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Peyto Energy Trust Announces Fourth Quarter and 2007 Year End Report to Unitholders

Posted on: Wednesday, 5 March 2008, 21:00 CST

CALGARY, March 5 /PRNewswire-FirstCall/ -- Peyto Energy Trust ("Peyto" or the "Trust") is a leader in the exploration and development of natural gas in western Canada. By design, the Trust's core areas are located in Alberta's premier gas exploration area, the Deep Basin. Peyto is known for high quality, sweet natural gas assets, low cost structure and an ability to profitably find and develop new natural gas reserves, year after year. This performance is evidenced by an annual and five year average return on equity of 41% and 46%, respectively. Peyto is proud to present the operating and financial results for the fourth quarter and 2007 fiscal year.

The following summarizes certain attributes of the Trust at year end. - Long reserve life - Proved Producing 13 years, Total Proved 16 years, Proved plus Probable 21 years - High revenue natural gas - $47.48/boe before hedging, $53.56/boe after hedging - Low operating costs (including transportation) - $3.14/boe - High operating netback - $41.06/boe - Low base general and administrative costs - $0.94/boe - High operatorship - over 95% of production - Low cash distribution ratio - 64% of fourth quarter 2007 funds from operations - Low debt to funds from operations ratio - 1.65 times (net debt, before provision for future performance based compensation, divided by annualized fourth quarter 2007 funds from operations) - Distribution growth - distributions have been increased 5 times, never decreased, and are now 87% higher than when the Trust was formed four and a half years ago - Since inception, Peyto has raised a total of $406 million issuing units from treasury, accumulated earnings of $740 million, and distributed $622 million to unitholders. - Transparent capital structure - no convertible debentures, no exchangeable shares, no stock options, no warrants

The year 2007 was highlighted by improved efficiency and the successful execution of a disciplined capital investment strategy. The following summarizes certain performance highlights for the year.

- Value creation - invested $122 million in capital and created $569 million of Proved Producing and $465 million of Proved plus Probable undiscounted reserve value, translating into Net Present Value ("NPV") recycle ratios (as defined herein) of 4.7 and 3.8, respectively - Net Asset value - the debt adjusted, NPV per unit of the Trust's Total Proved and Proved plus Probable oil and gas assets, discounted at 5%, was $23.80/unit and $30.77/unit, respectively in 2007 - Reserve growth per unit - Proved Producing reserves, grew 2% year over year - Reserve life - Proved Producing reserve life grew from 12 years in 2006 to 13 years in 2007, while Proved plus Probable reserve life grew from 20 to 21 years - Distributions per unit - increased by 1% from $1.66 in 2006 to $1.68 in 2007. - Distribution life growth - increased from 23 years in 2006 to 24 years in 2007 (based on undiscounted Proved Producing NPV and as defined herein) - Annual production - decreased 10% from 22,873 boe/d in 2006 to 20,669 boe/d in 2007 - Annual production per unit(1) - decreased 10% year over year and 12% per debt adjusted unit - Annual funds from operations per unit(1) - decreased 9% year over year and 11% per debt adjusted unit - Cost of new reserves (Finding, Development & Acquisition "FD&A") - decreased 28% to $12.68/boe for Proved Producing, 52% to $9.42/boe for Total Proved and 46% to $9.38/boe for Proved Plus Probable (including change in Future Development Capital "FDC") - Recycle ratio - Proved Producing 2.8, Total Proved 3.7, Proved Plus Probable 3.7 - Reserve replacement - Proved Producing 125%, Total Proved 175%, Proved Plus Probable 117% Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl) (1) Per unit results are adjusted for changes in net debt (including future performance based compensation) and equity. Net debt is converted to equity using the Dec 31 unit price of $16.90 for 2007 and $17.70 for 2006. ------------------------------------------------------------------------- 3 Months Ended 12 Months Ended Dec. 31 % Dec. 31 % 2007 2006 Change 2007 2006 Change ------------------------------------------------------------------------- Operations Production Natural gas (mcf/d) 104,749 112,296 (7)% 102,418 112,751 (9)% Oil & NGLs (bbl/d) 3,675 3,834 (4)% 3,599 4,081 (12)% Barrels of oil equiv- alent (boe/d at 6:1) 21,134 22,550 (6)% 20,669 22,873 (10)% Product prices Natural gas ($/mcf) 7.67 8.84 (13)% 8.42 8.46 - Oil & NGLs ($/bbl) 75.23 54.89 37% 67.88 61.00 11% Operating expenses ($/boe) 2.25 2.69 (16)% 2.57 2.16 19% Transportation ($/boe) 0.54 0.52 4% 0.57 0.58 (2)% Field netback ($/boe) 39.54 40.85 (3)% 41.06 39.25 5% General & administrative expenses ($/boe) 0.87 0.85 2% 0.94 0.48 96% Interest expense ($/boe) 3.19 2.72 17% 3.05 2.16 41% Financial ($000, except per unit) Revenue 99,387 110,696 (10)% 404,033 439,008 (8)% Royalties (net of ARTC) 17,080 19,271 (11)% 70,621 88,446 (20)% Funds from operations 68,976 77,360 (11)% 279,624 305,845 (9)% Funds from operations per unit 0.65 0.74 (12)% 2.65 2.93 (10)% Total distributions 44,399 44,206 - 177,548 173,755 2% Total distributions per unit 0.42 0.42 - 1.68 1.66 1% Payout ratio 64 57 12% 63 57 11% Cash distributions (net of DRIP) 44,399 44,206 - 177,548 158,204 12% Payout ratio 64 57 12% 63 52 21% Earnings 73,289 47,012 56% 208,884 195,228 7% Earnings per diluted unit 0.69 0.44 57% 1.98 1.86 6% Capital expenditures 35,546 28,413 25% 121,571 311,926 (61)% Weighted average trust units outstand- ing 105,712,364 105,251,394 - 105,712,364 104,554,322 1% As at December 31 Net debt (before future compensation expense) 457,427 433,624 5% Unitholders' equity 528,992 489,712 8% Total assets 1,192,232 1,136,700 5% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net Earnings 73,289 47,012 208,884 195,228 Items not requiring cash: Provision for (recovery of) performance based compensation (371) (10,340) 269 (10,149) Future income tax expense (30,226) 7,981 (12,453) 27,357 Depletion, depreciation and accretion 19,151 20,397 75,791 81,098 Non-recurring items: Performance based compensation 7,133 12,310 7,133 12,310 ------------------------------------------------------------------------- Funds from operations(1) 68,976 77,360 279,624 305,845 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Funds from operations - Management uses funds from operations to analyze the operating performance of its energy assets. In order to facilitate comparative analysis, funds from operations is defined throughout this report as earnings before performance based compensation, non-cash and non-recurring expenses. Peyto believes that funds from operations is an important parameter to measure the value of an asset when combined with reserve life. Funds from operations is not a measure recognized by Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. Therefore, funds from operations, as defined by Peyto, may not be comparable to similar measures presented by other issuers, and investors are cautioned that funds from operations should not be construed as an alternative to net earnings, cash flow from operating activities or other measures of financial performance calculated in accordance with GAAP. Funds from operations cannot be assured and future distributions may vary.

For some, Peyto's 2007 may seem rather unremarkable. Lower capital expenditures and reduced activity resulted in 39 net wells drilled in 2007, compared to 66 net wells the year before. Even though this reduced activity resulted in 125% of the annual produced reserves being replaced, total average production rate declined from 22,873 boe/d to 20,669 boe/d, from last year to this year. In addition, natural gas prices (AECO Monthly) were down 5% from $6.62/GJ in 2006 to $6.26/GJ in 2007. As was expected, however, the NPV of the reserve assets was relatively unchanged from the previous year.

What makes 2007 a remarkable year is the significant improvement in Peyto's operating efficiency. Finding, Development and Acquisition ("FD&A") costs for Proved Producing reserves dropped 28% to $12.68/boe while FD&A costs for Total Proved reserves were down 52% to $9.42/boe. This improved efficiency was not only evident in lower FD&A costs but also in increased operating margins, and it ultimately translates into increased returns for unitholders. It is Peyto's relentless focus on generating high rates of return that ensures operating efficiencies are retained when business conditions could cause them to be lost. The Peyto strategy has always been to invest capital into internally generated ideas for the exploration and development of new Deep Basin natural gas reserves. These investments have, throughout Peyto's nine year history, generated substantial returns for shareholders and unitholders alike. The following table highlights those returns.

------------------------------------------------------------------------- 2003 2004 2005 2006 2007 ------------------------------------------------------------------------- Return on Equity - ROE 51% 46% 51% 43% 41% Return on Capital Employed - ROCE 18% 23% 29% 23% 20% Operating Margin(1) 73% 72% 71% 75% 77% ------------------------------------------------------------------------- (1) Return on Equity is earnings for the period divided by average unitholders equity (2) Return on Capital Employed is earnings before interest and tax for the period divided by total assets less current liabilities (3) Operating Margin is operating netback divided by sales price in $/boe

The returns that were generated in 2007 were no different. They were partly due to newly found and developed reserves and partly due to increasing the value of the existing assets. For instance, a new pipeline contract for transportation of liquids has reduced the trucking costs and increased Peyto's product prices for the condensate and NGLs from the Oldman gas plant. This arrangement has increased the value of the existing reserves. In addition, Peyto's 100% owned and operated gas plants continue to generate third party midstream revenues that improve the return on those specific capital investments. Expertise among the Peyto team extends beyond the exploration and development of new reserves, to the optimization and value realization of the existing assets. In 2007, Peyto invested $122 million of capital, just 43% of total funds from operations, yet the value of the producing asset base (Proved Producing, Before Tax NPV, discounted at 5% "BT NPV5"per unit) grew by 2%.

Peyto's strategy of reduced activity and improved capital efficiency began in 2006 and was successfully executed throughout 2007. Retention of financial flexibility and sustainability of distributions were primary goals. Year end net debt of $457 million leaves close to $70 million of available bank lines. Monthly distributions of $0.14/unit have been maintained since their increase in February 2006. Also during that time period, base production decline rates have lessened, requiring less capital to offset them. This trend is expected to continue into the future, allowing more capital to effect growth in total production rates.

Since Peyto's inception, a total of $1.4 billion in capital has been invested to build an asset that is worth $3.7 billion ($3.3 billion after adjusting for debt, Proved plus Probable, BT NPV5). In doing so, Peyto utilized $406 million of unitholders equity but has already returned to unitholders that amount plus $216 million more.

------------------------------------------------------------------------- Funding Sources for Capital Since Inception (from 1998 to 2007) ($000) % of Total ------------------------------------------------------------------------- Cash flow from projects found and developed by Peyto 1,164,151 83% Net Equity (Equity issued of $406.3 million less Accumulated Distributions of $622.5 million) (216,165) (16)% Net Debt (year end 2007 excluding future performance-based compensation) 457,427 33% ------------------------------------------------------------------------- Total Capital Expenditures 1,405,413 100% ------------------------------------------------------------------------- -------------------------------------------------------------------------

As illustrated in the above table, cash flow generated from investments has played a dominant role, while net equity has played a relatively minor role in funding the capital expenditures since Peyto's inception nine years ago.

Capital Expenditures

Net capital expenditures for 2007 totaled $122 million, a decrease of 61% from 2006, continuing a strategy of reduced activity in response to service cost inflation. Substantially all of the capital was directed to well-related activity with 80% associated with drilling and completions and 18% associated with wellsite equipment and pipelines. One significant infrastructure investment during the year was a 15 km pipeline which connected gas reserves in the Chime area to Peyto's Kakwa gas plant resulting in reduced processing costs. Minor amounts were spent on land and seismic, reflective of an increased concentration of development activity. None of the 2007 capital was spent in the higher priced acquisition market. The following table summarizes capital expenditures for the year.

------------------------------------------------------------------------- 2007 2006 Since Inception Capital % of % of % of Expenditures ($000) Total ($000) Total ($000) Total ------------------------------------------------------------------------- Land 984 - 13,253 4% 41,980 3% Seismic 1,799 2% 8,944 3% 35,055 3% Drilling & Completion - Exploratory & Development 96,908 80% 227,585 73% 1,026,435 73% Production Equipment, Facilities & Pipelines 21,834 18% 61,961 20% 270,029 19% Acquisitions & Dispositions - - - - 30,856 2% Office Equipment 46 - 183 - 1,086 - ------------------------------------------------------------------------- Total 121,571 100% 311,926 100% 1,405,441 100% ------------------------------------------------------------------------- -------------------------------------------------------------------------

During the year, 48 gross (39 net) gas wells were drilled, 76 gross (63 net) zones were completed and 67 gross (54 net) zones were brought on production. Reduced service costs and increased efficiency of operations is evidenced by comparing the total capital per net well, year by year. The total capital per net well in 2007 of $3.1 million represents a reduction of 34% from $4.7 million per net well in 2006. As in past years, the average depth of Peyto's new wells increased another 35m to 2,641m, as drilling prospects continue to evolve to include deeper Cretaceous zones. Most wells have at least two and sometimes three prospective gas bearing zones for development.

Reserves

During 2007, the Trust was again successful in adding high quality, long life reserves with the drill bit. The following table illustrates the change in reserve volumes and net present value of future cash flow, discounted at 5%, before income tax using forecast pricing.

------------------------------------------------------------------------- As at December 31 % Change Per Unit (NPV(5) % debt 2007 2006 Change adjusted) ------------------------------------------------------------------------- Reserves BOE 6:1 (mstb) Proved Producing 99,226 97,181 2% 2% Total Proved 124,328 118,681 5% 5% Proved + Probable Additional 164,759 163,464 1% 1% Net Present Value ($million) Discounted at 5% Proved Producing 2,515 2,462 2% 2% Total Proved 2,966 2,869 3% 3% Proved + Probable Additional 3,703 3,679 1% 0% ------------------------------------------------------------------------- Note: Based on the Paddock Lindstrom & Associates report effective December 31, 2007. The Paddock Lindstrom and Associates Ltd. price forecast is available at http://www.padlin.com/. For more information on Peyto's reserves, refer to the Press Release dated February 13, 2008 announcing the 2007 Year End Reserve Report which is available on the website at http://www.peyto.com/ . The complete statement of reserves data and required reporting in compliance with NI 51-101 will be included in Peyto's Annual Information Form to be released in March 2008. Value Creation

Peyto's primary objective is to build upon the per unit value of its energy resources so that income delivered to unitholders can be sustained, and increased over time. Each year's investment success is quantified by measuring the value created during the year compared to the capital invested. This investment success is then used as justification for re-investment of unitholders' capital. At Peyto's request and for the benefit of unitholders, the independent engineers have run last year's Net Present Value (NPV), against this year's price forecast to eliminate the change in value attributable to commodity prices. This approach isolates the value created by the Peyto team from the value created by the change in commodity prices. In 2007, $569 million of Proved Producing and $465 million of Proved plus Probable undiscounted reserve value was created from $122 million in capital. Relative to the enterprise value, this amount of net value creation represents a significant growth rate. The following table, using forecast prices and costs as at December 31, 2007, breaks out the value created by Peyto's capital investments and reconciles the changes in debt adjusted NPV of future net revenues.

------------------------------------------------------------------------- Proven + Proven Total Probable Producing Proven Additional ($millions) Discounted at 0% 5% 0% 5% 0% 5% ------------------------------------------------------------------------- Net Present Value at Beginning of Year ($millions) $4,066 $2,029 $4,961 $2,435 $7,059 $3,245 Dec. 31, 2006 Evaluation using PLA Jan. 1, 2007 price forecast, debt adjusted ------------------------------------------------------------------------- Per Unit Outstanding at Dec. 31, 2006 ($/unit) $38.53 $19.22 $47.01 $23.08 $66.88 $30.75 ------------------------------------------------------------------------- 2007 sales (revenue less royalties and operating costs) ($310) ($310) ($310) ($310) ($310) ($310) Net Change due to price forecasts (using PLA Jan 1, 2008 price forecast) ($82) ($50) ($94) ($64) ($92) ($86) Net Change due to discoveries (additions, extensions, transfers, revisions) $569 $395 $675 $454 $465 $403 ----------------------------------------------- ----------------------------------------------- Net Present Value at End of Year ($millions) $4,243 $2,064 $5,232 $2,516 $7,122 $3,253 Dec. 31, 2007 Evaluation using PLA Jan. 1, 2008 price forecast, debt adjusted ------------------------------------------------------------------------- Per Unit Outstanding at Dec. 31, 2007 ($/unit) $40.14 $19.53 $49.49 $23.80 $67.37 $30.77 ------------------------------------------------------------------------- Performance Measures

There are a number of performance measures that are used in the oil and gas industry in an attempt to evaluate how profitably capital has been invested. Peyto believes that the value analysis presented above is the best determination of profitability as it compares the value of what was created relative to what was invested, or what is termed, the NPV recycle ratio. This is because the NPV of an oil and gas asset takes into consideration the reserves, the production forecast, the future royalties and operating costs, future capital and the current commodity price outlook. In 2007, the Proved plus Probable NPV recycle ratio remained at 3.8 times, as in 2006. This means for each dollar invested, the Peyto team was able to create 3.8 new dollars of Proved plus Probable reserve value.

------------------------------------------------------------------------- Dec 31, Dec 31, 2007 Value Creation 2007 2006 % Change ------------------------------------------------------------------------- NPV Recycle Ratio Proved Producing 4.7 2.9 62% Total Proved 5.5 2.9 90% Proved + Probable 3.8 3.8 0% ------------------------------------------------------------------------- - NPV (net present value) recycle ratio is calculated by dividing the undiscounted NPV of reserves added in the year by the total capital cost for the period (eg. Proved Producing ($569/$122)= 4.7).

As is expected with the producing profile of tight gas reservoirs, the reserve life increased year over year in all of the reserve categories. The Proved plus Probable reserve life grew from 20 years at the end of 2006 to 21 years at the end of 2007. Along with this reserve life growth was a growth in the assets that fund distributions. The distribution life grew from 23 years to 24 years for the Proved Producing category, increasing the sustainability of Peyto's distributions. Also presented are other measures for comparative purposes, such as FD&A, recycle ratio and reserve replacement ratio, but it is cautioned that they are incomplete and on their own do not measure investment success.

------------------------------------------------------------------------- Proved Total Proved + Performance Ratios Producing Proved Probable ------------------------------------------------------------------------- Reserve life index (years) Q4 2007 average production - 21,134 boe/d 13 16 21 Finding, development and acquisition costs ($/boe) 2007 (Incl. change in future development capital, "FDC") $12.68 $9.42 $9.38 2006 (Incl. change in FDC) $17.67 $19.66 $17.39 3 year average (2005-2007 incl. change in FDC) $14.90 $14.80 $13.98 Reserve replacement ratio 1.3 1.7 1.2 Recycle ratio (Incl. change in FDC) 2.8 3.7 3.7 Distribution life (years) 24 29 40 ------------------------------------------------------------------------- - FD&A (finding, development and acquisition) costs are used as a measure of capital efficiency and are calculated by dividing the capital costs for the period, including the change in undiscounted future development capital ("FDC"), by the change in the reserves, incorporating revisions and production, for the same period (eg. Total Proved ($121,600+$2,648)/(124,328-118,681+7,544) =$9.42). - The reserve life index is calculated by dividing the reserves (in boes) in each category by the annualized average production rate in boe/year (eg. Proved Producing 99,226/(21.134(x)365)=13). Peyto believes that the most accurate way to evaluate the current reserve life is by dividing the proved developed producing reserves by the actual fourth quarter average production. For comparative purposes, Peyto believes the proved developed producing reserve life provides the best measure of sustainability. - The distribution life index is calculated by dividing the debt adjusted undiscounted NPV (in millions$) by the Q4 annualized distribution (in million$/year) (eg. Proved Producing ($4,694-$450.4)/($44.4(x)4) = 24 years). - Recycle ratio is calculated by dividing the field net back per boe, before hedging, by the FD&A costs for the period (eg. Proved Producing ($41.06/boe-$6.08/boe)/$12.68/boe = 2.8). In Peyto's opinion, it can be a very good measure of investment performance as long as the replacement barrel is of equivalent quality as the produced barrel. Because the recycle ratio is comparing the netback from existing reserves to the cost of finding new reserves it may not accurately indicate investment success. - The reserve replacement ratio is determined by dividing the yearly change in reserves before production by the actual annual production for the year (eg. Total Proved ((124,291-118,681+7,544)/7,544) =1.7). Quarterly Review

Daily production for the three months ending December 31, 2007 averaged 105 mmcf of natural gas and 3,675 barrels of oil and natural gas liquids. Reductions in production and commodity prices decreased funds from operations from $77.4 million in Q4 2006 to $69.0 million in Q4 2007. Peyto's commodity prices, net of hedging, decreased by 13% to average $7.67 per mcf of natural gas, and increased by 37% to average $75.23 per barrel of oil and natural gas liquids. The high heating value of Peyto's gas resulted in a 17% premium when converted from gigajoules at the AECO price hub to mcf.

Operating costs averaged $2.25/boe in the fourth quarter of 2007 compared to $2.69/boe for the fourth quarter of 2006. Operating costs have continued to fall throughout 2007 as a result of reductions in chemical consumption, electrical costs, and third party processing charges. Year after year, Peyto continues to lead the industry with its low operating costs.

Capital expenditures for the quarter totaled $35.5 million, an increase from the previous year, reflecting increased confidence in the reduced cost structure and improved returns. Consistent with past strategy, only the premium opportunities attracted Peyto's capital dollars. As usual, well-related activity made up 98% of this capital, with drilling and completion costs accounting for $29.7 million while facilities and tie-ins accounted for $5.3 million. Peyto spent $0.5 million on land and seismic in the quarter.

Activity Update

To date in 2008, Peyto has drilled 11 gross gas wells (8.9 net) and completed 7 gross zones (5.9 net). Drilling activity has been split between the winter access areas in Kakwa and the year round access areas in Sundance.

Natural gas prices have recently shown significant strength. Summer prices have risen from $6.80/GJ to over $8.00/GJ. Next winter prices have risen from $7.50/GJ to over $8.50/GJ. If realized, these prices will provide Peyto with greater funds to invest in drilling ideas. Consistent with Peyto's marketing strategy, the Trust has already forward sold 65,000 GJ for the summer at $7.01/GJ or $8.20/mcf (based on historical heat content) and 45,000 GJ for next winter at $7.72/GJ or $9.04/mcf. These forward sales provide security for distributions and capital programs while at the same time capturing prices that are the second highest ever seen for those periods.

Marketing

By design, Peyto's marketing strategy smoothes out short term fluctuations in the price of natural gas through future sales. This is done by selling approximately 30% of the natural gas, net of royalties, on the daily and monthly spot markets while the other 70% is hedged. These future sales are meant to be methodical and consistent and to avoid speculation. In general, this approach will show hedging losses when short term prices climb and hedging gains when short term prices fall. Over the long run Peyto expects to break even on forward sales. Cumulative gains since Peyto began its hedging strategy are $52 million. This hedging approach creates a forward average price typically made up of fifteen to twenty transactions placed over a 12 month period. Peyto generally sells its contracts in either the 7 month summer or the 5 month winter season.

Peyto's natural gas price before hedging averaged $6.57/mcf during the fourth quarter of 2007, a decrease of 7% from $7.08/mcf reported for the equivalent period in 2006. Oil and natural gas liquids prices averaged $76.67/bbl up 49% from $51.60/bbl a year earlier. Hedging activity for the fourth quarter of 2007 increased Peyto's achieved price by $5.19/boe. The fourth quarter hedging gain was $10.1 million, for an annual total gain of $45.8 million, as compared to the 2006 hedging gain of $37.8 million. The following table shows commodity prices and revenue before and after hedging.

------------------------------------------------------------------------- Commodity Prices Three Months ended Twelve Months ended Dec. 31 Dec. 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Natural gas ($/mcf) 6.57 7.08 7.24 7.50 Hedging - gas ($/mcf) 1.10 1.76 1.18 0.96 ------------------------------------------------------------------------- Natural gas - after hedging ($/mcf) 7.67 8.84 8.42 8.46 ------------------------------------------------------------------------- Oil and natural gas liquids($/bbl) 76.67 51.60 66.68 62.11 Hedging - oil ($/bbl) (1.44) 3.29 1.20 (1.11) ------------------------------------------------------------------------- Oil and natural gas liquids - after hedging ($/bbl) 75.23 54.89 67.88 61.00 ------------------------------------------------------------------------- Total Hedging ($/boe) 5.19 9.30 6.08 4.53 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue Three Months ended Twelve Months ended Dec. 31 Dec. 31 ($000) 2007 2006 2007 2006 ------------------------------------------------------------------------- Natural gas 63,374 73,192 270,602 308,692 Oil and natural gas liquids 25,923 18,200 87,594 92,523 Hedging gain (loss) 10,090 19,304 45,837 37,793 ------------------------------------------------------------------------- Total revenue 99,387 110,696 404,033 439,008 -------------------------------------------------------------------------

As at December 31, 2007, Peyto had committed to the forward sale of 45,500 barrels of crude oil at an average price of $78.85 per barrel and 12.5 million gigajoules (GJ) of natural gas at an average price of $7.34 per GJ. Based on the historical heating value of Peyto's natural gas, the price per mcf of the forward sale will be $8.59, which is 2% higher than the price Peyto realized in 2007.

Performance Based Compensation

When Peyto converted to a trust in July, 2003, a performance based compensation plan was adopted. Performance based compensation was established to compensate employees for per unit market and reserve value growth. The market based component replaced the stock option plan. It was designed to be less costly, more transparent, more tax efficient for the unitholders and to provide better alignment with unitholders' objectives. The reserve value component was meant to compensate employees based on per unit growth of the Proved Producing reserve value, more conservatively discounted at 8%, independent of increases due to commodity prices. A more detailed discussion of Peyto's market and reserve value based compensation plan is available on the website.

Total performance based compensation paid in 2007 was $7.1 million (market component - $0 million; reserve value component - $7.1 million). As a testament to the effectiveness of the reserve value component, greater compensation was awarded in 2007 than in 2006, despite a 61% reduction in capital spending. This is due to the much improved efficiency and increased value creation on a per unit basis. After the performance based compensation payment, private placements are offered to Peyto employees and consultants. Unlike typical option plans, the employees of Peyto have voluntarily chosen to re-invest 96% of the after tax proceeds into Peyto Trust units at an undiscounted market price. At Peyto, there is a high degree of ownership at all levels; Board, Executive and Employee. It is through ownership that the Peyto's team is best aligned with unitholders' interests.

Sustainable Distributions

As a growth oriented, sustainable trust, Peyto's primary objective is to grow the resources from which sustainable distributions for unitholders are generated. As of December 31, 2007, cumulative distributions to unitholders totaled $622.5 million or $6.195 per unit (adjusted for 2 for 1 split). Since converting to a trust, 81% of the unit price at the time of conversion has been returned while increasing the reserves per unit by 53% and the production per unit by 23%.

Outlook

Peyto is now into its tenth year of operations with an inventory of opportunities greater than ever before. The strategy for value creation remains the same today as it did the day Peyto started. It is to generate tight gas drilling ideas that will spawn predictable and repeatable results; execute on these ideas to find and develop new reserves; operate and process the produced volumes at industry leading operating margins; optimize that operation over time to maximize value; and, ultimately, to measure investment success on the rate of return on capital deployed, and the resultant impact on per unit value creation.

Commodity prices have set the stage for an exciting year in 2008. Cost reductions have been achieved and profitability has been increased. The challenge now becomes one of increasing the scale of the business again, while keeping that profitability intact. Peyto has been successful in doing just that in the past and is confident it can be done again in the future. If one understands the value of one's own capital and is interested in understanding the value of Peyto, please visit the Peyto website at http://www.peyto.com/ where a wealth of information can be found, designed to educate and inform investors who understand value and real returns.

The current Vice-President of Exploration, Ken Veres, will be retiring effective March 31, 2008. On behalf of the directors, staff and unitholders, Peyto would like to thank Mr. Veres for his contribution over the last three years and wish him all the best in his retirement. At this time, there are no plans to replace this position as Peyto has a wealth of existing geotechnical experience to facilitate the ongoing success of our exploration strategies.

National Instrument 51-101 Cautionary Statements

The Canadian Securities Administrators have implemented standards of disclosure for reporting issuers engaged in upstream oil and gas activities effective December 31, 2003. The disclosure standards referred to as National Instrument ("NI") 51-101 establish a regime of continuous disclosure for oil and gas companies and include specific reporting requirements.

- Peyto's year-end reserve report summarized herein is compliant with NI 51-101. Under NI 51-101's revised reserve definitions and evaluation standards, proved plus probable reserves represent a "best estimate" and hence for years prior to 2003, are compared to "established" reserves which were comprised of proved plus 50 percent of probable reserves. - The term "boes" may be misleading particularly if used in isolation, a boe conversion ratio of 6 mcf : 1 barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead - It should not be assumed that the discounted net present values represent the fair market value of the reserves. - Due to the effects of aggregation, the estimate of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties. - The aggregate of the exploration and development costs incurred in the most recent financial year, and the change during that year in estimated future development costs, generally will not reflect total finding and development costs related to reserve additions for that year. Conference Call and Webcast

A conference call will be held with the senior management of Peyto to answer questions with respect to the 2007 fourth quarter and full year financial results on Thursday, March 6th, 2008, at 9:00 a.m. Mountain Standard Time (MST), or 11:00 a.m. Eastern Standard Time (EST). To participate, please call 1-416-644-3424 (Toronto area) or 1-800-588-4942 for all other participants. The conference call will also be available on replay by calling 1-416-640-1917 (Toronto area) or 1-877-289-8525 for all other parties, using passcode 21264765 followed by the pound key (#). The replay will be available at 11:00 a.m. MST, 1:00 p.m. EST Thursday, March 6th, 2008 until midnight EST on Thursday, March 13th, 2008. The conference call can also be accessed through the internet at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2188340. After this time the conference call will be archived on the Peyto Energy Trust website at http://www.peyto.com/.

Annual General Meeting

The Trust's Annual General Meeting of Unitholders is scheduled for 2:30 p.m. on Tuesday, May 13, 2008 at the Telus Convention Centre, Mcleod Hall B/C, 120 - 9th Avenue SE, Calgary, Alberta.

Darren Gee President and Chief Executive Officer March 5, 2008

Certain information set forth in this document and Management's Discussion and Analysis, including management's assessment of Peyto's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond these parties' control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Peyto's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefitst Peyto will derive therefrom. Peyto disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The Toronto Stock Exchange has neither approved nor disapproved the information contained herein. Management's discussion and analysis

This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the audited consolidated financial statements of Peyto Energy Trust ("Peyto") for the years ended December 31, 2007 and 2006. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

The Trust was created by way of a Plan of Arrangement effective July 1, 2003 which reorganized Peyto Exploration & Development Corp. ("PEDC") from a corporate entity into a trust. Accordingly, the consolidated financial statements were reported on a continuity of interests basis. This discussion provides management's analysis of Peyto's historical financial and operating results and provides estimates of Peyto's future financial and operating performance based on information currently available. Actual results will vary from estimates and the variances may be significant. Readers should be aware that historical results are not necessarily indicative of future performance. This MD&A was prepared using information that is current as of March 4, 2008. Additional information about Peyto, including the most recently filed annual information form is available at http://www.sedar.com/.

On January 1, 2008, Peyto completed an internal reorganization. As a result of this reorganization, all of the oil and gas assets of Peyto are now held in the Peyto Energy Limited Partnership. Peyto Energy Administration Corp. is the administrator of Peyto and Peyto Operating Trust, and PEDC is the general partner of the Partnership. Certain subsidiaries of Peyto were amalgamated pursuant to the internal reorganization.

Certain information set forth in this Management's Discussion and Analysis, including management's assessment of the Trust's future plans and operations, contains forward-looking statements. By their nature, forward- looking statements are subject to numerous risks and uncertainties, some of which are beyond these parties' control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Peyto's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Peyto will derive there from. Peyto disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Management uses funds from operations to analyze the operating performance of its energy assets. In order to facilitate comparative analysis, funds from operations is defined throughout this report as earnings before performance based compensation, non cash and non recurring expenses. Peyto believes that funds from operations is an important parameter to measure the value of an asset when combined with reserve life. Funds from operations is not a measure recognized by Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. Therefore, funds from operations, as defined by Peyto, may not be comparable to similar measures presented by other issuers, and investors are cautioned that funds from operations should not be construed as an alternative to net earnings, cash flow from operating activities or other measures of financial performance calculated in accordance with GAAP. Funds from operations cannot be assured and future distributions may vary.

Peyto's foreign ownership level currently stands at approximately 34 percent, well below the level that would jeopardize Peyto's status as a mutual fund trust under current or proposed legislation.

All references are to Canadian dollars unless otherwise indicated. Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl).

Alberta's New Royalty Framework

On October 25, 2007 the Alberta Government released a new Royalty Framework pertaining to royalties on oil and gas resources including oil sands, conventional oil and gas, and coalbed methane. This new framework was scheduled to take effect on January 1, 2009 and was based on the Alberta government's response to the recommendations put forth by the Alberta Royalty Review Panel.

On February 4, 2008, the Alberta Premier, Ed Stelmach, dissolved the provincial legislature and called for a provincial election for March 3, 2008. As the detailed legislation containing the new royalty framework was not passed, the succeeding government is now responsible for implementing any changes to the existing royalty scheme. Until that time, Peyto continues to operate under the existing Alberta royalty guidelines. Also in the interim, Alberta Energy continues to evaluate the "unintended consequences" of the proposed new framework and may provide future recommendations for modification. Should the succeeding government implement the royalty framework that was announced in October 2007, the impact to Peyto's reserves and their NPV is not expected to be material but there may be a minor negative impact on cashflow.

Federal Government's Trust Tax Legislation

On June 12, 2007, Bill C-52 (the "SIFT Rules") enacted the October 31, 2006 proposal to impose a new tax on distributions from flow-through entities, including publicly traded income trusts. Under the SIFT Rules, existing income trusts will be subject to the new measures commencing in their 2011 taxation year, following a four-year grace period. In simplified terms, under the proposed tax plan, income distributions will first be taxed at the trust level at a special rate estimated to be the Federal Corporate rate and applicable provincial corporate rate. Income distributions to individual unitholders will then be treated as dividends from a Canadian corporation and 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 (RRSPs, RRIFs and Pension Plans) will continue to pay no tax on distributions. 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 can take advantage of the dividend tax credit. However, as a result of the tax at the trust level, distributions to tax-deferred accounts and non-residents will be reduced. On the basis of proposed legislation it is anticipated that the tax will be 26.5%. Peyto is currently assessing the proposals and the potential implications to the Trust. Structural alternatives will continue to be reviewed to ensure that Peyto's structure is as efficient as possible.

Climate Change Programs

On March 8, 2007, the Alberta government introduced legislation to reduce greenhouse gas emission intensity. Bill 3 states that facilities emitting more than 100,000 tonnes of greenhouse gases per year must reduce their emissions intensity by 12 per cent over the average emissions levels of 2003, 2004 and 2005; if they are not able to do so, these facilities will be required to pay $15 per tonne for every tonne above the 12 per cent target, beginning on July 1, 2007. At this time, the Trust has determined that there is currently no impact of this legislation on Peyto's existing facilities ownership.

In April 2007, the Federal Government announced a new climate change plan that calls for greenhouse gas emissions to be reduced by 20 per cent below current levels by 2020. Firms may employ the following strategies to achieve the targets. They will be able to:

- make in-house reductions; - take advantage of domestic emissions trading; - purchase offsets; - use the Clean Development Mechanism under the Kyoto Protocol; and, - invest in a technology fund.

The Trust is waiting for additional information so as to fully assess what impact, if any, this new legislation will have on operations.

United States Proposed Changes to Qualifying Dividends

A bill was introduced into United States Congress on March 23, 2007 that could deny qualified dividend income treatment to the distributions made by the Trust to its U.S. unitholders. The bill is in the first step of the legislative process and it is uncertain whether it will eventually be passed into law in its current form. If the bill is passed in its current form, distributions received by U.S. unitholders would no longer qualify for the 15 per cent qualified dividend tax rate. For additional information, please refer to the February 27, 2008 press release "2007 United States Tax Information".

OVERVIEW

Peyto is a Canadian energy trust involved in the development and production of natural gas in Alberta's deep basin. As at December 31, 2007, the total Proved plus Probable reserves were 164.8 million barrels of oil equivalent with a reserve life of 21 years as evaluated by the independent petroleum engineers. Production is weighted approximately 83% natural gas and 17% natural gas liquids and oil.

The Peyto model is designed with the objective to deliver growth in its assets, production and income, all on a per unit basis. The model is built around three key principles:

- Use technical expertise to achieve the best return on capital employed, through the development of internally generated drilling projects. - Maintain a low payout ratio designed to efficiently fund a growing inventory of drilling projects. - Build an asset base which is made up of high quality long life natural gas reserves.

Operating results over the last nine years indicate that these principles have been successfully implemented. This business model makes Peyto a truly unique energy trust.

ANNUAL FINANCIAL INFORMATION

The following is a summary of selected financial information of the Trust for the periods indicated. Reference should be made to the audited consolidated financial statements of the Trust, which are available at http://www.sedar.com/.

------------------------------------------------------------------------- Year Ended December 31 2007 2006 2005 ($000 except per unit amounts) ------------------------------------------------------------------------- Total revenue (before royalties) 404,033 439,008 431,695 Funds from operations 279,624 305,845 296,970 Per unit - basic 2.65 2.93 3.01 Per unit - diluted 2.65 2.93 3.01 Earnings 208,884 195,228 161,568 Per unit - basic 1.98 1.86 1.64 Per unit - diluted 1.98 1.86 1.64 Total assets 1,192,232 1,136,700 944,927 Total long-term debt 430,000 420,000 180,000 Cash distributions per unit 1.68 1.66 1.39 ------------------------------------------------------------------------- QUARTERLY FINANCIAL INFORMATION ------------------------------------------------------------------------- 2007 ($000 except per unit amounts) Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Total revenue (net of royalties) 82,307 75,589 83,017 92,499 Funds from operations 68,976 62,938 69,345 78,364 Per unit - basic 0.65 0.60 0.66 0.74 Per unit - diluted 0.65 0.60 0.66 0.74 Earnings 73,289 39,886 38,825 56,883 Per unit - basic 0.69 0.37 0.37 0.54 Per unit - diluted 0.69 0.37 0.37 0.54 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2006 ($000 except per unit amounts) Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Total revenue (net of royalties) 91,425 84,164 88,515 86,459 Funds from operations 77,360 72,360 77,507 78,617 Per unit - basic 0.74 0.69 0.74 0.76 Per unit - diluted 0.74 0.69 0.74 0.76 Earnings 47,012 46,155 56,768 45,293 Per unit - basic 0.44 0.44 0.54 0.44 Per unit - diluted 0.44 0.44 0.54 0.44 ------------------------------------------------------------------------- RESULTS OF OPERATIONS Production ------------------------------------------------------------------------- Three Months ended Twelve Months ended Dec. 31 Dec. 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Natural gas (mmcf/d) 104,749 112,296 102,418 112,751 Oil & natural gas liquids (bbl/d) 3,675 3,834 3,599 4,081 Barrels of oil equivalent (boe/d) 21,134 22,550 20,669 22,873 -------------------------------------------------------------------------

Natural gas production averaged 104.7 mmcf/d in the fourth quarter of 2007, 7 percent lower than the 112.3 mmcf/d reported for the same period in 2006. Oil and natural gas liquids production averaged 3,675 bbl/d, a decrease of 4 percent from 3,834 bbl/d reported in the prior year. Production for the year decreased 10 percent from 22,873 boe/d to 20,669 boe/d. The production decreases are attributable to Peyto's reduced drilling program and natural production declines.

Commodity Prices ------------------------------------------------------------------------- Three Months ended Twelve Months ended Dec. 31 Dec. 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Natural gas ($/mcf) 6.57 7.08 7.24 7.50 Hedging - gas ($/mcf) 1.10 1.76 1.18 0.96 ------------------------------------------------------------------------- Natural gas - after hedging ($/mcf) 7.67 8.84 8.42 8.46 ------------------------------------------------------------------------- Oil and natural gas liquids($/bbl) 76.67 51.60 66.68 62.11 Hedging - oil ($/bbl) (1.44) 3.29 1.20 (1.11) ------------------------------------------------------------------------- Oil and natural gas liquids - after hedging ($/bbl) 75.23 54.89 67.88 61.00 ------------------------------------------------------------------------- Total Hedging ($/boe) 5.19 9.30 6.08 4.53 -------------------------------------------------------------------------

Peyto's natural gas price before hedging averaged $6.57/mcf during the fourth quarter of 2007, a decrease of 7 percent from $7.08/mcf reported for the equivalent period in 2006. Oil and natural gas liquids prices averaged $76.67/bbl up 49 percent from $51.60/bbl a year earlier. Average natural gas prices for the year were down 3 percent at $7.24/mcf while oil and natural gas liquids prices were up 7 percent at $66.68/bbl compared to 2006. Hedging activity for fiscal 2007 increased Peyto's price achieved by $6.08/boe.

Revenue ------------------------------------------------------------------------- Three Months ended Twelve Months ended Dec. 31 Dec. 31 ($000) 2007 2006 2007 2006 ------------------------------------------------------------------------- Natural gas 63,374 73,192 270,602 308,692 Oil and natural gas liquids 25,923 18,200 87,594 92,523 Hedging gain (loss) 10,090 19,304 45,837 37,793 ------------------------------------------------------------------------- Total revenue 99,387 110,696 404,033 439,008 -------------------------------------------------------------------------

For the three months ended December 31, 2007, gross revenue decreased 10 percent to $99.4 million from $110.7 million for the same period in 2006. The decrease in revenue for the period was a result of decreased production volumes and lower natural gas prices as detailed in the following table:

------------------------------------------------------------------------- Three Months ended Twelve Months ended Dec. 31 Dec. 31 2007 2006 $million 2007 2006 $million ------------------------------------------------------------------------- Total Revenue, Dec 31, 2006 110.7 439.0 ------------------------------------------------------------------------- Revenue change due to: ------------------------------------------------------------------------- Natural gas Volume (mmcf) 9637 10,331 (6.1) 37,382 41,154 (31.9) Price ($/mcf) 7.67 $8.84 (11.3) 8.42 $8.46 (1.5) Oil & NGL Volume (mbbl) 338 353 (0.8) 982.5 1,490 (10.7) Price ($/bbl) 75.23 $54.89 6.9 67.88 $61.00 9.0 ------------------------------------------------------------------------- Total Revenue, Dec 31, 2007 99.4 404.0 ------------------------------------------------------------------------- Royalties

Royalties are paid to the owners of the mineral rights with whom leases are held, including the provincial government of Alberta. Alberta gas crown royalties are invoiced on the Crown's share of production based on a monthly established Alberta Reference Price. The Alberta Reference Price is a monthly weighted average price of gas consumed in Alberta and gas exported from Alberta reduced for transportation and marketing allowances.

------------------------------------------------------------------------- Three Months ended Twelve Months ended Dec. 31 Dec. 31 2007 2006 2007 2006 ------------------------------------------------------------------------- Royalties, net of ARTC ($000) 17,080 19,271 70,621 88,446 % of sales 17 18 18 21 $/boe 8.78 9.29 9.36 10.59 -------------------------------------------------------------------------

For the fourth quarter of 2007, royalties averaged $8.78/boe or approximately 17 percent of Peyto's total petroleum and natural gas sales. Royalties for the year were 18 percent of sales in 2007 compared to 21 percent in 2006. The royalty rate expressed as a percentage of sales, will fluctuate from period to period due to the fact that the Alberta Reference Price can differ significantly from the commodity prices obtained by the Trust and that hedging gains and losses are not subject to royalties. As average per well production rates decline, the associated effective Crown Royalty rate will decrease. In addition, Peyto will receive Deep Gas Royalty Holiday or Marginal Deep Gas Well Program benefits until December 31, 2008, which further decrease the crown royalty rate. Effective January 1, 2007, the Alberta Government discontinued the Alberta Royalty Tax Credit ("ARTC") program.

Operating Costs & Transportation

The Trust's operating expenses include all costs with respect to day-to- day well and facility operations. Processing and gathering income related to joint venture and third party gas reduces operating expenses.

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Source: PRNewswire-FirstCall

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