Eveready Income Fund Announces 2008 Second Quarter Financial Results
Thu Aug 7, 8:00 AMEDMONTON, ALBERTA--(Marketwire - Aug. 7, 2008) - Eveready Income Fund (TSX: EIS-UN.TO)
Selected Consolidated Financial Information
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$ thousands, Three Months Ended Six Months Ended
except per June 30 June 30 % June 30 June 30 %
unit amounts 2008 2007 Change 2008 2007 Change
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Revenue $ 142,871 $ 111,005 29% $ 327,592 $ 254,978 28%
Gross profit 37,354 32,809 14% 94,325 78,357 20%
Gross margin 26.1% 29.6% 28.8% 30.7%
EBITDA(1) 18,563 14,771 26% 55,033 39,711 39%
EBITDA
margin(1) 13.0% 13.3% 16.8% 15.6%
Per unit(1)(2) 0.20 0.18 11% 0.60 0.50 20%
Net earnings
(loss) 1,208 (5,405) n/a 19,942 6,327 215%
Per unit -
basic and
diluted(2) 0.01 (0.07) n/a 0.22 0.08 175%
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Cash provided
by operating
activities 37,326 23,999 56% 31,310 26,874 17%
Funds from
operations(1) 14,847 11,477 29% 46,606 34,196 36%
Per unit(1)(2) 0.16 0.14 14% 0.51 0.43 19%
Distributions
declared 16,091 13,834 16% 31,442 26,913 17%
Per unit 0.18 0.18 0% 0.36 0.36 0%
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Basic weighted
average units
outstanding(2) 91,740 81,591 12% 91,748 79,717 15%
Units
outstanding at
June 30 93,526 83,004 13% 93,526 83,004 13%
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Working
capital(1) 93,988 78,536 20%
Total assets 644,631 588,155 10%
Long-term
liabilities 276,330 233,529 18%
Unitholders'
equity 305,712 296,573 3%
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Notes: (1) These financial measures are identified and defined under the
section "Non-GAAP Financial Measures."
(2) Comparative unit and per unit amounts for the three and six
months ended June 30, 2007 were restated to reflect the dilutive
effect of "in-kind" distributions declared in 2008.
Quarter Overview: - Revenue for the second quarter was approximately $143 million reflecting an increase of 29% from 2007; - We continued our expansion in the Alberta oil sands region in the second quarter generating revenue of approximately $64 million from operations located in this area compared to approximately $39 million in 2007. This represented 45% (2007 - 35%) of our total revenue. On a year-to-date basis, we generated approximately $145 million or 44% of our total revenue (2007 - $85 million or 33% of total revenue) from operations located in this area; - We reported EBITDA (see "Non-GAAP Financial Measures") of $18.6 million in the second quarter. This reflects an increase of 26% from EBITDA of $14.8 million in 2007; - We reported net earnings of $1.2 million or $0.01 per unit in the second quarter compared to a net loss of $5.4 million or $(0.07) per unit in 2007. The net loss in the prior year resulted from recognizing an additional future income tax expense of $5.7 million. This expense was caused by the Government of Canada's enactment of a new legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011; - We invested $41.5 million in property, plant and equipment during the first half of 2008, including $33.9 million in growth capital expenditures to expand our service offerings in several areas; - To help meet the growing demand for our services, we have revised our 2008 capital expenditure program from $78 million to $90 million. The majority of the increase in our capital expenditure program has been earmarked to expand our industrial lodge facilities in the Alberta oil sands region; - In June 2008, we declared an "in-kind" distribution of $0.18 per unit payable to unitholders of record on June 30, 2008. The "in-kind" units were issued at a deemed price equal to $3.8862 per unit; and - On July 7, 2008, we acquired the business and assets of a private Saskatchewan-based oilfield services company for cash consideration of $3.2 million. Acquired assets included water trucks and various support equipment, which will be utilized to help meet our service commitments in the Alberta oil sands region. Management's Discussion & Analysis This Management's Discussion & Analysis ("MD&A") was prepared as of August 6, 2008 and is provided to assist readers in understanding Eveready Income Fund's ("Eveready" or the "Fund") consolidated financial performance for the three and six months ended June 30, 2008 and significant trends that may affect Eveready's future performance. This MD&A should be read together with the accompanying interim consolidated financial statements for the three and six months ended June 30, 2008 and the notes contained therein. In addition, this MD&A should be read in conjunction with the MD&A and audited consolidated financial statements for the year ended December 31, 2007. 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 2007 Annual Information Form dated March 25, 2008, 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." Our Business We are a growth oriented income fund providing industrial and oilfield maintenance and production services to the energy, resource, and industrial sectors. Operating from 79 locations in Canada, the United States, and internationally, we currently employ over 2,700 employees and operate a service fleet of over 1,300 trucks. We are a leading provider of infrastructure services in Alberta's fast growing oil sands sector. 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 large equipment items 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 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. We provide our services within the following four business segments: - Oil sands, industrial and production services; - Lodging and rentals; - Exploration services; and - Environmental services. Seasonality Our second quarter is typically our weakest quarter of the year due to the inherent seasonality of our business. A large portion of our operations are carried out in western Canada where the ability to move heavy equipment is dependant on weather conditions. An example of such a condition includes thawing in the spring, which renders many secondary roads incapable of supporting heavy equipment until the ground is dry. As a result, many areas of our business traditionally follow a seasonal pattern, with revenue and earnings being lower in the second quarter compared to the other quarters of the fiscal year. Overall Performance In the second quarter, we continued to achieve year-over-year revenue, EBITDA and earnings growth. We generated revenue of $142.9 million compared to revenue of $111.0 million in 2007, an increase of 29%. Likewise, we increased our EBITDA (see "Non-GAAP Financial Measures") by 26% to $18.6 million from $14.8 million in 2007 and increased Funds from operations (see "Non-GAAP Financial Measures") by 29% to $14.8 million from $11.5 million in 2007. Finally, we reported net earnings of $1.2 million during the quarter compared to a net loss of $5.4 million in 2007. These financial results reflect the on-going execution of our growth strategies, which consistently reflect year-over-year growth in our business. Breaking down our financial results, we were pleased with the growth in our lodging and rentals segment. We generated revenue of $16.7 million for the three months ended June 30, 2008, representing an increase of $6.9 million from 2007. Our acquisition of Denman Industrial Trailers Ltd. ("Denman") on May 1, 2007 caused the majority of this increase. Denman's financial results were only consolidated with Eveready for two months in the comparative 2007 periods. Organic expansion of our lodging facilities in the Alberta oil sands region over the past year has also contributed to this segment's growth. We have also approved an increase in our capital expenditure program for the remainder of 2008. The majority of this increase has been earmarked to expand our industrial lodge facilities in the Alberta oil sands region including the construction of a new lodge facility. Within our oil sands, industrial and production services segment, we also achieved significant growth, increasing our revenue by $22.7 million or 26% to $108.4 million for the three months ended June 30, 2008 from $85.7 million in 2007. However on the negative side, this revenue growth continues to be offset by a lower gross margin due to lower margin services provided in the Alberta oil sands region. We continue to experience the challenges associated with rapid growth in the oil sands including shortages of qualified local labour pools, lack of infrastructure, and inflationary cost pressures. We also continue to require the use of lease operators and sub-contractors to meet our service commitments in this region. Services provided by third party contractors and lease operators earn a lower gross margin than services provided through our own equipment and personnel. We believe our gross margin in this region can significantly improve in the future as our rate of growth stabilizes and we improve the utilization of our equipment and manpower. We plan to accomplish this objective through a number of initiatives. One current initiative includes restructuring and integrating several of our industrial and oilfield services divisions, which we expect to complete prior to the upcoming winter season. Within our exploration services segment, we generated revenue of $8.6 million during the second quarter compared to revenue of $6.0 million in 2007. This growth was primarily due to our expansion in the United States. Revenue generated from exploration services in the United States was $2.7 million during the quarter, representing an increase of $2.2 million from the same three month period in 2007. Results within our environmental services segment were comparable to the prior year, generating revenue of $9.1 million during the three months ended June 30, 2008 compared to revenue of $9.4 million in 2007. Our overall outlook for the remainder of 2008 and 2009 continues to be very 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 and 2009 from this region. A significant amount of this growth will also come from expanding our industrial lodge facilities in the region. In addition, we expect our exploration services segment to experience significant growth going into 2009 due to increased industry activity in oil and gas exploration. We also expect to show modest growth during the remainder of 2008 and into 2009 from our industrial maintenance and production services throughout North America. Over the longer term, we continue to see significant growth opportunities for Eveready as we expect substantial investment in exploration and infrastructure within the Alberta oil sands to continue for at least the next 10 years. In addition, several new upgrader projects are currently being planned or are under construction in the Fort McMurray and greater Edmonton areas to support oil sands production. These facilities will require substantial on-going industrial maintenance services over their life span and we believe Eveready is well positioned to capture a significant portion of this work. Due to the increase in our 2008 capital expenditure program and our positive outlook for the remainder of the year, we now estimate our revenue for the year ended December 31, 2008 could exceed $640 million (see "Note Regarding Forward-Looking Statements"). If achieved, this will represent revenue growth of 23% from 2007. Increase in 2008 Capital Expenditure Program To help meet the growing demand for our services, we have revised our 2008 capital expenditure program from $78 million to $90 million. The majority of the increase has been earmarked to expand our industrial lodge facilities in the Alberta oil sands region. This expansion totals $32 million and includes several lodge additions and the construction of a new lodge facility. Of this, we included $25 million in our revised 2008 capital expenditure program with the remaining expenditures to be incurred in the first quarter of 2009. Our expansion will aggregately add approximately 600 beds to our lodge facilities with 400 of these beds expected to be in place by the end of 2008. Once this planned expansion is complete, the total number of beds within our industrial lodge facilities will exceed 2,300 beds. The actual timing of our capital expenditures will vary depending on how quickly construction progresses. In addition, we have also increased our capital expenditure program in our exploration services segment. These expenditures will be incurred to allow us to meet expected increased demand for our exploration services going into 2009. A large portion of our total capital expenditure program in 2008 is being incurred to support planned revenue and earnings growth in 2009. We plan to fund these capital expenditures from our credit facilities and from cash provided by operating activities. In addition on July 7, 2008, we acquired the business and assets of a private Saskatchewan-based oilfield services company for cash consideration of $3.2 million. Acquired assets included water trucks and various support equipment, which will be utilized to help meet our service commitments in the Alberta oil sands region.
Results of Operations
Revenue
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
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Revenue by segment:
Oil sands, industrial and
production services $ 108,430 $ 85,708 $ 240,519 $ 198,133
Lodging and rentals 16,689 9,821 38,469 12,989
Exploration services 8,646 6,050 30,394 25,170
Environmental services 9,106 9,426 18,210 18,686
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Total 142,871 111,005 327,592 254,978
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Oil sands, industrial and production services Revenue from oil sands, industrial and production services increased by $22.7 million or 26% to $108.4 million for the three months ended June 30, 2008 from $85.7 million in 2007. The majority of this increase resulted from significant organic revenue growth in the Alberta oil sands region of north-eastern Alberta. In addition, we also experienced year-over-year growth within many of our industrial maintenance services during the quarter including decoking and pigging services and catalyst handling services. Revenue also increased by $42.4 million or 21% to $240.5 million for the six months ended June 30, 2008. This increase was also primarily due to organic growth experienced within our industrial and production services provided in the Alberta oil sands region. Lodging and rentals During the three and six month periods ended June 30, 2008, we generated revenue of $16.7 million and $38.5 million, respectively, from our lodging and rentals segment. This reflects an increase of $6.9 million and $25.5 million, respectively, from 2007. Our acquisition of Denman on May 1, 2007 caused the majority of this increase. Denman's financial results were only consolidated with Eveready for two months in the comparative 2007 periods. Organic expansion of our lodging facilities in the Alberta oil sands region over the past year has also contributed to our revenue growth in this segment. Exploration services In the second quarter we generated $8.6 million of revenue from our exploration services segment, representing an increase of $2.6 million or 43% from 2007. This growth was primarily due to our expansion in the United States. Revenue generated from exploration services in the United States was $2.7 million during the quarter, representing an increase of $2.2 million from the same three month period in 2007. On a year-to-date basis, revenue was $30.4 million for the six months ended June 30, 2008 compared to $25.2 million in 2007, reflecting an increase of $5.2 million or 21%. In 2008, we achieved organic revenue growth from several service lines in this segment including track drilling, seismic surveying and geospatial data imaging services. Environmental services We generated revenue of $9.1 million from this segment in the second quarter, representing a decline from revenue of $9.4 million in 2007. For the six months ended June 30, 2008, revenue also declined slightly to $18.2 million from $18.7 million in 2007. This small decline is due to revenue within our environmental services segment fluctuating from quarter-to-quarter depending on the timing of projects completed.
Gross Profit
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007(1) 2008 2007(1)
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Amount $ 37,354 $ 32,809 $ 94,325 $ 78,357
Gross margin % 26.1% 29.6% 28.8% 30.7%
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Note: (1) Certain expenses, previously included in general and
administrative expenses, were reclassified to direct costs and
other expense categories to better reflect the nature of those
expenses. The comparative figures in 2007 were reclassified to
conform to the current period's presentation.
Our significant revenue growth in the second quarter contributed to a corresponding increase in gross profit. However, our gross margin declined to 26.1% from 29.6% in 2007. This decrease resulted from lower margin industrial and oilfield services provided in the Alberta oil sands region. We continue to experience the challenges associated with rapid growth in the oil sands including shortages of qualified local labour pools, lack of infrastructure, and inflationary cost pressures. We also require the use of lease operators and sub-contractors to meet our service commitments in this region. Services provided by third party contractors and lease operators earn a lower gross margin than services provided through our own equipment and personnel. We believe our gross margin in the region can significantly improve in the future as our rate of growth stabilizes and we improve the utilization of our equipment and manpower. We plan to accomplish this objective through a number of initiatives. One current initiative includes restructuring and integrating several of our industrial and oilfield services divisions, which we expect to complete prior to the upcoming winter season. Lastly, we also continue to experience rising fuel costs. Although we normally pass the majority of these additional costs onto our customers through fuel surcharges, these costs do reduce our overall gross margins. Offsetting a portion of the gross margin decline in 2008 was growth in our lodging and rentals segment. Our lodging services typically earn a higher gross margin than our traditional industrial and oilfield services.
General and Administrative Expenses
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007(1) 2008 2007(1)
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Amount $ 17,556 $ 16,568 $ 37,254 $ 35,457
% of revenue 12.3% 14.9% 11.4% 13.9%
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Note: (1) Certain expenses, previously included in general and
administrative expenses, were reclassified to direct costs and
other expense categories to better reflect the nature of those
expenses. The comparative figures in 2007 were reclassified to
conform to the current period's presentation.
General and administrative expenses increased by $1.0 million to $17.6 million during the quarter ended June 30, 2008 and by $1.8 million to $37.3 million in the six months ended June 30, 2008 from the comparative periods in 2007. The majority of the increase in general and administration expenses during the six month period ended June 30, 2008 consisted of the following components: - Increased accrued bonus expense of $1.3 million due to higher earnings levels in 2008; - Increased occupancy costs of $0.9 million due to additional locations and lease rate increases; and - Increased administrative wages and benefits of $0.8 million for additional resources and personnel required to support the significant growth in our business. Offsetting these increases were declines in insurance and consulting expenses. In addition, our provision for bad debts decreased by $0.4 million. As a percentage of revenue, general and administrative expenses declined to 12.3% and 11.4%, respectively, during the three and six months ended June 30, 2008 from 14.9% and 13.9%, respectively in 2007. Although our operations continue to expand at a significant rate, we are achieving economies of scale associated with our general and administrative expenses. In 2008, we were able to achieve the majority of our revenue growth without adding a significant amount of general and administrative costs.
Other Expenses
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
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Unit-based compensation $ 949 $ 700 $ 1,689 $ 1,648
Loss (gain) on foreign exchange 197 886 (91) 979
Loss (gain) on disposal of
property, plant and equipment 90 (167) 165 (88)
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During the three months ended June 30, 2008, unit-based compensation increased by $0.2 million to $0.9 million from $0.7 million in 2007. This increase resulted from unit-based compensation expense related to unit options granted to employees, trustees and officers in April and May of 2008. The loss (gain) on foreign exchange in each of the periods presented primarily results from translating the monetary assets and liabilities associated with our operations situated in the United States into Canadian dollars. In 2008, we experienced nominal loss (gain) on foreign exchange because the Canadian dollar remained relatively stable compared to the US dollar; whereas in the prior year, the Canadian dollar appreciated significantly.
EBITDA
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
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EBITDA by segment:
Oil sands, industrial and
production services $ 14,082 $ 13,413 $ 33,766 $ 33,738
Lodging and rentals 6,540 4,670 17,576 5,947
Exploration services (358) (231) 6,321 6,037
Environmental services 1,205 601 2,650 1,471
Corporate costs, loss (gain) on
foreign exchange, and
non-controlling interest (2,906) (3,682) (5,280) (7,482)
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Total 18,563 14,771 55,033 39,711
% of revenue 13.0% 13.3% 16.8% 15.6%
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For the three months ended June 30, 2008, our EBITDA (see "Non-GAAP Financial Measures") grew to $18.6 million from $14.8 million in 2007. This increase is directly attributable to higher revenues during the quarter. However, our EBITDA margin declined slightly to 13.0% from 13.3% in 2007 due to a decline in our gross margin (see discussion under "Gross Margin" above). On a year-to-date basis, our EBITDA margin increased to 16.8% from 15.6% in 2007. This improvement was caused by achieving revenue growth and by controlling increases in our general and administrative expenses. Further discussion of our operating results by segment is provided under "Segment Contribution" below.
Amortization
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
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Amortization of property, plant and
equipment and assets under capital
lease $ 9,625 $ 8,068 $ 19,305 $ 15,266
Amortization of intangible assets 2,147 1,874 4,368 3,555
Accretion on asset retirement
obligations 39 32 76 47
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Total 11,811 9,974 23,749 18,868
% of revenue 8.3% 9.0% 7.2% 7.4%
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During the three months ended June 30, 2008, amortization expense increased by $1.9 million or 19% to $11.9 million from $10.0 million in 2007. The following two factors caused this increase: - Growth in our property, plant and equipment. Property, plant and equipment increased to $327.1 million at June 30, 2008 from $285.0 million at June 30, 2007, a 15% increase; and - Intangible assets. Amortization expense related to intangible assets was $2.1 million in the second quarter of 2008 compared to $1.9 million in 2007. Customer relationships and other intangible assets acquired with the acquisition of Denman on May 1, 2007 and additions to our data image library throughout 2007 caused this increase. On a year-to-date basis, amortization expense increased by $4.9 million to $23.7 million in 2008 from $18.9 million in 2007. This increase was also caused from growth in our property, plant and equipment and intangible assets over the past year.
Interest Expense
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
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Amount $ 5,464 $ 4,603 $ 11,161 $ 8,102
% of revenue 3.8% 4.1% 3.4% 3.2%
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Interest costs increased in 2008 due to increased use of our debt credit facilities. Capital expenditures completed in the second half of 2007 and the first six months of 2008 required us to utilize more of our debt credit facilities. At June 30, 2008, our long-term debt and obligations under capital lease were $229.6 million compared to $185.0 million at June 30, 2007.
Segment Contribution
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
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Contribution by segment:
Oil sands, industrial and
production services $ 8,197 $ 8,585 $ 22,152 $ 24,246
Lodging and rentals 4,881 3,426 14,271 4,097
Exploration services (1,795) (1,521) 3,491 3,484
Environmental services 522 (137) 1,018 53
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Total segment contribution 11,805 10,353 40,932 31,880
Less unallocated items:
Corporate costs 2,710 2,745 5,096 5,853
Amortization of intangible assets 2,147 1,874 4,368 3,555
Interest expense 5,464 4,603 11,161 8,102
Loss (gain) on foreign exchange 197 886 (91) 979
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Earnings before income taxes and
non controlling interest 1,287 245 20,398 13,391
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Segment contribution represents earnings before income taxes and non-controlling interest for each of our business segments prior to unallocated items. We use segment contribution as a key measure to analyze the financial performance of our business segments. Oil sands, industrial and production services During the three months ended June 30, 2008, contribution from our oil sands, industrial and production services segment declined slightly to $8.2 million from $8.6 million in 2007. Likewise, on a year-to-date basis, contribution declined to $22.2 million from $24.2 million. Despite strong revenue growth, lower gross margins (see discussion under "Gross Margin" above) and higher amortization expense weakened this segment's contribution. Lodging and rentals We generated contribution of $4.9 million from our lodging and rentals segment in the second quarter of 2008 compared to $3.4 million in 2007. On a year-to-date basis, we also increased contribution by $10.2 million to $14.3 million from $4.1 million in 2007. Our acquisition of Denman on May 1, 2007 caused the majority of this increase. Denman's financial results were only consolidated with Eveready for two months in the comparative 2007 periods. Organic expansion of our lodging facilities in the Alberta oil sands region over the past year has also contributed to growth in contribution from this segment. Exploration services In the second quarters of both 2008 and 2007, we generated negative contributions of $1.8 million and $1.5 million, respectively, from our exploration services segment. These financial results are typical and expected in the second quarter due to the inherent seasonality of this business. However, on a year-to-date basis, contribution was consistent with 2007 at positive $3.5 million. Environmental services We generated positive contribution of $0.5 million from our environmental services segment in the second quarter compared to a loss of $0.1 million in 2007. Likewise, for the six months ended June 30, 2008, contribution also increased to $1.0 million from $53 thousand in 2007. Continued growth in our filtration services divisions caused the majority of the increase. In addition, in 2007 we incurred losses within our safety services division. In 2008, these losses were substantially reduced through cost reduction initiatives. We expect these positive trends within our environmental services to continue during the remainder of 2008. Earnings before Income Taxes and Non-controlling Interest Earnings before income taxes and non-controlling interest for the three and six months ended June 30, 2008 were $1.3 million and $20.4 million, respectively, compared to $0.2 million and $13.4 million, respectively in 2007. These increases are attributed to higher revenue and segment contribution in 2008, as discussed in the analyses above. Income Taxes As an income fund, we are not subject to current income taxes to the extent our taxable income in a year is paid or payable to our unitholders. The majority of our current income tax expense of $1.2 million and $0.7 million, for the respective six months ended June 30, 2008 and 2007, relate to income earned within our incorporated subsidiaries situated in the United States. Enacted tax changes for Canadian income trusts On June 12, 2007, the Government of Canada enacted legislation, originally announced on October 31, 2006, to impose additional income taxes on publicly traded income trusts and limited partnerships (Specified Investment Flow-Through Entities or "SIFTs"), including Eveready, effective January 1, 2011. Prior to June 2007, we estimated the future income tax on certain temporary differences between amounts recorded on our balance sheet for book and tax purposes at a nil effective tax rate. Under this new legislation (and updated legislation enacted in June 2008), we now estimate the effective tax rate on the post 2010 reversal of these temporary differences to range from 25.0% to 26.5%. Temporary differences reversing before 2011 will still give rise to $nil future income taxes. As a result of the above enacted legislation, we were required to recognize future income tax expense of $5.7 million during the three and six months ended June 30, 2007. Our future income tax recoveries of $0.2 million and $1.0 million, respectively, for the three and six months ended June 30, 2008 resulted from changes in our estimate of temporary differences expected to reverse after January 1, 2011 as well as changes in our future income tax liabilities held within our incorporated subsidiaries. Income tax provisions, including current and future income tax assets and liabilities, require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to our specific situation. Therefore, it is possible the ultimate value of Eveready's income tax assets and liabilities could change in the future and changes to these amounts could have a material effect on our consolidated financial statements. Non-controlling Interest (Loss) earnings attributable to non-controlling interest was $nil and $0.3 million, respectively, during the three and six months ended June 30, 2008 compared to $51 thousand and $0.7 million, respectively, in 2007. The non-controlling interest represents earnings attributable to the 20% non-controlling interests that vendors retained from three business acquisitions in 2006.
Net Earnings and Earnings per Unit
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands, except per unit amounts 2008 2007 2008 2007
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Net earnings (loss) (numerator for
basic earnings per unit) $ 1,208 $ (5,405) $ 19,942 $ 6,327
Interest - convertible debentures - - 2,665 -
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Numerator for diluted earnings per
unit 1,208 (5,405) 22,607 6,327
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Basic weighted average number of
units(1) 91,740 81,591 91,748 79,717
Dilutive effect of outstanding unit
options 74 - 28 8
Dilutive effect of convertible
debentures - - 12,739 -
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Diluted weighted average number of
units(1) 91,814 81,591 104,515 79,725
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Earnings (loss) per unit - basic and
diluted(1) $ 0.01 $ (0.07) $ 0.22 $ 0.08
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Note: (1) Comparative unit and per unit amounts for the three and six months
ended June 30, 2007 were restated to reflect the dilutive effect
of "in-kind" distributions declared in 2008.
Net earnings increased to $1.2 million in the three months ended June 30, 2008 compared to a net loss of $5.4 million in the prior year. Future income tax expense of $5.7 million resulting from SIFT legislation enacted in June 2007 (see "Income Taxes" discussion above) caused the loss in the prior year. On a year-to-date basis, higher revenue and segment contribution also caused net earnings to increase to $19.9 million from $6.3 million in 2007. Basic and diluted earnings per unit in the second quarter increased to $0.01 per unit from a loss of $0.07 per unit in 2007 due to the increase in net earnings discussed above. On a year-to-date basis, basic and diluted earnings per unit increased to $0.22 per unit from $0.08 per unit in 2007. However, offsetting the large increase in net earnings was an increase in the weighted average number of units outstanding. In the first six months of 2008, the basic weighted average number of units outstanding increased to 91.7 million units from 79.7 million units in 2007. The completion of an equity financing for 8.1 million units in June 2007 and on-going participation in the Distribution Reinvestment Plan ("DRIP") throughout 2007 caused the majority of this increase.
Summary of Quarterly Data
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($ thousands,
except per
unit June March Dec Sept June March Dec Sept
amounts) 2008 2008 2007 2007 2007 2007 2006 2006
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Revenue 142,871 184,721 137,152 126,767 111,005 143,972 109,441 93,470
EBITDA(1) 18,563 36,469 18,331 20,378 14,771 24,942 13,624 15,687
Net earnings
(loss) 1,208 18,734 2,747 4,551 (5,405) 11,733 2,741 5,599
----------------------------------------------------------------------------
Earnings
(loss)
per unit -
basic(2)(3) 0.01 0.20 0.03 0.05 (0.07) 0.15 0.04 0.08
----------------------------------------------------------------------------
Earnings (loss)
per unit
- diluted
(2)(3) 0.01 0.19 0.03 0.05 (0.07) 0.15 0.04 0.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes: (1) EBITDA is identified and defined under the section "Non-GAAP
Financial Measures."
(2) Quarterly earnings per unit are not additive and may not equal
the annual earnings per unit reported. This is due to the effect
of units issued during the year on the weighted average number
of units outstanding.
(3) Comparative quarterly per unit amounts have been restated to
reflect the dilutive effect of "in-kind" distributions declared
in 2008.
A large portion of our operations are carried out in western Canada where the ability to move heavy equipment is dependant on weather conditions. An example of such a condition includes thawing in the spring, which renders many secondary roads incapable of supporting heavy equipment until the ground is dry. As a result, many areas of our business traditionally follow a seasonal pattern, with revenue and earnings being higher in the first quarter and lower in the second quarter of each fiscal year compared to the other quarters of the year. The net loss reported in the second quarter of 2007 was caused from SIFT future income tax expense of $5.7 million. The SIFT future income tax expense resulted from the Government of Canada enacting legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011 (see discussion under "Income Taxes" above).
Financial Condition and Liquidity
----------------------------------------------------------------------------
June 30 December 31
($ thousands, except ratio amounts) 2008 2007
----------------------------------------------------------------------------
Current assets $ 156,577 $ 146,266
Total assets 644,631 618,531
----------------------------------------------------------------------------
Current liabilities 62,589 66,526
Total liabilities 338,919 333,669
----------------------------------------------------------------------------
Unitholders' equity 305,712 284,862
----------------------------------------------------------------------------
Working capital(1) 93,988 79,740
Working capital ratio(1) 2.50 2.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note: (1) These financial measures are identified and defined under the
section "Non-GAAP Financial Measures."
Working Capital Our working capital (see "Non-GAAP Financial Measures") position improved from $79.7 million at December 31, 2007 to $94.0 million at June 30, 2008. The majority of this improvement resulted from an increase in our accounts receivable. Due to revenue growth achieved in the first half of 2008, accounts receivable increased to $136.1 million at June 30, 2008 from $122.2 million at December 31, 2007. The majority of the increase in our accounts receivable was financed by our credit facilities, which are primarily presented as long-term liabilities, and thus do not negatively affect our working capital position. We expect our working capital to remain strong throughout the second half of 2008 as we will continue to use our cash provided by operating activities and our long-term debt credit facilities to support our working capital requirements. Cash Provided by Operating Activities and Funds from Operations During the three months ended June 30, 2008, we generated cash provided by operating activities of $37.3 million compared to $24.0 million for the same three month period in 2007 and compared to negative cash provided by operating activities of $6.0 million for the three months ended March 31, 2008. The high cash flow generated during the quarter reflects the seasonality of our business where we typically generate a higher amount of revenue in the first quarter than the other quarters of the year. However, we generally collect a significant amount of our first quarter's accounts receivable in the second quarter. Accounts receivable at June 30, 2008 decreased by $32.3 million from the first quarter. If we exclude changes in non-cash operating working capital balances and asset retirement costs, we actually generated substantially lower operating cash flows in the second quarter of both the current and prior year. Funds from operations (see "Non-GAAP Financial Measures") were $14.8 million for the three months ended June 30, 2008 compared to $11.5 million in 2007, a $3.3 million increase. Increased revenue and EBITDA (see "Non-GAAP Financial Measures") during the quarter caused a corresponding increase in our Funds from operations compared to the same three month period in 2007. Capital Expenditures We acquired $41.5 million in property, plant and equipment during the first six months of 2008. Of these assets, $0.6 million was acquired through obligations under capital lease and the remaining $40.9 million from cash expenditures. Capital expenditures consisted of $7.6 million in maintenance capital expenditures and $33.9 million in growth capital expenditures. We believe capital expenditures are necessary to support the growing demand for our services and to achieve our growth strategies. These expenditures also reflect our capital maintenance program. We designed our capital maintenance program to keep our equipment efficient and profitable by replacing our equipment when it is cost prohibitive to operate due to high maintenance and operating costs. To help meet the growing demand for our services, we have revised our 2008 capital expenditure program from $78 million to $90 million. This program is now comprised of growth capital expenditures of $74 million and maintenance capital expenditures of $16 million. A large portion of our total capital expenditure program in 2008 is being incurred to support planned revenue and earnings growth in 2009. We plan to fund these capital expenditures from our credit facilities and from cash provided by operating activities. Debt and Contractual Obligations Long-term debt Our long-term debt relates to credit facilities of $250 million with a syndicate of lenders led by a Canadian affiliate of GE Energy Financial Services. The credit facilities consist of a $100 million revolving, renewable credit facility and a $150 million term loan. Amounts borrowed under these credit facilities bear interest, at our option, at bank prime or bankers' acceptance rates, plus a credit spread based on a sliding scale. The revolving credit facility ("Revolver") requires payments of interest only and is renewable annually, subject to Eveready's and the lending syndicate's consent. A stand-by fee is calculated at a rate of 0.25% per annum on the unused portion of the Revolver. If the Revolver were not renewed, the outstanding credit facility is subject to a 12-month interest-only phase, followed by a 24-month straight-line amortization period. As a result, the Revolver is classified as long-term debt in the accompanying interim consolidated financial statements. In April 2008, the Revolver was extended for an additional 364 day period with the next renewal date being April 24, 2009. The term loan ("Term") requires fixed monthly payments of $125 thousand and a balloon payment of $142.5 million due May 2012. We may prepay all or part of the term loan at any time, subject to the payment of a breakage fee. The credit facilities are collateralized by substantially all of our assets, including our accounts receivable, inventory, and property, plant and equipment. At June 30, 2008, the effective interest rate on the credit facilities was 5.89% (December 31, 2007 - 7.41%). The credit facilities contain financial covenants, including, but not limited to, a working capital ratio, a fixed charge coverage ratio, funded debt to EBITDA ratios, a minimum net worth, and a maximum distribution payout ratio, each calculated on a quarterly basis. We were in compliance with all financial covenants under this agreement at June 30, 2008. Obligations under capital lease Obligations under capital lease substantially relate to industrial lodging facilities purchased with the Denman acquisition in May 2007. During the six months ended June 30, 2008, we financed additional industrial lodge facilities through sale-leasebacks of $8.0 million. These obligations bear interest at prime plus 0.25% per annum and are repayable in monthly blended principal and interest payments of $428 thousand. Maturing at dates ranging from August 2012 to March 2015, these obligations may be repaid in full without penalty two years after lease inception. At June 30, 2008, the effective rate of interest was 5.00% (December 31, 2007 - 6.25%). All of our obligations under capital lease are collateralized by equipment with a $27.1 million net book value at June 30, 2008. Convertible debentures Convertible debentures consist of $50 million principal amount of convertible unsecured subordinated debentures (the "Debentures") with an annual coupon rate of 7.00%, payable semi-annually. The Debentures mature on June 30, 2011, and are convertible, at the holder's option, into units of Eveready. The Debentures trade on the Toronto Stock Exchange under the symbol "EIS.DB". Pursuant to the terms of the Debenture agreement, an adjustment to the conversion price is required when units are issued to unitholders by way of an "in-kind" distribution. The "in-kind" distribution declared to unitholders of record on March 31, 2008 resulted in an adjustment to the Debentures' initial conversion price from $8.50 per unit to $8.1090 per unit. The "in-kind" distribution declared to unitholders of record on June 30, 2008 resulted in a further adjustment to the Debenture's conversion price to $7.7508 per unit. After June 30, 2009 and before June 30, 2010, the Debentures may be redeemed in whole or in part, at our option, at a price equal to their principal amount plus accrued interest thereon, provided the market price of the units on the date on which notice is given is not less than 125% of the conversion price. After June 30, 2010, we have the option to redeem the Debentures in whole or in part at a price equal to their principal amount plus accrued interest. We may also, subject to certain conditions, elect to satisfy our obligation to repay all or any portion of the principal amounts of the Debentures to be redeemed or repaid at maturity, by issuing units. The number of units a holder will receive in respect of each Debenture will be determined by dividing the principal amount of the Debentures that are to be redeemed or repaid at maturity by 95% of the market price of the units. The market price of the units will be calculated as the volume-weighted average trading price of the units on the Toronto Stock Exchange for the 20 consecutive trading days ending five days prior to the applicable event. Contractual obligations At June 30, 2008, our contractual obligations for the next five years (12 month periods ending on June 30th) and thereafter are as follows: ---------------------------------------------------------------------------- Contractual Obligations ($ in thousands) 2009 2010 2011 2012 2013 Thereafter Total ---------------------------------------------------------------------------- Long-term debt 1,500 6,482 31,396 168,663 - - 208,041 Obligations under capital lease (including imputed interest) 5,412 5,405 5,285 5,143 4,311 3,291 28,847 Convertible debentures - - 50,000 - - - 50,000 Asset retirement obligations 129 500 - - - 1,799 2,428 Operating leases 13,821 8,688 4,886 2,297 1,076 2,448 33,216 ---------------------------------------------------------------------------- Total 20,862 21,075 91,567 176,103 5,387 7,538 322,532 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------The table above presents the minimum principal repayments required on the Revolver if it were not renewed (the next renewal date is April 24, 2009) and we were not able to refinance this credit facility with another lender. The estimated timing and amount of our asset retirement obligations could change in the future or could be incurred in different periods from those indicated above. Unitholders' Equity Unitholders' equity increased $20.8 million to $305.7 million at June 30, 2008 from $284.9 million at December 31, 2007. Net earnings of $19.9 million achieved during the six months ended June 30, 2008 resulted in the majority of this change. "In-kind" distributions of $31.4 million declared during 2008 did not have an overall impact on unitholders' equity as substantially all of the distributions were settled through the issuance of 8,242,710 units. Normal course issuer bid In January 2008, we received regulatory approval from the Toronto Stock Exchange to purchase for cancellation, from time to time, as we consider advisable, our issued and outstanding units. Pursuant to the normal course issuer bid (the "Bid"), we may purchase for cancellation up to a maximum of 5,090,401 units, being approximately 10% of our outstanding "public float." The Bid commenced January 29, 2008 and will terminate on January 28, 2009 or such earlier time as the Bid is completed or terminated at our option. During the six months ended June 30, 2008, we purchased for cancellation 41,600 units at an average cost of $3.37 per unit for total cash consideration of $141 thousand. Subsequent to June 30, 2008 and before the release of this MD&A, we purchased and cancelled 144,982 units at an average cost of $3.39 per unit for a total cash consideration of $491 thousand. Unit Option Plan On April 7, 2008, our Board of Trustees granted 745,000 unit options to employees and 150,000 unit options to non-employee officers and trustees of Eveready. The unit options granted to employees were exercisable at $3.60 per unit, which equalled the market value of our units at the grant date. The unit options granted to non-employee officers and trustees were exercisable at $3.96 per unit, or a 10% premium to the market value of our units at the grant date. These unit options expire on April 7, 2013. On May 15, 2008 an additional 25,000 unit options were granted to a new Eveready trustee, were exercisable at $4.28 per unit, and expire on May 15, 2013. All unit options granted in 2008 vest 20% per year over four years, with the first 20% vesting on the grant date. During the second quarter, 8,000 unit options were exercised. Pursuant to the terms of our Unit Option Plan, the exercise price of unit options may be adjusted by the Board of Trustees when units are issued to unitholders by way of an "in-kind" distribution in order to prevent dilution of any outstanding unit options. For the "in-kind" distribution declared to unitholders of record on June 30, 2008, the Board of Trustees amended the exercise prices for outstanding unit options granted in 2008 as follows:
---------------------------------------------------------------------------- Grant Date Original grant date exercise price Adjusted exercise price ---------------------------------------------------------------------------- April 7, 2008 $ 3.60 $ 3.4410 April 7, 2008 $ 3.96 $ 3.7851 May 15, 2008 $ 4.28 $ 4.0910 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------Distributions In January 2008, our Board of Trustees unanimously approved amendments to our distribution policy to maximize the retention of operating cash flow to re-invest in growth. As a result, we eliminated our monthly cash distribution of $0.06 per unit ($0.72 per unit on an annualized basis) and replaced it with a quarterly "in-kind" distribution of $0.18 per unit ($0.72 per unit on an annualized basis). Distributions settled "in-kind" means unitholders will receive additional units instead of cash. A key benefit from our "in-kind" distribution includes the ability to retain in excess of $60 million in cash provided by operating activities to re-invest in our capital expenditure programs. In addition, payment of "in-kind" distributions allow us to take advantage of the tax deferral on income trusts until 2011 as "in-kind" distributions are deductible for income tax purposes. Our first "in-kind" distribution of $0.18 per unit was declared to unitholders of record as of the close of business on March 31, 2008 and consisted of 4,111,750 units issued at a deemed price of $3.7242 per unit. Our second "in-kind" distribution of $0.18 per unit was declared to unitholders of record as of the close of business on June 30, 2008 and consisted of 4,130,960 units issued at a deemed price of $3.8862 per unit. Going forward, we will continue to monitor our distribution policy and adjust our policy as deemed necessary. We will also continue to consider the timing of our eventual conversion into a corporation prior to 2011. Taxation of Distributions Our distributions can consist of taxable and tax-deferred components. The taxable amount of our distributions in 2008 will be based on the actual taxable income of the Fund for the year ended December 31, 2008. Tax-deferred distributions are considered to be a return of capital for income tax purposes and will reduce the adjusted cost base of the units held. In 2007, 100% of our distributions were considered taxable amounts. As explained earlier, 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. In anticipation of these tax changes, we plan to maximize the amount of tax pools we can carry forward to reduce and defer, as much as possible, our income tax exposure beginning in 2011. To achieve this objective we plan to maximize the taxable component of all distributions we declare in 2008 and until our eventual conversion into a corporation. Therefore, we also anticipate 100% of our 2008 distributions will be considered taxable amounts. However, we will continue to monitor future changes in tax legislation and adjust our strategy as needed. Cautionary Note Regarding our Distributions Our distributions are always subject to approval by our Board of Trustees, who at any time can increase, decrease or suspend the distributions. The Board of Trustees may also convert the distributions entirely to cash at any time. Our ability to make cash distributions also depends on factors such as our financial performance, our debt covenants and obligations, our ability to refinance our debt obligations on similar terms and at similar interest rates, our working capital requirements, our future tax obligations, and our future capital requirements. As per the terms of our credit facilities, we are restricted from declaring distributions and distributing cash if we are in breach of our financial covenants. These include, but are not limited to, a working capital ratio, a fixed charge coverage ratio, funded debt to EBITDA ratios, a minimum net worth, and a maximum distribution payout ratio, each calculated on a quarterly basis. Our maximum distribution payout ratio limits our cash distributions (excluding "in-kind" distributions) to an amount equal to 80% of our annualized Excess Cash Flow. Excess Cash Flow, as defined in our credit facilities agreement, is substantially the same as Funds from operations, as defined in this MD&A (see "Non-GAAP Financial Measures"). We were in compliance with all financial covenants under our credit facilities at June 30, 2008.
Distributable Cash
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands, except per unit amounts 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by operating
activities $ 37,326 $ 23,999 $ 31,310 $ 26,874
Add (deduct):
Net change in non-cash operating
working capital (22,484) (12,522) 15,169 7,320
Scheduled principal repayments of
debt(1) (1,394) (695) (3,014) (695)
Maintenance capital expenditures(1) (5,214) (3,871) (7,600) (8,343)
----------------------------------------------------------------------------
Cash available for distribution and
growth(1) 8,234 6,911 35,865 25,156
Per unit(1,2) 0.09 0.08 0.39 0.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note: (1) These terms are identified and defined under the section "Non-GAAP
Financial Measures."
(2) Comparative per unit amounts for the three and six months ended
June 30, 2007 were restated to reflect the dilutive effect of "in-
kind" distributions declared in 2008.
Although cash available for distribution and growth remains a useful supplemental measure to provide an indication of cash available for distribution to our unitholders, our new distribution policy adopted in January 2008 is no longer based on the amount of our cash available for distribution and growth. We plan to maximize the retention of our operating cash flows to re-invest in growing our business. "In-kind" distributions are being declared to allow us to take advantage of the tax deferral on income trusts until 2011 (see discussion under "Distributions" above). Cash available for distribution and growth reported for the three and six months ended June 30, 2008 and 2007 are net of maintenance capital expenditures. Maintenance capital expenditures are capital expenditures incurred during the period to maintain existing levels of service. This includes capital expenditures to replace property, plant and equipment and any costs incurred to enhance the operational life of existing property, plant and equipment. Maintenance capital expenditures can fluctuate from period to period depending on our needs to upgrade or replace existing property, plant and equipment. If maintenance capital levels increase in future periods, our cash available for distribution and growth would be negatively affected. Due to our significant rate of growth in recent years, the majority of our equipment is relatively new and the remaining economic useful life is long. As a result, we currently experience relatively low levels of maintenance capital expenditures. Over time, we expect to incur annual maintenance capital expenditures in an amount approximating our amortization of property, plant and equipment reported in each period, adjusted for inflationary factors. However, we do not expect this level of maintenance capital expenditures for a number of years until the average age of our existing property, plant and equipment approaches the end of their economic useful lives. For 2008, we estimate our total maintenance capital expenditures will approximate $15 million to $17 million (see "Note Regarding Forward-Looking Statements"). We base this estimate on our replacement expectations for property, plant and equipment. The actual timing of future capital replacements will always be subject to a number of variables that cannot be accurately predicted. Although we believe these estimates are appropriate, our actual maintenance capital expenditures may be materially different from our current estimates. We expect that our internally generated cash provided by operating activities will be sufficient to fund our future maintenance capital expenditures. Off-Balance Sheet Arrangements Our off-balance sheet arrangements are substantially the same as disclosed in our MD&A for the year ended December 31, 2007, except for the cancellation of a US $500 thousand letter of credit in January 2008 drawn under our Revolver credit facility, and a $333 thousand reduction in third party financings we guaranteed. In addition, we entered into long-term operating leases with various vendors to provide office space and equipment in our normal course of operations. Our commitments under operating leases are disclosed under the section "Debt and Contractual Obligations." Related Party Transactions Our related party transactions are disclosed in the notes to the accompanying interim consolidated financial statements. Except for the disposal of property, plant and equipment for proceeds of $233 thousand, all related party transactions occurred in the normal course of operations and were measured at their exchange amounts, which were established and agreed to by the related parties. The proceeds received on disposal of property, plant and equipment were measured at the disposed asset's carrying amount, which also equalled the exchange amount. Outlook Our overall outlook for the remainder of 2008 and 2009 continues to be very positive. We plan 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 and 2009 from this region. A significant amount of our growth in this area will also come from expanding our industrial lodge facilities. In addition, we expect our exploration services segment to experience significant growth going into 2009 due to increased industry activity in oil and gas exploration. We also expect to show modest growth during the remainder of 2008 and into 2009 from our industrial maintenance and production services throughout North America. Over the longer term, we continue to see significant growth opportunities for Eveready as we expect substantial investment in exploration and infrastructure within the Alberta oil sands to continue for at least the next 10 years. In addition, several new upgrader projects are currently being planned or are under construction in the Fort McMurray and greater Edmonton areas to support oil sands production. These facilities will require substantial on-going industrial maintenance services over their life span and we believe Eveready is well positioned to capture a significant portion of this work. Due to the increase in our 2008 capital expenditure program and our positive outlook for the remainder of the year, we now estimate that our revenue for the year ended December 31, 2008 could exceed $640 million (see "Note Regarding Forward-Looking Statements"). If achieved, this will represent revenue growth of 23% from 2007. Oil sands, industrial and production services We expect to continue our significant rate of revenue growth from this segment in the second half of 2008, with the majority of this growth coming from our customers in the Alberta oil sands region. We also expect to achieve revenue and earnings growth from a number of our specialty industrial services that we provide to customers throughout North America. Our biggest challenge in this segment will be ensuring our tremendous revenue growth in the Alberta oil sands also translates into strong earnings growth. The Alberta oil sands region continues to be a difficult environment to operate in due to shortages of qualified local labour pools, lack of infrastructure, and inflationary cost pressures. To achieve our objectives in this region, we will need to manage our growth carefully to ensure we have sufficient manpower and equipment to meet the demand for our services, while also ensuring our services continue to be profitable, safe, and of high quality. Lodging and rentals Overall, we expect this segment will continue to experience significant growth in the latter half of 2008 and into 2009. We expect to generate additional revenue growth from our lodge expansions and from construction of a new lodge facility later this year. Over the longer term, industry analysts predict the demand for workforce accommodations in the Alberta oil sands region could increase by up to 50% over the next three to five years, representing a significant growth opportunity for our lodging services. Demand for our oilfield rental equipment dependant on conventional exploration and drilling activity could also improve in the latter part of the year and into 2009 as higher natural gas prices drive higher drilling activity levels. Exploration services Our outlook for our exploration services segment has improved significantly from the beginning of the year. We are now expecting to have a very busy winter season going into 2009 due to higher industry activity in oil and gas exploration. We have also revised our 2008 capital expenditure program in this segment to prepare for this increased demand. Environmental services Although our outlook for our environmental services for the remainder of 2008 is positive, this segment continues to experience some volatility. This is most notably due to our mechanical dewatering services whose revenues tend to be project-specific and can fluctuate significantly depending on the number of projects being completed during a specific period. However, based on current project expectations, this division could operate at full capacity for much of the remainder of the year. Results from our waste hauling and landfill solid waste disposal services will also continue to be affected by changes in industry activity levels throughout the remainder of 2008. Business Risks Our business is subject to certain risks and uncertainties. Prior to making any investment decision regarding Eveready, investors should carefully consider, among other things, the risks described within this MD&A and the business risks and factors set forth in our 2007 Annual MD&A and our 2007 Annual Information Form. These business risks and factors are incorporated by reference herein. These documents are available on the System for Electronic Document Analysis and Retrieval ("SEDAR") website at www.sedar.com. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business and operations. Adoption of New Accounting Policies Effective January 1, 2008, we adopted the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") under CICA Handbook Section 1535 Capital Disclosures, Section 3031 Inventories, Section 3862 Financial Instruments - Disclosures, and Section 3863 Financial Instruments - Presentation. These Sections apply to fiscal years beginning on or after October 1, 2007, except for Section 3031, which applies to fiscal years beginning on or after January 1, 2008. Capital Disclosures Under Section 1535 Capital Disclosures, an entity discloses its objectives, policies, and processes for managing capital, including quantitative data about capital and whether it has complied with any externally imposed capital requirements. The adoption of this section did not have any material impact on our financial position or results of operations. Inventories Section 3031, which replaces Section 3030 Inventories, increases guidance regarding the scope, measurement, and allocation of costs to inventories. Under Section 3031, inventory is to be measured at the lower of cost and net realizable value. Net realizable value approximates the estimated selling price less all estimated costs of completion and necessary costs to complete the sale. Costs shall be assigned using the first-in, first-out (FIFO) or weighted average cost formula. Further, Section 3031 allows the reversal of previous write-downs of inventory to net realizable value when economic changes support an increased value to inventory. The adoption of this standard had no material impact on our interim consolidated financial statements during the six months ended June 30, 2008. Inventory is comprised primarily of materials, parts, and supplies consumed in rendering services to customers. We value our inventory at the lower of weighted average cost and net realizable value. CICA Section 3862 Financial Instruments - Disclosures and Section 3863 Financial Instruments - Presentation Section 3862 establishes standards for risk disclosures, specifically the risk associated with both recognized and unrecognized financial instruments and how those risks are managed. Section 3863 carries forward the former presentation standards. These new accounting standards supersede Section 3861 Financial Instruments - Disclosure and Presentation, which we adopted on January 1, 2007. The adoption of Sections 3862 and 3863 had no material impact on our financial position or results of operations. Recent Accounting Pronouncements Issued but not yet Adopted CICA Section 3064 Goodwill and Intangible Assets In February 2008, the CICA issued Handbook Section 3064 Goodwill and Intangible Assets that supersedes Sections 3062 Goodwill and Other Intangible Assets and 3450 Research and Development Costs. Section 3064 provides additional guidance on when expenditures qualify for recognition as intangible assets and requires that costs be deferred only when relating to an item meeting the asset definition. This new accounting standard is effective for interim or annual financial statements relating to fiscal years beginning on or after October 31, 2008. We will adopt this new standard for our fiscal year commencing January 1, 2009 and do not expect the adoption to have a material impact on our financial position or results of operations. International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board (AcSB) confirmed that Canadian public enterprises will need to adopt International Financial Reporting Standards (IFRS) effective for years beginning on or after January 1, 2011. We are currently evaluating the impact this new framework will have on our consolidated financial statements. Internal Controls over Disclosure and Financial Reporting During the three months ended June 30, 2008, we did not make any changes to our internal controls over disclosure and financial reporting that would have materially affected, or would likely materially affect, such controls.
Outstanding Unit Data
----------------------------------------------------------------------------
As at August 6 December 31
2008 2007
----------------------------------------------------------------------------
Fund units 86,657,795 71,610,833
Rollover LP units 6,723,543 13,706,377
----------------------------------------------------------------------------
Total 93,381,338 85,317,210
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Rollover LP units issued in conjunction with certain business acquisitions, are units of subsidiary limited partnerships of the Fund and are designed to be, to the greatest extent practicable, the economic equivalent of Fund units. Rollover LP units are non-transferable (except to certain permitted assigns) and the holders thereof are entitled to receive distributions on a per unit basis equivalent to unitholders of the Fund. The Rollover LP units are exchangeable, at the option of the holder, into units of the Fund at anytime. We had a total of 930,000 (December 31, 2007 - 55,000) unit options and $50 million principal amount of convertible debentures (December 31, 2007 - $50 million principal amount) outstanding at August 6, 2008. Non-GAAP Financial Measures Our MD&A contains certain financial measures that do not have any standardized meaning prescribed by Canadian GAAP. Therefore, these financial measures may not be comparable to similar measures presented by other issuers. Investors are cautioned that these measures should not be construed as an alternative to net earnings or to cash provided by operating, investing, and financing activities determined in accordance with Canadian GAAP as indicators of our performance. We provide these measures to assist investors in determining our ability to generate earnings and cash provided by operating activities and to provide additional information on how these cash resources are used. We list and define these measures below: EBITDA EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. We believe, in addition to net earnings, EBITDA is a useful supplemental earnings measure as it provides an indication of the financial results generated by our principal business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions and before non-cash amortization expense. EBITDA margin is calculated as EBITDA divided by revenue. EBITDA per unit is calculated as EBITDA divided by the basic weighted average number of units outstanding during the period. The following is a reconciliation of net earnings to EBITDA for each of the periods presented in this MD&A:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
----------------------------------------------------------------------------
Net earnings (loss) $ 1,208 $ (5,405) $ 19,942 $ 6,327
Add:
Interest 5,464 4,603 11,161 8,102
Income tax expense 80 5,599 181 6,414
Amortization 11,811 9,974 23,749 18,868
----------------------------------------------------------------------------
EBITDA 18,563 14,771 55,033 39,711
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of quarterly net earnings to EBITDA for
each of the quarters presented in this MD&A:
----------------------------------------------------------------------------
June March Dec Sept June March Dec Sept
($ thousands) 2008 2008 2007 2007 2007 2007 2006 2006
----------------------------------------------------------------------------
Net earnings
(loss) 1,208 18,734 2,747 4,551 (5,405) 11,733 2,741 5,599
Add / deduct:
Interest 5,464 5,696 5,841 4,933 4,603 3,500 3,306 2,516
Income tax
expense
(recovery) 80 101 (1,993) (386) 5,599 815 (537) 297
Amortization 11,811 11,938 11,736 11,280 9,974 8,894 8,114 7,275
----------------------------------------------------------------------------
EBITDA 18,563 36,469 18,331 20,378 14,771 24,942 13,624 15,687
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Funds from operations Funds from operations is derived from the consolidated statements of cash flows and is calculated as cash provided by operating activities before asset retirement costs incurred and changes in non-cash operating working capital. Per unit amounts refer to funds from operations divided by the basic weighted average number of units outstanding during the period. We believe funds from operations is a useful supplemental measure as it provides an indication of our ability to generate cash flow and is a useful measure in analyzing our operating performance. A reconciliation of cash provided by operating activities to funds from operations follows:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
$ thousands 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by operating
activities $ 37,326 $ 23,999 $ 31,310 $26,874
Asset retirement costs incurred 5 - 127 2
Add (deduct) changes in non-cash
operating working capital (22,484) (12,522) 15,169 7,320
----------------------------------------------------------------------------
Funds from operations 14,847 11,477 46,606 34,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash Available for Distribution and Growth Cash available for distribution and growth is calculated as cash provided by operating activities before changes in non-cash operating working capital, less scheduled principal repayments of debt and maintenance capital expenditures. Per unit amounts refer to cash available for distribution and growth divided by the basic weighted average number of units outstanding during the period. We believe cash available for distribution and growth is a useful supplemental measure as it provides an indication of cash available for distribution to our unitholders and /or available to re-invest in growing our operations. Components of this supplemental measure are described below: - "Scheduled principal repayments of debt" are required principal repayments on our long-term debt and obligations under capital lease and excludes repayments on our Revolver and any short-term over advances. - "Maintenance capital expenditures" are capital expenditures incurred during the period to maintain existing levels of service. These include capital expenditures to replace property, plant and equipment disposed of and any costs incurred to enhance the operational life of existing property, plant and equipment. Growth capital expenditures are excluded from this calculation. Growth capital expenditures include additions of new equipment to grow our capital asset base. A schedule showing how cash available for distribution and growth is calculated is provided under the section "Distributable Cash." Working Capital Working capital is calculated as current assets less current liabilities. Working capital ratio is calculated as current assets divided by current liabilities. We believe working capital is a useful supplemental measure as it provides an indication of our ability to settle our debt obligations as they come due. Our calculation of working capital is provided in the table below: ---------------------------------------------------------------------------- As at June 30 December 31 ($ thousands) 2008 2007 ---------------------------------------------------------------------------- Current assets $ 156,577 $ 146,266 Less: current liabilities 62,589 66,526 ---------------------------------------------------------------------------- Working capital 93,988 79,740 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Working capital ratio 2.50 2.20 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------Note Regarding Forward-Looking Statements Certain statements contained in this MD&A constitute "forward-looking statements." All statements, other than statements of historical fact, that address activities, events, or developments that we or a third party expect or anticipate will or may occur in the future, including our future growth, results of operations, performance and business prospects and opportunities, and the assumptions underlying any of the foregoing, are forward-looking statements. These forward-looking statements reflect our current beliefs and are based on information currently available to us and on assumptions we believe are reasonable. Actual results and developments may differ materially from the results and developments discussed in the forward-looking statements as they are subject to a number of significant risks and uncertainties, including those discussed under "Business Risks" and elsewhere in this MD&A and set forth in our 2007 Annual MD&A and 2007 Annual Information Form. Certain of these risks and uncertainties are beyond our control. Consequently, all of the forward-looking statements made in this MD&A are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Eveready. These forward-looking statements are made as of the date of this MD&A, and we assume no obligation to update or revise them to reflect subsequent information, events, or circumstances unless otherwise required by applicable securities legislation. In this MD&A we estimate our revenue could exceed $640 million for the year ending December 31, 2008. This estimate is based on our internal forecasts. Achieving our internal revenue forecasts for 2008 is dependant on a number of factors beyond our control. These factors include the demand for our services, the level of overall demand for oil, and the feasibility of current and future oil sands projects for our customers.
Eveready Income Fund
Consolidated Balance Sheets
(Unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at June 30 December 31
2008 2007
(thousands of Canadian dollars) $ $
----------------------------------------------------------------------------
ASSETS
Current
Cash 5,409 8,092
Accounts receivable 136,060 122,214
Income taxes recoverable - 19
Inventory 12,204 13,242
Prepaid expenses and deposits 2,904 2,699
----------------------------------------------------------------------------
156,577 146,266
Property, plant and equipment 327,129 307,560
Intangible assets 48,393 52,458
Goodwill 110,746 110,746
Other long-term assets 1,786 1,501
----------------------------------------------------------------------------
644,631 618,531
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 56,288 58,452
Unitholder distributions payable 37 3,438
Income taxes payable 570 -
Current portion of long-term debt (note 4) 1,500 1,500
Current portion of obligations under capital lease
(note 5) 4,065 2,880
Current portion of asset retirement obligations 129 256
----------------------------------------------------------------------------
62,589 66,526
Long-term debt (note 4) 203,579 199,836
Obligations under capital lease (note 5) 20,472 15,292
Convertible debentures 43,159 42,244
Asset retirement obligations 2,299 2,222
Future income taxes 3,526 4,545
Non-controlling interest 3,295 3,004
----------------------------------------------------------------------------
338,919 333,669
----------------------------------------------------------------------------
Unitholders' Equity
Unitholders' capital (note 6) 359,241 327,991
Units held under Employee Unit Plan (note 7) (11,230) (13,601)
Equity component of convertible debentures 8,030 8,030
Contributed surplus (note 8) 2,417 3,688
Deficit (52,746) (41,246)
----------------------------------------------------------------------------
305,712 284,862
----------------------------------------------------------------------------
644,631 618,531
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(see accompanying notes)
Eveready Income Fund
Consolidated Statements of Earnings and Comprehensive Income and Deficit
(Unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
(thousands of Canadian dollars, 2008 2007 2008 2007
except per unit amounts) $ $ $ $
----------------------------------------------------------------------------
Revenue 142,871 111,005 327,592 254,978
Direct costs 105,517 78,196 233,267 176,621
----------------------------------------------------------------------------
Gross profit 37,354 32,809 94,325 78,357
----------------------------------------------------------------------------
Expenses
General and administrative 17,556 16,568 37,254 35,457
Amortization (note 11) 11,811 9,974 23,749 18,868
Interest (note 11) 5,464 4,603 11,161 8,102
Unit-based compensation (note 7) 949 700 1,689 1,648
Loss (gain) on foreign exchange 197 886 (91) 979
Loss (gain) on disposal of property,
plant and equipment 90 (167) 165 (88)
----------------------------------------------------------------------------
36,067 32,564 73,927 64,966
----------------------------------------------------------------------------
Earnings before income taxes and
non-controlling interest 1,287 245 20,398 13,391
----------------------------------------------------------------------------
Income tax expense (recovery)
Current 272 (124) 1,228 721
Future (192) 5,723 (1,047) 5,693
----------------------------------------------------------------------------
80 5,599 181 6,414
----------------------------------------------------------------------------
Earnings (loss) before non-controlling
interest 1,207 (5,354) 20,217 6,977
(Loss) earnings attributable to
non-controlling interest (1) 51 275 650
----------------------------------------------------------------------------
Net earnings (loss) and comprehensive
income (loss) 1,208 (5,405) 19,942 6,327
(Deficit) retained earnings, beginning
of period (37,863) 828 (41,246) 2,175
Distributions (note 9) (16,091) (13,834) (31,442) (26,913)
----------------------------------------------------------------------------
Deficit, end of period (52,746) (18,411) (52,746) (18,411)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per unit - basic and
diluted (note 10) 0.01 (0.07) 0.22 0.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(see accompanying notes)
Eveready Income Fund
Consolidated Statements of Cash Flows
(Unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
2008 2007 2008 2007
(thousands of Canadian dollars) $ $ $ $
----------------------------------------------------------------------------
Operating activities
Net earnings (loss) 1,208 (5,405) 19,942 6,327
Items not affecting cash:
Amortization 11,811 9,974 23,749 18,868
Unit-based compensation 949 700 1,689 1,648
Loss (gain) on disposal of property,
plant and equipment 90 (167) 165 (88)
Amortization of deferred costs 365 120 577 214
Accretion of long-term debt 166 74 314 74
Accretion of convertible debentures 458 407 915 810
Future income taxes (192) 5,723 (1,047) 5,693
Foreign exchange on future income
taxes (7) - 27 -
(Loss) earnings attributable to
non-controlling interest (1) 51 275 650
----------------------------------------------------------------------------
14,847 11,477 46,606 34,196
Asset retirement costs incurred (5) - (127) (2)
Net change in non-cash operating
working capital (note 12) 22,484 12,522 (15,169) (7,320)
----------------------------------------------------------------------------
Cash provided by operating activities 37,326 23,999 31,310 26,874
----------------------------------------------------------------------------
Investing activities
Purchase of property, plant and
equipment (16,597) (18,577) (40,856) (40,424)
Purchase of intangible assets (109) (681) (303) (773)
Proceeds on disposal of property,
plant and equipment 1,204 1,887 2,448 3,338
Other long-term assets - net (355) (199) (562) (129)
Business acquisitions, net of cash
acquired - (59,650) - (60,160)
----------------------------------------------------------------------------
Cash used in investing activities (15,857) (77,220) (39,273) (98,148)
----------------------------------------------------------------------------
Financing activities
Decrease in bank indebtedness - (27,333) - (26,049)
Distributions, net of distribution
reinvestments (37) (8,446) (3,475) (16,802)
Proceeds from issuance of long-term
debt 23,691 101,048 52,891 126,048
Repayment of long-term debt (38,962) (43,990) (49,761) (43,990)
Proceeds from sale-leasebacks (note 5) - - 7,997 -
Repayment of obligations under capital
lease (1,019) (445) (2,264) (445)
Repurchase of units for cancellation - - (141) -
Proceeds from unit options exercised 29 - 29 -
Collection of employee share purchase
loans receivable 1 197 4 264
Unit issuance costs - acquisitions - - - (6)
Proceeds from issuance of units -
Employee Unit Plan - 1,020 - 5,612
Purchase of units - Employee Unit Plan - (660) - (5,188)
Proceeds from issuance of units, net
of issuance costs - 41,029 - 41,029
----------------------------------------------------------------------------
Cash (used in) provided by financing
activities (16,297) 62,420 5,280 80,473
----------------------------------------------------------------------------
Net change in cash 5,172 9,199 (2,683) 9,199
Cash, beginning of period 237 - 8,092 -
----------------------------------------------------------------------------
Cash, end of period 5,409 9,199 5,409 9,199
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow information (note 12)
(see accompanying notes)
Eveready Income Fund
Notes to the Consolidated Financial Statements
(thousands of Canadian dollars, except unit and per unit amounts)
(Unaudited)
1. Nature of operations and significant accounting policies Eveready Income Fund ("Eveready" or the "Fund") is an unincorporated open-ended mutual fund trust governed by the laws of the province of Alberta. The business of Eveready, held in subsidiaries and limited partnerships, provides industrial and oilfield maintenance and production services to the energy, resource, and industrial sectors. Eveready's operations follow a seasonal pattern, with earnings traditionally being higher in the quarter ending March 31st and lower in the quarter ending June 30th compared to the other quarters of the year. Due to this seasonality, interim earnings reported for the three and six months ended June 30, 2008 may not be reflective of earnings on an annual basis. These interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") and are presented in Canadian dollars rounded to the nearest thousand ($000), except where otherwise indicated. Except as described in note 2 below, these interim consolidated financial statements have been prepared following the same accounting policies and application methods as those disclosed in Eveready's annual consolidated financial statements for the year ended December 31, 2007. Because the disclosures provided in these interim consolidated financial statements do not conform in all respects with GAAP for annual financial statements, these interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2007. 2. New accounting policies Effective January 1, 2008, Eveready adopted the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") under CICA Handbook Section 1535 Capital Disclosures, Section 3031 Inventories, Section 3862 Financial Instruments - Disclosures, and Section 3863 Financial Instruments - Presentation. These Sections apply to fiscal years beginning on or after October 1, 2007, except for Section 3031, which applies to fiscal years beginning on or after January 1, 2008. Capital Disclosures Under Section 1535 Capital Disclosures, an entity discloses its objectives, policies, and processes for managing capital, including quantitative data about capital and whether it has complied with any externally imposed capital requirements (note 15). The adoption of this section did not have any material impact on Eveready's financial position or results of operations. Inventories Section 3031, which replaces Section 3030 Inventories, increases guidance regarding the scope, measurement, and allocation of costs to inventories. Under Section 3031, inventory is to be measured at the lower of cost and net realizable value. Net realizable value approximates the estimated selling price less all estimated costs of completion and necessary costs to complete the sale. Costs shall be assigned using the first-in, first-out (FIFO) or weighted average cost formula. Further, Section 3031 allows the reversal of previous write-downs of inventory to net realizable value when economic changes support an increased value to inventory. The adoption of this standard had no material impact on Eveready's interim consolidated financial statements during the six months ended June 30, 2008. Inventory is comprised primarily of materials, parts, and supplies consumed in rendering services to customers. Eveready values its inventory at the lower of weighted average cost and net realizable value. CICA Section 3862 Financial Instruments - Disclosures and Section 3863 Financial Instruments - Presentation Section 3862 establishes standards for risk disclosures, specifically the risk associated with both recognized and unrecognized financial instruments and how those risks are managed. Section 3863 carries forward the former presentation standards. These new accounting standards supersede Section 3861 Financial Instruments - Disclosure and Presentation, which Eveready adopted on January 1, 2007. The adoption of Sections 3862 and 3863 had no material impact on Eveready's financial position or results of operations. 3. Recent accounting pronouncements issued but not yet adopted CICA Section 3064 Goodwill and Intangible Assets In February 2008, the CICA issued Handbook Section 3064 Goodwill and Intangible Assets that supersedes Sections 3062 Goodwill and Other Intangible Assets and 3450 Research and Development Costs. Section 3064 provides additional guidance on when expenditures qualify for recognition as intangible assets and requires that costs be deferred only when relating to an item meeting the asset definition. This new accounting standard is effective for interim or annual financial statements relating to fiscal years beginning on or after October 31, 2008. Eveready will adopt this new standard for its fiscal year commencing January 1, 2009 and does not expect the adoption to have a material impact on its financial position or results of operations. International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board (AcSB) confirmed that Canadian public enterprises will need to adopt International Financial Reporting Standards (IFRS) effective for years beginning on or after January 1, 2011. Eveready is currently evaluating the impact this new framework will have on its consolidated financial statements. 4. Long-term debt Eveready's long-term debt relates to credit facilities of $250,000 with a syndicate of lenders led by a Canadian affiliate of GE Energy Financial Services. The credit facilities consist of a $100,000 revolving, renewable credit facility and a $150,000 term loan. Amounts borrowed under these credit facilities bear interest, at Eveready's option, at bank prime or bankers' acceptance rates, plus a credit spread based on a sliding scale. The revolving credit facility ("Revolver") requires payments of interest only and is renewable annually, subject to Eveready's and the lending syndicate's consent. A stand-by fee is calculated at a rate of 0.25% per annum on the unused portion of the Revolver. If the Revolver were not renewed, the outstanding credit facility is subject to a 12-month interest-only phase, followed by a 24-month straight-line amortization period. As a result, the Revolver is classified as long-term debt in these interim consolidated financial statements. The term loan ("Term") requires fixed monthly payments of $125 and a balloon payment of $142,500 due May 2012. Eveready may prepay all or part of the term loan at any time, subject to the payment of a breakage fee. In February 2008, Eveready received, from the syndicate of lenders, an additional short-term over advance loan of $20,000, which was repaid during the second quarter of 2008. The credit facilities are collateralized by substantially all of Eveready's assets, including Eveready's accounts receivable, inventory, and property, plant and equipment. At June 30, 2008, the carrying amount of Eveready's assets was $644,631 and the effective interest rate on the credit facilities was 5.89% (December 31, 2007 - 7.41%). For the three and six months ended June 30, 2008, total interest expense recognized under Eveready's credit facilities was $3,811 and $7,774 (2007 - $3,036 and $4,596), respectively. Eveready's long-term debt consists of the following components:
----------------------------------------------------------------------------
As at June 30 December 31
2008 2007
$ $
----------------------------------------------------------------------------
Revolver 59,791 55,000
Term 148,250 149,000
----------------------------------------------------------------------------
208,041 204,000
Less: unamortized transaction costs (2,962) (2,664)
----------------------------------------------------------------------------
205,079 201,336
Less: current portion of long-term debt (1,500) (1,500)
----------------------------------------------------------------------------
203,579 199,836
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The credit facilities contain financial covenants, including, but not limited to, a working capital ratio, a fixed charge coverage ratio, funded debt to earnings before interest, taxes, depreciation, and amortization ("EBITDA") ratios, a minimum net worth, and a maximum distribution payout ratio, each calculated on a quarterly basis. Eveready was in compliance with all financial covenants under this agreement at June 30, 2008. If the Revolver were not renewed (the next renewal date is April 24, 2009) and Eveready were not able to refinance this credit facility with another lender, the required minimum principal repayments on the credit facilities at June 30, 2008 are as follows:
----------------------------------------------------------------------------
Amount
$
----------------------------------------------------------------------------
2009 1,500
2010 6,482
2011 31,396
2012 168,663
2013 -
----------------------------------------------------------------------------
208,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Obligations under capital lease Obligations under capital lease substantially relate to industrial lodging facilities purchased with the Denman Industrial Trailers Ltd. acquisition in May 2007. During the six months ended June 30, 2008, Eveready financed additional industrial lodge facilities through sale-leasebacks of $7,997. These obligations bear interest at prime plus 0.25% per annum and are repayable in monthly blended principal and interest payments of $428. Maturing at dates ranging from August 2012 to March 2015, these obligations may be repaid in full without penalty two years after lease inception. At June 30, 2008, the effective rate of interest was 5.00% (December 31, 2007 - 6.25%). All of Eveready's obligations under capital lease are collateralized by equipment with a $27,119 net book value at June 30, 2008 (December 31, 2007 - $19,058). For the three and six month periods ended June 30, 2008, interest expense related to all obligations under capital lease was $312 and $679 (2007 - $146 and $146), respectively. Future minimum lease payments required over the next five years and thereafter for all obligations under capital lease are as follows:
----------------------------------------------------------------------------
Amount
$
----------------------------------------------------------------------------
2009 5,412
2010 5,405
2011 5,285
2012 5,143
2013 4,311
Thereafter 3,291
----------------------------------------------------------------------------
Total minimum lease payments 28,847
Less: amounts representing imputed interest at rates ranging from
4.50% to 15.00% (4,310)
----------------------------------------------------------------------------
Balance of obligations under capital lease 24,537
Less: current portion of obligations under capital lease (4,065)
----------------------------------------------------------------------------
20,472
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Unitholders' capital
----------------------------------------------------------------------------
Number of Amount
Authorized - Unlimited number of voting units units $
----------------------------------------------------------------------------
Units issued and to be issued:
Balance as at December 31, 2007 85,317,210 327,991
Activity during the six months ended June 30, 2008:
Units repurchased and cancelled (41,600) (160)
Units issued - "in-kind" distribution (note 9) 4,111,750 15,313
Units to be issued - "in-kind" distribution (note 9) 4,130,960 16,054
Unit options exercised (note 7) 8,000 39
Collection of employee share purchase loans receivable - 4
----------------------------------------------------------------------------
Balance as at June 30, 2008 93,526,320 359,241
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The number of units issued and to be issued as at June
30, 2008 consisted of:
Fund units 82,646,481
Rollover LP units 6,748,879
Units to be issued - "in-kind" distribution (note 9) 4,130,960
----------------------------------------------------------------------------
93,526,320
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Rollover LP units The Rollover LP units issued in conjunction with certain business acquisitions, are units of subsidiary limited partnerships of the Fund, and are designed to be, to the greatest extent practicable, the economic equivalent of Fund units. Rollover LP units are non-transferable (except to certain permitted assigns) and the holders thereof are entitled to receive distributions on a per unit basis equivalent to unitholders of the Fund. The Rollover LP units are exchangeable, at the option of the holder, into units of the Fund at anytime. During the six months ended June 30, 2008, 6,957,498 Rollover LP units were exchanged into Fund units. Normal course issuer bid On January 25, 2008, Eveready received regulatory approval from the Toronto Stock Exchange to purchase for cancellation, from time to time as Eveready considers advisable, its issued and outstanding Fund units. Pursuant to the normal course issuer bid ("the Bid"), Eveready may purchase for cancellation up to a maximum of 5,090,401 Fund units, being approximately 10% of Eveready's "public float." The Bid commenced January 29, 2008 and will terminate on January 28, 2009 or such earlier time as the Bid is completed or terminated at Eveready's option. During the six months ended June 30, 2008, Eveready purchased and cancelled 41,600 units at an average cost of $3.37 per unit for total cash consideration of $141. Unitholders' capital has been reduced by the stated value of the units amounting to $160 with the excess over the total cash consideration being credited to contributed surplus (note 8). Subsequent to June 30, 2008 and before the release of these interim consolidated financial statements, Eveready purchased and cancelled 144,982 units at an average cost of $3.39 per unit for a total cash consideration of $491. 7. Employee Unit Plan and Unit Option Plan Employee Unit Plan During the three and six months ended June 30, 2008, unit-based compensation expense of $658 and &