Daylight Energy Trust
TSX : DAY.DB
TSX : DAY.UN

Daylight Energy Trust

August 08, 2005 07:30 ET

Daylight Energy Trust Delivers Excellent Q2 Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 8, 2005) -

INCREASED PRODUCTION, REDUCED OPERATING COST, INCREASED CASH FLOW, 100% DRILLING SUCCESS, INCREASED RESERVES, AND PLAN TO DISTRIBUTE NEWLY FORMED JUNIOR EXPLORATION COMPANY TO UNITHOLDERS

MESSAGE TO UNITHOLDERS

Daylight Energy Trust ("Daylight") is pleased to announce excellent second quarter ("Q2 2005") results from its operations and its intention to distribute the shares of a newly formed junior exploration company to its unitholders.



Second Quarter Highlights:

- Record production volumes of 14,648 barrels of oil equivalent ("boe")
per day
- Increased 9% quarter over quarter

- Continued operating cost reduction to $9.89 per boe
- Initiatives reduced costs 3% ($0.31 per boe) quarter over
quarter

- Record Cash Flow from operations to $29.85 million ($0.57 per diluted
share)
- Increased 18% quarter over quarter (up 12% per diluted share)

- Continued 100% drilling success with 5 gross (3.4 net) wells
- Drilling and positive revisions more than replaced production

- Increased reserves to 44.2 million boe proven plus probable
- Increased 40% quarter over quarter
- Reserve Life Index ("RLI") extended to 8.2 years


Daylight announces its intention to create a publicly traded junior exploration ("Spinco") company from certain non-core assets and to distribute the associated shares to its unitholders.

- Spinco will have 400 to 500 boe/d (100% natural gas)

- Undeveloped lands of 40,000 to 50,000 net acres

"Our second quarter was another quarter of record operating and financial results. We increased production, lowered operating costs and combined with strong prices from our substantially unhedged production generated record cash flow." states Fred Woods, Executive Chairman. "Our Daylight team continues to identify and unlock the tremendous potential of our assets and combined with our Spinco initiative delivers these value adds to our unitholders."

RECORD PRODUCTION VOLUMES - Increased production 9% quarter over quarter.

Daylight's Q2 2005 production average of 14,648 boe per day was comprised of 57.9 mmcf per day of natural gas and 5,000 barrels per day of oil and natural gas liquids, up 9% from 13,426 in Q1 2005. Despite a very difficult spring break-up with wet weather conditions which restricted drilling and tie-in activity combined with numerous plant turnarounds, Daylight delivered very solid production results. Gas production was relatively flat at 57.9 mmcf per day compared to 58.9 in Q1 2005. While oil and natural gas liquids volumes increased 38% from 3,613 bbls per day in Q1 2005 to 5,000 bbls per day primarily due to the acquisition of our Wildmere property during the quarter. Q3 2005 production is expected to average 14,500 to 15,000 boe per day.

CONTINUED OPERATING COST REDUCTION - Reduced costs 3% quarter over quarter.

Daylight delivered further operating cost reduction to $9.89 per boe, a 3% reduction from $10.20 per boe in Q1 2005. Daylight has put in place many of the operating cost efficiencies we have identified and continues to reduce operating costs. Daylight has identified further operating cost reductions as we continue towards our 2005 target of $9.50 per boe and lower into 2006.

RECORD CASH FLOW OF $29.85 MILLION - Increased 18% quarter over quarter.

Daylight generated cash flow of $0.63 per unit-basic $0.57 per unit-diluted for Q2 2005. Strong commodity prices on both the oil and natural gas side allowed our production profile to realize a combined oil and natural gas liquids (NGLs) price of $46.02 per barrel and a natural gas price of $7.51 per mcf.

CONTINUED 100% DRILLING SUCCESS - 5 of 5 wells cased in quarter.

Daylight continued to deliver an excellent drilling program with 5 gross (3.4 net) wells composed of 1 gross (0.5 net) gas well and 4 gross (2.9 net) oil wells. During the first half of 2005 Daylight's high-end technical expertise has delivered solid, 100% drilling success with 22 gross (12.0 net) wells across all core areas.

On the Peace River Arch, Daylight drilled 3 gross (1.9 net) wells with an extension to our Kiskatinaw oil pool at Cecil. Daylight has a multi-well exploration and delineation program planned for this area. The Cecil area was temporarily constrained by production allowables during Q2 2005 which have now been eased. Daylight has plans for 20 wells during 2005 in its Peace River Arch area.

In West Central Alberta, Daylight drilled 1 gross (0.5 net) successful well targeting the Bluesky and Nordegg formations at Pine Creek. This area's program was significantly impacted by weather that delayed numerous tie-ins of our highly successful winter drilling program as well as our aggressive follow-up drilling program. Daylight has plans for 40 wells during 2005 in its West Central area.

East 5 capital activities resulted in 1 gross (1.0 net) oil well with solid production and low costs. Daylight has plans for 30 wells during 2005 in its East 5 area.

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

INCREASED RESERVES 40% - RLI extended to 8.2 years.

Successful drilling and positive revisions, as reviewed by our independent engineers, maintained our reserve levels prior to acquisition activities. Including our Wildmere acquisition Daylight increased proven plus probable reserves by over 40% and increased our reserve life index to over 8.2 years.

WILDMERE ACQUISITION GREAT VALUE AND GREAT POTENTIAL

Daylight acquired its Wildmere property during the quarter for approximately $62 million including asset retirement obligations and future taxes, with excellent acquisition metrics of approximately $29,500 per flowing boe per day and a cost of less than $5.00 per boe of proven plus probable reserves. Wildmere is a large long life oil property with significant development and exploitation potential. We have identified 48 additional locations that we have added to our prospect inventory.

DISTRIBUTIONS AND CAPITAL PROGRAM BALANCED WITH CASH FLOW

During the quarter distributions of $16.3 million or $0.36 per unit were declared resulting in a payout ratio below 55%. While on the capital side Daylight invested $14.1 million in its properties to maintain production, reserves and a sustainable operation. With Daylight's solid production, strong commodity prices and large opportunity base Daylight plans to increase its capital program to $55 million for the 2005 year.

OUTLOOK

Daylight remains substantially unhedged with only 3% of production hedged, 500 bbls per day at $52.70 WTI Canadian to December 31, 2005. Combined with continued operating cost reduction Daylight's netbacks continue to grow as we fully participate in increasingly strong commodity prices.

Daylight's asset base has excellent potential. Our plan is to unlock that potential through focusing our high-end team on targeted objectives to reduce operating costs and add reserves through drilling and value added exploitation projects. We are actively engaged in culling and upgrading our asset base through farmouts, sales, farm-ins and acquisitions. By creating a desirable disposition package of non-core assets for establishment of a new exploration company that will be distributed to our unitholders via share issuance, Daylight is further delivering value from our assets.

"Our record operating and financial results and the Spinco initiative show the tremendous potential of the assets and the value-add of our high-end team." said Fred Woods. "Since starting in December of 2004, this has been an excellent beginning for Daylight - but only a beginning. We like the opportunities we have identified and are confident of our continued ability to generate opportunities and deliver value."



Signed: "Fred Woods"
Fred Woods
Executive Chairman
August 5, 2005


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion & Analysis ("MD&A") is dated August 5, 2005 and should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes for the three month and six month periods ended June 30, 2005 as well as the December 31, 2004 MD&A, consolidated financial statements and notes. The consolidated financial statements and other financial data presented have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Daylight Energy Trust ("Daylight" or the "Trust") is an open-ended investment trust created on October 1, 2004 under the laws of the Province of Alberta and began active oil and gas operations on November 30, 2004. As active oil and gas operations began late in 2004 there is no comparative 2004 period and the three month period ended June 30, 2005 ("Q2 2005") is compared to the three month period ended March 31, 2005 ("Q1 2005").

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

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

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

CREATION OF DAYLIGHT AND PLAN OF ARRANGEMENT

The 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 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. 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 Technical Services and Corporate Governance committees within their respective Boards of Directors to monitor compliance with the Administrative and Technical Services Agreement.



HIGHLIGHTS

Financial (in thousands Three months Three months
of dollars, except unit, ended June 30, ended March 31, %
per unit and boe data) 2005 2005 Change
------------------------------------------------------------------------
Petroleum and
natural gas revenues $ 60,529 $ 53,984 12
Royalties (10,506) (10,340) 2
Realized gain on commodity
derivative 59 - n/a
Operating expenses (13,184) (12,328) 7
Transportation (950) (430) 121
------------------------------------------------------------------------
Operating netback 35,948 30,886 16
General and administrative
- cash charge (2,108) (1,987) 6
Cash financial charges (2,861) (2,584) 11
Cash taxes (347) (244) 42
Asset retirement expenditures (782) (788) (1)
------------------------------------------------------------------------
Cash flow from operations 29,850 25,283 18
Per unit - Basic 0.63 0.58 9
- Diluted 0.57 0.51 12
------------------------------------------------------------------------
Net income 12,201 5,887 107
Per unit - Basic 0.27 0.14 93
- Diluted 0.26 0.14 86
------------------------------------------------------------------------
Cash distributions declared 16,283 14,962 9
Per unit 0.36 0.36 -
------------------------------------------------------------------------
Capital expenditures 14,086 14,387 (2)
Wells drilled - gross (net) 5 (3.4) 17 (8.6) n/a
------------------------------------------------------------------------
Bank debt 131,755 101,850 29
Working capital deficiency 11,602 12,256 (5)
Total assets 676,212 610,970 11
------------------------------------------------------------------------
Units outstanding (000s)
Basic including exchangeable
shares 47,253 43,975 7
Diluted 56,209 52,594 7
------------------------------------------------------------------------
------------------------------------------------------------------------
Operational
Average daily production
Natural gas (mcf/d) 57,890 58,875 (2)
Light oil (bbls/d) 2,292 2,721 (16)
Heavy oil (bbls/d) 1,937 - n/a
Natural Gas Liquids
("NGLs") (bbls/d) 771 892 (14)
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 5,000 3,613 38
------------------------------------------------------------------------
Combined (boe/d) 14,648 13,426 9
------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 7.51 $ 6.86 9
Light oil ($/bbl) 62.80 56.49 11
Heavy oil ($/bbl) 23.49 - n/a
NGLs ($/bbl) 52.71 46.35 14
------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 46.02 $ 53.99 (15)
------------------------------------------------------------------------
Petroleum and natural
gas revenues ($/boe) $ 45.41 $ 44.68 2
Royalties ($/boe) (7.88) (8.56) (8)
Realized gain on commodity
derivatives ($/boe) 0.04 - n/a
Operating expenses ($/boe) (9.89) (10.20) (3)
Transportation ($/boe) (0.71) (0.36) 97
------------------------------------------------------------------------
Operating netback ($/boe) $ 26.97 $ 25.56 6
General and administrative
- cash charge ($/boe) (1.58) (1.64) (4)
Cash financial charges ($/boe) (2.15) (2.14) -
Cash taxes ($/boe) (0.26) (0.20) 30
Asset retirement expenditures
($/boe) (0.59) (0.65) (9)
------------------------------------------------------------------------
Cash flow from operations ($/boe) $ 22.39 $ 20.92 7
------------------------------------------------------------------------
------------------------------------------------------------------------

Per boe amounts many not add exactly due to rounding.


RESULTS OF OPERATIONS

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

On April 5, 2005 Daylight closed the acquisition of all of the issued and outstanding shares of Flowing Energy Corporation ("Flowing") through the issuance of 2,783,904 trust units and 370,218 exchangeable shares with a value of approximately $33 million. Daylight also assumed the combined bank debt, working capital deficiency and commodity derivatives liability of Flowing with a value of approximately $28 million and recognized asset retirement obligations and future taxes of approximately $1 million resulting in the addition of approximately $62 million to petroleum and natural gas assets. The acquired assets primarily produce heavy oil which contributed 1,937 bbls per day to Q2 2005 production.

Production

Daylight's production volumes for Q2 2005 averaged 14,648 boe per day which is a 9% increase over Q1 2005. Q2 2005 production is comprised of 57,890 mcf per day of natural gas, 2,292 bbls per day of light oil, 1,937 bbls per day of heavy oil and 771 bbls per day of NGLs. Production of natural gas, light oil and NGLs was lower in Q2 2005 versus Q1 2005 as multiple plant turnarounds shut in production and extended wet weather delayed tie-ins of new production and forced the shut in of certain established production.



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Three months Three months Six months
ended ended ended
Daily production June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Natural gas (mcf/day) 57,890 58,875 58,380
Light oil (bbls/day) 2,292 2,721 2,505
Heavy oil (bbls/day) 1,937 - 974
NGLs (bbls/day) 771 892 831
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Combined oil and NGLs
(bbls/day) 5,000 3,613 4,310
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Combined all products
(boe/day) 14,648 13,426 14,040
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2005 production addition activities continue to be focused on:

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

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

- Eastern properties of Bonnyville and Little Bow

Daylight expects production of approximately 14,500 to 15,000 boe per day during Q3 2005.

Commodity Prices

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

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

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



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Three months Three months Six months
ended ended ended
Market Prices June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
AECO ($Cdn/mcf) $ 7.23 $ 6.79 $ 7.00
WTI ($US/bbl) 53.11 49.83 51.51
Edmonton Par ($Cdn/bbl) 65.93 62.20 64.08
Exchange rate ($Cdn/$US) 0.8039 0.8159 0.8098
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Three months Three months Six months
Daylight prices ended ended ended
realized: June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Natural gas ($/mcf) $ 7.51 $ 6.86 $ 7.18
Light oil ($/bbl) 62.80 56.49 59.40
Heavy oil ($/bbl) 23.49 - 23.49
NGLs ($/bbl) 52.71 46.35 49.32
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Combined oil and NGLs
($/bbl) 46.02 53.99 49.34
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Combined all products
($/boe) $ 45.41 $ 44.68 $ 45.06
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-----------------------------------------------------------------------


Daylight's natural gas price during Q2 2005 was $7.51/mcf representing a 4% premium to AECO in the quarter and a 9% improvement over the Q1 2005 realized price.

Daylight's combined oil and NGLs price during Q2 2005 was $46.02/bbl which is down 15% from Q1 2005 due to the addition of heavy oil, acquired on the Flowing acquisition, at a price of $23.49/bbl. Daylight's light oil price during Q2 2005 was $62.80/bbl, up 11% from Q1 2005, and the NGLs price during Q2 2005 was $52.71/bbl, up 14% from Q1 2005.

Daylight's realized prices are expected to continue to correlate with market prices during the remainder of 2005 subject to any additional hedging transactions that Daylight enters into.



Revenue
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Three months Three months Six months
Petroleum and ended ended ended
natural gas (000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Natural gas $ 39,565 $ 36,335 $ 75,900
Light oil 13,099 13,835 26,934
Heavy oil 4,141 - 4,141
NGLs 3,698 3,721 7,419
Other 26 93 119
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Total $ 60,529 $ 53,984 $ 114,513
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Natural gas sales for Q2 2005 were $39.6 million, up 9% from Q1 2005. Light oil sales for Q2 2005 were $13.1 million, down 5% from Q1 2005, and NGLs sales were $3.7 million, down 1% from Q1 2005. New heavy oil sales contributed $4.1 million to revenue during Q2 2005.

Royalties

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

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

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



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Three months Three months Six months
Royalties by ended ended ended
type (000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Crown royalties,
net of ARTC $ 7,783 $ 9,467 $ 17,250
Freehold royalties 1,102 289 1,391
Overriding royalties 1,621 584 2,205
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Total $ 10,506 $ 10,340 $ 20,846
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$ per boe $ 7.88 $ 8.56 $ 8.20
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% of revenue 17.4 19.2 18.2
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Three months Three months Six months
Royalties by ended ended ended
commodity June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Natural gas (000s) $ 6,696 $ 7,194 $ 13,890
Oil and NGLs (000s) 3,810 3,146 6,956
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Total (000s) $ 10,506 $ 10,340 $ 20,846
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-----------------------------------------------------------------------

Natural gas (per boe) $ 7.63 $ 8.15 $ 7.89
Oil and NGLs (per boe) 8.37 9.67 8.92
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Total (per boe) $ 7.88 $ 8.56 $ 8.20
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Natural gas (% of revenue) 16.9 19.8 18.3
Oil and NGLs (% of revenue) 18.2 17.9 18.1
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Total (% of revenue) 17.4 19.2 18.2
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During Q2 2005 Daylight received significant favourable credits on gas crown royalties related to gas cost allowance and custom processing adjustments which reduced the quarterly total royalty rate approximately 1%. Daylight expects total royalty rates of approximately 18% on a go forward basis for the remainder of 2005.

Gain (loss) on Commodity Derivatives

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

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

In conjunction with the Flowing acquisition a commodity derivative contract was assumed. The commodity derivative contact is for 500 barrels per day of oil at a fixed price of $52.70 Canadian WTI expiring on December 31, 2005. Daylight has applied mark-to-market accounting to this financial instrument. During Q2 2005 this commodity derivative generated a loss of $233,000 composed of a realized gain of $59,000 and an unrealized loss of $292,000.



-----------------------------------------------------------------------
-----------------------------------------------------------------------
Three months Three months Six months
Commodity derivatives ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Realized gain $ 59 $ - $ 59
Unrealized loss (292) - $ (292)
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Total $ (233) $ - $ (233)
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$ per boe
-----------------------------------------------------------------------
Realized gain $ 0.04 $ - $ 0.02
Unrealized loss (0.22) - (0.11)
-----------------------------------------------------------------------
Total $ (0.17) $ - $ (0.09)
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Daylight continues to monitor commodity prices and may selectively hedge an additional portion of its production. The current 12 month forward strip for AECO natural gas is approximately $9.45 per mcf and WTI oil is approximately US$64 per bbl. These forward prices are well in excess of Daylight's budgeted prices for the remainder of 2005 of $7.50 per mcf for natural gas and US$55 per bbl WTI for oil, which provides Daylight increased flexibility in executing our capital and operating plans.

Operating Expenses

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



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Three months Three months Six months
ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Operating costs $ 13,184 $ 12,328 $ 25,512
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$ per boe $ 9.89 $ 10.20 $ 10.04
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Daylight continued to reduce operating costs on a boe basis during Q2 2005 with a further reduction of $0.31/boe versus Q1 2005 resulting in an operating cost of $9.89 per boe. These cost savings relate to the execution of cost saving initiatives. Daylight continues to identify further operating costs savings to be implemented during the remainder of 2005 and into 2006 to reduce per boe operating costs.

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. This recently acquired heavy oil production is responsible for the increased transportation expense in Q2 2005 of $950,000, $0.71 per boe, versus Q1 2005 expense of $430,000, $0.36 per boe. Natural gas is usually transported to an established delivery point such as AECO in Alberta and then delivered to the purchaser.



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Three months Three months Six months
ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Transportation costs $ 950 $ 430 $ 1,380
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$ per boe $ 0.71 $ 0.36 $ 0.54
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Operating Netbacks (per boe)

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-----------------------------------------------------------------------
Natural Gas, Oil Three months Three months Six months
& NGLs Combined ended ended ended
(per boe) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Revenue $ 45.41 $ 44.68 $ 45.06
Royalty (7.88) (8.56) (8.20)
Commodity Derivative
- realized 0.04 - 0.02
Operating cost (9.89) (10.20) (10.04)
Transportation (0.71) (0.36) (0.54)
-----------------------------------------------------------------------
Operating netback $ 26.97 $ 25.56 $ 26.30
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General and Administrative Expenses

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-----------------------------------------------------------------------
Three months Three months Six months
ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Gross G&A $ 4,388 $ 3,613 $ 8,001
Operating recoveries (863) (912) (1,775)
Capitalized costs (1,417) (714) (2,131)
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2,108 1,987 4,095
Unit based compensation 726 386 1,112
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Net G&A $ 2,834 $ 2,373 $ 5,207
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Three months Three months Six months
ended ended ended
$ per boe June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Gross G&A $ 3.29 $ 2.99 $ 3.15
Operating recoveries (0.65) (0.75) (0.70)
Capitalized costs (1.06) (0.59) (0.84)
-----------------------------------------------------------------------
1.58 1.64 1.61
Unit based compensation 0.54 0.32 0.44
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Net G&A $ 2.13 $ 1.96 $ 2.05
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General and administrative expense ("G&A") during Q2 2005 was $2,834,000 ($2.13/boe) including non-cash unit based compensation of $726,000 ($0.54/boe). General and administrative expense ("G&A") on a year to date basis was $5,207,000 ($2.05/boe) including non-cash unit based compensation of $1,112,000 ($0.44/boe).

Pursuant to the Administrative and Technical Services Agreement, Daylight Energy charged MOX $433,000 relating to general and administrative activities and $745,000 relating to capital expenditures for the six month period ending June 30, 2005.

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

Financial Charges

Daylight incurs cash interest expense on bank debt and convertible debentures. Daylight's effective bank debt interest rate was 3.9% and the convertible debentures have a fixed 8.5% interest rate. Non-cash financial charges relate to the amortization of cost related to issuing the convertible debentures, establishing the bank credit facility and accreting the convertible debenture discount.



-----------------------------------------------------------------------
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Three months Three months Six months
ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Bank debt interest $ 1,273 $ 947 $ 2,220
Convertible debenture
interest 1,588 1,637 3,225
-----------------------------------------------------------------------
Cash financial charges 2,861 2,584 5,445
Amortization of financial
charges 178 181 359
Accretion of convertible
debenture discount 107 111 218
-----------------------------------------------------------------------
Total $ 3,146 $ 2,876 $ 6,022
-----------------------------------------------------------------------
-----------------------------------------------------------------------


-----------------------------------------------------------------------
-----------------------------------------------------------------------
Three months Three months Six months
ended ended ended
$ per boe June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Bank debt interest $ 0.96 $ 0.78 $ 0.87
Convertible debenture
interest 1.19 1.35 1.27
-----------------------------------------------------------------------
Cash financial charges 2.15 2.14 2.14
Amortization of financial
charges 0.13 0.15 0.14
Accretion of convertible
debenture discount 0.08 0.09 0.09
-----------------------------------------------------------------------
Total $ 2.36 $ 2.38 $ 2.37
-----------------------------------------------------------------------
-----------------------------------------------------------------------


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

Depletion, Depreciation and Accretion

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



-----------------------------------------------------------------------
-----------------------------------------------------------------------
Three months Three months Six months
ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Depletion and
Depreciation $ 18,320 $ 20,036 $ 38,356
Accretion 365 335 700
-----------------------------------------------------------------------
Total $ 18,685 $ 20,371 $ 39,056
-----------------------------------------------------------------------
-----------------------------------------------------------------------
$ per boe
-----------------------------------------------------------------------
Depletion and
Depreciation $ 13.74 $ 16.58 $ 15.09
Accretion 0.27 0.28 0.28
-----------------------------------------------------------------------
Total $ 14.02 $ 16.86 $ 15.37
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Daylight's depletion, depreciation and accretion rate per boe decreased 17% versus Q1 2005 due to the acquisition of Flowing at a low cost per boe and reserve additions during 2005 from our capital program.

Future Income and Capital Taxes

During Q2 2005 Daylight recognized cash taxes of $347,000 ($0.26/boe) related to capital tax obligations. Daylight also recognized a future income tax reduction of $2,044,000 during Q2 2005. Daylight is a taxable entity under the Canadian Income Tax Act and is taxable only on income that is not distributed or distributable to its unitholders.

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

Non-Controlling Interest - Exchangeable shares

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

Adjustments to prior periods have been reflected in the Q2 2005 financial statements and during Q2 2005 Daylight recognized a non-controlling interest - exchangeable share charge of $487,000.

Net Earnings and Cash Flow

As a result of the previously discussed factors Daylight recognized net earnings of $12,201,000 and cash flow from operations of $29,850,000 during Q2 2005.



-----------------------------------------------------------------------
-----------------------------------------------------------------------
Three months Three months Six months
ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Net earnings $ 12,201 $ 5,887 $ 18,088
-----------------------------------------------------------------------
Per boe $ 9.15 $ 4.87 $ 7.12
-----------------------------------------------------------------------
Per Unit
-----------------------------------------------------------------------
Basic $ 0.27 $ 0.14 $ 0.42
-----------------------------------------------------------------------
Diluted $ 0.26 $ 0.14 $ 0.42
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Cash flow from operations $ 29,850 $ 25,283 $ 55,133
-----------------------------------------------------------------------
Per boe $ 22.39 $ 20.92 $ 21.70
-----------------------------------------------------------------------
Per Unit
-----------------------------------------------------------------------
Basic $ 0.63 $ 0.58 $ 1.22
-----------------------------------------------------------------------
Diluted $ 0.57 $ 0.51 $ 1.09
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Daylight's cash flow from operations is significantly influenced by production volumes and commodity prices. Daylight's estimated sensitivity to changes in its commodity price and production volume assumptions during the 2005 year is approximately:

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

- $1.4 million per $US1.00 change in the WTI oil price per bbl.

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

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

- $0.6 million per 100 bbl per day change in heavy oil production.



Capital Expenditures

-----------------------------------------------------------------------
-----------------------------------------------------------------------
Three months Three months Six months
Capital Expenditures ended ended ended
(000s) June 30, 2005 March 31, 2005 June 30, 2005
-----------------------------------------------------------------------
Land and acquisitions $ 316 $ 685 $ 1,001
Geological and
geophysical 1,514 952 2,466
Drill, complete and
recomplete 7,791 8,236 16,027
Equipping and facilities 4,465 4,514 8,979
-----------------------------------------------------------------------
Total $ 14,086 $ 14,387 $ 28,473
-----------------------------------------------------------------------
-----------------------------------------------------------------------
During Q2 2005 Daylight drilled a total of 5 (3.4 net) wells with 100%
success in the quarter.


The 2005 capital expenditure program of $55 million is being focused on:

- West Central properties include Pine Creek, Kaybob, Fir, Marlboro, and Windfall. Daylight plans to drill 40 gross (10 net) wells on these properties as well as various production and reserve enhancement activities. Approximately 40% of the capital expenditure program is planned for this area. During Q2 2005 Daylight drilled 1 (0.5 net) wells in this area.

- Peace River Arch properties include Elmworth, Hines Creek, Cecil, Wapiti and Sinclair. Daylight plans to drill 20 gross (12 net) wells on these properties as well as various production and reserve enhancement activities. Approximately 35% of the capital expenditure program is planned for this area. During Q2 2005 Daylight drilled 3 (1.9 net) wells in this area.

- Eastern and Minor properties include Bonnyville and Little Bow. Daylight plans to drill 30 gross (25 net) wells on these properties as well as various production and reserve enhancement activities. Approximately 25% of the capital expenditure program is planned for this area. During Q2 2005 Daylight drilled 1 (1.0 net) well in this area.

Daylight has identified multiple opportunities to purchase equipment that is currently under lease and has acquired certain of these assets. These transactions are and will continue to have a positive impact on operating costs and economics at the affected properties. Daylight is also evaluating the disposition of certain non-core, non-producing assets during 2005.

Distributable Cash and Distributions

During Q2 2005 Daylight declared three monthly distributions related to the period totalling $16.3 million ($0.36/trust unit).

Daylight expects to continue distributing $0.12 per unit per month which is approximately 60% of its annual cash flow with the remaining 40% allocated primarily for capital expenditures to maintain production and reserve levels. Daylight's management and the Board of Directors continually monitor the distributions in relation to forecast net cash flow, debt levels and capital expenditure plans. Commodity prices and production volumes are critical variables in determining cash flow and changes in these two items have a material impact on cash flow and distributions.



Liquidity and Capital Resources

------------------------------------------------------------------------
June 30, December 31,
Liquidity and Capital Resources (000s) 2005 2004
------------------------------------------------------------------------
Bank debt $ 131,755 $ 89,220
Working capital deficiency 11,602 20,820
------------------------------------------------------------------------
Bank debt and working capital deficiency 143,357 110,040
Convertible debentures 72,919 77,718
Non-controlling interest - exchangeable
shares 17,713 24,019
Unitholders' equity $ 377,675 $ 345,228
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2005 Daylight had $131.8 million outstanding on its credit facilities. Daylight's credit facilities provide up to $145 million and are subject to semi-annual review by the banking syndicate. Daylight's working capital deficiency of $11.6 million combined with bank debt results in $143.4 million of total bank debt net of working capital deficiency.

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

As at June 30, 2005 Daylight had 45,337,722 trust units, 1,739,837 exchangeable shares equivalent to 1,915,213 trust units and $74.8 million principal amount of convertible debentures convertible into 7,877,789 trust units outstanding. As at June 30, 2005, Daylight also had 883,000 restricted trust unit awards and 150,000 performance trust unit awards outstanding and equivalent to 1,084,262 trust units.

As at August 5, 2005, Daylight has 45,433,842 trust units, 1,738,626 exchangeable shares equivalent to 1,936,064 trust units and $73.9 million principal amount of convertible debentures convertible into 7,783,053 trust units outstanding. As at August 5, 2005, Daylight also has 885,000 restricted trust unit awards and 150,000 performance trust unit awards outstanding and equivalent to 1,098,988 trust units.



Quarterly Information
------------------------------------------------------------------------
Financial (in thousands Period from
of dollars, except Three months Three months October 21 to
unit, per unit and ended ended December 31,
boe data) June 30, 2005 March 31, 2005 2004
------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 60,529 $ 53,984 $ 17,377
Royalties (10,506) (10,340) (3,662)
Realized gain on
commodity derivatives 59 - -
Operating expenses (13,184) (12,328) (4,335)
Transportation (950) (430) (153)
------------------------------------------------------------------------
Operating netback 35,948 30,886 9,227
Interest income - - 726
General and administrative
- cash charge (2,108) (1,987) (987)
Cash financial charges (2,861) (2,584) (1,677)
Cash taxes (347) (244) (92)
Asset retirement
expenditures (782) (788) (223)
------------------------------------------------------------------------
Cash flow from operations 29,850 25,283 6,974
Per unit - Basic 0.63 0.58 0.24
- Diluted 0.57 0.51 0.22
------------------------------------------------------------------------
Net income 12,201 5,887 1,045
Per unit - Basic 0.27 0.14 0.04
- Diluted 0.26 0.14 0.04
------------------------------------------------------------------------
Cash distributions declared 16,283 14,962 9,777
Per unit 0.36 0.36 0.24
------------------------------------------------------------------------
Capital expenditures
(excluding
corporate acquisitions) 14,086 14,387 5,057
Corporate acquisitions 315 - 311,433
Wells drilled - gross (net) 5 (3.4) 17 (8.6) 4 (2.1)
------------------------------------------------------------------------
Bank debt 131,755 101,850 89,220
Working capital deficiency 11,602 12,256 20,820
Total assets 676,212 610,970 615,486
------------------------------------------------------------------------
Units outstanding (000s)
Basic including
exchangeable shares 47,253 43,975 43,385
Diluted 56,209 52,594 51,806
------------------------------------------------------------------------
------------------------------------------------------------------------
Operations

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


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

Dated August 5, 2005



Consolidated Balance Sheets

(in thousands of dollars)
------------------------------------------------------------------------
As at As at
June 30, 2005 December 31, 2004
------------------------------------------------------------------------
(unaudited) (audited)
(restated)
Assets
Current assets
Accounts receivable $ 35,751 $ 27,551
Prepaid expenses and deposits 1,484 955
------------------------------------------------------------------------
37,235 28,506
Petroleum and natural gas assets
(note 5) 455,285 402,729
Deferred financing charges (note 7) 3,121 3,680
Goodwill (note 4) 180,571 180,571
------------------------------------------------------------------------
$ 676,212 $ 615,486
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 41,672 $ 44,427
Unrealized loss on commodity
derivatives (note 13) 1,724 -
Distributions payable 5,441 4,899
------------------------------------------------------------------------
48,837 49,326
Bank debt (note 6) 131,755 89,220
Convertible debentures (note 7) 72,919 77,718
Asset retirement obligations (note 9) 17,194 16,528
Future taxes 10,119 13,447

Non-controlling interest
- exchangeable shares (note 10) 17,713 24,019
------------------------------------------------------------------------
298,537 270,258
------------------------------------------------------------------------

Unitholders' Equity

Unitholders' capital (note 11) 396,282 351,640
Contributed surplus (note 11) 1,112 -
Equity component of convertible
debentures (note 7) 2,170 2,320
Accumulated income 19,133 1,045
Accumulated distributions (note 11) (41,022) (9,777)
------------------------------------------------------------------------
377,675 345,228
------------------------------------------------------------------------
$ 676,212 $ 615,486
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Consolidated Statements of Income and Accumulated Income

(in thousands of dollars, except per unit amounts)
------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2005 June 30, 2005
------------------------------------------------------------------------
(unaudited) (unaudited)
Revenues
Petroleum and natural gas $ 60,529 $ 114,513
Royalties, net of ARTC (10,506) (20,846)
Loss on commodity derivatives (note 13) (233) (233)
------------------------------------------------------------------------
49,790 93,434
Expenses
Operating 13,184 25,512
Transportation 950 1,380
General and administrative 2,834 5,207
Financial charges (note 8) 3,146 6,022
Depletion, depreciation and accretion 18,685 39,056
------------------------------------------------------------------------
38,799 77,177
------------------------------------------------------------------------
Income before taxes and non-controlling
interest 10,991 16,257

Taxes
Capital taxes 347 591
Future tax reduction (2,044) (3,231)
------------------------------------------------------------------------
(1,697) (2,640)
------------------------------------------------------------------------

Income before non-controlling interest 12,688 18,897

Non-controlling interest - exchangeable
shares (note 10) 487 809
------------------------------------------------------------------------

Net income $ 12,201 $ 18,088

Accumulated income, beginning of period
as previously reported 7,296 1,087
Effect of retroactive change in
accounting policy (note 2) (364) (42)
------------------------------------------------------------------------
Accumulated income, beginning of
period as restated 6,932 1,045
------------------------------------------------------------------------
Accumulated income, end of period $ 19,133 $ 19,133
------------------------------------------------------------------------
------------------------------------------------------------------------
Net income per unit (note 11(b))
Basic $ 0.27 $ 0.42
Diluted $ 0.26 $ 0.42
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows

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

Operating
Net income $ 12,201 $ 18,088
Items not affecting cash:
Depletion, depreciation and accretion 18,685 39,056
Non-controlling interest
- exchangeable shares 487 809
Future tax reduction (2,044) (3,231)
Non-cash financial charges 285 577
Unit based compensation 726 1,112
Unrealized loss on commodity derivatives 292 292
Asset retirement expenditures (782) (1,570)
------------------------------------------------------------------------
Funds from operations 29,850 55,133
Change in non-cash operating working
capital (note 12) (5,755) (12,121)
------------------------------------------------------------------------
------------------------------------------------------------------------
24,095 43,012
Financing
Bank debt 10,332 22,962
Unit issue costs (523) (523)
Cash distribution to unitholders (15,883) (30,703)
Change in non-cash financing working
capital (note 12) (1,614) (76)
------------------------------------------------------------------------
(7,688) (8,340)
Investing
Petroleum and natural gas additions (14,086) (28,473)
Corporate acquisition costs (315) (315)
Changes in non-cash investing working
capital (note 12) (2,006) (5,884)
------------------------------------------------------------------------
(16,407) (34,672)
Changes in cash - -
Cash, beginning of period - -
------------------------------------------------------------------------
Cash, end of period $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to consolidated financial statements.


Notes to Consolidated Financial Statements

For the three and six months ended June 30, 2005 (unaudited).

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

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

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

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

Relationship with MOX

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

1. Significant Accounting Policies

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

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

Hedging relationships

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

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

2. Change in accounting policy

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

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

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



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

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

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

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

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


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

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


3. Corporate acquisition

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



---------------------------------------------------------------------
---------------------------------------------------------------------
Net assets acquired:
Petroleum and natural gas assets $ 62,316
Bank debt (19,573)
Unrealized loss on oil derivatives (2,101)
Working capital deficiency (5,928)
Asset retirement obligations (1,413)
Future taxes 97
---------------------------------------------------------------------
Total net assets acquired $ 33,398
---------------------------------------------------------------------
---------------------------------------------------------------------

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


4. Plan of Arrangement

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

a) Midnight Oil and Gas Ltd.

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



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

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


b) Vintage Petroleum Canada, Inc.

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



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

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


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

c) Midnight Oil Exploration Ltd.

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



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


5. Petroleum and Natural Gas Assets

---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
---------------------------------------------------------------------
Petroleum and natural
gas properties $ 498,552 $ 45,219 $ 453,333
Other assets 2,097 145 1,952
---------------------------------------------------------------------
Balance, June 30, 2005 $ 500,649 $ 45,364 $ 455,285
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
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 six months ended June 30, 2005, Daylight capitalized $2,131,000 of general and administrative expenses related to exploration and development activities.

Future development costs of $44.8 million associated with proven reserves were included in the depletion and depreciation calculation. Future salvage value of production equipment and facilities of $25.5 million and a cost of $33.6 million for unproven properties have been excluded from the depletion and depreciation calculation.

6. Bank Debt

Daylight has a total of $145 million available under revolving term credit facilities with a syndicate of banks of which $131.8 million was drawn at June 30, 2005. The effective interest rate for the bank debt was 3.9% for the six months ended June 30, 2005. The credit facilities bear interest based on the lenders' prime rate and/or at money market rates plus a stamping fee. The facilities are secured with a demand debenture of $250 million over the petroleum and natural gas assets and are subject to semi-annual review where the lenders may re-determine the borrowing base.

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

7. Convertible Debentures

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

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 six month period ended June 30, 2005:



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Debt Equity
Convertible Debentures Component Component
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Issued, October 21, 2004 $ 77,680 $ 2,320
Accretion 38 -
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Balance, December 31, 2004 $ 77,718 $ 2,320
Accretion 218 -
Conversion to Trust Units (5,017) (150)
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Balance, June 30, 2005 $ 72,919 $ 2,170
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8. Financial Charges

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



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Three months ended Six months ended
June 30, 2005 June 30, 2005
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Bank debt interest $ 1,273 $ 2,220
Convertible debenture interest 1,588 3,225
Amortization of financial charges 178 359
Accretion of convertible
debenture liability 107 218
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$ 3,146 $ 6,022
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9. Asset Retirement Obligations

Daylight's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. Daylight estimates the total undiscounted amount of cash flow required to settle its asset retirement obligations is approximately $56.6 million which will be incurred between 2005 and 2054. The majority of the costs will be incurred between 2005 and 2021. An inflation factor of 2% has been applied to the estimated asset retirement cost. A credit-adjusted risk-free rate of 8% was used to calculate the fair value of the asset retirement obligations.



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

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2005 2004
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Balance, beginning of period $ 16,528 $ -
Acquired on Plan of Arrangement - 16,595
Acquired on acquisition of
Flowing (note 3) 1,413 -
Liabilities incurred 123 45
Liabilities settled (1,570) (223)
Accretion expense 700 111
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Balance, end of period $ 17,194 $ 16,528
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10. Non-Controlling Interest - exchangeable shares

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

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



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Number of Amount
Shares (restated)
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Exchangeable shares:
Issued on acquisition of MOG 2,518,497 $ 24,178
Retracted for Trust Units (20,860) (201)
Income attributable to
non-controlling interest - 42
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Balance, December 31, 2004 2,497,637 $ 24,019
Issued on acquisition of
Flowing (note 3) 370,218 4,087
Retracted for Trust Units (1,128,018) (11,202)
Income attributable to
non-controlling interest - 809
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Balance, June 30, 2005 1,739,837 $ 17,713
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The exchangeable shares can be retracted, at the option of the holder into trust units at any time. If the number of exchangeable shares outstanding is less than 400,000, the Trust can elect to redeem the exchangeable shares for trust units or an amount in cash equal to the amount determined by multiplying the exchange ratio on the last business day prior to the redemption date by the current market price of a trust unit on the last business day prior to such redemption date. The number of trust units issued upon conversion is based on the exchange ratio in effect on the date of conversion. The exchange ratio is calculated monthly based on the five day weighted average trust unit trading price preceding the monthly distribution record date. The exchange ratio at June 30, 2005 was 1.10080. The exchangeable shares are not eligible for cash distributions.

Retraction of Exchangeable Shares

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

Redemption of Exchangeable Shares

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

11. Unitholders' Equity

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



a) Trust Units

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Number of Amount
Unitholders' capital Units (restated)
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Trust Units:
Issued on Plan of Arrangement 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)
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Balance, December 31, 2004 40,824,926 $ 351,640
Issued on retraction of
exchangeable shares 1,185,682 11,202
Issued on acquisition of
Flowing (note 3) 2,783,904 28,996
Issued on conversion of debentures 543,260 4,967
Unit issue costs - (523)
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Balance, June 30, 2005 45,337,772 $ 396,282
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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:

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Three months ended Six months ended
June 30, 2005 June 30, 2005
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Trust units 44,999,324 43,183,205
Exchangeable shares at
exchange ratio 2,047,300 2,154,415
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Basic 47,046,624 45,337,620
Convertible debentures 7,898,647 8,060,591
Trust Unit Awards 106,806 -
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Diluted 55,052,077 53,398,211
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Basic net income per unit includes income before non-controlling interest of $18,897,000 for the six months ended June 30, 2005 ($12,688,000 for the three months ended June 30, 2005). Diluted net income per unit adds back convertible debenture interest expense of $3,225,000 for the six months ended June 30, 2005 ($1,588,000 for the three months ended June 30, 2005).

c) Unit Award Incentive Plan

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

During the six month period ended June 30, 2005 the Board of Directors granted Restricted Unit Awards totaling 980,000 of which 883,000 remain outstanding at June 30, 2005 and Performance Unit Awards totaling 157,000 of which 150,000 remain outstanding at June 30, 2005. The fair value of the Unit Awards are determined at date of grant and amortized through general and administrative expense over the vesting period as unit based compensation with a corresponding increase to contributed surplus. The weighted average fair value at the date of grant for the Unit Awards granted during the six month period ended June 30, 2005 was $9.74 per Unit Award and $1,112,000 was charged to general and administrative expense in the period.



d) Accumulated Distributions

The table below shows the cumulative distributions to unitholders:

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Distribution
Record Date Per Unit Amount
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November 30, 2004 $ 0.12 $ 4,878
December 31, 2004 0.12 4,899
January 31, 2005 0.12 4,920
February 28, 2005 0.12 5,001
March 31, 2005 0.12 5,041
April 30, 2005 0.12 5,405
May 31, 2005 0.12 5,437
June 30, 2005 0.12 5,441
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Total $ 0.96 $ 41,022
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12. Supplemental Cash Flow Information

Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
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Changes in non-cash working
capital:
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Accounts receivable $ (6,989) $ (8,200)
Prepaid expenses and deposits (309) (529)
Accounts payable and accrued
liabilities 4,520 (2,755)
Unrealized loss on oil derivatives (669) (669)
Working capital acquired on
acquisition (note 3) (5,928) (5,928)
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Change in non-cash working capital $ (9,375) $ (18,081)
Relating to:
Operating activities $ (5,755) (12,121)
Financing activities (1,614) (76)
Investing activities (2,006) (5,884)
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Change in non-cash working capital $ (9,375) $ (18,081)
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Interest and taxes paid:
---------------------------------------------------------------------
Interest paid $ 4,546 $ 5,621
Taxes paid 935 935
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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 June 30, 2005, with a face value of $74.8 million, had a fair value based on quoted market value of $80.5 million.

Commodity Price Risk:

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



Contract Volume Pricing Fixed Price Term Recognized
Point Fair Value
of Loss
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---------------------------------------------------------------------

Forward 500 bbls/ WTI CDN$52.70/bbl January 01/05 to $1,724,000
sale day December 31/05

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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 June 30, 2005.

Foreign Currency:

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

14. Related Party

Pursuant to the Administrative and Technical Services Agreement, Daylight Energy charged MOX $433,000 relating to general and administrative activities for the six months ended June 30, 2005 ($292,000 for the three months ended June 30, 2005) and $745,000 relating to capital expenditures for the six months ended June 30, 2005 ($373,000 for the three months ended June 30, 2005). The Administrative and Technical Services Agreement has no set termination date and will continue until terminated by either party with three months written notice to the other party.

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