QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2016

Transcription

1 QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2016 MANAGEMENT S DISCUSSION AND ANALYSIS May 4, 2016 The Management s Discussion and Analysis ( MD&A ) for Enerflex Ltd. ( Enerflex or the Company ) should be read in conjunction with the unaudited Interim Condensed Financial Statements for the three months ended March 31, 2016, the Company s 2015 Annual Report, the Annual Information Form for the year ended December 31, 2015, and the cautionary statement regarding forward looking information and statements on page 14 of this report. The MD&A focuses on information and key statistics from the unaudited Interim Condensed Financial Statements, and pertains to known risks and uncertainties relating to the oil and gas service sector. This discussion should not be considered all inclusive, as it excludes possible future changes that may occur in general economic, political and environmental conditions. FINANCIAL SUMMARY Three months ended March 31, ($ Canadian thousands) Total revenue $ 271,702 $ 455,521 Gross margin 46,382 83,533 Selling and administrative expenses 47,681 49,906 Operating income (1,299) 33,627 (Loss) earnings before finance costs and taxes ( EBIT ) (91,130) 36,986 Net (loss) earnings $ (93,565) $ 22,858 Key Financial Performance Indicators 1 Bookings $ 65,019 $ 140,600 Backlog $ 334,879 $ 715,132 Recurring revenue as a percentage of revenue % 28.2% Gross margin as a percentage of revenue 17.1% 18.3% EBIT (loss) gain as a percentage of revenue 2 (2.3)% 8.9% (Loss) earnings before interest, tax, depreciation and amortization ( EBITDA ) $ (68,514) $ 55,109 Return on capital employed (2.2)% 12.1% Cash from operations $ 50,367 $ 21,798 1 Key financial performance indicators used by Enerflex to measure its performance include revenue and EBIT. Certain of these key performance indicators are non GAAP measures and certain are additional GAAP measures. Further detail is provided in the Non GAAP Measures sections. 2 Determined by taking the trailing 12 month period. HIGHLIGHTS: FIRST QUARTER OF 2016 During the first quarter of 2016, the continuing commodity price challenges and reduced capital budgets for 2016 resulted in a decrease in bookings of $75.6 million across all three segments compared to the same period in 2015, with the most notable decrease of $55.4 million occurring in the United States of

2 Management s Discussion and Analysis America ( USA ). The movement in exchange rates had an unfavourable impact of $13.3 million on US dollar denominated bookings during the first quarter of 2016, compared to a favourable impact of $46.6 million for the first quarter of There were no project cancellations during the first quarter of Overall, backlog fell by $92.3 million during the quarter, as the lower booking levels were more than offset by Engineered Systems revenue. Service revenues decreased in the first quarter primarily in the Canada and Rest of World ( ROW ) segments, while Rental revenues increased with new projects that have come on stream in Latin America and the Middle East/Africa ( MEA ). Overall, recurring revenues were higher in the USA and ROW segments but lower in Canada. As a result of the prolonged downturn in commodity prices and the impact on customer capital budgets and activity levels, Enerflex has taken a number of steps in its Canadian segment to respond. These steps have included the closure of six service branches, a reduction in the scale of the retrofit business and reduced shifts at the two manufacturing locations in Calgary. The result has been a reduction in headcount of 70 during the quarter, severance costs of $3.1 million and restructuring costs of $2.3 million. In the USA, steps have been taken to further downsize the manufacturing and service operations, resulting in a headcount reduction of 145 and severance of $0.5 million. In the Rest of World segment, the previously announced restructuring of the Process Construction business in Australia continues as planned. In addition, further steps have been taken to trim headcount in the Rest of World segment. The result of these actions has been a reduction in headcount of 61, with additional severance costs of $0.3 million. Overall, during the quarter, headcount is down 276 to just under 2,100 and severance and restructuring costs have been recorded of $6.2 million. These additional steps taken during the quarter, along with other cost saving measures are anticipated to result in annualized savings of $35 to $40 million. Enerflex reviews the carrying value of its long lived assets including goodwill at each reporting period for indicators of impairment. During the period, a decline in market capitalization and further decreases in industry activity resulting from the uncertainty around oil and natural gas prices and the anticipated impact on operating budgets, were indicators of possible impairment and required the completion of an impairment test for goodwill. The recoverable amount of goodwill was determined using a multi year discounted cash flow with cash flow assumptions based on expected future results derived from the business planning process updated for recent forecasts. The Company recognized an impairment of $92.1 million for the goodwill reviewed during the first quarter of The goodwill impairment resulted from the uncertainty around commodity prices during the first quarter, the associated impact on customer capital budgets and therefore the outlook for activity in Canada in 2016 and beyond. During the second quarter of 2015, Enerflex initiated arbitration proceedings against Oman Oil Company Exploration and Production LLC ( OOCEP ) related to previously disclosed variation claims which were submitted to OOCEP, and to approximately $30.0 million in milestone payments which are overdue and remain unpaid. These variation claims were the result of customer driven scope and schedule changes which led to increased costs and delays with respect to the construction and delivery of a gas processing plant owned by OOCEP and located in the Sultanate of Oman. During April 2016, Enerflex submitted its detailed claim to the tribunal panel. As previously disclosed, Enerflex is currently unable to reasonably estimate when it expects this arbitration to be resolved. ENERFLEX 2016 Quarterly Report 2

3 Management s Discussion and Analysis During the quarter, the Company completed the fabrication and installation of a large rental project in the MEA region, which included the use and repurpose of just over 11,000 horsepower in previously idle compression capacity in the region. This project started to contribute rental revenue on almost 30,000 compression horsepower at the end of the first quarter, while the processing equipment is currently undergoing commissioning and is expected to contribute to revenue during the second quarter of The Company has now added approximately 105,000 horsepower in rental projects in the MEA and Latin America regions over the last 12 months, which will continue to contribute to increased recurring revenue going forward. Over the course of the first quarter, Enerflex generated $50.4 million of cash flows from operations, which included active management of working capital levels. Coupled with reduced capital expenditures, the Company reported reductions on its borrowings of $39.2 million. The resulting impact on net debt to EBITDA for covenant purposes has been positive because the decrease in net debt has more than offset the impact of the decrease in EBITDA for the trailing 12 month period. CONSOLIDATED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2016 The Company continues to assess and react to adverse market conditions and in the quarter has responded with further headcount and related restructuring actions, principally in Canada. Together with additional provisions for warranty and customer disputes, these initiatives have reduced EBIT by $18.2 million in the three months ended March 31, Enerflex has also recorded a $92.1 million goodwill impairment charge in the first quarter related to deteriorating market conditions for the Canada segment. Results from continuing operations for the three months ended March 31, 2016: Revenues from Continuing Operations during the first quarter of 2016 were $271.7 million compared to $455.5 million in the first quarter of The decrease of $183.8 million was due to $90.9 million lower revenue in the Canada segment and $97.2 million in the USA segment, partially offset by an increase in the ROW segment of $4.3 million. Please refer to the section Segment Results for additional information about results by geographic segment. Gross Margin for the three months ended March 31, 2016 was $46.4 million or 17.1% of revenue compared to $83.5 million or 18.3% of revenue for the same period of Gross margin decreased in all three segments. The decrease in gross margin percentage was attributable to reduced absorption of overheads from lower facilities utilization, to severance costs of $1.6 million, and costs related to on going warranty disputes, partially offset by project margin improvements on Engineered Systems jobs, and a greater proportion of higher margin recurring revenue during the first quarter of Severance costs of $0.5 million were recorded in the same quarter in SG&A expenses were $47.7 million during the three months ended March 31, 2016, compared to $49.9 million in the same period of The decrease was a result of lower compensation expense, partially offset by third party services as a result of customer disputes, unfavourable foreign exchange movements and restructuring costs. Compensation expense was reduced due to lower headcount, reduced incentive accruals based on decreased profitability, and the markto market impact of a larger decline in the share price during the first quarter of 2016 compared ENERFLEX 2016 Quarterly Report 3

4 Management s Discussion and Analysis to the same quarter in 2015, partially offset by severance costs. Restructuring and severance costs of $4.6 million were recorded compared to $1.3 million in the first quarter of Operating (Loss) Income during the first quarter of 2016 was $(1.2) million compared to $33.6 million in the same period of The decrease resulted from lower gross margin, partially offset by reduced SG&A expenses. EBIT for the first quarter of 2016 was a loss of $(91.1) million compared to earnings of $37.0 million in the same period of The decrease was due to lower operating income and the $92.1 million impairment of goodwill related to the Canada segment. The goodwill impairment, provisions for on going warranty disputes, customer legal disputes and severance and restructuring costs reduced EBIT by $110.4 million during the first quarter of The impact of severance and customer dispute costs during the first quarter of 2015 reduced EBIT by $2.8 million. Net (Loss) Earnings from Continuing Operations for the first quarter of 2016 were $(93.5) million or $(1.18) per share, compared to $23.5 million or $0.30 per share in the same period of Net earnings were lower due to the decrease in EBIT, partially offset by income tax recoveries compared to income tax expense in the first quarter of 2015, which were attributable to reduced earnings before tax and the impact of earnings taxed in foreign jurisdictions, partially offset by the effect of unrealized exchange rate fluctuations on tax bases in foreign jurisdictions. Net Loss from Discontinued Operations for the first quarter of 2016 was $(0.1) million or $0.00 per share, compared to $(0.7) million or $(0.01) per share in the same period of OUTLOOK The Company expects weak oil, natural gas liquids ( NGLs ) and natural gas commodity prices to continue through 2016, creating further uncertainty and likely resulting in further capital budget cuts and cost reduction initiatives by customers, as they seek to preserve financial flexibility and re position for profitable operations longer term. This would create significant uncertainty for bookings and activity levels and result in reduced demand for Enerflex products and services over the remainder of Notwithstanding the weaker markets, the Company s financial performance continues to benefit from the recurring revenue stream derived from existing and new long term rental and service contract progress, and from a geographically diversified business. Enerflex will look to continue to preserve awarded gross margins and to aggressively manage SG&A expenses. Steps taken during 2015 and into the first quarter of 2016 have allowed a greater focus on key market opportunities and resulted in a lower headcount over the remainder of 2016, which will lead to material savings in Engineered Systems Bookings and Backlog The Company monitors bookings and backlog as an indicator of future revenue and business activity levels for its largest product line, Engineered Systems. Bookings represent a firm commitment for new orders awarded to Enerflex during the period. Backlog represents unfulfilled orders at period end. ENERFLEX 2016 Quarterly Report 4

5 Management s Discussion and Analysis Bookings Three months ended March 31, ($ Canadian thousands) Canada $ 28,836 $ 29,681 USA 34,177 89,545 Rest of World 2,006 21,374 Total bookings $ 65,019 $ 140,600 Backlog March 31, December 31, ($ Canadian thousands) Canada $ 135,178 $ 150,928 USA 109, ,931 Rest of World 90, ,345 Total backlog $ 334,879 $ 427,204 Bookings were lower in the first quarter of 2016 for all segments. The weak commodity price environment has led many customers to defer capital investments. While some companies have proceeded with projects, activity has been drastically reduced and the competition for the reduced pipeline of work has intensified, putting pressure on awarded margins. Without a meaningful recovery in bookings during the second and third quarters of 2016, the Company will experience significant available production capacity and lower Engineered Systems revenue over the remainder of Outlook by Segment Canada High gas production levels in North America continue to increase gas storage levels, which are higher than both the previous year and the five year average, and ended the winter heating season at a record high. Since storage levels are expected to remain high, Enerflex expects continued downward pressure on natural gas prices. Prices are unlikely to recover in the near term. Power generation switching from coal to gas and the increase in gas fired power generation capacity along with coal plant retirements has provided some relief, but decreased heating degree days across North America during the winter have led to gas prices trending around US$2.00 per thousand cubic feet ( mcf ). Coupled with lower oil prices, the current commodity price environment is anticipated to result in reduced operating cash flows for customers, which in turn will result in continuing low activity levels through the remainder of Customers are expected to continue to defer projects until there is greater clarity to the commodity price environment. Consequently, there is significant uncertainty as to the extent and duration of the slowdown. USA The recent performance of the USA segment has been largely dependent on activity in liquids rich U.S. gas basins, which gave rise to new orders for compression and process equipment for this region. The significant decrease in oil prices, the impact on new production and therefore gas associated with oil production, and the unfavourable impact on NGL prices has and is expected to continue to depress activity into There is significant uncertainty as to the extent and duration of the slowdown. ENERFLEX 2016 Quarterly Report 5

6 Management s Discussion and Analysis Rest of World Enerflex is cautiously optimistic about the outlook in the Latin America region despite the political uncertainty that exists most notably in Brazil. The development of the Vaca Muerta shale play in Argentina in the short to medium term, and the on going Energy Reform in Mexico in the medium to long term, could generate unprecedented opportunities for Enerflex s products and services. In Brazil, the Company is seeing an increased interest for natural gas fuelled projects as a means to reduce dependency on hydroelectric power. This interest, coupled with the associated gas expected from pre salt oil production presents interesting opportunities for surface facilities. Additionally, infrastructure developments in Colombia, Peru and Bolivia, are expected to result in an increased Enerflex presence in these countries. Within the MEA region, three large rental projects totaling approximately 80,000 horsepower, have been completed and will contribute to results through the remainder of 2016 and beyond. In addition, the Company is pursuing a number of large Engineering Systems and recurring revenue opportunities in the region. ENERFLEX STRATEGY A summary of key strategic objectives is provided in the table below, along with a brief update on the performance against each objective to the end of the first quarter. The current weak market environment has precluded meaningful progress and assessment of several 2016 objectives Strategic Objective Performance to March 31, 2016 Status Establish and implement The current commodity price environment and the Behind target regional field service plans to grow Service revenue by 10%. impact on customer s behavior, and the loss of the General Electric distributorship have reduced demand for parts and service most notably in Canada. Service revenue is lower in the first quarter of 2016 compared to the same period in Grow bookings for gas processing solutions by 20%. Deploy 100% free cash flow on BOOM natural gas facilities. Continue progress in safety management programs and improve the Company wide total recordable injury rate ( TRIR ) to 1.00 in Achieve recurring revenue as a percentage of total revenue of 35 40%. Processing bookings are tracking below target although they are expected to increase over the remainder of The Company has deployed capital during the first quarter to complete the rental project in the MEA region and will assess new 2016 opportunities relative to internal return goals. The TRIR at March 31, 2016 was 0.73, which is 13% below the March 31, 2015 rate of 0.84 and 27% below the 2016 goal of Recurring revenue as a percentage of revenue for the period ended March 31, 2016 at 35.9% compares to a 28.2% recurring revenue percentage for the period ended March 31, 2015, calculated on a trailing 12 month basis. Behind target On going Ahead of target On target ENERFLEX 2016 Quarterly Report 6

7 Management s Discussion and Analysis 2016 Strategic Objective Performance to March 31, 2016 Status Align costs with revenue to EBIT margin turned negative for the period ended Below target progress towards the March 31, 2016 compared to 8.9% for the same medium term objective of a 10% EBIT margin. period in 2015, calculated on a trailing 12 month basis. Excluding the impact of goodwill impairment, severance and restructuring costs and customer legal disputes, EBIT was 9.1% for the trailing 12 months ended March 31, For the same period in 2015, excluding the impact of severance and acquisition costs, EBIT was 9.8%. CANADA SEGMENT RESULTS Three months ended March 31, ($ Canadian thousands) Segment revenue $ 62,101 $ 156,486 Intersegment revenue (950) (4,457) Revenue $ 61,151 $ 152,029 Revenue Engineered Systems $ 44,586 $ 113,556 Revenue Service $ 13,282 $ 31,404 Revenue Rental $ 3,283 $ 7,069 Operating (loss) income $ (11,403) $ 9,612 EBIT $ (101,217) $ 11,466 EBITDA $ (97,173) $ 15,711 Segment revenue as a % of total revenue 22.5% 33.4% Recurring revenue as a % of segment revenue 27.1% 25.3% Operating income as a % of segment revenue (18.6)% 6.3% EBIT as a % of segment revenue (165.5)% 7.5% EBITDA as a % of segment revenue (158.9)% 10.3% The Canada segment is sensitive to North American natural gas prices, which remained low during the first quarter of 2016, continuing the trend witnessed in The average quarterly Henry Hub price during the first quarter of 2016 was US$2.06/mcf compared to US$2.98/mcf in the same period of The decrease in revenue of $90.9 million for the three months ended March 31, 2016 compared to 2015 was attributable to lower revenue across all three product lines, largely driven by the current economic environment. Engineered Systems revenue was down on lower opening backlog, which was less than half the opening backlog in Service revenue was lower on reduced parts sales and service calls, while Rental revenue decreased due to lower revenues from contracts and reduced rental unit sales. Utilization levels by horsepower were 51% compared to 67% in the first quarter of Operating income for the first quarter of 2016 decreased by $21.0 million due to lower gross margin and higher SG&A expenses. The decrease in gross margin resulted primarily from lower revenues, in addition to increased inventory allowances, and severance costs of $1.2 million, partially offset by improved awarded margins due to the mix of engineered systems jobs. The ENERFLEX 2016 Quarterly Report 7

8 Management s Discussion and Analysis increase in SG&A expense was attributable to severance and restructuring costs of $4.2 million associated with service branch closures and headcount reductions in Canada, partially offset by reduced compensation expense on lower headcount compared to the first quarter of USA SEGMENT RESULTS Three months ended March 31, ($ Canadian thousands) Segment revenue $ 116,899 $ 243,226 Intersegment revenue (7,079) (36,169) Revenue $ 109,820 $ 207,057 Revenue Engineered Systems $ 77,514 $ 176,716 Revenue Service $ 28,561 $ 29,130 Revenue Rental $ 3,745 $ 1,211 Operating income $ 8,012 $ 11,202 EBIT $ 7,999 $ 12,675 EBITDA $ 11,875 $ 15,314 Segment revenue as a % of total revenue 40.4% 45.4% Recurring revenue as a % of segment revenue 29.4% 14.7% Operating income as a % of segment revenue 7.3% 5.4% EBIT as a % of segment revenue 7.3% 6.1% EBITDA as a % of segment revenue 10.8% 7.4% The USA segment is sensitive to prices for NGLs, which were lower in the first quarter of 2016 than experienced in the first quarter of 2015, and continued the trend of low prices experienced throughout For one such NGL, propane, the price on average during the first quarter of 2016 was US$0.48 per gallon compared to US$0.66 during the first quarter of The decrease in revenue of $97.2 million for the three months ended March 31, 2016 compared to 2015 resulted from lower Engineered Systems revenue on lower opening backlog, partially offset by higher Rental revenue due to an increase in revenue on customer contracts. Operating income decreased by $3.2 million during the first quarter of 2016 due to lower gross margin, partially offset by reduced SG&A expenses. Gross margin decreased primarily as a result of lower revenues, in addition to reduced absorption of overheads, to severance costs of $0.3 million, and lower warranty releases, partially offset by project margin improvements and a decrease in inventory allowances taken during the quarter. The decrease in SG&A expenses were primarily a result of lower compensation on reduced headcount, and a decrease in third party services, partially offset by severance costs of $0.2 million. ENERFLEX 2016 Quarterly Report 8

9 Management s Discussion and Analysis REST OF WORLD SEGMENT RESULTS Three months ended March 31, ($ Canadian thousands) Segment revenue $ 107,895 $ 96,506 Intersegment revenue (7,164) (71) Revenue $ 100,731 $ 96,435 Revenue Engineered Systems $ 35,244 $ 31,878 Revenue Service $ 30,231 $ 35,124 Revenue Rental $ 35,256 $ 29,433 Operating income $ 2,092 $ 12,813 EBIT $ 2,088 $ 12,845 EBITDA $ 16,784 $ 24,084 Segment revenue as a % of total revenue 37.1% 21.2% Recurring revenue as a % of segment revenue 65.0% 66.9% Operating income as a % of segment revenue 2.1% 13.3% EBIT as a % of segment revenue 2.1% 13.3% EBITDA as a % of segment revenue 16.7% 25.0% Rest of World revenue increased by $4.3 million in the first quarter due to higher Engineered Systems revenue despite lower opening backlog on higher activity in the Latin America and MEA regions, partially offset by reduced activity in Australia with the restructuring underway. Rental revenue was also higher with new rental projects in the Middle East and Latin America. Service revenue decreased during the quarter on lower activity in Australia and Asia, partially offset by increased activity with long term service contracts in the MEA region. Operating income decreased by $10.7 million in the first quarter as a result of lower gross margin and higher SG&A expenses. The decrease in gross margin was a result of lower absorption of overheads, to severance costs of $0.1 million, and provisions for on going warranty disputes, partially offset by margin improvements on jobs and higher revenue. SG&A expenses increased due to costs associated with unresolved customer disputes and unfavourable foreign exchange movements, partially offset by lower compensation expense on reduced headcount, partially offset by severance costs of $0.2 million. QUARTERLY SUMMARY (Loss) earnings per share basic (Loss) earnings per share diluted ($ Canadian thousands, except per share amounts) Revenue Net (loss) earnings March 31, $ 271,702 $ (93,477) $ (1.18) $ (1.18) December 31, ,548 (33,423) (0.42) (0.42) September 30, ,242 31, June 30, ,721 26, March 31, ,521 23, December 31, ,628 32, September 30, ,108 31, June 30, ,898 11, Amounts presented are from continuing operations. ENERFLEX 2016 Quarterly Report 9

10 Management s Discussion and Analysis NON GAAP MEASURES Three months ended March 31, ($ Canadian thousands) EBITDA (Loss) earnings before finance costs and taxes $ (91,130) $ 36,986 Depreciation and amortization 22,616 18,123 EBITDA $ (68,514) $ 55,109 Recurring Revenue Service $ 72,074 $ 95,658 Rental 42,284 37,713 Total Recurring Revenue $ 114,358 $ 133,371 ROCE Trailing 12 month EBIT $ (33,238) $ 163,752 Capital Employed beginning of period Net Debt (Cash) $ 420,559 $ 347,007 Shareholders' equity 1,158,040 1,019,982 $ 1,578,599 $ 1,366,989 Capital Employed end of period Net Debt $ 379,604 $ 395,658 Shareholders' equity 1,015,510 1,078,572 $ 1,395,114 $ 1,474,230 Average Capital Employed 1 $ 1,520,318 $ 1,250,833 Return on Capital Employed (2.2)% 12.1% 1 Based on a trailing five quarter average. ENERFLEX 2016 Quarterly Report 10

11 Management s Discussion and Analysis FINANCIAL POSITION The following table outlines significant changes in the Statements of Financial Position as at March 31, 2016 compared to December 31, 2015: ($ Canadian millions) Increase (Decrease) Explanation Working capital $(20.2) Accounts receivable and deferred revenue were lower due to reduced Engineered Systems activity over the first three months of 2016 as evidenced by the reduced backlog, while inventory was lower due to reduced service inventory levels and the conversion of work in process into revenue. Accounts payable was lower due to the settlement of trade payables associated with purchases for work in process, and the reduced accrued liabilities balance resulted from the payout of the year end profit share accrual. Rental equipment $(30.9) The decrease in rental assets is due to reduction in additions during the quarter, depreciation and a decrease in the movement of US exchange rate. Total assets $(216.5) The decrease in total assets is due to lower accounts receivable and rental equipment. In addition, goodwill decreased due to the impact of foreign exchange revaluation of assets allocated to the USA and Rest of World and impairment of $92.1 million booked for Canada. Long term debt $(38.8) The decrease in long term debt reflects repayments against the Company s Bank Facility, as well as the revaluation of US dollar denominated debt over the first three months of LIQUIDITY The Company expects that continued cash flows from operations in 2016, together with cash and cash equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets. Statements of Cash Flow Three months ended March 31, ($ Canadian thousands) Cash, beginning of period $ 158,081 $ 158,069 Cash (used in) provided by: Operating activities 50,367 21,967 Investing activities (561) (67,526) Financing activities (45,560) (3,287) Exchange rate changes on foreign currency cash (2,072) 2,636 Cash, end of period $ 160,255 $ 111,859 ENERFLEX 2016 Quarterly Report 11

12 Management s Discussion and Analysis Operating Activities The increase in cash from operating activities in the first quarter of 2016 was due to higher cash inflows associated with working capital changes, in addition to earnings from operations for the quarter. Investing Activities Cash used in investing activities in the first quarter of 2016 was lower with the fabrication of rental assets largely complete compared to the first quarter of 2015, when a number of rental fleet fabrication projects were underway. RISK MANAGEMENT In the normal course of business, the Company is exposed to financial and operating risks that may potentially impact its operating results. The Company employs risk management strategies with a view to mitigating these risks on a cost effective basis. The Company enters into derivative financial agreements to manage exposure to fluctuations in exchange rates and interest rates, but not for speculative purposes. There have been no significant changes in risk since the 2015 Annual Report other than those described below: Project Execution Risk The Company has made progress with an integrated project risk management framework with a focus on large projects involving multiple business units and geographies. This has been achieved in part by leveraging the knowledge of seasoned executives, with extensive project experience, a focus on improved project management processes, and through improved project governance with the establishment of a Risk Committee comprised of key management personnel that meets on a regular basis. Enerflex remains focused on preserving booked margins and achieved an overall pick up in project margins for all three segments during the quarter. During the early part of 2016, the Company also completed the implementation of SAP for some of its operations in Latin America with the remainder to be completed in the second half of Once achieved, this completes the implementation of SAP across Enerflex. Energy Prices and Industry Conditions There continues to be significant uncertainty and volatility in the oil and gas industry. While oil and NGL prices have somewhat stabilized in the first quarter, they continue to be very low, with the real possibility of further volatility. Gas prices continued to trend at low levels during the quarter, which coupled with the current oil price environment creates significant risk that industry capital expenditures will continue to be restrained. The Company has been proactive in maintaining financial flexibility, restructuring and implementing cost saving initiatives and maintaining diversification of its revenue streams; but there is still high risk of reduced demand for Enerflex s products and services, which could have a significant effect on its results of operations. Credit Risk The Company has remained diligent during the quarter in assessing credit levels granted to customers, monitoring the aging of receivables and proactively collecting outstanding balances. The challenging economic conditions have resulted in financial failures in the industry but Enerflex has been able to maintain very low levels of doubtful debts, and during the first quarter recorded a small increase in the allowance for doubtful accounts. For the three months ended March 31, ENERFLEX 2016 Quarterly Report 12

13 Management s Discussion and Analysis 2016, the Company had no individual customers which accounted for more than 10% of its revenue. CAPITAL RESOURCES On May 1, 2016, Enerflex had 79,196,942 shares outstanding. Enerflex has not established a formal dividend policy and the Board of Directors anticipates setting the quarterly dividends based on the availability of cash flow and anticipated market conditions, taking into consideration business opportunities and the need for growth capital. There have been no changes in the quarter involving the Company s syndicated revolving credit facilities ( Bank Facility ). Further information on the Bank Facility is provided in Note 7 to the Interim Condensed Financial Statements. FUTURE ACCOUNTING PRONOUNCEMENTS IFRS 9 Financial Instruments sets out the requirements for the classification and measurement of financial assets and liabilities and a substantially reformed approach to hedge accounting. The new Standard will come into effect on January 1, IFRS 15 Revenue from Contracts with Customers specifies how and when to recognize revenue, as well as requiring entities to provide users of financial statements with more informative, relevant disclosures. The standard supersedes IAS 18 Revenue, IAS 11 Construction Contracts and a number of revenue related interpretations. IFRS 15 will be effective for annual periods beginning on or after January 1, Application of the standard is mandatory and early adoption is permitted. IFRS 16 Leases sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract. The standard supersedes IAS 17 Leases and lease related interpretations. IFRS 16 will be effective for annual periods beginning on or after January 1, Application of the standard is mandatory and early adoption is permitted only if applied with IFRS 15. The Company has commenced its assessment of the impact of the new standards but has not yet determined the impact of these standards on the Company s Interim Condensed Financial Statements. RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS Management is responsible for the information disclosed in this MD&A and the accompanying Interim Condensed Financial Statements, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company s Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the Interim Condensed Financial Statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures ( DC&P ) and internal control over financial reporting ( ICFR ). ENERFLEX 2016 Quarterly Report 13

14 Management s Discussion and Analysis INTERNAL CONTROLS OVER FINANCIAL REPORTING There have been no significant changes in the design of the Company s ICFR during the three month period ended March 31, 2016, that would materially affect, or is reasonably likely to materially affect the Company s ICFR. SUBSEQUENT EVENT Subsequent to March 31, 2016, the Company declared a dividend of $0.085 per share, payable on July 7, 2016, to shareholders of record on May 17, FORWARD LOOKING STATEMENTS This MD&A contains forward looking statements, which are based on certain assumptions and analyses made by the Company derived from its experience and perceptions. For further information on the nature of forwardlooking statements, and the related risks, uncertainties and assumptions, refer to the Company s MD&A for the year ended December 31, The forward looking statements in this MD&A, primarily in the Outlook and Enerflex Strategy sections, are subject to important risks, uncertainties, and assumptions, which are difficult to predict and which may affect the Company s operations. The critical risks, uncertainties, and assumptions relating to these sections, include, without limitation: the impact of economic conditions including volatility in the price of oil, gas, and natural gas liquids, interest rates and foreign exchange rates; industry conditions including supply and demand fundamentals for oil and gas, and the related infrastructure; the ability to continue to build and improve on proven manufacturing capabilities and innovate into new product lines and markets; increased competition; insufficient funds to support capital investments required to grow the business; the lack of availability of qualified personnel or management; and political unrest. As such, actual results, performance, or achievements could differ materially from those expressed in, or implied by, these forward looking statements and accordingly, no assurance can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds or dividends the Company and its shareholders, will derive therefrom. The forward looking statements included in this MD&A are made as of the date of this MD&A and other than as required by law, the Company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. ENERFLEX 2016 Quarterly Report 14

15 Interim Condensed Financial Statements INTERIM CONDENSED STATEMENTS OF FINANCIAL POSITION (unaudited) ($ Canadian thousands) March 31, 2016 December 31, 2015 Assets Current assets Cash and cash equivalents $ 160,255 $ 158,081 Accounts receivable 276, ,270 Inventories (Note 3) 199, ,099 Income taxes receivable 6,634 7,937 Derivative financial instruments (Note 10) 298 1,131 Other current assets 9,650 10,547 Total current assets 652, ,065 Property, plant and equipment (Note 4) 129, ,979 Rental equipment (Note 4) 418, ,249 Deferred tax assets 50,685 41,714 Other assets 52,498 58,177 Intangible assets 42,628 44,301 Goodwill (Note 5) 632, ,604 1,978,843 2,195,089 Assets held for sale (Note 2) 13,966 14,175 Total assets $ 1,992,809 $ 2,209,264 Liabilities and Shareholders Equity Current liabilities Accounts payable and accrued liabilities $ 217,128 $ 245,459 Provisions (Note 6) 27,088 25,228 Income taxes payable 6,502 3,259 Deferred revenues 131, ,509 Current portion of long term debt (Note 7) 50,500 50,500 Derivative financial instruments (Note 10) Total current liabilities 433, ,877 Long term debt (Note 7) 489, ,140 Decommissioning liability 8,181 8,548 Deferred revenues Deferred tax liabilities 37,824 36,833 Other liabilities 7,584 8, ,011 1,050,919 Liabilities related to assets held for sale (Note 2) Total liabilities $ 977,299 $ 1,051,224 Shareholders equity Share capital $ 239,153 $ 238,580 Contributed surplus 653, ,120 Retained earnings 15, ,397 Accumulated other comprehensive income 105, ,969 Total shareholders equity before non controlling interest 1,013,423 1,154,066 Non controlling interest 2,087 3,974 Total shareholders equity and non controlling interest 1,015,510 1,158,040 Total liabilities and shareholders equity $ 1,992,809 $ 2,209,264 See accompanying Notes to the Interim Condensed Financial Statements, including guarantees, commitments and contingencies (Note 13). ENERFLEX 2016 Quarterly Report 15

16 Interim Condensed Financial Statements INTERIM CONDENSED STATEMENTS OF (LOSS) EARNINGS (unaudited) Three months ended March 31, ($ Canadian thousands, except per share amounts) Revenue (Note 12) $ 271,702 $ 455,521 Cost of goods sold 225, ,988 Gross margin 46,382 83,533 Selling and administrative expenses 47,681 49,906 Operating (loss) income (1,299) 33,627 Gain on disposal of property, plant and equipment 7 1,504 Equity earnings from associate and joint venture 2,254 1,855 Impairment of goodwill (92,092) (Loss) earnings before finance costs and income taxes (91,130) 36,986 Net finance costs 4,182 3,613 (Loss) earnings before income taxes (95,312) 33,373 Income taxes (Note 8) (1,835) 9,825 Net (loss) earnings from continuing operations (93,477) 23,548 Loss from discontinued operations (Note 2) (88) (690) Net (loss) earnings $ (93,565) $ 22,858 Net (loss) earnings attributable to: Controlling interest $ (93,270) $ 21,214 Non controlling interest (295) 1,644 $ (93,565) $ 22,858 (Loss) earnings per share basic Continuing operations $ (1.18) $ 0.30 Discontinued operations $ (0.00) $ (0.01) (Loss) earnings per share diluted Continuing operations $ (1.18) $ 0.30 Discontinued operations $ (0.00) $ (0.01) Weighted average number of shares basic 79,178,075 78,672,137 Weighted average number of shares diluted 79,182,222 79,103,317 esee accompanying Notes to the Interim Condensed Financial Statements. ENERFLEX 2016 Quarterly Report 16

17 Interim Condensed Financial Statements INTERIM CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited) See accompanying Notes to the Interim Condensed Financial Statements. Three months ended March 31, ($ Canadian thousands) Net (loss) earnings $ (93,565) $ 22,858 Other comprehensive (loss) income: Other comprehensive (loss) income that may be reclassified to profit or loss in subsequent periods: Change in fair value of derivatives designated as cash flow hedges, net of income tax recovery (2016: $(26); 2015: $(559)) (219) (1,994) Gain on derivatives designated as cash flow hedges transferred to net earnings in the current year, net of income tax expense 1, (2016: $304; 2015: $74) Unrealized gain (loss) on translation of foreign denominated debt 21,395 (29,818) Unrealized (loss) gain on translation of financial statements of foreign operations (65,018) 71,999 Other comprehensive (loss) income $ (42,826) $ 40,369 Total comprehensive (loss) income $ (136,391) $ 63,227 Total comprehensive (loss) income attributable to: Controlling interest $ (41,234) $ 41,189 Non controlling interest (1,592) (820) $ (42,826) $ 40,369 ENERFLEX 2016 Quarterly Report 17

18 Interim Condensed Financial Statements INTERIM CONDENSED STATEMENTS OF CASH FLOWS (unaudited) Three months ended March 31, ($ Canadian thousands) Operating Activities Net (loss) earnings $ (93,565) $ 22,858 Items not requiring cash and cash equivalents: Depreciation and amortization 22,616 18,505 Goodwill impairment 92,092 Equity earnings from associate and joint venture (2,254) (1,855) Deferred income taxes (Note 8) (6,600) (62) Share based compensation (recovery) expense (Note 9) (724) 823 Gain on sale of property, plant and equipment (23) (1,506) 11,542 38,763 Net change in non cash working capital and other (Note 11) 38,825 (16,796) Cash provided by operating activities $ 50,367 $ 21,967 Investing Activities Additions to: Property, plant and equipment (Note 4) $ (1,309) (7,483) Rental equipment (Note 4) (9,552) (71,238) Proceeds on disposal of: Property, plant and equipment 174 2,847 Rental equipment 537 4,649 Change in other assets 9,589 3,699 Cash used in investing activities $ (561) $ (67,526) Financing Activities (Repayment of) proceeds from long term debt $ (39,223) $ 2,021 Dividends (6,726) (6,680) Stock option exercises 389 1,372 Cash used in financing activities $ (45,560) $ (3,287) Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies $ (2,072) $ 2,636 Increase (decrease) in cash and cash equivalents 2,174 (46,210) Cash and cash equivalents, beginning of period 158, ,069 Cash and cash equivalents, end of period $ 160,255 $ 111,859 See accompanying Notes to the Interim Condensed Financial Statements. ENERFLEX 2016 Quarterly Report 18

19 Interim Condensed Financial Statements INTERIM CONDENSED STATEMENTS OF CHANGES IN EQUITY (unaudited) ($ Canadian thousands) Share capital Contributed surplus Retained earnings Foreign currency translation adjustments Hedging reserve Accumulated other comprehensive income Total shareholders equity before noncontrolling interest Noncontrolling interest Total At January 1, 2015 $ 229,534 $ 653,624 $ 96,503 $ 38,765 $ (1,946) $ 36,819 $ 1,016,480 $ 3,502 $ 1,019,982 Net earnings 21,214 21,214 1,644 22,858 Other comprehensive income (loss) 43,001 (1,812) 41,189 41,189 (820) 40,369 Effect of stock option plans 2,113 (60) 2,053 2,053 Dividends (6,690) (6,690) (6,690) At March 31, 2015 $ 231,647 $ 653,564 $ 111,027 $ 81,766 $ (3,758) $ 78,008 $ 1,074,246 $ 4,326 $ 1,078,572 At January 1, 2016 $ 238,580 $ 653,120 $ 115,397 $ 149,124 $ (2,155) $ 146,969 $ 1,154,066 $ 3,974 $ 1,158,040 Net (loss) earnings (93,270) (93,270) (295) (93,565) Other comprehensive (loss) income (42,031) 797 (41,234) (41,234) (1,592) (42,826) Effect of stock option plans Dividends (6,731) (6,731) (6,731) At March 31, 2016 $ 239,153 $ 653,139 $ 15,396 $ 107,093 $ (1,358) $ 105,735 $ 1,013,423 $ 2,087 $ 1,015,510 See accompanying Notes to the Interim Condensed Financial Statements. ENERFLEX 2016 Quarterly Report

20 Notes to the Consolidated Financial Statements (All amounts in thousands of Canadian dollars, except per share amounts or as otherwise noted.) Note 1. Summary of Significant Accounting Policies (a) Statement of Compliance These Interim Condensed Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting ( IAS 34 ) using accounting policies consistent with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). These Interim Condensed Financial Statements were approved and authorized for issue by the Board of Directors on May 4, (b) Basis of Presentation and Measurement These Interim Condensed Financial Statements for the three months ended March 31, 2016 and 2015 were prepared in accordance with IAS 34 and accordingly, do not include all the disclosures included in the Company s Annual Consolidated Financial Statements for the year ended December 31, Accordingly, these Interim Condensed Financial Statements should be read in conjunction with the Annual Consolidated Financial Statements. Certain prior year amounts have been reclassified to conform with the current period s presentation. Effective January 1, 2015, the Company realigned its reporting segments into the following categories: Canada, United States of America ( USA ) and Rest of World segments. The USA segment now includes the Northern United States Service business, as well as the Retrofit and Rentals operations based out of Casper, Wyoming both of which were previously reported in the Canada and Northern United States segment. The Rest of World segment includes what was previously the Latin American Engineered Systems, After Market Service and Rental businesses combined with what was previously the International segment. The Company reallocated goodwill using the relative fair value approach for the revised reportable segments described above. These Interim Condensed Financial Statements are presented in Canadian dollars rounded to the nearest thousands, except per share amounts or as otherwise noted, and are prepared on a going concern basis under the historical cost convention with certain financial assets and financial liabilities recorded at fair value. There have been no significant changes in accounting policies compared to those described in the Annual Consolidated Financial Statements for the year ended December 31, 2015, other than those identified below under New Standards, Interpretations and Amendments. (c) New Policies, Standards, Interpretations and Amendments The Company continues to assess the impact of adopting the following pronouncements from the IASB: IFRS 9 Financial Instruments sets out the requirements for the classification and measurement of financial assets and liabilities and a substantially reformed approach to hedge accounting. The new Standard will come into effect on January 1, IFRS 15 Revenue from Contracts with Customers specifies how and when to recognize revenue, and introduces more informative relevant disclosures. The standard supersedes IAS 18 Revenue, IAS 11 Construction Contracts, and a number of revenue related interpretations. IFRS 15 will be effective for annual periods beginning on or after January 1, Application of the standard is mandatory and early adoption is permitted. ENERFLEX 2016 Quarterly Report 20

21 Notes to the Consolidated Financial Statements IFRS 16 Leases sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract. The standard supersedes IAS 17 Leases and lease related interpretations. IFRS 16 will be effective for annual periods beginning on or after January 1, Application of the standard is mandatory and early adoption is permitted only if applied with IFRS 15. The Company has commenced its assessment of the impact of the new standards but has not yet determined the impact of these standards on the Company s interim condensed financial statements. Note 2. Assets held for sale and discontinued operations On February 3, 2015, the Company announced its intention to close the Production and Processing ( P&P ) manufacturing facility in Nisku, Alberta and exit the oil sands modular fabrication business. The business unit completed the fabrication of projects at the end of June The following table summarizes the revenues and loss from discontinued operations: Three months ended March 31, Revenue $ $ 19,802 Expenses ,735 Loss before income taxes (120) (933) Income taxes (32) (243) Loss from discontinued operations $ (88) $ (690) The following table summarizes cash from discontinued operations: Three months ended March 31, Cash used in operating activities $ (215) $ (7,923) Cash provided by (used in) investing activities $ 215 $ (121) Net cash flow for the period $ $ (8,044) At March 31, 2016 P&P s assets were stated at the lower of cost and fair value less costs to sell and were comprised of the following: March 31, 2016 December 31, 2015 Property, plant and equipment $ 13,959 $ 14,156 Other current assets 7 19 Assets held for sale $ 13,966 $ 14,175 Accounts payable and accrued liabilities $ 288 $ 305 Liabilities related to assets held for sale $ 288 $ 305 ENERFLEX 2016 Quarterly Report 21

22 Notes to the Consolidated Financial Statements Note 3. Inventories Inventories consisted of the following: March 31, 2016 December 31, 2015 Equipment $ 15,097 $ 16,650 Repair and distribution parts 54,958 58,886 Direct materials 63,706 67,174 Work in process 65,280 57,389 Total inventories $ 199,041 $ 200,099 The amount of inventory and overhead costs recognized as an expense and included in cost of goods sold for the three months ended March 31, 2016 was $225.3 million (March 31, 2015 $372.0 million). Cost of goods sold includes inventory write downs pertaining to obsolescence and aging together with recoveries of past write downs upon disposition. The net amount charged to the interim condensed statement of earnings and included in cost of goods sold for the three months ended March 31, 2016 was $3.0 million (March 31, 2015 $0.6 million). Note 4. Property, Plant and Equipment and Rental Equipment During the three months ended March 31, 2016, the Company acquired $1.3 million in property, plant and equipment (March 31, 2015 $7.5 million) and $9.6 million in rental equipment (March 31, 2015 $71.2 million). Depreciation of property, plant and equipment and rental equipment included in earnings for the three months ended March 31, 2016 was $20.3 million (March 31, 2015 $14.6 million), of which $18.8 million was included in cost of goods sold and $1.5 million was included in selling and administrative expenses (March 31, 2015 $13.0 million and $1.6 million, respectively). Impairment of property, plant and equipment and rental equipment included in earnings for the three months ended March 31, 2016 was $0.1 million (March 31, 2015 nil). The impairment relates to write down of assets primarily in the Canada segment due to obsolescence and onerous lease. Note 5. Goodwill and Impairment Review of Goodwill March 31, 2016 December 31, 2015 Balance, January 1 $ 748,604 $ 707,913 Adjustment 4,363 Impairment (92,092) (36,900) Currency translation effects (24,360) 73,228 Closing Balance $ 632,152 $ 748,604 Goodwill acquired through business combinations has been allocated to the Canada, USA and Rest of World business segments, and represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. ENERFLEX 2016 Quarterly Report 22

23 Notes to the Consolidated Financial Statements In assessing whether goodwill has been impaired, the carrying amount of the segment (including goodwill) is compared with its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. The recoverable amounts for the segments have been determined based on value in use calculations, using discounted cash flow projections as at December 31, Management has adopted a four year projection period to assess each segment s value in use. The cash flow projections are based on financial budgets approved by the Board of Directors. The Board approved budget has been updated based on changes in assumptions and forecasts approved by management at March 31, Key Assumptions Used in Value In Use Calculations: The calculation of value in use for the Company s segments is most sensitive to the following assumptions: Earnings Before Finance Costs and Taxes: Management has made estimates relating to the amount and timing of revenue recognition for projects included in backlog, and the assessment of the likelihood of maintaining and growing market share. For each 1.0% change in earnings before finance costs and taxes, the average impact on the value in use of the Company s three segments would be $3.5 million; and Discount Rate: Management has used an average post tax discount rate of 10.50% per annum (10.42% per annum December 31, 2015) which is derived from the estimated weighted average cost of capital of the Company. This discount rate has been calculated using an estimated risk free rate of return adjusted for the Company s estimated equity market risk premium, the Company s cost of debt, and the tax rate in the local jurisdiction. For each 1.0% change in the discount rate, the average impact on the value in use of the Company s three segments would be $48.8 million. The Company completed its assessment for goodwill impairment and determined that the recoverable amount for the USA and Rest of World segments exceeded the carrying amount using a 9.91% and 12.55% post tax discount rate, respectively. However, the Canada segment s recoverable amount was determined to be less than its carrying value of $374.0 million using a 9.03% post tax discount rate. This resulted in a goodwill impairment charge of $92.1 million for the period ended March 31, The impairment in the Canada segment was primarily triggered by a continued decline in commodity prices and reduced customer capital budgets resulting in lower activity levels. Management notes that the USA segment is sensitive to a change in discount rate. The discount rate assigned to the USA segment is 9.91% (9.91% December 31, 2015) and provides a cushion of $17.9 million at March 31, 2016 as an impairment of $36.9 million was previously recorded at December 31, The recoverable amount will equal the carrying value if the discount rate were to change by 0.59%. A reasonable change in assumptions for the Rest of World segment would not trigger an impairment. ENERFLEX 2016 Quarterly Report 23

24 Notes to the Consolidated Financial Statements Note 6. Provisions March 31, 2016 December 31, 2015 Warranty provision $ 18,111 $ 20,208 Restructuring provision 4,437 2,623 Legal provision Onerous lease provision 4,480 2,347 $ 27,088 $ 25,228 During the first quarter of 2016, the Company committed to, and started to implement, a plan to restructure the Canadian business segment due to deteriorating economic circumstances. The Company recognized a restructuring provision of $3.1 million for expected severance costs. The Company s restructuring provision also includes remaining severance amounts related to the restructuring of the Process Construction business in Australia, accrued at December 31, The Company previously entered into non cancellable leases for several office spaces in Alberta, Canada and one office space in Ontario, Canada. Due to the restructuring of the Gas Drive Service business, the Company stopped using the premises in March The majority of the leases will expire in An office space that was leased in Edmonton, Alberta will expire in The Company intends to sub let this space but at a discount to the lease payments. The resulting provision of $2.3 million represents the future payments for all the non cancellable leases and associated costs, net of anticipated sub lease recoveries. The provision also includes amounts related to onerous leases previously accrued for the restructuring of the Process Construction business in Australia. Note 7. Long Term Debt The composition of the borrowings on the Bank Facility and the Notes was as follows: March 31, 2016 December 31, 2015 Drawings on Bank Facility $ 454,030 $ 492,953 Notes due June 22, ,500 50,500 Notes due June 22, ,000 40,000 Deferred transaction costs (4,671) (4,813) Subtotal $ 539,859 $ 578,640 Less: current portion of long term debt 50,500 50,500 $ 489,359 $ 528,140 The weighted average interest rate on the Bank Facility for the three months ended March 31, 2016 was 2.3% (December 31, %). At March 31, 2016, without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $504.5 million, and $40.0 million thereafter. ENERFLEX 2016 Quarterly Report 24

25 Notes to the Consolidated Financial Statements Note 8. Income Taxes (a) Income Tax Recognized in Net Earnings The components of income tax expense were as follows: Three months ended March 31, Current income taxes $ 4,733 $ 9,644 Deferred income taxes (6,568) 181 $ (1,835) $ 9,825 (b) Reconciliation of Tax Expense The provision for income taxes differs from that which would be expected by applying Canadian statutory rates. A reconciliation of the difference is as follows: Three months ended March 31, Loss earnings before income taxes $ (95,312) $ 33,373 Canadian statutory rate 27.0% 25.0% Expected income tax provision (25,734) 8,343 Add (deduct): Impairment of goodwill not deductible for tax purposes 24,865 Exchange rate effects on tax basis 4,424 Earnings taxed in foreign jurisdictions (4,913) 2,113 Expenses not deductible for tax purposes Impact of accounting for associates and joint ventures (528) (874) Other (31) 47 Income taxes $ (1,835) $ 9,825 The Company s effective tax rate is subject to fluctuations in the Argentine Peso and Mexican Peso exchange rate against the U.S. Dollar. Since the Company holds significant rental assets in Argentina and Mexico, the tax base of these assets is denominated in Argentine Peso and Mexican Peso, respectively. The functional currency is, however, the U.S. Dollar and as a result, the related local currency tax bases are revalued periodically to reflect the closing U.S. dollar rate against these currencies. Any movement in the exchange rate results in a corresponding unrealized exchange rate gain or loss being recorded as part of deferred income tax expense or recovery. During periods of large fluctuation or devaluation of the local currency against the U.S. Dollar, these amounts may be significant but are unrealized and may reverse in the future. Recognition of these amounts is required by IFRS, even though the revalued tax basis does not generate any cash tax obligation or liability in the future. The Canadian statutory rate is the aggregate of the Canadian federal income tax rate of 15.0% ( %) and the provincial income tax rate of 12.0% ( %). ENERFLEX 2016 Quarterly Report 25

26 Notes to the Consolidated Financial Statements Note 9. Share Based Compensation The share based compensation (recovery) expense included in the determination of net earnings was: Three months ended March 31, Equity settled share based payments $ 204 $ 682 Cash settled share based payments (928) 141 Share based compensation (recovery) expense $ (724) $ 823 Deferred share units ( DSUs ), phantom share rights ( SARs ), performance share units ( PSUs ), restricted share units ( RSUs ) and cash performance target plan ( CPTP ) are all classified as cash settled share based payments. Stock options are equity settled share based payments. The Company did not grant any PSUs, DSUs, RSUs, SARs or CPTP to its employees during the first three months of The RSU, PSU and DSU holders had dividends credited to their account during the period. The carrying amount of the liability relating to all cash settled share based payments as at March 31, 2016 included in Current Liabilities was $2.6 million (December 31, 2015 $2.5 million) and in Other Long Term Liabilities was $5.5 million (December 31, 2015 $6.1 million). (a) Equity Settled Share Based Payments March 31, 2016 December 31, 2015 Weighted average Number of exercise price options Number of options Weighted average exercise price Options outstanding, beginning of period 2,776,268 $ ,550,224 $ Granted 781, Exercised 1 (40,450) 9.61 (538,466) Forfeited (5,000) (15,082) Expired (134,886) (1,500) Options outstanding, end of period 2,595,932 $ ,776,268 $ Options exercisable, end of period 1,078,040 $ ,156,525 $ The weighted average share price of option at the date of exercise at the period ended March 31, 2016 was $11.86 (March 31, 2015 $15.66) The following table summarizes options outstanding and exercisable at March 31, 2016: Options Outstanding Options Exercisable Weighted average Weighted average Weighted average Range of exercise prices Number outstanding remaining life (years) exercise price Number outstanding remaining life (years) Weighted average exercise price $11.04 $ ,231, $ , $ $11.77 $ , , $13.66 $ , , Total 2,595, $ ,078, $ ENERFLEX 2016 Quarterly Report 26

27 Notes to the Consolidated Financial Statements b) Cash Settled Share Based Payments During the three months ended March 31, 2016, directors fees and executive bonuses elected to be received in DSUs totalled $0.2 million and $0.5 million, respectively (March 31, 2015 $0.2 million and $0.9 million, respectively). Weighted average Number of DSUs grant date fair value per unit DSUs outstanding, January 1, ,436 $ Granted 72, In lieu of dividends 2, DSUs outstanding, March 31, ,066 $ Note 10. Financial Instruments Designation and Valuation of Financial Instruments Financial instruments at March 31, 2016 were designated in the same manner as they were at December 31, Accordingly, with the exception of the Company s long term debt Notes, the estimated fair values of financial instruments approximated their carrying values. The carrying value and estimated fair value of the Notes as at March 31, 2016 was $90.5 million and $93.9 million, respectively (December 31, 2015 $90.5 million and $93.2 million, respectively). The fair value of these Notes at March 31, 2016 was determined on a discounted cash flow basis with a weighted average discount rate of 4.0% (December 31, %). Derivative Financial Instruments and Hedge Accounting Foreign exchange contracts are transacted with financial institutions to hedge foreign currency denominated obligations and cash receipts related to purchases of inventory and sales of products. The following table summarizes the Company s commitments to buy and sell foreign currencies as at March 31, 2016: Notional amount Maturity Canadian dollar denominated contracts Purchase contracts USD 11,329 April 2016 January 2017 EUR 67 May 2016 Sales contracts USD (10,214) April 2016 January 2017 U.S. dollar denominated contracts Purchase contracts EUR 508 April 2016 Sales contracts EUR (4,063) April 2016 October 2016 At March 31, 2016, the fair value of derivative financial instruments classified as financial assets was $0.3 million, and as financial liabilities was $0.8 million (December 31, 2015 $1.1 million and $0.9 million, respectively). ENERFLEX 2016 Quarterly Report 27

28 Notes to the Consolidated Financial Statements Foreign Currency Translation Exposure The Company is subject to foreign currency translation exposure, primarily due to fluctuations of the Canadian dollar against the US dollar, Australian dollar and British pound. Enerflex uses foreign currency borrowings to hedge against the exposure that arises from foreign subsidiaries that are translated to the Canadian dollar through a net investment hedge. As a result, exchange gains and losses on the translation of USD $242.9 million in designated foreign currency borrowings are included in accumulated other comprehensive income for March 31, The following table shows the Company s sensitivity to a 5% weakening of the Canadian dollar against the US dollar, Australian dollar and British pound. Canadian dollar weakens by 5% USD AUD GBP Earnings from foreign operations Earnings before income taxes $ 724 $ (81) $ 18 Financial instruments held in foreign operations Other comprehensive income $ 10,628 $ 1,444 $ 279 Financial instruments held in Canadian operations Earnings before income taxes $ (4,741) $ $ Interest Rate Risk The Company s liabilities include long term debt subject to fluctuations in interest rates. The Company s Notes outstanding at March 31, 2016 were at fixed interest rates and therefore the related interest expense would not be impacted by fluctuations in interest rates. The Company s Bank Facility, however, is subject to changes in market interest rates. The Company has entered into an interest rate swap to exchange the floating rate interest payments for fixed rate interest payments, which fix the London Interbank Offered Rates components of its interest payments on $140.0 million of its outstanding term debt until September 2016, and $70.0 million of its outstanding term debt until September Under the interest rate swap agreement, the Company pays a fixed rate of 0.785% per annum plus the applicable credit spread. The interest rate swap agreement has an aggregate notional principal amount of $140.0 million. The fair value of the interest rate swap arrangement is the difference between the forward interest rates and the discounted contract rate. As at March 31, 2016, the mark to market of the interest rate swap was $(0.3) million. For each 1% change in the rate of interest on the remaining $272.4 million Bank Facilities, the change in interest expense for the three months ended would be $2.7 million (December 31, 2015 $3.0 million). All interest charges are recorded on the Interim Condensed Statement of Earnings as net finance costs. Liquidity Risk Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. In managing liquidity risk, the Company has access to a significant portion of its committed facility with a U.S. lender, and a Bank Facility for future drawings to meet the Company s future growth targets. As at March 31, 2016, the Company held cash and cash equivalents of $160.3 million and had drawn $454.0 million against the Bank Facility, leaving it with access to $261.1 million for future drawings. ENERFLEX 2016 Quarterly Report 28

29 Notes to the Consolidated Financial Statements A liquidity analysis of the Company s financial instruments has been completed on a maturity basis. The following table outlines the cash flows associated with the maturity of the Company s financial liabilities as at March 31, 2016: Less than 3 months 3 months to 1 year Greater than 1 year Total Derivative financial instruments Foreign currency forward contracts $ 438 $ 27 $ $ 465 Interest rate swap Accounts payable and accrued liabilities 217, ,218 Long term debt bank facility 454, ,030 Long term debt notes 50,500 40,000 90,500 Other long term liabilities 7,584 7,584 The Company expects that continued cash flows from operations in 2016, together with cash and cash equivalents on hand and credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets. Note 11. Supplemental Cash Flow Information Three months ended March 31, Cash provided by (used in) changes of non cash working capital Accounts receivable $ 53,526 $ 70,386 Inventories 1,058 16,630 Deferred revenues (11,883) (28,771) Accounts and taxes payable and accrued liabilities and provisions (23,245) (41,398) Foreign currency and other 19,369 (33,643) $ 38,825 $ (16,796) Cash paid during the period: Three months ended March 31, Interest $ 2,254 $ 1,707 Taxes 1,465 4,915 ENERFLEX 2016 Quarterly Report 29

30 Notes to the Consolidated Financial Statements Note 12. Revenue Revenue by geographic location, which is attributed by destination of sale, was as follows: Three months ended March 31, United States $ 96,557 $ 192,255 Canada 52, ,241 Mexico 23,694 21,046 Oman 19,272 6,136 Argentina 16,952 3,936 Australia 14,862 45,421 Bahrain 12,698 4,787 Nigeria 5,271 9,424 Brazil 3,801 7,473 Other 25,952 20,802 Total Revenue $ 271,702 $ 455,521 Note 13. Guarantees, Commitments and Contingencies Operating leases relate to leases of equipment, automobiles and premises with lease terms between one and ten years. The material lease arrangements generally include renewal and escalation clauses. The aggregate minimum future required lease payments over the next five years and thereafter is as follows: 2016 $ 13, , , , ,471 Thereafter 8,248 Total $ 62,709 In addition, the Company has purchase obligations over the next three years as follows: 2016 $ 100, , ENERFLEX 2016 Quarterly Report 30

31 Notes to the Consolidated Financial Statements Note 14. Seasonality The oil and natural gas service sector in Canada and in some parts of the USA has a distinct seasonal trend in activity levels which results from well site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex s Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are stable throughout the year. Rental revenues are also impacted by both the Company s and its customers capital investment decisions. The USA and Rest of World segments are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating. ENERFLEX 2016 Quarterly Report 31

32 Notes to the Consolidated Financial Statements Note 15. Segmented Information The Company has three reportable operating segments as outlined below, each supported by the Corporate office. Corporate overheads are allocated to the operating segments based on revenue. For each of the operating segments, the Company s Chief Operating Decision Maker reviews internal management reports on at least a quarterly basis. For three months ended March 31, 2016, the Company had no individual customers which accounted for more than 10% of its revenue. The following summary describes the operations of each of the Company s reportable segments: Canada generates revenue from manufacturing primarily compression and process equipment, service and rentals; USA generates revenue from the manufacture of natural gas compression and process equipment in addition to generating revenue from product support services, and rentals; and Rest of World generates revenue from manufacturing primarily compression and process equipment, service and rentals. The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies. Three months ended Canada USA Rest of World Total March 31, Segment revenue $ 62,101 $ 156,486 $ 116,899 $ 243,226 $ 107,895 $ 96,506 $ 286,895 $ 496,218 Intersegment revenue (950) (4,457) (7,079) (36,169) (7,164) (71) (15,193) (40,697) External revenue $ 61,151 $ 152,029 $ 109,820 $ 207,057 $ 100,731 $ 96,435 $ 271,702 $ 455,521 Operating income (loss) $ (11,403) $ 9,612 $ 8,012 $ 11,202 $ 2,092 $ 12,813 $ (1,299) $ 33,627 Canada USA Rest of World Total Mar. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, Dec. 31, As at Segment assets $ 392,446 $ 406,343 $ 358,282 $ 401,265 $ 754,586 $ 793,743 $ 1,505,314 $ 1,601,351 Goodwill 157, , , , , , , ,604 Corporate (158,623) (154,866) 549, , , ,399 1,092,942 1,144,952 1,978,843 2,195,089 Asset held for sale 13,966 14,175 13,966 14,175 Total segment assets $ 563,581 $ 669,779 $ 494,909 $ 549,399 $ 1,092,942 $ 1,144,952 $ 1,992,809 $ 2,209,264 ENERFLEX 2016 Quarterly Report

33 Notes to the Consolidated Financial Statements Note 16. Subsequent Event Subsequent to March 31, 2016, the Company declared a quarterly dividend of $0.085 per share, payable on July 7, 2016, to shareholders of record on May 17, ENERFLEX 2016 Quarterly Report 33

34 DIRECTORS AND EXECUTIVE Robert S. Boswell 1, 4 Director Denver, CO W. Byron Dunn 2, 4 Director Dallas, TX J. Blair Goertzen Director President and Chief Executive Officer Calgary, AB Wayne S. Hill 2, 5 Director Toronto, ON 1 Chair of the Nominating and Corporate Governance Committee 2 Member of the Nominating and Corporate Governance Committee 3 Chair of the Human Resources and Compensation Committee 4 Member of the Human Resources and Compensation Committee 5 Chair of the Audit Committee H. Stanley Marshall 3 Director Paradise, NL Stephen J. Savidant Chairman Calgary, AB Michael A. Weill 6 Director Houston, TX Helen J. Wesley 6 Director Calgary, AB D. James Harbilas Executive Vice President and Chief Financial Officer Calgary, AB Bradley Beebe President, Canada Calgary, AB Marc Rossiter President, United States of America Houston, TX Patricia Martinez President, Latin America Houston, TX Phil Pyle President, International Abu Dhabi, UAE Greg Stewart Senior Vice President, Corporate Services and Chief Information Officer Calgary, AB 6 Member of the Audit Committee Head Office Enerflex Ltd. Suite 904, 1331 Macleod Trail SE Calgary, AB T2G 0K3 Canada Tel: Fax: ir@enerflex.com Web: Whistleblower Contact Tel: whistleblower@enerflex.com ener@openboard.info ener.hr@openboard.info Web: ENERFLEX LTD. / 2016 QUARTERLY REPORT

35 SHAREHOLDERS INFORMATION COMMON SHARES The common shares of the Company are listed and traded on the Toronto Stock Exchange under the symbol EFX. TRUSTEE, REGISTRAR, AND TRANSFER AGENT CST Trust Company Calgary, AB Canada For shareholder inquiries: CST Trust Company 2001 Boul. Robert-Bourassa, Suite 1600 Montreal, QC H3A 2A6 Canada Mail: PO Box 700 Station B Montreal, QC H3B 3K3 Canada Tel: or Fax: inquiries@canstockta.com Web: AUDITORS Ernst & Young Calgary, AB Canada BANKERS The Toronto Dominion Bank Calgary, AB Canada The Bank of Nova Scotia Toronto, ON Canada INVESTOR RELATIONS Enerflex Ltd. Suite 904, 1331 Macleod Trail SE Calgary, AB T2G 0K3 Canada Tel: ir@enerflex.com Requests for Enerflex s Annual Report, Quarterly Reports, and other corporate communications should be directed to ir@enerflex.com. All questions about accounts, share certificates, or dividend cheques should be directed to the Trustee, Registrar, and Transfer Agent. ENERFLEX LTD. / 2016 QUARTERLY REPORT

36 Enerflex Head Office Suite 904, 1331 Macleod Trail SE Calgary, Alberta T2G 0K3 Canada Tel: