Management s Discussion and Analysis

Transcription

1 Management s Discussion and Analysis For the three and nine months ended 2016

2 The following management discussion and analysis ( MD&A ) of the financial position and results of operations of Petrowest Corporation ( Petrowest, our, we or the Company ) has been prepared by management and reviewed and approved by the Board of Directors of Petrowest, and is dated November 10, This discussion and analysis is a review of the financial results of the Company which are prepared in accordance with International Financial Reporting Standards ( IFRS ). The following discussion and analysis is a comparison of the financial performance for the three and nine months ended 2016 and 2015, and should be read in conjunction with the unaudited condensed consolidated financial statements for the three and nine months ended 2016 and 2015, as well as the audited consolidated financial statements and MD&A for the year ended December 31, Readers should also refer to the cautionary statements at the end of this discussion respecting Forward-Looking Statements and Non-IFRS Measures. All financial information is reported in Canadian Dollars unless otherwise indicated. PETROWEST S BUSINESS Petrowest is incorporated under the laws of the Province of Alberta, Canada. Petrowest is a diversified infrastructure company with primary operations based in northeastern British Columbia ( NE BC ) and Alberta. Petrowest s operations are focused on industrial and civil infrastructure projects, gravel crushing and hauling activities, as well as pre-drilling and post-completion energy services. Petrowest s business includes land clearing, earth moving and site preparation services, loading and hauling of logs and gravel, earth and heavy equipment transportation, gravel and rock crushing, safety equipment rentals and supervision, oilfield and heavy equipment rentals, and the operation of a landfill to receive and manage contaminated waste. Petrowest s services and equipment can be found throughout the northern region of Western Canada, with the operational head office located in Grande Prairie, Alberta, and corporate head office in Calgary, Alberta. The Company also has strategically placed field offices in Grande Prairie, Fort Saskatchewan, Worsley, and Fox Creek in NW Alberta and Fort St. John, Peejay and Fort Nelson in NE BC. The Company has five major business segments (as described below in this MD&A) that utilize a fleet of heavy equipment including dozers, track hoe excavators, articulated rock haulers, motor scrapers, heavy transport trucks, a mobile fleet of cone and jaw crusher units, log and gravel loading equipment, mulchers, as well as other ancillary support equipment. The Company also holds a 25% ownership interest in the Peace River Hydro Partners ( PRHP ) partnership, the purpose of which is to complete the contract with BC Hydro for the $1.75 billion main civil works portion of the Site C Clean Energy Project in British Columbia (the Site C Project ). The current focus of PRHP s work on the Site C Project is the continuation of earthworks required for dam construction. This includes excavation on the north and south banks, construction of the south bank drainage tunnel and construction of the south bank cofferdam. Work is also well underway on the construction of the 329 metre Moberly River construction bridge. In addition, PRHP has begun aggregate crushing on the south bank and is continuing with the work required to construct concrete batch plants. ADDITIONAL CORPORATE INFORMATION The Company is listed on the Toronto Stock Exchange under the trading symbol PRW. Additional information relating to the Company, including the Company s Annual Information Form, can be found on SEDAR at Petrowest Corporation Third Quarter Report

3 OPERATING SEGMENTS The Construction division ( Construction ) operates under the trade names Roy Larson Construction, Jim Moffatt Construction, Petrowest Construction, B.C. Ltd., Enviro-Mulch Land Clearing Solutions and Quigley Contracting, and specializes in industrial and civil infrastructure work, land clearing, earth moving and site preparation, road construction, as well as the construction and remediation of oil and gas well sites. The Civil Services division ( Civil ) operates under the trade names R Bee Crushing, and S.O.S. Oilfield Safety. Civil specializes in custom aggregate rock crushing and sand screening for gravel supply operations in Alberta, British Columbia and Saskatchewan. Civil also provides services including aggregate washing, safety supervision, and rental of safety air units and wash units for safety support in the oil and gas drilling operations and plant turnarounds. The Transportation division ( Transportation ) operates under the trade names Murtron Hauling, Cutbank Trucking, CJM Trucking Ltd., and Trans Carrier Ltd. and specializes in specialty hauling services including log and gravel loading and hauling, maintenance and construction equipment transportation, contaminated soil and hazardous waste hauling, oversized load and equipment hauling, and heavy equipment transportation. The Rental Services division ( Rentals ) operates under the trade names Nu-Northern Tractor Rentals and Petrowest Rentals and specializes in heavy equipment rentals as well as oilfield equipment rentals to operators in the civil construction, oil and gas, mining, logging, and pulp and paper industries. Rentals is strategically placed to provide the rental of heavy equipment to internal divisions during periods of increased activity, but also allows the Company to rent surplus equipment to external third parties in order to maximize utilization of the fleet. On a percentage of revenue basis, Rentals is the largest provider of intracompany services in the Company. The Environmental Services division ( Environmental ) is a landfill. Operations at the landfill commenced in January Total licensed capacity of this landfill is approximately 1.6 million cubic meters of waste of which less than 5% is utilized to date. The landfill site is located approximately 108 km north of Fort St. John in NE BC. The Environmental Services Division operates under the business name "Petrowest Environmental Services LP." Petrowest Corporation Third Quarter Report

4 FINANCIAL HIGHLIGHTS ($000 s, except per share amounts and per share data) Revenue 45,741 65, , ,012 Gross margin 1 4,358 11,081 9,546 15,328 % of revenue 9.5% 17.0% 8.3% 10.5% Adjusted EBITDA 1 3,500 9,594 6,719 10,617 % of revenue 7.7% 14.7% 5.8% 7.3% Total Adjusted EBITDA 1 5,328 9,532 Comprehensive (loss) income (3,024) 983 (11,944) (13,288) Per share ($) basic (0.01) 0.00 (0.06) (0.07) Per share ($) diluted (0.01) 0.00 (0.06) (0.07) Funds from Operations 1 2,127 8,427 2,296 7,186 Per share ($) basic Capital expenditures 3,028 4,086 8,808 13,003 Total assets 157, , , ,052 Total liabilities 96, ,378 96, ,378 Weighted average shares outstanding 211, , , ,209 Shares outstanding, 211, , , ,059 1 See Non-IFRS Measures NINE MONTH 2016 BUSINESS HIGHLIGHTS Financial Revenue decreased 21% to $114.9 million for the nine months ended 2016 compared to $146.0 million for the same period in 2015 primarily as a result of poor operating conditions due to fires and heavy rain, in addition to ongoing economic challenges in the oil and gas sector. Adjusted EBITDA decreased by $3.9 million to $6.7 million for the nine months ended September 30, 2016 compared to $10.6 million for the same period in Equipment Capital expenditures decreased by 32% to $8.8 million for the nine months ended 2016 compared to $13.0 million for the same period in This decrease of $4.2 million reflects the Company s continued focus on controlling capital expenditures in the current economic environment. Proceeds from equipment sales totalled approximately $11.6 million in the first three quarters of The majority of the dispositions related to the sale of aged and underutilized equipment. Petrowest Corporation Third Quarter Report

5 Credit Agreements On September 15, 2016 the Company received a waiver of non-compliance for certain financial covenants in the Syndicated Credit Facility and Subordinated Debt Facility effective until October 14, On October 14, 2016 the Company obtained a second waiver for non-compliance effective until November 10, On November 10, 2016 the Company entered into an amendment of its Syndicated Credit Facility and Subordinated Debt Facility, specifically the modification of the Adjusted EBITDA financial covenant, as well as specific timelines regarding financing alternatives, and enhanced reporting requirements and process reviews going forward. INDUSTRY OVERVIEW AND OUTLOOK The first nine months of 2016 had significant weather challenges in Western Canada, including early spring forest fires and unseasonably heavy rains throughout the summer. The Fort St. John area experienced its fourth wettest August on record. In addition, flooding in and around the Grande Prairie region resulted in additional lost operating days in the third quarter. As a result Petrowest was delayed on some of its major projects, shifting revenues into Even with these weather issues, the ramp up of major projects in the third quarter of 2016 has positioned Petrowest for a strong 2017, including the $1.75 billion Main Civil Works Site C contract. Petrowest has successfully bid on 13 road jobs amounting to over $20.0 million in additional infrastructure contracts to date in However, due to extreme weather patterns experienced to date in 2016, the revenue realization will be shifted into The Alberta Government has progressed on the development of additional infrastructure projects in 2016, reaffirming that 2016 marks the commencement of a multi-year infrastructure development build out in Western Canada. The Alberta Government has finalized its five year capital plan which includes approximately $4.6 billion for roads and bridges, approximately $2.0 billion dollars of which is budgeted to be expended in 2016 and Activity levels in the energy sector across Western Canada remain significantly impacted by the slowdown in drilling activity in the oil and natural gas industry due to continuing low commodity prices. Petrowest has maintained key relationships in the energy sector and remains strongly positioned to benefit from any increased drilling activity. In addition, Petrowest is pleased to announce that PRHP, in which Petrowest is a 25% working interest partner, has been shortlisted in a BC Hydro announcement made September 26, 2016 for the generating station and spillways civil works contract for the Site C Clean Energy Project. As indicated in the BC Hydro announcement, the proponents have been issued the request for proposals. Following submission and evaluation of the proposals, a preferred proponent will be selected and negotiations to reach a final agreement will begin. Contract award is anticipated in summer The weather also affected the Civil division s operations during the third quarter, in addition to increased mobilization activity as a result of the nature and size of jobs to date in However, similar to 2015, the Civil division is expected to operate near or above capacity through the gravel crushing season, double shifting some plants. In addition, as increased infrastructure projects commence it is anticipated that there will be increased demand for our Civil operations. Petrowest Corporation Third Quarter Report

6 Over the quarter, the Transportation division was challenged with difficult operating conditions and competitive economic conditions. Petrowest has maintained significant contracts within the forestry industry but realized approximately 30% less revenue, year over year, from these contracts in the quarter. Peace River Hydro Partners BC Hydro provides bi-weekly construction bulletin updates on BC Hydro also provides quarterly updates on the project. As of October 28, 2016, BC Hydro disclosed that the Main Civil Works contractors are well underway on both the north and south banks of the project site. Petrowest will be a key contributor to PRHP s recovery from project delays in the first half of Guidance The purpose of having previously presented financial outlook information for 2016 had been to assist investors and others in understanding our business outlook, objectives, and plans as well as the Company s expectations as to the anticipated results of its proposed business activities for Readers are cautioned that financial outlook information may not be appropriate for other purposes. See the Forward Looking Statements section below in this MD&A for additional information on the assumptions on which financial outlook information is based. In our annual MD&A, we set an Adjusted EBITDA target of $45 million for the fiscal year We reduced our 2016 annual guidance to $20-25 million Adjusted EBITDA in Q Petrowest has now determined that the 2016 annual guidance range of $20-25 million Adjusted EBITDA presented in Q2 will not be achieved in 2016 due to the extremely atypical and unseasonal weather conditions that have persisted in the Company s operating locations during much of this year, having a significant adverse effect on the Company s ability to achieve and maintain projected operating levels over this period of time has marked one of the wettest years on record over the last 40 years in Western Canada. Entering the fourth quarter, atypical and unseasonal weather continued and as a result, unfavourable operating conditions also continued in October. The resulting and cumulative delays to date in much of Petrowest s operations have the effect of shifting expected 2016 revenues into However, given the unprecedented impact of the extremely atypical weather patterns on operations to date in 2016, Petrowest has determined that it is prudent to discontinue the issuance of 2016 financial outlook guidance at this time. The Company s Adjusted EBITDA for the nine months ended 2016 was $6.7 million, and the Total Adjusted EBITDA for the nine months ended 2016 was $9.5 million. See the Non-IFRS Measures section below in this MD&A for further information regarding the definitions of Adjusted EBITDA and Total Adjusted EBITDA. Petrowest Corporation Third Quarter Report

7 FINANCIAL OPERATING SUMMARY ($000 s) Revenue 45,741 65, , ,012 Operating expense 41,383 54, , ,684 Gross margin 1 4,358 11,081 9,546 15,328 General and administrative 858 1,487 2,827 4,711 Adjusted EBITDA 1 3,500 9,594 6,719 10,617 Amortization of property and equipment 5,775 7,990 18,367 23,118 Amortization of intangible assets Share based compensation ,395 Gain on disposal of property and equipment (92) (246) (2,156) (349) Foreign exchange gain (loss) (5) 16 (80) Operating income (loss) (2,584) 1,268 (10,675) (13,901) Gain from investment in partnership (303) (567) Net finance expense 1,436 1,063 4,915 3,608 Net (loss) income and comprehensive (loss) income before income tax (3,717) 205 (15,023) (17,509) Income tax (recovery) expense (693) (778) (3,079) 4,221 Net and comprehensive (loss) income (3,024) 983 (11,944) (13,288) 1 See Non-IFRS Measures Revenues in the third quarter continued to be impacted by low commodity prices and the resultant reduced oil and gas industry activity. In addition, weather conditions throughout the quarter remained challenging, negatively impacting infrastructure and non-energy sector construction work expected to be completed during the period. Overall, there continue to be challenges in the areas in which we operate due primarily to reduced commodity prices, challenging weather conditions and uncertainties that still exist regarding the timing for planned provincial infrastructure projects. Revenue for the three months ended 2016 decreased 30% to $45.7 million compared to $65.3 million for the same period in The decrease in revenue of $19.6 million is primarily due to: decreased Construction revenues of $6.3 million due primarily to poor operating conditions as a result of adverse weather combined with ongoing economic challenges in the oil and gas sector; decreased Civil revenues of $8.6 million due primarily to unfavorable operating conditions as a result of the weather and increased mobilization activity as a result of the nature and size of jobs to date in 2016; and decreased Transportation revenues of $5.2 million due primarily to decreased customer activity and continued downward pressure on rates. These decreases were partially offset by: increased rentals revenues of $0.7 million due primarily to equipment rentals to PRHP. Petrowest Corporation Third Quarter Report

8 Revenue for the nine months ended 2016 decreased 21% to $114.9 million compared to $146.0 million for the same period in The decrease in revenue of $31.1 million is primarily due to: decreased Construction revenues of $9.5 million due primarily to poor operating conditions as a result of adverse weather combined with ongoing economic challenges in the oil and gas sector, less work performed during the spring break-up compared to 2015, and continued customer and competitive pressures; decreased Civil revenues of $6.3 million due primarily to weather and increased mobilization activity as a result of the nature and size of jobs to date in 2016; decreased Transportation revenues of $14.5 million due primarily to decreased customer activity and continued downward pressure on rates; and decreased Environmental revenues of $1.1 million due primarily to less remediation work performed in 2016 due to less demand from energy sector customers for hazardous waste remediation services. These decreases were partially offset by: increased rentals revenues of $0.3 million due primarily to equipment rentals to PRHP. The composition of revenue by division was as follows: Change Change Construction 33% 33% 27% 28% (1%) Civil 39% 41% (2%) 46% 41% 5% Transportation 25% 25% 25% 29% (4%) Rentals 3% 1% 2% 2% 1% 1% Environmental 0% 0% 0% 1% (1%) Adjusted EBITDA for the three months ended 2016 was $3.5 million compared to $9.6 million for the same period in The decrease of $6.1 million in Adjusted EBITDA is primarily due to: decreased Construction Gross Margin of $4.0 million due primarily to reduced activity during the period, and the fixed cost component of operations; decreased Civil Gross Margin of $1.9 million due primarily to increased mobilization activity as a result of the nature and size of jobs to date in 2016; and decreased Transportation Gross Margin of $0.6 million due primarily to continuing downward pressure on rates from the slowdown in the energy sector and the significant reduction in heavy hauling, which is typically performed for a higher rate. These decreases were partially offset by: decreased general and administrative costs of $0.6 million due primarily to cost savings initiatives implemented by management. Petrowest Corporation Third Quarter Report

9 Adjusted EBITDA for the nine months ended 2016 was $6.7 million compared to $10.6 million for the same period in The decrease of $3.9 million in Adjusted EBITDA is primarily due to: decreased Civil Gross Margin of $2.5 million due primarily to increased mobilization activity as a result of the nature and size of jobs to date in 2016; decreased Transportation Gross Margin of $2.1 million due primarily to continuing downward pressure on rates from the slowdown in the energy sector and the significant reduction in heavy hauling, which is typically performed for a higher rate; and decreased Environmental Gross Margin of $1.0 million due primarily to less remediation work performed in 2016 due to the reduced allocation of capital from the energy sector to remediate hazardous waste. These decreases were partially offset by: increased Construction Gross Margin of $0.5 million due primarily to a reduction in operating expenses as a result of cost cutting efforts initiated by management; and decreased general and administrative costs of $1.9 million due primarily to cost savings initiatives implemented by management. RESULTS OF OPERATIONS In order to discuss the factors that have caused period to period variations in operating activities, the Company has divided the business into five reportable operating segments; Construction, Civil, Transportation, Rentals and Environmental. The segments are differentiated by the type of service provided, equipment requirements and customer needs. Total operating expenses by division excludes share based compensation, corporate and finance expenses, amortization and foreign exchange gains/losses, as management considers one of the important measures of divisional performance in each period to be earnings before corporate expenses and noncash items such as share based compensation. Construction ($000 s) % change % change Revenue 15,186 21,498 (29%) 31,545 41,055 (23%) Operating expenses 13,608 15,942 (15%) 27,419 37,456 (27%) Gross Margin 1 1,578 5,556 (72%) 4,126 3,599 15% Gross Margin Percentage 1 10% 26% (16%) 13% 9% 4% 1 See Non-IFRS Measures Revenue Construction s revenue for the three months ended 2016 decreased by $6.3 million to $15.2 million, a decrease of 29% compared to $21.5 million for the same period in This decrease is primarily due to poor operating conditions as a result of the poor weather conditions during the quarter, combined with ongoing economic challenges in the oil and gas sector. When compared to five-year average data for the quarter, the Grande Prairie area experienced a 61% increase in precipitation, and the Fort St. John area experienced a 55% increase in precipitation. The result was a significant impact on the number of work days available, and therefore the ability of the Construction operating segment to generate revenue. The majority of this work is expected to be completed throughout the remainder of 2016 and into Petrowest Corporation Third Quarter Report

10 Revenue in Construction for the nine months ended 2016 decreased by $9.6 million to $31.5 million, a decrease of 23% compared to $41.1 million for the same period in The majority of this decrease is as a result of reduced customer activity in the oil and gas sector, less work performed during the spring breakup, and the continuing impact of competitive pressure on rates. In addition, the impact of poor operating conditions has also had a significant impact on the ability of the Construction operating segment to generate revenue as several projects have been delayed. However, such delayed projects are expected to be completed throughout the remainder of 2016 and into Gross Margin Construction s Gross Margin for the three months ended 2016 decreased by $4.0 million to $1.6 million compared to $5.6 million for the same period in The Gross Margin Percentage decreased to 10% for the three months ended 2016, compared to 26% in the comparable period of The decrease in Gross Margin is primarily attributable to: (i) Reduced Revenues due to the negative impact of weather conditions relative to 2015, in addition to ongoing downward pressure on rates, revenues were reduced by $6.3 million compared to 2015; (ii) Equipment Rental Expense rental expense in the Construction division has increased by $0.6 million compared to This is attributable to equipment that has been sold and not replaced, and therefore must be rented internally or externally to satisfy customer demand; (i ii) Fuel and Oil despite the reduction in activity, fuel and oil expense increased by $0.2 million, or 4% as a percentage of revenue, compared to 2015 as a result of the nature and location of jobs being completed in Gross Margin in Construction for the nine months ended 2016 increased by $0.5 million to $4.1 million compared to $3.6 million for the same period in The Gross Margin Percentage increased to 13% for the nine months ended 2016, compared to 9% in the comparable period of This increase is primarily attributable to: (i) Camp and Subsistence camp and subsistence costs decreased by $1.5 million compared to 2015 as a result of the reduction in activity, in addition to the nature and location of jobs being completed. Subsistence costs to employees for several of the division s larger projects have not been required given the current labour environment, which has reduced the overall burden to the Company and increased margins; (ii) Personnel personnel costs have decreased by $3.8 million compared to 2015 due primarily to cost recoveries from PRHP, in addition to a general reduction in the workforce as a result of reduced activity. Average headcount in Construction for 2016 was 182 compared to 195 in Civil ($000 s) % change % change Revenue 17,951 26,574 (32%) 53,028 59,328 (11%) Operating expenses 15,220 21,968 (31%) 46,193 50,012 (8%) Gross Margin 1 2,731 4,606 (41%) 6,835 9,316 (27%) Gross Margin Percentage 1 15% 17% (2%) 13% 16% (3%) 1 See Non-IFRS Measures Petrowest Corporation Third Quarter Report

11 Revenue Civil s revenue for the three months ended 2016 decreased by $8.6 million to $18.0 million, a decrease of 32% compared to $26.6 million for the same period in This decrease was primarily the result of increased mobilization activity due to the nature and size of jobs to date in 2016, the negative impact of weather conditions relative to 2015, and ongoing downward pressure on rates. Revenue in Civil for the nine months ended 2016 decreased by $6.3 million to $53.0 million, a decrease of 11% compared to $59.3 million for the same period in This decrease was primarily the result of increased mobilization activity due to the nature and size of jobs to date in 2016, the negative impact of weather conditions relative to 2015, and ongoing downward pressure on rates. Gross Margin Civil s Gross Margin for the three months ended 2016 decreased to $2.7 million compared to $4.6 million for the same period in For the three months ended 2016, the Gross Margin Percentage decreased to 15% compared to 17% for the same period in This decrease in Gross Margin and Gross Margin Percentage is primarily a result of: (i) Reduced Revenues due to the negative impact of weather conditions relative to 2015, in addition to ongoing downward pressure on rates, revenues were reduced by $8.6 million compared to 2015; (ii) Equipment Leasing Expense leasing expense in the Civil division increased by $0.6 million compared to 2015 which is attributable to equipment sales made to date in 2016, and the replacement of previously owned equipment with leased equipment. Gross Margin in Civil for the nine months ended 2016 decreased by $2.5 million to $6.8 million compared to $9.3 million for the same period in For the nine months ended 2016, the Gross Margin Percentage decreased to 13% compared to 16% for the same period in This decrease in Gross Margin and Gross Margin Percentage is due to: (i) Reduced Revenues due to the negative impact of weather conditions relative to 2015, in addition to ongoing downward pressure on rates, revenues were reduced by $6.3 million compared to 2015; (i i) Equipment Leasing Expense leasing expense in the Civil division increased by $1.0 million compared to 2015 which is attributable to equipment sales made to date in 2016, and the replacement of previously owned equipment with leased equipment. Transportation ($000 s) % change % change Revenue 11,232 16,437 (32%) 27,484 41,985 (35%) Operating expenses 10,652 15,291 (30%) 27,724 40,161 (31%) Gross Margin ,146 (49%) (240) 1,824 (113%) Gross Margin Percentage 1 5% 7% (2%) 0% 4% (4%) 1 See Non-IFRS Measures Petrowest Corporation Third Quarter Report

12 Revenue Transportation s revenue for the three months ended 2016 decreased by $5.2 million to $11.2 million, a decrease of 32% compared to $16.4 million for the same period in This decrease in revenue for Transportation was primarily due to poor operating conditions as a result of the weather during the quarter, combined with ongoing economic challenges in the oil and gas sector. Revenue in Transportation for the nine months ended 2016 decreased by $14.5 million to $27.5 million, a decrease of 35% compared to $42.0 million for the same period in This decrease in revenue for Transportation was primarily due to poor operating conditions as a result of the weather during the period, combined with ongoing economic challenges in the oil and gas sector. Gross Margin Transportation s Gross Margin for the three months ended 2016 decreased by $0.5 million to $0.6 million compared to $1.1 million for the same period in For the three months ended 2016, the Gross Margin Percentage decreased to 5% compared to 7% for the same period in This decrease in Gross Margin is primarily a result of reduced activity levels due to poor operating conditions, and the fixed cost structure of operations. Gross Margin in Transportation for the nine months ended 2016 decreased by $2.1 million to a loss of $0.2 million compared to a positive margin of $1.8 million for the same period in For the nine months ended 2016, the Gross Margin Percentage decreased to a loss of 1% compared to a positive margin of 4% for the same period in This decrease in Gross Margin is primarily a result of reduced activity levels due to poor operating conditions, and the fixed cost structure of operations. Rentals ($000 s) % change % change Revenue 1, % 2,711 2,421 12% Operating expenses 1, % 3,820 2,790 37% Gross Margin 1 (484) (226) (114%) (1,109) (369) (200%) Gross Margin Percentage 1 (35%) (33%) (2%) (41%) (15%) (26%) 1 See Non-IFRS Measures Revenue Revenue in Rentals for the three and nine month periods ended 2016 was $1.4 million and $2.7 million, respectively, compared to $0.7 million and $2.4 million for the comparable periods of These increases are due primarily to equipment rentals to PRHP. Petrowest Corporation Third Quarter Report

13 Gross Margin Gross Margin loss in Rentals for the three months ended 2016 was $0.5 million compared to a Gross Margin loss of $0.2 million for the same period in Gross Margin loss in Rentals for the nine months ended 2015 was $1.1 million compared to a Gross Margin loss of $0.4 million for the same period in The increase in the Gross Margin loss is primarily due to start-up costs relating to a long-term contract recently entered-into for the purpose of supplying equipment for mining activities in northern Alberta, in addition to increased equipment rental costs incurred to replace equipment that has been sold or is otherwise being utilized. The Rentals division provides rentals both internally to the Company s other divisions and externally to clients. Typically the majority of the revenues generated by the Rentals division are internally generated and therefore are required to be eliminated upon consolidation. The elimination of these internally generated revenues and any associated intercompany expenses negatively impacts the consolidated gross margin for the Rentals division. The Rentals division results on an unconsolidated basis, which does not consider the elimination of the intracompany revenue and operating expenses, shows that the Rentals division would have generated a gross margin of 18% for the three months ended 2016 ( %) and 5% for the nine months ended 2016 ( %). Environmental ($000 s) % change % change Revenue 101 (100%) 112 1,223 (91%) Operating expenses (54%) (33%) Gross Margin 1 (47) (1) N/A (66) 957 (107%) Gross Margin Percentage 1 N/A (1%) N/A (59%) 78% (137%) 1 See Non-IFRS Measures Revenue Revenue in Environmental decreased for the three months ended 2016 by $0.1 million to $nil, as compared to $0.1 million for the same period in This decrease in revenue is due primarily to less remediation work performed in 2016 due to reduced demand from energy sector operators for hazardous waste remediation services. Revenue in Environmental decreased for the nine months ended 2016 by $1.1 million to $0.1 million, as compared to $1.2 million for the same period in This decrease in revenue is due primarily to less remediation work performed in 2016 due to reduced demand from energy sector operators for hazardous waste remediation services. Gross Margin Environmental s Gross Margin decreased for the three months ended 2016 to a loss of $47 thousand compared to a loss of $1 thousand for the same period in This decrease in Gross Margin is due primarily to less remediation work performed in 2016 due to reduced demand from energy sector operators for hazardous waste remediation services. Petrowest Corporation Third Quarter Report

14 Gross Margin in Environmental decreased for the nine months ended 2016 to a loss of $66 thousand compared to Gross Margin of $1.0 million for the same period in This decrease in Gross Margin is due primarily to less remediation work performed in 2016 due to reduced demand from energy sector operators for hazardous waste remediation services. Investment in Partnership Amounts are presented at 100% of the value included in the statement of comprehensive income (loss) for PRHP; Petrowest holds a 25% interest in PRHP. ($000 s) % change % change Revenue 41, % 75, % Operating expenses 40, % 73, % Net income before tax 1, % 2, % Corporate General and administrative The Company s general and administrative expenses for the three months ended 2016 were $0.9 million compared to $1.5 million in the comparable period of This decrease was due to cost recoveries received from PRHP and cost saving measures implemented by the Company in response to the slowdown of the oil and gas industry and resulting downturn in economic conditions. The Company s general and administrative expenses for the nine months ended 2016, were $2.8 million compared to $4.7 million in the comparable period of This decrease was due to cost recoveries received from PRHP and cost saving measures implemented by the Company in response to the slowdown of the oil and gas industry and resulting downturn in economic conditions. Share based compensation Share based compensation was $0.3 million and $0.8 million for the three and nine month periods ended 2016 compared to $0.4 million and $1.4 million for the same periods in 2015, respectively. Share based compensation fluctuates based on the effects of stock option vesting and forfeitures. Amortization Amortization of property and equipment for the three months ended 2016 was $5.8 million compared to $8.0 million for the same period in This decrease is primarily the result of a reduced property and equipment balance for the three months ended 2016 as compared to the same period in The reduced property and equipment balance is due to reduced capital spending and a number of capital asset dispositions which resulted in a reduced amortization expense. Petrowest Corporation Third Quarter Report

15 Amortization of property and equipment for the nine months ended 2016 was $18.4 million compared to $23.1 million for the nine months ended This decrease is primarily the result of a reduced property and equipment balance and due to reduced capital spending and a number of capital asset dispositions which resulted in a reduced amortization expense. Amortization of intangible assets for the three and nine months ended 2016 was $0.1 million and $0.4 million respectively, which was unchanged from the same periods in Finance expense ($000 s) Finance expense Bank and leasing interest and fees 1, ,413 3,219 Accretion of debt issue costs Accretion of decommissioning liabilities Finance expense 1,443 1,073 4,943 3,633 The Company s finance expense increased for the three months ended 2016 to $1.4 million from $1.1 million in the same period in 2015 primarily due to an increase in banking fees compared to the same period in 2015, as well as fee payments required in connection with the waivers obtained on the Syndicated Credit Facility. For the same reasons, the Company s finance expense increased for the nine months ended September 30, 2016 to $4.9 million from $3.6 million for the same period in Deferred income tax recovery The Company s deferred taxes are recognized for future tax consequences relating to differences between the carrying amounts of assets and liabilities on the Company s consolidated statements of financial position and the related tax basis. There are many complex factors which the Company must consider in the calculation of income taxes as well as the interpretation of current tax legislation and regulations. Deferred income tax assets are assessed by management at the end of each reporting period to determine the likelihood that they will be realized from future taxable earnings with the deferred tax asset recognized only if deemed recoverable. At 2016, the Company had an estimated $45.5 million ( December 31, 2015 $39.9 million) of non-capital tax losses, $2.4 million ( December 31, 2015 $2.4 million) of capital losses and $48.8 million (December 31, 2015 $62.8 million) of undepreciated capital cost available to carry forward. Approximately $9.0 million ( December 31, 2015 $8.2 million) of the non-capital losses and all of the $2.4 million (2015 $2.4 million) of capital losses are not recognized in the deferred tax asset. The non-capital losses expire in varying annual amounts between 2026 and Based on internal forecasts, management considers it probable that sufficient future taxable profits will be available against which the remaining non-capital losses recognized can be utilized. For the three months ended 2016, the Company had a deferred tax recovery of $0.7 million compared to a deferred tax recovery of $1.1 million in the same period for In the nine months ended 2016, the Company had a deferred tax recovery of $3.1 million compared to a deferred tax recovery of $4.5 million in the same period for Petrowest Corporation Third Quarter Report

16 SUMMARY OF QUARTERLY RESULTS Seasonality of Operations Petrowest s operations are conducted primarily in NW Alberta and NE BC and are susceptible to the impacts of seasonal weather in these regions. The first quarter is subject to frozen conditions and therefore it is typically an active quarter for Petrowest during periods where there is significant activity in the energy sector. The second quarter is generally the slowest quarter for Petrowest s operations, as the milder spring conditions result in soft, wet ground which makes remote sites inaccessible and generally requires the implementation of road bans which prevent heavy load transportation on public roadways. The third quarter usually reflects increased activity levels and typically generates the largest quarterly revenues with work relating to infrastructure projects, and oil and gas projects in areas that do not entail access through muskeg. The fourth quarter usually starts out similar to the summer months with activity typically ramping up as the ground freezes and road access is permitted. Increased construction activity in the fourth quarter is partially offset by the wind-down of civil activities. ($000 s, except per share amounts) Sept 30 June 30 Mar. 31 Total Dec. 31 Sept. 30 June 30 Mar. 31 Total Dec. 31 Revenue by segment Construction 15,186 8,874 7,485 31,545 16,084 21,498 9,902 9,655 57,139 21,602 Civil 17,951 18,011 17,066 53,028 12,214 26,574 20,938 11,816 71,542 24,554 Transportation 11,232 5,061 11,191 27,484 10,452 16,437 10,839 14,709 52,437 15,772 Rentals 1, , , Environmental ,101 2, Total Revenue 45,741 32,532 36, ,880 40,339 65,295 42,499 38, ,351 63,124 Operating expenses by segment Construction 13,608 6,205 7,606 27,419 15,053 15,942 11,623 9,891 52,509 19,208 Civil 15,220 16,920 14,053 46,193 11,241 21,968 15,069 12,975 61,253 18,928 Transportation 10,652 6,407 10,665 27,724 12,621 15,291 10,788 14,082 52,782 15,322 Rentals 1,856 1, , ,676 1,131 Environmental Total Operating expenses 41,383 30,626 33, ,334 40,012 54,214 38,486 37, ,697 54,707 G&A expenses ,184 2, ,487 1,733 1,490 4,901 1,071 Adjusted EBITDA (1) 3,500 1,121 2,098 6, ,594 2,280 (1,257) 10,753 7,346 Amortization of property and equipment 5,775 5,856 6,736 18,367 7,717 7,990 7,732 7,396 30,835 7,682 Amortization of intangible assets Impairment 8,471 (Gain) loss on disposal of assets (92) (599) (1,465) (2,156) (432) (246) (139) 36 (781) (196) Foreign exchange (gain) loss (1) (5) 8 (82) (81) Share based compensation , Gain from investment in partnership (303) (226) (38) (567) Finance income (8) (8) (13) (29) (20) (10) (8) (7) (5) (20) Finance expense 1,443 1,726 1,774 4,943 2,150 1,073 1,304 1,256 5,783 1,738 Net (loss) income before (3,717) (5,943) (5,363) (15,023) (10,138) 205 (7,206) (10,509) (27,647) (10,957) tax Income tax (recovery) expense (693) (986) (1,400) (3,079) (2,758) (778) (777) (2,666) (6,979) 85 Comprehensive (loss) income (3,024) (4,957) (3,963) (11,944) (7,380) 983 (6,429) (7,843) (20,668) (11,042) Net (loss) income per share - basic and diluted (0.01) (0.02) (0.02) (0.06) (0.04) 0.00 (0.04) (0.04) (0.12) (0.07) (1) See "Non-IFRS Measures" Petrowest Corporation Third Quarter Report

17 Quarterly Review Summary Quarterly performance is affected by, among other things, weather conditions, road bans, timing of projects, seasonality, market demand and timing of growth capital investments as well as acquisitions and contributions from those investments. These seasonal trends typically lead to quarterly fluctuations in operating results and working capital requirements, and as a result the financial results from one quarter are not necessarily indicative of financial results in other quarters. Q to Q change: Revenue decreased primarily due to poor operating conditions as a result of inclement weather, and the ongoing impact of competitive downward pressure on operating rates. Adjusted EBITDA was negatively impacted by the reduction in revenues, and the challenging operating conditions throughout the quarter. Q to Q change: Revenues decreased primarily due to poor operating conditions combined with ongoing economic challenges in the oil and gas sector. Adjusted EBITDA was negatively impacted by the reduction in revenues, and the ongoing challenges in the energy sector combined with competitive downward pressure on operating rates. Q to Q change: Revenues decreased slightly due to the continuing impact of low commodity prices and the resultant decrease in activity in addition to increased competitive pressure on operating rates. This reduction in revenues was partially offset by increased Civil revenues. Adjusted EBITDA improved despite the slight reduction in revenues due to increased margins in the Civil division relating to activity in the quarter (Regina ring road, Fort St. James mine) and reduced operating expenses (particularly fuel and operating personnel costs). Q to Q change: Revenues and Adjusted EBITDA were both negatively impacted due to the continued reduction in customer activity and competitive downward pressure on operating rates. Adjusted EBITDA was also impacted by $0.8 million in business development costs relating to acquisitions made in In October 2014 the Company acquired all of the issued and outstanding shares of CJM Trucking Ltd., Trans Carrier Ltd. and Trans Carrier Rentals Ltd. Net (loss) income in 2014 was impacted by impairment charges of $8.5 million. Petrowest Corporation Third Quarter Report

18 LIQUIDITY AND CAPITAL RESOURCES Liquidity risk is the risk that the Company will not be able to meet financial obligations at the point at which they are due. The Company monitors its liquidity position to ensure it has sufficient funds to complete capital and other expenditures and make the minimum required payments on its current debt facilities. In addition, the Company monitors funding options available in the capital markets, as well as trends in the availability and costs of such funding, with a view to maintaining financial flexibility and limiting repayment risks. The Company s liquidity position and capital resources are expected to be sufficient to finance its operations and working capital requirements for the foreseeable future. The Company s liquidity needs can be sourced in several ways including: Funds from Operations, borrowings against existing credit facilities, new debt instruments, equity issuances and proceeds from the sale of assets. Sources and Uses of Cash The Company s primary uses of funds include maintenance and replacement capital expenditures, acquisitions, payment of operating and general and administrative expenses, payment of interest and repayment of debt. ($000 s) Cash, beginning of period Sources of net cash: Funds from Operations 1 2,127 8,427 2,296 7,186 Issuance of common shares 10, Proceeds from long-term debt 9,694 25,538 14,294 91,590 Proceeds on property and equipment disposals 538 1,909 11,581 4,057 Total sources 12,359 35,874 38, ,858 Uses of net cash: Decrease in non-cash working capital 7,930 10,644 4,342 1,400 Repayment of contingent consideration Repayment of long-term debt 17,617 19,657 80,628 Repayment of finance lease obligations 2,361 4,336 8,197 9,717 Purchase of property and equipment 2,068 3,428 6,540 11,579 Total uses 12,359 36,038 38, ,455 Decrease in cash (164) (597) Cash, end of period (1) See "Non-IFRS Measures" Petrowest Corporation Third Quarter Report

19 Funds from Operations ($000 s) Cash flow (used in) provided by operating activities (5,803) (2,217) (2,046) 5,786 Add: decreases in non-cash working capital 7,930 10,644 4,342 1,400 Funds from Operations 1 2,127 8,427 2,296 7,186 1 See "Non-IFRS Measures" Funds from Operations are closely related to revenue, Adjusted EBITDA and general and administrative expenses. The decrease in Funds from Operations for the three months ended 2016 compared to the same period in 2015 is due primarily to reduced Adjusted EBITDA resulting from poor operating conditions during the quarter due to inclement weather, ongoing competitive downward pressure on rates and the economic slowdown generally. Funds from Operations decreased to $2.3 million for the nine months ended 2016 compared to $7.2 million for the same period in The reduction in Funds from Operations is primarily attributable to the reduction in Adjusted EBITDA for the period. The change in non-cash working capital items from operating activities is detailed in the table below: ($000 s) Sources (uses) of cash Trade and other receivables (13,428) (12,625) (11,364) (745) Prepaid expenses and other 972 1, Inventories 100 (887) (1,470) (1,076) Trade and other payables 4, ,757 (290) Changes in Non-Cash Working Capital (7,930) (10,644) (4,342) (1,400) During the three month period ended 2016 the Company used $7.9 million in cash from changes in non-cash working capital items as compared to $10.6 million during the same period in 2015, a decrease of $2.7 million which was mainly due to the factors listed below: $13.4 million of cash was used in trade and other receivables as a result of the Company generating more receivables than it collected (2015 $12.6 million); $1.0 million of cash was generated from the use of prepaid expenses and other (2015 $1.9 million); $0.1 million of cash was generated from the use of inventory (2015 $0.9 million cash used); and $4.4 million of cash was generated in accounts payable and accrued liabilities as a result of the Company paying less of its payables than it incurred (2015 $1.0 million). Petrowest Corporation Third Quarter Report

20 During the nine month period ended 2016 the Company used $4.3 million in cash from changes in non-cash working capital items as compared to $1.4 million during the same period in 2015, a decrease of $2.9 million which was mainly due to the factors listed below: $11.4 million of cash was used in trade and other receivables as a result of the Company generating more receivables than it collected (2015 $0.7 million); $0.7 million of cash was generated from the use of prepaid expenses and other (2015 $0.7 million); $1.5 million of cash was used on inventory purchases (2015 $1.1 million); and $7.8 million of cash was generated in accounts payable and accrued liabilities as a result of the Company paying less of its payables than it incurred (2015 $0.3 million cash used). Cash provided by (used in) Investing Activities ($000 s) Purchase of property and equipment (2,068) (3,428) (6,540) (11,579) Proceeds on property and equipment disposals 538 1,909 11,581 4,057 Cash provided by (used in) Investing Activities (1,530) (1,519) 5,041 (7,522) During the three and nine month periods ended 2016 cash provided by (used in) investing activities was $1.5 million used and $5.0 million generated respectively, as compared to $1.5 million used and $7.5 million used during the same periods, respectively, in Capital expenditures, which includes the purchase of property and equipment and property and equipment acquired through finance lease additions and excludes amounts incurred on business acquisitions, were as follows: ($000 s) Construction ,778 2,317 Civil 1,930 2,123 4,954 6,845 Transportation 352 1,104 1,677 2,645 Rentals Environmental Corporate Capital expenditures 3,028 4,086 8,808 13,003 Purchase of property and equipment 2,068 3,428 6,540 11,579 Finance lease liabilities additions ,268 1,424 Capital expenditures 3,028 4,086 8,808 13,003 Petrowest Corporation Third Quarter Report