Daylight Resources Trust
TSX : DAY.UN
TSX : DAY.DB
TSX : DAY.DB.B
TSX : DAY.DB.C

Daylight Resources Trust

November 04, 2009 20:21 ET

Daylight Resources Trust Reports Third Quarter 2009 Financial and Operating Results- Significant Operational Results Validate Resource Play Strategy on Multiple Fronts

CALGARY, ALBERTA--(Marketwire - Nov. 4, 2009) - Daylight Resources Trust (TSX:DAY.UN)

MESSAGE TO UNITHOLDERS

Daylight Resources Trust ("Daylight" the "Trust" or the "Company") is pleased to report financial and operating results for the three and nine months ended September 30, 2009 ("Q3 2009" and "YTD 2009" respectively).

Record production volumes of 23,502 barrels of oil equivalent ("boe") per day highlight another strong quarter for Daylight representing year over year production growth of 8% which was net of approximately 2,500 boe per day shut-in during the period due to low natural gas prices. Daylight expects to return these shut-in volumes to production prior to the end of 2009 in conjunction with improved natural gas prices. In addition, Daylight elected to defer the majority of our Q3 2009 natural gas capital program to Q4 2009 with an expectation of improved prices. Increased production volumes delivered during Q3 2009 combined with stronger light oil, heavy oil and natural gas liquids ("NGLs") prices, reduced royalties and the continued strength of our hedging program resulted in a quarter over quarter increase in the Company's funds from operations to over $50 million. Daylight continues to benefit from our reliable operational results and high value hedging program, delivering a payout ratio of 58% for Q3 2009 and 54% YTD 2009. Based on our positive results and solid outlook, the Trust has declared that our distributions will continue at $0.08 per unit per month for Q4 2009.

During Q3 2009 Daylight announced the acquisition of Highpine Oil & Gas Limited ("Highpine"). This acquisition delivers on a number of strategic objectives of the Company: re-balancing our production base towards light oil, adding a strong future source of cash flow to fund growth operations on our resource play assets and providing Daylight with a significant land base in the exciting new Cardium oil resource play area of central Alberta. Including the addition of the Highpine assets, Daylight expects to meet our previously announced Q4 2009 production guidance of 38,000 boe per day.

The Highpine acquisition represents a significant milestone in Daylight's maturation from a suite of trust type assets to a growing intermediate sized producer. Daylight has expended considerable time and resources during the last three years accumulating and proving up multiple resource play assets in our core areas, focused on the premier Deep Basin gas producing region of Western Canada. The addition of a developing Cardium oil resource play in Pembina places Daylight at the forefront of emerging intermediate producers. After analyzing various restructuring options available to income trusts and considering our long-term growth oriented asset base, Daylight intends to propose to our unitholders the conversion of Daylight to a dividend paying corporation during 2010. The timing of the conversion is dependent upon a number of factors; however, we expect to propose conversion no later than May 2010 at our Annual General Meeting.

Daylight has focused on adding to our core areas in the Deep Basin of Alberta and Northeast British Columbia due to the breadth and depth of resource play type opportunities available there. The following provides an overview of recent operational results, both from Daylight and our industry peers, and a summary of how these results impact Daylight's significant opportunity base across the Deep Basin:

Pembina: Cardium Oil Resource Play - Daylight currently has over 100 net sections of land with Cardium rights in the key Pembina area of Alberta.

- The Cardium oil zone has produced over 1.0 billion barrels of oil in Pembina since the 1950s utilizing conventional technologies. Several operators, including Daylight, are beginning to test the area for unconventional resource development on new trends that have been identified adjacent to the older conventional developments.

- Recent advancements in unconventional horizontal drilling and multi-stage fracture completion technologies have shown promising results in the Pembina area for further development of the Cardium as an oil resource play. An offsetting operator recently announced a 48 hour flow test on a new horizontal Cardium oil well with 270 boe per day produced adjacent to a large contiguous block of high working interest Daylight Cardium lands. Internal Daylight geological estimates indicate between 8 million and 12 million barrels of oil in place per section in this area of Pembina.

- Thirty miles to the northeast of this test well, Daylight has another large contiguous block of Cardium rights. Daylight has now drilled and cased our first horizontal Cardium oil well in Pembina within this second block of lands. This well is currently being completed with multiple fractures across the horizontal interval. Daylight plans to bring this 100% working interest well on production in December. Recent results in the Pembina area are very encouraging and this play has the potential to add a significant number of horizontal Cardium oil locations to our 2010 capital program.

Elmworth and Northeast British Columbia: Cadomin, Cretaceous, Montney and Nikanassin Natural Gas Resource Plays - Total Daylight lands on this trend are now over 200 net sections.

- Daylight was successful at a Q4 2009 land sale in Northeast British Columbia, adding 53 gross and net sections of land on trend with our resource play developments in Elmworth.

- Daylight has previously disclosed internal estimates that indicate, excluding the newly acquired lands, these opportunities combine to expose Daylight to an unrisked opportunity to develop 4 Tcf of natural gas on our Elmworth land base.

- Daylight is currently undertaking drilling and completion operations on two follow-up wells to our first two Nikanassin vertical wells in Elmworth. The first two wells drilled had average sand thickness of over 100 metres and produced at initial rates of between 2 and 3 mmcf per day. Daylight plans to drill our initial horizontal well into the Nikanassin during Q1 2010.

- Daylight will continue our Cadomin and uphole Cretaceous resource play development in Elmworth during 2010. Daylight has over 20 horizontal Cadomin and uphole Cretaceous wells on production in the Elmworth area. With the advancement of our Nikanassin program during 2009 and early 2010, we will establish an optimal development strategy for the Cadomin in conjunction with the Nikanassin.

- Daylight is currently drilling our first Montney horizontal well in the Wapiti area, just east of Elmworth. This well is on trend with a competitor horizontal well that had an initial production rate of 2.9 mmcf per day. Daylight has 24 net sections of land on trend with this initial well available for potential follow-up drilling.

West Central Alberta: Bluesky, Wilrich and other Cretaceous opportunities - Daylight's initial core producing area is our West Central property. West Central includes regions such as Kaybob, Pine Creek and Obed that have been proven natural gas exploration and development areas for decades. This region has been identified by Daylight and others as an excellent area for utilizing horizontal multi-stage fracture development technologies in multiple play types.

- Bluesky - Daylight has been an active developer of conventional Bluesky natural gas in West Central for several years. We have participated in five non-operated unconventional horizontal multi-stage fractured wells with partners, testing natural gas beyond the periphery of the original conventional development. The first two wells came on production at initial rates of 2.7 and 3.8 mmcf per day with NGL yield rates of over 40 bbls per mmcf. Two of the follow-up wells are not yet on production but tested at double the test rates of the initial two wells, the final well is awaiting completion. Daylight has 17 net sections of lands with Bluesky rights in the West Central Bluesky fairway and we commenced drilling the first well of our seven well Daylight operated Bluesky program during Q3 2009.

- Marlboro Wilrich - Daylight has participated in the drilling of three horizontal multi-stage fractured wells into the Wilrich zone. The first well drilled had an initial production rate in excess of 4 mmcf per day and has produced 0.5 Bcf in its first five months of production. Daylight has subsequently participated in two additional Wilrich wells with similar production results. Daylight has over 24 net sections of prospective land with Wilrich rights in the West Central area.

- Obed Cretaceous - Daylight has continued to pursue our successful program in the Cretaceous at Obed. Our most recent well was tied in during late September 2009 and at the end of October was still producing in excess of 10 mmcf per day. Daylight has 11 net sections of Cretaceous rights in the Obed area.

- Cardium Gas - Daylight recently participated in a horizontal well testing unconventional drilling and completion technology for Cardium gas development. The well came on production at an initial rate of over 4 mmcf per day and 180 bbl per day of NGLs. Daylight has a 40% working interest in this well with an additional three net sections of prospective lands adjacent to this discovery.

DAYLIGHT RESOURCES TRUST - HIGHLIGHTS

Operations

- Recorded Q3 2009 production volumes of 23,502 boe per day. The Trust maintains our Q4 production guidance of 38,000 boe per day based on the closing of the Highpine transaction on October 8, 2009.

- Capital expenditures of $10.6 million during Q3 2009. Daylight plans capital spending of approximately $75 million in Q4 2009 in order to accelerate development on several of the projects detailed previously and we maintain our $160 million 2009 capital budget guidance.

Financials

- Funds from operations increased to $50.2 million during Q3 2009 from $48.5 million in Q2 2009 due to higher production volumes and increases in oil and NGL prices.

- Royalty rates for Q3 2009 decreased to 15.9% of revenue compared to 16.9% of revenue in Q2 2009.

- Recognized a realized gain of $32.3 million on derivative contracts in Q3 2009 compared to a realized gain of $30.0 million in Q2 2009.

- Trust declared a continuation of our $0.08 per unit per month distribution for Q4 2009.

Balance Sheet

- Maintained our strong financial position with a net debt to annualized funds from operations ratio of 1.0 times.

- Bank debt increased to $164.2 million at the end of Q3 2009 from $161.0 million at the end of Q2 2009. Subsequent to the end of the quarter, with the addition of the Highpine assets, Daylight's bank credit facility was increased to $500 million with approximately $250 million drawn at closing of the Highpine acquisition. This provides Daylight significant flexibility to actively pursue strategic opportunities.



THIRD QUARTER FINANCIAL AND OPERATIONAL RESULTS

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial
(CDN$ thousands,
except unit, per
unit and
operational Q3 Q2 Q3 YTD YTD
data) 2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Petroleum and
natural gas
revenues $ 66,100 $ 66,649 $ 145,269 $ 204,642 $ 410,426
----------------------------------------------------------------------------
Operating
netback 60,252 58,383 81,808 174,951 238,154
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Funds from
operations 50,245 48,459 78,646 143,599 214,345
Per unit
- Basic 0.41 0.45 0.91 1.34 2.63
- Diluted 0.39 0.42 0.84 1.25 2.37
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Cash
distributions
declared 29,385 26,254 33,684 77,296 81,824
Per unit 0.24 0.24 0.39 0.72 0.99
Payout ratio 58% 54% 43% 54% 38%
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Capital
expenditures 10,613 15,803 45,657 85,829 127,153
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Units
outstanding
(000s)
Basic 122,437 122,434 86,299 122,437 86,299
Diluted 138,499 138,457 94,295 138,499 94,295
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----------------------------------------------------------------------------
Operational
----------------------------------------------------------------------------
Average daily
production
Natural gas
(mcf/d) 100,250 96,173 81,798 96,062 74,869
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Light oil
(bbls/d) 3,421 3,596 4,864 3,649 4,979
Heavy oil
(bbls/d) 2,096 2,141 2,179 2,118 2,205
NGLs (bbls/d) 1,277 1,281 1,106 1,345 1,109
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Oil & NGLs
(bbls/d) 6,794 7,018 8,149 7,112 8,293
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Combined
(boe/d) 23,502 23,047 21,782 23,122 20,771
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Average prices
received
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Natural gas
($/mcf) $ 3.05 $ 3.53 $ 8.54 $ 3.90 $ 8.90
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Light oil
($/bbl) 67.58 60.54 116.11 57.65 109.14
Heavy oil
($/bbl) 59.39 56.16 99.43 51.10 89.15
NGLs ($/bbl) 45.08 42.75 89.43 42.06 82.88
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Oil & NGLs
($/bbl) $ 60.82 $ 55.96 $ 108.03 $ 52.75 $ 100.32
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Combined
($/boe) $ 30.58 $ 31.78 $ 72.50 $ 32.42 $ 72.12
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$ per boe
Petroleum and
natural gas
revenues $ 30.58 $ 31.78 $ 72.50 $ 32.42 $ 72.12
Royalties (4.87) (5.36) (14.05) (5.68) (13.96)
Realized gain
(loss) on
derivative
contracts 14.93 14.33 (4.61) 13.88 (3.29)
Operating
expenses (11.65) (11.86) (11.95) (11.80) (12.00)
Transportation
expenses (1.12) (1.05) (1.06) (1.10) (1.02)
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Operating
netback $ 27.87 $ 27.84 $ 40.82 $ 27.72 $ 41.85
G&A - cash
charge (2.28) (2.44) (2.27) (2.68) (2.18)
Cash financial
charges (2.35) (2.29) (2.31) (2.28) (3.06)
Provision for
non-recoverable
accounts
receivable - - (0.90) - (0.32)
Other income(1) - - 3.90 - 1.37
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Funds from
operations $ 23.24 $ 23.11 $ 39.24 $ 22.76 $ 37.66
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(1) Non-recurring termination fee of $9.0 million relates to termination of
arrangement with Cadence Energy Inc., less transaction costs of $1.2
million.

Per boe amounts may not add exactly due to rounding


THIRD QUARTER FINANCIAL RESULTS

Operating Netback

- Operating netback of $27.87 per boe for Q3 2009 compared to $27.84 per boe for Q2 2009.

- Operating expenses improved to $11.65 per boe for Q3 2009 from $11.86 per boe for Q2 2009. Daylight expects its operating costs to be approximately $11.50 per boe for Q4 2009.

- Overall royalty rates decreased to 15.9% of revenue in Q3 2009 versus 16.9% of revenue in Q2 2009.

Funds from Operations

- Funds from operations for Q3 2009 increased to $50.2 million from $48.5 million for Q2 2009.

- Increased funds from operations for Q3 2009 were generated by increased production volumes combined with higher oil and NGL prices.

- Average price received for natural gas decreased to $3.05 per mcf from $3.53 per mcf for Q3 2009.

- Average price received for light oil improved to $67.58 per bbl for Q3 2009, a 12% increase over Q2 2009.

- Average price received for heavy oil improved to $59.39 per bbl for Q3 2009, an increase of 6% over Q2 2009.

2009 OUTLOOK

Capital Expenditures

- 2009 capital expenditure budget has been maintained at $160 million to be invested in our inventory of repeatable, low risk exploitation projects.

- Capital spending of approximately $75 million for the remainder of the year will focus primarily on horizontal resource play gas wells targeting the Bluesky in West Central, the Montney formation in Wapiti and Cardium oil in Pembina. Moving forward into 2010, the Company will spud our first horizontal Nikanassin test in Elmworth and also pursue additional vertical conventional natural gas opportunities.

Tax Pools and Safe Harbour

- Daylight and its subsidiaries have tax pools of over $1.4 billion upon closing of the Highpine transaction on October 8, 2009 which are available to shelter significant cash flow from income tax in current periods and well beyond our planned proposal to unitholders to convert to a dividend paying corporation during 2010.

- Current safe harbour capacity for the issuance of approximately $350 million of new equity provides significant flexibility to execute on strategic acquisition opportunities as they arise.

Daylight is also pleased to announce that Mr. Gordon Stollery has been appointed to the Board of Directors of Daylight. Mr. Stollery is a veteran oil executive who has been involved in the founding and building of a number of successful energy companies including Morrison Petroleums Ltd. and most recently was on the Board of Directors of Highpine.

Daylight is a growing intermediate oil and natural gas producing company with a high quality suite of resource play assets in Western Canada. Our highly focused team utilizes our technical expertise in exploitation, development and acquisitions to create long-term value for our unitholders. Our team has developed a multi-year inventory of repeatable, low risk exploitation resource play projects with substantial potential reserve additions on assets we currently own and control in the premier Deep Basin area of Alberta.

Daylight has approximately 174 million trust units currently outstanding which trade on the TSX under the symbol DAY.UN. Daylight Series A, Series B, and Series C convertible debentures trade on the TSX under the symbols DAY.DB, DAY.DB.B and DAY.DB.C respectively.

An updated corporate presentation is available on Daylight's website at www.daylightenergy.ca.

Signed:

Anthony Lambert, President & CEO

November 4, 2009

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion & Analysis ("MD&A") is dated November 4, 2009 and should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes for the three and nine months ended September 30, 2009 and 2008 as well as the MD&A and audited consolidated financial statements and notes for the years ended December 31, 2008 and 2007. 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 September 30, 2009 ("Q3 2009") to the three months ended June 30, 2009 ("Q2 2009") and to the three months ended September 30, 2008 ("Q3 2008"). This MD&A also compares the results of the nine months ended September 30, 2009 ("YTD 2009") to the nine months ended September 30, 2008 ("YTD 2008"). All references are to Canadian dollars unless otherwise indicated.

NON-GAAP MEASURES

Daylight Resources Trust ("Daylight" or the "Trust") utilizes the following terms for measurement within the MD&A that do not have standardized prescribed meaning under GAAP and these measurements may not be comparable with the calculation of similar measurements of other entities.

"Funds from operations" and "funds from operations per unit" are terms utilized by Daylight to evaluate operating performance and assess leverage. Daylight considers funds from operations to be an important measure of Daylight's ability to generate the funds necessary to pay distributions, repay debt and finance capital expenditures. Funds from operations does not represent net income for the period nor should it be viewed as an alternative to net income or other measures of financial performance calculated in accordance with GAAP. All references to funds from operations throughout the MD&A are based on cash provided by operating activities before the change in non-cash operating working capital and asset retirement expenditures since Daylight believes the timing of collection, payment or incurrence of these items involves a high degree of discretion and as such these items are not useful for evaluating Daylight's operating performance. A reconciliation of cash provided by operating activities to funds from operations follows.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Cash provided by
operating activities $ 44,054 $ 49,198 $ 97,799 $ 140,681 $ 212,343
Change in non-cash
operating working
capital 2,684 (1,993) (20,342) (2,854) (468)
Asset retirement
expenditures 3,507 1,254 1,189 5,772 2,470
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Funds from operations $ 50,245 $ 48,459 $ 78,646 $ 143,599 $ 214,345
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----------------------------------------------------------------------------


"Payout ratio" is a term utilized to evaluate financial flexibility and the capacity to fund distributions. Payout ratio is defined on a percentage basis as distributions declared divided by funds from operations.

"Operating netback" is a term utilized by Daylight to evaluate the operating performance of petroleum and natural gas assets. The term operating netback is defined as petroleum and natural gas revenues less royalties, realized gain (loss) on derivative contracts, operating and transportation expenses.

"boe" is a term utilized by Daylight in relation to reserves or production to combine the volumetric measures of natural gas, light oil, heavy oil and natural gas liquids ("NGLs") to a common "barrel of oil equivalent" term of measurement. Natural gas volumes have been converted at the ratio of 6,000 cubic feet of natural gas to one boe and 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. Light oil, heavy oil and NGLs have been converted at the ratio of one barrel of these liquids to one boe. Use of the terms boe and amounts per boe without reference to the underlying commodity may be misleading.

FORWARD-LOOKING STATEMENTS

Certain statements contained within this MD&A, 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 these 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 MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A or as of the date specified in the documents incorporated by reference into this MD&A, as the case may be.

This MD&A, and the documents incorporated by reference, contain forward-looking statements pertaining to the following:

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

- the size of our oil, natural gas liquids and natural gas reserves and production levels;

- estimates of future cash flow and distributions;

- projections of market prices and costs and the related sensitivities to distributions;

- drilling plans and timing of drilling, recompletion and tie-in of wells;

- weighting of production between different commodities;

- commodity prices, exchange rates and interest rates;

- expected levels of royalty rates, operating costs, general and administrative costs, costs of services and other costs and expenses;

- capital expenditure programs and other expenditures and the timing and method of financing thereof;

- supply of and demand for oil, natural gas liquids and natural gas;

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

- the existence, operation and strategy of our commodity price risk management program;

- the approximate and maximum amount of forward sales and hedging to be employed by us;

- our acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom;

- our ability to grow or sustain production and reserves through prudent management;

- the emergence of accretive growth opportunities and continued access to capital markets;

- our future operating and financial results;

- schedules and timing of certain projects and our strategy for future growth; and

- treatment under governmental and other regulatory regimes and tax, environmental and other laws.

In particular, this MD&A contains the following forward-looking statements pertaining to the following:

- production volumes;

- timing of cash flows;

- future oil and gas prices;

- operating costs;

- royalty rates;

- future development, exploration, and acquisition and development activities and related expenditures;

- future liquidity and future financial capacity;

- distributions to unitholders;

- future tax treatment of the Trust; and

- future structure of the Trust and its subsidiaries.

With respect to forward-looking statements contained in this MD&A and the documents incorporated by reference herein, we have made assumptions regarding, among other things:

- future oil and natural gas prices and differentials between light, medium and heavy oil prices;

- the continued availability of capital, undeveloped lands and skilled personnel;

- the costs of expanding our property holdings;

- the ability to obtain equipment in a timely manner to carry out exploration, development and exploitation activities;

- the ability to obtain financing on acceptable terms;

- the ability to add production and reserves through exploration, development and exploitation activities; and

- the continuation of the current tax and regulatory regime and other assumptions contained in this MD&A and the documents incorporated by reference herein.

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 MD&A and the documents incorporated by reference into this document:

- volatility in market prices for oil, natural gas liquids and natural gas;

- counterparty credit risk;

- access to capital;

- changes or fluctuations in oil, natural gas liquids and natural gas production levels;

- liabilities inherent in oil and natural gas operations;

- adverse regulatory rulings, orders and decisions;

- attracting, retaining and motivating skilled personnel;

- uncertainties associated with estimating oil and natural gas reserves;

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

- incorrect assessments of the value of acquisitions and targeted exploration and development assets;

- fluctuations in foreign exchange or interest rates;

- stock market volatility, market valuations and the market value of the securities of Daylight;

- failure to realize the anticipated benefits of acquisitions;

- actions by governmental or regulatory authorities including changes in royalty structures and programs and income tax laws (including those relating to mutual fund trusts or investment eligibility) or changes in tax laws and incentive programs relating to the oil and gas industry and income trusts;

- limitations on insurance;

- changes in environmental or other legislation applicable to our operations, and our ability to comply with current and future environmental and other laws;

- geological, technical, drilling and processing problems and other difficulties in producing oil, natural gas liquids and natural gas reserves; and

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

Statements relating to "reserves" or "resources" are by their nature 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 MD&A 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 except as required by applicable securities law.



HIGHLIGHTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial
(CDN$ thousands,
except unit,
per unit and Q3 Q2 Q3 YTD YTD
operational data) 2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 66,100 $ 66,649 $145,269 $204,642 $410,426
Royalties (10,527) (11,238) (28,149) (35,876) (79,450)
Realized gain (loss) on
derivative contracts 32,282 30,048 (9,237) 87,615 (18,744)
Operating expenses (25,179) (24,875) (23,943) (74,495) (68,299)
Transportation expenses (2,424) (2,201) (2,132) (6,935) (5,779)
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Operating netback 60,252 58,383 81,808 174,951 238,154
G&A - cash charge (4,934) (5,117) (4,542) (16,936) (12,396)
Cash financial charges (5,073) (4,807) (4,626) (14,416) (17,419)
Provision for
non-recoverable
accounts receivable - - (1,800) - (1,800)
Other income(1) - - 7,806 - 7,806
----------------------------------------------------------------------------
Funds from operations 50,245 48,459 78,646 143,599 214,345
Per unit - Basic 0.41 0.45 0.91 1.34 2.63
- Diluted 0.39 0.42 0.84 1.25 2.37
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Cash provided by
operating activities 44,054 49,198 97,799 140,681 212,343
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Net income (loss) (7,244) (14,543) 69,692 (15,716) 116,095
Per unit
- Basic (0.06) (0.14) 0.81 (0.15) 1.42
- Diluted (0.06) (0.14) 0.76 (0.15) 1.33
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Cash distributions
declared 29,385 26,254 33,684 77,296 81,824
Per unit 0.24 0.24 0.39 0.72 0.99
Payout ratio 58% 54% 43% 54% 38%
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Capital expenditures 10,613 15,803 45,657 85,829 127,153
Capital divestitures - - (87,695) - (87,695)
Corporate acquisitions - 123,827 36,433 123,827 36,433
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Market value of
investments 4,143 2,599 9,987 4,143 9,987
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Bank debt 164,172 160,983 199,282 164,172 199,282
Working capital
deficiency (2) 31,298 40,986 37,200 31,298 37,200
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Convertible debentures 117,217 116,525 54,180 117,217 54,180
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Total assets 1,097,686 1,153,128 915,364 1,097,686 915,364
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Units outstanding (000s)
- Basic 122,437 122,434 86,299 122,437 86,299
- Diluted 138,499 138,457 94,295 138,499 94,295
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operational (Per boe amounts may not add exactly due to rounding)
----------------------------------------------------------------------------
Average daily production
----------------------------------------------------------------------------
Natural gas (mcf/d) 100,250 96,173 81,798 96,062 74,869
----------------------------------------------------------------------------
Light oil (bbls/d) 3,421 3,596 4,864 3,649 4,979
Heavy oil (bbls/d) 2,096 2,141 2,179 2,118 2,205
NGLs (bbls/d) 1,277 1,281 1,106 1,345 1,109
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Oil & NGLs (bbls/d) 6,794 7,018 8,149 7,112 8,293
----------------------------------------------------------------------------
Combined (boe/d) 23,502 23,047 21,782 23,122 20,771
----------------------------------------------------------------------------
Average prices received
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 3.05 $ 3.53 $ 8.54 $ 3.90 $ 8.90
----------------------------------------------------------------------------
Light oil ($/bbl) 67.58 60.54 116.11 57.65 109.14
Heavy oil ($/bbl) 59.39 56.16 99.43 51.10 89.15
NGLs ($/bbl) 45.08 42.75 89.43 42.06 82.88
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Oil & NGLs ($/bbl) $ 60.82 $ 55.96 $ 108.03 $ 52.75 $ 100.32
----------------------------------------------------------------------------
Combined ($/boe) $ 30.58 $ 31.78 $ 72.50 $ 32.42 $ 72.12
----------------------------------------------------------------------------
$ per boe
Petroleum and natural
gas revenues $ 30.58 $ 31.78 $ 72.50 $ 32.42 $ 72.12
Royalties (4.87) (5.36) (14.05) (5.68) (13.96)
Realized gain (loss)
on derivative contracts 14.93 14.33 (4.61) 13.88 (3.29)
Operating expenses (11.65) (11.86) (11.95) (11.80) (12.00)
Transportation expenses (1.12) (1.05) (1.06) (1.10) (1.02)
----------------------------------------------------------------------------
Operating netback $ 27.87 $ 27.84 $ 40.82 $ 27.72 $ 41.85
G&A - cash charge (2.28) (2.44) (2.27) (2.68) (2.18)
Cash financial charges (2.35) (2.29) (2.31) (2.28) (3.06)
Provision for
non-recoverable
accounts receivable - - (0.90) - (0.32)
Other income(1) - - 3.90 - 1.37
----------------------------------------------------------------------------
Funds from operations $ 23.24 $ 23.11 $ 39.24 $ 22.76 $ 37.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Wells drilled -
gross (net) 17 (10.4) 2 (0.1) 15 (7.0) 39 (16.6) 40 (18.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Non-recurring termination fee of $9.0 million relates to termination of
arrangement with Cadence Energy Inc., less transaction costs of $1.2
million.
(2) Excludes unrealized gain (loss) on derivative contracts and future
income tax liability.


RESULTS OF OPERATIONS

Overview

Daylight is a growing intermediate oil and natural gas producing company with a high quality suite of assets in Western Canada. Our highly focused team utilizes our technical expertise in exploitation, development and acquisitions to create long-term value for our unitholders. Our team has developed a multi-year inventory of repeatable, low risk exploitation resource play projects with substantial potential reserve additions on assets we currently own and control in the premier Deep Basin area of Alberta. Daylight's trust units, 8.5% Convertible Debentures Series A, 8.5% Convertible Debentures Series B, and 10.0% Convertible Debentures Series C trade on the Toronto Stock Exchange ("TSX") with the symbols DAY.UN, DAY.DB, DAY.DB.B, and DAY.DB.C respectively.

Although the first nine months of 2009 have been challenging in the oil and gas sector with continued low natural gas prices and volatility in the global economy, Daylight has remained focused on its long-term plan of acquiring and developing high quality assets in its core areas. Daylight has maintained its strong financial position with a net debt to annualized funds from operations ratio of 1.0 times, significant available capacity on its bank credit facilities, and an extensive portfolio of internal development prospects. The maintenance of a healthy balance sheet has provided Daylight the flexibility to execute on opportunities throughout the year. On October 8, 2009, Daylight closed its acquisition of Highpine Oil & Gas Limited ("Highpine") which is expected to increase Daylight's production to approximately 38,000 boe per day for the fourth quarter 2009 from current quarter production of 23,502 boe per day. Daylight also acquired Intrepid Energy Corporation ("Intrepid") on June 5, 2009 (see "Capital Expenditures, Acquisitions and Divestitures"). On May 7, 2009, the Trust issued 24,630,000 trust units for gross proceeds of $172 million (see "Liquidity and Capital Resources").

Based on analysis of restructuring options available to income trusts, tax considerations and long-term plans for the organization, Daylight intends to propose to unitholders that Daylight convert to a dividend paying corporation by not later than May 2010 at our Annual General Meeting. The timing of conversion is dependent upon a number of factors including, but not limited to, Daylight's current safe harbour capacity of approximately $350 million. Throughout the remainder of 2009 and into 2010, Daylight will continue to pursue strategic opportunities as they arise, capitalize on the organization's extensive portfolio of internal development prospects and maintain focus on preserving financial flexibility.

Production

Daylight's total production volumes for Q3 2009 averaged 23,502 boe per day, a 2% increase from Q2 2009, as Daylight shut in approximately 2,500 boe per day of natural gas weighted production during the quarter due to low natural gas prices. As natural gas prices continue to improve during the fourth quarter 2009, it is anticipated these volumes will be brought back on stream prior to the end of 2009. Q3 2009 production was comprised of 100,250 mcf per day of natural gas, 3,421 bbls per day of light oil, 2,096 bbls per day of heavy oil and 1,277 bbls per day of NGLs. Production for Q3 2009 increased 8% from Q3 2008 due to our successful capital expenditure program coupled with our recent corporate and property acquisitions. See the "Capital Expenditures, Acquisitions and Divestitures" section of this MD&A for additional information on the acquisitions of Intrepid, Athlone Energy Ltd. ("Athlone"), West Central properties and Elmworth properties. Production for YTD 2009 was 23,122 boe per day, an increase of 11% from YTD 2008.

On October 8, 2009, Daylight acquired Highpine. With the addition of the Highpine volumes, offset by a reduction in natural gas volumes shut in due to low prices, Daylight expects production to average approximately 38,000 boe per day for the fourth quarter 2009, resulting in average production of approximately 26,800 boe per day for 2009. Daylight's 2009 production guidance is based on the investment of $160 million in our 2009 internal capital program.



----------------------------------------------------------------------------
Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Natural gas (mcf/d) 100,250 96,173 81,798 96,062 74,869
----------------------------------------------------------------------------
Light oil (bbls/d) 3,421 3,596 4,864 3,649 4,979
Heavy oil (bbls/d) 2,096 2,141 2,179 2,118 2,205
NGLs (bbls/d) 1,277 1,281 1,106 1,345 1,109
----------------------------------------------------------------------------
Combined oil & NGLs (bbls/d) 6,794 7,018 8,149 7,112 8,293
----------------------------------------------------------------------------
Combined all products (boe/d) 23,502 23,047 21,782 23,122 20,771
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Production addition activities for calendar 2009 are focused on the following:

- Peace River Arch properties of Elmworth and Bilbo

- West Central properties of Obed, Pine Creek and Kaybob

- East properties of Wildmere and Pembina

Commodity Prices

Daylight's natural gas prices are influenced by both North American and global supply and demand balances, seasonal changes, storage levels, the Canadian to US dollar exchange rate and transportation capacity constraints. Daylight's realized natural gas price has a high correlation to the daily Alberta benchmark price ("AECO") which provides pricing for natural gas. Daylight markets the majority of its natural gas through a combination of the daily AECO index price and monthly AECO index price contracts with a small portion of its natural gas sold through longer-term contracts with aggregators. As a result, Daylight's realized natural gas price is compared below to AECO index prices.

Daylight's oil prices are 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, including the Edmonton par price, correlate to refinery postings that adjust WTI for the Canadian to US dollar exchange rate as well as transportation costs and quality differentials.

Daylight's realized heavy oil price is lower than its light oil price and the historical correlation with Edmonton par price and Bow River price, a heavy oil benchmark, is not overly strong. Heavy oil requires increased refining and other costs, such as condensate for transportation blending, which reduce the realized price of this product.

NGLs include condensate, pentane, butane and propane. Prices for NGLs have their own market dynamic with a relatively strong correlation to light oil prices for condensate and pentane, while butane and propane trade at varying discounts due to market conditions including supply and demand.



----------------------------------------------------------------------------
Market prices Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
AECO Index ($Cdn/mcf)
Daily Index $ 2.94 $ 3.45 $ 7.75 $ 3.77 $ 8.62
Monthly Index 3.02 3.66 9.25 4.11 8.58
----------------------------------------------------------------------------
WTI ($US/bbl) 68.14 59.69 118.23 57.21 113.54
Edmonton par ($Cdn/bbl) 71.74 66.11 122.74 62.82 115.83
Bow River ($Cdn/bbl) 64.59 61.50 104.95 56.76 95.50
Exchange rate ($Cdn/$US) 0.9116 0.8579 0.9609 0.8580 0.9822
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Daylight prices realized Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 3.05 $ 3.53 $ 8.54 $ 3.90 $ 8.90
----------------------------------------------------------------------------
Light oil ($/bbl) 67.58 60.54 116.11 57.65 109.14
Heavy oil ($/bbl) 59.39 56.16 99.43 51.10 89.15
NGLs ($/bbl) 45.08 42.75 89.43 42.06 82.88
----------------------------------------------------------------------------
Combined oil & NGLs ($/bbl) $ 60.82 $ 55.96 $108.03 $ 52.75 $100.32
----------------------------------------------------------------------------
Combined all products ($/boe) $ 30.58 $ 31.78 $ 72.50 $ 32.42 $ 72.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight markets its natural gas through contracts based on daily and monthly AECO index pricing with less than 5% sold through longer-term contracts with aggregators. Daylight's natural gas price during Q3 2009 was $3.05 per mcf, a slight premium to the average of the daily and monthly AECO index prices during the period, and a 14% decrease from the Q2 2009 natural gas price of $3.53 per mcf. Daylight's Q3 2009 natural gas price was 64% lower than the Q3 2008 natural gas price of $8.54 per mcf, which is consistent with the decrease to both daily and monthly AECO index prices between these two periods. During Q3 2009, the daily AECO pricing for natural gas ranged from a low of approximately $1.72 per mcf to a high of approximately $4.06 per mcf. Daylight's YTD 2009 natural gas price was $3.90 per mcf, consistent with the daily and monthly AECO index prices during the period and a 56% decrease over the YTD 2008 natural gas price of $8.90 per mcf.

Daylight's Q3 2009 light oil realized $67.58 per bbl, 94% of Edmonton par, while Q2 2009 light oil realized $60.54 per bbl, 92% of Edmonton par, resulting in a quarter over quarter increase of 12%. Daylight's light oil price for Q3 2009 was 42% lower than the Q3 2008 light oil price of $116.11 per bbl, which was 95% of Edmonton par. Daylight's YTD 2009 light oil price of $57.65 per barrel, 92% of Edmonton par, was 47% lower than the YTD 2008 realized light oil price of $109.14 per barrel, 94% of Edmonton par. Changes in the Canadian dollar to US dollar exchange rate affect the Canadian dollar Edmonton par and Daylight's realized light oil price relative to the US dollar WTI, with a higher exchange rate generally reducing Edmonton par and Daylight's realized light oil price relative to WTI and a lower exchange rate generally increasing Edmonton par and Daylight's realized light oil price relative to WTI. The Canadian dollar to US dollar exchange rate for Q3 2009 was 0.9116 which generally put downward movement on Edmonton par and Daylight's realized light oil price in the quarter when compared to Q2 2009 with an exchange rate of 0.8579 and upward movement compared to Q3 2008 with an exchange rate of 0.9609. The Canadian dollar to US dollar exchange rate for YTD 2009 was 0.8580 as compared to 0.9822 for YTD 2008.

For the first nine months of 2008, the Edmonton par price and Bow River price were very strong which resulted in an enhanced price realization by Daylight on its heavy oil production. In Q4 2008 and Q1 2009, the Edmonton par price and Bow River price dropped significantly resulting in lower realized prices by Daylight on its heavy oil production. In Q2 2009 and Q3 2009, the Edmonton par and Bow River prices started to recover, increasing Daylight's realized prices, but not to the levels of the first nine months of 2008. Daylight's heavy oil production is concentrated at two properties, with Wildmere producing approximately 90% of Q3 2009 volumes and Chipman producing the remaining 10%. Daylight's Q3 2009 heavy oil price of $59.39 per bbl, 92% of Bow River, is 6% higher than the Q2 2009 heavy oil price of $56.16 per bbl, 91% of Bow River. Daylight's Q3 2009 heavy oil price was 40% lower than the Q3 2008 heavy oil price of $99.43 per bbl, 95% of Bow River. Daylight's YTD 2009 heavy oil price of $51.10 per barrel, 90% of Bow River, was 43% lower than the YTD 2008 heavy oil price of $89.15 per barrel, 93% of Bow River.

Daylight's combined oil and NGLs price during Q3 2009 was $60.82 per bbl, 9% higher than Q2 2009 and 44% lower than Q3 2008. Daylight's combined oil and NGLs price for YTD 2009 was $52.75 per barrel, a decrease of 47% from the YTD 2008 combined oil and NGLs price of $100.32 per barrel.

The impact of derivative contracts is recorded within Daylight's gain (loss) on financial instruments. As at September 30, 2009, Daylight had derivative contracts in place for a portion of natural gas production volumes for the period October 1, 2009 to August 31, 2010 and a portion of crude oil production volumes from October 1, 2009 through December 31, 2009. Please refer to the "Financial Instruments" section of this MD&A for further details.

Daylight's realized prices are expected to continue to correlate with market prices during the remainder of 2009.



Revenue
----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Natural gas $28,088 $30,913 $64,286 $102,214 $182,479
Light oil 21,263 19,812 51,950 57,426 148,899
Heavy oil 11,453 10,941 19,933 29,553 53,863
NGLs 5,296 4,983 9,100 15,449 25,185
----------------------------------------------------------------------------
Total $66,100 $66,649 $145,269 $204,642 $410,426
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Revenue for Q3 2009 remained flat with Q2 2009 as a 2% increase in production was offset by a 4% decrease in price on a combined boe basis. Natural gas sales for Q3 2009 were $28.1 million, a decrease of 9% from Q2 2009. Light oil sales for Q3 2009 were $21.3 million, up 7% from Q2 2009. Heavy oil sales for Q3 2009 were $11.5 million, up 5% from Q2 2009, and NGLs sales for Q3 2009 were $5.3 million, up 6% from Q2 2009. Total revenue decreased 54% in Q3 2009 from Q3 2008, consistent with a 58% decrease in the average realized price on a combined boe basis partially offset by an 8% increase in production volumes. For the YTD 2009 period, Daylight realized a 44% decrease in natural gas revenue, a 61% decrease in light oil revenue, a 45% decrease in heavy oil revenue, a 39% decrease in NGL revenue, and a 50% decrease in total revenue over the YTD 2008 period.

Royalties

Royalty payments are made to the owners of the mineral rights on 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 their 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 Alberta provincial government.



----------------------------------------------------------------------------
Royalties by type (000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Crown royalties $ 7,698 $ 8,521 $21,539 $27,286 $61,224
Freehold royalties 1,179 1,133 3,070 3,423 8,502
Overriding royalties 1,650 1,584 3,540 5,167 9,724
----------------------------------------------------------------------------
Total $10,527 $11,238 $28,149 $35,876 $79,450
----------------------------------------------------------------------------
$ per boe $ 4.87 $ 5.36 $ 14.05 $ 5.68 $ 13.96
----------------------------------------------------------------------------
% of revenue 15.9 16.9 19.4 17.5 19.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Royalties by commodity (000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Natural gas $ (443) $ 3,153 $10,853 $ 9,993 $30,473
Oil and NGLs 10,970 8,085 17,296 25,883 48,977
----------------------------------------------------------------------------
Total $10,527 $11,238 $28,149 $35,876 $79,450
----------------------------------------------------------------------------
Natural gas ($/boe) $ (0.29) $ 2.16 $ 8.65 $ 2.29 $ 8.91
Oil and NGLs ($/boe) 17.55 12.66 23.07 13.33 21.55
----------------------------------------------------------------------------
Total ($/boe) $ 4.87 $ 5.36 $ 14.05 $ 5.68 $ 13.96
----------------------------------------------------------------------------
Natural gas (% of revenue) (1.6) 10.2 16.9 9.8 16.6
Oil and NGLs (% of revenue) 28.9 22.6 21.4 25.3 21.5
----------------------------------------------------------------------------
Total (% of revenue) 15.9 16.9 19.4 17.5 19.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Overall royalty rates decreased to 15.9% of revenue in Q3 2009 from 16.9% of revenue in Q2 2009. Daylight received Gas Cost Allowance credits in Q3 2009 resulting in a recovery of $0.4 million or 1.6% of revenue. Had these credits not been received, Daylight's natural gas royalty rate for Q3 2009 would have been 16.6%. Oil and NGLs royalty rates increased to 28.9% of revenue during Q3 2009 as compared to 22.6% of revenue in Q2 2009 due to increased commodity prices. Total royalty rates decreased to 15.9% of revenue for Q3 2009 compared with 19.4% of revenue for Q3 2008. Year over year for the nine month period, total royalty rates decreased to 17.5% of revenue for YTD 2009 from 19.4% of revenue for YTD 2008, a change of 1.9% due to higher commodity prices realized during YTD 2008.

On October 25, 2007, the Alberta government introduced a proposed New Royalty Framework ("NRF") which took effect January 1, 2009. On April 10, 2008, the Alberta Government announced revisions to the NRF to increase royalty rates on conventional and non-conventional oil and natural gas production whereby royalty rates may increase to maximum rates of 50%, to introduce broader ranges of commodity prices in its sliding scale royalty calculations, and to eliminate royalty incentive and holiday programs with the exception of specific programs relating to deep oil and natural gas drilling, innovative technology and enhanced recovery programs. Subsequent to the legislation of the NRF in November 2008, the Transitional Royalty Plan ("TRP") was introduced in response to the economic downturn and declining commodity prices. The TRP offers reduced royalty rates for wells drilled on or later than November 19, 2008 which meet certain depth criteria. The TRP is in place for a maximum period of five years up to December 31, 2013.

On March 3, 2009, an incentive program (the "Energy Incentive Program") designed to encourage the execution of new drilling projects in Alberta was announced in response to the slowdown in drilling activity throughout the province of Alberta. The Energy Incentive Program provides for a drilling royalty credit for new conventional oil and natural gas wells that initiate drilling on or after April 1, 2009 and that complete drilling by March 31, 2010. The drilling credit is based on a $200 per meter credit on total meters drilled with a cap based on production levels and Alberta Crown royalties paid. The Energy Incentive Program also provides a reduced royalty rate of 5% on new wells for the first year of production up to an established total production volume. On June 25, 2009, the Alberta government extended the Energy Incentive Program by one year to March 31, 2011. The Trust adjusted portions of its capital program for Q1 2009 wells to take advantage of this program.

Approximately 95% of Daylight's reserves and production are in Alberta, with the balance located in British Columbia and Saskatchewan. Approximately 76% of current production is subject to Crown royalties, which are affected directly by the government royalty programs, and the remaining 24% of Daylight's 2009 royalties are related to freehold and override charges, which are not directly affected by these programs. Consequently, the NRF, TRP and the new Energy Incentive Program will impact Daylight's royalty rates, the effect of which is dependent upon commodity prices.

Future reserve and production addition activities are expected to be significantly impacted by changes to the royalty system. The Trust's depth of prospect inventory allows Daylight to select capital expenditure programs that provide the greatest value to our unitholders in the context of the expected change to the royalty system.

Financial Instruments

Financial instruments comprise accounts receivable, investments, accounts payable and accrued liabilities, derivative contracts, cash distributions payable, bank debt, and convertible debentures. Unless otherwise noted, carrying values reflect the current fair value of the Trust's financial instruments due to the short term to maturity. The Trust's investments held for trading include the trust units of Harvest Energy Trust ("Harvest") and shares of Midway Energy Ltd. ("Midway") (see "Investments" section below). The Trust also has an equity investment in Bengal Energy Ltd. ("Bengal") (see "Investments" section below). The investments held for trading have a fair value based on quoted market values of $2.1 million as at September 30, 2009. During Q3 2009, Daylight experienced a $1.1 million unrealized gain on these investments held for trading and a $0.1 million unrealized loss in Q2 2009. The investment in Bengal has a fair value based on quoted market value of $2.1 million as at September 30, 2009. At December 31, 2008, the investment in Bengal was written down to its market value. For the three and nine months ended September 30, 2009 the equity loss on the investment in Bengal was $0.2 million (2008 - $0.3 million) and $0.4 million (2008 - $0.3 million) respectively.

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 September 30, 2009, with a face value of $132.3 million, had a fair value based on quoted market value of $146.2 million. The convertible debentures outstanding at November 4, 2009, with a face value of $132.3 million, had a fair value based on quoted market value of $147.6 million.

The Trust may enter into financial or commodity derivative contracts to manage commodity prices, foreign exchange and interest rate risk. The current 12 month forward strip for AECO natural gas is approximately $5.30 per mcf and WTI oil is approximately US$83.90 per barrel which is equivalent to approximately $89.00 Canadian per barrel.



As at September 30, 2009, Daylight had the following derivative contracts in
place:

----------------------------------------------------------------------------
Hedged
Type of Contract Commodity Volume (3) Hedge Price Hedge Period
----------------------------------------------------------------------------
Oct 1/09 to
Financial (Swap) (1) Natural gas 35,000 GJ/d Cdn$7.58/GJ Oct 31/09
Oct 1/09 to
Financial (Swap) (1) Natural gas 10,000 GJ/d Cdn$7.59/GJ Oct 31/09
Oct 1/09 to
Financial (Swap) (1) Natural gas 5,000 GJ/d Cdn$7.63/GJ Oct 31/09
Cdn$4.78 - Oct 1/09 to
Financial (Collar) (2) Natural gas 5,000 GJ/d $7.00/GJ Aug 31/10
Cdn$110.00 - Oct 1/09 to
Financial (Collar) (2) Crude oil 1,000 bbl/d $206.00/bbl Dec 31/09
Cdn$110.00 - Oct 1/09 to
Financial (Collar) (2) Crude oil 1,000 bbl/d $205.55/bbl Dec 31/09
Cdn$110.00 - Oct 1/09 to
Financial (Collar) (2) Crude oil 1,000 bbl/d $205.00/bbl Dec 31/09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Swap indicates fixed price.
(2) Collar price indicates floor (minimum) and ceiling (maximum).
(3) A GJ converts to a mcf at the rate of 1.055056 GJs per mcf.


Financial or commodity derivative contracts used to manage risk are subject to periodic settlements throughout the term of the instruments. Such settlements may result in a gain or loss which is recognized as a realized derivative gain or loss at the time of settlement. The mark-to-market value of a derivative contract outstanding at the end of a reporting period reflects the value of the derivative contracts based upon market conditions existing as of that date. Any change in value from that determined at the end of the prior period is recognized as an unrealized gain or loss on derivative contracts.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Realized gain (loss) on
derivative contracts $32,282 $30,048 $(9,237) $87,615 $(18,744)
Unrealized gain (loss) on
derivative contracts (24,173) (32,679) 46,260 (55,015) 18,602
Unrealized gain (loss) on
investments held for trading 1,073 (51) (2,390) 919 (951)
----------------------------------------------------------------------------
Gain (loss) on financial
instruments $ 9,182 $(2,682) $34,633 $33,519 $ (1,093)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
($ per boe) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Realized gain (loss) on
derivative contracts $ 14.93 $ 14.33 $ (4.61) $ 13.88 $ (3.29)
Unrealized gain (loss) on
derivative contracts (11.18) (15.58) 23.08 (8.72) 3.27
Unrealized gain (loss) on
investments held for trading 0.50 (0.02) (1.19) 0.15 (0.17)
----------------------------------------------------------------------------
Gain (loss) on financial
instruments $ 4.25 $ (1.27) $ 17.28 $ 5.31 $ (0.19)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight recognized a realized gain of $32.3 million in Q3 2009 on its derivative contracts compared to a $30.0 million realized gain in Q2 2009 and a $9.2 million realized loss in Q3 2008. Daylight experienced a $24.2 million unrealized loss on its derivative contracts during Q3 2009 compared to a $32.7 million unrealized loss in Q2 2009 and a $46.3 million unrealized gain during the same period last year. For the nine months ended September 30, 2009, Daylight recorded a gain on financial instruments of $33.5 million including a realized gain of $87.6 million on its derivative contracts, compared to a $1.1 million loss for YTD 2008, which included a $18.7 million realized loss on derivative contracts. At September 30, 2009, the unrealized gain on derivative contracts was $17.7 million.

Operating Expenses

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



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Operating expenses $ 25,179 $24,875 $23,943 $74,495 $68,299
$ per boe $ 11.65 $ 11.86 $ 11.95 $ 11.80 $ 12.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight's operating costs during Q3 2009 decreased 2% to $11.65 per boe as compared to Q2 2009 at $11.86 per boe and were 3% lower than Q3 2008, at $11.95 per boe. Daylight's YTD 2009 operating expense on a boe basis, decreased 2% to $11.80 per boe from $12.00 per boe in YTD 2008. Daylight expects its operating costs to continue to decrease in the last quarter of 2009 due to lower costs for goods and services. Daylight expects its operating costs to average approximately $11.50 per boe for the fourth quarter of 2009.

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 increased 7% to $1.12 per boe in Q3 2009 compared to $1.05 per boe in Q2 2009 and increased 6% compared to $1.06 per boe in Q3 2008. On a year to date basis, transportation costs increased 8% in 2009 to $1.10 per boe from the 2008 rate of $1.02 per boe.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Transportation expenses $ 2,424 $ 2,201 $ 2,132 $ 6,935 $ 5,779
$ per boe $ 1.12 $ 1.05 $ 1.06 $ 1.10 $ 1.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Operating Netbacks

The following table provides detail regarding Daylight's operating netbacks
on a per boe basis.

----------------------------------------------------------------------------
$ per boe Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 30.58 $ 31.78 $ 72.50 $ 32.42 $ 72.12
Royalties (4.87) (5.36) (14.05) (5.68) (13.96)
Realized gain (loss) on
derivative contracts 14.93 14.33 (4.61) 13.88 (3.29)
Operating expenses (11.65) (11.86) (11.95) (11.80) (12.00)
Transportation expenses (1.12) (1.05) (1.06) (1.10) (1.02)
----------------------------------------------------------------------------
Operating netback $ 27.87 $ 27.84 $ 40.82 $ 27.72 $ 41.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------

General and Administrative Expenses

The following tables provide detail regarding Daylight's general and
administrative expenses ("G&A") on a total and per boe basis.

----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Gross G&A $ 7,637 $ 7,956 $ 8,845 $26,980 $23,867
Operating recoveries (738) (799) (1,846) (3,174) (5,591)
Capitalized costs (1,965) (2,040) (2,457) (6,870) (5,880)
----------------------------------------------------------------------------
G&A - cash charge 4,934 5,117 4,542 16,936 12,396
Unit-based compensation 1,232 1,236 735 3,428 5,131
----------------------------------------------------------------------------
Net G&A $ 6,166 $ 6,353 $ 5,277 $20,364 $17,527
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
$ per boe Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Gross G&A $ 3.53 $ 3.79 $ 4.42 $ 4.27 $ 4.19
Operating recoveries (0.34) (0.38) (0.92) (0.50) (0.98)
Capitalized costs (0.91) (0.97) (1.23) (1.09) (1.03)
----------------------------------------------------------------------------
G&A - cash charge 2.28 2.44 2.27 2.68 2.18
Unit-based compensation 0.57 0.59 0.36 0.54 0.90
----------------------------------------------------------------------------
Net G&A $ 2.85 $ 3.03 $ 2.63 $ 3.22 $ 3.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------


General and administrative expenses during Q3 2009 were $6.2 million ($2.85 per boe) including non-cash unit-based compensation of $1.2 million ($0.57 per boe). General and administrative expenses for Q2 2009 were $6.4 million ($3.03 per boe) including non-cash unit-based compensation of $1.2 million ($0.59 per boe). G&A expenses for Q3 2008 were $5.3 million ($2.63 per boe) including non-cash unit-based compensation of $0.7 million ($0.36 per boe). The Q3 2009 G&A cash expenses were $0.16 per boe lower than Q2 2009 and $0.01 per boe higher than Q3 2008. Daylight's YTD 2009 G&A cash expenses of $16.9 million were higher than the YTD 2008 G&A cash expenses of $12.4 million due to bonus payments made during 2009. Including non-cash unit-based compensation, G&A expenses for YTD 2009 increased 16% over YTD 2008. During 2009, trust units issued under the Employee Unit Ownership Plan and the Employee Bonus Plan were acquired in the open market and recorded as cash G&A expenses as compared to 2008 when trust units were issued from treasury and included in non-cash unit-based compensation.

Unit-based compensation expense is an allocation of the fair value of Restricted Trust Unit Awards ("RTUs") and Performance Trust Unit Awards ("PTUs") over their vesting period starting at the date of grant. Unit-based compensation expense also includes amounts related to the Employee Bonus Plan and Employee Unit Ownership Plan that were settled in units issued from treasury. The Q3 2009 unit-based compensation expense per boe was 3% lower than Q2 2009 and 58% higher than Q3 2008 due to the issuance of additional unit awards since Q3 2008. No trust units were issued under the Employee Bonus Plan or the Employee Unit Ownership Plan during 2009 and the trust units provided under these plans have been acquired through open market purchases with the cost included in G&A cash expenses.

Related Party Transactions

Daylight and Midnight Oil Exploration Ltd. ("MOX") are considered related, as Daylight's Chairman is a director and officer of MOX. In addition, Daylight's Chief Executive Officer and director is also a director of MOX and Daylight's Corporate Secretary is also MOX's Corporate Secretary. Daylight and MOX are joint venture partners in certain properties, and as a result, revenues and costs related to these properties are allocated to each partner under standard joint venture billing arrangements. Each partner's costs and revenues are based on the exchange amounts which reflect actual third party costs incurred and revenue received. All transactions are conducted under standard business terms and are considered within the normal course of Daylight's business activities and operations. In addition, certain administrative services which provide reasonable economy and do not involve competitive issues are provided to MOX by Daylight on a fixed fee basis negotiated by the parties, which is considered comparable to the fee an independent third party would charge for the services, and may be cancelled by either party.

For the three and nine months ended September 30, 2009, Daylight charged MOX $0.2 million (2008 - $0.4 million) and $0.5 million (2008 - $1.1 million) respectively, for premises costs with a payable balance, which includes joint venture and commodity marketing amounts of approximately $9.0 million due to MOX as at September 30, 2009 (December 31, 2008 - $2.8 million). At September 30, 2009, MOX held an advance capital deposit of $3.0 million (December 31, 2008 - $3.9 million) in conjunction with normal course oil and gas drilling activities.

On October 31, 2008, Daylight acquired from MOX certain petroleum and natural gas assets in the West Central area and entered a farmin arrangement on over 40 gross sections of land in the Elmworth and Peace River Arch areas in exchange for 3.75 million Daylight units and $2.0 million cash. Based on the exchange amount of $7.17 per unit, total consideration for the petroleum and natural gas assets was $28.9 million. The effective date of the purchase was October 1, 2008 and results from operations are included with those of the Trust commencing October 31, 2008. Results from operations and capital expenditures incurred from the effective date of October 1, 2008 to the closing date of October 31, 2008 have been recorded as an adjustment to the purchase equation. (See the "Capital Expenditures, Acquisitions and Divestitures" section of this MD&A.)

Financial Charges

Daylight incurs cash interest expense on its outstanding bank debt and convertible debentures. Daylight's effective bank debt interest rate was 3.0% for Q3 2009 as compared to 2.8% for Q2 2009 and 4.4% for Q3 2008. The effective bank debt interest rate was 2.6% for YTD 2009 (2008 - 4.7%). Daylight's bank debt interest rate is expected to continue to correlate with market interest rates during 2009. On December 19, 2008, Daylight issued $75 million principal amount of 10% Convertible Unsecured Subordinated Debentures, Series C ("Series C Debentures") for net proceeds of $71.7 million (see "Liquidity and Capital Resources" section below). On October 3, 2007, Daylight issued $125 million principal amount of 8.5% Convertible Unsecured Subordinated Debentures, Series B ("Series B Debentures") for net proceeds of $119.6 million, On October 21, 2004, Daylight issued $80 million principal amount of 8.5% Convertible Unsecured Subordinated Debentures, Series A ("Series A Debentures") for net proceeds of $76.8 million. Series A and Series B Debentures have a fixed interest rate of 8.5%. Series C Debentures have a fixed interest rate of 10.0%. Cash financial charges are influenced by both the interest rate and the level of debt outstanding.

Non-cash financial charges relate to amortization of costs incurred to establish bank credit facilities and issue convertible debentures as well as the accretion of the convertible debenture discount. The increase in total financial charges for Q3 2009 as compared to Q3 2008 and Q2 2009 is principally due to the increase in the convertible debenture interest. The decrease in total financial charges for YTD 2009 from YTD 2008 is principally due to the decrease in the interest rate on bank debt and a lower average bank debt outstanding.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Bank debt interest $ 1,955 $ 1,723 $ 3,107 $ 5,163 $10,246
Convertible debenture
interest 3,118 3,084 1,519 9,253 7,173
----------------------------------------------------------------------------
Cash financial charges 5,073 4,807 4,626 14,416 17,419
Amortization of financial
charges 28 27 27 82 81
Accretion of convertible
debenture discount 704 702 216 2,067 1,057
----------------------------------------------------------------------------
Total $ 5,805 $ 5,536 $ 4,869 $16,565 $18,557
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
$ per boe Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Bank debt interest $ 0.91 $ 0.82 $ 1.55 $ 0.82 $ 1.80
Convertible debenture
interest 1.44 1.47 0.76 1.46 1.26
----------------------------------------------------------------------------
Cash financial charges 2.35 2.29 2.31 2.28 3.06
Amortization of financial
charges 0.01 0.01 0.01 0.01 0.01
Accretion of convertible
debenture discount 0.33 0.33 0.11 0.33 0.19
----------------------------------------------------------------------------
Total $ 2.68 $ 2.63 $ 2.43 $ 2.62 $ 3.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Depletion, Depreciation and Accretion

Daylight's depletion, depreciation and accretion for Q3 2009 totalled $45.9 million, which is 3% higher than Q2 2009. Q3 2009 charges increased 18% from Q3 2008, primarily due to higher production. Daylight's depletion, depreciation and accretion for YTD 2009 totalled $133.2 million, which is 20% higher than the YTD 2008 total of $111.3 million.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Depletion and Depreciation $ 45,064 $43,799 $38,387 $130,819 $109,256
Accretion 837 749 667 2,331 1,994
----------------------------------------------------------------------------
Total $ 45,901 $44,548 $39,054 $133,150 $111,250
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
$ per boe Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Depletion and Depreciation $ 20.84 $ 20.88 $ 19.16 $ 20.72 $ 19.20
Accretion 0.39 0.36 0.33 0.37 0.35
----------------------------------------------------------------------------
Total $ 21.23 $ 21.24 $ 19.49 $ 21.09 $ 19.55
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Future Taxes

Daylight recorded a future income tax reduction of $13.7 million in Q3 2009, a future income tax reduction of $16.4 million in Q2 2009, and a future income tax expense of $12.9 million in Q3 2008. For YTD 2009, Daylight recorded a future income tax reduction of $33.9 million and a future income tax reduction of $1.9 million for YTD 2008. Daylight is a taxable entity under the Canadian Income Tax Act and is currently taxable only on income that is not distributed or distributable to its unitholders.

Daylight does not currently expect to pay any income taxes until at least 2011.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Future Tax $ (13,678)$(16,437) $12,860 $(33,906) $(1,852)
$ per boe $ (6.33)$ (7.84) $ 6.42 $ (5.37) $ (0.33)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at September 30, 2009, Daylight and its subsidiaries have tax pools of approximately $1.0 billion. These tax pool balances are subject to change as tax returns are completed, annual claims are made, and reclassification of items between categories may occur.



----------------------------------------------------------------------------
(000s) 2009 2008
---------------------------------------------
Corporate Trust Combined Combined
----------------------------------------------------------------------------
Canadian exploration expense $ 123,000 $ - $ 123,000 $ 65,000
Canadian development expense 251,000 - 251,000 251,000
Canadian oil and gas property
expense 65,000 82,000 147,000 134,000
Undepreciated capital cost 211,000 - 211,000 220,000
Non-capital losses 293,000 - 293,000 228,000
Cumulative eligible capital 4,000 - 4,000 4,000
Share and unit issue costs - 13,000 13,000 9,000
----------------------------------------------------------------------------
Total $ 947,000 $ 95,000 $1,042,000 $ 911,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On June 22, 2007, income tax legislation was passed resulting in tax on the distributions of publicly traded income trusts, referred to as Specified Investment Flow-Through ("SIFT Tax") entities, commencing in 2011. Under this legislation, income trust distributions will be subject to a two tier tax structure, similar to that of corporations, whereby distributions paid to unitholders, other than returns of capital, will be subject to tax at the trust level and at the unitholder level. The SIFT Tax is not expected to affect the Trust until 2011 provided that the Trust does not exceed the normal growth guidelines which were amended in December 2008 to allow Trusts to accelerate use of their normal growth room rather than staging it over 2009 and 2010.

On March 12, 2009, new legislation was passed to change the provincial tax rate on income trusts from 13% per the SIFT Tax to the blended provincial tax rate in each province, which for the province of Alberta is currently 10%. Due to this change in legislation, Daylight recorded a future tax expense of $0.9 million at the Trust level in Q1 2009. A reduction in rate would normally cause a future tax reduction; however, due to the Trust being in a future tax asset position, the change resulted in an expense.

On March 12, 2009, The Department of Finance of Canada passed legislation (the SIFT conversion rules) that will facilitate the restructuring of income trusts into corporations by permitting a conversion to be a non-taxable exchange for both the unitholders and the trust.

Management and the Board of Directors continue to review the impact of the SIFT Tax on our business strategy. At this time management is of the opinion that the conversion from a trust to a corporation is the most logical and tax efficient alternative for Daylight unitholders. Management is in the process of detailing the steps required to convert to a corporation and is working with tax advisors to further define the process.

A conversion to a corporation will require the approval of Daylight's unitholders, as well as customary court and regulatory approvals. The closing of a conversion requires a unitholder meeting and must be approved by not less than two-thirds of the votes cast by unitholders voting at the meeting. Daylight currently anticipates that the closing of a conversion would occur on or before its Annual General Meeting in May 2010. The intention would be for a conversion to be a non-taxable exchange for both Canadian and U.S. income tax purposes.

Under Canadian GAAP, management anticipates that the conversion would be accounted for on a continuity of interests basis. Under the continuity of interests method of accounting, the corporation would be recognized as the successor entity to the Trust and the Consolidated Financial Statements would reflect the financial position, results of operations and cash flows as if the corporation had always carried on the business formerly carried on by the Trust. Terms such as shareholder, unitholder, dividend and distribution would be used interchangeably throughout the Consolidated Financial Statements and MD&A.

As a corporation, Daylight expects to continue to allocate its funds from operations to capital expenditures, periodic debt repayments, asset retirement obligations and dividends. Taxable income as a corporation will vary depending on total income and expenses which will vary with commodity prices, costs, claims for both accumulated tax pools and tax pools associated with current year expenditures. Current taxes payable will be subject to normal corporate tax rates. Because Daylight has accumulated over $1.0 billion of tax pools at September 30, 2009, taxable income is expected to be nil for several years following conversion. Tax pools are deductible at various rates and annual deductions associated with the initial tax pools are expected to decline over time.

Returns to shareholders are not expected to be impacted by Daylight's requirement to pay current taxes, if any, for several years following conversion. If a conversion from the trust structure to a corporation is approved by unitholders, the income tax payable by unitholders will vary and each unitholder should consult their own tax advisor for details on the direct impact of the change.

Net Income (Loss), Funds from Operations, and Cash Provided by Operating Activities

As a result of the previously discussed factors, Daylight recognized a Q3 2009 net loss of $7.2 million ($3.35 per boe, $0.06 per unit-basic, $0.06 per unit-diluted), funds from operations of $50.2 million ($23.24 per boe, $0.41 per unit-basic, $0.39 per unit-diluted) and cash provided by operating activities of $44.1 million. For the YTD 2009 period, Daylight recognized a net loss of $15.7 million ($2.49 per boe, $0.15 per unit-basic, $0.15 per unit-diluted), funds from operations of $143.6 million ($22.75 per boe, $1.34 per unit-basic, $1.25 per unit-diluted) and cash provided by operating activities of $140.7 million. Actual results from the comparative periods are presented below.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Net income (loss) $ (7,244)$(14,543) $69,692 $(15,716)$116,095
Per boe $ (3.35)$ (6.93) $ 34.78 $ (2.49)$ 20.40
----------------------------------------------------------------------------
Per Unit
Basic $ (0.06)$ (0.14) $ 0.81 $ (0.15)$ 1.42
Diluted $ (0.06)$ (0.14) $ 0.76 $ (0.15)$ 1.33
----------------------------------------------------------------------------
Funds from operations $ 50,245 $ 48,459 $78,646 $143,599 $214,345
Per boe $ 23.24 $ 23.11 $ 39.24 $ 22.75 $ 37.66
----------------------------------------------------------------------------
Per Unit
Basic $ 0.41 $ 0.45 $ 0.91 $ 1.34 $ 2.63
Diluted $ 0.39 $ 0.42 $ 0.84 $ 1.25 $ 2.37
----------------------------------------------------------------------------
Cash provided by operating
activities $ 44,054 $ 49,198 $97,799 $140,681 $212,343
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight's funds from operations are significantly influenced by commodity prices and production volumes.

Daylight's estimated sensitivity in funds flow to changes in its commodity price, production volume and exchange rate assumptions for the full year 2009 are estimated as follows:

- $2.9 million per $0.10 change in natural gas price per mcf.

- $1.5 million per US$1.00 change in the WTI oil price per bbl.

- $0.7 million per 1 mmcf per day change in production.

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

- $1.5 million per 100 bbl per day change in heavy oil production.

- $0.7 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, Acquisitions and Divestitures

Daylight invested $10.6 million on its capital expenditure program during Q3 2009 compared to $15.8 million in Q2 2009 and $45.7 million in Q3 2008. The capital expenditure program continues to provide new production volumes and Daylight anticipates fiscal 2009 production volumes to average approximately 26,800 boe per day with the addition of 14,000 boe per day from Highpine in the fourth quarter of 2009 and an investment of approximately $160 million for the 2009 year. On a year to date basis, Daylight invested $85.8 million, a decrease of 32% from the same period last year.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Land and acquisitions $ 469 $ 3,131 $ 5,033 $ 6,125 $12,695
Geological and geophysical 1,996 2,192 2,551 7,054 6,771
Drill, complete and recomplete 4,966 3,709 24,919 55,422 70,039
Equipping and facilities 3,182 6,771 13,154 17,228 37,648
----------------------------------------------------------------------------
Capital expenditures $ 10,613 $15,803 $45,657 $85,829 $127,153
Disposition of Sturgeon - - (87,695) - (87,695)
----------------------------------------------------------------------------
Net capital additions $ 10,613 $15,803 $(42,038) $85,829 $ 39,458
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate acquisition $ - $123,827 $ 36,433 $123,827 $ 36,433
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In the first nine months of 2009, Daylight drilled a total of 39 gross (16.6 net) wells with 100% success. This program provided production and reserve additions within the following core areas:

- Peace River Arch Properties include Elmworth, Wapiti and Bilbo. YTD 2009, Daylight drilled 9 gross (4.4 net) natural gas wells.

- West Central properties include Pine Creek, Kaybob, Obed and Oldman. YTD 2009, Daylight drilled 15 gross (4.1 net) natural gas wells.

- Eastern properties include Wildmere, Caroline and Sylvan Lake. YTD 2009, Daylight drilled 6 gross (0.8 net) natural gas wells and 9 gross (7.3 net) light oil wells.

On October 8, 2009, Daylight and Highpine announced that they had closed an agreement that provided for the acquisition of Highpine by Daylight pursuant to a Plan of Arrangement whereby shareholders could elect to receive 0.85 of a Daylight trust unit or $7.00 in cash per share held to a maximum of $75 million. Daylight acquired all of the issued and outstanding class "A" common shares of Highpine through a cash payment of $46 million and the issuance of 51.4 million trust units at a price of $8.11 per unit based on Daylight's weighted average trading price at the August 23, 2009 announcement date.

On June 5, 2009, Daylight acquired all of the issued and outstanding shares of Intrepid by issuing 7.25 million Daylight units at a price of $7.40 per unit and paying $32 million cash. Total consideration for the transaction was approximately $124 million including the assumption of $27.6 million in bank debt and a $10.0 million working capital deficiency including the mark to market value of Intrepid's commodity contract.

On December 1, 2008, Daylight acquired certain petroleum and natural gas assets in the Elmworth area for $64.6 million. This acquisition included an allocation of $12.0 million to undeveloped land and seismic and was effective December 1, 2008. Daylight recorded $0.1 million in associated asset retirement obligations.

On October 31, 2008, Daylight acquired from MOX certain petroleum and natural gas assets in the West Central area and entered into a farmin arrangement on over 40 gross sections of land in the Elmworth and Peace River Arch areas in exchange for 3.75 million Daylight units and $2.0 million cash. Based on the exchange amount of $7.17 per unit, total consideration for the petroleum and natural gas assets was $28.9 million. The effective date of the purchase was October 1, 2008 and results from operations are included with those of the Trust commencing October 31, 2008. Results from operations and capital expenditures incurred from the effective date of October 1, 2008 to the closing date of October 31, 2008 have been recorded as an adjustment to the purchase equation. (See the "Related Party Transactions" section of this MD&A.) Daylight recorded $0.9 million in associated asset retirement obligations.

On September 30, 2008, Daylight disposed of its working interests in the Sturgeon Lake petroleum and natural gas property to a third party for cash proceeds of $87.7 million and removed $3.3 million of associated asset retirement obligations.

On September 17, 2008, Daylight acquired all of the issued and outstanding shares of Athlone for cash consideration of $0.85 per share. Total consideration for the transaction was $36.4 million including the assumption of $3.0 million in bank debt and a $3.8 million working capital deficiency.

On May 26, 2008, Daylight and Cadence Energy Inc. ("Cadence") announced that they had entered into an agreement whereby Daylight would acquire all of the issued and outstanding common shares of Cadence, pursuant to a Plan of Arrangement. On July 20, 2008, Daylight and Cadence terminated the arrangement agreement, due to another offer. As a result, Cadence paid Daylight a $9.0 million termination fee which was received on July 21, 2008. This one-time fee, net of transaction costs of $1.2 million, was reported as other income during the third quarter of 2008.



Investments
----------------------------------------------------------------------------
Number of September 30, 2009 December 31, 2008
Shares or Equity or Equity or
Symbol Units Fair Value Fair Value
----------------------------------------------------------------------------
Bengal Energy Ltd. BNG 4,260,000 $ 965 $ 1,363
Midway Energy Ltd. MEL 1,046,511 1,800 385
Harvest Energy Trust HTE.UN 36,600 255 537
----------------------------------------------------------------------------
Total $ 3,020 $ 2,285
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight owns approximately 23% of the basic issued and outstanding common shares of Bengal Energy Ltd. ("Bengal"), a Calgary-based junior exploration company actively pursuing opportunities in Australia and India. Bengal is a public company trading on the Toronto Stock Exchange under the symbol BNG. This investment is composed of 4,260,000 common shares and Daylight accounts for this investment using the equity method.

On September 30, 2009, Bengal common shares closed at $0.49 per share. As at September 30, 2009, the market value of this investment was approximately $2.1 million (December 31, 2008 - $1.4 million). At December 31, 2008, the investment in Bengal was written down to its market value. For the three months ended September 30, 2009, the equity loss in Bengal was $0.2 million (2008 - $0.1 million gain) and for the nine months ended September 30, 2009, the equity loss on the investment in Bengal was $0.4 million (2008 - $0.2 million).

Daylight owns 1,046,511 common shares of Midway Energy Ltd. ("Midway"), formerly Trafalgar Energy Inc., which is approximately 4% of the issued and outstanding common shares of Midway at September 30, 2009. During Q3 2009, Daylight acquired 306,273 common shares at $0.70 per share through the exercise of warrants. The Trust accounts for its investment in Midway at fair value based on the quoted market price. On September 30, 2009 the Midway common shares closed at $1.72 per share resulting in a market value of this investment of approximately $1.8 million (December 31, 2008 - $0.4 million).

Daylight also owns 36,600 trust units of Harvest Energy Trust ("Harvest"), formerly Pegasus Oil & Gas Inc., which is less than 1% of the issued and outstanding trust units outstanding at September 30, 2009. The Trust accounts for its investment in Harvest at fair value based on the quoted market price. On September 30, 2009, the units closed at $6.97 per unit resulting in a market value of this investment of approximately $0.3 million (December 31, 2008 - $0.5 million).

Daylight continues to consider its investments in Bengal, Midway and Harvest as available for disposition. Harvest has recently entered into a Plan of Arrangement that, at close, will result in the sale of the Harvest units for $10 per unit.

Distributions

During Q3 2009, Daylight declared three monthly cash distributions totalling $29.4 million ($0.24 per trust unit) with a resulting payout ratio of 58%. During Q2 2009, Daylight declared three monthly cash distributions totalling $26.3 million ($0.24 per trust unit) with a resulting payout ratio of 54%. During Q3 2008, Daylight declared three cash distributions totalling $33.7 million ($0.39 per trust unit) with a resulting payout ratio of 43%. YTD 2009, Daylight declared nine monthly cash distributions totalling $77.3 million ($0.72 per trust unit) with a resulting payout ratio of 54%. YTD 2008, Daylight declared nine monthly cash distributions totalling $81.8 million ($0.99 per trust unit) with a resulting payout ratio of 38%.

Daylight's management and the Board of Directors continually monitor the distribution level in relation to forecasted funds from operations, debt levels and capital expenditure programs. Commodity prices and production volumes are critical variables in determining funds from operations and changes in these two items have a material impact on funds from operations and Daylight's ability to fund distributions. Distributions beyond the periods declared are not guaranteed to occur in the future.

Daylight targets to substantially finance its capital expenditures and cash distributions with funds from operations over the longer term. To the extent that capital expenditures are not fully financed by funds from operations, Daylight may draw upon its available credit facilities or issue new trust units or convertible debentures.

As discussed in the non-GAAP measures section of this MD&A, Daylight utilizes the non-GAAP term "funds from operations" to evaluate operating performance and assess leverage. Daylight considers this term to be an important measure in assessing its ability to generate the funds necessary to pay distributions, repay debt and finance capital expenditures. Funds from operations is also utilized in the calculation of "payout ratio" which is also a non-GAAP measure utilized by Daylight to evaluate financial flexibility and the capacity to fund distributions. National Policy 41-201 requires certain disclosures comparing distributions to cash provided by operating activities which is a GAAP measure. A reconciliation of cash provided by operating activities to funds from operations is included in the non-GAAP measures section of this MD&A. The disclosures required by National Policy 41-201 are contained in the following table and paragraphs of this section of the MD&A.



----------------------------------------------------------------------------
(000s) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Cash distributions
declared per unit $ 0.24 $ 0.24 $ 0.39 $ 0.72 $ 0.99
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by
operating activities $ 44,054 $ 49,198 $ 97,799 $ 140,681 $ 212,343
Cash distributions
declared $ 29,385 $ 26,254 $ 33,684 $ 77,296 $ 81,824
----------------------------------------------------------------------------
Excess of cash provided
by operating activities
over cash
distributions
declared: $ 14,669 $ 22,944 $ 64,115 $ 63,385 $ 130,519
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) $ (7,244) $ (14,543) $ 69,692 $ (15,716) $ 116,095
Cash distributions
declared $ 29,385 $ 26,254 $ 33,684 $ 77,296 $ 81,824
----------------------------------------------------------------------------
Excess (shortfall) of
net income over cash
distributions
declared: $ (36,629) $ (40,797) $ 36,008 $ (93,012) $ 34,271
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash provided by operating activities of $44.1 million for Q3 2009 exceeded Daylight's cash distributions declared of $29.4 million by $14.7 million. Cash provided by operating activities of $49.2 million for Q2 2009 exceeded cash distributions declared of $26.3 million by $22.9 million. Cash provided by operating activities of $97.8 million for Q3 2008 exceeded cash distributions declared of $33.7 million by $64.1 million in the period. On a year over year basis, cash provided by operating activities of $140.7 million exceeded the cash distributions of $77.3 million for YTD 2009 by $63.4 million and cash provided by operating activities of $212.3 million exceeded the cash distributions of $81.8 million for YTD 2008 by $130.5 million.

For Q3 2009 and Q2 2009, the cash distributions declared exceeded the net loss of $7.2 million and $14.5 million, respectively, by $36.6 million and $40.8 million respectively. For Q3 2008, net income of $69.7 million exceeded the cash distributions declared by $36.0 million. For the nine months ended September 30, 2009, the cash distributions declared exceeded the net loss of $15.7 million by $93.0 million. For the nine months ended September 30, 2008 the net income of $116.1 million exceeded the cash distributions declared by $34.3 million.

Cash distributions declared often exceed net income but do not typically exceed cash provided by operating activities and this relationship is expected to continue for future periods. Daylight has often declared cash distributions in excess of net income since net income includes several non-cash charges including depletion, depreciation and accretion, unit-based compensation, unrealized gain (loss) on financial instruments and future taxes, which do not impact the funds available to pay distributions declared. The depletion, depreciation and accretion charge does not necessarily represent the cost of maintaining and replacing the volume of reserves produced in the period. In those periods where cash distributions exceed net income, a portion of the distribution declared may represent an economic return of capital for unitholders and the distributions declared may be subject to increases or decreases in future periods depending on future circumstances.

Daylight has a Premium Distribution Reinvestment and Optional Trust Unit Purchase Plan ("Premium DRIP™") for eligible unitholders. On distribution payment dates eligible Premium DRIP™ unitholders may receive, in lieu of the cash distribution that unitholders are otherwise entitled to receive in respect of their units, a cash payment equal to 102% of such amount. Unitholders may also reinvest their cash distributions in additional trust units at a price that is 95% of the average market price for the Pricing Period. The Pricing Period refers to the period beginning on the later of the 21st business day preceding the distribution payment date and the second business day following the record date applicable to that distribution payment date, and ending on the second business day preceding the distribution payment date. Eligible Premium DRIPTM unitholders may also make optional cash payments on this date to purchase additional trust units at a price that is equal to the average market price for the Pricing Period. Daylight can prorate or suspend requests for the receipt of amounts under the Premium DRIP™. Daylight has not issued any trust units under the Premium DRIP™ program since August 2007 when Daylight suspended this program.



Liquidity and Capital Resources

----------------------------------------------------------------------------
(000s) September 30, June 30, December 31, September 30,
2009 2009 2008 2008
----------------------------------------------------------------------------
Bank debt $ 164,172 $ 160,983 $ 219,853 $ 199,282
Working capital
deficiency(1) 31,298 40,986 42,275 37,200
----------------------------------------------------------------------------
195,470 201,969 262,128 236,482
Convertible
debentures -
long-term 117,217 116,525 115,201 54,180
Market value of
investments (4,143) (2,599) (2,285) (9,987)
----------------------------------------------------------------------------
308,544 315,895 375,044 280,675
Unitholders' equity $ 719,207 $ 754,138 $ 588,932 $ 545,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excludes unrealized gain (loss) on derivative contracts and future
income tax liability.


The Trust continually monitors its financing alternatives and expects to substantially finance its cash capital expenditures program and distributions from internally generated funds from operations over the longer term.

At September 30, 2009, Daylight had $164 million outstanding on its credit facilities which provided up to $350 million available under revolving term credit facilities with a syndicate of banks and are subject to semi-annual review by the banking syndicate. The working capital deficiency does not affect the amount available under the credit facilities. Daylight's banking syndicate reviewed and increased the revolving term credit facilities to $500 million on October 8, 2009 upon close of the Highpine acquisition. The next scheduled review date is April 30, 2010. The available lending limits of the facilities are based on the syndicate's interpretation of the Trust's reserves and future commodity prices. There can be no assurance that the amount of the available facilities will not decrease at the next scheduled review on or before April 30, 2010.

On May 7, 2009, Daylight issued 24,630,000 trust units at a price of $7.00 per trust unit for gross proceeds of $172 million. Net proceeds were used by the Trust to reduce outstanding borrowings under Daylight's credit facilities, fund future growth initiatives and for general corporate purposes.

On December 19, 2008, Daylight issued $75 million principal amount of 10% Convertible Unsecured Subordinated Debentures, Series C for net proceeds of $71.7 million. The Series C Debentures pay interest semi-annually on December 31 and June 30, commencing with the initial interest payment on June 30, 2009 and have a maturity date of December 31, 2013. The Series C Debentures are convertible at the option of the holder to trust units at a conversion price of $9.60 per trust unit. The Trust has the option to redeem the Series C Debentures at a price of $1,050 per Series C Debenture after December 31, 2011 and on or before December 31, 2012 and at a price of $1,025 per Series C Debenture after December 31, 2012 and before the maturity date of December 31, 2013.

The market value of Daylight's investments is based on the closing trading value of the related securities at the end of the periods and Daylight's ability to realize this value is subject to changes in the trading value of these securities. Daylight's working capital deficiency, excluding the unrealized gain on derivative contracts and future income tax liability, at September 30, 2009 was $31.3 million.

Daylight targets funding distributions and capital expenditures from internally generated funds from operations over the longer term. As such, management anticipates that Daylight will continue to have adequate liquidity to fund future working capital and forecasted capital expenditures during 2009 and 2010 through funds from operations and/or debt and equity as required. Funds from operations used to finance these expenditures may reduce the amount of funding available to provide cash distributions to unitholders. Major acquisitions will require the issuance of new equity and/or convertible debentures.

On July 22, 2008, one of Daylight's minor oil marketing and natural gas processing counterparties, SemGroup L.P. ("SemCanada") entered creditor protection. As of that date, Daylight had a receivable from certain subsidiaries of SemCanada of approximately $1.8 million. As of December 31, 2008, Daylight considered collection of this receivable at risk and as such, had provided an allowance for doubtful accounts of $1.8 million. Daylight has no history of losses associated with its marketing counterparties and believes this to be non-recurring in nature. Daylight's credit risk program is considered appropriate and it has been concluded that these events could not have been foreseen by a standard credit risk program.

Trust Unit Information

Daylight's trust 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.



----------------------------------------------------------------------------
(per unit) Q3 Q2 Q3 YTD YTD
2009 2009 2008 2009 2008
----------------------------------------------------------------------------
High $ 9.13 $ 8.66 $ 13.45 $ 9.13 $ 13.45
Low $ 7.02 $ 6.44 $ 9.37 $ 5.12 $ 6.81
Close $ 8.50 $ 7.37 $ 10.20 $ 8.50 $ 10.20
Average daily volume 1,103,624 881,776 902,430 847,239 708,051
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On October 22, 2009 Daylight filed notice with the Toronto Stock Exchange (the "TSX") to make a normal course issuer bid (the "2009 Bid") to purchase outstanding trust units on the open market through the facilities of the TSX. The TSX has authorized Daylight to purchase up to 17,102,157 trust units, being 10% of the public float, from October 26, 2009 through October 25, 2010 or such earlier time as the 2009 Bid is completed or terminated at the option of the Trust. The Trust will pay for any trust units acquired under the 2009 Bid at the prevailing market price on the TSX at the time of the purchase. The Trust Units acquired under the 2009 Bid will be cancelled.

On July 28, 2008, Daylight filed notice with the TSX to make a normal course issuer bid (the "2008 Bid") to purchase outstanding trust units on the open market through the facilities of the TSX. The TSX authorized Daylight to purchase up to 8,206,753 trust units, being 10% of the public float, from July 30, 2008 through July 29, 2009 or such earlier time as the 2008 Bid was completed or terminated at the option of the Trust. The Trust paid for any trust units acquired under the 2008 Bid at the prevailing market price on the TSX at the time of the purchase and any trust units acquired under the 2008 Bid were cancelled. For the nine months ended September 30, 2009, no trust units were purchased and cancelled. For the year ended December 31, 2008, Daylight purchased and cancelled 386,200 units at a cost of $3.9 million. The average carrying value of the units repurchased of $5.2 million was charged to unitholders' capital with the excess of $1.3 million charged to contributed surplus.



As at September 30, 2009, Daylight had the following trust units and trust
unit equivalents outstanding:

----------------------------------------------------------------------------
Number
----------------------------------------------------------------------------
Trust units 122,436,562
Convertible debentures Series A ($3,576,000 face value) 253,997
Convertible debentures Series B ($53,737,000 face value) 6,248,488
Convertible debentures Series C ($75,000,000 face value) 7,812,500
Restricted Trust Unit Awards (946,268) 1,243,779
Performance Trust Unit Awards (430,666) 503,412
----------------------------------------------------------------------------
Total Diluted 138,498,738
----------------------------------------------------------------------------
----------------------------------------------------------------------------

On October 8, 2009, Daylight issued 51,413,561 trust units on the
acquisition of Highpine. Daylight also issued 363,958 trust units upon the
vesting of Restricted and Performance Trust Unit Awards subsequent to
September 30, 2009.

As at November 4, 2009, Daylight has the following trust units and trust
unit equivalents outstanding:

----------------------------------------------------------------------------
Number
----------------------------------------------------------------------------
Trust units 174,214,081
Convertible debentures Series A ($3,576,000 face value) 253,997
Convertible debentures Series B ($53,737,000 face value) 6,248,488
Convertible debentures Series C ($75,000,000 face value) 7,812,500
Restricted Trust Unit Awards (874,052) 1,088,445
Performance Trust Unit Awards (405,249) 465,926
----------------------------------------------------------------------------
Total Diluted 190,083,437
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Commitments

The following is a summary of Daylight's contractual obligations and
commitments as at September 30, 2009:

----------------------------------------------------------------------------
2009 2010 2011 2012 2013 Thereafter
----------------------------------------------------------------------------
Operating leases $ 2,426 $ 4,093 $ 2,432 $ 1,526 $ 1,525 $ 4,956
Natural gas
transportation 586 2,236 1,656 422 - -
Convertible
debentures
(face value) 3,576 - - 53,737 75,000 -
Bank debt - - 164,172 - - -
----------------------------------------------------------------------------
$ 6,588 $ 6,329 $ 168,260 $ 55,685 $ 76,525 $ 4,956
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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



Quarterly Financial Information
----------------------------------------------------------------------------
(000s) Q3 Q2 Q1 Q4
2009 2009 2009 2008
----------------------------------------------------------------------------
Funds from operations $ 50,245 $ 48,459 $ 44,895 $ 50,075
Per Unit
Basic $ 0.41 $ 0.45 $ 0.50 $ 0.56
Diluted $ 0.39 $ 0.42 $ 0.45 $ 0.52
----------------------------------------------------------------------------
Cash provided by operating
activities $ 44,054 $ 49,198 $ 47,429 $ 47,416
----------------------------------------------------------------------------
Net income (loss) $ (7,244) $ (14,543) $ 6,071 $ 44,424
----------------------------------------------------------------------------
Per Unit
Basic $ (0.06) $ (0.14) $ 0.07 $ 0.50
Diluted $ (0.06) $ (0.14) $ 0.07 $ 0.48
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 66,100 $ 66,649 $ 71,893 $ 91,311
----------------------------------------------------------------------------
Average daily production
combined (boe/d) 23,502 23,047 22,810 21,863
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
(000s) Q3 Q2 Q1 Q4
2008 2008 2008 2007
----------------------------------------------------------------------------
Funds from operations $ 78,646 $ 77,032 $ 58,667 $ 47,479
----------------------------------------------------------------------------
Per Unit
Basic $ 0.91 $ 0.95 $ 0.75 $ 0.61
Diluted $ 0.84 $ 0.85 $ 0.66 $ 0.54
----------------------------------------------------------------------------
Cash provided by operating
activities $ 97,799 $ 71,028 $ 43,516 $ 44,824
----------------------------------------------------------------------------
Net income (loss) $ 69,692 $ 42,462 $ 3,941 $ (127,381)
----------------------------------------------------------------------------
Per Unit
Basic $ 0.81 $ 0.53 $ 0.05 $ (1.64)
Diluted $ 0.76 $ 0.48 $ 0.05 $ (1.64)
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 145,269 $ 151,171 $ 113,986 $ 99,718
----------------------------------------------------------------------------
Average daily production
combined (boe/d) 21,782 20,717 19,804 20,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Funds from operations increased during Q3 2009 and Q2 2009 versus Q1 2009 as crude oil prices recovered and total production increased. Cash provided by operating activities increased during Q2 2009 versus Q1 2009 also due to improved crude oil prices and total production increases. Cash provided by operating activities decreased during Q3 2009 due to increased asset retirement expenditures. Funds from operations and cash provided by operating activities decreased during Q1 2009 and Q4 2008 versus Q3 2008 due to falling commodity prices. Funds from operations remained relatively flat during Q3 2008 and Q2 2008. During Q4 2007 and the first half of 2008, funds from operations showed significant increases due to rising commodity prices for crude oil and natural gas resulting in significant increases in revenue. Fluctuating commodity prices resulted in realized gains on commodity contracts in 2007 and 2009, and losses in 2008. Two transactions affected funds from operations in Q3 2008. Q3 2008 funds from operations was positively impacted by a termination fee of $9.0 million, net of transaction costs of $1.2 million, paid to Daylight by Cadence upon termination of their arrangement agreement. A provision for non-recoverable accounts receivable due from certain subsidiaries of SemCanada, for $1.8 million, negatively impacted Q3 2008 funds from operations. Cash provided by operating activities remained relatively flat for the period Q4 2007 to Q1 2008.

Net income (loss) has been affected by fluctuations in commodity prices and realized gains and losses on derivative contracts as well as the two transactions in Q3 2008 as discussed above. Net income (loss) has been significantly impacted by non-cash items such as future taxes, unrealized gains and losses on commodity contracts, and a write down to goodwill. In Q4 2007, Daylight recorded a write down of $137.9 million to goodwill which significantly affected net income (loss) for the period. There has been no impairment to the value of Daylight's petroleum and natural gas assets and no write down of petroleum and natural gas assets has been recorded in any period.

Control Environment

Disclosure Controls and Procedures

Daylight's Chief Executive Officer and Chief Financial Officer have designed or caused to be designed under their supervision, disclosure controls and procedures that 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 interim filing, that Daylight's disclosure controls and procedures for the three months ended September 30, 2009 are designed to provide reasonable assurance that material information related to Daylight, including its consolidated subsidiaries, is made known to them by others within those entities.

Internal Control Over Financial Reporting

Daylight's Chief Executive Officer and Chief Financial Officer have designed or caused to be designed under their supervision, internal controls over financial reporting related to the Trust, including its consolidated subsidiaries, to provide reasonable assurance regarding the reliability of the Trust's financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. As at September 30, 2009, Daylight's Chief Executive Officer and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the design of the Trust's internal controls over financial reporting and have concluded that these controls are designed effectively.

Daylight's Chief Executive Officer and Chief Financial Officer are required to disclose herein any change in the Trust's internal control over financial reporting that occurred during the Trust's most recent interim period that has materially affected, or is reasonably likely to have materially affected, the Trust's control over financial reporting. No changes in the Trust's internal controls over financial reporting were identified during the three months ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Trust's internal controls over financial reporting.

It should be noted that while Daylight's Chief Executive Officer and Chief Financial Officer believe that the Trust's disclosure controls and procedures and internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal controls over financial reporting 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

The significant accounting policies used by Daylight are disclosed in note 1 to the Consolidated Financial Statements for the years ended December 31, 2008 and 2007. Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates on a regular basis. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates.

Future Accounting Changes

Financial Instruments - Disclosures

In May 2009, the CICA amended Section 3862, "Financial Instruments - Disclosures" to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. These amendments are effective for the Trust on December 31, 2009.

International Financial Reporting Standards ("IFRS")

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises for interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011, including comparatives for 2010.

In response, the Trust has developed a changeover plan and established a timeline for the execution and completion of the conversion project. During the three months ended September 30, 2009, IFRS in-depth reviews have been concentrated on business combinations, intangible assets, borrowing costs and investments while activities during the first half of 2009 were focused on componentization; provisions and contingent liabilities; property, plant, and equipment; exploration assets; cash-generating units and unit-based compensation. During Q3 2009, the Trust has also been developing and testing system changes. The Trust continues to monitor standards development as issued by the IASB and the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.

Risks and Uncertainties

Daylight is subject to multiple business risks that are similar to other entities involved in the conventional energy trust sector. Daylight's financial position, results of operations, funds from operations and distributions to unitholders are directly impacted by these factors.

For a detailed discussion of the Risks and Uncertainties, refer to the Trust's Revised Annual Information Form, filed on SEDAR at www.sedar.com.



Quarterly Information

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial
2009 2008
(in thousands of dollars, except -------------------------------------------
unit, per unit and boe data) Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 66,100 $ 66,649 $ 71,893 $ 91,311
Royalties (10,527) (11,238) (14,111) (18,814)
Realized gain (loss) on
derivative contracts 32,282 30,048 25,285 12,230
Operating expenses (25,179) (24,875) (24,441) (24,038)
Transportation expenses (2,424) (2,201) (2,310) (2,423)
----------------------------------------------------------------------------
Operating netback 60,252 58,383 56,316 58,266
G&A - cash charge (4,934) (5,117) (6,885) (4,483)
Cash financial charges (5,073) (4,807) (4,536) (3,708)
Provision for non- recoverable
accounts receivable - - - -
Other income (1) - - - -
----------------------------------------------------------------------------
Funds from operations 50,245 48,459 44,895 50,075
Per unit - Basic 0.41 0.45 0.50 0.56
- Diluted 0.39 0.42 0.45 0.52
----------------------------------------------------------------------------
Cash provided by operating
activities 44,054 49,198 47,429 47,416
----------------------------------------------------------------------------
Net income (loss) (7,244) (14,543) 6,071 44,424
Per unit - Basic (0.06) (0.14) 0.07 0.50
- Diluted (0.06) (0.14) 0.07 0.48
----------------------------------------------------------------------------
Cash distributions declared 29,385 26,254 21,657 35,193
Per unit 0.24 0.24 0.24 0.39
Payout ratio 58% 54% 48% 70%
----------------------------------------------------------------------------
Capital expenditures 10,613 15,803 59,413 38,766
Cash property acquisitions - - - 66,571
Cash property divestitures - - - -
Non-cash property acquisitions - - - 26,887
----------------------------------------------------------------------------
Corporate acquisitions - 123,827 - -
----------------------------------------------------------------------------
Market value of investments 4,143 2,599 2,013 2,285
----------------------------------------------------------------------------
Bank debt 164,172 160,983 238,359 219,853
Working capital
deficiency(2) 31,298 40,986 60,981 42,275
----------------------------------------------------------------------------
Convertible debentures 117,217 116,525 115,836 115,201
----------------------------------------------------------------------------
Total assets 1,097,686 1,153,128 1,077,667 1,058,195
----------------------------------------------------------------------------
Units outstanding (000s)
Basic 122,437 122,434 90,239 90,239
Diluted 138,499 138,457 106,517 106,050
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
----------------------------------------------------------------------------
Natural gas (mcf/d) 100,250 96,173 91,668 82,572
----------------------------------------------------------------------------
Light oil (bbls/d) 3,421 3,596 3,935 4,086
Heavy oil (bbls/d) 2,096 2,141 2,117 2,798
NGLs (bbls/d) 1,277 1,281 1,480 1,217
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 6,794 7,018 7,532 8,101
----------------------------------------------------------------------------
Combined (boe/d) 23,502 23,047 22,810 21,863
----------------------------------------------------------------------------
Average prices received
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 3.05 $ 3.53 $ 5.24 $ 7.11
----------------------------------------------------------------------------
Light oil ($/bbl) 67.58 60.54 46.17 55.28
Heavy oil ($/bbl) 59.39 56.16 37.57 45.20
NGLs ($/bbl) 45.08 42.75 38.81 43.27
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 60.82 $ 55.96 $ 42.31 $ 50.00
----------------------------------------------------------------------------
Combined ($/boe) $ 30.58 $ 31.78 $ 35.02 $ 45.40
----------------------------------------------------------------------------
Wells drilled - gross (net) 17 (10.4) 2 (0.1) 20 (6.1) 10 (3.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial 2008 2007
(in thousands of dollars, except -------------------------------------------
unit, per unit and boe data) Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 145,269 $ 151,171 $ 113,986 $ 99,718
Royalties (28,149) (29,568) (21,733) (18,853)
Realized gain (loss) on
derivative contracts (9,237) (9,507) - 2,145
Operating expenses (23,943) (22,587) (21,769) (23,072)
Transportation expenses (2,132) (1,926) (1,721) (2,019)
----------------------------------------------------------------------------
Operating netback 81,808 87,583 68,763 57,919
G&A - cash charge (4,542) (4,175) (3,679) (3,724)
Cash financial charges (4,626) (6,376) (6,417) (6,716)
Provision for non-recoverable
accounts receivable (1,800) - - -
Other income (1) 7,806 - - -
----------------------------------------------------------------------------
Funds from operations 78,646 77,032 58,667 47,479
Per unit - Basic 0.91 0.95 0.75 0.61
- Diluted 0.84 0.85 0.66 0.54
----------------------------------------------------------------------------
Cash provided by operating
activities 97,799 71,028 43,516 44,824
----------------------------------------------------------------------------
Net income (loss) 69,692 42,462 3,941 (127,381)
Per unit - Basic 0.81 0.53 0.05 (1.64)
- Diluted 0.76 0.48 0.05 (1.64)
----------------------------------------------------------------------------
Cash distributions declared 33,684 24,807 23,333 23,296
Per unit 0.39 0.30 0.30 0.30
Payout ratio 43% 32% 40% 49%
----------------------------------------------------------------------------
Capital expenditures 45,657 37,866 43,630 29,089
Cash property acquisitions - - - -
Cash property divestitures (87,695) - - -
Non-cash property acquisitions - - - -
----------------------------------------------------------------------------
Corporate acquisitions 36,433 - - -
----------------------------------------------------------------------------
Market value of investments 9,987 18,554 15,172 13,068
----------------------------------------------------------------------------
Bank debt 199,282 274,313 268,410 257,342
Working capital deficiency(2) 37,200 9,740 29,908 32,088
----------------------------------------------------------------------------
Convertible debentures 54,180 62,762 120,170 119,792
----------------------------------------------------------------------------
Total assets 915,364 970,810 949,143 922,344
----------------------------------------------------------------------------
Units outstanding (000s)
Basic 86,299 85,481 77,914 77,657
Diluted 94,295 94,553 94,096 93,850
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
----------------------------------------------------------------------------
Natural gas (mcf/d) 81,798 75,041 67,691 71,187
----------------------------------------------------------------------------
Light oil (bbls/d) 4,864 4,899 5,174 4,964
Heavy oil (bbls/d) 2,179 2,257 2,181 2,488
NGLs (bbls/d) 1,106 1,054 1,167 1,266
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 8,149 8,210 8,522 8,718
----------------------------------------------------------------------------
Combined (boe/d) 21,782 20,717 19,804 20,583
----------------------------------------------------------------------------
Average prices received
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 8.54 $ 10.16 $ 7.92 $ 6.49
----------------------------------------------------------------------------
Light oil ($/bbl) 116.11 120.93 91.40 81.84
Heavy oil ($/bbl) 99.43 96.07 71.54 53.50
NGLs ($/bbl) 89.43 84.76 74.91 64.99
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 108.03 $ 109.46 $ 84.06 $ 71.31
----------------------------------------------------------------------------
Combined ($/boe) $ 72.50 $ 80.19 $ 63.25 $ 52.66
----------------------------------------------------------------------------
Wells drilled - gross (net) 15 (7.0) 3 (2.2) 22 (8.9) 11 (7.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Termination fee of $9.0 million relates to termination of arrangement
with Cadence Energy Inc., less transaction costs of $1.2 million.
(2) Excludes unrealized gain (loss) on derivative contracts and future
income taxes.

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial
2007 2006
(in thousands of dollars, except ------------------------------------------
unit, per unit and boe data) Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 82,557 $ 92,699 $ 91,982 $ 92,715
Royalties (14,454) (18,223) (16,237) (17,444)
Realized gain (loss) on
derivative contracts 5,118 (320) 24 91
Operating expenses (21,555) (27,268) (21,971) (21,319)
Transportation expenses (1,920) (2,085) (1,833) (1,871)
----------------------------------------------------------------------------
Operating netback 49,746 44,803 51,965 52,172
G&A - cash charge (3,552) (4,117) (3,840) (4,326)
Cash financial charges (5,851) (5,412) (5,292) (4,519)
Cash taxes - - - (54)
----------------------------------------------------------------------------
Funds from operations 40,343 35,274 42,833 43,273
Per unit - Basic 0.52 0.46 0.57 0.59
- Diluted 0.52 0.46 0.57 0.59
----------------------------------------------------------------------------
Cash provided by operating
activities 38,850 37,211 46,500 21,314
----------------------------------------------------------------------------
Net income (loss) 7,131 18,682 5,301 (283,511)
Per unit - Basic 0.09 0.24 0.07 (3.88)
- Diluted 0.09 0.24 0.07 (3.88)
----------------------------------------------------------------------------
Cash distributions declared 27,006 34,475 34,114 43,008
Per unit 0.35 0.45 0.45 0.59
Payout ratio 67% 98% 80% 99%
----------------------------------------------------------------------------
Capital expenditures 33,727 12,887 20,677 17,032
Cash property acquisition - - - 32,729
Non-cash property divestitures - - - -
----------------------------------------------------------------------------
Corporate acquisitions - - - -
----------------------------------------------------------------------------
Market value of investments 13,336 17,988 16,673 22,860
----------------------------------------------------------------------------
Bank debt 363,153 358,832 338,511 349,336
Working capital deficiency(2) 40,097 25,499 29,649 22,624
----------------------------------------------------------------------------
Convertible debentures 3,467 3,456 3,444 3,515
----------------------------------------------------------------------------
Total assets 1,065,025 1,072,055 1,083,695 1,114,085
----------------------------------------------------------------------------
Units outstanding (000s)
Basic 77,475 76,652 76,542 74,322
Diluted 78,983 78,133 77,597 75,309
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
----------------------------------------------------------------------------
Natural gas (mcf/d) 69,143 74,356 78,556 80,991
----------------------------------------------------------------------------
Light oil (bbls/d) 4,565 4,258 4,310 4,455
Heavy oil (bbls/d) 2,382 2,416 2,504 2,796
NGLs (bbls/d) 1,129 1,258 1,449 1,449
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 8,076 7,932 8,263 8,700
----------------------------------------------------------------------------
Combined (boe/d) 19,600 20,325 21,356 22,199
----------------------------------------------------------------------------
Average prices received
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 5.33 $ 7.46 $ 7.29 $ 6.89
----------------------------------------------------------------------------
Light oil ($/bbl) 73.87 67.09 61.34 60.07
Heavy oil ($/bbl) 51.97 46.05 42.50 39.59
NGLs ($/bbl) 59.90 53.42 54.31 49.53
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 65.46 $ 58.51 $ 54.40 $ 51.73
----------------------------------------------------------------------------
Combined ($/boe) $ 45.79 $ 50.12 $ 47.86 $ 45.40
----------------------------------------------------------------------------
Wells drilled - gross (net) 18 (9.9) 4 (3.6) 11 (6.0) 9 (1.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Financial 2006 2005
(in thousands of dollars, except -------------------------------------------
unit, per unit and boe data) Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 69,877 $ 68,554 $ 66,187 $ 85,615
Royalties (13,312) (14,040) (12,485) (15,802)
Realized gain (loss) on
derivative contracts (133) - - (99)
Operating expenses (15,901) (15,286) (14,848) (13,580)
Transportation expenses (1,959) (1,354) (1,309) (1,657)
----------------------------------------------------------------------------
Operating netback 38,572 37,874 37,545 54,477
G&A - cash charge (3,634) (2,625) (2,596) (3,545)
Cash financial charges (2,695) (2,286) (1,699) (1,862)
Cash taxes (1) 222 (225) (603)
----------------------------------------------------------------------------
Funds from operations 32,242 33,185 33,025 48,467
Per unit - Basic 0.71 0.79 0.80 1.33
- Diluted 0.68 0.77 0.77 1.26
----------------------------------------------------------------------------
Cash provided by operating
activities 31,783 42,119 17,889 47,285
----------------------------------------------------------------------------
Net income (loss) (2,140) 15,735 12,093 25,447
Per unit - Basic (0.05) 0.38 0.29 0.70
- Diluted (0.05) 0.38 0.29 0.69
----------------------------------------------------------------------------
Cash distributions declared 31,844 26,663 26,407 24,316
Per unit 0.62 0.63 0.63 0.63
Payout ratio n/a(1) 80% 80% 50%
----------------------------------------------------------------------------
Capital expenditures 19,358 21,034 35,378 20,215
Cash property acquisition - - - -
Non-cash property divestitures (21,100) (6,628) - (14,636)
----------------------------------------------------------------------------
Corporate acquisitions 527,691 - - 116,509
----------------------------------------------------------------------------
Market value of investments 20,500 5,783 - -
----------------------------------------------------------------------------
Bank debt 287,392 165,114 162,190 123,455
Working capital deficiency(2) 50,318 28,931 17,048 26,575
----------------------------------------------------------------------------
Convertible debentures 3,510 3,973 6,996 9,219
----------------------------------------------------------------------------
Total assets 1,424,236 833,821 845,746 841,254
----------------------------------------------------------------------------
Units outstanding (000s)
Basic 71,863 42,209 41,861 40,806
Diluted 72,117 44,349 44,110 43,854
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
----------------------------------------------------------------------------
Natural gas (mcf/d) 57,926 59,452 56,012 54,438
----------------------------------------------------------------------------
Light oil (bbls/d) 3,172 2,855 2,575 2,368
Heavy oil (bbls/d) 2,760 2,579 2,701 2,460
NGLs (bbls/d) 756 740 677 814
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 6,688 6,174 5,953 5,642
----------------------------------------------------------------------------
Combined (boe/d) 16,342 16,083 15,288 14,715
----------------------------------------------------------------------------
Average prices received
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 5.72 $ 6.18 $ 7.73 $ 11.96
----------------------------------------------------------------------------
Light oil ($/bbl) 74.23 71.78 65.55 63.40
Heavy oil ($/bbl) 51.27 52.01 34.29 33.06
NGLs ($/bbl) 67.79 63.05 60.50 58.79
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 64.03 $ 62.48 $ 50.79 $ 49.52
----------------------------------------------------------------------------
Combined ($/boe) $ 46.48 $ 46.84 $ 48.10 $ 63.24
----------------------------------------------------------------------------
Wells drilled - gross (net) 12 (9.2) 5 (1.0) 21 (15.6) 34 (21.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) On a proforma basis, if the Sequoia acquisition had been completed on
September 1, 2006, the payout ratio would have been 88% for Q3 2006.
(2) Excludes unrealized gain (loss) on derivative contracts and future
income tax liability.


Annual Information
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial
(in thousands of
dollars, except unit,
per unit and boe data) 2008 2007 2006 2005 2004
----------------------------------------------------------------------------
Petroleum and
natural gas
revenues $ 501,737 $ 366,956 $ 297,333 $ 276,573 $ 17,377
Royalties (98,264) (67,767) (57,281) (49,977) (3,674)
Realized gain (loss)
on derivative
contracts (6,514) 6,967 (42) (390) -
Operating expenses (92,337) (93,866) (67,354) (52,073) (4,335)
Transportation
expenses (8,202) (7,857) (6,493) (4,055) (153)
----------------------------------------------------------------------------
Operating netback 296,420 204,433 166,163 170,078 9,215
Interest income - - - - 726
G&A - cash charge (16,879) (15,233) (13,181) (9,856) (987)
Cash financial
charges (21,127) (23,271) (11,199) (10,063) (1,677)
Provision for
non-recoverable
accounts receivable (1,800) - - - -
Other income (1) 7,806 - - - -
Cash taxes - - (58) (1,277) (80)
----------------------------------------------------------------------------
Funds from
operations 264,420 165,929 141,725 148,882 7,197
Per unit - Basic 3.17 2.16 2.80 4.59 0.36
- Diluted 2.89 2.10 2.71 4.20 0.35
----------------------------------------------------------------------------
Cash provided by
operating
activities 259,759 167,385 113,105 133,219 9,392
----------------------------------------------------------------------------
Net income (loss) 160,519 (96,267) (257,823) 64,060 1,045
Per unit - Basic 1.92 (1.26) (5.09) 2.06 0.06
- Diluted 1.80 (1.26) (5.09) 1.99 0.06
----------------------------------------------------------------------------
Cash distributions
declared 117,017 118,891 127,922 72,585 9,777
Per unit 1.38 1.55 2.47 2.26 0.36
Payout ratio 44% 72% n/a(2) 49% 136%
----------------------------------------------------------------------------
Capital expenditures 165,919 96,380 92,802 72,539 5,057
Cash property
acquisitions 66,571 - 32,729 - -
Cash property
divestitures (87,695) - - - -
Non-cash property
acquisitions 26,887 - - - -
Non-cash property
divestitures - - (27,728) (14,636) (33,456)
----------------------------------------------------------------------------
Corporate
acquisitions 36,433 - 527,691 177,509 587,164
----------------------------------------------------------------------------
Market value of
investments 2,285 13,068 22,860 - -
----------------------------------------------------------------------------
Bank debt 219,853 257,342 349,336 123,455 89,220
Working capital
deficiency(3) 42,275 32,088 22,624 26,575 20,820
----------------------------------------------------------------------------
Convertible
debentures 115,201 119,792 3,515 9,219 77,718
----------------------------------------------------------------------------
Total assets 1,058,195 922,344 1,114,085 841,254 615,486
----------------------------------------------------------------------------
Units outstanding
(000s)
Basic 90,239 77,657 74,322 40,806 27,119
Diluted 106,050 93,850 75,309 43,854 34,409
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily
production
----------------------------------------------------------------------------
Natural gas (mcf/d) 76,805 73,279 63,648 56,306 58,264
----------------------------------------------------------------------------
Light oil (bbls/d) 4,754 4,526 3,269 2,476 2,671
Heavy oil (bbls/d) 2,354 2,447 2,709 1,631 -
NGLs (bbls/d) 1,136 1,275 908 815 846
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 8,244 8,248 6,886 4,922 3,517
----------------------------------------------------------------------------
Combined (boe/d) 21,045 20,461 17,494 14,307 13,228
----------------------------------------------------------------------------
Average prices
received
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 8.41 $ 6.67 $ 6.64 $ 8.87 $ 6.93
----------------------------------------------------------------------------
Light oil ($/bbl) 97.52 71.54 67.15 62.83 44.29
Heavy oil ($/bbl) 76.01 48.52 44.24 36.35 -
NGLs ($/bbl) 72.22 57.99 58.09 53.47 45.34
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 87.89 $ 62.62 $ 56.94 $ 52.51 $ 44.54
----------------------------------------------------------------------------
Combined ($/boe) $ 65.14 $ 49.14 $ 46.57 $ 52.97 $ 42.37
----------------------------------------------------------------------------
Wells drilled
- gross (net) 50 (21.4) 44 (27.3) 47 (27.6) 71 (40.6) 4 (2.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Termination fee of $9.0 million relates to termination of arrangement
with Cadence Energy Inc., less transaction costs of $1.2 million.
(2) On a proforma basis, if the Sequoia acquisition had been completed on
September 1, 2006, the payout ratio would have been 83% for 2006.
(3) Excludes unrealized gain (loss) on derivative contracts and future
income tax liability.

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 November 4, 2009

Consolidated Balance Sheets

(in thousands of dollars) (unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, December 31,
2009 2008
----------------------------------------------------------------------------
Assets
Current assets
Accounts receivable (note 12) $ 33,320 $ 45,502
Prepaid expenses and deposits 6,515 3,577
Unrealized gain on derivative contracts
(note 12) 17,682 71,535
----------------------------------------------------------------------------
57,517 120,614
Investments (note 4) 3,020 2,285
Property, plant and equipment (note 5) 1,016,201 923,465
Deferred financing charges (note 8) 18 100
Future income tax asset 20,930 11,731
----------------------------------------------------------------------------
$ 1,097,686 $ 1,058,195
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 57,770 $ 76,090
Distributions payable 9,795 11,731
Future income tax liability 5,128 20,745
Current portion of convertible debentures
(note 7) 3,568 3,533
----------------------------------------------------------------------------
76,261 112,099
Bank debt (note 6) 164,172 219,853
Convertible debentures (note 7) 117,217 115,201
Asset retirement obligations (note 9) 20,829 22,110
----------------------------------------------------------------------------
378,479 469,263
----------------------------------------------------------------------------
Unitholders' Equity
Unitholders' capital (note 10) 1,402,457 1,181,868
Contributed surplus (note 10) 6,853 4,155
Equity component of convertible debentures
(note 7) 9,080 9,080
Deficit (699,183) (606,171)
----------------------------------------------------------------------------
719,207 588,932
----------------------------------------------------------------------------
$ 1,097,686 $ 1,058,195
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Commitments (note 14)

Subsequent events (notes 6 and 15)

See accompanying notes to the consolidated financial statements.


Consolidated Statements of Income (Loss), Comprehensive Income
(Loss) and Deficit

(in thousands of dollars, except per unit amounts) (unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Revenues
Petroleum and natural gas $ 66,100 $ 145,269 $ 204,642 $ 410,426
Royalties (10,527) (28,149) (35,876) (79,450)
Other income - 7,806 - 7,806
Gain (loss) on financial
instruments (note 12) 9,182 34,633 33,519 (1,093)
----------------------------------------------------------------------------
64,755 159,559 202,285 337,689
Expenses
Operating 25,179 23,943 74,495 68,299
Transportation 2,424 2,132 6,935 5,779
General and administrative 6,166 5,277 20,364 17,527
Financial charges (note 8) 5,805 4,869 16,565 18,557
Provision for non-recoverable
accounts receivable - 1,800 - 1,800
(Earning) loss on equity
method investment
(note 4) 202 (68) 398 234
Depletion, depreciation and
accretion 45,901 39,054 133,150 111,250
----------------------------------------------------------------------------
85,677 77,007 251,907 223,446
----------------------------------------------------------------------------
Income (loss) before taxes (20,922) 82,552 (49,622) 114,243

Future tax provision
(reduction) (13,678) 12,860 (33,906) (1,852)
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income (loss) (7,244) 69,692 (15,716) 116,095
Deficit, beginning of period (662,554) (651,410) (606,171) (649,673)
Distributions (note 10) (29,385) (33,684) (77,296) (81,824)
----------------------------------------------------------------------------
Deficit, end of period $ (699,183) $ (615,402) $ (699,183) $ (615,402)
----------------------------------------------------------------------------
Net income (loss) per unit
(note 10)
Basic $ (0.06) $ 0.81 $ (0.15) $ 1.42
Diluted $ (0.06) $ 0.76 $ (0.15) $ 1.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements.


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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------

Cash provided by (used in):

Operating
Net income (loss) $ (7,244) $ 69,692 $ (15,716) $ 116,095
Items not affecting cash:
Depletion, depreciation and
accretion 45,901 39,054 133,150 111,250
Future taxes provision
(reduction) (13,678) 12,860 (33,906) (1,852)
Non-cash financial charges
(note 8) 732 243 2,149 1,138
Unit-based compensation 1,232 735 3,428 5,131
Unrealized (gain) loss on
financial instruments 23,100 (43,870) 54,096 (17,651)
(Earning) loss on equity
method investment 202 (68) 398 234
Asset retirement expenditures
(note 9) (3,507) (1,189) (5,772) (2,470)
Change in non-cash operating
working capital (note 11) (2,684) 20,342 2,854 468
----------------------------------------------------------------------------
Cash provided by operating
activities 44,054 97,799 140,681 212,343

Financing
Bank debt 3,189 (78,031) (83,315) (61,060)
Convertible debentures
issued, net of issue costs - - (16) 73
Trust units repurchased - (2,686) - (2,686)
Issue of trust units, net of
issue costs (note 10) (15) - 163,584 522
Cash distribution to
unitholders (29,385) (31,013) (79,232) (78,371)
Repayments on obligation
under capital lease - - - (932)
Change in non-cash financing
working capital (note 11) 3,452 1,313 2,082 319
----------------------------------------------------------------------------
Cash provided by (used in)
financing activities (22,759) (110,417) 3,103 (142,135)

Investing
Petroleum and natural gas
asset additions (10,613) (45,657) (85,829) (127,153)
Corporate acquisition (note3) - (29,580) (32,538) (29,580)
Investment in Midway Energy
Ltd. (note 4) (214) - (214) -
Proceeds on disposition - 87,695 - 87,695
Change in non-cash investing
working capital (note 11) (10,468) 160 (25,203) (1,170)
----------------------------------------------------------------------------
Cash provided by (used in)
investing activities (21,295) 12,618 (143,784) (70,208)
Change in cash - - - -
Cash, beginning of period - - - -
----------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to the consolidated financial statements.


Notes to the Consolidated Financial Statements

For the three and nine months ended September 30, 2009 and 2008

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

Daylight Resources 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 Ltd. ("Daylight Energy") and its subsidiaries. The Trust owns 100% of the common shares of Daylight Energy. The activities of Daylight Energy are financed through internally generated funds from operations and third party debt as described in note 6.

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 exceeds 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 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. The Trust intends to continue to make cash distributions; however, these distributions cannot be guaranteed.

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 are stated in Canadian dollars, have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") following the same accounting policies and methods of computation as the audited consolidated financial statements for the year ended December 31, 2008, and include the accounts of the Trust and its wholly owned subsidiaries. Preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results may differ materially from those estimates.

Specifically, the amounts recorded for the depletion and depreciation of petroleum and natural gas assets and for the accretion of asset retirement obligations are based on estimates. The ceiling test is based on estimates of reserves, production rates, oil and gas prices, future costs and other relevant assumptions. The amounts for unit-based compensation are based on estimates of unit price and performance factors, while the fair value estimates for derivative contracts are based on expected future oil and gas prices. Future income taxes are based on estimates as to the timing of the reversal of temporary differences and tax rates currently substantively enacted. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material.

2. Changes in Accounting Polices

Future Accounting Changes

In May 2009, the CICA amended Section 3862, "Financial Instruments - Disclosures" to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. These amendments are effective for the Trust on December 31, 2009.

3. Corporate Acquisition

Intrepid Energy Corporation

On June 5, 2009, Daylight acquired all of the issued and outstanding shares of Intrepid Energy Corporation ("Intrepid"). As consideration, Daylight paid cash of $32.0 million before transaction costs of $0.5 million and issued 7,249,937 units at a price of $7.40 per unit. The unit price was based on the weighted average market price of the units at the date of announcement being April 27, 2009. The operations of Intrepid have been included with the results of the Trust commencing June 5, 2009. The transaction was accounted for by the purchase method based on fair values as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net assets acquired:
----------------------------------------------------------------------------
Property, plant and equipment $ 135,529
Bank debt (27,634)
Working capital deficiency (11,191)
Fair value of derivative contracts 1,162
Asset retirement obligations (1,685)
Future income tax liability (10,017)
----------------------------------------------------------------------------
Total $ 86,164
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consideration:
----------------------------------------------------------------------------
Cash $ 31,994
Units issued 53,626
Transaction costs 544
----------------------------------------------------------------------------
Total $ 86,164
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The above amounts are estimates based on information available to the Trust at the time of preparation of these financial statements. Accordingly, these amounts are subject to changes as cost estimates and values are finalized.



4. Investments

----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Number
of Shares Equity or Fair Equity or Fair
Entity Symbol or Units Value Value
----------------------------------------------------------------------------
Bengal Energy Ltd. BNG 4,260,000 $ 965 $ 1,363
Midway Energy Ltd. MEL 1,046,511 1,800 385
Harvest Energy Trust HTE.UN 36,600 255 537
----------------------------------------------------------------------------
Total $ 3,020 $ 2,285
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight owns 4,260,000 common shares of Bengal Energy Ltd. ("Bengal"), representing a 23% interest, and accounts for the investment using the equity method. For the three months ended September 30, 2009, the equity loss on the investment in Bengal was $0.2 million (2008 - $0.1 million gain) and for the nine months ended September 30, 2009, the equity loss on the investment in Bengal was $0.4 million (2008 - $0.2 million). As at September 30, 2009, the market value of the investment in Bengal was $2.1 million (December 31, 2008 - $1.4 million).

Daylight owns 1,046,511 common shares of Midway Energy Ltd. ("Midway"), formerly Trafalgar Energy Ltd., with a value of $1.8 million at September 30, 2009. During the three months ended September 30, 2009, Daylight acquired 306,273 common shares of Midway at a cost of $0.70 per share through the exercise of warrants. Daylight owns 36,600 trust units of Harvest Energy Trust ("Harvest"), formerly Pegasus Oil & Gas Inc., with a value of $0.3 million at September 30, 2009. Daylight accounts for these investments at fair value based on the quoted market price.

Daylight continues to consider its investments in Bengal, Midway and Harvest as available for disposition.



5. Property, Plant and Equipment

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
----------------------------------------------------------------------------
Property, plant and equipment $ 1,624,592 $ 610,912 $ 1,013,680
Other assets 6,476 3,955 2,521
----------------------------------------------------------------------------
Balance, September 30, 2009 $ 1,631,068 $ 614,867 $ 1,016,201
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
----------------------------------------------------------------------------
Property, plant and equipment $ 1,401,340 $ 480,681 $ 920,659
Other assets 6,173 3,367 2,806
----------------------------------------------------------------------------
Balance, December 31, 2008 $ 1,407,513 $ 484,048 $ 923,465
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the nine months ended September 30, 2009, Daylight capitalized $8.6 million (2008 - $7.5 million) of general and administrative expenses related to exploration and development activities. Included in this amount is $1.3 million (2008 - $1.2 million) of non-cash unit-based compensation and the related tax effect of $0.4 million (2008 - $0.4 million). Future development costs of $212.6 million (2008 - $59.1 million) associated with proved reserves were included in the depletion and depreciation calculation. Future salvage value of production equipment and facilities of $41.2 million (2008 - $30.6 million) and a cost of $59.5 million (2008 - $32.7 million) for unproved properties have been excluded from the depletion and depreciation calculation.

6. Bank Debt

Daylight had a total of $350 million (2008 - $350 million) available under revolving term credit facilities with a syndicate of banks of which $164 million (December 31, 2008 - $220 million) was drawn at September 30, 2009. The effective interest rate for the bank debt was 2.6% for the nine months ended September 30, 2009 (2008 - 4.7%). The credit facilities bears interest based on the lenders' prime rate and/or at money market rates plus a stamping fee. On October 8, 2009 in conjunction with the acquisition of Highpine Oil & Gas Limited ("Highpine") (see note 15), the facilities were reviewed and increased to $500 million. The amended facilities are secured with a demand debenture of $1.0 billion 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 revolving credit facilities dated May 7, 2008, Daylight may, with the bank's approval, extend the revolving period from April 30, 2010 for a further 364 day period. If not extended, the revolving facility will automatically convert to a one year and one day non-revolving term facility with the entire payment due on the 366th day after commencement of the term period. The available lending limits of the facilities are based on the syndicate's interpretation of the Trust's reserves and future commodity prices. There can be no assurance that the amount available under the credit facilities will not decrease at the next scheduled review on or before April 30, 2010.

7. Convertible Debentures

On December 19, 2008, Daylight issued $75 million principal amount of 10% Convertible Unsecured Subordinated Debentures, Series C ("Series C Debentures") for net proceeds of $71.7 million. The Series C Debentures pay interest semi-annually on December 31 and June 30, commencing with the initial interest payment on June 30, 2009 and have a maturity date of December 31, 2013. The Series C Debentures are convertible at the option of the holder to trust units at a conversion price of $9.60 per trust unit. The Trust has the option to redeem the Series C Debentures at a price of $1,050 per Series C Debenture after December 31, 2011 and on or before December 31, 2012 and at a price of $1,025 per Series C Debenture after December 31, 2012 and before the maturity date of December 31, 2013. On redemption or maturity the Trust may elect to repay the principal and satisfy its interest obligations by issuing Daylight trust units.

The Series C Debentures were initially recorded at $67.6 million representing the fair value of the obligation net of the fair value of the conversion feature of $7.4 million. The fair value of the conversion feature of $7.4 million has been recorded in unitholders' equity. The Series C Debenture liability has been further reduced by $3.3 million for associated transaction costs.

On October 3, 2007, Daylight issued $125 million principal amount of 8.5% Convertible Unsecured Subordinated Debentures, Series B ("Series B Debentures") for net proceeds of $119.6 million. The Series B Debentures pay interest semi-annually on October 31 and April 30, commencing with the initial interest payment on April 30, 2008 and have a maturity date of October 31, 2012. The Series B Debentures are convertible at the option of the holder to trust units at a conversion price of $8.60 per trust unit. The Trust has the option to redeem the Series B Debentures at a price of $1,050 per Series B Debenture after October 31, 2010 and on or before October 31, 2011 and at a price of $1,025 per Series B Debenture after October 31, 2011 and before the maturity date of October 31, 2012. On redemption or maturity the Trust may elect to repay the principal and satisfy its interest obligations by issuing Daylight trust units.

The Series B Debentures were initially recorded at $121.4 million representing the fair value of the obligation net of the conversion feature of $3.6 million. The fair value of the conversion feature of $3.6 million has been recorded in unitholders' equity. The Series B Debenture liability has been further reduced by $5.4 million for associated transaction costs.

On October 21, 2004, Daylight issued $80 million principal amount of 8.5% Convertible Unsecured Subordinated Debentures, Series A ("Series A Debentures") for net proceeds of $76.8 million. Issue costs of $3.2 million were initially classified as deferred financing charges. Due to the change in accounting policy adopted in 2007, the balance of the unamortized costs of $0.1 million was recorded against the convertible debenture liability. The Series A Debentures pay interest semi-annually on June 1 and December 1 and have a maturity date of December 1, 2009. Series A Debentures are convertible at the option of the holder to trust units at a conversion price of $14.07888 per trust unit. Daylight has the option to redeem the Series A Debentures at a price of $1,025 per Series A Debenture after December 1, 2008 and on or before December 1, 2009 and on maturity at $1,000 per Series A Debenture. On redemption or maturity the Trust may elect to repay the principal and satisfy its interest obligations by issuing Daylight trust units.

The Series A Debentures were initially recorded at $77.7 million representing the fair value of the obligation net of the conversion feature of $2.3 million. The fair value of the conversion feature of $2.3 million has been recorded in unitholders' equity.

The following table indicates the Convertible Debenture activities, which include the Series A Debentures, the Series B Debentures, and the Series C Debentures, for the nine months ended September 30, 2009 and the year ended December 31, 2008:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Face Debt Equity
Value Component Component
----------------------------------------------------------------------------
Balance, December 31, 2007 $ 128,576 $ 119,792 $ 3,724
Issued December 19, 2008 75,000 67,580 7,420
Transaction costs on December 19,
2008 issuance - (3,300) -
Transaction costs on October 3,
2007 issuance - 73 -
Converted to trust units (71,263) (66,742) (2,064)
Accretion and amortization - 1,331 -
----------------------------------------------------------------------------
Balance, December 31, 2008 $ 132,313 $ 118,734 $ 9,080
Transaction costs on December 19,
2008 issuance - (16) -
Accretion and amortization - 2,067 -
----------------------------------------------------------------------------
Balance, September 30, 2009 $ 132,313 $ 120,785 $ 9,080
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following table indicates the Series A Debentures, Series B Debentures,
and Series C Debentures outstanding as at September 30, 2009:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Face Debt Equity
Value Component Component
----------------------------------------------------------------------------
Series A Debentures $ 3,576 $ 3,568 $ 104
Series B Debentures 53,737 51,381 1,556
Series C Debentures 75,000 65,836 7,420
----------------------------------------------------------------------------
Balance, September 30, 2009 $ 132,313 $ 120,785 $ 9,080
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Series A Debentures mature on December 1, 2009. As a result, the debt component of $3.6 million has been shown as a current liability.

8. Financial Charges

During the nine months ended September 30, 2009 and 2008, Daylight incurred interest charges on bank debt and convertible debentures as well as the amortization of financial charges and accretion of the convertible debenture liability as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009 2008
----------------------------------------------------------------------------
Bank debt interest $ 5,163 $ 10,246
Convertible debenture interest 9,253 7,173
Amortization of financial charges 82 81
Accretion of convertible debenture liability 2,067 1,057
----------------------------------------------------------------------------
Total $ 16,565 $ 18,557
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Balance, beginning of period $ 100 $ 208
Amortization (82) (108)
----------------------------------------------------------------------------
Balance, end of period $ 18 $ 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


9. Asset Retirement Obligations

Daylight's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. Daylight estimates the total undiscounted cash flow required to settle its asset retirement obligations is approximately $127.6 million (December 31, 2008 - $118.4 million) which will be incurred between 2009 and 2056. The majority of the costs will be incurred between 2009 and 2031. An inflation factor of 2% has been applied to the estimated asset retirement cost at September 30, 2009 and December 31, 2008. A credit-adjusted risk-free rate of 10% has been used to calculate the fair value of the asset retirement obligations since the fourth quarter of 2008. All prior asset retirement obligations have been recorded using a credit adjusted risk-free rate of 8%.

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



----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Balance, beginning of period $ 22,110 $ 22,458
Liabilities incurred on corporate
acquisition (note 3) 1,685 797
Liabilities incurred on property
acquisitions - 1,041
Liabilities transferred on property
dispositions (403) (3,311)
Change in estimate 770 -
Liabilities incurred 108 2,302
Liabilities settled (5,772) (3,800)
Accretion expense 2,331 2,623
----------------------------------------------------------------------------
Balance, end of period $ 20,829 $ 22,110
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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
----------------------------------------------------------------------------
Balance, December 31, 2007 77,657,133 $ 1,083,664
Issued on vesting of Trust Unit Awards 562,729 4,221
Issued on conversion of debentures 8,286,372 68,806
Issued through Employee Unit Ownership Plan 126,742 1,044
Issued through Employee Bonus Plan 242,467 2,410
Issued on acquisition of property 3,750,000 26,887
Cancelled under normal course issuer bid (386,200) (5,164)
----------------------------------------------------------------------------
Balance, December 31, 2008 90,239,243 $ 1,181,868
----------------------------------------------------------------------------
Issued on vesting of Trust Unit Awards 317,382 2,021
Issued through public offering 24,630,000 172,410
Issued on corporate acquisition (note 3) 7,249,937 53,626
Unit issue costs, net of tax effect of
$1,358,000 - (7,468)
----------------------------------------------------------------------------
Balance, September 30, 2009 122,436,562 $ 1,402,457
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Normal Course Issuer Bid

On October 22, 2009 Daylight filed notice with the Toronto Stock Exchange (the "TSX") to make a normal course issuer bid (the "2009 Bid") to purchase outstanding trust units on the open market through the facilities of the TSX. The TSX has authorized Daylight to purchase up to 17,102,157 trust units, being 10% of the public float, from October 26, 2009 through October 25, 2010 or such earlier time as the 2009 Bid is completed or terminated at the option of the Trust. The Trust will pay for any trust units acquired under the 2009 Bid at the prevailing market price on the TSX at the time of the purchase. The Trust Units acquired under the 2009 Bid will be cancelled.

On July 28, 2008 Daylight filed notice with the TSX to make a normal course issuer bid (the "2008 Bid") to purchase outstanding trust units on the open market through the facilities of the TSX. The TSX authorized Daylight to purchase up to 8,206,753 trust units, being 10% of the public float, from July 30, 2008 through July 29, 2009 or such earlier time as the 2008 Bid was completed or terminated at the option of the Trust. The Trust paid for any trust units acquired under the 2008 Bid at the prevailing market price on the TSX at the time of the purchase and any trust units acquired under the 2008 Bid were cancelled. For the nine months ended September 30, 2009, no trust units were purchased and cancelled. For the year ended December 31, 2008, Daylight purchased and cancelled 386,200 trust units at a cost of $3.9 million. The average carrying value of the units repurchased of $5.2 million was charged to unitholders' capital with the excess of $1.3 million charged to contributed surplus.

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

Daylight has a Premium Distribution Reinvestment and Optional Trust Unit Purchase Plan ("Premium DRIP™") for eligible unitholders of the Trust. On distribution payment dates eligible Premium DRIP™ unitholders may receive in lieu of the cash distribution that unitholders are otherwise entitled to receive in respect of their units, a cash payment equal to 102% of such amount. Unitholders may also reinvest their cash distributions in additional trust units at a price that is 95% of the average market price for the Pricing Period. The Pricing Period refers to the period beginning on the later of the 21st business day preceding the distribution payment date and the second business day following the record date applicable to that distribution payment date, and ending on the second business day preceding the distribution payment date. Eligible Premium DRIP™ unitholders may also make optional cash payments on this date to purchase additional trust units at a price that is equal to the average market price for the Pricing Period. Daylight can prorate or suspend requests for the receipt of amounts under the Premium DRIP™.

Daylight has not issued any trust units under the Premium DRIP™ program since August 2007 when Daylight suspended this program.

Employee Unit Ownership Plan ("EUOP")

Daylight has an Employee Unit Ownership Plan ("EUOP") whereby the Trust matches every dollar contributed by each employee, to a maximum of 11% of the employee's salary. Under the terms of the EUOP, the Trust has the option to acquire trust units on behalf of employees through open market purchases or to issue new trust units from treasury. During the nine months ended September 30, 2009, the Trust elected to issue no trust units from treasury in settlement of EUOP obligations representing the employee contributions and the Trust's matching contributions. During the year ended December 31, 2008, the Trust elected to issue 126,742 trust units ($1.0 million) from treasury in settlement of EUOP obligations representing the employee contributions and the Trust's matching contributions. The price used to determine the number of trust units issued from treasury on a monthly basis is the average market price for the period beginning on the second business day of the month and ending on the second business day preceding the monthly distribution payment date. Daylight has not issued any trust units from treasury under the EUOP since April 2008.

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% 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 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 (Loss) Per Unit

The following table summarizes the weighted average trust units, convertible debentures, and Restricted and Performance Trust Unit Awards used in calculating the net income (loss) per trust unit:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Sept 30, Nine months ended Sept 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Basic 122,435,044 86,160,743 106,837,466 81,605,654
Convertible
debentures - 6,896,690 - 11,227,394
Restricted and
Performance
Trust Unit Awards - 860,945 - 774,995
----------------------------------------------------------------------------
Diluted 122,435,044 93,918,378 106,837,466 93,608,043
----------------------------------------------------------------------------
----------------------------------------------------------------------------


A total of 14,314,985 (2008 - nil) trust units attributable to convertible debentures and 950,526 Restricted and Performance Trust Unit Awards were excluded from the calculation for the three months ended September 30, 2009 as they were anti-dilutive. A total of 14,314,985 (2008 - nil) trust units attributable to convertible debentures and 859,213 Restricted and Performance Trust Unit Awards were excluded from the calculation for the nine months ended September 30, 2009 as they were anti-dilutive. Diluted net income per unit reflects the add back of interest and accretion expense on convertible debentures. Interest and accretion for the three and nine months ended September 30, 2008 was $1.7 million and $8.2 million, respectively.

c) Trust Unit Award Incentive Plan

Daylight has a Trust Unit Award Incentive Plan which allows the Board of Directors to grant up to 4.3% of the trust units outstanding as Restricted and/or Performance Trust Unit Awards to directors, officers, employees and service providers of Daylight and its affiliates. The Restricted Trust Unit Awards and Performance Trust Unit Awards vest over a two or three-year period. The number of units issued for Performance Trust 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 producers. A holder of a Restricted or Performance Trust Unit Award may elect, subject to the 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 Trust Unit Award is outstanding.

The following tables reconcile the number of Restricted and Performance Trust Unit Awards outstanding:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Restricted Trust Unit Awards Number
----------------------------------------------------------------------------
Balance, December 31, 2007 1,037,420
Issued 488,430
Vested and converted to trust units (324,715)
Forfeited (134,606)
----------------------------------------------------------------------------
Balance, December 31, 2008 1,066,529
Issued 130,650
Vested and converted to trust units (186,497)
Forfeited (64,414)
----------------------------------------------------------------------------
Balance, September 30, 2009 946,268
Weighted average adjustment factor 1.31440
----------------------------------------------------------------------------
Trust unit equivalent 1,243,779
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Performance Total
Performance Trust Unit Awards Number Multiplier Number
----------------------------------------------------------------------------
Balance, December 31, 2007 170,000 1 170,000
Issued 26,250 - 26,250
Vested and converted to trust units (55,833) - (55,833)
----------------------------------------------------------------------------
Balance, December 31, 2008 140,417 1 140,417
Issued 339,000 - 339,000
Vested and converted to trust units (25,418) (25,418)
Forfeited (23,333) - (23,333)
----------------------------------------------------------------------------
Balance, September 30, 2009 430,666 1 430,666
Weighted average adjustment factor 1.16892
Trust unit equivalent 503,412
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The performance multiplier is calculated on an annual basis for one third of the Performance Trust Unit Awards originally granted. The performance multiplier may range from 0 to 2 in any given year as determined by the Board of Directors. For the period ended October 9, 2007, a performance multiplier of 0 was granted on the units. For the periods ended April 9, 2008, October 9, 2008, February 23, 2009 and April 9, 2009 a performance multiplier of 2 was granted on the units. Daylight has assumed a multiplier of 1 on the performance units for the three months ended September 30, 2009, although the final multiplier may range anywhere from 0 to 2.

The fair value of the Trust Unit Awards is determined at the 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 Trust Unit Awards granted during the nine months ended September 30, 2009 was $6.86 per Trust Unit Award (2008 - $9.31). During the nine months ended September 30, 2009, $4.7 million (2008 - $3.4 million) was charged to general and administrative expense.



d) Contributed Surplus

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amount
----------------------------------------------------------------------------
Balance, December 31, 2007 $ 2,437
Unit-based compensation 4,610
Vested Trust Unit Awards (4,221)
Excess of trust unit redemption amount over trust unit stated
amount 1,329
----------------------------------------------------------------------------
Balance, December 31, 2008 $ 4,155
----------------------------------------------------------------------------
Unit-based compensation 4,719
Vested Trust Unit Awards (2,021)
----------------------------------------------------------------------------
Balance, September 30, 2009 $ 6,853
----------------------------------------------------------------------------
----------------------------------------------------------------------------


e) Accumulated Distributions

The table below shows the cumulative distributions of Daylight Energy Trust ("DET") in total and per unit as well as per Daylight Resources Trust unit equivalent:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
per Daylight per DET
Record Date Unit equivalent(i) Unit Amount
----------------------------------------------------------------------------
Total 2004 cash distributions $ 0.36 $ 0.24 $ 9,777
----------------------------------------------------------------------------
Total 2005 cash distributions $ 2.26 $ 1.50 $ 72,585
Open Range distribution (cost base) 0.47 0.31 15,235
----------------------------------------------------------------------------
Total 2005 distributions $ 2.73 $ 1.81 $ 87,820
----------------------------------------------------------------------------
Total 2006 cash distributions $ 1.68 $ 1.12 $ 70,901
Trafalgar distribution (cost base) 0.26 0.17 11,202
----------------------------------------------------------------------------
Total 2006 distributions $ 1.94 $ 1.29 $ 82,103
----------------------------------------------------------------------------
Total distributions since inception $ 5.03 $ 3.34 $ 179,700
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) may not add exactly due to rounding


The table below shows the cumulative distributions and per unit equivalent
for Daylight Resources Trust:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Record Date Per Unit Amount
----------------------------------------------------------------------------
Total 2006 cash distributions $ 0.78 $ 57,021
----------------------------------------------------------------------------
Total 2007 cash distributions $ 1.55 $ 118,891
----------------------------------------------------------------------------

January 31, 2008 0.10 7,769
February 29, 2008 0.10 7,773
March 31, 2008 0.10 7,791
April 30, 2008 0.10 7,868
May 30, 2008 0.10 8,391
June 30, 2008 0.10 8,548
July 31, 2008 0.13 11,216
August 29, 2008 0.13 11,249
September 30, 2008 0.13 11,219
October 31, 2008 0.13 11,731
November 28, 2008 0.13 11,731
December 31, 2008 0.13 11,731
----------------------------------------------------------------------------
Total 2008 cash distributions $ 1.38 $ 117,017
----------------------------------------------------------------------------

January 30, 2009 0.08 7,219
February 27, 2009 0.08 7,219
March 31, 2009 0.08 7,219
April 30, 2009 0.08 7,244
May 29, 2009 0.08 9,215
June 30, 2009 0.08 9,795
July 31, 2009 0.08 9,795
August 31, 2009 0.08 9,795
September 30, 2009 0.08 9,795
----------------------------------------------------------------------------
Total 2009 cash distributions $ 0.72 $ 77,296
----------------------------------------------------------------------------

Total distributions since inception $ 4.43 $ 370,225
----------------------------------------------------------------------------
----------------------------------------------------------------------------


11. Supplemental Cash Flow Information


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
Sept 30, Sept 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Change in non-cash working
capital:
Accounts receivable $ 4,521 $ 17,100 $ 12,182 $ (3,399)
Prepaid expenses and deposits 127 (425) (2,938) (982)
Accounts payable and accrued
liabilities (14,348) 8,114 (18,320) 6,972
Working capital acquired on
acquisition - (2,974) (11,191) (2,974)
----------------------------------------------------------------------------
Change in non-cash working
capital $ (9,700) $ 21,815 $ (20,267) $ (383)
----------------------------------------------------------------------------
Relating to:
Operating activities $ (2,684) $ 20,342 $ 2,854 $ 468
Financing activities 3,452 1,313 2,082 319
Investing activities (10,468) 160 (25,203) (1,170)
----------------------------------------------------------------------------
Change in non-cash working
capital $ (9,700) $ 21,815 $ (20,267) $ (383)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
Sept 30, Sept 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Interest and taxes paid:
Interest paid $ 1,316 $ 3,098 $ 10,305 $ 16,068
Taxes paid $ - $ 638 $ 34 $ 908
----------------------------------------------------------------------------
----------------------------------------------------------------------------


12. Financial Risk Management

Overview

The Trust has exposure to the following risks from its use of financial instruments:

- Credit risk

- Liquidity risk

- Market risk

This note presents information about the Trust's exposure to each of the above risks, the Trust's objectives, policies and processes for measuring and managing risk, and the Trust's management of capital. Further quantitative disclosures are included throughout these financial statements.

The Board of Directors has overall responsibility for the establishment and oversight of the Trust's risk management framework. Daylight's management has implemented and continues to maintain and monitor risk management procedures for the benefit of the organization.

The Trust's risk management policies are established to: (i) Identify and analyze the risks faced by the Trust; (ii) Set appropriate risk limits and controls; and (iii) Monitor risks and consider the implications of market conditions in relation to the Trust's activities.

The Trust's banking syndicate completed its semi-annual borrowing base review on October 8, 2009 in conjunction with the acquisition of Highpine, and the bank credit facilities increased to $500 million. The next review will take place on or before April 30, 2010. On May 7, 2009, Daylight issued 24,630,000 trust units at a price of $7.00 per trust unit for gross proceeds of $172 million. Net proceeds of the issue were used by the Trust to reduce outstanding borrowings on the credit facilities, to fund future growth initiatives and for general corporate purposes. On December 19, 2008, Daylight issued $75 million principal amount of 10% Convertible Unsecured Subordinated Debentures, Series C for net proceeds of $71.7 million. Proceeds of the convertible debenture issuance were used to repay bank debt. The Trust continually monitors its financing alternatives, and makes adjustments as circumstances and opportunities vary.

Credit Risk

Credit risk is the risk of financial loss to the Trust if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from Daylight's receivables from joint venture partners and petroleum and natural gas marketers. As at September 30, 2009, Daylight's receivables consisted of $5.9 million (December 31, 2008 - $7.5 million) from joint venture partners, $22.4 million (December 31, 2008 - $33.9 million) of receivables from petroleum and natural gas marketers and $5.0 million (December 31, 2008 - $4.1 million) of other trade receivables.

Receivables from petroleum and natural gas marketers are normally collected on or about the 25th day of the month following production. Daylight's policy to mitigate credit risk associated with these balances is to maintain marketing relationships with large, established and reputable purchasers that are considered to be creditworthy. Historically, Daylight has not experienced any collection issues related to its petroleum and natural gas marketers with the exception of an issue with SemGroup L.P. ("SemCanada") in 2008 which is described in further detail within this note. Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. Daylight attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure and in certain circumstances may require cash deposits in advance of incurring financial obligations on behalf of joint venture partners. However, the receivables are from participants in the petroleum and natural gas sector and collection of the outstanding balances is dependent on industry factors such as changes in commodity prices, escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with joint venture partners as disagreements occasionally arise that increase the potential for non-collection. The Trust does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however, Daylight does have the ability to withhold production from joint venture partners in the event of non-payment or may be able to register security on the assets of joint venture partners.

On July 22, 2008, one of Daylight's minor oil marketing and natural gas processing counterparties, SemCanada entered creditor protection. As of that date, Daylight had a receivable from certain subsidiaries of SemCanada of approximately $1.8 million. As of December 31, 2008, Daylight considered collection of this receivable at risk and as such, provided an allowance for doubtful accounts of $1.8 million. Although an allowance has been provided, Daylight will continue to pursue collection of this receivable. The allowance may be adjusted if circumstances or events change. Daylight's management has concluded that its existing credit risk program remains appropriate and has concluded that these events could not have been foreseen by a standard credit risk program. Daylight continues its regular review of purchasers against its credit risk program to ensure credit worthiness given current market conditions.

The derivative contracts asset consists of commodity contracts used to manage the Trust's exposure to fluctuations in commodity prices. The Trust manages the credit risk exposure related to derivative assets by selecting counterparties based on credit ratings and financial stability and by not entering into commodity contracts for trading or speculative purposes. Daylight's policy to mitigate credit risk associated with derivatives is to only enter into derivative contracts with large, established and reputable counterparties that are considered to be creditworthy. Daylight has International Swaps and Derivatives Association ("ISDA") agreements or long form confirmations in place with all of its derivative contract counterparties. These agreements and confirmations provide some credit protection in that they generally allow parties to aggregate amounts owing to each other under all outstanding transactions and settle with a single net amount in the case of a credit event. Daylight's derivative counterparties include the members of its banking syndicate that provide access to bank debt under the revolving term credit facilities described in note 6. At September 30, 2009, 79% of Daylight's $17.7 million unrealized gain on derivative contracts was with members of Daylight's banking syndicate. The remaining 21% of Daylight's unrealized gain on derivative contracts is with a major American financial institution.

The carrying amount of accounts receivable and derivative contracts represents the maximum credit exposure. Daylight has provided an allowance for doubtful accounts as at September 30, 2009 of $1.8 million (December 31, 2008 - $1.8 million).

As at September 30, 2009 and December 31, 2008, Daylight considers its receivables to be fully collectible with receivable aging as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Current (90 days or less) $ 29,367 $ 38,820
Past due (more than 90 days) 3,953 6,682
----------------------------------------------------------------------------
Total $ 33,320 $ 45,502
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Liquidity Risk

Liquidity risk is the risk that the Trust will not be able to meet its financial obligations as they are due. Daylight's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking harm to Daylight's reputation.

Daylight prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary. Further, Daylight utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate timing and liquidity requirements as well as a desirable low cost of capital, Daylight has revolving reserve-based credit facilities, as outlined in note 6, that is reviewed at least annually by the lender. On May 7, 2009, Daylight issued 24,630,000 trust units at a price of $7.00 per trust unit for gross proceeds of $172 million. Net proceeds of the issue were used by the Trust to reduce outstanding borrowings on the credit facilities, to fund future growth initiatives and for general corporate purposes. On December 19, 2008, Daylight issued $75 million principal amount of 10% Convertible Unsecured Subordinated Debentures, Series C for net proceeds of $71.7 million. Proceeds of the convertible debenture issuance were used to repay bank debt.



The following are the contractual maturities of financial liabilities as at
September 30, 2009:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
less than 1 1 - 2 2 - 5
Year Years Years
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities $ 57,770 $ - $ -
Distributions payable 9,795 - -
Bank debt - principal - 164,172 -
Convertible debentures - face value 3,576 - 128,737
----------------------------------------------------------------------------
$ 71,141 $ 164,172 $ 128,737
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the Trust's operations, net earnings or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing long-term returns.

The Trust utilizes both financial derivative contracts and physical delivery sales contracts to manage market risks. All such transactions are conducted in accordance with the Trust's established risk management procedures.

Interest Rate Risk:

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. 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. For the nine months ended September 30, 2009, Daylight's effective interest rate was 2.6% (2008 - 4.7%). If this rate had been 1.6% for the nine months ended September 30, 2009 (2008 - 3.7%), with all other variables held constant, net income for the period would have been $1.1 million (2008 - $1.4 million) higher due to lower interest expense for the period of $1.5 million (2008 - $2.0 million). An equal and opposite impact would have occurred to net income and interest expense had interest rates increased for the nine months ended September 30, 2009 to 3.6% (2008 - 5.7%). The sensitivity to interest rate changes is lower in 2009 as compared to 2008 because of a reduction in outstanding bank debt which averaged $192 million in the first nine months of 2009 compared to $278 million for the same period in 2008.

The Trust had no interest rate swap or financial contracts in place as at or during the period ended September 30, 2009.

Foreign Currency Exchange Rate Risk:

Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in foreign exchange rates. While substantially all of the Trust's petroleum and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for petroleum and natural gas are impacted by changes in the exchange rate between the Canadian and United States dollar.

Daylight had no forward exchange rate contracts in place as at or during the period ended September 30, 2009.

Commodity Price Risk:

Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by not only the relationship between the Canadian and United States dollar, as outlined above, but also world economic events that dictate the levels of supply and demand. The Trust has attempted to mitigate commodity price risk through the use of various financial derivative and physical delivery sales contracts.

The Trust's current policies permit hedging of up to 50% of its petroleum and natural gas production for up to 24 months in the future. These hedging limits can be changed upon approval by the Board of Directors.



As at September 30, 2009, the following derivative contracts were
outstanding:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Hedged
Type of Contract Commodity Volume(3) Hedge Price Hedge Period
----------------------------------------------------------------------------
Financial (Swap) (1) Natural gas 35,000 GJ/d Cdn$7.58/GJ Oct 1/09 to
Oct 31/09
Financial (Swap) (1) Natural gas 10,000 GJ/d Cdn$7.59/GJ Oct 1/09 to
Oct 31/09
Financial (Swap) (1) Natural gas 5,000 GJ/d Cdn$7.63/GJ Oct 1/09 to
Oct 31/09
Financial (Collar) (2) Natural gas 5,000 GJ/d Cdn$4.78/GJ - Oct 1/09 to
$7.00/GJ Aug 31/10
Financial (Collar) (2) Crude oil 1,000 bbl/d Cdn$110.00 - Oct 1/09 to
$206.00/bbl Dec 31/09
Financial (Collar) (2) Crude oil 1,000 bbl/d Cdn$110.00 - Oct 1/09 to
$205.55/bbl Dec 31/09
Financial (Collar) (2) Crude oil 1,000 bbl/d Cdn$110.00 - Oct 1/09 to
$205.00/bbl Dec 31/09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Swap indicates fixed price.
(2) Collar price indicates floor (minimum) and ceiling (maximum).
(3) A GJ converts to a mcf at the rate of 1.055056 GJs per mcf.


The following table provides a summary of the gain (loss) on financial
instruments for the nine months ended September 30, 2009 and 2008:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009 2008
----------------------------------------------------------------------------
Realized gain (loss) on derivative contracts $ 87,615 $ (18,744)
Unrealized gain (loss) on derivative contracts (55,015) 18,602
Unrealized gain (loss) on investments held for
trading (note 4) 919 (951)
----------------------------------------------------------------------------
Total $ 33,519 $ (1,093)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The unrealized gain on derivative contracts has been included on the balance sheet with changes in the fair value included in gain (loss) on financial instruments on the statement of income. As at September 30, 2009, if the future strip prices for natural gas were $0.10 per GJ lower and $1.00 per barrel lower for crude oil, with all other variables held constant, net income for the period would have been $0.3 million higher due to the increase in the fair value of the derivative contracts asset of $0.4 million. As at September 30, 2008, if the future strip prices for natural gas were $0.10 per GJ lower and $1.00 per barrel lower for crude oil, with all other variables held constant, net income for the period would have been $1.0 million higher due to the decrease in the fair value of the derivative contracts liability of $1.5 million. An equal and opposite impact would have occurred to net income and the fair value of the derivative contracts asset had natural gas prices been $0.10 per GJ higher and crude oil prices been $1.00 per barrel higher.

Fair Value of Financial Instruments

Financial instruments include accounts receivable, investments, accounts payable and accrued liabilities, derivative contracts, distributions payable, bank debt, and convertible debentures. Unless otherwise noted, carrying values reflect the current fair value of the Trust's financial instruments due to the short term to maturity. The Trust's investments held for trading have a fair value based on a quoted market value of $2.1 million that also represents their carrying value. The equity method investment has a fair value based on a quoted market value of $2.1 million that is greater than its carrying value of $1.0 million. The fair value of derivative contracts as presented on the balance sheet is determined by discounting the difference between the contracted price and published forward price curves (ranging from $70.61 per barrel to $71.08 per barrel for oil and $2.87 per GJ to $5.62 per GJ for natural gas) as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes. The Trust's bank debt bears interest at a floating market rate and accordingly the fair market value approximates the carrying value. The convertible debentures outstanding at September 30, 2009, with a face value of $132.3 million (December 31, 2008 - $132.3 million), had a fair value based on a quoted market value of $146.2 million (December 31, 2008 - $123.2 million).

Capital Management

The Trust targets the maintenance of a strong capital base so as to maintain and potentially increase investor, creditor and market confidence and to sustain the future development of the business. Daylight targets to fully finance its capital expenditures and cash distributions with funds from operations over the longer term but may not fully finance these items within a quarterly or annual period.

Daylight manages its capital structure and makes adjustments to its capital structure in consideration of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets. The Trust considers its capital structure to include unitholders' equity, convertible debentures, bank debt and working capital. In order to maintain or adjust the capital structure, the Trust may from time to time issue units, issue convertible debentures, adjust its capital spending or adjust distributions levels. On May 7, 2009, Daylight closed a financing of 24,630,000 trust units at a price of $7.00 per trust unit for gross proceeds of $172 million. Net proceeds of the issue were used by the Trust to reduce outstanding borrowings on the credit facilities, to fund future growth initiatives and for general corporate purposes. On December 19, 2008, Daylight issued $75 million principal amount of 10% Convertible Unsecured Subordinated Debentures, Series C for net proceeds of $71.7 million. Proceeds of the convertible debenture issuance were used to repay bank debt.



----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Bank debt $ 164,172 $ 219,853
Working capital deficiency(1) 31,298 42,275
----------------------------------------------------------------------------
Net debt $ 195,470 $ 262,128
Convertible debentures - long-term $ 117,217 $ 115,201
Unitholders' equity $ 719,207 $ 588,932
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excludes unrealized gain on derivative contracts and future income tax
liability.


The Trust monitors its capital structure with consideration of the ratio of net debt to annualized funds from operations. This ratio is calculated as net debt, defined as outstanding bank debt plus or minus working capital, excluding the unrealized gain on derivative contracts and future income tax liability, divided by funds from operations on an annualized basis, defined as the preceding six month period times 2. Funds from operations is based on cash provided by operating activities before the change in non-cash operating working capital and asset retirement expenditures.

The Trust's strategy is to maintain a ratio that is considered reasonable and prudent in the circumstances. This ratio may increase at certain times. In order to facilitate the management of this ratio, the Trust prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors including current and forecast commodity prices and production levels, the success of the capital expenditure program and general industry conditions. The annual and updated budgets are approved by the Board of Directors. As at September 30, 2009, Daylight's ratio of net debt to annualized funds from operations, utilizing the current and prior quarter funds from operations times 2, was 1.0 to 1, unchanged from December 31, 2008.



----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, 2009 December 31, 2008
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Bank debt $ 164,172 $ 219,853
Working capital deficiency(1) 31,298 42,275
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Net debt $ 195,470 $ 262,128
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Cash provided by operating activities $ 44,054 $ 47,416
Change in non-cash operating working
capital 2,684 1,329
Asset retirement expenditures 3,507 1,330
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Funds from operations - current
quarter $ 50,245 $ 50,075
Funds from operations - prior quarter 48,459 78,646
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$ 98,704 $ 128,721
x 2 x 2
----------------------------------------------------------------------------
Annualized funds from operations $ 197,408 $ 257,442
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Ratio of net debt to annualized funds
from operations 1.0 1.0
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(1) Excludes unrealized gain on derivative contracts and future income tax
liability.


The Trust also monitors the payout ratio to evaluate financial flexibility and the capacity to fund distributions. Payout ratio is defined on a percentage basis as distributions declared divided by funds from operations. Daylight believes that a payout ratio above 100% is a significant concern as it indicates that no funds from operations are being retained to finance capital expenditures or to repay debt. Daylight believes that a lower payout ratio corresponds to greater financial flexibility since the excess funds from operations can be invested in capital expenditures for the long-term benefit of Daylight or be utilized to repay debt and reduce the leverage utilized by Daylight. For the three months ended September 30, 2009, the payout ratio was 58%, and for the three months ended June 30, 2009 the payout ratio was 54%, compared to 70% for the three months ended December 31, 2008 due to the decrease in distributions declared in 2009.



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September 30, June 30, December 31,
2009 2009 2008
----------------------------------------------------------------------------
Distributions declared $ 29,385 $ 26,254 $ 35,193

Cash provided by operating
activities $ 44,054 $ 49,198 $ 47,416
Change in non-cash operating
working capital 2,684 (1,993) 1,329
Asset retirement expenditures 3,507 1,254 1,330
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Funds from operations $ 50,245 $ 48,459 $ 50,075
----------------------------------------------------------------------------
Payout ratio 58% 54% 70%
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The Trust's unit capital is not subject to external restrictions; however, the bank debt facilities are based on petroleum and natural gas reserves (see note 6). The Trust's ability to raise new equity will be limited by the safe harbour limit guidelines as announced by the Federal government. Current safe harbour capacity allows for the issuance of approximately $350 million of new equity after the Highpine acquisition. There were no changes in the Trust's approach to capital management during the nine month period ended September 30, 2009.

13. Related Party Transactions

Daylight and Midnight Oil Exploration Ltd. ("MOX") are considered related parties, as Daylight's Chairman is a director and officer of MOX. In addition, Daylight's Chief Executive Officer and director is also a director of MOX and Daylight's Corporate Secretary is also MOX's Corporate Secretary. Daylight and MOX are joint venture partners in certain properties, and as a result, revenues and costs related to these properties are allocated to each partner under standard joint venture billing arrangements. Each partner's costs and revenues are based on the exchange amounts which reflect actual third party costs incurred and revenue received. All transactions are conducted under standard business terms and are considered within the normal course of Daylight's business activities and operations. In addition, certain administrative services which provide reasonable economy and do not involve competitive issues continue to be provided to MOX by Daylight Energy. These administrative services are provided on a fixed fee basis negotiated by the parties, which is considered comparable to the fee an independent third party would charge for the services, and may be cancelled by either party.

For the three and nine months ended September 30, 2009, Daylight charged MOX $0.2 million (2008 - $0.4 million) and $0.5 million (2008 - $1.1 million) respectively, for premises costs with a payable balance, which included joint venture and commodity marketing amounts, of approximately $9.0 million due to MOX as at September 30, 2009 (December 31, 2008 - $2.8 million). At September 30, 2009, MOX held an advance capital deposit of $3.0 million (December 31, 2008 - $3.9 million) in conjunction with normal course oil and gas drilling activities.



14. Commitments

The following is a summary of Daylight's contractual obligations and
commitments as at September 30, 2009:

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----------------------------------------------------------------------------
2009 2010 2011 2012 2013 Thereafter
----------------------------------------------------------------------------
Operating leases $2,426 $4,093 $ 2,432 $ 1,526 $ 1,525 $ 4,956
Natural gas transportation 586 2,236 1,656 422 - -
Convertible debentures
(face value) 3,576 - - 53,737 75,000 -
Bank debt - - 164,172 - - -
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$6,588 $6,329 $168,260 $55,685 $76,525 $ 4,956
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Included in operating leases are obligations related to office space, office equipment and a drilling rig contract. In addition to the above, the Trust has commitments related to its risk management program (see note 12).

15. Subsequent Event

On October 8, 2009, Daylight acquired all of the issued and outstanding class "A" common shares of Highpine pursuant to a Plan of Arrangement whereby shareholders could elect to receive 0.85 of a Daylight trust unit or $7.00 in cash per share held to a maximum of $75 million. Daylight issued 51.4 million trust units at $8.11 per trust unit, based on Daylight's weighted average trading price at the August 23, 2009 announcement date, and paid $46 million in cash as consideration.



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
mmbtu million British thermal units
mmstb million stock tank barrels of oil
Cdn Canadian
GJ gigajoules
NGLs natural gas liquids
WTI West Texas Intermediate crude oil
US United States



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