|
Builders Energy Services Trust TSX: BET.UN 
|
Mar 08, 2006 20:14 ET
Builders Energy Services Trust Reports Results for the 341-Day Period Ended December 31, 2005
CALGARY, ALBERTA--(CCNMatthews - March 8, 2006) - Builders Energy Services Trust (TSX:BET.UN) ("Builders", or the "Trust") announced today that funds from operations for the 341-day period ended December 31, 2005 were $30.9 million ($2.38 diluted per unit). Builders commenced operations as a Trust on January 25, 2005. Builders' net earnings for the 341-day period ended December 31, 2005 were $16.5 million ($1.38 diluted per unit).
"With over 40% of our 2005 EBITDA generated in the fourth quarter, Builders is demonstrating its operational strength through excellent financial results", stated Garnet K. Amundson, President and Chief Executive Officer of Builders, "We finished the year with revenue of $125 million and EBITDA of $33 million. Our very strong fourth quarter provides a good indication of our increasing cash flow generation".
Highlights
- Successful IPO of 5.1 million Trust Units at $10.00 each, which commenced trading on the Toronto Stock Exchange on January 25, 2005;
- Twelve acquisitions in 2005, including the simultaneous closing of nine acquisitions on January 25th; Tryton Tool Services Ltd. in June; Endeavor E-Line Services Inc. in July; Puma Well Service Ltd. in October;
- Revenue of $125 million and EBITDA of $33 million;
- Increased credit facilities to $70 million in December;
- Closed two separate private placements; one in June for net proceeds of $13.9
million; one in December for net proceeds of $23.7 million;
- Monthly distributions increased by 8% to $0.13 per month in October.
Based in Calgary, Builders Energy Services Trust is an open-end, unincorporated investment trust providing oilfield services in western Canada through skilled staff and specialized equipment. Builders provides services to the oil and gas industry related to the ongoing servicing of producing wells and new drilling activity.
When used in this news release, the words "expect", "anticipate", "estimate" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those contemplated in the forward-looking statements. Forward-looking statements are based on the estimates and opinions of management at the date that the statements are made, and the Trust undertakes no obligation to update forward-looking statements if conditions or opinions should change.
FINANCIAL RESULTS
------------------------------------------------------------------------
------------------------------------------------------------------------
As at and As at and
for the for the
66-day 341-day
(Thousands, period period
except per ended As at and for the quarter ended ended
unit amounts March 31, --------------------------------- December 31,
or as 2005 June 30, September December 2005
otherwise noted) 2005 30, 2005 31, 2005
------------------------------------------------------------------------
Revenue $ 20,221 $ 17,303 $ 37,164 $ 50,772 $125,460
Gross margin $ 9,437 $ 4,361 $ 14,078 $ 18,361 $ 46,237
EBITDA $ 7,560 $ 1,887 $ 9,646 $ 14,166 $ 33,259
Per unit
- basic $ 0.76 $ 0.18 $ 0.77 $ 1.04 $ 2.82
Per unit
- diluted $ 0.65 $ 0.15 $ 0.69 $ 0.95 $ 2.56
Funds flow $ 6,588 $ 2,532 $ 9,234 $ 12,544 $ 30,898
Per unit
- basic $ 0.66 $ 0.24 $ 0.73 $ 0.93 $ 2.62
Per unit
- diluted $ 0.57 $ 0.20 $ 0.66 $ 0.84 $ 2.38
Net earnings $ 4,249 $ 83 $ 4,960 7,220 $ 16,512
Per unit
- basic $ 0.43 $ 0.01 $ 0.39 $ 0.53 $ 1.40
Per unit
- diluted $ 0.40 $ 0.01 $ 0.38 $ 0.52 $ 1.38
Distributions
to unitholders $ 2,692 $ 3,808 $ 4,734 $ 5,497 $ 16,731
Per unit $ 0.27 $ 0.36 $ 0.37 $ 0.39 $ 1.39
As a percentage
of funds flow
from
operations
("Payout ratio") 41% 150% 51% 44% 54%
Gross margin as
a percentage
of revenue 47% 25% 38% 36% 37%
General and
administrative
expenses as a
percentage of
revenue 9% 14% 12% 8% 10%
Capital
expenditures
(net) $ 1,731 $ 5,691 $ 7,956 $ 11,349 $ 26,727
Long-term debt $ 11,194 $ 16,821 $ 34,862 $ 21,928 $ 21,928
Unitholders'
equity $ 90,415 $108,709 $122,839 $152,171 $152,171
Working capital $ 8,322 $ 14,663 $ 17,207 $ 18,440 $ 18,440
Trust units
- outstanding,
end of period 9,970 11,793 12,814 14,624 14,624
Trust units
- weighted
average,
basic 9,931 10,565 12,599 13,557 11,788
Trust units
- weighted
average,
diluted 11,648 12,387 13,997 14,898 13,006
------------------------------------------------------------------------
Trust units
- price
per unit
- high $ 15.20 $ 15.50 $ 17.85 $ 19.45 $ 19.45
per unit
- low $ 11.52 $ 12.00 $ 14.48 $ 14.00 $ 11.52
per unit
- close $ 12.59 $ 14.80 $ 16.75 $ 18.70 $ 18.70
Trust units
trading
volume 5,063 1,154 1,881 3,296 11,394
------------------------------------------------------------------------
------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") of Builders Energy Services Trust ("Builders" or the "Trust") for the 341-days ended December 31, 2005, should be read in conjunction with the Trust's audited consolidated financial statements as at and for the 341-days ended December 31, 2005 and the notes contained therein. This MD&A was prepared effective March 7, 2006.
Forward-Looking Statements
Certain statements contained in this MD&A constitute forward-looking statements. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect", and similar expressions, as they relate to the Trust, are intended to identify forward-looking statements. Such statements reflect Management's current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation, those described in this MD&A under the heading "Outlook". Many factors could cause the Trust's actual results, performance or achievements to vary from those anticipated in this MD&A. Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this MD&A as intended, planned, anticipated, believed, estimated or expected. Management does not assume any obligation to update these forward-looking statements if conditions or opinions should change.
Non-GAAP Measures
Throughout this MD&A, certain terms that are not specifically defined in Canadian generally accepted accounting principles ("GAAP") are used to analyze the operations. In addition to the primary measures of net earnings and net earnings per unit in accordance with GAAP, management believes that certain measures not recognized under GAAP assist management and the reader in assessing the performance and understanding the Trust's results. Each of these measures provides the reader with additional insight into the Trust's ability to generate ongoing cash flow, which is key to the sustainability of the trust model.
- Gross margin - This measure is considered a primary indicator that highlights the operating component of the funds flow generated by the Trust through its business units.
- EBITDA (Earnings before interest, income taxes, depreciation, amortization and non-cash charges) - This measure is used extensively in the Trust's financial covenants and is also considered an indicator of the Trust's ability to generate funds flow in order to meet distributions, ongoing operating commitments, servicing of debt and funding for capital programs.
- Funds flow or funds flow from operations - This measure, consistent with EBITDA, is an indicator of the Trust's ability to generate funds flow in order to make distributions, fund ongoing operating commitments, service debt and fund capital programs. Funds flow or funds flow from operations is defined as funds flow from operations before changes in non-cash working capital.
- Maintenance capital - Capital additions that are incurred in order to refurbish or replace previously acquired capital assets. Such additions do not provide incremental increases in revenue. Maintenance capital is a key component in understanding the sustainability of the Trust as cash resources retained within the trust must be sufficient to meet maintenance capital needs to replenish the assets for future cash generation.
- Growth capital - Growth capital is capital spending which is intended to result in incremental increases in revenue. Growth capital is considered a key measure by management as it represents the total expenditures on equipment expected to add incremental revenues and funds flow to the Trust.
- Payout ratio - This ratio is an indicator of the Trust's ability to meet its distribution levels while still maintaining adequate funds flow to fund the Trust's ongoing operations.
- Working capital - This term is defined as current assets less current liabilities excluding current portion of long-term debt.
- Distributable cash - Distributable cash is a key measure of the Trust's ability to fund cash distributions to its Unitholders. Distributable cash is determined by subtracting maintenance capital and scheduled debt repayments from funds flow from operations and adding back proceeds on disposal of capital assets replaced by maintenance capital.
These non-GAAP measures are not recognized measures under GAAP. As a result, the method of calculation may not be comparable with other companies or Trusts. These measures should not be considered alternatives to net earnings and net earnings per unit as calculated in accordance with GAAP.
These non-GAAP measures have been reconciled to GAAP measures in the tables throughout the MD&A.
Additional Information
Additional information regarding Builders can be found in the initial prospectus of the Trust dated January 13, 2005 and in Builders' Annual Information Form. These documents can be found on SEDAR at www.sedar.com.
BUILDERS OVERVIEW
Builders was formed on January 25, 2005, through an Initial Public Offering ("IPO") which included the concurrent closing of the acquisitions of nine oilfield service companies (the "IPO Acquisitions" as defined in Note 3 of the Consolidated Financial Statements). In addition to the IPO Acquisitions, Builders completed three acquisitions during the 341-day period ended December 31, 2005 with the purchases of the net assets of Tryton Tool Services Ltd. ("Tryton") and Puma Well Service Ltd. ("Puma") and the shares of Endeavor E-line Services Inc. ("Endeavor"). In addition, Builders acquired Leachman Enterprises Ltd. ("Leachman") in 2006.
Builders is a growth-oriented income trust focused on oilfield services in the Western Canadian Sedimentary Basin ("WCSB"). Builders was established as a trust versus a more traditional corporate structure for several reasons including:
- Better access to the capital markets which would aid management in its implementation of its growth strategy;
- Stronger trust valuations versus a traditional corporate structure due to the lower cost of capital; and
- The ability to generate cash on a tax-effective basis for unitholders. A trust is a flow-through structure whereby the distribution is either taxed as income in the hands of the unitholder or as a reduction to the unitholders adjusted cost base of the Trust units. Management recommends that unitholders consult their tax advisors regarding the tax implications of their investment in Trust units. In a traditional corporation, taxes are paid by the corporation and then paid again, albeit at a reduced rate, by the shareholder on the receipt of dividends.
Strategy
Builders is committed to building value for its unitholders through disciplined management and the implementation of its long-term strategy. The key aspects of Builders' strategy are:
- Select Oilfield Services: Focus on providing energy services.
- Entrepreneurial Spirit: Preserve the branding, culture and spirit of the businesses within Builders.
- Operational Excellence: Efficient operations and superior customer service within a safe working environment.
- Business Diversity: Operational and geographic diversity in Western Canada.
- Growth: Internal expansion and acquisitions.
- Cash Distributions: Sustainable cash distributions for Unitholders.
THE INDUSTRY
The WCSB is one of the largest oil and gas exploration and producing regions in North America, with the majority of oil and natural gas production in Canada occurring in this area. There are approximately 160,000 producing wells in the WCSB. The WCSB is a maturing basin with estimates of annual decline rates for natural gas, in the absence of additional production from new drilling, of approximately 23 percent per year, according to the National Energy Board of Canada. This rate of decline, coupled with the fact that the average production rates per well of oil and natural gas have been declining in Western Canada for the past decade, has resulted in an increase in drilling activity over the same period in order to maintain current production levels. In addition, there has been an increase in activity involving existing wells to preserve their productivity and to improve recovery rates. A combination of declining reserves and high commodity prices has seen the number of wells drilled annually in Canada increase from approximately 10,000 in 1999 to an estimated 25,000 in 2006, of which 20,000 are expected to be drilled in Alberta.
The oilfield services sector offers specialized staff and equipment to crude oil and natural gas production, exploration and development entities. These services, among others, include oilfield transportation, equipment rental and supply, coil tubing, nitrogen and wireline services. Oilfield service entities provide services to support drilling activity and also provide services associated with existing wells that are already on production. Producing wells generally require regular maintenance activities to ensure their production capabilities are maintained. Examples of activities that oilfield service entities offer that relate to productive wells include service rigs to repair, re-perforate and stimulate wells to improve crude oil and natural gas production, coil tubing units that are used to remove unwanted corrosive acids, solids, gels and fluids from producing zones, and nitrogen units that are used to support coil tubing operations. Production-related activities are generally regarded as less cyclical than drilling-related service activities, as they tend not to be directly impacted by the level of drilling activity. At certain commodity pricing levels, drilling may become less economic, which in turn, can affect the amount of drilling activity.
Successful oilfield service firms are those that offer availability, reliability and performance of equipment, as well as technical knowledge, experience, competitive pricing, and a focus on safety.
Commodity Prices
The primary activity driver in the oil and gas industry is commodity prices. These prices determine the level of both exploration and reservoir development activity. Crude oil prices are primarily determined by world markets and are dependent on the overall supply and demand of the related commodities. With world economies in China, India and North America continuing to be robust, in the past number of years demand for oil has been high. This level of demand, in addition to the fact that a significant percentage of world reserves are impacted by the political instability in regions such as the Middle East, has caused prices to continue to escalate and reach all time highs in 2005. Given the political instability of many regions in the world, North America continues to focus on ensuring that reserves within the WCSB are developed and existing wells are continually serviced to maximize their output.
With current commodity pricing, exploration and production ("E&P") businesses are reporting record profits and are active in programs to replace and increase their reserves. This has resulted in profitable exploration and development in the WCSB in previously uneconomic areas and the drilling of both deeper and higher cost wells and shallow, lower productivity wells.
OILFIELD SERVICES
Builders provides a variety of oilfield services to oil and natural gas producers and explorers. Builders services include: oilfield hauling such as the transportation of pipe, tubular products, supplies and equipment to the wellsite; rig relocation services which involve using specialized equipment and procedures to move coil tubing units, service rigs and conventional drilling rigs from site to site once drilling is completed; service rigs, which are used to repair, re-perforate and stimulate existing oil and gas wells and perform completion work on new wells; e-line services which include logging and perforating services; and coil tubing services, which involve injecting coil tubing into wells to perform various well-servicing operations. Builders also provides services that include oilfield rentals, downhole tool services, and slickline services.
DISCUSSION OF FINANCIAL RESULTS
Management views Builders as a single business segment, due to the similarity of its operations and services, common customer base, geographic concentration in the WCSB and its single focus on the oilfield services sector.
The operations and financial results of the IPO Acquisitions are included in the December 31, 2005 financial statements and MD&A of the Trust from the January 25, 2005 closing of the acquisitions. The operations and financial results of Tryton, Endeavor and Puma, are included in the December 31, 2005 financial statements and MD&A of the Trust from June 1, July 21, and October 14, 2005, respectively. Due to the complexity of harmonizing the accounting periods and policies for past financial information, no comparative information is provided.
------------------------------------------------------------------------
As at and As at and
for the for the
66-day As at and for 341-day
period the three months ended period
(Thousands ended --------------------------------- ended
except per March 31, June 30, September December December 31,
unit amounts) 2005 2005 30, 2005 31, 2005 2005
------------------------------------------------------------------------
Selected Statement of Operations Information
--------------------------------------------
Revenue $ 20,221 $17,303 $37,164 $50,772 $125,460
Operating
expenses 10,784 12,942 23,086 32,411 79,223
------------------------------------------------------------------------
Gross margin 9,437 4,361 14,078 18,361 46,237
General and
administrative 1,877 2,474 4,432 4,195 12,978
------------------------------------------------------------------------
EBITDA 7,560 1,887 9,646 14,166 33,259
Other cash
expense
(income) - (42) 35 325 318
Interest on
long-term debt 163 206 377 310 1,056
Income tax
expense
(recovery) 809 (809) - 987 987
------------------------------------------------------------------------
Funds flow
from
operations 6,588 2,532 9,234 12,544 30,898
Depreciation
and
amortization 1,598 2,287 3,048 3,314 10,247
Unit-based
compensation 247 351 468 534 1,600
Other non-cash
expense (income) 17 (39) 155 129 262
Future income
tax expense
(recovery) 59 (158) 201 793 895
Non-controlling
interest 418 8 402 554 1,382
------------------------------------------------------------------------
Net earnings $ 4,249 $ 83 $ 4,960 $ 7,220 $ 16,512
------------------------------------------------------------------------
------------------------------------------------------------------------
Net earnings
per unit
- basic $ 0.43 $0.01 $ 0.39 $ 0.53 $ 1.40
------------------------------------------------------------------------
------------------------------------------------------------------------
Net earnings
per unit
- diluted $ 0.40 $0.01 $ 0.38 $ 0.52 $ 1.38
------------------------------------------------------------------------
------------------------------------------------------------------------
Selected Balance Sheet Information
----------------------------------
Working capital $8,322 $ 14,663 $ 17,207 $ 18,440 $ 18,440
------------------------------------------------------------------------
------------------------------------------------------------------------
Total assets $147,231 $165,632 $203,709 $232,369 $232,369
------------------------------------------------------------------------
------------------------------------------------------------------------
Total
liabilities $ 57,234 $ 56,923 $ 80,870 $ 80,198 $ 80,198
------------------------------------------------------------------------
------------------------------------------------------------------------
Unitholders'
equity $ 90,415 $108,709 $122,839 $152,171 $152,171
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash
distributions
to
unitholders $ 2,692 $ 3,808 $ 4,734 $ 5,497 $ 16,731
------------------------------------------------------------------------
------------------------------------------------------------------------
Net Earnings
Net earnings for the 341-day period ended December 31, 2005 were $16.5 million ($1.40 per basic unit, $1.38 per diluted unit), slightly higher than management's internal forecasts, reflecting the strength and performance of the businesses that comprise Builders and the robust nature of the oil and gas industry in the WCSB.
Revenue and Gross Margin
The following table highlights revenue, gross margin and EBITDA:
------------------------------------------------------------------------
For the For the
(Thousands 66-days For the three months ended 341-days
except where ended --------------------------------- ended
otherwise March 31, June 30, September December December 31,
indicated) 2005 2005 30, 2005 31, 2005 2005
------------------------------------------------------------------------
Revenue $20,221 $17,303 $37,164 $50,772 $125,460
Operating
expenses 10,784 12,942 23,086 32,411 79,223
------------------------------------------------------------------------
Gross margin 9,437 4,361 14,078 18,361 46,237
General &
administrative 1,877 2,474 4,432 4,195 12,978
------------------------------------------------------------------------
EBITDA $ 7,560 $ 1,887 $ 9,646 $14,166 $ 33,259
------------------------------------------------------------------------
------------------------------------------------------------------------
Gross margin
as a
percentage
of revenue 47% 25% 38% 36% 37%
------------------------------------------------------------------------
------------------------------------------------------------------------
EBITDA as a
percentage
of revenue 37% 11% 26% 28% 27%
------------------------------------------------------------------------
------------------------------------------------------------------------
Overall gross margin percentage, at 37 percent, fell slightly short of management's 2005 annual estimate of 40 percent. Primary factors contributing to this were:
- Revenue was impacted by delays in receiving new equipment and lower utilization rates caused by unfavourable weather conditions. Specifically,
-- New equipment was delayed due to shortages of both equipment and fabrication facility availability caused by the heavy demand in the industry.
-- Weather conditions impacted utilization rates in the second quarter and, to a lesser extent in the third quarter, as wet weather impeded the ability of equipment to get into the field. Revenue and equipment utilization tends to be higher in the fall and winter months when activity in the industry increases as a result of ground freezing which allows access to additional well sites. The spring tends to be the season when access is limited and equipment is repaired and maintained.
- Operating costs were driven by increased costs for fuel, higher labour costs caused by wage increases as a result of industry-wide labour shortages driven by demand, and carrying additional crews in preparation for the arrival of new equipment which was delayed. With the arrival of equipment late in 2005 and in the first quarter of 2006, revenues and margins are expected to be positively impacted as this equipment is deployed into the field.
- Equipment delivery delays impacted the gross margin percentage, as additions of new equipment generally improve margins, reflecting the fact that the incremental revenues only have to cover incremental variable expenses, and fixed costs are spread over a greater revenue base.
Absolute gross margin at $46 million was slightly higher than management had anticipated. This reflects better than expected revenue from the stronger than projected activity levels in the industry in the fourth quarter.
EBITDA
Management considers EBITDA and gross margin two of the key measures in assessing the operational performance of the Trust. Consistent with gross margin, EBITDA for the 341-day period was slightly ahead of management expectations due to variances noted above.
The Trust's general and administrative expenses include primarily Calgary personnel and office costs and certain personnel in the field offices associated with administrative functions. General and administrative expenses approximated management's expectations for the period.
The following table reconciles EBITDA to net earnings:
------------------------------------------------------------------------
For the For the
66-days For the three months ended 341-days
ended --------------------------------- ended
March 31, June 30, September December December 31,
(Thousands) 2005 2005 30, 2005 31, 2005 2005
------------------------------------------------------------------------
EBITDA $ 7,560 $ 1,887 $ 9,646 $14,166 $33,259
Depreciation
and
amortization 1,598 2,287 3,048 3,314 10,247
Unit-based
compensation 247 351 468 534 1,600
Other expense
(income) 17 (81) 190 454 580
Interest on
long-term debt 163 206 377 310 1,056
Income tax
expense
(recovery) 868 (967) 201 1,780 1,882
Non-controlling
interest 418 8 402 554 1,382
------------------------------------------------------------------------
Net earnings $ 4,249 $ 83 $ 4,960 $ 7,220 $16,512
------------------------------------------------------------------------
------------------------------------------------------------------------
Depreciation and Amortization
Depreciation on capital assets is calculated on a straight-line basis over the estimated useful lives, net of the estimated salvage value, and reflects management's best estimates of the lives of the equipment, assuming regular ongoing maintenance. Amortization on intangible assets purchased primarily represents customer lists, and amortization of financing costs associated with credit facilities. Depreciation and amortization has increased from the first quarter to the fourth quarter of 2005 reflecting the shortened first quarter reporting period and the impact of the acquisitions of Tryton, Endeavor and Puma.
Unit-based Compensation
Unit-based compensation represents the fair value of option grants recognized over the vesting period. For the 341-day period, 1.3 million options were granted at an average fair value of $2.96 per option using the Black Scholes option valuation model. The option program is considered a key component of employee compensation and retention in a very competitive industry. The options vest annually in one-third increments over a three-year period and expire after five years.
Interest on Long-term Debt
Interest on long-term debt is attributable to the Trust's term acquisition loan facility, capital leases and financing contracts. Interest rates increased slightly throughout the period and fluctuated with the prime lending rate.
Income Taxes
For the 341-day period ended December 31, 2005 the tax provision was $1.9 million, reflecting the strong operating results of the Trust combined with the tax impact of retaining cash in the Trust to cover scheduled debt principal repayments and maintenance and growth capital requirements.
Note 13 to the consolidated financial statements includes a reconciliation between the income tax provision in the financial statements and the amounts that would be computed by applying the combined Canadian federal and provincial statutory income tax rates to earnings before income taxes.
FINANCIAL RESOURCES
In a trust structure, funds flow generation is considered a key performance indicator. In determining cash distribution levels, management must consider the future funds flow generating capabilities of the businesses, their capital requirements to maintain equipment and repayment requirements of debt.
The following sections review the overall cash generation, resources and uses of cash during 2005.
Operating Funds Flow
Funds flow from operations of $31 million exceeded management's internal estimates, reflecting the robust nature of the industry and the funds flow generating capabilities of the businesses that have become part of Builders in 2005.
Funds flow from operations after changes in non-cash working capital, a second key measure reflecting both operational cash generation and the ability of management to manage working capital, also exceeded management's internal estimates. Non-cash working capital reflects a use of cash for the 341-day period ended December 31, 2005 as the fall and winter seasons are peak activity periods for the industry in the WCSB and accounts receivable and inventory balances tend to increase in these periods.
A key component of working capital is accounts receivable and significant long-term changes in the oil and gas industry could adversely impact their collectibility. Builders manages this risk through various internal processes including monitoring days outstanding and following up with customers once a balance exceeds certain thresholds. As at December 31, 2005, Builders did not have any individual accounts receivable that represented 10 percent or more of the total accounts receivable balance.
Financing
In 2005, a number of financing alternatives were used to fund the activities of the Trust. The issuance of Trust units, use of the term acquisition loan facility and financing arrangements for equipment were used for investment in growth initiatives such as acquisitions and equipment purchases. An operating line of credit facility was established to manage seasonal fluctuations in working capital. Other than leases for premises and equipment, management does not use off-balance sheet arrangements to manage the operating or longer-term financing needs of the Trust.
Trust and Subordinated Units
A summary of Trust units, Subordinated units and Exchangeable shares is as follows:
Issued and outstanding
(Thousands except where ------------------------
otherwise indicated) Authorized Number Amount
------------------------------------------------------------------------
Trust units Unlimited
Issued on IPO 5,100 $ 46,991
Private placements 2,788 37,562
Consideration for acquisitions 5,669 63,055
Conversion of exchangeable shares 67 682
------------------------------------------------------------------------
13,624 $ 148,290
------------------------------------------------------------------------
------------------------------------------------------------------------
Subordinated units Unlimited 1,000 $ 2,500
------------------------------------------------------------------------
------------------------------------------------------------------------
During the 341-day period ended December 31, 2005, the Trust issued $84.6 million in Trust units for cash, net of issuance costs. The units were issued in three separate transactions as follows:
- On January 25, 2005, the Trust completed an IPO of 5,100,000 Trust units at $10 each, for total gross proceeds of $51.0 million less agents' commissions of $3.1 million and other expenses of $0.9 million. The net proceeds of $47.0 million were used for the IPO Acquisitions. An additional 3,835,226 units were issued as part of the purchase consideration for the IPO Acquisitions. In addition, on January 25, 2005 as part of the IPO, 1,000,000 Subordinated Trust units were issued to the founders of the Trust for proceeds of $2.5 million reflecting the initial capitalization of the Trust. These units are subordinated to the Trust units and only receive monthly distributions once distributions of at least $0.12 per unit per month have been paid to existing unitholders. Throughout 2005, Subordinated unitholders received all monthly distributions. The Subordinated units are eligible for conversion into 1,000,000 Trust units on January 1, 2008.
- On June 2, 2005, the Trust closed a bought deal private placement of 1,200,000 Trust units at a price of $12.50 per Trust unit for total gross proceeds of $15.0 million. Net proceeds after issuance costs were $14.0 million. These funds were used for capital expenditures and the Endeavor acquisition that closed on July 21, 2005.
- On November 30, 2005, the Trust closed a bought deal private placement of 1,588,000 Trust units at a price of $15.75 per Trust unit for total gross proceeds of $25.0 million. Net proceeds after issuance costs were $23.6 million. These funds were used to fund the ongoing capital expenditure and acquisition program and for general corporate purposes.
As at March 7, 2006, there are 15,142,772 Trust units outstanding.
Exchangeable Shares
Issued and outstanding
(Thousands except where ------------------------
otherwise indicated) Authorized Number Amount
------------------------------------------------------------------------
Exchangeable shares Unlimited 946 $ 10,807
------------------------------------------------------------------------
------------------------------------------------------------------------
Exchangeable shares are used as partial consideration for certain acquisitions. These shares are convertible into Trust units using a specified exchange ratio, at a future date. As at December 31, 2005, the Exchangeable shares outstanding would have converted to 1,029,574 Trust Units. These shares have economic rights and voting attributes equivalent to those of the Trust units into which they are exchangeable. The number of Trust units to be issued on conversion is based on the exchange ratio. The exchange ratio is determined on the date of acquisition adjusted for distributions from the date of acquisition to the exchange date.
Distributable Cash and Payout Ratio
One of the key indicators for both an investor and management is the payout ratio. This ratio reflects the percentage of cash that is being paid out to Unitholders in relation to the amount that is being generated within the Trust. Unlike a more traditional corporate structure, trusts are structured to make distribution payments to unitholders. Management sets an annualized payout ratio target that reflects the risk profile of the Trust and the balance between distributions to Unitholders and maintaining the ongoing operations, including maintenance capital expenditures and scheduled debt repayments. The following table provides the payout ratio calculations for 2005:
------------------------------------------------------------------------
For the 341-days
(Thousands except where ended December
otherwise indicated) 31, 2005
------------------------------------------------------------------------
Funds flow from operations $ 30,898
Principal repayments on long-term debt 2,568
Maintenance capital 3,838
Proceeds on the disposal of capital assets (2,221)
------------------------------------------------------------------------
Distributable cash $ 26,713
------------------------------------------------------------------------
------------------------------------------------------------------------
Distributions:
Paid $ 14,830
Payable 1,901
------------------------------------------------------------------------
Total distributions $ 16,731
------------------------------------------------------------------------
------------------------------------------------------------------------
Payout ratio on funds flow from operations 54%
------------------------------------------------------------------------
------------------------------------------------------------------------
Payout ratio on distributable cash 63%
------------------------------------------------------------------------
------------------------------------------------------------------------
The payout ratios on funds flow from operations and on distributable cash for the 341-day period ended December 31, 2005 were in line with management's expectations. On a longer term basis, management is targeting a payout ratio on distributable cash of 65 percent to 70 percent. Management continues to be disciplined in setting the distribution level, and evaluating whether funds flows allow for sustainable distributions.
Credit Facilities and Long-term Debt
Credit facilities:
------------------------------------------------------------------------
Outstanding Unutilized
as at as at Total
December December credit
(Thousands) 31, 2005 31, 2005 facility
------------------------------------------------------------------------
Credit facilities
Operating line of credit $ 5,700 $ 14,300 $ 20,000
Term acquisition loan facility 14,895 35,105 50,000
------------------------------------------------------------------------
Total $ 20,595 $ 49,405 $ 70,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Other long-term debt:
------------------------------------------------------------------------
Outstanding as at
(Thousands) December 31, 2005
------------------------------------------------------------------------
Term debt $ 6,502
Capital leases 531
------------------------------------------------------------------------
Total $ 7,033
------------------------------------------------------------------------
------------------------------------------------------------------------
The amount outstanding on the operating facility at December 31, 2005 reflects funding of ongoing operations and the timing between receivables collections and the performance of services during the peak activity period in the winter.
During 2005, $36.5 million in long-term debt was repaid, of which $12.3 million was repaid related to the IPO Acquisitions. The remaining debt was repaid through partial use of proceeds received from the issuance of Trust units pursuant to the two private placements that were completed in 2005.
On May 3, 2005, Builders obtained a $45.0 million credit facility with two major Canadian chartered banks. In December, this facility was amended, increasing the total facility to $70.0 million and a third Canadian chartered bank was added. The operating line of credit is $15.0 million from June 1 to October 31, increasing to $20.0 million for the period from November 1 to May 31. The term acquisition loan facility is $50.0 million. At December 31, 2005, the Trust had drawn $5.7 million of the $20.0 million operating line and $14.9 million of the $50.0 million term acquisition loan facility resulting in a total of $49.4 million of utilized financing capacity. The available financing is expected to be sufficient to meet existing operating needs and commitments for at least the next year.
The term date of the operating line of credit and the term acquisition loan facility is May 31, 2006. At this time, it is management's intention to renew the facilities for an additional 364 days. Since the term date occurs within one year, as at December 31, 2005, $2.9 million of the acquisition loan facility has been recognized as part of the current portion of long-term debt in current liabilities.
All financial debt covenants were satisfied at December 31, 2005. All banking requirements were up to date and the Trust does not anticipate any covenant issues restricting its future operating, investing or financing activities.
The financing contracts and capital leases are repayable in monthly installments of $0.3 million, including interest, at a weighted average interest rate of six percent, and mature between January 2006 and December 2010. The contracts and leases are collateralized by specific equipment.
Through its use of long-term debt, the Trust is exposed to interest rate risk as its debt has a floating rate. At December 31, 2005, the long-term debt had a carrying and fair value of $21.9 million due to the fact that interest associated with the long-term debt facility is directly tied to the prime rate. At December 31, 2005, the debt facility's effective rate of interest was 4.61 percent.
Investing
The Trust invests in three primary areas: existing oilfield services businesses via acquisition, growth capital to increase the size and operations of these businesses and maintenance capital. The following table provides a breakdown of the key investing activities during the period:
------------------------------------------------------------------------
For the 341-day period
(Thousands) ended December 31, 2005
------------------------------------------------------------------------
Acquisitions:
IPO Acquisitions $ 36,907
Tryton, Endeavor and Puma 27,501
------------------------------------------------------------------------
64,408
Capital expenditures 28,948
Proceeds on disposal of capital assets (2,221)
------------------------------------------------------------------------
$ 91,135
------------------------------------------------------------------------
------------------------------------------------------------------------
The IPO Acquisitions are the initial nine companies that were purchased in conjunction with the IPO on January 25, 2005. These transactions were structured with the consideration being a combination of Trust units, Exchangeable shares and cash. The companies that were purchased were Brazeau Well Servicing Ltd., C.D.T Rentals Inc., Circle D Transport Inc., Coil Tubing Completions Ltd., CTC Nitrogen Services Ltd., CTC Production Testing Ltd., Decarson Rentals (2000) Inc., Ken Polege Enterprises Inc. and Remote Wireline Services Ltd.
In addition to the IPO Acquisitions, the Trust completed the following acquisitions during 2005:
- On June 1, 2005, the Trust acquired substantially all of the net operating assets of Tryton Tool Services Ltd. for total cash consideration of $10.4 million and the issuance by the Trust of 623,077 Trust units at a deemed price of $13.00 per Trust unit;
- On July 21, 2005, the Trust acquired all the issued and outstanding shares of Endeavor E-Line Services Inc. for total cash consideration of $14.0 million and the issuance by the Trust of 988,947 Trust units at a deemed price of $13.25 per Trust unit;
- On October 14, 2005, the Trust acquired substantially all of the net operating assets of Puma Well Service Ltd. for total cash consideration of $3.1 million and the issuance by the Trust of 222,222 Trust units at a deemed price of $15.75 per Trust unit.
On February 1, 2006, the Trust purchased all the issued and outstanding shares of Leachman Enterprises Ltd. ("Leachman") for $3.5 million in cash consideration, 150,307 Trust units and 64,417 Exchangeable shares. Leachman specializes in oilfield equipment hauling and storage and is located in Provost, Alberta.
Capital
Capital expenditures for the 341-day period ended December 31, 2005:
------------------------------------------------------------------------
341-day period
(Thousands) ended December 31, 2005
------------------------------------------------------------------------
Growth Capital
Oilfield hauling and rig relocation
(trucks, pickers, trailers) $ 13,550
Service rigs 4,358
Wireline services (wireline and E-line units) 1,957
Oilfield services, rentals and other
(coil tubing units, nitrogen units) 5,245
------------------------------------------------------------------------
25,110
Maintenance capital 3,838
------------------------------------------------------------------------
Total capital expenditures $ 28,948
------------------------------------------------------------------------
------------------------------------------------------------------------
Growth capital represents expenditures on assets that are intended to provide an incremental revenue increase to Builders.
Maintenance capital represents capital additions incurred in order to refurbish or replace existing capital assets that are not expected to add incremental revenue.
Anticipated capital expenditures for the year ended December 31, 2006:
------------------------------------------------------------------------
Year ended
(Thousands) December 31, 2006
------------------------------------------------------------------------
Growth Capital
Oilfield hauling and rig relocation
(trucks, pickers, trailers) $ 11,000
Service rigs 5,100
Wireline services (E-line units and other equipment) 2,800
Oilfield services, rentals and other (coil tubing units) 4,100
------------------------------------------------------------------------
23,000
Maintenance capital and other 7,000
------------------------------------------------------------------------
Total capital expenditures $ 30,000
------------------------------------------------------------------------
------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
------------------------------------------------------------------------
(Thousands) 2006 2007 2008 2009 2010+
------------------------------------------------------------------------
Operating leases $ 2,555 $ 2,438 $ 2,316 $ 1,824 $ 3,658
Capital leases 292 184 30 15 10
Financing contracts 2,371 2,128 1,457 449 97
------------------------------------------------------------------------
Total $ 5,218 $ 4,750 $ 3,803 $ 2,288 $ 3,765
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating leases relate to the leasing of equipment, property and buildings from both third parties and related parties. Capital leases and financing contracts were a component of the acquisitions completed during 2005. These contracts primarily relate to the financing of vehicles and equipment.
RELATED PARTIES
During the normal course of operations, on commercial terms established and agreed to by the related parties, the Trust rents land and buildings from the former owners of businesses acquired. For the 341-day period ended December 31, 2005, $1.3 million has been included in operating expenses for these items.
CRITICAL ACCOUNTING ESTIMATES
In preparing the Trust's consolidated financial statements, management is required to make estimates and assumptions based on information available as of the date of the consolidated financial statements that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and revenues and expenses for the periods reported. The most significant of these estimates are depreciation and amortization, the valuation of goodwill and intangible assets and unit based compensation. Actual results could differ from these amounts.
Although estimates and assumptions based on information available at the time are required to be made, it is management's opinion that none of the above items identified or other items in Builders' financial statements involve assumptions or estimates that are highly uncertain at the time they were made and that different estimates that the Trust could have used or changes in the accounting estimate that are reasonably likely to occur would have a material impact on the Trust's financial condition, changes in financial condition or results of operations.
ACCOUNTING POLICIES
As this is the first period of operations, all accounting polices were adopted at the commencement of operations.
Recent Accounting Pronouncements
The following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA"), are applicable to Builders but have not been implemented:
- CICA Handbook Section 1530 - Comprehensive Income
This standard will be effective for the Trust's 2007 reporting period and is not expected to have a significant impact on the Trust. The standard creates a separate financial statement that captures items included in other comprehensive income but excluded from income in accordance with GAAP.
- CICA Handbook Section 3831 - Non-Monetary Transactions
This standard is effective for the Trust's 2006 reporting period and is not expected to have a significant impact on the Trust. The primary change from existing guidance is that the test of a non-monetary transaction is based on commercial substance versus the existing test of culmination of the earnings process.
- CICA Handbook Section 3855 and Section 3861 - Financial Instruments
These standards will be effective for the Trust's 2007 reporting period and are not expected to have a significant impact on the Trust. These standards address the requirement to record financial instruments at fair value in the financial statements unless certain criteria are met allowing them to be recorded at cost or amortized cost.
DISCLOSURE CONTROLS AND PROCEDURES
Management has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Trust, including its consolidated subsidiaries, is made known to the Chief Executive Officer and the Chief Financial Officer by others within those entities, particularly during the period in which the annual filings of the Trust are being prepared, in an accurate and timely manner in order for the Trust to comply with its continuous disclosure and financial reporting obligations and in order to safeguard assets. Management has concluded that the Trust's disclosure controls and procedures, as of the end of the period covered by the annual filings, are effective in providing reasonable assurance that material information is accumulated and disclosed accurately. Consistent with the concept of reasonable assurance, the Trust recognizes that the relative cost of maintaining these controls and procedures should not exceed their expected benefits. As such, the Trust's disclosure controls and procedures can only provide reasonable assurance, and not absolute assurance, that the objectives of such controls and procedures are met.
BUSINESS RISKS
The cyclical nature of the oil and gas industry results in inherent service industry risk, as the success of WCSB oilfield service businesses are directly tied, in large part, to the general health of the oil and natural gas industry in Western Canada. Such risks include, but are not necessarily limited to, the trust structure, federal, provincial, government regulatory and environmental compliance, seasonality of operations, competition, alternative energy sources, capital markets and commodity pricing. Specific risks are identified below.
Trust Structure
Trusts must fund ongoing distributions while retaining sufficient cash flow to sustain the assets of the underlying operations. In the event that industry fundamentals shift, distribution levels may also have to be adjusted.
Regulatory Environment
In addition to the various federal, provincial and municipal regulations that oilfield service businesses must adhere to in their ongoing operations, these businesses are also subject to environmental regulations pursuant to a variety of provincial and federal legislation.
Seasonality
In Canada, the level of activity in the oilfield service industry is influenced by seasonal weather patterns. Spring break-up, which typically occurs during the second quarter, leaves many secondary roads temporarily incapable of supporting the weight of heavy equipment, which results in severe restrictions in the level of oilfield service activity. The timing and duration of spring breakup is dependent on regional weather patterns but typically occurs in April and May. Additionally, if an unseasonably warm winter prevents sufficient freezing, oilfield service businesses may not be able to access certain well sites and its operating results and financial condition may therefore be
adversely affected.
The demand for oilfield services may also be affected by the severity of the Canadian winters. In addition, during excessively rainy periods, equipment moves may be delayed, thereby adversely affecting operations. The volatility in the weather and temperature can therefore create unpredictability in activity and utilization rates.
Competition
The oilfield services industry in the WCSB is highly competitive, and in order to be successful, businesses must provide quality service, reliability and availability. The Trust competes with businesses that offer the same service in the same geographic areas that it operates. Competitive factors may result in the Trust not being able to continue to provide its present services at competitive prices.
Capital Markets
The state of the financial markets in Canada is influenced by commodity prices and the ability to finance capital programs with cash flow, debt or new equity issues. Market forces, in combination with consumer demand for oil and gas, are key factors in determining the number of wells that will be drilled by E&P companies in Canada.
Commodity Prices
Any prolonged, substantial reduction in commodity prices will likely affect the activity levels of the oil and gas E&P companies and the demand for energy services. A significant, prolonged decline in commodity prices could have a material adverse effect on the oilfield services industry's financial condition, results of operations and cash flows.
These risks have and will continue to be considered as management continues to implement the Trust's strategy.
OUTLOOK
The oil and gas industry closed out 2005 on a high note and expectations for 2006 are that the industry will remain robust. The outlook for commodity prices continues to remain strong relative to recent years and current estimates indicate that the number of wells to be drilled in Canada in 2006 will be approximately 25,000. In addition, the existing 160,000 producing wells in the WCSB require ongoing maintenance to ensure their productive capability is maintained. These factors, combined with the current demand in North America and abroad for crude oil and natural gas, bodes well for the oilfield services sector and it is expected to be strong throughout 2006.
Reservoir declines and challenges in finding new oil and gas reserves through exploration are expected to lead the industry towards increased service work to maintain and enhance recoveries from existing reservoirs. These reservoir challenges, coupled with expectations for high prices and strong demand for oil and natural gas, have led many to conclude that the oilfield services sector will continue to grow.
Expectations are that the Trust will eclipse the 2005 levels of activity, reflecting a full year of operations, and will benefit from the additions of 2005 growth capital that came into service late in the year and in the first quarter of 2006. Additional strategic acquisitions continue to be assessed by the Trust, as industry consolidation in the oilfield services sector is expected to continue.
Management expects to continue to generate sufficient cash flows to maintain our current monthly distribution level of $0.13 per unit per month and stay within our targeted payout ratio of 65 percent to 70 percent of distributable cash.
Management believes current cash resources and credit facilities are sufficient and expects to meet all bank covenant requirements.
Consolidated Balance Sheet
(unaudited)
------------------------------------------------------------------------
As at
(Thousands) December 31, 2005
------------------------------------------------------------------------
Assets (notes 6 and 7)
Current assets
Cash $ 1,461
Accounts receivable 38,862
Inventory 5,730
Prepaid expenses and deposits 764
------------------------------------------------------------------------
46,817
Capital assets (note 4) 104,403
Intangible assets (note 5) 13,798
Goodwill (note 3) 66,876
Deferred charges 475
------------------------------------------------------------------------
$ 232,369
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current liabilities
Operating line of credit (note 6) $ 5,700
Accounts payable and accrued liabilities 18,767
Income taxes payable 2,009
Distributions payable (note 11) 1,901
Current portion of long-term debt (note 7) 5,559
------------------------------------------------------------------------
33,936
Long-term debt (note 7) 16,369
Future income tax liability (note 13) 19,086
Non-controlling interest (note 8) 10,807
------------------------------------------------------------------------
80,198
Commitments (notes 16 and 17)
Subsequent event (note 18)
Unitholders' equity
Trust units (note 9) 150,790
Contributed surplus (note 10) 1,600
Accumulated net earnings 16,512
Accumulated distributions (note 11) (16,731)
------------------------------------------------------------------------
152,171
------------------------------------------------------------------------
$ 232,369
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statement of Operations and Accumulated Net Earnings
From inception of operations of the Trust on January 25, 2005 to
December 31, 2005
(unaudited)
------------------------------------------------------------------------
341-day period ended
(Thousands, except per unit amounts) December 31, 2005
------------------------------------------------------------------------
Revenue $ 125,460
Operating expenses 79,223
------------------------------------------------------------------------
46,237
------------------------------------------------------------------------
Expenses
General and administrative 12,978
Depreciation 8,704
Amortization 1,543
Unit-based compensation (note 10) 1,600
Interest on long-term debt 1,056
Other 580
------------------------------------------------------------------------
26,461
------------------------------------------------------------------------
Earnings before income taxes and non-controlling interest 19,776
Income tax expenses (note 13):
Current 987
Future 895
------------------------------------------------------------------------
1,882
------------------------------------------------------------------------
Earnings before non-controlling interest 17,894
Non-controlling interest earnings (note 8) 1,382
------------------------------------------------------------------------
Net earnings 16,512
Accumulated net earnings, beginning of period -
------------------------------------------------------------------------
Accumulated net earnings, end of period $ 16,512
------------------------------------------------------------------------
------------------------------------------------------------------------
Net earnings per unit (note 12):
Basic $ 1.40
Diluted $ 1.38
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statement of Cash Flows
From inception of operations of the Trust on January 25, 2005
to December 31, 2005
(unaudited)
------------------------------------------------------------------------
341-day period ended
(Thousands) December 31,2005
------------------------------------------------------------------------
Operating activities
Net earnings $ 16,512
Items not affecting cash:
Depreciation and amortization 10,247
Unit-based compensation 1,600
Non-controlling interest earnings 1,382
Future income tax expense 895
Loss on disposal of capital assets 262
------------------------------------------------------------------------
30,898
Changes in non-cash operating working capital
(note 14) (11,683)
------------------------------------------------------------------------
19,215
------------------------------------------------------------------------
Financing activities
Issue of Trust units, net of issue costs (note 9) 84,553
Issue of Subordinated units (note 9) 2,500
Distributions paid (note 11) (14,830)
Increase in operating line of credit 5,700
Increase in long-term debt 31,694
Repayment of long-term debt (24,219)
Repayment of long-term debt related to the Initial Public
Offering Acquisitions (12,250)
Deferred charges (545)
------------------------------------------------------------------------
72,603
------------------------------------------------------------------------
Investing activities
Capital assets (28,948)
Business acquisitions (note 3) (64,408)
Proceeds on disposal of capital assets 2,221
Changes in non-cash investing working capital 778
------------------------------------------------------------------------
(90,357)
------------------------------------------------------------------------
Increase in cash 1,461
Cash, beginning of period -
------------------------------------------------------------------------
Cash, end of period $ 1,461
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplementary cash flow information
Income taxes paid $ -
Interest paid $ 1,178
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
As at or for the Period Ended December 31, 2005
(unaudited)
(Tabular amounts in thousands unless otherwise stated, except for
per unit amounts)
1. Nature of the Organization
Builders Energy Services Trust (the "Trust" or "Builders") is an open-end unincorporated investment trust governed by the laws of the Province of Alberta and created pursuant to a Declaration of Trust dated November 29, 2004. The Trust commenced operations on January 25, 2005. The principal undertaking of the Trust is to engage in oilfield services, indirectly, through its wholly-owned subsidiaries.
2. Summary of Significant Accounting Policies
(a) Basis of presentation
The consolidated financial statements of the Trust have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP). Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements necessarily involves the use of estimates and approximations based on information available as of the date of the consolidated financial statements that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and revenues and expenses for the period reported. The most significant of these are the estimates used for depreciation and amortization, intangible assets, goodwill, and unit-based compensation. Accordingly, actual results could differ from those estimates. The consolidated 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.
(b) Principles of consolidation
The consolidated financial statements include the accounts of the Trust and its subsidiaries. All subsidiaries are directly or indirectly wholly-owned and their operations are fully reflected in the consolidated financial statements. All intercompany transactions have been eliminated.
(c) Cash and cash equivalents
Cash and cash equivalents consist of cash and short-term investments with original terms to maturity of less than three months.
(d) Financial instruments
The Trust's financial instruments consist of accounts receivable, deposits, accounts payable and accrued liabilities, income taxes payable, distributions payable, operating line of credit and long-term debt. The carrying value of the Trust's financial instruments, unless otherwise noted, approximate the fair value due to their short-term until maturity or because they are based on the prime lending rate. A change in a financial instrument's fair value would be recognized in earnings during the period it is identified.
(e) Inventory
Inventory consists of downhole service tools and related supplies that are stated at the lower of cost, determined on a specific or average cost basis, and fair market value.
(f) Capital assets
Capital assets are recorded at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets (net of estimated salvage value).
Oilfield services equipment 5 - 10 years
Service rigs and equipment 15 years
Vehicles and automotive equipment 5 years
Other 3 - 10 years
Capital assets are subject to impairment tests in accordance with the accounting policy on impairment of long-lived assets.
(g) Intangible assets
Intangible assets are comprised of the values attributable to customer relationships from acquired businesses and are amortized on a straight-line basis. Amortization of intangible assets is included in amortization expense.
Intangible assets are subject to impairment tests in accordance with the accounting policy on impairment of long-lived assets.
(h) Impairment of long-lived assets
Builders' long-lived assets include capital assets and intangible assets with finite useful lives. Management assesses the carrying value of long-lived assets whenever events or changes in circumstances indicate impairment. When an indication of impairment is present, a test for impairment is carried out by comparing the carrying value of the asset to its expected future cash flows. If the carrying amount is greater than the expected future cash flows, the asset would be considered impaired and an impairment loss would be realized to reduce the asset's carrying value to its estimated fair value.
(i) Goodwill
Goodwill represents the excess of the purchase price of acquired businesses over the fair value of net assets acquired and is not subject to amortization.
Goodwill is tested for impairment annually to determine if events or circumstances indicate the asset might be impaired. The impairment test includes the application of a fair value test, with an impairment loss recognized when the carrying value of goodwill exceeds its estimated fair value. Impairment provisions are not reversed if there is a subsequent increase in the fair value of goodwill.
(j) Revenue recognition
Revenue for oilfield services is recognized in the period that the services are provided to the customer.
(k) Segmented information
For financial reporting purposes, management views the operations of Builders as a single business segment. All operations are located in the Western Canadian Sedimentary Basin and provide oilfield services to crude oil and natural gas exploration and production customers. Additionally, the operations are complementary in nature with similar risk profiles and historical returns.
(l) Income taxes
The Trust follows the liability method to account for income taxes. Under this method, future tax assets and liabilities are determined based on differences between the carrying value and the tax basis of assets and liabilities, and are measured using the substantially enacted tax rates expected to be in effect when the differences are expected to reverse. Changes to these balances are recognized in net earnings in the period in which they occur. The amount of any future income tax assets recognized is limited to the amount that is more likely than not to be realized.
The Trust is a mutual fund trust for the purposes of the Canadian Income Tax Act and is taxable only on income that is not distributed or distributable to the Unitholders.
(m) Deferred charges
Deferred charges consisting of costs associated with the establishment of the debt agreement, are deferred and amortized using the straight-line method over the anticipated term of repayment. Amortization is included in amortization expense.
(n) Unit-based compensation
The Trust has applied the fair value method to account for the trust unit option plan whereby the Trust records the fair value of unit options granted as unit-based compensation expense over the vesting period of the grants, with a corresponding increase in contributed surplus.
(o) Net earnings per unit
Basic net earnings per unit is calculated using the weighted average number of Trust units and Subordinated units outstanding during the period. Diluted per unit amounts reflect the dilutive effect of options outstanding and Exchangeable shares. The Exchangeable shares are assumed to be converted to Trust units using the average exchange ratio during the period. Diluted earnings per unit is calculated using the treasury stock method whereby outstanding options are only dilutive if, and to the extent that, the exercise price of the options is less than the market price of the Trust's units. The treasury stock method assumes that any proceeds obtained on exercise of options would be used to purchase Trust units at the average market price during the period. The weighted average number of Trust units outstanding is then adjusted by this change.
(p) Distributions to Unitholders
Distributions to Unitholders are declared and approved by the Administrator of the Trust and are based on issued Trust units at a specified point in time.
(q) Non-controlling interest
Non-controlling interest on the consolidated balance sheet is recognized based on the fair value of the Exchangeable shares upon issuance plus the accumulated earnings attributable to the non-controlling interest. Net earnings are reduced for the portion of earnings attributable to the non-controlling interest. As the Exchangeable shares are converted to Trust units, the non-controlling interest on the consolidated balance sheet is reduced by the cumulative book value of the Exchangeable shares and the book value of Trust units is increased by the corresponding amount.
3. Business Acquisitions
During the 341-day period ended December 31, 2005, Builders completed a number of acquisitions. These acquisitions have been accounted for by the purchase method with the results of operations of the Initial Public Offering Acquisitions (the "IPO Acquisitions"), Tryton Tool Services Ltd. ("Tryton"), Endeavor E-Line Services Inc. ("Endeavor"), and Puma Well Service Ltd. ("Puma") being included in the financial statements from the date of acquisition.
A summary of the net assets acquired and the allocation of the purchase prices are as follows:
------------------------------------------------------------------------
IPO
Acquisitions Tryton Endeavor Puma Total
(i) (ii) (iii) (iv)
------------------------------------------------------------------------
Net assets acquired
------------------------------------------------------------------------
Bank indebtedness $ (2,016)$ - $ - $ - $ (2,016)
Non-cash working
capital 7,916 4,099 1,640 20 13,675
Capital assets 73,189 1,109 5,781 6,563 86,642
Intangible assets 9,382 2,751 3,138 - 15,271
Goodwill 37,294 10,543 19,039 - 66,876
Long-term debt (25,824) - (879) - (26,703)
Future income taxes (16,591) - (1,600) - (18,191)
------------------------------------------------------------------------
$ 83,350 $ 18,502 $ 27,119 $ 6,583 $ 135,554
------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration
------------------------------------------------------------------------
Cash $ 34,891 $ 10,402 $ 14,016 $ 3,083 $ 62,392
Trust units (note 9) 38,352 8,100 13,103 3,500 63,055
Exchangeable shares
(note 8) 10,107 - - - 10,107
------------------------------------------------------------------------
$ 83,350 $ 18,502 $ 27,119 $ 6,583 $ 135,554
------------------------------------------------------------------------
Issued:
Trust units (note 9) 3,835 623 989 222 5,669
Exchangeable
shares (note 8) 1,011 - - - 1,011
------------------------------------------------------------------------
------------------------------------------------------------------------
(i) IPO Acquisitions
------------------------------------------------------------------------
Brazeau CDT Circle D CTC
------------------------------------------------------------------------
Net assets acquired
Acquired cash
(bank indebtedness) $ (2,001) $ (99) $ (1,093) $ 614
Non-cash working capital 2,665 (81) 2,690 (339)
Capital assets 23,559 1,617 15,803 8,628
Intangible assets 1,187 261 - 1,172
Goodwill 12,387 1,339 3,831 7,098
Long-term debt (6,304) (24) (10,895) (4,626)
Future income taxes (5,599) (201) (2,218) (1,488)
------------------------------------------------------------------------
$ 25,894 $ 2,812 $ 8,118 $ 11,059
------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration
Cash $ 12,129 $ 1,202 $ 4,596 $ 5,618
Trust units (note 9) 13,765 1,260 2,900 4,977
Exchangeable shares (note 8) - 350 622 464
------------------------------------------------------------------------
$ 25,894 $ 2,812 $ 8,118 $ 11,059
------------------------------------------------------------------------
------------------------------------------------------------------------
Issued:
Trust units (note 9) 1,377 126 290 498
Exchangeable shares (note 8) - 35 62 47
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Decarson Polege Remote Total
------------------------------------------------------------------------
Net assets acquired
Acquired cash
(bank indebtedness) $ 159 $ 158 $ 246 $ (2,016)
Non-cash working capital 973 1,323 685 7,916
Capital assets 15,525 4,715 3,342 73,189
Intangible assets 2,839 2,609 1,314 9,382
Goodwill 3,351 7,151 2,137 37,294
Long-term debt (3,381) (29) (565) (25,824)
Future income taxes (3,979) (2,061) (1,045) (16,591)
------------------------------------------------------------------------
$ 15,487 $ 13,866 $ 6,114 $ 83,350
------------------------------------------------------------------------
------------------------------------------------------------------------
Consideration
Cash $ 932 $ 7,195 $ 3,219 $ 34,891
Trust units (note 9) 7,055 5,500 2,895 38,352
Exchangeable shares (note 8) 7,500 1,171 - 10,107
------------------------------------------------------------------------
$ 15,487 $ 13,866 $ 6,114 $ 83,350
------------------------------------------------------------------------
------------------------------------------------------------------------
Issued:
Trust units (note 9) 705 550 289 3,835
Exchangeable shares (note 8) 750 117 - 1,011
------------------------------------------------------------------------
------------------------------------------------------------------------
On January 25, 2005, Builders completed the acquisition of all the issued and outstanding shares of a group of oilfield service companies, the IPO Acquisitions, for an aggregate purchase price of $83.4 million. The combined purchase price was funded by payment of $34.9 million in cash, the issuance by the Trust of an aggregate of 3,835,226 Trust units at a price of $10.00 per Trust unit and the issuance by Builders Energy Services Ltd., a subsidiary of the Trust, of an aggregate of 1,010,691 Exchangeable shares at a price of $10.00 per Exchangeable share. The operations of the IPO Acquisitions have been recorded in the consolidated operations of the Trust for 341-days ended December 31, 2005. The individual IPO Acquisitions are as follows:
Brazeau Well Servicing Ltd.
On January 25, 2005, the Trust purchased all of the net assets of Brazeau Well Servicing Ltd. ("Brazeau"). Brazeau specializes in the deployment and operation of service rigs.
C.D.T. Rentals Inc.
On January 25, 2005, the Trust purchased all of the net assets of C.D.T. Rentals Inc. ("CDT"). CDT is a business involving the rental of oilfield equipment to oil and gas companies.
Circle D Transport Inc.
On January 25, 2005, the Trust purchased all of the net assets of Circle D Transport Inc. ("Circle D"). Circle D specializes in oilfield hauling and rig relocation.
CTC Energy Services
On January 25, 2005, the Trust purchased all of the net assets of CTC Coil Tubing Completions Ltd., CTC Nitrogen Services Ltd. and CTC Production Testing Inc. (collectively known as "CTC Energy Services"). CTC Energy Services is a group of companies involving various oilfield services.
Decarson Rentals (2000) Inc.
On January 25, 2005, the Trust purchased all of the net assets of Decarson Rentals (2000) Inc. ("Decarson"). Decarson is a business involving oilfield rentals and services.
Ken Polege Enterprises Ltd.
On January 25, 2005, the Trust purchased all of the net assets of Ken Polege Enterprises Ltd. ("Polege"). Polege specializes in oilfield equipment hauling and storage.
Remote Wireline Services Ltd.
On January 25, 2005, the Trust purchased all of the net assets of Remote Wireline Services Ltd. ("Remote"). Remote specializes in providing wireline services for oil and gas production companies.
(ii) Tryton Tool Services Ltd.
On June 1, 2005, the Trust purchased all of the net assets of Tryton. Tryton specializes in the sale, rental, installation and servicing of downhole tools and accessories. The operations of Tryton have been recorded in the consolidated operations of the Trust for 214-days ended December 31, 2005.
(iii) Endeavor E-Line Services Inc.
On July 21, 2005, the Trust purchased all of the issued and outstanding shares of Endeavor. Endeavor performs e-line services for the oil and gas industry. The operations of Endeavor have been recorded in the consolidated operations of the Trust for 164-days ended December 31, 2005.
(iv) Puma Well Service Ltd.
On October 14, 2005, the Trust purchased all of the net assets of Puma. Puma specializes in the deployment, operation and fabrication of service rigs. The operations of Puma have been recorded in the consolidated operations of the Trust for 79-days ended December 31, 2005.
4. Capital Assets
------------------------------------------------------------------------
As at December 31, 2005
------------------------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
------------------------------------------------------------------------
Oilfield service equipment $ 65,529 $ 6,208 $ 59,321
Service rigs and equipment 30,189 1,080 29,109
Vehicles and automotive equipment 14,123 1,154 12,969
Other 3,257 253 3,004
------------------------------------------------------------------------
$ 113,098 $ 8,695 $ 104,403
------------------------------------------------------------------------
------------------------------------------------------------------------
Included above is $1.4 million of capital assets under capital leases of which $0.6 million of accumulated depreciation has been recognized.
The carrying value of assets under construction, not being depreciated until put into use, is $5.5 million as at December 31, 2005.
5. Intangible Assets
------------------------------------------------------------------------
As at December 31, 2005
------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
------------------------------------------------------------------------
Intangible assets $ 15,271 $ 1,473 $ 13,798
------------------------------------------------------------------------
------------------------------------------------------------------------
Intangible assets are comprised of the values attributable to customer relationships of the acquired businesses and are being amortized on a straight-line basis over a period of eight years.
6. Operating Line of Credit
On May 3, 2005, the Trust entered into a debt agreement that was subsequently amended on December 7, 2005. The agreement, with three major Canadian chartered banks, is comprised of an operating line of credit and a term acquisition loan facility (note 7). The operating line of credit is limited to the lesser of $20.0 million or 75 percent of the Trust's accounts receivable, less specific items. The operating line of credit decreases by $5.0 million between June 1 and October 31, each year, changing the limit to the lesser of $15.0 million or 75 percent of the Trust's accounts receivable, less specific items. The operating line of credit bears interest at the bank prime rate or at banker's acceptance rates plus a variable stamping fee of 0.75 to 1.00 percent. The operating line of credit is secured by a general security agreement and a general assignment of accounts receivable.
7. Long-term Debt
------------------------------------------------------------------------
As at
December 31,
2005
------------------------------------------------------------------------
Term acquisition loan(i) $ 14,895
Term debt(ii) 6,502
Capital leases(ii) 531
------------------------------------------------------------------------
21,928
Less: current portion of long-term debt 5,559
------------------------------------------------------------------------
Long-term debt $ 16,369
------------------------------------------------------------------------
------------------------------------------------------------------------
(i) On May 3, 2005, the Trust entered into a debt agreement that was subsequently amended on December 7, 2005. The agreement, with three major Canadian chartered banks, is comprised of an operating line of credit (note 6) and a term acquisition loan facility. The term acquisition loan facility is limited to the lesser of $50.0 million or 60 percent of the unencumbered net tangible assets. The facility has no required principal repayments during the term and bears interest at the bank's prime rate plus 0.75 percent or at banker's acceptance rates plus a variable stamping fee of 1.75 to 2.00 percent. The facility expires on May 31, 2006 and can be renewed, at the lender's option, for an additional 364-day period. If not renewed, the loan is repayable in equal monthly installments over a three-year period. As a result, the portion of the term acquisition loan included in the current portion of long-term debt at December 31, 2005 is $2.9 million. The term acquisition loan facility is collateralized by a general security agreement and a general assignment of book debts.
(ii) The term debt is repayable in monthly installments of $0.2 million, including interest, at a weighted average interest rate of six percent maturing between January 2006 and December 2010. Collateral for the term debt is specific equipment.
The obligations under capital leases are repayable in negligible monthly installments at a weighted average interest rate of seven percent. Collateral for the obligations under capital leases is specific equipment.
Principal payments of term debt and obligations under capital leases over the next five years are as follows:
------------------------------------------------------------------------
2006 $ 2,663
2007 2,312
2008 1,487
2009 464
2010 107
------------------------------------------------------------------------
$ 7,033
------------------------------------------------------------------------
------------------------------------------------------------------------
8. Non-controlling Interest
------------------------------------------------------------------------
341-day period
ended December 31, 2005
------------------------------------------------------------------------
Exchangeable
Shares Amount
------------------------------------------------------------------------
Consideration for IPO Acquisitions (note 3) 1,011 $ 10,107
Conversion to Trust units (65) (682)
Non-controlling interest earnings - 1,382
------------------------------------------------------------------------
Balance, end of period 946 $ 10,807
------------------------------------------------------------------------
Exchange ratio, end of period 1.0887
Trust units issuable upon conversion,
end of period 1,030
------------------------------------------------------------------------
------------------------------------------------------------------------
The Exchangeable shares are not eligible to receive distributions from the Trust and have voting attributes equivalent to the number of Trust units issuable upon conversion of the Exchangeable shares from time-to-time. The Exchangeable shares are required to be converted prior to January 31, 2008.
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 at one to one, is cumulatively adjusted each time a distribution is made to Unitholders.
9. Trust Units
(a) Authorized:
Builders is authorized to issue an unlimited number of Trust units and an unlimited number of Subordinated units.
(b) Issued and Outstanding:
------------------------------------------------------------------------
Units Amount
------------------------------------------------------------------------
Trust units
Initial Public Offering 5,100 $ 51,000
Consideration for acquisitions (note 3) 5,669 63,055
Private placements 2,788 40,011
Conversion of exchangeable shares 67 682
Issue costs - (6,458)
------------------------------------------------------------------------
13,624 $ 148,290
Subordinated units issued for cash on
January 25, 2005 1,000 $ 2,500
------------------------------------------------------------------------
Balance end of period 14,624 $ 150,790
------------------------------------------------------------------------
------------------------------------------------------------------------
Trust units and Subordinated units have the same rights with respect to voting but distributions in respect of Subordinated units are until December 31, 2007, subordinated to distributions in respect of the Trust units if monthly distributions in respect of the Trust units, on a cumulative basis, are less than $0.12 per Trust unit. If during any given month, an amount less than $0.12 per Trust unit is paid to the holders of Trust units, any such unpaid portion will be paid in a subsequent month or months ending on or prior to December 31, 2007 in priority to distribution payments made to holders of Subordinated units. Subsequent to December 31, 2007, distributions to Unitholders and Subordinated units will be made proportionately and at an equal rate.
(c) Escrowed Trust Units and Exchangeable Shares:
As at December 31, 2005, a total of 3,778,459 Trust units and 635,926 Exchangeable shares were held in escrow. The holders of the escrowed Trust units are entitled to receive any and all distributions in respect of the escrowed Trust units.
10. Unit-based Compensation
The Trust has a unit option plan (the "Plan") under which certain directors, officers, employees, and consultants of the Trust are eligible to receive Trust unit options to acquire Trust units, with terms not to exceed five years from the date of the grant. The grant price is not less than the weighted-average price of the units for the five trading days immediately prior to the grant date. Under the Plan, vesting periods are determined by the Board of Directors of the Trust at the time of the grant. For options granted to December 31, 2005, one-third of the options are exercisable on each anniversary date from the date of the original grant.
The maximum number of Trust unit options issuable under the Plan may not exceed 10 percent of the Trust's outstanding Trust units and Exchangeable shares converted to Trust units at any time, which at December 31, 2005 totaled 1,565,395 Trust unit options.
A summary of changes in the number of Trust unit options, with their weighted average exercise prices as at December 31, 2005 is presented below:
------------------------------------------------------------------------
Weighted
Average
Trust Unit Exercise Price
Options (Per Unit)
------------------------------------------------------------------------
Issued 1,355 $ 11.20
Forfeitures (33) 10.44
------------------------------------------------------------------------
Outstanding, end of year 1,322 $ 11.21
------------------------------------------------------------------------
Exercisable, end of year -
-----------------------------------------------------
-----------------------------------------------------
The following table summarizes information about the Trust unit options
outstanding as at December 31, 2005:
------------------------------------------------------------------------
Weighted
Average Weighted
Trust Unit Remaining Average
Options Contractual Exercise Price
Range of Exercise Prices Outstanding Life (years) (Per Unit)
------------------------------------------------------------------------
$ 10.00 1,007 4.1 $ 10.00
$ 12.37 - $ 16.79 315 4.6 15.09
------------------------------------------------------------------------
1,322 4.2 $ 11.21
------------------------------------------------------------------------
------------------------------------------------------------------------
The Trust recorded unit-based compensation expense of $1.6 million with an offsetting increase to contributed surplus in respect of the Trust unit options granted for the 341-days ended December 31, 2005. The amount of unit-based compensation expense has been reduced for options issued during the year but forfeited prior to vesting.
The fair value of Trust unit options issued during the year was estimated using the Black-Scholes pricing model. This model requires the input of various assumptions, including unit price volatility and expected time until exercise, which can cause significant variation in the estimate of the fair value of the options. The following assumptions were used for options issued in 2005:
------------------------------------------------------------------------
Risk-free Expected Expected Present Value of
Interest Volatility Term Future Distributions
Rate (percent) (percent) (years) (Per Unit)
------------------------------------------------------------------------
3.2 - 3.9 22 - 26 Five -
------------------------------------------------------------------------
------------------------------------------------------------------------
A Trust unit option holder may elect to decrease the exercise price of each Trust unit option that he or she holds by the aggregate distributions issued per Trust unit from the date of the Trust unit option grant until the date of exercise. As such an election may place the Trust unit option holder in an unfavorable after-tax cash position, the Trust has assumed that no such Trust unit option holders will make such election. Therefore, the assumption with respect to future distributions, to be included in the Black-Scholes pricing model is nil.
11. Accumulated Distributions
During 2005, the Trust declared monthly distributions to Unitholders of record as at the close of business on each Distribution Record Date. Such distributions are recorded as reductions of Unitholders' equity upon declaration of the distribution.
During 2005, the Trust declared distributions of $1.39 per unit for a total of $16.7 million. Declared distributions payable of $1.9 million as at December 31, 2005 were paid on January 16, 2006.
------------------------------------------------------------------------
341-days ended
December 31, 2005
Per Unit Amount
------------------------------------------------------------------------
Distributions declared and paid $ 1.26 $ 14,830
Distributions declared and payable 0.13 1,901
------------------------------------------------------------------------
$ 1.39 $ 16,731
------------------------------------------------------------------------
------------------------------------------------------------------------
12. Net Earnings Per Unit
The following table summarizes the computation of net earnings per unit:
------------------------------------------------------------------------
341-days ended
December 31,
2005
------------------------------------------------------------------------
Numerator:
Basic earnings $ 16,512
Non-controlling interest earnings 1,382
------------------------------------------------------------------------
Diluted earnings $ 17,894
------------------------------------------------------------------------
------------------------------------------------------------------------
Denominator:
Weighted average units for basic earnings 11,788
Exchangeable shares converted to Trust units
at the average exchange ratio during the period 1,012
Options converted to units 206
------------------------------------------------------------------------
Weighted average units for diluted earnings 13,006
------------------------------------------------------------------------
------------------------------------------------------------------------
Net earnings per unit:
Basic $ 1.40
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted $ 1.38
------------------------------------------------------------------------
------------------------------------------------------------------------
13. Income Taxes
The provision for income taxes differs from the amount computed by applying the combined federal and provincial statutory income tax rate to earnings before income taxes and non-controlling interest for the following reasons:
------------------------------------------------------------------------
341-days ended
December 31,
2005
------------------------------------------------------------------------
Earnings before income taxes and
non-controlling interest $ 19,776
Statutory income tax rate 33.62%
------------------------------------------------------------------------
Expected income tax expense $ 6,649
Increase (decrease) resulting from:
Distributed taxable earnings (5,440)
Non-deductible expenses 575
Large corporations tax 204
Other (106)
------------------------------------------------------------------------
Provision for income tax expenses $ 1,882
------------------------------------------------------------------------
------------------------------------------------------------------------
The future income tax liability at December 31, 2005 is comprised of the
following temporary timing differences:
------------------------------------------------------------------------
As at
December 31,
2005
------------------------------------------------------------------------
Capital assets $ 15,291
Intangible assets 3,795
------------------------------------------------------------------------
Future income tax liability $ 19,086
------------------------------------------------------------------------
------------------------------------------------------------------------
14. Changes in Non-cash Operating Working Capital
Components of changes in non-cash operating working capital are as
follows:
------------------------------------------------------------------------
As at
December 31,
2005
------------------------------------------------------------------------
Accounts receivable $ (13,041)
Inventory (731)
Prepaid expenses and deposits (136)
Accounts payable, accrued liabilities
and income taxes payable 2,225
------------------------------------------------------------------------
$ (11,683)
------------------------------------------------------------------------
------------------------------------------------------------------------
15. Financial Instruments
(a) Fair Values
Financial instruments of the Trust consist mainly of accounts receivable, deposits, accounts payable and accrued liabilities, income taxes payable, distributions payable and operating line of credit and term acquisition loan. As at December 31, 2005, there are no significant differences between the carrying values of these amounts and their estimated fair market values due to their short term to maturity.
(b) Interest Rate Risk
The Trust is exposed to changes in the prime interest rate on its operating line of credit and term acquisition loan. All of the Trust's other debt has fixed interest rates.
(c) Credit Risk
Substantially all accounts receivable are due from customers in the oil and natural gas industry and are subject to normal industry credit risks. Concentration of credit risk is mitigated by having a broad customer base. The carrying value of accounts receivable reflects management's assessment of the associated credit risks.
16. Related Party Transactions
The Trust rents land and buildings from the previous owners of certain businesses acquired. Total related party transactions included in operating expenses were $1.3 million for the 341-day period ended December 31, 2005.
These transactions were conducted in the normal course of operations, on commercial terms established and agreed to by the related parties, and were recorded at the exchange amount.
The Trust is committed to future minimum payments under operating lease contracts for land, buildings and certain light oilfield equipment, with varying expiration dates, from the previous owners of certain businesses acquired. The minimum lease payments under these operating leases over the next five years and in aggregate are as follows:
------------------------------------------------------------------------
2006 $ 1,434
2007 1,434
2008 1,425
2009 1,031
2010 733
Thereafter 1,756
------------------------------------------------------------------------
$ 7,813
------------------------------------------------------------------------
------------------------------------------------------------------------
17. Commitments
The Trust is committed to future minimum payments under operating lease contracts, excluding those commitments previously disclosed within note 16, for office space, office equipment and vehicles with varying expiration dates. The minimum lease payments under these leases over the next five years and in aggregate are as follows:
------------------------------------------------------------------------
2006 $ 1,121
2007 1,004
2008 891
2009 793
2010 944
Thereafter 225
------------------------------------------------------------------------
$ 4,978
------------------------------------------------------------------------
------------------------------------------------------------------------
18. Subsequent Event
On February 1, 2006, the Trust acquired all of the outstanding shares of Leachman Enterprises Ltd. ("Leachman") for aggregate consideration of $7.5 million, consisting of $3.5 million in cash, 150,307 Trust units and 64,417 Exchangeable shares. Leachman is an oilfield tubulars storage and hauling business.
The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.
For more information, please contact
Builders Energy Services TrustGarnet K. Amundson
President and Chief Executive Officer
(403) 693-3426
Email: IR-BEST@BuildersEnergy.com
or
Builders Energy Services Trust
John W. Nearing
Vice President, Finance and Chief Financial Officer
(403) 693-3426
Email: IR-BEST@BuildersEnergy.com