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Trinidad Energy Services Income Trust announces fourth quarter and year end results - December 31, 2006
TSX SYMBOL: TDG.UN
CALGARY, March 1 /CNW/ - The following is management's discussion and
analysis ("MD&A") concerning the operating and financial results for the three
and twelve months ended December 31, 2006 and its outlook based on information
available as at February 20, 2007. The MD&A is based on the Trinidad Energy
Services Income Trust (the "Trust" or "Trinidad") consolidated financial
statements for the year ended December 31, 2006 which were prepared in
accordance with Canadian generally accepted accounting principles. The
following discussion should be read in conjunction with the consolidated
financial statements and attached notes contained in this report. Additional
information is also available on the Trust's website(www.trinidaddrilling.com)
and all previous public filings, including the most recently filed Annual
Report and Annual Information Form, which are available through SEDAR
(www.sedar.com).FINANCIAL HIGHLIGHTS
For the years ended December 31,
(thousands except unit
and per unit data) 2006 2005 2004
-------------------------------------------------------------------------
Revenue 579,855 288,332 138,477
Gross margin(1) 269,584 120,415 56,827
EBITDA(1) 210,319 91,116 42,803
Per unit (diluted) 2.48 1.52 1.14
EBITDA before unit based
compensation(1) 217,424 94,319 42,973
Per unit (diluted) 2.57 1.57 1.15
Funds flow before change in
non-cash working capital(1) 196,924 87,299 38,906
Per unit (diluted) 2.33 1.45 1.04
Distributions paid and declared 105,475 51,905 23,698
Distributions paid and declared
per unit (basic) 1.27 0.88 0.64
Payout ratio(2) 54% 59% 61%
Net earnings 123,706 47,427 20,790
Per unit (basic) 1.49 0.81 0.56
Per unit (diluted) 1.46 0.79 0.55
Net earnings before unit
based compensation 130,811 50,630 20,960
Per unit (diluted) 1.55 0.84 0.56
Units outstanding - basic
(weighted average)(3) 83,078,833 58,850,122 36,833,388
Units outstanding - diluted
(weighted average)(3) 84,644,439 60,134,317 37,513,167
(1) Readers are cautioned that gross margin, EBITDA and funds flow before
change in non-cash working capital and the related per unit
information do not have a standardized meaning prescribed by GAAP and
therefore may not be comparable to similar measures presented by
other issuers; however, the Trust does compute gross margin, EBITDA
and funds flow before change in non-cash working capital on a
consistent basis for each reporting period. EBITDA refers to earnings
of the Trust before interest, taxes, depreciation and amortization
and gain or loss on investment in long-term assets and funds flow
before change in non-cash working capital refers to the amount of
cash that is expected to be available for distribution to
unitholders. Funds flow before change in non-cash working capital has
replaced the term cash flow before change in non-cash working capital
as shown in previous filings.
(2) Payout ratio is calculated as distributions paid and declared divided
by funds flow before changes in non-cash working capital.
(3) Basic and diluted units outstanding include trust units to be issued
upon conversion of exchangeable shares.
OPERATING HIGHLIGHTS
For the years ended December 31, 2006 2005 2004
-------------------------------------------------------------------------
Operating days - drilling
Canada 12,531 12,298 7,829
United States 7,046 272 -
Rate per drilling day (CDN $)
Canada 24,191 20,783 16,922
United States 23,724 22,782 -
Utilization rate - drilling
Canada 62% 64% 66%
United States 84% 85% -
CAODC industry average 55% 59% 53%
Number of drilling rigs
Canada 60 54 51
United States 31 17 -
Utilization rate for service rigs 62% 61% 54%
Number of service rigs 18 16 8
Number of coring and surface casing rigs 17 18 -FORWARD-LOOKING STATEMENTS
The MD&A contains certain forward-looking statements relating to the
Trust's plans, strategies, objectives, expectations and intentions.
Expressions such as "anticipate", "expect", "project", "believe", "estimate",
and "forecast" should be used to identify these forward-looking statements.
The Trust believes that the expressions reflected in those forward-looking
statements are reasonable; however, such statements are subject to a number of
known and unknown risks, uncertainties and other factors that may cause actual
results to differ materially from those anticipated in our forward-looking
statements. These statements speak only as of the date of the MD&A and the
Trust does not intend, and does not assume any obligation, to update these
forward-looking statements.
NON-GAAP MEASURES
This MD&A contains references to the term "funds flow before change in
non-cash working capital" to refer to the amount of cash that is expected to
be available for distribution to unitholders, the term "EBITDA" to refer to
earnings of the Trust before interest, taxes, depreciation and amortization
and gain or loss on investment in long-term assets and the term "Gross Margin"
to refer to revenue less operating expenses, which the Trust believes are
measures followed by the investment community and therefore provide useful
information. The terms "funds flow before change in non-cash working capital"
and "EBITDA" are not measures recognized by Generally Accepted Accounting
Principles ("GAAP") and do not have standardized meanings prescribed by GAAP
and accordingly may not be comparable to similar measures presented by other
companies. However, the Trust computes "funds flow before change in non-cash
working capital" and "EBITDA" on a consistent basis for each reporting period.
OVERVIEW
In 2005 Trinidad's operations were primarily focused in the deeper
drilling sector of the Western Canadian Sedimentary Basin. In order to
increase the stability of the overall funds flow the Trust began the process
of strategically diversifying its operations into the US. This commenced with
the announcement of the Trust's commitment to construct an additional 29
drilling rigs of which 17 were to be deployed in the US, all backed by
long-term take-or-pay contracts. These long-term contracts along with the
acquisition of Cheyenne Drilling at the end of 2005 created a stable drilling
base in the US. Throughout 2006 an additional 10 rigs were released into the
US market under the rig construction program and Cheyenne Drilling deployed
two rigs that were under construction at the time of acquisition and two
inactive rigs were refurbished and placed into operations. This significantly
increased the rig count in the US from 17 at the end of 2005 to 31 at the end
of 2006, an increase of 82.4% in a market which typically operates at
utilization rates of 85%. Additionally, the fully functional drilling fleet in
the US for the entire year produced significantly higher revenues and funds
flow throughout the period.
The second dramatic change in the Trust's operations throughout the year
was the acquisition of Mastco Derrick Services Ltd. ("Mastco"), a company with
the expertise to design, manufacture, sell and refurbish drilling rigs and
related equipment. This acquisition provided Trinidad with increased
flexibility over the current rig construction program providing an improved
ability to control the delivery schedule of its rigs. As a result of this, six
Canadian rigs were completed and put into operations throughout 2006 and the
remainder are expected to be delivered in the first and second quarter of
2007. The integration of Mastco into the Trust's operations also improves the
Trust's ability to complete required repairs and maintenance and
recertifications.
Activity levels slowed in the Canadian market throughout 2006 as a result
of declines in commodity prices and concerns over high storage levels.
Trinidad has been able to mitigate the impact of these reductions through a
focus on longer term contracts and its US diversification which resulted in
overall utilization levels exceeding industry averages throughout the year.
Furthermore, the Trust continues to focus its efforts on the deeper drilling
market which is less impacted by seasonal fluctuations and commodity price
volatility. Despite a slower market the Trust has continued to grow in both
revenue and funds flow due to increases in the Trust's drilling capacity and
increased day rates across the market.RESULTS FROM OPERATIONS
Canadian Drilling Operations
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Revenue 364,278 282,938 28.7
Operating expense 196,665 164,701 19.4
----------------------------------------
Gross margin 167,613 118,237 41.8
----------------------------------------
Gross margin percentage 46.0% 41.8%
Operating days - drilling 12,531 12,298 1.9
Rate per drilling day (CDN $) 24,191 20,783 16.4
Utilization rate - drilling 62% 64% (3.1)
CAODC industry average 55% 59% (6.8)
Number of drilling rigs 60 54 11.1
Utilization rate - well servicing 62% 61% 1.6
Number of service rigs 18 16 12.5
Number of coring and surface rigs 17 18 (5.6)Reduced activity levels throughout the Canadian drilling sector continued
to be an issue as commodity prices declined from record highs in 2005 to more
stable levels in 2006. These weakening conditions affected the overall
utilization across the sector with reductions in the utilization rates from
59% in 2005 to 55% in 2006, a level more consistent with usual seasonal
patterns. Despite the reduction in overall utilization, Trinidad was able to
minimize the impact of this slow down by focusing on the deeper drilling
market which is less impacted during softer market conditions and execution of
long-term contracts with oil and gas producers. This allowed the Trust to
continue to exceed industry utilization levels by 12.7% despite slight
reductions year-over-year. As a result overall revenues in the Canadian
drilling market continued to grow and increased by 28.7% to $364.3 million in
2006.
The acquisition of Mastco in the first quarter of 2006 facilitated the
expansion of the Trust's Canadian drilling fleet from 54 rigs at the end of
2005 to 60 rigs at the end of 2006. The expansion of the rig fleet and
increases in day rates contributed to overall growth in revenue throughout the
period. The acquisition of Summit Energy Services in the third quarter of 2005
continues to provide additional depth in the well servicing sector increasing
overall revenue and utilization levels throughout the period. Finally, the
increased involvement of the surface and coring operations in the oil sands
projects throughout 2006 generated revenue growth.
Operating expenses in the Trust's Canadian drilling operations increased
by $32.0 million, from $164.7 million in 2005 to $196.7 million in 2006.
Consolidated gross margin percentages also increased from 41.8% to 46.0% as
increased depth capacity of the Trust's fleet throughout 2006 produced
increased work at higher margins. Furthermore the execution of long-term
contracts has allowed for increased growth in margin levels. Throughout 2005
several of the Trust's well servicing rigs were relocated from Lloydminster
where they were predominately focused on maintenance and workover services to
Grande Prairie where they focused on higher margin completions work. This
relocation allowed the Trust to benefit from higher margin work throughout
2006 positively impacting margins throughout the period. Finally, the surface
casing and coring division's involvement in oil sands projects generated more
revenue at higher margins in 2006.United States Drilling Operations
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Revenue 166,498 5,394 2,986.7
Operating expense 77,676 3,216 2,315.3
----------------------------------------
Gross margin 88,822 2,178 3,978.1
----------------------------------------
Gross margin percentage 53.3% 40.4%
Operating days - drilling 7,046 272 2,490.4
Rate per drilling day (CDN $) 23,724 22,782 4.1
Utilization rate - drilling 84% 85% (1.2)
Number of drilling rigs 31 17 82.4Growth of the US drilling operations throughout the 2006 fiscal year was
instrumental in achieving stability of the Trust's funds flow throughout the
year and increasing the capability of the Trust to meet the needs of oil and
gas producers on a more comprehensive basis. The strategic decision to expand
geographically into a region that is uninterrupted by the seasonal conditions
present in the Canadian marketplace resulted in utilization levels in the US
marketplace of 84% through the year on an expanded drilling fleet which
totaled 31 rigs at year-end. In 2005 the Trust announced its intent to
construct a total of 29 drilling rigs, of which 17 were to be deployed into
the US market and backed by long-term take-or-pay contracts. By the end of the
2006 fiscal year, 11 of these rigs had been put into operations expanding the
drilling capacity and significantly increasing revenues throughout the period.
Furthermore, the acquisition of Cheyenne Drilling at the end of 2005 provided
the Trust with 10 days of revenue on a fleet of 16 rigs. The Trust reaped the
benefits of having this fully functional drilling fleet operating throughout
the entire year in 2006 and expanded the fleet by an additional four rigs, two
of which were under construction and two that required refurbishment at the
time of acquisition. The combined impact of these two factors resulted in
tremendous growth in revenue to $166.5 million in 2006 from $5.4 million in
2005.
Operating expenses grew as a result of the overall growth in revenue
throughout the period from $3.2 million in 2005 to $77.7 million in 2006.
Furthermore, the US operations increased gross margin by 31.9% from 40.4% in
2005 to 53.3% in 2006. As the 2005 fiscal year was predominately a year of
growth and construction in the US marketplace the resulting increases in
margins throughout 2006 are due to improved operational efficiency and
expanding knowledge in the US and are more indicative of the future outlook in
this market. In addition, the execution of the rig build program, which is
backed by long-term take-or-pay contracts, promoted stability in utilization
rates and revenues throughout the year.Construction Operations
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Revenue 111,128 - -
Operating expense 97,979 - -
----------------------------------------
Gross margin 13,149 - -
----------------------------------------
Gross margin percentage 11.8% -The acquisition of Mastco was an instrumental factor in the deployment of
six rigs since March 2006 and placed the Trust in a favourable position to
deploy the remaining four Canadian rigs committed under the current rig
construction program. Throughout 2006 Mastco concentrated its operations on
the completion of Trinidad's rig construction program and completed much of
the recertification work required on the Trust's current fleet. As a result,
Mastco recognized inter-segment revenue and costs of $62.0 million with the
Canadian and US drilling operations. Additionally, revenues of $49.1 million
were generated on sales to external customers completed throughout the year.
Costs of $35.9 million on these sales generated a gross margin of 26.9%
throughout the period.GENERAL AND ADMINISTRATIVE EXPENSE
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
General and administrative expenses 51,627 26,183 97.2
% of revenue 8.9% 9.1%General and administrative expenses increased to $51.6 million from
$26.2 million as a result of the Trust's growth over the past year. Increases
in the general and administrative expenses resulted from Trinidad's growth and
expansion into the US marketplace and the diversification of its Canadian
operations. However, despite these overall increases, the Trust continues to
focus on maintaining conservative expenditure levels to ensure accretive
growth for unitholders by creating internal efficiencies, centralizing certain
required functions and integrating its management team. This focus has enabled
overall reductions in general and administrative expenses as a percentage of
revenue from 9.1% in 2005 to 8.9% in 2006.INTEREST
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Interest 20,724 5,600 270.1In April 2006 the Trust closed a new debt agreement which increased the
principal available from $250.0 million to a debt facility with total Canadian
dollar equivalent capacity of approximately $495.7 million. This new debt
facility encompasses both US and Canadian term and revolving facilities which
bear interest at the LIBOR and BA rates, respectively, plus a spread. Upon
closure of the new debt facility the entire $125.0 million (USD) balance was
drawn on the US term loan and $175.0 million on the Canadian term and
revolving facilities increasing the overall debt levels of the Trust. This new
debt facility was used throughout the year to fund the execution of the
Trust's commitment to construct an additional 29 drilling rigs, of which 15
were released in the current year and four were released in 2005.
Additionally, the Trust funded approximately $93.2 million of the capital
requirements on the remaining 10 rigs expected to be released in the first and
second quarter of 2007 and $33.8 million on the additional five rigs announced
January 2007. The increased debt levels of the Trust from $105.5 million at
the end of 2005 to $391.5 million at the end of 2006 resulted in higher
interest expense throughout the year. Excess cash throughout the period, which
was not utilized to fund capital expenditures, was invested in short term
investments which generated interest income of approximately $1.9 million
during the year.
Furthermore, throughout 2005 the Trust paid interest at a fixed borrowing
rate. With the inception of the new debt facility Trinidad is obligated to pay
interest at a floating BA or LIBOR rate for both the Canadian and US
facilities, respectively. This increased the Trust's overall exposure to
fluctuations in the floating rate. In order to mitigate this risk Trinidad
entered into an interest rate swap at the beginning of the third quarter on
50% of the outstanding Canadian and US term facilities. As a result changes in
the structure of the debt facilities impacted the overall interest expense
incurred throughout the period.UNIT BASED COMPENSATION
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Unit based compensation 7,105 3,203 121.8The Trust has established a Trust Unit Incentive Plan to assist
directors, officers, employees and consultants of the Trust and its affiliates
to participate in the growth and development of the Trust and uses the fair
value method to calculate compensation expense associated with rights granted
under the Plan. This compensation expense is recognized into earnings over the
vesting period of the rights granted with a corresponding increase in
contributed surplus. As a result of applying the fair value method, unit based
compensation increased from $3.2 million in 2005 to $7.1 million in 2006, an
increase of $3.9 million. Increases are a result of the continuing growth of
the Trust and three additional option grants completed in the year.FOREIGN EXCHANGE (GAIN) LOSS
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Foreign exchange (gain) loss 533 (87) 712.6In the third quarter of 2005, the commencement of operations through the
release of the first newly constructed drilling rig in the United States
resulted in a revaluation of the US operations into Canadian currency for the
purposes of financial reporting. The acquisition of Cheyenne Drilling and
continued deployment of drilling rigs in the United States has reduced the US
reliance on the Canadian operations, resulting in the US operations being
considered a self-sustaining operation effective January 1, 2006. Therefore,
upon consolidation of the US operations, gains and losses due to fluctuations
in the foreign currency exchange rates are deferred on the balance sheet as a
component of equity; however, gains and losses in the Canadian entity on US
denominated balances continue to be recognized in the income statement. For
the year ended 2006, the Trust recognized a loss of $0.5 million in comparison
with a gain of $0.1 million in 2005 which was attributable to fluctuations in
the Canadian and US currency rates. The Trust has mitigated its overall
exposure to currency fluctuations through the increased financial independence
of the US operations as a result of the US debt facility which was closed in
April 2006 and through utilizing funds flows generated from the US market to
fund the ongoing operations.DEPRECIATION AND AMORTIZATION
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Depreciation 50,983 27,939 82.5
Amortization 1,218 284 328.9
(Gain) loss on sale of assets (1,879) 263 814.4Depreciation increased 82.5% on year-to-date basis from $27.9 million in
2005 to $51.0 million in 2006. Changes in the composition of Trinidad's asset
base through acquisitions and the current rig construction program have
resulted in the addition of drilling rigs with increased drilling depth,
increasing the capital cost of the Trust's asset base. This increased the per
day depreciation rates by $381 per drilling day to $2,604 in 2006 from $2,223
in 2005. Increased rates per drilling day and increases in the number of
drilling days from 12,570 in 2005 to 19,577 in 2006 produced higher
depreciation in the current year. This increase has been offset as a result of
management re-assessing the useful life of the drilling and well servicing
rigs as of January 1, 2006 and increasing the useful life of its drilling rigs
from 3,300 drilling days (10% salvage value) to 4,200 drilling days (10%
salvage value) and its well servicing rigs from 15 years (20% salvage value)
to 24,000 hours (20% salvage value) to be more reflective of the actual useful
life of the assets.
Amortization expense increased from $0.3 million in 2005 to $1.2 million
in 2006 as a result of the Trust closing its new debt agreement. Previously
deferred financing costs of $0.8 million at the end of 2005 associated with
the old facility were expensed in 2006 and the financing costs related to the
new debt facility were capitalized and amortized into income throughout the
period.
Throughout the year Trinidad disposed of one of its drilling rigs for
proceeds of $5.4 million which resulted in a one time gain of $2.0 million
being recognized into earnings. This gain was offset through several smaller
dispositions throughout the year netting to a gain of $1.9 million in 2006.INCOME TAXES
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Current income tax (388) 1,420 (127.3)
Future income tax 15,955 8,183 95.0In the second quarter the Canadian government passed the 2006 Federal
Budget which enacted several tax reductions for corporations, specifically a
reduction in general corporate tax rates from 21.0% to 19.0% phased in from
2008 to 2010, the elimination of the federal large corporation tax effective
January 1, 2006 and the elimination of the corporate surtax effective
January 1, 2008. Additionally, the Alberta government also substantively
enacted a reduction in corporate tax rates from 11.5% to 10.0% effective
April 1, 2006. Despite increases in the Trust's capitalization, the recovery
position in 2006 resulted from the reversal of previously booked federal large
corporation tax as well as realization of the tax reductions that were
substantively enacted.
Future income tax expenses increased 95.0% from $8.2 million in 2005 to
$16.0 million in 2006. The increase in future income tax expense resulted from
higher depreciation rates for tax purposes which increased the taxable
temporary difference between the accounting value and the tax value on the
Trust's capital assets. This increase was offset by lower future income tax
rates as a result of the Federal Budget changes and further reductions to the
Trust's taxable income from increases in monthly distributions to unitholders.
On December 21, 2006, the Minister of Finance released for comment draft
legislation concerning the taxation of certain publicly traded trusts. The
legislation reflects proposals originally announced by the Minister on
October 31, 2006. Under the proposed legislation, Income Trusts will be taxed
on a basis similar to corporations, where distributions made from the Trust to
unitholders will be taxed at the Trust level. Under the proposed plan, income
distributions will first be taxed at the Trust level at a special rate
estimated to be 31.5%, and for taxable Canadian residents distributions will
be treated as dividends from a Canadian corporation and will be eligible for
the dividend tax credit. The government is proposing a four-year transition
period for existing Trusts and as such Trinidad will not be subject to the
proposed measures until it's 2011 taxation year. It is not known at this time
if or when the proposal will be enacted by Parliament.
We encourage our unitholders to read the full transcript of the
government's plan at www.fin.gc.ca/news06/06-061e.html and to consult their
personal financial and tax advisors regarding the potential tax consequences.
Unitholders may also express their views directly to the Minister of Finance,
whose contact information is available at www.fin.gc.ca/admin/contract-e.html.NET EARNINGS AND FUNDS FLOW
For the years ended December 31,
(thousands) 2006 2005 % Change
-------------------------------------------------------------------------
Net earnings 123,706 47,427 160.8
Per unit (diluted) 1.46 0.79 84.8
Funds flow from operations 196,924 87,299 125.6
Per unit (diluted) 2.33 1.45 60.7Trinidad increased consolidated net earnings by 160.8% from $47.4 million
to $123.7 million achieved through the diversification of the Trust's
operations in both Canada and the US. Despite lower industry wide utilization
levels in Canada, stabilization of net income was obtained through the Trust's
expansion into the US market. This provided overall stability to annualized
funds flow and net earnings through its growth into a market which is
uninterrupted by the seasonal conditions that are present in the Canadian
operations. This growth in net income reflects the expansion of Trinidad's
fleet through its current rig construction program. The acquisition of Mastco
in the first quarter of 2006 placed Trinidad in a favourable position to
execute on its rig construction program resulting in the Trust releasing six
Canadian rigs throughout the year. The further deployment of US rigs committed
under the current rig construction program continues to generate increased
revenues. Throughout the period the Trust's ongoing focus on delivering
superior performance to its customers has allowed us to exceed industry
utilization levels. Trinidad's ability to execute on market opportunities is
expanding the Trust's overall operations to ensure greater future stability of
net income and funds flow. Higher operating margins and conservative general
and administrative expenditures also contributed to net earnings, offset by
increased interest and depreciation expense that were triggered through the
growth of the Trust's operations.
Funds flow from operations before change in non-cash working capital for
the year increased from $87.3 million ($1.45 per unit (diluted)) in 2005 to
$196.9 million ($2.33 per unit (diluted)) in 2006 as a result of significant
growth in revenues and increases in gross margin throughout the period. The
Trust continues to follow an investment strategy designed to ensure accretive
growth for unitholders, including the expansion into the US market as well as
diversification of the Trust's asset base which contributed to the overall
growth in funds flow throughout the period.FOURTH QUARTER ANALYSIS
---------------------------------------------------------------
2006
(millions except per
unit data) Q4 Q3 Q2 Q1
---------------------------------------------------------------
Financial Highlights
Revenue 161.9 150.6 104.5 162.9
Gross margin(1) 74.9 66.9 43.1 84.7
Net earnings (loss) 31.3 31.6 20.8 40.0
Depreciation and
amortization 15.4 14.0 9.7 13.1
(Gain) loss on assets 0.1 (2.0) - -
Unit based compensation 1.8 0.7 0.8 3.8
Future income tax expense
(recovery) 6.2 4.6 (8.7) 13.9
Unrealized foreign
exchange loss (gain) (0.1) - 0.2 (0.2)
Other - 0.1 (0.3) 0.1
---------------------------------------
Funds flow before change
in non-cash working
capital(1) 54.7 49.0 22.5 70.7
Earnings (loss) per unit
(diluted) 0.37 0.38 0.24 0.48
Funds flow before change
in non-cash working
capital per unit
(diluted)(1) 0.65 0.57 0.26 0.84
Operating Highlights
Operating days - drilling
Canada 3,163 3,358 1,826 4,184
United States 2,105 1,891 1,603 1,447
Rate per drilling day
(CDN $)
Canada 26,328 23,083 23,927 23,579
United States 24,621 24,042 24,089 21,596
Utilization rate -
drilling
Canada 61% 64% 36% 86%
United States 85% 85% 82% 85%
CAODC industry average 47% 57% 34% 81%
Number of drilling rigs
Canada 60 59 57 56
United States 31 26 22 21
Utilization for service rigs 64% 68% 31% 85%
Number of service rigs 18 18 17 17
Number of coring and
surface casing rigs 17 17 17 17
---------------------------------------------------------------
-------------------------------------------------------------------------
2005 2004
(millions except per
unit data) Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Financial Highlights
Revenue 106.4 75.3 32.5 74.1 58.8
Gross margin(1) 46.4 31.8 7.8 34.5 26.8
Net earnings (loss) 19.4 13.8 (1.8) 16.0 15.1
Depreciation and
amortization 9.3 8.0 3.4 7.5 5.5
(Gain) loss on assets 0.2 0.1 - - 0.5
Unit based compensation 0.6 0.5 2.0 0.1 (4.8)
Future income tax expense
(recovery) 5.5 1.7 (4.0) 5.0 3.5
Unrealized foreign
exchange loss (gain) - - - - -
Other - - - - -
-------------------------------------------------
Funds flow before change
in non-cash working
capital(1) 35.0 24.1 (0.4) 28.6 19.8
Earnings (loss) per unit
(diluted) 0.29 0.21 (0.03) 0.31 0.33
Funds flow before change
in non-cash working
capital per unit
(diluted)(1) 0.51 0.37 (0.01) 0.56 0.43
Operating Highlights
Operating days - drilling
Canada 3,795 3,487 1,472 3,544 3,011
United States 235 37 - - -
Rate per drilling day
(CDN $)
Canada 23,280 19,196 19,448 20,121 18,942
United States 19,245 20,122 - - -
Utilization rate -
drilling
Canada 78% 73% 31% 76% 76%
United States 83% 100% - - -
CAODC industry average 71% 63% 32% 71% 62%
Number of drilling rigs
Canada 54 52 52 52 51
United States 17 1 - - -
Utilization for service rigs 67% 61% 41% 69% 61%
Number of service rigs 16 16 9 9 8
Number of coring and
surface casing rigs 17 18 18 - -
-------------------------------------------------------------------------
(1) Readers are cautioned that gross margin and funds flow before change
in non-cash working capital and per unit information do not have a
standardized meaning prescribed by GAAP; however, the Trust does
compute gross margin and funds flow before change in non-cash working
capital and the per unit information on a consistent basis for each
reporting period. Funds flow before change in non-cash working
capital has replaced the term cash flow before change in non-cash
working capital as shown in previous filings.Throughout the fourth quarter of 2006, reduction in activity levels seen
earlier in the year throughout the drilling industry continued to be present
as the overall market softened due to declines in commodity prices from the
comparable quarter in 2005. This resulted in a reduction in utilization rates
across the industry from 71% in the fourth quarter of 2005 to 47% in 2006.
Throughout this period of interim instability Trinidad continued to exceed
industry utilization by 29.8% despite slight decreases from the third quarter
2006. A continued focus on long-term contracts and the deeper drilling market
shielded the Trust from some of the market turbulence throughout this period.
Additionally, in the Canadian drilling market, two of the rigs that were
completed at the end of the prior quarter were put into operation and the
completion of one more rig increased overall revenue quarter-over-quarter. The
US drilling operations continued to provide increased stability to revenues
and funds flow throughout the fourth quarter, maintaining utilization rates of
85% at drilling rates of $24,621 per day. As the US operations are not subject
to the seasonal conditions and have less susceptibility to the fluctuations in
the Canadian market, this has been a significant factor in the growth of
revenue and funds flow throughout the year. These factors resulted in
increased revenue of $11.3 million from $150.6 million in the third quarter to
$161.9 million in the fourth quarter of 2006; and increased revenue on a
quarter-over-quarter basis from $106.4 million in 2005 to $161.9 million in
2006.
Consolidated gross margin increased for the fourth quarter of 2006 to
$74.9 million from $46.4 million in 2005 and gross margin percentages
increased to 46.3% from 43.6% in 2005, an increase of 6.2%. The increased
contribution of the US operations, which currently generates higher margins
than the Canadian market, resulted in the increases quarter-over-quarter.
Net earnings in the fourth quarter of 2006 increased by 61.3% from
$19.4 million in 2005 to $31.3 million due to the significant growth of the
Trust's operations and increases in revenue and gross margins as operations
have been expanded. This increase was offset by increases in depreciation and
amortization of 65.6% from $9.3 million in the fourth quarter of 2005 to
$15.4 million in 2006 and increase in general and administrative expenses of
$4.4 million to $13.8 million in 2006. Interest expense for the quarter also
increased to $7.0 million in 2006 from $1.6 million in 2005 as a result of
advances which were made on the debt facility throughout the quarter as
Trinidad executed on its build commitment.LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31,
(thousands) 2006 2005 2004
-------------------------------------------------------------------------
Working capital 58,246 45,289 11,884
Bank overdraft - - 1,988
Operating line of credit - - 8,000
Current portion of long-term debt 3,232 9,494 6,482
Long-term debt 388,276 95,956 60,909
----------------------------------------
Total debt 391,508 105,450 77,379
----------------------------------------
Total debt as a percentage
of assets 31.4% 12.7% 20.8%
Net debt(1) 330,030 50,667 49,025
Net debt as a percentage of assets(1) 26.5% 6.1% 13.2%
Total assets 1,245,633 833,316 372,454
Total long-term liabilities 434,065 125,344 79,001
Total long-term liabilities as a
percentage of assets 34.8% 15.0% 21.2%
Unitholders' equity 698,092 641,430 255,055
Total debt to unitholders' equity 56.1% 16.4% 30.3%
Net debt to unitholders' equity(1) 47.3% 7.9% 19.2%
(1) Readers are cautioned that net debt does not have a standardized
meaning prescribed by GAAP and therefore may not be comparable to
similar measures presented by other issuers; however, the Trust does
compute net debt on a consistent basis for each reporting period.
Net debt refers to the Trust's long-term debt less it's working
capital position and is indicative of the Trust's overall
indebtedness.Effective April 18, 2006, the Trust closed a new syndicated loan
agreement in both Canada and the US that increased the principal available
from $250.0 million to a facility comprised of a $250.0 million Canadian
revolver, a $100.0 million Canadian five-year term facility and a
$125.0 million US five-year term facility, representing a total debt facility
of approximately $495.7 million. On closing, the Trust drew down on both the
$125.0 million US term facility and $175.0 million of the Canadian term and
revolving facilities. The debt drawn on the new agreement was used to repay
amounts previously drawn under the prior debt facility and the remainder was
retained for the execution of the Trust's rig construction program. As a
result of the draw down on the new debt facility and the further execution of
our rig construction program total debt increased by $286.1 million from the
prior year of which approximately $54.0 million was drawn in the fourth
quarter of 2006. These advances, along with funds flow from operations, have
been used to fund capital additions of $111.3 million throughout the quarter
and $357.9 million year-to-date. Expected costs to complete the current rig
construction program are estimated to be $44.8 million and will be funded
through total cash available under the debt facilities of approximately
$104.2 million, cash on hand and funds flow from operations.
Effective June 2005 Trinidad closed an equity issuance to fund the
capital requirements on the rig construction program for net proceeds of
$118.6 million. The proceeds from this issuance were used to repay debt
facilities that were previously drawn, reducing the overall debt levels of the
Trust. Throughout 2005, as the Trust executed its rig construction program,
advances were made on the debt facility to fund the capital requirements of
the rig construction program of which only $82.5 million of the $401.0 million
total costs of construction were paid, resulting in abnormally low debt levels
at the end of 2005. In 2006, as Trinidad executed on the rig build program,
advances on the debt facility increased both total debt as a percentage of
assets and net debt as a percentage of assets. Despite the total growth in
debt from $105.5 million to $391.5 million debt as a percentage of assets only
increased from 12.7% to 31.4%. Internally generated funds flow resulting from
the deployment of additional rigs throughout 2006 in both Canada and the US
has been utilized to further advance the rig construction program. As the
Trust continues to deploy additional rigs throughout the early part of 2007,
the additional funds generated will be utilized to complete both the remaining
obligations under the current rig construction program as well as complete the
additional five rigs announced in January 2007.
Working capital increased by $13.0 million throughout the year from
$45.3 million to $58.2 million. This increase is primarily a result of
increases in accounts receivable of $55.2 million from the prior year, offset
by an increase in accounts payable and accrued trust unit distributions of
$41.6 million due to the expansion of the Trust's activities. Additionally
with the acquisition of Mastco, working capital was increased through the
inventory levels being maintained on the Trust's construction operations of
$7.5 million. Despite reductions in market activity the Trust continues to
exceed industry utilization and is in a favourable working capital position
moving into 2007.
Unitholders' equity increased as a result of the 1.5 million trust units
($24.7 million) that were issued to the former shareholders of Mastco and net
earnings, net of distributions paid, of $19.0 million. Additionally proceeds
on options and rights exercised throughout the period of $8.3 million
increased overall unitholders' equity throughout the period. Effective
September 14, 2006, Trinidad announced its intent to acquire for cancellation
up to 10% (7,336,882 trust units) of the Trust's publicly traded units by way
of a Normal Course Issuer Bid ("NCIB") commencing September 18, 2006 and
extending to September 17, 2007. During the year the Trust repurchased 66,500
units at a cost of $0.9 million which were cancelled in the year. Purchases
under the NCIB are at the discretion of management and will be made with
internal funds flow generated throughout the year.
The Trust has several capital and operating lease agreements on buildings
and equipment. The future lease obligations for the next five years are
summarized below:(thousands)
-------------------------------------------------------------------------
2007 3,024
2008 2,774
2009 2,412
2010 2,052
2011 7,154In 2005 and early 2006, Trinidad announced its intent to expand its
existing drilling fleet through the construction of 29 new diesel electric
drilling rigs which will be deployed in both Canada and the US. This
construction program has enabled the Trust to actively pursue growth
opportunities in both markets and provide accretive growth to its unitholders.
All of the rigs are backed by take-or-pay contracts which provide for
committed drilling days and drilling rates over the next three to five years.
Furthermore, the cost of construction on five of the rigs has been partially
financed through customer contributions, to be returned based on drilling days
over the term of the contract. Total capital costs of construction are
expected to be $401.0 million, of which approximately $356.2 million has been
paid as at December 31, 2006. Four of these rigs were completed and deployed
in 2005 and an additional 15 throughout 2006 with the remainder scheduled to
be delivered in the first and second quarter of 2007. The rig construction
program continues to be a major focus of the Trust and the acquisition of
Mastco at the end of the first quarter of 2006 positioned Trinidad favorably
to execute on its rig construction program and increased Trinidad's influence
over the ability to meet delivery schedules.
On January 26, 2007, Trinidad announced the construction of an additional
five new customer backed rigs to the rig construction program. All five rigs
will be operating in the US, each backed by take-or-pay contracts, providing
committed drilling days and drilling rates over the next three years. Total
capital costs of construction are estimated to be $80.0 million which is being
funding through Trinidad's recently expanded credit facility and internal cash
flow. Approximately $33.8 million has been paid as at February 20, 2007.-------------------------------------------------------------------------
UNITHOLDERS' CAPITAL
For the years ended December 31,
(thousands) 2006 2005
-------------------------------------------------------------------------
Unitholders' capital 669,584 621,972
Exchangeable shares 5,777 19,602
-------------------------------------------------------------------------Unitholders' capital increased from the 2005 year-end by $47.6 million,
with the issuance of an additional 4.1 million trust units. This increase
resulted from the conversion of 347,100 Initial Series exchangeable shares
($2.7 million) to 403,332 trust units, 1,048,817 Series C exchangeable shares
($11.1 million) to 1,102,298 trust units and the conversion of 1,138,287
options and rights ($8.3 million) into trust units. Furthermore, the expansion
of the Trust's operations through the acquisition of Mastco also increased
unitholders' capital through the issuance of 1.5 million trust units
($24.7 million). This acquisition has improved the Trust's operational
flexibility by enhancing its ability to deliver on its current rig
construction program, complete future rig recertifications and execute on
ongoing maintenance programs. Under the Trust's Normal Course Issuer Bid
program, the Trust purchased and cancelled 66,500 units at a cost of
$0.9 million for the year ended December 31, 2006. The excess of the purchase
price over the carrying amount of the units purchased of $0.4 million is
recorded as reduction of accumulated earnings. Unitholders' capital on
February 20, 2007 was $670.7 million (83,092,336 units).-------------------------------------------------------------------------
DISTRIBUTIONS Three months ended Twelve months ended
December 31, December 31,
(thousands except
unit and per unit
data - Unaudited) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash flow from
operating activities 32,584 18,476 152,478 54,219
Net change in non-cash
operating working
capital 22,116 16,485 44,446 33,080
---------------------------------------------------
Funds flow before
change in non-cash
working capital 54,700 34,961 196,924 100% 87,299 100%
Distributions paid
& declared (28,629) (17,216) (105,475) 54% (51,905) 59%
---------------------------------------------------
Funds retained for
growth, debt reduction
& future distribution 26,071 17,745 91,449 46% 35,394 41%
Funds flow before
change in non-cash
working capital per
unit (basic(1)) 0.65 0.53 2.37 1.48
Distributions paid
& declared per unit (0.34) (0.26) (1.27) (0.88)
---------------------------------------------------
Funds retained per unit 0.31 0.27 1.10 0.60
Quarter ending
annualized
distribution per unit 1.38 1.02
-------------------------------------------------------------------------
(1) Includes trust units to be issued upon conversion of exchangeable
shares.During the year, Trinidad distributed $105.5 million, an increase of
$53.6 million or 103.2%, from the comparative quarter in the prior year. The
Trust's focused strategy of identifying accretive acquisitions while
sustaining the distributable funds flow from its current operations continues
to provide opportunities for increased distributions to unitholders. This
strategy has allowed the Trust to increase its annualized distribution levels
twice throughout 2006 from $1.02 per unit at the beginning of the year to
$1.38 per unit as at December 31, 2006. The Trust manages its distributions
based on a payout ratio goal of up to 75%, and the remainder is retained for
future growth opportunities, debt repayment, or incremental distributions to
unitholders.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements requires that
certain estimates and judgements be made with regard to the reported amount of
revenues and expenses and the carrying values of assets and liabilities. These
estimates are based on historical experience and management judgement.
Anticipating future events involves uncertainty and consequently the estimates
used by management in the preparation of the consolidated financial statements
may change as future events unfold, additional experience is acquired or the
Trust's operating environment changes.
Depreciation
The accounting estimate that has the greatest impact on the Trust's
financial results is depreciation. Depreciation of the Trust's property and
equipment incorporates estimates of useful lives and residual values. These
estimates may change as more experience is obtained or as general market
conditions change impacting the operation of the Trust's capital assets.
Effective January 1, 2006, the Trust re-assessed the useful life of its
drilling and well servicing rigs for purposes of determining depreciation
expense. As a result of this evaluation the Trust has increased the useful
life of its drilling rigs from 3,300 drilling days (10% salvage value) to
4,200 drilling days (10% salvage value). This change in estimate has been
applied prospectively and resulted in a reduction of depreciation expense of
$9.1 million for the year ended December 31, 2006. In addition, the Trust has
changed its policy for depreciating its well servicing rigs from 15 years (20%
salvage value) to 24,000 hours (20% salvage value) to be more reflective of
the useful life of the assets. This change in policy has been applied
retroactively. The impact on prior years was immaterial for restatement and
resulted in an increase of $0.4 million in depreciation expense for its well
servicing rigs for the year ended December 31, 2006.
The acquisition of Mastco in the second quarter diversified the Trust's
operations providing it with the capability to design, manufacture, sell and
refurbish drilling rigs and related equipment. As a result the Trust's asset
base has been diversified to include rig construction and related equipment,
creating an additional asset class for the Trust. This rig construction and
related equipment has been assigned a useful life of five to 20 years and will
be depreciated on a straight-line basis (with a 10% salvage value).
Unit based compensation
Compensation expense associated with rights at grant date are estimates
based on various assumptions such as volatility, annual distribution yield,
risk free interest rate and expected life using the Black-Scholes methodology
to produce an estimate of the fair value of such compensation.
Allowance for doubtful accounts receivable
The Trust performs credit evaluations of its customers and grants credit
based on past payment history, financial conditions and anticipated industry
conditions. Customer payments are regularly monitored and a provision for
doubtful accounts is established based on specific situations and overall
industry conditions. The Trust's history of bad debt losses has been minimal
and generally limited to specific customer circumstances; however, given the
cyclical nature of the oil and gas industry, the credit risks can change
suddenly and without notice.
Goodwill
In accordance with Canadian Generally Accepted Accounting Principles, the
Trust performs an annual goodwill impairment test in the first quarter of each
fiscal year. This test was performed and no goodwill impairment exists.
NEW ACCOUNTING POLICIES
Foreign currency translation
Effective January 1, 2006, the Trust changed from the temporal method of
foreign currency translation to the current rate method to account for the
Trust's US operations. Based on events since December 31, 2005, Trinidad
Drilling US is now considered a self-sustaining operation; hence the revenues
and expenses of the subsidiary are translated at the average exchange rate for
the period while assets and liabilities are translated at the current exchange
rate in effect at the balance sheet date. Gains or losses resulting from these
translation adjustments are included in the cumulative translation account in
unitholders' equity. The change in accounting policy has been applied
prospectively and resulted in a foreign exchange loss of $2.1 million being
deferred and recorded in the cumulative translation account as at January 1,
2006.
Derivative financial instruments
The Trust has entered into contracts to manage economic exposure to
market risks relating to interest rates. The Trust is impacted by interest
rate changes based on the amount of floating rate debt outstanding. Derivative
financial instruments are not used for trading or speculative purposes.
The Trust formally documents all relationships between hedging
instruments and the hedged items, the risk management objective and the method
for assessing the effectiveness of the hedge. The effectiveness of the hedge
is assessed both at inception of the hedge and throughout its term. If the
derivative is deemed effective, and qualifies for hedge accounting, gains and
losses are deferred until settlement of the derivative contract. If a
derivative does not qualify for hedge accounting, gains and losses resulting
from fluctuations in the fair value of the derivative are recognized into
income in the period that they occur.
DISCLOSURE CONTROLS & PROCEDURES
Disclosure controls and procedures are designed to provide reasonable
assurance that all information required to be disclosed by the Trust is
recorded, processed, summarized and reported to senior management, including
the CEO and CFO, in an appropriate manner to allow timely decisions regarding
required disclosure.
Trinidad Energy Services Income Trust has evaluated the effectiveness of
the design and operation of disclosure controls and procedures, under the
supervision of the CEO and the CFO. Internal controls over financial reporting
are designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian GAAP. Based on the evaluation, the Trust
has concluded that the disclosure controls and procedures and the design of
internal controls over financial reporting, as defined under Multilateral
instrument 52-109, Certification of Disclosures in Annual and Interim Filings
were effective as of the end of the period covered by this report.
The business process controls of Mastco have not been assessed at the
process level as at December 31, 2006. In light of the short time period
between the date of acquisition and the reporting date, a complete assessment
over the design of internal controls was not feasible and as a result have
relied on management review to assess the accuracy of the financial statements
at each reporting date. Management is in the process of evaluating the design
effectiveness of the process level controls at Mastco. There have been no
changes in the Trust's internal controls over financial reporting during the
year ended December 31, 2006 that have materially affected or are reasonably
likely to materially affect the internal controls over financial reporting.
OUTLOOK
Trinidad will continue to develop its key competitive strengths: deeper
drilling focus, modern rig fleet, and investment in both technology and
personnel. With these initiatives effective throughout 2006 and 2007, Trinidad
is favourably positioned to address the recent adjustment in customer drilling
programs, as the primary decline has been focused on shallow gas drilling.
Approximately 80% of Trinidad's drilling rigs, including the current rig
construction program, are tailored to the medium and deeper drilling market
with depths in excess of 2,000 metres. The focus on longer term contracts at
fixed day rates and utilization levels has stabilized operational performance
throughout the period. The current fleet will allow the Trust to effectively
capitalize on the busy first quarter of 2007 and continue to deliver strong
utilization performance. The US market has delivered exceptional results for
2006 and this is expected to remain stable as the US drilling industry is not
affected by seasonal conditions and has been less impacted by the recent
fluctuation in commodity prices. As the US operations become an even stronger
force in 2007, the benefits to the stability and growth of the Trust's overall
funds flow will surpass that of 2006, allowing the Trust to further optimize
unitholders' return in the coming year.
With the acquisition of Mastco, Trinidad has diversified its operations
by integrating its current rig fleet with the expertise of a company that
designs, manufactures, sells and refurbishes drilling rigs and related
equipment. This provides Trinidad with increased flexibility over the current
rig construction program and enhances the overall ability of the Trust to
control the development of new rig designs and investment in technology. These
benefits will allow Trinidad to complete one of the larger build programs
undertaken in the Canadian drilling industry by the second quarter of 2007.
We are focused on continuing to add to our distribution capabilities by
accretively growing our business and continuing to be the market leader. All
future capital investments will continue to be evaluated based on return on
capital and focused on low risk operating environments.
Trinidad Energy Services Income Trust is a growth-oriented oil and
natural gas services provider based in Calgary, Alberta. Focusing on deeper
drilling, modern rig fleets, in-house design and technology-based advancement,
Trinidad has positioned itself as a premium service provider. Trinidad's
growth is driven by chasing and capturing new horizons - advancing
technologies, offering new services, entering new markets and performing
strategic acquisitions. With the completion of the current rig construction
programs, the Trust will have 106 drilling rigs ranging in depths from 1,000 -
6,500 metres. In addition to its drilling rigs, Trinidad has 18 service rigs
that have been completely retrofitted or are new within the past five years
and 17 pre-set and coring rigs. Trinidad is focused on providing modern,
reliable, expertly designed equipment operated by well-trained and experienced
personnel. Trinidad's drilling fleet is one of the most adaptable and
competitive in the industry."signed" Michael E. Heier "signed" Brent J. Conway
----------------------------- -----------------------------
Chairman of the Board Chief Financial Officer
Chief Executive Officer
The Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
As at December 31,
(thousands)
2006 2005
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 9,413 11,749
Accounts receivable 151,990 96,764
Inventory 7,451 -
Prepaid expenses 2,868 2,092
Future income taxes (note 6) - 1,226
-------------------------
171,722 111,831
Deposit on capital assets 42,172 73,859
Capital assets (note 4) 903,111 567,387
Goodwill 123,483 79,429
Other long-term assets 5,145 810
-------------------------
1,245,633 833,316
-------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 88,083 49,275
Accrued trust distributions 9,543 6,707
Current portion of deferred revenue 9,090 1,066
Current portion of long-term debt (note 5) 3,232 9,494
Future income taxes (note 6) 3,528 -
-------------------------
113,476 66,542
Deferred revenue 7,070 388
Long-term debt (note 5) 388,276 95,956
Future income taxes (note 6) 38,719 29,000
-------------------------
547,541 191,886
Unitholders' equity
Unitholders' capital (note 7) 669,584 621,972
Exchangeable shares (note 8) 5,777 19,602
Contributed surplus (note 7) 11,722 5,949
Cumulative translation adjustment (750) -
Accumulated trust distributions (189,984) (84,509)
Accumulated earnings 201,743 78,416
-------------------------
698,092 641,430
-------------------------
1,245,633 833,316
-------------------------
(See Notes to the Consolidated Financial Statements)
Commitments (note 11)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
For the years ended December 31,
(thousands except unit and per unit data)
2006 2005
-------------------------------------------------------------------------
Revenue
Oilfield services 577,199 287,612
Other 2,656 720
-------------------------
579,855 288,332
-------------------------
Expenses
Operating 310,271 167,917
General and administrative 51,627 26,183
Interest 20,724 5,600
Unit based compensation 7,105 3,203
Foreign exchange (gain) loss 533 (87)
Depreciation and amortization 52,201 28,223
(Gain) loss on sale of assets (1,879) 263
-------------------------
440,582 231,302
-------------------------
Earnings before income taxes 139,273 57,030
Income taxes (note 6)
Current tax expense (recovery) (388) 1,420
Future tax expense 15,955 8,183
-------------------------
15,567 9,603
-------------------------
Net earnings 123,706 47,427
Charges for normal course issuer bid (note 7) (379) -
Accumulated earnings - beginning of year 78,416 30,989
-------------------------
Accumulated earnings - end of year 201,743 78,416
-------------------------
Earnings per unit
Basic 1.49 0.81
Diluted 1.46 0.79
Weighted average number of trust units
Basic 83,078,833 58,850,122
Diluted 84,644,439 60,134,317
(See Notes to the Consolidated Financial Statements)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(thousands)
2006 2005
-------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the year 123,706 47,427
Items not affecting cash
Depreciation and amortization 52,201 28,223
(Gain) loss on assets (1,879) 263
Unit based compensation 7,105 3,203
Future income tax expense 15,955 8,183
Unrealized foreign exchange loss (gain) (164) -
-------------------------
Funds flow from operations before change in
non-cash working capital 196,924 87,299
Net change in non-cash operating working capital (44,446) (33,080)
-------------------------
152,478 54,219
-------------------------
Investing activities
(Increase) decrease in deposits on capital assets 30,292 (46,480)
Acquisition of Titan Surface Casing (note 3(a)) - (11,300)
Acquisition of Summit Energy Services (note 3(b)) - (18,040)
Acquisition of Cheyenne Drilling (note 3(c)) - (176,287)
Acquisition of Mastco Derrick Services (note 3(d)) (15,804) -
Purchase of capital assets (371,303) (98,231)
Proceeds from dispositions 6,752 1,566
Change in non-cash working capital - accounts
payable and accrued liabilities 12,166 16,061
-------------------------
(337,897) (332,711)
-------------------------
Financing activities
Decrease in bank overdraft - (1,988)
Decrease in line of credit - (8,000)
Increase in long-term debt 285,066 38,059
Increase in deferred revenue 195 -
Net proceeds from unit issues (note 7) 8,272 310,499
Purchased units (note 7) (916) -
Debt financing costs (5,258) (377)
Trust unit distribution (105,475) (51,905)
Change in non-cash working capital item -
accrued distributions 2,836 3,953
-------------------------
184,720 290,241
-------------------------
Cash flow from operating, investing, and
financing activities (699) 11,749
Effect of translation on foreign currency cash (1,637) -
-------------------------
Increase (decrease) in cash for the year (2,336) 11,749
Cash - beginning of year 11,749 -
-------------------------
Cash - end of year 9,413 11,749
Interest paid 17,317 5,494
Taxes paid 1,207 866
(See Notes to the Consolidated Financial Statements)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. STRUCTURE OF THE TRUST
Organization
Trinidad Energy Services Income Trust ("Trust") is an unincorporated
open-ended investment trust formed under the laws of the Province of
Alberta. The Trust was formed by way of an arrangement ("the
Arrangement") under the Business Corporations Act of Alberta pursuant
to an arrangement agreement dated August 8, 2002 between the Trust,
Trinidad Drilling Ltd. and Acquisition Corp., a wholly-owned
subsidiary of the Trust. The Arrangement involved the exchange of
Trinidad Drilling Ltd. securities on a one-to-one basis for trust
units of the Trust. The effective date of the Trust indenture was
September 17, 2002.
2. ACCOUNTING POLICIES AND ESTIMATES
These consolidated financial statements are prepared by management,
in accordance with Canadian Generally Accepted Accounting Principles.
The preparation of financial statements in accordance with Canadian
Generally Accepted Accounting Principles requires management to make
estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities, disclosure of
contingent amounts and the reported amounts of revenues and expenses.
Actual results could differ from these estimates.
Principles of consolidation
The consolidated financial statements include the accounts of the
Trust and its subsidiaries, all of which are wholly-owned at
December 31, 2006. Any reference to the Trust throughout these
consolidated financial statements refers to the Trust and its
subsidiaries. All intercompany transactions have been eliminated.
Foreign currency translation
Effective January 1, 2006, the Trust changed from the temporal method
of foreign currency translation to the current rate method to account
for the Trust's US operations. Revenues and expenses of the
subsidiary are translated at the average exchange rate for the period
while assets and liabilities are translated at the current exchange
rate in effect at the balance sheet date. Gains or losses resulting
from these translation adjustments are included in the cumulative
translation account in unitholders' equity. The change in accounting
policy has been applied prospectively and resulted in a foreign
exchange loss of $2.1 million being deferred and recorded in the
cumulative translation account as at January 1, 2006.
Revenue recognition
Revenue from contract drilling services are recognized based upon
purchase orders or contracts with customers that specify fixed prices
calculated on a daily or hourly base. Customer contracts do not
include a provision for post-service delivery obligations. Revenue is
recognized when services are performed and only when collectability
is reasonably assured.
Construction operations recognize revenue on a percentage of
completion basis and only when collectability is reasonably assured.
Losses are provided for in full when first determined.
Deposits received on future contracts are recorded as deferred
revenue and recognized as services are performed.
Cash and cash equivalents
Cash and cash equivalents consist of cash and short term investments
with maturities of three months or less.
Inventory
Inventory consists of parts, materials and labour related to the
construction, recertification and refurbishment of rigs and rig
related equipment. Inventory is valued at the lower of cost
(principally on the specific identification method) or net realizable
value.
Capital assets
Capital assets are recorded at cost less accumulated amortization.
Major renewals and improvements, which extend the future life of the
asset, are capitalized, while repair and maintenance expenses are
charged to operations as incurred. Disposals are removed at carrying
costs less accumulated amortization with any resulting gain or loss
reflected in operations. Any deposits or advances on the Trust's
build programs are held as deposits on capital assets and any costs
incurred internally on the construction of rig and rig related
equipment are recorded as assets under construction. These costs will
be held as deposit on capital assets or assets under construction
until the related asset is ready for use at which time it will be
capitalized.
Depreciation is based on the estimated useful lives of the assets and
is as follows:
---------------------------------------------------------------------
Drilling rigs and related 4,200 drill days Unit-of-production
equipment (10% salvage value)
Drilling pipe and collars 1,300 drill days Unit-of-production
Well servicing rigs 24,000 hours Unit-of-production
(20% salvage value)
Construction equipment 5 to 20 years Straight-line
Buildings 25 years Straight-line
Office furniture and other 5 years Straight-line
equipment
Automotive equipment 4 years Straight-line
(10% salvage value)
---------------------------------------------------------------------
Effective January 1, 2006, the Trust re-assessed the useful life of
its drilling and well servicing rigs for purposes of determining
depreciation expense. As a result of this evaluation the Trust has
increased the useful life of its drilling rigs from 3,300 drilling
days (10% salvage value) to 4,200 drilling days (10% salvage value).
This change in estimate has been applied prospectively and resulted
in a reduction of depreciation expense of $9.1 million for the year
ended December 31, 2006. In addition, the Trust has changed its
policy for depreciating its well servicing rigs from 15 years
straight-line basis (20% salvage value) to 24,000 hours (20% salvage
value) to be more reflective of the useful life of the assets. This
change in policy has been applied retroactively. The impact on prior
years was immaterial for restatement and resulted in an increase of
$0.4 million in depreciation expense for its well servicing rigs for
the year ended December 31, 2006.
Goodwill
Goodwill represents the excess of the purchase price over the fair
values of the assets purchased. Goodwill is not subject to
amortization, but is tested for impairment at least annually by
applying a fair value based test. Any goodwill impairment will be
recognized as an expense if the carrying amount of the goodwill
exceeds its fair value.
Deferred finance costs
Costs associated with obtaining financing are deferred and amortized
on a straight line basis over five years. The amortization is
included in depreciation and amortization expense.
Income tax
The Trust follows the liability method of accounting for income tax.
Under this method, income tax liabilities and assets are recognized
for estimated tax consequences attributable to differences between
the amounts reported in the financial statements and their respective
tax basis, using substantively enacted income tax rates. The effect
of a change in income tax rates on future tax liabilities and assets
is recognized in income in the period that the change occurs.
The Trust is a taxable entity under the Canadian Income Tax Act and
is taxable only on the income that is not distributed or
distributable to unitholders (note 6).
Unit based compensation
The Trust has established a Trust Unit Incentive Plan ("the Plan") to
assist directors, officers, employees and consultants of the Trust
and its affiliates to participate in the growth and development of
the Trust.
Compensation expense associated with rights granted under the Plan is
deferred and recognized into earnings over the vesting period of the
rights granted with a corresponding increase in contributed surplus.
The Trust uses the fair value method using the Black-Scholes model to
calculate compensation expense.
Exchangeable shares
Exchangeable shares which were issued by a subsidiary of the Trust
are convertible into trust units based on an exchange ratio, which is
adjusted monthly to reflect the distributions paid on the Trust
units. These exchangeable shares are not transferable to third
parties and can only be disposed of by exchanging them for trust
units. As a result the exchangeable shares have been classified as
part of unitholders' equity.
Financial instruments
The Trust's financial assets and liabilities consist of cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities, deferred revenue and long-term debt. The fair value of
these financial assets and liabilities approximate their carrying
value, unless otherwise noted. It is management's opinion that the
Trust is not exposed to significant interest or credit risks other
than such risk relating to non-hedged floating rate debt.
Derivative financial instruments
The Trust utilizes derivative financial instruments to manage
economic exposure to market risks relating to fluctuations in
interest rates. The Trust is impacted by interest rate changes based
on the amount of floating rate debt outstanding. Derivative financial
instruments are not used for trading or speculative purposes.
The Trust formally documents all relationships between hedging
instruments and the hedged items, the risk management objective and
the method for assessing the effectiveness of the hedge. The
effectiveness of the hedge is assessed both at inception of the hedge
and throughout its term. If the derivative is deemed effective, and
qualifies for hedge accounting, gains and losses are deferred until
settlement of the derivative contract. If a derivative does not
qualify for hedge accounting, gains and losses resulting from
fluctuations in the fair value of the derivative are recognized into
income in the period that they occur.
Earnings per unit
Earnings per unit is calculated using the weighted-average number of
units and exchangeable shares outstanding during the year. Diluted
calculations have been completed using the treasury method.
3. ACQUISITIONS
(a) Acquisition of shares of Titan Surface Casing Ltd.
On April 29, 2005 Trinidad Drilling, a subsidiary of the Trust,
purchased all of the outstanding shares of Titan Surface Casing Ltd.
("Titan"), effective April 1, 2005, for consideration of
$33.0 million. The acquisition was funded through the issuance of
1,961,132 exchangeable shares with a value of $20.8 million, the
issuance of 85,960 trust units with a value of $0.9 million and cash
of $3.4 million. As part of the Titan acquisition, at the time of
closing, Trinidad was obligated to repay the $3.8 million of long-
term debt and $4.1 million of shareholder loans.
The exchangeable shares can be converted (at the option of the
holder) into trust units at any time. The exchangeable shares are a
new series of exchangeable shares which are not publicly traded and
have an exchange ratio of 1:1 at the time of issuance. The
exchangeable shares are exchangeable into trust units at any time up
to five years after issuance, based on an exchange ratio that adjusts
each time the Trust makes a distribution to its unitholders.
The consideration paid for this acquisition has been allocated under
the purchase method as follows:
(thousands) 2005
---------------------------------------------------------------------
Purchase price allocated as follows:
Working capital, net 13
Other assets 60
Goodwill 21,985
Capital assets 12,450
Future income taxes (1,496)
------------
33,012
------------
Financed as follows:
Trust units 911
Exchangeable shares 20,788
Cash, net of working capital 11,300
------------
32,999
Plus: working capital 13
------------
33,012
------------
Goodwill from this acquisition is not tax deductible.
(b) Acquisition of assets of Summit Energy Services Inc.
On September 30, 2005 Trinidad Well Servicing, a subsidiary of the
Trust, purchased substantially all of the well servicing assets of
Summit Energy Services Inc. for consideration of $18.0 million. The
acquisition was funded through internal funds flow.
The consideration paid for this acquisition has been allocated under
the purchase method as follows:
(thousands) 2005
---------------------------------------------------------------------
Capital assets 12,716
Goodwill 5,324
------------
18,040
------------
Financed as follows:
------------
Internal funds flow 18,040
------------
The total amount of goodwill arising from this acquisition that is
tax deductible is $4.0 million.
(c) Acquisition of assets of Cheyenne Drilling LP
On December 20, 2005 Trinidad Drilling LP, a subsidiary of the Trust,
purchased substantially all of the assets of Cheyenne Drilling LP
("Cheyenne") for consideration of $231.4 million. The acquisition
was funded through $175.9 million in cash proceeds raised through the
issuance of 10,666,667 trust units for gross proceeds of
$189.9 million and the issuance of 3,696,786 trust units at a price
of $15.00 to the shareholders of Cheyenne.
The consideration paid for this acquisition has been allocated under
the purchase method as follows:
(thousands) 2005
---------------------------------------------------------------------
Capital assets 189,425
Goodwill 42,314
------------
231,739
------------
Financed as follows:
New equity raised net of issue costs 176,287
New equity issued to shareholders of Cheyenne 55,452
------------
231,739
------------
The total amount of goodwill arising from this acquisition that is
tax deductible is $42.3 million.
(d) Amalgamation of Mastco Derrick Services Ltd.
Effective March 16, 2006, the Trust amalgamated one of its wholly-
owned subsidiaries with Mastco Derrick Services Ltd. ("Mastco") for
consideration of $62.4 million less outstanding debts adjusted for
net working capital. Mastco's purchase price is subject to a working
capital adjustment which has not been finalized to date. The
acquisition was funded through internal funds flow of $15.8 million
and the issuance of 1,494,557 trust units with a value of
$24.7 million.
The consideration paid for this acquisition has been preliminarily
allocated under the purchase method as follows:
(thousands) 2006
---------------------------------------------------------------------
Purchase price allocated as follows:
Working capital, net (21,808)
Other assets 329
Goodwill 42,837
Capital assets 17,148
Future income taxes 2,018
------------
40,524
------------
Financed as follows:
Trust units 24,720
Cash, net of working capital adjustment 15,804
------------
40,524
------------
Goodwill from this acquisition is not tax deductible.
4. CAPITAL ASSETS
2006
As at December 31, Accumulated Net Book
(thousands) Cost Amortization Value
---------------------------------------------------------------------
Rigs and rig related equipment 860,144 96,674 763,470
Automotive equipment and other
equipment 15,288 4,592 10,696
Construction equipment 615 52 563
Building 23,234 938 22,296
Land 12,346 - 12,346
Assets under construction 93,740 - 93,740
-----------------------------------------
1,005,367 102,256 903,111
-----------------------------------------
2005
As at December 31, Accumulated Net Book
(thousands) Cost Amortization Value
---------------------------------------------------------------------
Rigs and rig related equipment 593,758 50,055 543,703
Automotive equipment and other
equipment 8,064 2,041 6,023
Construction equipment - - -
Building 11,156 133 11,023
Land 6,638 - 6,638
Assets under construction - - -
-----------------------------------------
619,616 52,229 567,387
-----------------------------------------
5. LONG-TERM DEBT
As at December 31,
(thousands) 2006 2005
---------------------------------------------------------------------
Credit facilities(a) 382,037 95,080
Building loans(b) 8,752 9,100
Vehicle loans(c) 719 1,270
-------------------------
391,508 105,450
Less: current portion of long-term debt (3,232) (9,494)
-------------------------
388,276 95,956
-------------------------
a) Effective April 18, 2006, the Trust closed a new syndicated loan
facility to increase the principal available from $250.0 million to a
facility comprised of a $250.0 million Canadian revolver and a
$100.0 million Canadian five-year term facility. The Canadian
revolving facility requires monthly interest payments and is
renewable annually subject to the mutual consent of the lenders and
the Trust. To the extent that the facility is not renewed the drawn
down principal would be due 364 days later. The Canadian term loan
requires monthly interest payments based on a spread over the one,
two or three month BA rate and requires repayment based on
one percent annual amortization and a balloon payment at its maturity
date of May 1, 2011.
A US subsidiary of the Trust closed a $125.0 million US dollar
five-year term facility to fund the current US operations. This
facility requires monthly interest payments based on a spread over
the one, two or three month LIBOR rate and requires repayment based
on one percent annual amortization and a balloon payment at its
maturity date of May 1, 2011.
The new facilities represent a combined Canadian dollar equivalent
debt capacity of approximately $495.7 million and were structured by
GE Energy Financial Services and syndicated by GE Capital Markets,
Inc. The members of the syndicate group include major Canadian,
United States and International financial institutions. This debt is
secured by a general guarantee over the assets of the Trust.
The effective interest rate on this facility was 7.6% for the
year-ended.
b) On December 15, 2005, Trinidad entered into a $9.1 million
non-revolving credit facility with GE Canada on properties held by
the Trust. The facility requires monthly interest payments at a rate
of 6.26% per annum, matures June 2011 and is secured by the
respective properties.
c) The vehicle loans are payable over various periods from 24 months
to 40 months at interest rates varying from 0% to 9%, and are secured
by the related assets.
6. INCOME TAXES
For the years ended December 31,
(thousands) 2006 2005
---------------------------------------------------------------------
Net income before tax 139,273 57,834
Corporate tax rate 32.98% 34.16%
-------------------------
Tax expense at statutory rate 45,932 19,756
Tax reduction arising from trust
income distribution (26,765) (12,656)
Non deductible expenses 2,156 1,136
Statutory and other rate differences (1,656) -
Effect of change in expected tax rate (2,912) (344)
Large corporation tax expense (388) 1,334
Other (800) 377
-------------------------
Total tax expense 15,567 9,603
-------------------------
The liability and asset for future income taxes on the Trust's
balance sheet is comprised of the following temporary differences:
As at December 31,
(thousands) 2006 2005
---------------------------------------------------------------------
Loss carry forward 2,057 1,226
Unbilled revenue (5,585) -
-------------------------
Future tax liability (3,528) 1,226
-------------------------
Loss carry forward 18,836 4,768
Capital assets (57,657) (33,731)
Financing costs 102 (37)
-------------------------
Future tax liability (38,719) (29,000)
-------------------------
Loss carry forwards of $61.8 million have been recognized for income
tax purposes of which $55.3 million have been recorded as a non-
current future tax asset and are due to expire between 2025 and 2026.
On December 21, 2006, the Minister of Finance released for comment
draft legislation concerning the taxation of certain publicly traded
trusts. The legislation reflects proposals originally announced by
the Minister on October 31, 2006. Under the proposed legislation,
income trusts will be taxed on a basis similar to corporations, where
distributions made from the Trust to unitholders will be taxed at the
Trust level. Under the proposed plan, income distributions will
first be taxed at the Trust level at a special rate estimated to be
31.5%, and for taxable Canadian residents distributions will be
treated as dividends from a Canadian corporation and will be eligible
for the dividend tax credit. The government is proposing a four-year
transition period for existing trusts and as such Trinidad will not
be subject to the proposed measures until its 2011 taxation year. It
is not known at this time if or when the proposal will be enacted by
Parliament.
7. UNITHOLDERS' CAPITAL AND CONTRIBUTED SURPLUS
a) Unitholders' Capital
Authorized
Unlimited number of trust units, voting, participating
For the years ended December 31,
(thousands except unit data) 2006 2005
---------------------------------------------------------------------
Number of Amount Number of Amount
Units $ Units $
------------------------------------------------
Unitholders' capital
- opening balance 78,909,976 621,972 45,898,116 222,815
Trust units issued
- for cash, net of
issue costs - - 24,590,144 308,522
Trust units issued
on acquisitions 1,494,557 24,720 3,782,746 56,363
Trust units issued
on conversion of
exchangeable shares 1,505,630 13,825 4,158,022 31,986
Trust units issued
on exercise of
options and rights 1,138,289 8,272 480,948 1,977
Trust units
repurchased under
normal course issuer
bid (66,500) (537) - -
Contributed surplus
transferred on
exercised options
and rights - 1,332 - 309
------------------------------------------------
Unitholders' capital
- ending balance 82,981,952 669,584 78,909,976 621,972
------------------------------------------------
Effective September 14, 2006 Trinidad announced its intent to acquire
for cancellation up to 10% (7,336,882 trust units) of the Trust's
publicly traded units by way of a normal course issuer bid ("NCIB")
commencing September 18, 2006 and extending to September 17, 2007.
During the year ended December 31, 2006 the Trust purchased
66,500 units at a cost of $0.9 million. The excess of the purchase
price over the carrying amount of the units purchased and cancelled
is recorded as a reduction of accumulated earnings.
The per unit trust amounts were calculated on the weighted average
number of units outstanding of 83,078,833 (2005 - 58,850,122). In
the current year the calculated additional diluted units are
1,565,606 (2005 - 1,284,195) due to the dilutive impact of employee
and director rights and options.
b) Contributed surplus
For the years ended December 31,
(thousands) 2006 2005
---------------------------------------------------------------------
Contributed surplus - opening balance 5,949 3,055
Unit based compensation expense 7,105 3,203
Contributed surplus transferred on exercise
of rights (1,332) (309)
-------------------------
Contributed surplus - ending balance 11,722 5,949
-------------------------
8. EXCHANGEABLE SHARES
A subsidiary of the Trust has issued the following exchangeable
shares:
For the years ended December 31,
(thousands except unit data) 2006 2005
---------------------------------------------------------------------
Number of Amount Number of Amount
Shares $ Shares $
------------------------------------------------
Exchangeable shares
- opening balance 2,007,883 19,602 3,948,718 30,800
Exchangeable shares
issued, Series C
- Titan purchase - - 1,961,132 20,788
Exchangeable shares
exchanged, Initial
Series (347,100) (2,707) (1,707,162) (13,316)
Exchangeable shares
exchanged, Series B - - (1,641,026) (12,800)
Exchangeable shares
exchanged, Series C (1,048,817) (11,118) (553,779) (5,870)
------------------------------------------------
Exchangeable shares
- ending balance 611,966 5,777 2,007,883 19,602
------------------------------------------------
The exchange ratio for the 253,430 initial series exchangeable shares
is 1.23871 and the trust units issuable upon conversion are 313,926.
All Series B exchangeable shares were converted in the prior year.
The exchange ratio for the 358,536 Series C exchangeable shares is
1.13161 and the trust units issuable upon conversion are 405,722.
9. UNIT OPTION AND RIGHTS PLAN
Unit Option Plan
The Trust Unit Option Plan provides for unit options to assist
directors, officers, employees and consultants of the Trust and its
affiliates to participate in the growth and development of the Trust.
All options issued shall vest in equal proportions over a period of
three years from the date of grant (unless otherwise determined by
the Board of Directors at the time of issue) and, shall be
exercisable for a period of five years from the date of grant. The
options will have an exercise price not exceeding the closing trading
price for the units on the Toronto Stock Exchange on the date
immediately preceding the date of grant and not less than the price
permitted by applicable securities law.
The following summarizes the unit options that are outstanding under
the Unit Option Plan as at December 31, 2006 and 2005 and the changes
during these periods:
For the years ended
December 31, 2006 2005
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
------------------------------------------------
Outstanding
- beginning
of period 19,850 2.25 107,729 1.97
Granted during
the period - - - -
Exercised during
the period (19,850) 2.25 (87,879) 1.91
Forfeited during
the period - - - -
------------------------------------------------
Outstanding - end
of period - - 19,850 2.25
------------------------------------------------
All outstanding options at the beginning of the period were exercised
during the year; hence there are no unit options outstanding as of
December 31, 2006.
For options granted in 2002, the Trust has elected to disclose the
pro forma results as if the amended accounting standard had been
applied retroactively. On May 24, 2002, the Trust issued 172,000
options under the Unit Option Plan at an exercise price of $1.58.
The Trust recognized no compensation expense in respect of the
options granted under its Unit Option Plan. The estimated fair value
of these options, computed using the Black-Scholes model was
approximately $120,000. If the Trust applied the fair value method
of accounting for stock based compensation, the estimated fair value
of $120,000 would be recognized as additional compensation expense
over the vesting period of the options. The pro forma effect of
applying this method of accounting would have no impact for the 2006
fiscal year (2005 - $15,781). There would be no effect on the basic
and diluted earnings per trust unit.
Trust Unit Rights Incentive Plan
On May 2, 2003 the Trust established the Trust Unit Rights Incentive
Plan for unit rights to assist directors, officers, employees and
consultants of the Trust and its affiliates to participate in the
growth and development of the Trust. The Trust Unit Rights Incentive
Plan restricts the number of rights reserved for issuance such that
it does not exceed 10% of the trust units outstanding.
Rights granted vest 50% immediately and 25% on the first and second
anniversary from the date of grant (unless otherwise determined by
the Board of Directors at the time of issuance) and, shall be
exercisable for a period of five years from the date of grant. The
rights will have an exercise price not exceeding the closing trading
price for the units on the Toronto Stock Exchange on the date
immediately preceding the date of grant and not less than the price
permitted by applicable securities law. The exercise price of rights
may be adjusted downwards at the option of the rights holder from
time to time by the amount, if any, that the distributions to
unitholders in any calendar quarter exceed 2% (8% annually) of the
Trust's net book value of capital assets.
The following summarizes the unit rights that are outstanding under
the Trust Unit Rights Incentive Plan as at December 31, 2006 and 2005
and the changes during these periods:
For the years ended
December 31, 2006 2005
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Rights Price Rights Price
------------------------------------------------
Outstanding
- beginning
of period 5,746,326 9.64 3,928,738 7.62
Granted during
the period 3,890,818 15.13 2,257,724 12.22
Exercised during
the period (1,118,437) 7.36 (393,069) 4.60
Forfeited during
the period (271,868) 13.09 (47,067) 6.34
------------------------------------------------
Outstanding
- end of period 8,246,839 12.43 5,746,326 9.64
------------------------------------------------
The range of exercise prices for the unit rights outstanding at
December 31, 2006 is as follows:
---------------------------------------------------------------------
Total Rights Outstanding Exercisable Rights
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Life Exercise
Exercise Prices Number Price (years) Number Price
---------------------------------------------------------------------
$2.78 - $4.00 31,250 2.78 1.34 31,250 2.78
$4.01 - $6.00 252,537 5.30 1.86 252,537 5.30
$6.01 - $9.00 889,662 8.36 2.46 889,662 8.36
$9.01 - $12.50 3,358,262 11.23 3.23 2,663,757 10.97
$12.51 - $16.83 3,715,128 15.06 4.41 1,460,505 15.46
---------------------------------------------------------------------
$2.78 - $16.83 8,246,839 12.43 3.63 5,297,711 11.47
---------------------------------------------------------------------
The Trust uses the Black-Scholes option-pricing model to determine
the estimated fair value of the unit rights issued subsequent to
January 1, 2003. The per unit weighted average fair value of stock
options granted during the year ended December 31, 2006 was $2.15
(2005 - $1.70). For the year ended December 31, 2006 the Trust
recognized compensation expense included in the calculation of net
earnings of $7.1 million (2005 - $3.2 million) using the following
weighted average assumptions:
For the years ended December 31, 2006 2005
---------------------------------------------------------------------
Expected volatility 35.3% 37.1%
Annual distribution yield 8.4% 8.5%
Risk free interest rate 3.5% 3.3%
Expected life (years) 3.3 3.5
---------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS
Effective July 1, 2006, Trinidad entered into two interest rate swap
agreements to hedge the floating interest rates on fifty percent of
the outstanding balances of the Canadian and US term debt facilities.
These interest rate swaps mature concurrently with the long-term debt
facility on May 1, 2011 allowing the Trust to mitigate its risk of
interest rate fluctuations over the term of the debt agreement.
Fifty percent of the outstanding balance of the Canadian term
facility swapped interest based on a spread over the one month BA for
a fixed interest rate of 5.362%. Simultaneously the Trust hedged
fifty percent of the US term facility swapping interest based on a
spread over the one, two or three month LIBOR for fixed interest of
6.108%.
The effectiveness of the interest rate swaps were evaluated and found
to be effective. As such the Trust has applied hedge accounting. For
the year ended December 31, 2006, a loss of $0.5 million was recorded
in interest expense.
11. COMMITMENTS
The Trust has several capital and operating lease agreements on
buildings and equipment. The future lease obligations for the next
five years are summarized below:
(thousands)
---------------------------------------------------------------------
2007 3,024
2008 2,774
2009 2,412
2010 2,052
2011 7,154
In 2005 and early 2006, Trinidad announced its intent to expand its
existing drilling fleet through the construction of 29 new diesel
electric drilling rigs which will be deployed in both Canada and the
United States. This construction program has enabled the Trust to
actively pursue growth opportunities in the market and provide
accretive growth to its unitholders. All of the rigs are backed by
take-or-pay contracts which provide for committed drilling days and
drilling rates over the next three to five years. Furthermore, the
cost of construction on five of the rigs has been partially financed
through customer contributions, to be returned based on drilling days
over the term of the contract. Total capital costs of construction
are expected to be $401.0 million, of which approximately
$356.2 million was paid as at December 31, 2006. Four of these rigs
were completed and deployed in 2005 and an additional fifteen
throughout 2006. The remaining rigs are scheduled to be delivered in
the first and second quarter of 2007.
12. SEGMENTED INFORMATION
The acquisition of Cheyenne Drilling, which closed December 20, 2005,
and the current rig construction program have diversified the Trust's
operations from its primary geographic focus in Western Canada to
include locations in the United States, including the Rocky Mountain
region, Mid Continent region, and the Texas and Oklahoma regions.
This acquisition added additional rigs of varying depths and
capabilities to the current drilling fleet operating in the Canadian
market complementing the current drilling operations. Despite the
similarities in the assets acquired, the increased management depth
in the United States and the varying conditions between the Canadian
and United States market has resulted in management evaluating the
Trust's drilling operations performance on a geographically segmented
basis. In addition, the acquisition of Mastco further broadened the
operations of the Trust to include the capability to design,
manufacture, sell and refurbish drilling rigs, and related equipment.
The unique characteristics of this subsidiary from the Trust's core
drilling operations have resulted in management's separate evaluation
of its results. Transactions between the segments are recorded at
cost and have been eliminated upon consolidation.
---------------------------------------------------------------------
For the
year ended United Inter-
December 31, Canadian States Construc- segment
2006 Drillings Drilling tion Elimin-
(thousands) Operations Operations Operations ations Total
---------------------------------------------------------------------
Revenue 364,278 166,498 111,128 (62,049) 579,855
Operating
expense 196,665 77,676 97,979 (62,049) 310,271
------------------------------------------------------
Gross margin 167,613 88,822 13,149 - 269,584
Interest 12,151 8,424 149 - 20,724
Depreciation
and
amortization 30,749 20,994 458 - 52,201
(Gain) loss on
assets (1,852) (27) - - (1,879)
------------------------------------------------------
Income before
corporate
items 126,565 59,431 12,542 - 198,538
General and
administrative 51,627
Unit based
compensation 7,105
Foreign exchange
(gain) loss 533
Income taxes 15,567
------------------------------------------------------
Net earnings 123,706
------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 158,517 199,358 74 - 357,949
Total assets 680,591 528,872 36,170 - 1,245,633
Goodwill 38,155 42,491 42,837 - 123,483
---------------------------------------------------------------------
---------------------------------------------------------------------
For the
year ended United Inter-
December 31, Canadian States Construc- segment
2005 Drillings Drilling tion Elimin-
(thousands) Operations Operations Operations ations Total
---------------------------------------------------------------------
Revenue 282,938 5,394 - - 288,332
Operating
expense 164,701 3,216 - - 167,917
------------------------------------------------------
Gross margin 118,237 2,178 - - 120,415
Interest 5,600 - - - 5,600
Depreciation
and
amortization 27,255 968 - - 28,223
(Gain) loss
on assets 263 - - - 263
------------------------------------------------------
Income before
corporate
items 85,119 1,210 - - 86,329
General and
administrative 26,183
Unit based compensation 3,203
Foreign exchange (gain) loss (87)
Income taxes 9,603
------------------------------------------------------
Net earnings 47,427
------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 135,859 293,069 - - 428,928
Total assets 558,665 274,651 - - 833,316
Goodwill 37,115 42,314 - - 79,429
---------------------------------------------------------------------
13. SUBSEQUENT EVENT
On January 26, 2007, Trinidad announced the construction of an
additional 5 new customer backed rigs to the rig construction
program. All five rigs will be operating in the United States, each
backed by take-or-pay contracts, providing committed drilling days
and drilling rates over the next three years. Total capital costs of
construction are estimated to be $80 million to be funded through
Trinidad's recently expanded credit facility and internal cash flow.
Approximately $33.8 million has been paid as at February 20, 2007.
14. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to current year's presentation. Such reclassification did not impact
previously reported net income or retained earnings.
For further information:
For further information: Michael Heier, Chairman & Chief Executive Officer or Brent Conway, Chief Financial Officer at: Phone: (403) 265-6525, Fax: (403) 265-4168; E-mail: twood@trinidaddrilling.com