ENERFLEX SYSTEMS LTD. ANNUAL INFORMATION FORM For the ...

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ENERFLEX SYSTEMS LTD. – ANNUAL INFORMATION FORM The Company was founded in 1980 by P. John Aldred, Enerflex’s Chairman, President and Chief Executive Officer. Since 1980, Enerflex has benefited from the growing demand for natural gas and is now a significant player in providing companies around the world with the ability to “one-stop shop” for products and services used in the production and processing of crude oil and natural gas. Enerflex’s strategic goals are: • Expand the compression and production equipment rental business; • Maintain an efficient and responsive organizational structure; • Foster a culture and corporate philosophy of operational excellence; • Explore opportunities to expand into complementary business areas; • Develop a significant presence in International markets including the United States, Latin America, Europe, Africa, Australia and the Middle East including Pakistan; and • Continue to maintain a strong customer focus. In 2001 and 2002, the Company completed several acquisitions, both domestically and internationally, establishing a worldwide product and service offering. In addition, Gas Drive Systems Pty Limited, the Company’s Australian-based service organization, was granted the Waukesha distributorship for engine sales and parts for the Republic of Indonesia in 2001. On October 29, 2001, Enerflex, through its wholly-owned subsidiary, Enerflex European Holdings bv, acquired 100% of the issued and outstanding shares of Landré Ruhaak bv, a Netherlands based company, for cash consideration of $8.5 million. Geographic expansion and continued development of Enerflex’s worldwide service business is one of the key elements of the plan for the growth of Enerflex. The acquisition of Landré Ruhaak bv strengthened the Company’s service operations in the North Sea and provided a strong engine sales and parts and service organization from which to expand into other parts of continental Europe. On March 20, 2002, Enerflex, through its wholly-owned subsidiary, Enerflex Systems, Inc., acquired the operating assets of VR Systems Inc., a specialty natural gas compression equipment packager located in Odessa, Texas, for cash consideration of $4.1 million. This acquisition was also consistent with the Company’s strategic objective of increasing its global presence. VR Systems’ 20,000 square foot manufacturing facility is particularly well placed to serve customers in the west Texas and New Mexico regions and it also contributes to the packaging needs of Enerflex’s Houston sales office. Additionally, the facility provides a base from which the Company is establishing a service and leasing presence in the United States. On July 18, 2002, Enerflex acquired 100% of the issued and outstanding shares of EnSource Energy Services Inc. in exchange for 7,384,288 Common Shares valued at $19.10 per Common Share. Including the assumption of EnSource long-term debt, the transaction was valued at approximately $167.0 million. The EnSource acquisition enhanced the Company’s service capability, expanded the compression equipment offering to include sub-400 horsepower screw compression, provided the expertise and facilities to design and fabricate oil and gas production and processing equipment, expanded the compression rental fleet and offered new power generation solutions. It also introduced Enerflex to new international markets. In December 2002, Enerflex simplified its legal structure by amalgamating the majority of its Canadian subsidiaries into its wholly owned subsidiary, EnSource Energy Services Inc., and subsequently conveyed the net assets and liabilities to the parent Canadian company, Enerflex Systems Ltd. Also in December 2002, the Company merged its United States subsidiaries into Enerflex Systems, Inc. In 2003, the Company introduced an internal re-organization of its operating divisions under the direction of P. John Aldred, who resumed the position of President and Chief Executive Officer in May 2003, and J. Blair Goertzen, who was appointed Executive Vice President and Chief Operating Officer in August 2003. In 2004, the Company completed the re-organization it introduced during 2003. These efforts included the restructuring of business units around successful product lines, the establishment of product line managers, a focus on improved cost controls and expenditure reduction, the implementation of improved processes and practices and the pursuit of contracts on a global basis. These efforts have also served as the initiation point for Enerflex’s response to the expanded reporting and governance requirements for publicly traded organizations. During the fourth quarter of 2004, Enerflex was awarded the Waukesha distribution rights for Poland. Significant Acquisitions Enerflex made no significant acquisitions during the year. PAGE 4
ENERFLEX SYSTEMS LTD. – ANNUAL INFORMATION FORM Trends The needs of Enerflex’s customers are changing in several ways and the Company is anticipating this by proactively adjusting how it operates. One such trend is the increasing globalization of the oil and gas industry and power generation industry. In this changing world, Enerflex is taking steps to increase its exposure to international markets. A second trend affecting customer needs is the rapid pace of consolidation among natural gas producers. In the past few years, several Enerflex customers were acquired by companies seeking greater economies of scale or a stronger Canadian presence. This consolidation affects the Company’s sales strategies. For example, whereas in the past the Company might have pursued five projects with each of five different companies, in the future the Company might pursue 25 projects in the hands of a single organization. In North America, income trusts and master limited partnerships are becoming a commonly used corporate structure for crude oil and natural gas production organizations. Producers adopting this form of organization tend to focus increasingly on annual cash flows and distributions to unit holders. As a consequence, there is a growing tendency for these entities to focus on a short term production requirements and, to a growing extent, avoid capital expenditures by leasing infrastructure related assets. Should this trend proliferate, we believe the sale of natural gas infrastructure assets provided by our Fabrication segment could reduce while revenue from leasing activities and our Mechanical Service division could increase. In 2005, industry analysts forecast that capital expenditures on plant and equipment by crude oil and natural gas production companies will remain strong and will be comparable to, or above, 2004 levels. Many forecasters also expect that, in the absence of significant discoveries, North American conventional natural gas production will decrease. Sustaining or increasing production volumes is progressively more dependent upon development of tight gas and coal-bed 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. While the oil and gas industry and the power generation industry have always been cyclical businesses, cycles are becoming shorter and more pronounced. Industry consolidation underscores Enerflex’s longer-term strategy of increasing the proportion of revenue earned outside Canada, growing the portion of the business related to service and leasing, and expanding into complementary lines of business. In 2004, 27% of revenue was derived from international sources, compared to 25% in 2003. Looking ahead, revenues from international operations are expected to represent an increasing percentage of Enerflex’s consolidated revenues. General Description NARRATIVE DESCRIPTION OF THE BUSINESS Enerflex is a leading supplier of products and services to the global oil and gas industry. The Company’s core expertise lies in its ability to provide products and services to the industry segment that operates between the wellhead and the pipeline. Enerflex’s primary products and services are: natural gas compression, production, and power generation equipment for sale or lease, hydrocarbon production and processing facilities, electrical, instrumentation and controls services and a comprehensive package of mechanical field maintenance and contracting capabilities. Through our ability to provide these products and services in an integrated manner, or as stand-alone offerings, Enerflex believes it offers customers a unique value proposition. The Company is headquartered in Calgary, Canada, and has operations in Canada, the United States, Germany, the Netherlands, Australia, Pakistan and Indonesia. The Company’s revenue is derived from offering a complete suite of oil and gas related products and services, including: • service, parts and re-engineering of existing compression and power generation equipment; • electrical, instrumentation and controls services; • design and packaging of new compression and power generation equipment; • design and fabrication of hydrocarbon production and processing facilities, flare systems and combustionrelated equipment; and • oil and gas equipment rental and leasing. PAGE 5
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