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May 10, 2012 16:41 ET

Enerflex Reports First Quarter 2012 Financial Results and Announces Quarterly Dividend

CALGARY, ALBERTA--(Marketwire - May 10, 2012) - Enerflex Ltd. (TSX:EFX) ("Enerflex" or "the Company"), a leading supplier of products and services to the global energy industry, today reported its financial and operating results for the three months ended March 31, 2012.


Financial Highlights                                                        

                                       Three months ended March 31,         
(unaudited)                                                                 
($ millions, except per share                                               
 amounts and percentages)                2012         2011(1)     Change ($)
----------------------------------------------------------------------------
Revenue                             $   355.7      $   314.5           41.2 
Gross margin                             62.3           55.4            6.9 
Gross margin %                           17.5%          17.6%               
Operating income(2)                      21.2           15.3            5.9 
EBITDA(2)                                31.4           27.1            4.3 
Net earnings (loss)                                                         
  Continuing                             14.9            9.8            5.1 
  Discontinued                           (0.8)           0.1           (0.9)
Earnings (loss) per share                                                   
  Continuing                             0.19           0.13           0.06 
  Discontinued                          (0.01)          0.00          (0.01)

(1) Results for Q1 2011 have been prepared on a carve-out basis. Enerflex   
    became an independently operated and listed company on June 1, 2011.    
(2) Operating income and Earnings before Interest, Taxes, Depreciation and
    Amortization ("EBITDA") are non-GAAP measures that do not have a    
    standardized meaning and therefore are unlikely to be comparable to
    similar measures presented by other issuers.              

Enerflex reported improved results from continuing operations in the first quarter of 2012, compared to the same period last year. Net earnings from continuing operations improved by $5.1 million (51.5%) or $0.06 cents per share as a result of higher revenues and higher gross margins, which were partially offset by higher selling, general and administrative expenses.

The Company recorded bookings of $222.7 million during the quarter, which was $21.0 million lower than the comparable period last year. The increase in bookings in Canada and Northern U.S. was offset by lower bookings in the Southern U.S. and International markets. Bookings have been driven predominantly by activity in unconventional natural gas basins in Canada and liquids-rich gas basins in the U.S. Backlog has grown to $927.6 million, which represents an increase of $255.5 million (38.0%) compared to the same period last year. This backlog provides good visibility for revenue growth for Engineered Systems in 2012. Sequentially, backlog has decreased by $58.5 million from December 31, 2011.

"With our Company's opening 2012 backlog, Enerflex is well-positioned to deliver improved results through the balance of 2012," said J. Blair Goertzen, Enerflex's President and Chief Executive Officer. "Given the current outlook for natural gas prices in North America our balance sheet provides us with the financial flexibility to weather any potential downturn in the Canadian natural gas market and positions us to pursue opportunities to expand our global footprint and grow our business. We see continued strength in the United States and International markets for 2012."


First Quarter Highlights                                                    

In the three months ended March 31, 2012, Enerflex:                         

--  Generated revenue of $355.7 million compared to $314.5 million in the
    first quarter of 2011. The increase of $41.2 million was a result of
    increased revenue in all Enerflex segments; 
--  Achieved a gross margin of $62.3 million or 17.5% compared to $55.4
    million or 17.6% during the first quarter of 2011, an increase of $6.9
    million; 
--  Achieved operating income of $21.2 million or 6.0% of revenue compared
    to $15.3 million or 4.9% during the first quarter of 2011; 
--  Generated first quarter EBITDA of $31.4 million, an increase of $4.3
    million over the first quarter of 2011;  
--  Achieved net earnings from continuing operations in the first quarter of
    $14.9 million ($0.19 cents per share), an increase of $5.1 million over
    the same period last year; 
--  Increased backlog to $927.6 million at March 31, 2012 compared to $672.1
    million at March 31, 2011, an increase of 38.0% over the prior year; 
--  Exited the quarter with $88.0 million in cash, resulting in net debt to
    EBITDA ratio of 0.89:1 and a net debt to equity ratio of 0.03:1; and 
--  The Houston facility expansion is on-going and scheduled to be fully
    operational during the second quarter of 2012. This will double the
    capacity of the Houston facility which will be used to serve the
    Southern U.S., South American and International markets for compression
    and processing equipment. 

Subsequent to the end of the first quarter of 2012: 
-- Enerflex declared a dividend of $0.06 per share, payable on July 5, 2012,
   to shareholders of record on June 19, 2012; and
-- Gas Drive, a limited partnership of Enerflex, has taken steps to reduce
   operating costs as a result of weak natural gas prices and the
   corresponding decline in dry gas production.  This has resulted in a
   reduction of its administrative workforce at certain Canadian branches,
   which is expected to produce annualized savings of approximately $4.0
   million.  Enerflex will record a reorganization expense of approximately
   $1.5 million in the second quarter of 2012.  The Company will continue to
   focus on the opportunities for growth and position itself strategically
   to support its customers in all Gas Drive service territories.

Financial Results

Enerflex's $41.2 million or 13.1% period-over-period increase in revenue to $355.7 million in the first quarter of 2012 was a result of increased revenue in the Canada and Northern U.S., Southern U.S., and International segments. Canada and Northern U.S. revenues increased $8.3 million compared to the same period of last year, while the International revenues increased by $9.3 million. The Southern U.S. and South America segment revenues increased by $23.5 million to $112.8 million from $89.3 million in 2011.

EBITDA totalled $31.4 million in the first three months of 2012, an increase of 15.9% compared to the same period of the prior year.

Gross margin of $62.3 million represented an increase of 12.5% over the first quarter of 2011 primarily due to strong gross margin performance in Canada and Northern U.S. and Southern U.S. and South America, as a result of higher margin projects in opening backlog and better plant utilization. This was partially offset by lower gross margin performance in the International business segment, as a result of costs incurred on scope changes and potential warranty claims related to certain projects during the quarter. Enerflex has recognized these expenses with no corresponding revenue until the likelihood of recovery of these costs can be ascertained. Enerflex has filed variation claims with respect to these projects, which could result in revenue and gross margin recognition in subsequent quarters if these claims are approved. Gross margin in the first quarter of 2011 included $9.5 million with respect to a delayed project that was completed in Middle East North Africa ("MENA") on more favorable terms than had been anticipated.

Backlog at March 31, 2012 increased to $927.6 million compared to $672.1 million at March 31, 2011, a 38.0% increase over the comparable period. This increase is a result of increased activity in unconventional natural gas basins, liquids rich shale resources in the United States and Canada, increased gas production in MENA and various coal seam gas to liquefied natural gas projects in Australia.

Enerflex's consolidated financial statements as at and for the three months ended March 31, 2012, and the accompanying management's discussion and analysis, will be available on the Enerflex website at www.enerflex.com or on SEDAR at www.sedar.com.

Conference Call and Webcast Details

Enerflex will host a conference call for analysts and investors on Friday, May 11, 2012 at 8:00 a.m. MST (10:00 a.m. EST) to discuss the Company's 2012 first quarter results. The call will be hosted by Mr. J. Blair Goertzen, President and Chief Executive Officer and Mr. D. James Harbilas, Vice President and Chief Financial Officer of Enerflex Ltd.

If you wish to participate in this conference call, please call, 1.800.952.4972 or 1.416.695.6617. Please dial in 10 minutes prior to the start of the call. No passcode is required. The live audio webcast of the conference call will be available on the Enerflex website at www.enerflex.com under the Investor Relations section on May 11, 2012 at 8:00 a.m. MST (10:00 a.m. EST). Approximately one hour after the call, a recording of the event will be available on the Company's website.

A replay of the teleconference will be available one hour after the conclusion of the call until midnight, May 18, 2012. Please call 1.800.408.3053 or 1.905.694.9451 and enter passcode 2184308.

About Enerflex

Enerflex Ltd. is a single source supplier of products and services to the global oil and gas production industry. Enerflex provides natural gas compression and oil and gas processing equipment for sale or lease, refrigeration systems and power generation equipment and a comprehensive package of field maintenance and contracting capabilities. Through the Company's ability to provide these products and services in an integrated manner, or as stand-alone offerings, Enerflex offers its customers a unique value proposition.

Headquartered in Calgary, Canada, Enerflex has approximately 3,100 employees. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates, Egypt, Oman, Bahrain and Indonesia. Enerflex's shares trade on the Toronto Stock Exchange under the symbol "EFX". For more information about Enerflex, go to www.enerflex.com.

Advisory Regarding Forward-Looking Statements

To provide Enerflex shareholders and potential investors with information regarding Enerflex, including management's assessment of future plans, Enerflex has included in this news release certain statements and information that are forward-looking statements or information within the meaning of applicable securities legislation, and which are collectively referred to in this advisory as "forward-looking statements." Information included in this news release that is not a statement of historical fact is forward-looking information. When used in this document, words such as "plans", "expects", "will", "may" and similar expressions are intended to identify statements containing forward-looking information. In developing the forward-looking information in this news release, we have made certain assumptions with respect to general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and shareholder, regulatory and TSX approvals. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated in or implied by such forward-looking statements will occur or that plans, intentions or expectations upon which the forward-looking statements are based will occur.

Forward-looking information involves known and unknown risks and uncertainties and other factors, which may cause or contribute to Enerflex achieving actual results that are materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such risks and uncertainties include, among other things, the impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation 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 ability to generate sufficient cash flow from operations to meet current and future obligations, including future dividends to shareholders of the Company; increased competition; the lack of availability of qualified personnel or management; labour unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company, the reliability of Toromont's historical financial information as an indicator of Enerflex's historical or future results; potential tax liabilities if the requirements of the tax-deferred spinoff rules are not met; the effect of Enerflex's rights plan on any potential change of control transaction; obtaining financing; and other factors, many of which are beyond its control.

The foregoing list of factors and risks is not exhaustive. For an augmented discussion of the risk factors and uncertainties that affect or may affect Enerflex, the reader is directed to the section entitled "Risk Factors" in Enerflex's most recently filed Annual Information Form, as well as Enerflex's other publicly filed disclosure documents, available on www.sedar.com. The reader is cautioned that these factors and risks are difficult to predict and that the assumptions used in the preparation of such information, although considered reasonably accurate at the time of preparation, may prove to be incorrect. Readers are cautioned that the actual results achieved will vary from the information provided in this press release and that such variations may be material. Consequently, Enerflex does not represent that actual results achieved will be the same in whole or in part as those set out in the forward-looking information.

Furthermore, the statements containing forward-looking information that are included in this news release are made as of the date of this news release, and Enerflex does not undertake any obligation, except as required by applicable securities legislation, to update publicly or to revise any of the included forward-looking information, whether as a result of new information, future events or otherwise. The forward-looking information contained in this news release is expressly qualified by this cautionary statement.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements for the three months ended March 31, 2012 and 2011 and the audited consolidated financial statements for the year ended December 31, 2011. They should also be read in combination with Toromont Industries Ltd. ("Toromont") Management Information Circular relating to an arrangement involving Toromont Industries Ltd., its shareholders, Enerflex Ltd. ("Enerflex" or "the Company") and 7787014 Canada Inc. ("Information Circular" or "Arrangement") dated April 11, 2011.

The interim consolidated financial statements reported herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and are presented in Canadian dollars unless otherwise stated. IFRS has been adopted in Canada as Generally Accepted Accounting Principles ("GAAP") and as a result, GAAP and IFRS are used interchangeably within this MD&A.

The MD&A has been prepared taking into consideration information that is available up to May 10, 2012 and focuses on information and key statistics from the interim consolidated financial 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 possible future 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 Enerflex Ltd. in the future. Additional information relating to the Company, including the Annual Information Form and Information Circular, is available on SEDAR at www.sedar.com.

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 Company's 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 analyses made by the Company derived from its experience and perceptions. All statements, other than statements of historical fact contained in this MD&A are forward-looking statements, including, without limitation: statements with respect to anticipated financial performance; future capital expenditures, including the amount and nature thereof; bookings and backlog; oil and gas prices and demand; other development trends of the oil and gas industry; business prospects and strategy; expansion and growth of the business and operations, including market share and position in the energy service markets; the ability to raise capital; expectations regarding future dividends; expectations and implications of changes in government regulation, laws and income taxes; 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 difficult to predict and which may affect the Company's operations, including, without limitation: the impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation 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 ability to generate sufficient cash flow from operations to meet current and future obligations, including future dividends to shareholders of the Company; increased competition; the lack of availability of qualified personnel or management; labour unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company and other factors, many of which are beyond its control.

As such, 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 benefits, including the amount of proceeds or dividends the Company and its shareholders, will derive there-from. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this MD&A are made as of the date of this MD&A and other than as required by law, 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.

THE COMPANY

Enerflex was formed after the acquisition of Enerflex Systems Income Fund ("ESIF") by Toromont and subsequent integration of ESIF's products and services with Toromont's existing Natural Gas Compression and Processing business. In January 2010, the operations of Toromont Energy Systems Inc., a subsidiary of Toromont Industries Ltd., were combined with the operations of ESIF to form Enerflex Ltd. Enerflex began independent operations on June 1, 2011 pursuant to the Arrangement with Toromont which received all necessary regulatory approvals. The transaction was implemented by way of a plan of arrangement whereby Toromont shareholders received one share of Enerflex for each common share of Toromont, creating two independent public companies - Toromont Industries Ltd. and Enerflex Ltd. Enerflex's shares began trading on the Toronto Stock Exchange ("TSX") on June 3, 2011 under the symbol EFX.

Enerflex Ltd. is a single-source supplier for natural gas compression, oil and gas processing, refrigeration systems and power generation equipment - plus in-house engineering and mechanical services expertise. The Company's broad in-house resources provide the capability to engineer, design, manufacture, construct, commission and service hydrocarbon handling systems. Enerflex's expertise encompasses field production facilities, compression and natural gas processing plants, CO2 processing plants, refrigeration systems and power generators serving the natural gas production industry.

Headquartered in Calgary, Canada, Enerflex has approximately 3,100 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates, Oman, Egypt, Bahrain and Indonesia.

OVERVIEW

The oil and natural gas service sector in Canada and Northern U.S. has a distinct seasonal trend in activity levels which results from wellsite access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex's Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are more stable throughout the year. Rentals revenues are also impacted by both the Company's and its customer's capital investment decisions.

The Southern U.S. and South America and International markets are not significantly impacted by seasonal variations. Variations from these trends in all regional segments generally occur when hydrocarbon energy fundamentals are either improving or deteriorating.

During the first quarter of 2012, Enerflex recorded strong bookings in the Canada and Northern U.S. and Southern U.S. and South America regions, while bookings in the International segment were $42.6 million lower as a result of the varying nature of project awards in this region. Projects in the International markets are typically larger projects with longer evaluation and award timelines. Manufacturing activity levels for the Engineered Systems product line have increased in all regions as backlog at the start of 2012 was $986.1 million, compared to $643.6 million at the start of 2011. Service activity levels have remained stable in the first quarter of 2012 in Canada and Northern U.S. and Southern U.S. and South America when compared to the first quarter of 2011. In response to low natural gas prices, natural gas producers in both of these regions have announced their intention to curtail or "shut-in" dry gas production and this could potentially impact revenues from our Service product line in future periods. Service activity levels increased in our International region as a result of new service contracts in Middle East North Africa ("MENA") and increased activity levels in Australia related to Coal Seam Gas ("CSG") to Liquefied Natural Gas ("LNG") development.

North American rental utilization levels have increased to 62% in the first quarter of 2012, compared to 56% in the same quarter of 2011. The increase in utilization is primarily due to the sale of idle rental units from the fleet, resulting in a decrease in the total horsepower available.

In the International segment, MENA continues to expand as key Service contracts in the region commenced operations and we continue to actively evaluate and submit proposals in this region. The European Service and Combined Heat and Power ("CHP") business, within the International segment, has been reported as a discontinued operation for the twelve months ended December 31, 2011, and for the comparative periods in 2012. In 2011, Enerflex recorded a total impairment of $54.0 million, consisting of non-cash impairments of $46.0 million for goodwill, intangible assets, deferred tax assets and fair value adjustments, and anticipated cash transaction costs totalling $8.0 million.


FINANCIAL HIGHLIGHTS                                                        

                                                Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
----------------------------------------------------------------------------
Revenue                                                                     
Canada and Northern U.S.                           $ 150,646      $ 142,298 
Southern U.S. and South America                      112,840         89,339 
International                                         92,245         82,872 
----------------------------------------------------------------------------
Total revenue                                      $ 355,731      $ 314,509 
Gross margin                                          62,317         55,377 
Selling and administrative expenses                   41,146         40,080 
----------------------------------------------------------------------------
Operating income                                   $  21,171      $  15,297 
Gain on disposal of property, plant and                                     
 equipment                                                 -           (742)
Equity earnings                                         (427)          (201)
----------------------------------------------------------------------------
Earnings before finance costs and taxes            $  21,598      $  16,240 
Finance costs and income                               1,377          2,337 
----------------------------------------------------------------------------
Earnings before taxes                              $  20,221      $  13,903 
Income tax expense                                     5,323          4,071 
Gain on sale of discontinued operations                    -          1,430 
Loss from discontinued operations                       (754)        (1,376)
----------------------------------------------------------------------------
Net earnings                                       $  14,144      $   9,886 
                                              ------------------------------
                                              ------------------------------

Key Ratios                                                                  
----------------------------------------------------------------------------
Gross margin as a % of revenues                         17.5%          17.6%
Selling and administrative expenses as a % of                               
 revenues                                               11.6%          12.7%
Operating income as a % of revenues                      6.0%           4.9%
Income taxes as a % of earnings before taxes            26.3%          29.3%
----------------------------------------------------------------------------

NON-GAAP MEASURES                                                           

                                                Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
----------------------------------------------------------------------------
EBITDA                                                                      
Earnings before finance costs and taxes            $  21,598      $  16,240 
Depreciation and amortization                          9,789         10,879 
----------------------------------------------------------------------------
EBITDA                                             $  31,387      $  27,119 
                                              ------------------------------
                                              ------------------------------

Cash flow                                                                   
Cash flow from operations                          $  22,561      $  16,811 
Non-cash working capital and other                      (945)           429 
----------------------------------------------------------------------------
Cash flow provided by operations                   $  21,616      $  17,240 
                                              ------------------------------
                                              ------------------------------

The success of the Company and business unit strategies is measured using a number of key performance indicators, some of which are outlined below. These measures are also used by management in its assessment of relative investments in operations. Some of these key performance indicators are not measurements in accordance with GAAP. It is possible that these measures will not be comparable to similar measures prescribed by other companies. They should not be considered as an alternative to net income or any other measure of performance under GAAP.

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")

EBITDA provides the results generated by the Company's primary business activities prior to consideration of how those activities are financed, assets are amortized or how the results are taxed in various jurisdictions.

Cash Flow

Cash flow provides the amount of cash generated by the business (net of non-cash working capital) and measures the Company's ability to finance capital programs and meet financial obligations.

Operating Income and Operating Margin

Each operating segment assumes responsibility for its operating results as measured by, amongst other factors, operating income, which is defined as income before income taxes, interest income, interest expense, equity income or loss and gain or loss on sale of assets. Financing and related charges cannot be attributed to business segments on a meaningful basis that is comparable to other companies. Business segments and income tax jurisdictions are not synonymous, and it is believed that the allocation of income taxes distorts the historical comparability of the performance of business segments.

Bookings and Backlog

Bookings and backlog are monitored by Enerflex as an indicator of future revenue and business activity levels for Enerflex's Engineered Systems' product line. Bookings are recorded in a period when a firm commitment or order has been received from customers. Bookings increase backlog in the period that they are received. Revenue recognized on Engineered Systems products decrease backlog in the period that this revenue is recognized. As a result backlog is an indication of revenue to be recognized in future periods using percentage of completion accounting.

FOR THE THREE MONTHS ENDED MARCH 31, 2012

During the first quarter of 2012, the Company generated $355.7 million in revenue, as compared to $314.5 million in the first quarter of 2011. The increase of $41.2 million was the result of increased revenue in all three of Enerflex's segments. As compared to the three month period ended March 31, 2011:


--  Canada and Northern U.S. revenues increased by $8.3 million as a result
    of higher Engineered Systems and Service revenue. Engineered Systems
    revenue was higher as a result of higher opening backlog for the first
    quarter of 2012, compared to the same period in 2011. Increased
    exploration of unconventional gas in the Montney and the Horn River
    shale plays throughout 2011 had a favorable impact in this region.
    Service revenue during the first quarter of 2012 was marginally higher
    compared to the same period in 2011. Natural gas producers in this
    region have begun to curtail dry gas production in 2012 as a result of
    weak natural gas prices. This could negatively impact Service revenue in
    future quarters. Rental revenue was slightly lower in the quarter
    despite higher utilization rates. This was due to lower pricing on the
    sale of rental units compared to the same period in 2011; 

--  Southern U.S. and South America revenues increased by $23.5 million, as
    a result of increased Engineered Systems and Service revenue in the
    first quarter of 2012. Engineered Systems revenue was higher as a result
    of higher activity levels in liquids rich resource basins and revenue
    recognition associated with projects that were previously delayed.
    Service revenues were slightly higher as a result of new branches being
    opened in close proximity to the Eagle Ford shale play as activity
    levels in this and other liquids rich basins have remained strong
    throughout the quarter; and 

--  International revenues increased by $9.4 million as a result of
    increased revenue in Australia and International Production and
    Processing ("P&P"), partially offset by lower revenues in MENA. Revenues
    in the comparable quarter of 2011 for MENA included $15.6 million with
    respect to a delayed project that was completed on more favorable terms
    than originally anticipated.  Revenues in Australia during the first
    quarter of 2012 were higher as a result of increased activity in the
    development of CSG and construction projects in Western Australia. P&P
    revenues were higher due to increased demand for gas processing
    equipment in MENA as we continue to expand in this region. 

Gross Margin for the three months ended March 31, 2012 was $62.3 million or 17.5% of revenue as compared to $55.4 million or 17.6% of revenue for the three months ended March 31, 2011. The increase in gross margin of $6.9 million was primarily due to strong gross margin performance in Canada and Northern U.S. and Southern U.S. and South America, as a result of higher margin projects in opening backlog, and better plant utilization. This was partially offset by lower gross margin performance in the International segment, as a result of costs incurred due to scope changes and potential warranty claims on certain projects. Enerflex has recognized the costs associated with these projects with no corresponding revenue recorded until the likelihood of recovery of these costs can be ascertained. Enerflex has filed variation claims with these customers which could result in revenue and gross margin recognition in subsequent quarters if these claims are approved. Gross margin in the comparable quarter of 2011 included $9.5 million with respect to a delayed project that was completed in MENA on more favorable terms than originally anticipated.

Selling, General and Administrative ("SG&A") expenses were $41.1 million or 11.6% of revenue during the three months ended March 31, 2012, compared to $40.1 million or 12.7% of revenue in the same period of 2011. The increase in SG&A expenses during the quarter is primarily attributable to higher compensation and incentive costs, partially offset by lower occupancy costs and lower depreciation and amortization resulting from the sale of non-core facilities during 2011.

Operating Income assists the reader in understanding the net contributions made from the Company's core businesses after considering all SG&A expenses. During the first quarter of 2012, Enerflex produced an operating income of $21.2 million or 6.0% of revenue as compared to operating income of $15.3 million or 4.9% of revenue in 2011. The increase in operating income was a result of the same factors contributing to the increased revenue and gross margin, which was partially offset by higher SG&A expenses.

Finance Costs and Income totaled $1.4 million for the three months ended March 31, 2012, compared with $2.3 million in the same period of 2011, a decrease of $0.9 million. Finance costs in 2012 were lower than those in 2011 primarily as a result of lower average borrowings, a lower effective interest rate and higher finance income arising from higher cash balances.

Income Tax Expense totaled $5.3 million or 26.3% of earnings before tax for the three months ended March 31, 2012 compared with an expense of $4.1 million or 29.3% of earnings before tax in the same period of 2011. The increase in income tax expense was due to higher pretax earnings. Enerflex's effective tax rate decreased compared to the same period in 2011 as a result of increased earnings in lower tax jurisdictions within Canada and Northern U.S. and the International segment and lower earnings in higher tax jurisdictions within the Southern U.S. and South America segment.

Net Earnings for the first quarter of 2012, from continuing operations were $14.9 million or $0.19 cents per share, as compared to $9.8 million or $0.13 cents per share in the same period of 2011.

Loss from discontinued operations reflects the results of Enerflex Environmental Australia ("EEA") during 2011 and Enerflex Europe ("EE") during 2011 and 2012. These business units recorded a net loss from discontinued operations of $0.8 million ($0.01 cents per share) and net income of $0.1 million in the first quarter of 2012 and 2011 respectively.

SEGMENTED RESULTS

Enerflex operates three business segments: Canada and Northern U.S., Southern U.S. and South America, and International, which operate as follows:


1.  Canada and Northern U.S. is comprised of three divisions: 
    --  Manufacturing, with business units operating in Canada and the
        Northern U.S., focuses on Compression and Power which provides
        custom and standard compression packages for reciprocating and screw
        compressor applications, Production and Processing which designs,
        manufactures, constructs and installs modular natural gas processing
        equipment and Retrofit which operates from plants located in
        Calgary, Alberta and Casper, Wyoming; 
    --  Service provides mechanical services and parts as the authorized
        Waukesha distributor to the oil and gas industries, focusing in
        Canada and Northern U.S. Enerflex re-branded its service business
        during the fourth quarter of 2011 as Gas Drive Global LP ("Gas
        Drive") and was awarded new service territories within the U.S. All
        future parts sales and service revenue will be undertaken by this
        new wholly owned entity; and 
    --  Rentals which provides compression and natural gas processing
        equipment rentals in Canada and Northern U.S. 
2.  Southern U.S. and South America is comprised of three divisions: 
    --  Compression and Power provides custom and standard compression
        packages for reciprocating and screw compressor applications from
        facilities located in Houston, Texas;  
    --  Production and Processing designs, manufactures, constructs and
        installs modular natural gas processing equipment; and 
    --  Service which provides mechanical services and products to the oil
        and gas industries focusing on Southern and Eastern U.S., as well as
        South America. 
3.  International is comprised of four divisions: 

Continuing Operations:                                                      
-----------------------                                                     

--  AustralAsia division provides process construction for gas and power
    facilities and compression package assembly. This division also provides
    mechanical service and parts, as the authorized Waukesha distributor for
    the oil and gas industry in this region; 

--  MENA provides engineering, procurement and construction services, as
    well as operating and maintenance services for gas compression and
    processing facilities in the region; and 

--  P&P designs, manufactures, constructs and installs modular natural gas
    processing equipment, and waste gas systems, for the natural gas, heavy
    oil Steam Assisted Gravity Drainage ("SAGD") and heavy mining segments
    of the market. 

Discontinued Operations:                                                    
-------------------------                                                   

--  Europe provides CHP generator products and mechanical service to the CHP
    product line. Enerflex has announced its intention to exit this business
    through a sale, partial sale or closure of these operations. As a result
    of this decision, the Europe division is reported as a discontinued
    operation. 

Each regional business segment has three main product lines:

Engineered Systems product line includes engineering, fabrication and assembly of standard and custom-designed compression packages, production and processing equipment and facilities and power generation systems. The Engineered Systems product line tends to be more cyclical with respect to revenue, gross margin and earnings before interest and income taxes than Enerflex's other business segments. Revenues are derived primarily from the investments made in natural gas infrastructure by producers.

The Services product line includes support services, labor and parts sales to the oil and gas industry. Enerflex, through its wholly owned Gas Drive subsidiary, is an authorized distributor for Waukesha engines and parts in Canada, Alaska, Northern U.S., Australia, Indonesia and Papua New Guinea. Enerflex is also an exclusive authorized distributor for Altronic, a leading manufacturer of electric ignition and control systems in Canada, Australia, Papua New Guinea and New Zealand. Finally, Enerflex is an authorized distributor of Jenbacher parts and engines in Canada. Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to maintain the customer's natural gas production.

Rentals revenue includes a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. The rental fleet is primarily deployed in Western Canada and Northern U.S. Expansion in international markets is conducted on a selective basis to minimize the risk of these newer markets.


CANADA AND NORTHERN U.S.                                                    

                                                Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
----------------------------------------------------------------------------
Segment revenue                                    $ 165,095      $ 143,558 
Intersegment revenue                                 (14,449)        (1,260)
----------------------------------------------------------------------------
Revenue                                            $ 150,646      $ 142,298 
                                              ------------------------------
                                              ------------------------------
Revenue - Engineered Systems                       $ 101,061      $  92,936 
Revenue - Service                                  $  39,597      $  39,225 
Revenue - Rental                                   $   9,988      $  10,137 
Operating income                                   $  12,667      $   6,834 

Segment revenues as a % of total revenues               42.3%          45.2%
Service revenues as a % of segment revenues             26.3%          27.6%
Operating income as a % of segment revenues              8.4%           4.8%
                                              ------------------------------

Canada and Northern U.S. revenues totaled $150.6 million in the first quarter of 2012 as compared to $142.3 million for the same period of 2011. The increase of $8.3 million was the result of higher Engineered Systems due to higher opening backlog in the first quarter of 2012 compared to the same period in 2011. The Montney and Horn River were very active resource basins throughout 2011 resulting in strong bookings in the latter half of the year. Service revenue was higher as a result of marginally higher parts sales during the first quarter of 2012. This was partially offset by lower Rental revenue resulting from lower pricing on the sale of rental units. Weak natural gas prices have resulted in dry gas production being curtailed by certain producers which could result in lower activity levels for our Service and Rental business in this region.

Operating income increased to $12.7 million in 2012 from $6.8 million in 2011. This $5.9 million increase was due to better gross margin performance, resulting from higher gross margins in opening backlog and higher realized margins as a result of better project execution and strong plant utilization. This was partially offset by higher SG&A expenses during the quarter.


SOUTHERN U.S. AND SOUTH AMERICA                                             

                                                Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
----------------------------------------------------------------------------
Segment revenue                                    $ 113,146      $  89,475 
Intersegment revenue                                    (306)          (136)
----------------------------------------------------------------------------
Revenue                                            $ 112,840      $  89,339 
                                              ------------------------------
                                              ------------------------------
Revenue - Engineered Systems                       $ 103,298      $  80,326 
Revenue - Service                                  $   9,542      $   9,013 
Operating income                                   $   9,769      $   8,202 

Segment revenues as a % of total revenues               31.7%          28.4%
Service revenues as a % of segment revenues              8.5%          10.1%
Operating income as a % of segment revenues              8.7%           9.2%
                                              ------------------------------

Southern U.S. and South America revenues totaled $112.8 million in the first quarter of 2012 as compared to $89.3 million in the first quarter of 2011. The increase of $23.5 million was the result of higher opening backlog in Engineered Systems for the first quarter of 2012, compared to the same period in 2011 and revenue recognition on projects that were previously deferred from 2011 into the first quarter of 2012. Service revenues were also higher in the first quarter of 2012, compared to the same period in 2011 resulting from increased activity levels in new branches that were opened to service equipment located in the Eagle Ford and Permian resource basins. The liquids rich resource basins such as the Eagle Ford, Woodford and Permian have remained active in this segment in the first quarter of 2012 which has resulted in strong backlog levels.

Operating income increased from $8.2 million in the first quarter of 2011 to $9.8 million in the first quarter of 2012, as a result of higher revenues, and higher gross margin, which was partially offset by higher SG&A compared to the same period in 2011.


INTERNATIONAL                                                               

                                                Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
----------------------------------------------------------------------------
Segment revenue                                    $  92,600      $  85,023 
Intersegment revenue                                    (355)        (2,151)
----------------------------------------------------------------------------
Revenue                                            $  92,245      $  82,872 
                                              ------------------------------
                                              ------------------------------
Revenue - Engineered Systems                       $  76,900      $  70,434 
Revenue - Service                                  $  14,403      $  11,454 
Revenue - Rental                                   $     942      $     984 
Operating (loss) income                            $  (1,265)     $     261 

Segment revenues as a % of total revenues               25.9%          26.3%
Service revenues as a % of segment revenues             15.6%          13.8%
Operating (loss) income as a % of segment                                   
 revenues                                              (1.4)%           0.3%
                                              ------------------------------

Continuing Operations:

International revenues totaled $92.2 million in the first quarter of 2012, compared to $82.9 million in the same period of 2011. The increase of $9.3 million was due to higher activity levels in Australia related to CSG projects and higher activity levels in P&P for gas processing projects in Africa. This was partially offset by lower revenue in MENA. Revenue in the first quarter of 2011 included $15.6 million resulting from a delayed project that was completed on more favorable terms than originally anticipated.

Operating loss for the first quarter of 2012 was $1.3 million, compared to operating income of $0.3 million in the first quarter of 2011. The operating loss was due to costs incurred on scope changes and potential warranty claims related to certain projects during the quarter. Consistent with IFRS guidelines, Enerflex has recognized these expenses with no corresponding revenue recorded until the likelihood of recovery of these costs can be ascertained. Enerflex has filed variation claims with respect to these projects, which could result in revenue and gross margin recognition in subsequent quarters if these claims are approved. In addition, operating income in the first quarter of 2011 included $9.5 million with respect to a delayed gas compression project that was completed in MENA on more favorable terms than originally anticipated.

Discontinued Operations:

Operating results for the International segment do not include the results for the discontinued operations of the EEA business, which was sold in the first quarter of 2011 for a gain of $1.4 million net of tax. During the third quarter of 2011, Enerflex announced its intention to exit the European Service and CHP operations via a sale, partial sale or closure of this business unit. As a result, this business unit has been reported as a discontinued operation since the third quarter of 2011 and has been excluded from the operating results of the International segment.

These two discontinued operations recorded a loss before tax totaling $0.8 million in the first quarter of 2012 compared to a gain of $0.1 million in the same period a year ago.

BOOKINGS AND BACKLOG

The Company records bookings and backlog when a firm commitment is received from customers for the Engineered Systems product line. Bookings represent new orders awarded to Enerflex during the period. Backlog represents unfulfilled orders at period end and is an indicator of future Engineered Systems revenue for the Company.


Bookings                                        Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
----------------------------------------------------------------------------
Canada and Northern U.S.                           $  88,600      $  58,999 
Southern U.S. and South America                      115,592        123,578 
International                                         18,546         61,141 
----------------------------------------------------------------------------
Total bookings                                     $ 222,738     $  243,718 
                                              ------------------------------

Backlog                                                      As at March 31,
($ Canadian thousands)                                  2012           2011
----------------------------------------------------------------------------
Canada and Northern U.S.                           $ 164,595      $ 103,213 
Southern U.S. and South America                      296,916        189,742 
International                                        466,073        379,142 
----------------------------------------------------------------------------
Total backlog                                      $ 927,584      $ 672,097 
                                              ------------------------------

Backlog at March 31, 2012 was $927.6 million compared to $672.1 million at March 31, 2011, representing a 38.0% increase over the prior year.

Backlog in Canada and Northern U.S. was $61.4 million higher in 2012 as a result of increased activity in unconventional resource basins such as the Montney and Horn River in 2011 and into the first quarter of 2012. The Southern U.S. and South America backlog was $107.2 million higher during 2012 as a result of increased activity in the liquids rich shale resources in the Eagle Ford, Marcellus, Permian and Woodford resource basins. The International backlog was $86.9 million higher in 2012, compared to the same period in 2011, as a result of increased activity in Australia related to CSG exploration and increased activity in MENA related to gas production for domestic consumption.


QUARTERLY SUMMARY                                                           

                                                 Earnings per  Earnings per 
                                            Net       share -       share - 
($ Canadian thousands)  Revenue(1)   earnings(1)    basic(1,2)  diluted(1,2)
March 31, 2012          $ 355,371     $  14,898     $    0.19     $    0.19 
December 31, 2011         383,802        17,719          0.22          0.22 
September 30, 2011        282,335        16,979          0.22          0.22 
June 30, 2011             246,491        12,209          0.16          0.16 
March 31, 2011            314,509         9,832          0.13          0.13 
December 31, 2010         347,616         8,319          0.11          0.11 
September 30, 2010        270,859         5,062          0.06          0.06 
June 30, 2010             244,502         3,686          0.05          0.05 

(1) Amounts presented are from continuing operations.                       
(2) Enerflex shares were issued pursuant to the Arrangement on June 1, 2011;
    as a result, per share amounts for comparative periods are based on     
    Toromont's common shares at the time of initial exchange.               

FINANCIAL POSITION                                                          

The following table outlines significant changes in the Consolidated        
Statement of Financial Position as at March 31, 2012 as compared to December
31, 2011:                                                                   

----------------------------------------------------------------------------
                               Increase                                     
($ Canadian millions)         (Decrease)  Explanation                       
----------------------------------------------------------------------------
Assets:                                                                     
----------------------------------------------------------------------------
Accounts receivable             (18.7)    The decrease in accounts          
                                          receivable is due to lower        
                                          revenues in the first quarter of  
                                          2012 and improved cash            
                                          collections.                      
----------------------------------------------------------------------------
Inventory                       (23.1)    The decrease is primarily related 
                                          to lower work in process and      
                                          direct material inventory,        
                                          partially offset by higher        
                                          distribution parts inventory.     
----------------------------------------------------------------------------
Property, plant and               7.5     The increase is primarily related 
 equipment                                to the expansion of our Houston   
                                          manufacturing facility and the    
                                          installation of a new Enterprise  
                                          Resource Planning ("ERP") system, 
                                          partially offset by depreciation  
                                          charges.                          
----------------------------------------------------------------------------
Rental equipment                 (5.0)    The decrease is primarily related 
                                          to depreciation charges and the   
                                          sale of equipment, partially      
                                          offset by rental asset additions  
                                          during the quarter.               
----------------------------------------------------------------------------
Intangible assets                (2.7)    The decrease is due to            
                                          amortization of intangible assets 
                                          related to the ESIF acquisition.  
----------------------------------------------------------------------------
Goodwill                         (2.2)    The decrease is primarily related 
                                          to a foreign exchange revaluation 
                                          of goodwill allocated to the      
                                          Southern U.S. and South America   
                                          and International segments.       
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Liabilities:                                                                
----------------------------------------------------------------------------
Accounts payable and accrued    (13.1)    The decrease is primarily related 
 liabilities                              to the payment of major equipment 
                                          purchases and year end incentive  
                                          bonuses that were accrued at      
                                          December 31, 2011.                
----------------------------------------------------------------------------
Provisions                        1.3     The increase is due to higher     
                                          warranty claims anticipated on    
                                          certain projects.                 
----------------------------------------------------------------------------
Deferred revenues                (38.7)   The decrease is related to lower  
                                          bookings in the first quarter of  
                                          2012 and revenue recognition      
                                          exceeding progress billings in the
                                          Canada and Northern U.S. and      
                                          International segment in the      
                                          quarter.                          
----------------------------------------------------------------------------
Long-term debt                   (3.1)    The decrease is due to the        
                                          repayment of borrowings on the    
                                          Company's credit facility.        
----------------------------------------------------------------------------

LIQUIDITY                                                                   

The Company's primary sources of liquidity and capital resources are:       

--  Cash generated from continuing operations; 
--  Bank financing and operating lines of credit; and 
--  Issuance and sale of debt and equity instruments. 

Statement of Cash Flows                                                     

                                                Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
Cash, beginning of period                          $  81,200      $  15,000 
Cash provided by (used in):                                                 
Operating activities                                  21,616         17,240 
Investing activities                                  (8,892)         2,167 
Financing activities                                  (5,493)        (5,523)
Exchange rate changes on foreign currency cash          (464)          (311)
----------------------------------------------------------------------------
Cash, end of period                                $  87,967      $  28,573 
                                                   -------------------------

Operating Activities

For the three months ended March 31, 2012, cash provided by operating activities was $21.6 million as compared to $17.2 million in the same period of 2011. The increase of $4.4 million was a result of improved profitability from continuing operations.

Investing Activities

Cash used in investing activities was $8.9 million for the three months ended March 31, 2012, as compared to cash generated of $2.2 million during the same period of 2011. Capital expenditures for the three months ended March 31, 2012 increased by $7.5 million compared to the same period in 2011, as a result of increased expenditures related to the expansion of the Company's Houston manufacturing facility and the ERP conversion. Proceeds on the sale of assets and non-core operations was $4.9 million lower in the first quarter of 2012 compared to the same period of the prior year. Enerflex sold its EEA business unit during the first quarter of 2011 for $3.4 million as it was not considered a core operation.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2012 was $5.5 million, which was comparable to the same period of 2011. Enerflex paid dividends of $4.6 million and repaid $3.3 million of debt during the first quarter of 2012.

The Company expects that continued cash flows from operations in 2012, together with cash and cash equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets.

RISK MANAGEMENT

In the normal course of business, the Company is exposed to financial and operating risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes.

Foreign Exchange Risk

Enerflex mitigates the impact of exchange rate fluctuations by matching expected future U.S. dollar denominated cash inflows with U.S. dollar liabilities, principally through the use of foreign exchange contracts, bank debt, accounts payable and by manufacturing U.S. dollar denominated contracts at plants located in the U.S. The Company utilizes U.S. based manufacturing plants, combined with foreign exchange forward contracts as its primary mitigation strategy to hedge any net foreign currency exposure. Forward contracts are entered into for the amount of the net foreign dollar exposure for a term matching the expected payment terms outlined in the sales contract.

The Company applies hedge accounting for foreign exchange forward contracts for firm commitments, which are designated as cash flow hedges. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income, net of taxes. The ineffective portion of fair value changes is recognized in net income. Amounts charged to accumulated other comprehensive income ("AOCI") are reclassified to the statement of earnings when the hedged transaction affects the income statement.

Outstanding forward contracts are marked-to-market at the end of each period with any gain or loss on the forward contract included in accumulated other comprehensive income until such time as the forward contract is settled, when it flows to income.

Enerflex does not hedge its exposure to investments in foreign subsidiaries. Exchange gains and losses on net investments in foreign subsidiaries are included in accumulated other comprehensive income. The AOCI at the end of 2011 of $7.9 million declined to $2.9 million at March 31, 2012, as a result of changes in the value of the Canadian dollar against the Euro, Australian dollar and U.S. dollar. The Canadian dollar appreciated by 2% against the U.S. dollar in the first quarter of 2012 versus an appreciation of 2% against the U.S. dollar during the same period of 2011. The Australian dollar appreciated by 1% against the Canadian dollar during the first quarter of 2012, consistent with a 1% appreciation in the same period of 2011. The Euro depreciated against the Canadian dollar by 1% during the first quarter of 2012, as compared to a 3% depreciation in the same period of 2011.

The types of foreign exchange risk and the Company's related risk management strategies are as follows:

Transaction Exposure

The Canadian operations source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate.

The Company also sells compression packages in foreign currencies, primarily the U.S. dollar and the Australian dollar and enters into foreign currency contracts to reduce exchange rate risks.

Most of Enerflex's international orders are manufactured in the U.S. operations if the contract is denominated in U.S. dollars. This minimizes the Company's foreign currency exposure on these projects.

The Company identifies and hedges all significant transactional currency risks.

Translation Exposure

The Company's earnings from, and net investment in, foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the U.S. dollar and Australian dollar.

Assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the statement of financial position dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the ownership interest in the foreign operations.

Earnings from foreign operations are translated into Canadian dollars each period at average exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net earnings. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company.

Interest rate risk

The Company's liabilities include long-term debt that is subject to fluctuations in interest rates. The Company's Notes outstanding at March 31, 2012 include interest rates that are fixed and therefore will not be impacted by fluctuations in market interest rates. The Company's Bank Facilities however, are subject to changes in market interest rates. For each 1.0% change in the rate of interest on the Bank Facilities, the change in interest expense for the three months ended March 31, 2012 would be approximately $0.3 million. All interest charges are recorded in the statement of earnings in finance costs.

Credit risk

Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, and derivative financial instruments. The carrying amount of assets included on the balance sheet represents the maximum credit exposure.

Cash equivalents consist mainly of short-term investments, such as money market deposits with maturity dates of 90 days or less. The Company has deposited the cash equivalents with highly rated financial institutions, from which management believes the risk of loss to be remote.

The Company has accounts receivable from clients engaged in various industries including natural gas producers, natural gas transportation, agricultural, chemical and petrochemical processing and the generation and sale of electricity. These specific industries may be affected by economic factors that may impact accounts receivable. Enerflex has entered into a number of significant projects through to 2013. One customer accounted for 12.4% of the Company's total revenue for the three months ended March 31, 2012.

The credit risk associated with net investment in sales-type lease arises from the possibility that the counterparty may default on their obligations. In order to minimize this risk, the Company enters into sales-type lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as, and if, they arise.

The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions.

Liquidity risk

Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. Accounts payable are primarily due within 90 days and will be satisfied from current working capital.

CAPITAL RESOURCES

On May 1, 2012, Enerflex had 77,588,681 shares outstanding. Enerflex has not established a formal dividend policy and the Board of Directors anticipates setting the quarterly dividends based on the availability of cash flow and anticipated market conditions, taking into consideration business opportunities and the need for growth capital. In the first quarter of 2012, the Company declared a dividend of $0.06 per share.

The Company has a series of credit facilities with a syndicate of banks ("Bank Facilities") totaling $325.0 million. The Bank Facilities consist of a committed 4-year $270.0 million revolving credit facility ("the Revolver"), a committed 4-year $10.0 million operating facility ("the Operator"), a committed 4-year $20.0 million Australian operating facility ("the Australian Operator") and a committed 4-year $25.0 million bi-lateral letter of credit facility ("the LC Bi-Lateral"). The Revolver, Operator, Australian Operator and LC Bi-Lateral are collectively referred to as the Bank Facilities. The Bank Facilities were funded on June 1, 2011.

The Bank Facilities have a maturity date of June 1, 2015 ("Maturity Date"), but may be extended annually on or before the anniversary date with the consent of the lenders. In addition, the Bank Facilities may be increased by $50.0 million at the request of the Company, subject to the lenders' consent. There is no required or scheduled repayment of principal until the Maturity Date of the Bank Facilities.

Drawings on the Bank Facilities are available by way of Prime Rate loans ("Prime"), U.S. Base Rate loans, London Interbank Rate ("LIBOR") loans, and Bankers' Acceptance ("BA") notes. The Company may also draw on the Bank Facilities through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Bank Facilities.

Pursuant to the terms and conditions of the Bank Facilities, a margin is applied to drawings on the Bank Facilities in addition to the quoted interest rate. The margin is established in basis points and is based on consolidated net debt to EBITDA ratio. The margin is adjusted effective the first day of the third month following the end of each fiscal quarter based on the above ratio.

The Company also has a committed facility with one of the lenders in the Bank Facilities for the issuance of letters of credit ("the Bi-Lateral"). The amount available under the Bi-Lateral is $50.0 million and has a maturity date of June 1, 2013, which may be extended annually with the consent of the lender. Drawings on the Bi-Lateral are by way of letters of credit.

In addition, the Company has a committed facility with a U.S. lender ("U.S. Facility") in the amount of $20.0 million U.S. dollars. Drawings on the U.S. Facility are by way of LIBOR loans, U.S. Base Rate loans and letters of credit. The maturity date of the U.S. Facility is July 1, 2014 and may be extended annually at the request of the Company, subject to the lenders consent. There are no required or scheduled repayments of principal until the maturity date of the U.S. Facility.

The Company completed the restructuring of its debt with the closing of a private placement for $90.5 million in Unsecured Private Placement Notes ("Notes") during the second quarter of 2011. The Notes mature on two separate dates with $50.5 million, with a coupon of 4.841%, maturing on June 22, 2016 and $40.0 million, with a coupon of 6.011%, maturing on June 22, 2021.

The Bank Facilities, the Bi-Lateral and the U.S. Facility are unsecured and rank pari passu with the Notes. The Company is required to maintain certain covenants on the Bank Facilities, the Bi-Lateral, the U.S. Facility and the Notes. As at March 31, 2012, the Company was in compliance with these covenants.

At March 31, 2012, the Company had $28.1 million drawn against the Bank Facilities.


CONTRACTUAL OBLIGATIONS, COMMITTED CAPITAL INVESTMENT AND OFF-BALANCE SHEET 
ARRANGEMENTS                                                                

The Company's contractual obligations are contained in the following table. 

CONTRACTUAL OBLIGATIONS                                                     

                                    Payments due by period               
($ Canadian thousands)        2012 2013-2014 2015-2016 Thereafter     Total 
----------------------------------------------------------------------------
Leases                    $  9,377  $ 15,692  $  9,288  $   7,450  $ 41,807 
Purchase obligations        12,851     1,312         -          -    14,163 
----------------------------------------------------------------------------
Total                     $ 22,228  $ 17,004  $  9,288  $   7,450  $ 55,970 
                         ---------------------------------------------------
                         ---------------------------------------------------

The majority of the Company's lease commitments are operating leases for Service vehicles.

The majority of the Company's purchase commitments relate to major components for the Engineered Systems product line and to long-term information technology and communications contracts entered into in order to reduce the overall cost of services received.

The Company does not believe that it has off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, results of operations, liquidity or capital expenditures.

RELATED PARTIES

Enerflex transacts with certain related parties as a normal course of business. Related parties include Toromont, which owned 100% of Enerflex until June 1, 2011, and Total Production Services Inc. ("Total"), which was an influenced investee by virtue of the Company's 40% investment in Total. As described in the interim consolidated financial statements the Company has two joint ventures, Presson-Descon International (Private) Limited ("PDIL") and Enerflex-ES.

All transactions occurring with related parties were in the normal course of business under the same terms and conditions as transactions with unrelated companies. A summary of the financial statement impacts of all transactions with all related parties are as follows:


                                                Three months ended March 31,
($ Canadian thousands)                                  2012           2011 
----------------------------------------------------------------------------
Management fees                                    $       -      $   3,767 
Purchases                                                118            223 
Interest expense                                           -          1,168 
----------------------------------------------------------------------------

                                                               December 31, 
($ Canadian thousands)                         March 31, 2012          2011 
Accounts receivable                                 $      44     $      44 
----------------------------------------------------------------------------

The above noted management fee and interest expense was paid to Toromont during 2011; there are no related party transactions with or payables due to Toromont as at March 31, 2012.

Purchases identified above for 2012 and 2011 were from Total. The accounts receivable balances outstanding at March 31, 2012 and December 31, 2011 were from the joint venture.

All related party transactions are settled in cash.

ACCOUNTING POLICIES

(a) Performance Share Units

In the first quarter of 2012, the Company approved a new performance share unit ("PSU") plan. PSUs may be granted at the discretion of the Human Resources and Compensation Committee ("HRCC") to officers of the Company or its related entities. A PSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested PSUs multiplied by the weighted average price per share at which the shares of the Company have traded on the TSX during the last 5 trading days immediately preceding the valuation date. Vesting is based on the achievement of performance measures and objectives specified by the HRCC. The HRCC assesses performance of the officer to determine the vesting percentage, which can range from 0%-200%. On the 14th day after the determination of the vesting percentage, the holder will be paid for the vested PSUs either in cash or in shares of the Company acquired by the Company on the open market on behalf of the holder, at the discretion of the Company.

PSU recipients are entitled to additional PSUs over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends that would have been received had the units then subject to vesting been actual shares in the Company, following each dividend paid to Shareholders of the Company. The additional PSUs are calculated with each dividend declared by the Company.

(b) Restricted Share Units

In the first quarter of 2012, the Company approved a new restricted share unit ("RSU") plan. RSUs may be granted at the discretion of the HRCC to any officers or other key employees of the Company or its related entities. A RSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested RSUs multiplied by the weighted average price per share at which the shares of the Company have traded on the TSX during the last 5 trading days immediately preceding the vesting date. RSUs vest at a rate of one-third on the 1st, 2nd and 3rd anniversaries of the award date. Within 30 days of the vesting date, the holder will be paid for the vested RSUs either in cash or in shares of the Company acquired by the Company on the open market on behalf of the holder, at the discretion of the Company.

RSU recipients are entitled to additional RSUs over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends that would have been received had the units then subject to vesting been actual shares in the Company, following each dividend paid to Shareholders of the Company. The additional RSUs are calculated with each dividend declared by the Company.

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of the Company's interim consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of revenues and expenses during the reporting period, as well as, assets and liabilities at the date of the interim consolidated financial statements. On an ongoing basis, management reviews its estimates, particularly those related to revenue recognition for long-term contracts, provisions for warranty, depreciation of property, plant and equipment and rental equipment, amortization of finite life intangible assets, allowances for doubtful accounts, impairment of non-financial assets, impairment of goodwill, income taxes, assets held for sale and discontinued operations and the fair value of financial instruments. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates. 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.

FUTURE ACCOUNTING PRONOUNCEMENTS

The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company:

As of January 1, 2013, the Company will be required to adopt IFRS 10 Consolidated Financial Statements; IFRS 11 Joint Arrangements; IFRS 12 Disclosure of Interest in Other Entities; IFRS 13 Fair Value Measurement; and IAS 1 Presentation of Items of Other Comprehensive Income.

IFRS 10 Consolidated Financial Statements replaces the consolidation requirements in SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess. At this time, the Company does not expect that its previous assessments of control will change and therefore no change is expected upon adoption of this standard.

IFRS 11 Joint Arrangements replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 uses some of the terms that were originally used by IAS 31, but with different meanings. This standard addresses two forms of joint arrangements (joint operations and joint ventures) where there is joint control. The Company is assessing its existing joint arrangements, which are currently proportionately consolidated, to determine if there will be a change in the accounting for these interests.

IFRS 12 Disclosure of Interest in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard includes disclosure about significant judgments and assumptions made in determining whether the entity controls, jointly controls or has significant influence over other entities. The Company's disclosures will be updated as required upon adoption of this standard.

IFRS 13 Fair Value Measurement provides new guidance on how to measure fair value and aims to enhance fair value disclosures. The Company would maximize the use of quoted prices for the same or similar assets in active markets in determining fair value. For non-financial assets where there is no active market, the Company must consider the best use that another market participant would have for the asset even if that is not the Company's current use for the asset. The effect of any changes for the Company is limited to fair value disclosures for financial instruments, the fair value of assets held for sale and in asset impairment calculations. The Company's disclosures will be updated as required upon adoption of this standard.

IAS 1 Presentation of Items of Other Comprehensive Income has been amended to require entities to split items of other comprehensive income ("OCI") between those that are reclassed to income and those that are not. The Company's consolidated statement of OCI will be updated as required upon adoption of this Standard.

There are no other standards and interpretations that have been issued, but are not yet effective, that the Company anticipates will have a material effect on the interim consolidated financial statements once adopted.

RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS

Management is responsible for the information disclosed in this MD&A and the accompanying consolidated financial statements, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the accompanying consolidated financial statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR").

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING

The Chief Executive Officer and the Chief Financial Officer, together with other members of management, have designed the Company's DC&P to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to them and by others within those entities.

Additionally, they have designed ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with IFRS.

There have been no significant changes in the design of the Company's internal controls over financial reporting during the three month period ended March 31, 2012 that would materially affect, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

While the Officers of the Company have designed the Company's disclosure controls and procedures and internal controls over financial reporting, they expect that these controls and procedures may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.

SUBSEQUENT EVENTS

Subsequent to March 31, 2012, the Company declared a dividend of $0.06 per share, payable on July 5, 2012, to shareholders of record on June 19, 2012.

Also subsequent to March 31, 2012, Gas Drive, a limited partnership of Enerflex, has taken steps to reduce operating costs as a result of weak natural gas prices and the corresponding decline in dry gas production. This has resulted in a reduction of its administrative workforce at certain Canadian branches, which is expected to produce annualized savings of approximately $4.0 million. Enerflex will record a reorganization expense of approximately $1.5 million during the second quarter of 2012. The Company will continue to focus on the opportunities for growth and position itself strategically to support its customers in all Gas Drive service territories.

OUTLOOK FOR MARKETS

Enerflex entered 2012 with significantly stronger backlog than the prior year. Bookings during the twelve months of 2011, including the large International contract in the Sultanate of Oman received during the fourth quarter of 2011, resulted in backlog for Engineered Systems of approximately $1.0 billion to start 2012.

The Canada and Northern U.S. region benefited from improved bookings and backlog during 2011 and in the first quarter of 2012, as a result of increased activity in Canada's unconventional gas basins in the Montney and the Horn River basins. Natural gas prices have fallen below $2.00/mcf during the first quarter of 2012 and North America has experienced a very mild winter, which has increased storage levels well above the five year average. This has created uncertainty for producers and capital spending directed at dry gas production has been reduced for natural gas exploration in this region during 2012. In addition, producers have announced that they will curtail dry gas production as a result of weak natural gas prices. This could negatively impact Enerflex's Engineered Systems, Service and Rentals business during the current year.

The Southern U.S. and South America region also experienced improved bookings and backlog during the twelve months of 2011. Bookings for the first quarter of 2012 were slightly lower than the same period a year ago. Strong activity in liquids rich U.S. gas basins has driven new orders for compression and processing equipment for this region. These liquids rich resource basins can achieve superior returns for producers despite low natural gas prices due to the higher value that could be realized for the natural gas liquids ("NGL"). In addition, the requirement for gas compression and gas processing equipment for liquids rich resource basins like Eagle Ford, Woodford and Permian has increased backlog in this region. Enerflex's U.S. business is heavily weighted to activity in liquids rich resource basins and as long as the frac spread (the differential between NGL prices and natural gas prices) remains high, the Company expects activity levels to remain strong in this region. It is possible that activity levels in dry gas resource basins like Haynesville and Barnett could be negatively impacted by weak natural gas prices in 2012.

The International region continues to hold considerable long-term opportunity has benefited from strong bookings and backlog during the twelve months of 2011. Activity in these regions is being driven by increased activity in Australia's natural gas industry. There are numerous Liquefied Natural Gas projects in early stages of development with the potential for additional phases to be developed in the future. In the Middle East and North Africa, Enerflex has taken a targeted approach to mitigate exposure to political unrest. The Company's primary areas of focus have been Bahrain, Kuwait, Egypt, Oman and the United Arab Emirates. Enerflex has achieved commercial operations of some key projects in the region during 2011 and was awarded a $228.0 million U.S. dollar gas processing plant in the region. Domestic demand for gas in this region remains strong and the Company is well positioned to compete for future projects in Oman and Bahrain for compression, processing equipment and after-market service support. Project tendering, bid evaluation and contract award have longer lead times in the International region due to projects being larger in scale and scope.



INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (unaudited)           
(All amounts in thousands of Canadian dollars)                              

As at                                                          December 31, 
                                              March 31, 2012           2011 
----------------------------------------------------------------------------
Assets                                                                      
Current assets                                                              
  Cash and cash equivalents                      $    87,967    $    81,200 
  Accounts receivable (Note 7)                       235,746        254,482 
  Inventories (Note 8)                               217,295        240,419 
  Income tax receivable                                  107          2,800 
  Derivative financial instruments                     1,903          2,136 
  Other current assets                                14,060         15,220 
----------------------------------------------------------------------------
Total current assets                                 557,078        596,257 
Property, plant and equipment (Note 9)               130,584        123,130 
Rental equipment (Note 9)                             96,938        101,908 
Deferred tax assets                                   40,539         39,581 
Other assets (Note 10)                                 6,777          8,167 
Intangible assets (Note 11)                           28,825         31,528 
Goodwill                                             457,763        459,935 
----------------------------------------------------------------------------
                                                   1,318,504      1,360,506 
----------------------------------------------------------------------------
Assets held for sale (Note 5)                          9,661         10,054 
----------------------------------------------------------------------------
Total assets                                     $ 1,328,165    $ 1,370,560 
                                              ------------------------------
                                              ------------------------------

Liabilities and Shareholders' Equity                                        
Current liabilities                                                         
  Accounts payable and accrued liabilities                                  
   (Note 12)                                     $   140,926    $   153,980 
  Provisions                                          14,240         12,953 
  Income taxes payable                                 6,257          2,410 
  Deferred revenues                                  196,069        234,756 
  Derivative financial instruments                       153            455 
----------------------------------------------------------------------------
Total current liabilities                            357,645        404,554 
Long-term debt (Note 13)                             115,903        118,963 
Other liabilities                                        418            590 
----------------------------------------------------------------------------
                                                     473,966        524,107 
----------------------------------------------------------------------------
Liabilities related to assets held for sale                                 
 (Note 5)                                             10,564         10,191 
----------------------------------------------------------------------------
Total liabilities                                $   484,530    $   534,298 
                                              ------------------------------
                                              ------------------------------
Guarantees, commitments and contingencies                                   
 (Note 14)                                                                  

Shareholders' Equity                                                        
  Share capital (Note 16)                            211,298        207,409 
  Contributed surplus (Note 17)                      655,377        656,536 
  Retained deficit                                  (26,050)       (35,540) 
  Accumulated other comprehensive income               2,927          7,857 
----------------------------------------------------------------------------
Total shareholders' equity before non-                                      
 controlling interest                                843,552        836,262 
----------------------------------------------------------------------------
Non-controlling interest                                  83              - 
----------------------------------------------------------------------------
Total shareholders' equity and non-controlling                              
 interest                                            843,635        836,262 
----------------------------------------------------------------------------
Total liabilities and shareholders' equity       $ 1,328,165    $ 1,370,560 
                                              ------------------------------
                                              ------------------------------

See accompanying Notes to the Interim Consolidated Financial Statements.    

INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)                     
(All amounts in thousands of Canadian dollars)                              
Three Months Ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Revenues                                         $   355,731    $   314,509 
Cost of goods sold                                   293,414        259,132 
----------------------------------------------------------------------------
Gross margin                                          62,317         55,377 
Selling and administrative expenses                   41,146         40,080 
----------------------------------------------------------------------------
Operating income                                      21,171         15,297 
Gain on disposal of property, plant and                                     
 equipment                                                 -           (742)
Equity earnings from associates                         (427)          (201)
----------------------------------------------------------------------------
Earnings before finance costs and income taxes        21,598         16,240 
Finance costs                                          1,732          2,620 
Finance income                                          (355)          (283)
----------------------------------------------------------------------------
Earnings before income taxes                          20,221         13,903 
Income taxes (Note 15)                                 5,323          4,071 
----------------------------------------------------------------------------
Net earnings from continuing operations          $    14,898    $     9,832 
Gain on sale of discontinued operations (Note                               
 6)                                                        -          1,430 
Loss from discontinued operations (Note 6)              (754)        (1,376)
----------------------------------------------------------------------------
Net earnings                                     $    14,144    $     9,886 
                                              ------------------------------
                                              ------------------------------


Net earnings attributable to:                                               
Controlling interest                             $    14,144    $     9,881 
Non-controlling interest                         $         -    $         5 

Earnings per share - basic (Note 19)                                        
Continuing operations                            $      0.19    $      0.13 
Discontinued operations                          $     (0.01)   $      0.00 

Earnings per share - diluted (Note 19)                                      
Continuing operations                            $      0.19    $      0.13 
Discontinued operations                          $     (0.01)   $      0.00 

Weighted average number of shares - basic         77,488,497     77,162,569 
Weighted average number of shares - diluted       77,701,369     77,492,954 

See accompanying Notes to the Interim Consolidated Financial Statements.    

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)         
(All amounts in thousands of Canadian dollars)                              
Three Months Ended March 31,                            2012           2011 
----------------------------------------------------------------------------

Net earnings                                       $  14,144      $   9,886 

Other comprehensive income (loss):                                          
  Change in fair value of derivatives                                       
   designated as cash flow hedges net of                                    
   income tax expense (2012:                                     
   $126; 2011: $229)                                     427            589 
  (Loss) gain on derivatives designated as                                  
   cash flow hedges transferred to net income                               
   in the current year, net of income tax                                   
   (recovery) expense (2012: ($14); 2011: $33)           (44)            84 
  Unrealized loss on translation of financial                               
   statements of foreign operations                   (5,313)        (3,153)
----------------------------------------------------------------------------
Other comprehensive loss                           $  (4,930)     $  (2,480)
----------------------------------------------------------------------------
Total comprehensive income                         $   9,214      $   7,406 
                                              ------------------------------
                                              ------------------------------

See accompanying Notes to the Interim Consolidated Financial Statements.    

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)                   
(All amounts in thousands of Canadian dollars)                              
Three Months Ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Operating Activities                                                        
Net earnings                                       $  14,144      $   9,886 
Items not requiring cash and cash equivalents:                              
  Depreciation and amortization                        9,789         10,879 
  Equity earnings from associates                       (427)          (201)
  Deferred income taxes                               (1,316)          (540)
  Stock option expense (Note 18)                         331              - 
(Gain) loss on sale of:                                                     
  Discontinued operations                                  -         (2,471)
  Property, plant and equipment                           40           (742)
----------------------------------------------------------------------------
                                                      22,561         16,811 
Net change in non-cash working capital and                                  
 other                                                  (945)           429 
----------------------------------------------------------------------------
Cash provided by operating activities              $  21,616      $  17,240 
----------------------------------------------------------------------------
Investing Activities                                                        
Additions to:                                                               
  Rental equipment (Note 9)                        $  (2,345)     $  (4,012)
  Property, plant and equipment (Note 9)             (11,534)        (2,396)
Proceeds on disposal of:                                                    
  Rental equipment                                     3,038          1,975 
  Property, plant and equipment                           48          2,630 
Disposal of discontinued operations, net of                                 
 cash (Note 6)                                             -          3,389 
Change in other assets                                 1,818            581 
----------------------------------------------------------------------------
                                                      (8,975)         2,167 
Net change in non-cash working capital and                                  
 other                                                    83              - 
----------------------------------------------------------------------------
Cash (used in) provided by investing                                        
 activities                                        $  (8,892)     $   2,167 
----------------------------------------------------------------------------
Financing Activities                                                        
Repayment of note payable                          $       -      $  (8,320)
Repayment of long-term debt                           (3,254)             - 
Dividends                                             (4,638)             - 
Stock option exercises                                 2,399              - 
Equity from parent                                         -          2,797 
----------------------------------------------------------------------------
Cash used in financing activities                  $  (5,493)     $  (5,523)
----------------------------------------------------------------------------
Effect of exchange rate changes on cash and                                 
 cash equivalents denominated in foreign                                    
 currencies                                        $    (464)     $    (311)
Increase in cash and cash equivalents                  6,767         13,573 
Cash and cash equivalents, beginning of period        81,200         15,000 
----------------------------------------------------------------------------
Cash and cash equivalents, end of period           $  87,967      $  28,573 
                                              ------------------------------
                                              ------------------------------

Supplemental cash flow information (Note 22).                               
See accompanying Notes to the Interim Consolidated Financial Statements.    


INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)            
(All amounts in thousands of Canadian dollars)                              
                                                                    Foreign 
                                                                   currency 
                            Net     Share Contributed  Retained translation 
                     investment   capital     surplus   deficit adjustments 
----------------------------------------------------------------------------

At December 31, 2010  $ 849,977  $      -  $        -  $      -  $  (10,901)
Net earnings              9,881         -           -         -           - 
Other comprehensive                                                         
 (loss) income                -         -           -         -      (3,153)
Owner's                                                                     
 investment/dividends     2,800         -           -         -           - 
----------------------------------------------------------------------------
At March 31, 2011     $ 862,658  $      -  $        -  $      -  $  (14,054)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


At December 31, 2011  $       -  $207,409  $  656,536  $(35,540) $    6,881 
Net earnings                  -         -           -    14,144           - 
Non-controlling                                                             
 Interest                     -         -           -         -           - 
Other comprehensive                                                         
 (loss) income                -         -           -         -      (5,313)
Effect of stock                                                             
 option plans                 -     3,889      (1,159)        -           - 
Dividends                     -         -           -    (4,654)          - 
----------------------------------------------------------------------------
At March 31, 2012     $       -  $211,298  $  655,377  $(26,050) $    1,568 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                            Total                           
                                      accumulated                           
                                            other          Non-             
                           Hedging  comprehensive   controlling             
                           reserve  (loss) income      interest       Total 
----------------------------------------------------------------------------

At December 31, 2010      $     56  $     (10,845) $        396  $  839,528 
Net earnings                     -              -             5       9,886 
Other comprehensive                                                         
 (loss) income                 673         (2,480)            -      (2,480)
Owner's                                                                     
 investment/dividends            -              -             -       2,800 
----------------------------------------------------------------------------
At March 31, 2011         $    729  $     (13,325) $        401  $  849,734 
----------------------------------------------------------------------------
----------------------------------------------------------------------------


At December 31, 2011      $    976  $       7,857  $          -  $  836,262 
Net earnings                     -              -             -      14,144 
Non-Controlling                                                             
 Interest                        -              -            83          83 
Other comprehensive                                                         
 (loss) income                 383         (4,930)            -      (4,930)
Effect of stock                                                             
 option plans                    -              -             -       2,730 
Dividends                        -              -             -      (4,654)
----------------------------------------------------------------------------
At March 31, 2012         $  1,359  $       2,927  $         83  $  843,635 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying Notes to the Interim Consolidated Financial Statements.

Notes to the Interim Consolidated Financial Statements (unaudited)

(Unaudited) (All amounts in thousands of Canadian dollars, except per share amounts or as otherwise noted)

Note 1. Nature and Description of the Company

Enerflex Ltd. ("Enerflex" or "the Company") was formed subsequent to the acquisition of Enerflex Systems Income Fund ("ESIF") by Toromont Industries Ltd. ("Toromont") and subsequent integration of Enerflex's products and services with Toromont's existing Natural Gas Compression and Processing business.

On May 16, 2011 Toromont Shareholders approved the Plan of Arrangement ("the Arrangement") that established Enerflex as a stand-alone publicly traded company listed on the Toronto Stock Exchange ("TSX"). In connection with the Arrangement, Toromont common shareholders received one share of Enerflex for each common share of Toromont, creating two independent public companies - Toromont Industries Ltd. and Enerflex Ltd.

Enerflex began independent operations on June 1, 2011 pursuant to the Arrangement with Toromont. Enerflex's shares began trading on the TSX on June 3, 2011 under the symbol "EFX".

In the second quarter of 2011, Enerflex entered into a transitional services agreement (the "Agreement") pursuant to which Toromont provided consulting services and other assistance with respect to information technology of Enerflex which, from time to time, were reasonably requested by Enerflex in order to assist in its transition to a public company, independent from Toromont. Unless terminated earlier, the Agreement will expire on June 1, 2012. The Agreement reflects terms negotiated in anticipation of each company being a stand-alone public company, each with independent directors and management teams.

Accordingly, until the completion of the Arrangement, Toromont and Enerflex were considered related parties due to the parent - subsidiary relationship that existed. Subsequent to June 1, 2011, Toromont was no longer considered a related party.

Headquartered in Calgary, the registered office is located at 904, 1331 Macleod Trail SE, Calgary, Canada. Enerflex has approximately 3,100 employees worldwide. Enerflex, its subsidiaries, affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates ("UAE"), Oman, Egypt, Bahrain and Indonesia.

Note 2. Basis of Presentation and Measurement

(a) Statement of Compliance

These interim consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting ("IAS 34") using accounting policies consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). Certain prior year amounts have been reclassified to conform with the current period's presentation.

(b) Basis of Presentation and Measurement

These interim consolidated financial statements for the three months ended March 31, 2012 and 2011 were prepared in accordance with IAS 34 and accordingly, should be read together with the annual consolidated financial statements for the year ended December 31, 2011.

The historical financial statements for the three months ended March 31, 2011 have been derived from the accounting system of Toromont using the historical results of operations and historical bases of assets and liabilities of the business transferred to Enerflex on a carve-out accounting basis.

As the Company operated as a subsidiary of Toromont up to May 31, 2011 and was a stand-alone entity effective June 1, 2011, certain historical financial information includes an allocation of selected Toromont corporate expenses up to the date of the Arrangement.

The carve-out operating results of Enerflex were specifically identified based on Toromont's divisional organization. Certain other expenses presented in the interim consolidated financial statements represent allocations and estimates of services incurred by Toromont on behalf of Enerflex.

These interim consolidated financial statements are presented in Canadian dollars rounded to the nearest thousand and are prepared on a going concern basis under the historical cost convention with certain financial assets and financial liabilities at fair value. There have been no significant changes in accounting policies to those described in the annual consolidated financial statements for the year ended December 31, 2011. Standards and guidelines issued, but not yet effective, for the current accounting period are described in Note 4.

These interim consolidated financial statements were authorized for issue by the Board of Directors on May 10, 2012.

(c) Basis of Consolidation

These interim consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, and continue to be consolidated until the date that control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, income and expenses, and unrealized gains and losses resulting from intra-group transactions are eliminated in full.

Note 3. Summary of Significant Accounting Policies

(a) Performance Share Units

In the first quarter of 2012, the Company approved a new performance share unit ("PSU") plan. PSUs may be granted at the discretion of the Human Resources and Compensation Committee ("HRCC") to officers of the Company or its related entities. A PSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested PSUs multiplied by the weighted average price per share at which the shares of the Company have traded on the TSX during the last 5 trading days immediately preceding the valuation date. Vesting is based on the achievement of performance measures and objectives specified by the HRCC. The HRCC assesses performance of the officer to determine the vesting percentage, which can range from 0%-200%. On the 14th day after the determination of the vesting percentage, the holder will be paid for the vested PSUs either in cash or in shares of the Company acquired by the Company on the open market on behalf of the holder, at the discretion of the Company.

PSU recipients are entitled to additional PSUs over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends that would have been received had the units then subject to vesting been actual shares in the Company, following each dividend paid to Shareholders of the Company. The additional PSUs are calculated with each dividend declared by the Company.

(b) Restricted Share Units

In the first quarter of 2012, the Company approved a new restricted share unit ("RSU") plan. RSUs may be granted at the discretion of the HRCC to any officers or other key employees of the Company or its related entities. A RSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested RSUs multiplied by the weighted average price per share at which the shares of the Company have traded on the TSX during the last 5 trading days immediately preceding the vesting date. RSUs vest at a rate of one-third on the 1st, 2nd and 3rd anniversaries of the award date. Within 30 days of the vesting date, the holder will be paid for the vested RSUs either in cash or in shares of the Company acquired by the Company on the open market on behalf of the holder, at the discretion of the Company.

RSU recipients are entitled to additional RSUs over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends that would have been received had the units then subject to vesting been actual shares in the Company, following each dividend paid to Shareholders of the Company. The additional RSUs are calculated with each dividend declared by the Company.

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of the Company's interim consolidated financial statements in accordance with IAS 34 requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of revenues and expenses during the reporting period, as well as, assets and liabilities at the date of the interim consolidated financial statements. On an ongoing basis, management reviews its estimates, particularly those related to revenue recognition for long-term contracts, provisions for warranty, depreciation of property, plant and equipment and rental equipment, amortization of finite life intangible assets, allowances for doubtful accounts, impairment of non-financial assets, impairment of goodwill, income taxes, assets held for sale and discontinued operations. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates. 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.

Note 4. Changes in Accounting Policies

Future Accounting Changes

The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company:

As of January 1, 2013, the Company will be required to adopt IFRS 10 Consolidated Financial Statements; IFRS 11 Joint Arrangements; IFRS 12 Disclosure of Interest in Other Entities; IFRS 13 Fair Value Measurement; and IAS 1 Presentation of Items of Other Comprehensive Income.

IFRS 10 Consolidated Financial Statements replaces the consolidation requirements in SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess. At this time, the Company does not expect that its previous assessments of control will change and therefore no change is expected upon adoption of this standard.

IFRS 11 Joint Arrangements replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-Controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 uses some of the terms that were originally used by IAS 31, but with different meanings. This standard addresses two forms of joint arrangements (joint operations and joint ventures) where there is joint control. The Company is assessing its existing joint arrangements, which are currently proportionately consolidated, to determine if there will be a change in the accounting for these interests.

IFRS 12 Disclosure of Interest in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard includes disclosure about significant judgments and assumptions made in determining whether the entity controls, jointly controls, or has significant influence over other entities. The Company's disclosures will be updated as required upon adoption of this standard.

IFRS 13 Fair Value Measurement provides new guidance on how to measure fair value and aims to enhance fair value disclosures. The Company would maximize the use of quoted prices for the same or similar assets in active markets in determining fair value. For non-financial assets where there is no active market, the Company must consider the best use that another market participant would have for the asset even if that is not the Company's current use for the asset. The effect of any changes for the Company is limited to fair value disclosures for financial instruments, the fair value of assets held for sale and in asset impairment calculations. The Company's disclosures will be updated as required upon adoption of this standard.

IAS 1 Presentation of Items of Other Comprehensive Income has been amended to require entities to split items of other comprehensive income ("OCI") between those that are reclassed to income and those that are not. The Company's consolidated statement of OCI will be updated as required upon adoption of this standard.

There are no other standards and interpretations that have been issued, but are not yet effective, that the Company anticipates will have a material effect on the interim consolidated financial statements once adopted.

Note 5. Assets and Associated Liabilities Held for Sale

During 2011, the Company reclassified its European operations to assets and associated liabilities held for sale as the Combined Heat and Power ("CHP") and Service business within the European region represents a specific line of business that management intends to exit. Accordingly, the assets and liabilities have been reflected in assets and associated liabilities held for sale on the interim consolidated statement of financial position.

Enerflex will continue to sell compression processing equipment in Europe through its sales office in the United Kingdom.

The following table represents the assets and associated liabilities reclassified to held for sale:


                                                               December 31, 
                                              March 31, 2012           2011 
----------------------------------------------------------------------------
Assets                                                                      
Accounts receivable                                $   7,055      $   5,474 
Inventories                                            1,727          3,621 
Other current assets                                     723            901 
Property, plant and equipment                            156             58 
                                              ------------------------------
Assets held for sale ("AHFS")                      $   9,661      $  10,054 
                                              ------------------------------
                                              ------------------------------
Liabilities                                                                 
Accounts payable, accrued liabilities and                                   
 provisions                                        $   9,519      $   9,428 
Deferred revenues                                      1,045            763 
                                              ------------------------------
Liabilities associated with AHFS                   $  10,564      $  10,191 
                                              ------------------------------
                                              ------------------------------

The carrying value of the AHFS was established at the lower of the carrying value and the estimated fair value less costs to sell.

Note 6. Discontinued Operations

As disclosed in Note 5, the Company reclassified its European operations to assets held for sale during 2011. As the CHP and Service business within the European region represents a specific line of business that management intends to exit, the corresponding revenues and expenses have been reclassified to discontinued operations in the interim consolidated statement of earnings.

Effective February 2011, the Company sold the shares of Enerflex Environmental Australia Pty ("EEA") to a third party, as the business was not considered core to the future growth of the Company. Total consideration received was $3.4 million, net of cash, and resulted in a pre-tax gain of $2.5 million, less tax of $1.1 million.

The following tables summarize the revenues, loss from operations, impairments and income taxes from discontinued operations. The operations presented below had all been part of the International reporting segment.


                                     Three months ended  Three months ended 
                                         March 31, 2012      March 31, 2011 
                                     Enerflex            Enerflex           
                                       Europe       EEA    Europe       EEA 
----------------------------------------------------------------------------
Revenue                              $ 10,883  $      -  $ 11,896  $  2,653 
Loss from operations                 $   (754) $      -  $ (1,544) $   (239)
Income tax                           $      -  $      -  $    332  $     75 

The following table summarizes cash provided by (used in) discontinued      
operations:                                                                 

                                     Three months ended  Three months ended 
                                         March 31, 2012      March 31, 2011 
                                     Enerflex            Enerflex           
                                       Europe       EEA    Europe       EEA 
----------------------------------------------------------------------------
Cash from operating                  $    410  $      -  $   (327) $ (1,407)
Cash from investing                  $   (353) $      -  $    (79) $    (67)
Cash from financing                  $      -  $      -  $      -  $      - 

Note 7. Accounts Receivable                                                 

Accounts receivable consisted of the following:                             

                                                   March 31,   December 31, 
                                                        2012           2011 
----------------------------------------------------------------------------
Trade receivables                                  $ 173,811      $ 198,165 
Less:  allowance for doubtful accounts                 4,832          3,761 
----------------------------------------------------------------------------
Trade receivables, net                               168,979        194,404 
Other receivables(1)                                  66,767         60,078 
----------------------------------------------------------------------------
Total accounts receivable                          $ 235,746      $ 254,482 
                                              ------------------------------
                                              ------------------------------

Aging of trade receivables:                                                 

                                                   March 31,   December 31, 
                                                        2012           2011 
----------------------------------------------------------------------------
Current to 90 days                                 $ 150,395      $ 186,046 
Over 90 days                                          23,416         12,119 
----------------------------------------------------------------------------
                                                   $ 173,811      $ 198,165 
                                              ------------------------------
                                              ------------------------------

(1) Included in other receivables at March 31, 2012 is $48.7 million        
    relating to amounts due from customers under construction contracts     
    (December 31, 2011 - $43.1 million).                                    

Movement in allowance for doubtful accounts:                                

                                                               December 31, 
                                              March 31, 2012           2011 
--------------------------------------------------------------------------- 
Balance, beginning of period                       $   3,761      $   6,217 
Provisions and revisions, net                          1,071         (2,456)
--------------------------------------------------------------------------- 
Balance, end of period                             $   4,832      $   3,761 
                                              ----------------------------- 
                                              ----------------------------- 

Note 8. Inventories                                                         

Inventories consisted of the following:                                     

                                                               December 31, 
                                              March 31, 2012           2011 
----------------------------------------------------------------------------
Equipment                                          $  12,166      $  13,153 
Repair and distribution parts                         40,804         32,985 
Direct materials                                      25,021         33,918 
Work-in-process                                      139,304        160,363 
----------------------------------------------------------------------------
Total inventories                                  $ 217,295      $ 240,419 
                                              ------------------------------
                                              ------------------------------

The amount of inventory and overhead costs recognized as an expense and included in cost of goods sold accounted for other than by the percentage-of-completion method during the first quarter of 2012 was $54.9 million (2011 - $59.5 million). Cost of goods sold includes inventory write-downs pertaining to obsolescence and aging together with recoveries of past write-downs upon disposition. The net amount charged to the interim consolidated statement of earnings and included in cost of goods sold during the first quarter of 2012 was $0.2 million (2011 - $0.1 million).


Note 9. Property, Plant and Equipment and Rental Equipment                  

                                         Land       Building      Equipment 
----------------------------------------------------------------------------
Cost                                                                        
January 1, 2011                     $  47,384      $ 107,845      $  44,222 
Additions                                  61            802          1,987 
Reclassification                        2,422          8,118          3,311 
AHFS                                        -              -            (72)
Impairment of AHFS                          -           (207)        (1,355)
Disposals                             (23,519)       (29,833)        (3,251)
Currency translation effects              151          1,169          2,397 
----------------------------------------------------------------------------
December 31, 2011                   $  26,499      $  87,894      $  47,239 
Additions                                   -             48          1,465 
Reclassification                            -            120             55 
AHFS                                        -              -           (156)
Disposals                                   -            (15)          (303)
Currency translation effects             (122)          (739)          (284)
----------------------------------------------------------------------------
March 31, 2012                      $  26,377      $  87,308      $  48,016 
                               ---------------------------------------------


Accumulated depreciation                                                    
January 1, 2011                     $       -      $ (18,308)     $ (24,713)
Depreciation charge                         -         (6,597)        (8,013)
Reclassification                            -              -          2,746 
Impairment of AHFS                          -             35            670 
Disposals                                   -          3,914            796 
Currency translation effects                -           (291)        (1,709)
----------------------------------------------------------------------------
December 31, 2011                   $       -      $ (21,247)     $ (30,223)
Depreciation charge                         -         (1,340)        (1,694)
Reclassification                            -              -              - 
Disposals                                   -             11            219 
Currency translation effects                -            192            240 
----------------------------------------------------------------------------
March 31, 2012                      $       -      $ (22,384)     $ (31,458)
                               ---------------------------------------------

Carrying Amount                                                             
----------------------------------------------------------------------------
 As at December 31, 2011            $  26,499      $  66,647      $  17,016 
 As at March 31, 2012               $  26,377      $  64,924      $  16,558 
                               ---------------------------------------------
                               ---------------------------------------------

                                                       Total                
                                                   property,                
                                 Assets under      plant and         Rental 
                                 construction      equipment      equipment 
----------------------------------------------------------------------------
Cost                                                                        
January 1, 2011                     $  15,611      $ 215,062      $ 132,703 
Additions                              19,190         22,040         12,634 
Reclassification                      (22,434)        (8,583)         3,262 
AHFS                                        -            (72)            14 
Impairment of AHFS                          -         (1,562)          (322)
Disposals                                   -        (56,603)       (16,622)
Currency translation effects              601          4,318          1,084 
----------------------------------------------------------------------------
December 31, 2011                   $  12,968      $ 174,600      $ 132,753 
Additions                              10,021         11,534          2,345 
Reclassification                         (175)             -              - 
AHFS                                        -           (156)             - 
Disposals                                   -           (318)        (5,047)
Currency translation effects              (89)        (1,234)          (534)
----------------------------------------------------------------------------
March 31, 2012                      $  22,725      $ 184,426      $ 129,517 
                               ---------------------------------------------


Accumulated depreciation                                                    
January 1, 2011                     $       -      $ (43,021)     $ (16,541)
Depreciation charge                         -        (14,610)       (18,124)
Reclassification                            -          2,746              - 
Impairment of AHFS                          -            705             98 
Disposals                                   -          4,710          4,589 
Currency translation effects                -         (2,000)          (867)
----------------------------------------------------------------------------
December 31, 2011                   $       -      $ (51,470)     $ (30,845)
Depreciation charge                         -         (3,034)        (3,872)
Reclassification                            -              -              - 
Disposals                                   -            230          2,009 
Currency translation effects                -            432            129 
----------------------------------------------------------------------------
March 31, 2012                      $       -      $ (53,842)     $ (32,579)
                               ---------------------------------------------

Carrying Amount                                                             
----------------------------------------------------------------------------
 As at December 31, 2011            $  12,968      $ 123,130      $ 101,908 
 As at March 31, 2012               $  22,725      $ 130,584      $  96,938 
                               ---------------------------------------------
                               ---------------------------------------------

Depreciation of property, plant and equipment and rental equipment included 
in income for the three months ended March 31, 2012 was $6.9 million (March 
31, 2011 - $7.5 million) of which $5.3 million was included in cost of goods
sold and $1.6 million was included in selling and administrative expenses   
(March 31, 2011 - $5.7 million and $1.8 million respectively).              

Note 10. Other Assets                                                       

                                                               December 31, 
                                              March 31, 2012           2011 
----------------------------------------------------------------------------
Investment in associates                           $   3,795      $   3,317 
Net investments in finance lease                       2,982          4,850 
----------------------------------------------------------------------------
                                                   $   6,777      $   8,167 
                                              ------------------------------
                                              ------------------------------

The Company entered into finance lease arrangements for certain of its      
rental assets. Leases are denominated in Canadian or U.S. dollars. The term 
of the leases entered into ranges from 2 to 5 years.                        

The value of the net investment is comprised of the following:              

                                                           Present value of 
                                          Minimum lease     minimum lease  
                                            payments           payments     
                                    March 31,  December March 31,  December 
                                         2012  31, 2011      2012  31, 2011 
----------------------------------------------------------------------------
Not later than one year              $ 10,067  $ 10,717  $  9,682  $ 10,271 
Later than one year and not later                                           
 than five years                        2,982     4,850     2,352     3,983 
----------------------------------------------------------------------------
                                     $ 13,049  $ 15,567  $ 12,034  $ 14,254 
Less: unearned finance income          (1,015)   (1,313)        -         - 
----------------------------------------------------------------------------
                                     $ 12,034  $ 14,254  $ 12,034  $ 14,254 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The weighted average interest rates inherent in the leases are fixed at the 
contract date for the entire lease term and are approximately 9% per annum  
(December 31, 2011-9%). The finance lease receivables at the end of the     
reporting period are neither past due nor impaired.                         

Note 11. Intangible Assets                                                  

                                                 Accumulated                
                                              amortization &       Carrying 
March 31, 2012                 Acquired value  impairment(1)         amount 
----------------------------------------------------------------------------
Customer relationships              $  36,100      $  16,374      $  19,726 
Software and other                     15,542          6,443          9,099 
----------------------------------------------------------------------------
                                    $  51,642      $  22,817      $  28,825 
                               ---------------------------------------------
                               ---------------------------------------------

                                                 Accumulated                
                                              amortization &       Carrying 
December 31, 2011              Acquired value  impairment(1)         amount 
----------------------------------------------------------------------------
Customer relationships              $  36,400      $  14,820      $  21,580 
Software and other                     17,775          7,827          9,948 
----------------------------------------------------------------------------
                                    $  54,175      $  22,647      $  31,528 
                               ---------------------------------------------
                               ---------------------------------------------
(1) Impairment includes $1.8 million from the European discontinued         
    operations which was recognized during the year ended December 31, 2011.
    No additional impairment was recognized for the three months ended March
    31, 2012.                                                               

Note 12. Accounts Payable and Accrued Liabilities                           

                                                               December 31, 
                                               March 31, 2012          2011 
----------------------------------------------------------------------------
Accounts payable and accrued liabilities            $ 135,818     $ 149,119 
Accrued dividend payable                                4,654         4,638 
Cash-settled share-based payments                         454           223 
----------------------------------------------------------------------------
                                                    $ 140,926     $ 153,980 
                                               -----------------------------
                                               -----------------------------

Note 13. Long-Term Debt

The Company has, by way of private placement, $90.5 million of Unsecured Notes ("Notes") issued and outstanding. They have different maturities with $50.5 million, with a coupon of 4.841%, maturing on June 22, 2016 and $40.0 million, with a coupon of 6.011%, maturing on June 22, 2021.

The Company has syndicated revolving credit facilities ("Bank Facilities") with an amount available of $325.0 million. The Bank Facilities consist of a committed 4-year $270.0 million revolving credit facility ("the Revolver"), a committed 4-year $10.0 million operating facility ("the Operator"), a committed 4-year $20.0 million Australian operating facility ("the Australian Operator") and a committed 4-year $25.0 million bi-lateral letter of credit facility ("the LC Bi-Lateral"). The Revolver, Operator, Australian Operator and LC Bi-Lateral are collectively referred to as the Bank Facilities. The Bank Facilities were funded on June 1, 2011. The weighted average interest rate on the Bank Facilities for the three months ended March 31, 2012 is 2.09% (March 31, 2011 - nil).

The Bank Facilities have a maturity date of June 1, 2015 ("Maturity Date"), but may be extended annually on or before the anniversary date with the consent of the lenders. In addition, the Bank Facilities may be increased by $50.0 million at the request of the Company, subject to the lenders' consent. There is no required or scheduled repayment of principal until the Maturity Date of the Bank Facilities.

Drawings on the Bank Facilities are available by way of Prime Rate loans ("Prime"), U.S. Base Rate loans, London Interbank Offered Rate ("LIBOR") loans, and Bankers' Acceptance ("BA") notes. The Company may also draw on the Bank Facilities through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Bank Facilities.

Pursuant to the terms and conditions of the Bank Facilities, a margin is applied to drawings on the Bank Facilities in addition to the quoted interest rate. The margin is established in basis points and is based on consolidated net debt to earnings before interest, income taxes, depreciation and amortization ("EBITDA") ratio. The margin is adjusted effective the first day of the third month following the end of each fiscal quarter based on the above ratio.

The Company also has a committed facility with one of the lenders in the Bank Facilities for the issuance of letters of credit ("the Bi-Lateral"). The amount available under the Bi-Lateral is $50.0 million and has a maturity date of June 1, 2013, which may be extended annually with the consent of the lender. Drawings on the Bi-Lateral are by way of letters of credit.

In addition, the Company has a committed facility with a U.S. lender ("U.S. Facility") in the amount of $20.0 million U.S. dollars. Drawings on the U.S. Facility are by way of LIBOR loans, U.S. Base Rate loans and letters of credit. The maturity date of the U.S. Facility is July 1, 2014 and may be extended annually at the request of the Company, subject to the lenders' consent. There are no required or scheduled repayments of principal until the maturity date of the U.S. Facility.

The Bank Facilities, the Bi-Lateral and the U.S. Facility are unsecured and rank pari passu with the Notes. The Company is required to maintain certain covenants on the Bank Facilities, the Bi-Lateral, the U.S. Facility and the Notes. As at March 31, 2012, the Company was in compliance with these covenants.

At March 31, 2012, the Company had $28.1 million cash drawings against the Bank Facilities (December 31, 2011- $31.3 million).

The composition of the March 31, 2012 borrowings on the Bank Facilities and the Notes was as follows:


                                                             March 31, 2012 
----------------------------------------------------------------------------
Drawings on Bank Facilities                                       $  28,094 
Notes due June 22, 2016                                              50,500 
Notes due June 22, 2021                                              40,000 
Deferred transaction costs                                           (2,691)
----------------------------------------------------------------------------
                                                                  $ 115,903 
                                                             ---------------
                                                             ---------------

Canadian dollar equivalent principal payments which are due over the next   
five years and thereafter, without considering renewal at similar terms,    
are:                                                                        

2012                                                              $       - 
2013                                                                      - 
2014                                                                      - 
2015                                                                 28,094 
2016                                                                 50,500 
Thereafter                                                           40,000 
----------------------------------------------------------------------------
Total                                                             $ 118,594 
                                                             ---------------
                                                             ---------------

Note 14. Guarantees, Commitments and Contingencies

At March 31, 2012, the Company had outstanding letters of credit of $87.3 million (December 31, 2011 - $102.2 million).

The Company is involved in litigation and claims associated with normal operations against which certain provisions have been made in the interim consolidated financial statements. Management is of the opinion that any resulting net settlement arising from the litigation would not materially affect the financial position, results of operations or liquidity of the Company.

Operating leases relate to leases of equipment, automobiles and premises with lease terms between 1 to 10 years. The material lease arrangements generally include the existence of renewal and escalation clauses.

The aggregate minimum future required lease payments over the next five years and thereafter are as follows:


2012                                                              $   9,377 
2013                                                                  8,876 
2014                                                                  6,816 
2015                                                                  5,296 
2016                                                                  3,992 
Thereafter                                                            7,450 
----------------------------------------------------------------------------
Total                                                             $  41,807 
                                                             ---------------
                                                             ---------------

In addition, the Company has purchase obligations over the next three years 
as follows:                                                                 

2012                                                              $  12,851 
2013                                                                    998 
2014                                                                    314 

Note 15. Income Taxes                              

Income tax recognized in profit or loss            

Three months ended March 31,                             2012          2011 
----------------------------------------------------------------------------
Total income tax expense is attributable to:                                
  Continuing operations                             $   5,323     $   4,071 
  Discontinued operations                                   -           587 
----------------------------------------------------------------------------
                                                    $   5,323     $   4,658 
                                               -----------------------------
                                               -----------------------------

The components of income tax expense attributable to continuing operations  
are as follows:                                                             

Current tax                                        $   6,639      $   4,279 
Deferred tax                                          (1,316)          (208)
----------------------------------------------------------------------------
                                                   $   5,323      $   4,071 
                                              ------------------------------
                                              ------------------------------

Reconciliation of Tax Expense                                               

The provision for income taxes attributable to continuing operations differs
from that which would be expected by applying Canadian statutory rates. A   
reconciliation of the difference follows:                                   

Three months ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Earnings before income taxes from continuing                                
 operations                                        $  20,221      $  13,903 
Canadian statutory rate                                 25.1%          26.6%
                                              ------------------------------
Expected income tax provision                          5,075          3,698 
Add (deduct)                                                                
  Income taxed in foreign jurisdictions                  469            588 
  Expenses not deductible for tax purposes               115              - 
  Impact of future income tax rate adjustments          (229)             - 
  Other                                                 (107)          (215)
----------------------------------------------------------------------------
Income tax expense from continuing operations      $   5,323      $   4,071 
                                              ------------------------------
                                              ------------------------------

Note 16. Share Capital                                                      

Authorized:                                                                 

The Company is authorized to issue an unlimited number of common shares.    

Issued and Outstanding:                                                     

                                                   Number of   Common share 
March 31, 2012                                 common shares        capital 
----------------------------------------------------------------------------
Balance, beginning of period                      77,339,781      $ 207,409 
Exercise of stock options                            233,900          3,889 
----------------------------------------------------------------------------
Balance, end of period                            77,573,681      $ 211,298 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The share capital comprises only one class of ordinary shares. The ordinary shares carry a voting right and a right to a dividend. The payment of any dividend is at the discretion of the Board of Directors and depends on the financial condition of the Company and other factors.

For the three months ended March 31, 2012, the Company declared dividends of $4.7 million, or $0.06 per share (March 31, 2011 - no dividend declared).

Normal Course Issuer Bid ("NCIB")

On December 15, 2011, Enerflex filed a notice with the TSX of the Company's intention to make a NCIB to purchase up to 6.3 million of its common shares, representing approximately 10% of its public float of common shares then outstanding. Purchases made under the bid can be executed on the TSX in the 12 months following commencement of the bid on December 19, 2011. During the three months ended March 31, 2012, Enerflex did not purchase any of its common shares.


Note 17. Contributed Surplus                                                

March 31, 2012                                                  Contributed 
                                                                    surplus 
----------------------------------------------------------------------------
Contributed surplus, beginning of period                          $ 656,536 
Share-based compensation                                                331 
Exercise of stock options                                            (1,490)
----------------------------------------------------------------------------
Balance, end of period                                            $ 655,377 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note 18. Share-Based Compensation

a) Stock Options

The Company maintains a stock option program for certain directors, officers and full-time employees of the Company. Under the plan, up to 7.7 million options may be granted for subsequent exercise in exchange for common shares. It is Company policy that no more than 1% of outstanding shares or approximately 0.8 million share options may be granted in any one year.

The stock option plan entitles the holder to acquire shares of the Company at the strike price, established at the time of the grant, after vesting and before expiry. The strike price of each option equals the weighted average of the market price of the Company's shares on the five days preceding the effective date of the grant. The options have a seven-year term and vest at a rate of one-fifth on each of the five anniversaries of the date of the grant.



                                                                   Weighted 
                                                   Number of        average 
As at March 31, 2012                                 options exercise price 
----------------------------------------------------------------------------
Options outstanding, beginning of period           2,563,985        $ 11.53 
Exercised                                           (233,900)         10.26 
Expired                                               (1,425)          9.57 
Forfeited                                            (37,100)         12.73 
----------------------------------------------------------------------------
Options outstanding, end of period                 2,291,560        $ 11.65 
                                              ------------------------------
Options exercisable, end of period                 1,064,800        $ 11.49 
                                              ------------------------------

The following table summarizes options outstanding and exercisable at March 
31, 2012:                                                                   

                           Options Outstanding         Options Exercisable  
Range of exercise                Weighted                                   
 prices                           average   Weighted               Weighted 
                                remaining    average                average 
                         Number      life   exercise      Number   exercise 
                    outstanding    (years)     price outstanding      price 
----------------------------------------------------------------------------
$9.53 - $11.87        1,445,660      4.49 $    10.96     604,240 $    10.53 
$11.88 - $12.96         845,900      4.13      12.82     460,560      12.75 
----------------------------------------------------------------------------
Total                 2,291,560      4.36 $    11.65   1,064,800 $    11.49 
----------------------------------------------------------------------------

No stock options were granted in the first three months of 2012.

b) Deferred Share Units

The Company offers a deferred share unit ("DSU") plan for executives and non-employee directors, whereby they may elect on an annual basis to receive all or a portion of their annual bonus, or retainer and fees, respectively, in DSUs and share awards. Non-employee directors may also elect to receive a portion of their annual retainer in shares purchased in the open market. In addition, the Board may grant discretionary DSUs to executives. A DSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the implied market value calculated as the number of DSUs multiplied by the closing price of Enerflex shares on the entitlement date.

DSUs may be granted to eligible participants on an annual basis and will vest upon being credited to the executive or non-employee director's account. Vested DSUs are to be settled by the end of the year vesting occurs.

DSU recipients are entitled to additional units over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends that would have been received had the units then subject to vesting been actual shares of the Company, following each dividend paid to the shareholders of the Company. The additional units are calculated with each dividend declared by the Company.

DSUs represent an indexed liability of the Company relative to the Company's share price. In 2012, the Board of Directors did not grant any DSUs to employees of the Company. For the three months ended March 31, 2012, director's fees elected to be received in deferred share units totalled $0.1 million (March 31, 2011 - nil).

c) Performance Share Units

The Company offers performance share unit ("PSU") plan. PSUs may be granted at the discretion of the Human Resources and Compensation Committee ("HRCC") to officers of the Company or its related entities. A PSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested PSUs multiplied by the weighted average price per share at which the shares of the Company have traded on the TSX during the last 5 trading days immediately preceding the valuation date. Vesting is based on the achievement of performance measures and objectives specified by the HRCC. The HRCC assesses performance of the officer to determine the vesting percentage, which can range from 0%-200%. On the 14th day after the determination of the vesting percentage, the holder will be paid for the vested PSUs either in cash or in shares of the Company acquired by the Company on the open market on behalf of the holder, at the discretion of the Company.

PSU recipients are entitled to additional PSUs over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends that would have been received had the units then subject to vesting been actual shares in the Company, following each dividend paid to Shareholders of the Company. The additional PSUs are calculated with each dividend declared by the Company.

To date, no PSUs have been granted.

d) Restricted Share Units

The Company offers a restricted share unit ("RSU") plan. RSUs may be granted at the discretion of the HRCC to any officers or other key employees of the Company or its related entities. A RSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested RSUs multiplied by the weighted average price per share at which the shares of the Company have traded on the TSX during the last 5 trading days immediately preceding the vesting date. RSUs vest at a rate of one-third on the 1st, 2nd and 3rd anniversaries of the award date. Within 30 days of the vesting date, the holder will be paid for the vested RSUs either in cash or in shares of the Company acquired by the Company on the open market on behalf of the holder, at the discretion of the Company.

RSU recipients are entitled to additional RSUs over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends that would have been received had the units then subject to vesting been actual shares in the Company, following each dividend paid to Shareholders of the Company. The additional RSUs are calculated with each dividend declared by the Company.

To date, no RSUs have been granted.

e) Phantom Share Rights

The Company utilizes a Phantom Share Rights Plan (Share Appreciation Rights - "SARs") for certain directors and key employees of affiliates located in Australia and the UAE, for whom the Company's Stock Option Plan would have negative personal taxation consequences.

The exercise price of each SAR equals the average of the market price of the Company's shares on the five days preceding the date of the grant. The SARs vest at a rate of one-fifth on each of the first five anniversaries of the date of the grant and expire on the fifth anniversary. The award entitlements for increases in the share trading value of the Company are to be paid to the recipient in cash upon exercise.

The Board of Directors granted 4,000 SARs and recognized a nominal expense for the three months ended March 31, 2012 (March 31, 2011- nil). No SARs had vested at March 31, 2012 and 2011.

f) Employee Share Ownership Plan

The Company offers an Employee Share Ownership Plan whereby employees who meet the eligibility criteria can purchase shares by way of payroll deductions. There is a Company match of up to one thousand dollars per employee per annum based on contributions by the Company of one dollar for every three dollars contributed by the employee. Company contributions vest to the employee immediately. Company contributions are charged to selling and administrative expense when paid. The Plan is administered by a third party.

g) Share-Based Compensation Expense

The share-based compensation expense included in the determination of net earnings for the three months ended March 31, 2012 was:


                                                               Three months 
                                                                ended March 
                                                                   31, 2012 
----------------------------------------------------------------------------
Stock options                                                     $     331 
Deferred share units                                                     83 
Phantom share units                                                      38 
----------------------------------------------------------------------------
Total                                                             $     452 
                                                             ---------------
                                                             ---------------

No expense was recognized for the three months ended March 31, 2011.        

Note 19. Reconciliation of Earnings per Share Calculations                  

                           Three months ended            Three months ended 
                               March 31, 2012                March 31, 2011 
                             Weighted                      Weighted         
                              average                       average         
                     Net       shares     Per      Net       shares     Per 
                earnings  outstanding   share earnings  outstanding   share 
----------------------------------------------------------------------------
Basic           $ 14,144   77,488,497 $  0.18 $  9,886   77,162,569 $  0.13 
Dilutive effect                                                             
 of stock option                                                            
 conversion            -      212,872       -        -      330,385       - 
----------------------------------------------------------------------------
Diluted         $ 14,144   77,701,369 $  0.18 $  9,886   77,492,954 $  0.13 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Since Enerflex's shares were issued pursuant to the Arrangement with Toromont to create the Company, per share amounts disclosed for the comparative period are based on Toromont's common shares.

Note 20. Financial Instruments

Designation and Valuation of Financial Instruments

The Company has designated its financial instruments as follows:



                                                    Carrying      Estimated 
As at March 31, 2012                                   value     fair value 
----------------------------------------------------------------------------
Financial Assets                                                            
Cash and cash equivalents(1)                       $  87,967      $  87,967 
Derivative instruments designated as fair                                   
 value through profit or loss ("FVTPL")                   16             16 
Derivative instruments in designated hedge                                  
 accounting relationships                              1,887          1,887 
Loans and receivables:                                                      
  Accounts receivable                                235,746        235,746 
Financial Liabilities                                                       
Derivative instruments designated as FVTPL         $      61      $      61 
Derivative instruments in designated hedge                                  
 accounting relationships                                 92             92 
Other financial liabilities:                                                
  Accounts payable and accrued liabilities           140,926        140,926 
  Long-term debt - Bank Facilities                    28,094         28,094 
  Long-term debt - Notes                              87,809         94,689 
  Other long-term liabilities                            418            418 
----------------------------------------------------------------------------
(1) Includes $0.9 million of highly liquid short term investments with      
    maturities of three months or less.                                     


                                                     Carrying     Estimated 
As at December 31, 2011                                 value    fair value 
----------------------------------------------------------------------------
Financial Assets                 
Cash and cash equivalents                           $  81,200     $  81,200 
Derivative instruments designated as FVTPL                 68            68 
Derivative instruments in designated hedge                                  
 accounting relationships                               2,068         2,068 
Loans and receivables:                                                      
  Accounts receivable                                 254,482       254,482 
Financial Liabilities                                                       
Derivative instruments designated as FVTPL          $      16     $      16 
Derivative instruments in designated hedge                                  
 accounting relationships                                 439           439 
Other financial liabilities:                                                
  Accounts payable and accrued liabilities            153,980       153,980 
  Long-term debt - Bank Facilities                     31,348        31,348 
  Long-term debt - Notes                               87,615        91,095 
  Other long-term liabilities                             590           590 
----------------------------------------------------------------------------

Fair Values of Financial Assets and Liabilities

The following table presents information about the Company's financial assets and financial liabilities measured at fair value on a recurring basis as at March 31, 2012 and indicates the fair value hierarchy of the valuation techniques used to determine such fair value. During the three months ended March 31, 2012, there were no transfers between Level 1 and Level 2 fair value measurements.


                                                         Fair Value         
                                     Carrying                               
                                        value   Level 1   Level 2   Level 3 
----------------------------------------------------------------------------
Financial Assets                                                            
Derivative financial instruments     $  1,903  $      -  $  1,903  $      - 
Financial Liabilities                                                       
Derivative financial instruments     $    153  $      -  $    153  $      - 

Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, other long-term liabilities and drawings on the Bank Facilities are reported at amounts approximating their fair values on the statement of financial position. The fair values approximate the carrying values for these instruments due to their short-term nature.

The fair value of derivative financial instruments is measured using the discounted value of the difference between the contract's value at maturity based on the contracted foreign exchange rate and the contract's value at maturity based on prevailing exchange rates. The financial institution's credit risk is also taken into consideration in determining fair value.

Long-term debt associated with the Company's Notes is recorded at amortized cost using the effective interest rate method. The amortized cost of the Notes is equal to the face value as there were no premiums or discounts on the issuance of the debt. Transaction costs associated with the debt were deducted from the debt and are being recognized over the life of the related debt. The fair value of these Notes at March 31, 2012, as determined on a discounted cash flow basis with a weighted average discount rate of 4.31%, was $94.7 million.

Fair values are determined using inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Fair values determined using inputs including forward market rates and credit spreads that are readily observable and reliable, or for which unobservable inputs are determined not to be significant to the fair value, are categorized as Level 2. If there is no active market, fair value is established using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable market data where possible, including recent arm's-length market transactions, and comparisons to the current fair value of similar instruments; where this is not feasible, inputs such as liquidity risk, credit risk and volatility are used.

Derivative Financial Instruments and Hedge Accounting

Foreign exchange contracts are transacted with financial institutions to hedge foreign currency denominated obligations related to purchases of inventory and sales of products. The following table summarizes the Company's commitments to buy and sell foreign currencies as at March 31, 2012:


                                       Notional                             
                                         amount                    Maturity 
----------------------------------------------------------------------------
Canadian dollar denominated contracts                                       
Purchase contracts                 USD   11,560    April 2012 to April 2013 
                                   EUR      166     April 2012 to June 2012 
Sales contracts                    USD   54,977  April 2012 to January 2013 
                                   EUR    4,538     April 2012 to June 2012 
                                   AUD    9,800                  April 2012 
Australian dollar denominated contracts                                     
Purchase contracts                 EUR      225      June 2012 to July 2012 
Sales contracts                    USD   27,750   May 2012 to February 2014 

Management estimates that a gain of $1.9 million would be realized if the contracts were terminated on March 31, 2012. Certain of these forward contracts are designated as cash flow hedges, and accordingly, a gain of $0.4 million has been included in other comprehensive income for the three months ended March 31, 2012. These gains or losses are not expected to affect net earnings as the gains or losses will be reclassified to net earnings and will offset gains or losses recorded on the underlying hedged items, namely foreign currency denominated accounts payable and accounts receivable. The amount removed from other comprehensive income during the year and included in the carrying amount of the hedging items as a basis adjustment was nominal for 2012.

All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.

Risks Arising from Financial Instruments and Risk Management

In the normal course of business, the Company is exposed to financial risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes.

Foreign Currency Risk

In the normal course of operations, the Company is primarily exposed to movements in the U.S. dollar and the Australian dollar. In addition, Enerflex has significant international exposure through export from its Canadian operations as well as a number of foreign subsidiaries, the most significant of which are located in the United States, Australia and the United Arab Emirates. The Company does not hedge its net investment exposure in foreign subsidiaries.

The types of foreign exchange risk and the Company's related risk management strategies are as follows:

Transaction Exposure

The Canadian operations of the Company source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate.

The Company also sells compression packages in foreign currencies, primarily the U.S. dollar and the Australian dollar and enters into foreign currency contracts to reduce these exchange rate risks.

Most of Enerflex's international orders are manufactured in the U.S. operations if the contract is denominated in U.S. dollars. This minimizes the Company's foreign currency exposure on these contracts.

The Company identifies and hedges all significant transactional currency risks.

Translation Exposure

The Company's earnings from, and net investment in, foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the U.S. dollar and Australian dollar.

Assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the statement of financial position dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the ownership interest in the foreign operations.

Earnings from foreign operations are translated into Canadian dollars each period at average exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net earnings. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company. The following table shows the effect on net earnings before tax for the period ended March 31, 2012 of a 5% weakening of the Canadian dollar against the U.S. dollar and Australian dollar, everything else being equal. A 5% strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as an indicative range in a volatile currency environment.


Canadian dollar weakens by 5%                            USD            AUD 
----------------------------------------------------------------------------
Net earnings before tax                            $     748      $     (59)

The movement in net earnings before tax in Canadian operations associated with changes in foreign exchange rates is a result of a change in the fair values of financial instruments. The majority of these financial instruments are hedged.

Sensitivity Analysis

The following sensitivity analysis is intended to illustrate the sensitivity to changes in foreign exchange rates on the Company's financial instruments and show the impact on net earnings and comprehensive income. Financial instruments affected by currency risk include cash and cash equivalents, accounts receivable, accounts payable and derivative financial instruments. This sensitivity analysis relates to the position for the period ended March 31, 2012. The following table shows the Company's sensitivity to a 5% weakening of the Canadian dollar against the U.S. dollar and Australian dollar. A 5% strengthening of the Canadian dollar would have an equal and opposite effect.


Canadian dollar weakens by 5%                            USD            AUD 
----------------------------------------------------------------------------
Financial instruments held in foreign                                       
 operations                                                                 
Other comprehensive income                         $   4,256      $   1,728 
Financial instruments held in Canadian                                      
 operations                                                                 
Net earnings                                             269              - 
Other comprehensive loss                                  (4)             - 

Certain movement in accumulated other comprehensive income is a result of the changes in fair value of derivative instruments designated as hedging instruments in cash flow hedges.

Interest Rate Risk

The Company's liabilities include long-term debt that is subject to fluctuations in interest rates. The Company's Notes outstanding at March 31, 2012 include interest rates that are fixed and therefore the related interest expense will not be impacted by fluctuations in interest rates. The Company's Bank Facilities however, are subject to changes in market interest rates. For each 1% change in the rate of interest on the Bank Facilities, the change in interest expense would be approximately $0.3 million. All interest charges are recorded on the consolidated statement of earnings in finance costs.

Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, net investment in finance lease, and derivative financial instruments. The carrying amount of assets included on the statement of financial position represents the maximum credit exposure.

Cash equivalents consist mainly of short-term investments, such as money market deposits. The Company has deposited the cash equivalents with highly-rated financial institutions, from which management believes the risk of loss to be remote.

The Company has accounts receivable from clients engaged in various industries. These specific industries may be affected by economic factors that may impact accounts receivable. Credit quality of the customer is assessed based on an extensive credit rating scorecard and individual credit limits are defined in accordance with this assessment. Credit is extended based on an evaluation of the customer's financial condition and, generally, advance payment is not required. For the three months ended March 31, 2012, one customer accounted for 12.4% of the Company's total revenue. Outstanding customer receivables are regularly monitored and an allowance for doubtful debts is established based upon specific situations.

The Company evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several jurisdictions and industries and operate in largely independent markets. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in this note. The Company does not hold collateral as security.

The credit risk associated with the net investment in finance leases arises from the possibility that the counterparty may default on its obligations. In order to minimize this risk, the Company enters into finance lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as, and if, they arise.

The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions.

The Company does not hold any collateral or other credit enhancements to cover its credit risks associated with its financial assets, except that the credit risk associated with the finance lease receivable is mitigated because the lease receivables are secured over the leased equipment.

Liquidity Risk

Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. In managing liquidity risk, the Company has access to a significant portion of its Bank Facilities for future drawings to meet the Company's future growth targets. At March 31, 2012, the Company had $28.1 million committed against the Bank Facilities, leaving $296.9 million available for future drawings plus cash and cash equivalents of $88.0 million at that date.

A liquidity analysis of the Company's financial instruments has been completed on a maturity basis. The following table outlines the cash flows including interest associated with the maturity of the Company's financial liabilities:


                                         Less             Greater           
                                       than 3  3 months    than 1           
                                       months to 1 year      year     Total 
----------------------------------------------------------------------------
Derivative financial instruments                                            
Foreign currency forward contracts   $    153  $      -  $      -  $    153 
Other financial liabilities                                                 
Accounts payable and accrued                                                
 liabilities                         $140,926  $      -  $      -  $140,926 
Long-term debt-Bank Facilities              -         -    28,094    28,094 
Long-term debt-Notes                        -         -    87,809    87,809 
Other Long-term liabilities                 -         -       418       418 

The Company expects that continued cash flows from operations in 2012, together with cash and cash equivalents on hand and credit facilities, will be more than sufficient to fund its requirements for investments in working capital, and capital assets.

Note 21. Capital Disclosures

The capital structure of the Company consists of shareholders' equity plus net debt. The Company manages its capital to ensure that entities in the Company will be able to continue to grow while maximizing the return to shareholders through the optimization of the debt and equity balances. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new Company shares, or access debt markets.

The Company formally reviews the capital structure on an annual basis and monitors it on an on-going basis. As part of this review, the Company considers the cost of capital and the risks associated with each class of capital. In order to position itself to execute its long-term plan to become a leading supplier of products and services to the global energy sector, the Company is maintaining a conservative statement of financial position. The Company uses the following measure to monitor its capital structure:

Net Debt-to-Equity Ratio

The Company targets a net debt-to-equity ratio of less than 1.00:1. As at March 31, 2012, the net debt-to-equity was 0.03:1 (December 31, 2011 - 0.05:1), calculated as follows:


                                                               December 31, 
                                              March 31, 2012           2011 
----------------------------------------------------------------------------
Long-term debt                                     $ 115,903      $ 118,963 
Cash                                                 (87,967)       (81,200)
----------------------------------------------------------------------------
Net debt                                           $  27,936      $  37,763 
----------------------------------------------------------------------------
Shareholders' equity                               $ 843,635      $ 836,263 
----------------------------------------------------------------------------

Net debt-to-equity ratio                              0.03:1         0.05:1 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note 22. Supplemental Cash Flow Information                                 

Three Months Ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Cash provided by (used in) changes in non-cash                              
 working capital                                                            
Accounts receivable                                $  17,804      $ (18,981)
Inventories                                           25,018         44,094 
Accounts and taxes payable, accrued                                         
 liabilities and deferred revenue                    (43,739)       (27,576)
Foreign currency and other                                55          2,892 
----------------------------------------------------------------------------
                                                   $    (862)     $     429 
                                              ------------------------------
                                              ------------------------------

Cash paid during the period:                                                

Three months ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Interest                                           $     426      $   1,430 
Taxes                                                    893          2,739 

Note 23. Related Parties

Enerflex transacts with certain related parties as a normal course of business. Related parties include Toromont, which owned 100% of Enerflex until June 1, 2011, and Total Production Services Inc. ("Total"), which was an influenced investee by virtue of the Company's 40% investment in Total. As described in Note 24 the Company has two joint ventures, Presson-Descon International (Private) Limited ("PDIL") and Enerflex-ES. Enerflex-ES was incorporated in Q4 2011, and there are no related party transactions or balances to report.

All transactions occurring with related parties were in the normal course of business operations under the same terms and conditions as transactions with unrelated companies. A summary of the financial statement impacts of all transactions with all related parties are as follows:



Three months ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Management fee expense                             $       -      $   3,767 
Purchases                                                118            223 
Interest expense                                           -          1,168 

                                                   March 31,   December 31, 
                                                        2012           2011 
----------------------------------------------------------------------------
Accounts receivable                                $      44      $      44 

The above noted management fee expense and interest expense has been paid to Toromont; there are no related party payables due to Toromont as at March 31, 2012.

Purchases identified above for 2012 and 2011 were from Total. The accounts receivable balances outstanding at March 31, 2012 and December 31, 2011 were from the joint venture.

All related party transactions are settled in cash.

Note 24. Interest in Joint Ventures

The Company proportionately consolidates its 50% interest in the assets, liabilities, results of operations and cash flows of its joint venture in Pakistan, Presson-Descon International (Private) Limited and its 51% interest in Enerflex-ES located in Russia. The interest included in the Company's accounts includes:


                                                               December 31, 
                                              March 31, 2012           2011 
----------------------------------------------------------------------------
Statement of Financial Position                                             
Current assets                                     $   2,904      $   2,535 
Long-term assets                                         404            415 
----------------------------------------------------------------------------
Total assets                                       $   3,308      $   2,950 

Current liabilities                                $   1,966      $   1,688 
Long-term liabilities and equity                       1,342          1,262 
----------------------------------------------------------------------------
Total liabilities and equity                       $   3,308      $   2,950 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three Months Ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Statement of Earnings                                                       
Revenue                                            $       8      $      19 
Expenses                                                 (16)           312 
----------------------------------------------------------------------------
Net earnings (loss)                                $      24      $    (293)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three Months Ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Cash Flows                                                                  
Cash from operations                               $    (132)     $    (229)
Cash from investing                                       70            (18)
Cash from financing                                       (2)            (3)

Note 25. Segmented Information

The Company has three reportable segments as outlined below, each supported by the Corporate office. Corporate overheads are allocated to the business segments based on revenue. For each of the reportable segments, the Company's CEO reviews internal management reports on at least a quarterly basis.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.


Three Months Ended                    Canada & Northern     Southern U.S. & 
                                                   U.S.       South America 
March 31,                                2012      2011      2012      2011 
----------------------------------------------------------------------------

Segment revenue                      $165,095  $143,558  $113,146  $ 89,475 
Intersegment revenue                  (14,449)   (1,260)     (306)     (136)
----------------------------------------------------------------------------
External revenue                     $150,646  $142,298  $112,840  $ 89,339 

Operating income                     $ 12,667  $  6,834  $  9,769  $  8,202 
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Three Months Ended                        International               Total 
March 31,                                2012      2011      2012      2011 
----------------------------------------------------------------------------

Segment revenue                      $ 92,600  $ 85,023  $370,841  $318,056 
Intersegment revenue                     (355)   (2,151)  (15,110)   (3,547)
----------------------------------------------------------------------------
External revenue                     $ 92,245  $ 82,872  $355,731  $314,509 

Operating income                     $ (1,265) $    261  $ 21,171  $ 15,297 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                                      Southern U.S. & South 
                             Canada & Northern U.S.                 America 
As at                           Mar 31,     Dec 31,     Mar 31,     Dec 31, 
                                   2012        2011        2012        2011 
----------------------------------------------------------------------------

Segment assets               $  517,484  $  516,135  $  221,705  $  219,931 
Corporate                             -           -           -           - 
Goodwill                        198,539     198,891      53,444      54,402 
----------------------------------------------------------------------------
                             $  716,023  $  715,026  $  275,149  $  274,333 
----------------------------------------------------------------------------
AHFS                                  -           -           -           - 
----------------------------------------------------------------------------
Total segment assets         $  716,023  $  715,026  $  275,149  $  274,333 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                      International                   Total 
As at                           Mar 31,     Dec 31,     Mar 31,     Dec 31, 
                                   2012        2011        2012        2011 
----------------------------------------------------------------------------

Segment assets               $  323,354  $  274,615  $1,062,543  $1,010,681 
Corporate                             -           -    (201,802)   (110,110)
Goodwill                        205,780     206,642     457,763     459,935 
----------------------------------------------------------------------------
                             $  529,134  $  481,257  $1,318,504  $1,360,506 
----------------------------------------------------------------------------
AHFS                              9,661      10,054       9,661      10,054 
----------------------------------------------------------------------------
Total segment assets         $  538,795  $  491,311  $1,328,165  $1,370,560 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenue by geographic location was as follows:                              

Three Months Ended March 31,                            2012           2011 
----------------------------------------------------------------------------
Australia                                          $  60,509      $  31,363 
Bahrain                                                1,112         21,066 
Canada                                               148,652        145,692 
Mexico                                                 8,125             60 
Nigeria                                               12,208              - 
Russia                                                 4,388             28 
United States                                        108,585         84,473 
Other                                                 12,152         31,827 
----------------------------------------------------------------------------
Total Revenue                                        355,731        314,509 

Revenue is attributed by destination of sale.

Note 26. Seasonality

The oil and natural gas service sector in Canada has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex's Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are stable throughout the year. Rentals revenues are also impacted by both the Company's and its customer's capital investment decisions. The international markets are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.

Note 27. Subsequent Events

Subsequent to March 31, 2012, the Company declared its first quarter dividend of $0.06 per share, payable on July 5, 2012, to shareholders of record on June 19, 2012.

Also subsequent to March 31, 2012, Gas Drive, a limited partnership of Enerflex, has taken steps to reduce operating costs as a result of weak natural gas prices and the corresponding decline in dry gas production. This has resulted in a reduction of its administrative workforce at certain Canadian branches. Enerflex will record a reorganization expense of approximately $1.5 million during the second quarter of 2012. The Company will continue to focus on the opportunities for growth and position itself strategically to support its customers in all Gas Drive service territories.

 

Enerflex Ltd.
J. Blair Goertzen
President & Chief Executive Officer
403.236.6852

Enerflex Ltd.
D. James Harbilas
Vice-President & Chief Financial Officer
403.236.6857