TSX-BAD.UN
CALGARY, March 22 /CNW/ - Badger Income Fund ("Badger" or the "Fund") is pleased to announce its results for the year and three months ended December 31, 2006.
Financial Highlights
($ thousands, except per unit and total units outstanding information)
Three Three
Months Months Year Year
Ended Ended Ended Ended
December 31 December 31 December 31 December 31
2006 2005 2006 2005
----------------------------------------------------
Revenue 25,622 23,094 98,371 83,332
EBITDA(1) 7,307 6,845 28,895 24,794
Earnings before
income taxes 4,845 4,670 19,832 16,980
Taxes
Current 183 92 687 173
Future 3 1,110 2,648 2,026
Net earnings 4,659 3,468 16,497 14,781
Net earnings per unit
- diluted 0.43 0.32 1.53 1.38
Funds generated from
operations(2) 6,820 6,890 27,855 24,534
Funds generated from
operations per unit
- diluted 0.63 0.64 2.59 2.30
Maintenance capital
expenditures(3) - 978 3,170 1,955
Long-term debt
repayments 27 201 109 1,274
Cash available for
growth and
distribution(4) 6,794 6,108 25,291 21,778
Cash distributions
declared 3,389 3,144 13,246 11,166
Growth capital
expenditures(3) 8,650 4,252 19,304 11,776
Total units
outstanding 10,758,618 10,738,820 10,758,618 10,738,820
The following financial measures do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles (GAAP) and may
not be comparable to similar measures as presented by other funds or entities:
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is a measure of the Fund's operating profitability and is
therefore useful to management and investors. EBITDA provides an
indication of the results generated by the Fund's principal business
activities prior to how these activities are financed, assets are
amortized or how the results are taxed in various jurisdictions.
EBITDA is calculated from the Consolidated Statements of Earnings and
Retained Earnings as gross margin, less selling, general and
administrative costs and foreign exchange loss (gain).
(2) Funds generated from operations is used to assist management and
investors in analyzing operating performance and leverage. It is not
intended to represent operating cash flow or operating profits for
the period nor should it be viewed as an alternative to cash flow
from operating activities, net earnings or other measures of
financial performance calculated in accordance with GAAP. Funds
generated from operations is calculated from the Consolidated
Statements of Cash Flows and is defined as cash provided by operating
activities before changes in non-cash working capital.
(3) Maintenance capital expenditures is defined as the amount incurred
during the period to keep the daylighting fleet at the same number of
units, plus any other capital expenditures required to maintain the
existing business. It also includes any costs incurred to enhance the
operational life of a daylighting unit. This amount will fluctuate
from period-to-period depending on the number of units retired from
the fleet. During the three-month period ended December 31, 2006
Badger added 13 units to the fleet and did not remove any from
service. As a result, all of the units added during the three months
ended December 31, 2006 represent growth capital expenditures, while
none of the units represent maintenance capital expenditures.
Included in growth capital expenditures is approximately $3.7 million
worth of cabs and chassis acquired prior to the end of December.
During the year ended December 31, 2006 Badger added 54 units to the
fleet, of which 10 are reflected as maintenance capital expenditures.
The economic life of a Badger hydrovac is approximately 10 years. The
average age of the fleet is approximately four and a half years.
(4) Cash available for growth and distribution is used by management to
supplement cash flow as a measure of operating performance and
leverage. The objective of this measure is to calculate the amount
which is available for distribution to unitholders. It is defined as
funds generated from operations, less required debt repayments and
maintenance capital expenditures, plus any proceeds received on the
disposal of assets.
Overview
Highlights for the year are as follows:
- The Fund generated improved operating and financial results for the
twelve month period ended December 31, 2006 versus the twelve month
period ended December 31, 2005. Revenues increased to $98.4 million
in 2006 from $83.3 million in 2005, while EBITDA increased to
$28.9 million in 2006 compared to $24.8 million in 2005.
- Cash available for growth and distributions increased 16 percent to
$25.3 million compared to $21.8 million in 2005. The Fund increased
distributions during 2006 to $1.260 per unit on an annualized basis,
versus $1.176 per unit on an annualized basis at year-end 2005.
- The Fund put in place a $20 million extendable, revolving credit
facility, which replaced the existing $12 million demand operating
facility. The facility was used to repay existing demand operating
line advances and will assist in financing Badger's capital
expenditure program as well as general corporate activities.
- The Fund added 54 new hydrovac units in 2006 and removed 10 from
service, exiting the year at 285 hydrovac units. Of the total, 198
units are operating in Canada and 87 in the United States. The growth
in hydrovac units was financed from cash generated from operations
and existing credit facilities.
- On October 31, 2006 the federal Minister of Finance announced a new
tax plan that will affect the future level of taxation of income
trusts and corporations. One element of the proposed plan is a tax on
non-capital distributions from publicly-traded income trusts, which
would make their income tax treatment more like corporations. For
existing publicly-traded income trusts, the federal government has
proposed a four-year transitional delay in implementing the new
rules. The application of the proposed new tax plan would reduce the
tax efficiency of publicly-traded income trusts such as Badger. Since
the announcement, the federal government has clarified certain
matters related to growth and conversion guidelines for income
trusts. Badger will continue to monitor these proposed changes to
ensure its structure protects the long-term interest of its
unitholders. The proposed new tax measures will require in-depth
review, examination and assessment pending enactment into tax law.
Selected Annual Financial Information
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Period Ended
--------------------------------------
2006(1) 2005(1) 2004(1)
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Revenue ($) 98,370,896 83,331,679 78,696,706
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Net earnings ($) 16,496,455 14,780,994 13,711,874
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Net earnings per unit - basic ($) 1.53 1.39 1.31
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Net earnings per unit - diluted ($) 1.53 1.38 1.30
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Total assets ($) 90,192,248 74,551,335 67,751,424
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Total long-term debt ($)(2) 8,625,052 1,114,843 2,388,801
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Distributions declared ($) 13,246,474 11,165,792 8,356,386
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(1) The 2004 period reflects results for the 13 months ended December 31,
2004.
(2) Includes the current portion of long-term debt.
Overall Performance for the Year Ended December 31, 2006 Compared to the
Year Ended December 31, 2005
Results of Operations
Revenues
--------
Revenues were $98.4 million for the year ended December 31, 2006 compared
to $83.3 million for the year ended December 31, 2005. The increase is
attributable to the following:
- The majority of the increase in Canadian revenues occurred in Eastern
Canada where we expanded our customer base, added locations to
provide better services and increased spending on construction
projects.
- United States revenues increased to $29.4 million in 2006 from
$18.6 million in 2005. Revenue growth reflects the Fund's continued
focus on certain geographical areas and market segments, which
resulted in an increased customer base and higher demand for hydrovac
services. The other major contributing factor was the increased
activity related to oil field service in the United States.
Badger's average revenue per truck per month for 2006 was $29,600 an increase of four percent from the $28,500 generated during 2005.
Included in revenues is $1.8 million of truck placement and franchise fees for 2006, versus $2.2 million for 2005.
Direct Costs
------------
Direct costs were $62.0 million in 2006, an increase of $9.6 million from the $52.4 million recorded in 2005. This is consistent with the increase in revenues.
Gross Margin
------------
Gross margin for 2006 was 37 percent, which is consistent with 2005.
Amortization
------------
Amortization of capital assets was $8.6 million in 2006 or $1.3 million higher than the $7.3 million in 2005. The increase reflects a larger number of hydrovac units in the fleet.
Interest Expense
----------------
Interest expense was $0.4 million in 2006 versus $0.3 million in 2005. The higher interest expense is attributable to maintaining a higher balance of debt throughout 2006 compared to 2005. The increased debt was used for growth capital expenditures. The higher interest expense also reflects increased interest rates.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses were $1.5 million higher at $7.6 million in 2006 compared to $6.1 million in 2005. As a percentage of revenues, selling, general and administrative expenses were 7.7 percent in 2006 versus 7.4 percent in 2005. The increased expenses are due to the following:
- Badger hired additional personnel to support the growth of the
business, including a Vice President of Operations in July 2006 who
is responsible for all of Badger's regional operations;
- Badger increased compensation in order to retain quality personnel in
a competitive labour environment;
- The Fund added professional fees due to the announced internal
reorganization, which was postponed due to the government's
announcement; and,
- Badger had higher general office costs.
Selling, general and administrative expenses include salaries and benefits for office, field, safety and sales staff, as well as rent, utilities, and communications. These expenses also include costs to maintain the Fund's public listing and professional fees.
Foreign Exchange Loss (Gain)
----------------------------
The minor foreign exchange loss/gain results from converting the balance sheet and earnings statement related to United States operations into Canadian currency.
Income Taxes
------------
The effective tax rate for 2006 was 17 percent versus 13 percent for 2005. The increase resulted from not recognizing the accounting benefit of using certain United States tax losses during all of 2006 versus only part of 2005, although these losses were used to reduce cash taxes which would have been payable in the United States. The increase in current taxes is due to the increase in Canadian pre-tax income, which is only partially offset by available tax deductions at the operating company level.
The minimal effective tax rate overall is due to the trust structure, which results in tax deductible distributions being made to unitholders.
Liquidity
Funds generated from operations in 2006 increased to $27.9 million from $24.5 million in 2005, reflecting increased activity levels in Eastern Canada and the United States. The Fund uses its cash to make distributions to unitholders, build additional hydrovac units, invest in maintenance capital expenditures and repay long-term debt.
The Fund had working capital of $9.4 million at December 31, 2006 compared to $8.2 million at December 31, 2005. The increase in working capital is primarily attributable to putting in place a $20 million extendable, revolving credit facility, which replaced the demand operating facility. A portion of the funds received from the extendable, revolving credit facility were used to pay off the balance of the demand operating facility. The increase in accounts payable and accrued liabilities of $5.5 million was the result of acquiring cabs and chassis before year-end 2006, which were valued at approximately $3.7 million. This is further discussed under the heading capital resources - contractual obligations and committed capital investment.
The following table outlines the cash available to fund growth and pay distributions to unitholders in 2006 compared to 2005:
Year Ended Year Ended
December 31, December 31,
2006 2005
$ $
Cash provided by operating activities 27,393,449 26,017,210
Add (deduct): net change in non-cash
working capital 461,313 (1,483,193)
----------- -----------
Funds generated from operations 27,854,762 24,534,017
Add: proceeds on disposal of property,
plant and equipment 714,615 473,515
Deduct: required repayments of long-term debt (108,702) (1,273,958)
Deduct: maintenance capital expenditures (3,169,728) (1,955,340)
----------- -----------
Cash available for growth capital
expenditures and distributions 25,290,947 21,778,234
------------ ------------
------------ ------------
Growth capital expenditures 19,303,939 11,776,259
------------ ------------
------------ ------------
Cash distributions declared 13,246,474 11,165,792
------------ ------------
------------ ------------
The Fund makes regular monthly cash distributions to unitholders. These cash distributions may be reduced, increased or suspended entirely by the trustees depending on the operations of Badger and the performance of its assets. The actual cash flow available for distribution to holders of Fund units is a function of numerous factors, including the Fund's financial performance; debt covenants and obligations; maintenance and growth capital expenditure requirements for the purchase of property, plant and equipment; and number of units outstanding. It may also be impacted by the future tax treatment of income trusts.
The majority of the cash provided by operating activities was used to finance maintenance and growth capital expenditures and to pay distributions to unitholders. As outlined in the above chart, cash which was not distributed to unitholders was used to finance growth capital expenditures.
If maintenance capital expenditures levels increase in future periods, our cash available for growth capital expenditures and distribution will be negatively affected. Due to Badger's growth rate in recent years, the majority of our hydrovac units are relatively new, with an average age of approximately four and a half years. As a result, Badger is currently experiencing relatively low levels of maintenance capital expenditures. Over time, Badger would expect to incur annual maintenance capital expenditures in an amount that approximates the amortization expense reported in the year. Badger expects continued increases in cash provided by operations and cash available for growth capital expenditures and distributions will be sufficient to fund the maintenance capital expenditures in the future.
Badger is restricted from declaring distributions and distributing cash if it is in breach of the covenants under its credit facility. As at the date of this press release the Fund is in material compliance with all debt covenants and is able to fully utilize all existing credit facilities. Badger does not have a stability rating.
Currently the Fund has a $20 million extendable, revolving facility to fund working capital requirements and finance capital expenditures of which $7.6 million was used at December 31, 2006. The Fund will maintain an appropriate mix of flexible debt and equity to finance its maintenance capital expenditures and growth initiatives.
Capital Resources
Investing
---------
In 2006 the Fund spent $22.5 million on property, plant and equipment compared to $12.6 million for 2005. Included in the $22.5 million is the $3.7 million worth of cabs and chassis acquired in December. During 2006, the Fund built 54 new hydrovac units compared to 35 in 2005. The 2006 capital expenditures figure includes maintenance capital expenditures of $3.2 million. Generally speaking, maintenance capital expenditures are incurred during a period to keep the hydrovac fleet at the same number of units, which was 10 for 2006, plus any other capital expenditures required to maintain the existing business.
Financing
---------
During 2006 Badger put in place a $20 million extendable, revolving credit facility to replace its existing $12.0 million demand operating facility. The facility was used to repay existing demand operating line advances and on a go-forward basis will assist in financing Badger's capital expenditure program and general corporate activities. The facility has no required principal repayments. It expires on June 30, 2007 and is renewable at Badger's option for an additional 364-day period. If not renewed, interest is payable on the facility for 364 days, after which the entire amount must be repaid. The facility bears interest at the bank's prime rate or banker's acceptance rate plus 1.00 percent plus 0 to 200 basis points depending on Badger's ratio of funded debt-to-EBITDA.
During 2006 Badger repaid $0.1 million of long-term debt pursuant to regularly scheduled repayments. As a result of these principal payments and the establishment of the $20 million revolving credit facility, the Fund's long-term debt, including the current portion, was $8.6 million at year-end 2006.
At December 31, 2006 the Fund had a long-term, debt-to-equity ratio of 0.16:1 and a long-term, debt-to-trailing-funds-generated-from-operations of 0.30:1. Management believes that the Fund's healthy balance sheet and unutilized borrowing capacity, combined with funds generated from operations, will provide sufficient capital to fund ongoing operations, make distributions to unitholders, finance future capital expenditures and execute its strategic plan for the foreseeable future.
Contractual Obligations and Committed Capital Investment
--------------------------------------------------------
The Fund intends to meet its contractual obligations through funds generated by operating activities. The Fund's contractual obligations for the next five years relating to repayment of long-term debt are as follows (assuming the extendable revolving credit facility is not renewed on June 30, 2007):
2007 $ 108,768
2008 7,727,679
2009 108,768
2010 108,768
2011 108,768
Thereafter 462,301
---------
Total $8,625,052
------------
------------
In addition to the contractual obligations above, at year-end 2006 the Fund had committed to certain capital expenditures totalling approximately $1.8 million. These capital expenditures will be financed with existing credit facilities and funds generated from operations. There are no set terms for remitting payment for these financial obligations.
Due to uncertainty in truck engine and chassis configurations available to Badger in early 2007 as a result of the U.S. Environmental Protection Agency's (EPA) regulations, the Fund committed to purchase a number of chassis with current engines and configurations for production of daylighting units in early 2007. This purchase commitment amounts to approximately $3.7 million and is in the accounts payable and accrued liabilities figure as at December 31, 2006.
Unitholders' Capital
Unitholders' capital increased by $234,000 to $43.5 million at December 31, 2006. This was the result of issuing the following units:
- 10,660 fund units from the long-term incentive plan as payment for
2005 management performance bonuses;
- 3,250 fund units from the long-term incentive plan as partial payment
of 2006 fees to non-management trustees; and
- 5,888 fund units pursuant to the exercise of exchange rights.
Units outstanding at December 31, 2006 were 10,758,618. There was no change to the balance as of March 20, 2007.
Off-Balance Sheet Arrangements
At December 31, 2006 and 2005, the Fund had no off-balance sheet arrangements.
Transactions with Related Parties
Shea Nerland Calnan LLP provides legal services to Badger at market rates. David Calnan, a Trustee and Corporate Secretary of the Fund, is a partner in the law firm of Shea Nerland Calnan LLP and is involved in providing and managing Badger's legal services. The total cost of these legal services in 2006 was $240,000 compared to $261,000 for 2005.
Selected Quarterly Financial Information
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Quarter Ended
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2006
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Dec. 31 Sept. 30 June 30 Mar. 31
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Revenues ($) 25,621,658 25,324,030 21,696,318 25,728,890
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Net earnings ($) 4,659,784 3,974,958 2,841,459 5,020,254
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Net earnings per unit
- basic ($) 0.43 0.37 0.26 0.47
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Net earnings per unit
- diluted ($) 0.43 0.37 0.26 0.47
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Quarter Ended
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2005
---------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
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Revenues ($) 23,093,735 20,471,322 18,923,312 20,843,310
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Net earnings ($) 3,468,113 3,547,545 3,629,935 4,135,401
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Net earnings per unit
- basic ($) 0.32 0.33 0.34 0.39
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Net earnings per unit
- diluted ($) 0.32 0.33 0.34 0.39
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Fourth Quarter Highlights
- As a result of increased activity in the United States, revenue
increased to $25.6 million from $23.1 million comparing the
three months ended December 31, 2006 to three months ended
December 31, 2005. Badger's United States revenue increased to
$8.5 million from $5.6 million quarter-over-quarter due to increased
activity related to oil field services. Although revenue increased,
the average revenue per truck per month during the fourth quarter was
$29,000 which was a reduction from the $30,300 per month for the same
period in 2005. The Canadian revenues remained relatively unchanged
due to several factors which slowed growth in the quarter. These
factors included unseasonably warm weather in north eastern British
Columbia, northern Alberta and Ontario and a slowing in the oil and
natural gas industry in Western Canada.
- With the increase in revenues, earnings before income taxes increased
by four percent for the quarter.
- The Fund added 13 hydrovac units to the fleet and did not remove any
from service.
- In December, the Fund put in place a $20 million extendable,
revolving credit facility, which replaced the existing $12 million
demand operating facility. The facility was used to repay existing
demand operating line advances and will assist in financing Badger's
capital expenditure program as well as general corporate activities.
- On October 26, 2006 Badger announced it was undergoing an internal
reorganization to convert the organizational structure of the Fund to
a more modern trust-on-partnership structure. As a result of the
federal government's October 31, 2006 announcement the process was
put on hold. Badger has received a satisfactory advance tax ruling
from the Canada Revenue Agency allowing it to proceed with the
internal reorganization. The Fund will continue to monitor these
proposed changes and determine if the trust-on-partnership structure
is the most appropriate for maximizing unitholder value and
accommodating future expansion opportunities.
- Due to uncertainty in truck engine and chassis configurations
available to Badger in early 2007 as a result of EPA regulations, the
Fund committed to purchase a number of chassis with current engines
and configurations for production of daylighting units in early 2007.
This amounted to approximately $3.7 million and is in the accounts
payable and accrued liabilities figure as at December 31, 2006.
New Accounting Pronouncements
CICA Handbook Section 3855 and Section 3861 - Financial Instruments standards will be effective for the Fund's 2007 reporting period and are not expected to have a significant impact on the Fund. 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.
Critical Accounting Estimates
Management is responsible for applying judgement in preparing accounting estimates. Certain estimates and related disclosures included within the financial statements are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from management's current judgements. An accounting estimate is considered critical only if it requires the Fund to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and different estimates the Fund could have used would have a material impact on Badger's financial condition, changes in financial condition or results of operations.
While there are several estimates and assumptions made by management in the preparation of financial statements in accordance with generally accepted accounting principles, the following critical accounting estimates have been identified by management:
Estimates of Amortization of the Hydrovac Units
-----------------------------------------------
The Fund currently amortizes the hydrovac units over 10 years based on current knowledge and past experience. There is a certain amount of business risk that newer technology or some other unforeseen circumstance could lower this life expectation.
Estimates of Tax Pools and Their Recoverability
-----------------------------------------------
Badger has estimated its tax pools for the income tax provision. The actual tax pools the Fund may be able to use could be materially different in the future.
Estimates of Impairment of Long-lived Assets
--------------------------------------------
The carrying value of long-lived assets, which include property, plant and equipment and intangible assets, is assessed for indications of impairment when events or circumstances indicate that the carrying amounts may not be recoverable from estimated cash flows. Estimating future cash flows requires assumptions about future business conditions and technological developments. Significant, unanticipated changes to these assumptions could require a provision for impairment in the future.
Estimates of Collectibility of Accounts Receivable
--------------------------------------------------
The Fund estimates the collectibility of its accounts receivable. The Fund continually reviews its accounts receivable balances and makes an allowance when a receivable is deemed uncollectible. The actual collectibility of accounts receivable could differ materially from the estimate.
Estimates of Unit-based Compensation
------------------------------------
Compensation expense associated with unit options at grant date is an estimate based on various assumptions such as volatility, annual distribution yield, risk-free interest rate and expected life. Badger uses the Black-Scholes methodology to produce an estimate of the fair value of such compensation.
Financial and Other Instruments
Fair Values
-----------
The carrying values of cash, bank indebtedness, accounts receivable, accounts payable and accrued liabilities, income taxes payable and distributions payable approximate the fair value of these financial instruments due to their short-term maturities. The carrying value of the long-term debt approximates fair value due to its floating interest rates.
Foreign Currency Risk
---------------------
In the normal course of operations the Fund is exposed to movements in the United States dollar exchange rate relative to the Canadian dollar. Badger has United States operations and purchases certain items in United States dollars. Badger does not utilize hedging instruments but chooses to be exposed to current United States exchange rates as increases or decreases in exchange rates are not considered to have a significant effect on its business.
Interest Rate Risk
------------------
The floating interest-rate profile of Badger's long-term debt exposes Badger to interest-rate risk. Badger does not use hedging instruments to mitigate this risk.
Credit Risk
-----------
A substantial portion of Badger's accounts receivable is with customers involved in the oil and natural gas industry, whose revenues may be impacted by fluctuations in commodity prices. Although collection of these receivables could be influenced by economic factors affecting this industry, management considers the risk of a significant loss to be remote at this time. The Fund's credit risk from customers is minimized by Badger's broad customer base and the diverse industries it serves.
Disclosure Controls and Procedures Related to Financial Reporting
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, including the President and Chief Executive Officer (CEO) and the Vice President Finance and Chief Financial Officer (CFO). This allows appropriate decisions to be made regarding public disclosure. As of December 31, 2006 both the CEO and the CFO have evaluated the effectiveness of Badger's disclosure controls and procedures as defined in Multilateral Instrument 52-109 of the Canadian Securities Administrators. They have concluded that such disclosure controls and procedures are effective.
Business Risks
(Reference is also made to Badger's Annual Information Form.)
Reliance on the Oil and Natural Gas Sector
------------------------------------------
The oil and natural gas sector accounts for a significant portion of the Fund's revenues. The petroleum service industry relies heavily on the volume of capital expenditures made by oil and natural gas explorers and producers and is also affected by certain adverse weather conditions. These spending decisions are based on several factors including, but not limited to, hydrocarbon prices; production levels of current reserves; and access to capital - all of which can vary greatly. To minimize the impact of the oil and natural gas industry cycles, the Fund also focuses on generating revenue from the utility and general contracting market segments.
Competition
-----------
The Fund operates in a highly competitive environment for hydrovac services in Canada. In order to remain the leading provider of hydrovac services in this region, we continually enhance our safety and operational procedures to ensure that they meet or exceed customer expectations. We also have the in-house capabilities to continuously improve our daylighting units so that they remain the most productive and efficient hydrovacs in the business. There can be no assurance that Badger's competitors will not achieve greater market acceptance due to pricing, efficiency, safety and other factors.
United States Operations
------------------------
Badger also faces risks associated with doing business in the United States. The Fund has made a significant investment in the United States to develop the hydrovac market. To date, the market for Badger's hydrovac service business remains mostly undeveloped. The growth rate of the United States market is not determinable.
Safety
------
Safety is one of the Fund's primary concerns. We have implemented programs to ensure our operations meet or exceed current hydrovac safety standards. The Fund also employs regional safety managers who are responsible for maintaining and developing the Fund's safety policies. In addition, these regional managers monitor the Fund's operations to ensure they are operating in compliance with such policies.
Amortization of Daylighting Units
---------------------------------
The Fund currently amortizes the hydrovac units over 10 years, a policy that is based on our current knowledge and past experience. There is a certain amount of business risk that newer technology or some other unforeseen circumstance could lower this life expectation.
Dependence on Key Personnel
---------------------------
Today, Badger has a strong, stable employee base. Badger relies on its ability and the ability of its agents/franchisees to attract and retain key personnel necessary to maintain and grow our business. Any loss of services of key personnel could have a material adverse effect on the business and operations of the Fund. The ability to secure the services of additional personnel is constrained in times of strong industry activity.
Reliance on Key Suppliers
-------------------------
Badger has established relationships with key suppliers. There can be no assurance that current sources of equipment, parts, components or relationships with key suppliers will be maintained. If these are not maintained, Badger's ability to manufacture its hydrovac units may be impaired.
Fluctuations in Weather and Seasonality
---------------------------------------
Badger's operating results have been, and are expected to continue to be, subject to quarterly and other fluctuations due to a variety of factors including changes in weather conditions and seasonality. For example, in Western Canada Badger's results may be negatively affected if there is an extended spring break-up period since oil and natural gas industry sites may not be accessible during such periods. In Eastern Canada, Badger has in the past experienced enhanced use of its equipment during cold winters, thus improving the results of its operations during such times. The Fund may then experience a slow period during spring thaw.
In the Western United States, Badger has from time-to-time been restricted by the imposition of government regulations from conducting its work in environmentally sensitive areas during the winter mating seasons of certain animals and birds. This has had a negative effect on Badger's results of operations. As such, changes in the weather and seasonality may, depending on the location and nature of the event, have either a positive or negative effect on Badger's results of operations.
Fluctuations in the Economy and Political Landscape
---------------------------------------------------
Operations could be adversely affected by a general economic downturn, changes in the political landscape or limitations on spending.
Compliance with Government Regulations
--------------------------------------
While Badger believes it is currently in compliance with all applicable government standards and regulations, there can be no assurance that all of Badger business will be able to continue to comply with all applicable standards and regulations.
Access to Additional Financing
------------------------------
Badger may find it necessary in the future to obtain additional debt or equity to support ongoing operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. There can be no assurance additional financing will be available to Badger when needed or on terms acceptable to Badger. Badger's inability to raise financing to support ongoing operations or to fund capital expenditures or acquisitions could limit the Fund's growth and may have a material adverse effect upon the Fund.
Self-Insurance
--------------
Due to the significant increase in insurance premiums, the Fund decided to self-insure against any physical damage it could incur on the Canadian hydrovac units. This decision will be re-evaluated periodically as circumstances change.
Outlook
Badger is optimistic that it will continue to grow in 2007. Actual growth amounts are difficult to predict due to uncertainty in the oil and natural gas sector and the weather. Lack of a good level of frozen ground and the timing of spring break-up in Western Canada will have an effect on first-quarter results in Canada. Badger has strengthened its Canadian management team to provide more focus on developing future hydrovac business. The United States business will continue to grow given good economic indicators and an active oil and gas segment.
BADGER INCOME FUND
Consolidated balance sheets
December 31, December 31,
2006 2005
$ $
--------------------------
ASSETS
Current
Cash 1,319,912 1,190,398
Accounts receivable 22,873,841 19,552,905
Inventories 1,399,661 1,180,291
Prepaid expenses 679,675 504,365
--------------------------
26,273,089 22,427,959
Property, plant and equipment 62,367,823 49,389,459
Intangible assets 1,551,336 1,401,336
Future income taxes - 1,332,581
--------------------------
90,192,248 74,551,335
--------------------------
--------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness - 3,497,348
Accounts payable and accrued liabilities 14,951,723 9,457,926
Income taxes payable 671,544 86,505
Distributions payable 1,129,655 1,052,404
Current portion of long-term debt 108,768 108,768
--------------------------
16,861,690 14,202,951
Long-term debt 8,516,284 1,006,075
Future income taxes 10,259,536 8,418,801
--------------------------
35,637,510 23,627,827
--------------------------
Unitholders' equity
Unitholders' capital 43,488,255 43,254,606
Contributed surplus 973,600 826,000
Retained earnings 10,092,883 6,842,902
--------------------------
54,554,738 50,923,508
--------------------------
90,192,248 74,551,335
--------------------------
--------------------------
BADGER INCOME FUND
Consolidated statements of earnings and retained earnings
Dec. 31/06 Dec. 31/05
$ $
--------------------------
Revenue 98,370,896 83,331,679
Direct costs 61,987,817 52,383,444
--------------------------
--------------------------
Gross margin 36,383,079 30,948,235
--------------------------
Expenses
Amortization 8,636,268 7,313,090
Loss (gain) on sale of property,
plant and equipment (5,580) 226,072
Interest
Long-term 68,525 85,746
Current 363,882 188,724
Selling, general and administrative 7,613,620 6,142,778
Foreign exchange loss (gain) (126,004) 11,745
--------------------------
16,550,711 13,968,155
--------------------------
Earnings before income taxes 19,832,368 16,980,080
--------------------------
Income taxes
Current 687,480 172,970
Future 2,648,433 2,026,116
--------------------------
3,335,913 2,199,086
--------------------------
Net earnings for the year 16,496,455 14,780,994
Retained earnings, beginning of year 6,842,902 3,227,700
Cash distributions (13,246,474) (11,165,792)
--------------------------
--------------------------
Retained earnings, end of year 10,092,883 6,842,902
--------------------------
--------------------------
Net earnings per unit
Basic 1.53 1.39
--------------------------
--------------------------
Diluted 1.53 1.38
--------------------------
--------------------------
BADGER INCOME FUND
Consolidated statements of cash flows
Dec. 31/06 Dec. 31/05
$ $
--------------------------
Operating activities
Net earnings for the year 16,496,455 14,780,994
Non-cash items:
Amortization 8,636,268 7,313,090
Future income taxes 2,648,433 2,026,116
Unit-based compensation 205,190 176,000
Foreign exchange loss (gain) (126,004) 11,745
Loss (gain) on sale of property,
plant and equipment (5,580) 226,072
--------------------------
27,854,762 24,534,017
Net change in non-cash working capital (461,313) 1,483,193
--------------------------
27,393,449 26,017,210
--------------------------
Financing activities
Proceeds from units issued 59 89
Proceeds from long-term debt 7,618,911 -
Repayment of long-term debt (108,702) (1,273,958)
Distributions to unitholders (13,169,223) (12,599,901)
Increase (decrease) in bank indebtedness (3,497,348) 676,025
--------------------------
(9,156,303) (13,197,745)
--------------------------
Investing activities
Purchase of property, plant and equipment (22,323,667) (11,230,263)
Purchase of intangible assets (150,000) (1,401,336)
Proceeds on disposal of property,
plant and equipment 714,615 473,515
Net change in non-cash working capital 3,651,420 -
--------------------------
(18,107,632) (12,158,084)
--------------------------
Increase in cash during the year 129,514 661,381
Cash, beginning of year 1,190,398 529,017
--------------------------
Cash, end of year 1,319,912 1,190,398
--------------------------
--------------------------
Interest paid 411,383 274,470
--------------------------
--------------------------
Income taxes paid (received) (421,349) (1,689,581)
--------------------------
--------------------------
GEOGRAPHIC SEGMENTED INFORMATION
The Fund operates in two geographic/reportable segments providing
daylighting services to each of these segments. The following is selected
information for the year and three months ended December 31, 2006 and
December 31, 2005 based on these geographic segments:
Three months ended Dec. 31, 2006
--------------------------------------
Canada ($) USA ($) Total ($)
Revenue 17,125,230 8,496,428 25,621,658
Direct costs 10,835,288 5,405,809 16,241,097
Selling, general and
administrative 1,546,277 738,672 2,284,949
EBITDA((x)) 4,742,266 2,564,310 7,306,576
Amortization 1,608,965 702,196 2,311,161
Earnings before income taxes 2,983,620 1,861,735 4,845,355
Capital expenditures 6,317,701 2,332,481 8,650,182
Three months ended Dec. 31, 2005
--------------------------------------
Canada ($) USA ($) Total ($)
Revenue 17,489,671 5,604,064 23,093,735
Direct costs 10,888,311 3,759,363 14,647,674
Selling, general and
administrative 1,068,407 519,880 1,588,287
EBITDA((x)) 5,548,913 1,295,695 6,844,608
Amortization 1,462,500 444,817 1,907,317
Earnings before income taxes 3,807,918 861,780 4,669,698
Capital expenditures 4,506,282 723,614 5,229,896
Twelve months ended Dec. 31, 2006
--------------------------------------
Canada ($) USA ($) Total ($)
Revenue 68,940,697 29,430,199 98,370,896
Direct costs 43,013,050 18,974,767 61,987,817
Selling, general and
administrative 5,135,903 2,477,717 7,613,620
EBITDA((x)) 20,835,062 8,060,401 28,895,463
Amortization 6,267,848 2,368,420 8,636,268
Earnings before income taxes 14,193,183 5,639,185 19,832,368
Property, plant and equipment 44,542,937 17,824,886 62,367,823
Intangible assets 1,551,336 - 1,551,336
Total assets 63,313,728 26,878,520 90,192,248
Capital expenditures 11,722,715 10,750,952 22,473,667
Twelve months ended Dec. 31, 2005
--------------------------------------
Canada ($) USA ($) Total ($)
Revenue 64,732,824 18,598,855 83,331,679
Direct costs 40,157,585 12,225,859 52,383,444
Selling, general and
administrative 4,109,154 2,033,624 6,142,778
EBITDA((x)) 20,520,034 4,273,678 24,793,712
Amortization 5,680,863 1,632,227 7,313,090
Earnings before income taxes 14,337,818 2,642,262 16,980,080
Property, plant and equipment 39,399,044 9,990,415 49,389,459
Intangible assets 1,401,336 - 1,401,336
Total assets 58,593,631 15,957,704 74,551,335
Capital expenditures 10,853,981 2,877,618 13,731,599
((x)) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is a measure of the Fund's operating profitability and is
therefore useful to management and investors. EBITDA provides an
indication of the results generated by the Fund's principal business
activities prior to how these activities are financed, assets are
amortized or how the results are taxed in various jurisdictions. EBITDA
is calculated from the Consolidated Statements of Earnings and Retained
Earnings as gross margin, less selling, general and administrative costs
and foreign exchange loss (gain).
Forward-Looking Statements
Certain statements contained in the press release constitute forward-looking statements. These statements relate to future events or Badger's future performance. All statements other than statements of historical fact may be forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Other factors include, but are not limited to: the future tax treatment of income trusts; supply-demand fluctuations for oil and natural gas and related products and services; political and economic conditions; the demand for services provided by the Fund; industry competition; and Badger's ability to attract and retain key personnel. The Fund believes that the expectations reflected in these forward-looking statements are reasonable; however, no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this press release should not be relied upon. In addition, these forward-looking statements relate to the date on which they are made. Badger disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Badger Income Fund is an open-ended trust that is North America's largest provider of non-destructive excavating services. Badger traditionally works for contractors and facility owners in the utility and petroleum industries. Our key technology is the Badger Hydrovac, which is used primarily for safe digging in congested grounds and challenging conditions. The Badger Hydrovac uses a pressurized water stream to liquefy the soil cover, which is then removed with a powerful vacuum system and deposited into a storage tank. Badger manufactures its truck-mounted hydrovac units.
Badger Income Fund's business model involves the provision of excavating services through two distinct entities: the Operating Partners (franchisees in the United States and agents in Canada), and Badger Corporate. Badger Corporate works with its Operating Partners to provide Hydrovac service to the end user. In this partnership, Badger provides the expertise, the trucks, and North American marketing and administration support. The Operating Partners deliver the service by operating the equipment and developing their local markets. All work is invoiced by Badger and then shared with the Operating Partner based upon a revenue sharing formula. In limited locations Badger has established corporate run operations to market and deliver the service in the local area.
The Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
%SEDAR: 00020566E