Daylight Energy Trust
TSX : DAY.UN

Daylight Energy Trust

July 31, 2006 07:00 ET

Daylight Energy Trust Reports Excellent Second Quarter 2006 Financial and Operating Results and Provides Update on Merger with Sequoia Oil & Gas Trust to Create Evergreen Energy Trust

CALGARY, ALBERTA--(CCNMatthews - July 31, 2006) - Daylight Energy Trust (TSX:DAY.UN)

MESSAGE TO UNITHOLDERS

Daylight Energy Trust ("Daylight") is pleased to report excellent financial and operating results for the three months ended June 30, 2006 and provide unitholders with an update on the merger with Sequoia Oil & Gas Trust ("Sequoia") to create Evergreen Energy Trust ("Evergreen") and transaction with Trafalgar Energy Ltd. ("Trafalgar").

"Q2 2006 was an excellent quarter for Daylight and its unitholders as our highly experienced technical team delivered production volume increases and excellent financial returns in a challenging environment of higher service costs and lower natural gas prices"

SECOND QUARTER 2006 HIGHLIGHTS

PRODUCTION - INCREASED QUARTER OVER QUARTER

- Q2 2006 production volumes increased 5% to 16,083 boe/d from Q1 2006 of 15,288 boe/d

- Increased Q2 2006 natural gas production 6% to 59.5 MMcf/d from Q1 2006 of 56.0 MMcf/d

- Increased Q2 2006 oil & NGL production 4% to 6,174 bbls/d from Q1 2006 of 5,953 boe/d

- Q2 2006 production volumes increased 10% to 16,083 boe/d from Q2 2005 of 14,648 boe/d

"Daylight delivered increased second quarter production and maintains current production of over 16,000 boe/d. Our quality property base and solid production portfolio provides stable, reliable and predictable production volumes"

CASH FLOW - INCREASED QUARTER OVER QUARTER

- Q2 2006 cash flow increased to $33.2 million from Q1 2006 of $33.0 million

- Cash flow of $0.51 per diluted unit for Q2 2006 equals Q1 2006 level

- Natural gas prices were 20% lower in Q2 2006 versus Q1 2006

- Oil and NGL prices were 23% higher in Q2 2006 versus Q1 2006

- Q2 2006 cash flow increased 8% to $33.2 million from Q2 2005 of $30.6 million

"Daylight's Q2 2006 revenue is balanced between the commodities with 49% of revenue generated from natural gas and 51% of revenue generated from oil and NGLs"

DISTRIBUTIONS - MAINTAINED AT $0.14 PER UNIT PER MONTH

- Q2 2006 payout ratio of 80% maintained at the same level as Q1 2006

- Production volume strength offset the impact of a 20% reduction to natural gas prices versus Q1 2006

- Daylight has provided distributions of $2.89 per unit since inception on November 30, 2004

- Includes the distribution of Open Range Securities at a Net Asset Value ("NAV") of $0.31 per unit

"Daylight's team has delivered an efficient capital and operating program that has grown production and cash flow while maintaining distributions despite cost pressures and weaker natural gas prices"

RESERVES - ADDITIONS IN THE QUARTER

- Q2 2006 total proved plus probable reserves were maintained at 46.6 MMboe

- Includes the impact of seeding Pegasus Oil and Gas Inc. ("Pegasus") with assets

- Organic program added 2.4 MMboe of reserves during 2006 to replace 86% of production

- Reserve Life Index ("RLI") is 7.9 years based on Q2 2006 average production volumes

"Daylight's large prospect inventory drives our highly successful organic program which continues to generate reserve additions and maintains Daylight's RLI at 7.9 years"

OPERATING COSTS - REDUCED QUARTER OVER QUARTER

- Q2 2006 operating costs per boe reduced 3% to $10.44 from Q1 2006 level of $10.79

- Operating costs per boe expected to be maintained at $10.50 for the remainder of 2006

- Operating costs successfully reduced in an environment of increasing cost pressures

"Operating cost initiatives reduced the impact of the 20% lower natural gas price to provide an operating netback reduction of only 5% to $25.92 per boe in Q2 2006 from $27.31 per boe in Q1 2006"

TECHNICAL EXPERTISE AND BUSINESS EXECUTION SKILLS DELIVER CONTINUING SUCCESSES

During the quarter, the Daylight team applied its proven expertise and strong business execution skills to identify and then seed into Pegasus, certain non-core properties in return for equity in Pegasus. Pegasus is a high potential junior exploration company led by the highly successful technical team that was in place at Mustang Resources Inc. At this time the intention is to retain the Pegasus equity holding within a portfolio of investments.

As part of our detailed evaluation of Daylight and Sequoia we identified the core holdings and core expertise that will form the foundation of Evergreen Energy Trust as a top quality intermediate sized energy trust. This process resulted in a re-determination of values, opportunities and non-core properties to be contributed to Trafalgar. Trafalgar is a new exploration company that Evergreen plans to seed with these identified non-core properties in return for common shares and arrangement warrants in Trafalgar. At this time it is our intention to distribute a portion of these common shares and all the arrangement warrants in Trafalgar to Evergreen unitholders and retain a portion of the common shares as a holding within our portfolio of investments, similar to our previously identified Pegasus and Sequoia's Avery holdings.

TECHNICAL EXPERTISE - DELIVERS INCREASED PRODUCTION

- Q2 2006 production volumes increases 795 boe/d to 16,083 boe/d from 15,288 boe/d in Q1 2006

- Organic program delivers excellent results to increase production and maintain reserves

- During 2006 Daylight delivered 100% drilling success with 26 gross (16.6 net) successful wells

- Since inception, Daylight has delivered 100% drilling success with in excess of 100 wells drilled

"During an unprecedented period of demand for services, Daylight's proven operational expertise and long-term relationships enabled the trust to access services and execute its highly successful capital program".

BUSINESS EXECUTION SKILLS - SEEDING HIGH POTENTIAL JUNIOR EXPLORATION ENTITIES

- Pegasus was seeded with approximately 130 boe/d of production volumes during Q2 2006 in exchange for approximately 20% of its initial Class A common shares which are held directly by the Trust

- Trafalgar is to be seeded with approximately 600 to 650 boe/d of production volumes during Q3 2006 in exchange for approximately 50% of its initial equity with 43% to be distributed to unitholders and 7% to be held directly by the Trust

"The Daylight team continues to identify and execute creative and innovative transactions as a part of its core business plan to unlock and deliver value for the benefit of all unitholders"

EVERGREEN ENERGY TRUST - TO BE CREATED BY MERGER OF DAYLIGHT AND SEQUOIA

On July 14, 2006, Daylight and Sequoia announced revised merger terms for the creation of Evergreen, a new intermediate-sized, gas-weighted energy trust, by way of Plan of Arrangement (the "Arrangement"). On July 17, 2006, Daylight and Sequoia announced revised terms with Trafalgar, a high-growth junior exploration company, for the receipt and distribution of Trafalgar common shares and arrangement warrants in connection with the Arrangement for the benefit of Daylight securityholders, Sequoia unitholders and Evergreen unitholders.

EVERGREEN PROVIDES INCREASED VALUE AND EXPANDED OPPORTUNITIES FOR DAYLIGHT

- Production volumes projected to increase 44% to 22,500-23,500 boe/d, net of Trafalgar transaction

- Reserves expected to increase 48% to 70.2 MMboe on a proved plus probable basis

- RLI expected to increase 6% to 8.4 years

- Participation in Trafalgar, a high-growth junior exploration company, which will have a proven high-end technical team, initial production of approximately 600 to 650 boe/d and 55,000 net undeveloped acres

- Significantly expanded portfolio across all commodities and time frames projected to provide a stable, diversified and reliable production profile:

- Near term oil opportunities at Gift, Wildmere and Sturgeon

- Near term, low cost natural gas opportunities at Kaybob and Sylvan

- Medium to long term natural gas resource plays at Sylvan, Chigwell, Obed and Medicine Lodge

- Medium to long term enhanced oil recovery potential at Sturgeon

- High-impact exposure to near term West Pembina oil production from existing wells and future opportunities on additional drilling locations at this premium priced, high well deliverability area

STRATEGIC RATIONALE FOR CREATION OF EVERGREEN IS UNCHANGED

- A synergistic combination of two highly respected technical teams in addition to the added support of proven operational abilities and capacity with a strong, highly motivated leadership team

- An extensive multi-year inventory of high-potential, multi-zone exploitation opportunities to complement the outstanding resource-play opportunities within the asset base

- An excellent property fit, particularly the technical fit of similar plays across the combined properties, allowing Evergreen to leverage its competitive advantage of technical skills across a larger opportunity base

- A substantial suite of opportunities for asset portfolio management to seed additional growth exploration entities with appropriate assets and high-grade the Evergreen asset base

- The opportunity to participate in a high-growth junior exploration company through the distribution of Trafalgar securities to unitholders

- Access to broader capital markets through a larger entity and consideration of an NYSE listing following closing of the transaction

SETTLEMENTS FOR SECURITYHOLDERS UPON COMPLETION OF THE ARRANGEMENT

Daylight unitholders will receive for each Daylight unit held:

- 0.6642 Evergreen units

- 0.0417 Trafalgar common shares - with a NAV of $4.02/share

- 0.0116 Trafalgar arrangement warrants - exercisable at $4.02/warrant

The deemed value of the Trafalgar common shares and arrangement warrants to be distributed for each Daylight unit is expected to be $0.1674.

Daylight exchangeable shareholders will receive the same allocation of securities as Daylight unitholders based on the number of Daylight units the exchangeable shares are exchangeable for upon completion of the Arrangement.

Sequoia unitholders will receive, upon completion of the Arrangement, for each Sequoia unit held:

- 0.8250 Evergreen units

- 0.0517 Trafalgar common shares - with a NAV of $4.02/share

- 0.0144 Trafalgar arrangement warrants - exercisable at $4.02/warrant

The deemed value of the Trafalgar common share and Arrangement warrants to be distributed for each Sequoia unit is expected to be $0.2080.

All Trafalgar common share and arrangement warrant amounts are after giving effect to a proposed 1 for 3 share consolidation by Trafalgar.

JOINT INFORMATION CIRCULAR AND UNITHOLDER MEETINGS

Both Daylight and Sequoia will include Q2 2006 actual financial and operating results in the Joint Information Circular. The time required to complete the joint information circular, receive regulatory and court approvals results in an anticipated mailing date of August 21, 2006 with an estimated meeting date of September 19, 2006. Daylight will confirm and press release the final dates as the joint information circular is completed and mailed.

Daylight securityholders will continue to benefit from our highly experienced team's ability to execute at favorable metrics and convert opportunities into long-term value creation. Evergreen's combination of Daylight and Sequoia into a single integrated team will match very strong technical personal with a proven management to an excellent property and diversified production base.

The combined technical teams continue to be integrated quickly and efficiently with a continuing focus on managing and upgrading Evergreen's asset base for the benefit of all securityholders. Evergreen will continue to pursue innovative transactions including the seeding of new junior exploration entities such as Open Range, Pegasus and now Trafalgar for the distribution to unitholders or equity holding by Evergreen. In addition, Evergreen will maintain its exposure to international opportunities in Australia with a 44% fully-diluted interest in Avery Resources Inc., a TSX Venture Exchange listed company.

Daylight has enjoyed another excellent quarter of financial and operating results. Despite the necessity to revise the terms of our planned arrangement with Sequoia we have benefited from the time and opportunity to conduct an extended and detailed evaluation. Both entities are secure in the value and benefits of the transaction and the additional time re-enforced our views of the added value and potential of the merged entities.

As a result, we are fully confident Evergreen Energy Trust will be well managed with a very solid, well balanced and opportunity rich asset base and an excellent combined technical and operations team that is well positioned to deliver solid predictable returns to our unitholders.



Signed: Signed:
"Fred Woods" "Anthony Lambert"
Fred Woods Anthony Lambert
Executive Chairman President & CEO

July 31, 2006


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion & Analysis ("MD&A") is dated July 28, 2006 and should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes for the six months ended June 30, 2006 and 2005 as well as the MD&A and 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"). The following MD&A compares the results of the three months ended June 30, 2006 ("Q2 2006") to the three months ended June 30, 2005 ("Q2 2005") and to the three months ended March 31, 2006 ("Q1 2006"). The MD&A also compares the results of the six months ended June 30, 2006 ("YTD 2006") to the six months ended June 30, 2005 ("YTD 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 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. 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 statements contained within the Management Discussion and Analysis, and in certain documents incorporated by reference into this document, constitute forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "budget", "plan", "continue", "estimate", "expect", "forecast", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. We believe the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in, or incorporated by reference into, this Management Discussion and Analysis should not be unduly relied upon. These statements speak only as of the date of this Management Discussion and Analysis or as of the date specified in the documents incorporated by reference into this Management Discussion and Analysis, as the case may be.

In particular, this Management Discussion and Analysis, and the documents incorporated by reference, contain forward-looking statements pertaining to the following:

- the performance characteristics of our oil and natural gas properties;

- oil and natural gas production levels;

- the size of the oil and natural gas reserves;

- projections of market prices and costs;

- supply and demand for oil and natural gas;

- expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development;

- treatment under governmental regulatory regimes and tax laws; and

- capital expenditures programs.

The actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere in this Management Discussion and Analysis:

- volatility in market prices for oil and natural gas;

- liabilities inherent in oil and natural gas operations;

- uncertainties associated with estimating oil and natural gas reserves;

- competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel;

- incorrect assessments of the value of acquisitions;

- geological, technical, drilling and processing problems;

- changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry and income trusts; and

- the other factors discussed under "Risks and Uncertainties" in the annual Management and Discussion Analysis.

Statements relating to "reserves" or "resources" are deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future. Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward looking statements contained in this Management Discussion and Analysis and the documents incorporated by reference herein are expressly qualified by this cautionary statement. We do not undertake any obligation to publicly update or revise any forward-looking statements.

Evergreen Energy Trust to be Created upon Merger of Daylight and Sequoia Oil and Gas Trust

On April 20, 2006, Daylight and Sequoia Oil and Gas Trust ("Sequoia") announced that they had entered into an agreement to merge and create a new trust ("New Trust") and convey assets from both companies to create a new junior exploration company ("ExploreCo"). On June 14, 2006 Daylight and Sequoia announced that the New Trust would be named Evergreen Energy Trust ("Evergreen") and that the ExploreCo transaction would be completed with Trafalgar Energy Ltd. ("Trafalgar"). On July 14, 2006 Daylight and Sequoia announced that based on many factors, which included the Q2 2006 production levels of Sequoia, the original merger terms had been revised. On July 17, 2006 Daylight and Sequoia announced revised terms with Trafalgar.

The transaction will be conducted by way of a Plan of Arrangement (the "Arrangement") and is subject to approval by Daylight Securityholders (including holders of Trust Units and Exchangeable Shares), Sequoia Unitholders and Trafalgar shareholders. Pursuant to the Arrangement, under the original and revised terms, certain oil and natural gas properties will be transferred to Trafalgar in exchange for common shares and arrangement warrants of Trafalgar which will be distributed to the Daylight Securityholders and Sequoia Unitholders with a portion of the Trafalgar common shares remaining with Evergreen.

Under the Arrangement each Daylight Unitholder will receive 0.6642 units (originally 0.6642 units) of Evergreen for each one Daylight unit held and Daylight Exchangeable Shareholders will receive 0.6642 units (originally 0.6642 units) of Evergreen for each Trust unit the Exchangeable Shares held are equivalent to at the closing date of the Arrangement. Under the Arrangement each Sequoia Unitholder will receive 0.8250 units (originally 1.0000 unit) of Evergreen for each one Sequoia unit held. Under the Arrangement, Daylight expects its Unitholders to receive approximately 62% of the outstanding units of Evergreen.

In certain circumstances where Daylight or Sequoia is determined to be in a material breach of an agreement covenant a break fee of up to $15 million may be payable by the party in material breach to the other entity.

Administrative & Technical Services Agreement and Relationship with Midnight Oil Exploration Ltd.

Since November 30, 2004, Daylight Energy and Midnight Oil Explorations Ltd. ("MOX") have been operating pursuant to 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. 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. Pursuant to Daylight's proposed merger with Sequoia, Daylight and Midnight have announced their intention to terminate the agreement on mutually acceptable terms.



HIGHLIGHTS
------------------------------------------------------------------------
Financial
(CDN$ thousands,
except unit, per unit Q2 Q1 Q2 YTD YTD
and operational data) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 68,554 $ 66,187 $ 60,529 $ 134,741 $ 114,513
Royalties (13,985) (12,455) (10,506) (26,440) (20,846)
Realized gain on
commodity derivatives - - 59 - 59
Operating expenses (15,286) (14,848) (13,184) (30,134) (25,512)
Transportation (1,354) (1,309) (950) (2,663) (1,380)
------------------------------------------------------------------------
Operating netback 37,929 37,575 35,948 75,504 66,834
G&A - cash charge (2,625) (2,596) (2,108) (5,221) (4,095)
Cash financial charges (2,286) (1,699) (2,861) (3,985) (5,445)
Cash taxes 167 (255) (347) (88) (591)
------------------------------------------------------------------------
Cash flow 33,185 33,025 30,632 66,210 56,703
Per unit - Basic 0.52 0.53 0.68 1.05 1.31
- Diluted 0.51 0.51 0.59 1.02 1.12
------------------------------------------------------------------------
Net income 15,735 12,093 12,201 27,828 18,088
Per unit - Basic 0.25 0.19 0.27 0.44 0.42
- Diluted 0.25 0.19 0.26 0.44 0.42
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Cash distributions
declared 26,663 26,407 16,283 53,070 31,245
Per unit 0.42 0.42 0.36 0.84 0.72
Payout ratio 80% 80% 53% 80% 55%
------------------------------------------------------------------------
Capital expenditures 21,034 35,378 14,086 56,412 28,473
Non-cash capital
divestitures (6,628) - - (6,628) -
Corporate acquisitions - - 61,000 - 61,000
------------------------------------------------------------------------
Wells drilled - gross
(net) 5 (1.0) 21 (15.6) 5 (3.4) 26 (16.6) 22 (12.0)
------------------------------------------------------------------------
Bank debt 165,114 162,190 131,755 165,114 131,755
Market value of
investments 5,783 - - 5,783 -
Working capital
deficiency 28,931 17,048 11,602 28,931 11,602
------------------------------------------------------------------------
Total assets 833,821 845,746 676,212 833,821 676,212
------------------------------------------------------------------------
Units outstanding (000s)
Basic 63,548 63,025 45,338 63,548 45,338
Diluted 66,771 66,411 56,209 66,771 56,209
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------------------------------------------------------------------------
Operational
------------------------------------------------------------------------
Average daily production
Natural gas (mcf/d) 59,452 56,012 57,890 57,742 58,380
Light oil (bbls/d) 2,855 2,575 2,292 2,716 2,505
Heavy oil (bbls/d) 2,579 2,701 1,937 2,640 974
NGLs (bbls/d) 740 677 771 709 831
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 6,174 5,953 5,000 6,065 4,310
------------------------------------------------------------------------
Combined (boe/d) 16,083 15,288 14,648 15,689 14,040
------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 6.18 $ 7.77 $ 7.51 $ 6.95 $ 7.18
Light oil ($/bbl) 71.78 65.55 62.80 68.84 59.40
Heavy oil ($/bbl) 52.01 34.29 23.49 42.99 23.49
NGLs ($/bbl) 63.05 60.50 52.71 61.81 49.32
------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 62.48 $ 50.79 $ 46.02 $ 56.76 $ 49.34
------------------------------------------------------------------------
Combined ($/boe) $ 46.84 $ 48.10 $ 45.41 $ 47.45 $ 45.06
------------------------------------------------------------------------
Petroleum and natural
gas revenues ($/boe)$ 46.84 $ 48.10 $ 45.41 $ 47.45 $ 45.06
Royalties ($/boe) (9.56) (9.05) (7.88) (9.31) (8.20)
Realized on commodity
derivatives ($/boe) - - 0.04 - 0.02
Operating expenses
($/boe) (10.44) (10.79) (9.89) (10.61) (10.04)
Transportation ($/boe) (0.93) (0.95) (0.71) (0.94) (0.54)
------------------------------------------------------------------------
Operating netback
($/boe) $ 25.92 $ 27.31 $ 26.97 $ 26.59 $ 26.30
G&A cash charge
($/boe) (1.79) (1.89) (1.58) (1.84) (1.61)
Cash financial
charges ($/boe) (1.56) (1.23) (2.15) (1.40) (2.14)
Cash taxes ($/boe) 0.11 (0.19) (0.26) 0.03 (0.23)
------------------------------------------------------------------------
Cash flow ($/boe) $ 22.67 $ 24.00 $ 22.98 $ 23.32 $ 22.32
------------------------------------------------------------------------
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 total production volumes for Q2 2006 averaged 16,083 boe per day which is a 5% increase from Q1 2006. Q2 2006 production is comprised of 59,452 mcf per day of natural gas, 2,855 bbls per day of light oil, 2,579 bbls per day of heavy oil and 740 bbls per day of natural gas liquids ("NGLs"). Production for Q2 2006 increased 10% over Q2 2005 due to corporate acquisitions and a highly successful winter capital program in 2005/2006. Production for the YTD 2006 averaged 15,689 a 12% increase from the corresponding period in 2005.



------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
Natural gas (mcf/day) 59,452 56,012 57,890 57,742 58,380
Light oil (bbls/day) 2,855 2,575 2,292 2,716 2,505
Heavy oil (bbls/day) 2,579 2,701 1,937 2,640 974
NGLs (bbls/day) 740 677 771 709 831
------------------------------------------------------------------------
Combined oil & NGLs
(bbls/day) 6,174 5,953 5,000 6,065 4,310
------------------------------------------------------------------------
Combined all products
(boe/day) 16,083 15,288 14,648 15,689 14,040
------------------------------------------------------------------------
------------------------------------------------------------------------


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 and Beaverlodge

- Eastern properties of Wildmere, Bon Accord, Norris 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 2006 the WTI price has been very strong which has enhanced the price realized by Daylight on its oil production.

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 Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
AECO ($Cdn/mcf) $ 5.87 $ 7.34 $ 7.23 $ 6.58 $ 7.00
WTI ($US/bbl) 70.51 63.34 53.11 66.95 51.51
Edmonton Par ($Cdn/bbl) 79.06 69.27 65.93 74.16 64.08
Bow River ($Cdn/bbl) 60.91 40.19 40.65 50.55 42.71
Exchange rate ($Cdn/$US) 0.8918 0.8662 0.8039 0.8790 0.8098
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Daylight prices realized: Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
Natural gas ($/mcf) $ 6.18 $ 7.77 $ 7.51 $ 6.95 $ 7.18
Light oil ($/bbl) 71.78 65.55 62.80 68.84 59.40
Heavy oil ($/bbl) 52.01 34.29 23.49 42.99 23.49
NGLs ($/bbl) 63.05 60.50 52.71 61.81 49.32
------------------------------------------------------------------------
Combined oil & NGLs
($/bbl) 62.48 50.79 46.02 56.76 49.34
------------------------------------------------------------------------
Combined all products
($/boe) $ 46.84 $ 48.10 $ 45.41 $ 47.45 $ 45.06
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's natural gas price during Q2 2006 was $6.18/mcf representing a 5% premium to AECO in the quarter. YTD 2006 gas price was $6.95/mcf representing a 6% premium to AECO. Daylight has consistently realized a slight premium to AECO on its natural gas sales and expects this to continue for the remainder of 2006. With the decrease in natural gas prices during 2006, Daylight's realized price for YTD 2006 was 3% lower than YTD 2005 realized price. The Q2 2006 natural gas price was 18% lower than the price realized in Q2 2005 and 20% lower than the price realized in Q1 2006.

Daylight's light oil price generally correlates with the Edmonton par price. For Q2 2006, Daylight's light oil realized $71.78/bbl, 91% of the Edmonton par price, while in Q1 2006 this production realized $65.55/bbl, 95% of the Edmonton par price, for a combined YTD 2006 realized price of $68.84/bbl, 93% of the Edmonton par price. On a per barrel basis, Daylight's price has increased from the corresponding periods in 2005 in line with the increases in Edmonton par price.

Daylight's heavy oil price does not consistently correlate with the established heavy oil reference price - Bow River. Daylight's Wildmere production is generally heavier than Bow River specifications and has been subject to large variances in realized pricing, while heavy oil acquired from Tempest in the Chipman area is lighter than Bow River and generally correlates to 75 - 80 % of Edmonton Par. During Q2 2006 Daylight's heavy oil price realized 85% of the Bow River price which is a 52% increase from Q1 2006. YTD 2006 heavy oil price of $42.99/bbl is 83% higher than the YTD 2005 heavy oil price of $23.49/bbl as Daylight's heavy oil blend has changed and the realized price of Wildmere heavy oil was significantly higher during the 2006 period. The price of heavy oil is influenced by many factors including the price of condensate and we expect the realized price will continue to fluctuate. Daylight only had heavy oil production for the last three months of YTD 2005.

Daylight's combined oil and NGLs price during Q2 2006 was $62.48/bbl and $56.76/bbl for the YTD 2006 period which represents a 36% and 15% increase from the corresponding periods in 2005.

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



Revenue
------------------------------------------------------------------------
(000s) Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
Natural gas $ 33,415 $ 39,176 $ 39,565 $ 72,591 $ 75,900
Light oil 18,649 15,191 13,099 33,840 26,934
Heavy oil 12,206 8,336 4,141 20,542 4,141
NGLs 4,246 3,686 3,698 7,932 7,419
Other 38 (202) 26 (164) 119
------------------------------------------------------------------------
Total $ 68,554 $ 66,187 $ 60,529 $ 134,741 $114,513
------------------------------------------------------------------------
------------------------------------------------------------------------


Production increased by 5% on a per boe basis, with a corresponding 4% increase in revenue for Q2 2006 to $68.6 million. Natural gas sales for Q2 2006 were $33.4 million, a decrease of 15% from Q1 2006. Light oil sales for Q2 2006 were $18.6 million, up 23% from Q1 2006, heavy oil sales for Q2 2006 were $12.2 million, up 46% from Q1 2006, and NGLs sales for Q2 2006 were $4.2 million, up 15% from Q1 2006. The increases in oil and NGLs prices offset the 20% decrease in gas prices. For the YTD 2006 period, Daylight realized a 4% decrease in natural gas sales, a 26% increase in light oil sales, a 396% increase in heavy oil sales, and a 7% increase in NGL sales over the YTD 2005 period. The YTD 2005 period contains only 3 months of heavy oil production.

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.



------------------------------------------------------------------------
Royalties by type Q2 Q1 Q2 YTD YTD
(000s) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Crown royalties, net of
ARTC $ 11,190 $ 9,979 $ 7,783 $ 21,169 $ 17,250
Freehold royalties 1,625 1,282 1,102 2,907 1,391
Overriding royalties 1,170 1,194 1,621 2,364 2,205
------------------------------------------------------------------------
Total $ 13,985 $ 12,455 $ 10,506 $ 26,440 $ 20,846
------------------------------------------------------------------------
$ per boe $ 9.56 $ 9.05 $ 7.88 $ 9.31 $ 8.20
------------------------------------------------------------------------
% of revenue 20.4 18.8 17.4 19.6 18.2
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Royalties by commodity Q2 Q1 Q2 YTD YTD
(000s) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Natural gas $ 7,121 $ 8,652 $ 6,696 $ 15,773 $ 13,890
Oil and NGLs 6,864 3,803 3,810 10,667 6,956
------------------------------------------------------------------------
Total $ 13,985 $ 12,455 $ 10,506 $ 26,440 $ 20,846
------------------------------------------------------------------------
Natural gas
($ per boe) $ 7.90 $ 10.30 $ 7.63 $ 9.06 $ 7.89
Oil and NGLs
($ per boe) 12.22 7.10 8.37 12.22 8.92
------------------------------------------------------------------------
Total ($ per boe) $ 9.56 $ 9.05 $ 7.88 $ 9.31 $ 8.20
------------------------------------------------------------------------
Natural gas
(% of revenue) 21.3 22.1 16.9 21.7 18.3
Oil and NGLs
(% of revenue) 19.6 14.0 18.2 17.1 18.1
------------------------------------------------------------------------
Total (% of revenue) 20.4 18.8 17.4 19.6 18.2
------------------------------------------------------------------------
------------------------------------------------------------------------


Overall royalty rates increased 8% in Q2 2006 over Q1 2006. Natural gas rates decreased slightly, but oil and NGLs royalties increased 40% due to increased prices and increased production from areas with higher rates. Rates increased 8% for the first six months of 2006 to 19.6% of revenue from 18.2% for the same period last year. Gas royalties decreased to 21.3% of gas revenue in Q2 2006 from 22.1% in Q1 2006. Oil and NGLs royalties increased to 19.6% of oil and NGL revenue during Q2 2006 over Q1 2006 rate of 14.0%. Royalties on a dollar per boe basis increased 6% from Q1 2006.

Gain (loss) on Commodity Derivatives

Daylight did not have any commodity derivatives in place during YTD 2006. The Trust may enter into financial or commodity derivatives to manage commodity prices, foreign exchange and interest rate risk.

In conjunction with the Flowing acquisition in Q2 2005, 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 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.

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 $8.60 per mcf and WTI oil is approximately US$76.00 per barrel. Daylight's budgeted prices for 2006 are $7.00 per mcf for natural gas and US$69.00 per barrel WTI for oil as well as a United States dollar to Canadian dollar exchange rate of 0.89.

Operating Expenses

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



------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
(000s) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Operating costs $ 15,286 $ 14,848 $ 13,184 $ 30,134 $ 25,512
$ per boe $ 10.44 $ 10.79 $ 9.89 $ 10.61 $ 10.04
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight experienced a 3% decrease to operating costs on a per boe basis during Q2 2006 over Q1 2006 resulting in an operating cost of $10.44 per boe. Daylight's YTD 2006 operating expenses of $10.61 reflects an increase of 6% over YTD 2005.

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, and a small portion of its light oil, production are delivered to a terminal by truck and as such bear trucking charges which are 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 of $1,354,000 in Q2 2006, or $0.93 per boe, stayed consistent on a per boe basis from Q1 2006 where costs were $0.95/boe. For the YTD 2006 period, the transportation charge of $0.94/boe increased from $0.54/boe in the same period in 2005 as there was no heavy oil production in Q1 2005.



------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
(000s) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Transportation costs $ 1,354 $ 1,309 $ 950 $ 2,663 $ 1,380
$ per boe $ 0.93 $ 0.95 $ 0.71 $ 0.94 $ 0.54
------------------------------------------------------------------------
------------------------------------------------------------------------


Operating Netbacks

------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
$ per boe 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Revenue $ 46.84 $ 48.10 $ 45.41 $ 47.45 $ 45.06
Royalties (9.56) (9.05) (7.88) (9.31) (8.20)
Commodity Derivative
- realized - - 0.04 - 0.02
Operating cost (10.44) (10.79) (9.89) (10.61) (10.04)
Transportation (0.93) (0.95) (0.71) (0.94) (0.54)
------------------------------------------------------------------------
Operating netback $ 25.92 $ 27.31 $ 26.97 $ 26.59 $ 26.30
------------------------------------------------------------------------
------------------------------------------------------------------------


General and Administrative Expenses

------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
(000s) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Gross G&A $ 5,867 $ 5,594 $ 4,989 $ 11,461 $ 9,131
Recoveries from MOX (1,082) (1,003) (601) (2,085) (1,130)
Operating recoveries (1,149) (1,033) (863) (2,182) (1,775)
Capitalized costs (1,011) (962) (1,417) (1,973) (2,131)
------------------------------------------------------------------------
2,625 2,596 2,108 5,221 4,095
Unit based compensation 1,506 1,251 726 2,757 1,112
------------------------------------------------------------------------
Net G&A $ 4,131 $ 3,847 $ 2,834 $ 7,978 $ 5,207
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
$ per boe 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Gross G&A $ 4.01 $ 4.07 $ 3.74 $ 4.04 $ 3.59
Recoveries from MOX (0.74) (0.74) (0.45) (0.74) (0.44)
Operating recoveries (0.79) (0.75) (0.65) (0.77) (0.70)
Capitalized costs (0.69) (0.70) (1.06) (0.69) (0.84)
------------------------------------------------------------------------
1.79 1.89 1.58 1.84 1.61
Unit based compensation 1.03 0.91 0.54 0.97 0.44
------------------------------------------------------------------------
Net G&A $ 2.82 $ 2.80 $ 2.12 $ 2.81 $ 2.05
------------------------------------------------------------------------
------------------------------------------------------------------------


General and administrative expenses ("G&A") during Q2 2006 were $4,131,000 ($2.82 per boe) including non-cash unit based compensation of $1,506,000 ($1.03 per boe). General and administrative expense for Q1 2006 was $3,847,000 ($2.80 per boe) including non-cash unit based compensation of $1,251,000 ($0.91 per boe). YTD 2006 G&A expenses were $7,978,000 ($2.81 per boe) including non-cash unit based compensation of $2,757,000 ($0.97 per boe) which represents a 53% increase on an absolute basis and a 37% increase on a per boe basis from the same period in 2005.

Pursuant to the Administrative and Technical Services Agreement, Daylight Energy charged MOX $968,000 relating to general and administrative activities for the YTD 2006 period (2005 - $385,000) and $1,117,000 relating to capital expenditures for the YTD 2006 period (2005 - $745,000).

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 4.9% for the Q2 2006 and 4.6% for YTD 2006 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. 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%.



------------------------------------------------------------------------
(000s) Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
Bank debt interest $ 2,178 $ 1,529 $ 1,273 $ 3,707 $ 2,220
Convertible debenture
interest 108 170 1,588 278 3,225
------------------------------------------------------------------------
Cash financial charges 2,286 1,699 2,861 3,985 5,445
Amortization of
financial charges 36 42 178 78 359
Accretion of
convertible debenture
discount 6 11 107 17 218
------------------------------------------------------------------------
Total $ 2,328 $ 1,752 $ 3,146 $ 4,080 $ 6,022
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
$ per boe Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
Bank debt interest $ 1.49 $ 1.11 $ 0.96 $ 1.31 $ 0.87
Convertible debenture
interest 0.07 0.12 1.19 0.10 1.27
------------------------------------------------------------------------
Cash financial charges 1.56 1.23 2.15 1.41 2.14
Amortization of
financial charges 0.02 0.03 0.13 0.03 0.14
Accretion of
convertible debenture
discount - 0.01 0.08 0.01 0.09
------------------------------------------------------------------------
Total $ 1.58 $ 1.27 $ 2.36 $ 1.45 $ 2.37
------------------------------------------------------------------------
------------------------------------------------------------------------


Depletion, Depreciation and Accretion

Daylight's depletion, depreciation and accretion for Q2 2006 totalled $24.8 million and $48.0 million for YTD 2006, a 33% and 23% increase over the corresponding periods in 2005. Q2 2006 charges increased $1.5 million from Q1 2006 resulting from higher production as the charge on a per boe basis has remained relatively consistent.



------------------------------------------------------------------------
(000s) Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
Depletion and
Depreciation $ 24,323 $ 22,785 $18,320 $ 47,108 $ 38,356
Accretion 446 440 365 886 700
------------------------------------------------------------------------
Total $ 24,769 $ 23,225 $18,685 $ 47,994 $ 39,056
------------------------------------------------------------------------
------------------------------------------------------------------------


$ per boe
------------------------------------------------------------------------
Depletion and
Depreciation $ 16.62 $ 16.56 $ 13.74 $ 16.59 $ 15.09
Accretion 0.30 0.32 0.27 0.31 0.28
------------------------------------------------------------------------
Total $ 16.92 $ 16.88 $ 14.02 $ 16.90 $ 15.37
------------------------------------------------------------------------
------------------------------------------------------------------------


Future Income and Capital Taxes

During Q2, several tax rate reductions were substantively enacted, both federally and provincially, resulting in the reduction of future taxes and the elimination of the Large Corporations Tax provision. During YTD 2006 Daylight recognized cash taxes of $88,000 related to Saskatchewan capital tax obligations and a future income tax reduction of $13,032,000 compared to cash taxes of $591,000 related to capital tax obligations and a future income tax reduction of $3,231,000 for the same period in 2005. For the three months ended Q2 2006, Daylight recognized a reduction of cash taxes of $167,000 related to capital tax obligations and a future income tax reduction of $9,168,000. 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.



------------------------------------------------------------------------
(000s) Q2 Q1 Q2 YTD YTD
2006 2006 2005 2006 2005
------------------------------------------------------------------------
Future Tax $ (9,168) $ (3,864) $(2,044) $(13,032) $ (3,231)
Capital Tax (167) 255 347 88 591
------------------------------------------------------------------------
Total $ (9,335) $ (3,609) $(1,697) $(12,944) $ (2,640)
------------------------------------------------------------------------
------------------------------------------------------------------------


$ per boe
------------------------------------------------------------------------
Future Tax $ (6.26) $ (2.81) $ (1.53) $ (4.59) $ (1.27)
Capital Tax (0.11) 0.19 0.26 0.03 0.23
------------------------------------------------------------------------
Total $ (6.37) $ (2.62) $ (1.27) $ (4.56) $ (1.04)
------------------------------------------------------------------------
------------------------------------------------------------------------


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 income attributed to the non-controlling interest was $568,000 for YTD 2006 (2005 - $809,000).

Net Income and Cash Flow

As a result of the previously discussed factors, Daylight recognized Q2 2006 net income of $15.7 million ($10.52/boe, $0.25/unit-basic, $0.25/unit-diluted) and cash flow of $33.2 million ($22.67/boe, $0.52/unit-basic, $0.51/unit-diluted). For the YTD 2006 period, Daylight recognized net income of $27.8 million ($9.68/boe, $0.44/unit-basic, $0.44/unit-diluted) and cash flow of $66.2 million ($23.32/boe, $1.05/unit-basic, $1.02/unit-diluted). Results from the comparative periods are presented below.



------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
(000s) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Net income $ 15,735 $ 12,093 $ 12,201 $ 27,828 $ 18,088
Per boe $ 10.75 $ 8.79 $ 9.15 $ 9.80 $ 7.12
------------------------------------------------------------------------
Per Unit
Basic $ 0.25 $ 0.19 $ 0.27 $ 0.44 $ 0.42
Diluted $ 0.25 $ 0.19 $ 0.26 $ 0.44 $ 0.42
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash flow $ 33,185 $ 33,025 $ 30,632 $ 66,210 $ 56,703
Per boe $ 22.67 $ 24.00 $ 22.98 $ 23.32 $ 22.31
------------------------------------------------------------------------
Per Unit
Basic $ 0.52 $ 0.53 $ 0.68 $ 1.05 $ 1.31
Diluted $ 0.51 $ 0.51 $ 0.59 $ 1.02 $ 1.12
------------------------------------------------------------------------
------------------------------------------------------------------------


Daylight's cash flow is significantly influenced by production volumes and commodity prices. Daylight has budgeted prices for 2006 of $7 per mcf for natural gas and US$69 per bbl WTI for oil as well as a United States dollar to Canadian dollar exchange rate of 0.89.

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 US$1.00 change in the WTI oil price per bbl.

- $1.5 million per 1 mmcf per day change in production.

- $1.7 million per 100 bbl per day change in light oil production.

- $1.0 million per 100 bbl per day change in heavy oil production.

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

- $1.5 million per $0.01 change in the United States dollar to Canadian dollar exchange rate.

Capital Expenditures

Daylight invested $21.0 million on its capital expenditure program for the three months ended June 30, 2006 compared to $35.4 million in Q1 2006 and $14.1 million in Q2 2005. YTD 2006 capital expenditures were $56.4 million compared to $28.5 million in the comparative period in 2005.



------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
(000s) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
Land and
acquisitions $ 189 $ 5,109 $ 316 $ 5,298 $ 1,001
Geological and
geophysical 1,737 3,101 1,514 4,838 2,466
Drill, complete
and recomplete 11,465 18,201 7,791 29,666 16,027
Equipping and
facilities 7,643 8,967 4,465 16,610 8,979
------------------------------------------------------------------------
------------------------------------------------------------------------
Gross Capital
Expenditures $ 21,034 $ 35,378 $ 14,086 $ 56,412 $ 28,473
Conveyance to Pegasus (6,628) - - (6,628) -
------------------------------------------------------------------------
Net Capital Additions $ 14,406 $ 35,378 $ 14,086 $ 49,784 $ 28,473
------------------------------------------------------------------------
------------------------------------------------------------------------


YTD 2006 Daylight drilled a total of 26 gross (16.6 net) wells with 100% success. This program provided production and reserve additions within the following core areas:

- West Central properties including Pine Creek, Kaybob, Fir and Windfall. YTD 2006 Daylight drilled 4 gross (2.9 net) natural gas wells.

- Peace River Arch properties include Red Earth, Cecil, Beaverlodge, Sinclair and Elmworth. YTD 2006 Daylight drilled 8 gross (2.8 net) wells comprised of 7 gross (2.7 net) light oil wells and 1 gross (0.1 net) natural gas wells.

- Eastern properties include Wildmere, Bon Accord, Norris, Chigwell, Calling Lake and Chipman. YTD 2006 Daylight drilled 14 gross (10.9 net) wells comprised of 6 gross (5.5 net) heavy oil wells, 1 gross (0.2 net) light oil wells and 7 gross (5.2 net) natural gas wells.

Investments

On June 23, 2006, Daylight closed a transaction with Pegasus Oil & Gas Inc. ("Pegasus"), whereby Daylight contributed non-core assets in Sunrise, Hines Creek and 50% of its interest in Chigwell valued at $6.0 million to Pegasus in exchange for 1,840,000 class A common shares of Pegasus and a $1.4 million promissory note. Immediately prior to this transaction, Daylight also participated in the initial private placement of Pegasus and contributed $120,000 in exchange for 600,000 class A common shares. At June 30, 2006 450,000 of the class A common shares were held in escrow with 150,000 class A common shares being released on each of December 29, 2006, June 29, 2007 and December 29, 2007.

Pegasus is a public company trading on the TSX Venture Exchange under the symbols POG.A and POG.B. Daylight owns 2,440,000 class A common shares of Pegasus. On June 30, 2006, the class A shares closed at $2.37 and on July 28, 2006 they closed at $2.55. Daylight accounts for this investment at cost and may consider monetizing this asset in the future.

Distributions

During the six months ended June 30, 2006, Daylight declared six monthly cash distributions totalling $53.1 million ($0.84 per Trust Unit). During the same period in 2005 Daylight declared six monthly cash distributions totalling $31.2 million ($0.72 per Trust Unit). 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 six months ended June 30, 2006, Daylight issued 179,954 trust units from treasury for the DRIP in lieu of cash distributions totalling $2,016,000.



Liquidity and Capital Resources
------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
(000s) 2006 2006 2005 2005
------------------------------------------------------------------------
Bank debt $ 165,114 $ 162,190 $ 123,455 $ 131,755
Market value of
investments (5,783) - - -
Working capital
deficiency 28,931 17,048 26,575 11,602
------------------------------------------------------------------------
188,262 179,238 150,030 143,357
Convertible debentures 3,973 6,996 9,219 72,919
Non-controlling interest-
exchangeable shares 9,758 9,783 19,422 17,713
Unitholders' equity $ 530,271 $ 536,051 $ 535,846 $ 377,675
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2006, Daylight had $165 million outstanding on its credit facilities which provide up to $180 million and are subject to semi-annual review by the banking syndicate. Daylight's working capital deficiency at June 30, 2006 was $28.9 million.

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 in exchange for the equity of acquired entities such as the Flowing acquisition that closed on April 5, 2005, the Tempest acquisition that closed on November 30, 2005 and the planned Evergreen Energy Trust transaction announced on April 20, 2006 and revised on July 14, 2006 or may require the issuance of new equity through a public offering.

Trust Unit Information

Daylight units trade on the Toronto Stock Exchange 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.



------------------------------------------------------------------------
Q2 Q1 Q2 YTD YTD
(per unit) 2006 2006 2005 2006 2005
------------------------------------------------------------------------
High $ 13.50 $ 12.70 $ 10.40 $ 13.50 $ 11.05
Low $ 10.41 $ 10.53 $ 9.26 $ 10.41 $ 9.26
Close $ 11.00 $ 12.18 $ 10.00 $ 11.00 $ 10.00
Average daily volume 318,338 423,782 232,171 371,475 312,747
------------------------------------------------------------------------
------------------------------------------------------------------------

As at June 30, 2006, Daylight has the following trust units and trust
unit equivalents outstanding:

------------------------------------------------------------------------
Number
------------------------------------------------------------------------
Trust Units 63,548,162
Exchangeable shares (830,523) 1,046,501
Convertible debentures ($4,053,000 face value) 426,632
Restricted trust unit awards (1,153,851) 1,308,401
Performance trust unit awards (290,000) 441,061
------------------------------------------------------------------------
Total Diluted 66,770,757
------------------------------------------------------------------------
------------------------------------------------------------------------

As at July 28, 2006, Daylight has the following trust units and trust
Unit equivalents outstanding:

------------------------------------------------------------------------
Number
------------------------------------------------------------------------
Trust Units 63,601,097
Exchangeable shares (830,523) 1,046,501
Convertible debentures ($3,790,000 face value) 398,947
Restricted trust unit awards (1,150,685) 1,321,418
Performance trust unit awards (290,000) 446,673
------------------------------------------------------------------------
Total Diluted 66,814,636
------------------------------------------------------------------------
------------------------------------------------------------------------


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, 2006, with a face value of $4.1 million, had a fair value based on quoted market value of $5.0 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 and YTD 2006 filings, that Daylight's disclosure controls and procedures for the year ended December 31, 2005 and the six month period ended June 30, 2006, 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.

Critical Accounting Estimates and Changes in Accounting Policies

There have been no changes in our critical accounting estimates, nor changes in accounting policies.



Quarterly Information

------------------------------------------------------------------------
Financial 2006
-----------------
(in thousands of dollars,
except unit, Q2 Q1
per unit and boe data)
------------------------------------------------------------------------
Petroleum and natural gas
revenues $68,554 $66,187
Royalties (13,985) (12,455)
Realized gain (loss) on
commodity derivative - -
Operating expenses (15,286) (14,848)
Transportation (1,354) (1,309)
------------------------------------------------------------------------
Operating netback 37,929 37,575
Interest income - -
G&A - cash charge (2,625) (2,596)
Cash financial charges (2,286) (1,699)
Cash taxes 167 (255)
------------------------------------------------------------------------
Cash flow 33,185 33,025
Per unit - Basic 0.52 0.53
- Diluted 0.51 0.51
------------------------------------------------------------------------
Net income 15,735 12,093
Per unit - Basic 0.25 0.19
- Diluted 0.25 0.19
------------------------------------------------------------------------
Cash distributions declared 26,663 26,407
Per unit 0.42 0.42
Payout ratio 80% 80%
------------------------------------------------------------------------
Capital expenditures 21,034 35,378
Non-cash capital
divestitures (6,628) -
Corporate acquisitions - -
------------------------------------------------------------------------

Wells drilled - gross (net) 5(1.0) 21(15.6)
------------------------------------------------------------------------
Bank debt 165,114 162,190
Market value of investments 5,783 -
Working capital deficiency 28,931 17,048
------------------------------------------------------------------------
Total assets 833,821 845,746
------------------------------------------------------------------------
Units outstanding (000s)
Basic 63,548 63,025
Diluted 66,771 66,411
------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcf/d) 59,452 56,012
Light oil (bbls/d) 2,855 2,575
Heavy oil (bbls/d) 2,579 2,701
NGLs (bbls/d) 740 677
------------------------------------------------------------------------
Oil & NGLs (bbls/d) 6,174 5,953
------------------------------------------------------------------------
Combined (boe/d) 16,083 15,288
------------------------------------------------------------------------
Average prices received
Natural gas (/mcf) $ 6.18 7.77
Light oil (/bbl) 71.78 65.55
Heavy oil (/bbl) 52.01 34.29
NGLs (/bbl) 63.05 60.50
------------------------------------------------------------------------
Oil & NGLs (/bbl) $ 62.48 $ 50.79
------------------------------------------------------------------------
Combined all products
(/boe) $ 46.84 $ 48.10
------------------------------------------------------------------------


------------------------------------------------------------------------
Financial 2005 2004
--------------------------------------------
(in thousands of dollars, Oct. 21
except unit, Q4 Q3 Q2 Q1 to
per unit and boe data) 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 0.89 0.91 0.68 0.63 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
Non-cash capital
divestitures (14,636) - - - (33,456)
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
Market value of investments - - - - -
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 61,436 50,839 45,338 42,012 40,830
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 July 28, 2006
Consolidated Balance Sheets

(in thousands of dollars) (unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, December 31,
2006 2005
------------------------------------------------------------------------
Assets

Current assets
Accounts receivable (note 3) $ 44,962 $ 61,371
Prepaid expenses and deposits 2,806 1,327
------------------------------------------------------------------------
47,768 62,698
Petroleum and natural gas assets (note 4) 563,988 560,972
Investments (note 3) 4,720 -
Deferred financing charges (note 7) 481 720
Goodwill 216,864 216,864
------------------------------------------------------------------------
$ 833,821 $ 841,254
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities $ 67,802 $ 80,672
Distributions payable 8,897 8,601
------------------------------------------------------------------------
76,699 89,273
Bank debt (note 5) 165,114 123,455
Convertible debentures (note 6) 3,973 9,219
Asset retirement obligations (note 8) 15,178 18,179
Future taxes 32,828 45,860
Non-controlling interest - exchangeable
shares (note 9) 9,758 19,422
------------------------------------------------------------------------
303,550 305,408
------------------------------------------------------------------------

Unitholders' Equity

Unitholders' capital (note 10) 584,799 565,128
Contributed surplus (note 10) 3,088 2,936
Equity component of convertible
debentures (note 6) 118 274
Deficit (57,734) (32,492)
------------------------------------------------------------------------
530,271 535,846
------------------------------------------------------------------------
$ 833,821 $ 841,254
------------------------------------------------------------------------
------------------------------------------------------------------------

Subsequent event (note 15).

See accompanying notes to consolidated financial statements.


Consolidated Statements of Income and Deficit
(in thousands of dollars, except per unit amounts) (unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------

Revenues

Petroleum and natural gas $ 68,554 $ 60,529 $ 134,741 $ 114,513
Royalties (13,985) (10,506) (26,440) (20,846)
Loss on commodity
derivatives - (233) - (233)
------------------------------------------------------------------------
54,569 49,790 108,301 93,434

Expenses

Operating 15,286 13,184 30,134 25,512
Transportation 1,354 950 2,663 1,380
General and administrative 4,131 2,834 7,978 5,207
Financial charges (note 7) 2,328 3,146 4,080 6,022
Depletion, depreciation and
accretion 24,769 18,685 47,994 39,056
------------------------------------------------------------------------
47,868 38,799 92,849 77,177
------------------------------------------------------------------------

Income before taxes and
non-controlling interest 6,701 10,991 15,452 16,257

Taxes
Capital taxes (recovery) (167) 347 88 591
Future tax reduction
(note 12) (9,168) (2,044) (13,032) (3,231)
------------------------------------------------------------------------
(9,335) (1,697) (12,944) (2,640)
------------------------------------------------------------------------

Income before
non-controlling interest 16,036 12,688 28,396 18,897

Non-controlling interest
- exchangeable shares
(note 9) 301 487 568 809

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

Net income 15,735 12,201 27,828 18,088

Deficit, beginning of period (46,806) (17,807) (32,492) (8,732)
Distributions (note 10) (26,663) (16,283) (53,070) (31,245)
------------------------------------------------------------------------
Deficit, end of period $ (57,734) $ (21,889) $ (57,734) $ (21,889)
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per unit
(note 10)
Basic $ 0.25 $ 0.27 $ 0.44 $ 0.42
Diluted $ 0.25 $ 0.26 $ 0.44 $ 0.42
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30

2006 2005 2006 2005
------------------------------------------------------------------------

Cash provided by (used in):

Operating

Net income $ 15,735 $ 12,201 $ 27,828 $ 18,088
Items not affecting cash:
Depletion, depreciation and
accretion 24,769 18,685 47,994 39,056
Non-controlling interest
- exchangeable shares 301 487 568 809
Future tax reduction (9,168) (2,044) (13,032) (3,231)
Non-cash financial charges
(note 7) 42 285 95 577
Unit based compensation 1,506 726 2,757 1,112
Unrealized loss on
commodity derivatives - 292 - 292
Asset retirement
expenditures (note 8) (1,967) (782) (3,614) (1,570)
Change in non-cash operating
working capital (note 11) 10,901 (5,755) (2,588) (12,121)
------------------------------------------------------------------------
42,119 24,095 60,008 43,012

Financing

Bank debt 2,924 10,332 41,659 22,962
Unit issue costs (278) (523) (440) (523)
Cash distribution to
unitholders (25,934) (15,883) (50,758) (30,703)
Change in non-cash financing
working capital (note 11) (119) (1,614) 136 (76)
------------------------------------------------------------------------
(23,407) (7,688) (9,403) (8,340)

Investing

Petroleum and natural gas
asset additions (21,034) (14,086) (56,412) (28,473)
Investment (note 3) (120) - (120) -
Corporate acquisition costs - (315) - (315)
Change in non-cash investing
working capital (note 11) 2,442 (2,006) 5,927 (5,884)
------------------------------------------------------------------------
(18,712) (16,407) (50,605) (34,672)
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 three and six months ended June 30, 2006 and 2005

(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 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 interim consolidated financial statements have been prepared by management, in accordance with Canadian generally accepted accounting principles, following the same accounting policies and methods of computation as the audited consolidated financial statements for the year ended December 31, 2005 except as noted below. The following disclosure is incremental to the disclosure included in the annual consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2005.

Investments

Investments are comprised of portfolio investments in common shares of publicly traded companies. Investments in which the Trust exercises significant influence are accounted for using the equity method where the recorded amount of the investment is increased or decreased for the Trust's ownership percentage of the companies' net earnings or loss and reduced by dividends paid to the Trust. Investments in which the Trust does not exercise significant influence are accounted for at cost.

The Trust evaluates the carrying value of its investments at least annually or more frequently should economic events dictate. If there has been a decline in value of an investment, other than a temporary decline, the investment is written down to its market value and the impairment charged to net income.

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, Midnight Oil Exploration Ltd. 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
------------------------------------------------------------------------
------------------------------------------------------------------------


3. Investments

On June 23, 2006, the Trust transferred interests in certain oil and gas properties valued at $6.0 million, with associated asset retirement obligations of $613,000, to Pegasus Oil & Gas Inc. ("Pegasus") in exchange for 1,840,000 Class A common shares valued at $2.50 per share and a $1.4 million, non-interest bearing promissory note. The note is secured by the oil and gas properties transferred to Pegasus and is due on December 1, 2006. Immediately prior to this transaction the Trust acquired 600,000 Class A common shares of Pegasus for $120,000. At June 30, 2006, 450,000 of the Class A common shares were held in escrow with 150,000 Class A common shares being released on each of December 29, 2006, June 29, 2007 and December 29, 2007.

The investment, composed of 2,440,000 Class A common shares of Pegasus, is accounted for at cost. As at June 30, 2006 the market value of the investment in Pegasus was $5.8 million.



4. Petroleum and Natural Gas Assets

------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
------------------------------------------------------------------------
Petroleum and natural gas
properties $ 693,691 $ 132,077 $ 561,614
Other assets 3,303 929 2,374
------------------------------------------------------------------------
Balance, June 30, 2006 $ 696,994 $ 133,006 $ 563,988
------------------------------------------------------------------------
------------------------------------------------------------------------


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


During the six months ended June 30, 2006, Daylight capitalized $1,973,000 (2005 - $2,131,000) of general and administrative expenses related to exploration and development activities.

Future development costs of $44.5 million (2005 - $44.8 million) associated with proven reserves were included in the depletion and depreciation calculation. Future salvage value of production equipment and facilities of $23.2 million (2005 - $25.5 million) and a cost of $43.9 million (2005 - $33.6 million) for unproven properties have been excluded from the depletion and depreciation calculation.

5. Bank Debt

Daylight has a total of $180 million available under revolving term credit facilities with a syndicate of banks of which $165 million was drawn at June 30, 2006. The effective interest rate for the bank debt was 4.6% for the six months ended June 30, 2006 (2005 - 3.9%). 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, and as amended April 13, 2006, 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, 2006.

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 six months ended June 30, 2006 and for the year ended December 31, 2005:



------------------------------------------------------------------------
------------------------------------------------------------------------
Face Debt Equity
Value Component Component
------------------------------------------------------------------------
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
Accretion and amortization - 17 -
Conversion to Trust Units (5,380) (5,263) (156)
------------------------------------------------------------------------
Balance, June 30, 2006 $ 4,053 $ 3,973 $ 118
------------------------------------------------------------------------
------------------------------------------------------------------------


7. Financial Charges

During the six months ended June 30, 2006 and 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:



------------------------------------------------------------------------
------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------
Bank debt interest $ 3,707 $ 2,220
Convertible debenture interest 278 3,225
Amortization of financial charges 78 359
Accretion of convertible debenture
liability 17 218
------------------------------------------------------------------------
Total $ 4,080 $ 6,022
------------------------------------------------------------------------
------------------------------------------------------------------------


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

------------------------------------------------------------------------
------------------------------------------------------------------------
Six months ended Year ended
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Balance, beginning of period $ 720 $ 3,680
Amortization (78) (553)
Conversion to Trust Units (161) (2,407)
------------------------------------------------------------------------
Balance, end of period $ 481 $ 720
------------------------------------------------------------------------
------------------------------------------------------------------------


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 $67.6 million 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 June 30, 2006 and December 31, 2005. A credit-adjusted risk-free rate of 8% was used to calculate the fair value of the asset retirement obligations at June 30, 2006 and December 31, 2005.



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

------------------------------------------------------------------------
------------------------------------------------------------------------
Six months ended Year ended
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Balance, beginning of period $ 18,179 $ 16,528
Acquisitions (note 2) - 3,819
Liabilities incurred 340 676
Change in estimates - 923
Liabilities settled (3,614) (4,010)
Liabilities transferred to Open
Range (note 10) - (1,192)
Liabilities transferred to
Pegasus (note 3) (613) -
Accretion expense 886 1,435
------------------------------------------------------------------------
Balance, end of period $ 15,178 $ 18,179
------------------------------------------------------------------------
------------------------------------------------------------------------


9. Non-Controlling Interest - exchangeable shares

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
Shares Amount
------------------------------------------------------------------------
Exchangeable shares:
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
Retracted for trust units (896,764) (10,232)
Income attributable to non-controlling interest - 568
------------------------------------------------------------------------
Balance, June 30, 2006 830,523 $ 9,758
------------------------------------------------------------------------
------------------------------------------------------------------------


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, 2006 was 1.26005 (1.17462 as at December 31, 2005).

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
Units Amount
------------------------------------------------------------------------
Trust units:
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
Issued on retraction of exchangeable shares 1,057,809 10,232
Issued on conversion of debentures 566,308 5,258
Issued through DRIP Plan 179,954 2,016
Issued on vesting of unit awards 308,126 2,605
Unit issue costs - (440)
------------------------------------------------------------------------
Balance, June 30, 2006 63,548,162 $ 584,799
------------------------------------------------------------------------
------------------------------------------------------------------------


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 six months ended June 30, 2006 Daylight issued 179,954 (2005 - nil) trust units from treasury for the DRIP in lieu of cash distributions totaling $2,016,000 (2005 - nil).

Redemption Right

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

b) Net Income Per Unit

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



------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic 63,378,023 44,999,324 62,923,775 43,183,205
Exchangeable shares
at exchange ratio 1,047,780 2,047,300 1,203,009 2,154,415
Convertible debentures 538,458 7,898,647 694,364 8,060,591
Restricted and Performance
unit awards 644,669 106,806 571,786 -
------------------------------------------------------------------------
Diluted 65,608,930 55,052,077 65,392,934 53,398,211
------------------------------------------------------------------------
------------------------------------------------------------------------


Diluted net income per unit adds back interest, amortization and accretion expense on convertible debentures and non-controlling interest. Interest, amortization and accretion for the three months ended June 30, 2006 was $123,000 (2005 - $1,873,000) and for the six months ended June 30, 2006 was $319,000 (2005 - $3,802,000). Non-controlling interest for the three months ended June 30, 2006 was $301,000 (2005 - $487,000) and for the six months ended June 30, 2006 was $568,000 (2005 - $809,000).

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.



The following tables reconcile the number of restricted and performance
units outstanding:

------------------------------------------------------------------------
------------------------------------------------------------------------
Number
------------------------------------------------------------------------
Restricted Awards:
Balance, December 31, 2004 -
Issued 1,221,850
Cancelled (177,500)
------------------------------------------------------------------------
Balance, December 31, 2005 1,044,350
Issued 409,173
Vested and converted to trust units (268,671)
Cancelled (31,000)
------------------------------------------------------------------------
Balance June 30, 2006 1,153,852
Weighted average adjustment factor 1.1339
Trust unit equivalent 1,308,401
------------------------------------------------------------------------
------------------------------------------------------------------------


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

Balance, December 31, 2004 - - -
Issued 322,000 - -
Cancelled (32,000) - -
------------------------------------------------------------------------
Balance, December 31, 2005 and
June 30, 2006 290,000 1.33 386,667
Weighted average adjustment factor 1.1407
Trust unit equivalent 441,061
------------------------------------------------------------------------
------------------------------------------------------------------------


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 six months ended June 30, 2006 was $12.37 per Unit Award (2005 - $9.74) and $2,757,000 (2005 - $1,112,000) 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
Unit based compensation 2,757
Vested Unit Awards (2,605)
------------------------------------------------------------------------
Balance, June 30, 2006 $ 3,088
------------------------------------------------------------------------
------------------------------------------------------------------------


e) Accumulated Distributions

The table below shows the cumulative distributions:

------------------------------------------------------------------------
------------------------------------------------------------------------
Record Date Per Unit Amount
------------------------------------------------------------------------
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
------------------------------------------------------------------------
January 31, 2006 0.14 8,773
February 28, 2006 0.14 8,810
March 31, 2006 0.14 8,824
April 28, 2006 0.14 8,873
May 31, 2006 0.14 8,893
June 30, 2006 0.14 8,897
------------------------------------------------------------------------
Total 2006 distributions $ 0.84 $ 53,070
------------------------------------------------------------------------
Total distributions since inception $ 2.89 $150,667
------------------------------------------------------------------------
------------------------------------------------------------------------


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)
------------------------------------------------------------------------
Total $ 15,235
------------------------------------------------------------------------
------------------------------------------------------------------------

11. Supplemental Cash Flow Information

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Changes in non-cash
working capital:
Accounts receivable $ 8,423 $ (6,989) $ 16,409 $ (8,200)
Prepaid expenses and deposits (1,756) (309) (1,479) (529)
Accounts payable and accrued
liabilities 5,142 4,520 (12,870) (2,755)
Unrealized loss on oil
derivatives - (669) - (669)
Note receivable acquired on
disposal ofproperties (note 3) 1,415 - 1,415 -
Working capital acquired on
acquisition - (5,928) - (5,928)
------------------------------------------------------------------------
Change in non-cash working
capital $ 13,224 $ (9,375) $ 3,475 $ (18,081)
------------------------------------------------------------------------
------------------------------------------------------------------------
Relating to:
Operating activities $ 10,901 $ (5,755) $ (2,588) $ (12,121)
Financing activities (119) (1,614) 136 (76)
Investing activities 2,442 (2,006) 5,927 (5,884)
------------------------------------------------------------------------
Change in non-cash working
capital $ 13,224 $ (9,375) $ 3,475 $ (18,081)
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Interest and taxes paid:
Interest paid $ 2,275 $ 4,546 $ 3,967 $ 5,621
Taxes paid $ 190 $ 935 $ 279 $ 935
------------------------------------------------------------------------
------------------------------------------------------------------------


12. Taxes

During the second quarter of 2006, the federal government substantively enacted legislation reducing the federal tax rates. This legislation has reduced the Trust's future income tax liability and provision for future taxes by $4.3 million.

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, 2006, with a face value of $4.1 million (2005 - $74.8 million), had a fair value based on quoted market value of $5.0 million (2005 - $80.5 million).

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, 2006.

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 Midnight Oil Exploration Ltd. $968,000 relating to general and administrative activities for the six months ended June 30, 2006 (2005 - $385,000) and $1,117,000 relating to capital expenditures for the six months ended June 30, 2006 (2005 - $745,000). The Administrative and Technical Services Agreement has no set termination date and will continue until terminated by either party with three months written notice to the other party.

15. Subsequent Event

On April 20, 2006, Daylight and Sequoia Oil and Gas Trust ("Sequoia") announced that they had entered into an agreement to merge and create a new trust ("New Trust") and convey assets from both companies to create a new junior exploration company ("ExploreCo"). On June 14, 2006 Daylight and Sequoia announced that the New Trust would be named Evergreen Energy Trust ("Evergreen") and that the ExploreCo transaction would be completed with Trafalgar Energy Ltd. ("Trafalgar"). On July 14, 2006 Daylight and Sequoia announced that based on many factors, which included the Q2 2006 production levels of Sequoia, the original merger terms had been revised. On July 17, 2006 Daylight and Sequoia announced revised terms with Trafalgar.

The transaction will be conducted by way of a Plan of Arrangement (the "Arrangement") and is subject to approval by Daylight Securityholders (including holders of Trust Units and Exchangeable Shares), Sequoia Unitholders and Trafalgar share holders. Pursuant to the Arrangement, under the original and revised terms, certain oil and natural gas properties will be transferred to Trafalgar in exchange for common shares and arrangement warrants of Trafalgar which will be distributed to the Daylight Securityholders and Sequoia Unitholders with a portion of the Trafalgar common shares remaining with Evergreen.

Under the Arrangement each Daylight Unitholder will receive 0.6642 units (originally 0.6642 units) of Evergreen for each one Daylight unit held and Daylight Exchangeable Shareholders will receive 0.6642 units (originally 0.6642 units) of Evergreen for each Trust unit the Exchangeable Shares held are equivalent to at the closing date of the Arrangement. Under the Arrangement each Sequoia Unitholder will receive 0.8250 units (originally 1.0000 unit) of Evergreen for each one Sequoia unit held. Under the Arrangement, Daylight expects its Unitholders to receive approximately 62% of the outstanding units of Evergreen.

In certain circumstances where Daylight or Sequoia is determined to be in a material breach of an agreement covenant a break fee of up to $15 million may be payable by the party in material breach to the other entity.



Abbreviations
/d per day
bbl(s) barrel(s)
mbbls thousand barrels
mmbbls million barrels
mcf thousand cubic feet
mmcf million cubic feet
bcf billion cubic feet
boe barrels of oil equivalent
mmboe million barrels of oil equivalent
mmstb million stock tank barrels of oil
ARTC Alberta Royalty Tax Credit
Cdn Canadian
NGLs natural gas liquids
WTI West Texas Intermediate crude oil
US United States



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