CALGARY, ALBERTA - May 10, 2010 /CNW/ - Newalta Corporation ("Newalta") (TSX:NAL) today announced financial results for the three months ended March 31, 2010. Results in Q1 were dramatically improved over last year with Adjusted EBITDA up 145% from $11.8 million in 2009 to $28.9 million. Approximately 61% of the increase was attributable to stronger activity and reduced costs and 39% was due to higher commodity prices in the quarter compared to last year.
"Our strong results in the quarter demonstrated the powerful impact of changes in market demand and commodity prices on bottom-line performance. In the quarter, revenue was up $18.7 million compared to last year while Adjusted EBITDA improved by $17.1 million," said Al Cadotte, President and CEO of Newalta.
"Results in the second quarter are expected to be much improved over last year and the outlook for the second half of the year is very positive."
Financial results and highlights for the three months ended March 31, 2010:
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-- Revenue, net earnings, and Adjusted EBITDA(1) increased by 17%, 231% and
145%, respectively, compared to the same period last year.
-- Trailing twelve-month Adjusted EBITDA was $99.2 million at the end of
Q1.
-- Revenue and net margin(1) in the Facilities Division increased 19% and
105%, respectively, year-over-year, primarily due to higher commodity
prices, increased landfill volumes and higher production at VSC.
-- Onsite Division's revenue and net margin increased by 11% and 100%,
respectively, year-over-year, as a result of strong performance from the
Heavy Oil business unit driven by higher oil prices, as well as improved
results in Western Onsite from higher equipment utilization due to
increased drilling activity.
-- SG&A before non-cash stock-based compensation was in line with our
expectations at $14.3 million, and less than 11% of total revenue.
-- Maintenance capital expenditures(1) for the quarter were $3.0 million
compared to $2.0 million in 2009. Growth capital expenditures(1) were
$5.6 million, compared to $6.1 million in 2009.
Other highlights:
-- In 2010, capital expenditures are budgeted at $87 million, comprised of
growth capital of $60 million, and maintenance capital of $27 million.
These projects will be funded entirely from Funds from operations, with
approximately 35% expected to be spent in the first half of 2010.
-- Our Board of Directors declared a dividend of $0.05 per share to holders
of record as at March 31, 2010 which was paid April 15, 2010. We expect
to pay a dividend of $0.05 per share to holders of record on June 30,
2010.
Financial Results and Highlights
Three months ended
March 31,
% Increase
($000s except per share data) (unaudited) 2010 2009 (Decrease)
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Revenue 131,240 112,538 17
Net earnings 5,722 (4,381) 231
- per share ($) - basic 0.12 (0.10) 220
- per share ($) - diluted 0.12 (0.10) 220
EBITDA(1) 27,370 12,030 128
- per share ($)(1) 0.56 0.28 100
Adjusted EBITDA(1) 28,866 11,792 145
- per share ($)(1) 0.60 0.28 114
Cash from operations 10,737 30,042 (64)
- per share ($) 0.22 0.71 (69)
Funds from operations(1) 23,073 6,809 239
- per share ($)(1) 0.48 0.16 200
Maintenance capital expenditures(1) 3,048 2,046 49
Dividends declared(1) 2,424 2,126 14
- per share- ($)(1) 0.05 0.05 -
Cash distributed(1) 2,424 7,560 (68)
Growth capital expenditures(1) 5,582 6,069 (8)
Weighted average shares outstanding 48,480 42,402 14
Shares outstanding, March 31,(2) 48,487 42,494 14
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(1) These financial measures do not have any standardized meaning prescribed
by Canadian generally accepted accounting principles ("GAAP") and are
therefore unlikely to be comparable to similar measures presented by
other issuers. Non-GAAP financial measures are identified and defined
throughout the attached Management's Discussion and Analysis.
(2) Newalta has 48,486,502 shares outstanding as at May 10, 2010.
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Management's Discussion and Analysis and Newalta's unaudited consolidated financial statements and notes thereto are attached.
Management will hold a conference call on Tuesday, May 11, 2010 at 4 p.m. (EST) to discuss Newalta's performance for the first quarter. To participate in the teleconference, please call 416-695-7848 or 1-800-766-6630. To access the simultaneous webcast, please visit www.newalta.com. For those unable to listen to the live call, a taped broadcast will be available at www.newalta.com and, until midnight on Tuesday, May 18, 2010 by dialing 1-800-408-3053 and using the pass code 1433465.
NEWALTA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31, 2010 and 2009
Certain statements contained in this document constitute "forward-looking statements". When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", and similar expressions, as they relate to Newalta Corporation (the "Corporation" and together with other subsidiaries, "Newalta"), or their management, are intended to identify forward-looking statements. In particular, forward-looking statements included or incorporated by reference in this document include statements with respect to:
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-- future operating and financial results;
-- expected demand for our services;
-- business prospects and strategy;
-- capital expenditure programs and other expenditures;
-- the amount of dividends declared or payable in the future;
-- realization of anticipated benefits of acquisitions and growth capital
investments;
-- our projected cost structure; and- expectations and implications of
changes in legislation.
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Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation:
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-- general market conditions of the industries we service;
-- strength of the oil and gas industry, including drilling activity;
-- fluctuations in commodity prices for oil and lead;
-- fluctuations in interest rates and exchange rates;
-- supply of waste lead acid batteries as feedstock to support direct lead
sales
-- demand for our finished lead products by the battery manufacturing
industry;
-- our ability to secure future capital to support and develop our
business, including the issuance of additional common shares;
-- dependence on our senior management team and other operations management
personnel with waste industry experience;
-- the seasonal nature of our operations;
-- success of our growth and acquisition strategies including integration
of businesses into our operations and potential liabilities from
acquisitions;
-- the highly regulated nature of the waste management and environmental
services business in which we operate;
-- costs associated with operating our landfills and reliance on third
party waste volumes;
-- the competitive environment of our industry in eastern and western
Canada;
-- risk of pending and future legal proceedings;
-- our ability to attract and retain skilled employees and maintain
positive labour union relationships;
-- fluctuations in the costs and availability of fuel for our operations;
-- open access for new industry entrants and the general unprotected nature
of technology used in the waste industry;
-- possible volatility of the price of, and the market for, our common
shares;
-- obtaining insurance for various potential risks and hazards on
reasonable financial terms;
-- the nature of and market for our debentures; and
-- such other risks or factors described from time to time in reports we
file with securities regulatory authorities.
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By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and readers are cautioned that the foregoing list of factors is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the forward-looking statements contained in this document are made as of the date of this document and the forward-looking statements in this document are expressly qualified by this cautionary statement. Unless otherwise required by law, we do not intend, or assume any obligation, to update these forward-looking statements.
RECONCILIATION OF NON-GAAP MEASURES
This Management's Discussion and Analysis contains references to certain financial measures, including some that do not have any standardized meaning prescribed by Canadian generally accepted accounting principles ("GAAP") and may not be comparable to similar measures presented by other corporations or entities. These financial measures are identified and defined below:
"Combined divisional net margin" and "net margin" are used by management to analyze divisional operating performance. Combined divisional net margin and net margin as presented are not intended to represent earnings before taxes, nor should it be viewed as an alternative to net earnings or other measures of financial performance calculated in accordance with GAAP. Combined divisional net margin is calculated from the segmented information contained in the notes to the consolidated financial statements and is defined as revenue less operating and amortization and accretion expenses for both of our operating segments. Combined divisional net margin excludes inter-segment eliminations and unallocated revenue and expenses. Net margin for each of our segments is calculated from the segmented information contained in the notes to the consolidated financial statements and is defined as earnings before taxes with financing and selling, general, and administrative ("SG&A") expenses added back.
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Three months ended
March 31,
($000s) 2010 2009
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Earnings before taxes 8,013 (6,362)
Add back (deduct):
Selling,general, and administrative(1) 15,812 13,607
Finance charges(1) 6,252 5,580
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Consolidated net margin 30,077 12,825
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Unallocated net margin(1) 2,621 3,204
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Combined divisional net margin 32,698 16,029
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(1) Management does not allocate interest income; selling, general, and
administrative; taxes; finance charges; and corporate amortization and
accretion expense in the segmented analysis (see Note 21 to the
Consolidated Financial Statements).
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"EBITDA", "EBITDA per share", "Adjusted EBITDA", and "Adjusted EBITDA per share" are measures of our operating profitability. EBITDA provides an indication of the results generated by our principal business activities prior to how these activities are financed, assets are amortized or how the results are taxed in various jurisdictions. In addition, Adjusted EBITDA provides an indication of the results generated by our principal business activities prior to recognizing non-cash stock-based compensation. Non-cash stock-based compensation, a component of employee remuneration, can vary significantly with changes in the price of our common shares. As such, Adjusted EBITDA provides improved continuity with respect to the comparison of our operating results over a period of time. EBITDA and Adjusted EBITDA are derived from the consolidated statements of operations, comprehensive income and retained earnings. EBITDA per share and Adjusted EBITDA per share are derived by dividing EBITDA and Adjusted EBITDA by the basic weighted average number of shares.
They are calculated as follows:
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Three months ended
March 31,
($000s) 2010 2009
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Net earnings (loss) 5,722 (4,381)
Add back (deduct):
Current income taxes 128 195
Future income taxes 2,163 (2,176)
Finance charges 6,252 5,580
Amortization and accretion 13,105 12,812
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EBITDA 27,370 12,030
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Add back (deduct)
Non-cash stock-based compensation 1,496 (238)
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Adjusted EBITDA 28,866 11,792
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Weighted average number of shares 48,480 42,402
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EBITDA per share 0.56 0.28
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Adjusted EBITDA per share 0.60 0.28
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"Funds from operations" is used to assist management and investors in analyzing cash flow and leverage. Funds from operations as presented is not intended to represent operating funds from operations or operating profits for the period, nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Funds from operations is derived from the consolidated statements of cash flows and is calculated as follows:
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Three months ended March 31,
($000s) 2010 2009
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Cash from operations 10,737 30,042
Add back (deduct):
Changes in non-cash working capital 12,059 (23,476)
Asset retirement costs incurred 277 243
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Funds from operations 23,073 6,809
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Weighted average number of shares 48,480 42,402
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Funds from operations per share 0.48 0.16
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References to Combined divisional net margin, net margin, EBITDA, EBITDA per share, Adjusted EBITDA, Adjusted EBITDA per share and Funds from operations throughout this document have the meanings set out above.
On December 31, 2009, the sole unitholder of Newalta Income Fund (the "Fund") approved the wind-up of the Fund. Subsequent to year end, on January 1, 2010, Newalta Inc. was amalgamated with its wholly-owned operating subsidiary, Newalta Corporation, to form Newalta Corporation.
The following discussion and analysis should be read in conjunction with (i) the consolidated financial statements of Newalta, and the notes thereto for the three months ended March 31, 2010, (ii) the consolidated financial statements of Newalta and notes thereto and Management's Discussion and Analysis of Newalta for the year ended December 31, 2009, (iii) the most recently filed Annual Information Form of Newalta and (iv) the consolidated interim financial statements of Newalta and the notes thereto and Management's Discussion and Analysis for the three months ended March 31, 2009. This information is available at SEDAR (www.sedar.com). Information for the three months ended March 31, 2010, along with comparative information for 2009, is provided.
This Management's Discussion and Analysis is dated May 10, 2010 and takes into consideration information available up to that date. Throughout this document, unless otherwise stated, all currency is stated in Canadian dollars, MT is defined as "tonnes" or "metric tons" and references to shares includes trust units prior to the conversion to a corporate structure.
NEWALTA
Newalta provides cost-effective solutions to industrial customers to improve their environmental performance with a focus on recycling and recovery of products from industrial residues. These services are provided both through our network of 80 facilities across Canada and at our customers' facilities where we mobilize our equipment and people to process material directly onsite. Our customers operate in a broad range of industries including the oil and gas, petrochemical, refining, lead, manufacturing and mining industries. Newalta has delivered strong, profitable growth for over 15 years and has established a leadership position in the industry with talented people, efficient and safe operations, innovative approaches and high ethical standards.
Our strategic objective is to provide our customers with environmentally superior solutions to their complex environmental needs. We will leverage our existing talent and asset base to provide cost-effective solutions which reduce environmental footprints through recycling, recovery, reuse and where possible, eliminating transportation. Longer term, our focus will be to search globally for innovative ways of applying new technologies to provide solutions for existing customers as well as new markets.
FIRST QUARTER RESULTS
Q1 2010 results improved dramatically compared to last year as demand in our markets continued to recover and commodity prices strengthened. Net earnings increased by 231% in Q1 2010 to $5.7 million, while Adjusted EBITDA increased from $11.8 million, or $0.28 per share, to $28.9 million, or $0.60 per share. Improved activity levels combined with productivity and cost efficiencies contributed $10.5 million, or 61%, to the $17.1 million improvement in Adjusted EBITDA, with higher commodity prices contributing $6.6 million, or 39%, to the improvement.
Compared to Q1 2009, Combined divisional net margin increased by 104% as a result of strong performance across all business units. Revenue and net margin in the Facilities Division ("Facilities") increased 19% and 105%, respectively, year-over-year, primarily due to higher commodity prices, increased landfill volumes and higher production at VSC. Onsite Division's ("Onsite") revenue and net margin increased by 11% and 100%, respectively, year-over-year, as a result of strong performance from the Heavy Oil business unit driven by higher oil prices, as well as improved results in Western Onsite from higher equipment utilization due to increased drilling activity.
Adjusted EBITDA on a trailing twelve-month basis increased for the first time since Q4 2008. The trailing twelve-month Adjusted EBITDA was $99.2 million at the end of Q1 2010. This improvement in operational cash flow is highlighted by Funds from operations which increased year-over-year by 239%, or $0.32 per share, compared to Q1 2009.
Table 1: Revenue, Adjusted EBITDA and Trailing Twelve Month Adjusted EBITDA
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Impact of
change in Impact of
Q1 commodity market and
2009 prices(1) other changes Q1 2010
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Revenue 112,538 11,436 7,266 131,240
Expenses
Operating 86,901 4,803 (3,646) 88,058
Selling, general and
administrative(2) 13,607 - 2,205 15,812
Finance charges 5,580 - 672 6,252
Amortization and accretion 12,812 - 293 13,105
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Net earnings (loss) (4,381) 6,633 3,470 5,722
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EBITDA 12,030 6,633 8,707 27,370
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Non-cash Stock Based
Compensation (238) - 1,734 1,496
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Adjusted EBITDA 11,792 6,633 10,441 28,866
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(1) The change in commodity prices is defined as the change in the price
received for recovered crude oil and the change in the price of lead
received, in each instance, in Canadian dollars.
(2) Includes non-cash stock based compensation.
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OUTLOOK
Performance in Q2 2010 is expected to be much improved compared to last year. Crude oil and lead prices for Q2 2010 are trending well above 2009. We anticipate steady commodity prices and improved demand across all of our markets to positively contribute to performance throughout the remainder of 2010.
Facilities performance will be driven by strong commodity prices and increased volumes. Compared to Q2 2009, increased production at VSC and higher volumes at SCL are also expected to result in improved performance in Q2 2010. In terms of development in the Bakken, Montney and Cardium areas, we are well positioned with facilities to meet increasing market demand. Increased demand for drill site equipment in the U.S., specifically in the Marcellus and Fayetteville shale gas plays, will drive growth in the Western Onsite business unit, while our focused expansion on onsite projects serving the refining and petrochemical industries will strengthen performance in Eastern Onsite.
RESULTS OF OPERATIONS - FACILITIES DIVISION
Overview
Facilities includes an integrated network of more than 55 facilities located to service key market areas across Canada employing over 900 people. This division features Canada's largest lead-acid battery recycling facility, located in Ville Ste-Catherine, Quebec ("VSC"), an engineered non-hazardous solid waste landfill located in Stoney Creek, Ontario ("SCL"), and over 25 oilfield facilities throughout western Canada. Facilities is organized into the Western Facilities, Eastern Facilities and VSC business units.
Facilities performance is affected by the following factors:
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-- fluctuation in the price of crude oil, lead and base oil
-- state of the oil and gas industry in western Canada including drilling
activity
-- supply and demand in the North American battery manufacturing industry
-- the amount of waste generated by producers
-- fluctuation in the U.S./Canadian dollar exchange rate
-- the strength of other industries in western Canada, including:
construction, forestry, mining, petrochemical, pulp and paper, refining,
and transportation service industries
-- market conditions in eastern Canada and bordering U.S. states,
including: automotive, construction, forestry, manufacturing, mining,
oil and gas, petrochemical, pulp and paper, refining, steel, and
transportation service industries
The business units contributed the following to division revenue:
Three months ended March 31,
2010 2009
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Western Facilities 47% 53%
Eastern Facilities 22% 21%
VSC 31% 26%
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Table 2: Facilities Revenue and Net Margin
The following table compares Facilities' results for the periods indicated:
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Three months ended
March 31,
($000s) 2010 2009 % change
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Revenue(1) 91,749 77,101 19
Operating costs 58,886 57,950 2
Amortization and accretion 7,118 6,607 8
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Net margin 25,745 12,544 105
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Net margin as % of revenue 28% 16% 75
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Maintenance capital 1,702 1,539 11
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Growth capital(2) 451 3,361 (87)
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Assets employed(3) 556,706 576,146 (3)
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(1) Includes $157,000 in internal revenue in Q1 2010 and $156,000 in Q1
2009.
(2) Growth capital does not include acquisitions
(3) "Assets employed" is provided to assist management and investors in
determining the effectiveness of the use of the assets at a divisional
level. Assets employed is the sum of capital assets, intangible assets
and goodwill allocated to each division.
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Compared to Q1 2009, Facilities revenue and net margin grew by 19% and 105%, respectively. Net margin as a percentage of revenue improved from 16% in Q1 2009 to 28% in Q1 2010. This dramatic improvement was driven by higher commodity prices and increased market activity as well as cost reductions. Volumes at SCL increased by 154% when compared to Q1 2009, while production at VSC increased by 13%. Increased drilling activity in western Canada improved volume receipts at the Western Facilities. Stronger commodity prices accounted for 38% of the increase in net margin in Q1 2010 when compared to 2009.
Western Facilities
Western Facilities are located in British Columbia, Alberta and Saskatchewan and generate revenue from:
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-- the processing of industrial and oilfield-generated wastes, including
collection, treatment, water disposal, clean oil terminalling, custom
treating, and landfilling
-- sale of recovered crude oil for our account
-- oil recycling, including the collection and processing of waste lube
oils and the sale of finished products
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Improved performance in Western Facilities in Q1 2010 compared to Q1 2009 was driven by higher crude oil prices as well as productivity and cost efficiencies recognized in the quarter. Recovery at oilfield facilities, driven by improved crude oil prices and increased oil & gas activity, was partially offset by reduced demand for finished products from our oil recycling business combined with lower base oil prices. Waste processing and recovered crude oil volumes increased by 16% and 6%, respectively, consistent with the 22% increase in wells drilled in Q1 2010 compared to Q1 2009.
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Three months ended
March 31,
2010 2009 % change
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Waste processing volumes ('000 m3) 110.3 95.1 16
Recovered crude oil ('000 bbl)(1) 59 56 6
Average crude oil price received (CDN$/bbl) 75.60 44.90 68
Recovered crude oil sales ($ millions) 4.4 2.5 76
Edmonton par price (CDN$/bbl)(2) 80.01 49.36 62
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(1) Represents the total crude oil recovered and sold for our account.
(2) Edmonton par is an industry benchmark for conventional crude oil.
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Table 3: Recovered Crude Oil - Western Facilities and Waste Processing Volumes - Western Facilities
Eastern Facilities
Eastern Facilities is comprised of facilities in Ontario, Quebec and Atlantic Canada and includes an engineered non-hazardous solid waste landfill located in Stoney Creek, Ontario ("SCL"). Eastern revenue is primarily derived from:
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-- the processing of industrial wastes, including collection, treatment,
and disposal
-- SCL, an engineered non-hazardous solid waste landfill with an annual
permitted capacity of 750,000MT of waste per year
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In Q1 2010, revenue grew by 27% when compared to Q1 2009, due primarily to improved performance at SCL. Compared to Q1 2009, the total volume collected at SCL increased by 154%, a portion of which was derived from event based projects. For the remainder of the year, we expect landfill volumes at or about our three year quarterly average of 150,000 MT.
Stronger performance throughout the remainder of the Eastern Facilities reflected the economic recovery in activity levels in eastern Canada.
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Three months ended
March 31,
2010 2009 % change
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SCL Volume of Collected ('000 MT) 195.2 77.0 154
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Table 4: Volume of Waste Collected - Stoney Creek Landfill
Ville Ste-Catherine ("VSC")
VSC is our lead-acid battery recycling facility. This facility generates revenue from a combination of direct lead sales and tolling fees received for processing batteries. Historically, based on the operation of two kilns, our objective is to maintain a 50/50 split between direct sales and tolling. In 2010, based on customer demand, we expect tolling to account for approximately 60% of total production. Tolling fees are generally fixed, reducing our exposure to fluctuations in lead prices.
VSC revenue in Q1 2010 increased by over 40% compared to Q1 2009 due to both higher lead prices and increased production. The average lagged LME price rose 113% in Q1 2010 to $2,274 U.S./MT from $1,065 U.S./MT in Q1 2009, while lead tonnage sold increased by 13% to 15,700 MT in Q1 2010. Production in Q1 reflected down time for extended maintenance for Kiln 2. We anticipate fairly consistent quarterly production for the remainder of 2010, ranging between 17,000 MT and 20,000 MT per quarter.
RESULTS OF OPERATIONS - ONSITE DIVISION
Overview
Onsite includes a network of 25 facilities with over 400 employees across Canada. Onsite services involve the mobilization of equipment and our people to manage industrial by-products at our customer sites. Onsite includes: the processing of oilfield-generated wastes and the sale of recovered crude oil for our account; industrial cleaning; site remediation; dredging and dewatering; and drill site processing including solids control and drill cuttings management. Onsite includes the Western Onsite, Eastern Onsite and Heavy Oil business units.
The business units contributed the following to division revenue:
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Three months ended
March 31,
2010 2009
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Western Onsite 38% 36%
Eastern Onsite 26% 30%
Heavy Oil 36% 34%
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Onsite's performance is affected by the following factors:
-- fluctuation in the price of crude oil and heavy oil price differentials
-- state of the oil and gas industry in Canada and the U.S. including
drilling activity
-- fluctuation in the U.S./Canadian dollar exchange rate
-- the amount of waste generated by producers
-- changes in regulations
-- market conditions in Canada and bordering U.S. states, including:
automotive, construction, forestry, manufacturing, mining, oil and gas,
petrochemical, pulp and paper, refining, steel, and transportation
service industries
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Table 5: Onsite Revenue and Net Margin
The following table compares Onsite's results for the periods indicated:
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Three months ended
March 31,
($000s) 2010 2009 % change
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Revenue - external 39,648 35,593 11
Operating costs 29,329 29,107 1
Amortization and accretion 3,366 3,001 12
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Net margin 6,953 3,485 100
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Net margin as % of revenue 18% 10% 80
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Maintenance capital 1,039 507 105
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Growth capital(1) 2,536 1,361 86
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Assets employed(2) 240,780 242,286 (1)
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(1) Growth capital does not include acquisitions.
(2) "Assets employed" is provided to assist management and investors in
determining the effectiveness of the use of the assets at a divisional
level. Assets employed is the sum of capital assets, intangible assets
and goodwill allocated to each division.
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Revenue and net margin increased by approximately 11% and 100%, respectively, in Q1 2010 compared to Q1 2009, while net margin as a percentage of revenue almost doubled, increasing from 10% in Q1 2009 to 18% in 2010. Strong performance across all business units was supported by our ability to leverage our cost structure with incremental growth. Strong results from Heavy Oil driven by higher crude oil prices and increased demand for drill site services in Western Onsite resulted in marked improvement year-over-year. Recovery in drilling activity, especially in the U.S., strengthened performance in Western Onsite. Higher crude oil prices accounted for 39% of the increase in revenue and 46% of the increase in margin.
Western Onsite
Revenue is primarily generated from:
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-- the supply and operation of drill site processing equipment, including
equipment for solids control and drill cuttings management throughout
western Canada and the U.S.
-- onsite service in western Canada, excluding services provided by Heavy
Oil, including industrial cleaning; site remediation; dredging and
dewatering; and centrifugation
-- environmental services comprised of environmental projects and drilling
waste management services for primarily oil & gas customers
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Q1 2010 Western Onsite revenue improved by 16% due to increased drilling activity in western Canada, primarily in the Horn River and Montney shale gas plays, and the U.S., where we are most active in the Marcellus and Fayetteville shale gas plays. Total equipment utilization increased from 31% in Q1 2009 to 52% in Q1 2010, with an 81% increase in utilization of the U.S. fleet and a 63% increase in utilization of the Canadian fleet. We anticipate continued recovery in this business unit consistent with increased drilling activity in both Canada and the U.S. We will continue to balance our fleet in Canada and the U.S. to meet customer demand.
Eastern Onsite
Eastern Onsite revenue is derived from:
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-- onsite service in eastern Canada, including industrial cleaning;
centrifugation; and dredging and dewatering
-- a fleet of specialized vehicles and equipment for emergency response,
and onsite processing
-- the supply and operation of drill site processing equipment, including
equipment for solids control and drill cuttings management in eastern
Canada
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Compared to Q1 2009, Eastern Onsite revenue was flat. Q1 is typically the weakest quarter for this business unit due to the aqueous nature of our work. Growth from refocusing our business to the refining and petrochemical industry was offset by timing deferrals of onsite projects in the Atlantic region. As we establish our market position, we are engaged primarily in short term projects providing centrifugation, dredging services and industrial cleaning at our customers sites. In Q2, we expect our momentum from gains made in the refining and petrochemical industry to drive growth when compared to Q2 2009.
Heavy Oil
Our heavy oil services business began 15 years ago with facilities at Hughenden and Elk Point, Alberta. This business has evolved from processing heavy oil in our facility network to operating equipment on customers' sites. Leveraging our facilities as staging areas, we deliver a broad range of specialized services at numerous customer sites under short and long-term arrangements.
Heavy Oil business unit revenue is generated from three main activities:
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-- specialized onsite services for heavy oil producers under short and
long-term arrangements
-- processing and disposal of oilfield-generated wastes, including water
disposal, and landfilling
-- sale of recovered crude oil for our account
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Compared to Q1 2009, Heavy Oil revenue increased by 18%.
SAGD onsite projects continued to perform as expected with service expansion at existing long term project locations. Revenue from onsite services are generally based on processing volumes and are not directly susceptible to fluctuations in crude oil pricing.
At our Heavy Oil facilities, waste processing and recovered crude oil volumes to our account decreased by 6% and 20%, respectively, due to reduced production related waste volumes as a result of lower drilling activity in the area served by our Heavy Oil facilities. This decline was more than offset by an 81% increase in the average crude oil price received.
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Three months ended
March 31,
2010 2009 % change
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Waste processing volumes ('000 m3) 124 132 (6)
Recovered crude oil ('000 bbl)(1) 42 52 (20)
Average crude oil price received (CDN$/bbl) 66.05 36.43 81
Recovered crude oil sales ($ millions) 2.7 1.9 42
Bow River Hardisty (CDN$/bbl)(2) 75.20 45.41 66
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(1) Represents the total crude oil recovered and sold for our account.
(2) Bow River Hardisty is an industry benchmark for heavy crude oil.
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Table 6: Recovered Crude Oil - Heavy Oil Facilities and Waste Processing Volumes - Heavy Oil Facilities
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CORPORATE AND OTHER
Three months ended
March 31,
($000s) 2010 2009 % change
----------------------------------------------------------------------------
Selling, general and administrative expenses
("SG&A") 15,812 13,607 16
Less non-cash stock-based compensation 1,496 (238) 729
------------------------------
SG&A before non-cash stock-based compensation 14,316 13,845 3
SG&A before non-cash stock-based
compensation as a % of revenue 10.9% 12.3% (11)
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/T/
SG&A before non-cash stock-based compensation for Q1 2010 was in line with expectation, reflecting our continued focus on managing our cost framework in concert with increasing customer demand and growth initiatives.
/T/
Three months ended
March 31,
($000s) 2010 2009 % change
----------------------------------------------------------------------------
Amortization and accretion 13,105 12,812 2
as a % of revenue 10.0% 11.4% (12)
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/T/
Amortization and accretion in Q1 2010 included $0.2 million for a net loss on disposal of assets for the quarter compared to a $0.7 million net loss in Q1 2009. Compared to Q1 2009, amortization and accretion increased due to higher depreciation for assets amortized on a unit of production basis with higher utilization.
/T/
Three months ended
March 31,
($000s) 2010 2009 % change
----------------------------------------------------------------------------
Bank fees and interest 3,909 3,264 20
Convertible debentures interest and accretion 2,343 2,316 1
of issue costs
----------------------------------------------------------------------------
Finance charges 6,252 5,580 12
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/T/
Compared to Q1 2009, finance charges increased in Q1 2010 primarily due to higher credit facility fees and higher standby fees. Finance charges associated with the Convertible Debentures ("Debentures") include an annual coupon rate of 7%, the accretion of issue costs and discount on the debt portion of the Debentures. See "Liquidity and Capital Resources" in this MD&A for discussion of our long-term borrowings.
/T/
Three months ended
March 31,
($000s) 2010 2009 % change
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Current tax 128 195 (34)
Future income tax 2,163 (2,176) 199
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Provision for (recovery of) income taxes 2,291 (1,981) 216
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/T/
The increase in future income tax expense in the quarter is due to higher taxable income compared to Q1 2009. To date, loss carry forwards are approximately $174 million. Other than provincial capital taxes and U.S. state and federal income taxes, we do not anticipate paying significant income tax for at least three years. See "Critical Accounting Estimates - Income Taxes" on page 34 of the MD&A for the year ended December 31, 2009 for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
The term liquidity refers to the speed with which a company's assets can be converted into cash, as well as cash on hand. Our liquidity risk may arise from general day-to-day cash requirements, and in the management of our assets, liabilities and capital resources. Liquidity risk is managed against our financial leverage to meet obligations and commitments in a balanced manner. For further information on our risk management, refer to Note 18 to the consolidated financial statements for the year ended December 31, 2009.
Our debt capital structure is as follows:
/T/
($000s) March 31, 2010 December 31, 2009 ---------------------------------------------------------------------------- Use of Credit Facility: Amount drawn on Credit 191,753 Facility(1) 195,199 Letters of credit 22,292 22,137 ---------------------------------------------------------------------------- Funded debt A 214,046 217,336 Unused Credit Facility capacity 135,954 132,664 ---------------------------------------------------------------------------- Debentures B 115,000 115,000 ---------------------------------------------------------------------------- Total Debt =A+B 329,046 332,336 ---------------------------------------------------------------------------- 1) See Note 5 to the consolidated financial statements for the three months ended March 31, 2010. The senior long-term debt at March 31, 2010 was $194.2 million.
/T/
We continue to focus on managing our working capital accounts while supporting our growth. Working capital at March 31, 2010 increased to $48.9 million from $31.0 million at December 31, 2009, due to the BioteQ investment, changes in our accrued liabilities and the timing of payments. Cash from operations was similarly impacted. Days' sales outstanding in receivables and accounts receivable over 90 days were consistent with Q4 2009.
At current activity levels, working capital of $49 million is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. We will continue to manage working capital to balance prudent management with increasing activity levels.
SOURCES OF CASH
Our liquidity needs can be sourced in several ways including: Funds from operations, borrowings against our Credit Facility, new debt instruments, the issuance of securities from treasury, return of letters of credit or replacement of letters of credit with other types of financial security, proceeds from the sale of assets and adjustments to dividends paid to shareholders.
Credit Facility
At March 31, 2010, $136 million was available and undrawn under the Credit Facility to fund growth capital expenditures and for general corporate purposes, as well as to provide letters of credit to third parties for financial security up to a maximum amount of $60.0 million. The aggregate dollar amount of outstanding letters of credit is not categorized in the financial statements as long-term debt; however, the issued letters of credit reduce the amount available under the Credit Facility and are included in the definition of Funded Debt for covenant purposes. Under the Credit Facility agreement, surety bonds (including performance and bid bonds) to a maximum of $125 million are excluded from the definition of Funded Debt. As at March 31, 2010, surety bonds issued and outstanding totalled $19.4 million.
Financial performance relative to the financial ratio covenants(1) under the Credit Facility is reflected in the table below:
/T/
March 31, 2010 Threshold
----------------------------------------------------------------------------
Current Ratio(2) 1.60:1 1.10:1 minimum
Funded Debt(3) to EBITDA(4)(5) 2.15:1 3.00:1 maximum
Fixed Charge Coverage(6) 3.04:1 1.00:1 minimum
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(1) We are restricted from declaring dividends if we are in breach of the
covenants under our Credit Facility.
(2) Current Ratio means, the ratio of consolidated current assets to
consolidated net current liabilities (excluding the current portion of
long-term debt and capital leases outstanding, if any).
(3) Funded Debt is a non-GAAP measure, the closest measure of which is
long-term senior debt. Funded Debt is generally defined as long-term
debt and capital leases including any current portion thereof but
excluding future income taxes and future site restoration costs. Funded
Debt is calculated by adding the senior long-term debt to the amount of
letters of credit outstanding at the reporting date. In calculating
Funded Debt, letters of credit returned after the end of a fiscal
quarter but prior to the date that is 45 days following the end of the
first, second or third interim period (90 days following the end of the
annual period) are excluded.
(4) EBITDA is a non-GAAP measure, the closest measure of which is net
earnings. For the purpose of calculating the covenant, EBITDA is
defined as the trailing twelve-months consolidated net income for
Newalta before the deduction of interest, taxes, depreciation and
amortization, and non-cash items (such as non-cash stock-based
compensation and gains or losses on asset dispositions). Additionally,
EBITDA is normalized for any acquisitions completed during that time
frame and excludes any dispositions incurred as if they had occurred at
the beginning of the trailing twelve-months.
(5) Funded Debt to EBITDA means the ratio of consolidated Funded Debt to the
aggregate EBITDA for the trailing twelve-months.
(6) Fixed Charge Coverage Ratio means, based on the trailing twelve-month
period, EBITDA less unfinanced capital expenditures and cash taxes to
the sum of the aggregate of principal payments (including amounts under
capital leases, if any), interest (excluding accretion for the
convertible debentures), dividends paid for such period, other than cash
payments in respect of a dividend reinvestment plan, if any. Unlike the
Funded Debt to EBITDA ratio, the Fixed Charge Coverage ratio trailing
twelve-month EBITDA is not normalized for acquisitions or dispositions.
/T/
Our Funded Debt was $214 million for Q1 2010, resulting in a Funded Debt to EBITDA ratio of 2.15:1; a $94 million improvement over Q1 2009. Strong results in the quarter improved our Fixed Charge Coverage ratio from 2.24:1 at December 31, 2009 to 3.04:1 at March 31, 2010. The current ratio, defined as the ratio of total current assets to total current liabilities, improved to 1.60 times at March 31, 2010 from 1.34:1 compared to December 31, 2009. This ratio exceeds our bank covenant minimum requirement of 1.10:1.
Ongoing improved operating performance combined with effective management of our working capital continues to have positive impacts on our debt position and balance sheet. We will manage within our covenants throughout 2010.
Debentures
The Debentures have a maturity date of November 30, 2012 and bear interest at a rate of 7.0% payable semi-annually in arrears on May 31 and November 30 each year. Each $1,000 debenture is convertible into 43.4783 shares, at a conversion price of $23.00 per share, at any time at the option of the holders of the Debentures. The Debentures are not included in calculating financial covenants in the Credit Facility.
There were no redemptions of the Debentures in 2009.
USES OF CASH
Our primary uses of funds include maintenance and growth capital expenditures as well as acquisitions, payment of dividends, operating and SG&A expenses, and the repayment of debt.
Capital Expenditures
"Growth capital expenditures" or "growth and acquisition capital expenditures" are capital expenditures that are intended to improve our efficiency and productivity, allow us to access new markets, and diversify our business. Growth capital or growth and acquisition capital are reported separately from maintenance capital because these types of expenditures are discretionary. "Maintenance capital expenditures" are capital expenditures to replace and maintain depreciable assets at current service levels. Maintenance capital expenditures are reported separately from growth activity because these types of expenditures are not discretionary and are required to maintain current operating levels.
Capital expenditures for the three months ended March 31, 2010 were:
/T/
Three months ended
March 31,
($000s) 2010 2009
----------------------------------------------------------------------------
Growth capital expenditures 5,582 6,069
Maintenance capital expenditures 3,048 2,046
----------------------------------------------------------------------------
Total capital expenditures(1) 8,603 8,115
----------------------------------------------------------------------------
(1) The numbers in this table differ from the consolidated statements of
cash flows because the numbers above do not reflect the net change in
working capital related to capital asset accruals.
/T/
Total capital expenditures for the quarter were $8.6 million. Growth capital expenditures of $5.6 million primarily related to centrifugation equipment for project work in our Heavy Oil business unit and leasehold improvements. Maintenance capital expenditures related primarily to the construction of landfill cells and routine process equipment refurbishment in both Facilities and Onsite. Capital expenditures were funded by Funds from operations.
Capital expenditures in 2010 are budgeted at $87 million, comprised of growth capital expenditures of $60 million, and maintenance capital of $27 million, with approximately 35% expected to be spent in the first half of 2010. First quarter capital expenditures were 10% of the budget for the year. We may revise the budget, from time to time, in response to changes in market conditions that materially impact our financial performance and/or investment opportunities.
Dividends and Share Capital
In determining the dividend to be paid to our shareholders, the Board of Directors considers a number of factors including the forecasts for operating and financial results, maintenance and growth capital requirements as well as market activity and conditions. After a review of all factors, the Board declared $2.4 million in dividends or $0.05 per share, paid April 15, 2010 to shareholders of record as at March 31, 2010.
We expect to pay a dividend of $0.05 per share to holders of record on June 30, 2010. The Board will continue to review future dividends, taking into account all factors noted above.
As at May 10, 2010, Newalta had 48,486,502 shares outstanding, outstanding options to purchase up to 2,789,575 shares and a number of shares that may be issuable pursuant to the $115.0 million in Debentures (see Sources of Cash - Debentures on page 27 of the MD&A for the year December 31, 2009.)
Contractual Obligations
For the three months ended March 31, 2010, there were no significant changes in our contractual obligations. For a summary of our contractual obligations, see page 29 of the MD&A for the year ended December 31, 2009.
SUMMARY OF QUARTERLY RESULTS
/T/
($000s except per share
data) 2010 2009
Q1 Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue 131,240 137,308 122,169 111,386 112,538
Earnings (loss) before
taxes 8,013 3,451 5,936 (293) (6,362)
Net earnings (loss) 5,722 4,092 3,567 (179) (4,381)
Earnings (loss) per share
($) 0.12 0.09 0.08 0.00 (0.10)
Diluted earnings (loss)
per share ($) 0.12 0.09 0.08 0.00 (0.10)
Weighted average shares -
basic 48,480 46,770 42,438 42,450 42,402
Weighted average shares -
diluted 48,826 47,049 42,610 42,450 42,402
EBITDA 27,370 24,698 25,253 17,940 12,030
Adjusted EBITDA 28,866 25,506 26,606 18,253 11,792
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($000s except per share
data) 2008
Q4 Q3 Q2
--------------------------------------------------------
Revenue 145,341 158,579 142,939
Earnings (loss) before
taxes 5,616 19,041 9,293
Net earnings (loss) 9,085 18,717 11,776
Earnings (loss) per share
($) 0.21 0.44 0.28
Diluted earnings (loss)
per share ($) 0.21 0.44 0.28
Weighted average shares -
basic 42,266 42,102 41,822
Weighted average shares -
diluted 42,266 42,111 41,950
EBITDA 27,600 37,441 26,573
Adjusted EBITDA 27,630 36,887 27,190
--------------------------------------------------------
/T/
Quarterly performance is affected by, among other things, weather conditions, timing of Onsite projects, commodity prices, foreign exchange rates, market demand, and the timing of our growth capital investments as well as acquisitions and the contributions from those investments. Growth capital investments completed in the first half of the year will tend to strengthen the second half financial performance. Revenue from certain business units is impacted by seasonality. However, due to the diversity of our business, the impact is limited on a consolidated basis. For example, waste volumes received at our oilfield facilities decline in the second quarter due to road bans which restrict drilling activity. This decline is masked by increased activity in our Eastern Onsite business unit due to the aqueous nature of work performed, as well as potentially by fluctuations in commodity prices, or event based waste receipts at SCL. As experienced over the last six quarters, fluctuations in commodity prices can dramatically impact our results.
Revenue, earnings before taxes, and net earnings for most of 2008 reflected relatively high commodity prices and strong drilling activity. However, in Q4 2008, crude oil prices declined significantly, negatively impacting revenue and earnings in the Western Facilities and Heavy Oil business units. In addition, earnings in Q4 2008 were negatively impacted by non-recurring charges related to conversion costs, reorganization charges and changes in estimated revenue associated with certain environmental projects. Increases in weighted average shares in 2008 related to the distribution re-investment plan which was discontinued after we converted from an income trust to a corporation.
In 2009, revenue and net earnings grew as the year progressed, with lower revenue, earnings before taxes, and net earnings in the first half of the year as compared to the prior period mainly due to weaker economic conditions. Lead and crude oil prices fell from historic highs achieved in 2008, continuing the negative impact on revenue and margin from Q4 2008. The improvement in Q2 2009 was driven by a combination of stronger commodity prices and management's cost containment program. In Q3 2009, we observed improved commodity prices and typical seasonal activity increases; however, our waste volumes remained below historic levels. Revenue in Q4 2009 improved due to higher commodity prices, better waste receipts at SCL and increased lead production at VSC. Weighted average shares increased reflecting the equity offering of 6 million shares completed on October 27, 2009. Q1 2010 revenue, earnings before taxes and net earnings reflect continued improvements in commodity prices and productivity and cost efficiencies combined with strengthened demand across all business units.
FACILITIES AND ONSITE ADDITIONAL HISTORICAL INFORMATION
The tables below outline the business unit contributions to revenue in 2009, 2008 and 2007 within the Facilities and Onsite divisions.
Facilities - Information by Quarter
/T/
2009 2008
----------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------------------------------------------
Western Facilities 53% 46% 48% 39% 58% 55% 61% 51%
Eastern Facilities 21% 26% 23% 24% 18% 21% 21% 28%
VSC 26% 28% 29% 37% 24% 24% 18% 21%
----------------------------------------------------------------------------
2007
------------------------------------------------
Q1 Q2 Q3 Q4
------------------------------------------------
Western Facilities 75% 68% 72% 65%
Eastern Facilities 25% 32% 28% 26%
VSC -% -% -% 9%
------------------------------------------------
Onsite - Information by Quarter
2009 2008
----------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------------------------------------------
Western Onsite 36% 18% 23% 25% 41% 27% 29% 37%
Eastern Onsite 30% 40% 39% 40% 28% 33% 35% 37%
Heavy Oil 34% 42% 38% 35% 31% 40% 36% 26%
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2007
------------------------------------------------
Q1 Q2 Q3 Q4
------------------------------------------------
Western Onsite 59% 46% 41% 39%
Eastern Onsite 24% 33% 33% 31%
Heavy Oil 17% 21% 26% 30%
------------------------------------------------
/T/
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
SENSITIVITIES
There have been no significant variations from the sensitivities provided in the MD&A for the year ended December 31, 2009. For further information on sensitivities, see page 33 of the MD&A for the year ended December 31, 2009.
FUTURE ACCOUNTING POLICY CHANGES
For information regarding our changes in accounting policies see page 45 of the Consolidated Financial Statements for the year ended December 31, 2009.
CRITICAL ACCOUNTING ESTIMATES
For the three months ended March 31, 2010, there have been no significant changes in our critical accounting estimates. For further information on our critical accounting estimates, see page 34 of the MD&A for the year ended December 31, 2009.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
In February 2008, the Canadian Accounting Standards Board ("AcSB") confirmed that Canadian publicly accountable enterprises would be required to adopt IFRS for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to GAAP, but there are differences in recognition, measurement and disclosures.
Management established a project team to plan for and achieve a smooth transition to IFRS. An external resource has also been engaged in an advisory capacity. The Audit Committee of the Board of Directors regularly receives progress reports on the status of the IFRS implementation project. The following table summarizes our key activities, related milestones, and accomplishments to date.
/T/
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Key Activity Milestones Status
----------------------------------------------------------------------------
Accounting policies and
procedures:
- Identification of - Finalize accounting We have completed our
differences between IFRS policy choices internal review of
and the company's under IFRS differences between IFRS
existing policies and and current
procedures policies and procedures
and have made
- Accounting policy - Finalize opening initial assessments of
choices under IFRS balances (Q4 accounting policy
2009/Q1 2010) choices. We are in the
process of confirming
- Financial statement - Complete new financial these assessments with
impact policies and our consultants and
procedures manual auditors.
addressing IFRS
requirements.
- Opening balances Significant impact areas
have been identified.
- Financial policies and The financial
procedures statement impact
assessment is ongoing.
- Identification of areas We are on track for
that may have a finalizing opening
significant impact. balances in the third
quarter of 2010.
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Financial Statement
Preparation:
- Prepare financial - Senior management A preliminary pro forma
statements and note approval and financial statement
disclosures in audit committee review and note disclosure
compliance with IFRS of pro forma structure was presented
financial statements to senior management and
and disclosures the audit committee
(by Q3 2010) early in 2009.
- Quantify the effects of
converting to IFRS
- Prepare first-time
adoption reconciliations
required under IFRS 1
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IT Infrastructure:
Identify key changes in the - Ensure readiness for Required system
following areas: parallel processing upgrades
of 2010 financial and changes
- IT system changes and results and IFRS have been made.
upgrades -compliant
reporting in
2011 (Q4 2009)
- Systemic process changes
for data collection for G/L,- Identify and recommend Parallel SAP
disclosures, and systemic system is
consolidation process changes operational.
(Q2/Q3 2009)
- One-time processes due to - Testing phase We are proceeding
IFRS 1 (Q3/Q4 2009) in accordance with
our IT plan.
- SAP parallel run
(Q4 2009)
----------------------------------------------------------------------------
Control Environment:
Internal control over - Complete final Assessment will be
financial reporting signoff and ongoing throughout
review of 2010.
- Accounting policy changes accounting policy
and approval changes by Q4
2010
- Changes to certification - Update certification
process process by Q4 2010
Disclosure controls and - Publish material Assessment will be
procedures changes ongoing throughout
in policies and known 2010.
impacts of IFRS in
- MD&A communications the MD&A throughout
package 2009 & 2010
(starting Q3 - 2009)
- IFRS adjustments to GAAP - Publish impact of Material changes in
statements (2010) conversion (with policies and known
reconciliation to impacts are expected
GAAP) on key to be communicated
measures (Q1 2011) throughout 2010.
- 2011 financial statement - Publish disclosure of
presentation 2010 comparative
information (with
reconciliation to GAAP)
in the interim
and annual financial
statements (Q1 2011)
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Training, Communication and
Other:
- Provide training to key - Develop working Issue specific
stakeholders groups and training sessions
training began Q1 2010, and
to implement changes will continue
for significant throughout the
impact items. remainder of the
year.
- Address impacts to
operations due to IFRS
- Investor relations - Develop investor Key communication
relations continues to be
communication plan provided through the
(Q3 2009) MD&A. Assessment
of requirements for
further communication
is ongoing.
- Financial covenants - Review of:
-Financial covenants Assessment of impact
- Compensation packages (by Q3 2010) on financial
covenants and
compensation
packages is pending.
-Compensation packages Planning for
(by Q3 2010) communication is
ongoing.
Key stakeholder
communications will
continue in 2010.
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/T/
Management has not yet completed its assessment of the full impact of adopting IFRS. A summary of the key areas where changes in accounting policies are expected to impact our consolidated financial statements are listed below. This summary should not be regarded as a complete list of the changes that will result from the transition to IFRS. Rather, it is intended to highlight those areas management currently believes to be the most significant. The analysis of changes is still in progress and not all decisions have been finalized where choices of accounting policies are available.
Most adjustments required on transition to IFRS will be made retrospectively against opening retained earnings as of January 1, 2010 ("transition date"). Transitional adjustments relating to those standards where comparative figures are not required to be restated will only be made as of the first day of the year of adoption.
First-Time Adoption of IFRS
IFRS 1 ("First-Time Adoption of International Financial Reporting Standards") provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, to the general requirement for full retrospective application of IFRS. The most significant IFRS 1 exemptions expected to apply to Newalta are summarized below.
/T/
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Area of IFRS Summary of Exemption Available
----------------------------------------------------------------------------
Business An entity may elect, on transition to IFRS, not to
Combinations retrospectively apply IFRS 3, "Business Combinations" to
past business combinations. This election is allowed
subject to specific requirements (an entity must
maintain the classification of the acquirer and
acquiree, recognize/derecognize certain assets or
liabilities as required under IFRS and remeasure certain
assets and liabilities at fair value).
Newalta intends to elect, on transition to IFRS, to
apply this exemption and not restate business
combinations prior to transition date.
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Property, Plant and An elective exemption exists whereby an entity may elect
Equipment (Capital to revalue, as the new cost basis for property, plant
Assets) and equipment, its fair value at the date of transition.
The exemption can be applied on an asset by asset basis.
Newalta is not planning on taking this election to
revalue any of its assets at transition date, and will
continue to measure its property, plant and equipment at
historical cost.
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Share-Based An entity may elect not to apply IFRS 2, "Share-based
Payments Payments" to equity instruments granted on or before
November 7, 2002, or which vested prior to transition to
IFRS, and may also elect not to apply IFRS 2 to
liabilities arising from share-based payment
transactions which settled before the date of transition
to IFRS.
Newalta is planning on electing, on transition to IFRS,
to take this exemption and not apply IFRS 2 to equity
instruments and liabilities as described above.
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Decommissioning In accounting for changes in obligations to dismantle,
Liabilities (Asset remove and restore items of property, plant and
Retirement equipment, IFRS guidance requires changes in such
Obligations) obligations to be added to or deducted from the cost of
the asset to which it relates. The adjusted depreciable
amount of the asset is then depreciated prospectively
over its remaining useful life. Rather than
recalculating the effect of all such changes throughout
the life of the obligation, an entity may elect to
measure the liability and the related depreciation
effects at the date of transition to IFRS.
Newalta intends to elect to measure any decommissioning
liabilities and the related depreciation effects at the
date of transition to IFRS.
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/T/
Expected Areas of Significance in Accounting Policies
The following table summarizes the key areas where accounting policies are expected to differ under IFRS and for which accounting policy decisions are necessary. This summary is limited to those areas (with the exception of transition policy choices made under IFRS which are described above) that, based on management's assessment, may have an impact on Newalta's consolidated financial statements.
/T/
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Accounting Policy
Area Summary of Differences and Decision Requirements
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Property, Plant and Under IFRS, an entity is required to prospectively
Equipment choose between the cost model and the revaluation model
(Capital Assets) to account for its capital and intangible assets. The
cost model refers to the use of an asset's carrying
value as its cost less any accumulated depreciation and
impairment loss, and is generally consistent with GAAP.
Under the revaluation model the asset is carried at its
fair value as at the date of revaluation, less any
accumulated depreciation and impairment loss. Value
increases affect equity whereas decreases (in excess of
previously recognized surpluses, if any) affect net
income.
Newalta expects to continue to value property, plant and
equipment using the historical cost method. As such, the
impact of this difference under IFRS will be minimal.
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Borrowing Costs IFRS requires the capitalization of borrowing costs that
are directly attributable to the acquisition,
construction or production of a qualifying asset as part
of the cost of that asset. A qualifying asset is an
asset that necessarily takes a substantial period of
time to prepare for its intended use or sale. Borrowing
costs are considered to be directly attributable to a
qualifying asset when they would have been avoided if
the expenditure on the qualifying asset had not been
made.
This change will be applied prospectively, and
will result in ongoing reduced finance charges and
increased capital asset values, which will be driven by
the levels of activity within qualifying projects in any
given period.
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Impairment Under GAAP, goodwill is tested for impairment by
comparing the fair value of the goodwill, on a reporting
unit basis, with the carrying value of the goodwill.
For remaining assets, GAAP generally uses a two-step
approach to impairment testing: first comparing asset
carrying values with undiscounted future cash flows to
determine whether impairment exists; and then measuring
any impairment by comparing asset carrying values with
fair values.
With IFRS, goodwill is not tested independent of other
assets. Instead, a one step approach is used for testing
for and measuring impairment of all assets at the cash
generating unit (CGU) level. A cash-generating unit
(CGU) is the smallest identifiable group of assets that
generates cash inflows that are largely independent of
the cash inflows from other assets or groups of assets.
Any impairment is applied first to goodwill and then
prorated to the other assets in the CGU. Impairment of
assets other than goodwill can be reversed in later
periods if there is a change in the estimate that
resulted in the original impairment.
Newalta has not yet completed its assessment of the
transition impact of this accounting policy change.
Prospective impacts will be dependent on future
circumstances.
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Provisions IFRS requires a provision to be recognized when: there
including is a present obligation as a result of a past
Decommissioning transaction or event; it is probable that an outflow of
Liabilities(Asset resources will be required to settle the obligation; and
Retirement a reliable estimate can be made of the obligation.
Obligations) and "Probable" in this context means more likely than not.
Constructive Under GAAP, the criterion for recognition in the
Obligations financial statement is "likely", which is a higher
threshold than "probable". Therefore it is possible that
there may be some contingent liabilities which would
meet the criteria for recognition under IFRS that would
not have been recognized under GAAP.
Other differences between IFRS and GAAP exist in
relation to the measurement of provisions, such as the
methodology for determining the best estimate where
there is a range of equally possible outcomes (IFRS
uses the mid-point of the range, whereas GAAP uses the
low end of the range) and the requirement under IFRS for
provisions to be discounted where material.
In measuring the Decommissioning Liability, the IFRS
requirement is based on management's best estimate of
cash flows discounted to present value using a discount
rate which is based on the risks specific to the
liability (unless those risks have been built into the
cash flow estimates). GAAP uses fair value of the
obligation and cash flows discounted using a credit
adjusted risk-free rate to discount cash flow estimates.
Newalta has not yet finalized its assessment of the
ongoing impact of this accounting policy change, but
does not expect the impact to be significant.
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Share-Based Under GAAP, cash settled transactions and transactions
Payments containing settlement alternatives are measured and re-
measured at each reporting date using the intrinsic
value method. IFRS requires initial and subsequent
measurement of fair value by applying an option pricing
model. The difference will impact the accounting
measurement of awards of share appreciation rights and
options granted under Newalta's option plans adopted in
2006 and 2008.
Newalta has not yet finalized its assessment of the
transition impact of this accounting policy change.
Future differences between the fair value and intrinsic
value of outstanding SARs and options plans will result
in different measurements under IFRS and GAAP.
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Income Taxes IFRS requires that deferred tax assets and liabilities
must be classified as non-current in the statement of
financial position. Under GAAP, future income taxes are
classified as current and non-current based on the
classification of the underlying assets or liabilities
to which they relate, or, if there is no underlying
recognized asset or liability, based on the expected
reversal of the temporary difference.
GAAP, like IFRS, current tax represents the amount of
income taxes payable (recoverable) based on taxable
profit (tax loss) for the period and is measured based
on tax rates and laws that are enacted or substantively
enacted at the reporting date. However, the
interpretation of "substantively enacted" under GAAP may
differ from IFRS.
Newalta's assessment of the impact of this accounting
policy change is ongoing.
----------------------------------------------------------------------------
/T/
The above list and related comments should not be regarded as a complete list of changes that will result from transition to IFRS. It is intended to highlight those areas we believe to be most significant at this time; however, our assessment of the impacts of certain differences is still in process and not all decisions have been finalized where choices of accounting policies are available. Moreover, until a full set of financial statements under IFRS has been prepared, management will not be able to determine or precisely quantify all of the impacts that will result from converting to IFRS. There are significant ongoing International Accounting Standards Board ("IASB") projects that could affect the ultimate differences between GAAP and IFRS and their impact on Newalta's consolidated financial statements in future years. In particular, there may be additional new or revised IFRS standards in relation to income taxes, liabilities, leases, related party disclosures, and financial instruments. We have processes in place to ensure that such potential changes are monitored and evaluated. The future impacts of IFRS will also depend on the particular circumstances prevailing in those years. The differences described are those existing based on GAAP and IFRS as of May 10, 2010.
BUSINESS RISKS
Our business is subject to certain risks and uncertainties. Prior to making any investment decision regarding Newalta, investors should carefully consider, among other things, the risks described herein (including the risks and uncertainties listed on the front page of this Management's Discussion and Analysis) and the risk factors set forth in the most recently filed Annual Information Form of Newalta which are incorporated by reference herein.
FINANCIAL AND OTHER INSTRUMENTS
The carrying values of accounts receivable and accounts payable approximate the fair value of these financial instruments due to their short term maturities. Our credit risk from our customers is mitigated by our broad customer base and diverse product lines. In the normal course of operations, we are exposed to movements in U.S. dollar exchange rates relative to the Canadian dollar. The foreign exchange risk arises primarily from U.S. dollar denominated long-term debt and working capital. We have not entered into any financial derivatives to manage the risk for the foreign currency exposure as at March 31, 2010. In Q1 2010, our exposure to foreign exchange was mitigated by the rise in commodity prices as well as our U.S. dollar denominated long-term debt which served as a natural hedge, reducing our balance sheet exposure by approximately 85%.
The floating interest rate profile of our long-term debt exposes us to interest rate risk. We do not use hedging instruments to mitigate this risk. The carrying value of the long-term debt approximates fair value due to its floating interest rates. For further information regarding our financial and other instruments, please refer to Note 18 to the consolidated financial statements for the year ended December 31, 2009.
In January 2010, we invested $4 million in shares and warrants in BioteQ Environmental Technologies Inc. This investment is classified as held for sale on our balance sheet and re-valued each quarter. The unrealized gain or loss on this investment is reflected on the Statements of Comprehensive Income and Accumulated Other Comprehensive Income.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended March 31, 2010, there have been no changes in the internal controls and procedures relating to disclosure and financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ADDITIONAL INFORMATION
Additional information relating to Newalta, including the Annual Information Form, is available through the internet on the Canadian SEDAR which can be accessed at www.sedar.com. Copies of the Annual Information Form of Newalta may be obtained from Newalta Corporation on the internet at www.newalta.com, by mail at 211 - 11th Avenue S.W., Calgary, Alberta T2R 0C6, or by facsimile at (403) 806-7032.
Consolidated Balance Sheets
/T/
December 31,
($000s) (unaudited) March 31, 2010 2009
----------------------------------------------------------------------------
Assets
Current assets
Accounts receivable 86,574 84,317
Inventories 32,493 33,148
Investment (Note 2) 5,171 -
Prepaid expenses and other 5,801 6,183
----------------------------------------------------------------------------
130,039 123,648
Note receivable 966 978
Capital assets 698,147 701,884
Permits and other intangible assets (Note 4) 61,562 61,935
Goodwill 103,597 103,597
Future tax asset 1,646 1,688
----------------------------------------------------------------------------
995,957 993,730
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 78,669 90,191
Dividends payable 2,424 2,423
----------------------------------------------------------------------------
81,093 92,614
Senior long-term debt (Note 5) 194,232 188,123
Convertible debentures - debt portion 111,039 110,708
Other long-term liabilities (Note 9) 1,691 1,218
Future income taxes 41,484 39,164
Asset retirement obligations (Note 6) 22,121 21,903
----------------------------------------------------------------------------
451,660 453,730
----------------------------------------------------------------------------
Shareholders' Equity
Shareholders' capital (Note 7) 552,871 552,871
Convertible debentures - equity portion 1,850 1,850
Contributed surplus 1,679 1,679
Retained earnings (deficit) (13,102) (16,400)
Accumulated other comprehensive income 999 -
----------------------------------------------------------------------------
544,297 540,000
----------------------------------------------------------------------------
995,957 993,730
----------------------------------------------------------------------------
Consolidated Statements of Operations and
Retained Earnings (Deficit)
For the Three Months Ended
March 31,
($000s except per share data) (unaudited) 2010 2009
----------------------------------------------------------------------------
Revenue 131,240 112,538
Expenses
Operating 88,058 86,901
Selling, general and administrative 15,812 13,607
Finance charges 6,252 5,580
Amortization and accretion (Note 3) 13,105 12,812
----------------------------------------------------------------------------
123,227 118,900
----------------------------------------------------------------------------
Earnings (loss) before taxes 8,013 (6,362)
Provision for (recovery of) income taxes
Current 128 195
Future 2,163 (2,176)
----------------------------------------------------------------------------
2,291 (1,981)
----------------------------------------------------------------------------
Net earnings (loss) 5,722 (4,381)
Retained earnings (deficit), beginning of
period (16,400) (11,358)
Dividends (Note 11) (2,424) (2,126)
----------------------------------------------------------------------------
Retained earnings (deficit), end of period (13,102) (17,865)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) per share (Note 10) 0.12 (0.10)
----------------------------------------------------------------------------
Diluted earnings (loss) per share (Note 10) 0.12 (0.10)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Loss) and
Accumulated Other Comprehensive Income
For the Three Months Ended
March 31,
($000s) (unaudited) 2010 2009
----------------------------------------------------------------------------
Net earnings (loss) 5,722 (4,381)
Other comprehensive income:
Unrealized gain on available for sale
investment (1) 999 -
----------------------------------------------------------------------------
Other comprehensive income 999 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive income (loss) 6,721 (4,381)
----------------------------------------------------------------------------
Accumulated other comprehensive income,
beginning of period - -
Other comprehensive income 999 -
----------------------------------------------------------------------------
Accumulated other comprehensive income, end of
period 999 -
----------------------------------------------------------------------------
(1) Net of tax of $0.1 million.
Consolidated Statements of Cash Flows
For the Three Months Ended
March 31,
($000s) (unaudited) 2010 2009
----------------------------------------------------------------------------
Net inflow (outflow) of cash related to the
following activities:
Operating Activities
Net earnings (loss) 5,722 (4,381)
Items not requiring cash:
Amortization and accretion 13,105 12,812
Future income tax expense (recovery) 2,163 (2,176)
Stock based compensation expense 1,415 (238)
Other 668 792
----------------------------------------------------------------------------
Funds from Operations 23,073 6,809
Increase (decrease) in non-cash working
capital (Note 14) (12,059) 23,476
Asset retirement expenditures incurred (277) (243)
----------------------------------------------------------------------------
10,737 30,042
----------------------------------------------------------------------------
Investing Activities
Additions to capital assets (Note 14) (10,018) (18,727)
Net proceeds on sale of capital assets 55 606
Purchase of investment (Note 2) (4,000) -
----------------------------------------------------------------------------
(13,963) (18,121)
----------------------------------------------------------------------------
Financing Activities
Issuance of shares - 248
Increase (decrease) in debt 5,638 (4,688)
Decrease in note receivable 12 79
Dividends (Note 11) (2,424) (7,560)
----------------------------------------------------------------------------
3,226 (11,921)
----------------------------------------------------------------------------
Net cash flow - -
Cash - beginning of period - -
----------------------------------------------------------------------------
Cash - end of period - -
----------------------------------------------------------------------------
Supplementary information:
Interest paid 3,342 2,540
Income taxes paid 100 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Notes to the Interim Consolidated Financial Statements
For the three months ended March 31, 2010 and 2009
(all tabular data in $000s except per share and ratio data) (unaudited)
Newalta Corporation (the "Corporation" or "Newalta") was incorporated on October 29, 2008 pursuant to the laws of the Province of Alberta. Newalta completed an internal reorganization resulting in a name change from Newalta Inc. to Newalta Corporation effective January 1, 2010. Newalta provides cost-effective solutions to industrial customers to improve their environmental performance with a focus on recycling and recovery of products from industrial residues. These services are provided both through our network of 80 facilities across Canada and at our customers' facilities where we mobilize our equipment and people to process material directly onsite. Our customers operate in a broad range of industries including the oil and gas, petrochemical, refining, lead, manufacturing and mining industries.
NOTE 1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements ("financial statements") include the accounts of Newalta. The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). Certain information and disclosures normally required to be included in the notes to the audited annual financial statements have been omitted or condensed. These financial statements and the notes thereto should be read in conjunction with the consolidated financial statements of Newalta Inc. for the year ended December 31, 2009 as contained in the Annual Report for fiscal 2009.
The accounting principles applied are consistent with those as set out in the annual financial statements of Newalta Inc. for the year ended December 31, 2009.
USE OF ESTIMATES AND ASSUMPTIONS
Accounting measurements at interim dates inherently involve reliance on estimates and the results of operations for the interim periods shown in these financial statements are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the accompanying financial statements include all adjustments necessary to present fairly the consolidated results of Newalta's operations and cash flows for the periods ended March 31, 2010 and 2009.
NOTE 2. INVESTMENT
During the quarter, Newalta acquired 3,636,364 common shares, at a price of $1.10 per share from the treasury of BioteQ Environmental Technologies Inc. ("BioteQ") for consideration of $4 million. This resulted in a gain of $2.8 million based on the closing bid price on the date of acquisition of the shares, including a value of $1.7 million assigned to warrants. Each share purchased includes a warrant to acquire an additional common share of BioteQ at $1.375 during the first year and $1.65 thereafter. The warrants expire after 5 years. This investment has been classified as available for sale. The warrants have been valued using a binomial valuation methodology, with an expected volatility of 44%, a risk-free interest rate of 2.2% and no expected dividend. Shares are carried at fair market value, based on the closing bid price as of the balance sheet date.
NOTE 3. DISPOSAL OF CAPITAL ASSETS
During the quarter, Newalta disposed of certain transport vehicles and building assets with a net book value of $0.3 million for proceeds of $0.1 million. The resulting net loss of $0.2 million is included in amortization and accretion in the consolidated statements of operations and retained earnings.
NOTE 4. PERMITS AND OTHER INTANGIBLE ASSETS
/T/
----------------------------------------------------------------------------
March 31, 2010
----------------------------------------------------------------------------
Accumulated
Cost Amortization Net Book Value
----------------------------------------------------------------------------
Indefinite permits 53,037 - 53,037
Expiring permits/rights 14,650 (6,528) 8,122
Non-competition contracts 6,020 (5,617) 403
----------------------------------------------------------------------------
Total 73,707 (12,145) 61,562
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, 2009
----------------------------------------------------------------------------
Accumulated
Cost Amortization Net Book Value
----------------------------------------------------------------------------
Indefinite permits 53,012 - 53,012
Expiring permits/rights 14,650 (6,338) 8,312
Non-competition contracts 6,020 (5,409) 611
----------------------------------------------------------------------------
Total 73,682 (11,747) 61,935
----------------------------------------------------------------------------
NOTE 5. SENIOR LONG-TERM DEBT
December 31,
March 31, 2010 2009
----------------------------------------------------------------------------
Commitments under credit facility(1) 196,917 191,280
Issue costs (2,685) (3,157)
----------------------------------------------------------------------------
Senior long-term debt 194,232 188,123
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes all outstanding cheques as at period end.
/T/
The Credit Facility's maturity date is October 12, 2011. An extension of the Credit Facility may be granted at the option of the lenders. If an extension is not granted, the entire amount of the outstanding indebtedness would be due in full at the maturity date. The facility also requires Newalta to be in compliance with certain covenants. At March 31, 2010, Newalta was in compliance with all covenants.
NOTE 6. RECONCILIATION OF ASSET RETIREMENT OBLIGATIONS
The total future asset retirement obligations were estimated by management based on the anticipated costs to abandon and reclaim facilities and wells, and the projected timing of these expenditures. The reconciliation of estimated and actual expenditures for the period is provided below:
/T/
----------------------------------------------------------------------------
Three months ended March 31,
2010 2009
----------------------------------------------------------------------------
Asset retirement obligations, beginning of
period 21,903 21,094
Expenditures incurred to fulfill obligations (277) (243)
Accretion 495 448
----------------------------------------------------------------------------
Asset retirement obligations, end of period 22,121 21,299
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
NOTE 7. SHAREHOLDERS' CAPITAL
Authorized capital of Newalta Corporation consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in series. The following table is a summary of the changes in Shareholders' capital during the period:
/T/
Shares (#) Amount ($)
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2008 42,400 509,369
----------------------------------------------------------------------------
Shares issued (net of issues costs) 6,136 44,227
----------------------------------------------------------------------------
Shares cancelled and returned to treasury (60) (725)
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2009 48,476 552,871
----------------------------------------------------------------------------
Share issuance costs - (56)
----------------------------------------------------------------------------
Shares issued (net of issues costs) 11 56
----------------------------------------------------------------------------
Shares outstanding as at March 31, 2010 48,487 552,871
----------------------------------------------------------------------------
NOTE 8. CAPITAL DISCLOSURES
Newalta's capital structure consists of:
----------------------------------------------------------------------------
December 31,
March 31, 2010 2009
----------------------------------------------------------------------------
Senior long-term debt 196,917 191,280
Letters of Credit issued as financial security
to third parties (Note 12) 22,292 22,137
Convertible debentures, debt portion 111,039 110,708
Shareholders' equity 544,297 540,000
----------------------------------------------------------------------------
874,545 864,125
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The objectives in managing the capital structure are to:
-- Utilize an appropriate amount of leverage to maximize return on
Shareholders' equity, and
-- To provide for borrowing capacity and financial flexibility to support
Newalta's operations.
/T/
Management and the Board of Directors review and assess Newalta's capital structure and dividend policy at least at each regularly scheduled board meeting which are held at a minimum four times annually. The financial strategy may be adjusted based on the current outlook of the underlying business, the capital requirements to fund growth initiatives and the state of the debt and equity capital markets. In order to maintain or adjust the capital structure, Newalta may:
/T/
-- Issue shares from treasury
-- Issue new debt securities
-- Cause the return of letters of credit with no additional financial
security requirements
-- Replace outstanding letters of credit with bonds or other types of
financial security
-- Amend, revise, renew or extend the terms of its then existing long-term
debt facilities
-- Enter into new agreements establishing new credit facilities
-- Adjust the amount of dividends paid to shareholders, and/or
-- Sell idle, redundant or non-core assets.
/T/
Management monitors the capital structure based on measures required pursuant to the Credit Facility agreement which restricts Newalta from declaring dividends and distributing cash if the Corporation is in breach of a covenant under the Credit Facility. These measures include:
/T/
------------------------------------------------------------------------
Ratio March 31, December 31, 2009 Threshold
2010
------------------------------------------------------------------------
Current(1) 1.60:1 1.34:1 1.10:1 minimum
Funded Debt(2) to EBITDA(3)(4) 2.15:1 2.60:1 3.00:1 maximum
Fixed Charge Coverage(5) 3.04:1 2.24:1 1.00:1 minimum
------------------------------------------------------------------------
(1) Current Ratio means, the ratio of consolidated current assets to
consolidated net current liabilities (excluding the current portion of
long-term debt and capital leases outstanding, if any).
(2) Funded Debt is a non-GAAP measure, the closest measure of which is
long-term senior debt. Funded Debt is generally defined as long-term
debt and capital leases including any current portion thereof but
excluding future income taxes and future site restoration costs. Funded
Debt is calculated by adding the senior long-term debt to the amount of
letters of credit outstanding at the reporting date. In calculating
Funded Debt, letters of credit returned after the end of a fiscal
quarter but prior to the date that is 45 days following the end of the
first, second or third interim period (90 days following the end of the
annual period) are excluded.
(3) EBITDA is a non-GAAP measure, the closest measure of which is net
earnings. For the purpose of calculating the covenant, EBITDA is defined
as the trailing twelve-months consolidated net income for Newalta before
the deduction of interest, taxes, depreciation and amortization, and
non-cash items (such as non-cash stock-based compensation and gains or
losses on asset dispositions). Additionally, EBITDA is normalized for
any acquisitions completed during that time frame and excludes any
dispositions incurred as if they had occurred at the beginning of the
trailing twelve-months.
(4) Funded Debt to EBITDA means the ratio of consolidated Funded Debt to the
aggregate EBITDA for the trailing twelve-months.
(5) Fixed Charge Coverage Ratio means, based on the trailing twelve-month
period, EBITDA less unfinanced capital expenditures and cash taxes to
the sum of the aggregate of principal payments (including amounts under
capital leases, if any), interest (excluding accretion for the
convertible debentures), dividends paid for such period, other than cash
payments in respect of a dividend reinvestment plan, if any. Unlike the
Funded Debt to EBITDA ratio, the Fixed Charge Coverage ratio trailing
twelve-month EBITDA is not normalized for acquisitions or dispositions.
/T/
NOTE 9. LONG-TERM INCENTIVE PLANS
a) The 2008 Option Plan
On January 4, 2010 a total of 842,500 options were granted to certain directors, officers and employees of the Corporation. The options were granted at the market price of $8.07 per share. Each tranche of the options vest over a three year period (with a five year life), and the holder of the option can exercise the option for either a share of Newalta or an amount of cash equal to the difference between the exercise price and the market price at the time of exercise. The options granted under the 2008 Plan have therefore been accounted for as stock appreciation options and the total compensation expense for these options was $0.7 million for the three months ended March 31, 2010, (nil for the same period in 2009).
b) Share Appreciation Rights
On January 4, 2010, 490,000 share appreciation rights were granted to certain employees of the Corporation at the market price of $8.07. On March 11, 2010, 40,000 share appreciation rights were granted to an officer of the Corporation at the market price of $8.70. Each tranche of these rights vests over a three year period (with a five year life). On this same date, the expiry date of 155,000 rights previously granted to this Officer, was amended such that the expiry date of such rights be five years from the initial grant date.
The holder of the right has the option to exercise the right for an amount of cash equal to the difference between the exercise price and the market price at the time of exercise. The rights granted have been accounted for as stock appreciation rights. Total compensation expense for these rights was $0.7 million for the three months ended March 31, 2010 (nil for the same period in 2009).
c) Other Long-term liabilities
Other long-term liabilities consist of non-current obligations under the Corporation's long-term incentive plans.
NOTE 10. EARNINGS PER SHARE
Basic earnings per share calculations for the three months ended March 31, 2010 and 2009 were based on the weighted average number of shares outstanding for the periods. Diluted earnings per share include the potential dilution of the outstanding options to acquire shares and from the conversion of the Debentures.
The calculation of dilutive earnings per share does not include anti-dilutive options. These options would not be exercised during the period because their exercise price is higher than the average market price for the period. The inclusion of these options would cause the diluted earnings per share to be overstated. The number of excluded options for the three months ended March 31, 2010 was 1,072,700 (2,830,200 in 2009).
The dilutive earnings per share calculation does not include the impact of anti-dilutive Debentures. These debentures would not be converted to shares during the period because the current period interest (net of tax) per share obtainable on conversion exceeds basic earnings per share. The inclusion of the Debentures would cause the diluted earnings per share to be overstated. The number of shares issuable on conversion of the Debentures excluded for the three months ended March 31, 2010 was 5,000,000 (5,000,000 in 2009).
/T/
Three Months Ended March 31,
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Weighted average number of shares 48,480 42,402
Net additional shares if rights exercised 346 -
Net additional shares if debentures converted - -
----------------------------------------------------------------------------
Diluted weighted average number of shares 48,826 42,402
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
NOTE 11. DIVIDENDS DECLARED AND PAID
During the quarter, Newalta declared a dividend of $0.05 per share to holders of shares of record on March 31, 2010. This dividend was paid on April 15, 2010.
NOTE 12. COMMITMENTS
As at March 31, 2010, Newalta had issued letters of credit and surety bonds in respect of compliance with environmental licenses in the amount of $22.3 million and $19.4 million respectively.
NOTE 13. FINANCIAL INSTRUMENTS
a) Fair Value of Financial Assets and Liabilities
Newalta's financial instruments include accounts receivable, available for sale investment, note receivable, accounts payable and accrued liabilities, dividends payable, senior long-term debt and debentures. The fair values of Newalta's financial instruments that are included in the consolidated balance sheet, with the exception of the debentures, approximate their recorded amount due to the short term nature of those instruments for accounts receivable, accounts payable and accrued liabilities and for senior long-term debt and the note receivable due to the floating nature of the interest rate applicable to these instruments. The fair values incorporate an assessment of credit risk. The carrying values of Newalta's financial instruments at March 31, 2010 are as follows:
/T/
----------------------------------------------------------------------------
Total
Held for Loans and Available Other Carrying
trading Receivables for sale Liabilities Value
----------------------------------------------------------------------------
Accounts
receivable - 86,574 - - 86,574
Investment - - 5,171 - -
Note receivable - 966 - - 966
Accounts payable
and accrued - - - 78,669 78,669
liabilities
Dividends
payable - - - 2,424 2,424
Senior long-term
debt(1) - - - 194,232 194,232
----------------------------------------------------------------------------
(1) Net of related costs.
/T/
The fair value of the Debentures is based on the closing trading price on the Toronto Stock Exchange as follows:
/T/
----------------------------------------------------------------------------
As at March 31, 2010
Carrying value(1) Quoted fair value
----------------------------------------------------------------------------
7% Convertible debentures due
November 30, 2012 112,889 118,450
----------------------------------------------------------------------------
(1) Includes both the debt and equity portions.
/T/
Newalta categorizes its financial instruments carried at fair value into one of three different levels depending on the significance of inputs employed in their measurement.
Level 1 includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for an asset or liability is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Instruments valued using Level 1 inputs include our Debentures.
Level 2 includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Financial instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for the entire duration of the derivative instrument. Instruments valued using Level 2 inputs include our investment in BioteQ.
Level 3 includes valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the instruments' fair value. Generally, Level 3 valuations are longer dated transactions, occur in less active markets, occur at locations where pricing information is not available, or have no binding broker quote to support Level 2 classification. At March 31, 2010 and December 31, 2009, Newalta did not have any Level 3 assets or liabilities.
b) Financial Instrument Risk Management
Credit risk and economic dependence
Newalta is subject to credit risk on its trade accounts receivable balances. The customer base is large and diverse and no single customer balance exceeds 13% of total accounts receivable. Newalta views the credit risks on these amounts as normal for the industry. Credit risk is minimized by Newalta's broad customer base and diverse product lines and is mitigated by the ongoing assessment of the credit worthiness of its customers as well as monitoring the amount and age of balances outstanding.
Based on the nature of its operations, established collection history, and industry norms, receivables are not considered past due until 90 days after invoice date although standard payment terms require payment within 30 to 120 days. Depending on the nature of the service and/or product, customers may be provided with extended payment terms while Newalta gathers certain processing or disposal data. Included in the Corporation's trade receivable balance, are receivables totalling $1.2 million which are considered to be outstanding beyond normal repayment terms at March 31, 2010. A provision of $0.8 million has been established as an allowance for doubtful accounts. Newalta does not hold any collateral over these balances.
/T/
----------------------------------------------------------------------------
Aging Allowance for doubtful
Trade Receivables aged by invoice date accounts
March 31, December 31,
March 31, 2010 December 31, 2009 2010 2009
----------------------------------------------------------------------------
Current 59,210 53,981 51 13
31-60 days 11,229 15,454 (1) 21
61-90 days 2,116 3,159 100 65
91 days + 1,230 791 669 725
----------------------------------------------------------------------------
Total 73,785 73,385 819 824
----------------------------------------------------------------------------
----------------------------------------------------
Aging Net Receivables
March 31, 2010 December 31, 2009
----------------------------------------------------
Current 59,159 53,968
31-60 days 11,230 15,433
61-90 days 2,016 3,094
91 days + 561 66
----------------------------------------------------
Total 72,996 72,561
----------------------------------------------------
/T/
To determine the recoverability of a trade receivable, management analyzes accounts receivable, first identifying customer groups that represent minimal risk (large oil and gas and other low risk large companies, governments and municipalities). Impairment of the remaining accounts is determined by identifying specific accounts that are at risk, and then by applying a formula based on aging to the remaining amounts receivable. All amounts identified as impaired are provided for in an allowance for doubtful accounts. The changes in this account for three months ended March 31, 2010 are as follows:
/T/
Allowance for doubtful accounts March 31, 2010 ---------------------------------------------------------------------------- Balance, beginning of period 824 Additional amounts provided for 1 Amounts written off as uncollectible (67) Amounts recovered during the period 61 ---------------------------------------------------------------------------- Balance, end of period 819 ----------------------------------------------------------------------------
/T/
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the Board of Directors of Newalta, which has built an appropriate liquidity risk management framework for the management of the Corporation's short, medium and long-term funding and liquidity management requirements. Management mitigates liquidity risk by maintaining adequate reserves, banking facilities and other borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.
Interest rate risk
Newalta is exposed to interest rate risk to the extent that its credit facility has a variable interest rate. Management does not enter into any derivative contracts to manage the exposure to variable interest rates. The Debentures have a fixed interest rate until November 30, 2012, at which point, any remaining Debentures will need to be repaid or refinanced. The table below provides an interest rate sensitivity analysis for the three months ended March 31, 2010:
/T/
Net earnings
----------------------------------------------------------------------------
If interest rates increased by 1% with all other
variables held constant (374)
----------------------------------------------------------------------------
/T/
Market risk
Market risk is the risk that the fair value or future cash flows of Newalta's financial instruments will fluctuate because of changes in market prices. Newalta is exposed to foreign exchange market risk. Foreign exchange risk refers to the risk that the value of a financial commitment, recognised asset or liability will fluctuate due to changes in foreign currency exchange rates. The risk arises primarily from U.S. dollar denominated long-term debt and working capital. As at March 31, 2010, Newalta had $16.7 million in working capital and $15.0 million in long-term debt denominated in U.S. dollars. Management has not entered into any financial derivatives to manage the risk for the foreign currency exposure as at March 31, 2010.
The table below provides a foreign currency sensitivity analysis on long-term debt and working capital outstanding as at March 31, 2010:
/T/
Net earnings
----------------------------------------------------------------------------
If the value of the U.S. dollar increased by $0.01 with
all other variables held constant 13
----------------------------------------------------------------------------
NOTE 14. CASH FLOW STATEMENT INFORMATION
The following tables provide supplemental information.
Three Months Ended March 31,
2010 2009
----------------------------------------------------------------------------
Changes in current assets (6,391) 35,627
Changes in current liabilities (11,521) (28,065)
Investment 5,171 -
Dividends payable (1) 5,436
Stock based compensation, foreign exchange and other (781) (223)
Changes in capital asset accruals 1,464 10,702
----------------------------------------------------------------------------
Total increase (decrease) in non-cash working capital (12,059) 23,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended March 31,
2010 2009
----------------------------------------------------------------------------
Foreign exchange (12) 139
Accretion of convertible debentures 331 338
Amortization of deferred financing charges 472 393
Other (123) (78)
----------------------------------------------------------------------------
Total other items not requiring cash 668 792
----------------------------------------------------------------------------
Three Months Ended March 31,
2010 2009
----------------------------------------------------------------------------
Cash additions to capital assets during the year (8,554) (8,025)
Changes in capital asset accruals (1,464) (10,702)
----------------------------------------------------------------------------
Total cash additions to capital assets (10,018) (18,727)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
NOTE 15. SEGMENTED INFORMATION
Effective January 1, 2010, Newalta reorganized its reporting structure into two divisions, Onsite and Facilities, which constitute our two reportable segments. The reportable segments are distinct strategic business units whose operating results are regularly reviewed by the Corporation's executive officers in order to assess financial performance and make resource allocation decisions. The reportable segments have separate operating management and operate in distinct competitive and regulatory environments. The Facilities segment includes the processing of industrial and oilfield-generated wastes including collection, treatment, and disposal; clean oil terminalling; custom treating; the sale of recovered crude oil for our account; oil recycling; and lead battery recycling. The Onsite segment involves the mobilization of equipment and staff to process waste at our customer sites, including the processing of oilfield-generated wastes, the sale of recovered crude oil; industrial cleaning; site remediation; dredging and dewatering; and drill site processing including solids control and drill cuttings management. Newalta had previously reported Western and Eastern reportable segments. As such 2009 comparative information has been restated to present information under the applicable new segments.
/T/
For the Three Months Ended March 31, 2010
Inter- Consolidated
Facilities Onsite segment Unallocated(3) Total
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External revenue 91,592 39,648 - - 131,240
Inter segment revenue(1) 157 - (157) - -
Operating expense 58,886 29,329 (157) - 88,058
Amortization and
accretion expense 7,118 3,366 - 2,621 13,105
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Net margin 25,745 6,953 - (2,621) 30,077
Selling, general and - - -
administrative 15,812 15,812
Finance charges - - - 6,252 6,252
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Earnings (loss) before
taxes 25,745 6,953 - (24,685) 8,013
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Capital expenditures
and acquisitions(2) 2,153 3,575 - 2,902 8,630
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Goodwill 44,381 59,216 - - 103,597
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Total assets 641,170 275,882 - 78,905 995,957
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For the Three Months Ended March 31, 2009
Inter- Consolidated
Facilities Onsite segment Unallocated(3) Total
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External revenue 76,945 35,593 - - 112,538
Inter segment
revenue(1) 156 - (156) - -
Operating expense 57,950 29,107 (156) - 86,901
Amortization and
accretion expense 6,607 3,001 - 3,204 12,812
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Net margin 12,544 3,485 - (3,204) 12,825
Selling, general and - - -
administrative 13,607 13,607
Finance charges - - - 5,580 5,580
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Earnings (loss)
before taxes 12,544 3,485 - (22,391) (6,362)
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Capital expenditures
and acquisitions(2) 4,973 1,796 - 1,346 8,115
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Goodwill 44,381 59,216 - - 103,597
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Total assets 661,314 278,481 - 72,183 1,011,978
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(1) Inter-segment revenue is recorded at market, less the costs of serving
external customers.
(2) Includes capital asset additions and the purchase price of acquisitions.
(3) Management does not allocate selling, general and administrative, taxes,
and interest costs in the segment analysis.