Horizon North Logistics Inc.
Annual Report 2013

Plain-text annual report

Annual Report 2013 Table of Contents Information on Annual Meeting President’s Letter to Shareholders Management’s Discussion and Analysis Management’s Report to Shareholders Independent Auditors’ Report to Shareholders Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Information Page ifc 3 4 32 33 34 38 obc Information on Annual General Meeting The Annual General Meeting of the Shareholders of Horizon North Logistics Inc. will be held on April 30, 2014 at 3:00 p.m. (local time) in the Strand/Tivoli Room, Metropolitan Conference Centre, 333-4th Avenue SW., Calgary, Alberta. Shareholders are encouraged to attend and those unable to do so are requested to complete and submit the Instrument of Proxy at their earliest convenience. President’s Letter to Shareholders At its onset, Horizon’s 2013 fiscal year was not expected to continue the trend of rapid expansion set in the previous three years. However, results were more muted than originally anticipated and the year ended with a particularly weak fourth quarter. Revenue for the year increased by 5% over the prior year while EBITDAS and Earnings per Share decreased by 13% and 42%, respectively, from the record results achieved in 2012. As a result, bottom line performance as measured by return on invested capital declined to 15.8% in 2013 from 20.4% in 2012. Commensurate with the reduced operating results, net capital spending was held to $63 million, a substantial reduction from the $130 million spent in 2012. Initial capital spending plans were lower than the program undertaken in 2012 in recognition of the fact that as a service provider, the organization’s service delivery capabilities imbedded in our workforce and related support systems must match, or ideally be slightly ahead of, the growth of our asset base. The planned reduction in the capital program after the rapid expansion in 2012 was meant to provide time to further solidify our service delivery capabilities. Further capital spending restraint was implemented as the year progressed. With that said, the macro environment for Horizon’s businesses continues to be robust. Operator capital spending in the oil sands is forecast by many analysts to be $25 to $30 billion per year for the foreseeable future. LNG development prospects, both in Canada and the United States, hold promise for a significant enhancement of the economics of natural gas production in North America. The majority of this development activity in Western Canada takes place in remote locations which bodes well for Horizon’s work force accommodation and matting businesses. This was evidenced most recently by our announcement in February 2014 of additional multi-year, full service workforce accommodation contracts, both of which were with new customers to the organization. Maintaining a conservative balance sheet continues to be an important objective for Horizon, as is the continuation of the upward trend in our dividend distributions. The company’s debt level declined substantially during the course of 2013, ending the year at $80 million compared to $118 million at December 31, 2012. The combination of a positive business outlook and a strong balance sheet lead to the Board of Directors increasing the company’s dividend payment by 28% in early 2014. The quarterly dividend now sits at $0.08 per share or $0.32 per share on an annual basis. As a service company, the foundation of Horizon’s success has been, and will continue to be our employees. Our average employee count in 2013 was 1,749. A key element of our workforce management program is ensuring the safety of our employees at all of our work sites. I am very happy to report stellar results achieved by our safety programs in 2013. The Company’s safety record, as measured by Total Recordable Incident Rate, continued its downward trend moving to 1.13 in 2013 compared to 2.77 in 2012 and 2.94 in 2011. Creating a safe work environment is an ongoing objective that we will diligently continue to pursue. The capabilities embodied in Horizon’s people, assets and financial strength place the Company among the leaders in our industry. We look forward to continuing to provide top tier service to our customers and building upon past successes for the benefit of all stakeholders. Bob German President and Chief Executive Officer March 19, 2014 Page | 3 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 This Management’s Discussion and Analysis (“MD&A”), prepared as at February 19, 2014, focuses on key statistics from the Consolidated Financial Statements and pertains to known risks and uncertainties relating to the business carried on by Horizon North Logistics Inc. (“Horizon” or the “Corporation”). This discussion should not be considered all-inclusive, as it does not attempt to include changes that may occur in general economic, political and environmental conditions. Annual Financial Summary (000’s except per share amounts) 2013 % change 2012 % change Years ended December 31 Revenue EBITDAS(1) EBITDAS as a % of revenue Operating earnings (1) Operating earnings as a % of revenue Total profit Total comprehensive income Earnings per share – basic – diluted Total assets Long-term loans and borrowings Cash from operations Capital spending Purchase of capital Proceeds from capital disposals Net capital spending Debt to total capitalization ratio(2) Dividends declared Dividends declared per share $ $ $ $ $ 554,387 126,334 23% 63,291 11% 42,451 42,637 0.39 0.38 471,115 78,256 125,369 90,146 (26,925) 63,221 0.21 27,378 0.25 5% (13%) (38%) (42%) (42%) (42%) (42%) (5%) (33%) 47% (35%) 205% (52%) (30%) $ $ $ $ $ 526,616 145,027 28% 102,758 20% 72,883 72,933 0.67 0.66 495,993 116,872 85,036 139,346 (8,831) 130,515 0.30 21,662 0.20 31% 41% 45% 63% 62% 60% 61% 39% 112% 3% 38% 2% 41% 43% $ $ $ $ $ 2011 402,993 102,636 25% 62,723 16% 44,822 44,980 0.42 0.41 357,137 55,234 87,711 101,034 (8,683) 92,351 0.21 12,770 0.12 (1) EBITDAS (Earnings before finance costs, taxes, depreciation, amortization, gain/loss on disposal of property, plant and equipment, impairment loss and share based compensation) and operating earnings (earnings before finance costs, taxes, impairment loss, and earnings on equity investments) are not recognized measures under IFRS. Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Operating earnings is a useful supplemental measure as it provides an indication of the results generated by the Corporation’s principal business activities prior to consideration of how those activities are financed or taxed. Horizon’s method of calculating EBITDAS and operating earnings may differ from other entities and accordingly, may not be comparable to measures used by other entities. EBITDAS and operating earnings should not be construed as alternatives to total profit and total comprehensive income determined in accordance with IFRS as an indicator of the Corporation’s performance. For a reconciliation of EBITDAS and operating earnings to total profit and total comprehensive income, please refer to page 3 of the Management’s Discussion and Analysis. (2) Debt to total capitalization is calculated as the ratio of debt to total capitalization. Debt is defined as the sum of curren t and long-term portions of loans and borrowings. Total capitalization is calculated as the sum of debt and shareholders’ equity. Page | 4 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Overview Horizon’s 2013 results were mixed compared to 2012, while revenue increased year over year EBITDAS, operating earnings and earnings per share declined. The increase in revenue came from strong performance in the manufacturing sales operations, a result of a large camp sale project in the Alberta oil sands being manufactured and installed throughout 2013. This revenue strength was partially offset by weaker performance in the camp rental and catering operation primarily as a result of lower utilization in the open style camps, particularly in the second half of 2013. In addition, 2013 matting revenues were down compared to 2012 with weather being a significant factor contributing to reduced sales and rental volumes. The summer saw extremely wet ground conditions in a very short period of time which limited the ability to work and the fourth quarter was cold with a quick freeze up. These factors resulted in a significantly different revenue mix in 2013 compared to 2012 which had an impact on earnings. EBITDAS decreased in 2013 compared to 2012 primarily as a result of the shift in revenue mix. The manufacturing sales operation typically contributes lower margins in comparison to camp rental and catering operations and matting operations. In 2013 manufacturing sales increased to 41% of total revenue compared to 30% in 2012, as a result of this shift in revenues EBITDAS decreased. Operating earnings and earnings per share decreased in 2013 compared to the same period of 2012, driven by lower EBITDAS, higher depreciation costs and losses on disposal of plant, property and equipment. Increased depreciation was a result of the addition of camp assets and camp setup costs related to new camps added late in 2012 and throughout 2013. Camp setup costs are typically depreciated over the contract term which is a much shorter time frame than camp equipment. The loss on disposal of assets came mainly from the disposal of set-up costs related to the decommissioning of a large camp in the second quarter of 2013, disposal of the Corporation’s blast resistant structures business and the sale of ancillary land in the fourth quarter of 2014. All of these factors contributed to decreased operational earnings for the year ended December 31, 2013 compared to the same period of 2012. Outlook After a very soft quarter to end 2013, activity levels have improved to start 2014. In the camp rental and catering business, activity levels are slightly ahead of where they were last year at this time. The matting business is also seeing rental and sales levels similar to last year at this time with increases expected as spring break-up approaches. First quarter and early second quarter plant activity will be focused on manufacturing the capital equipment required to meet the needs of our recently announced, multi-year oil sands contract. Third party revenues during this period will be mainly generated by the continued on-site installation work being performed at a large camp sale project in the Fort McMurray, Alberta oil sands region. The manufacturing sales revenue stream is the most variable component of Horizon’s operation. Manufacturing capacity is currently 45% booked for 2014. By comparison, at this point in 2013, 75% of Horizon’s manufacturing capacity was booked for either third party sales or construction of contracted camps. Horizon anticipates visibility regarding the utilization of its manufacturing capacity for the second half of 2014 to continue to improve and is encouraged by a continued strong bidding pipeline that relates to oil sands projects and LNG development in British Columbia. The macro fundamentals of the workforce accommodation and matting businesses continue to be sound. Oil sands investment is forecasted to be near $30 billion per year for the foreseeable future and Canada’s LNG projects are progressing with reserve delineation drilling occurring in the north eastern British Columbia gas fields. Anticipated announcements pertaining to provincial LNG/natural gas tax structures should facilitate project proponents making final investment decisions on gas liquefaction plant construction. Dividend payment Horizon North Logistics Inc. announced today that its Board of Directors has declared a dividend for the first quarter of 2014 at $0.08 per share. The dividend is payable to shareholders of record at the close of business on March 31, 2014 to be paid on April 15, 2014. The dividends are eligible dividends for Canadian tax purposes. Page | 5 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Annual Financial Results (000’s) Revenue Expenses Direct costs Selling & administrative EBITDAS EBITDAS as a % of revenue Share based compensation Depreciation & amortization Loss (gain) on disposal of property, plant and equipment Year ended December 31, 2013 Camps & Catering Matting Corporate Inter-segment Eliminations Total $ 496,594 $ 62,419 $ - $ (4,626) $ 554,387 369,940 5,677 120,977 24% 1,143 46,197 6,173 43,657 1,002 17,760 28% 168 8,112 (21) - 12,372 (12,372) 897 583 - (4,595) - (31) 1% - (209) - 409,002 19,051 126,334 23% 2,208 54,683 6,152 Operating earnings $ 67,464 $ 9,501 $ (13,852) $ 178 $ 63,291 Finance costs Share of equity accounted investees Income tax expense Other comprehensive income Total comprehensive income Earnings per share – basic – diluted (000’s) Revenue Expenses Direct costs Selling & administrative EBITDAS EBITDAS as a % of revenue Share based compensation Depreciation & amortization Loss (gain) on disposal of property, plant and equipment 3,822 - 17,018 (186) 42,637 0.39 0.38 $ $ $ Year ended December 31, 2012 Camps & Catering Matting Corporate Inter-segment Eliminations Total $ 447,190 $ 91,466 $ - $ (12,040) $ 526,616 307,443 5,518 134,229 30% 1,096 31,713 28 68,252 588 22,626 25% 172 8,179 (108) - 11,157 (11,157) 883 482 (13) (11,369) - (671) 6% - (163) - 364,326 17,263 145,027 28% 2,151 40,211 (93) Operating earnings $ 101,392 $ 14,383 $ (12,509) $ (508) $ 102,758 Finance costs Share of equity accounted investees Income tax expense Other comprehensive income Total comprehensive income Earnings per share – basic – diluted 3,557 529 25,789 (50) 72,933 0.67 0.66 $ $ $ Page | 6 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Camps & Catering Camps & Catering revenue is comprised of camp rental and catering operations revenue, manufacturing sales revenue, space rental revenue and the associated service revenue within each operation. (000’s except bed rental days and catering only days) Camp rental and catering operations revenue Manufacturing sales Space rental Total revenue EBITDAS EBITDAS as % of revenue Operating earnings Bed rental days(1) Catering only days(2) Years ended December 31 2012 2013 % change $ $ 257,820 227,650 11,124 280,348 156,514 10,328 $ 496,594 $ 447,190 $ $ 120,977 24% 67,464 $ $ 134,229 30% 101,392 1,690,199 165,006 1,441,297 246,194 (8%) 45% 8% 11% (10%) (32%) 17% (33%) (1) (2) One bed rental day represents the provision of one bed for one day under a combined rental and catering manday rate, or the provision of one bed for one day under an equipment rental rate for dedicated camp equipment. One catering only day equals the provision of catering and housekeeping services with no related bed rental for one day. Revenues from the Camps & Catering segment for the year ended December 31, 2013 were $496.6 million, an increase of $49.4 million or 11% from the comparative year. EBITDAS for the year ended December 31, 2013 were $121.0 million, a decrease of $13.3 million or 10% compared to the same period of 2012. Horizon’s revenues in the Camps & Catering segment continue to be driven by Alberta oil sands activity with 61% of revenues generated from oil sands compared to 63% in the same period of 2012. Additionally, natural gas exploration and development activities started to grow with Horizon increasing exposure through the last half of 2013. Of note in 2013 was the shift of revenue mix in the comparative periods with 2013 having a higher proportion of revenue generated from manufacturing sales compared to the same period of 2012, a result of Horizon executing a sale of a large camp manufacturing and installation project for a major oil sands operator throughout 2013. The impact of this shift is reflected in EBITDAS as a result of the different cost structures in the manufacturing sales operations compared to the camp rental and catering operations. Manufacturing sales operations typically contributes lower margins compared to the camp rental and catering business. Camp rental and catering operations revenue Revenues are derived from the following main business areas: large camp operations, drill camp operations, catering only operations, and the associated service work within each operation. Service work includes the transportation, set-up and de- mobilization of camp and catering projects. Page | 7 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 The table below outlines the key performance metrics used by management to measure performance in the large camp and drill camp operations: (000’s for revenue only) Revenue Bed rental days(1) Revenue per bed rental day Number of rentable beds at period end Average rentable beds available(2) Utilization(3) Years ended December 31 Large camp $ 197,079 1,574,231 $125 7,059 7,078 61% 2013 Drill camp $ 20,105 115,968 $173 882 873 36% Total $ 217,184 1,690,199 $128 7,941 7,951 58% Large camp 2012 Drill camp Total $ 211,853 1,358,043 $156 $ 14,968 83,254 $180 $ 226,821 1,441,297 $157 6,905 6,141 60% 871 794 29% 7,776 6,935 57% (1) (2) (3) One bed rental day represents the provision of one bed for one day under a combined rental and catering manday rate, or the provision of one bed for one day under an equipment rental rate for dedicated camp equipment. Average rentable beds available is equal to total average beds in the fleet over the period less beds required for staff. Utilization equals the total number of bed rental days divided by average rentable beds available in the period. Revenues from large camp operations for the year ended December 31, 2013 decreased by $14.8 million or 7% compared to the same period in 2012. The decreased revenues were driven mainly by lower volumes at several of the open style camps. Bed rental days increased by 216,188 days or 16% as bed utilization was up slightly to 61% on a larger fleet compared to the same period of 2012. Horizon added 682 rentable beds to the fleet in 2013 and disposed of 528 to close the year with growth of 154 rentable beds. The average rentable beds increased in 2013 by 937 compared to 2012, this increase is reflective of the timing of when beds were added or removed from the fleet during the year. Revenue per bed rental day declined in the comparative periods by $31 or 20%. The majority of the rate decrease was related to the mix of contracts with a higher number of split rate contracts in 2013. Under the split rate contract beds are considered 100% utilized as the customer has contracted the beds and pays a separate rate for the catering and camp management services. The remainder of the decrease was due to slightly lower rates at the open style of camps. Revenues from drill camp operations for the year ended December 31, 2013 increased by $5.1 million or 34% compared to the same period of 2012. In the comparative years, the increase was a result of higher utilization of Horizon’s drill camps. Page | 8 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 The table below outlines the key performance metrics used by management to measure performance in the catering only operations: (000’s for revenue only) Catering only revenue Catering only days(1) Revenue per catering only day Years ended December 31 $ 2013 17,692 165,006 $107 $ 2012 25,853 246,194 $105 (1) One catering only day equals the provision of catering and housekeeping services with no related bed rental for one day. Revenues from the provision of catering and housekeeping only services, with no associated bed rentals, for the year ended December 31, 2013 decreased $8.2 million or 32% as compared to same period of 2012. The majority of the decrease in revenue was related to a catering only contract for a mine development project in Nunavut which ended in September of 2012. The remainder of the decrease was a result of lower volumes primarily in the catering only for customer owned drill camps. The revenue per catering only day increased due to the mix of contracts in the comparative years. The table below outlines the service revenue generated from the camp and catering operations: (000’s) Camp and catering operations service related revenue Years ended December 31 2013 2012 $ 22,944 $ 27,674 Service revenues are related to the transportation, set-up and de-mobilization of relatively short term camps for customers. Revenues for the year ended December 31, 2013 decreased $4.8 million or 17% compared to the same periods in 2012. The decrease was mainly due to the timing of the specific service projects undertaken in the comparative periods. Manufacturing sales Manufacturing sales revenues include in-plant construction, transportation and installation of camps sold to third parties. Revenues for the year ended December 31, 2013 were $227.7 million, an increase of $71.2 million or 45% as compared to the same period of 2012. The increase in revenue for 2013 was a result of larger manufacturing projects, the timing of those projects and the project phase compared to the same period of 2012. Direct manufacturing hours for the year ended December 31, 2013 were 810,694 compared to 643,148 in the same period of 2012, an increase of 167,546 hours or 26%. This increase in direct hours was achieved by ramping up staffing levels at the existing production facilities later in 2012 and the first half of 2013. Of the total direct manufacturing hours, 58% were allocated to external sales projects as compared to 55% in the same period of 2012. Space rental revenues Space rental revenues increased $0.8 million for the year ended December 31, 2013 compared to 2012. The space rental fleet size and utilization was relatively consistent at 830 units and 81% for the comparative periods with the increased revenue a result of the mix of contracts in the comparative years. Direct costs Direct costs for the year ended December 31, 2013 were $369.9 million or 74% of revenue compared to $307.4 million or 69% of revenue for the same period of 2012. Direct costs are closely related to business volumes and the mix of operations within the business volumes. As a percentage of revenue, direct costs increased mainly due to the shift in revenue mix between camp rental and catering operations and manufacturing sales compared to same periods of 2012. In 2013, a larger proportion of revenue was derived from manufacturing sales operations which by its nature has higher direct costs than the camp rental and catering operations. Page | 9 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Matting Matting revenue is comprised of access mat rental revenue, other mat and rental equipment revenue, mat sales revenue, installation, transportation, service, and other revenue as follows: (000’s except mat rental days and numbers of mats) Access mat rental revenue(1) Other mat and rental equipment revenue(2) Total mat and rental equipment revenue Mat sales revenue Installation, transportation, service, and other revenue Total revenue EBITDAS EBITDAS as a % of revenue Operating earnings Access mat rental days – owned mats(3) Access mat rental days – third party mats(4) Total access mat rental days Average owned access mats in rental fleet(5) Average sub rental access mats in rental fleet(6) Owned access mats in rental fleet at year end(7) Mats sold: New mats Used Mats Total mats sold Years ended December 31, 2013 2012 $ 13,828 2,969 $ 16,797 13,081 32,541 $ 17,556 3,707 $ 21,263 31,506 38,697 $ 62,419 $ 91,466 $ 17,760 28% 9,501 $ $ 22,626 25% $ 14,383 4,157,699 1,653,828 3,677,410 2,537,743 5,811,527 6,215,153 17,057 4,521 16,392 12,849 6,818 19,667 13,812 9,216 13,714 37,652 6,189 43,841 % change (21%) (20%) (21%) (58%) (16%) (32%) (22%) (34%) 13% (35%) (6%) 23% (51%) 20% (66%) 10% (55%) (1) (2) (3) (4) (5) (6) (7) Access mat rental revenue includes revenues generated from the rental of traditional oak and oak edged mats. Other mat and rental equipment revenue includes the rental of rig mats, quad mats and other ancillary equipment such as well site accommodation units and light towers. One mat rental day equals the rental of one owned access mat for one day. One mat rental day equals the rental of one third party sub rented access mat for one day. Average access mat rental fleet numbers reflect only owned access mats. Average sub rental access mats is the average number of non-owned access mats in the rental fleet. These mats are rented from third parties on a short term basis. Access mats in rental fleet at period end represents the number of owned access mats in the Matting fleet. Revenues from the Matting segment for the year ended December 31, 2013 were $62.4 million, a decrease of $29.1 million or 32% compared to the same period of 2012. EBITDAS for the year ended December 31, 2013 were $17.8 million or 28% of revenue, a decrease of $4.8 million or 21% compared the same period of 2012. The decrease in revenues year over year was a result of both moderate customer demand for mat sales throughout 2013 and lower mat rentals primarily a result of the extremely wet conditions in the second and third quarters of 2013. Mat and rental equipment revenue Access mat rental revenues for the year ended December 31, 2013 were $16.8 million, down $4.5 million or 21% compared to the same periods of 2012. Rental revenues decreased year over year as a result of decreased activity levels and lower revenue per mat rental day. Total mat rental days in the year ended December 31, 2013 decreased 403,626 or 6% compared to the same period of 2012 with extremely wet and flooded ground conditions in the second and third quarter and a quick freeze up in the fourth quarter being significant factors. Revenue per mat rental day was $2.38 in 2013 compared to $2.82 in 2012 due to the mix of contracts and competitive factors. Utilization of the owned mat fleet for the year ended December 31, 2013 was 67% compared to 73% in the same periods of 2012. Compared to 2012, the 2013 decreased utilization was driven from both a larger owned mat rental fleet and lower activity levels. Page | 10 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Mat sales revenue Revenues from mat sales for the year ended December 31, 2013 were $13.1 million, down $18.4 million or 58% compared to the same period of 2012. The decrease in revenue is reflective of moderating customer requirements and timing of projects. In comparison to 2012, the mix of mat sales shifted to a higher proportion of used mats in 2013 and as a result revenue per mat sale decreased due to the lower price point of used mats compared to new mats. Installation, transportation, service, and other revenue Installation, transportation, service, and other revenues are driven primarily from the level of activity in the mat rental and mat sale businesses and are charged for separately from rentals and sales. Revenues for the year ended December 31, 2013 were $32.5 million, a decrease of $6.2 million or 16% compared to the same periods in 2012. The decrease in revenue was not as significant as the decrease in sales and rentals due to the offsetting effect of the customer owned mat management work. Currently, matting is managing 120,000 customer owned mats compared to 100,000 for the same period of 2012. Direct costs Direct costs for the year ended December 31, 2013 were $43.7 million or 70% of revenue compared to $68.3 million or 75% of revenue for the same period of 2012. Direct costs are driven by the level of business activity and with the decrease in mat sales and rental revenue compared to the same periods of 2012, direct costs have decreased accordingly. In addition, lower costs in the rental operation due to decreased usage of sub rented mats in comparison to the same periods of 2012. Corporate Corporate costs are the costs of the head office which include the President and Chief Executive Officer, Chief Financial Officer, Vice President of Health, Safety, and Environment, Vice President of Aboriginal Relations, Corporate Secretary, corporate accounting staff, information technology, and associated costs of supporting a public company. Corporate costs for the year ended December 31, 2013 were $12.4 million, an increase of $1.2 million or 11% compared to the same period in 2012. Corporate costs, as a percentage of total revenue, were relatively consistent at approximately 2.1% for the comparative years. Page | 11 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Other Items Selling and administrative Selling and administrative expenses for the year ended December 31, 2013 were $19.0 million, an increase of $1.8 million or 10% compared to the same period for 2012. As a percentage of revenue, selling and administrative expenses were 3.4% compared to 3.3% in 2012. Depreciation and amortization (000’s) Depreciation of property, plant and equipment Amortization of intangibles Total depreciation and amortization Years ended December 31, 2013 2012 % change $ $ 47,623 7,060 $ 54,683 $ 32,007 8,204 40,211 49% (14%) 36% Depreciation and amortization costs for the year ended December 31, 2013 were $54.7 million, an increase of $14.5 million or 36% compared to the same period of 2012. The increased depreciation was mainly a result of camp asset additions in 2012 and during the year including camp set-up and installation costs which are depreciated over the term of the contract, generally a shorter time frame than the camp assets. Depreciation related to camp set-up and installation was $7.0 million higher in the year ended December 31, 2013 as compared to the same period of 2012 primarily as a result of camps added in last quarter of 2012 and throughout 2013. Amortization costs related to customer relationships decreased $1.1 million or 50% as compared to the same period of 2012 as a portion of these assets have now been fully amortized. Financing costs Financing costs include interest on loans and borrowings and accretion of notes payable. For the year ended December 31, 2013 financing costs were $3.8 million, an increase of $0.2 million compared to 2012. The increase in financing costs was mainly a result of higher average debt levels in 2013, $93.2 million compared to $83.8 million in 2012. The effective interest rate on loans and borrowings for the year ended December 31, 2013 was 3.6%, consistent with the comparative year. Income taxes For the year ended December 31, 2013 income tax expense was $17.0 million, an effective tax rate of 28.6%, compared to $25.8 million, an effective tax rate of 26% in 2012. The decrease in income taxes expense was mainly a result of lower profit before taxes compared to 2012 while the full year effective rate increased slightly as a result of revisions to prior year tax estimates which flowed through the current period. Gain/Loss on disposal For the year ended December 31, 2013 Horizon recognized a loss on disposal of $6.2 million compared to a small gain in the comparative period of 2012. The loss on disposal of assets came mainly from the disposal of set-up costs related to the decommissioning of a large camp in the second quarter of 2013, disposal of the Corporation’s blast resistant structures business and the sale of ancillary land in the fourth quarter of 2014. Page | 12 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 Fourth Quarter Financial Summary Three months ended December 31 2012 % Change (000’s except per share amounts) Revenue EBITDAS(1) EBITDAS as a % of revenue Operating earnings (1) Operating earnings as a % of revenue Total profit Total comprehensive income Earnings per share – basic – diluted Total assets Long-term loans and borrowings Cash from operations Capital spending Purchase of capital Proceeds from capital disposals Net capital spending Debt to total capitalization ratio(2) Dividends declared Dividends declared per share $ 2013 108,641 15,687 14% (1,607) (1%) (2,520) (2,376) (0.02) (0.02) $ 138,558 36,039 26% 23,390 17% 15,991 15,959 0.15 0.15 $ 471,115 $ 495,993 78,256 28,726 34,883 (3,493) 31,390 0.21 6,880 0.0625 $ $ 116,872 26,334 23,378 (3,428) 19,950 0.30 5,439 0.05 $ $ (22%) (56%) (107%) (111%) (110%) (111%) (111%) (5%) (33%) 9% 57% 2% 57% (30%) (1) EBITDAS (Earnings before finance costs, taxes, depreciation, amortization, gain/loss on disposal of property, plant and equipment, impairment loss and share based compensation) and operating earnings (earnings before finance costs, taxes, impairment loss, and earnings on equity investments) are not recognized measures under IFRS. Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Operating earnings is a useful supplemental measure as it provides an indication of the results generated by the Corporation’s principal business activities prior to consideration of how those activities are financed or taxed. Horizon’s method of calculating EBITDAS and operating earnings may differ from other entities and accordingly, may not be comparable to measures used by other entities. EBITDAS and operating earnings should not be construed as alternatives to total profit and total comprehensive income determined in accordance with IFRS as an indicator of the Corporation’s performance. For a reconciliation of EBITDAS and operating earnings to total profit and total comprehensive income, please refer to page 11 of the Management’s Discussion and Analysis. (2) Debt to total capitalization is calculated as the ratio of debt to total capitalization. Debt is defined as the sum of current and long-term portions of loans and borrowings. Total capitalization is calculated as the sum of debt and shareholders’ equity. Overview Horizon’s results for the fourth quarter of 2013 were below the comparable quarter of 2012 in all major categories, with revenues, EBITDAS, operating earnings and earnings per share lower. These reductions were driven by lower camp utilization mainly in the open style camps. In addition, matting operations experienced lower activity levels as customer demand for rentals, sales and the associated services decreased in conjunction with colder weather in the quarter. EBITDAS in the fourth quarter of 2013 decreased compared to the same quarter of 2012 as a result of lower activity levels in the quarter and from maintaining core operating capabilities in the camp rental and catering operations in strategic areas which experienced lower utilization. Operating earnings and earnings per share decreased in the three months ended December 31, 2013 compared to the same period of 2012 driven by lower EBITDAS, increased depreciation and a loss on disposal of assets. Depreciation increased primarily from the addition of camp set-up and installation costs related to camps added at the end of 2012 and during the year. The loss on disposal was related to the disposal of the Corporation’s blast resistant structures business and the disposal of ancillary land in the quarter. All of these factors contributed to an operational loss of $1.6 million and a loss per share of $0.02. Page | 13 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 Fourth Quarter Financial Results (000’s) Revenue Expenses Direct costs Selling & administrative EBITDAS EBITDAS as a % of revenue Share based compensation Depreciation & amortization Loss on disposal of property, plant and equipment Three months ended December 31, 2013 Camps & Catering Matting Corporate Inter-segment Eliminations Total $ 97,827 $ 11,431 $ - $ (617) $ 108,641 80,496 1,426 15,905 16% 310 11,841 3,127 8,213 182 3,036 27% 40 1,644 - - 3,254 (3,254) 222 163 - (617) - - - (53) - 88,092 4,862 15,687 14% 572 13,595 3,127 Operating earnings (loss) $ 627 $ 1,352 $ (3,639) $ 53 $ (1,607) Finance costs Share of equity accounted investees Income tax expense Other comprehensive income Total comprehensive loss Earnings per share – basic – diluted (000’s) Revenue Expenses Direct costs Selling & administrative EBITDAS EBITDAS as a % of revenue Share based compensation Depreciation & amortization Gain on disposal of property, plant and equipment Operating earnings (loss) Finance costs Share of equity accounted investees Income tax expense Other comprehensive loss Total comprehensive income Earnings per share – basic – diluted 786 - 127 (144) (2,376) (0.02) (0.02) $ $ $ Three months ended December 31, 2012 Camps & Catering Matting Corporate Inter-segment Eliminations Total $ 117,214 $ 24,151 $ - $ (2,807) $ 138,558 81,691 1,728 33,795 29% 379 9,867 (38) 18,752 196 5,203 22% 55 2,122 (80) - 2,840 (2,840) 291 122 (13) (2,688) - (119) 4% - (56) - 97,755 4,764 36,039 26% 725 12,055 (131) $ 23,587 $ 3,106 $ (3,240) $ (63) $ 23,390 971 504 5,924 32 15,959 0.15 0.15 $ $ $ Page | 14 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 Camps & Catering Camps & Catering revenue is comprised of camp rental and catering operations revenue, manufacturing sales revenue, space rental revenue and the associated service revenue within each operation. Three months ended December 31 (000’s except bed rental days and catering only days) Camp rental and catering operations revenue Manufacturing sales Space rental $ 2013 55,138 39,942 2,747 $ 76,668 38,019 2,527 2012 % change Total revenue EBITDAS EBITDAS as % of revenue Operating earnings Bed rental days(1) Catering only days(2) $ 97,827 $ 117,214 $ $ 15,905 16% 627 $ $ 384,496 27,128 33,795 29% 23,587 433,832 58,794 (28%) 5% 9% (17%) (53%) (97%) (11%) (54%) (1) (2) One bed rental day represents the provision of one bed for one day under a combined rental and catering manday rate, or the provision of one bed for one day under an equipment rental rate for dedicated camp equipment. One catering only day equals the provision of catering and housekeeping services with no related bed rental for one day. Revenues from the Camps & Catering segment were $97.8 million for the three months ended December 31, 2013, a decrease of $19.4 million or 17% compared to the same period of 2012. EBITDAS for the three months ended December 31, 2013 were $15.9 million, a decrease of $17.9 million or 53% compared to the same period of 2012. The decrease in revenue for the three months ended December 31, 2013 was attributable to lower levels of activity compared to the same period of 2012. The majority of the decline in activity was related to low utilization at several large open style camps as demand for beds in the area did not materialize as expected. Lower camp rental and catering operations revenue overshadowed the increased revenues in both manufacturing sales and space rentals. Horizon’s revenues in the Camps & Catering segment continue to be driven by Alberta oil sands activity with 61% of revenues generated from oil sands compared to 63% in the same period of 2012. Additionally, natural gas exploration and development activities started to grow with Horizon increasing its exposure through the last half of 2013. Camp rental and catering operations revenue Revenues are derived from the following main business areas: large camp operations, drill camp operations, catering only operations, and the associated service work within each operation. Service work includes the transportation, set-up and de- mobilization of camp and catering projects. Revenues from camp and catering operations were $55.1 million for the three months ended December 31, 2013 compared to $76.7 million for the three months ended December 31, 2012, a decrease of $21.6 million or 28%. Page | 15 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 The table below outlines the key performance metrics used by management to measure performance in the large camp and drill camp operations: (000’s for revenue only) Revenue Bed rental days(1) Revenue per bed rental day Rentable beds at period end Average rentable beds available(2) Utilization(3) Three months ended December 31 Large camp $ 40,396 362,986 $111 2013 Drill camp $ 3,570 21,510 $166 Total $ 43,966 384,496 $114 7,059 6,977 57% 882 871 27% 7,941 7,848 53% Large camp $ 59,718 410,456 $145 6,905 6,897 65% 2012 Drill camp $ 3,925 23,376 $168 871 836 30% Total $ 63,643 433,832 $147 7,776 7,733 61% (1) (2) (3) One bed rental day represents the provision of one bed for one day under a combined rental and catering manday rate, or the provision of one bed for one day under an equipment rental rate for dedicated camp equipment. Average rentable beds available is equal to total average beds in the fleet over the period less beds required for staff. Utilization equals the total number of bed rental days divided by average rentable beds available in the quarter. Revenues from large camp operations for the three months ended December 31, 2013 decreased $19.3 million or 32% compared to the same period in 2012. The decrease was primarily driven by lower volumes at several of the large open style camps. Bed rental days in the fourth quarter of 2013 were 362,986, a decrease of 47,470 days or 12% compared to the same period of 2012. Bed utilization for the three months ended December 31, 2013 was 57%, down from 65% in the same period of 2012. This decrease was due to lower than anticipated volumes throughout the fourth quarter of 2013 at several larger open style camps and a larger fleet. Revenue per bed rental day was $111, a decrease of $34 or 23% per bed day. This decrease is driven by the mix of contracts and a higher number of split rate contracts in place in the fourth quarter of 2013 as compared to the same period of 2012. Under the split rate contract beds are considered 100% utilized as the customer has contracted the beds and pays a separate rate for the catering and camp management services. The remainder of the decrease was due to slightly lower rates at the open style of camps. Revenues from drill camp operations for the three months ended December 31, 2013 decreased by $0.3 million or 8% compared to the same period of 2012. Revenue decreased primarily as a result of lower volumes as there were fewer drill camps operating in the fourth quarter of 2013 compared to the same period of 2012. The tables below outline the key performance metrics used by management to measure performance in the catering only operations: (000’s for revenue only) Catering only revenue Catering only days(1) Revenue per catering only day Three months ended December 31 2012 2013 $ $ 3,364 27,128 $124 6,119 58,794 $104 (1) One catering only day equals the provision of catering and housekeeping services with no related bed rental for one day. Revenues from the provision of catering and housekeeping only services, with no associated bed rentals, decreased $2.7 million or 44% for the three months ended December 31, 2013 as compared to same period of 2012. The decreased revenues were mainly a result of lower volumes in the catering only for customer owned drill camps. The increase in revenue per catering day was additional services requested by the customer and the mix of contracts compared to the same period of 2012. Page | 16 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 The table below outlines the service revenue generated from the camp and catering operations: (000’s) Camp and catering operations service related revenue Three months ended December 31 2012 2013 $ 7,808 $ 6,906 Service revenues are related to the transportation, set-up and de-mobilization of relatively short term camps for customers. Revenue increased by $0.9 million or 13% primarily as a result of the timing of projects in the comparative quarter. Manufacturing sales Manufacturing sales revenues include the in-plant construction, transportation and installation of camps sold to third parties. Revenues for the three months ended December 31, 2013 were $39.9 million as compared to $38.0 million for the same period in 2012, an increase of $1.9 million or 5%. Actual direct manufacturing hours were 192,300 hours for the three months ended December 31, 2013 as compared to 188,123 in the comparative period, an increase of 4,177 hours or 3%. Of total direct hours in the fourth quarter of 2013, 22% were allocated to external sales compared to 43% in the fourth quarter of 2012. While the majority of in-plant manufacturing capacity was focused on internal rental fleet build, which does not generate external revenue, installation activities in the quarter were focused on a large project for a major oil sands operator which more than offset this difference to result in similar revenue levels in the comparative quarters. Manufacturing production capacity is regularly reviewed by management to determine the allocation of production required to meet external third party sales contracts and internal fleet requirements. Space rental revenues Space rental revenues for the three months ended December 31, 2013 were $2.7 million as compared to $2.5 million for the same period in 2012, an increase of $0.2 million or 8%. The increase in revenue was primarily generated by the mix of contracts in the comparative quarter with utilization relatively consistent quarter over quarter at 81%. Direct costs Direct costs for the three months ended December 31, 2013 were $80.5 million or 82% of revenue as compared to $81.7 million or 70% of revenue for the same period of 2012. Direct costs are closely related to business activities as well as the mix of those activities. The decrease in direct costs reflects the lower activity levels in the camp rental and catering operations. As a percentage of revenue, direct costs were 82% as compared to 70% in the same period of 2012 which reflects the difference in the mix of volumes with manufacturing making up 41% of revenue in the fourth quarter of 2013 compared to 32% in the same period of 2012. Page | 17 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 Matting Matting revenue is comprised of mat rental revenue, mat sales revenue, installation, transportation, service, and other revenue as follows: Three months ended December 31 2012 % change (000’s except mat rental days and numbers of mats) Access mat rental revenue(1) Other mat and rental equipment revenue(2) Total mat and rental equipment revenue Mat sales revenue Installation, transportation, service, and other revenue Total revenue EBITDAS EBITDAS as a % of revenue Operating earnings Access mat rental days – owned mats(3) Access mat rental days – third party mats(4) Total access mat rental days Average owned access mats in rental fleet(5) Average sub rental access mats in rental fleet(6) Access mats in rental fleet at quarter end(7) Mats sold: New mats Used Mats Total mats sold $ $ $ 2013 3,027 868 3,895 2,124 5,412 $ $ $ 2,919 888 3,807 10,893 9,451 $ 11,431 $ 24,151 $ $ 3,036 27% 1,352 $ $ 5,203 22% 3,106 877,053 361,377 777,350 263,808 1,238,430 1,041,158 16,845 3,930 16,392 494 3,464 3,958 14,190 2,866 13,714 13,910 992 14,902 4% (2%) 2% (81%) (43%) (53%) (42%) (56%) 13% 37% 19% 19% 37% 20% (96%) 249% (73%) (1) (2) (3) (4) (5) (6) (7) Access mat rental revenue includes revenues generated from the rental of traditional oak and oak edged mats. Other mat rental equipment revenue includes the rental of rig mats, quad mats and other ancillary equipment such as well site accommodation units and light towers. One mat rental day equals the rental of one owned access mat for one day. One mat rental day equals the rental of one third party sub rented access mat for one day. Average access mat rental fleet numbers reflect only owned access mats. Average sub rental access mats is the average number of non-owned access mats in the rental fleet. These mats are rented from third parties on a short term basis. Access mats in rental fleet at quarter end represents the number of owned access mats in the Matting fleet on December 31, 2013. Revenues from the Matting segment for the three months ended December 31, 2013 were $11.4 million as compared to $24.2 million for the same period of 2012, a decrease of $12.7 million or 53%. EBITDAS for the three months ended December 31, 2013 were $3.0 million or 27% of revenue as compared to $5.2 million or 22% of revenue for the same period of 2012, a decrease of $2.2 million or 42%. Mat and equipment rental revenue Mat rental revenues remained consistent in the comparative quarters as increased activity levels were offset by lower revenues per mat rental day. Mat rental days in the three months ended December 31, 2013 increased by 197,272 or 19% compared to the same period of 2012. Utilization of the owned mat rental fleet was slightly lower at 57% in the fourth quarter of 2013 compared to 60% for the same period of 2012 due to the mix of third party mats deployed and the larger owned fleet size. Revenue per mat rental day was $2.44 for the three months ended December 31, 2013 compared to $2.80 for the same period of 2012 as a result of the mix of contracts in place and competitive factors. Page | 18 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 Mat sales revenue Revenues from mat sales for the three months ended December 31, 2013 were $2.1 million, down $8.8 million or 81% compared the same period of 2012. The decrease is reflective of moderating customer requirements driven by colder than expected weather which affected the timing of projects. The mix of new and used mats shifted with a higher proportion of used mats sales in the fourth quarter of 2013 compared to the same period of 2012. The change in sales mix decreased revenue per mat in the comparative quarters as used mats typically sell for less than new mats. Installation, transportation, service, and other revenue Installation, transportation, service, and other revenues are driven primarily from the level of activity in the mat rental and mat sale businesses and are charged for separately from rentals and sales. Revenues for the three months ended December 31, 2013 were $5.4 million, a decrease of $4.0 million or 43%. The decrease is mainly reflective of the lower activity levels in the fourth quarter of 2013 compared to the same period of 2012. Direct costs Direct costs for the three months ended December 31, 2013 were $8.2 million or 72% of revenue as compared to $18.8 million or 78% of revenue for the same period of 2012. Direct costs are driven by the level and mix of business activity and the large decrease in new mat sales drove direct costs significantly lower in the comparative quarters. Direct costs as a percentage of revenue decreased from 78% to 72% for the three months ended December 31, 2013 as compared the same period of 2012. The decrease is primarily a result of the mix of business activity in the comparative quarters, the fourth quarter of 2013 had significantly lower mat sales compared to 2012 and mat sales generally have higher material directs costs than rentals. Corporate Corporate costs are the costs of the head office which include the President and Chief Executive Officer, Chief Financial Officer, Vice President of Health, Safety, and Environment, Vice President of Aboriginal Relations, Corporate Secretary, corporate accounting staff, and associated costs of supporting a public company. Corporate costs for the three months ended December 31, 2013 were $3.3 million compared to $2.8 million in the same period in 2012. Corporate costs, as a percentage of total revenue, were 3.0% compared to 2.0% for the same period of 2012. The increased percentage is reflective of the lower revenue in the fourth quarter of 2013 compared to the same period of 2012. Page | 19 Management’s Discussion and Analysis Three months ended December 31, 2013 and 2012 Other Items Selling and administrative Selling and administrative expenses were $4.9 million for the three months ended December 31, 2013, relatively unchanged compared to the same quarter of 2012. As a percentage of revenue, selling and administrative expenses were 4.5% in 2013 compared to 3.4% in 2012 as a result of the lower revenue in the fourth quarter of 2013 compared to the same period of 2012. Depreciation and amortization (000’s) Depreciation of property, plant and equipment Amortization of intangibles Total depreciation and amortization Three months ended December 31, 2013 2012 % change $ 12,688 907 $ 13,595 $ 10,004 2,051 $ 12,055 27% (56%) 13% Depreciation and amortization costs for the three months ended December 31, 2013 were $13.6 million as compared to $12.1 million in the same period of 2012. Depreciation increased by $2.7 million or 27% in the comparative quarters primarily as a result of camp asset additions which include camp set-up and installation costs. Camp set-up and installation costs are depreciated over the term of the contract, generally a shorter time frame than the camp assets. Depreciation related to the camp set-up and installation was $2.0 million higher in the fourth quarter of 2013 as compared to the same period of 2012 due to a large camp set-up in the fourth quarter of 2013. Amortization costs related to customer relationships decreased $1.1 million or 56% as compared to the same period of 2012 as a portion of these assets have now been fully amortized. Financing costs Financing costs include interest on loans and borrowings and accretion of notes payable. For the three months ended December 31, 2013 financing costs were $0.8 million as compared to $1.0 million in the same period of 2012, a decrease of $0.2 million as a result of lower average debt of $59.2 million for the three months ended December 31, 2013 compared to $105.1 million in the same period of 2012. The effective interest rate in the fourth quarter of 2013 was 3.6%, essentially unchanged from the comparative period of 2012. Income taxes Income tax expense was $0.1 million, an effective tax rate of 5%, for the three months ended December 31, 2013 as compared to a tax expense of $5.9 million, an effective rate of 27% for the same period of 2012. The tax expense and effective tax rate in the fourth quarter of 2013 was a result of the operating loss before tax. Gain/Loss on disposal For the three months ended December 31, 2013, Horizon incurred a loss on disposal of $3.2 million compared to a slight gain in the comparative period of 2012. The loss on disposal was related to the disposal of the Corporation’s blast resistant structures business and the disposal of ancillary land in the quarter. Page | 20 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Liquidity and Capital Resources The Corporation’s working capital position and borrowing capacity are set out below: (000’s) Current assets Current liabilities excluding loans and borrowings(1) Current portion of loans and borrowings Current liabilities Working capital(2) Bank borrowing: Available bank lines Drawings on credit facility Borrowing capacity(3) December 31, 2013 December 31, 2012 $ 113,608 $ 149,166 60,408 1,496 61,904 51,704 150,000 70,756 79,244 $ $ $ 72,760 1,416 74,176 74,990 150,000 108,247 41,753 $ $ $ (1) (2) (3) Calculated as the sum of trade and other payables, deferred revenue and income taxes payable. Calculated as current assets less current liabilities. Calculated as available bank lines less drawings on credit facility. Working capital at December 31, 2013 was $51.7 million as compared to $75.0 million at December 31, 2012, a decrease of $23.3 million. The change in working capital was primarily due to a significant improvement in accounts receivable balances in combination with softer revenue in the three months ended December 31, 2013 as compared to the same period of 2012. On November 6, 2013, the Corporation’s current credit facility of $150,000,000 was renewed for a term of 3 years. The credit facility is extendable annually at the Corporation’s request subject to lender approval. The committed credit facility is secured by a $300,000,000 first fixed and floating charge debenture over all assets of the Corporation and its wholly owned subsidiaries. Interest is payable at the bank prime rate plus 0.625%. Amounts borrowed under the facility become due on October 26, 2016, the maturity date of the facility. At December 31, 2013 the Corporation was in compliance with its debt covenants as shown below: Debt Covenants Debt (1) to EBITDAS (2)(3) – must be less than 2.0:1 Interest coverage(4) – must be greater than 3.0:1 December 31, 2013 0.6:1 37.3:1 (1) (2) (3) (4) Debt is calculated as the sum of current and long-term portions of loans and borrowings. EBITDAS (Earnings before interest, taxes, depreciation, amortization, gain/loss on disposal of property, plant and equipment, and share based compensation) is not a recognized measure under IFRS. Management believes that in addition to net earnings, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Horizon’s method of calculating EBITDAS may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. For a reconciliation of EBITDAS to net earnings, please refer to page 3 of the Management’s Discussion and Analysis. Debt to EBITDAS is calculated as the ratio of Debt to trailing 12 months EBITDAS. Interest coverage is calculated as the ratio of trailing 12 months EBITDAS to 12 months trailing interest expense on loans and borrowings. Page | 21 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Capital Spending During the year ended December 31, 2013, the Corporation spent $90.1 million on capital asset additions as compared to $139.3 million in the same period of 2012. Capital spending was concentrated on rental fleet expansion and replacement to meet demand in the Camps & Catering segment in addition to moderate maintenance capital. Management evaluates and manages its capital spending plans taking into account proceeds from disposals for year of $26.9 million, resulting in net capital spending for the year ended December 31, 2013 of $63.2 million. Quarterly Summary of Results (000’s except per share amounts) Revenue EBITDAS Operating earnings (loss) Total profit (loss) Total comprehensive income Earnings (loss) per share – basic Earnings (loss) per share – diluted (000’s except per share amounts) Revenue EBITDAS Operating earnings Total profit Total comprehensive income Earnings per share – basic Earnings per share – diluted March 2013 139,959 36,633 23,209 16,509 16,384 0.15 0.15 March 2012 128,597 34,445 26,080 18,861 18,792 0.18 0.17 $ $ $ $ $ $ $ $ $ $ $ $ Three months ended June 2013 September 2013 December 2013 Year ended December 2013 148,426 32,708 14,257 10,123 9,986 0.09 0.09 $ $ $ 157,361 41,306 27,432 18,339 18,643 0.17 0.17 $ $ $ 108,641 $ 15,687 (1,607) (2,520) (2,376) (0.02) (0.02) $ $ 554,387 126,334 63,291 42,451 42,637 0.39 0.38 Three months ended June 2012 September 2012 December 2012 Year ended December 2012 139,551 40,463 30,056 21,769 21,854 0.20 0.20 $ $ $ 119,910 34,080 23,232 16,262 16,328 0.15 0.15 $ $ $ 138,558 36,039 23,390 15,102 15,969 0.15 0.15 $ $ $ 526,616 145,027 102,758 72,883 72,933 0.67 0.66 As a company providing services to the resource sector, Horizon’s performance is highly correlated to activity levels in that sector which are sensitive to the price of oil and minerals. Over the previous eight quarters the price of oil and minerals has had some variability and these fluctuations have flowed into Horizon’s results for 2012 and 2013. Throughout the last eight quarters Horizon continued to expand its manufacturing capacity and invest in fleet capital to take advantage of the activity levels particularly in the Alberta oil sands area. Page | 22 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Risks and Uncertainties Volatility of Oil, Natural Gas and Mining Industry Conditions The demand, pricing and terms for Horizon’s Camps & Catering and Matting segments depend upon the level of industry activity for oil, natural gas and mineral exploration and development in the western Canadian provinces and northern territories. Industry conditions are influenced by numerous factors over which Horizon has no control, including: the level of oil and natural gas and mineral prices; expectations about future oil and natural gas and mineral prices; the cost of exploring for, producing and delivering oil and natural gas and minerals; the expected rates of declining current production; the discovery rates of new oil and natural gas and mineral reserves; available pipeline and other oil and natural gas transportation capacity; demand for oil, natural gas and minerals; worldwide weather conditions; global political, military, regulatory and economic conditions; and the ability of oil and natural gas and mining companies to raise equity capital or debt financing for exploration and development work. Current global economic events and uncertainty have the potential to significantly impact commodity pricing and, as such, change the economic feasibility of industry development projects. No assurance can be given that expected trends in oil and natural gas and mineral production activities will continue or that demand for services provided by Horizon will reflect the level of activity in the industry. Any prolonged substantial reduction in oil and natural gas and mineral prices would likely affect activity levels in these industries and therefore affect the demand for the services provided by Horizon. Competition Horizon provides Camps & Catering and Matting Services primarily to oil and natural gas and mineral exploration and production companies in the western Canadian provinces and northern territories. The service businesses in which Horizon operates are highly competitive. To be successful, Horizon has to provide services that meet the specific needs of its clients at competitive prices. The principal competitive factors in the markets in which Horizon operates are service, quality, availability, reliability and performance of equipment used to perform its services, technical knowledge and experience, safety records and ongoing safety programs and price. Horizon competes with several competitors that are both smaller and larger than it is. These competitors offer similar services in all geographic areas in which Horizon operates. As a result of competition, Horizon’s business, financial condition and results of operations could be adversely affected. Reduced levels of activity in the oil and natural gas and mining industries can intensify competition and result in lower revenue to Horizon. Variations in the exploration and development budgets of oil and natural gas and mining companies, which are directly affected by fluctuations in energy prices and mineral prices, the cyclical nature and competitiveness of the oil and natural gas and mining industries and governmental regulation, will have an effect upon Horizon’s ability to generate revenue and earnings. Credit Risk A substantial portion of Horizon’s trade and other accounts receivable are with customers involved in the oil and natural gas and mining industries, whose revenues may be impacted by fluctuations in commodity prices. Collection of these receivables could be influenced by economic factors affecting the oil and natural gas and mining industries. Additional Funding Requirements Horizon’s cash flow may not be sufficient to fund its ongoing activities at all times. From time to time, Horizon may require additional financing. Failure to obtain such financing on a timely basis could cause Horizon to miss certain acquisition opportunities or prevent further growth of its operations. If Horizon’s revenues decrease, it will affect Horizon’s ability to expend the necessary capital to maintain its operations. If Horizon’s cash flow from operations is not sufficient to satisfy its capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or available on terms acceptable to Horizon. Page | 23 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Labour Relations The largest component of Horizon’s overall expenses is salaries, wages, benefits and payments to employees, agents and contractors. Any significant increase in these expenses could impact the financial results of Horizon. In addition, Horizon will be at risk if there are any labour disruptions. Horizon believes that it has and will continue to foster a positive relationship with employees, agents and contractors. Agreements and Contracts The business operations of Horizon depend on successful execution of performance-based contracts. The key factors which will determine whether a client will continue to use Horizon will be service quality and availability, reliability and performance of equipment used to perform its services, technical knowledge and experience, safety record and ongoing safety programs and competitive price. There can be no assurance that Horizon’s relationship with its customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, could have a material adverse effect on Horizon’s business, financial condition and results of operations. Significant Customers The Corporation had one major customer in 2013 which was in the Camps & Catering segment and generated 24% of total revenues. This compares to two different major customers in 2012 who generated 37% of total revenue. There can be no assurance that Horizon’s relationship with its customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, could have a material adverse effect on Horizon’s business, financial condition and results of operations. Reliance on Key Personnel Horizon’s success depends in large measure on certain key personnel. The loss of services of such key personnel could have a material adverse effect on Horizon. Horizon does not have key person insurance in effect for management. The contributions of these individuals to the immediate operations of Horizon are likely to be of central importance. Investors must rely upon the ability, expertise, judgment, discretion, integrity and good faith of the management of Horizon. Camp Permits In most cases, permits issued by government agencies are required to set up and operate remote work camp facilities. The issuance of permits is dependent upon water and waste treatment alternatives available, road traffic volumes and fire conditions in forested areas. Failure to receive or renew permits could have a negative impact on the business of the Camps & Catering segment. Government Regulation The operations of Horizon are subject to a variety of federal, provincial and local laws of Canada, including laws and regulations relating to health and safety, the conduct of operations, the protection of the environment, the operation of equipment used in its operations and the transportation of materials and equipment it provides for its customers. Horizon invests financial and managerial resources to ensure such compliance. Although such expenditures are generally not material to service providers, such laws or regulations are subject to change. Accordingly, it is impossible for Horizon to predict the cost or impact of such laws and regulations on its future operations. Page | 24 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Environmental Regulation The Government of Canada and provincial governments in areas where Horizon does business have been working through various forms of regulation and legislation focused on climate change and greenhouse gas emissions. Future federal legislation, together with provincial emission reduction requirements may require the reduction of emissions or emissions intensity from Horizon’s operations and facilities and those of its customers. A number of Horizon’s customers are involved in the oil and gas exploration and development industry, with specific focus on oil sands related projects. Focus and scrutiny has recently intensified on oil sands development, which could lead to incremental environmental regulation or legislation. Potential changes in requirements may result in increased operating costs and capital expenditures for oil and gas and mining industry participants, thereby delaying or decreasing the demand for Horizon’s services. Management is unable to predict the impact of potential emissions targets and it is possible that changes could adversely affect Horizon’s business, financial condition and results of operations. These regulations would likely result in higher operating costs for our customers in the region, putting further pressure on project economics, and may also impair Horizon’s ability to provide its services economically. Aboriginal Relationships A component of Horizon’s business strategy is based on developing and maintaining positive relationships with the aboriginal people and communities in the areas where Horizon operates. These relationships are important to Horizon’s operations and customers who desire to work on traditional aboriginal lands. The inability to develop and maintain relationships and to be in compliance with local requirements could adversely affect Horizon’s business strategy, growth and profitability. Seasonal Operations Each of Horizon’s businesses has slightly different seasonal aspects. Certain segments of the Camps & Catering division are exposed to the seasonality of the western Canadian oil and natural gas drilling industry where the busiest months are January through March and the slowest months are April through September. However, seasonality has been significantly reduced due to increased exposure in the oil sands and mining sectors, which operate year round. The Matting segment is typically busiest in the spring and summer months of April through September when soft ground conditions hinder the movement of heavy equipment. Other Risks Due to the nature of Horizon’s business, it is subject to a number of regulations, environmental laws and risks associated with lawsuits arising from accidents and claims. Horizon manages these risks through a combination of quality management, training and by securing insurance coverage to protect the assets of Horizon in the event of litigation. Page | 25 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Changes in Accounting Policies As at January 1, 2013, the Company changed certain accounting policies as a result of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interest in Other Entities, as well as the consequential amendment to IAS 28 Investments in Associates and Joint Ventures (2011), IFRS 13 Fair Value Measurement and IFRS 7 Amendments to Financial Instrument Disclosures. The adoption of these standards had no impact on the amounts recorded in the financial statements as at January 1, 2013. A number of new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2013, and have not been applied in preparing these consolidated financial statements. The Corporation intends to adopt the amendments to IAS 32 in its financial statements for the annual period beginning January 1, 2014. The Corporation does not expect the amendments to have a material impact on the financial statements. Critical Accounting Estimates This Management’s Discussion and Analysis of the Corporation’s financial condition and results of operations is based on its consolidated financial statements which are prepared in accordance with International Financial Reporting Standards (IFRS). The presentation of these financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of provisions at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and judgments are based on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Anticipating future events cannot be done with certainty, therefore these estimates may change as new events occur, more experience is acquired and as the Corporation’s operating environment changes. The accounting estimates believed to be the most difficult, subjective or complex judgments and which are the most critical to the reporting of results of operations and financial positions are as follows: Revenue recognition The Corporation uses the percentage-of-completion method in accounting for its construction contract revenue. Use of the percentage-of-completion method requires estimates of the stage of completion of the contract to date as a proportion of the total contract work to be performed in accordance with the accounting policy set out in the notes to the consolidated financial statements. Asset Retirement Obligations Asset Retirement Obligation (“ARO”) – The Corporation recognizes an asset retirement obligation to account for future demobilisation and reclamation of specific camps. Use of an ARO requires estimates of the asset retirement costs, timing of payments, present value discount rate and inflation rate to determine the amount recognized, in accordance with the accounting policy set out in the notes to the consolidated financial statements. Page | 26 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Financial Instruments and Risk Management (a) Overview The Corporation is exposed to a number of different financial risks arising from normal course business operations as well as through the Corporation’s financial instruments comprised of: cash and cash equivalents, trade and other receivables, trade and other payables, and long-term loans and borrowings. These risk factors include credit risk, liquidity risk, and market risk including currency exchange risk and interest rate risk. The Corporation’s risk management practices include identifying, analyzing and monitoring the risks faced by the Corporation. The following presents information about the Corporation’s exposure to each of the risks and the Corporation’s objectives, policies and processes for measuring and managing risk. (b) Credit risk Credit risk is the risk that a customer will be unable to pay amounts due causing a financial loss. The Corporation’s practice is to manage credit risk by examining each new customer individually for credit worthiness before the Corporation’s standard payment terms are offered. The Corporation’s review may include financial statement review, credit references, or bank references. Customers that lack credit worthiness transact with the Corporation on a prepayment only basis. The Corporation constantly monitors individual customer trade receivables, taking into consideration industry, aging profile, maturity, payment history and existence of previous financial difficulties in assessing credit risk. A formal review is performed each month for each subsidiary, focusing on amounts which have been outstanding for periods which are considered abnormal for each customer. The Corporation establishes an allowance for doubtful accounts for specifically identifiable customer balances which are assessed to have credit risk exposure. The following shows the aged balances of trade and other receivables: (000’s) Neither impaired nor past due Impaired Outstanding 31-60 days Outstanding 61-90 days Outstanding more than 90 days Total Allowance for doubtful accounts Accrued revenue Other receivables Total trade and other receivables December 31, 2013 $ $ 29,370 65 15,826 4,001 2,073 51,335 (65) 38,659 927 90,856 $ December 31, 2012 44,337 495 38,313 16,800 13,126 113,071 (495) 19,439 1,180 $ 133,195 In the twelve months ended December 31, 2013, the Corporation provided an allowance for $368,000 of receivables aged greater than 90 days and collected $218,000 that had previously been allowed for. The Corporation also applied $580,000 of allowance for doubtful accounts against the associated receivable balance. As at February 19, 2014, the Corporation has collected $1,216,000 on amounts outstanding more than 90 days. (c) Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation believes that it has access to sufficient capital through internally generated cash flows and committed credit facilities to meet current spending forecasts. To manage liquidity risk, the Corporation forecasts operational results and capital spending on a regular basis. Actual results are compared to these forecasts to monitor the Corporation’s ability to continue to meet spending forecasts. Page | 27 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 The following shows the timing of cash outflows relating to trade and other payables and loans and borrowings: Year 1 Year 2 Year 3 Year 4 Year 5 and beyond December 31, 2013 Trade and other payables(1) 56,961 $ - - - 5,656 $ Loans and borrowings(2) 1,496 7,500 70,756 - - Trade and other payables(1) 72,172 $ - - - 1,364 $ December 31, 2012 Loans and borrowings(2) 1,416 1,543 115,329 - - (1) Trade and other payables include trade and other payables, income taxes payable, and provisions. (2) Loans and borrowings include non-interest bearing notes payable and Horizon’s senior secured revolving term facility. Cash flows of Horizon’s note payable have been recorded according to estimated utilization of specific equipment. $ 62,617 $ 79,752 $ 73,536 $ 118,288 (d) Market risk Market risk is the risk or uncertainty arising from possible market price movements and their impact on future performance of the Corporation. The market price movements that could adversely affect the value of the Corporation’s financial assets, liabilities and expected future cash flows include foreign currency exchange risk and interest rate risk. As the Corporation’s exposure to foreign currency exchange risk and interest rate risk is limited, the Corporation does not currently hedge its financial instruments. (i) Foreign currency exchange risk The Corporation has limited exposure to foreign currency exchange risk as sales and purchases are typically denominated in CAD. The Corporation’s exposure to foreign currency exchange risk arises from the purchase of some raw materials in the matting segment which are denominated in USD. As the foreign currency exchange risks are primarily based on realized foreign exchange differences, the following sensitivity analysis is to determine the impact on cash generated in operating activities. The effect of a $0.01 increase in the USD/CAD exchange rate would decrease cash generated in operating activities for the year ended December 31, 2013 by approximately $182,500 (December 31, 2012 - $261,000). This assumes that the quantity of USD purchases and the foreign operations in the year remain unchanged and that the change in the USD/CAD exchange rate is effective from the beginning of the year. (ii) Interest rate risk The Corporation is exposed to interest rate risk as changes in interest rates may affect interest expense and future cash flows. The primary exposure is related to the Corporation’s revolving credit facility which bears interest at a rate of prime plus 1.00%. If prime were to have increased by 1.00%, it is estimated that the Corporation’s net earnings would have decreased by approximately $933,500 for the year ended December 31, 2013 (December 31, 2012 – $841,000). This assumes that the amount and mix of fixed and floating rate debt in the year ended December 31, 2013 remains unchanged and that the change in interest rates is effective from the beginning of the year. Page | 28 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Outstanding Shares Horizon had 110,084,884 voting common shares issued and outstanding with a book value of $183,851,000 or $1.67 per share as at December 31, 2013. Off Balance Sheet Financing Horizon has no off balance sheet financing. Management’s Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting Disclosure Controls & Procedures Disclosure controls and procedures (DC&P) are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. As at December 31, 2013, an evaluation was carried out, under the supervision of the CEO and the CFO, of the effectiveness of the design and operation of Horizon’s DC&P as defined by National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings. Based on this evaluation, the CEO and CFO have concluded that, as at December 31, 2013 Horizon’s DC&P, as defined by National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, were effective. Throughout 2013, Horizon focused on continuous improvement and improved execution of its DC&P. Horizon will continue to evaluate its DC&P making modifications from time-to-time as deemed necessary. There were no changes in Horizon’s DC&P that occurred during the period ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, Horizon’s DC&P. Internal Controls over Financial Reporting Internal controls over financial reporting (ICFR) are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS. Management is responsible for establishing and maintaining adequate ICFR. Horizon’s ICFR include, but are not limited to, policies and procedures addressing: (cid:120) the maintenance of records that provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with IFRS; (cid:120) receipts and expenditures are being made only in accordance with authorizations of management and directors; (cid:120) maintenance of records in reasonable detail to accurately and fairly reflect transactions and disposition of assets; and (cid:120) the reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on annual and interim consolidated financial statements. Because of inherent limitations, ICFR can only provide reasonable assurance and may not prevent or detect all misstatements. Additionally, projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. As at December 31, 2013, an evaluation was carried out, under the supervision of the CEO and the CFO, of the effectiveness of Horizon’s ICFR based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the design and operating effectiveness of Horizon’s ICFR was effective as of December 31, 2013. Throughout 2013 Horizon focused on continuous improvement and improved execution of its ICFR. Horizon will continue to evaluate its ICFR making modifications from time-to-time as deemed necessary. There were no changes in Horizon’s ICFR that occurred during the period ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, Horizon’s ICFR. Page | 29 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Control over Financial Reporting Because of their inherent limitations, DC&P and ICFR may not prevent or detect misstatements, errors or fraud. Control systems, no matter how well conceived or implemented, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Related parties All related party transactions in the normal course of operations have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is similar to those negotiated with third parties. All outstanding balances are to be settled with cash, and none of the balances are secured. (000’s) Equity accounted investees Purchases Sales Recovery of administrative overhead Included in accounts receivable Joint venture Purchases Sales Recovery of administrative overhead Included in accounts receivable Key management personnel interests Purchases Sales Included in accounts receivable Included in accounts payable December 31, 2013 December 31, 2012 $ $ $ $ $ $ - 164 - 505 - - 30 - - 947 395 - 2 1,211 - 164 - 8 30 - (17) 1,261 271 - Key management personnel include the directors and officers of Horizon that are also directors or officers of other companies. All related party transactions are in the normal course of operations and have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is similar to those negotiated with third parties. All outstanding balances are to be settled with cash, and none of the balances are secured. Advisories This Management’s Discussion and Analysis, prepared as at February 19, 2014 focuses on key statistics from the Condensed Consolidated Interim Financial Statements and pertains to known risks and uncertainties relating to the business carried on by Horizon North Logistics Inc. (the “Corporation” or “Horizon”). This discussion should not be considered all-inclusive, as it does not attempt to include changes that may occur in general economic, political and environmental conditions. Additional information related to the Corporation, including the Corporation’s annual information form, is available on SEDAR at www.sedar.com. Unless otherwise indicated, the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and the reporting currency is in Canadian dollars. Page | 30 Management’s Discussion and Analysis Years ended December 31, 2013 and 2012 Caution Regarding Forward-Looking Information and Statements Certain statements contained in this Management Discussion and Analysis (“MD&A”) constitute forward-looking statements or information. These statements relate to future events or future performance of Horizon. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan” “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “should”, “believe” and similar expressions are intended to identify forward-looking statements. In particular, such forward looking statements include: under the heading “Outlook” the statements that “After a very soft quarter to end 2013, activity levels have improved to start 2014. In the camp rental and catering business, activity levels are slightly ahead of where they were last year at this time. The matting business is also seeing rental and sales levels similar to last year at this time with increases expected as spring break up approaches”, “The manufacturing sales revenue stream is typically the most variable component of Horizon’s operation, with manufacturing capacity currently 45% booked for 2014. By comparison, at this point in 2013 75% of Horizon’s manufacturing capacity was under contract. Horizon expects visibility regarding its manufacturing capacity for the second half of 2014 to continue to improve and is encouraged by a continued strong bidding pipeline that relates to oil sands projects, infrastructure projects and LNG development in British Columbia” and “The macro fundamentals of the workforce accommodation and matting businesses continue to be sound. Oil sands investment is forecasted to be near $30 billion per year for the foreseeable future and Canada’s LNG projects are progressing with reserve delineation drilling occurring in the north eastern British Columbia gas fields. Anticipated announcements pertaining to provincial LNG/natural gas tax structures should facilitate project proponents making final investment decisions on gas liquefaction plant construction.” The foregoing statements are based on the assumption that oil sands development in Alberta and other resource development in western Canada will strengthen. Many factors could cause the performance or achievements of Horizon to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. These include, but are not limited to, general economic, market and business conditions. Readers are cautioned that the foregoing list of risks and uncertainties is not exhaustive. Additional information on these and other risk factors that could affect Horizon’s operations and financial results are included in Horizon’s annual information form which may be accessed through the SEDAR website at www.sedar.com. The forward-looking statements and information contained in this MD&A are made as of the date hereof and Horizon does not undertake any obligation to update publicly or revise and forward-looking statements and information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. Page | 31 Management’s Report to Shareholders The accompanying consolidated financial statements of Horizon North Logistics Inc. (“Horizon” or the “Corporation”) have been approved by the Board of Directors (the “Board”) of Horizon and have been prepared by management in accordance with International Financial Reporting Standards. Financial statements will, by necessity, include certain amounts based on estimates and judgments. The financial information contained throughout this report has been reviewed to ensure consistency with these consolidated financial statements. Management has overall responsibility for internal controls and maintains accounting systems designed to provide reasonable assurance that transactions are properly authorized, assets safeguarded and that the financial records form a reliable base for the preparation of accurate and timely financial information. The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of disclosure controls and procedures and internal controls over financial reporting and have concluded that they are effective. The Board oversees the management of the business and affairs of Horizon; including ensuring management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility principally through its Audit Committee, which consists of three independent directors. The Audit Committee has reviewed the consolidated financial statements with management and the external auditor. An independent firm of chartered accountants, appointed as external auditor by the shareholders, has audited the consolidated financial statements and its report is included herein. Bob German President and Chief Executive Officer March 19, 2014 Scott Matson Vice President Finance and Chief Financial Officer Page | 32  ABCD INDEPENDENT AUDITORS’ REPORT To the Shareholders of Horizon North Logistics Inc. We have audited the accompanying consolidated financial statements of Horizon North Logistics Inc., which comprise the consolidated statements of financial position as at December 31, 2013 and December 31, 2012, the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Horizon North Logistics Inc. as at December 31, 2013 and December31, 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Accountants Calgary, Canada February 19, 2014 Page | 33 Consolidated statement of financial position (000’s) Assets Current assets: Trade and other receivables (Note 11) Inventories (Note 12) Prepayments Income taxes receivable Non-current assets: Property, plant and equipment (Note 13) Intangible assets (Note 14) Goodwill (Note 14) Deferred tax assets (Note 18) Other assets (Note 15) Liabilities and Shareholders’ Equity Current liabilities: Trade and other payables Deferred revenue Income taxes payable Current portion of loans and borrowings (Note 16) Non-current liabilities: Asset retirement obligations (Note 17) Loans and borrowings (Note 16) Deferred tax liabilities (Note 18) Shareholders’ equity: Share capital (Note 19) Contributed surplus Accumulated other comprehensive income Retained earnings December 31, 2013 December 31, 2012 90,856 15,638 3,000 4,114 113,608 349,252 2,968 1,664 1,067 2,556 357,507 133,195 13,321 2,506 146 149,168 330,205 10,028 2,136 1,772 2,684 346,825 $ 471,115 $ 495,993 56,677 3,447 284 1,496 61,904 5,656 78,256 30,872 176,688 183,851 11,836 394 98,346 294,427 59,511 588 12,661 1,416 74,176 1,364 116,872 29,318 221,730 179,999 10,783 208 83,273 274,263 The accompanying notes are an integral part of the consolidated financial statements. $ 471,115 $ 495,993 Ann Rooney Director Bob German Director Page | 34 Consolidated statement of comprehensive income Twelve months ended December 31, 2013 and 2012 (000’s except per share amounts) Revenue (Note 5) Operating expenses: Direct costs (Note 6) Depreciation (Note 13) Share based compensation Loss (gain) on disposal of property, plant and equipment Direct operating expenses (Note 6) Gross profit Selling & administrative expenses: Selling & administrative expenses (Note 7) Amortization of intangible assets (Note 14) Share based compensation (Note 19) Selling & administrative expenses (Note 7) Operating earnings Finance costs (Note 9) Share of equity accounted investees Profit before tax Current tax expense Deferred tax expense (Note 18) Income tax expense (Note 10) Total profit Other comprehensive income: Translation of foreign operations Other comprehensive income, net of income tax December 31, 2013 December 31, 2012 $ 554,387 $ 526,616 409,007 47,623 1,311 6,152 464,093 364,361 32,007 1,268 (93) 397,543 90,294 129,073 19,046 7,060 897 27,003 63,291 3,822 - 59,469 14,759 2,259 17,018 42,451 186 186 17,228 8,204 883 26,315 102,758 3,557 529 98,672 19,862 5,927 25,789 72,883 50 50 Total comprehensive income $ 42,637 $ 72,933 Earnings per share: Basic (Note 20) Diluted (Note 20) $ $ 0.39 0.38 $ $ 0.67 0.66 The accompanying notes are an integral part of the consolidated financial statements. Page | 35 Consolidated statement of changes in equity (000’s) Share Capital Contributed Surplus Accumulated Other Comprehensive Income Retained Earnings Total Balance at December 31, 2011 $ 173,438 $ 10,421 $ 158 $ 32,052 $ 216,069 Total profit Share based compensation (Note 19) Share options exercised (Note 19) Translation of foreign operations Dividends declared and paid ($0.15 per share) Dividends declared ($0.05 per share) Balance at December 31, 2012 Total profit Share based compensation (Note 19) Share options exercised (Note 19) Translation of foreign operations Dividends declared and paid ($0.1875 per share) Dividends declared ($0.0625 per share) - - 6,561 - - - 2,151 (1,789) - - - $ 179,999 $ - 10,783 $ - - 3,852 - - - - 2,208 (1,155) - - - - - - 50 - - 208 - - - 186 - - 72,883 - - - (16,223) 72,883 2,151 4,772 50 (16,223) (5,439) 83,273 (5,439) $ 274,263 $ 42,451 - - - (20,498) 42,451 2,208 2,697 186 (20,498) (6,880) (6,880) Balance at December 31, 2013 $ 183,851 $ 11,836 $ 394 $ 98,346 $ 294,427 The accompanying notes are an integral part of the consolidated financial statements. Page | 36 Consolidated statement of cash flows Twelve months ended December 31, 2013 and 2012 (000’s) Cash provided by (used in): Operating activities: Profit for the period Adjustments for: Depreciation (Note 13) Amortization of intangible assets (Note 14) Share based compensation (Note 19) Amortization of other assets Share of equity accounted investees Loss (gain) on sale of property, plant and equipment Unrealized foreign exchange Finance costs (Note 9) Income tax expense (Note 10) Income taxes paid Interest paid Changes in non-cash working capital items (Note 25) Investing activities: Purchase of property, plant and equipment (Note 13) Proceeds on sale of property, plant and equipment Financing activities: Proceeds from shares issued on exercise of options Net proceeds from loans and borrowings Payment of dividends Change in cash position Cash, beginning of period Cash, end of period The accompanying notes are an integral part of the consolidated financial statements. December 31, 2013 December 31, 2012 $ 42,451 $ 72,883 47,623 7,060 2,208 128 - 1,384 55 3,822 17,018 121,749 (31,104) (3,412) 38,136 125,369 (90,146) 26,925 (63,221) 2,697 (38,907) (25,938) (62,148) 32,007 8,204 2,151 127 529 (2,924) 85 3,557 25,789 142,408 (11,727) (2,904) (42,741) 85,036 (139,346) 8,831 (130,515) 4,772 61,200 (20,493) 45,479 - - - $ - - - $ Page | 37 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 1. Reporting Entity Horizon North Logistics Inc. (“Horizon” or the “Corporation”) is a company registered and domiciled in Canada and is a publicly-traded company, listed on the Toronto Stock Exchange under the symbol HNL. The Corporation’s registered offices are at 1600, 505 – 3rd Street SW, Calgary, AB T2P 3E6. The consolidated financial statements of the Corporation as at and for the year ended December 31, 2013 comprise the Corporation and its subsidiaries and the Corporation’s interest in associates and jointly controlled entities. Horizon provides camp & catering services and ground matting services to oil and gas exploration and production companies, oilfield service companies and mining companies working on oil sands, mineral exploration and development, and conventional oil and gas projects primarily in western Canada. 2. Basis of Presentation (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements were authorized for issue by the Board of Directors on February 19th, 2014. (b) Basis of measurement The consolidated financial statements have been prepared using the historical cost basis. Certain prior period amounts have been amended to conform to current period presentation. (c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s and subsidiaries functional currency with the exception of United States (“US”) operations which have a US dollar functional currency. (d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The judgements, estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual outcomes may differ from these estimates. The judgements, estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The judgements, estimates and assumptions that have the most significant risk of causing a material adjustment to the carrying amounts of assets and liabilities recognized in the consolidated financial statements are as follows: Estimates (cid:120) (cid:120) Revenue Recognition Estimate – The Corporation uses the percentage-of-completion method in accounting for its construction contract revenue. Use of the percentage-of-completion method requires estimates of the stage of completion of the contract to date as a proportion of the total contract work to be performed in accordance with the accounting policy set out in Note 3(j)(iv). Asset Retirement Obligation (“ARO”) – The Corporation recognizes an asset retirement obligation to account for future demobilisation and reclamation of specific camps. Use of an ARO requires estimates of the asset retirement costs, timing of payments, present value discount rate and inflation rate to determine the amount recognized, in accordance with the accounting policy set out in Note 3(i). Judgements (cid:120) Impairment - The Corporation is required to make a judgement for the need for impairment at each reporting date by evaluating conditions specific to the organization that may lead to impairment of assets. Page | 38 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Corporation. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries are aligned then with the policies adopted by the Corporation. Acquisitions of non-controlling interests are accounted for as transactions with equity holders in their capacity as equity holders; therefore no goodwill is recognized as a result of such transactions. (ii) Special purpose entities The Corporation has established a number of special purpose entities (“SPE”) for operating purposes. An SPE is consolidated when, based on an evaluation of the substance of its relationship with the Corporation and the SPE’s risks and rewards, the Corporation concludes that it controls the SPE. SPE’s controlled by the Corporation were established under terms that impose strict limitations on the decision-making powers of the SPE’s management and that result in the Corporation receiving the majority of the benefits related to the SPE’s operations and net assets, being exposed to the majority of risks incident to the SPE’s activities, and retaining the majority of the residual or ownership risks related to the SPEs or their assets. (iii) Investments in associates (equity accounted investees) Associates are those entities in which the Corporation has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Corporation holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The Corporation’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Corporation’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Corporation, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the Corporation’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that the Corporation has an obligation or has made payments on behalf of the investee. (iv) Joint ventures Joint ventures are those entities over whose activities the Corporation has joint control, established by contractual agreement. Joint ventures are accounted for using the equity method (equity accounted investees) and are initially recognized at cost. (v) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Corporation’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. Page | 39 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (b) Changes in accounting policy and disclosure Standards, amendments and interpretations to existing standards that are in effective and have been adopted by the Corporation include: IFRS 10 – Consolidated Financial Statements. The new standard establishes a clear set of principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. The standard was effective and adopted by the Corporation as of January 1, 2013. The adoption of the standard did not have a material effect on the Corporation. IFRS 11 – Joint Arrangements. The new standard establishes principles for financial reporting by entities that have an interest in arrangements that are controlled jointly and clearly defines the difference between joint operations and joint ventures and the accounting requirements for each. The standard was effective and adopted by the Corporation as of January 1, 2013. The adoption of the standard did not have a material effect on the Corporation. IFRS 12 – Disclosure of interests in other entities. The new standard requires an entity to disclose information that enables users of the financial statements to evaluate the nature, and risks associated with, its interest in other entities and the effects of those interests on its financial position, performance and cash flows. The standard was effective and adopted by the Corporation as of January 1, 2013. The adoption of the standard did not have a material effect on the Corporation. IFRS 13 – Fair Value Measurement. The new standard defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. This standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard was effective and adopted by the Corporation as of January 1, 2013. The adoption of the standard did not have a material effect on the Corporation. (c) Financial instruments Financial Instrument Trade and other receivables Trade and other payables Loans and other borrowings (i) Non-derivative financial assets Category Measurement Method Loans and receivables Other financial liabilities Other financial liabilities Amortized cost Amortized cost Amortized cost The Corporation initially recognizes trade and other receivables and deposits on the date that they originate. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Corporation becomes a party to the contractual provisions of the instrument. The Corporation derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, there is a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Corporation uses the following non-derivative financial asset classifications: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. Page | 40 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (c) Financial instruments (continued) (i) Non-derivative financial assets (continued) Financial assets at fair value through profit or loss are classified as held for trading or are designated as such upon initial recognition. Held-for-trading instruments are financial assets and liabilities typically acquired with the intention of generating revenues in the short-term. However, an entity is allowed to designate certain financial instruments as held-for-trading on initial recognition even if it would otherwise not satisfy the definition. As at December 31, 2013 and 2012 the Corporation does not hold any held-for-trading financial instruments. Financial assets required to be classified or designated as held-for-trading are measured at fair value, with gains and losses recorded in net earnings for the period in which the change occurs. Attributable transaction costs are recognized in profit or loss as incurred. The Corporation uses trade-date accounting for its held-for-trading financial assets. Held-to-maturity investments are non-derivative financial assets, with fixed or determinable payments and fixed maturity, which an entity has the positive intention and ability to hold to maturity. These financial assets are initially recognized at fair value plus any directly attributable transaction costs. These financial assets are measured at amortized cost using the effective interest method. As at December 31, 2013 and 2012, the Corporation does not have any financial assets classified as held-to-maturity. Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. These financial assets are initially recognized at fair value plus any directly attributable transaction costs. Financial assets classified as loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Available-for-sale financial assets are non-derivative assets that are designated as available-for-sale or that are not classified as loans and receivables, held-to-maturity investments or held-for-trading. Available-for-sale financial assets are carried at fair value with unrealized gains and losses included in other comprehensive income until such gains or losses are realized or an other than temporary impairment is determined to have occurred. Available-for-sale assets are measured at fair value, except for assets that do not have a readily determinable fair value which are recorded at cost. Attributable transaction costs are recognized in profit or loss as incurred. As at December 31, 2013 and 2012, the Corporation does not have any financial assets classified as available-for-sale. (ii) Non-derivative financial liabilities The Corporation initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which it becomes a party to the contractual provisions of the instrument. The Corporation derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, there is a legal right to offset the amounts and the entity intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Included in loans and borrowing are cash and cash equivalents comprising of cash balances and call deposits with original maturities of less than three months. Bank overdrafts that are repayable on demand and form an integral part of the Corporation’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. The Corporation has the following non-derivative financial liabilities: loans and borrowings, and trade and other payables. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. (iii) Share capital Common shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. Page | 41 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (d) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self- constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized net within operating expenses in profit or loss. (ii) Subsequent costs The cost of replacing a major component of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its cost can be measured reliably. The carrying amount of the replaced major component is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. (iii) Depreciation Depreciation is calculated using the depreciable amount, which is the cost of an asset, less its residual value. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Corporation will obtain ownership by the end of the lease term. The estimated useful lives for the current and comparative periods are as follows: Assets Method Residual Value Useful Life Camp facilities Camp setup & installation Marine equipment Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line 20% - - - - - - 15 years 2 to 5 years 20 years 20 years 4 to 8 years 6 years 2 to 10 years Depreciation methods, useful lives, and residual values are reviewed at each financial year end and adjusted if appropriate. Land and assets under construction are not depreciated. (e) Intangible assets (i) Goodwill Goodwill arises on the acquisition of subsidiaries, associates and joint ventures. Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment. Goodwill is not amortized but is tested at least annually for impairment. Page | 42 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (e) Intangible assets (continued) (ii) Assets acquired on business combinations Non-operating intangible assets are intangible assets that are acquired as a result of a business combination, which arise from contractual or other legal rights and are not transferable or separable. On initial recognition they are measured at fair value. Amortization is charged on a straight line basis to the statement of comprehensive income over their expected useful lives which are: Customer relationships Other intangible assets Estimated useful lives 7 years 5 years Amortization methods, useful lives, and residual values are reviewed at each financial year-end and adjusted if appropriate. Other intangible assets that are acquired by the Corporation, which have finite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses. (f) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on a weighted average or standard cost principle and includes expenditures incurred in acquiring the inventories, production or conversion costs, and other costs in bringing them to their existing location and condition. In the case of manufactured inventories and work-in-progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (g) Impairment (i) Financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Corporation on terms that the Corporation would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Corporation considers evidence of impairment for loans and receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant loans and receivables and held- to-maturity investment securities are assessed for specific impairment. All individually significant loans and receivables and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and Receivables and held-to- maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together receivables and held-to-maturity investment securities with similar risk characteristics. In assessing collective impairment, the Corporation uses historical trends of the probability of default, timing of recoveries, and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. Page | 43 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (g) Impairment (continued) (i) Financial assets (continued) An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognized by transferring the cumulative loss that has been recognized in other comprehensive income, and presented in the fair value reserve in equity, to profit or loss. The cumulative loss that is removed from other comprehensive income and recognized in profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognized in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. (ii) Non-financial assets The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives or assets that are not yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit” or “CGU”). For the purposes of goodwill impairment testing, goodwill acquired in a business combination is allocated to the group of CGUs that are expected to benefit from the synergies of the combination. This allocation is subject to an operating segment ceiling test and reflects the lowest level at which that goodwill is monitored for internal reporting purposes. The Corporation’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the group of CGUs to which the corporate asset belongs. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units), on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Page | 44 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (g) Impairment (continued) (iii) Non-financial assets (continued) Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. (h) Employee benefits (i) Non-financial assets The Corporation’s defined contribution plan which is a post-employment benefit plan under which the Corporation pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognized as an employee benefit expense in profit or loss when they are due. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under the short-term cash bonus plans if the Corporation has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (iii) Share based compensation transactions The grant date fair value of share based compensation awards granted to employees is recognized as an expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards (vesting period). The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. (i) Provisions A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. As at December 31, 2013 and 2012 the Corporation has recognized a provision for Asset Retirement Obligation. (j) Revenue (i) Goods sold Revenue from the sale of goods is measured at the fair value of the consideration received or receivable. Revenue is recognized when the significant risks and rewards have transferred to the customer, collectability is reasonably assured, the associated costs can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. For the sale of camps and mats, transfer usually occurs when the product is delivered to the customer’s site; however, in instances where the customer has provided a certificate of insurance for undelivered assets, the Corporation will recognize revenue prior to delivery. Page | 45 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (j) Revenue (continued) (ii) Services The Corporation’s services are generally provided based upon purchase orders or contracts with its customers that include fixed or determinable prices based upon monthly, daily, or hourly rates. Revenue is recognized when services are rendered and only when collectability is reasonably assured. (iii) Rental income Rental income is recognized in profit or loss on a straight line basis over the term of the arrangement, or on a daily or monthly rate. (iv) Construction contracts Contract revenue includes the initial amount agreed to in the contract plus any variations in contract work, claims, and incentive payments, to the extent that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a construction contract can be estimated reliably, contract revenue is recognized in profit or loss in proportion to the stage of completion of the contract. Contract expenses are recognized as incurred unless they create an asset related to future contract activity. The stage of completion is assessed by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognized immediately in profit or loss. (k) Lease payments Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Leases in terms of which substantially all the risks and rewards of ownership are transferred to the Corporation are classified as finance leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Determining whether an arrangement contains a lease: At inception of an arrangement, the Corporation determines whether such an arrangement is, or contains, a lease. A specific asset is the subject of a lease if fulfillment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Corporation the right to control the use of the underlying asset. At inception or upon reassessment of the arrangement, the Corporation separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Corporation concludes for a finance lease that it is impracticable to separate the payments reliably, an asset and a liability are recognized at an amount equal to the fair value of the underlying asset. Subsequently, the liability is reduced as payments are made and an imputed finance charge on the liability is recognized using the Corporation’s incremental borrowing rate. (l) Finance income and costs Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss, and impairment losses recognized on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction, or production of a qualifying asset are recognized in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. Page | 46 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (m) Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits, and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (n) Earnings per share The Corporation presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which is comprised of share options granted to employees. (o) Segment reporting A segment is a distinguishable component of the Corporation that is engaged either in providing related products or services (business segment) which is subject to risks and returns that are different from those of other segments. The business segments are determined based on the Corporation’s management and internal reporting structure. Segment results, assets, and liabilities include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly investments and related revenue, loans and borrowings and related expenses, corporate assets (primarily the Corporation’s headquarters) and head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill. Page | 47 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 3. Significant Accounting Policies (continued) (p) Foreign currency translation The consolidated financial statements are presented in Canadian Dollars (“CAD”). Foreign currency transactions entered into are translated into the functional currency of the operations at the exchange rate on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated into the functional currency using the exchange rate on the period end date. Foreign currency translation gains and losses resulting from the settlement of transactions and the re-translation at period end are recognized in the statement of comprehensive income within total profit. Non-monetary items that originated in a foreign currency are translated at the exchange rate from the original transaction date. US operations have a US Dollar (“USD”) functional currency and therefore are translated to be included in the consolidated financial statements in CAD as follows: income and expenses are translated into CAD using the exchange rates on the dates of the transactions and the assets and liabilities on the statement of financial position is translated into CAD at the period end exchange rate. The effect of translation is recognized in other comprehensive income and included as translation of foreign operations in accumulated other comprehensive income within equity. Foreign currency gains and losses arising from monetary items receivable from or payable to a foreign operation, for which settlement is neither planned nor likely to occur, form a part of the exchange differences in the net investment in the foreign operations and are recognized initially in other comprehensive income. Upon disposal or partial disposal of an entity with a functional currency other than CAD, any accumulated exchange differences will be reclassified to the statement of comprehensive income within total profit. (q) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2013, and have not been applied in preparing these consolidated financial statements. The Corporation intends to adopt the amendments to IAS 32 in its financial statements for the annual period beginning January 1, 2014. The Corporation does not expect the amendments to have a material impact on the financial statements. 4. Determination of fair values A number of the Corporation’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Property, plant and equipment The fair value of property, plant and equipment recognized as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller, in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably and willingly. The fair value of items of plant, equipment, fixtures and fittings is based on the market and cost approaches using quoted market prices for similar items when available and replacement cost when appropriate. (b) Intangible assets The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use or eventual sale of the assets. Page | 48 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 4. Determination of fair values (continued) (c) Other financial assets and liabilities The fair value of other financial assets and liabilities is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. (d) Share-based compensation transactions The fair value of the employee share options is measured using the Black-Scholes option pricing model. Measurement inputs include the share price on measurement date, the exercise price of the instrument, the expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), the weighted average expected life of the instruments (based on historical experience and general option holder behavior), the expected dividends, and the risk-free interest rate (based on government bonds). Service and non- market performance conditions are not taken into account in determining fair value. 5. Revenue (000’s) Rental and Catering revenue Construction contract revenue Rendering of services Sales of goods Twelve months ended December 31, 2012 2013 $ 285,741 227,650 27,916 13,080 $ 311,939 156,513 26,658 31,506 $ 554,387 $ 526,616 Construction contract revenue has been determined based on the percentage of completion method. The amount of construction contract revenue results from the manufacture of camps and other modular facilities in the Camp & Catering segment. These units are based on specifically negotiated contracts with customers. At December 31, 2013, advances received from customers under open construction contracts amounted to $2,702,000 (2012 - $337,000). Advances for which the related work has not been completed are presented as deferred revenue. 6. Direct Operating Expenses (000’s) Labour Job supplies Rental equipment Repairs & maintenance Trucking costs Other operating expenses Direct costs Depreciation Share based compensation Loss (gain) on disposal of property, plant and equipment Twelve months ended December 31, $ 2013 211,204 112,297 13,175 16,735 16,919 38,677 $ 2012 181,891 113,720 14,299 14,843 13,099 26,509 $ 409,007 $ 364,361 47,623 1,311 6,152 32,007 1,268 (93) $ 464,093 $ 397,543 The amount of inventories recognized as an expense during the twelve months ended December 31, 2013 is $84,341,000 (2012 - $78,463,000). Page | 49 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 7. Selling & Administrative Expenses (000’s) Salaries Other selling & administrative expenses Selling & administrative expenses Amortization of intangible assets Share based compensation 8. Personnel expenses (000’s) Wages, salaries & benefits Contributions to defined contribution plans Share based compensation Twelve months ended December 31, 2012 2013 $ 11,619 7,427 19,046 7,060 897 $ 10,278 6,950 17,228 8,204 883 $ 27,003 $ 26,315 Twelve months ended December 31, 2012 2013 $ 218,244 4,579 2,208 $ 187,941 4,228 2,151 $ 225,031 $ 194,320 The Corporation has two types of defined contribution plans: a registered defined contribution plan covering a number of its employees and a collectively bargained plan covering union employees. Under the registered defined contribution plan, the Corporation matches individual contributions up to a maximum of 5% of the employee’s annual salary. Under the collectively bargained plan, the Corporation contributes a set amount per hour worked. The total amount expensed under both defined contribution plans for the year ended December 31, 2013 was $4,579,000 (2012 - $4,228,000). 9. Finance Costs (000’s) Interest expense Accretion of discount on notes payable Accretion of provisions Twelve months ended December 31, 2012 2013 $ $ 3,388 371 63 3,822 $ $ 2,918 573 66 3,557 Page | 50 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 10. Income Taxes The provision for income taxes differs from that which would be expected by applying statutory rates. A reconciliation of the difference is as follows: (000’s) Profit before tax Combined federal and provincial income tax rate Expected income tax provision Non-deductible share based compensation Share of equity accounted investees Revisions to prior year tax pool estimates Change in estimated timing of realization of temporary differences Differences in jurisdictional tax rates Non-taxable portion of capital loss (gain) Other Twelve months ended December 31, 2012 2013 $ 59,469 25% 14,867 $ 98,672 25% 24,668 552 - 655 (397) 104 995 242 538 132 (45) - 270 (187) 413 $ 17,018 $ 25,789 For the year ended December 31, 2013 income tax expense was $17,018,000, an effective tax rate of 28.6%, for the year ended December 31, 2012 income tax expense was $25,789,000, an effective tax rate of 26.1%. The increase in the effective tax rate was primarily due to the revision of the prior year tax estimates and permanent differences. 11. Trade and other receivables (000’s) Trade receivables Accrued receivables Loans and other receivables Receivables due from related parties Allowance for doubtful Trade and other receivables December 31, 2013 December 31, 2012 $ 50,435 38,659 927 900 90,921 $ 112,636 19,439 1,180 435 133,690 (65) (495) $ 90,856 $ 133,195 At December 31, 2013, progress billings to customers under open construction contracts included in trade receivables amounted to $11,855,000 (2012 - $7,683,000). The Corporation estimates that the carrying value of financial assets within trade and other receivables approximate their fair value. 12. Inventories (000’s) Raw materials Finished goods December 31, 2013 December 31, 2012 $ 9,547 6,091 $ $ 15,638 $ 10,919 2,402 13,321 Page | 51 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 13. Property, Plant and Equipment Cost (000’s) Balance December 31, 2012 Additions Disposals Impact of Foreign Translation Balance December 31, 2013 $ Camp facilities, setup & installation Marine equipment Land & Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligation Assets under construction $ $ 343,032 18,830 31,638 32,162 8,703 5,722 1,087 3,208 64,032 - 2,677 6,830 5,561 1,410 4,229 9,636 $ (26,493) (6,019) (3,249) (1,159) (4,139) (283) - (154) $ 444,382 $ 94,375 $ (41,496) $ 147 - - - - - - - 147 $ 380,718 12,811 31,066 37,833 10,125 6,849 5,316 12,690 $ 497,408 Accumulated Depreciation (000’s) Camp facilities, setup & installation Marine equipment Land & Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligation Assets under construction Balance December 31, 2012 Depreciation Disposals Impact of Foreign Translation Balance December 31, 2013 $ $ $ 65,929 15,682 7,287 17,137 4,962 2,863 317 - 36,904 192 1,541 4,044 3,936 956 50 - $ (6,176) (3,804) (290) (822) (2,305) (262) - - $ 114,177 $ 47,623 $ (13,659) $ 15 - - - - - - - 15 Carrying Amounts (000’s) Balance December 31, 2012 $ Camp facilities, setup & installation Marine equipment Land & Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligation Assets under construction 277,103 3,148 24,351 15,025 3,741 2,859 770 3,208 $ 96,672 12,070 8,538 20,359 6,593 3,557 367 - $ 148,156 Balance December 31, 2013 $ 284,046 741 22,528 17,474 3,532 3,292 4,949 12,690 $ 330,205 $ 349,252 Page | 52 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 13. Property, Plant and Equipment (continued) Cost (000’s) Balance December 31, 2011 Additions Disposals Impact of Foreign Translation Balance December 31, 2012 $ Camp facilities, setup & installation Marine equipment Land & Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligation Assets under construction $ 223,391 18,830 28,456 25,346 6,294 4,433 1,071 6,850 $ 125,565 - 3,171 7,107 5,745 1,384 16 (3,642) $ (5,904) - 11 (291) (3,336) (95) - - $ (20) - - - - - - - 343,032 18,830 31,638 32,162 8,703 5,722 1,087 3,208 $ 314,671 $ 139,346 $ (9,615) $ (20) $ 444,382 Balance December 31, 2011 Depreciation Disposals Impairment loss Balance December 31, 2012 Accumulated Depreciation (000’s) Camp facilities, setup & installation Marine equipment Land & Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligation Assets under construction $ $ $ 45,718 15,410 5,932 13,072 3,393 2,177 176 - 22,013 272 1,344 4,313 3,143 781 141 - $ (1,802) - 11 (248) (1,574) (95) - - $ 85,878 $ 32,007 $ (3,708) $ Carrying Amounts (000’s) Balance December 31, 2011 $ Camp facilities, setup & installation Marine equipment Land & Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligation Assets under construction 177,673 3,420 22,524 12,274 2,901 2,256 895 6,850 - - - - - - - - - $ 65,929 15,682 7,287 17,137 4,962 2,863 317 - $ 114,177 Balance December 31, 2012 $ 277,103 3,148 24,351 15,025 3,741 2,859 770 3,208 $ 228,793 $ 330,205 Page | 53 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 13. Property, Plant and Equipment (continued) (a) Assets under construction At December 31, 2013 and 2012, the Corporation had several camp facility fleet structures under construction for both maintenance and expansion purposes. The Corporation has not capitalized any borrowing costs for the twelve months ended December 31, 2013 (December 31, 2012 - $nil), due to the short term nature of construction. (b) Capital commitments At December 31, 2013 the Corporation had no outstanding commitments to purchase property, plant and equipment (2012 - $227,000). 14. Intangible Assets and Goodwill Intangible assets, other than goodwill, have finite useful lives. The amortization charges for intangible assets are included on the consolidated statement of comprehensive income. Goodwill has an infinite life and is not amortized. Cost (000’s) Customer relationships Other intangible assets Amortization (000’s) Customer relationships Other intangible assets Carrying Amount (000’s) Customer relationships Other intangible assets Balance December 31, 2012 $ $ 56,194 1,741 $ 57,935 $ Removal of fully amortized Balance December 31, 2013 Additions - - - $ (33,515) (1,741) $ $ (35,256) $ 22,679 - 22,679 Balance December 31, 2012 Amortization Removal of fully amortized Balance December 31, 2013 $ $ 46,797 1,110 $ 6,429 631 (33,515) (1,741) $ $ 47,907 $ 7,060 $ (35,256) $ 19,711 - 19,711 Balance December 31, 2012 $ 9,397 631 $ 10,028 Balance December 31, 2013 $ $ 2,968 - 2,968 Page | 54 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 14. Intangible Assets and Goodwill (continued) Cost (000’s) Customer relationships Other intangible assets Amortization (000’s) Customer relationships Other intangible assets Carrying Amount (000’s) Customer relationships Other intangible assets (a) Impairment loss Balance December 31, 2011 Removal of fully amortized Balance December 31, 2012 Additions $ $ 56,194 1,741 $ 57,935 $ - - - $ $ - - - $ $ 56,194 1,741 57,935 Balance December 31, 2011 Amortization Removal of fully amortized Balance December 31, 2012 $ $ 38,533 1,170 $ 8,264 (60) $ 39,703 $ 8,204 $ - - - $ $ 46,797 1,110 47,907 Balance December 31, 2011 $ $ 17,661 571 18,232 Balance December 31, 2012 $ 9,397 631 $ 10,028 Intangible assets with an indefinite useful life are required to be tested annually for impairment. All of the Corporation’s intangible assets have a definite useful life and are currently being used. During the year ended December 31, 2013 and 2012, there were no indicators of impairment; therefore no impairment test was performed. (b) Impairment testing for cash-generating units containing goodwill For the purpose of impairment testing, goodwill is allocated to the Corporation’s CGU which represent the lowest level at which goodwill is monitored for internal management purposes and which are not higher than the Corporation’s operating segments. As at December 31, 2013 the aggregate carrying amount of goodwill is $1,664,000 (2012 - $2,136,000), allocated entirely to the Camp and Catering CGU. The reduction is related to the disposal of the Corporation’s blast resistant structures business. The recoverable amount determined using the value in use calculation which exceeded the carrying amount, and therefore no impairment was recorded. Value in use was determined by discounting the future cash flows generated from the continuing use of the unit. Unless indicated otherwise, value in use in 2013 was determined similarly as in 2012. The calculation of the value in use was based on the following key assumptions: (cid:120) (cid:120) Forecasts use current contracts and market conditions to project revenue. Costs are calculated using historical gross margins and additional known or pending factors. The projections were extrapolated over the remaining useful life of the primary assets of 15 years and discounted at a rate of 11.80% (2012 – 11.80%). The discount rate was estimated based on past experience, and industry average unlevered beta, which was based on a possible range of debt leveraging of 9% at a market interest rate of 4%. (cid:120) No growth rate was applied, as the amount from the value-in-use exceeded carrying value. It is unlikely that a change in a key assumption in the value-in-use calculation would cause the unit’s carrying amount to exceed its recoverable amount. Page | 55 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 15. Other Assets The Corporation’s other assets consists of a 25 year prepaid lease for a building and land to accommodate a portion of the Corporation’s manufacturing operations in Kamloops, British Columbia. The amount expensed during the year ended December 31, 2013 related to the prepaid lease was $128,000 (2012 - $127,000) with 21 years remaining. 16. Loans and Borrowings (000’s) Committed credit facility Notes payable Vehicle and equipment financing Less current portion December 31, 2013 December 31, 2012 $ $ $ 70,756 5,655 3,341 79,752 $ $ $ 108,247 6,304 3,737 118,288 (1,496) (1,416) $ 78,256 $ 116,872 The carrying value of Horizon’s debt approximates its fair value, as the majority of the debt bears interest at variable rates. On November 6, 2013, the Corporation’s current credit facility of $150,000,000 was renewed for a term of 3 years. The credit facility is extendable annually at the Corporation’s request and subject to lender approval. The committed credit facility is secured by a $300,000,000 first fixed and floating charge debenture over all assets of the Corporation and its wholly owned subsidiaries. Interest is payable at the bank prime rate plus 0.625%. Amounts borrowed under the facility become due on October 26, 2016, the maturity date of the facility. As at December 31, 2013, the Corporation was in compliance with all financial and non-financial covenants. The calculations of the Corporation’s financial covenants for its committed credit facility are shown below: Debt Covenants Debt (1) to EBITDAS (2)(3) – must be less than 2.0:1 Interest coverage(4) – must be greater than 3.0:1 December 31, 2013 0.6:1 37.3:1 (1) (2) (3) (4) Debt is calculated as the sum of current and long-term portions of loans and borrowings, excluding vehicle and equipment financing. EBITDAS (Earnings before finance costs, taxes, depreciation, amortization, gain/loss on disposal of property, plant and equipment, and share based compensation) is not a recognized measure under IFRS. Horizon’s method of calculating EBITDAS may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. Debt to EBITDAS is calculated as the ratio of Debt to trailing 12 months EBITDAS. Interest coverage is calculated as the ratio of trailing 12 months EBITDAS to 12 months trailing interest expense on loans and borrowings. Notes Payable Horizon incurred $10,850,000 of notes payable during 2009 as part of the purchase price for drill camp equipment and generators. The notes payable are non-interest bearing and are repayable over a term of up to 6 years. Actual payments on the note are dependent on utilization levels of specific equipment with minimum repayments of at least $1,000,000 per year. The fair value of these notes was initially measured at $8,771,000 using a discount rate of 9% which was consistent with market rates for debt with similar characteristics at the time. At December 31, 2013 these notes were recorded at an amortized cost amount of $5,655,000. Principal Repayments for Loans and Borrowings (000’s) 2014 2015 2016 2017 2018 and beyond Amount 1,496 7,500 70,756 - - 79,752 $ $ Page | 56 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 17. Asset retirement obligations and commitments (a) Provisions include constructive site restoration obligations for camp projects to restore lands to previous condition when camp facilities are dismantled and removed at the end of their useful lives. (000’s) Balance, beginning of period Additions Revisions Accretion of provisions Balance, end of period December 31, 2013 December 31, 2012 $ $ 1,364 4,229 - 63 5,656 $ $ 1,283 - 15 66 1,364 The estimated present value of rehabilitating the sites at the end of their useful lives has been estimated using existing technology, at current prices, and discounted using a risk free rate. The future value amount at December 31, 2013 was $7,561,000 (2012 - $2,734,000) and determined using a present value discount rate of 4% and an inflation rate of 1%. The timing of these payments is dependent on various factors, such as the estimated lives of the equipment and industry activity in the region, but is anticipated to occur between 2016 and 2032. (b) The Corporation has outstanding bank letters of credit as follows: Maturity date January 16, 2014 February 1, 2014 June 1, 2014 March 31, 2015 Amount (000’s) $ 25 50 150 72 (c) The Corporation rents premises and equipment under multiple operating lease contracts with varying expiration dates. The minimum lease payments under these leases over the next five years are as follows: (000’s) 2014 2015 2016 2017 2018 and beyond $ Amount 4,421 5,031 2,353 1,644 3,709 $ 17,158 Page | 57 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 18. Deferred tax assets and liabilities (a) Unrecognized deferred tax assets and liabilities have not been recognized in respect of the following items: (000’s) Deductible temporary differences Tax losses Balance, end of period December 31, 2013 December 31, 2012 $ $ 52 373 425 $ $ 52 345 397 Tax losses not recognized expire in 2028 and beyond. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the subsidiary of the Corporation can utilize the benefits. (b) The Corporation has net operating losses for Canadian tax purposes of $3,086,000 available to reduce future taxable income in Canada, which will expire as follows: (000’s) 2013 2014 2015 2016 2017 and beyond Amount - - - - 3,086 3,086 $ $ The components of net deferred tax asset (liability) recognized are as follows: (000’s) Property, plant and equipment Intangibles Goodwill Deferred partnership income Non-capital loss carry forwards Net capital loss carry forwards Restructuring costs Asset retirement obligation Reserves Deferred tax asset Deferred tax liability Assets $ 2013 249 1,997 2,523 - 818 710 122 1,378 386 $ 2012 938 1,873 2,614 - 1,465 - - - 873 Liabilities 2013 2012 Net 2013 2012 $ (32,807) - (151) (5,030) - - - - - $ (26,910) (946) (124) (7,329) - - - - - $ (32,558) 1,997 2,372 (5,030) 818 710 122 1,378 386 $ (25,972) 927 2,490 (7,329) 1,465 - - - 873 1,067 (30,872) 1,772 (29,318) $ (29,805) $ (27,546) Page | 58 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 18. Deferred tax assets and liabilities (continued) Movements in temporary differences during the year are as follows: (000’s) Property, plant and equipment Intangibles Goodwill Deferred partnership income Non-capital loss carry forwards Net capital loss carry forwards Restructuring costs Asset retirement obligation Reserves 19. Share Capital (a) Authorized December 31, 2012 and loss December 31, 2013 Recognized in profit $ $ (25,972) 927 2,490 (7,329) 1,465 - - - 873 (27,546) $ $ (6,586) 1,070 (118) 2,299 (647) 710 122 1,378 (487) (2,259) $ $ (32,558) 1,997 2,372 (5,030) 818 710 122 1,378 386 (29,805) Unlimited number of voting common shares without nominal or par value. Unlimited number of preferred shares issuable in series. (b) Issued Balance at December 31, 2011 Share options exercised Balance at December 31, 2012 Share options exercised Balance at December 31, 2013 (c) Share option plan Number Amount (000’s) 106,751,651 $ 173,438 1,957,624 6,561 108,709,275 $ 179,999 1,375,609 3,852 110,084,884 $ 183,851 The Corporation has a share option plan for its directors, officers, and key employees whereby options may be granted, to a maximum of 10% of the issued and outstanding common shares, subject to terms and conditions. Share option vesting privileges are at the discretion of the Board of Directors and were set at three years. The Corporation uses graded vesting for share options over the period in which the option vests. All share options are equity settled with a weighted average remaining contractual life of 3.1 years and all options granted have a maximum term of 5 years with the exception of options granted on July 25, 2006 which have a maximum term of 10 years. Balance, beginning of year Granted Forfeited Exercised Balance, end of year Year ended December 31, 2013 Weighted average exercise price Outstanding options $ 4,914,831 321,400 (148,667) (1,375,609) 3,711,955 $ 4.40 6.77 5.59 1.96 5.46 Year ended December 31, 2012 Weighted average exercise price Outstanding options $ 4,216,007 2,750,700 (94,252) (1,957,624) 4,914,831 $ 2.27 6.25 3.73 2.44 4.40 Page | 59 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 19. Share Capital (continued) (c) Share option plan (continued) Balance, beginning of year Vested Expired Exercised Balance, end of year Year ended December 31, 2013 Weighted average exercise price Exercisable options Year ended December 31, 2012 Weighted average exercise price Exercisable options $ 2,096,712 681,773 (7,000) (1,375,609) 1,395,876 $ 2.10 5.87 6.25 1.96 4.06 $ 3,208,815 858,187 (12,666) (1,957,624) 2,096,712 $ 2.47 1.49 2.27 2.44 2.10 The exercise prices for options outstanding at December 31, 2013 are as follows: Exercise price per share $1.36 to $3.93 $3.94 to $6.20 $6.21 to $6.27 $6.28 to $6.77 $6.78 to $9.01 Number 864,835 304,167 2,194,553 167,500 180,900 $ Total options outstanding Weighted average remaining contractual life in years Weighted average exercise price per share 2.77 5.42 6.25 6.71 7.70 5.46 2.1 3.4 3.2 4.4 4.1 3.1 Exercisable options Weighted average exercise price per share $ 2.77 5.04 6.25 - 7.80 4.06 Number 864,835 75,832 425,210 - 29,999 3,711,955 $ 1,395,876 $ The weighted average share price at the date of exercise for share options exercised during the year ended December 31, 2013 was $7.20/share (2012 - $6.08/share). The Corporation calculated the fair value of the share options granted using the Black-Scholes pricing model to estimate the fair value of the share options issued at the date of grant. The weighted average fair market value of all options granted during the year and the assumptions used in their determination are as follows: (000’s) Weighted average fair value per option Weighted average forfeiture rate Weighted average grant price Weighted average expected life Weighted average risk free interest rate Weighted average dividend yield rate Weighted average volatility December 31, 2013 December 31, 2012 $ 1.47 6.61% $ 6.77 3.02 years 1.20% 3.74% 39.9% $ 2.15 6.98% $ 6.25 3.20 years 1.33% 3.21% 58.9% Expected volatility is estimated by considering historic average share price volatility. For the twelve months ended December 31, 2013, share based compensation for share options included in net earnings amounted to $2,208,000 (2012 - $2,151,000). Page | 60 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 20. Earnings Per Share The calculation of basic earnings per share for the twelve months ended December 31, 2013 was based on the total profit attributable to common shareholders of $42,451,000 (2012 - $72,883,000). A summary of the common shares used in calculating earnings per share for the twelve months ended December 31, 2013 and 2012 is as follows: Number of common shares, beginning of period Weighted average effect of share options exercised Weighted average common shares outstanding – basic Effect of share purchase options(1) Weighted average common shares outstanding – diluted 2013 108,709,275 631,198 109,340,473 2012 106,751,651 1,326,037 108,077,688 1,101,356 1,872,884 110,441,829 109,950,572 (1) The Corporation utilizes the treasury stock method for calculating the dilutive effect of share purchase options when the average market price of the Corporation’s common stock during the period exceeds the exercise price of the option For the twelve months ended December 31, 2013, 2,206,700 share options (2012 - 2,597,450) were excluded from the calculation of weighted average common shares outstanding - diluted as the result would be anti-dilutive. 21. Financial Risk Management (d) Overview The Corporation is exposed to a number of different financial risks arising from normal course business operations as well as through the Corporation’s financial instruments comprised of cash and cash equivalents, trade and other receivables, trade and other payables, and loans and borrowings. These risk factors include credit risk, liquidity risk, and market risk, including currency exchange risk and interest rate risk. The Corporation’s risk management practices include identifying, analyzing, and monitoring the risks faced by the Corporation. The following presents information about the Corporation’s exposure to each of the risks and the Corporation’s objectives, policies, and processes for measuring and managing risk. (b) Credit risk Credit risk is the risk that a customer will be unable to pay amounts due, causing a financial loss; as a result, the Corporation’s maximum exposure to credit risk is the amount of trade and other receivables and cash and cash equivalents. The Corporation’s practice is to manage credit risk by examining each new customer individually for credit worthiness before the Corporation’s standard payment terms are offered. The Corporation’s review may include financial statement review, credit references, or bank references. Customers that lack credit worthiness transact with the Corporation on a prepayment only basis. The Corporation constantly monitors individual customer trade receivables, taking into consideration industry, aging profile, maturity, payment history, and existence of previous financial difficulties in assessing credit risk. A formal review is performed each month for each subsidiary, focusing on amounts which have been outstanding for periods which are considered abnormal for each customer. The Corporation establishes an allowance for doubtful accounts for specifically identifiable customer balances which are assessed to have credit risk exposure. Page | 61 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 21. Financial Risk Management (continued) The following shows the aged balances of trade and other receivables: (000’s) Neither impaired nor past due Impaired Outstanding 31-60 days Outstanding 61-90 days Outstanding more than 90 days Total Allowance for doubtful accounts Accrued revenue Other receivables Total trade and other receivables December 31, 2013 December 31, 2012 $ $ 29,370 65 15,826 4,001 2,073 51,335 (65) 38,659 927 90,856 $ 44,337 495 38,313 16,800 13,126 113,071 (495) 19,439 1,180 $ 133,195 In the twelve months ended December 31, 2013, the Corporation provided an allowance for $368,000 of receivables aged greater than 90 days and collected $218,000 that had previously been allowed for. The Corporation also applied $580,000 of allowance for doubtful accounts against the associated receivable balance. As at February 19, 2014, the Corporation has collected $1,216,000 on amounts outstanding more than 90 days. (c) Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation believes that it has access to sufficient capital through internally generated cash flows and committed credit facilities to meet current spending forecasts. To manage liquidity risk, the Corporation forecasts operational results and capital spending on a regular basis. Actual results are compared to these forecasts to monitor the Corporation’s ability to continue to meet spending forecasts. On November 6, 2013, the Corporation’s current credit facility of $150,000,000 was renewed for a term of 3 years. The credit facility is extendable annually at the Corporation’s request and subject to lender approval. The committed credit facility is secured by a $300,000,000 first fixed and floating charge debenture over all assets of the Corporation and its wholly owned subsidiaries. Interest is payable at the bank prime rate plus 0.625%. Amounts borrowed under the facility become due on October 26, 2016, the maturity date of the facility. The following shows the timing of cash outflows relating to trade and other payables and loans and borrowings: December 31, 2013 December 31, 2012 $ Trade and other payables(1) 56,961 - - - 5,656 $ Loans and borrowings(2) 1,496 7,500 70,756 - - $ $ Trade and other payables(1) 72,172 - - - 1,364 Total 58,457 7,500 70,756 - 5,656 Loans and borrowings(2) $ 1,416 1,543 115,329 - - $ Total 73,588 1,543 115,329 - 1,364 $ 62,617 $ 79,752 $ 142,369 $ 73,536 $ 118,288 $ 191,824 Year 1 Year 2 Year 3 Year 4 Year 5 and beyond (1) (2) Trade and other payables include trade and other payables, income taxes payable, and asset retirement provisions. Loans and borrowings include non-interest bearing notes payable, vehicle and equipment financing and committed credit facility. Cash flows of Horizon’s note payable have been recorded according to estimated utilization of specific equipment. Page | 62 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 21. Financial Risk Management (continued) (d) Market risk Market risk is the risk or uncertainty arising from possible market price movements and their impact on future performance of the Corporation. The market price movements that could adversely affect the value of the Corporation’s financial assets, liabilities, and expected future cash flows include foreign currency exchange risk and interest rate risk. As the Corporation’s exposure to foreign currency exchange risk and interest rate risk is limited, the Corporation does not currently hedge its financial instruments. (iii) Foreign currency exchange risk The Corporation has limited exposure to foreign currency exchange risk as sales and purchases are typically denominated in CAD. The Corporation’s exposure to foreign currency exchange risk arises from the purchase of some raw materials, which are denominated in USD, and foreign operations with USD functional currency. As the foreign currency exchange risks are primarily based on the realized foreign exchange, the following sensitivity analysis is to determine the impact on cash used in operating activities. The effect of a $0.01 increase in the USD/CAD exchange rate would decrease cash used in operating activities for the twelve months ended December 31, 2013 by approximately $182,500 (December 31, 2012 - $261,000). This assumes that the quantity of USD raw material purchases and the foreign operations in the year remain unchanged and that the change in the USD/CAD exchange rate is effective from the beginning of the year. (iv) Interest rate risk The Corporation is exposed to interest rate risk as changes in interest rates may affect interest expense and future cash flows. The primary exposure is related to the Corporation’s revolving credit facility which bears interest at a rate of prime plus 0.625%. If prime were to have increased by 1.00%, it is estimated that the Corporation’s net earnings would have decreased by approximately $933,500 for the twelve months ended December 31, 2013 (December 31, 2012 - $841,000). This assumes that the amount and mix of fixed and floating rate debt in the year remains unchanged and that the change in interest rates is effective from the beginning of the year. 22. Capital Management The Corporation’s main objective is to build a profitable, growth-oriented company. Therefore, the Corporation’s primary capital management objective is to maintain a conservative balance sheet to maintain investor, creditor, and market confidence and to sustain future development of the business. The Corporation monitors capital through two key ratios: total loans and borrowings to EBITDAS(1) and total loans and borrowings to total loans and borrowings plus shareholders’ equity. Total loans and borrowings to EBITDAS(1) is calculated as current loans and borrowings plus long-term loans and borrowings divided by trailing 12 months EBITDAS(1). Total loans and borrowings to EBITDAS(1) is monitored from both a historical and anticipated EBITDAS(1) perspective. Total loans and borrowings to total loans and borrowings plus shareholders equity is calculated as current loans and borrowings plus long-term loans and borrowings divided by current loans and borrowings plus long-term loans and borrowings plus shareholders’ equity. The Corporation’s strategy during the twelve months ended December 31, 2013, which was unchanged from 2012, which was to maintain an appropriate level of loans and borrowings in comparison to EBITDAS(1) and total loans and borrowings plus shareholders’ equity. Page | 63 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 22. Capital Management (continued) The Corporation’s strategy during the twelve months ended December 31, 2013, which was unchanged from 2012, which was to maintain an appropriate level of loans and borrowings in comparison to EBITDAS(1) and total loans and borrowings plus shareholders’ equity. (000’s) Statement of financial position components of ratios Current loans and borrowings(2) Loans and borrowings(2) Total loans and borrowings Shareholders’ equity Total loans and borrowings plus shareholders’ equity Statement of comprehensive income components of ratios (trailing 12 months) Operating earnings Depreciation Amortization Loss (gain) on disposal of property, plant and equipment Share based compensation EBITDAS(1) December 31, 2013 December 31, 2012 $ $ $ $ $ $ 1,496 78,256 79,752 294,427 374,179 63,291 47,623 7,060 6,152 2,208 $ 126,334 $ 1,416 116,872 118,288 274,263 392,551 102,758 32,007 8,204 (93) 2,151 145,027 0.82 0.30 Total loans and borrowings to EBITDAS(1) Total loans and borrowings to total loans and borrowings plus shareholders’ equity 0.63 0.21 (1) (2) EBITDAS (Earnings before finance costs, taxes, depreciation, amortization, gain/loss on disposal of property, plant and equipment, and share based compensation) is not a recognized measure under IFRS. Management believes that in addition to net earnings, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Horizon’s method of calculating EBITDAS and operating earnings (loss) may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. The Corporation’s loans and borrowings include the committed credit facility, vehicle and equipment financing and notes payable. The Corporation’s variable-rate committed credit facility approximates its carrying value, as it is at a floating market rate of interest. The Corporation’s notes payables and vehicle and equipment financing are non-interest bearing without a fixed term of repayment and have been initially measured at fair value. Page | 64 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 23. Operating segments The Corporation operates in Canada and the US through two business segments: Camps & Catering and Matting. The Camps & Catering segment includes camp rental and catering services, marine operations as well as the manufacture, sale, and repair of camps. Matting includes mat rental, installation, and fleet management services, as well as the manufacture and sale of mats. Information regarding the results of all segments is included below. Inter-segment pricing is determined on an arm’s length basis. Twelve months ended December 31, 2013 (000’s) Revenue EBITDAS(1) Depreciation and amortization Loss (gain) on disposal of assets Share based compensation Operating earnings (loss) Total assets Capital expenditures Twelve months ended December 31, 2012 (000’s) Revenue EBITDAS(1) Depreciation and amortization Loss (gain) on disposal of assets Share based compensation Operating earnings (loss) Total assets Capital expenditures Camps & Catering $ 496,594 120,977 46,197 6,173 1,143 67,464 433,908 78,519 Camps & Catering $ 447,190 134,229 31,713 28 1,096 101,392 449,676 124,674 Matting Corporate Inter-segment Eliminations $ 62,419 17,760 8,112 (21) 168 9,501 33,606 10,382 $ - (12,372) 583 - 897 (13,852) 3,601 1,292 Matting Corporate $ 91,466 22,626 8,179 (108) 172 14,383 43,352 14,383 $ - (11,157) 482 (13) 883 (12,509) 2,965 1,060 $ (4,626) (31) (209) - - 178 - (47) Inter-segment Eliminations $ (12,040) (671) (163) - - (508) - (771) Total $ 554,387 126,334 54,683 6,152 2,208 63,291 471,115 90,146 Total $ 526,616 145,027 40,211 (93) 2,151 102,758 495,993 139,346 The Corporation has one major customer in the Camps & Catering segment which generated a combined 24% of total revenues for the year ended December 31, 2013 (December 31, 2012 – 37%). (1) EBITDAS (Earnings before interest, taxes, depreciation, amortization, gain/loss on disposal of property, plant and equipment, and share based compensation) is not a recognized measure under IFRS. Management believes that in addition to net earnings, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Horizon’s method of calculating EBITDAS may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. Page | 65 Notes to the consolidated financial statements Years ended December 31, 2013 and 2012 24. Related Parties (000’s) Joint venture Purchases Sales Recovery of administrative overhead Included in accounts receivable Key management personnel interests Purchases Sales Included in accounts receivable Included in accounts payable December 31, 2013 December 31, 2012 $ $ $ $ - - 30 - - 947 395 - - 8 30 - (17) 1,261 271 - Key management personnel include the directors and officers of Horizon that are also directors or officers of other companies. All related party transactions are in the normal course of operations and have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is similar to those negotiated with third parties. All outstanding balances are to be settled with cash, and none of the balances are secured. Key management personnel compensation for the year ended December 31, 2013 and 2012 is comprised as follows: (000’s) Short-term employee benefits Post-employment benefits Termination benefits Other long-term benefits Share based compensation 25. Supplemental Information December 31, 2013 December 31, 2012 $ $ 2,850 55 - - 450 3,050 32 - - 981 Components of change in non-cash working capital balances related to operating activities: (000’s) Accounts receivable Inventory Prepaid expenses Accounts payable and accrued liabilities Deferred revenue Finance cost payable December 31, 2013 December 31, 2012 $ $ 42,339 (2,317) (494) (4,275) 2,859 24 $ 38,136 $ (49,711) 2,013 1,475 16,509 (13,013) (14) (42,741) 26. Significant Subsidiaries The Corporation operates through two significant subsidiaries based on business line: Subsidiary Name Horizon North Camp & Catering Partnership Swamp Mats Inc. Country of Incorporation Canada Canada Ownership Interest (%) December 31, 2013 December 31, 2012 100 100 100 100 Page | 66 Corporate Information Directors Bob German Calgary, Alberta Kevin D. Nabholz(1)(2)(3) Calgary, Alberta Russell Newmark(1)(2) Calgary, Alberta Ric Peterson(3) Calgary, Alberta Ann Rooney(1)(2) Calgary, Alberta Dean Swanberg(3) Grande Prairie, Alberta Dale E. Tremblay(1)(2)(3) Calgary, Alberta (1) Audit Committee Member (2) Corporate Governance and Compensation Committee Member (3) Health, Safety and Environment Committee Member Corporate Office 1600, 505-3rd Street S.W. Calgary, Alberta T2P 3E6 P 403 517-4654 F 403 517-4678 Website www.horizonnorth.ca Officers Bob German President and Chief Executive Officer Scott Matson Vice President Finance and Chief Financial Officer Roderick Graham Senior Vice President, Corporate Development and Planning Bill Anderson Vice President Health, Safety and Environment Jan Campbell Corporate Secretary Legal Counsel Borden Ladner Gervais LLP Calgary, Alberta Auditor KPMG LLP Calgary, Alberta Stock Exchange Listing Toronto Stock Exchange Symbol: HNL Transfer Agent CIBC Mellon Trust Company Calgary, Alberta  

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