management’s discussion and analysis - terravest capital … · this management’s discussion...

MANAGEMENT’S DISCUSSION AND ANALYSIS For the Three months ended December 31, 2016 Dated: February 8, 2017

2 2017 Q1 ‐ MD&A

TerraVest Capital Inc.

MANAGEMENT’S DISCUSSION & ANALYSIS This Management’s Discussion and Analysis (“MD&A”) presents management’s view of the financial position and performance of

TerraVest Capital Inc. (“TerraVest” or the “Company”) for the three months ended December 31, 2016, and should be read in

conjunction with TerraVest’s unaudited interim condensed consolidated financial statements as at and for the three months ended

December 31, 2016. All amounts are stated in thousands of Canadian dollars, except per share data unless otherwise stated, and

have been prepared in accordance with International Financial Reporting Standards (“IFRS”). This discussion is prepared as at

February 8, 2017 and has been prepared with all available information up to and including the date of this report.

This document should be read in full including the definitions of non‐GAAP measures such as EBITDA, Adjusted EBITDA, Free Cash

Flow, Cash Available for Distribution, Maintenance Capital Expenditures, Dividend Payout Ratio, Working Capital and Backlog which

are found on pages 12 and 13 of this MD&A and the cautionary Forward Looking Statements found on pages 14 and 15 of this

Management’s Discussion and Analysis.

OVERVIEW & STRATEGY

TerraVest is a publicly traded holding company focused on acquiring businesses with strong cash flow generation, long track records

of operating success, strong balance sheets and committed management teams. We are focused on creating value for shareholders

through our existing lines of business as well as acquiring additional businesses with stable cash flows and potential for growth

through our support.

We are primarily focused on evaluating opportunities within our circle of competence that complement our existing businesses and

provide integration benefits. For TerraVest these opportunities reside in the fabrication of oil and gas processing equipment and the

manufacturing of tanks and fuel containment vessels where expertise in metal fabrication and welding are required. We also see

opportunities to augment our existing oilfield services business.

TerraVest is comprised of three business segments: Fuel Containment, which manufactures tanks and pressure vessels for fuel and

liquid containment, Fabrication, which manufactures oil and gas processing equipment, and the Service segment, which provides

services to oil and gas producers in Western Canada.

Fuel Containment Segment

TerraVest’s Fuel Containment segment consists of Gestion Jerico Inc. (“Jerico”), a leading North American manufacturer of items

such as bulk propane trucks, propane dispensers, pressure vessels and commercial and residential liquid containment units. Jerico’s

products are sold into many industries across Canada and the Northeastern United States. Jerico sells bulk propane trucks, propane

storage tanks, residential fuel tanks, furnaces and boilers through its distribution network. The end users of Jerico’s products are

fuel distributers and public retail consumers.

Fabrication Segment

TerraVest fabricates oil and gas wellhead processing equipment through its subsidiaries RJV Gas Field Services (“RJV”), NWP

Industries (“NWP”), EnviroVault LP (“EnviroVault”) and Segretech Inc. (“Segretech”) for the oil and natural gas industry in Western

Canada. RJV and NWP are widely recognized names with many years of operating history respectively. Both Companies provide a

wide array of wellsite processing equipment to major oil and gas producers in North America. RJV operates out of Vegreville, Alberta

and NWP operates out of Innisfail, Alberta with a sales office in Calgary, Alberta. EnviroVault produces specialized environmentally

friendly containment products for the oil and gas industry in Canada and the United States. Segretech Inc., which is located in

Calgary, Alberta, provides sand separators to oil and gas producers. The sand separators are manufactured by RJV, NWP as well as

third parties.

Service Segment

TerraVest’s Service segment consists of Diamond Energy Services (“Diamond”) which provides well servicing to the oil and natural

gas sector in South‐Western and Central Saskatchewan. Diamond has been providing well servicing to major oil and gas producers in

Saskatchewan for many years and is a well‐recognized name. Diamond currently operates 21 service rigs giving it the critical mass to

service the needs of the largest oil and gas producers in the area.

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HIGHLIGHTS – First Quarter fiscal 2017

Revenues of $48,278 for the quarter, down 13% from the comparable period in fiscal 2016;

First quarter Adjusted EBITDA of $8,448, which represents a decrease of 18% over the first quarter of fiscal 2016;

Free cash flow for the quarter of $(3,856), which represents a decrease of $10,330 over the first quarter of fiscal 2016;

Repurchased $441 face value of convertible debentures; and

Earnings per share and diluted earnings per share of $0.21 and $0.19, respectively, for the three months ended December 31, 2016 compared to earnings per share and diluted earnings per share of $0.26 and $0.24, respectively, in the first quarter of fiscal 2016

OUTLOOK

TerraVest’s Fuel Containment segment continues to see strong demand for this segment’s residential steel and fiberglass tank

products. Demand for this segment’s propane product line has been mixed over the previous year with demand for bulk storage

tanks being relatively strong and demand for trailers and bobtails being soft as a result of the previous unseasonably warm winter.

Management is starting to see this trend reverse as we experience normal seasonal temperatures.

TerraVest’s Fabrication segment is seeing an increase in plant utilization in conjunction with the increase in drilling activity in recent

months. Despite this increase in plant utilization, margins remain depressed as there is considerable pricing pressure. Overall,

Management remains optimistic that performance will improve relative to the previous fiscal year. Management also continues to

streamline operations and develop new revenue opportunities for the segment, the benefits of which are expected to materialize

over the medium term.

Similar to the Fabrication segment, the Service segment is seeing an increase in utilization of its service rigs. While hourly rates have

yet to follow suit, management is optimistic that financial performance for the segment will improve if existing oil prices stabilize.

TERRAVEST CONSOLIDATED RESULTS OF OPERATIONS The following section provides the financial results of TerraVest’s operations for the three months ended December 31, 2016 and the comparative period in fiscal 2016.

2016 2015

$ $

Sales 48,278 55,762

Cost of sales 36,190 42,226

Gross profit 12,088 13,536

General and administration expenses 4,647 4,704

Selling expenses 1,436 1,140

Financing costs 887 897

Net income before tax 5,118 6,795

Income taxes 1,377 1,861

Net Income 3,741 4,934

Allocated to non‐controlling interest (35) 96

Net income available to common shareholders 3,776 4,838

Weighted average shares outstanding ‐ Basic 18,318 18,279

Weighted average shares outstanding – Diluted 21,148 21,154

Earnings per share – Basic $0.21 $0.26

Earnings per share – Diluted $0.19 $0.24

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Revenue for the three months ended December 31, 2016 was $48,278 compared to $55,762 in the first quarter last year. This

represents a decrease of approximately 13% over the comparable period in fiscal 2016. The decrease is primarily due to the propane

related product division of Fuel Containment, in which weak demand for a new truck line in the first quarter of fiscal 2017 impacted

the sales of the segment negatively.

The Company’s gross profit for the three months ended December 31, 2016, was approximately 11% lower than in the comparable

quarter primarily resulting from pricing pressure in the oil and gas entities. Management expects this pricing pressure will continue

in the short to medium term.

General and administration expenses for the three months ended December 31, 2016 were 1% lower than in the same period of

fiscal 2016. Included in administration expenses in the quarter is a foreign exchange gain of approximately $310 and amortization of

$1,421 compared to a foreign exchange gain of $647 and amortization of $1,201 in the comparable quarter. General and

administration expenses for the quarter, after adjusting for foreign exchange gains and amortization, were approximately 15%

lower than in the same quarter of 2016.

Selling expense increased by 26% in the quarter compared to the first quarter of fiscal 2016. The increase is primarily due to

increased selling costs in the Fabrication segment as a result of acquisitions in the segment.

Financing costs for the three months ended December 31, 2016 were $887 compared to $897 for the same period in fiscal 2016.

The decrease over the prior comparable period is primarily a result of lower average debt levels during the quarter and the

reduction in the number of issued and outstanding 7% convertible debentures, which were issued in April 2015.

Income tax expense for the three months ended December 31, 2016 was $1,377 compared to $1,861 in the first quarter of fiscal

2016. Several of TerraVest’s operating subsidiaries are taxable entities. TerraVest does carry tax losses which are available to shelter

certain future income tax obligations for some, but not all of TerraVest’s Subsidiaries. The portion of the income tax expense related

to deferred taxes for the three months December 31, 2016 was $33 compared to $489 for the comparative period ended December

31, 2015.

Management believes that there are certain non‐GAAP financial measures that can be used to assist shareholders in determining

the performance of the Company. The table below highlights certain financial results and reconciles net income to EBITDA, EBITDA

to Adjusted EBITDA and Adjusted EBITDA to Cash Available for Distribution for the first quarter in fiscal 2017 and the comparative

period in fiscal 2016.

Three months ended December 31

2016 2015

$ $

Revenue 48,278 55,762

Net income 3,741 4,934

Add (subtract): Income taxes 1,377 1,861

Financing costs 887 897

Amortization and depreciation 2,519 2,584

EBITDA 8,524 10,276

Gain on disposal of property, plant and equipment (76) (25)

Adjusted EBITDA 8,448 10,251

Maintenance Capital Expenditures (2,355) (802)

Cash income taxes paid (1,484) (2,647)

Financing costs paid (710) (1,522)

Distribution to non‐controlling interest - (266)

Cash Available for Distribution 3,899 5,014

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Dividends Paid in the Period 1,832 1,831

Dividend Payout Ratio 47% 37%

Free Cash Flow

Cash flow from operations before changes in non‐cash Working Capital 6,361 6,116

Changes in non‐cash Working Capital (7,998) 1,101

Cash flow from operations (1,637) 7,217

Add (subtract): Purchase of property, plant and equipment (2,355) (802)

Proceeds on disposal of property, plant and equipment 136 59

Free Cash Flow (3,856) 6,474

TerraVest generated $8,448 of Adjusted EBITDA in the first quarter of fiscal 2017 compared to $10,251 in the same quarter of fiscal

2016. The 18% decrease is the result of poorer operating results in all segments compared to the same period in fiscal 2016.

Cash Available for Distribution in the quarter decreased over the same quarter of fiscal 2016 largely due to increased levels of

maintenance capital expenditures as well as poorer operating results in the Fuel Containment and Service segments. As a result of

the decreased Cash Available for Distribution the dividend payout ratio was 47% in the quarter compared to 37% in the quarter

ended December 31, 2015.

Free Cash Flow for the quarter decreased by $10,330 compared to the same quarter in fiscal 2016. The decrease in free cash flow is

largely the result of weaker operating results in Fuel Containment and Service, as well as increased levels of capital expenditures as the

Fuel Containment segment has incurred some capital expenditures aimed at improving operating efficiency.

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SEGMENTED RESULTS

a) Fuel Containment

2016 2015

$ $

Revenue 30,027 33,794

EBITDA 6,301 7,607



Amortization and depreciation (1,444) (1,431)

Gain on disposal of property, plant and equipment 41 21

Financing costs (158) (188)

Income taxes expense (1,277) (1,717)


Cash flow before changes in non‐cash working capital 4,795 5,595

Changes in non‐cash working capital 2,675 3,350

Cash flow from operating activities 7,470 8,945

Purchase of property, plant and equipment (1,261) (536)

Proceeds of disposal of property, plant and equipment 50 21

Free Cash Flow 6,259 8,430

The Fuel Containment segment’s revenue was $30,027 for the quarter ended December 31, 2016, compared to $33,794 in the same

quarter of fiscal 2016, which is primarily the result of weaker propane product demand in the quarter.

Adjusted EBITDA for this segment was $6,260 for the quarter ended December 31, 2016 compared to $7,586 for the comparable

quarter. Adjusted EBITDA decreased by $1,326 for the same reason as stated above.

Free Cash Flow was $6,259 for the first quarter of fiscal 2017 compared to $8,430 in the first quarter of fiscal 2016. The decrease is

explained in part by the decrease in operating results and the increased capital expenditures compared to the previously

comparable period.

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b) Fabrication

2016 2015

$ $

Revenue 14,684 15,361

EBITDA 1,503 1,717



Amortization and depreciation (446) (374)

Gain on disposal of property, plant and equipment 35 5



Cash flow before changes in non‐cash working capital 1,433 1,668

Changes in non‐cash working capital (1,887) (3,118)

Cash flow from operating activities (454) (1,450)

Purchase of property, plant and equipment (789) (83)

Proceeds of disposal of property, plant and equipment 86 14

Free Cash Flow (1,157) (1,519)

Revenue for the Fabrication segment was $14,684 for the quarter ended December 31, 2016, compared to $15,361 for the same

quarter in fiscal 2016. The decline in revenues for the quarter is directly attributable to pricing pressure in Western Canada.

Adjusted EBITDA for the Fabrication segment was $1,468 for the three months ended December 31, 2016 as compared to $1,712 for

the three months ended December 31, 2015. The decline is a result of the reasons stated above.

Free Cash Flow for the Fabrication segment was $(1,157) for the three months ended December 31, 2016. This compares to $(1,519)

for the three months ended December 31, 2015. The increase in working capital that this segment usually experiences during the

first quarter was not as significant as the prior year as result of focused efforts on working capital management.

Capital expenditures, net of proceeds of disposal, for the three months ended December 31, 2016 were $703, compared to $69 for

the comparative quarter ended December 31, 2015. Gross capital expenditures increased from $83 in the first quarter of fiscal 2016

to $789 in the first quarter of the current year as the Fabrication segment has taken steps to build out its fleet of sand separators.

c) Service

2016

$

2015

$

Revenue 5,536 6,607

EBITDA 986 1,586

Gain on disposal of property, plant and equipment ‐ ‐

Adjusted EBITDA 986 1,586

Amortization and depreciation (629) (779)


Income taxes (expense) recovery (17) 37

Net Income 307 804

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2016 2015

$ $

Cash flow before changes in non‐cash working capital 954 1,545

Changes in non‐cash working capital (91) (372)

Cash flow from operating activities 863 1,173

Purchase of property, plant and equipment (305) (183)

Proceeds of disposal of property, plant and equipment - 25

Free Cash Flow 558 1,015

Gross revenues for the three month period ended December 31, 2016 decreased 16% to $5,536 from $6,607 compared to the same

period in fiscal 2016 due to a combination of lower utilization and lower field rates.

Diamond currently operates three shallow coiled tubing units. During the quarter, operating hours for the coil units were 43% higher

than last year and the revenue contribution from the coiled tubing division increased 12%. The average rate for coil tubing in the

quarter dropped 15% over last year due to pricing pressure. During the three month period ended December 31, 2016, the

utilization rates for Diamond’s active coiled tubing units averaged 49% compared to 23% for the same period in fiscal 2016.

During the quarter, EBITDA was $986 compared to $1,586 for the same period in fiscal 2016, a decrease of 38%, as a result of the

same reasons discussed above. Cash flow before changes in non-cash working capital for the three month period ended December

31, 2016 was $954 compared to $1,545 for the comparable period in fiscal 2016 and net earnings were lower at $307 compared to

$804 for the comparable period in fiscal 2016.

TERRAVEST CONSOLIDATED QUARTERLY FINANCIAL INFORMATION

For the quarters ended

31‐Dec‐16 30‐Sep‐16 30‐Jun‐16 31‐Mar‐16 31‐Dec‐15 30‐Sep‐15 30‐Jun‐15 31‐Mar‐15

$ $ $ $ $ $ $ $

Revenue 48,278 43,320 36,016 43,415 55,762 54,288 46,305 41,441

Adjusted EBITDA 8,448 8,273 1,456 4,821 10,251 11,164 7,285 6,019

Net income attributable to common shares

3,776

1,552

(204)

1,267

4,838

5,357

2,183

2,364

Free cash flow (3,856) 156 6,938 14,033 6,474 3,285 (1,314) 5,092

Net income per share

− Basic 0.21 0.08 (0.01) 0.07 0.26 0.30 0.12 0.13

− Diluted 0.19 0.08 (0.01) 0.07 0.24 0.28 0.12 0.13

TerraVest’s business divisions are seasonal in nature. The strongest quarters for the Company as a whole are the three month

periods ending September 30 and December 31. The Fabrication and Service segments generally experience higher revenues for the

three month periods ending December 31 and March 31 as the majority of drilling in Western Canada occurs during the winter

months. The Fuel Containment segment generally experiences higher revenues during the three month periods ending September

30 and December 31 as demand for residential, commercial and industrial heating products increases heading into the winter

months. The three month period ending June 30 is typically the weakest across all of its segments.

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DISTRIBUTIONS AND DIVIDENDS The following table outlines the dividends declared by TerraVest in the current period:

Record Date Payment Date Dividend per share Type of Dividend

December 30, 2016 January 11, 2017 $0.10 Eligible

Subsequent to the end of the first quarter, TerraVest declared a dividend of $0.10 per share payable on April 12, 2017 to

shareholders of record March 31, 2017.

TerraVest expects to declare and pay a dividend on a quarterly basis. The dividend policy may be changed from time to time in the

sole discretion of the Board of Directors. Accordingly, there can be no assurances as to the amount or timing of any dividend in the

future. In assessing whether to pay a dividend and in determining the amount of the dividend, the Board of Directors will consider

TerraVest’s financial condition and its then current business needs and other factors the Board of Directors may consider

appropriate in the circumstances.

LIQUIDITY AND CAPITAL RESOURCES At December 31, 2016, TerraVest’s cash position was $5,131, as compared to $9,643 at September 30, 2016. The decrease in

TerraVest’s cash position in the first quarter of 2017 is largely the result of the cash used in investing activities.

The following table provides summary information with respect to consolidated cash flows from operations, investing and financing

activities for the three months ended December 31, 2016 compared to the three months ended December 31, 2015:

2016

$

2015

$

Cash (used in) provided by operating activities (1,637) 7,217

Cash used in investing activities (2,219) (2,264)

Cash used in financing activities (699) (11,038)

Net cash outflows for the period (4,555) (6,085)

Impact of foreign exchange on revaluation of foreign assets 43 (553)

Cash, beginning of period 9,643 14,059

Cash, end of period 5,131 7,421

Cash (used in) provided by operating activities Cash used in operating activities for the three months ended December 31, 2016 was $1,637 compared to cash of $7,217 provided

for the same period in fiscal 2016. The decrease is largely due to reduced operating results in the Fabrication and Service segments.

At December 31, 2016, consolidated working capital was $49,234, compared to $44,468 as at September 30, 2016. As at December

31, 2016, TerraVest had available operating loans totaling $57,558 of which $24,508 had been drawn. TerraVest currently has the

capacity to fund working capital requirements through existing credit facilities.

Cash used in investing activities For the three months ended December 31, 2016, TerraVest used net cash of $2,219 for investing activities, compared to $2,264 in

the three months ended December 31, 2015.

Cash used financing activities Net cash used in financing activities was $699 for the three months ended December 31, 2016, compared to $11,038 for the three

months ended December 31, 2015.

TerraVest and its subsidiaries have access to short‐term credit facilities which include operating loans that are margined based on

accounts receivable and inventories and a capital loan which is margined on the net book value of the property, plant and

equipment of the Service segment. These short‐term credit facilities are subject to certain financial covenants which are based on

the results of the individual subsidiaries in which the credit facilities are held. These short‐term credit facilities are also subject to

certain restrictive non‐financial covenants which may limit the ability of an individual subsidiary to draw on its credit facility. The

availability of these short‐term credit facilities at any given time may have an impact on TerraVest’s liquidity and available capital

resources and its ability to fund its operating and future growth plans. As at December 31, 2016, the Diamond and Jerico Loans were

10 2017 Q1 ‐ MD&A


in compliance with all the financial and non-financial covenants. The TerraVest Loan was in compliance with two of the three

covenants. The creditor has issued a certificate extending the loan conditions due to this covenant violation. The debt service charge

coverage covenant has been amended to at least 1.25:1 from 1.10:1 going forward with the first testing period beginning March 31,

2017. For further information on the financial and non-financial covenants please refer to notes 5, 6 and 7 in the unaudited interim

condensed consolidated financial statements for the three months ended December 31, 2016.

The following table provides a summary of the available short‐term credit facilities at December 31, 2016:

Maximum availability based on

Margin

Amount Drawn

Amount available to Draw

$ $ $

Operating loans 57,558 24,508 33,050 Capital loans 6,500 3,682 2,818

64,058 28,190 35,868

Commitments As at December 31, 2016, TerraVest’s contractual obligations are as follows:

Payments

Next

twelve

months

Two‐five

years

To

maturity

Bank indebtedness $ 905 $ 905 $ ‐ $ ‐

Operating loans 24,508 ‐ 24,508

Accounts payable and accrued liabilities 18,065 18,065 ‐ ‐

Capital loan 3,682 3,682 ‐ ‐

Long‐term debt 4,734 4,650 84 -

Interest on capital loan and long‐term debt 927 168 587 172

Principal amount of convertible debentures 22,950 ‐ 22,950 ‐

Interest on convertible debentures 5,604 1,607 3,997 ‐

Operating leases 6,163 1,684 3,172 1,307

$ 87,538 $ 30,761 $ 55,298 $ 1,479

TerraVest also has obligations under forward foreign exchange contracts expiring on various dates up to and including November

28, 2019 to sell US $19,600. The forward contracts are marked to market at December 31, 2016 resulting in a liability of $294 which

is included in accounts payable and accrued liabilities at December 31, 2016.

TerraVest expects to be able to fund all working capital requirements, contractual obligations and capital expenditures from a

combination of operating cash flows and existing credit facilities.

CAPITAL MANAGEMENT TerraVest’s objective in managing its capital resources is to ensure that there are adequate capital resources to support the

operations of its various business segments in order to maximize the return to shareholders.

Management continually assesses TerraVest’s capital needs to meet TerraVest’s objectives with its business segments. The capital

structure of TerraVest consists of its credit facilities, convertible debentures, shareholders’ equity, and non‐controlling interest.

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The following table outlines TerraVest’s capital structure at December 31, 2016 and September 30, 2016:

December 31, September 30, 2016 2016

Bank indebtedness $ 905 $ 1,622 Drawn on operating loans 24,508 21,723 Available on operating loans, net of amount drawn 33,050 31,658 Drawn on capital loan 3,682 4,057 Available on capital loan, net of amount drawn 2,818 2,443 Long‐term debt (current and non‐current) 4,734 4,845 Convertible debentures 19,128 19,272 Shareholders’ equity 88,033 85,752 Non‐controlling interest 734 769

$ 177,592 $ 172,141

Other than the financial covenants and restrictive non‐financial covenants contained in the loan agreements TerraVest is not subject

to any externally imposed capital restrictions. For further information on TerraVest’s financial covenants refer to Notes 5, 6 and 7 in

the unaudited interim condensed consolidated financial statements for the three months ended December 31, 2016.

The Board of Directors does not establish quantitative return on capital criteria for Management. TerraVest intends to maintain a

flexible capital structure that is consistent with its stated objectives and make adjustments to it in light of economic conditions. In

order to maintain or adjust its capital structure, TerraVest may, from time to time, acquire shares for cancellation in connection with

a substantial issuer bid or a normal course issuer bid, issue new shares, raise capital through various debt instruments or refinance

current debt through instruments with different characteristics.

COMMON SHARES TerraVest’s common shares are listed on the Toronto Stock Exchange under the symbol TVK.

The following summarizes the changes in the shares of TerraVest during the three months ended December 31, 2016:

December 31, 2016

Number $

Issued and outstanding, beginning of period 18,318,720 142,585

Shares acquired under normal course issuer bid (2,000) (16)

Issued and outstanding, end of period 18,316,720 142,569

TerraVest renewed its Current NCIB during the year. In the three months ended December 31, 2016, TerraVest acquired 2,000

shares. The NCIB expires on December 18, 2017. Subsequent to the end of the quarter, TerraVest acquired an additional 2,400

shares. At February 8, 2017, there are 18,325,834 common shares issued and outstanding.

SHARE BASED PAYMENTS TerraVest has reserved 1,500,000 common shares under a stock option plan for key personnel, of which 333,000 stock options were

issued in fiscal 2015, and 498,000 stock options were issued in fiscal 2014. The options may only be exercised for common shares of

the company. Total expense arising from the share‐based payment transactions recognized during the period as part of the

compensation expense was $15 (2015 - $34).

The stock options outstanding and the weighted average exercise prices as at December 31, 2016, are as follows:

Grant Date

Expiry Date

Weighted average exercise

price

Opening balance

Granted

Closing balance

Vested and exercisable

Unvested

18‐Jun‐14 18‐Jun‐19 $6.10 498,000 ‐ 498,000 332,000 166,000

18‐Jun‐15 18‐Jun‐20 $6.30 333,000 ‐ 333,000 111,000 222,000

$6.18 831,000 ‐ 831,000 443,000 388,000

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No stock options were exercised or forfeited during the period.

TOTAL ASSETS Total assets at December 31, 2016 were $178,594 compared to $168,968 at September 30, 2016. The increase in total assets is

largely the result of cash, accounts receivable and inventory levels.

RISK FACTORS For a detailed discussion of the risk factors related to the businesses and to the structure of TerraVest please refer to the Annual

Information Form of TerraVest dated December 7, 2016 under the heading “Risk Factors” which is incorporated herein by reference.

RELATED PARTY TRANSACTIONS The Company was party to related party transactions during the three months ended December 31, 2016. All related party

transactions were in the normal course of operations and occurred at fair value and there were no significant changes since fiscal

year ended September 30, 2016. For full details of the Company’s related party transactions, please refer to note 22 of our

consolidated financial statements for the year ended September 30, 2016.

ACCOUNTING POLICIES TerraVest prepares its financial statements in accordance with IFRS. TerraVest’s accounting policies under IFRS are disclosed in Note

3 to the audited consolidated financial statements for the year ended September 30, 2016, incorporated herein by reference.

NON‐GAAP FINANCIAL MEASURES EBITDA, Adjusted EBITDA, Free Cash Flow, Cash Available for Distribution, Maintenance Capital Expenditures, Dividend Payout Ratio,

Working Capital, Backlog and Operating Expenses are not defined measures under IFRS and are therefore defined below.

TerraVest’s definitions may differ from those of other issuers and therefore may not be comparable to measures used by them.

EBITDA: is defined as income from operations before financial expenses, income taxes, depreciation and amortization, EBITDA

should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital

expenditures, debt changes and other sources and uses of cash which are disclosed in the unaudited interim condensed

consolidated statement of cash flows. Management uses EBITDA as part of its assessment of TerraVest’s operating performance.

There is no directly comparable IFRS measure for EBITDA.

Adjusted EBITDA: is defined as EBITDA adjusted for gains or losses on disposal of property, plant and equipment, impairment

charges and other non‐cash items.

Free Cash Flow: is defined as cash flow from operating activities from continuing operations less net capital expenditures from

continuing operations. Free Cash Flow is a useful measure in that it provides Management and investors an indication of TerraVest’s

capacity to generate discretionary cash flows from operations. Free Cash Flow should not be an exclusive measure of cash flow since

it does not necessarily reflect the cash flow in the period available for Management to use at its discretion, which may be affected

by other sources and non‐discretionary uses of cash such as scheduled debt repayments. There is no directly comparable IFRS

measure for Free Cash Flow.

Cash Available for Distribution: is defined as EBITDA less Maintenance Capital Expenditures, cash income taxes and financing costs.

Management believes that Cash Available for Distribution as a liquidity measure is a useful supplemental measure as it provides an

indication of the amount of cash available to pay as dividends to shareholders. There is no directly comparable IFRS measure for

Cash Available for Distribution.

Maintenance Capital Expenditures: is defined as capital expenditures made to sustain the operations of TerraVest’s operating

businesses and to maintain the productive capacity of the business over an economic cycle, whether or not they yield significant

cost or production efficiencies. Management believes that maintenance capital expenditures should be funded by cash flow from

existing operating activities and, therefore, deducted in determining cash available for distributions. There is no directly comparable

IFRS measure for Maintenance Capital Expenditures.

Dividend Payout Ratio: is defined as dividends paid in cash during the period divided by Cash Available for Distribution for the

period. There is no directly comparable IFRS measure for Dividend Payout Ratio.

Working Capital: is calculated by subtracting current liabilities from current assets. Management uses working capital as a measure

13 2017 Q1 ‐ MD&A


for assessing overall liquidity. There is no directly comparable IFRS measure for Working Capital.

Backlog: is defined as committed purchases orders received for future delivery of product to customers. There is no directly

comparable IFRS measure for Backlog.

Operating expenses: is defined as cost of goods sold plus administration and selling expenses.

NEW ACCOUNTING PRONOUNCEMENTS For a detailed discussion of new accounting pronouncements please refer to Note 3(b) of the unaudited interim condensed

consolidated financial statements for the three months ended December 31, 2016.

CRITICAL ACCOUNTING ESTIMATES

For a detailed discussion of the use of estimates and judgments please refer to Note 2 of the consolidated financial statements for

the year ended September 30, 2016 incorporated herein by reference.

FINANCIAL INSTRUMENTS

TerraVest, through its financial assets and liabilities, has exposure to the following risks from its use of financial instruments: foreign

currency risk, credit risk, liquidity risk, commodity price risk and interest rate risk. An analysis of these risks as at December 31,

2016, is provided below.

Foreign currency risk

TerraVest is subject to foreign exchange risk for Revenue and purchases denominated in foreign currencies. Foreign currency risk

arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar.

TerraVest considers itself partially hedged given the level of its purchases denominated in foreign currencies relative to its Revenue

and therefore does not have a policy to hedge its foreign currency risk. Based on the net US dollar exposure during the three

months ended December 31, 2016, a one cent increase/decrease in the Canadian/U.S. dollar exchange rate would have an impact of

$188 on net income (2015 ‐ $133) for the period.

While the Company does not have a policy to hedge its foreign currency risk it manages its exposure to foreign exchange risk by

periodically entering into forward foreign exchange contracts. Please refer to the Liquidity Section of this MD&A for a further

discussion on the outstanding forward foreign exchange contracts.

Credit risk

TerraVest is exposed to credit risk. Credit risk arises from the potential that a counterparty will fail to perform its obligations.

TerraVest’s credit risk is mitigated as the majority of its customers are large well established companies with a history of prompt

payment. As at December 31, 2016, 95% (September 30, 2016 – 94%) of TerraVest’s accounts receivable were less than 90 days past

invoice date and 5% (September 30, 2016 – 6%) were greater than 90 days past invoice date. TerraVest maintains allowances that it

considers adequate for potential bad debts on its accounts receivable and any such losses to date have been provided for. All other

accounts receivable not previously allowed for are considered collectible and of good quality. TerraVest’s maximum exposure to

credit risk is $32,562 (September 30, 2016 – $28,966).

Liquidity risk

TerraVest’s objective is to have sufficient liquidity to meet its liabilities when due. TerraVest monitors its cash balances and cash

flows generated from operations to meet its requirements. For a more detailed discussion of liquidity, refer to the section entitled

“Liquidity and Capital Resources” in this MD&A.

Commodity price risk

TerraVest is sensitive to changes in commodity prices for steel, crude oil and natural gas. Fluctuations in commodity prices for steel,

crude oil and natural gas have an indirect impact on TerraVest’s business segments operating in all of TerraVest’s segments. The

indirect impact is the effect that the price variations have on activity levels for customers of those business segments and,

therefore, the demand for goods and services. The indirect impact is not quantifiable.

Interest rate risk

TerraVest is exposed to interest rate risk arising from fluctuations in interest rates on amounts payable under TerraVest’s debt

structure. Based on the outstanding average balances on the Operating Loan, Capital Loan and Long‐Term Debt with fluctuating

14 2017 Q1 ‐ MD&A


interest rates and Canadian bank prime rates during the three months ended December 31, 2016, a fluctuation of 100 basis points

in the interest rates paid would result in an impact on net income for the three months ended December 31, 2016, of approximately

$85 (December 31, 2015 ‐ $99).

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures TerraVest’s disclosure controls and procedures are designed to ensure that all important information about TerraVest, including

operating and financial activities, is communicated fully, accurately and in a timely manner and that they provide TerraVest with the

assurance the financial reporting is accurate.

Internal Control Over Financial Reporting

Internal control over financial reporting means a process designed by or under the supervision of the Executive Chairman, in his

capacity as Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO”), to provide reasonable assurance regarding

the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

The internal controls are not expected to prevent and detect all misstatements due to fraud and error.

As at December 31, 2016, TerraVest’s Executive Chairman, in his capacity as CEO and Interim CFO, has certified that the disclosure

controls and procedures are effective and that during the three months ended December 31, 2016, TerraVest did not make any

changes in internal controls over financial reporting that materially affected or are reasonably likely to materially affect TerraVest’s

internal controls over financial reporting.

FORWARD‐LOOKING STATEMENTS

The public communications of TerraVest often include written or oral forward-looking statements. Statements of this type are

included in this MD&A, and may be included in other filings with Canadian securities regulators, or in other communications. All

statements other than statements of historical fact contained in this MD&A are forward-looking statements, including, without

limitation, statements regarding our objectives under “Overview”, our dividend policy under “Distributions and Dividends”, the

availability of credit and other financing sources under “Liquidity and Capital Resources”, outlook for operations, financial position,

results and cash flow under “Outlook” and other plans, objectives and expectations of or involving TerraVest (including under

“Commitments” and “Contingencies”). Readers can identify many of these statements by looking for words such as “believe”,

“expects”, “will”, “intends”, “projects”, “anticipates”, “estimates”, “continues”, and similar words or the negative thereof. Although

management of the Company (“Management”) believes that the expectations represented in such forward-looking statements are

reasonable, there can be no assurance that such expectations will prove to be correct. Forward-looking statements are used to

describe Management expectations and plans and to assist shareholders in understanding the financial position of the Company, as

a whole, and its business segments. Readers are cautioned that this information may not be appropriate for other purposes.

By their nature, forward-looking statements require the Company to make assumptions and, accordingly, forward-looking

statements are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not

prove to be accurate. TerraVest cautions readers of this MD&A not to place undue reliance on our forward-looking statements

because a number of factors may cause actual future circumstances, results, conditions, actions or events to differ materially from

the plans, expectations, estimates or intentions expressed in the forward-looking statements and the assumptions underlying the

forward-looking statements.

Assumptions and analysis about the performance of the Company, as a whole, and its business segments, the markets in which the

business segments compete and the prospects and values of the business segments are considered in setting the business plan for

the Company, in evaluating and forecasting availability of credit, outlook for operations, financial position, results and cash flow,

ability to pay dividends, other plans and objectives and in making related forward-looking statements. In respect of the business

segments, key assumptions are that, other than as specifically identified herein, demand for products and services of the business

segments in respect of the Canadian and other markets in which the businesses are active will be stable, and that the input costs to

the business segments do not vary significantly from the levels experienced historically. Should any of these factors or assumptions

vary, actual results may differ materially from the forward-looking statements.

15 2017 Q1 ‐ MD&A


The information set forth under “Risk Factors” in the annual information form of the Company dated December 7, 2016,

incorporated by reference herein, and under “Financial Instruments” in this MD&A, identifies risk factors that could affect the

operating results and performance of the Company and its business segments and the values of the business segments and the

Company as a whole. We caution that the lists of factors discussed under “Risk Factors” in the annual information form of the

Company dated December 7, 2016, and under “Financial Instruments” in this MD&A are not exhaustive and that, when relying on

forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the

factors discussed, as well as other uncertainties and potential events, and the inherent risks and uncertainties of forward-looking

statements. The forward-looking statements herein are made based on the assumption that the Company will not be affected by

such risks, but that, if the Company is affected by such risks, the forward-looking statements may become inaccurate.

The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The

forward-looking statements included in this MD&A are made as of the date of this MD&A. Except as required by applicable

securities laws, the Company does not undertake to update any forward-looking statement, whether written or oral that it may

make or that may be made, from time to time, on its behalf.

ADDITIONAL INFORMATION

Additional information relating to TerraVest, including the annual information form of the Company, is available on SEDAR at

www.sedar.com.

http://www.sedar.com/

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