Second QUARTER 2018 For the three and six months ended June 30, 2018

Transcription

1 Second QUARTER For the three and six months ended, This Management s Discussion and Analysis (MD&A) for ENTREC Corporation ( ENTREC, the Company, we, us or our ) was prepared as of August 8, to assist readers in understanding our financial performance for the three and six months ended,. This MD&A should be read in conjunction with the accompanying unaudited interim consolidated financial statements for the three and six months ended, and the notes contained therein. In addition, this MD&A should be read in conjunction with our MD&A and audited consolidated financial statements for the year ended December 31, prepared in accordance with International Financial Reporting Standards (IFRS). Our consolidated financial statements are presented in Canadian dollars, our functional currency. This MD&A contains forward-looking statements. Please see Note Regarding Forward-Looking Statements for a discussion of the risks, uncertainties and assumptions used to develop our forward-looking statements. This MD&A also refers to certain non-ifrs financial measures that we present to assist users in assessing our performance. Non- IFRS financial measures do not have any standard meaning under IFRS and may not be comparable to similar measures presented by other issuers. These measures are identified and described under Non-IFRS Financial Measures. Accounting principles applied under IFRS require us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We believe our estimates and assumptions are reasonable based on the information available at the time that these estimates and assumptions are made. Actual results may differ from these estimates. Additional information on ENTREC, including our most recently filed annual information form dated March 6, and audited consolidated financial statements, is available on the System for Electronic Document Analysis and Retrieval (SEDAR) website at Our Business We are a heavy haul transportation and crane solutions provider to the oil and natural gas, construction, petrochemical, mining and power generation industries. Operating from 12 locations throughout western Canada, North Dakota, Colorado and Texas, we currently employ approximately 550 employees and operate a fleet of 190 cranes, 750 multi-wheeled trailers and 190 tractors, as well as 375 lines of specialized platform trailers. Our crane fleet consists of rough-terrain cranes, mobile cranes, crawlers, carry decks and picker trucks. Our tractor and trailer fleet consists of tractor units, winch trucks, and a wide range of conventional heavy haul trailer units. Our common shares trade on the Toronto Stock Exchange (TSX) under the trading symbol ENT. TSX: ENT Page 1

2 Second Quarter Selected Financial Information $ thousands, except per share amounts and margin percent Three Months Ended Six Months Ended Revenue 43,921 35,925 83,988 73,223 Gross profit 7,541 6,095 12,063 11,654 Gross margin 17.2% 17.0% 14.4% 15.9% Adjusted EBITDA (1) 4,132 2,691 5,053 4,972 Adjusted EBITDA margin (1) 9.4% 7.5% 6.0% 6.8% Per share (1) Adjusted net loss (1) (2,685) (3,878) (7,903) (7,564) Per share (1) (0.02) (0.04) (0.07) (0.07) Net loss (4,436) (4,215) (9,514) (7,619) Per share basic (0.04) (0.04) (0.09) (0.07) Per share diluted (0.04) (0.04) (0.09) (0.07) Cash provided by operating activities (309) 718 (1,038) (882) Funds from operations (1) 1, ,636 Per share (1) Basic weighted average shares outstanding 109, , , ,504 Total shares outstanding 109, , , ,519 As at $ thousands December 31 Working capital (1) 24,066 27,052 Total assets 223, ,496 Total liabilities 187, ,705 Shareholders equity 36,267 44,791 Note: (1) Identified and defined under Non-IFRS Financial Measures. Business Highlights Revenue for the quarter ended, increased by 22% to $43.9 million from $35.9 million in, reflecting revenue growth from our operations in the United States; Adjusted EBITDA increased to $4.1 million in Q2 from $2.7 million in, while adjusted net loss decreased to $2.7 million from $3.9 million a year earlier; and We entered into a letter of intent to acquire Capstan Hauling Inc. based in Grande Prairie, Alberta. TSX: ENT Page 2

3 Second Quarter Overall Performance, Strategy and Outlook Revenue for the three months ended, increased by 22% to $43.9 million from $35.9 million in due to significant growth from our operations in the United States. Our US revenue increased by 44% to $19.1 million in from $13.2 million last year. Higher activity levels related to oil and natural gas in North Dakota, along with improved customer pricing, were the largest drivers of this growth. In addition, our recent expansion into Colorado generated additional revenue of $1.7 million in the quarter. Our revenue in Canada also increased by 9% to $24.8 million in the second quarter of from $22.7 million last year due to higher activity levels related to maintenance, repair and operations (MRO) work in the Alberta oil sands region. On a year-to-date basis, revenue increased by 15% to $84.0 million from $73.2 million in due to higher activity levels within our US operations. Our US revenue increased by 55% to $35.4 million in the first six months of from $22.9 million in. Revenue in Canada declined slightly to $48.6 million in the six months ended, from $50.3 million in. This decline was caused from a slower start to the year in conventional oil and gas. Adjusted EBITDA increased to $4.1 million in the second quarter of from $2.7 million last year due to the higher revenue. The higher revenue also caused our adjusted net loss to improve to $2.7 million from $3.9 million last year. On a year-to-date basis, adjusted EBITDA increased slightly to $5.1 million from $5.0 million last year. Despite the higher revenue in, we recorded a loss provision of $1.9 million related to a construction project with the JV Driver Group of Companies (the JV Driver Loss Provision ) in Q1 (see Related Party Transactions section for additional information). Excluding this loss provision, adjusted EBITDA would have been $7.0 million for the six months ended,. Due to the JV Driver Loss Provision, our adjusted net loss also increased to $7.9 million year-to-date in from $7.6 million last year. Strategy and Outlook Overall, our strategy to grow our business through geographic and industry diversification in fiscal continues to be focused on the following initiatives: Significantly expanding our business in the United States; Obtaining additional MRO work with existing and new clients; Pursuing construction project work related to infrastructure, power generation, and other industries; Cross-selling crane services and specialized transportation services to existing clients; and Acquiring new customers through a continued focus on safety and customer service. United States The outlook for our US business continues to be very positive going into the second half of. Growing demand for our services in a recovering oil and gas sector is leading to both increased activity levels as well as higher customer pricing. Assuming oil prices can be maintained at current levels or increase further as progresses, we should continue to see higher industry activity levels in the United States that should result in further customer pricing improvements and improved profitability. In the fall of, we expanded our operations into Colorado. Our new operations in Colorado are focused on supporting several industries, including the oil and gas sector, and other general construction. We are currently experiencing strong growth in this region and anticipate our revenue will continue to grow in the Colorado market over the balance of. TSX: ENT Page 3

4 Second Quarter Despite strong demand for our services, the profitability of our Texas operations was severely hampered in Q2 by high operating costs and labour shortages. We are executing a strategy to improve our profitability in this region in the second half of. This includes establishing our own employee accommodation facilities to house current and future staff. We will also be supporting our Texas operations with additional employees from other regions including Canada. Canada Due to macro-economic factors and low natural gas prices, our outlook for the oil and natural gas industry in western Canada has been very cautious. These macro-economic factors included pipeline constraints, which have contributed to significant discounts in the market price for the oil produced in western Canada compared with other jurisdictions, as well as rising carbon taxes and increasing regulatory requirements to achieve government approvals for large industrial projects. However, as we enter the second half of, our outlook for western Canada is beginning to improve. First, we expect revenue from our MRO work in the Alberta oil sands region will continue to be steady throughout the remainder of and into fiscal Second, we now anticipate that a positive final investment decision on the $40 Billion LNG Canada project in Kitimat, B.C. is likely in the second half of. If approved, this project would be very positive for the natural gas industry in Canada and for ENTREC. We could benefit from this project in a number of ways, including direct and indirect construction activity in the Kitimat region as well as an anticipated increase in natural gas exploration and production activity in north-west Alberta and north-east B.C. Lastly, with the purchase of the Trans Mountain pipeline by the Federal Government, we are optimistic that the pipeline expansion project will proceed, providing much needed capacity growth for western Canadian oil production. Capstan Hauling Inc. ( Capstan ) We are pleased to announce that we have entered into a letter of intent to acquire Capstan. Based in Grande Prairie, Alberta, Capstan is a leading provider of heavy haul transportation services to the oil and natural gas industry in north-west Alberta and north-east B.C. Capstan has approximately 45 employees and lease operators and operates an extensive equipment fleet valued in excess of $9 million. Capstan s fleet consists of mobile cranes, picker trucks, winch trucks and a wide variety of multi-wheeled trailers. With our outlook improving for the oil and natural gas industry in western Canada, this acquisition is very timely for ENTREC. Capstan has a very strong reputation for customer service and when combined with our existing operations in the region, we will be well positioned to benefit from improving market fundamentals. This includes the potential for increased demand for our services related to natural gas exploration and production, should LNG Canada proceed with the construction of a Liquefied Natural Gas ( LNG ) facility in Kitimat. Following completion of the acquisition, we plan to merge our Grande Prairie oilfield transportation division with Capstan and operate the combined business under the Capstan brand. The shareholders of Capstan will also retain a large ownership interest in the combined business post-acquisition and the existing Capstan management will lead and manage the combined business going forward. Additional details regarding the Capstan acquisition will be provided once the acquisition is completed. The proposed acquisition of Capstan remains subject to a number of conditions, including the execution of a definitive share purchase agreement. If all conditions to the acquisition are met, we anticipate the acquisition of Capstan will close in September. TSX: ENT Page 4

5 Second Quarter Overall outlook Over the longer-term, our competitive position continues to be positive. We are well-positioned geographically, with a complete range of crane and specialized transportation services in each of our key markets in western Canada, North Dakota, Colorado, and Texas. We also continue to be the industry leader in customer service, employee engagement and safety, which will be key contributors to our success in the long-term. Results of Operations Revenue $ thousands Three Months Ended Six Months Ended Revenue related to owned/leased equipment fleet Cranes 18,973 15,719 36,743 28,746 Automotive equipment 9,675 9,860 19,148 20,782 Trailers 2,932 2,199 5,626 5,591 Other equipment ,739 1,651 32,538 28,156 63,256 56,770 Labour revenue (not directly applied to equipment) 2,974 3,130 7,116 5,678 3 rd party revenue (contractor / permitting / wire lifting) 7,460 3,936 11,391 9,149 Other revenue ,225 1,626 Total revenue 43,921 35,925 83,988 73,223 Revenue for the three months ended, increased by 22% to $43.9 million from $35.9 million in due to significant growth from our operations in the United States. Our US revenue increased by 44% to $19.1 million in from $13.2 million last year. Higher activity levels related to oil and natural gas in North Dakota, along with improved customer pricing, were the largest drivers of this growth. In addition, our recent expansion into Colorado generated additional revenue of $1.7 million in the quarter. Our revenue in Canada also increased by 9% to $24.8 million in the second quarter of from $22.7 million last year due to higher activity levels related to MRO work in the Alberta oil sands region. On a year-to-date basis, revenue increased by 15% to $84.0 million from $73.2 million in due to higher activity levels within our US operations. Our US revenue increased by 55% to $35.4 million in the first six months of from $22.9 million in. Revenue in Canada declined slightly to $48.6 million during the six months ended, from $50.3 million last year. This decline was caused from a slower start to the year in conventional oil and gas, which was due to both less construction project activity as well as lower spending on upstream activities by our customers. Offsetting a portion of the revenue decline in Canada for the six month period was higher revenue related to oil sands MRO work. Crane revenue increased to $19.0 million for the quarter ended, from $15.7 million in. Likewise, on a year-to-date basis, crane revenue increased to $36.7 million in from $28.7 million last year. These increases were caused from higher utilization of our mobile cranes servicing the oil and gas industry in the United States. TSX: ENT Page 5

6 Second Quarter Transportation revenue generated from our automotive fleet during the three and six months ended, decreased slightly to $9.7 million and $19.1 million, respectively, from $9.9 million and $20.8 million, respectively, in. Activity levels related to our oilfield transportation services in both Canada and the United States were relatively flat when compared to the same periods in the prior year. Revenue from our trailer fleet increased to $2.9 million in the quarter ended, from $2.2 million last year due to higher utilization of our platform trailers servicing oil and gas construction project activities. On a yearto-date basis revenue generated from our trailer fleet was consistent with. The increase in revenue from labour (not directly applied to equipment) in the first six months of was directly attributable to the increase in activity levels within our US operations. 3 rd party contractor, wire lifting and permitting revenue increased to $7.5 million for the three months ended June 30, from $3.9 million last year. In Q2, we generated significantly higher revenue from transportation permits required during the spring break up period in North Dakota. In addition, in Canada we generated substantially higher revenue related to permitting and wire lifting for various heavy haul transportation projects. Wire lifting and permitting revenue is typically billed to our customers on a cost plus basis. On a year-to-date basis, 3 rd party contractor, wire lifting and permitting revenue was also higher in for the same reasons. However, offsetting a portion of this increase was the JV Driver Loss Provision, which negatively impacted 3 rd party revenue by $1.9 million during the six month period. Direct Costs and Gross Profit $ thousands, except margin % Three Months Ended Six Months Ended Revenue 43,921 35,925 83,988 73,223 Direct costs 36,380 29,830 71,925 61,569 Gross profit 7,541 6,095 12,063 11,654 Gross margin 17.2% 17.0% 14.4% 15.9% Our direct costs include both variable components (such as labour, fuel, and third-party costs such as wire lifting, permitting, hired pilots, lease operators and subcontractors) as well as fixed costs that change little from period to period. Certain variable costs, such as wire lifting expenses, are typically billed to our customers on a cost-plus basis. Fixed direct costs include lease and rental costs, insurance and licensing, indirect labour, and operations salaries, among other items. Direct costs consisted of the following main components: $ thousands Three Months Ended Six Months Ended % Rev % Rev % Rev % Rev Direct labour 13, % 12, % 26, % 24, % Equipment costs 9, % 7, % 18, % 15, % 3 rd party contractor, permitting and wire lifting 6, % 3, % 12, % 8, % Shop rental, indirect labour and other indirect costs 6, % 6, % 14, % 12, % Total 36, % 29, % 71, % 61, % TSX: ENT Page 6

7 Second Quarter Quarter review Higher revenue during the three months ended, caused gross profit to increase to $7.5 million from $6.1 million in. Gross margin, as a percentage of revenue, also increased slightly to 17.2% from 17.0% last year. Our gross margin was impacted by the following factors: Direct labour. Direct labour declined to 29.9% of revenue in the second quarter of from 34.0% of revenue in. This decline was driven from changes in revenue mix as we generated higher revenue from 3 rd party contractors in Q2 as well as more revenue from cranes services. In addition, higher customer pricing also contributed to the decline in direct labour percentage. Equipment costs. Equipment costs increased to $9.6 million in the second quarter of from $7.5 million in due to higher equipment rental, repairs and maintenance, and fuel costs, which were incurred to support increased activity levels. Equipment costs as a percentage of revenue also increased from the prior year due to higher fuel prices and higher equipment rental expenses. The majority of the equipment rental expense incurred in was related to additional cranes we acquired under rent-to own ( RPO ) arrangements to support our growth in the United States. 3 rd party costs. 3 rd party contracting, permitting and wire lifting costs increased significantly in the second quarter of from the prior year. We incurred higher transportation permitting costs in North Dakota due to increased activity levels during the typical spring road ban restriction period. In addition, in Canada we incurred substantially higher costs related to permitting and wire lifting for various heavy haul transportation projects. Shop rental, indirect labour and other indirect costs. Shop rental, indirect labour and other indirect costs increased to $6.7 million in the second quarter of from $6.3 million in. Over the past year, we incurred incremental shop rental and other operating costs associated with growth from our Texas and Colorado locations. However, as a result of the relatively fixed nature of these expenditures, shop rental, indirect labour and other indirect costs decreased to 15.4% of revenue from 17.4% of revenue in due to our revenue growth over the past year. Six-month review Gross profit during the six months ended, increased to $12.1 million from $11.7 million in. However, gross margin, as a percentage of revenue, declined to 14.4% from 15.9% last year. Several factors contributed to the decline in gross margin. The biggest factor was the JV Driver Loss Provision of $1.9 million incurred in the first quarter of (see Related Party Transactions for additional information). Excluding the JV Driver Loss Provision, gross profit would have increased to 14.0 million or 16.7% of revenue for the six months ended,. Other factors affecting the gross margin included: Direct labour. Direct labour declined to 31.5% of revenue in the first half of from 33.4% of revenue in. This decline was driven by a change in revenue mix towards more crane services in as well as from increased customer pricing in the United States. Equipment costs. Equipment costs increased to $18.6 million in the six months ended, from $15.4 million in due to higher equipment rental, repairs and maintenance, and fuel costs, which were incurred to support increased activity levels. Equipment costs as a percentage of revenue also increased to 22.2% of revenue in from 21.0% of revenue last year due to higher equipment rental costs (increased to 2.1% of revenue from 0.4% of revenue in ) as we acquired additional cranes through RPO arrangements to support the higher demand for our crane services in the United States and higher fuel prices. Fuel increased to 7.5% of revenue in the first half of from 6.7% of revenue last year. A portion of the fuel cost increase was attributable to an increase in the Alberta carbon tax levy on January 1,. TSX: ENT Page 7

8 Second Quarter 3 rd party costs. 3 rd party contracting, permitting and wire lifting costs increased significantly in the first half of from the prior year. As mentioned above, we incurred substantially higher transportation permitting costs in North Dakota due to increased activity levels during the typical spring road ban restriction period. In addition, we incurred substantially higher costs related to permitting and wire lifting for various heavy haul transportation projects in Canada and higher 3 rd party contracting costs associated with a construction project in Texas. Shop rental, indirect labour and other indirect costs. Shop rental, indirect labour and other indirect costs increased to $14.2 million in the six months ended, from $12.9 million in. Over the past year, we incurred incremental shop rental and other operating costs associated with growth from our Texas and Colorado locations. However, as a result of the relatively fixed nature of these expenditures, shop rental, indirect labour and other indirect costs decreased to 16.9% of revenue in from 17.7% of revenue in due to our revenue growth over the past year. General and Administrative (G&A) Expenses $ thousands Three Months Ended Six Months Ended General and administrative expenses 3,409 3,514 7,010 6,792 % of revenue 7.8% 9.8% 8.3% 9.3% G&A expenses were $3.4 million for the quarter ended,, which was very similar to the $3.5 million expense we reported in the prior year. On a year-to-date basis, G&A expenses increased slightly to $7.0 million in from $6.8 million last year. The increase on a year-to-date basis was driven primarily by growth in our operations in the United States over the past year, including our expansion into Colorado in the fall of. Adjusted EBITDA $ thousands Three Months Ended Six Months Ended Adjusted EBITDA (1) 4,132 2,691 5,053 4,972 % of revenue 9.4% 7.5% 6.0% 6.8% Note: (1) Identified and defined under Non-IFRS Financial Measures. Due to the higher revenue, adjusted EBITDA increased to $4.1 million in the quarter ended, from $2.7 million last year. As a percentage of revenue, adjusted EBITDA margin also increased to 9.4% from 7.5% last year. On a year-to-date basis, adjusted EBITDA increased to $5.1 million or 6.0% of revenue from $5.0 million or 6.8% of revenue in. Despite the higher revenue, our adjusted EBITDA for the six months ended, was negatively impacted by the JV Driver Loss Provision of $1.9 million incurred in Q1. Excluding this provision, our adjusted EBITDA would have increased by 40% to $7.0 million for the six months ended,. TSX: ENT Page 8

9 Second Quarter Depreciation and Amortization $ thousands Three Months Ended Six Months Ended Depreciation of property, plant and equipment 5,006 5,357 10,014 10,867 Amortization of intangible assets Total 5,097 5,521 10,196 11,232 During the three and six months ended, we incurred depreciation of property, plant and equipment of $5.0 million and $10.0 million, respectively. These costs were lower than in the comparative periods in due to dispositions of under-utilized equipment over the past 12 months. Amortization of intangible assets during the three and six months ended, also declined from the prior year as certain intangible assets related to non-compete agreements were fully amortized. Segment Contribution Our activities are conducted in two geographic segments: Canada and the United States. All activities in both segments are related to the provision of heavy haul transportation and crane services to the oil and natural gas, construction, petrochemical, mining and power generation industries. Direct costs and general and administrative expenses directly attributable to the two operating segments are included as operating expenses for these segments. There are no significant inter-segment revenues. Segment contribution represents earnings before income taxes for each operating segment prior to unallocated corporate items. We use segment contribution as a key measure to analyze the financial performance of our geographic business segments. $ thousands Three Months Ended Six Months Ended Contribution by segment: Canada 296 (759) (868) (801) United States 1, Total segment contribution (loss) 1,374 (25) (348) (341) Less: unallocated items: Corporate costs 2,248 2,751 4,613 5,664 Amortization of intangible assets Share-based compensation (Gain) loss on disposal of property, plant and equipment (34) 408 (31) (142) Finance items 4,786 2,028 6,710 3,229 Loss before income taxes (5,821) (5,555) (12,032) (9,818) TSX: ENT Page 9

10 Second Quarter Quarter review Segment contribution from Canada increased to $0.3 million in the quarter ended, from a segment loss of $0.8 million in the prior year. Lower depreciation expense, which declined to $3.8 million from $4.6 million last year, was the primary driver of this improvement. The decline in depreciation expense was caused from the disposal of under-utilized equipment, including transfers of equipment to the United States, over the past year. Segment contribution from the United States increased to $1.1 million in Q2 from $0.7 million last year. Significantly higher revenue in North Dakota and Colorado, along with improved customer pricing in North Dakota, were the primary drivers of this increase. Offsetting a large part of the increase in Q2 were operating losses we incurred in our Texas operations during the quarter. Higher operating costs and labour shortages in the region contributed to the loss. Unallocated corporate costs declined to $2.2 million in Q2 from $2.8 million in. Cost reduction initiatives over the past year, including reductions in personnel and other corporate costs, caused a portion of the decrease. In addition, changes in how certain costs were allocated to the operating segments also contributed to the reduction. Six-month review Segment loss in Canada for the six months ended, remained flat from the prior year due to a decrease in revenue from this segment. Offsetting the impact of the lower revenue was lower depreciation expense, which declined to $7.7 million in from $9.4 million last year. This decline was caused from the disposal of underutilized equipment, including transfers of equipment to the United States, over the past year. Segment contribution from the United States for the six months ended, increased only slightly from due to the JV Driver Loss Provision. Excluding this provision, segment contribution from the United States would have improved considerably from, increasing to $2.4 million from $0.5 million last year. Significantly higher revenue, along with improved gross margins, would have been the primary drivers of this increase. The higher gross margin (excluding the JV Driver Loss Provision) was caused from both higher customer pricing and better absorption of the fixed components of our operating costs. Unallocated corporate costs declined to $4.6 million in the first half of from $5.7 million in. Cost reduction initiatives over the past year, including reductions in personnel and other corporate costs, caused a portion of the decrease. In addition, changes in how certain costs were allocated to the operating segments also contributed to the reduction. Share-based Compensation $ thousands Three Months Ended Six Months Ended Share-based compensation Share-based compensation represents the fair value compensation cost associated with share options and restricted shares. The notes to the accompanying unaudited interim consolidated financial statements for the three and six months ended, provide a detailed discussion of our share options and restricted shares. The smaller expense incurred year-to-date in fiscal was due to a lower share price applied in calculating the fair value and corresponding stock-based compensation for our issued options and restricted shares. TSX: ENT Page 10

11 Second Quarter (Gain) Loss on Disposal of Property, Plant and Equipment $ thousands Three Months Ended Six Months Ended (Gain) loss on disposal of property, plant and equipment (34) 408 (31) (142) We disposed of property, plant and equipment for net proceeds of $2.3 million during the six months ended,, which resulted in a nominal gain on disposal of $31 thousand. In the comparative six months ended,, we disposed of property, plant and equipment for net proceeds of $5.9 million, which resulted in a gain on disposal of $0.1 million. These dispositions were all incurred in the normal course of operations. Finance Items $ thousands Three Months Ended Six Months Ended Interest long-term debt 1,990 1,134 3,709 2,325 Interest convertible debentures ,530 1,738 Interest obligations under finance lease Interest bank indebtedness and other short-term obligations Foreign exchange loss (gain) on long-term debt 2,014-1,459 (856) Total 4,786 2,028 6,710 3,229 Interest on long-term debt for the three and six months ended, increased from the prior year due to higher interest rates and higher debt balances outstanding. Over the past 12 months, the Bank of Canada increased its key interest rate by a total of 100 basis points, which caused corresponding increases to the interest rates applicable to our long-term debt. In addition, following the amendment and extension to our senior secured assetbased credit facility (the ABL Facility ) in October, the credit spread applicable to the bank prime, CDOR, or LIBOR rates on our debt increased. The average effective interest rate on our long-term debt at, was 5.36% compared to 3.10% at,. The interest on convertible debentures arises from our outstanding $21.8 million principal of unsecured convertible debentures (the Debentures ). The decrease in interest expense in fiscal was due to a $3.5 million repayment of the principal balance of the Debentures in November. A large portion of our ABL Facility was carried in USD over the past year. Therefore, as a result of fluctuations in the US dollar during each of these periods, we recognized a foreign exchange loss on long-term debt of $2.0 million and $1.5 million (three and six months ended, - $nil and a gain of $0.9 million), respectively, during the three and six months ended,. We carry a large portion of our ABL Facility in USD to hedge against future decreases in our excess borrowing capacity that may be caused by a decline in the USD. As the market value for the majority of our equipment is generally valued in US dollars, the orderly liquidation value of our fleet is impacted by changes in the value of the USD. Additional information regarding our debt facilities is provided under Debt and Contractual Obligations. TSX: ENT Page 11

12 Second Quarter Income Taxes For the three months ended,, income tax expense recovery was $1.4 million, representing an effective income tax rate of 23.8% on a loss before income taxes of $5.8 million. For the six months ended,, income tax recovery was $2.5 million, representing an effective tax rate of 21.0% on a loss before income taxes of $12.0 million. Although our statutory combined federal-provincial corporate income tax rate in Alberta is currently 27.0%, our actual effective rate was impacted by various items, including non-deductible expenses such as sharebased compensation, rate adjustments for income in other provincial and foreign jurisdictions, and capital gains. The lower effective income tax recovery rate in was primarily attributable to not recognizing a deferred income tax recovery related to tax loss carry-forwards and other deductible temporary differences in our U.S. subsidiary due to the uncertainty that sufficient taxable income will be generated in the future to utilize these assets. For the three months ended,, income tax expense recovery was $1.3 million, representing an effective income tax rate of 24.1% on a loss before income taxes of $5.6 million. For the six months ended,, income tax recovery was $2.2 million, representing an effective tax rate of 22.4% on a loss before income taxes of $9.8 million. Similar to fiscal, the lower effective income tax recovery rate in was primarily attributable to not recognizing a deferred income tax recovery related to tax loss carry-forwards and other deductible temporary differences in our U.S. subsidiary. Income tax provisions, including current and deferred income tax assets and liabilities, require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to our specific situation. Therefore, it is possible the ultimate value of our income tax assets and liabilities could change in the future and these changes could have a material effect on our consolidated financial statements. Net Loss and Loss per Share $ thousands, except for per share amounts Three Months Ended Six Months Ended Net loss (4,436) (4,215) (9,514) (7,619) Basic and diluted weighted average number of shares 109, , , ,504 Loss per share - basic (0.04) (0.04) (0.09) (0.07) Loss per share - diluted (0.04) (0.04) (0.09) (0.07) We generated a net loss of $4.4 million or $0.04 per share during the three months ended, compared with a net loss of $4.2 million or $0.04 per share in. Despite the higher adjusted EBITDA in Q2, our net loss increased due to higher finance costs and an unrealized foreign exchange loss on long-term debt of $2.0 million. During the six months ended, we incurred a net loss of $9.5 million, compared to a net loss of $7.6 million in. Contributing to the higher net loss was the JV Driver Loss Provision of $1.9 million that was incurred in the first quarter of. TSX: ENT Page 12

13 Second Quarter Summary of Quarterly Data $ thousands, except per share amounts June March Dec Sept June March Dec 2016 Sept 2016 Revenue 43,921 40,067 38,798 36,665 35,925 37,298 30,027 28,394 Adjusted EBITDA (1) 4, ,811 2,795 2,691 2, ,552 Adjusted net loss (1) (2,685) (5,217) (2,660) (3,432) (3,878) (3,683) (8,707) (3,539) Net loss (4,436) (5,078) (2,929) (3,768) (4,215) (3,404) (10,791) (5,070) Adjusted loss per share (1) (2) (0.02) (0.05) (0.02) (0.03) (0.04) (0.03) (0.08) (0.03) Loss per share basic (2) (0.04) (0.05) (0.03) (0.03) (0.04) (0.03) (0.10) (0.05) Loss per share diluted (2) (0.04) (0.05) (0.03) (0.03) (0.04) (0.03) (0.10) (0.05) Notes: (1) Identified and defined under Non-IFRS Financial Measures. (2) Quarterly loss per share is not additive and may not equal the annual loss per share reported. This is due to the effect of shares issued during the year on the basic weighted average number outstanding. Revenue increased by 10% to $43.9 million in the quarter ended, from $40.1 million in the previous quarter ended March 31, due to higher revenue in the United States. Revenue from our US operations increased to $19.1 million from $16.3 million last quarter due to higher utilization of our mobile cranes servicing the oil and gas industry. The higher revenue, combined with a higher gross margin, caused a corresponding improvement in adjusted EBITDA and adjusted net loss in the quarter. Also contributing to the positive variance was the JV Driver Loss Provision of $1.9 million that was incurred in the previous quarter ended March 31,. Revenue for the quarter ended March 31, increased by 3% to $40.1 million from $38.8 million in the previous quarter ended December 31, due to higher revenue in Canada. Revenue from our Canadian operations increased by $1.2 million to $23.7 million in Q1 as a result of higher activity levels in oil sands MRO. Revenue from our US operations remained consistent at $16.3 million in Q1. The JV Driver Loss Provision, which reduced our US revenue by $1.9 million in the quarter, was fully offset by higher activity levels in the recovering oil and gas sector as well as our recent expansion into the state of Colorado. Due to the JV Driver Loss Provision and higher general and administrative expenses in Q1, we experienced a lower adjusted EBITDA and higher adjusted net loss in the quarter, compared to Q4. Revenue increased by 6% to $38.8 million in the quarter ended December 31, from the previous quarter ended September 30, due to growth from our US operations. Revenue from our US operations increased by $2.1 million or 15% from the previous quarter. The higher revenue, combined with an increased gross margin in Q4, caused adjusted EBITDA to increase and our adjusted net loss to decline from the previous quarter. Revenue in the three months ended September 30, increased slightly from the previous quarter ended, due to growth from our US operations. The higher revenue also contributed to slightly higher adjusted EBITDA and a lower adjusted net loss in the quarter. Revenue decreased slightly to $35.9 million in the quarter ended, from $37.3 million in the previous quarter ended March 31,. This decline was primarily attributable to our seasonal spring break-up period in our second quarters when the spring snow melt and wet conditions make the ground unstable and less capable of supporting vehicles with heavy loads. Despite the lower revenue, adjusted EBITDA increased from the prior quarter due to improving gross margins from our US operations and lower sub-contractor expenses. Adjusted net loss increased slightly in the second quarter of due to a loss on disposal of property, plant and equipment of $0.4 million compared to a gain of $0.6 million in the prior quarter ended March 31,. TSX: ENT Page 13

14 Second Quarter Revenue for the quarter ended March 31, increased by 24% to $37.3 million from $30.0 million in the previous quarter ended December 31, With higher crude oil prices, we experienced higher activity levels for our crane and transportation services supporting oil and gas exploration and production activities in both Canada and the United States. Due to the higher revenue, we also experienced higher adjusted EBITDA and a lower adjusted net loss in the quarter. Revenue in the quarter ended December 31, 2016 increased to $30.0 million from $28.4 million in the previous quarter ended September 30, This increase was attributable to our expansion into the Permian Basin of Texas, where we generated revenue of $4.0 million in the fourth quarter of 2016 compared to revenue of only $0.4 million in the previous quarter. Despite the higher revenue, we experienced a lower adjusted EBITDA and a higher adjusted net loss in the quarter due to a decline in our gross margin to 11.6% from 19.7% in Q3. This decline was largely due to a very low gross margin earned on the revenue generated from our new location in Texas due to customary inefficiencies associated with start-up operations and lower customer pricing as we penetrated this new market. In addition, we incurred a $3.6 million increase in our income tax provision for the quarter due to not recognizing any deferred tax assets related to our U.S. subsidiary. Our operations follow a slightly seasonal pattern, with revenue traditionally being lower in the three months ended and three months ended December 31 than in the other quarters. Due to this seasonality, revenue and net (loss) income reported in an individual quarter may not proportionately reflect revenue and net (loss) income on an annual basis. Financial Condition and Liquidity As at $ thousands, except working capital ratio December 31 Current assets 44,644 39,424 Total assets 223, ,496 Current liabilities 20,578 12,372 Total liabilities 187, ,705 Shareholders equity 36,267 44,791 Working capital (1) 24,066 27,052 Working capital ratio (1) Six months ended $ thousands Cash used in operating activities (1,038) (882) Funds from operations (1) 65 1,636 Note: (1) Identified and defined under Non-IFRS Financial Measures. Working Capital Working capital was $24.1 million at, compared to $27.1 million at December 31,. The decrease of $3.0 million resulted primarily from the reclassification of our operating debt facility of $4.7 million to a current liability at,. The operating facility matures on March 6, TSX: ENT Page 14

15 Second Quarter Funds from Operations and Cash Provided by Operating Activities We generated positive funds from operations of $0.1 million during the six months ended, compared with $1.6 million in. This decline was due to higher interest and current income tax expenses in. Cash provided by operating activities during the six months ended, was negative $1.0 million as our positive funds from operations was reduced by an in increase in our non-cash working capital requirements. Similarly, in the comparative six months ended,, higher working capital requirements resulted in negative cash provided by operating activities of $0.9 million. Investing Activities We acquired $3.2 million in property, plant and equipment during the six months ended, as part of our capital expenditure program. These expenditures included a mobile crane and trailers to support out US growth as well as light duty trucks to replace older units in our fleet. Total capital expenditures for the year ending December 31, are currently expected to range between $5.0 million and $6.0 million. Our capital expenditures in will primarily relate to crane and transportation equipment to support our planned growth in the United States. With a relatively new fleet, we will incur only minimal maintenance capital expenditures for the foreseeable future. However, should industry conditions continue to improve as progresses, we may increase our capital expenditures to take advantage of new growth opportunities. Proceeds on the disposal of property, plant and equipment during the six months ended, was $2.3 million. As progresses, we will continue to pursue the sale of under-utilized equipment. We will focus these selling efforts on private sales and brokered transactions rather than relying on auction sales, where suitable sale prices for specialized equipment can be difficult to achieve. The actual net proceeds we achieve from the sale of equipment will be subject to a number of factors including our ability to obtain sales prices acceptable to us and changes in customer demand for our services and equipment. We currently expect proceeds from the sale of equipment to range between $4.0 million and $5.0 million for the year ending December 31,. Debt and Contractual Obligations Long-term Debt We have a $172.5 million senior secured asset-based credit facility (the ABL Facility ) with a syndicate of lenders led by Wells Fargo Capital Finance Corporation Canada. We utilize the ABL Facility to fund our capital expenditures and business acquisitions and for general corporate purposes. The ABL Facility requires payments of interest only until its maturity on October 10, The ABL Facility is also subject to a requirement that ENTREC s convertible debentures due, 2021 be repaid or extended prior to March 31, If the convertible debentures are not repaid or extended prior to March 31, 2021, the maturity date of the ABL Facility will also be March 31, We may prepay all or any part of the ABL Facility at any time. Amounts borrowed bear interest, at bank prime, CDOR or LIBOR rates, plus a credit spread based on a sliding scale, determined by our excess borrowing capacity. A standby fee is calculated at the rate of 0.25% per annum on the facility s unused portion. At,, the cash interest rate on the ABL Facility was 5.17% (effective rate including unamortized initial transaction costs 5.36%). The ABL Facility is collateralized by substantially all of our assets, including our accounts receivable and property, plant and equipment. TSX: ENT Page 15

16 Second Quarter The ABL Facility is subject to compliance with financial covenants. We are required to maintain a minimum excess borrowing capacity of $15.0 million at all times. In addition, we are also subject to a springing fixed charge coverage ratio ( FCCR ) covenant of 1.0x and a springing capital expenditure covenant, which limits our annual capital expenditures to 120% of annual plan, should our excess borrowing capacity decline to an amount below the lesser of: (i) 12.5% of our total borrowing capacity or (ii) 12.5% of the total ABL Facility of $172.5 million. We are also subject to the capital expenditure covenant and restricted from paying dividends or repurchasing common shares should our FCCR ratio not exceed 1.0x. The total amount available under the ABL Facility is calculated from the value of our accounts receivable and property, plant and equipment. Eligible equipment utilized in the borrowing base calculation is valued by a third party appraiser and is included in the borrowing base at an amount equal to 85% of net orderly liquidation value. At,, based on our fleet and accounts receivable at that date, the borrowing base under the ABL Facility was $157.6 million. Based on borrowings and letters of credit utilized at,, we had an excess borrowing capacity of $21.1 million. As the excess borrowing capacity exceeded $19.7 million or 12.5% of the borrowing base, we were not subject to the FCCR covenant at,. At,, our excess borrowing capacity of $21.1 million exceeded this threshold by $1.4 million. At,, our excess borrowing capacity of $21.1 million also exceeded the minimum $15.0 million requirement. The definition of FCCR is in accordance with the lending agreement and is calculated based on the lender s interpretation, which may not be equal to individual financial statement figures. FCCR is calculated on a trailing 12- month basis and is defined in the lending agreement to be the ratio of EBITDA ( Bank EBITDA ) to fixed charges ( Fixed Charges ). Bank EBITDA is defined in the lending agreement to be net income (loss) before extraordinary gains and losses, interest income and expense, gains and losses on disposals of property, plant and equipment and other long lived assets, income taxes, depreciation and amortization, non-cash share-based compensation, unrealized risk management or foreign exchange losses, losses on the revaluation of embedded derivatives, and impairments of property, plant and equipment, intangible assets and goodwill. Fixed Charges is defined in the lending agreement to be the sum of interest expense, schedule principal payments of indebtedness, unfunded capital expenditures, cash dividends and distributions, and current income taxes. A calculation of the springing FCCR covenant ratio follows: Trailing 12 months ended $ thousands, except ratio December 31 Adjusted EBITDA for financial reporting purposes 11,659 11,578 Deduct: Business acquisition and integrations costs (173) (283) Bank EBITDA 11,486 11,295 Fixed Charges 9,721 7,508 FCCR 1.18x 1.50x At,, our FCCR of 1.18x exceeded the FCCR springing covenant level of 1.0x. Under the terms of the ABL Facility, we are also restricted from voluntarily prepaying subordinated debt obligations exceeding $1.0 million, paying dividends or repurchasing common shares, and completing business acquisitions exceeding $10.0 million in any calendar year should our excess borrowing capacity not exceed the levels of $43.1 million, $38.8 million, and $30.2 million, respectively. With an excess borrowing base capacity of $21.1 million, we were restricted from these activities at,. TSX: ENT Page 16

17 Second Quarter In March, we converted $100 million CAD of funds drawn under our ABL Facility into USD to hedge against decreases in our excess borrowing capacity resulting from potential future decreases in the USD. As the market value for the majority of our equipment is generally valued in US dollars, the orderly liquidation value of our fleet is impacted by changes in the value of the USD. Our excess borrowing capacity will also be impacted by future changes in the liquidation value of our equipment fleet. The last appraisal of our equipment fleet was completed at,. Our excess borrowing capacity of $21.1 million at, declined from $23.8 million at December 31,. At,, all of our accounts receivable with the JV Driver Group of Companies (CAD $4.1 million) became ineligible for the borrowing base due to the aging of the outstanding balances (see Related Party Transactions ). This ineligibility caused a decrease in our excess borrowing capacity for the six months ended June 30,. Convertible Debentures We have outstanding $21.8 million principal of Debentures. The Debentures have an annual coupon rate of 8.50%, payable semi-annually, mature on, 2021 and are convertible, at the holder s option, into common shares of ENTREC at a conversion price of $1.00 per share. We may redeem the Debentures, in whole or in part, at any time up to, 2021, at a price equal to the principal amount thereof plus accrued and unpaid interest to, but excluding the date of redemption. The Debentures trade on the TSX under the symbol ENT.DB. At,, the market value of the Debentures, as traded on the TSX, was $20.1 million. Contractual Obligations At,, our contractual undiscounted debt and lease obligation payments for the next five years and thereafter were as follows: $ thousands Less than 1 year 1 5 years After 5 years Total Trade and other payables 14, ,904 Long-term debt 4, , ,216 Obligations under operating lease 11,543 26,927 54,954 93,424 Obligations under finance lease Debentures - 21,800-21,800 31, ,238 54, ,688 At,, we had assets that are expected to generate sufficient cash inflows to exceed cash outflows on our financial liabilities and commitments. Shareholders Equity Shareholders equity declined to $36.3 million at, from $44.8 million at December 31,. The statements of shareholders equity included in the accompanying consolidated financial statements for the six months ended, provide a schedule showing changes to share capital, deficit, contributed surplus and accumulated other comprehensive income during the period. The decrease of $8.5 million was primarily attributable to the net loss incurred during the six months ended,. TSX: ENT Page 17