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

Daylight Resources Trust

March 04, 2009 22:42 ET

Daylight Resources Trust Reports Year End 2008 Financials and Delivers Record Results- Increased Production and 175% Reserve Replacement Highlight Record Year

CALGARY, ALBERTA--(Marketwire - March 4, 2009) - Daylight Resources Trust (TSX:DAY.UN) (TSX:DAY.DB) (TSX:DAY.DB.B) (TSX:DAY.DB.C) -

MESSAGE TO UNITHOLDERS

Daylight Resources Trust ("Daylight" or the "Trust") is pleased to report financial and operating results for the three months and year ended December 31, 2008 ("Q4 2008" and "2008" respectively).

Strong operational performance complimented by our strategic acquisition program drove Daylight's record results. The Trust grew both production and reserves during 2008 while maintaining a strong financial discipline and delivering one of the most conservative payout ratios in the sector. Our solid balance sheet, supported by our positive operational results, our conservative financial practices and our effective hedging program, provide Daylight the financial flexibility to pursue strategic opportunities during this time of downward financial pressure on the world economy. During 2008, Daylight consolidated our position in our key Elmworth resource play asset and made a substantial increase to our inventory of low geological risk, repeatable drilling opportunities. The Trust also began development of our exciting new Montney opportunity in Kaybob and continued to refine developing opportunities utilizing new drilling and completion technologies across our high quality asset base.

Q1 2009 OPERATIONAL UPDATE

Daylight has now completed or initiated drilling on eight wells of our nine well earning program in Elmworth and Bilbo. The drilling of the final earning well was deferred to the third quarter of 2009 with the consent of the farmor and no change to the earning terms. Daylight expects the first of these wells to come on stream in early March. Results of the wells drilled and completed to date have met our expectations both geologically and from preliminary production test results. These strategic farmins have allowed Daylight to effectively utilize our capital to earn lands in our core areas and add to our future inventory of well locations.

Based on the above activity and continued operations on our other high quality assets, Daylight is pleased to report current production of approximately 24,000 boe per day with the Trust well on target to meeting its 2009 production guidance of 22,000-23,000 boe per day.

Having now completed the majority of our earning requirements on the above lands, and with our production in-line with budget, Daylight will now focus on further strategic opportunities while carefully managing our costs as we execute the remainder of our 2009 capital program. Indications from our service providers are that their rates, which directly impact our capital expenditures, are under downward pressure and should drop in the latter half of the year by between 15% and 25%. On March 3, 2009 the Province of Alberta announced an incentive program designed to stimulate the province's energy sector through a system of royalty credits and new well royalty reductions. Currently Alberta Crown Royalties represent approximately 80% of Daylight's total royalties paid. While still evaluating the impact on Daylight's capital allocation from the expected reduction in service costs and the new royalty incentives, Daylight believes that both will serve to strengthen the Trust's cash flow and drilling economics for 2009 and 2010 and may allow the Trust to execute additional capital expenditures within our current capital budget. As an operator with the majority of our drilling activity in the Province of Alberta and our focus on deep horizontal resource play wells, Daylight is positioned to be a major beneficiary of the Alberta Incentive Program. Daylight continues to target a total 2009 capital budget of $110 to $125 million.

DAYLIGHT RESOURCES TRUST - HIGHLIGHTS

- Achieved record 2008 production of 21,045 boe per day with an exit rate of over 23,000 boe per day.

- Recorded December 31, 2008 Proved Plus Probable reserves of 70.0 million boe, replacing 175% of 2008 production, an increase of 9% over prior year reserves.

- Increased Reserve Life Index ("RLI") to 8.8 years.

- Made significant increases to land base and drilling inventory in key Elmworth property through several strategic transactions.

- Attained a Proved Plus Probable Finding, Development & Acquisitions ("FD&A") cost of $15.33 per boe (excluding changes in Future Development Capital ("FDC")), highlighting the Trust's ability to consistently add to our reserve base with very competitive capital effectiveness both in our organic drilling results and strategic acquisition program.

- Generated record cash flow of $264.4 million for the year.

- Continues to have an enviable hedging position in the current low commodity price environment with 43% of mid-range 2009 production guidance hedged at very favorable prices.

- Reported payout ratio for 2008 of 44% continued Daylight's strategy of conservative financial practices designed to position the Trust with a strong balance sheet.



FOURTH QUARTER AND FULL YEAR FINANCIAL RESULTS

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Financial Q4 Q3 Q4 Year ended December 31
(CDN$ thousands, except
unit, per unit and
operational data) 2008 2008 2007 2008 2007
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Petroleum and
natural gas revenues $ 91,311 $ 145,269 $ 99,718 $ 501,737 $ 366,956
Operating netback 58,266 81,808 57,919 296,420 204,433
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Funds from
operations 50,075 78,646 47,479 264,420 165,929
Per unit - Basic 0.56 0.91 0.61 3.17 2.16
- Diluted 0.52 0.84 0.54 2.89 2.10
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Cash distributions
declared 35,193 33,684 23,296 117,017 118,891
Per unit 0.39 0.39 0.30 1.38 1.55
Payout ratio 70% 43% 49% 44% 72%
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Capital expenditures 38,766 45,657 29,089 165,919 96,380
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Units outstanding
(000s)
Basic 90,239 86,299 77,657 90,239 77,657
Diluted 106,050 94,295 93,850 106,050 93,850
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FOURTH QUARTER AND FULL YEAR OPERATIONAL RESULTS

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Operational
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Average daily
production
Natural gas (mcf/d) 82,572 81,798 71,187 76,805 73,279
Light oil (bbls/d) 4,086 4,864 4,964 4,754 4,526
Heavy oil (bbls/d) 2,798 2,179 2,488 2,354 2,447
NGLs (bbls/d) 1,217 1,106 1,266 1,136 1,275
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Oil & NGLs (bbls/d) 8,101 8,149 8,718 8,244 8,248
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Combined (boe/d) 21,863 21,782 20,583 21,045 20,461
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Average prices
received
Natural gas ($/mcf) $ 7.06 $ 8.52 $ 6.45 $ 8.43 $ 6.61
Light oil ($/bbl) 55.28 116.11 81.84 97.52 71.54
Heavy oil ($/bbl) 45.20 99.43 53.50 76.01 48.52
NGLs ($/bbl) 43.27 89.43 64.99 72.22 57.99
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Oil & NGLs ($/bbl) $ 50.00 $ 108.03 $ 71.31 $ 87.89 $ 62.62
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Combined ($/boe) $ 45.40 $ 72.50 $ 52.66 $ 65.14 $ 49.14
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$ per boe
Petroleum and
natural gas revenues $ 45.40 $ 72.50 $ 52.66 $ 65.14 $ 49.14
Royalties (9.35) (14.05) (9.96) (12.76) (9.07)
Realized gain (loss)
on derivative
contracts 6.08 (4.61) 1.13 (0.85) 0.93
Operating expenses (11.95) (11.95) (12.18) (11.99) (12.57)
Transportation (1.20) (1.06) (1.07) (1.06) (1.05)
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Operating netback $ 28.98 $ 40.82 $ 30.59 $ 38.48 $ 27.37
G&A - cash charge (2.23) (2.27) (1.97) (2.19) (2.04)
Cash financial
charges (1.84) (2.31) (3.55) (2.74) (3.12)
Provision for
non-recoverable
accounts receivable - (0.90) - (0.23) -
Other income(1) - 3.90 - 1.01 -
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Funds from operations $ 24.91 $ 39.24 $ 25.07 $ 34.33 $ 22.21
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(1) 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


Q4 2008 FINANCIAL & OPERATING RESULTS

Production

- The Trust's 2008 production was 21,045 boe per day, an increase of 3% from 2007. Daylight previously announced that 2008 exit production volumes were in excess of 23,000 boe per day, confirming that Daylight had accomplished our 2008 annual production guidance target of 21,000 boe per day.

- Daylight's total production volumes for Q4 2008 averaged 21,863 boe per day, a slight increase over Q3 2008 and an increase of 6% over Q4 2007 production volumes.

- The Trust grew production through our successful 2008 capital program and a series of highly strategic transactions executed during the second half of 2008.

Reserves and Finding Costs

- Daylight's capital program and net acquisition activity replaced 175% of the Trust's 2008 production on a Proved Plus Probable basis and 129% on a proved basis.

- The increase in the Trust's Proved Plus Probable reserves to 70.0 million barrels of oil equivalent ("boe") represents an increase of 9% over the prior year. In addition, Daylight's Proved Plus Probable RLI increased to 8.8 years, based on Daylight's Q4 2008 production of 21,863 boe per day versus the comparable RLI of 8.5 for 2007.

- This growth in reserves was derived primarily from: the Trust's operational success and acquisition activity in Elmworth; our drilling, completion and acquisition activity in our West Central properties; well performance and drilling additions from farmout activity in Obed; and the implementation of a waterflood at Cecil. The Trust intends on continuing both acquisition activity and drilling in the Elmworth area and our West Central properties during 2009 to continue building on our operational momentum.

- Daylight's reported production of 7.7 million boe was more than offset by organic drilling, optimization and secondary recovery activities which added 10.1 million boe of Proved Plus Probable reserves during 2008. In addition, the Trust added 7.4 million boe of Proved Plus Probable reserves through acquisition activity, offset by dispositions of 3.9 million boe, primarily through the sale of our Sturgeon Lake asset. Total Proved Plus Probable reserve additions through organic growth and acquisitions, net of dispositions amount to 13.5 million boe, representing 175% of total 2008 production.

- Based on Daylight's 2008 Proved Plus Probable reserve additions and our total capital expenditures of $165.9 million, the Trust is reporting 2008 FD&A cost (excluding change in FDC) of $15.33 per boe, yielding a recycle ratio of 2.5x based on our realized 2008 annual operating netback of $38.48 per boe. These costs are in line with Daylight's reserve replacement costs since inception and highlight the Trust's ability to consistently add to our reserve base with very competitive capital effectiveness, underlying the quality of our asset base and the capabilities of our technical team.

Strategic Transaction Activity

- During the second half of 2008 Daylight was very active, through a series of transactions, in building additional inventory in areas where our technical expertise and successful track record can provide the greatest value creation for our Unitholders.

- During Q3 2008 Daylight acquired Athlone Energy Ltd., which increased our heavy oil drilling inventory by 17 wells, and sold our Sturgeon Lake light oil asset. This strategic well timed sale of a mature oil asset during a period of high oil prices positioned the Trust to successfully pursue two subsequent strategic acquisitions of natural gas properties with exceptional future development potential.

- During Q4 2008 Daylight acquired 550 boe per day of production in our West Central properties in a transaction that included a large farmin in the Elmworth and Bilbo areas. This farmin greatly increased Daylight's land position in the Elmworth and Bilbo fairway.

- Daylight also executed a major acquisition of 1,000 boe per day in the Elmworth area during Q4 2008. Included in the transaction were 77 gross (58 net) sections of land with an average working interest of 75%. The acquired lands are located either directly adjacent to Daylight's Elmworth land base or in the fairway between Elmworth and Bilbo.

- The net result of the above transactions was an increase in production of 1,250 boe per day and 3.8 million boe of Proved Plus Probable reserves at very competitive net acquisition metrics. Total land holdings in our key Elmworth and Bilbo fairway as a result of these transactions, including lands expected to be earned under the above farmin, was approximately 150 gross (92.8 net) sections. Subsequent to these transactions, the Trust has accumulated additional lands through a series of landsales, purchases and farmins, increasing our land base in this area to 185 gross (113 net) sections.

- While considerable additional activity is required to confirm our estimates, our analysis has identified the unrisked opportunity to develop over 1 Tcf of net potential natural gas on these lands. This includes nearly 50 gross (36 net) firm drilling locations and over 200 additional contingent locations identified on these lands.

Capital

- Daylight's 2008 capital expenditures included the drilling of 50 gross (21.4 net) wells with a 98% success rate. This investment in Daylight's assets and the strategic acquisitions executed by the Trust during 2008 resulted in Daylight's production increasing to an exit rate of over 23,000 boe per day and provided solid growth in Daylight's booked reserves.

- Capital expenditures for Q4 2008 decreased to $38.8 million, down from $45.7 million in Q3 2008 and increasing from $29.1 million during Q4 2007. Capital expenditures for the full year 2008 totaled $165.9 million, an increase of 72% over 2007.

- Drilling activity in 2008 focused on Daylight's key property of Elmworth developing both the Cadomin zone and multiple uphole Cretaceous sands. In addition, the Trust pursued opportunities in both the Montney and Bluesky zones in our large West Central land base.

- Farmout drilling activity also continued at our Obed property, with 8 gross (2.5 net) wells drilled with no cash drilling or completion costs payable by the Trust.

Hedges

- The Trust has financial hedges in place for 3,000 bbls of oil per day through zero premium collars with a floor price of Cdn$110.00 per bbl and an average ceiling price of Cdn$205.52 per bbl for the period August 1, 2008 to December 31, 2009. In addition, the Trust has natural gas hedges in place for the period January 1, 2009 to October 31, 2009, on a volume of 47,400 mcf per day (50,000 GJ per day) at an average price of $8.00 per mcf AECO ($7.59 per GJ).

- These hedges represent 43% of Daylight's 2009 mid-range production volumes guidance hedged at very favorable prices, securing our cash flow in a low commodity price environment and providing the financial flexibility to pursue strategic opportunities that may arise.

Funds from Operations

- Funds from operations were $50.1 million for Q4 2008 and $264.4 million for 2008. While Q4 2008 funds from operations were down 36% from Q3 2008, the total funds from operations for 2008 represent a 59% increase over 2007, a record for the Trust.

- This year over year increase in funds from operations is primarily a result of increased production and increased commodity prices. The decrease in funds from operations in Q4 2008 versus Q3 2008 is due to lower commodity prices in the quarter.

Operating Netback

- Daylight's 2008 natural gas price was $8.43 per mcf, a 28% increase over the 2007 natural gas price of $6.61 per mcf. Daylight's natural gas price during Q4 2008 was $7.06 per mcf which is a 17% decrease from the Q3 2008 natural gas price of $8.52 per mcf and is 9% higher than the Q4 2007 natural gas price of $6.45 per mcf.

- Daylight's 2008 light oil price of $97.52 per bbl was 36% higher than the 2007 realized light oil price of $71.54 per bbl. Daylight's Q4 2008 light oil price was $55.28 per bbl while Q3 2008 light oil realized $116.11 per bbl, a decrease of 52%, and Q4 2007 light oil price of $81.84 per bbl, a decrease of 32%.

- Daylight's 2008 heavy oil price of $76.01 per bbl was 57% higher than the 2007 heavy oil price of $48.52 per bbl. Daylight's Q4 2008 heavy oil price of $45.20 per bbl, is 55% lower than the Q3 2008 heavy oil price of $99.43 per bbl and is 16% lower than the Q4 2007 heavy oil price of $53.50.

- Daylight's 2008 operating expenses were $11.99 per boe a decrease of 5% from $12.57 per boe for 2007. Operating expenses were flat at $11.95 per boe for Q4 2008 versus $11.95 per boe for Q3 2008 and 2% lower than the $12.18 per boe recorded in Q4 2007. Daylight expects its operating costs for 2009 to be approximately $11.50 per boe.

- Royalty rates increased to 19.6% of revenue in 2008 from 18.5% in 2007, primarily due to high commodity prices realized during 2008. Royalty rates increased to 20.6% of revenue in Q4 2008 from 19.4% of revenue in Q3 2008 and increased from the Q4 2007 rate of 18.9%.

- Operating netbacks were $38.48 per boe in 2008, an increase of 41% over the $27.37 per boe operating netback recorded in 2007. Operating netback was $28.98 per boe for Q4 2008, a decrease of 29% from the $40.82 per boe recorded in Q3 2008 and a decrease of 5% from Q4 2007's value of $30.59 per boe.

Payout Ratio

- Payout ratio for 2008 was 44%, down from 72% in 2007, which was one of the most conservative payout ratios in the sector.

- Since inception of the Trust in November 2004 through year end 2008, Daylight has provided a total of $473 million or $8.74 per unit of distributions.

- Daylight continues to target a low distribution payout ratio balanced with an impactful investment of capital on our high quality assets with the goal of fully funding both with our funds from operations.

Balance Sheet and Financial Flexibility

- In December 2008 the Trust issued on a "bought-deal" basis $75 million of Convertible Unsecured Subordinated Debentures.

- At year end 2008, Daylight's outstanding bank debt had been reduced to $219.9 million from $257.3 million at year end 2007 while our bank credit facility capacity was also expanded to $350 million at year end 2008 from $300 million at year end 2007.

- The Trust is favorably positioned to pursue strategic opportunities with over $130 million available on our existing bank lines.

- Daylight's bank lines were reviewed and approved by our syndicate of banks in November 2008. Our next regularly scheduled review is May 2009 and based on the growth in the Trust's production and reserves, Daylight is confident that we will maintain our $350 million bank credit facility and continue to have significant funds available to pursue strategic opportunities as they arise.

Tax Pools and Safe Harbour

- Daylight and its subsidiaries have tax pools of over $900 million at December 31, 2008 which are available to shelter cash flow from income tax in current periods and beyond 2011.

- Current Safe Harbour capacity for the issuance of $1.0 billion of new equity provides flexibility to execute on larger scale strategic opportunities as they arise.

The recent global economic downturn has affected all businesses and individuals including the Canadian oil and gas industry and Daylight. The slowing global economy has resulted in a decline in commodity prices and the unit price of Daylight and its peers. Looking forward, our industry will see the impact in its funds from operations, debt levels, capital expenditures, cash distributions and payout ratios. The Trust exited 2008 in a solid financial position with a net debt to annualized cash flow ratio of 1.0 times, over $130 million of available capacity on our bank credit facility, an effective hedging program with 43% of guided 2009 production volumes hedged at attractive prices and an excellent portfolio of internal development prospects. The success of our oil and gas operations over the past year and the financial discipline we have exercised has positioned us quite favorably for the current economic circumstances. Using this financial flexibility, Daylight will continue to pursue selected strategic acquisitions and opportunities that meet our rigorous criteria.

Daylight's high-end technical team integrates and emphasizes our exploitation, reservoir engineering, production optimization, geological and geophysical expertise to identify and capture reserves and production addition opportunities for the delivery of long term value creation to our Unitholders. Our team has developed a multi-year inventory of repeatable, low risk exploitation projects with substantial potential reserve additions on assets we currently own and control. Daylight's inventory includes a significant depth of prospects across our high quality asset base.

With continued solid results, both operationally and financially, Daylight targets to substantially fund our cash capital expenditures and distributions with internally generated funds from operations for 2009. This approach provides the Trust with the financial flexibility to execute on strategic opportunities as they arise.

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

Signed:

Anthony Lambert

President & CEO

March 4, 2009

RESERVE HIGHLIGHTS

Reserves are based on an independent reserves evaluation conducted by GLJ Petroleum Consultants Ltd. ("GLJ") effective December 31, 2008 and prepared in accordance with NI 51-101.

- Total proved reserves at December 31, 2008 are 48.6 mmboe and total proved plus probable reserves are 70.0 mmboe. These compare to reserves at December 31, 2007 of 46.3 mmboe total proved reserves, an increase of 5% and 64.2 mmboe total proved plus probable reserves, an increase of 9%.

- Reserve additions were primarily focused on our successful drilling, optimization and completion programs in Elmworth, Obed, and Kaybob, along with the West Central and Elmworth property acquisitions, and the corporate acquisition of Athlone, offset by our Sturgeon property disposition.

- Daylight's proved plus probable RLI was 8.8 years at the end of 2008 while the proved RLI was 6.1 years based upon GLJ reserves and Daylight's Q4 2008 production of 21,863 boe per day, an increase from the 2007 proved plus probable RLI of 8.5.

- Net present value ("NPV") of total proved plus probable reserves sustained value of $1,176 million at the end of 2008 versus $1,027 million at the end of 2007, discounted at 10% and before income taxes.

- Recycle ratio of 2.5x based on total proved plus probable FD&A cost of $15.33 per boe (excluding FDC), based on an annual operating netback of $38.48 per boe.

RESERVE INFORMATION

Reserves included herein are stated on a company interest basis (before royalty burdens and including royalty interests) unless noted otherwise. All reserves information has been prepared in accordance with National Instrument ("NI") 51-101. This report contains several cautionary statements that are specifically required by NI 51-101. In addition to the detailed information disclosed in this press release more detailed information on a net interest basis (after royalty burdens and including royalty interests) and on a gross interest basis (before royalty burdens and excluding royalty interests) will be included in Daylight's Annual Information Form ("AIF") which will be available on www.sedar.com.

Based on an independent reserves evaluation of all of Daylight's assets conducted by GLJ Petroleum Consultants Ltd. ("GLJ") effective December 31, 2008 and prepared in accordance with NI 51-101, Daylight had proved plus probable reserves of 70.0 mmboe. Proved plus probable reserve additions from exploration and development activities (including revisions) were 10.1 mmboe. This represents 131% of the 7.7 mmboe produced during 2008. These additions combined with acquisitions net of dispositions reserves of 3.4 mmboe brings total proved plus probable reserve additions to 13.5 mmboe. As a result, year-end 2008 proved plus probable reserves are 9% higher than the 64.2 mmboe of reserves recorded at year-end 2007.

Proved developed producing reserves represent 56% of proved plus probable reserves while total proved reserves account for 69% of proved plus probable reserves. Approximately 37% of Daylight's proved plus probable reserves are crude oil and natural gas liquids while 63% are natural gas on a boe basis.



TOTAL COMPANY INTEREST

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Light and Heavy Total Natural
Medium Crude Crude Gas Natural Oil
Crude Oil Oil Oil Liquids Gas Equivalent
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(mbbl) (mbbl) (mbbl) (mbbl) (mmcf) (mboe)
Proved
Developed Producing 5,596 7,038 12,634 2,369 145,901 39,319
Developed
Non-Producing 160 31 191 178 10,754 2,161
Undeveloped 723 1,733 2,456 198 26,557 7,081
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Total Proved 6,479 8,802 15,281 2,744 183,212 48,560
Probable 2,542 3,755 6,297 1,288 83,059 21,429
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Proved plus Probable 9,021 12,557 21,578 4,033 266,272 69,989
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NET INTEREST

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Light and Heavy Total Natural
Medium Crude Crude Gas Natural Oil
Crude Oil Oil Oil Liquids Gas Equivalent
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(mbbl) (mbbl) (mbbl) (mbbl) (mmcf) (mboe)
Proved
Producing 4,161 6,288 10,449 1,496 117,471 31,524
Developed
Non-Producing 113 23 136 116 9,098 1,768
Undeveloped 483 1,401 1,884 133 22,107 5,702
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Total Proved 4,757 7,711 12,469 1,745 148,676 38,993
Probable 1,790 3,153 4,943 836 64,811 16,581
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Proved plus Probable 6,547 10,865 17,412 2,581 213,486 55,574
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Notes:

(1) Boe's may be misleading, particularly if used in isolation. In
accordance with NI 51-101, a boe conversion ratio for natural gas of 6
Mcf: 1 bbl has been used which is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
(2) Numbers may not add due to rounding.


RESERVES RECONCILIATIONS

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Total Crude Natural Gas Oil
Oil Liquids Natural Gas Equivalent
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(mbbl) (mbbl) (mmcf) (mboe)
Proved Producing
December 31, 2007 14,825 2,149 130,399 38,707
Exploration Discoveries - 45 6,048 1,053
Drilling Extensions 180 87 18,308 3,319
Improved Recovery 280 - 10 282
Infill Drilling 375 - - 375
Technical Revisions (464) 117 5,579 583
Acquisitions 701 373 14,825 3,544
Dispositions (712) (11) (537) (812)
Production (2,551) (391) (28,731) (7,731)
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December 31, 2008 12,634 2,369 145,901 39,319
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Total Crude Natural Gas Oil
Oil Liquids Natural Gas Equivalent
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(mbbl) (mbbl) (mmcf) (mboe)
Total Proved
December 31, 2007 17,875 2,514 155,460 46,298
Exploration Discoveries - 52 7,479 1,298
Drilling Extensions 75 93 19,044 3,342
Improved Recovery 556 - 10 559
Infill Drilling 9 - - 9
Technical Revisions (218) 35 8,178 1,181
Acquisitions 1,072 475 24,088 5,562
Dispositions (1,539) (34) (2,316) (1,958)
Production (2,551) (391) (28,731) (7,731)
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December 31, 2008 15,281 2,744 183,212 48,560
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Total Crude Natural Gas Oil
Oil Liquids Natural Gas Equivalent
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(mbbl) (mbbl) (mmcf) (mboe)
Total Proved Plus
Probable
December 31, 2007 25,585 3,333 211,588 64,183
Exploration Discoveries - 68 9,232 1,606
Drilling Extensions 168 377 36,513 6,630
Improved Recovery 640 14 562 748
Infill Drilling 15 - - 15
Technical Revisions (751) 99 10,582 1,112
Acquisitions 1,605 611 30,914 7,368
Dispositions (3,134) (77) (4,389) (3,943)
Production (2,551) (391) (28,731) (7,731)
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December 31, 2008 21,578 4,033 266,272 69,989
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RESERVE LIFE INDEX ("RLI")

Daylight's proved plus probable RLI was 8.8 years at the end of 2008 while the proved RLI was 6.1 years based upon GLJ reserves and Daylight's Q4 2008 production of 21,863 boe per day.

NET PRESENT VALUE ("NPV") SUMMARY

Daylight's crude oil, natural gas and natural gas liquids reserves were evaluated using GLJ's product price forecasts effective January 1, 2009 prior to provision for income taxes, interest, financial charges and general and administrative expenses. It should not be assumed that the discounted future net production revenues estimated by GLJ represent the fair market value of the reserves.



NPV of Cash Flow Using GLJ January 1, 2009 Forecast Prices and Costs
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NI 51-101 Net Interest 0% 5% 10% 12% 15%
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($,000)
Proved
Developed Producing 1,224,823 947,918 780,158 730,231 667,637
Developed
Non-Producing 67,653 48,724 37,552 34,300 30,284
Undeveloped 167,510 103,303 67,493 57,399 45,186
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Total Proved 1,459,987 1,099,945 885,204 821,930 743,107
Probable 742,720 432,987 290,679 254,182 211,933
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Proved plus Probable 2,202,707 1,532,932 1,175,882 1,076,112 955,040
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At a 10% discount factor, the proved producing reserves make up 66% of the proved plus probable value while total proved reserves account for 75% of the proved plus probable value. GLJ's price forecast utilized in the evaluation is summarized below.



GLJ January 1, 2009 Price Forecast
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West Texas Edmonton Natural
Intermediate Light Gas at Foreign
Year Crude Oil Crude Oil AECO Exchange
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($US/bbl) ($Cdn/bbl) ($Cdn/mmbtu) ($US/$Cdn)
2009 57.50 68.61 7.58 0.825
2010 68.00 78.94 7.94 0.850
2011 74.00 83.54 8.34 0.875
2012 85.00 90.92 8.70 0.925
2013 92.01 95.91 8.95 0.950
2014 93.85 97.84 9.14 0.950
2015 95.73 99.82 9.34 0.950
2016 97.64 101.83 9.54 0.950
2017 99.59 103.89 9.75 0.950
2018 101.59 105.99 9.95 0.950
2019 103.62 108.11 10.15 0.950
Escalate thereafter at +2.0%/yr +2.0%/yr +2.0%/yr 0%/yr
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ALBERTA GOVERNMENT NEW ROYALTY FRAMEWORK

Effective January 1, 2009 the Alberta government's New Royalty Framework ("NRF") took effect. Under the NRF, royalty rates on conventional and non-conventional oil and natural gas production in Alberta may increase to a maximum of 50 percent, the sliding scale royalty calculations are based on a broader range of commodity prices, and royalty incentives and holiday programs have been eliminated with the exception of specific programs. In November 2008, the Transitional Royalty Plan ("TRP") was introduced which offers reduced royalty rates for wells drilled on or after November 19, 2008 which meet certain depth criteria. This program is in effect for five years up to December 31, 2013.

On March 3, 2009, an incentive program designed to encourage the execution of new drilling projects in Alberta was announced in response to the global economic crisis and slowdown in drilling activity throughout the province of Alberta. The 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 incentive program also provides a reduced royalty rate on new wells for the first year of production up to an established total production volume. This program is expected to positively impact the Trust. The effect of the March 3, 2009 announcement has not been reflected in the GLJ reserves at December 31, 2008.

Approximately 95% of Daylight's reserves and production are in Alberta, with the balance located in BC and Saskatchewan. Approximately 78% of current production is subject to Crown royalties, which are affected directly by the government royalty programs, and the remaining 22% of Daylight's 2008 royalties are related to freehold and override charges, which are not directly affected by these programs. Consequently, the NRF, TRP and the new royalty incentive program will impact Daylight's royalty rates, the effect of which is dependent upon commodity prices. The NRF and TRP royalty programs have been incorporated into the GLJ evaluation effective December 31, 2008.

NET ASSET VALUE ("NAV") SUMMARY

The following NAV table shows what is normally referred to as a "produced-out" NAV calculation under which the current value of the Trust's reserves would be produced at forecast future prices and costs. The value is a snapshot in time and is based on various assumptions including commodity prices and foreign exchange rates that vary over time.



----------------------------------------------------------------------------
Net Asset Value 2008
----------------------------------------------------------------------------
(000)
Proved plus Probable NI 51 - 101 discounted at 10% $1,175,882
Undeveloped Land, Seismic and Other Assets (internal estimate) 46,287
Investments 2,285
Unrealized gain on derivative contracts(1) 48,982
Bank Debt (219,853)
Debenture (face value) (132,313)
Working Capital Deficiency (38,742)
----------------------------------------------------------------------------
Net Asset Value - Basic $ 882,528
Basic Units Outstanding (000) 90,239
----------------------------------------------------------------------------
Net Asset Value - Basic (per unit) $9.78
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Unrealized gain on derivative contracts represents the fair market value
of these contracts as at December 31, 2008 based on the GLJ future
pricing used to arrive at the fair value of proved plus probable
reserves. This amount will differ from the value of the unrealized gain
on derivative contracts in the 2008 consolidated financial statements
due to differing future pricing assumptions.


FUTURE DEVELOPMENT CAPITAL ("FDC")

NI 51-101 requires that finding, development and acquisition ("FD&A") costs be calculated including changes in FDC. Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities and capital cost estimates that reflect the independent evaluator's best estimate of what it will cost to bring the proved undeveloped and probable reserves on production.

FINDING AND DEVELOPMENT COSTS ("F&D") - COMPANY INTEREST RESERVES(1)

During 2008 Daylight spent $165.9 million on its internal capital program which added 6.4 mmboe of proved and 10.1 mmboe of proved plus probable reserves, including revisions. Daylight's internal capital program replaced 131% of its 2008 production on a proved plus probable basis. In total, Daylight drilled 50 gross (21.4 net) wells with a 98% drilling success rate.

(1) In all cases, the F&D number is calculated by dividing the identified capital expenditures by the applicable reserves additions. Boe's may be misleading, particularly if used in isolation. In accordance with NI 51-101, a boe conversion ratio for natural gas of 6 Mcf: 1 bbl has been used which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.



----------------------------------------------------------------------------
Proved
plus
Proved Probable
----------------------------------------------------------------------------
FD&A Costs Excluding Future Development Capital
Exploration and Development Capital
Expenditures - (000) $ 165,919 $ 165,919
Exploration and Development Reserve Additions
Including Revisions - mboe 6,389 10,111
----------------------------------------------------------------------------
Finding and Development Cost - per boe $ 25.97 $ 16.41
----------------------------------------------------------------------------

Net Acquisition Capital - (000) $ 41,593 $ 41,593
Net Acquisition Reserve Additions - mboe 3,604 3,425
----------------------------------------------------------------------------
Net Acquisition Cost - per boe $ 11.54 $ 12.14
----------------------------------------------------------------------------

Total Capital Expenditures including Net
Acquisitions - (000) $ 207,512 $ 207,512
Reserve Additions including Net Acquisitions - mboe 9,993 13,536
----------------------------------------------------------------------------
Finding Development and Acquisition Cost - per boe $ 20.77 $ 15.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------

FD&A Costs Including Future Development Capital
Exploration and Development Capital
Expenditures - (000) $ 165,919 $ 165,919
Exploration and Development Change in FDC - (000) $ 17,491 $ 40,729
----------------------------------------------------------------------------
Exploration and Development Capital including
change in FDC - (000) $ 183,410 $ 206,648
Exploration and Development Reserve Additions
including Revisions - mboe 6,389 10,111
----------------------------------------------------------------------------
Finding and Development Cost - per boe $ 28.70 $ 20.44
----------------------------------------------------------------------------

Net Acquisition Capital - (000) $ 41,593 $ 41,593
Net Acquisition FDC - (000) $ 6,979 $ (9,025)
----------------------------------------------------------------------------
Net Acquisition Capital including FDC - (000) $ 48,572 $ 32,568
Net Acquisition Reserve Additions - mboe 3,604 3,425
----------------------------------------------------------------------------
Net Acquisition Cost - per boe $ 13.48 $ 9.51
----------------------------------------------------------------------------

Total Capital Expenditures including Net
Acquisitions - (000) $ 207,512 $ 207,512
Total Change in FDC - (000) $ 24,470 $ 31,704
----------------------------------------------------------------------------
Total Capital Including Change in FDC - (000) $ 231,982 $ 239,216
Reserve Additions including Net Acquisitions - mboe 9,993 13,536
----------------------------------------------------------------------------
Finding Development and Acquisition Cost
including FDC - per boe $ 23.22 $ 17.67
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Proved
plus
FDC (000) Proved Probable
----------------------------------------------------------------------------

December 31, 2007 $ 88,937 $ 151,162
Exploration & development changes in period $ 24,470 $ 31,704
----------------------------------------------------------------------------
December 31, 2008 $ 113,407 $ 182,866
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight's proved plus probable F&D costs for 2008 were $16.41 per boe excluding FDC and $20.44 including FDC. On a proved basis, Daylight's F&D costs were $25.97 per boe excluding FDC and $28.70 including FDC.

Daylight completed two strategic property acquisitions and one corporate acquisition during 2008 spending $129.3 million to purchase 7.4 mmboe of proved plus probable reserves. Daylight sold its Sturgeon Lake assets for $87.7 million resulting in a reduction to proved plus probable reserves of 3.9 mmboe. Incorporating net acquisitions during 2008, Daylight's proved plus probable FD&A costs were $15.33 per boe excluding FDC and $17.67 including FDC. Daylight's proved FD&A costs were $20.77 per boe excluding FDC and $23.22 per boe including FDC.



----------------------------------------------------------------------------
$ per boe 2006 2007 2008 3 year
----------------------------------------------------------------------------

F&D Costs Excluding Future Development
Capital
Proved 14.97 15.97 25.97 19.07
Proved plus Probable 15.35 15.47 16.41 15.86
----------------------------------------------------------------------------

F&D Costs Including Future Development
Capital
Proved 14.93 21.40 28.70 21.75
Proved plus Probable 14.12 22.78 20.44 19.38
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
$ per boe 2006 2007 2008 3 year
----------------------------------------------------------------------------
FD&A Costs Excluding Future Development
Capital
Proved 30.59 15.97 20.77 25.48
Proved plus Probable 25.59 15.47 15.33 21.02
----------------------------------------------------------------------------
FD&A Costs Including Future Development
Capital
Proved 30.99 21.40 23.22 27.28
Proved plus Probable 26.11 22.78 17.67 23.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------


RESERVE REPLACEMENT

Daylight's 2008 FD&A activities replaced 175% of production on a proved plus probable basis and 129% on a proved basis.



----------------------------------------------------------------------------
2008
----------------------------------------------------------------------------
Production - mboe 7,731
----------------------------------------------------------------------------
Proved plus probable reserve additions - mboe 13,536
Proved plus probable reserve replacement - % 175
----------------------------------------------------------------------------
Proved reserve additions - mboe 9,993
Proved reserve replacement - % 129
----------------------------------------------------------------------------
Proved producing reserve additions - mboe 8,344
Proved producing reserve replacement - % 108
----------------------------------------------------------------------------
----------------------------------------------------------------------------


RECYCLE RATIO

The recycle ratio is a measure for evaluating the effectiveness of an organization's reinvestment program. This ratio measures the efficiency of Daylight's internal capital program by comparing the operating netback per boe to the current year internal FD&A costs per boe and F&D costs per boe.



----------------------------------------------------------------------------
2008
----------------------------------------------------------------------------
Operating netback - $ per boe 38.48
----------------------------------------------------------------------------
Proved plus probable reserve FD&A cost (excluding FDC) - $ per boe 15.33
Proved plus probable recycle ratio (excluding FDC) 2.5x
----------------------------------------------------------------------------
Proved plus probable reserve FD&A cost (including FDC) - $ per boe 17.67
Proved plus probable recycle ratio (including FDC) 2.2x
----------------------------------------------------------------------------
Proved reserve FD&A cost (excluding FDC) - $ per boe 20.77
Proved recycle ratio (excluding FDC) 1.9x
----------------------------------------------------------------------------
Proved reserve FD&A cost (including FDC) - $ per boe 23.22
Proved recycle ratio (including FDC) 1.7x
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

2008
----------------------------------------------------------------------------
Operating netback - $ per boe 38.48
----------------------------------------------------------------------------
Proved plus probable reserve F&D cost (excluding FDC) - $ per boe 16.41
Proved plus probable recycle ratio (excluding FDC) 2.3x
----------------------------------------------------------------------------
Proved plus probable reserve F&D cost (including FDC) - $ per boe 20.44
Proved plus probable recycle ratio (including FDC) 1.9x
----------------------------------------------------------------------------
Proved reserve F&D cost (excluding FDC) - $ per boe 25.97
Proved recycle ratio (excluding FDC) 1.5x
----------------------------------------------------------------------------
Proved reserve F&D cost (including FDC) - $ per boe 28.70
Proved recycle ratio (including FDC) 1.3x
----------------------------------------------------------------------------
----------------------------------------------------------------------------


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion & Analysis ("MD&A") is dated March 4, 2009 and should be read in conjunction with the accompanying 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"). This MD&A should also be read in conjunction with the Annual Information Form which includes complete NI 51-101 reserve disclosure and is available at www.sedar.com and on our website at www.daylightenergy.ca. The following MD&A compares the results of the three months ended December 31, 2008 ("Q4 2008") to the three months ended September 30, 2008 ("Q3 2008") and to the three months ended December 31, 2007 ("Q4 2007"). This MD&A also compares the results of the year ended December 31, 2008 ("2008") to the year ended December 31, 2007 ("2007"). 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 to 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.



----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by
operating activities $ 47,416 $ 97,799 $ 44,824 $ 259,759 $ 167,385
Change in non-cash
operating working
capital 1,329 (20,342) 1,819 861 (5,385)
Asset retirement
expenditures 1,330 1,189 836 3,800 3,929
----------------------------------------------------------------------------
Funds from operations $ 50,075 $ 78,646 $ 47,479 $ 264,420 $ 165,929
----------------------------------------------------------------------------
----------------------------------------------------------------------------


"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. Daylight believes that a payout ratio above 100% is a 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.

"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 those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in, or incorporated by reference into, this 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;

- the amount of future asset retirement obligations;

- 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 Q4 Q3 Q4 Year ended December 31
(CDN$ thousands,
except unit, per unit
and operational data) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 91,311 $ 145,269 $ 99,718 $ 501,737 $ 366,956
Royalties (18,814) (28,149) (18,853) (98,264) (67,767)
Realized gain (loss)
on derivative
contracts 12,230 (9,237) 2,145 (6,514) 6,967
Operating expenses (24,038) (23,943) (23,072) (92,337) (93,866)
Transportation (2,423) (2,132) (2,019) (8,202) (7,857)
----------------------------------------------------------------------------
Operating netback 58,266 81,808 57,919 296,420 204,433
G&A - cash charge (4,483) (4,542) (3,724) (16,879) (15,233)
Cash financial
charges (3,708) (4,626) (6,716) (21,127) (23,271)
Provision for
non-recoverable
accounts receivable - (1,800) - (1,800) -
Other income(1) - 7,806 - 7,806 -
----------------------------------------------------------------------------
Funds from operations 50,075 78,646 47,479 264,420 165,929
Per unit - Basic 0.56 0.91 0.61 3.17 2.16
- Diluted 0.52 0.84 0.54 2.89 2.10
----------------------------------------------------------------------------
Cash provided by
operating activities 47,416 97,799 44,824 259,759 167,385
----------------------------------------------------------------------------
Net income 44,424 69,692 (127,381) 160,519 (96,267)
Per unit - Basic 0.50 0.81 (1.64) 1.92 (1.26)
- Diluted 0.48 0.76 (1.64) 1.80 (1.26)
----------------------------------------------------------------------------
Cash distributions
declared 35,193 33,684 23,296 117,017 118,891
Per unit 0.39 0.39 0.30 1.38 1.55
Payout ratio 70% 43% 49% 44% 72%
----------------------------------------------------------------------------
Capital expenditures 38,766 45,657 29,089 165,919 96,380
Cash property
acquisitions 66,571 - - 66,571 -
Cash property
divestitures - (87,695) - (87,695) -
Non-cash property
acquisitions 26,887 - - 26,887 -
----------------------------------------------------------------------------
Corporate
acquisitions - 36,433 - 36,433 -
----------------------------------------------------------------------------
Market value of
investments 2,285 9,987 13,068 2,285 13,068
----------------------------------------------------------------------------
Bank debt 219,853 199,282 257,342 219,853 257,342
Working capital
deficiency (2) 38,742 37,200 32,088 38,742 32,088
----------------------------------------------------------------------------
Convertible
debentures 118,734 54,180 119,792 118,734 119,792
----------------------------------------------------------------------------
Total assets 1,058,195 915,364 922,344 1,058,195 922,344
----------------------------------------------------------------------------
Units outstanding
(000s)
- Basic 90,239 86,299 77,657 90,239 77,657
- Diluted 106,050 94,295 93,850 106,050 93,850
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operational (Per boe amounts may not add exactly due to rounding)
----------------------------------------------------------------------------
Average daily
production
Natural gas (mcf/d) 82,572 81,798 71,187 76,805 73,279
Light oil (bbls/d) 4,086 4,864 4,964 4,754 4,526
Heavy oil (bbls/d) 2,798 2,179 2,488 2,354 2,447
NGLs (bbls/d) 1,217 1,106 1,266 1,136 1,275
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 8,101 8,149 8,718 8,244 8,248
----------------------------------------------------------------------------
Combined (boe/d) 21,863 21,782 20,583 21,045 20,461
----------------------------------------------------------------------------
Average prices
received
Natural gas ($/mcf) $ 7.06 $ 8.52 $ 6.45 $ 8.43 $ 6.61
Light oil ($/bbl) 55.28 116.11 81.84 97.52 71.54
Heavy oil ($/bbl) 45.20 99.43 53.50 76.01 48.52
NGLs ($/bbl) 43.27 89.43 64.99 72.22 57.99
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 50.00 $ 108.03 $ 71.31 $ 87.89 $ 62.62
----------------------------------------------------------------------------
Combined ($/boe) $ 45.40 $ 72.50 $ 52.66 $ 65.14 $ 49.14
----------------------------------------------------------------------------
$ per boe
Petroleum and natural
gas revenues $ 45.40 $ 72.50 $ 52.66 $ 65.14 $ 49.14
Royalties (9.35) (14.05) (9.96) (12.76) (9.07)
Realized gain (loss)
on derivative
contracts 6.08 (4.61) 1.13 (0.85) 0.93
Operating expenses (11.95) (11.95) (12.18) (11.99) (12.57)
Transportation (1.20) (1.06) (1.07) (1.06) (1.05)
----------------------------------------------------------------------------
Operating netback $ 28.98 $ 40.82 $ 30.59 $ 38.48 $ 27.37
G&A - cash charge (2.23) (2.27) (1.97) (2.19) (2.04)
Cash financial
charges (1.84) (2.31) (3.55) (2.74) (3.12)
Provision for
non-recoverable
accounts receivable - (0.90) - (0.23) -
Other income(1) - 3.90 - 1.01 -
----------------------------------------------------------------------------
Funds from operations $ 24.91 $ 39.24 $ 25.07 $ 34.33 $ 22.21
----------------------------------------------------------------------------
Wells drilled -
gross (net) 10 (3.2) 15 (7.0) 11 (7.8) 50 (21.4) 44 (27.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(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, current
portion of convertible debentures and future income tax liability.


RESULTS OF OPERATIONS

Daylight is an oil and natural gas energy trust applying a high-end technical and business execution team to a high quality asset base to provide sustainable production and reserves levels. Daylight operates in the Western Canadian Sedimentary Basin. 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.

The recent global economic downturn has affected all businesses and individuals including the Canadian oil and gas industry and Daylight. The Trust's unit price has declined along with its peers and the decline in commodity prices will affect the Trust's funds from operations, debt levels, capital expenditures, cash distributions and payout ratios. During these challenging economic times, the Trust finds itself in a strong financial position with a net debt to annualized cash flow ratio of 1.0 times, over $130 million of available capacity on our bank credit facility, and an excellent portfolio of internal development prospects. The Trust will continue to pursue strategic opportunities as they arise with a focus on maintaining strong financial flexibility.

Daylight's 2008 results include a termination fee and a provision for non-recoverable accounts receivable. The termination fee of $9.0 million was paid to Daylight by Cadence Energy Inc. ("Cadence") as a result of the termination of an arrangement agreement between the two parties. This fee, net of costs of $1.2 million, is included in other income during the period. The provision for non-recoverable accounts receivable of $1.8 million relates to a receivable due to Daylight from certain subsidiaries of SemGroup L.P. ("SemCanada") which entered creditor protection on July 22, 2008. This provision is included as an expense in net income during the period. These items have affected net income and funds from operations, as well as these per unit amounts. The termination fee also affected cash provided from operating activities. Daylight has not incurred transactions of this nature in the past nor does management have any reason to believe it will incur transactions of this nature in the future. Both items are discussed further in this MD&A and in the notes to the consolidated financial statements.

Production

Daylight's total production volumes for Q4 2008 averaged 21,863 boe per day, a slight increase from Q3 2008. Q4 2008 production was comprised of 82,572 mcf per day of natural gas, 4,086 bbls per day of light oil, 2,798 bbls per day of heavy oil and 1,217 bbls per day of NGLs. Production for Q4 2008 increased 6% from Q4 2007 due to our successful capital expenditure program as well as the acquisition of Athlone Energy Ltd. ("Athlone") on September 17, 2008, the acquisition of West Central properties on October 31, 2008, the acquisition of Elmworth properties on December 1, 2008, net of the disposition of our Sturgeon Lake property on September 30, 2008. Production for 2008 was 21,045 boe per day, an increase of 3% from 2007.

With the continuing addition of new production volumes, Daylight expects production to average approximately 22,000 to 23,000 boe per day for 2009. Daylight's 2009 production guidance is based on the investment of $110 to $125 million in our 2009 internal capital program. See the "Capital Expenditures, Acquisitions and Divestitures" section of this MD&A for additional information on the acquisitions of Athlone, West Central properties, and Elmworth properties.



----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Natural gas (mcf/d) 82,572 81,798 71,187 76,805 73,279
Light oil (bbls/d) 4,086 4,864 4,964 4,754 4,526
Heavy oil (bbls/d) 2,798 2,179 2,488 2,354 2,447
NGLs (bbls/d) 1,217 1,106 1,266 1,136 1,275
----------------------------------------------------------------------------
Combined oil & NGLs (bbls/d) 8,101 8,149 8,718 8,244 8,248
----------------------------------------------------------------------------
Combined all products (boe/d) 21,863 21,782 20,583 21,045 20,461
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Production replacement 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

Commodity Prices

Daylight's natural gas prices are influenced by both North American and, more recently, global supply and demand balance, 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 Alberta benchmark price ("AECO") which provides pricing for natural gas based on heating value.

Daylight's oil price is significantly influenced by global supply and demand conditions. Daylight's realized light oil price has a high correlation to the US benchmark West Texas Intermediate at Cushing, Oklahoma ("WTI") price and the Canadian to US dollar exchange rate. Canadian light oil prices, 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 blending, which reduce the realized price of this product. During 2007 and 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, the Edmonton par price and Bow River price dropped significantly resulting in lower realized prices by Daylight on its heavy oil production.

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.



----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
Market prices 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
AECO daily ($Cdn/mcf) $ 6.62 $ 7.69 $ 6.01 $ 8.06 $ 6.32
WTI ($US/bbl) 59.06 118.23 90.57 99.92 72.33
Edmonton par ($Cdn/bbl) 63.62 122.74 86.89 102.66 77.00
Bow River ($Cdn/bbl) 48.75 104.95 56.40 83.75 53.09
Exchange rate ($Cdn/$US) 0.8277 0.9609 1.0198 0.9432 0.9355
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Daylight prices Q4 Q3 Q4 Year ended December 31
realized 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Natural gas ($/mcf) $ 7.06 $ 8.52 $ 6.45 $ 8.43 $ 6.61
Light oil ($/bbl) 55.28 116.11 81.84 97.52 71.54
Heavy oil ($/bbl) 45.20 99.43 53.50 76.01 48.52
NGLs ($/bbl) 43.27 89.43 64.99 72.22 57.99
----------------------------------------------------------------------------
Combined oil & NGLs
($/bbl) 50.00 108.03 71.31 87.89 62.62
----------------------------------------------------------------------------
Combined all products
($/boe) $ 45.40 $ 72.50 $ 52.66 $ 65.14 $ 49.14
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight's natural gas price during Q4 2008 was $7.06 per mcf, a 7% premium to AECO, which is a 17% decrease from the Q3 2008 natural gas price of $8.52 per mcf, an 11% premium to AECO. Daylight's Q4 2008 natural gas price was 9% higher than the Q4 2007 natural gas price of $6.45 per mcf, which is consistent with the 10% increase to AECO between these two periods. During Q4 2008, the daily AECO pricing for natural gas ranged from a low of approximately $4.43 per mcf to a high of approximately $9.92 per mcf. Throughout Q3 and Q4 2008, approximately half of Daylight's natural gas was sold at monthly index prices. Monthly index prices were significantly higher than average daily prices during this period, resulting in Daylight realizing a higher premium than usual. The 2008 natural gas price was $8.43 per mcf, a 5% premium to AECO and a 28% increase over the 2007 natural gas price of $6.61 per mcf, also a 5% premium to AECO. The volatility in natural gas prices can cause the premium realized to increase or decrease.

Daylight's Q4 2008 light oil realized $55.28 per bbl, 87% of Edmonton par, while Q3 2008 light oil realized $116.11 per bbl, 95% of Edmonton par, for a decrease of 52% to Daylight's light oil price. Due to the volatility of crude oil prices during Q4, Daylight experienced a larger than normal differential to Edmonton par. Daylight's light oil price for Q4 2008 was 32% lower than the Q4 2007 light oil price of $81.84 per bbl, which was 94% of Edmonton par. Daylight's 2008 light oil price of $97.52 per bbl, 95% of Edmonton par, was 36% higher than the 2007 realized light oil price of $71.54 per bbl, 93% 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 Q4 2008 was 0.8277 which generally put upward movement on Edmonton par and Daylight's realized light oil price in the quarter when compared to Q3 2008 with an exchange rate of 0.9609 and upward movement compared to Q4 2007 with an exchange rate of 1.0198. The Canadian dollar to US dollar exchange rate for 2008 was 0.9432 as compared to 0.9355 for 2007.

Daylight's heavy oil production is concentrated at two properties, with Wildmere producing approximately 90% of Q4 2008 volumes, and Chipman producing the remaining 10%. Daylight's Q4 2008 heavy oil price of $45.20 per bbl, 93% of Bow River, is 55% lower than the Q3 2008 heavy oil price of $99.43 per bbl, 95% of Bow River. Daylight's Q4 2008 heavy oil price was 16% lower than the Q4 2007 heavy oil price of $53.50 per bbl, 95% of Bow River. Daylight's 2008 heavy oil price of $76.01 per bbl, 91% of Bow River, was 57% higher than the 2007 heavy oil price of $48.52 per bbl, 91% of Bow River.

Daylight's combined oil and NGLs price during Q4 2008 was $50.00 per bbl, 54% lower than Q3 2008 and 30% lower than Q4 2007. Daylight's combined oil and NGLs price for 2008 was $87.89 per bbl, an increase of 40% over the 2007 combined oil and NGLs price of $62.62 per bbl.

The impact of derivative contracts is recorded within Daylight's gain (loss) on financial instruments. As at December 31, 2008, Daylight had derivative contracts in place for a portion of natural gas production volumes for the period January 1, 2009 to October 31, 2009 and a portion of crude oil production volumes from January 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 2009.



Revenue

----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Natural gas $ 53,632 $ 64,093 $ 42,212 $ 236,849 $ 176,764
Light oil 20,782 51,950 37,376 169,681 118,182
Heavy oil 11,635 19,933 12,245 65,498 43,337
NGLs 4,846 9,100 7,569 30,031 26,989
Other 416 193 316 (322) 1,684
----------------------------------------------------------------------------
Total $ 91,311 $145,269 $ 99,718 $ 501,737 $ 366,956
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The slight increase in Q4 2008 production offset by a 37% decrease in the price on a combined boe basis resulted in a 37% decrease in total revenue to $91.3 million from Q3 2008. Natural gas sales for Q4 2008 were $53.6 million, a decrease of 16% from Q3 2008. Light oil sales for Q4 2008 were $20.8 million, down 60% from Q3 2008 due to the sale of the Sturgeon Lake property effective September 30, 2008, combined with lower pricing. Heavy oil sales for Q4 2008 were $11.6 million, down 42% from Q3 2008, and NGLs sales for Q4 2008 were $4.8 million, down 47% from Q3 2008. Total revenue decreased 8% in Q4 2008 from Q4 2007, consistent with a 14% decrease in the average realized price on a combined boe basis partially offset by a 6% increase in production volumes. For the 2008 year, Daylight realized a 34% increase in natural gas sales, a 44% increase in light oil sales, a 51% increase in heavy oil sales, an 11% increase in NGL sales, and a 37% increase in total revenue over the 2007 year due to a 3% increase in annual production and strong commodity prices.

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. Effective September 1, 2007, the Alberta provincial government changed several incentive programs to cap reductions at a maximum dollar value. Existing wells under the programs that have exceeded the cap are subject to increased royalties effective September 1, 2007. Daylight has a number of wells under these programs and these changes resulted in a slight increase to the oil royalty rate.



----------------------------------------------------------------------------
Year ended
Royalties by type Q4 Q3 Q4 December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Crown royalties $ 15,315 $21,539 $ 14,851 $ 76,539 $ 53,724
Freehold royalties 1,288 3,070 2,048 9,790 6,907
Overriding royalties 2,211 3,540 1,954 11,935 7,136
----------------------------------------------------------------------------
Total $ 18,814 $28,149 $ 18,853 $ 98,264 $ 67,767
----------------------------------------------------------------------------
$ per boe $ 9.35 $ 14.05 $ 9.96 $ 12.76 $ 9.07
----------------------------------------------------------------------------
% of revenue 20.6 19.4 18.9 19.6 18.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Year ended
Royalties by commodity Q4 Q3 Q4 December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Natural gas $ 10,195 $10,853 $ 5,744 $ 40,668 $ 28,223
Oil and NGLs 8,619 17,296 13,109 57,596 39,544
----------------------------------------------------------------------------
Total $ 18,814 $28,149 $ 18,853 $ 98,264 $ 67,767
----------------------------------------------------------------------------
Natural gas ($/boe) $ 8.05 $ 8.65 $ 5.26 $ 8.68 $ 6.33
Oil and NGLs ($/boe) 11.56 23.07 16.34 19.09 13.14
----------------------------------------------------------------------------
Total ($/boe) $ 9.35 $ 14.05 $ 9.96 $ 12.76 $ 9.07
----------------------------------------------------------------------------
Natural gas (% of revenue) 19.0 16.9 13.6 17.2 16.0
Oil and NGLs (% of revenue) 23.1 21.4 22.9 21.7 21.0
----------------------------------------------------------------------------
Total (% of revenue) 20.6 19.4 18.9 19.6 18.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Overall royalty rates increased to 20.6% of revenue in Q4 2008 from 19.4% of revenue in Q3 2008. Natural gas royalty rates increased to 19.0% of revenue from 16.9% of revenue in Q3 2008 due to Gas Cost Allowance credits received in Q3 2008 temporarily reducing royalties in that period below normal levels. Oil and NGLs royalty rates increased to 23.1% of revenue during Q4 2008 as compared to 21.4% of revenue in Q3 2008 as a result of higher heavy oil royalty rates associated with the heavy oil acquired from Athlone Energy Inc. (see "Capital Expenditures, Acquisitions and Divestures" section below). Total royalty rates increased to 20.6% of revenue for Q4 2008 compared with 18.9% of revenue for Q4 2007. This is a result of Gas Cost Allowance credits received during Q4 2007 and higher heavy oil royalties in Q4 2008. Year over year, total royalty rates increased to 19.6% of revenue for 2008 from 18.5% of revenue for 2007, a change of 1.1% due to higher commodity prices realized during 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. Approximately 95% of Daylight's current reserves and production are within the Province of Alberta.

On March 3, 2009, an incentive program designed to encourage the execution of new drilling projects in Alberta was announced in response to the global economic crisis and slowdown in drilling activity throughout the province of Alberta. The 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 incentive program also provides a reduced royalty rate on new wells for the first year of production up to an established total production volume. This program is expected to positively impact the Trust. The effect of the March 3, 2009 announcement has not been reflected in the GLJ reserves at December 31, 2008.

Approximately 95% of Daylight's reserves and production are in Alberta, with the balance located in BC and Saskatchewan. Approximately 78% of current production is subject to Crown royalties, which are affected directly by the government royalty programs, and the remaining 22% of Daylight's 2008 royalties are related to freehold and override charges, which are not directly affected by these programs. Consequently, the NRF, TRP and the new royalty incentive program will impact Daylight's royalty rates, the effect of which is dependent upon commodity prices. The NRF and TRP royalty programs have been incorporated into the GLJ evaluation effective December 31, 2008.

Daylight has also performed an analysis based on actuals to date and forward strip commodity prices at March 3, 2009 for the remainder of the 2009 fiscal year: AECO natural gas price of $5.25 per mcf; WTI crude oil price of US$46.00 per barrel which is equivalent to approximately $58.50 Canadian per barrel; an exchange rate of $1.00 Canadian to $0.79 US. Based on this commodity pricing, Daylight's internal estimate is that 2009 royalty rates will be approximately 18.2%. This does not include the effects of the incentive program announced on March 3, 2009 which is expected to lower royalties.

Future reserve and production addition activities are expected to be significantly impacted by the changes to the royalty system. The Trust's depth of prospect inventory will allow 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 shares of Pegasus Oil & Gas Inc. ("Pegasus") and Trafalgar Energy Ltd. ("Trafalgar") (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 $0.9 million as at December 31, 2008. During Q4 2008 Daylight experienced a $4.6 million unrealized loss on these investments held for trading compared to a $2.4 million loss in Q3 2008. The investment in Bengal has a fair value based on quoted market value of $1.4 million as at December 31, 2008. At December 31, 2007 and 2008, it was determined that the decline in value of the investment in Bengal was other than temporary and the investment was written down to its market value. For the year ended December 31, 2008, the equity loss on the investment in Bengal was $1.9 million.

The Trust's long-term debt bears interest at a floating market rate and accordingly, the fair market value approximates the carrying value. The convertible debentures outstanding at December 31, 2008, with a face value of $132.3 million, had a fair value based on quoted market value of $123.2 million. The convertible debentures outstanding at March 4, 2009, with a face value of $132.3 million, had a fair value based on quoted market value of $117.2 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 $5.80 per mcf and WTI oil is approximately US$51.00 per barrel which is equivalent to approximately $64.80 Canadian per barrel.



As at December 31, 2008, Daylight had the following derivative contracts in
place:

----------------------------------------------------------------------------
Hedged
Type of Contract Commodity Volume (3) Hedge Price Hedge Period
----------------------------------------------------------------------------
Financial (Swap)
(1) Natural gas 35,000 GJ/d Cdn$7.58/GJ Jan 1/09 to Oct 31/09
Financial (Swap)
(1) Natural gas 10,000 GJ/d Cdn$7.59/GJ Jan 1/09 to Oct 31/09
Financial (Swap)
(1) Natural gas 5,000 GJ/d Cdn$7.63/GJ Jan 1/09 to Oct 31/09

Financial Cdn$110.00 -
(Collar) (2) Crude oil 1,000 bbl/d $206.00/bbl Jan 1/09 to Dec 31/09

Financial Cdn$110.00 -
(Collar) (2) Crude oil 1,000 bbl/d $205.55/bbl Jan 1/09 to Dec 31/09

Financial Cdn$110.00 -
(Collar) (2) Crude oil 1,000 bbl/d $205.00/bbl Jan 1/09 to 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.



----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Realized gain (loss) on
derivative contracts $ 12,230 $(9,237) $ 2,145 $(6,514) $ 6,967
Unrealized gain (loss) on
derivative contracts 52,933 46,260 (2,234) 71,535 (7,063)
Unrealized loss on
investments held for
trading (4,592) (2,390) (1,120) (5,543) (3,402)
----------------------------------------------------------------------------
Gain (loss) on financial
instruments $ 60,571 $34,633 $ (1,209) $59,478 $ (3,498)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
($/boe) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Realized gain (loss) on
derivative contracts $ 6.08 $ (4.61) $ 1.13 $ (0.85) $ 0.93
Unrealized gain (loss) on
derivative contracts 26.32 23.08 (1.18) 9.29 (0.95)
Unrealized loss on
investments held for
trading (2.28) (1.19) (0.59) (0.72) (0.46)
----------------------------------------------------------------------------
Gain (loss) on financial
instruments $ 30.11 $ 17.28 $ (0.64) $ 7.72 $ (0.48)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight recognized a realized gain of $12.2 million in Q4 2008 compared to a $9.2 million realized loss in Q3 2008 and a $2.1 million realized gain on its derivative contracts during Q4 2007. Daylight experienced a $52.9 million unrealized gain on its derivative contracts during Q4 2008 compared to a $46.3 million unrealized gain in Q3 2008 and a $2.2 million unrealized loss during the same period last year. For the year ended December 31, 2008, Daylight recorded a gain on financial instruments of $59.5 million compared to a $3.5 million loss for 2007. At December 31, 2008, the unrealized gain on derivative contracts was $71.5 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.



----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Operating expenses $ 24,038 $ 23,943 $ 23,072 $ 92,337 $ 93,866
$ per boe $ 11.95 $ 11.95 $ 12.18 $ 11.99 $ 12.57
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight's operating costs during Q4 2008 were flat at $11.95 per boe as compared to Q3 2008 also at $11.95 per boe and were 2% lower than Q4 2007, at $12.18 per boe. Daylight's 2008 operating expense on a per boe basis decreased 5% to $11.99 per boe from $12.57 per boe in 2007. Daylight expects its operating costs to be approximately $11.50 per boe for 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 13% to $1.20 per boe in Q4 2008 compared to $1.06 per boe in Q3 2008 and increased 12% compared to the $1.07 per boe in Q4 2007. Transportation expenses increased in Q4 2008 due to the addition of Athlone volumes and new production in Cecil that required trucking. Year over year, transportation costs increased 1% in 2008 to $1.06 per boe from the 2007 rate of $1.05 per boe.



----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Transportation expenses $ 2,423 $ 2,132 $ 2,019 $ 8,202 $ 7,857
$ per boe $ 1.20 $ 1.06 $ 1.07 $ 1.06 $ 1.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Operating Netbacks

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

----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
$ per boe 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 45.40 $ 72.50 $ 52.66 $ 65.14 $ 49.14
Royalties (9.35) (14.05) (9.96) (12.76) (9.07)
Realized gain (loss) on
derivative contracts 6.08 (4.61) 1.13 (0.85) 0.93
Operating expenses (11.95) (11.95) (12.18) (11.99) (12.57)
Transportation expenses (1.20) (1.06) (1.07) (1.06) (1.05)
----------------------------------------------------------------------------
Operating netback $ 28.98 $ 40.82 $ 30.59 $ 38.48 $ 27.37
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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.



----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Gross G&A $ 8,277 $ 8,845 $ 6,980 $ 32,144 $ 27,707
Operating recoveries (1,579) (1,846) (1,651) (7,170) (6,054)
Capitalized costs (2,215) (2,457) (1,605) (8,095) (6,420)
----------------------------------------------------------------------------
G&A - cash charge 4,483 4,542 3,724 16,879 15,233
Unit-based compensation 815 735 708 5,946 4,862
----------------------------------------------------------------------------
Net G&A $ 5,298 $ 5,277 $ 4,432 $ 22,825 $ 20,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
$ per boe 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Gross G&A $ 4.12 $ 4.42 $ 3.69 $ 4.17 $ 3.71
Operating recoveries (0.79) (0.92) (0.87) (0.93) (0.81)
Capitalized costs (1.10) (1.23) (0.85) (1.05) (0.86)
----------------------------------------------------------------------------
G&A - cash charge 2.23 2.27 1.97 2.19 2.04
Unit-based compensation 0.41 0.36 0.37 0.77 0.65
----------------------------------------------------------------------------
Net G&A $ 2.64 $ 2.63 $ 2.34 $ 2.96 $ 2.69
----------------------------------------------------------------------------
----------------------------------------------------------------------------


General and administrative expenses during Q4 2008 were $5.3 million ($2.64 per boe) including non-cash unit-based compensation of $0.8 million ($0.41 per boe). General and administrative 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). G&A expenses for Q4 2007 were $4.4 million ($2.34 per boe) including non-cash unit-based compensation of $0.7 million ($0.37 per boe). The Q4 2008 G&A cash expense per boe was 2% lower than Q3 2008 and 13% higher than Q4 2007. Daylight's 2008 G&A cash expenses of $16.9 million were 11% higher than the 2007 G&A cash expenses of $15.2 million and 7% higher on a per boe basis. Including the non-cash unit-based compensation, G&A expenses for 2008 increased 14% over 2007. Cash G&A expenses, including capitalized costs, for 2008 were higher than 2007 due to increased staffing levels during a very active year.

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 three year vesting period starting at the date of grant. Unit-based compensation expense also includes amounts relating to the Employee Bonus Plan and Employee Unit Ownership Plan that were settled in units issued from treasury. No trust units were issued from treasury under the Employee Bonus Plan or the Employee Unit Ownership Plan during Q4 2008.

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 Energy 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 year ended December 31, 2008, Daylight charged MOX $1.5 million (2007 - $1.4 million) for administrative services and premises costs with a payable balance, which includes joint venture and commodity marketing amounts of approximately $2.8 million due to MOX as at December 31, 2008 (2007 - $4.7 million). At December 31, 2008, MOX held an advance capital deposit of $3.9 million (2007 - $nil) 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 3.8% for Q4 2008 as compared to 4.4% for Q3 2008 and 6.0% for Q4 2007. The effective bank debt interest rate was 4.5% for 2008 (2007 - 6.0%). 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 decrease in total financial charges for Q4 2008 versus Q3 2008 and Q4 2007, and for 2008 from 2007 is due to the decrease in the interest rate on bank debt and the conversion of convertible debentures into trust units.



----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Bank debt interest $ 2,237 $ 3,107 $ 4,020 $ 12,483 $20,347
Convertible debenture interest 1,471 1,519 2,696 8,644 2,924
----------------------------------------------------------------------------
Cash financial charges 3,708 4,626 6,716 21,127 23,271
Amortization of financial charges 27 27 27 108 109
Accretion of convertible
debenture discount 274 216 445 1,331 480
----------------------------------------------------------------------------
Total $ 4,009 $ 4,869 $ 7,188 $ 22,566 $23,860
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
$ per boe 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Bank debt interest $ 1.11 $ 1.55 $ 2.12 $ 1.62 $ 2.72
Convertible debenture interest 0.73 0.76 1.42 1.12 0.39
----------------------------------------------------------------------------
Cash financial charges 1.84 2.31 3.55 2.74 3.12
Amortization of financial charges 0.01 0.01 0.01 0.01 0.01
Accretion of convertible debenture
discount 0.14 0.11 0.23 0.17 0.06
----------------------------------------------------------------------------
Total $ 1.99 $ 2.43 $ 3.80 $ 2.92 $ 3.19
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Depletion, Depreciation and Accretion

Daylight's depletion, depreciation and accretion for Q4 2008 totalled $40.5 million, which is 4% higher than Q3 2008. Q4 2008 charges increased 11% from Q4 2007, primarily due to higher production. Daylight's depletion, depreciation and accretion for 2008 totalled $151.8 million, which is 7% higher than the 2007 total of $142.5 million.



----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Depletion and Depreciation $ 39,907 $ 38,387 $ 35,730 $ 149,163 $ 139,834
Accretion 630 667 662 2,624 2,636
----------------------------------------------------------------------------
Total $ 40,537 $ 39,054 $ 36,392 $ 151,787 $ 142,470
$ per boe
----------------------------------------------------------------------------
Depletion and Depreciation $ 19.84 $ 19.16 $ 18.87 $ 19.37 $ 18.72
Accretion 0.31 0.33 0.35 0.34 0.35
----------------------------------------------------------------------------
Total $ 20.15 $ 19.49 $ 19.22 $ 19.71 $ 19.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Future Taxes

Daylight recorded a future income tax expense of $7.3 million in Q4 2008, a future income tax expense of $12.9 million in Q3 2008, and a future income tax recovery of $6.8 million in Q4 2007. For 2008, Daylight recorded a future income tax expense of $5.5 million and a future income tax recovery of $38.3 million for 2007. 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. Cash taxes paid in 2008 of $1.5 million related to previous acquisitions for which accruals were made as part of the purchase equation. As such, no cash taxes are included in net income for 2008.



----------------------------------------------------------------------------
Year ended
Q4 Q3 Q4 December 31
(000s) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Future Tax $ 7,333 $12,860 $ (6,754) $ 5,481 $ (38,336)
$ per boe $ 3.65 $ 6.42 $ (3.57) $ 0.71 $ (5.13)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at December 31, 2008, Daylight and its subsidiaries have tax pools of approximately $911 million. 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) 2008 2007
-------------------------------
Corporate Trust Combined Combined
----------------------------------------------------------------------------
Canadian exploration expense $ 65,000 $ - $ 65,000 $ 67,000
Canadian development expense 251,000 - 251,000 283,000
Canadian oil and gas property
expense 52,000 82,000 134,000 113,000
Undepreciated capital cost 220,000 - 220,000 302,000
Non-capital losses 228,000 - 228,000 35,000
Cumulative eligible capital 4,000 - 4,000 -
Share and unit issue costs - 9,000 9,000 14,000
----------------------------------------------------------------------------
Total $ 820,000 $ 91,000 $ 911,000 $ 814,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Management and the Board of Directors continue to review the impact of federal legislation (Bill C-52) implementing a tax on publicly traded income trusts (the "SIFT Rules") on our business strategy. The SIFT Rules are 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 February 26, 2008, new legislation was introduced to change the provincial tax rate on Trusts from 13% per the SIFT Rules to a lower rate for Trusts based on the provincial tax rate in each province, which for the province of Alberta is 10%. Once this legislation is substantively enacted, Daylight expects to record additional future tax recoveries at the Trust level due to this lower rate.

On July 14, 2008, The Department of Finance of Canada released draft tax legislation (the SIFT conversion rules) that will facilitate the restructuring of income trusts into corporations. In general, the proposed amendments will permit a conversion to be tax deferred for both the unitholders and the trust. Management continues to analyze its business options for structural changes and to determine a course of action and potential restructuring to maximize value in the best interest of unitholders.

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

As a result of the previously discussed factors, Daylight recognized Q4 2008 net income of $44.4 million ($22.09 per boe, $0.50 per unit-basic, $0.48 per unit-diluted), funds from operations of $50.1 million ($24.91 per boe, $0.56 per unit-basic, $0.52 per unit-diluted) and cash provided by operating activities of $47.4 million. For 2008, Daylight recognized net income of $160.5 million ($20.84 per boe, $1.92 per unit-basic, $1.80 per unit-diluted), funds from operations of $264.4 million ($34.33 per boe, $3.17 per unit-basic, $2.89 per unit-diluted) and cash provided by operating activities of $259.8 million. Excluding the termination fee and provision for non-recoverable accounts receivable, Daylight would have recognized Q3 2008 net income of $63.7 million ($31.78 per boe, $0.74 per unit-basic, $0.70 per unit-diluted), funds from operations of $72.6 million ($36.25 per boe, $0.84 per unit-basic, $0.77 per unit-diluted) and cash provided by operating activities of $90.0 million. For the full year, excluding the termination fee and provision for non-recoverable accounts receivable, Daylight would have recognized net income of $154.5 million ($20.06 per boe, $1.85 per unit-basic, $1.74 per unit-diluted), funds from operations of $258.4 million ($33.55 per boe, $3.10 per unit-basic, $2.83 per unit-diluted) and cash provided by operating activities of $252.0 million. Actual results from the comparative periods are presented below.



----------------------------------------------------------------------------
Year ended
(000s) Q4 Q3 Q4 December 31
2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Net income (loss) $ 44,424 $ 69,692 $ (127,381) $ 160,519 $ (96,267)
Per boe $ 22.09 $ 34.78 $ (67.27) $ 20.84 $ (12.89)
----------------------------------------------------------------------------
Per Unit
Basic $ 0.50 $ 0.81 $ (1.64) $ 1.92 $ (1.26)
Diluted $ 0.48 $ 0.76 $ (1.64) $ 1.80 $ (1.26)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Funds from operations $ 50,075 $ 78,646 $ 47,479 $ 264,420 $ 165,929
Per boe $ 24.91 $ 39.24 $ 25.07 $ 34.33 $ 22.22
----------------------------------------------------------------------------
Per Unit
Basic $ 0.56 $ 0.91 $ 0.61 $ 3.17 $ 2.16
Diluted $ 0.52 $ 0.84 $ 0.54 $ 2.89 $ 2.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by
operating
activities $ 47,416 $ 97,799 $ 44,824 $ 259,759 $ 167,385
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

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

- $0.8 million per $0.10 change in natural gas price per mcf.

- $0.8 million per US$1.00 change in the WTI oil price per bbl.

- $1.3 million per 1 mmcf per day change in production.

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

- $0.7 million per 100 bbl per day change in heavy oil production.

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

- $0.5 million per $0.01 change in the United States dollar to Canadian dollar exchange rate.

Capital Expenditures, Acquisitions and Divestitures

Daylight invested $38.8 million on its capital expenditure program during Q4 2008 compared to $45.7 million in Q3 2008 and $29.1 million in Q4 2007. Capital expenditures for 2008 have provided significant additions of new production volumes and Daylight anticipates fiscal 2009 production volumes to average 22,000 to 23,000 boe per day with the investment of approximately $110 to $125 million in our 2009 internal capital program. Additional production was added through the acquisition of Athlone, and the West Central and Elmworth property acquisitions, net of the disposition of the Sturgeon Lake property. During 2008, 8 gross (2.5 net) wells were drilled under a farmout arrangement which resulted in Daylight receiving a net interest in the wells at no cash cost up to and including the drilling and completion of the wells. The results of this farmout arrangement are included in Daylight's wells drilled information. For the full year, Daylight invested $165.9 million during 2008, an increase of 72% over the same period last year.



----------------------------------------------------------------------------
Year ended
(000s) Q4 Q3 Q4 December 31
2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Land and acquisitions $ 730 $ 5,033 $ 1,352 $ 13,425 $ 3,211
Geological and
geophysical 2,282 2,551 1,682 9,053 6,664
Drill, complete and
recomplete 24,945 24,919 13,681 94,984 55,647
Equipping and
facilities 10,809 13,154 12,374 48,457 30,858
----------------------------------------------------------------------------
Capital expenditures $ 38,766 $ 45,657 $ 29,089 $ 165,919 $ 96,380
Cash property
acquisitions 66,571 - - 66,571 -
Disposition of
Sturgeon - (87,695) - (87,695) -
----------------------------------------------------------------------------
Net cash capital
additions $ 105,337 $ (42,038) $ 29,089 $ 144,795 $ 96,380
Non-cash property
acquisition 26,887 - - 26,887 -
----------------------------------------------------------------------------
Total net additions $ 132,224 $ (42,038) $ 29,089 $ 171,682 $ 96,380
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate acquisition $ - $ 36,433 $ - $ 36,433 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In 2008, Daylight drilled a total of 50 gross (21.4 net) wells with 98% success. This program provided production and reserve additions within the following core areas:

- Peace River Arch Properties include Cecil, Elmworth, and Sinclair. In 2008, Daylight drilled 12 gross (8.3 net) natural gas wells and 4 gross (4.0 net) oil wells.

- West Central properties include Pine Creek, Kaybob, Pembina, Oldman and Windfall. In 2008, Daylight drilled 23 gross (4.9 net) natural gas wells.

- Eastern and Southern properties include Wildmere, Sylvan Lake, Chigwell, Bon Accord and Chipman. In 2008, Daylight drilled 5 gross (1.4 net) natural gas wells, 3 gross (1.2 net) heavy oil wells, 2 gross (1.3 net) light oil wells and 1 gross (0.3 net) dry hole.

On May 26, 2008, Daylight and Cadence Energy Inc. 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 period.

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 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 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 has recorded $0.9 million in associated asset retirement obligations.

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 has recorded $0.1 million in associated asset retirement obligations.



Investments

----------------------------------------------------------------------------
December 31, 2008 December 31, 2007
Number of Equity or Equity or
Symbol Shares Fair Value Fair Value
----------------------------------------------------------------------------
Bengal Energy Ltd. BNG 4,260,000 $ 1,363 $ 6,603
Trafalgar Energy Ltd. TFL 740,240 385 2,073
Pegasus Oil & Gas Inc. POG.A 2,440,000 537 4,392
----------------------------------------------------------------------------
Balance, December 31, 2008 $ 2,285 $ 13,068
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Daylight owns approximately 23% of the basic issued and outstanding common shares of Bengal Energy Ltd. ("Bengal"), formerly Avery Resources Inc., 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 (21,300,000 common shares before consolidating 5:1) and Daylight accounts for this investment using the equity method.

On December 31, 2008, Bengal common shares closed at $0.32 per share. As at December 31, 2008, the market value of this investment was approximately $1.4 million (2007 - $6.6 million). At December 31, 2008, it was determined that the decline in value of the investment in Bengal was other than temporary and the investment was written down to its market value and the impairment of $3.4 million (2007 - $2.3 million) was charged to net income. For the three months ended December 31, 2008, the equity loss in Bengal was $1.6 million (2007 - $0.4 million) and for the year ended December 31, 2008, the equity loss on the investment in Bengal was $1.9 million (2007 - $1.9 million).

Daylight owns 740,240 common shares of Trafalgar Energy Ltd. ("Trafalgar"), which is approximately 7% of the issued and outstanding common shares of Trafalgar at December 31, 2008. The Trust accounts for its investment in Trafalgar at fair value based on the quoted market price. Trafalgar is a public company trading on the Toronto Stock Exchange under the symbol TFL. On December 31, 2008 the Trafalgar common shares closed at $0.52 per share. As at December 31, 2008, the market value of this investment was approximately $0.4 million (2007 - $2.1 million).

Daylight also owns 2,440,000 Class A common shares of Pegasus Oil & Gas Inc. ("Pegasus"), which is approximately 7% of the issued and outstanding Class A common shares outstanding at December 31, 2008. The Trust accounts for its investment in Pegasus at fair value based on the quoted market price. Pegasus is a public company trading on the TSX Venture Exchange under the symbols POG.A and POG.B. On December 31, 2008, the class A shares closed at $0.22 per share. As at December 31, 2008, the market value of this investment was approximately $0.5 million (2007 - $4.4 million).

Daylight continues to consider its investments in Bengal, Trafalgar and Pegasus as available for disposition.

Distributions

During Q4 2008, Daylight declared three monthly cash distributions totalling $35.2 million ($0.39 per trust unit) with a resulting payout ratio of 70%. During Q3 2008, Daylight declared three monthly cash distributions totalling $33.7 million ($0.39 per trust unit) with a resulting payout ratio of 43%. During Q4 2007, Daylight declared three cash distributions totalling $23.3 million ($0.30 per trust unit) with a resulting payout ratio of 49%. In 2008, Daylight declared twelve monthly cash distributions totalling $117.0 million ($1.38 per trust unit) with a resulting payout ratio of 44%. In 2007, Daylight declared twelve monthly cash distributions totalling $118.9 million ($1.55 per trust unit) with a resulting payout ratio of 72%. On January 13, 2009, Daylight announced a decrease to monthly cash distributions during the first quarter of 2009 to $0.08 per trust unit.

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 but may not fully finance these items within a quarterly or annual period. 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 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.



----------------------------------------------------------------------------
Year ended
(000s) Q4 Q3 Q4 December 31,
2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash distributions
declared
per unit $ 0.39 $ 0.39 $ 0.30 $ 1.38 $ 1.55
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by
operating activities $ 47,416 $ 97,799 $ 44,824 $ 259,759 $ 167,385
Cash distributions
declared $ 35,193 $ 33,684 $ 23,296 $ 117,017 $ 118,891
----------------------------------------------------------------------------
Excess of cash provided
by operating activities
over cash
distributions declared: $ 12,223 $ 64,115 $ 21,528 $ 142,742 $ 48,494
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) $ 44,424 $ 69,692 $ (127,381) $ 160,519 $ (96,267)
Cash distributions
declared $ 35,193 $ 33,684 $ 23,296 $ 117,017 $ 118,891
----------------------------------------------------------------------------
Excess (shortfall) of
net income over
cash distributions
declared: $ 9,231 $ 36,008 $ (150,677) $ 43,502 $ (215,158)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash provided by operating activities of $47.4 million for Q4 2008 exceeded Daylight's cash distributions declared of $35.2 million by $12.2 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. Cash provided by operating activities of $44.8 million for Q4 2007 exceeded cash distributions declared of $23.3 million by $21.5 million in the period. On a year over year basis, cash provided by operating activities of $259.8 million exceeded the cash distributions declared of $117.0 million for 2008 by $142.7 million and cash provided by operating activities of $167.4 million exceeded the cash distributions declared of $118.9 million for 2007 by $48.5 million.

For Q4 2008 and Q3 2008, the net income of $44.4 million and $69.7 million respectively, exceeded the cash distributions declared by $9.2 million and $36.0 million respectively. For Q4 2007, the cash distributions declared exceeded the net loss of $127.4 million by $150.7 million. For the year ended December 31, 2008, the net income of $160.5 million exceeded the cash distributions declared by $43.5 million and for the year ended December 31, 2007, the cash distributions declared exceeded the net loss of $96.3 million by $215.2 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 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. During the year ended December 31, 2008, Daylight issued no trust units (2007 - 1,891,527) from treasury for the Premium DRIP™ in lieu of cash distributions totalling $nil (2007 - $17.6 million).



Liquidity and Capital Resources

----------------------------------------------------------------------------
December 31, September 30, December 31,
(000s) 2008 2008 2007
----------------------------------------------------------------------------
Bank debt $ 219,853 $ 199,282 $ 257,342
Working capital deficiency(1) 38,742 37,200 32,088
----------------------------------------------------------------------------
258,595 236,482 289,430
Market value of investments (2,285) (9,987) (13,068)
----------------------------------------------------------------------------
256,310 226,495 276,362
Convertible debentures 118,734 54,180 119,792
Unitholders' equity $ 588,932 $ 545,312 $ 440,152
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excludes unrealized gain (loss) on derivative contracts, current portion
of convertible debentures and future income tax liability.


As a result of the global economic downturn, there is uncertainty in capital markets and as a result, Daylight anticipates that it and others in the oil and gas sector will have limited access to capital and an increased cost of capital. Although the business and assets of the Trust have not changed, financial institutions and investors have increased their risk premiums and their overall lending capacity and equity investment has diminished. The Trust continually monitors its financing alternatives, and expects to substantially finance its 2009 cash capital expenditures program and distributions from internally generated funds from operations.

At December 31, 2008, Daylight had $220 million outstanding on its credit facilities which provide up to $350 million available under a revolving term credit facility 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 facility. Daylight's banking syndicate reviewed and unanimously confirmed the $350 million revolving term credit facility on October 31, 2008. The next scheduled review date is May 31, 2009. The available lending limits of the facility 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 facility will not decrease at the next scheduled review on or before May 31, 2009.

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.

On October 3, 2007, Daylight issued $125 million principal amount of 8.5% Convertible Unsecured Subordinated Debentures, Series B 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 October 31, 2012.

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 bank debt, unrealized gain on derivative contracts, current portion of convertible debentures and future income tax liability, at December 31, 2008 was $38.7 million.

Daylight's 2009 budget is substantially balanced to fund capital expenditures and distributions through funds from operations. As such, management anticipates that Daylight will continue to have adequate liquidity to fund future working capital and forecasted capital expenditures during 2009 through funds from operations and/or debt and equity as required. Funds from operations used to finance these commitments may reduce the amount of funding available to provide cash distributions to unitholders. Major acquisitions will require the issuance of new equity and/or debentures.

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 $2.8 million, including an operating deposit for natural gas processing. As of December 31, 2008, Daylight considers collection of this receivable at risk and as such, has provided an allowance for doubtful accounts of $1.8 million. Daylight has no history of losses associated with its marketing counter parties 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.



----------------------------------------------------------------------------
Q4 Q3 Q4 Year ended December 31
(per unit) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
High $ 10.24 $ 13.45 $ 7.84 $ 13.45 $ 11.75
Low $ 6.00 $ 9.37 $ 6.07 $ 6.00 $ 6.07
Close $ 7.81 $ 10.20 $ 7.23 $ 7.81 $ 7.23
Average daily volume 669,264 902,430 573,236 698,355 425,803
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On July 28, 2008 Daylight filed notice with the Toronto Stock Exchange (the "TSX") to make a normal course issuer bid (the "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 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 Bid is completed or terminated at the option of the Trust. The Trust will pay for any trust units acquired under the Bid at the prevailing market price on the TSX at the time of the purchase. The trust units acquired under the Bid will be 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 December 31, 2008, Daylight had the following trust units and trust
unit equivalents outstanding:

----------------------------------------------------------------------------
Number
----------------------------------------------------------------------------
Trust units 90,239,243
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 (1,066,529) 1,313,284
Performance Trust Unit Awards (140,417) 182,726
----------------------------------------------------------------------------
Total Diluted 106,050,238
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

----------------------------------------------------------------------------
Number
----------------------------------------------------------------------------
Trust units 90,239,243
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 (1,030,864) 1,292,854
Performance Trust Unit Awards (125,834) 167,012
----------------------------------------------------------------------------
Total Diluted 106,014,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Commitments

The following is a summary of Daylight's contractual obligations and
commitments as at December 31, 2008:
----------------------------------------------------------------------------
2009 2010 2011 2012 2013 Thereafter
----------------------------------------------------------------------------
Operating leases $ 6,645 $ 3,755 $ 2,456 $ 1,526 $ 1,525 $ 4,956
Natural gas
transportation 2,484 2,236 1,656 422 - -
Convertible debentures
(face value) 3,576 - - 53,737 75,000 -
Bank debt - 219,853 - - - -
----------------------------------------------------------------------------
$12,705 $225,844 $ 4,112 $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) Q4 Q3 Q2 Q1
2008 2008 2008 2008
----------------------------------------------------------------------------
Funds from operations $ 50,075 $ 78,646 $ 77,032 $ 58,667
Per Unit
Basic $ 0.56 $ 0.91 $ 0.95 $ 0.75
Diluted $ 0.52 $ 0.84 $ 0.85 $ 0.66
----------------------------------------------------------------------------
Cash provided by operating
activities $ 47,416 $ 97,799 $ 71,028 $ 43,516
----------------------------------------------------------------------------
Net income $ 44,424 $ 69,692 $ 42,462 $ 3,941
----------------------------------------------------------------------------
Per Unit
Basic $ 0.50 $ 0.81 $ 0.53 $ 0.05
Diluted $ 0.48 $ 0.76 $ 0.48 $ 0.05
----------------------------------------------------------------------------
Petroleum and natural gas revenues $ 91,311 $ 145,269 $ 151,171 $ 113,986
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Average daily production combined
(boe/d) 21,863 21,782 20,717 19,804
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(000s) Q4 Q3 Q2 Q1
2007 2007 2007 2007
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Funds from operations $ 47,479 $ 40,343 $ 35,274 $ 42,833
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Per Unit
Basic $ 0.61 $ 0.52 $ 0.46 $ 0.57
Diluted $ 0.54 $ 0.52 $ 0.46 $ 0.57
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Cash provided by operating
activities $ 44,824 $ 38,850 $ 37,211 $ 46,500
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Net income (loss) $(127,381) $ 7,131 $ 18,682 $ 5,301
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Per Unit
Basic $ (1.64) $ 0.09 $ 0.24 $ 0.07
Diluted $ (1.64) $ 0.09 $ 0.24 $ 0.07
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Petroleum and natural gas revenues $ 99,718 $ 82,557 $ 92,699 $ 91,982
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Average daily production combined
(boe/d) 20,583 19,600 20,325 21,356
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Funds from operations and cash provided by operating activities decreased during Q4 2008 versus Q3 2008 due to falling commodity prices. Funds from operations remained relatively flat during Q3 2008 versus Q2 2008 and for the period Q1 2007 to Q3 2007. Cash provided by operating activities remained relatively flat for the period Q1 2007 to Q1 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 have resulted in realized gains on commodity contracts in 2007 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.

Net income 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 has been significantly impacted by non-cash items such as future taxes, unrealized hedging gains and losses, and write downs to goodwill. In Q4 2007, Daylight recorded a write down of $137.9 million to goodwill which significantly affected net income for the period. There has been no impairment to the value of Daylight's petroleum and natural gas assets and no write down to petroleum and natural gas assets has been recorded in any period.

Control Environment

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by Daylight is accumulated and communicated to Daylight's management as appropriate to allow timely decisions regarding required disclosure. Daylight's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filing, that Daylight's disclosure controls and procedures for the year ended December 31, 2008 are effective to provide reasonable assurance that material information related to Daylight, including its consolidated subsidiaries, is made known to them by others within those entities.

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 December 31, 2008 Daylight's Chief Executive Officer and Chief Financial Officer have evaluated or caused to be evaluated under their supervision, the effectiveness of the Trust's internal controls over financial reporting and have concluded that these controls are operating 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 control over financial reporting were identified during the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Trust's internal control 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.

Reserves

Under the National Instrument 51-101 ("NI 51-101"), "proved" reserves are defined as those reserves that can be estimated with a high degree of certainty to be recoverable. The level of certainty should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated proved reserves.

"Proved plus probable" reserves are the most likely case and are based on a 50 percent certainty that they will equal or exceed the reserves estimated. The new standard provides for a more conservative evaluation of proved and probable reserves, particularly on new wells where production history has not yet been established.

These oil and gas reserve estimates are made using all available geological and reservoir data, as well as historical production data. All of Daylight's reserves were evaluated and reported on by an independent qualified reserves evaluator; however, revisions can occur as a result of various factors including: actual reservoir performance, changes in price and cost forecasts or a change in Daylight's plans. Reserve changes will impact the financial results as reserves are used in the calculation of depletion and are used to assess whether asset impairment occurs. Reserve changes also affect other non-GAAP measurements such as finding and development costs, recycle ratios and net asset value calculations.

Depletion

Daylight follows the full cost method of accounting for oil and natural gas properties. Under this method, all costs related to the acquisition of, exploration for and development of oil and natural gas reserves are capitalized whether successful or not. Depletion of the capitalized oil and natural gas properties and depreciation of production equipment which includes estimated future development costs less estimated salvage values are calculated using the unit-of-production method based on production volumes in relation to estimated proved reserves.

An increase in estimated proved reserves would result in a reduction in depletion expense. A decrease in estimated future development costs would also result in a reduction in depletion expense.

Unproved Properties

The cost of acquisition and evaluation of unproved properties are initially excluded from the depletion calculation. These properties are assessed to ascertain whether impairment in value has occurred. When proved reserves are assigned or a property is considered to be impaired, the cost of the property or the amount of the impairment will be added to the capitalized costs for the calculation of depletion.

Ceiling Test

The ceiling test is a cost recovery test intended to identify and measure potential impairment of assets. An impairment loss is recorded if the sum of the undiscounted cash flows expected from the production of the proved reserves and the lower of cost and market of unproved properties does not exceed the carrying values of the petroleum and natural gas assets. An impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using future product prices and costs and are discounted using the risk free rate. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment as a result of this ceiling test will be charged to operations as additional depletion and depreciation expense.

Asset Retirement Obligations

Daylight records a liability for the fair value of legal obligations associated with the retirement of petroleum and natural gas assets. The liability is equal to the discounted fair value of the obligation in the period in which the asset is recorded with an equal offset to the carrying amount of the asset. The liability then accretes to its fair value with the passage of time and the accretion is recognized as an expense in the financial statements. The total amount of the asset retirement obligation is an estimate based on Daylight's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total amount of the estimated cash flows required to settle the asset retirement obligation, the timing of those cash flows and the discount rate used to calculate the present value of those cash flows are all estimates subject to measurement uncertainty. Any change in these estimates would impact the asset retirement liability and the accretion expense.

Acquisitions

Acquisitions have been accounted for by the purchase method using fair values. The determination of fair value involves numerous estimates. The valuation of petroleum and natural gas assets is based on Daylight's estimate of proved plus probable reserves using estimated forecasted prices at the time of the transaction, plus an estimate of unproved properties. Management also estimates the fair value of other assets and liabilities in these transactions and the balances for tax pools. This valuation could differ materially by altering the various assumptions which would have impacted the composition of the balance sheet.

Income Taxes

The determination of income and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. The estimation of future tax liabilities includes uncertainty around the reversal of temporary differences. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.

Financial Instruments

Derivative contracts are recorded at fair value based on an estimate of the amounts that would have been received or paid to settle these instruments prior to maturity given future market prices and other relevant factors. The actual amounts received or paid to settle these instruments at maturity could differ significantly from those estimated.

Other Estimates

The accrual method of accounting requires management to incorporate certain estimates including estimates of revenues, royalties and operating costs as at a specific reporting date but for which actual revenues and costs have not yet been received. In addition, estimates are made on capital projects which are in progress or recently completed where actual costs have not been received by the reporting date. Daylight obtains the estimates from the individuals with the most knowledge of the activity and from all project documentation received. The estimates are reviewed for reasonableness and compared to past performance to assess the reliability of the estimates. Past estimates are compared to actual results in order to make informed decisions on future estimates.

Changes in Accounting Policies

On January 1, 2008, the Trust adopted Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments Disclosures and Section 3863 - Financial Instruments Presentation. Section 1535 establishes standards for disclosing information about an entity's capital and how it is managed. This Section specifies disclosure about objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital, whether the entity has complied with all capital requirements, and if it has not complied, the consequences of such non-compliance. Sections 3862 and 3863 establish standards for the presentation and disclosure of information that enable users to evaluate the significance of financial instruments to the entity's financial position, and the nature and extent of risks arising from financial instruments and how the entity manages those risks. The implementation of these new standards did not impact the Trust's financial results; however, it did result in additional disclosures.

Future Accounting Changes

Goodwill and Intangible Assets

In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets. Effective for fiscal years beginning on or after October 1, 2008, this section provides guidance on the recognition, measurement, presentation and disclosure for goodwill and intangible assets, other than the initial recognition of goodwill or intangible assets acquired in a business combination. Retroactive application to prior-period financial statements will be required. The Trust is still assessing the impact of this new standard on its financial statements.

Business Combinations

In January 2009, the CICA issued Section 1582, Business Combinations. This section is effective January 1, 2011 and applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after January 1, 2011 for the Trust. Early adoption is permitted. This section replaces Section 1581, Business Combination and harmonizes the Canadian standards with IFRS.

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.

The International Accounting Standards Board ("IASB") has also issued an exposure draft relating to certain amendments and exemptions to IFRS 1. It is anticipated that this exposure draft will not result in an amended IFRS 1 standard until late 2009. The amendment, if implemented, will permit the Trust to apply IFRS prospectively by utilizing its current reserves at the transition date to allocate the Trust's full cost pool, with the provision that a ceiling test, under IFRS standards, be conducted at the transition date.

Although the amended IFRS 1 standard would provide relief, the changeover to IFRS represents a significant change in accounting standards and the transition from current Canadian GAAP to IFRS will be a significant undertaking that may materially affect the Trust's reported financial position and reported results of operations.

In response, the Trust has completed its high-level IFRS changeover plan and established a preliminary timeline for the execution and completion of the conversion project. The changeover plan was determined following a preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight into what are anticipated to be the most significant areas of difference applicable to the Trust.

During the next phase of the project, scheduled to take place during 2009, the Trust will perform an in-depth review of the significant areas of difference, identified during the preliminary assessment, in order to identify all specific Canadian GAAP and IFRS differences and select ongoing IFRS policies. Key areas addressed will also be reviewed to determine any information technology issues, the impact on internal controls over financial reporting and the impact on business activities including the effect, if any, on covenants and compensation arrangements. External advisors have been retained and will assist management with the project on an as needed basis. Staff training programs began in 2008 and will continue in 2009 and be ongoing as the project unfolds.

The Trust will also continue 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 the following factors:

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

Volatility of Oil and Natural Gas Prices

Operational results and the financial condition of Daylight will be dependent on the prices received for oil and natural gas production. Oil and natural gas prices have fluctuated widely during recent years and are determined by economic and in the case of oil prices, political factors. Supply and demand factors, including weather and general economic conditions as well as conditions in other oil and natural gas regions impact prices. Any movement in oil and natural gas prices could have an effect on Daylight's financial condition and therefore on the cash available to be distributed to unitholders. Daylight may manage the risk associated with changes in commodity prices by entering into oil or natural gas price hedges. If Daylight hedges its commodity price exposure, it will forego the benefits it would otherwise experience if commodity prices were to increase. In addition, commodity hedging activities could expose Daylight to losses. To the extent that Daylight engages in risk management activities related to commodity prices, it will be subject to credit risks associated with counterparties contracted with.

Access to Capital and Credit Facility Risk

Access to capital has become limited during this time of economic uncertainty. To the extent that external sources of capital become limited or unavailable, Daylight's ability to make the necessary capital investments to maintain or expand oil and gas reserves may be impaired. To the extent that Daylight is required to use funds from operations to finance capital expenditures or property acquisitions or to pay debt service charges or to reduce debt, the level of funds available for distributions may be reduced. In the normal course of making capital investments to maintain and expand Daylight's oil and gas reserves, additional trust units may be issued from treasury which may result in a decline in production per trust unit and reserves per trust unit. Additionally, from time to time Daylight may issue trust units from treasury in order to reduce debt and maintain a more conservative capital structure.

Daylight's revolving term credit facility is with a syndicate of lenders. The available lending limits of the facility 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 facility will not decrease at the next scheduled review on or before May 31, 2009.

Credit Exposure

Recent economic conditions have increased the risk that certain counterparties for our oil and gas sales, derivative contracts, and our joint venture partners may fail to pay. We mitigate these increased risks through diversification and review processes that assess and monitor our counterparties' credit worthiness on a regular basis.

Daylight's policy to mitigate credit risk associated with product sales is to maintain marketing relationships with large, established and reputable purchasers that are considered to be creditworthy. The Trust does not typically obtain collateral from petroleum and natural gas marketers. 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. 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.

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 facility.

Variations in Interest Rates and Foreign Exchange Rates

An increase in interest rates would result in an increase in the amount Daylight pays to service debt, which could result in a decrease in distributions to unitholders, as well as impact the market price of the trust units.

World oil prices are quoted in United States dollars and the price received by Canadian producers is therefore affected by the Canadian/U.S. dollar exchange rate that may fluctuate over time. A material increase in the value of the Canadian dollar may negatively impact Daylight's net production revenue.

To the extent that Daylight engages in risk management activities related to foreign exchange rates, it will be subject to credit risk associated with the contract counterparties. The increase in the exchange rate for the Canadian dollar and future Canadian/U.S. exchange rates will impact the future value of reserves as determined by Daylight's independent evaluators and may impact future distributions.

Reserve Estimates

There are numerous uncertainties inherent in estimating quantities of oil, natural gas and NGLs reserves and cash flows to be derived therefrom, including many factors beyond Daylight's control. The reserve and associated cash flow information represents estimates only. In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom prepared by different engineers, or by the same engineers at different times, may vary. Daylight's actual production, revenues and development and operating expenditures with respect to reserves will vary from estimates thereof and such variations could be material.

Estimates of proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices may result in variations in the estimated reserves and such variations could be material.

In accordance with applicable securities laws, Daylight's independent petroleum engineering firm has used both constant and forecast price and cost estimates in calculating reserve quantities. Actual future net cash flows will be affected by other factors such as actual production levels, supply and demand for oil and natural gas, curtailments or increases in consumption by oil and natural gas purchasers, changes in governmental regulation or taxation and the impact of inflation on costs.

Actual production and cash flows derived therefrom will vary from the estimates contained in the engineering report, and such variations could be material. The engineering report is based in part on the assumed success of activities Daylight intends to undertake in future years. The reserves and estimated cash flows to be derived therefrom contained in the engineering report will be reduced to the extent that such activities do not achieve the level of success assumed.

Depletion of Reserves

Distributions of income from Daylight properties, absent commodity price increases or cost effective acquisition and development activities, will decline over time in a manner consistent with declining production from typical oil, natural gas and NGLs reserves. Daylight will not be reinvesting cash flow in the same manner as other industry participants as Daylight conducts only minimal exploratory activities; nor to the same extent as other industry participants as one of Daylight's main objectives is to maximize long-term distributions. Accordingly, absent capital injections, production levels and reserves will decline and the funds available for distributions will be reduced.

Future oil and natural gas reserves and production, and therefore Daylight's cash flows, will be highly dependent on Daylight's success in exploiting its reserve base and acquiring additional reserves. Without reserve additions through acquisition or development activities, reserves and production will decline over time as reserves are exploited.

To the extent that external sources of capital, including the issuance of additional trust units become limited or unavailable, Daylight's ability to make the necessary capital investments to maintain or expand oil and natural gas reserves will be impaired. To the extent that Daylight requires the use of cash flow to finance capital expenditures or property acquisitions, the funds available for distributions will be reduced.

There can be no assurance that Daylight will be successful in developing or acquiring additional reserves on terms that meet its investment objectives.

Environmental Concerns

All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial and local laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require Daylight's operating entities to incur costs to remedy such discharge. Although Daylight believes that it is in material compliance with current applicable environmental regulations, no assurance can be given that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect Daylight's financial condition, results of operations or prospects.

Operational Matters

Continuing production from a property, and to some extent the marketing of production therefrom, depend upon many factors, including the ability of the operator of the property. To the extent the operator fails to perform these functions properly, revenue may be reduced. Payments from production generally flow through the operator and there is a risk of delay and additional expense in receiving such revenues if the operator becomes insolvent. Although satisfactory title reviews are generally conducted in accordance with industry standards, such reviews do not guarantee or certify that a defect in the chain of title may not arise to defeat Daylight's or its subsidiaries' claim to certain properties. Any such circumstances could impair the ability of Daylight Energy to satisfy its obligations or otherwise reduce the amount received by Daylight.

Insurance

Daylight's involvement in the exploration for and development of oil and natural gas properties may result in Daylight becoming subject to liability for pollution, blowouts, property damage, personal injury or other hazards. Although, prior to drilling, Daylight's operating entities will obtain insurance in accordance with industry standards to address certain of these risks, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not in all circumstances be insurable or, in certain circumstances, Daylight's operating entities may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or other reasons. The payment of such uninsured liabilities would reduce the funds available to Daylight. The occurrence of a significant event that was not fully insured against, or the insolvency of the insurer of such event, could have a material adverse effect on Daylight's operating subsidiaries' financial position, results of operations or prospects and will reduce income otherwise distributable.

Royalties

Daylight's production and related Crown royalty expense is primarily generated from our properties within the province of Alberta. Crown royalty rates are subject to change and a change may have a significant impact on Daylight's cash flow. 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 designed to encourage the execution of new drilling projects in Alberta was announced in response to the global economic crisis and slowdown in drilling activity throughout the province of Alberta. The 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 incentive program also provides a reduced royalty rate on new wells for the first year of production up to an established total production volume. This program is expected to positively impact the Trust. The effect of the March 3, 2009 announcement has not been reflected in the GLJ reserves at December 31, 2008.

Approximately 95% of Daylight's reserves and production are in Alberta, with the balance located in BC and Saskatchewan. Approximately 78% of current production is subject to Crown royalties, which are affected directly by the government royalty programs, and the remaining 22% of Daylight's 2008 royalties are related to freehold and override charges, which are not directly affected by these programs. Consequently, the NRF, TRP and the new royalty incentive program will impact Daylight's royalty rates, the effect of which is dependent upon commodity prices. The NRF and TRP royalty programs have been incorporated into the GLJ evaluation effective December 31, 2008. See "Royalties" section of this MD&A for further details.

Changes in Legislation

Income tax laws, or other laws or government incentive programs relating to the oil and gas industry, such as the treatment of mutual fund trusts and resource taxation, may in the future be changed or interpreted in a manner that adversely affects Daylight and the unitholders. Tax authorities having jurisdiction over Daylight or unitholders may disagree with how Daylight calculates its income for tax purposes or could change administrative practises to the detriment of Daylight or its unitholders.

Daylight intends to continue to qualify as a mutual fund trust for purposes of the Income Tax Act (Canada); however, Daylight may not always be able to satisfy any future requirements for the maintenance of mutual fund trust status. Should Daylight's status as a mutual fund trust be lost or successfully challenged by a relevant tax authority, certain adverse consequences may arise for Daylight and its unitholders.

Some of the significant consequences of losing mutual fund trust status are as follows:

- Daylight would be taxed on certain types of income distributed to unitholders, including income generated by the royalties held. Payment of this tax may have adverse consequences for some unitholders, particularly unitholders that are not residents of Canada and residents of Canada that are otherwise exempt from Canadian income tax.

- Daylight would cease to be eligible for the capital gains refund mechanism available under Canadian tax laws if it ceased to be a mutual fund trust.

- Trust units held by unitholders that are not residents of Canada would become taxable Canadian property. These non-resident holders would be subject to Canadian income tax on any gains realized on a disposition of trust units held by them.

- Trust units would not constitute qualified investments for registered retirement savings plans ("RRSPs"), registered retirement income funds ("RRIFs"), registered education savings plans ("RESPs") or deferred profit sharing plans ("DPSPs"). If, at the end of any month, one of these exempt plans holds Trust Units that are not qualified investments, the plan must pay a tax equal to 1% of the fair market value of the trust units at the time the trust units were acquired by the exempt plan. An RRSP or RRIF holding non-qualified trust units would be subject to taxation on income attributable to the trust units. If an RESP holds non-qualified trust units, it may have its registration revoked by the Canada Revenue Agency.

Daylight may take certain measures in the future to the extent considered necessary to ensure that status as a mutual fund trust is maintained. These measures could be adverse to certain holders of trust units, particularly "non-residents" of Canada as defined in the Income Tax Act (Canada).

Taxation of Daylight Energy

Daylight Energy is subject to taxation in each taxation year on its income for the year, after deducting certain payments made to Daylight to the extent that there are not sufficient resource pool deductions, capital cost allowance or utilization of prior year non-capital losses to reduce taxable income to zero. Daylight Energy intends to deduct, in computing its income for tax purposes, the full amount available for deduction in each year associated with the income tax resource pools, undepreciated capital cost ("UCC") and non-capital losses carried forward, if any, plus resource pools and UCC created by capital expenditures of Daylight Energy. If there are not sufficient resource pools, UCC and non-capital losses carried forward to shelter the income of Daylight Energy, then cash taxes would be payable by Daylight Energy. In addition, there can be no assurance that taxation authorities will not seek to challenge certain amounts. If such a challenge were to succeed against Daylight Energy, it could have a material adverse effect on the amount of distributable cash available.

The Trust Indenture provides that an amount equal to the taxable income of Daylight will be distributed each year to unitholders in order to reduce Daylight's taxable income to zero.

On October 31, 2006, the Federal Minister of Finance announced proposals (the "October 31, 2006 Proposals") to amend the Tax Act to apply a tax on distributions from publicly-traded income trusts. Under the October 31, 2006 Proposals, existing income trusts will be subject to the new measures commencing in their 2011 taxation year, following a four-year grace period. This legislation was enacted in June 2007.

In simplified terms, under the tax plan, distributions to unitholders that had previously been provided without taxes or withholdings will become subject to a new tax at the income trust level. The income distributions to Canadian taxable individual unitholders will be treated as dividends from a Canadian corporation and be eligible for the dividend tax credit. Income distributions to corporations resident in Canada will be eligible for full deduction as tax free intercorporate dividends. Tax-deferred accounts (Registered Retirement Savings Plans, Registered Retirement Income Funds and Canadian Pension Funds) will continue to pay no tax on distributions received. Non-resident unitholders will be taxed on distributions at the non-resident withholding tax rate for dividends. The net impact on Canadian taxable investors is expected to be minimal because they may take advantage of the dividend tax credit. Distributions to tax-deferred accounts and to non-residents will be negatively affected since these distributions will be subject to the distribution tax at the trust level but the recipients will not be eligible for the dividend tax credit which is available to Canadian taxable investors.

Given the grace period before existing trusts will be taxed, the Trust has an opportunity to examine its strategy, and if warranted, modify it to provide the best possible return for unitholders. The grace period applies limitation thresholds on the issuance of new equity or securities convertible into new equity from October 31, 2006 to December 31, 2010 and issuances exceeding these thresholds may cause an earlier expiry of the grace period. Unitholders also have an opportunity to arrange their investments to minimize the impact of the proposed tax changes on their portfolios. Daylight's high quality tax pools of over $900 million at December 31, 2008 will be available to provide significant shelter from cash taxes payable beyond the expiry of the grace period available to the Trust.

Debt Service

Daylight Energy may, from time to time, finance a significant portion of its operations through debt. Amounts paid in respect of interest and principal on debt incurred by Daylight Energy may impair Daylight Energy's ability to satisfy its obligations to Daylight. Variations in interest rates and scheduled principal repayments could result in significant changes in the amount required to be applied to debt service before payment by Daylight Energy of its obligation to Daylight. Ultimately, this may result in lower levels of distributable cash.

Pursuant to its credit facilities, Daylight Energy is restricted from making distributions to Daylight, including payments of principal and interest in the following circumstances: (i) after a demand has been made under the facility; (ii) after a default or event of default has occurred under the facility or if the borrowings thereunder exceed the borrowing base established from time to time by the lender; and (iii) if such distribution would result in a default or event of default under the facility. This may restrict the ability of Daylight Energy to pay Daylight, and therefore may limit or eliminate cash available for distribution.

Lenders have security over all of the assets of Daylight Energy. If Daylight Energy becomes unable to pay its debt service charges or otherwise commits an event of default such as bankruptcy, a lender may foreclose on or sell the assets of Daylight Energy.

Delay in Cash Distributions

In addition to the usual delays in payment by purchasers of oil and natural gas to the operators of the properties, and by the operator to Daylight Energy, payments between any of such parties may also be delayed by restrictions imposed by lenders, delays in the sale or delivery of products, delays in the connection of wells to a gathering system, blowouts or other accidents, recovery by the operator of expenses incurred in the operation of the properties or the establishment by the operator of reserves for such expenses.

Reliance on Management

Unitholders will be dependent on the management of Daylight Energy in respect of the administration and management of all matters relating to its operations. Daylight Energy, as of December 31, 2008, operated approximately 75% of total daily production. Investors who are not willing to rely on the management of Daylight Energy should not invest in the trust units and/or convertible debentures.

Expansion of Operations

The operations and expertise of management are currently focused on conventional oil and gas production and development in the Western Canadian Sedimentary Basin. In the future, Daylight may acquire oil and gas properties outside this geographic area. In addition, the Trust Indenture does not limit Daylight's activities to oil and gas production and development, and Daylight could acquire other energy related assets, such as oil and natural gas processing plants or pipelines. Expansion activities into new areas may present new additional risks or alternatively, significantly increase the exposure to one or more of the present risk factors which may result in future operational and financial conditions being adversely affected.

Net Asset Value

Daylight's net asset value from time to time will vary dependent upon a number of factors beyond the control of management, including oil and gas prices. The trading prices of the trust units from time to time is also determined by a number of factors which are beyond the control of management and such trading prices may be greater than Daylight's net asset value.

Competition

There is strong competition relating to all aspects of the oil and gas industry. There are numerous trusts and oil and gas companies who are competing for the acquisitions of properties with longer life reserves and properties with exploitation and development opportunities as well as skilled industry personnel. As a result of such increasing competition, it will be more difficult to acquire reserves on beneficial terms. Many of these entities have significantly greater financial and other resources.

Return of Capital

Trust units will have no value when Daylight's oil and gas properties can no longer be economically produced and, as a result, cash distributions do not represent a "yield" in the traditional sense and are not comparable to bonds or other fixed yield securities, where investors are entitled to a full return of the principal amount of debt on maturity in addition to a return on investment through interest payments. Distributions represent a combination of return of unitholders initial investment and a return on unitholders initial investment.

Unitholders have a limited right to require Daylight to repurchase their trust units, which is referred to as a redemption right. It is anticipated that the redemption right will not be the primary mechanism for unitholders to liquidate their investment. The right to receive cash in connection with a redemption is subject to limitations.

Nature of Trust Units

Trust units do not represent a traditional investment in the oil and natural gas sector and should not be viewed as shares in Daylight Energy. Trust units represent a fractional interest in the Trust. As holders of trust units, unitholders do not have the statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring "oppression" or "derivative" actions. Daylight's sole assets are investments in Daylight Energy. The price per trust unit is a function of anticipated distributable cash, underlying assets and management's ability to effect long-term growth in value. The market price of the trust units will be sensitive to a variety of market conditions including, but not limited to, interest rates and Daylight's ability to acquire suitable oil and natural gas properties. Changes in market conditions may adversely affect the trading price of the trust units.

The trust units are not "deposits" within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of that Act or any other legislation. Furthermore, Daylight is not a trust company and, accordingly, is not registered under any trust and loan company legislation as it does not carry on nor intend to carry on the business of a trust company.

Unitholder Limited Liability

The Trust Indenture provides that no unitholder will be subject to any liability in connection with Daylight or its obligations and affairs and, in the event that a court determines unitholders are subject to any such liabilities, the liabilities will be enforceable only against, and will be satisfied only out of Daylight assets. Pursuant to the Trust Indenture, Daylight will indemnify and hold harmless each unitholder from any costs, damages, liabilities, expenses, charges and losses suffered by a unitholder resulting from or arising out of such unitholder not having such limited liability.

The Trust Indenture provides that all written instruments signed by or on behalf of Daylight must contain a provision to the effect that such obligation will not be binding upon unitholders personally. Personal liability may also arise in respect of claims against Daylight that do not arise under contracts, including claims in tort, claims for taxes and possibly certain other statutory liabilities. The possibility of any personal liability of this nature arising is considered unlikely.

Daylight's operations will be conducted, upon the advice of counsel, in such a way and in such jurisdictions as to avoid as far as possible any material risk of liability on the unitholders for claims.

In addition, the Income Trust Liability Act (Alberta) was proclaimed in force in Alberta on June 30, 2004. The Income Trust Liability Act (Alberta) provides that the beneficiary of a trust that is (a) created by a trust instrument governed by the laws of Alberta, and (b) a reporting issuer as defined in the Securities Act (Alberta), is not liable as a beneficiary for any act, default, obligation or liability of the trustee.

Stability Rating

Daylight does not have a stability rating and has no current plans to apply for a stability rating.

Non-Resident Ownership of Trust Units

In order for Daylight to maintain its status as a mutual fund trust under the Income Tax Act (Canada), it must not be established or maintained primarily for the benefit of non-residents within the meaning of the Income Tax Act (Canada). The Trust Indenture provides that if at any time Daylight become aware that the beneficial owners of 45% or more of the trust units then outstanding are or may be non-residents or that such a situation is imminent, Daylight shall take such action as may be necessary to carry out the foregoing intention.

Regulatory

Oil and natural gas operations (exploration, production, pricing, marketing and transportation) are subject to extensive controls and regulations imposed by various levels of government that may be amended from time to time. Daylight's operations may require licenses from various governmental authorities. There can be no assurance that Daylight will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development at planned projects.

Maintenance of Distributions

Daylight adds to its oil and natural gas reserves primarily through development and acquisitions with only a small percentage of the capital directed to exploration. As a result, future oil and natural gas reserves are highly dependent on Daylight's operating entities' success in exploiting existing properties and acquiring additional reserves. Daylight also distributes a portion of its funds from operations to unitholders rather than reinvesting it in reserve additions. Accordingly, if external sources of capital, including the issuance of additional trust units, become limited or unavailable on commercially reasonable terms, Daylight's operating entities' ability to make the necessary capital investments to maintain or expand oil and natural gas reserves will be impaired. To the extent that Daylight's operating entities are required to use funds from operations to finance capital expenditures or property acquisitions, the level of cash available for distribution to unitholders will be reduced. Additionally, Daylight cannot guarantee that it will be successful in developing additional reserves or acquiring additional reserves on terms that meet its investment objectives. Without these reserve additions, Daylight's reserves will deplete and as a consequence, either production from, or the average reserve life of, Daylight properties will decline. Either decline may result in a reduction in the value of trust units and in a reduction in cash available for distributions to unitholders.

Kyoto Protocol

Canada is a signatory to the United Nations Framework Convention on Climate Change and has ratified the Kyoto Protocol established thereunder to set legally binding targets to reduce nationwide emissions of carbon dioxide, methane, nitrous oxide and other so called "greenhouse natural gases". Daylight's exploration and production facilities and other operations and activities emit a small amount of greenhouse natural gases which may subject Daylight to legislation regulating emissions of greenhouse natural gases. The Government of Canada has put forward a Climate Change Plan for Canada which suggests further legislation will set greenhouse natural gases emission reduction requirements for various industrial activities, including oil and natural gas exploration and production. Future federal legislation, together with provincial emission reduction requirements such as those proposed in Alberta's Bill 37: Climate Change and Emissions Management, may require the reduction of emissions or emissions intensity produced by Daylight's operations and facilities. The direct or indirect costs of these regulations may adversely affect Daylight's business.



Quarterly Information
----------------------------------------------------------------------------
Financial 2008
-------------------------------------------------
(in thousands of dollars,
except unit, per unit and
boe data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 91,311 $ 145,269 $ 151,171 $ 113,986
Royalties (18,814) (28,149) (29,568) (21,733)
Realized gain (loss) on
derivative contracts 12,230 (9,237) (9,507) -
Operating expenses (24,038) (23,943) (22,587) (21,769)
Transportation (2,423) (2,132) (1,926) (1,721)
----------------------------------------------------------------------------
Operating netback 58,266 81,808 87,583 68,763
G&A - cash charge (4,483) (4,542) (4,175) (3,679)
Cash financial charges (3,708) (4,626) (6,376) (6,417)
Provision for non-
recoverable accounts
receivable - (1,800) - -
Other income (1) - 7,806 - -
----------------------------------------------------------------------------
Funds from operations 50,075 78,646 77,032 58,667
Per unit - Basic 0.56 0.91 0.95 0.75
- Diluted 0.52 0.84 0.85 0.66
----------------------------------------------------------------------------
Cash provided by
operating activities 47,416 97,799 71,028 43,516
----------------------------------------------------------------------------
Net income (loss) 44,424 69,692 42,462 3,941
Per unit - Basic 0.50 0.81 0.53 0.05
- Diluted 0.48 0.76 0.48 0.05
----------------------------------------------------------------------------
Cash distributions
declared 35,193 33,684 24,807 23,333
Per unit 0.39 0.39 0.30 0.30
Payout ratio 70% 43% 32% 40%
----------------------------------------------------------------------------
Capital expenditures 38,766 45,657 37,866 43,630
Cash property
acquisitions 66,571 - - -
Cash property
divestitures - (87,695) - -
Non-cash property
acquisitions 26,887 - - -
----------------------------------------------------------------------------
Corporate acquisitions - 36,433 - -
----------------------------------------------------------------------------
Market value of
investments 2,285 9,987 18,554 15,172
----------------------------------------------------------------------------
Bank debt 219,853 199,282 274,313 268,410
Working capital
deficiency(2) 38,742 37,200 9,740 29,908
----------------------------------------------------------------------------
Convertible debentures 118,734 54,180 62,762 120,170
----------------------------------------------------------------------------
Total assets 1,058,195 915,364 970,810 949,143
----------------------------------------------------------------------------
Units outstanding (000s)
Basic 90,239 86,299 85,481 77,914
Diluted 106,050 94,295 94,553 94,096
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcf/d) 82,572 81,798 75,041 67,691
Light oil (bbls/d) 4,086 4,864 4,899 5,174
Heavy oil (bbls/d) 2,798 2,179 2,257 2,181
NGLs (bbls/d) 1,217 1,106 1,054 1,167
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 8,101 8,149 8,210 8,522
----------------------------------------------------------------------------
Combined (boe/d) 21,863 21,782 20,717 19,804
----------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 7.06 $ 8.52 $ 10.30 $ 7.92
Light oil ($/bbl) 55.28 116.11 120.93 91.40
Heavy oil ($/bbl) 45.20 99.43 96.07 71.54
NGLs ($/bbl) 43.27 89.43 84.76 74.91
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 50.00 $ 108.03 $ 109.46 $ 84.06
----------------------------------------------------------------------------
Combined ($/boe) $ 45.40 $ 72.50 $ 80.19 $ 63.25
----------------------------------------------------------------------------
Wells drilled - gross
(net) 10 (3.2) 15 (7.0) 3 (2.2) 22 (8.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Financial 2007
-------------------------------------------------
(in thousands of dollars,
except unit, per unit and
boe data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Petroleum and natural
gas revenues $ 99,718 $ 82,557 $ 92,699 $ 91,982
Royalties (18,853) (14,454) (18,223) (16,237)
Realized gain (loss) on
derivative contracts 2,145 5,118 (320) 24
Operating expenses (23,072) (21,555) (27,268) (21,971)
Transportation (2,019) (1,920) (2,085) (1,833)
----------------------------------------------------------------------------
Operating netback 57,919 49,746 44,803 51,965
G&A - cash charge (3,724) (3,552) (4,117) (3,840)
Cash financial charges (6,716) (5,851) (5,412) (5,292)
Provision for non-
recoverable accounts
receivable - - - -
Other income (1) - - - -
----------------------------------------------------------------------------
Funds from operations 47,479 40,343 35,274 42,833
Per unit - Basic 0.61 0.52 0.46 0.57
- Diluted 0.54 0.52 0.46 0.57
----------------------------------------------------------------------------
Cash provided by
operating activities 44,824 38,850 37,211 46,500
----------------------------------------------------------------------------
Net income (loss) (127,381) 7,131 18,682 5,301
Per unit - Basic (1.64) 0.09 0.24 0.07
- Diluted (1.64) 0.09 0.24 0.07
----------------------------------------------------------------------------
Cash distributions
declared 23,296 27,006 34,475 34,114
Per unit 0.30 0.35 0.45 0.45
Payout ratio 49% 67% 98% 80%
----------------------------------------------------------------------------
Capital expenditures 29,089 33,727 12,887 20,677
Cash property acquisitions - - - -
Cash property divestitures - - - -
Non-cash property
acquisitions - - - -
----------------------------------------------------------------------------
Corporate acquisitions - - - -
----------------------------------------------------------------------------
Market value of
investments 13,068 13,336 17,988 16,673
----------------------------------------------------------------------------
Bank debt 257,342 363,153 358,832 338,511
Working capital
deficiency(2) 32,088 40,097 25,499 29,649
----------------------------------------------------------------------------
Convertible debentures 119,792 3,467 3,456 3,444
----------------------------------------------------------------------------
Total assets 922,344 1,065,025 1,072,055 1,083,695
----------------------------------------------------------------------------
Units outstanding
(000s)
Basic 77,657 77,475 76,652 76,542
Diluted 93,850 78,983 78,133 77,597
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcf/d) 71,187 69,143 74,356 78,556
Light oil (bbls/d) 4,964 4,565 4,258 4,310
Heavy oil (bbls/d) 2,488 2,382 2,416 2,504
NGLs (bbls/d) 1,266 1,129 1,258 1,449
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 8,718 8,076 7,932 8,263
----------------------------------------------------------------------------
Combined (boe/d) 20,583 19,600 20,325 21,356
----------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 6.45 $ 5.33 $ 7.24 $ 7.31
Light oil ($/bbl) 81.84 73.87 67.09 61.34
Heavy oil ($/bbl) 53.50 51.97 46.05 42.50
NGLs ($/bbl) 64.99 59.90 53.42 54.31
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 71.31 $ 65.46 $ 58.51 $ 54.40
----------------------------------------------------------------------------
Combined ($/boe) $ 52.66 $ 45.79 $ 50.12 $ 47.86
----------------------------------------------------------------------------
Wells drilled - gross
(net) 11 (7.8) 18 (9.9) 4 (3.6) 11 (6.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(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, current portion
of convertible debentures and future income taxes.


Quarterly Information
----------------------------------------------------------------------------
Financial 2006
------------------------------------------------
(in thousands of dollars,
except unit, per unit and
boe data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 92,715 $ 69,877 $ 68,554 $ 66,187
Royalties (17,444) (13,312) (14,040) (12,485)
Realized gain (loss) on
derivative contracts 91 (133) - -
Operating expenses (21,319) (15,901) (15,286) (14,848)
Transportation (1,871) (1,959) (1,354) (1,309)
----------------------------------------------------------------------------
Operating netback 52,172 38,572 37,874 37,545
G&A - cash charge (4,326) (3,634) (2,625) (2,596)
Cash financial charges (4,519) (2,695) (2,286) (1,699)
Cash taxes (54) (1) 222 (225)
----------------------------------------------------------------------------
Funds from operations 43,273 32,242 33,185 33,025
Per unit - Basic 0.59 0.71 0.79 0.80
- Diluted 0.59 0.68 0.77 0.77
----------------------------------------------------------------------------
Cash provided by
operating activities 21,314 31,783 42,119 17,889
----------------------------------------------------------------------------
Net income (loss) (283,511) (2,140) 15,735 12,093
Per unit - Basic (3.88) (0.05) 0.38 0.29
- Diluted (3.88) (0.05) 0.38 0.29
----------------------------------------------------------------------------
Cash distributions
declared 43,008 31,844 26,663 26,407
Per unit 0.59 0.62 0.63 0.63
Payout ratio 99% n/a(1) 80% 80%
----------------------------------------------------------------------------
Capital expenditures 17,032 19,358 21,034 35,378
Cash property acquisition 32,729 - - -
Non-cash property
divestitures - (21,100) (6,628) -
----------------------------------------------------------------------------
Corporate acquisitions - 527,691 - -
----------------------------------------------------------------------------
Market value of
investments 22,860 20,500 5,783 -
----------------------------------------------------------------------------
Bank debt 349,336 287,392 165,114 162,190
Working capital
deficiency(2) 22,624 50,318 28,931 17,048
----------------------------------------------------------------------------
Convertible debentures 3,515 3,510 3,973 6,996
----------------------------------------------------------------------------
Total assets 1,114,085 1,424,236 833,821 845,746
----------------------------------------------------------------------------
Units outstanding
(000s)
Basic 74,322 71,863 42,209 41,861
Diluted 75,309 72,117 44,349 44,110
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcf/d) 80,991 57,926 59,452 56,012
Light oil (bbls/d) 4,455 3,172 2,855 2,575
Heavy oil (bbls/d) 2,796 2,760 2,579 2,701
NGLs (bbls/d) 1,449 756 740 677
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 8,700 6,688 6,174 5,953
----------------------------------------------------------------------------
Combined (boe/d) 22,199 16,342 16,083 15,288
----------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 6.75 $ 5.74 $ 6.18 $ 7.77
Light oil ($/bbl) 60.07 74.23 71.78 65.55
Heavy oil ($/bbl) 39.59 51.27 52.01 34.29
NGLs ($/bbl) 49.53 67.79 63.05 60.50
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 51.73 $ 64.03 $ 62.48 $ 50.79
Combined ($/boe) $ 45.40 $ 46.48 $ 46.84 $ 48.10
----------------------------------------------------------------------------
Wells drilled - gross
(net) 9 (1.8) 12 (9.2) 5 (1.0) 21 (15.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Quarterly Information
----------------------------------------------------------------------------
Financial 2005
-------------------------------------------------
(in thousands of dollars,
except unit, per unit and
boe data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Petroleum and natural gas
revenues $ 85,615 $ 76,445 $ 60,529 $ 53,984
Royalties (15,802) (13,242) (10,558) (10,375)
Realized gain (loss) on
derivative contracts (99) (350) 59 -
Operating expenses (13,580) (12,981) (13,184) (12,328)
Transportation (1,657) (1,018) (950) (430)
----------------------------------------------------------------------------
Operating netback 54,477 48,854 35,896 30,851
G&A - cash charge (3,545) (2,216) (2,108) (1,987)
Cash financial charges (1,862) (2,756) (2,861) (2,584)
Cash taxes (603) (170) (295) (209)
----------------------------------------------------------------------------
Funds from operations 48,467 43,712 30,632 26,071
Per unit - Basic 1.33 1.37 1.02 0.95
- Diluted 1.26 1.23 0.88 0.80
----------------------------------------------------------------------------
Cash provided by
operating activities 47,285 42,922 24,095 18,917
----------------------------------------------------------------------------
Net income (loss) 25,447 20,525 12,201 5,887
Per unit - Basic 0.70 0.68 0.41 0.21
- Diluted 0.69 0.63 0.40 0.21
----------------------------------------------------------------------------
Cash distributions
declared 24,316 17,023 16,284 14,962
Per unit 0.63 0.54 0.54 0.54
Payout ratio 50% 39% 53% 57%
----------------------------------------------------------------------------
Capital expenditures 20,215 23,851 14,086 14,387
Cash property acquisition - - - -
Non-cash property
divestitures (14,636) - - -
----------------------------------------------------------------------------
Corporate acquisitions 116,509 - 61,000 -
----------------------------------------------------------------------------
Market value of
investments - - - -
----------------------------------------------------------------------------
Bank debt 123,455 124,185 131,755 101,850
Working capital
deficiency(2) 26,575 15,346 9,878 12,256
----------------------------------------------------------------------------
Convertible debentures 9,219 22,117 72,919 73,083
----------------------------------------------------------------------------
Total assets 841,254 689,297 676,212 610,970
----------------------------------------------------------------------------
Units outstanding (000s)
Basic 40,806 33,767 30,113 27,904
Diluted 43,854 37,501 37,334 34,933
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations
Average daily production
Natural gas (mcf/d) 54,438 54,096 57,890 58,875
Light oil (bbls/d) 2,368 2,527 2,292 2,721
Heavy oil (bbls/d) 2,460 2,096 1,937 -
NGLs (bbls/d) 814 785 771 892
----------------------------------------------------------------------------
Oil & NGLs (bbls/d) 5,642 5,408 5,000 3,613
----------------------------------------------------------------------------
Combined (boe/d) 14,715 14,424 14,648 13,426
----------------------------------------------------------------------------
Average prices received
Natural gas ($/mcf) $ 11.91 $ 9.26 $ 7.51 $ 6.86
Light oil ($/bbl) 63.40 68.98 62.80 56.49
Heavy oil ($/bbl) 33.06 51.94 23.49 -
NGLs ($/bbl) 58.79 56.56 52.71 46.35
----------------------------------------------------------------------------
Oil & NGLs ($/bbl) $ 49.52 $ 60.57 $ 46.02 $ 53.99
Combined ($/boe) $ 63.24 $ 57.61 $ 45.41 $ 44.68
----------------------------------------------------------------------------
Wells drilled - gross
(net) 34 (21.7) 15 (6.9) 5 (3.4) 17 (8.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(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 (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) 38,742 32,088 22,624 26,575 20,820
----------------------------------------------------------------------------
Convertible
debentures 118,734 119,792 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) $ 8.43 $ 6.61 $ 6.61 $ 8.84 $ 6.89
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, current portion
of convertible debentures 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.

Consolidated Balance Sheets
As at December 31,
(in thousands of dollars)
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Assets

Current assets
Accounts receivable (note 13) $ 45,502 $ 47,311
Prepaid expenses and deposits 3,577 3,201
Unrealized gain on derivative contracts (note 13) 71,535 -
----------------------------------------------------------------------------
120,614 50,512
Investments (note 4) 2,285 13,068
Property, plant and equipment (note 5) 923,465 854,464
Deferred financing charges (note 8) 100 208
Future income tax asset (note 12) 11,731 4,092
----------------------------------------------------------------------------
$1,058,195 $ 922,344
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 76,090 $ 73,902
Distributions payable 11,731 7,766
Future income tax liability (note 12) 20,745 -
Current portion of convertible
debentures (note 7) 3,533 -
Current portion of capital lease obligations - 932
----------------------------------------------------------------------------
112,099 82,600
Bank debt (note 6) 219,853 257,342
Convertible debentures (note 7) 115,201 119,792
Asset retirement obligations (note 9) 22,110 22,458
----------------------------------------------------------------------------
469,263 482,192
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Unitholders' Equity
Unitholders' capital (note 10) 1,181,868 1,083,664
Contributed surplus (note 10) 4,155 2,437
Equity component of convertible
debentures (note 7) 9,080 3,724
Deficit (606,171) (649,673)
----------------------------------------------------------------------------
588,932 440,152
----------------------------------------------------------------------------
$1,058,195 $ 922,344
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Commitments (note 15)

See accompanying notes to the consolidated financial statements.

On behalf of the Board of Directors:

Signed "Graham Wilson" Signed "Fred Woods"
Director Director

Consolidated Statements of Income (Loss), Comprehensive Income (Loss) and
Deficit
Years ended December 31,

(in thousands of dollars, except per unit amounts)
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Revenues
Petroleum and natural gas $ 501,737 $ 366,956
Royalties (98,264) (67,767)
Other income (note 3) 7,806 -
Gain (loss) on financial instruments (note 13) 59,478 (3,498)
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470,757 295,691
Expenses
Operating 92,337 93,866
Transportation 8,202 7,857
General and administrative 22,825 20,095
Financial charges (note 8) 22,566 23,860
Provision for non-recoverable accounts receivable
(note 13) 1,800 -
Loss on equity investment (note 4) 1,873 1,861
Depletion, depreciation and accretion 151,787 142,470
Write down of equity investment (note 4) 3,367 2,338
Write down of goodwill - 137,947
----------------------------------------------------------------------------
304,757 430,294
----------------------------------------------------------------------------
Income (loss) before taxes 166,000 (134,603)

Future tax provision (reduction) (note 12) 5,481 (38,336)
----------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) 160,519 (96,267)
Deficit, beginning of year (649,673) (436,361)
Change in accounting policy - 1,846
Distributions (note 10) (117,017) (118,891)
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Deficit, end of year $ (606,171) $ (649,673)
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Net income (loss) per unit (note 10)
Basic $ 1.92 $ (1.26)
Diluted $ 1.80 $ (1.26)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements.

Consolidated Statements of Cash Flows
Years ended December 31,
(in thousands of dollars)
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------

Cash provided by (used in):

Operating
Net income (loss) $ 160,519 $ (96,267)
Items not affecting cash:
Depletion, depreciation and accretion 151,787 142,470
Write down of goodwill - 137,947
Write down of equity investment (note 4) 3,367 2,338
Future tax provision (reduction) 5,481 (38,336)
Non-cash financial charges (note 8) 1,439 589
Unit-based compensation 5,946 4,862
Unrealized (gain) loss on financial instruments (65,992) 10,465
Loss on equity investment 1,873 1,861
Asset retirement expenditures (note 9) (3,800) (3,929)
Change in non-cash operating working
capital (note 11) (861) 5,385
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Cash provided by operating activities 259,759 167,385

Financing
Bank debt (40,489) (91,994)
Convertible debentures issued, net of issue
costs (note 7) 71,773 119,500
Trust units repurchased (note 10) (3,835) -
Issue of trust units, net of issue costs (note 10) 522 922
Cash distribution to unitholders (113,052) (102,556)
Repayments on obligation under capital lease (932) (3,243)
Change in non-cash financing working
capital (note 11) (646) 3,079
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Cash used in financing activities (86,659) (74,292)

Investing
Property, plant and equipment additions (165,919) (96,380)
Property acquisitions (note 5) (66,571) -
Corporate acquisition (note 3) (29,597) -
Proceeds on property disposition (note 5) 87,695 -
Change in non-cash investing working
capital (note 11) 1,292 3,287
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Cash used in investing activities (173,100) (93,093)

Change in cash - -
Cash, beginning of year - -
----------------------------------------------------------------------------
Cash, end of year $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Cash is defined as cash and cash equivalents.

See accompanying notes to the consolidated financial statements.


Notes to the Consolidated Financial Statements

For the years ended December 31, 2008 and 2007

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

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

Specifically, the amounts recorded for 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.

Principles of Consolidation

The consolidated financial statements include the accounts of the Trust, its subsidiaries and a partnership. Any reference to "the Trust" throughout these consolidated financial statements refers to the Trust, its subsidiaries, and the partnership. All inter-entity balances and transactions have been eliminated.

Property, Plant and Equipment

Daylight follows the full cost method of accounting for petroleum and natural gas operations whereby all costs related to the acquisition, exploration and development of petroleum and natural gas reserves are capitalized and accumulated in one cost centre as all operations are in Canada. Such costs include lease acquisition costs, geological and geophysical costs, carrying charges of non-producing properties, costs of drilling both productive and non-productive wells, the cost of petroleum and natural gas production equipment, asset retirement costs and overhead charges related to exploration and development activities.

Daylight evaluates its petroleum and natural gas assets in each reporting period to determine that the costs are recoverable and the costs do not exceed the fair value of the properties. If the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the petroleum and natural gas assets, the costs are considered recoverable. If the carrying value of the petroleum and natural gas assets is not considered to be recoverable, an impairment loss is recognized and charged against net income to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using future product prices and costs and are discounted using a risk-free rate.

Proceeds from the disposition of petroleum and natural gas properties are applied against capitalized costs except for dispositions that would change the rate of depletion and depreciation by 20% or more, in which case a gain or loss would be recorded.

Depletion of petroleum and natural gas assets and depreciation of production equipment are calculated using the unit-of-production method, based on volumes of total proved petroleum and natural gas reserves and production, before royalties, converted at the energy equivalent conversion ratio of six thousand cubic feet of natural gas to one barrel of oil, calculated in accordance with National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities. The depletable base includes all capitalized costs, excluding undeveloped lands, plus estimated future development costs of proved undeveloped reserves, and future estimated asset retirement costs.

The cost of acquisition and evaluation of unproved properties are initially excluded from the depletion calculation. A separate impairment test is performed on these assets to determine whether the carrying value exceeds the fair value. Any excess in carrying value over fair value is an impairment. When proved reserves are assigned or a property is considered to be impaired, the cost of the property or the amount of the impairment will be added to the capitalized costs for the calculation of depletion.

Goodwill

The Trust must record goodwill relating to a corporate acquisition when the total purchase price exceeds the fair value for accounting purposes of the net identifiable assets and liabilities of the acquired company. The goodwill balance is assessed for impairment annually at year-end or as events occur that could result in an impairment. Impairment is recognized based on the fair value of the reporting entity (consolidated Trust) compared to the book value of the reporting entity. If the fair value of the consolidated Trust is less than the book value, impairment is measured by allocating the fair value of the consolidated Trust to the identifiable assets and liabilities as if the Trust had been acquired in a business combination for a purchase price equal to its fair value. The excess of the fair value of the consolidated trust over the amounts assigned to the identifiable assets and liabilities is the fair value of the goodwill. Any excess of the book value of goodwill over this implied fair value of goodwill is the impairment amount. Impairment is charged to net income in the period in which it occurs. Goodwill is stated at cost less impairment and is not amortized.

Asset Retirement Obligations

Daylight recognizes the fair value of an Asset Retirement Obligation ("ARO") in the period in which it is incurred when a reasonable estimate of the fair value can be made. On a periodic basis, management will review these estimates and changes to the estimate, if any, will be applied on a prospective basis. The fair value of the estimated ARO is recorded as a long-term liability with a corresponding increase in the carrying amount of the related asset. The capitalized amount is depleted on a unit-of-production basis over the life of the reserves. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost would also result in an increase or decrease to the ARO. Actual costs incurred upon settlement of the ARO are charged against the ARO to the extent of the liability recorded.

Revenue Recognition

Revenue associated with the sale of crude oil, natural gas and natural gas liquids ("NGLs") is recognized when legal title passes to the purchaser.

Transportation

Costs paid by the Trust for the transportation of natural gas, crude oil, and NGLs from the wellhead to the point of title transfer are recognized when the transportation is provided.

Taxes

Daylight is a taxable entity under the Canadian Income Tax Act and until 2011 is taxable only on income that is not distributed or distributable to its unitholders. Commencing in 2011, distributions paid to unitholders will not be deductible for tax and the Trust will be taxed on its income similar to a corporation.

The Trust follows the asset and liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the financial statements of Daylight Energy and its wholly owned subsidiaries and their respective tax basis, using substantively enacted income tax rates expected to be in effect when the temporary differences are anticipated to reverse. In addition, income tax liabilities and assets are recognized for the estimated tax consequences of temporary differences arising in Daylight that reverse after 2011. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in net income in the period that the change occurs.

Joint Operations

Daylight conducts development and production activities jointly with others. These financial statements only reflect Daylight's proportionate interest in such activities.

Cash and Cash Equivalents

Daylight considers cash and investments with a maturity of three months or less to be cash equivalents.

Investments

Investments are comprised of common shares of publicly traded companies. Investments in which the Trust may exercise significant influence are accounted for using the equity method where the recorded amount of the investment is increased or decreased for the Trust's ownership percentage of the companies' net earnings or loss and reduced by dividends paid to the Trust. The Trust evaluates the carrying value of its equity investments at least annually or more frequently should economic events dictate. If there has been a decline in value of an investment, other than a temporary decline, the investment is written down to its market value and the impairment charged to net income.

Investments in which the Trust does not exercise significant influence are classified as financial assets held for trading. Financial assets held for trading are initially recorded at their fair value with changes in their fair value recognized in net income.

Unit-based Compensation

The Trust has established a unit award incentive plan for employees, officers, directors and other service providers. The Trust uses the fair value method for valuing unit-based compensation. Under this method, compensation cost attributable to the unit awards are measured at the fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon settlement of the unit awards, the previously recognized value in contributed surplus will be recorded as an increase to Unitholders' capital. The Trust has not incorporated an estimated forfeiture rate for unit awards that will not vest and accounts for actual forfeitures as they occur.

Per Unit Information

Basic net income per unit is calculated using the weighted average number of units outstanding during the year. Diluted net income per unit is calculated using the treasury stock method to determine the dilutive effects of grants under the unit award incentive plan and also considers the impact of the conversion of the convertible debentures. Interest and accretion on convertible debentures is added back to net income in calculating diluted net income per unit.

Financial Instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Upon initial recognition, all financial instruments, including all derivative contracts, are recognized on the balance sheet at fair value. Subsequent measurement is then based on the financial instruments being classified into one of five categories: held for trading, held to maturity, loans and receivables, available for sale and other liabilities. The Trust has designated its cash and cash equivalents and investments, other than equity investments, as held for trading which are measured at fair value. Accounts receivable are classified as loans and receivables which are measured at amortized cost. Accounts payable and accrued liabilities, distributions payable and bank debt are classified as other liabilities which are measured at amortized cost, which is determined using the effective interest method. The convertible debentures are classified as debt on the balance sheet with a portion of the proceeds allocated to equity. The debt component has been measured at amortized cost.

The Trust is exposed to market risks resulting from fluctuations in commodity prices, foreign exchange rates and interest rates in the normal course of operations. A variety of derivative instruments may be used by the Trust to reduce its exposure to fluctuations in commodity prices, foreign exchange rates, and interest rates. The Trust does not use these derivative instruments for trading or speculative purposes. The Trust considers all of these transactions to be economic hedges; however, the majority of the Trust's contracts do not qualify or have not been designated as hedges for accounting purposes. As a result, all derivative contracts are classified as held for trading and are recorded on the balance sheet at fair value, with changes in the fair value recognized in net income, unless specific hedge criteria are met. The fair values of these derivative instruments are based on an estimate of the amounts that would have been received or paid to settle these instruments prior to maturity given future market prices and other relevant factors. Proceeds and costs realized from holding the derivative contracts are recognized in net income at the time each transaction under a contract is settled.

The Trust has elected to account for its physical delivery sales contracts, which were entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements as executory contracts on an accrual basis rather than as non-financial derivative contracts.

The Trust measures and recognizes embedded derivative contracts separately from the host contracts when the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, when it meets the definition of a derivative and when the entire contract is not measured at fair value. Embedded derivative contracts are recorded at fair value.

The Trust nets all transaction costs incurred, in relation to the acquisition of a financial asset or liability, against the related financial asset or liability. In accordance with this policy, convertible debentures are recorded net of issue costs and bank debt is presented net of deferred interest payments, with interest recognized in net income on an effective interest basis.

The Trust applies trade-date accounting for the recognition of a purchase or sale of cash equivalents, investments and derivative contracts.

Presentation

Certain prior period balances have been reclassified to conform to the current period's presentation.

2. Changes in Accounting Policies

On January 1, 2008, the Trust adopted Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments Disclosures and Section 3863 - Financial Instruments Presentation. Section 1535 establishes standards for disclosing information about an entity's capital and how it is managed. This Section specifies disclosure about objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital, whether the entity has complied with all capital requirements, and if it has not complied, the consequences of such non-compliance. Sections 3862 and 3863 establish standards for the presentation and disclosure of information that enable users to evaluate the significance of financial instruments to the entity's financial position, and the nature and extent of risks arising from financial instruments and how the entity manages those risks. The implementation of these new standards did not impact the Trust's financial results; however, it did result in additional disclosures (note 13).

Future Accounting Changes

Goodwill and Intangible Assets

In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets. Effective for fiscal years beginning on or after October 1, 2008, this section provides guidance on the recognition, measurement, presentation and disclosure for goodwill and intangible assets, other than the initial recognition of goodwill or intangible assets acquired in a business combination. Retroactive application to prior-period financial statements will be required. The Trust is still assessing the impact of this new standard on its financial statements.

Business Combinations

In January 2009, the CICA issued Section 1582, Business Combinations. This section is effective January 1, 2011 and applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after January 1, 2011 for the Trust. Early adoption is permitted. This section replaces Section 1581, Business Combination and harmonizes the Canadian standards with IFRS.

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.

The International Accounting Standards Board ("IASB") has also issued an exposure draft relating to certain amendments and exemptions to IFRS 1. It is anticipated that this exposure draft will not result in an amended IFRS 1 standard until late 2009. The amendment, if implemented, will permit the Trust to apply IFRS prospectively by utilizing its current reserves at the transition date to allocate the Trust's full cost pool, with the provision that a ceiling test, under IFRS standards, be conducted at the transition date.

Although the amended IFRS 1 standard would provide relief, the changeover to IFRS represents a significant change in accounting standards and the transition from current Canadian GAAP to IFRS will be a significant undertaking that may materially affect the Trust's reported financial position and reported results of operations.

In response, the Trust has completed its high-level IFRS changeover plan and established a preliminary timeline for the execution and completion of the conversion project. The changeover plan was determined following a preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight into what are anticipated to be the most significant areas of difference applicable to the Trust.

During the next phase of the project, scheduled to take place during 2009, the Trust will perform an in-depth review of the significant areas of difference, identified during the preliminary assessment, in order to identify all specific Canadian GAAP and IFRS differences and select ongoing IFRS policies. Key areas addressed will also be reviewed to determine any information technology issues, the impact on internal controls over financial reporting and the impact on business activities including the effect, if any, on covenants and compensation arrangements. External advisors have been retained and will assist management with the project on an as needed basis. Staff training programs began in 2008 and will continue in 2009 and be ongoing as the project unfolds.

The Trust will also continue 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.

3. Corporate Acquisitions

Athlone Energy Ltd.

On September 17, 2008, Daylight acquired all of the issued and outstanding shares of Athlone Energy Ltd. ("Athlone"). As consideration, Daylight paid cash of $29.3 million before transaction costs of $0.3 million. The operations of Athlone have been included with the results of the Trust commencing September 18, 2008. The transaction was accounted for by the purchase method based on fair values as follows:



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Net assets acquired:
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Property, plant and equipment $ 44,310
Bank debt (3,000)
Working capital deficiency (3,836)
Asset retirement obligations (797)
Future income tax liability (7,080)
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Total $ 29,597
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Consideration:
----------------------------------------------------------------------------
Cash $ 29,335
Transaction costs 262
----------------------------------------------------------------------------
Total $ 29,597
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Cadence Energy Inc.

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 amount, net of transaction costs of $1.2 million, has been reported as other income.

4. Investments



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2008 2007
----------------------------------------------------------------------------
Number of Equity or Fair Equity or Fair
Entity Symbol Shares Value Value
----------------------------------------------------------------------------
Bengal Energy Ltd. BNG 4,260,000 $ 1,363 $ 6,603
Trafalgar Energy Ltd. TFL 740,240 385 2,073
Pegasus Oil & Gas Inc. POG.A 2,440,000 537 4,392
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Total $ 2,285 $ 13,068
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Daylight owns 4,260,000 common shares of Bengal Energy Ltd. ("Bengal"), formerly Avery Resources Inc., representing a 23% interest, and accounts for the investment using the equity method. For the year ended December 31, 2008, the equity loss on the investment in Bengal was $1.9 million (2007 - $1.9 million). As at December 31, 2008, the book value of the investment was in excess of the $1.4 million (2007 - $6.6 million) market value. The decline in value of the investment was considered other than temporary and a write down of $3.4 million (2007 - $2.3 million) to its market value of $1.4 million was charged to net income.

Daylight owns 740,240 common shares of Trafalgar Energy Ltd. ("Trafalgar") with a value of $0.4 million at December 31, 2008. Daylight accounts for this investment at fair value based on the quoted market price.

Daylight owns 2,440,000 Class A common shares of Pegasus Oil & Gas Inc. ("Pegasus") with a value of $0.5 million at December 31, 2008. Daylight accounts for this investment at fair value based on the quoted market price.

Daylight continues to consider its investments in Bengal, Trafalgar and Pegasus as available for disposition.

5. Property, Plant and Equipment



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----------------------------------------------------------------------------
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
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Balance, December 31, 2008 $ 1,407,513 $ 484,048 $ 923,465
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Accumulated
depletion and Net book
Cost depreciation value
----------------------------------------------------------------------------
Property, plant and equipment $ 1,183,658 $ 332,488 $ 851,170
Other assets 5,690 2,396 3,294
----------------------------------------------------------------------------
Balance, December 31, 2007 $ 1,189,348 $ 334,884 $ 854,464
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During the year ended December 31, 2008, Daylight capitalized $10.2 million (2007 - $8.1 million) of general and administrative expenses related to exploration and development activities. Included in this amount is $1.6 million (2007 - $1.3 million) of non-cash unit-based compensation and the related tax effect of $0.5 million (2007 - $0.4 million). Future development costs of $113.4 million (2007 - $88.9 million) associated with proved reserves were included in the depletion and depreciation calculation. Future salvage value of production equipment and facilities of $34.4 million (2007 - $33.3 million) and a cost of $39.5 million (2007 - $36.5 million) for unproved properties have been excluded from the depletion and depreciation calculation.

At December 31, 2008 Daylight applied a ceiling test to its petroleum and natural gas assets and determined that no impairment had occurred. The ceiling test was calculated using the following expected future market prices:



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Benchmark
reference
price
forecast 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
----------------------------------------------------------------------------
WTI
($US/bbl) 57.50 68.00 74.00 85.00 92.01 93.85 95.73 97.64 99.59 101.59
Edmonton Par
($Cdn/bbl) 68.61 78.94 83.54 90.92 95.91 97.84 99.82 101.83 103.89 105.99
AECO
($Cdn/mcf) 7.58 7.94 8.34 8.70 8.95 9.14 9.34 9.54 9.75 9.95
Exchange
rate
($US/$Cdn) 0.825 0.850 0.875 0.925 0.950 0.950 0.950 0.950 0.950 0.950
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After 2018 the price forecast for WTI, Edmonton Par and AECO escalates at 2% per year to the end of the reserve life and the exchange rate remains constant at 0.950.

Property Acquisitions and Dispositions

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

On October 31, 2008, Daylight acquired from Midnight Oil Exploration Ltd. ("MOX") certain working interests in petroleum and natural gas properties 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 trust 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. MOX is a related party as described in note 14. Daylight has recorded $0.9 million in associated asset retirement obligations.

On September 30, 2008, Daylight disposed of certain working interests in petroleum and natural gas properties in the Sturgeon Lake area for cash proceeds of $87.7 million, plus the removal of $3.3 million of associated asset retirement obligations.

6. Bank Debt

Daylight has a total of $350 million (2007 - $300 million) available under a revolving term credit facility with a syndicate of banks of which $220 million (2007 - $257 million) was drawn at December 31, 2008. The effective interest rate for the bank debt was 4.5% for the year ended December 31, 2008 (2007 - 6.0%). The credit facility bears interest based on the lenders' prime rate and/or at money market rates plus a stamping fee. The facility is secured with a demand debenture of $500 million over the petroleum and natural gas assets and is subject to semi-annual review where the lenders may re-determine the borrowing base.

Pursuant to the terms of the revolving credit facility dated May 7, 2008, Daylight may, with the bank's approval, extend the revolving period 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 $350 million revolving term credit facility was reviewed and confirmed on October 31, 2008. The next scheduled review date for the revolving term credit facility is on or prior to May 31, 2009. The available lending limits of the facility 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 facility will not decrease at the next scheduled review on or before May 31, 2009.

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 $1,050 per Series A Debenture after December 1, 2007 and on or before December 1, 2008, 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 years ended December 31, 2008 and 2007:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Face Debt Equity
Value Component Component
----------------------------------------------------------------------------
Balance, December 31, 2006 $ 3,576 $ 3,515 $ 104
Issued, October 3, 2007 125,000 121,380 3,620
Transaction costs on October 3,
2007 issuance - (5,500) -
Transaction costs on change in
accounting policy - (83) -
Accretion and amortization - 480 -
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The following table indicates the Series A Debentures, Series B Debentures,
and Series C Debentures outstanding as at December 31, 2008:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Face Debt Equity
Value Component Component
----------------------------------------------------------------------------
Series A Debentures $ 3,576 $ 3,533 $ 104
Series B Debentures 53,737 50,857 1,556
Series C Debentures 75,000 64,344 7,420
----------------------------------------------------------------------------
Balance, December 31, 2008 $ 132,313 $ 118,734 $ 9,080
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Series A Debentures mature on December 1, 2009 and therefore the debt component of $3.5 million has been shown as a current liability.

8. Financial Charges

During the year ended December 31, 2008 and 2007, 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:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Bank debt interest $ 12,483 $ 20,347
Convertible debenture interest 8,644 2,924
Amortization of financial charges 108 109
Accretion of convertible debenture liability 1,331 480
----------------------------------------------------------------------------
Total $ 22,566 $ 23,860
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Balance, beginning of year $ 208 $ 400
Change in accounting policy - (83)
Amortization (108) (109)
----------------------------------------------------------------------------
Balance, end of year $ 100 $ 208
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 $118.4 million (2007 - $107.3 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 December 31, 2008 and 2007. A credit-adjusted risk-free rate of 10% was used to calculate the fair value of the asset retirement obligations for the fourth quarter 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:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Balance, beginning of year $ 22,458 $ 23,294
Liabilities incurred on corporate acquisition
(note 3) 797 -
Liabilities incurred on property acquisitions
(note 5) 1,041 -
Liabilities transferred on disposal (note 5) (3,311) -
Liabilities incurred 2,302 457
Liabilities settled (3,800) (3,929)
Accretion expense 2,623 2,636
----------------------------------------------------------------------------
Balance, end of year $ 22,110 $ 22,458
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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, 2006 74,322,268 $ 1,053,317
Issued through Premium DRIP™ 2,559,950 23,062
Issued on vesting of Unit Awards 196,811 1,719
Issued through Employee Unit Ownership Plan 200,000 1,845
Issued through Employee Bonus Plan 378,104 3,721
----------------------------------------------------------------------------
Balance, December 31, 2007 77,657,133 $ 1,083,664
----------------------------------------------------------------------------
Issued on vesting of 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 (note 5) 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
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Normal Course Issuer Bid

On July 28, 2008 Daylight filed notice with the Toronto Stock Exchange (the "TSX") to make a normal course issuer bid (the "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 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 Bid is completed or terminated at the option of the Trust. The Trust will pay for any trust units acquired under the Bid at the prevailing market price on the TSX at the time of the purchase. The trust units acquired under the Bid will be 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. During the year ended December 31, 2008, Daylight issued no trust units (2007 - 2,113,577) from treasury, related to unitholders electing to receive the 102% of cash distributions option, in lieu of cash distributions totalling $nil (2007 - $19.0 million). Daylight also issued no trust units (2007 - 446,373) from treasury related to unitholders electing to receive the 95% reinvestment price for additional trust units option, in lieu of cash distributions totalling $nil (2007 - $4.1 million) in the same period. No trust units were issued through the optional cash purchase plan.

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 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. During the year ended December 31, 2007, the Trust elected to issue 200,000 trust units ($1.8 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.

Redemption Right

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

b) Net Income (Loss) Per Unit

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



----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Basic 83,468,313 76,700,329
Convertible debentures 10,317,205 -
Restricted and Performance Unit Awards 728,688 -
----------------------------------------------------------------------------
Diluted 94,514,206 76,700,329
----------------------------------------------------------------------------
----------------------------------------------------------------------------


A total of 3,837,941 trust units attributable to convertible debentures and 1,134,390 Restricted and Performance units were excluded from the calculation for the year ended December 31, 2007 as they were not dilutive due to the net loss reported. Diluted net income per unit reflects the add back of interest and accretion expense on convertible debentures. Interest and accretion for the year ended December 31, 2008 was $10.0 million (2007 - $3.4 million).

c) Unit Award Incentive Plan

Daylight has a Unit Award Incentive Plan which allows the Board of Directors to grant up to 5% of the trust units outstanding as Restricted and/or Performance Unit Awards to directors, officers, employees and service providers of Daylight and its affiliates. The Restricted Unit Awards and Performance Unit Awards vest over a three-year period. The number of units issued under the Performance Unit Awards granted is also subject to a performance multiplier and is dependent on the performance of the Trust relative to a peer comparison group of oil and gas trusts. A holder of a Restricted or Performance Unit Award may elect, subject to 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 Unit Award is outstanding.

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



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Restricted Unit Awards Number
----------------------------------------------------------------------------
Balance December 31, 2006 557,533
Issued 855,365
Vested and converted to trust units (163,081)
Forfeited (212,397)
----------------------------------------------------------------------------
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
Weighted average adjustment factor 1.23136
----------------------------------------------------------------------------
Trust unit equivalent 1,313,284
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Performance Total
Performance Unit Awards Number Multiplier Number
----------------------------------------------------------------------------
Balance, December 31, 2006 135,000 1 135,000
Issued 110,000 - 110,000
Vested and converted to trust units (27,500) - (27,500)
Forfeited (47,500) - (47,500)
----------------------------------------------------------------------------
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
Weighted average adjustment factor 1.30131
----------------------------------------------------------------------------
Trust unit equivalent 182,726
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The performance multiplier is calculated on an annual basis for one third of the Performance 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 and October 9, 2008, a performance multiplier of 2 was granted on the units. Daylight has assumed a multiplier of 1 on the performance units for the year ended December 31, 2008, although the final multiplier may range anywhere from 0 to 2.

The fair value of the 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 Unit Awards granted during the year ended December 31, 2008 was $8.02 per Unit Award (2007 - $9.16). During the year ended December 31, 2008, $4.6 million (2007 - $3.6 million) was charged to general and administrative expense.

d) Contributed Surplus



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amount
----------------------------------------------------------------------------
Balance, December 31, 2006 $ 562
Unit-based compensation 3,594
Vested Unit Awards (1,719)
----------------------------------------------------------------------------
Balance, December 31, 2007 $ 2,437
Unit-based compensation 4,610
Vested Unit Awards (4,221)
Excess of trust unit redemption amount over trust unit stated
amount 1,329
----------------------------------------------------------------------------
Balance, December 31, 2008 $ 4,155
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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
----------------------------------------------------------------------------
January 31, 2007 0.15 11,274
February 28, 2007 0.15 11,358
March 30, 2007 0.15 11,482
April 30, 2007 0.15 11,484
May 31, 2007 0.15 11,493
June 29, 2007 0.15 11,498
July 31, 2007 0.15 11,513
August 31, 2007 0.10 7,745
September 28, 2007 0.10 7,748
October 31, 2007 0.10 7,765
November 30, 2007 0.10 7,765
December 31, 2007 0.10 7,766
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
Total distributions since inception $ 3.71 $ 292,929
----------------------------------------------------------------------------
----------------------------------------------------------------------------


11. Supplemental Cash Flow Information

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Changes in non-cash working capital:
Accounts receivable $ 1,809 $ 11,491
Prepaid expenses and deposits (376) 1,330
Accounts payable and accrued liabilities 2,188 5,756
Plan of arrangement costs settled with units - 2,131
Working capital acquired on acquisition (3,836) (8,957)
----------------------------------------------------------------------------
Change in non-cash working capital $ (215) $ 11,751
----------------------------------------------------------------------------
Relating to:
Operating activities $ (861) $ 5,385
Financing activities (646) 3,079
Investing activities 1,292 3,287
----------------------------------------------------------------------------
Change in non-cash working capital $ (215) $ 11,751
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Interest and taxes paid:
Interest $ 20,814 $ 20,469
Taxes $ 1,470 $ 317
----------------------------------------------------------------------------
----------------------------------------------------------------------------


12. Taxes

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Income (loss) before taxes $ 166,000 $ (134,603)
Statutory income tax rate 29.50% 32.12%
----------------------------------------------------------------------------
Expected taxes $ 48,970 $ (43,235)
Add (deduct):
Net income of the Trust (36,480) (38,219)
Write down of goodwill - 44,308
Non-taxable portion of capital gains 439 1,221
Future tax rate adjustments 1,283 (970)
Unit-based compensation 1,757 1,562
Trust tax recognition - (2,915)
Revision to estimated tax pools (10,784) -
Other 296 (88)
----------------------------------------------------------------------------
Total $ 5,481 $ (38,336)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Future Taxes

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Property, plant and equipment $ (62,913) $ (22,029)
Asset retirement obligations 5,527 5,669
Non-capital losses 56,934 8,849
Share issue costs 728 879
Attributed Canadian Royalty Income 10,029 10,645
Unrealized gain on derivative contracts (20,745) -
Unrealized loss on investments 1,426 79
----------------------------------------------------------------------------
Total $ (9,014) $ 4,092
----------------------------------------------------------------------------
----------------------------------------------------------------------------


At December 31, 2008, Daylight Energy and its subsidiaries had $227.7 million of non-capital losses available to carry forward. The non-capital losses expire $0.2 million in 2012, $14.2 million in 2013, $42.9 million in 2025, $30.8 million in 2026, and $139.6 million in 2027.

13. 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.

Due to the global economic downturn, there is uncertainty in capital markets and as a result, Daylight anticipates that it and others in the oil and gas sector will have limited access to capital and an increased cost of capital. Although the business and assets of the Trust have not changed, financial institutions and investors have increased their risk premiums and their overall lending capacity and equity investment has diminished. The Trust's banking syndicate completed its semi-annual borrowing base review on October 31, 2008, and the bank credit facility remains at $350 million. The next review will take place on or before May 31, 2009. 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 expects to finance its 2009 cash capital expenditures program and distributions from internally generated funds from operations.

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 December 31, 2008, Daylight's receivables consisted of $7.5 million (2007 - $8.3 million) from joint venture partners, $33.9 million (2007 - $37.2 million) of receivables from petroleum and natural gas marketers and $4.1 million (2007 - $1.8 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 recent exception of an issue with SemGroup L.P. ("SemCanada") 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 $2.8 million, including an operating deposit for natural gas processing. As of December 31, 2008, Daylight considers collection of this receivable at risk and as such, has 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 facility described in note 6. At December 31, 2008, 77% of Daylight's $71.5 million unrealized gain on derivative contracts was with members of Daylight's banking syndicate. The remaining 23% 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 December 31, 2008 of $1.8 million and had no allowance for doubtful accounts as at December 31, 2007.

As at December 31, 2008 and 2007, Daylight considers its receivables to be fully collectible with receivable aging as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Current (90 days or less) $ 38,820 $ 43,344
Past due (more than 90 days) 6,682 3,967
----------------------------------------------------------------------------
Total $ 45,502 $ 47,311
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 a revolving reserve-based credit facility, as outlined in note 6, that is reviewed at least annually by the lender. 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 December 31, 2008:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Less than 1 - 2 2 - 5
1 Year Years Years
----------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 76,090 $ - $ -
Distributions payable 11,731 - -
Bank debt - principal - 219,853 -
Convertible debentures - principal 3,576 - 128,737
----------------------------------------------------------------------------
$ 91,397 $ 219,853 $ 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 year ended December 31, 2008, Daylight's effective interest rate was 4.5% (2007 - 6.0%). If this rate had been 3.5% for the year ended December 31, 2008 (2007 - 5.0%), with all other variables held constant, net income for the period would have been $3.0 million (2007 - $4.5 million) higher due to lower interest expense for the period of $4.2 million (2007 - $6.4 million). An equal and opposite impact would have occurred to net income and interest expense had interest rates increased for the year ended December 31, 2008 to 5.5% (2007 - 7.0%). The sensitivity to interest rate changes is lower in 2008 as compared to 2007 because of a reduction in outstanding bank debt which averaged $267 million in 2008 compared to $331 million for 2007.

The Trust had no interest rate swap or financial contracts in place as at or during the year ended December 31, 2008.

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 year ended December 31, 2008.

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 12 months in the future and up to 25% of petroleum and natural gas production for the period commencing 12 months in the future and ending 24 months in to the future. These hedging limits can be changed upon approval by the Board of Directors.

As at December 31, 2008, the following derivative contracts were outstanding:



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Type of Hedged
Contract Commodity Volume(3) Hedge Price Hedge Period
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Financial
(Swap) (1) Natural gas 35,000 GJ/d Cdn$7.58/GJ Jan 1/09 to Oct 31/09
Financial
(Swap) (1) Natural gas 10,000 GJ/d Cdn$7.59/GJ Jan 1/09 to Oct 31/09
Financial
(Swap) (1) Natural gas 5,000 GJ/d Cdn$7.63/GJ Jan 1/09 to Oct 31/09
Financial Cdn$110.00 -
(Collar) (2) Crude oil 1,000 bbl/d $206.00/bbl Jan 1/09 to Dec 31/09
Financial Cdn$110.00 -
(Collar) (2) Crude oil 1,000 bbl/d $205.55/bbl Jan 1/09 to Dec 31/09
Financial Cdn$110.00 -
(Collar) (2) Crude oil 1,000 bbl/d $205.00/bbl Jan 1/09 to Dec 31/09
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(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 years ended December 31, 2008 and 2007:

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2008 2007
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Realized gain (loss) on derivative contracts $ (6,514) $ 6,967
Unrealized gain (loss) on derivative contracts 71,535 (7,063)
Unrealized loss on investments held for trading (note 4) (5,543) (3,402)
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Total $ 59,478 $ (3,498)
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The unrealized gain from 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 December 31, 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 $1.8 million higher, due to the increase in the fair value of the derivative contracts asset of $2.6 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. There were no derivative contracts outstanding at December 31, 2007.

Fair Value of Financial Instruments

Financial instruments include 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 have a fair value based on quoted market value of $0.9 million that also represents their carrying value. The equity investment has a fair value based on quoted market value of $1.4 million that also represents its carrying value of $1.4 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 $59.36 per barrel to $71.67 per barrel for oil and $5.94 per GJ to $6.47 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 December 31, 2008, with a face value of $132.3 million (2007 - $128.6 million), had a fair value based on quoted market value of $123.2 million (2007 - $124.7 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 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.



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2008 2007
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Bank debt $ 219,853 $ 257,342
Working capital deficiency(1) 38,742 32,088
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Net debt $ 258,595 $ 289,430
Convertible debentures $ 118,734 $ 119,792
Unitholders' equity $ 588,932 $ 440,152
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(1) Excludes unrealized gain on derivative contracts, current portion of
convertible debentures 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, future income tax liability and the current portion of convertible debentures, 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 December 31, 2008, 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 compared to 1.6 to 1 as at December 31, 2007. This decrease is a result of the increase in funds from operations due to higher production levels and product prices, and lower net debt.



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2008 2007
----------------------------------------------------------------------------
Bank debt $ 219,853 $ 257,342
Working capital deficiency(1) 38,742 32,088
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Net debt $ 258,595 $ 289,430
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Cash provided by operating activities $ 47,416 $ 44,824
Change in non-cash operating working capital 1,329 1,819
Asset retirement expenditures 1,330 836
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Funds from operations - current quarter $ 50,075 $ 47,479
Funds from operations - prior quarter 78,646 40,343
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$ 128,721 $ 87,822
x 2 x 2
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Annualized funds from operations $ 257,442 $ 175,644
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Ratio of net debt to annualized funds from
operations 1.0 1.6
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(1) Excludes unrealized gain on derivative contracts, current portion of
convertible debentures 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 year ended December 31, 2008, the payout ratio was 44%, compared to 72% for the year ended December 31, 2007 due to the higher funds from operations generated in 2008.



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2008 2007
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Distributions declared $ 117,017 $ 118,891

Cash provided by operating activities $ 259,759 $ 167,385
Change in non-cash operating working capital 861 (5,385)
Asset retirement expenditures 3,800 3,929
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Funds from operations $ 264,420 $ 165,929
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Payout ratio 44% 72%
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The Trust's unit capital is not subject to external restrictions; however, the bank debt facility is 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. There were no changes in the Trust's approach to capital management during the three month period ended December 31, 2008.

14. Related Party Transactions

Daylight and 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 year ended December 31, 2008, Daylight charged MOX $1.5 million (2007 - $1.4 million) for administrative services and premises costs with a payable balance, which included joint venture and commodity marketing amounts, of approximately $2.8 million due to MOX as at December 31, 2008 (2007 - $4.7 million). At December 31, 2008, MOX held an advance capital deposit of $3.9 million (2007 - $nil) 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. See note 5.

15. Commitments

The following is a summary of Daylight's contractual obligations and commitments as at December 31, 2008:



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2009 2010 2011 2012 2013 Thereafter
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Operating leases $ 6,645 $ 3,755 $ 2,456 $ 1,526 $ 1,525 $ 4,956
Natural gas
transportation 2,484 2,236 1,656 422 - -
Convertible
debentures
(face value) 3,576 - - 53,737 75,000 -
Bank debt - 219,853 - - - -
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$ 12,705 $ 225,844 $ 4,112 $ 55,685 $ 76,525 $ 4,956
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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 13).



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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