Canadian-based Progress Energy Ltd. and junior independent Cequel Energy Inc. have announced they will combine their assets to create a new energy trust and two publicly listed exploration and production companies.

Combined, Progress Energy Trust will have an enterprise value of C$1 billion ($740 million) and own 90% of the existing assets, while Progress ExploreCo and Cequel ExploreCo will own the prospective natural gas-weighted assets and undeveloped lands.

The reorganization combines some of the low risk, long-life assets of Progress and Cequel to create a platform for growth, while at the same time creating two new exploration-oriented entities. The transaction will separate the mature assets from the growth assets, and with Canada’s tax system, offer tax advantages through the trust.

“This transaction represents an important step in the evolution of Progress,” said Progress CEO David Johnson. “We are genuinely excited about the prospects for the trust and both exploration companies and are confident that the positive momentum of both Progress and Cequel will be continued in these resulting entities.”

Donald Archibald, Cequel’s CEO, said the new companies would provide his shareholders “with the ability to realize the value of Cequel’s mature assets while preserving access to its sizeable portfolio of growth opportunities.”

Initially, the new trust will produce approximately 20,000 boe/d, comprised of 95 MMcf/d of natural gas and 4,200 bbl/d of crude oil and liquids. Current operating costs are approximately $C4.50-5.00/boe, and Progress currently operates more than 90% of its assets. At closing, the trust is expected to have approximately $C150 million of debt. Initially, the trust will retain about 30% of its cash flow to fund development activities.

Progress ExploreCo will receive some of Progress’ producing assets and undeveloped lands in the foothills and northern plains regions of British Columbia, along with a 20% interest in Progress’ Fort St. John core area. These interests currently produce approximately 1,000 boe/d of gas and liquids. The new Progress ExploreCo assets will contain approximately 52,000 net acres of undeveloped land and 79,000 acres of option land. In addition, Progress ExploreCo will have an option to farm-in on 25,000 net acres of Progress’ exploratory lands retained by the trust on standard industry terms, which would give the new exploration company more opportunities.

Cequel ExploreCo will receive some of Cequel’s producing assets and undeveloped lands in the Deep Basin (Gold Creek) area. These interests currently produce approximately 1,000 boe/d of gas and liquids production and contain approximately 36,000 net acres of undeveloped land. In addition, Cequel ExploreCo will also have an option to farm-in on 55,000 net acres of former Cequel exploratory lands retained by the trust on standard industry terms.

Under the proposed combination, Progress shareholders will receive one trust unit or exchangeable share of the trust and one share each of the two producers, before a planned five-for-one share consolidation. Current Cequel shareholders will receive 0.695 trust units or exchangeable shares of the trust and 0.695 of a share in each of the new producers (before the consolidation). Up to 16 million exchangeable shares will be issued under the proposed combination.

At closing, Progress ExploreCo will assume $C10 million of debt and will have an initial capital expenditure program of between $C15-20 million for the rest of 2004. A private placement, comprised of shares and warrants of Progress ExploreCo and units of Progress Energy Trust, will be made available to the Progress employees, which would raise total proceeds to $C10 million for Progress ExploreCo and $C2.5 million for Progress Energy Trust. Cequel ExploreCo also will assume $C10 million of debt and also will have a capital expenditure program of $C15-20 million for 2004. A private placement of shares and warrants also will be undertaken by Cequel Explore Co to raise its total proceeds to $C6.5 million.

Progress Energy Trust will be led by Johnson, who also will be chairman. Michael Culbert will be president; Steven Allaire, CFO, Daniel Topolinsky, vice president exploration; and Neil Samis, vice president production and engineering. Progress ExploreCo will be chaired by Johnson and Allaire also will serve as CFO. John Stewart will serve as chairman.

Cequel ExploreCo will be led by Archibald, who also will be chairman. Mike Kabanuk will be COO; Brendan Carrigy, vice president, exploration; Richard Thompson, vice president geophysics; and Erin Thorson, controller. The board will be comprised of Cequel’s current board and also include Howard Crone, Alison Jones and Gary Peddle.

The board of directors of both companies have unanimously approved the new trust and production companies. Management and directors of Progress represent about 19% of the outstanding shares, while Cequel management represents about 22% of the outstanding shares. A compensation program will be put in place that aligns both unitholder and employee interests, the companies said. There will be no fixed percent bonus plan for management or employees of the trust, or fees payable to management or employees on acquisitions or dispositions.

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