Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

May 15, 2008 18:13 ET

Enerflex Reports First Quarter 2008 Financial Results

CALGARY, ALBERTA--(Marketwire - May 15, 2008) - Enerflex Systems Income Fund (TSX:EFX.UN), today announced its financial and operating results for the three months ended March 31, 2008.

Revenues and EBITDA increased by 16% and 19% respectively when compared to the first quarter of 2007. After normalizing results for a $2.9 million income tax recovery in the first quarter of 2007, net income increased by 25% to $13.5 million or $0.29 per unit.

Enerflex achieved a new record backlog in the first quarter of 2008 as a result of the continued success and momentum of its international strategy. Backlog of $414 million represents an increase of 102% over the first quarter of 2007 and a 43% increase over the backlog at December 31st, 2007.

"We are very pleased with the solid progress we made in the quarter. We continue to deliver on our stated goal of penetrating the global market for our products and services by realizing a 33% increase in international revenues when compared to the prior year period" stated J. Blair Goertzen, President and CEO of Enerflex. "International bookings and backlog continue to grow and we anticipate an improvement in the domestic market later in the year as a result of strengthening gas prices" continued Goertzen.



Financial Highlights

Three Months Ended March 31
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$ millions, except per unit amounts
and percentages (Unaudited) 2008 2007 % change
----------------------------------------------------------------------------
Revenue $ 232.6 $ 200.0 16%
Gross margin $ 46.7 $ 42.3 10%
Gross margin percent 20.1 21.1
Operating margin(1) $ 13.9 $ 12.2 14%
Operating margin percent(1) 6.0 6.1
Net income $ 13.5 $ 13.7 (2)%
Earnings per unit (basic) $ 0.29 $ 0.29 -
Distributable cash flow per
unit(2)(3) $ 0.06 $ 0.22 (73)%
Distribution/dividend per unit $ 0.25 $ 0.25 -
Distribution/dividend payout ratio
percent(2)(3) 410 114
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(1) 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 re-
organization costs. Operating margin is a non-GAAP measure that does not
have a standardized meaning prescribed by GAAP and therefore is unlikely
to be comparable to similar measures presented by other issuers.

(2) Distributable cash flow provides the amount of cash available for
distribution to unitholders and will fluctuate on a quarterly basis due
to seasonal cash flows, maintenance capital expenditures incurred,
income taxes paid, and interest costs on outstanding debt and changes to
non-cash working capital. Distributable cash flow is a non-GAAP measure
that does not have a standardized meaning prescribed by GAAP and
therefore is unlikely to be comparable to similar measures presented by
other issuers.

(3) In 2007 the Fund adopted The Canadian Securities Administrator's (CSA)
guidance on calculating distributable cash flow. This method requires
distributable cash flow to be calculated by including changes to non
cash working capital in the computation.


In the first quarter of 2008, Enerflex maintained its quarterly distribution of $0.25 per unit which totaled $11.7 million in distributions equal to the same period of 2007. The distribution during the first quarter equates to 410% of distributable cash flow calculated as defined by the Canadian Securities Administrator's (CSA) guidance on calculating distributable cash which the Fund adopted as of September 30th, 2007.

This method of calculation negatively impacted reported distributable cash by $13.8 million by recognizing changes to non-cash working capital. Distributable cash under the previous method (which excluded changes to non cash working capital) would have been $16.7 million resulting in the declared distribution representing 70% of distributable cash flow which was comparable to the same period last year. On a rolling 12 month basis, distributions represent 59% of distributable cash when calculated in accordance with the CSA guidance.

Key Achievements Include

- Engineered Systems segment bookings increased to $269.3 million, an 88% increase compared to the same period last year. International bookings represented 87% of total bookings.

- As a result, backlog more than doubled to $413.6 million compared to the first quarter of 2007.

- International revenue increased by 33% to $110.2 million in the first quarter of 2008 as compared to the first quarter of 2007. This represents 47% of total revenues for the quarter.

- EBITDA of $21.0 million represented a 19% increase from the same period last year. Net Income also increased by 25% to $0.29 per unit as compared to $0.23 during the first quarter of last year after normalizing for the income tax recovery recognized during the first quarter of 2007.

- Export sales in the Engineered Systems segment increased 102% to $50.7 million in relation to the first quarter of 2007.

- The Waukesha Engine Division of Dresser Industries appointed Enerflex as their sole authorized distributor for Alaska. Enerflex has set up a full service centre in Soldotna, approximately 150 miles from Anchorage

- Our focus on safety continues to deliver world class results in all categories of our HSE program.

Conference Call and Webcast Details

Enerflex Systems Income Fund will host a conference call for analysts and investors on Friday, May 16, 2008 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the Fund's 2008 first quarter results which will be released on Thursday, May 15, 2008 after market close. The call will be hosted by Blair Goertzen, President and Chief Executive Officer of Enerflex Systems Income Fund.

If you wish to participate in this conference call, please call, 1.866.542.4236 or 1.416.641.6127. Please initiate this call ten minutes prior to the scheduled start 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 (pass code: 3249255#) approximately one hour after the completion of the call. The recording will be available until the end of day May 23, 2008.

A live audio webcast and slide presentation of the conference call will be available on our website at www.enerflex.com under the Investor Relations section on May 16, 2008 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 website. Pre-registration for this webcast is available now on the website.

About Enerflex

Enerflex Systems Income Fund is a leading supplier of products and services to the global oil and gas production industry. Our core expertises are products and services between the wellhead and the pipeline. Enerflex provides natural gas compression and process equipment for sale or lease, hydrocarbon production and processing facilities, electrical, instrumentation and controls services and a comprehensive package of field maintenance and contracting capabilities. Through our ability to provide these products and services in an integrated manner, or as standalone offerings, Enerflex offers its customers a unique value proposition.

Headquartered in Calgary, Canada, Enerflex has approximately 2,750 employees. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, Australia, the Netherlands, the United States, Germany, Pakistan, the United Arab Emirates, Egypt, Indonesia and Malaysia. Enerflex's trust units trade on the Toronto Stock Exchange under the symbol "EFX.UN".

Forward-Looking Statements

Certain information contained herein constitutes forward-looking information under applicable securities laws. All statements, other than statements of historical fact, which address activities, events or developments that we expect or anticipate may or will occur in the future, are forward-looking information. Forward-looking information typically contains statements with words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "potential", "targeting", "intend", "could", "might", "should", "believe" or similar words suggesting future outcomes or outlook. The following discussion is intended to identify certain factors, although not necessarily all factors, which could cause future outcomes to differ materially from those set forth in the forward-looking information. The risks and uncertainties that may affect the operations, performance, development and results of Enerflex's businesses include, but are not limited to, the following factors: the impact of general economic conditions; industry conditions, including the adoption of new environmental 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 Enerflex's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or management; labor unrest; fluctuations in the foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by Enerflex and other factors, many of which are beyond the control of Enerflex. The reader is cautioned that these factors and risks are difficult to predict and that the assumptions used in the preparation of such information, although considered reasonably accurate by Enerflex at the time of preparation, may prove to be incorrect or may not occur. Accordingly, readers are cautioned that the actual results achieved will vary from the information provided herein and the variations may be material. Readers are also cautioned that the foregoing list of factors and risks is not exhaustive. Additional information on these and other risks, uncertainties and factors that could affect Enerflex's operations or financial results are included in our filings with the securities commissions or similar authorities in each of the provinces of Canada, as may be updated from time to time. There is no representation by Enerflex that actual results achieved will be the same in whole or in part as those set out in the forward-looking information.
Furthermore, the forward-looking statements contained herein are made as of the date hereof, and Enerflex does not undertake any obligation to update publicly or to revise any forward-looking information, whether as a result of new information, future events or otherwise, unless required by law. Any forward-looking information contained herein is expressly qualified by this cautionary statement.



FINANCIAL HIGHLIGHTS

----------------------------------------------------------------------------
Three months ended March 31,
----------------------------------------------------------------------------
2008 2007 Increase/
(Unaudited)(Thousands) (decrease)
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Canadian $ 122,422 $ 117,000 $ 5,422
----------------------------------------------------------------------------
International 110,199 83,017 27,182
----------------------------------------------------------------------------
Total revenue 232,621 200,017 32,604
----------------------------------------------------------------------------
Gross margin 46,744 42,271 4,473
----------------------------------------------------------------------------
Gross margin % 20.1% 21.1%
----------------------------------------------------------------------------
Selling, general &
administrative expenses 31,985 30,273 1,712
----------------------------------------------------------------------------
Income before interest & taxes 15,215 12,681 2,534
----------------------------------------------------------------------------
Interest expense 1,528 2,301 (773)
----------------------------------------------------------------------------
Income before taxes 13,687 10,380 3,307
----------------------------------------------------------------------------
Income tax expense (recovery) 195 (3,315) 3,510
----------------------------------------------------------------------------
Net income 13,492 13,695 (203)
----------------------------------------------------------------------------


NON-GAAP MEASURES

----------------------------------------------------------------------------
Three months ended March 31, 2008 2007
----------------------------------------------------------------------------
Operating margin(1)
----------------------------------------------------------------------------
Gross margin $ 46,744 $ 42,271
----------------------------------------------------------------------------
Selling, general and administrative expenses 31,985 30,273
----------------------------------------------------------------------------
Foreign currency losses (gains) 988 (55)
----------------------------------------------------------------------------
Equity earnings (119) (124)
----------------------------------------------------------------------------
Operating margin $ 13,890 $ 12,177
----------------------------------------------------------------------------
Operating margin percent 6.0% 6.1%
----------------------------------------------------------------------------

----------------------------------------------------------------------------
EBITDA(1)
----------------------------------------------------------------------------
Earnings before interest and income taxes $ 15,215 $ 12,681
----------------------------------------------------------------------------
Depreciation and amortization 5,790 4,940
----------------------------------------------------------------------------
EBITDA $ 21,005 $ 17,621
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Distributable cash flow(1)(2)
----------------------------------------------------------------------------
Cash flow from operations before working
capital adjustments $ 17,403 $ 17,805
----------------------------------------------------------------------------
Adjustments to working capital and other (13,824) (6,623)
----------------------------------------------------------------------------
Net maintenance capital expenditures (730) (946)
----------------------------------------------------------------------------
Distributable cash $ 2,849 $ 10,236
----------------------------------------------------------------------------
Distribution payout ratio 410% 114%
----------------------------------------------------------------------------

(1) Operating margin, operating margin percent, earnings before interest,
taxes, depreciation and amortization ("EBITDA"), distributable cash flow
and distribution payout ratio 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 re-organization costs. EBITDA provides
the results generated by the Fund's primary business activities prior to
consideration of how those activities are financed, assets are amortized
or how the results are taxed in various jurisdictions. Distributable
cash flow provides the amount of cash available for distribution to
unitholders and will fluctuate on a quarterly basis due to seasonal cash
flows, maintenance capital expenditures incurred, income taxes paid, and
interest costs on outstanding debt and changes to non-cash working
capital. Investors should be cautioned that operating margin, operating
margin percent, EBITDA, distributable cash flow and distribution payout
ratio should not be construed as an alternative to net income and cash
flow from operations determined in accordance with GAAP as an indicator
of Enerflex's performance.

(2) The Fund has adopted the Canadian Securities Administrators' (CSA)
recommendations on the calculation of distributable cash. The
recommendations of the CSA require that the calculation of distributable
cash incorporate changes to non-cash working capital. Comparative
figures have been adjusted to conform to the CSA definition.


FOR THE THREE MONTHS ENDED MARCH 31, 2008

During the first quarter of 2008 the Fund generated $232.6 million in revenue, as compared to $200.0 million in the first quarter of 2007. The increase of $32.6 million or 16% was a result of increased revenues in the Engineered Systems segment exceeding revenue declines in the Service and Production Services segments. International revenue increased $27.2 million from the same period in 2007 and represented 47% of revenue as compared to 42% in 2007. As compared to the three month period ended March 31, 2007:

- Engineered Systems revenue increased by $36.3 million due to increased export sales from the Fund's Canadian facilities, improved domestic activity levels and increased activity in the AustralAsia region;

- Service revenue decreased by $1.1 million, a result of decreased EI&C and European revenues partially offset by increased revenues in the AustralAsia region; and

- Production Services revenue decreased by $2.6 million as a result of lower capital utilization across all horsepower levels due to continued low levels of domestic compression investment and a reduction in the size of the rental fleet as compared to 2007. This decline was partially offset by increased revenues from the Fund's VCP initiative.

Gross margin for the three months ended March 31, 2008 was $46.7 million or 20.1% of revenue as compared to $42.3 million or 21.1% of revenue for the three months ended March 31, 2007, an increase of $4.4 million. Gross margins increased in the Service and Engineered Systems segment with a partial offset due to declines in Production Services' margins. Many factors contributed to these movements and are summarized as follows:

- Engineered Systems gross margin percentage of 15.2% was consistent with the 15.1% margin percentage in the same period of 2007. Higher plant utilization rates in 2008 and the absence of project commissioning costs incurred in the first quarter of 2007 were partially offset by the negative impact of a stronger Canadian dollar;

- Service gross margin percentage of 26.0% increased from 24.7% in 2007 as a result of improved margin percentages from EI&C in Canada, strong parts margins in AustralAsian operations and cost recoveries from a supplier in Europe offset by reduced Mechanical Service margins in Canada, the impact of which was compounded as this business accounted for an increased percentage of the segment's total revenue; and

- Production Services gross margin percentage of 55.8% decreased from 60.0% due to lower fleet utilization rates and consistent depreciation charges with the same period of 2007, despite the lower revenue in 2008.

Selling, general and administrative ("SG&A") expenses were $32.0 million or 13.7% of revenue during the three months ended March 31, 2008, compared with $30.3 million or 15.1% of revenue in the same period of 2007. The $1.7 million increase in SG&A expenses during the quarter, as compared to the same period in 2007, is attributed to the expansion of Enerflex's global business and increases in the various administration costs. Notable SG&A increases by region included: $1.7 million in Europe and $0.1 million in AustralAsia to respond to the increased activity in the region and to prepare for anticipated future business. These increases were offset with reductions to SG&A expenditures in the Americas of $0.1 million. Specific cost increases by category occurred as follows: $0.8 million in additional depreciation charges, $0.3 million of increased IT expenses and a $0.2 million increase in office costs.

Foreign exchange losses totalled $1.0 million in 2008 as compared to a gain of $0.1 million in 2007. The primary reason for the loss was the result of forward exchange contracts used to hedge foreign currency exposure on Engineered Systems fabrication contracts.

Enerflex mitigates the impact of exchange rate fluctuations by matching expected future U.S. dollar denominated cash inflows with U.S. dollar liabilities, principally bank debt, accounts payable or forward exchange contracts. For example, when Enerflex is awarded a sales contract in U.S. dollars, it converts an equivalent amount of its bank debt from Canadian to U.S. dollars. The debt is repaid when Enerflex receives payment from its customer. In 2007, this program was expanded to include the use of foreign currency forward contracts to hedge any net foreign currency exposure. Forward contracts are entered into in the amount of the net foreign dollar exposure for a term agreeing to the payment terms and production schedule in the sales contract. Outstanding forward contracts are marked to market at the end of each period with any gain or loss on the forward contract included in income.

The result is that any gain or loss in margins resulting from exchange rate fluctuations is offset by gains or losses in U.S. dollar liabilities. However, the timing of recognition of the offsetting gain or loss in margin can vary from the gain or loss on foreign denominated debt or forward contract due to percentage of completion revenue recognition, as these hedges relate to long-term contracts. The Canadian dollar depreciated 4% against the US dollar in 2008 and appreciated by 1% against the U.S. dollar during the same period of 2007.

At March 31, 2008, the Fund's bank debt included U.S. $33.0 million of LIBOR loans, compared to U.S. $41.0 million of LIBOR loans at March 31, 2007. At March 31, 2008, the Fund was party to foreign currency contracts with a total net sales value of U.S. $78.3 million, Euro EUR 10.5 million and Australian $12.4 million as compared to no contracts outstanding as at March 31, 2007.

Enerflex does not hedge its exposure to investments in foreign subsidiaries, which are largely self-sustaining. Exchange gains/losses on net investments in foreign subsidiaries are accumulated in unitholders' equity within "Accumulated comprehensive income/loss". Accumulated comprehensive loss decreased from $7.8 million at the end of 2007 to $0.6 million at March 31, 2008. This change was the result of the decline of the Canadian dollar against the Euro, Australian dollar and U.S. dollar. The Australian dollar appreciated by 8% against the Canadian dollar during 2008, as compared to a 3% appreciation in the same period of 2007. The Euro appreciated by 13% against the Canadian dollar during 2008, as compared to an appreciation of 1% in the same period of 2007.

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 and the impact of the Fund's foreign exchange hedging strategy and excluding reorganization costs. For the three months ended March 31, 2008, Enerflex produced an operating margin (1) of $13.9 million, or 6.0% of revenue, as compared to an operating margin (1) of $12.2 million, or 6.1% of revenue, for the same period in 2007. The increase in operating margin (1) for the quarter as compared to 2007 occurred as a result of the same factors contributing to the increased revenue and gross margin offset by the increased SG&A expenses.

Interest costs totalled $1.5 million for the three months ended March 31, 2008, compared with $2.3 million in the same period of 2007, a decrease of $0.8 million. Interest costs in 2008 were lower than those in 2007 as a result of lower effective interest rates on the Fund's U.S. denominated debt and increased interest income from investing the Fund's higher cash balances. Enerflex's total borrowings consisted of U.S. $33.0 million in the first quarter of 2008 as compared to an average of U.S. $40.3 million in the first three months of 2007.

Income tax expense totalled $0.2 million for the three months ended March 31, 2008 compared with a recovery of $3.3 million in the same period of 2007. The Fund benefited from a favourable tax ruling in the first quarter of 2007 totalling $2.9 million or $0.06 per unit.

During the first quarter of 2008, Enerflex generated net income of $13.5 million as compared to $13.7 million in the same period of 2007. This results in earnings per income trust unit of $0.29 in 2008 and 2007.

During the first quarter of 2008, the Fund declared distributions of $0.25 per unit or $11.7 million. This declaration totalled 410% of distributable cash flow (1) as compared to 114% of distributable cash flow (1) in the same period of 2007. Under the CSA's definition of distributable cash flow (1), changes in non-cash working capital are incorporated into the calculation of distributable cash flow (1). This definition negatively impacted distributable cash flow (1) by $13.8 million in the first quarter of 2008 as compared to $6.6 million in the same period of 2007.

(1) Operating margin, operating margin percent, distributable cash flow, distribution payout ratio and EBITDA are non-GAAP earnings 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. Please refer to the complete description of non-GAAP measures after the financial highlights table.

SERVICE

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



(unaudited)(thousands) Three months ended March 31, 2008 2007
----------------------------------------------------------------------------
Segment revenue $ 83,128 $ 83,629
Intersegment revenue (3,467) (2,912)
----------------------------------------------------------------------------
Revenue $ 79,661 $ 80,717
----------------------------------------------------------------------------
Revenue - Canadian $ 59,025 $ 60,356
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Revenue - international $ 20,636 $ 20,361
----------------------------------------------------------------------------
Gross margin $ 20,684 $ 19,928
----------------------------------------------------------------------------
EBITDA(2) $ 3,919 $ 4,025
----------------------------------------------------------------------------
Income before interest and income taxes $ 2,145 $ 2,973

(2) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP earnings measures that does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to be
comparable to similar measures presented by other issuers. Please refer
to the complete description of non-GAAP measures after the financial
highlights table.


Service revenue was $79.7 million in the first quarter of 2008 and comprised 34% of consolidated revenue. This compares to $80.7 million and 40% of consolidated revenue in the same period of 2007. The decrease of $1.0 million was the result of decreased revenues from the EI&C division in Canada and by the Mechanical Services operations in Europe. Mechanical Service activity in Canada was stable from 2007 and activity continued to grow in the AustralAsia region, partially offsetting the declines in Europe and EI&C activity. International revenues of $20.6 million accounted for 26% of the segment's total revenue as compared to 25% of revenue in 2007.

Gross margin for the segment totalled $20.7 million, or 26.0% as compared to $19.9 million, or 24.7% in 2007. The increase in gross margin percent resulted from strong parts margins internationally, recoveries from a major European supplier for warranty costs incurred by Enerflex in 2007 and improved EI&C margins in Canada. These increases were partially offset by reduced margin percentages on mechanical service work in Canada, which represented a larger percentage of overall segment revenue in 2008 as compared to 2007, due to lower labour utilization. Income before interest and income taxes declined by $0.9 million to $2.1 million in the three months ended March 31, 2008 from $3.0 million in the first quarter of 2007. This reduction was the result of increased expenditures on the integration of Enerflex Energiesystemen in Europe and the maintenance of the Canadian branch network.

ENGINEERED SYSTEMS

The Engineered Systems 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.



(unaudited)(thousands) Three month ended March 31, 2008 2007
----------------------------------------------------------------------------
Segment revenue $ 147,153 $ 115,725
Intersegment revenue (1,173) (5,994)
----------------------------------------------------------------------------
Revenue $ 145,980 $ 109,731
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Revenue - Canadian $ 57,027 $ 47,786
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Revenue - international $ 88,953 $ 61,945
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Gross margin $ 22,164 $ 16,605
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EBITDA(1) $ 10,629 $ 5,998
----------------------------------------------------------------------------
Income before interest and income taxes $ 9,149 $ 4,723

Plant utilization - Compression and Power 64% 57%
Plant utilization - Production and Processing 88% 87%
Plant utilization - AustralAsia 89% 79%
----------------------------------------------------------------------------

(1) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP earnings measures that does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to be
comparable to similar measures presented by other issuers. Please refer
to the complete description of non-GAAP measures after the financial
highlights table.


Engineered Systems' revenue totalled $146.0 million in the first three months of 2008 as compared to $109.7 million in the same period of 2007. This increase of $36.3 million was the result of strong increases in both international and domestic sales from all of the segment's businesses with the exception of the domestic small horsepower market which remained consistent with 2007's low activity levels. International revenue represented 61% of 2008 year to date revenue as compared to 56% in 2007. Increases in exports by both the Compression & Power and Production & Processing divisions and continuing high levels of activity in AustralAsia and the Middle East accounted for the increase in international revenue. In the first quarter of 2008, the Fund secured multiple orders in the domestic market in both of the segment's divisions, a sign of potentially increasing activity levels in Canada, along with a high level of new international bookings.

Gross margin for the segment totalled $22.2 million, or 15.2% compared to $16.6 million or 15.1% of revenue in 2007. The stable gross margin was the result of the negative impact on international contracts created by the stronger Canadian dollar as compared to the first quarter of 2007 offsetting much of the benefits from higher utilization levels in the Fund's facilities and the absence of project commissioning costs experienced in the first quarter of 2007. The Fund utilizes foreign currency forward contracts to mitigate the exposure on international contracts however a timing difference exists between the foreign exchange gains and losses recorded on the forward contracts and the full gross margin impact related to foreign exchange movements. Income before interest and income taxes increased by 94% to $9.1 million in 2008 from $4.7 million in 2007 as a result of the increased revenue and stable margins partially offset by higher general and administrative costs for continued expansion of operations in the AustralAsia region and the integration of Enerflex Energiesystemen in Europe.

Bookings and Backlog

The Fund records bookings and backlog when the Fund receives a firm commitment from customers for products and services. Backlog is an indicator of future revenue for the Fund.



Bookings

(thousands) Three month ended March 31, 2008 2007
----------------------------------------------------------------------------
Canadian $ 33,988 $ 23,296
International 235,342 119,892
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Total bookings $ 269,330 $ 143,188
--------------------------

Backlog
(thousands) As at March 31, 2008 2007
----------------------------------------------------------------------------
Canadian $ 69,343 $ 52,408
International 344,220 152,291
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Total backlog $ 413,563 $ 204,699
--------------------------


Backlog at March 31, 2008 was $413.6 million compared to $204.7 million at March 31, 2007. This represents a 102% increase over the prior year and a 43% increase over the backlog at December 31, 2007.

International backlog increased by 126% from March 31, 2007 and represents 83% of total backlog at March 31, 2008, as compared to 74% for the same period in 2007. The Fund has been impacted from a slowing domestic market, primarily in the low horsepower compression market segment, but this downturn has been significantly offset by an expansion of the organization's international strategy and expanding international footprint.

PRODUCTION SERVICES

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



(unaudited)(thousands) Three months ended March 31, 2008 2007
----------------------------------------------------------------------------
Segment revenue $ 6,982 $ 9,572
Intersegment revenue (2) (3)
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Revenue $ 6,980 $ 9,569
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Revenue - Canadian $ 6,370 $ 8,858
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Revenue - international $ 610 $ 711
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Gross margin $ 3,896 $ 5,738
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EBITDA(1) $ 6,457 $ 7,598
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Income before interest and income taxes $ 3,921 $ 4,985
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Capital expenditures, net of proceeds on disposal $ (7,570) $ 5,897
----------------------------------------------------------------------------

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Capital utilization - Compression 60% 70%
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Capital utilization - Power and Processing 35% 46%
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(1) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP earnings measures that does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to be
comparable to similar measures presented by other issuers. Please refer
to the complete description of non-GAAP measures after the financial
highlights table.


Production Services' revenue for the first quarter of 2008 decreased $2.6 million to $7.0 million as compared to $9.6 million in 2007. The decrease was the result of reductions in rental revenue due to a decline in utilization rates and in the size of the fleet partially offset by higher VCP revenues. The reduced fleet size resulted from a high level of rental contract buy-out activity in the fourth quarter of 2007 and first quarter of 2008 and little new capital investment by the Fund due to the reduced demand for rental equipment.

Gross margin in the first three months of 2008 totalled $3.9 million, or 55.8%, as compared to $5.7 million or 60.0% in 2007. The reduction in gross margin percent was the result of lower fleet utilization, resulting in the allocation of depreciation over a lower revenue base partially offset by a reduction in overhaul provisions. Income before interest and income taxes of $3.9 million was $1.1 million lower than 2007 as a result of the factors discussed above.

During the first three months of 2008, Production Services sold 11 compression units and 9 power and process equipment units from its fleet, for gross proceeds of $8.5 million and a gain on sale of $1.0 million. This compares to 14 compression units and 1 power and process equipment unit, for gross proceeds of $5.3 million and a gain on sale of $0.4 million in 2007. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. To satisfy the demand for rental equipment, Enerflex added 1 compression unit and 3 power and processing units to its fleet during the first quarter of 2008, for an investment of $0.8 million.

FINANCIAL POSITION

The following table outlines significant changes in the Consolidated Balance Sheets as at March 31, 2008 as compared to December 31, 2007:



----------------------------------------------------------------------------
Increase /
($millions) (decrease) Explanation
----------------------------------------------------------------------------
Assets:
----------------------------------------------------------------------------
Assets held for trading The market value of foreign exchange
(1.4) contracts used by the Fund declined in
the first quarter as a result of
weakening in the Canadian dollar.
----------------------------------------------------------------------------
Accounts receivable 28.1 Increased progress billings due to the
continuing high activity levels in the
Engineered Systems segment and
continued high revenue accrual
balances in first quarter of 2008.
----------------------------------------------------------------------------
Inventory (5.7) Strong activity levels have led to
continuing usage of existing inventory
and the implementation of CICA Section
3031 resulted in declines in the
overall value of inventory.
----------------------------------------------------------------------------
Property, plant and (5.2) The decline is due to continuing
equipment depreciation of existing assets and
buy-outs of rental units continuing
at a high level in the first quarter
of 2008 leading to disposals exceeding
new capital additions for the quarter.
----------------------------------------------------------------------------
Liabilities:
----------------------------------------------------------------------------
Liabilities held for 2.4 The market value of foreign exchange
trading contracts used by the Fund declined in
the first quarter as a result of
weakening in the Canadian dollar.
----------------------------------------------------------------------------
Deferred revenue 9.1 The continued high activity levels in
the Engineered Systems segment has led
to increased progress billings used by
the Fund to maintain a positive cash
position during the manufacturing
process.
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LIQUIDITY

The Fund's primary sources of liquidity and capital resources are:

- Cash generated from continuing operations;

- Bank financing and operating lines of credit; and

- The issuance and sale of debt and equity instruments.



Statement of Cash Flows:
Three months ended March 31,
(unaudited)(thousands)

--------------------------
2008 2007
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Cash, beginning of period $ 38,927 $ 22,344
Cash provided from / (used) in:

Operating activities 3,579 11,182
Investing activities 9,208 (10,077)
Financing activities (10,402) 10,544
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Cash, end of period $ 41,312 $ 33,993
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Operating Activities

For the three months ended March 31, 2008, cash generated from operating activities was $3.6 million, compared to $11.2 million during the same period of 2007. The decrease of $7.6 million was the result of increased working capital needs, primarily for accounts receivable as a result of the higher activity levels for the Engineered Systems segment and the associated increase in progress billings as compared to December 31, 2007. These increases were partially offset by reduced inventory levels.

Investing Activities

Cash generated from investing activities for the three months ended March 31, 2008 was $9.2 million as compared to cash used of $10.1 million for the same period in 2007. The change was the result of an $8.8 million reduction in expenditures on acquisitions, a $1.1 million reduction in net property, plant and equipment expenditures, and net proceeds on the sale of rental equipment of $7.7 million as compared to net expenditures of $4.6 million in the same period of 2007. The increased proceeds in 2008 for rental equipment was due to the collection of outstanding amounts owing at December 31, 2007 related to the number of unit sales in the fourth quarter of 2007.

Financing Activities

Cash used in financing activities was $10.4 million for the three months ended March 31, 2008 as compared to cash generated of $10.5 million for the same period of 2007. The change was primarily a result of the Fund not requiring additional borrowings from its credit facility during the first quarter of 2008. Distributions for the period were comparable to those in the first quarter of 2007.



Distributable Cash Flow
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Three months ended March 31, 2008 2007
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(unaudited)(thousands)
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Distributable cash flow(1) $ 2,849 $ 10,236
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(1) Distributable cash flow and distribution payout ratio are non-GAAP
earnings 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. Please refer to the complete description of
non-GAAP measures after the financial highlights table.


Distributable cash flow (1) for the first quarter of 2008 of $2.8 million decreased by $7.4 million from distributable cash flow (1) of $10.2 million in the same period of 2007 primarily due to changes in non-cash working capital. The decrease is due to reduced cash flow from operations in 2008 and consistent maintenance capital expenditures between 2007 and 2008. Distributable cash flow, before the changes in non-cash working capital was $16.7 million for the first quarter of 2008, $0.2 million lower than the $16.9 million during the same period of 2007.



Distribution Payout Ratio
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Three months ended March 31, 2008 2007
----------------------------------------------------------------------------
(Unaudited)
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Distribution payout ratio(1) 410% 114%
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(1) Distributable cash flow and distribution payout ratio are non-GAAP
earnings 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. Please refer to the complete description of
non-GAAP measures after the financial highlights table.


Distributions declared in the first quarter of 2008 represented 410% of distributable cash flow (1) in comparison to 114% for the same period of 2007. The increased payout ratio was the result of an additional $7.2 million increase in non-cash working capital in the first quarter of 2008 as compared to the same period of 2007. After removing the impact of changes in non-cash working capital, the payout ratio for the first quarter of 2008 was 70% as compared to 69% in the same period of 2007.



Net Capital Spending
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Three months ended March 31, 2008 2007
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(unaudited)(Thousands)
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Net capital spending $ (5,918) $ 7,458
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Capital proceeds exceeded expenditures in the first quarter of 2008 by $5.9 million as compared to net expenditures in the same period of 2007 of $7.5 million. The change was the result of minimal capital investment in the rental fleet during 2008 as a result of reduced customer demand and an increase in the proceeds from rental units that were purchased by customers.

CAPITAL RESOURCES

On April 30, 2008, the Fund had 44,017,739 income trust units and 2,678,260 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 2007, Enerflex declared quarterly distributions equal to $0.25 for a total of $1.00 per unit. In the first quarter of 2008, Enerflex declared a distribution of $0.25 per unit.

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, 2010 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-EBITDA2 ratio and a limitation on distributions to unit holders in certain circumstances. Enerflex was in full compliance with these covenants at March 31, 2008 and April 30, 2008.

On March 31, 2008, $100.6 million Notes were outstanding and approximately $39.5 million of the $150 million Bank Facility was drawn, comprised of $33.9 million in cash borrowings and $5.6 million of uninsured letters of credit or guarantees, leaving approximately $110.5 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.



Consolidated Balance Sheets March 31 December 31
(Unaudited) (Thousands) 2008 2007
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ASSETS
Current assets
Cash $ 41,312 $ 38,927
Assets held for trading 929 2,330
Accounts receivable 200,564 172,507
Inventory 119,010 124,736
Income taxes receivable 12,257 12,174
Future income taxes 5,215 5,249
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Total current assets 379,287 355,923

Property, plant and equipment 165,328 170,570
Investment in affiliates 2,972 2,858
Future income taxes 3,152 2,802
Deferred charges 237 261
Intangible assets 9,825 9,262
Goodwill 127,154 125,241
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$ 687,955 $ 666,917
---------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 95,646 $ 96,243
Liabilities held for trading 4,235 1,786
Accrued distributions payable 11,673 11,673
Deferred Revenue 46,038 36,925
Income taxes payable 1,147 1,117
Future income taxes 124 144
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Total current liabilities 158,863 147,888

Long-term debt 133,760 132,450
Other long-term liabilities 2,297 1,592
Future income taxes 7,478 7,492
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302,398 289,422
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Unitholders' equity
Unitholders' capital 205,617 205,588
Accumulated other comprehensive income (587) (7,822)
Contributed surplus 305 235
Retained earnings 180,222 179,494
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385,557 377,495
---------------------------
$ 687,955 $ 666,917


Three Months Ended
Consolidated Statements of Income March 31
(Unaudited) (Thousands, except unit amounts) 2008 2007
----------------------------------------------------------------------------
Revenue $ 232,621 $ 200,017
Cost of goods sold 185,877 157,746
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Gross margin 46,744 42,271
Selling, general and administrative expenses 31,985 30,273
Foreign currency losses/(gains) 988 (55)
Gain on sale of assets (1,325) (504)
Equity earnings from affiliates (119) (124)
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Income before interest and income taxes 15,215 12,681
Interest 1,528 2,301
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Income before income taxes 13,687 10,380
Income taxes 195 (3,315)
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Net income $ 13,492 $ 13,695
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Net income per unit - basic $ 0.29 $ 0.29
- diluted $ 0.29 $ 0.29
Weighted average number of units 46,693,033 46,677,408
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Three Months Ended
Consolidated Statements of Retained Earnings March 31
----------------------------
(Unaudited) (Thousands) 2008 2007
----------------------------------------------------------------------------
Retained earnings, beginning of period $ 179,494 $ 169,383
Adjustment to Retained Earnings (1,091) -
Net income 13,492 13,695
Distributions (11,673) (11,669)
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Retained earnings, end of period $ 180,222 $ 171,409
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Three Months Ended
Consolidated Statements of Comprehensive Income March 31
----------------------------
(Unaudited) (Thousands) 2008 2007
----------------------------------------------------------------------------
Net Income $ 13,492 $ 13,695
Other comprehensive income, net of tax
Foreign currency translation of
self-sustaining operations 7,235 821
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Comprehensive income $ 20,727 $ 14,516
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Consolidated Statements of Cash Flows ------------------------
(Unaudited) (Thousands) Three months ended March 31, 2008 2007
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Operating Activities
Net income $ 13,492 $ 13,695
Depreciation and amortization 5,790 4,940
Future income taxes (505) (246)
Gain on sale of assets (1,325) (504)
Equity earnings from affiliates (119) (124)
Unit option expense 70 44
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17,403 17,805
Changes in non-cash working capital and other (13,824) (6,623)
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Cash flow produced by operations 3,579 11,182
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Investing Activities
Acquisitions - (8,759)
Purchase of:
Rental equipment (770) (9,869)
Property, plant and equipment (1,383) (1,257)
Assets under construction (438) (2,241)
Proceeds on disposal of:
Rental equipment 8,486 5,305
Property, plant and equipment 23 604
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5,918 (16,217)
Changes in non-cash working capital and other 3,290 6,140
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Cash flow produced/(used) in investing 9,208 (10,077)
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Financing Activities
Advance of long-term debt - 20,518
Distribution reinvestment plan 29 -
Distributions (11,673) (11,669)
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(11,644) 8,849
Changes in non-cash working capital and other 1,242 1,695
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Cash flow produced/(used) in financing (10,402) 10,544
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Increase in cash 2,385 11,649
Cash, beginning of period 38,927 22,344
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Cash, end of period $ 41,312 $ 33,993
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Cash flows include the following elements:
Interest paid $ 155 $ 775
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Income taxes paid/(received) $ (85) $ 576
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SEGMENTED INFORMATION

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



Service Engineered Systems
Three Months ended March 31, 2008 2007 2008 2007
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Segment revenue $ 83,128 $ 83,629 $ 147,153 $ 115,725
Intersegment revenue (3,467) (2,912) (1,173) (5,994)
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External revenue 79,661 80,717 145,980 109,731
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Gross Margin 20,684 19,928 22,164 16,605
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Depreciation and amortization 1,774 1,052 1,480 1,275
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Income (loss) before interest
and income taxes 2,145 2,973 9,149 4,723
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-----------------------------------------------

Segment assets 167,602 153,048 250,434 198,788
Corporate
Goodwill 51,721 51,230 68,077 66,655
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Total Segment assets 219,323 204,278 318,511 265,443
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Capital expenditures 412 470 1,013 1,504
Corporate

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Proceeds on disposal of
assets $ 7 $ 33 $ 16 $ 559
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Production Services Consolidated
Three Months ended March 31, 2008 2007 2008 2007
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Segment revenue $ 6,982 $ 9,572 $ 237,263 $ 208,926
Intersegment revenue (2) (3) (4,642) (8,909)
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External revenue 6,980 9,569 232,621 200,017
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Gross Margin 3,896 5,738 46,744 42,271
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Depreciation and amortization 2,536 2,613 5,790 4,940
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Income (loss) before interest
and income taxes 3,921 4,985 15,215 12,681
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-----------------------------------------------

Segment assets 107,350 102,737 525,386 454,573
Corporate 35,415 50,178
Goodwill 7,356 7,356 127,154 125,241
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Total Segment assets 114,706 110,093 687,955 629,992
-----------------------------------------------
Capital expenditures 916 11,214 2,341 13,188
Corporate 250 179
2,591 13,367
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Proceeds on disposal of
assets $ 8,486 $ 5,317 $ 8,509 $ 5,909
$ 8,509 $ 5,909
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-----------------------------------------------


Revenue from foreign countries was:

Three Months Ended March 31, 2008 2007
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Australia $ 56,064 $ 25,799
China 4,689 -
Germany 888 1,204
Indonesia 8,138 3,115
Netherlands 13,833 24,826
Pakistan 5,224 2,192
United States 14,598 15,534
Other 6,765 10,347
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$ 110,199 $ 83,017
--------------------------

Included in these amounts are exports from
domestic operations of: $ 50,681 $ 25,086
--------------------------

Revenue is attributed to countries by the destination of the sale.



Contact Information

  • Enerflex Systems Income Fund
    D. James Harbilas
    Vice-President & Chief Financial Officer
    (403) 236-6857
    (403) 720-4385 (FAX)
    or
    Enerflex Systems Income Fund
    Berk Sumen
    Manager, Investor Relations & Communications
    (403) 720-4308
    (403) 720-4385 (FAX)