November 13, 2007 09:00 ET

TerraVest Income Fund Releases 2007 Q3 Financial Results

VEGREVILLE, ALBERTA--(Marketwire - Nov. 13, 2007) - TerraVest Income Fund (TSX:TI.UN) today released its financial results for the 2007 third quarter.

For the 2007 third quarter, the Fund reported revenue of $54.9 million and a net loss of $445,000 or $0.03 per Unit, compared with revenue of $72.9 million and net earnings of $6.6 million or $0.40 per Unit for the 2006 third quarter.

For the nine-month period ended September 30, 2007, the Fund reported revenue of $169.6 million and net earnings of $3.2 million or $0.18 per Unit, compared with revenue of $204.0 million and net earnings of $12.7 million or $0.85 per Unit for the comparable nine-month period.

On September 16, 2007, the Fund provided four months notice to its external manager to terminate the management services agreement effective January 16, 2008 in accordance with the terms thereof, while immediately relieving the external manager of its duties. As a result of the termination, the Fund is obligated to pay a termination fee of $1.6 million plus GST and to continue to pay the manager's base fee during the notice period totaling $0.23 million plus GST, which amount has been accrued in the results for the three and nine month periods ended September 30, 2007.

"The Fund's results for the three and the nine month periods have been impacted by a significant decline in activity in the oil and gas industry brought about by relatively low gas prices, higher than average natural gas storage levels and high service costs." said Dale Laniuk, President and Chief Executive Officer. "We expect these conditions, as well as uncertainty surrounding the impact of the changes in the Alberta royalty regime to impact operating results for the remainder of 2007."

"On the non-energy side of the TerraVest portfolio, Stylus, Beco, Ezee-On and Don Park continue to face challenging operating conditions in their respective industries. The Fund is taking a more active approach in managing these companies and is assisting them with new business development initiatives, cost-cutting measures and working capital efficiencies." said Raffi Sethian, Chief Operating Officer. "While we have already seen tangible results from some of these initiatives, we expect progress to be gradual over the coming quarters."

As a result of the difficulties faced by the energy businesses, and to prudently manage cash resources, the Fund reduced distributions in the third quarter from a monthly rate of $0.08333 per Unit to a monthly rate of $0.04167 per Unit commencing with the distribution paid on September 17, 2007.

The Fund's payout ratio, which is defined as the percentage of Adjusted Distributable Cash that is paid as distributions to Unitholders, was 70% for the 2007 third quarter, compared with 72% for the 2006 third quarter and 273% for the 2007 second quarter. For the nine-month period ended September 30, 2007, the payout ratio was 100%, compared with 83% for the 2006 nine-month period.

During the quarter, the Fund renegotiated its credit facility to reduce the overall size of the facility and to amend certain financial covenants. As at September 30, 2007, the Fund met all of its financial covenants.

Highlights from the Fund's 2007 third quarter and its 2007 nine-month reporting period are as follows:

Three Months ended Nine Months ended
September 30 September 30
thousands of dollars 2007 2006 Change 2007 2006 Change
RJV 5,847 22,397 31,357 57,455
Ezee-On 2,324 2,387 7,048 8,223
Stylus 7,851 7,236 24,536 25,054
Don Park 21,966 22,078 61,307 63,249
Diamond 6,073 7,144 17,734 20,405
Beco 10,867 11,673 27,616 29,620
Total revenues 54,928 72,915 (25%) 169,598 204,006 (17%)
Net (loss) earnings for
the period (445) 6,608 3,223 12,669
Per Unit (0.03) 0.40 0.18 0.85
Cash flow from
operating activities 485 2,594 18,738 10,730
Net capital expenditures (517) (1,508) (1,695) (5,302)
Retractable non-
controlling interest 187 (337) (10) (809)
Distributable Cash 155 749 17,033 4,619
Change in non-cash
working capital 1,901 6,644 (7,625) 11,480
Net capital expenditures 517 1,508 1,695 5,302
Maintenance capital
expenditures (305) (1,009) (1,279) (2,674)
MSA terminations fees 1,943 - 1,943 -
Adjusted Distributable
Cash 4,211 7,892 (46%) 11,767 18,727 (37%)
Distributions declared 2,938 5,651 (48%) 11,751 15,505 (24%)
Adjusted distributable
cash per Unit 0.24 0.53 0.67 1.35
Adjusted distributable
cash surplus 1,273 2,241 16 3,222
Payout ratio 70% 72% 100% 83%
Proforma payout ratio(1) 77% 72% 111% 92%

(1) assumes conversion of all Exchangeable Shares

As of November 13, 2007, there are 17,626,498 Units and 1,410,642 Exchangeable Shares issued and outstanding. The Exchangeable Shares are not listed on an exchange, but are exchangeable at the option of the holder for Units or are callable by the Fund at any time. In addition, as an inducement to hire a senior officer for the Fund, options to acquire 250,000 Units were issued at a strike price of $3.43 and which vest between September 27, 2008 and September 28, 2010.

The Fund's interim financial statements and MD&A are available on SEDAR at www.sedar.com and on the Fund's website at www.terravestincomefund.com.

About TerraVest Income Fund

The Fund has invested in six businesses:

- RJV is one of the largest providers of wellhead processing equipment for the natural gas industry in western Canada.

- Diamond is a market leader in providing well servicing to the oil and natural gas sector in south-western Saskatchewan, with a growing presence in Alberta.

- Don Park is one of Canada's largest manufacturers and suppliers of heating, ventilation and air conditioning (HVAC) products.

- Stylus is one of Canada's leading made-to-order upholstered furniture manufacturers.

- Beco is the largest Canadian designer, manufacturer and importer of home textile products.

- Ezee-On manufactures heavy-duty equipment for large acreage grain farms and livestock operations.

Caution Regarding Forward-Looking Statements

All statements other than statements of historical fact contained in this press release are forward-looking statements, including, without limitation, statements regarding the future financial position and operations, business strategy, proposed acquisitions, budgets, distributions, projected costs and plans and objectives of or involving the Fund. Readers can identify many of these statements by looking for words such as "believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" and similar words or the negative thereof. Although Management believes that the expectations represented in such forward looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. Assumptions and analysis about the performance of the Fund, as a whole, and the Fund's portfolio businesses and the markets in which they compete are considered in setting the business plan for the Fund, in forecasting the Fund's expected financial results and the Fund's ability to pay distributions, in setting financial targets for the Fund and in making related forward-looking statements. The key assumption in respect of the Fund's level of distributions is that the cumulative distributable cash will be able to support the Fund's current level of distributions. The Fund receives distributable cash from its portfolio businesses. In respect of the portfolio businesses, key assumptions include those relating to the demand for products and services of the portfolio businesses and in respect of the Canadian and other markets in which the Fund's businesses are active (and in particular, the Canadian oil and natural gas industry in western Canada and the markets for household materials and household goods). Should any of these factors or assumptions vary, actual results may differ materially from the forward-looking statements.

The information set forth in the MD&A of the Fund for the year ended December 31, 2006 and the annual information form of the Fund dated March 15, 2007, identifies additional factors that could affect the operating results and performance of the Fund and its portfolio businesses. We caution that these discussions of factors are not exhaustive and that, when relying on forward-looking statements to make decisions with respect to the Fund, investors and others should carefully consider the factors discussed, as well as other uncertainties and potential events.

Standardized and Adjusted Distributable Cash

The calculation of standardized distributable cash is, in all material respects, in accordance with the recommendations provided in the CICA publication Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure. Standardized distributable cash is not a defined term under Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. Standardized distributable cash is defined as cash flow from operations after non-cash working capital items, less: gross capital expenditures; restrictions on distributions arising from compliance with financial covenants restrictive at the time of reporting; and limitations arising from the existence of a minority interest. Gross capital expenditures represent all capital expenditures incurred during the reporting period.

Adjusted distributable cash is not a defined term under GAAP and does not have a standardized meaning. Adjusted distributable cash is defined as standardized distributable cash adjusted for changes in non-cash working capital, items that may be of a non-recurring nature and reflecting only maintenance capital expenditures and not growth-related capital expenditures.

Management believes that adjusted distributable cash as a liquidity measure is a useful supplemental measure as it provides the independent Trustees with an indication of the amount of cash available for distribution to Unitholders before the effects of seasonal fluctuations in working capital. Investors are cautioned, however, that adjusted distributable cash should not be construed as an alternative to using net earnings as a measure of profitability or to using information contained in the unaudited interim Consolidated Statements of Cash Flows as a measure of liquidity. Further, the Fund's method of calculating adjusted distributable cash may not be comparable to measures used by other entities.

Standardized distributable cash and adjusted distributable cash are discussed in the Fund's MD&A.

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