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Trinidad Energy Services Income Trust announces first quarter results - March 31, 2007
TSX SYMBOL: TDG.UN
CALGARY, May 9 /CNW/ - The following is management's discussion and
analysis ("MD&A") concerning the operating and financial results for the three
months ended March 31, 2007, and its outlook based on information available as
at April 30, 2007. The MD&A is based on the Trinidad Energy Services Income
Trust (the "Trust" or "Trinidad") consolidated financial statements for the
period ended March 31, 2007 which were prepared in accordance with Canadian
Generally Accepted Accounting Principles ("GAAP"). The MD&A should be read in
conjunction with the audited consolidated financial statements of the Trust
for the year ended December 31, 2006. Additional information is 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, are available through SEDAR (www.sedar.com).-------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Three months ended March 31,
(thousands except unit and per unit
data - Unaudited) 2007 2006
-------------------------------------------------------------------------
Revenue 206,211 162,937
Gross margin(1) 95,943 84,689
EBITDA(1) 80,527 69,573
Per unit (diluted) 0.95 0.83
EBITDA before unit based compensation(1) 81,302 73,426
Per unit (diluted) 0.96 0.88
Funds flow before change in non-cash
working capital(1) 72,810 70,742
Per unit (diluted) 0.86 0.84
Distributions paid and declared 28,737 21,370
Distributions paid and declared per unit (basic) 0.34 0.26
Payout ratio(2) 39% 30%
Net earnings 41,943 39,984
Per unit (basic) 0.50 0.49
Per unit (diluted) 0.49 0.48
Net earnings before unit based compensation 42,718 43,837
Per unit (diluted) 0.50 0.52
Units outstanding - basic (weighted
average)(3) 83,796,732 81,515,476
Units outstanding - diluted (weighted
average)(3) 84,865,852 83,742,614
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(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 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.
(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.
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OPERATING HIGHLIGHTS
Three months ended March 31,
(Unaudited) 2007 2006
-------------------------------------------------------------------------
Operating days - drilling
Canada 3,817 4,184
United States 2,464 1,447
Rate per drilling day (CDN $)
Canada 26,063 23,579
United States 25,506 21,596
Utilization rate - drilling
Canada 69% 86%
United States 85% 85%
CAODC industry average 59% 81%
Number of drilling rigs
Canada 63 56
United States 37 21
Utilization rate for service rigs 73% 85%
Number of service rigs 20 17
Number of coring and surface casing rigs 17 17
-------------------------------------------------------------------------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 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", "EBITDA", "gross
margin" and associated per unit data are not measures recognized by GAAP and
therefore do not have standardized meaning. Accordingly, these measures may
not be comparable to similar measures presented by other companies. However,
the Trust computes "funds flow before change in non-cash working capital",
"EBITDA" and "gross margin" on a consistent basis for each reporting period.
OVERVIEW
Overall reductions in the Canadian drilling market continued to impact
the industry throughout the period, causing a 27.2% decline in the average
industry utilization from the comparable quarter in the prior year. The
Trust's Canadian drilling operations, while impacted by the softer market
conditions, was shielded from the impact of this slower market through its
focus on deeper drilling and longer term contracts. Although overall
utilization levels declined in the first quarter of 2007 to an average of
69.0% Trinidad continued to exceed the market by 16.9%. Further growth in the
Canadian drilling fleet has also continued to be a major focus of the Trust,
which resulted in an additional three Canadian rigs being deployed in the
current quarter increasing the fleet by seven rigs since the end of March
2006. The growth in the overall drilling fleet and increases in day rates from
the first quarter of 2006 resulted in relatively stable revenue from the
Canadian drilling operations despite the softer market. Additionally,
increased involvement of the Trust's coring operations in the oil sands
throughout the first quarter contributed approximately $3.7 million in revenue
growth quarter-over-quarter.
The US operations continued to grow throughout the first quarter of 2007
and the deployment of the rigs currently committed under long-term take-or-pay
contracts continues to be a primary focus of operations in the US. Throughout
the quarter an additional six rigs were released increasing the total rig
count to 37 at the end of March 2007. The strategic decision to expand
operations into the US provided increased revenue at stable utilization rates
throughout the period, significantly increasing US revenue
quarter-over-quarter and stabilizing the overall performance of the Trust
during a time of market volatility in Canada. Furthermore, the increased
revenue generated in the United States will continue to add stability to the
Trust's funds flow throughout the year as the US market is not impacted by
road bans which typically prohibit the movement of rigs in the Trust's
Canadian operations during spring break-up.
The acquisition of Mastco Derrick Service Ltd. ("Mastco") has placed the
Trust in a favourable position to fulfill its obligations under the current
rig construction program as well as complete future recertifications on the
current drilling fleets. Since the acquisition, Mastco has completed and
released eight Canadian rigs under Trinidad's long-term take-or-pay contracts
and has assisted in the recertification work completed on the Canadian
drilling fleet, increasing the efficiency of the overall recertification
program. In addition, Mastco is assisting in the completion of the US rigs
committed to customers in order to ensure that their demands are met on a more
timely basis. External work was minimal throughout the quarter, but the
completion of intercompany work resulted in significant headway on the Trust's
current rig construction program. Progress on the rig construction program
continues to be a major focus of the Trust to ensure unitholder return.2007 2006
Q1 Q4 Q3 Q2 Q1
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Financial Highlights
(millions except per unit
data - Unaudited)
Revenue 206.2 161.9 150.6 104.5 162.9
Gross margin(1) 95.9 74.9 66.9 43.1 84.7
Net earnings (loss) 41.9 31.3 31.6 20.8 40.0
Depreciation and amortization 18.3 15.4 14.0 9.7 13.1
(Gain) loss on assets 0.1 0.1 (2.0) - -
Unit based compensation 0.8 1.8 0.7 0.8 3.8
Future income tax
expense (recovery) 10.2 6.2 4.6 (8.7) 13.9
Effective interest on
financing costs 0.3 - - - -
Unrealized foreign exchange
loss (gain) 1.2 (0.1) - 0.2 (0.2)
Other - - 0.1 (0.3) 0.1
-------------------------------------------
Funds flow before change in
non-cash working capital(1) 72.8 54.7 49.0 22.5 70.7
Earnings (loss) per
unit (diluted) 0.49 0.37 0.38 0.24 0.48
Funds flow before change in
non-cash working capital
per unit (diluted)(1) 0.86 0.65 0.57 0.26 0.84
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2005
Q4 Q3 Q2 Q1
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Financial Highlights
(millions except per unit
data - Unaudited)
Revenue 106.4 75.3 32.5 74.1
Gross margin(1) 46.4 31.8 7.8 34.5
Net earnings (loss) 19.4 13.8 (1.8) 16.0
Depreciation and amortization 9.3 8.0 3.4 7.5
(Gain) loss on assets 0.2 0.1 - -
Unit based compensation 0.6 0.5 2.0 0.1
Future income tax
expense (recovery) 5.5 1.7 (4.0) 5.0
Effective interest on
financing costs - - - -
Unrealized foreign exchange
loss (gain) - - - -
Other - - - -
-----------------------------------
Funds flow before change in
non-cash working capital(1) 35.0 24.1 (0.4) 28.6
Earnings (loss) per
unit (diluted) 0.29 0.21 (0.03) 0.31
Funds flow before change in
non-cash working capital
per unit (diluted)(1) 0.51 0.37 (0.01) 0.56
----------------------------------------------------------------
(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.
2007 2006
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Operating Highlights
(Unaudited)
Operating days - drilling
Canada 3,817 3,163 3,358 1,826 4,184
United States 2,464 2,105 1,891 1,603 1,447
Rate per drilling day (CDN $)
Canada 26,063 26,328 23,083 23,927 23,579
United States 25,506 24,621 24,042 24,089 21,596
Utilization rate - drilling
Canada 69% 61% 64% 36% 86%
United States 85% 85% 85% 82% 85%
CAODC industry average 59% 47% 57% 34% 81%
Number of drilling rigs
Canada 63 60 59 57 56
United States 37 31 26 22 21
Utilization for service rigs 73% 64% 68% 31% 85%
Number of service rigs 20 18 18 17 17
Number of coring and
surface casing rigs 17 17 17 17 17
-------------------------------------------------------------------------
2005
Q4 Q3 Q2 Q1
----------------------------------------------------------------
Operating Highlights
(Unaudited)
Operating days - drilling
Canada 3,795 3,487 1,472 3,544
United States 235 37 - -
Rate per drilling day (CDN $)
Canada 23,280 19,196 19,448 20,121
United States 19,245 20,122 - -
Utilization rate - drilling
Canada 78% 73% 31% 76%
United States 83% 100% - -
CAODC industry average 71% 63% 32% 71%
Number of drilling rigs
Canada 54 52 52 52
United States 17 1 - -
Utilization for service rigs 67% 61% 41% 69%
Number of service rigs 16 16 9 9
Number of coring and
surface casing rigs 17 18 18 -
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RESULTS FROM OPERATIONS
Canadian Drilling Operations
Three months ended March 31, 2007 2006 % Change
(thousands except percent data
and operating data - Unaudited)
-------------------------------------------------------------------------
Revenue 135,085 130,132 3.8
Operating expense 70,406 63,511 10.9
--------------------------------------
Gross margin 64,679 66,621 (2.9)
--------------------------------------
Gross margin percentage 47.9% 51.2%
Operating days - drilling 3,817 4,184 (8.8)
Rate per drilling day (CDN $) 26,063 23,579 10.5
Utilization rate - drilling 69% 86% (19.8)
CAODC industry average 59% 81% (27.2)
Number of drilling rigs 63 56 12.5
Utilization rate - well servicing 73% 85% (14.1)
Number of service rigs 20 17 17.6
Number of coring and surface
casing rigs 17 17 -The first quarter of 2007 continued to demonstrate the strength of the
Trust's Canadian drilling fleet achieved through its diversification into the
deeper drilling market and its focus on securing long-term contracts with oil
and gas producers. As industry fundamentals weakened throughout 2006 due to
reductions in commodity prices and high natural gas storage levels, average
industry utilization declined by 27.2% from 81.0% in first quarter of 2006 to
59.0% in the first quarter of 2007. The Trust's strong market position
achieved through its growth initiatives enabled Trinidad to achieve
utilization rates for the quarter of 69.0%, exceeding the industry average by
16.9%, despite the market reductions and an earlier spring break-up than in
the prior year. Growth in the Trust's drilling fleet to 63 rigs at the end of
the first quarter and increased day rates of 10.5% from the first quarter of
2006 allowed the drilling operations to maintain revenue levels consistent
with the prior year despite the overall decline in utilization. Additionally,
growth in the Trust's surface casing and coring division provided the majority
of the revenue increase of $5.0 million quarter-over-quarter from
$130.1 million in 2006 to $135.1 million in 2007. Increased coring in the oil
sands throughout the period was the main contributing factor to this growth in
revenue, producing increased revenue at improved margins.
Operating expenses in the Trust's Canadian drilling operations increased
by $6.9 million, from $63.5 million in 2006 to $70.4 million in 2007.
Additional rigs deployed throughout 2006 increased the drilling fleet from
56 rigs at the end of the first quarter of 2006 to 63 rigs in 2007. The
expanded fleet contributed to higher labour costs throughout the period which
increased operating expenses quarter-over-quarter. Consolidated gross margin
percentages however declined from 51.2% to 47.9% primarily due to higher
operating costs and one time expenses for commissioning the new rigs.United States Drilling Operations
Three months ended March 31,
(thousands except percent and
operating data - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Revenue 62,840 31,016 102.6
Operating expense 32,761 12,931 153.3
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Gross margin 30,079 18,085 66.3
--------------------------------------
Gross margin percentage 47.9% 58.3%
Operating days - drilling 2,464 1,447 70.3
Rate per drilling day (CDN $) 25,506 21,596 18.1
Utilization rate - drilling 85% 85% -
Number of drilling rigs 37 21 76.2The Trust's US drilling operations continue to provide significant growth
quarter-over-quarter increasing revenue by 102.6% from $31.0 million in the
first quarter of 2006 to $62.8 million in 2007. The continued execution of the
commitment to build 34 drilling rigs in both Canada and the US increased the
overall rig count significantly, resulting in the US building its drilling
fleet to 37 drilling rigs at March 31, 2007. The increase of 16 drilling rigs
throughout 2006 and 2007, secured by take-or-pay contracts, increased the
overall number of operating days in comparison with the first and fourth
quarter of 2006 contributing to the overall revenue growth. Additionally, the
continued deployment of these rigs also increased the rate per drilling day
quarter-over-quarter and fluctuations in foreign currency increased it
slightly in comparison with the fourth quarter of 2006. Growth of the US
drilling operations has been 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.
Operating expenses grew as a result of the overall growth in revenue
throughout the period from $12.9 million in 2006 to $32.8 million in 2007,
however, overall margins declined from 58.3% to 47.9%. Declines in margins
resulted from the additional rigs being deployed throughout the quarter and
additional costs incurred to prepare them for the field as well as incremental
training costs incurred for the crews required once the rigs were fully
operational. As the number of new rigs being deployed declines and the rig
construction program is completed, margin levels should increase to levels
comparable with 2006.Construction Operations
Three months ended March 31,
(thousands except percent
data - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Revenue(1) 30,608 4,304 611.2
Operating expense(1) 29,423 4,321 580.9
--------------------------------------
Gross margin 1,185 (17) 7,070.6
--------------------------------------
Gross margin percentage 3.9% -
(1) Includes inter-segment revenue and costs of $22.3 million.On March 16, 2006 the Trust acquired Mastco to facilitate the rig
construction program and enhance control over the delivery of the rigs under
the current rig construction program in order to ensure customer demands were
being met. As this acquisition occurred during the latter part of the first
quarter of 2006, revenue and expenses during this period were minimal.
Throughout 2006 and the first quarter 2007 Mastco concentrated its operations
on completing Trinidad's rig construction program and supported the deployment
of eight Canadian rigs, of which three were released in 2007. As a result,
Mastco recognized inter-segment revenue and costs of $22.3 million with the
Canadian and US drilling operations. Additional revenues of $8.3 million were
also generated in sales to external customers throughout the quarter with
costs of $7.1 million generating a gross margin of 14.5%.GENERAL AND ADMINISTRATIVE EXPENSE
Three months ended March 31,
(thousands except percent
data - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
General and administrative expenses 13,355 11,476 16.4
% of revenue 6.5% 7.0%General and administrative expenses increased to $13.4 million in the
first quarter of 2007 from $11.5 million in 2006, and were maintained at a
level consistent with the fourth quarter of 2006. Changes in the composition
of the Trust's business through the acquisition of Mastco and expansion of the
US operations increased overhead expenses throughout the 2006 fiscal year.
Towards the end of the prior year, as resource requirements stabilized for the
current operations, general and administrative expenses levelled. In addition,
despite 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 7.0% to
6.5% quarter-over-quarter.INTEREST
Three months ended March 31,
(thousands - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Interest 8,575 2,327 268.5In 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 $494.3 million. The debt facility
encompasses both US and Canadian term and revolving facilities which bear
interest at the LIBOR and Bankers Acceptance ("BA") rates, respectively, plus
a spread. This new debt facility was used throughout the year to fund the
execution of the Trust's commitment to construct an additional 34 drilling
rigs, of which 28 had been released by the end of first quarter 2007.
Additionally, the Trust has funded approximately $61.9 million of the capital
requirements on the remaining six rigs expected to be released in the second
and third quarters of 2007. This increased the Trust's long-term debt from
$130.5 million at March 31, 2006 to $471.7, million at March 31, 2007 which
subsequently increased interest expense quarter-over-quarter. Furthermore,
throughout the first quarter of 2006 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, increasing the Trust's overall exposure to
fluctuations in the floating rate.
In order to mitigate the risk of fluctuations in floating interest rates
Trinidad entered into an interest rate swap at the beginning of the third
quarter of 2006 on 50% of the outstanding Canadian and US term facilities. The
net settlement of the interest rate swaps increased interest expense for the
quarter by $0.3 million.
Additionally, effective January 1, 2007, the Trust adopted CICA 3855
Financial Instruments - Recognition and Measurement, which resulted in the
valuation of long-term debt to be recorded net of transaction costs. As a
result of this adoption, the amortization of transaction costs that were
previously classified as amortization expense are now recorded as part of
interest expense under the effective interest method. The application of this
method resulted in a $0.3 million increase in interest expense for the current
quarter.UNIT BASED COMPENSATION
Three months ended March 31,
(thousands - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Unit based compensation 775 3,853 (79.9)The Trust has established a Trust Unit Rights 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 decreased from $3.9 million in the first quarter of 2006 to
$0.8 million in 2007. The decrease of $3.1 million from the first quarter of
2006 is due to the granting of 2.3 million options in the first quarter of
2006 in comparison to 0.6 million options in 2007.FOREIGN EXCHANGE (GAIN) LOSS
Three months ended March 31,
(thousands - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Foreign exchange (gain) loss 1,286 (213) 703.8In the first quarter of 2006, as a result of the acquisition of Cheyenne
Drilling and continued deployment of drilling rigs in the United States, the
US reduced its reliance on the Canadian operations for cash requirements,
resulting in the US operations being considered a self-sustaining operation.
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 first quarter of 2007, the Trust recognized a loss
of $1.3 million in comparison with a gain of $0.2 million in 2006 primarily as
a result of the construction of an additional five new US rigs announced in
January 2007 being funded through Trinidad's Canadian debt facility and
increasing the Trust's exposure to currency fluctuations from the comparative
quarter in 2006.DEPRECIATION AND AMORTIZATION
Three months ended March 31,
(thousands - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Depreciation 18,258 12,781 42.9
Amortization - 325 -
Loss on sale of assets 44 1 4,300.0Depreciation increased 42.9% from $12.8 million in the first quarter of
2006 to $18.3 million in same quarter of 2007. Changes in the composition of
Trinidad's asset base through the current rig construction program have
resulted in the addition of drilling rigs with increased drilling depth which
therefore incrementally added to the capital cost of the Trust's asset base.
This increased the per day depreciation rates for the Canadian drilling
division by $275 per drilling day to $2,471 in first quarter of 2007 from
$2,196 in the comparable quarter of 2006. Increased rates per drilling day
were offset by a decrease in the number of drilling days from 4,184 in the
prior quarter to 3,817 in the current quarter, resulting in relatively stable
depreciation expense from the Canadian operations quarter-over-quarter.
Depreciation in the US market accounted for the majority of the increase in
depreciation expense as rates per drilling day increased by $834 from $2,687
in the first quarter of 2006 to $3,521 in 2007. This resulted from the
deployment of 16 newly constructed US rigs from the end of the first quarter
2006 and the higher cost of capital on these rigs. This higher per day
depreciation rate and a 70.3% increase in US drilling days from 1,447 in the
prior quarter to 2,464 in the current quarter were the main contributing
factors to the overall growth in depreciation.
Due to the adoption of CICA 3855, transaction costs that were previously
classified as amortization expense are now recorded as part of interest
expense under the effective interest method. The application of this method
resulted in a $0.3 million decrease in amortization for the current quarter.INCOME TAXES
Three months ended March 31,
(thousands - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Current income tax 1,473 273 439.6
Future income tax 10,234 13,882 (26.3)In the second quarter of 2006, 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.
On May 19, 2006, the Texas government implemented a significant change to
Texas tax for all corporations. As a result, corporations including limited
liability partnerships, which previously had limited exposure to Texas
franchise tax, are now, effective January 1, 2007, subject to "Margins Tax".
This new law results in the application of a 1% tax rate to the taxable margin
of the US operations which resulted in the Trust recording $0.3 million to
current income tax expense for the period ended March 31, 2007. In addition,
current income tax expense increased due to current federal and provincial tax
of $1.1 million on the earnings of the surface casing and coring operations of
the Trust due to taxable earnings surpassing the available cumulative cost
allowance claim resulting in current tax expense in the current quarter.
Future income tax expense decreased by 26.3% from $13.9 million in the
first quarter of 2006 to $10.2 million in 2007 as a result of a lower
depreciation claim for tax purposes in the current quarter from prior year due
to slight decreases in taxable income of the Canadian entities. This decrease
resulted in lower temporary differences between the accounting value and the
tax value of the Trust's capital assets in the current quarter versus the
comparable quarter. In addition, 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 further reduced
the Trust's future income tax expense. Finally, future income tax expense in
the US division remained relatively stable due to a higher depreciation claim
for tax purposes resulting from increased capital expenditures offset by
higher earnings.
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 a 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.
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
Three months ended March 31,
(thousands except per unit
data - Unaudited) 2007 2006 % Change
-------------------------------------------------------------------------
Net earnings 41,943 39,984 4.9
Per unit (diluted) 0.49 0.48 2.1
Funds flow from operations 72,810 70,742 2.9
Per unit (diluted) 0.86 0.84 2.4Trinidad increased consolidated net earnings by 4.9% from $40.0 million
to $41.9 million primarily as a result of growth in the Trust's US operations.
The deployment of an additional 16 US based rigs since the end of the first
quarter 2006 produced considerably higher revenue. Additionally, despite the
increased rig fleet in the Canadian market, lower utilization levels due to
reduced market activity resulted in comparative revenue quarter-over-quarter.
Higher revenue in the first quarter of 2007 was offset by increased interest
as a result of higher borrowings to fund the Trust's rig construction program
and higher depreciation in the US market as a result of the increased capital
base of its operations. In addition, future income taxes were reduced due to
lower income in comparison with the prior year and reduction in the future tax
rates. Net earnings per unit also increased quarter-over-quarter by 2.1% from
$0.48 per unit (diluted) to $0.49 per unit (diluted).
Funds flow from operations before change in non-cash working capital for
the first quarter increased by $2.1 million from $70.7 million ($0.84 per unit
(diluted)) in the first quarter 2006 to $72.8 million ($0.86 per unit
(diluted)) in 2007. Funds flow remained relatively stable as increased
depreciation was offset by lower future income taxes on relatively stable net
income levels. 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 enabled
the Trust to maintain funds flow for the period despite the reduced market
condition in the Canadian market.-------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES March 31, December 31,
(thousands except percent data - Unaudited) 2007 2006
-------------------------------------------------------------------------
Working capital 89,283 58,246
Current portion of long-term debt 1,993 3,232
Long-term debt 469,743 388,276
-------------------------
Total debt 471,736 391,508
-------------------------
Total debt as a percentage of assets 34.6% 31.4%
Net debt(1) 380,460 330,030
Net debt as a percentage of assets(1) 27.9% 26.5%
Total assets 1,363,340 1,245,633
Total long-term liabilities 534,576 434,065
Total long-term liabilities as a percentage
of assets 39.2% 34.8%
Unitholders' equity 706,888 698,092
Total debt to unitholders' equity 66.7% 56.1%
Net debt to unitholders' equity(1) 53.8% 47.3%
-------------------------------------------------------------------------
(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 its working capital
position and is indicative of the Trust's overall indebtedness.In the current quarter, the Trust drew an additional $99.0 million on the
Canadian revolving facility, resulting in a 21% increase in long-term debt
from $388.3 million at year-end to $469.7 million at March 31, 2007. These
advances, together with internally generated funds flow, have been used to
fund capital expenditures of $105.4 million throughout the quarter. As of
March 31, 2007, the Trust has completed 28 of the 34 rigs committed under the
rig construction program and has already incurred $61.9 million of costs
relating to the remaining six rigs as at March 31, 2007. These rigs are
expected to be completed and deployed in the second and third quarters of
2007, with remaining costs on these rigs estimated at $22.4 million. Due to
the adoption of CICA 3855, Financial Instruments - Recognition and
Measurement, the increase in long-term debt was slightly offset by the
reclassification of deferred financing costs to long-term debt, which resulted
in the balance of long-term debt being offset by $4.5 million of deferred
financing costs.
Working capital has increased by 53.3% from $58.2 million at year-end to
$89.3 million at March 31, 2007. The increase in working capital is directly
attributable to a 20.8% increase in accounts receivable which was driven by a
proportionate increase in total revenues from last quarter to the current
quarter. Cash and cash equivalents also increased from $9.4 million to
$16.8 million as a result of advances made on the current debt facility to
fund the cash requirements of the current rig build program. Excess cash on
hand throughout the quarter was invested in short-term money markets to
minimize the cost of borrowing. Working capital assets increased at a higher
rate than working capital liabilities, with accounts payable increasing by
only 11.2%, further driving the overall percentage increase in working capital
from last quarter to the current quarter. The Trust utilizes internally
generated funds flow and the revolving debt facility to ensure that accounts
payable are paid in a timely manner.
Unitholders' equity increased $8.8 million from year-end due to the
addition of $13.2 million of net income generated from current quarter
operations, net of distributions paid to unitholders. Proceeds from the
exercise of rights under the Trust Unit Rights Incentive Plan also contributed
to the increase by $1.2 million and the adoption of the new standards,
discussed in "Changes in Accounting Policy", added an additional account to
unitholders' equity and resulted in an opening accumulated other comprehensive
income adjustment of $1.9 million. Accumulated other comprehensive income is
comprised of gains and losses on the translation of foreign subsidiaries and
the fair value of the Trust's interest rate swaps which offset the increase in
unitholders' equity by $7.1 million.-------------------------------------------------------------------------
UNITHOLDERS' CAPITAL March 31, December 31,
(thousands - Unaudited) 2007 2006
-------------------------------------------------------------------------
Unitholders' capital 673,642 669,584
Exchangeable shares 3,070 5,777
-------------------------------------------------------------------------
Unitholders' capital increased from the 2006 year-end by $4.1 million,
with the conversion of 255,396 Series C exchangeable shares ($2.7 million) to
291,501 trust units and the exercise of 138,169 rights ($1.2 million) into
trust units. Unitholders' capital on April 30, 2007 was $675.2 million
(83,573,164 units). Subsequent to March 31, 2007, 55,971 Series C exchangeable
shares were converted into 64,903 trust units ($0.6 million).
-------------------------------------------------------------------------
DISTRIBUTIONS
Three months ended March 31,
(thousands except unit and per unit
data - Unaudited) 2007 2006
-------------------------------------------------------------------------
Cash flow from operating activities 45,513 56,804
Net change in non-cash operating
working capital 27,297 13,938
-----------------------------------
Funds flow before change in non-cash
working capital 72,810 100% 70,742 100%
Distributions paid & declared (28,737) 39% (21,370) 30%
-----------------------------------
Funds retained for growth, debt
reduction & future distribution 44,073 61% 49,372 70%
Funds flow before change in non-cash
working capital per unit (basic(1)) 0.87 0.87
Distributions paid & declared per unit (0.34) (0.26)
-----------------------------------
Funds retained per unit 0.53 0.61
Quarter ending annualized
distribution per unit 1.38 1.14
-------------------------------------------------------------------------
(1) Includes trust units to be issued upon conversion of exchangeable
shares.During the three months ended March 31, 2007, Trinidad distributed
$28.7 million, an increase of $7.4 million, or 34.5%, from the comparative
quarter in the prior year. Annualized distributions increased 21.1% from $1.14
per unit to $1.38 per unit and despite decreasing industry fundamentals, the
Trust has maintained stable cash flow levels by capitalizing on prior
acquisitions and its internal expansion, allowing increased distributions
while maintaining a conservative payout ratio. Furthermore, the Trust's
strategy of identifying accretive acquisitions for growth continues to provide
opportunities for increased distributions to unitholders. 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.
SEASONALITY
The Trust operates the majority of its fleet in Western Canada and
therefore operations are heavily dependent upon the seasons. The winter
season, which incorporates the first quarter, is a busy period as oil and gas
companies take advantage of frozen conditions to move drilling rigs into
regions which might otherwise be inaccessible to heavy equipment due to swampy
conditions. The second quarter normally encompasses a slow period referred to
as spring break-up. During this period melting conditions result in temporary
municipal road bans that effectively prohibit the movement of drilling rigs.
The third and fourth quarters are usually representative of average activity
levels.
The Trust's expansion to the US market has reduced its overall exposure
to the seasonal factors that are present in its Canadian operations. These
seasonal conditions typically limit Canadian drilling activity, whereas in the
United States operators can work throughout the year. This increased number of
operating days throughout the year will allow the Trust to better manage its
business with more sustainable cash flows throughout the annual cycle.
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.
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.
Fair value of interest rate swaps
The fair value of the interest rate swaps are estimated based on future
projected interest rates and adjusted on a quarterly basis for monthly
settlements and changes in projections. The Trust receives the valuation from
the contract counterparty on a quarterly basis and records the associated
change in fair value at each reporting period.
CHANGES IN ACCOUNTING POLICY
Effective January 1, 2007, the Trust adopted the following new accounting
standards issued by the Canadian Institute of Chartered Accountants ("CICA"),
as described further in note 1 of the Notes to the Consolidated Financial
Statements.
Section 1530, Comprehensive Income
Section 1530 introduces a new Statement of Comprehensive Income, which
reflects changes in the fair value of financial instruments designated as cash
flow hedges, to the extent that they are effective, and changes in the foreign
currency translation of self-sustaining subsidiaries of the Trust. These
cumulative changes are reflected in equity as part of accumulated other
comprehensive income and the Trust's Consolidated Financial Statements now
include a Consolidated Statement of Other Comprehensive Income ("OCI") and
Accumulated Other Comprehensive Income ("AOCI").
As a result of adopting CICA Section 1530, a new Statement of
Comprehensive Income forms part of the Trust's consolidated financial
statements. Previously, the accumulated gains and losses arising from
translation of $0.8 million were deferred and included in the foreign currency
translation adjustment as part of unitholders' equity. In accordance with the
transitional provisions, this prior year balance was reclassified into AOCI.
In addition, the foreign currency translation adjustment for the three months
ended March 31, 2007 of $2.7 million has been recognized into OCI.
Section 3855, Financial Instruments - Recognition and Measurement
Section 3855 establishes standards for recognizing and measuring
financial instruments, including financial assets, financial liabilities and
derivatives. All financial instruments are required to be measured at fair
value upon initial recognition of the transaction and measurement in
subsequent periods is dependant on whether the instrument is classified as
"held-for-trading", "available-for-sale", or "held-to-maturity" based on the
standard. Financial instruments classified as "held-for-trading" are
subsequently re-valued to fair market value with changes in the fair value
being recognized into earnings; financial instruments classified as
"available-for-sale" are subsequently re-valued to fair market value with
changes in the fair value being recognized to OCI and financial instruments
designated as "held-to-maturity" are valued at amortized cost using the
effective interest method of amortization.
Upon initial adoption of the financial instrument standard, long-term
debt is recognized at fair value net of transaction costs directly
attributable to the issuance of the debt. Accordingly, at January 1, 2007,
previously deferred costs of $5.7 million that were separately presented as a
component of other assets on the Consolidated Balance Sheet and amortized into
income using the straight-line method over the life of the debt were
reclassified to long-term debt. The cost capitalized as a portion of long-term
debt will be amortized using the effective interest method. The change in
amortization methodology was immaterial for adjustment to opening retained
earnings and resulted in a net decrease in other assets and long-term debt by
$4.9 million.
Section 3865, Hedges
Section 3865 establishes how hedge accounting may be applied. For cash
flow hedges the fair value of the hedged instrument is recognized on the
balance sheet and changes in the fair value, to the extent that the hedge is
effective, are recognized into OCI and any ineffectiveness is recognized into
income in the period. In accordance with transitional provisions, the
cumulative prior period effect of $5.6 million has been recognized into OCI
without restatement of prior period amounts. Opening AOCI has been adjusted by
$1.9 million to reflect the future income tax asset that would have arisen in
the prior year in accordance with the new standards.
There are no other material impacts on the Consolidated Financial
Statements for the adoption of these new standards.
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 as defined under Multilateral instrument 52-109,
Certification of Disclosures in Annual and Interim Filings.
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.
At December 31, 2006, the Trust was not able to perform a full assessment
of the business process controls in Mastco in light of the short time period
between the acquisition date and reporting date. The Trust is currently
completing this assessment and has not concluded on the design effectiveness
as at March 31, 2007 and as a result, the Trust has relied on management
review to assess the accuracy of the financial statements at the reporting
date.
OUTLOOK
Canadian industry utilization levels have decreased in the first quarter
of 2007 in light of spring break-up conditions and reductions in customer
drilling programs. The second quarter of 2007 will continue to be affected by
road bans due to warmer weather conditions and the execution of the Trust's
spring maintenance program will further impact overall operations. However,
the outlook for 2007 still remains positive as natural gas prices continue to
strengthen and the window between supply and demand decreases due to declining
drilling activity in the latter half of the prior year and the first quarter
of 2007.
With only six rigs remaining under the 34 rig construction program, the
Trust's rig fleet is equipped with modern, high quality, deeper drilling rigs.
In conjunction with competitive day rates and high quality equipment, the
Trust has managed to secure long-term take-or-pay contracts on all of the rigs
committed under the construction program. While the CAODC is projecting 19,023
well completions in 2007, representing a 15% decline from 2006, the majority
of the anticipated decline is focused on shallow gas and coal bed methane.
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. These factors have allowed the Trust to
successfully mitigate decreasing industry fundamentals resulting in
utilization levels that surpass the Canadian industry average by 16.9%. The
Trust has also mitigated pricing uncertainty by securing fixed day rates
within the take-or-pay contracts.
The US market continues to deliver exceptional results, with utilization
rates ranging from 82% to 100% since the deployment of the first US based rig
in 2005. Results in this market are expected to remain stable as the US
drilling industry is not affected by seasonal conditions and has been less
impacted by the fluctuations in commodity prices. All rigs deployed in the US
under the rig construction program are secured by long-term take-or-pay
contracts, further reinforcing the Trust's strong market position in an
industry faced with uncertainty.
The costs of construction and labour have been significantly affected by
the vast increase in commodity prices in the industry over the past three
years. Despite the recent adjustment in commodity prices, costs to build rigs
have not followed suit. 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. Not only has this provided Trinidad with
increased flexibility over the rig construction program in terms of technology
and timing, but it also has resulted in substantial cost savings. Trinidad has
been able to build customized rigs at lower costs than its competitors and
essentially pass these savings to both customers and unitholders. Trinidad
will further recognize these benefits in 2007 with the deployment of
additional rigs built by the Mastco division.
We are focused on continuing to add to our distribution capabilities by
accretively growing our business and focusing on being the market leader. All
future capital investments will continue to be evaluated based on return on
capital with a focus 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 20 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
(thousands - Unaudited)
March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 16,807 9,413
Accounts receivable 183,654 151,990
Inventory 8,036 7,451
Prepaid expenses 2,662 2,868
-------------------------
211,159 171,722
Deposit on capital assets 13,808 42,172
Capital assets 1,015,006 903,111
Goodwill 123,089 123,483
Other long-term assets 278 5,145
-------------------------
1,363,340 1,245,633
-------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 98,547 88,083
Accrued trust distributions 9,592 9,543
Current portion of deferred revenue 9,507 9,090
Current portion of long-term debt 1,993 3,232
Current portion of fair value of interest
rate swap (note 1 and 7) 1,327 -
Future income taxes 910 3,528
-------------------------
121,876 113,476
Deferred revenue 11,215 7,070
Long-term debt (note 1 and 7) 469,743 388,276
Fair value of interest rate swaps (note 1 and 7) 4,117 -
Future income taxes 49,501 38,719
-------------------------
656,452 547,541
Unitholders' equity
Unitholders' capital (note 4) 673,642 669,584
Exchangeable shares (note 5) 3,070 5,777
Contributed surplus 12,339 11,722
Accumulated other comprehensive income (note 1) (7,128) (750)
Accumulated trust distributions (218,721) (189,984)
Accumulated earnings 243,686 201,743
-------------------------
706,888 698,092
-------------------------
1,363,340 1,245,633
-------------------------
(See Notes to the Consolidated Financial Statements)
Commitments (note 8)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
Three months ended March 31,
(thousands except unit and per unit data -
Unaudited)
2007 2006
-------------------------------------------------------------------------
Revenue
Oilfield services 205,933 162,879
Other 278 58
-------------------------
206,211 162,937
-------------------------
Expenses
Operating 110,268 78,248
General and administrative 13,355 11,476
Interest 8,575 2,327
Unit based compensation 775 3,853
Foreign exchange (gain) loss 1,286 (213)
Depreciation and amortization 18,258 13,106
Loss on sale of assets 44 1
-------------------------
152,561 108,798
-------------------------
Earnings before income taxes 53,650 54,139
Income taxes
Current tax expense 1,473 273
Future tax expense 10,234 13,882
-------------------------
11,707 14,155
-------------------------
Net earnings 41,943 39,984
Accumulated earnings - beginning of year 201,743 78,416
-------------------------
Accumulated earnings - end of period 243,686 118,400
-------------------------
Earnings per unit
Basic 0.50 0.49
Diluted 0.49 0.48
Weighted average number of trust units
Basic 83,796,732 81,515,476
Diluted 84,865,852 83,742,614
(See Notes to the Consolidated Financial Statements)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three months ended March 31,
(thousands - Unaudited)
2007 2006
-------------------------------------------------------------------------
Net earnings 41,943 39,984
Other comprehensive income
Change in fair value of derivatives designated
as cash flow hedges, net of income tax 60 -
Foreign currency translation adjustment (2,738) (976)
-------------------------
Total other comprehensive income (loss) (2,678) (976)
Comprehensive income 39,265 39,008
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(thousands - Unaudited)
March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) - beginning of year (750) -
Adjust opening balance due to adoption of new
accounting policies (3,700) -
Other comprehensive income (loss) during
the period (2,678) (750)
-------------------------
Accumulated other comprehensive
income (loss) - end of period (7,128) (750)
-------------------------
(See Notes to the Consolidated Financial Statements)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
(thousands - Unaudited)
2007 2006
-------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 41,943 39,984
Items not affecting cash
Depreciation and amortization 18,258 13,106
Loss on assets 44 1
Unit based compensation 775 3,853
Future income tax expense 10,234 13,882
Effective interest on financing costs (note 7) 349 -
Unrealized foreign exchange loss (gain) 1,207 (84)
-------------------------
Funds flow from operations before change in
non-cash working capital 72,810 70,742
Net change in non-cash operating working capital (27,297) (13,938)
-------------------------
45,513 56,804
-------------------------
Investing activities
(Increase) decrease in deposits on capital assets 28,170 (7,915)
Acquisition of Mastco Derrick
Service Ltd. (note 3) - (37,080)
Purchase of capital assets (133,554) (53,533)
Proceeds from dispositions 203 395
Change in non-cash working capital item -
accounts payable and accrued liabilities 4,897 (11,475)
-------------------------
(100,284) (109,608)
-------------------------
Financing activities
Increase in line of credit - 25,000
Increase in long-term debt 86,066 25,006
Increase in deferred revenue 4,717 9,437
Net proceeds from unit issues (note 4) 1,193 2,269
Trust unit distribution (28,737) (21,370)
Debt financing costs - (61)
Change in non-cash working capital item -
accrued distributions 49 1,067
-------------------------
63,288 41,348
-------------------------
Cash flow from operating, investing and
financing activities 8,517 (11,456)
Effect of translation on foreign currency cash (1,123) 52
-------------------------
Increase (decrease) in cash for the period 7,394 (11,404)
Cash - beginning of period 9,413 11,749
-------------------------
Cash - end of period 16,807 345
-------------------------
Interest paid 7,726 2,108
Taxes paid 86 1,601
(See Notes to the Consolidated Financial Statements)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND ESTIMATES
These consolidated interim financial statements are prepared by
management, in accordance with Canadian Generally Accepted Accounting
Principles, and follow the same accounting policies and methods as
the audited consolidated financial statements for the year ended
December 31, 2006, except as noted below, and therefore do not
contain all of the disclosures required for the annual financial
statements. As a result, the unaudited consolidated interim financial
statements should be read in conjunction with the consolidated
financial statements contained in the annual report for the year
ended December 31, 2006.
Financial Instruments and Hedge Accounting
Effective January 1, 2007, the Trust adopted the following new
accounting standards issued by the Canadian Institute of Chartered
Accountants (CICA):
Section 1530, Comprehensive Income, introduces a new Statement of
Comprehensive Income, which reflects changes in the fair value of
financial instruments designated as cash flow hedges, to the
extent that they are effective, and changes in the foreign
currency translation of self-sustaining subsidiaries of the Trust.
These cumulative changes are reflected in equity as part of
accumulated other comprehensive income and the Trust's
Consolidated Financial Statements now include a Statement of Other
Comprehensive Income ("OCI") and Accumulated Other Comprehensive
Income ("AOCI").
Section 3855, Financial Instruments - Recognition and Measurement,
establishes standards for recognizing and measuring financial
instruments, including financial assets, financial liabilities and
derivatives. All financial instruments are required to be measured
at fair value upon initial recognition of the transaction and
measurement in subsequent periods is dependant on whether the
instrument is classified as "held-for-trading", "available-for-
sale", or "held-to-maturity" based on the standard.
Financial instruments classified as "held-for-trading" are
subsequently re-valued to fair market value with changes in the
fair value being recognized into earnings; financial instruments
classified as "available-for-sale" are subsequently re-valued to
fair market value with changes in the fair value being recognized
to OCI and financial instruments designated as "held-to-maturity"
are valued at amortized cost using the effective interest method
of amortization.
Section 3865, Hedges, establishes how hedge accounting may be
applied. For cash flow hedges any change in the fair value of a
financial instrument designated as a cash flow hedge is recognized
into income in the same period as the hedged item. Any fair value
change in the financial instrument is recognized on the balance
sheet and changes in the fair value, to the extent that the hedge
is effective, are recognized into OCI and any ineffectiveness is
recognized into income in the period.
Translation of self-sustaining foreign operations
As a result of adopting CICA Section 1530, a new Statement of
Comprehensive Income forms part of the Trust's consolidated financial
statements. Gains and losses resulting from the translation of the
assets and liabilities of the Trust's self-sustaining foreign
operations into Canadian dollars are included in the Consolidated
Statement of Comprehensive Income as a separate component of OCI.
Previously, the accumulated gains and losses arising from translation
of $0.8 million were deferred and included in the foreign currency
translation adjustment as part of unitholders' equity. In accordance
with the transitional provisions, this prior year balance was
reclassified into AOCI. In addition, the foreign currency translation
adjustment for the three months ended March 31, 2007 of $2.7 million
has been recognized into OCI.
Cash flow hedge
The application of hedge accounting to the Trust's interest rate
swaps has resulted in the designation of cash flow hedges whereby
gains and losses resulting from changes in the fair value of the
hedge are included in the Consolidated Statement of Comprehensive
Income, to the extent that the hedge is effective. In accordance with
transitional provisions, the cumulative prior period effect of
$5.6 million has been recognized into OCI without restatement of
prior period amounts. Opening AOCI has been adjusted by $1.9 million
to reflect the future income tax asset that would have arisen in the
prior year in accordance with the new standards.
Long-term debt
Upon initial adoption of the financial instrument standard, long-term
debt is recognized at fair value net of transaction costs directly
attributable to the issuance of the debt. Accordingly, at January 1,
2007, previously deferred costs of $5.7 million that were separately
presented as a component of other assets on the Consolidated Balance
Sheet and amortized into income using the straight-line method over
the life of the debt were reclassified to long-term debt. The cost
capitalized as a portion of long-term debt will be amortized using
the effective interest method. The change in amortization methodology
was immaterial for restatement and resulted in a net decrease in
other assets and long-term debt by $4.9 million.
There are no other material impacts on the Consolidated Financial
Statements for the adoption of these new standards.
2. SEASONALITY
The Trust operates the majority of its fleet in Western Canada and
therefore operations are heavily dependent upon the seasons. The
winter season, which incorporates the first quarter, is a busy period
as oil and gas companies take advantage of frozen conditions to move
drilling rigs into regions which might otherwise be inaccessible to
heavy equipment due to swampy conditions. The second quarter normally
encompasses a slow period referred to as spring break-up. During this
period melting conditions result in temporary municipal road bans
that effectively prohibit the movement of drilling rigs. The third
and fourth quarters are usually representative of average activity
levels.
The Trust's expansion to the US market has reduced its overall
exposure to the seasonal factors that are present in its Canadian
operations. These seasonal conditions typically limit Canadian
drilling activity, whereas in the United States operators can work
throughout the year. This increased number of operating days
throughout the year will allow the Trust to better manage its
business with more sustainable cash flows throughout the annual
cycle.
3. ACQUISITION
Amalgamation of Mastco Derrick Service Ltd.
Effective March 16, 2006, the Trust amalgamated one of its wholly-
owned subsidiaries with Mastco Derrick Service 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 been finalized as of March 31, 2007. The
acquisition was funded through internal funds flow of $14.7 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 allocated under
the purchase method as follows:
(thousands) 2006
---------------------------------------------------------------------
Purchase price allocated as follows:
Working capital, net (22,943)
Other assets 329
Goodwill 42,837
Capital assets 17,148
Future income taxes 2,018
------------
39,389
------------
Financed as follows:
Trust units 24,720
Cash, net of working capital adjustment 14,669
------------
39,389
------------
Goodwill from this acquisition is not tax deductible.
4. UNITHOLDERS' CAPITAL AND CONTRIBUTED SURPLUS
a) Unitholders' capital
Authorized
Unlimited number of trust units, voting, participating
(thousands except
unit data) March 31, 2007 December 31, 2006
---------------------------------------------------------------------
Number Amount Number Amount
of Units $ of Units $
---------------------------------------------------
Unitholders'
capital -
opening balance 82,981,952 669,584 78,909,976 621,972
Trust units issued
on acquisitions - - 1,494,557 24,720
Trust units issued
on conversion of
exchangeable
shares 291,501 2,707 1,505,630 13,825
Trust units issued
on exercise of
options and rights 138,169 1,193 1,138,289 8,272
Trust units
repurchased under
normal course
issuer bid - - (66,500) (537)
Contributed surplus
transferred on
exercised options
and rights - 158 - 1,332
---------------------------------------------------
Unitholders'
capital - ending
balance 83,411,622 673,642 82,981,952 669,584
---------------------------------------------------
b) Contributed surplus
(thousands) March 31, 2007 December 31, 2006
---------------------------------------------------------------------
Contributed
surplus - opening
balance 11,722 5,949
Unit based
compensation
expense 775 7,105
Contributed
surplus
transferred
on exercise
of rights (158) (1,332)
---------------------------------------------------
Contributed
surplus -
ending balance 12,339 11,722
---------------------------------------------------
5. EXCHANGEABLE SHARES
A subsidiary of the Trust has issued the following exchangeable
shares:
(thousands except
unit data) March 31, 2007 December 31, 2006
---------------------------------------------------------------------
Number Amount Number Amount
of Shares $ of Shares $
---------------------------------------------------
Exchangeable
shares - opening
balance 611,966 5,777 2,007,883 19,602
Exchangeable
shares exchanged,
Initial Series - - (347,100) (2,707)
Exchangeable
shares exchanged,
Series C (255,396) (2,707) (1,048,817) (11,118)
---------------------------------------------------
Exchangeable
shares - ending
balance 356,570 3,070 611,966 5,777
---------------------------------------------------
The exchange ratio for the 253,430 initial series exchangeable shares
is 1.25992 at March 31, 2007 and the trust units issuable upon
conversion are 319,301. All Series B exchangeable shares were
converted in the prior year. The exchange ratio for the 103,140
Series C exchangeable shares is 1.15098 at March 31, 2007 and the
trust units issuable upon conversion are 118,712.
6. UNIT OPTION AND RIGHTS PLAN
Trust Unit Rights Incentive Plan
On May 2, 2003, the Trust established the Trust Unit Rights 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. The following table sets out unit options that are
outstanding under the Trust Unit Rights Incentive Plan:
---------------------------------------------------------------------
March 31, 2007 December 31, 2006
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Rights Price ($) Rights Price ($)
---------------------------------------------------
Outstanding -
opening balance 8,246,839 12.43 5,746,326 9.64
Granted during
the period 63,486 13.44 3,890,818 15.13
Exercised during
the period (138,169) 8.63 (1,118,437) 7.36
Forfeited during
the period (12,746) 13.42 (271,868) 13.09
---------------------------------------------------
Outstanding -
ending balance 8,159,410 12.50 8,246,839 12.43
---------------------------------------------------
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 period ended March 31, 2007 was $1.49
(2006 - $2.15).
7. FINANCIAL INSTRUMENTS
Interest rate swap
The Trust entered into cash flow hedges using interest rate swap
arrangements to hedge the floating rate interest on fifty percent of
the outstanding balance of the US and Canadian term debt facilities.
These contracts have been recorded at their fair value on the Trust's
consolidated financial statements. During the first quarter of 2007,
the Trust recorded a gain of $0.06 million in OCI due to the change
in fair value of the cash flow hedge. The Trust has assessed 100%
hedge effectiveness; hence the entire change in fair value has been
recorded in OCI.
Long-term debt
The carrying value of long-term debt has been adjusted in accordance
with CICA Section 3855 on financial instruments. Debt issuance costs
which were previously classified as a component of other assets have
been reclassified to long-term debt. For the period ending March 31,
2007, the Trust recorded interest expense of $0.3 million under the
effective interest method.
8. COMMITMENTS
Trinidad has continued to focus on the expansion of its existing
drilling fleet through its commitment to construct 34 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 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 costs of
construction on seven of these rigs have been partially financed
through customer contributions, to be returned in equal payments over
the term of the take-or-pay contract commencing upon the delivery of
each rig. As of March 31, 2007, 28 of these rigs were completed, with
the remaining scheduled to be completed and deployed in the second
and third quarters of 2007. Total capital costs of construction are
expected to be $84.3 million for the six rigs remaining, of which
$61.9 million was paid as of March 31, 2007.
9. SEGMENTED INFORMATION
The acquisition of Cheyenne Drilling in 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. These factors have 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 have
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.
---------------------------------------------------------------------
Three months
ended United Inter-
March 31, Canadian States Construc- segment
2007 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 135,085 62,840 30,608 (22,322) 206,211
Operating
expense 70,406 32,761 29,423 (22,322) 110,268
-----------------------------------------------------
Gross margin 64,679 30,079 1,185 - 95,943
Interest 5,294 3,254 27 - 8,575
Depreciation and
amortization 9,432 8,675 151 - 18,258
Loss on assets 14 30 - - 44
-----------------------------------------------------
Income before
corporate
items 49,939 18,120 1,007 - 69,066
General and
administrative 13,355
Unit based
compensation 775
Foreign
exchange loss 1,286
Income taxes 11,707
-----------------------------------------------------
Net earnings 41,943
-----------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 30,598 75,470 (684) - 105,384
Total assets 748,146 600,934 14,260 - 1,363,340
Goodwill 38,154 42,098 42,837 - 123,089
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months
ended United Inter-
March 31, Canadian States Construc- segment
2006 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 130,132 31,016 4,304 (2,515) 162,937
Operating
expense 63,511 12,931 4,321 (2,515) 78,248
-----------------------------------------------------
Gross margin 66,621 18,085 (17) - 84,689
Interest 2,322 1 4 - 2,327
Depreciation and
amortization 9,192 3,888 26 - 13,106
(Gain) loss
on assets 10 (9) - - 1
-----------------------------------------------------
Income (loss)
before
corporate items 55,097 14,205 (47) - 69,255
General and
administrative 11,476
Unit based
compensation 3,853
Foreign
exchange gain (213)
Income taxes 14,155
-----------------------------------------------------
Net earnings 39,984
-----------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 98,458 25,068 - - 123,526
Total assets(1) 566,414 347,488 50,401 - 964,303
Goodwill(1) 37,115 42,586 - - 79,701
---------------------------------------------------------------------
(1) As at March 31, 2006, Mastco purchase price allocation had not
been allocated therefore the appropriate allocation to goodwill
was not reflected.
10. 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