CCS Income Trust second quarter results and highlights



    Q2 Interim Report
    Three and six months ended June 30, 2007

    CALGARY, Aug. 3 /CNW/ -

    
    -  On June 29, 2007, the Trust announced that it had entered into a
       definitive agreement for a going private transaction with an investor
       group led by Mr. David Werklund, the Founder, President and Chief
       Executive Officer of CCS. Through a series of transactions, a company
       controlled by the investor group will acquire all the assets of CCS
       and each securityholder of CCS will receive $46 per trust unit or the
       equivalent amount per exchangeable share (other than Mr. Werklund, who
       has agreed to accept $45.50 for each trust unit sold by him). The
       transaction is subject to conditions including unitholder approval but
       has been unanimously recommended for approval by the Board of
       Directors (with interested and non-independent directors abstaining).

    -  On April 5, 2007, the Trust acquired the operating assets of Pride
       Oilfield Services, LLC ("Pride") for approximately $5.6 million. Pride
       collects and hauls produced water for customers within the east Texas
       and northern Louisiana regions.

    (UNAUDITED)        Three months ended June 30   Six months ended June 30
    -------------------------------------------------------------------------
    (000s) except per                          %                          %
     unit amounts           2007  2006(1)  change      2007  2006(1)  change
    -------------------------------------------------------------------------
    Revenue             $419,913 $355,997     18%  $937,290 $725,889     29%
    EBITDA(2)             40,618   47,193    (14%)  132,268  123,473      7%
    Income before
     non-controlling
     interest             12,746   26,121    (51%)   65,412   73,350    (11%)
    Net income             9,735   21,880    (56%)   50,498   57,066    (12%)
      per unit
       - diluted            0.19     0.39    (51%)     0.97     1.21    (20%)
    -------------------------------------------------------------------------
    Funds from
     operations(2)        37,662   41,169     (9%)  118,452  105,804     12%
      per unit
       - diluted            0.55     0.62    (11%)     1.75     1.74      1%
    -------------------------------------------------------------------------
    Capital
     expenditures(3)      63,396   45,154     40%   112,086   72,522     55%
    -------------------------------------------------------------------------
    Weighted average
     trust units          52,276   45,945     14%    52,276   45,945     14%
    Exchangeable
     shares(4)            15,422   14,753      5%    15,422   14,753      5%
    -------------------------------------------------------------------------
    Weighted average
     trust units
     - diluted            67,698   60,698     12%    67,698   60,698     12%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Certain comparative figures have been reclassified to conform to the
        presentation adopted in 2007.
    (2) Non-GAAP financial measures are identified and defined in the
        attached Management's Discussion and Analysis.
    (3) Does not include business acquisitions.
    (4) Assuming all exchangeable shares at June 30, 2007 converted at the
        period-end exchange ratio of 2.75134:1 (2006 - 2.60289:1).



    MANAGEMENT'S DISCUSSION AND ANALYSIS

    August 3, 2007

    This Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the attached unaudited, interim consolidated financial
statements of CCS Income Trust (the "Trust" or "CCS"), and readers should also
refer to the audited consolidated financial statements and the MD&A included
in the CCS Income Trust 2006 Annual Report.

    CCS INCOME TRUST - QUARTERLY DATA
    (UNAUDITED)

    -------------------------------------------------------------------------
                         2007                          2006
    (000s except
     per unit
     amounts)           Q2        Q1        Q4        Q3     Q2(1)     Q1(1)
    -------------------------------------------------------------------------
    REVENUE       $419,913  $517,377  $471,530  $476,400  $355,997  $369,892
    EXPENSES
    Operating      372,130   418,402   395,188   389,805   302,808   288,806
    General and
     administrative  7,165     7,325     6,160     6,156     5,996     4,806
    Depreciation
     and
     amortization   21,284    19,622    25,027    16,640    13,804    11,745
    Financing
     charges         5,423     4,819     4,404     3,559     2,577     2,520
    -------------------------------------------------------------------------
    Income
     before non-
     controlling
     interest       12,746    52,666    33,443    53,664    26,121    47,229
    Net income       9,735    40,763    25,664    41,624    21,880    35,186
    per unit
     - diluted        0.19      0.78      0.48      0.81      0.39      0.82
    -------------------------------------------------------------------------
    Funds from
     operations(2)  37,662    80,790    69,100    70,392    41,169    64,635
    per unit
     - diluted        0.55      1.20      1.02      1.07      0.62      1.12
    -------------------------------------------------------------------------
    Capital
     expenditures
     (3)            63,396    48,690    63,528    58,059    45,154    27,368
    Long-term
     debt          355,346   374,336   359,001   265,575   211,626   202,533
    Non-
     controlling
     interest      117,734   113,952   101,745    93,514    81,332    81,619
    Unitholders'
     equity        611,829   636,002   621,854   619,453   586,781   280,429
    Distributions
     per unit         0.53      0.53      0.53      0.46      0.45      0.38
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    ---------------------------------
                        2005(1)
    (000s except
     per unit
     amounts)           Q4        Q3
    ---------------------------------
    REVENUE       $325,511  $257,193
    EXPENSES
    Operating      252,475   203,300
    General and
     admini-
     strative        6,024     3,369
    Depreciation
     and amort-
     ization        11,976    10,319
    Financing
     charges         2,357     2,127
    ---------------------------------
    Income
     before non-
     controlling
     interest       38,829    27,722
    Net income      29,207    20,665
    per unit
     - diluted        0.69      0.48
    ---------------------------------
    Funds from
     operations(2)  54,959    41,888
    per unit
     - diluted        0.97      0.74
    ---------------------------------
    Capital
     expend-
     itures(3)      43,604    27,899
    Long-term
     debt          156,397   154,507
    Non-
     controlling
     interest       69,582    63,552
    Unitholders'
     equity        259,986   241,086
    Distributions
     per unit         0.35      0.32
    ---------------------------------
    ---------------------------------
    (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," "intend" 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" (earnings before interest, taxes, depreciation and
       amortization, and for the Trust, before the gas delivery obligation
       valuation) is determined from the consolidated statements of income
       and accumulated earnings and is defined as operating margin less
       general and administrative expenses.

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s)                       2007         2006         2007         2006
    -------------------------------------------------------------------------
    Operating margin        $  47,783    $  53,189    $ 146,758    $ 134,275
    Less: General and
     administrative expense     7,165        5,996       14,490       10,802
    -------------------------------------------------------------------------
    EBITDA                  $  40,618    $  47,193    $ 132,268    $ 123,473
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -  "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          Six months ended
                                           June 30                   June 30
    (000s)                       2007         2006         2007         2006
    -------------------------------------------------------------------------
    Cash provided by
     operating activities   $ 108,126    $  61,412    $ 162,853    $  83,476
    Change in non-cash
     working capital          (70,556)     (20,246)     (44,778)      22,130
    Asset retirement
     obligations fulfilled         92            3          377          198
    -------------------------------------------------------------------------
    Funds from operations   $  37,662    $  41,169    $ 118,452    $ 105,804
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -  "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 Midstream Services Division (Midstream 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. This division, previously known as 'CCS Energy Services'
has been rebranded to 'CCS Midstream Services' to better reflect the
production nature of the business and the breadth of services offered.
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;
    -  Well abandonment and facility decommissioning; and
    -  Transporting of water and waste for disposal.

    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 Midstream 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 the United States and Peru.

    Concord Well Servicing Division (Concord)

    This division owns and operates 140 rigs, 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, is reported within the Concord division.

    DISCUSSION OF FINANCIAL RESULTS

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s except per unit
     amounts)                    2007       2006(1)        2007       2006(1)
    -------------------------------------------------------------------------
    Revenue                 $ 419,913    $ 355,997    $ 937,290    $ 725,889
    % change from prior
     period                       18%         113%          29%         104%
    -------------------------------------------------------------------------
    EBITDA(2)                  40,618       47,193      132,268      123,473
    % change from prior
     period                      (14%)        119%           7%          71%
    -------------------------------------------------------------------------
    Income before non-
     controlling interest      12,746       26,121       65,412       73,350
    % change from prior
     period                      (51%)        212%         (11%)         86%
    -------------------------------------------------------------------------
    Net income                  9,735       21,880       50,498       57,066
    % change from prior
     period                      (56%)        255%         (12%)         95%
      per unit - diluted         0.19         0.39         0.97         1.21
    -------------------------------------------------------------------------
    Funds from
     operations(2)          $  37,662    $  41,169    $ 118,452    $ 105,804
    % change from prior
     period                       (9%)        117%          12%          69%
      per unit - diluted         0.55         0.62         1.75         1.74
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Certain comparative figures have been reclassified to conform to the
        presentation adopted in 2007.
    (2) Non-GAAP financial measures are identified and defined in this MD&A.

    The second quarter of the year is generally one of lower activity levels,
when the ability to move heavy equipment in the Canadian oil and gas fields is
dependent on weather conditions. Please refer to the 'Seasonality of
Operations' section below. The second quarter of 2007 was impacted by an
extended spring breakup period, unfavourable weather conditions and a
continued lower level of capital spending by many of the oil and gas
producers. These adverse weather and economic conditions negatively impacted
the Trust's financial results, with the Concord division reporting its lowest
second quarter utilization rate in five years, at 29 percent. Unfavourable
conditions also impacted activity levels and operating costs in the Landfills
Services business unit. The U.S. Midstream operations were negatively impacted
by $1.4 million in one-time costs associated with restructuring efforts in the
Gulf Coast Waste Disposal business unit, and by the cancellation of its
temporary discharge permit at the Shreveport facility.
    On a more positive note, all divisions, except Concord, reported growth in
revenue due to the ongoing growth of the Trust through acquisitions and
capital projects completed throughout 2006.

    CASH DISTRIBUTIONS

    Monthly distributions declared per trust unit, for the three months ended
June 30, 2007, were $0.175 per unit, with total distributions paid of $27.4
million (2006 - $20.5 million). The following summary outlines the principal
utilization of funds from operations for the three and six month periods ended
June 30, 2007 and 2006:

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s)                       2007         2006         2007         2006
    -------------------------------------------------------------------------
    Funds from
     operations(1)          $  37,662    $  41,169    $ 118,452    $ 105,804
    Required principal
     repayments of long-
     term debt                   (295)      (1,355)      (1,176)      (2,009)
    Maintenance capital
     expenditures(1)          (20,063)     (12,930)     (33,754)     (18,708)
    Amortization of landfill
     and cavern capacity(2)    (2,052)      (1,716)      (5,231)      (4,897)
    -------------------------------------------------------------------------
    Cash available for
     distribution and
     growth capital
     expenditures(1) (b)       15,252       25,168       78,291       80,190
    Cash retained for growth
     and capital expenditures  12,113       (2,449)     (23,585)     (41,245)
    -------------------------------------------------------------------------
    Cash distributions
     declared (a)              27,365       22,719       54,706       38,945
    Accumulated cash
     distributions,
     beginning of period      260,467      159,064      233,126      142,838
    -------------------------------------------------------------------------
    Accumulated cash
     distributions, end
     of period              $ 287,832    $ 181,783    $ 287,832    $ 181,783
    -------------------------------------------------------------------------
    Payout ratio(1) (a)/(b)      179%          90%          70%          49%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Non-GAAP financial measures are identified and defined in this MD&A.
    (2) Based on the amortization expense in the consolidated statements of
        income and accumulated earnings, these are funds retained to replace
        utilized engineered landfill and cavern capacity.

    The unfavourable weather and economic conditions mentioned above had a
direct impact on funds from operations for the second quarter of the year.
Despite these adverse conditions, the Trust continued with its 2007 capital
budget for growth and maintenance expenditures and maintained monthly
distributions at $0.175 per unit. As a result, the payout ratio for the second
quarter increased to 179 percent.
    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 Trust's 2006 Annual Report and Annual Information Form
for further details. Other risks identified are as follows:

    -  Capital requirements;
    -  Access to qualified and experienced personnel;
    -  Credit risk;
    -  Interest rate and commodity price risks;
    -  Foreign exchange risk; and
    -  Critical accounting estimates.

    The Trust is required to make principal payments on some of its credit
facilities, including repayment of the 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 June 30, 2007, 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 June 22, 2007, the
federal government passed legislation 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. This
legislation does not take effect until January 1, 2011 for trusts that
commenced trading prior to November 2006, providing the Trust only experiences
"normal growth" and no "undue expansion" before then. Implementation of this
legislation is 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 due to the requirement of the Trust to pay a 32 percent tax on
distributions paid.
    While the distribution policy is focused on mitigating the risk of a
reduction in monthly per unit distributions, changes to the current business
environment, legislation enacted by the Canadian federal government on 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          Six months ended
                                           June 30                   June 30
    (000s)                       2007         2006         2007         2006
    -------------------------------------------------------------------------
    CCS Midstream Services  $  59,702    $  52,028    $ 143,400    $ 113,598
      % change from prior
       period                     15%          70%          26%          51%
    -------------------------------------------------------------------------
    Concord Well Servicing     24,184       36,907      103,121       77,689
      % change from prior
       period                    (34%)        227%          33%          91%
    -------------------------------------------------------------------------
    HAZCO                      78,928       67,548      170,972      138,618
      % change from prior
       period                     17%          52%          23%          47%
    -------------------------------------------------------------------------
    CCS Energy Marketing      257,099      199,514      519,797      395,984
      % change from prior
       period                     29%         146%          31%         172%
    -------------------------------------------------------------------------
    Total                   $ 419,913    $ 355,997    $ 937,290    $ 725,889
      % change from prior
       period                     18%         113%          29%         104%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Midstream Services

    The TRD and cavern business units reported a nine percent increase in
revenue in the second quarter due to incremental revenue generated from new
facilities and higher volumes received in the caverns business unit. Activity
levels at the TRDs were impacted by unfavourable weather conditions and road
bans that extended into mid-June. Cavern revenue increased by 62 percent over
the second quarter of 2006 due to higher activity levels in these geographic
areas.
    The revenue reported on the sale of oil recovered from waste increased by
two percent in the second quarter of 2007 over the same period in 2006, with
the increase attributable to an 18 percent increase in the volume of oil
recovered. On a year-to-date basis, revenue in this area declined by four
percent over the prior year due to lower oil prices. The recovered oil revenue
stream comprised approximately 11 percent (2006 - 14 percent) of total revenue
reported for this division.
    The U.S. Midstream operations reported a 46 percent increase in revenue
over the same quarter in 2006 and a 32 percent increase over the first quarter
of 2007. The acquisitions of Mobley Oilfield Services, LP ("Mobley") and Pride
Oilfield Services, LLC ("Pride") in March and April, respectively, of this
year resulted in a $7.0 million increase to revenue for the second quarter.
The Shreveport facility was impacted negatively late in the quarter from a
ruling by the Louisiana Department of Environmental Quality ("LDEQ"),
canceling the temporary discharge permit. CCS will resubmit its application
for this permit by the end of July, with a decision from the LDEQ expected to
take approximately six months. In the interim, the facility will utilize its
permit with the Publicly Operated Treatment Works ("POTW") to continue
accepting disposal volumes. For the remainder of 2007, this interim solution
should not impact revenue for this facility. The Gulf Coast Waste Disposal
business unit reported a slight increase in revenue over the first quarter of
the year, attributable primarily to the revised pricing strategy implemented
in March of 2007. On a year-to-date basis, revenue for this division totaled
$28.2 million compared to $15.1 million for 2006.

    Concord

    Revenue for the second quarter of 2007 showed a significant decline over
the same period in 2006. An early spring breakup lasted until mid-June, with
wet weather conditions and reduced capital spending by many of the oil and gas
producers contributing to a 29 percent utilization rate for the second
quarter. Utilization rates for the same period in 2006 were 55 percent.
Year-to-date utilization of 51 percent is consistent with published industry
results. On a year-over-year basis, the growth in revenue is primarily
attributable to the acquisition of the Grizzly service rigs on May 1, 2006.
    Rig hours worked for the second quarter of 2007 totalled 34,721 hours
compared to 53,190 hours in the second quarter of 2006.

    HAZCO

    The HAZCO division reported a 17 percent quarter-over-quarter increase in
revenue, due primarily to a 65 percent and 44 percent increase in the
geotechnical drilling and HMI business units, respectively. Expansion capital
incurred late in 2006 and the first quarter of 2007 contributed to the
increased revenue generated by both of these business units. The Landfill
Services business unit reported a 15 percent decline in quarter-over-quarter
revenue due to the prolonged spring breakup and lower levels of drilling and
remediation activity.
    For the six months ended June 30, 2007, this division reported a 23
percent increase in year-over-year revenue. The growth in revenue results from
the acquisition of HMI in the second quarter of 2006, increased capacity
resulting from expansion capital and a continued strong economy in western
Canada.

    CCS Energy Marketing

    The second quarter and year-to-date revenue increase in this division is
attributable to an increase in the purchase and sale of third-party lease
volumes.

    
    OPERATING MARGINS

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s)                       2007       2006(1)        2007       2006(1)
    -------------------------------------------------------------------------
    CCS Midstream Services  $  24,529    $  23,113    $  66,288    $  60,223
      % of division revenue       41%          44%          46%          53%
    -------------------------------------------------------------------------
    Concord                       733       10,374       29,056       27,602
      % of division revenue        3%          28%          28%          36%
    -------------------------------------------------------------------------
    HAZCO                      16,828       14,939       38,960       37,626
      % of division revenue       21%          22%          23%          27%
    -------------------------------------------------------------------------
    CCS Energy Marketing        5,693        4,763       12,454        8,824
      % of division revenue        2%           2%           2%           2%
    -------------------------------------------------------------------------
    Total                   $  47,783    $  53,189    $ 146,758    $ 134,275
      % of consolidated
       revenue                    11%          15%          16%          18%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Comparative figures have been reclassified to conform to the
        presentation adopted in 2007.

    Midstream Services

    For this division, operating margin, as a percentage of revenue, reflected
a quarter-over-quarter decline due, in large part, to the addition of lower
margin business units reported under this division. The following business
units report under the Midstream Services division, with many of the acquired
business units generating operating margins lower than what was historically
reported when the division was comprised mainly of the Canadian TRD and cavern
business units:

    -  TRD and cavern facilities (Canada);
    -  Midstream Services (U.S.), including the Gulf Coast Waste Disposal
       business unit, ARKLA, Mobley, and Pride;
    -  Hardisty Caverns Limited Partnership;
    -  Normcan;
    -  Lionhead; and
    -  ProDrill.
    

    Operating margin, as a percentage of revenue, for the TRD and cavern
business units declined by two percent in the second quarter of 2007 over the
same period in 2006. A well workover in the first quarter of 2007 carried over
into the second quarter, with an additional $0.9 million of expenses incurred.
On a year-to-date basis, well workover expenses have negatively impacted
operations by $2.6 million.
    The U.S. Midstream Services operations reported an operating margin of
$3.7 million for the second quarter of 2007, with earnings negatively impacted
by a $1.4 million, one-time charge to operating expense in the Gulf Coast
Waste Disposal business unit. The $1.4 million charge was directly related to
the restructuring of operations and moving the Baton Rouge, Louisiana regional
office to Houston, Texas. The Mobley and Pride acquisitions contributed $3.3
million to operating margin in the quarter. Operating margin for the ARKLA
business unit declined by 31 percent over the first quarter of the year, due
primarily to the cancellation of the temporary discharge permit. The interim
alternative of utilizing the POTW permit will result in higher monthly
operating expenses of approximately $0.2 million per month.

    Concord

    Operating margin in this division was impacted by low utilization rates
for the quarter, as previously mentioned. With utilization rates at this
level, the fixed costs of the business have a larger impact on operating
margin and this is reflected in both the quarterly and year-to-date results.
Repairs and maintenance expenditures for the quarter were focused on essential
maintenance, with expenditures increasing in June as crews prepared the rigs
for a return to higher activity levels.

    HAZCO

    On a quarter-over-quarter basis, HAZCO's operating margin was relatively
unchanged at 21 percent of divisional revenue. The geotechnical drilling and
HMI business units generated higher operating margins, as a percentage of
revenue, due to high utilization rates, increased activity levels and capital
expansion. The Landfill Services business unit reported a 39 percent decline
in operating margin dollars over the second quarter of 2006. The reduced
levels of activity for this business unit along with increased operating costs
directly impacted operating margin for the quarter. Trucking costs related to
the landfill business unit increased by $0.6 million in the quarter in order
to manage higher leachate volumes attributable to the wet weather conditions.
    On a year-to-date basis, operating margin, as a percentage of revenue,
declined to 23 percent due to the lower activity levels in the Landfill
Services business unit.

    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 EXPENSES

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s)                       2007       2006(1)        2007       2006(1)
    -------------------------------------------------------------------------
    General and
     administrative
     expenses               $   7,165    $   5,996    $  14,490    $  10,802
      % change from prior
       period                     19%          65%          34%          75%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Comparative figures have been reclassified to conform to the
        presentation adopted in 2007.

    Overall, general and administrative expenses are higher in 2007, due
primarily to the ongoing growth of the Trust. Expenses have increased in the
following areas:

    -  Wages and benefits, due to higher staff levels along with incremental
       costs associated with the trust unit option plan;
    -  Information technology and communications; and
    -  General office costs.

    Administrative costs directly related to the individual business segments
are included in operating expenses for that division.

    DEPRECIATION AND AMORTIZATION

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s)                       2007         2006         2007         2006
    -------------------------------------------------------------------------
    Depreciation            $  17,588    $  11,605    $  32,982    $  19,687
      % change from prior
       period                     52%          69%          68%          45%
    -------------------------------------------------------------------------
    Amortization of
     engineered landfills
     and caverns                2,052        1,716        5,231        4,897
      % change from prior
       period                     20%         130%           7%          68%
    -------------------------------------------------------------------------
    Amortization of
     intangibles                1,644          483        2,693          965
      % change from prior
       period                    240%          80%         179%           2%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Trust's capital assets continue to increase through in-house capital
expansion and acquisitions. Capital spending of $194.1 million and the
acquisition of 86 service rigs in 2006 has resulted in higher depreciation
expense for the quarter and year-to-date, compared to the same periods in
2006.
    The increased activity in the caverns business unit resulted in higher
depletion charges for the second quarter and year-to-date. Depletion expense
for Landfill Services is lower because of reduced activity levels, but is
comparable to prior years due to additional depletion reported on new
landfills opened.
    The amortization expense associated with intangible assets may fluctuate
from quarter to quarter 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 June 30, 2007, the Trust has not reported any impairment to
intangible assets acquired.

    INCOME TAXES

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s)                       2007         2006         2007         2006
    -------------------------------------------------------------------------
    Income before income
     taxes and non-
     controlling interest   $  13,096    $  30,431    $  78,461    $  92,150
    Provision for income
     taxes                        350        4,310       13,049       18,800
    Effective tax rate             3%          14%          17%          20%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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. In 2006, Canadian and provincial governments enacted
various reductions in corporate rates, with combined rates declining by
approximately four percent over a four-year period.
    On June 22, 2007, the federal government passed and enacted legislation
eliminating the deduction of distributions from taxable income for certain
publicly traded mutual fund trusts. This legislation does not take effect
until January 1, 2011 for trusts that commenced trading prior to November
2006, providing the Trust only experiences "normal growth" and no "undue
expansion" before then. This legislation also introduced a reduction in
federal corporate tax rates by 0.5 percent starting in 2011. For the second
quarter of 2007, the consolidated financial statements of the Trust reflect
the impact of this legislation, resulting in a decrease of $0.8 million in
future income taxes. This adjustment is directly attributable to applying the
0.5 percent rate reduction to temporary differences which are expected to
reverse in 2011 and beyond.
    The second quarter income tax provision is directly related to the lower
income reported to June 30, 2007. The provision for current income taxes in
the second quarter of 2007 is a recovery of $1.6 million (2006 - expense of
$4.2 million), with future income taxes totaling $1.9 million (2006 - $0.1
million).

    FINANCING

                                Three months ended          Six months ended
                                           June 30                   June 30
    (000s)                       2007         2006         2007         2006
    -------------------------------------------------------------------------
    Interest expense        $   5,423    $   2,577    $  10,242    $   5,097
      % change from prior
       period                    110%          21%         101%          24%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financing charges in 2007 reflect the interest expense associated with
increased levels of debt. Long-term debt increased by $143.7 million on a
year-over-year basis to June 30, 2007. The average interest rate paid on
long-term debt for the six month period in 2007 was 5.4 percent, essentially
unchanged from the same period in 2006. The Trust reduced its exposure to
floating interest rates in December 2006 through the closing of its fixed-rate
private placement debt financing. As at June 30, 2007, approximately eight
percent of the Trust's debt outstanding was subject to floating-rate interest
(2006 - 57 percent).
    The significant transactions impacting long-term debt and financing
requirements on a quarter-over-quarter basis are as follows:

    -  The acquisition of Mobley for cash consideration of $44.2 million in
       the first quarter of 2007;
    -  Capital spending of $112.1 million in the first six months of 2007
       (2006 - $72.5 million); and
    -  A non-cash reclassification of $5.2 million in deferred financing
       costs on January 1, 2007, as an offset to long-term debt on adoption
       of the new rules and regulations with respect to financial
       instruments.

    LIQUIDITY AND CAPITAL RE

SOURCES As at As at June 30 Dec. 31 (000s) 2007 2006 ------------------------------------------------------------------------- Capital data Current portion of long-term debt $ 1,488 $ 2,657 Long-term debt 355,346 359,001 Less: cash and cash equivalents (6,192) (54,399) ------------------------------------------------------------------------- Net debt(1) 350,642 307,259 Unitholders' equity 611,829 621,854 Non-controlling interest 117,734 101,745 ------------------------------------------------------------------------- Total capitalization $ 1,080,205 $ 1,030,858 Net debt to total capitalization 32% 30% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 June 30, 2007, the net debt to total capitalization ratio increased to 32 percent, due to the financing of the Mobley and Pride acquisitions and adoption, on January 1, 2007, of the new accounting standards for financial instruments, which resulted in a $ 5.2 million reduction in long-term debt. Credit Facilities, Swaps and Bonds As at June 30, 2007, the Trust has the following credit facilities available: - $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 June 30, 2007, the Trust had borrowed $45.6 million on this facility. Outstanding letters of credit of $43.8 million at June 30, 2007, reduce the amount of credit available on this facility. - $270.0 million, non-amortizing, private placement senior notes, with a weighted average interest rate of 5.2 percent. Maturity and repayment terms range from seven to 12 years. On December 14, 2006, a total of $220.0 million of senior notes were issued, with the remaining $50.0 million issued on June 28, 2007. - $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. - $11.0 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 June 30, 2007, the amount outstanding on this facility was $1.4 million. CCS will continue to utilize this facility if the cost to do so minimizes overall borrowing costs to the Trust. - $5.7 million of bonds outstanding with the Caddo-Bossier Parishes Port Commission (the "Port"). These bonds are carried by CCS Energy Services LLC pursuant to a lease agreement dated October 1, 2004. The bonds were issued to finance the acquisition, construction, renovation and equipping of a facility to clean and process industrial waste water in Shreveport, Louisiana. The bonds bear interest at a rate of five percent and mature on November 1, 2024. Interest and payments of principal 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 June 30, 2007, the Trust was in compliance with all such covenants. 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 June 30, 2007, the Trust had $18.9 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. This swap expired on July 1, 2007. 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 $4.0 million remained outstanding at June 30, 2007. The fair value of this swap is recognized in the consolidated financial statements of the Trust. UNITHOLDERS' EQUITY As at As at June 30 Dec. 31 (000s) 2007 2006 ------------------------------------------------------------------------- Trust units 52,126 51,958 Exchangeable shares(1) 15,422 15,074 ------------------------------------------------------------------------- Total 67,548 67,032 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Converted at an exchange ratio of 2.75134:1 at June 30, 2007 (December 31, 2006 - 2.67427:1). The increase in the number of trust units outstanding at June 30, 2007 is attributable to the issuance of units with respect to the Pride acquisition and the exercising of stock options. CAPITAL EXPENDITURES Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 ------------------------------------------------------------------------- Capital expenditures(1) $ 63,396 $ 45,154 $ 112,086 $ 72,522 % change from prior period 40% 168% 55% 104% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excludes business acquisitions. Midstream Services The following projects contributed to this division's total capital expenditures of $22.9 million in the second quarter of 2007: - $8.5 million for ongoing construction of the new Peace River TRD facility; - $4.7 million on disposal well additions and recompletions; - $3.1 million in new trucks and equipment for the Mobley business unit; and - $2.0 million for the installation of centrifuge equipment at existing TRD facilities. On a year-to-date basis, this division incurred $42.0 million in expansion capital and $1.7 million in maintenance capital expenditures. Concord Capital expenditures for the quarter totalled $14.8 million, of which $5.3 million related to the expansion of the Acheson rig refit facility; this facility was completed and opened in the second quarter. Maintenance capital expenditures of $6.9 million incurred in the quarter related to the refitting of rigs and requisite upgrading of aging mobile equipment. On a year-to-date basis, expansion capital for this division totaled $14.6 million with maintenance capital expenditures totaling $16.2 million. HAZCO In the second quarter of 2007, the HAZCO division purchased previously leased land and buildings in Edmonton, Alberta and Richmond, British Columbia for $10.8 million. Expansion of the HMI facility in Red Deer, Alberta and the HAZCO head office facility in Calgary, Alberta contributed to expansion capital expenditures of $8.6 million for the second quarter (excluding Landfill Services). Capital spending by the Landfill Services business unit totalled $4.8 million for the second quarter of 2007. Construction of the Janvier landfill is substantially complete and expected to be operational early in the third quarter of 2007. Capital spending also included expansion at the Fox Creek landfill and construction of a tank farm at the Marshall landfill. On a year-to-date basis, this division incurred $20.6 million in expansion capital and $17.1 million in maintenance capital expenditures. BUSINESS OUTLOOK Drilling activity in the western Canadian sedimentary basin declined sharply in the second quarter of 2007, a result of seasonal weather conditions and road bans, lower projected natural gas prices and reduced capital spending programs by oil and gas producers. The lower level of drilling activity negatively impacted revenue streams in several of the Trust's business units in the second quarter. The Trust believes that the heavier exposure of its operations to the production side of the oil and gas industry will continue to insulate its performance, to some extent, from this reduced level of drilling activity. However, a portion of our revenue in several areas, including waste processing, well servicing and engineered landfills results from drilling activities and, should lower levels of drilling activity continue, this will impact year-over-year growth for the balance of 2007. While the Trust generally believes that drilling activity levels will improve in the second half of the year, the amount of such improvement will be dependent on producer capital spending plans and other factors outside the control of the Trust. The Trust plans to continue its previously announced growth capital spending plan for 2007, and now anticipates growth capital spending for calendar 2007 to aggregate approximately $235.0 million. This represents a $30.0 million increase over previously announced growth capital spending, with approximately $16.0 million attributable to increased costs on previously announced projects. Midstream Services Second quarter results for 2007 continued to be impacted by a prolonged spring breakup and lower than anticipated drilling activity. Waste volumes related to production activity continue to increase, with drilling activity anticipated to recover late in the third quarter of the year. Construction of the TRD at Peace River, Alberta is expected to be completed late in the third quarter of the year, with expansion of the High Prairie TRD on schedule to be completed in the fourth quarter. The U.S. Midstream Services division continues to restructure and integrate operations, with the recently acquired Mobley and Pride companies consolidating fleet operations under the Mobley name. The Baton Rouge regional office was relocated to Houston, and management was added in key areas to accommodate the growth of this division. The Gulf Coast Waste Disposal business unit was able to resolve its issue with the disposal of solids waste at third-party landfill facilities by making operational changes at one of its facilities and utilizing third-party cavern disposal options. These operational changes, along with the revised pricing strategy undertaken in the first quarter, are anticipated to make this business unit profitable for the remainder of the year. The Shreveport facility will be impacted by additional costs required to discharge its volume for the remainder of the year, with the total impact to operating margin estimated at $1.5 million. Capital projects for the remainder of 2007 consist of ongoing permitting and development of the Weeks Island cavern and expansion of the Shreveport facility. The permitting process for Weeks Island continues, with a permit expected to be issued by the end of the first quarter in 2008, and the facility operational late in the third quarter of 2008. Concord The first half of 2007 was impacted by a variety of factors including lower industry activity levels, poor weather, and lower oil and gas pricing. This is reflected in Concord's year-to-date results with a lower than anticipated average utilization rate of 51 percent. The latest Canadian Association of Oilwell Drilling Contractors ("CAODC") forecast includes a 14 percent reduction in drilling activity from their preliminary forecast, and a 27 percent reduction from 2006 results. Drier weather conditions, coupled with improved oil prices should lead to improved utilization late in the third quarter of 2007. 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. Annual operating margin for the division, excluding landfills, is anticipated to continue in the 13 to 15 percent range. The Landfill Services business unit will continue to be negatively impacted by the reduced levels of drilling activity. However, the outlook remains positive for remediation and reclamation projects scheduled for the remainder of the year. Despite an anticipated increase in the receipt of volumes at the landfills during the second half of the year, it is not expected that the increased disposal activity from remediation projects will fully offset prior year revenue generated from drilling related waste disposal. 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 Midstream Services facilities, with growth dependent on optimization and lease purchase opportunities. 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES These interim consolidated financial statements are prepared in accordance with GAAP on a basis consistent with those followed in the most recent annual consolidated financial statements, except for the changes in accounting policies or estimates noted below. 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, amortization of engineered landfills and caverns, and the Trust's outstanding gas purchase obligation. For further details please refer to the MD&A disclosure in the Trust's 2006 Annual Report. CHANGES IN ACCOUNTING POLICIES OR ESTIMATES Financial Instruments As of January 1, 2007, the Trust adopted, on a retroactive basis, four 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"; - Section 3861 - "Financial Instruments - Disclosure and Presentation"; and - Section 3865 - "Hedges". The new standards address the recognition and measurement of financial assets, financial liabilities and non-financial derivatives. These standards, and the impact on the Trust's financial statements, are disclosed in Note 2f of the consolidated financial statements, with no restatement of opening accumulated earnings required. Accounting Changes The CICA released 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 has adopted the requirements of this section and will apply these standards to any future changes in accounting policies and/or estimates. DISCLOSURE CONTROLS AND PROCEDURES RELATED TO FINANCIAL REPORTING For the three months ended June 30, 2007, no changes were made in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Consolidated Interim Financial Statements CCS Income Trust June 30, 2007 (Unaudited) CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, Dec. 31, As at 2007 2006 (000s) $ $ ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents 6,192 54,399 Accounts receivable 151,569 229,410 Inventory and other current assets 14,408 14,385 ------------------------------------------------------------------------- 172,169 298,194 Property, plant and equipment (note 4) 975,178 890,916 Goodwill (note 4) 94,871 86,313 Intangible assets (note 4) 32,963 22,508 Deferred financing costs (note 2f) - 5,196 Investments and other long-term assets 244 180 ------------------------------------------------------------------------- 1,275,425 1,303,307 ------------------------------------------------------------------------- LIABILITIES Current liabilities Accounts payable and accrued liabilities 81,835 110,932 Income taxes payable (recoverable) (5,202) 275 Distributions payable 9,122 9,093 Current portion of long-term debt 1,488 2,657 Current portion of long-term purchase obligations 1,288 1,168 Current portion of asset retirement obligations (note 5) 4,343 3,922 ------------------------------------------------------------------------- 92,874 128,047 ------------------------------------------------------------------------- Long-term debt 355,346 359,001 Long-term purchase obligations 5,425 5,000 Future income tax 58,728 51,887 Asset retirement obligations (note 5) 32,412 35,074 Other long-term liabilities 1,077 699 ------------------------------------------------------------------------- 452,988 451,661 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Non-controlling interest (note 8) 117,734 101,745 ------------------------------------------------------------------------- UNITHOLDERS' EQUITY Unitholders' capital (note 6a) 523,712 522,114 Accumulated other comprehensive income (loss) (notes 2f and 11) (8,163) 948 Contributed surplus (note 6c) 4,278 2,582 Accumulated earnings 92,002 96,210 ------------------------------------------------------------------------- Total unitholders' equity 611,829 621,854 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total liabilities and unitholders' equity 1,275,425 1,303,307 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED EARNINGS (UNAUDITED) Three months ended Six months ended June 30 June 30 (000s except per unit 2007 2006 2007 2006 amounts) $ $ $ $ ------------------------------------------------------------------------- REVENUE CCS Midstream Services 59,702 52,028 143,400 113,598 Concord Well Servicing 24,184 36,907 103,121 77,689 HAZCO Environmental Services 78,928 67,548 170,972 138,618 CCS Energy Marketing 257,099 199,514 519,797 395,984 ------------------------------------------------------------------------- 419,913 355,997 937,290 725,889 ------------------------------------------------------------------------- Operating expenses (note 9) 371,355 302,366 789,615 590,784 Asset retirement accretion expense (note 5) 775 442 917 830 ------------------------------------------------------------------------- 372,130 302,808 790,532 591,614 ------------------------------------------------------------------------- Operating margin 47,783 53,189 146,758 134,275 ------------------------------------------------------------------------- EXPENSES General and administrative (notes 7 and 9) 7,165 5,996 14,490 10,802 Financing 5,423 2,577 10,242 5,097 Depreciation and amortization 21,284 13,804 40,906 25,549 Gas delivery obligation valuation (185) (116) 1,182 96 Foreign exchange loss 1,008 341 1,170 414 Loss (gain) on sale of assets (8) 156 307 167 ------------------------------------------------------------------------- 34,687 22,758 68,297 42,125 ------------------------------------------------------------------------- Income before income taxes and non-controlling interest 13,096 30,431 78,461 92,150 ------------------------------------------------------------------------- Income taxes Current (1,554) 4,240 5,746 14,300 Future 1,904 70 7,303 4,500 ------------------------------------------------------------------------- 350 4,310 13,049 18,800 ------------------------------------------------------------------------- Income before non- controlling interest 12,746 26,121 65,412 73,350 Non-controlling interest (note 8) (3,011) (4,241) (14,914) (16,284) ------------------------------------------------------------------------- Net income for the period 9,735 21,880 50,498 57,066 Accumulated earnings, beginning of period 109,632 81,104 96,210 62,144 Distributions (note 3) (27,365) (22,719) (54,706) (38,945) ------------------------------------------------------------------------- Accumulated earnings, end of period 92,002 80,265 92,002 80,265 ------------------------------------------------------------------------- Net income per unit (note 6b) Basic 0.19 0.43 0.97 1.25 Diluted 0.19 0.39 0.97 1.21 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 (000s) $ $ $ $ ------------------------------------------------------------------------- Net income for the period 9,735 21,880 50,498 57,066 Other comprehensive income (loss) (note 11) Gain (loss) on foreign currency translation of self-sustaining sub- sidiaries (net of tax) (7,942) (1,018) (9,111) (857) ------------------------------------------------------------------------- Other comprehensive income (loss) for the period (7,942) (1,018) (9,111) (857) ------------------------------------------------------------------------- Comprehensive income for the period 1,793 20,862 41,387 56,209 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 (000s) $ $ $ $ ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the period 9,735 21,880 50,498 57,066 Add (deduct) non-cash items: Non-controlling interest 3,011 4,241 14,914 16,284 Unit-based compensation (notes 6c and 7a) 924 491 1,794 907 Depreciation and amortization 21,284 13,804 40,906 25,549 Asset retirement accretion expense 775 442 917 830 Gas delivery obligation valuation (185) (116) 1,182 96 Loss (gain) on sale of assets (8) 156 307 167 Future income taxes 1,904 70 7,303 4,500 Other non-cash operating items 222 201 631 405 ------------------------------------------------------------------------- 37,662 41,169 118,452 105,804 Change in non-cash working capital 70,556 20,246 44,778 (22,130) Asset retirement obligations fulfilled (note 5) (92) (3) (377) (198) ------------------------------------------------------------------------- Cash provided by operating activities 108,126 61,412 162,853 83,476 ------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of long-term debt (18,695) 10,575 1,847 57,452 Repayment of long-term debt (295) (1,355) (1,176) (2,009) Deferred financing costs - - - (560) Payments under purchase obligations (317) (270) (637) (668) Exercise of trust unit options (notes 6a and c) 246 608 1,245 608 Trust unit issue (net of costs) - 231,381 - 231,871 Distribution payments (note 3) (27,357) (20,480) (54,676) (36,062) ------------------------------------------------------------------------- Cash (used in) provided by financing activities (46,418) 220,459 (53,397) 250,632 ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property, plant and equipment (63,396) (45,154) (112,086) (72,522) Proceeds on disposal of property, plant and equipment 1,018 1,964 2,117 2,303 Acquisitions (note 4) (4,676) (237,781) (48,789) (259,759) Funding of retention bonus - 161 - 161 Investments and other long-term assets 69 (2,166) (64) (1,962) Change in non-cash working capital (2,623) (664) 1,159 (1,978) ------------------------------------------------------------------------- Cash used in investing activities (69,608) (283,640) (157,663) (333,757) ------------------------------------------------------------------------- Increase in cash and cash equivalents (7,900) (1,769) (48,207) 351 Cash and cash equivalents, beginning of period 14,092 5,746 54,399 3,626 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 6,192 3,977 6,192 3,977 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary cash flow information: Cash taxes paid 4,210 6,812 11,224 35,370 ------------------------------------------------------------------------- Cash interest paid 2,591 2,405 4,404 4,619 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2007 and 2006 (000s except unit and per unit amounts) 1. NATURE OF THE ORGANIZATION CCS Income Trust (the "Trust" or "CCS") 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"). The consolidated financial statements include the accounts of the 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 and statements of income and accumulated earnings. These interim consolidated financial statements follow the same accounting policies and methods of application as described in the notes to the most recent annual audited consolidated financial statements for the year ended December 31, 2006, except for note 2f. These interim consolidated financial statements do not include all of the disclosures required in the annual financial statements, and should be read in conjunction with the audited consolidated financial statements included in the Trust's 2006 Annual Report. 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, unless otherwise stated. b) Inventory Inventory of drilling fluids, oilfield supplies and scrap metal is stated at the lower of cost and net realizable value. Crude oil inventory is recorded at fair value at the balance sheet date. c) Derivative financial instruments Derivative financial instruments are utilized by the Trust in the management of its interest rate exposures. 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. These instruments are recorded at fair value at the balance sheet date, with any change in fair value reported as a net gain or loss to financing expense. The CCS Energy Marketing division utilizes derivative instruments in the trading of crude oil through the use of commodity contracts which are settled with physical delivery. The contracts are recorded at fair value. d) 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 accumulated other comprehensive income in 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, in which case 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. e) 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 judgement. The effect on the consolidated 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. f) New accounting pronouncements Financial instruments On January 1, 2007, the Trust adopted the recommendations of four new Handbook Sections issued by the Canadian Institute of Chartered Accountants ("CICA") on the recognition and measurement of financial assets, financial liabilities and non-financial derivatives. The new sections are as follows: - Section 1530 - "Comprehensive Income"; - Section 3855 - "Financial Instruments - Recognition and Measurement"; - Section 3861 - "Financial Instruments - Disclosure and Presentation"; and - Section 3865 - "Hedges". Upon initial adoption of these standards, the Trust measured all financial instruments at fair value and classified them into one of the following five categories: 1) loans and receivables; 2) assets held-to- maturity; 3) assets available-for-sale; 4) other financial liabilities; or 5) held-for-trading. Financial instruments classified as available-for-sale or held-for- trading are revalued to fair value each reporting period. Gains and losses on financial instruments classified as held-for-trading are recognized in net income in the period in which they arise, with the exception of gains and losses arising from certain financial instruments that qualify for hedge accounting. Gains and losses on financial instruments classified as available-for-sale are deferred in other comprehensive income until sold or impaired. Subsequent measurement of all other financial instruments is at amortized cost. Other comprehensive income is comprised of revenues, expenses and gains and losses that are included in comprehensive income, but excluded from net income. Under this new standard, unrealized gains and losses on the translation of self-sustaining foreign operations and other comprehensive income components are disclosed separately as accumulated other comprehensive income on the consolidated balance sheet and reclassified to net income when realized. Except for other comprehensive income, the Trust has applied these accounting standards on a retroactive basis with no restatement of opening accumulated earnings required. The following is a summary of the impact of these new accounting standards on the consolidated financial statements of the Trust: - The Trust's inventory of crude oil is classified as held-for-trading and therefore measured at fair value, which is based upon quoted market prices. Crude oil inventory was previously valued at the lower of weighted average cost or net realizable value. On initial adoption, this change in valuation did not have a material impact on inventory values, with no retroactive adjustment made to retained earnings; inventory is normally sold the month after purchase, with very little difference between weighted average cost and net realizable value. These 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 fix pricing, and as a result, these new accounting standards do not impact the current method of accounting for revenue and expenses. The current value recorded for accounts receivable and accounts payable approximates fair value. - The Trust has two interest rate swaps outstanding which are recognized as financial derivatives and classified as held-for- trading. The difference between the accounting value and fair value of these swaps on January 1, 2007 was $165; this was charged to financing expense upon initial adoption of the new standards. - Deferred financing charges are no longer presented separately on the consolidated balance sheet but incorporated as a component of long- term debt, which resulted in a reduction of $5,196 to long-term debt on January 1, 2007. Deferred financing charges are now amortized to income using the effective interest method over the term of the debt facility to which they relate. Application of this method did not result in a retroactive adjustment to opening accumulated earnings. - The Trust's unrealized gains and losses on the translation of self- sustaining foreign operations, net of tax, are presented as a component of other comprehensive income and reclassified to net income when realized. Please refer to the Consolidated Statements of Comprehensive Income and Note 11. Accounting changes Effective January 1, 2007, the Trust adopted the revised recommendations of CICA Handbook Section 1506, relating to accounting changes. 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 revised recommendations also require disclosure when an entity has not applied a new primary source of GAAP that has been issued but is not yet effective. As a result, the Trust has assessed new and revised accounting pronouncements issued but not yet effective and determined that the following may impact the Trust's disclosure in the future: - As of January 1, 2008, current Handbook Section 3861 "Financial Instruments - Disclosure and Presentation" will be replaced with two new standards: Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation". The new disclosure requirements increase the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. - As of January 1, 2008, Handbook Section 1535 "Capital Disclosures" will require companies to disclose their objectives, policies and processes for managing capital. Disclosure must include whether companies have complied with externally imposed capital requirements. The Trust is assessing the possible impact of these new standards on the consolidated financial statements. g) Reclassification Certain information for prior years has been reclassified to conform to the presentation adopted in 2007. 3. DISTRIBUTIONS For the six month period ended June 30, 2007, the Trust paid distributions to unitholders in the amount of $54,676 (2006 - $36,062) and declared distributions of $54,706 (2006 - $38,945) in accordance with the following schedule: Date of Date of distri- Period covered record bution Per unit $ ------------------------------------------------------------------------- December 1, 2006 to December 31, 2006 12/29/06 01/15/07 0.175 January 1, 2007 to January 31, 2007 01/31/07 02/15/07 0.175 February 1, 2007 to February 28, 2007 02/28/07 03/15/07 0.175 March 1, 2007 to March 31, 2007 03/30/07 04/16/07 0.175 April 1, 2007 to April 30, 2007 04/30/07 05/15/07 0.175 May 1, 2007 to May 31, 2007 05/31/07 06/15/07 0.175 June 1, 2007 to June 30, 2007 06/29/07 07/16/07 0.175 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 4. ACQUISITIONS On March 7, 2007, the Trust, through its wholly-owned subsidiary, CCS Energy Services, LLC, acquired all of the operating assets of Mobley Oilfield Services LP ("Mobley") for cash consideration of $44,212. Mobley is an integrated oilfield services company providing trucking and on-site storage and disposal of waste produced in the drilling, completion and ongoing production of oil and gas wells. Service areas include the states of Oklahoma, Arkansas, Louisiana and Texas. On April 5, 2007, the Trust completed an asset purchase agreement with Pride Oilfield Services, LLC ("Pride"). Headquartered in Benton, Louisiana, Pride collects produced water from various generators within the east Texas and northern Louisiana areas and hauls it to various locations for disposal. The purchase price for these assets was $5,578, consisting of $4,577 in cash and $1,001 in trust units. Trust units issued are held in escrow, to be released in equal amounts over the next five years, beginning April 2008. The purchase price for these transactions has been allocated, on a preliminary basis, as follows: Mobley Pride Total Net assets acquired: $ $ $ ------------------------------------------------------------------------- Working capital 3,135 - 3,135 Property, plant and equipment 20,637 1,441 22,078 Goodwill 8,808 978 9,786 Intangibles 11,632 3,055 14,687 Future income tax - 104 104 ------------------------------------------------------------------------- 44,212 5,578 49,790 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consideration paid: ------------------------------------------------------------------------- Cash 43,910 4,513 48,423 Trust units - 1,001 1,001 Transaction costs 302 64 366 ------------------------------------------------------------------------- 44,212 5,578 49,790 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 5. 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 $86,624 (2006 - $60,760) using an annual inflation rate of two percent (2006 - three percent). The fair value at June 30, 2007 was $36,755 (2006 - $22,781) using a discount rate of 5.8 percent (2006 - eight percent). For the six months ended June 30, 2007 and 2006, the Trust recorded the following activity related to the liability: Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 $ $ $ $ ------------------------------------------------------------------------- Asset retirement obligations, beginning of period 36,191 20,994 38,996 20,326 New obligations and revised estimates (119) 1,348 (2,781) 1,823 Obligations fulfilled (92) (3) (377) (198) Accretion expense 775 442 917 830 ------------------------------------------------------------------------- Asset retirement obligations, end of period 36,755 22,781 36,755 22,781 Less: current portion 4,343 2,720 4,343 2,720 ------------------------------------------------------------------------- Long-term portion 32,412 20,061 32,412 20,061 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 6. UNITHOLDERS' EQUITY a) Unitholders' capital Authorized - Unlimited number of voting trust units ------------------------------------------------------------------------- Trust Units $ ------------------------------------------------------------------------- ------------------------------------------------------------------------- December 31, 2006 51,958,249 522,114 Issued upon conversion of exchangeable shares for trust units 84,184 83 Issued upon exercise of employee trust unit options 51,894 1,344 Issued upon acquisitions (net of costs) 31,832 999 Adjustment for exchangeable share conversions and trust unit dilution - (1,158) Units vested on retention bonus (note 7b) - 330 ------------------------------------------------------------------------- June 30, 2007 52,126,159 523,712 ------------------------------------------------------------------------- ------------------------------------------------------------------------- b) Weighted average trust units As at June 30, 2007 and 2006, respectively, diluted net income per trust unit has been calculated based on the following: 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average trust units outstanding - basic 52,080,500 45,762,373 Trust units issuable on conversion of exchangeable shares 15,422,466 14,752,772 Dilutive options 194,994 182,709 ------------------------------------------------------------------------- Dilutive trust units and exchangeable shares 67,697,960 60,697,854 ------------------------------------------------------------------------- ------------------------------------------------------------------------- c) Contributed surplus The balance as at June 30, 2007 and 2006, is comprised of the following: 2007 2006 $ $ ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance, beginning of period 2,582 605 Unit-based compensation expense 1,794 907 Transferred to unitholders' capital on exercise of options (98) (27) ------------------------------------------------------------------------- Balance, end of period 4,278 1,485 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. 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 June 30, 2007, 25 percent of the options are exercisable annually on the anniversary 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 June 30, 2007 totaled 67,548,625. Option transactions for the period are as follows: 2007 2006 ------------------------------------------------------------------------- Weighted Weighted average average exercise exercise price price Six months ended June 30 Units $ Units $ ------------------------------------------------------------------------- Options outstanding, beginning of period 1,647,891 31.32 769,500 24.14 Granted 1,198,500 36.46 908,500 36.19 Exercised (51,894) 23.99 (27,579) 22.04 Forfeited (155,920) 33.24 (85,360) 28.31 ------------------------------------------------------------------------- Options outstanding, end of period 2,638,577 33.69 1,565,061 30.94 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options outstanding Options exercisable ------------------------------------------------------------------------- Weighted average remaining Options con- Weighted exercis- Weighted Outstanding tractual average able at average at June 30, life exercise June 30, exercise Range of prices 2007 (years) price ($) 2007 price ($) ------------------------------------------------------------------------- $22.04 - $27.00 359,660 2.5 22.04 161,034 22.04 $27.01 - $32.00 226,792 2.9 27.94 87,962 27.66 $32.01 - $37.00 2,027,625 4.1 36.35 210,000 36.18 $37.01 - $38.15 24,500 4.1 37.78 1,125 38.15 ------------------------------------------------------------------------- Total 2,638,577 3.8 33.69 460,121 29.60 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The estimated weighted average fair value of trust unit options granted to date is $5.58 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: Weighted average As at June 30 assumptions ------------------------------------------------------------------------- Dividend yield 5.75% Discount for forfeiture 3.00% Risk-free interest rate 4.03% Expected life of options 4.0 years Expected volatility factor of the future expected market price of trust units 27.60% ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Trust recorded compensation expense, included as part of general and administrative expense, of $1,794 (2006 - $907) with an offsetting increase to contributed surplus in respect of the options granted as of June 30, 2007. b) Retention bonus The Board of Directors of CCS Inc. 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 six months ended June 30, 2007, $165 (2006 - $165) was accrued and charged to general and administrative expense. The January 1, 2007 vesting of units carried a total cost of $330 and was charged to unitholders' capital at the time of vesting. 2007 2006 As at June 30 $ $ ------------------------------------------------------------------------- Balance, beginning of period (660) (1,231) Vesting on January 1 330 410 Proceeds on sale - 161 ------------------------------------------------------------------------- Balance, end of period (330) (660) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. 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 cumulative portion of net income 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. 2007 2006 As at June 30 $ $ ------------------------------------------------------------------------- Carrying value of exchangeable shares 14,867 14,955 Accumulated earnings attributable to NCI - prior years 86,878 54,627 ------------------------------------------------------------------------- Balance, beginning of period 101,745 69,582 NCI interest in net income 14,914 16,284 Adjustment for trust unit dilution of NCI interest (note 6a) 1,158 (4,528) Redeemed upon conversion to trust units (note 6a) (83) (6) ------------------------------------------------------------------------- Balance, end of period 117,734 81,332 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 at 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 June 30, 2007 was 2.75134 (June 30, 2006 - 2.60289). 2007 2006 As at June 30 Shares $ Shares $ ------------------------------------------------------------------------- Balance, beginning of period 5,636,766 14,867 5,670,143 14,955 Redeemed upon conversion to trust units (31,328) (83) (2,300) (6) ------------------------------------------------------------------------- Balance, end of period 5,605,438 14,784 5,667,843 14,949 Exchange ratio, end of period 2.75134 - 2.60289 - ------------------------------------------------------------------------- Trust units issuable upon conversion 15,422,466 14,784 14,752,772 14,949 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. RELATED-PARTY TRANSACTIONS a) Fractional interest The Trust has a 50 percent fractional interest in a Piaggio Avanti P-180 aircraft for use in CCS' operations. Corpac Canada Ltd. ("Corpac"), a company controlled by the Chairman and CEO of CCS Inc. until March 1, 2007, provides management services and operates the aircraft on behalf of the Trust. To March 1, 2007, the Trust incurred management fee expense, operating costs and costs for contract air services with Corpac totaling $117 (2006 - $194). b) Other On April 30, 2007, the Trust acquired approximately 19 acres of land in Edmonton, Alberta and nine acres in Richmond, B.C by acquiring the shares of HAZCO Industrial Services Limited Partnership, an entity controlled by certain members of HAZCO's management and their immediate families. The purchase price for the two parcels of land was equal to its appraised fair market value of $5,100 and $5,675, respectively. The land had previously been leased by the Trust for use in its operations. To the date of purchase, lease fees totaled $155 (2006 - $219). All related-party transactions are recorded at the exchange amount and charged to operating or general and administrative expense, or property, plant and equipment. 10. FINANCIAL INSTRUMENTS a) Designation and valuation of financial instruments Initial adoption of Section 3855 of the CICA Handbook requires an entity to classify its financial instruments into one of the following five categories: - loans and receivables; - assets held-to-maturity; - assets available-for-sale; - other financial liabilities; and - held-for-trading (assets and liabilities). Section 3855 also requires that all financial instruments be initially measured at their fair value. Effective January 1, 2007, the Trust has elected to classify its financial instruments as follows: June 30, 2007 December 31, 2006 Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ------------------------------------------------------------------------- Loans and receivables Accounts receivable(1) 151,569 151,569 229,410 229,410 ------------------------------------------------------------------------- Available-for-sale ------------------------------------------------------------------------- Investments and other long- term assets 244 244 180 180 ------------------------------------------------------------------------- Other financial liabilities(1) ------------------------------------------------------------------------- Accounts payable and accrued liabilities 81,835 81,835 110,932 110,932 Income taxes payable (5,202) (5,202) 275 275 Distributions payable 9,122 9,122 9,093 9,093 Long-term debt(2)(3) 356,834 356,834 356,462 356,462 Other long-term liabilities 1,077 1,077 699 699 ------------------------------------------------------------------------- Held-for-trading (assets and liabilities) ------------------------------------------------------------------------- Crude oil inventory 3,586 3,586 2,819 2,819 ------------------------------------------------------------------------- Purchase obligations 6,713 6,713 6,168 6,168 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Due to the nature and/or short maturity of these financial instruments, carrying value approximates fair value. (2) Includes both current and long-term portions net of deferred financing charges. (3) Long-term debt has been valued using the effective interest method. Derivatives The Trust is party to a five-year, non-amortizing, interest rate swap agreement for $18,000 at a fixed rate of 5.6 percent, and a five-year amortizing swap arrangement for $20,000 at a fixed rate of 4.1 percent. At June 30, 2007, the fair value of these derivatives was $46, the values of which are reported under other accounts receivable and other accrued liabilities. The Trust has entered into a commitment to deliver a specified volume of gas over a 13-year period. The gas delivery obligation is recorded at fair market value based on the present value of the future delivery obligation using a future gas price curve. For the six months ended June 30, 2007, a loss of $1,182 was recognized in earnings to reflect the change in the estimated fair market value of the obligation. b) Risks i) 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. ii) Interest rate risk The Trust is exposed to interest rate risk with respect to fluctuating interest rates on its revolving credit facilities. At June 30, 2007, approximately eight 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. iii) 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 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 in accumulated other comprehensive income 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 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. ACCUMULATED OTHER COMPREHENSIVE INCOME The Trust's accumulated other comprehensive income includes the unrealized gain (loss) on the translation of self-sustaining foreign operations. Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 $ $ $ $ ------------------------------------------------------------------------- Balance, beginning of period (221) 161 948 - Unrealized gain (loss) on translation of self- sustaining subsidiaries (8,077) (1,018) (9,246) (857) ------------------------------------------------------------------------- Tax effect of unrealized gain (loss) on translation of self-sustaining subsidiaries 135 - 135 - ------------------------------------------------------------------------- Balance, end of period (8,163) (857) (8,163) (857) ------------------------------------------------------------------------- 12. 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. 13. SEGMENTED INFORMATION The Trust's reportable operating segments consist of the following divisions: CCS Midstream Services ("Midstream Services"); Concord Well Servicing ("Concord"); HAZCO Environmental Services ("HAZCO"); and CCS Energy Marketing ("CEM"). - The Midstream 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 U.S. 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, trucking, on site storage 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 the U.S. and Peru. - CEM extracts additional value and operating margin on waste and recovered oil volumes from the Midstream 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 among 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. General and 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 and geographic segment for the three and six months ended June 30, 2007 and 2006: For the six Midstream Con- months ended Services Concord HAZCO CEM solidated June 30, 2007 $ $ $ $ $ ------------------------------------------------------------------------- Revenue prior to inter-segment eliminations 145,986 103,763 172,451 535,353 957,553 Inter-segment eliminations (2,586) (642) (1,479) (15,556) (20,263) ------------------------------------------------------------------------- Net revenue 143,400 103,121 170,972 519,797 937,290 Operating expenses prior to inter- segment elimin- ations 78,573 74,070 134,512 522,917 810,072 Inter-segment eliminations (1,461) (5) (2,500) (15,574) (19,540) ------------------------------------------------------------------------- Net expenses 77,112 74,065 132,012 507,343 790,532 ------------------------------------------------------------------------- Operating margin 66,288 29,056 38,960 12,454 146,758 Gas delivery obligation valuation 1,182 - - - 1,182 Loss (gain) on sale of assets 18 213 35 41 307 Depreciation and amortization 14,741 11,931 13,492 22 40,186 ------------------------------------------------------------------------- Income before corporate items 50,347 16,912 25,433 12,391 105,083 ------------------------------------------------------------------------- General and administrative 14,490 Financing 10,242 Depreciation and amortization 720 Foreign exchange loss 1,170 Income taxes 13,049 ------------------------------------------------------------------------- Income before non- controlling interest 65,412 Non-controlling interest (14,914) ------------------------------------------------------------------------- Net income for the period 50,498 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets 530,430 425,869 309,412 9,714 1,275,425 ------------------------------------------------------------------------- Goodwill 28,261 9,286 57,324 - 94,871 ------------------------------------------------------------------------- Capital expend- itures 42,695 30,746 37,716 929 112,086 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operations related to Canada and foreign countries are as follows: Inter- For the six months ended Canada national Total June 30, 2007 $ $ $ ------------------------------------------------------------------------- Revenue 903,234 34,056 937,290 ------------------------------------------------------------------------- Capital assets and goodwill 991,293 78,756 1,070,049 ------------------------------------------------------------------------- Total assets 1,218,348 57,077 1,275,425 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six Midstream Con- months ended Services Concord HAZCO CEM solidated June 30, 2006 $ $ $ $ $ ------------------------------------------------------------------------- Revenue prior to inter-segment eliminations 114,119 77,756 139,607 412,297 743,779 Inter-segment eliminations (521) (67) (989) (16,313) (17,890) ------------------------------------------------------------------------- Net revenue 113,598 77,689 138,618 395,984 725,889 Operating expenses prior to inter- segment elimin- ations 53,896 50,087 101,981 403,473 609,437 Inter-segment eliminations (521) - (989) (16,313) (17,823) ------------------------------------------------------------------------- Net expenses 53,375 50,087 100,992 387,160 591,614 ------------------------------------------------------------------------- Operating margin 60,223 27,602 37,626 8,824 134,275 Gas delivery obligation valuation 96 - - - 96 Loss (gain) on sale of assets (78) (3) 248 - 167 Depreciation and amortization 8,968 5,086 10,938 33 25,025 ------------------------------------------------------------------------- Income before corporate items 51,237 22,519 26,440 8,791 108,987 ------------------------------------------------------------------------- General and administrative 10,802 Financing 5,097 Depreciation and amortization 524 Foreign exchange loss 414 Income taxes 18,800 ------------------------------------------------------------------------- Income before non- controlling interest 73,350 Non-controlling interest (16,284) ------------------------------------------------------------------------- Net income for the period 57,066 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets 388,282 411,949 242,669 7,443 1,050,343 ------------------------------------------------------------------------- Goodwill 15,095 10,671 54,756 - 80,522 ------------------------------------------------------------------------- Capital expend- itures 35,699 18,243 16,948 1,632 72,522 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operations related to Canada and foreign countries are as follows: Inter- For the six months ended Canada national Total June 30, 2006 $ $ $ ------------------------------------------------------------------------- Revenue 709,527 16,362 725,889 ------------------------------------------------------------------------- Capital assets and goodwill 834,117 26,051 860,168 ------------------------------------------------------------------------- Total assets 1,012,172 38,171 1,050,343 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three Midstream Con- months ended Services Concord HAZCO CEM solidated June 30, 2007 $ $ $ $ $ ------------------------------------------------------------------------- Revenue prior to inter-segment eliminations 61,631 24,240 79,458 264,868 430,197 Inter-segment eliminations (1,929) (56) (530) (7,769) (10,284) ------------------------------------------------------------------------- Net revenue 59,702 24,184 78,928 257,099 419,913 Operating expenses prior to inter- segment elimin- ations 35,683 23,453 63,959 259,183 382,278 Inter-segment eliminations (510) (2) (1,859) (7,777) (10,148) ------------------------------------------------------------------------- Net expenses 35,173 23,451 62,100 251,406 372,130 ------------------------------------------------------------------------- Operating margin 24,529 733 16,828 5,693 47,783 Gas delivery obligation valuation (185) - - - (185) Loss (gain) on sale of assets 18 31 (57) - (8) Depreciation and amortization 8,410 6,098 6,403 11 20,922 ------------------------------------------------------------------------- Income before corporate items 16,286 (5,396) 10,482 5,682 27,054 ------------------------------------------------------------------------- General and administrative 7,165 Financing 5,423 Depreciation and amortization 362 Foreign exchange loss 1,008 Income taxes 350 ------------------------------------------------------------------------- Income before non- controlling interest 12,746 Non-controlling interest (3,011) ------------------------------------------------------------------------- Net income for the period 9,735 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets 530,430 425,869 309,412 9,714 1,275,425 ------------------------------------------------------------------------- Goodwill 28,261 9,286 57,324 - 94,871 ------------------------------------------------------------------------- Capital expend- itures 22,846 14,831 25,719 - 63,396 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operations related to Canada and foreign countries are as follows: Inter- For the three months ended Canada national Total June 30, 2007 $ $ $ ------------------------------------------------------------------------- Revenue 401,222 18,691 419,913 ------------------------------------------------------------------------- Capital assets and goodwill 991,293 78,756 1,070,049 ------------------------------------------------------------------------- Total assets 1,218,348 57,077 1,275,425 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three Midstream Con- months ended Services Concord HAZCO CEM solidated June 30, 2006 $ $ $ $ $ ------------------------------------------------------------------------- Revenue prior to inter-segment eliminations 52,386 36,974 68,302 207,250 364,912 Inter-segment eliminations (358) (67) (754) (7,736) (8,915) ------------------------------------------------------------------------- Net revenue 52,028 36,907 67,548 199,514 355,997 Operating expenses prior to inter- segment elimin- ations 29,273 26,533 53,363 202,487 311,656 Inter-segment eliminations (358) - (754) (7,736) (8,848) ------------------------------------------------------------------------- Net expenses 28,915 26,533 52,609 194,751 302,808 ------------------------------------------------------------------------- Operating margin 23,113 10,374 14,939 4,763 53,189 Gas delivery obligation valuation (116) - - - (116) Loss (gain) on sale of assets (77) (61) 294 - 156 Depreciation and amortization 4,608 3,575 5,347 16 13,546 ------------------------------------------------------------------------- Income before corporate items 18,698 6,860 9,298 4,747 39,603 ------------------------------------------------------------------------- General and administrative 5,996 Financing 2,577 Depreciation and amortization 258 Foreign exchange loss 341 Income taxes 4,310 ------------------------------------------------------------------------- Income before non- controlling interest 26,121 Non-controlling interest (4,241) ------------------------------------------------------------------------- Net income for the period 21,880 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets 388,282 411,949 242,669 7,443 1,050,343 ------------------------------------------------------------------------- Goodwill 15,095 10,671 54,756 - 80,522 ------------------------------------------------------------------------- Capital expend- itures 22,078 11,033 11,979 64 45,154 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operations related to Canada and foreign countries are as follows: Inter- For the three months ended Canada national Total June 30, 2006 $ $ $ ------------------------------------------------------------------------- Revenue 344,316 11,681 355,997 ------------------------------------------------------------------------- Capital assets and goodwill 834,117 26,051 860,168 ------------------------------------------------------------------------- Total assets 1,012,172 38,171 1,050,343 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 14. SUBSEQUENT EVENTS On June 29, 2007, the Trust entered a definitive agreement for a going private transaction with an investor group led by Mr. David Werklund, the President and CEO of CCS, and which includes CAI Capital Partners, Goldman Sachs Capital Partners, Kelso & Company, Vestar Capital Partners, British Columbia Investment Management Corporation and O.S.S. Capital Management L.P. Subject to unitholder and regulatory approvals, the investor group, through a series of transactions, will acquire all the assets of the Trust and each securityholder of the Trust will receive $46.00 per trust unit or the equivalent amount per exchangeable share, based on the applicable exchange ratio (other than Mr. Werklund, who has agreed to accept $45.50 for each trust unit sold by him). The transaction has been approved unanimously by the Board of Directors of the Trust (with interested and non-independent directors abstaining), following receipt of the unanimous recommendation of an Independent Committee of directors of CCS Inc. CORPORATE INFORMATION CCS INCOME TRUST Corporate Office EXECUTIVE MANAGEMENT Watermark Tower Calgary, AB T2P 3S8 DAVID P. WERKLUND Telephone: 403.233.7565 Founder, Chairman of the Board, Fax: 403.261.5612 President and Chief Executive Website: www.ccsincometrust.com Officer STOCK TRADING INFORMATION JOHN BEAN, CA CCS Income Trust units are listed President, HAZCO Division on the Toronto Stock Exchange (TSX) under the symbol CCR.UN. DONALD E. FRIESEN Vice President, Business TRANSFER AGENT AND REGISTRAR Development, HAZCO Division Computershare Trust Company of Canada RALPH C. HESJE, P. Eng. Calgary, Alberta President, CCS Midstream Services Division BANKERS Toronto Dominion Bank JIM McMAHON Calgary, Alberta Vice President, Business Development AUDITORS Ernst & Young LLP MARSHALL L. McRAE, CA Calgary, Alberta Chief Financial Officer CORPORATE COMMUNICATIONS BLAINE G. MELNYK Shauna Lowry General Counsel and Corporate Manager, Corporate Communications Secretary Telephone: 403.233.7565 Fax: 403.261.5612 DOUGLAS B. OLSON, CA Email: info@ccsincometrust.com Vice President, Finance INVESTOR RELATIONS GORDON N. VIVIAN Marshall McRae, CA President, Concord Well Chief Financial Officer Servicing Division Telephone: 403.233.7565 Fax: 403.261.5612 RICK M. WISE, P.Eng. Email: mmcrae@ccsincometrust.com Vice President, Engineering, Regulatory and Midstream Development DIANE YUILL, CA Corporate Controller %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

Organization Profile

CCS CORPORATION

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890