Underground Solutions Inc. (fka UGSI)

[Obamination]

Q4 Letter to Shareholders

March 16, 2015

Dear UGSI Shareholder,

I’m pleased to report that 2014 was another successful year for Underground Solutions (UGSI), with considerable achievements on a number of fronts.

From a financial standpoint, 2014 was our fourth straight year of double-digit growth in both bookings and revenue, resulting in a compound annual growth rate in revenue of roughly 25% over the 10 years since current management joined the Company. Bookings during the year increased by 43% (24% excluding bookings from the recently-acquired Process Solutions, Inc. (PSI) business), which helped drive a 27% (19% on a “same-store” basis) increase in total revenue. Additionally, this robust order activity led to a record backlog at year-end 2014, up 139% over the year-ago period, which bolsters our optimism about 2015. In terms of profitability, 2014 EBITDA (earnings before interest, taxes, depreciation and amortization) grew by 46% over 2013, even after absorbing significant costs related to the acquisition and integration of PSI during the second half of the year, as we continue to see operating leverage in the business.

Other notable accomplishments during 2014, all of which I’ve touched on in previous quarterly updates, included:

• Completed the acquisition of PSI, now a part of the UGSI Solutions Group, giving us a foothold in the growing on-site water disinfection market. With its MicrOclor™ product, PSI is the domestic leader in on-site chlorine generation systems which replace bulk chlorine systems. Additionally, PSI’s Tank Shark™ product, a reservoir and tank mixing system designed to optimize tank disinfectant levels, is gaining steady traction with several recent notable orders. Since PSI’s acquisition, we’ve spent considerable time and energy on integration activities and the necessary business “body-building” to ensure that we have the right people and processes in place for the business to successfully move to the next stage of its evolution.

• Streamlined the capital structure of UGSI to provide capital for external growth and improve financial flexibility. In a series of related transactions, we raised $31.5 million of equity capital through the issuance of a new series of preferred stock, most of it from Riverwood Capital. A portion of this new capital was used to fund the PSI acquisition in the third quarter, as well as to pay the cumulative accrued dividends on our previously outstanding Series A and Series B preferred stock issues. As part of this transaction, all of the outstanding Series A shares were converted to common stock and all of the outstanding Series B shares were exchanged for Series C shares. As a result, no further dividends will accrue in respect of the Series A or Series B shares.

• Continued our penetration into the electrical conduit market which we believe holds great promise for the future given the bidding activity we are seeing. During 2014, we were recognized by Trenchless Technology Magazine as “Project of the Year New Installations Honorable Mention” for our Fusible PVC® pipe that was used in a large HDD installation of an electrical transmission line, an industry first in terms of distance and complexity using PVC.
http://trenchlessonline.com/project-of-the-year-new-installation-honorable-mentions/

As we near the end of the first quarter of 2015 and look at the balance of the year, we remain bullish about your Company’s prospects. With our substantial backlog and continued success in winning bids by securing preferred specification positions for our products, we are well-positioned for yet another year of double-digit revenue growth. In particular, we are excited about the opportunities that lie ahead in the UGSI Solutions Group, as our Chemical Feed and PSI units are both projecting above-trend growth this year with a newly-expanded, combined sales force supporting both businesses. Since its acquisition and re-start in 2012, the Chemical Feed business has continued to regain market presence and industry position. Investments made in personnel and product development are expected to bear fruit in 2015. Further, given its increasing market acceptance and ever-expanding order backlog, we expect PSI to grow significantly in 2015.

The UGSI Infrastructure Group, consisting of our Fusible PVC® pipe, Service Guard® Composite Pipe, and Mobile Pipe Lining and Coating businesses, is also anticipating another successful year with meaningful revenue growth despite some challenges. While this portion of the business faces headwinds from the recent downturn in the oil and gas markets, resulting in volatility in the timing of certain projects and pressure on pricing and margins, the extent of the impact of the slowdown remains to be seen. During 2015, we are also continuing to invest in additional sales professionals which we expect will begin to pay dividends in 2016 and 2017 through increased sales. While these sales investments will penalize earnings in the short-run, we believe this strategy is prudent as we manage the business for the longer term.

As stated earlier, we believe the UGSI business has substantial operating leverage potential as it scales up through continued growth, both organically and through acquisition. The business has ample liquidity, through its available cash resources, unused bank credit facilities, and ability to raise equity capital from Riverwood, to invest in growth and to capitalize on new acquisition opportunities to augment its internal growth. We will continue to seek out and diligently evaluate these expansion prospects, whether existing businesses or complementary technologies, where we believe they are a good fit and can create shareholder value.

As always, we appreciate your continued support.