Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

May 03, 2007 16:21 ET

Enerflex Announces First Quarter 2007 Financial Results

CALGARY, ALBERTA--(CCNMatthews - May 3, 2007) - Enerflex Systems Income Fund (TSX:EFX.UN), a leading supplier of products and services to the global energy industry, today announced its financial and operating results for the three months ended March 31, 2007.

During the first quarter of 2007, Enerflex generated net income of $13.7 million ($0.29 per trust unit) from revenue of $200.0 million, while distributable cash flow per unit(1) increased by 24% from $0.29 in the first quarter of 2006 to $0.36. Distributions per unit increased from $0.0625 per unit to $0.25 per unit in 2007 as a result of the effects of the conversion to an income trust in October 2006. The distribution payout ratio(1) was 69% as compared to a dividend payout ratio of 22% in the first quarter of 2006.

Revenue generated in the three months ended March 31, 2007 decreased by 3%, or $6.8 million, as compared to the same period in 2006. The decline in revenue is attributable to lower domestic activity in the Engineered Systems segment largely offset by increased international revenues. The Fund's Service and Production Services segments both posted revenue gains.



Financial Highlights

Three Months Ended March 31
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$ millions, except per
unit/share amounts
(Unaudited) 2007 2006 % change
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Revenue $ 200.0 $ 206.8 ( 3%)
Gross margin $ 42.3 $ 46.6 ( 9%)
Gross margin percent 21.1 22.5
Operating margin(1) $ 12.2 $ 21.6 (44%)
Operating margin percent(1) 6.1 10.4
Net income $ 13.7 $ 12.9 6%
Earnings per unit/share (basic) $ 0.29 $ 0.29 -
Distributable cash flow per unit(1) $ 0.36 $ 0.29 24%
Distribution/dividend per unit $ 0.25 $0.0625 300%
Distribution payout ratio percent(1) 69 22
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For Note 1 please refer to the Note to the Financial Highlights set forth on page 9 of this release.

"While new equipment orders from domestic customers remain depressed, we are very pleased with our strong performance in the international market," said Mr. J. Blair Goertzen, President and Chief Executive Officer. "Clearly our Enerflex Global initiative is delivering results with significant gains in international revenue, bookings and backlog."

Mr. Goertzen continued, "We are also pleased that our first quarter results represent an improvement over the fourth quarter of 2006 and that our Service and Production Services segments continue to perform well with 9% and 16% revenue gains respectively."

First Quarter Highlights Include:

- International revenues increased by 45% over the prior year period to $83.0 million to comprise 42% of total revenues.

- New international orders in the first quarter increased by 99% over the first quarter of 2006.

- Backlog in the Engineered Systems segment has increased by 19% over December 31, 2006 as a result of a sharp increase in new international business.

- On January 30, 2007 Enerflex completed the purchase of the operating assets of Powertec Beheer B.V. ("Powertec") in Europe. This strategic acquisition, in combination with Enerflex's existing European operations, provides the critical mass for further growth and development of the Fund's European region, with pro-forma revenues for 2006 of $80.2 million.

- Production Services added four new Variable Cost Production projects.

- Production Services successfully completed shop testing of a fully automated, portable Flue Gas Compression unit for deployment in under balanced drilling and enhanced recovery projects.

For The Three Months Ended March 31, 2007

During the first quarter of 2007 Enerflex generated $200.0 million in revenue, as compared to $206.8 million in the first quarter of 2006. The decrease of $6.8 million or 3% was a result of declining revenues in the Engineered Systems segment partially offset by increased revenue in both the Service and Production Services segments. As compared to the three month period ended March 31, 2006:

- Service revenue increased by $6.3 million with the acquisition of Powertec in Europe contributing $4.0 million of this increase and the balance attributable to continued stable demand for Mechanical Services in Canada.

- Production Services revenue increased by $1.3 million as a result of the expansion of the rental fleet and Variable Cost Production and Flue Gas Compression contracts, partially offset by lower rental fleet utilization rates.

- Engineered Systems revenue declined by a total of $14.4 million with Compression and Power revenue declining by $2.1 million and Production and Processing revenues declining by $12.3 million, largely as a result of the curtailment of Canadian drilling activity and reduced demand for production equipment, partially offset by increased international demand in the Compression and Power division.

Gross margin for the three months ended March 31, 2007 was $42.3 million or 21.1% of revenue as compared to $46.6 million or 22.5% of revenue for the three months ended March 31, 2006, a decrease of $4.3 million. Each segment experienced a lower gross margin percentage than realized in the first quarter of 2006. Many factors contributed to this decline and are summarized as follows:

- Service gross margin percentage of 24.7% decreased from 27.9% in 2006 as the segment experienced higher labour costs, increased training costs associated with employee development and modest declines in labour utilization rates;

- Production Services gross margin percentage of 60.0% declined from 63.4% due to lower rental fleet utilization rates, increased depreciation charges and the costs associated with the introduction and startup of Variable Cost Production and Flue Gas Compression services; and

- Engineered Systems gross margin percentage of 15.1% decreased from 16.5% as a result of lower plant utilization rates due to reduced Canadian activity, price pressure in the low horsepower compression market and project commissioning costs incurred on the turnkey natural gas processing plant in Egypt.

Selling, general and administrative ("SG&A") expenses were $30.3 million or 15.1% of revenue during the three months ended March 31, 2007, compared with $25.3 million or 12.2% of revenue in the same period of 2006. The $5.0 million increase in SG&A expenses during the quarter, as compared to the same period in 2006, is principally attributed to: the Fund's growth initiatives in AustralAsia, the Middle East and Europe; the need to react to increased compensation pressures for skilled and professional employees; and the amortization of assets acquired through various acquisitions. Significant SG&A increases by region included: $1.4 million attributable to the newly acquired operation in Europe; $1.0 million in AustralAsia to respond to the significantly increased business levels that commenced in 2006; $1.4 million for increased Canadian service and parts personnel and infrastructure associated with selling new product lines and services in Enerflex's existing branch network; and $0.5 million of costs related to Enerflex's Global initiative. These increased expenditures are viewed by Enerflex as investments in future business. Specific cost increases by category occurred as follows: $2.2 million increase in personnel and compensation expenses; increased travel of $0.7 million; increased legal and professional fees of $0.8 million; increased depreciation and amortization of $0.5 million; increased office costs of $0.7 million; and increased insurance costs of $0.5 million. These cost increases were offset by reduced consulting costs related to 52-109 compliance of $0.2 million and reduced bad debt expense of $1.1 million.

Operating margin(1) assists the reader in understanding the net margin contributions made from the Fund's core businesses after considering all SG&A expenses, the impact of the Fund's foreign exchange hedging strategy and excluding reorganization costs. For the three months ended March 31, 2007, Enerflex produced an operating margin(1) of $12.2 million, or 6.1% of revenue, as compared to an operating margin(1) of $21.6 million, or 10.4% of revenue, for the same three month period in 2006. The reduction in operating margin(1) for the quarter as compared to 2006 occurred as a result of the same factors contributing to the reduced gross margin and increased SG&A expenses. The foreign exchange gain during the quarter resulted primarily from the Fund's hedging strategy and changes in the value of the Euro and United States dollar as compared to the Canadian dollar during the period.

For Note 1 please refer to the Note to the Financial Highlights set forth on page 9 of this release.

Income before interest and income taxes totaled $12.7 million for the first quarter of 2007, as compared to $22.4 million for the same period in 2006. Income taxes for the quarter were reduced to a recovery of $3.3 million from an expense of $7.8 million in the first quarter of 2006 as a consequence of a recovery of $2.9 million from a favourable income tax ruling received during the quarter and the conversion to an income trust.

During the first quarter of 2007, Enerflex generated net income of $13.7 million as compared to $12.9 million in the same period of 2006. This results in an earnings per income trust unit of $0.29 in 2007, as compared to $0.29 in the first quarter of 2006, adjusted for the two for one split which occurred on October 2, 2006 upon conversion to an income trust.

During the quarter, the Fund declared distributions of $0.25 per unit or $11.7 million. This represented 69% of distributable cash flow.

Segmented Results

Enerflex has three business segments: Service, Engineered Systems and Production Services, which operate as follows:

Service

The Service business segment provides a complete line of mechanical and electrical, instrumentation and controls services to the oil and gas industry through an extensive branch network in Canada, Germany, the Netherlands, Australia and Indonesia.



Three Months Ended March 31
(Unaudited) (Thousands) 2007 2006
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Service segment revenue $ 83,629 $ 77,617
Intersegment revenue (2,912) (3,231)
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Revenue $ 80,717 $ 74,386
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Gross margin $ 19,928 $ 20,777
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EBITDA $ 4,025 $ 7,943
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Income before interest and income taxes $ 2,973 $ 7,130
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Service revenue was $80.7 million for the three months ending March 31, 2007 and represented 40% of consolidated revenue. This compares to $74.4 million and 36% of consolidated revenue for the same period of 2006. Mechanical Service generated 61% of the segment's revenue in the first quarter of 2007 and 56% in the same period of 2006. EI&C contributed 39% of the segment's revenue in the first quarter of 2007 and 44% in the same period of 2006. The increase in segment revenue of 9%, or $6.3 million, was a result of increased international revenue, including $4.0 million from the addition of Enerflex Energiesystemen and the balance from continued stable demand in Canada. Gross margin for the three months ending March 31, 2007 for the segment totaled $19.9 million, or 24.7% as compared to $20.8 million or 27.9% in the first quarter of 2006. The decrease in gross margin percent was caused by reduced utilization in Canada. Income before interest and income taxes decreased from the first quarter of 2006 by $4.2 million, or 58%, to $3.0 million as a result of these factors. The decline in the profitability of the segment from 9.6% of revenue to 3.7% of revenue was due to decreased gross margin and higher branch and general administrative expenses associated with selling new product lines and services and increased training costs associated with employee development, including $1.0 million from the addition of Enerflex Energiesystemen and $1.4 million in Canada.

Mechanical Service

Mechanical Service revenue for the three months ending March 31, 2007 was $49.5 million, or 19% higher than first quarter 2006 revenue of $41.6 million. In Canada, which accounted for 59% of the division's revenue, as compared to 68% in the first quarter of 2006, sales increased by 4% over the same period of 2006 as a result of increased parts sales and modest price increases. These were partially offset by increased training costs and lower utilization rates as the division increased its labour force to reduce the negative impacts of maintaining too high a utilization rate. During the fourth quarter of 2006, the division was awarded the distributorship for Altronic ignition and control systems in Canada. This product line is anticipated to assist the division in growing its revenues and leveraging its cost base in the future.

For the first three months of 2007, international revenue increased by 51% over 2006. The increase in international revenue resulted from new maintenance contracts in Australia and $4.0 million of increased service revenue in Europe from Enerflex Energiesystemen.

During the first quarter, gross margins for Mechanical Service increased by $0.9 million or 7% over the same period in 2006, though, as a percentage of revenue, the gross margin percentage was lower at 27.7% as compared to 30.7% in the first quarter of 2006. Reduced staff utilization accounted for the decrease in gross margin. The division's income before interest and income taxes for the first quarter of 2007 decreased by $2.3 million, or 48%, as compared to the same period in 2006. As a percentage of revenue, income before interest and income taxes decreased from 11.5% to 5.0% due to the decrease in gross margin percentage and higher branch and general administrative expenses and increased training costs as previously discussed.

Electrical, Instrumentation and Controls

During the quarter, EI&C generated revenue of $31.2 million, a decrease of $1.6 million, or 5%, as compared to $32.8 million in the same period of 2006. EI&C serves both the oil and natural gas markets and it was not as negatively impacted as some of the other divisions when domestic natural gas activity declined. However, the EI&C business in Canada is highly competitive and, consequently, this division realizes lower margins than the Mechanical Service division. As such, it requires a focused and disciplined approach to the bidding and execution of the services provided. The division continues to focus its efforts on obtaining projects with higher margin potential and improving its gross margin percentage and reducing, as a percentage of revenue, the cost of maintaining its central services and branch infrastructure requirements throughout Alberta, Saskatchewan and northeast British Columbia. For the three months ending March 31, 2007, the division gross margin decreased by $1.8 million or 22% as compared to the same period of 2006. As a percentage of revenue its gross margin decreased from 24.4% in the first quarter of 2006 to 19.9% for the same period of 2007. Sales mix changes and moderately decreased customer demand accounted for the decline in gross margin percentage. As a result of the above factors, the division's earnings before interest and income taxes decreased by $1.8 million and were 78% lower in the first quarter of 2007 as compared to the first quarter of 2006.

Engineered Systems

The Engineered Systems business segment engineers, fabricates and assembles standard and custom-designed compression packages, production and processing equipment and facilities, combined heat and power systems, and power generation systems.



Three Months Ended March 31
(Unaudited) (Thousands) 2007 2006
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Engineered Systems segment revenue $ 115,725 $ 131,046
Intersegment revenue (5,994) (6,886)
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Revenue $ 109,731 $ 124,160
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Gross margin $ 16,605 $ 20,531
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EBITDA $ 5,998 $ 11,699
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Income before interest and income taxes $ 4,723 $ 10,006
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For the first quarter of 2007, Engineered Systems' revenue totaled $109.7 million and comprised 55% of consolidated revenue. This compares to $124.2 million and 60% of consolidated revenue for the same period of 2006. Compression and Power generated 68% of the segment's revenue for the three months ending March 31, 2007 and 61% for the same period in 2006. Production and Processing contributed 32% of the segment's revenue in the first quarter of 2007 and 39% for the same period of 2006. The decrease of $14.5 million, or 12%, in segment revenue for the quarter was a result of the completion of a turnkey natural gas processing plant in Egypt in the first quarter of 2006 without a comparable project in 2007 and a decline in Canadian demand, partially offset by increased international sales. For the quarter, gross margin for the segment was 15.1%, or $16.6 million, as compared to 16.5%, or $20.5 million, in the same period of 2006. The decrease in gross margin of $3.9 million, or 19%, was a result of the same factors that caused the decline in the segment's revenue and project commissioning costs incurred on the turnkey natural gas processing plant in Egypt. Income before interest and income taxes decreased by $5.3 million, or 53%, to $4.7 million as a result of the above-mentioned factors and $1.0 million of increased general and administrative expenses in the AustralAsia operation to respond to the significantly increased business levels that commenced in 2006.

Compression and Power

For the first quarter of 2007, the Compression and Power division recorded revenue of $74.2 million, a decrease of $2.1 million over the same quarter of the prior year. International revenue totaled $37.5 million in the first quarter of 2007, as compared to $6.3 million in the first three months of 2006, an increase of 493%. $15.0 million of this increase is attributable to the CHP business of Enerflex Energiesystemen, $0.9 million represented the revenue increase from the Odessa operation (sold effective February 28, 2007) and the remainder was export sales from Canada. Canadian revenues declined 48% as softening energy prices, high drilling and completion costs and changing tax laws negatively impacted the spending patterns of energy producing entities in Canada. As such, domestic order bookings declined in the first quarter of 2007 as compared to 2006. In anticipation of the slowing of domestic orders, Enerflex devoted a greater proportion of its sales efforts to international markets. This resulted in higher international order bookings in the first quarter of 2007 as compared to the same period of 2006. While definitive market share data is difficult to obtain, Enerflex estimates that its Canadian large horsepower compressor package market share was constant in the first quarter of 2007 as compared to the same period in 2006. Though some measure of pricing leverage was achieved in 2006, these gains are presently under pressure as domestic competition for order bookings increases.

During the first three months of 2007, in terms of dollars, gross margin decreased negligibly. As a percentage of revenue, the division's gross margin was 16.3% of revenue in the first quarter of 2007 as compared to 16.0% in the same period of 2006. During the quarter, Enerflex sold its Odessa, Texas based operation for proceeds of $2.7 million. At present, Enerflex owns approximately 350,000 square feet of compression shop floor space in Canada and during the first three months of 2007 management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 57% as compared to 79% in the same period in 2006. The Compression and Power division's income before interest and income taxes decreased by 3% to $6.4 million as a result of the factors mentioned above.

Production and Processing

For the first quarter of 2007, the Production and Processing division contributed revenue of $35.6 million, a decrease of $12.3 million, or 26%, as compared to the same period in the prior year. In each market segment competition remains strong. Production and Processing revenues decreased by $11.1 million for the first three months of 2007 as a result of the completion of a turnkey natural gas processing plant in Egypt in 2006 without any corresponding project revenue in the first quarter of 2007. The continued awarding of future international turnkey projects and product sales will be important to the success of the division in 2007.

During the first quarter of 2007, gross margin decreased by $3.9 million, or 46%, as a result of the factors identified above, reduced utilization in Canada and project commissioning costs incurred on the turnkey natural gas processing plant in Egypt. As a percentage of revenue, the division's gross margin was 12.6% in the three months ending March 31, 2007 as compared to 17.5% during the same period of 2006. At present, Enerflex owns approximately 107,000 square feet of production and processing shop floor space in Alberta, Canada and leases 62,000 square feet of shop floor space in Perth, Western Australia. During the first quarter of 2007, management estimates that the average utilization rate, based on available labour hours, in its Canadian based facilities was 87% as compared to 92% for the same period of 2006 and 79% in its Australian based facilities as compared to 90% for the same period of 2006. The division's income before interest and income taxes decreased by 148% during the three months ended March 31, 2007 to a loss of $1.6 million, as compared to the income of $3.4 million for the first quarter of 2006, due to the factors impacting gross margin described above and $1.0 million of increased general and administrative infrastructure spending in AustralAsia to sustain the region's significantly increased business levels that commenced in 2006.

Engineered Systems Segment Bookings

During the first quarter of 2007, Enerflex experienced a decrease in its order bookings in the Engineered Systems segment by approximately 18% versus bookings recorded in the same period of 2006. The Engineered Systems segment's order backlog at March 31, 2007 was approximately 19% above the segment's order backlog at December 31, 2006 principally as a result of an increase in international bookings, partially offset by reduced demand in the Canadian sector. The backlog is represented 74% by international projects at March 31, 2007 as compared to 55% at December 31, 2006. In early April, Production and Processing was awarded their first modules for steam assisted gravity drainage ("SAGD") heavy oil processing in Alberta.

Production Services

The Production Services business segment provides a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment.



Three Months Ended March 31
(Unaudited) (Thousands) 2007 2006
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Production Services segment revenue $ 9,572 $ 8,284
Intersegment revenue (3) (7)
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Revenue $ 9,569 $ 8,277
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Gross margin $ 5,738 $ 5,246
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EBITDA $ 7,598 $ 7,423
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Income before interest and income taxes $ 4,985 $ 5,307
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Capital expenditures, net of proceeds on disposal $ 5,897 $ 2,457
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Revenue for the first three months of 2007 increased by $1.3 million, or 16%, to $9.6 million as compared to the first quarter of 2006. While the segment owns and rents compression, power and processing equipment, the main driver for its revenue growth is the rental of compression equipment and its VCP and Flue Gas Compression offerings. During the first quarter of 2007, the segment's revenue was generated 83% by compression and 17% by power and processing, Flue Gas and VCP activities. The revenue increase experienced in the three months ending March 31, 2007 over the same period in 2006 was a result of the larger rental fleet and the introduction of VCP and Flue Gas equipment services. These were partially offset by lower utilization rates during the quarter. Overall, for the first quarter of 2007, the segment experienced compression rental utilization rates, based on capital deployed, of 70.2% compared to 75.2% during the first quarter of 2006. Power and processing fleet utilization rates, based on average capital deployed, decreased from 80.8% for the three months ended March 31, 2006 to 45.8% in the same period of 2007. The reduction in utilization rates was attributed to reduced activity in the Canadian market, for the reasons previously discussed. Gross margin for the first quarter of 2007 totaled $5.7 million, or 60.0% of revenue, as compared to $5.2 million, or 63.4% of revenue, during the same period of 2006. The reduction in gross margin as a percent of revenue was caused by product operating costs associated with new product offerings and lower equipment utilization rates.

During the first quarter of 2007, Production Services sold 14 compression units and 1 power and processing unit from its fleet, for gross proceeds of $5.3 million and a gain on sale of $0.4 million. This compares to 14 compression units and 4 power and processing units, for gross proceeds of $7.5 million and a gain on sale of $1.2 million during the first quarter of 2006. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. To satisfy the demand for new rental equipment, Enerflex added 5 compression units and 42 power and processing units to its fleet in the first quarter of 2007, for an investment of $9.9 million. This turnover of assets renews the fleet, resulting in an average fleet age of less than five years.

Production Services expects continued growth in demand for its products in Canada, and has targeted specific geographic regions for expansion in the United States and abroad. Production Services does not generally increase the capital invested in its compression fleet unless it has related rental contracts. Growth in the rental fleet is expected to be the largest internal capital investment opportunity for the Fund in 2007. During the quarter, four VCP deals were signed with various terms, representing approximately $11.1 million of its capital to be deployed. Enerflex is pleased with the initial level of interest in this new offering and estimates that it could deploy $15 million in capital towards this initiative during 2007. VCP provides Enerflex the opportunity to combine the strength of its balance sheet with its expertise in compression optimization, maintenance and operations in order to improve the returns generated from existing compression and processing assets for both its customers and its unitholders.

Financial Condition and Liquidity

During the first quarter of 2007, Enerflex increased its cash balances by $11.6 million, compared with a $4.3 million reduction in the same period of 2006. This increase occurred as the Fund purchased Powertec for $8.7 million, incurred $4.6 million net purchases of rental assets, incurred $2.9 million of net additions to property, plant and equipment and paid $11.7 million in distributions. These activities were offset by funds generated from operations before changes in non-cash working capital of $17.8 million, an advance of long term debt of $20.5 million and a decrease in working capital of $1.2 million.

During the quarter, the non-cash working capital from operations increased as a result of an $8.7 million increase in inventory, a $4.3 million increase in income taxes receivable and a $2.5 million increase in accounts receivable, offset by a $9.5 million increase in accounts payable.

On April 27, 2007, the Fund had 43,927,940 income trust units and 2,753,254 Exchangeable LP units outstanding. Enerflex has not established a formal distribution policy and the Board of Directors of the General Partner anticipates setting the quarterly distributions based on the availability of distributable cash flow and anticipated market conditions, taking into consideration business opportunities and the need for growth capital. In 2006, prior to the conversion, Enerflex declared quarterly dividends equal to $0.0625 per trust unit for a total of $0.1875 per trust unit for the first three quarters of 2006. Post conversion, the Fund declared a cash distribution of $0.25 paid on January 15, 2007 and a cash distribution of $0.25 paid on April 15, 2007.

During 2006, the Fund completed the restructuring of its debt with the closing of a private placement for $100.6 million Senior Secured Notes ("Notes") and the amendment of its bank credit facility ("Bank Facility") for $150.0 million. The Notes mature on two separate dates with $21.0 million maturing on December 20, 2013 and $79.6 million maturing on December 20, 2016. The Bank Facility matures June 30, 2009 and is extendable at the banks' option in June of each year.

The Notes and Bank Facility share security on a pari passu basis with collateral consisting of a fixed and floating charge on the Fund's Canadian assets and guarantees from various subsidiary companies. These credit facilities require the Fund to meet certain covenants, including a limitation on the debt-to-EBITDA(1) ratio and a limitation on distributions to unitholders in certain circumstances. Enerflex was in full compliance with these covenants at March 31, 2007 and April 27, 2007.

On March 31, 2007, $100.6 million Notes were outstanding and approximately $62.1 million of the $150.0 million Bank Facility was drawn, comprised of $47.3 million in cash borrowings and $14.8 million in letters of credit or guarantees, leaving approximately $87.9 million available for future drawings. These credit facilities provide the financing required to support the Fund's operating requirements, as well as the flexibility to pursue growth opportunities.

Note to Financial Highlights

(1) Operating margin, distributable cash flow, distributable cash flow per unit and distribution payout ratio percent are non-GAAP (Generally Accepted Accounting Principles) measures that do not have a standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other issuers. Management believes these measures are useful supplemental measures. Operating margin provides the net margin contributions made from the Fund's core businesses after considering all SG&A expenses, the impact of the Fund's foreign exchange hedging strategy and excluding reorganization costs. Distributable cash flow per unit will fluctuate on a quarterly basis due to seasonal cash flows, maintenance capital expenditures incurred, income taxes paid, and interest costs on outstanding debt. The distributable cash payout ratio in 2007 was influenced by reduced maintenance capital requirements. Investors should be cautioned that operating margin, distributable cash flow per unit and distribution payout ratio should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of Enerflex's performance. The Fund calculates these measures as follows:



Three Months Ended March 31
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Operating margin (Unaudited) (Thousands) 2007 2006
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Gross margin $ 42,271 $ 46,554
Selling, general and administrative expenses 30,273 25,325
Foreign currency losses (gains) (55) (212)
Equity earnings (124) (135)
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Operating margin $ 12,177 $ 21,576
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Operating margin percent
Operating margin divided by revenue (%) 6.1 10.4
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Distributable cash flow (Unaudited) (Thousands)
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Cash flow from operations before changes in
non-cash working capital $ 17,805 $ 16,501
Maintenance capital expenditures 946 3,532
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Distributable cash flow $ 16,859 $ 12,969
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Weighted average number of units/shares 46,677,408 45,290,902
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Distributable cash flow per unit $ 0.36 $ 0.29
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Distribution payout ratio
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Distribution/dividend $ 11,669 $ 2,832
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Distribution divided by distributable cash flow (%) 69 22
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Conference Call and Webcast Details

Enerflex Systems Income Fund (TSX:EFX.UN) will host a conference call for analysts and investors on Friday, May 4, 2007 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the Fund's 2007 first quarter results. The call will be hosted by Blair Goertzen, President and Chief Executive Officer of Enerflex.

If you wish to participate in this conference call, please call, 1.866.542.4239 or 1.416.641.6105. Please call at least ten minutes ahead of time.

Participants who wish to listen to a recording of the conference at a later time may do so by calling 1.800.408.3053 or 1.416.695.5800 (passcode: 3220630#) approximately one hour after the completion of the call. The recording will be available until the end of day Friday, May 11, 2007.

A live audio webcast of the conference call will be available on our internet site at www.enerflex.com in the Investor Relations section under Webcasts on May 4, 2007 at 9:00 a.m. MDT (11:00 a.m. EDT). Approximately one hour after the call, a recording of the event will be available on our internet site. Pre-registration for this web cast is available now on the web site.

Headquartered in Calgary, Canada, Enerflex has approximately 2,700 employees. Enerflex, its subsidiaries, interests in affiliates and joint ventures operate in Canada, Australia, the Netherlands, the United States, Germany, Pakistan, Egypt, Indonesia and Malaysia. Enerflex's trust units trade on the Toronto Stock Exchange under the symbol "EFX.UN".

Forward Looking Statements

This press release contains forward-looking statements. Certain statements containing words such as "anticipate", "could", "expect", "seek", "may", "intend", "will", "believe" and similar expressions, statements that are based on current expectations and estimates about the markets in which the Fund operates and statements of the Fund's belief, intentions and expectations about development, results and events which will or may occur in the future constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Fund and the General Partner derived from their experience and perceptions. All statements, other than statements of historical fact contained in this press release are forward-looking statements, including, without limitation: statements with respect to anticipated financial performance; future capital expenditures, including the amount and nature thereof; oil and gas prices, supply and demand; other development trends of the oil and gas industry; business prospects and strategy; expansion and growth of the business and operations, including market share and position in the oilfield service markets; the ability to raise capital; non-resident ownership of the Fund; expectations regarding future distributions; expectations and implications of changes in government regulation, laws and income taxes; and other such matters. In addition, other written or oral statements which constitute forward-looking statements may be made from time to time by and on behalf of the Fund and the General Partner. Such forward-looking statements are subject to important risks, uncertainties, and assumptions which are difficult to predict and which may affect the Fund's and the General Partner's operations, including, without limitation: the impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations, including future distributions to unitholders of the Fund; increased competition; the lack of availability of qualified personnel or management; labour unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Fund or the General Partner and other factors, many of which are beyond their control.

As such, actual results, performance, or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, dividends or distributions the Fund and its unitholders, will derive there-from. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this press release are made as of the date of this press release and other than as required by law, the Fund and the General Partner disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



ENERFLEX SYSTEMS INCOME FUND
CONSOLIDATED BALANCE SHEETS
Restated (Note 1)
(Unaudited) (Thousands) March 31, 2007 December 31, 2006
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ASSETS
Current assets
Cash $ 33,993 $ 22,344
Accounts receivable 159,785 157,257
Inventory 121,525 112,826
Income taxes receivable 2,812 -
Future income taxes 5,205 4,876
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Total current assets 323,320 297,303

Rental equipment 108,816 106,108
Property, plant and equipment 69,640 69,967
Assets under construction 2,875 3,743
Investment in affiliates 2,988 2,864
Future income taxes 5,066 5,505
Deferred financing costs (Note 1) - 814
Intangible assets 10,016 7,666
Goodwill 128,714 125,204
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$ 651,435 $ 619,174
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LIABILITIES AND UNITHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities $ 93,631 $ 84,166
Accrued distributions payable 11,669 11,669
Income taxes payable - 1,459
Future income taxes 35 -
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Total current liabilities 105,335 97,294

Long-term debt 155,068 133,557
Other long-term liabilities 1,828 1,662
Future income taxes 13,323 13,670
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275,554 246,183

Unitholders' equity
Unitholders' capital 205,454 205,454
Accumulated other comprehensive income
(Note 1) (1,096) (1,917)
Contributed surplus 114 71
Retained earnings 171,409 169,383
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375,881 372,991
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$ 651,435 $ 619,174
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See accompanying Notes to the Consolidated Financial Statements.


CONSOLIDATED STATEMENTS OF INCOME

(Unaudited) (Thousands, Three Months Ended March 31
except unit/share amounts) 2007 2006
----------------------------------------------------------------------------
Revenue $ 200,017 $ 206,823
Cost of goods sold 157,746 160,269
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Gross margin 42,271 46,554
Selling, general and administrative expenses 30,273 25,325
Foreign currency gains (55) (212)
Gain on sale of assets (504) (867)
Equity earnings on investments (124) (135)
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Income before interest and income taxes 12,681 22,443
Interest 2,301 1,694
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Income before income taxes 10,380 20,749
Income taxes (3,315) 7,845
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Net income $ 13,695 $ 12,904
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Net income per unit/share - basic $ 0.29 $ 0.29
- diluted $ 0.29 $ 0.28
Weighted average number of units/shares 46,677,408 45,290,902
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended March 31
(Unaudited) (Thousands) 2007 2006
----------------------------------------------------------------------------
Net income $ 13,695 $ 12,904
Other comprehensive income, net of tax
Foreign currency translation of
self-sustaining operations 821 (431)
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Change in unrealized gains and losses on
available-for-sale financial assets
arising during the period 821 (431)
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Comprehensive income $ 14,516 $ 12,473
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Three Months Ended March 31
(Unaudited) (Thousands) 2007 2006
----------------------------------------------------------------------------
Retained earnings, beginning of period $ 169,383 $ 149,617
Normal course issuer bid - (196)
Net income 13,695 12,904
Dividends - (2,832)
Distributions (11,669) -
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Retained earnings, end of period $ 171,409 $ 159,493
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See accompanying Notes to the Consolidated Financial Statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31
(Unaudited) (Thousands) 2007 2006
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Operating Activities
Net income $ 13,695 $ 12,904
Depreciation and amortization 4,940 4,622
Future income taxes (246) (334)
Gain on sale of assets (504) (867)
Equity earnings on investments (124) (135)
Stock option expense - 311
Unit option expense 44 -
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17,805 16,501
Changes in non-cash working capital and other (6,623) (4,702)
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Cash flow from operations 11,182 11,799
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Investing Activities
Acquisition of assets of Powertec Beheer B.V. (8,759) -
Purchase of:
Rental equipment (9,869) (6,274)
Property, plant and equipment (1,257) (2,319)
Assets under construction (2,241) (1,996)
Proceeds on disposal of:
Rental equipment 5,305 3,832
Property, plant and equipment 604 19
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(16,217) (6,738)
Changes in non-cash working capital and other 6,140 (3,802)
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(10,077) (10,540)
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Financing Activities
Decrease in operating bank loans - (10,927)
Advance of long-term debt 20,518 6,568
Stock options exercised - 932
Normal course issuer bid - (278)
Dividends - (2,260)
Distributions (11,669) -
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8,849 (5,965)
Changes in non-cash working capital and other 1,695 446
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10,544 (5,519)
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Increase (decrease) in cash 11,649 (4,260)
Cash, beginning of period 22,344 16,350
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Cash, end of period $ 33,993 $ 12,090
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See accompanying Notes to the Consolidated Financial Statements.


Note 1. Change in Accounting Policy

Effective January 1, 2007, the Fund adopted the provisions of CICA Sections 3855, "Financial Instruments - Recognition and Measurement", 3865, "Hedges", 1530, "Comprehensive Income", 3861, "Financial Instruments - Disclosure and Presentation" and 3251, "Equity". These sections have been adopted prospectively and the comparative interim financial statements have not been restated with one exception as noted below.

With the adoption of sections 1530 and 3251, the Fund has created "Statements of Consolidated Comprehensive Income" and restated its balance sheet to include "Accumulated comprehensive income" within the Unitholders' Equity section of the balance sheet. No other amounts have been restated.

Note 2. Segmented Information

The Company has three reportable segments: Service, Engineered Systems and Production Services. The Service reportable segment is the aggregation of the Mechanical Service and the Electrical, Instrumentation and Controls divisions. The Engineered Systems reportable segment is the aggregation of the Production and Processing, Compression and Power divisions.



Engineered
(Unaudited) (Thousands) Service Systems
-------------------------------------------
Three months ended March 31 2007 2006 2007 2006
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Segment revenue $ 83,629 $ 77,617 $ 115,725 $ 131,046
Intersegment revenue (2,912) (3,231) (5,994) (6,886)
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External revenue 80,717 74,386 109,731 124,160
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Gross margin 19,928 20,777 16,605 20,531
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Depreciation and amortization 1,052 813 1,275 1,693
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Income before interest and
income taxes 2,973 7,130 4,723 10,006
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Segment assets 157,253 137,735 211,543 198,868
Corporate
Goodwill 54,105 50,528 67,253 61,835
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Total segment assets 211,358 188,263 278,796 260,703
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Capital expenditures 1,504 996 470 2,307
Corporate
----------------------------------------------------------------------------

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Proceeds on disposal
of assets $ 559 $ 3 $ 33 $ 16
Corporate
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Production
(Unaudited) (Thousands) Services Consolidated
-------------------------------------------
Three months ended March 31 2007 2006 2007 2006
----------------------------------------------------------------------------
Segment revenue $9,572 $ 8,284 $ 208,926 $ 216,947
Intersegment revenue (3) (7) (8,909) (10,124)
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External revenue 9,569 8,277 200,017 206,823
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Gross margin 5,738 5,246 42,271 46,554
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Depreciation and amortization 2,613 2,116 4,940 4,622
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Income before interest and
income taxes 4,985 5,307 12,681 22,443
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Segment assets 120,226 102,642 489,022 439,245
Corporate 33,699 10,426
Goodwill 7,356 7,356 128,714 119,719
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Total segment assets 127,582 109,998 651,435 569,390
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Capital expenditures 11,214 6,289 13,188 9,592
Corporate 179 997
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13,367 10,589
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Proceeds on disposal of assets $5,317 $ 3,832 $ 5,909 $ 3,851
Corporate - -
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$ 5,909 $ 3,851
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Revenue from foreign countries was:

Three months ended March 31
(Unaudited) (Thousands) 2007 2006
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Australia $ 25,799 $ 24,804
Egypt 2,679 8,591
Indonesia 3,115 990
Kuwait 3,294 -
Netherlands 24,826 4,512
Pakistan 2,192 1,771
United States 15,534 3,599
Other 5,578 13,007
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$ 83,017 $ 57,274
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Included in these amounts are gross exports
from domestic operations of: $ 25,086 $ 20,820
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Revenue is attributed to countries by the destination of the sale.

Contact Information

  • Enerflex Systems Income Fund
    P. John Aldred
    Executive Chairman
    (403) 236-6800
    (403) 236-6816 (FAX)
    or
    Enerflex Systems Income Fund
    J. Blair Goertzen
    President & CEO
    (403) 236-6800
    (403) 720-4385 (FAX)
    or
    Enerflex Systems Income Fund
    Gail P. Boehm
    Interim Vice-President & CFO
    (403) 236-6800
    (403) 720-4385 (FAX)