Daylight Energy Trust
TSX : DAY.UN

Daylight Energy Trust

November 08, 2005 08:00 ET

Daylight Energy Delivers Excellent Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 8, 2005) - Daylight Energy Trust (TSX:DAY.UN):

DAYLIGHT ENERGY DELIVERS EXCELLENT THIRD QUARTER RESULTS

- UNHEDGED GAS PRODUCTION AND REDUCED OPERATING COSTS GENERATE RECORD CASH FLOW WITH SIGNIFICANTLY IMPROVED FINANCIAL FLEXIBILITY AND DISTRIBUTION OF AN EXCITING NEW GROWTH ORIENTED EXPLORECO TO DAYLIGHT UNITHOLDERS

EXECUTIVE CHAIRMAN'S MESSAGE TO UNITHOLDERS

Daylight Energy Trust ("Daylight") is pleased to announce excellent third quarter ("Q3 2005") results from its oil and gas operations and the innovative distribution of shares and arrangement warrants in an exciting new growth oriented junior exploration company, Open Range Energy Corp. ("Open Range"), to all Daylight securityholders.

Third Quarter Highlights:

- Record Cash Flow from operations of $43.6 million ($0.91 per basic unit, $0.81 per diluted unit)

- Increased 46% over Q2 2005 (up 44% per basic unit, 42% per diluted unit)

- Cash flow per boe up 47% over Q2 2005 to $32.86 from $22.39

- Solid production volumes of over 14,400 boe per day

- Oil and NGLs production increased 8% over Q2 2005 to 5,408 barrels per day

- Natural gas production of 54.1 mmcf per day down 7% versus Q2 2005

- Overall boe production decreased 2% from Q2 2005

- Since inception, total production has grown 9% from 13,228 to 14,424 boe per day

- Reduced operating costs to $9.78 per boe

- Initiatives reduced costs 7% ($0.79 per boe) since Q4 2004

- Trust peer group trends are double digit percentage increases over Q2 2005

- Record operating netbacks of $36.86 per boe

- Increased 37% from Q2 2005 operating netback of $26.97 per boe

- Daylight projected to have top quartile Q3 2005 operating netback among Trust peer group

- Increased monthly cash distribution 17% to $0.14 per unit from $0.12 per unit

- Effective for unitholders of record on October 31, 2005

- Reduced payout ratio to 39% for Q3 2005 from 55% for Q2 2005

- Distributions were $17 million ($0.36 per unit) resulting in a payout ratio of 39%

- Daylight's payout ratio is among lowest in Trust sector peer group

- Continued 100% drilling success with 15 gross (6.9 net) wells

- Since inception,100% success with 41 gross (21.0 net) cased wells

- Reserve additions maintained Reserve Life Index ("RLI") at 8.2 years

- Reserves of 43.7 million boe proved plus probable at quarter end

- Since inception, Daylight has increased its RLI from 6.4 years to 8.2 years

- Significantly improved financial strength during the quarter

- Record cash flow exceeds distributions and capital expenditures

- Net debt (bank debt plus working capital deficiency) to annualized third quarter 2005 cash flow was approximately 0.8 times compared to net debt to annualized Q2 2005 cash flow of 1.2 times

- Balance Sheet flexibility significantly enhanced with debt reduction

- During the quarter approximately $52.2 million of Debentures were converted to Trust Units reducing the principal amount of the Debentures outstanding to $22.7 million

- Total debt (net debt plus convertible debentures) to annualized cashflow reduced to 0.9 times from 1.8 times at Q2 2005

- Strategic arrangement to acquire Tempest Energy Corp.

- Daylight structures acquisition to obtain Tempest properties at attractive metrics

- $37,400 per flowing boe per day (net of land)

- $14.80 per proved plus probable boe of reserves

- Undeveloped lands in excess of 117,000 gross (115,000 net) undeveloped acres

- Create and distribute a high growth junior exploration company to securityholders

- Seeded new exploration focused high growth junior with 400 boe per day

- New ExploreCo to have 20,800 undeveloped acres and 72,000 acre seismic option

- New ExploreCo to be run by proven team (former Tempest management)

The strategic arrangement that Daylight structured for the acquisition of Tempest and creation of Open Range is a truly new initiative for a Trust entity. Through this creative arrangement, Daylight provides a highly accretive transaction plus the enhanced distribution to securityholders of an exciting new high growth junior exploration company. Daylight securityholders receive shares in Open Range directly plus the opportunity to invest additional funds through arrangement warrants at the same price as the initial private placement to Open Range management.

"Our third quarter was another quarter of record operating and financial results. We maintained production, lowered operating costs and combined with strong prices from our substantially unhedged production, generated record cash flow," states Fred Woods, Executive Chairman. "Our Daylight team continues to identify and unlock the tremendous potential of our assets. The cash distribution increase, the Tempest acquisition and the distribution of Open Range shares and warrants deliver tremendous value adds directly and consistently to our unitholders."

RECORD CASH FLOW OF $43.6 MILLION - Increased 46% quarter over quarter

Daylight generated cash flow of $0.91 per unit-basic, $0.81 per unit-diluted for Q3 2005. Solid production volumes and strong commodity prices on both the oil and natural gas side generated a price per boe of $57.61 based on a combined oil and natural gas liquids (NGLs) price of $60.57 per barrel and a natural gas price of $9.26 per mcf. Given our financial strength and flexibility, Daylight is able to maintain its production 100% unhedged for 2006 and 97% unhedged for 2005 allowing unitholders to participate in the strong commodity environment.

SOLID PRODUCTION VOLUMES OF OVER 14,400 BOE PER DAY

Production has grown from 13,228 boe per day during Q4 2004 to 14,424 boe per day in Q3 2005 representing a 9% increase since the Trust was formed in November 2004. Daylight's oil and NGL production was up over 400 barrels per day and increased 8% from Q2 2005 to 5,408 bbl per day. This increase was driven by new wells from our successful 2005 capital program as well as recent re-completion and workover activities on existing wells. Natural gas production of 54.1 mmcf per day was constrained by multiple turnarounds and weather related delays to our tie-in activities which resulted in a 7% decrease versus Q2 2005. Q4 2005 production is expected to average 14,500 to 15,000 boe per day.

CONTINUED OPERATING COST REDUCTION - Reduced costs 7% since Q4 2004

Daylight has continued to deliver further operating cost reductions from $10.57 per boe to $9.78 per boe, a 7% reduction since Q4 2004.

Daylight has put in place many operating cost efficiencies that we internally identified and we continue to define additional operating cost improvements. Daylight has delivered operating cost reductions every quarter since inception, while the industry trend is for escalating operating costs.

CONTINUED 100% DRILLING SUCCESS - 15 of 15 wells cased in quarter

Daylight continued to deliver an excellent drilling program with 15 gross (6.9 net) wells composed of 10 gross (5.2 net) gas wells and 5 gross (1.7 net) oil wells. During the first nine months of 2005, Daylight's high-end technical team has delivered 100% drilling success with 37 gross (18.9 net) successful wells across all core areas.

On the Peace River Arch, Daylight drilled 6 gross (2.3 net) successful wells.

In West Central Alberta, Daylight drilled 4 gross (1.1 net) successful wells.

In the East 5 Area, Daylight drilled 5 gross (3.5 net) successful wells.

Our continued 100% drilling success validates our high-end technical team approach and the extensive low risk development drilling potential within Daylight's land base.

SOLID RESERVE LEVELS AND RESERVE LIFE INDEX (RLI) MAINTAINED - RLI steady at 8.2 years

Daylight's successful drilling and positive revisions, as reviewed by our independent engineers, maintained our proved plus probable reserve with 43.7 million boe recognized at the end of Q3 2005. Since inception Daylight has increased our Reserve Life Index from 6.4 to 8.2 years.

CASH FLOW EXCEEDS DISTRIBUTIONS AND CAPITAL EXPENDITURES

During the quarter, distributions of $17.0 million or $0.36 per unit were declared resulting in a payout ratio of 39% of cash flow. On the capital side, Daylight invested $23.9 in its properties to maintain production, reserves and a sustainable operation. Cash flow of $43.6 million exceeded distributions and capital investment by $2.7 million or 6% during an active Q3 2005.

With Daylight's solid production, strong commodity prices and large opportunity base, we are increasing our capital program to $80 million for the 2005 year. The increased $80 million capital program will initiate the winter program on Tempest lands, kick start our exploitation project in the Wildmere area and respond to the increasing cost of services in the sector.

The acquisition of Tempest is anticipated to increase production to between 16,750 to 17,250 boe per day for 2006 with cash flow of approximately $190 million based on US$55 WTI and C$9.50 AECO. For 2006, Daylight has projected distributions of approximately $105 million or $1.68 per unit resulting in a payout ratio of 55%. Daylight has also established a $90 million 2006 capital program to sustain its reserve and production base in the range of 16,750 to 17,250 boe per day.

BALANCE SHEET FINANCIAL FLEXIBILITY ENHANCED

Record cash flow and the conversion of approximately $52.2 million of convertible debentures during Q3 2005 resulted in Daylight's total debt (inclusive of working capital and debentures) to annualized cash flow decreasing to 0.9 times in Q3 2005 from 1.8 times in Q2 2005. In addition, total debt to enterprise value has decreased from 32% to 19% over the same period. Daylight's balance sheet has never been stronger and matches the excellent financial flexibility our balanced cash flow to distribution and capital program provides.

Daylight's low debt levels and the equity financed Tempest acquisition provide Daylight with even stronger financial flexibility to fund the 2006 capital expenditure program, distributions and strategic opportunities.

STRATEGIC ARRANGEMENT TO ACQUIRE TEMPEST ENERGY CORP

On September 26, 2005, Daylight entered into a strategic arrangement to acquire Tempest through a structured arrangement that netted to Daylight selected high potential high working interest properties and divested certain non-core Daylight properties into a newly formed exploration company (Open Range). Through this structured transaction Daylight will acquire approximately 2,300 boe per day of production at a cost of $37,400 per flowing boe per day, add approximately 6 million boe of proved plus probable reserves ($14.80 per boe) in a focused high working interest property base, add over 115,000 net undeveloped acres and distribute Open Range shares and warrants to Daylight securityholders.

CREATE AND DISTRIBUTE A HIGH GROWTH JUNIOR EXPLORATION COMPANY TO SECURITYHOLDERS

As part of the strategic arrangement involving the acquisition of Tempest, Daylight created a new high growth junior exploration company (Open Range) seeded with certain non-core Daylight properties and a high potential exploration property from the Tempest asset base. In a unique and ground breaking initiative, Daylight is enfranchising all securityholders (unitholders, convertible debenture holders and exchangeable shareholders) with the distribution of Open Range shares as well as warrants to acquire additional Open Range shares at the same price as the initial private placement to management of Open Range. Daylight securityholders will receive a direct distribution of Open Range shares which will begin operations with approximately 400 boe per day of production, a high potential exploration prospect plus 20,800 undeveloped acres and a further 72,000 acres through a large seismic review option from Daylight. Open Range will be run by the proven management team from Tempest.

FEDERAL GOVERNMENT'S CONSULTATION PROCESS ON INCOME TRUSTS

On September 8, 2005, the federal government issued its consultation paper regarding the treatment of income trusts. The possibility that the government may impose additional taxes or other types of restrictions on income trusts has created wide spread uncertainty. The creation of new taxes on income trusts could potentially lead to reduction in distributions, capital programs or both and further downward pressure on unit values and total unitholder return.

Daylight strongly encourages its securityholders that are concerned with this issue to participate in the consultative process and express their views.

For electronic submission, please e-mail: trusts-fiducies@fin.gc.ca



The contact information for the Minister of Finance is:
The Honourable Ralph Goodale
Department of Finance
140 O'Connor Street
Ottawa, Ontario K1A 0A6
Phone: 613-996-4743
Fax: 613-996-9790
e-mail: goodale.R@parl.gc.ca

To contact your Member of Parliament go to
www.canada.gc.ca/directories/direct_ee.html


DAYLIGHT TO BE INCLUDED IN S&P/TSX COMPOSITE INDEX

Based on our discussions with the S&P/TSX and subject to their final review on November 30, 2005, Daylight expects to be included in the S&P/TSX provisional Composite Index to be initially implemented on December 15, 2005 and fully implemented on March 15, 2006. The S&P consider a number of elements in determining qualification for exchange listing including market capitalization and liquidity. With our acquisition of Tempest Energy, Daylight continues to grow as a top tier Energy Trust and we will have approximately 60.5 million units outstanding and an estimated market capitalization of $700 million. In addition, Daylight is a very liquid and actively traded Trust with average daily trading volume of 400,000 to 500,000 units.

OUTLOOK

Daylight securityholders continue to benefit from a perfect storm - a tremendous and high-end team executing its business plan on a solid high potential asset base at a time of strong commodity prices. Our financial strength and flexibility allows us to remain substantially unhedged (97% unhedged for 2005 and entirely unhedged for 2006). Combined with continued operating cost reductions, Daylight's netbacks are projected to remain strong as revenues fully participate in the strong and favorable current commodity environment.

Daylight's high-end technical team continues to reveal the excellent potential within our asset base. The focus of this high-end team on targeted objectives of reduction of operating costs and reserve additions through drilling and value added exploitation projects continue to yield excellent results. We are actively engaged in managing and upgrading our asset base through acquisitions and innovative transactions. Daylight's Tempest acquisition and Open Range distribution are an example of the creative value adds we target on an ongoing basis.

"Our record operating and financial results coupled with the Tempest acquisition and Open Range distribution demonstrate the tremendous potential of our assets and value-add of our creative high-end team," said Fred Woods. "As we approach the first anniversary of Daylight Energy Trust, we have optimized a quality asset base and leveraged a team possessing great depth of knowledge and experience. Together we proudly celebrate a fine year of achievement and look forward to a bright future of unlocking opportunities and delivering value to unitholders."

Signed:

"Fred Woods"

Fred Woods, Executive Chairman

November 7, 2005

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion & Analysis ("MD&A") is dated November 7, 2005 and should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes for the three and nine months ended September 30, 2005 as well as the December 31, 2004 MD&A, amended consolidated financial statements and notes. The consolidated financial statements and other financial data presented have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Daylight Energy Trust ("Daylight" or the "Trust") is an open-ended investment trust created on October 1, 2004 under the laws of the Province of Alberta and began active oil and gas operations on November 30, 2004. As active oil and gas operations began late in 2004 there is no comparative 2004 period and the three month period ended September 30, 2005 ("Q3 2005") is compared to the three month period ended June 30, 2005 ("Q2 2005").

Daylight uses the term cash flow from operations (defined as cash flow from operating activities prior to changes in non-cash working capital) to analyze operating performance and leverage. Cash flow from operations as used in the MD&A does not have any standardized prescribed meaning under GAAP and therefore it may not be comparable with the calculation of similar measures of other entities. Cash flow from operations does not represent operating profit for the period nor should it be viewed as an alternative to operating profit, net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. The reconciliation of net income to cash flow from operations can be found in the consolidated statements of cash flows in the unaudited interim financial statements. Daylight uses the term payout ratio (defined on a percentage basis as distributions declared divided by cash flow from operations) to analyze operating performance and financial flexibility. Payout ratio as used in the MD&A does not have any standardized meaning under GAAP and therefore it may not be comparable with the calculation of similar measures of other entities. Daylight also uses the term operating netback (defined as petroleum and natural gas revenues less royalties, realized gain (loss) on commodity derivatives, operating and transportation expenses) to analyze operating performance. Operating netback as used in the MD&A does not have any standardized meaning under GAAP and therefore it may not be comparable with the calculation of similar measures of other entities.

All references are to Canadian dollars unless otherwise indicated. Where reserves or production are stated on a barrel of oil equivalent (boe) basis, natural gas volumes have been converted to a barrel of oil equivalent (boe) at a ratio of 6,000 cubic feet of natural gas to one barrel of oil. This conversion ratio is based upon an energy equivalent conversion method primarily applicable at the burner tip and does not represent value equivalence at the wellhead. Boe's may be misleading, particularly if used in isolation.

Forward Looking Statements - Certain information regarding Daylight set forth in this document, including management's assessment of future plans and operations, contains forward looking statements that involve substantial known and unknown risks and uncertainties. By their very nature, these forward looking statements are subject to numerous risks and uncertainties, certain of which are beyond Daylight's control. Actual results could differ materially from those currently anticipated due to any number of factors including such variables as new information regarding recoverable reserves, volatility of commodity prices, competition from other entities, environmental, legislative, regulatory and political changes along with other factors discussed in our annual information form. Accordingly, no assurance can be given that any events anticipated by the forward looking statements will transpire or occur, or if any of them do, what the impact to Daylight will be.

CREATION OF DAYLIGHT AND PLAN OF ARRANGEMENT

The Trust was formed on October 1, 2004, completed a private placement on October 21, 2004 and began active oil and gas operations through its subsidiary, Daylight Energy Ltd. ("Daylight Energy") as part of a Plan of Arrangement ("Plan of Arrangement") on November 30, 2004. Pursuant to the Plan of Arrangement, Daylight acquired all the shares of Midnight Oil and Gas Ltd. ("MOG") and Vintage Petroleum Canada, Inc. ("VPCI") with certain assets conveyed to a new exploration focused entity, Midnight Oil Exploration Ltd. ("MOX"). The acquisition of VPCI and MOG has been accounted for by the purchase method using fair values as at November 30, 2004. The conveyance of assets to Midnight Oil Exploration Ltd. ("MOX") has been accounted for by the continuity of interests method.

Administrative and Technical Services Agreement

In conjunction with the Plan of Arrangement, Daylight Energy and MOX entered into an Administrative and Technical Services Agreement which provides for the shared services required to manage the activities of Daylight and MOX and to govern the allocation of general and administrative expenses between the entities. Under this agreement, Daylight Energy is the employer on behalf of the parties and receives payment for certain technical and administrative services provided to MOX on a cost recovery basis. The Administrative and Technical Services Agreement has no set termination date and will continue until terminated by either party with three months written notice to the other party. In the interest of strong governance practices, both Daylight and MOX have established independent Technical Services and Corporate Governance committees within their respective Boards of Directors to monitor compliance with the Administrative and Technical Services Agreement.



HIGHLIGHTS

Financial Three months ended
(in thousands of ----------------------------------- %
dollars, except unit, September June March Change
per unit and boe data) 30, 2005 30, 2005 31, 2005 Q3 vs.Q2
------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 76,445 $ 60,529 $ 53,984 26
Royalties (13,188) (10,506) (10,340) 26
Realized gain (loss) on
commodity derivatives (350) 59 - n/a
Operating expenses (12,981) (13,184) (12,328) (2)
Transportation (1,018) (950) (430) 7
------------------------------------------------------------------------
Operating netback 48,908 35,948 30,886 36
General and administrative
- cash charge (2,216) (2,108) (1,987) 5
Cash financial charges (2,756) (2,861) (2,584) (4)
Cash taxes (224) (347) (244) (35)
Asset retirement
expenditures (111) (782) (788) (86)
------------------------------------------------------------------------
Cash flow from operations 43,601 29,850 25,283 46
Per unit - Basic 0.91 0.63 0.58 45
- Diluted 0.81 0.57 0.51 42
------------------------------------------------------------------------
Net income 20,525 12,201 5,887 68
Per unit - Basic 0.45 0.27 0.14 66
- Diluted 0.42 0.26 0.14 62
------------------------------------------------------------------------
Distributions declared 17,022 16,283 14,962 5
Per unit 0.36 0.36 0.36 -
Payout ratio 39% 55% 59% (16)
------------------------------------------------------------------------
Capital expenditures 23,851 14,086 14,387 69
Wells drilled - gross (net) 15 (6.9) 5 (3.4) 17 (8.6) n/a
------------------------------------------------------------------------
Bank debt 124,185 131,755 101,850 (6)
Working capital deficiency 16,467 11,602 12,256 42
Total assets 689,297 676,212 610,970 2
------------------------------------------------------------------------
Units outstanding (000s)
Basic including
exchangeable shares 52,796 47,253 43,975 8
Diluted 56,460 56,209 52,594 -
------------------------------------------------------------------------
------------------------------------------------------------------------
Operational

Average daily production
Natural gas (mcf/d) 54,096 57,890 58,875 (7)
Light oil (bbls/d) 2,527 2,292 2,721 10
Heavy oil (bbls/d) 2,096 1,937 - 8
Natural Gas Liquids
("NGLs") (bbls/d) 785 771 892 2
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 5,408 5,000 3,613 8
------------------------------------------------------------------------
Combined (boe/d) 14,424 14,648 13,426 (2)
------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 9.26 $ 7.51 $ 6.86 23
Light oil ($/bbl) 68.98 62.80 56.49 10
Heavy oil ($/bbl) 51.94 23.49 - 121
NGLs ($/bbl) 56.56 52.71 46.35 7
------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 60.57 $ 46.02 $ 53.99 32
------------------------------------------------------------------------
Petroleum and natural gas
revenues ($/boe) $ 57.61 $ 45.41 $ 44.68 27
Royalties ($/boe) (9.94) (7.88) (8.56) 26
Realized on commodity
derivatives ($/boe) (0.26) 0.04 - n/a
Operating expenses ($/boe) (9.78) (9.89) (10.20) (1)
Transportation ($/boe) (0.77) (0.71) (0.36) 8
------------------------------------------------------------------------
Operating netback ($/boe) $ 36.86 $ 26.97 $ 25.56 37
General and administrative
- cash charge ($/boe) (1.67) (1.58) (1.64) 6
Cash financial charges
($/boe) (2.08) (2.15) (2.14) (3)
Cash taxes ($/boe) (0.17) (0.26) (0.20) (35)
Asset retirement
expenditures ($/boe) (0.08) (0.59) (0.65) (86)
------------------------------------------------------------------------
Cash flow from operations
($/boe) $ 32.86 $ 22.39 $ 20.92 47
------------------------------------------------------------------------
------------------------------------------------------------------------

Per boe amounts many not add exactly due to rounding.


RESULTS OF OPERATIONS

Daylight is an oil and natural gas energy trust applying a high end technical and business execution team to a high quality asset base to provide sustainable production and reserve levels. Daylight operates primarily on the Peace River Arch, West Central Alberta and Eastern Alberta. Daylight's units and the 8.5% Convertible Debentures trade on the Toronto Stock Exchange ("TSX") with the symbols DAY.UN and DAY.DB respectively.

Production

Daylight's production volumes for Q3 2005 averaged 14,424 boe per day which is a 2% decrease from Q2 2005. Q3 2005 production is comprised of 54,096 mcf per day of natural gas, 2,527 bbls per day of light oil, 2,096 bbls per day of heavy oil and 785 bbls per day of NGLs. Production of natural gas was lower in Q3 2005 versus Q2 2005 as extended wet weather delayed the tie-in of new production.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
Daily production 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Natural gas (mcf/day) 54,096 57,890 58,875 56,936
Light oil (bbls/day) 2,527 2,292 2,721 2,513
Heavy oil (bbls/day) 2,096 1,937 - 1,352
NGLs (bbls/day) 785 771 892 816
------------------------------------------------------------------------
Combined oil and NGLs
(bbls/day) 5,408 5,000 3,613 4,681
------------------------------------------------------------------------
Combined all products
(boe/day) 14,424 14,648 13,426 14,170
------------------------------------------------------------------------
------------------------------------------------------------------------


2005 production addition activities are focused on:

- West Central properties of Pine Creek, Kaybob, Fir, Marlboro and Windfall

- Peace River Arch properties of Red Earth, Elmworth, Hines Creek, Cecil and Wapiti

- Eastern properties of Wildmere, Bonnyville and Little Bow

Daylight expects production of approximately 14,500 to 15,000 boe per day during Q4 2005.

Commodity Prices

Daylight's natural gas prices are influenced by overall North American supply and demand balance, seasonal changes, storage levels and transportation capacity constraints. Daylight's realized natural gas price has a high correlation to the Alberta benchmark price ("AECO").

Daylight's oil price is significantly influenced by global supply and demand conditions. Daylight's realized light oil price has a high correlation to the US benchmark West Texas Intermediate at Cushing, Oklahoma ("WTI") price and the Canadian to US dollar exchange rate. Canadian light oil prices correlate to refinery postings that adjust WTI for the Canadian to US dollar exchange rate as well as transportation costs and quality adjustments. Daylight's realized heavy oil price is lower than its light oil price and the historical correlation with WTI is not as strong. Heavy oil requires increased refining and costs, such a condensate for blending, which reduce the realized price of this production. During 2005 the WTI price has been very strong and improving which has enhanced the price realized by Daylight on its oil.

Natural Gas Liquids ("NGLs") include Condensate, Pentane, Butane and Propane. Prices for NGLs have their own market dynamic with a relatively strong correlation to oil prices for Condensate and Pentane while Butane and Propane trade at moderate discounts.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
Market Prices 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
AECO ($Cdn/mcf) $ 9.24 $ 7.23 $ 6.79 $ 7.75
WTI ($US/bbl) 63.18 53.11 49.83 55.46
Edmonton Par ($Cdn/bbl) 77.02 65.93 62.20 68.46
Bow River ($Cdn/bbl) 52.64 40.65 39.10 44.20
Exchange rate ($Cdn/$US) 0.8322 0.8039 0.8159 0.8174
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
Daylight prices realized: 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Natural gas ($/mcf) $ 9.26 $ 7.51 $ 6.86 $ 7.85
Light oil ($/bbl) 68.98 62.80 56.49 62.63
Heavy oil ($/bbl) 51.94 23.49 - 38.36
NGLs ($/bbl) 56.56 52.71 46.35 51.64
------------------------------------------------------------------------
Combined oil and NGLs
($/bbl) 60.57 46.02 53.99 53.71
------------------------------------------------------------------------
Combined all products
($/boe) $ 57.61 $ 45.41 $ 44.68 $ 49.32
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's natural gas price during Q3 2005 was $9.26/mcf representing a slight premium to AECO in the quarter and a 23% increase over the Q2 2005 realized price.

Daylight's combined oil and NGLs price during Q3 2005 was $60.57/bbl which is up 32% from Q2 2005 due to increased commodity prices realized in the quarter. Daylight's heavy oil price was $51.94 for Q3 2005, up 121% over the Q2 2005 price of $23.49. This significant increase to the heavy oil price was a result of improved contracts negotiated by our marketing department and a reduced heavy to light oil differential. Daylight's light oil price during Q3 2005 was $68.98/bbl, up 10% from Q2 2005, and the NGLs price during Q3 2005 was $56.56/bbl, up 7% from Q2 2005.

Daylight's realized prices are expected to continue to correlate with market prices during the remainder of 2005 as we have remained substantially unhedged throughout the year and do not anticipate hedging any additional production for 2005.



Revenue

------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
Petroleum and natural September June March September
gas (000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Natural gas $ 46,071 $ 39,565 $ 36,335 $ 121,971
Light oil 16,036 13,099 13,835 42,970
Heavy oil 10,016 4,141 - 14,157
NGLs 4,085 3,698 3,721 11,504
Other 237 26 93 356
------------------------------------------------------------------------
Total $ 76,445 $ 60,529 $ 53,984 $ 190,958
------------------------------------------------------------------------


Natural gas sales for Q3 2005 were $46.1 million, up 16% from Q2 2005. Light oil sales for Q3 2005 were $16.0 million, up 22% from Q2 2005, heavy oil sales for Q3 2005 were $10.0 million, up 142% from Q2 2005, and NGLs sales for Q3 2005 were $4.1 million, up 10% from Q2 2005. Increased revenue for the quarter is largely the result of increased commodity prices which we were able to realize with substantially unhedged production. The notable increase in heavy oil revenues was a result improved marketing contracts and the reduction of the differential between heavy and light oil prices.

Royalties

Royalty payments are made to the owners of the mineral rights on our leases which include provincial governments (Crown) and freehold landowners as well as to other third parties by way of contractual overriding royalties.

In Alberta, royalties on natural gas and NGLs are charged by the government based on an established monthly Reference Price. The Reference Price is meant to reflect the average price for gas and NGLs in Alberta. Gas cost allowance, custom processing credits, and other incentive programs reduce the effective royalty rate. Approximately 85% of Daylight's natural gas production is from Alberta.

Oil royalty rates are generally a function of production rates on a per well basis, prices and are also subject to certain reductions and incentives. Crown royalties in Alberta are generally satisfied by delivering the required amount of oil to the Crown.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
Royalties by type 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Crown royalties, net of
ARTC (000s) $ 11,045 $ 7,783 $ 9,467 $ 28,295
Freehold royalties (000s) 868 1,102 289 2,259
Overriding royalties (000s) 1,275 1,621 584 3,480
------------------------------------------------------------------------
Total (000s) $ 13,188 $ 10,506 $ 10,340 $ 34,034
------------------------------------------------------------------------
$ per boe $ 9.94 $ 7.88 $ 8.56 $ 8.80
------------------------------------------------------------------------
% of revenue 17.3 17.4 19.2 17.8
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
Royalties by commodity 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Natural gas (000s) $ 8,410 $ 6,696 $ 7,194 $ 22,300
Oil and NGLs (000s) 4,778 3,810 3,146 11,734
------------------------------------------------------------------------
Total (000s) $ 13,188 $ 10,506 $ 10,340 $ 34,034
------------------------------------------------------------------------

Natural gas (per boe) $ 10.14 $ 7.63 $ 8.15 $ 8.61
Oil and NGLs (per boe) 9.60 8.37 9.67 9.18
------------------------------------------------------------------------
Total (per boe) $ 9.94 $ 7.88 $ 8.56 $ 8.80
------------------------------------------------------------------------

Natural gas (% of revenue) 18.3 16.9 19.8 18.3
Oil and NGLs (% of revenue) 15.9 18.2 17.9 17.1
------------------------------------------------------------------------
Total (% of revenue) 17.3 17.4 19.2 17.8
------------------------------------------------------------------------
------------------------------------------------------------------------


Overall royalty rates remained relatively unchanged at 17.3% of revenue for Q3 2005 versus 17.4% for Q2 2005. Gas royalties increased to 18.3% of gas revenue in Q3 2005 from 16.9% in as the Q2 2005 as the Q2 2005 results included the favourable effect of prior period GCA credits. Oil royalties decreased to 15.9% of oil revenues during Q3 2005 as heavy oil, which attracts a lower royalty rate, made up a larger percentage of oil and NGL revenue during Q3 2005 than during Q2 2005. Daylight expects total royalty rates of approximately 18% to 19% on a go forward basis.

Gain (loss) on Commodity Derivatives

Effective January 1, 2005, the Trust adopted Accounting Guideline 13 "Hedging Relationships", which deals with the identification, designation, documentation and effectiveness of hedging relationships for the purposes of applying hedge accounting. Where hedge accounting does not apply, any changes in the fair value of the financial derivative contracts relating to a financial period can either reduce or increase net income for that period. The Trust may enter into financial instruments to manage commodity price, foreign exchange and interest rate risk that do not qualify as hedges under the guidelines.

Where hedge accounting is used, the Trust assesses, both at inception and on an ongoing basis, whether the derivative used in the particular hedging transaction is effective in offsetting changes in fair value or cash flows of the hedged item. For instruments that do not meet the hedge accounting criteria the Trust applies the mark-to-market accounting method.

In conjunction with the Flowing acquisition a commodity derivative contract was assumed. The commodity derivative contact is for 500 barrels per day of oil at a fixed price of $52.70 Canadian WTI expiring on December 31, 2005. Daylight has applied mark-to-market accounting to this financial instrument. During Q3 2005 this commodity derivative generated a loss of $462,000 composed of a realized loss of $350,000 and an unrealized loss of $112,000.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
Commodity derivatives September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Realized gain (loss) $ (350) $ 59 $ - $ (291)
Unrealized loss (112) (292) - $ (404)
------------------------------------------------------------------------
Total $ (462) $ (233) $ - $ (695)
------------------------------------------------------------------------
------------------------------------------------------------------------

$ per boe
------------------------------------------------------------------------
Realized gain $ (0.26) $ 0.04 $ - $ (0.07)
Unrealized loss (0.09) (0.22) - (0.10)
------------------------------------------------------------------------
Total $ (0.35) $ (0.17) $ - $ (0.18)
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight continues to monitor commodity prices and may selectively hedge a portion of its production. The current 12 month forward strip for AECO natural gas is approximately $10.60 per mcf and WTI oil is approximately US$62 per bbl. These forward prices are well in excess of Daylight's budgeted prices for the remainder of 2005 of $9.50 per mcf for natural gas and US$55 per bbl WTI for oil, which provides Daylight increased flexibility in executing our capital and operating plans.

Operating Expenses

Operating expenses include activities in the field required to operate wells and facilities, lift to surface, gather, process, treat and store production.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Operating costs $ 12,981 $ 13,184 $ 12,328 $ 38,493
$ per boe $ 9.78 $ 9.89 $ 10.20 $ 9.95
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight continued to reduce operating costs on a per boe basis during Q3 2005 with a further reduction of $0.11 per boe from Q2 2005 resulting in an operating cost of $9.78 per boe. These cost savings relate to the execution of multiple operational enhancements and initiatives. As part of Daylight's ongoing approach to add value, management continues to pursue further operating costs savings for implementation in the future.

Transportation Expenses

Transportation expenses are defined by the point of legal custody transfer of the commodity and are influenced by the nature of the production, location, availability of transportation and the sales point. The cost of delivering production to the custody transfer point is shown separately as transportation expense.

Daylight generally sells its light oil and NGLs production at the lease with the purchaser taking legal custody of the oil and paying a price for the oil at that delivery point. Daylight's heavy oil production is delivered to a terminal by truck and as such bears a trucking charge which is a transportation expense. Transportation expense in Q3 2005 of $1,018,000, or $0.77 per boe, increased by 7% over the Q2 2005 expense of $950,000, or $0.71 per boe. Natural gas is usually transported to an established delivery point such as AECO in Alberta and then delivered to the purchaser.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Transportation costs $ 1,018 $ 950 $ 430 $ 2,398
$ per boe $ 0.77 $ 0.71 $ 0.36 $ 0.62
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating Netbacks (per boe)
------------------------------------------------------------------------
Nine
Natural Gas, Three months ended months
Oil & NGLs ----------------------------------- ended
Combined September June March September
(per boe) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Revenue $ 57.61 $ 45.41 $ 44.68 $ 49.36
Royalty (9.94) (7.88) (8.56) (8.80)
Commodity Derivative
- realized (0.26) 0.04 - (0.07)
Operating cost (9.78) (9.89) (10.20) (9.95)
Transportation (0.77) (0.71) (0.36) (0.62)
------------------------------------------------------------------------
Operating netback $ 36.86 $ 26.97 $ 25.56 $ 29.92
------------------------------------------------------------------------
------------------------------------------------------------------------


General and Administrative Expenses
------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Gross G&A $ 4,132 $ 4,388 $ 3,613 $ 12,133
Operating recoveries (663) (863) (912) (2,438)
Capitalized costs (1,253) (1,417) (714) (3,384)
------------------------------------------------------------------------
2,216 2,108 1,987 6,311
Unit based compensation 808 726 386 1,920
------------------------------------------------------------------------
Net G&A $ 3,024 $ 2,834 $ 2,373 $ 8,231
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
$ per boe 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Gross G&A $ 3.11 $ 3.29 $ 2.99 $ 3.14
Operating recoveries (0.50) (0.65) (0.75) (0.63)
Capitalized costs (0.94) (1.06) (0.59) (0.87)
------------------------------------------------------------------------
1.67 1.58 1.64 1.63
Unit based compensation 0.61 0.54 0.32 0.50
------------------------------------------------------------------------
Net G&A $ 2.28 $ 2.13 $ 1.96 $ 2.13
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative expense ("G&A") during Q3 2005 was $3,024,000 ($2.28 per boe) including non-cash unit based compensation of $808,000 ($0.61 per boe). General and administrative expense on a year to date basis was $8,231,000 ($2.13 per boe) including non-cash unit based compensation of $1,920,000 ($0.50 per boe).

Pursuant to the Administrative and Technical Services Agreement, Daylight Energy charged MOX $686,000 relating to general and administrative activities for the nine months ended September 30, 2005 ($253,000 for the three months ended September 30, 2005)and $1,053,000 relating to capital expenditures for the nine month period ended September 30, 2005 ($308,000 for the three months ended September 30, 2005).

Unit based compensation expense is an allocation of the fair value of Restricted Unit Awards and Performance Unit Awards as of the date of grant over the three year vesting period of the unit awards.

Financial Charges

Daylight incurs cash interest expense on bank debt and convertible debentures. Daylight's effective bank debt interest rate was 3.7% and the convertible debentures have a fixed 8.5% interest rate. Non-cash financial charges relate to the amortization of cost related to issuing the convertible debentures, establishing the bank credit facility and accreting the convertible debenture discount.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Bank debt interest $ 1,255 $ 1,273 $ 947 $ 3,475
Convertible debenture
interest 1,501 1,588 1,637 4,726
------------------------------------------------------------------------
Cash financial charges 2,756 2,861 2,584 8,201
Amortization of financial
charges 139 178 181 498
Accretion of convertible
debenture discount 83 107 111 301
------------------------------------------------------------------------
Total $ 2,978 $ 3,146 $ 2,876 $ 9,000
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
$ per boe 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Bank debt interest $ 0.95 $ 0.96 $ 0.78 $ 0.90
Convertible debenture
interest 1.13 1.19 1.35 1.22
------------------------------------------------------------------------
Cash financial charges 2.08 2.15 2.14 2.12
Amortization of financial
charges 0.10 0.13 0.15 0.13
Accretion of convertible
debenture discount 0.06 0.08 0.09 0.08
------------------------------------------------------------------------
Total $ 2.24 $ 2.36 $ 2.38 $ 2.33
------------------------------------------------------------------------
------------------------------------------------------------------------


During 2005, Daylight's bank debt interest is expected to continue to correlate with market interest rates and the convertible debentures interest rate is established at 8.5%.

Depletion, Depreciation and Accretion

Daylight's depletion, depreciation and accretion values relate to the Plan of Arrangement acquisition value of MOG and VPCI which were recorded at fair value, the acquisition of Flowing during Q2 2005 and the ongoing internal capital program.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Depletion and Depreciation $ 18,935 $ 18,320 $ 20,036 $ 57,291
Accretion 366 365 335 1,066
------------------------------------------------------------------------
Total $ 19,301 $ 18,685 $ 20,371 $ 58,357
------------------------------------------------------------------------
------------------------------------------------------------------------

$ per boe
------------------------------------------------------------------------
Depletion and Depreciation $ 14.27 $ 13.74 $ 16.58 $ 14.81
Accretion 0.28 0.27 0.28 0.28
------------------------------------------------------------------------
Total $ 14.54 $ 14.02 $ 16.86 $ 15.09
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's Q3 2005 depletion, depreciation and accretion rate per boe of $14.54 is an increase of 4% from the Q2 2005 rate.

Future Income and Capital Taxes

During Q3 2005 Daylight recognized cash taxes of $224,000 ($0.17/boe) related to capital tax obligations. Daylight also recognized a future income tax expense of $1,851,000 during Q3 2005. Daylight is a taxable entity under the Canadian Income Tax Act and is taxable only on income that is not distributed or distributable to its unitholders.

Daylight does not expect to incur any cash income taxes in the future and expects to recover the recorded future tax liability recorded on the balance sheet over time as income is generated and distributions are paid to unitholders.

Non-Controlling Interest - Exchangeable shares

Effective June 30, 2005, Daylight retroactively adopted and applied the new accounting policy relating to the classification of exchangeable shares in accordance with the CICA issued revised draft EIC-151 "Exchangeable Securities Issued by a Subsidiary of an Income Trust". As a result the exchangeable shares issued by the Trust's subsidiary must be reflected as non-controlling interest on the balance sheet. Accordingly, net earnings are reduced by the net earnings attributed to the non-controlling interest. The net earning attributed to the non-controlling interest was $893,000 for the three months ended September 30, 2005 and $1,702,000 for the nine months ended September 30, 2005.

Net Earnings and Cash Flow

As a result of the previously discussed factors Daylight recognized net earnings of $20,525,000 and cash flow from operations of $43,601,000 during Q3 2005.



------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Net earnings $ 20,525 $ 12,201 $ 5,887 $ 38,613
Per boe $ 15.47 $ 9.15 $ 4.87 $ 9.98
------------------------------------------------------------------------
Per Unit
Basic $ 0.45 $ 0.27 $ 0.14 $ 0.87
Diluted $ 0.42 $ 0.26 $ 0.14 $ 0.85
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash flow from operations $ 43,601 $ 29,850 $ 25,283 $ 98,734
Per boe $ 32.86 $ 22.39 $ 20.92 $ 25.52
------------------------------------------------------------------------
Per Unit
Basic $ 0.91 $ 0.63 $ 0.58 $ 2.14
Diluted $ 0.81 $ 0.57 $ 0.51 $ 1.92
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's cash flow from operations is significantly influenced by production volumes and commodity prices. Daylight has budgeted prices for the remainder of 2005 of $9.50 per mcf for natural gas and US$55 per bbl WTI for oil as well as a United States dollar to Canadian dollar exchange rate of $0.85. Daylight's estimated sensitivity to changes in its commodity price, production volume and exchange rate assumptions during the 2005 year is approximately:

- $1.7 million per $0.10 change in natural gas price per mcf.

- $1.8 million per $US1.00 change in the WTI oil price per bbl.

- $2.2 million per 1 mmcf per day change in production.

- $1.2 million per 100 bbl per day change in light oil and NGLs production.

- $0.9 million per 100 bbl per day change in heavy oil production.

- $1.1 million per $0.01 change in the United States dollar to Canadian dollar exchange rate.


Capital Expenditures

------------------------------------------------------------------------
Nine
Three months ended months
----------------------------------- ended
Capital Expenditures September June March September
(000s) 30, 2005 30, 2005 31, 2005 30, 2005
------------------------------------------------------------------------
Land and acquisitions $ 1,010 $ 316 $ 685 $ 2,011
Geological and geophysical 1,421 1,514 952 3,887
Drill, complete and
recomplete 12,114 7,791 8,236 28,141
Equipping and facilities 9,306 4,465 4,514 18,285
------------------------------------------------------------------------
Total $ 23,851 $ 14,086 $ 14,387 $ 52,324
------------------------------------------------------------------------
------------------------------------------------------------------------


During Q3 2005 Daylight drilled a total of 15 (6.9 net) wells with 100% success in the quarter.

The expanded 2005 capital expenditure program of $80 million is being focused on:

- West Central properties include Pine Creek, Kaybob, Fir, Marlboro, and Windfall. Daylight plans to drill 20 gross (5 net) wells on these properties as well as various production and reserve enhancement activities. Approximately one third of the 2005 capital expenditure program is planned for this area and to the end of Q3 2005 Daylight has drilled 10 (2.9 net) wells in this area.

- Peace River Arch properties include Red Earth, Elmworth, Hines Creek, Cecil, Wapiti and Sinclair. Daylight plans to drill 20 gross (10 net) wells on these properties as well as various production and reserve enhancement activities. Approximately one third of the 2005 capital expenditure program is planned for this area and to the end of Q3 2005 Daylight has drilled 14 (6.5 net) wells in this area.

- Eastern properties include Wildmere, Bonnyville and Little Bow. Daylight plans to drill 40 gross (35 net) wells on these properties as well as various production and reserve enhancement activities. Approximately one third of the 2005 capital expenditure program is planned for this area and to the end of Q3 2005 Daylight has drilled 13 (9.5 net) wells in this area.

Daylight has identified multiple opportunities to purchase equipment that is currently under lease and has acquired certain of these assets. These transactions are and will continue to have a positive impact on operating costs and economics at the affected properties.

Distributable Cash and Distributions

During Q3 2005 Daylight declared three monthly distributions related to the period totalling $17.0 million ($0.36 per Trust Unit). On September 26, 2005 Daylight announced its intention to increase its monthly distributions to $0.14 per unit. Daylight's management and the Board of Directors continually monitor the distributions in relation to forecast net cash flow, debt levels and capital expenditure plans. Commodity prices and production volumes are critical variables in determining cash flow and changes in these two items have a material impact on cash flow and distributions.

On August 9, 2005 Daylight announced the implementation of the Distribution Reinvestment and Optional Trust Unit Purchase Plan ("DRIP") for eligible unitholders of the Trust. Under the DRIP, eligible unitholders may reinvest their cash distributions on the payment date in additional trust units at a price that is 95% of the 10 day weighted average trading price and eligible unitholders may also make optional cash payments on this date in additional trust units at a price that is equal to the 10 day weighted average trading price. During the three months ended September 30, 2005 Daylight issued 8,042 trust units from treasury for the DRIP in lieu of cash distributions totalling $89,000.



Liquidity and Capital Resources
------------------------------------------------------------------------
September December
Liquidity and Capital Resources (000s) 30, 2005 31, 2004
------------------------------------------------------------------------
Bank debt $124,185 $ 89,220
Working capital deficiency 16,467 20,820
------------------------------------------------------------------------
Bank debt and working capital deficiency 140,652 110,040
Convertible debentures 22,117 77,718
Non-controlling interest - exchangeable shares 18,592 24,019
Unitholders' equity $431,199 $345,228
------------------------------------------------------------------------
------------------------------------------------------------------------


At September 30, 2005 Daylight had $124.2 million outstanding on its credit facilities. Daylight's credit facilities provide up to $145 million and are subject to semi-annual review by the banking syndicate. Daylight's working capital deficiency of $16.5 million combined with bank debt results in $140.7 million of total bank debt net of working capital deficiency.

Management anticipates that Daylight will continue to have adequate liquidity to fund future working capital and forecasted capital expenditures during 2005 through a combination of cash flow, debt and equity. Cash flow used to finance these commitments may reduce the amount of cash distributions paid to unitholders. Major acquisitions will require the issuance of new equity such as the Flowing acquisition that closed on April 5, 2005 and the Tempest acquisition that is expected to close on November 30, 2005.

As at September 30, 2005 Daylight had 50,839,155 trust units, 1,738,611 exchangeable shares equivalent to 1,956,476 trust units and $22.7 million principal amount of convertible debentures convertible into 2,385,789 trust units outstanding. As at September 30, 2005, Daylight also had 997,850 restricted trust unit awards and 195,000 performance trust unit awards outstanding and equivalent to 1,278,785 trust units.

As at November 7, 2005, Daylight has 51,264,252 trust units, 1,731,551 exchangeable shares equivalent to 1,970,674 trust units and $18.9 million principal amount of convertible debentures convertible into 1,985,895 trust units outstanding. As at November 7, 2005, Daylight also has 1,006,850 restricted trust unit awards and 195,000 performance trust unit awards outstanding and equivalent to 1,302,317 trust units.

DAYLIGHT PLAN OF ARRANGEMENT WITH TEMPEST AND OPEN RANGE

On September 26, 2005 Daylight and Tempest Energy Corp. ("Tempest") announced they had entered into an agreement whereby Daylight will acquire all of the issued and outstanding shares of Tempest and the companies will create a new growth oriented junior exploration company, Open Range Energy Corp. ("Open Range"). The transaction will be conducted by way of a Plan of Arrangement (the "Arrangement") and is subject to approval by Tempest Shareholders and Daylight Securityholders (including holders of Trust Units, Exchangeable Shares and Convertible Debentures). Prior to the acquisition and pursuant to the Arrangement, Daylight and Tempest will each transfer interests in certain oil and natural gas properties to wholly owned subsidiaries in exchange for shares and arrangement warrants which will be distributed to the Daylight Securityholders and Tempest Shareholders. These subsidiaries will then amalgamate with Open Range, a company created and financed by the former management of Tempest. Tempest, prior to the acquisition by Daylight, will dispose of certain oil and natural gas properties to MOX for $46 million, subject to adjustment for activities from October 1, 2005 to the closing date.

Under the Arrangement one Daylight Trust Unit is to be issued for every 2.35 Class A common shares of Tempest, and prior to the completion of the Arrangement all of the issued and outstanding Class B common shares of Tempest will be converted into Class A common shares in accordance with their conversion terms. Under the Arrangement, Daylight expects to issue approximately 9.2 million trust units. The equity of Open Range will be distributed to former Tempest Shareholders and Daylight Securityholders in the form of common shares and arrangement warrants. The arrangement warrants are exercisable into common shares at a price of $3.10 per share which is the same price as the net asset value per common share of Open Range and the price at which Open Range management will be investing $6.2 million for 2.0 million common shares. At closing, Tempest Shareholders will receive 0.1344 common shares and 0.02688 arrangement warrants of Open Range for each Class A common share held and Daylight Securityholders will receive 0.10 common shares and 0.02 arrangement warrants of Open Range for each Trust Unit or equivalent. The Trust Unit equivalent for Convertible Debentures is the number of Trust Units the debentures are convertible into immediately prior to closing and for Daylight Exchangeable Shares is the number of Trust Units the Shares are exchangeable for immediately prior to closing.

On November 1, 2005 Daylight and Tempest announced the mailing of their joint information circular and proxy statement with respect to the Plan of Arrangement. The meeting dates to approve the transaction have been set for November 28, 2005 for the Daylight Securityholders and the Tempest Shareholders. The transaction is expected to close on November 30, 2005.

In certain circumstances where Daylight or Tempest is determined to be in a material breach of an agreement covenant a break fee of up to $4 million may be payable by the party in material breach to the other entity.



Quarterly Information

------------------------------------------------------------------------
Period
Financial from
Three months ended October
(in thousands of dollars, ----------------------------------- 21 to
except unit, per unit September June March December
and boe data) 30, 2005 30, 2005 31, 2005 31, 2004
------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 76,445 $ 60,529 $ 53,984 $ 17,377
Royalties (13,188) (10,506) (10,340) (3,662)
Realized on commodity
derivative (350) 59 - -
Operating expenses (12,981) (13,184) (12,328) (4,335)
Transportation (1,018) (950) (430) (153)
------------------------------------------------------------------------
Operating netback 48,908 35,948 30,886 9,227
Interest income - - - 726
General and administrative
- cash charge (2,216) (2,108) (1,987) (987)
Cash financial charges (2,756) (2,861) (2,584) (1,677)
Cash taxes (224) (347) (244) (92)
Asset retirement expenditures (111) (782) (788) (223)
------------------------------------------------------------------------
Cash flow from operations 43,601 29,850 25,283 6,974
Per unit - Basic 0.91 0.63 0.58 0.24
- Diluted 0.81 0.57 0.51 0.22
------------------------------------------------------------------------
Net income 20,525 12,201 5,887 1,045
Per unit - Basic 0.45 0.27 0.14 0.04
- Diluted 0.42 0.26 0.14 0.04
------------------------------------------------------------------------
Distributions declared 17,022 16,283 14,962 9,777
Per unit 0.36 0.36 0.36 0.24
Payout ratio 39% 55% 59% 140%
------------------------------------------------------------------------
Capital expenditures
(excluding corporate
acquisitions) 23,851 14,086 14,387 5,057
Corporate acquisitions - - - 311,433
Wells drilled - gross (net) 15 (6.9) 5 (3.4) 17 (8.6) 4 (2.1)
------------------------------------------------------------------------
Bank debt 124,185 131,755 101,850 89,220
Working capital deficiency 16,467 11,602 12,256 20,820
Total assets 689,297 676,212 610,970 615,486
------------------------------------------------------------------------
Units outstanding (000s)
Basic including
exchangeable shares 52,796 47,253 43,975 43,385
Diluted 56,460 56,209 52,594 51,806
------------------------------------------------------------------------
------------------------------------------------------------------------
Operations

Average daily production
Natural gas (mcf/d) 54,096 57,890 58,875 58,264
Light oil (bbls/d) 2,527 2,292 2,721 2,671
Heavy oil (bbls/d) 2,096 1,937 - -
Natural Gas Liquids
("NGLs") (bbls/d) 785 771 892 846
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 5,408 5,000 3,613 3,517
------------------------------------------------------------------------
Combined (boe/d) 14,424 14,648 13,426 13,228
------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 9.26 $ 7.51 $ 6.86 $ 6.89
Light oil ($/bbl) 68.98 62.80 56.49 44.29
Heavy oil ($/bbl) 51.94 23.49 - -
NGLs ($/bbl) 56.56 52.71 46.35 45.34
------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 60.57 $ 46.02 $ 53.99 $ 44.54
------------------------------------------------------------------------
Combined all products
($/boe) $ 57.61 $ 45.41 $ 44.68 $ 42.17
------------------------------------------------------------------------
------------------------------------------------------------------------


The 2004 financial results reflect the activities of Daylight from October 21, 2004 to December 31, 2004. Active oil and gas operations commenced subsequent to the Plan of Arrangement on November 30, 2004 and Operations information above applies to that one month period.

Dated November 7, 2005



Consolidated Balance Sheets

(in thousands of dollars)
------------------------------------------------------------------------
As at As at
September 30, 2005 December 31, 2004
------------------------------------------------------------------------
(unaudited) (restated note 2)
Assets
Current assets
Accounts receivable $ 43,934 $ 27,551
Prepaid expenses and deposits 1,962 955
------------------------------------------------------------------------
45,896 28,506
Petroleum and natural gas assets
(note 5) 461,623 402,729
Deferred financing charges
(note 8) 1,207 3,680
Goodwill (note 4) 180,571 180,571
------------------------------------------------------------------------
$ 689,297 $ 615,486
------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 55,142 $ 44,427
Unrealized loss on commodity
derivatives (note 13) 1,121 -
Distributions payable 6,100 4,899
------------------------------------------------------------------------
62,363 49,326
Bank debt (note 6) 124,185 89,220
Convertible debentures (note 7) 22,117 77,718
Asset retirement obligations (note 9) 17,638 16,528
Future taxes 13,203 13,447
Non-controlling interest -
exchangeable shares (note 10) 18,592 24,019
------------------------------------------------------------------------
258,098 270,258
------------------------------------------------------------------------

Unitholders' Equity

Unitholders' capital (note 11) 447,008 351,640
Contributed surplus (note 11) 1,920 -
Equity component of convertible
debentures (note 7) 657 2,320
Accumulated income 39,658 1,045
Accumulated distributions (note 11) (58,044) (9,777)
------------------------------------------------------------------------
431,199 345,228
------------------------------------------------------------------------
$ 689,297 $ 615,486
------------------------------------------------------------------------
------------------------------------------------------------------------

Subsequent event (note 15).

See accompanying notes to consolidated financial statements.


Consolidated Statements of Income and Accumulated Income

(in thousands of dollars, except per unit amounts)
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)

Revenues

Petroleum and natural gas $ 76,445 $ 190,958
Royalties, net of ARTC (13,188) (34,034)
Loss on commodity derivatives
(note 13) (462) (695)
------------------------------------------------------------------------
62,795 156,229

Expenses
Operating 12,981 38,493
Transportation 1,018 2,398
General and administrative 3,024 8,231
Financial charges (note 8) 2,978 9,000
Depletion, depreciation and
accretion 19,301 58,357
------------------------------------------------------------------------
39,302 116,479
------------------------------------------------------------------------
Income before taxes and non-controlling
interest 23,493 39,750

Taxes
Capital taxes 224 815
Future taxes 1,851 (1,380)
------------------------------------------------------------------------
2,075 (565)
------------------------------------------------------------------------
Income before non-controlling
interest 21,418 40,315

Non-controlling interest -
exchangeable shares
(note 10) 893 1,702
------------------------------------------------------------------------

Net income $ 20,525 $ 38,613

Accumulated income, beginning of
period as previously reported 19,133 1,087
Effect of retroactive change in
accounting policy (note 2) - (42)
------------------------------------------------------------------------
Accumulated income, beginning of
period as restated 19,133 1,045
------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated income, end of period $ 39,658 $ 39,658
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per unit (note 11(b))
Basic $ 0.45 $ 0.87
Diluted $ 0.42 $ 0.85
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows

(in thousands of dollars)
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)
Cash provided by (used in):

Operating
Net income $ 20,525 $ 38,613
Items not affecting cash:
Depletion, depreciation and
accretion 19,301 58,357
Non-controlling interest -
exchangeable shares 893 1,702
Future taxes 1,851 (1,380)
Non-cash financial charges 222 799
Unit based compensation 808 1,920
Unrealized loss on commodity
derivatives 112 404
Asset retirement expenditures (111) (1,681)
------------------------------------------------------------------------
Funds from operations 43,601 98,734
Change in non-cash operating
working capital (note 12) (679) (12,800)
------------------------------------------------------------------------
42,922 85,934
Financing
Bank debt (7,570) 15,392
Unit issue costs - (523)
Cash distribution to unitholders (16,274) (46,977)
Change in non-cash financing
working capital (note 12) (4) (80)
------------------------------------------------------------------------
(23,848) (32,188)
Investing
Petroleum and natural gas additions (23,851) (52,324)
Corporate acquisition costs - (315)
Changes in non-cash investing
working capital (note 12) 4,777 (1,107)
------------------------------------------------------------------------
(19,074) (53,746)
Changes in cash - -
Cash, beginning of period - -
------------------------------------------------------------------------
Cash, end of period $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to consolidated financial statements.


Notes to Consolidated Financial Statements

For the three and nine months ended September 30, 2005 (unaudited).

Tabular amounts are stated in thousands of dollars except unit, share, per unit and per share amounts.

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

The Trust was formed on October 1, 2004, completed a private placement on October 21, 2004 and began active oil and gas operations through its subsidiary, Daylight Energy Ltd. ("Daylight Energy") as part of a Plan of Arrangement ("Plan of Arrangement") on November 30, 2004. The acquisition of Vintage Petroleum Canada, Inc. ("VPCI") and Midnight Oil and Gas Ltd. ("MOG") has been accounted for by the purchase method using fair values as at November 30, 2004. The conveyance of assets to Midnight Oil Exploration Ltd. ("MOX") has been accounted for by the continuity of interests method. The consolidated financial statements reflect the financial position, results of operations and cash flows since Daylight's private placement on October 21, 2004 with oil and gas operations commencing on November 30, 2004 in accordance with the Plan of Arrangement.

Daylight is involved in the exploitation, development and production of petroleum and natural gas in Alberta, British Columbia and Saskatchewan.

Relationship with MOX

In conjunction with the Plan of Arrangement, Daylight Energy and MOX entered into an Administrative and Technical Services Agreement which provides for the shared services required to manage the activities of MOX and Daylight and to govern the allocation of general and administrative expenses between the entities. Under this agreement, Daylight Energy is the employer on behalf of the parties and receives payment for certain technical and administrative services provided to MOX on a cost recovery basis.

1. Significant Accounting Policies

The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the period ended December 31, 2004, except as described below. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the period ended December 31, 2004. The consolidated financial statements are stated in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of the Trust and its wholly owned subsidiaries. Preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results may differ materially from those estimates. As Daylight began active oil and gas operations on November 30, 2004 there are no comparable figures for the three and nine months ended September 30, 2005.

Specifically, the amounts recorded for depletion, depreciation and accretion of petroleum and natural gas assets and asset retirement obligations are based on estimates. The ceiling test is based on estimates of reserves, production rates, oil and gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material.

Hedging relationships

Effective January 1, 2005, the Trust adopted Accounting Guideline 13 "Hedging Relationships", which deals with the identification, designation, documentation and effectiveness of hedging relationships for the purposes of applying hedge accounting. Where hedge accounting does not apply, any changes in the fair value of the financial derivative contracts relating to a financial period can either reduce or increase net income for that period. The Trust may enter into financial instruments to manage commodity price, foreign exchange and interest rate risk that do not qualify as hedges under the guidelines.

Where hedge accounting is used, the Trust assesses, both at inception and on an ongoing basis, whether the derivative used in the particular hedging transaction is effective in offsetting changes in fair value or cash flows of the hedged item. For instruments that do not meet the hedge accounting criteria the Trust applies the mark-to-market accounting method.

2. Change in accounting policy

Effective June 30, 2005, the Trust adopted the new accounting policy relating to the classification of exchangeable shares. On January 19, 2005, the CICA issued revised draft EIC-151 "Exchangeable Securities Issued by a Subsidiary of an Income Trust" that states that exchangeable securities issued by a subsidiary of an Income Trust should only be reflected as part of unitholders' equity if they are economically equivalent to Trust units and they are non-transferable. If they do not meet both of these criteria, they should be classified as minority interest or debt as based on their characteristics. As the exchangeable shares issued by Daylight Energy are transferable they do not meet the criteria as set out in the Abstract, and should therefore be classified as minority interest. Previously, the exchangeable shares were reflected as a component of Unitholders' Equity.

In accordance with the transitional provisions of EIC-151, the Trust has retroactively restated all prior periods.



The effect of the adoption on the balance sheet is presented in the
table below:

------------------------------------------------------------------------
------------------------------------------------------------------------

December 31, 2004 As reported Change Restated
------------------------------------------------------------------------
Non-controlling interest -
exchangeable shares: $ - $ 24,019 $ 24,019
Unitholders' equity:
Unitholders' capital 351,639 1 351,640
Exchangeable shares 23,978 (23,978) -
Accumulated income: $ 1,087 $ (42) $ 1,045
------------------------------------------------------------------------
------------------------------------------------------------------------


The effect on the statement of income for the periods are presented in
the tables below:

------------------------------------------------------------------------
------------------------------------------------------------------------

Period ended December 31, 2004 As reported Change Restated
------------------------------------------------------------------------
Non-controlling interest -
exchangeable shares $ - $ 42 $ 42
Net income: 1,087 (42) 1,045
Basic income per unit: 0.04 - 0.04
Diluted income per unit: 0.04 - 0.04
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended March 31, 2005 As reported Change Restated
------------------------------------------------------------------------
Non-controlling interest -
exchangeable shares $ - $ 322 $ 322
Net income: 6,209 (322) 5,887
Basic income per unit: 0.14 - 0.14
Diluted income per unit: 0.14 - 0.14
------------------------------------------------------------------------
------------------------------------------------------------------------


3. Corporate acquisition

On April 5, 2005, Daylight through its wholly owned subsidiary, Daylight Energy Ltd. acquired all of the issued and outstanding shares of Flowing Energy Corporation ("Flowing"). As consideration, Daylight issued one trust unit, or exchangeable share equivalent, for every 13.45 Flowing common shares. This resulted in Daylight issuing 370,218 exchangeable shares with an exchange ratio of 1.06169 and 2,783,904 trust units. The transaction was accounted for by the purchase method, based on fair values as follows:



------------------------------------------------------------------------
------------------------------------------------------------------------
Net assets acquired:
Petroleum and natural gas assets $ 63,549
Bank debt (19,573)
Unrealized loss on commodity derivatives (2,101)
Working capital deficiency (5,928)
Asset retirement obligations (1,413)
Future taxes (1,136)
------------------------------------------------------------------------
Total net assets acquired $ 33,398
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration:
Trust units issued $ 28,996
Non-controlling interest - exchangeable shares 4,087
Transaction costs 315
------------------------------------------------------------------------
Total purchase price $ 33,398
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Plan of Arrangement

The Plan of Arrangement involved the acquisition of Vintage Petroleum Canada, Inc. ("VPCI") and Midnight Oil and Gas Ltd. ("MOG") by Daylight Energy on November 30, 2004 with certain assets conveyed to a new exploration focused entity, Midnight Oil Exploration Ltd. ("MOX"). As a result of the Plan of Arrangement former shareholders of MOG received one Daylight trust unit or one Daylight Energy exchangeable share for each MOG share held as well as 0.5 shares of MOX for each MOG share held.

a) Midnight Oil and Gas Ltd.

On November 30, 2004, pursuant to the Plan of Arrangement, Daylight Energy acquired all the issued and outstanding shares of MOG. The acquisition has been accounted for by the purchase method with oil and gas operating results included in the financial statements commencing November 30, 2004. As part of the Plan of Arrangement options were transferred to Daylight and exercised resulting in the issuance of 1,022,237 trust units. As consideration, former MOG shareholders received 1 trust unit or exchangeable share for each MOG share resulting in the issuance of 22,574,640 trust units and 2,518,497 exchangeable shares, including the exercise of options. The value of the transaction was $240.9 million with fair values as detailed below:



------------------------------------------------------------------------
------------------------------------------------------------------------
Net assets acquired:
Petroleum and natural gas assets $ 109,151
Goodwill 164,707
Bank debt (41,604)
Working capital 12,459
Asset retirement obligations (3,471)
Future taxes (300)
------------------------------------------------------------------------
Total net assets acquired $ 240,942
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration:
Trust units issued $ 216,764
Non-controlling interest - exchangeable shares 24,178
------------------------------------------------------------------------
Total purchase price $ 240,942
------------------------------------------------------------------------
------------------------------------------------------------------------


b) Vintage Petroleum Canada, Inc.

On November 30, 2004, pursuant to the Plan of Arrangement, Daylight Energy acquired all the issued and outstanding shares of VPCI. The acquisition has been accounted for by the purchase method with oil and gas operating results included in the financial statements commencing November 30, 2004. The value of the transaction was $350.8 million with fair values as detailed below:



------------------------------------------------------------------------
------------------------------------------------------------------------
Net assets acquired:
Petroleum and natural gas assets $ 328,940
Goodwill 15,864
Cash 39,414
Non-cash working capital (5,644)
Asset retirement obligations (13,666)
Future taxes (14,061)
------------------------------------------------------------------------
Total net assets acquired $ 350,847
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration:
Cash $ 350,847
------------------------------------------------------------------------
Total purchase price $ 350,847
------------------------------------------------------------------------
------------------------------------------------------------------------


The above amounts are estimates made by management based on currently available information. Amendments may be made to the purchase equation as the cost estimates and tax balances are finalized.

c) Midnight Oil Exploration Ltd.

Under the Plan of Arrangement, certain assets of Daylight Energy were transferred to MOX. At the time of the transaction, the entities were related and therefore the assets and liabilities of MOX have been transferred on a continuity of interests basis using the following fair value allocations:



------------------------------------------------------------------------
------------------------------------------------------------------------
Net assets disposed:
Petroleum and natural gas assets $ 33,456
Future taxes 195
Working Capital 138
Debt assumed (2,000)
Asset retirement obligations (542)
------------------------------------------------------------------------
$ 31,247
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Petroleum and Natural Gas Assets

------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
------------------------------------------------------------------------
Petroleum and natural gas
properties $ 523,621 $ 63,861 $ 459,760
Other assets 2,301 438 1,863
------------------------------------------------------------------------
Balance, September 30, 2005 $ 525,922 $ 64,299 $ 461,623
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
------------------------------------------------------------------------
Petroleum and natural gas
properties $ 408,065 $ 6,970 $ 401,095
Other assets 1,672 38 1,634
------------------------------------------------------------------------
Balance, December 31, 2004 $ 409,737 $ 7,008 $ 402,729
------------------------------------------------------------------------
------------------------------------------------------------------------


During the nine months ended September 30, 2005, Daylight capitalized $3,384,000 of general and administrative expenses related to exploration and development activities.

Future development costs of $44.5 million associated with proven reserves were included in the depletion and depreciation calculation. Future salvage value of production equipment and facilities of $25.5 million and a cost of $32.3 million for unproven properties have been excluded from the depletion and depreciation calculation.

6. Bank Debt

Daylight has a total of $145 million available under revolving term credit facilities with a syndicate of banks of which $124.2 million was drawn at September 30, 2005. The effective interest rate for the bank debt was 3.7% for the nine months ended September 30, 2005. The credit facilities bear interest based on the lenders' prime rate and/or at money market rates plus a stamping fee. The facilities are secured with a demand debenture of $250 million over the petroleum and natural gas assets and are subject to semi-annual review where the lenders may re-determine the borrowing base.

Pursuant to the terms of the credit facilities dated June 29, 2005, Daylight may, with the bank's approval, extend the revolving period for a further 364 day period. If not extended, the revolving facilities will automatically convert to a one year and one day non-revolving term facility with the entire payment due on the 366th day after commencement of the term period. The credit facility has been classified as long-term on the balance sheet at September 30, 2005.

7. Convertible Debentures

On October 21, 2004 Daylight issued $80 million principal amount of 8.5% Convertible Unsecured Subordinated Debentures (the "Debentures") for net proceeds of $76.8 million. Issue costs of $3.2 million have been classified as deferred financing charges (note 8).

The Debentures pay interest semi-annually on June 1 and December 1 and have a maturity date of December 1, 2009. The Debentures are convertible at the option of the holder to Trust Units at a conversion price of $9.50 per Trust Unit. Daylight has the option to redeem the Debentures at a price of $1,050 per Debenture after December 1, 2007 and on or before December 1, 2008, at a price of $1,025 per Debenture after December 1, 2008 and on or before December 1, 2009 and on maturity at $1,000 per Debenture. On redemption or maturity the Trust may elect to satisfy its obligations to repay the principal and interest obligations by issuing Daylight Energy Trust Units.

The Debentures were initially recorded at the fair value of the obligation without the conversion feature. This fair value to make future payments of principal and interest was determined to be $77.68 million. The difference between the principal amount of $80 million and the fair value of the obligation is $2.32 million and has been recorded in unitholders' equity as the fair value of the conversion feature of the Debentures. The following table indicates the convertible debenture activities for the nine month period ended September 30, 2005 and for the period from inception to December 31, 2004:



------------------------------------------------------------------------
------------------------------------------------------------------------
Debt Equity
Convertible Debentures Component Component
------------------------------------------------------------------------
Issued, October 21, 2004 $ 77,680 $ 2,320
Accretion and amortization 38 -
------------------------------------------------------------------------
Balance, December 31, 2004 $ 77,718 $ 2,320
Accretion and amortization 301 -
Conversion to Trust Units (55,902) (1,663)
------------------------------------------------------------------------
Balance, September 30, 2005 $ 22,117 $ 657
------------------------------------------------------------------------
------------------------------------------------------------------------


8. Financial Charges

During the period ended September 30, 2005, Daylight incurred interest charges on bank debt and convertible debentures as well as the amortization of financial charges and accretion of convertible debenture liability as follows:



------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------------------------------------------------------------
Bank debt interest $ 1,255 $ 3,475
Convertible debenture interest 1,501 4,726
Amortization of financial charges 139 498
Accretion of convertible
debenture liability 83 301
------------------------------------------------------------------------
$ 2,978 $ 9,000
------------------------------------------------------------------------
------------------------------------------------------------------------


A reconciliation of the deferred financing charges is provided as
follows:

------------------------------------------------------------------------
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Balance, beginning of period $ 3,680 $ 3,742
Amortization (498) (62)
Conversion to Trust Units (1,975) -
------------------------------------------------------------------------
Balance, end of period $ 1,207 $ 3,680
------------------------------------------------------------------------
------------------------------------------------------------------------


9. Asset Retirement Obligations

Daylight's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. Daylight estimates the total undiscounted amount of cash flow required to settle its asset retirement obligations is approximately $57.1 million which will be incurred between 2005 and 2054. The majority of the costs will be incurred between 2005 and 2021. An inflation factor of 2% has been applied to the estimated asset retirement cost. A credit-adjusted risk-free rate of 8% was used to calculate the fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided as
follows:

------------------------------------------------------------------------
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Balance, beginning of period $ 16,528 $ -
Acquired on Plan of Arrangement (note 4) - 16,595
Acquired on acquisition of Flowing (note 3) 1,413 -
Liabilities incurred 312 45
Liabilities settled (1,681) (223)
Accretion expense 1,066 111
------------------------------------------------------------------------
Balance, end of period $ 17,638 $ 16,528
------------------------------------------------------------------------
------------------------------------------------------------------------


10. Non-Controlling Interest - exchangeable shares

The Trust retroactively applied the amended accounting abstract "Exchangeable Securities Issued by a Subsidiary of an Income Trust" whereby the exchangeable shares issued by the Trust's subsidiary must be reflected as non-controlling interest on the balance sheet. Accordingly, net earnings are reduced by the net income attributed to the non-controlling interest.

Daylight Energy is authorized to issue an unlimited number of exchangeable shares. Exchangeable shares are convertible into trust units based on an exchange ratio, which is adjusted monthly to reflect the distribution paid on the trust units. Cash distributions are not paid on exchangeable shares.



------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Amount
Shares (restated note 2)
------------------------------------------------------------------------
Exchangeable shares:
Issued on acquisition of MOG (note 4) 2,518,497 $ 24,178
Retracted for Trust Units (20,860) (201)
Income attributable to non-controlling
interest - 42
------------------------------------------------------------------------
Balance, December 31, 2004 2,497,637 $ 24,019
Issued on acquisition of Flowing
(note 3) 370,218 4,087
Retracted for Trust Units (1,129,244) (11,216)
Income attributable to non-controlling
interest - 1,702
------------------------------------------------------------------------
Balance, September 30, 2005 1,738,611 $ 18,592
------------------------------------------------------------------------
------------------------------------------------------------------------


The exchangeable shares can be retracted, at the option of the holder into trust units at any time. If the number of exchangeable shares outstanding is less than 400,000, the Trust can elect to redeem the exchangeable shares for trust units or an amount in cash equal to the amount determined by multiplying the exchange ratio on the last business day prior to the redemption date by the current market price of a trust unit on the last business day prior to such redemption date. The number of trust units issued upon conversion is based on the exchange ratio in effect on the date of conversion. The exchange ratio is calculated monthly based on the five day weighted average trust unit trading price preceding the monthly distribution record date. The exchange ratio at September 30, 2005 was 1.13610. The exchangeable shares are not eligible for cash distributions.

Retraction of Exchangeable Shares

The retraction price will be satisfied with trust units equal to the amount determined by multiplying the exchange ratio on the last business day prior to the retraction date by the number of exchangeable shares redeemed.

Redemption of Exchangeable Shares

On November 30, 2007 the exchangeable shares will be, unless extended by the Board of Directors, redeemed by the Trust. The exchangeable shares may be redeemed by either issuing units or the payment in cash for an amount equivalent to the value of the exchangeable shares at the applicable exchange ratio.

11. Unitholders' Equity

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



a) Trust Units

------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Amount
Unitholders' capital Units (restated note 2)
------------------------------------------------------------------------
Trust Units:
Issued on Plan of Arrangement (note 4) 22,574,640 $ 185,517
Issued on private placement 18,229,167 175,000
Issued on retraction of exchangeable
shares 21,119 201
Unit issue costs - (9,078)
------------------------------------------------------------------------
Balance, December 31, 2004 40,824,926 $ 351,640
Issued on retraction of exchangeable
shares 1,187,033 11,216
Issued on acquisition of Flowing
(note 3) 2,783,904 28,996
Issued on conversion of debentures 6,035,250 55,590
Issued through DRIP Plan 8,042 89
Unit issue costs - (523)
------------------------------------------------------------------------
Balance, September 30, 2005 50,839,155 $ 447,008
------------------------------------------------------------------------
------------------------------------------------------------------------


Redemption Right

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

b) Net Income Per Unit

The following table summarizes the weighted average trust units, exchangeable shares and convertible debentures used in calculating net income per trust unit:



------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Trust units 45,857,120 44,084,305
Exchangeable shares at
exchange ratio 1,936,458 2,080,964
------------------------------------------------------------------------
Basic 47,793,578 46,165,269
Convertible debentures 7,360,909 7,824,801
Trust Unit Awards 345,487 -
------------------------------------------------------------------------
Diluted 55,499,974 53,990,070
------------------------------------------------------------------------
------------------------------------------------------------------------


Basic net income per unit includes income before non-controlling interest of $40,315,000 for the nine months ended September 30, 2005 ($21,418,000 for the three months ended September 30, 2005). Diluted net income per unit adds back interest, amortization and accretion expense on convertible debentures of $5,443,000 for the nine months ended September 30, 2005 ($1,697,000 for the three months ended September 30, 2005).

c) Unit Award Incentive Plan

Daylight has a Unit Award Incentive Plan which allows the Board of Directors to grant up to 5% of the trust units outstanding, including trust units which may be issued on exchange of exchangeable shares, as Restricted and/or Performance Unit awards to directors, officers, employees and service providers of Daylight and its affiliates. The Restricted Unit Awards vest equally over a three-year period. The Performance Unit Awards vest on the third anniversary of the date of the grant. The number of units issued under the Performance Unit Awards granted is subject to a performance multiplier and is dependent on the performance of the Trust relative to a peer comparison group of oil and gas trusts. A holder of a Restricted or Performance Unit Award may elect, subject to consent of Daylight, to receive cash upon vesting in lieu of the number of units held. The plan provides for adjustments to the number of units issued based on the cumulative distributions of the Trust during the period that the Restricted or Performance Unit is outstanding.

During the nine month period ended September 30, 2005 the Board of Directors granted Restricted Unit Awards totalling 1,164,350 of which 997,850 remain outstanding at September 30, 2005 and Performance Unit Awards totalling 227,000 of which 195,000 remain outstanding at September 30, 2005. No unit awards have vested at September 30, 2005. The fair value of the Unit Awards are determined at date of grant and amortized through general and administrative expense over the vesting period as unit based compensation with a corresponding increase to contributed surplus. The weighted average fair value at the date of grant for the Unit Awards granted during the nine month period ended September 30, 2005 was $10.06 per Unit Award and $1,920,000 was charged to general and administrative expense in the period.

At September 30, 2005, the Restricted Unit Awards were convertible into 1,072,307 trust units and the Performance Unit Awards were convertible into 206,478 trust units assuming a one times multiplier on the Performance Unit Awards.



d) Accumulated Distributions

The table below shows the cumulative distributions to unitholders:

------------------------------------------------------------------------
------------------------------------------------------------------------
Distribution
Record Date Per Unit Amount
------------------------------------------------------------------------

November 30, 2004 $ 0.12 $ 4,878
December 31, 2004 0.12 4,899
January 31, 2005 0.12 4,920
February 28, 2005 0.12 5,001
March 31, 2005 0.12 5,041
April 29, 2005 0.12 5,405
May 31, 2005 0.12 5,437
June 30, 2005 0.12 5,441
July 29, 2005 0.12 5,456
August 31, 2005 0.12 5,466
September 30, 2005 0.12 6,100
------------------------------------------------------------------------
Total $ 1.32 $ 58,044
------------------------------------------------------------------------
------------------------------------------------------------------------


e) Distribution Reinvestment and Optional Trust Unit Purchase Plan ("DRIP")

On August 9, 2005 Daylight announced the implementation of the DRIP for eligible unitholders of the Trust. Under the DRIP, eligible unitholders may reinvest their cash distributions on the payment date in additional trust units at a price that is 95% of the 10 day weighted average trading price and eligible unitholders may also make optional cash payments on this date in additional trust units at a price that is equal to the 10 day weighted average trading price. During the three months ended September 30, 2005 Daylight issued 8,042 trust units from treasury for the DRIP in lieu of cash distributions totalling $89,000.



12. Supplemental Cash Flow Information

Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Changes in non-cash working capital:
------------------------------------------------------------------------
Accounts receivable $ (8,183) $ (16,383)
Prepaid expenses and deposits (478) (1,007)
Accounts payable and accrued
liabilities 13,470 10,715
Unrealized loss on commodity
derivatives (715) (1,384)
Working capital acquired on
acquisition (note 3) - (5,928)
------------------------------------------------------------------------
Change in non-cash working capital $ 4,094 $ (13,987)
Relating to:
Operating activities $ (679) (12,800)
Financing activities (4) (80)
Investing activities 4,777 (1,107)
------------------------------------------------------------------------
Change in non-cash working capital $ 4,094 $ (13,987)
------------------------------------------------------------------------
Interest and taxes paid:
------------------------------------------------------------------------
Interest paid $ 2,474 $ 8,095
Taxes paid 355 1,290
------------------------------------------------------------------------
------------------------------------------------------------------------


13. Financial Instruments

Fair Value of Financial Instruments:

Financial instruments comprise accounts receivable, prepaid expenses and deposits, accounts payable and accrued liabilities and cash distributions payable. The fair values of these financial instruments approximate their carrying amounts due to their short-term maturities. The Trust's long-term debt bears interest at a floating market rate and accordingly the fair market value approximates the carrying value. The convertible debentures outstanding at September 30, 2005, with a face value of $22.7 million, had a fair value based on quoted market value of $30.3 million.

Commodity Price Risk:

Daylight acquired the following commodity derivative financial instrument on the acquisition of Flowing and has applied mark-to-market accounting.



Recognized
Pricing Fixed Fair Value
Contract Volume Point Price Term of Loss
------------------------------------------------------------------------
------------------------------------------------------------------------
Forward 500 January 01/05
sale bbls/day WTI CDN$52.70/bbl to December 31/05 $1,121,000
------------------------------------------------------------------------
------------------------------------------------------------------------


Credit Risk:

Portions of the Trust's accounts receivable are with joint operating partners in the oil and gas industry and are subject to normal industry credit risks. Purchasers of the Trust's oil and natural gas products are subject to an internal credit review designed to mitigate the risk of non-payment.

Interest Rate Risk:

The Trust is exposed to interest rate risk to the extent that changes in market interest rates will impact the Trust's bank debt which is subject to a floating interest rate. The Trust had no interest rate swaps or financial hedges at September 30, 2005.

Foreign Currency:

While substantially all of the Trust's sales are denominated in Canadian dollars, the market prices in Canada for oil and natural gas are impacted by changes in the exchange rate between the Canadian and United States dollar.

14. Related Party

Pursuant to the Administrative and Technical Services Agreement, Daylight Energy charged MOX $686,000 relating to general and administrative activities for the nine months ended September 30, 2005 ($253,000 for the three months ended September 30, 2005) and $1,053,000 relating to capital expenditures for the nine months ended September 30, 2005 ($308,000 for the three months ended September 30, 2005). The Administrative and Technical Services Agreement has no set termination date and will continue until terminated by either party with three months written notice to the other party.

15. Subsequent Event

On September 26, 2005 Daylight and Tempest Energy Corp. ("Tempest") announced they had entered into an agreement whereby Daylight will acquire all of the issued and outstanding shares of Tempest and the companies will create a new growth oriented junior exploration company, Open Range Energy Corp. ("Open Range"). The transaction will be conducted by way of a Plan of Arrangement (the "Arrangement") and is subject to approval by Tempest Shareholders and Daylight Securityholders (including holders of Trust Unites, Exchangeable Shares and Convertible Debentures). Prior to the acquisition and pursuant to the Arrangement, Daylight and Tempest will each transfer interests in certain oil and natural gas properties to wholly owned subsidiaries in exchange for shares and arrangement warrants which will be distributed to the Daylight Securityholders and Tempest Shareholders. These subsidiaries will then amalgamate with Open Range, a company created and financed by the former management of Tempest. Tempest, prior to the acquisition by Daylight, will dispose of certain oil and natural gas properties to MOX for $46 million, subject to adjustment for activities from October 1, 2005 to the closing date.

Under the Arrangement one Daylight Trust Unit is to be issued for every 2.35 Class A common shares of Tempest, and prior to the completion of the Arrangement all of the issued and outstanding Class B common shares of Tempest will be converted into Class A common shares in accordance with their conversion terms. Under the Arrangement, Daylight expects to issue approximately 9.2 million trust units. The equity of Open Range will be distributed to former Tempest Shareholders and Daylight Securityholders in the form of common shares and arrangement warrants. The arrangement warrants are exercisable into common shares at a price of $3.10 per share which is the same price as the net asset value per common share of Open Range and the price at which Open Range management will be investing $6.2 million for 2.0 million common shares. At closing, Tempest Shareholders will receive 0.1344 common shares and 0.02688 arrangement warrants of Open Range for each Class A common share held and Daylight Securityholders will receive 0.10 common shares and 0.02 arrangement warrants of Open Range for each Trust Unit or equivalent. The Trust Unit equivalent for Convertible Debentures is the number of Trust Units the debentures are convertible into immediately prior to closing and for Daylight Exchangeable Shares is the number of Trust Units the Shares are exchangeable for immediately prior to closing.

On November 1, 2005 Daylight and Tempest announced the mailing of their joint information circular and proxy statement with respect to the Plan of Arrangement. The meeting dates to approve the transaction have been set for November 28, 2005 for the Daylight Securityholders and the Tempest Shareholders. The transaction is expected to close on November 30, 2005.

In certain circumstances where Daylight or Tempest is determined to be in a material breach of an agreement covenant a break fee of up to $4 million may be payable by the party in material breach to the other entity.

Contact Information