Eveready Income Fund Announces 2008 Second Quarter Financial Results

EDMONTON, ALBERTA, Aug 7, 2008 (Marketwire via COMTEX) -- EISU | Quote | Chart | News | PowerRating -- Eveready Income Fund (TSX:EIS.UN)

Selected Consolidated Financial Information ---------------------------------------------------------------------------- $ thousands, Three Months Ended Six Months Ended except per June 30 June 30 % June 30 June 30 % unit amounts 2008 2007 Change 2008 2007 Change ---------------------------------------------------------------------------- Revenue $ 142,871 $ 111,005 29% $ 327,592 $ 254,978 28% Gross profit 37,354 32,809 14% 94,325 78,357 20% Gross margin 26.1% 29.6% 28.8% 30.7% EBITDA(1) 18,563 14,771 26% 55,033 39,711 39% EBITDA margin(1) 13.0% 13.3% 16.8% 15.6% Per unit(1)(2) 0.20 0.18 11% 0.60 0.50 20% Net earnings (loss) 1,208 (5,405) n/a 19,942 6,327 215% Per unit - basic and diluted(2) 0.01 (0.07) n/a 0.22 0.08 175% ---------------------------------------------------------------------------- Cash provided by operating activities 37,326 23,999 56% 31,310 26,874 17% Funds from operations(1) 14,847 11,477 29% 46,606 34,196 36% Per unit(1)(2) 0.16 0.14 14% 0.51 0.43 19% Distributions declared 16,091 13,834 16% 31,442 26,913 17% Per unit 0.18 0.18 0% 0.36 0.36 0% ---------------------------------------------------------------------------- Basic weighted average units outstanding(2) 91,740 81,591 12% 91,748 79,717 15% Units outstanding at June 30 93,526 83,004 13% 93,526 83,004 13% ---------------------------------------------------------------------------- Working capital(1) 93,988 78,536 20% Total assets 644,631 588,155 10% Long-term liabilities 276,330 233,529 18% Unitholders' equity 305,712 296,573 3% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Notes: (1) These financial measures are identified and defined under the section "Non-GAAP Financial Measures." (2) Comparative unit and per unit amounts for the three and six months ended June 30, 2007 were restated to reflect the dilutive effect of "in-kind" distributions declared in 2008.

Quarter Overview:

- Revenue for the second quarter was approximately $143 million reflecting an increase of 29% from 2007;

- We continued our expansion in the Alberta oil sands region in the second quarter generating revenue of approximately $64 million from operations located in this area compared to approximately $39 million in 2007. This represented 45% (2007 - 35%) of our total revenue. On a year-to-date basis, we generated approximately $145 million or 44% of our total revenue (2007 - $85 million or 33% of total revenue) from operations located in this area;

- We reported EBITDA (see "Non-GAAP Financial Measures") of $18.6 million in the second quarter. This reflects an increase of 26% from EBITDA of $14.8 million in 2007;

- We reported net earnings of $1.2 million or $0.01 per unit in the second quarter compared to a net loss of $5.4 million or $(0.07) per unit in 2007. The net loss in the prior year resulted from recognizing an additional future income tax expense of $5.7 million. This expense was caused by the Government of Canada's enactment of a new legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011;

- We invested $41.5 million in property, plant and equipment during the first half of 2008, including $33.9 million in growth capital expenditures to expand our service offerings in several areas;

- To help meet the growing demand for our services, we have revised our 2008 capital expenditure program from $78 million to $90 million. The majority of the increase in our capital expenditure program has been earmarked to expand our industrial lodge facilities in the Alberta oil sands region;

- In June 2008, we declared an "in-kind" distribution of $0.18 per unit payable to unitholders of record on June 30, 2008. The "in-kind" units were issued at a deemed price equal to $3.8862 per unit; and

- On July 7, 2008, we acquired the business and assets of a private Saskatchewan-based oilfield services company for cash consideration of $3.2 million. Acquired assets included water trucks and various support equipment, which will be utilized to help meet our service commitments in the Alberta oil sands region.

Management's Discussion & Analysis

This Management's Discussion & Analysis ("MD&A") was prepared as of August 6, 2008 and is provided to assist readers in understanding Eveready Income Fund's ("Eveready" or the "Fund") consolidated financial performance for the three and six months ended June 30, 2008 and significant trends that may affect Eveready's future performance. This MD&A should be read together with the accompanying interim consolidated financial statements for the three and six months ended June 30, 2008 and the notes contained therein. In addition, this MD&A should be read in conjunction with the MD&A and audited consolidated financial statements for the year ended December 31, 2007. The accompanying consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") using Eveready's reporting currency, the Canadian dollar. Eveready is a reporting issuer in each of the provinces of Canada, except Quebec. Eveready's units trade on the Toronto Stock Exchange under the symbol "EIS.UN".

Additional information relating to Eveready, including our 2007 Annual Information Form dated March 25, 2008, is available on the System for Electronic Document Analysis and Retrieval ("SEDAR") web site at www.sedar.com.

This MD&A contains forward-looking statements. Please see the section "Note Regarding Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions relating to those statements. This MD&A also makes reference to certain non-GAAP financial measures to assist users in assessing Eveready's performance. Non-GAAP financial measures do not have any standard meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures are identified and described under the section "Non-GAAP Financial Measures."

Our Business

We are a growth oriented income fund providing industrial and oilfield maintenance and production services to the energy, resource, and industrial sectors. Operating from 79 locations in Canada, the United States, and internationally, we currently employ over 2,700 employees and operate a service fleet of over 1,300 trucks. We are a leading provider of infrastructure services in Alberta's fast growing oil sands sector.

Our fleet consists of chemical and high pressure trucks, vacuum trucks, hydro-excavation trucks, pressure trucks, hot oiler units, steamer trucks, tank trucks, and flush-by units. In addition, we also own hundreds of additional large equipment items including directional boring rigs, heli-portable drills, mulchers, catalyst handling and support systems, and other specialized pieces of equipment. Our lodging services include 18 portable camps and six industrial lodges. All six industrial lodges and the majority of our portable camps are currently located in the Alberta oil sands region.

We provide over 80 different services to our customers. The common thread in the wide range of services we provide is our customer. We believe our customers place great value on those providers who are able to deliver a broad, top-quality offering composed of many different services to support their operations. Many of our customers use several of the services we offer. We provide our services within the following four business segments:

- Oil sands, industrial and production services;

- Lodging and rentals;

- Exploration services; and

- Environmental services.

Seasonality

Our second quarter is typically our weakest quarter of the year due to the inherent seasonality of our business. A large portion of our operations are carried out in western Canada where the ability to move heavy equipment is dependant on weather conditions. An example of such a condition includes thawing in the spring, which renders many secondary roads incapable of supporting heavy equipment until the ground is dry. As a result, many areas of our business traditionally follow a seasonal pattern, with revenue and earnings being lower in the second quarter compared to the other quarters of the fiscal year.

Overall Performance

In the second quarter, we continued to achieve year-over-year revenue, EBITDA and earnings growth. We generated revenue of $142.9 million compared to revenue of $111.0 million in 2007, an increase of 29%. Likewise, we increased our EBITDA (see "Non-GAAP Financial Measures") by 26% to $18.6 million from $14.8 million in 2007 and increased Funds from operations (see "Non-GAAP Financial Measures") by 29% to $14.8 million from $11.5 million in 2007. Finally, we reported net earnings of $1.2 million during the quarter compared to a net loss of $5.4 million in 2007. These financial results reflect the on-going execution of our growth strategies, which consistently reflect year-over-year growth in our business.

Breaking down our financial results, we were pleased with the growth in our lodging and rentals segment. We generated revenue of $16.7 million for the three months ended June 30, 2008, representing an increase of $6.9 million from 2007. Our acquisition of Denman Industrial Trailers Ltd. ("Denman") on May 1, 2007 caused the majority of this increase. Denman's financial results were only consolidated with Eveready for two months in the comparative 2007 periods. Organic expansion of our lodging facilities in the Alberta oil sands region over the past year has also contributed to this segment's growth. We have also approved an increase in our capital expenditure program for the remainder of 2008. The majority of this increase has been earmarked to expand our industrial lodge facilities in the Alberta oil sands region including the construction of a new lodge facility.

Within our oil sands, industrial and production services segment, we also achieved significant growth, increasing our revenue by $22.7 million or 26% to $108.4 million for the three months ended June 30, 2008 from $85.7 million in 2007. However on the negative side, this revenue growth continues to be offset by a lower gross margin due to lower margin services provided in the Alberta oil sands region. We continue to experience the challenges associated with rapid growth in the oil sands including shortages of qualified local labour pools, lack of infrastructure, and inflationary cost pressures. We also continue to require the use of lease operators and sub-contractors to meet our service commitments in this region. Services provided by third party contractors and lease operators earn a lower gross margin than services provided through our own equipment and personnel.

We believe our gross margin in this region can significantly improve in the future as our rate of growth stabilizes and we improve the utilization of our equipment and manpower. We plan to accomplish this objective through a number of initiatives. One current initiative includes restructuring and integrating several of our industrial and oilfield services divisions, which we expect to complete prior to the upcoming winter season.

Within our exploration services segment, we generated revenue of $8.6 million during the second quarter compared to revenue of $6.0 million in 2007. This growth was primarily due to our expansion in the United States. Revenue generated from exploration services in the United States was $2.7 million during the quarter, representing an increase of $2.2 million from the same three month period in 2007.

Results within our environmental services segment were comparable to the prior year, generating revenue of $9.1 million during the three months ended June 30, 2008 compared to revenue of $9.4 million in 2007.

Our overall outlook for the remainder of 2008 and 2009 continues to be very positive. We will continue to increase our exposure to the growing infrastructure development in the Alberta oil sands and expect to achieve the majority of our organic growth in 2008 and 2009 from this region. A significant amount of this growth will also come from expanding our industrial lodge facilities in the region. In addition, we expect our exploration services segment to experience significant growth going into 2009 due to increased industry activity in oil and gas exploration. We also expect to show modest growth during the remainder of 2008 and into 2009 from our industrial maintenance and production services throughout North America.

Over the longer term, we continue to see significant growth opportunities for Eveready as we expect substantial investment in exploration and infrastructure within the Alberta oil sands to continue for at least the next 10 years. In addition, several new upgrader projects are currently being planned or are under construction in the Fort McMurray and greater Edmonton areas to support oil sands production. These facilities will require substantial on-going industrial maintenance services over their life span and we believe Eveready is well positioned to capture a significant portion of this work.

Due to the increase in our 2008 capital expenditure program and our positive outlook for the remainder of the year, we now estimate our revenue for the year ended December 31, 2008 could exceed $640 million (see "Note Regarding Forward-Looking Statements"). If achieved, this will represent revenue growth of 23% from 2007.

Increase in 2008 Capital Expenditure Program

To help meet the growing demand for our services, we have revised our 2008 capital expenditure program from $78 million to $90 million. The majority of the increase has been earmarked to expand our industrial lodge facilities in the Alberta oil sands region. This expansion totals $32 million and includes several lodge additions and the construction of a new lodge facility. Of this, we included $25 million in our revised 2008 capital expenditure program with the remaining expenditures to be incurred in the first quarter of 2009. Our expansion will aggregately add approximately 600 beds to our lodge facilities with 400 of these beds expected to be in place by the end of 2008. Once this planned expansion is complete, the total number of beds within our industrial lodge facilities will exceed 2,300 beds. The actual timing of our capital expenditures will vary depending on how quickly construction progresses.

In addition, we have also increased our capital expenditure program in our exploration services segment. These expenditures will be incurred to allow us to meet expected increased demand for our exploration services going into 2009.

A large portion of our total capital expenditure program in 2008 is being incurred to support planned revenue and earnings growth in 2009. We plan to fund these capital expenditures from our credit facilities and from cash provided by operating activities.

In addition on July 7, 2008, we acquired the business and assets of a private Saskatchewan-based oilfield services company for cash consideration of $3.2 million. Acquired assets included water trucks and various support equipment, which will be utilized to help meet our service commitments in the Alberta oil sands region.

Results of Operations Revenue ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007 2008 2007 ---------------------------------------------------------------------------- Revenue by segment: Oil sands, industrial and production services $ 108,430 $ 85,708 $ 240,519 $ 198,133 Lodging and rentals 16,689 9,821 38,469 12,989 Exploration services 8,646 6,050 30,394 25,170 Environmental services 9,106 9,426 18,210 18,686 ---------------------------------------------------------------------------- Total 142,871 111,005 327,592 254,978 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Oil sands, industrial and production services

Revenue from oil sands, industrial and production services increased by $22.7 million or 26% to $108.4 million for the three months ended June 30, 2008 from $85.7 million in 2007. The majority of this increase resulted from significant organic revenue growth in the Alberta oil sands region of north-eastern Alberta. In addition, we also experienced year-over-year growth within many of our industrial maintenance services during the quarter including decoking and pigging services and catalyst handling services.

Revenue also increased by $42.4 million or 21% to $240.5 million for the six months ended June 30, 2008. This increase was also primarily due to organic growth experienced within our industrial and production services provided in the Alberta oil sands region.

Lodging and rentals

During the three and six month periods ended June 30, 2008, we generated revenue of $16.7 million and $38.5 million, respectively, from our lodging and rentals segment. This reflects an increase of $6.9 million and $25.5 million, respectively, from 2007. Our acquisition of Denman on May 1, 2007 caused the majority of this increase. Denman's financial results were only consolidated with Eveready for two months in the comparative 2007 periods. Organic expansion of our lodging facilities in the Alberta oil sands region over the past year has also contributed to our revenue growth in this segment.

Exploration services

In the second quarter we generated $8.6 million of revenue from our exploration services segment, representing an increase of $2.6 million or 43% from 2007. This growth was primarily due to our expansion in the United States. Revenue generated from exploration services in the United States was $2.7 million during the quarter, representing an increase of $2.2 million from the same three month period in 2007.

On a year-to-date basis, revenue was $30.4 million for the six months ended June 30, 2008 compared to $25.2 million in 2007, reflecting an increase of $5.2 million or 21%. In 2008, we achieved organic revenue growth from several service lines in this segment including track drilling, seismic surveying and geospatial data imaging services.

Environmental services

We generated revenue of $9.1 million from this segment in the second quarter, representing a decline from revenue of $9.4 million in 2007. For the six months ended June 30, 2008, revenue also declined slightly to $18.2 million from $18.7 million in 2007. This small decline is due to revenue within our environmental services segment fluctuating from quarter-to-quarter depending on the timing of projects completed.

Gross Profit ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007(1) 2008 2007(1) ---------------------------------------------------------------------------- Amount $ 37,354 $ 32,809 $ 94,325 $ 78,357 Gross margin % 26.1% 29.6% 28.8% 30.7% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Note: (1) Certain expenses, previously included in general and administrative expenses, were reclassified to direct costs and other expense categories to better reflect the nature of those expenses. The comparative figures in 2007 were reclassified to conform to the current period's presentation.

Our significant revenue growth in the second quarter contributed to a corresponding increase in gross profit. However, our gross margin declined to 26.1% from 29.6% in 2007. This decrease resulted from lower margin industrial and oilfield services provided in the Alberta oil sands region. We continue to experience the challenges associated with rapid growth in the oil sands including shortages of qualified local labour pools, lack of infrastructure, and inflationary cost pressures. We also require the use of lease operators and sub-contractors to meet our service commitments in this region. Services provided by third party contractors and lease operators earn a lower gross margin than services provided through our own equipment and personnel.

We believe our gross margin in the region can significantly improve in the future as our rate of growth stabilizes and we improve the utilization of our equipment and manpower. We plan to accomplish this objective through a number of initiatives. One current initiative includes restructuring and integrating several of our industrial and oilfield services divisions, which we expect to complete prior to the upcoming winter season.

Lastly, we also continue to experience rising fuel costs. Although we normally pass the majority of these additional costs onto our customers through fuel surcharges, these costs do reduce our overall gross margins.

Offsetting a portion of the gross margin decline in 2008 was growth in our lodging and rentals segment. Our lodging services typically earn a higher gross margin than our traditional industrial and oilfield services.

General and Administrative Expenses ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007(1) 2008 2007(1) ---------------------------------------------------------------------------- Amount $ 17,556 $ 16,568 $ 37,254 $ 35,457 % of revenue 12.3% 14.9% 11.4% 13.9% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Note: (1) Certain expenses, previously included in general and administrative expenses, were reclassified to direct costs and other expense categories to better reflect the nature of those expenses. The comparative figures in 2007 were reclassified to conform to the current period's presentation.

General and administrative expenses increased by $1.0 million to $17.6 million during the quarter ended June 30, 2008 and by $1.8 million to $37.3 million in the six months ended June 30, 2008 from the comparative periods in 2007. The majority of the increase in general and administration expenses during the six month period ended June 30, 2008 consisted of the following components:

- Increased accrued bonus expense of $1.3 million due to higher earnings levels in 2008;

- Increased occupancy costs of $0.9 million due to additional locations and lease rate increases; and

- Increased administrative wages and benefits of $0.8 million for additional resources and personnel required to support the significant growth in our business.

Offsetting these increases were declines in insurance and consulting expenses. In addition, our provision for bad debts decreased by $0.4 million.

As a percentage of revenue, general and administrative expenses declined to 12.3% and 11.4%, respectively, during the three and six months ended June 30, 2008 from 14.9% and 13.9%, respectively in 2007. Although our operations continue to expand at a significant rate, we are achieving economies of scale associated with our general and administrative expenses. In 2008, we were able to achieve the majority of our revenue growth without adding a significant amount of general and administrative costs.

Other Expenses ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007 2008 2007 ---------------------------------------------------------------------------- Unit-based compensation $ 949 $ 700 $ 1,689 $ 1,648 Loss (gain) on foreign exchange 197 886 (91) 979 Loss (gain) on disposal of property, plant and equipment 90 (167) 165 (88) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

During the three months ended June 30, 2008, unit-based compensation increased by $0.2 million to $0.9 million from $0.7 million in 2007. This increase resulted from unit-based compensation expense related to unit options granted to employees, trustees and officers in April and May of 2008.

The loss (gain) on foreign exchange in each of the periods presented primarily results from translating the monetary assets and liabilities associated with our operations situated in the United States into Canadian dollars. In 2008, we experienced nominal loss (gain) on foreign exchange because the Canadian dollar remained relatively stable compared to the US dollar; whereas in the prior year, the Canadian dollar appreciated significantly.

EBITDA ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007 2008 2007 ---------------------------------------------------------------------------- EBITDA by segment: Oil sands, industrial and production services $ 14,082 $ 13,413 $ 33,766 $ 33,738 Lodging and rentals 6,540 4,670 17,576 5,947 Exploration services (358) (231) 6,321 6,037 Environmental services 1,205 601 2,650 1,471 Corporate costs, loss (gain) on foreign exchange, and non-controlling interest (2,906) (3,682) (5,280) (7,482) ---------------------------------------------------------------------------- Total 18,563 14,771 55,033 39,711 % of revenue 13.0% 13.3% 16.8% 15.6% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

For the three months ended June 30, 2008, our EBITDA (see "Non-GAAP Financial Measures") grew to $18.6 million from $14.8 million in 2007. This increase is directly attributable to higher revenues during the quarter. However, our EBITDA margin declined slightly to 13.0% from 13.3% in 2007 due to a decline in our gross margin (see discussion under "Gross Margin" above). On a year-to-date basis, our EBITDA margin increased to 16.8% from 15.6% in 2007. This improvement was caused by achieving revenue growth and by controlling increases in our general and administrative expenses. Further discussion of our operating results by segment is provided under "Segment Contribution" below.

Amortization ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007 2008 2007 ---------------------------------------------------------------------------- Amortization of property, plant and equipment and assets under capital lease $ 9,625 $ 8,068 $ 19,305 $ 15,266 Amortization of intangible assets 2,147 1,874 4,368 3,555 Accretion on asset retirement obligations 39 32 76 47 ---------------------------------------------------------------------------- Total 11,811 9,974 23,749 18,868 % of revenue 8.3% 9.0% 7.2% 7.4% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

During the three months ended June 30, 2008, amortization expense increased by $1.9 million or 19% to $11.9 million from $10.0 million in 2007. The following two factors caused this increase:

- Growth in our property, plant and equipment. Property, plant and equipment increased to $327.1 million at June 30, 2008 from $285.0 million at June 30, 2007, a 15% increase; and

- Intangible assets. Amortization expense related to intangible assets was $2.1 million in the second quarter of 2008 compared to $1.9 million in 2007. Customer relationships and other intangible assets acquired with the acquisition of Denman on May 1, 2007 and additions to our data image library throughout 2007 caused this increase.

On a year-to-date basis, amortization expense increased by $4.9 million to $23.7 million in 2008 from $18.9 million in 2007. This increase was also caused from growth in our property, plant and equipment and intangible assets over the past year.

Interest Expense ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007 2008 2007 ---------------------------------------------------------------------------- Amount $ 5,464 $ 4,603 $ 11,161 $ 8,102 % of revenue 3.8% 4.1% 3.4% 3.2% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Interest costs increased in 2008 due to increased use of our debt credit facilities. Capital expenditures completed in the second half of 2007 and the first six months of 2008 required us to utilize more of our debt credit facilities. At June 30, 2008, our long-term debt and obligations under capital lease were $229.6 million compared to $185.0 million at June 30, 2007.

Segment Contribution ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands 2008 2007 2008 2007 ---------------------------------------------------------------------------- Contribution by segment: Oil sands, industrial and production services $ 8,197 $ 8,585 $ 22,152 $ 24,246 Lodging and rentals 4,881 3,426 14,271 4,097 Exploration services (1,795) (1,521) 3,491 3,484 Environmental services 522 (137) 1,018 53 ---------------------------------------------------------------------------- Total segment contribution 11,805 10,353 40,932 31,880 Less unallocated items: Corporate costs 2,710 2,745 5,096 5,853 Amortization of intangible assets 2,147 1,874 4,368 3,555 Interest expense 5,464 4,603 11,161 8,102 Loss (gain) on foreign exchange 197 886 (91) 979 ---------------------------------------------------------------------------- Earnings before income taxes and non controlling interest 1,287 245 20,398 13,391 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Segment contribution represents earnings before income taxes and non-controlling interest for each of our business segments prior to unallocated items. We use segment contribution as a key measure to analyze the financial performance of our business segments.

Oil sands, industrial and production services

During the three months ended June 30, 2008, contribution from our oil sands, industrial and production services segment declined slightly to $8.2 million from $8.6 million in 2007. Likewise, on a year-to-date basis, contribution declined to $22.2 million from $24.2 million. Despite strong revenue growth, lower gross margins (see discussion under "Gross Margin" above) and higher amortization expense weakened this segment's contribution.

Lodging and rentals

We generated contribution of $4.9 million from our lodging and rentals segment in the second quarter of 2008 compared to $3.4 million in 2007. On a year-to-date basis, we also increased contribution by $10.2 million to $14.3 million from $4.1 million in 2007. Our acquisition of Denman on May 1, 2007 caused the majority of this increase. Denman's financial results were only consolidated with Eveready for two months in the comparative 2007 periods. Organic expansion of our lodging facilities in the Alberta oil sands region over the past year has also contributed to growth in contribution from this segment.

Exploration services

In the second quarters of both 2008 and 2007, we generated negative contributions of $1.8 million and $1.5 million, respectively, from our exploration services segment. These financial results are typical and expected in the second quarter due to the inherent seasonality of this business. However, on a year-to-date basis, contribution was consistent with 2007 at positive $3.5 million.

Environmental services

We generated positive contribution of $0.5 million from our environmental services segment in the second quarter compared to a loss of $0.1 million in 2007. Likewise, for the six months ended June 30, 2008, contribution also increased to $1.0 million from $53 thousand in 2007. Continued growth in our filtration services divisions caused the majority of the increase. In addition, in 2007 we incurred losses within our safety services division. In 2008, these losses were substantially reduced through cost reduction initiatives. We expect these positive trends within our environmental services to continue during the remainder of 2008.

Earnings before Income Taxes and Non-controlling Interest

Earnings before income taxes and non-controlling interest for the three and six months ended June 30, 2008 were $1.3 million and $20.4 million, respectively, compared to $0.2 million and $13.4 million, respectively in 2007. These increases are attributed to higher revenue and segment contribution in 2008, as discussed in the analyses above.

Income Taxes

As an income fund, we are not subject to current income taxes to the extent our taxable income in a year is paid or payable to our unitholders. The majority of our current income tax expense of $1.2 million and $0.7 million, for the respective six months ended June 30, 2008 and 2007, relate to income earned within our incorporated subsidiaries situated in the United States.

Enacted tax changes for Canadian income trusts

On June 12, 2007, the Government of Canada enacted legislation, originally announced on October 31, 2006, to impose additional income taxes on publicly traded income trusts and limited partnerships (Specified Investment Flow-Through Entities or "SIFTs"), including Eveready, effective January 1, 2011. Prior to June 2007, we estimated the future income tax on certain temporary differences between amounts recorded on our balance sheet for book and tax purposes at a nil effective tax rate. Under this new legislation (and updated legislation enacted in June 2008), we now estimate the effective tax rate on the post 2010 reversal of these temporary differences to range from 25.0% to 26.5%. Temporary differences reversing before 2011 will still give rise to $nil future income taxes.

As a result of the above enacted legislation, we were required to recognize future income tax expense of $5.7 million during the three and six months ended June 30, 2007.

Our future income tax recoveries of $0.2 million and $1.0 million, respectively, for the three and six months ended June 30, 2008 resulted from changes in our estimate of temporary differences expected to reverse after January 1, 2011 as well as changes in our future income tax liabilities held within our incorporated subsidiaries.

Income tax provisions, including current and future income tax assets and liabilities, require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to our specific situation. Therefore, it is possible the ultimate value of Eveready's income tax assets and liabilities could change in the future and changes to these amounts could have a material effect on our consolidated financial statements.

Non-controlling Interest

(Loss) earnings attributable to non-controlling interest was $nil and $0.3 million, respectively, during the three and six months ended June 30, 2008 compared to $51 thousand and $0.7 million, respectively, in 2007. The non-controlling interest represents earnings attributable to the 20% non-controlling interests that vendors retained from three business acquisitions in 2006.

Net Earnings and Earnings per Unit ---------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 $ thousands, except per unit amounts 2008 2007 2008 2007 ---------------------------------------------------------------------------- Net earnings (loss) (numerator for basic earnings per unit) $ 1,208 $ (5,405) $ 19,942 $ 6,327 Interest - convertible debentures - - 2,665 - ---------------------------------------------------------------------------- Numerator for diluted earnings per unit 1,208 (5,405) 22,607 6,327 ---------------------------------------------------------------------------- Basic weighted average number of units(1) 91,740 81,591 91,748 79,717 Dilutive effect of outstanding unit options 74 - 28 8 Dilutive effect of convertible debentures - - 12,739 - ---------------------------------------------------------------------------- Diluted weighted average number of units(1) 91,814 81,591 104,515 79,725 ---------------------------------------------------------------------------- Earnings (loss) per unit - basic and diluted(1) $ 0.01 $ (0.07) $ 0.22 $ 0.08 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Note: (1) Comparative unit and per unit amounts for the three and six months ended June 30, 2007 were restated to reflect the dilutive effect of "in-kind" distributions declared in 2008.

Net earnings increased to $1.2 million in the three months ended June 30, 2008 compared to a net loss of $5.4 million in the prior year. Future income tax expense of $5.7 million resulting from SIFT legislation enacted in June 2007 (see "Income Taxes" discussion above) caused the loss in the prior year. On a year-to-date basis, higher revenue and segment contribution also caused net earnings to increase to $19.9 million from $6.3 million in 2007.

Basic and diluted earnings per unit in the second quarter increased to $0.01 per unit from a loss of $0.07 per unit in 2007 due to the increase in net earnings discussed above. On a year-to-date basis, basic and diluted earnings per unit increased to $0.22 per unit from $0.08 per unit in 2007. However, offsetting the large increase in net earnings was an increase in the weighted average number of units outstanding. In the first six months of 2008, the basic weighted average number of units outstanding increased to 91.7 million units from 79.7 million units in 2007. The completion of an equity financing for 8.1 million units in June 2007 and on-going participation in the Distribution Reinvestment Plan ("DRIP") throughout 2007 caused the majority of this increase.

Summary of Quarterly Data ---------------------------------------------------------------------------- ($ thousands, except per unit June March Dec Sept June March Dec Sept amounts) 2008 2008 2007 2007 2007 2007 2006 2006 ---------------------------------------------------------------------------- Revenue 142,871 184,721 137,152 126,767 111,005 143,972 109,441 93,470 EBITDA(1) 18,563 36,469 18,331 20,378 14,771 24,942 13,624 15,687 Net earnings (loss) 1,208 18,734 2,747 4,551 (5,405) 11,733 2,741 5,599 ---------------------------------------------------------------------------- Earnings (loss) per unit - basic(2)(3) 0.01 0.20 0.03 0.05 (0.07) 0.15 0.04 0.08 ---------------------------------------------------------------------------- Earnings (loss) per unit - diluted (2)(3) 0.01 0.19 0.03 0.05 (0.07) 0.15 0.04 0.08 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Notes: (1) EBITDA is identified and defined under the section "Non-GAAP Financial Measures." (2) Quarterly earnings per unit are not additive and may not equal the annual earnings per unit reported. This is due to the effect of units issued during the year on the weighted average number of units outstanding. (3) Comparative quarterly per unit amounts have been restated to reflect the dilutive effect of "in-kind" distributions declared in 2008.

A large portion of our operations are carried out in western Canada where the ability to move heavy equipment is dependant on weather conditions. An example of such a condition includes thawing in the spring, which renders many secondary roads incapable of supporting heavy equipment until the ground is dry. As a result, many areas of our business traditionally follow a seasonal pattern, with revenue and earnings being higher in the first quarter and lower in the second quarter of each fiscal year compared to the other quarters of the year.

The net loss reported in the second quarter of 2007 was caused from SIFT future income tax expense of $5.7 million. The SIFT future income tax expense resulted from the Government of Canada enacting legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011 (see discussion under "Income Taxes" above).

Financial Condition and Liquidity ---------------------------------------------------------------------------- June 30 December 31 ($ thousands, except ratio amounts) 2008 2007 ---------------------------------------------------------------------------- Current assets $ 156,577 $ 146,266 Total assets 644,631 618,531 ---------------------------------------------------------------------------- Current liabilities 62,589 66,526 Total liabilities 338,919 333,669 ---------------------------------------------------------------------------- Unitholders' equity 305,712 284,862 ---------------------------------------------------------------------------- Working capital(1) 93,988 79,740 Working capital ratio(1) 2.50 2.20 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Note: (1) These financial measures are identified and defined under the section "Non-GAAP Financial Measures."

Working Capital

Our working capital (see "Non-GAAP Financial Measures") position improved from $79.7 million at December 31, 2007 to $94.0 million at June 30, 2008. The majority of this improvement resulted from an increase in our accounts receivable. Due to revenue growth achieved in the first half of 2008, accounts receivable increased to $136.1 million at June 30, 2008 from $122.2 million at December 31, 2007. The majority of the increase in our accounts receivable was financed by our credit facilities, which are primarily presented as long-term liabilities, and thus do not negatively affect our working capital position.

We expect our working capital to remain strong throughout the second half of 2008 as we will continue to use our cash provided by operating activities and our long-term debt credit facilities to support our working capital requirements.

Cash Provided by Operating Activities and Funds from Operations

During the three months ended June 30, 2008, we generated cash provided by operating activities of $37.3 million compared to $24.0 million for the same three month period in 2007 and compared to negative cash provided by operating activities of $6.0 million for the three months ended March 31, 2008. The high cash flow generated during the quarter reflects the seasonality of our business where we typically generate a higher amount of revenue in the first quarter than the other quarters of the year. However, we generally collect a significant amount of our first quarter's accounts receivable in the second quarter. Accounts receivable at June 30, 2008 decreased by $32.3 million from the first quarter.

If we exclude changes in non-cash operating working capital balances and asset retirement costs, we actually generated substantially lower operating cash flows in the second quarter of both the current and prior year. Funds from operations (see "Non-GAAP Financial Measures") were $14.8 million for the three months ended June 30, 2008 compared to $11.5 million in 2007, a $3.3 million increase. Increased revenue and EBITDA (see "Non-GAAP Financial Measures") during the quarter caused a corresponding increase in our Funds from operations compared to the same three month period in 2007.

Capital Expenditures

We acquired $41.5 million in property, plant and equipment during the first six months of 2008. Of these assets, $0.6 million was acquired through obligations under capital lease and the remaining $40.9 million from cash expenditures. Capital expenditures consisted of $7.6 million in maintenance capital expenditures and $33.9 million in growth capital expenditures. We believe capital expenditures are necessary to support the growing demand for our services and to achieve our growth strategies. These expenditures also reflect our capital maintenance program. We designed our capital maintenance program to keep our equipment efficient and profitable by replacing our equipment when it is cost prohibitive to operate due to high maintenance and operating costs.

To help meet the growing demand for our services, we have revised our 2008 capital expenditure program from $78 million to $90 million. This program is now comprised of growth capital expenditures of $74 million and maintenance capital expenditures of $16 million.

A large portion of our total capital expenditure program in 2008 is being incurred to support planned revenue and earnings growth in 2009. We plan to fund these capital expenditures from our credit facilities and from cash provided by operating activities.

Debt and Contractual Obligations

Long-term debt

Our long-term debt relates to credit facilities of $250 million with a syndicate of lenders led by a Canadian affiliate of GE Energy Financial Services. The credit facilities consist of a $100 million revolving, renewable credit facility and a $150 million term loan. Amounts borrowed under these credit facilities bear interest, at our option, at bank prime or bankers' acceptance rates, plus a credit spread based on a sliding scale.

The revolving credit facility ("Revolver") requires payments of interest only and is renewable annually, subject to Eveready's and the lending syndicate's consent. A stand-by fee is calculated at a rate of 0.25% per annum on the unused portion of the Revolver. If the Revolver were not renewed, the outstanding credit facility is subject to a 12-month interest-only phase, followed by a 24-month straight-line amortization period. As a result, the Revolver is classified as long-term debt in the accompanying interim consolidated financial statements. In April 2008, the Revolver was extended for an additional 364 day period with the next renewal date being April 24, 2009. The term loan ("Term") requires fixed monthly payments of $125 thousand and a balloon payment of $142.5 million due May 2012. We may prepay all or part of the term loan at any time, subject to the payment of a breakage fee.

The credit facilities are collateralized by substantially all of our assets, including our accounts receivable, inventory, and property, plant and equipment. At June 30, 2008, the effective interest rate on the credit facilities was 5.89% (December 31, 2007 - 7.41%).

The credit facilities contain financial covenants, including, but not limited to, a working capital ratio, a fixed charge coverage ratio, funded debt to EBITDA ratios, a minimum net worth, and a maximum distribution payout ratio, each calculated on a quarterly basis. We were in compliance with all financial covenants under this agreement at June 30, 2008.

Obligations under capital lease

Obligations under capital lease substantially relate to industrial lodging facilities purchased with the Denman acquisition in May 2007. During the six months ended June 30, 2008, we financed additional industrial lodge facilities through sale-leasebacks of $8.0 million. These obligations bear interest at prime plus 0.25% per annum and are repayable in monthly blended principal and interest payments of $428 thousand. Maturing at dates ranging from August 2012 to March 2015, these obligations may be repaid in full without penalty two years after lease inception. At June 30, 2008, the effective rate of interest was 5.00% (December 31, 2007 - 6.25%).

All of our obligations under capital lease are collateralized by equipment with a $27.1 million net book value at June 30, 2008.

Convertible debentures

Convertible debentures consist of $50 million principal amount of convertible unsecured subordinated debentures (the "Debentures") with an annual coupon rate of 7.00%, payable semi-annually. The Debentures mature on June 30, 2011, and are convertible, at the holder's option, into units of Eveready. The Debentures trade on the Toronto Stock Exchange under the symbol "EIS.DB".

Pursuant to the terms of the Debenture agreement, an adjustment to the conversion price is required when units are issued to unitholders by way of an "in-kind" distribution. The "in-kind" distribution declared to unitholders of record on March 31, 2008 resulted in an adjustment to the Debentures' initial conversion price from $8.50 per unit to $8.1090 per unit. The "in-kind" distribution declared to unitholders of record on June 30, 2008 resulted in a further adjustment to the Debenture's conversion price to $7.7508 per unit.

After June 30, 2009 and before June 30, 2010, the Debentures may be redeemed in whole or in part, at our option, at a price equal to their principal amount plus accrued interest thereon, provided the market price of the units on the date on which notice is given is not less than 125% of the conversion price. After June 30, 2010, we have the option to redeem the Debentures in whole or in part at a price equal to their principal amount plus accrued interest.

We may also, subject to certain conditions, elect to satisfy our obligation to repay all or any portion of the principal amounts of the Debentures to be redeemed or repaid at maturity, by issuing units. The number of units a holder will receive in respect of each Debenture will be determined by dividing the principal amount of the Debentures that are to be redeemed or repaid at maturity by 95% of the market price of the units. The market price of the units will be calculated as the volume-weighted average trading price of the units on the Toronto Stock Exchange for the 20 consecutive trading days ending five days prior to the applicable event.

Contractual obligations

At June 30, 2008, our contractual obligations for the next five years (12 month periods ending on June 30th) and thereafter are as follows:

---------------------------------------------------------------------------- Contractual Obligations ($ in thousands) 2009 2010 2011 2012 2013 Thereafter Total ---------------------------------------------------------------------------- Long-term debt 1,500 6,482 31,396 168,663 - - 208,041 Obligations under capital lease (including imputed interest) 5,412 5,405 5,285 5,143 4,311 3,291 28,847 Convertible debentures - - 50,000 - - - 50,000 Asset retirement obligations 129 500 - - - 1,799 2,428 Operating leases 13,821 8,688 4,886 2,297 1,076 2,448 33,216 ---------------------------------------------------------------------------- Total 20,862 21,075 91,567 176,103 5,387 7,538 322,532 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

The table above presents the minimum principal repayments required on the Revolver if it were not renewed (the next renewal date is April 24, 2009) and we were not able to refinance this credit facility with another lender. The estimated timing and amount of our asset retirement obligations could change in the future or could be incurred in different periods from those indicated above.

Unitholders' Equity

Unitholders' equity increased $20.8 million to $305.7 million at June 30, 2008 from $284.9 million at December 31, 2007. Net earnings of $19.9 million achieved during the six months ended June 30, 2008 resulted in the majority of this change. "In-kind" distributions of $31.4 million declared during 2008 did not have an overall impact on unitholders' equity as substantially all of the distributions were settled through the issuance of 8,242,710 units.

Normal course issuer bid

In January 2008, we received regulatory approval from the Toronto Stock Exchange to purchase for cancellation, from time to time, as we consider advisable, our issued and outstanding units. Pursuant to the normal course issuer bid (the "Bid"), we may purchase for cancellation up to a maximum of 5,090,401 units, being approximately 10% of our outstanding "public float." The Bid commenced January 29, 2008 and will terminate on January 28, 2009 or such earlier time as the Bid is completed or terminated at our option.

During the six months ended June 30, 2008, we purchased for cancellation 41,600 units at an average cost of $3.37 per unit for total cash consideration of $141 thousand. Subsequent to June 30, 2008 and before the release of this MD&A, we purchased and cancelled 144,982 units at an average cost of $3.39 per unit for a total cash consideration of $491 thousand.

Unit Option Plan

On April 7, 2008, our Board of Trustees granted 745,000 unit options to employees and 150,000 unit options to non-employee officers and trustees of Eveready. The unit options granted to employees were exercisable at $3.60 per unit, which equalled the market value of our units at the grant date. The unit options granted to non-employee officers and trustees were exercisable at $3.96 per unit, or a 10% premium to the market value of our units at the grant date. These unit options expire on April 7, 2013.

On May 15, 2008 an additional 25,000 unit options were granted to a new Eveready trustee, were exercisable at $4.28 per unit, and expire on May 15, 2013.

All unit options granted in 2008 vest 20% per year over four years, with the first 20% vesting on the grant date. During the second quarter, 8,000 unit options were exercised.

Pursuant to the terms of our Unit Option Plan, the exercise price of unit options may be adjusted by the Board of Trustees when units are issued to unitholders by way of an "in-kind" distribution in order to prevent dilution of any outstanding unit options. For the "in-kind" distribution declared to unitholders of record on June 30, 2008, the Board of Trustees amended the exercise prices for outstanding unit options granted in 2008 as follows:

---------------------------------------------------------------------------- Grant Date Original grant date exercise price Adjusted exercise price ---------------------------------------------------------------------------- April 7, 2008 $ 3.60 $ 3.4410 April 7, 2008 $ 3.96 $ 3.7851 May 15, 2008 $ 4.28 $ 4.0910 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Distributions

In January 2008, our Board of Trustees unanimously approved amendments to our distribution policy to maximize the retention of operating cash flow to re-invest in growth. As a result, we eliminated our monthly cash distribution of $0.06 per unit ($0.72 per unit on an annualized basis) and replaced it with a quarterly "in-kind" distribution of $0.18 per unit ($0.72 per unit on an annualized basis). Distributions settled "in-kind" means unitholders will receive additional units instead of cash.

A key benefit from our "in-kind" distribution includes the ability to retain in excess of $60 million in cash provided by operating activities to re-invest in our capital expenditure programs. In addition, payment of "in-kind" distributions allow us to take advantage of the tax deferral on income trusts until 2011 as "in-kind" distributions are deductible for income tax purposes.

Our first "in-kind" distribution of $0.18 per unit was declared to unitholders of record as of the close of business on March 31, 2008 and consisted of 4,111,750 units issued at a deemed price of $3.7242 per unit. Our second "in-kind" distribution of $0.18 per unit was declared to unitholders of record as of the close of business on June 30, 2008 and consisted of 4,130,960 units issued at a deemed price of $3.8862 per unit.

Going forward, we will continue to monitor our distribution policy and adjust our policy as deemed necessary. We will also continue to consider the timing of our eventual conversion into a corporation prior to 2011.

Taxation of Distributions

Our distributions can consist of taxable and tax-deferred components. The taxable amount of our distributions in 2008 will be based on the actual taxable income of the Fund for the year ended December 31, 2008. Tax-deferred distributions are considered to be a return of capital for income tax purposes and will reduce the adjusted cost base of the units held. In 2007, 100% of our distributions were considered taxable amounts.

As explained earlier, on June 12, 2007, the Government of Canada enacted legislation to impose additional income taxes on publicly traded income trusts and limited partnerships, including Eveready, effective January 1, 2011. In anticipation of these tax changes, we plan to maximize the amount of tax pools we can carry forward to reduce and defer, as much as possible, our income tax exposure beginning in 2011. To achieve this objective we plan to maximize the taxable component of all distributions we declare in 2008 and until our eventual

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