CCS Income Trust announces 2006 financial and operating results for the fourth quarter and year-to-date



    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 RE

SOURCES 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:

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

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CCS CORPORATION

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