------------------------------------------------- 607,669 536,607 ------------------------------------------------------------------------- $ 1,673,285 $ 1,462,839 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings ($000's except unit and per unit amounts, unaudited) Three Months Ended Nine Months Ended September September September September 30, 30, 30, 30, 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue: Petroleum and natural gas revenue $ 187,939 $ 167,301 $ 501,609 $ 462,350 Royalties (30,126) (21,659) (68,416) (67,209) ------------------------------------------------------------------------- 157,813 145,642 433,193 395,141 ------------------------------------------------------------------------- Expenses and other income: Operating 30,067 26,207 85,199 67,973 Transportation 6,304 2,766 16,919 7,706 Unit based compensation (Note 8) 3,704 3,321 13,120 14,779 Loss (gain) on derivative instruments (Note 10) 1,085 (1,678) 1,390 346 Interest 6,345 4,320 15,693 10,006 General and administration 4,584 5,529 14,967 12,406 Foreign exchange gain (2,634) (1,142) (14,310) (53) Other expense (income) 594 - (6) - Depletion, depreciation and accretion 53,475 45,276 151,699 116,378 ------------------------------------------------------------------------- 103,524 84,599 284,671 229,541 ------------------------------------------------------------------------- Earnings before income taxes and other items 54,289 61,043 148,522 165,600 ------------------------------------------------------------------------- Income taxes (recovery): Future (10,201) (4,228) (19,758) (17,598) Current 10,186 12,962 33,332 42,145 ------------------------------------------------------------------------- (15) 8,734 13,574 24,547 ------------------------------------------------------------------------- Other items: Non-controlling interest - exchangeable shares (Note 7) 4,978 4,369 12,388 11,673 Equity in loss (gain) of affiliate 686 (141) 1,523 61 ------------------------------------------------------------------------- 5,664 4,228 13,911 11,734 ------------------------------------------------------------------------- Net earnings and comprehensive income 48,640 48,081 121,037 129,319 ------------------------------------------------------------------------- Retained earnings, beginning of period 194,833 185,108 185,059 168,774 Cumulative effect of adoption of new accounting standards (Note 2) - - 5,765 - Distributions declared (33,949) (32,773) (100,825) (97,677) Unit-settled distributions on vested unit based awards (Note 6) - - (1,512) - ------------------------------------------------------------------------- Retained earnings, end of period $ 209,524 $ 200,416 $ 209,524 $ 200,416 ------------------------------------------------------------------------- Net earnings per trust unit (Note 9): Basic $ 0.73 $ 0.75 $ 1.84 $ 2.03 Diluted $ 0.71 $ 0.72 $ 1.77 $ 1.94 ------------------------------------------------------------------------- Weighted average trust units outstanding (Note 9): Basic 66,506,235 64,201,082 65,829,215 63,772,903 Diluted 75,735,767 73,121,167 75,222,465 72,677,574 ------------------------------------------------------------------------- Consolidated Statements of Cash Flows ($000's unaudited) Three Months Ended Nine Months Ended September September September September 30, 2007 30, 2006 30, 2007 30, 2006 ------------------------------------------------------------------------- Operating Net earnings $ 48,640 $ 48,081 $ 121,037 $ 129,319 Items not affecting cash: Depletion, depreciation and accretion 53,475 45,276 151,699 116,378 Change in unrealized gains and losses and amounts accrued relating to derivative contracts (Note 10) 1,116 (2,113) 1,932 (489) Unit based compensation 3,704 3,321 13,120 14,779 Equity in loss (gain) of affiliate 686 (141) 1,523 61 Unrealized foreign exchange gain (4,235) (1,083) (22,139) (1,179) Non-controlling interest - exchangeable shares 4,978 4,369 12,388 11,673 Unrealized investment loss (income) 594 - (6) - Future income taxes (10,201) (4,228) (19,758) (17,598) ------------------------------------------------------------------------- Fund flows from operations 98,757 93,482 259,796 252,944 Asset retirement costs incurred (1,221) (559) (2,438) (1,363) Changes in non-cash operating working capital 15,384 (32,371) 40,795 (39,279) ------------------------------------------------------------------------- Cash flows from operating activities 112,920 60,552 298,153 212,302 ------------------------------------------------------------------------- Investing Drilling and development of petroleum and natural gas properties (51,720) (35,709) (123,518) (99,514) Acquisitions of petroleum and natural gas properties (Note 3) (14) (8,787) (120,928) (20,590) Long-term investment (Note 13) (30,000) - (30,000) - Corporate acquisition, net of cash acquired (Note 3) - (124,604) - (124,604) Contributions to reclamation fund - (3,242) - (4,380) Changes in non-cash investing working capital 1,326 (6,704) (7,517) 7,419 ------------------------------------------------------------------------- Cash flows used in investing activities (80,408) (179,046) (281,963) (241,669) ------------------------------------------------------------------------- Financing Increase in long-term debt 45,110 28,621 137,239 141,539 Issue of trust units for cash, net of issue costs 2,588 2,277 5,710 10,390 Issue of trust units pursuant to distribution reinvestment plan 9,501 4,007 26,185 12,680 Cash distributions (33,860) (32,711) (100,479) (97,355) Changes in non-cash financing working capital (193) (2,402) - (2,381) ------------------------------------------------------------------------- Cash flows from (used in) financing activities 23,146 (208) 68,655 64,873 ------------------------------------------------------------------------- Foreign exchange (loss) gain on cash held in a foreign currency (2,376) 419 (5,431) (87) ------------------------------------------------------------------------- Net change in cash and cash equivalents 53,282 (118,283) 79,414 35,419 Cash and cash equivalents, beginning of period 53,082 196,479 26,950 42,777 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 106,364 $ 78,196 $ 106,364 $ 78,196 ------------------------------------------------------------------------- Supplementary information - cash payments Interest paid $ 9,827 $ 7,390 $ 19,176 $ 14,206 Income taxes paid $ 9,068 $ 12,549 $ 34,838 $ 35,343 ------------------------------------------------------------------------- Notes to the Consolidated Financial Statements For the three and nine months ended September 30, 2007 and 2006 (000's except unit and per unit amounts, unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements of Vermilion Energy Trust (the "Trust" or "Vermilion") include the accounts of the Trust and its subsidiaries and have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP") on a consistent basis with the audited consolidated financial statements for the year ended December 31, 2006 except as disclosed in Note 2 below. These interim consolidated financial statements do not include all disclosures required in annual financial statements and should be read in conjunction with the audited consolidated financial statements as at and for the year ended December 31, 2006 included in the Trust's 2006 Annual Report. 2. NEW ACCOUNTING POLICIES Financial Instruments On January 1, 2007 the Trust adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, "Comprehensive Income"; Section 3855, "Financial Instruments"; Section 3861, "Financial Instruments - Presentation and Disclosure"; and Section 3865, "Hedges". These standards require that entities categorize financial instruments and measure certain financial instruments at fair value. In addition, these standards introduce the concept of comprehensive income within Canadian GAAP and establish new guidance relating to hedge accounting. As a result of adopting Section 3855, the Trust's investments in marketable securities are now measured at fair value whereas previously they were carried at cost. Gains and losses associated with these securities are reflected in net earnings in the period in which they arise. Transaction costs and discounts are now added to the fair value of long-term debt on initial recognition whereas previously these amounts were deferred and amortized using the straight-line method over the term of the debt. Unamortized amounts were included in prepaid expenses and other on the consolidated balance sheet. The Trust does not currently use hedge accounting and accordingly risk management related derivatives continue to be accounted for at fair value with the associated gains and losses reflected in net earnings. As the Trust does not have any other comprehensive income, net earnings equals comprehensive income. In accordance with the transitional provisions, prior periods have not been restated as a result of adopting these standards. The cumulative effect of the adoption of these new standards had the following impact on the Trust's consolidated balance sheet as at January 1, 2007: Increase (Decrease) ------------------------------------------------------------------------- Prepaid expenses and other $ (2,431) Long-term investments $ 4,704 Reclamation fund $ 2,436 Long-term debt $ (2,431) Future income taxes $ 1,375 Retained earnings $ 5,765 ------------------------------------------------------------------------- There was no other material impact on the consolidated financial statements relating to the adoption of these standards. 3. INVESTMENTS AND ACQUISITIONS a) Australia Acquisition On June 20, 2007, the Trust acquired the remaining 40% interest in the Wandoo field in offshore Australia for cash consideration of $117.9 million. The purchase price allocation was determined as follows: Capital assets $ 138,596 Asset retirement obligation (12,405) Working capital (8,311) ------------------------------------------------------------------------- Total consideration $ 117,880 ------------------------------------------------------------------------- b) Esso Rep Acquisition On July 10, 2006, the Trust, through its France subsidiary, acquired an 89.886% interest in Esso Rep, from Esso SAF, a subsidiary of Exxon Mobil Corporation. On July 12, 2006, the Trust acquired the remaining 10.114% interest in Esso Rep from another party. The acquisition has been accounted for using the purchase method of accounting and as no significant transactions occurred affecting the results of operations or the fair value of assets acquired and liabilities assumed during the two day period between the two purchase events, the allocation of the purchase price was determined as at July 10, 2006. Results of operations are included in the consolidated results from that date. The aggregate purchase price, exclusive of the acquired working capital deficiency, was $126.6 million consisting of cash of $123.1 million and a current payable of $3.5 million. Subsequent to the date of acquisition, Esso Rep was renamed Vermilion Emeraude Rep SAS. The purchase price allocation was determined as follows: Capital assets $ 256,320 Asset retirement obligation (20,636) Future income taxes (66,239) Cash 1,996 Working capital, excluding cash (44,841) ------------------------------------------------------------------------- Total consideration $ 126,600 ------------------------------------------------------------------------- 4. ASSET RETIREMENT OBLIGATION The total asset retirement obligation was determined by management based on the estimated future costs and timing to reclaim the Trust's net interest in all wells and facilities. The Trust has estimated the net present value of its asset retirement obligations to be $133.7 million as at September 30, 2007 (December 31, 2006 - $127.5 million) based on a total undiscounted future liability of $371.6 million (December 31, 2006 - $367.1 million) before inflation adjustment. These payments are expected to be made over the next 47 years with most arising within the next 25 to 30 years. The Trust used a credit adjusted risk free rate of 8% and an inflation rate of 1.5% to calculate the present value of the asset retirement obligation. The following table reconciles the Trust's total asset retirement obligation: September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Carrying amount, beginning of period $ 127,494 $ 70,214 Increase in liabilities in the period 12,926 21,297 Disposition of liabilities in the period (2,438) (4,217) Change in estimate - 24,946 Accretion expense 7,405 7,380 Foreign exchange (11,680) 7,874 ------------------------------------------------------------------------- Carrying amount, end of period $ 133,707 $ 127,494 ------------------------------------------------------------------------- The Trust has established a reclamation fund for the future payment of its estimated asset retirement obligations. 5. LONG-TERM DEBT As at September 30, 2007 the Trust had an unsecured covenant based credit facility consisting of a revolving term loan in the amount of $625 million. The revolving period under the term loan is expected to expire in June 2008 and may be extended for an additional period of up to 364 days at the option of the lenders. If the lenders convert the revolving credit facility to a non-revolving credit facility, the amounts outstanding under the facility become repayable 24 months after the end of the revolving period. Various borrowing options are available under the facility including prime rate based advances and bankers' acceptance loans. The amount available to the Trust under this facility is reduced by a US$15 million letter of credit associated with the Trust's operations. 6. UNITHOLDERS' CAPITAL AND CONTRIBUTED SURPLUS Number of Units Amount ------------------------------------------------------------------------- Trust Units Unlimited number of trust units authorized to be issued Balance as at December 31, 2005 62,508,214 $ 274,813 Distribution reinvestment plan 609,907 18,811 Issued on conversion of exchangeable shares 225,132 7,430 Transfer from contributed surplus for unit based awards - 8,436 Trust units issued under bonus plan 14,400 429 Unit rights exercised and issuance of units on vesting of trust unit award plan grants 1,350,541 11,116 ------------------------------------------------------------------------- Balance as at December 31, 2006 64,708,194 $ 321,035 ------------------------------------------------------------------------- Distribution reinvestment plan 798,450 $ 26,185 Issued on conversion of exchangeable shares 2,143 70 Transfer from contributed surplus for unit based awards - 13,319 Trust units issued under bonus plan 23,039 695 Unit rights exercised and issuance of units on vesting of trust unit award plan grants 1,171,728 5,710 Unit-settled distributions on vested unit based awards 41,905 1,512 ------------------------------------------------------------------------- Balance as at September 30, 2007 66,745,459 $ 368,526 ------------------------------------------------------------------------- September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Contributed Surplus Opening balance $ 30,513 $ 14,566 Unit compensation expense (excluding bonus plan) 12,425 24,383 Transfer to unitholders' capital for unit based awards (13,319) (8,436) ------------------------------------------------------------------------- Ending balance $ 29,619 $ 30,513 ------------------------------------------------------------------------- Cash distributions to unitholders for the three months ended September 30, 2007 were $33,860 (2006 - $32,711). Cash distributions to unitholders for the nine months ended September 30, 2007 were $100,479 (2006 - $97,355). Cash distributions are determined by the Board of Directors in accordance with the Trust indenture and are paid monthly. 7. NON-CONTROLLING INTEREST - EXCHANGEABLE SHARES Exchangeable shares are convertible into trust units based on an exchange ratio which is adjusted monthly to reflect the distributions paid on the trust units. Cash distributions are not paid on the exchangeable shares. The exchangeable shares are mandatorily converted into trust units upon redemption by the shareholder. The Company holds the option to redeem all outstanding exchangeable shares for trust units or cash on or before January 22, 2013 and it is the intention of the Trust that trust units would be issued upon redemption of the exchangeable shares. On or before January 22, 2013, there will be no remaining non-controlling interest as all exchangeable shares will have been converted to trust units. The non-controlling interest on the consolidated balance sheet consists of the book value of the exchangeable shares upon issuance plus the accumulated earnings attributable to the non-controlling interest. The net earnings attributable to the non-controlling interest on the consolidated statement of earnings represents the share of net earnings attributable to the non-controlling interest based on the Trust units issuable for exchangeable shares in proportion to total trust units issued and issuable at each period end. September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Exchangeable Shares Opening number of exchangeable shares 4,458,919 4,619,335 Exchanged for trust units (1,446) (160,416) ------------------------------------------------------------------------- Ending balance 4,457,473 4,458,919 Ending exchange ratio 1.53425 1.46741 ------------------------------------------------------------------------- Trust units issuable upon conversion 6,838,878 6,543,062 ------------------------------------------------------------------------- The following is a summary of the non-controlling interest: September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Non-controlling interest, beginning of period $ 51,780 $ 38,760 Reduction of book value for conversion to trust units (17) (1,897) Current period net earnings attributable to non-controlling interest 12,388 14,917 ------------------------------------------------------------------------- Non-controlling interest, end of period $ 64,151 $ 51,780 ------------------------------------------------------------------------- 8. UNIT COMPENSATION PLANS Unit Rights Incentive Plan The following table summarizes information about the Trust's Unit Rights Incentive Plan: Weighted Average Number of Exercise Unit Rights Price ------------------------------------------------------------------------- Balance as at December 31, 2006 2,244,258 $ 14.12 Granted - - Cancelled (3,900) 21.55 Exercised (786,192) 14.11 ------------------------------------------------------------------------- Balance as at September 30, 2007 1,454,166 $ 14.10 ------------------------------------------------------------------------- A summary of the plan as at September 30, 2007 is as follows: Remaining Range of Adjusted Number Contractual Number of Exercise Price Exercise of Rights Life of Rights At Grant Date Price Outstanding Right (Years) Exercisable ------------------------------------------------------------------------- $11.45 $1.93 824,100 0.33 824,100 $11.46 - $15.00 $2.11 - $5.65 102,400 0.63 102,400 $15.01 - $19.56 $7.36 - $11.91 527,666 1.93 436,133 ------------------------------------------------------------------------- Compensation expense of $0.2 million and $1.1 million has been recorded related to the Unit Rights Incentive Plan for the three and nine month periods ended September 30, 2007, respectively ($0.5 million and $1.9 million for the three and nine month periods ended September 30, 2006, respectively). Trust Unit Award Incentive Plan The following table summarizes information about the Trust Unit Award Incentive Plan: Number of Awards ------------------------------------------------------------------------- Balance as at December 31, 2006 967,800 Granted 422,945 Vested (192,775) Cancelled (84,310) ------------------------------------------------------------------------- Balance as at September 30, 2007 1,113,660 ------------------------------------------------------------------------- Compensation expense of $3.5 million and $11.3 million has been recorded for the three and nine month periods ended September 30, 2007, respectively ($2.8 million and $12.9 million for the three and nine month periods ended September 30, 2006, respectively) related to the Trust Unit Award Incentive Plan. Phantom Award Incentive Plan In September 2006, the Board of Directors approved a new long-term incentive plan for certain employees not eligible to participate in the Trust Unit Award Incentive Plan, which provides for cash payments based on the market value of a trust unit. The cash consideration paid upon vesting is dependent upon the future performance of the Trust compared to its peers based on a performance factor that may range from zero to two times the number of notional units originally granted. Compensation expense recognized is based on the closing market price of a trust unit and is remeasured at each reporting date. The total expense is amortized over the relevant vesting periods and the amount payable is recorded as a liability until settlement. Compensation expense of $0.3 million and $1.2 million has been recorded as general and administration expense during the three and nine month periods ended September 30, 2007, respectively ($0.7 million for the three and nine month periods ended September 30, 2006). 9. PER UNIT AMOUNTS Basic and diluted net earnings per unit has been determined based on the following: Three Months Ended Nine Months Ended September September September September 30, 2007 30, 2006 30, 2007 30, 2006 ------------------------------------------------------------------------- Net earnings $ 48,640 $ 48,081 $ 121,037 $ 129,319 Non-controlling interest - exchangeable shares 4,978 4,369 12,388 11,673 ------------------------------------------------------------------------- Net earnings for diluted net earnings per trust unit calculation $ 53,618 $ 52,450 $ 133,425 $ 140,992 ------------------------------------------------------------------------- Three Months Ended Nine Months Ended September September September September 30, 2007 30, 2006 30, 2007 30, 2006 ------------------------------------------------------------------------- Weighted average trust units outstanding 66,506,235 64,201,082 65,829,215 63,772,903 ------------------------------------------------------------------------- Trust units issuable on conversion of exchangeable shares 6,838,868 6,454,177 6,839,119 6,497,622 Dilutive impact of unit rights incentive and trust unit award plans 2,390,664 2,465,908 2,554,131 2,407,049 ------------------------------------------------------------------------- Diluted weighted average trust units outstanding 75,735,767 73,121,167 75,222,465 72,677,574 ------------------------------------------------------------------------- Basic net earnings per trust unit has been calculated based on net earnings divided by the basic weighted average trust units outstanding. Earnings attributable to the non-controlling interest related to the exchangeable shares are added back to net earnings in calculating diluted net earnings per trust unit. All outstanding unit rights were dilutive and therefore have been included in the calculation of the diluted trust units for all periods presented. 10. DERIVATIVE INSTRUMENTS Risk Management Activities The nature of the Trust's operations result in exposure to fluctuations in commodity prices, interest rates and foreign currency exchange rates. The Trust monitors and, when appropriate, uses derivative financial instruments to manage its exposure to these risks. The Trust is exposed to credit-related losses in the event of non-performance by counterparties to the financial instruments. The Trust does not obtain collateral or other security to support its financial derivatives as the majority of these instruments are with the Trust's banking syndicate. Risk Management: Oil Funded Cost bbls/d US$/bbl ------------------------------------------------------------------------- Collar - WTI 2007 US$1.00/bbl 500 $60.00 - $77.30 Q4 2007 US$0.50/bbl 500 $60.50 - $75.25 Q4 2007 US$0.50/bbl 500 $63.35 - $75.00 Q4 2007 US$0.50/bbl 500 $63.00 - $79.00 Q1 2008 US$0.50/bbl 500 $63.00 - $79.05 Q2 2008 US$0.50/bbl 500 $64.30 - $76.00 Put - WTI 2007 US$1.27/bbl 250 $57.05 Collar - BRENT Q4 2007 US$0.70/bbl 500 $60.00 - $89.00 Q4 2007 US$0.50/bbl 500 $62.90 - $80.00 Q4 2007 US$0.25/bbl 500 $67.00 - $81.00 Q1 2008 US$0.25/bbl 500 $68.42 - $83.00 Q1 2008 US$0.25/bbl 500 $69.25 - $82.00 Q2 2008 US$0.50/bbl 500 $64.00 - $80.10 Q2 2008 US$0.25/bbl 500 $67.20 - $82.00 Q3 2008 US$0.25/bbl 500 $66.40 - $82.00 Q3 2008 US$0.25/bbl 500 $66.60 - $82.00 Q4 2008 - 500 $68.20 - $81.00 Call Spread - BRENT 2009 - 2011 US$5.73/bbl 700 $65.00 - $85.00 ------------------------------------------------------------------------- Risk Management: Natural Gas Funded Cost GJ/d C$/GJ ------------------------------------------------------------------------- Collar October 2007 $0.02/GJ 2,500 $6.50 - $9.00 October 2007 $0.10/GJ 2,500 $5.00 - $6.72 ------------------------------------------------------------------------- The fair value of derivative instruments are recorded on the consolidated balance sheets with the associated unrealized gain or loss recorded in net earnings. The estimated fair value of all derivative financial instruments is based on quoted market prices or, in their absence, third party market indications and forecasts. The following table reconciles the change in the unrealized amounts related to the fair value of derivative contracts: September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Fair value of contracts, beginning of period $ 6,280 $ 783 Opening unrealized (gain) on contracts settled during the period (1,449) (783) Realized gain (loss) on contracts settled during the period 542 (222) Unrealized (loss) gain during the period on contracts outstanding at the end of the period (483) 1,354 Purchase of derivative contracts at fair value - 4,926 Net payment to (receipt from) counterparties under contract settlements during the period (542) 222 ------------------------------------------------------------------------- Fair value of contracts, end of period $ 4,348 $ 6,280 ------------------------------------------------------------------------- Comprised of: Current derivative asset $ 396 $ 1,624 Current derivative liability (2,294) - Non-current derivative asset 6,246 4,656 ------------------------------------------------------------------------- $ 4,348 $ 6,280 ------------------------------------------------------------------------- The loss on derivative instruments for the periods is comprised of the following: Nine Months Nine Months Ended Ended September September 30, 2007 30, 2006 ------------------------------------------------------------------------- Realized (gain) loss on contracts settled during the period $ (542) $ 835 Opening unrealized gain on contracts settled during the period 1,449 804 Unrealized (gain) loss during the period on contracts outstanding at the end of the period 483 (1,293) ------------------------------------------------------------------------- Loss on derivative instruments for the period $ 1,390 $ 346 ------------------------------------------------------------------------- Pursuant to an acquisition under which the vendor participates in a portion of the net price received by Vermilion from 2009 to 2011 inclusive, the Trust entered into a derivative transaction to economically offset a portion of the related potential future payments. The transaction consisted of three dated Brent crude purchased call options at US$65.00 per barrel and three dated Brent crude written call options at US$85.00 per barrel representing approximately one half of the expected production subject to the related provision. The total cost of this derivative transaction was $4.9 million. The Trust has determined that any potential future payments under this provision would constitute additional consideration. As the outcome of this provision could not be determined beyond a reasonable doubt and as the amount of the potential contingent consideration could not be reasonably estimated, no amount related to this provision was recognized as part of the purchase price at the date of acquisition. If payments are made under this provision in future periods or if additional information becomes available that allows the Trust to determine the outcome of this provision beyond a reasonable doubt and reasonably estimate the amount of contingent consideration that will be paid, the Trust will recognize an adjustment to the purchase price on a prospective basis. During the normal course of business, the Trust enters into fixed and collared price arrangements to sell a portion of its production. The Trust has elected to exempt these contracts from fair value accounting through the use of the normal purchase and sale exemption. 11. SEGMENTED INFORMATION Three Months Ended Nine Months Ended September September September September 30, 2007 30, 2006 30, 2007 30, 2006 ------------------------------------------------------------------------- Petroleum and natural gas revenues Canada $ 51,886 $ 51,111 $ 166,869 $ 159,684 France 62,065 62,845 170,856 144,982 Netherlands 18,282 20,356 55,029 67,568 Australia 55,706 32,989 108,855 90,116 ------------------------------------------------------------------------- $ 187,939 $ 167,301 $ 501,609 $ 462,350 ------------------------------------------------------------------------- Net earnings Canada $ (2,331) $ 3,572 $ 8,065 $ 14,447 France 24,666 27,833 61,315 62,612 Netherlands 7,581 5,329 17,677 23,037 Australia 18,724 11,347 33,980 29,223 ------------------------------------------------------------------------- $ 48,640 $ 48,081 $ 121,037 $ 129,319 ------------------------------------------------------------------------- Fund flows from operations Canada $ 24,219 $ 23,113 $ 74,839 $ 82,299 France 37,095 42,236 102,171 93,871 Netherlands 9,546 12,182 28,637 36,755 Australia 27,897 15,951 54,149 40,019 ------------------------------------------------------------------------- $ 98,757 $ 93,482 $ 259,796 $ 252,944 ------------------------------------------------------------------------- Capital expenditures Canada $ 14,319 $ 33,817 $ 48,599 $ 82,128 France 28,087 132,838 56,860 157,763 Netherlands 8,222 335 12,603 1,016 Australia 1,106 2,110 126,384 3,801 ------------------------------------------------------------------------- $ 51,734 $ 169,100 $ 244,446 $ 244,708 ------------------------------------------------------------------------- September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Identifiable assets Canada $ 638,915 $ 627,147 France 599,728 542,074 Netherlands 161,121 148,710 Australia 273,521 144,908 ------------------------------------------------------------------------- $1,673,285 $1,462,839 ------------------------------------------------------------------------- 12. FINANCIAL INSTRUMENTS The Trust has classified its financial instruments as follows: - Cash and cash equivalents are classified as held for trading and are measured at carrying value, which approximates fair value due to the short-term nature of these instruments. A gain or loss arising from a change in the fair value is recognized in net earnings in the current period. - Accounts receivable are classified as loans and receivables and are initially measured at fair value and subsequently measured at amortized cost. The carrying value approximates the fair value due to the short-term nature of these instruments. - Accounts payable and accrued liabilities, distributions to unitholders and long term debt have been classified as other financial liabilities and are initially recognized at fair value. The carrying value approximates the fair value due to the short-term nature of these instruments. - Investments in debt securities are classified as held to maturity and are initially measured at fair value and subsequently measured at amortized cost. A gain or loss arising from the de-recognition or impairment of assets is recognized in net earnings in the period. - All derivative and equity security investments not subject to consolidation or equity method accounting have been classified as held for trading and are measured at fair value. Accordingly, gains and losses are reflected in net income in the period in which they arise. Gains and losses associated with the Trust's investments in equity securities are included in other income in the consolidated statement of earnings. The fair values of derivative instruments and equity securities are determined by reference to published prices in active markets. 13. LONG-TERM INVESTMENTS The following table reconciles the Trust's total long-term investments: September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Portfolio investments, at fair value $ 5,554 $ - Portfolio investments, at cost (fair value 2006 - $5.2 million) - 496 Investment in Verenex Energy Inc., equity method (fair value - $199.3 million, 2006 - $109.6 million) 55,133 26,656 ------------------------------------------------------------------------- $ 60,687 $ 27,152 ------------------------------------------------------------------------- In July 2007, Vermilion purchased 2.1 million shares in Verenex Energy Inc. ("Verenex") for total consideration of CDN $30 million as part of a CDN $115 million bought-deal financing announced by Verenex. After reflecting these additional shares, Vermilion owns 18.5 million shares representing 41.8% of the outstanding shares of Verenex. 14. INCOME TAXES On June 22, 2007, legislation that effectively imposes an income tax on income trusts starting in 2011 was passed into law. Applying this legislation resulted in the recognition of future income taxes related to timing differences in Vermilion Energy Trust, the parent entity, whereas previously such differences were only recognized in relation to subsidiaries of the Trust. The related impact on the Trust's consolidated future income tax provision and future income tax liability related to this legislation was not material. 15. COMPONENTS OF CASH AND CASH EQUIVALENTS The components of cash and cash equivalents are as follows: September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Monies on deposit with banks $ 99,565 $ 26,039 Guaranteed short-term investments 6,799 911 ------------------------------------------------------------------------- Total cash and cash equivalents $ 106,364 $ 26,950 ------------------------------------------------------------------------- 16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2006 the CICA issued Section 1535, "Capital Disclosures" which establishes disclosure standards about an entity's capital structure and how it is managed. Section 3862, "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation" were also issued in December 2006 and establish standards for the presentation of financial instruments and non-financial derivatives and require additional disclosure to enable users to evaluate the significance and risks relating to financial instruments on an entity's financial position. These three sections are effective for fiscal years beginning on or after October 1, 2007. The Trust does not anticipate that the adoption of these standards will have an impact on its results of operations and financial position. In June 2007, the CICA issued Section 3031, "Inventories." This section enhances the guidance relating to the determination of inventory cost and effectively harmonizes the Canadian standard with the International Financial Reporting Standards equivalent. This section applies to interim and annual financial statements for fiscal years beginning on or after January 1, 2008. The Trust does not anticipate that the adoption of this standard will have a material impact on its results of operations and financial position. In June 2007, the CICA amended Section 1400, "General Standards of Financial Statement Presentation," to require an assessment and potential disclosure of an entity's ability to continue as a going concern. The new requirements are effective for interim and annual periods beginning on or after January 1, 2008. These amendments will not impact the Trust's consolidated financial statements. In September 2007, the Accounting Standards Board ("AcSB") issued a bulletin relating to the transition to International Financial Reporting Standards ("IFRS") from Canadian GAAP and based on work undertaken to date, no significant impediments to adopting IFRS by the proposed transition date have been identified. The AcSB expects to be in a position to confirm by March 31, 2008 whether the transition date for adopting IFRS will be January 1, 2011. %SEDAR: 00018945E

For further information:

For further information: Curtis W. Hicks, C.A., Executive Vice President
& Chief Financial Officer or Paul Beique, Director Investor Relations, 2800,
400 - 4th Avenue S.W. - Calgary, Alberta, T2P 0J4, Phone: (403) 698-8827, Fax:
(403) 264-6306, IR Toll Free: 1-866-895-8101,
investor_relations@vermilionenergy.com, www.vermilionenergy.com

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VERMILION ENERGY TRUST

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