CALGARY, March 9 /CNW/ -2006 HIGHLIGHTS:
- Record revenue of $1.7 billion reported for the year.
- Successful expansion into the U.S. market by acquiring the outstanding
equity interests of Environmental Treatment Team ("ETT") and ARKLA
Disposal Inc. ("ARKLA"); re-branded to CCS Energy Services LLC
post-acquisition.
- Completion of a private placement financing with a group of
institutional investors in Canada and the U.S. for $270 million and
expansion of our bank credit facility to $430 million.
- Completion of a bought-deal subscription receipt financing, for gross
proceeds of $245 million.
- A 65 percent increase in distributions paid over 2005:
- Opening of two new treatment, recovery and disposal ("TRD") facilities
during the year; Brooks and Spirit River.
- Expansion of Concord's rig fleet by 86 rigs through the acquisition of
the operating assets of the Grizzly, Hi-West and Poncho Well Servicing
Group ("Grizzly") for $280 million.
- Total capital expenditures, excluding acquisitions, of $194 million;
an increase of 81 percent over 2005.
Three months ended Dec. 31 Twelve months ended Dec. 31
(000s) except
per unit % %
amounts 2006 2005(1) chg 2006 2005(1) chg
-------------------------------------------------------------------------
Revenue $ 471,530 $ 325,511 45% $ 1,673,819 $ 938,659 78%
EBITDA(2) 70,182 67,012 5% 274,094 189,672 45%
Income before
non-controlling
interest 33,443 38,829 (14%) 160,457 105,971 51%
Net income 25,664 29,207 (12%) 124,354 79,161 57%
per unit
- diluted 0.48 0.69 (30%) 2.50 1.87 34%
-------------------------------------------------------------------------
Funds from
operations(2) 69,100 54,959 26% 245,296 159,544 54%
per unit
- diluted 1.02 0.97 5% 3.83 2.81 36%
-------------------------------------------------------------------------
Capital
expenditures(3) 63,528 43,604 46% 194,109 107,105 81%
-------------------------------------------------------------------------
Weighted average
trust units 49,002 42,264 16%
Exchangeable
shares(4) 15,074 14,443 4%
-------------------------------------------------------------------------
Weighted average
trust units
- diluted 64,076 56,707 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
presentation adopted in 2006.
(2) Non-GAAP financial measures are identified and defined in the
Management's Discussion and Analysis.
(3) Does not include business acquisitions.
(4) Assuming all exchangeable shares at December 31, 2006 converted at
the period-end exchange ratio of 2.67427:1 (2005 - 2.54714:1).
MANAGEMENT'S DISCUSSION AND ANALYSIS
March 8, 2007
This Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the Audited Consolidated Financial Statements and the
Auditors' Report included in this Annual Report of CCS Income Trust (the
"Trust" or "CCS").
CCS INCOME TRUST - THREE YEAR REVIEW OF OPERATIONS
12 months ended December 31
(000s except per unit or share amounts) 2006 2005(1) 2004(1)
-------------------------------------------------------------------------
REVENUE 1,673,819 938,659 300,576
-------------------------------------------------------------------------
EXPENSES
Operating 1,376,607 733,416 177,713
General and administrative 23,118 15,571 11,016
Depreciation and amortization 67,216 39,755 29,589
Financing charges 13,060 8,598 4,554
-------------------------------------------------------------------------
Income before non-controlling
interest 160,457 105,971 63,739
Net income 124,354 79,161 47,422
per unit - diluted 2.50 1.87 1.18
-------------------------------------------------------------------------
Funds from operations(2) 245,296 159,544 107,959
per unit - diluted 3.83 2.81 1.99
-------------------------------------------------------------------------
Capital expenditures(3) 194,109 107,105 70,168
Total assets 1,303,307 677,831 539,365
Long-term debt 359,001 156,397 136,503
Non-controlling interest 101,745 69,582 46,669
Unitholders' equity 621,854 259,986 226,834
-------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
presentation adopted in 2006.
(2) Non-GAAP financial measures are identified and defined in this MD&A.
(3) Does not include business acquisitions.
CCS INCOME TRUST - QUARTERLY DATA
2006
(000s except per unit amounts) Q4 Q3 Q2(1) Q1(1)
-------------------------------------------------------------------------
REVENUE 471,530 476,400 355,997 369,892
EXPENSES
Operating 395,188 389,805 302,808 288,806
General and administrative 6,160 6,156 5,996 4,806
Depreciation and
amortization 25,027 16,640 13,804 11,745
Financing charges 4,404 3,559 2,577 2,520
-------------------------------------------------------------------------
Income before
non-controlling interest 33,443 53,664 26,121 47,229
Net income 25,664 41,624 21,880 35,186
per unit - diluted 0.48 0.81 0.39 0.82
-------------------------------------------------------------------------
Funds from operations(2) 69,100 70,392 41,169 64,635
per unit - diluted 1.02 1.07 0.62 1.12
-------------------------------------------------------------------------
Capital expenditures(3) 63,528 58,059 45,154 27,368
Long-term debt 359,001 265,575 211,626 202,533
Non-controlling interest 101,745 93,514 81,332 81,619
Unitholders' equity 621,854 619,453 586,781 280,429
Distributions per unit 0.53 0.46 0.45 0.38
2005(1)
(000s except per unit amounts) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
REVENUE 325,511 257,193 167,528 188,427
EXPENSES
Operating 252,475 203,300 142,377 135,264
General and administrative 6,024 3,369 3,624 2,553
Depreciation and
amortization 11,976 10,319 7,900 9,560
Financing charges 2,357 2,127 2,136 1,978
-------------------------------------------------------------------------
Income before
non-controlling interest 38,829 27,722 8,382 31,038
Net income 29,207 20,665 6,166 23,123
per unit - diluted 0.69 0.48 0.15 0.55
-------------------------------------------------------------------------
Funds from operations(2) 54,959 41,888 18,993 43,704
per unit - diluted 0.97 0.74 0.33 0.77
-------------------------------------------------------------------------
Capital expenditures(3) 43,604 27,899 16,869 18,733
Long-term debt 156,397 154,507 117,209 132,222
Non-controlling interest 69,582 63,552 56,622 54,406
Unitholders' equity 259,986 241,086 230,278 238,043
Distributions per unit 0.35 0.32 0.31 0.29
(1) Certain comparative figures have been reclassified to conform to the
presentation adopted in the third quarter of 2006.
(2) Non-GAAP financial measures are identified and defined in this MD&A.
(3) Does not include business acquisitions.This MD&A contains certain statements that are not historical in nature
and are forward-looking statements. These forward-looking statements include
statements relating to the Trust's plans, strategies, objectives,
expectations, intentions and resources. They are not guarantees as to the
Trust's future results since there are inherent difficulties in predicting
future results. When used throughout this report, the words "anticipate,"
"expect," "project," "believe," "estimate," "forecast," "intends" or similar
expressions identify forward-looking statements, which include statements
relating to pending and proposed projects and business activities. Such
statements are subject to certain risks, uncertainties and assumptions
pertaining to operating performance, regulatory parameters, weather and
economic conditions and, in the case of pending and proposed projects, risks
relating to design and construction, regulatory processes, obtaining financing
and performance of other parties, including partners, contractors and
suppliers. Accordingly, actual results could differ materially from those
expressed or implied in forward-looking statements.
This MD&A contains references to certain financial measures that do not
have any standardized meaning prescribed by Canadian Generally Accepted
Accounting Principles (GAAP) and may not be comparable to similar measures
presented by other companies or trusts. These measures are provided to assist
investors in determining the Trust's ability to generate cash from operations
and to provide additional information regarding the use of its cash resources.
These financial measures are identified and defined below:- "EBITDA" is determined from the consolidated statements of income and
accumulated earnings and is defined as operating margin less general
and administrative expenses. In 2006, the Trust revised its definition
of EBITDA to conform to the recognized standard of EBITDA (earnings
before interest, taxes, depreciation and amortization), resulting in
the inclusion of asset retirement accretion expense as a component of
EBITDA. Prior periods have been reclassified for comparative purposes.
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating margin $ 76,342 $ 73,036 $ 297,212 $ 205,243
Less: General &
administrative expense 6,160 6,024 23,118 15,571
-------------------------------------------------------------------------
EBITDA 70,182 67,012 274,094 189,672
-------------------------------------------------------------------------
-------------------------------------------------------------------------
- "Funds from operations" is derived from the consolidated statements of
cash flows and is calculated as cash provided by operating activities
before changes in non-cash working capital and asset retirement
obligations fulfilled.
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided by
operating activities $ 59,765 $ 70,235 $ 178,183 $ 159,776
Change in non-cash
working capital 9,118 (15,945) 66,562 (1,217)
Asset retirement
obligations fulfilled 217 669 551 985
-------------------------------------------------------------------------
Funds from operations 69,100 54,959 245,296 159,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
- "Growth capital expenditures" include amounts incurred to add new
facilities, equipment or services and to replace utilized capacity
and expand engineered landfills and waste-disposal caverns.
- "Maintenance capital expenditures" refer to capital expenditures
required to maintain existing levels of service.
- "Cash available for distribution and growth capital expenditures" is
calculated as funds from operations (see above), less required
principal repayments of long-term debt, maintenance capital
expenditures and amortization of capacity, which is funds designated
for the replacement of engineered landfill and cavern capacity. This
amount is calculated in the CCS Cash Distributions table disclosed
later in this document.
- "Payout ratio" is calculated as cash distributions for the period
divided by cash available for distribution and growth capital
expenditures, as referenced in the CCS Cash Distributions table
disclosed later in this document.
- "Net debt" is comprised of the Trust's current and long-term portion
of debt less the value of cash and cash equivalents. Net debt is used
as a key indicator of the Trust's leverage and the overall strength of
its balance sheet. Net debt is directly related to the Trust's
operating cash flows and capital investment activities.
CCS reports results of its operations through four main business segments:
CCS Energy Services Division (Energy Services)
This division owns and operates treatment, recovery and disposal (TRD) and
cavern facilities throughout western Canada and in the Gulf Coast region of
the United States. Services are provided in the following areas:
- Emulsion treatment;
- Water treatment and disposal;
- Waste processing;
- Naturally occurring radioactive material (NORM) processing;
- Drilling mud disposal;
- Tank/truck washing;
- Crude oil terminalling;
- Cavern disposal; and
- Well abandonment and facility decommissioning.
CCS Energy Marketing Division (CEM)
Responding to the opportunity to maximize the return on the marketing of
recovered crude oil, CEM extracts additional value and operating margin on
waste and recovered oil volumes from the Energy Services facilities. The
division captures the incremental value created through the marketing chain
with the following revenue streams:
- Lease purchases;
- Single shipper/optimization; and
- Bulk purchases.
HAZCO Environmental Services Division (HAZCO)
This division is an industry leader providing a wide range of specialized
services including:
- Site remediation;
- Decommissioning;
- Waste services;
- Scrap metal processing;
- Environmental construction;
- Environmental technologies;
- Emergency response;
- Engineered landfill disposal;
- Sulphur services;
- Environmental and geotechnical drilling; and
- Other specialty services.
HAZCO operates a network of industrial and engineered landfills,
bioremediation facilities and hazardous waste transfer stations across western
Canada. HAZCO provides services primarily throughout Canada, with select
services provided in Peru and the United States.
In 2006, the HAZCO and CCS Energy Services landfill business units were
integrated to form CCS Landfill Services. The results of operations for this
new business unit are reported under the HAZCO division, with prior year
results reclassified for comparative purposes.
Concord Well Servicing Division (Concord)
This division owns and operates 139 service rigs and one drilling rig,
forming one of the most modern fleets in the Canadian oil and gas services
sector. Established in 1979, Concord provides a variety of contract services
from its strategically located offices in western Canada. HiAlta Energy
Services ("HiAlta"), an oilfield rental business acquired in 2005, is reported
within the Concord division.
Additional information on CCS is filed with the Canadian securities
commission including annual and periodic quarterly reports as well as the
Annual Information Form (AIF). These documents are also available online at
www.sedar.com and on our website at www.ccsincometrust.com.
DISCUSSION OF FINANCIAL RESULTS
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s except per unit
amounts) 2006 2005(1) 2006 2005(1)
-------------------------------------------------------------------------
Revenue $ 471,530 $ 325,511 $ 1,673,819 $ 938,659
% change from prior
period 45% 142% 78% 212%
-------------------------------------------------------------------------
EBITDA(2) 70,182 67,012 274,094 189,672
% change from prior
period 5% 59% 45% 70%
-------------------------------------------------------------------------
Income before
non-controlling interest 33,443 38,829 160,457 105,971
% change from prior
period (14%) 52% 51% 66%
-------------------------------------------------------------------------
Net income 25,664 29,207 124,354 79,161
% change from prior
period (12%) 51% 57% 67%
per unit - diluted 0.48 0.69 2.50 1.87
-------------------------------------------------------------------------
Funds from operations(2) 69,100 54,959 245,296 159,544
% change from prior
period 26% 34% 54% 48%
per unit - diluted 1.02 0.97 3.83 2.81
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
presentation adopted in 2006.
(2) Non-GAAP financial measures are identified and defined in this MD&A.
The financial results for 2006 reflect the ongoing growth of the Trust,
with each business unit reporting year-over-year growth in revenue and
operating margin. Growth in the year was partially attributable to revenue
generated from the opening of new facilities, expansion of the business into
complementary markets along with geographic expansion. Acquisitions completed
throughout the year facilitated the Trust's growth in many of these areas. The
companies and operating assets acquired are summarized as follows:
- On February 23, 2006 the Trust acquired the outstanding equity
interest of Environmental Treatment Team LLC ("ETT") for
$22.1 million. ETT provides waste treatment and disposal services to
the U.S. Gulf Coast offshore oil and gas market. Post-acquisition,
ETT changed its name to CCS Energy Services LLC.
- On April 3, 2006, the Trust acquired the operating assets of
HMI Industries Inc. ("HMI") for $34.2 million. HMI operates a scrap
metal processing facility in Red Deer, Alberta.
- On May 1, 2006, the purchase of the operating assets of the
Grizzly, Hi-West and Poncho Well Servicing Group ("Grizzly") was
completed for $279.9 million. This acquisition expanded Concord's rig
fleet by 86 rigs.
- On September 8, 2006, ARKLA Disposal Services Inc. ("ARKLA") was
acquired through a share purchase deal for $11.0 million plus the
assumption of $6.1 million in long-term debt. ARKLA owns and operates
an industrial waste water treatment plant located in the Port of
Shreveport, Louisiana. On December 31, 2006 this company was merged
with CCS Energy Services LLC and will operate as a business unit
within that entity.
- On October 11, 2006 the Trust acquired the operating assets of
Lionhead Engineering & Consulting Ltd. ("Lionhead") for $10.2 million.These acquired businesses contributed a total of $147.7 million to
revenue for the year and $45.4 million to operating margin.
Industry activity and demand for services remained relatively high
throughout the first nine months of the year, with a general decline
experienced in the fourth quarter due to unfavourable weather conditions and
reduced oil and gas prices. Industry reports indicate wells drilled for the
fourth quarter of 2006 declined by 25 percent over the third quarter of the
year. The Energy Services, Concord and HAZCO divisions were impacted by this
decline, with fourth quarter operating margins, as a percentage of revenue,
lower than those reported in the same period of 2005.
Net income for the fourth quarter and year-to-date was impacted by higher
financing and depreciation and amortization charges. The Energy Services
division accelerated the depreciation rate on certain facility assets,
resulting in an additional charge of $5.8 million to depreciation expense in
the fourth quarter of the year. Of the $5.8 million adjustment, $3.4 million
related to the abandonment of four disposal wells no longer in use in the
business. Overall, depreciation expense in 2006 was higher than 2005 due
primarily to the addition of the assets acquired in the Grizzly acquisition,
and from incremental depreciation taken on capital assets constructed.
Net income was favourably impacted in the year by a decrease of
six percent in the effective income tax rate. During 2006, Canadian federal
and provincial governments enacted various reductions in corporate tax rates,
resulting in a recovery of future income taxes previously provided for at
higher rates. Net income for the year was also impacted by a $1.3 million gain
on the termination of a foreign exchange contract with respect to the Trust's
interest in the Hardisty Caverns Limited Partnership. Declining future gas
prices resulted in a gain of $0.3 million (2005 - loss of $2.7 million) on the
Trust's gas delivery obligation.
CASH DISTRIBUTIONS
During 2006, the Trust declared distributions of $90.3 million (2005 -
$53.7 million), an increase of 68 percent over the previous year. The monthly
distribution increased by 46 percent in 2006, from $0.120 per unit to
$0.175 per unit. Cash retained in the business for growth and capital
expenditures totalled $99.6 million (2005 - $64.3 million) for the year and
was reinvested in the following areas:- expansion into the U.S. market resulted in a total cash investment of
approximately $52.0 million for the year;
- growth expansion capital expenditures in Canada for the year totalled
$137.7 million; and
- the acquisition of the operating assets of HMI and Lionhead required
aggregate cash consideration of $30.9 million, as partial settlement
of the purchase price.
The following summary outlines the principal utilization of funds from
operations for the three and twelve month periods ended December 31, 2006 and
2005:
Three months ended Twelve months ended
CCS CASH DISTRIBUTIONS Dec. 31 Dec. 31
(000s) 2006 2005 2006 2005
-------------------------------------------------------------------------
Funds from operations(1) $ 69,100 $ 54,959 $ 245,296 $ 159,544
Required principal
repayments of long-term
debt(3) (1,233) (5,350) (3,703) (8,230)
Maintenance capital
expenditures(1) (9,486) (10,120) (41,441) (24,973)
Amortization of landfill
and cavern capacity(2) (3,058) (3,221) (10,303) (8,407)
-------------------------------------------------------------------------
Cash available for
distribution and
growth capital
expenditures(1) (b) 55,323 36,268 189,849 117,934
Cash retained for growth
and capital expenditures (28,046) (21,401) (99,561) (64,283)
-------------------------------------------------------------------------
Cash distributions
declared (a) 27,277 14,867 90,288 53,651
Accumulated cash
distributions, beginning
of period 205,849 127,971 142,838 89,187
-------------------------------------------------------------------------
Accumulated cash
distributions, end of
period 233,126 142,838 233,126 142,838
-------------------------------------------------------------------------
Payout ratio(1) (a)/(b) 49.3% 41.0% 47.6% 45.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Non-GAAP financial measures are identified and defined in this MD&A.
(2) Based on amortization expense in the consolidated statements of
income and accumulated earnings, these are funds retained to replace
utilized engineered landfill and cavern capacity.
(3) Does not include $20.0 million repayment of term facility debt, as
this was funded through new term debt facilities issued in December
2006.The Trust's cash distribution policy is focused on maintaining a level of
distributions that are sustainable for the longer term while retaining funds
for ongoing maintenance capital expenditures, replacement of capacity in the
engineered landfills and caverns and for the funding of planned growth
initiatives, if determined beneficial to do so. Cash distributions are
proposed by management and are subject to the approval and discretion of the
Board of Directors. The Board reviews cash distributions in conjunction with
its review of operating and financial results throughout the year.
Management monitors and assesses distribution levels through forecasts
which incorporate the most recent operating and financial results, maintenance
and growth capital requirements as well as market activity and conditions. The
Trust is exposed to a number of business risks which are also taken into
consideration when establishing distribution levels. The business environment
in which CCS operates involves risks with respect to the overall demand for
services, oil and gas prices, environmental requirements and general
competition. Treatment and waste disposal services are largely dependent on
the willingness of customers to outsource their waste management activities.
Environmental regulations do not prohibit numerous internal options available
to oilfield waste generators, such as bioremediation, land spreading, road
spreading and deep well disposal options. As such, the demand for CCS'
services could be curtailed by a trend towards internal waste management.
Please refer to the 'Business Risks' section of this MD&A and the Trust's
Annual Information Form for further details on risks identified which may have
a significant impact on CCS' operations.
The Trust is required to make principal payments on its various credit
facilities as outlined in the 'Contractual Obligations and Contingencies'
section of this MD&A. The Trust includes the repayment of its revolving credit
facility at the end of its three year term; however the Trust has the option
to make a request for extension of the facility, which would extend the period
of repayment. The Trust is required, under its credit facilities and private
placement senior notes, to remain in compliance with specific financial
covenants, with, among other possible ramifications, the Trust no longer
entitled to make distributions upon receipt of a notice of default. As at
December 31, 2006, the Trust was in compliance with all such covenants. Please
refer to the 'Liquidity and Capital Resources' section of this MD&A.
The exchangeable shares issued by CCS Inc. are reported in the
consolidated financial statements as non-controlling interest and are
comprised of the carrying value of the exchangeable shares upon issuance plus
accumulated earnings attributable to the non-controlling interest. The
exchangeable shares, upon conversion to trust units, become eligible for trust
unit distributions. If all or a substantial amount of the exchangeable shares
are converted to trust units, there may be an increase in the payout ratio.
The cash distributions table does not take into consideration the conversion
of exchangeable shares, as distributions are not guaranteed and there is no
obligation to maintain distribution levels per unit upon conversion.
The income trust model is based on the flow-through of income and the tax
liabilities associated with this income to trust unitholders, resulting in
increased cash available for distribution by the trust. On October 31, 2006,
the Federal Minister of Finance proposed to apply a tax, at the trust level,
on distributions of certain income from publicly traded mutual fund trusts, at
rates of tax comparable to the combined federal and provincial corporate tax
rates and to treat such distributions as dividends to the unitholders (the
"Tax Fairness Plan"). On December 21, 2006, the Federal Minister of Finance
released draft legislation to implement the Tax Fairness Plan pursuant to
which, commencing January 1, 2011 (provided the Trust only experiences "normal
growth" and no "undue expansion" before then) certain distributions from the
Trust, which would have otherwise been taxed as ordinary income, will
generally be characterized as dividends in addition to being subject to
corporate rates of tax at the trust level. Assuming the Tax Fairness Plan is
ultimately enacted in its existing form, with no change to the corporate
structure or distribution policy of the Trust, the implementation of such
legislation would be expected to result in adverse tax consequences to the
Trust and certain Unitholders (most particularly Unitholders that are tax
deferred or non-residents of Canada). Cash distributions from the Trust may
also be impacted. It is not known at this time when the Tax Fairness Plan will
be enacted by Parliament, if at all, or whether or not it will be enacted in
the form currently proposed.
While the distribution policy is focused on mitigating the risk of a
reduction in monthly per unit distributions, changes to the current business
environment, changes by the Canadian federal government to the taxation of
trusts, required expenditures on asset retirement obligations or failure to
achieve forecast financial performance may result in the requirement to reduce
future cash distributions.REVENUE
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005(1) 2006 2005(1)
-------------------------------------------------------------------------
CCS Energy Services $ 65,664 $ 50,931 $ 240,956 $ 168,233
% change from prior
period 29% 37% 43% 33%
-------------------------------------------------------------------------
Concord Well Servicing 64,213 31,783 204,482 93,983
% change from prior
period 102% 33% 118% 20%
-------------------------------------------------------------------------
HAZCO 98,980 95,322 333,874 280,124
% change from prior
period 4% 100% 19% 100%
-------------------------------------------------------------------------
CCS Energy Marketing 242,673 147,475 894,507 396,319
% change from prior
period 65% 177% 126% 645%
-------------------------------------------------------------------------
Total 471,530 325,511 1,673,819 938,659
% change from prior
period 45% 142% 78% 212%
-------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
presentation adopted in 2006.Energy Services
For 2006, the TRD facilities reported a 21 percent year-over-year
increase in revenue. Incremental revenue generated by new facilities opened
during the year accounted for eight percent of this increase. Other facilities
reported increased revenue due to high demand for waste processing services
and higher oil prices for the first three quarters of the year. TRD revenue in
the fourth quarter of the year reflected a two percent increase over the same
period in 2005, due to a reported 25 percent drop in fourth quarter drilling
activity and unfavourable weather conditions in many areas of western Canada.
The revenue reported on the sale of oil recovered from waste increased by
eight percent for the year, with higher oil prices accounting for the
significant portion of this increase. For the fourth quarter of the year, a
20 percent quarter-over-quarter decline in volumes of oil recovered
contributed to a 25 percent decline in revenue in this area. Approximately 50
percent of this decline was attributable to the timing of oil recoveries from
the Lindbergh cavern. For 2006 this revenue stream comprised 13 percent (2005
- 17 percent) of total revenue reported for this division.
The ProDrill business unit reported a 25 percent increase in annual
revenue due to the completion of several projects in the third quarter of the
year, along with overall higher sales volume throughout the year with one
customer.
The U.S operations of Energy Services LLC and ARKLA generated
$34.5 million in revenue for 2006 and $10.2 million for the fourth quarter.
Reported fourth quarter results for the U.S. are lower due to a reduction in
drilling activity in the Gulf of Mexico, driven partly by a mild hurricane
season which enabled drilling programs to finish earlier than anticipated.
Revenue was also impacted by the ability to dispose of customer waste at
certain third party landfills, due to volumetric limitations established by
landfill operators. The ARKLA operations reported strong results for the
fourth quarter; however an 11-day shutdown, as a result of tank construction,
impacted reported results.
Concord
The Concord division finished the year with an increase of $110.5 million
in year-over-year revenue, making this a record year for revenue reported by
this division. The 86 rigs acquired through the Grizzly acquisition on May 1,
2006 significantly impacted results for this division, contributing an
incremental $87.4 million in revenue year-to-date. Rig hours worked for fiscal
2006 totalled 259,069 hours compared to 130,812 hours in 2005. Utilization for
the division decreased to 66 percent for 2006 from 70 percent in 2005, due to
a decline in activity in the fourth quarter of 2006 primarily because of wet
weather and weaker commodity prices.
Rig hours and utilization for the fourth quarter of 2006 were
75,379 hours and 61 percent, respectively, as compared to 37,185 hours and
79 percent utilization for the same period in 2005. Reduced activity levels in
the fourth quarter of 2006 resulted from poor weather conditions and lower oil
and gas prices. The incremental revenue generated from the 86 acquired Grizzly
rigs and a price increase taken in the fourth quarter of the year generated a
102 percent increase in quarter-over-quarter revenue reported by this
division.
HAZCO
This division reported a 19 percent increase in revenue over 2005, driven
mainly by higher activity levels in all the business units and the acquisition
of HMI in April, 2006. HMI contributed incremental revenue of $20.2 million
for the year. The geotechnical drilling service group reported a 45 percent
increase in revenue for the year with CCS Landfill Services reporting an
11 percent increase in revenue.
HAZCO's fourth quarter results were strong in the project services group
due to the carryover of demand for environmental, demolition and
decommissioning services from the third quarter and the commencement of
two large remediation projects in the fourth quarter. CCS Landfill Services
reported a 13 percent decline in fourth quarter revenue due to unfavourable
weather conditions and lower activity levels. Revenue in this business unit
was also impacted, to a certain extent, with some customers implementing in-
house solutions for their waste management needs. The fourth quarter of 2005
also reported higher revenue from the disposal of soil on a large reclamation
project in the Grande Prairie area of Alberta.
CCS Energy Marketing
This division was successful in generating a 126 percent increase in
revenue in 2006 due to high industry activity throughout most of the year and
increased volumes of oil purchased at the Energy Services TRD facilities. The
division became the sole marketer of oil at five additional CCS facilities
during the year. This division has single shipper status at all 14 of CCS'
pipeline connected facilities, enabling the division to monitor the quality of
oil coming into the facilities and optimize the revenue associated with the
various grades of oil.OPERATING MARGINS
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005(1) 2006 2005(1)
-------------------------------------------------------------------------
CCS Energy Services $ 26,426 $ 29,022 $ 120,372 $ 100,952
% of division revenue 40% 57% 50% 60%
-------------------------------------------------------------------------
Concord 20,173 13,022 69,919 32,092
% of division revenue 31% 41% 34% 34%
-------------------------------------------------------------------------
HAZCO 22,587 27,912 84,512 64,259
% of division revenue 23% 29% 25% 23%
-------------------------------------------------------------------------
CCS Energy Marketing 7,156 3,080 22,409 7,940
% of division revenue 3% 2% 3% 2%
-------------------------------------------------------------------------
Total 76,342 73,036 297,212 205,243
% of consolidated revenue 16% 22% 18% 22%
-------------------------------------------------------------------------
(1) Comparative figures have been reclassified to conform to the
presentation adopted in 2006.Energy Services
The year-to-date decline in operating margin, as a percentage of revenue,
for the Energy Services division is attributable to lower margin business
units reported under this division. The Energy Services LLC business unit
generated an operating margin of eight percent for the year with ARKLA water
treatment services reporting an operating margin of 36 percent. The operating
margin for the Canadian TRD facilities for 2006 remained unchanged from the
prior year. Higher wages and benefits throughout the year have impacted
expenses in this division due to the overall increased demand for labour in
the local Alberta environment; however, the higher expenses were offset with
price and volume increases. Total operating margin dollars increased by
19 percent for the division due to higher activity levels throughout most of
the year along with the incremental margin generated from new TRD facilities
and acquired business units.
Fourth quarter results in this division were significantly impacted by
decreased activity levels both in Canada and the U.S. Operating margin dollars
and operating margin, as a percentage of revenue, declined over the same
period in 2005 due mainly to this lower level of industry activity. The TRD
business unit reported a three percent decline in operating margin on a
quarter-over-quarter basis, with the caverns reporting a quarter-over-quarter
decline of seven percent. Fourth quarter operating margin for the TRDs and
caverns declined due to increased costs for wages and benefits, well workover
expenses and the reduced volumes of recovered oil sold in the quarter. The
Energy Services LLC operations have a higher component of fixed costs which
impacts operating margin in periods of lower activity.
Concord
The division managed to hold operating margin, as a percentage of
revenue, constant at 34 percent for the year. Overall, the division was
successful in controlling operating expenses in a strong and somewhat volatile
market. Throughout most of 2006, high industry activity levels in western
Canada created a strong demand for labour, resulting in higher costs for wages
and benefits. Concord was also successful at integrating the operating assets
from the Grizzly acquisition and managing costs during a significant period of
growth. Repairs and maintenance expenditures, as a percentage of revenue, have
held steady at six percent of revenue for both 2006 and 2005.
The decline in 2006 fourth quarter operating margin to 31 percent of
revenue was attributable to the decline in utilization rates for the division.
The poor weather conditions mentioned previously impacted activity levels and
operating margin along with implementation of the Canadian Association of
Oilwell Drilling Contractors (CAODC) wage increases in October, 2006. In an
effort to maintain stability of its workforce and to ensure there are trained
and experienced leaders on each rig during periods of high activity, Concord
has for the past several years put its rig managers on salary. During these
periods of lower activity, fixed costs impact operating margin, however over
the long-term the division experiences fewer health, safety and equipment
issues. Repairs and maintenance expenditures were higher in the quarter as the
division managed ongoing required maintenance in periods of lower utilization.
HAZCO
HAZCO's operating margin, as a percentage of revenue, increased on a
year- to-date basis due to higher activity levels in the project services and
geo- technical drilling business units along with the addition of the HMI
business unit. HMI contributed incremental operating margin of $6.6 million
for the year. On an annual basis, operating margin in the landfills business
unit improved by one percent over 2005, due to the higher activity levels and
revenue reported.
Fourth quarter results in this division were impacted by the decreased
activity levels in western Canada, with the landfill services business unit
reporting a six percent decline in operating margin, as a percentage of
revenue. Operating margin in this business unit was also impacted by an
adjustment to asset retirement accretion expense of $0.9 million related to
revised estimates with respect to the timing and estimated costs for capping
landfill cells.
CCS Energy Marketing
The operating margin for this division remains fairly constant, in the
range of one to three percent of revenue. The business model is focused on
capturing the incremental value in marketing crude oil through CCS facilities.
The division is not expected to generate operating margin, as a percentage of
revenue, significantly different from that reflected to date. Revenue is
recorded at its gross value, and as a result the financial statements reflect
a higher dollar value for both revenue and operating expense, creating a lower
operating margin as a percentage of revenue.GENERAL AND ADMINISTRATIVE
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005(1) 2006 2005(1)
-------------------------------------------------------------------------
General and
administrative $ 6,160 $ 6,024 $ 23,118 $ 15,571
% change from prior
period 2% 60% 48% 41%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Comparative figures have been reclassified to conform to the
presentation adopted in 2006.
General and administrative expenses increased in the following areas for
2006:
- Wages and benefits;
- Professional and consulting fees;
- International consulting, travel and marketing;
- Training and travel;
- General office costs; and
- Information technology.Wages and benefits increased by 42 percent or $3.4 million on a year-to-
date basis over 2005. Throughout 2006, resources were added in many areas to
support the continued growth and geographical expansion of the Trust. Salary
increases for staff also impacted costs due to a strong demand for personnel
in the western Canadian labour market. Expenses associated with the trust unit
option plan increased with the annual allocation of options to employees;
costs associated with this program are $1.4 million higher on a year-over-year
basis. The 2006 fourth quarter wages and benefits expenses declined over the
same quarter in 2005 due to a year end adjustment reported in 2005 with
respect to CCS' incentive bonus program.
Year-to-date general and administrative expenses remained constant at
eight percent of operating margin for 2006 and 2005, reflecting management's
commitment to controlling expenditures during periods of growth.
Administrative costs directly related to the individual business segments are
included in operating expenses for that division.DEPRECIATION AND AMORTIZATION
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005 2006 2005
-------------------------------------------------------------------------
Depreciation $ 20,941 $ 8,079 $ 54,534 $ 29,462
% change from prior
period 159% 15% 85% 38%
-------------------------------------------------------------------------
Amortization of
engineered landfills
and caverns 3,058 3,221 10,303 8,407
% change from prior
period (5%) 52% 23% 2%
-------------------------------------------------------------------------
Amortization of
intangibles 1,028 676 2,379 1,886
% change from prior
period 52% 100% 2% 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Depreciation expense increased in 2006 with the addition of the Grizzly
assets in May, 2006. The Energy Services depreciable asset base also increased
through assets acquired in the U.S. and from the opening of the Brooks and
Spirit River TRDs during the year. Fourth quarter depreciation for the Energy
Services division was impacted by a $5.8 million adjustment to the estimated
remaining depreciable life on certain facility assets no longer in use in the
business.
Amortization of the engineered landfills increased by $1.9 million for
the year, due mainly to the increase in volumes received over the previous
year. Landfill capacity at all CCS engineered landfills is reviewed twice a
year by independent engineering consultants, with capacity adjustments
accounted for prospectively. The two surveys completed in 2006 resulted in
minor capacity adjustments. The decrease in 2006 fourth quarter amortization
expense is consistent with the lower activity reported in the quarter.
The amortization expense on intangible assets increased in the fourth
quarter upon completion of the valuation of intangibles assets acquired in the
various acquisitions throughout the year. Amortization expense in this area
may fluctuate from period to period depending on the nature of intangible
assets acquired and their estimated useful life. An annual impairment test is
conducted for all intangible assets with any impairment in value reflected in
amortization expense. As at December 31, 2006, the Trust has not reported any
impairment to intangible assets acquired.INCOME TAXES
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005 2006 2005
-------------------------------------------------------------------------
Income before
income taxes and
non-controlling
interest $ 41,487 $ 51,547 $ 195,080 $ 138,671
Provision for income
taxes 8,044 12,718 34,623 32,700
Effective tax rate 19% 25% 18% 24%
-------------------------------------------------------------------------
-------------------------------------------------------------------------The Trust follows the asset and liability method of accounting for income
taxes. Under this method, future tax assets and liabilities are measured using
enacted or substantially enacted rates of tax expected to apply to taxable
income in the years in which temporary differences are anticipated to be
recovered or settled. During 2006, Canadian federal and provincial governments
enacted various reductions in corporate rates with combined rates declining by
approximately four percent over the next four years. The Trust expects its
underlying temporary differences to reverse in 2010 or later, and as a result,
the full benefit of these substantially enacted rate reductions has been
recognized in the 2006 year-to-date tax provision.
CCS has determined that implementation of the federal government's Tax
Fairness Plan would not result in significant changes to the amount of current
or future income tax liabilities reported at December 31, 2006. As of the date
of this MD&A, this Plan has not been substantially enacted and, as a result,
the 2006 financial results of the Trust do not reflect any adjustments that
may arise due to the implementation of this Plan.
The effective tax rate for the year ended December 31, 2006 declined to
18 percent from 24 percent in 2005. This was mainly attributable to the
incremental tax recovery recorded for future tax rate reductions in the third
quarter of the year and to an increase in available tax deductions at the
operating company level. This increase in available tax deductions results
from the acquisitions and capital expansion incurred during the year.
The year-to-date provision for income tax expense was comprised of
$23.0 million (2005 - $24.5 million) of current income tax and $11.6 million
(2005 - $8.2 million) of future income tax.FINANCING
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005 2006 2005
-------------------------------------------------------------------------
Interest expense $ 4,404 $ 2,357 $ 13,060 $ 8,598
% change from prior
period 87% 69% 52% 89%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Long-term debt increased by $202.6 million on a year-over-year basis to
$359.0 million as at December 31, 2006. Year-to-date financing charges reflect
the interest expense associated with this increased level of debt, with the
annual average interest rate paid approximating 5.4 percent. The Trust reduced
its exposure to floating interest rates in late 2006 through the closing of
its fixed rate private placement debt financing which was completed in
December, 2006. At December 31, 2006, approximately 28 percent of the Trust's
debt outstanding was subject to floating rate interest.
The significant transactions impacting long-term debt and financing
requirements in 2006 are as follows:- A total of $59.1 million paid as cash consideration in the
acquisitions of ETT, HMI, ARKLA, and Lionhead;
- A reduction of $17.5 million in long-term debt, comprised of the
difference between the net proceeds received on the subscription
receipt offering and the cash payment made with respect to the Grizzly
acquisition;
- Capital spending of $194.1 million year-to-date in 2006; and
- Increased working capital requirements due to high industry activity
levels in most of the operating divisions.
LIQUIDITY AND CAPITAL RESOURCES
As at As at
Dec. 31 Dec. 31
(000s) 2006 2005
-------------------------------------------------------------------------
Capital data
Current portion of long-term debt $ 2,657 $ 2,068
Long-term debt 359,001 156,397
Less: cash and cash equivalents (54,399) (3,626)
-------------------------------------------------------------------------
Net debt(1) 307,259 154,839
Unitholders' equity 621,854 259,986
Non-controlling interest 101,745 69,582
-------------------------------------------------------------------------
Total capitalization 1,030,858 484,407
Net debt to total capitalization 30% 32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------(1) Non-GAAP financial measures are identified and defined in this MD&A.
The Trust uses net debt and net debt to total capitalization as key
indicators of its leverage and to monitor the strength of the balance sheet.
At December 31, 2006 the net debt to total capitalization ratio declined to
30 percent, due mainly to the increase in Unitholders' Equity. The
subscription receipt financing of April 13, 2006 contributed gross proceeds of
$244.6 million to Unitholders' Equity and acquisitions completed throughout
the year resulted in an additional $83.6 million of trust units being issued.
Credit Facilities, Swaps and Bonds
On December 14, 2006 the Trust closed a private placement financing with
a group of institutional investors in Canada and the U.S., for a total of
$270.0 million Canadian. This debt is non-amortizing with maturity dates
ranging from seven to 12 years. On December 13, 2006 the Trust completed the
renegotiation of its existing revolving and term credit facility. The revised
credit facility is unsecured and provides an additional $90.0 million of
borrowing capacity on the revolving facility. The term facility was reduced
from $50.0 million to $30.0 million due to the withdrawal of a lender from the
syndicate.
A summary of the credit facilities available to the Trust at December 31,
2006 are as follows:- $400.0 million, three-year extendible revolving facility bearing
interest, at CCS' option, at the bank's prime rate, bankers'
acceptance rate or LIBOR rate plus zero to 175 basis points ("bps"),
depending on CCS' ratio of Funded Debt to EBITDA. At December 31, 2006
the Trust had borrowed $98.5 million on this facility. Outstanding
letters of credit of $39.9 million at December 31, 2006 reduce the
amount of credit available on this facility.
- $30.0 million, seven-year, non-revolving, non-amortizing term facility
with a fixed interest rate of 6.4 percent. This facility is fully
drawn and repayable in full on December 10, 2011.
- $270.0 million, non-amortizing private placement senior notes. On
December 14, 2006, a total of $220.0 million of senior notes were
issued with the remaining $50.0 million to be issued by June 28, 2007.
The following table summarizes the notes issued to date:
Interest
Note Amount Rate Due Date
---------------------------------------------------------------
Series A $85.0 million 4.995% December 30, 2013
Series B $70.0 million 5.200% December 30, 2016
Series C $65.0 million 5.350% December 30, 2018
Series D $15.0 million 4.995% December 30, 2013
Series E $20.0 million 5.200% December 30, 2016
Series F $15.0 million 5.350% December 30, 2018
- $6.0 million for the financing of capital equipment, with interest
charged on a transactional basis. Fixed and floating-rate options are
available. Interest under the fixed option is currently charged at a
maximum rate of four percent. Contracts under the floating option
charge interest at prime minus 0.7 percent to prime minus 3.5 percent.
Repayment terms cannot extend beyond five years. At December 31, 2006
the amount outstanding on this facility was $2.9 million. CCS will
continue to utilize this facility if the cost to do so minimizes
overall borrowing costs to the Trust.
- $6.4 million of bonds outstanding with the Caddo-Bossier Parishes
Port Commission (the "Port"). These bonds are carried by CCS Energy
Services LLC (by merger on December 31, 2006 with the former
bondholder, ARKLA Disposal, LLC) pursuant to a lease agreement dated
October 1, 2004. The bonds were issued to finance ARKLA's acquisition,
construction, renovation and equipping of a facility to clean and
process industrial waste water. The bonds bear interest at a rate of
five percent and mature on November 1, 2024. Interest and payments of
principle on the bonds are due monthly. The bonds, along with accrued
interest, can be repaid at any time without penalty.
In accordance with the terms of its credit facilities, CCS must remain in
compliance with certain financial and non-financial covenants, as defined by
its lenders. As at December 31, 2006, the Trust was in compliance with all
such covenants. The significant financial covenants required are outlined
below:
- Consolidated Debt to Consolidated Total Capitalization shall not
exceed 55 percent;
- Fixed Charge Coverage Ratio shall not be less than 1.0:1; and
- Funded Debt to EBITDA ratio shall not be greater than 2.5:1.The Trust issues surety bonds to secure bids tendered, to provide for
environmental liabilities and for completion of work with respect to its
operating divisions. These bonds do not impact the amount of credit available
under the credit facilities; however the total amount of bonds outstanding at
any point in time cannot exceed $60.0 million. At December 31, 2006 the Trust
had $21.5 million of surety bonds outstanding.
In 2002 the Trust entered into a five-year, non-amortizing, interest-rate
swap agreement for $18.0 million at a fixed rate of 5.6 percent. In 2003 the
Trust entered into an additional five-year amortizing swap arrangement for
$20.0 million at a fixed rate of 4.1 percent, of which $6.0 million remained
outstanding at December 31, 2006. At December 31, 2006 the total cost to
settle these swaps would be $0.2 million. These amounts have not been
reflected in the consolidated financial statements.UNITHOLDERS' EQUITY
As at As at
Dec. 31 Dec. 31
(000s) 2006 2005
-------------------------------------------------------------------------
Outstanding unit data
Trust units 51,958 42,679
Exchangeable shares(1) 15,074 14,443
-------------------------------------------------------------------------
Total 67,032 57,122
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Converted at an exchange ratio of 2.67427:1 at December 31, 2006
(December 31, 2005 - 2.54714:1)
A total of 9.3 million trust units were issued in 2006. Trust unit
activity during the year included the following:
- On April 13, 2006 the Trust announced the closing of its bought deal
subscription receipt financing. A total of 6.7 million subscription
receipts were issued at a price of $36.75 per subscription receipt,
for gross proceeds of $244.6 million. The subscription receipts were
converted into Trust units on a one-for-one basis upon closing of the
acquisition of the Grizzly assets.
- On May 1, 2006 the Trust completed the Grizzly acquisition, with
consideration consisting of 1.9 million trust units at a deemed price
of $36.75 per trust unit and $214.6 million in cash. Of the trust
units issued, 75 percent are held in escrow and will be released in
equal amounts, over a three-year period. The remaining 25 percent were
released to the seller but subject to a four month statutory hold
period from the date of closing.
- The HMI, ARKLA and Lionhead acquisitions resulted in the issuance of
0.6 million trust units.
CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
CCS has entered into various contractual obligations with respect to debt,
operating commitments and capital. The following table summarizes CCS'
contractual obligations at December 31, 2006:
Payments Due by
Period
-------------------------------------------------------------------------
Contractual
obligations
(000s) Total 2007 2008-2009 2010-2011 Thereafter
-------------------------------------------------------------------------
Long-term debt 361,658 2,657 102,998 30,605 225,398
-------------------------------------------------------------------------
Office and
facility
leases 9,339 2,244 3,571 1,757 1,767
-------------------------------------------------------------------------
Operating leases 5,891 2,796 2,753 342 -
-------------------------------------------------------------------------
Gas delivery
obligation
(undiscounted) 7,968 1,227 2,457 2,454 1,830
-------------------------------------------------------------------------
Pipeline capacity
commitment 2,724 454 908 908 454
-------------------------------------------------------------------------
Total contractual
obligations 387,580 9,378 112,687 36,066 229,449
-------------------------------------------------------------------------
The Trust has entered into various consulting arrangements with respect to
international corporate development initiatives. Compensation consists of
consulting fees and the commitment to purchase, on behalf of the consultants,
CCS Income Trust units on the open market upon the signing of executable,
international service contracts. The Trust is contingently obligated to
acquire eight thousand trust units, or pay the cash equivalent thereof;
however, to date has not entered into any service contracts.
CAPITAL EXPENDITURES
Three months ended Twelve months ended
Dec. 31 Dec. 31
(000s) 2006 2005 2006 2005
-------------------------------------------------------------------------
Capital expenditures(1) $ 63,528 $ 43,604 $ 194,109 $ 107,105
% change from prior
period 46% 57% 81% 53%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes business acquisitions.
Energy Services
The Energy Services division incurred capital expenditures of
$99.2 million in the year, with the majority of the spending focused in the
following areas:
- $43.1 million on the construction of new TRD facilities including
Brooks, Spirit River, South Wapiti and Peace River;
- $5.3 million on new injection and disposal wells;
- $5.7 million on the installation of centrifuge equipment at existing
TRD facilities;
- $4.6 million for ongoing cavern washing at the Lindbergh cavern and
cavern expansion at the Unity cavern; and
- $3.1 million in Energy Services LLC for the purchase of marine vessels
and $3.9 million with respect to the Weeks Island cavern acquisition.Concord
Capital expenditures for the division totalled $45.3 million for the year
with a total of $17.2 million expended on the construction of new facilities
and the expansion and renovation of existing facilities. The capital spent in
this area accommodates the recent growth and expansion of the division and
provides efficiencies with respect to the management and repair of equipment.
Capital expenditures for the refitting of rigs and the ongoing upgrading of
equipment totalled $24.0 million. The HiAlta business unit incurred capital
expenditures of $4.1 million year-to- date for new rental equipment. This new
rental equipment is expected to generate higher utilization with lower costs
for repairs and maintenance.
HAZCO
The HAZCO division, excluding landfills, incurred capital expenditures of
$23.8 million, with the majority of spending in the following areas:- $13.6 million for heavy equipment purchased primarily for the site
remediation and demolition business unit;
- $3.9 million for geo-technical drilling rigs and related support
vehicles for the geo-technical drilling business unit; and
- $4.4 million for land and costs associated with the expansion of the
HAZCO and HMI operating facilities.CCS Landfill Services capital spending totalled $22.9 million for the
year, with $15.0 million related to capacity replacement at existing
landfills. Growth capital expenditures in this division were focused on the
construction of two new landfills in northern Alberta. Judy Creek opened in
the fourth quarter of the year and a temporary engineered landfill cell at
Janvier opened in February, 2007. This temporary landfill cell was built to
accommodate customer demand in the area with permanent landfill facilities
under construction and expected to be operational in the third quarter of
2007.
SEASONALITY OF OPERATIONS
The majority of the Trust's operations take place in Canada where the
ability to move heavy equipment in the oil and gas fields is dependent on
weather conditions. As warm weather returns in the spring, the winter's frost
comes out of the ground, rendering many secondary roads and oil and gas
production sites incapable of supporting the weight of heavy equipment until
they thoroughly dry out. The duration of this "spring breakup" has a direct
impact on activity levels of the Trust and its customers. As a result, each
year the Trust tends to record lower revenues and operating profit in the
second fiscal quarter. The Trust's operations on the U.S. Gulf Coast are
affected by the seasonal differences in weather patterns in the Gulf of
Mexico. The rainy weather, tropical storms and hurricanes prevalent in the
Gulf of Mexico and along the Gulf Coast at various times of the year may
affect operating results depending on weather patterns experienced in any
particular reporting period.
CHANGES IN ACCOUNTING POLICY
The Trust did not report any changes in accounting policies for the year
ended December 31, 2006.
NEW ACCOUNTING PRONOUNCEMENTS- Financial Instruments
Effective January 1, 2007, the Trust will adopt the recommendations of
three new Handbook Sections issued by the Canadian Institute of
Chartered Accountants ("CICA") relating to financial instruments.
These new accounting standards are effective for fiscal years
beginning on or after October 1, 2006 and are identified as follows:
- Section 1530 - "Comprehensive Income";
- Section 3855 - "Financial Instruments - Recognition and
Measurement"; and
- Section 3865 - "Hedges".
The new standards determine how reporting entities recognize and
measure financial assets, financial liabilities and non-financial
derivatives. All financial assets should be measured at fair value
with the exception of loans, receivables and investments that are
intended to be held to maturity, and certain equity investments, which
should be measured at cost. All financial liabilities should be
measured at fair value when they are held for trading or if they are
derivatives.
Gains and losses on financial instruments measured at fair value must
be recognized in net income in the period in which they arise, with
the exception of gains and losses arising from:
- Financial assets held for sale where gains and losses are deferred
in other comprehensive income until sold or impaired; and
- Certain financial instruments that qualify for hedge accounting.
The following is a summary of the anticipated impact these new
accounting standards will have on the consolidated financial
statements of the Trust:
- Under these new standards, the Trust's inventory of crude oil meets
the definition of a financial instrument held for trading and
therefore must be measured at fair value, which is based upon
quoted market prices. Crude oil inventory is currently valued at
the lower of weighted average cost or net realizable value. This
change in valuation would not have had a material impact on
financial results reported in 2006 as inventory was normally sold
the month after purchase, with very little difference between
weighted average cost and net realizable value. The new standards
may materially impact future financial results if the market
experiences volatile oil prices.
- The CCS Energy Marketing division enters into physical purchase
and sales contracts at stated market values that settle the
following month. The division does not use financial derivatives
to hedge or lock-in pricing, and as a result these new accounting
standards will not impact the current method of accounting for
revenues and expenses. The current value recorded for accounts
receivable and accounts payable approximates fair value.
- The Trust has two interest rate swaps outstanding which must be
recognized under the new standards as financial assets and
liabilities. The difference between the accounting value and fair
value of these swaps at December 31, 2006 was $0.2 million.
- Under the new standards, deferred financing charges will be netted
against long-term debt and no longer presented separately on the
balance sheet.
- The Trust's unrealized gains and losses on the translation of
self-sustaining foreign operations will be presented as a component
of other comprehensive income and reclassified to net income when
realized.
- Accounting Changes
The CICA has issued revisions to Handbook Section 1506 - "Accounting
Changes", applicable to interim and annual financial statements issued after
January 1, 2007. The revisions in this section address changes in accounting
policies, accounting estimates and the correction of errors. A change in
accounting policy is recommended only if the change is required by a primary
source of GAAP or results in the financial statements providing reliable and
more relevant information. The Trust will adopt the requirements of this
section for any future changes to accounting policies and estimates.
BUSINESS RISKS
(Reference is also made to the Annual Information Form of
the Trust)
Credit Risk
- The Trust provides environmental solutions for waste management, well
abandonment and facility decommissioning, crude oil sales and
marketing, contract oil well services, rental of oilfield equipment
and sales of drilling fluids to the oil and gas industry. This results
in a concentration of credit risk. The Trust generally extends
unsecured credit to these customers, and therefore, the collection of
accounts receivable may be affected by changes in economic or other
conditions and may accordingly impact the Trust's overall credit risk.
Management believes the risk is mitigated by the size, reputation and
diversified nature of the companies to which the Trust extends credit.
- Credit exposure on financial instruments arises from the possibility
that a counter-party, in which the Trust has an unrealized gain, fails
to perform according to the terms of the contract. This exposure is
limited to interest rate swaps and management believes the risks of
non-performance are minimal as the counter-parties are major financial
institutions.
- Credit exposure on cash and cash equivalents arises as the Trust holds
those assets with major financial institutions. Management believes
the risk is mitigated by the size and financial strength of those
major financial institutions.
Interest Rate and Commodity Price Risks
- The Trust is exposed to interest rate risk with respect to fluctuating
interest rates on its revolving credit facility. The Trust manages
this exposure through interest rate swap initiatives, thereby fixing a
portion of the interest on outstanding floating rate debt. At
December 31, 2006 approximately 24 percent (2005 - 26 percent) of the
interest on outstanding floating interest rate debt was fixed through
swap agreements.
- CCS believes its exposure to energy price fluctuations is less than
many oilfield service companies because its Energy Services division
derives a significant portion of its revenue from activities
associated with oil and gas production, as opposed to exploration or
drilling activities. During 2006, 13 percent (2005 - 17 percent) of
this division's revenue came directly from the proceeds of the sale of
recovered oil. Also, the Concord service rigs have the ability to
switch easily from natural gas to light crude activity as commodity
prices fluctuate. The service offerings of the HAZCO division provide
a level of diversification with customers involved in industries such
as transportation, forestry, land development and government.
- Risk factors inherent within the Energy Marketing business include
changes in industry practice with respect to crude oil equalization
and changes to the equalization scale; market-price risk for
commodity, volume and basis exposure; and counterparty credit risk of
non-performance. The management of CCS has formalized and approved a
risk management policy for this division which clearly defines open
position limits, physical contract authorization limits along with
counterparty credit rating criteria and maximum counterparty exposure
limits. This division is currently not authorized to deal with
over-the-counter swaps and options.
- In August 2000, CCS entered into a long-term gas delivery contract
with The Canadian Salt Company Limited to deliver 2.4 million
gigajoules (GJ) of gas over the term of the contract. CCS is exposed
to commodity price fluctuations on future delivery of this gas.Foreign Exchange Risk
The Trust is exposed to foreign exchange risk with respect to its U.S.
operations. Acquisitions in the U.S. of equity interests and operating assets
along with the subsequent funding of capital and working capital requirements
results in the exchange of Canadian dollars for U.S. dollars on an ongoing
basis. The Canadian/US dollar exchange rate averaged $0.8818 in 2006 with a
high of $0.9099 and a low of $0.8528.
The Trust is also exposed to foreign exchange risk on the translation of
its U.S. operations to Canadian dollars on consolidation of financial results.
The cumulative translation adjustment is reported as a separate component of
unitholders' equity.
The Trust has foreign operations through its subsidiary, HAZCO del Peru
S.A., which operates in Peru. Service contracts with various customers and
bank accounts are denominated in U.S. dollars, with local operating expenses
incurred in the local currency (Nuevos Soles). Excess cash earned by this
subsidiary is transferred to a U.S. dollar bank account in Canada.
Environmental Risks
All phases of the oil and natural gas business present environmental
risks and hazards and are subject to environmental regulation pursuant to a
variety of federal, provincial and local laws and regulations. Compliance with
such legislation can require significant expenditures and a breach may result
in the imposition of fines and penalties, some of which may be material.
Environmental legislation is evolving in a manner expected to result in
stricter standards and enforcement, larger fines and liability and potentially
increased capital expenditures and operating costs. In 2002, the Government of
Canada ratified the Kyoto Protocol (the "Protocol"), which calls for Canada to
reduce its greenhouse gas emissions to specified levels. There has been much
public debate with respect to Canada's ability to meet these targets and the
Government's strategy or alternative strategies with respect to climate change
and the control of greenhouse gases. Implementation of strategies for reducing
greenhouse gases, whether to meet the limits required by the Protocol or as
otherwise determined, could have a material impact on the nature of oil and
natural gas operations, including those of the Trust. Given the evolving
nature of the debate related to climate change and the control of greenhouse
gases and resulting requirements, it is not possible to predict either the
nature of those requirements or the impact on the Trust and its operations and
financial condition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The December 31, 2006 audited financial statements of the Trust have been
prepared by management in accordance with GAAP. Because a precise
determination of the valuation of certain revenues, expenses, assets and
liabilities is dependent upon future events, the preparation of periodic
financial statements necessarily involves the use of estimates and
approximations. CCS uses estimates which are based on certain factors,
assumptions and methods which are subject to judgement. Accordingly, actual
results could differ from those estimates. The financial statements have, in
management's opinion, been properly prepared within reasonable limits of
materiality and within the framework of the Trust's accounting policies.
The components of the Trust's financial statements which incorporate
significant assumptions or estimates include:
Asset retirement obligations
CCS is required to provide for the cost of restoring all facilities to a
useful and acceptable condition, as determined by regulatory authorities. The
nature, timing and cost of the remediation process is managed by the CCS
Environmental department, with estimates based upon CCS 'best practices' and
current regulatory requirements. An assessment is not made for any facilities
with an indeterminate life. At December 31, 2006 the liability for asset
retirement obligations was $39.0 million compared to $20.3 million at
December 31, 2005. The increase is attributable to the addition of new
facilities during the year and a reassessment of the provision required for
the engineered landfills on the timing and estimated costs for capping.
Amortization of CCS engineered landfills and caverns
Waste received at a CCS engineered landfill or cavern is measured in
tonnes and converted to cubic metres for depletion and capacity measurement
purposes. A density factor, which is used in converting the waste to cubic
metres, can change over time due to the type of waste received, compaction,
weather and leachate factors. CCS commissions an independent engineering firm
to provide an analysis of all engineered landfills and caverns twice a year,
with all adjustments prospectively applied.
Gas purchase obligation
The Trust is committed to deliver 2.4 million GJ of natural gas over a
13-year period, ending in 2013. This commitment arose as partial consideration
in the acquisition of three caverns at the Lindbergh facility. The original
value of $5.4 million assigned to this commitment is adjusted quarterly to
reflect its estimated fair market value. The fair market value is based on the
present value of the future delivery obligation, using an estimate of future
gas prices. Any gain or loss resulting from the re-pricing is included in
earnings. In 2006, a gain of $0.3 million (2005 - loss of $2.7 million) was
recognized due to a decline in current year and estimated future gas prices.
BUSINESS OUTLOOK
Drilling activity in the western Canadian oil and gas industry continued
to weaken in the fourth quarter of 2006. This was caused by wet weather and
heavy snow conditions during the quarter, a focus on cost reduction and lower
capital expenditures by oil and gas producers and lower commodity prices. The
CAODC is forecasting approximately 19,023 new wells in 2007 compared with
22,127 wells in 2006, a 14 percent decrease.
The Trust believes that the heavier exposure of our operations to the
production side of the oil and gas industry insulates its performance, to some
extent, from the reduced level of drilling activity. However, a portion of our
revenue in waste processing, well servicing and engineered landfills results
from drilling activities, and should lower levels of drilling activity
materialize as forecast, this may impact year-over-year growth in 2007.
The Trust believes that any slowdown in sector activity will be short-
lived and plans to continue its previously announced growth capital spending
for 2007. This will position the Trust for continued strong growth as sector
activity levels strengthen. As previously announced, we are forecasting 2007
consolidated capital spending to be in the range of $230 to $250 million. The
planned capital spending is comprised of expansion capital of $195 to
$205 million plus sustaining capital of $30 to $35 million and $5 to
$10 million to replace capacity utilized in our engineered landfills.
Energy Services
Fourth quarter results for 2006 were impacted by the overall decline in
industry activity both in Canada and the U.S. Activity levels in Canada are
anticipated to recover during 2007; however the forecasted 14 percent decline
in drilling activity may impact 2007 results in comparison to 2006.
Revenue for the Energy Services LLC business unit will be impacted by
their ability to dispose of solids waste at third party landfill facilities.
Limitations on the volume of waste accepted by third party landfill operators
in the U.S. is expected to impact revenue and operating costs in the short-
term until alternative disposal solutions are assessed and implemented. The
Weeks Island cavern project will enable Energy Services LLC to provide waste
disposal solutions directly to its customers, reduce the division's reliance
on third party waste providers within the U.S. market and enable increased
revenue and margins. Weeks Island is expected to be operational in the second
quarter of 2008, subject to regulatory approval.
The division's focus on organic growth in 2006 resulted in the opening of
two new TRDs. Construction of the South Wapiti, Alberta TRD began in the
second quarter of 2006 and became operational in February, 2007. Construction
of the TRD in Peace River, Alberta commenced late in the third quarter of 2006
and is expected to be operational by the third quarter of 2007. Construction
of a significant expansion at the High Prairie TRD is expected to begin in
April 2007. Energy Services LLC is forecasting approximately $35.0 million of
capital expenditures in 2007, related primarily to the proposed Weeks Island
cavern facility.
Concord
Concord experienced skilled labour shortages and high service rig
utilization rates in the first half of 2006. The fourth quarter of the year
reflected a decrease in utilization due to poor weather and lower demand as a
result of lower oil and gas prices. The division anticipates a return to
higher rig utilization during the winter months with utilization rates for
January, 2007 coming in at 78 percent, a 25 percent increase over utilization
rates reported for December 2006. Utilization in the second quarter of 2007 is
expected to be higher than what has historically been reported due to the
division's increased exposure to oil in the Lloydminster and Cold Lake areas.
On a year-over-year basis, operating results will continue to be positively
impacted by the additional service rigs acquired in the Grizzly acquisition.
Previously announced 2007 capital spending of $5 million for facility
expansion, remains unchanged for this division.
HAZCO
Quarterly revenue for the division's project services group is expected
to follow a fairly consistent cyclical pattern in 2007, with stronger revenue
reported in the third and fourth quarters. Revenue in the first quarter of
2007 is forecast to be higher than the same period in 2006, due mainly to the
incremental revenue generated by HMI. The geo-technical and environmental
drilling business unit anticipates activity levels in the first quarter of
2007 to be stronger than those reported in the first quarter of 2006 as a
result of increased drilling activity in the Fort McMurray region. Annual
operating margin for the division, excluding landfills, is anticipated to
continue in the 13 to 15 percent range. The Landfill Services business unit is
expecting lower activity levels in the first quarter of 2007, attributable
mainly to the decline in drilling activity in northern Alberta. It is
anticipated that a portion of this revenue decline will be offset with
increased reclamation activity in several areas.
CCS Energy Marketing
This division's revenue and expenses are impacted by fluctuating oil
prices and the volume of oil marketed through CCS' facilities. Operating
margin, as a percentage of revenue, is expected to remain fairly constant in
the one to three percent range. The business model for this division continues
to focus on the marketing of crude oil recovered or purchased at the Energy
Services facilities, with growth dependent on optimization and lease purchase
opportunities.
DISCLOSURE CONTROLS AND PROCEDURES RELATED TO FINANCIAL REPORTING
Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Trust is accumulated and
communicated to the Trust's management as appropriate to allow timely
decisions regarding required disclosure. The Trust's Chief Executive Officer
and Chief Financial Officer have concluded, based on their evaluation as of
the end of the period covered by the Trust's annual filings for the most
recently completed financial year, that the Trust's disclosure controls and
procedures as of the end of such period are effective to provide reasonable
assurance that material information related to the Trust, including its
consolidated subsidiaries, is made known to them by others within those
entities.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Internal controls have been designed to provide reasonable assurance
regarding the reliability of the Trust's financial reporting and the
preparation of financial statements together with the other financial
information for external purposes in accordance with Canadian GAAP. The
Trust's Chief Executive Officer and Chief Financial Officer have designed or
caused to be designed under their supervision internal controls over financial
reporting related to the Trust, including its consolidated subsidiaries.
The Trust's Chief Executive Officer and Chief Financial Officer are
required to cause the Trust to disclose herein any change in the Trust's
internal control over financial reporting that occurred during the Trust's
most recent interim period that materially affected, or is reasonably likely
to materially affect the Trust's internal control over financial reporting.
While the Trust makes ongoing enhancements to its internal controls over
financial reporting, no material changes were identified in the Trust's
internal controls over financial reporting during the three months ended
December 31, 2006, that had materially affected, or are reasonably likely to
materially affect, the Trust's internal control of financial reporting.
It should be noted that a control system, including the Trust's
disclosure and internal controls and procedures, no matter how well conceived,
can provide only reasonable, but not absolute, assurance that the objectives
of the control system will be met and it should not be expected that the
disclosure and internal controls and procedures will prevent all material
errors or fraud.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements included in this annual report of
CCS Income Trust for the year ended December 31, 2006 are the responsibility
of the management of the Trust and have been approved by the Board of
Directors. Management has prepared the financial statements in accordance with
Canadian Generally Accepted Accounting Principles, with financial information
presented elsewhere in this annual report consistent with that in the
financial statements.
Management has developed and maintains a comprehensive system of internal
controls which provides assurance that transactions are recorded and executed
in compliance with legislation and required authority, to ensure assets are
properly safeguarded and that reliable financial records are maintained.
The independent chartered accounting firm of Ernst & Young LLP has been
appointed by the unitholders of the Trust to examine the financial statements,
and has expressed an opinion thereon. Their auditors' report is included with
the financial statements. The Board of Directors has established an Audit
Committee to review the financial statements with management and the auditors,
and has reported to the Board of Directors thereon. On the recommendation of
the Audit Committee, the Board of Directors has approved the financial
statements.March 8, 2007
"signed"
David P. Werklund Marshall L. McRae, C.A.
CEO and President, Chairman of the Board Chief Financial Officer
Consolidated Financial Statements
CCS Income Trust
December 31, 2006
Consolidated Balance Sheets
-------------------------------------------------------------------------
As at December 31 2006 2005
(000s) $ $
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents 54,399 3,626
Accounts receivable (note 10b) 229,410 158,450
Inventory and other current assets 14,385 10,432
-------------------------------------------------------------------------
298,194 172,508
Property, plant and equipment (note 7) 890,916 443,103
Goodwill (note 5) 86,313 51,295
Intangible assets (note 5) 22,508 8,456
Deferred financing costs (note 9h) 5,196 1,189
Investments and other long-term assets 180 1,280
-------------------------------------------------------------------------
1,303,307 677,831
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 110,932 87,806
Income taxes payable 275 23,710
Distributions payable 9,093 5,121
Current portion of long-term debt (note 9) 2,657 2,068
Current portion of long-term purchase
obligations (note 16) 1,168 1,311
Current portion of asset retirement
obligations (note 8) 3,922 1,373
-------------------------------------------------------------------------
128,047 121,389
-------------------------------------------------------------------------
Long-term debt (note 9) 359,001 156,397
Long-term purchase obligations (note 16) 5,000 6,397
Future income tax (note 17) 51,887 45,127
Asset retirement obligations (note 8) 35,074 18,953
Other long-term liabilities (note 4) 699 -
-------------------------------------------------------------------------
451,661 226,874
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (note 15)
Non-controlling interest (note 14) 101,745 69,582
-------------------------------------------------------------------------
UNITHOLDERS' EQUITY
Unitholders' capital (note 12a) 522,114 197,237
Foreign currency translation adjustment (note 20) 948 -
Contributed surplus (note 12c) 2,582 605
Accumulated earnings 96,210 62,144
-------------------------------------------------------------------------
Total unitholders' equity 621,854 259,986
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total liabilities and unitholders' equity 1,303,307 677,831
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
On behalf of the Board: Director Director
David P. Werklund Brad. R. Munro
Consolidated Statements of Income and Accumulated Earnings
-------------------------------------------------------------------------
For the years ended December 31 2006 2005
(000s except per unit amounts) $ $
-------------------------------------------------------------------------
REVENUE
CCS Energy Services 240,956 168,233
Concord Well Servicing 204,482 93,983
HAZCO Environmental Services 333,874 280,124
CCS Energy Marketing 894,507 396,319
-------------------------------------------------------------------------
1,673,819 938,659
-------------------------------------------------------------------------
Operating expenses (note 19) 1,373,600 731,860
Asset retirement accretion expense (note 8) 3,007 1,556
-------------------------------------------------------------------------
1,376,607 733,416
Operating margin 297,212 205,243
-------------------------------------------------------------------------
EXPENSES
General and administrative (notes 13 and 19) 23,118 15,571
Financing (note 11) 13,060 8,598
Depreciation and amortization 67,216 39,755
Gas delivery obligation valuation (note 16) (331) 2,714
Foreign exchange loss (gain) (1,468) (15)
Loss (gain) on sale of assets 537 (51)
-------------------------------------------------------------------------
102,132 66,572
-------------------------------------------------------------------------
Income before income taxes and non-controlling
interest: 195,080 138,671
-------------------------------------------------------------------------
Income taxes (note 17)
Current 23,044 24,500
Future 11,579 8,200
-------------------------------------------------------------------------
34,623 32,700
-------------------------------------------------------------------------
Income before non-controlling interest: 160,457 105,971
Non-controlling interest (note 14) (36,103) (26,810)
-------------------------------------------------------------------------
Net income for the year 124,354 79,161
Accumulated earnings, beginning of year 62,144 36,634
Distributions (note 3) (90,288) (53,651)
-------------------------------------------------------------------------
Accumulated earnings, end of year 96,210 62,144
-------------------------------------------------------------------------
Net income per unit (note 12b)
Basic 2.55 1.88
Diluted 2.50 1.87
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
For the years ended December 31 2006 2005
(000s) $ $
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income for the year 124,354 79,161
Add (deduct) non-cash items:
Non-controlling interest 36,103 26,810
Unit-based compensation (note 12c & 13a) 2,016 605
Depreciation and amortization 67,216 39,755
Asset retirement accretion expense 3,007 1,556
Gas delivery obligation valuation (331) 2,714
Loss (gain) on sale of assets 537 (51)
Future income taxes 11,579 8,200
Other non-cash operating items (note 11) 815 794
-------------------------------------------------------------------------
245,296 159,544
Change in non-cash working capital (note 18) (66,562) 1,217
Asset retirement obligations fulfilled (note 8) (551) (985)
-------------------------------------------------------------------------
Cash provided by operating activities 178,183 159,776
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt 220,862 58,922
Repayment of long-term debt (24,332) (40,363)
Deferred financing costs (note 9h) (4,550) -
Payments under purchase obligations (note 16) (1,209) (1,452)
Exercise of trust unit options (notes 12a and c) 802 -
Trust unit issue (net of costs) (note 12a) 231,771 (4)
Distribution payments (note 3) (86,316) (52,410)
-------------------------------------------------------------------------
Cash (used in) provided by financing activities 337,028 (35,307)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (194,109) (107,105)
Proceeds on disposal of property, plant and
equipment 3,521 2,845
Acquisitions (note 4) (273,728) (13,337)
Funding of retention bonus (note 13b) 161 (1,231)
Investments and other long-term assets 1,100 (834)
Change in non-cash working capital (note 18) (1,383) (1,181)
-------------------------------------------------------------------------
Cash used in investing activities (464,438) (120,843)
-------------------------------------------------------------------------
Increase in cash and cash equivalents 50,773 3,626
Cash and cash equivalents, beginning of year 3,626 -
-------------------------------------------------------------------------
Cash and cash equivalents, end of year 54,399 3,626
-------------------------------------------------------------------------
Supplementary cash flow information:
-------------------------------------------------------------------------
Cash taxes paid 46,480 1,866
-------------------------------------------------------------------------
Cash interest paid 12,164 7,660
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(000s except unit and per unit amounts)
1. NATURE OF THE ORGANIZATION
CCS Income Trust (the "Trust") was formed for the purpose of effecting an
arrangement (the "Arrangement") under the Business Corporations Act
(Alberta), involving, among other things, the exchange of Canadian Crude
Separators Inc. ("Canadian Crude Separators") securities on a one-to-one
basis, for either trust units of the Trust or Series A Exchangeable
Shares ("exchangeable shares") of CCS Inc., a wholly-owned subsidiary of
the Trust. The effective date of the Arrangement was May 22, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
The consolidated financial statements of the Trust have been prepared by
management in accordance with Canadian Generally Accepted Accounting
Principles (GAAP). Because a precise determination of many assets and
liabilities is dependent upon future events, the preparation of financial
statements necessarily involves the use of estimates and approximations.
Accordingly, actual results could differ significantly from those
estimates. The financial statements have, in management's opinion, been
properly prepared within reasonable limits of materiality and within the
framework of the Trust's accounting policies summarized below.
All amounts reported in these statements are in Canadian dollars.
b) Principles of consolidation and preparation of financial statements
These consolidated financial statements include the accounts of CCS
Income Trust, its subsidiaries and its proportionate share of joint
venture and partnership interests. Non-controlling interest, which exists
through the exchangeable shares in the Trust's wholly owned subsidiary,
CCS Inc., is reported on the consolidated balance sheets.
c) Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and short-term
interest bearing securities with maturities less than three months. The
effective interest rate is equivalent to that earned on a 30 day Bankers'
Acceptance deposit note.
d) Inventory
Inventory consists of drilling fluids, oilfield supplies, crude oil and
scrap metal, all of which are valued at the lower of weighted average
cost and net realizable value.
e) Investments
Investments are carried at cost and written down only when a decline in
value that is other than temporary has occurred.
f) Property, plant and equipment
Property, plant and equipment are recorded at cost and amortized over
their estimated useful lives (net of salvage value) at the following
annual rates:
Processing facilities - five to 30 percent declining balance
Cavern and landfill facilities - units of total capacity utilized in a
period
Service rigs - straight-line over 15 years with 20
percent residual value
Environmental and geotechnical
drilling rigs - 20 percent declining balance
Buildings - five percent declining balance
Mobile equipment - seven percent to 30 percent declining
balance
Rental equipment - straight-line, not exceeding 15 years
Furniture and equipment - 25 to 30 percent declining balance
Airplane, fractional interest - straight-line over 12 years with no
residual value
Marine vessels - straight-line over 20 years with no
residual value
Service rigs require major refits at regular intervals over their
estimated useful life, the cost of which is capitalized and amortized on
a straight-line basis over 15 years with a 20 percent residual value.
Land, construction in progress and the cost of pipeline line-fill are
excluded from amortization and are subject to impairment tests in
accordance with the accounting policy on Impairment of Long-lived Assets.
g) Capitalized interest
Interest is capitalized on major development projects until the asset is
complete and ready for its intended use. A major development project is a
project with an acquisition or construction cost (excluding capitalized
interest) greater than $20,000, and a construction period of twelve
months or longer. The Trust must be in an interest paying situation
during the construction phase of the project. For the year ended
December 31, 2006, no interest was capitalized.
h) Impairment of long-lived assets
All non-monetary long-lived assets held for use, including property,
plant and equipment and intangible assets with finite useful lives, are
subject to review for asset impairment. Impairment is recognized if the
carrying value of the asset exceeds the sum of the undiscounted cash
flows expected to result from that asset. A long-lived asset must be
tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The Trust
conducts asset impairment reviews on a quarterly basis.
i) Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired and is not subject to amortization. Intangible
assets acquired through the acquisition of operating assets or share
purchase arrangements are amortized on a straight-line basis over a
period of one to 12 years, with the exception of those intangible assets
which have an indefinite life.
Goodwill and intangible assets are tested for impairment on an annual
basis, or more frequently, if events or circumstances indicate the asset
may be impaired. The impairment test for goodwill includes the
application of a fair value test, with an impairment loss recognized as
an expense where the carrying amount of the asset exceeds its fair value.
The Trust utilizes capitalized maintainable earnings in application of
the fair value test.
j) Asset retirement obligations
The Trust determines its asset retirement obligation associated with the
retirement of tangible long-lived assets at the plant or facility level.
The Trust recognizes the fair value of an asset retirement obligation in
the period in which it is incurred and when a reasonable estimate of fair
value can be made. Fair value is determined through a review of
engineering and environmental studies, industry guidelines, and
management's estimate. The initial fair value of the obligation is
capitalized to property, plant and equipment and amortized over the
useful life of the related productive assets; amortization is included as
a component of depreciation and amortization expense.
The asset retirement liability accretes until the time the obligation is
expected to settle, with accretion expense recognized as a component of
operating expense. The liability is adjusted periodically to reflect
revisions in the estimated timing and/or amount of the future cash flows
associated with the liability.
k) Income taxes
The Trust is a taxable entity under the Income Tax Act (Canada) and is
taxable only on income that is not distributed or distributable to the
unithholders. The Trust follows the liability method to account for
income taxes. Under this method, future tax assets and liabilities are
determined based on differences between the carrying value and the tax
basis of assets and liabilities, and measured using the substantively
enacted tax rates and laws expected to be in effect when the differences
are expected to reverse.
l) Derivative financial instruments
Derivative financial instruments are utilized by the Trust in the
management of its interest rate exposures and not for trading or
speculative purposes. Any realized gains or losses on derivative
contracts that are not designated hedges are recognized in income in the
period they occur.
The Trust enters into interest rate swaps in order to manage the impact
of fluctuating interest rates on its floating rate debt and to manage the
overall cost of borrowing on its total debt portfolio. The interest rate
swap agreements require the periodic exchange of payments without the
exchange of the notional principal amount on which the payments are
based. All payments are recognized in interest expense in the period to
which they relate.
m) Foreign currency translation
The Trust's U.S. operations, which are considered financially and
operationally independent, are translated into Canadian dollars using the
current rate method, with cumulative translation adjustments included as
a separate component of unitholders' equity:
- Assets and liabilities are translated at the period-end exchange
rate; and
- Revenues and expenses are translated using average exchange rates
during the period.
The Peruvian operations of the Trust are considered to be integrated
operations and are translated into Canadian dollars using the temporal
method, with any translation gains or losses included in net income for
the period:
- Monetary items are translated at the period-end exchange rate;
- Non-monetary items are translated using historical rates, unless
such items are carried at market where the period-end exchange rate
is used;
- Revenues and expenses are recorded using average exchange rates
during the period; and
- Depreciation and amortization are translated at the same exchange
rates as the assets to which they relate.
Other monetary assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at rates of exchange in effect at
the end of each reporting period.
n) Non-controlling interest
The Trust recognizes non-controlling interest in accordance with the
recommendations of EIC-151. Non-controlling interest on the consolidated
balance sheets is comprised of the carrying value of the exchangeable
shares plus the accumulated earnings attributable to the non-controlling
interest. Consolidated net income is reduced by the portion of earnings
attributable to the non-controlling interest. As the exchangeable shares
are converted to trust units, non-controlling interest on the
consolidated balance sheets is reduced by the book value and
cumulative earnings attributable to the exchangeable shares converted,
and unitholders' capital is increased by the corresponding amount.
o) Revenue recognition
Revenue recognized through the provision of services in the CCS operating
segments is reported in the period services are provided or performed and
when collectability is reasonably assured. A summary of services provided
includes the following:
- the provision of environmental solutions for waste management;
- sales of drilling fluids;
- storage services to the oil and gas industry;
- facility decommissioning and demolition;
- well completions, workovers and other well servicing related
services; and
- oilfield equipment rentals.
Revenue associated with the marketing of crude oil and the sale of scrap
metal is recognized when title passes from CCS to its customers. All
crude oil revenue is recorded on a gross basis.
p) Unit based compensation
The Trust established an employee unit option plan (the "Plan") for
employees, directors, and consultants of the Trust. The Trust accounts
for the options using the fair value method, whereby the fair value of
options is determined on the date in which fair value can initially be
determined. The fair value is then recorded as compensation expense on a
straight-line basis over the period the options vest, with a
corresponding increase to contributed surplus. When options are
exercised, the proceeds, together with the amount recorded in contributed
surplus, are recorded to unitholder's capital.
q) Measurement Uncertainty
Certain items recognized in the financial statements are subject to
measurement uncertainty as they are based on management's estimates using
current information and judgment. The effect on the financial statements
of changes in such estimates in future periods could be significant. The
recognized items include:
- Property, plant and equipment, goodwill and intangible assets, the
values of which are subject to market conditions in the oil and gas
and environmental remediation industries;
- Amortization of engineered landfills, the expense of which is
impacted by the type of waste received, compaction and weather and
leachate factors;
- Amortization of disposal caverns, the expense of which is impacted
by the type of waste received, the ability to recover and process
waste oil in the caverns, and uncertainty over total cavern
capacity available;
- The quality, quantity and recoverability of oil contained in the
disposal caverns, which accumulates through the waste disposal
process; the value of recovered oil is recognized when sold;
- Gas delivery obligation, the cost of which is dependent on future
gas prices; and
- Asset retirement obligations, the nature, timing and costs of the
remediation process are managed by the CCS Environmental
department, with estimates based upon CCS' "best practices" and
current regulatory requirements.
r) New Accounting Pronouncements
i) Financial Instruments
Effective January 1, 2007, the Trust will adopt the recommendations of
three new Handbook Sections issued by the Canadian Institute of Chartered
Accountants ("CICA") relating to financial instruments. These new
accounting standards are effective for fiscal years beginning on or after
October 1, 2006 and are identified as follows:
- Section 1530 - "Comprehensive Income";
- Section 3855 - "Financial Instruments - Recognition and
Measurement"; and
- Section 3865 - "Hedges".
The new standards determine how reporting entities recognize and measure
financial assets, financial liabilities and non-financial derivatives.
All financial assets should be measured at fair value with the exception
of loans, receivables and investments that are intended to be held to
maturity, and certain equity investments, which should be measured at
cost. All financial liabilities should be measured at fair value when
they are held for trading or if they are derivatives.
Gains and losses on financial instruments measured at fair value must be
recognized in net income in the period in which they arise, with the
exception of gains and losses arising from:
- Financial assets held for sale, where gains and losses are deferred
in other comprehensive income until sold or impaired; and
- Certain financial instruments that qualify for hedge accounting.
Other comprehensive income comprises revenue, expenses and gains and
losses that are included in comprehensive income, but excluded from net
income. Under the new standard, unrealized gains and losses on the
translation of self-sustaining foreign operations and other comprehensive
income components will be disclosed separately and reclassified to net
income when realized.
ii) Accounting Changes
The CICA has issued revisions to Handbook Section 1506 - "Accounting
Changes", applicable to interim and annual financial statements issued
after January 1, 2007. The revisions in this section address changes in
accounting policies, accounting estimates and the correction of errors. A
change in accounting policy is recommended only if the change is required
by a primary source of GAAP or results in the financial statements
providing reliable and more relevant information. The Trust will adopt
the requirements of this section for any future changes to accounting
policies and estimates.
s) Reclassification
Certain information provided for prior years has been reclassified to
conform to the presentation adopted in 2006.
3. DISTRIBUTIONS
For the twelve month period ended December 31, 2006 the Trust paid
distributions to unitholders in the amount of $86,316 (2005 - $52,410)
and declared distributions of $90,288 (2005 - $53,651) in accordance with
the following schedule:
Period covered Date of
Date of Distrib- Per
Record ution Unit $
-------------------------------------------------------------------------
December 1, 2005 to December 31, 2005 12/31/05 01/16/06 0.120
January 1, 2006 to January 31, 2006 01/31/06 02/15/06 0.120
February 1, 2006 to February 28, 2006 02/28/06 03/15/06 0.125
March 1, 2006 to March 31, 2006 03/31/06 04/17/06 0.135
April 1, 2006 to April 30, 2006 04/28/06 05/15/06 0.135
May 1, 2006 to May 31, 2006 05/31/06 06/15/06 0.155
June 1, 2006 to June 30, 2006 06/30/06 07/17/06 0.155
July 1, 2006 to July 31, 2006 07/31/06 08/15/06 0.155
August 1, 2006 to August 31, 2006 08/31/06 09/15/06 0.155
September 1, 2006 to September 30, 2006 09/30/06 10/16/06 0.155
October 1, 2006 to October 31, 2006 10/31/06 11/15/06 0.175
November 1, 2006 to November 30, 2006 11/30/06 12/15/06 0.175
December 1, 2006 to December 31, 2006 12/29/06 01/15/07 0.175
-------------------------------------------------------------------------
4. ACQUISITIONS
- On February 23, 2006 the Trust, through a newly formed wholly-owned
subsidiary, CCS (USA) Inc., acquired all of the outstanding equity
interests of Environmental Treatment Team LLC ("ETT") for cash
consideration of $22,139. Subsequent to the acquisition, ETT changed
its name to CCS Energy Services LLC ("Energy Services LLC"). The
company provides waste treatment and disposal services to the U.S.
Gulf coast offshore oil and gas industry through three transfer
stations and two processing facilities in Louisiana and Alabama.
- On April 3, 2006 the Trust completed an asset purchase agreement with
HMI Industries Inc. ("HMI"). Headquartered in Red Deer, Alberta, HMI
operates a scrap metal processing facility complete with a container
drop-off business for collection of scrap metal. The acquisition
allows CCS to diversify into services that are complementary to its
HAZCO Environmental Services division. The purchase price for these
assets was $34,191, with consideration consisting of cash and trust
units. Trust units issued are held in escrow, to be released in equal
amounts over the next five years, beginning April, 2007.
- On May 1, 2006 the Trust completed the acquisition of the operating
assets of the Grizzly, Hi-West, and Poncho Well Servicing Group
(collectively "Grizzly"). The acquired assets consist of 86 well
servicing rigs, auxiliary equipment, and real estate. The total
purchase price was $279,879, with consideration consisting of cash
and trust units. Of the trust units issued, 25 percent were released
on completion of the acquisition, with the remaining trust units held
in escrow, to be released in equal amounts over the next three years,
beginning May, 2007.
- On September 8, 2006 the Trust acquired all of the outstanding shares
of ARKLA Disposal Services Inc. and its affiliated company ARKLA
Disposal LLC (collectively "ARKLA"). ARKLA owns and operates an
industrial waste water treatment plant in the Port of Shreveport,
Louisiana, treating water from area gas wells and various industrial
waste streams. The ARKLA purchase price was $10,967, with
consideration consisting of cash and trust units. Trust units issued
are held in escrow, to be released in equal amounts over the next
five years, beginning September, 2007.
- On October 11, 2006 the Trust acquired the operating assets of
Lionhead Engineering & Consulting Ltd. ("Lionhead"). Lionhead
specializes in providing engineering and project management services
for the final phase of the oilfield lifecycle including well and
pipeline abandonment, facility decommissioning, inactive well
management and regulatory compliance services. The total purchase
price for the Lionhead assets was $10,161, with consideration
consisting of cash and trust units. Trust units issued are held in
escrow, to be released in equal amounts over the next three years,
beginning October, 2007.
All acquisitions were recorded using the purchase method, with the
results of operations included in these consolidated financial statements
from the date of acquisition. Energy Services LLC, ARKLA and Lionhead are
reported within the Energy Services operating segment. Grizzly results
are included within the Concord operating segment and HMI within the
HAZCO operating segment. The purchase price for each of the acquisitions
has been allocated as follows:
Energy
Services
LLC HMI Grizzly ARKLA Lionhead Total
Net assets acquired: $ $ $ $ $ $
-------------------------------------------------------------------------
Working capital 3,978 500 - (334) (279) 3,865
Property, plant and
equipment 19,449 6,680 265,249 14,969 1,741 308,088
Land - 1,900 - - - 1,900
Goodwill 1,426 18,842 7,914 2,454 4,242 34,878
Intangibles 1,844 5,400 3,800 1,061 4,260 16,365
Future income taxes (3,212) 869 2,916 (77) 197 693
Asset retirement
obligations (1,346) - - (364) - (1,710)
Other long-term
liabilities - - - (663) - (663)
Long-term debt - - - (6,079) - (6,079)
-------------------------------------------------------------------------
22,139 34,191 279,879 10,967 10,161 357,337
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration
paid:
$ $ $ $ $ $
Cash 21,682 23,075 213,850 5,718 7,825 272,150
Trust units
(note 12a) - 11,065 65,230 5,091 2,223 83,609
Transaction costs 457 51 799 158 113 1,578
-------------------------------------------------------------------------
22,139 34,191 279,879 10,967 10,161 357,337
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. GOODWILL AND INTANGIBLE ASSETS
Net Book Net Book
Value Value
Dec. 31, Dec. 31,
2005 Additions Amortization 2006
-------------------------------------------------------------------------
Goodwill 51,295 35,018 - 86,313
-------------------------------------------------------------------------
Intangible assets:
Marketing contracts 2,124 - (354) 1,770
Customer relationships 2,768 12,631 (1,147) 14,252
Non-compete agreements 3,012 460 (740) 2,732
Certificates of approval(1) 360 - - 360
Trade names 192 520 (66) 646
Software and technology - 1,340 (10) 1,330
Other Permits(1) - 1,119 - 1,119
Other - 361 (62) 299
-------------------------------------------------------------------------
8,456 16,431 (2,379) 22,508
-------------------------------------------------------------------------
Goodwill and Intangible
assets 59,751 51,449 (2,379) 108,821
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Intangible assets have a finite useful life and therefore are not
subject to amortization
6. JOINT VENTURES
The Trust has the following joint venture interests:
- a 50 percent interest, with voting rights equivalent to the other
joint venture party, in Hardisty Caverns Limited Partnership
(HCLP), which owns and operates an underground cavern for storing
crude oil. The joint venture was established between CCS and
Enbridge Inc. in 2003.
- a 50 percent interest, with voting rights equivalent to the other
joint venture party, in a joint venture established between HAZCO
and Komex International Ltd. The joint venture was established in
2001 and is involved in the remediation and commercial development
of land acquired in northern Alberta.
- a 50 percent interest, with voting rights equivalent to the other
joint venture party, in a joint venture established between HAZCO
and Denesoline Environmental LP. The joint venture was established
to provide environmental services in the Fort McMurray, Alberta
area.
The Trust's interest in these joint ventures is accounted for using the
proportionate consolidation method. Under this method, the Trust's
proportionate share of income, expenses, assets, liabilities and cash
flows of the joint ventures is included in the Trust's consolidated
balance sheets, statements of income and accumulated earnings, and cash
flows.
The following amounts are included in the Trust's consolidated financial
statements before consolidation eliminations:
2006 2005
$ $
-------------------------------------------------------------------------
Cash 233 646
Current assets 671 253
Property, plant and equipment 33,140 34,527
Current liabilities (1,083) (1,063)
Net income 5,116 3,259
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows:
Operating activities 5,707 4,882
Financing activities (6,011) (4,113)
Investing activities (110) (549)
-------------------------------------------------------------------------
(414) 220
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. PROPERTY, PLANT AND EQUIPMENT
Accumulated
Depreciation Net
and Amor- Book
Cost tization Value
2006 $ $ $
-------------------------------------------------------------------------
Processing, cavern and landfill
facilities 459,907 130,901 329,006
Service rigs, environmental and
geotechnical drilling rigs 364,029 38,278 325,751
Land 17,971 - 17,971
Buildings 57,480 9,420 48,060
Mobile equipment 82,358 19,993 62,365
Marine vessels 4,947 199 4,748
Rental equipment 3,903 196 3,707
Pipeline line-fill 4,148 - 4,148
Furniture and equipment 12,969 5,824 7,145
Airplane, fractional interest (note 19a) 3,680 830 2,850
Construction in progress 85,165 - 85,165
-------------------------------------------------------------------------
1,096,557 205,641 890,916
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
Depreciation Net
and Amor- Book
Cost tization Value
2005 $ $ $
-------------------------------------------------------------------------
Processing, cavern and landfill
facilities 354,297 98,881 255,416
Service rigs, environmental and
geotechnical drilling rigs 88,328 22,748 65,580
Land 8,990 - 8,990
Buildings 28,477 5,524 22,953
Mobile equipment 50,472 9,965 40,507
Rental equipment 3,599 40 3,559
Pipeline line-fill 1,396 - 1,396
Furniture and equipment 7,917 4,479 3,438
Airplane, fractional interest (note 19a) 2,901 523 2,378
Construction in progress 38,886 - 38,886
-------------------------------------------------------------------------
585,263 142,160 443,103
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. ASSET RETIREMENT OBLIGATIONS
The Trust estimates the undiscounted cash flows related to asset
retirement obligations, to be incurred over an estimated period of 20 to
30 years, will total approximately $90,392 (2005 - $56,807) using an
annual inflation rate of two percent (2005 - three percent). The fair
value at December 31, 2006 was $38,996 (2005 - $20,326) using a discount
rate of 5.8 percent (2005 - eight percent).
For the years ended December 31, 2006 and 2005, the Trust recorded the
following activity related to the liability:
2006 2005
$ $
-------------------------------------------------------------------------
Asset retirement obligations, beginning of year 20,326 18,893
New obligations and revised estimates 16,214 862
Obligations fulfilled (551) (985)
Accretion expense 3,007 1,556
-------------------------------------------------------------------------
Asset retirement obligations, end of year 38,996 20,326
Less: current portion 3,922 1,373
-------------------------------------------------------------------------
Long-term portion 35,074 18,953
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. LONG-TERM DEBT
2006 2005
$ $
-------------------------------------------------------------------------
Credit facilities (note 9a) 128,462 151,623
Private placement notes (note 9b) 220,000 -
Finance company loans (note 9c) 2,861 3,170
Bonds (note 9d) 6,391 -
Promissory note payable (note 9e) 3,944 3,672
-------------------------------------------------------------------------
Long-term debt 361,658 158,465
Less: current portion 2,657 2,068
-------------------------------------------------------------------------
Long-term portion 359,001 156,397
-------------------------------------------------------------------------
-------------------------------------------------------------------------
a) Credit Facilities
2006 2005
$ $
-------------------------------------------------------------------------
Extendible revolving facility - Facility A
$400,000 (2005 - $210,000), three-year extendible,
revolving facility bearing interest, at the Trust's
option, at either the bank's prime ("Prime") rate,
bankers' acceptance ("BA") rate or LIBOR rate plus
zero to 175 basis points ("bps"), with any unused
amounts subject to standby fees. Drawings under
Facility A are repayable in full in December 2009,
unless extended at the approval of the Lenders. 98,462 101,623
Term facility - Facility B
$30,000 (2005 - $50,000), seven-year non-revolving,
non-reducing term facility bearing interest at a
fixed rate of 6.4 percent. Facility B is repayable
in full in December 2011. 30,000 50,000
-------------------------------------------------------------------------
128,462 151,623
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Trust renegotiated its revolving and term credit facility with a bank
syndicate twice in 2006. The most recent revision, completed in December
2006, resulted in an unsecured facility, with borrowing capacity on
Facility A increased to $400,000. Interest rates on this facility were
reduced by 10 to 25 bps, depending on the Trust's covenant requirements
within the credit facility. Facility B was reduced to $30,000, due to the
withdrawal of a lender from the lending syndicate.
Outstanding letters of credit at December 31, 2006 totaled $39,902
(2005 - $25,741). The outstanding letters of credit effectively reduce
the borrowing available under Facility A. At December 31, 2006, the Trust
had $21,497 of surety bonds outstanding to secure work, provide for
environmental liabilities and for completion of work with respect to its
operating divisions. These outstanding bonds do not impact the amount of
credit available on Facility A, however, under the terms of the credit
facilities, total surety bonds outstanding at any time cannot exceed
$60,000.
b) Private placement senior notes
In December, 2006, the Trust negotiated $270,000 in private placement
senior notes with a group of institutional investors. These senior notes
are non-amortizing with maturity dates ranging from seven to 12 years.
On December 14, 2006, a total of $220,000 notes were issued as follows:
Note Amount Issued Interest Rate Due Date(2)
-------------------------------------------------------------------------
$ $ %
Series A 85,000 85,000 4.995 2013
Series B 70,000 70,000 5.200 2016
Series C 65,000 65,000 5.350 2018
Series D(1) 15,000 - 4.995 2013
Series E(1) 20,000 - 5.200 2016
Series F(1) 15,000 - 5.350 2018
-------------------------------------------------------------------------
270,000 220,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The $50,000 of Series D to F notes must be issued by June 28, 2007.
(2) All repayments are due on the 31st of December of each year.
c) Finance company loans
The Trust has available a $6,000 term loan facility with an equipment
manufacturer's finance company. The interest rates associated with these
loans range from prime minus 0.7 percent to prime minus 3.5 percent for
floating rate debt, and zero to four percent for fixed rate debt.
Repayment terms cannot extend beyond five years. The equipment purchased
through this facility is secured as collateral against the outstanding
debt obligation.
d) Bonds
The Trust has $6.391 of bonds outstanding with the Caddo-Bossier Parishes
Port Commission (the "Port"). These bonds are carried by CCS Energy
Services LLC (by merger on December 31, 2006 with the former bondholder,
ARKLA Disposal, LLC) pursuant to a lease agreement dated October 1, 2004.
The bonds were issued to finance ARKLA's acquisition, construction,
renovation and equipping of a facility to clean and process industrial
waste water. The bonds bear interest at a rate of five percent and mature
on November 1, 2024. Interest and payments of principle on the bonds are
due monthly. The bonds, along with accrued interest, can be repaid at any
time without penalty. The ARKLA facility in Shreveport, Louisiana is
secured as collateral against this outstanding debt obligation.
e) Promissory note payable
On December 10, 2004 the Trust issued a non-interest bearing promissory
note payable, with a face value of $5,000, as part of the purchase price
consideration in the HAZCO acquisition. The note is discounted at a rate
of eight percent to reflect its current fair market value; 2006 - $3,944
(2005 - $3,672). The note is repayable in full on December 10, 2009.
f) Minimum annual repayments
The minimum annual principal repayments of long-term debt over the next
five years are as follows:
$
-------------------------------------------------------------------------
2007 2,657
2008 309
2009 102,689
2010 296
2011 30,309
Thereafter 225,398
-------------------------------------------------------------------------
361,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
g) Effective interest rates
The average effective interest rate on long-term debt outstanding in 2006
was 5.4 percent (2005 - 5.3 percent).
h) Deferred financing costs
Costs associated with the negotiation, extension, amendment or
restatement of the Trust's debt facilities are deferred and amortized on
a straight-line basis over the terms of the debt agreement to which they
relate. For the year ended December 31, 2006, $543 (2005 - $522) was
amortized to financing charges on the consolidated statements of income
and accumulated earnings. In 2006, deferred financing costs increased by
$4,550 due to the renegotiation of the term and revolving credit
facilities and the closing of the private placement senior notes. The
total unamortized costs at December 31, 2006 totaled $5,196 (2005 -
$1,189).
i) Interest rate swap agreement
On May 17, 2002 the Trust entered into a five-year non-amortizing
interest rate swap agreement for $18,000 at a fixed rate of 5.6 percent.
As at December 31, 2006, the cost to settle this swap would be $175
(2005 - $516).
On May 29, 2003, the Trust entered into a $20,000 five-year amortizing
interest rate swap agreement at a fixed rate of 4.1 percent. This swap
has been amortized to $6,000 as at December 31, 2006. The Trust would
receive $9 (2005 - cost of $32) on settlement of this swap.
j) Debt covenants
Under the terms of the credit facilities, the Trust must comply with
certain financial and non-financial covenants, as defined by its lenders.
Throughout 2006, and as at December 31, 2006, the Trust was in compliance
with all of these covenants.
10. FINANCIAL INSTRUMENTS
a) Fair values of financial assets and liabilities
The Trust has financial instruments on its consolidated balance sheets
consisting of cash and cash equivalents, accounts receivable,
investments, accounts payable, income taxes payable, distributions
payable, long-term debt, and long-term purchase obligations. The carrying
value of these instruments approximates fair value unless otherwise
stated.
b) Credit Risk
The Trust provides environmental solutions for waste management, crude
oil sales and marketing, contract oilwell services, rental of oilfield
equipment and sales of drilling fluids to the oil and gas industry. This
results in a concentration of credit risk. The Trust generally extends
unsecured credit to these customers, and therefore, the collection of
accounts receivable may be affected by changes in economic or other
conditions and may accordingly impact the Trust's overall credit risk.
Management believes the risk is mitigated by the size, reputation and
diversified nature of the companies to which the Trust extends credit.
Credit exposure on financial instruments, which consists of interest rate
swaps, arises from the possibility that a counter-party in which the
Trust has an unrealized gain fails to perform according to the terms of
the contract. Management believes the risks of non-performance are
minimal as the counter-parties are major financial institutions.
Credit exposure on cash and cash equivalents arises as the Trust holds
those assets with major financial institutions. Management believes the
risk is mitigated by the size and financial strength of those major
financial institutions.
c) Interest rate risk
The Trust is exposed to interest rate risk with respect to fluctuating
interest rates on its revolving credit facilities. At December 31, 2006,
approximately 28 percent of the Trust's debt outstanding was subject to
floating rate interest. The Trust manages this exposure through interest
rate swap initiatives, thereby fixing a portion of the interest on
outstanding floating interest rate debt. At December 31, 2006,
approximately 24 percent (2005 - 26 percent) of the interest on
outstanding floating interest rate debt was fixed through swap
agreements.
d) Foreign exchange risk
The Trust is exposed to foreign exchange risk with respect to its U.S.
operations. Acquisitions in the U.S. of equity and operating assets along
with the subsequent funding of capital and working capital requirements
results in the exchange of Canadian dollars for U.S. dollars on an
ongoing basis.
The Trust is also exposed to foreign exchange risk on the translation of
its U.S. operations to Canadian dollars on consolidation of financial
results. The cumulative translation adjustment is reported as a separate
component of unitholders' equity.
The Trust has exposure to foreign exchange fluctuations on service
contracts executed by HAZCO del Peru S.A., which operates in Peru.
Service contracts and bank accounts are denominated in U.S. dollars, with
local operating expenses incurred in the local currency (Nuevos Soles).
Excess cash earned by this company is transferred to a U.S. dollar bank
account in Canada.
11. FINANCING CHARGES
Financing expense for the year is comprised of the following:
2006 2005
$ $
-------------------------------------------------------------------------
Interest on long-term debt 12,723 7,395
Recognized net loss on interest rate swaps 275 681
Amortization of deferred financing costs and
promissory note 815 522
Interest income (753) -
-------------------------------------------------------------------------
Net financing expense 13,060 8,598
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. UNITHOLDERS' EQUITY
a) Unitholders' capital
Authorized - Unlimited number of voting trust units
Trust Units
-------------------------------------------------------------------------
December 31, 2005 42,678,524 197,237
Issued upon conversion of exchangeable shares
for trust units 87,433 88
Issued upon exercise of employee trust unit
options 35,124 841
Issued upon acquisitions (note 4) 2,500,283 83,609
Trust unit issue (net of costs and taxes) 6,656,885 235,916
Adjustment for exchangeable share conversions
and trust unit dilution - 3,852
Units vested and sold on retention bonus (note 13b) - 571
-------------------------------------------------------------------------
December 31, 2006 51,958,249 522,114
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Weighted average trust units
As at December 31, 2006 and 2005, respectively, diluted net income per
trust unit has been calculated based on the following:
2006 2005
-------------------------------------------------------------------------
Weighted average trust units outstanding - basic 48,823,290 42,192,490
Trust units issuable on conversion of
exchangeable shares 15,074,234 14,442,648
Dilutive options 178,296 72,366
-------------------------------------------------------------------------
Dilutive trust units and exchangeable shares 64,075,820 56,707,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
c) Contributed surplus
The balance as at December 31, 2006 and December 31, 2005, is comprised
of the following:
2006 2005
$ $
-------------------------------------------------------------------------
Balance, beginning of year 605 -
Unit-based compensation expense 2,016 605
Transferred to unitholders' capital on exercise
of options (39) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, end of year 2,582 605
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. UNIT-BASED COMPENSATION
a) Unit option plan
Under the Trust's unit option plan, directors, officers, employees, and
consultants of the Trust are eligible to receive options to acquire trust
units, with terms not to exceed five years from the date of the grant.
The exercise price is based on the weighted average price of the units
for the five trading days immediately prior to the grant date, which may
differ from the closing price on the Toronto Stock Exchange for such
units on the day of the grant. For options granted to date, the exercise
price was not materially different from the trading price of the units on
the grant date. Under the unit option plan, vesting periods are
determined by the Board of Directors of CCS Inc. at the time of the
grant. For all options granted to December 31, 2006, 25 percent of the
options are exercisable annually on the anniversary date of the original
grant.
The maximum number of trust units issuable under this plan may not exceed
ten percent of the Trust's outstanding units. Outstanding units include
the issued and outstanding units on a non-diluted basis, plus all units
issuable on conversion of all exchangeable shares, at any time, which at
December 31, 2006 totalled 67,032,483.
Option transactions for the period are as follows:
2006 2005
-------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Twelve months ended price price
December 31 Units $ Units $
-------------------------------------------------------------------------
Options outstanding,
beginning of year 769,500 24.14 - -
Granted 1,020,500 36.25 815,000 24.04
Exercised (35,124) 22.84 - -
Forfeited (106,985) 29.41 (45,500) 22.42
-------------------------------------------------------------------------
Options outstanding,
end of year 1,647,891 31.32 769,500 24.14
-------------------------------------------------------------------------
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted
average Weighted Weighted
remaining average Options average
Outstanding contractual exercise exercisable exercise
Range of at Dec. 31, life price at Dec. 31, price
prices 2006 (years) ($) 2006 $
-------------------------------------------------------------------------
$22.04 -
$27.00 434,066 3.0 22.04 95,804 22.04
$27.01 -
$32.00 235,825 3.4 27.98 56,214 27.96
$32.01 -
$37.00 953,500 4.1 36.21 - -
$37.01 -
$38.15 24,500 4.6 37.78 - -
-------------------------------------------------------------------------
Total 1,647,891 3.7 31.32 152,018 24.23
-------------------------------------------------------------------------
The estimated weighted average fair value of trust unit options granted
to date is $6.52 per option. The fair value of each option grant was
estimated on the date of the grant and determined using the Black-Scholes
option-pricing model with the following assumptions:
As at December 31, 2006 Weighted average assumptions
-------------------------------------------------------------------------
Dividend yield 4.43%
Discount for forfeiture 3.00%
Risk-free interest rate 3.75%
Expected life of options 4.2 years
Expected volatility factor of the
future expected market price of
trust units 27.00%
-------------------------------------------------------------------------
The Trust recorded compensation expense, included as part of general and
administrative expense, of $2,016 (2005 - $605) with an offsetting
increase to contributed surplus in respect of the options granted as of
December 31, 2006.
b) Retention bonus
The Board of Directors of CCS Inc. ("Board of Directors") approved a one-
time retention bonus for executives of CCS Inc. on December 17, 2004. The
retention bonus was funded in June, 2005 through the purchase of 40,849
units of the Trust on the open market at a cost of $1,231. The units vest
to the executives in equal amounts on January 1, 2006, 2007, and 2008,
provided the executives are employed with the Trust at the time of
vesting. The trust unit purchase was charged to unitholders' capital
until the units vest and are distributed. For the twelve months ended
December 31, 2006, $295 (2005 - $410) was accrued and charged to general
and administrative expense. The January 1, 2006 vesting of units carried
a total cost of $410 and was charged to unitholders' capital at the time
of vesting. The resignation of one executive resulted in the sale of
units on the open market on June 30, 2006. Net proceeds of $161 were
charged to unitholders' capital.
$
-------------------------------------------------------------------------
Balance at December 31, 2005 (1,231)
Vesting on January 1, 2006 410
Proceeds on sale 161
-------------------------------------------------------------------------
Balance at December 31, 2006 (660)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. NON-CONTROLLING INTEREST ("NCI")
Exchangeable shares are accounted for in accordance with the CICA's
recommendations in EIC-151 "Exchangeable Securities Issued by
Subsidiaries of Income Trusts". In accordance with this accounting
abstract, the exchangeable shares issued by CCS Inc. are considered
transferable to third parties and must therefore be reflected as non-
controlling interest.
a) Non-controlling interest
Non-controlling interest on the consolidated balance sheets is comprised
of the carrying value of the exchangeable shares upon issuance plus the
accumulated earnings attributable to the non-controlling interest. The
net income attributable to the non-controlling interest on the
consolidated statements of income and accumulated earnings represents the
portion of net income in the period attributable to the non-
controlling interest, based on the proportion of trust units issuable for
exchangeable shares to total trust units issued and issuable at the end
of each period.
Non-controlling interest 2006 2005
$ $
-------------------------------------------------------------------------
Carrying value of exchangeable shares 14,955 15,567
Accumulated earnings attributable to NCI
- prior years 54,627 31,102
-------------------------------------------------------------------------
Balance at December 31, 2005 69,582 46,669
NCI interest in net income - 2006 36,103 26,810
Adjustment for trust unit dilution of
NCI interest (note 12a) (3,852) (3,285)
Redeemed upon conversion to trust units (note 12a) (88) (612)
-------------------------------------------------------------------------
Balance at December 31, 2006 101,745 69,582
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Exchangeable Shares
The exchangeable shares are convertible at the option of the holder into
trust units at any time. All exchangeable shares are required to be
converted on or before May 21, 2012, subject to extension to such other
later date that the Board of Directors may determine in its sole
discretion. The number of trust units issuable upon conversion is based
upon the exchange ratio in effect at the conversion date. The exchange
ratio, which was initially equal to one to one, is cumulatively adjusted
each time a distribution is made to unitholders. The adjustment to the
exchange ratio is based on the cash distributions paid to unitholders
divided by a weighted average trust unit price. The exchange ratio at
December 31, 2006 was 2.67427 (December 31, 2005 - 2.54714).
2006 2005
-------------------------------------------------------------------------
Exchangeable shares Shares $ Shares $
-------------------------------------------------------------------------
Balance, beginning
of year 5,670,143 14,955 5,902,060 15,567
Redeemed upon conversion
to trust units (33,377) (88) (231,917) (612)
-------------------------------------------------------------------------
Balance, end of year 5,636,766 14,867 5,670,143 14,955
Exchange ratio,
end of year 2.67427 - 2.54714 -
-------------------------------------------------------------------------
Trust units issuable
upon conversion 15,074,234 14,867 14,442,648 14,955
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES
a) Legal disputes
The Trust is not involved in any legal disputes that would generate a
material impact to the financial results of the Trust.
b) Operating leases
The Trust has entered into operating leases for office premises,
facilities and mobile and office equipment with future minimum lease
payments for the next five years as follows:
$
-------------------------------------------------------------------------
2007 5,040
2008 4,020
2009 2,304
2010 1,479
2011 620
-------------------------------------------------------------------------
c) Asset purchase agreements
Under the terms of certain asset purchase agreements entered into by the
Energy Services division, consideration provided to the vendors included
future royalty payments or a requirement to provide services at fixed,
discounted rates, with maximum daily limits. Due to the uncertainty
involved in determining the total value of future payments and services
to be provided over the term of the agreements, the amounts are
recognized in the consolidated financial statements, as part of property,
plant and equipment, when incurred. During 2006, the Trust incurred
payments and discounts under these agreements totalling $928 (2005 -
$592).
On September 22, 2004, the Trust entered into an eight year take or pay
agreement with a pipeline company with respect to its Rainbow Lake
facility. Under the terms of the agreement, the Trust is committed to
deliver minimum annual crude petroleum volumes to the pipeline. If, at
the end of each year, the Trust has not delivered the minimum volumes, it
is obligated to pay a tariff on the undelivered volumes. In 2006, the
Trust was required to pay $341 (2005 - $149) in tariffs on undelivered
volumes. The Trust expects to meet its future minimum annual volumes due
to increased customer activity in the area.
d) Consulting arrangements
The Trust has entered into various consulting arrangements with respect
to international corporate development initiatives, with compensation
consisting of consulting fees and the commitment to purchase, on behalf
of the consultants, CCS Income Trust units on the open market upon the
signing of executable, international service contracts. The Trust is
contingently obligated to acquire 8,000 trust units, or pay the cash
equivalent thereof, however to date, has not entered into any service
contracts.
e) Indemnification
The Trust indemnifies its directors and officers who are, or were,
serving at the Trust's request in such capacities. Historically these
costs have not been material to the Trust's financial position,
operations, or cash flows.
16. PURCHASE OBLIGATIONS
2006 2005
$ $
-------------------------------------------------------------------------
Purchase obligations, beginning of year 7,708 6,446
Loss (gain) on revaluation (331) 2,714
Payments for natural gas (1,209) (1,452)
-------------------------------------------------------------------------
Purchase obligations, end of year 6,168 7,708
Less: current portion (1,168) (1,311)
-------------------------------------------------------------------------
Long-term portion 5,000 6,397
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On August 8, 2000, the Trust, through its CCS Energy Services division,
acquired three caverns at its Lindbergh facility in exchange for a
commitment to deliver 2,353 gigajoules of natural gas to the vendor over
a 13-year period. The original value of $5,377 assigned to this
obligation was estimated using the average cost per unit of capacity
acquired by CCS in its Unity cavern acquisition, completed in the same
year.
In order to satisfy its gas delivery commitment, the Trust entered into a
long-term agreement with a major exploration and development company to
deliver the specified volume of gas at variable prices. The gas delivery
obligation is recorded at its fair market value based on the present
value of the future delivery obligation using a future gas price curve.
Any gain or loss resulting from the re-pricing is included in earnings
immediately. In 2006, the gas delivery commitment was adjusted by $331
(2005 - loss of $2,714) to reflect its estimated fair market value.
17. INCOME TAXES
Income tax expense varies from the amounts that would be computed by
applying the combined Canadian federal and provincial statutory income
tax rates for each of the years due to the following differences:
2006 2005
-------------------------------------------------------------------------
$ % $ %
-------------------------------------------------------------------------
Income before income taxes
and non-controlling
interest 195,080 138,671
Provision for income taxes
at statutory tax rates 64,252 32.9 47,425 34.2
Adjustment to income taxes
due to:
Trust distributions (26,960) (13.8) (16,135) (11.6)
Tax effect of rate
reductions on temporary
differences (6,668) (3.4) (108) (0.1)
Permanent differences 1,126 0.6 634 0.5
Other 2,873 1.5 884 0.6
-------------------------------------------------------------------------
34,623 17.8 32,700 23.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
a) Components of future income taxes
The net future tax liability is comprised of the following:
2006 2005
$ $
-------------------------------------------------------------------------
Differences between the tax base and reported
amounts of depreciable assets 66,111 52,020
Goodwill and intangible assets (989) 1,995
Provision for asset retirement obligations (11,668) (6,913)
Equity issue and deferred financing costs (2,923) (206)
Non-capital loss-carryforwards (55) (299)
Other 1,411 (1,470)
-------------------------------------------------------------------------
51,887 45,127
-------------------------------------------------------------------------
-------------------------------------------------------------------------
18. CHANGE IN NON-CASH WORKING CAPITAL BALANCES
Changes in non-cash working capital balances are comprised of the
following:
2006 2005
$ $
-------------------------------------------------------------------------
Accounts receivable (70,960) (45,687)
Inventory and other current assets (1,274) (5,728)
Accounts payable and accrued liabilities 23,545 28,762
Income taxes payable (23,121) 22,672
Working capital acquired (note 4) 3,865 17
-------------------------------------------------------------------------
(67,945) 36
Attributable to investing activities (1,383) (1,181)
Attributable to operating activities (66,562) 1,217
-------------------------------------------------------------------------
-------------------------------------------------------------------------
19. RELATED-PARTY TRANSACTIONS
a) Fractional interest
In 2006, the Trust purchased an additional 12.5 percent interest
in a Piaggio Avanti P-180 aircraft for use in CCS' operations, bringing
its total fractional ownership interest to 50 percent. Corpac Canada Ltd.
(formerly Avia Aviation Ltd.), a company controlled by the Chairman and
CEO of CCS Inc., also provides management services and operates the
aircraft on behalf of the Trust. For the twelve months ended December 31,
2006, the Trust incurred management fee expense, operating costs and
costs for contract air services with Corpac Canada Ltd. totalling $539
(2005 - $483).
b) Other
HAZCO Industrial Services Limited Partnership and Environmental Pumps
Inc., entities controlled by certain members of management and their
immediate families, charge rental fees to the Trust. For the
twelve months ended December 31, 2006 these fees totalled $481
(2005 - $438).
During the twelve months ended December 31, 2006, the Trust incurred
costs totalling $269 (2005 - nil) with Capital Technologies Inc. ("CTI")
for services related to research and development of technologies with
respect to the treating of heavy oil. The Chairman and CEO of CCS Inc.
has a 17 percent interest in CTI.
All related-party transactions were recorded at the exchange amount and
charged to either operating or general and administrative expense,
depending on the nature of the transaction.
20. FOREIGN CURRENCY TRANSLATION ADJUSTMENT
The foreign currency translation adjustment represents the unrealized
gain (loss) on the Trust's net investment in self-sustaining foreign
operations.
2006 2005
Twelve months ended December 31 $ $
-------------------------------------------------------------------------
Balance, beginning of year - -
Unrealized net gain on translation of investments 948 -
-------------------------------------------------------------------------
Balance, end of year 948 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
21. SEASONALITY
The majority of the Trust's operations take place in Canada where the
ability to move heavy equipment in the oil and natural gas fields is
dependent on weather conditions. As warm weather returns in the spring,
the winter's frost comes out of the ground, rendering many secondary
roads and oil and natural gas production sites incapable of supporting
the weight of heavy equipment until they thoroughly dry out. The duration
of "spring breakup" has a direct impact on activity levels of the Trust
and its customers. As a result, each year the Trust tends to earn lower
revenues and operating margin in the second fiscal quarter. The Trust's
operations on the U.S. Gulf Coast are affected by seasonal differences in
weather patterns in the Gulf of Mexico. The rainy weather, tropical
storms and hurricanes prevalent in the Gulf of Mexico and along the Gulf
Coast during the year may affect operating results depending on the
weather patterns in any particular reporting period.
22. SEGMENTED INFORMATION
The Trust's reportable operating segments consist of the following
divisions: CCS Energy Services ("Energy Services"); Concord Well
Servicing ("Concord"); HAZCO Environmental Services ("HAZCO"); and CCS
Energy Marketing ("CEM").
- The Energy Services operating segment owns and operates treatment,
recovery and disposal (TRD) facilities, transfer stations and
cavern facilities throughout western Canada and the Gulf Coast
region of the United States. Services are provided in the areas of
emulsion treatment, water processing and disposal, waste
processing, drilling mud disposal, tank/truck washing, crude oil
terminalling, cavern disposal, well and site abandonment and
processing of naturally occurring radioactive material (NORM).
- Concord provides contract oilfield services including well
completions, workovers, abandonments and, through the HiAlta
business unit, the rental of oilfield equipment. Concord operates
140 rigs in western Canada.
- HAZCO provides a wide range of specialized services including site
remediation, decommissioning, waste services, environmental
construction and technologies, emergency response, engineered
landfill disposal, sulphur and other specialty services. HAZCO also
operates a network of industrial and engineered landfills,
bioremediation facilities and hazardous waste transfer stations
that span western Canada. Through its HMI business unit, HAZCO
provides scrap metal collection and processing services. HAZCO
provides services primarily throughout Canada, with select services
provided in Peru and the U.S.
- CEM extracts additional value and operating margin on waste and
recovered oil volumes from the Energy Services facilities. This
division captures the incremental value created through the
marketing chain with revenue streams of lease purchases, single
shipper/optimization and bulk purchases.
Business activity between the divisions is recorded at market rates.
Inter-segment eliminations adjust revenue, expenses and profit on
inter-segment activity.
The accounting policies followed by these operating segments are the same
as those described in the summary of significant accounting polices.
Administrative expenses directly related to the individual business
segments are included in the operating expenses of that division.
The following tables provide information by operating segment for the
twelve months ended December 31, 2006 and 2005:
Energy Con-
Services Concord HAZCO CEM solidated
For the twelve months
ended Dec. 31, 2006 $ $ $ $ $
-------------------------------------------------------------------------
Revenue prior to
inter-segment
eliminations 243,039 204,618 335,487 924,857 1,708,001
Inter-segment
eliminations (2,083) (136) (1,613) (30,350) (34,182)
-------------------------------------------------------------------------
Net revenue 240,956 204,482 333,874 894,507 1,673,819
Operating expenses
prior to
inter-segment
eliminations 122,197 134,574 251,432 902,449 1,410,652
Inter-segment
eliminations (1,613) (11) (2,070) (30,351) (34,045)
-------------------------------------------------------------------------
Net expenses 120,584 134,563 249,362 872,098 1,376,607
-------------------------------------------------------------------------
Operating margin 120,372 69,919 84,512 22,409 297,212
Gas delivery
obligation valuation (331) - - - (331)
Loss (gain) on sale
of assets (67) 160 498 (54) 537
Depreciation and
amortization 26,511 15,728 23,575 67 65,881
-------------------------------------------------------------------------
Income before
corporate items 94,259 54,031 60,439 22,396 231,125
-------------------------------------------------------------------------
General and
administrative 23,118
Financing 13,060
Depreciation and
amortization 1,335
Foreign exchange
loss (gain) (1,468)
Income taxes 34,623
-------------------------------------------------------------------------
Income before
non-controlling
interest 160,457
Non-controlling
interest (36,103)
-------------------------------------------------------------------------
Net income for
the year 124,354
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets 530,207 444,068 315,981 13,051 1,303,307
-------------------------------------------------------------------------
Goodwill 19,703 9,286 57,324 - 86,313
-------------------------------------------------------------------------
Capital expenditures 99,171 45,313 46,687 2,938 194,109
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Energy Con-
Services Concord HAZCO CEM solidated
restated restated restated
(note 2s) (note 2s) (note 2s)
For the twelve months
ended Dec. 31, 2005 $ $ $ $ $
-------------------------------------------------------------------------
Revenue prior to
inter-segment
eliminations 170,865 94,700 281,119 430,197 976,881
Inter-segment
eliminations (2,632) (717) (995) (33,878) (38,222)
-------------------------------------------------------------------------
Net revenue 168,233 93,983 280,124 396,319 938,659
Operating expenses
prior to
inter-segment
eliminations 69,681 62,608 216,860 422,257 771,406
Inter-segment
eliminations (2,400) (717) (995) (33,878) (37,990)
-------------------------------------------------------------------------
Net expenses 67,281 61,891 215,865 388,379 733,416
-------------------------------------------------------------------------
Operating margin 100,952 32,092 64,259 7,940 205,243
Gas delivery
obligation valuation 2,714 - - - 2,714
Loss (gain) on sale
of assets 15 62 (128) - (51)
Depreciation and
amortization 15,321 4,661 18,785 - 38,767
-------------------------------------------------------------------------
Income before
corporate items 82,902 27,369 45,602 7,940 163,813
-------------------------------------------------------------------------
General and
administrative 15,571
Financing 8,598
Depreciation and
amortization 988
Foreign exchange
loss (gain) (15)
Income taxes 32,700
-------------------------------------------------------------------------
Income before
non-controlling
interest 105,971
Non-controlling
interest (26,810)
-------------------------------------------------------------------------
Net income for
the year 79,161
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets 377,239 109,861 184,800 5,931 677,831
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill 11,441 1,372 38,482 - 51,295
-------------------------------------------------------------------------
Capital expenditures 63,525 18,034 24,046 1,500 107,105
-------------------------------------------------------------------------
-------------------------------------------------------------------------
23. SUBSEQUENT EVENTS
On March 1, 2007 CCS signed a purchase and sale agreement for the
operating assets of Pride Oilfield Services, L.L.C. ("Pride") for
approximately $5,750, including the assumption of approximately $1,200 in
debt. Consideration consists of approximately $1,200 in CCS Income Trust
units and cash. The transaction is expected to close by March 31, 2007,
subject to the completion of due diligence. Pride is headquartered in
Benton, Louisiana, and is involved in the collection, hauling and
disposal of produced water from various generators within the East Texas
and Northern Louisiana areas. Approximately 50 percent of Pride's hauling
is currently delivered to CCS facilities in the U.S.
On March 7, 2007 CCS acquired the operating assets of Mobley Oilfield
Services, L.P. ("Mobley") for approximately $44,000, with all
consideration paid in cash. CCS acquired substantially all of the
operating assets and properties of Mobley with the assumption of certain
obligations and liabilities, including $6,000 in debt which was
discharged immediately upon closing. Mobley is an integrated oilfield
service company headquartered in Kilgore, Texas, providing trucking, on-
site storage and disposal of waste produced in the drilling, completion
and ongoing production of oil and gas wells. Its service area includes
Oklahoma, Arkansas, Louisiana and Texas.
Corporate Information
-------------------------------------------------------------------------
EXECUTIVE MANAGEMENT CORPORATE OFFICE
DAVID P. WERKLUND Watermark Tower
Founder, Chairman of the Board, 2400, 530 8th Avenue SW,
President and Chief Executive Calgary, Alberta T2P 3S8
Officer Telephone: (403) 233-7565
Fax: (403) 261-5612
JOHN BEAN, CA Website: www.ccsincometrust.com
President, HAZCO Division
STOCK TRADING INFORMATION
DONALD E. FRIESEN
Vice President, Business CCS Income Trust units are listed
Development, HAZCO Division on the Toronto Stock Exchange (TSX)
under the symbol CCR.UN.
RALPH C. HESJE, P. Eng. President,
CCS Energy Services Division TRANSFER AGENT AND REGISTRAR
BRIAN K.S. McGURK Computershare Trust Company of
Vice President, Human Resources Canada
Calgary, Alberta
JIM McMAHON
Vice President, Business Development BANKERS
MARSHALL L. McRAE, CA Toronto Dominion Bank
Chief Financial Officer Calgary, Alberta
BLAINE G. MELNYK AUDITORS
General Counsel and Corporate
Secretary Ernst & Young LLP
Calgary, Alberta
DOUGLAS B. OLSON, CA
Vice President, Finance CORPORATE COMMUNICATIONS
GORDON N. VIVIAN Shauna Lowry
President, Concord Well Servicing Manager, Corporate Communications
Division Telephone: (403) 233-7565
Fax: (403) 261-5612
RICK M. WISE Email: info@ccsincometrust.com
Vice President, Engineering,
Regulatory and Midstream Development INVESTOR RELATIONS
DIANE YUILL, CA Marshall McRae, CA
Corporate Controller Chief Financial Officer
Telephone: (403) 233-7565
Fax: (403) 261-5612
Email: mmcrae@ccsincometrust.com%SEDAR: 00017961E
For further information: CORPORATE COMMUNICATIONS: Shauna Lowry,
Manager, Corporate Communications, Telephone: (403) 233-7565, Fax: (403)
261-5612, Email: info@ccsincometrust.com; INVESTOR RELATIONS: Marshall McRae,
CA, Chief Financial Officer, Telephone: (403) 233-7565, Fax: (403) 261-5612,
Email: mmcrae@ccsincometrust.com
