Daylight Energy Trust
TSX : DAY.UN

Daylight Energy Trust

March 23, 2006 02:44 ET

Daylight Energy Trust Announces Excellent Fourth Quarter and Full Year 2005 Financial and Operating Results

CALGARY, ALBERTA--(CCNMatthews - March 23, 2006) -

DAYLIGHT ENERGY TRUST ANNOUNCES EXCELLENT FOURTH QUARTER AND FULL YEAR 2005 FINANCIAL AND OPERATING RESULTS

MESSAGE TO UNITHOLDERS

Daylight Energy Trust ("Daylight") is very pleased to announce the release of its fourth quarter and year ended December 31, 2005 financial and operating results.

2005 HIGHLIGHTS:


CASH FLOW - INCREASED

- 2005 Cash flow was $148.9 million ($3.05 per basic unit, $2.79 per diluted unit)

-- Q4 2005 increased 11% to $48.5 million from Q3 2005 of $43.7 million

-- Q4 2005 cash flow per boe up 9% to $35.80 from Q3 2005 of $32.94

- 2005 Operating costs per boe reduced to $9.97 from $10.57 year-over-year

-- Initiatives reduced costs 6% ($0.60 per boe) since inception

- 2005 Operating netback averaged $32.61 per boe

-- Q4 2005 increased 9% to $40.28 from Q3 2005 of $36.86

"Daylight reduced operating costs by 6% while industry peers' costs increased by approximately 15%"


DISTRIBUTIONS - INCREASED

- 2005 Cash distributions declared of $72.6 million generated a 49% payout ratio

-- Q4 2005 increased monthly cash distribution 17% to $0.14 per unit from $0.12 per unit

-- Q4 2005 payout ratio reduced to 50% from Q1 2005 of 57%

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

- 2005 Total distributions were $1.81 ($1.50 cash + $0.31 Open Range securities)

"Daylight's 2005 unitholder total return was 50% (total distributions + unit appreciation)"


PRODUCTION - INCREASED

- 2005 Production volumes averaged 14,307 boe per day during Daylight's first full year of operations

-- Q4 2005 production increased 11% to 14,715 boe per day from Q4 2004 of 13,228 boe per day

-- Q4 2005 Oil and NGLs production increased 60% to 5,642 barrels per day from Q4 2004 of 3,517 barrels per day

-- Q4 2005 Natural gas production decreased 7% to 54.4 mmcf per day from Q4 2004 of 58.3 mmcf per day

- 2006 Annual production guidance provides 19% growth over 2005

-- Daylight maintains previously announced 2006 annual production guidance of approximately 16,750 - 17,250 boe per day

"Daylight's production is balanced - 55% natural gas - 45% oil"


RESERVES - INCREASED

- Total proved plus probable reserves increased 52% to 47.4 mmboe from year end 2004 of 31.1 mmboe

-- Per Unit proved plus probable reserves increased 19% to 717 boe per thousand fully diluted units from year end 2004 of 600 boe

- Total proved reserves increased 54% to 33.7 mmboe from year end 2004 of 21.8 mmboe

-- Per Unit proved reserves increased 21% to 510 boe per thousand fully diluted units from year end 2004 of 422 boe

- Reserve Life Index increased 19% to 7.6 years from 6.4 years at inception

-- Proved plus probable reserve additions at $10.96 per boe excluding future development capital ("FDC") and $12.98 per boe including FDC

-- Proved additions were $13.81 per boe excluding FDC and $15.22 per boe including FDC

"Daylight generated a 3.0x recycle ratio with a $10.96 per boe finding, development and acquisition cost"


FINANCIAL FLEXIBILITY - INCREASED

- 2005 cash flow of $148.9 million exceeded distributions and capital expenditures

-- $3.8 million surplus after $72.6 million of distributions and $72.5 million of capital expenditures

- 2005 year-end market capitalization increased 89% to $788.9 million from $416.5 million

-- 2005 average trading volumes exceeded 360,000 units per day

-- Included in the S&P/TSX Income Trust Index

- 2005 year-end total debt (net debt plus convertible debentures) declined 15% to $159.2 million from $187.8 million

"Daylight's cash flow exceeded distributions plus capital expenditures"


TECHNICAL EXPERTISE - DELIVERED 100% DRILLING SUCCESS

- Achieved 100% drilling success with 71 gross ( 40.6 net) wells

-- 100% drilling success in Q4 2005 with 34 gross (21.7 net) wells

- Increased operatorship and ownership

-- Daylight owns and operates over 75% of its field operations

"Daylight's operational control delivered excellent results"


BUSINESS EXECUTION SKILLS - DELIVERED QUALITY LOW COST RESERVES

- Daylight completed two strategic acquisitions - Flowing Energy Corporation and Tempest Energy Corp.

-- Daylight's acquisition metrics were extremely attractive averaging $36,000 per flowing boe per day (net of land) vs. an industry average of approximately $56,700

-- $9.78 per proved plus probable boe of reserves excluding FDC vs. an industry average of approximately $17.00

- Unlocked value in minor properties through creation of Open Range Energy Corp. ("Open Range")

-- Distributed Open Range (0.10 common shares and 0.02 arrangement warrants per trust unit) to Daylight securityholders with a deemed net asset value of $0.31 per trust unit

-- Open Range distribution delivered over $0.50 per trust unit based on December 2005 weighted average trading value

"Daylight delivered additional value to unitholders through creative and strategic transactions"

Daylight securityholders continue to benefit from a highly experienced team's ability to create value through execution of its business plan. Our financial strength and flexibility allows us to remain focused on delivering additional value through our capital program and continuing to identify strategic opportunities in 2006.

Daylight's technical team also continues to optimize the excellent potential within our asset base. The team is highly focused on targeted objectives of the reduction of operating costs and reserve additions through drilling and value added exploitation projects. 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 recent examples of the team's ability to structure and create additional value.

ANNUAL MEETING OF UNITHOLDERS

Daylight invites all unitholders and interested parties to attend our Annual Meeting of Unitholders which is scheduled for 9:00 AM on Wednesday, May 10, 2006 at the Sun Life Conference Centre, 144 - 4th Avenue S.W. Calgary, Alberta.



Signed: Signed:


"Fred Woods" "Anthony Lambert"

Fred Woods Anthony Lambert

Executive Chairman President & CEO

March 22, 2006



MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion & Analysis ("MD&A") is dated March 21, 2006 and should be read in conjunction with the accompanying audited consolidated financial statements and notes for the periods ended December 31, 2005 and 2004. The consolidated financial statements and other financial data presented 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 and on our website at www.daylightenergy.ca. 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 began active oil and gas operations on November 30, 2004. The following MD&A does compare the year ended December 31, 2005 to the shorter 2004 period, but the focus of the MD&A is on the comparison of the three month period ended December 31, 2005 ("Q4 2005") to the three month period ended September 30, 2005 ("Q3 2005").

Daylight uses the term cash flow to analyze operating performance and leverage. Cash flow as presented and 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 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. All references to cash flow throughout the MD&A are based on cash provided by operating activities before changes in non-cash operating working capital and asset retirement expenditures. The reconciliation of net income to cash flow can be found in the consolidated statements of cash flows in the consolidated financial statements. Daylight uses the term payout ratio (defined on a percentage basis as distributions declared divided by cash flow) 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 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.



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

HIGHLIGHTS
------------------------------------------------------------------------
------------------------------------------------------------------------
Financial
(CDN$ thousands, Periods ended
except unit, December 31
per unit and Q4 Q3 % ---------------
operational data) 2005 2005 Change 2005 2004
------------------------------------------------------------------------
Petroleum and
natural gas
revenues $ 85,615 $ 76,445 12 $ 276,573 $ 17,377
Royalties (15,753) (13,188) 19 (49,787) (3,662)
Realized loss
on commodity
derivatives (99) (350) (72) (390) -
Operating expenses (13,580) (12,981) 5 (52,073) (4,335)
Transportation (1,657) (1,018) 63 (4,055) (153)
------------------------------------------------------------------------
Operating netback 54,526 48,908 11 170,268 9,227
Interest income - - - - 726
G&A - cash charge (3,545) (2,216) 60 (9,856) (987)
Cash financial
charges (1,862) (2,756) (32) (10,063) (1,677)
Cash taxes (652) (224) 191 (1,467) (92)
------------------------------------------------------------------------
Cash flow 48,467 43,712 11 148,882 7,197
Per unit - Basic 0.86 0.91 (6) 3.05 0.24
- Diluted 0.83 0.81 2 2.79 0.23
------------------------------------------------------------------------
Net income 25,447 20,525 24 64,060 1,045
Per unit - Basic 0.47 0.45 4 1.37 0.04
- Diluted 0.45 0.42 7 1.32 0.04
------------------------------------------------------------------------
Cash distributions
declared 24,316 17,023 43 72,585 9,777
Per unit 0.42 0.36 17 1.50 0.24
Payout ratio 50% 39% 28 49% 136%
------------------------------------------------------------------------
Capital expenditures 20,215 23,851 (15) 72,539 5,057
Corporate
acquisitions 116,509 - n/a 177,509 587,164
------------------------------------------------------------------------
Wells drilled
- gross (net) 34 (21.7) 15 (6.9) n/a 71 (40.6) 4 (2.1)
------------------------------------------------------------------------
Bank debt 123,455 124,185 (1) 123,455 89,220
Working capital
deficiency 26,575 16,467 61 26,575 20,820
------------------------------------------------------------------------
Total assets 841,254 689,297 22 841,254 615,486
------------------------------------------------------------------------
Units outstanding (000s)
Basic including
exchangeable
shares 63,465 52,796 20 63,465 43,385
Diluted 66,025 56,460 17 66,025 51,806
------------------------------------------------------------------------
------------------------------------------------------------------------
Operational
------------------------------------------------------------------------
Average daily
production
Natural gas (mcf/d) 54,438 54,096 1 56,306 58,264
Light oil (bbls/d) 2,368 2,527 (6) 2,476 2,671
Heavy oil (bbls/d) 2,460 2,096 17 1,631 -
NGLs (bbls/d) 814 785 4 815 846
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 5,642 5,408 4 4,922 3,517
------------------------------------------------------------------------
Combined (boe/d) 14,715 14,424 2 14,307 13,228
------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 11.91 $ 9.26 29 $ 8.84 $ 6.89
Light oil ($/bbl) 63.40 68.98 (8) 62.83 44.29
Heavy oil ($/bbl) 33.06 51.94 (36) 36.35 -
NGLs ($/bbl) 58.79 56.56 4 53.47 45.34
------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 49.52 $ 60.57 (18) $ 52.51 $ 44.54
------------------------------------------------------------------------
Petroleum and
natural gas
revenues ($/boe) $ 63.24 $ 57.61 10 $ 52.97 $ 42.37
Royalties ($/boe) (11.64) (9.94) 17 (9.53) (8.93)
Realized on
commodity
derivatives
($/boe) (0.07) (0.26) (73) (0.08) -
Operating expenses
($/boe) (10.03) (9.78) 3 (9.97) (10.57)
Transportation
($/boe) (1.22) (0.77) 58 (0.78) (0.37)
------------------------------------------------------------------------
Operating netback
($/boe) $ 40.28 $ 36.86 9 $ 32.61 $ 22.50
G&A - cash charge
($/boe) (2.62) (1.67) 57 (1.89) (2.41)
Cash financial
charges ($/boe) (1.38) (2.08) (34) (1.93) (2.32)
Cash taxes ($/boe) (0.48) (0.17) 185 (0.28) (0.22)
------------------------------------------------------------------------
Cash flow ($/boe) $ 35.80 $ 32.94 9 $ 28.51 $ 17.55
------------------------------------------------------------------------
------------------------------------------------------------------------

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 in the Western Canadian Sedimentary Basin. Daylight's units and its 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 Q4 2005 averaged 14,715 boe per day which is a 2% increase from Q3 2005. Q4 2005 production is comprised of 54,438 mcf per day of natural gas, 2,368 bbls per day of light oil, 2,460 bbls per day of heavy oil and 814 bbls per day of natural gas liquids ("NGLs"). Daylight's 2005 production increased 8% from 2004 to average 14,307 boe per day comprised of 56,306 mcf per day of natural gas, 2,476 bbls per day of light oil, 1,631 bbls per day of heavy oil and 815 bbls per day of NGLs. Daylight's capital expenditure program successfully added production volumes to replace natural declines while the acquisition of Flowing Energy Corporation ("Flowing") on April 5, 2005 and the acquisition of Tempest Energy Corp. ("Tempest") on November 30, 2005 provided additional production volumes to Daylight commencing on their closing dates.



------------------------------------------------------------------------
Periods ended
Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Natural gas (mcf/day) 54,438 54,096 56,306 58,264
Light oil (bbls/day) 2,368 2,527 2,476 2,671
Heavy oil (bbls/day) 2,460 2,096 1,631 -
NGLs (bbls/day) 814 785 815 846
------------------------------------------------------------------------
Combined oil and NGLs (bbls/day) 5,642 5,408 4,922 3,517
------------------------------------------------------------------------
Combined all products (boe/day) 14,715 14,424 14,307 13,228
------------------------------------------------------------------------


2006 production replacement activities are focused on the:

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

- Peace River Arch properties of Red Earth, Cecil, Beaverlodge, Sinclair and Elmworth

- Eastern properties of Wildmere, Bon Accord, Norris, Chigwell, Calling Lake and Chipman

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 as condensate for blending, which reduce the realized price of this production. During 2005 the WTI price was very strong which has enhanced the price realized by Daylight on its oil.

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.



------------------------------------------------------------------------
Market Prices Periods ended
Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
AECO ($Cdn/mcf) $ 11.46 $ 9.24 $ 8.65 $ 6.73
WTI ($US/bbl) 60.02 63.18 56.60 43.23
Edmonton Par ($Cdn/bbl) 71.40 77.02 69.18 51.31
Bow River ($Cdn/bbl) 42.71 52.64 43.83 37.25
Exchange rate ($Cdn/$US) 0.8522 0.8322 0.8262 0.8213
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Daylight prices realized: Periods ended
Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Natural gas ($/mcf) $ 11.91 $ 9.26 $ 8.84 $ 6.89
Light oil ($/bbl) 63.40 68.98 62.83 44.29
Heavy oil ($/bbl) 33.06 51.94 36.35 -
NGLs ($/bbl) 58.79 56.56 53.47 45.34
------------------------------------------------------------------------
Combined oil and NGLs ($/bbl) 49.52 60.57 52.51 44.54
------------------------------------------------------------------------
Combined all products ($/boe) $ 63.24 $ 57.61 $ 52.97 $ 42.37
------------------------------------------------------------------------


Daylight's natural gas price during Q4 2005 was $11.91/mcf representing a 4% premium to AECO in the quarter and a 29% increase over the Q3 2005 realized price. Daylight has consistently realized a slight premium to AECO on its natural gas sales and expects this to continue in 2006. Daylight averaged a 2% premium to AECO in both the year ended December 31, 2005 and period ended December 31, 2004.

Daylight's light oil price generally correlates with the Edmonton par price. For Q4 2005, Daylight's light oil realized 89% of the Edmonton par price while in Q3 2005 this production realized 90% of the Edmonton par price. For the year ended 2005, Daylight's realized 91% of the Edmonton par price.

Daylight's heavy oil price does not consistently correlate with the established heavy oil reference price - Bow River. Daylight's production is generally heavier than Bow River specifications and has been subject to large variances in realized pricing. During Q4 2005 Daylight's heavy oil price realized 77% of the Bow River price which is a large decrease from Q3 2005 where Daylight realized 99% of the Bow River price. The pricing of this production is influenced by many factors including the price of condensate and we expect the realized price will continue to be difficult to predict. Daylight's realized heavy oil price for the year ended December 31, 2005 was $36.35/bbl.

Daylight's combined oil and NGLs price during Q4 2005 was $49.52/bbl which is down 18% from Q3 2005, primarily due to the increasing heavy oil price differential. Daylight's combined oil and NGLs price for the year ended December 31, 2005 was $52.51/bbl.

Daylight's realized prices, with the exception of heavy oil, are expected to continue to correlate with market prices during 2006. However, we continue to monitor commodity prices and may selectively hedge a portion of our production.



Revenue
------------------------------------------------------------------------
Periods ended
(000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Natural gas $ 59,663 $ 46,071 $181,634 $12,437
Light oil 13,812 16,036 56,782 3,668
Heavy oil 7,482 10,016 21,639 -
NGLs 4,403 4,085 15,907 1,189
Other 255 237 611 83
------------------------------------------------------------------------
Total $ 85,615 $ 76,445 $276,573 $17,377
------------------------------------------------------------------------
------------------------------------------------------------------------


Revenue for Q4 2005 increased 12% over Q3 2005 to $85.6 million due to the increased natural gas price we were able to realize with unhedged production and slightly lower realized oil prices which partially offset the increase. Natural gas sales for Q4 2005 were $59.7 million, up 30% from Q3 2005. Light oil sales for Q4 2005 were $13.8 million, down 14% from Q3 2005, heavy oil sales for Q4 2005 were $7.5 million, down 25% from Q3 2005, and NGLs sales for Q4 2005 were $4.4 million, up 8% from Q3 2005. Daylight's total revenue for the year ended December 31, 2005 was $276.6 million with 66% of this revenue generated from natural gas, 20% from light oil, 8% from heavy oil and 6% from NGLs.

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 natural gas and NGLs in Alberta. Gas cost allowance, custom processing credits and other incentive programs reduce the effective royalty rate.

Overriding royalties are generally paid to third parties where Daylight has entered into agreements to earn an interest in their mineral rights by investing capital in the property.

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



------------------------------------------------------------------------
Periods ended
Royalties by type (000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Crown royalties, net of ARTC $ 13,504 $ 11,045 $ 41,799 $ 3,276
Freehold royalties 1,005 868 3,264 51
Overriding royalties 1,244 1,275 4,724 335
------------------------------------------------------------------------
Total $ 15,753 $ 13,188 $ 49,787 $ 3,662
------------------------------------------------------------------------
$ per boe $ 11.64 $ 9.94 $ 9.53 $ 8.93
------------------------------------------------------------------------
% of revenue 18.4 17.3 18.0 21.1
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Periods ended
Royalties by commodity (000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Natural gas $ 11,225 $ 8,410 $ 33,525 $ 2,644
Oil and NGLs 4,528 4,778 16,262 1,018
------------------------------------------------------------------------
Total $ 15,753 $ 13,188 $ 49,787 $ 3,662
------------------------------------------------------------------------
Natural gas ($ per boe) $ 13.45 $ 10.14 $ 9.79 $ 8.78
Oil and NGLs ($ per boe) 8.72 9.60 9.05 9.34
------------------------------------------------------------------------
Total ($ per boe) $ 11.64 $ 9.94 $ 9.53 $ 8.93
------------------------------------------------------------------------
Natural gas (% of revenue) 18.8 18.3 18.5 21.3
Oil and NGLs (% of revenue) 17.6 15.9 17.2 21.0
------------------------------------------------------------------------
Total (% of revenue) 18.4 17.3 18.0 21.1
------------------------------------------------------------------------
------------------------------------------------------------------------


Overall royalty rates have remained relatively consistent from quarter to quarter. Rates increased slightly to 18.4% of revenue for Q4 2005 versus 17.3% for Q3 2005. Gas royalties increased to 18.8% of gas revenue in Q4 2005 from 18.3% in Q3 2005. Oil and NGLs royalties increased to 17.6% of oil revenues during Q4 2005. Royalties on a dollar per boe basis increased throughout the year as a direct result of the increase in commodity prices. Daylight's 2005 overall royalty rate was 18% and we expect overall 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 was for 500 barrels per day of oil at a fixed price of Cdn$52.70 per barrel and expired on December 31, 2005. The fixed price of Cdn$52.70 per barrel was settled monthly against the actual US$ price per WTI barrel adjusted to Canadian dollars with the actual Cdn$/US$ exchange rate. Daylight applied mark-to-market accounting to this financial instrument. During Q4 2005 this commodity derivative generated a gain of $305,000 composed of a realized loss of $99,000 and an unrealized gain of $404,000. Daylight does not currently have any commodity derivatives or hedges in place.



------------------------------------------------------------------------
Periods ended
(000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Realized loss $ (99) $ (350) $ (390) $ -
Unrealized gain (loss) 404 (112) - -
------------------------------------------------------------------------
Total $ 305 $ (462) $ (390) $ -
------------------------------------------------------------------------
$ per boe
------------------------------------------------------------------------
Realized loss $ (0.07) $(0.26) $ (0.07) $ -
Unrealized gain (loss) 0.30 (0.09) - -
------------------------------------------------------------------------
Total $ 0.23 $(0.35) $ (0.07) $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


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 $8.25 per mcf and WTI oil is approximately US$65.00 per barrel. Daylight's budgeted prices for 2006 are $8.00 per mcf for natural gas and US$63.00 per barrel WTI for oil as well as a United States dollar to Canadian dollar exchange rate of 0.87.

Operating Expenses

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



------------------------------------------------------------------------
Periods ended
(000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Operating costs $ 13,580 $ 12,981 $ 52,073 $ 4,335
$ per boe $ 10.03 $ 9.78 $ 9.97 $ 10.57
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight experienced a slight increase to operating costs on a per boe basis during Q4 2005 over Q3 2005 resulting in an operating cost of $10.03 per boe. This Q4 2005 per boe operating cost increase was primarily a result of higher fuel and power costs which tend to increase with commodity prices. Fuel and power costs have moderated during the early stages of 2006.

For the year ended 2005, operating costs were $52.1 million or $9.97 per boe. On a per boe basis, Daylight decreased operating costs $0.60/boe as previously identified cost saving initiatives were implemented to more than offset the significant cost pressures experienced by the industry during 2005 which have been reported as being approximately 15% higher than 2004 levels. As part of Daylight's ongoing approach to add value, management continues to pursue further operating costs savings for implementation in 2006 and beyond.

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. Natural gas is usually transported to an established delivery point such as AECO in Alberta and then transferred to the purchaser. Transportation expense in Q4 2005 of $1,657,000, or $1.22 per boe, increased by 58% per boe over the Q3 2005 expense of $1,018,000, or $0.77 per boe as increasing oil production required trucking to terminal transfer points. Daylight's transportation expense for the year ended December 31, 2005 was $4,055,000, or $0.78 per boe.



------------------------------------------------------------------------
Periods ended
(000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Transportation costs $1,657 $1,018 $4,055 $ 153
$ per boe $ 1.22 $ 0.77 $ 0.78 $0.37
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating Netbacks
------------------------------------------------------------------------
Periods ended
$ per boe Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Revenue $63.24 $57.61 $52.97 $42.37
Royalties (11.64) (9.94) (9.53) (8.93)
Commodity Derivative - realized (0.07) (0.26) (0.08) -
Operating cost (10.03) (9.78) (9.97) (10.57)
Transportation (1.22) (0.77) (0.78) (0.37)
------------------------------------------------------------------------
Operating netback $40.28 $36.86 $32.61 $22.50
------------------------------------------------------------------------
------------------------------------------------------------------------


General and Administrative Expenses
------------------------------------------------------------------------
Periods ended
(000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Gross G&A $7,464 $4,677 $21,271 $1,646
Recoveries from MOX (948) (545) (2,622) (209)
Operating recoveries (747) (663) (3,185) (246)
Capitalized costs (2,224) (1,253) (5,608) (204)
------------------------------------------------------------------------
3,545 2,216 9,856 987
Unit based compensation 1,016 808 2,936 -
------------------------------------------------------------------------
Net G&A $4,561 $3,024 $12,792 $ 987
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Periods ended
$ per boe Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Gross G&A $ 5.51 $ 3.52 $ 4.07 $ 3.94
Recoveries from MOX (0.70) (0.41) (0.51) (0.44)
Operating recoveries (0.55) (0.50) (0.61) (0.60)
Capitalized costs (1.64) (0.94) (1.07) (0.49)
------------------------------------------------------------------------
2.62 1.67 1.89 2.41
Unit based compensation 0.75 0.61 0.56 -
------------------------------------------------------------------------
Net G&A $ 3.37 $ 2.28 $ 2.45 $ 2.41
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative expenses ("G&A") during Q4 2005 were $4,561,000 ($3.37 per boe) including non-cash unit based compensation of $1,016,000 ($0.75 per boe). This increase of $1,537,000 ($1.09 per boe) from Q3 2005 is a result of increased stock based compensation expense on the grant of unit awards and the provision for bonuses to employees based on 2005 performance. General and administrative expense for the year was $12,792,000 ($2.45 per boe) including non-cash unit based compensation of $2,936,000 ($0.56 per boe).

Pursuant to the Administrative and Technical Services Agreement, Daylight Energy charged MOX $995,000 relating to general and administrative activities for the year ended December 31, 2005 ($110,000 for the period ended December 31, 2004) and $1,627,000 relating to capital expenditures for the year ended December 31, 2005 ($99,000 for the period ended December 31, 2004). At December 31, 2005, Daylight had a receivable of $4.0 million from MOX, $0.9 million relating to the Technical Service Agreement and $3.1 million relating to joint venture activities. This receivable was collected within the terms of the agreement and in accordance with normal industry standards.

Unit based compensation expense is an allocation of the fair value of Restricted Trust Unit Awards ("RTUs") and Performance Trust Unit Awards ("PTUs") to their three year vesting period starting at the date of grant.

Financial Charges

Daylight incurs cash interest expense on its outstanding bank debt and convertible debentures. Daylight's effective bank debt interest rate was 3.9% for the year ended December 31, 2005 and the convertible debentures have a fixed interest rate of 8.5%. Non-cash financial charges relate to amortization of costs incurred to issue convertible debentures, establish bank credit facilities and accretion of the convertible debenture discount.



------------------------------------------------------------------------
Periods ended
Q4 Q3 December 31
-----------------
(000s) 2005 2005 2005 2004
------------------------------------------------------------------------
Bank debt interest $1,500 $1,255 $ 4,975 $ 337
Convertible debenture interest 362 1,501 5,088 1,340
------------------------------------------------------------------------
Cash financial charges 1,862 2,756 10,063 1,677
Amortization of financial charges 55 139 553 62
Accretion of convertible
debenture discount 20 83 321 38
------------------------------------------------------------------------
Total $1,937 $2,978 $10,937 $1,777
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Periods ended
Q4 Q3 December 31
-----------------
$ per boe 2005 2005 2005 2004
------------------------------------------------------------------------
Bank debt interest $1.11 $0.95 $0.96 $0.82
Convertible debenture interest 0.27 1.13 0.97 3.27
------------------------------------------------------------------------
Cash financial charges 1.38 2.08 1.93 4.09
Amortization of financial charges 0.04 0.10 0.11 0.15
Accretion of convertible
debenture discount 0.01 0.06 0.06 0.09
------------------------------------------------------------------------
Total $1.43 $2.24 $2.10 $4.33
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's bank debt interest is expected to continue to correlate with market interest rates during 2006 and the convertible debentures interest rate is fixed at 8.5%. Cash financial charges are 32% lower in Q4 2005 as compared to Q3 2005 due to the significant conversion of Daylight's convertible debentures during late Q3 2005 and early Q4 2005. Daylight's total financial charges for the year ended December 31, 2005 were $10,937,000 which includes cash financial charges of $10,063,000.

Depletion, Depreciation and Accretion

Daylight's depletion, depreciation and accretion values relate to the original Plan of Arrangement acquisition values of MOG and VPCI which were recorded at fair value, the acquisition of Flowing during Q2 2005, the acquisition of Tempest during Q4 2005 and the ongoing capital expenditure program.



------------------------------------------------------------------------
Periods ended
Q4 Q3 December 31
-----------------
(000s) 2005 2005 2005 2004
------------------------------------------------------------------------
Depletion and Depreciation $21,598 $18,935 $78,889 $7,008
Accretion 370 366 1,436 111
------------------------------------------------------------------------
Total $21,968 $19,301 $80,325 $7,119
------------------------------------------------------------------------
------------------------------------------------------------------------
$ per boe
------------------------------------------------------------------------
Depletion and Depreciation $ 15.95 $ 14.27 $ 15.11 $17.09
Accretion 0.27 0.28 0.28 0.27
------------------------------------------------------------------------
Total $ 16.23 $ 14.54 $ 15.39 $17.36
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's Q4 2005 depletion, depreciation and accretion rate per boe of $16.23 increased 12% from the Q3 2005 rate primarily due to the acquisition of Tempest at a higher cost per proven boe of reserves than the depletion rate experienced by Daylight in Q3 2005. Daylight's total depletion, depreciation and accretion expense for the year ended December 31, 2005 was $80.3 million ($15.39/boe).

Future Income and Capital Taxes

During Q4 2005 Daylight recognized cash taxes of $652,000 ($0.48/boe) related to capital tax obligations and a future income tax recovery of $594,000. For the year ended December 31, 2005, Daylight recognized cash taxes of $1,467,000 ($0.28/boe) related to capital tax obligations and a future income tax recovery of $1,974,000. 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.



------------------------------------------------------------------------
Periods ended
Q4 Q3 December 31
-----------------
(000s) 2005 2005 2005 2004
------------------------------------------------------------------------
Future Tax $(594) $1,851 $(1,974) $(1,109)
Capital Tax 652 224 1,467 92
------------------------------------------------------------------------
Total $ 58 $2,075 $ (507) $(1,017)
------------------------------------------------------------------------
------------------------------------------------------------------------
$ per boe
------------------------------------------------------------------------
Future Tax $(0.44) $ 1.39 $ (0.38) $ (2.68)
Capital Tax 0.48 0.17 0.28 0.22
------------------------------------------------------------------------
Total $ 0.04 $ 1.56 $ (0.10) $ (2.46)
------------------------------------------------------------------------
------------------------------------------------------------------------


As at December 31, 2005, Daylight Energy and its subsidiaries have tax pools of approximately $381 million, prior to recognition of approximately $37 million of deferred partnership income.



------------------------------------------------------------------------
(000s) 2005
------------------------------------------------------------------------
Canadian exploration expense $ 40,000
Canadian development expense 153,000
Canadian oil and gas property expense -
Undepreciated capital cost 150,000
Non-capital losses 34,000
Share issue costs 4,000
------------------------------------------------------------------------
Total $ 381,000
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight Energy also has approximately $94 million of additional tax pools, primarily in the form of Attributed Canadian Royalty Income, to shelter income in Alberta.

In addition to these tax pools, there are approximately $39 million of tax pools at the Trust level composed of $31 million of Canadian oil and gas property expense and $8 million of unit and debenture issue costs.

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 earnings attributed to the non-controlling interest was $959,000 for Q4 2005 and $2,661,000 for the year ended December 31, 2005.

Net Earnings and Cash Flow

As a result of the previously discussed factors, Daylight recognized Q4 2005 net earnings of $25,447,000 ($18.80/boe, $0.47/unit-basic, $0.45/unit-diluted) and cash flow of $48,467,000 ($35.80/boe, $0.86/unit-basic, $0.83/unit-diluted). For the year ended December 31, 2005, Daylight recognized net earnings of $64,060,000 ($12.27/boe, $1.37/unit-basic, $1.31/unit-diluted) and cash flow of $148,882,000 ($28.51/boe, $3.05/unit-basic, $2.79/unit-diluted).



------------------------------------------------------------------------
(000s) Q4 Q3 Periods ended December 31
2005 2005 2005 2004
------------------------------------------------------------------------
Net earnings $25,447 $20,525 $ 64,060 $1,045
Per boe $ 18.80 $ 15.47 $ 12.27 $ 2.55
------------------------------------------------------------------------
Per Unit
Basic $ 0.47 $ 0.45 $ 1.37 $ 0.04
Diluted $ 0.45 $ 0.42 $ 1.32 $ 0.04
------------------------------------------------------------------------
Cash flow $48,467 $43,712 $148,882 $7,197
Per boe $ 35.80 $ 32.94 $ 28.51 $17.55
------------------------------------------------------------------------
Per Unit
Basic $ 0.86 $ 0.91 $ 3.05 $ 0.24
Diluted $ 0.83 $ 0.81 $ 2.79 $ 0.23
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's cash flow is significantly influenced by production volumes and commodity prices. Daylight has budgeted prices for 2006 of $8.00 per mcf for natural gas and US$63.00 per bbl WTI for oil as well as a United States dollar to Canadian dollar exchange rate of 0.87. Daylight's estimated sensitivity to changes in its commodity price, production volume and exchange rate assumptions during the 2006 year is approximately:

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

- $2.0 million per $US1.00 change in the WTI oil price per bbl.

- $1.7 million per 1 mmcf per day change in production.

- $1.6 million per 100 bbl per day change in light oil production.

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

- $1.1 million per 100 bbl per day change in NGLs production.

- $1.4 million per $0.01 change in the United States dollar to Canadian dollar exchange rate.

Corporate Acquisitions

During 2005 Daylight completed two major corporate acquisitions which were accounted for using the purchase method. Daylight acquired all of the issued and outstanding shares of Flowing on April 5, 2005 and acquired all of the issued and outstanding shares of Tempest on November 30, 2005. In conjunction with the acquisition of Tempest, MOX purchased interests in certain oil and gas properties from Tempest for approximately $48 million. During 2004, Daylight acquired VPCI and MOG as part of the plan of arrangement which created the Trust. The following table provides a summary of the cost of these acquisitions to Daylight.



------------------------------------------------------------------------
(000s) VPCI MOG Flowing Tempest Total
------------------------------------------------------------------------
Net assets acquired 350,847 240,942 33,398 106,396 731,583
Working capital deficit 5,644 (12,459) 5,928 10,087 9,200
Bank debt - 41,604 19,573 26 61,203
Cash (39,414) - - - (39,414)
Unrealized loss on
derivative - - 2,101 - 2,101
------------------------------------------------------------------------
Cost of acquisition 317,077 270,087 61,000 116,509 764,673
------------------------------------------------------------------------
Period acquired
Q4 2004 317,077 270,087 587,164
Q2 2005 61,000 61,000
Q4 2005 116,509 116,509
------------------------------------------------------------------------
317,077 270,087 61,000 116,509 764,673
------------------------------------------------------------------------
------------------------------------------------------------------------


Capital Expenditures

Daylight invested $72.5 million on its capital expenditure program for the year ended December 31, 2005 with $20.2 million being invested during Q4 2005.



------------------------------------------------------------------------
Periods ended
(000s) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
Land and acquisitions $ 147 $ 1,010 $ 2,158 $ 177
Geological and geophysical 2,257 1,421 6,144 206
Drill, complete and recomplete 12,609 12,114 40,750 3,486
Equipping and facilities 5,202 9,306 23,487 1,188
------------------------------------------------------------------------
Total $20,215 $23,851 $72,539 $ 5,057
------------------------------------------------------------------------
------------------------------------------------------------------------


During Q4 2005 Daylight drilled a total of 34 (21.7 net) wells with 100% success in the quarter.

Daylight generated 100% drilling success from its $72.5 million 2005 capital expenditure program. This program provided production and reserve additions within the following core areas:

- West Central properties including Pine Creek, Kaybob, Fir, Marlboro and Windfall. Daylight drilled 18 gross (4.4 net) wells in the year with 8 gross (1.5 net) wells drilled during Q4 2005 and executed various production and reserve enhancement activities. Approximately 40% of the 2005 capital expenditure program was invested in this area.

- Peace River Arch properties including Red Earth, Elmworth, Hines Creek, Cecil, Wapiti, Beaverlodge and Sinclair. Daylight drilled 20 gross (8.2 net) wells in the year with 6 gross (1.8 net) wells drilled during Q4 2005 and executed various production and reserve enhancement activities. Approximately 35% of the 2005 capital expenditure program was invested in this area.

- Eastern properties including Wildmere, Bonnyville, Little Bow and Chigwell. Daylight drilled 33 gross (28.0 net) wells in the year with 20 gross (18.4 net) wells drilled during Q4 2005 and executed various production and reserve enhancement activities. Approximately 25% of the 2005 capital expenditure program was invested in this area.

The 2006 capital expenditure program is being focused on the following core areas:

- West Central properties include Pine Creek, Kaybob, Fir and Windfall. Daylight plans to drill 40 gross (16 net) wells and conduct various production and reserve enhancement activities on these properties. Approximately 40% of the 2006 capital expenditure program is planned for this area.

- Peace River Arch properties include Red Earth, Cecil, Beaverlodge, Sinclair and Elmworth. Daylight plans to drill 20 gross (9 net) wells and conduct various production and reserve enhancement activities on these properties. Approximately 20% of the 2006 capital expenditure program is planned for this area.

- Eastern properties include Wildmere, Bon Accord, Norris, Chigwell, Calling Lake and Chipman. Daylight plans to drill 40 gross (37 net) wells and conduct as well as various production and reserve enhancement activities on these properties. Approximately 40% of the 2006 capital expenditure program is planned for 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 of the affected properties.

Goodwill

Daylight recorded goodwill of $36 million related to the acquisition of Tempest in 2005. Goodwill of $165 million related to the acquisition of MOG and $16 million related to the acquisition of VPCI was recorded during 2004 for a total goodwill balance 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, 2005.

Distributions

During 2005 Daylight declared twelve monthly cash distributions totalling $72.6 million ($1.50 per Trust Unit) and also distributed securities of Open Range Energy Corp. ("Open Range") which was created in conjunction with the Tempest acquisition. On November 30, 2005, Daylight distributed 0.10 Open Range common shares and 0.02 Open Range Arrangement Warrants, with a combined deemed fair value of $0.31, to each trust unit equivalent holder. The Open Range securities were distributed on a trust unit equivalent basis which included unitholders, exchangeable shareholders and convertible debentureholders. Daylight's management and the Board of Directors continually 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 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. On distribution payment dates, eligible DRIP unitholders may reinvest their cash distributions in additional trust units at a price that is 95% of the 10 day weighted average trading price of Daylight units. Eligible DRIP unitholders may also make optional cash payments on this date to purchase additional trust units at a price that is equal to the 10 day weighted average trading price of Daylight units. During the year ended December 31, 2005, Daylight issued 80,553 trust units from treasury for the DRIP in lieu of cash distributions totalling $941,000.



Liquidity and Capital Resources
------------------------------------------------------------------------
December 31, December 31,
(000s) 2005 2004
------------------------------------------------------------------------
Bank debt $ 123,455 $ 89,220
Working capital deficiency 26,575 20,820
------------------------------------------------------------------------
Bank debt and working capital deficiency 150,030 110,040
Convertible debentures 9,219 77,718
Non-controlling interest- exchangeable shares 19,422 24,019
Unitholders' equity $ 535,846 $ 345,228
------------------------------------------------------------------------
------------------------------------------------------------------------


At December 31, 2005, Daylight had $123.5 million outstanding on its credit facilities. Daylight's credit facilities provide up to $170 million and are subject to semi-annual review by the banking syndicate. Daylight's working capital deficiency of $26.6 million combined with bank debt results in $150.0 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 2006 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 closed on November 30, 2005.

Trust Unit Information

Daylight units began trading on the Toronto Stock Exchange on December 2, 2004 under the symbol "DAY.UN" and Daylight is a constituent of the S&P/TSX Income Trust Index and S&P/TSX Composite Index. A summary of Daylight's trading history on the TSX follows.



------------------------------------------------------------------------
Periods ended
(per unit) Q4 Q3 December 31
-----------------
2005 2005 2005 2004
------------------------------------------------------------------------
High $ 13.49 $ 12.99 $ 13.49 $ 10.39
Low $ 10.99 $ 10.00 $ 9.26 $ 9.15
Close $ 12.43 $ 12.75 $ 12.43 $ 9.60
Average daily volume 388,020 444,740 364,470 328,902
------------------------------------------------------------------------
------------------------------------------------------------------------


As at December 31, 2005 Daylight had the following trust units and trust
unit equivalents outstanding:

------------------------------------------------------------------------
Trust Units and Trust Units Equivalents Number
------------------------------------------------------------------------
Trust Units 61,435,965
Exchangeable shares (1,727,287) 2,028,906
------------------------------------------------------------------------
Total Basic 63,464,871
Convertible debentures ($9,433,000 face value) 992,947
Restricted trust unit awards (1,044,350) 1,155,879
Performance trust unit awards (290,000) 411,471
------------------------------------------------------------------------
Total Diluted 66,025,168
------------------------------------------------------------------------
------------------------------------------------------------------------


As at March 21, 2006, Daylight has the following trust units and trust
unit equivalents outstanding:

------------------------------------------------------------------------
Trust Units and Trust Unit Equivalents Number
------------------------------------------------------------------------
Trust Units 62,960,594
Exchangeable shares (879,223) 1,057,529
------------------------------------------------------------------------
Total Basic 64,018,123
Convertible debentures ($7,518,000 face value) 791,368
Restricted trust unit awards (1,063,748) 1,215,208
Performance trust unit awards (290,000) 425,234
------------------------------------------------------------------------
Total Diluted 66,449,933
------------------------------------------------------------------------
------------------------------------------------------------------------


Contractual Obligations

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

------------------------------------------------------------------------
Less than After
(000s) Total 1 Year 1-3 Years 4-5 Years 5 Years
------------------------------------------------------------------------
Bank debt $ 123,455 $ - $ 123,455 $ - $ -
Office leases 9,749 1,791 5,429 2,529 -
Natural gas
transportation 1,893 872 1,021 - -
------------------------------------------------------------------------
Total contractual
obligations $ 135,097 $ 2,663 $ 129,905 $ 2,529 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


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.

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 December 31, 2005, with a face value of $9.4 million, had a fair value based on quoted market value of $12.3 million.

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by Daylight is accumulated and communicated to Daylight's management as appropriate to allow timely decisions regarding required disclosure. Daylight's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filings, that Daylight's disclosure controls and procedures for the year ended December 31, 2005 are effective to provide reasonable assurance that material information related to Daylight, including its consolidated subsidiaries, is made known to them by others within those entities. It should be noted that while Daylight's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.



Quarterly Information

------------------------------------------------------------------------
2005 2004
--------------------------------------------
Financial
(in thousands of dollars, Oct. 21
except unit, per unit and to
boe data) Q4 Q3 Q2 Q1 Dec. 31
------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 85,615 $ 76,445 $ 60,529 $ 53,984 $ 17,377
Royalties (15,753) (13,188) (10,506) (10,340) (3,662)
Realized gain (loss) on
commodity derivative (99) (350) 59 - -
Operating expenses (13,580) (12,981) (13,184) (12,328) (4,335)
Transportation (1,657) (1,018) (950) (430) (153)
------------------------------------------------------------------------
Operating netback 54,526 48,908 35,948 30,886 9,227
Interest income - - - - 726
G&A - cash charge (3,545) (2,216) (2,108) (1,987) (987)
Cash financial charges (1,862) (2,756) (2,861) (2,584) (1,677)
Cash taxes (652) (224) (347) (244) (92)
------------------------------------------------------------------------
Cash flow 48,467 43,712 30,632 26,071 7,197
Per unit - Basic 0.86 0.91 0.65 0.60 0.24
- Diluted 0.83 0.81 0.59 0.53 0.23
------------------------------------------------------------------------
Net income 25,447 20,525 12,201 5,887 1,045
Per unit - Basic 0.47 0.45 0.27 0.14 0.04
- Diluted 0.45 0.42 0.26 0.14 0.04
------------------------------------------------------------------------
Cash distributions
declared 24,316 17,023 16,284 14,962 9,777
Per unit 0.42 0.36 0.36 0.36 0.24
Payout ratio 50% 39% 53% 57% 136%
------------------------------------------------------------------------
Capital expenditures 20,215 23,851 14,086 14,387 5,057
Corporate acquisitions 116,509 - 61,000 - 587,164
Wells drilled - gross
(net) 34(21.7) 15(6.9) 5(3.4) 17(8.6) 4(2.1)
------------------------------------------------------------------------
Bank debt 123,455 124,185 131,755 101,850 89,220
Working capital deficiency 26,575 16,467 11,602 12,256 20,820
------------------------------------------------------------------------
Total assets 841,254 689,297 676,212 610,970 615,486
------------------------------------------------------------------------
Units outstanding (000s)
Basic including
exchangeable shares 63,465 52,796 47,253 43,975 43,385
Diluted 66,025 56,460 56,209 52,594 51,806
------------------------------------------------------------------------
------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcf/d) 54,438 54,096 57,890 58,875 58,264
Light oil (bbls/d) 2,368 2,527 2,292 2,721 2,671
Heavy oil (bbls/d) 2,460 2,096 1,937 - -
NGLs (bbls/d) 814 785 771 892 846
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 5,642 5,408 5,000 3,613 3,517
------------------------------------------------------------------------
Combined (boe/d) 14,715 14,424 14,648 13,426 13,228
------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 11.91 $ 9.26 $ 7.51 $ 6.86 $ 6.89
Light oil ($/bbl) 63.40 68.98 62.80 56.49 44.29
Heavy oil ($/bbl) 33.06 51.94 23.49 - -
NGLs ($/bbl) 58.79 56.56 52.71 46.35 45.34
------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 49.52 $ 60.57 $ 46.02 $ 53.99 $ 44.54
------------------------------------------------------------------------
Combined all products
($/boe) $ 63.24 $ 57.61 $ 45.41 $ 44.68 $ 42.37
------------------------------------------------------------------------

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 March 21, 2005


Consolidated Balance Sheets
As at December 31,

(in thousands of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
(restated - note 1)
Assets

Current assets
Accounts receivable $ 61,371 $ 27,551
Prepaid expenses and deposits 1,327 955
------------------------------------------------------------------------
62,698 28,506
Petroleum and natural gas assets
(note 4) 560,972 402,729
Deferred financing charges (note 7) 720 3,680
Goodwill (notes 2 and 3) 216,864 180,571
------------------------------------------------------------------------
$ 841,254 $ 615,486
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities

Current liabilities
Accounts payable and accrued
liabilities $ 80,672 $ 44,427
Distributions payable 8,601 4,899
------------------------------------------------------------------------
89,273 49,326

Bank debt (note 5) 123,455 89,220

Convertible debentures (note 6) 9,219 77,718

Asset retirement obligations (note 8) 18,179 16,528

Future taxes (note 11) 45,860 13,447

Non-controlling interest -
exchangeable shares (note 9) 19,422 24,019
------------------------------------------------------------------------
305,408 270,258
------------------------------------------------------------------------

Unitholders' Equity

Unitholders' capital (note 10) 565,128 351,640
Contributed surplus (note 10) 2,936 -
Equity component of convertible
debentures (note 6) 274 2,320
Deficit (32,492) (8,732)
------------------------------------------------------------------------
535,846 345,228
------------------------------------------------------------------------
$ 841,254 $ 615,486
------------------------------------------------------------------------
------------------------------------------------------------------------

Commitments (note 14)
See accompanying notes to consolidated financial statements.



Consolidated Statements of Income and Deficit
Periods ended December 31,

(in thousands of dollars, except per unit amounts)
------------------------------------------------------------------------
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
(restated - note 1)

Revenues

Petroleum and natural gas $ 276,573 $ 17,377
Royalties (49,787) (3,662)
Interest income - 726
Loss on commodity derivatives
(note 13) (390) -
------------------------------------------------------------------------
226,396 14,441

Expenses

Operating 52,073 4,335
Transportation 4,055 153
General and administrative 12,792 987
Financial charges (note 7) 10,937 1,777
Depletion, depreciation and accretion 80,325 7,119
------------------------------------------------------------------------
160,182 14,371
------------------------------------------------------------------------
Income before taxes and
non-controlling interest 66,214 70

Taxes (note 11)
Capital taxes 1,467 92
Future tax reduction (1,974) (1,109)
------------------------------------------------------------------------
(507) (1,017)
------------------------------------------------------------------------
Income before non-controlling interest 66,721 1,087

Non-controlling interest -
exchangeable shares (note 9) 2,661 42
------------------------------------------------------------------------
Net income $ 64,060 $ 1,045

Deficit, beginning of period (8,732) -
Distributions (note 10) (87,820) (9,777)
------------------------------------------------------------------------
Deficit, end of period $ (32,492) $ (8,732)
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per unit (note 10)
Basic $ 1.37 $ 0.04
Diluted $ 1.32 $ 0.04
------------------------------------------------------------------------
------------------------------------------------------------------------


See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows
Periods ended December 31,

(in thousands of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
(restated - note 1)

Cash provided by (used in):

Operating
Net income $ 64,060 $ 1,045
Items not affecting cash:
Depletion, depreciation and
accretion 80,325 7,119
Non-controlling interest -
exchangeable shares (note 9) 2,661 42
Future tax reduction (1,974) (1,109)
Non-cash financial charges (note 7) 874 100
Unit based compensation 2,936 -
Asset retirement expenditures (note 8) (4,010) (223)
Change in non-cash operating
working capital (note 12) (11,653) 2,418
------------------------------------------------------------------------
133,219 9,392
Financing
Bank debt (note 5) 14,636 49,616
Issue of trust units, net of
issue costs (note 10) (2,336) 165,922
Convertible debentures issued - 80,000
Deferred financing charges - (3,742)
Cash distribution to unitholders
(note 10) (67,942) (4,878)
Change in non-cash financing
working capital (note 12) (704) 4,899
------------------------------------------------------------------------
(56,346) 291,817
Investing
Petroleum and natural gas additions (72,539) (5,057)
Corporate acquisitions (note 3) - (311,433)
Corporate acquisition costs (note 2) (628) -
Change in non-cash investing working
capital (note 12) (3,706) 15,281
------------------------------------------------------------------------
(76,873) (301,209)
Change 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 year ended December 31, 2005 and the period from October 21, 2004 to December 31, 2004

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

The purpose of the Trust is to explore for, develop and hold interests in petroleum and natural gas properties, through investments in securities of subsidiaries and royalty interests in oil and natural gas properties. The business of the Trust is carried on by Daylight Energy and its subsidiaries. The Trust owns 100% of the common shares, (excluding the exchangeable shares - see note 9) of Daylight Energy. The activities of Daylight Energy are financed through internally generated cash flow, interest bearing notes from the Trust and third party debt as described in note 5.

Pursuant to the terms of an agreement (the "NPI Agreement"), the Trust is entitled to a payment from Daylight Energy each month equal to the amount by which 99% of the gross proceeds from the sale of production exceed 99% of certain deductible expenditures as defined under the terms of the NPI Agreement. Deductible expenditures may include amounts, determined on a discretionary basis, to fund capital expenditures, to repay debt and to provide for working capital required to carry out the operations of Daylight Energy.

The Trust may declare payable to the unitholders all or any part of the net income of the Trust earned from interest income on the notes and from the income generated under the NPI Agreement, and from any dividends paid on the common shares of Daylight Energy, less any expenses of the Trust, including interest on convertible debentures.

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") 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.

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 the Trust, its subsidiaries and one partnership. Subsidiaries of the Trust include Daylight Energy and two additional corporations. 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 a 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 the 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 and its wholly owned subsidiaries follow 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 its wholly owned subsidiaries and their respective tax basis, using substantially enacted income tax rates expected to be in effect when the temporary differences are anticipated to reverse. 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.

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.

Exchangeable shares

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 as debt 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 the prior period.

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) -
Deficit: $ (8,690) $ (42) $ (8,732)
------------------------------------------------------------------------
------------------------------------------------------------------------


The effect on the statement of income for the period is presented in the table 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
Basic income per unit: 0.04 - 0.04
------------------------------------------------------------------------
------------------------------------------------------------------------


2. Corporate acquisitions

a) Flowing Energy Corporation

On April 5, 2005, Daylight through its wholly owned subsidiary, Daylight Energy 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 operations of Flowing have been included with the results of the Trust commencing April 5, 2005. 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
------------------------------------------------------------------------
------------------------------------------------------------------------


b) Tempest Energy Corp.

On November 30, 2005, Daylight through its wholly owned subsidiary, Daylight Energy acquired all of the issued and outstanding shares of Tempest Energy Corp. ("Tempest"). As consideration, Daylight issued one trust unit for every 2.35 Tempest common shares, resulting in Daylight issuing 9,118,533 trust units. In conjunction with the acquisition, MOX acquired certain interests in oil and gas properties from Tempest for approximately $48 million. The operations of Tempest have been included with the results of the Trust commencing November 30, 2005. The transaction was accounted for by the purchase method, based on fair values as follows:



------------------------------------------------------------------------
Net assets acquired:
Petroleum and natural gas assets $ 114,082
Goodwill 36,293
Working capital deficiency (10,087)
Bank debt (26)
Asset retirement obligations (2,406)
Future taxes (31,460)
------------------------------------------------------------------------
Total net assets acquired $ 106,396
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Consideration:
Trust units issued $ 106,083
Transaction costs 313
------------------------------------------------------------------------
Total purchase price $ 106,396
------------------------------------------------------------------------
------------------------------------------------------------------------


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.

3. 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
Working capital deficiency (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
------------------------------------------------------------------------
------------------------------------------------------------------------


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 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.



4. Petroleum and Natural Gas Assets

------------------------------------------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
------------------------------------------------------------------------
Petroleum and natural
gas properties $ 644,300 $ 85,289 $ 559,011
Other assets 2,570 609 1,961
------------------------------------------------------------------------
Balance, December 31, 2005 $ 646,870 $ 85,898 $ 560,972
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
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 year ended December 31, 2005, Daylight capitalized $5.6 million ($0.2 million for the period ended December 31, 2004) of general and administrative expenses related to exploration and development activities.

Future development costs of $48.0 million ($23.9 million - 2004) associated with proven reserves were included in the depletion and depreciation calculation. Future salvage value of production equipment and facilities of $25.9 million ($24.6 million - 2004) and a cost of $45.5 million ($32.6 million - 2004) for unproven properties have been excluded from the depletion and depreciation calculation.

At December 31, 2005 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 prices:



------------------------------------------------------------------------
Benchmark reference 2011 to
price forecast 2006 2007 2008 2009 2010 2016
------------------------------------------------------------------------
WTI ($US/bbl) 57.00 55.00 51.00 48.00 46.50 46.54
Edmonton Par ($Cdn/bbl) 66.25 64.00 59.25 55.75 54.00 54.00
AECO ($Cdn/mcf) 10.60 9.25 8.00 7.50 7.20 7.17
Exchange rate ($Cdn/$US) 0.85 0.85 0.85 0.85 0.85 0.85
------------------------------------------------------------------------
------------------------------------------------------------------------


After 2016 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 0.85.

5. Bank Debt

Daylight has a total of $170 million available under revolving term credit facilities with a syndicate of banks of which $123.5 million was drawn at December 31, 2005. The effective interest rate for the bank debt was 3.9% for the year ended December 31, 2005 (4.5% for the period ended December 31, 2004). 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 December 31, 2005.

6. 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 7).

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 year ended December 31, 2005 and for the period from inception to December 31, 2004:



------------------------------------------------------------------------
Face Debt Equity
Convertible Debentures Value Component Component
------------------------------------------------------------------------
Issued, October 21, 2004 $ 80,000 $ 77,680 $ 2,320
Accretion and amortization - 38 -
------------------------------------------------------------------------
Balance, December 31, 2004 $ 80,000 $ 77,718 $ 2,320
Accretion and amortization - 321 -
Conversion to Trust Units (70,567) (68,820) (2,046)
------------------------------------------------------------------------
Balance, December 31, 2005 $ 9,433 $ 9,219 $ 274
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Financial Charges

During the year ended December 31, 2005 and the period ended December 31, 2004, 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:



------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Bank debt interest $ 4,975 $ 337
Convertible debenture interest 5,088 1,340
Amortization of financial charges 553 62
Accretion of convertible debenture liability 321 38
------------------------------------------------------------------------
$ 10,937 $ 1,777
------------------------------------------------------------------------
------------------------------------------------------------------------


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



------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Balance, beginning of period $ 3,680 $ 3,742
Amortization (553) (62)
Conversion to Trust Units (2,407) -
------------------------------------------------------------------------
Balance, December 31 $ 720 $ 3,680
------------------------------------------------------------------------
------------------------------------------------------------------------


8. 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 $66.9 million ($42.5 million - 2004) which will be incurred between 2006 and 2054. The majority of the costs will be incurred between 2006 and 2021. An inflation factor of 2% has been applied to the estimated asset retirement cost at December 31, 2005 and 2004. A credit-adjusted risk-free rate of 8% at December 31, 2005 and 2004 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 $ -
Acquisitions (notes 2 & 3) 3,819 16,595
Liabilities incurred 676 45
Change in estimates 923 -
Liabilities settled (4,010) (223)
Liabilities transferred to Open Range (note 10) (1,192) -
Accretion expense 1,435 111
------------------------------------------------------------------------
Balance, December 31 $ 18,179 $ 16,528
------------------------------------------------------------------------
------------------------------------------------------------------------


9. 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 1)
------------------------------------------------------------------------
Exchangeable shares:
Issued on acquisition of MOG (note 3) 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 2) 370,218 4,087
Retracted for trust units (1,140,568) (11,345)
Income attributable to non-controlling interest - 2,661
------------------------------------------------------------------------
Balance, December 31, 2005 1,727,287 $ 19,422
------------------------------------------------------------------------
------------------------------------------------------------------------


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, 2005 was 1.17462 (1.02491 as at December 31, 2004).

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.

10. 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
Units (restated
Unitholders' capital note 1)
------------------------------------------------------------------------
Trust units:
Issued on Plan of Arrangement (note 3) 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 1,199,964 11,345
Issued on acquisition of Flowing (note 2) 2,783,904 28,996
Issued on acquisition of Tempest (note 2) 9,118,533 106,083
Issued on conversion of debentures 7,428,085 68,459
Issued through DRIP Plan 80,553 941
Unit issue costs - (2,336)
------------------------------------------------------------------------
Balance, December 31, 2005 61,435,965 $ 565,128
------------------------------------------------------------------------
------------------------------------------------------------------------


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.

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

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. On distribution payment dates eligible DRIP unitholders may reinvest their cash distributions in additional trust units at a price that is 95% of the 10 day weighted average trading price of Daylight units. Eligible DRIP unitholders may also make optional cash payments on this date to purchase additional trust units at a price that is equal to the 10 day weighted average trading price of Daylight units. During the year ended December 31, 2005 Daylight issued 80,553 trust units from treasury for the DRIP in lieu of cash distributions totalling $941,000.

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:



------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Trust units 46,749,577 28,262,340
Exchangeable shares at exchange ratio 2,058,036 1,133,256
------------------------------------------------------------------------
Basic 48,807,613 29,395,596
Convertible debentures 6,301,459 8,421,053
Restricted and Performance unit awards 80,298 -
------------------------------------------------------------------------
Diluted 55,189,370 37,816,649
------------------------------------------------------------------------
------------------------------------------------------------------------


Basic net income per unit includes income before non-controlling interest of $66,721,000 for the year ended December 31, 2005 ($1,087,000 for the period ended December 31, 2004). Diluted net income per unit adds back interest, amortization and accretion expense on convertible debentures of $5,854,000 for the year ended December 31, 2005 ($1,428,000 for the period ended December 31, 2004).

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 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 also 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 Award is outstanding.



------------------------------------------------------------------------
Number
------------------------------------------------------------------------
Restricted Awards:

Balance, December 31, 2004 -
Issued 1,221,850
Cancelled (177,500)
------------------------------------------------------------------------
Balance, December 31, 2005 1,044,350
Weighted average adjustment factor 1.10679
Trust unit equivalent 1,155,879
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Performance Total
Number Multiplier Number
------------------------------------------------------------------------
Performance Awards:

Balance, December 31, 2004 - - -
Issued 322,000 1.33 429,333
Cancelled (32,000) 1.33 (42,666)
------------------------------------------------------------------------
Balance, December 31, 2005 290,000 1.33 386,667
Weighted average adjustment factor 1.06415
Trust unit equivalent 411,471
------------------------------------------------------------------------
------------------------------------------------------------------------


The performance multiplier is calculated on an annual basis for one third of the performance units originally granted. The performance multiplier may range from 0 to 2 in any given year as determined by the Board of Directors. For the year ended 2005, a performance multiplier of 2 was granted on one third of the units. Daylight has assumed a multiplier of 1 on the remaining units to arrive at the performance multiplier of 1.33, although the final multiplier may range anywhere from 0.67 to 2.

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 year ended December 31, 2005 was $10.27 per Unit Award and $2,936,000 was charged to general and administrative expense in the period.



d) Contributed Surplus

------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Balance, December 31, 2004 $ -
Unit based compensation 2,936
------------------------------------------------------------------------
Balance, December 31, 2005 $ 2,936
------------------------------------------------------------------------
------------------------------------------------------------------------


e) Accumulated Distributions

The table below shows the cumulative distributions:



------------------------------------------------------------------------
Distribution
Record Date Per Unit Amount
------------------------------------------------------------------------
November 30, 2004 $ 0.12 $ 4,878
December 31, 2004 0.12 4,899
------------------------------------------------------------------------
Total 2004 distributions $ 0.24 $ 9,777

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 5,438
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 6,101
October 31, 2005 0.14 7,177
November 30, 2005 0.14 8,538
December 31, 2005 0.14 8,601
------------------------------------------------------------------------
Total 2005 cash distributions $ 1.50 $ 72,585
Open Range distribution (cost base) 0.31 15,235
------------------------------------------------------------------------
Total 2005 distributions $ 1.81 $ 87,820
------------------------------------------------------------------------
Cumulative distributions $ 2.05 $ 97,597
------------------------------------------------------------------------
------------------------------------------------------------------------


As part of the Plan of Arrangement involving Daylight Energy Trust, Daylight Energy Ltd., Tempest Energy Corp., 1198311 Alberta Ltd., 1198249 Alberta Ltd., Open Range Finance Corp., the unitholders and convertible debentureholders of Daylight Energy Trust, the exchangeable shareholders of Daylight Energy Ltd., the shareholders of Tempest Energy Corp., and the shareholders of Open Range Finance Corp., Daylight Energy disposed of interests in certain oil and gas properties in exchange for Open Range Energy Corp. common shares and Open Range Arrangement Warrants ("the Open Range securities"). At the time of transfer, Daylight and Open Range were considered related parties and the disposition was recorded at the carrying value. The fair value of properties disposed of was $18,420,000. Daylight in turn distributed the securities to unitholders, exchangeable shareholders, and convertible debentureholders with each securityholder receiving 0.10 Open Range common share and 0.02 Open Range Arrangement Warrant with a deemed fair value of $0.31 per Trust unit equivalent. The disposition of the carrying value was recorded as follows:



------------------------------------------------------------------------
Petroleum and natural gas assets $ 14,636
Future taxes 1,791
Asset retirement obligations (1,192)
------------------------------------------------------------------------
$ 15,235
------------------------------------------------------------------------
------------------------------------------------------------------------


11. Taxes

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



------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------

Income before taxes and non-controlling interest $ 66,214 $ 70
Statutory income tax rate 37.62% 38.62%
------------------------------------------------------------------------
Expected taxes $ 24,910 $ 27
Add (deduct)
Net income of the Trust (21,568) (1,309)
Non-deductible crown charges 10,321 961
Resource allowance (11,723) (740)
Future tax rate reductions (1,478) (74)
Stock based compensation 1,105 -
Capital taxes 1,467 92
Other (3,541) 26
------------------------------------------------------------------------
Period ended December 31 $ (507) $ (1,017)
------------------------------------------------------------------------
------------------------------------------------------------------------


Future Taxes

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



2005 2004
------------------------------------------------------------------------
Petroleum and natural gas assets $ 62,920 $ 29,752
Asset retirement obligations (5,867) (5,950)
Non-capital loss carry-forwards (11,485) (2,494)
Share issue costs (1,464) (1,156)
Attributed Canadian Royalty Income (10,806) (6,705)
Deferred partnership income 12,562 -
------------------------------------------------------------------------
Balance, December 31 $ 45,860 $ 13,447
------------------------------------------------------------------------
------------------------------------------------------------------------


At December 31, 2005, Daylight Energy and its subsidiaries had $33.8 million of non-capital loss carry-forwards ($6.9 million as at December 31, 2004). The non-capital loss carry-forwards expire $1.1 million in 2006, $2.5 million in 2007, $3.2 million in 2008, $6.7 million in 2009 and $20.3 million in 2011.

At December 31, 2005, for the entities not subject to tax, the tax base exceed the book amounts by $10,445,000.



12. Supplemental Cash Flow Information

2005 2004
------------------------------------------------------------------------
Changes in non-cash working capital:
------------------------------------------------------------------------
Accounts receivable $ (33,820) $ (27,551)
Prepaid expenses and deposits (372) (955)
Accounts payable and accrued liabilities 36,245 44,427
Unrealized loss on commodity derivatives
acquired on acquisition (note 2) (2,101) -
Working capital acquired on acquisitions (note 2) (16,015) 6,677
------------------------------------------------------------------------
Change in non-cash working capital $ (16,063) $ 22,598
------------------------------------------------------------------------
------------------------------------------------------------------------
Relating to:
Operating activities $ (11,653) $ 2,418
Financing activities (704) 4,899
Investing activities (3,706) 15,281
------------------------------------------------------------------------
------------------------------------------------------------------------
Change in non-cash working capital $ (16,063) $ 22,598
------------------------------------------------------------------------
------------------------------------------------------------------------
Interest and taxes paid:
------------------------------------------------------------------------
Interest paid $ 10,349 $ 1,081
Taxes paid $ 2,365 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


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 December 31, 2005, with a face value of $9.4 million, had a fair value based on quoted market value of $12.3 million.

Commodity Price Risk:

Daylight acquired the following commodity derivative financial instrument on the acquisition of Flowing and has applied mark-to-market accounting during 2005. There are no commodity derivative financial instruments outstanding at December 31, 2005.



Contract Volume Pricing Point Fixed Price Term
------------------------------------------------------------------------
Forward sale 500 bbls/day CDN$ CDN$ January 01/05 to
WTI/bbl 52.70/bbl December 31/05
------------------------------------------------------------------------


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, 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. Commitments

------------------------------------------------------------------------
2006 2007 2008 2009 2010 2011
------------------------------------------------------------------------
Office leases $ 1,791 $ 1,861 $ 1,801 $ 1,767 $ 1,767 $762
Natural gas
transportation 872 758 175 88 - -
------------------------------------------------------------------------
$ 2,663 $ 2,619 $ 1,976 $ 1,855 $ 1,767 $762
------------------------------------------------------------------------
------------------------------------------------------------------------


15. Related Party

Pursuant to the Administrative and Technical Services Agreement, Daylight Energy charged MOX $995,000 relating to general and administrative activities for the year ended December 31, 2005 ($110,000 for the period ended December 31, 2004) and $1,627,000 relating to capital expenditures for the year ended December 31, 2005 ($99,000 for the period ended 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. At December 31, 2005 Daylight had a receivable of $4.0 million ($ 0.2 million - 2004) from MOX, $0.9 million relating to the Technical Service Agreement and $3.1 million relating to joint venture activities. This receivable was collected within the terms of the agreement and in accordance with normal industry standards.

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