Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

November 06, 2006 23:59 ET

Enerflex Reports Third Quarter 2006 Financial Results

CALGARY--(CCNMatthews - Nov. 6) - Enerflex Systems Income Fund. (EFX:TSX.UN), a leading Canadian supplier of products and services to the global oil and gas production industry, today announced its financial and operating results for the three and nine months ended September 30, 2006.

During the third quarter of 2006, Enerflex generated net income of $4.7 million ($0.21 per common share) from revenue of $194.2 million, after the incurrence of $7.1 million in after-tax trust conversion costs which equated to $0.31 per common share. Removing the impact of these costs to more clearly reflect the normal activity of the Company, would result in net income per common share of $0.52 as compared to $0.44 in the same three month period in 2005. This represents an increase of 18% per common share before recognition of conversion related costs.

Revenue generated in the three months ended September 30, 2006 increased by 19% or $31.5 million as compared to the same period in 2005. Revenue improvements were most notable in the Production & Processing division which increased revenues by 87% or $25.3 million, primarily through the expansion of the Company's activities in AustralAsia, which added $17.5 million in revenue for the quarter.


For the three months ended
September 30
-------------------------------------------------------------------------
$ millions, except per share amounts 2006 2005 % change
(unaudited)
-------------------------------------------------------------------------
Revenue $ 194.2 $ 162.7 19%
Gross margin $ 44.6 $ 35.0 27%
Gross margin percent 23.0% 21.5%
Operating margin $ 9.2 $ 15.8 (42%)
Operating margin percent 4.7% 9.7%
Net income $ 4.7 $ 9.8 (52%)
Earnings per share (Basic) $ 0.21 $ 0.44 (52%)
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For the nine months ended
September 30
-------------------------------------------------------------------------
$ millions, except per share amounts 2006 2005 % change
(unaudited)
-------------------------------------------------------------------------
Revenue $ 601.1 $ 467.5 29%
Gross margin $ 136.3 $ 101.3 35%
Gross margin percent 22.7% 21.7%
Operating margin $ 50.5 $ 42.4 19%
Operating margin percent 8.4% 9.1%
Net income $ 30.1 $ 26.4 14%
Earnings per share (Basic) $ 1.33 $ 1.17 14%
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"We are pleased to announce strong third quarter results that reflect the continued execution of our strategy for growth," said Mr. J. Blair Goertzen, President and Chief Executive Officer. "Our Engineered Systems segment delivered a 66% increase in gross margin, the backlog in the Compression and Power division increased by roughly 75% and Production Services revenue increased by 20%, with 12% of revenue coming from our Variable Cost Production initiative."

Mr. Goertzen continued, "Subsequent to the end of September, our Variable Cost Production group has signed two additional letters of intent, and our acquisition of Onstream Compressor Rentals Inc. in October has positioned our Production Services division as a leading industry player in the rental of mobile, trailer mounted gas compression units".

The Government of Canada recently proposed tax changes for Income Trusts. Although exact details are not known at this time, the Minister of Finance did state there would be a transition period of four years for existing trusts. This four year tax exemption window will provide Enerflex with sufficient time to benefit from lower taxes and implement effective tax strategies. The Company continues to believe that distributions in the range of $0.25 to $0.26 per Trust Unit per fiscal quarter, or between $1.00 and $1.04 per Trust Unit annually, will be paid in 2007 as previously announced.


Quarterly Snapshot

- The Engineered Systems segment delivered a 66% increase in gross
margin on a 29% growth in revenues compared to the prior year period.
Earnings before interest and income taxes grew by 50% for this segment
when compared to the third quarter of 2005.

- Backlog as of September 30th, 2006 in the Compression and Power
division increased by roughly 75% when compared to the end of the
third quarter of 2005.

- Backlog in the Production and Processing division decreased by
approximately 56% as major international projects neared completion
and have yet to be replaced by new contracts. The value of active
proposals is at an all time high for this division.

- Production Services revenue increased by 20% over the prior year
period with 12% of revenue in the quarter coming from Variable Cost
Production (VCP)

- The Service segment made steady progress with a 7% increase in revenue
and a modest improvement in gross margins to 30.4% from 29.2% in the
prior year period.

- In October 2006, the Syntech division reached 2 million hours without
a lost time injury. This major achievement speaks volumes about the
dedication and commitment of our employees to the Company's core value
of maintaining a safe and productive work environment.


FORWARD-LOOKING STATEMENTS

This MD&A 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 Company and the Fund operates and statements of the Company's and 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 Company, the Fund and its general partner derived from their experience and perceptions. Forward-looking statements in this MD&A include, but are not limited to: statements with respect to future capital expenditures, including the amount and nature thereof; oil and gas prices and demand; other development trends of the oil and gas industry; business strategy; expansion and growth of the business and operations, including market share and position in the oilfield service markets; 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 Company, the Fund and its general partner. Such forward-looking statements are subject to important risks, uncertainties, and assumptions which are difficult to predict and which may affect the Company's, the Fund's and its general partner's operations, including, without limitations: 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 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 Company, the Fund or its 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 Company, its shareholders or the Fund and its unitholders, will derive there-from. Other than as required by law, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The oil and natural gas service sector in Canada, where Enerflex's operations are currently concentrated, has a distinct seasonal trend in activity levels which results from well-site access and drilling patterns being adjusted to take advantage of weather conditions. Generally, the Company's Engineered Systems segment experiences higher revenues in the fourth quarter of each year, its Service segment experiences higher revenues in the first quarter of each year and its Production Services segment experiences stable revenues throughout the year, impacted by the Company's capital investment decisions. Variations from this trend usually occur when hydrocarbon energy fundamentals are either improving or deteriorating. During the third quarter of 2006 the oil and natural gas service industry began to feel the implications of lower energy prices and, although this did not materially affect the Company's third quarter results from operations, the Company does anticipate a reduction in the demand for the Company's services and products in the Canadian market place. The Company believes that its international operations will not experience similar reductions in demand.

During the third quarter of 2006, Enerflex incurred significant costs associated with the trust conversion process and was required to accelerate the recognition of expenses related to various stock based compensation programs previously adopted by the Company which accounted for the majority of these charges. For the three months ended September 30, 2006 these costs amounted to $7.1 million net of income taxes, and totaled $0.31 per common share. Removing the impact of these costs from normal operating activities of the Company results in a net income per common share of $0.52 for the quarter as compared to $0.44 in the same three month period in 2005. This represents an increase of $0.08 per common share or 18% prior to the incurrence of conversion related costs.

During the third quarter of 2006, Enerflex generated net income of $4.7 million ($0.21 per common share) from revenue of $194.2 million, after the incurrence of $7.1 million in after-tax conversion costs totaling $0.31 per common share. This compares to net income of $0.44 per common share from revenue of $162.7 million during same period last year. Removing the costs of the conversion from the Company's normal activity, Enerflex generated net income of $0.52 per common share, an increase of 19% in revenue and 18% in net income per share, as compared to the same period in 2005. Revenue generated in the three months ended September 30, 2006 increased by $31.5 million or 19% as compared to the same period in 2005. Revenue improvements were most notable in the Production & Processing division which increased revenues by $25.3 million, primarily through the expansion of the Company's activities in AustralAsia, which added $17.5 million in revenue for the quarter. Other divisions also experienced increased revenue with the Electrical Instrumentation & Controls ("EI&C") division contributing an additional $2.4 million; the Mechanical Service division increasing revenue by $1.9 million; Production Services contributing $1.5 million in additional revenue; and the Compression and Power division increasing revenue by $0.3 million.

Gross margin for the three months ended September 30, 2006 was $44.6 million or 23.0% of revenue as compared to $35.0 million or 21.5% of revenue for the three months ended September 30, 2005, an increase of $9.6 million or 27%. The higher gross margin percentage was a result of price increases generated from the Company's Engineered Systems segment and higher field utilization rates in the Service segment, partially offset by higher input costs. Consolidated gross margin percent varies from quarter to quarter depending on the revenue mix from each of our segments.

Selling, general and administrative ("SG&A") expenses were $35.3 million, including $8.9 million in costs associated with the conversion process and the requirement to accelerate the recognition of expenses related to various stock based compensation programs previously adopted by the Company. Excluding these costs, SG&A for the period totaled $26.4 million or 13.6% of revenue during the three months ended September 30, 2006, compared with $22.2 million or 13.6% of revenue in the same period of 2005. Not including the conversion costs, SG&A increased by $4.2 million as compared to the same period in 2005, as a result of: $1.2 million resulting from the Company's expansion in AustralAsia; increases in compensation costs of $0.5 million; increased stock-based compensation expense of $0.1 million; increased bonus accruals of $0.3 million; increased marketing expenditures of $0.1 million and increases in audit costs of $0.2 million, partially offset by a reduction in Bill 198 compliance costs of $0.3 million.

Operating margin(1) assists the reader in understanding the net margin contributions made from the Company's core businesses after considering all SG&A expenses and the impact of the Company's foreign exchange hedging strategy. For the three months ended September 30, 2006, Enerflex produced an operating margin of $9.2 million, or 4.7% of revenue, as compared to an operating margin of $15.8 million, or 9.7% of revenue, for the same three month period in 2005. The decrease in operating margin(1) percentage for the quarter as compared to 2005 occurred as a result of the incurrence of $8.9 million in conversion related costs and other factors which contributed to the changes in gross margin percentage and SG&A expenses. The foreign exchange gain during the quarter resulted primarily from the Company's hedging strategy and changes in the value of the Euro and U.S. dollar as compared to the Canadian dollar.

Income before interest and income taxes totaled $9.8 million for the third quarter of 2006, as compared to $16.4 million for the same period in 2005, a decrease of $6.6 million. During the quarter, the Company experienced an effective income tax rate of 40.7% as compared to 35.2% for the same period in 2005. The incurrence of an effective tax rate higher than the statutory rate of 32.5% is a result of non-deductible stock based compensation expenses.

Segmented results for the three months ended September 30, 2006

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. Service is the Company's second largest business segment. It employs 44% of the staff, holds 32% of the total assets, generates 36% of the Company's revenue and produces 34% of Enerflex's income before interest and income taxes prior to one-time trust conversion costs. Key performance metrics include labour utilization, revenue, gross margin percent and income before interest and income taxes.

Enerflex, through various business units, is an authorized distributor for Waukesha engines and parts in Canada, Australia, Indonesia, Papua New Guinea, the Netherlands, Germany, Portugal, Poland and Spain. Mechanical Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to preserve the customer's natural gas production, with higher revenues in the first quarter. Outside of North America, the maintenance of power generation equipment is also a significant factor in the division's revenue base. EI&C services are provided in Canada through Syntech where revenues are more cyclical as they are generated from both maintenance spending and from infrastructure investment.


Three months ended
(Unaudited) (Thousands) September 30 2006 2005
-------------------------------------------------------------------------
Service Segment revenue $ 74,487 $ 70,802
Intersegment revenue (3,785) (4,445)
-------------------------------------------------------------------------
Revenue 70,702 66,357
-------------------------------------------------------------------------
Gross margin 21,523 19,368
-------------------------------------------------------------------------
EBITDA(2) 8,078 7,867
-------------------------------------------------------------------------
Income before interest and income taxes $ 7,007 $ 6,988

----------------------------
(1) Operating margin, operating margin percent and earnings before
interest, taxes, depreciation and amortization ("EBITDA") are non-GAAP
(Generally Accepted Accounting Principles) 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.

(2) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP (Generally Accepted Accounting Principles)
earnings 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.


Service revenue was $70.7 million for the three months ended September 30, 2006 and comprised 36% of consolidated revenue. This compares to $66.4 million and 41% of consolidated revenue during the same period in 2005. Mechanical Service generated 58% of the segment's revenue in the quarter and 59% in the same period of 2005. EI&C contributed 42% of the segment's revenue in the second quarter of 2006 and 41% in the same period of 2005. The increase in segment revenue of 7%, or $4.3 million, was a result of higher demand for parts and services, particularly in Canada. Gross margin for the segment totaled $21.5 million, or 30.4%, as compared to $19.4 million or 29.2% in the same period of 2005. The increase in gross margin percent was caused by higher parts pricing leverage and increased utilization rates. Income before interest and income taxes did not change during the quarter, as compared to the same period of 2005 principally due to higher selling, general and administrative expenses in the segment.

Mechanical Service

Mechanical Service revenue for the three months ended September 30, 2006 was $41.1 million, or 5% higher than 2005 revenue of $39.2 million. In Canada, which accounted for 71% of the division's revenue for the three months ended September 30, 2006 as compared to 66% during the same period of 2005, sales increased by 13% from 2005 as a result of higher parts sales and strong utilization rates. International revenue decreased by 11% in the quarter as compared to the same period in 2005. The decrease in international revenue resulted from lower engine and parts sales in Europe offset by higher engine and parts sales in Australia and Indonesia.

Gross margin for Mechanical Service increased by $0.5 million to $13.3 million in the third quarter of 2006 as compared to the same period in 2005. As a percentage of revenue, gross margin decreased from 32.5% to 32.3% due to lower engine and parts sales and increased input costs. These costs were offset by improved utilization and price increases. The division's income before interest and income taxes for the three months ended September 30, 2006 decreased by $0.5 million, as compared to the third quarter in 2005, as a result of increased selling, general and administrative costs.

Electrical, Instrumentation & Controls

The EI&C division continued to improve its gross margin as a percentage of revenue during the three months ended September 30, 2006. In the third quarter, EI&C generated revenue of $29.6 million, an increase of $2.4 million, as compared to $27.2 million in the third quarter of 2005. The EI&C business in Canada is highly competitive. Consequently, this division generally realizes lower margins than the Mechanical Service division and as such, it requires a focused and disciplined approach to the bidding and execution of the services provided. In 2006, the division focused the scope of contracts it would pursue to cost plus arrangements and on obtaining projects with higher margin potential. In addition, the division continued its efforts towards reducing the cost of maintaining the branch infrastructure requirements throughout Alberta, Saskatchewan and northeast British Columbia. Through this strategy and with the increase in demand for the division's services, its gross margin increased by $1.6 million or 25% in the third quarter of 2006 as compared to the same period in 2005. As a percentage of revenue, gross margin for the quarter was 27.8% as compared to 24.3% one year earlier. The division's earnings before interest and income taxes increased by $0.7 million for the three months ended September 30, 2006 as compared to the same period in 2005, principally as a direct result of improvements in gross margin.

Engineered Systems

The Engineered Systems business segment engineers, fabricates and assembles standard and custom-designed compression packages, production and processing equipment and facilities, and power generation systems. The key performance metrics for this business segment are market share, plant utilization, overhead application rates and gross margin as a percentage of revenue. Engineered Systems is the Company's largest business segment. It employs 55% of the staff, holds 44% of the total assets, generates 59% of the Company's revenue and produces 42% of Enerflex's income before interest and income taxes prior to one-time trust conversion costs.

Engineered Systems' business tends to have more volatility in revenue, gross margin and income before interest and income taxes than Enerflex's other business segments. Revenues are derived primarily from the investments made in natural gas infrastructure by producers.

During the third quarter the Company established an engineering and application design office in Kuala Lumpur, Malaysia, which presently employs 8 engineers, draftsman and support staff. The efforts of this engineering team will initially be directed towards the specific needs of the AustralAsia region but may be expanded to reduce the Company's reliance on engineers and professional and technical support staff in other regions where such skills are in high demand.


Three months ended
September 30
(Unaudited) (Thousands) 2006 2005
-------------------------------------------------------------------------
Engineered Systems segment revenue $ 129,379 $ 94,506
Intersegment revenue (15,067) (5,820)
-------------------------------------------------------------------------
Revenue 114,312 88,686
-------------------------------------------------------------------------
Gross margin 17,934 10,799
-------------------------------------------------------------------------
EBITDA(1) 8,988 6,398
-------------------------------------------------------------------------
Income before interest and income taxes $ 7,220 $ 4,829
-------------------------------------------------------------------------

----------------------------
(1) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP (Generally Accepted Accounting Principles)
earnings 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.


Engineered Systems' revenue totalled $114.3 million for the three months ended September 30, 2006 and comprised 59% of consolidated revenue. This compares to $88.7 million and 55% of consolidated revenue in the same period of 2005. Compression and Power generated 52% of the segment's revenue for the quarter as compared to 67% in the same period of 2005. Production and Processing contributed 48% of the segment's revenue for the three months ended September 30, 2006 as compared to 33% in the same period of 2005. The increase of $25.6 million, or 29%, in segment revenue was a result of the expansion in AustralAsia, significant progress made on the Company's Egyptian project, increased domestic revenue in the Production and Processing division, increased demand for the Company's high horsepower compression products, the introduction of new products and increases in the pricing of the segment's products. Revenue decreased as a result of lower demand in sub 600 horsepower compression and lower field revamp services. Gross margin for the segment totalled $17.9 million, or 15.7%, for the three months ended September 30, 2006, as compared to 12.2% in the same period of 2005. The increase in gross margin of $7.1 million, or 66%, was a result of the same factors that improved the segment's revenue. Income before interest and income taxes increased by $2.4 million, or 50%, to $7.2 million for the three months ended September 30, 2006.

Compression and Power

The Compression and Power division contributed revenue of $59.8 million for the three months ended September 30, 2006, an increase of $0.3 million, or 1% over the same quarter of 2005. International revenue in the division totalled $17.2 million for the period, as compared to $15.8 million in the same period of 2005. Expanded product ranges for both reciprocating and screw compression applications, increased customer demand for high horsepower compression equipment, increasing customer requirements and pricing improvements accounted for the increased revenue. These were offset by lower customer demand for sub 600 horsepower compression and for in-field compression refurbishment of legacy compression assets, both attributed to lower commodity prices for natural gas and the curtailment of CBM and shallow gas development programs in western Canada. While definitive market share data is difficult to obtain, Enerflex estimates that its Canadian large horsepower compressor package market share continued to increase in the high horsepower screw compression market segment, but was constant overall in other product segments. The improvement in pricing leverage is attributed to the high levels of customer demand, concerns over the lead times associated with major component parts and the introduction of expanded product offerings that better suit the customers' changing compression requirements. With lower commodity pricing and the existence of ample competition in the region, the Company anticipates the renewal of pricing pressure throughout the remainder of the year and well into 2007.

During the quarter, gross margin increased by $2.5 million, or 37% as compared to the third quarter of 2005, as a result of increased revenue, consistent plant utilization and price increases. These were partially offset by increased component, material and personnel related costs, higher overhead rates and costs associated with the design and production of new products and services. At present, Enerflex owns approximately 370,000 square feet of compression shop floor space in North America and during the quarter, management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 68% in the third quarter of 2006 and 2005. The consistent utilization of the facilities and increased overhead expenditures resulted in an overall net increase in overhead costs costs per hour of 12%, as compared to 2005. Compression and Power's income before interest and income taxes increased by 88% in the second quarter of 2006, as compared to the same period in 2005, as a result of the factors mentioned above.

Production and Processing

The Production and Processing division contributed revenue of $54.5 million for the three months ended September 30, 2006, an increase of $25.3 million, or 87% over the same period in 2005. While definitive market share data is difficult to obtain, Enerflex estimates that it has maintained its domestic market share, and has increased its market share in Australia. In each market segment competition remains strong. The increase in the division's revenues was generated $17.5 million in Australia, $7.1 million in other international markets and $0.7 million in domestic markets, due principally from the timing of orders. During the quarter, domestic demand continued to be strong though it is anticipated that lower commodity prices for natural gas could adversely affect future domestic order levels. Internationally, backlog is declining as existing orders for natural gas processing facilities are being completed and outstanding quotes for new orders have yet to be awarded.

During the quarter, gross margin also increased by $4.6 million, or 117% as compared to the third quarter of 2005 as a result of $2.3 million from the expansion in AustralAsia, the progress made on the Company's Egyptian project and higher Canadian demand for the division's products. At present, Enerflex owns approximately 107,000 square feet of production and processing shop floor space in Alberta, Canada, including its recently opened large vessel fabrication shop, and 62,000 square feet of leased shop floor space in Perth, Western Australia. During the quarter, management estimates that the average utilization rate, based on available labour hours, was 90% in the third quarter of 2006 as compared to 91% in the same period of 2005 in its Canadian based facilities and 89% in its Australian based facilities. The division's income before interest and income taxes increased by 13% during the quarter as compared to the same period in 2005, as a result of growth experience in AustralAsia and other factors as previously identified.

Engineered Systems Segment Bookings

During the quarter, Enerflex's order bookings in the Engineered Systems segment decreased by 56% as compared to bookings recorded in the same quarter of 2005. The Company presently believes that bookings during the period were reduced as many customers utilized this period to evaluate the implications of lower natural gas commodity prices. The Engineered Systems segment's order backlog at September 30, 2006 was approximately 15% below the segment's order backlog at September 30, 2005, and 14% below the order backlog at December 31, 2005. This is primarily a result of the completion of international projects during the quarter. At present, the Company has significant quotes outstanding that have yet to be awarded.

Production Services

The Production Services business segment provides a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. As of September 30, 2006, Production Services' rental fleet was comprised of approximately 370 compression units, representing 106,000 horsepower, and 155 processing units. This compared with 360 compression units, or 100,000 horsepower, and 127 processing units as at September 30, 2005. The compression fleet averaged 365 units and 104,000 horsepower for the three months ended September 30, 2006. The key performance metrics in this business are fleet size, utilization rates and rental rates. The Production Services segment employs 1% of Enerflex's employees, holds 19% of the total assets, generates 4% of the Company's revenue and produces 24% of Enerflex's income before interest and income taxes prior to one-time trust conversion costs.

The Company's rental fleet is located principally in western Canada. Expansion in international markets is presently being continued on a selective basis to minimize the risk from these new markets. As of September 30, 2006, Enerflex's compression rental fleet included 13 units located in the United States and 6 units in Australia.


Three months ended
September 30
(Unaudited) (Thousands) 2006 2005
-------------------------------------------------------------------------
Production Service segment revenue $ 9,199 $ 7,700
Intersegment revenue (3) (16)
-------------------------------------------------------------------------
Revenue 9,196 7,684
-------------------------------------------------------------------------
Gross margin 5,143 4,826
-------------------------------------------------------------------------
EBITDA(1) 6,743 6,478
-------------------------------------------------------------------------
Income before interest and income taxes 4,528 4,568
-------------------------------------------------------------------------
Capital expenditures, net of proceeds on disposal $ 12,964 $ 3,036
-------------------------------------------------------------------------

----------------------------
(1) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP (Generally Accepted Accounting Principles)
earnings 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.


Revenue for the three months ended September 30, 2006 increased by $1.5 million, or 20%, to $9.2 million, over the same period in 2005. While the segment owns and rents compression, power and processing equipment, the main driver for its revenue growth is the rental of compression equipment. During the quarter, the segment's revenue was generated 79% by compression, 9% by power and production and processing equipment and 12% from Variable Cost Production ("VCP"). During the quarter VCP generated revenue of $1.1 million from the deployment of approximately 1,500 horsepower of compression equipment in June of 2006 which accounted for the majority of the increased revenue generated in the segment.

The segment experienced compression rental utilization rates, based on average capital deployed, of 74% during the quarter compared to 78% in the same period in 2005. Power and processing fleet utilization rates, based on average capital deployed, decreased from 70% to 53% in the third quarter of 2006. The reduction in compression utilization rates was primarily attributed to lower customer demand for rentals and compression rental units acquired at or subsequent to the end of the initial rental term by customers. With higher than anticipated energy prices resulting in higher cash flows and working capital in the hands of the segment's customers, customers tended to acquire new compression assets, as exhibited through the increase in revenues generated by the Compression and Power division, and to purchase compression assets previously under rent. With lower commodity prices for natural gas it is anticipated that this trend will reverse in the upcoming months.

During the quarter, Production Services sold 5 compression units and 13 power and process equipment units from its fleet, for gross proceeds of $2.7 million, recording a gain on sale of $0.6 million. This compares to 5 compression units and 12 power and process equipment units, for gross proceeds of $2.9 million and a gain on sale of $0.5 million in the third quarter of 2005. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. In order to facilitate the expansion of Enerflex's rental fleet, the Company has altered the buyout provisions of new high horsepower rental contracts in a manner which discourages renters from acquiring the rental assets subsequent to the end of the contract expiry date. To satisfy the demand for rental equipment, Enerflex added 14 compression units and 22 power and processing units to its fleet in the quarter, for an investment of $16.2 million.

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 fleet unless it has rental contracts. Growth in the rental fleet is expected to be the largest internal capital investment opportunity for the Company in 2006. In the third quarter, Production Services expanded the scope of the process fleet by adding a natural gas refrigeration unit.

Variable Cost Production is an initiative which involves Enerflex owning, operating, maintaining and optimizing field equipment on behalf of producers for a variable fee based on throughput and uptime. This initiative provides Enerflex the opportunity to combine the strength of its balance sheet with its expertise in compression optimization in order to improve the returns generated from existing compression assets for both its customers and its shareholders. Enerflex is pleased with the initial level of interest in this new offering, however, estimates that it is unlikely to deploy the originally estimated $10.0 million in capital towards this endeavor over the remainder of the year. As of September, 2006 the Company had deployed approximately $2.0 million towards this initiative. Subsequent to the end of the quarter the Company entered into two letters of intent to deploy an additional $2.0 million in capital.

Nine Months Ended September 30, 2006

Segmented results for the nine months ended September 30, 2006

Enerflex generated revenue of $601.1 million and net income of $30.1 million ($1.33 per common share) for the nine months ended September 30, 2006 after the incurrence of $7.4 million in after-tax conversion costs totaling $0.32 per common share. This represents an increase in net income of $3.7 million ($0.16 per common share) or 14% as compared to the same period in 2005. Removing the impact of the costs associated with the conversion to a mutual fund trust, Enerflex would have generated net income of $37.5 million ($1.64 per common share), an increase of 42% over 2005. Revenue generated in the first nine months increased by $133.6 million or 29% as compared to the nine month period ended September 30, 2005. Revenue improvements were most notable in the Production and Processing and Compression and Power divisions. Production and Processing revenue increased by $83.9 million primarily due to the Company's expansion in AustralAsia, which added $65.0 million, strong domestic activity and the progress made on a contract for facilities in Egypt. Compression and Power revenue increased by $26.8 million, as a result of increased customer demand and new product lines. During the first three quarters of 2006, Enerflex's other divisions also generated revenue in excess of the same period of 2005 with the Mechanical Service division increasing revenue by $10.5 million; the Electrical Instrumentation & Controls ("EI&C") division adding $10.4 million; and the Production Services division providing an additional $2.1 million.

Gross margin for the nine months ended September 30, 2006 was $136.3 million or 22.7% of revenue as compared to $101.3 million or 21.7% of revenue for the nine months ended September 30, 2005, an increase of $35.0 million. The higher gross margin percentage was a result of price increases and increased facility utilization in the Company's Engineered Systems segment and higher activity levels in the Service segment, partially offset by higher input costs. Consolidated gross margin varies from quarter to quarter depending on the revenue mix from each of our segments. During the first nine months of 2006 our lower margined Engineered Systems segment contributed the highest portion of revenue and while they posted significant gross margin gains, the consolidated average gross margin percentage of revenue is reduced by this revenue shift.

Selling, general and administrative expenses were $87.3 million or 14.5% of revenue during the nine months ended September 30, 2006, and included $9.2 million in conversion related expenditures as previously outlined. This compares with $61.9 million or 13.2% of revenue in the same period of 2005. The $25.4 million increase in SG&A expenses during the first nine months, as compared to the same period in 2005, is a result of: the one-time trust conversion costs of $9.2 million; the expansion into AustralAsia of $7.0 million; increases in compensation costs of $3.3 million; increased intangible asset amortization of $0.3 million; increased stock-based compensation expense of $1.1 million; increased bonus accruals of $0.9 million; legal fees and consulting expenses of $1.7 million; increased marketing expenditures of $0.7 million; increased information technology costs of $0.2 million and increases in audit costs $0.5 million, partially offset by a reduction in Bill 198 compliance costs of $0.8 million.

Operating margin(1) assists the reader in understanding the net margin contributions made from the Company's core businesses after considering all SG&A expenses and the impact of the Company's foreign exchange hedging strategy. For the nine months ended September 30, 2006, Enerflex produced an operating margin of $50.5 million, or 8.4% of revenue, as compared to an operating margin of $42.4 million, or 9.1% of revenue, for the same nine month period in 2005. The decrease in operating margin percentage(1) for the first nine months of 2006, as compared to 2005, occurred principally as a result of the conversion costs of $9.2 million and the same factors contributing to the increased gross margin percentage and increased SG&A expenses. The foreign exchange gain during the first nine month period ended September 30, 2006 resulted primarily from the Company's hedging strategy and changes in the value of the Euro and U.S. dollar as compared to the Canadian dollar during the period.

Income before interest and income taxes totaled $53.3 million for the first three quarters of 2006, as compared to $44.4 million for the same period in 2005, an increase of $8.9 million, or 20%. During the nine months of 2006, the Company experienced an effective income tax rate of 37.6% as compared to 36.2% for the same period in 2005. This increase is a result of non-deductible stock based compensation expenditures and the Company not recognizing the benefit of losses generated in certain foreign jurisdictions.



SEGMENTED RESULTS

Service

Nine months ended
September 30
(Unaudited) (Thousands) 2006 2005
-------------------------------------------------------------------------
Service segment revenue $ 229,023 $ 209,161
Intersegment revenue (10,591) (11,619)
-------------------------------------------------------------------------
Revenue 218,432 197,542
-------------------------------------------------------------------------
Gross margin 63,213 54,381
-------------------------------------------------------------------------
EBITDA(2) 23,956 19,208
-------------------------------------------------------------------------
Income before interest and income taxes $ 21,214 $ 16,554

----------------------------
(1) Operating margin, operating margin percent and earnings before
interest, taxes, depreciation and amortization ("EBITDA") are non-GAAP
(Generally Accepted Accounting Principles) 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.

(2) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP (Generally Accepted Accounting Principles)
earnings 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.


Service revenue was $218.4 million for the nine months ended September 30, 2006 and comprised 36% of consolidated revenue and 34% of consolidated income before interest and income taxes prior to one-time trust conversion costs. This compares to $197.5 million and 42% of consolidated revenue and 37% of consolidated income before interest and income taxes during the same period in 2005. Mechanical Service generated 59% of the segment's revenue in the first nine months of both 2006 and 2005. EI&C contributed 41% of the segment's revenue in the first three quarters of both 2006 and 2005. The increase in segment revenue of 11%, or $20.9 million, was a result of higher demand for parts and services, improved inventory and supply chain management and strong oilfield service activity in Canada. Gross margin for the segment totaled $63.2 million, or 28.9%, as compared to $54.4 million or 27.5% in 2005. The increase in gross margin percent was caused by higher demand for the Company's services and increased utilization rates. In general, pricing increases were offset by increases in input costs, such as parts, materials, personnel costs and the costs associated with responding to supply chain management issues that arise in periods of high demand for these products. Income before interest and income taxes in the first nine months of 2006, as compared to the same period of 2005, increased by $4.7 million, or 28%, to $21.2 million as a result of these same factors. The improvement in income before interest and income taxes of the segment from 8.4% of revenue for the nine months ended September 30, 2005 to 9.7% of revenue in 2006 was due to the above factors, better leveraging of existing branch costs and a focus on improving execution of services.

Mechanical Service

Mechanical Service revenue for the first nine months of 2006 was $127.8 million, or 9% higher than 2005 revenue of $117.3 million. In Canada, which accounted for 70% of the division's revenue in 2006 as compared to 67% in 2005, sales increased by 13% from 2005 as a result of strong utilization rates, an expansion of product offerings to include additional suppliers of equipment, increased efficiency in exchange parts due to the centralization of a rebuild facility in 2004, increased customer demand and modest price increases for parts and services. International revenue also increased by 1% in the first nine months of 2006 over the same period in 2005. The increase in international revenue resulted from higher utilization rates, new maintenance contracts in Australia and increased engine sales in Indonesia offset by lower parts and engine sales in Europe.

Gross margins for Mechanical Service increased by $3.2 million, or 9%, in the first three quarters of 2006 as compared to the same period in 2005. As a percentage of revenue, the gross margin was constant at 31.0%. The division's income before interest and income taxes for the first nine months of 2006 increased by $0.4 million, or 3%, as compared to the first three quarters in 2005, as it leveraged its existing fixed branch and administrative services to meet the expanding demands of its customers.

Electrical, Instrumentation & Controls

The EI&C division continued to improve its gross margin as a percentage of revenue for the first nine months of 2006. During the first three quarters of 2006, EI&C generated revenue of $90.6 million, an increase of $10.4 million, or 13%, as compared to $80.2 million in the first nine months of 2005. The division's gross margin increased by $5.6 million or 31% in the first nine months of 2006 as compared to the same period in 2005. As a percentage of revenue, gross margin for the period was 26.0% as compared to 22.4% one year earlier. The division's earnings before interest and income taxes increased by $4.3 million for the first nine months of 2006 as compared to the same period in 2005. The improved performance of this division is a consequence of increased business activity, improved pricing and an improved focus on project management and execution.

Engineered Systems


Nine months ended
September 30
(Unaudited) (Thousands) 2006 2005
-------------------------------------------------------------------------
Engineered Systems segment revenue $ 389,364 $ 263,869
Intersegment revenue (32,352) (17,529)
-------------------------------------------------------------------------
Revenue 357,012 246,340
-------------------------------------------------------------------------
Gross margin 57,563 31,648
-------------------------------------------------------------------------
EBITDA(1) 31,708 16,675
-------------------------------------------------------------------------
Income before interest and income taxes $ 26,540 $ 12,983
-------------------------------------------------------------------------

----------------------------
(1) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP (Generally Accepted Accounting Principles)
earnings 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.


Engineered Systems revenue has benefited from the Company's expansion in AustralAsia, strong markets and customer demand, and a focus on improving its profitability. Engineered Systems' revenue totaled $357.0 million for the first nine months of 2006 and comprised 59% of consolidated revenue and 42% of consolidated income before interest and income taxes prior to one-time trust conversion costs. This compares to $246.3 million, 53% of consolidated revenue and 29% of consolidated income before interest and income taxes in the first nine months of 2005. Compression and Power generated 56% of the segment's revenue for the first three quarters of 2006 as compared to 70% in the same period of 2005. Production and Processing contributed 44% of the segment's revenue for the first nine months of 2006 as compared to 30% in the same period of 2005. The increase of $110.7 million, or 45%, in segment revenue was a result of the AustralAsia expansion, increased domestic revenue in the Production and Processing division, the continuation of the Production and Processing division's Egyptian project, increased demand for the Company's high horsepower compression products, the introduction of new products and increases in the pricing of the segment's products. Gross margin for the segment totaled $57.6 million, or 16.1%, for the nine months ended September 30, 2006, as compared to 12.8% in the same period of 2005. The increase in gross margin of $25.9 million, or 82%, was a result of the same factors that improved the segment's revenue. Income before interest and income taxes increased by $13.6 million, or 104%, to $26.5 million for the nine months ended September 30, 2006 as a result of the above-mentioned factors.

Compression and Power

The Compression and Power division contributed revenue of $200.3 million for the nine months ended September 30, 2006, an increase of $26.8 million, or 15% over the same period of 2005. International revenue in the division totaled $39.5 million for the first nine months of 2006, as compared to $39.8 million in the first three quarters of 2005. The increase in divisional revenue during the period is a result of improvements in pricing leverage, high levels of customer demand, concerns over the lead times associated with major component parts and the introduction of expanded product offerings that better suit the customers' changing compression requirements.

During the first nine months of 2006, gross margin increased by $11.2 million, or 52% as compared to the first three quarters of 2005, as a result of increased revenue, improved plant utilization and price increases. These were partially offset by increased component, material and personnel related costs, higher overhead rates and costs associated with the design and production of new products and services. At present, Enerflex owns approximately 370,000 square feet of compression shop floor space in North America and during the first nine months of 2006, management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 73% as compared to 65% in 2005. Increases in the utilization of the facilities, due to increased customer demand, were offset by increases in overhead costs. As such, overhead costs per hour increased by 2%, as compared to 2005. Compression and Power's income before interest and income taxes increased by $9.5 million, or 123%, in the first nine months of 2006 as compared to the same period in 2005 as a result of the factors mentioned above.

Production and Processing

The Production and Processing division contributed revenue of $156.7 million for the nine months ended September 30, 2006, an increase of $83.9 million, or 115% over the same period in 2005. The increase in the division's revenues was generated $65.0 million in Australia, $17.5 million in other international markets and $1.3 million from domestic markets.

During the first nine months of 2006, gross margin also increased by $14.7 million, or 146% as compared to the first three quarters of 2005 as a result of $10.8 million from the expansion in AustralAsia and higher Canadian demand for the division's products. At present, Enerflex owns approximately 107,000 square feet of production and processing shop floor space in Alberta, Canada and 62,000 square feet of leased shop floor space in Perth, Western Australia. During the first nine months of 2006, management estimates that the average utilization rate, based on available labour hours, was 91% as compared to 93% in 2005 in its Canadian based facilities and 89% in its Australian based facilities. The division's income before interest and income taxes increased by $4.0 million, or 77%, during the first nine months of 2006 as compared to the same period in 2005.

Engineered Systems Segment Bookings

During the first nine months of 2006, Enerflex's order bookings decreased by approximately 3% as compared to bookings recorded in the first three quarters of 2005.

Production Services


-------------------------------------------------------------------------
Nine months ended
September 30
(Unaudited) (Thousands) 2006 2005
-------------------------------------------------------------------------
Production Services segment revenue $ 25,693 $ 23,702
-------------------------------------------------------------------------
Intersegment revenue (17) (80)
-------------------------------------------------------------------------
Revenue 25,676 23,622
-------------------------------------------------------------------------
Gross margin 15,509 15,242
-------------------------------------------------------------------------
EBITDA(1) 21,107 20,372
-------------------------------------------------------------------------
Income before interest and income taxes 14,751 14,905
-------------------------------------------------------------------------
Capital expenditures, net of proceeds on disposal $ 13,395 $ 2,746
-------------------------------------------------------------------------

----------------------------
(1) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP (Generally Accepted Accounting Principles)
earnings 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.


Revenue for the first nine months of 2006 increased by 2.1 million, or 9%, to $25.7 million, over the same period in 2005. While the segment owns and rents compression, power and processing equipment, the main driver for its revenue growth is the rental of compression equipment. During the period, the segment's revenue was generated 85% by compression, 10% by power and processing equipment and 5% from VCP. The revenue increase experienced in the first nine months of 2006 over 2005 was a primarily a result of VCP revenue of $1.2 million, and increased utilization rates in the power and processing fleet, partially offset by the impact of lower utilization rates in the compression fleet. The segment experienced compression rental utilization rates, based on average capital deployed, of 75% for the nine months ended September 30, 2006 as compared to 81% in 2005. Power and processing fleet utilization rates, based on average capital deployed, during the period increased from 65% to 67% in 2006. Gross Margin for the first nine months of 2006 totalled $15.5 million, 60.4% of revenue, as compared to $15.2 million, 64.5% of revenue. The lower gross margin as a percentage of revenue was primarily due to the reduction in the compression fleet utilization rate and a general increase in input costs such as maintenance. Gains on the sale of rental equipment and additional costs incurred with respect to the initiation of VCP and flue gas product lines also impacted income before interest and income taxes for the period as compared with the first nine months of 2005.

During the first nine months of 2006, Production Services sold 29 compression units and 41 power and process equipment units from its fleet, for gross proceeds of $15.5 million generating a gain on sale of $2.8 million. This compares to 30 compression units and 45 power and process equipment units, for gross proceeds of $12.8 million and a gain on sale of $2.0 million in the first nine months of 2005. To satisfy the existing demand for rental compression, Enerflex added 30 compression units and 44 power and processing units to its fleet in the first nine months of 2006, for an investment of $28.7 million.

Capital spending for the nine months ended September 30, 2006 totaled $28.8 million and included $5.3 million of capital related to the Company's flue gas compression product line. At present, Enerflex has four units available for under-balanced drilling applications. The units presently operate under an exclusive contract to an international drilling service company. Proceeds resulting from the exercise of buy-out options on rented units totaled $15.5 million.

Financial Condition and Liquidity

For the first nine months of 2006, Enerflex reduced its cash balances by $10.0 million, compared with $0.5 million in 2005. This reduction occurred as the Company incurred additions to property, plant and equipment of $15.0 million, incurred $28.7 million in purchases of rental assets, concluded the purchase of HPS Group in Australia by funding the contingent purchase payment of $4.1 million, paid $7.9 million in dividends, repurchased shares for $1.1 million and increased working capital by $48.5 million. These activities were offset by funds generated from operations before changes in non-cash working capital of $43.1 million, proceeds on the sale of rental assets of $15.5 million, proceeds on the sale of property, plant and equipment of $0.8 million, increased drawings on its credit facility of $20.7 million and the receipt of proceeds on the exercise of stock options of $15.4 million.

During 2006, non-cash working capital from operations increased by $48.5 million as a result of a $32.6 million increase in accounts receivable, a $15.6 million increase in inventory and $5.5 million in other working capital items, offset by a $5.2 million increase in accounts payable. The increase in accounts receivable reflects the increase in revenue in 2006. Inventories increased in order to ensure the Company had access to sufficient quantities of major components and parts for items that are continuing to experience long re-order lead times. With the recent changes in the commodity price for natural gas and the anticipated reductions in the Canadian energy sector, the Company will closely monitor its working capital investment in order to generate additional cash reserves, reduce its financial risk and maximize its ability to meet the needs of its customers. As at September 30, 2006 the Company maintained an investment in working capital of $141.1 million comprised principally of accounts receivable and inventories offset by accounts payable and accrued liabilities.

INDUSTRY OUTLOOK

The current economics for the oil and gas industry and trends within Enerflex's markets continue to provide growth opportunities. Though there is a general expectation that oil and natural gas exploration and development activities in western Canada will be lower than previously anticipated in the fourth quarter of 2006 and throughout 2007, this is not the case in other areas of the world. As such, a key to Enerflex's future success will be the execution of its strategy to expand its operations in three international regions and maintain sufficient utilization levels in its existing facilities by efficiently executing on its existing backlog of orders and supplementing domestic demand for equipment with international opportunities for turn-key projects and product sales.

Domestically, the lower activity levels are expected to have a greater impact on natural gas investments related to shallow gas and CBM activity. Should this trend develop Enerflex's domestic sales order activity in its Engineered Systems segment and the utilization rates of its low horsepower compression rental fleet could be adversely affected. This trend could also assist the growth of the mid and high horsepower rental fleet and provide marketing opportunities for the Company's VCP product line. The Service segment would undoubtedly become more competitive but due to the close relationship, this business segment's activity levels have with oil and natural gas production, it may not experience the same downward pressure on revenue.


- Customers in domestic markets are becoming more receptive to
outsourcing their production infrastructure on a fee for service
basis. A new generation of natural gas producer focused on a shorter
business cycle with shorter-life reserves and the growth of income
trusts, which place a greater priority on cash flow, and the drive to
optimize legacy gas production facilities in western Canada, have
heightened this interest.

- The oil and natural gas sector continues to become more global. While
oil and gas production in North America is maturing, the industry
outside North America is largely in its infancy and international
markets therefore present a growth opportunity. The rapid
industrialization of China and the Indian subcontinent is driving
worldwide demand for natural gas. This demand, combined with
development of liquefied natural gas, is expanding the market for
production and processing infrastructure. International customers are
focused on their core business of exploration and production, and want
a fully integrated service provider for engineering, fabrication,
transportation, construction, commissioning and maintenance.

- There is a growing shortage of human capital in the industry. This is
a serious long-term issue that results primarily from demographics and
the increasing demand for skilled employees. As a result, customers
are placing greater reliance on energy service companies to deliver
these skills on an 'as and when needed basis' rather than the
historical approach of maintaining these capabilities in house. While
this skills shortage represents an opportunity it has also evolved
into Enerflex's greatest challenge.


While Enerflex continues to build its international presence and develop its new product lines to take advantage of the trends identified above, the Company's fortunes will continue to be tied to natural gas capital and operating expenditures in western Canada. Approximately 21,000 wells are expected to be completed in 2007, of which approximately 70% will be natural gas wells. Industry analysts forecast that capital expenditures on plant and equipment will remain strong, though they believe the focus of such expenditures will be weighted towards the development of Alberta's oilsands, oil development and conventional natural gas with reductions in spending in shallow gas and CBM. Many forecasters continue to expect that, in the absence of significant discoveries, North American conventional natural gas production will decrease. Sustaining or increasing production volumes is progressively more dependent upon the development of tight gas and coal-bed methane, and as such any reduction in spending in these areas will eventually reverse.

Management also believes that the availability of major components used in the fabrication of the Company's products and access to skilled personnel to meet the technical and trade requirements for designing and assembling these products will continue to affect the industry on a worldwide basis.

Subsequent Event

On October 31, 2006 the Finance Minister of the Government of Canada announced proposed changes to the Income Tax Act of Canada which, if enacted, could result in the imposition of a form of income tax on Income Trusts and Limited Partnerships. Though exact details are not known at this time, the Minister did state there would be a transition period of four years for existing trusts. As such, it is not believed that this announcement will impact Enerflex during the next four years. The Company will monitor this situation closely and implement appropriate strategies to minimize the effect of such actions should legislation develop.

Conference Call and Webcast Details

Enerflex Systems Income Fund. (TSX:EFX.UN) will host a conference call for analysts and investors on Tuesday, November 7, 2006 at 9:00 a.m. MST (11:00 a.m. EST) to discuss the Company's 2006 third quarter results which will be released on Monday, November 6, 2006. The call will be hosted by Blair Goertzen, Enerflex's President and Chief Executive Officer.

If you wish to participate in this conference call, please call 1.866.250.4910 or 1.416.644.3416. 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 1.877.289.8525 or 1.416.640.1917 (passcode: 21206476 followed by the number sign) approximately one hour after the completion of the call. The recording will be available until the end of day Tuesday, November 14, 2006.

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 November 7, 2006 at 9:00 a.m. MST (11:00 a.m. EST). Approximately one hour after the call, a recording of the event will be available on our internet 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, Malaysia and Poland. Enerflex's common shares trade on the Toronto Stock Exchange under the symbol "EFX.UN".





ENERFLEX SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS

September 30 December 31
(Unaudited ) (Thousands) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 6,367 $ 16,350
Accounts receivable 196,478 163,899
Inventory 100,009 84,378
Future income taxes 5,685 3,983
-------------------------------------------------------------------------
Total current assets 308,539 268,610

Rental equipment 98,823 90,348
Property, plant and equipment 67,694 65,585
Assets held for resale 5,802 -
Assets under construction 2,948 3,374
Investment in affiliates 2,784 2,797
Future income taxes 4,990 4,868
Intangible assets 7,400 7,355
Goodwill 123,794 121,378
-------------------------------------------------------------------------
$ 622,774 $ 564,315
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Operating bank loans $ 56,999 $ 43,310
Accounts payable and accrued liabilities 95,729 90,561
Accrued dividends payable 2,842 2,260
Income taxes payable 7,077 7,612
Current portion of long-term debt 4,756 12,717
-------------------------------------------------------------------------
Total current liabilities 167,403 156,460

Long-term debt 76,587 63,587
Other long-term liabilities 398 1,969
Future income taxes 10,207 13,042
-------------------------------------------------------------------------
254,595 235,058

Shareholders' equity
Share capital 203,003 184,151
Cumulative translation adjustment (7,672) (6,250)
Contributed surplus 2,451 1,739
Retained earnings 170,397 149,617
-------------------------------------------------------------------------
368,179 329,257
-------------------------------------------------------------------------
$ 622,774 $ 564,315
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.



ENERFLEX SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended Nine Months Ended
(Unaudited)(Thousands, September 30 September 30
except share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------

Revenue $ 194,210 $ 162,727 $ 601,120 $ 467,504
Cost of goods sold 149,610 127,734 464,835 366,233
-------------------------------------------------------------------------
Gross margin 44,600 34,993 136,285 101,271
Selling, general and
administrative
expenses 35,295 22,153 87,293 61,866
Foreign currency
(gains) and losses (177) (2,987) (1,502) (2,987)
Gain on sale of assets (609) (558) (2,790) (2,050)
Equity earnings from
affiliates 263 - 13 -
-------------------------------------------------------------------------
Income before
interest and income
taxes 9,828 16,385 53,271 44,442
Interest 1,865 1,223 5,062 3,093
-------------------------------------------------------------------------
Income before
income taxes 7,963 15,162 48,209 41,349
Income taxes 3,244 5,330 18,113 14,971
-------------------------------------------------------------------------
Net income $ 4,719 $ 9,832 $ 30,096 $ 26,378
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per
common share -
basic $ 0.21 $ 0.44 $ 1.33 $ 1.17
- diluted $ 0.21 $ 0.43 $ 1.32 $ 1.17
Weighted average
number of common
shares 22,728,472 22,591,951 22,692,072 22,490,878
-------------------------------------------------------------------------
-------------------------------------------------------------------------



CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)

Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited)(Thousands) 2006 2005 2006 2005
-------------------------------------------------------------------------

Retained earnings,
beginning of period $ 168,763 $ 130,592 $ 149,617 $ 118,540
Normal course issuer
bid (243) - (803) -
Net income 4,719 9,832 30,096 26,378
Dividends (2,842) (2,261) (8,513) (6,755)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 170,397 $ 138,163 $ 170,397 $ 138,163
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.



ENERFLEX SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited)(Thousands) 2006 2005 2006 2005
-------------------------------------------------------------------------

Operating Activities
Net income $ 4,719 $ 9,832 $ 30,096 $ 26,378
Depreciation and
amortization 5,054 4,358 14,266 11,813
Future income taxes (1,127) 37 (2,965) (3,510)
Gain on sale of
assets (609) (558) (2,790) (2,050)
Equity earnings from
affiliates 263 - 13 -
Stock option
expense 3,764 231 4,475 598
-------------------------------------------------------------------------
12,064 13,900 43,095 33,229
Changes in non-
cash working
capital and other (26,524) (2,903) (39,528) (14,581)
-------------------------------------------------------------------------
Cash flow from
operations (14,460) 10,997 3,567 18,648
-------------------------------------------------------------------------

Investing Activities
Acquisition of HPS
Group Limited (4,138) (16,543) (4,138) (16,543)
Purchase of:
Rental equipment (16,241) (5,913) (28,742) (15,561)
Property, plant
and equipment (1,862) (1,219) (13,181) (3,991)
Assets under
construction - (1,829) (1,807) (3,176)
Proceeds on disposal of:
Rental equipment 2,659 2,893 15,451 12,816
Property, plant
and equipment 89 93 826 246

-------------------------------------------------------------------------
(19,493) (22,518) (31,591) (26,209)
Changes in non-cash
working capital
and other (7,041) (2,482) (7,428) (2,397)
-------------------------------------------------------------------------
(26,534) (25,000) (39,019) (28,606)
-------------------------------------------------------------------------

Financing Activities
Increase (decrease) in
operating bank loans 14,884 (2,617) 13,690 (8,013)
Advance of long-term
debt 11,911 24,691 6,990 23,270
Stock options
exercised 13,587 263 15,407 2,427
Normal course issuer
bid (346) - (1,122) -
Dividends (2,840) (2,247) (7,932) (6,728)
-------------------------------------------------------------------------
37,196 20,090 27,033 10,956
Changes in non-cash
working capital
and other (84) (1,590) (1,564) (1,449)
-------------------------------------------------------------------------
37,112 18,500 25,469 9,507
-------------------------------------------------------------------------
Increase (decrease)
in cash (3,882) 4,497 (9,983) (451)
Cash, beginning
of period 10,249 7,892 16,350 12,840
-------------------------------------------------------------------------
Cash, end of period $ 6,367 $ 12,389 $ 6,367 $ 12,389
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.

Note 1. SEGMENTED INFORMATION

The Company has three reportable segments: Service, Engineered Systems
(formerly Fabrication) and Production Services (formerly Leasing). 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.


Three months ended September 30

Service ($) Engineered Systems ($)
formerly known as
'Fabrication'
2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 74,487 $ 70,802 $ 129,379 $ 94,506
Intersegment
revenue (3,785) (4,445) (15,067) (5,820)
-------------------------------------- ------------
External revenue 70,702 66,357 114,312 88,686
-------------------------------------------------------------------------
Gross Margin 21,523 19,368 17,934 10,799
-------------------------------------------------------------------------
Depreciation and
amortization 1,071 879 1,768 1,569
-------------------------------------------------------------------------
Income (loss) before
interest and income
taxes 7,007 6,988 7,220 4,829
Trust conversion costs


-------------------------------------------------------------------------
Capital expenditures 297 $ 496 1,512 $ 1,231
Corporate


-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 71 39 $ 18 54
Corporate


-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------



Production Services ($) Consolidated ($)
formerly known as
'Leasing'
2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 9,199 $ 7,700 $ 213,065 $ 173,008
Intersegment
revenue (3) (16) $ (18,855) $ (10,281)
-------------------------------------- ------------
External revenue 9,196 7,684 $ 194,210 $ 162,727
-------------------------------------------------------------------------
Gross Margin 5,143 4,826 $ 44,600 $ 34,993
-------------------------------------------------------------------------
Depreciation and
amortization 2,215 1,910 $ 5,054 $ 4,358
-------------------------------------------------------------------------
Income (loss) before
interest and income
taxes 4,528 4,568 $ 18,755 $ 16,385
Trust conversion costs (8,927) -
------------ ------------
$ 9,828 $ 16,385
-------------------------------------------------------------------------
Capital expenditures 15,623 $ 5,929 $ 17,432 $ 7,656
Corporate 671 1,305
------------ ------------
$ 18,103 $ 8,961
-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 2,659 2,893 $ 2,748 $ 2,986
Corporate - $ -
------------ ------------
$ 2,748 $ 2,986
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------



Nine months ended September 30

Service ($) Engineered Systems ($)
formerly known as
'Fabrication'
2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 229,023 $ 209,161 $ 389,364 $ 263,869
Intersegment
revenue (10,591) (11,619) (32,352) (17,529)
-------------------------------------- ------------
External revenue 218,432 197,542 357,012 246,340
-------------------------------------------------------------------------
Gross Margin 63,213 54,381 57,563 31,648
-------------------------------------------------------------------------
Depreciation and
amortization 2,742 2,654 5,168 3,692
-------------------------------------------------------------------------
Income (loss) before
interest and income
taxes 21,214 16,554 26,540 12,983
Trust conversion costs


-------------------------------------------------------------------------
Segment assets 146,220 123,831 207,533 172,516
Corporate
Goodwill 50,524 52,233 65,914 62,216
------------ ------------ ------------ ------------
Total Segment assets 196,744 176,064 273,447 234,732
-------------------------------------------------------------------------
Capital expenditures 2,014 $ 1,838 5,189 $ 2,964
Corporate


-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 792 109 $ 34 137
Corporate


-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------



Production Services ($) Consolidated ($)
formerly known as
'Leasing'
2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 25,693 $ 23,702 $ 644,080 $ 496,732
Intersegment
revenue (17) (80) $ (42,960) $ (29,228)
------------------------- ------------ ------------
External revenue 25,676 23,622 $ 601,120 $ 467,504
-------------------------------------------------------------------------
Gross Margin 15,509 15,242 $ 136,285 $ 101,271
-------------------------------------------------------------------------
Depreciation and
amortization 6,356 5,467 $ 14,266 $ 11,813
-------------------------------------------------------------------------
Income (loss) before
interest and income
taxes 14,751 14,905 $ 62,505 $ 44,442
Trust conversion costs (9,234) -
------------ ------------
$ 53,271 $ 44,442
-------------------------------------------------------------------------

Segment assets 110,247 93,260 $ 464,000 $ 389,607
Corporate $ 34,980 $ 12,221
Goodwill 7,356 7,356 $ 123,794 $ 121,805
------------ ------------ ------------ ------------
Total Segment assets 117,603 100,616 $ 622,774 $ 523,633
-------------------------------------------------------------------------
Capital expenditures 28,846 $ 15,562 $ 36,049 $ 20,364
Corporate 7,681 2,364
------------ ------------
$ 43,730 $ 22,728
-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 15,451 $ 12,816 $ 16,277 $ 13,062
Corporate - -
------------ ------------
$ 16,277 $ 13,062
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------



Revenue from foreign countries was:

Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
------------ ------------ ------------ ------------
Australia $ 41,996 $ 15,536 $ 105,305 $ 34,088
Egypt 3,117 988 20,325 1,995
Indonesia 4,493 3,144 6,550 6,148
Netherlands 4,168 4,691 13,586 15,274
Pakistan 134 1,461 3,007 10,917
United States 8,865 9,374 20,346 20,142
Other 6,933 10,170 32,150 30,351
------------ ------------ ------------ ------------
$ 69,706 $ 45,364 $ 201,269 $ 118,915
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Included in these
amounts are gross
exports from
domestic
operations of: $ 26,323 $ 16,967 $ 76,829 $ 56,758
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

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

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