STRATEGIC ENERGY FUND
TSX : SEF.UN

STRATEGIC ENERGY FUND

November 04, 2005 17:30 ET

Strategic Energy Fund 'TSX:SEF.UN' Releases 2005 Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 4, 2005) - Strategic Energy Management Corp. is pleased to announce the results of Strategic Energy Fund (TSX:SEF.UN) for the three and nine month periods ended September 30, 2005.

Highlights
The Fund's net assets were $241,297,119 on September 30, 2005, an increase from $58,698,266 on June 30, 2005.

- In September, the Fund completed a cash and exchange offering that raised total gross proceeds of $171,400,002.

- On a per unit basis, the Fund's Net Asset Value after distributions was $14.61 at September 30, 2005, an increase from $13.55 at June 30, 2005 and $13.14 at December 31, 2004.

- The Fund paid a total of C$0.55 per unit in distributions during the quarter. This included a $0.10 regular distribution in each of July, August and September, and a special distribution of C$0.25 in September.

- On a total return basis, using market prices, and without re-investing distributions, the Fund returned 10.2 per cent in the third quarter of 2005 and 70.9 per cent over the 12 months ended September 30, 2005.

- The Fund established holdings in a number of energy trusts in the third quarter, including Baytex Energy Trust, Daylight Energy Trust, Focus Energy Trust, Harvest Energy Trust, Shiningbank Energy Income Fund, and Vault Energy Trust.

- The Fund also established holdings in a number of publicly-traded equities, including Enbridge Inc, Petro-Canada, Cyries Energy Inc., and Diamond Tree Energy Ltd.

- During the quarter the Fund initiated holdings in four private companies: Can-Able Energy Inc., Newcast Energy Corp., Synenco Energy Inc., and Tasman Exploration Ltd. Shares of Anderson Energy Ltd., formerly a private issuer held by the Fund at the end of the second quarter, commenced trading on the Toronto Stock Exchange in September after the company purchased publicly traded Aquest Energy Ltd.

Introduction

Strategic Energy Fund's net assets increased over $182 million in the third quarter to $241,297,119 as at September 30, 2005. This increase was mostly the result of a successful cash and exchange offering that raised total gross proceeds of over $171 million.

The Fund continued to pay monthly distributions of $0.10 per Unit and made a special distribution of $0.25 per Unit payable in September that reflected realized capital gains. The $0.10 per Unit monthly distribution represented a yield of 8.6 per cent based on the $14.00 per Unit closing price on the Toronto Stock Exchange at September 30, 2005.

The Fund's portfolio recorded strong gains in the third quarter as share prices for oil and gas companies, and unit prices for energy trusts, benefited from robust commodity prices, including a record, nominal high price for West Texas Intermediate crude oil on the New York Mercantile Exchange late in the quarter.

The Fund's Units returned 10.2 per cent in the third quarter, 40.0 per cent over the first nine months of 2005, and 70.9 per cent over the 12 months ended September 30, 2005 on a total return basis (using market prices, without re-investing distributions and including the average trading value of rights).

Commodity Commentary and Outlook

Crude Oil

West Texas Intermediate (WTI) crude oil averaged US$63.00 per barrel for the third quarter of 2005, up from an average of US$53.10 per barrel for the second quarter and just US$49.68 during the first quarter. For the third quarter of 2004, WTI averaged US$43.65. For the first nine months of 2005, WTI averaged US$55.31, which was 41 per cent above its US$39.08 average for the first nine months of 2004. Light Canadian crude at Edmonton averaged $68.29 for the nine months, up 34 per cent from its $51.11 for the same period last year. For the last week of August, light Canadian crude topped $80.00 per barrel. These are record historical highs for crude oil. (All price data: Woodside Research Ltd.)

While WTI prices above US$55.00 were justified by analysts earlier in the year based on tight markets and fear of supply disruption, the shortage of refining capacity coupled with a busy summer driving season pushed prices to new highs during the third quarter. The final blow came from Hurricanes Katrina in August and Rita in September. These were the two most disruptive storms ever to hit the energy facilities in the U.S. Gulf coast and offshore.

By the end of September, 97.8 per cent of normal daily oil (about 1.5 million barrels per day) and 79.4 per cent of daily gas production (about eight billion cubic feet per day) was shut in. The U.S. offshore normally accounts for 28.7 per cent of total U.S. crude production and 20.0 per cent of natural gas production. The region also accounts for 47.4 per cent of U.S. refining capacity and handles 60.4 per cent of its crude imports. Katrina and Rita destroyed some 109 offshore production platforms and damaged another 50. They also destroyed at least five drilling rigs. Another 19 rigs were damaged and at least 19 more were adrift and not yet evaluated, and with a few unaccounted for at the end of September. (Source: The Minerals Management Service (MMS), a bureau of the U.S. Department of the Interior).

These two hurricanes also temporarily cut off crude imports (6.5 million barrels per day) and shut storage facilities, pipeline terminals and refineries (over 2 million barrels per day of refining capacity at September 30). Crude oil inventories dipped sharply as a result of these disruptions but remained above normal levels. However, gasoline, diesel and heating oil stocks all dropped well below normal. In response to this natural disaster, Washington made crude oil available from the Strategic Petroleum Reserve, the Organization of the Petroleum Exporting Countries (OPEC) promised to pump whatever volumes would be needed, and the Paris-based International Energy Agency allocated additional crude and refined products to the U.S. market - its first emergency intervention in decades.

Many observers are convinced that we have moved to a new plateau of higher oil prices. China and India combined now import nearly 6 million barrels per day compared to net-zero imports as late as 1993. Demand from all of Asia is expected to continue to put pressure on supplies. For the near future, oil production will operate at or near physical capacity and all new demand growth plus losses from the annual depletion of existing fields will have to be met from newly developed fields. This is a tall order and the issue of how and from where the next 10, 20 or 30 million barrels per day of production can be developed (or if it can!) has sparked a lively debate among analysts.

The underlying concern is that very high prices will be necessary to slow global demand growth and generate the capital needed to grow production and expand delivery infrastructure, such as pipelines, docks, terminals and tankers.

Natural Gas

The average price of natural gas at the Henry Hub in Louisiana in the third quarter was US$8.814 per million British thermal units (mmbtu) compared to the second quarter at US$6.939 per mmbtu and US$6.416 for the first quarter. For the first nine months of 2005, Henry Hub gas averaged US$7.450 versus US$5.725 for the same period of 2004. The average price of natural gas at the AECO Hub in southeast Alberta for the third quarter of 2005 was $9.792 per gigajoule compared to $5.871 for the third quarter of 2004. For the first nine months, AECO gas averaged $7.727, up 25 per cent from $6.183 for the first nine months of 2004.

Weather was the most important factor in the higher gas prices. A warmer than normal summer meant large volumes of gas were used to generate electricity for air conditioning and as a result, less was available for injection into storage. At the close of last winter, U.S. gas storage stood at 1,455 billion cubic feet (bcf), 18.6 per cent above the previous year's winter close and well above the norm. By the end of September, these same storage facilities were at 2,929 bcf, 4.9 per cent below last year's September close.

Worse, U.S. gas production for the first seven months of 2005 (pre-hurricane) was slightly below the same periods in both 2004 and 2003. In contrast, there were 16 percent more gas wells completed for the first eight months of 2005 compared to 2004 and 39 per cent more than in the same eight months of 2003. The U.S. is drilling more gas wells but not growing production. (Source: The U.S. International Energy Agency).

This production shortfall is made even more serious by the disruption caused by Hurricanes Katrina and Rita. Total U.S. gas production for 2005 will fall well below recent years. At the end of September, the U.S. offshore had 79.4 of its gas production shut-in, this for a region that normally produces 20.0 per cent of all U.S. natural gas. (Source: MMS)

Nearly every analyst now believes that unless the coming winter is surprisingly mild, we will continue to experience these elevated gas prices (US$10 to US$14 per mmbtu at Henry Hub since the end of August) through at least the next six months.

When gas prices spiked in the winter of 2000-2001, caused by the California energy crisis plus market manipulation - as we later learned, there was widespread demand destruction by the industrial sector. Big energy-consuming companies cut output or closed facilities, and in some cases, moved operations overseas permanently.

The commercial (malls and office buildings) and residential sectors respond slowly to high prices and the power sector has continued to add new capacity based on burning clean natural gas. As a consequence, there are few options in the U.S. economy to adjust gas demand to these high prices. Supplies from Alaska or the Canadian Arctic are years away and liquefied gas imports are growing slowly.

As in the global oil sector, North American natural gas demand is bumping up against supply constraints.

Portfolio Commentary

Income Trusts

At September 30, 2005, 94.65 per cent of the Fund's net assets are invested in energy-related royalty and income trusts (December 31, 2004 - 47.37%; June 30, 2005 - 80.11%).

The oil and gas royalty trust sector posted spectacular returns in the third quarter, underpinned by exceptionally strong commodity prices, with the Scotia Capital Income Trust Index Energy sub-index recording a total return of 24.6 per cent. (Prices of energy trusts experienced a significant correction in October, falling 10.2 per cent on a total return basis for the month, partly the result of uncertainty over the taxation of income trusts; see 'Outlook').

The Fund established holdings in a number of trusts in the third quarter, including Baytex Energy Trust, Daylight Energy Trust, Focus Energy Trust, Harvest Energy Trust, Shiningbank Energy Income Fund, and Vault Energy Trust.

Senior Energy Issuers

Senior energy issuers comprised 4.04 per cent of the Fund's net assets at September 30, 2005 (December 31, 2004 - 2.30%; June 30, 2005 - 1.99%).

These companies may engage in a variety of energy businesses, including exploration and development, production, refining, transportation, and oilfield services.

During the third quarter the Fund established holdings in Enbridge Inc., Petro-Canada, and Precision Drilling Corp. (on October 31, shareholders of Precision Drilling Corp. approved a plan to convert the company into an income rust).

Junior Energy Issuers

At September 30, 2005, 3.44 per cent of the Fund's net assets are invested in junior energy issuers (December 31, 2004 - 46.69%; June 30, 2005 - 2.30%). These companies focus on cash flow growth through exploration, development, and acquisitions. In contrast, energy royalty trusts focus more on cash flow stability through development and acquisitions.

During the third quarter the Fund initiated holdings in Cyries Energy Inc. and Diamond Tree Energy Ltd.

Private Issuers

Private issuers comprised 3.91 per cent of the Fund's net assets at September 30, 2005 (December 31, 2004 - 18.65%; June 30, 2005 - 14.30%). These companies are a unique investment opportunity unavailable to most retail investors. The Fund's Investment Advisor is able to draw upon extensive industry contacts to source the most promising companies. The Fund targets management teams with excellent track records, significant stakes in their companies, and a solid plan to build reserves and execute a successful exit strategy.

During the quarter, the Fund initiated positions in Can-Able Energy Inc., Newcast Energy Corp., Synenco Energy Inc., and Tasman Exploration Ltd.

Shares of Anderson Energy Ltd., formerly a private issuer held by the Fund at the end of the second quarter, commenced trading on the Toronto Stock Exchange in September after the company purchased publicly traded Aquest Energy Ltd. Shares of Anderson Energy are still held by the Fund and are classified as a junior energy issuer.

Outlook

High commodity prices should allow the oil and gas sector to continue to generate strong returns, in particular the energy trusts.

Payout ratios have been pushed down to record low levels, meaning that many energy trusts will be able to fund higher cash distributions, debt reduction, as well as 100 per cent of capital expenditures from cash flow, making their business models more sustainable.

In determining the sustainability of an individual trust, the Fund's Investment Advisor examines payout ratios, balance sheets, and the quality of both management and assets in an effort to determine if the business is able to maintain production and distributions without relying on outside sources of capital.

Over the longer term, we believe trusts that exhibit a more sustainable business model should generate better per unit results than their peers, and we will continue to build the Fund's portfolio around those trusts.

Management's Discussion and Analysis

Fund Performance

The Fund's net assets were $241,297,119 on September 30, 2005, an increase from $58,698,266 on June 30, 2005 and $43,925,640 at December 31, 2004. On September 30, 2004, the Fund had net assets of $40,270,292.

The largest factor contributing to the Fund's increase in net assets during the third quarter of 2005 was the cash and exchange offering. Upon closing on September 13, the Fund issued 10,668,259 Units for gross proceeds of $150,000,000. On September 21, the Fund issued an additional 1,522,006 Units for gross proceeds of $21,400,002 pursuant to the exercise by the agents of their over-allotment option.

Also contributing to the increase in net assets in the third quarter was a change in unrealized appreciation of investments of $21,472,518.

On a per unit basis, the net asset value (NAV) increased to $14.61 at September 30, 2005 from $13.55 at June 30, 2005. The NAV per Unit was $13.14 at December 31, 2004 and $11.97 at September 30, 2004.

The increase in the NAV per Unit in the third quarter was due to a change in unrealized appreciation of investments, net realized gain on sale of investments and net investment income.

The Fund's holdings of private companies are valued at cost unless a subsequent transaction establishes a different value for the shares, or a material change in the value of the company's shares occurs.

Closed-end trusts may trade above, at or below their NAV per unit. On the Toronto Stock Exchange, the Fund's Units closed on September 30 at $14.00. At this closing price, Units traded at a 4.2 per cent discount to NAV. At June 30, 2005 the Units closed at $13.30, a 1.8 per cent discount to NAV.

Distributions

The Fund began paying distributions of $0.0175 per unit in June 2003. This was increased to $0.06 per unit in November 2004, $0.07 in March 2005, and $0.10 per unit in April 2005.

A special distribution of $0.23 per Unit was paid to Unitholders of record on May 16, 2005. This capital gains distribution was the result of realized portfolio gains during the first quarter of 2005.

On July 28, 2005 the Manager announced that the Fund would make a special distribution of $0.25 per Unit payable on September 30, 2005 to Unitholders of record September 12, 2005. This capital gains distribution was the result of realized portfolio gains during the second quarter of 2005.



Distribution History

Date of Payment Amount Record Date
---------------------------------------------------------------------
30-September-2005 $ 0.10 16-September-2005
30-September-2005 $ 0.25 12-September-2005
31-August-2005 $ 0.10 17-August-2005
29-July-2005 $ 0.10 15-July-2005
30-June-2005 $ 0.10 17-June-2005
31-May-2005 $ 0.23 16-May-2005
31-May-2005 $ 0.10 16-May-2005
29-April-2005 $ 0.10 15-April-2005
31-March-2005 $ 0.07 16-March-2005
28-February-2005 $ 0.06 14-February-2005
31-January-2005 $ 0.06 17-January-2005
Calendar 2004 $ 0.295
Calendar 2003 $ 0.1225
---------------------------------------------------------------------
Total $ 1.6875


Mandatory Market Purchase Program

The Fund has in place a mandatory market purchase program. Under this program, if the market price at which Unitholders are offering their Units for sale is less than 90 per cent of the latest determined NAV, the Fund is obligated to purchase Units at the prevailing market price. For the period April 1, 2003 to March 31, 2004, this program was subject to a maximum of 1.00 per cent of the number of Units outstanding at the beginning of such calendar quarter. For the period April 1, 2004 to March 31, 2005, this basis has been reduced to a maximum of 0.75 per cent per quarter. For the period April 1, 2005 to March 31, 2006, this basis has been reduced to a maximum of 0.50 per cent per quarter.

In 2004, 72,588 Units were purchased at an average price of $9.4539. In the first three months of 2005, 12,341 Units were purchased under this program at an average price of $11.5643. In the second and third quarters of 2005, no Units were purchased under this program.

Units are repurchased at market prices rather than at the NAV, and are then cancelled. This increases the NAV for the remaining Units if the Units trade at a discount to NAV.

Right of Redemption Program

The Fund has in place an annual redemption program (the "Right of Redemption Program"). Under this program, the Fund will redeem Units at a price of 95 per cent of the NAV per Unit as at the last business day of March each year (the "Redemption Valuation Date"), up to a maximum of 2.5 per cent of the outstanding Units as at March 1 of such year. This program is restricted to those Units surrendered for redemption between March 1 and 5:00 p.m. (Eastern Time) on the fifth business day prior to March 31 (the "Notice Period"). In 2004, 87,480 Units were redeemed at $10.05 for a total redemption amount of $879,174. In the first nine months of 2005, 83,285 Units were redeemed at a price of $13.32 for a total redemption amount of $1,109,356.

Rights Offering

Unitholders of record on April 1, 2005 received one right for each unit held, with three rights entitling the holder to purchase one unit at a price of $12.00 up to April 29, 2005. Upon closing on May 4, 2005, 1,082,694 Fund units were issued, raising total gross proceeds of $12,992,328. This Rights Offering was over-subscribed by nearly $9 million.

Cash and Exchange Offering

On August 29, the Fund filed a final prospectus for a cash and exchange offering. Upon closing on September 13, the Fund issued 10,668,259 Units for total gross proceeds of $150,000,000. On September 21, the Fund issued an additional 1,522,006 Units for gross proceeds of $21,400,002 pursuant to the exercise by the agents of their over-allotment option.

Management Fees

Management fees were $306,771 in the third quarter of 2005, compared with $110,000 for the same period in 2004. For the nine months ended September 30, 2005, management fees were $599,944, compared with $323,730 for the first nine months of 2004. The increase in management fees in 2005 is the result of the growth of the Fund's assets under management over this time period, as fees are calculated on the amount of the Fund's assets under management.

Fund Administration Fees

Fund administration fees were $84,992 in the third quarter of 2005, compared with $418,470 in the same period in 2004. For the nine months ended September 30, 2005, these fees were $289,926, compared with $845,291 for the first nine months of 2004. The decrease in fund administration fees in 2005 is the result of lower legal and reporting costs during the period.

Incentive Fees

The incentive fee is earned when net capital gains earned by the Fund in respect of each realized investment exceeds what the Fund would have earned on such investment if the simple rate of return thereon had been equal to the simple rate of return of the S&P / TSX Oil & Gas Exploration and Production Index during the period from the date of acquisition of such investment up to and including the date of realization. This incentive fee payable may be reduced in the future when the rate of return on a realized investment is less than the simple rate of return on that Index during the period when the investment is held. The accrued incentive fee liability of the Trust was nil as at September 30, 2005, compared with $1,077,868 at December 31, 2004 and nil at June 30, 2005.

Investment Approach and Risk Management

The Fund invests in securities of oil and gas royalty and income trusts to provide income to make monthly cash distributions to Unitholders. The Fund also invests in start-up and early-stage energy companies, with a focus on those that have strong, experienced management teams with proven track records of enhancing shareholder value and successfully executing exit strategies. The Fund will also invest in energy issuers where the portfolio manager believes the potential for capital appreciation exists.

Individual oil and gas companies may face unforeseeable production declines. The manager attempts to mitigate these risks by maintaining a diversified portfolio. Smaller and early-stage companies may have low trading volumes. Private companies present an additional liquidity risk. The Fund selects private companies whose business plans anticipate a public offering or other liquidity event within three to five years, thereby reducing this liquidity risk. Commodity prices also affect the value of the Fund's holdings. Commodity transactions are largely priced in U.S. dollars, or reflect U.S. prices, creating a currency risk. A change in value of the commodity prices, or the U.S. dollar, may affect the Fund's value.

In addition, both income trusts and equities are subject to the risk of possible changes to tax policies. On September 8, the Federal Department of Finance released a Consultation Paper on Income Trusts requesting input on the potential taxation of income trusts by December 31, 2005. In this paper, the Department of Finance estimated that tax revenues would have been $300 million higher had income trusts been taxed as corporations. Then on September 19, the Department of Finance announced that they were ceasing the practice of providing advanced tax rulings on any income trust conversions. These actions have had a negative effect on all income trust prices, including energy trusts. Though the government's intentions in regards to the taxation of income trusts and equities are unknown at this time, the Fund's management and Investment Advisor will continue to closely monitor this situation.

Liquidity and Capital Resources

The Fund is a closed-end investment trust. It funds additional investments through new equity issues, supplemented by bank loans. The Fund does not consider substantial levels of debt financing to be appropriate. The Fund has negotiated a revolving credit facility for investment and operating purposes, with a current limit of $20 million. The Fund may pledge up to 100 per cent of its assets (excluding private company securities) to secure a lower interest rate on borrowings, though the low limit on the level of borrowings remains. As at September 30, 2005, the Fund had $20 million outstanding against the loan facility.

The Fund derives substantially all its income from investment sources. Accounts receivable are settled on a monthly or quarterly basis and accounts payable are settled on a monthly basis. Working capital liquidity is maintained through drawings or repayments on the revolving credit facility.

Forward-Looking Statements

This disclosure includes statements about expected future events and/or financial results that are forward-looking in nature and subject to substantial risks and uncertainties. For those statements, Strategic Energy Fund cautions that actual performance will be affected by a number of factors, many of which are beyond its control. These include general economic conditions in Canada and the United States; industry conditions including changes in laws and regulations; changes in income tax regulations; increased competition; and fluctuations in commodity prices, foreign exchange and interest rates. In addition, there are numerous risks and uncertainties associated with oil and natural gas operations and the evaluation of oil and natural gas reserves. As a result, future events and results may vary substantially from what Strategic Energy Fund currently foresees.



Strategic Energy Fund
3rd Quarter Report 2005

Statements of Net Assets

As at September 30, 2005 (unaudited)
and December 31, 2004 (audited) 2005 2004
---------------------------------------------------------------------

Assets
Investments, at estimated
fair value $ 255,882,008 $ 50,517,218
Cash and short-term investments 3,045,965 329,377
Receivable for securities sold 5,777,994 -
Interest receivable and other assets 1,646,607 220,590
---------------------------------------------------------------------
266,352,574 51,067,185
---------------------------------------------------------------------

Liabilities
Management and servicing fees payable 183,501 85,813
Accrued incentive fee (Note 3) - 1,077,868
Payable for securities purchased 4,147,204 -
Accounts payable and other accrued
liabilities 724,750 144,684
Redemption payable (Note 4) - 33,180
Bank loan payable (Note 8) 20,000,000 5,800,000
---------------------------------------------------------------------
25,055,455 7,141,545
---------------------------------------------------------------------

Net assets $ 241,297,119 $ 43,925,640
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of Trust units
outstanding (Note 4) 16,521,041 3,343,708
---------------------------------------------------------------------
Net asset value per Trust unit $ 14.61 $ 13.14
---------------------------------------------------------------------
---------------------------------------------------------------------


Approved on behalf of Strategic Energy Fund, by the Board of
Directors of Strategic Energy Management Corp., the Manager:


("Signed") John F. Driscoll ("Signed") Richard Zarzeczny
____________________________ _____________________________
Director Director

The accompanying notes are an integral part of these financial
statements.


Statements of Operations

For For For For
the three the three the nine the nine
months months months months
(unaudited) ended ended ended ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
---------------------------------------------------------------------

Investment and other
income
Distributions:
Royalties and
dividends $ 1,949,168 $ 154,153 $ 3,557,854 $ 476,102
Return of capital 491,766 45,592 996,235 143,812
Interest 34,401 6,154 67,351 19,178
---------------------------------------------------------------------
2,475,335 205,899 4,621,440 639,092
---------------------------------------------------------------------

Expenses
Management fees 306,771 110,000 599,944 323,730
Fund administration 84,992 418,470 289,926 845,291
Servicing fee 241,293 40,464 346,834 114,319
Loan interest and
fees 30,438 33,367 116,640 57,560
Transfer and custody
fees 37,032 8,326 91,299 73,249
---------------------------------------------------------------------
700,526 610,627 1,444,643 1,414,149
---------------------------------------------------------------------

Net investment income
(loss) 1,774,809 (404,728) 3,176,797 (775,057)
---------------------------------------------------------------------
Net realized gain on
sale of investments 1,411,789 1,542,411 11,628,322 4,003,659
Return of capital (491,766) (45,592) (996,235) (143,812)
Change in unrealized
appreciation of
investments 21,472,518 1,787,000 16,788,805 5,236,217
Change in incentive
fee provision - 111,098 345,101 35,607
---------------------------------------------------------------------
22,392,541 3,394,917 27,765,993 9,131,671
---------------------------------------------------------------------

Increase in net
assets from
operations $ 24,167,350 $ 2,990,189 $ 30,942,790 $ 8,356,614
---------------------------------------------------------------------
---------------------------------------------------------------------
Income per Trust
unit(a) $ 3.67 $ 0.89 $ 6.67 $ 2.44
---------------------------------------------------------------------
---------------------------------------------------------------------

(a) Calculated by dividing the increase (decrease) in net assets
from operations by the weighted average outstanding units during
the period.


Statements of Net Realized Gain on Sale of Investments

For For For For
the three the three the nine the nine
months months months months
(unaudited) ended ended ended ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
---------------------------------------------------------------------

Proceeds from sale
of investments $ 15,367,805 $ 6,879,934 $ 56,200,098 $ 18,008,168
---------------------------------------------------------------------

Cost of investments,
beginning of
period 51,744,376 29,959,456 39,643,576 24,866,912
Return of capital (491,766) (45,592) (996,235) (143,812)
Cost of investments
purchased, during
the period 190,922,967 5,574,990 234,143,996 19,432,740
---------------------------------------------------------------------
242,175,577 35,488,854 272,791,337 44,155,840
Cost of
investments, end
of period 228,219,561 30,151,331 228,219,561 30,151,331
---------------------------------------------------------------------
Cost of
investments sold,
during the period 13,956,016 5,337,523 44,571,776 14,004,509
---------------------------------------------------------------------
Net realized gain
on sale of
investments $ 1,411,789 $ 1,542,411 $ 11,628,322 $ 4,003,659
---------------------------------------------------------------------
---------------------------------------------------------------------


Statements of Changes in Net Assets

For For For For
the three the three the nine the nine
months months months months
(unaudited) ended ended ended ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
---------------------------------------------------------------------
Net assets,
beginning of
period $ 58,698,266 $ 37,738,407 $ 43,925,640 $ 33,829,601
---------------------------------------------------------------------

Increase
(decrease) in
net assets from
operations
Net investment
income (loss) 1,774,809 (404,728) 3,176,797 (775,057)
Net realized gain
on sale of
investments 1,411,789 1,542,411 11,628,322 4,003,659
Return of capital (491,766) (45,592) (996,235) (143,812)
Change in
unrealized
appreciation of
investments and
incentive fee 21,472,518 1,898,098 17,133,906 5,271,824
---------------------------------------------------------------------
24,167,350 2,990,189 30,942,790 8,356,614
---------------------------------------------------------------------
Unitholder
distributions (3,448,752) (177,461) (6,269,162) (540,143)
---------------------------------------------------------------------

Unitholder
transactions
(Note 4)
Units issued per
cash and exchange
offer 171,400,002 - 171,400,002 -
Issue cost of
cash and
exchange offer (9,519,747) - (9,519,747) -
Units issued per
rights offering - (35,139) 12,992,328 (35,139)
Issue cost of
rights offering - - (922,661) -
Redemption of
units - - (1,109,356) (879,174)
Repurchase of
units - (245,704) (142,715) (461,467)
---------------------------------------------------------------------
161,880,255 (280,843) 172,697,851 (1,375,780)
---------------------------------------------------------------------
Net increase in
net assets 182,598,853 2,531,885 197,371,479 6,440,691
---------------------------------------------------------------------
Net asset value,
end of period $ 241,297,119 $ 40,270,292 $241,297,119 $ 40,270,292
---------------------------------------------------------------------
---------------------------------------------------------------------


Statements of Cash Flows

For For For For
the three the three the nine the nine
months months months months
(unaudited) ended ended ended ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
---------------------------------------------------------------------

OPERATING
ACTIVITIES
Increase in net
assets from
operations $ 24,167,350 $ 2,990,189 $ 30,942,790 $ 8,356,614
Items not
affecting
cash/other:
Net realized gain
on sale of
investments (1,411,789) (1,542,411) (11,628,322) (4,003,659)
Change in
unrealized
appreciation of
investments (21,472,518) (1,787,000) (16,788,805) (5,236,217)
---------------------------------------------------------------------
1,283,043 (339,222) 2,525,663 (883,262)
Net change in
working capital:
Payment of
incentive fee - - (1,077,868) -
Change in other
assets and
liabilities (4,145,977) (2,544,859) (2,412,233) (2,662,196)
---------------------------------------------------------------------
Cash flows used
in operating
activities (2,862,934) (2,884,081) (964,438) (3,545,458)
---------------------------------------------------------------------

FINANCING
ACTIVITIES
Proceeds from loan
credit facility 20,000,000 2,000,000 20,000,000 4,000,000
Repayment of loan
credit facility - - (5,800,000) -
Distributions to
unitholders (3,448,752) (177,461) (6,269,162) (540,143)
Cash proceeds from
issuance of trust
units 143,767,731 (35,139) 156,760,059 (35,139)
Cost of issue (9,519,747) - (10,442,408) -
Redemption of
trust units - - (1,109,356) (879,174)
Repurchase of
trust units - (245,704) (142,715) (461,467)
---------------------------------------------------------------------
Cash flows from
financing
activities 150,799,232 1,541,696 152,996,418 2,084,077
---------------------------------------------------------------------

INVESTING
ACTIVITIES
Sales of
investments 15,367,805 6,879,934 56,200,098 18,008,168
Return of capital 491,766 45,592 996,235 143,812
Purchase of
investments (163,290,696) (5,574,990)(206,511,725) (19,432,740)
---------------------------------------------------------------------
(147,431,125) 1,350,536 (149,315,392) (1,280,760)
---------------------------------------------------------------------

Net increase
(decrease) in
cash during
the period 505,173 8,151 2,716,588 (2,742,141)
Cash and
short-term
investments,
beginning of
period 2,540,792 649,903 329,377 3,400,195
---------------------------------------------------------------------
Cash and
short-term
investments,
end of period $ 3,045,965 $ 658,054 $ 3,045,965 $ 658,054
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash $ 3,045,965 $ 658,054 $ 3,045,965 $ 658,054
Short-term
investments - - - -
---------------------------------------------------------------------
$ 3,045,965 $ 658,054 $ 3,045,965 $ 658,054
---------------------------------------------------------------------

Supplemental
disclosure of cash
flow information:
Amount of interest
paid during the
period $ 18,988 $ 42,849 $ 111,372 $ 57,560
---------------------------------------------------------------------


Statement of Investment Portfolio

As at September 30, 2005 (unaudited)

Shares/ Estimated % of
Investments Units Held Average Cost Fair Value Net
Assets
---------------------------------------------------------------------
Private Issuers
Adamant Energy Inc. 333,334 $ 500,001 $ 500,001 0.21%
Argent Energy Inc. 1,000,000 1,000,000 1,000,000 0.42%
Can-Able Energy Ltd. 1,000,000 1,000,000 1,000,000 0.41%
Citadel Resources Inc. 750,000 750,000 750,000 0.31%
Ferus Gas Industries
Trust 100,000 250,000 250,000 0.10%
Newcast Energy Corp. 100,000 500,000 500,000 0.21%
Newpack Energy Corp. 385,000 500,500 577,500 0.24%
Redsky Energy Ltd. 220,000 660,000 660,000 0.27%
Revolve Energy Inc. 300,000 300,000 300,000 0.12%
Ridgeback
Exploration Ltd. 300,000 375,000 375,000 0.16%
Spry Energy Ltd. 250,000 500,000 912,500 0.38%
Standard Energy Inc. 666,666 999,999 999,999 0.41%
Synenco Energy
Inc. Cl. A 15,000 243,750 243,750 0.10%
Tasman Exploration Ltd. 290,000 466,900 466,900 0.19%
Timber Rock Energy Ltd. 400,000 400,000 400,000 0.17%
Timing Energy Ltd. 500,000 500,000 500,000 0.21%
---------------------------------------------------------------------
8,946,150 9,435,650 3.91%
---------------------------------------------------------------------

Market
Investments Value
---------------------------------------------------------------------
Senior Energy Issuers
Enbridge Inc. 7,368 $ 253,678 $ 274,532 0.12%
Petro-Canada 6,000 278,846 291,960 0.12%
Precision Drilling
Corporation 160,300 9,290,576 9,170,763 3.80%
---------------------------------------------------------------------
9,823,100 9,737,255 4.04%
---------------------------------------------------------------------
Junior Energy Issuers
Anderson Energy Ltd. 182,000 1,001,000 1,465,100 0.61%
Cyries Energy Inc. 250,000 4,422,500 4,435,000 1.84%
Diamond Tree Energy
Ltd., Restricted 136,000 693,600 690,333 0.29%
Duvernay Oil Corp. 10,000 277,500 423,500 0.17%
Fairquest Energy
Limited 43,290 281,385 464,935 0.19%
Fairquest Energy
Limited, Restricted 33,000 219,450 347,610 0.14%
Highpine Oil & Gas
Ltd. Cl. A 20,292 338,892 482,950 0.20%
---------------------------------------------------------------------
7,234,327 8,309,428 3.44%
---------------------------------------------------------------------
Income Trusts
Acclaim Energy Trust 343,101 5,525,791 7,033,570 2.91%
AltaGas Income Trust 32,770 809,764 914,283 0.38%
ARC Energy Trust 517,628 11,279,801 12,474,835 5.17%
Badger Income Fund 34,813 598,788 647,522 0.27%
Baytex Energy Trust 399,100 6,573,814 7,403,305 3.07%
Bonavista Energy Trust 341,191 10,887,851 12,692,305 5.26%
Canadian Oil Sands Trust 200 23,354 25,690 0.01%
Cathedral Energy
Services Income Trust 2,170 17,589 21,157 0.01%
CCS Income Trust 244,700 7,584,938 7,580,806 3.14%
Crescent Point Energy
Trust 109,598 1,476,846 2,378,277 0.98%
Daylight Energy Trust 413,130 4,931,351 5,267,407 2.18%
Enerplus Resources Fund 162,991 7,842,035 8,949,836 3.71%
Esprit Energy Trust 422,600 6,029,507 6,123,474 2.54%
Fairborne Energy Trust 589,315 8,526,573 10,896,434 4.52%
Focus Energy Trust 132,789 2,895,516 3,192,248 1.32%
Fording Canadian
Coal Trust 105 4,738 5,205 -%
Fort Chicago Energy
Partners L.P. Cl. A 22,392 290,881 283,931 0.12%
Freehold Royalty Trust 229,500 4,127,091 4,287,060 1.78%
Harvest Energy Trust 106,537 3,862,902 4,048,406 1.68%
Innergex Power
Income Fund 8,500 113,632 116,450 0.05%
Inter Pipeline Fund
Cl. A 569,130 5,251,544 5,691,300 2.36%
Ketch Resources Trust 250,288 3,152,318 3,233,721 1.34%
Keyera Facilities
Income Fund 520,250 9,416,861 9,811,915 4.07%
Mullen Group Income Fund 88,100 1,942,110 2,364,604 0.98%
NAL Oil & Gas Trust 266,111 3,891,275 4,244,470 1.76%
Paramount Energy Trust 316,600 6,327,182 7,376,780 3.06%
Penn West Energy Trust 388,984 13,593,158 14,201,806 5.88%
Petrofund Energy Trust 228,966 4,643,598 5,225,004 2.16%
Peyto Energy Trust 241,339 6,764,823 7,348,773 3.04%
Phoenix Technology
Income Fund 265,900 1,845,862 2,459,575 1.02%
Primary Energy
Recycling Corporation 130,000 1,300,000 1,271,400 0.53%
Progress Energy Trust 211,614 2,871,086 3,726,523 1.54%
Shiningbank Energy
Income Fund 275,527 6,448,600 7,125,128 2.95%
StarPoint Energy Trust 395,391 7,875,284 9,481,476 3.93%
Taylor NGL Limited
Partnership 547,030 5,087,005 5,306,191 2.20%
Total Energy Services
Trust, Restricted 148,000 1,998,000 1,927,899 0.80%
Trilogy Energy Trust 400,215 8,339,686 11,165,998 4.63%
Trimac Income Fund 93,220 932,940 832,455 0.34%
Trinidad Energy Services
Income Trust 104,712 1,171,318 1,667,015 0.69%
Vault Energy Trust 360,000 4,689,504 4,942,800 2.05%
Vermilion Energy Trust 416,730 10,923,663 12,126,843 5.03%
Viking Energy Royalty
Trust 203,760 1,522,886 1,994,810 0.83%
Zargon Energy Trust 303,050 8,824,519 10,530,988 4.36%
---------------------------------------------------------------------
202,215,984 228,399,675 94.65%
---------------------------------------------------------------------
Total portfolio of
investments $ 228,219,561 $255,882,008 106.04%
---------------------------------------------------------------------
Liabilities, net of
cash and other assets (14,584,889) (6.04%)
---------------------------------------------------------------------
Total net assets $ 241,297,119 100.00%
---------------------------------------------------------------------
---------------------------------------------------------------------

Note: Percentage of net assets shown relates to investments at market
value to total net assets of the Trust.


The accompanying notes are an integral part of these financial
statements.


Notes to Financial Statements
(unaudited)
September 30, 2005 and 2004


NOTE 1 - ORGANIZATION OF THE FUND

Strategic Energy Fund (the "Fund") is a closed-end investment trust established under the laws of the Province of Ontario pursuant to a trust agreement amended and restated as of December 31, 2004 (the "Trust Agreement") and began operations on May 9, 2002.

Strategic Energy Management Corp. (the "Manager"), a corporation incorporated under the laws of the Province of Ontario, is the manager of the Fund. Computershare Trust Company of Canada (the "Trustee") is the trustee of the Fund.

The Fund's investment objectives are: i) to provide holders of the Units (the "Unitholders") with an opportunity for superior rates of return, principally in the form of long-term capital appreciation; and ii) a cost-effective method of reducing investment risk through a diversification strategy focused on investment opportunities within the Canadian energy sector.

NOTE 2 - INTERIM FINANCIAL STATEMENTS

These unaudited interim financial statements have been prepared by management following the same accounting policies and methods of their application as the most recent annual financial statements. The note disclosure for annual financial statements provides additional disclosure to that required for interim financial statements. Accordingly, these interim financial statements should be read in conjunction with the audited financial statements included in the Fund's 2004 annual report as set out on pages 9 to 19 of that report.

NOTE 3 - INCENTIVE FEE

The fund had no accrued incentive fee as at September 30, 2005 (December 31, 2004: $1,077,868).

NOTE 4 - UNITS

The authorized capital of the Fund consists of an unlimited number of Units. Each Unitholder in the Fund acquires Units, which represent an undivided interest in the net assets of the Fund. All Units are of the same class with equal rights and privileges and are entitled to one vote at any meeting of the Unitholders and to equal participation in any distributions made by the Fund.

The Fund has in place an annual redemption program (the "Right of Redemption Program"). Under this program, the Fund will redeem Units, at a price of 95 per cent of the net asset value per fund unit as at the last business day of March each year (the "Redemption Valuation Date"), up to a maximum of 2.5 per cent of the outstanding Fund Units as at March 1 of such year. This program is restricted to those Units surrendered for redemption between March 1 and 5:00 p.m. (Eastern Time) on the fifth business day prior to March 31 (the "Notice Period"). In 2004, 87,480 units were redeemed at $10.05, for a total redemption amount of $879,174. In 2005, 83,285 units were redeemed at $13.32, for a total redemption amount of $1,109,356.

The Fund has in place a mandatory market purchase program (the "Mandatory Market Purchase Program"). Under this program, the Fund is obligated, on a best efforts basis, to purchase Units at the prevailing market price, if the market price at which Unitholders are then offering their Units for sale is less than 90 per cent of the latest determined net asset value per unit. This program was subject to a maximum of 1.25 per cent of the number of Units outstanding at the beginning of such calendar quarter, until March 31, 2003. For the period April 1, 2003, to March 31, 2004, this program was subject to a maximum of 1.00 per cent per quarter. For the period April 1, 2004 to March 31, 2005, this basis is reduced to a maximum of 0.75 per cent per quarter. For the period April 1, 2005 to March 31, 2006, this basis is reduced to a maximum of 0.50 per cent per quarter. Pursuant to this program, 72,588 Units were purchased at an average price of $9.4539 in 2004. In the second and third quarter of 2005 no Units were purchased. In the first three months of 2005, 12,341 Units were purchased at an average price of $11.5643.

Here is a summary of the Unit transactions for the year 2004 and the first nine months of 2005:



Fund Units 2005 2004

Balance, beginning of period 3,343,708 3,503,776

Issued pursuant to Rights Offering
(Note 5) 1,082,694 -

Issued pursuant to Cash & Exchange
Offer (Note 6) 12,190,265 -

Mandatory Market Purchase Plan (12,341) (72,588)

Annual Redemption (83,285) (87,480)

Balance, end of period 16,521,041 3,343,708
---------------------------------------------------------------------


NOTE 5 - RIGHTS OFFERING

Strategic Energy Management Corp. filed a final prospectus dated March 18, 2005 on behalf of the Fund that qualified the distribution of the rights (the "Rights") and the units (the "Units") issuable on the exercise of the Rights in each of the provinces and territories of Canada. Unitholders of record on April 1, 2005 received one Right for each Unit held. Three Rights entitled the holder of the Rights to purchase one Unit at a price of $12.00 until 4:00 p.m. (Toronto time) on April 29, 2005. The Rights started trading on the Toronto Stock Exchange on April 1, 2005 and were posted for trading on a "when issued" basis as of March 30, 2005 under the symbol SEF.RT. The offering closed May 4, 2005 and 1,082,694 fund units were issued, raising total gross proceeds of $12,992,328.

NOTE 6 - CASH AND EXCHANGE OFFER

The Manager filed a final prospectus dated August 29, 2005 on behalf of the Fund that qualified the distribution (the "Offering") of the Units. Units were acquired by prospective purchasers either by an exchange option of freely tradable securities of certain eligible issuers or by cash payment. The offering closed August 26, 2005 and 12,190,265 trust units were issued at $14.0604 per Strategic Energy Fund unit, raising total cash gross proceeds of $143,767,731 with exchange proceeds equivalent to $27,632,271.

NOTE 7 - INVESTMENTS IN RELATED PARTIES

Pursuant to the Trust Agreement, the Fund is permitted to invest in other trusts that are managed by the Manager or entities under common control as the Manager, subject to some restrictions.

As of September 30, 2005, the Fund held 569,130 (December 31, 2004: 130,000) units in Inter Pipeline Fund, a fund that is controlled by the same entity that ultimately controls the Manager of the Fund, having a market value of $5,691,300 (December 31, 2004: $1,190,800) that represents 2.36% (December 31, 2004: 2.71%) of the Fund's net asset value.

As of September 30, 2005, the Fund held 228,966 (December 31, 2004: Nil) units in Petrofund Energy Trust, a trust that has a director and shareholder in common with the same entity that ultimately controls the Manager of the Fund, having a market value of $5,225,004 (December 31, 2004: Nil) that represents 2.16% (December 31, 2004: Nil) of the Fund's net asset value.

NOTE 8 - BANK LOAN

The Fund has a secured 364-day revolving credit facility due October 2005 that bears interest at the prime rate, payable monthly. The facility is secured by a Security Interest pledge of the Portfolio. As at December 31, 2004 the maximum facility was $ 7 million. On May 5, 2005 this was increased to $10 million. On September 30, 2005 the facility was increased to $43 million. The facility bears interest at the prime rate, payable monthly.

As at September 30, 2005 $20 million of the credit facility was drawn down (December 31, 2004 - $5,800,000). In the first nine months of 2005, $116,640 in interest was accrued pursuant to this facility (2004 - $57,560).

On October 24, 2005 the Credit Facility was renewed for a further 364 day period, and amended to allow Banker's Acceptances to be used as well as prime borrowing.



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