4th quarter oil & gas update january 11, 2007 conference call kpmg llp

4th QuarterOil & Gas UpdateJanuary 11, 2007

CONFERENCE CALL

KPMG LLP

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© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Agenda

John Gordon Introduction

Wayne Chodzicki Trusts: Permitted “Normal Growth”

Keith Raskob-Smith Flow-Through Shares

Murray Suey Financial Reporting Update

John Gordon Derivatives and Hedging Activities

Continuing professional education credit: You may qualify for up to 2 hours of professional education credit by attending this event.

Trusts: Permitted “Normal Growth”

Wayne ChodzickiPartner, Tax

403.691.8004

[email protected]

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Summary of Announcements

• On October 31, 2006, Department of Finance announced new tax regime for Publicly traded Canadian income trusts, royalty trusts and partnerships—now called “Specified Investment Flow-Through’s” (“SIFT’s”)

• On December 15, 2006 the Department of Finance issued guidance on “Undue Expansion”

– Safe Harbour and permitted transactions

– Conversions of SIFT’s to Corporations

• On December 21, 2006 the Department of Finance issued Draft Legislative proposals

– Distributions of certain SIFT income will be subject to tax at corporate income tax rates in the SIFT

– SIFT’s will not be able to deduct distributions of this income for tax purposes, and distributions by partnerships that are SIFT’s will be taxed in the SIFT

– Investors will be taxed as if the distributions were dividends

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“Normal Growth” During Transition Period

• On December 15, 2006, Department of Finance provided further guidance on “Normal Growth”

• “Normal Growth” of a SIFT during the transition period would be allowed

• On the other hand, an aggressive interpretation of the term “undue expansion” may cause the Department to propose further legislative changes

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“Normal Growth” During Transition Period (Cont'd)

Department of Finance proposed the following safe harbour guidelines:

Period Normal Growth

(Safe Harbour)

November 1, 2006 to December 31, 2007

New Equity ≤ the greater of:

a) $50 million; and

b) 40 per cent* of market capitalization (as of October 31, 2006)

For each year, from January 1, 2008 to December 31, 2010

New Equity ≤ the greater of:

a) $50 million; and

b) 20 per cent* of market capitalization (as of October 31, 2006)New Equity = includes units and debt that is convertible into units

* Allowed percentages are cumulative (for a total of 100 per cent growth). The $50 million annual threshold allows smaller income trusts with market capitalization less than $200 million to more than double in size during the 4 year transition.

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“Normal Growth” During Transition Period (Cont'd)

• Measured by ‘issuance of new equity’

• Based on market capitalization—October 31st

• Cumulative: 60 per cent for 2008, 80 per cent for 2009 and 100 per cent for 2010

• Merger of two Trusts not part of growth limit

• Special rules around debt repayment and issuance

• Tax rates will be an incentive for change

2006 2007 2008 2009 2010 2011

Public Corporation (Alberta) 32.12% 32.12% 30.5% 30.0% 29.0% 28.5%

SIFT - New 0% 34.0% 33.5% 33.0% 32.0% 31.5%

• Press Release available at: http://www.fin.gc.ca/news06/06-082e.html

http://www.fin.gc.ca/news06/06-082e.html

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Consultations

• The Department of Finance is accepting submission on the December 21st draft legislation until January 31st, 2007

• The “undue expansion” rules are not contained in the draft legislation of December 21, 2006

• The rules for tax free conversion from SIFT to Corporate status are not contained in the draft legislation of December 21, 2006—Finance not able to draft before Christmas

• Important to model out the effects of the draft legislation to (1) develop a strategy and (2) to ensure that the expected tax result occurs

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Additional Considerations

• Possibly reducing discretionary deductions until 2011 and increasing the taxable portion of distributions in the transition period

• The future tax accounting implications of the announcements including timing of recognition and required disclosures

• Impact of “normal growth” room on mergers and acquisitions

• Future structure

• Going private (rules do not apply to non-listed entities, including pension funds)

Keith Raskob-SmithManager, Tax

403.691.7982

[email protected]

Flow-Through Shares

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Flow-Through Shares

It is Flow-Through Share (FTS) season!

November-December – Majority of 2006 FTS issuances

January-March – Forms and admin for 2006 shares

– Classifying expenses for 2005 shares

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FTS filings and deadlines

If you issued in December

• Form T100A (FTS registration) due by the end of January 2007

• Penalty if late (0.25 per cent up to $15k)

If you are renouncing effective December 31, 2006

• Have until March 31, 2007 to issue T101 slips to investors (although end of Feb is good practice)

• T101A summary/T101 copies—end of next month after slips issued—penalty if late

• If “Look-Back”—have until Dec 31, 2007 to spend, but Part XII.6 tax if not all spent by Feb 28, 2007

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FTS filings and deadlines

If you issued/renounced in December 2005

• Had until December 31, 2006 to incur qualifying expenses

• Part XII.6 tax return due by Feb 28, 2007

– Accumulate and apply costs month by month from 2006

– Penalty if late

– File NIL return if uncertainty in January/February costs

• Not coincidently, February 28, 2007 is also the deadline to file a T101B if an amendment is required to a December 31, 2005 renunciation

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Classifying expenses—CEE

If you need CEE from 2006 to fulfill a 2005 renunciation

• Drilling and/or completing

– Must be NEW pool discovery or FULL abandonment—do NOT rely on Lahee well licence classification

– Six month window—have until June 30, 2007 to abandon and get CEE treatment of 2006 drilling costs. Consider standing wells—you may need that CEE

• Seismic

– Cost to acquire used data (“off the shelf”)—cannot renounce

– Current processing costs—okay

• General and Administration (G&A)—90 per cent rule

Financial Reporting Update

Murray SueyPartner, Audit

403.691.8474

[email protected]

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Accounting for Taxes of Trusts—2006

• Issues being considered by EIC but process not yet complete

• Previously most trusts did not provide for taxes on temporary differences at the trust level if conditions in EIC 107 are satisfied

• When tax changes are substantively enacted, many trusts will be required to record additional future income taxes

• As changes were not substantively enacted in 2006, no accounting is required at this point

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Accounting for Taxes of Trusts—2006

• Consider disclosure requirements from CICA 3465.99

– Nature and extent of temporary differences for entities not providing for taxes—would include most trusts/LPs

• Most trusts will be required to assess goodwill for impairment in Q4-2006. Market cap may be an indicator of fair value, but further analysis often required

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Non-GAAP Financial Measures

CSA Staff Notice 52-306 issued in 2003 and revised in August 2006. Revisions focused on:

• Appropriate explanations for purpose and merits of disclosures

• Inconsistent disclosures from period to period

• Inappropriate exclusion of and inadequate discussion of “non-recurring” amounts excluded

• Lack of appropriate reconciliations

• Clarified that distributable cash is a cash flow measure and needs to be reconciled to cash flow from operating activities after changes in non-cash working capital

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Certification of Design of Internal Controls

• September 2006 guidance issued on reporting when weaknesses exist

– MD&A should include disclosure of nature of weakness, associated risks, plans to remediate (if any)

– We expect many smaller issuers to disclose some weaknesses, such as lack of segregation of duties or lack of resources to address complex accounting requirements

• Some indicators of weaknesses for smaller entities might include

– Audit adjustments

– Prior period adjustments

– Lack of resources to apply complex accounting requirements, like hedging, VIE’s or future income taxes

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US GAAP—SAB 108

Considering the Effect of Prior Year Differences when Quantifying Effect of Misstatements in Current Year (effective for 2006)

• Registrants required to quantify misstatements using both the balance sheet (iron curtain) method and income statement (rollover) method to assess if differences are material

• Clarifies that assessment of impact of differences is first an accounting requirement (management) and secondly an auditing requirement

• Impact on CDN GAAP is unclear, but would be unusual to have a CDN/US GAAP difference due to materiality differences

• Tip of the day—record all known differences each period

Derivatives and Hedging Activities

John GordonPartner, Audit

403.691.8118

[email protected]

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• New rules are effective for 2007 for the recognition and measurement of derivatives

• For existing hedges, documentation and analysis of effectiveness needs to be completed for last quarter of 2006, even if hedge accounting will not be followed for future periods

• MD&A should probably include disclosures of expected future accounting policy changes

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• Certain analysis and actions required by January 1, 2007

– Modify hedge documentation if hedge accounting to be continued. 2006 documentation probably will not cover all required matters

– Identify non-financial derivatives, such as fixed price physical contracts

– Identify embedded derivatives

– Prepare documentation for “expected usage” exemption where required

• Mark to market accounting would be required for all derivatives, including non-financial derivatives for prior to the preparation of the documentation

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If hedge accounting not adopted for future periods

• Balance sheet

– All derivatives recorded at fair value on balance sheet

• Income statement

– Derivatives adjusted to fair value each period

– Realized and unrealized amounts should be grouped together

• Cash flow statement

– Expect that cash flows on settlements will be included as operating activity

– Unrealized gains and losses will be added back as non-cash item

• Expect most entities will add back before funds from operations amount

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Contact Information

Contact details:

Wayne Chodzicki

[email protected]

403.691.8004

Keith Raskob-Smith

[email protected]

403.691.7982

Murray Suey

[email protected]

403.691.8474

John Gordon

[email protected]

403.691.8118

Mailing Address for all:

KPMG LLP

2700 205 5th Avenue SW

Calgary, Alberta

T2P 4B9

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. © 2007 KPMG LLP, a Canadian limited liability partnership and a

member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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4th quarter oil & gas update january 11, 2007 conference call kpmg llp

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