Q1

ENERFLEX SYSTEMS LTD. 4700 47 Street SE Calgary AB Canada T2B 3R1

QUART E RLY
RE PORT
2006 www.enerex.com
THREE MONTHS ENDED MARCH 31, 2006
Q1
FIRST
QUARTER
LETTER TO
SHAREHOLDERS
The rst quarter of 2006 marked the eleventh quarter that Enerex has delivered earnings per
share that exceed the prior year comparatives. The Company also achieved strong gains in other
key performance measures. We view this latest period as a decisive quarter in terms of growth
in momentum and the traction we have achieved in our markets. This comes as a result of an
extraordinary commitment throughout the Company over the past three years to improve operating
performance and position Enerex to capitalize on growth opportunities.
Tel 1.403.236.6800 Fax 1.403.236.6816 www.enerex.com
Revenue increased by 40% during the quarter to $206.8 million, from $147.7 million in the rst quarter of 2005. Total gross margin and
operating margin increased by 48% and 84% respectively, compared with the rst quarter of 2005. EBITDA (earnings before interest,
taxes, depreciation and amortization) increased by 67% to represent 13.1% of revenue compared with 11.0% a year ago. Earnings per
diluted common share increased by 72% to $0.57, compared with $0.33 per share during the rst quarter of 2005.
The accelerated growth during the quarter was mainly the result of operational improvements and recent growth strategy initiatives,
notably the acquisition of Australia-based HPS Group Pty Ltd. (HPS) in July 2005 and the introduction of new products. Gains also reected
the strong markets for natural gas infrastructure and maintenance spending in a period of high commodity prices. Revenue and income
growth was broad based, with the Engineered Systems segment experiencing the largest gains, followed by the Service segment which
is seasonally strongest in the rst quarter. International revenue increased its contribution, representing 28% of consolidated revenue
compared with 25% in the rst quarter of 2005.
We made good progress with two strategic priorities for 2006:
In domestic markets, we increased customer interest in our Variable Cost Compression (VCC) initiative whereby Enerex will own,
operate, maintain and optimize eld equipment on behalf of customers for a variable fee based on throughput and uptime. This
initiative addresses customers increased focus on cash ow and their drive to optimize legacy gas production assets. In April 2006,
we received a letter of intent for our rst VCC contract in western Canada.
In international markets, we further developed Enerex Global as a single point of contact for turnkey projects valued in the $5
million to $100 million range and completed the integration of existing operations in the AustralAsia region with HPS, establishing
a strong regional business unit. We next plan to establish a similar business unit in the Middle East, where we are exploring
opportunities to make an acquisition conceptually similar to HPS.
FIRST QUARTER HIGHLIGHTS
International revenue increased by 55% to $57.3 million
Engineered Systems (which includes two divisions Compression and Power, and Production and Processing) increased revenue
by 56%, gross margin by 90%, and income before interest and income taxes (EBIT) by 126%. This segment increased bookings by
95% and its order backlog at quarter end by 234% on a year-over-year basis and by 22% compared with December 31, 2005.
The Compression and Power division increased revenue by 36% and EBIT by 144%, while the Production and Processing division
increased revenue by 106% and EBIT by 98%.
Service increased revenue by 24%, gross margin by 34% and EBIT by 142%.
LETTER TO SHAREHOLDERS
2 ENERFLEX SYSTEMS LTD.
We made substantial progress in the development and marketing of new products, notably we:
- received two additional orders for water recovery packages for steam-assisted gravity drainage (SAG-D)
applications in the Alberta oil sands;
- received several orders totaling $45 million for Enerexs recently developed ve new models of screw
compressors in the 600 horsepower and above range; and
- subsequent to quarter end, began testing of ue gas technology for enhanced hydrocarbon production,
responding to strong market interest; and deployed a new single rotary screw compressor for coal bed
methane (CBM) applications at a customer site.
We continued the rationalization of the Companys branch network to reduce costs and improve efciencies.
OUTLOOK
The operational improvements that we started in 2003 have achieved a level of protability in our core business
that enables us to focus on our growth strategy. This strategy is to signicantly increase the scale and reach of
Enerex in Canada and around the world by offering complete solutions for our customers needs.
Enerex is beneting from strong industry fundamentals, tempered by an industry-wide shortage of qualied
personnel due to demographics and increased demand for skilled workers. We are addressing this challenge by
emphasizing employee attraction, retention, training and career development as an important part of our overall
growth strategy.
We are off to a strong start in 2006. The record order backlog and booking levels that we are seeing in Engineered
Systems, and the continuing execution of our growth strategy, point toward continuing protable growth.
Sincerely,
P. John Aldred
Chairman and Chief Executive Ofcer
J. Blair Goertzen
President and Chief Operating Ofcer
May 4, 2006
2006 QUARTERLY REPORT 3
Managements
Discussion and
Analysis
The Managements Discussion and Analysis (MD&A) should be read in conjunction with the unaudited consolidated
nancial statements and the accompanying notes to the consolidated nancial statements for the three months
ended March 31, 2006 and 2005 contained on pages 17 to 25 of this interim report. It is also advisable to read the
MD&A in conjunction with the Companys 2005 annual report and the audited consolidated nancial statements
and the MD&A for the years ended December 31, 2005 and 2004 and the accompanying notes to consolidated
nancial statements contained on pages 33 to 89 of the 2005 annual report. The results reported herein have
been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) and are presented
in Canadian dollars unless otherwise stated. The MD&A has been prepared taking into consideration information
that is available up to April 28, 2006 and focuses on key statistics from the consolidated nancial statements, and
pertains to known risks and uncertainties relating to the oil and gas service sector. This discussion should not be
considered all-inclusive, as it excludes changes that may occur in general economic, political and environmental
conditions. Additionally, other elements may or may not occur which could affect industry conditions and/or
Enerex Systems Ltd. (Enerex or the Company) in the future. Additional information relating to the Company,
including the Companys Annual Information Form, is available on SEDAR at www.sedar.com.
The interim report, which includes the MD&A, the unaudited consolidated nancial statements and accompanying
notes thereto, is reviewed and approved by the Companys Audit Committee and its Board of Directors prior to
publication.
Enerex is a leading supplier of products and services to the global oil and natural gas production industry. The
Companys core expertise lies in its ability to provide products and services to the industry segment that operates
between the wellhead and the pipeline. Enerexs primary products and services are: natural gas compression,
power generation and process equipment for sale, rent or lease; hydrocarbon production and processing equipment
and facilities; electrical, instrumentation and controls services; and a comprehensive package of eld maintenance
and contracting capabilities. Through our ability to provide these products and services in an integrated manner, or
as stand-alone offerings, Enerex believes it offers its global customers a unique value proposition.
Headquartered in Calgary, Canada, the Company has approximately 2,600 employees worldwide. Enerex, its
subsidiaries, interests in afliates and joint-ventures, operate in Canada, Australia, the Netherlands, the United
States, Germany, Pakistan, Egypt, Indonesia and Poland. The Companys common shares trade on the Toronto Stock
Exchange under the symbol EFX.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
4 ENERFLEX SYSTEMS LTD.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements. Certain statements containing words such as anticipate, could,
expect, seek, may, intend, will, believe and similar expressions, statements that are based on current
expectations and estimates about the markets in which the Company operates and statements of the Companys
belief, intentions and expectations about development, results and events which will or may occur in the future
constitute forward-looking statements and are based on certain assumptions and analysis made by the Company
derived from its experience and perceptions. Forward-looking statements in this MD&A include, but are not limited
to: statements with respect to future capital expenditures, including the amount and nature thereof; oil and gas
prices and demand; other development trends of the oil and gas industry; business strategy; expansion and growth
of the Companys business and operations, including the Companys market share and position in the oileld
service markets; and other such matters. In addition, other written or oral statements which constitute forward-
looking statements may be made from time to time by and on behalf of the Company. Such forward-looking
statements are subject to important risks, uncertainties, and assumptions which are difcult to predict and which
may affect the Companys operations, including, without limitations: the impact of general economic conditions;
industry conditions, including the adoption of new environmental and other laws and regulations and changes in
how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand;
risks inherent in the Companys ability to generate sufcient cash ow from operations to meet its current and
future obligations; increased competition; the lack of availability of qualied personnel or management; labour
unrest; uctuations in the foreign exchange or interest rates; stock market volatility, opportunities available to or
pursued by the Company and other factors, many of which are beyond the control of the Company. The Companys
actual results, performance, or achievements could differ materially from those expressed in, or implied by, these
forward-looking statements and accordingly, no assurance can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of them do so, what benets, including the amount
of proceeds, the Company will derive there-from. The Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise, except
as required by law.
2006 QUARTERLY REPORT 5
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
SUMMARY QUARTERLY STATISTICS
The oil and natural gas service sector in Canada, where Enerexs operations are currently concentrated, has a
distinct seasonal trend in activity levels which results from well-site access and drilling patterns being adjusted to
take advantage of weather conditions. Generally, the Companys Engineered Systems segment experiences higher
revenues in the fourth quarter of each year, its Service segment experiences higher revenues in the rst quarter
of each year and its Production Services segment experiences stable revenues throughout the year, impacted by
the Companys capital investment decisions. Variations from this trend usually occur when hydrocarbon energy
fundamentals are either improving or deteriorating.
During the rst quarter of 2006, Enerex continued to produce year over year improvements in operating results.
As demonstrated in the following table, the Company generated increased revenue of $59.1 million, improved its
gross margin to 22.5%, increased its operating margin
1
by $9.9 million and produced $0.57 in basic earnings per
common share, all as compared to the rst quarter of 2005. As compared to the fourth quarter of 2005, gross margin
and operating margin improved to 22.5% and 10.4% respectively, as compared to 22.0% and 10.0%. The basic
earnings per share for the twelve months ended March 31, 2006 are $2.03, as compared to $1.45 for the twelve
months ending March 31, 2005. These improved results can be attributed to increased natural gas infrastructure
and maintenance spending by oil and natural gas producers in a period of high commodity prices, the acquisition of
HPS Group Pty Ltd. (HPS) in July 2005, and cost and process efciencies generated by the Company.
($ thousands, except
percent and per share
amounts)
2006 2005 2004
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenue $ 206,823 $ 203,108 $ 162,727 $ 157,088 $ 147,689 $ 167,677 $ 141,293 $ 119,833 $ 128,274
Gross margin 46,554 44,674 34,993 34,750 31,528 37,391 30,610 27,744 29,465
Gross margin % 22.5 22.0 21.5 22.1 21.3 22.3 21.7 23.2 23.0
Operating margin
1
21,576 20,242 15,827 14,860 11,705 18,092 11,535 9,215 11,225
Operating margin
1
% 10.4 10.0 9.7 9.5 7.9 10.8 8.2 7.7 8.8
Net income: 12,904 13,714 9,832 9,164 7,382 11,406 7,726 5,784 7,143
Per common share
Basic ($) 0.57 0.61 0.44 0.41 0.33 0.51 0.35 0.26 0.32
Diluted ($) 0.57 0.60 0.43 0.41 0.33 0.51 0.34 0.26 0.32
EBITDA
1
$ 27,065 $ 25,140 $ 20,743 $ 19,277 $ 16,235 $ 22,713 $ 16,239 $ 13,535 $ 15,666
1 Operating margin, operating margin percent and earnings before interest, taxes, depreciation and amortization (EBITDA) are non-GAAP
(Generally Accepted Accounting Principles) earnings measures that do not have a standardized meaning prescribed by GAAP and therefore
are unlikely to be comparable to similar measures presented by other issuers. Enerflex calculates operating margin, operating margin
percent and EBITDA as follows:
Operating margin (Unaudited) ($ thousands) Three months ended March 31, 2006
Gross margin $ 46,554
Selling, general and administrative expenses 25,325
Foreign currency losses (gains) (212)
Equity earnings from afliates (135)
Operating margin $ 21,576
Operating margin percent
Operating margin divided by revenue (%) 10.4
EBITDA (Unaudited) ($ thousands)
Earnings before interest and income taxes $ 22,443
Depreciation and amortization 4,622
EBITDA $ 27,065
The Company discloses EBITDA as it is a component of the Company's debt covenants calculations and a statistic requested by a number of
shareholders.
6 ENERFLEX SYSTEMS LTD.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
FOR THE THREE MONTHS ENDED MARCH 31, 2006
During the rst quarter of 2006, the Company beneted signicantly from the opportunities available in the current
business environment, high order backlog in the Engineered Systems segment, the acquisition of HPS and the
continued construction activity associated with the Companys previously announced contract to provide a natural
gas processing facility in Egypt.
Enerex generated net income for the three months ended March 31, 2006 of $12.9 million ($0.57 per common
share) from revenue of $206.8 million. This represents an increase in net income of $5.5 million ($0.24 per
common share), or 75%, as compared to the same period in 2005. Revenue generated in the rst quarter increased
by $59.1 million, or 40%, as compared to the three month period ended March 31, 2005. International revenue
increased by 55%, or $20.4 million, in the rst quarter of 2006 as compared to 2005. Revenue improvements were
most notable in the Compression and Power division, as a result of increased customer demand; in the Electrical
Instrumentation & Controls (EI&C) division which experienced increased electrical construction project activity
as compared to 2005; in the Mechanical Service division which experienced signicant revenue improvements
due to an early start to the busy eld maintenance season; and the Production and Processing division, due to a
strong backlog at the beginning of the year and the acquisition of HPS in July of 2005, which added $20.5 million
in revenue for the quarter. The Companys revenue in the Production Services segment was essentially unchanged
as increases arising from a larger rental eet were offset by lower equipment utilization during the period.
Gross margin for the three months ended March 31, 2006 was $46.6 million or 22.5% of revenue as compared to
$31.5 million or 21.3% of revenue for the three months ended March 31, 2005, an increase of $15.1 million. The
higher gross margin percentage was a result of price increases generated from the Companys Engineered Systems
segment, increased activity levels which improved overhead utilization, and higher activity levels in the Service
segment, partially offset by higher input costs.
Selling, general and administrative (SG&A) expenses were $25.3 million or 12.2% of revenue during the three
months ended March 31, 2006, compared with $19.7 million or 13.4% of revenue in the same period of 2005. The
$5.6 million increase in SG&A expenses during the quarter, as compared to the same period in 2005, is a result
of: $1.7 million resulting from the inclusion of HPS; increases in compensation costs of $1.5 million; increased
bad debt expense of $0.7 million; increased intangible asset amortization of $0.5 million; increased stock-based
compensation expense of $0.5 million; increased bonus accruals of $0.3 million; increased marketing expenditures
of $0.2 million and increases in information technology costs, audit costs and employee training and recruitment
costs of $0.1 million each, partially offset by a reduction in Bill 198 compliance costs of $0.3 million.
Operating margin
1
assists the reader in understanding the net margin contributions made from the Companys
core businesses after considering all SG&A expenses and the impact of the Companys foreign exchange hedging
strategy. For the three months ended March 31, 2006, Enerex produced an operating margin
1
of $21.6 million, or
10.4% of revenue, as compared to an operating margin
1
of $11.7 million, or 7.9% of revenue, for the same three
month period in 2005. The increase in operating margin percentage
1
for the quarter as compared to 2005 occurred
as a result of the same factors contributing to the increased gross margin percentage and increased SG&A expenses.
The foreign exchange gain during the quarter resulted primarily from the Companys hedging strategy and changes
in the value of the Euro and U. S. dollar as compared to the Canadian dollar during the period.
1 Operating margin, operating margin percent and earnings before interest, taxes, depreciation and amortization (EBITDA) are non-GAAP
(Generally Accepted Accounting Principles) earnings measures that do not have a standardized meaning prescribed by GAAP and therefore
are unlikely to be comparable to similar measures presented by other issuers.
2006 QUARTERLY REPORT 7
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
Income before interest and income taxes totalled $22.4 million for the rst quarter of 2006, as compared to $12.4
million for the same period in 2005, an increase of $10.0 million, or 81%. During the quarter, the Company
experienced an effective income tax rate of 37.8% as compared to 35.3% for the same period in 2005. This
increase is a result of the Company not recognizing the benet of losses generated in certain foreign jurisdictions
and a provision for the reassessment of prior year taxes.
During the rst quarter of 2006, Enerex increased its net income by $5.5 million to $12.9 million over the same
period of 2005.
SEGMENTED RESULTS
Enerex has three business segments: Service, Engineered Systems and Production Services, which operate as
follows:
1. Service is comprised of two divisions:
Syntechs electrical, instrumentation and controls business in Canada; and
Mechanical Service, with business units operating in Canada (Pamco Jiro Service), the Netherlands (Landr
Ruhaak bv), Australia (Gas Drive Systems Pty Limited) and Indonesia (PT Gas Drive Systems Indonesia), its
interest in S&L Energie Projekte GmbH, a 51% owned joint-venture in Germany and its interest in Gaz serwis
- Polska Sp. z.o.o., a 33.3% owned afliate in Poland.
2. Engineered Systems is comprised of two divisions:
Compression and Power has ve business units: EFX Compression located in Calgary, Alberta, providing custom
and standard compression packages for both reciprocating and screw compressor applications above 800
horsepower; Power, which provides electrical generation equipment in the under 10 mega-watt market; EFX
Compression USA in Odessa, Texas, packages specialty natural gas applications; Jiro Compression, located in
Stettler, Alberta, focusing on lower horsepower (sub 800 hp) screw compressor products; and Compression
Services, located in Calgary, Alberta, re-engineering and refurbishing legacy compression equipment; and,
Production and Processing has three business units: Pressons modular natural gas processing equipment
manufacturing facility in Nisku, Alberta; Mactronics waste gas systems which are designed and fabricated in
Red Deer, Alberta; HPS Group Pty Ltd., located in Perth, Western Australia; and the Companys 46.5% interest in
the Presson Descon International (Private) Limited (PDIL) joint-venture, operating in Pakistan.
3. Production Services: providing compression, power generation and natural gas processing equipment rentals,
primarily in Canada. This division also supplies Enerexs newest service offering of Variable Cost Compression
and owns 40% of Total Production Services Inc., based in Alberta.
SERVICE
The Service business segment provides a complete line of mechanical, and electrical, instrumentation and controls
services to the oil and gas industry through an extensive branch network in Canada, Germany, the Netherlands,
Australia and Indonesia. Service is the Companys second largest business segment. It employs 40% of staff, holds
33% of the total assets, generates 36% of the Companys revenue and produces 32% of Enerexs income before
interest and income taxes. Key performance metrics include labour utilization, revenue, gross margin percent and
income before interest and income taxes.
Enerex, through various business units, is an authorized distributor for Waukesha engines and parts in Canada,
Australia, Indonesia, Papua New Guinea, the Netherlands, Germany, Portugal, Poland and Spain. Mechanical
Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to preserve the
customers natural gas production, with higher revenues in the rst quarter. EI&C services are provided in Canada
through Syntech where revenues are more cyclical as they are generated from both maintenance spending and
from infrastructure investment.
8 ENERFLEX SYSTEMS LTD.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
(Unaudited) (Thousands) Three months ended March 31 2006 2005
Service segment revenue $ 77,617 $ 63,698
Intersegment revenue (3,231) (3,517)
Revenue 74,386 60,181
Gross margin 20,777 15,558
EBITDA
1
7,943 3,830
Income before interest and income taxes $ 7,130 $ 2,949
Service revenue was $74.4 million for the three months ended March 31, 2006 and comprised 36% of consolidated
revenue. This compares to $60.2 million and 41% of consolidated revenue during the same period in 2005.
Mechanical Service generated 56% of the segments revenue in the rst quarter of 2006 and 58% in the same
period of 2005. EI&C contributed 44% of the segments revenue in the rst quarter of 2006 and 42% in the same
period of 2005. The increase in segment revenue of 24%, or $14.2 million, was a result of higher demand for parts
and services, improved inventory and supply chain management and strong oileld service activity in Canada. Gross
margin for the segment totalled $20.8 million, or 27.9%, as compared to $15.6 million, or 25.9%, in 2005. The
increase in gross margin percent was caused by higher demand for the Companys services and increased utilization
rates. In general, pricing increases were offset by increases in input costs, such as parts, materials, personnel
costs and the costs associated with responding to supply chain management issues that arise in periods of high
demand for these products. Income before interest and income taxes in the rst quarter of 2006, as compared to
the same period of 2005, increased by $4.2 million, or 142%, to $7.1 million as a result of these same factors.
The improvement in the income before interest and income taxes of the segment from 4.9% of revenue for the
three months ended March 31, 2005 to 9.6% of revenue in 2006 was due to the above factors, better leveraging
of existing branch costs and a focus on improving execution of services.
Mechanical Service
Mechanical Service revenue for the rst three months of 2006 was $41.6 million, or 20% higher than 2005 revenue
of $34.7 million. In Canada, which accounted for 68% of the divisions revenue in both 2006 and 2005, sales
increased by 20% from 2005 as a result of strong utilization rates, an expansion of product offerings to include
additional suppliers of equipment, increased efciency in exchange parts due to the centralization of a rebuild
facility in 2004, increased customer demand and modest price increases for parts and services. International
revenue also increased by 20% in the rst three months of 2006 over the same period in 2005. The increase in
international revenue resulted from higher utilization, new maintenance contracts in Australia, increased service in
Europe and engine sales to Indonesia.
Gross margins for Mechanical Service increased by $2.7 million or 26% in the rst quarter of 2006 as compared to
the same period in 2005. As a percentage of revenue, the gross margin increased from 29.1% to 30.7%. Increased
customer demand accounted for the increase in gross margin with pricing increases offsetting the increase in costs
of parts and personnel associated with the services. The divisions income before interest and income taxes for
the rst three months of 2006 increased by $2.2 million, or 85%, as compared to the rst quarter in 2005, as it
leveraged its existing xed branch and administrative services to meet the expanding demands of its customers.
1 Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP (Generally Accepted Accounting Principles) earnings
measure that does not have a standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures
presented by other issuers.
2006 QUARTERLY REPORT 9
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
Electrical, Instrumentation & Controls
The EI&C division continued to improve its gross margin as a percentage of revenue for the rst three months of
2006. During the quarter, EI&C generated revenue of $32.8 million, an increase of $7.4 million, or 29%, as compared
to $25.4 million in the rst quarter of 2005. The EI&C business in Canada is highly competitive. Consequently, this
division realizes lower margins than the Mechanical Service division and as such, it requires a focused and disciplined
approach to the bidding and execution of the services provided. In 2006, the division focused the scope of contracts
it would pursue to cost plus arrangements and on obtaining projects with higher margin potential. In addition,
the division continued its efforts towards reducing the cost of maintaining the branch infrastructure requirements
throughout Alberta, Saskatchewan and northeast British Columbia. Through this strategy and with the increase in
demand for the divisions services, its gross margin increased by $2.6 million, or 47%, in the rst quarter of 2006
as compared to the same period in 2005. As a percentage of revenue, gross margin for the quarter was 24.4% as
compared to 21.4% one year earlier. The divisions earnings before interest and income taxes increased by $2.0
million and were 537% higher for the rst three months of 2006 as compared to the same period in 2005.
ENGINEERED SYSTEMS
The Engineered Systems business segment engineers, fabricates and assembles standard and custom-designed
compression packages, production and processing equipment and facilities, and power generation systems. The
key performance metrics for this business segment are market share, plant utilization, overhead application rates
and gross margin as a percentage of revenue. Engineered Systems is the Companys largest business segment. It
employs 56% of staff, holds 46% of the total assets, generates 60% of the Companys revenue and produces 44%
of Enerexs income before interest and income taxes.
Engineered Systems business tends to have more volatility in revenue, gross margin and income before interest
and income taxes than Enerexs other business segments. Revenues are derived primarily from the investments
made in natural gas infrastructure by producers. Capital spending by Enerexs customers was high in 2001,
dropped sharply in 2002 and early 2003, increased in late 2003 and continued to grow throughout 2004 and
2005. It is presently estimated by industry commentators that this increased investment rate will continue in
2006. Factors expected to positively affect this include: increased investments in Canadian oil sands development
projects; expansion of the Australian natural gas distribution system; the need for additional international natural
gas processing facilities; and coal bed methane (CBM) production in North America and Australia.
(Unaudited) (Thousands) Three months ended March 31 2006 2005
Engineered Systems segment revenue $ 131,046 $ 84,359
Intersegment revenue (6,886) (4,858)
Revenue 124,160 79,501
Gross margin 20,531 10,821
EBITDA
1
11,699 5,493
Income before interest and income taxes $ 10,006 $ 4,419
1 Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP (Generally Accepted Accounting Principles) earnings
measure that does not have a standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures
presented by other issuers.
10 ENERFLEX SYSTEMS LTD.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
Engineered Systems continued to meet the challenges of signicant supplier lead times and the high demand
for skilled labour, and, combined with a strong market, achieved revenue growth and margin improvement.
Engineered Systems revenue totalled $124.2 million for the rst three months of 2006 and comprised 60% of
consolidated revenue. This compares to $79.5 million and 54% of consolidated revenue in the rst three months of
2005. Compression and Power generated 61% of the segments revenue for the rst quarter of 2006 as compared
to 71% in the same period of 2005. Production and Processing contributed 39% of the segments revenue for
the rst three months of 2006 as compared to 29% in the same period of 2005. The increase of $44.7 million, or
56%, in segment revenue was a result of the acquisition of HPS, increased domestic revenue in the Production
and Processing division, the continuation of the Production and Processing divisions Egyptian project, increased
demand for the Companys high horsepower compression products, the introduction of new products and increases
in the pricing of the segments products. Gross margin for the segment totalled $20.5 million, or 16.5%, for the
three months ended March 31, 2006, as compared to 13.6% in the same period of 2005. The increase in gross
margin of $9.7 million, or 90%, was a result of the same factors that improved the segments revenue. Income
before interest and income taxes increased by $5.6 million, or 126%, to $10.0 million for the three months
ended March 31, 2006 as a result of the above-mentioned factors.
Compression and Power
The Compression and Power division contributed revenue of $76.3 million for the three months ended March 31,
2006, an increase of $20.1 million, or 36% over the same quarter of 2005. International revenue in the division
totalled $6.3 million for the rst three months of 2006, as compared to $9.7 million in the rst quarter of 2005,
due to a shift in timing of orders. This resulted in lower earned international revenue in 2006. Expanded product
ranges for both reciprocating and screw compression applications, increased customer demand for compression
equipment, increasing customer requirements for in-eld compression refurbishment of legacy compression assets
and pricing improvements accounted for the increased revenue. The development of ve new models of screw
compressors above 600 horsepower in 2005 resulted in the receipt of several orders totalling $45 million in the rst
quarter of 2006. While denitive market share data is difcult to obtain, Enerex estimates that its Canadian large
horsepower compressor package market share was increasing in the high horsepower screw compression market
segment, but was constant overall in the rst quarter of 2006 and 2005. The improvement in pricing leverage is
attributed to the high levels of customer demand, concerns over the lead times associated with major component
parts and the introduction of expanded product offerings that better suit the customers changing compression
requirements.
During the quarter, gross margin increased by $4.9 million, or 67%, as compared to the rst quarter of 2005,
as a result of increased revenue, improved plant utilization and price increases. These were partially offset by
increased component, material and personnel related costs, higher overhead rates and costs associated with the
design and production of new products and services. At present, Enerex owns approximately 370,000 square
feet of compression shop oor space in North America and during the quarter management estimates that the
average utilization rate, based on the theoretical plant capacity in labour hours, was 79% as compared to 64% in
2005. Increases in the utilization of the facilities, due to increased customer demand, were offset by increases in
overhead costs, resulting in an increase in overhead costs per hour of 6%, as compared to 2005. Compression and
Powers income before interest and income taxes increased by 144% in the rst quarter of 2006 as compared to
the same period in 2005 as a result of the factors mentioned above.
2006 QUARTERLY REPORT 11
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
Production and Processing
The Production and Processing division contributed revenue of $47.9 million for the three months ended March
31, 2006, an increase of $24.6 million, or 106% over the same period in 2005. While denitive market share
data is difcult to obtain, Enerex estimates that it has maintained its domestic and international market share,
and through the acquisition of HPS, Enerex has increased its market share in Australia. In each market segment
competition remains strong. The increase in the divisions revenues was generated $20.5 million in Australia,
$1.1 million in other international markets and $3.0 million from domestic markets. During the quarter, domestic
demand continued to be strong. The international backlog is also solid, and includes natural gas processing
facilities under construction for Egypt and Indonesia, and a signicant project for installation of compressor stations
in Western Australia.
During the quarter, gross margin also increased by $4.8 million, or 136%, as compared to the rst quarter of 2005
as a result of $3.8 million from the addition of HPS and higher Canadian demand for the divisions products. At
present, Enerex owns approximately 100,000 square feet of production and processing shop oor space in Alberta,
Canada and 62,000 square feet of shop oor space in Perth, Western Australia. During the quarter, management
estimates that the average utilization rate, based on available labour hours, was 92% as compared to 94% in 2005
in its Canadian based facilities and 90% in its Australian based facilities. The divisions income before interest and
income taxes increased by 98% during the quarter as compared to the same period in 2005, as a result of the
acquisition of HPS and additional domestic projects.
Engineered Systems Segment Bookings
During the quarter, Enerex increased its order bookings in the Engineered Systems segment to record levels.
Bookings during the rst three months of 2006 increased by approximately 95% as compared to bookings recorded
in the rst quarter of 2005. The Engineered Systems segments order backlog at March 31, 2006 was approximately
234% above the segments order backlog at March 31, 2005, and 22% above the order backlog at December 31,
2005.
PRODUCTION SERVICES
The Production Services business segment provides a variety of rental and leasing alternatives for natural gas
compression, power generation and processing equipment. As of March 31, 2006, Production Services rental eet
was comprised of approximately 365 compression units, representing 99,000 horsepower, and 160 processing
units. This compared with 350 compression units, or 97,000 horsepower, and 140 processing units as at March 31,
2005. This resulted in an average compression eet of 366 units and 102,000 horsepower for the three months
ended March 31, 2006. The key performance metrics in this business are eet size, utilization rates and rental rates.
The Production Services segment employs 1% of Enerexs employees, holds 19% of the total assets, generates 4%
of the Companys revenue and produces 24% of Enerexs income before interest and income taxes.
The Companys rental eet is located principally in western Canada. Expansion in international markets commenced
during 2004, and is presently being continued on a selective basis to minimize the risk from these new markets.
As of March 31, 2006, Enerexs compression rental eet included 11 units located in the United States and 6 units
in Australia.
12 ENERFLEX SYSTEMS LTD.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
(Unaudited) (Thousands) Three months ended March 31 2006 2005
Production Services segment revenue $ 8,284 $ 8,039
Intersegment revenue (7) (32)
Revenue 8,277 8,007
Gross margin 5,246 5,149
EBITDA
1
7,423 6,912
Income before interest and income taxes 5,307 5,009
Capital expenditures, net of proceeds on disposal $ 2,457 $ (1,372)
Revenue for the rst three months of 2006 increased by $0.3 million, or 3%, to $8.3 million, over the same period in
2005. The revenue increase experienced in the rst quarter of 2006 over 2005 was a result of increased utilization
rates in the power and processing eet and increased capital deployed in both eets. While the segment rents
compression, power and processing equipment, the main driver for its revenue growth is the rental of compression
equipment. During the quarter, the segments revenue was generated 89% by compression and 11% by power and
processing equipment. The segment experienced process eet utilization rates, based on capital deployed, of 80.8%
compared to 61.3% in 2005. Compression eet utilization rates, based on capital deployed, decreased from 84.4%
to 75.2% in 2006. The reduction in compression utilization rates was primarily attributed to rental units acquired
at or subsequent to the end of the initial rental term by customers. With higher than anticipated energy prices
resulting in stronger cash ows and working capital in the hands of the segments customers, customers tended to
acquire new compression assets, as exhibited through the increase in revenues generated by the Compression and
Power division, and to purchase compression assets previously under rent.
During the quarter, Production Services sold 14 compression units and 4 power and process equipment units from
its eet, for gross proceeds of $7.5 million, of which $3.8 million was received by March 31, 2006, and a gain on
sale of $1.2 million. This compares to 15 compression units and 15 power and process equipment units, for gross
proceeds of $6.5 million and a gain on sale of $0.6 million in the rst quarter of 2005. The sale of units generally
occurs when customers exercise their contractual option to purchase equipment. In order to facilitate the expansion
of Enerexs rental eet, the Company has altered the buyout provisions of new rental contracts in a manner which
discourages renters from acquiring the rental assets subsequent to the end of the contract expiry date. To satisfy
growing demand for rental compression, Enerex added 10 compression units and 10 power and processing units
to its eet in the quarter, for an investment of $6.3 million. This turnover of assets renews the eet, resulting in an
average eet age of less than ve years.
Production Services expects continued growth in demand for its products in Canada, and has targeted specic
geographic regions for expansion in the United States and abroad. Production Services does not generally increase
the capital invested in its eet unless it has rental contracts. Growth in the rental eet is expected to be the largest
internal capital investment opportunity for the Company in 2006. By the third quarter, Production Services will
expand the scope of the process eet by adding a refrigeration unit, currently under construction by the Production
and Processing division. As at March 31, 2006, the segment had approximately 7,500 horsepower of additional
committed compression equipment under construction.
1 Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP (Generally Accepted Accounting Principles) earnings
measure that does not have a standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures
presented by other issuers.
2006 QUARTERLY REPORT 13
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
Variable Cost Compression (VCC) is an initiative which involves Enerex owning, operating, maintaining and
optimizing eld equipment on behalf of producers for a variable fee based on throughput and uptime. This initiative
provides Enerex the opportunity to combine the strength of its balance sheet with its expertise in compression
optimization in order to improve the returns generated from existing compression assets for both its customers and
its shareholders. Enerex is pleased with the initial level of interest in this new offering and the Company presently
estimates that it could deploy $10.0 million in capital towards this endeavour during 2006. In April of 2006, a letter
of intent was received for the rst VCC contract.
FINANCIAL CONDITION AND LIQUIDITY
For the rst three months of 2006, Enerex reduced its cash balances by $4.3 million, compared with $3.7 million
in 2005. This reduction occurred as the Company incurred net additions to property, plant and equipment of $4.3
million, incurred $2.4 million net purchases of rental assets, repaid operating loans of $10.9 million, paid $2.3
million in dividends, repurchased shares for $0.3 million and increased working capital by $8.1 million. These
activities were offset by funds generated from operations before changes in non-cash working capital of $16.5
million, $6.6 million in increased long-term debt, and the receipt of proceeds on the exercise of stock options of
$0.9 million.
During the quarter, non-cash working capital from operations increased by $11.4 million as a result of a $1.8 million
increase in accounts and income taxes receivable, an $8.2 million increase in inventory, and a $1.4 million decrease
in total accounts payable. The increase in accounts receivable reects the increase in revenue in 2006. Inventories
increased in order to ensure the Company had access to sufcient quantities of major components and parts for
items that are continuing to experience long re-order lead times.
On April 28, 2006, the Company had 22,694,996 common shares outstanding. Enerex has a dividend policy, which
is reviewed on an annual basis. On April 20, 2006, the Company declared a quarterly dividend equal to $0.125 per
common share, which equates to an annualized dividend payment to shareholders of $0.50 per common share,
payable on July 7, 2006 to shareholders of record June 22, 2006.
During the quarter, there were no signicant changes in the structure of the Companys bank credit facilities. The
Credit Agreement provides for a $75 million revolving operating facility and a $100 million extendible revolving
term loan facility. The availability of the operating facility is subject to a monthly borrowing base calculation that
considers eligible accounts receivable and inventories. As of March 31, 2006, $175.0 million of the $175.0 million
facility was available to the Company and Enerex had drawn $119.8 million, comprised of $103.0 million in cash
borrowings and $16.8 million in letters of credit or guarantees, leaving approximately $55.2 million available for
future drawings. If the term loan is not extended at the end of its term, which is extendible at the banks option
on June 22 of each year, it will be repayable in 36 equal consecutive monthly principal installments. The loans are
collateralized by a rst oating charge over all of the assets of the Company, and require the Company to meet
certain covenants, including a limitation on the debt-to-EBITDA
1
ratio. Enerex was in full compliance with these
covenants at March 31, 2006 and April 28, 2006.
These credit facilities provide the nancing required to support the Companys operating requirements, as well as
the exibility to pursue growth opportunities.
In September 2005, the Companys subsidiary, Enerex Australia Holdings Pty Limited, entered into an Australian
$20.0 million surety bonding facility in order to assist the Australian operations in obtaining future contracts. The
facility is collateralized by a guarantee of the Australian subsidiary and a corporate guarantee of Enerex. As of
March 31, 2006 surety bonds totalling Australian $5.4 million had been issued and as at April 28, 2006 surety bonds
totalling $5.4 million had been issued.
CONTRACTUAL OBLIGATIONS AND COMMITTED CAPITAL INVESTMENT
The Companys contractual obligations, assuming that the extendible revolving term loan facility is renewed in June
2006, are contained in the following table:
Contractual Oligations
Payments Due by Period

(thousands)
Less than
one year
1-3 years 4-5 years Thereafter Total
Leases $ 5,894 $ 12,236 $ 4,640 $ 3,829 $ 26,599
Purchase obligations 71,597 22,548 - - 94,145
Total $ 77,491 $ 34,784 $ 4,640 $ 3,829 $ 120,744
The majority of the Companys lease commitments are operating leases for Service vehicles.
The majority of the Companys purchase commitments relate to major components subject to signicant lead times
for the Engineered Systems segment. These purchase obligations were made in order to x the costs associated
with these items, ensure the delivery of major components for existing sales obligations and to provide the
Company with a competitive advantage for the awarding of future sales contracts. Also included are long-term
information technology and communications contracts entered into in order to reduce the overall costs of services
received.
In addition to the contractual obligations above, Enerex has budgeted for capital spending investments of $56.7
million in 2006. Of that, $34.0 million relates to the expansion of the Companys rental eet; $10.0 million in
compression facilities for Variable Cost Compression; $1.1 million relates to the construction of a facility for Pressons
large vessel fabrication operations; $4.1 million relates to business application software and information technology
investments; and the balance is normal replacement and expansion needs. As of April 28, 2006, a total of
$30.7 million has been committed.
INTERNAL CONTROLS
The creation of Bill 198 by the Ontario legislature, and Multilateral Instruments (MI) 52-109, 52-110, and 52-111
by the Canadian Securities Administrators, resulted in additional legal requirements for Corporate Governance.
These instruments are the Canadian response to the Sarbanes-Oxley legislation in the U.S. Enerex is committed to
adopting emerging and best practices in Corporate Governance. The Company believes that Corporate Governance
is fundamental to an efcient and effectively operated organization, as it contributes to business and nancial
success.
14 ENERFLEX SYSTEMS LTD.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
2006 QUARTERLY REPORT 15
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
Details of accomplishments to the end of 2005 are listed in the annual MD&A. In the rst quarter of 2006, the
following was accomplished:
continued remediation for control gaps identied;
commenced identifying key controls;
developed a testing plan for internal controls for the balance of 2006; and
evaluated the March proposal made by the Canadian Securities Administrators to repeal MI 52-111 and
therefore remove the external audit requirement on internal controls. The proposal modies MI 52-109 so
that management will still be required to certify that internal controls are functioning.
Two signicant challenges facing Enerex regarding this project include the uncertainty surrounding the regulations
and the difculty in attracting and retaining sufciently qualied personnel to complete the remediation and
internal assessments in order to certify.
This project is on schedule. With respect to the evaluation and documentation of internal controls over nancial
reporting, and excluding the costs incurred with respect to specic remediation efforts, the Company has incurred
costs of approximately $3.7 million from the projects initiation up to and including March 31, 2006. At present
Enerex estimates that an additional $0.8 million will be incurred during 2006.
INDUSTRY OUTLOOK
The current favourable economics for the oil and gas industry and trends within Enerexs markets continue
to provide growth opportunities. Management believes that three developing trends which could impact the
Companys outlook are:
Customers in domestic markets are becoming more receptive to outsourcing their production infrastructure
on a fee for service basis. A new generation of natural gas producer focused on a shorter business cycle with
shorter-life reserves and the growth of income trusts, which place a greater priority on cash ow, and the
drive to optimize legacy gas production facilities in western Canada, have heightened this interest.
The oil and natural gas sector continues to become more global. While oil and gas production in North
America is maturing, the industry outside North America is largely in its infancy and international markets
therefore present a growth opportunity. The rapid industrialization of China and the Indian subcontinent is
driving worldwide demand for natural gas. This demand, combined with development of liqueed natural
gas, is expanding the market for production and processing infrastructure. International customers are
focused on their core business of exploration and production, and want a fully integrated service provider for
engineering, fabrication, transportation, construction, commissioning and maintenance.
There is a growing shortage of human capital in the industry. This is a serious long-term issue that results
primarily from demographics and the increasing demand for skilled employees. As a result, customers are
placing greater reliance on energy service companies to deliver these skills on an as and when needed
basis rather than the historical approach of maintaining these capabilities in house. While this skills shortage
represents an opportunity it has also evolved into Enerexs greatest challenge.
16 ENERFLEX SYSTEMS LTD.
MANAGEMENTS DI SCUSSI ON AND ANALYSI S
While Enerex continues to build its international presence and develop its Variable Cost Compression service
offering to take advantage of the trends identied above, the Companys fortunes will continue to be tied to natural
gas capital and operating expenditures in western Canada. Approximately 24,800 wells were completed in 2005, of
which approximately 69% were natural gas wells. In 2006, industry analysts forecast that capital expenditures on
plant and equipment will remain strong, and wells completed will be 5 to 10% higher than 2005. Many forecasters
expect that, in the absence of signicant discoveries, North American conventional natural gas production will
decrease. Sustaining or increasing production volumes is progressively more dependent upon development of tight
gas and coalbed methane, both of which require more compression than traditional reservoirs, and expansion in
frontier regions such as the Northwest Territories. The continuation of higher natural gas prices similar to or above
those experienced in recent years will be required to support gas development in these areas.
During this period of high activity, the availability of major components used in the fabrication of the Companys
products and access to skilled personnel to meet the technical and trade requirements for designing and assembling
these products are under increasing pressure on a worldwide basis.
2006 QUARTERLY REPORT 17
CONSOLI DATED FI NANCI AL STATEMENTS
Consolidated
Financial
Statements
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Thousands)
March 31,
2006
December 31,
2005
ASSETS
Current assets
Cash $ 12,090 $ 16,350
Accounts receivable 165,736 163,899
Inventory 92,539 84,378
Future income taxes 3,909 3,983
Total current assets 274,274 268,610
Rental equipment 88,158 90,348
Property, plant and equipment 65,515 65,585
Assets under construction 5,369 3,374
Investment in afliates 2,933 2,797
Future income taxes 4,869 4,868
Intangible assets 8,553 7,355
Goodwill 119,719 121,378
$ 569,390 $ 564,315
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Operating bank loans $ 32,382 $ 43,310
Accounts payable and accrued liabilities 86,628 90,561
Accrued dividends payable 2,832 2,260
Income taxes payable 9,611 7,612
Current portion of long-term debt 20,712 12,717
Total current liabilities 152,165 156,460
Long-term debt 62,136 63,587
Other long-term liabilities 2,568 1,969
Future income taxes 12,658 13,042
229,527 235,058
Guarantees, commitments and contingencies (Note 1)
Shareholders equity
Share capital (Note 2) 185,139 184,151
Cumulative translation adjustment (6,681) (6,250)
Contributed surplus 1,912 1,739
Retained earnings 159,493 149,617
339,863 329,257
$ 569,390 $ 564,315
See accompanying Notes to the Consolidated Financial Statements.
18 ENERFLEX SYSTEMS LTD.
CONSOLI DATED FI NANCI AL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands, except share amounts) Three Months Ended March 31 2006 2005
Revenue $ 206,823 $ 147,689
Cost of goods sold 160,269 116,161
Gross margin 46,554 31,528
Selling, general and administrative expenses 25,325 19,726
Foreign currency (gains) losses (212) 97
Gain on sale of assets (867) (672)
Equity earnings from afliates (135) -
Income before interest and taxes 22,443 12,377
Interest 1,694 962
Income before income taxes 20,749 11,415
Income taxes 7,845 4,033
Net income $ 12,904 $ 7,382
Net income per common share - basic (Note 4) $ 0.57 $ 0.33
- diluted $ 0.57 $ 0.33
Weighted average number of common shares 22,645,451 22,408,621
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited) (Thousands) Three Months Ended March 31 2006 2005
Retained earnings, beginning of period $ 149,617 $ 118,540
Normal course issuer bid (Note 2) (196) -
Net income 12,904 7,382
Dividends (2,832) (2,247)
Retained earnings, end of period $ 159,493 $ 123,675
See accompanying Notes to the Consolidated Financial Statements.
2006 QUARTERLY REPORT 19
CONSOLI DATED FI NANCI AL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Thousands) Three Months Ended March 31 2006 2005
OPERATING ACTIVITIES
Net income $ 12,904 $ 7,382
Depreciation and amortization 4,622 3,858
Future income taxes (334) (3,268)
Gain on sale of assets (867) (672)
Equity earnings from afliates (135) -
Stock option expense (Note 3) 311 135
16,501 7,435
Changes in non-cash working capital and other (4,702) (8,944)
Cash ow from operations 11,799 (1,509)
INVESTING ACTIVITIES
Purchase of:
Rental equipment (6,274) (5,096)
Property, plant and equipment (2,319) (1,322)
Assets under construction (1,996) (579)
Proceeds on disposal of:
Rental equipment 3,832 6,453
Property, plant and equipment 19 66
(6,738) (478)
Changes in non-cash working capital and other (3,802) (384)
(10,540) (862)
FINANCING ACTIVITIES
Decrease in operating bank loans (10,927) (1,357)
Advance of long-term debt 6,568 -
Stock options exercised 932 2,160
Normal course issuer bid (278) -
Dividends (2,260) (2,234)
(5,965) (1,431)
Changes in non-cash working capital and other 446 76
(5,519) (1,355)
Decrease in cash (4,260) (3,726)
Cash, beginning of period 16,350 12,840
Cash, end of period $ 12,090 $ 9,114
See accompanying Notes to the Consolidated Financial Statements.
Supplemental disclosure of cash ow information (Note 5).
20 ENERFLEX SYSTEMS LTD.
NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS
(Unaudited) (Tabular dollar amounts in thousands, except per share/option amounts)
The unaudited interim consolidated financial statements for the period ended March 31, 2006 should be read in
conjunction with the consolidated financial statements for the year ended December 31, 2005, and the unaudited
interim consolidated financial statements for the period ended March 31, 2005, as the interim consolidated
financial statements do not conform in all respects to the note disclosure requirements of generally accepted
accounting principles for annual financial statements.
The interim consolidated financial statements are prepared in accordance with the same accounting policies and
methods of their application as the most recent annual financial statements. Certain comparative amounts have
been reclassified to conform to the current presentation.
Note 1. GUARANTEES, COMMITMENTS AND CONTINGENCIES
At March 31, 2006, the Company had outstanding letters of credit issued in lieu of holdbacks, performance
guarantees and bid bonds of $22,356,000 (December 31, 2005 - $25,548,000) of which $1,567,000 (December
31, 2005 - $1,419,000) are insured by Export Development Canada, against wrongful call.
The Company is involved in litigation and claims associated with normal operations against which certain provisions
have been made in the nancial statements. Management is of the opinion that any resulting net settlement
would not materially affect the nancial position, results of operations or liquidity of the Company.
On March 13, 2006, the Company received a Statement of Claim in the amount of US $2 million in respect of
certain product warranty claims. Management is presently investigating the merits of this claim and Management
believes there is little or no liability associated with this claim.
Aggregate minimum future required lease payments, primarily for operating leases for equipment, automobiles
and premises are $26,599,000 for the remainder of 2006 and thereafter are as follows:
2006 $ 5,894
2007 6,971
2008 5,265
2009 3,176
2010 1,464
Thereafter 3,829
Total $ 26,599
In addition the company has purchase obligations for the remainder of 2006 , 2007 and 2008 as follows:
2006 $ 71,597
2007 20,957
2008 1,591
Total $ 94,145
Notes to
Consolidated
Financial
Statements
2006 QUARTERLY REPORT 21
NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS
Note 2. SHARE CAPITAL
Authorized The Company is authorized to issue an unlimited number of common shares and rst preferred
shares.
Issued March 31, 2006 December 31, 2005
Common
Shares Amount
Common
Shares Amount
Balance, beginning of period 22,607,890 $ 184,151 22,337,438 $ 178,540
Stock options exercised 72,856 1,070 148,276 2,769
Shares issued on acquisition
(net of issuance costs)
- - 122,176 2,842
Shares purchased and
cancelled
(10,000) (82) - -
Balance, end of period 22,670,746 $ 185,139 22,607,890 $ 184,151
In December 2005, the Company issued a Normal Course Issuer Bid to purchase up to 1,130,313 shares, expiring
on December 4, 2006. As at March 31, 2006, the Company has purchased 10,000 shares under this Issuer Bid.
Note 3. STOCK-BASED COMPENSATION
a) Stock Options
On February 20, 2006, the Company issued 4,850 stock options to employees and directors at an exercise price
of $26.55. The exercise price equals the average of the market price of the Companys shares on the ve days
preceding the date of the grant.
The estimated fair value of the options used for accounting purposes has been determined using a modied
Black-Scholes option pricing model with the following assumptions:
Three months ended March 31 2006 2005
Weighted average risk-free interest rate (%) 4.0 3.7
Weighted average expected life (in years) 4.0 5.8
Estimated volatility in the market price of the common shares (%) 31.2 33.6
Expected dividend yield (%) 1.8 1.4
Weighted average fair value per option $ 6.89 $ 9.19

Subsequent event
On April 23, 2006 , 110,500 options were surrendered for no consideration. These options have been returned to
the pool of options available for grant.
22 ENERFLEX SYSTEMS LTD.
NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS
b) Share Units
On February 20, 2006, the Company issued 2,400 Restricted Share Units (RSUs) to employees of the Company.
Of these RSUs, 50% are subject to sliding scale performance criteria based on the increase in Return on Capital
Employed (ROCE) in scal 2006 over that achieved in scal 2005. An increase in ROCE of 0.0%, or less, will result
in 0% of the units subject to performance criteria being eligible for vesting. An increase in ROCE of 2.0%, or better,
will result in 100% of the units subject to performance criteria being eligible for vesting. Each 0.1% increment
between 0.0% and 2.0% in the change in ROCE increases the number of units eligible for vesting by 5%.
c) Stock-based compensation expense
The stock-based compensation expense included in the determination of net income is:
Three months ended March 31 2006 2005
Stock options 311 135
Share units 559 221
Phantom Shares 2 -
Total 872 356
Note 4. RECONCILIATION OF EARNINGS PER SHARE CALCULATIONS
Three months ended March 31 2006 2005
Weighted
average
shares
outstanding
Weighted
average
shares
outstanding
Net Income Per share Net Income Per share
Basic $ 12,904 22,645,451 $ 0.57 $ 7,382 22,408,621 $ 0.33
Options assumed exercised 770,200 713,399
Shares assumed purchased (655,844) (570,333)
Diluted $ 12,904 22,759,807 $ 0.57 $ 7,382 22,551,687 $ 0.33
2006 QUARTERLY REPORT 23
NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS
Note 5. SUPPLEMENTAL INFORMATION
Supplemental disclosure of cash ow information
Three months ended March 31 2006 2005
Interest paid $ 1,638 $ 963
Interest received $ 146 $ 39
Income taxes paid $ 6,752 $ 10,826
Income taxes received $ 58 $ 464
Changes in non-cash working capital
2006 2005
Accounts and taxes receivable (1,837) 13,388
Inventory (8,161) (7,238)
Accounts, taxes payable and accrued liabilities (1,363) (14,461)
Foreign currency and other 3,303 (941)
(8,058) (9,252)
Resulting from operations (4,702) (8,944)
Resulting from investing (3,802) (384)
Resulting from nancing 446 76
(8,058) (9,252)
Note 6. INTEREST IN JOINT-VENTURE
The Company proportionately consolidates its 46.5% interest in the assets, liabilities, results of operations and
cash ows of its joint-venture in Pakistan, Presson Descon International (Private) Limited. The 46.5% interest
included in the Companys account includes:
Balance sheet
March 31,
2006
December 31,
2005
Current assets $ 1,483 $ 558
Long-term assets 143 147
Current liabilities 1,470 409
Long-term liabilities and equity $ 156 $ 296
Income Statement Three months ended March 31 2006 2005
Revenue $ 19 $ 248
Expenses (356) 288
Net income $ 375 $ (40)
Cash ows Three months ended March 31 2006 2005
From operations $ 15 $ (1,366)
From nancing activities (3) (4)
From investing activities $ (5) $ (2)
24 ENERFLEX SYSTEMS LTD.
NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS
NOTE 7. SEGMENTED INFORMATION
The Company has three reportable segments: Service, Engineered Systems (formerly Fabrication) and Production
Services (formerly Leasing). The Service reportable segment is the aggregation of the Mechanical Service and
Syntech divisions. The Engineered Systems reportable segment is the aggregation of the Production and Processing
and Compression and Power divisions.
Three months ended
March 31
Service Engineered Systems Production Services Consolidated
2006 2005 2006 2005 2006 2005 2006 2005
Segment revenue $ 77,617 $ 63,698 $ 131,046 $ 84,359 $ 8,284 $ 8,039 $ 216,947 $ 156,096
Intersegment revenue (3,231) (3,517) (6,886) (4,858) (7) (32) (10,124) (8,407)
External revenue 74,386 60,181 124,160 79,501 8,277 8,007 206,823 147,689
Gross margin 20,777 15,558 20,531 10,821 5,246 5,149 46,554 31,528
Depreciation and amortization 813 881 1,693 1,074 2,116 1,903 4,622 3,858
Income before
interest and income taxes
7,130 2,949 10,006 4,419 5,307 5,009 22,443 12,377
Segment assets 137,735 121,449 198,868 133,831 102,642 91,717 439,245 346,997
Corporate 10,426 14,848
Goodwill 50,528 52,686 61,835 52,086 7,356 7,356 119,719 112,128
Total segment assets 188,263 174,135 260,703 185,917 109,998 99,073 569,390 473,973
Capital expenditures 996 769 2,307 791 6,289 5,081 9,592 6,641
Corporate 997 356
10,589 6,997
Proceeds on disposal of assets $ 3 $ 45 $ 16 $ 21 $ 3,832 $ 6,453 3,851 6,519
Corporate - -
$ 3,851 $ 6,519
2006 QUARTERLY REPORT 25
NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS
Revenue from foreign countries was: Three months ended March 31 2006 2005
Australia $ 24,804 $ 11,818
Egypt 8,591 318
Indonesia 990 531
Netherlands 4,512 5,347
Pakistan 1,771 5,896
United States 3,599 2,980
Other 13,007 10,033
$ 57,274 $ 36,923
Included in these amounts are gross exports from domestic operations of: $ 20,820 $ 22,662
Revenue is attributed to countries by the destination of the sale.
Revenue from one customer represents approximately $23,043,000 (11%) of the Companys total revenue, for the three
months ended March 31, 2006 across all segments.
Total assets in foreign countries were as follows:
March 31, 2006 December 31, 2005
Capital Assets
& Goodwill
Other Assets Total Assets
Capital Assets
& Goodwill
Other Assets Total Assets
Australia $ 15,445 $ 31,379 $ 46,824 $ 15,261 $ 30,241 $ 45,502
Netherlands 3,800 13,408 17,208 4,069 13,352 17,421
United States $ 7,094 $ 8,480 15,574 $ 9,255 $ 7,116 16,371
Other 7,781 7,997
Total assets $ 87,387 $ 87,291
Total assets are attributed to countries by the location of the business.
26 ENERFLEX SYSTEMS LTD.
NOTES TO CONSOLI DATED FI NANCI AL STATEMENTS
QUARTERLY DATA
(Unaudited)
($ Millions, except per share data) 2006 2005 2004
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenue 206.8 203.1 162.7 157.1 147.7 167.7 141.3 119.8 128.3
EBITDA
(1)
27.1 25.1 20.7 19.3 16.2 22.7 16.2 13.5 15.7
Income before income taxes 20.7 19.3 15.1 14.8 11.4 17.9 11.5 8.8 11.0
Net income 12.9 13.7 9.8 9.2 7.4 11.4 7.7 5.8 7.1
per common share - basic 0.57 0.61 0.44 0.41 0.33 0.51 0.35 0.26 0.32
Depreciation and amortization 4.6 4.3 4.3 3.6 3.9 3.7 3.9 3.8 3.7
Cash from operations 11.8 2.8 11.0 9.2 (1.5) 14.6 16.0 10.5 9.7
Capital expenditures, net
Rental equipment 2.4 2.5 3.0 1.1 (1.4) 7.0 4.7 5.1 4.8
Property, plant and equipment 4.3 2.6 3.0 2.1 1.8 1.7 3.4 2.6 1.1
Dividends on common shares 2.8 2.3 2.3 2.2 2.2 2.2 2.3 2.2 2.2
Dividends per comon share () 12.5 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Pre-tax income as a % of revenue 10.0 9.5 9.3 9.4 7.7 10.7 8.1 7.4 8.6
Enerex calclulates EBITDA as follows ($ Thousands): 2006
Income before interest and income taxes $ 22,443
Depreciation and amortization 4,622
EBITDA $ 27,065
COMMON SHARE DATA
2006
Q1 2005 2004 2003 2002 2001 2000
Trading price range of
common stock: - high ($) 29.30 29.95 26.30 20.20 26.50 32.40 42.00
- low ($) 26.15 21.75 19.25 12.05 13.20 18.60 25.00
- close ($) 27.91 26.84 23.56 20.20 15.00 19.75 31.00
Trading volume (millions) 2.2 9.1 9.5 8.9 7.0 5.2 6.8
Common shares (millions)
Outstanding at end of period 22.7 22.6 22.3 22.2 22.2 14.9 15.0
Weighted average - basic 22.6 22.5 22.3 22.2 18.2 14.9 15.0
(1) Earnings before interest, income taxes and depreciation and amortization (EBITDA) is a non-GAAP (Generally Accepted Accounting Principals) earnings measure that
does not have a standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other issuers.
P. JOHN ALDRED
DIRECTOR
OFFICER OF THE CORPORATION
Chairman and
Chief Executive Ofcer
Enerex Systems Ltd.
Calgary AB
PATRICK D. DANIEL
(1,2)
INDEPENDENT DIRECTOR
President and
Chief Executive Ofcer
Enbridge Inc.
Calgary AB
DOUGLAS J. HAUGHEY
(3)
INDEPENDENT DIRECTOR
President
Gas Transmission West
Duke Energy Corporation
Calgary AB
ROBERT B. HODGINS
(1)
INDEPENDENT DIRECTOR
Investor and
Corporate Director
Calgary AB
GEOFFREY F. HYLAND
(2)
INDEPENDENT DIRECTOR
Consultant and
Corporate Director
Caledon ON
NANCY M. LAIRD
(1,3)
INDEPENDENT DIRECTOR
Investor and
Corporate Director
Calgary AB
J. NICHOLAS ROSS
(1,3)
INDEPENDENT DIRECTOR
Chairman and
Chief Executive Ofcer
Rover Capital Corporation
Toronto ON
ROBERT C. WILLIAMS
(2)
INDEPENDENT DIRECTOR
Managing Director
Equity Capital Markets
and Syndication
Scotia Capital Inc.
Toronto ON
LEONARD A. CORNEZ
OFFICER OF THE CORPORATION
Vice-President and
Chief Financial Ofcer
Calgary AB
J. BLAIR GOERTZEN
OFFICER OF THE CORPORATION
President and
Chief Operating Ofcer
Red Deer AB
RACHEL M. MOORE
OFFICER OF THE CORPORATION
Vice-President
Human Resources
and Privacy Ofcer
Calgary AB
WILLIAM A. MOORE
OFFICER OF THE CORPORATION
Vice-President
Mechanical Service
Calgary AB
YVES J. TREMBLAY
OFFICER OF THE CORPORATION
Vice-President
Syntech
Calgary AB
SEAN R. ULMER
OFFICER OF THE CORPORATION
Vice-President
Production Services
Calgary AB
Directors
(4)
and Ofcers
1
Audit Committee
2
Corporate Governance Committee
3
Human Resources and Compensation Committee
4
As at April 28, 2006
CORPORATE DI RECTORY
2006 QUARTERLY REPORT 27
CORPORATE OFFICE
Enerex Systems Ltd.
4700 47 Street SE
Calgary AB T2B 3R1
Tel: 1.403.236.6800
Fax: 1.403.236.6816
Email: [email protected]
Website: www.enerex.com
AUDITORS
Deloitte & Touche LLP
Calgary AB
SHARES
The common shares of the Company
are listed and traded on the Toronto
Stock Exchange under the share symbol
EFX. The Company is a constituent of
the S&P/TSX Composite Index and the
S&P/TSX Small Cap Index.
WHISTLEBLOWER CONTACT
North America: 1.866.294.5561
The Netherlands: 0800.0226174
Australia: 1.800.339276
www.ethicspoint.com
BANKERS
Canadian Imperial Bank of Commerce
HSBC Bank Canada
The Toronto Dominion Bank
Calgary AB
SOLICITORS
Bennett Jones LLP
Calgary AB
REGISTRAR AND TRANSFER AGENT
Computershare Trust Company of Canada
Calgary AB