Outlook

Churchill is well positioned in Western Canada to compete for projects through its three operating business segments.

•     Margins for SODCL, Churchill’s General Contracting segment, are expected to gradually improve in the second half of 2012 as several large projects near completion and as the company transitions from lower margin legacy Dominion backlog and projects procured in the more competitive environment of late 2008, 2009 and early 2010, to new higher-margin projects recently added to backlog.

•     Canem, the Commercial Systems segment, experienced some margin weakness in the first quarter of 2012 largely due to the inclusion of McCaine’s operations and the deferral of several large projects which remain to be executed in the remainder of 2012 and 2013. Canem’s outlook is positive, since those projects have not been cancelled but are just proceeding at a slower pace, while other projects are experiencing scope increases.

•     Within the Industrial Services segment, Churchill Services Group (CSG) had a strong quarter as turnaround and maintenance work, largely in Alberta’s oil sands, continued. Recent backlog additions, including bundled service offerings, provided a strong start to 2012. Broda, as expected, showed a loss in the first quarter as it took advantage of the relatively slow winter season to do corrective and preventative maintenance on its fleet of equipment. This practice improves the performance and availability of the equipment during the balance of the year. Going forward, CSG is expecting continued growth in the remainder of 2012 and Broda also expects strong performance in 2012.

The Corporation intends to reduce debt with operating cash flow, unless corporate development initiatives necessitate deployment of that cash in an alternative manner. Churchill is continuing to explore adding complementary lines of business through “tuck-in” acquisitions. Churchill may also consider more impactful acquisitions where the price is reasonable and there is a clear opportunity to enhance the business model and create shareholder value.

Sovereign debt concerns in Europe and the United States continue to trouble the capital markets and have continued to cause significant volatility in the first quarter of 2012. Prices of commodities such as crude oil and natural gas have also been volatile. Oil prices have been strong with the West Texas Intermediate spot price averaging US$102.88 per barrel in the first quarter of 2012, and forecast by the U.S. Department of Energy’s Energy Information Administration to average approximately US$106 per barrel on an annual basis in 2012. Natural gas prices, on the other hand, are expected to continue to remain low with an average Henry Hub spot price of US$2.45 per million British thermal units (“MMBtu”) in the first quarter of 2012 and a forecasted average spot price of $2.51 per MMBtu on an annual basis in 2012. It is management’s intention to continue to monitor these developments very closely and to remain in close communication with customers to ensure that the Corporation is positioned to react should a severe market correction occur. In the recessionary period of late 2008 and 2009, there were no significant delays in the Corporation’s backlog with the exception of the Lethbridge Hospital project, which was subsequently re-awarded to SODCL, as announced on July 6, 2011. Churchill’s backlog remains approximately 60% institutionally levered, so management expects limited impact on the backlog should Western Canada experience an economic slowdown. Also, during the previous recession, Churchill actually delivered strong financial performance as a result of right-sizing its industrial organization to adjust to the prevailing economic environment and from executing its higher margin, multi-year General Contracting backlog.