Daylight Energy Trust

Daylight Energy Trust

March 29, 2005 21:26 ET

Daylight Energy Trust Announces 2004 Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: DAYLIGHT ENERGY TRUST

TSX SYMBOL: DAY.UN
TSX SYMBOL: DAY.DB

MARCH 29, 2005 - 21:26 ET

Daylight Energy Trust Announces 2004 Results

CALGARY, ALBERTA--(CCNMatthews - March 29, 2005) - Daylight Energy Trust
(TSX:DAY.UN) (TSX:DAY.DB):

Executive Chairman's Message to Unitholders

We are pleased to present Daylight Energy Trust's first report to
unitholders. Daylight Energy Trust is an actively managed, sustainable
trust. The business model for Daylight is built on a high-end team with
strong technical expertise and business execution skills combined with a
quality property base containing large exploitable opportunities.

Daylight Energy Trust was formed in November 2004 from the combination
of Midnight Oil and Gas Ltd. and Vintage Petroleum Canada, Inc.
("Vintage"). The bringing together of a proven high-end technical team
from Midnight and the quality asset base of Vintage created an ideal
combination of opportunities and expertise.

Today, Daylight is a mid-sized Canadian oil and natural gas trust
endowed with a number of competitive advantages. The Trust's
under-exploited asset base offers an array of value-creating
opportunities. These range from low-risk exploitation and cost-reducing
optimization through to development drilling of deep gas prospects with
long-life reserves potential. Daylight has a team with a proven track
record in the Trust's targeted operating areas - the multi-zone areas of
West Central Alberta and the Peace River Arch. Beyond these numerous
value added opportunities, Daylight has the added potential of an
exceptionally large land base with 420,000 net undeveloped acres in its
core areas.

Daylight's business model as an actively managed, sustainable trust is
founded on internal development and exploitation of its large
opportunity base, with funding derived from internal cash flow after
providing for a conservative pay-out ratio. We have already identified
years of opportunities in Daylight's under-exploited asset base that can
add new reserves and production sufficient to offset annual production
declines. This portion of the business model will from time to time be
augmented by strategic acquisitions that meet our rigorous criteria.

The first such opportunity, the acquisition of Flowing Energy
Corporation ("Flowing") announced in February 2005, adds to Daylight's
production, reserves, reserve-life-index and cash flow per share, and
was accretive to cash available for distribution. At closing of this
acquisition in early April 2005, Daylight's production will be
approximately 15,900 boe per day, a significant proportion of which is
liquids-rich natural gas from deeper reservoirs.

Daylight's Asset Base and Technical Team

Daylight's fundamental advantage is the matching of an experienced
technical team with an opportunity-rich asset base. Prior to Daylight's
creation, the current management team launched and operated Midnight Oil
and Gas Ltd. from July 2000 until last fall's trust conversion. The
Midnight team delivered growth in reserves per share, production per
share, cash flow per share and undeveloped land per share. Midnight's
results were driven by drill bit success, primarily by pursuing
multi-zone gas opportunities in West Central Alberta and Deep Basin gas
opportunities in the Peace River Arch area. Midnight's discoveries and
plays are an integral part of the go forward program at Daylight.

The seven members of Daylight's senior management team each have 20-30
years' experience in their respective fields and the Trust's areas of
focus including a recognized expert in the specialized area of
Sedimentology and Deep Basin geology. In addition, all Board of Director
members have similar years of experience in the oil and natural gas
industry and offer experience in founding and operating companies,
executing business plans and conducting major transactions. Daylight
thus brings a strong leadership group to bear on an under-managed,
capital-starved asset base that offers depth and breadth of
opportunities beyond that typical for an energy trust.

We have already identified a range of opportunities. This includes
"low-hanging fruit," low-risk and low-cost opportunities at Little Bow
and Long Coulee, where for small investments we can add volumes and cut
unit costs by improving efficiencies. Moving forward, Sinclair, Sturgeon
Lake and Freeman River offer larger scale oil exploitation opportunities
that are capable of adding substantial volumes through exploitation
programs including waterfloods and multi-well development drilling
programs. In addition, we have a host of "resource plays" - tight gas
plays and coal bed methane. Opportunities include the Cadomin Formation
on our Elmworth and Wapiti lands, a Deep Basin reservoir of "tight" gas
that, when drilled and completed correctly, yields wells that produce
steadily for decades. Our coal bed methane potential includes large land
holdings at Chigwell, Alexander and Windfall. Finally our bread and
butter prospects in our West Central area are multi-zone, liquids-rich
gas targets that flow at high rates, generating strong cash flow.

The Daylight technical team has a demonstrable record of success with
such plays, which are not the common domain of energy trusts. While this
approach brings technical challenges, it also offers operating "elbow
room" away from the typically intense competition and high prices
encountered when pursuing traditional trust plays. Deep Basin prospects,
for example, cannot be pursued by seismic, but require experience and
diligent, sophisticated geological work. This is beyond the scope of
many energy trusts - but it is exactly what we did with great success at
Midnight.

Major Events in 2004

Prior to the acquisition of Vintage, Midnight Oil and Gas Ltd. enjoyed
tremendous drilling success through the first nine months of 2004 with
28 gross (17.6 net) wells and an overall 97% success rate. Midnight Oil
and Gas Ltd. increased production throughout 2004, reaching 3,750 boe
per day and a market capitalization of $250 million prior to acquiring
Vintage.

The year's pivotal event was Midnight Oil and Gas Ltd.'s acquisition of
Vintage and the creation of Daylight Energy Trust and Midnight Oil
Exploration Ltd. The $350 million acquisition, which closed November 30,
2004 added approximately 11,000 boe per day in production and proved
plus probable reserves of 28 million boe with a large undeveloped land
base. The net acquisition price of $25,000 per daily flowing boe was
widely recognized as the lowest cost, best value acquisition in 2004.
The acquisition and Trust conversion was a tremendous value add for
shareholders and a new model for the industry.

Daylight's plan of arrangement was approved by a 100 percent unanimous
vote of shareholders on November 29, 2004. Daylight's units began
trading on the TSX on December 2, 2004. In December, monthly cash
distributions were initiated at $0.12 per unit. Production in December
was 13,228 boe per day, generating cash flow of $7 million. The plan of
arrangement also created a new exploration company, Midnight Oil
Exploration Ltd., which received the combined entity's higher risk
exploration lands plus a modest production base in combination with
Daylight in the West Central area which includes joint ownership of
infrastructure.

Financial Matters and Distributions Policy

Historically, Midnight Oil and Gas Ltd.'s track record included top
decile unit operating costs and product prices delivering consistently
high netbacks. Operating costs for the former Vintage assets are
considerably higher, resulting in lower netbacks. We have identified
numerous areas of investment that will result in lower operating costs.
This creates financial upside opportunities by applying
unit-cost-reduction efficiency measures. In addition, many of our
opportunities for production growth are on the gas side, which will also
promote reductions to unit operating costs.

Daylight intends to fund its internal development program using retained
cash flow. This is more capital-efficient for unitholders than paying
out all of our cash flow and externally financing the drilling
activities. Daylight has adopted a more conservative distributions
policy, aiming for an average long-term payout ratio of 60-70 percent of
cash flow. The current payout ratio is at the low end of this range,
which is appropriate given our large opportunity base and very high
commodity prices.

Hedging a proportion of production is an accepted tool to provide
downside protection to near-term cash flow and protect the integrity of
capital budgets relying on internal cash flow. This must be balanced
against the desire for exposure to price upside. Daylight's production
remained completely unhedged in 2004, creating full exposure to the
year's commodity price upside and avoiding hedging losses. Going
forward, the Trust plans to layer-in some short-term hedges with terms
of less than one year, covering up to 30 percent of its production
volumes.

Subsequent Events in Early 2005

On February 9, 2005 Daylight announced the acquisition of Flowing. The
$53.1 million transaction (including assumption of $19.5 million in
debt) will be accomplished by exchanging one Daylight Trust unit for
every 13.45 Flowing common shares. This results in an acquisition cost
of $22,750 per flowing boe or $4.60 per bbl of proved plus probable
reserves. The addition of approximately 2,100 bbls per day of
conventional heavy oil production adds more balance to Daylight's
production mix and increases our estimated annual cash flow by $13
million or $0.10 per unit and reduces our distribution percentage. The
addition of 10.4 million bbls in proved plus probable reserves increases
Daylight's combined reserve-life-index (RLI) by one year. The
transaction also included more than $50 million in tax pools.

The Flowing asset base consists of a single producing entity in
east-central Alberta which becomes part of Daylight's low-risk "East 5"
properties, adding longer-life production that can be maintained with
minimal capital. At the time of the transaction, heavy-light oil price
differentials were very high making it a counter-cyclical move with
potential future commodity price upside. The property also has the
opportunity to add substantial volumes through in-fill drilling plus
further development of a recent extension to the existing pool. We will
add these opportunities to other Daylight opportunities and pursue them
under optimum circumstances.

2005 Plans and Outlook

Moving into 2005, Daylight has identified tremendous financial upside
through unit cost reductions, production increases and reserve
additions. We have a wealth of opportunities to create value. The added
potential from this opportunity base, combined with one of the highest
current yields in the trust sector, make Daylight a very attractive
investment vehicle.

With a capital budget of $45 million, Daylight has an active year ahead.
Development and exploitation drilling of approximately 90 gross (47 net)
wells are planned with a focus on large reserve multi-zone Cretaceous
natural gas opportunities at Pine/Fir and Oldman in West Central
Alberta. Daylight will also continue development of its deep, tight gas
play at Elmworth and pursue carefully selected opportunities in the
Peace River Arch. With a view to reducing operating costs and increasing
netbacks, we will conduct a broad program of optimization and
exploitation throughout our asset base. The 2005 capital budget is based
on average commodity prices of US$48 per bbl of WTI crude oil and
Cdn$6.60 per mcf of natural gas at AECO. The budgeted commodity prices
are well below the current 12 month forward strip of US$55 per bbl of
WTI crude oil and Cdn$8.00 per mcf of natural gas at AECO.

Under the planned capital program, Daylight's production should average
approximately 16,700 boe per day for the remainder of the year (yielding
a full-year average of approximately 16,000 boe per day), weighted about
65 percent to natural gas. Under this price and production scenario,
Daylight should generate $115 million in cash flow. The capital program
includes contingency plans to expand our drilling program should
realized commodity prices exceed our budget. Our conservative
distributions policy, with a current payout ratio of approximately 60
percent, provides ample cushion to maintain monthly distributions,
subject to a material change in cash flow.

We are very excited about the opportunities we see in the energy sector
at this time. We are also very excited about the tremendous potential we
see at Daylight in the matching of our high-end team and our substantial
opportunity base. We look forward to realizing on that potential and
delivering solid and sustainable results to the Daylight unitholders.



On behalf of the Board of Directors,

Fred Woods
Executive Chairman
March 24, 2005


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion & Analysis ("MD&A") is dated March 24, 2005
and should be read in conjunction with the accompanying Consolidated
Financial Statements and Notes for the period ended December 31, 2004.
The Consolidated Financial Statements have been prepared in accordance
with Canadian Generally Accepted Accounting Principles ("GAAP"). This
MD&A should also be read in conjunction with the Annual Information Form
which includes complete NI 51-101 reserve disclosure and is available at
www.sedar.com. 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. Daylight completed a private placement on
October 21, 2004 and commenced oil and gas operations through its
subsidiary, Daylight Energy Ltd. ("Daylight Energy"), on November 30,
2004 as part of a Plan of Arrangement (the "Plan of Arrangement"). The
Plan of Arrangement involved Daylight Energy acquiring Midnight Oil and
Gas Ltd. ("MOG") as well as Vintage Petroleum Canada, Inc. ("VPCI") and
conveying certain assets to Midnight Oil Exploration Ltd. ("MOX"). The
MOG and VPCI acquisitions have been accounted for by the purchase method
using fair values, the conveyance to MOX has been accounted for by the
continuity of interest method. The 2004 financial results reflect the
activities of Daylight from October 21, 2004 to December 31, 2004.

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 can be found in the
consolidated statement of cash flows within the period end financial
statements. Daylight also uses the term operating netback (defined as
petroleum and natural gas revenues less royalties, 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, and
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 following series of significant events during 2004 lead to the
creation of Daylight as it exists at December 31, 2004:

- On September 22, 2004 MOG entered into an acquisition agreement to
purchase VPCI for a base purchase price of $322.5 million plus working
capital and other adjustments. The effective date for the determination
of working capital and other adjustments was June 30, 2004.

- On October 1, 2004, Daylight was created under the laws of the
Province of Alberta.

- On October 21, 2004 Daylight raised aggregate gross proceeds of $255
million by way of private placement of 18,229,167 Series U Subscription
Receipts at a price of $9.60 per Receipt (convertible to one trust unit
and 0.5 post consolidation shares of MOX) for gross proceeds of $175
million, and 80,000 Series D Subscription Receipts at a price of $1,000
per Receipt (convertible to a $1,000 - 8.5% Convertible Debenture) for
gross proceeds of $80 million.

- On November 29, 2004 Daylight Energy executed a credit agreement
providing a $145 million facility from a syndicated bank group which was
utilized to finance the acquisition of VPCI and for general corporate
purposes.

- On November 30, 2004 the Plan of Arrangement became effective and
resulted in:

-- The acquisition of MOG and VPCI as well as the reorganization of
Daylight into a new oil and natural gas energy trust which owns the
combined reserves, undeveloped land and other assets of VPCI and MOG
which are predominantly mature, lower-risk oil and natural gas producing
assets.

-- The creation of MOX, an exploration focused producer, which owns
certain of the former MOG and VPCI assets including reserves and
undeveloped land which are predominantly higher growth natural gas
assets with significant exploration and development upside.

-- Shareholders of MOG received either one trust unit of Daylight or one
exchangeable share of Daylight Energy for each share owned in addition
to 0.5 post consolidation shares of MOX.

-- Series U Subscription Receipt holders received one trust unit of
Daylight for each Series U Subscription Receipt held in addition to 0.5
post consolidation shares of MOX.

-- Holders of Series D Subscription Receipts received 8.5% Convertible
Debentures of the Trust for each Series D Subscription Receipt held.



HIGHLIGHTS

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Financial
(in thousands of dollars, Period from October 21 to
except unit, per unit and boe data) December 31, 2004 Per boe
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Petroleum and natural gas revenues $ 17,377 $42.37
Royalties (3,662) (8.93)
Operating expenses (4,335) (10.57)
Transportation (153) (0.37)
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Operating netback 9,227 $22.50
Interest income 726 1.77
General and administrative (987) (2.41)
Cash financial charges (1,677) (4.09)
Cash taxes (92) (0.22)
Asset retirement expenditures (223) (0.54)
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Cash flow from operations 6,974 $17.01
Per unit - Basic 0.24 --------
- Diluted 0.22 --------
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Net income 1,087
Per unit - Basic 0.04
- Diluted 0.04
------------------------------------------------------------
Cash distributions 9,777
Per unit 0.24
------------------------------------------------------------
Capital expenditure
(excluding corporate acquisitions) 5,057
Corporate acquisitions 311,433
Bank debt 89,220
Working capital deficiency 20,820
Total assets 615,486
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Units outstanding (000s)
Basic including exchangeable shares 43,385
Diluted 51,806

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Operations
Average daily production
Natural gas (mcf/d) 58,264
Crude oil (bbls/d) 2,671
Natural Gas Liquids ("NGLs") (bbls/d) 846
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Crude oil & NGLs (bbls/d) 3,517
------------------------------------------------------------
Combined (boe/d) 13,228
------------------------------------------------------------
Average prices received
Natural gas (mcf) $ 6.89
Crude oil (bbls) 44.29
NGLs (bbls) 45.34
------------------------------------------------------------
Crude oil & NGLs (bbls) 44.54
------------------------------------------------------------
Combined all products (boe) $ 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.

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 and West Central 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.

On February 9, 2005 Daylight and Flowing Energy Corporation ("Flowing")
announced they had entered into an agreement whereby Daylight will
acquire all of the issued and outstanding shares of Flowing on the basis
of one trust unit of Daylight for every 13.45 Flowing common shares.
Pursuant to the agreement, Flowing Shareholders will be entitled to
receive up to a maximum aggregate of 480,000 exchangeable shares of
Daylight Energy divided by the exchange ratio applicable to exchangeable
shares at closing instead of trust units. As of March 24, 2005, Flowing
had 42.7 million shares outstanding, which implies the issuance of 3.2
million trust units less the amount of exchangeable shares which Flowing
shareholders elect to receive. A meeting of Flowing securityholders will
be held on April 4, 2005 to approve the transaction.

Production

Daylight's production volumes for the month of December, 2004 (oil and
gas operations commenced November 30, 2004) averaged 13,228 boe/d
comprised of 58,264 mcf/d of natural gas, 2,671 bbls/d of oil and 846
bbls/d of NGLs.

During the month of December, 2004 the Wapiti 11-18 gas well, which
contributes approximately 800 boe/d to Daylight, was suspended for the
entire month due to a pipeline rupture. The rupture was repaired and the
well was brought on stream during the month of January, 2005. This
disruption negatively impacted Daylight's production during the month.



---------------------------------------------------------------------
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Daily production
---------------------------------------------------------------------
Natural gas (mcf/day) 58,264
Crude oil (bbls/day) 2,671
NGLs (bbls/day) 846
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Combined Crude oil and NGLs (bbls/day) 3,517
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Combined all products (boe/day) 13,228
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2005 activities will be focused on:

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

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

- Eastern properties of Bonnyville and Little Bow

Daylight expects production of approximately 13,800 boe/d during Q1,
2005, increasing by 2,100 boe/d with the closing of the Flowing
acquisition early in Q2, 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 crude oil price is significantly influenced by global supply
and demand conditions. Daylight's realized crude 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 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. During 2004 and continuing into 2005 the WTI
price has been very strong which has enhanced the price realized by
Daylight with the strengthening of the Canadian dollar relative to the
US dollar having a moderating effect on realized oil prices.

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.



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Market prices December, 2004
---------------------------------------------------------------------
AECO ($Cdn/mcf) 6.73
WTI ($US/bbl) 43.23
Edmonton Par ($Cdn/bbl) 51.31
Exchange rate ($Cdn/$US) 0.8213
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Daylight prices realized: December, 2004
---------------------------------------------------------------------
Natural gas ($/mcf) 6.89
Crude oil ($/bbl) 44.29
NGLs ($/bbl) 45.34
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Combined Crude oil and NGLs ($/bbl) 44.54
---------------------------------------------------------------------
Combined all products ($/boe) 42.17
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---------------------------------------------------------------------


Daylight's natural gas price during December, 2004 was $6.89/mcf
representing a 2% premium to AECO in the month.

Daylight's combined crude oil and NGLs price during December, 2004 was
$44.54/bbl. Daylight's oil price during December, 2004 was $44.29/bbl
and NGLs price during December, 2004 was $45.34/bbl.

Daylight's realized prices are expected to continue to correlate with
market prices during 2005 subject to any hedging transactions that
Daylight enters into during 2005. 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
$8.00/mcf and for WTI crude oil is approximately US$55.00/bbl. These
forward prices are well in excess of Daylight's budgeted prices of
$6.60/mcf for natural gas and WTI-US$48.00/bbl for crude oil which
allows us increased flexibility in executing our capital and operating
plans.



Revenue

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Petroleum and natural gas (000s) December, 2004
---------------------------------------------------------------------
Natural gas $ 12,437
Crude oil 3,668
NGLs 1,189
Other 83
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Total $ 17,377
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Natural gas sales for the month of December, 2004 were $12.4 million.

For the month of December, 2004 oil sales were $3.7 million and NGLs
sales were $1.2 million for combined oil and NGLs sales of $4.9 million.

Royalties

Daylight's production results in royalties due to the owners of the
mineral rights on our leases which includes provincial governments
(Crown) and freehold landowners as well as contractual overriding
royalties to others.

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 in the
province. For December 2004, the Reference Price averaged $6.70/GJ or
approximately $7.06/mcf. 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.



---------------------------------------------------------------------
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Royalties by type (000s) December, 2004
---------------------------------------------------------------------
Crown royalties, net of ARTC $ 3,276
Freehold royalties 51
Overriding royalties 335
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Total $ 3,662
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$ per boe $ 8.93
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% of revenue 21.1
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Royalties by commodity (000s) $/boe % of revenue
---------------------------------------------------------------------
Natural gas $ 2,644 $ 8.78 21.3
Crude oil and NGLs 1,018 9.34 21.0
---------------------------------------------------------------------
Total $ 3,662 $ 8.93 21.1
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---------------------------------------------------------------------


Daylight expects royalty rates to remain at approximately 21% during
2005.

Interest Income

On October 21, 2004 Daylight raised $255 million by way of the private
placement of Series U Subscription Receipts and Series D Subscription
Receipts. These proceeds generated $726,000 of interest income prior to
the closing of the Plan of Arrangement on November 30, 2004 when the
proceeds were fully utilized.

Daylight does not expect to earn interest income during 2005.

Operating Expenses

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



---------------------------------------------------------------------
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(000s) December, 2004
---------------------------------------------------------------------
Operating costs $ 4,335
---------------------------------------------------------------------
$ per boe $ 10.57
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---------------------------------------------------------------------


Daylight has identified several operating costs savings which are being
implemented during 2005 and are expected to reduce costs per boe during
the year.

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.

Daylight sells its oil production at the lease with the purchaser taking
legal custody of the oil and paying a price for the oil at that delivery
point. Natural gas is usually transported to an established delivery
point such as AECO in Alberta and then delivered to the purchaser.

The cost of delivering production to the custody transfer point is shown
separately as transportation expense.



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(000s) December, 2004
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Transportation costs $ 153
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$ per boe $ 0.37
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---------------------------------------------------------------------

During 2005 Daylight expects transportation expense, on a boe basis,
to remain near the 2004 level.

Operating Netbacks

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Oil, NGLs & Natural Gas Combined (per boe) December, 2004
---------------------------------------------------------------------
Revenue $ 42.37
Royalty (8.93)
Operating cost (10.57)
Transportation (0.37)
---------------------------------------------------------------------
Operating netback $ 22.50
---------------------------------------------------------------------
---------------------------------------------------------------------


General and Administrative Expenses

General and administrative expense ("G&A") during 2004 for Daylight was
$987,000 ($2.41/boe). G&A is higher than normal expectations due to the
fact that certain annual costs, including the audit and reserve reports
were incurred, for only one month of related oil and natural gas
operations. The impact of these annual costs on the 2004 results is
approximately $440,000 ($1.07/boe).



---------------------------------------------------------------------
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(000s) $/boe
---------------------------------------------------------------------
Gross G&A $ 1,437 $ 3.50
Operating recoveries (246) (0.60)
Capitalized costs (204) (0.49)
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Net G&A $ 987 $ 2.41
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---------------------------------------------------------------------


During 2005 Daylight expects its net G&A per boe will decrease as the
effect of annual costs are recognized over an entire year of operations
as opposed to the one month of oil and gas operations which occurred
during 2004.

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 MOX's activities and
govern the allocation of general and administrative expenses between the
entities. Under this agreement, Daylight receives payment for certain
technical and administrative services provided to MOX on a cost recovery
basis. Pursuant to the Administrative and Technical Services Agreement,
Daylight Energy charged MOX $110,000 relating to general and
administrative activities and $99,000 relating to capital expenditures
for the period ending December 31, 2004. 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, Daylight has established a Technical Services and Corporate
Governance committee of the Board of Directors to monitor the compliance
with the Administrative and Technical Services Agreement.

Financial Charges

Daylight incurs cash interest expense on bank debt and convertible
debentures. Daylight's effective bank debt interest rate was 4.5% 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.



---------------------------------------------------------------------
---------------------------------------------------------------------
(000s) $/boe
---------------------------------------------------------------------
Bank debt interest $ 337 $0.82
Convertible debenture interest 1,340 3.27
---------------------------------------------------------------------
Cash financial charges 1,677 4.09
Amortization of financial charges 62 0.15
Accretion of convertible debenture discount 38 0.09
---------------------------------------------------------------------
Total $1,777 $4.33
---------------------------------------------------------------------
---------------------------------------------------------------------


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.



---------------------------------------------------------------------
---------------------------------------------------------------------
(000s) $/boe
---------------------------------------------------------------------
Depletion and Depreciation $7,008 $17.09
Accretion 111 0.27
---------------------------------------------------------------------
Total $7,119 $17.36
---------------------------------------------------------------------
---------------------------------------------------------------------


During 2005 as Daylight implements its capital expenditure program and
subsequent to the planned acquisition of Flowing in early April 2005,
the depletion, depreciation and accretion rate per boe is expected to
decrease.

Future Income and Capital Taxes

During the period Daylight recognized cash taxes of $92,000 ($0.22/boe)
related to capital tax obligations. Daylight also recognized a future
income tax reduction of $1,109,000 during 2004. 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.

Net Earnings and Cash Flow

As a result of the previously discussed factors Daylight recognized net
earnings of $1,087,000 and cash flow from operations of $6,974,000
during 2004.



---------------------------------------------------------------------
---------------------------------------------------------------------
Cash Flow
(000s) Net Earnings from Operations
---------------------------------------------------------------------
Recognized for 2004 $ 1,087 $ 6,974
---------------------------------------------------------------------
Per boe $ 2.65 $ 17.01
---------------------------------------------------------------------
Per unit
Basic $ 0.04 $ 0.24
Diluted $ 0.04 $ 0.22
---------------------------------------------------------------------
---------------------------------------------------------------------


Daylight's cash flow from operations is significantly influenced by
production volumes and commodity prices. Daylight's estimated
sensitivity to changes in these material assumptions during 2005 is
approximately:

- $1.9 million per $0.10 change in natural gas price per mcf.

- $1.5 million per $US1.00 change in the WTI oil price per bbl.

- $1.4 million per 1 mmcf per day change in production.

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

- $0.6 million per 100 bbl per day change in heavy oil production
related to the Flowing acquisition.

Corporate Acquisitions and Capital Expenditures

Daylight completed two major corporate acquisitions by way of Plan of
Arrangement on November 30, 2004. The acquisition of MOG had a fair
value of $241 million and the acquisition of VPCI had a fair value of
$351 million as discussed in note 2 of the Consolidated Financial
Statements. In addition to these acquisitions, Daylight commenced its
initial capital expenditure program on the acquired properties by
investing $5 million during December 2004 as detailed below:



---------------------------------------------------------------------
---------------------------------------------------------------------
Capital Expenditures (000s) December, 2004
---------------------------------------------------------------------
Land and acquisitions $ 177
Geological and geophysical 206
Drilling and completions 3,486
Equipping and facilities 1,188
---------------------------------------------------------------------
Total $ 5,057
---------------------------------------------------------------------
---------------------------------------------------------------------


The 2005 capital expenditure program of $45 million will be focused on:

- West Central properties of Pine Creek, Kaybob, Fir, Marlboro, and
Windfall. Daylight plans to drill 40 gross (10 net) wells on these
properties as well as various production and reserve enhancement
activities. Approximately 40% of the capital expenditure program is
planned for this area.

- Peace River Arch properties of Elmworth, Hines Creek, Cecil, Wapiti
and Sinclair. Daylight plans to drill 20 gross (12 net) wells on these
properties as well as various production and reserve enhancement
activities. Approximately 35% of the capital expenditure program is
planned for this area.

- Eastern and Minor properties of Bonnyville and Little Bow. Daylight
plans to drill 30 gross (25 net) wells on these properties as well as
various production and reserve enhancement activities. Approximately 25%
of the capital expenditure program is planned for this area.

Daylight has also identified a number of opportunities to purchase
equipment that is currently under lease. These transactions will have a
significant positive impact on operating costs and economics at the
affected properties. Daylight is also pursuing the disposition of
approximately $10 million of non-core non-producing assets during 2005.

Goodwill

Daylight recorded goodwill of $165 million related to the acquisition of
MOG and $16 million related to the acquisition of VPCI for total
goodwill of $181 million at December 31, 2004. In accordance with GAAP,
goodwill is not amortized but is subject to an impairment test that is
conducted at least annually. There is no impairment of goodwill as at
December 31, 2004.

Distributable Cash and Distributions

Daylight commenced active oil and gas operations on November 30, 2004
and declared two monthly distributions (November 30, 2004 and December
31, 2004) totaling $9.8 million ($0.24/trust unit).

Daylight expects to distribute $0.12 per unit per month which is
approximately 60% of its annual cash flow with the remaining 40%
allocated primarily for capital expenditures to maintain production and
reserve levels. Daylight's management and the Board of Directors
continuously monitor the distribution level 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 has a material impact on cash flow and
distributions.



Liquidity and Capital Resources

---------------------------------------------------------------------
---------------------------------------------------------------------
December, 2004 (000s)
---------------------------------------------------------------------
Bank debt $ 89,220
Working capital deficiency 20,820
---------------------------------------------------------------------
Total $ 110,040
---------------------------------------------------------------------
---------------------------------------------------------------------


At December 31, 2004 Daylight had $89 million outstanding on its credit
facilities and a working capital deficiency of $21 million, resulting in
$110 million of total bank debt net of working capital deficiency.
Daylight's current credit facilities provide up to $145 million which is
subject to semi-annual review by the banking syndicate.

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 and debt.
Cash flow used to finance these commitments may reduce the amount of
cash distributions paid to unitholders. Major acquisitions draw on
existing credit facilities and require the issuance of new equity such
as the Flowing trust unit for common share exchange expected to close in
April, 2005.

As at December 31, 2004 Daylight had 40,824,926 trust units, 2,497,637
exchangeable shares equivalent to 2,559,853 trust units and $80 million
of convertible debentures convertible into 8,421,053 trust units.

As at March 24, 2005 Daylight had 42,136,936 trust units, 1,854,045
exchangeable shares equivalent to 1,944,708 trust units, 683,500
restricted trust units awards and 50,000 performance trust unit awards
as well as $73.883 million of convertible debentures convertible to
7,777,158 trust units.

Contractual Obligations

The contractual obligations for which Daylight is responsible are as
follows:



---------------------------------------------------------------------
Contractual Less than 1-3 4-5 After 5
Obligations (000s) Total 1 Year Years Years Years
---------------------------------------------------------------------
---------------------------------------------------------------------
Bank Debt $ 89,220 - 89,220 - -
Office Leases 6,145 1,845 3,667 633 -
Natural Gas
Transportation 2,037 1,069 776 192 -
---------------------------------------------------------------------
Total Contractual
Obligations $ 97,402 2,914 93,663 825 -
---------------------------------------------------------------------
---------------------------------------------------------------------


Daylight enters into multiple contractual obligations as part of
conducting day to day business. Material contractual obligations include
bank debt, leases for office space and commitments for natural gas
transportation.



Consolidated Balance Sheet

As at December 31, 2004
(in thousands of dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
---------------------------------------------------------------------

Assets

Current assets
Accounts receivable $ 27,551
Prepaid expenses and deposits 955
---------------------------------------------------------------------
28,506
Petroleum and natural gas assets (note 3) 402,729
Deferred financing charges (note 5) 3,680
Goodwill (note 2) 180,571
---------------------------------------------------------------------
$ 615,486
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities $ 44,427
Cash distributions payable 4,899
---------------------------------------------------------------------
49,326

Bank debt (note 4) 89,220
Convertible debentures (note 5) 77,718
Asset retirement obligations (note 7) 16,528
Future taxes (note 9) 13,447
---------------------------------------------------------------------
246,239
---------------------------------------------------------------------

Unitholders' Equity
Unitholders' capital (note 8) 351,639
Exchangeable shares (note 8) 23,978
Equity component of convertible debentures (note 5) 2,320
Accumulated income 1,087
Accumulated distributions (9,777)
--------------------------------------------------------------------
369,247
---------------------------------------------------------------------
$ 615,486
---------------------------------------------------------------------
---------------------------------------------------------------------

Commitments (note 12)
Subsequent event (note 14)

See accompanying notes to consolidated financial statements.



Consolidated Statement of Income and Accumulated Income

For the period October 21, 2004 to December 31, 2004
(in thousands of dollars, except per unit amounts)
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
---------------------------------------------------------------------

Revenues
Petroleum and natural gas $ 17,377
Royalties, net of ARTC (3,662)
Interest income 726
---------------------------------------------------------------------
14,441

Expenses
Operating 4,335
Transportation 153
General and administrative 987
Financial charges (note 6) 1,777
Depletion, depreciation and accretion 7,119
---------------------------------------------------------------------
14,371

---------------------------------------------------------------------
Income before taxes 70

Taxes (note 9)
Capital taxes 92
Future tax reduction (1,109)
---------------------------------------------------------------------
(1,017)

---------------------------------------------------------------------
Net income and accumulated income at end of period $ 1,087
---------------------------------------------------------------------
---------------------------------------------------------------------

Net income per unit (note 8(C))
Basic $ 0.04
Diluted $ 0.04
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



Consolidated Statement of Cash Flows

For the period October 21, 2004 to December 31, 2004
(in thousands of dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
---------------------------------------------------------------------

Cash provided by (used in):

Operating
Net income $ 1,087
Items not affecting cash:
Depletion, depreciation and accretion 7,119
Future tax reduction (1,109)
Non-cash financial charges 100
Asset retirement expenditures (223)
--------------------------------------------------------------------
Funds from operations 6,974
Change in non-cash operating working capital (note 10) 2,418
---------------------------------------------------------------------
9,392

Financing
Bank debt 49,616
Convertible debentures issued 80,000
Deferred financing charges (3,742)
Issue of trust units, net of issue costs 165,922
Cash distributions to unitholders (4,878)
Change in non-cash financing working capital (note 10) 4,899
---------------------------------------------------------------------
291,817

Investing
Corporate acquisitions (311,433)
Petroleum and natural gas additions (5,057)
Change in non-cash investing working capital (note 10) 15,281
---------------------------------------------------------------------
(301,209)

Change in cash during the period -

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 period October 21, 2004 to December 31, 2004

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.

1. Significant Accounting Policies

The consolidated financial statements are stated in Canadian dollars and
have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP"). 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.

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.

Consolidation

The consolidated financial statements include the accounts of Daylight
and its subsidiary, Daylight Energy. All inter-entity balances and
transactions have been eliminated.

Petroleum and Natural Gas Assets

Daylight follows the full cost method of accounting for petroleum and
natural gas operations whereby all costs related to the acquisition,
exploration and development of petroleum and natural gas reserves are
capitalized. Such costs include lease acquisition costs, geological and
geophysical costs, carrying charges of non-producing properties, costs
of drilling both productive and non-productive wells, the cost of
petroleum and natural gas production equipment, asset retirement costs
and overhead charges related to exploration and development activities.

Daylight evaluates its petroleum and natural gas assets in each
reporting period to determine that the costs are recoverable and the
costs do not exceed the fair value of the properties. If the sum of the
undiscounted cash flows expected from the production of proved reserves
and the lower of cost and market of unproved properties exceed the
carrying value of the petroleum and natural gas assets, the costs are
considered recoverable. If the carrying value of the petroleum and
natural gas assets is not considered to be recoverable, an impairment
loss is recognized to the extent that the carrying value exceeds the sum
of the discounted cash flows expected from the production of proved and
probable reserves and the lower of cost and market of unproved
properties. The cash flows are estimated using the future product prices
and costs and are discounted using a risk-free rate.

Proceeds from the disposition of petroleum and natural gas properties
are applied against capitalized costs except for dispositions that would
change the rate of depletion and depreciation by 20% or more, in which
case a gain or loss would be recorded.

Depletion of petroleum and natural gas assets and depreciation of
production equipment are calculated using the unit-of-production method,
based on production volumes before royalties in relation to estimated
proven reserves as determined by an independent petroleum engineering
firm. Natural gas reserves and production are converted to equivalent
barrels of oil based upon the relative energy content of six thousand
cubic feet of gas to one barrel of oil.

The cost of acquisition and evaluation of unproved properties are
initially excluded from the depletion calculation. A separate impairment
test is performed on these assets to determine whether the carrying
value exceeds the fair value. Any excess in carrying value over fair
value is an impairment. When proved reserves are assigned or a property
is considered to be impaired, the cost of the property or the amount of
the impairment will be added to the capitalized costs for the
calculation of depletion.

Goodwill

Goodwill represents the excess of purchase price of a business above the
fair value of net assets acquired. Goodwill in not amortized and is
tested for impairment at least annually or more frequently if economic
events dictate. A goodwill impairment provision would be recognized when
the recorded amount of goodwill exceeds its fair value. Should an
impairment provision be required, it will be charged to income in the
period of impairment.

Asset Retirement Obligations

Daylight records a liability for the fair value of legal obligations
associated with the retirement of long-lived tangible assets in the
period in which they are incurred, which is normally when the asset is
purchased, constructed or developed discounted to its present value
using the credit adjusted risk-free interest rate. At recognition of the
liability there is a corresponding increase in the carrying amount of
the related asset known as the asset retirement cost, which is depleted
on a unit-of-production basis over the life of the reserves. The
liability is adjusted each reporting period to reflect the passage of
time, with the accretion charged to income, and for revisions to the
estimated future cash flows. Actual costs incurred upon settlement of
the obligations are charged against the liability to the extent of the
liability recorded.

Revenue Recognition

Revenue associated with sale of crude oil, natural gas and natural gas
liquids is recognized when legal title passes to the purchaser.

Taxes

Daylight is a taxable entity under the Canadian Income Tax Act ("Act")
and is taxable only on income that is not distributed or distributable
to its unitholders. Since Daylight distributes all of its taxable income
(if any) to its unitholders and meets the requirements of the Act, no
provision for income tax has been made in the Trust.

Daylight Energy follows the liability method of accounting for income
taxes. Under this method, income tax liabilities and assets are
recognized for the estimated tax consequences attributable to
differences between the amounts reported in the financial statements of
Daylight Energy and their respective tax basis, using substantially
enacted income tax rates. The effect of a change in income tax rates on
future income tax liabilities and assets is recognized in income in the
period that the change occurs.

Deferred Financing Charges

Deferred financing charges include the unamortized cost of issuing the
convertible debentures and the unamortized cost of establishing the
revolving term facility. Amortization is provided on a straight-line
basis over the term of the related debt and is included in financial
charges for the period.

Joint Operations

Daylight conducts development and production activities jointly with
others. These financial statements only reflect Daylight's proportionate
interest in such activities.

Cash and Cash Equivalents

Daylight considers cash and investments with a maturity of three months
or less to be cash equivalents.

Unit Based Compensation

The Trust has established a unit award incentive plan for employees,
officers, directors and other service providers. The Trust uses the fair
value method for valuing unit based compensation. Under this method,
compensation cost attributable to the unit awards are measured at the
fair value at the grant date and expensed over the vesting period with a
corresponding increase to contributed surplus. Upon settlement of the
unit awards, the previously recognized value in contributed surplus will
be recorded as an increase to Unitholders' capital.

Per Unit Information

Basic income per unit is calculated using the weighted average number of
units outstanding during the year adjusted for the impact of units to be
issued on the conversion of exchangeable shares. Diluted income per unit
is calculated using the treasury stock method to determine the dilutive
effects of convertible debentures and grants under the unit award
incentive plan.

2. 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
Exchangeable shares issued 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
---------------------------------------------------------------------
---------------------------------------------------------------------


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 MOX's activities and
governs the allocation of general and administration expenses between
the entities. Under this agreement, Daylight receives payment for
certain technical and administration services provided to MOX on a cost
recovery basis.



3. Petroleum and Natural Gas Assets

---------------------------------------------------------------------
---------------------------------------------------------------------
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 period, Daylight capitalized $204,000 of general and
administrative expenses related to exploration and development
activities.

Future development costs of $23.9 million associated with proven
reserves were included in the depletion and depreciation calculation.
Future salvage value of production equipment and facilities of $24.6
million and a cost of $32.6 million for unproven properties have been
excluded from the depletion and depreciation calculation.

At December 31, 2004, Daylight applied a ceiling test to its petroleum
and natural gas assets and determined that no impairment has occurred.
The ceiling test was calculated using the following expected future
market price:



---------------------------------------------------------------------
---------------------------------------------------------------------
Benchmark reference 2010 to
price forecast 2005 2006 2007 2008 2009 2015
---------------------------------------------------------------------
WTI ($US/bbl) 42.00 40.00 38.00 36.00 34.00 33.50
Edmonton Par ($Cdn/bbl) 50.25 47.75 45.50 43.25 40.75 40.08
AECO ($Cdn/mcf) 6.60 6.35 6.15 6.00 6.00 6.10
Exchange rate ($Cdn/$US) 0.82 0.82 0.82 0.82 0.82 0.82
---------------------------------------------------------------------


After 2015 the price forecast for WTI, Edmonton Par and AECO escalate at
2% per year to the end of the reserve life and the exchange rate remains
constant at 0.82.

4. Bank Debt

Daylight has a $145 million revolving term facility with a syndicate of
banks of which $89.2 million was drawn at December 31, 2004. The
effective interest rate for the bank debt was 4.5% for the period ended
December 31, 2004. The full facility bears interest at the lenders'
prime rate and/or at money market rates plus a stamping fee. The
facility is secured with a demand debenture over the petroleum and
natural gas assets of $250 million and is subject to semi-annual review
where the lenders may re-determine the borrowing base.

Pursuant to the terms of the credit facility dated November 29, 2004,
Daylight may, with the bank's approval, extend the revolving period for
a further 364 day period. If not extended, the revolving facility 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 December 31, 2004.

5. 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.

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 may satisfy its
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 Debentures are being accreted such that the liability at maturity
will equal the gross proceeds of $80 million less conversions. For the
period ended December 31, 2004 $38,000 of accretion has been included in
financial charges. As at December 31, 2004, no Debentures had been
converted to equity.

6. Financial Charges

During the period ended December 31, 2004, Daylight incurred cash
interest charges on bank debt and convertible debentures as well as the
non-cash amortization of financial charges and accretion of convertible
debenture liability as follows:



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

---------------------------------------------------------------------
Bank debt interest $ 337
Convertible debenture interest 1,340
Amortization of financial charges 62
Accretion of convertible debenture liability 38
---------------------------------------------------------------------
Period ended December 31, 2004 $1,777
---------------------------------------------------------------------
---------------------------------------------------------------------


7. 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 $42.5 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:



---------------------------------------------------------------------
---------------------------------------------------------------------
2004
---------------------------------------------------------------------
Acquired on Plan of Arrangement (note 2) $16,595
Liabilities incurred 45
Liabilities settled (223)
Accretion expense 111
---------------------------------------------------------------------
Balance, December 31, 2004 $16,528
---------------------------------------------------------------------
---------------------------------------------------------------------


8. 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
Unitholders' capital Units Amount
---------------------------------------------------------------------

Trust Units:
Issued on Plan of Arrangement (note 2) 22,574,640 $185,517
Issued on private placement 18,229,167 175,000
Issued on retraction of exchangeable shares 21,119 200
Unit issue costs - (9,078)
---------------------------------------------------------------------
Balance, December 31, 2004 40,824,926 $351,639
---------------------------------------------------------------------
---------------------------------------------------------------------


Private Placement

On October 21, 2004 Daylight raised gross proceeds of $175 million by
way of a private placement of 18,229,167 Subscription Receipts at a
price of $9.60 per Subscription Receipt. On November 30, 2004 each
Subscription Receipt converted into one Trust Unit and 0.5 shares of MOX.

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) Exchangeable Shares

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



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Number of
Shares Amount
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Exchangeable shares:
Issued on acquisition of MOG (note 2) 2,518,497 $24,178
Retracted for Trust Units (20,860) (200)
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Balance, December 31, 2004 2,497,637 $23,978
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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
December 31, 2004 was 1.02491. 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.

c) 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:



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Trust units 28,262,340
Exchangeable shares at exchange ratio 1,133,256
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Basic 29,395,596
Convertible debentures 8,421,053
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Diluted 37,816,649
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Basic net income per unit includes net income of $1,087,000 for the
period ended December 31, 2004 and diluted net income per unit adds back
convertible debenture interest expense of $1,340,000 for the period
ended December 31, 2004.

d) Unit Award Incentive Plan

Daylight has a Unit Award Incentive Plan which allows the Board of
Directors to grant up to 2,158,106 units consisting of Restricted and
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. No Restricted or
Performance Unit Awards were granted during 2004.

e) Accumulated Distributions

The table below shows the cumulative distributions to unitholders:



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---------------------------------------------------------------------
Distribution
Record Date Per Unit Amount
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November 30, 2004 $0.12 $4,878
December 31, 2004 0.12 4,899
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Period ended December 31, 2004 $0.24 $9,777
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9. Taxes

The combined provision for taxes in the consolidated statements of
income and accumulated income reflect an effective tax rate which
differs from the expected statutory tax rate. Differences are accounted
for as follows:



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---------------------------------------------------------------------
Income before taxes $ 70
Statutory income tax rate 38.62%
---------------------------------------------------------------------
Expected taxes $ 27
Add (deduct)
Net income of the Trust (1,309)
Non-deductible crown charges 961
Resource allowance (740)
Future tax rate reductions (74)
Capital taxes 92
Other 26
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Period ended December 31, 2004 $(1,017)
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---------------------------------------------------------------------


Future Taxes

The future tax liability at December 31, 2004 is comprised of the tax
effect of temporary differences as follows:



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Petroleum and natural gas assets $23,047
Asset retirement obligations (5,950)
Non-capital loss carry-forwards (2,494)
Share issue costs (1,156)
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Balance, December 31, 2004 $13,447
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As at December 31, 2004, Daylight Energy had $6.9 million of non-capital
loss carry-forwards. The non-capital loss carry-forwards expire $0.1
million in 2005, $1.0 million in 2006, $2.4 million in 2007, $1.3
million in 2008, $0.3 million in 2009 and $1.8 million in 2011.



10. Supplemental Cash Flow Information

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---------------------------------------------------------------------
Changes in non-cash working capital:
---------------------------------------------------------------------
Accounts receivable $ (111)
Prepaid expenses and deposits 20,215
Accounts payables and accrued liabilities 2,494
---------------------------------------------------------------------
Change in non-cash working capital $22,598
Relating to:
Operating activities $ 2,418
Financing activities 4,899
Investing activities 15,281
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Change in non-cash working capital $22,598
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---------------------------------------------------------------------

Interest and taxes paid:
---------------------------------------------------------------------
Interest paid $ 1,081
Taxes paid -
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11. 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
fair value of the convertible debentures at December 31, 2004, based on
quoted market value was $85.6 million.

Commodity Price Risk:

There were no financial instruments in place to influence realized
commodity prices during the period ended December 31, 2004.

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 December 31, 2004.

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.



12. Commitments

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2005 2006 2007 2008 2009
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Office leases $1,845 $1,845 $1,822 $ 633 $ -
Natural gas transportation 1,069 532 244 105 87
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$2,914 $2,377 $2,066 $ 738 $ 87
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13. Related Party

Pursuant to the Administrative and Technical Services Agreement,
Daylight Energy charged MOX $110,000 relating to general and
administrative activities and $99,000 relating to capital expenditures
for the period ending December 31, 2004. 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.

14. Subsequent Event

On February 9, 2005, Daylight and Flowing Energy Corporation ("Flowing")
announced they had entered into an agreement whereby Daylight will
acquire all of the issued and outstanding shares of Flowing on the basis
of one trust unit of Daylight for every 13.45 Flowing common shares.
Pursuant to the agreement, Flowing Shareholders will be entitled to
receive up to a maximum aggregate of 480,000 exchangeable shares of
Daylight Energy divided by the exchange ratio applicable to exchangeable
shares at closing instead of trust units. As of March 24, 2005, Flowing
had 42.7 million shares outstanding, which implies the issuance of 3.2
million trust units less the amount of exchangeable shares which Flowing
shareholders elect to receive. A meeting of Flowing securityholders will
be held on April 4, 2005 to approve the transaction.

-30-

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