everready - cdn oil service mm
2007 Overview:
- Revenue for the year ended December 31, 2007 was approximately $519 million reflecting an increase of 37% from 2006;
- We continued our expansion in the Alberta oil sands region generating revenue of approximately $170 million from operations located in this area compared to approximately $95 million in 2006. This represents 33% (2006 - 25%) of our total revenue. During the year we also announced that we were awarded significant long-term service contracts in the Alberta oil sands region with several large customers. The contracts range in length from two to five years and will utilize a number of Eveready's services. We expect these contracts could generate approximately $400 million in revenue over the next three years (see "Note Regarding Forward-Looking Statements");
- We generated EBITDA (see "Non-GAAP Financial Measures") of $78.4 million in 2007. This reflects an increase of 21% from EBITDA of $64.7 million in 2006;
- We reported net earnings of $13.6 million or $0.18 per unit in 2007 compared to net earnings of $29.9 million or $0.48 per unit in 2006. The decrease in net earnings was caused by a decline in our gross margin and increases in amortization, interest, and general and administrative expenses. Net earnings in 2007 were also negatively affected by future income tax expense of $4.7 million caused by the enactment of new legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011;
- We invested $79.1 million in property, plant and equipment in 2007, including $64.3 million in growth capital expenditures to grow our services in a number of locations including the Alberta oil sands region;
- We declared distributions of $57.0 million or $0.72 per unit in 2007, compared to distributions of $38.6 million or $0.60 per unit in 2006;
- In April 2007, we completed a long-term debt financing of $250 million. The financing consisted of a $150 million term loan and a $100 million revolving credit facility. The financing amended and increased our previous long-term debt credit facility and replaced our demand revolving credit facility;
- On May 1, 2007, we acquired Denman Industrial Trailers Ltd. ("Denman"), our largest business acquisition to date, for cash consideration of $59.5 million. Denman is a premier supplier of industrial lodges to the Alberta oil sands region;
- In June 2007, we raised gross proceeds of $43.5 million through an equity financing of 8,130,900 units at a price of $5.35 per unit. Issuance costs of $2.5 million were incurred relating to the financing, resulting in net proceeds of $41.0 million. We used the net proceeds to reduce our outstanding debt arising from the acquisition of Denman;
- On June 12, 2007, the Government of Canada enacted legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011. These proposals were originally announced by the Government of Canada on October 31, 2006;
- On October 5, 2007, we acquired the Truck division of Wellco Energy Services Trust for cash consideration of $5.0 million. The assets acquired include a fleet of 25 units consisting of vacuum trucks, hydro-excavation trucks, and water trucks, along with additional support equipment. Combined with our capital expenditure programs, these assets are being utilized to fulfill our growing service commitments in the Alberta oil sands region;
- In January 2008, we approved a capital expenditure program of $78 million for 2008. The program is comprised of growth capital expenditures of $62 million and maintenance capital expenditures of $16 million;
- In January 2008, we announced strategic changes to our distribution policy to maximize the retention of operating cash flow to re-invest in growth. Eveready's monthly cash distribution of $0.06 per unit ($0.72 per unit on an annualized basis) has been eliminated and will be replaced with a quarterly "in-kind" distribution of $0.18 per unit ($0.72 per unit on an annualized basis). We anticipate the first "in-kind" distribution will be paid on or about April 15, 2008 to unitholders of record as of the close of business on March 31, 2008; and
- In January 2008, we received approval from the Toronto Stock Exchange to establish a Normal Course Issuer Bid to purchase for cancellation, from time to time, as we consider advisable, our issued and outstanding units up to a maximum of 5,090,401 units. Although it is not our long-term objective to purchase units for cancellation, if our market price were to experience abnormal weakness in the near future, such purchases would increase the proportionate interest of, and be advantageous to, all remaining unitholders.
This Management's Discussion & Analysis ("MD&A") was prepared as of March 7, 2008 to assist readers in understanding Eveready Income Fund's ("Eveready" or the "Fund") consolidated financial performance for the year ended December 31, 2007 and significant trends that may affect Eveready's future performance. This MD&A should be read together with the accompanying consolidated financial statements for the year ended December 31, 2007 and the notes contained therein. The accompanying consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") using Eveready's reporting currency, the Canadian dollar. Eveready is a reporting issuer in each of the provinces of Canada, except Quebec. Eveready's units trade on the Toronto Stock Exchange under the symbol "EIS.UN."
Additional information relating to Eveready, including our Annual Information Form, is available on the System for Electronic Document Analysis and Retrieval ("SEDAR") web site at www.sedar.com.
This MD&A contains forward-looking statements. Please see the section "Note Regarding Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions relating to those statements. This MD&A also makes reference to certain non-GAAP financial measures to assist users in assessing Eveready's performance. Non-GAAP financial measures do not have any standard meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures are identified and described under the section "Non-GAAP Financial Measures."
Overall Performance
We generated revenue of $518.9 million during the year ended December 31, 2007 compared to revenue of $379.7 million in 2006, an increase of 37%. Likewise, we increased our EBITDA (see "Non-GAAP Financial Measures") by 21% to $78.4 million from $64.7 million in 2006 and increased Funds from Operations (see "Non-GAAP Financial Measures") by 6% to $65.8 million from $61.7 million in 2006. However, net earnings declined to $13.6 million in 2007 from $29.9 million in 2006.
We experienced mixed results in 2007 with some areas of our business growing at a substantial rate and other areas of our business declining. On the positive side, we continued to see growth in our core business - the provision of essential industrial maintenance and production services to companies operating in the energy, resource and industrial sectors. The majority of this growth was generated from our operations located in the Alberta oil sands region. In addition, in May 2007 we acquired Denman, a company providing workforce accommodations to companies operating in the Alberta oil sands region. To date, Denman has exceeded our original expectations and we plan to continue to expand our industrial lodge facilities in 2008 to meet the increasing demand for these services.
On the negative side, our services dependant on conventional oil and gas exploration and drilling were negatively affected by the downturn in industry activity in 2007. In addition certain specialty environmental services, including our safety services and mechanical dewatering and dredging divisions, operated in loss positions in 2007, which negatively impacted our overall financial results.
We also experienced an overall decline in our gross margin to 29.1% in 2007 from 31.7% in 2006. This decline was partially caused by a change in our sales mix. In 2007, we experienced a decline in revenue from many of our high margin services dependant on conventional oil and gas exploration and drilling activity and an increase in revenue from many of our lower margin services. This was apparent in our Alberta oil sands operations. To meet the demand for our services in this region, we were required to utilize third party contractors and lease operators to supplement the services provided by our own equipment and personnel. Services provided by third party contractors and lease operators earn a lower gross margin than services provided through our own equipment and personnel. In addition, as we prepared for further growth in the Alberta oil sands region in 2008, we also incurred additional payroll and training costs, which further hampered our gross margin. These costs are necessary to fulfill our long-term service commitments to our customers.
Our net earnings were also negatively affected by higher amortization costs in 2007 due to the significant growth in our property, plant and equipment over the past year. Also included in amortization expense in 2007 was amortization of intangible assets of $8.1 million compared to $3.9 million in 2006. The majority of our intangible assets were acquired with business acquisitions over the past two years. Interest expense also increased by $11.2 million in 2007 as we utilized our debt credit facilities to fund our growth. Finally, net earnings were negatively affected by future income tax expense of $4.7 million caused by the enactment of new legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011.
Our overall outlook for 2008 is positive. We will continue to increase our exposure to the growing infrastructure development in the Alberta oil sands and expect to achieve the majority of our organic growth in 2008 from this region. In addition, we expect demand for our industrial maintenance and production services throughout North America will continue to show modest growth. However, we anticipate lower demand for our services dependant on conventional oil and gas exploration and drilling to continue into 2008.
We estimate revenue for the year ended December 31, 2008 will exceed $600 million (see "Note Regarding Forward-Looking Statements"). If achieved, this will represent revenue growth of over 15% from 2007.
Our Business
We are a growth oriented income fund that provides industrial and oilfield maintenance and production services to the energy, resource, and industrial sectors. Operating from over 75 locations in Canada, the United States, and internationally, we currently employ over 2,500 employees and operate a service fleet of over 1,000 trucks. We are a leading provider of infrastructure services in Alberta's fast growing oil sands sector. Our units trade on the Toronto Stock Exchange under the symbol "EIS.UN."
Our fleet consists of chemical and high pressure trucks, vacuum trucks, hydro-excavation trucks, pressure trucks, hot oiler units, steamer trucks, tank trucks, and flush-by units. In addition, we also own hundreds of additional pieces of large equipment including directional boring rigs, heli-portable drills, mulchers, catalyst handling and support systems, and other specialized pieces of equipment. Our lodging services include 18 portable camps and six industrial lodges. All six industrial lodges and the majority of our portable camps are currently located in the Alberta oil sands region.
We provide over 80 different services to our customers. The common thread in the wide range of services we provide is our customer. We believe that our customers place great value on those providers who are able to deliver a broad, top-quality offering composed of many different services to support their operations. Many of our customers use several of the services we offer.
In 2007, we revised the segmentation of our financial reporting into four business segments to better differentiate the range of services we offer our customers.
Oil Sands, Industrial and Production Services
Oil sands, industrial and production services account for the largest portion of our business. These services include a wide range of industrial maintenance services provided at plants, refineries, and other industrial facilities as well as production support services for oil and gas companies. Many of these services are provided within Alberta's oil sands region. Some of the main services we offer within this segment include:
AI
