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Trinidad Energy Services Income Trust announces third quarter results - September 30, 2007
TSX SYMBOL: TDG.UN
CALGARY, Nov. 8 /CNW/ - The following is management's discussion and
analysis ("MD&A") concerning the operating and financial results for the three
and nine months ended September 30, 2007, and its outlook based on information
available as at November 2, 2007. The MD&A is based on the Trinidad Energy
Services Income Trust (the "Trust" or "Trinidad") consolidated financial
statements for the period ended September 30, 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 and MD&A 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
(thousands except unit and per unit data - Unaudited)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue 162,183 150,625 483,888 418,109
Gross margin(1) 75,150 66,878 217,554 194,545
EBITDA(1) 54,299 54,576 161,390 150,342
Per unit (diluted) 0.64 0.64 1.56 1.78
EBITDA before unit
based compensation(1) 54,807 55,316 163,344 155,665
Per unit (diluted) 0.64 0.65 1.58 1.84
Funds flow before
change in non-cash
working capital(1) 46,456 48,973 142,619 142,224
Per unit (diluted) 0.55 0.57 1.42 1.68
Distributions paid
and declared 28,843 28,640 86,416 76,846
Per unit (basic) 0.34 0.34 1.03 0.93
Payout ratio(2) - - 61% 54%
Net earnings 15,043 31,573 61,627 92,369
Per unit (basic) 0.18 0.38 0.73 1.11
Per unit (diluted) 0.18 0.37 0.65 1.09
Net earnings before unit
based compensation 15,551 32,313 63,581 97,692
Per unit (diluted) 0.18 0.38 0.66 1.15
Units outstanding -
basic (weighted
average)(3) 83,989,145 83,705,299 83,917,739 82,851,643
Units outstanding -
diluted (weighted
average)(3) 85,140,262 85,316,897 103,605,851 84,651,979
-------------------------------------------------------------------------
(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;
gross margin refers to revenue less operating expenses; 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 and is only
provided on a year-to-date basis.
(3) Basic units include the weighted average units outstanding and units
issuable upon exchange of outstanding exchangeable shares. Diluted units
include the weighted average units outstanding, units issuable upon
exchange of outstanding exchangeable shares and the dilutive impact, if
any, of the deemed conversion of convertible debentures and units
issuable pursuant to the Trust Unit Rights Incentive Plan. Interest
expense incurred on the dilutive convertible debentures is added back to
net earnings and to funds flow before change in non-cash working capital
for the diluted per unit calculation.
OPERATING HIGHLIGHTS
(Unaudited) Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Land Drilling Market
Operating days
Canada 2,718 3,358 7,699 9,368
United States 3,305 1,891 8,713 4,941
Rate per drilling
day (CDN $)
Canada 21,746 23,083 24,156 23,469
United States 23,265 24,042 24,460 23,341
Utilization rate
Canada 47% 64% 45% 62%
United States 85% 85% 86% 84%
CAODC industry average 39% 57% 38% 58%
Number of drilling rigs
Canada 63 59 63 59
United States 43 26 43 26
Utilization rate for
service rigs 46% 68% 35% 61%
Number of service rigs 20 18 20 18
Number of coring and
surface casing rigs 20 17 20 17
Barge Drilling Market
Operating days 352 - 352 -
Rate per drilling day
(CDN $) 51,904 - 51,904 -
Utilization rate 100% - 100% -
Number of drilling rigs 1 - 1 -
Number of drilling rigs
under Bareboat Charter
agreements 3 - 3 -
-------------------------------------------------------------------------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; 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
Through geographical disbursement and expansion of service lines, the
Trust has sustained unitholder value, secured distributions and counteracted
the low industry fundamentals in the Canadian drilling industry. In the third
quarter, revenues from the Trust's operations in the United States exceeded
the Canadian operations by 23.8% with utilization rates consistently at or
above 85% with stable day rates. Through accretive acquisitions and the
substantial completion of the rig construction program, the US rig count has
reached a total of 43 drillings rigs, one barge rig and three barge rigs under
the Bareboat Charter Agreements ("Bareboat Charter" or "Charter"). Throughout
2006 and 2007 the Trust has successfully deployed 31 rigs under the rig
construction program, of which 17 were released into the US, with the
remaining three rigs substantially complete and ready for deployment into the
US in the fourth quarter of 2007, further enhancing the strength of the US
division.
On July 5, 2007 the Trust acquired the assets of US-based Drilling
Productivity Realized, L.L.C., P.C. Axxis, L.L.C., DPR International, L.L.C.
and DPR Rentals, L.L.C. (collectively, "Axxis") for $148.1 million. The assets
acquired include four land based drilling rigs and one barge drilling rig,
together with related inventory, crew boats and spare parts. Furthermore, the
Trust has assumed the remaining commitments on a second barge drilling rig
currently under construction, expected to be deployed in early 2008. This
acquisition has complemented the current US rig fleet with the addition of
four technologically advanced rigs with the capability to drill at deeper
depths. Additionally, the Trust gained entrance into the niche barge market
and adopted industry expertise, which has positioned the Trust favourably to
capitalize on future opportunities. Concurrent with the acquisition of Axxis
the Trust closed a $325.0 million convertible unsecured subordinated debenture
financing to fund the acquisition. The convertible debentures have a face
value of $1,000, coupon rate of 7.75%, mature July 31, 2012 with interest
being paid semi-annually on June 30 and December 31. The Trust has the option
to redeem the debentures in whole or in part at a redemption price of $1,000
after December 31, 2010 and before their maturity date. On redemption or
maturity, the Trust may elect to satisfy its obligation to repay the principal
by issuing Trust units. Proceeds in excess of the purchase price were used to
pay down the Trust's revolving debt facility.
Natural gas drilling in the Canadian market has continued to slow in
light of weak commodity prices and high storage levels. Pursuant to the "Our
Fair Share" report issued by the Alberta government, the province's new
royalty system has caused many oil and gas producers to consider curtailing
activity in Alberta. These factors have led to further volatility in the
Canadian market; however, the Trust has continued to perform better than
industry averages by targeting the deeper drilling market and through its
long-term take-or-pay contracts has found stability in the current market.
Through these efforts, the Trust has exceeded industry utilization by 20.5%
for the third quarter of 2007 and increased day rates by 2.9% on a
year-to-date basis. However, due to increased competition and capacity
available in the industry, pricing in the third quarter experienced a 5.8%
decrease from the comparable quarter of 2006.
Despite the reductions in the Canadian market, the Trust's US expansion
and resulting diversification of funds flow leaves it well positioned to ride
out the volatility in the market. During this time of instability in the
market, when many other energy service companies are struggling to maintain
positive funds flow and sustain distribution levels, the Trust has continued
to exceed the prior year's results and meet market expectations. Growth and
sustainability continue to be a primary focus and accretive growth for our
unitholders remains the Trust's primary goal.QUARTERLY ANALYSIS 2007
Q3 Q2 Q1
------------------------------------------------
Financial Highlights
(millions except per unit data - Unaudited)
Revenue 162.2 115.5 206.2
Gross margin(1) 75.2 46.5 95.9
Net earnings 15.0 4.7 41.9
Depreciation and
amortization 20.2 14.8 18.3
(Gain) loss on sale
of assets - 0.1 0.1
Unit based
compensation 0.5 0.7 0.8
Future income tax
expense (recovery) 3.3 (3.1) 10.2
Effective interest on
financing costs 1.1 0.4 0.3
Non-cash interest
expense on debentures 1.0 - -
Unrealized foreign
exchange loss (gain) 5.3 5.8 1.2
Other - - -
------------------------------------------------
Funds flow before
change in non-cash
working capital(1) 46.4 23.4 72.8
Earnings per unit
(diluted) 0.18 0.05 0.49
Funds flow before
change in non-cash
working capital per
unit (diluted)(1) 0.55 0.27 0.86
Operating Highlights
Land Drilling Market
Operating days
Canada 2,718 1,165 3,817
United States 3,305 2,944 2,464
Rate per drilling
day (CDN $)
Canada 21,746 23,527 26,063
United States 23,265 24,927 25,506
Utilization rate
Canada 47% 20% 69%
United States 85% 88% 85%
CAODC industry
average 39% 17% 59%
Number of drilling
rigs
Canada 63 64 63
United States 43 38 37
Utilization rate for
service rigs 46% 23% 73%
Number of service
rigs 20 21 20
Number of coring
and surface casing
rigs 20 17 17
Barge Drilling Market
Operating days 352 - -
Rate per drilling
day (CDN $) 51,904 - -
Utilization rate 100% - -
Number of drilling
rigs 1 - -
Number of drilling
rigs under Bareboat
Charter agreements 3 - -
------------------------------------------------
QUARTERLY ANALYSIS 2006 2005
Q4 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Financial Highlights
(millions except per unit data - Unaudited)
Revenue 161.9 150.6 104.5 162.9 106.4 75.3
Gross margin(1) 74.9 66.9 43.1 84.7 46.4 31.8
Net earnings 31.3 31.6 20.8 40.0 19.4 13.8
Depreciation and
amortization 15.4 14.0 9.7 13.1 9.3 8.0
(Gain) loss on sale
of assets 0.1 (2.0) - - 0.2 0.1
Unit based
compensation 1.8 0.7 0.8 3.8 0.6 0.5
Future income tax
expense (recovery) 6.2 4.6 (8.7) 13.9 5.5 1.7
Effective interest on
financing costs - - - - - -
Non-cash interest
expense on debentures - - - - - -
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 35.0 24.1
Earnings per unit
(diluted) 0.37 0.38 0.24 0.48 0.29 0.21
Funds flow before
change in non-cash
working capital per
unit (diluted)(1) 0.65 0.57 0.26 0.84 0.51 0.37
Operating Highlights
Land Drilling Market
Operating days
Canada 3,163 3,358 1,826 4,184 3,795 3,487
United States 2,105 1,891 1,603 1,447 235 37
Rate per drilling
day (CDN $)
Canada 26,328 23,083 23,927 23,579 23,280 19,196
United States 24,621 24,042 24,089 21,596 19,245 20,122
Utilization rate
Canada 61% 64% 36% 86% 78% 73%
United States 85% 85% 82% 85% 83% 100%
CAODC industry
average 47% 57% 34% 81% 71% 63%
Number of drilling
rigs
Canada 60 59 57 56 54 52
United States 31 26 22 21 17 1
Utilization rate for
service rigs 64% 68% 31% 85% 67% 61%
Number of service
rigs 18 18 17 17 16 16
Number of coring
and surface casing
rigs 17 17 17 17 17 18
Barge Drilling Market
Operating days - - - - - -
Rate per drilling
day (CDN $) - - - - - -
Utilization rate - - - - - -
Number of drilling
rigs - - - - - -
Number of drilling
rigs under Bareboat
Charter agreements - - - - - -
-------------------------------------------------------------------------
(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.
RESULTS FROM OPERATIONS
Canadian Drilling Operations
(thousands except
percent data and Three months ended Nine months ended
operating data - September 30, September 30,
Unaudited) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Revenue 67,656 87,875 (23.0) 233,991 267,892 (12.7)
Operating expense 39,390 48,524 (18.8) 137,461 144,934 (5.2)
------------------------------------------------------
Gross margin 28,266 39,351 (28.2) 96,530 122,958 (21.5)
------------------------------------------------------
Gross margin
percentage 41.8% 44.8% (6.7) 41.3% 45.9% (10.0)
Operating days -
drilling 2,718 3,358 (19.1) 7,699 9,368 (17.8)
Rate per drilling
day (CDN $) 21,746 23,083 (5.8) 24,156 23,469 2.9
Utilization rate -
drilling 47% 64% (26.6) 45% 62% (27.4)
CAODC industry
average 39% 57% (31.6) 38% 58% (34.5)
Number of drilling
rigs 63 59 6.8 63 59 6.8
Utilization rate
- well servicing 46% 68% (32.4) 35% 61% (42.6)
Number of service rigs 20 18 11.1 20 18 11.1
Number of coring
and surface casing
rigs 20 17 17.6 20 17 17.6
The Canadian drilling market continued throughout the third quarter to be
impacted by the slower market conditions prevalent across the industry as
reduced utilization levels and downward pressures on day rates continued to
impact the Trust's Canadian drilling fleet. Industry utilization rates
declined by 31.6% from the comparable quarter in 2006 from 57% to 39% and on a
year-to-date basis dropped to 38%, a decrease of 34.5% from the prior year.
The Trust's Canadian drilling operations were impacted by this downward trend;
however, its focus on the deeper drilling market and long-term contracts did
shelter operations from the full reduction experienced in the drilling market,
allowing Trinidad to continue to exceed industry's average utilization by
20.5% for the quarter and 18.4% year-to-date. Growth in the Trust's drilling
fleet from 59 rigs at September 30, 2006 to 63 rigs at September 30, 2007
provided an increased asset base, slightly offsetting the impact of the
reduced utilization rates on operating days. However, quarter-over-quarter and
on a year-to-date basis these reductions were still present.
Quarter-over-quarter revenue declined by 23.0% from $87.9 million in 2006
to $67.7 million in 2007 and on a year-to-date basis was reduced by
$33.9 million to $234.0 million. The Trust's drilling division contributed to
the bulk of the decline as the largest component of the Canadian operations.
Slight reductions were also seen in the well servicing and surface casing and
coring divisions; however, oil sands activity and operators focused on
lengthening the production of current wells in light of reductions in their
capital budget lessened the impact of the slower market in these sectors.
Additionally, increased competition in the market due to the reduced activity
levels prompted downward market pressures on day rates throughout the period,
ultimately adversely impacting both revenue and margins. These slower market
conditions continued to adversely impact day rates as drilling contractors
competed for less work which reduced margin levels from 45.9% in 2006 to 41.3%
in 2007, reducing the overall gross margin obtained in the Canadian
operations.
United States Drilling Operations
(thousands except
percent and Three months ended Nine months ended
operating data - September 30, September 30,
Unaudited) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Revenue 83,771 45,473 84.2 220,005 115,337 90.7
Operating expense 39,700 20,265 95.9 105,254 50,215 109.6
------------------------------------------------------
Gross margin 44,071 25,208 74.8 114,751 65,122 76.2
------------------------------------------------------
Gross margin
percentage 52.6% 55.4% (5.1) 52.2% 56.5% (7.6)
Land drilling rigs
Operating days
- drilling 3,305 1,891 74.8 8,713 4,941 76.3
Rate per drilling
day (CDN $) 23,265 24,042 (3.2) 24,460 23,341 4.8
Utilization rate -
drilling 85% 85% - 86% 84% 2.4
Number of drilling
rigs 43 26 65.4 43 26 65.4
Barge drilling rigs
Operating days -
drilling 352 - 100.0 352 - 100.0
Rate per drilling
day (CDN $) 51,904 - 100.0 51,904 - 100.0
Utilization rate -
drilling 100% - 100.0 100% - 100.0
Number of drilling
rigs 1 - 100.0 1 - 100.0
Number of drilling
rigs under Bareboat
Charter agreements 3 - 100.0 3 - 100.0The US drilling operations have become a key component in the overall
success of the Trust, providing continued growth and an increasing source of
funds flow. Through growth in this sector of the business, the Trust has
managed to sustain unitholder value, secure distributions and counteract the
volatile Canadian market. Under the rig construction program 13 rigs have been
deployed since September 30, 2006, all backed by take-or-pay contracts with
excellent utilization levels and stable day rates. To further complement the
construction program, the acquisition of the Axxis assets has resulted in the
addition of four more land rigs with deep depth ratings and the latest
technology. On a year-to-date basis, the Trust has managed to optimize the
benefits of these additional rigs through a 4.8% increase in day rates and
2.4% increase in utilization on a substantially larger fleet of drilling rigs,
resulting in an overall increase in revenues of 90.7% from the prior year.
Revenue increased 84.2% quarter-over-quarter and the Trust maintained
utilization at 85% for the quarter with a 3.2% decrease in day rates primarily
due to slightly lower day rates that are being honoured on existing contracts
on the four acquired Axxis land rigs. These contracts will be completed within
the next 12 months, at which point day rates will be re-negotiated and will
become more reflective of the rest of the US fleet.
In addition, the Trust entered the offshore drilling market in the third
quarter with the acquisition of one barge drilling rig from Axxis and the
assumption of three Bareboat Charter agreements (see "Bareboat Charters" for
further details). Entrance into the barge market has provided $5.5 million in
incremental revenue, including $1.0 million net earned from the Bareboat
Charter, for the period ended September 30, 2007 due to exceptional day rates
of $51,904 per day and a utilization level of 100%. The barge rigs have added
geographical diversification to the asset base and have provided the Trust
with significant opportunities to grow in other jurisdictions.
Operating expenses grew as a result of the overall growth in revenue
throughout the quarter from $20.3 million in 2006 to $39.7 million in 2007
with an overall decline in operating margins from 55.4% to 52.6%. An increase
in year-to-date operating expenses also produced declining margins from 56.5%
in 2006 to 52.2% in 2007. Despite an exceptionally high margin on the barge
rig of 71.8% and margins of 55.3% on the four Axxis land rigs, the incremental
costs associated with new rig deployments in the existing US division have
resulted in the decline in margins. Start-up costs for new rigs include costs
incurred to prepare them for the field as well as additional training costs
for the crews once the rigs are 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.
Bareboat Charters
As a part of the Axxis acquisition the Trust entered into an Assignment
Agreement in which the contracts to operate three barge rigs were transferred
to the Trust. Under the Bareboat Charters, the Trust is committed to operate
the rigs, for a three year period, on behalf of a third party. In turn, as
owners of the rigs, this third party is entitled to receive 25% of the Net
Operating Revenues and 50% of the Net Margin earned under each Charter. Under
the original agreement any earnings in excess of this payment were to be
retained as compensation for the operation of the barge rigs; however, as part
of the purchase agreement the Trust committed to pay the former owners of
Axxis US$12.5 million per year for the next three consecutive years, of which
one-third of the payment, or US$4.2 million, shall be attributable to each of
the three Bareboat Charters and is recorded as an intangible asset and
deferred purchase price on the acquisition. The Trust has reported all
transactions pertaining to the Bareboat Charters on a net basis in accordance
with EIC 123, Reporting Revenue Gross as a Principal versus Net as an Agent,
for purposes of financial statement disclosure as the Trust does not bear the
significant risks and rewards of the arrangement nor does it absorb the
associated credit risk or asset risk. For the three and nine months ended
September 30, 2007, the Trust recorded $1.0 million in net revenue pertaining
to the Bareboat Charters due to better than expected day rates.Construction Operations
(thousands except
percent data - Three months ended Nine months ended
Unaudited) September 30, September 30,
2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Revenue(1) 19,507 31,040 (37.2) 76,700 75,935 1.0
Operating expense(1) 16,694 28,721 (41.9) 70,427 69,470 1.4
------------------------------------------------------
Gross margin 2,813 2,319 21.3 6,273 6,465 (3.0)
------------------------------------------------------
Gross margin
percentage 14.4% 7.5% 92.0 8.2% 8.5% (3.5)
(1) Includes inter-segment revenue and operating expenses of $8.8 million
and $13.8 million for the three months ended September 30, 2007 and 2006,
respectively and $46.8 million and $41.1 million for the nine months
ended September 30, 2007 and 2006, respectively.On March 16, 2006 the Trust acquired Mastco Derrick Service Ltd.
("Mastco") to facilitate the construction of 10 rigs committed by the Canadian
drilling operations and four rigs committed by the US drilling operations,
which enhanced control over the timing and construction of these rigs.
Throughout 2006 and 2007, Mastco's main focus was on completing this rig
construction program resulting in the deployment of all 10 Canadian rigs and
one US rig as of September 30, 2007, with only 3 rigs left for deployment in
the US. Additionally, as the construction program nears completion, Mastco's
capacity is also being utilized to complete inter-segment recertification and
repair work. This focus on supporting the Trust's drilling operations resulted
in Mastco recognizing inter-segment revenue and operating expenses of
$8.8 million and $13.8 million for the three months ended September 30, 2007
and 2006, respectively and $46.8 million and $41.1 million for the nine months
ended September 30, 2007 and 2006.
Third quarter revenues decreased by 37.2% from the prior year due to
substantial completion of the rig program while revenues for the nine months
ended September 30, 2007 remained relatively stable as the incremental two and
half months of revenue in 2007 offset the decreased activity in the third
quarter. A decrease in third party revenue also contributed to the decline, at
$29.9 million for the nine months ended September 30, 2007 generating margins
of 21.0% compared to the prior year's $34.8 million at an 18.6% margin. The
focus on creating internal efficiencies by completing inter-segment work has
resulted in a decrease in third party contracts.GENERAL AND ADMINISTRATIVE EXPENSE
(thousands except
percent data - Three months ended Nine months ended
Unaudited) September 30, September 30,
2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
General and
administrative
expenses 14,949 11,607 28.8 41,927 37,835 10.8
% of revenue 9.2% 7.7% 8.7% 9.0%Changes in the composition of the Trust's business through the
acquisition of Axxis and the expansion of the US drilling operations have
resulted in an increase in general and administrative expenses
quarter-over-quarter and year-to-date. From a quarterly perspective, the 28.8%
increase is primarily a result of incremental general and administrative
expenses from the addition of Axxis as well as property taxes payable on rigs
operating in the US. As of September 30, 2007, the Trust has assessed $3.4
million of property taxes of which $1.6 million was recorded in the current
quarter. Property taxes of this nature are assessed based on the value and
location of rigs on the first day of each year; hence the balance in the prior
year was minimal given that the Trust's rig count in the US was substantially
lower in the prior year.
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. As a result of this focus, year-to-date general and
administrative expenses as a percentage of revenue decreased from 9.0% to
8.7%.INTEREST
Three months ended Nine months ended
(thousands - September 30, September 30,
Unaudited) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Interest on
bank debt 6,749 6,388 5.7 24,107 13,740 75.4
Effective interest
on deferred
financing costs 425 - 100.0 1,177 - 100.0
------------------------------------------------------
7,174 6,388 12.3 25,284 13,740 84.0
------------------------------------------------------
Interest on
convertible
debentures 6,621 - 100.0 6,621 - 100.0
Effective interest
on deferred
financing costs 654 - 100.0 654 - 100.0
Accretion of
convertible
debenture 1,027 - 100.0 1,027 - 100.0
------------------------------------------------------
8,302 - 100.0 8,302 - 100.0
------------------------------------------------------The Trust fulfilled a number of capital initiatives in the current year
including the acquisition of Axxis, the substantial completion of the rig
construction program and the purchase of three additional rigs which increased
the asset base of the coring and surface casing division. Financing this
extensive capital program was critical in order to realize the benefits of the
expanded breadth and depth of the Trust's drilling fleet. This was facilitated
in April 2006 when the Trust closed a new debt facility, which increased the
principal available from $250.0 million to a debt facility with total Canadian
dollar equivalent capacity of approximately $474.4 million, excluding a
temporary increase of $35.0 million which was obtained in the second quarter
of 2007 and fully repaid in July 2007. 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 whereas under
the original agreement, the Trust was obligated to pay interest at a fixed
borrowing rate. In order to mitigate the risk of fluctuations in floating
interest rates on the debt facility, 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 and on a year-to-date basis by
$0.2 million and $0.7 million, respectively. This effort to expand service
lines and further enhance existing ones resulted in the Trust increasing debt
levels throughout 2006 and into 2007 which increased interest expense on the
bank facility by $10.4 million on a year-to-date basis and $0.4 million
quarter-over-quarter.
Effective July 5, 2007, the Trust closed the issuance of $325.0 million
convertible debentures in order to facilitate the acquisition of Axxis.
Proceeds in excess of the purchase price were used to repay $187.8 million of
the Canadian revolving facility which significantly reduced the debt drawn
under the facility. As at September 30, 2007 the combined debt facility
balance of approximately $327.2 million was comparable to the balance at
September 30, 2006, explaining the small variance in interest expense
quarter-over-quarter.
Interest on the convertible debentures is paid semi-annually at a coupon
rate of 7.75% and for the three and nine months ended, the Trust recorded
associated interest expense of $6.6 million. The fixed interest rate on the
convertible debentures will reduce the Trust's exposure to interest rate
fluctuations and further enhance funds flow stability.
Non-cash interest expense represents $2.1 million of total interest
expense on a quarterly basis and $2.9 million on a year-to-date basis. The
Trust's adoption of CICA 3855, Financial Instruments - Recognition and
Measurement, requires the amortization of transaction costs that were
previously classified as amortization expense to be recorded as part of
interest expense under the effective interest method. The application of this
method resulted in a $1.1 million and $1.8 million increase in interest
expense for the three and nine months ended September 30, 2007, respectively.
Furthermore, the convertible debt balance accretes over time to the amount
owing at maturity and such increases to the debt balance have resulted in a
$1.0 million increase in non-cash interest expense for the period.UNIT BASED COMPENSATION
Three months ended Nine months ended
(thousands - September 30, September 30,
Unaudited) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Unit based
compensation 508 740 (31.4) 1,954 5,323 (63.3)
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. Unit based compensation for the nine months ended
September 30, 2007 decreased by $3.4 million from the comparable period in
2006 due to the granting of 2.3 million options in the first quarter of 2006
in comparison with 0.6 million options in 2007. Unit based compensation for
the three months ended September 30, 2007 experienced a minimal change in
comparison to the prior quarter, as no option grants took place in either the
third quarter of 2006 or 2007.
FOREIGN EXCHANGE (GAIN) LOSS
Three months ended Nine months ended
(thousands - September 30, September 30,
Unaudited) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Foreign exchange
loss (gain) 5,394 (45) 12,086.7 12,283 1,045 1,075.4
Foreign exchange loss increased significantly both quarter-over-quarter
and year-to-date primarily due to unrealized losses in the Canadian entity on
US denominated intercompany balances. The intercompany debt was minimal in
2006 as the US operations drew on the US portion of the debt facility to fund
the capital requirements under the rig construction program. However, in early
2007 Trinidad announced the construction of an additional five US rigs which
were not contemplated in the original debt facility and therefore required
funding through the Canadian revolver. This resulted in the intercompany
balance increasing significantly in 2007 which, when coupled with the
continuing weakness of the US dollar created unrealized losses on the
intercompany balance. The loss corresponds to an unrealized gain in the US
subsidiary that is capitalized in the cumulative translation adjustment which
is reflected in equity as part of accumulated other comprehensive income.
DEPRECIATION AND AMORTIZATION
Three months ended Nine months ended
(thousands - September 30, September 30,
Unaudited) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Depreciation 20,190 13,695 47.4 53,279 35,851 48.6
Amortization - 281 (100.0) - 936 (100.0)
Loss (gain) on sale
of assets 31 (2,032) 101.5 238 (2,002) 111.9Increases in depreciation of $6.5 million quarter-over-quarter and
$17.4 million year-over-year have resulted from changes in the composition of
Trinidad's asset base as a result of the current rig construction program,
growth in the Trust's drilling fleet and the acquisition of Axxis. These
growth initiatives increased the land drilling fleet by 32 drilling rigs
throughout 2006 and into 2007, many of these rigs being the most
technologically advanced in the industry. The higher capital costs on these
rigs together with an increased number of drilling days in comparison with
2006 have increased depreciation expense on both a quarterly and year-to-date
basis. In addition, the acquisition of the assets of Axxis increased the
Trust's fleet of land drilling rigs by four and added a barge rig contributing
approximately $1.7 million in depreciation for the third quarter of 2007. The
US operations as a whole contributed $30.8 million to depreciation expense for
2007, compared to only $14.2 million in 2006, an increase of 116.9%, which
represents a significant portion of the increase year-over-year. As the
majority of the growth initiatives over the last year have been focused on the
US operations and the market continues to thrive, it is expected that this
trend will continue.
Depreciation rates per day for US operations also rose from $2,878 to
$3,527 on a year-to-date basis and $3,086 to $3,615 quarter-over-quarter as a
result of the higher capital costs associated with the newly released rigs.
Additionally, depreciation rates per day for Canadian operations have risen by
18% to $2,929 for 2007 and on a quarterly basis have increased to $3,033 from
$2,424; however, the decline in operating days compared to 2006 has resulted
in only a marginal increase in the Canadian depreciation expense for the
period.
Due to the adoption of CICA 3855, Financial Instruments - Recognition and
Measurement, 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 and
$0.9 million decrease in amortization for the three and nine months ended
September 30, 2007, respectively.INCOME TAXES
Three months ended Nine months ended
(thousands - September 30, September 30,
Unaudited) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Current tax expense
(recovery) 299 36 730.6 2,283 (389) 686.9
Future tax expense 3,260 4,635 (29.7) 10,377 9,837 5.5Effective June 12, 2007, the Canadian government substantively enacted
Bill C-52 and on June 22, 2007 the bill received Royal Assent. The new
legislation has resulted in a "Distribution Tax" of 18.5% on distributions of
publicly traded income trusts and limited partnerships (specified investment
flow-through entities, or "SIFTs") plus the "provincial SIFT tax factor" of
13% and reduces the general corporate tax rate to 18.5% starting in 2011.
Under Canadian GAAP the SIFT legislation, now enacted, will trigger the
recognition of future income tax assets and liabilities based on temporary
differences expected to reverse after the date that the changes take effect.
The Trust assessed the impact of the SIFT legislation and has recorded a
future income tax impact of $0.5 million pertaining to financing costs on the
issuance of the convertible debentures.
Year-to-date and quarter-to-date future income tax expense increased by
5.5% and decreased by 29.7%, respectively, primarily due to the acquisition of
Axxis assets resulting in a substantial increase in the tax pools of the US
division and large temporary differences between book-to-tax depreciation.
This factor was offset by future income tax recoveries in the Canadian
divisions, as weak industry fundamentals have resulted in lower earnings on
both a quarterly and year-to-date basis. Furthermore, the construction segment
recognized a future income tax recovery in the current year which was higher
than that of the comparable period due to the additional four months of
incremental operations. The enactment of Bill C-52 has resulted in a slight
reduction in the effective tax rate in accordance with the general rate
reduction to 18.5% for 2011 and beyond.
On May 19, 2006, the Texas Legislature implemented a significant change
to Texas franchise 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
$0.9 million to current income tax expense for the nine month period ended
September 30, 2007. In addition, Canadian current income tax expense increased
due to current federal and provincial tax of $1.3 million recognized on the
earnings of certain smaller divisions of the Trust, due to taxable earnings
surpassing the available capital cost allowance claim.NET EARNINGS AND FUNDS FLOW
(thousands except
per unit data - Three months ended Nine months ended
Unaudited) September 30, September 30,
2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Net earnings 15,043 31,573 (52.4) 61,627 92,369 (33.3)
Per unit
(diluted)(1) 0.18 0.37 (51.4) 0.65 1.09 (40.4)
Funds flow from
operations 46,456 48,973 (5.1) 142,619 142,224 0.3
Per unit
(diluted)(1) 0.55 0.57 (3.5) 1.42 1.68 (15.5)
(1) Diluted units include the weighted average units outstanding, units
issuable upon exchange of outstanding exchangeable shares and the
dilutive impact, if any, of the deemed conversion of convertible
debentures and units issuable pursuant to the Trust Unit Rights Incentive
Plan. Interest expense incurred on the dilutive convertible debentures is
added back to net earnings and to funds flow before change in non-cash
working capital for the diluted per unit calculation.Geographical disbursement and expansion of service lines have enabled the
Trust to effectively counteract the prevailing market conditions in Canada.
Results in the current period continued to demonstrate the strength of the US
operations, which were further enhanced with the acquisition of Axxis. Gross
margin in the US division increased by 76.2% to $114.8 million for the nine
months ended September 30, 2007 and 74.8% to $44.1 million for the three
months ended September 30, 2007, representing incremental margin from the
acquisition of Axxis as well as the additional revenue generated through rig
deployments. The results of the US division were offset by a 21.5% decline in
the gross margin of the Canadian operations from $123.0 million for the nine
months ended September 30, 2006 to $96.5 million in the comparable period of
2007. On a quarterly basis, gross margin decreased 28.2% to $28.3 million in
2007 from $39.4 million in the comparable quarter of 2006 as a result of
overall declines across the Canadian market. The Trust has minimized the
downward impact of the declining Canadian market by securing higher
year-to-date day rates in comparison to the prior year, consistently
performing at utilization levels above industry averages and ensuring that the
well servicing, surface casing and coring and manufacturing divisions continue
to perform at optimal levels.
From an operational perspective, the Trust's performance improved from
the prior year from both a quarterly and year-to-date perspective; however,
higher interest expense including non-cash interest on the accretion of the
convertible debentures and transaction costs being amortized into interest
expense, depreciation expense increases and an unrealized foreign exchange
loss contributed to the overall decline in net earnings. Higher debt levels
required to fund the Trust's capital initiatives increased cash interest
expense and the capital cost of the Trust's asset base continued to increase
with the addition of newer and deeper rigs, resulting in higher per day
depreciation rates which have increased overall depreciation expense.
Furthermore, weakening of the US dollar since 2006 and the higher balance of
US dollar denominated intercompany balances resulted in the Trust recognizing
a significant unrealized foreign exchange loss in 2007.
Funds flow from operations before change in non-cash working capital
remained relatively stable in comparison to prior periods at $142.6 million
year-to-date and $46.5 million for the third quarter as non-cash reductions
that impacted net earnings during the period were added back to reconcile to
the cash position of the Trust. Overall stability was achieved through strong
results in the US operations where higher revenues in the US offset lower
margins in the Canadian segment. 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
reduction in the Canadian market.LIQUIDITY AND CAPITAL RESOURCES September 30, December 31,
(thousands except percent data - Unaudited) 2007 2006
-------------------------------------------------------------------------
Working capital 71,343 58,246
Current portion of long-term debt 1,547 3,232
Convertible debentures(2) 314,203 -
Long-term debt(2) 364,575 388,276
--------------------------
Total debt 680,325 391,508
--------------------------
Total debt as a percentage of assets 45.8% 31.4%
Net debt(1) 607,435 330,030
Net debt as a percentage of assets(1) 40.9% 26.5%
Total assets 1,485,975 1,245,633
Total long-term liabilities 732,426 434,065
Total long-term liabilities as a percentage
of assets 49.3% 34.8%
Unitholders' equity 647,559 698,092
Total debt to unitholders' equity 105.1% 56.1%
Total debt to unitholders' equity -
assuming debenture conversion 38.1% 56.1%
Net debt to unitholders' equity(1) 93.8% 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 including convertible debentures less its
working capital position and is indicative of the Trust's overall
indebtedness.
(2) Convertible debentures and long-term debt are reflected net of
associated transaction costs.Under the rig construction program the Trust has successfully deployed 31
rigs and with only three rigs remaining, the program is substantially
complete. In light of the construction program coming to a close as well as
the completion of three well servicing rigs, the purchase of three surface
casing and coring rigs and the acquisition of Axxis on July 5, 2007, the Trust
has increased total debt from the prior year by $288.8 million. Year-to-date
capital expenditures totalled $350.4 million which was funded through both
internally generated funds flow and long-term debt, of which $124.4 million
was associated with the cash portion of the Axxis acquisition. As the rig
construction program nears completion with the deployment of five Canadian
drilling rigs and eight US drilling rigs during the nine months ended
September 30, 2007, the Trust's capital requirements should begin to decline
as the outstanding commitment on the construction program is minimal with the
remaining three rigs ready for deployment in the early part of the fourth
quarter of 2007.
In connection with the closing of the Axxis acquisition on July 5, 2007,
the Trust issued $354.3 million convertible debentures, of which $325.0
million was issued through a public offering and $29.3 million was issued to
former owners of Axxis to finance a portion of the acquisition (see details of
the convertible debentures below). The remaining portion of the purchase price
of $124.4 million was financed through the proceeds raised on the closing of
the convertible debenture, including $5.6 million to reimburse the former
owners for construction costs spent on a barge rig under construction as at
the date of acquisition. As part of the acquisition the Trust acquired a
commitment to complete a second barge rig at an estimated cost of $27.5
million, of which $19.8 million was remaining at end of the third quarter of
2007.
With the remaining proceeds of $197.8 million, the Trust reduced its
Canadian Revolving Credit Facility to $106.0 million. Subsequent to this
payment, approximately $51.8 million was drawn down on the revolver to fund
the remaining construction commitments on the build program, construction
costs on the barge rig, the purchase of three coring and surface casing rigs,
and various other minor capital initiatives resulting in an overall decline in
the revolver of $146.0 million from the balance at June 30, 2007.
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. This resulted
in the balance of bank debt being offset by $4.0 million of deferred financing
costs. Similarly, the balance of convertible debentures at September 30, 2007
is reflected net of $12.9 million in transaction costs.
Working capital experienced a favourable increase of $13.1 million from
the prior year, of which the working capital from the Axxis acquisition
contributed an incremental $9.5 million. Despite the addition of Axxis working
capital, total accounts receivable and accounts payable decreased by 2.6% and
2.8%, respectively from December 31, 2006 as a result of a slower Canadian
market, resulting in a reduction of revenues and operating expenses in
comparison to the prior year and more aggressive collection practices.
Inventory also increased by approximately $7.6 million from the prior year in
construction operations due to spare equipment and parts purchased to
facilitate construction and recertification programs.
Unitholders' equity decreased $50.5 million from year-end due to a
significant cumulative translation adjustment on the Trust's US
self-sustaining subsidiary as a result of an increasingly favourable Canadian
dollar. Year-to-date distributions of $84.4 million also contributed to the
decline while the equity component of the convertible debentures and net
earnings for the nine months ended September 30, 2007 increased unitholders'
equity by $28.2 million and $61.6 million, respectively.
Convertible debentures
In connection with the acquisition of Axxis, the Trust issued
$354.3 million in unsecured subordinated debentures, of which $325.0 million
was issued through a public offering and $29.3 million was issued to former
owners of Axxis. The debentures are convertible into units of the Trust at the
option of the holder at any time prior to maturity at a conversion price of
$19.30. They have a face value of $1,000, coupon rate of 7.75%, mature
July 31, 2012 with interest being paid semi-annually on June 30 and December
31. The Trust has the option to redeem the debentures in whole or in part at a
redemption price of $1,000 after December 31, 2010 and before their maturity
date. On redemption or maturity, the Trust may elect to satisfy its obligation
to repay the principal by issuing Trust units.
The value of the conversion feature was determined to be $28.2 million
and has been recorded as equity with the remaining $326.1 million allocated to
long-term debt, net of $13.6 million of transaction costs. The debentures are
being accreted such that the liability at maturity will equal the face value
of $354.3 million. As at September 30, 2007 there were no conversions of these
debentures.-------------------------------------------------------------------------
UNITHOLDERS' CAPITAL September 30, December 31,
(thousands - Unaudited) 2007 2006
-------------------------------------------------------------------------
Unitholders' capital 675,712 669,584
Exchangeable shares 2,477 5,777
-------------------------------------------------------------------------
Unitholders' capital increased from the 2006 year-end by $6.1 million,
with the conversion of 311,367 Series C exchangeable shares ($3.3 million) to
356,404 trust units and the exercise of 274,089 rights ($2.5 million) into
trust units. Unitholders' capital on November 2, 2007 was $675.7 million
(83,613,130 units).
DISTRIBUTIONS
(thousands except
unit and per unit Three months ended Nine months ended
data - Unaudited) September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flow from
operating
activities 48,388 2,366 122,450 119,894
Net change in
non-cash operating
working capital (1,932) 46,607 20,169 22,330
-----------------------------------------------------
Funds flow before
change in non-cash
working capital 46,456 48,973 142,619 100% 142,224 100%
Distributions paid
& declared (28,843) (28,640) (86,416) 61% (76,846) 54%
-----------------------------------------------------
Funds retained for
growth, debt
reduction & future
distribution 17,613 20,333 56,203 39% 65,378 46%
Funds flow before
change in non-cash
working capital per
unit (basic)(1) 0.55 0.59 1.70 1.72
Distributions paid &
declared per unit (0.34) (0.34) (1.03) (0.93)
-----------------------------------------------------
Funds retained
per unit 0.21 0.25 0.67 0.79
Quarter ending
annualized
distribution per
unit 1.38 1.38 1.38 1.38
-------------------------------------------------------------------------
(1) Includes trust units to be issued upon conversion of exchangeable
shares.During the three and nine months ended September 30, 2007, Trinidad
distributed $28.8 million and $86.4 million, respectively, to unitholders.
Distributions per unit have remained stable quarter-over-quarter; however,
lower distributions in the earlier part of 2006 resulted in an increase in
distributions paid and declared by $0.2 million and $9.6 million for the three
and nine months ended September 30, 2007. Despite distribution reductions
across the sector, the Trust has sustained annualized distributions per unit
at $1.38 throughout the current period and maintained a conservative payout
ratio of 61% for the nine months ended September 30, 2007. The Trust has
maintained stable funds flow through its significant presence in the US
drilling market which has been uninterrupted by seasonality or fluctuations in
commodity prices. Entrance into the offshore barge market will further enhance
the future stability of funds flow. Low industry fundamentals in Canada have
resulted in a 7% increase in the payout ratio in comparison to the nine months
ended September 30, 2006. However, the payout ratio continues to improve as
the year progresses and as the US segment capitalizes on additional rig
deployments and the Canadian segment enters into a busier fourth quarter. The
Trust manages its distributions based on a payout ratio goal of up to 75%,
with the remainder 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 into 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 funds flow 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 each fiscal year. This test
was performed based on current industry factors 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.
Convertible debentures
The proceeds from the offering have been bifurcated into separate
liability and equity components. The value of the conversion feature has been
determined based on an option pricing model and recorded as equity on the
Consolidated Balance Sheet.
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 Comprehensive Income and Consolidated
Statement of Accumulated Other Comprehensive Income ("AOCI").
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 and nine months
ended September 30, 2007 of $29.5 million and $56.2 million, respectively, 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 the reclassification of transactions costs resulted in a net
decrease in other assets and long-term debt by $4.9 million.
Similarly, costs related to the issuance of the Trust's convertible
debentures are netted against the carrying value of the convertible debentures
and amortized into earnings over the life of the convertible debentures using
the effective interest rate method.
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, net of $1.9 million to reflect
the future income tax asset that would have arisen in the prior year in
accordance with the new standards.
Section 1506, Accounting Changes
Section 1506 allows for voluntary changes in accounting policy only if
they result in financial statements which provide reliable and more relevant
information. Accounting policy changes are applied retrospectively unless it
is impractical to determine the period or cumulative impact of the change.
Corrections of prior period errors are applied retrospectively and changes in
accounting estimates are applied prospectively by including these changes in
earnings. The Trust has adopted the requirements of this section and will
apply these standards to any future changes in accounting policies and/or
estimates.
There are no other material impacts on the Consolidated Financial
Statements for the adoption of these new standards.
DISCLOSURE CONTROLS & PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING
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.
The 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. There have been no changes in the Trust's internal controls
over financial reporting that occurred during the three months ended September
30, 2007 that have materially affected, or are reasonably likely to affect the
Trust's internal controls over financial reporting.
The Trust is currently completing an assessment of the business process
controls of Mastco and Axxis and has not concluded on the design effectiveness
as at September 30, 2007. As a result, the Trust has relied on management's
review to assess the accuracy of the financial statements at the reporting
date.
OUTLOOK
Under the "Our Fair Share" report issued by the Alberta government, the
province's new royalty system has caused many oil and gas producers to
re-evaluate Alberta based activity and potentially shift investment dollars
into other regions of Canada and into the US. Furthermore, in conjunction with
weak natural gas prices and an influx of supply, Canadian drillers are
challenged and being forced to endure idle capacity and competitive consumer
pricing. The CAODC is projecting 16,339 well completions in 2007 and early
forecasts for 2008 do not indicate signs of improvement for the coming year.
The Trust is prepared to face these challenges with approximately 80% of the
Canadian rig fleet tailored to the medium and deeper drilling market with
depths in excess of 2,000 metres. The Canadian rig construction program has
successfully reached completion resulting in a rig fleet equipped with modern,
high quality, deeper drilling rigs with all rigs deployed under the rig build
program secured by three to five year take-or-pay contracts. These factors
have allowed the Trust to mitigate decreasing industry fundamentals resulting
in utilization levels that have surpassed the Canadian industry average by
18.4% in 2007 and will continue to do so by focusing on the deeper drilling
market and fulfilling obligations under the take-or-pay contracts.
Operations in the US market are now contributing more than 50% to the
overall results of the Trust. With the completion of the rig construction
program in the fourth quarter of 2007 and the acquisition of Axxis, the
combined US rig fleet will include 46 land drilling rigs, one barge rig, three
barge rigs under Bareboat Charters and one barge rig under construction. All
rigs deployed under the rig construction program are secured by long-term
take-or-pay contracts while rigs acquired through Axxis are secured by fixed
price contracts. By capitalizing on US opportunities, the Trust has managed to
maintain funds flow at levels consistent with the prior year. Future cash
flows will be further enhanced with the deployment of the second barge
drilling rig.
The acquisition of Axxis has added a fleet of recently built high quality
assets, an experienced management team and an opportunity to further diversify
the services of the Trust into a lucrative niche market. Unlike jack-up rigs
that operate in the deeper waters of the Gulf of Mexico, the barge rigs
acquired from Axxis are tailored to shallower waters which is more cost
effective for the operators and less impacted by the poor weather conditions
experienced in the Gulf of Mexico in recent years. The barge drilling market
is an expanding niche with opportunities for growth both in the US and other
international regions. The combination of Trinidad's technology construction
expertise and the experienced management of Axxis will allow this division to
grow and add value for investors.
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 and the acquisition of Axxis, the Trust will have 109 drilling rigs
ranging in depths from 1,000 - 6,500 metres and two barge drilling rigs. 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 20 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) September 30, December 31,
2007 2006
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 10,113 9,413
Accounts receivable 147,994 151,990
Inventory 15,054 7,451
Prepaid expenses 4,172 2,868
--------------------------
177,333 171,722
Deposit on capital assets 3,118 42,172
Capital assets 1,101,689 903,111
Goodwill 169,387 123,483
Other long-term assets 34,448 5,145
--------------------------
1,485,975 1,245,633
--------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 85,556 88,083
Accrued trust distributions 9,615 9,543
Current portion of deferred revenue 7,399 9,090
Current portion of long-term debt 1,547 3,232
Current portion of fair value of interest
rate swap (note 7) 1,179 -
Future income taxes 694 3,528
--------------------------
105,990 113,476
Deferred revenue 5,379 7,070
Long-term debt, net of transaction costs
(note 3, 7 and 8) 364,575 388,276
Convertible debentures, net of transaction
costs (note 8) 314,203 -
Fair value of interest rate swaps (note 7) 3,055 -
Future income taxes 45,214 38,719
--------------------------
838,416 547,541
Unitholders' equity
Unitholders' capital (note 4) 675,712 669,584
Exchangeable shares (note 5) 2,477 5,777
Convertible debentures (note 8) 28,223 -
Contributed surplus (note 4) 13,349 11,722
Accumulated other comprehensive income (59,172) (750)
Accumulated trust distributions (note 9) (276,400) (189,984)
Accumulated earnings 263,370 201,743
--------------------------
647,559 698,092
--------------------------
1,485,975 1,245,633
--------------------------
(See Notes to the Consolidated Financial Statements)
Commitments (note 10)
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
(thousands except unit and per unit data -
Unaudited)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue
Oilfield services 160,980 149,924 482,128 416,041
Bareboat revenue
(note 10) 1,021 - 1,021 -
Other 182 701 739 2,068
----------------------------------------------------
162,183 150,625 483,888 418,109
----------------------------------------------------
Expenses
Operating 87,033 83,747 266,334 223,564
General and
administrative 14,949 11,607 41,927 37,835
Interest on
long-term debt 7,174 6,388 25,284 13,740
Interest on
convertible
debentures (note 8) 8,302 - 8,302 -
Unit based compensation 508 740 1,954 5,323
Foreign exchange loss
(gain) 5,394 (45) 12,283 1,045
Depreciation and
amortization 20,190 13,976 53,279 36,787
Loss (gain) on sale
of assets 31 (2,032) 238 (2,002)
----------------------------------------------------
143,581 114,381 409,601 316,292
----------------------------------------------------
Earnings before
income taxes 18,602 36,244 74,287 101,817
Income taxes
Current tax expense
(recovery) 299 36 2,283 (389)
Future tax expense 3,260 4,635 10,377 9,837
---------------------------------------------------
3,559 4,671 12,660 9,448
---------------------------------------------------
Net earnings 15,043 31,573 61,627 92,369
Charges for normal
course issuer bid - (96) - (96)
Accumulated earnings
- beginning of period 248,327 139,212 201,743 78,416
----------------------------------------------------
Accumulated earnings
- end of period 263,370 170,689 263,370 170,689
----------------------------------------------------
Earnings per unit
Basic 0.18 0.38 0.73 1.11
Diluted 0.18 0.37 0.65 1.09
Weighted average
number of trust units
Basic 83,989,145 83,705,299 83,917,739 82,851,643
Diluted 85,140,262 85,316,897 103,605,851 84,651,979
(See Notes to the Consolidated Financial Statements)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(thousands - Unaudited)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Net earnings 15,043 31,573 61,627 92,369
Other comprehensive
income
Change in fair value
of derivatives
designated as cash
flow hedges, net of
income tax (264) - 1,474 -
Foreign currency
translation adjustment (29,510) 319 (56,196) (12,677)
----------------------------------------------------
Total other
comprehensive
income (loss) (29,774) 319 (54,722) (12,677)
Comprehensive
income (loss) (14,731) 31,892 6,905 79,692
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(thousands - Unaudited) September 30, September 30,
2007 2006
-------------------------------------------------------------------------
Accumulated other comprehensive loss
- beginning of period (750) -
Adjust opening balance due to adoption
of new accounting policies (3,700) -
Other comprehensive loss during
the period (54,722) (12,677)
--------------------------
Accumulated other comprehensive loss
- end of period (59,172) (12,677)
--------------------------
(See Notes to the Consolidated Financial Statements)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands - Unaudited)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by
(used in)
Operating activities
Net earnings for the
period 15,043 31,573 61,627 92,369
Items not affecting
cash
Depreciation and
amortization 20,190 13,976 53,279 36,787
Loss (gain) on sale
of assets 31 (2,032) 238 (2,002)
Unit based
compensation 508 740 1,954 5,323
Future income taxes 3,260 4,635 10,377 9,837
Effective interest
on financing costs
(note 7) 1,078 - 1,830 -
Accretion on convertible
debentures (note 8) 1,028 - 1,028 -
Unrealized foreign
exchange loss (gain) 5,318 81 12,286 (90)
-----------------------------------------------
Funds flow from operations
before change in non-cash
working capital 46,456 48,973 142,619 142,224
Net change in non-cash
operating working
capital 1,932 (46,607) (20,169) (22,330)
-----------------------------------------------
48,388 2,366 122,450 119,894
-----------------------------------------------
Investing activities
(Increase) decrease in
deposits on capital
assets 278 5,122 37,242 (22,891)
Acquisition of Mastco
Derrick Service Ltd.
(note 3) - 13,523 - (24,717)
Acquisition of Axxis
Drilling Inc. (note 3) (124,370) - (124,370) -
Purchase of capital
assets (44,703) (89,203) (233,958) (223,731)
Proceeds from
dispositions 532 5,592 1,021 6,598
Change in non-cash
working capital item
- accounts payable
and accrued liabilities (20,773) 7,317 10,521 6,024
-----------------------------------------------
(189,036) (57,649) (309,544) (258,717)
-----------------------------------------------
Financing activities
(Decrease) increase in
long-term debt - net (146,745) 53,318 (34,450) 231,984
Net proceeds from unit
issues (note 4) 199 1,891 2,501 8,088
Proceeds from debenture
issuance (note 8) 325,000 - 325,000 -
Increase (decrease) in
deferred revenue (2,812) - (1,311) -
Purchased units (note 4) - (276) - (276)
Trust unit distribution
(note 9) (28,843) (28,640) (86,416) (76,846)
Debt financing costs
(note 7) (13,593) (111) (14,193) (5,204)
Change in non-cash
working capital item
- accrued distributions 2 22 72 2,839
-----------------------------------------------
133,208 26,204 191,203 160,585
-----------------------------------------------
Cash flow from operating,
investing and financing
activities (7,440) (29,079) 4,109 21,762
Effect of translation on
foreign currency cash 449 (97) (3,409) (817)
-----------------------------------------------
Increase (decrease) in
cash for the period (6,991) (29,176) 700 20,945
Cash - beginning of
period 17,104 61,870 9,413 11,749
-----------------------------------------------
Cash - end of period 10,113 32,694 10,113 32,694
-----------------------------------------------
Interest paid 7,503 5,427 24,421 11,338
Taxes paid 38 46 185 1,195
(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.
Adoption of New Accounting Standards
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 Consolidated Statement of Comprehensive
Income and Consolidated Statement of 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
other comprehensive income ("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.
Section 1506, Accounting Changes, allows for voluntary changes in
accounting policy only if they result in financial statements which
provide reliable and more relevant information. Accounting policy
changes are applied retrospectively unless it is impractical to
determine the period or cumulative impact of the change. Corrections
of prior period errors are applied retrospectively and changes in
accounting estimates are applied prospectively by including these
changes in earnings. The Trust has adopted the requirements of this
section and will apply these standards to any future changes in
accounting policies and/or estimates.
Financial Instruments and Hedge Accounting
Translation of self-sustaining foreign operations
As a result of adopting CICA Section 1530, a new Consolidated
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 and nine months ended
September 30, 2007 of $29.5 million and $56.2 million, respectively,
has been recognized into OCI.
Cash flow hedge
The application of hedge accounting to the Trust's interest rate swaps
and forward foreign exchange contract 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 pertaining to the interest rate swaps has been
recognized into OCI without restatement of prior period amounts, net
of $1.9 million to reflect the future income tax asset that would have
arisen in the prior year in accordance with the new standards. The
forward foreign exchange contract was entered into in the current
year; hence, there is no impact on prior year figures.
Transaction costs
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 the reclassification of transaction
costs resulted in a net decrease in other assets and long-term debt by
$4.9 million.
Similarly, costs related to the issuance of the Trust's convertible
debentures are netted against the carrying value of the convertible
debentures and amortized into earnings over the life of the
convertible debentures using the effective interest rate method.
There are no other material impacts on the Consolidated Financial
Statements for the adoption of these new standards.
Convertible Debentures
The Trust's convertible debentures have been classified as debt with a
portion of the proceeds representing the value of the conversion
option bifurcated to equity. The debt balance accretes over time to
the amount owing on maturity and such increases in the debt balance
are reflected as non-cash interest expense in the Consolidated
Statement of Operations. Upon conversion, portions of debt and equity
are transferred into Unitholders' Capital.
Capital assets
The acquisition of substantially all the assets of Axxis (defined
herein) in the third quarter diversified the Trusts' operations to
include barge drilling rigs, with related inventory, crew boats and
spare parts. Additional asset classes resulting from the acquisition
include barge drilling rigs that have been assigned a useful life of
9,125 days (10% salvage value) to be depreciated on a unit-of-
production basis and crew boats that have been assigned a useful life
of 15 years on a straight-line basis. The Trust has applied existing
policies to all other assets acquired.
Future income taxes
On June 22, 2007, Bill C-52 was enacted for Canadian accounting
purposes that effectively imposed a new income tax on distributions
from income trusts for taxation years beginning in 2011, at a rate of
31.5%. The enactment of this legislation triggered the recognition of
future income taxes based on temporary differences expected to reverse
after the date that the taxation changes take effect. There was no
impact of this legislation for the Trust at the end of the second
quarter of 2007; however, an additional future income tax recovery of
$0.5 million was recognized in the third quarter of 2007 on financing
costs incurred on the issuance of the convertible debentures.
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. ACQUISITIONS
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 was 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.
Acquisition of assets of Axxis
Effective July 5, 2007, a subsidiary of the Trust, purchased
substantially all of the assets of US-based Drilling Productivity
Realized, L.L.C., P.C. Axxis, L.L.C., DPR International, L.L.C. and
DPR Rentals, L.L.C. (collectively, "Axxis") for consideration of
$148.1 million. Additionally, the Trust acquired a commitment to
construct an additional barge rig for approximately $27.5 million, of
which $5.6 million had been spent at the time of acquisition and was
included in the purchase price. The acquisition was funded through the
issuance of $29.3 million of convertible debentures to the former
shareholders of Axxis and $124.4 million in cash proceeds raised
through a public issuance of 325,000 convertible debentures for gross
proceeds of $325.0 million.
The consideration paid for this acquisition has been allocated under
the purchase method as follows:
(thousands) 2007
----------------------------------------------------------------------
Purchase price allocated as follows:
Capital assets 96,490
Assets under construction 5,624
Intangible assets 39,569
Goodwill 51,593
Long-term liabilities (39,569)
----------------
153,707
----------------
Financed as follows:
Convertible debentures 29,337
Cash 124,370
----------------
153,707
----------------
Goodwill from this acquisition is tax deductible.
As a result of the acquisition of Axxis the Trust is obligated to pay
US$12.5 million annually to the former shareholders of Axxis for the
next three years pertaining to provisions under the Bareboat Charter,
discussed further in Note 10 - Commitments. The consideration will be
paid annually and is contingent on the continued operation of three
barge rigs currently under contract. To the extent that these
contracts are terminated prior to the end of the three years no
further payments will be required. The amount paid under this
commitment is considered a cost of the purchase and has been included
in the purchase price and will be accrued and recorded against the
associated revenue earned from the rigs and reported net as Bareboat
revenues in accordance with EIC-123, Reporting Revenue Gross as a
Principal versus Net as an Agent.
4. UNITHOLDERS' CAPITAL AND CONTRIBUTED SURPLUS
a) Unitholders' capital
Authorized
Unlimited number of trust units, voting, participating
(thousands except unit data)
September 30, 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 356,404 3,300 1,505,630 13,825
Trust units
issued on exercise
of options
and rights 274,089 2,501 1,138,289 8,272
Trust units
repurchased
under normal
course
issuer bid - - (66,500) (537)
Contributed surplus
transferred on
exercised options
and rights - 327 - 1,332
---------------------------------------------------
Unitholders'
capital - ending
balance 83,612,445 675,712 82,981,952 669,584
---------------------------------------------------
Basic earnings per unit are calculated using the weighted average
number of Trust units outstanding during the three and nine month
period ended September 30, 2007 of 83,989,145 and 83,917,739,
respectively, (three and nine months ended September 30, 2006 -
83,705,299 and 82,851,643). For purposes of calculating diluted
earnings per unit, 1,151,117 and 1,328,664 units issuable pursuant to
the Trust Unit Rights Incentive Plan for the three and nine month
period ended September 30, 2007, respectively (three and nine months
ended September 30, 2006 - 1,611,598 and 1,800,336) were added to the
weighted average calculation. Additionally, the diluted earnings per
unit calculation for the three months ended September 30, 2007 does
not include 18,359,448 of potentially issuable units pursuant to the
conversion of the convertible debentures as the impact on net earnings
was anti-dilutive; however, this impact has been reflected in diluted
net earnings per unit for the nine months ended September 30, 2007.
b) Contributed surplus
(thousands) September 30, December 31,
2007 2006
----------------------------------------------------------------------
Contributed surplus - opening balance 11,722 5,949
Unit based compensation expense 1,954 7,105
Contributed surplus transferred on
exercise of rights (327) (1,332)
-------------------------
Contributed surplus - ending balance 13,349 11,722
-------------------------
5. EXCHANGEABLE SHARES
A subsidiary of the Trust has issued the following exchangeable
shares:
(thousands except unit data)
September 30, 2007 December 31, 2006
----------------------------------------------------------------------
Number Amount Number Amount
of Units $ of Units $
---------------------------------------------------
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 (311,367) (3,300) (1,048,817) (11,118)
---------------------------------------------------
Exchangeable shares
- ending balance 300,599 2,477 611,966 5,777
---------------------------------------------------
The exchange ratio for the 253,430 initial series exchangeable shares
is 1.31831 at September 30, 2007 and the trust units issuable upon
conversion are 334,099. The exchange ratio for the 47,169 Series C
exchangeable shares is 1.20431 at September 30, 2007 and the trust
units issuable upon conversion are 56,806.
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:
----------------------------------------------------------------------
September 30, 2007 December 31, 2006
----------------------------------------------------------------------
Weighted Weighted
Number of Average Number of Average
Rights Exercise Price Rights Exercise 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 (274,089) 9.13 (1,118,437) 7.36
Forfeited during the
period (31,128) 13.81 (271,868) 13.09
---------------------------------------------------
Outstanding - ending
balance 8,005,108 12.55 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 September 30, 2007 was $1.49
(2006 - $2.66).
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. The Trust recorded a loss of
$0.3 million and gain of $1.5 million in OCI for the three and nine
months ended September 30, 2007 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.
Financing costs
The carrying value of long-term debt has been adjusted in accordance
with CICA Section 3855, Financial Instruments - Recognition and
Measurement, on financial instruments. Debt issuance costs which were
previously classified as a component of other assets have been
reclassified to long-term debt. The Trust recorded interest expense of
$0.4 million and $1.2 million for the three and nine months ended
September 30, 2007 under the effective interest method.
Additionally, the carrying value of the debt component of convertible
debentures is reflected net of $13.6 million in financing costs. The
Trust recorded interest expense of $0.7 million for the three and nine
months ended September 30, 2007 under the effective interest method.
Foreign exchange forward contract
On June 29, 2007 the Trust entered into a forward contract to purchase
US currency to fund the acquisition of the assets of Axxis - see note
3. The future commitment of US$111.2 million exposed the Trust to
foreign currency risk which was mitigated by a forward contract to
purchase US currency at a rate of 1.0631 on the date of closing. The
Trust designated this contract as a cash flow hedge and assessed it as
100% effective and as such no gain or loss was recorded on the
contract and the acquisition was recorded at the forward contracted
rate.
8. LONG-TERM DEBT
Revolving Credit Facility
Effective June 18, 2007, Trinidad amended its current Canadian
Revolving Credit Facility (the "First Amending Agreement") to provide
a temporary increase of $35.0 million, increasing the principal
available from $250.0 million to $285.0 million. This increase was
underwritten by GE Energy Financial Services, as agent for the Credit
Facilities and is subject to similar terms and conditions as the
original Revolving Credit Facility. This increase was made available
to the Trust for six months subsequent to the execution of the First
Amending Agreement and any repayments will be first applied to the
$35.0 million increase prior to any other reductions in the original
Revolving Credit Facility.
This temporary increase was fully repaid and retired on July 5, 2007
with a portion of the proceeds from the issuance of the convertible
unsecured subordinated debentures issued on this same date.
Convertible Debentures
In connection with the acquisition of the assets of Axxis on July 5,
2007 the Trust issued $354.3 million in convertible unsecured
subordinated debentures, of which $325.0 million was issued through a
public offering and $29.3 million was issued to former owners of
Axxis. The debentures are convertible into units of the Trust at the
option of the holder at any time prior to maturity at a conversion
price of $19.30. They have a face value of $1,000, coupon rate of
7.75%, mature July 31, 2012 with interest being paid semi-annually on
June 30 and December 31. The Trust has the option to redeem the
debentures in whole or in part at a redemption price of $1,000 after
December 31, 2010 and before their maturity date. On redemption or
maturity, the Trust may elect to satisfy its obligation to repay the
principal by issuing Trust units.
The value of the conversion feature was determined to be $28.2 million
and has been recorded as equity with the remaining $326.1 million
allocated to long-term debt, net of $13.6 million of transaction
costs. The debentures are being accreted such that the liability at
maturity will equal the face value of $354.3 million. As at
September 30, 2007 there were no conversions of these debentures.
Interest on convertible debentures of $8.3 million represents accrued
coupon payments of $6.6 million, $1.0 million pertaining to the
accretion of the convertible debenture and $0.7 million pertaining to
the effective interest on financing costs for the three and nine
months ended September 30, 2007.
9. ACCUMULATED CASH DISTRIBUTIONS
Pursuant to the Trust Indenture established on September 17, 2002,
distributions are determined at the discretion of the Board of
Directors. The intention of the Board of Directors is to provide
stability to the monthly distributions based on anticipated cash flow;
however, the actual amount of distributions paid by the Trust is
subject to review by the Board of Directors, taking into account the
prevailing financial and market circumstances of the Trust at the
relevant time.
----------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(thousands) 2007 2006 2007 2006
----------------------------------------------------------------------
Accumulated cash
distributions -
beginning of
period 247,557 132,715 189,984 84,509
Cash distributions 19,228 19,094 76,801 67,300
Distributions
declared and payable 9,615 9,546 9,615 9,546
---------------------------------------------------
Accumulated cash
distributions -
end of period 276,400 161,355 276,400 161,355
---------------------------------------------------
10. COMMITMENTS
Rig Construction Program
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 September 30, 2007, 31 of these rigs were completed,
with the remaining scheduled to be completed and deployed in the
fourth quarter of 2007 and substantially all the costs pertaining to
the rig build program have been expended.
In conjunction with the acquisition of the assets of Axxis the Trust
has assumed the remaining construction commitments of a barge rig, of
which $5.6 million had been spent as at the date of the acquisition
and was reimbursed to the former owners of Axxis. Total capital costs
of construction are expected to be $27.5 million of which
$7.8 million was spent as of September 30, 2007. The barge rig is
expected to be deployed in the second quarter of 2008.
Bareboat Charters
As a part of the Axxis acquisition the Trust entered into an
Assignment Agreement in which the contracts to operate three barge
rigs (the "Bareboat Charter" or "Charter") were transferred to the
Trust. Under the Bareboat Charters, the Trust is committed to operate
the rigs on behalf of a third party. In turn, as owners of the rigs,
this third party is entitled to receive 25% of the Net Operating
Revenues and 50% of the Net Margin earned under each Charter. Under
the original agreement any earnings in excess of this payment were to
be retained as compensation for the operation of the barge rigs
however, as part of the purchase agreement the Trust committed to pay
the former owners of Axxis US$12.5 million per year for the next
three consecutive years, of which one-third of the payment, or
US$4.2 million, shall be attributable to each of the three Bareboat
Charters.
This payment is contingent on the continued operation of the rigs and
to the extent that the contract is terminated by the owners of the
rigs, no further payments will be required. This fixed payment was
structured to represent the residual earnings in excess of the
payment to the third party owners; hence the Trust is exposed to
minimal risk and rewards of the arrangement. In the instance that day
rates or expenses fluctuate from the original provisions in the
Bareboat Charters, the Trust is exposed to the residual gain or loss;
however, it was determined the impact would be minimal. The Trust has
disclosed all transactions pertaining to the Bareboat Charters on a
net basis in accordance with EIC 123, Reporting Revenue Gross as a
Principal versus Net as an Agent, for purposes of financial statement
disclosure as the Trust does not bear the significant risks and
rewards of the arrangement nor does it absorb the associated credit
risk or asset risk.
11. SEGMENTED INFORMATION
Since Trinidad first announced its intent to expand operations in
2005 into the US marketplace operations have been diversified from
its primary geographic focus in Western Canada to include various
locations in the United States, such that a significant portion of
the Trust's operations are now driven from the US market. The
acquisitions of Cheyenne Drilling and Axxis as well as the Trust's
rig construction program added additional rigs of varying depths and
capabilities to the drilling fleet operating in the Canadian market
complementing the Trust's 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 in 2006 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
September 30, Canadian States Inter-
2007 Drilling Drilling Construction segment
(thousands) Operations Operations Operations Eliminations Total
---------------------------------------------------------------------
Revenue 67,656 83,771 19,507 (8,751) 162,183
Operating
expense 39,390 39,700 16,694 (8,751) 87,033
-----------------------------------------------------
Gross margin 28,266 44,071 2,813 - 75,150
Interest 4,051 3,107 16 - 7,174
Interest on
convertible
debentures 8,302 - - - 8,302
Depreciation and
amortization 8,074 11,946 170 - 20,190
Loss (gain) on
sale of assets 35 (4) - - 31
-----------------------------------------------------
Income before
corporate items 7,804 29,022 2,627 - 39,453
General and
administrative 14,949
Unit based compensation 508
Foreign exchange loss 5,394
Income taxes 3,559
-----------------------------------------------------
Net earnings 15,043
-----------------------------------------------------
Capital expenditures
(including
acquisitions
and deposits) 11,324 186,745 63 - 198,132
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months
ended United
September 30, Canadian States Inter-
2006 Drilling Drilling Construction segment
(thousands) Operations Operations Operations Eliminations Total
---------------------------------------------------------------------
Revenue 87,875 45,473 31,040 (13,763) 150,625
Operating
expense 48,524 20,265 28,721 (13,763) 83,747
-----------------------------------------------------
Gross margin 39,351 25,208 2,319 - 66,878
Interest 3,324 3,054 10 - 6,388
Depreciation and
amortization 7,995 5,836 145 - 13,976
Gain on sale of
assets (1,992) (40) - - (2,032)
-----------------------------------------------------
Income before
corporate items 30,024 16,358 2,164 - 48,546
General and
administrative 11,607
Unit based compensation 740
Foreign exchange gain (45)
Income taxes 4,671
-----------------------------------------------------
Net earnings 31,573
-----------------------------------------------------
Capital expenditures
(including
acquisitions
and deposits) 32,394 38,070 94 - 70,558
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months
ended United
September 30, Canadian States Inter-
2007 Drilling Drilling Construction segment
(thousands) Operations Operations Operations Eliminations Total
---------------------------------------------------------------------
Revenue 233,991 220,005 76,700 (46,808) 483,888
Operating
expense 137,461 105,254 70,427 (46,808) 266,334
-----------------------------------------------------
Gross margin 96,530 114,751 6,273 - 217,554
Interest 15,559 9,683 42 - 25,284
Interest on
convertible
debentures 8,302 - - - 8,302
Depreciation
and
amortization 22,068 30,730 481 - 53,279
Loss on sale of
assets 212 26 - - 238
-----------------------------------------------------
Income before
corporate items 50,389 74,312 5,750 - 130,451
General and
administrative 41,927
Unit based compensation 1,954
Foreign exchange loss 12,283
Income taxes 12,660
-----------------------------------------------------
Net earnings 61,627
-----------------------------------------------------
Capital expenditures
(including
acquisitions
and deposits) 71,702 278,616 105 - 350,423
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months
ended United
September 30, Canadian States Inter-
2006 Drilling Drilling Construction segment
(thousands) Operations Operations Operations Eliminations Total
---------------------------------------------------------------------
Revenue 267,892 115,337 75,935 (41,055) 418,109
Operating
expense 144,934 50,215 69,470 (41,055) 223,564
-----------------------------------------------------
Gross margin 122,958 65,122 6,465 - 194,545
Interest 8,218 5,374 148 - 13,740
Depreciation and
amortization 22,258 14,220 309 - 36,787
Gain on sale of
assets (1,944) (58) - - (2,002)
-----------------------------------------------------
Income before
corporate items 94,426 45,586 6,008 - 146,020
General and
administrative 37,835
Unit based compensation 5,323
Foreign exchange loss 1,045
Income taxes 9,448
-----------------------------------------------------
Net earnings 92,369
-----------------------------------------------------
Capital
expenditures
(including acquisitions
and deposits) 169,315 126,602 142 - 296,059
---------------------------------------------------------------------
---------------------------------------------------------------------
As at United
September 30, Canadian States Inter-
2007 Drilling Drilling Construction segment
(thousands) Operations Operations Operations Eliminations Total
-------------------------------------------------------
Total assets 727,942 752,532 5,501 - 1,485,975
Goodwill 38,154 84,616 46,617 - 169,387
---------------------------------------------------------------------
---------------------------------------------------------------------
As at United
December 31, Canadian States Inter-
2006 Drilling Drilling Construction segment
(thousands) Operations Operations Operations Eliminations Total
-------------------------------------------------------
Total assets 680,591 528,872 36,170 - 1,245,633
Goodwill 38,155 42,491 42,837 - 123,483
---------------------------------------------------------------------
12. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to
the 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, Phone: (403) 265-6525, Fax: (403) 265-4168, E-mail: mbentley@trinidaddrilling.com